SAMPLE COMPETENCY EXAMINATION: 1 TAX TECHNICIAN (SA)

Transcription

1 SAMPLE COMPETENCY EXAMINATION: 1 TAX TECHNICIAN (SA) Outcomes to be tested in the 2013 competency assessment: The following topics will be covered: Framework of the income tax system (including the capital gains tax framework) Gross income, residence-based taxation, specific inclusions in income and specific exemptions from income General deductions, specific deductions and capital allowances Capital gains tax Trading stock and share dealers Income tax liability of individuals, including allowances and fringe benefits Employees tax and provisional tax Donations tax Estate duty Retirement benefits Taxation of trusts Value added tax and transfer duty Recommended reading material: Silke: South African Income Tax This sample competency assessment is based on the Certificate in Taxation at the University of Pretoria. Page 1 of 12

2 QUESTION 1 (30 marks, 90 minutes) Amabokoboko(Pty) Ltd ( Amabokoboko ) is a resident company with a February year end. The company is a manufacturer of sport equipment and the Commissioner has indicated that this process is regarded as a process of manufacture for Income Tax purposes. Amabokoboko is a registered VAT vendor. It should be noted that all amounts reflected in the draft statement of comprehensive income below and in the notes that follow, exclude VATunless indicated otherwise and Amabokoboko is in possession of all tax invoices where relevant. You may assume that all transactions were conducted with registered VAT vendors, unless indicated otherwise. The detailed draft statement of comprehensive income of Amabokoboko for the financial year ended 28 February 2011 is set out below: Notes R R Sales Less: Cost of sales ( ) Opening inventory ( ) Purchases ( ) ( ) Less: Closing inventory Gross profit Add: Sundry income Dividend income (local accrued on 30 May 2010) Insurance settlement received Profit on sale of Machine A 3b Less: Expenditure ( ) Bad debts 2 ( ) Depreciation 3 ( ) Insurance premiums 4 (81 000) Interest on bank overdraft for operational expenses ( ) Rentals 5 ( ) Restraint of trade 6 ( ) Salaries, wages and benefits ( ) Other tax-deductible admin and marketing expenses ( ) Net profit before tax Additional notes: 1. A road freight contractor had collected an order of sport equipment (trading stock) from Amabokoboko s premises for delivery to a customer. On its way to its destination, the road freight contractor s delivery van, along with the trading stock, was stolen. On 15 February 2011, Amabokobokoreceived an insurance settlement from its insurer of R for the stolen trading stock. The amount of the insurance settlement, Page 2 of 12

3 including VAT, was recorded in the accounting records. The sale was never recorded as the stock did not reach the customer. Closing stock was already adjusted with the loss. 2. Bad debts written-off of R consist of R for trade debtors and a loan of R to a supplier that has been liquidated. The loan (an interest-free loan) came about during the previous financial year of Amabokoboko when it lent the money to a supplier (not a connected party) who was experiencing liquidity problems. The supplier was liquidated on 1 December 2010 and Amabokoboko has been unable to recover any portion of the loan. 3. Depreciation is made up as follows: (Note) Motor car (a) R Machine A (b) R Machine B (b) R Other machinery and depreciable assets (c) R R a. On 1 June 2010, a motor car (as defined for VAT purposes), used by Amabokoboko sales staff for visits to customers, was purchased for R (including VAT)and immediately brought into use. SARS provides for a five-year write-off period for motor vehicles in terms of section 11(e). b. On 1 March 2009, Amabokoboko purchased a new machine (Machine A) for cash in an arm s length transaction for R Machine A was immediately brought into use in its process of manufacture. On 31 August 2010, Machine A (with a carrying amount of R ) was traded in for a more advanced machine (Machine B). A trade-in price of R was obtained for Machine A.Machine B was purchased as a new machine for cash in an arm s length transaction for R and was immediately brought into use in the process of manufacture. Amabokoboko will elect any option that is available to it to defer any of its tax liabilities. c. All other machinery and depreciable assets had a nil tax value on 1 March Insurance premiums of R relating to the 2011 year of assessment were paid by Amabokoboko. In addition, on the advice of its insurance broker, Amabokoboko paid insurance premiums of R covering the period 1 March 2011 to 28 February No portion of the advance insurance premium amount was expensed to its statement of comprehensive income for the 2011 year of assessment. 5. The rentals paid are paid monthly for the use of an office building that is leased by Amabokoboko for trade purposes. 6. The restraint of trade payment of R , which iseffective for two years commencing on 1 October 2010, was paid to a sport equipment engineer who had been employed by Amabokoboko. He left the company s employment on 30 September REQUIRED: Calculate (supported with brief reasons OR references to legislation) the taxable income of Amabokoboko (Pty) Ltd for its year of assessment ended 28 February Start your answer with net profit before tax of R Also address nil effects. (30) Page 3 of 12

