Question Pack

Practice Questions
Activity 1
You are a trainee accountant and a member of the audit team currently performing the audit of Betty Blue (Pty)
Ltd (“Betty Blue”). Betty Blue manufactures lipsticks at its factory in the south of Johannesburg and distributes
them locally. Betty Blue is a registered VAT vendor.
The financial accountant at Betty Blue has almost completed the calculation of the taxable income for the year
of assessment ending 31 December 2019. She is unsure how to handle some of the transactions that occurred
during the year for taxation purposes and has asked that you complete the taxable income calculation taking
these transactions into account.
The taxable income she arrived at was R2 356 000. Assume the calculation of this figure is correct (in terms of
the provisions of the Income Tax Act).
The following are the transactions she is unsure of: (All amounts exclude VAT unless stated otherwise.)
1. The following Legal fees were incurred:
 Collection of outstanding trade debtors R85 000.
 Collection of staff debtor of R35 000.
 Court cases in respect of CCMA remuneration case for R55 000
 Legal appeal to SARS regarding imposed tax for R25 000.
 Costs to draw up a lease contract amounting to R28 000. This contract relates to the lease of a factory
from a third party for a period of 10 years. The company is the lessee.
2. A restraint-of-trade payment of R260 000 was paid to the managing directors cousin, who decided to
resign from the company. The restraint is for a period of two years.
3. The following bad debts and doubtful debts were provided for.
The accountant proposes to write off the following bad debts in the 2019 tax year:
 Bad debts of R26 400, in respect of sales that occurred in the 2018 tax year;
 Bad debts of R12 850, in respect of sales that occurred in the 2018 tax year; and
 Bad debts of R16 900 in respect of amounts that arose in the 2017 tax year, relating to loans made to
employees who cannot be traced.
 A debtor, Fizzpops CC, was placed in liquidation during January 2019. Fizzpops CC paid its creditors 50c
in the rand. Fizzpops CC‟s debt owing to Twizzers (Pty) Ltd at year end amounted to R16 000. This
amount is not included in the above bad debts or list of doubtful debts for 2019.
4. At year-end a list was compiled, detailing all trade debtors who are considered a risk of defaulting on
their payments as the amounts were 60 days in arrears. The total amount of the list came to R45 000.
The company does not apply IFRS 9.
5. The following salaries and wages were paid

 Salaries and wages amounting to R1 200 000.
 Contributions to a medical aid of R180 000.
 Contributions to a pension fund of R110 000.
 Dividends to the amount of R20 000 were distributed to the only shareholder.
6. The following Annuities were paid

 An annuity of R20 000 was paid to a former financial director, who left employment because he
immigrated to Australia and
 Another annuity of R12 500 was paid to the dependant of a former employee who retired on the
grounds of ill health.
7. The following prepayments
1
 Insurance premiums of R245 000 were paid in full for the 12-month period from 1 August 2019 to 31
July 2020.
 Rental of the switchboard system for head office for the period 1 July 2019 to 31 January 2020 for
R40 000.
 Rental of the photocopy machine for head office for the period 1 November 2019 to 31 October 2020
for R28 000.
 Deposit for the purchase of a delivery vehicle that will be delivered on 1 February 2020 for R85 000
8. The following learnership agreements were entered into

 6 months’ contract with John a disabled employee at an NQF level 3 entered into on 1 January 2019.
 An 18-month contract entered into with Peter on 1 January 2018 at an NQF level 4 (not disabled).
 A 36-month contract entered into with Faith on 1 January 2018 at an NQF level 6 (not disabled).
9. Trademark and design

 On 30 June 2019 one of the trademarks they had registered in 2011 was renewed for a further three
years at a cost of R75 000.
 On the same day, they purchased a trademark for R150 000.
 On the same day, they purchased a patent for R500 000.
 On 31 May 2019, they purchased a specific design for R120 000.
10. Penalties and interest

 There is a penalty of R250 from submitting a VAT return one month late and some interest of R1 789
for outstanding skills development levies.
11. Sale of lipsticks

 Forty lipsticks that were end of range and were sold to staff for less than the market value during the
stock take that took place on 30 December 2019. The lipsticks had a market value of R65 each and the
staff members purchased them for R30 each. The cost of the stock was R50.
 Stock with a market value of R14 000 and cost of R8 000 was donated to an orphanage. This is not
registered as a PBO.
 Betty Blue made a R50 000 donation to the Makeup Institute of South Africa, a registered public benefit
organisation. Betty Blue did receive the necessary section 18A income tax certificate for the donation
made from the institute.
12. Travel expenditure
 During April 2019, the managing director and his wife (not an employee of the company) attended a
conference for business purposes in Cape Town. The trip cost R11 500 and R9 000 for the managing
director and his wife respectively.
13. Repairs
 The unpaved parking lot for approximately 40 vehicles washed away after a cloudburst. The parking lot
was repaired and paved with bricks at a cost of R50 000. Additional parking space for approximately 15
additional vehicles was provided simultaneously at a cost of R25 000.
14. The cost price of fixed assets that the company used during the year consists of the following:
R
 Manufacturing machine Z purchased new on 1 May 2019. 500 000
 Truck purchased second hand on 1 December 2019 800 000
 Burglar alarm purchased on 1 March 2009 60 000

 Manufacturing building purchased on 1 January 2015 2 500 000
 Second hand commercial building. 1 500 000
2
 Manufacturing machine A purchased second hand on 1 April 2019. The machine was
not bought from a connected person. This machine was sold on 31 January 2010 for
R100 000. Fafa (Pty) Ltd selected the section 11(o) allowance. 200 000
Interpretation note 47 allows the following write-off periods for assets:
 Trucks 4 years
 Burglar alarm 6 years
The company incurred an assessed loss of R90 000 during the previous year of assessment.
Provisional tax payments for the 2019 year of assessment amount to R100 000.
Calculate the tax liability of Betty Blue (Pty) Ltd for the 31 December 2019 year of assessment.
You must start your calculation with the taxable income of R2 356 000, taking into account the above-mentioned
transactions for taxation purposes only.
Activity 2
VenusFlytrap (Pty) Ltd (VenusFlytrap) sells exotic plants and animals from the Amazon rainforest by buying them
from local residents and selling them to interested buyers in South Africa. Venus Flytrap’s year-end is on 28
February 2020 and it is regarded as a small business corporation as defined in the Income Tax Act. The following
was the statement of comprehensive income for the 2020 year of assessment:
Statement of comprehensive income Notes R

Sales 1 690 000
Cost of sales 1 (800 000)
Gross profit 890 000
Other income 147 000

Dividends 120 000
Interest 27 000
Expenses 1 132 750

Salaries 370 000
Water and electricity 10 000
Provision for doubtful debts 2 ?
Bad debts 3 8 000
Damages and compensation 4 23 250
Legal fees 4 3 000
Travel expenses 5 52 300
Restraint of trade 6 66 200
Bonus scheme provision 7 600 000
Net loss before tax ?
Notes
1. Cost of sales comprised of the following:

R
Opening stock (at cost price) 720 000
Plus: purchases 180 000
3
Less: closing stock (at cost price) (100 000)
800 000
The market value of stock was as follows:

Opening stock on 1 March 2019 780 000
Closing stock on 28 February 2020 180 000
Not included in any of the above figures was a donation made by a previous customer who purchased an Amazon
River dolphin, named Freddy, four years ago for R10 000. He no longer had the capacity to keep the animal, and
gave Freddy to VenusFlytrap for no consideration. Amazon River dolphins had a market value of R18 000 on the
day he was given to VenusFlytrap. Freddy was not sold by the end of the year of assessment.
2. One of the company’s customers was liquidated. VenusFlytrap received 20cents in the rand from the
liquidator. The total debt was R10 000.
3. A Capuchin monkey held in the shop attacked one of the customers, Mr Phantsy, by jumping on his head
and pulling his hair. Mr Phantsy subsequently sued VenusFlytrap for emotional distress. The claim against
VenusFlytrap succeeded and a court ordered VenusFlytrap to pay Mr Phantsy an amount of R23 250.
VenusFlytrap incurred legal expenses of R3 000 when opposing the claim by Mr Phantsy.
4. VenusFlytrap paid for the wife of the CFO, Mr Anilovr, to take a trip to South America during July 2020 to
visit the Yanomami tribe, as this has been her lifelong dream. This was given to her as a gift for the support
she has been giving Mr Anilovr.
5. After Mr Anilovr’s wife had taken the trip, they decided to move to South America. VenusFlytrap paid Mr
Anilovr a restraint of trade of R66 200 for a period of five years.
6. VenusFlytrap made an agreement with employees to pay a bonus of R300 000 per employee should all the
stipulations of the agreement be met by the bonus scheme expiry date. A bonus of R600 000 was made
based on expectation.
OTHER INFORMATION
The first provisional tax payment for the 2020 year of assessment amounted to R62 000 and the second
provisional payment was R72 000.
Calculate the tax liability/ refund of VenusFlytrap (Pty) Ltd for the year of assessment ended 28 February 2020.
Also, indicate in your answer whether it is a tax refund or a tax liability.
4
Activity 3
Whizzers (Pty) Ltd manufacture sweets. The taxable net income of the company, before the following
transactions were taken into account, for the year of assessment ended 30 April 2019 amounted to R910
000:
1. On 1 February 2019 machine B, with a purchase price of R500 000, was purchased new for the factory
in terms of an instalment sales agreement and was brought into use on the same date. Interest of
R113 201 will be paid over a 5-year period of which R7 585 relates to the period 1 February 2019 to 30
April 2019.
This machine was purchased to replace machine Z which was technologically obsolete. Machine Z was
purchased 31 October 2011 for R228 000 (including VAT) and the original installation costs amounted
to R10 000. The cost to move machine Z from the old to the new factory AAA amounted to R5 000 in
the current year. Machine Z was sold on 1 February 2019 for R25 000. Assume that there was no
paragraph 65 or 66 of the 8th schedule application for the replacement.
2. Whizzers (Pty) Ltd further decided to build a new factory on vacant premises BBB, which has been
leased for a 10-year period from GGG Property Ltd. The lease contract was signed on 1 July 2018 and
stipulated the following:
 On the signing of the contract a lease premium of R80 000 for the right of use of the land was
payable.
 The erection of a factory building to the value of R480 000. Building commenced on 1 August
2018 and the factory was completed on 1 October 2018 at a total cost of R500 000 and brought
into use on 31 October 2018.
 The monthly rental amounted to R10 000 and was payable from 1 July 2018
 The contract makes provision for a renewal period of 5 years.
3. A fax machine with a tax value of Rnil and a market value of R500 on 29 February 2019, was donated
to the shareholder, Mr Whizz on this date. The fax machine originally cost R3 000.
4. A luxury passenger vehicle was leased by Whizzers from 1 July 2018 and the use of the vehicle was
granted as a fringe benefit to the managing director. The cost price of the vehicle was R438 900
(including VAT). The monthly lease payment amounted to R95 350 in total for the period 1 July 2018
– 30 April 2019.
Calculate the tax liability/ refund of Whizzers Ltd for the year of assessment ended 30 April 2019. Also, indicate
in your answer whether it is a tax refund or a tax liability.
5
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QUESTION 5 34 Marks
You have been approached by a number of clients (all residents of the Republic) requesting some normal
tax advice. You need to respond to each of these queries individually. You may ignore Value-Added
Tax.
CASE 1 18 marks
As a result of the high rates of crime in South Africa, Jack Alert, trading as Extreme Alert Alarms, conducts
an extremely successful business in the field of installation and maintenance of burglar alarms. When
shop comprises 10% of the floor area of
his home. His workshop is specifically equipped for his business and is regularly and exclusively used for
his trade purposes. Jack incurred the following expenses and losses in this regard during the 2019 year
of assessment:
(i) The interest portion of the mortgage loan repayments on his home loan amounted to R100 000
during the current year of assessment. He paid a further R20 000 on the capital balance out-
standing on the loan in respect of this same period. Jack wishes to claim these payments as
deductions for normal tax purposes. (5)
(ii) Apart from having a full-time assistant in his employment, Jack Alert has to make use of his
housekeeper to take down messages left by clients and potential clients, when he and his
assis
pays his housekeeper an additional R500 per month for performing the aforementioned task.
00. Jack wishes to deduct the R6 000, for taking
down the business related messages, that he pays per year to his housekeeper, from his
income earned from his business. (3)
(iii)
Jack paid R1 500 as a result of the attack, i.e. R1 000 for the medical treatment and R500 as
compensation for the shock and anxiety caused by the attack. Jack wishes to claim the R1 500
as a deduction against his business income. He believes it was incurred as part of his business
premises. (5)
(iv) While Ja
broke into his bakkie (which he uses solely for business purposes) and stole his car radio. The
loss incurred amounted to R580. Fortunately, his insurance contract provides cover in respect
of stolen goods, but at year-end he was still waiting for the insurance claim to be paid out. He
wishes to deduct the R580 expenditure incurred in the determination of his taxable income. (2)
(v) station (i.e. computer unit) during the 2019 year of

