TAX3701 Assignment 2 (DETAILED ANSWERS) Semester 1 2025 - DISTINCTION GUARANTEED

TAX3701 Assignment 2 (DETAILED ANSWERS) Semester 1 2025 - DISTINCTION GUARANTEED - DISTINCTION GUARANTEED - DISTINCTION GUARANTEED Answers, guidelines, workings and references ... QUESTION 1 (30 marks, 54 minutes) Lucky Dlamini Steel (Pty) Ltd (LDS) manufactures a wide variety of steel products for the building industry in South Africa. LDS is a small business corporation as defined in the Income Tax Act. LDS’s financial year ends on 28 February 2025 and the company is also a registered VAT vendor. LDS only makes taxable supplies and have all the valid tax invoices in support of expenses incurred and payments made. The accountant provides you with the following information for the two-month VAT period ending on 28 February 2025. All amounts stated excludes VAT, unless specifically stated otherwise: INCOME/RECEIPTS NOTE AMOUNT R Sales to South African customers 1 1 575 000 Sales to customers in Germany 85 000 Receipt from Naidoo Attorneys 2 18 975 Interest received on investments 5 780 Insurance payment received 3 189 750 Rent received 4 75 500 EXPENSES/PAYMENTS MADE Bank charges 3 790 Interest paid to AZN Bank 9 820 Steel sheets purchases for South African suppliers 5 950 350 New single cab bakkie purchased from a registered VAT vendor 6 425 500 Steel cutting machine purchased 7 95 000 A new coffee machine purchased for the canteen 25 750 Steel products imported from Italy 8 275 350 Electricity 100 851 Legal fees 2 2 250 Salaries and wages 352 500 Membership fees 9 16 675 Notes 1. Included in the amount of the sales to South African customers is an amount of R13 200 for sales made to Mr. D. Moto on 15 January 2025. Mr. D. Moto was finally sequestrated on 25 February 2025 in the Pretoria High Court. 2. The receipt of R18 985 from Naidoo Attorneys relates to an amount that was written off as a bad debt on 20 February 2024 for a sale to Peter Odinga Manufacturing (Pty) Ltd during the 2024 year of assessment. This amount includes VAT. The legal fees paid of R2 250 relates to the collection of the bad debt previously written off. 3. LDS received an amount of R189 750 on 21 February 2025 from its insurance company. The amount received represents a claim for the following: • R171 250 for a damaged steel cutting machine used in the manufacturing process. • R18 500 for a damaged coffee machine used by staff members in their canteen. 4. The rent received of R75 500 is for rental income from DCT Consulting (Pty) Ltd renting vacant office space from LDS. 5. Included in the purchases amount of R950 350 is an amount of R15 250 that was identified as damaged goods on delivery to the factory building of LDS on 17 February 2025. The supplier has issued the necessary tax credit note on 22 February 2025 for LDS. 6. A new single cap bakkie was purchased on 1 February 2025 for an amount of R425 500 (including VAT). The bakkie was provided as a company vehicle to Mr. D Matebula, the marketing manager of LDS, on 1 February 2025. Mr. Matebula makes not contribution to the cost of the bakkie. 7. A second-hand cutting machine was purchased from a non-vendor on 2 January 2025 for R95 000. LDS paid R50 000 of the purchase price on 15 January 2025 and the balance of R40 000 on 3 March 2025. 8. LDS purchased special steel plates from an Italian supplier for R275 350 on 17 January 2025. LDS also had to pay import surcharges of R15 180 on 19 January 2025 before the goods were released from customs in Durban. 9. LDS paid the following membership fees (including VAT) on 1 February 2025: • R10 350 to the Engineering Society of South Africa for the membership fees of the three mechanical engineers involved in the manufacturing of the steel products at LDS. • R6 325 to the local golf club for the membership fees of the managing director of LDS. REQUIRED: MARKS Calculate the VAT payable by/refundable to Lucky Dlamini Steel (Pty) Ltd for the two-month VAT period 28 February 2025. Please provide a reason should any amount not be subject to output tax or does not qualify for an input tax deduction. 30 QUESTION 2 (40 marks, 72 minutes) Lucky Dlamini Steel (Pty) Ltd (LDS) manufactures a wide variety of steel products for the building industry in South Africa. LDS is a small business corporation as defined in the Income Tax Act. LDS’s financial year ends on 28 February 2025 and the company is also a registered VAT vendor. The following information is made available by the accountant of LDS to calculate the normal income tax liability for the year of assessment ended on 28 February 2025 (all amounts exclude VAT unless otherwise stated): 1. Total sales amounted to R for the 2025 year of assessment. 2. LDS purchased R steel inventory during the 2025 year of assessment. 