ACC4002H Taxation III 2023

April Test Suggested Solution

(a) Employees' tax on pension annuity

Pension annuity is included in remuneration
No deductions to get to balance of remuneration
Annual equivalent 14 000 x 12 168 000
Tax per tables on R168 000 168 000 x 18% 30 240
Primary rebate ( 16 425)
13 815
Tax withheld in December / 12 1 151

(b) Critically analyse the fringe benefit calculation

No recalculations required, but provided for completeness
Contributions by employer to pension fund - para 12A of the 7th Schedule
These contributions are included per para 12D of the 7th Schedule (not para 12A)
The contributions should be limited to the period employed (9 months): R7 000 x 9 63 000

Contributions by employer to medical aid - para 12A of the 7th Schedule

The no value rule only applies once employee has retired (i.e. not applicable while employed)
Therefore the contributions are a fringe benefit for 9 months R4 200 x 9 37 800

Medical expenses paid by employer - para12B of the 7th Schedule

para12B(1) includes child 150 000

Travel allowance R8 000 x 9 72 000

As the travel allowance is in respect of the same car as the right of use, there is no reduction s8(1)(a)(i)(aa)
The travel allowance isn't a fringe benefit, and is included in taxable income by s8.

Company car - para 7 of the 7th Schedule

Initial inclusion R650 000 x 3.5% x 9 204 750
As there is no maintenance plan, the monthly inclusion should be 3.5%
The right of use ended upon retirement - limiting the number of months to 9
Business reduction R204 750 x 40 000 / 52 500km ( 156 000)
This is correct, although will now apply to the corrected initial inclusion
Licence, insurance and maintenance reduction (R1 100 + R7 200 + R6 000)
Should be based on 12 500 private kilometres x 12 500 / 52 500km ( 3 405)
Fuel reduction
Should be based on 12 500 private kilometres and using the correct rate of R2.18 12 500 km x R2.18 ( 27 250)
Fringe benefit 18 095

The fringe benefit calc is incomplete with respect to the car as it was given to the employee at retirement.
Asset acquisition at less than actual value 200 000
No reduction for long service, as there isn't an additional unbroken period of 10 years after the first long service award

Use of cellphone - para 6(2)(a) of the 7th Schedule

the no value para 6(4)(bA) applies as it's used mainly for business 0
Total fringe benefits, excl travel allowance (for required in question) 468 895
Note to markers: while the s8C shares are not a fringe benefit (specifically excluded), they aren't on the calc from the tax expert
Communication - logical thought process
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(c) VAT effects on employment package
Salary - not an enterprise / no supply
Employee share scheme - not a fringe benefit therefore no deemed supply (also a financial service, exempt - s2, s12)
Contribution to pension fund, medical aid and medical expenses paid - financial service, exempt supply - s2, s12
Travel allowance - not a fringe benefit, no deemed supply - s18(3)
Right of use of motor vehicle - s10(13) R650 000 x 100/115 x 0.3% x 15/115 x 9 1 991
Note: no reduction of R85 as also given travel allowance
Supply of motor car to employee - input denied upon acquisition, no output charged s17(3)
Use of cellphone - no fringe benefit value, therefore no VAT (or if value calc'ed above then entertainment which is input denied)

(d) VAT effects of export services

The consulting contract is a supply of services by a vendor in terms of section 7(1)(a) and therefore is a taxable supply.
The services are rendered in the Republic to the Namibian company, a non-resident and the services do not relate to land or movable property
situated in South Africa (i.e. first two provisos to s11(2)(l) are not met).
This supply of services is thus zero rated in terms of s11(2)(l) for the period over which the Namibian company was not present in South Africa

However, the Namibian executive was in the Republic for a week, thus at the time the services were rendered, zero-rating will not be applicable
to that portion and VAT will be levied at 15%
The time of supply is the earlier of the date on which the tax invoice is issued or payment is made – 31 July 2022

(e) Donation of shares to the Crood Family Trust

The donation of the shares is gratuitous in nature as the scenario does not indicate anything to the contrary.
The value of the donation is the fair market value on 15 December, which is R41 per share - s62(1)(d)
A portion of the donation will be exempt due to the R100 000 general exemption - s56(2)(b)
The R100 000 general exemption must be applied in the order of the donations - s60(2) - and hence must first be applied to the disposal of the
car to the sister (sold at less than market value) - donation of (R200 000 - R160 000) R40 000
Therefore the value of the share donation is 12 500 shares at R41 per share, equallying R512 500, less the remaining exemption of R60 000.
As no other donations have been made, the rate applicable per s64 is 20%.
Therefore donations tax of ((R512 500 - R60 000) x 20%) R90 500 is payable 90 500
By 31 January (the end of the month after the donation).
Communication - logical thought process
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(f) Diddy Crood's taxable income

