TAX4862/109/0/2012

NTA4862/109/0/2012

Tutorial Letter 109/0/2012

Applied Taxation

TAX4862
NTA4862
Year module

Department of Taxation

Bar code
 2 TAX4862/109

PAPER 1 FOR TAX4862/NTA4862

QUESTION 1 100 Marks

This question consists of four related parts (PART A to PART D).

All taxpayers referred to are South African residents, unless stated otherwise.

Construct (Pty) Ltd (not a Small Business Corporation) continuously builds residential units, either for
resale or for the letting thereof. The construction of buildings is classified as a process similar to that
of manufacturing. The company has a 31 December year-end and is registered as a category B
vendor (two-monthly periods ending on the last day of February, April, June, August, October and
December respectively) on the invoice basis for VAT purposes.

PART A 40 Marks

Mark Sanders is divorced and is 60 years old. Mark had been employed by Construct (Pty) Ltd for the
past 30 years and had been responsible for the marketing and the development of software suit-
able for the construction industry. In terms of his contract of employment, Mark retired on
28 February 2013.

The following information relates to his year of assessment ended 28 February 2013:

Notes R
Income and benefits accrued from Construct (Pty) Ltd
Salary (pensionable) 720 000
Incentive bonus – paid December 2012 (non-pensionable) 80 000
Free use of motor vehicle 1 ?
Reimbursive travel allowance 2 4 500
Medical aid fund contributions paid by the company on behalf of Mark 3 21 600
Contributions to a pension fund paid by the company on behalf of Mark 4 27 000
Lump sums 5 295 000

Other income accrued

Lump sum from pension fund (total amount accrued) 6 1 000 000
Proceeds from selling his house 7 2 600 000
Net taxable profit from his business 8 30 000

Expenses
Own contributions to medical aid fund and extra medical costs incurred 3 36 600
Contributions to Retirement annuity fund (RAF) 6 3 600
Contributions to pension fund 4 27 000
Buy-back payment to pension fund 4 30 000

Notes:

1. Mark had the exclusive use of a company provided 4 x 4 double cab Isuzu bakkie as from
1 March 2012. Construct (Pty) Ltd outsources the services of Mark to various clients. There is a
qualifying maintenance plan in respect of the bakkie. The company paid all expenses in respect
of the vehicle. Mark kept accurate records of all his travelling. Further details are as follows:

R
Purchase price of the Isuzu bakkie paid by Construct (Pty) Ltd on
28 December 2010 ................................................................................... 360 000
Value-Added Tax ........................................................................................ 50 400
410 400
 3 TAX4862/109

QUESTION 1 (continued)

Kilometres travelled for business purposes during the year of assessment 36 000 km
Kilometres travelled for private use ............................................................. 7 560 km
43 560 km

2. During June 2012, Mark was involved in an accident with the Isuzu bakkie. The vehicle was at
the panel beaters from 15 June 2012 to 30 June 2012. During that period Mark used his neigh-
bour’s bakkie and Construct (Pty) Ltd paid him R3,00 per kilometre travelled for business (he
travelled 1 500 kilometres for business purposes).

3. Mark is the main member of the medical aid fund with no dependants. In terms of the rules of
the fund, Mark and the company contributed equal amounts to the medical aid fund. Other
qualifying medical expenses paid by Mark amounted to R15 000, none of which were refunded
by the medical aid fund.

4. In addition to the amount contributed to the pension fund by his employer, Mark contributed the
same amount to the fund. In previous years, all pension fund contributions were allowed as a
tax deduction. On 1 March 2012, Mark made use of the rules of the pension fund to “buy back”
pensionable years. He paid an amount of R30 000 towards the pension fund (in addition to his
monthly contributions).

5. Upon retirement, the following lump sums accrued to Mark from Construct (Pty) Ltd:

R
Accumulated leave .............................................................................................. 50 000
Gratuity .......................................................................................................... 125 000
Restraint of trade payment. Mark and the company signed a restraint of trade
agreement on 28 February 2013, prohibiting Mark from using software developed
specifically for the company for the benefit of any other business for the next five
years ................................................................................................................... 120 000
295 000

6. On 28 February 2013, Mark received one third of the total benefits payable to him from the
pension fund. The balance of his benefits was converted into a monthly pension payable from
31 March 2013.

During February 2012, Mark withdrew R350 000 from his retirement annuity fund. The cash was
required to set up his own businesses (refer note 8) pending his retirement. His retirement
annuity fund will mature when he reaches the age of 65. All contributions to the fund until that
date, were allowed as a tax deduction.

7. Ten years ago (1 March 2003) Mark purchased a house in Johannesburg for R450 000. He sold
the house for R2.6 million on 28 February 2013. The house was used as his primary residence
for the 10 years. When he started his own businesses (see note 8) on 1 March 2012, he added
one bedroom to the house at a cost of R25 000 as he used one of the existing bedrooms exclu-
sively as an office for his businesses. He claimed 10% (based on the area of the office in rela-
tion to the total area of the house) of all his running expenses in maintaining the house, as a
business expense during his 2013 year of assessment (these expenses were taken into account
in calculating the taxable income in note 8). SARS accepted this arrangement.
 4 TAX4862/109

QUESTION 1 (continued)

8. With the permission of Construct (Pty) Ltd, Mark conducted his own two businesses after hours
and during weekends. His businesses entailed the development of specialised software for
companies in Australia and software support services in South Africa. He operated these two
businesses as two independent trades as a sole proprietor. His net taxable income of R30 000
for the 2013 year of assessment was correctly calculated as follows:

R
Taxable income from South Africa .............................................................. 50 000
Taxable loss from Australia ........................................................................ (20 000)
Net taxable income ..................................................................................... 30 000

PART B 10 Marks

On 31 January 2012, Construct (Pty) Ltd purchased a property, situated in South Africa, from a South
African resident (not a VAT vendor) at the market value of R3 500 000. Construct (Pty) Ltd paid
transfer duty of R197 000 as well as the purchase price on 29 February 2012, the day of registration of
the property into the name of the company. The company claimed the correct amount of input tax.

The company purchased the property with the intention of developing eight residential units (project 1)
on the property with the purpose of selling these units. The residential units were completed on
30 June 2012 but the company was not able to sell them.

On 20 July 2012 Construct (Pty) Ltd entered into agreements for the letting of the eight units until the
company could find suitable buyers. Assume that the company will be able to sell six of these units on
30 November 2013, 17 months after their completion, at the open market value of R1 200 000 each,
payable in two equal instalments on 31 December 2013 and 31 January 2014 respectively. Regis-
tration of the units in the name of the new owners will take place on 31 December 2013. The other
2 units will still be on hand at 31 December 2015.

PART C 22 Marks

All amounts in this part of the question include VAT (where applicable) and all purchases have
been made from registered VAT vendors.

On 3 February 2012 Construct (Pty) Ltd purchased another property, situated in South Africa, from a
South African resident (a VAT vendor) at the market value of R5 000 000. On the same day, the
company paid the full purchase price into the trust account of its lawyers handling the transfer of the
property. The purchase price was paid to the seller on the date of registration of the property in the
name of Construct (Pty) Ltd.

The company purchased the property with the intention of developing 20 identical four-bedroom
residential units (project 2) on the property for the purpose of letting these units. Assume that
Construct (Pty) Ltd subdivided the land into 20 identical stands. Ignore subdivision costs.

By 15 August 2012, these apartments were completed. The total construction costs amounted to
R20 000 000, including labour costs of R1 200 000 that was paid to casual labourers.

Since 1 September 2012, 15 of these units have been rented out in terms of a 24-month agreement at
R5 000 each per month. Rent is payable in advance on the first of each month.
 5 TAX4862/109

QUESTION 1 (continued)

On 1 October 2012 the caretaker moved into one of the five vacant units. The caretaker received a
monthly cash salary of R10 000 since 1 January 2012, the date of the commencement of his employ-
ment. From 1 October 2012, the company deducted R500 per month from his gross salary as rent
towards the use of the unit. The caretaker is responsible for his own municipal account.

On 15 November 2012, the company sold three of these units for R2 000 000 each (the open market
value on this date), due to cash flow problems. Registration of these units in the names of the new
owners took place on 20 December 2012. On 31 December 2012, the market value of the remaining
unit was R2 015 000.

PART D 28 Marks

All amounts in this part of the question include VAT, unless otherwise stated.

Other transactions that occurred during Construct (Pty) Ltd’s 2012 year of assessment:

1. On 1 January 2012, one of the company’s employees suffered a heart attack while driving a
delivery truck to the building site where Construct (Pty) Ltd was building a block of flats for a
client. The delivery truck burst through the barriers on the highway and crashed into a bridge.
The delivery truck, as well as the hand basins that the driver had to collect at the supplier for
delivery at the building site, were completely destroyed. The original cost of the delivery truck was
R185 000 (excluding VAT) and the tax value on the date of the accident was R111 000. The cost
of the hand basins was R36 000.

