PRACTICAL EXAM TYPE QUESTIONS FOR LEARNING UNIT 5 –
GENERAL DEDUCTION FORMULA
QUESTION 5.1 (34 marks, 61 minutes)
Case study 1 (23 marks, 41 minutes)
Bean Counter (Pty) Ltd is an accounting and tax consulting company operated from the private
residence of Thomas Bean, the sole shareholder of the company. He has converted a granny
flat, located on the same stand as his private residence, into company offices. The company is a
registered VAT vendor. Bean Counter (Pty) Ltd has concluded the following transactions for the
year of assessment ended 28 February 2023 and it requires your advice on the correct tax treatment of each of the following transactions:
1. R3 700 was paid to Maintenance Man on 15 September 2022 to replace the front door of the
offices that was damaged by an angry client. Fortunately, the full amount could be recovered
from the company's insurance.
(2)
2. R750 was paid to SARS on 31 October 2022 for administrative penalties relating to the late
submission of the annual income tax return for the 2021 year of assessment.
(2)
3. Monthly rental of R1 150 (including VAT) in respect of a photocopying machine used
exclusively in the business, payable on the first of each month via debit order to Happy
Copiers.
(11)
4. R50 000 was paid to Room Contractors on 30 November 2022 for adding two rooms to the
granny flat. The rooms will be rented out to Bean Counter (Pty) Ltd's employees as from
1 January 2023.
(8)
REQUIRED:
Briefly discuss whether the expenses relating to the transactions in case study 1
would be deductible by Bean Counter (Pty) Ltd for the 2023 year of assessment
according to the general deduction formula (section 11(a)) and in terms of section
23 (prohibited deductions) of the Income Tax Act. Refer to relevant case law.
Marks
23
Case study 2 (3 marks, 5 minutes)
The following transaction relates to Hanzer (Pty) Ltd:
On 1 August 2022, Hanzer (Pty) Ltd acquired the exclusive right to sell one of its flagship products
for a period of seven years in the Cape Town area. The cost of this right was R175 000, payable
as follows:
•
•
R40 000 on 1 September 2022, and
R22 500 for each of the next six years, payable as from 1 September 2023
QUESTION 5.1 (continued)
REQUIRED:
Briefly discuss the deductibility of the initial payment of R40 000 for the 2023 year
of assessment and the R22 500 payable for the next six years of assessment according to the general deduction formula. You may ignore case law.
Marks
3
Case study 3 (8 marks, 15 minutes)
Daisy (Pty) Ltd borrowed R120 000 from V-Bank to purchase a delivery vehicle to deliver flowers
to customers. The loan was granted on 1 October 2022. Daisy (Pty) Ltd runs a business as a
florist and the delivery of flowers to customers is part of its main business. The following information was provided for the year of assessment ended on 28 February 2023:
•
•
Interest of R8 500 paid on the loan from V-Bank
Capital of R21 500 repaid against the loan from V-Bank
Daisy (Pty) Ltd also signed a new lease agreement on 1 September 2022 with Big Brother Rentals
for a period of three years. A monthly rental of R15 000 is payable on the first of each month as
from 1 September 2022. The lease agreement also stipulates that, apart from the monthly rental
of R15 000, an additional rental amount of 1,5% of the annual turnover for the period 1 September 2022 to 31 August 2023 will be paid to Big Brother Rentals if the turnover for that period
exceeds R850 000. The turnover for the year of assessment ended 28 February 2023 amounted
to R820 000.
REQUIRED:
Marks
a. Discuss if the interest paid of R8 500 and the capital repaid of R21 500 against
the loan from V-Bank will be deductible according to the general deduction
formula for the 2023 year of assessment.
4
b. Discuss the deductibility of the monthly rental of R15 000 and the 1,5% rental
based on the turnover of Daisy (Pty) Ltd if it exceeds R850 000, according to
the general deduction formula. List all the requirements, where necessary.
4
QUESTION 5.2 (20 marks, 36 minutes)
Rosemary Hill (Pty) Ltd sells second-hand furniture. Rosemary Hill’s financial year ends on the
last day of March and is a registered VAT vendor making only taxable supplies.
On 28 February 2023, the company paid an amount of R103 040 in advance to Electric4all Ltd
for electricity to be supplied during the six-month period from 1 March 2023 to 31 August 2023
relating to the property it occupies for the purposes of its trade in selling second-hand furniture.
