TXT8X00

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FACULTY/COLLEGE College of Business and Economics

SCHOOL School of Accountancy
DEPARTMENT Accountancy
CAMPUS APK
MODULE NAME South African Tax
MODULE CODE TXT8X00
SEMESTER Second
ASSESSMENT OPPORTUNITY, Final replacement
MONTH AND YEAR January 2020

ASSESSMENT DATE January 2020 SESSION

ASSESSOR(S) Mrs S Mostert, Mr R Wessels
INTERNAL MODERATOR Mr M Hassan
EXTERNAL MODERATOR Ms T Johnston (UCT)
DURATION 225 TOTAL MARKS 150
READING TIME 30

NUMBER OF PAGES OF QUESTION PAPER (Including cover page 9

and required)

INFORMATION/INSTRUCTIONS:
 This is an open-book assessment.
 There are nine questions.
 Read the questions carefully and answer only what is required.
 Round all amounts to the nearest Rand
 Number you’re answers clearly and correctly as per the question paper.
 The marks shown against the requirement(s) for every question should be regarded as an
indication of the expected length and depth of your answer:
Question Marks Time allocated (minutes)
1 21 31.5
2 10 15
3 34 51
4 10 15
5 58 87
6 17 25,5
Total 150 225

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QUESTION 1 [21 MARKS]

The KT family trust:

In 2005 Kelso Tshabalala (Kelso) sold a rental property with a market value of R3 000 000 to the
KT Family Trust. The trust is an an inter vivos trust.

The trust was financed with an interest-free loan from Kelso. The KT Family Trust has two
beneficiaries, namely Kelso’s children: Aldo and Levi (30 and 35 years old respectively). They have
a vested interest in income and capital at a ratio of 50:50. The trust is a valid trust with independent
trustees.

All the rental income earned by the trust was used settle the interest-free loan.

The rent-producing property consists of:

 offices on the ground floor and
 residential accommodation (4 flats) on the upper floor. All the offices and flats are occupied
by tenants. The building was built by the trust. The date of completion was 2009.

The trust is a registered VAT vendor with SARS. The Commissioner deems it acceptable that 60%
of the rentals are derived from the offices and 40% from the flats. The trust does not have any other
assets.

Income earned by the trust:

The rental income amounts to R120 000 per month (excluding VAT).

Proposal to sell the property:

Aldo and Levi are considering selling the property to a company of which they are the only two
shareholders. The trustees have granted the necessary permission for the trust to sell the property
to the company.

The company lets commercial property and is a registered VAT vendor. The following two
alternatives are being considered:

1. The trust sells the property to the company for its market value of R5 000 000 and continue to
let the property (60% of the rentals will still be derived from the offices and 40% from the flats).
2. The trust sells the property to the company for R2 500 000. The company will continue to let the
property as stated above.

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QUESTION 2 [10 MARKS]

Oak Manufacturing Ltd is a manufacturing concern and a resident in South Africa. They
manufacture kitchen cupboards in solid wood. Their clients range from household kitchen
installations to large hotel projects. They are registered as a VAT vendor with SARS.

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The following information is applicable to its year of assessment ending 31 March 2019. (All
amounts exclude VAT, unless stated otherwise.)

Note R
Sales 1 28,793,210
Less: Cost of sales (16,711,872)
Gross profit 12,081,338
Other income
Local dividends earned 150,700
Expenditure
Exchange rate difference 2 Refer note below
Instalment sale payment 3 184,800

Notes:

1. Included in sales is an advance payment received to the amount of R300 000. This was received
in respect of an order for cupboards that still needs to be manufactured. The quoted selling price
for the making the cupboards is R800 000. The projected cost of making the cupboards is
R500 000. The balance is due on delivery.

2. On 18 December 2018 Oak Manufacturing Ltd took out a forward exchange contract (FEC) on
an order from an overseas client. The purchase of the goods was included in cost of sales
already.

The FEC was taken out in dollars to cover the order. The customer ordered goods to the
value of $92 000 on 18 December 2018, to be delivered immediately (FOB- free on boards).

The debt was paid on 18 April 2019. The rand equivalent at the appropriate exchange rate for
tax purposes had already been taken into account in sales. The following exchange rate
information is applicable:

Date Spot Rate FEC Rate

18 December 2018 $1:R14,15 $1:R14,55
28 February 2019 $1:R14,45
31 March 2019 $1:R14,60 $1:R14,70(remaining period)
18 April 2019 $1:R14,85

No entries have been made in respect of any exchange rate differences on the debt owed to Oak
Manufacturing Ltd or the FEC.

3. A passenger car was acquired to replace the current vehicle used by the marketing team on
1 May 2018. The transaction was an instalment sale agreement for VAT purposes.
R
Cost price (including VAT) 552 000
Less: Deposits (55 200)

Finance charges 175 200

Total debt 672 000

The debt is payable over 48 months at R14 000 a month (including VAT).

