OCCUPATIONAL CERTIFICATE: TAX PROFESSIONAL SAQA ID: 93624 Initial Test of Competency RPL Assessment July 2017 Paper 2: Questions 3 and 4 QUESTIONS CANDIDATE NUMBER 1
Instructions to Candidates 1. This competency assessment consists out of 2 papers. 2. This paper comprises questions 3 and 4. 3. Answer each question in a separate answer book. Paper 2: Question Topic Marks Answer Book 3 Companies (Corporate tax) 30 Pink 4 4.1. Analysis of Financial 20 Blue Statements 4.2. Value-Added Tax (VAT) 10 White Total marks: 60 Marks Time: 3 ½ hours writing time The marks specified are an indication of the expected length and detail of your response. 4. Enter your examination number on the cover of each answer book as well as on all answer sheets. 5. Your name must not appear anywhere in the answer books. 6. Answers may not be written in pencil and correction pens (Tipp-ex) may not be used. 7. 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. 8. 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. 9. Please take note of the tax rates and tables provided in Annexure A to this paper (see page 15). 2
PAPER 2: QUESTION 3 - COMPANIES (CORPORATE TAX) 30 Marks Heatset Printing and Binding (Pty) Ltd ( HPB ) is a company specialising in the printing and binding of short to high-volume magazines, catalogues and brochures. The printing and binding of these products is considered to be a process of manufacture by the South African Revenue Service ( SARS ). The company is a tax resident in South Africa and is not registered as a small business corporation as defined in section 12E of the Income Tax Act No. 58 of 1962 ( the Act ). During the year of assessment ended 31 December 2016, HPB recorded the following transactions as indicated in the paragraphs to follow. All amounts are stated exclusive of value-added tax (VAT) where applicable. 1. Services rendered in respect of the printing of catalogues and brochures for clients amounted to R641 400 for the 2016 year of assessment. Sales of customised display holders for the brochures amounted to R25 375 in the same year. In respect of the magazine printing services, HPB only had one client, Agriculture Annual. In order to try to promote its magazine printing services, HPB offered this client a 10% discount for early settlement. On 10 December 2016 the invoice for services rendered to Agriculture Annual was issued in the amount of R84 000. The invoice indicated that the 10% settlement discount in respect of the invoiced amount would be provided if payment was made by 10 January 2017. As at 31 December 2016, no payment had been made by Agriculture Annual. 2. As at 1 January 2016, stock of the display holders, valued at cost, was R12 300. During the 2016 year of assessment, stock acquired by HPB had a cost of R7 000. The cost of stock sold during 2016 amounted R14 500. During the year of assessment, HPB used stock which was acquired at a cost of R2 300 to display their own brochures at their premises and at other targeted locations. The market value of this stock used for display amounted to R4 025. 3
3. On 1 July 2014, HPB acquired a small plot of land at a cost of R1 million for the purposes of erecting a building thereon solely for its printing activities. Building commenced on 20 March 2015 after costs of land-surveying and levelling were incurred in the amount of R90 000. Construction was completed on 10 November 2015 at a cost of R1 300 000 and the building was brought into use on 1 December 2015. On 1 August 2016, construction of an additional wing commenced as HPB found it was in need of additional space for a second-hand catalogue printing press it had recently acquired. This improvement cost R120 000 and was completed on 1 December 2016. Anticipating a rise in crime over the festive season closure, HPB had burglar bars installed on all windows at a cost of R16 000 on 15 December 2016. 4. HPB had to replace (see paragraph 5) its brochure printing press due to frequent jamming as a result of a manufacturing fault. The original press was acquired new for R160 000 on 1 June 2015 and was scrapped on 31 March 2016. There was no insurance payment in respect of the brochure press since the claim was directed to the manufacturer. The manufacturer (not a connected person in relation to HPB) had gone into liquidation, but the liquidator paid HPB R40 000 in settlement of the claim during the 2016 year of assessment. 5. A new brochure printing press was acquired and brought into use on 1 April 2016 at a cost of R180 000 plus installation costs of R6 000. A second-hand catalogue printing press was acquired and brought into use on 25 July 2016 at a cost of R200 000 plus installation costs of R8 000. HPB also has a magazine print and bind machine which it acquired new and brought into use on 25 February 2012 at a cost of R80 000. 6. On 1 July 2016, HPB acquired, at a cost of R180 000, 100% of the equity shares in Gloss Paper Products (Pty) Ltd ( GPP ). HPB secured a loan from its bank in order to acquire the equity shares and incurred interest on this loan in the amount of R9 900 in the 2016 year of assessment. GPP is an unlisted company, tax resident in South Africa, and it specialises in the supply of high quality paper used in the printing industry. During the two months leading up to the sale, HPB incurred costs in the amount of R28 000 in respect of consulting fees paid to legal advisors to review the share sale agreement and conclude the sale. Gloss Paper Products (Pty) Ltd ( GPP ) is not regarded by the SARS as an operating company as defined in section 24O of the Act. 4
