UNIVERSITY OF LIMPOPO

TURFLOOP CAMPUS

FACULTY OF MANAGEMENT AND LAW

SCHOOL OF ACCOUNTANCY

DEPARTMENT OF TAXATION

DEGREE AND DIPLOMA TEST 2 APRIL: 2019

MODULE: CTAA040/CTAE080 PAPER: P1

(TAXATION)

TIME: 2.5 HOURS MARKS: 100

INTERNAL EXAMINER: MS P NEELEMAN

INTERNAL EXAMINER: MS M SEFALA

INTERNAL MODERATOR : MR H GROBBELAAR

THIS PAPER CONSISTS OF 8 PAGES INCLUDING COVER PAGE

INSTRUCTIONS:

1. Answer all the questions

2. Start each question on a new page
3. Write neatly and legibly
4. Number all questions clearly
5. SAICA Student Handbook volume 3 is allowed in the test venue. (Flag, highlight and
underline only. No writing is allowed.)
6. Show all calculations clearly and round to the nearest rand
7. Cancel all open pages/spaces in your script
 CTAA040/CTAE080 TEST 1

QUESTION 1 46 MARKS

Tebogo and his university friend Steward both qualified physiotherapist saw the need for
consultation rooms in Turfloop, Limpopo and decided to start their own practice.

They registered a company Let’s Move (Pty) Ltd (“Let’s Move”) on 1 May 2018. Let’s Move has a
March year-end and is not a registered VAT vendor.

Let’s Move entered into a rental agreement on 1 June 2018 to rent property close to the University
of Limpopo to allow students to have easy access to their services. Let’s move had to incur various
expenses before it could start trading on 1 September 2018.

Let’s Move incurred the following expenses during the period 1 May 2018 – 31 August 2018

Description Note R
Company registration and formation cost 4 500
Office rent 1 74 000
Internet cost 2 350
Computers 2 14 200
Equipment, consumables & stock 3 116 610
Office furniture 2 23 100
Office stationary 2 070

Note:
1. On 1 June 2018 Let’s Move entered into a lease agreement for 10 years to pay R8 000
rent per month with a 10% increase each year. In addition the lease agreement required a
lease premium payable on 1 June 2018 of R50 000. This premium was included in the
lessor’s gross income for the tax period.
2. The computers and office furniture was acquired on 1 July 2018 and immediately brought
into use.

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CTAA040/CTAE080 TEST 1

3. The equipment was delivered on 1 August 2018 but was only brought into use on
1 September 2018 when the practice officially opened.
The total is made up as follows:
Description Cost (R)
Treatment tables (3 tables @ R6 500 each) 19 500
Ultra sound machine 40 000
Consumables used during treatment (massage gel, needles, etc) 18 750
Stock consisting of:
Kinesiology Tape 12 800
Foam Rollers 13 360
Mobility Bands 12 200

Let’s move has a 55% mark up on the cost of trading stock at which items are sold. The
consumables and trading stock was delivered on 15 August 2018 but was only brought
into use the morning when the practice officially opened.

The following relates to the period 1 September 2018, the day the practice opened to
31 March 2019:
1. Income for the period R820 000 (Including sales of inventory).
2. Salaries R240 000.
3. Let’s Move donated Kinesiology Tape, Foam Rollers and Mobility Bands, which cost
R15 000, to the University Track and Field team. In return their name was printed on
the team’s kit bags. The price that Let’s Move sell their stock to the public is considered
to be their market value.
4. During December 2018 Let’s Move acquired a patent to the value of R100 000 to make
a special compression sock wore by athletes after intense training sessions to assist
with recovery and increase recovery time of muscles. On 1 January 2019 Let’s Move
registered a trademark (“Squeeze”) for their socks at a cost of R25 000.
5. Additional consumables to the value of R23 000 was purchased during the period.
6. On 15 October Let’s Move received a donation of Foam Rollers and Mobility Bands
from a company just entering the market. The market value of these products were
R35 000.
7. Due to the popularity of Kinesiology Tape, Let’s Move bought more tape to the value
R47 000 on 7th November 2018.
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CTAA040/CTAE080 TEST 1

8. Let’s move made a cash donation of R7 500 to a PBO who assist with rehabilitation of
injured athletes. The PBO did not provide them with a S18A receipt for this donation.
9. Internet cost to 31 December 2018 amounted to R3 500. Let’s Move noted that their
data cost were extremely high for internet usage and on 1 January 2019 the company
entered in to a fixed price unlimited data WiFi agreement for the following 12 months of
R9 000. This amount was paid upfront on the day the agreement was signed.
10. On 1 October 2018 Let’s Move took over a learnership agreement from another practice
who originally signed an 18 month agreement on 1 October 2017 with Allison Baily who
holds a NQF 7 qualification to be trained as an assistant. Allison Baily completed the
learnership on 31 March 2019.
11. Let’s Move had consumables with an original cost of R13 500 on hand on
31 March 2019. The market value of these items was R11 850 on this date. The
reduction in value was due to damage. Trading stock with a cost of R67 500 was sold
during the period. The market value of all trading stock was equal to the cost at year
end.
12. At year end outstanding debt from clients was set out in the age analysis as follow:
Current 30 Days 60 Days 90 Days 120 + Days
55 000 42 600 32 300 16 480 18 750

Let’s Move provide for bad debt as set out in the legislation.

Interpretation Note: 47 allows the following write-off periods in respect of the assets used by
Let’s Move:
 Furniture – 6 years
 Computers – 3 years
 Equipment – 5 years

YOU ARE REQUIRED TO: MARKS

Calculate the income tax payable by Let’s Move for the year ending
46
31 March 2019.

