TAX2601 May/Jun 2015 exam paper — questions

🔒 Scan locked

  1. Question 1 · Tax liability of a company · 30 marks

    Guitar Hero (Pty) Ltd, a company that is expressly stated not to be a small business corporation as defined in the Income Tax Act, manufactures musical instruments such as guitars, pianos and drums and sells them to a single South African retailer, Music Moods CC. The company's financial year ends on 31 March, and you have been asked by the accountant to work out its income tax liability for the year of assessment ended 31 March 2015, using the following facts: (1) sales to Music Moods CC for the year totalled R6 865 000; (2) the company donated R150 000 to Lifeline, a registered public benefit organisation, and obtained the required section 18A certificate; (3) raw materials were bought for R3 650 500, and a further R8 600 was paid to a transport company to deliver this stock to the premises; (4) Guitar Hero developed a new computer program to simplify its manufacturing process, incurring research and development expenditure of R375 000 and research staff salaries of R98 000, both incurred on 1 May 2014, with ministerial and Department of Science and Technology approval for the project having been obtained on 15 April 2014; (5) bad debts actually written off during the year came to R58 960; (6) the list of doubtful debts stood at R112 000 for the 2013/2014 year (1 April 2013 to 31 March 2014) and R97 000 for the 2014/2015 year (1 April 2014 to 31 March 2015); (7) regarding fixed assets: new furniture costing R36 000 was bought for the distribution office on 1 August 2013; the company relocated to a new distribution office on 1 October 2014, moving this furniture on that date at a moving cost of R15 000; the old furniture (originally bought for R25 000 on 1 July 2013) was sold to a second-hand dealer on 1 August 2014 for R18 000; on 1 July 2014 the company bought two manufacturing machines, Machine A new for R220 000 and Machine B second-hand for R125 000; and on 1 May 2014 the company bought five new apartments in a residential building in Cape Town at R650 000 each, renting them out from that date at R3 500 per apartment per month solely for trade purposes; (8) on 1 January 2015 the company paid the local municipality R110 000 for water and electricity covering the period 1 January 2015 to 31 December 2015; (9) employee costs comprised salaries and wages (approved by the Commissioner) of R1 200 000, contributions to the medical aid fund for all employees of R155 000, and leave pay of R54 000 paid to Lucinda Marshall; (10) on 1 February 2015 there was a robbery at the distribution office in which five guitars, each with a cost price of R5 500, were stolen; the company paid a R1 500 bribe to a security officer in an attempt to recover the stolen guitars, and its insurance company paid out R20 000 for the theft; and (11) as additional information, Binding General Ruling No. 7 prescribes a six-year write-off period for furniture and fittings where applicable, and Guitar Hero (Pty) Ltd has elected to apply the section 11(o) scrapping allowance wherever it is applicable. Using all of this information, calculate the tax liability of Guitar Hero (Pty) Ltd for the year of assessment ended on 31 March 2015.Show the full question

  2. Question 2.1(a) · Small business corporations and micro businesses · 5 marks

    Fly Away With Me (Pty) Ltd (FAWM) operates hot air balloon flights over the Drakensberg mountains and is registered as a microbusiness for tax purposes. FAWM's year of assessment ends in February, and the following relates to the 2015 year of assessment: income from hot air balloon trips (note 1) is an unknown amount to be calculated; royalties earned (note 2) amounted to R77 000; and the sale of a hot air balloon (note 3) realised R50 000. Note 1: the fee charged for a balloon ride is R2 500 per person per trip, and trips are conducted only on Saturdays. Customers must pay an upfront deposit equal to 50% of the fee before a booking is confirmed, with the balance of the fee payable within two days after the trip. During the 2015 year of assessment, 320 people went on balloon trips, excluding those who flew on the final Saturday of the year, 28 February 2015. On that date, 10 people went on the balloon trip and none of them had yet paid the outstanding balance of their fee. In addition, another 40 people booked and paid their deposits on 28 February 2015 for trips that will only take place during the 2016 year of assessment. Note 2: FAWM owns a registered trademark for the phrase 'Up, up and away!' A company called UK Farming approached FAWM to use this phrase on one of its products, and FAWM agreed, receiving a yearly royalty (treated as investment income) from UK Farming in exchange. Note 3: FAWM sold one of its hot air balloons to another company for R50 000. You are required to calculate the taxable turnover of Fly Away With Me (Pty) Ltd for the year of assessment ended 28 February 2015.Show the full question

  3. Question 2.1(b) · Small business corporations and micro businesses · 2 marks

    Continuing with Fly Away With Me (Pty) Ltd (FAWM), a registered microbusiness providing hot air balloon trips over the Drakensberg mountains with a February year-end, assume for this part that FAWM's taxable turnover for the 2015 year of assessment is R970 000. You are required to calculate the tax liability of Fly Away With Me (Pty) Ltd for the year of assessment ended 28 February 2015 based on this assumed taxable turnover.Show the full question

  4. Question 2.2 · Small business corporations and micro businesses · 5 marks

    Minora CC is in the process of applying to SARS for recognition as a small business corporation for income tax purposes. Mr Sharp Blade, the sole member of Minora CC, has asked you to explain the requirements that must be met. You are required to list the requirements set out in the Income Tax Act that must be satisfied in order for an entity to qualify as a small business corporation for income tax purposes.Show the full question

  5. Question 2.3 · Small business corporations and micro businesses · 10 marks

    Minora CC is a small business corporation as defined in the Income Tax Act. It manufactures blades and other cutting products, supplying three South African supermarkets, and its year of assessment ends on 31 March 2015. Mr Sharp Blade has supplied the following information to enable calculation of Minora CC's tax liability for the year of assessment ended 31 March 2015: total sales to South African supermarkets amounted to R12 250 000; purchases of raw materials amounted to R9 188 000; on 1 July 2013 Minora CC purchased a delivery vehicle for R251 500 and brought it into use on the same date, and the vehicle was still in use on 31 March 2015; on 2 February 2015 Minora CC purchased a new manufacturing machine at a total cost of R855 000 for use directly in its manufacturing process, bringing it into use on 5 February 2015; Minora CC sold a computer on 15 January 2015 for R8 000 to a second-hand trading company, having originally purchased that computer on 25 August 2012 for R14 500; during the 2010 year of assessment Minora CC erected a new factory building at a total cost of R12 750 000 and brought the building into use on 1 July 2009; and Minora CC, experiencing a shortage of office space, purchased part of a new commercial building to be used mainly for office purposes, paying R2 230 725 for this portion and bringing it into use on 1 September 2014. You are required to calculate the tax liability of Minora CC for the year of assessment ended 31 March 2015.Show the full question

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