TAX3761

Test 3 and solution

July 2023
 IMPORTANT INSTRUCTIONS:

Assumptions:
1. All amounts exclude Value-Added Tax (VAT) unless specifically
stated otherwise.
2. The VAT rate increased from 14% to 15% from 1 April 2018.
3. All persons mentioned are residents of the Republic of South
Africa unless stated other­wise.
4. SARS = South African Revenue Service.
5. All transactions are conducted with registered VAT vendors,
unless specifically stated other­wise.
6. Valid tax invoices and required documentation are obtained for all
transactions.
 IMPORTANT INSTRUCTIONS:
The answering of this paper:

1. This is a closed-book test.

2. This paper consists of two (2) questions.
3. All questions and sub-sections must be answered.
4. Each sub-section must be commenced on a new (separate) page.
5. All workings, where applicable, must be shown. Where an
amount is subject to a limita­tion, clearly indicate the application of
the limitation. Where any item does not form part of gross
income, is exempt from tax or not allowable as a deduction, this
must specifically be indi­cated, and a short reason should be provided.
6. All amounts must be rounded to the nearest Rand.
 QUESTION 1: REQUIRED:

Calculate Kevin Zondo’s normal income tax

payable after rebates and tax credits for the
year of assessment ended 28 February 2023.
Provide reasons and substantiate in terms of the
Income Tax Act, where an amount is not
excluded from taxable income, or not subject to
tax, or not allowable as a deduction, with
reference to all the information provided.
(40 marks)
 Background
• Kevin Zondo (Kevin) (38 years old) is the mine manager for a South African
coal mining com­pany (CoalCo). Kevin does not own any of CoalCo’s equity
shares. Kevin is married in community of property to Faith Zondo (Faith).
They have a 20-year-old daughter and a 17-year-old son. Their daughter is
employed however she is partially dependent on her parents, she lives with
them and her income is below the tax threshold. Their son is still attending
secondary (high) school. Faith owns a hair salon business in her own name.
•
• Kevin is responsible for managing the coal mine in Emalahleni, Mpumalanga,
which is 700 kilometres away from his primary residence (home). Kevin
receives six (6) days leave each month of the year, which can overlap
between months, in addition to 31 days annual leave per year, which he
always makes use of to go home or to go away on holiday.
 Information
Details of Kevin and Faith’s income/receipts/benefits and expenses/contributions for the 2023 year of
assessment are as follows:
Notes R

Income/receipts/benefits
Salary 1 200 000
Bonus 200 000
Travel facility 1 ?
Accommodation and furniture 2 ?
Hair salon business taxable income 3 900 000
Sale of a flat 4 1 800 000
Local interest 5 ?

Expenses/contributions
Medical expenditure 6 ?
Current contributions to a provident fund 7 ?
Current contributions to a retirement annuity fund 7 ?
 Information - notes
1. Travel facility

CoalCo provided a travel facility two times during the current year of assessment for Faith, their
daughter and son, to visit Kevin at his apartment close to the mine. A bus ticket to Kevin’s apartment
(close to the mine) and back home costs R750 per person. Faith, their daughter, and son made use
of the travel facility during the year. Had they used Faith’s vehicle, it would have cost R600 per person.

2. Accommodation and furniture

CoalCo provided Kevin with a four-roomed, fully furnished apartment that they owned, for two months
during the year of assessment. It was provided to Kevin temporarily, after the flat he rented was
destroyed by a fire and needed to be repaired. CoalCo also paid for the electricity that Kevin used.
You may assume Kevin’ remuneration proxy for the previous year of assessment was R1 100 000.

Kevin purchased a desk and chair set costing R8 000 on 1 June 2022 to perform strategic mine
operational planning from during the year of assessment.

The write-off period based on Interpretation Note no. 47 is six (6) years for furniture and fittings.

3. Hair salon business taxable income

Faith owns a hair salon in her own name which earned a taxable income of R900 000 for the year of
assessment.
 Solution
Salary 1 200 000
Bonus 200 000
Travel facility:
Faith and son, excluded, spouse and/or minor child (1), Nil
Kevin’s work is more than 250 km away from home (1),
Kevin’s away from home [365 days – (6 days x 12 months) +31 days] = 262
days (1), more than 183 days (1),
and facility granted between usual place of residence and stationed (1)
Daughter – not a minor (1) 1 500
(R750 x 2)
Accommodation, excluded, provided temporarily to perform duties Nil
of employment (1)
Depreciation – desk and chair (R8 000/6 (1) years x 9/12 (1)) (1 000)
Hair salon taxable income – taxable in Faith’s hands (1) Nil
 Information - notes
4. Sale of a flat

Faith sold a flat on 1 March 2022 for R1 800 000. Faith inherited the flat from her late grandmother
seven years ago, which she rented out and earned a taxable rental income of R7 000 per month. She
received the rent for February 2022 on 7 March 2022. The value of the flat in her late grandmother’s
estate was R1 395 000 when Faith inherited it. The flat originally cost her grandmother R800 000
when she purchased it twenty years prior to her death. Faith had an awning (roof) added to cover the
flat’s veranda five years ago at a cost of R85 000. She also had the flat disinfected at a cost of
R10 000 before she sold it. The flat is not excluded from Kevin and Faith’s communal estate.

