Tutorial letter 201/1/2017

Transcription

1 TAX2601/201/1/2017 Tutorial letter 201/1/2017 Principles of Taxation TAX2601 Semester 1 Department of Taxation QUESTIONS AND SUGGESTED SOLUTIONS ASSIGNMENT 3 Bar code

2 2 Dear Student This tutorial letter contains assignment 3, which are the questions and updated solutions for a previous exam paper. This assignment is not compulsory; however, it will assist you in your preparation for the exam. The solution for Assignment 1 will be provided in tutorial letter 202 and the solution for assignment 2 will be provided in tutorial letter 203. Best wishes for your preparation for the exam. Kind regards TAX2601 Lecturers Telephonic contact with lecturers: The lecturers who are available to assist you are: Prof AP Swanepoel Ms MSI Wentzel Ms C Cass Ms C Stedall Mr A Swanepoel Ms M Barnard Ms E Doussy Ms I Kretzschmar Ms Moosa (this is a hunting line you will need to let it ring so that the exchange can find a free extension) Departmental cell phone number: contact with lecturers: TAX S1@unisa.ac.za (semester 1) TAX S2@unisa.ac.za (semester 2) Course contact tab on myunisa Fax numbers: (Department of Taxation) or

3 3 TAX2601/201 This assignment is based on a simulated examination paper. This is a selfassessment assignment. You will see that the current year of assessment used in all the questions in this tutorial letter, is This means that you are working with a hypothetical (imaginary) current year of In other words, you assume the current year is 2050, and not 2017, for all the questions. This will in no way affect how you approach the questions and calculate your answers. Even though the year of assessment is set as 2050, you can assume that the 2017 legislation applies in 2050; therefore all your calculations will be based on current legislation. These are the instructions that will also appear on your examination paper. ead them now and make sure that you understand what we require from you. We also suggest that you try to do this assignment like a proper examination, under examination conditions, to see how much you know and what you need to spend time on. IMPOTANT INSTUCTIONS: 1. All amounts exclude VAT unless stated otherwise. 2. All persons mentioned are residents of the epublic of South Africa unless stated otherwise. 3. SAS = South African evenue Service The answering of this paper: 1. This paper consists of four (4) questions. 2. Answer all the questions. 3. Start each question on a new (separate) page. 4. Show all workings, where applicable. Where aln amount is subject to a limitation, clearly indicate the application of the limitation. Where any item is exempt from tax or not allowable as a deduction, this must be indicated, and a brief reason provided. All amounts must be rounded to the nearest rand. 5. Please complete the cover page of the answer book in full. 6. You are reminded that answers may NOT be written in pencil. 7. Proposed timetable (try as far as possible not to deviate from this timetable): Question Topic Marks Minutes 1 Tax liability of a company Micro business and small business corporation Capital gains tax Provisional tax, general deduction formula and tax administration TOTAL

4 4 QUESTION 1 (30 marks, 36 minutes) Guitar Hero (Pty) Ltd is not a small business corporation as defined in the Income Tax Act. The company manufactures all kinds of musical instruments, including guitars, pianos and drums and it sells these instruments to one retailer in South Africa, namely Music Moods CC. Guitar Hero (Pty) Ltd s financial year ends on 31 March. The accountant requested you to calculate the company s income tax liability for the year of assessment ended 31 March The following information is provided to you: 1. Sales to Music Moods CC amounted to A donation of was made to Lifeline, a registered public benefit organisation. The relevant section 18A receipt was obtained. 3. The company purchased raw materials amounting to and also paid a transport company to deliver the stock to its premises. 4. Guitar Hero created a new computer program that would simplify the manufacture process. esearch and development expenses incurred in developing the computer program amounted to and were incurred on 1 May Salaries paid to research staff amounted to and were also incurred on the same date. Approval was obtained from the Minister, as well as the Department of Science and Technology for the development of the computer program on 15 April Bad debts written off during the year of assessment amounted to The following table relates to the list of doubtful debts: List of doubtful debts 01/04/ /03/ /04/ /03/ The following information relates to the fixed assets: On 1 August 2048 the company purchased a range of new furniture for for the distribution office. On 1 October 2049, the company relocated to a new distribution office and the furniture was moved on the same date. Moving costs amounted to The old furniture was only sold on 1 August 2049 to a second-hand dealer for This old furniture was originally purchased for on 1 July Guitar Hero (Pty) Ltd purchased two manufacturing machines on 1 July Manufacturing machine A was bought new for and manufacturing machine B was bought secondhand for On 1 May 2049, the company purchased five new apartments in a residential building in Cape Town at a cost of each. The company rented these apartments out at each per month from 1 May 2049, solely for trade purposes. 8. Guitar Hero (Pty) Ltd paid an amount of on 1 January 2050 to the local municipality for water and electricity for the period 1 January 2050 to 31 December 2050.