assessment and brought it into use for business purposes during the same year of assessment.
the 2019 year of assessment, at a total cost of R2 000. Jack wishes to deduct the transport
costs of R2 000 in the determination of his taxable income. (3)
REQUIRED MARKS
Discuss, with reasons, whether each of the aforementioned expenses and losses are de-
ductible ment.
18
In your answer you must refer to relevant legislation and deal with each query separately.
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QUESTION 5 (continued)
CASE 2 2 marks
Steven Knowledge, a
30 November 2017. He was paid the sum of R500 000 as compensation for the restraint of trade imposed
on him. He included this amount in his gross income in terms of paragraph (cA) of the gross income
definition in respect of his 2018 year of assessment.
In May 2018 he breached the restraint of trade agreement and was required to repay an amount of
R250 000 to his former employer.
REQUIRED MARKS
Indicate the normal tax implications (if any) for Steven Knowledge that will result from the
repayment of the restraint of trade amount during his 2019 year of assessment. Assume
that current legislation remains in force. 2
CASE 3 5 marks
On 1 November 2018, Builders Best Ltd acquired a vacant piece of land in a new urban development
residential estate for R800 000. During the period 1 November 2018 to 30 June 2019, Builders Best Ltd
erected seven residential houses on this land. The houses were all rented out during the period from
1 August 2019 to 1 October 2019. As a result of its sound reputation and a strong relationship with its
building suppliers, Builders Best Ltd managed to obtain discounted rates on most of its building materials
used. It was therefore able to construct each house at an average cost of R400 000 each. It was, however,
estimated that the market value of each house upon its date of completion was R450 000.
REQUIRED MARKS
(a) Calculate what allowance(s), if any, Builders Best Ltd will be entitled to in its year of
assessment ending 31 October 2019. 3
(b) Calculate the allowance(s), if any, if Builders Best Ltd purchased the seven houses
from a developer at a cost of R600 000 each (excluding the cost of land). 2
CASE 4 6 marks
Company A leased plant for its business from Company B (not a connected person) for a period of two
years at an annual rental of R150 000. These rental payments were fully deductible by Company A for
normal tax purposes. Company X, the majority shareholder of Company A, was given the option to acquire
the plant at the end of the 2-year lease period for an amount of R30 000. Company X exercised this option
at the end of the lease when the fair market value of the plant was R90 000. Assume that plant would
normally qualify for a 5-year write-off period in terms of Binding General Ruling (or Interpretation Note No
47).
REQUIRED MARKS
Indicate the normal tax implications for Company A and Company X respectively arising
6
from the exercise of the option by Company X. Provide brief reasons.
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CASE 5 3 marks
On 1 October 2018, Rosy Seedlington (a non-disabled person who has a NQF level 7 qualification) entered
into a learnership agreement registered in terms of the Skills Development Act, 1998, with a period of two
years (to be completed on 30 September 2020). She is a new employee of Seeds for Africa (Pty) Ltd and
would, in terms of the learnership agreement, learn the ins and outs of planting and growing seedlings.
She would earn a salary of R36 000 per year for the duration of her learnership.
REQUIRED MARKS
Calculate the allowances that Seeds for Africa (Pty) Ltd is entitled to under the provisions of
section 12H for its years of assessment ending on 31 December 2018 and
31 December 2019. Assume that current legislation remains in force for both years of
3
assessment. Show your workings.
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QUESTION 6 23 Marks
This question consists of two unrelated parts. All amounts exclude Value-Added Tax (VAT), where
applicable.
PART A 16 marks
Tons of Tyres (Pty) Ltd (a resident company) with a 28/29 February year end, carries on a process of
manufacturing tyres. The company is not a small business corporation.
Listed below are transactions entered into for the 2019 year of assessment.
1) Tons of Tyres (Pty) Ltd paid R23 800 during the year to register their -
which is used in the production of income.
2) Tons of Tyres (Pty) Ltd owns a commercial building (from which they operate). The construction of
the building commenced during the 2018 year of assessment and the building was brought into use
on 1 September 2018. The cost of the building was R5 500 000.
3) The company decided to expand their operations to Cape Town. A suitable premises was identified
and a lease agreement was signed. The details of the agreement are as follows:
Monthly rental: R40 000
Lease term: 5 years
Lease premium: R25 000 (payable on the commencement date of the lease)
Commencement date: 1 May 2018
During the first three months of trading, the operations in Cape Town did exceptionally well and the
directors realised that the leased premises would not be sufficient for their requirements. They
approached the owner of the premises and an obligation was written into the agreement in terms of
which the leasehold premises would be improved to the value of R750 000. They commenced with
the improvements during September 2018 and completed the improvements by 30 April 2019. The
total cost of the improvements was R950 000.
4) On 31 December 2018 an electrical fault resulted in a fire in one of the workshops. Due to the speedy
reaction of the security guard, the fire was contained and only a mobile fitment centre (mobile caravan
converted into a mobile fitment centre) was destroyed in the fire. This mobile fitment centre is not
regarded as being used in the process of manufacturing. The mobile fitment centre was purchased
for R420 000 (and brought into use) on 1 March 2016. The write-off period of mobile caravans, in
terms of Binding General Ruling (or Interpretation Note No 47), is five (5) years. Tons of Tyres (Pty)
Ltd received an indemnity payment of R50 000 (excluding VAT).
5) Machine 101B, used directly in the process of manufacture, was sold to one of the holders of shares.
The machine was sold for R20 000 on 30 November 2018 and had a market value of R50 000 on this
date. The machine was initially acquired (new) and brought into use on 1 January 2017 for an amount
of R150 000.
REQUIRED MARKS
Calculate all the tax allowances and deductions that Tons of Tyres (Pty) Ltd is entitled to
in its 2019 year of assessment in respect of the above mentioned transactions. Indicate,
16
with reasons, if the company is not entitled to any allowance/deduction for any of the
above transactions. Show all calculations and round off to the nearest Rand.
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PART B 7 marks
Despite all of the previous research performed by Tons of Tyres (Pty) Ltd, one of Tons of Tyres (Pty)
customers burst a tyre after hitting a pot-hole, resulting in the driver losing control of the vehicle and hitting
a concrete wall. Tons of Tyres (Pty) Ltd paid, in terms of a court settlement, the repairs amounting to
R65 000, as well as the legal expenses of R5 000.
REQUIRED MARKS
Discuss, with reference to case law and legislation, whether the R70 000 paid in terms of
the settlement will be deductible in the hands of Tons of Tyres (Pty) Ltd for tax purposes.
7
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QUESTION 8 40 Marks
On 1 August 2017, Mr Jack Rhite decided to commence with his own business the manufacture and sale
of revolutionary new machines that are built for the strengthening and toning of muscles and certain
movable body parts. These machines will play a significant role in the healing of sport injuries. In light of
-profile
rugby team to expire, subsequent to which his company, Sports Kinetics (Pty) Ltd, was incorporated in the
Republic of South Africa on 15 January 2018. Sports Kinetics (Pty) Ltd only commenced trading on 1
March 2018.
Rhite, as the sole holder

of shares of the company, decided to expand operations. In September 2018 Sports Kinetics (Pty) Ltd
acquired all the shares in a South African resident company called Sports Revolution (Pty) Ltd.
Mr Rhite has appointed your audit firm to perform the annual audit of Sports Kinetics (Pty) Ltd and as a
ment
ended 28 February 2019. You have been provided with the following income and expenditure statement.
Note that all amounts exclude VAT. Sports Kinetics (Pty) Ltd is not a small business corporation as
defined in section 12E of the Income Tax Act.
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 28 FEBRUARY 2019
Notes R R
Income
Gross profit on sales to RSA residents 1 5 300 000
Other income 2 140 000
5 440 000
Expenses, losses, allowances and distributions

Property rental 3 140 000
Lease premium and lease payments 4 190 000
Depreciation on leasehold improvements 4 55 000
Depreciation on fixed property new office block 5 18 750
Depreciation on other fixed assets 6 133 680
Pre-trade expenditure 7 50 000
Telephone and internet 15 000
Interest paid on loan 8 12 000
Donation (section 18A certificate obtained) 65 000
Staff costs 9 220 000
Restraint of trade payment 10 80 000
Repairs and maintenance 11 26 000
Legal expenses 12 500
Provision for doubtful debt 13 45 000
Dividend declared 14 135 000 (1 185 930)
Net income 4 254 070

