UNIVERSITY OF THE WESTERN CAPE
TEST 2
MAY 2024
MODULE NAME
: TAXATION 327
MODULE CODE
: TAX327
DURATION
: 180 minutes (3hours)
TOTAL MARKS
: 90
Examiner/s
: B Smith & Z Mongane
Internal moderator
: Z Mongane & B Smith & E Hamel
External moderator
:N/A
Departmental
chairperson
: B Raymond
EXAMINER’S INSTRUCTIONS:
1. Answers must be in blue or black ink if written.
2. Students are permitted to use a single copy of 'SAICA Legislation Handbook
(published by LexisNexis) as well as the official errata page provided by SAICA.
• Only underlining, side-lining, highlighting and flags are permitted.
• No annotations whatsoever may be made in the allowed publications. Flags
may only contain information which already appears on the page to which the
flag is attached. Texts may not be supplemented with loose papers and no loose
pages may be pasted into the books, except for the official errata provided by
SAICA.
GENERAL INSTRUCTIONS:
This test paper consists of 12 printed pages (including cover sheet, required and
appendix A); please ensure that you have all of them.
Please ensure that your Student Number is clearly printed on the examination answer
booklet/s and that you have completed the attendance form (control form). Also ensure
that your student number is correctly captured on the multiple choice answer sheet
should you be required to complete one.
You may not have any books, writing paper, notes, manuscripts, electronic media
(cellphones, smart devices, laptops, etc.) in your possession, unless otherwise
stipulated in this examination question paper.
Please ensure that all your answer booklets are collected by an invigilator at the end of
the examination session. Answer booklets must be intact when collected by the
invigilator. No stapled, paper clipped or glued booklets will be accepted.
Please answer all questions (unless indicated otherwise). It is in your interest to write
in a legible manner.
Question 1
(35 Marks)
IGNORE VAT
International House of Pop (Pty) Ltd (“IHOP”) is a company that specializes in the
manufacture of various musical instruments. They operate from a factory space located
in Belville, Cape Town. IHOP has been in business since 2003 and sell their products
directly to customers as well as wholesalers both in South Africa and abroad.
The taxation manager of IHOP, a Mr. Jazzy Beats, has taken an extended holiday and you
have been asked to assist with preparing the tax return of IHOP for their year of
assessment ended 30 June 2024.
Mr. Jazzy Beats has already correctly prepared the taxable income calculation for all
items other than those mentioned below and has correctly calculated a taxable income
of R 3 500 000 relating to those items:
Replacement of drum stretching machine:
A drum stretching machine, which as part of the process of manufacture which is
approved by SARS, stretches the drumskins placed over the drum body, broke down on 1
April 2024. A machine operator had by mistake dropped a coin from their pocket into the
machine, jamming it and causing it to catch fire. The machine was damaged beyond
repair. The machine had cost R 170 000 when purchased new and was brought into use
on 1 October 2022. Thankfully the machine was insured and proceeds of R 150 000 was
received from ABC insurers. These receipts and an additional R 40 000 from the
company’s savings were used to purchase a new replacement machine for R190 000. The
replacement machine was brought into use on 1 May 2024.
Additionally, it just so happened that on the day of the fire, an auditor was visiting the
factory and her shoes got burnt in the fire. Thankfully she was not hurt but IHOP
purchased her replacement shoes to the value of R 2 500 on 2 April 2024.
Sales of stock
An extract from the accounting records of IHOP is as follows:
Description
Cash receipts for the Period 1/7/2023 until 30/6/2024
Less: Sale made to Dodgy Cat for a trumpet to be delivered on
4/7/2024. Cash received on 18/6/2024
Less: Amount received from Tay Swifty on 1/7/2023 relating to
a trade debt originating on 26/5/2023
Add: Sale made to Chris Black on 23/6/2024 for R50 000 which
is due on 23/8/2024. Chris will be entitled to a 5% discount if he
settles before the due date.
Revenue as per IFRS 15
R
6 500 000
(30 000)
(20 000)
47 500
6 497 500
Excluded from the above figures is information relating to a sale made to a distributor in
Hong Kong. The distributor requested that the invoice be denominated in Hong Kong
Dollars and IHOP agreed to do this.