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QUESTION 3 [34 MARKS]

Vera Nzimande (Vera), 61 years old died suddenly on 31 October 2018 of a brain aneurism. Her
husband passed away 12 years ago. Vera had not remarried after her husband’s death and raised
her children as a single mother. Both of her children are majors. Rentishia is a South-African resident
for tax purposes and Bellarmine is a non-resident for tax purposes

An executor was appointed by her children to deal with her estate. You in turn were appointed by
the Executor to assist with the Income Tax implications of her death.

The following information was contained in the file handed to you by the Executor of the deceased
estate:

1. On 1 May 2018 Vera donated a plot of land (under 2 hectares) to her two children equally. The
plot had cost her R385 000 on 2 November 2006. The market value of the property was
R3 100 000 at the date of the donation. No other donations were made in the 2019 year of
assessment.

2. On 1 June 2018 Vera sold her 50% share in a company to her brother for R50 000. Her 50%
share was valued at R40 000 at the time, but her brother was willing to pay R50 000. Vera had
acquired her share in the company on 1 July 1998 for R10 000. The valuation performed on
1 October 2001 amounted to R16 000.

3. For the period of 1 March to 31 October 2018 income and expenditure were as follows:

Description Amount
(R)
Rental income 89 000
Rental expenditure (42 000)
Bad debt in respect of unpaid rental (5 200)
Interest income (SA source) 88 000
Interest income (Foreign source) 5 800
Dividends received, net withholding tax (listed South African shares) 43 000

4. Vera had the following assets at 31 October 2018:

Description Market value at Valuation

31/10/18 date value
(R) 1/10/01 (R)
Flats (acquired in 1992) 4 200 000 2 300 000
Primary residence (in South Africa – see note below) 5 000 000
Money market cash value 980 000
Listed shares 2 800 000 800 000
Foreign bank account (converted into Rands) 150 000

Note: The primary residence was inherited from her husband who died 12 years ago. It has always
been their only primary residence. The market value at the date of his death was R4 500 000 and
he had acquired the property on 3 July 2004 for R800 000. Vera made certain improvements to the
property after his death, which cost her R95 000.

5. In terms of Vera’s will the following bequests were made:

 The flats to her son, Bellarmine, on condition that half of the net rental income must be paid
to his sister, Rentishia.
 The primary residence to her daughter, Rentishia.

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 The listed share to both children in equal shares.

 Cash must be paid out of the money market cash account as follows:
To Bellarmine R100 000
To Rentishia R100 000
 The balance of the R780 000 to be used to pay any expenses in the estate. Any cash
remaining would be distributed equally between the two children.
 Foreign bank account to her son, Bellarmine.

The following income was received by the executor for the period 1 November 2018 to 28 February
2019. The estate was not would up at 28 February 2019, and all assets still in possession of the
Executor. No cash distributions were made before 28 February 2019.

Description Amount
(R)
Rental income (net of expenses) 56 000
Bad debt recovered (relating to unpaid rentals at 31/10/2018) 3 400
Interest received – SA Source (money market account) 24 000
Interest received – Foreign source (foreign bank account) 2 900
SA dividends received, net of withholding tax 21 000
Sale of listed shares – proceeds 41 000

The Executor sold a share included in the listed share portfolio in terms of a delisting arrangement.
The share had a market value of R51 000 at the date of death and a base cost of R13 000 at
1 October 2001. The cash was awarded to the two children in equal shares.
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QUESTION 4 [10 MARKS]

Gadgets (Pty) Limited is a resident company in South Africa that trades in entertainment systems.
They started trading on 1 March 2017 for the first time. They sell their products on credit with a
suspensive sale agreement. The term of the agreement provides for repayment over a 3 year period.
The gross profit percentage was the same for both 2018 and 2019. The have a February year-end.

The following entries appeared in the statement of comprehensive income for its 2019 year of
assessment.

 Finance charges on suspensive sale transactions R 300 000

 Total sales for the 2019 year of assessment R5 250 000
 Cost of sales R3 750 000.

The finance charges was calculated in accordance with section 24J on a yield to maturity basis, day
to day.

An extract from Gadgets (Pty) Limited’s statement of financial position follows:

2019 2018
Suspensive sale debtors 2 362 500 681 750
Less: Earned finance charges 105 000 30 000
2 257 500 651 750
Add: Open debtors 862 500 1 087 500
3 120 000 1 739 250

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QUESTION FIVE [58 MARKS]

Amahle Zulu (‘Amahle’) is a 43 year old South African resident. She is married, out of community of
property, to Sfiso and has two minor children.
Amahle is an employee of UM (Pty) Ltd (‘UM’), a South African resident company. The following is
applicable to Amahle’s employment during the 2019 year of assessment:
(1) A basic salary of R47 000 per month.
(2) A performance bonus of three times her monthly salary was received after her employers
financial year end, December 2018.
(3) Amahle was promoted to manager on 1 March 2018. This resulted in Amahle receiving the right
of use of a vehicle, an Alfa Guilietta. UM acquired the vehicle on 1 May 2015 for R442 900
(including VAT and a maintenance plan as defined). Amahle was given the right of use on
1 March 2018. She recorded the opening odometer reading on 1 March 2018 as 34 995 and
the end reading on 28 February 2019 as 46 887. She travelled 7 980 business kilometers. She
incurred the following costs:
Cost incurred Amount
Fuel R8 206
Maintenance R5 364

(4) A cell phone allowance of R2 000 per month for the year. Her total cell phone bills for the year
of assessment amounted to R26 000. R14 000 was for private calls and R12 000 for business
calls.