3. The information in the table below relates to steel inventory: 01/03/2024 28/02/2025 Cost Price Market Value Cost Price Market Value Completed steel products R 3 351 000 R 3 435 000 R 2 871 256 R 2 798 569 4. On 28 February 2025 the list of doubtful debts amounted to R681 250 of which 80% was outstanding for less than 90 days. LDS does not apply IFRS 9 to the debt. SARS has granted LDS a doubtful debt allowance of R155 240 for the 2024 year of assessment. 5. On 16 February 2025 an amount of R18 750 (excluding VAT) was paid into the bank account of LDS by TEX Attorneys. This amount represents a recovery of a bad debt written off in full during the 2023 year of assessment (being a debtor for sales). 6. The following expenses were incurred in connection with a design and a patent: • Expenses incurred in acquiring design B for a build-in braai…… R75 250 • Expenses incurred for a renewal of the term of patent M……… R15 950 7. LDS ordered a new manufacturing machine (Machine Y) from the United States of America (USA) at a cost of $95 000 on 1 November 2024. Air freight, customs and insurance costs amounted to R125 750. Machine Y was received in Cape Town harbour in South Africa on 18 December 2024 and brought into use on 1 February 2025 (transaction date). Payment was made in full by LDS 15 March 2025 to the USA supplier. The applicable exchange rates were as follows: Date R $ 1 November 2024 17,25 1 18 December 2024 17,67 1 1 February 2025 17,89 1 28 February 2025 18,12 1 15 March 2025 18,03 1 Average rate for the year 17,91 1 8. LDS entered into learnership agreements with two new employees, David Matanzima (in possession of a NQF qualification on level 5) and Precious Mbembe (in possession of a NQF qualification on a level 7), for a period of 18 months each from 1 July 2023. Precious Mbembe has a disability as defined in the Income Tax Act. Both agreements are registered and comply with all the necessary requirements. 9. LDS entered into a lease agreement with Thabo Properties (Pty) Ltd on 1 April 2024 for a period of ten years, with the option to extend the contract for another five years. The lease agreement stipulated that LDS Steel had to effect improvements on the premises to the value of R1 750 000. The building improvements commenced on 1 May 2024 and were completed on 1 November 2024. The improvement was brought into use on 1 December 2024. The total cost of the leasehold improvements was R. A monthly rental of R23 300 (including VAT) was payable by LDS to Thabo Properties (Pty) Ltd from 1 April 2024. LDS also had to pay Thabo Properties (Pty) Ltd a lease premium of R225 000, which was paid on 1 April 2024 to Thabo Properties (Pty) Ltd. 10. LDS has an assessed income tax loss of R75 209 carried forward from the 2024 year of assessment. 11. On 1 February 2024, LDS purchased four second-hand light delivery trucks from a non-vendor and paid the non-vendor R520 000 (being equal to its market value) in cash for all four light delivery trucks. All four light delivery trucks were brought into use on 1 February 2024. Binding general ruling No. 7 makes provision for the following write-off period: • Light delivery trucks – 4 years 12. LDS incurred the following legal expenses during the 2025 year of assessment: • R20 750 paid to Mkize Attorneys for collecting outstanding trading debtors. • R5 750 paid to Naidoo Attorneys for collecting an outstanding amount on a personal loan grated to Peter Matimba, an employee of LDS. 13. LDS paid its annual insurance for the period 1 October 2024 to 30 September 2025 of R240 000 (excluding VAT) on 25 September 2024. 14. LDS purchased new computer equipment on 15 December 2024 for 253 000 (including VAT) and brought it into use on 2 January 2025. REQUIRED: MARKS Calculate the normal income tax liability of Lucky Dlamini Steel (Pty) Ltd for the year of assessment ended 28 February 2025. Please provide a reason should any amount not be deductible for normal income tax purposes. 40 QUESTION 3 (10 marks, 18 minutes) Moses Patel (Pty) Ltd (MP) is a company that mainly sells animal feed to farmers and operates from Winterton in KwaZulu-Natal Free-State. The company also has a few specialists that assists the farmers with cost effective improvements of feeding supplements for their life stock. This commercial knowledge (know-how payments) passed to the farmers has proven to be very profitable. The company’s year of assessment ends on 28 February 2025 and is a registered VAT vendor making only taxable supplies. On 1 August 2024, MP paid an amount of R175 000 to an animal feeding supplement specialist to lure this feeding supplement specialist to start working for the company from 1 September 2024. The service contract and salary package will be negotiated at a later stage. REQUIRED: MARKS Discuss, supported with relevant legislation and case law principles, whether the amount of R175 000 paid by Moses Patel (Pty) Ltd will qualify as a deduction from the company’s taxable income for the 2025 year of assessment.