On 29 February 2012 the insurance company paid the company a total cash amount of R86 000
being R36 000 for the hand basins and R50 000 for the delivery truck, as the company was, in
their opinion, negligent for letting an employee with a history of heart problems act as a driver.
Construct (Pty) Ltd decided to take the case to court. The insurance company agreed that it
would pay an additional amount of R55 000 (in respect of the truck) if the court should find that the
employee was not responsible for the loss.

It was only on 20 January 2013 that the court came to the conclusion that there was not sufficient
evidence to prove that the company was negligent. The insurance company consequently paid
Construct (Pty) Ltd the additional R55 000 during February 2013.

The company will elect to claim a deduction under section 11(o) of the Income Tax Act, where
applicable.

2. During the company’s 2011 year of assessment, Construct (Pty) Ltd commenced with the erection
of a new office building for the company’s own use. The building was completed on
30 September 2012 at a cost of R7 000 000 (excluding VAT) and was brought into use on
1 October 2012.

On 1 November 2012, Construct (Pty) Ltd sold their old office building to Excellent Structures
(Pty) Ltd. In terms of the deed of sale, Excellent Structures (Pty) Ltd had to pay a deposit of
R3 400 000 on the signing of the contract and thereafter 10% per annum of the sales generated
by Excellent Structures (Pty) Ltd for five subsequent years. Excellent Structures (Pty) Ltd paid the
deposit on 1 November 2012 and R1 450 000 on 31 March 2013, the end of the company’s 2013
year of assessment.
 6 TAX4862/109

QUESTION 1 (continued)

Construct (Pty) Ltd originally erected the old office building for an amount of R2 100 000 (exclu-
ding VAT) during 2003. During the company’s 2007 year of assessment, improvements of
R800 000 (excluding VAT) were effected to the building. The company has not claimed any tax
allowances in respect of the old office building.

3. On 31 August 2012, Construct (Pty) Ltd concluded a contract to import a scarce type of tile from
an American supplier at a cost of $50 000. On the same day, the tiles were shipped free on board
to South Africa. It arrived in South Africa and was cleared by Customs for home consumption on
15 October 2012. The company paid the import duty of R43 000 on the customs duty value of
R430 000 as well as the VAT in respect of the importation. In terms of the contract, Construct
(Pty) Ltd paid $10 000 on the date of conclusion of the contract. The remaining $40 000 is pay-
able on 28 February 2013 with interest payable every three months, being on 30 November 2012
and 28 February 2013 at 12% per annum on the outstanding debt.

At year-end, the company still had 25% of the tiles in stock, while the other 75% had been used
for purposes of the block of flats that Construct (Pty) Ltd was contracted to build for the client
(refer to point 1 above).

The following exchange rates are applicable:

Date Spot rate

$1 = R

31 August 2012 $1 = R8.42

15 October 2012 $1 = R8.41

30 November 2012 $1 = R8.45

31 December 2012 $1 = R8.40

Average exchange rate for the 2012 year of assessment $1 = R8.39

31 January 2013 $1 = R8.46

28 February 2013 $1 = R8.48

4. On 1 August 2012, Construct (Pty) Ltd entered into an instalment credit agreement for the
purchase of a new concrete mixer truck, to be used in the company’s process similar to a manu-
facturing process. In terms of the agreement, 12 instalments are payable on a three month-basis,
commencing on 31 October 2012. The company made all payments on time as stipulated in the
agreement. The concrete mixer truck was brought into use on 1 September 2012.
 7 TAX4862/109

QUESTION 1 (continued)

Instalments were calculated as follow:

R
Cash cost (excluding VAT) 810 000
Add: VAT 113 400
923 400
Less: Deposit (184 680)
738 720
Add: Finance charges (the yield to maturity is 3.06% per three month-period) 155 034
Total 893 754

Instalments per three month-period 74 479

©
UNISA 2012
 8 TAX4862/109

ANNEXURE A

TAX TABLES
INCOME TAX RATES: NATURAL PERSONS AND SPECIAL TRUSTS FOR YEARS OF
ASSESSMENT ENDING 28 FEBRUARY 2013
Taxable income Rates of tax
R0 – R160 000 18% of taxable income
R160 001 – R250 000 R28 800 + 25% of taxable income exceeding R160 000
R250 001 – R346 000 R51 300 + 30% of taxable income exceeding R250 000
R346 001 – R484 000 R80 100 + 35% of taxable income exceeding R346 000
R484 001 – R617 000 R128 400 + 38% of taxable income exceeding R484 000
Exceeding R617 000 R178 940 + 40% of taxable income exceeding R617 000

Retirement fund lump sum withdrawal benefits

Taxable Income Rates of tax for the 2013 year of assessment
R0 - R22 500 0% of taxable income
R22 501 - R600 000 R0 plus 18% of the amount by which the taxable income exceeds R22 500
R600 001 - R900 000 R103 950 plus 27% of the amount by which the taxable income exceeds
R600 000
Exceeding R900 000 R184 950 plus 36% of the amount by which the taxable income exceeds
R900 000

Retirement fund lump sum benefits

Taxable Income Rates of tax for the 2013 year of assessment
R0 - R315 000 0% of taxable income
R315 001 - R630 000 R0 plus 18% of the amount by which the taxable income exceeds
R315 000
R630 001 - R945 000 R56 700 plus 27% of the amount by which the taxable income exceeds
R630 000
Exceeding R945 000 R141 750 plus 36% of the amount by which the taxable income exceeds
R945 000
 9 TAX4862/109

ANNEXURE B: TRAVELLING ALLOWANCE

SCALE OF VALUES (2013 year of assessment)

Fixed Fuel Mainte-
Where the value of the vehicle (including VAT) cost cost nance cost
R c c
R0 - R 60 000............... ...................................................... 19 492 73.7 25.7
R60 001 - R120 000 ........................................................... 38 726 77.6 29.0
R120 001 - R180 000 ......................................................... 52 594 81.5 32.3
R180 001 - R240 000 ......................................................... 66 440 89.6 36.9
R240 001 - R300 000 ......................................................... 79 185 102.7 45.2
R300 001 - R360 000 ......................................................... 91 873 117.1 53.7
R360 001 - R420 000 ......................................................... 105 809 119.3 65.2
R420 001 - R480 000 ......................................................... 119 683 133.6 68.3
Exceeding R480 000 ......................................................... 119 683 133.6 68.3

ANNEXURE C

MONETARY THRESHOLDS, REBATES AND OTHER RATES 2013

R
Rebates
Primary – All natural persons 11 440
Secondary – Persons aged 65 and older 6 390
Tertiary – Persons aged 75 and older 2 130

Interest and dividend income

The annual exemption on interest earned for individuals younger than 65 years 22 800
The exemption for individuals 65 years and older 33 000

Section 18(2)(c) limitations (medical aid rebates)

Benefits to the taxpayer 230
Benefits to the taxpayer and one dependant 460
Benefits to each additional dependant 154

Section 8(1)(b)(iii) (reimbursive allowance – business kilometres do not exceed 8 000km)

Rate per kilometre 3.16

Capital gains exclusions

Annual exclusion for individuals and special trusts 30 000
Exclusion in year of death 300 000
Primary residence exclusion 2 000 000
Inclusion rate (Natural persons and special trusts) 33,3%
Inclusion rate (Other) - For years of assessment commencing on/after 1 March 2012 66,6%
- For prior years 50%
Subsistence allowance
Local travel
- Per day or part of a day for incidental costs 93
- Per day or part of a day for meals and incidental costs 303

Seventh Schedule paragraph 9(3)(a)(ii) – B in the formula (residential accommodation) 63 556

Official interest rates

Prime interest rate – from 19 November 2010 to date 9%
Official interest rate – linked to repurchase rate from 1 March 2011 6.5%
 10 TAX4862/109

ANNEXURE D – OTHER

Small Business Corporation (as defined in section 12E)

(Applicable in respect of years of assessment ending on or after 1 April 2012)

Taxable Income Rate of Tax

R0 – R63 556 0% of taxable income

R63 557 - R350 000 7% of taxable income above R63 556
Exceeding R350 000 R20 051 + 28% of taxable income above R350 000

A personal service provider and a company, which is not a resident, will be taxed at 28% (and
NOT 33%) with effect from years of assessment ending on or after 1 April 2012.

