TAX2601 Assessment 5 (DETAILED ANSWERS) Semester 2 2023 - DUE 16 October 2023

TAX2601 Assessment 5 (DETAILED ANSWERS) Semester 2 2023 - DUE 16 October 2023 100% TRUSTED workings, explanations and solutions. For assistance call or us on +/ 2/ 5/ 4 /7 /7 /9 /5 /4 /0 /1 /3 /2 . GENERAL INFORMATION You are a junior tax consultant at Tax Easy, a tax consultancy firm. Your manager has assigned tax-related work to you which you must complete for two different clients. Below is information regarding these clients and the tasks you are required to complete. CLIENT 1 (QUESTION 1) (23 marks) Ubuntu Catering (Pty) Ltd (”UC”) is a manufacturer and supplier of commercial and industrial catering equipment in South Africa. The company has one factory building situated in an industrial area of Johannesburg and offices located in Woodmead Office Park, Johannesburg. The company is not a small business corporation as defined in the Income Tax Act and its year of assessment ends on 31 March. The tasks that you need to attend to relate to the taxable income calculation of the company for the year of assessment ending 31 March 2023. UC informed you that they have elected the section 11(o) scrapping allowance, where applicable, and also the deferral of recoupments, where allowed. The company accountant supplied you with the below incomplete wear and tear and capital allowances calculation relating to the company’s fixed assets: Asset Capital/ wear & tear allowance amount Additional information 1. Asset UC1 ? Information is missing 2. Asset UC2 R180 000 Asset UC2 was purchased and brought into use on 1 October 2022 to manufacture steel baking trays. It was purchased for R900 000 from another company that closed and sold their assets, which were all used in the manufacturing process. The capital allowance calculated by the accountant for this asset for the current year was: R900 000 x 40% x 6/12 = R180 000, which is incorrect. 3. Asset UC3 R240 000 Asset UC3 is used in the process of manufacturing commercial ovens. It was purchased new and brought into use on 1 July 2020 for R. When factory FF1 was sold (see number 5 below), special transportation was arranged to move UC3 from factory FF1 to factory FF2 on 15 February 2023, at a cost of R48 000. The capital allowance calculated by the accountant for this asset for the current year was: R x 20% = R240 000, which is correct. However, the moving costs have not been dealt with. 4 TAX2601/2023/Semester 2/Assessment 5 4. Asset TK1 R595 000 A heavy-duty truck, used to deliver goods to customers, was purchased new and brought into use on 1 July 2021 at a cost of R595 000. The truck was in an accident and was scrapped on 1 December 2022. The company received an insurance payout of R280 000. The accountant has shown the cost price of the truck as the wear & tear allowance for the current year, which is incorrect. 5. Factory FF1 & FF2 ? Factory FF1 was purchased and brought into use by UC on 3 November 2003 for R1 million. The factory was purchased from the previous owner who erected the factory building in 1980 for R800 000. UC undertook major improvements to the factory building which were completed and brought into use in April 2013 at a cost of R. On 1 February 2023, UC sold factory FF1 for R and simultaneously purchased factory FF2 for R and brought it into use on the same day. Assume the tax value of factory FF1 at the time of sale is R. The accountant has not calculated any capital allowances or other tax consequences regarding the two factory buildings for the current year of assessment. REQUIRED MARKS a. List the questions you must ask the accountant about Asset UC1, to gather the necessary information to calculate the missing capital allowance. 4 b. Explain to the accountant what errors exist with the R180 000 capital allowance calculation for the current year of assessment of Asset UC2 and why. Also explain how to correct each error. No calculation is required in your answer – marks will be allocated for explanations only. 5 c. Calculate the capital allowance (if any), relating to the moving costs incurred to move asset UC3. 2 d. Calculate the correct wear & tear allowance for the current year of assessment and any other tax consequences arising from the scrapping of the truck. Ensure you use brackets to indicate amounts that must be deducted and no brackets for amounts that must be added in the taxable income calculation. Note: UC informs you that non-manufacturing assets are written off using the binding general ruling no.7, which allows three (3) years for heavy-duty trucks. 6 e. Calculate the capital allowances relating to Factory FF1 & FF2 for the current year of assessment and any other tax consequences arising from the sale of Factory FF1. Ensure you use brackets to indicate amounts that must be deducted and no brackets for amounts that must be added in the taxable income calculation. 6 5 TAX2601/2023/Semester 2/Assessment 5 CLIENT 2 (QUESTION 2) (17 marks) Jumping Castle Factory (Pty) Ltd (“JCF”) is a company that manufactures large jumping castles and water slides. They earn income from the sale and hiring out thereof. The company is a small business corporation as defined in the Income Tax Act. The company’s year of assessment ends on 28/29 February and your tasks relate to the taxable income calculation of the company for the year of assessment ending 28 February 2023. During a meeting between you and the accountant, the following issues are brought to your attention: Issue 1: The company has a few rental agreements with some of their customers, where a monthly rental is paid by the customer to hire jumping castles for a fixed period. In terms of the rental agreements a specified monthly rental amount is payable on or before the seventh (7th) day of the relevant month of use. That is, if an amount is paid by the 7th of June, it is then for the use of the item for the month of June. One of JCF’s customers hired a jumping castle for three months for a monthly amount of R7 000. The customer deliberately paid an amount of R21 000 into JCF’s bank account on 5 February 2023, which is the rental for February 2023 to April 2023. The accountant is uncertain how to account for the R21 000 rental income received in the taxable income calculation. REQUIRED MARKS Write a short paragraph for your manager to review before presenting it to the client. In your paragraph you must discuss and conclude whether the receipt of the R21 000 rental income would constitute gross income of JCF (Pty) Ltd for the year of assessment ending 28 February 2023, by addressing only the “received by or accrued to” requirement of the gross income definition as defined in the Income Tax Act. Also briefly refer to the relevant case law to strengthen your argument. 5 Issue 2: Capital allowances on the following fixed assets must still be calculated: • Heavy-duty truck purchased new for R550 000 and brought into use on 1 October 2021. • Manufacturing machine purchased second-hand for R400 000 and brought into use on 1 February 2023. Moving and installation costs of R10 000 were incurred on 20 January 2023 to move the machinery from the seller’s premises. • Delivery vehicle purchased new for R300 000 and brought into use on 2 January 2020. REQUIRED MARKS Calculate the capital allowances that JCF (Pty) Ltd can deduct in the taxable income calculation for the year of assessment ending 28 February 2023. Show all calculations. 4 6 TAX2601/2023/Semester 2/Assessment 5 CLIENT 2 (QUESTION 2) (continued) Issue 3: A donation of R50 000 cash was made by JCF to Tshwane Child Welfare Organisation (a registered public benefit organization). The accountant has not dealt with this donation yet and needs to finalise the taxable income calculation. REQUIRED MARKS a) State the requirement for JCF (Pty) Ltd to be able to claim a deduction in respect of the donation in the taxable income calculation for the 2023 year of assessment? b) Assume JCF (Pty) Ltd is allowed to claim a donation deduction for tax purposes and the taxable income is correctly calculated to be R589 000 before this deduction. Calculate the donations tax deduction JCF (Pty) Ltd can claim in their 2023 taxable income calculation. c) Calculate the income tax liability of JCF (Pty) Ltd for the 28 February 2023 year of assessment, by using the taxable income amount after taking the donation deduction into account. 1 3 4 End of Assessment 5 © Unisa 2023