LML4804 EXAM PACK 2023 LATEST QUESTIONS WITH ANSWERS

LML4804 EXAM PACK 2023 LATEST QUESTIONS WITH ANSWERS. Income Tax: QUESTION 1 During the 2003 tax year, Mr Johnson leased a dilapidated but wellsituated shopping centre for a period of 10 years. He intended to sub-let it at a profit. Mr Johnson had to renovate the property in order to render it suitable for letting. His expenditure in this regard during the 2003 tax year included an amount of R30 000 for the replacement of broken windows, an amount of R80 000 for the painting of the building, an amount of R250 000 for the replacement of broken and damaged roof tiles, and an amount of R3 000 on a new burglar alarm control box to replace a broken-down one that could no longer be repaired. Mr Johnson only started to look for tenants for the building upon completion of the renovations during the 2004 tax year. a) What are the requirements for the deduction of the cost of repairs in terms of section 11(d) of the Act? S11 (d) – Repairs Repairs to property used for the purposes of the taxpayer’s trade may be deducted in the tax year in which it actually incurred. Any costs pertaining to the improvements of a capital asset will not be deductible. Expenses incurred by a mine for the rehabilitation of mining soil, water, sea or air is regarded as repairs. Therefore nothing could be deducted in the 2003/2004 tax year as repairs as everything for which money was laid out was improvements or replacement of the entire object. b) Explain whether the various items of expenditure in respect of the renovation of the building during the 2003 tax year will qualify as deductible repairs in terms of section 11(d) of the Act. The general deduction formula is defined as:  any expenditure or loss  which has actually been incurred or suffered  inside or outside the Republic  in the production of income from the carrying on of any trade  to the extent that the monies claimed as a deduction were laid out for the purposes of the taxpayer’s trade  Which is not of a capital nature It can be said that there was an expenditure which was actually incurred within the Republic with the idea of laying out the money in order to produce income for the taxpayers trade. However, one must determine whether the amounts laid out where of a capital nature or not S - The study-notes marketplace and if they are allowable deductions in terms of section 11 or prohibited deductions in terms of section 23. Your allowable deductions in terms of section 11 include: repairs (s11(d)) – none of the mentioned expenditure constitute repairs. As well as improvements made to a leased property (s11(h)). An expense can’t be deducted if it is an expense of a capital nature. If an expense is of an income nature then it can be deducted (because you are taxed on income). I.e. if you spend money you may deduct the original amount spent. In New State Areas Ltd v CIR: the court held that if the expense was incurred to acquire a capital asset then the expense is of a capital nature (not deductible). In CIR v George Forest Timber Co Ltd: if an expense is incurred as a once-off expense and is not a recurring expense, it is off a capital nature. In Herron Investments (Pty) Ltd v SIR: (the enduring benefit test). The taxpayer rented out property to Pine Forbes (insurance brokers) and the lessee (Pine Forbes) wanted to move out of the premises because they were not modern enough. The taxpayer made alterations to the building and tried to claim the cost, i.e. deduct the costs of the deductions. The court accepted that the expenses were incurred for the purposes of trade and that the expense of the upgrade was in the production of income. The court held: the expenses were of a capital nature and could therefore not be deducted, because it was an advantage of an enduring benefit. Therefore I would say that based on the fact that it is not a repair and is not included elsewhere in the list of section 11 specific deduction and in line with the decision of Herron Investments that such amounts are of a capital nature and therefore not deductable. The only time such expenditures would be deductable is where the improvements where made subject to a lease agreement in terms of s11(h). S11 (h): The actual expenses of improvements made in terms of a leasing agreement by the lessee can be deducted from the lessee’s gross income. The amount can only be deducted in the year in which it was actually incurred. c) During the 2004 tax year Mr Johnson entered into a contract for the cession of his rights under the lease for an amount of R2 million. Discuss whether the amount of R2 million - will be taxable in Mr Johnson’s hands in terms of the general part of the definition of “gross income” in section 1 or in terms of any specific inclusion in that definition; AND The general definition of gross income:  The year or period of assessment  In the case of any resident  The total amount, in cash or otherwise  Received by, accrued to or in favour of such resident  Or any person other than a resident (source)  Excluding receipts or accruals of a capital nature  