EY s Young Tax Professional of the Year Competition Entry form for South African Competition 2016
Candidate details Name: Surname: ID/Passport number: Cellphone number: E-mail address: 2
A Long Questions Please refer to relevant caselaw and legislation in your answers. Section Question 1 (30 Marks) Solar (Pty) Ltd (Solar) is a value-added tax (VAT) vendor with a financial year ending on the last day of February. Solar is only making taxable supplies in its manufacturing and retail business. Solar is a Category B vendor and is situated in Kempton Park, Gauteng. Solar manufactures and retails water storage tanks locally. Solar is a South African resident company for tax purposes. The Commissioner considers the manufacture of water tanks as a process of manufacture. The water storage tanks are used in farming, industrial and residential applications. The water storage tanks are used to collect rainwater for irrigating small crop fields or gardens and providing drinking water for livestock. Due to the recent drought, it is also being used for industrial and residential purposes for storing water and then being used for irrigation and watering of gardens. Mr Rajesh Govender, age 47, is the sole shareholder and managing director of Solar. He is not married and is a South African resident. He lives in Bruma, Gauteng. He started the company on 1 January 2010, to fulfill his lifelong dream of owning his own business. Having himself trained in the USA and China in some of the leading water storage tank and solar geyser manufacturers, he believes his knowledge of creating high quality water storage tanks will assist him in developing a niche market for his company in South Africa. Oliver Jordan is a tax consultant employed by Solar to review its taxable income calculation for the year of assessment ended 29 February 2016. The calculation of the taxable income of the company was prepared by the company s tax trainee because the tax manager resigned. Oliver held discussions with the tax trainee to obtain an understanding of the process that was undertaken in calculating the taxable income. It has been brought to Oliver s attention that the taxable income calculation was incomplete because it did not take into account certain transactions, details of which have been forwarded to Oliver. Oliver reviewed the taxable income calculation and concluded that the taxable income calculated by the tax trainee of R5 852 000 is accurate, however, certain transactions (listed below under notes) have not been taken into account in the calculation of the taxable income of R5 852 000. Due to the urgency of the finalisation of the tax computation of Solar, Oliver has asked for your assistance to finalise the tax computation of Solar for the year of assessment ended 29 February 2016. Solar prepared the following notes with regard to transactions which were not taken into account in the determination of the R5 852 000 preliminary taxable income (all amounts exclude VAT unless otherwise stated): Notes 1. Solar entered into a 48 months instalment credit agreement (finance lease) with New Lease CC on 1 April 2015 for 15 new computers, requiring lease payments of R6 500 per month. The cash value of the computers was R228 000 (inclusive of VAT). The computers were brought into use immediately in the accounting, sales and administration divisions of the company. 2. Solar purchased a double cab bakkie for a cash amount of R342 000 (inclusive of VAT) on 1 August 2014 to use for the delivery of the water storage tanks to clients. On 1 November 2015, the double cab bakkie was involved in a serious accident. The double cab bakkie was written off. Insurance paid out R270 000 for the double cab bakkie. On 1 February 2016, a new single cab bakkie was purchased for R285 000 (inclusive of VAT) as the new delivery vehicle, using all the proceeds from the insurance pay-out. The balance was settled from the bank account of Solar immediately. The single cab bakkie was brought into use immediately. 3
A Long Questions (continued) Please refer to relevant caselaw and legislation in your answers. 3. Solar entered into a 30-year lease agreement for the rental of factory premises from 1 January 2014 at a rental of R12 500 per month and immediately occupied the property. In order to secure the lease, a premium of R80 000 was paid on 1 January 2014. The factory had to be adapted to suit the company s needs and in terms of the lease agreement, Solar was obliged to improve the factory building at a cost of R950 000. The building improvements were completed on 31 August 2015 at a cost of R 1 170 000 and was immediately brought into use in the process of manufacture. 