TAX2601 May/Jun 2014 exam paper — questions

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  1. Question 1 · Tax liability of a company · 25 marks

    Rashupi Trailers (Pty) Ltd (referred to as Rashupi) is a company that manufactures and sells trailers. It does not qualify as a small business corporation as defined in the Income Tax Act, and its financial year ends on 31 March. The company's accountant worked out a taxable income of R4 781 142 for the year of assessment ended 31 March 2014, but this figure excludes the transactions that occurred in February and March 2014. Those transactions are summarised as follows. Income for the two months comprised sales of R800 000, local dividends of R150 000 and interest of R355 000. Expenditure for the same two months comprised: trading stock movements (opening stock R244 000, purchases R486 000, closing stock R457 000, giving cost of sales of R273 000); dividends paid of R250 000; an amount relating to a learnership agreement (amount not given - marked '?'); salaries of R455 000; a 2014 doubtful debt allowance/expense of R54 000; a restraint of trade payment of R450 000; depreciation of R36 111; an employer contribution of R57 630; and a leave pay provision of R45 247. Supporting notes are as follows. Note 1 - trading stock: on 1 April 2013 the trailers held as trading stock had a cost price of R244 000 and a market value of R350 000; on 31 March 2014 the trailers held had a cost price of R457 000 and a market value of R420 000 (this stock movement was not taken into account by the accountant in arriving at the R4 781 142). Note 2: Rashupi paid a dividend of R250 000 to its shareholders. Note 3: Lerato Mofokeng, a person with a disability as defined in the Income Tax Act, entered into a registered learnership agreement with Rashupi on 1 March 2013 for a 12-month period; all requirements of a registered learnership agreement were met and Lerato successfully completed the learnership on 28 February 2014. The accountant was unsure how to treat this for tax purposes and excluded it from the R4 781 142 calculation. Note 4 - doubtful debts: the list of doubtful debts was R78 000 for the period 1 April 2012 to 31 March 2013, and R54 000 for the period 1 April 2013 to 31 March 2014. Note 5: Dieketseng Moloi, Rashupi's former Chief Executive Officer, was paid R450 000 on 15 January 2014 as consideration for agreeing not to work for a competitor for a period of 24 months. Note 6 - depreciation: new and unused manufacturing machines were purchased on 5 February 2014 at a cost of R350 000 and brought into use on 1 March 2014, with depreciation of R11 667 charged; new and unused trucks were purchased on 1 May 2009 at a cost of R440 000, brought into use on 1 June 2009, with depreciation of R24 444 charged; total depreciation charged was R36 111. The accountant was unsure how to treat this for tax purposes and excluded the related capital allowances from the R4 781 142 calculation. Binding General Ruling No 7 prescribes a write-off period of 4 years for trucks. Note 7: Rashupi contributed R57 630 to a medical aid scheme for the benefit of its employees; the remuneration approved by the Commissioner in this regard was R480 000. Note 8: Rashupi had an assessed loss of R274 145 brought forward from the previous year of assessment, and the company made a provisional tax payment of R976 214 in respect of the current year of assessment. Starting with the taxable income of R4 781 142 as calculated by the accountant (before taking the February and March 2014 transactions into account), calculate Rashupi Trailers (Pty) Ltd's normal tax liability for the year of assessment ended 31 March 2014, incorporating all the information given about trading stock, dividends paid, the learnership agreement with Lerato Mofokeng, salaries, the 2014 doubtful debt figures, the restraint of trade payment to Dieketseng Moloi, the depreciation/capital allowances on the manufacturing machines and trucks, the medical aid contributions, the leave pay provision, the assessed loss brought forward of R274 145, and the provisional tax payment of R976 214.Show the full question

