Taxnta4862 - TL105

TAX4862/105/0/2023
NTA4862/105/0/2023
Tutorial Letter 105/0/2023
Applied Taxation (CTA Level 2)
TAX4862
NTA4862
Year module
Department of Financial Intelligence
This tutorial letter contains learning units 7 to 10 as well

as self-assessment questions.
2 TAX4862/105/2023
CONTENTS
ORIENTATION ....................................................................................................................................5
I. INTRODUCTION ...................................................................................................................... 5
II. STUDY PROGRAMME AND TIME FRAME ............................................................................. 5
III. ABBREVIATIONS .................................................................................................................... 6
IV. BEANCOUNTER SCENARIO .................................................................................................. 6
V. LECTURERS ........................................................................................................................... 6
VI. IMPORTANT DATE FOR THIS TUTORIAL LETTER .............................................................. 7
VII. ADDITIONAL RESOURCES .................................................................................................... 7
SECTION A .........................................................................................................................................8
DAYS 1 & 2 - WORK PLAN FOR 5 AND 6 APRIL 2023....................................................................... 8
LEARNING UNIT 7 – GENERAL DEDUCTIONS, SPECIAL DEDUCTIONS AND ASSESSED LOSSES
.................................................................................................................................................8
7.1 BACKGROUND ....................................................................................................................... 8
7.1.1 UNGC Principle 10 ................................................................................................................... 9
7.2 OUTCOMES OF THIS LEARNING UNIT ................................................................................. 9
7.3 BEANCOUNTER SCENARIO ................................................................................................ 10
7.4 CONTENT OF LEARNING UNIT ........................................................................................... 11
7.4.1 Study approach ...................................................................................................................... 11
7.4.2 Table of Reference ................................................................................................................. 12
Chapter 3 & 4..................................................................................................................................... 12
7.4.3 Paragraphs in SILKE which you may ignore ........................................................................... 15
7.5 IMPORTANT LAW AMENDMENTS ....................................................................................... 15
7.6 ADDITIONAL NOTES ON THE GENERAL DEDUCTION FORMULA, SPECIAL DEDUCTIONS
AND ASSESSED LOSSES .................................................................................................... 17
7.6.1 The general deduction formula (sections 11(a) and 23(g) and SILKE 6.3 and 6.5.7) .............. 17
7.6.2 Pre-trade expenditure and losses (section 11A and SILKE 6.2.1)........................................... 20
7.6.3 Prepaid expenditure (section 23H and SILKE 6.4) .................................................................. 21
7.6.4 Tax treatment of leases versus suspensive sale agreements ................................................. 22
7.7 OUTCOMES OF THE BEANCOUNTER SCENARIO ............................................................. 24
7.8 SUMMARY OF LEARNING UNIT 7 ....................................................................................... 24
7.9 LIST OF REFERENCES FOR LEARNING UNIT 7 ................................................................ 24
DAYS 3 & 4 – WORK PLAN FOR 7 TO 8 APRIL 2023 ...................................................................... 25
LEARNING UNIT 8 – CAPITAL ALLOWANCES AND RECOUPMENTS ........................................... 25
8.1 BACKGROUND ..................................................................................................................... 25
8.1.1 UNGC principles 9 and 10 ...................................................................................................... 26
8.2 OUTCOMES OF THIS LEARNING UNIT ............................................................................... 26
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8.4 CONTENT OF LEARNING UNIT 8 ........................................................................................ 27

8.4.1 Study approach ...................................................................................................................... 27
8.4.3 Parts of paragraphs in SILKE which you may ignore .............................................................. 32
8.5 LAW AMENDMENTS............................................................................................................. 32
8.6 ADDITIONAL NOTES ON CAPITAL ALLOWANCES AND RECOUPMENTS ...................... 34
8.6.1 The acquisition of assets ........................................................................................................ 34
8.6.2 Lease of assets (rented/hired/leased) ..................................................................................... 36
8.6.3 Movable assets ...................................................................................................................... 37
8.6.4 Sections 11(e) and 12C allowances summary (SILKE 13.3.1 and 13.3.3) .............................. 37
8.6.5 Section 12E – deduction in respect of the assets of a small business corporation (SILKE par
13.3.4) .................................................................................................................................... 40
8.6.6 Immovable assets................................................................................................................... 40
8.6.7 Intellectual property (section 11(gB) and 11(gC) and SILKE 13.8.1) ....................................... 41
8.6.8 Recoupment: acquisition of hired assets (section 8(5) and SILKE 13.10.6) ............................ 41
8.6.9 Unquantified amounts (section 24M, par 39A of the 8th Schedule and SILKE 6.3.2.1, 13.10.1
and 17.9.4) ............................................................................................................................. 42
8.9 LIST OF REFERENCES FOR LEARNING UNIT 8 ................................................................ 47
DAYS 5 & 6 - WORK PLAN FOR 9 AND 10 APRIL 2023................................................................... 48
LEARNING UNIT 9 – TRADING STOCK ........................................................................................... 48
9.1 BACKGROUND ..................................................................................................................... 48
9.1.1 UNGC Principle 10 ................................................................................................................. 49
9.4 CONTENT OF LEARNING UNIT 9 ........................................................................................ 50
9.4.1 Study approach ...................................................................................................................... 50
9.4.3 Parts of paragraphs in SILKE which you may ignore .............................................................. 51
9.5 LAW AMENDMENTS............................................................................................................. 52
9.6 ADDITIONAL NOTES ON TRADING STOCK ....................................................................... 52
9.6.1 Change of intention ................................................................................................................ 52
9.6.2 Trading stock applied for purposes other than trade (section 22(8) and SILKE par 14.6)........ 53
9.6.3 Anti-avoidance provisions (section 23F and SILKE par 14.7) ................................................. 54
9.6.4 Deemed capital receipts from the disposal of shares (s 9C) ................................................... 54
9.6.5 Share dealers ......................................................................................................................... 55
9.9 REFERENCES FOR LEARNING UNIT 9 ............................................................................... 55
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DAYS 5 & 6 – WORK PLAN FOR 9 AND 10 APRIL 2023 ................................................................ 56

LEARNING UNIT 10 – INTEREST-BEARING INSTRUMENTS, FOREIGN EXCHANGE
DIFFERENCES, TRANSFER PRICING AND TAX MORALITY, STRATEGY AND RISK
MANAGEMENT ..................................................................................................................... 56
10.1 BACKGROUND ..................................................................................................................... 56
10.1.1 UNGC Principle 10 ................................................................................................................. 57
10.4 CONTENT OF LEARNING UNIT 10....................................................................................... 59
10.4.1 Study approach .................................................................................................................... 59
10.4.2 Table of reference................................................................................................................. 59
10.4.3 Paragraphs and parts of paragraphs in SILKE which you may ignore ............................. 63
10.5 LAW AMENDMENTS............................................................................................................. 63
10.6 ADDITIONAL NOTES ON THE INCURRAL AND ACCRUAL OF INTEREST ....................... 64
10.7 ADDITIONAL NOTES ON FOREIGN CURRENCY TRANSACTIONS ................................... 64
10.7.1 Foreign currency conversion – sections 25D and 24I........................................................ 64
10.7.2 Foreign exchange gains and losses - section 24I .............................................................. 65
10.7.3 Foreign exchange gains and losses relating to transactions between companies in the
same group or between connected persons - section 24I(10A) ........................................ 66
10.7.4 Bad debt - section 24I(4) ...................................................................................................... 67
10.7.5 Notes on the capital gains tax implications of foreign exchange transactions (SILKE
15.1) ....................................................................................................................................... 67
10.7.6 Notes on CGT treatment of foreign currency (SILKE par 15.7) ......................................... 69
10.7.7 Notes to SILKE example 15.7............................................................................................... 70
10.8 ADDITIONAL NOTES ON INTERNATIONAL TRANSACTIONS ........................................... 75
10.10 SUMMARY OF LEARNING UNIT 10 ..................................................................................... 77
10.11 LIST OF REFERENCES FOR LEARNING UNIT 10 .............................................................. 77
WORK PLAN FOR DAYS 6 - 7 (10 AND 11 APRIL 2023).................................................................. 78
SECTION B – SELF-ASSESSMENT QUESTIONS............................................................................ 78
SECTION C – PRIOR YEAR TEST ................................................................................................. 159
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ORIENTATION
I. INTRODUCTION
This tutorial letter is divided into four learning units:
• Learning unit 7 deals with the general deduction formula, prohibitions, special deductions and
assessed losses.
• Learning unit 8 deals with capital allowances and recoupments.
• Learning unit 9 deals with trading stock and share transactions (section 9C).
• Learning unit 10 deals with interest-bearing instruments (section 24J), foreign exchange
differences (sections 24I and 25D), transfer pricing (section 31) and tax morality, strategy and
risk management (chapter 34 in SILKE).
The goal of this tutorial letter is to assist you in making the most of the time available to master the topics
in this tutorial letter. Follow the guidelines and keep to the allocated time (remember that the time
allocations are based on the assumption that certain topics have already been covered in your previous
studies).
II. STUDY PROGRAMME AND TIME FRAME

The learning units in this tutorial letter should be covered during the week of 5 April – 11 April 2023 as
set out in the 2023 study programme in CASALL2_301/2023.
 Your time should be divided into two parts:
• Obtaining the required knowledge (26 hours)

This would entail working through this tutorial letter, the textbooks (Student Handbook and
SILKE), underlining, making summaries and familiarising yourself with the Income Tax Act
(covered in section A of this tutorial letter).
• Application of knowledge and revision of difficult concepts (4 hours)

This would entail completing the self-assessment questions (contained in sections B and
C of this tutorial letter). We understand that many of you may not be able to complete all
the self-assessment questions due to the limited time allocated. We wish to encourage you
to use your revision week to try to complete all the questions that you may not be able to
get to during your study week.
We assume that you have 3 hours of study time on a weekday/night and 15 hours over a
 weekend. We have based the work plan in this tutorial letter on this assumption. Full-time
students should adapt their study programme to full days.
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Day Date LU Topic Hours

1&2 Wednesday 5–6 7 General deduction formula, pre-trade 6
& April 2023 expenditure and losses, prohibited
Thursday deductions, prepaid expenditure,
prohibition against double deductions,
special deductions and assessed
losses.
3&4 Friday 7–8 8 Capital allowances and recoupments. 11
& April 2023
Saturday
5&6 Sunday 9 – 10 9 Trading stock and share transactions 2
& April 2023 10 Interest-bearing instruments, foreign 7
Monday exchange differences, transfer pricing
(2 hours) and tax morality, strategy and risk
management.
6&7 Monday 10 – 11 Sections B & C: self-assessment 4
(1 hour) April 2023 questions and prior year test.
&
Tuesday
30 hours
III. ABBREVIATIONS
The list of abbreviations used in the tutorial letters is contained in TL102/2023. Please take note of the
following additional abbreviations relevant to this tutorial letter:

Abbreviation Meaning of abbreviation
CGT Capital Gains Tax
REIT Real Estate Investment Trust
ITC Initial Test of Competence
IV. BEANCOUNTER SCENARIO

We’ll be continuing our investigation of the Beancounter family’s tax problems and financial affairs. To
follow this, you will need to refer back to TL102/2023 as well as TL103/2023 and TL104/2023.
V. LECTURERS
The following lecturers compiled this tutorial letter:
Ms IV Mkhomazi
Ms MM Pretorius
Please contact any of the tax lecturers, should you have questions about this tutorial letter. You may also
send your queries (regarding administrative and academic matters) and comments via e-mail to
TAX4862@unisa.ac.za (note that e-mail correspondence is the preferred method of communication –
refer to TL 101 in this regard).
For queries regarding administrative matters, please contact the administrative officer on
+27 12 429 2947. For queries regarding academic matters, you can contact any of the lecturers directly
or you can contact the administrative officer. The administrative officer will put you in touch with the
relevant lecturer on duty.
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VI. IMPORTANT DATE FOR THIS TUTORIAL LETTER
Date of test 2: TUESDAY, 09 May 2023
Note that mainly the topics covered in this tutorial letter, together with the relevant case
 law, will be assessed in test 2. Remember that all topics covered in previous tutorial letters
until now (for example VAT) can be incorporated in your assessment. Remember that the
test integrates topics to assess critical thinking.
VII. ADDITIONAL RESOURCES

To facilitate students in their learning process, material is also uploaded on the Unisa online platform
(myUnisa, myModules) under each learning unit. In most instances, an e-mail notification will be sent when
files are uploaded, but we recommend that you check myUnisa on a daily basis so that you don’t miss out
on any updates made or announcements posted. Lessons are created on myUnisa for each of the learning
units. These lessons will guide students through the content in a more interactive manner and include the
following:
PowerPoint slides that summarise the relevant study material in a specific tutorial letter.
? Additional questions (linked to a discussion platform to be used by students to engage with

one another on relevant topics or integrated questions).
Find pre-recorded lectures and recordings of live lectures on our YouTube channel –
UNISA - TAX CTA (PGDA)
(https://www.youtube.com/channel/UCnSJpIUZeHNsRSYpyTR5_Dg)
As well as:
• links to the tutorial content,

• short tasks (MCQ or videos to watch) for students,
• links to a gamification platform where you will earn rewards for mastering the learning units (this will
be explained in a short video on the Unisa online platform) and
• links for live lectures, test debrief sessions and Q & A sessions.
Note that many of the above resources are additional to the content of the tutorial letter and cannot be
used in isolation but must be used in conjunction with and in addition to your official study material, Student
Handbook and SILKE.
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SECTION A
DAYS 1 & 2 - WORK PLAN FOR 5 AND 6 APRIL 2023
LEARNING UNIT 7 – GENERAL DEDUCTIONS, SPECIAL DEDUCTIONS AND
ASSESSED LOSSES
 A total of 6 hours (3 hours + 3 hours) of your study time this week has been allocated to LU 7.
The following time allocation is recommended:
Topic Minutes
General deduction formula, pre-trade expenditure and losses, prohibited
deductions, prepaid expenditure and prohibition against double deductions
180
Special deductions – employee-related expenses
Special deductions – other
Special deductions – section 24 debtors allowance
Special deductions - section 24C allowance in respect of future expenditure on
contracts 180
Assessed losses
Comprehensive example 12.23 in SILKE par 12.13
Total (6 hours) 360
 The above time allocation is an indication only. The amount of time you need to spend on
each topic will be greatly influenced by the knowledge you already have from undergraduate
and previous postgraduate studies. You should therefore adapt the time allocation wherever
necessary to suit your level of prior knowledge.
7.1 BACKGROUND
In this learning unit you will study the general deduction formula, the prohibited deductions, as well as
those deductions which are not permitted in terms of the general deduction formula, but which are
contained in specific sections of the Income Tax Act (referred to as special deductions). You will also learn
about assessed losses.
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The topics covered in this learning unit fit into the tax framework as follows:
TAX FRAMEWORK
GROSS INCOME (s 1)
LESS: Exempt income (ss 10 and 10A to 10C)
= INCOME
LESS: Deductions and allowances (ss 11 – 24P, excluding s 20 and s 18A)
LESS: Assessed loss brought forward (s 20)
ADD: Amounts to be included in taxable income including TAXABLE CAPITAL GAINS
LESS: Deductions in terms of s 11
LESS: Qualifying donations (s 18A)
= TAXABLE INCOME
Use taxable income to calculate NORMAL TAX PAYABLE.
7.1.1 UNGC Principle 10
As you work through the tax legislation, you need to remember and apply ethical tax behaviour. In line with
the UNGC principles (introduced in TL102), compliance with the laws and regulations is the basis on which
the taxation legislation is founded.
UNGC principle 10 states that businesses should work against corruption in all its forms, including extortion
and bribery. The definition of corruption includes dishonest or fraudulent conduct; tax evasion would
therefore fall within the ambit of corruption. UNGC principle 10 encourages entities to find a balance
between the social obligation to pay taxes and tax planning, in order to minimise the ‘cost’ of these taxes
for an entity within the ambit of the law. Situations may arise where entities act with an intent to evade tax
(for example by claiming fraudulent deductions). It is thus important to take note of UNGC principle 10
when studying this unit, specifically as it relates to the requirements that need to be met before deductions,
which will decrease taxable income and thus taxes payable, can be claimed.
7.2 OUTCOMES OF THIS LEARNING UNIT
After studying LU 7, you should be able to achieve the following outcomes:

• Apply the general deduction formula and discuss its application through
relevant case law principles by identifying an amount as a deduction in a
practical scenario.
• Identify and explain whether an amount should be disallowed as a tax
deduction.
• Identify, explain and calculate amounts that should specifically be deducted
from taxable income.
• Identify and explain when pre-trade expenses should be allowed as a
deduction.
• Calculate, explain and apply the limitations rules relating to prepaid
expenditure.
• Identify and calculate the special allowance for suspensive sales.
• Identify and calculate the deduction for future expenditure.
• Identify and explain the application of assessed losses.
The most important outcome, however, is that you should be able to apply
your knowledge in practical case studies and in integrated questions (to
calculate and discuss) similar to those provided in sections B and C of this
tutorial letter by using critical thinking.
10 TAX4862/105/2023
7.3 BEANCOUNTER SCENARIO
 Before you start studying the detailed provisions of deductions and assessed losses, read the
following scenario relating to the Beancounter family, and/or watch the cartoon posted under
Lessons on myUnisa. The scenario requires you to read through the information provided. As
you study the applicable sections in the Income Tax Act, identify areas of concern that should
be brought to the attention of the Beancounter family. Refer back to TL102/2023, TL103/2023
and TL104/2023 for background information on the Beancounter Family.
Bizzie Beancounter has decided to start her own business venture, which will be carried out in her own
name. She has located the perfect business premises, available for letting, where she intends to start a
dry-cleaning business (recognised by the Commissioner as a process similar to a process of manufacture).
Bizzie has decided to call her new business Bizzie-as-a-bee Cleaners.
Bizzie intended to open the doors of her new business on 1 March 2022 (with the financial year ending on
28 February each year). Due to an unforeseen delay in obtaining an overdraft facility from her bank, trading
only commenced on 15 May 2022. Bizzie has registered as a vendor for VAT purposes in her own name,
as the estimated total value of taxable supplies will exceed R1 000 000 in the first 12 months based on
fixed contractual agreements.
Bizzie paid the rent of the business premises on 1 June 2022 for 12 months in advance. She has also
appointed four permanent staff members (not connected to herself) to assist her in dealing with the
customers and to operate the dry-cleaning machine. Bizzie pays the staff members a cash salary every
month as well as 50% of their monthly medical aid membership, as per the medical aid fund contract.
Bizzie expects her business to suffer a loss by the end of the financial year. She still takes care of the day-
to-day management of the business.
Bizzie wants to know the following:
• Will the expenses she has incurred prior to 15 May 2022 be deductible for income tax purposes?
• Will she be able to deduct the rent paid for the business premises for tax purposes?
• Are the monthly cash salaries and medical aid fund contributions paid by her deductible for tax
purposes?
• She knows that normal tax is payable annually in respect of a year of assessment; therefore she wants
to know what will happen if the business suffers a loss in the current financial year of assessment.
Should she rather not pay the rent in advance so that she will be able to deduct the rent in the following
year?
11 TAX4862/105/2023
 Discussion activity
Before attempting to help Bizzie with her questions, work through and master learning unit 7.
Only then will you be ready to identify areas of concern that should be brought to the
attention of the Beancounter family. The outcomes (solution) for the Beancounter scenario
will be made available on myUnisa during your study week for this learning unit. You need
to review these outcomes to improve your own understanding of the tax principles involved.
7.4 CONTENT OF LEARNING UNIT
7.4.1 Study approach
We provide you with a Table of Reference which contains the references to all the sections which you
must study in this learning unit, together with a reference to the relevant paragraph in SILKE and a
reference to additional notes provided (if any) in the tutorial letter, as well as an indication of whether a
specific section is examinable or not. Use the Table of Reference to guide you through the content of the
learning unit in this tutorial letter. We also guide you on how to spend your time. You should therefore work
your way through the content by starting at the top of the table and working your way through to the end.
In addition, please refer to TL102 for the relevant case law that applies to this learning unit. As the allocated
time is limited, you will require additional reading time to study case law. You only have to study the case
law in TL102. You may ignore case law mentioned in SILKE which is NOT dealt with in TL102 (highlighted
in grey in the textbook).
 A note on how to study and refer to case law
Marks will be awarded in a test or the exam for stating the correct principles of important
case law. Refer to TL102 which contains short summaries of the prescribed case law. Note
that these summaries do not represent an exhaustive list of established principles and merely
indicate the relevant part(s) of the tax legislation considered and principles
considered/established in the respective cases. Study these summaries together with the
summaries of the respective cases in SILKE. There is also a video uploaded on myUnisa and
the Tax YouTube channel on how to study and apply the case law.
You must be able to apply the relevant principles of particular cases to a particular set of
facts.
We are not ignorant of the fact that most of our students study part time. We therefore realise that you
may not always have the time available to follow the above study approach fully, with specific reference to
our recommendation that you read a section in the Income Tax Act. However, you still need to flag and
underline your Income Tax Act for you to benefit from the limited open-book policy for the tests, the
examination and the 2024 ITC examinations.
SILKE has a table of provisions towards the back of the book (just before the subject index). This is a
handy table to use if you have a specific section on which you need more information. The table provides
the paragraphs in SILKE which contain information on a specific section.
12 TAX4862/105/2023
7.4.2 Table of Reference
As mentioned above, the following table contains references to all the sections of the Income Tax Act that
you must study in this learning unit, together with a reference to the relevant paragraph in SILKE and a
reference to additional notes provided in the tutorial letter (if any), as well as an indication of whether a
specific section is examinable or not. Download the relevant interpretation notes from the following link:
http://www.sars.gov.za/legal-counsel/legal-advisory/Interpretation-notes/
(Relevant extracts of interpretation notes will be included in your assessments.)
Reference to Reference
Reference
the Income Topic to notes in Examinable
to SILKE
Tax Act TL
DAY 1 (3 hours)
General deduction formula, pre-trade expenditure and losses, prohibited deductions, prepaid
expenditure and prohibition against double deductions (1 hour)
s 11(a) & Overview and general deduction formula 12.1 & 6.1 7.6.1 Yes
11(x) & 6.3
s 23 Prohibited deductions 6.5 Yes

Excluding: 23(n), (o)(iii) & (p)
Interpretation Note No. 28 (Issue 3): Deductions: Home office expenses incurred by
persons in employment or persons holding an office
Interpretation Note No. 54 (Issue 2): Deductions: Corrupt activities, fines and penalties
Case law: TL102 Yes
- Refer to chapter 3 of TL102 for an Chapter 3
exhaustive list of case law relevant to
general deduction
s 11A Pre-trade expenditure and losses 6.2 & 7.6.2 Yes

6.2.1
Interpretation Note No. 51 (Issue 5): Pre-trade expenditure and losses – describes
s 11A in more detail.
s 23H Prepaid expenditure 6.4 7.6.3 Yes

Case law TL102 Yes
- Telkom SA SOC Limited v The Chapter 3
Commissioner for the South African &4
Revenue Service
- Warner Lambert SA (Pty) Ltd v C SARS
s 23B Prohibition against double deductions 6.6 Yes
s 23(g) Excessive expenditure 6.8 Yes
s 23C Cost of assets and VAT 6.9 Yes
Excluding: 23C(2)
Specific transactions 6.10 Yes
Special deductions - employee-related expenses (1 hour)
s 11(cA) Restraint of trade payments 12.2.1 Yes
Interpretation Note No. 7: Restraint of trade payments (Bear in mind that para-
graph (cA) of the gross income definition, as well as section 11(cA) referred to in the
interpretation note were amended in 2008 (i.e. the terms “personal service company”
and “personal service trust” were replaced by the term “personal service provider”). It is
thus the previous terms that are still reflected in Interpretation Note No. 7.
s 11(l) Fund contributions by employers 12.2.2 Yes

13 TAX4862/105/2023
Reference
to SILKE
Tax Act TL
s 12M Deduction of medical lump sum payments 12.2.3 No
s 11(lA) Shares issued by employers in terms of s 8B 12.2.4 No
s 11(m) Annuities to former employees or partners 12.2.5 Yes
and their dependants
s 11(w) Life insurance premiums 12.2.6 No

s 7B Variable remuneration 12.2.7 7.5 Yes
(This section deals with both incurral and
accrual. The accrual aspect will be covered in
TL106.)
s 12H Learnership agreements 12.2.8 7.5 Yes
(The question will state that it is a “registered
learnership agreement”, date of registration
and NQF level will be given. Only contracts
entered into on or after 1 October 2016 will be
examined.)
Interpretation Note No. 20 (Issue 8): Additional deduction for learnership allowance
Special deductions – other (1 hour)

s 11(c) Legal expenses 12.3 Yes
s 11(d) Repairs 12.4 - Yes

12.4.2
Interpretation Note No. 74 (Issue 2): Deduction and recoupment of expenditure on

repairs (Although the most important parts of this interpretation note are also covered in
SILKE 12.4, it is important that you also read through this interpretation note, since the
distinction between repairs and improvements is difficult. This distinction is often the
focus of a test or exam question, either as a discussion or as part of a calculation
question.)
Case law TL102 Yes
- Flemming v Kommissaris van Binnelandse Chapter 4
Inkomste
- CIR v African Products Manufacturing Co
Ltd
s 11(i) Bad debt 12.5 Yes
s 11(j) Doubtful debt 12.6 Yes

(Questions will state if IFRS 9 is applied or not
and provide either the IFRS 9 loss allowance
or days that debt is in arrears.)
Excluding 11(jA)
s 11(nA) & Repayment of employee benefits 12.7 Yes

(nB)
s 12J Deductions in respect of the issue of venture 12.8 No
capital company shares
s 18A(1) & Donations to public benefit organisations 12.9 7.5 Yes
(3) and other qualifying beneficiaries
(including s 18A(1) & (3))
Excluding
- any reference to collective investment schemes
14 TAX4862/105/2023
Reference
to SILKE
Tax Act TL
- 18A(1A), (1B), (1C), (2), (2A) – (2D), (3A) & (3B),
(4) – (7)
(It will be stated that a section 18A receipt was
obtained.)
DAY 2 (3 hours)
Special deductions – section 24
s 24 Allowance for outstanding debt: Credit 12.10 7.5 & Yes
agreements and debtors allowance 7.6.4
(Only the gross profit method will be tested.)
Interpretation Note No. 48 (Issue 3): Instalment credit agreements and debtors
allowance
Special deductions – section 24C

s 24C Future expenditure on contracts 12.11 Yes
(The methods which must be used to make
this determination will be provided in a
question.)
Interpretation Note No. 78: Allowance for future expenditure on contracts
Case law TL102 Yes
- Clicks Retailers (Pty) Ltd v Chapter 4
Commissioner for the South African
Revenue Services
Assessed losses
s 20 Assessed losses 12.12 – 7.5 Yes
12.12.2
s 20A Ring-fencing of assessed losses of TL106 Yes (but not
natural persons for test 2)
Interpretation Note No. 33 (Issue 5): Assessed losses: Companies: The “trade” and
“income from trade” requirements
Case law TL102 Yes

- SA Bazaars (Pty) Ltd v CIR Chapter 4
- Robin Consolidated Industries v CIR
Comprehensive examples
 Do the comprehensive example 12.23 in SILKE par 12.13.

15 TAX4862/105/2023
7.4.3 Paragraphs in SILKE which you may ignore
You may ignore the following paragraphs in SILKE as these paragraphs are excluded from the syllabus:
SILKE reference Topic

6.3.2.2 Disposal or acquisition of equity shares (s 24N)
6.5.13 Government grants (s 23(n))
6.5.14 Unlawful activities (s 23(o)) only the part that refers to s 23(o)(iii) can be ignored
6.5.15 The cession of policies by an employer (s 23(p))
6.7 Limitation of deductions in respect of certain short-term insurance policies (s 23L)
12.2.3 Deduction of medical lump sum payments (s 12M)
12.2.4 Shares issued by employers in terms of s 8B (s 11(lA))
12.2.6 Life insurance premiums (s 11(w))
12.8 Deductions in respect of the issue of venture capital company shares (s 12J)
7.5 IMPORTANT LAW AMENDMENTS
The taxation laws are amended annually. These amendments are firstly published in the form of draft Bills
and then as Bills. Only once the Bills have been passed through Parliament and once it is then assented
to by the President, they are published as Acts.
The following Amendment Acts, relevant to your studies, were published on 05 January 2023:
• Rates and Monetary Amounts and Amendment of Revenue Laws Act 19 of 2022
• Taxation Laws Amendment Act 20 of 2022; and
• Tax Administration Laws Amendment Act 16 of 2022.
Use the following link to access the published Amendment Acts:

https://www.sars.gov.za/legal-counsel/primary-legislation/amendment-acts/
'image: Flaticon.com'. The weblink icon has been designed using resources from Flaticon.com
The important amendments which are applicable to this LU are summarised below. Certain amendments
that were enacted in the prior year’s Taxation Laws Amendment Act 20 of 2021, are also summarised for
your reference.
 Certain law amendments enacted by the Taxation Laws Amendment Act 20 of 2022:
Section 1 Company tax rate
From years of assessment ending on any date on or after 31 March 2023, the
tax rate of companies will change from 28% to 27%.
16 TAX4862/105/2023
Section 7B Timing of accrual and incurral of variable remuneration
The definition of variable remuneration in section 7B has been extended to

include par (g) which states that variable remuneration means any amount of
‘remuneration’ as defined in paragraph 1 of the Fourth Schedule (other than a
bonus) that is determined based on the employee’s work performance.
A proviso has been added to section 7B(2) that provides that where the
employee is deceased before the date of payment, the amount is deemed to
accrue to the employee and constitutes expenditure incurred by the employer,
on the day during the year of assessment prior to the date of the employee’s
death.
The addition of par (g) and of the new proviso to section 7B(2) applies with
effect from 1 March 2023 and applies in respect of amounts accrued or
expenditure incurred on or after this date.
(Section 7B deals with both incurral and accrual. The accrual aspect will be
covered in TL106.)
Section 24 Allowance for outstanding debt: Credit agreements and debtors
allowance
Section 24 has been amended by the insertion of subsections (2A) and (2B)
which relate to lay-by agreements.
Section 24(2A) states that the Commissioner may allow a section 24 allowance
for all amounts deemed to have accrued, but not yet received, by the end of
the taxpayer’s year of assessment under a lay-by agreement (as contemplated
in section 62 of the Consumer Protection Act, 2008 (Act 68 of 2008)).
Section 24(2B) states that any allowance claimable under section 24(2A) must
be added back to (or included in) the taxpayer’s income in the following year of
assessment.
As a result of the above two new subsections, the wording in section 24(2) was
amended to note that the agreement referred to in section 24(2), excludes lay-
by agreements as they are specifically dealt with in section 24(2A) and (2B).
Another amendment was made to section 24(2) where the words ‘he’ and ‘him’
were amended to refer to ‘the Commissioner’, and the word ‘his’ was amended
to refer to ‘the taxpayer’.
This amendment came into effect on 1 January 2023 and applies in respect of
years of assessment ending on or after this date.
These new subsections are also explained in par 12.10 in SILKE on page 380.
17 TAX4862/105/2023
Section Assessed losses

20(1)(a)
Over the past few years, there has been an international trend to restrict the
use of assessed losses and to reduce the corporate income tax rate. In line
with this trend, section 20(1)(a) was amended as follows:
Any balance of assessed loss incurred by a company in its previous year of

assessment, and carried forward to the current year of assessment, will be
deductible by the company to the extent that the assessed loss carried forward
does not exceed the higher of:
• R1 million; or
• 80% of the taxable income before taking the offset of the assessed loss
into account.
This amendment comes into operation on 31 March 2023 and applies in

respect of years of assessment ending on or after this date.
Section 12H Learnership agreements
Section 12H was only applicable if the registered learnership was entered into
between a learner and an employer before 1 April 2022, the application of
section 12H has been extended to registered learnership agreements entered
into before 1 April 2024.
(This amendment came into operation on 1 April 2022 and applies in respect
of learnership agreements entered into on or after this date.)
7.6 ADDITIONAL NOTES ON THE GENERAL DEDUCTION FORMULA, SPECIAL

DEDUCTIONS AND ASSESSED LOSSES
7.6.1 The general deduction formula (sections 11(a) and 23(g) and SILKE 6.3 and 6.5.7)
The general deduction formula is contained in section 11(a) read with section 23(g). Section 11(a) contains
the positive criteria and section 23(g) the negative criteria.
Section 11(a) provides for a deduction of:
• expenditure and losses

• actually incurred (means paid or there must be an unconditional liability to pay)
• during the year of assessment (the courts established that it is a silent requirement (meaning that
section 11(a) does not specifically require it))
• in the production of income (means that the act that gave rise to the expenditure is closely connected
to the income-earning activities),
• provided such expenditure and losses are not of a capital nature (means that the expenditure/loss is
more closely related to the income-earning operations than to the income-earning structure, it does
not form part of fixed capital but rather floating capital (trading stock), or it did not create an enduring
benefit).
18 TAX4862/105/2023
The diagram below shows the treatment of expenditure and losses in terms of sections 11(a) and 23 once
their nature has been determined:
Expenditure
and losses
Revenue nature Capital nature
General deduction Special Base cost of

formula and deductions and capital asset
section 23 allowances
Deduction for Deduction or No deduction for

normal tax allowance for normal tax
normal tax purposes
No CGT Reduces base Forms part of

effect cost of asset base cost for
CGT purposes
 Section 23(o) – Interpretation Note No. 54: Deductions – Corrupt activities, fines and
penalties (see SARS website)
Interpretation Note No. 54 (Issue 2) was issued on 25 January 2017 and examines the
meaning and scope of section 23(o). Section 23(o) prohibits the deduction for income tax
purposes of expenditure incurred in respect of
• corruption or a corrupt activity; or
• a fine or penalty imposed as a result of an unlawful activity.
In other words, corrupt payments such as bribes, fines and penalties for unlawful activities
are not tax deductible. However, the deduction of bona fide commercial penalties is not
affected by the provisions of section 23(o). The deduction of such commercial penalties
must be considered in terms of the general deduction formula.
19 TAX4862/105/2023
General deduction formula: Case law
Be aware of the difference between the tests for establishing whether an item of expenditure is incurred
“in the production of income” and whether that expenditure is “capital or revenue in nature”. The tests are
different.
The tests used to establish whether gross income is capital or revenue in nature are also completely
different from the tests used to establish whether expenditure is capital or revenue in nature. The table
below provides a list of the different tests established by the courts in determining the capital/revenue
nature of gross income versus expenditure.
Remember the onus of proof in terms of section 102(1)(b) of the TAA.
Gross income – capital/revenue tests Expenditure – capital/revenue tests

• tree and fruit principle • closeness of the connection to the
• intention (most important test) (subjective income-earning operations or income-
factor) - mere realisation of capital asset or earning structure (the operating
pursuance of profit-making scheme versus structure test)
• change in intention (“crossing the Rubicon”) • fixed versus floating capital
• mixed intentions – main/dominant intention • once and for all expenditure
• alternative intentions - revenue • enduring benefit test
• objective factors • the nature of the transaction
• fixed versus floating capital • the nature of the business carried on
 You have now studied the requirements of the general deduction formula and the relevant
case law principles. You should be able to answer the following query relating to the applicable
case law principle(s) in respect of the general deduction formula.
Share your solution on the myUnisa discussion forum, then refer to the outcomes (solution)
that will be made available on myUnisa on the Friday of your study week.
Learning activity relating to case law – learning unit 7
Joy Stores (Pty) Ltd (“Joy Stores”) is a South African company with a 31 March financial
year-end. The company is a category A registered VAT vendor. Joy Stores is a soft toy
retailer and purchased soft toys, for resale, for R25 000 (VAT exclusive) on 25 March 2023.
The company paid a 20% deposit of R5 000 on the date of receipt of the invoice,
26 March 2023. The purchase transaction was subject to delivery of the stock in good order
at Joy Stores’ premises. The stock was delivered in good order and received by the
company on 5 April 2023. Joy Stores paid the balance of the purchase price of R20 000 at
the time of delivery.
Discuss, with reference to legislation and case law principles, whether the R25 000 will be
deductible by Joy Stores for tax purposes in its 2023 year of assessment.
No reference to relevant case names is required. (7 marks)
Attribution: 'https://www.freepik.com/vectors/business'>Business vector created by katemangostar - www.freepik.com

20 TAX4862/105/2023
7.6.2 Pre-trade expenditure and losses (section 11A and SILKE 6.2.1)
SARS issued Interpretation Note No. 51 (Issue 5) on 27 June 2018, which provides guidance on when
pre-trade expenses (including expenditure and losses) will be allowed as a deduction for income tax
purposes.
Below is an explanation of the working of section 11A:
• Section 11A allows the deduction of pre-trade expenses in the year of assessment in which
trade commences, subject to certain requirements (irrespective of when the expenses were
incurred).
• Section 11A is subject to section 23H.
• The section 11A deduction applies to all pre-trade expenses actually incurred which would have
been allowed as a deduction in terms of sections 11 (excluding section 11(x)), 11D (ignore) or
24J had the expenses been incurred after commencement of the carrying on of that trade.
• This means that the pre-trade expenses are ring-fenced and only pre-trade expenses actually
incurred in the preparation for carrying on the particular trade will be deductible from the income
resulting from that specific trade. Also, where pre-trade expenses have been incurred towards
a particular project and that project is abandoned prior to the commencement of trade, such pre-
trade expenses will not be deductible under section 11A. Read through examples 3 and 4 of
Interpretation Note 51.
• Certain capital allowances granted in terms of the following paragraphs of section 11 can qualify
for deduction under section 11A(1) (provided that all the necessary requirements have been
met):
- (cA) (restraint of trade payments – LU 7); (e) (wear-and-tear allowance – LU 8, see note
below); (f) (lease premiums - LU 8); (g) (leasehold improvements – LU 8); (gA) (ignore); (gC)
(intellectual property – LU 8); (gD) (ignore) and (hB) (ignore).
Note: (Work through example 5 of Interpretation Note 51)
A wear-and-tear (section 11(e)) allowance will qualify for deduction under section 11A only
if the specific asset
- has a cost (therefore an asset acquired by, for example, a donation or inheritance will
not qualify); and
- was used during the pre-trade period.
A section 11(e) allowance is not available if the asset is not used for purposes of the
taxpayer’s trade. Therefore, if the asset would not have qualified for an allowance under
section 11(e) (had the asset been acquired after commencement of the carrying on of
that trade), it will not qualify for a deduction under section 11A. An example where a
section 11A deduction is not available is where the asset was acquired but kept in
storage pending the commencement of that trade.
• In terms of section 11A(2), the deduction is limited to the taxable income derived from the
particular trade prior to the deduction of the section 11A pre-trade expenses. Therefore, pre-
trade expenses cannot create (or increase) an assessed loss in respect of the relevant trade.
Furthermore, the excess is ring-fenced. In other words, it may not be set off against income from
a different trade. The excess can, however, be carried forward to the subsequent year of
assessment for set-off against taxable income derived from the same trade. Should the taxpayer
have an assessed loss as opposed to taxable income, the assessed loss and the excess pre-
trade expenses will be carried forward to the subsequent year of assessment at the same time.
The excess pre-trade expenses will be carried forward each year until it can be set off against
any taxable income derived from that trade.
21 TAX4862/105/2023
Work through examples 6 and 7 of Interpretation Note 51.
• Section 11A also applies to a small business corporation.
The following diagram may assist in a better understanding of the application of section 11A:
Year of assessment
Commence trading
Start-up costs Normal costs
Deductible in next year of assess-

