FACULTY OF COMMERCE, HUMAN SCIENCES & EDUCATION

DEPARTMENT OF ECONOMICS, ACCOUNTING AND FINANCE

QUALIFICATION : BACHELOR OF ACCOUNTING (CHARTERED ACCOUNTANCY)

QUALIFICATION CODE: 07BACC LEVEL: 6

COURSE: TAXATION 201 COURSE CODE: TAX601Y

DATE: 1 JUNE 2023 SESSION: THEORY & CALCULATIONS

DURATION: 112.5 MINUTES MARKS: 75

ASSESSMENT OPPORTUNITY 3

EXAMINER: Mr G Jansen

MODERATOR: Mr A Ketjinganda

INSTRUCTIONS TO CANDIDATES

1. This paper consists of 8 pages (including cover page).

2. You are reminded that answers may NOT be written in pencil. NO tippex may be used.
3. The marks shown against the requirement(s) for every question should be regarded as an indication of the
expected length and depth of your answer.
4. Answer the questions by the use of:
- Effective structure and presentation; clear explanations.
- Logical arguments; and clear and concise language.
5. Show all calculations clearly. Round off calculated amounts to the nearest Rand.
Question Mark(s) Time allocated (minutes)
1 25 37.5
2 10 15.0
3 40 60.0
Total 75 112.5
QUESTION 1 (25 MARKS)
Due to the elevated levels of criminal activity in South Africa, Smart Alert, operating under the name
Smarty Alert Alarms, runs a highly prosperous enterprise specializing in the installation and upkeep of
burglar alarm systems. When Smart is not attending to clients on-site, he operates his business from his
residence. Within his home, a dedicated workshop occupies 10% of the total floor space. This workshop
is specifically tailored and consistently utilized for his trade activities. During the assessment year of 2023,
Smart encountered the following expenditures and losses related to his business endeavours:

a) 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. Smart wishes to claim these payments as
deductions for normal tax purposes. (6)

b) Apart from having a full-time assistant in his employment, Smart Alert has to make use of his
housekeeper to take down messages left by clients and potential clients, when he and his assistant
are engaged at a client’s premises and not contactable on their mobile phones. He pays his
housekeeper an additional R500 per month for performing the aforementioned task. The
housekeeper’s total annual salary is R24 000. Smart 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. (4)

c) While installing an alarm system at a client’s home, Smart Alert’s assistant was bitten by a dog.
Smart 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. Smart wishes to claim the R1 500
as a deduction against his business income. He believes it was incurred as part of his business
operations while attending to the installation and maintenance of burglar alarms at clients’
premises. (10)

d) While Smart Alert was working at one of his client’s premises in an industrial area, someone 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)

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 e) Smart Alert purchased his assistant’s workstation (i.e. computer unit) during the 2023 year of
assessment and brought it into use for business purposes during the same year of assessment. The
workstation was transported from the assistant’s home to Smart Alert’s workshop during the 2023
year of assessment, at a total cost of R2 000. Smart wishes to deduct the transport costs of R2 000
in the determination of his taxable income. (3)

REQUIRED:

Discuss, with reasons, whether each of the aforementioned expenses and losses are deductible in the
calculation of Smart Alert’s taxable income for the 2023 year of assessment. In your answer you must
refer to relevant legislation and deal with each query separately. You are not required to calculate the
taxable income. (25)

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QUESTION 2 (10 MARKS)
Tim and Gerome are the only two holders of shares of TG (Pty) Ltd (“TG”). Tim owns 40% of the shares in
TG and Gerome owns the other 60%. Both Tim and Gerome are registered accountants. The business of
TG is mainly to render accounting services to its clients. Both Tim and Gerome perform accounting services
in their personal capacity on behalf of TG to clients. The company is not a personal service provider (as
defined).
Gerome owns shares in a number of listed companies. He wanted to buy an investment property and
incorporated a company for this purpose. He owns 100% of this company. Up to 30 November 2022 this
company has owned no assets and has not traded as yet.

During the entire year of assessment TG employed three full-time employees. Two of the employees are
not related to either Tim or Gerome, while the third employee is Tim’s sister who is the receptionist of
the company.

On 1 September 2022 another full-time employee (also not related to Tim or Gerome) commenced
working in the employment of TG as a filing clerk.

The total income of TG for the year of assessment ended 30 November 2022 is as follows:

INCOME RAND
Turnover from accounting services rendered 5 570 230
Interest received on a money-market account 110 540
Rent received from the letting of fixed property 850 350
TOTAL INCOME 6 531 120

REQUIRED:

Discuss comprehensively, with reference to the South African Income Tax Act, whether TG (Pty) Ltd (“TG”)
will qualify as a small business corporation for the year of assessment ended 30 November 2022. Support
your answer with calculations, where necessary. You need to consider all the relevant requirements which
will determine whether TG will qualify as a small business corporation. (10)

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QUESTION 3 (40 MARKS)
Olenga (Pty) Ltd (Olenga) manufactures and trades in a variety of goods. The company is not a small
business corporation, as defined. Olenga qualifies as a process to manufacture as defined. The company
is a Value-Added Tax (VAT) vendor and a resident of the Republic. All amounts exclude VAT, unless
otherwise stated. IGNORE CAPITAL GAINS TAX.
The company’s net profit before tax for the financial year ended on 31 March 2023 amounted to
R12 949 200 and was calculated after taking, inter alia, the following into account:
INCOME NOTES RAND RAND
Gross profit from local and foreign sales 1 30 580 600
Investment income 2 209 000
Profit from the sale of machinery 3 22 000