Dividends Tax (effective 1 April 2012)

Rate increases from 10% to 15% (section 64E)

Ratios in section 10B change accordingly:

• Ratio of 30/40 changes to 25/40 (natural person, estate or special trust); and
• Ratio of 18/28 changes to 13/28 (other persons)
 11 TAX4862/109

QUESTION 1 100 Marks

PART A
REQUIRED: Marks

Calculate the normal tax payable by Mark Sanders for his 2013 year of assessment.
40
Where any income or deductions are not taken into account in calculating the taxable
income, provide reasons. Round off all amounts to the nearest R1.

PART B
REQUIRED: Marks

Discuss, with reference to the specific time and value of supply, the VAT consequences for
10
Construct (Pty) Ltd of the letting of the eight units as well as the sale of the six units.
Support your answer with reference to legislation.

PART C
REQUIRED: Marks

1. Discuss, with reference to legislation, the VAT consequences for Construct (Pty) Ltd
of the following two events in Part C:
• The purchase of the property and the construction costs; 3
• The caretaker moving into the residential unit. 3

2. Calculate the effect of all the transactions in Part C on the taxable income of
Construct (Pty) Ltd for its 2012 year of assessment. If any transaction has no effect 11
on the taxable income of the company, provide a reason. Round off all amounts to
the nearest R1.

3. Calculate the amounts to be included in the caretaker’s gross income for his year of
assessment ended 28 February 2013. You can assume that the caretaker’s income
5
and benefits received from his employment with Construct (Pty) Ltd will remain
unchanged for the rest of his 2013 year of assessment. Round off all amounts to the
nearest R1.

PART D
REQUIRED: Marks
Assume for purposes of Part D that Construct (Pty) Ltd makes only taxable supplies
for the purpose of VAT.
1. Calculate the effect that transactions 1 and 2 will have on the taxable income of
Construct (Pty) Ltd for the company’s 2012 and 2013 year of assessment. If the
14
transaction has no effect on the taxable income of the company, provide a reason.
You do not have to calculate the capital gain or loss in respect of transaction 1.
Round off all amounts to the nearest R1.

2. Calculate the effect that transactions 3 and 4 will have on the taxable income of
14
Construct (Pty) Ltd for the 2012 year of assessment. Round off all amounts to the
nearest R1.

©
UNISA 2012
 12 TAX4862/109

SUGGESTED SOLUTION: QUESTION 1

PART A

Calculation of income tax payable by Mark Sanders for the year of assessment ended
28 February 2013
Calculations Retirement Other
lump income
sums and
deductions
R R R
Salary 720 000 (½)
Incentive bonus 80 000 (½)
Free use of Isuzu bakkie:
Purchase price (inclusive of VAT) 410 400 (1)
Less: Par 7(1) of 7th Schedule 15% (61 560) (1)
Determined value 348 840
Value of private use: 3,25% x R348 840 x 12 = 136 048 (2)
Less: Reduction (par 7(7) of 7th Schedule):
36 000 km/43 560 km x R136 048 (112 436) 23 612 (1)
OR R136 048 x 7 560/43 560 = R23 612
(NB: No reduction for period at panel beaters
(Par 7(5) of 7th Schedule) -
Reimbursive travel allowance (excluded by - (1)
s 8(1)(b)(iii))
OR: Less than 8 000km and R3.16km
Medical aid contributions paid by company
(Par 12A of 7th Schedule) 21 600 (1)
Contribution to pension fund by employer (not yet
accrued/not settlement of an employee’s debt)) - (1)
Accumulated leave 50 000 (1)
Gratuity 125 000 (1)
Restraint of trade (Par cA of definition of Gross 120 000 (1)
Income)
Lump sum from pension fund 1 000 000 (1)
Less: Arrear pension fund contributions
R(30 000 – 1 800) (Par (5)(1)(a) 2nd Schedule) (28 200) 971 800 (1)
Taxable profit from business:
- South Africa source (Sec 20(1)(a),) 50 000 (1)
- Australia source (Sec 20 proviso (b) to par 1)(loss) carr. forward - (1)
1 015 212
Less: Deductions
Contributions to pension fund - actual 27 000
The greater of:
R1 750 or
7,5% x R720 000 = R54 000; limited to contribu- (27 000) (2)
tions (1 800) (1)
Arrear pension fund contributions (R30 000) limited
to

RAF contributions - actual 3 600

The greatest of:
15% of R(80 000 + 23 612 + 21 600 + 120 000
+ 50 000) or [R(1 015 212 – 720 000) x 15%
= R44 282 (1)
or R(3 500 – 27 000)= Rnil
or R1 750= R1 750 (1)
Limited to actual contributions (3 600) (1)
Carried forward 1 146 800 982 812
 13 TAX4862/109

SUGGESTED SOLUTION: QUESTION 1 (continued)

Calculations Retirement Other in-

lump sums come and
deductions
R R R
Brought forward 1 146 800 982 812

Add: Capital gain on sale of primary residence:

Proceeds 2 600 000 (½)
Less: Base cost 475 000 (1)
Purchase price (450 000)
Improvements (25 000)
2 125 000
Less: not used as primary residence (R2 125 000
x 1/10 x 10%) (21 250) (2)
2 103 750
Less: Primary residence exclusion: (2 000 000) (1)
103 750
Add: Non-primary use (see above) 21 250
125 000
Less: Annual exclusion (30 000) (1)
95 000
Inclusion 33,3% x R95 000 31 635 (1)
1 014 447
Less: Section 18 medical aid deduction:
Employer’s contribution 21 600
Own contribution 21 600
43 200 (1)
Less: Section 6A rebate x 4:
R230 x 12 x 4 (11 040) (2)
32 160
Add: Expenses 15 000 (1)
47 160
Less: 7,5% x R1 014 447 (76 084) - (1)
TAXABLE INCOME 1 146 800 1 014 447

Tax on R1 014 447: (R178 940 + 40% (R1 014 447 – R617 000)) 337 919 (1)
Less: Rebates
• Section 6A (R230 x 12) (2 760) (1)
• Primary (11 440) (1)
Income tax payable on taxable income excluding lump sums 323 719

Income tax payable on lump sums

Lumps sums received during 2013 year of assessment (see 1 146 800
above)
Amount withdrew from RAF fund – February 2012 350 000 (1)
1 496 800
Tax according to retirement table:
R141 750 + 36% of R(1 496 800 – 945 000) 340 398 (1)
Less: Hypothetical amount on RAF
18% x R(350 000 – 315 000) (6 300) (1)
Income tax on lump sums 334 098
Total tax payable: R323 719 + R334 098 657 817 (½)
40
 14 TAX4862/109

SUGGESTED SOLUTION: QUESTION 1 (continued)

PART B

a) VAT consequences of the letting of the eight units and the sale of the six units

The eight units were build for purposes of selling them, that is for the making of taxable
supplies. By changing the use of the units to the letting thereof resulted in the making of
exempt supplies (section 12(c)).

Section 18B caters specifically for the temporary letting of residential property built with the
intention of selling them. (2)

Construct (Pty) Ltd meets all the requirements of section 18B as the company is a developer
(a vendor who continuously constructs fixed property for the purpose of disposing of it after (1)
the construction thereof (section 18B(1)).

Construct (Pty) Ltd developed the property wholly for the making of taxable supplies
(section 18B(2)(a)) and subsequently temporary applied it for the supplying of accommo-
dation in a dwelling under an agreement for the letting and hiring thereof (section 18B(2)(b)).
Same marks as first 2 marks (2)

Notification must be made to SARS within 30 days of making the supply. Bonus mark (1)

In terms of section 18B(2) the supply of the residential units for the letting thereof, will at the
date of the change of use be deemed not to be a taxable supply in the course or furtherance
of Construct (Pty) Ltd’s enterprise – thus no change of use has to be accounted for. (1)

On the date of the selling of the six units (30 November 2013 – 17 months after completion on
30 June 2012) the residential units will be supplied by way of a taxable supply for R1 200 000 (1)
each (the money value ) (section 10(3) , which will result in output tax of 1 200 000 x 14/114 =
R884 210. (1)

The time of supply will be the earlier of date of registration or the date of any payment
received for the supply (section 9(3)(d)). (1)
Output tax should only be accounted for to the extent that payment has been received
(section16(4)) (1)
Therefore output tax of R884 210 x 50% = R 442 105 should be accounted for on
31 December 2013 and output tax of R442 105 should be accounted for on 31 January 2014. (1)

The two units that are not sold will be deemed to have been supplied by way of a taxable
supply 36 months after entering into the agreement for the letting thereof (or 20 July 2012) -
therefore on 20 July 2015 (section 18B(3(a)). (1)
The two units are deemed to be supplied for a consideration equal to the open market value
of the units on 20 July 2015. Output tax will be the open market value x 14/114. (1)
12
Maximum 10
 15 TAX4862/109