Deductible in current year,
ment once trade has commenced
once trade has
(deduction limited to taxable Deductible mainly under
commenced (deduction
income from relevant trade) sections 11-18A and 23 in
limited to taxable income
(section 11A) current year (deductions
from relevant trade)
(section 11A) NOT limited to taxable
income from the relevant
trade, therefore an
assessed loss may be
created)
7.6.3 Prepaid expenditure (section 23H and SILKE 6.4)
Section 23H seeks to match the timing of the deduction in terms of sections 11(a), (c), (d), (w), or 11A with
the amount of goods supplied, the period of service or the entitlement to other benefits derived during that
year of assessment. In other words, section 23H limits the deduction allowable in terms of sections 11(a),
(c), (d), (w), or 11(A) even though the amount has actually been incurred.
There are four instances when section 23H will not apply and we comment on two of them as follows:
• The first is where all the goods or services are supplied or all the benefits are enjoyed within six
months after year-end. No apportionment should then be made in terms of section 23H; thus
section 23H will not apply.
• The second instance, namely “if the aggregate of all the amounts of expenditure, which may otherwise
have been limited by section 23H, does not exceed R100 000”, should be applied last (thus, excluding
cases where the benefit will be received within six months).
22 TAX4862/105/2023
 Example
Prepaid expenditure (section 23H)
Full Prepaid
Year of assessment ended 28 February 2023 expense portion
R R
Rent paid (section 11(a))
(prepaid for 4 months after Feb 2023) 330 000 x 4/12 months = 110 000
Insurance (section 11(a))
Maintenance (section 11(d))
475 500 213 750
Note the following:
• The R330 000, R105 000 and R40 500 have actually been incurred.
• The prepaid amount for rent relates to a period of 4 months after year-end; therefore it will not be
subject to section 23H and the full amount of R330 000 may be claimed in the 2023 year of
assessment even though the prepaid portion is R110 000 (which is > R100 000).
• Both of the other prepaid amounts (R70 000 and R33 750) relate to a benefit, which will be enjoyed
over a period exceeding 6 months after year-end.
• In terms of proviso (bb) to section 23H, the deduction of the R105 000 in terms of section 11(a) and
R40 500 in terms of section 11(d) will be limited, as the aggregate of the prepaid amounts (not
otherwise limited by the section) exceeds R100 000, namely R103 750 (R70 000 + R33 750). Only
the portion which was enjoyed during the 2023 year of assessment will be deductible in the 2023 year
of assessment.
• Therefore, deductible for income tax purposes in the 2023 year of assessment is the full amount of
rent paid (R330 000), R35 000 (i.e. R105 000 – R70 000 or R105 000 x 4/12 months) in terms of
section 11(a) (insurance) and R6 750 (i.e. R40 500 – R33 750 or R40 500 x 2/12 months) in terms of
section 11(d) (maintenance).
• The prepaid portions of R70 000 and R33 750 will be deductible in the following (2024) year of
assessment in terms of section 11(a) and 11(d), respectively.
However, if the insurance were, for example, prepaid for 7 months of the 2024 year of assessment in the
above example and the maintenance were prepaid for 8 months of the 2024 year of assessment, the
aggregate of the prepaid amounts (not otherwise limited by the section) would not exceed R100 000:
R61 250 (R105 000 x 7/12 months) + R27 000 (R40 500 x 8/12 months) = R88 250
and the full R105 000 and R40 500 would accordingly be deductible in the 2023 year of assessment in
terms of section 11(a) and section 11(d), respectively.
7.6.4 Tax treatment of leases versus suspensive sale agreements
 Although not specifically included in this learning unit, we feel that it will add value to incorporate
a table to explain the different tax treatments of leases and suspensive sale agreements. Study
the table provided.
The most important difference between leases and suspensive sale agreements for normal tax purposes
is the fact that a lease (finance lease or operating lease) is treated as a rental agreement for normal tax
purposes, whereas a suspensive sale agreement is treated as a sale for normal tax purposes.
23 TAX4862/105/2023
Leases versus suspensive sale agreements table
Lease (operating or finance lease) Suspensive (instalment) sale agreement
Lessor Seller
Income tax Income tax
• Taxed on instalments (remember to exclude • Sale of asset (trading stock)  Selling price
VAT) received or accrued during the year of included in gross income (excluding finance
assessment. cost and VAT) less cost of sales (deducted as
• Include lease premium and leasehold improve- purchase price or opening stock).
ments (an obligation to effect) in gross income • Sale of asset (allowance asset) 
in terms of paragraphs (g) & (h) to the gross Recoupment included in taxable income.
income definition (remember possible relief in • Sale of asset (capital asset)  Capital gain or
terms of section 11(h)). loss aggregated with other capital gains or
• The lessor may claim capital allowances losses and any aggregate capital gain is
(sections 12C, 13(1), 13quin, 13sex or 11(e)), included in taxable income at the relevant
if applicable, on original cost of the asset. inclusion rate of the taxpayer.
• Claim other related expenses in terms of • Finance cost included in gross income, spread
section 11(a). over the period of the agreement in terms of
• Remember the possible application of sec- section 24J.
tions 23A and 23D (both sections are excluded • Possible section 24 allowance available on out-
from your syllabus). standing debtor’s balance.
VAT VAT
• Lease agreement (finance lease) – Treated as • Instalment credit agreement, therefore pay full
an instalment credit agreement. Account for full amount of VAT (output tax) on receipt of any
amount of VAT (output tax) on receipt of any payment or delivery of goods.
payment or delivery of goods.
• Rental agreement (operating lease) – Account (Note: VAT treatment same for finance lease and
for output tax on earlier of date that payment is suspensive sale.)
due or payment is received.
Lessee Purchaser
Income tax Income tax
• Deduct amount actually incurred in terms of • Bought an asset  capitalise asset (excluding
section 11(a) (full instalment – remember to VAT) and claim capital allowance on purchase
exclude VAT). price.
• Deduct lease premium in terms of section 11(f) • Claim finance cost in terms of section 24J.
and leasehold improvements in terms of
section 11(g). Remember, excess improve-
ments could be deductible in terms of
section 13(1).
• At the termination of lease, remember possible
section 8(5) recoupment.
24 TAX4862/105/2023
VAT VAT
• Lease agreement (finance lease) – Claim full • Claim full amount of VAT (input tax) if in
amount of input tax if in possession of a valid possession of valid tax invoice.
tax invoice (same time of supply rules as for the
lessor). (Note: VAT treatment same for finance lease and
• Rental agreement (operating lease) – Claim suspensive sale.)
VAT (input tax) on each instalment (same time
of supply rules as above for the lessor).
7.7 OUTCOMES OF THE BEANCOUNTER SCENARIO
 Read through the Beancounter scenario again, and/or watch the cartoon under the Lessons
on myUnisa, and make a rough summary of what your solution would be now that you have
studied this learning unit. You should now be able to answer Bizzie Beancounter’s queries.
7.8 SUMMARY OF LEARNING UNIT 7
This learning unit introduced you to the content in the Income Tax Act that is relevant to the general
deduction, special deductions and assessed losses together with the relevant law amendments. The table
of reference under 7.4.2 was provided to guide you through the work. You need to have a good
understanding of case law so that you can use the principles thereof to answer discussion type questions.
Consider every scenario to critically analyse all aspects of the general deduction formula. Ensure that you
have worked through (flagged and highlighted) the sections referred to in learning unit 7 (refer to 7.4.2) in
your Income Tax Act as well as in your prescribed textbook, SILKE. Remember to take a look at the
additional resources available for this learning unit on myUnisa and YouTube.
7.9 LIST OF REFERENCES FOR LEARNING UNIT 7
• SAICA. 2023. SAICA Student Handbook 2022/2023. Volume 3. Durban: LexisNexis.

• SARS. 2023. Interpretation notes. Available at: https://www.sars.gov.za/legal-counsel/legal-
advisory/interpretation-notes/
• South Africa. 2022. Taxation Laws Amendment Act (Act No. 20 of 2021). Cape Town: Government
Printer
Printer
• Stiglingh, et al. 2023. ‘Chapter 6: General deductions’, SILKE: South African Income Tax 2023. Durban:
LexisNexis.
• Stiglingh et al. 2023. ‘Chapter 12: Special deductions and assessed losses’, SILKE: South African
Income Tax 2023. Durban: LexisNexis.
END OF LEARNING UNIT 7

25 TAX4862/105/2023
DAYS 3 & 4 – WORK PLAN FOR 7 TO 8 APRIL 2023

LEARNING UNIT 8 – CAPITAL ALLOWANCES AND
RECOUPMENTS
 A total of 11 hours (3 hours on 7 April and 8 hours on 8 April) of your study time this week has
been allocated to LU 8.

Topic Minutes
Important definitions (core concepts) 10
Allowances on movable assets 100
Allowances on immovable assets 70
Leases 120
Intellectual property 30
Recoupments and debt reduction (debt benefit) 180
Alienation, loss or destruction allowance 60
Comprehensive examples 13.45 and 13.46 in SILKE par 13.13 90
Total (11 hours) 660
 The above time allocation is only an indication. The amount of time you need to spend on
8.1 BACKGROUND
This learning unit deals with capital allowances available as deductions against income and the related
recoupments, which are included in gross income (in terms of paragraph (n)). It also deals with the
concession or compromise in respect of debt (previously referred to as reduction of debt (section 19)), the
allowance in respect of the disposal of assets (section 11(o)), the limitation of losses from the disposal of
certain assets (section 20B) and the incurral and accrual of amounts in respect of assets acquired or
disposed of for unquantified amounts (section 24M).
26 TAX4862/105/2023
TAX FRAMEWORK
GROSS INCOME (s 1)
= INCOME
LESS: Deductions and allowances (ss 11 – 24P, excluding s 18A & s 20)
= TAXABLE INCOME
8.1.1 UNGC principles 9 and 10
As you work through the legislation, you need to remember and apply ethical behaviour. In line with the
UNGC principles introduced in TL102, compliance with the laws and regulations is the basis on which the
taxation legislation is founded.
UNGC principle 9 encourages the development and diffusion of environmentally friendly technologies. It
is worth mentioning that there are some capital allowances in sections 12I, 12L, 12U, 37B, 37C and 37D
which relate to, among other things, energy efficiency savings deductions and environmental and land
conservation expenditure, that enhance UNGC principle 9. Although these are specifically excluded from
your syllabus, it is important for you to be cognisant of these types of allowances for your own
development.
UNGC principle 10 states that businesses should work against corruption in all its forms, including extortion
and bribery. Therefore, to intentionally claim capital allowances on fictional assets or to inflate the
allowances claimed would result in tax evasion, which would fall within the ambit of corruption. Since
UNGC principle 10 encourages entities to find a balance between the social obligation to pay taxes and
tax planning, in order to minimise the ‘cost’ of these taxes for an entity within the ambit of the law, it is
important to keep the UNGC principle 10 in mind when studying this unit.

• Identify and explain whether a person is a connected person.
• Apply the connected person rules pertaining to depreciable assets and
capital allowances.
• Identify and distinguish between movable and immovable assets and
identify the capital allowances applicable to each.
• Calculate and explain the tax consequences of leased assets.
• Calculate and explain the capital allowances of intellectual property.
• Identify, explain and calculate a recoupment or a section 11(o) allowance
when a capital asset is disposed of.
• Apply deferral rules available on a recoupment.
• Identify and explain whether there is concession or compromise on a debt.
27 TAX4862/105/2023
 Before you start studying the detailed provisions of capital allowances and recoupments, read
the following scenario relating to the Beancounter family, and/or watch the cartoon posted
under Lessons on myUnisa. The scenario requires you to read through the information
provided. As you study the applicable sections in the Income Tax Act, identify areas of concern
that should be brought to the attention of the Beancounter family. Refer back to TL102/2023,
TL103/2023 and TL104/2023 for background information on the Beancounter Family.
Bizzie-as-a-bee Cleaners is now in full operation. Bizzie has acquired a new dry-cleaning machine, a
delivery van, a computer and some furniture for the reception area. All these assets were bought from VAT
vendors.
Bizzie wants to know which tax allowances and deductions she may claim in respect of the new assets
that she purchased.
Before attempting to help Bizzie with her query, work through and master learning unit 8.
8.4 CONTENT OF LEARNING UNIT 8
We provide you with a Table of Reference which contains the references to the paragraphs in SILKE,
together with the references to the additional notes provided (if any) in this tutorial letter, as well as the
references to all the relevant sections of the Income Tax Act which you must study in this learning unit.
Refer to the study approach that we recommend in paragraph 7.4.1 in this tutorial letter.
The following table contains references to the paragraphs in SILKE, the additional notes in this tutorial
letter and all the relevant sections of the Income Tax Act that you must study in this learning unit, as well
as an indication of whether a specific section is examinable or not. Download the relevant interpretation
notes from the following link:
https://www.sars.gov.za/legal-counsel/legal-advisory/interpretation-notes/

28 TAX4862/105/2023
Reference
Reference
to the Reference
Topics to notes in Examinable
Income Tax to SILKE
TL
Act
DAY 3 (3 hours)
SILKE: Overview 13.1
Core concepts (10 minutes)
s1 Connected person 13.2.1 8.5 Yes
Interpretation Note No. 67 (Issue 4): Connected persons
Machinery, plant, implements, utensils 13.2.2 Yes
and articles
Process of manufacture 13.2.3 Yes
(Information will be provided as to whether
a particular process is a manufacturing (or
similar) process.)
s1 Depreciable asset 13.2.4 Yes
Recoupments and the s 11(o) allowance 13.2.5 Yes
Allowances on movable assets (100 minutes)

s 11(e) Wear-and-tear allowance 13.3.1 8.5, 8.6.1, Yes
(Write-off periods (as per Interpretation & 13.12.1 8.6.3 &
Note No. 47 (issue 5) and Binding General 8.6.4
Ruling No. 7 (issue 4)) will be given in a
question.)
Interpretation Note No. 47 (Issue 5): Wear-and-tear or depreciation allowance
(section 11(e))
Excluding 11(e)(iiiA) No
s 12B Movable assets used in farming or 13.3.2 Yes
production of renewable energy
Excluding s 12B(1)(f) No
s 12C Movable assets used by manufacturers, 13.3.3 8.6.1, 8.6.3 Yes
for research and development or by & 13.12.1 & 8.6.4
hotelkeepers and ships, aircraft and
assets used for storage and packing of
agricultural products
(Information will be provided as to whether
a particular process is a manufacturing (or
similar) process.)
Excluding 12C(1)(bA), (c), (d), (e), (gA) and No
proviso (d)
s 12E Small business corporations 13.3.4 8.5, 8.6.1, Yes
(Information will be provided as to whether 8.6.3, 8.6.4
a particular process is a manufacturing (or & 8.6.5
similar) process.)
s 12DA Rolling stock 13.3.5 No
Allowances on immovable assets (70 minutes)
s 13 Buildings and improvements: Annual 13.4.1, 8.6.1 & Yes
allowance 13.2.1 & 8.6.6
(Tax values and allowances of buildings 13.12.1
erected prior to 1 January 1989 or during
the 10% write-off period will be provided.
29 TAX4862/105/2023
Reference
Reference
to the Reference
Income Tax to SILKE
TL
Act
Information will be provided as to whether a
particular process is a manufacturing (or
similar) process.)
Excluding
s 13(1A) and 13(8) No
s 13quat Urban development zones 13.4.2 No
s 13sex Residential units 13.4.3 8.6.1 & Yes
8.6.6
s1 Definition of a residential unit 13.4.3 Yes
s 13sept Low-cost residential units on loan account 13.4.4 No

s1 Definition of a low-cost residential unit 13.4.3 Yes
s 13quin Commercial buildings 13.4.5 8.6.1 & Yes
8.6.6
s 12S Buildings in special economic zones 13.4.6 No
s 12D Pipelines, transmission lines and railway 13.4.7 No
lines
s 12NA Deductions in respect of improvements on 13.4.8 No
property in respect of which Government
holds a right of use or occupation
Hotels and charters of aircraft and ships
s 13bis Immovable assets of hotels: Annual 13.5.1 No
allowance on buildings
s 12C Hotels: Movable assets 13.5.2 No
s 33 Owners and charterers of aircraft or ships 13.6 No
s 12Q Exemption of income in respect of ships 13.6.1 No
used in international shipping
s 12C & Movable assets: Aircraft and ships 13.6.1 Yes
12E
s 12F Immovable assets: Airport and port assets 13.6.2 No
DAY 4 (8 hours)
Leases (120 minutes)
s 11(f) Lease premiums 13.7.1 8.6.2 Yes
Interpretation Note No. 109: Lease premiums
Excluding s 11(f)(v), (vi) & proviso (dd) & (ee) No
s 11(g) Leasehold improvements 13.7.2 8.6.2 Yes
Interpretation Note No. 110: Leasehold improvements
s 11(h) Relief for the lessor (lessor’s special 13.7.3 Yes
allowance)
(Amount will be provided in question.)
Excluding s 11(hB) No
s 12N Deductions in respect of improvements 13.7.4 8.6.2 Yes
not owned by the taxpayer
(Excluding Public Private Partnerships and
Independent Power Producer Procurement
Programme)
30 TAX4862/105/2023
Reference
Reference
to the Reference
Income Tax to SILKE
TL
Act
Excluding s 12N(3) No
s 23A Limitation of allowances for lessors of 13.7.5 No
certain assets
s 23D Sale and leaseback arrangements 13.7.6 No
s 23G Sale and leaseback arrangements (tax- 13.7.6 No
exempt bodies)
Intellectual property (30 minutes)
s 11(gA) Acquisitions and registration of intellectual No
property before 1 January 2004
s 11(gB) Granting, renewal and registration of 13.8.1 8.6.7 Yes
intellectual property
s 11(gC) Acquisition of patents, designs, 13.8.1 8.6.7 Yes
copyrights or other similar property (not
a trade mark)
s 11D Deductions in respect of scientific or 13.8.1 No
technological research and development
s 23I Prohibitions of deductions in respect of 13.8.1 No
certain intellectual property
Allowances on other types of assets
s 11(gD) Government business licences 13.9.1 No
s 12I Industrial policy project allowance 13.9.2 No
s 12L Energy efficiency savings deduction 13.9.3 No
s 12U Additional deduction for roads and fences 13.9.4 No
used in respect of the production of
renewable energy
s 37B Environmental expenditure 13.9.5 No
s 37C Environmental conservation and 13.9.6 No
maintenance
s 37D Land conservation in respect of nature 13.9.7 No
reserves and national parks
Recoupments and concession or compromise regarding debt (180 minutes)
s 8(4)(a) Recoupments: General recoupment 13.2.5 & 8.5 Yes
Provision 13.10.1
s 8(4)(b) Actuarial surplus paid from a pension fund 13.10.1 No
s 24M Incurral and accrual of amounts in 13.10.1 & 8.6.9 Yes
respect of assets acquired or disposed 6.3.2.1
of for unquantified amount
s 8(4)(k) Recoupments: Donations, asset in 13.10.2 Yes
specie distributions, the disposal of
assets to connected persons or change
of use to trading stock
s 8(4)(e) – Recoupments: Deferred recoupment of 13.10.3 Yes
(eE) allowances
par 65 of 8 th
Roll-overs: Involuntary disposals 17.10.3.1 Yes
Schedule
par 66 of 8th Roll-overs: Reinvestment in 17.10.3.2 Yes
Schedule replacement assets
31 TAX4862/105/2023
Reference
Reference
to the Reference
Income Tax to SILKE
TL
Act
s 8(4)(l) Recoupments: Interest or related finance 13.10.4 No
charges
s 8(4)(n) Recoupments: Industrial policy project 13.10.5 No
allowance
s 8(4A) Recoupments: Deemed allowance No
s 8(5) Recoupments: Acquisition of hired 13.10.6 8.6.8 Yes
assets
s 19 read Recoupments: Concession or 13.10.7 8.5 Yes
with par 12A compromise regarding a debt (previously
reduction or cancellation of debt).
(Context will indicate whether it is a
commercial decision or a donation)
Interpretation Note No. 91 (Issue 2): Concession or compromise of a debt

Excluding proviso (bb)(B) of section No
19(8)(d)
Alienation, loss or destruction allowance (scrapping allowance) (60 minutes)
s 11(o) Alienation, loss or destruction 13.2.5 & Yes
allowance 13.11
(Previously scrapping allowance)
Interpretation Note No. 60 (Issue 2): Loss on disposal of qualifying depreciable asset
s 20B Limitation of losses from disposal of 13.11.1 Yes
certain assets
Sundry provisions (Not covered in SILKE)
s 8(4)(f) Excess recoupment in respect of further (replacement) asset No
s 13ter Deductions in respect of residential buildings No
Comprehensive examples (90 minutes)
 Do the comprehensive examples 13.45 and 13.46 in SILKE par 13.13.

32 TAX4862/105/2023
8.4.3 Parts of paragraphs in SILKE which you may ignore
Paragraphs that you can ignore in total are indicated in the table above.
You may ignore the following parts of paragraphs in SILKE due to the fact that they deal with sections that
are excluded from the syllabus:
SILKE
Topic
reference
13.2.2 & 13.2.3 Information will be provided as to whether a particular process is a manufacturing (or
similar) process as defined
13.3.2 The part that refers to s 12B(1)(f)
13.3.3 The part of the table that refers to industrial machinery or plant used under a supply
agreement in the automotive industry, agricultural co-operatives, hotelkeepers and
machinery or plant used for research and development purposes
13.4.3 The part that refers to s 25BB(4)
13.6.1 The part that refers to ss 24P and 12Q
13.6.2 Immovable assets – airport and port assets (the whole paragraph)
13.8.1 The part that deals with ss 11D and 23I (both sections are excluded from the SAICA
syllabus)
13.10.1 The part that refers to s 8(4)(b)
8.5 LAW AMENDMENTS
Before continuing with learning unit 8, take note of the following amendment to the Income Tax Act, which
is contained in the Taxation Laws Amendment Act 20 of 2022. Certain amendments that were enacted in
the prior year’s Taxation Laws Amendment Act 20 of 2021 are also summarised for your reference.
 Law amendments enacted by the Taxation Laws Amendment Act 20 of 2022:
Section 11(e) Wear and tear allowance
An amendment was made to section 11(e)(vii) where the words ‘a person’

and ‘he’ were amended to refer to ‘the taxpayer’.
Paragraph (x) has been added to the provisos to section 11(e), it provides
that no allowance may be made in respect of any machinery, plant,
implement, utensil or article acquired by the taxpayer as, or with, a
‘government grant’ as defined in section 12P(1).
This amendment is deemed to have come into effect on 29 July 2022.
(Note that section 12P: Exemption of amounts received or accrued in respect

of Government is excluded from the syllabus.)
33 TAX4862/105/2023
Section 19(6A) Recoupments: Concession or compromise regarding a debt
Section 19(6A) triggered a recoupment if a debt benefit arose, where the

allowance asset funded by the debt, was disposed of during a previous year
of assessment and a recoupment was included in income at the date of
disposal. An amendment was made to section 19(6A) to ensure that the
subsection triggers a recoupment to apply to all allowance assets disposed
of in an earlier year of assessment (irrespective of whether a recoupment (or
no recoupment), a scrapping allowance or a capital loss occurred during the
previous year of assessment during which the disposal occurred). The
wording of this provision was amended as follows:
If a debt owed by a person is reduced and the amount of the debt is owed in
respect of, or was used to fund expenditure in respect of, an allowance asset
that was disposed of during a year of assessment prior to the year in which
that debt benefit arises, the portion of the debt benefit, that relates to
• a deduction or allowance that was previously granted in respect of

that expenditure, and
• the debt benefit relating to the deduction or allowance, was not

applied to reduce the par 20 base cost of the allowance asset under
par 12A,
and that exceeds
• the amount (if any) that was recovered or recoupment in the year of
assessment during which the allowance asset was disposed of,
without taking the debt benefit into account,
will be deemed to be a recoupment in income (under s 8(4)(a)) in the year

that the debt benefit arises.
This amendment came into effect on 1 January 2023 and applies in respect
of years of assessment ending on or after this date.
See example 13.41 in SILKE relating to this proviso.
 The tax rates for small business corporations were amended in the budget speech on
22 February 2023.
The tax rates for small business corporations with years of assessment ending on any date
between 1 April 2023 and 31 March 2024 will be as follows:
Taxable income Rate of tax

R0 – R95 750 0% of taxable income
R95 751 – R365 000 7% of taxable income above R95 750
R365 001 – R550 000 R18 848 + 21% of taxable income above
R365 000
R550 001 and above R57 698 + 27% of the amount above
R550 000
34 TAX4862/105/2023
Section 1 Definition of connected person, paragraph (d)(iv):
The words “individually or jointly” in the definition of a connected person in

relation to a company were replaced with “alone or together”. Therefore any
person(s), other than a company, who alone or together holds at least 20%
of the shares in a company will qualify as a connected person of the
company.
Section Section 8(4)(a)(iii):

8(4)(a)(iii)
Section 8(4)(a)(iii) was amended to further exclude an amount, previously
taken into account as an amount that is deemed to have been recovered or
recouped in terms of section 19(6A), from the application of section 8(4)(a).
Section 19(6A) deals with a debt benefit that arises during any year of
assessment in respect of a debt owed by a person and the debt was used
to fund the acquisition of an allowance asset that was disposed of in a year
of assessment prior to the year of assessment in which the debt benefit
arises.
Section 19: Recoupments: Concession or compromise regarding a debt
The amendment to section 19(8)(f) makes it clear that section 19 will not
apply to the extent that the debt owed represents interest as defined in
section 24J incurred by that person during any year of assessment. The
words defined in section 24J was added to this subsection.
8.6 ADDITIONAL NOTES ON CAPITAL ALLOWANCES AND RECOUPMENTS
For capital allowances, a distinction should be made between assets which are purchased/acquired (see
note 8.6.1 below) and assets which are rented/hired/leased (see note 8.6.2 below).
8.6.1 The acquisition of assets
The taxation rules relating to assets acquired by the taxpayer can be divided into three areas: the first area
deals with the cost incurred that can be included in the cost of acquiring the asset, the second area deals
with the rate of the allowances that can be claimed while the person is using the assets and the last area
deals with the sale or disposal of the asset. The following table summarises the main sections of the
Income Tax Act that deal with each of the above areas:
Topic Section
Acquisition of the asset • S 1: Definition of a connected person and depreciable asset
(cost price) • S 23C: Reducing the cost or market value of certain assets with input
tax claimed
• Ss 11(e), 12B, 12C, 12E: Cost determinations
• VAT Act
• Ss 24I and 25D: Foreign currency transactions (See LU 10)
Use of the asset • S 11(e): Wear-and-tear allowance (read with Binding General Ruling
(allowances) No. 7/Interpretation Note No. 47)
• S 12C: Special wear-and-tear allowance
35 TAX4862/105/2023
Topic Section
• S 12E: Deductions in respect of a small business corporation
• S 13: Deduction in respect of buildings used in a manufacturing
process
• S 13sex: Deduction in respect of certain residential units
• S 13sept: Sale of low-cost residential units on loan account
• S 13quin: Deduction in respect of commercial buildings
• Ss 24I and 25D: Foreign currency transactions (See LU 10)
Sale of the asset • S 8(4)(a): General recoupment provision
(recoupment) • S 8(4)(e), (eA), (eB), (eC), (eD) & (eE): Deferred recoupments
• S 13(3)
• S 19: Concession or compromise in respect of debt
• S 11(o): Alienation, loss or destruction allowance (previously
scrapping allowance)
• S 20B: Limitation of losses from disposal of certain assets
• Eighth Schedule: CGT
 Example
Capital allowances
We can use the following simplified example to explain capital allowances in the Income Tax Act:
A taxpayer, which is a manufacturer and a registered vendor (but not a small business corporation),
acquires a second-hand manufacturing asset from a non-vendor for R1 000. The company used the asset
for 3 months in year 1 and 6 months in year 2. Binding General Ruling No. 7 (Interpretation Note No. 47)
allows taxpayers to claim wear-and-tear over a 5-year period on these assets. The taxpayer received
R1 500 cash when it sold the asset in year 2. Your friend gave the following answer in a test:
Year 1: Wear-and-tear allowance (R1 000/5 years x 3/12) R 50

Year 2: Wear-and-tear allowance (R1 000/5 years x 6/12) R100
Recoupment (R1 500 – (R1 000 – R50 – R100)) R650
He failed the test, getting 0/10 for the answer above. Can you identify the mistakes he made?
• As this is a second-hand asset, a deemed input tax can be claimed. Therefore, the cost of the asset
should be R1 000 x 100/115 = R870 (section 23C).
• The taxpayer is a manufacturer, but not a small business corporation. Therefore, the manufacturing
asset acquired qualifies for section 12C and not section 11(e) read with Binding General Ruling No. 7
(Interpretation Note No. 47). As this is a second-hand asset, the asset qualifies for a 20% write-off
per annum for 5 years.
• The section 12C wear-and-tear allowance of 20% per annum is not apportioned. Therefore, in year 1
and year 2 the taxpayer will qualify for an allowance of R174 (R870 x 20% = R174).
• As the taxpayer is a registered vendor and the asset is sold, the sale is subject to VAT. The amount
received therefore includes VAT of R1 500 x 15/115 = R196, and the exclusive selling price is
therefore R1 304.
• The recoupment will be the selling price (excluding VAT; R1 304) less the tax value of R522 (R870
– R174 – R174), thus R782; however, remember that the recoupment is limited to allowances pre-
viously claimed, namely R348 (R174 + R174).
• As it is a capital asset being sold, the CGT provisions must be applied.
36 TAX4862/105/2023
 Remember, terminology is important when answering taxation questions. For example, you
must use “base cost” and not “cost” when dealing with CGT.
• The proceeds must be reduced by the amount included for income tax purposes (the recoupment).
Proceeds = Selling price (R1 304) – Recoupment (R348) = R956.
• The base cost will be the cost incurred (R870) less the allowances claimed (R348) = R522.
• The capital gain on the disposal of the asset will be R434 (R956 – R522). Remember that all the
gains and losses for different assets must be added to calculate the taxable capital gain. Depending
on the type of taxpayer, you will apply the annual exclusion (if applicable) and the relevant inclusion
rate to determine the taxable capital gain.
 Remember, whenever a capital asset is sold, even for less than the original cost, a capital gain
must be calculated. Although the capital gain will be Rnil, the Income Tax Act still requires a
calculation to be done; marks are awarded for the calculation.
8.6.2 Lease of assets (rented/hired/leased)
The deductions that the taxpayer (lessee) can qualify for when entering into a lease will depend on the
nature of the amount being paid, for example
• monthly rental (section 11(a))

• lease premium (section 11(f))
• leasehold improvements (section 11(g))
The amount of the leasehold improvements is included in the gross income (paragraph (h) of the gross
income definition) of the lessor, subject to certain allowances. Always read the information carefully to
determine if you are dealing with the lessee or lessor when answering a question.
Summary of the interaction between section 11(g) and section 12N
A taxpayer (lessee) must construct a building for R100 000 on leased land in terms of a contract. The
actual cost amounted to R150 000.
S 11(g) S 12N S 13(1) S 13quin

1 Factory and owner (lessor) of R100 000  R2 500 (5% x
land is tax-paying entity ÷ period R50 000)
2 Factory and owner (lessor) of Rnil  R7 500 (5% x
land is tax-exempt entity (as tax exempt) R150 000)
3 Offices (commercial building) R100 000  Rnil
and owner (lessor) of land is ÷ period (not owner)
tax-paying entity
4 Offices (commercial building) Rnil  R7 500 (5% x
and owner (lessor) of land is (as tax exempt) R150 000)
tax-exempt entity
37 TAX4862/105/2023
8.6.3 Movable assets
It is important to remember that the allowances which may be claimed depend not only on the type of asset
used, but also on the status of the taxpayer (lessor) that owns it. These rules are mutually exclusive.
8.6.4 Sections 11(e) and 12C allowances summary (SILKE 13.3.1 and 13.3.3)
In SILKE paragraph 13.12.1 a summary (including a summary of section 13) is provided. The table below
is more comprehensive.
Capital allowance Wear-and-tear

Section 12C Section 11(e)
Machinery and plant used directly in a Machinery, plant, implements, utensils and articles
manufacturing or similar process or for (that do not qualify for section 12B, section 12C
research and development purposes and also or section 12E(1) (manufacturing assets of a
aircraft and ships including any improvements. small business corporation)); if the
(A question will indicate whether a process is a Commissioner is satisfied that the value of that
manufacturing or a similar process, in terms of the asset has diminished through wear-and-tear.
SAICA syllabus.)
Where machinery, mounted onto a foundation, Applicable to movable assets only: no allowance
qualifies for the section 12C deduction, so too will for buildings or other permanent structures (except
the foundation (proviso to section 12C(1)). foundations and supporting structures if they are
designed for the asset and have a similar useful
life).
Available to the owner of that asset or the Available to the owner of that asset or the pur-
purchaser (under a suspensive sale agree- chaser (under a suspensive sale agreement) of
ment) of the asset. the asset.
Machinery and plant, leased out by the taxpayer A lessor can claim wear-and-tear on assets leased
in terms of a financial (or operating) lease and in terms of a financial lease. Note, however, the
used by the lessee directly in a manufacturing or possible limitation in terms of sections 23A or 23D.
similar process, also qualify. It is then the lessor
that is entitled to the allowance. Note, however,
the possible limitation in terms of sections 23A or
23D (both sections are excluded from your
syllabus).
New or used
Brought into use for the first time by the taxpayer Used for trade purposes by the taxpayer or lessee.
or lessee for trade purposes.
Calculated on cost, which is the lesser of actual Calculated on value, thus possible to claim wear-
cost or cost under a cash transaction concluded and-tear on an asset that has no cost. However,
at arm’s length. No cost = no allowance. the practice is to use cost if available and
applicable.
Cost includes direct cost (which includes shipping Value is the direct cost of acquisition under a cash
and delivery charges) of foundations, installation transaction concluded at arm’s length and includes
and erection. shipping and delivery charges, cost of foundation
or supporting structures and the direct cost of
installation and erection, plus the cost of moving
these assets from one location to another (if not
written off in terms of section 11(a)); otherwise use
market value.
38 TAX4862/105/2023

Moving costs Moving costs
• Asset not yet written off – deduct over Write off over the remaining write-off period of the
remaining years (including current year) in asset.
equal instalments.
Asset fully written off – deduct in full.
Accelerated allowances (for new or unused plant Period of write-off per Binding General Ruling
and machinery only – thus not second-hand): No. 7 (Interpretation Note No. 47). Written
application for other periods.
• 40/20/20/20% p.a. Not available to banking,
financial services, insurance or rental busines- (You will be provided with the number of years over
ses. which assets may be written off in terms of Binding
General Ruling No. 7/Interpretation Note No. 47.)
• 50/30/20% p.a. for new or unused machinery
and plant used for research and development Small items: If the value of the item (not forming
(excluded from syllabus this year). part of a set) is < R7 000, it can be written off to R1
in the year of acquisition. Note, however, that this
In all other instances (thus used (i.e. second- small item write-off does not apply to assets
hand) plant and machinery) – 20% p.a. acquired by a lessor for letting purposes.
Assets written off in full must be shown at R1.
Straight-line basis. Written off over useful life = straight-line.
Start deducting in year in which asset is brought into use.