5 5 TAX2601/201 QUESTION 1 (continued) 9. The following employee expenses were paid: Salaries and wages Contribution to medical aid fund in respect of all employees Leave pay provision On 1 February 2050, there was a robbery at the distribution office and five guitars with a cost price of each were stolen (these items were not deducted yet as part of trading stock or production costs). In an attempt to recover the stolen items, the company paid a bribe of to a security officer to try and find the culprits. The insurance company paid an amount of to Guitar Hero (Pty) Ltd for the theft of the guitars. 11. Additional information Binding general ruling No. 7 allows for the following write-off periods for assets (where applicable): Furniture and fittings 6 years Guitar Hero (Pty) Ltd has elected to use the section 11(o) scrapping allowance, where applicable. EQUIED: MAKS Calculate the tax liability of Guitar Hero (Pty) Ltd for the year of assessment ended on 31 March

6 6 QUESTION 2 (22 marks, 26 minutes) PAT A (7 marks, 8 minutes) Fly Away With Me (Pty) Ltd (FAWM) provides hot air balloon trips over the Drakensberg mountains. FAWM is a registered microbusiness. FAWM has a February year-end. The following is a summary of the transactions that took place during the 2050 year of assessment: Notes Hot air balloon trips 1? oyalties earned Sale of hot air balloon Notes: 1. The fee for a hot air balloon ride is per person per trip. Trips are only done on Saturdays. All customers need to pay an upfront deposit of 50% of the fee for a booking to be confirmed. The balance of the fees levied for the trip is to be paid within two days after the trip. During the 2050 year of assessment, 320 persons went on hot air balloon trips. The persons who enjoyed the trip on 28 February 2050 (the last Saturday of the year of assessment), are not included in this figure. On 28 February 2050, 10 persons went on the hot air balloon trip and none have paid the remaining portion of the fee still due. Another 40 persons have already booked and paid their deposits on 28 February 2050 for the trips to be done in the 2051 year of assessment. 2. FAWM has a registered trademark for the phrase Up, up and away!. A company, UK Farming, approached FAWM to use the phrase for a product. FAWM agreed to this and UK Farming pays FAWM a royalty (investment income) every year. 3. FAWM sold one of its hot air balloons to another company for EQUIED: (a) MAKS Calculate the taxable turnover of Fly Away With Me (Pty) Ltd for the year of assessment ended on 28 February (b) Assume the taxable turnover is for the 2050 year of assessment. Calculate the tax liability of Fly Away With Me (Pty) Ltd on 28 February PAT B (5 marks, 6 minutes) Minora CC is in the process of applying to SAS to be recognised as a small business corporation for income tax purposes. Mr Sharp Blade, the sole member of Minora CC approached you to outline the requirements set by SAS to be regarded as a small business corporation for income tax purposes. EQUIED: List the requirements set in the Income Tax Act in order to qualify as a small business corporation for income tax purposes. MAKS 5