4. Solar (Pty) Ltd offers registered learnership agreements to some of its employees. The details of which is as follows: - Two learnership agreements were registered on 1 March 2014 of which both were completed on 29 February 2016. The total salary expense for the two learners for the 2016 year of assessment amounted to R240 000. Two learnership agreements were registered on 1 March 2015. One of these was with disabled employees. None of these learnership agreements had been completed at 29 February 2016. The total salary expense for these two learners for the 2016 year of assessment amounted to R300 000. Additional Information Solar has a policy of declaring dividends on an annual basis. Solar declared and paid a dividend of R380 000 cash on 27 March 2016 to its sole shareholder. A close friend of Rajesh, Anil Ram, is the sole shareholder of Excel (Pty) Ltd (Excel),a clothing manufacturer situated in Randfontein, Gauteng. Excel is a is a South African resident company for tax purposes and is not registered VAT vendor. In the last year, Excel has been experiencing cash flow problems. Excel invested in a new manufacturing machine on 1 April 2013 at a cost of R3 500 000(inclusive of VAT) because it s existing manufacturing machine was not able to cope with the production requirements of the clothing. An additional cost of R30 000(inclusive of VAT) was incurred in mounting the manufacturing machine to the factory building in Randfontein. The new manufacturing machine was brought into use for the first time on 1 April 2013. The new manufacturing machine was financed with a loan of R3 530 000 from American Bank Investments Ltd ( ABIL ), a South African resident bank. Excel has been struggling to pay off the loan and was still owing R2 400 000 to ABIL on 30 September 2015. ABIL then decided to discharge the R2 400 000 of the debt because of Excel s inability to pay. ABIL notified Excel about this discharge on 31 January 2016. All interest payments on the loan (including R237 417 interest incurred in the 2016 year of assessment) had been made. Excel has a financial year ending on the last day of February. You are required to: a) Calculate the taxable income of Solar (Pty) Ltd for the year of assessment ending 29 February 2016. The company wishes to defer its tax liability wherever possible. When calculating the normal tax liability, you may assume that Solar (Pty) Ltd qualifies as a small business corporation (SBC) for income tax purposes. (16 marks) b) Calculate, with reasons, the dividends tax to be withheld, if any, from the dividends declared and payable by Solar (Pty) Ltd on 27 March 2016. (2 marks) c) Discuss when the dividends tax, if any, will be paid over to the South African Revenue Services by Solar (Pty) Ltd. (4 marks) d) Advise Excel (Pty) Ltd of the normal tax implications of the discharge of debt by American Bank Investments Ltd for the year of assessment ended 29 February 2016. (8 marks) 4
A Long Questions (continued) Please refer to relevant caselaw and legislation in your answers. 5
A Long Questions (continued) Please refer to relevant caselaw and legislation in your answers. 6
A Long Questions (continued) Please refer to relevant caselaw and legislation in your answers. QUESTION 2 30 marks Assume today is 29 February 2016. Oscar Steynberg turned 50 years old on 15 December 2015. He is divorced and has twin girls, both currently studying full-time at the University of Pretoria. Up until 31 December 2015 Oscar was employed as head of training at Klinica Ltd ( Klinica ), a VAT vendor only making taxable supplies. The company imports and sells hospital equipment, supplies and consumables. It employs various medical representatives to market its products to local hospitals. Oscar decided to leave Klinica s employment and registered a company, OscarMed (Pty) Ltd ( OscarMed ). Oscar, his ex-wife and each of their daughters have equal shareholding. OscarMed has a 28/29 February year-end and is not registered as a VAT vendor. Effective 1 January 2016, OscarMed entered into an agreement with Klinica to market Klinica s products. OscarMed earns commission on sales concluded on behalf of Klinica. As from 1 January 2016 Oscar was the only full-time employee and director of OscarMed. Oscar s salary is calculated purely as a percentage of the amount invoiced to Klinica. Assume the following information relevant to Oscar s 2016 year of assessment: 1. Salary Since 1 March 2015, Oscar has earned a basic cash salary of R40 000 per month from Klinica. 2. Vehicle used by Oscar Up until 31 December 2015, Oscar was granted the use of a BMW X3 (cash cost R385 000 including VAT, owned by Klinica) for both private and business travelling. For the period 1 March 2015 until 31 December 2015, Oscar travelled a total of 6 500 km in this vehicle, of which 2 000 km was for business purposes. Although the vehicle had a market value (excluding VAT) of R120 000 and a remaining useful life of 3 years, Oscar purchased it for R50 000 from Klinica on 31 December 2015. During January and February 2016, Oscar travelled 5 800 km with the BMW X3, of which 4 300 km was for business purposes. He paid R12 650 cash (including VAT of only R776) to keep the car on the road during this period. 3. Membership of the Klinica Pension Fund Oscar and Klinica each contributed 7.5% of Oscar s cash salary to this pension fund. According to the rules of this fund, normal retirement age is 50 years. 