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Notes and additional information
1 Gross profit:
In arriving at gross profit, assume that the cost of sales figure per the statement of comprehensive
income has been correctly calculated (but also see the remainder of this note and export sales in
note 2). Trading stock with a cost of R60 000 was donated by Sports Kinetics (Pty) Ltd to Mr Rhite
on 28 February 2019. The market value of this stock was R70 000 on this date. For accounting
purposes, these items were merely excluded from closing stock.
2 Other income of R140 000 is made up as follows:
- R80 000: local dividend received from Sports Revolution (Pty) Ltd
- R40 000: income received from
parties).
- R20 000: interest received from a local bank.
3 Property rental:
The rentals were paid by Sports Kinetics (Pty) Ltd in terms of a six-month lease agreement for the
period 1 March 2018 to 31 August 2018, for the temporary use of a building accommodating its
manufacturing operations, until the erection of its factory (refer note 4) was completed. The payments
were made monthly in arrears. The lease agreement was terminated on 31 August 2018 by mutual
agreement between the parties. No further obligations arose from the termination of the contract.
4 Leasehold improvements:
On 1 April 2018, Sports Kinetics (Pty) Ltd entered into an agreement with Support Fanatics (Pty) Ltd
for the lease of land owned by Support Fanatics (Pty) Ltd. The lease agreement provided for the
following:
- the duration of the lease agreement was for 20 years, commencing 1 April 2018;
- a lease premium of R80 000 had to be paid on this date and rental of R10 000 per month was
payable for the duration of the agreement; and
- the lessee (i.e. Sports Kinetics (Pty) Ltd) had to erect a factory on the land at a cost of
R1 000 000.
Construction of the factory commenced once the plans had been approved and the factory was
completed and occupied on 1 September 2018 at an actual cost of R1 200 000. The value of the
income in terms of paragraph (h) of the definition
5 Erection of new office block:
On 10 January 2018, Sports Kinetics (Pty) Ltd acquired vacant land for R500 000. On 15 June 2018,
Sports Kinetics (Pty) Ltd entered into a building contract for the erection of a new office block on this
land at a total cost of R1 500 000. The office block was completed and the offices occupied by Sports
Kinetics (Pty) Ltd on 1 December 2018.
6 Depreciation:
Depreciation for the year for accounting purposes amounts to R133 680 in respect of the following
assets (note that all these assets were brought into use from the date of acquisition):
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Purchase date: Cost price:
- Office furniture 1 May 2018 R100 000 (excl. VAT)

Note: In terms of Binding General Ruling
(or Interpretation Note No 47) to
the Income Tax Act, the write-off period for
office furniture is 6 years.
- Second-hand delivery vehicle (not a motor car) 1 March 2018 R68 400 (incl. VAT)
(note that the cost price includes VAT at 14%)
Note: In terms of Binding General Ruling
(or Interpretation Note No 47) to the
Income Tax Act, the write-off period for delivery
vehicles is 4 years.
- New machine 1 May 2018 R500 000 (excl. VAT)

Note: The machine is used by Sports Kinetics
(Pty) Ltd in its manufacturing process and qualifies
for a section 12C allowance.
7 Pre-trade expenditure of R50 000 is made up as follows:
- R40 000: garden lay-out and paving on the aforementioned land acquired on 10 January 2018
- R2 500: stationery purchased (no stationery on hand at year-end)
- R7 500: other trading expenditure (would have been deductible in terms of section 11(a) of the
Income Tax Act if incurred after trade commenced)
8 Interest paid on loan:
A loan was raised to acquire the shares in Sports Revolution (Pty) Ltd. Interest of R12 000 was paid
on this loan in respect of the 2019 year of assessment. Sports Revolution (Pty) Ltd operates as a
business in the same industry as Sports Kinetics (Pty) Ltd and 90% of its receipts and accruals
co
9 Staff costs:
Staff costs of R220 000 include salaries of R200 000 and contributions to the pension and medical
aid funds of R20 000 on behalf of staff members.
10 Restraint of trade payment:
On 5 November 2018, Mr de Brain, the head of the manufacturing department, resigned with
immediate effect. At that stage it was believed that a rival company made him an offer he could not
refuse. Sports Kinetics (Pty) Ltd responded by paying Mr de Brain R80 000 for agreeing not to share
11 Repairs and maintenance:
- R16 000: On 2 January 2019, a part of Spor

lightning with the result that a part of the roof was damaged to such an extent that it had to be
repaired. The cost amounted to R16 000 and was not recovered from the insurance fund.
- R10 000: The parking area in front of the office block was expanded to accommodate more
visitors and improve the image of the company.
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12 Legal expenses:
Cost in attempting to collect the amount owing by an ex-employee in respect of a cash loan granted
to him while he was in employment by Sports Kinetics (Pty) Ltd.
13 Provision for doubtful debt:
At year-end a list was compiled, detailing all trade debtors who are considered a risk of defaulting on
their payments as the amounts were 60 days in arrears. The total amount of the list came to R45
000. The company does not apply IFRS 9.
14 Dividend declared:
Sports Kinetics (Pty) Ltd declared a dividend of R135 000 to Mr Rhite on 28 February 2019.
REQUIRED MARKS
Calculate the normal tax liability of Sports Kinetics (Pty) Ltd for the year of
assessment ended 28 February 2019. Commence your calculation with net income,
as per the statement of comprehensive income. Motivate with brief reasons and
show all your workings/calculations for adding back or deducting an amount. You
are also required to show amounts that have no tax effect (in other words, tax
treatment = accounting treatment) with a brief motivation/reason. Apportion, where
applicable, on a monthly basis.
Use the following framework for your calculation:
R R
Net income as per the statement of comprehensive income 4 254 070
Add back/(Deduct):
Item (in same order as per the statement of comprehensive income)
& relevant motivation/calculation
_______
Taxable income/(Assessed loss) net amount
Normal tax liability 40

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QUESTION 13 18 Marks
1. On 1 February 2019, the local municipality of Durban North entered into an agreement with
Prosper Professionals (Pty) Ltd for the lease of government owned land. Note that the local
municipality (lessor) is tax exempt. Prosper Professionals (Pty) Ltd is a private company (not a small
business corporation as defined), independent from government, that carries on business as health
and safety consultants. The company has a December year-end and is a registered VAT vendor. A
o access
and ease of use of buildings in the work place for disabled persons) at various government and semi-
government institutions.
The lease agreement provided for the following (all amounts under note 1 exclude VAT):
- The duration of the lease agreement is for 20 years, commencing 1 February 2019;
- A lease premium of R120 000 had to be paid on 1 February 2019 and rental of R10 000 per
month is payable for the duration of the agreement from 1 February 2019; and
- Prosper Professionals (Pty) Ltd undertook the building of a new office block for business use on
the land at a cost of R1.8 million.
Construction of the office block commenced on 15 February 2019 and the building was completed
on 1 August 2019 at an actual cost of R2 million. The building was brought into use immediately,
i.e. 1 August
2. On 10 August 2019, Prosper Professionals (Pty) Ltd won a large tender for a long-term project in the
Western Cape. The project commenced on 1 October 2019. As a result and in order to
accommodate its employees who were seconded from Durban to the Western Cape for the purposes
of the project, Prosper Professionals (Pty) Ltd purchased eight brand new apartments in a residential
building (consisting of 20 apartments) in close proximity of the area where the project was to be
undertaken.
The apartments were purchased on 15 September 2019 directly from the developer (a registered
VAT vendor) at a total cost of R210 000 each (excluding VAT). As from 30 September 2019, six of
the other two apartments were rented out for R2 500 (excluding VAT) each per month. These two
apartments were rented out as from 1 October 2019. Note that the VAT implications must be taken
into account.
3. During the 2019 year of assessment, Prosper Professionals (Pty) Ltd purchased two emergency
evacuation chairs (chairs utilised for the purposes of evacuating a physical impaired person from a
building in an emergency situation) as trading stock from a preferred supplier at a total cost of
R12 000 (excluding VAT). At year-end Prosper Professionals (Pty) Ltd gave one of these chairs to
a client during a marketing campaign. The other chair was still on hand at year-end. The market
value of the chair at year-end amounted to R7 000 (excluding VAT).
REQUIRED: MARKS
taxable income, for the year of assessment ending 31 December 2019. Show all your
workings/calculations, with a motivation/reason (including reference to legislation, where
relevant) for deducting an amount or claiming an allowance, or for not allowing a 18
deduction/allowance, where applicable.
Exam 2012 - Question 1 Part B adapted
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ADDITIONAL QUESTIONS AND SUGGESTED SOLUTIONS
QUESTION 18 6 Marks
Pharma City (Pty) Ltd is a wholesale pharmaceutical supplier with a 31 December year-end. The company
is not a small business corporation.
On 1 December 2019, Pharma City (Pty) Ltd debt amounted to R700 000.
The debt is made up as follows:
Creditor 1 Purchase of delivery vehicle (purchased during 2018) R400 000

Creditor 2 Purchase of trading stock (purchased during 2019) R300 000
The company experienced financial difficulties and was unable to pay its outstanding debt. As a result,
both creditors discharged the outstanding debt owing by Pharma City (Pty) Ltd on 1 December 2019.
On this date, Pharma City (Pty) Ltd had closing stock of R180 000 (all purchased from Creditor 2) and the
delivery vehicle had a tax value of R300 000.
REQUIRED MARKS
Discuss, supported by calculations and with reference to Income Tax legislation, the tax
6
assessment.
Extract Test 2 2013 adapted
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QUESTION 19 30 Marks
This question consists of two related parts (A and B).
Etophia (Pty) Ltd (Etophia) is a South African company that manufactures leather suitcases and handbags.
The company has a December year-end and is a vendor for value-added tax (VAT) purposes with monthly
tax periods. All amounts exclude VAT, unless specifically stated otherwise.
The information under Parts A and B relates to the 2019 year of assessment of Etophia (Pty) Ltd:
PART A 20 Marks
Factory buildings owned or leased:
On 1 January 2017 Etophia purchased a plot of land for R450 000. Erection of a factory on this land
commenced on 1 February 2017. It was completed on 30 September 2017 at a cost of R2 500 000 and was
brought into use in a process of manufacture on 1 October 2017.
As a result of continued unrest in the vicinity of this factory, the board of directors of Etophia decided on
1 March 2019 to dispose of the land and buildings as soon as possible. The land and buildings were sold to
a non-connected party on 30 September 2019 for R3 300 000, of which R500 000 was for the land and
R2 800 000 for the buildings. Etophia continued to use the land and buildings in its process of manufacture
for the period 1 March 2018 to 30 September 2019.
In anticipation of the proposed sale, Etophia, entered into a 20-year operating lease agreement with Inco Ltd
(a South African taxpayer) for the lease of an industrial site on 1 March 2019. This lease agreement stipulated
that Etophia would:
pay a premium of R75 000 on 1 March 2019;