5. Local interest

Kevin and Faith earned local interest of R15 000 and R73 600 respectively during the year of
assessment, which is not from a tax-free investment.

6. Medical expenditure

Kevin is a member of a medical aid fund and Faith, and the two children are registered as dependants.
No member of the family has a disability as defined. Kevin’s portion of twenty (20) percent of the total
medical aid contributions amounted to R36 000 for the year of assessment. CoalCo paid the balance
of eighty (80) percent on his behalf.
Kevin undergoes a health check-up every year at work, as part of CoalCo’s policy for employees to
ensure that they are healthy. Kevin’s check-up cost CoalCo R4 000 for the year.

7. Retirement fund contributions

CoalCo and Kevin each made provident fund contributions of R56 000 during the year of assessment
(R112 000 was contributed in total). Kevin also made a once off contribution of R180 000 towards a
retirement annuity fund, of which CoalCo is not aware. You may assume that his gross remuneration
for the year amounted to R1 600 000, only for purposes of the retirement fund contribution deduction
calculation. Kevin had a balance of disallowed retirement fund contributions of R50 000 on 28
February 2022.
 Solution
Rental income received for February 2022 – accrued/taxed in Nil
previous tax year (1)
Local interest married in community of property:
[(R15 000 + R73 600 (1)) x 50% (1)] 44 300
Medical fringe benefit: (R36 000 / 0.20 x 0.80 (1)) 144 000
Medical check-up at work, excluded, available to all employees (1) Nil
Provident fund fringe benefit 56 000
Less: Exempt local interest (23 800)
Taxable income before taxable capital gain and retirement fund contributions 1 621 000
Taxable capital gain – sale of Faith’s flat – correct order in tax framework (1)
Proceeds 1 800 000
Less: Base cost (1 480 000)
Market value when inherited (1 395 000) (1)
Cost of erecting awning (85 000) (1)
Disinfecting of flat – maintenance/not capital, not allowed for Nil
CGT (1)
Capital gain 320 000
Married in community of property – 50% (1) to Faith (160 000)
160 000
Less: Annual exclusion (40 000) (1)
Aggregate capital gain 120 000
Taxable capital gain R120 000 x 40% (1) 48 000
Taxable income before retirement fund contributions 1 669 000
 Solution
Taxable income before retirement fund contributions 1 669 000
Less: Retirement fund contributions:
R56 000 + R56 000 + R180 000 + R50 000 = R342 000 (1)
Percentage limit: higher of
Remuneration: [27.5% x R1 600 000 = R440 000], or
Taxable income: (27.5% (1) x R1 669 000 = R458 975) (1)
Deduction limited to the lesser of: R350 000 (1)
(1)
The contributions are deductible in full (342 000)

TAXABLE INCOME 1 327 000

 Solution
Normal tax per tables [R239 452 + (41% x (R1 327 000 - R817 600))] 448 306 (1)
Less: Primary Rebate (16 425) (1)
Less: Medical scheme fees tax credit [((R347 x 2) + (R234 x 2)) x 12 months]
Daughter is 20 years old, but not liable for tax (13 944) (1)
Less: Additional qualifying medical expense tax credit
Medical aid contributions
Kevin’s contributions (given) 36 000 (1)
Employer’s contributions (must be same as fringe benefit 144 000 (1)
calculated above)
Alternative 180 000
Less: 4 (1) x R13 944 [((R347 x 2) + (R234 x 2)) x 12 months] (1) (55 776)
Excess contributions 124 224
As exceeds: 7,5% x R1 327 000 (1) (99 525)
24 699
Additional qualifying medical expense tax credit:
R24 699 x 25% (1) (6 175)
Normal income tax payable 411 762
 QUESTION 2: REQUIRED
MSS has provided Buhle with the opportunity to structure her employment agreement in the most tax
efficient manner as allowed by the Income Tax Act No. 58 of 1962 (“ITA”), as amended, including the
consideration of any available fringe benefit and allowance.

Buhle approached you as a tax practitioner to advise her on how she could structure her employment
agreement in a way to effectively reduce her out of pocket expenses and pay as little tax as possible.

Write Buhle an email, providing her with a possible structure that her employment agreement could consist
of, considering only the relevant information provided in the question. For each item you include in your
recommendations to Buhle, provide an explanation of the suggestion, any requirements that must be met
in terms of the Income Tax Act, and the tax and cash consequences of the suggestion. Number and list
the included items, its requirements and tax and cash consequences separate from, and below each other.
(18 marks)

Example on how to structure the items in your reply to Buhle:

1. Flight tickets, accommodation, meals and incidental costs paid by employer.

Incurred for purposes of the employer’s business.
Does not form part of taxable income, no private benefit.
No cash effect/expense.