Salary - gross income, para (c ) (35000 + 12500) x 9 427 500

Employee Share Scheme - s8C

Gain on shares acquired in current year on 31 August 15 000 x (R38 - R20) 270 000
s10(1)(n D) exemption for shares not yet vested ( 270 000)

Shares vesting in current year:

12 500 shares acquired on 31 July 2021 vest on 31 July 2022 12 500 x (R37 - R20) 212 500

Share buyback (due to retiring):

S8C(5)(c) occurs as sale to employer at R20 x 150% = R30 is less than market value of R40.
Restricted equity instrument vests in terms of s8C(3)(b)(v) immediately before disposal.
Gain or loss is consideration less amount paid - s8C(2)(a)(i) and s8C(2)(b)(i)) 15 000 x (R30 - R20) 150 000
s10(1)(k) - The above gain is a dividend as defined, but is exempt from dividends tax (s64F(1)(l)) and thereby excluded from the
dividend exemption (s10(1)(k)(jj)).

Pension annuity - gross income, para (a) 14 000

Fringe benefits - given 468 895
Travel allowance 72 000
subtotal 1 344 895
less pension fund contributions - s11F: R63 000 (scenario stated fully deductible, hence don't need the explanation below )
As this amount is less than R350 000, 27.5% of salary (27.5% x 427 500 = R117563), and the previous subtotal (incl CGT), all
contributions are allowed as a deduction ( 63 000)

s26A - Capital Gains Tax

Sale of car to sister - personal use asset (disregarded) 0
 Shares donated to the trust
Proceeds - para 38 12 500 x 41 512 500
less base cost = MV on vesting, FIFO 10 000 x 32 ( 320 000)
2 500 x 37 ( 92 500)
para 22 donations tax addition = (512 500 - 320 000 - 92 500)/512 500 x 90 500 ( 17 659)
capital gain on shares donated 82 341

Share repurchased by Klubber upon retirement

Proceeds = base cost = MV on vesting - para 20(1)(h) 15 000 x 40 0

Deemed disposals on death

Klubber shares on hand Proceeds 10 000 x 42 420 000
Base cost 10 000 x 37 ( 370 000) 50 000

Primary residence
Deemed proceeds (MV as going to the trust) 5 000 000
Base cost (3 000 000)
2 000 000
Portion used for trade (23 months/142 months x 2m x 15%) ( 48 592) 48 592
Portion subject to primary residence exclusion 1 951 408
Less: primary residence exclusion of R2m, limited to (1 951 408)
Less: para 57 small business asset exclusion of R1.8m, limited to ( 48 592)
Capital gain 0 0 0
(Note: the capital gain or loss is apportioned for non-residential use, not the exclusion)

Holiday house - deemed to be disposed of at cost of R2.1m - zero CGT 0

Artwork - personal use asset (investment is not trade) 0
Aggregate capital gains 132 341
Annual exclusion ( 300 000)
0 0

Retirement lump sum (the amount you elect not to use to purchase the annuity) 3 000 000
Transfer to preservation fund (2 000 000)
Excess of past disallowed deductions (600 000 - 400 000 - 450 000) ( 250 000) 750 000
2 031 895

(g) Deceased estate effects

The primary residence must be treated as disposed of by the deceased estate for proceeds equal to the base cost of R5m of the deceased estate,
being the market value on the date Diddy died - s25(3)(a). Therefore there is no capital gain or loss.
There will be no effect for the holiday house as it was bequeathed to Diddy's wife. The estate is deemed to dispose of it to her at the cost for
which it acquired it (R2.1m), which is equal to the base cost of the deceased.
While the estate realised a capital gain on the disposal of the artwork, it remains a personal use asset and the gain will be disregarded.
The deceased estate will be taxed per the individual normal tax tables, and will not receive the primary or medical rebate.
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(h) Effect of the distribution on the daughter's taxable income
The R17 500 distribution from the trust will be included in the daughter's gross income under s25B.
The portion of the amount that relates to a dividend (i.e. 45000/(1440000+45000)) is 3.03%
None of the dividend income will be attributed back to Diddy in terms of s7(3) as he has passed away.
Therefore the daughter is entitled to a dividend exemption under s10(1)(k) of R530 (R17 500 x 3.03%) 530
The proportionate amount of admin expenses follow the rental income, and will be allowed as a deduction under s11(a)
(18000/1440000*(17500-530)) 212
There is no s13sex (as based on lower of cost of zero and market value, and not new and unused), no s13quin (as the building is residential
accomodation), nor s13(1) (as the building is not industrial) building allowance for the Trust (i.e. no further expenses follow the income).

There is no attribution of the rental income distributed as s7(3) does not apply to grandparents.
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Communication - logical thought process for both (g) and (h)
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