SUGGESTED SOLUTION: QUESTION 1 (continued)

PART C

1. VAT-effect for Construct (Pty) Ltd

Purchase of property and construction costs

The residential units are supplied as dwellings under an agreement for the letting thereof and
therefore qualifies as an exempt supply in terms of section 12(c). Exempt supplies are (1)
excluded from the definition of an enterprise in section 1 of the VAT Act. Even though the (1)
cost of the property and the construction costs include VAT (purchased from VAT vendors),
the expenses were not incurred in the furtherance of an enterprise, - thus no input tax can be
claimed. (1)

Caretaker moving into residential unit

Construct (Pty) Ltd is a vendor that has granted a benefit or advantage to an employee as (1)
contemplated in paragraph (i) of the definition of “gross income” in section 1 of the Income
Tax Act, read with the Seventh Schedule to the Act. This benefit consists of the supply of
goods or services made by a vendor in the course of an enterprise carried on by the vendor.
Therefore a deemed supply arises (section 18(3)), but as the deemed supply is in (1)
respect of an exempt supply in terms of section 12 of the VAT Act the proviso to
section 18(3) is applicable and section 18(3) will not apply. Therefore there is no deemed (1)
supply.
6

2. Income Tax-effect for Construct (Pty) Ltd

R R
Purchase of property
Capital in nature (not deductible in terms of section 11(a)) - (1)

Construction costs
Capital in nature (not deductible in terms of section 11(a)) - (1)

Rent received
(R5 000 x 15 x 4months) + (R500 x 3months) 301 500 (2)

Salary of caretaker (section 11(a))

(R10 000 x 12months) (120 000) (1)

Section 13sex
(R20 000 000 x 16/20) x 5% = R800 000 (800 000) (2)
(Not low cost residential units as cost > R200 000 each)
Fringe benefit: Bonus
No deemed supply and therefore no section 11(a) deduction mark - (1)
Sale of 3 units - disposal in terms of the Eighth Schedule

Proceeds (R2 000 000 x 3) 6 000 000 (1)

Less: Base cost ((R20 000 000 + R5 000 000) x 3/20) (3 750 000) (2)
Capital Gain 2 250 000
50% x R2 250 000 = R1 125 000 1 125 000 (1)
Remaining unit – no income tax effect as capital Bonus - (1)
mark
13
Maximum 11
 16 TAX4862/109

SUGGESTED SOLUTION: QUESTION 1 (continued)

3. Amounts to be included in Caretaker’s taxable Income R

Cash salary (R10 000 x 12 months) 120 000 (1)

Use of residential unit (Par 8(3) of the 7th Schedule)
(A – B) x 17/100 x 5/12
((R10 000 x 12) – R63 556) x 17/100 x 5/12 = R3 998 (3)
R3 998 – R2 500 (R500 x 5 months) 1 498 (1)
5
22

Part D

1) R R
2012
Trans 1. Deductible in terms of section 11(a) read with section 23F
(R36 000 x 100/114) (31 579) (1)
Recoupment in terms of section 8(4)(a) (R36 000 x
100/114) 31 579 (1)
OR Cost of basins not deducted as expense recoverable
under contract of insurance (section 23(c)) - (1)
No recoupment in terms of section 8(4)(a) as expense not
deducted during any year of assessment. - (1)
Delivery truck
Insurance proceeds (R50 000 x 100/114) 43 860 (1)
Less: Tax value (111 000) (1)
Section 11(o) loss (not deductible in terms of section 20B
read together with section 24M (unquantified amounts
involved), suspended until full consideration is
received) (67 140) - (1)
2013
Insurance proceeds (R55 000 x 100/114) 48 246 (1)
Tax value – already deducted in 2012 - (1)
48 246
Less: section 11(o) loss brought forward from 2012 (67 140) (1)
Section 11(o) loss (18 894) (18 894)
Trans 2. 2012
Section 24M
Proceeds (R3 400 000 x 100/114) 2 982 456 (1)
Less: Base cost ((R2 100 000 + R 800 000) (2 900 000) (1)
Capital Gain 82 456
Include R82 456 x 50% 41 228 (½)

Section 13quin – R7 000 000 x 5% (350 000) (1)

2013
Proceeds (R1 450 000 x 100/114) 1 271 930
Less: Base cost -
Capital Gain 1 271 930 (1)
Include R1 271 930 x 66.6% 847 105 (½)

Section 13quin – R7 000 000 x 5% (350 000) (1)

14
 17 TAX4862/109

SUGGESTED SOLUTION: QUESTION 1 (continued)

2) R R
Trans 3. Acquisition of tiles:
Cost $50 000 x R8.42 421 000 (1)
Add: import duties 43 000 (1)
(Ignore VAT – claimed as input tax) - (1)
Section 11(a) 464 000 (464 000)

Closing stock (R464 000 x 25%) (section 22(1)(a)) 116 000 (1)

Interest (section 24J)

• 30 November 2012 ($40 000 x 12% x 91/365 x (10 112) (2)
R8.45)
• Accrued on 31 December 2012 ($40 000 x 12% x
31/365 x R8.40) (3 424) (2)

Foreign exchange gain – debt (section 24I)

• ($40 000 x (R8.42 – R8.40)) 800 (2)

Trans 4. Section 12C deduction

• R810 000 x 40% (324 000) (1)

Section 24J
• 31 October 2012 (R738 720 x 3.06%) (22 605) (1)
• 31 December 2012
(R738 720 + R22 605 – R74 479) x 3.06% x 61/92 (13 936) (2)
14
28
 18 TAX4862/109

PAPER TWO FOR TAX4862/NTA4862

QUESTION 2 50 Marks

This question consists of three (3) related parts.

Megachef (Pty) Ltd, a resident company, manufactures and sells premium stainless steel kitchenware.
This is classified as a ‘process of manufacture’ by SARS. The company has a 30 September year-
end and is a registered VAT vendor. All amounts in the question exclude VAT (if applicable), unless
specifically stated otherwise.

Megachef (Pty) Ltd started ten years ago as the dream of the happily married couple Mr Salt and Mrs
Pepper Chef (who are married out of community of property). The company has, however, grown into
a multi-million rand business with a gross income of R12 500 000 and employed 16 full-time employ-
ees (including Salt and Pepper) throughout the year of assessment. The shares are held in equal
parts by Salt and Pepper, who are also both directors of the company.

PART A 25 marks

The effect of the following transactions on Megachef (Pty) Ltd’s 2012 year of assessment have not yet
been taken into account in the calculation of the taxable income of R8 450 670:

1. The following is a list of Megachef (Pty) Ltd’s fixed assets and transactions relating to the fixed
assets not yet taken into account:

• Megachef (Pty) Ltd ordered a manufacturing machine (machine A) from a supplier in

Germany for €350 000 on 15 August 2011. Machine A was shipped free-on-board (FOB) on
1 September 2011 and was delivered at Megachef (Pty) Ltd’s premises on 25 September
2011. The correct amount of VAT was paid (and claimed as input tax) and import duties of
R37 500 were paid on importation. On 1 September 2011, Megachef (Pty) Ltd entered into a
three-month forward exchange contract (FEC) with Independent Bank Limited in order to
hedge the full purchase price. The machine was brought into use on 1 October 2011. The full
payment for the machine was made to the supplier on 30 November 2011.

The following exchange rates were applicable:

Date Spot rate
€1 = R
15 August 2011 €1 = R10,38
1 September 2011 €1 = R10,50
€1 = R10,56 (forward rate under
a three-month FEC)
25 September 2011 €1 = R10,55
30 September 2011 €1 = R10,30
€1 = R10,60 (forward rate under
a two-month FEC)
1 October 2011 €1 = R9,95
30 November 2011 €1 = R9,70
 19 TAX4862/109

QUESTION 2 (continued)

• Due to Megachef (Pty) Ltd’s rapid expansion, the company had to replace one of its mobile
cranes (crane A) with a more powerful mobile crane for the packaging department. Crane A
was acquired new for R175 000 from an independent party on 15 June 2010 and immediately
brought it into use. On 1 September 2011, crane A was sold for R182 000 to an independent
party. Crane B (new and unused) was purchased for R250 000 on the same day to replace
crane A and was immediately brought into use. Binding General Ruling No 7 allows for a four
year write-off period on these mobile cranes, if applicable.

• During the last six months of 2008 a factory building and an office block were both erected by
Megachef (Pty) Ltd at a cost of R1 500 000 and R650 000 respectively and were both brought
into use on 1 January 2009.

2. During the 2012 year of assessment, an annuity of R5 000 was paid to Mrs Salad Dressing (aged
38), a former employee who was instrumental in helping to set up the business but who decided
to be a stay-at-home mom after the birth of her twins during the 2011 year of assessment.

