EISA MOCK EXAM- PAPER 3 TP

QUESTION 2
Adjustment in tax
calculation of
Bluelight
Increase/(Decrease
taxable) income
Transaction 1: Donated inventory received at no cost
Section 22(4) of the Income Tax Act No 58 of 1962 (hereafter referred to as the Act) deals with the value to be
placed on trading stock that the taxpayer acquired for 'no consideration'- the taxpayer is deemed to have acquired
such trading stock at a cost equal to the current market price of such trading stock on the date it was acquired.

Section 22(4) does not provide a deduction- it provides the value to be used in terms of section 22(2)- opening
stock. The taxpayer is therefore permitted to deduct a notional amount not actually expended by him.
The computer equipment is therefore deemed to be acquired at the market value of R21 550 and is deemed to be
part of the opening stock.
No notional input tax can be claimed by Bluelight on the second hand goods donated to the company as a notional
input tax is based on the lower of market value or the actual amount paid . As no amount has been paid , there
will be no input tax claim. ]
The inventory was still on hand at year end and Bluelight correctly included the inventory in the closing stock at
the deemed cost of the market value of the inventory at the date it was acquired. No adjustment required in
respect of closing stock.
The inventory was not added to the opening inventory in the accounting records when it was received and must
therefore be adjusted in the tax calculation at market value . The adjustment will result in a decrease of taxable (21 550.00)
income.
Logical flow of explanation provided
Note: Mr Abrahams, in his personal capacity, will have to consider whether there will be donations tax implications
for him in respect of the donation that he made to Bluelight. The first R100 000 worth of donations made by Mr
Abrahams in a tax year will be exempt from donations tax.

Transaction 2.1 : Inventory donated to PBO

The 2 laptops that were donated were purchased during the current year of assessment, and is therefore not
included in the opening or closing inventory balance in the accounting records.

The cost price (excluding VAT - see note below ) is included in "purchases" in the accounting records and a
deduction is therefore claimed for accounting and tax purposes (in terms of section 11(a) of the Act).
Note: Bluelight would have been able to claim input tax on the purchase of the laptops as the laptops were
acquired from a VAT vendor and a valid tax invoice was received from the VAT vendor.
Section 22(8)(C) determines that a recoupment should be included in income that is equal to the previous
deduction claimed, namely cost price.
A recoupment is a tax adjustment which is not recorded for accounting purposes. The recoupment at the original
cost price, excluding VAT (R6 975 x 2) , must therefore be adjusted for in the tax calculation by adding it to
(increasing) the taxable income. 13 950.00
Bluelight may also qualify for a section 18A deduction in respect of the donation made of 10% of its taxable
income, but limited to R13 950 (s18A(3)(a)(ii).
Logical flow of explanation provided
One will have to consider the VAT consequences too. In the case of goods or services acquired wholly or partly for
making taxable supplies that are then applied wholly for private, exempt or other non-taxable purposes, a taxable
supply adjustment will arise for which output tax must be levied in terms of section 18(1) of the VAT Act. The
output tax adjustment is calcualted as the tax fraction multiplied by the open market value . Open market value is
the consideration in money that the supply would fetch in an arm's lenght transaction. As donations to an
association s not for gain are excluded from the definition of consideration, there will be no output tax
adjustment .
Note: The donation to the PBO will not attract donations tax as the donation is exempt from donations tax in terms
of section 56(1)(h).
Transaction 2.2: Inventory donated to local veterinary practice

The donated laser printer was purchased during the previous year of assessment, and is therefore included in the
current year's opening stock for accounting and tax purposes at the original cost price of R6 425.
Since the inventory was donated during the current year of assessment, it is not included in the current year
closing stock for accounting purposes, even though it was not sold.
This is not a qualifying donation in terms of section 18A and therefore section 22(8)(B) of the Income Tax Act
should be considered.
Section 22(8)(B) determines that a recoupment will arise that is equal to the market value (excluding VAT - see
note below) of the trading stock at the time of the donation.
Recoupment is a tax adjustment which is not recorded for accounting purposes. The recoupment must therefore
be adjusted for in the tax calculation by adding it to (increasing) taxable income. 6 173.91
Logical flow of explanations provided
One will have to consider the VAT consequences too. In the case of goods or services acquired wholly or partly for
making taxable supplies that are then applied wholly for private, exempt or other non-taxable purposes , a
taxable supply will arise for which output tax must be levied in terms of section 18(1) of the VAT Act. The output
tax adjustment is calcualted as the tax fraction multiplied by the open market value . Open market value is the
consideration in money that the supply would fetch in an arm's lenght transaction. As the supply is a non-taxable
supply and the donation is not to an association for gain , an output tax adjustment of R7 100 x 15/115 may
have to be made .
Note: Bluelight will have to consider the donations tax implications of the donations made to the veterinary
practice. In terms of section 56(2)(a) the first R10 000 of casual gifts made by companies will be exempt from
donations tax.

Transaction 3: Inventory converted to capital asset

The desktop was purchased during the previous year of assessment, and is therefore included in the current
opening stock for accounting purposes and for tax purposes in terms of section 22(2) of the Act at the original cost
price of R7 025 (excluding VAT as input tax would have been claimed).
Since the desktop was converted to a capital asset during the current year of assessment, it is not included in the
current year closing stock, even though it was not sold.
Since the desktop was purchased (and not manufactured/ assembled) section 22(8)(B) determines that a deemed
sale of the trading stock at market value arises (recoupment)
Recoupment is an income tax adjustment which is not recorded for accounting purposes. The recoupment at the
market value of R7 500 must therefore be adjusted for in the tax calculation by adding it to (increasing) taxable
income. 7 500.00

Note: Although the VAT consequences are not specifically asked, one would need to consider it. There is no change
in use adjustment for VAT purposes as the desktop was purchased to be used 100% in taxable supplies as trading
stock and although it is now used as a capital asset, it is still used 100% to make taxable supplie s.
Capital allowances ito s11(e)may be claimed on the PC which will be based on the value of the asset (which is the
market value of R7500). In terms of BGR7 the write off period for computer equipment is 3 years, apportioned
from the date the computer equipment is brought into use.

The capital allowance for the PC is a taxation adjustment , and is not recorded for accounting purposes. The
capital allowance on the PC must therefore be adjusted for in the tax calculation by deducting it from (reducing)
taxable income. (R7 500 /3/365 x 348 (18 July 2019 to 30 June 2020= 348 days <365 - 17>) (2 383.56)
For tax purposes the PC is deemed to become a capital asset, and subsequent sale of the PC is considered a capital
gains tax event. The base cost of the asset to be used in CGT calculation is the deemed cost of R7500 less any
allowances claimed.

Logical flow of explanations provided

Transaction 4: Purchased inventory received after year end

The cost price (excluding VAT as input tax may be claimed) of the trading stock is included in "purchases" in the
accounting records, and therefore included in cost of sales. A deduction is therefore claimed in terms of section
11(a) of the Act.
Since the stock was only received on 17 July 2020, it is not included in the inventory balance as at 30 June 2020.
Inventory is recorded by way of a physical inventory count performed at financial year end, which means that this
trading stock is not part of closing stock in Cost of Sales and it is therefore not added back for accounting and tax
purposes.
Section 23F(1) determines that if a taxpayer has not disposed of trading stock during the year of assessment and
the trading stock was also not held by the taxpayer at the end of the year of assessment, a deduction is not
claimable.
Section 23F(1) therefore requires that the deduction claimed for the purchase of the stock not included in closing
inventory, must be reversed by adding it to taxable income. 37 121.00
Logical flow of explanations provided