4 QUESTION 2 (38marks,114minutes) This question consists of two related parts. Ignore VAT for purposes of this question. PART 1 (20 marks, 60 minutes) Kitty Scuffles, aged 55, was ordinarily resident in South Africa until she and her husband (married out of community of property)immigrated to Australia on 31 August The day before her immigration she sold the following assets: Description Note Cost Proceeds Farm 1 3,000,000 6,300,000 Holiday home 2 500,000 1,500,000 Aircraft (300 kg) 3 800, ,000 Block of flats (including improvements) 4 2,160,000 6,300, On 1 October 2001, Kitty acquired a farm (100 hectares of which 2 hectares were used by Kitty for domestic purposes). The land and the farmhouse were acquired for R3 million.the purchase price can be allocated as follows: Land (100 hectares) R Farmhouse R The proceeds on date of sale can be allocated as follows: Land (100 hectares) R Farmhouse R Kitty practiced as a beauty consultant over weekends. She used 20% of the farmhouse as a consultation room, but never claimed any expenses relating to the house for normal tax purposes. Kitty lived in this house with her husband until their immigration. 2. Kitty acquired a holiday home in Langebaan (South Africa) on 1 March 2000 for R A valuator valued this house for capital gains tax purposes on valuation date at R She elected this value as valuation date value for this house. 3. Kitty acquired an aircraft on 1 March 2002 that she used only when on holiday. She sold this aircraft at the market value of R to a third party. 4. Kitty held a block of flats (with only four flats) as an investment. She purchased this rent-producing property for R on 31 August 2000 and by the end of August 2002, improvements to the block of flats were completed at a total cost of R and the flats were rented out immediately until the date of her immigration. The market value of the block of flats on valuation date was R She did not select a valuation method for this investment, but indicated that the most favourable option must be selected. As from 1 January 2010 until Kitty s immigration, the monthly rental received per flat remained constant at R Kitty made a capital loss of R in the 2010 year of assessment when she sold a property to her best friend. This was her only disposal during the 2010 year of assessment. Page 4 of 12

5 REQUIRED: Based on the information provided in part 1 only, calculate Kitty Scuffles South African taxable capital gain or assessed capital loss for the year of assessment ended 28 February Show detailed calculations and supporting reasons for each inclusion, exclusion or limitation. Ignore VAT. (20) PART 2 (18marks,54minutes) You can assume that Kitty did not earn any income of a South African source after her immigration. The following additional information is relevant up until the date of Kitty s immigration: Employment Kitty was a full-time employee of Braby Ltd ( Braby ) until her immigration. Relevant information is as follows: R Basic salary (R x 6 months) Medical scheme contributions (R1 600 x 6 months) Kitty was the main member of the medical scheme, with her husband registered as her only dependant. Up until 31 August 2010 Braby paid 70% of her total monthly contributions of R All Kitty s medical costs were covered by the medical scheme. Contributions to Braby Pension Fund (until 31 August 2010) Kitty has always contributed 8% of her basic salary to this fund. Total contributionsnot claimed for income tax purposes up until 28 February 2010 amounted to R Lump sum received from Braby Pension Fund - paid to Kitty s on 31 August Kitty has never received a lump sum from any fund during her lifetime. Part-time beauty consulting service Up until Kitty s immigration, Kitty carried on a part time business as a beauty consultant. You obtained the statement of comprehensive income for this business for the period 1 March 2010 to 31 August 2010 from Kitty: R Net fee income Interest earned on fixed deposit investment Less: Cash donation to a PBO (section 18A receipt was obtained) (6 000) Net income for the period REQUIRED: Taking the relevant information of Part 1 into account and assuming that a taxable capital gain of R arose during Kitty s 2011 year of assessment from the disposals mentioned in Part 1, calculate Kitty ssouth African normal tax liability for the 2011 year of assessment. Clearly show nil effects. (18) Page 5 of 12

