OCCUPATIONAL CERTIFICATE: TAX PROFESSIONAL SAQA ID: 93624 Knowledge Competency Assessment November 2016 Paper 2 QUESTIONS CANDIDATE NUMBER 1
Instructions to Candidates 1. This competency assessment paper consists of four questions. 2. Answer each question in a separate answer book. Question Topic Marks Answer Book 1 Individuals and Share Schemes 40 Green 2 Estate Duty and Deceased Estates 40 White 3 Taxation of Farmers 40 Blue 4 Other taxes and Tax Administration 40 Pink Total marks: 160 Marks Time: 4 hours plus ½ hour reading time The marks specified are an indication of the expected length and detail of your response. 3. Enter your examination number on the cover of each answer book as well as on all answer sheets. 4. Your name must not appear anywhere in the answer books. 5. Answers may not be written in pencil and correction pens (Tipp-ex) may not be used. 6. Answer the questions using effective presentation and pay particular attention to the use of concise language, clarity of explanation and logical argument. Marks will be awarded for these aspects of your response. 7. It is your responsibility to ensure that all answer books are handed in to the invigilator before leaving the examination room, as answer books handed in thereafter will not be marked. 8. Please take note of the tax rates and tables provided in Annexure A to this paper (see pages 16 to 18). 2
QUESTION 1: INDIVIDUALS AND SHARE SCHEMES 40 Marks Sari Maree, 50 years old and married in community of property has been an accounting lecturer at a technical college and is a registered member of SAIT. She is a South African resident and has a part time accounting practice as sole proprietor that provides e-filing and other accounting services to her clients. She is not registered for Value-Added Tax (VAT) purposes. She was offered the position as chief accountant on 1 August 2015 at a local company (South African resident) that manufactures (considered to be similar to a process of manufacture in the opinion of the Commissioner) and distributes seed and fertilizer to the farming community. Although her cash salary as chief accountant was lower than what she received at the college, the local company offered her a number of other benefits. She therefore decided to accept the job offer, resigned from the college on 31 August 2015 and started at Seed and Fertilizer (Pty) Ltd on 1 September 2015. She had the following income and expenses for the year of assessment ending 29 February 2016: From the college 1 March 2015 to 31 August 2015: R Salary at R32 000 per month 192 000 One month s salary paid as bonus in her birthday month of May 2015 32 000 Repayment received from the college for the fee of a conference she attended and paid for. 7 800 The college also refunded her the travel costs to and from the conference in her own private vehicle, a 2012 Nissan that cost her R180 000 (VAT excluded). 2 415 Medical scheme fee contributions were paid by the college for Sari and her husband for 6 months 12 000 3
She had to contribute R2 500 per month to the college s pension fund. 15 000 This contribution is based on a percentage of her monthly salary. Accumulated leave paid out on her resignation (31 August 2015) 10 500 The entire college received 5 days leave in cash during May 2015 in lieu/commutation of a cost of living increase as the college did not have funds due to the fees must fall campaign. Sari received in total before any tax implications. 10 000 Monthly payment to the local trade union - for 6 months 360 From Seed and Fertilizer (Pty) Ltd 1 September 2015 to 29 February 2016: R Cash salary monthly R28 000? Sari and her husband own a duplex in town that they have paid off. Seed and Fertilizer (Pty) Ltd is renting this four bedroom home from them for R7 200 per month and they (Sari and her husband) have been offered this accommodation for R500 per month which is paid by Sari. The company pays the monthly electricity that amounted to R2 300 per month, but Sari furnished the duplex herself. The Maree s still pay the monthly levies of R750 and had the duplex painted for R6 700 during the 2016 year of assessment.? The company gave her the full use of a company car that cost them R256 000 (VAT included) (which also represented the retail market value) on 1 March 2014. She had the use of it from 1 October 2015. She kept accurate records and drove a total of 16 780 km until 29 February 2016 of which 7 000 km was for private purposes. The motor car was purchased with no maintenance plan. The company bears all other costs related to the company car.? She received the free use of a cellphone which the company rented at a cost of R850 (excluding VAT) per month as they need to be able to contact her after hours. This monthly rent excludes airtime and data. 4
