Sipasile Ltd is a tutoring company operating out of Dimbaza. The company has a 31 December year end.

Below is the Statement of Profit and Loss of the company for the year ended 31 December 2019 before the
computation of taxation.

Revenue 250 000

Dividend income 30 000

Rent income 20 000

Gain on sale of land 90 000

Depreciation expense (150 000)

Rent expense (60 000)

Fines and penalties (15 000)

Water and electricity (70 000)

Interest expense (30 000)

Net profit before tax 65 000

Additional information:

1. The dividends were received from a company local company registered in South Africa. Dividends
from local companies are exempt for tax purposes.
2. SARS includes rent income in taxable income when the rent is received. As at 31 December 2019, the
rent amount had not been received by Sipasile.
3. Land is accounted for on the cost model. The full gain on the sale of land was subject to capital gains
tax.
4. Included in the depreciation expense in depreciation of R50 000 on a luxury flat. The flat is used by the
business to accommodate guest tutors. SARS does not grant any wear and tear allowances on this flat.
5. Rent expense is deducted for tax purposes on accrual.
6. The fines and penalties relate to speeding fines and penalties for late payment of speeding fines. SARS
does not give a deduction on expenditure arising from the contravention of the law.
7. Water and electricity has been prepaid by R30 000. SARS grants a deduction in respect of
prepayments limited to R50 000.
8. SARS allows a deduction for interest expense when the interest is paid. There was no interest expense
accrued at 31 December 2018.
9. The opening balance of deferred tax as at 01 January 2019 was a liability of R60 000.
10. The SARS Income Tax Assessments for the 2018 financial year was received during the current
financial year. The assessment indicated an under provision of tax by Sipasile Ltd of R5 000.

Required: Prepare the required note disclosure for Sipasile Ltd for the year ended 31 December 2019
Suggested Solution

Extract of Statement of Comprehensive Income for the year ended 31 December 2019

Profit before tax 65 000

Taxation expense (27 140)
Profit after tax 37 860

Note to the financial statements of Sipasile Ltd for the year ended 31 December 2019

Note 4: Components of Tax expense

SA Normal Tax:
Current tax 35 640
Deferred tax (13 500)

Under provision 5 000

27 140

Note 5: Tax Rate Reconciliation

Profit before tax 65 000 65 000

17 550 0,27
Dividends (30 000* 27%) (8 100) (0,1246)
Fines (15 000 * 27%) 4 050 0,0623
Depreciation (50 000 *27%) 13 500 0,2077
Gain on Sale (90 000* 20% (4 860) (0,075)
*27%)
Under provision 5 000 0,077

Tax Expense 27 140

Effective Tax rate 41.75% 0,4175%
Workings

Taxable Income

Profit before tax 65 000

Permanent Differences 17 000

Dividend income (30 000)
Accounting profit: Sale of land (90 000*20%) (18 000)
Depreciation 50 000
Fines & Penalties 15 000

Temporary Differences 50 000

Accounting profit: sale of land (72 000)
Depreciation 100 000
Taxable capital gain 72 000
Rent income (20 000)
Water & Electricity (30 000)

Taxable Income 132 000

Current tax 35 640

Deferred tax movement (50 000 * 27%) (13 500)