TAX3701 Assignment 2 (DETAILED ANSWERS) Semester 2 2025 - DISTINCTION GUARANTEED

TAX3701 Assignment 2 (DETAILED ANSWERS) Semester 2 2025 - DISTINCTION GUARANTEED - DISTINCTION GUARANTEED - DISTINCTION GUARANTEED Answers, guidelines, workings and references ,... Joseph Dlamini Manufacturers (Pty) Ltd (JDM) is a company manufacturing a range of concrete products for the building industry in South Africa. JDM is a registered VAT vendor, and its year of assessments ends on 31 March 2025. JDM’s process of manufacturing has been approved by SARS and is not a small business corporation as defined. All amounts are exclusive of VAT unless stated otherwise. The accountant has compiled the following information for the year of assessment ended on 31 March 2025. Description Note Amount R Sales 1 Interest received 2 31 256 Dividends received 3 175 873 Insurance claim payment received 4 250 675 Sundry income 5 25 252 Cost of sales 6 () Salaries and wages 7 (3 871 350) Bad debts 8 (150 250) Interest paid 9 (141 395) General expenses 10 (75 456) Depreciation 11 (750 400) Restraint of trade payment 12 (320 000) Donations made 13 (360 250) Repairs and maintenance 14 (271 350) Insurance paid 15 (198 000) Rent paid 16 (520 000) Property expenses 17 (5 850 250) Notes 1. Sales to South African customers Included in the sales amount of R is a sale made to a building contractor on 25 March 2025 amounting to R125 000. The building contractor cancelled the sale due to cash flow problems and the all the goods were returned to JDM on 26 March 2025. JDM has a gross profit percentage of 25% to the cost of all manufactured concrete products. 2. Interest received The interest received comprised the following: • Interest levied on overdue debtors’ accounts – R15 126 • Interest received from investments – R16 130 3. Dividend received The dividends received comprised the following: • Dividends received from investments in a foreign company – R175 998 JDM holds 5% of the shares in the foreign company. 4. Insurance claim payment received JDM received an amount of R250 675 (including VAT) on 15 January 2025 from its insurance company for Machine DP that was damaged beyond repair during normal operations. Machine DP was purchased new on 4 April 2023 for R420 000 (excluding VAT) and brought into use on the same date. 5. Sundry income The sundry income comprised the following: • Bad debts recovered from debtors written off during the 2024 tax year – R25 252 6. Cost of sales The cost of sales amount of R comprised the following: • Opening stock on 1 April 2024 – R4 251 327 (market value is R4 328 726) • Purchases of R • Closing stock on 31 March 2024 – R5 007 752 (market value is R4 812 538) The goods returned by the debtor on 26 March 2024 with a sales value of R125 000, as indicated in note 1 above, has not been added back to the closing stock on 31 March 2025 and has not been considered in determining the market value of the closing stock on 31 March 2025. The cost price and the market value of the returned goods are the same. 7. Salaries and wages The salaries and wages amount of R3 871 350 comprise the following: • Salaries and wages to all employees – R3 551 900 • Company contributions to the pension fund for all employees – R310 250 • Bribes paid to various traffic officials – R9 200 8. Bad debts The bad debts amount comprised the following: • Actual bad debts of R15 250 relating to a debtor who was finally liquidated on 15 March 2025. • Doubtful debts amounting to R135 000 on 31 March 2025. Only 80% of the R135 000 doubtful debts are in arears for less than 90 days. JDM received a doubtful debt allowance of R75 670 in the 2024 years of assessment. 9. Interest paid The interest paid amount of R141 395 comprised the following: • Interest paid on long-term borrowing to finance capital assets – R141 395. 10. General expenses The general expenses amount of R75 456 comprised the following: • Advertising and marketing of new products – R75 456. 11. Depreciation The depreciation amount of R750 400 relates to the following capital assets: • New computer equipment of R390 000 (excluding VAT) purchased on 1 May 2024 and brought into use on 1 June 2024. • Sewen new delivery trucks were purchased on 1 June 2023 for a total amount of R3 565 000 (including VAT) and brought into use on the same day. • A second-hand Machine OJ was purchased on 20 January 2025 for R720 000 (excluding VAT) and brought into use on the same date. Machine OJ replaced Machine DP (refer to note 4 above). • Binding general ruling No. 7 allows for the following write-off periods: o Computer equipment – 3 years o Delivery trucks – 4 years o Carports – 5 years 12. Restraint of trade payment JDM made a restraint of trade payment of R390 000 on 31 January 2025 to Magic Ndlovu, the marketing manager. This payment was made to restrain Magic Ndlovu from competing with JDM for the next two years commencing on 31 January 2025. 13. Donations made The donations made of R360 250 comprised the following: • R360 250 was donated to public benefit organisation and the necessary section 18A income tax certificate was received on 25 March 2025. 14. Repairs and maintenance The repairs and maintenance amount of R271 350 comprised the following: • R271 350 was spend on 1 February 2025 to erect ten carports for customer parking. 