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 CTAA040/CTAE080 TEST 1

QUESTION 2 31 MARKS

Scenario 1

Tosca (Pty) Ltd (“Tosca”) is a real estate company focusing on residential rentals, since the
company deals with a lot of residential properties the Director, Ms Thembani, noted a gap in the
landscaping market and as a result Tosca incorporated landscaping to its business during 2017.
In addition to dealing with residential rentals it now provides services such as turf installation, new
plants, water and rock features. It has become well known for providing luxurious and breath-
taking gardens to its clients all across the country. Tosca is a resident company and a registered
VAT vendor under category C. It has a September year end and it is making 60% taxable supplies.
All amounts include VAT where applicable.

1. Tosca purchased a double cab bakkie to be used solely as a “company car” from
Bree (Pty) Ltd a registered Vat vendor for R420 000 on 1st February 2019 (Paid in cash).
It incurred petrol cost of R8 050 and insurance cost of R5 000 for the current VAT period.
2. Tosca placed an order for the new and unused machinery on the 4th February 2019 with
Luiza, a German supplier for a Rand equivalent of R210 000. On the same date a 50%
non-refundable deposit was paid to Luiza. The machinery was delivered on
17 February 2019 and control of the machinery passed to Tosca on the same date. Tosca
used a clearing agent for this transaction, the customs duty value of the machinery was
R210 000. The import duties of R19 000 were paid on the 20th February 2019. All custom
charges and import duties were paid cash.

Scenario 2

Mr. Lekota owns a bakery (“Billy’s Bakery”) and is a registered Category B VAT vendor. He was
audited by SARS for the January/February period (SARS request invoices supporting the VAT
return filed). The invoice below was flagged by SARS as not being a valid VAT invoice and as
such input VAT was denied.

Mr. Lekota doesn’t understand what SARS means by this since the invoice relates to training of
employees.

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CTAA040/CTAE080 TEST 1

YOU ARE REQUIRED TO: MARKS

a.) Process all the journal entries of Tosca for the transactions provided.
Journal narrations should indicate VAT consequences. 21

b.) Write a memo to Mr. Lekota explaining what a valid VAT invoice means and
indicate what information is missing from the invoice which should have 9
been included for SARS to consider it to be a valid VAT invoice.

Presentation and Lay-out 1

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 CTAA040/CTAE080 TEST 1

QUESTION 3 23 MARKS

PART A

Abacus (Pty) Ltd (“Abacus”) is an investment company that acquires struggling businesses that
have potential to succeed with the relevant managerial skills and financial support. It has been in
the business for the past 10 years and has saved many businesses from collapsing. It has a place
of effective management is South Africa. One of the businesses that Abacus has acquired with
the view of turning it around into being profitable again is Minco Plc (“Minco”), a non-resident
company situated in Kenya. Minco is in the business of agriculture. Due to a draught that has hit
the country during the 2015 to 2017 year of assessments, Minco is still recovering from the losses
suffered as a result.

Mr Agri is the majority shareholder of Abacus. He did not like Taxation so much during his varsity
years and his dislike was cemented with the recent state capture inquiry. His reasoning is that the
government is collecting so much taxes that he worked so hard for only for corrupt government
officials to enrich themselves, as such he feels this defeats the purpose of paying taxes. It is his
humble opinion that he’d rather take the 28% of his company’s taxable income and donate it to
charity rather than declaring it in the company’s tax return, in this way he believes he will be
putting it to good use.

The companies that Abacus has acquired in the past two years of assessment are not yet
profitable however the trend shows that by the 2020 year of assessment they should start realizing
profits. Abacus has identified a great business opportunity of acquiring Zeal (Pty) Ltd (“Zeal”), a
resident beverage company that manufactures soft drinks. Zeal is another struggling company on
the verge of collapsing due to high competitive market, implementation of sugar tax and labour
strikes. It has been experiencing losses for the past 4 years with no hope for future profits. Abacus
will utilise the assessed losses of Zeal to set off against the taxable income of Abacus in order to
reduce the taxable income for the current year of assessment. Mr Agri is of the opinion that the
lower tax will result in a relief on the company’s cash flow.

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 CTAA040/CTAE080 TEST 1

YOU ARE REQUIRED TO: MARKS

A. Discuss whether Abacus Ltd is allowed to set-off the assessed losses of 3
Minco against the income of Abacus.
B. Assume that Abacus acquires 100% shareholding in Zeal for R520 000. 7
Discuss whether Abacus Ltd will be allowed to set-off the assessed losses of
Zeal against the income of Abacus.
1
Presentation and layout
C. With reference to the Tax legislation, state which sections are applicable 2
from the scenario.
D. Discuss whether Mr Agri’s opinion of not declaring the company’s income on 5
their tax return is being ethical and legal.

UJ 2013 ADAPTED

PART B

Tech IT is an IT company that provides technological services to clients. Tuscan (Pty) Ltd
(“Tuscan”) purchased new computerized accounting system software and it contracted Tech IT
to install the new system. Tuscan paid Tech IT an amount of R11 500 for the installation of the
system to ensure it runs efficiently with the other systems and programs of the company. Tuscan
furthermore paid Tech IT an amount of R6 500 for training the employees on how to operate the
new system. Tech IT spent 90% of its time training the staff on how to process the taxable income
and the remaining 10% on how to process the exempt income which is considered a reasonable
apportionment.

YOU ARE REQUIRED TO: MARKS

Discuss with reference to case laws principles whether the training fees paid by 5
Tuscan are incurred in the production of income. (Ignore VAT)

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