TAX2601-2016-10-E-1.pdf - UNIVERSITY EXAMINATIONS UNISA“...

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Unformatted text preview: UNIVERSITY EXAMINATIONS UNIVERSITEITSEKSAMENS UNISA“ unmmty of smith afnca TAX2601 October/November 2016 PRINCIPLES OF TAXATION Duratlon 2 Hours 100 Marks EXAMINATION PANEL AS APPOINTED BY THE DEPARTMENT Use of a non-programmable pocket calculator Is pEI'MISSIbIe Closed book examination This examination question paper remains the property of the Unwersfly of South Africa and may not be removed from the examination venue UNIVERSITY EXAMINATIONS UNIVERSITEITSEKSAMENS UNISA‘S“ umve ofsanhzfnca TAX2601 October/November 2016 PRINCIPLES OF TAXATION Duration 2 Hours 100 Marks EXAMINATION PANEL AS APPOINTED BY THE DEPARTMENT Use of a non-programmable pocket calculator is permissmle Closed book examination This examination questron paper remains the property of the Univer5ity of South Africa and may not be removed from the examination venue This paper consists of seven (7) pages plus the annexures (pp I — n) IMPORTANT INSTRUCTIONS: 1. 2. 3. All amounts exclude VAT unless stated othenivise All persons mentioned are reSIdents of the Republic of South Africa unless stated other- Wise. SARS = South African Revenue Serwce The answering of this paper #WNA mm This paper consists of four (4) questions Answer all the questions Start each question on a new (separate) page Show all workings, where applicable Where an amount is subject to a limitation, clearly indicate the application of the limitation. Where any item is exempt from tax or not allow- able as a deduction, this must be indicated, and a brief reason provided. All amounts must be rounded to the nearest Rand. Please complete the cover page of the answer book in full You are reminded that answers may NOT be written in penCIl Proposed timetable (try as far as possmle not to dewate from this timetable). Taxable income of a company Tax liability of a small busmess corporation Capital gains tax and tax administration — as Prowstonal tax payments and general deduction 30 formula [TURN oven] 2 TAX2601 Oct/ Nov 2016 QUESTION 1 (25 marks, 30 minutes) Bright Ltd manufactures decorative glass containers The company IS not a small busaness corporation as defined m the Income Tax Act, and Its year of assessment ends on 29 February 2016 The taxable Income, before the tollowmg Information Is taken into account, l5 R14 300 000 In respect of the company's 2016 year of assessment 1 DIVIdendS and annumes paid 0 DIVldends to the amount of R40 000 were dlStl’thted to the company’s shareholders on 1 April 2015 o Annurtles of R130 000 were paid durlng the 2016 year of assessment to the dependant of an employee who retlred due to Ill health 2 Trading stock - Bright Ltd purchased trading stock for R155 000 and paid a transport company R5 000 to deliver the stock 0 Tradlng stock, Wthh was acqunred In the prewous year of assessment for R12 000, was sold to an employee’s brother for R2 000 The market value of the stock at the date 1t was sold was R19 000 . The opening stock for the 2016 year of assessment IS already Included In the above taxable Income amount of R14 300 000, but the closmg stock 01 R600 000 (as at the morning of 29 February 2016) still needs to be taken Into account None of the closrng stock Items were sold dunng the last day of the year, but after lunch time on 29 February 2016, an employee bumped Into one of the shelves In the warehouse, the boxes on It tumbled to the ground and all the glass containers In the boxes were damaged The company WI“ not be able to sell the damaged stock, of Wthh the cost pnce 15 R20 000 3 Trademarks A trademark, tCE, was purchased on 1 October 2015 for R95 000 The expected useful lute of the trademark IS five years On 1 February 2016, the company also renewed the registration of us SOLCON trademark for another five years at a cost 01 R10 000 4 Research and development An lnventlon, to be used 1n the busmess, was developed during the 2016 year of assessment by Brlght Ltd, followrng extensnve research and development The research commenced on 1 April 2015 at a cost of R200 000 Bnght Ltd Incurred further costs 01 R80 000 on 31 August 2015 The application for approval of thls prolect was received by the Department of Scrence and Technology on 15 May 2015 Bright Ltd also acquired a new manufacturing machlne With a cost of R300 000 on 1 September 2015 to be used solely for the research and development protect All costs Incurred are qualifylng costs In terms of sectlon 11D of the Income Tax Act 5 Legal costs The followmg legal costs were Incurred