TAX2601 Assignment 5 (ANSWERS) Semester 1 2023 (701094)

TAX2601 Assignment 5 (ANSWERS) Semester 1 2023 (), Whats app 0 for private documents from R99. QUESTION 1 (30 marks) You are a junior tax consultant at Easy Tax, a firm performing accounting and tax related services for its clients. You are currently assigned to the client SA Metals (Pty) Ltd (“SA Metals”) and your manager has asked you to complete the income tax liability calculation of the company. You obtain the following information about the company: SA Metals is a South African company that manufactures a wide range of steel products. The company has a corporate office in Johannesburg and two factories, one in Johannesburg and one in Gqeberha (in the Eastern Cape). The company’s year of assessment ends on 31 March 2023. It is not a small business corporation as defined in the Income Tax Act. The company accountant supplies you with a taxable income figure of R (assume correctly calculated) before taking the tax consequences for each of the assets/transactions below into account. The following information is provided to you for the company’s 2023 year of assessment: 1. Extract from the asset tax register Below is a summary of specific assets for which the income tax consequences have not been taken into account for the current year of assessment. Asset name Cost Date purchased and brought into use Additional information Manufacturing machine (SP10) R July 2022 SP10 was purchased new. Manufacturing machine (RT4) R August 2020 RT4 was purchased second hand. On 1 November 2022 it was moved from the Gauteng factory to the Gqeberha factory. Transport costs of R16 400 were incurred. Manufacturing machine (DP1) R July 2022 DP1 was purchased new and brought into use specifically for a research and development project SA Metals entered into on 1 July 2022 (refer to note 3 below). Printer R6 499 1 September 2022 New printer acquired for office use. Delivery van R380 000 1 September 2022 New delivery van purchased. Manufacturing machine (EB09) R October 2021 EB09 was purchased new. Machine EB09 no longer met the manufacturing specifications and was sold for R770 000 on 20 January 2023 to an unconnected person. TAX2601/2023/Semester 1/Assessment 5 _______________________________________________________________________________________ 4 Asset name Cost Date purchased and brought into use Additional information Heavy duty truck (HD1) R560 000 1 March 2022 A heavy-duty truck was purchased new and brought into use at the Gqeberha factory. On 28 February 2023 the truck was involved in an accident and totally written off. The truck was underinsured and the insurance company only paid out an amount of R95 000 to SA Metals on 31 March 2023. Suite of offices - Johannesburg R April 2019 SA Metals purchased a suite of offices situated in an office building in Johannesburg to accommodate the administration of its business. The building was erected by a developer in 2006, but SA Metals purchased these offices from the previous owner that used the offices for business purposes. Factory building - Johannesburg R March 2006 This building was purchased new. On 7 May 2022, an electric geyser burst and water damage occurred in the factory manager’s office. A wooden door, two wooden window frames and the carpet were replaced, at a cost of R84 000. Factory building - Gqeberha R (including refurbishment costs) 2 March 2021 and 1 November 2021 An old warehouse situated in an Urban Development Zone of Gqeberha was purchased on 2 March 2021 and totally refurbished (improved) by SA Metals during 2021. It was only brought into use for manufacturing on 1 November 2021. No structural or exterior changes were made to the warehouse. 2. Design and trademarks On 1 January 2023, Design A was registered at a cost of R30 000 and a trademark was acquired at a cost of R65 000. Both assets were brought into use in the business on the same date. 3. Research and development costs During the period 1 July 2022 until 30 November 2022 research and development costs (for which the necessary approval was obtained on 20 April 2022) relating to the innovation and improving a specifically designed steel pipe was incurred. It is envisaged that a registered design (Design B) will eventually result from these expenses. The expenses incurred consisted of the following: - Costs incurred relating to consumables used in the development amounted to R375 000 - Costs incurred relating to the sales promotion for Design B amounted to R158 000 TAX2601/2023/Semester 1/Assessment 5 _______________________________________________________________________________________ 5 QUESTION 1 (continued) 4. Payment of traffic fines SA Metals paid traffic fines amounting to R26 800 during the year of assessment ending 31 March 2023. Additional information: Binding general ruling no. 7 makes provision for the following write–off periods, where applicable: Heavy duty trucks: 3 years Delivery vehicles: 4 years Office equipment: 5 years Furniture & fittings: 6 years REQUIRED: MARKS Calculate the normal tax liability of SA Metals (Pty) Ltd for the year of assessment ending 31 March 2023. Start your answer with the taxable income of R and provide brief reasons where amounts are not taxable or not deductible. SA Metals has elected the section 11(o) scrapping allowance, where applicable. Ignore all capital gains tax consequences. 