She never becomes the owner of the cellphone. The cellphone is mainly? used for business purposes. She also received the free use of a laptop costing her employer company R15 000 (excluding VAT) which she uses mainly for her work.? The company pays the medical scheme fee contributions for her and her husband per month 4 500 She contributes to the company s provident fund on a Rand for Rand basis with her employer her contributions per month 3 250 This contribution is based on a percentage of her monthly cash salary. She has a free lunch in the cafeteria of her employer every work day. The lunch cost the employer R32 per day.? Her husband and her received the free use of a a lodge on a game farm over a long weekend belonging to the company. They spent three days there. The company normally rents out the lodge at R1 000 per day.? Other income and expenses Foreign dividends received (spot rate on receipt was R14.50/$). $4 500 Sari elected to use the spot rate. Local interest received from a South African resident bank R40 000 Fees received for her private practice R13 500 Debtor of the practice that went bankrupt and she will not receive the amount included in the R13 500 above. (R1 350) She uses her study at home for the practice work. According to the floor space she spent for cleaning, municipal fees and other maintenance R480 per month on the study alone. This study is exclusively used and specifically equipped for the purposes of the practice. Other deductible expenses in respect of the practice amounts to R600 per month.? 5
QUERY FROM CLIENT: One of her clients, a local private company, wants to improve employee loyalty by issuing company equity shares to all its employees. They do not know what the tax implications would be for them or the employees. REQUIRED MARKS (a) Calculate Sari Maree s taxable income for the 2016 year of assessment. Provide reasons or references to relevant legislation for all inclusions, deductions and exemptions. 32 (b) Write a memo to Sari Maree s client explaining the tax implications should they implement a share scheme for their employees (refer to the information under: Query from client ). Consider only the scheme that would be applicable if equity shares are granted to all employees. Be brief and give short indications of taxability, deductions and exemptions for both the employer and the employees. 8 TOTAL MARKS 40 6
QUESTION 2 ESTATE DUTY AND DECEASED ESTATES 40 Marks Peter Lane has always been a South African resident and was born on 1 March 1974. He passed away on 30 November 2015 and is survived by his spouse, Jane (born on 12 July 1976), and his son, John (born on 23 September 2011). Peter and Jane were married out of community of property. Peter s receipts, accruals and expenditure were as follows for the period1 March 2015 to 3 December 2015: Interest of R25 000 received from a South African savings account. A monthly salary of R33 000 (his salary for November 2015 had not been paid to him by 30 November 2015). Rental income of R150 000 was earned from letting a holiday house in Brittania Bay (located in South Africa). The holiday house was owned by Peter. Water, electricity, cleaning and repair costs in respect of the holiday house amounted to R67 500 (see provision 1). Dividends received from a share investment (see provision 2). Peter contributed R1 800 to a provident fund on a monthly basis. Peter s last will and testament contained the following provisions: Provision 1 The holiday house in Brittania Bay must be sold and the proceeds used to discharge any claims by creditors which may exist against the estate. On the date of Peter s death the mortgage loan balance (held with a South African bank) in respect of the holiday house was R756 000. The holiday house was originally purchased for R985 000 during January 2012. Amounts owing to other South African creditors (excluding the SARS) were R35 000. The executor of Peter s estate sold the holiday house for R1 400 000 during February 2016. Any remaining cash must be distributed to Jane. The market value of the holiday house was R1 300 000 on 30 November 2015. 7