  2. Question 2 · Capital allowances · 25 marks

    Bear Cut & Drill (Pty) Ltd is a South African resident company manufacturing a wide range of steel products for the building industry. The company does not qualify as a small business corporation as defined in the Income Tax Act, and its tax year ends on 31 March 2014. The company's accountant has asked for help completing the income tax calculation for the 2014 year of assessment. The company achieved an accounting profit of R2 676 387 for the 2014 year of assessment, before taking into account the following matters. (1) Repairs and maintenance: on 31 October 2013 a severe hailstorm damaged the factory roof; the roof was repaired on 30 November 2013 at a total cost of R72 000, of which R65 000 was recovered from an insurance policy. While the roof was being repaired, the company also enlarged the factory floor space to increase production capacity, at a total cost of R250 000 for the additions, completed on 30 November 2013 and brought into use on 2 December 2013. (2) Factory machinery: on 15 August 2013 the company bought a new steel bending machine for R450 000 to be used directly in its steel manufacturing process, incurring installation costs of R20 000, with the machine brought into use on 5 September 2013. The company also sold a steel drill machine, originally bought second-hand on 30 June 2011 for R120 000 and brought into use on the same date, which was sold for R80 000 on 28 February 2014. (3) Other assets purchased and sold: at 31 March 2014 the company held the following non-manufacturing assets: a delivery truck bought new on 30 June 2013 for a total cost of R185 000 and brought into use on 1 August 2013; and two laptop computers bought on 31 May 2012 for a total cost of R15 000, brought into use on the same date. The company also sold one of its passenger vehicles, which had been damaged in the hailstorm of 31 October 2013, for R59 500; this vehicle had originally been bought for R90 000 on 1 April 2013 and brought into use on the same date. General Binding Ruling No 7 (GBR 7) provides the following write-off periods where applicable: delivery trucks - 4 years; laptop computers - 3 years; passenger vehicles - 5 years. (4) Factory building: the factory building housing the whole manufacturing process was originally erected on 31 July 2010 at a total cost of R3 600 000 and brought into use on 1 August 2010. Several windows of this factory building were damaged by the hailstorm on 31 October 2013 and had to be replaced at a cost of R61 000 on 2 November 2013, none of which was covered by the company's insurance policy. (5) Commercial building: the company bought a used commercial building for a total cost of R350 000 on 31 August 2013, bringing it into use on 15 September 2013; the building has mainly been used to house the debtors and creditors administration function of the company from the date it was brought into use. (6) Other information: Loose CC, one of the company's debtors, was liquidated on 15 November 2013, owing the company R18 000 (excluding any finance charges); the liquidators recovered R2 000 of this outstanding balance on 17 February 2014 and remitted that amount to the company on 19 February 2014. The company had claimed a doubtful debt allowance of R42 500 for the 2013 year of assessment, and the list of doubtful debtors at 31 March 2014 amounted to R212 000. The monthly rental of R4 000 for the telephone and security system for March 2014 was not accounted for in the accounting records, as the rental invoice dated 1 March 2014 was only received by e-mail on 15 April 2014. The company had incurred an assessed tax loss of R181 697 during the 2013 year of assessment. You are required to calculate the income tax liability of Bear Cut & Drill (Pty) Ltd for the year of assessment ended 31 March 2014, starting your calculation with the accounting profit of R2 676 387 as provided.Show the full question

  3. Question 3.1 · Capital gains tax · 17 marks

    Aerostar (Pty) Ltd is a South African company that manufactures and sells sports cars. The company has a February year-end. Aerostar (Pty) Ltd brought forward an assessed capital loss of R64 500 from the previous year of assessment. During the 2014 year of assessment two capital transactions occurred. Firstly, Factory A, which had been purchased on 15 July 1998 for R250 000 and brought into use on the same date directly in the process of manufacturing the sports cars, was sold on 12 January 2014 to an unconnected person for R780 000. Transfer costs of R25 000 were incurred on the original purchase price of Factory A, and total capital allowances of R220 000 had been claimed on the factory up to the date of disposal. Additional information relevant to Factory A is that its market value on 1 October 2001 was R350 000 and its time-apportionment base cost (TAB) is R98 125. Secondly, Aerostar (Pty) Ltd sold manufacturing machine C on 18 May 2013, realising a capital gain of R50 000 on this machine. You are required to calculate the taxable capital gain or taxable capital loss of Aerostar (Pty) Ltd for the year of assessment ended 28 February 2014.Show the full question

  4. Question 3.2 · Capital gains tax · 8 marks

    Aerostar (Pty) Ltd is a South African company that manufactures and sells sports cars. The company has a February year-end. Aerostar (Pty) Ltd had a taxable income of R1 150 622 for the 2012 year of assessment, with the date of that assessment being 30 July 2012. The company's 2013 tax assessment was issued on 15 June 2013 and reflected a taxable income of R1 320 564. The actual taxable income calculated for the 2014 year of assessment was R1 055 877. For this part, Aerostar (Pty) Ltd is a small business corporation as defined in the Income Tax Act, and the company has a February year-end. You are required to (a) calculate the first provisional tax payment for the 2014 year of assessment and state clearly the date by which this payment must be made to SARS, and (b) calculate the second provisional tax payment for the 2014 year of assessment and state clearly the date by which this payment must be made to SARS. All amounts must be rounded to the nearest Rand.Show the full question

  5. Question 4(a) · Tax administration · 4 marks

    XYZ Trust is a resident of the Republic of South Africa for tax purposes and its year of assessment ends on 28 February 2014. The trust holds several investments that produce interest and dividends, and also runs a business selling electric chainsaws. On 2 December 2013, XYZ Trust sold seven electric chainsaws in total to a timber company (the customer) for R14 000. XYZ Trust supplied the customer with a warranty against any mechanical failure of these seven chainsaws, meaning it will replace any faulty chainsaw free of charge; the warranty applies for a period of six months from the date of sale. XYZ Trust had originally purchased the chainsaws for R1 500 each from its supplier. At year-end, the auditors raised a warranty provision of R10 500 (debiting the warranty expense and crediting the provision). The accountant calculated the following amounts for the trust's 2014 year of assessment, which may be assumed to be correct: taxable income of R1 253 000; qualifying turnover of R1 798 000; and taxable turnover of R1 120 000. Explain the distinction between direct taxes and indirect taxes, and give one example of a tax that would be classified as a direct tax and one example of a tax that would be classified as an indirect tax.Show the full question

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