6 QUESTION 3 (12marks, 36minutes) Lilly Green, aged 53, is ordinarily resident in South Africa. She created the Pond Trust on 1 August 2009 by way of donating a complex of townhouses with a market value of R to the Pond Trust. The complex of townhouses is rented out and the rental income that is not distributed is reinvested by the trustees in local shares and in money market funds. You may assume that the causal link between the reinvestment of the rental income attributable to the original donation of the complex of townhouses and the income of these investments (dividends and interest) has been broken. (In other words, there is no link between the original donation of the complex of townhouses and the dividends and interest earned by the trust.)the Trust is a resident trust. The trust deed provides for three trustees, namely Lilly, her husband Max Green (married out of community of property) and their accountant. The following relevant items are contained in the trust deed: 1. The beneficiaries of the Trust are: Rose Green (28 years old) Lilly s oldest daughter, living permanently in Switzerland. Palm Green (25 years old) Lilly s second daughter (a South African resident), married to Frik on 30 April Bush Green (4 years old) Lilly s son (a South African resident). 2. The complex of townhouses must be rented out by the trustees to earn rental income. 3. Rose is entitled to receive an annuity of R5 000 per month paid pro rata out of the various net receipts and accruals of the Trust. 4. Lilly retained the right to name another beneficiary in Palm s place at any time she wants, because she dislikes Frik and does not want him to obtain a share of the family assets. 5. Trustees may pay out any additional amounts during the year according to their discretion, pro rata out of the various net receipts and accruals of the Trust, to the beneficiaries. 6. The amounts not distributed must be reinvested by the trustees in local shares and in money market funds. Detail of the Pond Trust s income and distributions for the 2011 year of assessment: Money market funds Local shares Complex of Townhouses Asset Nature of receipt / accrual Total Interest Dividends Rentals 100% 7% 8% 85% Receipts and accruals 630,000 40,000 50, ,000 Trustee remuneration (25,000) (25,000) Net receipts and accruals 605,000 40,000 50, ,000 Annuities Rose (60,000) (4,200) (4,800) (51,000) Distributions Rose (90,000) (6,300) (7,200) (76,500) Distributions Palm (150,000) (10,500) (12,000) (127,500) Distributions Bush (150,000) (10,500) (12,000) (127,500) Retained in trust 155,000 8,500 14, ,500 Page 6 of 12

7 Rose, Palm and Bush received no other income other than their distributions from the Trust during the 2011 year of assessment. Excluding all amounts that are deemed to accrue to Lilly from the Trust, she received a salary of R for the 2011 year of assessment. REQUIRED: a) Calculate the normal tax payable by the Pond Trust for the 2011 year of assessment.show all inclusions and exemptions separately and support your answer with reasons or references to the relevant sections of the Income Tax Act. Clearly indicate where an exemption is not applicable. b) Calculate the taxable income for the 2011 year of assessment of: i. Rose and ii. Lilly Show all inclusions and exemptions separately and support your answer with reasons or references to the relevant sections of the Income Tax Act. Clearly indicate where an exemption is not applicable. (12) Page 7 of 12

8 QUESTION 4 (12 marks, 36minutes) Green Innovation (Pty) Ltd ( Green Innovation ) is a company that was established in South Africa by the agricultural-, chemical- and engineering students of a South African university.green Innovation manufactures bio-diesel, which is considered fuel levy goods for purposes of the VAT Actby means of a combination of mealie rice (qualifies as a zero rated supply) and the remanufacturing of used ethanol.the mealie rice is purchased from local farmers, who are all VAT-vendors, and the used ethanol (accept that it does not qualify as fuel levy goods for purposes of the VAT Act) is purchased from the Chemistry department of the university, which is not a VAT-vendor. Green Innovation is a Category B VAT-vendor.For purposes of this question, all amounts include VAT (where applicable).you can assume that Green Innovation (where applicable) is in possession of valid tax invoices for goods and services received and rendered.all transactions were incurred with registered VAT vendors, unless specifically mentioned otherwise. Income and expenses for the tax period ending 31 August 2011: Description Notes Amount Income: Sale of bio-diesel to local clients R Sale of machine A to an Australian(assume correctly converted to rand) 1 R Expenses: Purchase of mealie rice R Purchases of used ethanol from the Chemistry department at market value R9 120 Purchase of barrels (to store bio-diesel in) R Salaries R Purchase of machine B 2 R Purchase of delivery vehicle 3? Notes: 1. An Australian, who is also involved in the manufacturing of bio-diesel in Australia, purchased one of Green Innovation s machines, namely machine A on 25 July Machine A was originally purchased as a second-hand machine from a South African non-vendor for R and Green Innovation claimed a deemed input tax of R5 600 thereon. Green Innovation had machine A shipped to the Australian and delivered in Australia. 2. Machine B was imported on 30 July 2011 from a Namibian supplier (not a VAT-vendor). It has a cost price and a customs duty value of R ($ in Namibian dollars) and was purchased interest-free on credit. No import tax had to be paid. According to the purchase agreement, Green Innovationpaid the Namibian supplier by 31 October On 12 August 2011, Green Innovation purchased a delivery vehicle from a local VAT-vendor. The date of delivery was 15 August The vehicle is financed by a local bank in terms of an instalment credit agreement of the VAT Act and ownership of the vehicle will only be transferred to Green Innovation after the final instalment has been paid. The sales agreement requires that Green Innovation makes a monthly payment of R5 000 (including capital and financing costs) for the next three years. Total financing costs will amount to R The first payment was made on31 August REQUIRED: Calculate(with brief reasons) the VAT owed to or by SARS with regard to Green Innovation (Pty) Ltd s taxperiod ending on 31 August 2011.Clearly indicate (with reasons) where there are no VAT consequences. Indicate output and input tax separately. (12) Page 8 of 12