Provision 2 Peter purchased a share investment for R200 000 on 1 January 2009. The investment initially consisted of 10 000 ordinary equity shares in Action Dive Limited ( Action Dive ), a listed South African company. Action Dive has always been a resident for South African income tax purposes. Action Dive s board of directors decided to do a share repurchase and made an offer to Peter to repurchase 40% of his shares for R109 000 on 1 July 2015. Peter accepted the offer on 31 July 2015 and the payment was made to him on the same day. The transaction meets the requirements as prescribed by paragraphs 5.67 to 5.84 of section 5 of the JSE Limited Listing Requirements. Action Dive s board of directors decided to declare a cash dividend to Peter of R3.60 per share on 27 August 2015. The dividend was payable to Peter if he was registered on 30 September 2015 (which he was). The dividend was paid to him on 19 October 2015. The board of directors indicated that R10 200 of the amount declared, represented a reduction in the company s contributed tax capital. Action Dive s board of directors also determined that beneficial owners (holders of shares) had to submit a declaration certificate, in the prescribed form if they qualified for an exemption under sections 64F or 64G of the Act, before 1 October 2015. In terms of Peter s will, the share investment is bequeathed to John. The market value per share was R60 on 30 November 2015. Provision 3 The cash in Peter s bank account must be placed in a trust (of which his son, John, is the sole beneficiary) after the finalisation of his estate. John must receive R1 000 per month, paid from the interest earned on the cash, from the date of Peter s death. The cash balance of Peter s bank account was R613 000 on 30 November 2015. The following amounts were received by and accrued to the executor during the period 1 December 2015 to 29 February 2016: Receipt of Peter s salary for November 2015 amounting to R33 000. 8
RSA interest of R17 000. Rental income of R49 000 was earned up to the date of the disposal of the Brittania Bay holiday house. Deductible lease-related expenditure amounted to R42 000. The holiday house was sold for R1 400 000 during February 2016. Action Dive s directors decided during a directors meeting held on 1 January 2016 to declare a cash dividend of R3.45 per share to holders of shares. The dividend is payable to holders of shares registered on 31 January 2016. The dividend was paid to the estate on 7 February 2016. The estate was finalised on 29 February 2016. REQUIRED MARKS (a) Calculate Peter Lane s normal income tax liability for the 2016 year of assessment. Show detailed calculations. Your answer must be structured according to the correct framework applicable to natural persons in which all items are shown separately. Communication skill presentation and layout 22 1 (b) Calculate the normal income tax liability of Peter Lane s deceased estate for the 2016 year of assessment. Show detailed calculations. Also indicate if an item has no income tax implication for the deceased estate, and provide a brief reason why not. 12 (c) Discuss the normal tax and estate duty implications regarding the house in Britannia Bay for Peter Lane if the house was not sold, but instead bequeathed to Peter s wife, Jane. Instruction to candidate: Provide references to applicable sections of the Income Tax Act to support your discussion. 4 Communication skill logical argument 1 TOTAL MARKS 40 9