7 7 TAX2601/201 QUESTION 2 (continued) PAT C (10 marks, 12 minutes) Minora CC is a small business corporation as defined in the Income Tax Act. Minora CC manufactures blades and other cutting products for three South African supermarkets. Minora CC s year of assessment ends on 31 March Mr Sharp Blade has provided you with the following information to calculate the tax liability of Minora CC for the year of assessment ended on 31 March 2050: 1. Total sales to South African supermarkets Purchase of raw materials On 1 July 2048, Minora CC purchased a delivery vehicle for and brought it into use on the same date. The delivery vehicle was still in use at 31 March On 2 February 2050 Minora CC purchased a new manufacturing machine at a total cost of to be used directly in its process of manufacture. The new machine was brought into use on 5 February Minora CC sold a computer on 15 January 2050 for to a second-hand trading company. The computer was originally purchased on 25 August 2047 for During the 2045 year of assessment Minora CC erected a new factory building at a total cost of and brought the building into use on 1 July Minora CC experienced a lack of office space and decided to purchase a part of a new commercial building to be used mainly for office space. Minora CC paid for part of this commercial building and brought it into use on 1 September EQUIED: MAKS Calculate the tax liability of Minora CC for the year of assessment ended on 31 March

8 8 QUESTION 3 (25 marks, 30 minutes) Part A (16 marks, 19 minutes) Tube (Pty) Ltd manufactures and sells plastic pipes. Tube (Pty) Ltd is not regarded as a small business corporation as defined in the Income Tax Act and its year of assessment ends on 31 March. Tube (Pty) Ltd sold an office building (on which no allowances were claimed) on 1 January 2050 for The building was acquired for on 1 March 2042 and Tube (Pty) Ltd incurred transfer costs of On 1 February 2050, a manufacturing machine was stolen from the company s factory. The machine was purchased new on 20 November 2048 at a cost of The company was insured for the full replacement cost of the machine and the insurers paid out an amount of on 25 February Capital allowances of were claimed on this machine up to the date of sale. Tube (Pty) Ltd has an assessed capital loss brought forward from the previous year of assessment of EQUIED: MAKS Calculate the taxable capital gain or capital loss for the 2050 year of assessment. 16 Part B (9 marks, 11 minutes) Frames Ltd acquired a factory building at a cost of on 1 December 2000 and brought it into use directly in a process of manufacture on the same date. The building was sold on 1 February 2050 and capital allowances of was claimed until the date of sale. Assume that the adjusted proceeds for capital gains tax purposes are Valuation costs of were paid to a sworn appraiser on 1 March 2002 who determined the market value of the building to be as at 1 October The time apportionment base cost of this asset is Frames Ltd s year of assessment ends on 31 March EQUIED: Calculate only the base cost amount of the building, which will form part of the capital gains tax calculation for Frames Ltd s 2050 year of assessment. MAKS 9

9 9 TAX2601/201 QUESTION 4 (23 marks, 28 minutes) PAT A (8 marks, 10 minutes) Big Slam Pro Shop (Pty) Ltd (Big Slam) sells golfing equipment and golfing clothes at its pro shop and is also responsible for renting golf carts to golfers playing golf at Blue Gum Country Club near Durban in South Africa. Its year of assessment ends on 28 February 2050 and the company is not a small business corporation as defined in the Income Tax Act. The following information is presented to you: Year of assessment Date of ITA34 income tax Taxable income notice of assessment July August November Estimated not yet assessed EQUIED: MAKS (a) Calculate the first provisional tax payment of Big Slam Pro Shop (Pty) Ltd for the 2050 year of assessment. 5 (b) Calculate the second provisional tax payment of Big Slam Pro Shop (Pty) Ltd for the 2050 year of assessment. 3 PAT B (12 marks, 14 minutes) Big Slam hosted a golfing day on 28 December 2049, and all the golf carts were rented out to the participating players. On 3 January 2050, Big Slam received a claim from John Best, a participant in the golf day hosted on 28 December 2049, for injuries sustained as a result of a golf cart accident on 28 December The brakes failed and John Best ended up in the dam. Big Slam and John Best settled the claim out of court on 31 January Big Slam agreed to pay John Best an amount of , which was paid on 10 March EQUIED: MAKS Discuss, with reference to case law, whether Big Slam Pro Shop (Pty) Ltd will be able to claim the payment made to John Best as a deduction in terms of the general deduction formula (section 11(a)) for the 2050 year of assessment. 12 PAT C (3 marks, 4 minutes) Big Slam does not agree with the 2050 tax assessment issued by SAS on 15 May A doubtful debt allowance was disallowed in the assessment process. The tax assessment issued by SAS reflects an amount of due and payable to SAS. Big Slam submitted an objection against the tax assessment, but the objection was disallowed. EQUIED: Discuss the process that Big Slam Pro Shop (Pty) Ltd can follow to lodge an appeal against the disallowed objection. You do not need to mention any court cases. MAKS 3