during the year of assessment - Legal fees 01 R7 500 relating to the collection of long outstanding debtors. . Costs to draw up a lease contract amounting to R6 000 (ThlS contract relates to the lease of a warehouse from a thlrd party for a penod of two years Bnght Ltd Is the lessee ) [TURN oven] 3 TAX2601 Oct I NOV 2016 QUESTION 1 (continued) 6 Restraint of trade The finanCIal manager, Mrs Nlonkwe, resrgned on 31 January 2016 To prohibit her from trading in direct competition With Bright Ltd, the company paid her an amount of R300 000 as compensation for her restraint of trade for the tollowmg four years Only R264 000 was included in Mrs Nlonkwe’s income on her 2016 income tax return 7 Fixed assets Bright Ltd owns the tollowmg capital aSSets . A glass edging machine — which was purchased second-hand on 31 May 2015 at a total cost of R500 000 and was brought into use In a process of manufacture on the same date . A delwery vehicle — which was purchased second-hand on 1 November 2014 at a total cost of R115 000, to deliver the glass containers to the company’s clients The delivery vehicle was brought 1nto use on 1 December 2014 . Office furniture —— which was purchased new on 1 February 2015 at a total cost of R45 000 The office furniture was brought into use on 1 May 2015 Bright Ltd sold technologically outdated manufacturing machinery on 1 September 2015 for R175 000 It was originally purchased new on 30 June 2014 for R337 500 and brought into use on the same day According to the binding general ruling no 7, delivery vehicles are written off over a four year period and office furniture over a SIX year period 8 Other costs . Penalties and interest of R17 000 were paid on 31 May 2015 for underestimating the second prowsmnal income tax payment for 2015 REQUIRED“ Calculate the taxable Income of Bright Ltd for the 2016 year of assessment [TURN OVER] 4 TAX2601 Oct/ Nov 2016 QUESTION 2 (25 marks, 30 minutes) Frames Desrgn (Pty) Ltd rs a small busmess corporation as defined m the Income Tax Act The com- pany manufactures steel wmdow frames for use In resrdentlal houses In South Africa The accountant requested you to calculate the company’s Income tax llablllty for the year of assessment ended on 31 March 2016 The tollowrng Information IS provrded to you regardmg the 2016 year of assessment 1 2 10 Sales of wrndow frames amounted to R2 450 000 during the year Frames Desrgn (Pty) Ltd received drvrdends of R25 000 from shares held In a South African com- pany Raw materials of R800 000 were purchased dunng the current year of assessment The opening stock and the closmg stock were as follows Opening stock 1 April 2015 Closing stock 31 March 2016 Cost Market value Cost Market value R300 000 R200 000 R244 000 R360 000 Water and electncrty expenses of R65 000 and salaries to employees of R1 050 000 was pard dunng the year The company's accountant made a provrsmn for stolen/damaged stock of R80 000 Bad debts written off at year end amounted to R55 860 Included In thrs amount IS a loan made to an employee who has now resrgned The loan was for R10 000 The followrng amounts relate to doubtful debts R Doubtful debt allowance clarmed In the 2015 year of assessment _ _ _ 36 400 List of doubtful debts (on 31/0312016) . _ , _ . _ . _ ‘ _ _ _ , , 102 360 An annual Insurance premium of R95 000 was paid on 1 November 2015 for the period 1 January 2016 to 31 December 2016 The tollowrng Inlormatlon relates to Frames Desrgn (Pty) Ltd’s assets 0 The company purchased sux new arr conditioners for the offices on 1 September 2014 for a total cost of R55 000 and brought them Into use on the same day 0 On 23 November 2015 the company paid R37 500 to repalr the root of the warehouse that was damaged durlng a storm - An expense of R16 770 was Incurred on 31 July 2015 for the acqwsrtlon of a patent for new steel cutting technlques The patent met the requrrements as defined In the Patents Act . In June 2015 Frames Desrgn (Pty) Ltd purchased srx new apartments no a resrdentral burldlng srtuated In Port Elizabeth for R800 000 each as an Investment All of these apartments were rented out from 1 August 2015 for R6 000 per month per apartment It does not qualify as low cost housrng A donation of R60 000 was made to the Childrensfund, a registered public benefit organisation The relevant section 18A receipt was obtarned [TURN oven] 5 TAX2601 Oct / Nov 2016 QUESTION 2 (continued) 11 Additional Informatlon Brndmg general ruling no 7 allows for the followrng WFIIE‘ off period for assets (where applicable) . AIr condltloners 10 years REQUIRED: Calculate the Income tax Ilabtllty