QUESTION 3: TAXATION OF FARMERS 40 Marks QUESTION 3: PART A James Wing (hereafter referred to as James) is 57 years old and a resident of South Africa. James retired during the 2015 year of assessment and after a few months of doing nothing, James decided that he is still too young at heart and bought a farm on 1 April 2015 in the Free State district. James is not registered for VAT purposes. James bought the farm from a lady who inherited the farm 5 years ago from her father and did not do any farming activities in the years that passed. James decided to purchase the following livestock on 1 April 2015: Quantity R Bulls 6 360 000 Cows 100 1 000 000 Total purchases 1 360 000 An excerpt from his trial balance for the 2016 year of assessment is as follows: Note R R Livestock sales: 1-4, 8 30 cows 330 000 35 calves 280 000 Subsidy received for soil erosion 64 000 Wages 105 000 Veterinary expenses 5 600 Maintenance costs incurred 150 000 Deductible farm operating costs 185 000 Soil erosion prevention 80 000 10
New fencing 225 000 Costs of additional boreholes 118 950 Cost of dipping tanks 58 800 Cost of road-making 60 000 Additional information: 1. Natural increase in livestock is 80 calves. 2. James consumed one cow with a market value of R8 000 (cost R5 500) during the 2016 year of assessment. 3. The following livestock died during the 2016 year of assessment: a) One cow b) Two calves 4. James donated a cow to the local school (not a Public Benefit Organisation) for their fundraiser competition. The cost price of this cow was R7 850 and the market value of this cow was R10 500. 5. He purchased 3 new Case tractors for R438 900 each (VAT included) on 1 September 2015. The tractors were brought into use immediately in his framing operations. 6. During the 2016 year of assessment, James gave 3 calves to his farm workers as part of their rations. The cost price of the calves was R4 500 each and the market value was R6 000 each. 7. James has adopted the standard values as fixed by regulation: Per unit of Market value on Standard value livestock 29 February 2016 Bulls R50 R65 000 Cows R40 R12 500 11
Calves R4 R7 500 8. James rented out one of the houses that was situated on the farm to his sister s son for R4 000 per month. He entered into the rental agreement on 1 September 2015. REQUIRED PART A MARKS Calculate James Wing normal tax payable or refundable for the 2016 year of assessment. Where a specific item has no effect on taxable income, this should be clearly indicated. Support your answer with relevant references to the Income Tax Act No. 58 of 1962. 25 QUESTION 3: PART B James attended the yearly farm dance during November 2015 and all the farmers there insist that James need to register for Value-Added Tax (VAT). As it is in James nature to first do a thorough investigation of a situation before he makes a choice, James googled registration for VAT for farming activities and came along the VAT 404 Guide for Vendors from the SARS. James had no clue what all of this information meant and approached your tax consulting business to advise him if he needs to register for VAT. James handed you a list with information that he wants to know: (i) What is the difference in the tax periods between category A/B and category D specifically for farmers? (ii) What is meant by zero rated supplies for farmers? (iii) What forms do I need to complete to register for VAT? During the dance James overheard a conversation between two farmers where the one farmer indicated that he as a taxpayer disagreed with the SARS on the tax treatment of a 12
specific item. James then also heard one of the farmers referring to section 102 of the Tax Administration Act. REQUIRED PART B MARKS (a) Address the above mentioned questions (indicated as (i) to (ii)) from James Wing in a memo format. 10 (b) With reference to the discussion between the two farmers that James overheard, explain to James what the burden of proof in a tax related dispute will be. 5 TOTAL MARKS FOR PART B 15 13