erect a factory on the site at a cost of R2 800 000; and
from 1 March 2019, pay a monthly rental of R20 000.
Erection of the factory commenced on 1 April 2019. It was completed on 30 September 2019 and was
brought into use on 1 October 2019. The cost of the factory was R3 300 000.
REQUIRED MARKS
(1) Calculate the effect of the information provided above on the taxable income of
Etophia (Pty) Ltd for the year of assessment ending 31 December 2019.
Show all calculations and round off all amounts to the nearest Rand.
Assume that Etophia (Pty) Ltd wants to limit its normal tax liability for the 2019 year
of assessment to a minimum and will make any elections available to it in order to 12
achieve this. Refer to applicable legislation.
(2) Assume that Etophia (Pty) Ltd entered into the operating lease with the Municipality
of Tshwane and not with Inco Ltd as stated in Part A. Discuss the implications of the
premium paid and the erection of the factory on the taxable income of
Etophia (Pty) Ltd for the year of assessment ending 31 December 2019. 8
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PART B 10 Marks
1. Market research
colour of choice when purchasing suitcases and handbags. The total cost of the market research
amounted to R50 000.
The final results of the research showed that smoky grey was definitely the preferred colour of choice.
2. Second-hand plant
On 1 May 2019, Etophia purchased a second-hand plant from Suppa (Pty) Ltd (a connected person)
for R220 000. Etophia brought the plant into use in its process of manufacture on the same day. This
plant was independently valued at a market value of R225 000 on 1 May 2019.
3. Residential property
On 1 November 2017, Etophia bought, from the developer, five (5) of the twenty (20) flats in a newly
erected block of flats in the Republic, at a total cost of R300 000 (including VAT) each. All five (5) of
these flats were let to employees for a monthly rental of R2 500 each, effective from 1 December 2017.
Etophia does not own any other residential units in the Republic.
4. Learnership agreement
Solomon Mathlanga (who is disabled and has a NQF level 6 qualification) has been in the employ of
Etophia since 1 January 2019. Solomon receives remuneration of R170 000 per annum. On
1 January 2019 Solomon entered into a 12-month registered learnership agreement with Etophia. He
successfully completed the learnership agreement on 31 December 2019.
REQUIRED MARKS
Calculate the implications of all the above transactions on the taxable income of
Etophia (Pty) Ltd for the year of assessment ending 31 December 2019.
Show all calculations and round off all amounts to the nearest Rand. 10
Test 2 TAX4861 2014 - adapted
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This question consists of two related parts (Part A and Part B).
QUESTION 3 40 marks
This question consists of two related parts.
PART A
and is listed on the JSE. BP Motors manufactures budget cars, a process classified as a process of
manufacture by SARS. BP Motors is a VAT vendor and has a 30 September year-end. BP Motors is not a
small business corporation as defined, in terms of section 12E of the Income Tax Act.
All amounts include VAT at 15%, unless stated or implied otherwise and all parties are VAT vendors.
All valid VAT invoices and the requisite supporting documents are in place.
transactions into account:
1. During the 2016 year of assessment, BP Motors purchased a plot of land for R2.8 million from an
unconnected party. The land was purchased with the initial intention of erecting two identical blocks of
flats, (Block A and Block B), for occupation by the employees of BP Motors. However, the directors
decided that two floors of Block A will be constructed as commercial office space and the residual two
floors in Block A as well as all the floors in Block B for residential purposes. As a result, the total
commercial use was 25% and the residential use was 75%. The residential part contains fifteen (15)
flats per floor. The two blocks were completed on 28 February 2019. The commercial offices in Block
A were used to make 100% taxable supplies. The total cost for the erection of the two blocks amounted
to R18 750 000 (excluding the cost of the land).
the production department) for a rental of R1 100 per month.
2. On 15 December 2018, one of the assembly robots used in the process of manufacturing the cars was
damaged beyond economic repair, due to an electrical fault. The robot was purchased new and unused
for R1.4 million (excluding VAT), on 10 May 2018. The insurance compensated BP Motors, on 10 April
2019, for the damage by paying R1.7 million (market value on the date of the damage), into the
-
connected third party and delivered at BP Motor May 2019. It was brought into use on
10 May 2019. The cost of the replacement machine amounted to R1.3 million (excluding VAT) and was
paid on 30 May 2019.
3. On 1 July 2018, Herbie (not a disabled person) entered into a 12-month registered learnership
agreement with BP Motors as a specialised robotic technician. Herbie holds a NQF level 6 qualification.
Herbie successfully completed the learnership agreement on 30 June 2019. BP Motors paid Herbie a
salary of R6 000 per month, which has not been taken into account in taxable income for the 2019 year
of assessment.
4. BP Motors applies IFRS9. The total impairment loss allowance, in terms of IFRS9, was R3,2 million
for the 2019 year of assessment. It consisted of R1,2 million measured at an amount equal to lifetime
expected credit loss and R2 million at an amount equal to the 12-month expected credit losses. All
amounts are in respect of trade debtors. SARS allowed BP Motors to claim a doubtful allowance of
R700 000 in the 2018 year of assessment.
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5. On 30 September 2019 BP Motors paid the short-term insurance on the manufacturing building for the
period of 1 October 2019 to 30 September 2020 (evenly incurred). The total premium paid amounted
to R580 000.
PART B
BP Motors holds all issued shar

8 is a South African resident and has production plants in Germany and the United States of America
September year-end.
During the 2019 year of assessment, the USA plant of Fast 8 admitted guilt to the violation of the
Clean Air Act of the USA concerning a diesel emission scandal. The company admitted that a number of
cars were programmed to turn on the pollution controls during the diesel emission testing but the pollution
controls would turn off when the cars were on the road for performance purposes. This resulted in the
actual emission far exceeding the legal limits. The company was fined R1 billion under the Clean Air Act.
Fast 8 spent R5 million on legal costs during the 2019 year of assessment in defence of the fine imposed
Fast 8 donated one luxury car to a local church that was given as a prize in a church draw to raise funds,
on 1 June 2019. The open market value of the luxury car was R900 000 on the day of the donation. The
manufacturing cost of the car was R500 000, during the 2019 year of assessment. The church is a public
benefit organisation as defined and a section 18A receipt was issued to Fast 8 with regards to the donated
luxury car.
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QUESTION 3 25 marks
LEX Ltd is a company that is incorporated in South Africa and is listed on the JSE. LEX Ltd holds all of the
issued share capital of RK (Pty) Ltd (referred to as RK) and of ART (Pty) Ltd (referred to as ART) and has
done so since the dates of incorporation. LEX, ART and RT are a group of companies as defined in
section 41 of the Income Tax Act.
All three companies are incorporated in South Africa as well as effectively managed in South Africa and
are regarded as residents for South African taxation purposes. The companies are all involved in the motor
manufacturing industry.
The three companies all have a February financial year-end and the pro forma statement of financial
position (balance sheets) of RK and ART for the financial year ended 28 February 2019 are summarised
below:
ART (PTY) LTD

STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 2019
Note R million
ASSETS
Non-current assets 5 500
Borrowings (loan) due from fellow subsidiary 1 0
Property, plant and equipment 5 500
Current assets 6 650

Trade receivables 2 500
Inventories 1 750
Cash 2 400
Total assets 12 150
EQUITY AND LIABILITIES

Equity attributable to owners 7 305
Share capital 1 100
Retained revenue 6 205
Current liabilities
Trade payables 4 845
Total equity and liabilities 12 150
Note:
1. The loan amounts to R125 million and comprises a capital element of R100 million and accrued
interest of R25 million. The loan has been impaired as a result of the financial position of RK. The
impairment led the company to claim the R25 million as a bad debt deduction in terms of section 11(i)
of the Income Tax Act in its year of assessment ended 28 February 2019.
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The loan was originally advanced during the financial year ended 28 February 2016 and was funded out
of surplus cash.
RK (PTY) LTD
STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 2019
Note R million
ASSETS
Non-current assets
Property, plant and equipment 400
Current assets 910

Trade receivables 375
Inventories 535
Total assets 1 310
EQUITY AND LIABILITIES

Equity attributable to owners 125
Share capital 100
Retained deficit 1 (100)
Borrowings (loan) from fellow subsidiary 2 125
Current liabilities 1 185

Trade payables 1 025
Bank overdraft 160
Total equity and liabilities 1 310
Notes:
1. The company is in an assessed loss position for the year of assessment ended 28 February 2019
and is expected to have accumulated an assessed loss amounting to R55 million at the end of the
year of assessment ending 29 February 2020.
2. RK used the funds received from ART to fund the acquisition of land and buildings utilised for
purposes of its trade. Tax allowances have not been claimed on the buildings so acquired, as they
do not qualify for allowances in terms of the Income Tax Act. The R25 million interest expenditure
incurred on the loan has, however, been claimed as a deduction in terms of section 24J of the Income
Tax Act.
The financial director of LEX Ltd has proposed that ART waive its right to recover the R125 million loan
due from RK. He envisages that the transaction should be concluded in April 2019. The purpose of the
transaction would be to strengthen the balance sheet of RK (Pty) Ltd as the company is experiencing
severe cash flow problems.
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REQUIRED Marks
Discuss, with full supporting reasons and reference to relevant provisions of the Income Tax
Act, the potential taxation consequences arising from the proposed transaction from the
perspectives of both ART (Pty) Ltd and RK (Pty) Ltd. 25
Assume the following:
- The income tax legislation for the 2020 year of assessment will remain the same as
legislation applicable to the 2019 year of assessment.
- The waiver of debt is not a scheme to avoid tax.
NOTE:
Your solution should deal with any consequences of the proposal, with regard to normal
tax (including capital gains tax (CGT)) and donations tax.
(QE 2005 paper 1, question 2 - adapted)

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QUESTION 4 52 marks
Kiddies Cards (Pty) Ltd (referred to as Kiddies) is a company resident in South Africa. It designs and
manufactures cards that are collected by children and sells these cards to producers of breakfast cereals
and snack foods. Its financial year ends on the last day of February each year.
The issued ordinary share capital of Kiddies was held as follows throughout the 2019 financial year:
These four holders of shares were also the sole directors of Kiddies during the 2019 financial year. Jessy
Ash is its managing director. Jessy Ash, Tyson James and Max Pokemon are all full-time employees and
executive directors of Kiddies and as such they receive salaries from the company. Yugi Yuglyo is a non-
executive director. All
draft statement of comprehensive income.
(Note that all amounts reflected in the detailed draft statement of comprehensive income below and
in the notes that follow on it exclude VAT where appropriate unless specifically stated to the contrary.
Kiddies is a registered VAT vendor, making 100% taxable supplies.)
The detailed draft statement of comprehensive income of Kiddies for the year ended 28 February 2019 is as
follows:
Notes R R
Sales 16 250 000
Less: Cost of sales (12 500 000)
Opening stock (1 525 000)
Purchases 1 (11 575 000)
(13 100 000)
Less: Closing stock 1 600 000
Gross profit 3 750 000
Add: Sundry income 209 860
Dividend income 2 29 000
Capital profit on sale of local shares 3 80 000
Insurance settlement received 4 27 360
Prescribed debt 5 6 000
Profit on sale of machine A 11 67 500
3 959 860
Less: Expenditure (3 809 860)
Bad debt 6 (45 000)
Increase in provision for doubtful debt 7 (6 000)
Depreciation on motor vehicle 8 (37 050)
Depreciation on computer 9 (5 700)
Finance charges 10 (2 200)
Depreciation on machine A 11 (12 500)
Depreciation on machine B 11 (18 750)
Depreciation on other machinery and depreciable
assets 12 (86 250)
Rentals 13 (67 500)
Insurance premiums 14 (81 000)
Salaries, wages and benefits 15 (2 900 000)
Restraint of trade 16 (336 000)
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17 (9 500)
Provision for leave pay 18 (117 000)
Interest 19 (40 000)
Cost of trademark written off
Other tax-deductible administrative and marketing (45 410)
expenses
Comprehensive income (net profit) before tax 150 000
Additional notes
1. On 1 February 2019, Kiddies concluded a contract to import raw materials from an American supplier
at a cost of $24,000. The raw materials were shipped free on board on 22 February 2019 but had
not arrived in South Africa by 28 February 2019. Being concerned with the fluctuation of the
exchange rate, Kiddies took out a 2-month forward exchange contract on 1 February 2019 to cover
the settlement of the creditor. The creditor is to be settled on 31 March 2019. Kiddies did not, in its
2019 financial year, process any accounting entries relating to any of these transactions. Ruling rates
of exchange were as follows:
Date Spot rate Market-related forward rate Period
1 February 2019 $1 = R9,70 2 months