As such IHOP invoiced the distributor for 100 000 Hong Kong Dollars on 1 May 2024. The
goods were shipped on the same day. The distributor paid 40 000 Hong Kong Dollars on
1 June 2024. The other 60 000 is due to be paid on 1 August 2024.
In order to partially hedge against foreign currency fluctuations IHOP took out a forward
contract on 1 May 2024 to sell 30 000 Hong Kong Dollars on 30 June 2024 at a rate of
1$=R2,37.
Other rates which may be relevant are as follows:
Date
1 May 2024
1 June 2024
30 June 2024
1 August 2024
Rate
1$=R2,24
1$=R2,61
1$=R2,20
1$=R2,48
Bad Debts and a lack of Liquidity:
Towards the middle of their financial year IHOP noticed that several of their customers
were simply not paying their accounts and as such IHOP begun to experience a liquidity
crisis as they would be unable to pay their staff on time with the cash on hand.
As such IHOP had to borrow a sum of R 400 000 from Grammy Bank on 1 February 2024.
This is repayable in 8 equal installments of R 60 000 each due every 3 months starting on
1 May 2024. A correctly calculated 3-month yield to Maturity interest rate for this loan is
4,24%.
During the 2024 year of assessment IHOP wrote off debt to the value of R 150 000.
Included in this figure is R 20 000 that was loaned to a staff member in the current year.
The staff member never showed up to work one day and has not been found since, so the
R 18 000 capital amount and R 2 000 interest charged were written off in June 2024.
The previous year’s correctly caculateds11(j) allowance was R 52 000.
IHOP does not apply IFRS 9 and the debtors aging on 30 June 2024 is as follows:
Current
R 130 000
30-60 days
R 90 000
60-120 days
R120 000
120 days +
R82 000
REQUIRED – Question 1
Marks
Show all your calculations and round off to the nearest Rand.
Part A
Part B
Discuss whether the expense of replacing the auditor’s burnt
shoes would be “In the production of income” as required in
order to be deductible from the income of International House
of Pop for the year of assessment ended 30 June 2024.
5
Communication marks – Logical Approach
1
Calculate the effect that all provided information would have
on the taxable income of International House of Pop for the year
of assessment ended 30 June 2024. Provide reasons where
appropriate to substantiate your answer.
28
Communication marks – Layout
1
MARKS
35
Question 2
(20 Marks)
This Question consists of 2 unrelated parts.
PART A:
My husband, who is 66, recently began a new job, and one of the benefits of this job is
that they are willing to grant employees loans at favorable rates. He is looking at
borrowing a sum of R 500 000 on 1 March 2023 with an interest rate of only 1% payable
and investing it to earn a good return. Could you outline the total effect on his 2024
taxable income for him if he invests it in and earns the expected return of each of the
following options:
Option 1
Option 2
Option 3
Type of shareholding
A 5% shareholding in a South African company
A 4% shareholding in Real Estate Investment
Trust (REIT)
A local fixed deposit that earns 13,8% interest
Expected return
R 40 000 dividend
R 32 000 dividend
R35 000 interest
You may assume a constant official interest rate of 9,25%
PART B:
Hi there my cousin. As you know I operate a business, as a sole proprietorship, selling
burgers and hot dogs at my daughter’s school and have registered as a VAT vendor who
makes 100% taxable supplies. All amounts I am giving you here have VAT included where
appropriate.
I have purchased 2 new assets recently and was hoping you could assist with the effect
they might have on my taxable income.
I purchased a new industrial air fryer from my brother who runs a general store. He gave
me a good deal and sold it to me on 1 September 2023 for R 5 000. The open market value
on that date was R 12 000. I brought it into use on the day of purchase. My brother is a VAT
vendor who makes 97% taxable supplies.
It turned out that my brother sold me a demo unit that didn’t quite work as I had hoped so
I sold it on 1 December 2023 for R 4 000 to an unconnected 3rd party who is not a VAT
vendor.
