TITLE
SUBJECT
HET: BCOM ACCOUNTING
TAXATION 3B
SUBJECT CODE
TEST/EXAM
SEMESTER
DATE WRITTEN
TAX 310
MEMO EXAM
2ND
14 NOV 2017
TOTAL MARKS
DURATION
PASS MARK
WEIGHTING
EXAMINER
MODERATOR
150
3 HOURS
50%
60%
ONIAS UTETE
ELSON PHIRI
REQUIREMENTS:
Learner Requirements: Stationery and Examination Book
Equipment Requirements: calculator
This paper consists of:
One Section
Please answer ALL questions.
PLEASE READ THE ASSESSMENT RULES AND REGULATIONS THAT FOLLOW
Learners are warned that contravening any of the examination rules or disobeying the
instructions of an invigilator could result in the examination being declared invalid.
Disciplinary measures will be taken which may result in the students’ expulsion from
Damelin.
1
ASSESSMENT RULES AND REGULATIONS
Please ensure that you have read and fully understand the following assessment rules and
regulations prior to commencing with your assessment:
1. To be permitted access to the examination, a learner must arrive with:
- an Identity Document or other official proof of identity (for example,
- a student card, passport or driver's license card with photo); and
- The required exam stationery.
2. No learner may enter the examination room more than 30 minutes after the examination
sitting has commenced and no candidate may leave the room less than one hour after
the examination sitting has commenced.
3. No extra time will be allowed should a student arrive late.
4. All learners must sign the Attendance Register for the examination on arrival.
5. It is the responsibility of learners to familiarize themselves with the examination rules prior
to sitting for the examination.
6. All examinations are to be written on the date and time officially stipulated by the College.
7. It is the responsibility of learners to ensure that they are writing the correct paper and that
the question paper is complete
8. Cell phones must be switched off prior to entering the exam venue. Cell phones and
wallets may be placed under candidates' chairs rather than at the front of the room.
9. Learners may not handle cell phones or wallets during the exam.
10. No weapon of any description may be taken into the assessment room.
11. All personal belongings are to be placed at the front of the examination room. Personal
belongings brought to the examination are at the owner's risk.
12. Smoking is not permitted and learners will not be allowed to leave the examination room
in order to smoke
13. Once the examination has commenced, all conversation of any form between candidates
must cease until after candidates have left the room, after the examination.
14. Only the official College examination book, as supplied by the College, may be used.
15. Learners must ensure that their student number is written on the answer book.
16. Learners are responsible for ensuring that they follow the instructions in the examination
for submitting their answers.
17. Please read the instruction appearing on the examination paper carefully
18. The number of every question must be clearly indicated at the top of every answer.
19. No pages may be torn out of the answer book. All question papers and scrap paper must
be handed to the invigilator after the examination.
20. Learners finishing earlier are to leave the examination room as quietly as possible on the
instruction of the invigilator, and may not talk until outside the building where the
examination is being written.
21. Only under exceptional circumstances will a learner be permitted to leave the examination
room during the examination, and if the invigilator gives permission.
2
QUESTION ONE
FARMING
[80 MARKS]
Edward Darwin, a bachelor and a resident of the republic, retired from his employment as an
office manager of retail firm in Durban at the age of 75 years on 30 June 2016.
Edward Darwin purchased a small farm near Port Shepstone on 1 July 2016, and immediately
commenced farming operations. Details of his receipts, accruals, payments and incurrals for
the 2017 year of assessment follow:
Salary earned from 1 March to 30 June 2016 at R23 400 a month
Pension fund contributions at 5% of his salary
Retirement gratuity from his employer (this is only award of this nature ever
enjoyed by him). It accrued to him on 30 June 2016
A lump sum from his employer’s pension fund (accrued on 30 June 2016)
A lump sum from his employer’s pension fund as from 1 July 2016 at 15 000
a month
93 600
4 680
45 000
610 000
120 000
Dividends from South Africa companies
6 000
Farm purchased (note 2)
1 912 000
Cost of erection of new fences
4 000
Second hand tractor purchased and brought into use on 1 August 2016
72 000
Single-cab bakkie (a motor vehicle) – purchased second-hand on 15 July
49 600
2016 (used solely for farming purpose – used immediately)
Farming expenditure (all deductible in the determination of his farming
14 000
income)
Cash donation to a charity
400
Produce consumed by himself (at cost)
2 700
Cost of irrigation scheme
22 800
Prevention of soil erosion
3 200
Eradication of noxious plants
800
Cattle purchased
-two calves
4 500
-20 cows
180 000
-15 oxen
118 125
Seed purchased
1 200
Fertilisers purchased
2 000
Produce sold
162 900
Cattle sold: five oxen
43 875
Milk sales
182 400
Notes
1. Edward Drawin’s livestock and produce on hand at 28 February 2017 was as follows:
Live stock
-20 cows
-three calves
-10 oxen
Market Values
8 000
3 000
10 000
3
Standard Values
40
4
40
Produced at an estimated cost of R4 400.