QUESTION 4: OTHER TAXES AND TAX ADMINISTRATION 40 Marks You are a tax consultant and registered tax practitioner and received the following query from one of your clients during November 2016: Your client, Axel Rosewood operates a business consulting practice in his own name and is a registered VAT vendor. He recently discovered that he neglected to record the following transactions in his accounting records and that consequently; none of these items have been taken into account for tax purposes (Axel has not yet filed any return for the 2016 year of assessment): 1. A used office building was purchased from a person (who is not connected to Axel and who is not registered for VAT) at R570 000 (open market value) on 1 July 2015. Axel uses the building as the offices of his consulting practice. 2. Stationery and other office supplies was purchased for R6 840 (including VAT) from a registered VAT vendor during January 2010. 3. A used two-wheel motorcycle was purchased from a natural person (who is not registered for VAT) during March 2015 for R22 400 (open market value). The motorcycle is used to collect documents from clients. REQUIRED MARKS Draft an e-mail to your client, Axel Rosewood, to address the following: Format 2 (a) Indicate whether Axel will be able to make any income tax deductions or allowances in respect of the items listed above. Motivate your answer. 9 (b) Indicate whether Axel will be able to deduct input tax on any of the items listed above. Motivate your answer. 14 14
(c) If assumed that Axel may deduct input tax on each item listed above, list the documentation requirements (documentary proof) that he would need to obtain to claim the input tax on each item above. 10 (d) Advise Axel whether he should be registered for provisional tax. Motivate your answer. 4 Communication skill Logical argument 1 TOTAL MARKS 40 15
APPENDIX A RATES OF NORMAL TAX PAYABLE BY PERSONS OTHER THAN COMPANIES AND TRUSTS (BUT INCLUDING SPECIAL TRUSTS AS WELL AS INSOLVENT AND DECEASED ESTATES) IN RESPECT OF YEARS OF ASSESSMENT ENDING 29 FEBRUARY 2016 Taxable Income Rates of Tax Exceeds R But does not exceed R R 0 181 900 0 + 18% of each R1 181 901 284 100 32 742 + 26% of the amount above 181 900 284 101 393 200 59 314 + 31% of the amount above 284 100 393 201 550 100 93 135 + 36% of the amount above 393 200 550 101 701 300 149 619 + 39% of the amount above 550 100 701 301 208 587 + 41% of the amount above 701 300 SECTION 6 REBATES: YEARS OF ASSESSMENT ENDING LAST DAY OF FEBRUARY 2016 Rebates for natural persons 2016 (R) Under 65 Primary 13 257 65 and over Secondary 7 407 75 and over - Tertiary 2 466 MEDICAL SCHEME FEES TAX CREDITS: YEARS OF ASSESSMENT ENDING LAST DAY OF FEBRUARY 2016 2016 (R) Taxpayer and first dependant (each), 270 Each additional dependant 181 16
TABLE OF TAX LIABILITY ON RETIREMENT FUND LUMP-SUM BENEFITS IN RESPECT OF YEARS OF ASSESSMENT ENDING 29 FEBRUARY 2016 Taxable amount Up to R500 000 Rate of tax 0% of taxable income Exceeds R500 000 but not R700 000 R0 + 18% of taxable amount above R500 000 Exceeds R700 000 but not R1 050 000 R36 000 + 27% of taxable amount above R700 000 Exceeds R1 050 000 R130 500 + 36% of taxable amount above R1 050 000 TABLE OF TAX LIABILITY ON RETIREMENT LUMP-SUM WITHDRAWAL BENEFITS IN RESPECT OF YEARS OF ASSESSMENT ENDING 29 FEBRUARY 2016 Taxable amount Not exceeding R25 000 Rate of tax 0% of taxable income Exceeds R25 000 but not R660 000 R0 + 18% of taxable amount above R25 000 Exceeds R660 000 but not R990 000 R114 300 + 27% of taxable amount above R660 000 Exceeds R990 000 R203 400 + 36% of taxable amount above R990 000 17
SCALE OF VALUES - TRAVEL ALLOWANCE: YEARS OF ASSESSMENT ENDING LAST DAY OF FEBRUARY 2016 Value of the vehicle Fixed cost Fuel cost Maintenance cost R R per annum c per km c per km 0 80 000 26 105 78.7 29.3 80 001 160 000 46 505 87.9 36.7 160 001 240 000 66 976 95.5 40.4 240 001 320 000 84 945 102.7 44.1 320 001 400 000 102 974 109.9 51.8 400 001 480 000 121 886 126.1 60.8 480 001 560 000 140 797 130.4 75.6 Exceeding 560 000 140 797 130.4 75.6 Alternative fixed rate for certain reimbursive travel allowances: 318 cents per kilometer SUBSISTENCE ALLOWANCE: YEARS OF ASSESSMENT ENDING LAST DAY OF FEBRUARY 2016 2016 (R) Incidental costs only 109 Meals and incidental costs 353 OTHER INFORMATION RELEVANT FOR YEARS OF ASSESSMENT COMMENCING 1 MARCH 2015 FOREIGN DIVIDEND EXEMPTION (section 10B(3)) Ratio applicable to a natural person, deceased estates, insolvent estate or trust changed from 25/40 to 26/41. RESIDENTIAL ACCOMMODATION (para 9 of the Seventh Schedule)) Symbol B of R70 700 increases to R73 650 (being the tax threshold for an individual below 65 years of age). 18