3. On 1 July 2012, Megachef (Pty) Ltd registered a new patent for a newly designed kitchenware
range under the Patents Act 57 of 1978 and paid R2 800 for registration fees.

4. On 1 July 2011, Megachef (Pty) Ltd entered into a 12-month learnership agreement with Ice
Cream that was successfully completed on 30 June 2012. Ice Cream received an annual salary
of R50 000 that has already been taken into account in the calculation of the company’s taxable
income of R8 450 670.

5. Megachef (Pty) Ltd has an assessed capital loss of R1 500 that the company brought forward
from the 2011 year of assessment.

PART B 8 marks

Mr Salt Chef is not only employed by Megachef (Pty) Ltd but he also bakes and decorates cakes for
birthday parties (which business does not form part of the activities of Megachef (Pty) Ltd). During
weekends, when he is not baking or decorating cakes, Salt and Pepper escape to secluded spots in
nature, where he practices his other passion, photography (classified as a creative art). He is an ac-
claimed photographer and sells many of his photographs to nature magazines while others are sold
and used as calendar photographs. His taxable income (or assessed loss) stemming from each of
these businesses (all of which are operated in his personal capacity) for the 2012 and 2013 years of
assessment, are as follow (you can assume that he started both the above businesses during the
2012 year of assessment):

Taxable income Taxable income Maximum

from Taxable income or (assessed marginal rate of
employment at or (assessed loss) from the 40% applicable
Year of Megachef (Pty) loss) from the baking and to taxable
assessment Ltd photography decorating of income of:
cakes
R R R R
#
2012 595 000 (25 000) (10 000) 580 000
#
2013 590 000 (15 000) 12 000 617 000
#
You can assume that Salt will not be able to prove to SARS a reasonable prospect of earning taxable
income from the photography business within a reasonable period of time during that specific year of
assessment.
 20 TAX4862/109

QUESTION 2 (continued)

PART C 17 marks

Megachef (Pty) Ltd is one of the main sponsors of a reality cooking competition running for a three
month period (15 October 2012 to 15 January 2013). The sponsorship agreement (for which Mega-
chef (Pty) Ltd) had to pay their legal advisors R3 500 to draw up) stated the following:

• Megachef (Pty) Ltd will supply all the kitchenware required by the contestants during the cooking
competition. Ownership of the kitchenware will be retained by Megachef (Pty) Ltd during this
period.

• Megachef (Pty) Ltd’s logo and contact details will be advertised during, and after, every televised
episode of the show.

• All the kitchenware used by the contestants during the competition will be returned to Megachef
(Pty) Ltd at the end of the competition after which it will be donated to the Stellenbosch Child-
ren’s Orphanage (not a registered public benefit organisation (PBO)).

On 1 October 2012, kitchenware, with a cost price of R100 000 and a market value (excluding VAT) of
R150 000, was made available to the organisers of the competition.

On 31 January 2013, after the reality show was recorded, the kitchenware was checked by Salt and
Pepper before being donated to the children’s orphanage. They discovered that kitchenware with a
cost price of R3 750 (and an original market value (excluding VAT) of R5 625) had disappeared and
that kitchenware with a cost price of R2 250 (with an original market value (excluding VAT) of R3 375)
had been damaged beyond repair and could not be donated. The damaged kitchenware was sold as
scrap metal for R500 to a non-vendor, which amount was then also donated to the children’s orpha-
nage. The remaining kitchenware, valued at R55 000 (market value (excluding VAT) after being used
in the competition), was donated to the children’s orphanage that same afternoon. These were the
only donations that Megachef (Pty) Ltd made during the 2013 year of assessment.
 21 TAX4862/109

QUESTION 3 50 Marks

All the taxpayers are residents for South African tax purposes, except where specifically stated other-
wise.

You are the designated person at your office of tax practitioners to answer tax queries, which were
sent to the Daily Sun, for its Saturday’s edition, dated 29 September 2012. Your readers are aware
that VAT and double taxation agreements (DTA) issues will not be addressed.

Your answers to the following two queries (received by post or e-mail) should be addressed to the
relevant readers of the newspaper (Daily Sun) and must always be clear, objective and supported by
legislation and/or case law.

Query 1 30 Marks

Wessel from Heilbron wrote:

Good morning, I am Wessel from Heilbron. I am 68 years old, retired and have been married in com-
munity of property to my dear wife, Heiletjie for the past 40 years. We have three married children of
whom my eldest son, Petrus emigrated to Australia in 2004. The other two children are both living in
Bloemfontein.

I am very worried about this new dividend tax and my tax practitioner has no clue what’s going on. It
seems as if there are no tax-free investments for individuals anymore. If the government does not
make a plan, we, as pensioners will have to take our money and rather put it underneath our beds
instead of investing it.

I receive a monthly net income of R18 000, after the deduction of 30% PAYE, from my pension fund. I
am also contributing a total monthly amount of R2 300 to my medical aid fund for myself and my wife.
I pay approximately R800 per month for prescribed chronic medicine (that the medical aid fund does
not pay for) and in June 2012, I had pneumonia and had to pay R12 400 out of my own pocket.

My wife Heiletjie, has been a home executive since we married 40 years ago. I pay all her medical
costs (included in the R800 per month above). Heiletjie inherited a Karoo farm from her mother’s
estate 10 years ago when the farm had a market value of R3.3 million. She would like to donate this
farm to an inter vivos trust in which our three children will have an equal vested right to the net farm-
ing income and capital of the trust. This is a bona fide farm which has recently been valued at
R5.8 million by our local bank. This farm was excluded from our joint estate by the will of her mother.
The farm generated taxable income of R112 000 for Heiletjie’s 2012 year of assessment (accrued
evenly throughout the year). Her farm manager estimates that the taxable farming income will be 20%
less in the 2013 year of assessment compared to the year before because of the increased petrol
price and drought. The transfer to the trust will be on 1 October 2012.

We invested our savings, which we had built up throughout the years, in tax-free or low tax financial
instruments as follows:

1. An investment to the value of R500 000 in the SATRIX40, a collective investment scheme, that
allows investors to invest in the largest 40 companies listed on the JSE Limited. We received tax-
free dividends of R60 000 in the 2012 year of assessment and expect to earn a gross amount of
R54 000 in the 2013 year of assessment. Dividends are usually paid in June and December of
each year.

2. We also invested R200 000 in resident collective investment schemes in properties and received
dividends of R30 000 during July 2012 of which 70% of the dividends were paid out of profits of
a revenue nature (i.e. section 11(s) dividends) and 30% out of profits of a capital nature.
 22 TAX4862/109

QUESTION 3 (continued)

3. We have also invested an amount of R50 000 in a foreign collective investment scheme and
expect to receive foreign dividends of R8 000 and foreign interest of R2 000 in October 2012.

Can you please help us with an estimation of our taxable income for 2013 year of assessment, so that
we can know what to expect? It will also help me if you could explain to me what the implications of
the new dividend tax will be on the return from our investment portfolio.

Kind regards
Wessel

Query 2 20 Marks

Carlos Dimitri sent the following e-mail:

Hi there, I am Carlos Dimitri a 55 year old resident of South Africa. My mother and father are both
Greek and immigrated to South Africa during 1956. I am not married and do not plan to do so in the
foreseeable future. I have a small investment problem and would appreciate your opinion.

In 2006, three other South African businessmen and I invested R1 million each in an investment com-
pany that we registered in Greece. We are the sole shareholders and directors of this foreign com-
pany. The company’s sole purpose was to invest this money in Europe. We never received any
dividends from this foreign company, as we did not want to be taxed on the money in South Africa. I
see that my clueless accountant included 25% of the income of this foreign company in my tax
calculation every year. Why, I do not know. I think I must take him to court.

On 31 May 2012, we decided to liquidate the company in Greece, as we do not trust the financial
stability of Greece. We each received an amount of R1.5 million. We decided that the original
R1 million must be this so-called ‘contributed tax capital’. The Greek company’s taxable income
before the Greek tax of 20% was R80 000 for the company’s financial year ended on 31 May 2012, if
translated at average rate, and R65 000 if translated at spot rate. The retained profits of the company
are included in the liquidation dividend.

We decided not to bring the money back to South Africa but to transfer it directly into a newly founded
discretionary foreign trust in the Isle of Man (a tax-free haven). The sole purpose of the trust will be to
buy two flats in London, Great Britain, to earn rental income, which we all thought was a very good
idea. We are the sole beneficiaries of this trust and we will lend the money to the trust interest-free,
even if we could earn interest at a market-related rate of 7% in South Africa.
We have appointed two independent trustees and do not want to receive any distributions from the
foreign trust as we are already taxed to death in South Africa.

