How often Tax liability of a company is asked

Where it was asked

• May/Jun 201425 marks
• Oct/Nov 201327 marks
• May/Jun 201320 marks

The questions

1. May/Jun 2014, Q125 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.

2. Oct/Nov 2013, Q3.327 marks

   Ziyawa More (Pty) Ltd (Ziyawa) is an entertainment company that organises and promotes live concerts, earning royalties calculated as a percentage of ticket sales. Ziyawa is not a small business corporation as defined in the Income Tax Act. The following information relates to its year of assessment ended 31 March 2013. (1) Ziyawa is entitled to 20% of the proceeds from ticket sales generated by the concerts it organises. It organised and promoted Riyania's Tanzanite Tour concert as well as similar smaller-scale events, collecting total ticket-sale proceeds of R5 000 000. Ziyawa invested R1 000 000 in local shares and earned a dividend of R90 000, and placed R1 500 000 in a fixed deposit account that generated interest of R75 000. (2) The Riyania concert was Ziyawa's biggest event and required more staff than usual: salaries of R186 000 were paid in the current year of assessment, compared with R98 000 in the prior year. On 1 April 2012 Ziyawa's founder and chief executive officer, Alfie van Dyk, resigned, and the company made a restraint-of-trade payment of R100 000 to prevent Alfie from competing with the company for five years. During September 2012 Ziyawa built and sold a low-cost residential unit (just after it was erected, at a cost of R500 000) to an employee for R500 000 on an interest-free loan account with the company; the employee repaid R270 000 of this during the 2013 year of assessment. In addition, a R5 000 loan owed by an employee was written off. (3) An insurance premium of R165 000, covering the period 1 January 2013 to 30 November 2013, was paid on 2 January 2013 to an insurance company. (4) Expenses relating to the company's assets were: delivery vehicles used to organise the logistics of setting up concert venues, purchased on 1 October 2011 at a cost of R120 000 (subject to the note below); and an administration building used for the company's administrative functions, purchased on 8 January 2009 for R480 000, which was painted on 4 July 2012 at a cost of R12 650. Included in the delivery vehicle cost is one vehicle that was involved in an accident on 1 December 2012 while delivering equipment to a concert venue; this vehicle, originally purchased for R20 000, was completely destroyed, and the insurer indemnified Ziyawa for R10 000. An amount of R28 000 was paid to Bapela Music Equipment (Pty) Ltd to rent music instruments and stage equipment needed for the Tanzanite Tour concert. Binding General Ruling No. 7 prescribes write-off periods of 4 years for delivery vehicles and 5 years for music equipment. Ziyawa has elected to apply the section 11(o) scrapping allowance where the disposal of assets results in a loss. (5) Riyania's list of requests honoured by Ziyawa included accommodation at the Hilton Hotel costing R30 000 and scented candles for the change room costing R850. (6) Ziyawa donated concert tickets worth R50 680 to the Mogale Orphanage Home (a public benefit organisation) so that the organisation's young adults could attend the Tanzanite Tour concert. (7) The company had an assessed loss of R386 000 brought forward from the previous year of assessment. Required: calculate the normal income tax liability of Ziyawa More (Pty) Ltd for the year of assessment ended 31 March 2013. Show all calculations; items that are not taxable or deductible must be clearly indicated as such with a brief reason given. Round off all amounts to the nearest rand and ignore any VAT implications.

3. May/Jun 2013, Q420 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.