10 10 ANNEXUE A: EXTACT FOM THE INCOME TAX ACT (ACT 58 OF 1962, AS AMENDED) EIGHTH SCHEDULE 25. Determination of base cost of pre-valuation date assets. - The base cost of a pre-valuation date asset (other than an identical asset in respect of which paragraph 32(3A) has been applied), is the sum of the valuation date value of that asset, as determined in terms of paragraph 26, 27 or 28 and the expenditure allowable in terms of paragraph 20 incurred on or after the valuation date in respect of that asset. 26. Valuation date value where proceeds exceed expenditure or where expenditure in respect of an asset cannot be determined. - (1) Where the proceeds from the disposal of a pre-valuation date asset (other than an asset contemplated in paragraph 28 or in respect of which paragraph 32(3A) has been applied) exceed the expenditure allowable in terms of paragraph 20 incurred before, on and after the valuation date in respect of that asset, the person who disposed of that asset must, subject to subparagraph (3), adopt any of the following as the valuation date value of that asset- (a) the market value of the asset on the valuation date as contemplated in paragraph 29; (b) 20 per cent of the proceeds from disposal of the asset, after deducting from those proceeds an amount equal to the expenditure allowable in terms of paragraph 20 incurred on or after the valuation date; or (c) the time-apportionment base cost of the asset as contemplated in paragraph 30. (2) Where the expenditure incurred before valuation date in respect of a pre-valuation date asset cannot be determined by the person who disposed of that asset or the Commissioner, that person must adopt any of the following as the valuation date value of that asset- (a) the market value of the asset on the valuation date as contemplated in paragraph 29; or (b) 20 per cent of the proceeds from disposal of the asset, after deducting from those proceeds an amount equal to the expenditure allowable in terms of paragraph 20 incurred on or after the valuation date. (3) Where a person has adopted the market value as the valuation date value of an asset, as contemplated in subparagraph (1) (a), and the proceeds from the disposal of that asset do not exceed that market value, that person must substitute as the valuation date value of that asset, those proceeds less the expenditure allowable in terms of paragraph 20 incurred on or after the valuation date in respect of that asset. ANNEXUE B: ADDITIONAL INFOMATION The income tax rates applicable to a small business corporation are as follows: 0% on taxable income not exceeding % on taxable income exceeding , but not exceeding plus 21% on taxable income exceeding , but not exceeding plus 28% on taxable income exceeding

11 The income tax rates applicable to micro businesses: 11 TAX2601/201 Turnover ates of tax Nil 1% of the amount over % of the amount over % of the amount over ANNEXUE C: INCOME TAX MONETAY THESHOLDS SUBJECT TO PEIODIC LEGISLATIVE CHANGE (extract) Description Small-scale intellectual property: Intellectual property with a cost below the amount indicated is immediately deductible Prepaid expenses: Limit of prepaid expenses that will not be deferred until delivery of goods, services or benefits Small business corporations: Corporations qualify for tax incentives if gross income does not exceed the amount referred to eference to Income Tax Act, 1962 Paragraph (aa) of the proviso to section 11(gC) Paragraph (bb) of the proviso to section 23H(1) Section 12E(4)(a)(i) Monetary amount million