9 QUESTION 5 (8marks, 24minutes) You are the tax advisor of Lucky Luke (Pty) Ltd ( Lucky Luke ), a company that manufactures and sells toys.lucky Luke is a Category A registered VAT-vendor and is situated in Durban. The company s accountant approached you to help with the following VAT journals for the period stretching from 1 June 2011 to 31 July 2011: Journal entry 1: (5 marks) Fixed property (R R5 100) Dr Bank (R R5 100) Cr Creditors Cr Recording of the purchase of a shop on 4 June 2011 for R from a non-vendor living in Durban.Registration of transfer took place on 28 June 2011.On 28 June 2011, Lucky Luke has only paid a deposit of R and the transfer duty of R Journal entry 2: (3 marks) Diverse expenses Dr VAT input account Dr 510 Bank Cr Recording of cash expenses incurred with regard to a cocktail function held for existing clients free of charge on 30 June 2011 in the new shop. REQUIRED: Provide the correcting journal entries where needed.support your answer with the necessary reasons and calculations.journal descriptions are not required. (8) Page 9 of 12

10 APPENDIXES Appendix A:Rates of Tax: 2011 Natural persons Taxable income Rates of tax R0 R % of each R1 R R R % of the amount above...r R R R % of the amount above...r R R R % of the amount above...r R R R % of the amount above...r R R % of the amount above...r Retirement fund lump sum benefit Taxable income from lump sum Not exceed R Exceed R but does not exceed R Exceed R but does not exceed R Exceed R Rates of tax 0% of taxable income R0 plus 18% of taxable income that exceed R R plus 27% of taxable income that exceed R R plus 36% of taxable income that exceed R Retirement fund lump sum withdrawal benefit Taxable income from withdrawal Not exceed R Exceed R but does not exceed R Exceed R but does not exceed R Exceed R Rates of tax 0% of taxable income R0 plus 18% of taxable income that exceed R R plus 27% of taxable income that exceed R R plus 36% of taxable income that exceed R Page 10 of 12

11 Annexure B: Par 26, 8 th Schedule Proceeds > Total par 20 expenditure (or expenses cannot be determined) Market value IF MV is adopted &: 20% of (proceeds less costs 1/10/01) Time Apportionment Proceeds MV Valuation date value = Proceeds less par 20 expenses after 1 Oct 01 Effect: limit loss to Rnil Par 27, 8 th Schedule Proceeds Total par 20 expenditure Determined the Market value on 1/10/01 Did not determine the Market value on 1/10/01 Par 20 expenses before 1 Oct 01 Time apportionment method >= Proceeds > AND Market value YES NO HIGHER OF LOWER Proceeds less par 20 expenses after 1 Oct 01 Market Time apportionment method Market value Page 11 of 12

12 Annexure C: Par 30, 8 th Schedule: Time apportionment base cost P = R x B (A + B) Y = B + [(P- B) x N] T + N P 1 = R 1 x B 1 (A 1 +B 1 ) Y = B + [(P 1 - B 1 ) x N] T + N Page 12 of 12