No apportionment for part of the year (thus Apportion where used for part of the year.
allowance is allowed in full).
39 TAX4862/105/2023
Comparison of the movable asset allowances in sections 11(e), 12C and 12E
Section 11(e) (SILKE 13.3.1) Section 12C (SILKE 13.3.3) Section 12E (SILKE 13.3.4)
Not applicable to Applicable to Applicable to
- manufacturing assets of small - manufacturers (excluding - SBC
business corporations (SBC) SBC), ships, aircraft
(s 12E(1))
- assets that qualify for s 12B
- assets that qualify for s 12C
All movable assets, except Machinery or plant used in a All assets of SBC
where s 12B (SILKE 13.3.2), process of manufacture
s 12C or s 12E(1) applies (or similar process) except for
SBC
Mostly movable non-manu- Only the manufacturing assets of Manufacturing assets – new or
facturing assets, including non- manufacturing enterprises (not used and brought into use for the
manufacturing assets of assets like the office equipment, first time by the taxpayer
manufacturing enterprises vehicles etc.) - new or used and and
brought into use for the first time non-manufacturing (s 12E(1A))
by the taxpayer.
Apportion (pro rata) No apportionment (not pro rata)
Loose assets < R7 000 written
off to R1 (except for assets
leased by lessor, see summary
under 8.6.4 above)
Write-off periods – Binding New/unused – 40/20/20/20% Manufacturing assets - 100%
General Ruling No. Used – 20/20/20/20/20% Non-manufacturing assets -
7/Interpretation Note No. 47 50/30/20%
Loose assets/tools <R7 000 may Section 11(e) may be elected on

be written off to R1 non-manufacturing assets (loose
assets/tools <R7 000 may be
written off to R1, except if used
for letting purposes)
The following diagram may assist you in deciding which allowances may be claimed:
40 TAX4862/105/2023
8.6.5 Section 12E – deduction in respect of the assets of a small business corporation (SILKE
par 13.3.4)
In the case of non-manufacturing assets acquired by an SBC, the personal liability company, entity or
corporation may elect to write off the asset in terms of
• section 11(e), or
• section 12E(1A) – 50% of the cost of the asset in the year during which the asset was brought
into use for the first time, 30% of the cost in the second year and 20% of the cost in the third year
(50/30/20).
Note that, for example, in the case of assets with a cost of less than R7 000, it will be to the benefit of the
taxpayer to elect section 11(e), as opposed to section 12E(1A), as amounts less than R7 000 can be
written off to R1 (in terms of Binding General Ruling No. 7/Interpretation Note No. 47) in the first year
during which the asset is brought into use (provided the asset is not used for letting purposes). However,
this option is not available for manufacturing assets which must be written off in terms of
section 12E(1) or when not dealing with an SBC; section 12C must then be used.
8.6.6 Immovable assets
A concise summary of the allowances on immovable property is included below:
IMMOVABLE PROPERTY ALLOWANCES

Section 13 Section 13quin Section 13sex
Manufacturing buildings Commercial buildings Residential units
(factories) (offices and shops) (Must own at least 5 units)
Erected by the taxpayer
OR
New and unused New and unused
purchased from a person entitled to
(Erected by the taxpayer (Erected by the taxpayer
the allowance (second hand)
OR OR
OR
purchased as a new building) purchased as a new building)
purchased as a new building
Owned
OR
Owned Owned
on excess leasehold improvements
OR OR
OR
on section 12N leasehold on section 12N leasehold
on section 12N leasehold
improvements (1 Jan 2013) improvements (1 Jan 2013)
improvements (1 Jan 2013)
Used wholly or mainly in the production of income and for purposes of trade
From 1 October 1999 (Manufacturing) From 1 April 2007 From 21 October 2008
5% on residential units
5% 5% 10% on low-cost residential
units
Calculate on COST less any deferred

recoupment and portion deductible as Calculate on COST
leasehold improvements
41 TAX4862/105/2023
IMMOVABLE PROPERTY ALLOWANCES

Section 13 Section 13quin Section 13sex
Cost = lesser of actual cost incurred or market value if
Cost = cost to the taxpayer
purchased
Cost = 100% of the cost of erection or cost Cost = 100% of the cost of erection or acquisition OR 55%
of acquisition or cost of acquisition of of cost if part is acquired OR 30% of cost of acquisition of
improvement improvement
8.6.7 Intellectual property (section 11(gB) and 11(gC) and SILKE 13.8.1)
 Section 11D is excluded from the syllabus.
When studying the legislation regarding intellectual property, note the following:
• Section 11(gB) allows for the deduction of the registration or renewal of registration expenses on
intellectual property, including trade marks.
• Section 11(gC) allows for the deduction of the acquisition costs of intellectual property, excluding
trade marks. Only study the part relating to expenditure incurred on or after 1 January 2014.
8.6.8 Recoupment: acquisition of hired assets (section 8(5) and SILKE 13.10.6)
The diagram below may assist you in understanding the provisions of section 8(5) relating to leased assets.
42 TAX4862/105/2023
 Work through example 13.36 in SILKE 13.10.6.
8.6.9 Unquantified amounts (section 24M, par 39A of the 8th Schedule and SILKE 6.3.2.1,
13.10.1 and 17.9.4)
Section 24M (incurral and accrual of amounts in respect of assets acquired or disposed of for unquantified
amounts) applies to three types of assets:
• disposal of non-depreciable capital assets

• disposal of depreciable capital assets
• disposal of trading stock
The first two will be discussed here and disposal of trading stock will be discussed in LU10.
43 TAX4862/105/2023
Disposal of non-depreciable capital assets
The seller determines capital gains/losses during the initial year of disposal under normal CGT rules,
except that the proceeds for the initial year are taken into account only to the extent that those amounts
can be fully quantified. This calculation triggers an initial capital gain or loss. However, in terms of
paragraph 39A(1) of the Eighth Schedule, initial capital losses are disregarded (i.e. suspended) during that
year. The seller must then account for further consideration in later years as that consideration becomes
quantified (fully due and payable). This further consideration generates capital gains during each year of
assessment without any base cost offset (paragraph 3(b)(i) of the Eighth Schedule). However, the seller
reduces this gain to the extent of any remaining disregarded losses stemming from the initial year of
disposal (paragraph 39A(2) of the Eighth Schedule). If any disregarded losses still exist once no further
proceeds will accrue, these remaining capital losses can be fully accounted for at that time
(paragraph 39A(3) of the Eighth Schedule).
If a person acquires assets for consideration that wholly or partly include unquantified amounts, the
expenditure incurred (base cost) is accumulated over time. However, future quantified amounts will be
viewed as immediately incurred. More specifically, the person who acquires the asset is initially viewed as
having incurred expenditure to the extent of the quantified consideration provided on disposal. Further
expenditure is added to the disposed asset as further amounts become quantified. If the person who
acquires the asset sells an asset before all amounts are quantified, the gain on the disposal is calculated
without reference to the unquantified amounts. However, further quantified amounts incurred with regard
to the disposed asset will generate capital losses as those are incurred (paragraph 4(b)(ii)) of the Eighth
Schedule).
Refer to the following examples adapted from the Explanatory Memorandum on the Revenue Laws
Amendment Bill, 2004, which have been included to assist you in understanding the application and
implications of section 24M, as well as the interaction of section 24M with the rest of the Income Tax Act.
Illustrative example
 Gain on unquantified amounts
Individual A acquired retail property in December 2014 for R250 000. In March 2018, individual A sells all
the retail property to individual B. In terms of the contract, individual B must pay 10% of the profits
generated by the retail property to individual A for 5 years subsequent. Assume the amounts received are
eventually R300 000, R200 000, R150 000, R110 000 and R240 000, starting the end of February 2019.
Result: The special rules of section 24M apply because unquantified payments are involved. Under the
open transaction method, the initial 2019 year will trigger a small R50 000 gain for individual A. Subsequent
years will trigger additional capital gains. The net cumulative capital gain will amount to R750 000
(R1 million proceeds less the R250 000 base cost). Individual B’s base cost in the retail property acquired
is accumulated over the 5 years as and when individual B pays individual A. Therefore, individual B will
have a R300 000 base cost in the first year, R500 000 in the second year, etc.
Result for individual A (seller)

2019 2020 2021 2022 2023
R R R R R
Current receipts 300 000 200 000 150 000 110 000 240 000
Base cost: (250 000)
Gain/(loss) 50 000 200 000 150 000 110 000 240 000
Suspended loss
Capital gain 50 000 200 000 150 000 110 000 240 000
44 TAX4862/105/2023
 Illustrative example
Overall gain on unquantified amounts after suspended loss
Individual A acquired retail property in December 2014 for R500 000. In March 2018, individual A sells all
the retail property to individual B. In terms of the contract, individual B must pay 10% of the profits
generated by the retail property to individual A for 5 years subsequent. Assume the amounts received are
eventually R300 000, R200 000, R150 000, R110 000 and R240 000, starting the end of February 2019.
Result: The special rules of section 24M apply because unquantified payments are involved. Under the
open transaction method, the initial 2019 year will trigger a R200 000 suspended loss for individual A.
Subsequent years will trigger capital gains that will first be used against the suspended loss. The net
cumulative capital gain will amount to R500 000 (aggregated R1 million proceeds less the R500 000 base
cost). Individual B’s base cost in the retail property acquired is accumulated over the 5 years as and when
individual B pays individual A. Therefore, individual B will have a R300 000 base cost in the first year,
R500 000 in the second year, etc.
Result for individual A (seller)
2019 2020 2021 2022 2023

R R R R R
Base cost: (500 000)
Gain/(loss) 200 000 150 000 110 000 240 000
Suspended loss (200 000) (200 000)
Capital gain 0 0 150 000 110 000 240 000
Disposals of depreciable capital assets
Note that, if an asset which falls within the ambit of section 24M is sold and a recoupment should be
calculated by the seller in terms of section 8(4) or a loss in terms of section 11(o) of the Income Tax Act,
this recoupment or loss should be calculated with reference to the amounts already received by or accrued
to the taxpayer in terms of section 24M (therefore only amounts quantified at that stage). Section 20B, in
conjunction with section 24M, provide for the suspension of a loss made in terms of section 11(o) on a
section 24M transaction (where unquantified amounts are involved – section 20B(1)). The suspended
section 11(o) loss will be offset against future payments (section 20B(2)) and will only be realised once all
payments are received. A recoupment in terms of section 8(4) will, however, be accounted for as soon as
it is realised.
The buyer will accumulate the base cost (or cost price) over time as and when amounts are quantified.
This poses a problem for the calculation of wear-and-tear. Wear-and-tear should be calculated taking into
account only quantified amounts and if an amount is received in a subsequent year after the asset was
already brought into use, wear-and-tear should be calculated on that amount retrospectively, taking into
account all the years for which the asset had been in use.
Work through the example, adapted from the Explanatory Memorandum on the Revenue Laws Amend-
ment Bill, 2004, below.
45 TAX4862/105/2023
Company A (with a 31 March year-end) acquired a manufacturing machine in June 2018 at a cost of
R500 000 and immediately brought it into use. After depreciating the machine by R200 000 (s 12C at
40%), company A sells the machine to company B (also with a March year-end) on 31 March 2019. Under
the terms of the contract, company B must pay 10% of the value of the products produced by the machine
for 5 subsequent years. Assume the amounts eventually received are R190 000, R40 000, R250 000,
R280 000 and R240 000, starting on 31 March 2019.
Suggested solution
The special rules of section 24M apply because unquantified payments are involved.
Seller – Company A
N1 Net tax effect of transaction

Selling price = R1 000 000 (R190 000 + R40 000 + R250 000 + R280 000 + R240 000)
Cost price = R500 000
Tax value = R300 000 (R500 000 – R200 000)
N2 Total s8(4)(a) recoupment for the transaction

= R500 000 (R1 000 000 limited to cost) – R300 000 (tax value (N1))
= R200 000
N3 Total capital gain (Eighth Schedule)

Proceeds of R800 000 (R1 000 000 – R200 000 (s 8(4)(a)))
Less: Base cost of R300 000 (R500 000 – R200 000 (s 12C allowance))
= R500 000
N4 S 20B, in conjunction with s 24M, provides for the suspension of a loss made in terms of s 11(o)
on a s 24M transaction (s 20B(1)). The suspended loss will be offset against future payments (s
20B(2)) and will only be realised once all payments are received.
N5 R480 000 (R190 000 + R40 000 + R250 000) – R300 000 (tax value (N1)) = R180 000
N6 R760 000 (R480 000 + R280 000) limited to cost price = R500 000 – R300 000 = R200 000, but
R180 000 accounted for in 2021, therefore R20 000 recoupment (or R500 000 – R480 000).
Capital gain: R760 000 – R500 000 = R260 000 (or proceeds R560 000 (R760 000 – R200 000
(recoupment)) – base cost R300 000 (R500 000 – R200 000 (wear-and-tear)) = R260 000).
N7 Total s12C allowance claimed over the 5 years equals the total cost of R1 000 000.
46 TAX4862/105/2023
Seller – Company A
Tax treatment in terms of section 24M

2019 2020 2021 2022 2023
R R R R R
Less: Tax value
(500’ – 200’) N1 (300 000) - - - -
Gain/loss (110 000) 40 000 250 000 280 000 240 000
Suspended
s 11(o) loss N4 (110 000) (70 000) 0 0 0
(110’ – 40’) (70’ – 70’)
Recoupment N2 N5 180 000 N6 20 000 0
(s 8(4)(a)) (250’ – 70’)
Capital gain N3 N6 260 000 240 000
Buyer – Company B
2019 2020 2021 2022 2023
R R R R R
Current 190 000 40 000 250 000 280 000 240 000
payments
Base cost: 190 000 230 000 480 000 760 000 1 000 000
(s 12C) N7 38 000 54 000 196 000 320 000 392 000
R190 000 38 000 38 000 38 000 38 000 38 000
(20%) (20%) (20%) (20%) (20%)
R40 000 16 000 8 000 8 000 8 000
(40%) (20%) (20%) (20%)
R250 000 150 000 50 000 50 000
(60%) (20%) (20%)
R280 000 224 000 56 000
(80%) (20%)
R240 000 240 000
(100%)
S 12C 20% 20% 20% 20% 20%
allowance
(second-
hand)
Read through the Beancounter scenario again, and/or watch the cartoon under the Lessons
 on myUnisa, and make a rough summary of what your solution would be now that you have
47 TAX4862/105/2023
This learning unit introduced you to the content in the Income Tax Act that is relevant to capital allowances
and recoupments together with the relevant law amendments. The table of reference under 8.4.2 was
provided to guide you through the work. Ensure that you have worked through (flagged and highlighted)
the sections referred in this table of reference under 8.4.2) in your Income Tax Act as well as in your
prescribed textbook, SILKE. We have provided a number of comprehensive summaries to assist and guide
you in deciding which capital allowances may be claimed. Remember to take a look at the additional
resources available for this learning unit on myUnisa and YouTube.
• SAICA. 2023. SAICA Student Handbook 2022/2023. Volume 3. Durban: LexisNexis.

Printer
Printer
• Stiglingh, et al. 2023. ‘Chapter 6: General deductions’, SILKE: South African Income Tax 2023. Durban:
LexisNexis.
• Stiglingh, et al. 2023. ‘Chapter 13: Capital allowances and recoupments’, SILKE: South African Income
Tax 2023. Durban, LexisNexis.
• Stiglingh, et al. 2023. ‘Chapter 17: Capital gains tax (CGT)’, SILKE: South African Income Tax 2023.
Durban, LexisNexis.

48 TAX4862/105/2023
DAYS 5 & 6 - WORK PLAN FOR 9 AND 10 APRIL 2023

LEARNING UNIT 9 – TRADING STOCK

A total of 2 hours of your study time for day 4 has been allocated to LU 9. The other 5 hours
for today and 2 hours of tomorrow will be spent on LU 10.
Topic Minutes
Trading stock (LU 9) 120
Interest-bearing instruments, foreign exchange differences and transfer
420
pricing and tax morality, strategy and risk management (LU 10)
Total hours (9 hours) 540
9.1 BACKGROUND
Learning unit 9 covers trading stock (sections 22 and 23F), which has an impact on almost all the elements
of the tax framework. Section 9C is also dealt with in learning unit 9.
TAX FRAMEWORK
GROSS INCOME (s 1)
= INCOME
= TAXABLE INCOME

49 TAX4862/105/2023
UNGC principle 10 states that businesses should work against corruption in all its forms, including
extortion and bribery. The definition of corruption includes dishonest or fraudulent conduct. Tax evasion
would fall within the ambit of corruption. There are various tax avoidance and tax evasion schemes that
relate to trading stock, for example trading stock that is acquired during the year but then remains
undelivered at the end of the year. Taxpayers then exclude the undelivered trading stock from closing
stock, resulting in taxpayers only deducting acquisition costs of trading stock under section 11(a) without
including the ‘balancing amount’ in gross income as closing stock. Tax legislation also includes various
anti-avoidance provisions to work against corruption, a good example being the anti-avoidance provisions
relating to trading stock contained in section 23F (see 9.6.3 below).

• Calculate the value of trading stock relating to
– normal trade activities
– trading stock acquired for no consideration
– trading stock distributed as a dividend in specie
– trading stock donated or applied for own use
• Identify and calculate amounts to be taken into account in respect of
opening stock, closing stock and the cost price of the stock.
• Explain the anti-avoidance provisions relating to trading stock.
• Identify and calculate amounts of trading stock to be deducted in respect
of share dealers.
• Identify and apply the rules of section 9C relating to the disposal of shares.
 Before you start studying the detailed provisions of trading stock, read the following scenario
relating to the Beancounter family, and/or watch the cartoon posted under Lessons on
myUnisa. As you study the applicable sections in the Income Tax Act, identify areas of
concern that should be brought to the attention of the Beancounter family. Refer back to
TL102/2023, TL103/2023 and TL104/2023 for background information on the Beancounter
Family.
Remember that Bizzie is trading as a sole trader. She does the books for her business herself on a
program called Chinese Books.
Bizzie began selling organic laundry detergent, in January 2023, which she purchases wholesale from
Naturally Clean (Pty) Ltd, a VAT vendor (all amounts exclude VAT).
50 TAX4862/105/2023
She has approached you to help her calculate and explain the effect on her taxable income of the following
transactions:
a) Trading stock (organic laundry detergent) with a cost of R500 was removed by Bizzie for private use.
The market value of the trading stock on the date it was removed and used was R900.
b) Trading stock (organic laundry detergent) with a cost of R400 was used by Bizzie in the dry-cleaning
business (trade purposes). The market value of the trading stock on the date it was used was R750.
c) Trading stock (organic laundry detergent) with a cost of R1 000 was donated to a qualified public
benefit organisation (PBO) and a valid s 18A receipt was obtained. The market value of the trading
stock on the date it was donated was R1 500.
SILKE example 14.5 adapted
references to all the relevant sections of the Income Tax Act which you must study in this learning unit.
http://www.sars.gov.za/legal-counsel/legal-advisory/interpretation-notes/
Reference Reference
to the Reference to notes in
Topics Examinable
Income to SILKE TL
Tax Act
DAY 5 (2 hours)
Trading stock (120 minutes)
s1 Trading stock and deemed trading stock 14.1 & 4.13 9.6.1 Yes
Definitions
- Trading stock
- Gross income par (jA)
s 22 Amounts to be taken into account in 14.2 9.6.1 Yes

respect of values of trading stock 14.3 9.6.2
- Closing stock 14.4
51 TAX4862/105/2023
Reference Reference
to the Reference to notes in
Topics Examinable
Income to SILKE TL
Tax Act
- Opening stock 14.5
- Cost price of trading stock 14.6
- Trading stock for no consideration
- Trading stock distributed as a dividend
in specie
Excluding s 22(1)(b), (1A), (2A), No

(3)(a)(iii)(aa) & (bb), (3A), (4A), (4B), 22(8)
proviso (c) and 22(9)
Interpretation Note No. 65 (issue 3): Trading stock – Inclusion in income when
applied, distributed or disposed of otherwise than in the ordinary course of trade
Case law TL102 Yes
- Ernst Bester Trust v CSARS Chapter 4
- Eveready (Pty) Ltd v CSARS
(teaching aid case)
- CSARS v Volkswagen South Africa
(Pty) Ltd
s 23F Acquisition or disposal of trading stock 14.7 9.6.3 Yes

Anti-avoidance provisions
Excluding s 23F(2) – (3) No

s 22(1A) Deemed reduction of the cost of closing No
stock by sales tax amount
s 22(2A) & Contractor’s work-in-progress 14.8 No

22(3A)
s 22(4A), Securities lending arrangements 14.9 No
(4B) & (9)
s 9C (1), Deemed capital receipts from disposal 3.6.20 & 9.6.4 Yes
(2), (5), of shares 14.10
(6), (7) &
(8) Excluding No
s 9C(2A), (3), (4) & (4A)
s 22A Schemes of arrangement involving trading No
stock
s 22 and Share dealers 14.11 9.6.5 Yes

40C Share dealers will be dealt with in TL107;
only trading stock related issues are dealt
with here
s 22B Dividends treated as income on disposal of 14.11 No

certain shares
9.4.3 Parts of paragraphs in SILKE which you may ignore
Paragraphs in SILKE that you may ignore because they deal with sections that are excluded from the
syllabus are as indicated in the above table.
52 TAX4862/105/2023
9.5 LAW AMENDMENTS
There are no new law amendments promulgated in the Taxation Laws Amendment Act 20 of 2022 that
are applicable to trading stock.
9.6 ADDITIONAL NOTES ON TRADING STOCK
9.6.1 Change of intention
Capital asset  trading stock
If the intended use of an asset is changed from a capital asset to trading stock, the taxpayer is deemed
to have disposed of the asset at market value for the purpose of calculating the recoupment in terms of
section 8(4)(k). That person is deemed to have disposed of the asset at its market value at that stage for
CGT (par 12(1) and 12(2)(c) of the Eighth Schedule). At the same time the taxpayer is deemed to have
reacquired the asset as part of trading stock at the same market value. This value will then be deductible
as the cost of the trading stock (as part of opening stock - section 22(3)(a)(ii)).
 Change of intention from a capital asset to trading stock
If a taxpayer has a capital asset with a cost price of R6 000 and he changes his intention and it becomes
part of his trading stock when the market value of the asset is R10 000, it will be a deemed disposal for
CGT. The taxpayer will realise a capital gain of R4 000 (R10 000 proceeds less R6 000 base cost). He
will be able to claim a deduction for normal tax purposes equal to the market value (deemed to have
acquired the asset at current market value) of the trading stock, i.e. R10 000 (as part of opening stock).
Refer to the Natal Estates case in TL102.
Trading stock  capital assets
If the intended use of an asset changes from trading stock to a capital asset, a deemed disposal of the
trading stock for a consideration equal to market value takes place (section 22(8)). The amount will be
included in income as a recoupment for normal tax purposes. Since it is now a capital asset, the base
cost of the asset for CGT will be the amount (market value) included in the taxpayer’s income for normal
tax purposes.
53 TAX4862/105/2023
 Change of intention from trading stock to a capital asset
If a taxpayer purchased trading stock for R6 000 and his intention changed to using it as a capital asset
when the market value was R10 000, the taxpayer will have opening stock of R6 000 as a deduction and
income of R10 000. The taxpayer will be taxed on R4 000. His base cost for the capital asset will be
R10 000 (value included in income – market value). If the taxpayer in the future decides to sell the asset
for R18 000, he will realise a capital gain of R8 000 (proceeds of R18 000 less base cost of R10 000).
Note that if an asset manufactured by a taxpayer is subsequently used as a capital asset by the taxpayer,
it will continue to be regarded as trading stock and there will be no change in use; thus no recoupment
under section 22(8) will arise. (Review par (jA) of the gross income definition (SILKE 4.13), as well as the
definition of trading stock.) Par (jA) includes in gross income any amount received by or accrued to a
person in respect of the disposal of any asset manufactured, produced, constructed or assembled by
the person, which is similar to any trading stock manufactured, produced, constructed or assembled by
that person. For example, par (jA) will be applicable to a car manufacturer that sells cars, but uses some
of the cars for its employees as company cars. The receipt or accrual must be included in gross income
when the cars are sold, but will remain trading stock until sold (therefore section 22 will apply and the cars
will not be treated as capital assets when transferred from stock to company cars; no recoupment will be
accounted for). Proviso (d) to section 22(8) ensures that because this trading stock will already be
included in income under par (jA) of the gross income definition, it is not also included as a recoupment
in terms of section 22(8).
9.6.2 Trading stock applied for purposes other than trade (section 22(8) and SILKE par 14.6)
Section 22(8) seems to be a problem area for some students and we will therefore deal with it here. The
application of the section can be illustrated as follows:
Trading stock? Section 22(8) is

not applicable
N
YES
Utilised as follows:
Private or Donation Distributed Disposal for less Used for Trading

domestic as dividend than market value purpose stock now
consumption in specie not in the ordinary other than held as
(note 1) course of trade disposal in capital
ordinary asset
course of
Are the business
provisions (not private
of section or domestic
18A con-
applicable? sumption)
Recoup market value (if sold for less than

Yes No market value, only the difference between
selling price and market value will be
recouped).
Recoup amount included in value of

stock (cost or written-down value).
Only use market value if used for
private or domestic consumption and
cost cannot be determined.
54 TAX4862/105/2023
 1.
NOTE
In our opinion, private or domestic consumption can only pertain to individuals
and not companies.
2. If the trading stock is used or consumed in the carrying on of the taxpayer’s trade,
the same amount will also be allowed as a deduction as deemed expenditure
incurred, apart from a recoupment under this section. If a second-hand car dealer
utilises a car from trading stock for deliveries, there will be a recoupment of market
value and the market value will then be used to determine the cost of the vehicle to
claim a wear-and-tear allowance.
3. Remember that if a manufactured asset is subsequently used as a capital asset, it
will continue to be trading stock and there will be no recoupment under this section
(see par (jA) of the gross income definition, as well as the definition of trading stock
and also the discussion in note 9.6.1 above).
4. In terms of section 23C, cost for purposes of income tax will exclude VAT if input
tax could be claimed. Therefore, the trading stock will be reflected net of VAT. If
trading stock is dealt with in terms of section 22(8), in most cases, a VAT adjustment
will have to be made by a VAT vendor in terms of section 18(1) of the VAT Act.
9.6.3 Anti-avoidance provisions (section 23F and SILKE par 14.7)
Three anti-avoidance provisions were introduced into legislation to counter schemes by taxpayers to
deduct only the acquisition costs but not include a ‘balancing amount’ in taxable income as closing stock.
S23F(1) limits the deduction for acquired stock (under s 11(a)) in the following circumstances:
- Trading stock which was neither disposed of (no proceeds included in gross income in terms of
sales) by the taxpayer nor held by the taxpayer at the end of the year (no amount is included in
taxable income in terms of closing stock (i.e. goods in transit)
The deduction for trading stock acquired will only be allowed in the first year in which
- trading stock was disposed of, OR

- value of stock is included in income in closing stock (s 22(1)), OR
- trading stock was destroyed, OR
- trading stock cannot be disposed of nor held by the taxpayer at year-end.
The deduction is limited to the extent that payment has been received for stock disposed of (s 23F(1)).
The second and third anti-avoidance provisions (sections 23F(2) and (3)) are excluded from the syllabus.
9.6.4 Deemed capital receipts from the disposal of shares (s 9C)
Section 9C was introduced into the Income Tax Act to provide greater clarity on the capital or revenue
treatment of share transactions. This section applies to the disposal of equity shares (previously
“qualifying shares”) and deems the receipt arising on the disposal to be capital in nature. The equity share
must have been held by the taxpayer for a continuous period of at least three years prior to disposal. An
“equity share” includes a participatory interest in certain collective investment schemes (including a hedge
fund investment scheme) and a hybrid equity instrument as defined in section 8E (section 8E is excluded
from your syllabus).
The taxpayer need not make an election in this regard; provided such equity shares have been held for
at least three years prior to disposal, the proceeds will be capital in nature, even if that person is a share
dealer.
55 TAX4862/105/2023
9.6.5 Share dealers
We will cover share dealers (SILKE 14.11) in TL107 and we will highlight only the trading stock related
issues in this tutorial letter.
It is important to understand that if a taxpayer speculates in shares (i.e. a share dealer), these shares will
be treated as trading stock. Section 22 will therefore be applicable to a share dealer in the same way as
to any other taxpayer holding trading stock.
There are three exceptions to this general rule:
• All financial instruments included in closing stock must be valued at cost, regardless of the nature
of the holder (section 22(1)).
• Special valuation rules have also been introduced to establish the cost price of any shares held
directly by a resident in a controlled foreign company (CFC) (section 22(3)(a)(iii)). THIS DOES NOT
FORM PART OF THE SYLLABUS.
• If capitalisation shares, any options or any other right to acquire shares in any company are acquired
by a share dealer (as part of trading stock) for no value, sections 22(4) and 40C state that these
shares, options or rights will have no value.
 on myUnisa, and make a rough summary of what your solution would be now that you have
This learning unit introduced you to the content in the Income Tax Act that is relevant to trading stock.
The table of reference under 9.4.2 was provided to guide you through the work. We illustrated the
application of section 22(8) under 9.6.2 to help you to better understand the application of the section.
Ensure that you have worked through (flagged and highlighted) the sections referred to in learning unit 9
(refer to 9.4.2) in your Income Tax Act as well as in your prescribed textbook, SILKE. Remember to take
a look at the additional resources available for this learning unit on myUnisa and YouTube.
9.9 REFERENCES FOR LEARNING UNIT 9
• SAICA. 2023. SAICA student handbook 2022/2023 Volume 3. Durban, LexisNexis.

• Stiglingh, et al. 2023. ‘Chapter 3: Gross income’, SILKE: South African Income Tax 2023. Durban,
LexisNexis.
• Stiglingh, et al. 2023. ‘Chapter 4: Specific inclusions in gross income’, SILKE: South African Income
• Stiglingh, et al. 2023. ‘Chapter 14: Trading stock’, SILKE: South African Income Tax 2023. Durban,
LexisNexis.

56 TAX4862/105/2023
DAYS 5 & 6 – WORK PLAN FOR 9 AND 10 APRIL 2023

LEARNING UNIT 10 – INTEREST-BEARING INSTRUMENTS, FOREIGN
EXCHANGE DIFFERENCES, TRANSFER PRICING AND TAX MORALITY,
STRATEGY AND RISK MANAGEMENT

A total of 7 hours of your study time for this week has been allocated to LU 10.
Topic Minutes
Interest-bearing instruments 75
Foreign exchange (except for example 15.7 in SILKE par 15.3.4.1) 75
Example 15.7 in SILKE par 15.3.4.1 30
Comprehensive example 15.16 in SILKE par 15.11 60
International transactions (transfer pricing) 60
Tax morality, strategy and risk management in SILKE chapter 34 120
Total (7 hours) 420
each topic will be greatly influenced by the knowledge you already have from
undergraduate and previous postgraduate studies. You should therefore adapt the time
allocation wherever necessary to suit your level of prior knowledge.
10.1 BACKGROUND
Learning unit 10 covers tax payable in respect of international transactions to be based on the arm’s
length principle (transfer pricing) (section 31), foreign exchange gains and losses (section 24I), interest-
bearing instruments (or interest accrued and incurred) (section 24J) and tax morality, strategy and risk
management.. Interest accrued and incurred and foreign exchange gains and losses impact on both gross
income and deductions in the tax framework.
57 TAX4862/105/2023
TAX FRAMEWORK
GROSS INCOME (s 1)
LESS: Exempt income (ss 10, 10A to 10C)
= INCOME
= TAXABLE INCOME
UNGC principle 10 states that businesses should work against corruption in all its forms, including
extortion and bribery. The definition of corruption includes dishonest or fraudulent conduct. Tax evasion
would fall within the ambit of corruption. UNGC principle 10 encourages entities to find a balance between
the social obligation to pay taxes and tax planning, in order to minimise the ‘cost’ of these taxes for an
entity within the ambit of the law. Situations may arise where entities act with an intent to evade tax (for
example entities with multi-nationals may purposely shift profits into low-tax jurisdictions), so it is important
to take note of UNGC principle 10 when studying this learning unit.
• Identify and explain whether a financial arrangement is an instrument and
calculate the interest in respect of instruments in terms of s 24J.
• Identify and explain whether interest received by a taxpayer should be
included in gross income.
• Identify and explain whether a taxpayer can deduct an amount of interest
incurred.
• Identify whether a debt instrument is a hybrid debt instrument and explain
the implications.
• Apply and explain the general and specific translation rules in respect of
foreign exchange differences.
• Discuss and calculate when an amount should be included or deducted
from taxable income in respect of foreign exchange differences.
• Apply deferral rules in respect of exchange differences, if applicable.
• Apply anti-avoidance rules in respect of exchange differences.
• Identify, explain and calculate the tax treatment of foreign exchange
differences on transactions with connected persons and persons forming
part of the same group of companies.
• Apply the rules of par 43 of the Eighth Schedule in tax calculations.
• Explain the basic principles in respect of transfer pricing.
• Identify and explain whether a transaction is subject to transfer pricing
requirements and apply the transfer pricing rules to make any necessary
adjustments if applicable.
• Understand and discuss the social compact between the government and
the citizens.
• Discuss and apply the moral and legal responsibilities of the taxpayer.
58 TAX4862/105/2023
• Identify and discuss tax risks of the taxpayer and the taxpayer’s strategy
to manage his/her/its tax risks.

LIST OF ABBREVIATIONS USED IN LEARNING UNIT 10
CIF Cost-insurance-freight
FCOC Foreign currency option contract
FEC Forward exchange contract
FOB Free on board
 Before you start studying the detailed provisions of interest-bearing instruments, foreign
exchange differences and transfer pricing, read the following scenario relating to the
Beancounter family, and/or watch the cartoon posted under Lessons on myUnisa. As you
study the applicable sections in the Income Tax Act, identify areas of concern that should be
brought to the attention of the Beancounter family. Refer back to TL102/2023, TL103/2023
and TL104/2023 for background information on the Beancounter Family.
Remember that Bizzie is trading as a sole trader (she will therefore have a February year-end). Bizzie
only started trading on 15 May 2022 due to an unforeseen delay in obtaining an overdraft facility from her
bank. She does the books of her business herself on a program called Chinese Books. She has
approached you to assist her with the tax treatment (especially the conversion of the euro (€) amounts to
Rand) of the following transaction:
Bizzie placed an order for the importation of two dry-cleaning machines (which will be used in a process
of manufacturing) from Europe during January 2023 and hoped that she would receive them before
1 March 2023. One is a second-hand dry-cleaning machine and the other a new machine. The machines
were only shipped FOB on 1 June 2023 and only arrived in the Republic two weeks later. The overseas
creditor was settled in euros (€) one month after the machines arrived in the Republic. No forward cover
was taken out. The machines were brought into use immediately. (Ignore any VAT implications.)
59 TAX4862/105/2023

references to all the relevant sections of the Income Tax Act which you should study in this learning unit.
10.4.2 Table of reference
http://www.sars.gov.za/legal-counsel/legal-advisory/interpretation-notes/
 Note that no case law in respect of learning unit 10 is included in TL102, which means that
you don’t have to study any case law for this learning unit. Remember, case law mentioned
in SILKE which is NOT dealt with in TL102 (highlighted in grey in the textbook) may be
ignored.
Start at the beginning of the Table of reference and work your way down, keeping in mind the study
approach as set out in par 10.4.1 above.
Reference
Reference
to the Reference to
Income SILKE
TL105
Tax Act
DAY 5 (5 hours)
Interest-bearing instruments (Incurral and accrual of interest) (75 minutes)
s 24J(1), Common principles that apply to 10.6 Yes
s 24J(5) & lenders and borrowers 16.1 –
24J(10) Section 24J(1), (2), (3), (5) & (10) 16.2.1.3,
You need to study only the following Yes

definitions in section 24J(1):
• accrual amount
• accrual period
• adjusted initial amount
• deferred interest
• holder
• income instrument
• initial amount
• instrument
• interest (only par (a))
• issue
• issue price
• issuer
• term
• yield to maturity (basic calculation –
not the provisos)
Definitions in section 24J(1) not listed
No
above are excluded.
60 TAX4862/105/2023
Reference
Reference
to the Reference to
Income SILKE
TL105
Tax Act
(Excluding section 24J(3A), (4), (4A),
(5A), (6) to (9A) and (12))
Timing provisions of s 24J: Alternative
16.2.1.4 Read
methods
s 24J(4)
Transfer or disposal of instruments 16.2.1.5 No
&(4A)
Lender perspective: Taxability of interest
s 24J(3) 16.2.2 Yes
received or accrued
Borrower perspective: Deductibility of 16.2.3 to
s 24J(2) Yes
interest incurred 16.2.3.3
Other
s 24O Incurral and accrual in terms of certain 16.2.3.4 Yes
debts deemed to be in production of
income
Excluding section 24O(5) No
Interest incurred on loans to pay 16.2.3.5 Yes
dividends
s 23M Interest paid to persons not subject to tax 16.2.4 to No
16.2.4.1
s 23N Debt used in acquisition and reorgani- 16.2.4.2 No
sation transactions
s 24JA Sharia-compliant financing arrangements 16.2.5 No
Interest-free or low-interest debt 16.2.6 Yes
Equity instruments 16.3 to 16.3.2 Yes
Hybrid instruments 16.4 (ignore Yes
any reference
to ss 8E, 8EA
& 8FA)
s 8E & 8EA Hybrid instruments 16.4.1 to No
16.4.1.2
s 8F Debt instruments with equity 16.4.2 & 10.5 Yes
characteristics 16.4.2.1
(insurance, REIT and third-party backed (ignore any
instruments excluded) reference to
insurance,
REIT, third-
party backed
instruments
and s 8FA)
s 8FA Hybrid interest 16.4.2.2 No
s 24K Derivative instruments and interest rate 16.5 & 16.5.1 No
agreements
s 24L Option contracts 16.5.2 No
s 24JB & Financial institutions and authorised users 16.6 No
11(jA)
Foreign exchange (75 minutes)
Overview 15.1 & 15.2 10.7.1 & Yes
10.7.5
s1 Definitions: 15.2.1 Yes
Average exchange rate
Spot rate
61 TAX4862/105/2023
Reference
Reference
to the Reference to
Income SILKE
TL105
Tax Act
s 25D(1), General translation rules, excluding the 15.2.2 10.7.1 Yes
(2) & (3) last two rows of the table on page 534 of
SILKE and notes 3, 5 and 6.
(S 25D(2A), (4), (5) (6) and (7) are No

excluded)
s 9D Specific translation rule: CFCs (s 9D) 15.2.3 No
s 6quat Specific translation rule: Foreign tax 15.2.4 & 15.8 TL106 & Yes
rebates and deductions (s 6quat) TL107 (but not for
test 2)
(s 6quat (1)(b), (1)(f)(iii), (1A)(b), (1B)(iA), No
(1C) and (1D))
s 24I(1), Specific translation rule: Exchange 15.3 – 15.3.3 10.7.1 & Yes
(2), (3) & differences on exchange items 10.7.2
(6)
(Excluding section 24I(1) the definition of No
“local currency” par (d), (e) and (f)
included in par 15.3.1 in the table on page
528 of SILKE and any reference to
headquarter companies, domestic
treasury management companies and
international shipping companies)
s 24I(7) Determine if the exchange difference 15.3.4 – 10.7.7 Yes
should be deferred (s 24I(7)) 15.3.4.1
(excluding
example 15.7)
and 15.4 -
15.5.2
s 24I(10A) Transactions between companies forming 15.3.4.2 10.7.3 Yes
part of the same group of companies and
between connected persons (s 24I(10A))
Excluding reclassifications in s 24I(10A) No
where it may be assumed that the full loan
is long term; therefore that no portion of
the long-term loan is regarded as short
term (payable within 12 months from year-
end)
s 24I(4) Bad debt 15.6.1 10.7.4 Yes
s 24I(8) Anti-avoidance rule 15.6.2 Yes
s 24I(12) Commencement or cessation of 15.6.3 Yes
application of provisions of s 24I
Eighth Schedule - Capital gains tax

par 43 Specific translation rule: Disposal and 15.1 & 15.7 10.7.5 & Yes
(8th acquisition of assets (par 43 of the 8th 10.7.6
Schedule) Schedule)
(Excluding par 43(7) the definition of “local Bottom table No

currency” par (b), (c) and (d) and on page 560,
headquarter companies, domestic bullet 2, 3 and
treasury management companies and 4.
international shipping companies)
62 TAX4862/105/2023
Reference
Reference
to the Reference to
Income SILKE
TL105
Tax Act
par 43A Dividends treated as proceeds on disposal No
(8th of shares
Schedule)
par 43B Base cost of assets of controlled foreign No
(8th companies
Schedule)
Cryptocurrency 15.9 Yes
Exchange control regulations 15.10 No
DAY 5 (3 hours)
Example 15.7 (30 minutes)
 Do example 15.7 in SILKE. 15.3.4.1 10.7.7 Yes
Comprehensive example (60 minutes)
 Do the comprehensive example 15.16 in SILKE par 15.11.
International transactions (transfer pricing) (60 minutes)

s 31 Taxable income in respect of international 21.8 10.8 Yes
transactions to be based on arm’s length
principle (transfer pricing)
(Arm’s length terms and conditions will be
given along with whether the entities are
“associated enterprises”.)
s 31(1), (2) Basic principles (transfer pricing) 21.8.1.1 10.8 Yes
& (3) &
21.8.1.2
(excluding s 31(1) “affected transaction”
par (a)(iv) and the provisos to s 31(3)) No
s 31(1), Thin capitalisation 21.8.2 Yes
(2), (3) &
(4)(a)
(excluding 31(4)(b)) No
s 31(6) High-taxed CFC exemption (s 31(6)) 21.8.3.1 No
s 31(7) Equity loan exemption (s 31(7)) 21.8.3.2 No
Compliance and reporting requirements 21.8.4 Yes
s 31(5) Headquarter company regime (also including No
(s 31(5))
DAY 6 (2 hours)
Tax morality, strategy and risk management (120 minutes)
Overview 34.1 Yes
Moral and legal responsibilities of taxpayers 34.2 Yes
General tax risk management strategy 34.3 Yes
Specific tax related risks 34.4 Yes
• Operation risk 34.4.1 Yes
• Compliance risk 34.4.2 Yes
• Tax uncertainty or interpretation risk 34.4.3 Yes
• Reputation risk 34.4.4 Yes
63 TAX4862/105/2023
10.4.3 Paragraphs and parts of paragraphs in SILKE which you may ignore
Refer to the table provided above for any paragraphs in SILKE that may be ignored. You may ignore any
parts of the paragraphs in SILKE that were indicated in the table above which refer to international
headquarter companies, international shipping and domestic treasury management companies or CFCs
in this learning unit as they deal with sections which are excluded from the syllabus.
10.5 LAW AMENDMENTS
There are no new law amendments promulgated in the Taxation Laws Amendment Act 20 of 2022 that
are applicable to LU 10. We repeat amendments from previous years which were enacted for your
convenience.
Section 8F Debt instruments with equity characteristics
Section 8F applies to interest paid and received on hybrid debt instruments.

