TAX2601 Oct/Nov 2014 exam paper — questions

🔒 Scan locked

  1. Question 1 · Capital allowances · 25 marks

    Stix (Pty) Ltd, a manufacturer of matches, does not qualify as a small business corporation as defined in the Income Tax Act. Its accountant is uncertain how to treat various capital asset transactions for tax purposes. Before taking these transactions into account, Stix (Pty) Ltd's taxable income for the year of assessment ending 28 February 2014 amounts to R5 989 747. The following capital asset transactions must still be taken into account: (1) A water tank was badly damaged in a storm and was repaired on 1 March 2013 at a cost of R20 000; at the same time a further, additional water tank was installed at a cost of R36 000. (2) A new cutting machine, referred to as machine AA, was bought for R600 000 and brought into use in a manufacturing process on 1 July 2013; moving costs of R15 000 relating to machine AA were incurred on that same date. (3) Manufacturing machine BB, bought second-hand on 1 August 2012 for R250 000, was sold on 1 December 2013 for R180 000 to a person with whom Stix (Pty) Ltd has no connection. (4) Manufacturing building CC was bought on 1 September 2010 for R2 500 000 and remains in use. (5) An old residential building, building DD, situated in an urban development zone, was purchased on 1 May 2012 for R5 000 000, and all requirements for claiming the urban development zone building allowance have been satisfied. (6) Building EE, being part of a warehouse used as a storeroom (a commercial building), was purchased on 1 November 2013 for R1 700 000. (7) Regarding building LL, a low-cost residential unit: Stix (Pty) Ltd began erecting this unit on 1 October 2012 at a total cost of R130 000; the unit was sold to an employee on 1 February 2013 for R130 000 on an interest-free loan account granted by Stix (Pty) Ltd, and the employee repaid R10 000 of the outstanding loan on 10 February 2014. (8) Building XX: Stix (Pty) Ltd sold a factory building on 1 February 2013, realising a recoupment of R800 000; on 20 March 2013 it purchased a new and unused building for R12 000 000 to replace the factory building sold, and this replacement building (building XX) was brought into use in a process of manufacture on 25 March 2013; the company elected to set off the recoupment from the first building against the cost of building XX. (9) Other assets: (9.1) a new generator costing R30 000 was purchased on 1 December 2013; (9.2) office furniture bought for R66 000 on 1 March 2008, with a tax value of R11 000 as at 1 March 2013, became unsuitable for the business and was scrapped on 1 May 2013; (9.3) a heavy-duty truck bought on 1 September 2012 for R225 000 remains in use; (9.4) a toolbox costing R2 000 was bought on 15 December 2013; (9.5) rental of a photocopy machine totalling R42 000 for the 2014 year of assessment was not accounted for in the taxable income of R5 989 747. Binding General Ruling No. 7 prescribes the following write-off periods: water tank 6 years, generator 5 years, furniture 6 years, heavy-duty truck 3 years, and photocopy machine 6 years. You are required to calculate the income tax liability of Stix (Pty) Ltd for the year of assessment ending 28 February 2014, noting that Stix (Pty) Ltd elects to apply the section 11(o) scrapping allowance wherever it is applicable.Show the full question

  2. Question 2 · Tax liability of a company · 25 marks

    NickmyChick CC (NmC) is a close corporation that manufactures chicken coops, with a financial year-end of 31 March 2014. NmC qualifies as a small business corporation as defined in the Income Tax Act. For the year of assessment ended 31 March 2014, NmC's income statement reflects the following (all figures exclude VAT unless stated otherwise): Income - Sales (see note 1, amount not stated in the table); Local dividends of R50 000; Lease agreement income (see note 2, amount not stated in the table). Expenses - Water and electricity R45 000; Salaries R280 000; Purchase of stock R600 000 (note 3); Patent costs R516 000 (note 4); Restraint of trade payment R330 000 (note 5); Bad debts R50 000 (note 6); Provision for doubtful debts (note 7, amount not stated in the table); Damaged chicken coops R400 000 (note 8); Donation R28 000 (note 9). The notes provide further detail: Note 1 - normal sales of chicken coops amounted to R2 000 000, and NmC also sold, for R25 000, a chicken coop that it had manufactured and used itself in its manufacturing yard. Note 2 - NmC leased a portion of its property to Colour Chickens (Pty) Ltd for R5 000 per month under a lease that commenced on 1 April 2013; the lease required Colour Chickens (Pty) Ltd to erect an additional carport worth R300 000, which was actually completed and brought into use on 1 May 2013 at a cost of R320 000, and this carport will also qualify for a capital allowance in calculating NmC's taxable income. Note 3 - raw materials of R600 000 were purchased during the current year of assessment; opening stock on 1 April 2013 was R200 000 at cost and R250 000 at market value, while closing stock on 31 March 2014 was R350 000 at cost and R400 000 at market value. Note 4 - NmC purchased the patent 'PimpMyChicken' on 1 December 2013 for R500 000, and also renewed another patent it already owned at a cost of R16 000. Note 5 - a restraint of trade payment of R330 000 was made to Mr Brood, a mechanical engineer, prohibiting him from working in the farming industry for the next five years. Note 6 - the bad debts written off comprise R30 000 relating to trade debtors and R20 000 relating to a loan made to an employee to purchase his own chicken coops. Note 7 - the doubtful debt allowance for the 2013 year was R28 125, and the accountant, Mr Pecker, calculated the list of doubtful debts to be R126 000 for the 2014 year of assessment. Note 8 - chicken coops worth R400 000 were damaged in a fire that broke out in the warehouse, for which the insurance company paid out R380 000; this was not included as part of closing stock. Note 9 - NmC made a donation of R28 000 to FreeTheChickens.org, an online charity that is a registered Public Benefit Organisation, and received a section 18A certificate after making the donation. All other assets have been fully written off for tax purposes. Using all the information given for NickmyChick CC (NmC) above, calculate NmC's income tax liability for the year of assessment ending on 31 March 2014. Any items that are not taxable or not deductible must be clearly indicated as such, together with a brief reason for each such treatment.Show the full question