15. Insurance paid JDM paid its annual insurance of R198 000 on 25 October 2024 for the period 1 November 2024 to 31 October 2025. 16. Rent paid JDM paid rent of R520 000 for additional warehouse storage for its manufactured products. 17. Property expenses JDM purchased part of a new commercial building on 17 February 2025 for an amount of R5 850 250 (including VAT) and used this building from 1 March 2025 as additional office space for its operations. REQUIRED: Marks Calculate the normal income tax liability for Joseph Dlamini Manufacturers (Pty) Ltd for the year of assessment ended 31 March 2025. Please provide a reason where any amount is exempt from gross income or does not qualify as a deduction for normal income tax purposes. Naidoo Electronics (Pty) Ltd (NE) has a substantial property portfolio consisting of residential dwellings, commercial buildings, guest houses and warehouses. NE receives monthly rental income from its various properties that is all located in South Africa. NE is registered for VAT on an invoice basis and trades with VAT vendors. The accountant provides you with the following summary of supplies (all amounts stated are exclusive of VAT) made by NE for the two-month VAT period ended on 28 February 2025: Description Amount R Rental received from letting of townhouses 27 000 Rental received from quest houses (for periods less than 28 days) 45 260 Rental received from guest houses (for periods exceeding 28 days) 95 370 Rental received from commercial building tenants 350 860 Rental received from warehouse tenants 480 275 Electricity paid on all rental properties 55 780 Insurance paid on all rental properties 37 250 Maintenance paid on all properties, excluding the townhouses 75 420 REQUIRED: Marks Calculate the VAT payable by or refundable to Naidoo Electronics (Pty) Ltd for the two-month tax period ending 28 February 2025. Please provide reasons where you are of the opinion that input tax may not be claimed or output tax may not be charged. You may assume that Naidoo Electronics (Pty) Ltd taxable supplies represent 90% of the total supplies made and that exempt supplies represent 10% of the total supplies made. Naidoo Electronics (Pty) Ltd (NE) supplies electronic parts to computer and electronic gadgets manufacturers in South Africa and the rest of the Southern Africa region. Some of their inventory parts are imported from Japan and some are sourced from local suppliers. NE is registered for VAT on an invoice basis and trades with VAT vendors. Set out below are some of the transactions that took place during the months of January and February 2025: 1. On 17 January 2025, NE imported 7 500 inventory parts at a cost of R345 each from a supplier in Japan. The customs value was determined to be R340 per item. Import surcharges of R75 500 were charged. The date reflected on the Customs Billing of Entry is 12 February 2025. NE approached JHN Bank and was granted a loan of R500 000 for funding towards paying for this purchase. The loan agreement was concluded on the 18th of January 2025 and the interest rate was set at 10% per annum compounded monthly. (7) 2. Purchases from South African manufactures during this period were split as follows: Cash purchases R1 063 750 (VAT inclusive) Credit purchases R488 750 (VAT inclusive) NE’s policy is to try and pay all creditors within 90 days for all credit purchases. (2) 3. NE received a credit note for incorrect pricing as a 9.5% trade discount was not calculated by one of its local suppliers. The goods purchased on credit from this supplier amounted to R391 000 (VAT inclusive) before this discount. (2) 4. 80% of the locally sourced inventory was sold at cost plus 20% during this period. There were no sales to other African countries during this period. There was no opening stock on the 1st of January 2025. (5) 5. A coffee machine was purchased for R2 750 (VAT exclusive) to be used in the staff canteen. Tea and coffee provided to staff during the month costs R690 (VAT inclusive). (4) REQUIRED: MARKS Calculate the output tax and input tax effects for Naidoo Electronics (Pty) Ltd for each of the above transactions (1 to 5) assuming a two-month tax period ending 28 February 2025. Your answer must be supported by calculations as well as reasons where you are of the opinion that input tax may not be claimed or output tax may not be charged. Do each transaction separately. Moses Patel (Pty) Ltd (MP) is a company that sells animal feed to farmers and operates from Winterton in KwaZulu-Natal Free-State. The company also has a few specialists that assists the farmers with cost effective improvements of feeding supplements for their life stock. This commercial knowledge (know-how payments) passed to the farmers has proven to be very profitable. The company’s year of assessment ends on 28 February 2025 and is a registered VAT vendor making only taxable supplies. On 27 September 2024, MP received an amount of R95 000 in cash from a big commercial farmer in KwaZulu-Natal for the service rendered by the company’s newly appointed animal feeding supplement specialist. REQUIRED: MARKS Discuss, whether the amount of R95 000 received by Moses Patel (Pty) Ltd will be regarded as gross income as defined in the Income Tax Act for the 2025 year of assessment, supported with relevant legislation and case law principles.