The interest paid on or after the date that the instrument becomes a hybrid
debt instrument is deemed to be a dividend in specie in respect of a share
declared and paid by that person to whom the amount accrues. The section
was amended to make it clear that the amount received by or accrued to the
person in respect of the instrument will also be deemed to be a dividend in
specie and not interest.
Section 31 Transfer pricing
Section 31 deals with international transactions. The effective date of the

2019 amendment to include a definition of an “associated enterprises” was
extended to 1 January 2023.
64 TAX4862/105/2023
10.6 ADDITIONAL NOTES ON THE INCURRAL AND ACCRUAL OF

INTEREST
 Note that the yield to maturity will not be provided in questions. You should be able to do
a basic calculation of the yield to maturity (internal rate of return). See SILKE par 16.2.1.3 in
this regard.
The following is a list of a few important issues, which might help you gain a better understanding of
section 24J:
• Section 24J prescribes not only the timing of the incurral or accrual of interest, but also the
deductibility or taxability of specific amounts incurred or accrued in terms of section 24J
(section 24J(2) and (3)). An amount taxed in terms of section 24J cannot be included in gross
income again in terms of any other section, and amounts that are deductible in terms of section 24J
cannot be deducted again in terms of another section. Therefore, double inclusions or deductions
are prohibited (section 24J(5)).
• The calculation of the amount of interest incurred in a specific year of assessment can be simplified
by using a time scale. This can best be explained by taking the information in example 16.2 in SILKE
and putting it on a time scale.
Accrual period Accrual period Accrual period

1 2 3
01/10/23 30/09/24 30/09/25 30/09/26

Y/E Y/E Y/E Y/E
29/02/24 28/02/25 28/02/26 28/2/27
(R600 000) R1 000 000

PV FV
The use of this method will help you not only to establish your accrual periods over which interest
is incurred in terms of section 24J, but also to determine what portion of the accrual period falls
within the year of assessment that is included in your question. (In the example the interest
calculations were done manually, but you can also calculate the interest for each accrual period
using the “Amort” function on your HP or Sharp calculator, but remember to indicate exactly which
functions you have used on your calculator when answering questions in a test or an examination.)
• On the redemption or transfer of an instrument there can be CGT consequences, especially if the
instrument was held as an investment.
10.7 ADDITIONAL NOTES ON FOREIGN CURRENCY TRANSACTIONS

10.7.1 Foreign currency conversion – sections 25D and 24I
Note that the spot rate is to be used for companies with the conversion of foreign currency to rand. The
following exceptions apply:
• In the case of permanent establishments located outside the RSA and for purposes of
section 6quat, the average rate will still be used.
• The average rate is still available for use at the election of individuals and non-trading trusts (in other
words, natural persons and non-trading trusts have a choice between the average exchange rate
and spot rate). The rates will be provided to you if you are required to use these rates in a question.
This brings (in most cases) the tax treatment in line with the accounting treatment.
65 TAX4862/105/2023
10.7.2 Foreign exchange gains and losses - section 24I

Note that section 24I only deals with the foreign exchange differences on the exchange items (financing
and hedging) and not the underlying asset (or expenditure or sale or service (non-exchange item)). The
underlying non-exchange item (asset) is treated in terms of section 25D (for example, the cost price of
the asset).
Here are the rates to be used for the translation of the different exchange items (if IFRS is applied for
accounting) and a summary of the meaning of the dates used for each exchange item (remember to
calculate exchange differences for every exchange item separately):
Exchange item Transaction date Translation date Realisation date

(refer to note 1)
Debt Rate Spot rate (refer to Spot rate Spot rate (refer to note 2)
note 2)
Date Refer to note 3 End of year of When and to the extent that pay-
assessment ment is received or made; or
when and to the extent that the
debt is settled or disposed of
Unit of Rate Spot rate Spot rate Spot rate
currency
Date The date on which that End of year of The date on which the amount is
amount was acquired assessment disposed of
Forward Rate Forward rate Market-related Spot rate
exchange forward rate for the
contract remaining period
(FEC) Date The date on which the End of year of When payment is received or
contract is entered into assessment made in respect of the contract
Affected Rate Forward rate Forward rate Spot rate
FEC Date The date on which the End of year of When payment is received or
contract is entered into assessment made in respect of the contract
Foreign Rate Nil rate (but premium Market value of Market value of FCOC divided
currency paid on acquisition/ FCOC divided by fo- by foreign currency amount in
option received when sold, reign currency contract
contract deductible or taxable) amount in contract (refer to note 4)
(FCOC) (refer to note 4) If realised by disposal:
Amount received on disposal
divided by foreign currency
amount in contract
Date The date on which the End of year of When payment is received or
contract is entered into assessment made in respect of the right in
or acquired terms of the contract having
been exercised; or when the
contract expires; or when
disposed of
Affected Rate Nil rate (but premium Amount of premium Market value of FCOC (refer to
FCOC paid on acquisition/ received or paid note 4) divided by foreign cur-
received when sold, divided by foreign rency amount in contract
deductible or taxable) currency amount in If realised by disposal:
contract Amount received on disposal
divided by foreign currency
amount in contract
Date The date on which the End of year of When payment is received or
contract is entered into assessment made in respect of the right in
or acquired terms of the contract having
been exercised; or when the
contract expires; or when
disposed of
66 TAX4862/105/2023
 NOTE
1. When establishing the transaction date, free on board (FOB) or cost-insurance-

freight (CIF) means that ownership passes when loading ON the ship, train,
aeroplane, truck, etc.
2. If the amount paid/payable or amount received/receivable was determined by the
application of a rate other than the spot rate on transaction date or realisation date,
the acquisition or disposal rate (depending on the situation) is used (being actual
rand amount paid or received divided by the foreign currency amount). (Refer to the
proviso to the definition of ruling exchange rate for a debt in section 24I(1).)
3. Transaction date will differ based on the type of exchange item used:
• a debt owing by a person  the date on which the debt was incurred
• a debt owing to a person  the date on which the debt accrued to or was
acquired by that person
4. As defined in section 24I(1), market value for an FCOC depends on the accounting
treatment of the contract:
• If the person uses a market-related valuation method for accounting purposes,
the value of all its/his FCOCs is the market-related value as determined for
accounting purposes.
• If any other method is used, market value will be the intrinsic value, which is
the difference between the spot rate on that date (translation or realisation date)
and the option strike rate (the specified exchange rate in the FCOC) multiplied
by the foreign currency amount in the contract.
Note that the contract will have a nil value if the holder would have sustained a
loss had it/he exercised its/his right in terms of the contract on translation date
or date realised owing to an unfavourable intrinsic value (section 24I(1)). The
reason for this is that the holder would never exercise their option if they could
buy the foreign exchange cheaper in the market and could therefore never make
a loss.
10.7.3 Foreign exchange gains and losses relating to transactions between companies
in the same group or between connected persons - section 24I(10A)
Section 24I(10A) defers currency gains and losses in respect of unhedged debts between companies that
form part of the same group of companies and between connected persons. Exchange differences are
calculated by multiplying the exchange item (debt or loan) by the difference between the ruling exchange
rate on the last day of the year of assessment preceding the year of assessment in which the exchange
item is realised (or until the provisions of this deferral section no longer apply) and the ruling rate on
transaction date. The recognition of exchange differences is deferred until realisation or until the
provisions of this deferral section no longer apply.
In terms of section 24I(10A)(a) only foreign currency gains and losses which are realised or to which the
stipulations of the section no longer apply must be recognised.
67 TAX4862/105/2023
The section applies if, at the end of the year of assessment,
• the parties to the transaction form part of the same group of companies or are connected persons
(section 24I(10A)(a)(i)(aa)); and
• no FEC or FCOC has been entered into to serve as a hedge in respect of the debt
(section 24I(10A)(a)(i)(bb)); and
• the exchange item (or any portion thereof) should not represent a current asset or current
liability for IFRS reporting purposes (section 24I(10A)(a)(ii)(aa)); and
• the exchange item is not directly or indirectly funded by any debt owed to any person that does
not form part of the same group of companies nor a connected person in relation to that person
or the other party to the contractual provisions of that exchange item.
 It was probably not the intention to include the words “or any portion thereof”, as this would
then only refer to long-term debts with no repayment terms as the following year’s repayment
amount will always in terms of IFRS become a current asset or current liability.
This issue with the short-term portion of this debt is excluded from the SAICA syllabus. You
should therefore, in the case of a long-term liability, ignore the fact that a portion of the long-
term loan will be reclassified as a current liability.
Refer in this instance also to the “Please Note arrows” in SILKE on page 549.
10.7.4 Bad debt - section 24I(4)
If a debt relating to an exchange item owing to a person is irrecoverable on realisation date, by reason of
becoming bad, or results in a loss (determined in the foreign currency on the realisation date) due to a
decline in the market value of the debt, the amount of any foreign exchange gain relating to that debt
which is or was included in the income of that person in the current or any previous year of assessment
should be deducted from the income of that person when calculating taxable income.
The opposite is also true. The amount of any foreign exchange loss, relating to that debt, which is or was
deducted from the person’s income in the current or any previous year of assessment should be included
in the income of that person when calculating that person’s taxable income.
The application of section 24I(4) is explained in example 15.13a - 15.13c in SILKE.
10.7.5 Notes on the capital gains tax implications of foreign exchange transactions
(SILKE 15.1)
The aim of our discussion on section 24I in conjunction with the Eighth Schedule is to indicate the interaction
between section 24I (foreign exchange), section 25D (determination of taxable income in foreign currency)
and the CGT implications (Eighth Schedule). The interaction can best be explained by considering the
scenario of an import with a loan raised in foreign currency. Let’s assume a company taxpayer to which
section 24I(10A) (connected persons) does not apply.
68 TAX4862/105/2023
Every foreign currency transaction has two legs, namely the underlying asset (non-monetary item) and the
exchange (monetary) item. Each of these will have to be investigated:
Underlying asset purchased in foreign currency
Trading stock Fixed asset
S 25D (recorded at spot rate - S 25D (recorded at spot rate –

refer to note 2). refer to note 2). Claim wear-and-
Trading stock is dealt with in tear (if applicable).
terms of s 22. Selling price When subsequently disposed of,
included in gross income. par 43 of the Eighth Schedule
will apply.
Foreign currency
liability
(exchange item)
Section 24I
applicable?
YES NO
Apply general rule in s 24I to

exchange item to calculate Note 1
the exchange differences
69 TAX4862/105/2023
 Notes to the illustration
1. Section 24I will not be applicable if, for example, it is an individual who does not hold the
exchange item as part of his trading stock or a trust not carrying on a trade (section 24I(2)).
2. In some instances the average rate of exchange can be used (refer to section 25D(2), (3)
and 4), for example an individual or non-trading trust. (Remember, the average rate will
be provided to you in a question.)
3. If we assume the same scenario, except that a service was imported, the service would
have been recorded at the spot rate (section 25D) and claimed in terms of section 11(a).
4. An exchange gain or loss can only be included in or deducted from the taxable income
once an asset has been brought into use. This does not apply to trading stock. The
effect of this is that if an asset, being financed by a debt, is imported in the 2023 year
of assessment and only brought into use in the 2024 year of assessment, any realised
or unrealised exchange difference that arises in the 2023 year of assessment will only
be accounted for, for income tax purposes, in the 2024 year of assessment.
10.7.6 Notes on CGT treatment of foreign currency (SILKE par 15.7)
The main paragraph in the Eighth Schedule that affects foreign currency transactions is paragraph 43.
Paragraph 43 only deals with non-monetary assets acquired or disposed of in a foreign currency - refer to
the illustration above and work through the paragraphs below.
The application of paragraph 43 has been simplified. There are only two options for the translation of
capital gains denominated in foreign currency. These two options are contained in subparagraphs 43(1)
and 43(1A) and are, together with their effect, summarised in the table at the bottom of SILKE p 560 and
at the top of SILKE p 561 as well as in the paragraphs below.
Only two sets of capital gain currency rules are available when disposing of assets:
• The simplified method is available to a natural person or a non-trading trust that sells an asset
using foreign currency after having acquired the asset in the same foreign currency. The capital
gain or loss will be determined in the foreign currency and then be converted to rand by applying
the spot rate on the date of disposal or the average exchange rate for the year in which the disposal
took effect (paragraph 43(1)).
• In all other instances paragraph 43(1A) will apply (including where only the base cost or only the
proceeds amount is in a foreign currency or if both are, where deemed base cost for ceasing to be
a resident (section 9H of the Income Tax Act (see TL104, learning unit 5.5.1) needs to be
determined or if there is a debt reduction under par 12A). The currency gain or loss will be
determined in local currency and the base cost and/or proceeds will be translated to local currency
using spot rate or the average exchange rate for the year (use spot rate on date of acquisition or
disposal or the average rate of exchange for the year in which the acquisition or disposal took
place).
 The stipulations of par 43(1A) seem to contradict section 25D whereby a company or trust may
only use the spot rate. It is not clear whether the legislator intended this anomaly, but as it
stands, the option to use the average rate in the case of companies and trusts when disposing
of non-monetary assets in foreign currency is in fact available.
70 TAX4862/105/2023
Please keep the important stipulations in subparagraphs 43(5) and (6) in mind:
• In terms of paragraph 43(5), where a person is DEEMED to have disposed of an asset and the
expenditure incurred to acquire that asset was determined in a foreign currency, the proceeds will
be determined in the same foreign currency.
• Paragraph 43(6) stipulates that where a person has adopted the market value as the valuation date
value of an asset as contemplated in paragraph 43, the market value must be determined in the
same currency in which the expenditure was incurred and translated to the local currency by
applying the spot rate on valuation date.
10.7.7 Notes to SILKE example 15.7
First read through the information provided in the question. You can assume that all goods were shipped
FOB on 1 June 2022. Ignore the solution in SILKE but work through the information provided below.
 Note to the example
Remember that in terms of section 25D, the average rate may not be elected by a company.
A resident company should translate any amount received by or accrued to, or any expenditure
or loss incurred by the company in any currency other than the currency of the Republic (being
rand and cents) to the currency of the Republic at the spot rate on the date on which that amount
was received or accrued or the expenditure or loss was incurred. In terms of section 24J interest
accrues on and is incurred on a daily basis and should therefore be converted at the spot rate
at the end of each day of the accrual period until the date of payment.
In this example the company did not choose the average rate to translate the interest to the
currency of the Republic (rand). It would be a very complicated and difficult calculation to
translate the interest incurred on a daily basis. Therefore the average rate (section 24J) was
used to provide a more accurate amount than it would have been if the spot rate at year-end
had been used. As the interest was added to the loan, it became part of the loan
(monetary/exchange item) that had to be adjusted to spot rate at year-end, and therefore the
calculation of a foreign exchange difference on the interest part of the loan at year-end is
calculated as the difference between the average rate for the accrual period and the spot rate
at year-end.
71 TAX4862/105/2023
SILKE Example 15.7 ACCOUNTING JOURNALS

Accounting: Financial book year ending on 31 August 2022 Debit Credit
R R
1. Dr Bank 3 300 000
Cr Loan 3 300 000
(FC500 000 x R6,60 (spot on 1 June 2022)
2. Dr Manufacturing machine 2 475 000
Cr Bank 2 475 000
FC375 000 x R6,60 (spot on 1 June 2022)
3. Dr Inventory 825 000
Cr Bank 825 000
FC125 000 x R6,60 (spot on 1 June 2022)
4. Dr Exchange rate loss 70 000
Cr Loan 70 000
FC500 000 x (R6,74 - R6,60) [i.e. R52 500 + R17 500]
Only the portion related to inventory is recognised for normal tax purposes:
Trading stock: FC125 000/FC500 000 x R70 000 = R17 500 [recognised in terms of s24I(3)]
Machine: FC375 000/FC500 000 x R70 000 = R52 500 [deferred in terms of s 24I(7)]
5. Dr Interest on loan for machine (FC7 562 x R6,65 (average rate) 50 287
[FC375 000 x 8% x 92/365 days = FC7 562]
Dr Interest on loan for stock (FC2 521 x R6,65 (average rate) 16 765
[FC125 000 x 8% x 92/365 days = FC2 521]
Dr Exchange loss (balancing figure OR FC10 083 x
(R6,74 - R6,65) 907
Cr Loan (interest accrued) (FC10 083 x R6,74) 67 959
(spot on 31/8/2022)
Only portion related to inventory is recognised for normal tax purposes:

Trading stock: FC125 000/FC500 000 x R907 = R227 [recognised in terms of s24I(3)]
Machine: FC375 000/FC500 000 x R907 = R680 [deferred in terms of s 24I(7)]
72 TAX4862/105/2023
Accounting: Financial book year ending on 31 August 2023 Debit Credit

R R
1 Dr Interest on loan for machine (FC7 479 x R6,80 (average rate) 50 857
[FC375 000 x 8% x 91/365 days = FC7 479]
Dr Interest on loan for stock (FC2 493 x R6,80 (average rate) 16 952
[FC125 000 x 8% x 91/365 days = FC2 493]
Dr Exchange loss (P/L) (balancing figure OR FC9 972 x (R7 - R6,80) 1 995
Cr Loan (Interest accrued)) (FC9 972 x R6,74 (spot on 31/8/2022) 69 804
Trading stock: FC125 000/FC500 000 x R1 994 = R499 [recognised in terms of s24I(3)]
Machine: FC375 000/FC500 000 x R1 994 = R1 496 [no longer deferred in terms of s 24I(7)]
2 Dr Exchange rate loss 132 622

Cr Loan 132 622
(FC500 000 + FC10 083) x (R7,00 - R6,74) [i.e. R97 500 +
R32 500]
3 Dr Loan (R3 300 000 + R70 000 + R67 959 + R132 622 + R69 804) 3 640 385
Cr Bank (FC500 000 + FC10 083 + FC9 972) x R7 3 640 385
Actual settlement of capital and interest on 30/11/2022
73 TAX4862/105/2023
SILKE
Example 15.7 TAX CALCULATION
Tax calculation: Year of assessment ending on 31 August 2022 R

Exchange item: debt on machine
FC375 000 x (R6,74 - R6,60) = (R52 500) Exchange loss Nil
Not recognised, deferred in terms of s 24I(7)
Capital allowance on machine

None, as the asset was not brought into use
Nil
Exchange item: debt on trading stock

FC125 000 x (R6,74 - R6,60) = (R17 500)
Exchange loss (17 500)
Recognised in terms of s 24I(3)
Acquisition of trading stock
FC125 000 x R6,60 (s 25D) s 11(a) (825 000)
Closing stock (assumed nothing sold by year-end) s 22(1) 82 000
Exchange item: interest on debt financing machine
FC375 000 x 8% x 92/365 = FC7 562

FC7 562 x R6.65 (average rate) = R50 287
(liability on 31/8/2022)
FC7 562 x (R6,74 - R6,65) = (R681) Exchange loss Nil

Not recognised, deferred in terms of s 24I(7)
Exchange item: interest on debt financing trading stock
FC125 000 x 8% x 92/365 = FC2 521

FC2 521 x R6,65 (average rate) = R16 765 (liability on 31/8/2022)
FC2 521 x (R6,74 - R6,65) = (R227) Exchange loss (227)
74 TAX4862/105/2023
Tax calculation: Year of assessment ending on 31 August 2023 R

Capital allowance on machine brought into use
FC375 000 x R6,60 (s 25D) x 40% (s 12C) (990 000)
Exchange item: debt on machine

Machine brought into use on 1 September 2022.
Now all exchange differences should be recognised as the deferral in terms of s 24I(7) will
no longer apply.
2022: FC375 000 x (R6,74 - R6,60) = (R52 500) Exchange loss (52 500)
Opening stock deduction

Assume all stock is still on hand s 22(2) (825 000)
Exchange item: debt on trading stock

FC125 000 x (R7,00 - R6,74) = (R32 500) Exchange loss (32 500)
Exchange item: interest on debt financing machine

FC375 000 x 8% x 91/365 = FC7 479
FC7 479 x R6,80 (average rate) = R50 857
(liability on 30/11/2022)
Machine brought into use on 1 September 2022.
Now all exchange differences should be recognised
as the deferral in terms of s 24I(7) will no longer apply.
2022: FC7 562 x (R6,74 - R6,65) = (R681) Exchange loss (681)
Exchange item: interest on debt financing trading stock

FC125 000 x 8% x 91/365 = FC2 493
FC2 493 x R6,80 (average rate) = R16 952 (liability on 31/8/2022)
FC2 493 x (R7,00 - 6,80) = (R499) Exchange loss (499)
Recognised in terms of
s 24I(3)
Closing stock deduction

Assume all stock is still on hand s 22(1) 825 000
75 TAX4862/105/2023
10.8 ADDITIONAL NOTES ON INTERNATIONAL TRANSACTIONS

(section 31 and SILKE par 21.8 to 21.8.2)
Transfer pricing refers to transactions (between connected residents and non-residents) in which goods or
services are sold/transferred at a price that is not at arm’s length (not market value), resulting in the transfer
of income or expenses from one taxpayer (and one tax jurisdiction) to another.
• Section 31(2) and (3) primary and secondary transfer pricing adjustments
The effect of section 31(2) and (3) can best be explained by using a basic example:
Company X, a resident company, sells trading stock with a cost price of R200 000 to its holding company
(a connected person), Company Y, a non-resident company managed and controlled in a country with a
10% income tax rate, for R220 000. The market value of the trading stock is R350 000. Company Y then
sells the trading stock to a foreign client at R350 000. Calculate the tax implications for both taxpayers on
the assumption that similar legislation applies in the foreign country.
 Suggested solution (without the application of section 31)
Company X
R
Gross income 220 000

Cost (trading stock) (200 000)
Taxable income 20 000
Tax @ 28% 5 600
Company Y (tax payable in country of residence)

Gross income 350 000
Tax @ 10% 13 000
Total tax liability for the group (R5 600 + R13 000) 18 600
The result of this transaction is that the bulk of the profit is carried over to the country with the lower tax
rate, resulting in tax savings for Company X, as well as the group as a whole. The same effect could have
been obtained if Company Y sold trading stock to Company X at a price higher than market value,
resulting in Company X getting a tax deduction for an expense, which is much higher than market value.
From this example it is clear how easy it would be for connected parties to manipulate prices, for the
reduction of tax liabilities. Let’s do the same example, this time applying section 31.
76 TAX4862/105/2023
 Suggested solution (applying section 31)
Company X R
Section 31(2) primary adjustment

Gross income: Proceeds from sale 220 000
Proceeds included in gross income adjusted to market value (R350 000 – R220 000) 130 000
(section 31(2) (section 31(2) adjustment))
Tax @ 28% 42 000
Section 31(3) secondary adjustment
Section 31(2) adjustment is deemed a dividend in specie – R130 000 (section 31(3)(i)) 130 000
Dividends tax @ 20% on the above deemed dividend (R130 000 x 20%) 26 000
Company Y (tax payable in country of residence)
Same tax liability as before (see above) 13 000
Total tax liability for the group (R42 000 + R26 000 + R13 000) 81 000
The effect of section 31 is that the transaction is deemed to have been effected at arm’s length and the
selling price is deemed to be equal to open market value.
Section 31(3) now deems the primary adjustment of section 31(2) to be a deemed dividend in specie paid
by Company X and therefore creates a dividends tax liability for Company X in addition to the additional
income tax liability. In the case of a resident (other than a resident company), the primary adjustment of
section 31(2) is deemed to be a donation made by that resident and therefore creates a donations tax
liability for the resident at a rate of 20% or 25% (section 31(3)(ii)). Effectively the group is now “punished”
by paying double tax.
SILKE par 21.8.1.2 explains it clearly in the last paragraph under the heading “Secondary transfer pricing
adjustment (s 31(3)) on page 912.
 Remember that the amount of the difference (calculation of either a donation or dividend in
specie) will be determined six months after the end of the year of assessment (section 31(3)).
 Do example 21.32 in SILKE.
Section 31(4) Definition of connected person
Section 31(4): Paragraph (d)(v) of the definition of connected person in section 1 states that in relation to
a company, any other company will be a connected person to the company if
• that other company holds at least 20% of the equity shares or voting rights in the company and
• no holder of shares holds the majority voting rights in the company
Where section 31(2) is applicable in respect of granting any financial assistance (thin capitalisation – refer
to SILKE paragraph 21.8.2), the expression “and no holder of shares holds the majority voting rights in
the company” must be disregarded.
77 TAX4862/105/2023
 NOTE
The definition of connected persons in section 31(4) only applies to thin capitalisation and NOT
to transfer pricing. For transfer pricing the definition of connected persons in section 1 applies.
 on myUnisa, and make a rough summary of what your solution would be. You should now
be able to answer Bizzie Beancounter’s queries now that you have studied this learning
unit. Share your solution on the myUnisa discussion forum, then refer to the outcomes
(solution) that will be made available on myUnisa on the Friday of your study week.

This learning unit introduced you to the content in the Income Tax Act that is relevant to interest-bearing
instruments, foreign exchange differences, transfer pricing as well as to the tax morality, strategy and risk
management. The table of reference under 10.4.2 was provided to guide you through the work. We gave
you a number of additional notes together with detailed examples on the applications of the sections in
learning unit 10. Ensure that you have worked through (flagged and highlighted) the sections referred to
in learning unit 10 (refer to 10.4.2) in your Income Tax Act as well as in your prescribed textbook, SILKE.
Remember to take a look at the additional resources available for this learning unit on myUnisa and
YouTube. You are now ready to apply your knowledge by doing the questions in sections B and C of this
tutorial letter.

• SAICA. 2023. SAICA Student Handbook 2022/2023 Volume 3. Durban, LexisNexis.
• South Africa 2022. Taxation Laws Amendment Act (Act No. 20 of 2021). Cape Town: Government
Printer
• Stiglingh, et al. 2023. ‘Chapter 15: Foreign exchange’, SILKE: South African Income Tax 2023. Durban,
LexisNexis.
• Stiglingh, et al. 2023. ‘Chapter 16: Investment and funding instruments’, SILKE: South African Income
• Stiglingh, et al. 2023. ‘Chapter 21: Cross-border transactions’, SILKE: South African Income Tax 2023.
Durban, LexisNexis.
• Stiglingh, et al. 2023. ‘Chapter 34: Tax morality, strategy and risk management’, SILKE: South African
Income Tax 2023. Durban, LexisNexis.
Work through the questions in sections B and C of this tutorial letter. We recommend that you
 work through the allocated questions within the allocated time, then use the additional
questions provided as revision for tests and exams. This will help you assess your
knowledge. Revisit any areas that you have difficulty understanding.
____________________________________
78 TAX4862/105/2023
WORK PLAN FOR DAYS 6 - 7 (10 AND 11 APRIL 2023)

SECTION B – SELF-ASSESSMENT QUESTIONS
PURPOSE STATEMENT AND OUTCOMES

In SECTION B, you will find the self-assessment questions for you to attempt and mark yourself. Use
the questions to assess your own knowledge and competencies and take responsibility for your own
learning experience. The questions will assist you in identifying shortcomings in your knowledge and
also serve as a measure for your understanding.
 Four (4) hours have been allocated to work through sections B and C. However, for your benefit
we provide you with more than 4 hours of questions. Furthermore, a few additional questions
will be uploaded on myUnisa during the revision week before the test.
 Proposed self-assessment method

The questions in section B are mostly integrated questions at a level that we expect from
a CTA 2 student. You have to integrate previous knowledge of your undergraduate studies
with the previous tutorial letters. Take your time in answering a question thoroughly instead
of just looking at the proposed solution.
Attempt the questions, but start by reading the REQUIRED section.

Assess your answer with the help of the suggested solutions. Identify where you
made an error and refer back to the legislation and/or SILKE by using the references
provided in the solution in order to reaffirm your knowledge and understanding of the
application of the legislation.
Also, remember to critically read and understand the applicable case law
principles relating to this tutorial letter in TL102.
79 TAX4862/105/2023
NB! Remember that the tax rate of companies will change from 28% to 27%
from years of assessment ending on any date on or after 31 March 2023.
After completing the self-assessment questions within the time limits

provided, you should be able to
• identify if you had rectified the shortcomings identified in the previous sections
• demonstrate that you are competent to pass the formative assessments and
summative assessment relating to the topics you have covered so far.
SUMMARY OF QUESTIONS
Question TOPIC Marks/time
1 Loan between connected parties, section 19 and paragraphs 12A and 25/38
56(2) of the 8th Schedule
2 Sections 8(4), 8(5), 11(a), 11(cA), 11(gC), 11(e), 11(i), 11(j), 12C, 12H, 52/78
23F, 23H, 24I, VAT and CGT
3 Company income tax calculation (sections 8(4)(e), 11(i), 11(j), 12C, 36/54
13sex, 18A, 22(8), 24I and CGT) and discussion on the deductibility of
compensation and legal fees
4 Sections 1 (gross income paragraph (jA)), 11(a), 11(o), 12C, 12H, 22(2), 24/36
24C, 24M and CGT.
5 Sections 8(4)(e), 11(a), 11(c), 11(gB), 11(m), 11(o), 12E, 12H, 13(1), 42/63
13quin, 22(8), 24I, CGT and donations tax
6 Sections 1 (gross income paragraph (jA)), 8(4)(a), 11(a), 11(d), 11(e), 31/47
11(o), 19, 22(1), 22(2) and 22(8) and par 12A of the 8th Schedule
7 Sections 11(a) and 22 and VAT 5/8
8 Capital allowances and recoupments (specific emphasis on immovable 30/45

property), leases, learnership agreements and specific deductions-
Sections 11(a), 11(f), 11(g), 12C, 12H, 12N, 13, 13sex and CGT
9 Section 9C 11/17
10 Sections 8(4)(a), 11(e), 11(g),11A, 12C, 12N, 13(1), 13(3), 13quin, 50/75
13sex, 23H, 24J and CGT and VAT
11 Sections 12C, 13quin, 13sex, 24C, 24I, 24J and 31 33/50
12 Sections 12C, 19, 24I, 24J, 25D, 31 and par 12A of the 8th Schedule 28/42
13 Extract 2019 Test 2 40/60
14 Extract 2020 Test 2 40/60
15 Extract 2021 Test 2 40/60

487 marks
Total marks/time
±12 hours
80 TAX4862/105/2023
 QUESTION 1 25 marks
LEX Ltd is a company that is incorporated in South Africa and is listed on the JSE. LEX Ltd holds all of
the issued share capital of RK (Pty) Ltd (referred to as RK) and of ART (Pty) Ltd (referred to as ART) and
has done so since the dates of incorporation. LEX, ART and RT are a group of companies as defined in
section 41 of the Income Tax Act (group of companies – see TL107).
All three companies are incorporated in South Africa as well as effectively managed in South Africa and
are regarded as residents for South African taxation purposes. The companies are all involved in the
motor manufacturing industry.
The three companies all have a February financial year-end and the pro forma statement of financial
position of RK and ART for the financial year ended 28 February 2023 are summarised below:
ART (PTY) LTD

STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 2023
Note R million
ASSETS
Non-current assets 5 500
Borrowings (loan) due from fellow subsidiary 1 0
Property, plant and equipment 5 500
Current assets 6 650

Trade receivables 2 500
Inventories 1 750
Cash 2 400
Total assets 12 150
EQUITY AND LIABILITIES

Equity attributable to owners 7 305
Share capital 1 100
Retained revenue 6 205
Current liabilities
Trade payables 4 845
Total equity and liabilities 12 150
Note:
1. The loan amounts to R125 million and comprises a capital element of R100 million and accrued
interest of R25 million. The loan has been impaired as a result of the financial position of RK. The
impairment led the company to claim the R25 million as a bad debt deduction in terms of section 11(i)
of the Income Tax Act in its year of assessment ended 28 February 2023.
81 TAX4862/105/2023
QUESTION 1 (continued)
The loan was originally advanced during the financial year ended 28 February 2020 and was funded out
of surplus cash.
RK (PTY) LTD
STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 2023
Note R million
ASSETS
Non-current assets
Property, plant and equipment 400
Current assets 910

Trade receivables 375
Inventories 535
Total assets 1 310
EQUITY AND LIABILITIES

Equity attributable to owners 125
Share capital 100
Retained deficit 1 (100)
Borrowings (loan) from fellow subsidiary 2 125
Current liabilities 1 185

Trade payables 1 025
Bank overdraft 160
Total equity and liabilities 1 310
Notes:
1. The company is in an assessed loss position for the year of assessment ended 28 February 2023
and is expected to have accumulated an assessed loss amounting to R55 million at the end of the
year of assessment ending 29 February 2024.
2. RK used the funds received from ART to fund the acquisition of land and buildings utilised for
purposes of its trade. Tax allowances have not been claimed on the buildings so acquired, as they
do not qualify for allowances in terms of the Income Tax Act. The R25 million interest expenditure
incurred on the loan has, however, been claimed as a deduction in terms of section 24J of the
Income Tax Act.
The financial director of LEX has proposed that ART waive its right to recover the R125 million loan due
from RK. He envisages that the transaction should be concluded in April 2023. The purpose of the
transaction would be to strengthen the balance sheet of RK as the company is experiencing severe cash
flow problems.
82 TAX4862/105/2023
REQUIRED: Marks
Discuss, with full supporting reasons and reference to relevant provisions of the Income Tax
Act, the potential taxation consequences arising from the proposed transaction from the
perspectives of both ART (Pty) Ltd and RK (Pty) Ltd. 25
Assume the following:
- The income tax legislation for the 2024 year of assessment will remain the same as legis-
lation applicable to the 2023 year of assessment.
- The waiver of debt is not a scheme to avoid tax.
NOTE:
Your solution should deal with any consequences of the proposal, with regard to normal
tax (including capital gains tax (CGT)) and donations tax.
(QE 2005 paper 1, question 2 - adapted)

83 TAX4862/105/2023
 QUESTION 1 - SUGGESTED SOLUTION
ART (PTY) LTD TO WAIVE ITS RIGHT TO RECOVER THE R125 MILLION LOAN DUE FROM
RK (PTY) LTD
Implications for RK (Pty) Ltd
General
• The debt benefit received by RK does not form part of the general definition of gross income
as it constitutes an amount of a capital nature. (1)
• The waiver of the debt is not part of a scheme to avoid tax. (1)
Recoupment provisions
• Section 19 of the Income Tax Act applies where
o a debt benefit in respect of debt owed by a person (1)
o arises due to a concession or compromise regarding that debt, and
o the amount of the debt was used, either directly or indirectly, to fund any expenditure for
which a deduction or allowance was granted in terms of the Income Tax Act
(section 19(2)).
• Section 19 does not, however, apply to a debt reduction that is a specific debt between group
companies (where the debtor company is dormant) (section 19(8)(d)). (1)
o RK, LEX and ART are a group of companies in terms of section 41 (LEX holds all the
shares of RK and ART). (The requirements of section 41 will be covered in TL107, refer
to note below) but (1)
o Based on the statement of financial position it is evident that RK was not dormant as it
carried on a trade in the previous year of assessment.
• No allowance or deduction was allowed for the R100 million loan since it was not used, either (1)
directly or indirectly, to fund any expenditure for which a deduction or allowance was granted
in terms of the Income Tax Act and therefore section 19 will not apply to the R100 million
and no recoupment will arise on the loan. (2)
• The interest expense of R25 million, however, was claimed as a deduction in terms of
section 24J of the Income Tax Act and section 19(5) will apply to this interest expense of
R25 million. In terms of section 19(5) the amount of the reduction of R25 million is deemed,
for the purposes of section 8(4)(a), to be an amount that has been recovered or recouped in (2)
the income of RK in its 2024 year of assessment.
CGT consequences
• The waiver of the loan account will be treated as a disposal for CGT purposes and the debt
relief provisions in terms of paragraph 12A of the Eighth Schedule to the Income Tax Act (1)
need to be considered from RK’s point of view (as debtor).
• In terms of paragraph 12A(6)(d) the provisions of paragraph 12A will not apply where the
person (debtor) and the creditor form part of the same group of companies as defined in (1)
section 41 and the debtor (RK) is a dormant company. Therefore in this case, as RK was
not dormant, the provisions of paragraph 12A will apply.
o None of the exclusions in terms of paragraph 12A(6) apply.
• The provisions of paragraph 12A further do not apply to the extent that the debt benefit (1)
(reduced or discharged) was used to fund expenditure in respect of which a deduction or
allowance was claimed. (1)
o The provisions of paragraph 12A would therefore not apply to the R25 million interest
expenditure (as it was claimed in terms of s 24J) already recouped in terms of
section 19(5) read with section 8(4)(a) of the Income Tax Act. (1)
84 TAX4862/105/2023
QUESTION 1 - Suggested solution (continued)
• The provisions of paragraph 12A would therefore apply to the R100 million capital portion of
the loan waived, because RK is not a dormant company in the group of companies. (1)
• There is thus a reduction of the base cost of the asset, that is R100 million (base cost of land
and buildings) – R100 million (debt benefit). (1)
Implications for ART (Pty) Ltd
General
• The company has already claimed the interest portion of the debt, i.e. R25 million, as a bad
debt deduction in terms of section 11(i) of the Income Tax Act and therefore cannot claim
this amount as a deduction again. (1)
• With regard to the potential claim of the R100 million capital portion as a deduction for
income tax purposes, the company would not be able to claim the amount as a deduction in
terms of section 11(i) as the amount was not previously included in the company’s income. (1)
• The company would not be able to claim the amount as a deduction in terms of section 11(a)
of the Income Tax Act either, as the company is not engaged in the trade of money lending.
In other words, the loss would be capital in nature and would not be permissible as a (1)
deduction.
CGT consequences
• The granting of the loan itself is a capital transaction and creates a capital asset for ART
(Pty) Ltd with a base cost of R100 million.
• From a CGT perspective, the waiver of the loan would be treated as a deemed disposal in (1)
terms of paragraph 11(1)(b) of the Eighth Schedule. The proceeds on the deemed disposal
amount to Rnil.
• ART would suffer a capital loss of R100 million (Rnil – R100 million) which may be deductible (1)
for CGT purposes. However, paragraph 56(1) (debt owed by a connected person) of the
Eighth Schedule to the Income Tax Act provides that where a creditor disposes of a claim
owed by a debtor, who is a connected person in relation to that creditor, that creditor must
disregard any capital loss determined as a result of that disposal.
• From an analysis of the facts, it is evident that ART and RK are subsidiaries of LEX. This (1)
would mean that ART and RK are connected persons (as defined in section 1 of the Income
Tax Act) in relation to LEX and that LEX is a connected person in relation to both subsidiary
companies. In addition, as both ART and RK are subsidiaries of the same holding company,
they would be regarded as connected persons in relation to one another.
• In applying the principles to the facts, it would appear that, as ART and RK are connected (1)
parties in relation to one another and, based on the provisions contained in paragraph 56(1)
of the Eighth Schedule to the Income Tax Act, the capital loss must be disregarded by ART.
• However, paragraph 56(2) of the Eighth Schedule to the Income Tax Act states that
paragraph 56(1) does not apply to the extent that
− RK reduced the base cost of the asset (land and buildings) under par 12A(3), or (1)
− the aggregate capital loss was reduced by virtue of par 12A(4) of the Eighth Schedule.
In this case RK reduced the base cost of the land and buildings and therefore ART would be
able to claim the R100 million as a capital loss for CGT purposes. (1)
85 TAX4862/105/2023
• Paragraph 56(2) states that paragraph 56(1) (disregards loss) will not apply if (inter alia) RK
has to include the R100 million write-off in gross income or has to apply it to reduce base
cost (paragraph 56(2)(c)). As RK will reduce the base cost by the R100 million,
paragraph 56(2)(c) is applicable.
Therefore paragraph 56(1) will NOT apply and ART will NOT disregard the capital loss.
(1)
Donations tax consequences
• A further aspect that needs to be considered is a potential donations tax liability, because
the disposal by ART of the right to claim payment from RK might constitute a gratuitous (1)
disposal.
• However, as ART and RK form part of the same group of companies as defined in section 1
of the Income Tax Act, and they are both resident companies, section 56(1)(r) of the Income (1)
Tax Act would exempt the transaction from donations tax.
• The debt was also waived for commercial reasons for the benefit of the group, therefore it (1)
was not a gratuitous disposal.
• Therefore, there are no donations tax implications for RK. (1)
Total 31
Max 25
Note:
A “group of companies” definition is provided in section 41 and this will be covered in TL107. Therefore
for the purposes of this tutorial letter the question will explicitly state that the companies are a group of
companies in terms of section 41.
86 TAX4862/105/2023
Kiddies Cards (Pty) Ltd (referred to as Kiddies) is a company resident in South Africa. It designs and
manufactures cards that are collected by children and sells these cards to producers of breakfast cereals
and snack foods. Its financial year ends on the last day of February.
The issued ordinary share capital of Kiddies was held as follows throughout the 2023 financial year:
• 40% by Yugi Yuglyo, a resident of Armenia, a country with which South Africa does not have a double
tax agreement
• 30% by Jessy Ash, a resident of South Africa
• 20% by Tyson James, a resident of South Africa
• 10% by Max Pokemon, a resident of South Africa
These four holders of shares were also the sole directors of Kiddies during the 2023 financial year. Jessy
Ash is its managing director. Jessy Ash, Tyson James and Max Pokemon are all full-time employees and
executive directors of Kiddies and as such they receive salaries from the company. Yugi Yuglyo is a non-
executive director. All four directors also earn fees for attending directors’ meetings. The meetings are held
in South Africa. Directors’ salaries and fees are included in the amount stated under the heading “Salaries,
wages and benefits” in the detailed draft statement of comprehensive income.
(Note that all amounts reflected in the detailed draft statement of comprehensive income below and
in the notes that follow on it exclude VAT where appropriate unless specifically stated to the
contrary. Kiddies is a registered VAT vendor, making 100% taxable supplies.)
The detailed draft statement of comprehensive income of Kiddies for the year ended 28 February 2023 is
as follows:
Notes R R
Sales 16 250 000
Less: Cost of sales (12 500 000)
Opening stock (1 525 000)
Purchases 1 (11 575 000)
(13 100 000)
Less: Closing stock 1 600 000
Gross profit 3 750 000
Add: Sundry income 209 860
Dividend income 2 29 000
Capital profit on sale of local shares 3 80 000
Insurance settlement received 4 27 360
Prescribed debt 5 6 000
Profit on sale of machine A 11 67 500
3 959 860
Less: Expenditure (3 809 860)
Bad debt 6 (45 000)
Increase in provision for doubtful debt 7 (6 000)
Depreciation on motor vehicle 8 (37 050)
Depreciation on computer 9 (5 700)
Finance charges 10 (2 200)
Depreciation on machine A 11 (12 500)
Depreciation on machine B 11 (18 750)
Depreciation on other machinery and depreciable
assets 12 (86 250)
Rentals 13 (67 500)
Insurance premiums 14 (81 000)
Salaries, wages and benefits 15 (2 900 000)
Restraint of trade 16 (336 000)
87 TAX4862/105/2023
R
Provision for leave pay 17 (9 500)
Interest 18 (117 000)
Cost of trade mark written off 19 (40 000)
Other tax deductible administrative and marketing
expenses (45 410)
Comprehensive income (net profit) before tax 150 000
Additional notes
1. On 1 February 2023, Kiddies concluded a contract to import raw materials from an American supplier
at a cost of $24,000. The raw materials were shipped free on board on 22 February 2023 but had
not arrived in South Africa by 28 February 2023. Being concerned with the fluctuation of the
exchange rate, Kiddies took out a 2-month forward exchange contract on 1 February 2023 to cover
the settlement of the creditor. The creditor is to be settled on 31 March 2023. Kiddies did not, in its
2023 financial year, process any accounting entries relating to any of these transactions. Ruling
rates of exchange were as follows:
Date Spot rate Market-related forward rate Period
1 February 2023 $1 = R14,70 2 months