Can you think of any way that the Receiver can tax us? As I see it, nothing is taxable in South Africa
as no money was received by us in South Africa.
©
Unisa 2012
 23 TAX4862/109

ANNEXURE A

TAX TABLES
INCOME TAX RATES: NATURAL PERSONS AND SPECIAL TRUSTS FOR YEARS OF
ASSESSMENT ENDING 28 FEBRUARY 2013
Taxable income Rates of tax
R0 – R160 000 18% of taxable income
R160 001 – R250 000 R28 800 + 25% of taxable income exceeding R160 000
R250 001 – R346 000 R51 300 + 30% of taxable income exceeding R250 000
R346 001 – R484 000 R80 100 + 35% of taxable income exceeding R346 000
R484 001 – R617 000 R128 400 + 38% of taxable income exceeding R484 000
Exceeding R617 000 R178 940 + 40% of taxable income exceeding R617 000

Retirement fund lump sum withdrawal benefits

Taxable Income Rates of tax for the 2013 year of assessment
R0 - R22 500 0% of taxable income
R22 501 - R600 000 R0 plus 18% of the amount by which the taxable income exceeds R22 500
R600 001 - R900 000 R103 950 plus 27% of the amount by which the taxable income exceeds
R600 000
Exceeding R900 000 R184 950 plus 36% of the amount by which the taxable income exceeds
R900 000

Retirement fund lump sum benefits

Taxable Income Rates of tax for the 2013 year of assessment
R0 - R315 000 0% of taxable income
R315 001 - R630 000 R0 plus 18% of the amount by which the taxable income exceeds
R315 000
R630 001 - R945 000 R56 700 plus 27% of the amount by which the taxable income exceeds
R630 000
Exceeding R945 000 R141 750 plus 36% of the amount by which the taxable income exceeds
R945 000
 24 TAX4862/109

ANNEXURE B: TRAVELLING ALLOWANCE

SCALE OF VALUES (2013 year of assessment)

Fixed Fuel Mainte-
Where the value of the vehicle (including VAT) cost cost nance cost
R c c
R0 - R 60 000............... ...................................................... 19 492 73.7 25.7
R60 001 - R120 000 ........................................................... 38 726 77.6 29.0
R120 001 - R180 000 ......................................................... 52 594 81.5 32.3
R180 001 - R240 000 ......................................................... 66 440 89.6 36.9
R240 001 - R300 000 ......................................................... 79 185 102.7 45.2
R300 001 - R360 000 ......................................................... 91 873 117.1 53.7
R360 001 - R420 000 ......................................................... 105 809 119.3 65.2
R420 001 - R480 000 ......................................................... 119 683 133.6 68.3
Exceeding R480 000 ......................................................... 119 683 133.6 68.3

ANNEXURE C

MONETARY THRESHOLDS, REBATES AND OTHER RATES 2013

R
Rebates
Primary – All natural persons 11 440
Secondary – Persons aged 65 and older 6 390
Tertiary – Persons aged 75 and older 2 130

Interest and dividend income

The annual exemption on interest earned for individuals younger than 65 years 22 800
The exemption for individuals 65 years and older 33 000

Section 18(2)(c) limitations (medical aid rebates)

Benefits to the taxpayer 230
Benefits to the taxpayer and one dependant 460
Benefits to each additional dependant 154

Section 8(1)(b)(iii) (reimbursive allowance – business kilometres do not exceed 8 000km)

Rate per kilometre 3.16

Capital gains exclusions

Annual exclusion for individuals and special trusts 30 000
Exclusion in year of death 300 000
Primary residence exclusion 2 000 000
Inclusion rate (Natural persons and special trusts) 33,3%
Inclusion rate (Other) - For years of assessment commencing on/after 1 March 2012 66,6%
- For prior years 50%
Subsistence allowance
Local travel
- Per day or part of a day for incidental costs 93
- Per day or part of a day for meals and incidental costs 303

Seventh Schedule paragraph 9(3)(a)(ii) – B in the formula (residential accommodation) 63 556

Official interest rates

Prime interest rate – from 19 November 2010 to date 9%
Official interest rate – linked to repurchase rate from 1 March 2011 6.5%
 25 TAX4862/109

ANNEXURE D – OTHER

Small Business Corporation (as defined in section 12E)

(Applicable in respect of years of assessment ending on or after 1 April 2012)

Taxable Income Rate of Tax

R0 – R63 556 0% of taxable income

R63 557 - R350 000 7% of taxable income above R63 556
Exceeding R350 000 R20 051 + 28% of taxable income above R350 000

A personal service provider and a company, which is not a resident, will be taxed at 28% (and NOT
33%) with effect from years of assessment ending on or after 1 April 2012.

Dividends Tax (effective 1 April 2012)

Rate increases from 10% to 15% (section 64E)

Ratios in section 10B change accordingly:

• Ratio of 30/40 changes to 25/40 (natural person, estate or special trust); and
• Ratio of 18/28 changes to 13/28 (other persons)

©
Unisa 2012
 26 TAX4862/109

QUESTION 2 50 Marks

PART A

REQUIRED: MARKS

Calculate the normal tax liability of Megachef (Pty) Ltd for its 2012 year of assessment.
Start your calculation with the taxable income of R8 450 670. Show all your calculations
and round-off amounts to the nearest Rand. Provide brief explanations to support your 25
calculations and clearly indicate nil effects (with a brief reason). You can assume that
the company will qualify as a small business corporation and will elect any option avail-
able to minimise its tax liability.

PART B

REQUIRED: MARKS
Calculate the taxable income of Mr Salt Chef for his 2012 and 2013 years of assess-
ment. Show all your calculations and round-off amounts to the nearest Rand. You
8
have to refer to legislation, where applicable, and provide clear reasons when an
amount is not included in taxable income.

PART C

REQUIRED: MARKS

Discuss all the tax implications (except for VAT, which you can ignore) in respect of the
sponsorship agreement for Megachef (Pty) Ltd for its 2013 year of assessment. Your
discussion should refer to relevant legislation and also to case law, where applicable.
Substantiate your discussion with calculations.

Present your answer under the following headings: 17

• Legal cost;
• Kitchenware supplied for the competition;
• Donation of kitchenware to the Stellenbosch Children’s Orphanage;
• Stock stolen and
• Stock sold as scrap and proceeds donated.
 27 TAX4862/109

QUESTION 3 50 Marks

Query 1

Assume that all estimated amounts in this query will be received and/or accrued in the 2013 year of
assessment and the farm will be donated to the trust on 1 October 2012.

REQUIRED: Marks
(a) Discuss briefly (show clearly any calculations) the donations tax (if any) payable by
Heiletjie in respect of the donation of the farm to the inter vivos trust. State clearly 5
when the donation’s tax will be payable.
(b) Calculate the taxable income of Wessel and Heiletjie for their 2013 year of assess-
ment. Support your answer with reference to the Income Tax Act (including the
Eighth Schedule to the Income Tax Act).
In order to help you in answering this part, the following format is prescribed:
20
Description Calculation/ Wessel Heiletjie
reason
R R

(c) Discuss briefly if dividend tax (supported by calculations) will have to be paid on
Wessel and Heiletjie’s investment portfolio for the 2013 year of assessment as well 5
as who will be liable for the payment of the dividends tax

Query 2

REQUIRED: Marks

Answer Carlos Dimitri’s query to the Daily Sun by discussing (supported by calculations),
the amounts (if any) that will be included in his South African income with regards to the
18
foreign company’s liquidation and the subsequent transfer of the amounts (R1.5 million) to
the foreign trust for his 2013 year of assessment. Ignore any double tax agreement.
Please refer to relevant tax legislation and case law where applicable.