(5) Amahle is a member of UM’s pension fund. UM contributes 7.5% of basic salary and she makes
a matching contribution.
Amahle also contributed R5 000 per month to her Retirement Annuity Fund (RAF). Amahle
made a contribution of R22 000 to her RAF in 2018 that was disallowed as a deduction. Amahle
has provided proof of all her contribution to UM.

(6) Amahle is a member of a medical aid completely funded by UM. The monthly contributions
amounted to R7 900 per month. Amahle incurred and paid R9 800 as qualifying medical costs
during the year of assessment which was not recoverable from her medical aid.

In addition to Amahle’s receipts from UM the following is also applicable to her 2019 year of
assessment:

(7) Amahle sold her shares in Mundi Ltd (a company listed on the JSE). She made a Net Capital
Gain of R128 000.

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QUESTION SIX [17 MARKS]

Umnike (Pty) Ltd is a South African resident company. It is a registered VAT vendor with a December
financial year end. Umnike is considering entering into a transaction with Mr Bhayi. Umnike offered
Mr Bhayi the opportunity to subscribe for the shares in the company and will also take up the fulltime
position of chief strategic officer. Mr Bhayi would subscribe for a 6% shareholding in the company in
exchange for the company assuming ownership of one of Mr Bhayi’s assets.

Mr Bhayi would exchange a building for the shares. Mr Bhayi’s building was constructed on 1 June
2015 at a cost of R2 500 000. It’s current tax and market value is R2 000 000 and R3 100 000
respectively.

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YOU ARE REQUIRED:

QUESTION 1 21
PART A: 4
Discuss whether the sale of the fixed property by the trust to the company can be
a zero-rated supply for VAT purposes under the two alternatives set out above.
Provide the advantages of having the sale zero rated.
PART B: 7
Briefly explain the tax implications of the interest-free loan for Kelso Tshabalala, prior to
the loan being paid off.
Assume for purpose of the rest of the questions that the loan has been fully repaid. 3
PART C:
Explain whether the company will qualify for any capital allowances should the building
be sold by the trust to the company.
PART D: 4
Discuss the two options for the sale of the building by the trust to the company from a
income tax perspective for the trust.
PART E: 3
Discuss the Input VAT implications for the company once the building has been
purchased. The company does not meet the de minimus rule.

QUESTION 2 10
Calculate the taxable income of Oak Manufacturing Ltd for the year of assessment 10
ending 31 March 2019. SARS regards the manufacturing of cupboards as a process of
manufacture.

QUESTION 3: 34

A. Calculate the taxable income of Vera Nzimande for the 2019 year of assessment (her 25
last income tax return). Reasons must also be provided for Rand nil tax effects.

B. Calculate the taxable income of the deceased estate of Vera Nzimande for the 2019 9
year of assessment ending on the last day of February. Reasons must also be provided
for Rand nil tax effects.

QUESTION 4 10
Calculate how the transactions for the 2019 year of assessment needs to be dealt with 10
for normal tax purposes.

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QUESTION FIVE 58
A) Calculate Amahle’s tax liability for the 2019 year of assessment. You may ignore 25
employees’ tax and provisional tax for purposes of Part A.

With regards to Note 3. 5

B) Assume that Amahle only has the opening and closing km’s of the vehicle’s odometer,
but no other logbook information, such as business and private travel.
Recalculate the amount to be included in gross income if all other information (vehicle
value and costs incurred) remains the same.

C) Calculate Amahle’s employees tax for the month of December 2018. 13

You may assume that UM makes no deduction for Employees Tax where they are given
the option to do so.
D) Briefly discuss the records retention requirements for Amahle as contained in the Tax 5
Administration Act.

Communication mark: clarity of expression. 1

E) Briefly discuss the search and seizure provisions as contained in the Tax Administration 7
Act.

QUESTION SIX 17
A) Discuss Umnike and Mr Bhayi’s normal income tax implications if the exchange of the 10
building for shares takes place.

B) Assume that Umnike and Mr Bhayi both agreed in writing that section 42 would not 6
apply. Furthermore, assume for this part that the value of the 6% shareholding is
R2 600 000.
Discuss Umnike’s normal income tax implications if the exchange of the building for
shares takes place.

Communication mark: logical argument. 1

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