22 February 2023 $1 = R14,55
28 February 2023 $1 = R14,60 $1 = R14,75 1 month
31 March 2023 $1 = R14,65
The average exchange rate for the year ended 28 February 2023 was $1 = R14,50
2. The following dividends accrued to Kiddies during the 2023 year of assessment:
R
• Dividends from resident companies operating in South Africa that accrued to
Kiddies during the period March 2022 to December 2022. The holding of shares 20 200
by Kiddies in these companies is less than 50% in all cases.
• A distribution from a real estate investment trust (REIT) (i.e. a listed company
that manages a portfolio of real estate properties). This distribution comprises a 8 800
dividend of R8 800.
Total 29 000
3. During the 2023 year of assessment Kiddies disposed of only the following capital assets:
• some of its share investments at a capital profit of R55 000 (as determined in accordance with
the Eighth Schedule to the Income Tax Act); the related accounting profit is R80 000
• sale (trade-in) on 31 August 2022 of machine A (see note 11)
4. A road freight contractor had collected an order of cards (trading stock) from Kiddies’ premises for
delivery to a customer. On the way the road freight contractor’s delivery van, along with Kiddies’
trading stock, was stolen. On 15 February 2023 Kiddies received an insurance settlement from its
insurer of R27 360 for the stolen trading stock. This amount does not take into account any possible
VAT adjustment that may have to be made. Assume that no accounting entry was made to record
the sale of the trading stock or the write-off thereof as a result of the theft.
88 TAX4862/105/2023
5. During the 2020 year of assessment Kiddies had purchased raw materials for R15 000, excluding
VAT, from a manufacturer that was closing down. Kiddies paid R9 000 (being 60% of the purchase
consideration) on the date of delivery. For the following 3 years it tried unsuccessfully to pay the
40% balance of the purchase consideration (R6 000). Every cheque posted was returned with
“address no longer valid” endorsed on it. Because the debt has now prescribed, the amount owing
has been written back in its detailed draft statement of comprehensive income.
6. Bad debt written off of R45 000 consists of R18 000 for trade debtors and a loan of R27 000 to a
supplier who has been liquidated. This loan came about during the 2022 financial year of Kiddies,
when it lent R27 000 to a raw material supplier who was experiencing liquidity problems. The sup-
plier was liquidated on 1 December 2022 and Kiddies has been unable to recover any portion of the
loan.
7. Kiddies does not apply IFRS 9. Kiddies’ debtors age analysis as at 28 February 2023:
Debtors age Current 30 days 60 days 120+ days

Amount R20 000 R33 000 R10 000 R25 000
In the prior year the Commissioner for SARS allowed a doubtful debt allowance in terms of section
11(j) of the Income Tax Act equal to 25% of the year-end accounting provision (which consisted of
debts that were 60-days and 90-days outstanding). The prior year provision for doubtful debt
amounted to R44 000. As at 28 February 2023 the provision for doubtful debt was R50 000, an
increase of R6 000 from the balance as at 28 February 2022.
8. On 1 June 2022 a motor car used by Kiddies’ sales staff for visits to customers was purchased and
immediately brought into use. (This motor car meets the definition of a “motor car” provided in
section 1 of the VAT Act.) It cost R299 000 (R260 000 plus VAT of R39 000). Depreciation of
R37 050 has been provided for on this motor car. SARS’ Binding General Ruling No. 7 (or
Interpretation Note No. 47) provides for a 5-year write-off period for motor vehicles.
9. On 1 December 2020 Kiddies leased a computer from a financial institution under a 2-year finance
lease. Kiddies capitalised the financial lease for accounting purposes. It is treated as an instalment
credit agreement for VAT purposes. The computer cost the financial institution R19 665 (R17 100
plus VAT of R2 565). Total finance charges in terms of the lease amounted to R4 506 and the
monthly rental to R1 000. The final lease rental of R1 000 was paid on 30 November 2022. On
1 December 2022 the financial institution simply abandoned this computer to Kiddies without requi-
ring any further consideration by Kiddies. Ownership was therefore attained on 1 December 2022.
On this date its fair market value was R11 500 (R10 000 plus VAT of R1 500). Despite being 2 years
old, the computer was still in good working order and Kiddies indeed used it during the entire 2023
year of assessment. Depreciation of R5 700 has been provided for on the computer. SARS’ Binding
General Ruling No. 7 (or Interpretation Note No. 47) provides for a 3-year write-off period for
computers.
10. The finance charges of R2 200 accounted for in the 2023 draft statement of comprehensive income
concern the finance lease for the computer in note 9.
11. On 1 March 2021 Kiddies purchased a new machine (machine A) on a cash basis in an arm’s length
transaction for R100 000. Machine A was immediately brought into use in its process of
manufacture. On 31 August 2022 it traded this machine in for a more advanced manufacturing
machine (machine B). Machine B was purchased as a new machine on a cash basis in an arm’s
length transaction for R150 000. A trade-in price of R130 000 was obtained for machine A. On that
date machine A had a book value of R62 500. Machine B was immediately brought into use in its
process of manufacture. Kiddies will elect any option that is available to it to defer any of its tax
liability.
12. All other machinery and depreciable assets had a Rnil tax value on 1 March 2022.
89 TAX4862/105/2023
13. The rentals are paid monthly for the use of a warehouse leased by Kiddies for trade purposes.
14. Insurance premiums of R81 000 were incurred during the 2023 year of assessment. In addition,
Kiddies paid on 15 February 2022, insurance premiums of R88 750 covering the period 1 March 2023
to 29 February 2024, on the advice of its insurance broker who claimed that this early payment would
secure cheaper insurance. No portion of the advance insurance premium amount was expensed to its
statement of comprehensive income for the 2023 financial year.
15. Salaries, wages and benefits of R2 900 000 include directors’ salaries and fees. On 1 August 2022
Kiddies employed a learner (who is not disabled and who holds an NQF level 5 qualification) on a
full-time basis at a wage of R750 per week. (This learner was not previously employed by Kiddies.)
Kiddies entered into a 4-month, registered learnership agreement with the learner in the course of
its trade. The agreement commenced on 1 October 2022 and was completed on 31 January 2023.
The learnership agreement is registered with the relevant sector education and training authority
(SETA). Kiddies has complied with all the requirements of the Skills Development Act. The wages
paid to the learner and the levies paid to the relevant SETA are included in the salaries, wages and
benefits.
16. The restraint of trade payment of R336 000 was paid to a designer who had been employed by
Kiddies. She left its employ on 30 September 2022. The restraint of trade agreement is effective for
2 years commencing on 1 October 2022. The amount of the restraint of trade payment will be
included in the gross income of the designer.
17. The leave pay provision was increased by R9 500 for the 2022 financial year. As at
28 February 2023 the balance on the leave pay provision amounted to R54 500. Actual leave
payments made during the year have been expensed directly to salaries, wages and benefits.
18. Interest incurred during the 2023 financial year on the company’s business bank account (overdraft)
amounted to R117 000.
19. On 1 December 2022 Kiddies purchased outright the “Beyblade” trade mark from another card
manufacturer for R40 000. The acquisition gives Kiddies the exclusive right to market cards under
the Beyblade trade mark in South Africa.
20. In January 2022 Kiddies bought stock for R24 150 (R21 000 plus VAT of R3 150) from a local sup-
plier. Kiddies claimed an input tax credit of R3 150 for its tax period 1 December 2021 to
31 January 2022. However, because of quality problems, Kiddies paid the supplier only R19 320
(R16 800 plus VAT of R2 520) on 31 January 2022, refusing to settle the account until the quality
problems had been resolved. On 28 February 2023 an amount of R4 830 (R4 200 plus VAT of R630)
was still outstanding despite numerous letters of demand from the supplier. The amount was
reflected under creditors in the statement of financial position of Kiddies as at 28 February 2023. No
VAT adjustment that may be required has been reflected in the detailed draft statement of
comprehensive income of Kiddies for the 2023 financial year. None of this stock was on hand as at
28 February 2023.
Additional information
• Kiddies has neither an assessed loss nor an assessed capital loss to carry forward from its 2022
year of assessment.
REQUIRED: Marks
Calculate the normal tax liability of Kiddies Cards (Pty) Ltd for its 2023 year of assessment.
Show all workings and address all items. Your answer should start with the com-
prehensive income (net profit) before tax of R150 000. You can assume that Kiddies
Cards (Pty) Ltd is not a small business corporation. 52
(QE 2005 paper 2, question 2 - adapted)
90 TAX4862/105/2023
1. Net profit before tax 150 000

S 23F, expense incurred but stock imported not disposed of nor held at year-
end; therefore, no deduction allowed in terms of s 11(a) - (1)
Unrealised s 24I loss on foreign creditor, $24,000 x (R14,60 – R14,55) (1 200) (1)
Unrealised s 24I gain on FEC, $24,000 x (R14,75 – R14,70) 1 200 (1)
2. Local dividends, exempt (% shareholding is irrelevant) (s 10(1)(k)) (20 200) (1)

Dividend distributed from REIT, no exemption in terms of s 10(1)(k)(i)(aa) - (1)
3. Deduct accounting capital profit on sale of local shares (see point 22) (80 000) (1)
4. VAT adjustment on insurance award; deemed supply, output tax should be
raised, and removed from amount for normal tax purposes, R27 360 x 15/115 (3 569) (1)
No adjustment for loss - not included in closing stock or turnover - (1)
5. Recoupment of prescribed debt in terms of s 8(4)(a) read with s 19
Already included in taxable income; no adjustment required - (1)
6. Bad debt, trade debtors, deductible in terms of s 11(i), no adjustment required - (1)
Bad debt, loan to supplier, never included in income, not a moneylender, not
deductible, add back 27 000 (1)
(Refer to capital gains calculation at the end, point 22)
7. - Add back increase in accounting provision for doubtful debt, not deductible 6 000 (1)
- S 11(j), 2022 provision for doubtful debt, add back previous year allowance, 11 000 (1)
25% x R44 000
- S 11(j) deduction, as Kiddies does not apply IFRS 9
- The doubtful debt allowance is the sum of
o 40% of debt in arrears for 120 days or more [R25 000 x 40% = R10 000], (1)
plus
o 25% of debt in arrears for 60 days or more (excluding debt to which IFRS
9 applies or that is already included in the 40%) [R10 000 x 25% = R2 500]
(R10 000 + R2 500) (12 500) (1)
8. Add back depreciation on motor vehicle 37 050 (1)
S 11(e), wear-and-tear on motor car, R299 000 x 1/5 x 9/12 months (44 850) (1)
(VAT is included in the R299 000, as the input tax deduction was denied in
terms of s 17(2) of the VAT Act.)
91 TAX4862/105/2023

R
9. Add back depreciation on computer 5 700 (1)
(NB: s 11(e) is not applicable as the asset is not owned while under lease)
Lease rentals on computer - deductible as it is a finance lease
Cost excluding VAT R17 100

Finance charges R 4 506
R21 606
÷ 24 months
= R900,25 p.m. for 9 months (excluding VAT) [1 March 2022 to
30 November 2022] as it is an “instalment credit agreement” (the (8 102) (1)
total VAT amount (R2 565) was claimed at the beginning of the lease)
S 8(5)(bA) recoupment on abandoned computer (1)
Original cost to lessor R17 100 (1)

Less: 20% diminishing (R 3 420) (1)
R13 680
R10 944 10 000 (1)
Limited to market value of R10 000
Limited to the total rentals deducted of R21 606
(2 500) (1)
S 11(e), wear-and-tear on computer, R10 000/1 (1 year of write-off period
remains) x 3/12 (as the company now owns it.)
10. Add back accounting finance charges on the lease of the computer equipment, as
full lease payment can be claimed, refer to note 9 (above) 2 200 (1)
11. Deduct accounting profit on sale of machine A (67 500) (1)
Add back depreciation on machine A 12 500 (1)
S 12C allowance on machine A, R100 000 x 20% (20 000) (1)
Add back depreciation on machine B 18 750 (1)
S 12C allowance on machine B, R150 000 x 40% (60 000) (1)
S 8(4)(a) recoupment on sale of machine A
Selling price R100 000 (R130 000 limited to cost)
Less: Tax value (R 40 000) (R100 000 - (R40k + R20k))
Recoupment R 60 000
Recoupment limited to allowances previously claimed, R60 000 (1)
Par 66 of the Eighth Schedule is applicable as proceeds exceed base cost (refer
to calculation of capital gains at the end of the question), and therefore the
recoupment is deferred in terms of s 8(4)(e), based on the allowance granted on
the new machine B, therefore R60 000 x 40% (R60 000/R150 000) = R24 000 24 000 (1)
12. Add back depreciation on other machinery and depreciable assets 86 250 (1)
13. Rentals, deductible under s 11(a), no adjustment required - (1)
14. Insurance premiums for the 2023 year of assessment, deductible under s 11(a)
This is a prepayment in terms of s 23H, as no benefit was received during 2023 - (1)
year of assessment, period of prepaid benefits > 6 months (proviso (aa) to s 23H),
but since the prepaid amount is less than R100 000, the amount is fully deductible
(proviso (bb) to s 23H). (Note that no information of any other prepayments was (88 750) (1)
provided in the question.)
92 TAX4862/105/2023

R
15. Salaries, wages, benefits, directors’ fees, deductible under s 11(a), no - (1)
adjustment required
Learnership allowance, s 12H(2)(a)(ii)
• Commencement allowance: R40 000 x 4/12 (s 12H(2)(b) (13 333) (1)
• Completion allowance: R40 000 (< 24 months) (s 12H(3)) (40 000) (1)
16. Add back restraint of trade payment, capital in nature 336 000 (1)
S 11(cA) deduction, lesser of
• one-third, R336 000/3 = R112 000 or (1)
• amount divided by number of years, R336 000/2 = R168 000 (112 000) (1)
17. Add back increase in leave pay provision, not deductible (s 23(e)), s 7B will 9 500 (1)
apply on actual payments made
18. Interest deductible under s 11(a) (not s 24J, as an overdraft is payable on - (1)
demand and therefore falls out of the scope of s 24J)
19. Add back deduction of trade mark, capital in nature 40 000 (1)
No s 11(gC) allowance available for the acquisition of trade marks - (1)
20. Cost of VAT adjustment for purchases not paid for within 12 months (s 22(3)(b)
of the VAT Act) (630) (1)
Other tax-deductible administrative and marketing expenses -
21. Taxable capital gain (see notes 3 and 11 above)
22. Capital gains on disposal of local shares (given) R55 000 (1)
Capital gain on disposal of machine A (R30 000 x 40%) R12 000
Proceeds
Selling price R130 000
Less: Recoupment (s 8(4)(e)) (R 60 000) R 70 000 (1)
Base cost
Cost price R100 000
Less: Allowances (s 12C) (R 60 000) (R 40 000) (1)
Capital gain R 30 000
Par 66 applicable as proceeds > base cost, therefore inclusion

based on allowances granted on the new machine, current
year, 40% = *R60 000/R150 000) (1)
23. Capital loss - loan to supplier (Proceeds - R0; base cost = R27 000) (1)
(R27 000)
Net capital gain R40 000
Inclusion rate of 80% 32 000 (1)
TAXABLE INCOME 234 016
Taxed at 28% 65 524 (1)
Total 55
Max 52
93 TAX4862/105/2023
This question consists of two related parts.
Yum-Yum Babyfood Limited (referred to as Yum-Yum) is a resident company that manufactures organic
baby food (classified as a process of manufacture by SARS) that is sold both locally and internationally.
Yum-Yum has a June year-end and a 1-month tax (VAT) period. Yum-Yum is not an SBC and has no
majority holder of shares.
PART A 28 marks
Solly, the accountant of Yum-Yum, has done a preliminary tax calculation for the company for the year of
assessment ending 30 June 2023 and determined a taxable income of R37 250 000. Since Solly was
uncertain as to the correct tax treatment of the following items, these items have not yet been included
in the taxable income of R37 250 000. All amounts exclude VAT unless specifically stated otherwise.
1. Trading stock (cost of sales have been included correctly in the calculation of the taxable
income of R37 250 000, except for the cost of the imported berries in point 1.3, which has
not yet been included in the cost of sales).
1.1 On 1 August 2022 Yum-Yum donated non-perishable baby food to the Help a Child Foundation, a
qualifying PBO, and received a section 18A receipt. The cost of the stock donated was R15 000
and the company has a mark-up percentage of 150% on cost on all the products it sells.
1.2 Yum-Yum launched a new Yum-berry range of baby desserts during September 2022. For the
month of September, every customer buying a tin of Yum-Yum baby food received a tin of Yum-
berry dessert as a free gift. As a result, stock with a cost of R75 000 was given to customers as
promotional gifts (marketing).
1.3 Yum-Yum imports organically grown berries for its Yum-berry range from the USA. Yum-Yum
ordered berries, at a cost of $20,000 on 31 March 2023. The berries were shipped free on board
(FOB) on 15 April 2023 and were delivered at Yum-Yum’s premises on 15 May 2023. Import duties
of R8 715 were payable on the importation. A forward exchange contract (FEC) for a 3-month
period at a forward rate of R14,75 was entered into on 1 May 2023 to serve as a hedge against the
debt. The debt was settled on 31 July 2023. 70% of the imported berries were still on hand at year-
end.
The following exchange rates are applicable:
Date Spot rate

$1 = R
31 March 2023 $1 = R14,80
15 April 2023 $1 = R14,85
01 May 2023 $1 = R14,83
15 May 2023 $1 = R14,70
30 June 2023 $1 = R14,60
FEC rate: $1 = R14,65
(market related for a 1-month period)
31 July 2023 $1 = R14,95
Average exchange rate for 2023 year of
$1 = R14,80
assessment
94 TAX4862/105/2023
2. Fixed assets
2.1 On 1 December 2022, Yum-Yum bought 7 newly built flats in a residential building consisting of 12
flats, directly from a developer (a registered vendor), for R350 000 each (excluding VAT). All of
these residential units were rented out to employees of Yum-Yum, effective from 1 January 2023,
for R3 500 each per month.
2.2 On 1 January 2023, Yum-Yum sold one of its manufacturing machines, machine A, to a non-
connected company for R2 750 000. The machine (when purchased new on 31 March 2021) had
an original cost of R2 700 000 and tax allowances of R1 620 000 have been claimed until
30 June 2022 in terms of s 12C.
Machine A was immediately replaced by Machine B, which was purchased from Organic Baby
Drinks Limited, a subsidiary of Yum-Yum, for R3 500 000 when the market value was
R3 250 000. The machine was originally purchased by Organic Baby Drinks Limited for
R3 000 000 and tax allowances of R2 400 000 had been claimed by Organic Baby Drinks Limited
on the machine until the date of sale. Machine B will also be used by Yum-Yum in its process of
manufacturing.
3. Doubtful debt and bad debt
3.1 Yum-Yum does not apply IFRS 9. In the 2022 year of assessment, the Commissioner allowed a
doubtful debt allowance of R15 000. Yum-Yum’s debtors age analysis as at 30 June 2023:
Debtors age Current 30 days 60 days 120+ days

Amount R50 000 R45 000 R40 000 R25 000
3.2 Bad debts of R65 000 were written off during 2023. Of this amount
- R40 000 relates to trade debtors being written off

- R25 000 relates to the outstanding debt of an existing employee, R20 000 of which relates to the
capital loan amount and R5 000 to the outstanding interest on the capital amount
REQUIRED: Marks
Calculate the normal tax liability of Yum-Yum Babyfood Limited (“Yum-Yum”) for the year of
assessment ending 30 June 2023. Assume that Yum-Yum wants to minimise its normal tax
liability for the 2023 year of assessment and will use any provision of the Income Tax Act
available to achieve this. Show all your workings. Indicate, with reasons, if an amount has
no tax implications and round off all amounts to the nearest rand. 28
95 TAX4862/105/2023
PART B 8 marks
Contrary to the results of all the previous research performed by Yum-Yum, one of Yum-Yum’s customers
(a 6-month-old baby) developed an allergic reaction to their organic butternut baby food. The baby had
to be hospitalised on 15 July 2023 and Yum-Yum paid, in terms of a court settlement, the hospital bills
amounting to R35 000, as well as the family’s legal expenses of R5 000.
REQUIRED: Marks
Discuss, with reference to case law and legislation, whether the R40 000 will be deductible in
the hands of Yum-Yum for tax purposes. 8
PART A 28 marks
R
Taxable income 37 250 000
1. Trading stock
1.1 Donation Recoupment at cost in terms of s 22(8)(C) – donation
in terms of s 18A (allowable deduction – see s 18A
later) 15 000 (1)
1.2 Yum-berry No adjustment, as applied for purposes of trade
promotion (marketing) no recoupment under s 22(8) - (1)
1.3 Berries imported Cost of sales (s 11(a)): (305 715) (2)
– s 24I ($20,000 x R14,85 (s 25D)) + R8 715
Foreign exchange differences (s 24I)
Debt:
$20,000 x (R14,85 – R14,60) - gain 5 000 (2)
FEC:
$20,000 x (R14,75 – R14,65) – loss (2 000) (2)
Closing stock (s 22(1)) (R305 715 x 70%) 214 001 (1)
2. Fixed assets
2.1 Residential Rentals received: R3 500 x 7 units x 6 months 147 000 (1)
units – s 13sex S 13sex allowance: R350 000 x 1.15 (include VAT as
exempt supply and no VAT claimable – s 12(1)(c) of
the VAT Act) = R402 500 (1)
R402 500 x 7 units x 5% x 55% (77 481) (2)
Note: These are not low-cost residential

 units as the cost of each flat exceeds
R350 000.
96 TAX4862/105/2023
QUESTION 3 – Suggested solution (continued)
R R
2.2 Machines A and B Machine A:
– ss 12C, 8(4)(e) Purchase price = 2 700 000
and par 66 of Less:
Eighth Schedule Wear-and-tear (s 12C):
Previous – given (1 620 000)
20% x R2 700 000 (2023) (540 000) (540 000) (1)
Tax value 540 000
Less: Selling price limited to cost R2 700 000 (1)
R2 160 000
But can elect par 66 of the Eighth Schedule as proceeds

are equal to or greater than base cost (see below) and
defer recoupment in terms of s 8(4)(e) (1)
R
Capital gains tax Machine A:
implications Proceeds 590 000
(R2 750 000 – recoupment of R2 160 000) (1)
Less: Base cost (540 000)
(R2 700 000 – s 12C of R2 160 000) (1)
50 000
The capital gain can be deferred as per discussion above
(see end of calculation)
Machine B:
Section 12C(2) - Cost calculated as the lesser of actual

cost (R3 500 000) or cash transaction at arm’s length
(R3 250 000) in terms of s 12C(2), thus although paid
R3 500 000, use R3 250 000 (1)
R3 250 000 x 20% (second-hand machine: s 12C) (650 000) (1)
Therefore:
S 8(4)(e) recoupment on machine A [roll-over]:
R2 160 000 x 20% (same % as machine B) 432 000 (1)
3. Doubtful debt and bad debt

3.1 Doubtful debt Add back 2022 doubtful debt allowance (s 11(j)) 15 000 (1)
(s 11(j)) As Yum-Yum does not apply IFRS 9,
the doubtful debt allowance for 2023 is the sum of
• 40% of debt in arrears for 120 days or more
[R25 000 x 40% = R10 000], plus
• 25% of debt in arrears for 60 days or more (excluding
debt to which IFRS 9 applies or that is already included
in the 40%) [R40 000 x 25% = R10 000]
(R10 000 + R10 000) (20 000) (2)
3.2 Bad debt (s 11(i)) Trade debtors – deductible (40 000) (1)
Loan – not included in gross income, thus capital loan

amount is not deductible. The amount related to the
interest is deductible as it was included in gross (5 000) (1)
income.
36 437 805
97 TAX4862/105/2023
Capital R
gain/loss Capital gain on machine A (point 2.2 above)
calculation But par 66 of Eighth Schedule applicable,
Thus: R50 000 x 20% = R10 000 (based on machine B) =
R10 000
Net capital gain included in taxable income at 80%
(R10 000 x 80% = R8 000) 8 000 (1)
Subtotal 36 445 805
1.1 Donation R15 000 (see point 1.1 above), but maximum deduction:
(s 18A) 10% of R36 445 805 = R3 644 581, but limited to
R15 000 (15 000) (1)
TAXABLE
INCOME 36 430 805
Tax liability @ 27% 9 836 317 (1)
Total 29
Max 28
PART B 8 marks
• The compensation of R35 000 paid will only be deductible if all the requirements of section 11(a) are
met. The compensation must be an expenditure or loss, actually incurred, during the year of assess-
ment, in the production of income and not of a capital nature. Furthermore, it must be laid out for the
purposes of trade (section 23(g)). (1)
• All of the requirements are met, except for “in the production of income” and “not of a capital nature”,
which need to be discussed further. (1)
• To determine whether the compensation paid was in the production of income, two questions must be
asked:
• What action gave rise to the expenditure? The production and sale of baby food gave rise to the
expenditure. (1)
• Is this action closely connected with the income-earning activities? (Is it a necessary concomitant
of the business?) The sale of baby food is closely connected to the income-earning activities. (1)
(Joffe & Co (Pty) Ltd v CIR (1946 AD) and Port Elizabeth Electric Tramway Co Ltd v CIR (1936
CPD))
The compensation paid was therefore expenditure incurred in the production of income. (1)
• In determining whether the expense is capital in nature, you must establish whether it is part of
• the cost of performing the income-earning operations (which it is in this case – being related to
products sold), or (1)
• the cost of establishing, improving or adding to the income-earning structure (1)
(New State Areas Ltd v CIR (1946 AD) & BPSA (Pty) Ltd v SARS (2007))
The compensation is not creating an enduring benefit and is a once-off expense, thus not of a capital
nature. (1)
• Since the compensation meets all the requirements of section 11(a) read with section 23(g), it will be
deductible. (1)
• The legal expenses of R5 000 will also be deductible under section 11(c) since it is not of a capital
nature (following the nature of the compensation paid) and the compensation to which it relates is
deductible under section 11(a) (section 11(c)(ii)). (1)
Total 10
Max 8
98 TAX4862/105/2023
Meat Made Easy Limited (MME) is a resident company that manufactures meat-cutting machines
(classified as a “process of manufacture” by SARS) used by hunters, farmers and butcheries in South
Africa and other African countries. The company also owns a game farm and ten butcheries. MME has
a December year-end and a one-month tax period for VAT purposes. MME is not a small business
corporation as defined.
The equity share capital in MME is held as follows:
• 60% by Ching Limited, a non-resident company located in Beijing, China

• 20% by Chow Limited, a non-resident company located in Hong Kong, China
• 20% by various residents of the Republic of South Africa
The following transactions which have an effect on the calculation of MME’s taxable income for the 2023
year of assessment occurred in either the company’s 2022 or 2023 year of assessment. All amounts
exclude VAT, where applicable, unless specifically indicated otherwise:
1. On 1 April 2022 MME sold a machine that had been used in the company’s manufacturing process
to Please Eat Meat Limited, which has an April year-end. In terms of the agreement Please Eat Meat
Limited had to pay an amount of R180 000 on 1 April 2022 and thereafter 10% of the value of the
products produced by the machine during Please Eat Meat Limited’s 2023 year of assessment.
Please Eat Meat Limited paid MME R180 000 on 1 April 2022 and R350 000 on 1 April 2023.
MME acquired (and brought into use) the manufacturing machine that was sold to Please Eat Meat
Limited on 1 August 2021 as a new machine for R552 000 (including VAT).
2. On 15 November 2022 MME entered into a 9-month learnership agreement with Keba Skosana, a
disabled employee who holds an NQF level 7 qualification. The learnership agreement meets all the
requirements of section 12H. Keba successfully completed the learnership on 14 August 2023.
3. The cost of manufacturing a meat-cutting machine amounted to R12 080 for the 2023 year of
assessment and R10 800 for the 2022 year of assessment. MME has a mark-up percentage of 60%
on cost on all products sold. On 1 January 2023 MME had 180 machines in stock that were
manufactured during the 2022 year of assessment. During the 2023 year of assessment the
company manufactured 6 250 meat-cutting machines. The company uses the first-in-first-out (FIFO)
method when selling stock.
The following movements took place in respect of trading stock during the company’s 2023 year of
assessment:
• The company sold 5 580 meat-cutting machines to customers in South Africa. Sales took place
evenly throughout the year of assessment.
• On 1 October 2023 MME transferred eight meat-cutting machines to be used in the butcheries
owned and operated by the company. These machines will eventually be sold by MME as
second-hand machines.
4. On 1 December 2023 MME received a non-refundable deposit of R50 000 from Namibia Star
Hunters Limited, a company in Namibia, in terms of a contract for four specialised meat-cutting
machines. These machines are similar to the current machines manufactured by MME but in terms
of the contract, need to be adjusted for the fitting of specific electrical motors, chains and blades.
The company estimated that the cost of these machines will be R17 250 (including VAT) each. The
machines will be sold for R25 000 (excluding VAT) each. Manufacturing of these machines will
commence on 1 January 2023. On completion MME will deliver the machines to Namibia Star
Hunters Limited in Namibia.
99 TAX4862/105/2023
REQUIRED: Marks
(i) Note 1 only
Calculate the amounts to be included or deducted in the calculation of Meat Made Easy
Limited’s taxable income in respect of note 1 for the company’s 2022 and 2023 years
of assessment. If any amount that you have calculated is not deductible or should not
be included in the calculation of the company’s taxable income, provide a reason or
reference to legislation.
You can assume that the company will elect any tax option available to reduce its 10
income tax payable in a specific year of assessment.
(ii) Notes 2 to 4
Calculate the amounts to be included or deducted in the calculation of the taxable
income of Meat Made Easy Limited for the company’s 2023 year of assessment in
respect of notes 2 to 4. Provide a reason or reference to legislation if any event (note
14
or part of a note) has no effect on the calculation of the company’s taxable income.
Assume that the Commissioner will allow the cost as a percentage of contract price as
the basis for calculating future costs in respect of contracts, where applicable.
TOTAL 24
(Unisa 2017 - adapted)
100 TAX4862/105/2023
(i) Note 1 R R
Meat Made Easy Limited
1. 2022:
480 000 (1)
Cost: R552 000 x 100/115 = R480 000
Allowances claimed (288 000)
Section 12C (2021) R480 000 x 40% (192 000) (1)
Section 12C (2022) R480 000 x 20% (96 000) (96 000) (1)
Tax value on 1 April 2022 192 000
Less: Selling price (amount received 1 April 2022) 180 000 (1)
Section 11(o) loss (R180 000 – R192 000 = (R12 000)) – not (12 000)
deductible in terms of section 20B (1)
read with section 24M, suspended until full consideration
received (1)
2023:
Selling price – received 350 000 (1)
Less: Tax value – fully deducted in 2022 - (1)
350 000
Less: Section 11(o) not claimed in 2022 (12 000) (1)
Recoupment BUT 338 000
Limited to section 12C allowances claimed 288 000 (1)
(R192 000 + R96 000 = R288 000)
ALTERNATIVE
Selling price – received (R180 000 + R350 000) 530 000 (2)
Less: Tax value – fully deducted in 2022 (192 000) (1)
Recoupment BUT 388 000
Limited to section 12C allowances claimed
R192 000+ R96 000 = R288 000) (1)
Capital gains
Proceeds (R350 000 + R180 000 – R288 000 (recoupment)) 242 000
Less: Base cost (R480 000 – R288 000 (section 12C
allowance claimed)) (192 000)
Capital gain 50 000 (1)
Include @ 80% (inclusion rate for companies) 40 000 (1)
Total 12
Max 10
101 TAX4862/105/2023
(ii) Notes 2-4

Meat Made Easy Limited R R
2. Annual allowance:
(R20 000 + R30 000) x 7/12 (29 167) (2)
Section 12H(2A)(a) & section12H(5A) and apportion in terms
of section 12H(2A)(b) only in respect of full months
On completion:
(R20 000 + R30 000) sections 12H(3A) & 12H(5A) (50 000) (1)
3. Opening stock (180 x R10 800 (section 22(2)) (1 944 000) (1)
Cost of production (6 250 x R12 080) (section 11(a)) (75 500 000) (77 444 000) (1)
Sales (180 x (R10 800 x 160%)) 3 110 400 (1)

((5 580 – 180) x (R12 080 x 160%))
(section 1 - definition of gross income) 104 371 200 107 481 600 (2)
Machines moved to butcheries – no adjustment

(definition of gross income, paragraph (jA)) - (1)
Closing stock ((180 + 6 250) – 5 580) x R12 080 10 268 000 (2)
4. Income (zero-rated VAT as direct export) 50 000 (1)

Section 24C allowance
((R17 250 x 100/115) x 4)/(R25 000 x 4) x R50 000 (30 000) (3)
Total 15
Max 14
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This question consists of two related parts.
Megachef (Pty) Ltd (referred to as Megachef), a resident company, manufactures and sells premium
stainless steel kitchenware. This is classified as a process of manufacture by SARS. The company has
a 30 September year-end and is a registered VAT vendor. All amounts in the question exclude VAT (if
applicable), unless specifically stated otherwise.
Megachef started 10 years ago as the dream of the happily married couple Mr Salt and Mrs Pepper Chef
(who are married out of community of property). The company has, however, grown into a multimillion
rand business with a gross income of R12 500 000 and employed 16 full-time employees (including Salt
and Pepper) throughout the year of assessment. The shares are held in equal parts by Salt and Pepper,
who are also both directors of the company.
PART A 25 marks
The effect of the following transactions on Megachef’s 2023 year of assessment have not yet been taken
into account in the calculation of the taxable income of R8 450 670:
1. The following is a list of Megachef’s fixed assets and transactions relating to the fixed assets not yet
taken into account:
• Megachef ordered a new manufacturing machine (machine A) from a supplier in Germany for
€350,000 on 15 August 2022. Machine A was shipped free on board (FOB) on
1 September 2022 and was delivered at Megachef’s premises on 25 September 2022. The
correct amount of VAT was paid (and claimed as input tax) and import duties of R37 500 were
paid on importation. On 1 September 2022, Megachef entered into a 3-month forward exchange
contract (FEC) with Independent Bank Limited in order to hedge the full purchase price. The
machine was brought into use on 1 October 2022. The full payment for the machine was made
to the supplier on 30 November 2022.
Assume the following exchange rates were applicable:

Date Spot rate
€1 = R
15 August 2022 €1 = R14,38
1 September 2022 €1 = R14,50
€1 = R14,56 (forward rate under
a 3-month FEC)
25 September 2022 €1 = R14,55
30 September 2022 €1 = R14,30
€1 = R14,60 (forward rate under
a 2-month FEC)
1 October 2022 €1 = R13,95
30 November 2022 €1 = R13,70
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• Owing to Megachef’s rapid expansion, the company had to replace one of its mobile cranes
(crane A) with a more powerful one (crane B) for the packaging department. Crane A was
acquired new for R175 000 from an independent party on 15 June 2021 and immediately brought
into use. On 1 September 2022, crane A was sold for R182 000 to an independent party. Crane
B (new and unused) was purchased for R250 000 on the same day to replace crane A and was
immediately brought into use. Binding General Ruling No. 7 (or Interpretation Note No. 47)
allows for a 4-year write-off period on these mobile cranes, if applicable.
• During the last 6 months of 2019 a factory building and an office block were both erected by
Megachef at a cost of R1 500 000 and R650 000, respectively, and were both brought into use
on 1 January 2020.
2. During the 2023 year of assessment, an annuity of R5 000 was paid to Mrs Salad Dressing (aged 38),
a former employee who was instrumental in helping to set up the business but who decided to be a
stay-at-home mom after the birth of her twins during the 2022 year of assessment.
3. On 1 July 2023, Megachef registered a new patent for a newly designed kitchenware range under
the Patents Act 57 of 1978 and paid R2 800 for registration fees.
4. On 1 July 2022, Megachef entered into a 12-month learnership agreement with Ice Cream (not
disabled) who holds an NQF level 5 qualification. Ice Cream successfully completed the learnership
agreement on 30 June 2023. Ice Cream receives an annual salary of R50 000, which has already
been taken into account in the calculation of the company’s taxable income of R8 450 670.
5. Megachef has an assessed capital loss of R1 500 that the company brought forward from the 2022
year of assessment.
REQUIRED: Marks
Calculate the normal tax liability of Megachef (Pty) Ltd for its 2023 year of assessment.
Start your calculation with the taxable income of R8 450 670. Show all your calculations
and round off amounts to the nearest rand. Provide brief explanations to support your
calculations and clearly indicate nil effects (with a brief reason). Assume that the company
25
will qualify as an SBC and will elect any option available to minimise its tax liability.
104
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PART B 17 marks
Megachef (Pty) Ltd is one of the main sponsors of a reality cooking competition running for a 3-month
period (15 October 2023 to 15 January 2024). The sponsorship agreement (for which Megachef had to
pay its legal advisors R3 500 to draw up) stated the following:
• Megachef will supply all the kitchenware required by the contestants during the cooking competition.
Ownership of the kitchenware will be retained by Megachef during this period.
• Megachef’s logo and contact details will be advertised during and after every televised episode of
the show.
• All the kitchenware used by the contestants during the competition will be returned to Megachef at
the end of the competition, after which it will be donated to the Stellenbosch Children’s Orphanage
(not a registered PBO).
On 1 October 2023, kitchenware, with a cost price of R100 000 and a market value (excluding VAT) of
R150 000, was made available to the organisers of the competition.
On 31 January 2024, after the reality show was recorded, the kitchenware was checked by Salt and
Pepper before being donated to the children’s orphanage. They discovered that kitchenware with a cost
price of R3 750 (and an original market value (excluding VAT) of R5 625) had disappeared and that
kitchenware with a cost price of R2 250 (with an original market value (excluding VAT) of R3 375) had
been damaged beyond repair and could not be donated. The damaged kitchenware was sold as scrap
metal for R500 to a non-vendor, and this amount was then also donated to the children’s orphanage. The
remaining kitchenware, valued at R55 000 (market value (excluding VAT)) after being used in the
competition), was donated to the children’s orphanage that same afternoon. These were the only
donations that Megachef made during the 2024 year of assessment. Assume that donations made by
Megachef in prior years totalled R850 000.
REQUIRED: Marks
Discuss all the tax implications (except for VAT, which you can ignore) in respect of the
sponsorship agreement for Megachef (Pty) Ltd for its 2024 year of assessment. Your
discussion should refer to relevant legislation and also to case law, where applicable.
Substantiate your discussion with calculations.
Assume that the tax legislation for the 2024 year of assessment will remain the same as
legislation applicable to the 2023 year of assessment.
Present your answer under the following headings:
• Legal cost
• Kitchenware supplied for the competition
• Donation of kitchenware to Stellenbosch Children’s Orphanage
• Stock stolen
• Stock sold as scrap and proceeds donated
17
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PART A
Megachef (Pty) Ltd’s tax liability for the 2023 year of assessment
R
1 Fixed assets:
Machine A Purchase price (s 12E(1)) - capital:
imported – (€350,000 x R14,50 (s 25D)) + R37 500
ss 12E and 24I = R5 112 500 (2)
No s 12E allowance claimed during 2022 as only
brought into use on 1 October 2022, thus claim
100% under s 12E(1) in 2023 (5 112 500) (1)
Foreign exchange differences (s 24I)
All foreign exchange differences from 2022 would
have been deferred to 2023, since the asset was
only brought into use in 2023 (s 24I(7))
Debt:
2022: €350,000 x (R14,50 – R14,30) 70 000 (1½)
2023: €350,000 x (R13,70 – R14,30) 210 000 (1½)
FEC:
2022: €350,000 x (R14,60 – R14,56) 14 000 (1½)
2023: €350,000 x (R13,70 – R14,60) (315 000) (1½)
Cranes A and B Crane A: R

– ss 12E(1A), Purchase price = 175 000
8(4)(e) and par Less:
66 of Eighth Wear-and-tear (s 12E(1A)):
Schedule 2021: R175 000 x 50% (87 500)
2022: R175 000 x 30% (52 500)
(2)
Tax value 35 000
Less: Selling price of R182 000 limited
(1)
to cost 175 000
Recoupment (s 8(4)(a)) 140 000
But could elect par 66 of the Eighth Schedule as pro-

ceeds are equal to or greater than base cost (see
below) in 2022 and defer recoupment in terms of
(1)
s 8(4)(e)
Capital gains tax implications R

Proceeds 42 000 (1)
(R182 000 (SP) – recoupment of R140 000)
Less: Base cost (35 000) (1)
(R175 000 – s 12E(1A) of R140 000)
7 000
(Capital gain can be deferred (refer to discussion

above) – see end of calculation for CGT inclusion)
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QUESTION 5 - Suggested solution (continued) R
Crane B: R250 000 x 30% (2nd yr (2023): s 12E(1A)) (75 000) (1)
Therefore:
S 8(4)(e) recoupment on crane A:
R140 000 x 30% (same % as crane B) 42 000 (1)
Factory building Factory – R1 500 000 x 5% (s 13(1)) (75 000) (1)

and office block –
ss 13(1) and
Offices – R650 000 x 5% (s 13quin) (32 500) (1)
13quin
2 Annuity to former No deduction as not owing to ill health, old age or

employee – infirmity – s 11(m) not applicable - (1)
s 11(m)
3 Patent Full registration fee deductible (s 11(gB)) (2 800) (1)

registration fee –
s 11(gB)
4 Learnership Annual allowance: R40 000 x 9/12 (s 12H(2)(a)) (30 000) (1)
agreement – Completion allowance: R40 000 s 12H(3)) (40 000) (1)
s 12H
R
Capital gain/loss Capital gain on crane A (point 1 above)
calculation But par 66 of Eighth Schedule applicable, thus
R7 000 x 30% included (based on crane B) 2 100 (1)
Assessed capital loss brought forward from
the 2022 year of assessment (1 500) (1)
600
At 80% inclusion rate 480 480 (1)
TAXABLE INCOME 3 104 350
Tax liability = R57 698 + (27% x (R3 104 350 – R550 000))
= R57 698 + R689 675 747 373 (1)
(Apply SBC table – refer to par 8.5 in LU 8) Total 27
Max 25
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PART B
Tax implications of the sponsorship agreement
Legal cost
Income tax implications
The provisions of section 11(c) will first be applied to the legal cost of R3 500 to establish if it will be
deductible under this section (section 23B(3)).
Section 11(c) is applicable to legal expenses actually incurred by the taxpayer during the year of
assessment in respect of any claim, dispute or action of law arising in the course of or by reason of the
ordinary operations undertaken by them in the carrying on of their trade.
The finalisation of the sponsorship agreement is not in respect of any claim, dispute or action of law and
as such section 11(c) will not be applicable. (1)
Section 11(a) will have to be applied.
For an amount to be deductible in terms of the general deduction formula, all of the following requirements
must be satisfied (i.e. section 11(a) read with section 23(g) of the Income Tax Act):
• The taxpayer must carry on a “trade”.

• The amount to be claimed must constitute “expenditure or losses”.
• The expenditure or loss must be “actually incurred” by the taxpayer during the year of assessment
in which it is claimed.
• The expenditure or loss must be “incurred in the production of income”.
• The expenditure or loss must “not be of a capital nature”.
• The expenditure or loss can only be claimed to the extent to which the amount was laid out or
expended for the purposes of the taxpayer’s trade. (1)
All of the requirements are met, but “in the production of income” and “not of a capital nature” need to be
discussed further. (1)
To determine whether the legal cost was in the production of income, two questions should be asked:
• What action gave rise to the expenditure? The finalisation of the sponsorship agreement gave rise
to the expenditure. (1)
• Is this action closely connected with the income-earning activities? (Is it a necessary concomitant
of the business?) The sponsorship is closely related to the income-earning activities, since it will
lead to advertising, which will inevitably increase sales and will give rise to income in the future. (1)
(Port Elizabeth Electric Tramway Co Ltd case or BP South Africa (Pty) Ltd case) (1)
The legal cost was therefore expenditure incurred in the production of income.
(Alternative: the act entailing the expenditure must be a “necessary/inevitable concomitant” of the
taxpayer’s trade) (Joffe & Co (Pty) Ltd case)
In determining whether the expense is capital in nature, you must establish whether it is part of
• the cost of performing the income-earning operations – legal cost will be part of the cost of performing
the income-earning operations, or (1)
• the cost of establishing, improving or adding to the income-earning structure – it is not creating an
enduring benefit and will not be capital in nature
(New State Areas Ltd case or Rand Mines (Mining & Services) Ltd case) (1)
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The legal cost paid is part of the cost of performing the income-earning operations and thus not of a
capital nature and will be allowed as a deduction under sections 11(a) and 23(g). (1)
Kitchenware supplied for the competition
Trading stock has been used for purposes other than the disposal in the ordinary course of business
(section 22(8)(b)(iv)), therefore proviso (d) to section 22(8) will be applicable – the assets supplied
represent trading stock manufactured and as such represent assets to which the provisions of paragraph
(jA) of the gross income definition in section 1 will be applicable – and no recoupment will be made under
the provisions of section 22(8). It will still be treated as part of trading stock. No adjustment for tax
purposes. (2)
Donation of kitchenware to Stellenbosch Children’s Orphanage
Trading stock has been applied for the purposes of making a donation (s 22(8)(b)(i)) – note that
proviso (d) to section 22(8) will no longer be applicable, since it only applies to section 22(8)(b)(iv) – and
a recoupment at market value of R55 000 of the kitchenware supplied for the competition will be included
in the calculation of the taxable income of Megachef (Pty) Ltd. (Note that cost price is not recouped, since
section 18A will not apply to the donation.) (3)
No deduction of 10% of taxable income will be allowed under section 18A, since it was not made to a
qualifying PBO. (1)
Donations tax implications
Donations tax at a rate of 20% will be payable on the market value of the donation of kitchenware of
R55 000 plus the cash donation of R500, thus R11 100 (R55 500 x 20%) donations tax will be payable at
the end of the month following the month during which the donation was made after the date of the
donation, thus on or before 29 February 2024. (3)
Stock stolen
No further adjustment, since the deduction will be allowed when this stock is not included in closing stock.
(1)
Stock sold as scrap and proceeds donated
The R500 received for the sale of the damaged kitchenware should be included in gross income as trading
stock sold. (1)
The R500 donated will not be allowed under section 18A as a deduction from taxable income of Megachef
(Pty) Ltd, since it was not made to a qualifying PBO. (1)
Total 21 1
Max 17
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This question consists of three unrelated parts (part A to part C).
You are currently studying towards your Postgraduate Diploma in Applied Accounting Sciences (CTA 2)
and are preparing for your final examination. You have begged and borrowed various test and exam
questions from some of your friends studying at other institutions and today, after finalising your studies
of Tutorial Letter 105, have decided to attempt some of these questions as part of your final preparation.
Assume that all amounts exclude VAT, unless specifically stated otherwise.
PART A 13 marks
QUESTION FROM UNIVERSITY A
Standby Elec (Pty) Ltd (referred to as Standby) is a resident company that specialises in the
manufacturing and maintenance of industrial generators. Standby is a VAT vendor that only makes
taxable supplies. It has a 31 December year-end and does not qualify as a SBC.
The write-off period of generators under Binding General Ruling No. 7 (or Interpretation Note No. 47) is
15 years.
On 1 September 2022, Standby took one of its manufactured generators from its trading stock to be used
on a temporary basis as a capital asset at its administrative office building. It was Standby’s intention to
sell this generator in future. It will be sold as a used or second-hand generator. The cost to manufacture
this generator (incurred during its 2022 year of assessment) was R1 250 000. Its market value on
1 September 2022 was R2 050 000. Its market value on 31 December 2022 was R1 750 000.
On 30 August 2023, Standby sold the generator that it had been using in its administrative office building
for R1 955 000 (including VAT).
REQUIRED: Marks
(i) Calculate (supported with reference to legislation) the effect that the information
provided in part A has on the taxable income for Standby Elec (Pty) Ltd in its 2022
and 2023 years of assessment. Assume that the current legislation is applicable to 4
both the 2022 and 2023 years of assessment.
(ii) Recalculate (supported with reference to legislation) the effect that the information
provided in part A has on the taxable income for Standby Elec (Pty) Ltd’s 2022 and
2023 years of assessment, on the assumption that it does NOT manufacture
generators, but merely buys and sells them. Round off all amounts to the nearest 9
rand.
(University of Pretoria – adapted)

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PART B 9 marks
QUESTION FROM UNIVERSITY B
Going-Slow (Pty) Ltd (referred to as Going-Slow), a VAT vendor with a June year-end, is one of many
manufacturing companies (this is classified as a process of manufacture by SARS) currently experiencing
serious cash flow problems owing to the slow economy. To try and save the business and to regain
financial stability, the company has requested a compromise of its debts from several of its creditors.
The details of two of the transactions (both with independent parties) for which Going-Slow requested
and was granted a compromise of its outstanding debt on 30 June 2023 are listed below:
• Out-of-Cash Ltd discharged the outstanding debt relating to a new manufacturing machine
purchased by Going-Slow on 1 April 2022 for R1 850 000. SARS allows a 5-year write-off period
on these machines (if applicable) in terms of Binding General Ruling No. 7 (or
Interpretation Note No. 47). R950 000 of this debt was still outstanding on 30 June 2023.
• An outstanding creditor, Restless (Pty) Ltd, with a balance of R765 000 on 30 June 2023, was
discharged. Going-Slow owed Restless (Pty) Ltd this amount for various trading stock purchases
made during Going-Slow’s 2023 year of assessment. Going-Slow still had R350 000 of this trading
stock on hand at 30 June 2023.
REQUIRED: Marks
Discuss, supported by calculations and reference to income tax legislation, the normal tax
implications of the transactions for Going-Slow (Pty) Ltd for the company’s 2023 year of
9
assessment.
PART C 9 marks
QUESTION FROM UNIVERSITY C
On 15 September 2022 Reno Vate (a 40-year-old woman) decided to buy a small house, renovate it and
rent it out in order to earn additional income. The purchase price was R1 250 000. Although the property
is old, it only required limited work before it could be let.
The first tenant moved in on 1 January 2023 (paying a monthly rental of R8 000), after Reno had effected
the following renovations:
R
Replacing damaged carpets with wooden floors 25 000
Installing a security system 35 000
Painting the exterior and interior walls of the house 12 500
Landscaping the garden (the house did not have a garden before, only grass) 15 000
Total cost 87 500
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REQUIRED: Marks
Discuss, with reference to section 11(d) and case law, whether the renovation expenses
incurred by Reno Vate will be deductible for income tax purposes during her 2023 year of
assessment. 9
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PART A
(i) Effect on taxable income of Standby Elec (Pty) Ltd in its 2022 and 2023
years of assessment
R
2022 year of assessment
The manufacturing costs (excluding VAT) are deductible under s 11(a). (1 250 000) (1)
There is no s 22(8) adjustment (recoupment) - because the generator was
manufactured by Standby, it will be dealt with under par (jA) of the gross income
definition on disposal (no capital allowances are allowed as it is not considered to
be an allowance asset); thus it is treated as trading stock until sold. -
Closing stock is valued at cost (s 22(1)) (there was no reduction in the value of
the generator). 1 250 000 (1)

Opening stock (s 22(2)) (1 250 000) (1)
Gross income (s 1 par (jA)) (selling price, excluding VAT)
(R1 955 000 x 100/115) 1 700 000 (1)
4
(ii)Effect on taxable income of Standby Elec (Pty) Ltd on assumption that
it does NOT manufacture generators, but merely buys and sells them
The acquisition costs (excluding VAT) are deductible under s 11(a) (1 250 000) (1)
S 22(8) adjustment (recoupment) at market value 2 050 000 (2)
S 11(e) over 15 years (2 050 000/15 x 4/12) (45 556) (1)
Note: Section 11(e) is applied as the information states that Standby does not
manufacture generators, but merely buys and sells them.

S 11(e) over 15 years (2 050 000/15 x 8/12) (91 111) (1)
S 11(o) is NOT applicable since the write-off period exceeds 10 years
Tax value [R2 050 000 – R136 667 (R91 111 + R45 556)] = R1 913 333 and
(1)
selling price is R1 700 000 (R1 955 000 x 100/115) -
CGT
Proceeds: Selling price is R1 700 000 (excluding VAT) (1)
Base cost on date of sale: R2 050 000 – R136 667 (R91 111 + R45 556)
= R1 913 333 (1)
Standby will thus have a capital loss of R213 333 (R1 700 000 – R1 913 333)
that may be deducted from aggregate capital gains or carried forward to the next
year of assessment. (1)
Total 9
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PART B
Going-Slow (Pty) Ltd

R
Manufacturing machine – Out-of-Cash Ltd
The debt benefit arose due to a compromise regarding a debt that was initially
used to finance an allowance asset, therefore section 19 applies.
The amount of the debt benefit of R950 000 will first be applied to reduce the
base cost of the asset of R740 000 (R1 850 000 – R740 000 (40% - 2022
(s 12C)) – R370 000 (20% - 2023)) in terms of par 12A. The base cost of the
asset will now be reduced to Rnil (R740 000 – R740 000). No further (2)
allowances on the manufacturing machine will be allowed under s 19(7). (1)
The remaining debt benefit amount of R210 000 (R950 000 – R740 000) will be (1)
a recoupment.
Recoupment under s 19(6) read with s 8(4)(a) is included in gross income. 210 000 (1)
Trading stock – Restless (Pty) Ltd
The debt benefit amount of R765 000 will first be applied to reduce the cost of
the trading stock still held at the time of the compromise of the debt. The
deduction under s 11(a) for the trading stock purchased will be reduced to
R415 000.
Purchase of trading stock (s 11(a)). (765 000) (1)
Debt benefit due to compromise under s 19(3). 350 000 (1)
The remaining amount of R415 000 (R765 000 – R350 000) of the debt benefit
will be a deemed recoupment in gross income under s 19(4) read with s 8(4)(a).
Recoupment (s 19(4) read with s 8(4)(a)) 415 000 (2)
Total 9
PART C
The renovation cost will only be deductible if it meets all the requirements of section 11(d), namely
that it is
• expenditure actually incurred

• during the year of assessment
• on repairs of property
• occupied for the purposes of trade, or in respect of which income is receivable.
The expenditure was actually incurred by Reno Vate (given) during the 2023 year of assessment (started
on 15 September 2022 and finalised in December 2022, year-end 28 February 2023). (1)
The main concern is whether each cost can be classified as a repair. A repair is a renewal of a subsidiary
part, whereas an improvement will increase the income-earning capacity of the asset (Flemming v KBI
(1994)). (2)
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• Replacing damaged carpets with wooden floors – this is a repair, since it is a renewal of a
subsidiary part, although the replacement material is not identical (CIR v African Products
Manufacturing Co Ltd (1944)). (2)
• Installing a security system – this is not a renewal of a subsidiary part, it is a new addition and an
improvement to the house. (1)
• Painting the exterior and interior walls of the house – classified as a repair, since the house is
restored to its original condition. (1)
• Landscaping a garden (the house did not have a garden before, only grass) – the garden is a new
addition, will increase income-earning capacity – not a repair (not replacing a subsidiary part), but
an improvement. (1)
The replacement of the carpets and the painting of the walls might qualify for deduction under section
11(d) but only if they are in respect of an asset in terms of which income is receivable. Although income
was not received when the repairs were done, the section only requires that income is receivable at the
time of the repairs being done. (1)
Conclusion
The R25 000 for the floors and the R12 500 for the painting will be deductible under section 11(d),
whereas the cost of the garden and the security system will be classified as improvements and would be
part of the base cost of the house. (1)
Total 10
Max 9
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Five years ago, Mrs Flan, a cordon bleu chef, opened a cookery school. For this purpose, she formed a
close corporation, and named it Flan’s Cookery School CC. Mrs Flan is its sole member and one of its
employees.
Mrs Flan’s member’s interest in Flan’s Cookery School CC is her only shareholding in a company or close
corporation.
The school is registered as a vendor for VAT purposes. It has to submit a 2-monthly VAT return for periods
ending on the last day of February, April, June, August, October and December of each year. Flan’s
Cookery School CC has a February year-end.
The school enrols a total of 20 trainees each year. It is closed during the school holidays and therefore
operates over 4 terms per year. The trainees are charged a fee of R3 220 per term (which includes VAT
of R420).
You have recently qualified as a chartered accountant. Mrs Flan has approached you with the following
VAT and normal tax queries relating either to herself, or to Flan’s Cookery School CC, or to both of them.
Flan’s Cookery School CC purchased consumable stores (for example, soap powders, dish clothes,
dishwashing liquids, polish, oven cleaners, disinfectants) for its entire 2023 calendar year during
January 2023 for R23 000 (R20 000 plus R3 000 VAT).
Mrs Flan has taken 5% of these consumables for use in her private home (the cost of the individual items
of consumable stores used could not be readily determined). A further 10% was consumed by the cookery
school during January and February. At the end of its year of assessment, 85% of the consumable stores
were therefore still on hand.
REQUIRED: Marks
Explain to Mrs Flan both the normal tax and VAT consequences of using 5% of the
consumable stores purchased by Flan’s Cookery School CC in her private home and of 85%
of the consumable stores still being on hand at the end of the year of assessment of Flan’s
Cookery School CC. 5
(Extract SAICA 2002 - adapted)
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Normal tax implications for Mrs Flan
When Mrs Flan helped herself to the consumable stores, she was given a taxable fringe benefit by her
employer (Flan’s Cookery School CC). The value of this fringe benefit (fringe benefits will be covered in
TL106) is, in terms of paragraph 5(2) of the Seventh Schedule to the Income Tax Act, (1)
“the cost thereof to the employer or, where such asset was held as trading stock and the market value
thereof was less than such cost, such market value”. (1)
On the assumption that the market value is greater than the cost of the trading stock, the cost of R1 000
(R20 000 x 5%) must be included in Mrs Flan’s gross income.
Normal tax implications for Flan’s Cookery School CC
Flan’s Cookery School CC will be entitled to a R20 000 deduction in terms of section 11(a) in its 2023
year of assessment for the purchases of the consumable stores. Note that section 23H cannot limit this
deduction as it does not apply to the acquisition of trading stock. (1)
As the definition of trading stock includes consumable stores, it forms part of Flan’s Cookery School CC’s
trading stock.
Closing stock of R17 000 (R20 000 x 85%) is added back to taxable income for the 2023 year of
assessment, being the consumable stores on hand at the end of its year of assessment (section 22(1) of
the Income Tax Act). (1)
The use of the consumables by Mrs Flan falls under section 22(8)(b)(iv), in that it is trading stock that was
applied other than in the ordinary course of trade (as the cost could not be readily determined [given in
the facts]). Flan’s Cookery School CC will be deemed to have disposed of the trading stock at market
value. Therefore 5% of trading stock used by Mrs Flan will be included in Flan’s Cookery School CC’s
income as a recoupment at market value in terms of section 22(8)(B). A deduction of the same amount
will be allowed as part of salary cost. (1)
VAT implications for Flan’s Cookery School CC
When Flan’s Cookery School CC purchased the consumable stores, an input tax deduction of R3 000
was claimed. (1)
Although Mrs Flan took 5% of these consumable stores for her own use, no adjustment is required in
terms of section 18(1) of the VAT Act because the consumable stores are still used in making taxable
supplies (providing an employee with a fringe benefit). (1)
Flan’s Cookery School CC will, in terms of section 18(3) of the VAT Act, have to account for a deemed
output tax for this taxable benefit which it provided to its employee, Mrs Flan, calculated by multiplying
the cost of the consumable stores by the tax fraction (15/115). The cost is the consideration which is
calculated as the cash equivalent under the Seventh Schedule (being the lower of cost or open market
value, which in this case we assume is the cost), i.e. R1 000 (thus R1 000 x 15/115 = R130). (1)
No adjustment for the items still on hand at year-end.
Subtotal 8
Max 5
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This question consists of two related parts (A and B).
Etophia (Pty) Ltd (“Etophia”) is a South African company that manufactures leather suitcases and
handbags. The company has a December year-end and is a vendor for VAT purposes with monthly tax
periods. All amounts exclude VAT, unless specifically stated otherwise.
The information under parts A and B relates to the 2023 year of assessment of Etophia (Pty) Ltd.
PART A 20 marks
Factory buildings owned or leased
On 1 January 2021 Etophia purchased a plot of land for R450 000. Erection of a factory on this land
commenced on 1 February 2021. It was completed on 30 September 2021 at a cost of R2 500 000 and was
brought into use in a process of manufacture on 1 October 2021.
As a result of continued unrest in the vicinity of this factory, the board of directors of Etophia decided on
1 March 2023 to dispose of the land and buildings (factory) as soon as possible. The land and buildings were
sold to a non-connected party on 30 September 2023 for R3 300 000, R500 000 of which was for the land
and R2 800 000 for the buildings. Etophia continued to use the land and buildings in its process of manu-
facture for the period 1 March 2023 to 30 September 2023.
In anticipation of the proposed sale, Etophia entered into a 20-year operating lease agreement with Inco Ltd
(a South African taxpayer) for the lease of an industrial site on 1 March 2023. This lease agreement stipulated
that Etophia would
• pay a premium of R75 000 on 1 March 2023

• erect a factory on the site at a cost of R2 800 000
• from 1 March 2023, pay a monthly rental of R20 000
Erection of the factory commenced on 1 April 2023. It was completed on 30 September 2023 and was
brought into use on 1 October 2023. The cost of the factory was R3 300 000.
REQUIRED: MARKS
(i) Calculate the effect of the information provided above on the taxable income of
Etophia (Pty) Ltd for the year of assessment ending 31 December 2023.
Show all calculations and round off all amounts to the nearest rand.
Assume that Etophia wants to limit its normal tax liability for the 2023 year of
assessment to a minimum and will make any elections available to it in order to 12
achieve this. Refer to applicable legislation.
(ii) Assume that Etophia (Pty) Ltd entered into the operating lease with the Municipality
of Tshwane and not with Inco Ltd as stated in part A. Discuss the implications of the
premium paid and the erection of the factory on the taxable income of Etophia for the
year of assessment ending 31 December 2023. 8
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PART B 10 marks
1. Market research
During January 2023, Etophia decided to do some market research on the consumers’ preferred
colour of choice when purchasing suitcases and handbags. The total cost of the market research
The final results of the research showed that smokey grey was definitely the preferred colour of
choice.
2. Second-hand plant
On 1 May 2023, Etophia purchased a second-hand plant from Suppa (Pty) Ltd (a connected person)
for R220 000. Etophia brought the plant into use in its process of manufacture on the same day. This
plant was independently valued at a market value of R225 000 on 1 May 2023.
3. Residential property
On 1 November 2021, Etophia bought, from the developer, 5 of the 20 flats in a newly erected block
of flats in the Republic, at a total cost of R300 000 (including VAT) each. All of these flats were let to
employees for a monthly rental of R2 500 each, effective from 1 December 2021.
Etophia does not own any other residential units in the Republic.
4. Learnership agreement
Solomon Mathlanga (who is disabled and has an NQF level 6 qualification) has been in the employ of
Etophia since 1 January 2023. Solomon receives remuneration of R170 000 per annum. On
1 January 2023 Solomon entered into a 12-month registered learnership agreement with Etophia. He
successfully completed the learnership agreement on 31 December 2023.
REQUIRED: MARKS
Calculate the implications of all the above transactions on the taxable income of
Etophia (Pty) Ltd for the year of assessment ending 31 December 2023.
Show all calculations and round off all amounts to the nearest rand. 10
(Test 2 TAX4861 2014 – adapted)
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PART A (i) R R
Factory buildings and improvements to leasehold property

■ Old factory building
Cost of factory buildings 2 500 000
Section 13(1) allowance 2021 (R2 500 000 x 5%) (125 000)
(1)
Section 13(1) allowance 2022 (R2 500 000 x 5%) (125 000)
Section 13(1) allowance 2023 (R2 500 000 x 5%) (125 000) (125 000) (1)
Tax value 2 125 000
Less: Selling price, limited to cost 2 500 000 (1)
Recoupment of section 13(1) allowances 375 000
In terms of section 13(3) this recoupment of R375 000 may be

deferred (see below). It does not qualify for roll-over relief in
terms of par 66 of the Eighth Schedule as this paragraph does
not apply in respect of buildings. It also does not qualify for
par 65 of the Eighth Schedule because it was not disposed of
by expropriation, theft or destruction.
Capital gains tax implications
Land:
Proceeds 500 000
Less: Base cost (450 000)
Capital gain 50 000 (1)
Factory building R
Proceeds
- Received on disposal 2 800 000
- Less: Recoupment (s 13(3)) (375 000) 2 425 000 (1)
Less: Base cost

- Cost 2 500 000
- Less: Section 13(1) allowances claimed (375 000) (2 125 000) (1)
Capital gain/loss 300 000
■ New factory buildings

Section 11(f) lease premium allowance
R75 000/(20 yrs x 12 mths = 240 mths) x 10 (3 125) (1)
OR /20 x 10/12 = R3 125
Section 11(g) leasehold improvement allowance on

contracted value
R2 800 000/(20 yrs x 12 mths = 240 mths – 7 mths = 233) x
3) (36 052) (2)
OR /19,42 (20 yrs – 7 mths to complete) x 3/12 = 36 045
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QUESTION 8 – Suggested solution (continued) R R
Rental deduction – section 11(a)

R20 000 x 10 = R200 000 (200 000) (1)
Section 13(1) annual allowance:

Cost of factory 3 300 000
Less: Section 11(g) allowance (in total) (2 800 000) (1)
Less: Section 13(3) deferred recoupment (see above) (375 000) (1)
125 000
Section 13(1) annual allowance: R125 000 x 5% (6 250) (1)
Capital gain/loss
Gain on disposal of land 50 000
Gain on disposal of factory building 300 000
Net capital gain 350 000 (1)
Include in taxable income at inclusion rate – R350 000 x 80% 280 000 (1)
Total 15
Max 12
PART A (ii)
Sections 11(a) and 23(g)

The lease premium and the leasehold improvements will not be deductible in terms of
section 11(a) read with section 23(g), as these amounts are capital in nature. (1)
Sections 11(f) and 11(g)

Proviso (dd) to section 11(f) as well as proviso (vi) to section 11(g) both provide that the
deductions in terms of these sections will not be available to the taxpayer if the premium paid or
value of improvements does not constitute income of the person to whom it is paid or to whom the
right to have such improvements effected accrues. (1)
Section 10(1)(a) exempts from normal tax the receipts and accruals of the government of the
Republic in the national, provincial or local sphere. (1)
The Municipality of Tshwane is exempt in terms of s 10(1)(a) and will not be taxed on the lease
premium received or the value of the leasehold improvements and therefore Etophia will not
qualify for a deduction in terms of section 11(f) and 11(g). (1)
Section 11(f) contains an exception to the rule in respect of lease premiums paid in respect of the
use of certain lines or cables – Etophia does not qualify for this exception. (1)
Section 12N
In terms of section 12N, if a taxpayer incurs expenditure in respect of improvements to land or
buildings leased in terms of an agreement with the government of the Republic in the national,
provincial or local sphere, the taxpayer will for purposes of sections 11D, 12B, 12C, 12D, 12F, 12I,
12S, 13, 13ter, 13quat, 13quin, 13sex or 36 and for the Eighth Schedule be deemed to be the owner
of the improvements. (1)
As a result of section 12N the taxpayer will, although he does not qualify for the application of
section 11(f) and 11(g), qualify for a section 13 deduction in respect of the improvements.
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Section 13
Section 13 provides for a deduction in respect of buildings and improvements used in a process
of manufacture in the course of any trade other than mining or farming.
Proviso (d) to section 13(1) provides that in the case of an improvement as contemplated in
section 12N, the expenditure incurred by the taxpayer to complete the improvement is for the (1)
purposes of section 13 deemed to be the cost to the taxpayer of any building or improvement.
Etophia will thus qualify for a deduction of
R3 300 000 – R375 000 (recoupment in terms of s 13(3)) x 5% = R146 250 (2)
Total 9
Max 8
R
PART B
1 Market research
Deductible under section 11(a) (50 000) (1)
2 Second-hand plant
Section 12C applicable as second-hand plant used in manufacturing
process (from connected person – no effect on cost).
Section 12C allowance based on lesser of cost (R220 000) or cash
cost in an arm’s length transaction (R225 000):
Therefore section 12C allowance calculated on R220 000
R220 000 x 20% (second-hand plant) (44 000) (2)
3 Residential units
Residential units rented
Rent received R2 500 x 5 x 12 months 150 000 (1)
Section 13sex is applicable as Etophia owns at least 5 residential
units within the Republic.
Cost R300 000 each (VAT not deductible as exempt supply), thus
less than R350 000 each.
Rent is R2 500 per month each, thus less than 1% of cost.
The units qualify as “low-cost residential units”, as defined in
section 1 of the Income Tax Act. (1)
R300 000 x 10% x 55% x 5 = R82 500 (82 500) (3)
(Note that for the purpose of testing for the 1%, cost can be increased
by 10% for each year succeeding the year in which the flat is first
brought into use. Thus for cost use: (R300 000 x 10% x 2) +
R300 000 = R360 000).
4 Learnership agreement
Salary – Solomon (170 000) (1)
Annual allowance – R60 000 (i.e. R40 000 + R20 000) (section
12H(2)(a) read with 12H(5)) (60 000) (1)
Completion allowance – R60 000 (i.e. R40 000 + R20 000)
(section 12H(3) read with 12H(5)) (60 000) (1)
Total 11
MAX 10
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Mr Solute Kerzner acquired equity shares in a company listed on the Johannesburg Stock Exchange
(JSE Ltd) on 10 December 2019. At the time of acquisition, he intended to hold these shares as an
investment. However, during July 2021, he changed his intention to that of speculating with listed shares,
thereby effectively commencing to carry out a scheme of profit-making by trading with such shares and
seen by SARS as a share dealer. On 5 April 2022, these share prices reached an all-time high and he
disposed of the shares at a considerable profit. Details of these shares are as follows:
R
Cost price 10 000
Value at the time of changing his intention 40 000
Proceeds on disposal 100 000
No other disposals were made by Mr Kerzner for the entire period, except for the information provided
above.
REQUIRED: Marks
(i) Briefly discuss whether the proceeds on the disposal of the listed shares during the
2023 year of assessment will constitute gross income in his hands. Refer to relevant 4
case law.
(ii) Explain the normal tax implications (if any) that will flow from the change of intention
by Mr Kerzner during the 2022 year of assessment. 4
(iii) Indicate whether your answer to (i) will be different if the acquisition date was
10 December 2018 (and not 10 December 2019) and, if so, indicate in what way. 3
(i) The proceeds on the sale of the shares will only constitute gross income if it is revenue in nature.
The intention of the taxpayer with regard to the shares will determine the capital or revenue nature
of the proceeds. Initially, when the shares were bought, the taxpayer’s intention was to hold the
shares as an investment (and earn dividend income), thus as a capital asset (“tree v fruit” – Visser’s
case). However, the taxpayer’s intention changed in the course of the 2022 year of assessment
from holding the shares as an investment to dealing in shares. The taxpayer has “crossed the
Rubicon” (Natal Estates case) with no distinction between an investment and a speculative portfolio.
Accordingly, the proceeds of R100 000 on the sale of the shares are revenue in nature and
constitute gross income. (4)
(ii) In terms of paragraph 12(2)(c) of the Eighth Schedule, Mr Kerzner will be treated as having disposed
of his capital asset (the listed shares) for proceeds equal to its market value at the time of such
change of intention (R40 000) while, in terms of section 22(3)(a)(ii), he will also be deemed to have
acquired trading stock at a cost equal to that same market value (R40 000). The deemed disposal
of the capital asset will result in a capital gain of R40 000 (deemed proceeds) less R10 000 (base
cost) = R30 000 for Mr Kerzner. Mr Kerzner is entitled to an annual exclusion of R40 000 against
the total capital gains, which in this case amounts to R30 000 and accordingly, his taxable capital
gain is nil. Mr Kerzner will now hold such shares (from the time of changing his intention) as part of
his opening balance of trading stock at the same amount of R40 000. (4)
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(iii) Yes, it would differ. The shares would then constitute “qualifying shares” in terms of section 9C of
the Income Tax Act and section 9C will apply to deem the proceeds on disposal of the shares to
be capital in nature as they were held for more than three years (notwithstanding the fact that
they were held with a speculative intention and held as trading stock). The proceeds will thus not
constitute gross income, but will be subject to capital gains tax. (3)
11
Peter Molantoa (55 years of age) is a local businessman residing in Modimolle, Limpopo, South Africa.
He owns and manages the following two separate business enterprises as a sole proprietor:
• Business enterprise 1: Manufacturing, packaging and retailing of sorghum malt (sorghum

business)
• Business enterprise 2: Letting of business and residential properties (rental business)
Both business enterprises are registered as separate branches for VAT purposes on the invoice basis.
All amounts exclude VAT unless specifically indicated or implied otherwise. Peter wants to pay the least
amount of tax legally possible.
The following notes pertain to the two business ventures mentioned above:
Business enterprise 1
1. Factory 1 (store and drying plant) (sorghum business)
Peter purchased an 80-hectare property situated near the town of Modimolle at a cost of R2 300 000
(open market value) during February 2020 from an individual (a resident, but not a VAT vendor nor a
connected person) and immediately commenced constructing a large store on the property from which to
operate a drying plant for sorghum malt. The cost of excavating and levelling the land amounted to
R120 000. The cost of the construction of the building (store) amounted to R570 000. The construction of
the store was completed on 31 May 2020 and the store in its entirety qualifies as a building used in a
process of manufacture. From 1 April 2020, when the property was registered in his name, Peter has
been settling the purchase price in R50 000 monthly instalments on an interest-free basis.
A new drying plant was imported from Japan. The cost price of R512 000, correctly translated to SA rand,
was paid on 15 March 2020. Import duties amounted to R75 000 and was also paid on 15 March 2020.
The drying plant was installed in the store during June 2020 at a cost of R53 000. Both the drying plant
and the store were brought into use on 1 August 2020.
In order to improve the industrial capacity of the store, a loading bay was added to the store at a cost of
R180 000 and inside the store an office (also part of the store) was constructed at a cost of R95 000. Both
these improvements were brought into use on 1 May 2022. The office consisted of 10% of the total floor
space of the store and loading bay.
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2. Delivery trucks (sorghum business)
Peter purchased and brought into use two delivery trucks (truck 1 and truck 2) at a cost of R230 000 each
on 1 August 2021 and financed them with two suspensive sale agreements at African Bank. Monthly
instalments amounted to R6 777 (including VAT) per truck, payable from 1 August 2021. The interest
portion of the amortisation of instalments number 8 (March 2022) to number 18 (January 2023) is R20 849
for truck 1 and for instalments number 8 (March 2022) to number 19 (February 2023) it is R22 472 for
truck 2. These trucks may be written off over 4 years in terms of Binding General Ruling No. 7 (or
Interpretation Note No. 47).
Truck 1 was completely written off in an accident on 30 January 2023 (after instalment number 18 of the
finance agreement was paid). Peter was indemnified by his insurance company on 1 February 2023 when
the insurance company deposited R210 000 into his bank account.
3. Factory 2 (sorghum business)
In the past Peter purchased germinated sorghum (to be placed in the drying process), but he has now
decided to germinate his own sorghum (a process of manufacture) as he could purchase it at favourable
prices from local farmers. Peter entered into a 5-year lease agreement with the owner (not a tax-exempt
entity) of a stand in the industrial area of Modimolle for the right of use of the property from 1 June 2022.
In terms of the lease agreement Peter was obliged to effect improvements to the property to the value of
R600 000. The improvements consisted of the laying (pouring/constructing) of level and connecting
blocks of concrete over an area of 600 m2. These improvements will qualify as a building used in the
process of manufacture.
Peter commenced with the laying of the connecting blocks of concrete on 1 June 2022 and it was
completed and brought into use by the sorghum business on 1 September 2022 at a cost of R850 000.
Business enterprise 2
4. Residential units (rental business)
Peter purchased 4 residential units with a cost price of R550 000 each in a new residential development
on the outskirts of Modimolle in January 2022. The properties were all registered in his name on
1 April 2022 and immediately placed on the rental market by a rental agent. Two of the properties (units
1 and 2) were let from 1 June 2022 and the other two (units 3 and 4) only from 1 July 2022. The rent per
unit is R5 500 per month.
The properties were financed by way of mortgage loans at a local bank. The interest on the mortgage
loans was incurred as follows:
Units 1 and 2 1 April 2022 to 31 May 2022 R16 488
1 June 2022 to 28 February 2023 R73 558
Units 3 and 4 1 April 2022 to 30 June 2022 R24 713
1 July 2022to 28 February 2023 R65 333
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5. Office building (rental business)
Peter purchased a newly developed office building directly from a developer (a VAT vendor) at a total
inclusive cost of R6 555 000 on 1 October 2022 and paid a R500 000 deposit on the same date. The
balance of R6 055 000, which was paid on 2 January 2023, was financed by a bank loan over a 20-year
period with fixed monthly repayments of R54 478 payable from 31 January 2023. The fixed yield to
maturity rate on this finance is 0.75% per month.
The building was registered in Peter’s name on 2 January 2023 and he immediately entered into a 10-
year lease agreement with a provincial government department through which the department leases the
building from Peter at a monthly rental of R85 000 from 1 February 2023. By 28 February 2023 Peter had
not yet received any payment from the department, but he was still hopeful that he would eventually
receive payment.
On 2 January 2023 he paid the short-term insurance on the building for a period of 12 months (evenly
incurred) in advance. The total premium amounted to R136 800.
6. Laptop purchased (rental business)
A laptop with a cost price of R20 700 (VAT included) was purchased and brought into use by the rental
business on 1 February 2023. Laptops may be written off over 3 years in terms of Binding General Ruling
No. 7 (or Interpretation Note No. 47). You may assume that SARS will accept a turnover-based method
ratio of 80% for commercial rentals and 20% for residential rentals.
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REQUIRED: Marks
(i) Discuss, supported with calculations, the VAT effect of the purchase of the property in
note 1 for the sorghum business.
You also need to indicate when input tax (if any) may be claimed.
You are not required to refer to legislation in your discussion. You must assume that
current legislation applies.
4
(ii) Calculate the income tax effect of the transactions in notes 1 to 3 for the sorghum
business for the year of assessment ended 28 February 2023.
19
If a specific item has no income tax effect, indicate this together with reasons for it.
(iii) Indicate, with reasons, how your answer to (ii) will differ if Peter constructed the
building used in the process of manufacture (factory 2 in note 3) on land owned by the
municipality (a local government and a tax-exempt entity). 4
(iv) Indicate, with reasons, how your answer to (ii) will differ if Peter constructed an office
building instead of a building used in a process of manufacture (factory 9 in note 3) on
the leasehold property owned by a taxpaying entity. 2
(v) Discuss, supported with calculations and relevant references to the Income Tax and
VAT Acts, the income tax and VAT effect for Peter if he decides to sell the property,
including the store and the improvements (factory 1), on 1 April 2023 to an unconnec-
ted person, but excluding the drying plant which will be moved to different premises
(refer note 1).
Peter will reinvest the full proceeds from the sale of the store and improvements in a
similar replacement asset (also a store to be used solely in a process of manufacture)
within a period of 4 months.
The expected selling price is R2 400 000 (excluding VAT) for the property and
R840 000 (excluding VAT) for the store (factory 1).
The tax value of the store and improvements have already been correctly calculated
as R703 500 as at 1 April 2023.
The total cost price for the store and improvements amounted to R845 000 (exclu-
ding VAT) on 1 April 2023 (note 1).
You may ignore any capital gains tax consequences of these transactions. 6
(vi) Calculate the income tax effect of the transactions in notes 4 to 6 for the rental busi-
ness. If a specific item has no income tax effect, indicate this together with a reason
for it.
15
TOTAL 50
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(i) VAT effect on purchase of land
Notional input tax can be claimed on the land purchased as it is second-hand goods from a (1)
non-vendor (a supply that is not a taxable supply).
The notional input tax should be claimed as the tax fraction (15/115) with no apportionment, (1)
as the land will be used entirely (100%) for enterprise purposes to make taxable supplies.
Value of supply in terms of par (b) of the definition of input tax will be the lower of the (1)
consideration in money or the open market value - both constituting R2 300 000 in this case.
R2 300 000 x 15/115 = R300 000 (1)
Time of supply in terms of section 9(3)(d) is the earlier of registration or the date of any (1)
payment - 1 April 2020.
However, in terms of section 16(3)(a)(ii)(bb)(A) the input tax may only be deducted when
the property has been registered and then only to the extent that payment, which reduces
the obligation, is made (section 16(3)(a)(iiA)).
(1)
Therefore, the notional input tax may be claimed in every tax (VAT) period when a R50 000
payment is made OR R50 000 x 15/115 = R6 522
Total 6
Max 4
(ii) Income tax effect of the sorghum business (transactions in notes 1 to 3)