Communication and layout. (2 marks)

Do not show any calculations but provide legislated amounts (as stipulated in the ITA), where
applicable, for each item.
 BACKGROUND
On 2 January 2023, Buhle Moyo will start new employment as a marketing assistant manager with Medical
Supplies & Services (“MSS”), a large provider of various medical services and supplies. MSS is trading as
a medical scheme but is exempt from the requirements of the Medical Schemes Act. Buhle is 40 years old
and a widow and does not receive any additional support from someone else. She has two children, Brigid
(19 years old and passed grade 12) who wants to enrol for a degree at a university in the beginning of 2023,
and Princess (16 years old) who will start with grade 10 in 2023. Buhle contributes toward the children’s
study fees. None of the family members are beneficiaries of a registered medical aid scheme. None of the
family members has a disability, as defined.

MSS’s head office is based in Cape Town, with several branches throughout South Africa. MSS offered
Buhle a total gross remuneration package (before any deductions) of R600 000 per annum. The cash
remuneration package will exclude any equipment that she will need to perform her duties mainly for work
purposes, such as a computer and a mobile phone, which will be provided by her employer.

Buhle is a member of a professional marketing body, a condition of her employment, as stipulated by MSS.
She will be required to travel to current and prospective customers and branches of MSS. Flights,
accommodation costs and meals and incidental costs will be covered by MSS as business expenses. When
she does not travel by air, she is required to make use of her own motor vehicle for business trips.
Date
Solution
To: Buhle@gmail.com

Dear Buhle

Thank you for the opportunity to be of service to you.

In reference to your request for advice on structuring your employment agreement, the following
information is provided, as it relates to the information provided by yourself.

Structure of an employment agreement

Your employer could include the following items in your employment agreement. I have included the
relevant requirements that need to be met, where applicable, and the tax consequences thereof.

1. Costs incurred by employer for some medical services (1)

 Employer carries on a business of medical scheme but is exempt from the requirements
of the Medical Schemes Act. (1)
 Medical treatment listed in a category of the prescribed minimum benefits (1) determined
by the Minister of Health in terms of the Medical Schemes Act.
 Medical treatment provided by the employer to the employee, their spouse, or children in
terms of a scheme/programme of the employer. (1)
 Excluded as a fringe benefit (1)
 Save out of pocket expenses (1)
 Solution
1. The employer could pay the children’s school and university fees up to the amounts stipulated
in the Act (1)

 Scholarships and bursaries are based on merit (1) and not confined to employees or
relatives (1).
 The employer can award scholarships or bursaries to a relative of an employee. (1)
 For persons without disabilities: -
 The amount may not exceed: (1)
 R20 000 (1) in respect of grade R to grade 12, or
 R60 000 (1) in respect of qualifications at NQF levels 5 to 10.

 The employee’s remuneration proxy may not exceed R600 000 per year. (1)
 There may not be a salary sacrifice/reduction of the remuneration proxy. (1)
 The scholarships or bursaries will be exempt from tax. (1)
 The scholarships or bursaries will not be exempt from tax, should it exceed the limitations.
(1)

2. Membership fees of a professional body (1)

 Where it is a condition/requirement of employment (1) to subscribe/belong to, and pay a

professional body, the employer can pay the fee on your behalf, which will be excluded as
a fringe benefit (1).
 1.
Solution
Travelling for business purposes
a)
 MSS’ business travelling expenses could reimbursed at a rate of R4.18 per kilometre. (1)
 Proof/logbook (1) of business kilometres must be kept.
 The reimbursement will not form part of income or be taxed. (1)

b)
 A travel allowance can be paid by MSS. (1)
 Must use your own vehicle (1) or a vehicle that is not the employers’,
 A logbook must be kept, (1),
 Record of actual motor vehicle expenses should be kept, (1)
 Deemed travel cost table is available, (1)
 The claim will be limited to the vehicle value of R665 000 (1)
 For employees’ tax purposes, 80% of the allowance is taxed (1), or 20% of the
allowance is taxed if the employer is satisfied that the business travel is 80% or more
(1),
 For income tax purposes, the business travel expenses according to actual or deemed
expenses is deductible against the travel allowance (1).
 A portion of the remuneration package will be reduced by the travel allowance. (1)

2. Basic salary (1)

Fully taxed (1)

I trust the above information will be of assistance in structuring your employment agreement. Please do
not hesitate to contact me for any further information.

Yours sincerely,

Tax practitioner.

Layout of an email - (1)

Communication: separate, heading, reason, conclusion - (1)
Available [37]
Total marks [20]