Accounting Qualification Question paper Technician/Level 4 Diploma (QCF) Preparing business taxation computations South Africa (BTC-SA) Tuesday 30 November 2010 (morning) Time allowed - 3 hours plus 15 minutes reading time Please complete the following information in BLOCK CAPITALS: Student member number Desk number Venue code Date Venue name Important: This exam paper is in two sections. You should try to complete every task in both sections. We recommend that you use the 15 minutes reading time to study the exam paper fully and carefully so that you understand what to do for each task. However, you may begin to write your answers within the reading time, if you wish. You must use permanent ink, preferably black, to write your answers. Correcting fluid may not be used. You must not, during the exam, communicate with any other candidate or be in possession of unauthorised materials, such as pre-prepared notes, books, programmable calculators and dictionaries. Any of these actions will constitute malpractice and will result in disciplinary action. If you are in possession of unauthorised materials you must give them to the Supervisor before the start of the exam. Do NOT open this paper until instructed to do so by the Supervisor.
This exam paper is in TWO sections. You must show competence in BOTH sections. So, try to complete EVERY task in BOTH sections. Section 1 contains 4 tasks and Section 2 contains 7 tasks. You should spend about 90 minutes on each section. There is blank space for your workings on pages 12 and 21-23, but you should include all workings and essential calculations in your answers. 2
Note: This page is perforated. You may remove it for easy reference. Taxation tables for business tax 2009/10 Capital allowances: Section 12C New or unused plant and machinery Used plant and machinery 40:20:20:20 (over 4 years) 20% per annum Section 13(1) - Manufacturing buildings 5% Section 13quin - New or unused commercial buildings 5% Section 12E Plant and machinery 100% All other assets 50:30:20 (over 3 years) or s11(e) at taxpayer s election Section 11(e) Wear & Tear Section 11(gC) Patents Designs As the Commissioner allows 5% per annum 10% per annum Capital gains tax: 2010 2009 Natural person annual exclusion R17,500 R16,000 Inclusion rates: Individual 25% 25% Non-natural person 50% 50% Corporation tax: Financial year 2010 2009 Standard companies 28% 28% Small companies rate (2010): R0 R54,200 0% R54,201 R300,000 10% above R54,200 R300,001 + R24,580 + 28% above R300,000 Small companies rate (2009): R0 R46,000 0% R46,001 R300,000 10% above R46,000 R300,001 + R25,400 + 28% above R300,000 Secondary tax on companies: 10% on any dividend declared on or after 1 October 2007 3
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Note: This page is perforated. You may remove it for easy reference. Section 1 Data You work in the tax department of a firm of chartered accountants. You have been asked by your supervisor to prepare certain tax computations and complete selected pages of the tax return for a client, Rahl Enterprises Ltd, a manufacturing business. Rahl Enterprises Ltd is not a small business corporation as defined by the Income Tax Act. The financial records for the year ended 31 March 2010 show: 1. Profit and loss account: R R Turnover 13,546,892 Cost of sales (Note 2) (5,329,647) Gross profit 8,217,245 Other income: Profit on sale of manufacturing asset (Note 3) 1,567,923 Investment income (Note 4) 67,000 1,634,923 Other expenses: Depreciation (Note 5) 1,297,562 Trademarks and patents (Note 6) 596,847 Interest expense (Note 7) 323,467 Rental expenses (Note 8) 892,500 Salaries, wages and contributions (Note 9) 1,946,250 (5,056,626) Profit before tax 4,795,542 Dividend declared 1,000,000 2. Cost of Sales comprises: R Opening stock (at original cost) 3,876,128 Add purchases 8,429,761 Less closing stock (at cost) (6,976,242) Cost of sales 5,329,647 3. The profit on the manufacturing asset sold was determined as follows: R Sales proceeds (May 2009) 5,000,000 Less accounting carrying value: Original cost (new) (July 2007) 7,000,000 Accumulated Depreciation (3,567,923) (3,432,077) Profit on sale of asset 1,567,923 Rahl Enterprises has not elected to spread the recoupment over the tax life of the replacement asset (see the acquisition of new plant and machinery on 1 June 2009 in note 5) per section 8(4)(e) of the Income Tax Act. The above disposal did not generate a capital gain or a capital loss (meaning the capital gain was R0). 4. Investment income: Dividends from domestic companies 44,000 Interest on bank accounts 23,000 67,000 Note: Data continues on page 6. 5
5. The capital assets (excluding the asset sold) are: R 1 April 2005 - plant and machinery (second-hand) 2,500,000 1 July 2009 - delivery vans 1,240,000 1 June 2009 - new plant and machinery 6,800,000 The Commissioner will allow 25% on all qualifying assets for the purpose of section 11(e). 6. Trademarks and patents: R Trademark acquired 397,283 Registration fee for trademark 3,592 Design acquired 195,972 Total 596,847 7. Interest expense: R Owner Ltd 200,000 Financial Institutions 123,467 Total interest expense 323,467 Rahl Enterprises Ltd borrowed some money from its holding company, Owner Ltd. The money was borrowed to finance working capital. 8. Rahl Enterprises Ltd rents its premises from Owner Ltd at a market related rental charge. 9. Salaries, wages and contributions comprise: R Standard salaries and wages 1,456,278 Payment to a director for loss of office 50,000 Contributions to employee Pension and Medical Aid funds 439,972 Total 1,946,250 6