12 QUESTION 1 (30 marks, 36 minutes) 12 SUGGESTED SOLUTION Tax liability of Guitar Hero (Pty) Ltd for the year of assessment ended 31 March 2050 Sales Purchases s11(a) ( ) (1) Transport costs s22(3) (8 600) (1) esearch and development s11d esearch and development expenses ( x 150%) ( ) (1) Salaries paid to research staff ( x 150%) ( ) (1) Bad debts written off s11(i) (58 960) (1) Doubtful debts s11(j) Doubtful debts allowance 2049 ( x 25%) (1) Doubtful debts allowance 2050 ( x 25%) (24 250) (1) Furniture and fittings s11(e) Wear and tear 2050 ( / 6) (6 000) (1) Moving costs ( x 6/58) (1 552) (2) Old furniture sold Cost Less: Wear and tear 2049 (25 000/6 x 9/12) (3 125) (1) 2050 (25 000/6 x 4/12) (1 389) (1 389) (1) Tax value (1) Less: Proceeds (18 000) Scrapping allowance s11(o) (2 486) (1) Manufacturing machines s12c Machine A ( x 40%) (88 000) (1) Machine B ( x 20%) (25 000) (1) Apartments s13sex Apartments purchased ( x 5 x 55% x 5%) (89 375) (2) ent received (3 500 x 5 x 11) (1) Water and electricity s23h January to March 2050 ( x 3/12) (27 500) (1) April to December 2050 ( x 9/12 = (82 500) > 6 months, but < thus deductible (2) Employee expenses Salaries and wages s11(a) ( ) (1) Medical aid contributions - s11(l) Nil (1) Leave pay provision s23(e) Nil (1) Theft of guitars only portion not recovered from insurance deductible s23(c) ((5 500 x 5) )) (7 500) (1) Bribe paid to security officer prohibited (s 23(o)) Nil (1) Taxable income before donation Donation ( limited to 10% of ) ( ) (2) Taxable income Tax 28% (1)

13 13 TAX2601/201 QUESTION 2 (22 marks, 26 minutes) Part A (7 marks) (a) Calculation of taxable turnover (5 marks) Fees - all trips completed and paid x (1) Fees - trips completed but not paid last x 10 persons x 50% (1) instalment Fees - persons paid the deposit amount x 40 persons x 50% (1) oyalties Investment income included (1) Sale of hot air balloon x 50% (1) Taxable turnover (b) Calculation of tax liability (2 marks) Taxable turnover Tax liability ( ) x 3% (2) Part B (5 marks) equirements to qualify as a small business corporation: 1. The entity should be a close corporation, co-operative or a private company. (1) 2. All the members should be natural persons (for the entire year of assessment). (1) 3. None of the members may hold any share or interest in the equity of any other company other than permitted shareholdings. (1) 4. Investment income and income from personal service do not make up more than 20% x (revenue receipts and accruals plus capital gains). (1) 5. The gross income may not exceed 20 million for the year of assessment. (1) Part C (10 marks) Calculation of the tax liability of Minora CC for the year of assessment ended on 31 March 2050 Total sales (1) Purchase of materials ( ) (1) Wear & tear on delivery vehicle: x 30% (75 450) (1) New machine: S12E: x 100% ( ) (1) Wear & tear on computer Cost Less: Wear & tear: x 50% (7 250) (1) Less: Wear & tear: x 30% (4 350) Less: Wear & tear: x 20% (2 900) (2 900) (1) Tax value 0 Proceeds on disposal ecoupment (1) Manufacturing building allowance: x 5% ( ) (1) Commercial building allowance: x 55% x 5% (61 345) (2) Taxable income Tax liability (( ) x 28%) (1) Total marks 11, Max 10