The estimated value of growing crops is R11 000.
2. The farm sale and purchase agreement stated that the purchase price of R1 912 000
included R6 000 for standing crops.
3. Edward Darwin has not as yet made the election to be taxed on the so-called average
basis.
Required
Determine Edward Darwin’s 2017 normal tax liability.
Solution
Produce sales
162 900√√
Cattle sales
43 875√
Milk sales
182 400√√
2 700√
Home consumption
Closing stock:
– Calves: 3 × R4
12√√
– Cows: 20 × R40
800√√
– Oxen: 10 × R40
400√√
1 212√√
4 400√√
Produce on hand
-√
Growing crops (excluded)
5 612√
397 487
Less farming expenses deductible in the determination of his farming
taxable income:
Livestock purchases – sufficient farming gross income
– Calves
4 500√√
– Cows
180 000√
√
– Oxen
118 125√
√
Growing crops purchased (in the sale and purchase agreement)
6 000√√
Remainder of purchase price is capital in nature
-√
Feed purchased
1 200√
Fertiliser
2 000√
4
Section 12B: 50 / 30 / 20 capital allowance on the second-hand tractor 36 000√
√
at 50%
Section 12B: 50 / 30 / 20 capital allowance on the single-cab bakkie at 50%
24 800√
√
Farming expenses (all deductible in the determination of his farming taxable 14 000√√
income)
Donations are not to a ‘qualifying’ donee
-
386 625√
10 862√
Soil erosion prevention
3 200√
Noxious plants eradication
800√
4 000√
6 682√
Less capital expenditure:
– Fences
4 000√
– Irrigation scheme
22 800√
26 800√
Deducted only from farming income
6 862√
Carried forward
19 938√
Farming income for the year
6 862√
-
Add other income:
Salary
93 600√
Retirement gratuity (a severance benefit)
45 000√
Less exemption from normal tax (no exemption from normal tax is available)
Pension fund lump sum
-
45 000√√
610 000√
Less deductions (there are no ‘qualifying’ deductions under paragraph 5 of
the Second Schedule)
-
Monthly pension (annuity)
610 000√√
120 000√
Local dividends
6 000√
Less dividend exemption
(section 10(1)(k)(i))
from
normal
tax
from
normal
tax
6 000√
-
Less dividend exemption
(section 10(1)(k)(i))
from
normal
tax
from
normal
tax
6 000√
868 600√√
Less pension fund contributions of R4 680 deductible in full in the
determination of his taxable income since they are less than the maximum
5
deductible amount under section 11(k) of R58 740 (27,5% of R868 600 –
R655 000)
4 680√√√
863 920√
Less severance and retirement fund lump-sum benefits
655 000√
Taxable income excluding severance and retirement fund lump-sum
benefits
208 920√
Schedule tax payable
– On R188 000
33 840√√
– On R20 920 at 26%
5 439√√
Normal tax payable (section 5)
39 279√√
Less rebate (section 6)
– Primary
13 500√
25 779√
Add normal tax liability on the severance benefit
– On R45 000 at 0%
√
25 779√
Add normal tax liability on retirement fund lump-sum ‘retirement’ benefit
taxable income
– On R500 000
-√
– On R110 000 at 18%
53 100√
Normal tax liability
QUESTION TWO
19 800√
45 579√
TRADING STOCK
[50 MARKS]
Washwell Products Limited is a resident of the Republic. It manufactures baths and
washbasins. During its financial year that ended on 28 February 2017, it moved to new
premises. The total cost of the move was R55 000, made up as follows:
Transportation and re-installation of plant
45 500
Removal of office furniture
4 500
Removal of stocks of both raw materials and finished goods
8 000
55 000
6
As a result of the move to new premises, the all-round efficiency of Washwell (Pty) Limited
has been substantially increased. Is the R55 000 expenditure it has incurred deductible in the
determination of its taxable income?
You are required to prepare a report for Washwell Products Limited setting out the normal
tax implications of the R55 000 cost of the move. [50 marks]
To: The Financial Director√
Washwell Products Limited√
From: You√
Report on the R55 000 cost of moving certain assets: √√
In certain circumstances, the cost of re-locating fixed assets on which certain capital
allowances are granted, may be added to their cost.