Task 1.1 (20 minutes) Calculate and total the capital allowances in respect of each of the six items from Notes 5 and 6 for the year ended 31 March 2010, indicating whether or not an allowance may be deducted. 7
Task 1.2 (15 minutes) Calculate the capital allowance for the period for the manufacturing asset disposed of and the recoupment resulting from the sale (in Note 3). 8
Task 1.3 (30 minutes) Prepare a schedule that computes taxable income for the year ended 31 March 2010. Your schedule must start with the net profit before tax of R4,795,542 and must deal with each of the other expenses and other incomes referred to (in note 1) indicating whether adjustment is required or not. 9
Task 1.4 (25 minutes) As far as possible, complete the tax return extract for Rahl Enterprises Ltd on page 11. 10
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Note: This page is perforated. You may remove it for easy reference. Section 2 Data One of your clients, Ntombi (aged 45), operates as a sole trader. She runs two small trades, namely a rental trade and a retail trade. The rental trade involves the rental of two residential properties to independent third parties and the retail trade involves Ntombi s corner trading store (selling everything from food to basic tools). The following information is available for her year ended 28 February 2010. 1. The corner shop is very successful and runs at a profit. R R Sales 900,000 Cost of sales 600,000 Other deductible expenses 90,000 Repairs and maintenance (see note 2) 25,000 Personal (home) telephone account (see note 3) 4,800 Car running costs (see note 3) 12,800 732,600 Profit from retail trade 167,400 2. The repairs and maintenance are for shelving and the refrigeration units. The shelving became damaged after the refrigeration units stopped working during a power failure and water leaked onto the shelving. In anticipation of future power failures, the shelving was replaced with stainless steel shelving which was permanently fixed to the wall. The shelving cost R20,000 and repairs to the refrigeration units cost R5,000. The shelving could have been replaced with the same material for R6,000. 3. Ntombi uses her home telephone line 30% for business purposes. She also uses her car 10% of the time to buy supplies for the store. The full cost of these items is reflected in the information referred to above. 4. The rental trade is running at a loss and has done so for the last two years of assessment. R R Rentals received or accrued 40,000 Building maintenance - deductible 12,000 Levies paid - deductible 4,600 Garden maintenance - deductible 1,800 Special levies - deductible 20,000 Commission to rental agent - deductible 6,000 44,400 Rental loss 4,400 Ntombi is planning a new business venture. The venture is the stitching and stuffing of teddy bears for sale in her retail shop and for sale to other stores. The Commissioner has accepted this venture as a process of manufacture. While she has not yet incurred any expenditure, her investigations have generated the following information: R R Potential sales (per year) 1,020,000 Deductible expenditure 200,000 Cost of new manufacturing machinery 750,000 Miscellaneous loose tools 6,500 Other non-manufacturing machinery 300,000 The Commissioner allows all section 11(e) qualifying machinery to be deducted over 5 years. 13
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Task 2.1 (10 minutes) Explain whether or not the costs in note 2 for repairs and maintenance are deductible. Task 2.2 (5 minutes) Provide TWO reasons why the full expenses for the telephone and car running costs are not permitted as deductions. 15
Task 2.3 (15 minutes) Calculate Ntombi s taxable income from the retail trade for the year ended 28 February 2010, listing each item from the data. 16
Task 2.4 (30 minutes) Calculate Ntombi s theoretical taxable income from the new venture in the first year of trade should she choose to trade as: (a) a sole trader (b) a close corporation subject to small business tax rates. 17
Task 2.5 (5 minutes) If Ntombi s new venture (as a close corporation) declared a distribution to Ntombi (as the sole member) of R100,000, calculate the STC payable. Task 2.6 (5 minutes) If Ntombi s new venture were placed in a close corporation with a first financial year ending on 30 June 2011: (a) (b) on which dates would the two compulsory provisional tax payments be due? by what date would a third top up payment (if required) be due? 18
Data You have received the following email from Ntombi. From: Ntombi@cornershop.co.za To: AATtax@gmail.co.za Sent: 26 November 2010 Subject: Important I heard from a friend that a loss making trade may be ring-fenced. As my rental trade has been making losses for some time now, should I be concerned? Can my losses be ring-fenced? What mechanisms exist to avoid the ring-fencing of these losses? Would it make a difference if I formed a company and sold my shop and rental trade to the company? I would appreciate your speedy response. Ntombi Task 2.7 (20 minutes) Reply to Ntombi s email, answering her questions above. From: AATtax@gmail.co.za To: Ntombi@cornershop.co.za Sent: 30 November 2010 Subject: RE: Important 19
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NVQ/SVQ qualification codes Technician 100/2942/4 / G794 24 Unit number (BTC) K/101/8115 QCF qualification codes Level 4 Diploma 50041162 Unit number (BTC) M/103/6454 Association of Accounting Technicians (AAT) 12.10 140 Aldersgate Street, London EC1A 4HY, UK t: 0845 863 0800 (UK) +44 (0)20 7397 3000 (non-uk) e: aat@aat.org.uk w: aat.org.uk