14 14 QUESTION 3 (25 marks, 30 minutes) PAT A (16 marks) Office building Base cost: Cost Plus: Transfer costs (1) Base cost Capital gain office building: Proceeds (1) Less: Base cost ( ) (1) Capital gain Manufacturing machine Tax value: Cost (1) Less: All sec 12C Allowances ( ) (1) Tax value on date of sale ( ) ecoupment: Proceeds (1) Less: Tax value ( ) ecoupment (1) Limited to previous allowances, thus (1) Adjusted proceeds: Proceeds Less: ecoupment ( ) Adjusted proceeds (1) Base cost: Cost (1) Less: allowances ( ) (1) Base cost Capital gain - manufacturing machine: Proceeds (adjusted) (1) Less: Base cost ( ) (1) Capital gain Taxable Capital gain: Office building Manufacturing machine Aggregate capital gain (1) Less: Assessed capital loss (76 000) (1) Net capital gain Taxable capital gain: net capital gain x 80% (1)

15 15 TAX2601/201 QUESTION 3 (continued) PAT B (9 marks) Calculate valuation date value (VDV): Total expenditure = ( ) = Nil = (1) Adjusted proceeds (given) = As the adjusted proceeds are more than the total expenditure, paragraph 26 is applied. (1) VDV is greater of : (1) - Market value : TAB : (1) - 20% rule = 20% x (Proceeds less par 20 expenditure on or after 1 October 2001) = 20% x ( ) = (2) (1) Thus, market value is the highest. Determine if proceeds are < or > than MV. In this case, P>MV therefore, VDV = Base cost: Valuation date value (1) Plus: costs incurred after 1 October (1) Base cost QUESTION 4 (23 marks, 28 minutes) Part A (8 marks) (a) First provisional tax payment Taxable income assessed in 2047 (Basic amount) (1) (2049 not yet assessed assessment is less than 14 days old, therefore the 2047 taxable income will be used as the basic amount. The 2047 year of assessment is more than 18 months before the first 2050 provisional payment due date of 31 August 2049 (28 February 2047 to 31 August 2049 > 18 months) and the amount will be increased by 8% for each year of assessment thereafter) Add: 8% adjustment ( x 8% x 3) (2) Taxable income for % on (1) 50% for the first payment (1) (b) Second provisional tax payment Estimated taxable income for (1) Tax on x 28% (1) Less: First provisional tax payment made to SAS ( ) (1) Amount payable to SAS

16 16 QUESTION 4 (continued) Part B (12 marks) DEFINITION DISCUSSION Marks A trade must be carried on Big Slam operates a golfing pro shop. (2) In the production of income Closely connected to the income earning operations, which is the renting out of the golf carts. There was an inherent risk that an accident might occur. (2) Expenditure and losses The amount paid to John Best was paid in cash. (2) Actually incurred During the year of assessment Big Slam agreed on 31 January 2050 to pay an amount of to John Best and therefore has an unconditional liability to pay. (3) Edgars Stores v CI. Although the amount of was paid to John Best on 10 March 2050, it falls in the 2050 year of assessment as it was incurred on 31 January (2) Not of a capital nature The amount paid as compensation to John Best is not creating an enduring benefit and is not of a capital nature. (2) Conclusion All the requirements for the general deduction formula have been met, therefore the amount paid will qualify as a deduction in terms of the general deduction formula for the 2050 year of assessment. (1) Total marks 14 Max 12 Part C (3 marks) Big Slam will have to pay the outstanding amount of to SAS and then proceed to lodge an appeal. Big Slam will have to appeal within 30 days of the notice of disallowing the objection. (1) An AD 2 form or Notice of Appeal (NOA) is used for the notice of appeal. (1) The AD 2 or Notice of Appeal (NOA) must contain the details of the tax in dispute, i.e. the disallowance of the doubtful debt allowance and the grounds of appeal. (1) (1) Max 3 marks Unisa LW/(as) TAX2601_2017_TL_201_1_E.docx