4. Medical scheme The total monthly contribution for him, his ex-wife and the twins amounted to R6 534. Klinica paid the full contribution up until 31 December 2015. After Oscar left Klinica s employment, he stayed on as a member of the medical scheme and paid the contributions himself. Oscar suffers from high cholesterol and is asthmatic, for which he takes chronic medication costing him R5 700 per month (of which the medical scheme covers R3 492). Neither Oscar nor any of his dependants are disabled. 5. Contributions to a retirement annuity fund (RAF) Oscar has been contributing R2 000 per month to a RAF throughout his 2016 year of assessment. Up until 28 February 2015, R68 000 of Oscar s contributions to this fund have not been allowed as a deduction for normal tax purposes (and R10 000 up until 28 February 2011). Klinica was NOT aware of Oscar s membership of the RAF. 6. Other income earned by Oscar R36 000 (after employees tax was withheld) as a part-time lecturer for 3 hours per week in the Department of Marketing at the University of Pretoria. Royalty income of R20 000 from Pexis Books for his once-off contribution to a chapter in a Marketing Handbook. R58 000 interest from a local bank of which R32 000 was in respect of a R100 000 tax free investment as envisaged in section 12T 7
A Long Questions (continued) Please refer to relevant caselaw and legislation in your answers. 7. Home office Oscar maintains a home office (comprising 15% of the total floor space of his private residence) which he uses exclusively for business purposes. While employed by Klinica, he had to work from time to time over weekends to develop lecture material. It was a lot more convenient to work from home than to go to the office provided by Klinica. During January and February 2016 Oscar worked mainly out in the field visiting various hospitals, but performed his administrative work at home. Assume that Oscar, throughout his 2016 year of assessment, paid R35 000 a month to maintain his private residence (which includes expenses such as insurance, security costs, garden services and his municipal account). 8. Information relevant to OscarMed s 2016 year of assessment Total amount invoiced to Klinica (this is OscarMed s only income since it merely markets Klinica s products) Commission paid to Oscar On 29 February 2016 OscarMed decided that a bonus of R80 000 will be paid to Oscar during March 2016 in respect of the company s 2016 financial year. R287 000 R120 000 Additional information: Due to a technical glitch in Klinica s IT systems, no employees tax was deducted from the remuneration paid to Oscar during March 2015. The IT Manager only detected the error during early January 2016. According to the ITA34 issued to Oscar, the normal tax for his 2016 year of assessment is R246 576 (based on a taxable income of R793 957). All Oscar s tax affairs are in order and he has never received a penalty assessment in the past. Required: 1. Discuss and calculate the implications of the technical glitch (refer to the Additional Information note above) for Klinica and Oscar. Your answer should include references to relevant tax Acts. (15 Marks) 2. Explain whether Klinica should withhold any employees tax from payments made to OscarMed. Support your answer with references to relevant tax Acts. (5 Marks) 3. Explain why and by when Oscar should register as a provisional taxpayer. Support your answer with references to relevant tax Acts. (5 Marks) 4. Oscar claimed a deduction for business kilometres travelled in his ITA34 for his 2016 year of assessment. If Oscar s ITA34 for his 2016 year of assessment is selected for a SARS audit, what would the consequences be if he is unable to provide a logbook detailing his total, private and business kilometres travelled? Support your discussion with references to relevant tax Acts. You may assume that the second date on the ITA34 has not passed yet. (5 Marks) 8
A Long Questions (continued) Please refer to relevant caselaw and legislation in your answers. 9
A Long Questions (continued) Please refer to relevant caselaw and legislation in your answers. 10
B Multiple choice questions 1 mark each Section 1. (1) In CSARS v Brummeria Renaissance (Pty) Ltd and others, it was held that the right to receive an interest free loan was taxable, as the right had an ascertainable monetary value (being deemed interest). (2) In CIR v People Stores (Walvis Bay) (Pty) Ltd it was held that.. amount... must include not only money.... (3) In CIR v People Stores (Walvis Bay) (Pty) Ltd it was held that the present value of future amount must be used, but SARS negated this judgement by changing the law retrospectively to stating that the full value must be used. (4) In CIR v Visser, the concept of fruit and tree in relation to tax was discussed. (5) In CIR v Lategan, the concept of entitled to was established. Which of the above statements are true? A. 1 and 2 B. 1, 2 and 3 C. 1, 2, 3 and 4 D. All of the above E. None of the above 2. (1) In terms of the De Minimus