22 February 2019 $1 = R9,55
28 February 2019 $1 = R9,60 $1 = R9,75 1 month
31 March 2019 $1 = R9,65
The average exchange rate for the year ended 28 February 2019 was $1 = R9,50
Forex (s24I) will be covered in TL106. The only information in note 1 that is relevant is that the expense
for the stock has been incurred, however, the stock has not been disposed of nor is it held at year-end.
2. The following dividends accrued to Kiddies during the 2019 year of assessment:
R
Dividends from resident companies operating in South Africa that accrued to
Kiddies during the period March 2018 to December 2018. The holding of shares 20 200
by Kiddies in these companies is less than 50% in all cases.
A distribution from a collective investment scheme in property. This distribution
comprises interest of R8 800. 8 800
Total 29 000
3. During the 2019 year of assessment Kiddies disposed of only the following capital assets:
some of its share investments at a capital profit of R55 000 (as determined in accordance with
the Eighth Schedule to the Income Tax Act); the related accounting profit is R80 000, and
sale (trade-in) on 31 August 2018 of machine A (see note 11)
4. A road freight contractor had collect

delivery to a customer. On the
trading stock, was stolen. On 15 February 2019 Kiddies received an insurance settlement from its
insurer of R27 360 for the stolen trading stock. This amount does not take into account any possible
VAT adjustment that may have to be made. Assume that no accounting entry was made to record
the sale of the trading stock or the write-off thereof as a result of the theft.
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5. During the 2016 year of assessment Kiddies had purchased raw materials for R15 000, excluding
VAT, from a manufacturer that was closing down. Kiddies paid R9 000 (being 60% of the purchase
consideration) on the date of delivery. For the following 3 years it tried unsuccessfully to pay the 40%
balance of the purchase consideration (R6
written back in its detailed draft statement of comprehensive income.
6. Bad debt written off of R45 000 consist of R18 000 for trade debtors and a loan of R27 000 to a
supplier who has been liquidated. This loan came about during the 2018 financial year of Kiddies,
when it lent R27 000 to a raw material supplier who was experiencing liquidity problems. The supplier
was liquidated on 1 December 2018 and Kiddies has been unable to recover any portion of the loan.
7. Kiddies does not apply IFRS 9. Kiddies debtors age analysis as at 28 February 2019:
Debtors Age Current 30 days 60 days 120+ days

Amount R20 000 R33 000 R10 000 R25 000
In the prior year the Commissioner for SARS allowed a doubtful debt allowance in terms of section
11(j) of the Income Tax Act equal to 25% of the year-end accounting provision. The prior year
provision for doubtful debt amounted to R44 000. As at 28 February 2019 the provision for doubtful
debt was R50 000, an increase of R6 000 from the balance as at 28 February 2018.
8. On 1 June 2018
section 1 of the VAT Act.) It cost R299 000 (R260 000 plus VAT of R39 000). Depreciation of
R37 050 has been provi Binding General Ruling No 7 (or
Interpretation Note No 47) provides for a five-year (5) write-off period for motor vehicles.
9. On 1 December 2016 Kiddies leased a computer from a financial institution under a 2-year finance
lease. Kiddies capitalised the financial lease for accounting purposes. It is treated as an instalment
credit agreement for VAT purposes. The computer cost the financial institution R19 665 (R17 100
plus VAT of R2 565). Total finance charges in terms of the lease amounted to R4 506 and the
monthly rental to R1 000. The final lease rental of R1 000 was paid on 30 November 2018. On
1 December 2018 the financial institution simply abandoned this computer to Kiddies without requi-
ring any further consideration by Kiddies. Ownership was therefore attained on 1 December 2018.
On this date its fair market value was R11 500 (R10 000 plus VAT of R1 500). Despite being 2 years
old, the computer was still in good working order and Kiddies indeed used it during the entire 2019
year of assessment. Depreciation of R5 Binding
General Ruling No 7 (or Interpretation Note No 47) provides for a 3-year write-off period for
computers.
10. The finance charges of R2 200 accounted for in the 2019 statement of comprehensive income
concern the finance lease for the computer in note 9.
11. On 1 March 2017 Kiddies purchased a new machine (machine A) on a cash

transaction for R100 000. Machine A was immediately brought into use in its process of manufacture.
On 31 August 2018 it traded this machine in for a more advanced manufacturing machine
(machine B). Machine B was purchased as a
transaction for R150 000. A trade-in price of R130 000 was obtained for machine A. On that date
machine A had a book value of R62 500. Machine B was immediately brought into use in its process
of manufacture. Kiddies will elect any option that is available to it to defer any of its tax liability.
12. All other machinery and depreciable assets had a Rnil tax value on 1 March 2018.
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13. The rentals are paid monthly for the use of a warehouse leased by Kiddies for trade purposes.
14. Insurance premiums of R81 000 were incurred during the 2019 year of assessment. In addition, Kiddies
paid insurance premiums of R88 750 covering the period 1 March 2019 to 29 February 2020 on
15 February 2019, on the advice of its insurance broker who claimed that this early payment would
secure cheaper insurance. No portion of the advance insurance premium amount was expensed to its
statement of comprehensive income for the 2019 financial year.
15. Salaries, wages and benefits of R2 900 On 1 August 2018

Kiddies employed a learner (who is not disabled and holds a NQF level 5 qualification) on a full-time
basis at a wage of R750 per week. (This learner was not previously employed by Kiddies.) Kiddies
entered into a four month, registered learnership agreement with the learner in the course of its trade.
The agreement commenced on 1 October 2018 and was completed on 31 January 2019. The
learnership agreement is registered with the relevant sector education and training authority (SETA).
Kiddies has complied with all the requirements of the Skills Development Act. The wages paid to the
learner and the levies paid to the relevant SETA are included in the salaries, wages and benefits.
16. The restraint of trade payment of R336 000 was paid to a designer who had been employed by
Kiddies. She left its employ on 30 September 2018. The restraint of trade agreement is effective for
2 years commencing on 1 October 2018. The amount of the restraint of trade payment will be
included in the gross income of the designer.
17. The leave pay provision was increased by R9 500 for the 2018 financial year. As at 28 February 2019
the balance on the leave pay provision amounted to R54 500. Actual leave payments made during
the year have been expensed directly to salaries, wages and benefits.
18. Interest incurred during the 2019

amounted to R117 000.
19. On 1 December 2018 Kiddies p

manufacturer for R40 000. The acquisition gives Kiddies the exclusive right to market cards under
the Beyblade trademark in South Africa.
20. In January 2018 Kiddies bought stock for R24 150 (R21 000 plus VAT of R3 150) from a local supplier.
Kiddies claimed an input tax credit of R3 150 for its tax period 1 December 2017 to 31 January 2018.
However, because of quality problems, Kiddies paid the supplier only R19 320 (R16 800 plus VAT of
R2 520) on 31 January 2018, refusing to settle the account until the quality problems had been
resolved. On 28 February 2019 an amount of R4 830 (R4 200 plus VAT of R630) was still outstanding
despite numerous letters of demand from the supplier. The amount was reflected under creditors in
the statement of financial position of Kiddies as at 28 February 2019. No VAT adjustment that may
be required has been reflected in the detailed draft statement of comprehensive income of Kiddies
for the 2019 financial year. None of this stock was on hand as at 28 February 2019.
Additional information
Kiddies has neither an assessed loss nor an assessed capital loss to carry forward from its 2018
year of assessment.
REQUIRED Marks
Calculate the normal tax liability of Kiddies Cards (Pty) Ltd for its 2019 year of assess-
ment. Show all workings and address all items. Your answer should start with the com-
prehensive income (net profit) before tax of R150 000. You can assume that Kiddies
Cards (Pty) Ltd is not a small business corporation. 52
(QE 2005 paper 2, question 2)
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QUESTION 5 36 marks
Yum-Yum Babyfood Limited (referred to as Yum-Yum) is a resident company that manufactures organic
baby food (classified as a process of manufacture by SARS) that is sold both locally and internationally.
Yum-Yum has a June year-end and a 1-month tax (VAT) period. Yum-Yum is not a small business
corporation and has no majority holder of shares.
PART A 28 marks
Solly, the accountant of Yum-Yum, has done a preliminary tax calculation for the company for the year of
assessment ending 30 June 2019 and determined a taxable income of R37 250 000. Since Solly was
uncertain as to the correct tax treatment of the following items, these items have not yet been included
in the taxable income of R37 250 000. All amounts exclude VAT unless specifically stated otherwise.
1. Trading stock (cost of sales have been included correctly in the calculation of the taxable
income of R37 250 000, except for the cost of the imported berries in point 1.3, which has not
yet been included in the cost of sales)
1.1 On 1 August 2018 Yum-Yum donated non-perishable baby food to the Help a Child Foundation,
a qualifying public benefit organisation, and received a section 18A receipt. The cost of the
stock donated was R15 000 and the company has a mark-up percentage of 150% on cost on
all the products it sells.
1.2 Yum-Yum launched a new Yum-berry range of baby desserts during September 2018. For the
month of September, every customer buying a tin of Yum-Yum baby food received a tin of Yum-
berry dessert as a free gift. As a result, stock, with a cost of R75 000, was given to customers
as promotional gifts (marketing).
1.3 Yum-Yum imports organically grown berries for its Yum-berry range from the United States of
America. Yum-Yum ordered berries, at a cost of $20,000 on 31 March 2019. The berries were
shipped free on board (FOB) on 15 April 2019 and were delivered at Yum-
15 May 2019. Import duties of R5 780 were payable on the importation. A forward exchange
contract (FEC) for a 3-month period at a forward rate of R9,75 was entered into on 1 May 2019
to serve as a hedge against the debt. The debt was settled on 31 July 2019. 70% of the
imported berries were still on hand at year-end.
The following exchange rates are applicable:
Spot rate
Date
$1 = R
31 March 2019 $1 = R9,80
15 April 2019 $1 = R9,85
01 May 2019 $1 = R9,83
15 May 2019 $1 = R9,70
30 June 2019 $1 = R9,60
FEC rate: $1 = R9,65
(market related for a 1-month period)
31 July 2019 $1 = R9,95
Average exchange rate for 2019 year of
$1 = R9,80
assessment
Forex (s 24I) will be covered in TL106
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2. Fixed assets
On 1 December 2018, Yum-Yum bought 7 newly built flats in a residential building consisting of
12 flats, directly from a developer (a registered vendor), for R350 000 each (excluding VAT). All
of these residential units were rented out to employees of Yum-Yum, effective from
1 January 2019, for R3 500 each per month.
On 1 January 2019, Yum-Yum sold one of its manufacturing machines, machine A, to a non-
connected company for R2 750 000. The machine (when purchased new on 31 March 2017) had
an original cost of R2 700 000 and tax allowances of R1 620 000 have been claimed until
30 June 2018 in terms of s 12C.
Machine A was immediately replaced by Machine B, which was purchased from Organic Baby
Drinks Limited, a subsidiary of Yum-Yum, for R3 500 000 when the market value was R3 250 000.
The machine was originally purchased by Organic Baby Drinks Limited for R3 000 000 and tax
allowances of R2 400 000 had been claimed by Organic Baby Drinks Limited on the machine until
the date of sale. Machine B will also be used by Yum-Yum in its process of manufacturing.
On 31 March 2019, Yum-Yum bought Machine C from Veggies Limited, a non-connected

