TAX2601 May/Jun 2013 exam paper — questions

Free sample

  1. Question 1(a) · Gross income and special inclusions · 10 marks

    Dinepe Fela (Pty) Ltd (Dinepe) is a South African company that sells contemporary art and has a financial year ending on 31 March. On 28 March 2013 Dinepe sold an artwork worth R10 000 to an advertising company, which wanted the piece to display in its reception area. Rather than paying cash, the advertising company offered Dinepe an advertising campaign of equal value, R10 000. On 30 March 2013 Dinepe accepted this advertising campaign in place of cash. The campaign comprises 10 monthly advertisements to be placed in a local newspaper, starting during April 2013. You are required to discuss, for the year ending 31 March 2013, whether the receipt of this advertising campaign would amount to gross income of Dinepe Fela (Pty) Ltd as defined in the Income Tax Act 58 of 1962.Show the full question

  2. Question 1(b) · General deduction formula and deductions · 15 marks

    Dikoloto Fela (Pty) Ltd (Dikoloto) is a residential property developer with a March year-end, whose main business involves selling residential property in the form of freestanding full-title homes, sectional-title townhouses and full-title stands. On 13 October 2012 hurricane Sally struck one of the towns in which Dikoloto operates, destroying four unsold townhouses that had cost R4 500 000 in total. The insurance company subsequently paid Dikoloto R3 900 000 in respect of this loss. You are required to discuss, for the year of assessment ending 31 March 2013, whether the expenditure and/or losses described above are deductible by Dikoloto Fela (Pty) Ltd in terms of the general deduction formula (section 11(a) read with section 23), briefly referring to the applicable case law where relevant.Show the full question

  3. Question 2.1.1 · Provisional tax · 9 marks

    Sunshine (Pty) Ltd is not a small business corporation as defined, and its year of assessment ends on 31 March each year. Its tax records show the following: for the 2011 tax year, taxable income of R1 200 000, assessed on 4 April 2012; for the 2012 tax year, taxable income of R1 354 980, assessed on 15 September 2012; and for the 2013 tax year, an estimated taxable income of R1 784 432 which has not yet been assessed. Calculate the first and second provisional tax payments that Sunshine (Pty) Ltd must make for the 2013 year of assessment, clearly stating the date on which each payment must be made. Ignore the Tax Administration Act that came into effect on 1 October 2012.Show the full question

  4. Question 2.1.2 · Provisional tax · 1 mark

    Still regarding Sunshine (Pty) Ltd (not a small business corporation as defined, year of assessment ending 31 March), determine what the basic amount would be for the first provisional tax payment for the 2013 year of assessment, if the 2012 assessment had instead been issued on 15 June 2012. Ignore the Tax Administration Act that came into effect on 1 October 2012.Show the full question

  5. Question 2.2 · Tax administration · 5 marks

    Majuba (Pty) Ltd was issued its 2012 ITA34 tax assessment on 31 January 2013. The company's accountant reviewed this assessment and disagrees with SARS's disallowance of a capital allowance claimed of R15 500. The ITA34 shows an amount of R6 875 payable to SARS on or before 31 March 2013. The accountant lodged an objection against the issued assessment on 4 February 2013, and SARS declined this objection on 15 March 2013. Discuss what procedures, if any, Majuba (Pty) Ltd can follow to have the incorrect 2012 tax assessment rectified. Ignore the Tax Administration Act that came into effect on 1 October 2012.Show the full question