of Frames Desrgn (Pty) Ltd for the year of assessment ended on 31 March 2016 QUESTION 3 (25 marks, 30 rnmutes) PART A (21 marks, 25 minutes) Dura Plastics (Pty) Ltd IS a company manufactunng high quality plastic containers The company was founded In 1999 by two brothers, Dan and Ftaymond The company IS not a small busrness corporation as defined In the Income Tax Act and has a year of assessment endrng on 31 March Durmg the 2016 year, the followmg assets were disposed of Factory building The brothers are planning to retlre soon and dectded to sell the company's factory burtdfng, srtuated In the south of Johannesburg The factory was sold on 1 February 2016 for R4 600 000 The factory burld- mg was purchased new on 1 Apnl 2000 for R2 000 000 It was used wholly for the manufactunng of plastic contalners An extra 30 square meters of floor space was added to the factory burldtng whlch cost R300 000 ThlS construction was completed on 1 June 2011 Caprtal allowances claimed until the date of sale on the original factory burldlng were Ftt 600 000 and R75 000 on the extensrons to the fac- tory burldlng Machine “BPA" Machine “BPA” WhICh was purchased to manufacture BPA free bottles, was sold on 20 March 2016 for R685 000 It was purchased new at a cost of R650 000 and brought Into use on 30 November 2014 Assume the adjusted proceeds for purposes of calculating the capital gain for Machine “BPA“ Is R295 000 Capital allowances claimed until the date of sale on Machine “BPA" was R390 000 Additional Informatlon Market value on 1 October 2001 —_ Time-a- omonrnent base cost —— Ad usted roceeds on 20 March 2016 _— REQUIRED Calculate Dura Plastics (Pty) Ltd’s taxable capital galn or capital loss for the 2016 year of assessment [TURN oven] 6 TAX2601 Oct / Nov 2016 QUESTION 3 (continued) PART B (4 marks, 5 minutes) REQUIRED: Select the letter (a), ( ), (c) or (d) that represents the correct answer to the question and write It down next to the question number (e g 1 - b) 1 Where a taxpayer disagrees With an assessment received from SARS, what IS the first step the taxpayer may take? 3) Submit a request to make use of the alternative dispute resolution (ADR) b) Prepare an appeal and lodge It WIth the Tax Board c) Lodge an appeal on an ADRt or a “notlce of objectron" form wnth SARS d) Request written reasons for the assessment from SARS 2 If a taxpayer wrshes to appeal against a disallowed objection, the taxpayer has how many days m which to lodge the appeal from when the notice of dlsallowmg the objection was received? a) 21 days b) 30 days 0) 45 days d) 60 days 3 In dealing wrth an objection to an assessment, “day" IS defined as any day Including a Saturday, Sunday and publrc holrday any day other than a Saturday and Sunday a working day a busrness day 0.0 U9) guy's-l 4 If a taxpayer has lodged an appeal, been through the alternative dispute resolution and has gone to the Tax Board and the Tax Court, what IS the next step the taxpayer can take If hefshe lS stlll unsatlsfled With the outcome? a) Go to the H1gh Court b) Go to the ngh Supreme Court 0) Go to the Constltutlonal Court d) Go to the Supreme Court of Appeal [TURN OVER] 7 TAX2601 Oct / Nov 2016 QUESTION 4 (25 marks, 30 minutes) PART A (10 marks, 12 mlnutes) 0-Stnchy (Pty) Ltd IS a company that makes ostrich feather shoes and bags O-Strrchy (Pty) Ltd Is not a small busrness corporation as defined In the lncome Tax Act and has a 31 March year of assessment 0 The 2016 taxable lncome has not been assessed yet The taxable Income has been estimated to be R301 500 . The 2015 year of assessment was assessed on 22 September 2015 wrth a taxable Income of R377 000 . The 2014 year of assessment was assessed on 10 October 2014 and the taxable Income was R360 000, after taking Into account a taxable capital gain of R40 000 The 2013 year of assessment was assessed on 30 August 2013 With a taxable Income of R298 000 REQUIRED: Calculate the first and second provrsronal Income tax payments for the 2016 year of assessment for O—Stnchy (Pty) Ltd Provtde a bnet reason as to why you have or have not chosen to use an assessment m your calCUlatrons Also, state the due dates for the submrssron of the two -rovrsronal tax -a ments PART B (15 marks, 18 mlnutes) Twrllght Truckrng (Pty) Ltd (”Twrirght Trucking") IS a transportation company based In Cape Town It transports hrgh value cargo all over South Africa and has a 31 March 2016 year end On the night of 1 December 2015, one of the truck drivers was killed In an accrdent, whilst transporting cargo from the Free State to the Western Cape It IS alleged that the truck driver lost