7. On 1 September 2016, GPP declared and paid a dividend in the amount of R39 000. On 31 December 2016, HPB declared and paid a dividend in the amount of R46 000 to its ordinary holders of shares. Mr Msweli owns 80% of the ordinary equity shares in HPB and the Msweli Family Trust owns the remaining 20%. You may assume that no election to reduce contributed tax capital was made. 8. The SARS statement of the provisional tax account for HPB reflects that HPB made its first provisional tax payment of R10 000 on 30 June 2016 and a second provisional tax payment of R46 800 on 31 December 2016. The IRP6 issued in December 2016 accurately reflects that the basic amount is R380 000. 5
REQUIRED: QUESTION 3 1. With reference to paragraph 1 of the case study, calculate the amount that would be included in gross income in respect of the 2016 year of MARKS assessment. 2 2. With reference to paragraph 2 of the case study, set out the opening and closing stock adjustments that would be included in the 2016 tax computation, as well as any other adjustments arising from the transactions. Please support your answer with calculations where relevant and references to the relevant section(s) of the Act. 4 3. With reference to paragraph 3 of the case study, calculate the capital allowances claimable by HPB in its 2016 year of assessment. Please show your workings clearly and support your answer with references to the relevant section(s) of the Act. 3 4. With reference to paragraph 4 of the case study, calculate all income tax (including capital gains tax) consequences in respect of the brochure press for the 2016 year of assessment. Please show your workings clearly and support your answer with references to the relevant section(s) of the Act. 4 5. With reference to paragraph 5 of the case study, calculate the capital allowances claimable by HPB in its 2016 year of assessment. 2.5 6. With reference to paragraph 6 of the case study: (a) Is the interest incurred deductible for income tax purposes in the 2016 year of assessment? Support your answer with a short explanation and references to the relevant section(s) of the Act. (b) Are the consulting fees deductible for income tax purposes in the 2016 year of assessment? Support your answer with a short explanation and references to the relevant section(s) of the Act. (c) Calculate the Securities Transfer Tax ( STT ) implications of the equity share sale (if any), and if so, indicate who bears the liability for this tax. 7. With reference to paragraph 7 of the case study: a) Set out the effect that the dividend (declared by GPP) would have on HPB s 2016 normal income tax computation. Support your answer with references to the relevant section(s) of the Act. 1 1.5 1.5 1.5 6
b) Calculate the dividends tax implications of the dividend declared by GPP and indicate who bears the liability for this tax. Support your answer with a short explanation and references to the relevant section(s) of the Act. 1.5 c) Calculate the dividends tax implications of the dividend declared by HPB and indicate who bears the liability for this tax. Support your answer with a short explanation and references to the relevant section(s) of the Act. 1.5 d) In respect of any dividends tax liability (if any) determined in (b) or (c) of this question, please indicate the date (dd/mm/yyy) by which the payment of the dividends tax liability was/is due to the SARS. 1 8. With reference to paragraph 8 of the case study, please calculate the amount of any underestimation penalty that the SARS may levy on assessment in terms of paragraph 20 of the Fourth Schedule to the Act. For purposes of this calculation, please assume that the taxable income for the 2016 year of assessment is assessed by the SARS to be R400 000. Please show your workings clearly. 3 9. Consider the following in respect of the 2016 year of assessment: a) Could HPB have registered for the turnover tax regime for micro businesses as set out in the Sixth Schedule to the Act? Please justify your answer with a short explanation. 1 b) Could HPB have registered as a small business corporation as defined in terms of section 12E of the Act? Please justify your answer with a short explanation. TOTAL MARKS (30) 1 7