COMMUNICATION SKILLS: (presentation and layout) 2

 28 TAX4862/109

SUGGESTED SOLUTIONS: QUESTIONS 2 AND 3

QUESTION 2 - SUGGESTED SOLUTION

Part A:

Megachef (Pty) Ltd’s tax liability for the 2012 year of assessment
R
Taxable income 8 450 670

1 Fixed assets:
Machine A Purchase price (s 12E(1)) - capital:
imported – (€350 000 x R10,50 (s 25D)) + R37 500
section 12E and = R3 712 500 (2)
24I No section 12E allowance claimed during 2011 as
only brought into use on 1 October 2011, thus
claim 100% under s 12E(1) (3 712 500) (1)
Foreign exchange differences (section 24I):
All foreign exchange differences from 2011 would
have been deferred to 2012, since the asset was
only brought into use in 2012 (s 24I(7):
Debt:
2011: €350 000 x (R10,50 – R10,30) 70 000 (1½)
2012: €350 000 x (R9,70 – R10,30) 210 000 (1½)
FEC:
2011: €350 000 x (R10,60 – R10,56) 14 000 (1½)
2012: €350 000 x (R9,70 – R10,60) (315 000) (1½)

Cranes A and B Crane A: R

– sections Purchase price = 175 000
12E(1A), 8(4)(e) Less:
and par 66 of 8th Wear and tear (section 12E(1A)):
Schedule 2010: R175 000 x 50% (87 500)
2011: R175 000 x 30% (52 500)
Tax value 35 000 (2)
Less: Selling price of R182 000 limited
to cost 175 000
Recoupment (s 8(4)(a)) 140 000 (1)
But could elect par 66 of the Eighth Schedule as
proceeds is equal to or greater than base cost (refer
below) in 2011 and defer recoupment in terms of
section 8(4)(e). (1)

Cranes A and B Capital gains tax implications: R

– sections Proceeds 42 000 (1)
12E(1A), 8(4)(e) (R182 000 – recoupment of R140 000)
and par 66 of 8th Less: Base cost (35 000) (1)
Schedule (R175 000 – s 12E(1A) of R140 000)
(continued) 7 000
(Capital gain can be deferred (refer discussion
above) – see end of calculation)
 29 TAX4862/109

QUESTION 2 - SUGGESTED SOLUTION (continued)

Crane B: R250 000 x 30% (second year: s 12E(1A)) (75 000) (1)

Therefore:
Section 8(4)(e) on Crane A:
R140 000 x 30% (same % as crane B) 42 000 (1)

Factory building Factory – R1 500 000 x 5% (s 13(1)) (75 000) (1)

and office block –
section 13(1) and Offices – R650 000 x 5% (s 13quin) (32 500) (1)
13quin

2 Annuity to former No deduction as not due to ill health, old age or

employee – infirmity – s 11(m) not applicable - (1)
section 11(m)

3 Patent Full registration fee deductible (s 11(gB)) (2 800) (1)

registration fee –
section 11(gB)

4 Learnership Annual allowance: R30 000 x 9/12 (s 12H(2)(a)) (22 500) (1)
agreement – Completion allowance: R30 000 s 12H(3)) (30 000) (1)
section 12H
Capital gain/loss R
calculation Capital gain on Crane A (point 1 above),
But par 66 of 8th Schedule applicable, thus
R7 000 x 30% included (based on Crane B) 2 100 (1)
Assessed capital loss brought forward from
the 2011 year of assessment (1 500) (1)
600
At 50% inclusion rate 300 300 (1)
TAXABLE INCOME 4 521 670
Tax liability = R20 051 + (28% x (R4 521 670 – R350 000))
= R20 051 + R1 168 068 1 188 119 (1)
Total 27
Maximum 25
 30 TAX4862/109

QUESTION 2 - SUGGESTED SOLUTION (continued)

Part B:

Taxable income of Salt Chef:

Please note: additional information was supplied to clarify certain concepts for students, but
marks were only awarded for sections in bold.

2012:
Taxable income = R595 000 (salary) - R10 000 (cake business - not ring-fenced although an assessed
loss and taxed at maximum marginal rate, because it is not a suspect trade and only first year in which a
loss is incurred, thus 3 out of 5 year rule cannot yet be applicable (section 20A(2)(a))) = R585 000 (2)
The R25 000 loss from photography will be ring-fenced, because (1)
• Salt is a natural person carrying on a trade (being photography and baking and decorating of
cakes)) with an assessed loss.
• Salt is taxed at the maximum marginal tax rate (R595 000 v R580 000) (section 20A(2)).
• It is a listed suspect trade (s 20A(2)(b)) and therefore section 20A(1) will apply. (1)
• It is a trade which constitutes a business in respect of which there is not a reasonable prospect to
derive taxable income within a reasonable period (given) (section 20A(3))
• Thus section 20A(1) will apply and the R25 000 assessed loss from photography will be ring-fenced
and it will be carried forward to the 2013 year of assessment to be applied against taxable income of
the photography business.

2013:
R590 000 (salary) + R12 000 (cake business) – R15 000 (photography loss) = R587 000. (3)
Section 20A will not be applicable, since Salt is not taxed at the maximum marginal tax rate (R602 000 v
R617 000) (section 20A(2)) and the R15 000 loss from photography (for 2013) will not be ring-fenced,
although it originated from a trade to which the provisions of S20A(1) was previously applied (section
20A(5)). The R25 000 ring-fenced loss will however stay ring-fenced and will be brought forward to
the 2014 year of assessment to be applied against taxable income of the photography business. (1)
Total 8

Part C:

Tax implications of the sponsorship agreement:

Legal cost:
Income Tax implications:
The provisions of section 11(c) will first be applied to the legal cost of R3 500 to establish if it will be
deductible under this section (section 23B(3)).
Section 11(c) is applicable to legal expenses actually incurred by the taxpayer during the year of
assessment in respect of any claim, dispute or action of law arising in the course of or by reason of the
ordinary operations undertaken by him in the carrying on of his trade.
The finalisation of the sponsorship agreement is not in respect of any claim, dispute or action of law and
as such section 11(c) will not be applicable. (1)
Section 11(a) will have to be applied:
For an amount to be deductible in terms of the general deduction formula, all of the following
requirements must be satisfied (i.e. section 11(a) read with section 23(g) of the Income Tax Act): (1)
• The taxpayer must carry on a “trade”;
• The amount to be claimed must constitute “expenditure or losses”;
• The expenditure or loss must be “actually incurred” by the taxpayer during the year of assessment
in which it is claimed;
• The expenditure or loss must be “incurred in the production of income”;
• The expenditure or loss must “not be of a capital nature”; and
 31 TAX4862/109

QUESTION 2 - SUGGESTED SOLUTION (continued)

The expenditure or loss can only be claimed to the extent to which the amount was laid out or expended
for the purposes of the taxpayer’s trade. (1)
All of the requirements are met, but “in the production of income” and “not of a capital nature” needs to
be discussed further.

To determine whether the legal cost was in the production of income, two questions must be asked:
o What action gave rise to the expenditure? The finalisation of the sponsorship agreement gave
rise to the expenditure. (1)
o Is this action closely connected with the income-earning activities? (Is it a necessary concomitant
of the business?) The sponsorship is closely related to the income-earning activities, since it is
will lead to advertising, which will inevitably increase sales and will give rise to income in the
future. (1)
(Port Elizabeth Electric Tramway Co Ltd case or BP South Africa (Pty) Ltd case) (1)

The legal cost was therefore expenditure incurred in the production of income.
(Alternative: the act entailing the expenditure must be a “necessary/inevitable concomitant” of the
taxpayer’s trade) (Joffe & Co (Pty) Ltd case)

In determining whether the expense is capital in nature, one must establish whether it is part of
o The cost of performing the income-earning operations – legal cost will be part of the cost of
performing the income-earning operations, or (1)
o The cost of establishing, improving or adding to the income-earning structure – it is not creating an
enduring benefit and will not be capital in nature.
(New State Areas Ltd case or Rand Mines (Mining & Services) Ltd case) (1)
The legal cost paid is part of the cost of performing the income-earning operations and thus not of a
capital nature and will be allowed as a deduction under section 11(a). (1)

Kitchenware supplied for the competition:

Income Tax implications:
Trading stock have been used for purposes other than the disposal in the ordinary course of business
(s 22(8)(b)(iv)), therefore proviso (d) to section 22(8) will be applicable – the assets donated represents
trading stock manufactured and as such represents assets to which the provisions of paragraph (jA) of
the gross income definition in section 1 will be applicable – and no recoupment will be made under the
provisions of section 22(8). It will still be treated as part of trading stock. No adjustment for tax purposes.
(2)

Donation of kitchenware to the Stellenbosch Children’s Orphanage

Income Tax implications:
Trading stock have been applied for the purposes of making a donation (s 22(8)(b)(i)),(note that proviso
(d) to section 22(8) will no longer be applicable, since it only applies to section 22(8)(b)(iv)) and a
recoupment at market value of R55 000 of the kitchenware supplied for the competition, will be included
in the calculation of the taxable income of Megachef (Pty) Ltd. (Note that cost price is not recouped,
since section 18A will not apply to the donation.) (3)
No deduction of 10% of taxable income will be allowed under section 18A, since it was not made to a
qualifying PBO. (1)

Donations tax implications:

Donations tax at a rate of 20% will be payable on the market value of the donation of kitchenware of
R55 000 plus the cash donation of R500, thus R11 100 (R55 500 x 20%) in donations tax will be payable
within 3 months after the date of the donation, thus before 30 April 2013. (3)

Stock stolen:
No further adjustment, since the deduction will be allowed when this stock is not included in closing
stock. (1)
 32 TAX4862/109