  3. Question 3 · Capital gains tax · 25 marks

    Sparkle Unicorns (Pty) Ltd (SU) is a shoe manufacturer with a 31 March 2014 year-end. During the 2014 year of assessment, SU disposed of two assets. Firstly, a factory: SU had bought the factory on 1 April 2002, paying R250 000 for the land and R750 000 for the building. On 1 March 2014, SU sold this property, incurring selling costs of R40 000; the total selling price of R5 000 000 was made up of R1 500 000 for the land and R3 500 000 for the building. Capital allowances of R450 000 had been claimed on the building. Secondly, machinery: the Kingseason PU footwear manufacturing machine was sold on 30 November 2013 for R480 000, with selling costs of R20 000 incurred. The Kingseason machine had originally been purchased new on 30 September 1999 for R380 000, and capital allowances of R380 000 had been claimed on it in total. Its market value on 1 October 2001 (the valuation date) was R400 000, and its time-apportionment base cost has been calculated as R18 750. You are told to assume the adjusted proceeds on this machine amount to R100 000. Using the information about Sparkle Unicorns (Pty) Ltd's (SU) factory (land and building) and Kingseason PU footwear manufacturing machine disposals during the 2014 year of assessment, calculate SU's taxable capital gain or taxable capital loss for the 2014 year of assessment. Note that SU had an assessed capital loss of R100 000 brought forward from the 2013 year of assessment.Show the full question

  4. Question 4 Part A · General deduction formula and deductions · 12 marks

    Eagle Crown (Pty) Ltd is a South African company that manufactures specialised navigation equipment, with a tax year ending 28 February 2014. Eagle Crown (Pty) Ltd's designing engineer, Mr Z Tech, must travel overseas frequently to attend international workshops on the latest developments in navigation equipment. Mr Z Tech attended a five-day aviation workshop in Paris, France, from 5 June to 10 June 2013, and only returned to South Africa on 25 June 2013. His wife, Mrs B Tech, accompanied him to Paris and also returned with him to South Africa on 25 June 2013. Between 11 June and 24 June 2013 the couple visited friends and family in Munich, Germany. Eagle Crown (Pty) Ltd paid the full costs of the trip for both Mr Z Tech and Mrs B Tech, with all amounts settled in full by 30 June 2013. The costs comprised: business class air tickets of R33 250 each for Mr Z Tech and Mrs B Tech (R66 500 total); hotel costs from 5 June to 10 June 2013 in Paris of R22 875 each (R45 750 total); and hotel costs from 11 June to 24 June 2013 in Munich of R36 375 each (R72 750 total) - giving total costs paid of R92 500 for Mr Z Tech, R92 500 for Mrs B Tech, and R185 000 in total. You are required to discuss, with reference to the general deduction formula, section 23(g) and applicable case law, what amount Eagle Crown (Pty) Ltd will be allowed to deduct in respect of the costs paid for Mr Z Tech's and Mrs B Tech's overseas trip for the 2014 year of assessment.Show the full question

  5. Question 4 Part B (a) · Tax administration · 3 marks

    Eagle Crown (Pty) Ltd is a South African company that manufactures specialised navigation equipment, with a tax year ending 28 February 2014. Eagle Crown (Pty) Ltd received its ITA34 notice of assessment for its 2013 year of assessment, issued by SARS on 1 September 2013. The ITA34 reflects an amount of R25 871,37 due to SARS, made up of interest of R1 587,27 and a penalty of R4 047,35, with the penalty description stating 'An under-payment of provisional tax'. The tax practitioner of Eagle Crown (Pty) Ltd lodged an objection against the 2013 assessment on 28 September 2013 via eFiling using the ADR1 form, and on 17 October 2013 received notice from SARS that the objection had been disallowed. Eagle Crown (Pty) Ltd has now asked its tax practitioner to appeal against SARS's disallowance of the objection. You are required to discuss the steps the tax practitioner should follow to lodge an appeal with SARS against the disallowed objection.Show the full question

The full Spot Map and the marks by year — and this paper’s scan.