EXPENDITURE
Salaries and personnel expenditure 4 3 670 000
Depreciation 5 686 950
Interest paid on purchase of new machine 5.1 73 000
Repairs 6 932 500
Dividend paid 7 867 000
Fines and penalties 8 12 350
Donation 9 7 500

NOTES:

1) Gross profit from local and foreign sales

It is company policy to include trading stock at cost in the financial statements. Accordingly, the
market value of trading stock was ignored when calculating the gross profit of the company. The
following figures were, however, available as the company does keep record of the market value of
trading stock (on-hand at):

1 April 2022 31 March 2023

Cost price Market value Cost price Market value
R3 280 600 R5 850 400 R3 980 300 R3 100 850

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2) Investment income

2.1 Olenga holds shares in a number of local companies (not connected persons as defined) and received
the following dividends: RAND

25 April 2022 from ABC Ltd 88 000

15 September 2022 from DEF Ltd 121 000

2.2. Olenga also invested R2 800 000 in a structured deal at a foreign bank on 1 June 2022. Olenga will
hold this instrument for a period of 60 months. This investment earns a return far higher than the market
average, but the interest will only accrue to Olenga at the end of the 60-month period. The interest,
calculated by making use of the yield-to-maturity method for the period 1 June 2022 until 31 March 2023,
amounted to R285 700 and is not included in the net profit before tax as Olenga had not received any
interest as at 31 March 2023.

3) Profit from the sale of machinery

During May 2022, an old machine (Machine C105) used in the process of manufacture was sold for
R724 500 (including VAT) to an independent third party. Machine C105 was purchased and brought into
use during the 2018 year of assessment and had already been written-off for tax purposes at 1 April 2022
(tax value = Rnil). The original cost price amounted to R600 000 (excluding VAT). Refer to note 5.1 below
for more information.

4) Salaries and personnel expenses

The salaries and personnel expenses were made up as follows: RAND

Net salaries (paid in cash to the employees) 2 689 600

Employees’ tax (deducted from gross salaries and paid over to SARS) 920 000
Unemployment insurance fund contributions (deducted from gross salaries and paid 30 200
over to the Unemployment Insurance Fund (UIF))
Unemployment insurance fund contributions (company’s contribution paid over to 30 200
the UIF)
TOTAL 3 670 000

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5) DEPRECIATION

5.1. Machinery

Machine C105 was replaced with Machine C207. Machine C207 (a new manufacturing machine) was
purchased on 1 November 2022 for R1 600 000, and the purchase price was financed by way of a bank
loan. Interest payable on this loan amounted to an average of R14 600 per month for the current year of
assessment (calculated in terms of section 24J). A special foundation needed to be constructed for this
machine at a cost of R58 000. Due to this, Machine C207 was only brought into use on 1 March 2023.
Depreciation of R44 000 was written off on Machine C207 during the 2023 financial year.

5.2. Computers

On 1 June 2022 computers to be used in the administration offices of the company were imported free-
on-board from Europe. The cost of these computers amounted to R198 100. Freight and insurance costs
amounted to R30 000 and import duty to R10 000. These computers were installed and brought into use
by Olenga on 1 October 2022. The write-off period for computers in terms of Binding General Ruling (or
Interpretation Note No 47) is 3 years. Depreciation of R39 600 was written off on these assets during the
2023 financial year.

5.3. Factory building and new office building

The current factory building was erected at a cost of R15 740 000 and brought into use on 1 June 2022.
Depreciation of R525 000 was written-off in respect of the factory building during the 2023 financial year.
Up and until 30 September 2022, 25% of the total floor space of the factory building was used as offices
by the administrative staff of Olenga.
During June and July 2022, a new office building, which qualifies as a commercial building, was erected at
a cost of R2 350 600. The new office building was brought into use on 1 October 2022. Deprecation of
R78 350 was written off in respect of the new office building during the 2023 financial year.

6) Repairs

Repairs consisted of the following:

6.1. The surface of the current parking area for both employees and customers were covered with gravel
a few years ago. The gravel not only created a lot of dust, but the surface became uneven due to all the
building activities and extensive rain, which caused large mud puddles to form. The company

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consequently decided to resurface the whole parking area with tar surfacing. Management is also of the
opinion that more income will be generated. This project was completed and brought into use on 25
March 2023. The cost amounted to R82 000.

6.2. An extension was added to the current factory building during January and February 2023. The floor
area of the current factory building was enlarged by 600m2 (square meters). The cost of this project
amounted to R850 500. The project was completed, and the extension brought into use on 15 February
2023. As the project did not consist of the erection of a new factory building, the management of the
company decided that the amount must be written off as repairs.

7) Dividends declared

On 1 September 2022, Olenga declared a dividend to holders of shares registered on 15 October 2022.
This dividend amounted to R867 000.

8) Fines and penalties

The fines and penalties relate to several speeding tickets issued to the delivery employees of Olenga on
their way to deliver goods to customers.

9) Donation
The donation of R7 500 was made to a registered Public Benefit Organisation and a section 18A certificate
was obtained.

10) Assessed losses brought forward.

Assessed loss from trading activities, brought forward from the previous year of assessment R395 000.

REQUIRED:
a) Calculate the taxable income of Olenga (Pty) Ltd for the year of assessment ended 31 March 2023.
You must commence your answer with the net profit before tax. Show all your calculations and
round off to the nearest Rand. Also indicate cases where no adjustment is required. (36)
b) Discuss the treatment of the repairs expense in note 6 for normal tax purposes, giving reasons for
your answer. (4)

END OF ASSESSMENT 3! GOOD LUCK!!!!

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