PAPER 2: QUESTION 4 (COMPRISING TWO UNRELATED QUESTIONS) QUESTION 4.1: ANALYSIS OF FINANCIAL STATEMENTS 20 Marks Xixia Properties (Pty) Ltd ( XP ) owns a number of commercial properties, which it rents out to tenants as its trade. XP is a South African resident company for tax purposes with a March year-end and is not a small business corporation as defined in section 12E of the Income Tax Act No. 58 of 1962 ( the Act ). The financial manager of XP has provided you with an extract from the notes to its annual financial statements for the year ended 31 March 2017, as well as some additional details (in notes she has made, numbered 1 14) which she considered necessary for tax purposes. She requires your assistance in preparing the 2017 income tax computation which she will use to complete her 2017 income tax return (ITR14). Extract from financial statements: 2017 2016 Notes from XP R R Profit before tax Profit before tax 1 1 340 600 1 020 980 Trade and other receivables Trade receivables 2 2 541 900 1 920 840 Provision for doubtful debts 3 (350 730) (250 860) Net trade debtors 2 191 170 1 669 980 Pre-payments 4 845 900 716 870 Other receivables 5 1 360 870 1 294 530 Trade and other payables Trade payables 6 668 470 489 770 Amounts received in advance 7 489 560 468 520 Accrued bonus and leave pay 8 230 450 201 690 Sundry accruals 9 120 350 90 560 8
Notes from XP 2017 2016 R R Operating expenses Bad debts 10 800 230 730 550 Depreciation 11 144 000 144 000 Penalties 12 25 000 0 Sundry expenses 13 2 698 550 2 145 450 Other income Gains on disposal of assets 14 540 000 0 Notes from XP 1. The profit before tax figure as reflected in the statement of profit or loss and other comprehensive income, is R1 340 600 in respect of the 2017 financial year. 2. This is the gross trade debtors-balance before taking into consideration the provision for doubtful debts. 3. Regarding the provision for doubtful debts: a) The 2017 provision for doubtful debts balance relates to three specific debtors who have long outstanding rental due on commercial properties let to them. XP has taken steps to recover these debts and has decided to provide for them as doubtful as it is unlikely that any amounts will be recovered from these debtors. b) From a tax perspective, the section 11(j) doubtful debt allowance in terms of the Act claimed in the 2016 income tax return amounted to R62 715. 4. Regarding the pre-payments: a) Of the 2017 balance, R680 440 relates to business insurance prepaid for 4 months (1 April 2017 31 July 2017). b) Of the 2017 balance, R165 460 relates to an annual software licencing fee prepaid for 11 months (1 April 2017 28 Feb 2018). 9
c) In the 2016 income tax return, there was a deduction for pre-payments (not limited in terms of section 23H of the Act) in the amount of R550 890. 5. These are normal receivables arising in the ordinary course of XP's trade. 6. All trade payables are unconditional liabilities raised in respect of normal business expenditure of a revenue nature. 7. Regarding the income received in advance: a) The 2017 balance relates to commercial tenants who have paid their rental income earlier than usual. Such payments are not refundable. b) From a tax perspective, the 2016 balance was treated as taxable in the 2016 income tax return. 8. Regarding the accruals for leave pay and bonuses: a) The accruals as at 31 March 2017, were paid in April 2017. b) The accruals as at 31 March 2016, were paid in April 2016. 9. All sundry accruals are unconditional liabilities raised in respect of normal business expenditure of a revenue nature. 10. Regarding the 2017 bad debts expense: a) A portion of the expense in the amount of R35 000 relates to a loan to a staff member that was written off. b) The remainder in the amount of R765 230 relates to outstanding rentals from commercial tenants which have become irrecoverable and which was written off as bad debt 11. Regarding the 2017 depreciation expense: a) This expense relates to the depreciation in respect of furniture and fittings acquired on 1 April 2014 at a cost of R720 000. b) The write-off period acceptable to the South African Revenue Service ( SARS ) per Interpretation Note: No. 47, is 6 years for furniture and fittings. 10
