TAX2601 Assignment 3 (COMPLETE ANSWERS) Semester 2 2023 - DUE 4 September 2023.

TAX2601 Assignment 3 (COMPLETE ANSWERS) Semester 2 2023 - DUE 4 September 2023.100% CORRECT questions, answers, workings and explanations............ QUESTION 1 PART A Health Harmony (Pty) Ltd (“HH”) is a company offering various health and wellness services and sells health supplements. The company is situated in Johannesburg and its financial year ends on 31 March 2023. HH owns a 25% shareholding in another company specialising in organic juices, OJuicy (Pty) Ltd (“OJuicy”). HH is not a small business corporation as defined in section 12E the Income Tax Act. The company accountant calculated the preliminary taxable income as R6 785 000. You may assume that this amount is correctly calculated, however, the items listed below still needs to be taken into account: The following information is provided: Notes R Calculated taxable income 6 785 000 Dividends received 1 50 000 Rental income 2 ? Inventory 3 ? Marketing expense 4 90 000 Patents & related costs 5 95 000 Bad debts 6 71 000 Restraint of trade Notes: 1. Dividends received OJuicy declared and paid dividends to its shareholders on 15 March 2023. HH’s 25% share of the gross dividend amounted to R50 000. (You may ignore dividends tax). 2. Rental income & improvements A lease agreement was entered into on 1 July 2022 between a personal trainer (a natural person) and HH whereby the trainer will pay R15 000 monthly rent to use office space in HH’s property from 1 July 2022. In terms of the agreement, the trainer needed to make improvements to the space for an amount of R100 000. The improvements were all effected by the trainer and brought into use by 31 January 2023 at a cost of R130 000. TAX2601/2023/Semester 2/Assessment 3 _______________________________________________________________________________________ 4 QUESTION 1 (continued) 3. Inventory transactions Supplements for R1 789 000 were purchased during the year. The following was confirmed by the auditors during the latest company stock takes: Cost Market value Supplements - closing inventory 31 March 2022 R665 430 R690 000 Supplements - closing inventory 31 March 2023 R342 978 R300 670 On 1 March 2023, supplements which were about to expire and could not be sold to the public were sold to HH’s staff family members for R12 800. The R12 800 is already included in the calculated taxable income of R6 785 000. These supplements had a market value of R26 000. 4. Marketing expense HH entered into a contract with a marketing company to handle all the company’s marketing. An upfront payment of R90 000 was paid on 1 March 2023 for marketing services to be rendered from 1 March 2023 until 31 December 2023. 5. Patents & related costs 5.1 The term of a South African patent (patent S1) that HH owns on a supplement, was extended on 1 June 2022 for another two years for R35 000. 5.2 HH consulted with a foreign supplier regarding improvements to the supplement (patent S1). The foreign supplier shared their valuable expertise and knowledge for a fee of R60 000 which was paid by HH on 1 October 2022. 6. Bad debts The following amounts were written off by HH at the end of its 2023 year of assessment: 6.1 R58 000 in respect of product sales that were made in the previous year of assessment and are now considered to be irrecoverable. 6.2 R13 000 in respect of a loan made to an employee. R12 000 was loaned to the employee and R1 000 interest accrued on this loan amount in previous years of assessments. The employee absconded from work during April 2022 and cannot be traced. The full amount is regarded as irrecoverable by HH. 7. Restraint of trade expense HH employed a well known life coach two years ago, who resigned on 31 July 2022. An amount of R1 000 000 was paid to the life coach in order to restrain the coach to work in Johannesburg for a period of one year. REQUIRED: MARKS Calculate the normal tax liability of Health Harmony (Pty) Ltd for the 2023 year of assessment. Provide reasons for your answer in respect of the marketing expense as well as for all amounts that are not taxable and/or not deductible. 22 TAX2601/2023/Semester 2/Assessment 3 _______________________________________________________________________________________ 5 QUESTION 1 (continued) PART B HH must make its first provisional tax payment for the 31 March 2024 year of assessment soon. The following information was provided to you by the company accountant: Year of assessment Assessed Taxable income 2021 Yes, on 12 February 2023 R Yes, on 20 August 2023 R No R1 200 000 (estimated) REQUIRED: MARKS Calculate the first provisional tax payment of Health Harmony (Pty) Ltd for the 2024 year of assessment and provide the date by which it must be paid in order to avoid interest and penalties. 6 QUESTION 2 Bella Italia (Pty) Ltd operates as a franchise restaurant in a busy shopping mall in Pretoria. According to the contract between them and the franchisor, the restaurant must pay monthly franchise fees for various franchise services received. In addition, R80 000 must be paid each year by 30 April if a (verified and audited) turnover of more than R4million for the financial year was reached. The accountant decided to be prudent and paid the R80 000 on 26 February 2023 without knowing the annual turnover amount and deducted it for the purposes of calculating the taxable income for the 28 February 2023 year of assessment . REQUIRED: MARKS Discuss and conclude whether the expenditure of R80 000 is deductible by Bella Italia (Pty) Ltd in terms of the general deduction formula (s11(a) read with s23) for the year of assessment ending 28 February 2023. You do not need to list and discuss whether the amount is “not of a capital nature” and may assume that this requirement is met. Strengthen your argument with reference to relevant case law only as pertaining to the main issue in the question.