  6. Question 3 · Small business corporations and micro businesses · 25 marks

    Lazy Age CC is a small business corporation as defined and carries on business as a cosmetics product manufacturer. The close corporation operates mainly in Johannesburg and sells most of its cosmetics products on credit to retailers in South Africa. It has only one member, Jenny Levin. The following information relates to the close corporation's year of assessment ended 28 February 2013: cash sales amounted to R450 000 and credit sales to R5 025 000; purchases (cash and credit) totalled R3 587 150; inventory at cost was R290 000 on 1 March 2012 and R330 000 on 28 February 2013; bad debts written off amounted to R119 000; the doubtful debts allowance allowed by SARS for the 2012 year of assessment was R12 500, while the list of doubtful debts at 28 February 2013 came to R93 800; personnel costs consisted of salaries and wages (as approved by the Commissioner) of R650 000 and employer contributions to the pension fund on behalf of employees of R125 850. On 30 April 2012 Lazy Age CC received a letter from Quick Attorneys regarding alleged facial damages caused by one of its night creams to the upper cheek of Amy Kumalo, a supermodel from Parys on the Vaal, who claimed R1 500 000 for loss of income; the matter went to court, and on 31 March 2013 the court ordered Lazy Age CC to pay Amy R1 000 000 for her loss of income. Legal expenses incurred included R6 000 relating to the Amy Kumalo case and R1 275 paid on behalf of Jenny Levin personally. Advertising costs comprised R3 750 for advertising a vacant post in the Daily Informer and R25 850 for erecting a billboard close to the local airport. Lazy Age CC owns various capital assets: a new cosmetics manufacturing machine, Machine D, purchased on 31 January 2013 for R300 000 and brought into use on the same date; a second-hand delivery vehicle purchased on 31 July 2011 for R85 000 and used to deliver cosmetics products to clients, but only brought into use on 1 September 2011; and a manufacturing building erected on 30 June 2009 and brought into use on 31 August 2009 at a total cost of R1 250 000, which houses the entire cosmetics manufacturing process. During the year Lazy Age CC also sold technologically outdated manufacturing machinery, Machine Z, for R20 000; this machine had originally been bought second-hand on 30 April 2009 for R100 000 and brought into use on the same day. Costs relating to trademarks included a renewal fee of R8 500 paid on 15 April 2012 and a new trademark purchased on 31 January 2013 for R55 000. On 31 October 2012, the date on which he resigned, Lazy Age CC entered into an agreement with Tommy Strong, its former chemical researcher, and paid him R312 000 as a restraint of trade payment covering a period of four years; the R312 000 was paid on 15 November 2012 and the full amount was taxable in Tommy's hands for the 2013 year of assessment. Finally, on 15 December 2012 Lazy Age CC donated R15 000 to "Ladies in Blue", a public benefit organisation that uplifts women in rural areas, and received the required section 18A income tax certificate on 17 January 2013. Using all of the information given about Lazy Age CC above, calculate the taxable income of Lazy Age CC for its year of assessment ended 28 February 2013. Any capital gains tax implications should be ignored in this calculation.Show the full question

  7. Question 4 · Tax liability of a company · 20 marks

    Notes CC is a close corporation that manufactures music instruments and is not regarded as a small business corporation as defined in the Income Tax Act. For the year of assessment ending 31 March 2013, its taxable income, calculated before taking into account the items listed below, amounted to R5 800 000. The following additional information applies for that year: Fixed assets obtained in prior years and still in use at 31 March 2013 comprise (1) vehicles bought new on 1 June 2007 for R120 000, and (2) building CC, situated in an urban development zone, bought new on 1 November 2011 for R1 200 000, with all requirements for claiming the urban development zone building allowance having been met. Fixed assets obtained during the current year comprise: (3) two small item assets with a combined cost of R4 500, bought on 30 November 2012, which qualify for the section 11(e) wear-and-tear allowance; (4) manufacturing machine MM, bought second-hand on 1 June 2012 for R300 000 and brought into use on the same date; (5) a new manufacturing machine LL, bought on 1 February 2013 for R450 000 and brought into use on 1 March 2013; and (6) manufacturing building AA, which had been sold on 1 January 2012 for R5 000 000 resulting in a recoupment of R800 000 for Notes CC, was replaced by a new manufacturing building ZZ bought for R9 000 000 on 1 April 2012 and brought into use on the same date - the price was made up of land costing R1 000 000 and the building costing R9 000 000, giving a stated total of R10 000 000. Regarding repairs and extensions: (7) manufacturing building ZZ's roof was badly damaged in a storm and had to be replaced on 1 April 2012 at a cost of R220 000, and Notes CC also extended the roof to create an undercover parking area for employees at a cost of R300 000. Regarding fixed assets sold during the year: (8) furniture that had cost R30 000 and had originally been bought on 1 October 2011 was sold on 31 March 2013 for R10 000 to a pawnshop because it was damaged and no longer usable, and no entries relating to this asset are included in the R5 800 000 taxable income figure above; and (9) manufacturing machine PP, which had cost R290 000 and had been bought new on 30 June 2006, was sold on 30 November 2012 for R310 000, with no entries relating to this asset included in the R5 800 000 taxable income figure above. Finally, (10) Binding General Ruling No. 7 prescribes the following write-off periods: vehicles - 5 years; undercover parking (carports) - 5 years; furniture - 6 years. Calculate the income tax liability of Notes CC for the year of assessment ending 31 March 2013, given all the facts set out above. Note that the close corporation has elected to claim the section 11(o) allowance of the Income Tax Act and to make use of the building recoupment set-off where applicable, and that any capital gains tax implications must be ignored.Show the full question

  8. Question 5 · Capital gains tax · 15 marks

    Frozen Lemons CC, which has a year-end of 31 March, provides the following details concerning a manufacturing building it owned: the building was purchased on 1 July 2000 for R80 000, and it was sold on 1 April 2012 to an unconnected party at market value for R890 000. Other relevant information includes a valuation of the building performed on 1 October 2001 amounting to R88 000, a time-apportioned base cost of R90 000, the cost of obtaining that valuation (carried out on 1 July 2002) of R4 500, capital allowances claimed up to the date of sale totalling R48 000, and an assessed capital loss of R30 000 brought forward from the 2012 year of assessment. You are required to calculate the taxable capital gain arising for the 2013 year of assessment in respect of the disposal of this manufacturing building.Show the full question