But including specific inclusions Here we can say that we are dealing with the year of assessment, Mr Nkomo is a resident, the amount was payable in cash, and it is not of a capital nature. However, the question is who is liable for tax if the money is paid over or ceded to a new vendor. Allocation of income once accrued Once an amount has accrued to or been received by the taxpayer, the allocation will have no effect on his tax liability. In CIR v Witwatersrand Association of Racing Clubs 1960 (3) SA 296 (A) – the taxpayer held a race for the purposes of donating the profits to charity. Before he held the race, it was decided to hand all the profits to charity. The court held: the fact that the taxpayer had a moral duty to hand the profits to charity did not alter the fact that the money first accrued to him, before it was given to charity. It was thus TAXABLE IN HIS HANDS (1 st accrued to the taxpayer). Transfer of a right before accrual The question is whether, in SA, one can legally transfer or cede something before it is entitled or accrued to him is subject to debate. It is accepted that one can transfer a contingent right but this leads to consequences in the income tax field. - will be deductible in terms of the general deduction formula or any specific deduction of the Act, in the hands of the person to whom rights were ceded. Give reasons for your answer The general deduction formula is defined as:  any expenditure or loss  which has actually been incurred or suffered  inside or outside the Republic  in the production of income from the carrying on of any trade  to the extent that the monies claimed as a deduction were laid out for the purposes of the taxpayer’s trade  Which is not of a capital nature Rent is always revenue if you receive you can declare it and if you pay it you can deduct it from your year off assessment. If the rights are ceded to him then he will be liable for income tax on the amount ceded, provided that he complies with all of the other requirements of the formula. QUESTION 3 1. Ms Ntwagae was retrenched as hairdresser on 31 March 2004 as part of a general reduction in personnel by Funky Salon (Pty) Ltd owing to a slump in the business. Ms Ntwagae received R100 000 upon retrenchment as compensation for the termination of her employment and in respect of a restraint of trade in terms of which she was prohibited from engaging in any hairdressing activities in Cape Town for two years after termination of her employment. Explain whether a S - The study-notes marketplace lump sum payment received in respect of a termination of services as well as in respect of a restraint of trade would, in principle, form part, in the circumstances mentioned above, of a taxpayer’s gross income. Your answer must be supported by references to relevant authority. Here we are dealing with the question of restraint of trade clause. In Crowe the court held that something can be either of a capital or revenue nature but there is nothing in between. A specific indivisible amount cannot be of a capital and revenue nature simultaneously. In Tuck v CIR, the court found that the amount the taxpayer received was partly of a capital nature and partly of a revenue nature, thus a divisible amount. The facts were when the taxpayer retired, his company gave him an amount for the services rendered (revenue) and amount for compensation for restraint of trade (capital). Since the payment was in respect of both and one factor is not more important than the other, the court APPORTIONED the amount (taxed 50% services rendered and tax free for the restraint). However, nowadays payment for RESTRAINT OF TRADE is included in gross income and is also an allowable deduction. In terms of paragraph 11 RESTRAINT OF TRADE is now included in your gross income - Any amount received or accrued to a natural person, labour broker, personal service trust or company as compensation for R.O.T. are now included. The principles in Tuck and before 1962 are not included. S23 (l) – Payment in restraint of trade: states that an expense incurred in respect of the payment of any restraint in trade is prohibited, unless the provisions of S11 (cA) apply. S11 (cA) – Compensation for restraint of trade - Any amount actually incurred as compensation for any restraint of trade imposed on any natural person, labour broker, personal service company or personal service trust will be allowed as a deduction to the extent that such an amount constitutes income of the person to whom it was paid. The amount that will be allowed to be deducted in a particular year is the lesser of one third of the amount incurred or the value of the amount divided by the number of years during which the restraint of trade applies. Therefore the amount will be calculated so that it can be deducted and the amount that the employee is entitled to deduct will be the amount that the employer must include. = the amount divided by the years or one-third of the amount whichever is the lesser = R100 000 / 2 or 1/3 x R100 000 = R50 000 or R 33 333.33 Therefore R33 333.33 will be deductable. 