2
TAX3761/102
QUESTION 5.2 (continued)
REQUIRED:
Discuss, supported with calculations and relevant legislation and case law principles, whether the amount of R103 040 paid by Rosemary Hill (Pty) Ltd will
qualify as a deduction from the company’s taxable income for the 2023 year of
assessment. In addition, consider any other specific deduction in which the
amount can be deductible.
MARKS
20
QUESTION 5.3 (7 marks, 13 minutes)
You are the tax manager of a small auditing and accounting firm. One of the junior trainees has
approached you for advice concerning a client.
The general deduction formula (s11(a) of the Income Tax Act) provides:
For the purpose of determining the taxable income derived by any person from carrying on
any trade, there shall be allowed as deductions from the income of such person so derived
… expenditure and losses actually incurred in the production of the income, provided such
expenditure and losses are not of a capital nature.
REQUIRED:
Discuss in the following scenario whether the deductions sought would be allowed for tax purposes in terms of the general deduction formula. If not, indicate
which of the requirements of section 11(a) are not met and give a short reason
why the requirement is not met.
MARKS
7
The format of your answer should be:
Not deductible – not in production of income – not closely related to performance
of business activities.
Mrs Bend, an occupational therapist, started a practice from home during the current year of
assessment.
1
Before she commenced trading, she had a section of her home converted into a reception/
administration room, consulting/workshop area and a bathroom for patients and staff. General repair work relating to the practice, like painting, replacement of broken floor tiles and
ceilings, and replacement of the toilet, totalling a cost of R10 000, was included in the total
construction cost of R70 000.
2
During the year, she accidentally cut a patient’s arm with her scissors while removing a cast.
Because of this, the patient incurred medical costs of R2 500. She agreed to pay all the
patient’s medical expenses.
3
QUESTION 5.3 (continued)
3
During the year a patient who owed Mrs Bend R1 000 died. Mrs Bend will never receive the
amount owed to her.
QUESTION 5.4 (16 marks, 29 minutes)
1.
Johannes, a maker of garden pots, incurred a cost of R15 000 when moving machinery and
plant from his old premises to his new premises.
2.
Molato owns a property that he rented to tenants. He incurred a cost of R12 000 because
he used the services of a letting agent who collected rentals on his behalf.
3.
Lesley was a builder who, while constructing a house, had to pay damages and medical
expenses to a pedestrian who was struck by a brick that fell from the building site.
4.
Pamela paid R16 000 for a motorcycle that she awarded to her employee as a prize for
reaching a sales target.
5.
Mr Old is a retired taxpayer whose only receipts and accruals are pension and interest. In
his income tax return, he has claimed accounting fees for the preparation of his financial
records.
6.
Jeffrey inadvertently forgot to deduct allowable expenses in the previous year of assessment
and therefore decided to claim them in the current year of assessment.
7.
Ms Hungria claimed the cost of meals and argued that if she did not eat she would not be
able to work and therefore produce income.
8.
Andisha incurred expenses amounting to R3 800 in the current year of assessment in
respect of income, which will only be produced in the following year of assessment.
REQUIRED:
MARKS
In each of the above circumstances, state whether the expenses incurred may
be deducted in terms of section 11(a), read with section 23 of the Act, or not.
Give reasons for your answers.
16
QUESTION 5.5 (13 marks, 23 minutes)
1
A taxpayer may claim expenses for only one trade during the year of assessment.
2
A deduction can be claimed for the taxpayer’s own labour where the asset was created by
him, as his labour increases the value of the asset.
4
TAX3761/102
QUESTION 5.5 (continued)
3
If a taxpayer disputes a claim against him and at the end of the year of assessment, the
dispute is undetermined, he cannot claim the disputed amount as a deduction for income
tax purposes as the liability has not actually been incurred.
4
The concept of “matching” often requires expenditure to be carried forward to a subsequent
year or back to an earlier year, for the purposes of calculating taxable income.
5
In order to claim an expense, the particular item of expenditure must produce some income
in the year of assessment.
6
Expenditure is of a capital nature if it is incurred in addition to the cost incurred to produce
that income.
