LML4804 PORTFOLIO (DETAILED ANSWERS) Semester 2 2024 - DISTINCTION GUARANTEED

LML4804 PORTFOLIO (DETAILED ANSWERS) Semester 2 2024 - DISTINCTION GUARANTEED - DISTINCTION GUARANTEED - DISTINCTION GUARANTEED Answers, guidelines, workings and references ,... QUESTION 1 (TAX ADMINISTRATION AND TAX AVOIDANCE) The Tax Administration Act 28 of 2011 (TAA) empowers the Commissioner for the South African Revenue Service (the Commissioner) to conduct audits on taxpayers. The Commissioner has, over the years, announced that the South African Revenue Service (SARS) will conduct audits on all taxpayers that enjoy a certain lifestyle. Most recently, the Commissioner announced that taxpayers who buy certain premium-brand goods would be subjected to audits. In doing so, SARS is upholding its commitment to keep a close eye on the so-called High-Net-Worth (HNW) taxpayers. A HNW taxpayer is defined as a person whose estate is worth more than R50 million. Following the above statement, SARS announces in the press that it will be conducting lifestyle questionnaires on all wealthy taxpayers who are members of the Vintage Club. The Vintage Club receives a notice from SARS demanding information about the names and personal details of its members. WHAT IS REQUIRED OF YOU: The club approaches you for advice regarding SARS’ notice. Advise the club in terms of the existing law. [15] SUB-TOTAL FOR QUESTION 1 [15 marks] QUESTION 2 (GROSS INCOME) 2.1 Kamogelo is a South African tax resident and an attorney trading as a sole proprietor in Seshego, in the province of Limpopo. She has a policy of not doing any work for her clients unless they have deposited money into her trust account. Accordingly, at the end of the 2022/23 year of assessment, Kamogelo had an amount of R175 000 in her trust account for the work she still had to do. Despite this policy, Kamogelo failed to ensure that other clients deposited money into her trust account before she rendered legal services. Therefore, she issued invoices to those clients who did not pay into her trust account to collect the outstanding amounts. The invoices specified that if the client settled the outstanding account before 1 April 2023, the client would only need to pay ninety per cent (90%) of the invoiced amount. Failure to pay before this date would mean that the client must pay the full amount (100%). At the end of the 2022/23 year of assessment, none of the clients who received invoices had made a payment. WHAT IS REQUIRED OF YOU: Discuss the income tax consequences for Kamogelo’s 2022/23 year of assessment. [08] 2.2 In December 2021, Pravya purchased a new plot in Durban, KwaZulu-Natal, on which she built house. On 1 March 2022, Pravya decided to rent out the house on a LML4804 OCT/NOV EXAM 2024 permanent basis. She entered into a three-year renewable lease agreement with Natali. In terms of the agreement, Natali will pay a monthly rent of R12 000. The agreement also provides that Natali must construct a wooden deck and outdoor braai (Barbeque) at her own expense. In consideration for this, Pravya agreed to waive two months of rent upon completion of the deck and braai. Natali duly completed the construction and Pravya waived the rent for April and May 2022. WHAT IS REQUIRED OF YOU: Advise Pravya if the value of the improvements to the leased property must be included in her gross income for the 2022/23 year of assessment. Also advise her on waiver of the rent for April and May 2022. [07] SUB-TOTAL FOR QUESTION 2 [15 marks] QUESTION 3 (CAPITAL GAINS TAX) Zemura is a qualified structural engineer and a South African tax resident. He is married to his childhood sweetheart, Maria, with whom he has two children. The company he worked for, R&R (Pty) Ltd (R&R), experienced financial difficulties during the COVID-19 pandemic. As a result, R&R retrenched several engineers including Zemura. Upon his retrenchment, Zemura was given a severance package of R3 million for having worked for R&R for about ten years. The retrenchment did not sit well with Zemura. His health deteriorated and he was in and out of hospital. One evening on his way from the hospital, he was arrested on a suspicion of driving under the influence of alcohol. The officer who arrested him relied on Zemura’s slurred speech and poor vision. Zemura stated that these were the side effects of a flu medicine called Bilophys (not a real name), which he showed to the officer. However, the officer took him to the police custody. Zemura was kept in police custody for three days without being taken to the district surgeon for blood tests. The Minister of Police was alerted about the situation and offered Zemura compensation of R1 million, which he accepted. With all the money at his disposal, Zemura embarked on the following transactions: • Sold the house he was staying in with family in Midrand for R2,5 million. He bought for R1,5 million ten years ago; • Before selling the house, he appointed UVE Real Estate Agency to market and sell the house at a fee of R120 000; • He bought a penthouse worth R2 million in Johannesburg CBD; • He sold his car, a Tomota GT (not a real name), for R300 000; • He bought Tomota GTS (not a real name) for R500 000; and • He bought Kruger Rands worth R200 000 and donated them to Maria as a token of affection. LML4804 OCT/NOV EXAM 2024 WHAT IS REQUIRED OF YOU: Discuss the capital gains tax consequences of the transactions above. [15] SUB-TOTAL FOR QUESTION 3 [15 marks] QUESTION 4 (DEDUCTIONS) Bob graduated from Nelson Mandela University as a plant pathologist in 2021. In April 2022, after completing his internship programme at Fresh Produce (Pty) Ltd, he was not retained for permanent employment due to lack of funds. In 2023, he opened a laboratory in Kenhardt, in the Free State, from where he did soil analysis, plant analysis, and weather analysis for the local farming community. In addition, he conducted crop-failure investigations for insurance companies. He also assisted two seed-producing companies with genetically modifying maize to grow under severe drought conditions. On 1 March 2023, Bob purchased an old house in Kenhardt which he planned to transform into an office and laboratory. The house cost him R750 000 including estate agent’s commission and transfer costs. On 10 April 2023, Bob paid Kenhardt Building Contractors R525 000 to transform the house into an office and a laboratory. Bob also purchased a set of textbooks on plant pathology at a cost of R39 500. On 1 September 2023, Bob commenced with his business. WHAT IS REQUIRED OF YOU: Advise Bob, with reference to case law and relevant authority, on the deductibility of the above expenditures.