company, for R1 575 000 and then leased it back to Veggies Limited from 1 April 2019 for R45 000
per month. The machine was originally purchased by Veggies Limited on 1 April 2017, for
R1 600 000, and tax allowances of R640 000 in terms of s 11(e) have been claimed on the
machine until the date of sale. Binding General Ruling No 7 (or Interpretation Note No 47) allows
for a write-off period of 5 years on similar machines. The remaining useful life of the machine
was 3 years on the date of sale to Yum-Yum.
3. Doubtful debt and bad debt
21. Yum-Yum does not apply IFRS 9. In the 2018 year of assessment, the Commissioner allowed 25%
of the doubtful debt provision of R60 000 for tax purposes. The provision was increased by R20 000
for the 2019 year of assessment. Yum- debtors age analysis as at 30 June 2019:
Debtors Age Current 30 days 60 days 120+ days

Amount R50 000 R45 000 R40 000 R25 000
Bad debt of R65 000 were written off during 2019. Of this amount
R40 000 relates to trade debtors being written off;

R25 000 relates to the outstanding debt of an existing employee, of which R20 000 relates to
the capital loan amount and R5 000 relates to the outstanding interest on the capital amount.
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PART A
REQUIRED Marks
Calculate the normal tax liability of Yum-Yum Babyfood Limited - for the year
of assessment ending 30 June 2019. Assume that Yum-Yum wants to minimise its normal
tax liability for the 2019 year of assessment and will use any provision of the Income Tax
Act available to achieve this and that current legislation will stay in force for the whole of
the 2019 year of assessment. Show all your workings. Indicate, with reasons, if an amount
has no tax implications and round off all amounts to the nearest rand. 28
PART B 8 marks
Contrary to the results of all the previous research performed by Yum-Yum, one of Yum- customers
(a 6-month-old baby) developed an allergic reaction to their organic butternut baby food. The baby had to
be hospitalised on 15 July 2019 and Yum-Yum paid, in terms of a court settlement, the hospital bills
amounting to R35 000, as well as the 000.
REQUIRED Marks
Discuss, with reference to case law and legislation, whether the R40 000 will be deductible
in the hands of Yum-Yum for tax purposes. 8
Bonus marks will be awarded for relevant cases.
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QUESTION 6 24 marks
butcheries in South
Africa and other African countries. The company also owns a game farm and ten butcheries. MME has
a December year-end and a one-month tax period for VAT purposes. MME is not a small business
corporation.
The equity share capital in MME is held as follows:
60% by Ching Limited, a non-resident company located in Beijing, China;

20% by Chow Limited, a non-resident company located in Hong Kong, China;
20% by various residents of the Republic of South Africa.
9
8 or 2019 year of assessment. All amounts
exclude VAT, where applicable, unless specifically indicated otherwise:
1. On 1 April 2018
to Please Eat Meat Limited, which has an April year-end. In terms of the agreement Please Eat Meat
Limited had to pay an amount of R180 000 on 1 April 2018 and thereafter 10% of the value of the
9 year of assessment.
Please Eat Meat Limited paid MME R180 000 on 1 April 2018 and R350 000 on 1 April 2019.
MME acquired (and brought into use) the manufacturing machine that was sold to Please Eat Meat
Limited on 1 August 2017 as a new machine for R552 000 (including VAT).
2. On 15 November 2018 MME entered into a 9-month learnership agreement with Keba Skosana, a
disabled employee who holds a NQF level 7 qualification. The learnership agreement meets all the
requirements of section 12H. Keba successfully completed the learnership on 14 August 2019.
3. The cost of manufacturing a meat cutting machine amounted to R12 080 for the 2019 year of
assessment and R10 800 for the 2018 year of assessment. MME has a mark-up percentage of 60%
on cost on all products sold. On 1 January 2019 MME had 180 machines in stock that were
manufactured during the 2018 year of assessment. During the 2019 year of assessment the
company manufactured 6 250 meat cutting machines. The company uses the first-in-first-out (FIFO)
method when selling stock.
The following movement took place in respect of trading stock duri 9 year of
assessment:
The company sold 5 580 meat cutting machines to customers in South Africa. Sales took place
evenly throughout the year of assessment.
On 1 October 2019 MME transferred eight meat cutting machines to be used in the butcheries
owned and operated by the company. These machines will eventually be sold by MME as
second-hand machines.
4. On 1 December 2019 MME received a non-refundable deposit of R50 000 from Namibia Star
Hunters Limited, a company in Namibia, in terms of a contract for four specialised meat cutting
machines. These machines are similar to the current machines manufactured by MME but in terms
of the contract need to be adjusted for the fitting of specific electrical motors, chains and blades.
The company estimated that the cost of these machines will be R17 250 (including VAT) each. The
machines will be sold for R25 000 (excluding VAT) each. Manufacturing of these machines will
commence on 1 January 2020. On completion MME will deliver the machines to Namibia Star
Hunters Limited in Namibia.
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REQUIRED Marks
(a) Note 1 only:
Calculate the amounts to be included or deducted in the calculation of Meat Made Easy
note 1 8 and 2019 years
of assessment. If any amount that you have calculated is not deductible or should not
reference to legislation.
You can assume that the company will elect any tax option available to reduce its 10
income tax payable in a specific year of assessment.
(b) Note 2 to 5:
Calculate the amounts to be included or deducted in the calculation of the taxable
9 year of assessment in
respect of notes 2 to 5. Provide a reason or reference to legislation if any event (note
14
or part of a note) has no effect on the calculation o
Assume that the Commissioner will allow the cost as a percentage of contract price as
the basis for calculating future costs in respect of contracts, where applicable.
TOTAL 24
Unisa 2017 adapted

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QUESTION 7 42 marks
Megachef (Pty) Ltd (referred to as Megachef), a resident company, manufactures and sells premium
stainless steel kitchenware. This is classified as a process of manufacture by SARS. The company has
a 30 September year-end and is a registered VAT vendor. All amounts in the question exclude VAT (if
applicable), unless specifically stated otherwise.
Megachef started 10 years ago as the dream of the happily married couple Mr Salt and Mrs Pepper Chef
(who are married out of community of property). The company has, however, grown into a multimillion
rand business with a gross income of R12 500 000 and employed 16 full-time employees (including Salt
and Pepper) throughout the year of assessment. The shares are held in equal parts by Salt and Pepper,
who are also both directors of the company.
PART A 25 marks
9 year of assessment have not yet been taken

into account in the calculation of the taxable income of R8 450 670:
1. lating to the fixed assets not yet

taken into account:
Megachef ordered a new manufacturing machine (machine A) from a supplier in Germany for
August 2018. Machine A was shipped free on board (FOB) on
1 September 2018 September 2018. The
correct amount of VAT was paid (and claimed as input tax) and import duties of R37 500 were
paid on importation. On 1 September 2018, Megachef entered into a 3-month forward exchange
contract (FEC) with Independent Bank Limited in order to hedge the full purchase price. The
machine was brought into use on 1 October 2018. The full payment for the machine was made
to the supplier on 30 November 2018.
The following exchange rates were applicable:

Date Spot rate
15 August 2018
1 September 2018
a 3-month FEC)
25 September 2018
30 September 2018
a 2-month FEC)
1 October 2018
30 November 2018
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(crane A) with a more powerful one (crane B) for the packaging department. Crane A was
acquired new for R175 000 from an independent party on 15 June 2017 and immediately brought
it into use. On 1 September 2018, crane A was sold for R182 000 to an independent party.
Crane B (new and unused) was purchased for R250 000 on the same day to replace crane A
and was immediately brought into use. Binding General Ruling No 7 (or
Interpretation Note No 47) allows for a 4-year write-off period on these mobile cranes, if
applicable.
During the last 6 months of 2015 a factory building and an office block were both erected by
Megachef at a cost of R1 500 000 and R650 000, respectively, and were both brought into use
on 1 January 2016.
2. During the 2019 year of assessment, an annuity of R5 000 was paid to Mrs Salad Dressing (aged 38),
a former employee who was instrumental in helping to set up the business but who decided to be a
stay-at-home mom after the birth of her twins during the 2018 year of assessment.
3. On 1 July 2019, Megachef registered a new patent for a newly designed kitchenware range under
the Patents Act 57 of 1978 and paid R2 800 for registration fees.
4. On 1 July 2018, Megachef entered into a 12-month learnership agreement with Ice Cream (not
disabled) who holds a NQF level 5 qualification. Ice Cream successfully completed the learnership
agreement on 30 June 2019. Ice Cream receives an annual salary of R50 000, which has already
450 670.
5. Megachef has an assessed capital loss of R1 500 that the company brought forward from the 2018
year of assessment.
REQUIRED Marks
Calculate the normal tax liability of Megachef (Pty) Ltd for its 2019 year of assessment.
Start your calculation with the taxable income of R8 450 670. Show all your calculations
and round off amounts to the nearest rand. Provide brief explanations to support your
calculations and clearly indicate nil effects (with a brief reason). Assume that the
company will qualify as a small business corporation and will elect any option available
to minimise its tax liability. 25
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PART B 17 marks
Megachef (Pty) Ltd is one of the main sponsors of a reality cooking competition running for a 3-month
period (15 October 2019 to 15 January 2020). The sponsorship agreement (for which Megachef had to
pay its legal advisors R3 500 to draw up) stated the following:
Megachef will supply all the kitchenware required by the contestants during the cooking competition.
Ownership of the kitchenware will be retained by Megachef during this period.
Meg
the show.
All the kitchenware used by the contestants during the competition will be returned to Megachef at
the end of the competition, after which it will be donated to the Stellenbosch Child
(not a registered public benefit organisation (PBO)).
On 1 October 2019, kitchenware, with a cost price of R100 000 and a market value (excluding VAT) of
R150 000, was made available to the organisers of the competition.
On 31 January 2020, after the reality show was recorded, the kitchenware was checked by Salt and
ware with a cost
price of R3 750 (and an original market value (excluding VAT) of R5 625) had disappeared and that
kitchenware with a cost price of R2 250 (with an original market value (excluding VAT) of R3 375) had
been damaged beyond repair and could not be donated. The damaged kitchenware was sold as scrap
metal for R500 to a non- nage. The
remaining kitchenware, valued at R55 000 (market value (excluding VAT) after being used in the
donations that Megachef made during the 2020 year of assessment.
REQUIRED Marks
Discuss all the tax implications (except for VAT, which you can ignore) in respect of the
sponsorship agreement for Megachef (Pty) Ltd for its 2020 year of assessment. Your
discussion should refer to relevant legislation and also to case law (bonus marks will be
awarded for relevant case names), where applicable. Substantiate your discussion with
calculations.
Assume that the tax legislation for the 2020 year of assessment will remain the same as
legislation applicable to the 2019 year of assessment.
Present your answer under the following headings:
Legal cost
Kitchenware supplied for the competition
Stock stolen 17
Stock sold as scrap and proceeds donated
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QUESTION 8 31 marks
This question consists of three (3) unrelated parts (Part A to Part C).
You are currently studying towards your Postgraduate Diploma in Applied Accounting Sciences (CTA 2)
and are preparing for your final examination. You have begged and borrowed, various test and exam
questions from some of your friends studying at other institutions and today, after finalising your studies
of Tutorial Letter 105, have decided to attempt some of these questions as part of your final preparation.
Assume that all amounts exclude VAT, unless specifically stated otherwise.
PART A 13 marks
QUESTION FROM UNIVERSITY A
Standby Elec (Pty) Ltd (referred to as Standby) is a resident company that specialises in the
manufacturing and maintenance of industrial generators. Standby is a VAT vendor that only makes
taxable supplies. It has a 31 December year-end and does not qualify as a small business corporation.
The write-off period of generators under Binding General Ruling No 7 (or Interpretation Note No 47) is
15 years.
On 1 September 2018, Standby took one of its manufactured generators from its trading stock to be used
sell this generator in future. It will be sold as a used or second-hand generator. The cost to manufacture
this generator (incurred during its 2018 year of assessment) was R1 250 000. Its market value on
1 September 2018 was R2 050 000. Its market value on 31 December 2018 was R1 750 000.
On 30 August 2019, Standby sold the generator that it had been using in its administrative office building
for R1 955 000 (including VAT).
REQUIRED Marks
(1) Calculate (supported with reference to legislation) the effect that the information
provided in part A has on the taxable income for Standby Elec (Pty) Ltd in its 2018
and 2019 years of assessment. Assume that the current legislation is applicable to 4
both the 2018 and 2019 years of assessment.
(2) Recalculate (supported with reference to legislation) the effect that the information
8 and
2019 years of assessment, on the assumption that it does NOT manufacture
generators, but merely buys and sells them. Round all amounts to the nearest rand. 9
(University of Pretoria adapted)
PART B 9 marks
QUESTION FROM UNIVERSITY B
Going-Slow (Pty) Ltd (referred to as Going-Slow), a VAT vendor with a June year-end, is one of many
manufacturing companies (this is classified as a process of manufacture by SARS) currently experiencing
serious cash flow problems owing to the slow economy. To try and save the business and to regain
financial stability, the company has requested a compromise of its debts from several of its creditors.
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The details of two of the transactions (both with independent parties) for which Going-Slow requested and
was granted a compromise of its outstanding debt on 30 June 2019 are listed below:
Out-of-Cash Ltd discharged the outstanding debt relating to a new manufacturing machine
purchased by Going-Slow on 1 April 2018 for R1 850 000. SARS allows for a 5-year write-off period
on these machines (if applicable) in terms of Binding General Ruling No 7 (or
Interpretation Note No 47). R950 000 of this debt was still outstanding on 30 June 2019.
An outstanding creditor, Restless (Pty) Ltd, with a balance of R765 000 on 30 June 2019, was
discharged. Going-Slow owed Restless (Pty) Ltd this amount for various trading stock purchases
made during Going- 9 year of assessment. Going-Slow still had R350 000 of this trading
stock on hand at 30 June 2019.
REQUIRED Marks
Discuss, supported by calculations and reference to Income Tax legislation, the normal tax
implications of the transactions for Going- 9 year of
9
assessment.
PART C 9 marks
QUESTION FROM UNIVERSITY D
On 15 September 2018 Reno Vate (a 40-year-old female) decided to buy a small house, renovate it and
rent it out in order to earn additional income. The purchase price was R1 250 000. Although the property
is old, it only required limited work before it could be let.
The first tenant moved in on 1 January 2019 (paying a monthly rental of R8 000), after Reno had affected
the following renovations:
R
Replacement of damaged carpets with wooden floors 25 000
Installing a security system 35 000
Painting of the exterior and interior walls of the house 12 500
Landscaping the garden (the house did not have a garden before, only grass) 15 000
Total cost 87 500
REQUIRED Marks
Discuss, with reference to section 11(d) and case law, whether the renovation expenses
incurred by Reno Vate will be deductible for income tax purposes during her 2019 year of
assessment. 9
Bonus marks will be awarded for relevant case names.

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QUESTION 16 67 marks
This question consists of three related parts.
The Crock group of companies consists of four resident companies, all of which have December year-
ends and are registered category B VAT vendors (tax periods ending on February, April, June, etc.).
All amounts in the question exclude VAT (if applicable), and all parties involved are registered VAT
vendors unless specifically stated otherwise.
The following companies are members of the Crock group of companies:

Crock Holdings (Pty) Ltd (referred to as Crock Holdings) is the holding company and holds all the
shares in the remaining three companies. The company is involved in the residential and commercial
property rental market.
Crock Earthmoving Equipment (Pty) Ltd (referred to as Crock Earthmoving Equipment) specialises
in the manufacturing of sturdy earthmoving equipment.
Rent a Crock (Pty) Ltd (referred to as Rent a Crock) rents out second-hand motor cars.
Build a Crock (Pty) Ltd (referred to as Build a Crock) sells parts of motor cars as spares and
overhauled second-hand motor vehicles.
PART A
Information relating to Crock Earthmoving Equipment (Pty) Ltd
Crock Earthmoving Equipment is a company that manufactures earthmoving equipment (classified as a

process of manufacture by SARS) that is used both locally and internationally by mining and other
construction companies.
The following transactions relate to the 2019 year of assessment ending 31 December 2019:
1.
range) in July 2019. During the development phase of the new range, the company incurred the
following expenses:
Crock Earthmoving Equipment ordered a new manufacturing machine (machine A) from a

June 2019 to use in the new manufacturing process.
Machine A was shipped free on board (FOB) on 15 June 2019 and was delivered at Crock
The payment for the machine was made
to the supplier on 15 June 2019. The correct amount of VAT and import duties of R25 000 were
paid on importation. The company had to erect a supporting structure at a total cost of R17 500
to support the machine before it was brought into use on 1 July 2019.
Date Spot rate
1 June 2019
15 June 2019
25 June 2019
1 July 2019
31 December 2019
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Registration fee paid for the Hot Crock trade mark (paid on 31 May 2019) R455 794
Crock Earthmoving Equipment bought a second-hand manufacturing machine (machine B) from

an independent party for R2 150 000 (equal to its market value) on 20 June 2019 for use in the
new manufacturing process. Crock Earthmoving Equipment was unable to find this type of
machine from any other party and could not start the new manufacturing process without this
machine. Machine B was brought into use on 1 July 2019.
1. Crock Earthmoving Equipment imports steel-enforced tyres that are used in the production of the
Steel Crock earthmoving range of equipment from a supplier in America. Every construction vehicle
is fitted with 8 tyres. Crock Earthmoving Equipment ordered 8 000 tyres, at a cost of $25,50 per tyre
on 15 November 2018. The tyres were shipped CIF (cost-insurance-freight) on 1 December 2018.
On 1 December 2018, Crock Earthmoving Equipment entered into a 2-month forward exchange
contract (FEC) with Support Bank Limited in order to hedge the full purchase price. The tyres arrived
in South Africa on 21 December 2018 and were immediately cleared and released by customs.
Import duties of R64 220 were paid, as well as the correct amount of VAT. 95% of this material was
still on hand at the beginning of the 2019 year of assessment and none of the material was on hand
at the end of the 2019 year of assessment. The outstanding debt was settled in full on
31 January 2019.
Date Spot rate

$1 = R
15 November 2018 $1 = R8,80
1 December 2018 $1 = R7,83
$1 = R8,50 (forward rate under
a 2-month FEC)
21 December 2018 $1 = R8,85
31 December 2018 $1 = R7,75
$1 = R8,00 (forward rate under
a 1-month FEC)
31 January 2019 $1 = R8,10
2. Two forklifts from the Steel Crock earthmoving range were taken from manufactured stock on
1 March 2019 and were used in the factory to move heavy materials from that date. These forklifts
have a cost price of R80 000 each and a mark-up of 50% is added on the cost price when sold.
Binding General Ruling No 7 (or Interpretation Note No 47) allows for a 4-year write-off period on
these forklifts. The market value of the forklifts has at all times been equal to its selling price.
4. Since 1 April 2016, Crock Earthmoving Equipment leased a delivery truck (with a cost price of
R780 000) from Rentals Limited, a non-connected company, for R25 000 per month in terms of a
three-year lease agreement. The agreement stated that Crock Earthmoving Equipment will be
permitted to continue using the delivery truck at the end of the three-year period for a rental of R3 000
per month. The Commissioner will allow Crock Earthmoving Equipment to write off the delivery truck
over 2 years (the remaining useful life from 1 April 2019), if applicable.
5. The current factory building was erected by Crock Earthmoving Equipment at a cost of R5 500 000
and brought into use on 1 June 2017. 25% of the total floor space of the factory building is used as
offices by the administrative staff and the remainder is used for manufacturing.
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6. On 1 October 2019, a part of the factory was flooded during a heavy rain storm and machine B (see
note 1 above) and one of the forklifts taken from stock (see note 3 above) were irreparably damaged in
the process. On 15 October 2019, an amount of R1 840 000 (after taking VAT implications into account)
was received from the insurance company (R1 770 000 for machine B (which was insured at its
replacement value) and R70 000 for the forklift). The production manager immediately started looking
for a replacement machine and purchased manufacturing machine C (new) for R1 850 000 on
1 November 2019. Machine C was immediately brought into use in the manufacturing process. The
forklift was not replaced.
7. Crock Earthmoving Equipment paid R800 000 to Ex Crock, a former employee who left the employ
of Crock Earthmoving Equipment, on 1 November 2019 as a restraint of trade on the condition that
Ex Crock will not exercise a trade, profession or occupation in mining and construction for the next
five years.
8. Crock Earthmoving Equipment has been assessed as follows for Income Tax purposes for the
previous 2 years of assessment:
Tax year Date of assessment Taxable income

