TAX3701 Assignment 2 (VERIFIED ANSWERS) Semester 2 2024 (798141) - DUE 13 September 2024

TAX3701 Assignment 2 (VERIFIED ANSWERS) Semester 2 2024 (798141) - DUE 13 September 2024 QUESTION 1 (35 marks, 63 minutes) Tau Steelworks (Pty) Ltd (Tau) is a South African company manufacturing a range of steel products used in building construction for the local and the export market. The company is not a small business corporation as defined and is also registered as a VAT vendor with the South African Revenue Service (SARS). The company’s process of manufacturing has been approved by SARS and its financial year ends on 29 February 2024. All amounts exclude VAT unless specifically stated otherwise. The accountant presented you with the following information for the 2024 financial year: 1. The total sales amounted to R. Included in this amount is an amount of R17 500 related to export sales made to a client from Germany. On 25 February 2024 Tau received a letter from a German attorney, representing the German client, that the German client has filed for liquidation and was finally liquidated on 7 March 2024. 2. The cost of sales comprised the following: R Opening stock Purchases Closing stock () Cost of sales The market value of the opening stock on 1 March 2023 was R and the market value of the closing stock on 29 February 2024 was R. 3. Tau paid the following employee related expenses for the 2024 tax year: • Salaries and wages – R. • Contributions to a pension fund for all employees – R195 200. • An annuity of R52 500 to Mrs. Dorcas Mabete, the wife an employee who died during the 2024 year of assessment. • Tau made a restraint of trade payment of R150 000 to Mr. Ndlovu, the marketing manager, who has retired on 31 December 2023. Mr. Ndlovu is restrained from competing with Tau for four years from the date of payment. The full amount is taxable in the hands of Mr. Ndlovu. 4. Tau entered into a learnership agreement with an employee with a NQF level 5 qualification for a 12-month period on 1 August 2023. The employee was still employed with Tau on 29 February 2024. 5. Tau received a doubtful-debt allowance of R37 500 for the 2023 year of assessment. The accountant provided you a list of doubtful debts on 29 February 2024 amounting to R290 000. Of this amount 80% is in arrears for more than 90 days, but less than 120 days. Tau does not apply IFRS 9. 6. Tau incurred the following legal expenses for the 2024 year of assessment: • R12 500 paid to Impi Attorneys for collecting outstanding staff loans. • R17 870 paid to Vula Attorneys for collecting outstanding debtors for sales. 4 QUESTION 1 (continued) 7. Tau donated R150 000 to Abba Homes, a public-benefit organisation and received the relevant section 18A income tax certificate in this regard. 8. Tau purchased a new steel manufacturing machine, Delta, from Italy on 30 November 2023 for $75 000. Machine Delta was by ship (FOB on 30 November 2023) and was received by Tau on 7 January 2024 and brough into use on 10 January 2024. The $75 000 was paid on 15 March 2024 to the Italian supplier. The following spot rates applied: 30 November 2023 $1 = R17.75 7 January 2024 $1 = R18.25 29 February 2024 $1 = R18.55 15 March 2024 $1 = R18.68 9. Tau paid the annual insurance for the period 1 October 2023 to 30 September 2024 amounting to R240 000 on 25 September 2023. 10. The accountant provided with the following information regarding non-current assets for Tau: • Machine Eco, bought second-hand on 1 July 2022 for R483 000 (including VAT) and brought into use on the same day, was sold on 2 January 2024 for R190 000 (excluding VAT). • Seven delivery trucks bought new on 1 June 2023 for a total cost of R (excluding VAT) and brought into use on 1 July 2023. General binding ruling No. 7 allows for a write-off of delivery trucks over a period of four years. • Tau purchased part of a new office block on 30 June 2023 from a property developer at a cost of R (including VAT). The offices were brought into use on 15 July 2023 The following also relates to the 2024 year of assessment: • Tau has an assessed loss of R73 578 brought forward from the 2023 year of assessment. • Tau will use any permissible allowance to reduce its normal income tax liability. REQUIRED Marks Calculated the normal income tax liability for Tau Steelworks (Pty) Ltd for the 2024 year of assessment. Please provide a reason where a deduction or allowance has no income tax implication. 