7
Expenditure is normally of a capital nature if the expenditure is a cost that is going to be
spent once and for all, while expenditure of a revenue nature is often a cost that is going to
be incurred every year.
8
There is no halfway house between expenditure of a capital nature and expenditure of a
revenue nature.
9
No loss or expense can be deducted if it is recoverable under any contract of insurance,
guarantee, security or indemnity.
10
Interest that might have been made on any capital employed in trade (that is notional interest) can be deducted for income tax purposes.
11
Gifts are expenses incurred in the production of income and can generally be deducted as
expenses for tax purposes.
12
Fines for the contravention of regulations, the late submission of tax returns or traffic offences are normally allowed as a deduction.
13
Assets such as mines, quarries and forests are exhausted in the course of their use. Nevertheless, expenditure incurred in the acquisition of these assets is of a capital nature.
REQUIRED:
Indicate whether the following statements from your clients are correct according
to the general deduction formula – section 11(a) of the Income Tax Act read with
section 23.
MARKS
16
If the statement is correct, indicate with a “true”. If the statement is incorrect,
indicate with a “false”. No reasons are required for your answers
5
QUESTION 5.6 (10 marks, 18 minutes)
Daniel completed his postgraduate degree in taxation in December 2022.
On 1 January 2023, Daniel started a tax consulting business that he operated from his home. He
incurred the following expenses during January and February 2023:
•
Interest and capital repayments on a bank loan that was used to finance the purchase of a
computer and printer.
The computer and printer were used exclusively for his consulting business.
•
Payment of municipal assessment rates with respect to his home.
Daniel uses a spare bedroom in his home mainly as an office from which he operates his
consulting business. The bedroom constitutes of 10% of the entire floor space of the property. Daniel used the room occasionally as a bedroom, when a family member came to
stay with him for a weekend in January and February 2023.
REQUIRED:
Briefly discuss whether Daniel’s expenses are deductible from tax in terms of the
general deduction formula (section 11(a) read with section 23).
MARKS
10
QUESTION 5.7 (10 marks, 18 minutes)
Vincent is the owner of an apartment in Durban. He does not live in the apartment but has used
the apartment for vacation purposes during previous years of assessment.
Vincent decided to start letting the apartment for short-term holiday rentals. On 1 December 2022
the apartment was rented out for the first time. During that same month, Vincent spent R14 000,
in order to have a website established for the property. The website provided all the information
that prospective tenants might want to know about the property.
REQUIRED:
Discuss whether the cost of setting up the website will be deductible in terms of
section 11(a) of the general deduction formula.
6
MARKS
10
TAX3761/102
QUESTION 5.8 (20 marks, 36 minutes)
Sarel Siddle is a South African professional cyclist and competes in cycle races all over the world.
Sarel is unsure of how some of his receipts and expenses will be treated for South African income
tax purposes.
Background information:
Sarel is not employed by anyone. He has one sponsor – “Get Power”, an energy drink manufacturer. Sarel’s sponsor has stipulated that if he does not compete in at least 10 international races
during the year, he will lose his sponsorship. He must also always be seen, in public during races,
with at least one article of clothing displaying his sponsor’s name.
Receipts:
o Sarel received 10 bicycles from his sponsor during the current year of assessment. He
has a contract with them for five years and will receive 10 bicycles every year for the next
four years.
o Sarel’s sponsor paid him a lump sum amount on the condition that he did not cycle for
another sponsor for the next four years of his contract.
o During the year of assessment, Sarel inherited R100 000 from his late uncle.
Expense:
o During the current year of assessment, Sarel purchased a lifetime gym contract. The gym
has branches all over the world so that Sarel can do weight training wherever he is competing in a race, for the rest of his life (he paid a once-off amount for this contract).
REQUIRED:
MARKS
Briefly discuss, with reasons:
a) whether the three receipts will be included in Sarel’s gross income
15
b) whether the expense that Sarel incurred will be deductible in terms of the general deduction formula
5
QUESTION 5.9 (20 marks, 36 minutes)
Ramesh is 60 years of age and is married out of community of property. Ramesh owns a nursery,
Paradise Fields, in his own name as a sole proprietor, where seedlings (trees, plants and flowers)
are grown and sold to retailers and the public. Ramesh wants to retire in the near future and
spend less time working.
Paradise Fields was established 30 years ago in a rural area on the outskirts of Johannesburg.