Plant
The capital allowances that may be claimed on plant are the


section 12C capital allowance, and √
so-called wear-and-tear or depreciation capital allowance (section 11(e)). √
(Also section 12E(1) for a small business corporation.) √
Proviso (v) to section 11(e) specifically includes in the value of the asset for the purpose of
calculating the wear-and-tear or depreciation capital allowance expenditure incurred in
moving an asset from one location to another. √√
Section 11(e) provides that the wear-and-tear or depreciation capital allowance is available
on
‘any machinery, plant, implements, utensils and articles (other than machinery, plant,
implements, utensils and articles in respect of which a deduction may be granted under
section 12B or 12C) used . . .’. √√
Thus, if the plant that has been moved had either had qualified for a section 12B or
section 12C capital allowance, then the R42 500 will not qualify for the wear-and-tear or
depreciation capital allowance. √√
The section 12C capital allowance is also based on a defined cost. This ‘definition’ of ‘cost’ is
set out in section 12C(2) and no specific reference to the cost of moving an asset from one
location to another is provided for in this ‘definition’. (The cost that is dealt with in this
definition is the cost of the asset at that point in time when it is acquired.) √√
Section 12C(6), however, specifically covers instances when costs are incurred in relation to
the asset subsequent to its acquisition. Under this provision the section 12C, a capital
allowance is available on the costs incurred in moving plant from one location to another.
These moving costs are deductible in the determination of taxable income over the
remainder of the period available for enjoying this capital allowance. If the allowance has
7
been enjoyed in full (in other words, the plant has a ‘nil’ tax value) then the moving costs are
fully deductible in the determination of taxable income in the year when they are incurred. √√
The fact that the plant is not new and unused is not a factor in the determination of the
section 12C capital allowance since used plant also qualifies for this allowance.
Office furniture
Office furniture does not qualify for the section 12C capital allowance. The R4 500 incurred
on the removal of the office furniture would therefore qualify for the wear-and-tear or
depreciation capital allowance at the rates normally allowed on office furniture (section 11(e)
proviso (v)). (For a small business corporation an allowance is available in section 12E(1A).)
√√√
Trading stock
The cost of removal of stocks of both raw materials and finished goods of R8 000 is
expenditure of a non-capital nature. This cost is sufficiently closely related to its incomeproducing activities resulting in the R8 000 being deductible in the determination of its
taxable income under the provisions of section 11(a). √
In section 22(3), when defining the method to be used in the determination of the cost price
of trading stock, it is stated that the cost includes √
‘further costs incurred in getting such trading stock into its then existing condition or location’.
The R8 000 incurred on removing trading stock must then be apportioned over those items
that were moved, and added to their cost. √
To the extent that those items are still on hand at its financial year-end (28 February 2017), a
portion of the R8 000 will be carried forward as part of the value of closing stock
(section 22(1)), to be deducted in the determination of taxable income in the subsequent
year. In other words, the expenditure of R8 000 would in effect prove to be deductible in the
determination of its taxable income only as and when the moved items of trading stock are
sold. √
√= 2 marks
QUESTION THREE
CAPITAL GAINS TAX
[20 MARKS]
Winston Templehill is a resident of the Republic.
Winston Templehill has an assessed capital loss of R12 000 brought forward from the 2016
year of assessment.
During the 2017 year of assessment Winston Templehill suffered a capital loss of R95 000 on
the sale of his domestic motor car.
Winston Templehill made gains, as detailed below, on the sale of the following assets:


R80 000 from a rent producing property,
R7 000 from dividend-yielding shares,
8





R1 000 from a krugerrand,
R2 009 000 from his primary residence. It had cost R990 000 and was sold for R2 999
000,
R5 000 from units in a REIT (a so-called real estate investment trust), and
R20 000 from a six metre yacht.
Winston Templehill does not deal in the above assets.
You are required to determine Winston Templehill’s taxable capital gain for the year of
assessment.
Solution
Winston Templehill
Capital gains from
– A rent-producing property
80 000√
– Dividend-yielding shares
7 000√
– A krugerrand (deemed not to be a personal-use asset – paragraph 53(3) of the Eighth
Schedule)
1 000√
– His primary residence
2 009 000√
Less disregarded (paragraph 45 of the Eighth Schedule)
2 000 000√
9 000√
– Units in a REIT (real estate investment trust)
5 000√
– A six-metre yacht (disregarded because it is a personal-use asset – paragraph 53 of the
Eighth Schedule)
-√
102 000√
Less capital loss from
– A domestic motor car (disregarded because it is a personal-use asset – paragraph 53 of
the Eighth Schedule)
-√
Sum of all capital gains and losses
102 000√√
Less annual exclusion (paragraph 5 of the Eighth Schedule)
40 000√√
Aggregate capital gain (paragraph 6 of the Eighth Schedule)
62 000√
Less assessed capital loss brought forward
12 000√
Net capital gain (paragraph 8 of the Eighth Schedule)
50 000√√
Inclusion rate (paragraph 10 of the Eighth Schedule)
× 40%√
Taxable capital gain
20 000√√
9