I also purchased a new double cab bakkie for R 280 000 on 1 February 2024. It was
purchased from a VAT vendor, and I use it 60% for my trade and 40% for personal
purposes. On 16 February 2024 I knocked a stop sign and had to replace a dent in the
bakkie at a cost of R 4 500. I used a panel beater who is a VAT vendor.
Can you assist me in calculating the effect these transactions would have on my taxable
income for the 2024 year of assessment? SARS has told me that all my assets which
qualify for s11(e) can be assumed to be deductible over 5 years. Thanks so much.
REQUIRED – Question 2
Marks
Show all your calculations and round off to the nearest Rand.
Part A
Answer the question provided as asked
10
Part B
Answer the question provided as asked
10
MARKS
20
Question 3
(35 marks)
This question consists out of two unrelated parts.
PART A
Solar Power (Pty) Limited (hereafter referred to as “Solar Power”) is a South African
company that mainly focuses on the manufacturing and installation of solar panels.
Solar Power is a registered VAT vendor and in an attempt to diversify the company Solar
Power bought a petrol station and house in Cape Town. The house is leased to family
which uses it for residential purposes. Solar Power makes 85% taxable supplies.
The following transactions took place during the two-month period ended
30 April 2024. All amounts are inclusive of VAT unless otherwise stated or implied, and
Solar Power operates on the Invoice basis for VAT purposes.
Revenue:
Revenue generated by the petrol station from the sale of petrol and diesel amounted to
R320 000. Revenue from the sale of solar panels for business use (all to VAT vendors)
amounted to R560 000 and revenue from sale of solar panels for residential use (all to
non-VAT vendors) amounted to R210 000.
Rental income:
The rental income from the house situated in Cape Town amounted to R90 000 for the
two months.
Administration building:
Solar Power entered into a finance lease agreement with DEF Limited (an unrelated party)
for the lease of an administration building to be used by the company. The agreement was
entered into on 1 March 2024 and in terms of the agreement Solar Power must pay a
deposit of R20 000 on 1 March 2024 and from 1 April 2024 monthly lease payments of
R20 000 for 4 years. All payments were made on time by Solar Power. The total finance
charges of the lease payments amounted to R360 000.
Use of company car:
Solar Power bought a Volkswagen Amarok double cab bakkie on 1 April 2024 for
R540 000. The vehicle was immediately given to the Finance Director of Solar Power to
use as a company car. The finance director was responsible for the full maintenance
costs of the vehicle.
Purchase of laptops:
Solar Power purchased new laptops, on 15 April 2024, to be used by employees
responsible for designing and provided quotes for solar panels to potential clients. Solar
Power purchased 15 laptops for R120 000 (in total) from Mrs. Powell. Mrs. Powell is one
of the founding shareholders of the company and owns 25% of the equity shares in Solar
Power. The open market value on the date of purchase was R9 500 per laptop. Mrs. Powell
is not a registered VAT vendor.
Salaries:
Salaries for the two-month period amounted to R840 000.
Purchase of petrol and diesel:
Solar Power spent R350 000 to purchase petrol to be used at the petrol station during the
two-month period. As a token of appreciation for work well done by one employee, Solar
Power filled the employee’s car with petrol for free. The petrol could have been sold for
R1 050.
Property tax:
The property taxes for the house amounted to R6 000 during the two-month period.
Manufacturing machine:
Solar Power imported a new manufacturing machine from China. The manufacturing
machine costs R450 000 and import duties of R35 000 were incurred. The machine was
cleared by customs to be used in South Africa on 20 April 2024.
Bad debts:
Solar Power granted a loan of R10 000 on 15 January 2024 to one of its employees. The
employee was dismissed on 15 April 2024 due to fraud and Solar Power wrote off the loan
of R10 000 and interest of R200.
Purchase of minibus taxi:
Solar Power purchased a 25-seater minibus taxi for R450 000 on 28 March 2024. Due to
the high demand for solar panels, Solar Power had to operate its factory for 24 hours and
the minibus taxi will be used to transport factory employees free of charge.
PART B
You are a tax consultant and ABC Limited requires your assistance with some VAT
queries. ABC Limited makes both taxable and exempt supplies.