30 QUESTION 2 (13 marks) Siyahamba Events (Pty) Ltd (“Siyahamba”) is a South African incorporated company specialising in organizing corporate functions. On 10 March 2023, they received a R10 000 deposit from a client that requires a DJ (disk jockey) to perform at an event taking place on 2 April 2023. In terms of the contract that Siyahamba issues to all their clients, a 50% deposit of the full fee is payable to secure a DJ and a date. The outstanding fee is payable on the day of the event. The deposit is non-refundable should the event be cancelled by the client. Siyahamba has a 31 March year-end. REQUIRED: MARKS Discuss whether the receipt of the R10 000 deposit would constitute gross income of Siyahamba (Pty) Ltd as defined in the Income Tax Act 58 of 1962 for the year of assessment ending 31 March 2023. List all the requirements, discuss and apply each one and briefly refer to case law to strengthen your argument. 13 TAX2601/2023/Semester 1/Assessment 5 _______________________________________________________________________________________ 6 QUESTION 3 (31 marks) Funky Pants (Pty) Ltd (“Funky Pants”) is a South African company situated in Durban, Kwa-Zulu Natal. It manufactures sport clothing. The company’s shareholders are three brothers (natural persons). The company qualifies as a small business corporation as defined in the Income Tax Act. The following information is provided to you for the company’s year of assessment ending on 28 February 2023: Notes R Sales 1 967 000 Dividend income (from permitted shareholdings) 100 000 Manufacturing assets - income tax consequences 2 ? Non-manufacturing assets – income tax consequences 3 ? All other tax-deductible expenditure 4 R278 320 Notes: 1. Sales All sales are concluded online, with customers placing their order and paying for the items in the same transaction. No items are sold on credit. Included in the sales amount is proceeds of R60 000 from the sale of a small delivery vehicle sold on 1 December 2022. See note 3. 2. Manufacturing assets Funky Pants owns two manufacturing machines which are both in operation at the end of the 2023 year of assessment, i.e. Machine FP1 and Machine FP2. Machine FP1 was purchased (second hand) for R400 000 on 1 April 2021 and brought into use on the same date. Machine FP2 was purchased (new) for R320 000 on 1 October 2022 and brought into use on 1 November 2022. On 28 October 2022, Funky Pants incurred R37 000 to have machine FP2 installed and ready to be brought into use on 1 November 2022. 3. Non-manufacturing assets Since the 2022 year of assessment, most of the sold products are shipped using a courier service. Therefore, there was no longer a need to use the delivery vehicle and the company decided to sell it. It was purchased for R350 000 and brought into use on 1 June 2021 and sold on 1 December 2022 for R60 000. Other non-manufacturing assets consist of office and computer equipment with a cost price of R230 000, all purchased and brought into use on 1 August 2020. 4. All other tax-deductible expenditure Included in this amount is the cost price of trading stock (sport clothing) that was purchased during the 2023 year of assessment for R22 000. This trading stock was sold to family members of the shareholders of the company on 23 December 2022 at cost price. The selling price of R22 000 is included in sales. The transaction does not meet the requirements of a transaction made in the ordinary course of trade. The market value of the clothing so disposed of amounted to R32 000 on the date of sale. TAX2601/2023/Semester 1/Assessment 5 _______________________________________________________________________________________ 7 QUESTION 3 (continued) Other information: Binding general ruling no. 7 makes provision for the following write–off periods, where applicable: Delivery vehicles: 4 years Computer & office equipment: 3 years Funky Pants has elected the section 11(o) scrapping allowance, where applicable. REQUIRED: MARKS (a) Calculate the normal tax liability for Funky Pants (Pty) Ltd for the year of assessment ended 28 February 2023. Ignore all capital gains tax consequences. 17 (b) Explain whether Funky Pants (Pty) Ltd could qualify as a micro business. 5 (c) Assume Funky Pants (Pty) Ltd could qualify as a micro business, calculate the tax liability for the 2023 year of assessment using the information provided. 7 (d) Discuss whether it would be advisable for Funky Pants (Pty) Ltd to register as a micro business rather than a small business corporation. Substantiate your answer.