2017 15 May 2018 R16 500 000
2018 22 July 2019 R18 650 000
On 30 June 2019, Crock Earthmoving Equipment estimated that its taxable income for the 2019 year
of assessment would be R18 000 000. On 23 December 2019, at the close of business for the
December holidays, the company estimated that the taxable income for the 2019 year of assessment
would be R20 000 000. On 31 March 2020 when the final financial statements had been audited and
the final Income Tax calculation had been performed, the taxable income for the 2019 year of
assessment was calculated as R20 134 560 (you can assume that this is correct).
REQUIRED Marks
(1) Calculate the normal Income Tax implications of transactions 1 to 7 for Crock
Earthmoving Equipment (Pty) Ltd for its 2019 year of assessment. Show all your
calculations and round off all amounts to the nearest rand. Provide brief
explanations to support your calculations and clearly indicate (with a brief reason)
when no adjustment for Income Tax purposes is required. Assume that the company
will elect any option available to minimise its tax liability. 32
(2) Calculate the second and third (if applicable) provisional tax payments that the
company should have made according to the Fourth Schedule of the Income Tax
Act for the 2019 year of assessment. Ignore any interest or penalties. 7
(3) Mr Crock (aged 37), founder of the Crock group, is living a life of leisure after making
his fortune when selling his 100% shareholding in Crock Earthmoving Equipment
(Pty) Ltd to Crock Holdings (Pty) Ltd 5 years ago. Since the sale of the shares,
Crock Holdings (Pty) Ltd pays an annual amount of R2 500 000 to Mr Crock, a
former employee of Crock Holdings (Pty) Ltd (he retired immediately after the sale
of the shares) as payment for his shares. The annual payment will be payable for
the rest of his life.
Provide a fully substantiated tax opinion regarding the deductibility for tax purposes
for Crock Holdings (Pty) Ltd of the annual payment made to Mr Crock for the 2019
year of assessment. Discuss the deductibility in terms of the provisions of the
Income Tax Act and fully substantiate your opinion. Refer to relevant case law. 12
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PART B
Information relating to Build a Crock (Pty) Ltd
Build a Crock purchases damaged second-hand vehicles and then either sells parts of these vehicles as
spares or repairs these vehicles and sells them as second-hand vehicles. These vehicles are mainly
bought from insurance companies after being damaged in accidents to such an extent that 80% of the
cost to repair these vehicles is more than their book value.
If Build a Crock comes across a bargain, it will occasionally buy used motor vehicles from second-hand
motor dealers. After overhauling the vehicles, it sells the vehicles at a profit to the public.
Before taking into account the income tax effect of the transactions below, as well as the assessed loss
of R250 000 brought forward from the 2018 year of assessment, Build a Crock has a loss of R24 300 for
income tax purposes on 31 December 2019.
Transactions
1. On 1 January 2019, Build a Crock received a machine (not a machine used in the process of
manufacture) as a donation from Jake Blue, a 30% owner of shares of Crock Holdings. Jake carries
on a business as a sole proprietor in the repairing of motor vehicles and intends to replace the
machine with a newer model. He originally acquired the machine on 1 January 2017 for R275 000.
The tax value of the machine on the date of the donation was R137 500, while the market value was
R285 000 on this date. Binding General Ruling No 7 (or Interpretation Note No 47) allows for a 4-
year write-off period on this type of machine.
2. As Build a Crock is experiencing financial problems, Crock Holdings and Build a Crock reached a
compromise in accordance with which Crock Holdings wrote off a loan of R100 000 and interest of
R10 000 on the loan which it had advanced to Build a Crock on 1 March 2019.
Build a Crock had used the funds received in respect of the loan from Crock Holdings to finance
operational expenses that the company had claimed for income tax purposes in terms of
section 11(a) of the Income Tax Act. The R10 000 interest owing to Crock Holdings has been claimed
by the company for income tax purposes.
REQUIRED Marks
Calculate the taxable income or loss of Build a Crock (Pty) Ltd for the 2019 year of
assessment. 6
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PART C
Information relating to Rent a Crock (Pty) Ltd
Rent a Crock entered into the following agreements for the 2019 year of assessment:
On 1 September 2019, Rent a Crock entered into a twelve (12) month agreement with
Super Shining (Pty) Ltd. In terms of the agreement, Super Shining (Pty) Ltd will clean the offices
from where the rental activities are administered, twice a week at a charge of R5 000 a month
(payable in advance). The entire amount for the year of R60 000 was paid on 1 September 2019.
Rent a Crock decided that it wanted to change the exterior appearance of the office building to one
with a more modern image. It therefore decided to alter the exterior look of the building, especially
the entrance. The company entered into an agreement with Repairs and Improvements (Pty) Ltd for
R500 000 on 1 December 2019.
In terms of the agreement, work on the office building will commence on 2 January 2020 and should
be completed by 31 July 2020. In terms of the agreement, R350 000 was paid on 1 December 2019
and the outstanding amount is payable on the date of completion.
Assume that Rent a Crock made no other prepayments during its 2019 year of assessment.
REQUIRED Marks
Discuss, supported by calculations and with reference to income tax legislation, to what
extent (if any) the amounts mentioned are deductible by Rent a Crock (Pty) Ltd in cal-
years of assessment.
(Assume that income tax legislation for the 2020 year of assessment will remain the same
as legislation applicable to the 2019 year of assessment.) 10
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QUESTION 3 40 marks
This question consists of three (3) related parts A, B and C.
PART A 32 marks
Brickscreator Brickscreator and its fellow-subsidiary, Bricks-for-All (Pty) Ltd -for-

are South African resident companies that manufacture and supply bricks. Brickscreator and Bricks-for-
All are wholly owned by another South African company, Buildstrong (Pty) Ltd.
The manufacture of bricks is listed by the South Afric direct process

of manufacture. Brickscreator has a September year-end. The company is neither a small business
corporation nor a personal service provider as defined in the Income Tax Act. The company is registered
for Value- and only makes taxable supplies.
All amounts include VAT, unless stated or implied otherwise and all parties are VAT vendors. All valid
VAT invoices and the requisite supporting documents are in place.
The f 2019 and

has not 370 600
for the 2019 year of assessment.
Transactions:
1. On 15 August 2018 Brickscreator purchased six brand new apartments in a residential building that
comprises 25 apartments in total. Brickscreator purchased the apartments directly from the developer
(not a connected person to Brickscreator) at a cost of R250 000 each (excluding VAT). As from
1 September
charge, whilst the other four apartments are rented out for R3 000 per month.
2. Defective bricks, manufactured in August 2018 and included in closing stock at a cost of R150 000
(excluding VAT) at the end of the 2018 year of assessment and treated correctly in the cost of sales
figure for 2019, were donated by Brickscreator to a local charity project on 10 December 2018. No
section 18A receipt was obtained in respect of this donation. The market value of the stock donated
on 10 December 2018 was R140 000 (excluding VAT).
3. On 31 October 2018, Brickscreator
a non-connected third party for R480 000 (equal to market value). In addition to the purchase price,
Brickscreator incurred transport and installation costs of R7 600 in respect of Machine A. Machine A
was brought into use in the manufacturing process on 1 November 2018. On 1 June 2019
Brickscreator purchased, and brought into use, a second-
that was advertised by a non-connected third party for a special price of R345 000. The open market
value of Machine B on 1 June 2019 was R460 000. Brickscreator could not refuse the good deal. At
the same time, Brickscreator donated Machine A to Bricks-for-All. Bricks-for-All needed a new
brickmaking machine, but could not purchase one due to cash flow problems. The decision was
accordingly taken by the directors of Brickscreator to assist its fellow-subsidiary and to donate
Machine A to Bricks-for-All. On 1 June 2019, the open market value of Machine A was R598 000.
Binding General Ruling No 7 (or Interpretation Note No 47) allows a write-off period of 6 years for
brickmaking machines.
4. On 1 July 2019 Brickscreator purchased a new motor car (as defined in the VAT Act) from a non-
connected car dealer for R437 000. The motor car was immediately brought into use by the
Binding General Ruling No 7 (or Interpretation Note No 47) allows a
write-off period of 4 years for motor cars.
139
TAX4862/105
PART B 6 marks
Assume Brickscreator did not donate Machine A to Bricks-for-All. However, Bricks-for-All was still in need
of an additional brickmaking machine, but could not afford a new machine as a result of its cash flow
problems.
Assume Bricks-for-All managed to conclude an agreement with a non-connected third party bank,
Randco, whereby Bricks-for-All purchased a new machine, Machine C, for a total cost of R500 000
(excluding VAT) on 1 June 2019. Bricks-for-All then sold Machine C to Randco on 1 July 2019 for
R690 000 and Randco in turn leased the machine (under a finance lease with a cash cost of R701 500,
VAT inclusive) back to Bricks-for-All for a monthly lease payment of R16 944, for a period of 36 months
(commencing on 1 July 2019). Bricks-for-All would acquire Machine C at the end of the lease for R115 000
when the open market value would be R149 500.
Bricks-for-All also has a September year-end. Similar to Part A, all amounts include VAT, unless stated
or implied otherwise.
PART C 2 marks
The head of Bricks-for- August 2019 with

immediate effect. To prevent Mr Smart from sharing his expertise with competitors of Bricks-for-All, the
company immediately paid Mr Smart R250 000 (excluding VAT) for agreeing not to share any company
trade secrets with any of Bricks-for-
include this amount in his taxable income for the 2020 year of assessment.

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Practice Questions

5. The following salaries and wages were paid

6. The following Annuities were paid

7. The following prepayments

8. The following learnership agreements were entered into

9. Trademark and design

10. Penalties and interest

11. Sale of lipsticks

 Truck purchased second hand on 1 December 2019 800 000

 Burglar alarm purchased on 1 March 2009 60 000

 Second hand commercial building. 1 500 000

Interpretation note 47 allows the following write-off periods for assets:

Statement of comprehensive income Notes R

Gross profit 890 000

Other income 147 000

Expenses 1 132 750

Net loss before tax ?

1. Cost of sales comprised of the following:

The market value of stock was as follows:

 The contract makes provision for a renewal period of 5 years.

(v) station (i.e. computer unit) during the 2019 year of

Rhite, as the sole holder

STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 28 FEBRUARY 2019

Expenses, losses, allowances and distributions

Net income 4 254 070

Notes and additional information

2 Other income of R140 000 is made up as follows:

income in terms of paragraph (h) of the definition

5 Erection of new office block:

Purchase date: Cost price:

- Office furniture 1 May 2018 R100 000 (excl. VAT)

- New machine 1 May 2018 R500 000 (excl. VAT)

7 Pre-trade expenditure of R50 000 is made up as follows:

- R2 500: stationery purchased (no stationery on hand at year-end)

8 Interest paid on loan:

10 Restraint of trade payment:

11 Repairs and maintenance:

- R16 000: On 2 January 2019, a part of Spor

13 Provision for doubtful debt:

Taxable income/(Assessed loss) net amount

Normal tax liability 40

ADDITIONAL QUESTIONS AND SUGGESTED SOLUTIONS

The debt is made up as follows:

Creditor 1 Purchase of delivery vehicle (purchased during 2018) R400 000

This question consists of two related parts (A and B).

Factory buildings owned or leased:

pay a premium of R75 000 on 1 March 2019;

This question consists of two related parts.

transactions into account:

the production department) for a rental of R1 100 per month.

BP Motors holds all issued shar

ART (PTY) LTD

Current assets 6 650

Total assets 12 150

EQUITY AND LIABILITIES

Total equity and liabilities 12 150

Current assets 910

Total assets 1 310

EQUITY AND LIABILITIES

Current liabilities 1 185