35 5 QUESTION 2 (20 marks, 36 minutes) Tau Steelworks (Pty) Ltd (Tau) is a South African company manufacturing a range of steel products used in building construction for the local and the export market. The company is registered as a VAT vendor with the South African Revenue Service (SARS). The company’s two-month VAT period ends on 29 February 2024. All amounts exclude VAT unless specifically stated otherwise. The accountant presented you with the following information for the two-month VAT period: Description R Sales to South African clients Sales to clients in Europe and America 750 000 Interest received from South African investments 5 000 Bank charges 2 760 Purchases of raw material from South African suppliers 985 760 Purchases from Italy: Tau purchases raw material from Italy with a cost price of R285 000 and import surcharges of R11 780 were levied. The raw material imported will be used in making taxable supplies. Tau purchased a second-hand steel cutting machine from a non-vendor on 2 January 2024 for R65 000 (the deemed market value) and paid R40 000 on 15 January 2024 and the balance of R25 000 on 3 March 2024 to the non-vendor. Salaries 250 250 Entertainment of clients 17 380 Tau purchased a single cab bakkie on 2 January 2024 for R264 500 (including VAT) and provided the sole use of this bakkie to Mrs. Tiwane, the marketing manager of Tau, on the same date. She makes no payments towards the use of this vehicle. Insurance premiums paid 22 780 REQUIRED Marks Calculated the VAT payable by/refundable to Tau Steelworks (Pty) Ltd for the two-month VAT period ending on 29 February 2024. Please provide a reason where a transaction has no output or input tax implication. 20 6 QUESTION 3 (5 marks, 9 minutes) Happy Ndlomu Shearing (Pty) Ltd (HN) carries on the business of sheep shearing. The business commenced on 1 March 2022 and Mr. Happy Ndlomu is the sole shareholder. He has battled to keep proper accounting records and is considering registering as a micro business with SARS for the 2024 tax year. He provides you with the following information to assist him in calculating the taxable turnover for the 2024 tax year: 1. HN has an assessed loss of R2 250 brought forward from its 2023 year of assessment. 2. HN’s turnover (cash receipts) for the 2024 year of assessment amounted to R850 000. Included in this amount is R15 000 received from debtors during the 2024 tax year but was already subjected to normal income tax on accrual in the 2023 year of assessment. 3. HN received R9 000 in dividends from investments in South African listed companies. 4. HN sold shearing equipment and received R25 000 cash for this disposal. REQUIRED Marks Calculated the taxable turnover for Happy Ndlomu Shearing (Pty) Ltd for the 2024 year of assessment. Please provide a reason where a transaction has implication on the taxable turnover. 5 7 QUESTION 4 (20 marks, 36 minutes) You have received the following email from the accountant of Tau Steelworks (Pty) Ltd (Tau) regarding two transactions for which he requires clarity regarding the normal income tax treatment thereof: From: To: RE: Tax queries 19 August 2024 Dear Student I write this email to obtain clarity regarding the normal income tax treatment of the two transactions below that Tau Steelworks (Pty) Ltd concluded in the 2024 year of assessment. Transaction 1 Tau issued a tax invoice to Bato Construction (Pty) Ltd on 1 February 2024 for an amount of R31 625 (including VAT) for steel sheets delivered to one of their construction sites. Bato Construction (Pty) Ltd phoned the managing director of Tau Steelworks (Pty) Ltd explaining that it is experiencing cash flow problems and will not be able to pay this invoice soon. The managing director came to an agreement with Bato Construction (Pty) Ltd not to pay the tax invoice, but to repair the paving of the customer parking which will be at the same value as the tax invoice issued to it. Bato Construction (Pty) Ltd completed the repair work as requested on 25 February 2024. Transaction 2 Tau Steelworks (Pty) Ltd has paid the medical costs of R15 700 of an employee on 15 February 2024. The employee, who is still on probation, is not yet on the medical aid scheme for the employees of Tau Steelworks (Pty) Ltd and was injured when a piece of steel fell on his right foot while loading manufactured steel plates onto a delivery vehicle of Tau Steelworks (Pty) Ltd. I need clarity on how to treat the tax invoice issued for R31 625 (including VAT) and the payment of the medical expenses of R15 700 for the injured employee. Yours sincerely The Accountant of Tau Steelworks (Pty) Ltd REQUIRED Marks Draft an email to the accountant of Tau Steelworks (Pty) Ltd and provide clarity regarding the normal income tax treatment of the two transactions for the 2024 year of assessment: Transaction 1 Discuss the inclusion of the tax invoice in the gross income or not. Please support your answer with a relevant court case. Transaction 2 Discuss the deduction of the R15 700 medical expenses paid on behalf of an employee in terms of the general deduction formula. Please support your answer with a relevant court case.