rule, if 75% of goods are acquired for the purpose of making taxable supplies, 100% of the input tax credit on rent may be claimed. (2) A company, being a VAT vendor, acquires a 9m boat to take people on paid cruises of the Vaal Dam. The company will be denied an input tax credit. (3) A company today (27 April 2016), having anticipated turnover of R 500 000 in the next twelve (12) months, must register for VAT (Compulsory Registration) (4) Input tax can only be claimed if VAT was paid by the vendor at zero rate. (5) Non-vendors don t pay VAT on any taxable supplies. Which of the above statements are true? A. 1 and 2 B. 1, 2 and 3 C. 1, 3 and 5 D. All of the above E. None of the above 3. The following events will result in a deemed disposal taking place (1) taxpayer ceasing to be a resident (2) asset ceasing to be trading stock (3) donation (4) asset ceasing to be a personal use asset (5) 25 m luxury cruise boat expropriated A. 1 & 2 B. 1, 2 & 3 C. 1, 2 & 4 D. All of the above. E. None of the above. 11
B Multiple choice questions (continued) 1 mark each 4. If a primary residence is used mainly for business purposes (75%) then the amount of the primary exclusion is apportioned as follows: A. 25% for residential 75% for business B. 75% for residential 25% for business C. 50% for residential 50% for business D. It depends on the business for which it is used. E. None of the above. 5. A building is used 60% for commercial purposes and 40% for residential accommodation. Repairs to the inside of a retail shop in the building cost the registered VAT vendor R3 990 (including VAT). A. The vendors accounts for input tax of R490 B. The vendors accounts for output tax of R490 C. The vendors accounts for input tax of R196 D. The vendors accounts for input tax of R294 E. None of the above. 6. Which of the following is correct? (1) The deduction of fines and bribes is specifically prohibited against taxable income. (2) Losses resulting from theft or embezzlement will be deductible against taxable income provided that these losses are closely connected to the operation and are viewed as part of the cost of performing the business operations. (3) Any loss or expenditure, the deduction of which would otherwise be allowable, to the extent to which it is recoverable under any contract of insurance, guarantee, security or indemnity will not be allowed as a deduction. (4) The expenses incurred in maintaining the taxpayer and his family is not a tax deductible expense. (5) Income carried to any reserve fund or capitalised, for example, a provision made out of income to provide for a contingent liability will not be allowed as a tax deductible expense. A. 1 B. 2 C. 3 D. All of the above E. Only (1), (2), (4) and (5) 7. Which of the following are not fringe benefits? A. Subsidy B. Subsistence allowance C. Right of use of a motor vehicle D. (a) and (b) E. (b) and (c) 12
B Multiple choice questions (continued) 1 mark each 8. (1) Financial services by a registered VAT vendor (2) Exporting of goods by a registered VAT vendor (3) Importing of goods by a registered VAT vendor (4) Residential accommodation by a registered VAT vendor (5) Educational services, schools, universities, etc Which of the following are exempt supplies for VAT purposes? A. 1 only B. 1, 3 and 5 C. 2 and 4 D. 1, 4 and 5. E. None of the above combinations. 9. A registered VAT vendor, receives an amount of R228 000 from an insurance company in full settlement of a claim for a machine used in the process of manufacture. The cost of the machine to the vendor was R342 000 (including VAT). The following VAT consequences apply to the amount received from the insurance company A. the vendor may claim input tax of R28 000 B. the vendor may claim input tax of R42 000 C. the vendor must account for output tax of R28 000 D. the vendor must account for output tax of R42 000 E. None of the above. 10. If a natural person (who is not married) sells his / her holiday home (that is used exclusively during for holidays) in the 2016 year of assessment and makes a capital gain on the transaction of R1 000 000, the taxable capital gain is, assuming that he/she made no other capital gains or losses in the 2016 year of assessment. He/she has a R40 000 assessed capital loss brought forward from the 2015 year of assessment. A. R309 690 B. R333 000 C. R666 000 D. R1 000 000 E. R323 010 13