2. Under what circumstances will non-residents be subject to tax in the Republic in respect of royalties? A non resident will be liable for tax if the royalty falls within the definition of source. S - The study-notes marketplace Downloaded by: sheilavandyk | Distribution of this document is illegal Want to earn R1,135 per month? S - The study-notes marketplace Meaning of “source”: There is no statutory definition, generally the “republic” means within the 9 provinces. In Epstein the courts acknowledge the problem with the definitions and laid down certain tests or guidelines: Overseas Trust Corporation, held that the source is not the place from whence income is forthcoming, but indeed its originating cause. Lever Bros, laid down the test to determine source: 1. The determination of the origination cause of the income (what work was done). 2. The localization of that originating cause in order to decide whether it is inside or outside South Africa. The test from Lever Brestraint of tradehers and Overseas Trust Corp. does not always provide an answer to all the situations, e.g. profits from a purchase and sale, the originating cause being the purchase or the sale?? In Millin v CIR: Mrs Millin wrestraint of tradee books in SA but gave the right to print and publish her books in England. She would receive royalties for every book sold. The question was what was the source of those royalties? There was a number of originating factors: i) the writing if the books ii) the fact that they were published iii) the fact that they were sold The court held that the dominant cause was SA! – Manufacture and sale QUESTION 4 1. John Smook is a rental agent. He lets a house on behalf of a client, Angie, and collects the monthly rental of R5000 on her behalf. The agreement between them provides that he has to pay over the collected rental amounts to Angie once a month and will be entitled to R500 for his services, conditional upon actual collection. a) State the circumstances, as mentioned in the definition of gross income, in which a cash amount should generally be included in a taxpayer’s gross income. Assume for the purposes of the question that it does not resort under any specific inclusion (par (a) – (n) of the definition of gross income). The general definition of gross income:  The year or period of assessment  In the case of any resident  The total amount, in cash or otherwise  Received by, accrued to or in favour of such resident  Or any person other than a resident (source)  Excluding receipts or accruals of a capital nature  But including specific inclusions Here we are dealing with the question of what cash amounts must be included in the taxpayers gross income. It will be if the amount is cash and is any income that is off a revenue nature (it is in the course of business). The amount must also have been received by, accrued to or in S - The study-notes marketplace Downloaded by: sheilavandyk | Distribution of this document is illegal Want to earn R1,135 per month? S - The study-notes marketplace favour of the taxpayer. We need to determine if such amount has in fact accrued to the taxpayer. With regards to accrued to there was always uncertainty but this has since been sorted and confirmed through case law and the legislature. If the amount is paid in something other than cash then it can only be included if it has an ascertainable monetary value. (CIR v Butcher Brothers and Section 24M) b) Explain whether the amounts mentioned above should be included in John’s gross income. Assume for the purposes of the question that the relevant amounts are not of a capital nature. The general definition of gross income:  The year or period of assessment  In the case of any resident  The total amount, in cash or otherwise  Received by, accrued to or in favour of such resident  Or any person other than a resident (source)  Excluding receipts or accruals of a capital nature  But including specific inclusions Here we are dealing with the question of what cash amounts must be included in the taxpayers gross income. The amount to be included will be any income that is off a revenue nature (it is in the course of business). The amount must also have been received by, accrued to or in favour of the taxpayer. We need to determine if such amount has in fact accrued to the taxpayer. With regards to accrued to there was always uncertainty but this has since been sorted and confirmed through case law and the legislature.  Lategan v CIR, when the taxpayer is entitled to an accrued amount and the amount which is payable in future, its present discounted value, and not its full amount, be included in the gross income.  In Ochberg v CIR, the taxpayer is UNCONDITIONALLY entitled to an amount.  In CIR v Delfos, the words meant “when an amount was due and payable”.  Then there was CERTAINTY in CIR v People’s Stores – the court agreed with Lategan and Ochberg. They found that the words “accrued to” meant the amount which you were unconditionally entitled to which is not yet due and payable. If it is not on the full contract price, it must be discounted to its