12. XP incurred a penalty in the amount of R25 000 payable to the SARS in respect of late submission of its provisional tax return. 13. You may assume that all sundry expenses were incurred in the production of income and are not of a capital nature. The only exceptions to this those expenses where the related statement of financial position (balance sheet) information that has already been provided above. 14. Regarding the gains on disposal of assets: a) As XP experienced some cash flow problems during the 2017 financial year, the decision was taken to sell its share portfolio which it held as an investment (XP is not a share dealer). This resulted in an accounting profit of R540 000. b) The shares were acquired on 31 May 2015 at a cost of R300 000. XP also incurred consulting fees amounting to R10 000 in respect of the acquisition of the shares. The shares were sold on 1 February 2017 for R840 000. REQUIRED: QUESTION 4.1 You are required to prepare the 2017 income tax computation. Please note the following instructions in this regard: MARKS You must start your computation with profit before tax in the amount of R1 340 600 (as shown in the table below). Your computation must be set out in a table as follows: Note no. Description of adjustment and workings Amount (R) 1 Profit before tax (given in scenario) 1 340 600 2 (Please insert as many rows as you require) Taxable income xxxxxxxx 11
In respect of each of the notes (numbered 1 14) in the scenario, you must include the relevant adjustments in the table in order to reverse the accounting treatment (if necessary), and include the correct tax adjustments (where applicable). Your aim is to arrive at the correct amount of taxable income at the end of the computation. Number your adjustments such that the numbers correspond with the applicable notes (numbered 1 14) in the scenario. Include a description of your adjustment as well as any workings in the second column of your table. Include the amount of the adjustment in the third column of your table. Ensure that you include the minus sign (-) if the adjustment decreases the profit before tax for tax purposes. You may find that one note requires a number of adjustments. If this is the case, set out the various adjustments in separate rows in order to make your workings clear. If no adjustment is required in respect of a specific note, just state no adjustment required in the second column and insert an amount of R0 in the third column. TOTAL MARKS (20) 12
PAPER 2: QUESTION 4 QUESTION 4.2: VALUE-ADDED TAX (VAT) 10 Marks You are a registered Tax Professional with SAIT and you received the following queries from clients: i) MR VAN HOUT: Mr van Hout is a carpenter working for himself. He has installed cupboards for a housing development the past calendar year and received R1 500 000 for the contract. He has never been registered for Value-Added Tax (VAT) purposes, but is now concerned about his tax status. Mr van Hout also wants to know that if he should split his trade activities into two, namely: trading through a private company who invoices R500 000 of carpentry services per annum; and also trades in his personal capacity for the other invoices, how this would affect his tax status for VAT purposes (if at all)? ii) MRS LEBOGANG Mrs Lebogang rents out rooms in her house as an Airbnb and on average derives an annual income of R100 000. She has never been registered for Value-Added Tax (VAT) purposes, but is now concerned about her tax status. Mrs Lebogang also received a lump sum from her pension fund and requires your advice on her tax status for VAT purposes if she decides to use this lump sum in one of the following manners (purchase options): Option 1: She can use the money to build and stock a new restaurant next to her Airbnb which should also have a turnover of R100 000 per annum; or Option 2: She can buy two flats that she can rent out to students at the local university. The rental income from the flats would average R90 000 per annum. 13
REQUIRED: QUESTION 4.2 MARKS MR VAN HOUT: Respond to Mr Van Hout s concern and query as briefly as possible, but with proper motivation for your statements. 3 MRS LEBOGANG: a) Based on the information on the Airbnb trade alone, explain to Mrs Legogang whether or not she should register as a VAT vendor? Provide reasons for your answer. 2 b) Clearly indicate (separately) how Mrs Lebogang s tax status as VAT vendor would be affected when exercising each one of the two purchase options available to her due to her pension fund lump sum payout. Provide reasons for your answer. 5 TOTAL MARKS (10) ***END OF PAPER*** 14
ANNEXURE A Small Business Corporations (SBC) - see changes from last year Financial years ending on any date between 1 April 2017 and 31 March 2018: Taxable income (R) Rate of tax (R) 0 75 750 0% 75 751 365 000 7% of taxable income above 75 750 365 001 550 000 20 248 + 21% of taxable income above 365 000 550 001 and above 59 098 + 28% of taxable income above 550 000 SARS Official Rate of Interest: 8% Transfer Duty Rates: In respect of acquisition of property on or after 1 March 2017 VALUE OF PROPERTY (Rand) RATE 0 900 000 0% 900 001 1 250 000 3% of the value above R900 000 1 250 001 1 750 000 R10 500 + 6% of the value above R 1 250 000 1 750 001 2 250 000 R40 500 + 8% of the value above R 1 750 000 2 250 001 10 000 000 R80 500 +11% of the value above R2 250 000 10 000 001 and above R933 000 + 13% of the value above R10 000 000 15