R
1 Plot of land purchased - no deduction
Capital expenditure - forms part of base cost for CGT purposes - no
deduction for income tax. Also no deduction for repayments made on the
loan as there is no interest portion to deduct. - (1)
Store (building used in the process of manufacture)

Section 13(1) allowance - R570 000 x 5% (28 500) (1½)
Cost of excavating and levelling of the land is regarded as a capital
expenditure (R120 000) (SARS practice) - no allowance - (½)
Drying plant (new)

Section 12C allowance – [R512 000 + R75 000 + R53 000]
= R640 000 x 20% (40:20:20:20) – yr 3 (128 000) (2)
Loading bay (building used in the process of manufacture)

Section 13(1) allowance - R180 000 x 5% (9 000) (1)
Office inside store (improvements made to offices in a manufacturing
building do not qualify for s 13, since they will not be effected for the purpose
of increasing or improving the industrial capacity of these buildings) - (1)
The building is still used mainly in the process of manufacture.

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QUESTION 10 - Suggested solution (continued) R R
2 Delivery truck (2)

Section 11(e) allowance - February 2023 - R230 000/4 years (57 500) (1)
Interest incurred (section 24J) (22 472) (1)
Delivery truck (1)

Cost 230 000
Less: Wear-and-tear - Feb 2022 (R230 000/4 y x 7/12 m) (33 542) (1)
Less: Wear-and-tear - Feb 2023 (R230 000/4 y x 11/12 m) (52 708) (52 708) (1)
Tax value 143 750
Interest incurred (section 24J) (20 849) (1)
Insurance proceeds (R210 000 x 100/115) 182 609 (1)

Less: Tax value (143 750) (1)
Recoupment - section 8(4)(a) 38 859 38 859 (1)
CGT calculation:
Proceeds = R182 609 less R38 859 (recoupment) = R143 750
Less: Base cost = R143 750 (R230 000 – (R33 542 + R52 708) (s11(e) (1)
(allowances))
Capital gain/(loss) = Rnil -
3 Factory 2 - leasehold improvements

Section 11(g) allowance on leasehold improvements
R600 000/(60 months – 3 months) x 6 months (63 158) (2)
Section 13(1)(b) allowance on excess improvements
R250 000 (i.e. R850 000 - R600 000) x 5% (12 500) (1)
Total 19
(iii) Construction on leasehold land owned by the municipality
No section 11(g) allowance can be claimed as the improvements will not be income in
terms of par (h) of the gross income definition in the hands of the municipality in terms of (2)
section 11(g)(vi).
However, in terms of section 12N, the lessee is deemed to be the owner of the leasehold
improvements and therefore Peter will qualify for a section 13(1) allowance of 5% on the
cost price of the improvements of R850 000. (2)
Total 4
(iv) Construction of offices instead of building used in the process of manufacture
No section 13quin allowance will be available on the amount of improvements exceeding

the R600 000 according to the agreement as the taxpayer needs to be the owner of the
improvements to qualify for the section 13quin allowance. (2)
The taxpayer still qualifies for the section 11(g) allowance on the first R600 000 of the
improvements.
Total 2
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(v) Income tax and VAT effect on the selling of the land and the store
VAT effect
Output tax must be levied on the selling price of both the property and the store at 15%
as the assets form part of the enterprise and were used to make taxable supplies.
Section 7(1)(a) of the VAT Act. (1)
(R2 400 000 + R840 000) x 15% = R486 000 (2)

This is NOT the sale of a going concern.
Income tax effect

Recoupment in terms of section 8(4)(a) of the Income Tax Act of R840 000 - R703 500 =
R136 500 (2)
CGT: Proceeds (R2 400 000) less base cost (R2 300 000 x 100/115) = R400 000
(specifically not required)
BUT, in terms of section 13(3) of the Income Tax Act the recoupment does not have to
be included in taxable income, as a replacement building will be purchased or erected
within 12 months from the selling date of 1 April 2023. The recoupment will be deducted
from the cost price of the replacement asset. (1)
The selling of the land only gives rise to a capital gain as no allowance was claimed (not
required).
Par 65 of the 8th Schedule is not applicable as it will not be an involuntary disposal (not
required).
Par 66 of the 8th Schedule is not applicable as it does not apply to section 13 assets as
is the case under review (not required).
Total 6
(vi) Income tax effect of the transactions in notes 4 - 6 for the rental business
R
4 Residential units
No section 13sex allowance on residential units let as Peter owns fewer than
5 units in the RSA - (1)
Interest incurred (section 24J) - fully deductible as the properties

were available for letting from 1 April 2022
Units 1 and 2 - 1 April 2022 to 31 May 2022 (16 488) (½)
Units 1 and 2 - 1 June 2022 to 28 February 2023 (73 558) (½)
Units 3 and 4 - 1 April 2022 to 30 June 2022 (24 713) (½)
Units 3 and 4 - 1 July 2022 to 28 February 2023 (65 333) (½)
Rent received (R5 500 x 2 units x 9 m) + (R5 500 x 2 units x 8 m) 187 000 (2)
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5 Office building
Section 13quin allowance on building (new and unused)
(R6 555 000 x 100/115 x 5% x 100%) (285 000) (2)
Interest incurred on the loan for January 2023 (R6 055 000 x 0.75%) (45 413) (1)
Interest incurred - January 2023 - may not qualify under section 11(a) due to
trade requirement, but could qualify under section 11A (pre-trade
expenditure)
Interest incurred on the loan for February 2023 (R6 045 935 x 0.75%) (45 345) (2)
(R6 055 000 + R45 413 - R54 478 = R6 045 935 x 0.75%)
Rent income (accrued) for February 2023 85 000 (1)
Short-term insurance - January 2023 - R136 800/12 = R11 400 - may not
qualify under section 11(a) due to trade requirement, but could qualify under
(1)
section 11A (if the requirements of section 11A are met, also can only be
deducted from taxable income for rental from office and cannot create a loss)). (11 400)
Short-term insurance - February 2023 - R11 400 (11 400)
Short-term insurance - March - December 2023 - R114 000 - not deductible
(section 23H) as it is for a period of > 6 months and > R100 000. - (1)
6 Laptop purchased
R20 700 - ([R20 700 x 15/115] = R2 700 VAT x 80%) = R20 700 - R 2 160 =
R18 540/3 y x 1 m/12 m) (515) (3)
Total 16
Max 15
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Background information
Pinotage Winery Ltd(Pinotage) is a resident company that produces and bottles wine (classified as a
“process of manufacture” by SARS) that is sold both locally and internationally. Pinotage has an August
year-end and a one-month tax period for VAT purposes. Pinotage is not a small business corporation.
The equity share capital in Pinotage is held as follows:
• 60% by Bordoux Ltd (“Bordoux”), a non-resident company located in France;

• 25% by Shiraz Ltd (“Shiraz”), a resident company that is a registered vendor for VAT purposes
and has a September year-end; and
• 15% by Harvest (Pty) Ltd (“Harvest”), a resident company that is not registered for VAT purposes
and has a September year-end. Bordoux holds 55% of the shares in Harvest. The other 45% of
the shares are held by Shiraz.
Before taking into account the income tax effect of the transactions and information listed below, Pinotage
has a taxable income of R1 250 000 for its 2023 year of assessment. All amounts exclude VAT, unless
indicated otherwise.
1. On 1 July 2023 Pinotage sold and directly exported 15 000 bottles of wine to Bordoux at €5 (including
VAT at 0%) a bottle. Pinotage usually sells and exports wine at €9 (including VAT) a bottle to foreign
buyers. 60% of the selling price was paid on 31 July 2023 and the outstanding 40% of the purchase
price is only payable on 1 October 2024. Bordoux will pay interest at 5% per annum from the date of
purchase on all amounts owing to Pinotage. Pinotage usually charges interest at a rate of 11% on all
credit sales effective from the date of purchase.
The relevant exchange rates are as follows:
Spot rate
Date
€1 = R
1 July 2023 €1 = R15,86
31 July 2023 €1 = R15,90
31 August 2023 €1 = R15,95
31 August 2024 €1 = R15,85
1 October 2024 €1 = R15,80
Average exchange rate for the period 1 July 2023 to 31 July 2023 €1 = R15,88
Average exchange rate for the period 1 July 2023 to 31 August 2023 €1 = R15,92
2. On 1 August 2023 Pinotage entered into a contract with Bottle It Up Ltd (an independent party) to
produce 75 000 bottles of a specific variety of wine that would only be sold to Bottle It Up Ltd. The
contract price was R800 000. Bottle It Up Ltd paid Pinotage R450 000 on 1 August 2023, the date
that the contract was entered into. The remaining R350 000 is payable on the date of delivery of
the wine. At 31 August 2023 Pinotage had incurred expenses of R150 000 in respect of the contract
and the company will have to incur further expenses of R200 000 to meet its obligations in respect
of the contract. The total amount of expenditure (R350 000) meets the requirements of
section 11(a).
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3. On 31 August 2023 Pinotage owned the following assets with a tax value of more than Rnil:
• Four flats in South Africa. The flats were acquired on 15 June 2022 at a cost of R320 000
(including VAT) each, directly from the developer. Since 1 July 2022 all the flats have been
rented to tenants for R2 500 each per month.
• An office building that was purchased on 1 July 2022 from Welston (Pty) Ltd (a non-connected
party) for R920 000. Welston (Pty) Ltd erected the office building during 2014 for its own use.
• A building in which the wine is produced (a factory) that was erected at a cost of R2 500 000
during the 2017 year of assessment. Pinotage paid R360 000 for improvements to the building
during the 2023 year of assessment.
• A manufacturing machine (machine A) that was given to Pinotage by Shiraz, free of charge, on
1 November 2022. Shiraz purchased the manufacturing machine new for R650 000 on
1 March 2020. On 1 November 2022 (the date that the machine was transferred and brought
into use by Pinotage) the manufacturing machine had an open market value of R570 000.
• Two manufacturing machines (machine B and machine C). Machine B was purchased new for
R740 000 on 1 May 2021 and machine C was purchased new for R820 000 on
1 December 2022. Both machines were brought into use on the date of purchase.
Binding General Ruling No. 7 allows for a 5-year write-off period on this type of manufacturing machine.
REQUIRED: Marks
(i) Calculate the effect that the transactions and information provided in the question will have
on the taxable income of Pinotage for the company’s 2023 year of assessment. Address
each item and if any item or part of an item has no income tax effect, provide a reason.
Assume that the Commissioner will allow the gross cost percentage on a contract as the 30
basis for calculating future costs, where applicable.
Round off all amounts to the nearest RAND.
(ii) Calculate the dividends tax payable in respect of the transactions and information provided
in the question. Also indicate by whom the dividends tax is payable. 3
Round off all amounts to the nearest RAND.
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(i)
R
1. Sales – (15 000 x €5) x R15,86 1 189 500 (2)
Section 31(2) adjustment – proceeds included in gross 951 600 (2)

income to be adjusted to market value: 15 000 x (€9 - €5) x
R15.86
OR
Sales – (15 000 x €9) x R15,86 = R2 141 100
Section 24I – Foreign exchange

Realised exchange difference – payment of 60% section 24I(10A)(a))
(15 000 x €5) x 60% x (R15,86 - R15,90) = gain of R1 800 1 800 (2)
Unrealised exchange difference – on year-end 40% outstanding -

section 24I(10A)
(15 000 x €5) x 40% x (R15,86 – R15,95) = R2 700 gain is not - (1)
recognised as
• the transaction is between connected persons
(section 24I(10A)(a)(i)(aa)) (1)
• the debt is not hedged (section 24I(10A)(a)(i)(bb) (1)
• no part of the exchange item represents a current asset or liability for
IFRS reporting purposes – loan only repayable on 1 October 2024 (1)
(section 24I(10A)(a)(ii)(aa)
• the debt is not funded by any debt owed to any person that does not form
part of the same group of companies or a connected person
(section 24I(10A)(a)(ii)(bb) (1)
Interest received/accrued – section 24J
On 60% of the debt paid – (15 000 x €5) x 60% x 5% x 31/365 3 035 (2)
x R15,88 = R3 035
On 40% of debt not paid - (15 000 x €5) x 40% x 5% x 62/365 4 056 (2)
x R15,92 (section 25D(1)) = R4 056
Note:
The interest was translated at an average rate for the period during which it accrued as
interest is accrued on a daily basis (s24J) and using the average rate provides a more
accurate amount than using the spot rate at the end of the accrual period.
Section 31(2) adjustment
The interest that would have arisen had the credit transaction
been between Pinotage and an independent third party would
have been
(15 000 x €5) x 60% x 11% x 31/365 x R15,88 6 676
(15 000 x €5) x 40% x 11% x 62/365 x R15,92 8 924
Total amount of interest payable 15 600
Less: Amount accounted for (R3 035 + R4 056) (7 091) 8 509 (2)
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Foreign exchange differences – interest debited against the

debt:
On 60% of the debt paid:
((15 000 x €5) x 60% x 5% x 31/365) x (R15,88 – R15,90) = R3,83
gain 4 (2)
Section 31 adjustment on 60% paid:
((15 000 x €5) x 60% x (11% - 5%) x 31/365) x (R15,88 – R15,90)
= R4,59 additional gain 5 (2)
On 40% of debt not paid:

((15 000 x €5) x 40% x 5% x 62/365) x (R15,92 – R15,95) = R7,64
gain
Section 31 adjustment on 40% not paid:
((15 000 x €5) x 40% x (11% - 5%) x 62/365) x (R15,92 – R15,95)
= R9,17 additional gain
But section 24I(10A) applicable, therefore not included (1)
2. Part of contract price received 450 000 (1)

Expenses incurred – deductible in terms of section 11(a) (150 000) (1)
Section 24C deduction:
Gross cost percentage – (R150 000 + R200 000)/R800 000 = 43.75% (1)
Cost relating to amount received: R450 000 x 43.75% = R196 875 (1)
Cost still to be recognised: (R196 875 – R150 000) = (46 875) (1)
3. Flats
Rent received – (R2 500 x 12) x 4 120 000 (1)
No section 13sex deduction available as Pinotage does not own
at least 5 flats in South Africa - (1)
Office building
Section 13quin not available as building was not new and unused
on the date of acquisition - (1)
Factory
(R2 500 000 + R360 000 (improvements)) x 5% (section 13(1)) (143 000) (2)
Manufacturing machine A
No section 12C allowance, because cost is Rnil. Claim section
11(e) wear-and-tear on value over 5 years:
(R570 000 x 100/115)/5 x 10/12 (82 609) (2)
Manufacturing machine B
R740 000 x 20% (section 12C – (year 3)) (148 000) (1)
Manufacturing machine C
R820 000 x 40% (section 12C (year 1)) (328 000) (1)
Total 36
Max 30
(ii)
Dividends tax
In terms of section 31(3) a deemed dividend in specie should be accounted for in respect of the
section 31(2) adjustment, thus:
dividends tax payable - (R951 600 + R8 487) x 20% (section 64E(1)) = R192 017 (2)
The dividends tax is payable by Pinotage Winery Limited as it is a dividend in specie
(section 64EA(b)). (1)
Total 3
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Background information
Clear Velvet Ltd (“Clear Velvet”) is a resident company that manufactures anti-aging skincare products
(classified as a “process of manufacture” by SARS) that are sold both locally and internationally. Clear
Velvet has a December year-end and a one-month tax period for VAT purposes. Clear Velvet is not a
small business corporation as defined. All amounts exclude VAT, unless specifically indicated
otherwise.
The equity share capital in Clear Velvet is held as follows:
• 18% of the shares and voting rights by Radiant Skin Plc (“Radiant Skin”), a non-resident company
located in France;
• 70% of the shares and voting rights by Natural Beauty Plc (“Natural Beauty”), a non-resident
company located in Germany
• 12% of the shares and voting rights by Skincare (Pty) Ltd (“Skincare”), a resident company
Transactions
1. Clear Velvet purchased 100 kg of a specific anti-aging serum, used in the manufacturing of its
skincare products, from Radiant Skin at €200 per kilogram on 1 April 2023. Radiant Skin usually sells
this specific anti-aging serum at an arm’s length price of €140 per kilogram. The anti-aging serum
was shipped FOB on 15 April 2023. It arrived at the premises of Clear Velvet on 31 May 2023. Import
duty of R52 000 and VAT of R43 680 was paid by Clear Velvet on clearance through customs. The
debt was paid by the company on 30 June 2023. At the end of December 2023 all 100 kg of the
serum had been used in the manufacturing of anti-aging skincare products.
The ruling exchange rates were as follows:
Spot rate
Date
€1 = R
1 April 2023 €1 = R15,80
15 April 2023 €1 = R15,90
30 April 2023 €1 = R15,95
31 May 2023 €1 = R15,80
30 June 2023 €1 = R15,85
31 December 2023 €1 = R15,75
Average exchange rate for the 2023 year of assessment was €1 = R15,83
2. Natural Beauty granted Clear Velvet a loan of R2 000 000 on 31 May 2023 at an interest rate of
25% per annum. Clear Velvet used the loan to purchase a new manufacturing machine at a cost of
R2 000 000. The machine was brought into use in Clear Velvet’s manufacturing process on
15 June 2023. Applications with several independent financial institutions revealed that Clear Velvet
could only qualify for a loan of R1 200 000 at an arm’s length interest rate of 17% per annum.
Natural Beauty does not carry on business through a permanent establishment in South Africa. All
interest is compounded annually.
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REQUIRED: Marks
(i) Calculate the effect of transaction 1 on the income tax payable by Clear Velvet Ltd for
the 2023 year of assessment. 6
(ii) Calculate all the tax effects of the interest payable by Clear Velvet Ltd in respect of
transaction 2 for the 2023 year of assessment. Justify your answer with reasons, 10
supported by reference to legislation. Ignore any VAT implications.
(iii) Assume that Natural Beauty Plc reduces the R2 000 000 capital portion of the debt
together with capitalised interest of R500 000 to Rnil on 31 May 2024 due to Clear Velvet
Ltd experiencing financial difficulties.
Assume that total interest of R204 000 was correctly deducted for income tax purposes
by Clear Velvet Ltd during the company’s 2023 and 2024 year of assessment. The
reduction of the debt does not form part of a scheme to avoid tax.
Discuss, supported by calculations and reference to legislation, the income tax

implications of the reduction of debt for the 2024 year of assessment for Clear Velvet
Ltd. 10
Assume that the income tax legislation for the 2023 and 2024 year of assessment is the
same. Also assume that the reduction of the debt was due to a commercial decision and
does not constitute a donation.
Layout and presentation 2

Total 28
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(i) Income tax payable by Clear Velvet Ltd

R R
(100 kg x €200) x R15,90 (section 11(a) & section 25D) 318 000 (2)
Import duties 52 000 (½)
VAT – claimed as input tax - (½)
370 000 (370 000)
Foreign exchange difference – section 24I
((100 kg x €200) x (R15,90 – R15,85)) = R1 000 foreign exchange
gain 1 000 (2)
Net tax deduction (369 000)
Apply tax rate for companies X 27% (1)
Reduction in tax liability (99 630)
Total 6
 In this transaction, although it is an international transaction that was not concluded at arm’s
length, it is not two connected parties dealing with each other, as Radiant Skin Plc only holds
18% of the shares in Clear Velvet Ltd. Section 31 is therefore not applicable.
(ii) All tax effects of interest payable by Clear Velvet Ltd
Interest paid
R1 200 000 x 17% x 214/365 = R119 605 (3)

OR
R2 000 000 x 25% x 214/365 = R 293 151
Less: Section 31(2) adjustment – (R800 000 x 25%) x 214/365 (R117 260)
(R1 200 000 x (25% - 17%)) x 214/365 (R 56 285)
Interest deductible by Clear Velvet for income tax purposes (s 24J) R 119 606
OR
R2 000 000 x 25% x 214/365 = R293 151
Less: R293 151 - ((R1 200 000 x 17%) x 214/365) (R173 545)
R119 606
Reasons
In terms of section 31(1) paragraph (b) the loan between Clear Velvet and Natural Beauty (2)
constitutes an affected transaction:
Natural Beauty is a non-resident person and Clear Velvet is a resident person (OR international (1)
cross-border transaction between connected persons) and both parties are connected persons
in relation to each other in terms of section 1 of the Income Tax Act. Natural Beauty holds 70%
of the equity shares and voting rights in Clear Velvet, which constitutes the “at least 20%” (OR (1)
more than 20%) as required in terms of par (d)(v) of the definition of connected person in relation
to a company.

The fact that Natural Beauty holds the majority voting rights in Clear Velvet (70%) will not
affect this connected persons status of the two companies as the proviso to section 31(4)
determines that the expression “and no holder of shares holds the majority voting rights in
the company” in paragraph (d)(v) of the definition must be disregarded.
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The terms of the transaction are different from any terms that would have existed had the persons
been independent persons dealing at arm’s length (or not at arm’s length or not market related).
An independent person would not have granted Clear Velvet a loan of R2 000 000 and an
independent person would only have charged Clear Velvet an interest rate of 17% and not 25%.
Therefore, financial assistance arises in terms of section 31(1). (1)
Section 31(2) will apply as it is an affected transaction in which Clear Velvet obtained a tax benefit
by obtaining a much higher deduction for interest than under normal circumstances. The interest
received by Natural Beauty will be exempt from normal tax in terms of section 10(1)(h). (1)
The amount of the difference of R173 545 (i.e. R117 260 + R56 285) will be deemed to be a
dividend in specie subject to dividends tax at the rate of 20%, resulting in a dividends tax amount
of R34 709 payable by Clear Velvet on 30 June 2024. (2)
Total 11
Max 10
(iii) Income tax implications of the reduction in debt
Section 19 of the Income Tax Act and paragraph 12A of the 8th Schedule are applicable:
There was a concession or compromise in respect of a debt that was owed by a person and the
amount of the debt was used directly to fund expenditure for which a deduction and allowance were
granted in terms of the Income Tax Act. (1)
Section 19 and paragraph 12A of the 8th Schedule will not apply if
• the person and the other person (Clear Velvet and Natural Beauty) are companies that form
part of the same group of companies as defined in section 41 of the Income Tax Act, and
• the company to which the debt is owed did not carry on any trade during the year of
assessment that the debt arose and the immediately preceding year
Although Clear Velvet and Natural Beauty form part of the same group of companies in terms of
section 1, they do not form part of the same group of companies in terms of section 41, as Natural
Beauty (the non-resident company) is not managed and controlled in South Africa. It also seems
as if Natural Beauty is trading (not a dormant company). (2)
Therefore section 19 will apply in respect of the interest expense that was claimed and (1)
paragraph 12A will apply in respect of the allowance asset.
The debt that was reduced (debt benefit) is R2 000 000 plus interest of R500 000 capitalised (1)
against the debt, being R2 500 000.
Clear Velvet has claimed part of the interest portion of the debt, being R204 000 in terms of (1)
section 24J together with section 31.
As the interest of R204 000 was claimed as an income tax deduction, the provisions of section 19(5)
will apply and the amount will be recouped in the 2024 year of assessment in terms of (1)
section 8(4)(a).
The portion of the interest of (R500 000 – R204 000) = R296 000 that was prohibited in terms of
section 31(2) was not claimed as a tax deduction, neither was it used to finance an allowance asset (1)
or a capital asset; therefore, neither section 19 nor paragraph 12A of the 8th Schedule is applicable
to this amount. No tax implication arises in respect of this amount. (1)
The R2 000 000 was used to finance an allowance asset; therefore section 19 together with (1)
paragraph 12A should be applied.
In terms of paragraph 12A the base cost of the asset should be reduced by the reduction amount.
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The base cost of the machine

R
Cost 2 000 000
Less: Section 12C allowance – 2023 (R2 000 000 x 40%) (800 000) (1)
Less: Section 12C allowance – 2024 (R2 000 000 x 20%) (400 000) (1)
Base cost 800 000
R800 000 of the debt reduction should therefore be applied to reduce the base cost of the
machine by R800 000 to Rnil. (1)
The remaining capital portion of the debt reduction of R2 000 000 will be applied to recoup the
allowances claimed in respect of the allowance asset as a deduction for income tax purposes,
thus R2 000 000 – R800 000 = R1 200 000 will in terms of section 19(6) be a section 8(4)(a) (1)
recoupment.
No further section 12C allowances will be allowed to be claimed on the manufacturing machine (1)
by Clear Velvet in future years of assessment, due to the section 19(7) limitation, which is
calculated as follows:
Aggregate expenditure incurred in acquiring the asset: R2 000 000
Less: The sum of:
R2 000 000 (reduction amount) + R1 200 000 (deductions and allowances previously allowed in (1)
respect of the allowance asset) = (R3 200 000)
= Rnil
Total 16
Layout and presentation 2
18
Maximum 12
Total marks for the question 28
Notes to question iii

 This is a discussion question in which section 19 of the Income Tax Act and paragraph 12A of
the Eighth Schedule to the Income Tax Act are tested. The total amount of interest incurred
was provided (R500 000), as well as the amount of interest that was deductible (R204 000) for
income tax purposes. It was stated that the R2 000 000 (capital portion of the loan) was used
to acquire a new manufacturing machine.
• Paragraph 12A of the Eighth Schedule cannot be applied to the total loan (R2 500 000).
As the R500 000 is related to interest and not to an allowance or capital asset, the Eighth
Schedule cannot be applied in respect of the R500 000. Section 19 of the Income Tax
Act needs to be considered.
• Paragraph 12A of the Eighth Schedule is not applicable if the two parties to the
transaction are connected persons in terms of section 41 of the Income Tax Act. In terms
of section 41 both companies need to be residents of South Africa or the non-resident
company needs to be managed and controlled in South Africa. In this question one
company is a resident company and the other is a non-resident, but the non-resident
company is not managed and controlled in South Africa. Therefore paragraph 12A of the
Eighth Schedule is applicable.
• When applying section 19 it is important to note that any recoupment is always limited to
previous amounts deducted for income tax purposes. Therefore, as only interest of
R204 000 was deductible for income tax purposes, only R204 000 could be recouped.
The R296 000 balance of the interest was never allowed as a tax deduction, and
therefore there will be no income tax consequences in respect of the R296 000.
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Dentrix (Pty) Ltd (“Dentrix”) is a South African resident company that manufactures dental equipment and
other dental supplies, a process classified as a “process of manufacture” by SARS. The company also
distributes the dental equipment and supplies to various dental centres. Dentrix’s year-end is 30
September and it is a registered vendor for VAT purposes. The company is not a small business
corporation as defined. All amounts exclude VAT where applicable, unless stated or implied otherwise
and all transactions are with VAT vendors (unless stated otherwise). Assume all requisite supporting
documentation is in place.
The shareholders (not employed by the company and all South African residents ) of Dentrix are:
Dr Mike Nkosi (Dental surgeon) 40%
Mrs Caryn White (CA(SA)) 35%
Dr John Black (Dentist) 25%
The accountant calculated the company’s taxable income for the 2023 year of assessment to be
R32 500 550 before taking transactions 1 to 5 below into account. The company will make use of any
possible elections to legally minimise its tax liability.
Transactions
1. Dentrix made a cash dividend distribution of R2 700 000 to its shareholders. Dentrix also distributed
new dental equipment, manufactured by Dentrix during the 2023 year of assessment, to Dr Mike Nkosi
for use in his private practice. The dividend distributions were made on 1 April 2023. The open market
value of the dental equipment was R650 000, on the date of distribution, and the manufacturing costs
Dental supplies with a manufacturing cost of R31 050 (market value of R51 750) were removed from
trading stock and used for display purposes at the company’s entrance.
2. A specialised manufacturing machine was destroyed in a fire on 15 May 2023. A new replacement
machine was immediately purchased from a South African supplier. The destroyed machine was
purchased new and unused on 15 January 2021 at a cost of R870 000 (including VAT) to Dentrix and
brought into use on 31 January 2021.
Dentrix encountered problems with the insurance claim and as a result did not receive any insurance
pay-out but managed to sell the destroyed machine as scrap for R20 000 on 5 September 2023 to a
non-connected party. Dentrix received 50% of the selling price on 5 September 2023 and the other
50% of the selling price is receivable on 15 October 2023.
The replacement machine was purchased under a suspensive sale agreement on 20 May 2023 at a
cash price of R960 000 (including VAT) plus finance charges of R146 000 (in terms of s 24J of the
Income Tax Act) for the 24 months from 20 May 2023 to 20 May 2025. Due to technology changes, a
consultant was required to set up the software on the machine for the machine to be brought into
working condition. The consultant invoiced Dentrix for R83 000 (including VAT) on 15 July 2023. The
replacement machine was brought into use on 20 July 2023.
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3. Dentrix applies IFRS 9 for financial reporting purposes. The provision for doubtful debt (credit losses)
for the 2023 year of assessment amounts to R755 000, consisting of:
• R230 000 lifetime expected credit losses relating to trade debtors

• R425 000 expected credit losses relating to trade debtors outstanding for 12 months or more
(which excludes lifetime expected losses above)
• R100 000 loan to a former employee which is unlikely to be recovered
The Commissioner for SARS allowed a doubtful debt allowance in terms of s 11(j) of the Income Tax
Act in the amount of R167 500 for the 2022 year of assessment.
4. On 1 April 2022, the directors of Dentrix decided to construct a building in a prominent location in
Johannesburg, for the purposes of renting it to dental practitioners and medical doctors. The company
had never been in the property letting business, but the directors believe that this would generate
additional income for the company. The building was completed on 1 August 2022. On
1 September 2022 the company managed to secure various tenants that signed lease agreements
effective from 1 October 2022.
Dentrix incurred the following amounts during the 2022 year of assessment:
• Cost of the building R7 800 000

• Insurance premium (see note below) R424 000
Note:
The insurance broker advised the company to pay the insurance premiums in advance and as a
result, Dentrix paid the premiums on 1 August 2022, for 24 months. The insurance cover was effective
from 1 August 2022. The insurance amount was incurred evenly throughout the 24-month period.
5. The directors of Dentrix decided to donate dental supplies to Dr John Black’s personal dental practice
(sole proprietor business) to be used as consumables for the pro bono work he performs in his
personal dental practice (the consumables were not donated to Dr Black in his capacity as a
shareholder of Dentrix). No advertisement benefit arose from this donation. Dr Black’s personal
dental practice is not a registered vendor for VAT purposes. On the date of the donation
(30 June 2023) the open market value of the dental supplies was R45 000 and the cost price was
R32 000. This is the first donation made by the company since its inception.
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REQUIRED: Marks
Sub- Total
total
(i) Calculate the taxable income of Dentrix (Pty) Ltd for its
2023 year of assessment. Start your calculation with the preliminary taxable
income of R32 500 550 and incorporate transactions 1 to 3 only into your
calculation of the taxable income. Show all calculations.
Provide reasons or reference to legislation where amounts are Rnil or do not

affect the taxable income amount.
Ignore finance charges in terms of s 24J of the Income Tax Act. 17
(ii) Discuss the income tax effect of transaction 4 for Dentrix (Pty) Ltd in
respect of its 2022 and 2023 years of assessment. Ignore the rental
income in your discussion. Support your discussion with references to
relevant legislation. Show all calculations. 16
Assume that the tax legislation for the 2023 year of assessment also applied
in the 2022 year of assessment.
Communication skills – Logical argument 1 17
(iii) Discuss, supported by calculations, all the tax implications of transaction 5

for Dentrix (Pty) Ltd’s 2023 year of assessment. You may ignore any
dividends tax implications. 5
Communication skills – Clarity of expression 1 6
Total marks 40
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(i) Calculation/reason R R Marks

Manufacturing equipment -
1. Trading stock
Cash dividend distribution -
distribution of reserves (not
in the production of income) - (½)
Manufacturing cost of dental
equipment - s 11(a) (480 000) (1)
Recoupment - s 22(8) at
market value (R650 000 x 100/115) 565 217 (1)
Dividend distribution of new no deduction - not in the
dental equipment production of income - (½)
Manufacturing cost of dental
supplies (s 11(a)/s 22(2)) (31 050) (1)
Dental supplies used for No s 22(8)(b)(iv)
display purposes recoupment - proviso (d)
to s 22(8) (will be included
in gross income on
disposal in terms of par
(jA) to gross income) - (1)
2. Manufacturing machine
a. Old machine
Cost (R870 000 x 100/115) 756 522 (1)
S 12C allowance
2021 40% (302 609) (½)
2022 20% (151 304) (½)
2023 20% (151 304) (151 304) (1)
Tax value 151 305
Selling price 20 000 (1)
limited to cost 763 158
Less: Tax value (151 305) (½)
S 11(o) scrapping allowance (131 305) (131 305) (1)
CGT
Proceeds 20 000
Base cost
(R151 305 - R131 305) (20 000)
Capital gain/(loss) - (½)
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b. New machine
Cost
Purchase price R960 000 x 100/115 834 783 (1)
Installation costs –
consultant R83 000 x 100/115 72 174 (1)
906 957
S 12C allowance R906 957 x 40% (362 783) (1)
Note: Par 66 of 8th Schedule cannot apply because proceeds

on disposal of old machine do not equal or exceed base cost.
3. Doubtful debt allowance - s