QUESTION 2 - SUGGESTED SOLUTION (continued)

Stock sold as scrap and proceeds donated:

Income Tax implications:
The R500 received for the sale of the damaged kitchenware should be included in gross income as
trading stock sold. (1)
The R500 donated will be not be allowed under section 18A as a deduction from taxable income of
Megachef (Pty) Ltd, since it was not made to a qualifying PBO. (1)
Max 21
Total 17
 33 TAX4862/109

QUESTION 3: SUGGESTED SOLUTION

Query 1

Dear Wessel and Heiletjie,

I have not taken any value-added tax (VAT) implications nor any double tax agreements into account. In
order to answer your query I will calculate and provide reasons as follows:

a) Donation of the farm:

The donation of the farm to the trust is a gratuitous disposal of her asset. (1)
An annual exclusion of R100 000 (s 56(2)(b)) is available to her.
Donations tax must be paid over to SARS within 3 months from date of donation,
thus on/before 31 December 2012: (1)
Fair market value: Market value less 30% (R5.8 m X 70%) R4 060 000 (1)
Less: annual exclusion (section 56(2)(b) (100 000) (1)
Value 3 960 000
At 20% (1)
Donation tax payable R792 000
5

 Comment:
In general students achieved 3/5 for this part. Students must remember that only a donation
by a trust to a beneficiary will be exempt and not to a trust

c.) In answer to your question in regards to any dividends tax payable on your investment
portfolio, the following will be applicable:

1) Ordinary shares in the SATRIX40 companies listed on the Johannesburg Stock Exchange
(JSE):
In terms of section 64D, dividend tax of 15% will be levied on the R54 000 received from resident
companies. (1)
As you are the beneficial owner of the SATRIX shares, you will be liable for the dividends tax payable
(section 64EA). (1)
The Satrix40 companies will withhold 15% of R54 000 (R8 100) (section 64G(1)) and (1)
pay it over to SARS before the last day of the month following the month in which the dividend was paid
(section 64K). (1)
You will still include the full dividend of R54 000 in your gross income but as it was from resident
companies it will be exempt in terms of section 10(1)(k)(i). (1)

2) Collective investment scheme (CIS) in properties (RSA)

A CIS in property is not a company as defined in section 1 of the Income Tax Act, thus dividend tax will
not be levied on any dividends distributed by the CIS. (1)

3) Foreign Collective Investment Companies

This is a company as defined in section 1 of the Income Tax Act. However, because it’s not in respect of
a listed share of a non-resident company, dividends tax will not be levied (section 64D). (1)
7
Max 5

 Comment:
Students did not study the basic principles of when dividend tax will be levied.
 34 TAX4862/109

QUESTION 3: SUGGESTED SOLUTION (continued)

b) I have calculated your estimated taxable income for the year of assessment ending
28 February 2013 as follows:

Description Calculation/ Wessel Heiletjie MARKS

reason
R R

Income from pension Gross income: R18 000 X 100/70

fund X12 308 571 (1)

Income from farm R89 600 (R112 000 less 20%) ×

7/12 52 267 (2)
R89 600 X 5/12 X 1/3 12 444 (1)
I.t.o section 7(8), Petrus’s income (1)
included in that of donor
Passive Investments:
1) Shares in Satrix 40
• Local dividend Gross income; R54 000 27 000 27 000 (1)
Exempt – s 10(1)(k)(i) (27 000) (27 000) (1)
2)CIS in property RSA
• s 11(s) dividend Gross income: R30 000 15 000 15 000 (1)
70% not exempt in terms of
s 10(1)(k)(i)(aa), thus R10 500
30% exempt (4 500) (4 500)
(1)
3)Foreign CIS
Foreign dividend Gross income: R8 000 4 000 4 000 (1)
Exempt in terms of section
10B(3): 25/40 X R4 000 (2 500) (2 500) (1)
Foreign interest Gross income: R2 000 1 000 1 000 (1)
Not exempt
INCOME 321 571 77 711
Capital Gains Tax: Donation of farm Alternative:
Proceeds Market value/ or ito par 33(1)(f) 4 060 000 5 800 000 (1)
Less: Base cost Par 40 (3 300 000) (3 300 000) (1)
Less: Donations tax Par 22:
(5.8-3.3)/5.8 X R792 000/ (148 256) (341 379) (2)
(4.060-3.3)/4.060 X R792 000 611 744 2 158 621
Annual exclusion (30 000) (1)
2 128 621
(no primary residence exclusion)
Inclusion rate: 33.3% 708 831 (1)
Less: Medical aid fund Older than 65 years, medical
expenses deductible (section
Medical fund 18(1)) in full. (1)
contributions R2 300 X 12 (27 600) (1)
Own: R800 X 12
Medical costs R12 400 (9 600) (1)
(12 400) (1)
Taxable income 271 971 786 542
–
22
Max 20
 35 TAX4862/109

QUESTION 3: SUGGESTED SOLUTION (continued)

 Comment:
You MUST remember to add your calculate CGT and medical deduction at the correct
place! Update your knowledge in regards to sections 10B and 10(1)(i).

Query 2

Dear Carlos,
As a South African resident, you will be taxed on your world-wide income (section 1 gross income
definition), which includes capital gains and losses you make (section 26). (1)

Greek foreign company

As you and your friends are all South African residents, you, together with your friends, held 100%
directly in this foreign company.
As this is more than 50% of the participation and /or voting rights in a foreign company, section 9D(1) of
the Income Tax Act (the Act) will apply (1)
as the Greek company will be a controlled foreign company (CFC). (1)
As the amount of taxes paid in Greece is only 20% in comparison with 28% in South Africa, only 71.4 %
(20/28) of the amount of normal tax that would have been payable by the CFC had it been a resident,
(the net income of the CFC) will not deemed to be nil in terms of proviso (i) to section 9D(2A). (1
As you owned 25% of the shares in this CFC, section 9D applies on the net income of the CFC and you
will be taxed on 25% of the taxable income (before foreign taxes levied) of the CFC, calculated in terms
of the South African Income Tax Act. (1)
Your accountant thus did nothing wrong when he included 25% of the net income of the CFC.
The taxable income of the CFC will be translated to the currency of the Republic by applying the average
exchange rate for that foreign tax year in terms of section 9D(6). (1)
In terms of section 9D(2A) you have to include 25% of R80 000 =R20 000 in your 2013 taxable income. (1)
The amount (R20 000) is not be apportioned as the company ceased to be a CFC on the date of its
year-end. (1)
You will be allowed to apply section 6quat rebate with respect of your 25% of the 20% (R80 000 X 20%)
Greece taxes that were paid. (1)

In respect of the liquidation distribution of R1.5 million that you received:

You received R1.5 million of which R1 million was a distribution of contributed tax capital (CTC). The
CTC will be a capital distribution in terms of par 74 (proceeds) (1)
but as you originally invested R1 million your base cost will be equal to your proceeds and there will be
no capital gain or loss for capital gains tax (CGT) purposes. (1)
The balance of the distribution of R1.5 million distribution, being R500 000 qualifies as a foreign dividend
as defined in section 1 of the Act. (1)
However, the R500 000 will be exempt in terms of section 10B(2)(a)/(c) (own more than 10%)of the Act
and the net result will be Rnil. (1)
Dividends tax will not be applicable as it is a dividend received from a non-resident company which is not
listed on the JSE (section 64D) (1)

Now, let us look at the foreign trust founded in the Isle of Mann.
The investment in the foreign trust by way of an interest-free loan account is seen as a donation in terms
of section 7 of the Act. (1)
It is not a donation for donations tax purposes as there was no gratuitous disposal of property (the loan
account was put into place).
As this is a discretionary inter vivos trust, any income retained in the trust as consequence of the
donation (interest-free loan) will be subject to the condition that the trustees have a discretionary right to
distribute income. (1)
 36 TAX4862/109

QUESTION 3: SUGGESTED SOLUTION (continued)

Section 7(5) of the Act will thus apply and 25% of any retained rental income will be part of your income.(1)
According to the Woulidge court case, the income taxed in your hands in terms of section 7 will be
limited to the market-related interest (7%) that you would have earned, if you did not make a donation,
settlement or other disposition (interest-free loan account). (1)
Income will keep its nature (Armstrong) and thus the income received by you, in terms of section 7(5) will
be rental income. (1)
Kind regards 21
XXXAuditor MAX 18

OVERALL Outlay and presentation: 2

 Comment:
In general students did not do well in this part. The transfer of R1.5 million to the trust was
seen as a ‘donation’ in terms of section 55 instead of applying section 7. The Woulidge
principle was also not understood at all, please revise this area again.

UNISA
AS
TAX4862_2012_TL_109_0_E.docx