B Multiple choice questions (continued) 1 mark each 11. If a natural person (who is not married) has a sum of all capital losses of R15 000 in the 2016 year of assessment the assessed capital loss carried forward to the 2016 year of assessment, assuming that he/she and has no assessed capital loss brought forward from the 2015 year of assessment. A. R0 B. R15 000 C. R4 995 D. R9 990 E. None of the above 12. A kruger coin is held as a personal use asset by a natural person who purchased it 5 years ago. This is the only kruger coin that the person has ever owned. A gain of R10 000 is made on the disposal of the kruger coin in the 2016 year of assessment as he needs money urgently. Which is correct? A. The gain is excluded from the calculation of CGT as it is a personal use asset B. The gain is included in the calculation of CGT as it is excluded from personal use assets C. In the discretion of the Commissioner, the gain may or may not be taxed D. The taxpayer can decide if it is a personal use asset or an investment. E. None of the above. 13. Compensation received for personal injury, illness or defamation by a natural person in the 2016 year of assessment is A. Income in nature and included in taxable income B. Capital in nature and included in the capital gains tax calculation and included into taxable income at an inclusion rate of 33.3% C. Capital in nature and included in the capital gains tax calculation but not included at 33.3% inclusion rate, because the capital gains or losses are disregarded. D. Capital in nature and excluded from taxable income E. None of the above 14. Randy Jefferson is a 60-year-old South African resident. He went on a month long holiday to the United Kingdom during the 2016 year of assessment. While in the United Kingdom het entered the United Kingdom National Lottery. He bought a ticket costing R100 (correctly converted) and won R20 000 000 (correctly converted). Calculate Randy Jefferson s taxable capital gain for the 2016 year of assessment assuming he had no other capital gains or losses. A. R 6 649 977 B. R 0 C. R 6 659 967 D. R19 999 900 14
B Multiple choice questions (continued) 1 mark each 15. XTY Ltd is a resident company that made a cash distribution of R35 000 on 1 March 2015 to its only shareholder, Mr Aaron, a South African resident. XTY Ltd stated that part of the distribution included a return of capital to the amount of R5 000, which was approved by its directors. What is the amount of dividends tax that must be withheld and paid over to SARS by XTY Ltd? A. R5 250 B. R4 500 C. R4 375 D. R3 500 E. R0 16. On 1 February 2016, Altec Ltd, a company listed on the Johannesburg Securities Exchange (JSE) which has a financial year end that ends on the last day of February, declared a cash dividend of R50 000 to all its shareholders who are registered on the 31 March 2016. The dividend was paid on 11 April 2016. When is the dividend deemed to be paid? A. 1 February 2016 B. 11 April 2016 C. 31 March 2016 D. 29 February 2016 E. None of the above 17. A cash dividend of R300 000 was paid on 29 February 2016 by All Systems (Pty) Ltd, a South African resident company. All Systems (Pty) Ltd has a financial year end that ends on the last day of March. All Systems (Pty) Ltd s ownership structure is as follows: 20% is owned by a South African registered pension fund, 35% by Brooklyn (Pty) Ltd a resident company and 45% is owned by Mr. Reese a South African resident. What is the amount of dividends tax that must be withheld by All Systems (Pty) Ltd on the payment of the dividend, assuming all required documentation has been submitted to All Systems (Pty) Ltd? A. R15 750 B. R9 000 C. R45 000 D. R20 250 E. R36 000 15
B Multiple choice questions (continued) 1 mark each 18. Amish Naidoo is 66 years old and a South African resident. He is married to Roshni Naidoo age 67 who is also a South African resident. They are both retired and live in Cape Town. For the 2016 year of assessment he had the following: His pension income (annuity) amounting to R400 000. He paid contributions to a medical aid scheme of R3 000 per month for the 2016 year of assessment for himself and his wife. His wife is a dependent on his medical aid scheme. He paid R29 000 qualifying medical expenses which was not recovered from the medical aid scheme. What are the s6a medical scheme fees tax credits and s6b additional tax credit for medical expenses that Amish Naidoo can claim for the 2016 year of assessment respectively? A. R6 480 and R2 270 B. R6 480 and R15 171 C. R0 and R0 D. R6 168 and R8 49 E. R5 412 and R16 238 19. An employee that earns remuneration as defined in para 1 of the Fourth Schedule can have their employer deduct the following expenditure from his/her income for the 2016 year of assessment. Select the item not deductible A. s11(k) Pension fund contributions B. s11(n) Retirement annuity fund contributions and proof provided to employer C. s11(ca) restraint of trade payments D. s18a Donations made by the employer on behalf of the employee to a registered PBO and the employer receives the s18a certificate from the PBO. E. All of above 20. Remuneration as defined in the Fourth Schedule of the Income Tax Act does not include one of the following: A. Restraint of trade payments received in terms of par(ca) and (cb) of gross income in s1 of the Income Tax Act. B. Retirement fund lump sums in terms of par(e) of gross income in s1 of Income Tax Act. C. 80 percent of the right of use of a motor vehicle value if the employee satisfied the employer that the employee uses the motor vehicle at least 80 percent for business purposes D. Entertainment Allowance E. None of the above. 16
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