11(j)
S 11(j) - Add back 2022
deduction 167 500 (1)
S 11(j) - 2023 allowance (IFRS
9 applies)
- 40% of lifetime expected
losses R230 000 x 40% (92 000) (½)
- 25% of 12-month expected
losses R425 000 x 25% (106 250) (½)
Total allowance (198 250) (198 250)
Was never included in
Loan to employee - was never income, therefore does not
included in taxable income (not qualify for s 11(i) and then
trade debtor) not for 11(j). - (1)
Total 17
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(ii) Marks
• Section 11(a) (read with section 23(g)) allows for the deduction of expenses incurred
for trade purposes during the year of assessment, in the production of income and not
of a capital nature. For an expense to be deductible under section 11, a “trade” must
be carried on. (1)
• Since the letting, trade did not commence during Dentrix’s 2022 year of assessment,
the costs incurred in relation to the letting of the building will not be allowed as a
deduction in terms of section 11(a) (read with section 23(g)) during the 2022 year of
assessment.
Alternative:
The trade commenced in the 2023 year of assessment and therefore the costs that
were incurred in the 2022 year of assessment in relation to the letting of the building
would only be allowed in the 2023 year of assessment. (1)
• However, section 11A allows the deduction of pre-trade expenses in the year of
assessment in which trade commences. (1)
• The section 11A deduction will be limited to the taxable income before this deduction (1)
in relation to the letting of the building in the 2023 year of assessment. (Any excess will
be carried forward to the 2024 year of assessment.)
• The letting business constitutes a new trade and therefore section 11A could be
applicable to the pre-trade expenses. (1)
• The building cost is capital in nature and would not be allowed as a deduction in terms
of section 11A. The building was not used during the 2022 year of assessment (was
only brought into use on 1 November 2022). (1)
• The building would, however, be allowed a capital allowance in terms of s 13quin when (1)
it is brought into use for trade purposes (2023). The capital allowance claimable in the
2023 year of assessment is not apportioned for part of the year (from November 2022
to September 2023), i.e. R7 800 000 x 5% = R390 000. (1)
• The pre-trade insurance premiums could be allowed as a deduction in terms of
section 11A, in the 2023 year of assessment, as they would have qualified for a
deduction in terms of section 11(a) had a trade been carried on. (1)
• Insurance premiums for August and September 2022 (2 months) R424 000/24 x 2
months = R35 333 (section 11A) will be deductible in the 2023 year of assessment. (1)
• The insurance premiums for the 2023 year of assessment (1 October 2022 to
30 September 2023), R212 000 (R424 000/24 months x 12 months) will be allowed as
a deduction in terms of section 11(a) (not section 11A as trade commenced in 2023) in
the 2023 year of assessment. (1)
• The prepaid portion of insurance premiums (1 October 2023 to 31 July 2024) qualifies
for a deduction under section 11(a), but the amount allowed as a deduction is limited
in terms of section 23H. (1)
o The prepaid amount at the end of the 2023 year of assessment (1 October 2023
to 31 July 2024) will be R424 000/24 months x 10 months = R176 667. (1)
o The services will be received for 10 months after year-end (more than 6 months
after year-end). (1)
o The prepaid amount exceeds R100 000, i.e. R176 667. (1)
o Therefore, section 23H will apply and the full amount of R176 667 will not be
deductible in the 2023 year of assessment. (1)
• Section 11A deductions will be limited to the taxable income before this deduction in
relation to the letting of the building. (1)
• Any excess deductions will be allowed as a deduction from this trade in the subsequent
year of assessment. (1)
Available 18
Communication skills: Logical argument 1
Max 17
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(iii) Marks
• Trading stock has been applied for the purposes of making a donation This is a deemed
recoupment in terms of s 22(8)(b)(i) – note that proviso (d) to section 22(8) will no longer (1)
be applicable, since it only applies to section 22(8)(b)(iv). The recoupment is at market
value of R45 000 x 100/115 = R39 130. (1)
• Dentrix will not qualify for a section 18A deduction, as it is not a donation to a public (1)
benefit organisation (no s18A certificate obtained).
• Donations tax at 20% x R39 130 = R7 826 will be payable by Dentrix on 31 July 2023. (2)
• Connected person rule applies as Mr John Black is a connected person that cannot claim (1)
full input tax (non-vendor) and sale is for less than open market value. (1)
o Output tax: R45 000 x 15/115 = R5 870 (1)
Available 8
Communication skills: Clarity of expression 1
Max 6
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This question consists of two related parts, parts A and B.
Part A 32 marks
Bio-green (Pty) Ltd is a resident company that produces and supplies bio-fuel (i.e. the production of bio-
ethanol and bio-diesel) locally within South Africa’s borders. Bio-green’s factory is located in Gqeberha
(formerly Port Elizabeth) in the Eastern Cape. Bio-green has a September year-end and is a category C VAT
vendor. The equity share capital in Bio-green is held as follows:
• 90% by Bio-green Suppliers Plc (Suppliers Plc), a non-resident company incorporated in France.
• 10% by Bio-green Distributors SA (Pty) Ltd (Distributors), a resident company also with a September
year-end and registered for VAT with 1-month tax periods. Distributors is wholly owned by Suppliers
Plc. Distributors’ head office is in Polokwane in Limpopo, South Africa.
You are in the process of preparing Bio-green’s IT14 income tax return for the 2023 year of assessment. Bio-
green’s preliminary taxable income is R8 320 600, before taking into account the information under
notes 1 to 6 below. All amounts below include VAT, unless specifically stated or implied otherwise.
Notes
1. On 1 March 2023 Bio-green sold 55 000 litres of bio-diesel to a new customer (a South African
independent party) for R567 600 (i.e. R10,32 per litre). The normal price per litre is R14,74 and the
open market value for 55 000 litres of bio-diesel on 1 March 2023 was R810 700. Bio-green fixed the
selling price below market value in order to promote its business to the new customer (assume the
sale was in the ordinary course of Bio-green’s trade). The cost of production of the bio-diesel has
already been taken into account in the calculation of the preliminary taxable income amount.
2. Bio-green imported a fully automated bio-diesel processor from its French holding company,
Suppliers Plc, for €10,560. Suppliers Plc supplies this type of processor to other parties at a fixed
price of €13,200. The processor was shipped free on board (FOB) on 15 August 2023 and was
delivered at Bio-green’s premises on 25 September 2023 and brought into use on the same day. The
correct amount of VAT was paid (and claimed as input tax) and import duties of R11 000 were paid
on importation. No forward exchange contract or foreign currency option contract was entered into to
hedge the purchase price. Bio-green paid 50% of the purchase price on 25 September 2023. The
other 50% of the purchase price is only payable on 25 October 2023. It is standard practice for
Suppliers Plc to provide its customers with an interest-free 30-day credit term.
The following exchange rates were applicable:
Date Spot rate

€1 = R
15 August 2023 €1 = R17,40
25 September 2023 €1 = R17,45
30 September 2023 €1 = R17,30
25 October 2023 €1 = R17,35
3. Bio-green purchased its factory building in Gqeberha from a developer at a market-related price
of R4.6 million on 20 April 2021.
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4. From 1 June 2021 Bio-green leased a computer from a South African information technology (IT)
company (independent party) for a monthly rental of R2 000 (exclusive of VAT). The total cost
price of the computer to the IT company was R28 750 (exclusive of VAT). The 2-year rental
agreement expired on 31 May 2023, but Bio-green was allowed to continue using the computer
from 1 June 2023 for a monthly rental of R100 (exclusive of VAT). SARS Binding General Ruling
No. 7 (or Interpretation Note No. 47) provides for a 3-year write-off period for computers.
5. Bio-green acquired a bio-diesel production patent at an arm’s length price of R890 000 (exclusive
of VAT), after seeking advice from its legal advisor. The patent was purchased on 20 July 2023
and brought into use on 1 September 2023. Bio-green received an invoice on 10 August 2023
from its legal advisor for a general legal opinion regarding all the legal implications of acquiring a
patent. Bio-green paid the invoiced amount of R52 095 on 17 August 2023 and claimed the correct
amount of input tax in its August 2023 tax (VAT) period.
6. Bio-green’s 2022 assessment reflects a capital loss of R380 900.
Part B 8 marks
Bio-green and Distributors are connected persons. During the 2021 year of assessment, Bio-green
wanted to expand its operations and did not have the necessary reserves to do so. Accordingly, Bio-
green obtained funding from Distributors. Distributors issued a loan to Bio-green on 1 June 2021, at a
market-related interest rate, with interest payable per annum. Although Bio-green pays the interest on
the loan to Distributors, Bio-green has no obligation to repay the capital sum of the loan. The loan is also
not repayable on demand. Furthermore, Bio-green has no right to convert or exchange the loan for
shares.
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PART A
REQUIRED: Marks
Sub- Total
total
(i) Calculate the normal tax liability of Bio-green (Pty) Ltd for its 2023 year of
assessment by taking notes 1 to 6 into account. Start your answer with the
preliminary taxable income of R8 320 600.
Address all items for which notes are provided and show all the workings. If an
item has no effect on the taxable income, provide a reason. 22
(ii) Refer to note 1 under part A: Indicate, supported by a reason, how your answer
will differ if Bio-green (Pty) Ltd sold the 55 000 litres of bio-diesel to Bio-green
Distributors SA (Pty) Ltd for R567 600. Assume the sale below market value was
not in the ordinary course of Bio-green (Pty) Ltd’s trade. 3
(iii) Refer to note 2 under part A: Explain and fully justify your answer, with reference
to legislation, if your calculation under (i) will differ if the payment terms of the
purchase price for the automated bio-diesel processor were as follows:
No forward exchange contract or foreign currency option contract was entered into
to hedge the purchase price. Bio-green paid 50% of the purchase price on
25 September 2023. The other 50% of the purchase price is only payable on
25 October 2024. 6
Communication skill – clarity of expression 1 7

Total 32
PART B
REQUIRED: Marks
Sub- Total
total
Discuss, in terms of the relevant legislation, whether the interest-bearing loan
constitutes a hybrid debt instrument and provide the normal tax implications of the
interest payable in respect of the loan for both the issuer of the interest-bearing
instrument (Bio-green (Pty) Ltd) and the holder (Bio-green Distributors SA (Pty)
Ltd). 7
Communication skill – clarity of expression 1 8

Total 8
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PART A(i)
R
Preliminary taxable income 8 320 600
1. Sale of bio-diesel to new customer - gross income 567 600 (1)
(VAT is included at 0%, zero-rated supply ito s 11(1)(h) of VAT Act)
[Note: not a problem that sale is below market value, because not connected
persons.]
2. Bio-diesel processor purchased from holding company and imported:

Purchase price – not deductible ito ss 11(a) & 23(g) as capital : R183 744 - (1)
(€10 560 x R17,40) (s 25D) + R11 000 = R194 744 (2)
Less: s 12B allowance (used in production of bio-fuel): R194 744 x 50% (97 372) (1)
Foreign exchange differences (s 24I):
On 50% of debt paid: €10 560 x 50% x (R17.40 – R17.45 ) = loss of R264 (264) (2)
On 50% of debt outstanding at year-end: €10 560 x 50% x (R17.40 – R17.30)
= gain of R528 528 (2)
3. Less: s 13(1) building allowance: (R4.6 m x 100/115 ) x 5% (200 000) (2)
4. Deduct monthly rental payments: (8 months under the rental agreement x

R2 000 ) + (4 months x R100 ) (s 11(a)) (16 400) (2)
S 8(5)(b) read with s 8(5)(a) recoupment on termination of lease:

Determine “fair market value” ito s 8(5)(bA) read with s 8(5)(bB)(i):
Original cost to lessor R28 750 (1)
R23 000
R18 400
Deemed fair market value thus = R18 400
Rentals payable at R100 per month, thus R1 200 per annum, which
is less than 10% of fair market value (i.e. 10% x R18 400 = R1 840) (1)
(s 8(5)(bB)(iii)) and therefore nominal in relation to fair market value (1)
(s 8(5)(bA)(ii)); thus, recoupment added back is lesser of fair market value (1)
of R18 400 and rentals deducted under rental agreement, i.e. R2 000 x
24 months = R48 000, thus: 18 400 (1)
recoup at fair market value:
5. Less: s 11(gC) allowance on patent: R890 000 x 5% (44 500) (1)

Legal fees of R52 095 x 100/115 = R45 300 are not deductible ito s 11(a), - (1)
as capital in nature.
[Note: legal fees are also not deductible ito s 11(c).]
6. Capital loss of R380 900 brought forward from 2022 – no capital gains in
current year to offset against, carry forward to 2024 (par 9(c) of the 8th - (1)
Schedule)
Normal tax @ 27% 2 308 120 (1)
Available 24
Max 22
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PART A(ii)
The trading stock is disposed of to a holder of shares, otherwise than in the ordinary (1)
course of trade for a consideration less than market value. Section 22(8)(b)(ii) of
the Income Tax Act applies and there must be a recoupment of the market value
of the stock (s 22(8)(B)). The open market value of R810 700 includes VAT at 0%;
thus the recoupment added back in the calculation of Bio-green’s taxable income
at market value will be limited to R810 700. Since the stock was sold to Bio-green
Distributors, an amount of R567 600 will be included as sales or turnover for tax 567 600 (1)
purposes and therefore the recoupment under section 22(8) will be limited to the
difference of the market value of R810 700 and the selling price of R567 600 (VAT
at 0%) thus R243 100 (proviso (b) to section 22(8)). 243 100 (1)
Total 3
PART A(iii)
Yes, the calculation will be different as a result of the application of section 24I(10A) of the (2)
Income Tax Act.
The realised foreign exchange loss of R264 in respect of the 50% of the purchase price that was
paid remains the same and is deducted in Bio-green’s 2023 tax calculation. (1)
However, the unrealised foreign exchange difference at year-end, i.e. the gain of R528, in respect
of the outstanding balance of 50% of the purchase price which is only payable on
25 October 2024, is not added to income in the 2023 year of assessment and the foreign
exchange gain of R528 is deferred and will only be recognised once the exchange item is realised (1)
(paid).
Section 24I(10A)(a) applies as follows:
• Bio-green and Bio-green Plc are connected persons (or form part of the same group of (1)
companies) (section 24I(10A)(a)(i)(aa)), and
• The debt is not hedged (section 24I(10A)(a)(i)(bb), and (1)
• No part of the exchange item represents a current liability for IFRS reporting purposes at (1)
the 2023 year-end – loan only repayable on 25 October 2024 (will not be classified as a
current liability since the outstanding amount will be outstanding for a period of more than
12 months after year end and not a current liability ito IAS 1.69)
(section 24I(10A)(a)(ii)(aa), and
• The debt is not funded by any debt owed to any person that does not form part of the (1)
same group of companies or a connected person (section 24I(10A)(a)(ii)(bb).
Communication skill – clarity of expression (1)
Available 9
Max 7
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Part B
Section 8F of the Income Tax Act is an anti-avoidance provision which deals with hybrid debt (1)
instruments.
A “hybrid debt instrument” is defined in section 8F(1) as an instrument in respect of which a
company owes an amount during a year of assessment (that is, the loan owing by Bio-green)
and is an arrangement that meets any one of the three conditions mentioned in paragraph (a); (1)
(b) or (c) of the definition of a “hybrid debt instrument”. Paragraph (c) applies to the loan in (1)
question, i.e.:
 The company (Bio-green) owes the amount to a connected person (Bio-green Distributors)
and the company is not obliged to redeem the instrument within 30 years from the date of (1)
issue of the instrument. Furthermore, the instrument is not repayable on demand.
 There are a number of exclusions where section 8F does not apply, namely where the debt:
 Is owed by a small business corporation as defined;
 Is a tier 1 or 2 capital instrument issued by a bank or a controlling company in relation to the
bank;
 Is owed by a long or short term insurer;
 constitutes linked units in a company held by a long or short term insurer, a REIT, a pension
or a provident fund; or
 is a third-party backed instrument. (1)
None of the above exclusions in terms of section 8F(3) apply to the debt in question.
Thus, the interest-bearing loan in question is a hybrid debt instrument. (1)
The interest paid by Bio-green to Bio-green Distributors is deemed to be a dividend in specie and
no deduction is allowed from income (s 8F(2)(b)). (1)
The interest received by Bio-green Distributors is deemed to be a dividend in specie received on
the last day of the year of assessment of Bio-green and the dividend is included in gross income (1)
(s 8F(2)(a)) (1)
However, the dividend is exempt from normal tax in terms of section 10(1)(k)(i).
Communication skill – clarity of expression (1)
Available 10
Max 8
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This question consists of two related parts, Parts A and B.
Part A 36 marks
Global Glass (Pty) Ltd (“Global Glass”) is a South African resident company that manufactures, cuts, and
sells glass and glassware products both locally and across the border, exporting to certain African countries
such as Botswana, Kenya and Nigeria.
Global Glass is a wholly-owned subsidiary of GG Glassware (Pty) Ltd (“GG Glassware”), also resident in
South Africa. GG Glassware purifies sand for purposes of the glass manufacture by Global Glass. The
purification of sand and the manufacture of glass are both recognised by the South African Revenue Service
(SARS) as a process of manufacture. Global Glass has been trading since 15 April 2017 and has more than
one hundred employees mainly working in the glass factory.
GG Glassware was established in January 2017 by Mr Frame. In March 2017 Mr Frame donated 15% shares
in GG Glassware to each of his three sons; Lucky, Happy and Success, at the time 18, 16 and 15 years old
respectively. Mr Frame, Lucky, Happy and Success are all South African residents.
Mr Frame (with a 55%-shareholding), Lucky, Happy and Success (each with a 15%-shareholding) are the
sole directors of GG Glassware and Global Glass. Both GG Glassware and Global Glass have a December
financial year-end and are registered VAT vendors, making 100% taxable supplies.
For the financial year ended 31 December 2023, the two group companies’ accountant, Ms Y, has prepared
the preliminary tax calculations for Global Glass and GG Glassware respectively. The preliminary taxable
income for Global Glass as determined amounts to R18 770 000. The following transactions have not yet
been taken into account in the taxable income of R18 770 000. All amounts include VAT where appropriate
unless specifically stated or implied otherwise. Also, apart from any transactions within the group, all other
transactions are between independent parties.
Notes:
1. On 1 September 2023 Global Glass sold and directly exported manufactured glass to a regular
customer in Nigeria. The total sales reflected on the invoice was R3 550 500. Global Glass
received 50% of the selling price on 30 September 2023, but the remaining 50% was still
outstanding at year-end. Global Glass has a 30-day credit term for its credit sales and interest is
charged on any outstanding payment balance, effective from the first day after the 30 days have
expired, at an annual market-related interest rate of 5%. Global Glass’ normal credit terms applied
to this transaction and the 30-day period expired on 30 September 2023.
2. Global Glass purchased its factory building on 1 April 2017 for R2 500 000 and brought it into use
upon the commencement of trade (15 April 2017). The seller (a non-vendor) used the building as
a storage facility.
3. On 20 August 2019 Global Glass purchased a vacant piece of land at a public auction for
R650 000 (excluding VAT) intending to erect a second factory building. However, due to economic
hardship, the building was not erected, but instead, Global Glass changed its intention in
February 2023, when the market value of the land was R2 700 000 (excluding VAT) and decided
to enter into a profit-making scheme and to subdivide the vacant land in ten (10) smaller industrial
plots. Global Glass proceeded with its plans and the land was subdivided into ten plots at a total
cost of R350 000 (excluding VAT), and the ten plots were sold on 18 May 2023 for a total selling
price of R3 200 000, excluding VAT (the market value of the land on this date was R2 850 000
(excluding VAT)).
154
TAX4862/105/2023
4. Global Glass bought 30 apartments (of a total of 50 apartments) in a newly erected residential
building directly from the developer (a registered VAT vendor) on 1 December 2020 for R350 000
each. The apartments were rented out by Global Glass to its employees as from 1 January 2021
for a monthly rental of R3 500. The monthly rental for each of the 30 apartments escalated to
R3 850 with effect from 1 January 2022 and as from 1 January 2023, the monthly rental payable
to Global Glass by its employees amounts to R4 235 per apartment.
5. On 1 April 2023 GG Glassware sold a manufacturing machine to Global Glass for R460 000
(excluding VAT). The market value of the machine on the date of sale was R500 000 (excluding
VAT). GG Glassware originally acquired the machine for R960 000 in 2021. Global Glass brought
the machine into use in its manufacturing process immediately on the date of purchase.
6. On 1 November 2023 Global Glass ordered a new colour laser printer from a supplier in the United
States of America (USA), for $1 800. The printer was shipped free on board on 15 November 2023
and arrived in South Africa a week later, on 22 November 2023. Global Glass paid VAT of R4 020
and import duty of R4 500 and the printer was immediately cleared through customs. The printer was
brought into use for the administration of the business on 1 December 2023. On this same day
(1 December 2023) Global Glass entered into a 2-month forward exchange contract (FEC) with a
South African bank to serve as a hedge in respect of the debt. Global Glass settled the full debt on
31 January 2024.
The ruling exchange rates are as follows:
Date Spot rate 2-month forward rate 1-month forward rate
1 November 2023 $1 = R14.50
15 November 2023 $1 = R14.60
22 November 2023 $1 = R14.75
1 December 2023 $1 = R14.95 $1 = R15.00 $1 = R14.60
31 December 2023 $1 = R15.20 $1 = R15.50 $1 = R15.30
31 January 2024 $1 = R16.65 $1 = R16.85 $1 = R16.70
SARS allows a five year (5) write-off period on this type of equipment in terms of Binding General
Ruling No 7 (or Interpretation Note No.47).
7. Global Glass paid a cash dividend of R1 200 000 to its holder of shares (GG Glassware) on
15 December 2023.
Part B 4 marks
Ms Y (refer to part A) is experiencing a moral dilemma. As a chartered accountant, Ms Y knows the

fundamental principles of integrity and ethical behaviour. Two of her friends are CTA level 2 students at
an open distance education institution studying towards their Postgraduate Diploma in Applied
Accounting Sciences. Ms Y has become aware that the two of them might have worked together on an
Audit assignment that was submitted to the audit department of their faculty. The assignment will count
towards these students’ year marks to obtain examination admission at the end of the current academic
year. Ms Y is very concerned about the possible personal misconduct of her two friends. Ms Y does not
know if she should turn a blind eye or report the matter, and if she reports the matter, how she should
report it, and to whom.
155
TAX4862/105/2023
PART A
REQUIRED Marks
Sub- Total
total
(i) Calculate the normal tax liability of Global Glass (Pty) Ltd for its year of
assessment ended 31 December 2023 by taking into account transactions 1 to
7 in Part A. Commence your tax calculation with the preliminary taxable income
of R18 770 000.
Show all your calculations and if an amount has no effect on Global Glass (Pty)
Ltd’s tax calculation for its 2023 year of assessment, indicate this together with
the relevant motivation/reason.
Ignore any Double Tax Agreement (DTA) that may apply. 26

(ii) Refer to note 1 under Part A of the question. Explain in detail all the tax
implications for Global Glass (Pty) Ltd of the sale of the manufactured glass to
the customer in Nigeria if it is assumed that the customer and Global Glass (Pty)
Ltd are connected persons and that the total sales reflected on the invoice was
R3 550 500, whilst the open market value is R3 850 500.
A mark will be awarded for reference to the relevant legislation. In your answer,
also indicate when the tax(es) (excluding normal/income tax), if any, are payable.
Ignore Value-Added Tax and any DTA that may apply. 9
Assume that the tax legislation applicable to the 2023 year of assessment will
apply to any other relevant year of assessment.
Communication skills – clarity of expression 1 10

Total for Part A 36
PART B
REQUIRED Marks
Sub- Total
total
Share your view on this matter and advise Ms Y on the matter of collaboration
between her two friends in the Audit assignment and any action that should be
taken by her. 3
Communication skills – logical argument 1 4

Total for Part B 4
TOTAL 40
156
TAX4862/105/2023
PART A(i)
R
Preliminary taxable income of Global Glass (given) 18 770 000
1. Sales – gross income (earlier of receipt or accrual – 50% received, but 3 550 500 (1)
remaining 50% accrued)
(direct exports are zero-rated (s 11(1)(a)), VAT thus included at 0%)
Interest accrued ito s 24J:
50% x R3 550 500 x 5% x 92/365 = 22 373 (2)
2. Less: no s 13(1) building allowance is available as the seller was not - (2)
entitled to allowance (used building as a storage facility)
3. Sale of vacant land:

CGT - Change of Use
Deemed proceeds (MV) change of use para 12(1) & 2 700 000 (1)
12(2)(c)
Base cost par 20(1)(a) (650 000) (1)
Capital gain 2 050 000
Include in income at 80% - see end of calc - par 10 1 640 000
Gross income (sale) 3 200 000 (1)
Cost of subdivision of land – s 11(a) (350 000) (1)
Deemed opening stock s 22(2)(b) and s 22(3)(a)(ii) (2 700 000) (1)
4. Rental income = gross income: R4 235 x 30 (apartments) x 12 months 1 524 600 (1)
Less: s 13sex allowance: R350 000 x 30 x 55% x 10% (577 500) (3)
(Note: these are low-cost residential units as defined – an apartment with a
cost of R350 000 and the cost on which the 1% rental limitation is
calculated is increased by 10% annually and falls within the limit.)
5. Less: s 12C allowance on second-hand manufacturing machine:

20% x R460 000 (92 000) (1)
(Note: acquired from connected person, claim allowance on cost, not
market value)
6. Purchase price of printer – not deductible ito ss 11(a) & 23(g) as capital: - (1)
Less: s 11(e) allowance:
R
Cost: $1,800 x R14,60 (s 25D) 26 280 (1)
Add: Import duties 4 500 (1)
(VAT – no effect, input tax claimed) - (1)
30 780
Brought into use on 1 December 2023, therefore: R30 780 / 5 x 31/365 = (523) (1)
(or alternative: R30 780 / 5 x 1/12 = R513 if calc in months)
Foreign exchange gains and losses – section 24I

Debt: (15 November 2023 – 31 December 2023)
Foreign exchange loss ($1,800 x (R14,60 – R15,20)) (1 080) (2)
FEC (1 December 2023 – 31 December 2023)
Foreign exchange gain ($1,800 x (R15,30 – R15,00)) 540 (2)
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TAX4862/105/2023
7. Cash dividend of R1.2 million - distribution of reserves (not in the production - (1)
of income)
No other capital gains or losses, add capital gain under note 3: 1 640 000 (1)
Normal tax @ 27% 6 746 466 (1)
Available 27
Max 26
PART A(ii)
The manufactured glass constitutes Global Glass’ trading stock and the selling price of
R3 550 500 is included in Global Glass’ gross income in its 2023 year of assessment. (1)
However, the transaction is between Global Glass, a SA resident, and the Nigerian customer,
a non-resident, for the benefit of either or both parties; they are connected persons (given)
and the sale was concluded at below market value and thus, a term of the transaction is
different from a term that would have existed had the parties been independent persons (1)
dealing at arm’s length. This transaction therefore constitutes an “affected transaction” (1)
as defined in section 31(1) of the Income Tax Act. (1)
In terms of section 31(2), where an affected transaction results in a tax benefit for a party to the
transaction, the taxable income of the person deriving a tax benefit from the transaction
must be calculated as if the transaction had been entered into on arm’s length terms and (1)
conditions (the so-called “primary transfer pricing adjustment”).
Global Glass derived a tax benefit from the sale transaction because the selling price is lower (1)
than the market value (arm’s length price) (thus a reduced gross income inclusion). The
section 31(2) adjustment (primary transfer pricing adjustment) that must be made is (1)
therefore the difference between the market value (arm’s length price (R3 850 500) and
the selling price (R3 550 500), i.e. R3 850 500 less R3 550 500 = R300 000 and this amount
must be included in Global Glass’ taxable income for its 2023 year of assessment. (1)
In terms of section 31(3), the primary transfer pricing adjustment of R300 000 is deemed to be
a dividend in specie declared and paid by Global Glass (second transfer pricing adjustment). (1)
This dividend in specie is deemed to have been declared and paid on the last day of the period
of six months after the end of the year of assessment in respect of which the adjustment is
made, i.e. the dividend in specie will be deemed to have been paid by Global Glass on (1)
30 June 2024.
Global Glass will therefore be liable for dividends tax of R300 000 x 20% = R60 000 and this (1)
amount must be paid over to SARS by 31 July 2024. (1)
Communication skills – clarity of expression 1
Available 13
Max 10
158
TAX4862/105/2023
PART B
The suspected collaboration in question (i.e., if the students indeed collaborated), constitutes
plagiarism or cheating; it is seen as theft; they are basically stealing work that is not their own
and presenting it as their own. Students have the responsibility to uphold academic integrity
(principles). If the students have collaborated in respect of the assignment, it is a violation of
academic integrity. They have acted dishonestly. It is a contravention of university policy/ies
(Policy on Academic Integrity for example). It is wrong. It is unethical. (2)
Ms Y should not merely ignore this. As a CA(SA), she has the responsibility to act as a good
corporate citizen and to maintain and enhance the profession’s reputation. Ms Y has the moral
obligation (responsibility) to either talk to them and ask them to notify their relevant lecturer (or
department) of their collaboration or report the matter herself. The students also have a moral
obligation to report their misconduct. They need to come forward with the truth if they
collaborated. As said, Ms Y should otherwise report the matter herself – she can contact the
Audit department directly and inform any of the lecturers / or the school/college
management/anyone at the institution. There should then be an investigation and if it is proven
that there was collaboration/misconduct based on the evidence, or if the students admitted to
this misconduct, a disciplinary hearing could follow or they can be found guilty and the
necessary steps be taken by the institution. Ms Y could also decide to report the matter to (2)
SAICA (SAICA has professional authority over accounting students).
Communication skills – logical argument 1
Available 5
Max 3
___________________________
END OF SECTION B
159
TAX4862/105/2023
SECTION C – PRIOR YEAR TEST
PURPOSE STATEMENT
SECTION C contains the test from the previous year. The objectives of this section are to
• assist you in familiarising yourself with the format in which the tests (summative assessments) are
set out
• provide an opportunity to apply your knowledge under exam conditions and practise your exam
technique
 2 hours have been allocated to work through this section:

Reading time 15 minutes
The reading time available is for the question part only. Do not read the required section
until the writing time starts.
Writing time 60 minutes
Start by reading the required section and then attempt the question. Time allocated at
1.5 minutes per mark.
Debrief time 45 minutes
Take the time to mark yourself against the suggested solution and identify areas for
revision where your knowledge was lacking.
Before starting this section, familiarise yourself with the assessment procedures in TL101 (8.1 to 8.3.1).
 The scope of test 2 covers mainly TL105 topics, as well as the relevant court cases in TL102.
Aspects of previous tutorial letters (e.g. VAT in TL103) may also be tested; however, they
will not be the main focus of test 2.
 Attempt the test under exam conditions now that you have been through the self-
assessment questions in part B. Share your solution on the myUnisa discussion forum, then
refer to the outcomes (solution) that will be made available on myUnisa (lesson tool) on the
Friday of your study week.
160
TAX4862/105/2023
QUESTION 40 marks
Dwell (Pty) Ltd (“Dwell”) is a South African resident company that manufactures computers that are sold
to local and international customers. The manufacture of computers is recognised by the South African
Revenue Service (SARS) as a process of manufacture. The company has a year of assessment ending
on 31 December and is a category A registered Value-Added Tax (VAT) vendor making 100% taxable
supplies.
Assume the following (except where specifically stated or implied otherwise):

• All amounts, where applicable, include VAT.
• All requisite documentation is in order.
Voting rights are conferred to each holder of shares (“shareholder”) in proportion to the equity
shareholding. Dwell had the following shareholders throughout the company’s 2023 year of assessment:
Shareholder % Date Shareholding

shareholding shareholding acquired for
was acquired R
John Dlomo 10% 1 January 2014 100 000
Pacer Plc 30% 1 January 2014 300 000
Asus (Pty) Ltd 30% 1 January 2014 300 000
H Plus (Pty) Ltd 30% 1 January 2014 300 000
Shane Howard and John Dlomo have acted as the directors of the company since 1 January 2014 and
are therefore substantially involved in the operations of Dwell. None of the directors are VAT vendors.
The market value of Dwell’s assets is R7 000 000 on 31 December 2023.
Dwell - Purchase of stock from Pacer Plc
On 1 August 2023 Dwell ordered 5 000 motherboards from Pacer Plc, a company in China, for 15 000 Yen
each. The stock was shipped free on board on 31 August 2023 on which date Dwell paid 50% of the
purchase price. The stock arrived in South Africa on 30 September 2023 and was delivered at Dwell’s
premises on 10 October 2023. Dwell paid import duty of R6 000 as well as the necessary VAT on
30 September 2023, when the stock was cleared through customs. It was agreed that Dwell would settle
the purchase price, together with interest levied on the purchase price at a market related interest rate of
10% per annum (calculated from 1 September 2023), on 1 March 2024. Pacer Plc’s normal selling price
is 10 000 Yen each for these motherboards. At year-end all of this stock was used in manufacturing
computers and all of these computers have been sold.
John Dlomo
John Dlomo (“John”) is 60 years old and a resident of South Africa. Except for his 10% interest in Dwell
the only other business asset that John holds is his 10% interest in Printers Pty Ltd (“Printers”), which he
acquired during 2015 for R150 000. John has been substantially involved in the operations of Printers
since this date. During the 2023 year of assessment John started to experience problems with his health
and decided to sell his interest in Dwell as well as in Printers. His interests in the companies were sold
on 31 December 2023 for R 6 500 000 (R4 000 000 for his interest in Dwell and R2 500 000 for his
interest in Printers). The market value of Printers’ assets was R2 500 000 on 31 December 2023.
Asus (Pty) Ltd
Asus (Pty) Ltd (“Asus”) borrowed R5 000 000 from ICT Bank on 1 February 2022. Interest on the loan is
payable at 12% per annum. Asus used R2 000 000 of the amount on 1 April 2022 to buy a vacant plot of
land in Durban on which the company intended to build a new office building.
[TURN OVER]
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TAX4862/105/2023
QUESTION (continued)
The balance of R3 000 000 was used to buy a new manufacturing machine for the manufacturing of
components that are used in the manufacturing of computers. The manufacturing machine was
purchased and brought into use on 1 May 2022. Due to floods in the close vicinity of the vacant plot of
land Asus never commenced with the construction of the office building and had to sell the plot of land to
cover other expenses incurred due to the floods. The plot of land was sold for R1 350 000 on 1 December
2022. Due to financial difficulties Asus paid the correct amount of interest on 31 December 2022 but made
no other repayments on the loan. To assist, ICT Bank cancelled R3 500 000 of the R5 000 000 debt and
the amount of interest for the 2023 year of assessment on 31 December 2023. R1 500 000 of the
R3 500 000 debt benefit is attributable to the vacant plot of land and R2 000 000 of the debt benefit is
attributable to the manufacturing machine.
H Plus (Pty) Ltd
H Plus (Pty) Ltd (“H Plus”) is a company resident in South Africa for income tax purposes and has a year
of assessment ending on 31 December. The company is a residential property developer, as defined in
the VAT Act and is a category A registered VAT vendor making 100% taxable supplies. The construction
of residential property qualifies as a process of manufacture.
Assume the following (except where specifically stated or implied otherwise):

• All amounts, where applicable, include VAT.
• All requisite documentation is in order.
H Plus constructed a residential development in KwaZulu-Natal. Construction was completed at a cost of

R15 000 000 (excluding labour costs) on 1 June 2023. Due to the company not being able to attract a
cash buyer or a buyer who qualified for a loan, H Plus entered into an agreement to temporarily rent out
the property as residential accommodation from 1 July 2023 to 31 December 2023. On 1 November 2023
H Plus received an offer from Building (Pty) Ltd (“Building”) to purchase the total residential development
at a total cost of R18 000 000. Building agreed to take over the lease (rent) agreements. H Plus accepted
the offer and the residential development was finally registered in the name of Building on 15 December
2023, the same date that H Plus received the full amount in the company’s bank account.
Additional information
1. The ruling exchange rates are as follows:
Exchange rate
10 August 2023 1 Yen = R 0.11
31 August 2023 1 Yen = R 0.12
30 September 2023 1 Yen = R 0.15
10 October 2023 1 Yen = R 0.14
31 December 2023 1 Yen = R 0.13
Average rate for the 2023 year of assessment 1 Yen = R 0.14
2. SARS allows a five (5) year write-off period on the manufacturing equipment acquired by Asus in
terms of Binding General Ruling No 7 (or Interpretation Note No. 47).
162
TAX4862/105/2023
QUESTION (continued)
REQUIRED Marks
Sub- Total
Total
(i) Dwell (Pty) Ltd - Purchase of stock from Pacer Plc
Calculate the amounts to be included in, or deducted from, the taxable
income of Dwell (Pty) Ltd for the company’s 2023 year of assessment.
Clearly indicate whether an amount is included in, or deducted from, the
taxable income. You can assume that interest is translated to rand by using 10
the spot rate at the end of the year of assessment.
(ii) John Dlomo
Discuss, supported by calculations and reference to legislation, the income 11
tax implications for John Dlomo of the sale of his business interests.
Assume that John made no other disposals during his 2023 year of
assessment.
1 12
Communication skill: clarity of expression
(iii) Asus (Pty) Ltd
Calculate the amounts to be included in, or deducted from, the taxable
income of Asus (Pty) Ltd for the company’s 2023 year of assessment.
Clearly indicate whether an amount is included in, or deducted from, the 10
taxable income. Ignore any VAT implications.
(iv) H Plus (Pty) Ltd
Discuss, supported by calculations, all the income tax implications for H
Plus (Pty) Ltd of the information provided in respect of the residential 7
development.
Communication skill: clarity of expression 1 8
TOTAL 40
____________________________________
END OF TUTORIAL LETTER
©
UNISA
2023

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TAX4862/105/0/2023

Tutorial Letter 105/0/2023

Applied Taxation (CTA Level 2)

Department of Financial Intelligence

This tutorial letter contains learning units 7 to 10 as well

8.4 CONTENT OF LEARNING UNIT 8 ........................................................................................ 27

DAYS 5 & 6 – WORK PLAN FOR 9 AND 10 APRIL 2023 ................................................................ 56

II. STUDY PROGRAMME AND TIME FRAME

 Your time should be divided into two parts:

• Obtaining the required knowledge (26 hours)

• Application of knowledge and revision of difficult concepts (4 hours)

Day Date LU Topic Hours

IV. BEANCOUNTER SCENARIO

VI. IMPORTANT DATE FOR THIS TUTORIAL LETTER

Date of test 2: TUESDAY, 09 May 2023

VII. ADDITIONAL RESOURCES

? Additional questions (linked to a discussion platform to be used by students to engage with

• links to the tutorial content,

The following time allocation is recommended:

Use taxable income to calculate NORMAL TAX PAYABLE.

7.1.1 UNGC Principle 10

7.2 OUTCOMES OF THIS LEARNING UNIT

After studying LU 7, you should be able to achieve the following outcomes:

7.3 BEANCOUNTER SCENARIO

Bizzie wants to know the following:

7.4 CONTENT OF LEARNING UNIT

7.4.1 Study approach

 A note on how to study and refer to case law

7.4.2 Table of Reference

(Relevant extracts of interpretation notes will be included in your assessments.)

s 23 Prohibited deductions 6.5 Yes

s 11A Pre-trade expenditure and losses 6.2 & 7.6.2 Yes

s 23H Prepaid expenditure 6.4 7.6.3 Yes

s 11(l) Fund contributions by employers 12.2.2 Yes

s 11(w) Life insurance premiums 12.2.6 No

Special deductions – other (1 hour)

s 11(d) Repairs 12.4 - Yes

Interpretation Note No. 74 (Issue 2): Deduction and recoupment of expenditure on

s 11(i) Bad debt 12.5 Yes

s 11(j) Doubtful debt 12.6 Yes

s 11(nA) & Repayment of employee benefits 12.7 Yes

Special deductions – section 24C

Case law TL102 Yes

 Do the comprehensive example 12.23 in SILKE par 12.13.

7.4.3 Paragraphs in SILKE which you may ignore

SILKE reference Topic

7.5 IMPORTANT LAW AMENDMENTS

Use the following link to access the published Amendment Acts:

Section 1 Company tax rate

Section 7B Timing of accrual and incurral of variable remuneration

The definition of variable remuneration in section 7B has been extended to

Section Assessed losses

Any balance of assessed loss incurred by a company in its previous year of

This amendment comes into operation on 31 March 2023 and applies in

Section 12H Learnership agreements

7.6 ADDITIONAL NOTES ON THE GENERAL DEDUCTION FORMULA, SPECIAL

Section 11(a) provides for a deduction of:

• expenditure and losses

Revenue nature Capital nature

General deduction Special Base cost of

Deduction for Deduction or No deduction for

No CGT Reduces base Forms part of

General deduction formula: Case law