Answers

Fundamentals Level Skills Module, Paper F6 (ZAF) Taxation (South Africa)

December 2008 Answers and Marking Scheme Marks

Oman (Pty) Limited (a) Taxable income and tax payable year ended 29 February 2008 Net profit before tax 1. Deduct: dividends received exempt 2. 3. Debt written back correctly accounted for s.8(4)m Bad debts: Trade debt correctly accounted for Loan debt add back as never included in income New machine 95,000 x 100% Leased machine Add back depreciation Lease payments Less VAT 21,000 x 1/36 Retail shop purchased Insurance premiums Less than R50,000 paid in advance Lease payments no adjustment Add back buildings expense Lease improvements Additional improvements Motor cycle Add back book value Depreciation Deduct insurance proceeds in income Wear and tear Recoupment Wear and tear R950,000 x 5% R R 1,032,150 (8,000) 1,024,150 10,000 (95,000) 5,000 4,583 (583) 4,000 x 2

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4. 5.

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6. 7. 8.

(8,000) (47,500) (32,000) (6,200) (7,179)

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140,000/ 195

(155,000 140,000) = 15,000 x 5%

15,000 (750) 41,300 6,700 (40,000) (6,667) 80,000 (40,000) (24,000) (6,667) 9,333 40,000 30,667

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9.

R80,000 x 20% x 5/12 Cost 2006 50% 2007 30% 2008 20% x 5/12

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Tax value Insurance proceeds S.8(4)(a) recoupment No capital gain as sold for less than cost New motorcycle Taxable income Tax payable 43,000 (300,000 43,000) x 10% (823,521 300,000) x 29%

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102,000 x 50%

(51,000) 823,521 Nil 25,700 151,821

177,521

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(b)

STC payable on dividend declared Accounting net profit Taxation as calculated above

Dividend declared (half) Less dividends received

STC payable at 10%

R 1,032,150 (177,521) 854,629 427,314 (8,000) 419,314 41,931

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Marks (c) The STC is payable by not later than the last day of the month following the month in which the dividend cycle ends. In this instance by 31 March 2008. The lessor must include the value of the improvements required in terms of the lease agreement i.e. R140,000 in his gross income. Strictly, the whole of this amount is taxable in the year of assessment in which the right accrued or is received i.e. in this case the year ended 28 February 2006; however, the Commissioner may grant relief on account of the fact that the improvements do not benefit the lessor immediately (s.11(h)). 2

(d)

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Mary Brown (a) Taxable income year ended 29 February 2008 Cash salary Provident fund contribution - no deduction or taxable benefit Use of motor car 260,000 x 100/114 2.5% 022% 228,070 x 228% x 12 Long service award Painting 6,840 x 100/114 Less: limit Cheque Low interest loan R80,000 x (10% 6%) x 6/12 to 1 September 2007 R80,000 x (11% 6%) x 3/12 R50,000 x (11% 6%) x 3/12 Bonus services rendered Trading stock At market value at 1 January 2008 Less: paid by Mary Medical fund Fringe benefit Less: allowed R R 350,000

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228,070 228% 62,400 6,000 (5,000) 2 1 1

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1,000 10,000 1,600 1,000 625 40,000

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2,000 (500) 1,250 (1,060) 190 x 12

1,500

(530 + 530)

2,280 470,405

Retirement annuity Limited to the greater of

R3,500 0 R1,750 R15% x (470,405 350,000) = R18,060 (12,000) 458,405 21,000 (18,000) 3,000 461,405 fringe benefit additional expenses own contributions 1,250 x 12 71/2% x 461,405 2,280 30,000 15,000 47,280 (34,605)

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Therefore, full amount paid allowed Taxable income from employment Interest Less: exemption Dividends exempt Medical expenditure Expenses

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Less: Taxable income

(12,675) 448,730

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Marks (b) Employees tax paid Taxable income Add back: Retirement annuity Tax payable Less: rebate R 458,405 12,000 470,405 139,287 (7,740) 131,547
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(c)

Marys overpaid tax Taxable income Tax payable Less: rebate Normal tax payable Less: employees tax deducted at source Tax overpaid

R 130,642 (7,740) 122,902 (131,547) (8,645)

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(d)

Mary could request Twosun Limited to take her retirement annuity fund contributions into account on a monthly basis.