ABC Limited bought furniture and fittings on 1 February 2024 to be used in the portion of
the business that makes exempt supplies. The furniture and fittings were bought on credit
for R85 000 and finance charges of R2 000 was included in the consideration. 80% of the
purchase price was paid by 31 March 2024 and the remaining 20% was paid on 30 May
2024. The furniture and fittings were bought second hand from a non-vendor. The open
market value (excluding finance charges) on 1 February 2024 was R90 000.
On 1 May 2024, ABC Limited decided to use the furniture and fittings in the portion of its
business that makes 90% taxable supplies. The open market value on that date
amounted to R54 000.
REQUIRED – Question 3
Marks
Show all your calculations and round off to the nearest Rand.
Part A
Calculate the VAT payable or refundable by Solar Power (Pty)
Limited for the two-month period ended 30 April 2024. If a
transaction does not have any VAT consequences, you must
provide a brief reason as to why. You answer must be
presented in a table with input and output VAT shown in
different columns.
Presentation skills – table format
Part B
24
1
Discuss the VAT implications of the furniture and fittings for
ABC Limited. Your discussion must start from the purchase of
the furniture and fittings until (and including) 1 May 2024 and
include the time of supply if applicable.
10
MARKS
35
Appendix A – Rates for year of assessments ending 29 February 2024
REBATES (section 6)
Primary rebate increases from R16 425 to R17 235.
Secondary rebate increases from R9 000 to R9 444.
Tertiary rebate increases from R2 997 to R3 145.
MEDICAL REBATES (section 6A)
Benefits to the taxpayer: increases from R347 to R364.
Benefits to the taxpayer and one dependant: Increases from R694 to R728.
Benefits to each additional dependant: increases from R234 to R 246.
RATES OF NORMAL TAX
Taxable income (R)
Rates of tax (R)
1 – 237 100
18% of taxable income
237 101 – 370 500
42 678 + 26% of taxable income above 237 100
370 501 – 512 800
77 362 + 31% of taxable income above 370 500
512 801 – 673 000
121 475 + 36% of taxable income above 512 800
673 001 – 857 900
179 147 + 39% of taxable income above 673 000
857 901 – 1 817 000
251 258 + 41% of taxable income above 857 900
1 817 001 and above
644 489 + 45% of taxable income above 1 817 000
NOTE: For a company with a year of assessment ending on or after 31 March 2023 the
rate of taxes changes from 28% to 27%
Taxable income Rate of tax for small Business Corporations: Years of assessment
ending on any date between 1 April 2023 and 31 March 2024:
Taxable income (R)
Rates of tax (R)
1 – 91 250
0% of taxable income
91 251 – 365 000
7% of taxable income above 91 250
365 001 – 550 000
19 163 + 21% of taxable income above 365 000
550 001 and above
58 013 + 27% of the amount above 550 000
Travel Allowance
Value of the vehicle (R) Fixed cost (R p.a)
Fuel cost
(c/km)
Maintenance cost
(c/km)
0 – 100 000
33 760
141.5
43.8
100 001 – 200 000
60 329
158.0
54.8
200 001 – 300 000
86 958
171.7
60.4
300 001 – 400 000
110 554
184.6
65.9
400 001 – 500 000
134 150
197.6
77.5
500 001 – 600 000
158 856
226.6
91.0
600 001 – 700 000
183 611
230.5
102.1
700 001 – 800 000
209 685
234.4
113.1
800 001 and above
209 685
234.4
113.1
Alternative fixed rate for certain reimbursive travel allowances: 464 cents per kilometer.
Retirement lump sum withdrawal benefit
Taxable income (R)
Rate of tax (R)
0 – 27 500
0%
27 501 - 726 000
18% of taxable income above 27 500
726 001 – 1 089 000
125 730 + 27% of taxable income above 726 000
1 089 001 and above
223 740 + 36% of taxable income above 1089 000
Retirement lump sum benefit
Taxable income (R)
Rate of tax (R)
0 – 550 000
0%
550 001 - 770 000
18% of taxable income above 500 000
770 001 – 1 155 000
39 600 + 27% of taxable income above 770 000
1 155 001 and above
143 550 + 36% of taxable income above 1 155 000