CENTRE FOR ACCOUNTING STUDIES

CAT Advanced

Friday May 3, 2024

Question 1

Neo, a resident individual, is self-employed. During the year ended 31 March

2024, she made the following disposals.

(1) Sale of shares in OK Bazaar (Pty) Ltd for M252,000.

Neo had received the shares as part of a divorce settlement. The shares
were worth M188,000 at the date of transfer.

(2) Damage of a machine used in Neo’s business in a fire.

The adjusted cost base (ACB) of the machine on the date of fire was
M78,000. Neo received insurance proceeds of M102,000 from her
insurance company in respect of the destroyed machine and she used the
proceeds to purchase a replacement second-hand machine for M92,000.

(3) Sale of the family car for M255,000.

The adjusted cost base (ACB) of the car (which is not used in Neo’s
business) on the date of sale was M200,000.

(4) Sale of an industrial building for M620,000. Neo’s carpentry business

operated in this building. The adjusted cost base (ACB) of the industrial
building on 1 April 2023 was M356,900.

Required

Calculate the taxable gain or allowable loss for Neo on the disposal (1) –
(4) made during the year ended 31 March 2024. (6 marks)
Solution to Question 1

M Mark
1. OK Bazaar (Pty) Ltd shares

Proceeds 252,000 ½
Cost base 188,000 ½
Taxable Gain 64,000

2. Machinery destroyed by fire

Proceeds 102,000 ½
Amount reinvested 92,000 1
Profit on disposal 10,000

3. There is no gain or loss on disposal of

1½
family car because it is a personal asset

4. Sale of industrial building

Adjusted cost base

Depreciation (356,900 x 5%) 356,900 ½
Adjust cost base 17,845 1
Proceeds 339,055
Profit on disposal 620,000 ½
280,945
(6)

Question 2

1. The following disposals have been made in Lesotho.

(a) Mosa, who owns a manufacturing business, sold a business vehicle to her
associate, Kholu. The adjusted cost base of Mosa’s vehicle was M406,300
and Kholu acquired the vehicle for M395,900.

(b) Before leaving her job in Lesotho to work in Dubai, Limpho sold her motor
vehicle for M377,800. The adjusted cost base of the vehicle on the date of
sale was M258,300

(c) X Ltd owned equipment with an adjusted base of M97,760 on 30 June

2016. On 1 November 2016, the equipment was destroyed by fire. The
insurance company paid M86,000 to X Ltd when they made a claim in
respect of the destroyed equipment. On 1 January 2017, similar
replacement equipment was acquired for M99,000.

Required:

Calculate the taxable gain or allowable loss arising on the disposal of

each of the assets. (6 marks)
Solution to Question 2

Taxable gain or allowable loss

M Marks
(a) Disposal between associates

Proceeds 395,900 ½
Less: Adjusted cost base (406,300) ½
Loss (10,600)_
The loss on disposal is not allowable, proceeds are
deemed to be equal to the adjusted cost base. 1

(b) Disposal of personal assets

There is no gain no loss on disposal of personal 1

assets.

(c) Asset destroyed 1½

There is no gain or loss on the involuntary conversion

of an asset, where all the proceeds are invested in the
asset of a similar kind
1½
All of the proceeds received for the destroyed
equipment (M86,000) were utilised in purchasing (6)
similar replacement equipment (M99,000)

Question 3

(1)Kubake Supermarket owns a shopping complex. On 1 June 2023, it

sold the right wing of the complex for M2,800,000. The adjusted cost
base of the complex on the date of disposal was M4,200,000 and the
right wing constituted 40% of the adjusted cost base. The market
value of the complex on 1 June 2023 was M5,500,000 while it was
M3,150,000 on 30 April 2018 when it was acquired;

(2)Kubake Supermarket swapped its SUV vehicle with its associate

company for a 4 x 4 pick-up van. The adjusted cost of the SUV was
M378,900 and M309,450 for the 4 x 4 pick-up van.

Required:

Calculate the gain or loss on disposal of the assets realised by Kubake

Supermarket and comment on the tax treatment of any losses.(6 marks)
Solution to Question 3

(1)Shopping complex
M
Proceeds 2,800,000 1
Adjusted cost base of the right wing (M3,150,000 x 40%) 1,260,000 2
Taxable gain on disposal 1,540,000

(2)SUV vehicle
M
Proceeds (4 x 4 pic-up van) 309,450
Adjusted cost base (SUV) (378,900)
Loss on disposal (69,450)

The loss on disposal to an associate is not allowable because the proceeds are
deemed to be equivalent to the adjusted cost base 1
(6 marks)
Question 4

You have been provided with the following information in relation to Mr

Makeloane, a resident individual, trading as Makeloane Properties.

Mr Makeloane inherited a piece of land from his late grandfather in December

2008. The land had been used for farming purposes until it was sold to one of
the local farmers for M62,300 in June 2023. The adjusted cost base (ACB) and
the market value at the date of acquisition amounted to M30,500 and M12,300,
respectively.

Mr Makeloane acquired a site in October 2009 from one of his business

associates at a reduced price of M550,000. The market value at the date of
acquisition amounted to M700,000. The site consisted of the building premises
which were originally used by the owner as a supermarket. Mr Makeloane sub-let
the premises to a resident company, at a monthly rent of M5,000 with effect
from 1 November 2009. However, on 31 May 2023, Mr Makeloane sold the site
for M1,600,000.

Mr Makeloane disposed of residential buildings in July 2023 for M120,900. The

buildings were acquired by him in October 2022 at a market value of M90,500.
Mr Makeloane incurred costs of M32,000 in renovating the buildings.

Below are the dates for the prevailing consumer price indices:

December 2008 110

October 2009 180
November 2009 185
October 2022 300
May 2023 330
June 2023 332
July 2023 335

Required:
(a) Explain how the cost base of the assets is determined in each of
the above transactions. (7
marks)
(b) Calculate the chargeable income for Mr Makeloane for the year
ended 31 March 2024. (8 marks)

Solution

Makeloane Properties

(a) Inherited land:

This is a sale of immovable property held by the taxpayer for a period of
more than 12 months. The adjusted cost base (ACB) should be indexed
for inflation during the period of ownership. However, the indexation of
ACB does not apply in calculating a capital loss on disposal of an interest
in immovable property. 2

Site from business associate:

This is considered to be a non-arms length transaction. The adjusted cost
base is the fair market value of the asset at the date of acquisition. 2

Residential buildings
This is a sale of immovable property held by the taxpayer for a period of
less than 12 months. The ACB should not be indexed for inflation. Rather
the cost base should include the cost of acquiring and improving the
asset. 3

(b) Chargeable income M

M
Inherited land:
Sale price 62,300 ½
ACB (12,300*332/110) (37,124) 1½
_______
Chargeable gain 25,176
Site from business associate:
Sale price 1,600,000 ½
ACB (700,000) 1
________
Chargeable gain 900,000
Rentals (5,000*2) 10,000 1
Residential buildings:
Sale price 120,900 ½
ACB (90,500 + 32,000) (122,500) 2
________
Allowable loss (1,600)

Chargeable income 933,576 1