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Len Reed (a) Capital gains year ended 29 February 2008 1. Primary residence Base cost Time apportioned base cost 950,000 + [3,500,000 950,000 x 20% of proceeds R3,500,000 x 20% Market value on 1 October 2001 Proceeds Less: base cost Use TABC as the highest base cost Less: primary residence exclusion limited to Capital gain 2. Yacht Not a personal use asset as it is greater than 10 metres Proceeds Less: base cost Capital loss Loss to be disregarded in terms of paragraph 15 of the Eighth Schedule 3. Furniture Personal use asset Therefore the loss of R40,000 (200,000 160,000) is disregarded Donations of gold coins excluded from the definition of currency Deemed proceeds (market value) Less: base cost Capital gain 5. Gain taxable on shares on emigration Deemed proceeds (market value) Less: base cost Capital gain 120,000 (80,000) 40,000 1,200,000 (900,000) 300,000 R
20/ 20 + 7]

2,838,889 700,000 2,100,000 3,500,000 (2,838,889) 661,111 (661,111) Nil

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1 300,000 (350,000) (50,000)

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4.

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Marks 6. Holiday house: consequences of emigration No deemed disposal on emigration as it is immovable property situated in South Africa. 2 17 R 340,000 340,000 (15,000) 325,000 (92,000) 233,000 58,250
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(b)

Taxable capital gains Capital gains Capital loss disregarded Aggregate capital gains Less: annual exclusion Less: loss brought forward Taxable capital gains

(40,000 + 300,000)

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R233,000 x 25%

(1) Fines are not deductible prohibited in terms of the Income Tax Act s.23(o). (2) Repairs are deductible in terms of s.11(d). But they are only deductible if they are repairs of something previously in disrepair. Therefore the R40,000 will be deductible as the pipes and wiring were damaged. The R12,000 for the new fire screen will not be deductible as repairs, as it is an improvement. A s.11(e) allowance on the screen will not be permitted as it is not a movable asset. (3) The tax value of R1,500 will be allowed as a deduction in terms of s.11(o). (4) The patent acquired is of a capital nature but is allowed to be written off at 5% per year, i.e. R6,000. The registration costs can be written off in full. (5) The legal expenses will be deductible if the compensation payment is deductible. The deductibility of the compensation depends on whether the risk of such a mishap (falling rocks) was so closely related to the income earning activities of Entebe as to be incurred in the production of income. [PE Tramways case]. It seems this is the case and therefore both amounts would be deductible. (6) In terms of s.11(cA), the restraint payment can be written off over the lesser of the period of the restraint, i.e. R50,000 (R100,000/2) or over the period of three years. The amount to be written off each year is therefore R33,333 (R100,000/3). The remuneration amount of R50,000 will be deductible as it is incurred in the production of income as it is customary for Entebe to make such payments [Providers case].

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Ebony Limited (a) VAT inputs and outputs R 1. 2. 3. Land R500,000 x VAT input limited to transfer duty paid
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61,404 40,000 135,088 135,088/ 2 67,544

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Building purchased R1,100,000 x 14/114 VAT input limited to the extent of the purchase price paid Delivery truck Deemed VAT input limited to the lesser of consideration and market value R80,000 x 14/114 Sale of machine to a connected person VAT output cannot be on less than the market value R10,000 x 14/114

9,825

4.

1,228

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Marks 5. Sale of goods by branch Output VAT R200,000 x 0% R40,000 x 14/114

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Nil 4,912 32,912 173

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6.

Use of truck by employee VAT input on truck purchase R268,000 x VAT output on fringe benefit R268,000 x

x 06% x

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(b)

The 0% VAT rate would have applied to the R140,000 consideration when the goods were transferred in October 2007. Therefore, there would be no VAT consequences for Ebony Limited in December 2007 when the branch sold the goods.

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