control of the truck while tryrng to swerve out of the way of an oncomrng vehicle The truck driver's wrfe sued Twrllght Trucking for compensatton on 12 January 2016 On 20 March 2016, the court granted the Wlfe com- pensation and ordered Twrllght Truckrng to pay the wrfe an amount of H800 000 Twrllght Trucking paid this amount on 15 April 2016 REQUIRED: DISCUSS the tax deductrblllty of the compensatlon amount of R800 000 In terms of the gene— ral deductlon formula (section 11(3)) You can Ignore section 23(9) for purposes of this question Note Your answer should set out the requrrements of the general deduction formula and briefly dlSCUSS each element at hand of the given rnlormatlon Make brief references to the relevant case law to stren-then our ar- ument [TURN OVER] I TAX2601 Oct 1 Nov 2016 ANNEXURE A: EXTRACT FROM THE INCOME TAX ACT [ACT 58 OF 1962, AS AMENDED! -— EIGHTH SCHEDULE 25 Determination of base cost of pre-valuatton date assets. - The base cost of a pre-valuation date asset (other than an identical asset tn respect of Wthh paragraph 32(3A) has been applied), is the sum of the valuation date value of that asset, as determined in terms of paragraph 26, 27 or 28 and the expenditure allowable In terms of paragraph 20 incurred on or after the valuation date in respect of that asset 26. Valuatton date value where proceeds exceed expenditure or where expenditure in respect of an asset cannot be determined - (1) Where the proceeds from the dtsposal of a pre-valuatlon date asset (other than an asset contemplated in paragraph 28 or tn respect of which paragraph 32(3A) has been applied) exceed the expenditure allowable In terms of paragraph 20 incurred before, on and after the valuation date In respect of that asset, the person who disposed of that asset must. subject to sub- paragraph (3). adopt any of the tollowrng as the valuation date value of that asset- (a) the market value of the asset on the valuation date as contemplated in paragraph 29, (b) 20 per cent of the proceeds from disposal of the asset, after deducting from those proceeds an amount equal to the expendtture allowable in terms of paragraph 20 Incurred on or after the valuation date, or (c) the trme-apporttonment base cost of the asset as contemplated tn paragraph 30 (2) Where the expenditure Incurred before valuation date In respect of a pre-valuation date asset cannot be determined by the person who dtsposed of that asset or the Commissmner, that person must adopt any 01 the followmg as the valuation date value of that asset- (a) the market value of the asset on the valuation date as contemplated tn paragraph 29, or (b) 20 per cent of the proceeds from disposal of the asset, after deducting from those proceeds an amount equal to the expenditure allowable 1n terms of paragraph 20 Incurred on or after the valuatton date (3) Where a person has adopted the market value as the valuation date value of an asset, as contem- plated tn subparagraph (1) (a), and the proceeds from the disposal of that asset do not exceed that mar- ket value, that person must substitute as the valuation date value of that asset, those proceeds less the expendtture allowable In terms of paragraph 20 Incurred on or after the valuation date in respect of that asset [TURN oven] ll TAX2601 Oct I Nov 2016 ANNEXURE 3. ADDITIONAL INFORMATION The Income tax rates applicable to small busmess corporations are as follows 0% on taxable Income not exceeding R73 650 7% on taxable Income exceeding R73 650, but not exceedlng R365 000 R20 395 plus 21% on taxable Income exceeding R365 000, but not exceeding R550 000 R59 245 plus 28% on taxable Income exceeding R550 000 The Income tax rates applicable to micro busmesses: R O - 335 000 Nil 335 001 — 500 000 1% of the amount over R335 000 500 001 —— 750 000 R1 650 + 2% of the amount over R500 000 750 001 - 1 000 000 R6 650 + 3% of the amount over R750 000 ANNEXURE C: INCOME TAX MONETARY THRESHOLDS SUBJECT TO PERIODIC LEGISLATIVE CHANGE (extract) Monetary Description Reference to Income Tax Act, 1962 amount Small-scale Intellectual property- Paragraph (aa) of the R5 000 Intellectual property With a cost below the amount Indica- provrso to sectron 11(gC) ted rs Immediatel deductlble Prepaid expenses: Paragraph (bb) of the R100 000 Limit of prepatd expenses that Will not be deterred untII provrso to section 23H(1) detlve of mods, semces or benettts Small business corporations- Corporations qualify for tax Incentives It gross Income does not exceed the amount referred to Section 12E(4)(a)(|) R20 rmllton UNISA 2016 ...
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