Ramesh purchased the property and developed the nursery with some of his own savings and a
7
QUESTION 5.9 (continued)
mortgage loan from a bank. A building was erected on the property that is used as offices and a
shop that sells nursery and gardening related products. The remainder of the property is used to
cultivate (grow) seedlings, as well as space where seedlings are displayed for selling purposes.
Equipment was also purchased to develop and maintain the nursery.
Ramesh approached a business broker, who buys and sells businesses, to locate a buyer for
Paradise Fields. The business broker located a large nursery, Go-Green, in the near vicinity that
showed an interest in purchasing Ramesh’s nursery. Go-Green made an offer comprising the
following: R12 000 000 for the property and the building; R2 500 000 for the seedlings and the
products in the shop; and R500 000 for the equipment. Ramesh will retain the vehicle that was
used for the nursery’s business, as his private vehicle. The business broker charges a commission of 10% of the selling price of the business, which Ramesh must pay.
Assume that Paradise Fields did not claim any capital allowances for income tax purposes. Ignore
the effect of VAT and capital gains tax.
REQUIRED
MARKS
Assume that the transaction was concluded during the current year of assessment
and all contractual conditions were met. Provide advice concerning the tax implications of the sale of the nursery (Paradise Fields) by Ramesh to Go-Green, as
follows:
a) Briefly discuss, by referring to the relevant components of the gross income
definition, whether the sale of the property and building, equipment, seedlings and products, and retaining of the vehicle, will be included in Ramesh’s
gross income for income tax purposes. Group similar items together for
purposes of the discussion. No reference to case law is required.
10
b) Briefly discuss, by referring to relevant components of the general deduction
formula, whether:
-
Ramesh will be allowed to deduct the business broker commission of
10% for income tax purposes. Group similar items together for purposes
of the discussion. No reference to case law is required.
-
Go-Green will be allowed to deduct the purchase price paid by it for the
property and building, equipment, seedlings and products for income tax
purposes. Group similar items together for purposes of the discussion.
No reference to case law is required.
5
5
QUESTION 5.10 (20 marks, 36 minutes)
Styles (Pty) Ltd (“Styles”) manufactures wooden furniture as a wholesaler. The company’s
manufacturing process has been approved by SARS as a qualifying process of manufacture. The
company distributes its stock across Southern Africa. The company is not a small business
corporation as defined in the Income Tax Act.
8
TAX3761/102
The company is registered as a category B, value-added tax (VAT) vendor, making only taxable
supplies. All transactions are conducted with registered VAT vendors, unless specifically stated
otherwise. Where necessary, Styles obtained valid tax invoices and the required documentation
for all its transactions. The company’s financial year ends on the last day of February 2023.
The accountant of Styles approached you for advice regarding the purchase of a factory building.
The decision to purchase the factory building has been postponed by the management of Styles
for a few years now and if they decide to purchase this building, it will need a lot of maintenance
and upgrading. Management also wanted to move their head office to this new factory building
and thus part of the building would need to be converted into an administration building. If the
decision is made, the building will be purchased by the end of January 2023.
The accountant supplied you with a list of all the costs that would need to be incurred on the
factory building.
List of expenses as provided by the accountant
Factory building purchase cost
Replacing the roof of the factory building which was damaged due to a hailstorm
Carports must be added to the building for staff parking
Paving the area around the building to keep the factory clean
Replacing old electrical wires
Total
R
890 000
230 000
80 000
55 000
130 000
1 385 000
The accountant needs you to help identify which of the items listed above will constitute capital
and which will qualify as a deduction in terms of the Income Tax Act.
REQUIRED:
(i)
Discuss whether the carports that must be added to the building for staff
parking will be deductible in terms of the general deduction formula if the
management decided to purchase the building and continue with the
upgrading.
MARKS
10
You need to provide a clear conclusion relating to your argument.
(ii) Provide a reason for classifying the costs listed above as an expense or as
capital in terms of the “Not of a capital nature requirement” in the general
deduction formula.
8
Please note: You are not required to discuss the carports again.
(iii) Discuss, according to your conclusion in (i), what the effect will be on the
income tax liability of Styles (Pty) Ltd regarding the carports.
2
You are not required to show any calculations.
(Ignore value-added tax implications for i, ii and iii)
9