Irene Moises is ordinarily resident in Kenya. Irene came to South Africa on 01 March 2020 to study Medicine at the University of Pretoria. Irene had never been to South Africa before. Irene stays at the University’s residence, Erica (“Res”) and shares a room with Monica De Wet. On 23 March 2020, the president of South Africa, Cyril Ramaphosa announced that South Africa would be on lock down from 26 March 2020 because of the Covid-19 pandemic. Irene was too scared to fly back home to Kenya and decided to stay in South Africa. On 1 April 2020, Irene and Monica decide to incorporate a South African company that they registered as Irenica Masks (Pty) Ltd (“Irenica”). The company was registered on 2 April 2020. Irenica’s business is to manufacture and sell surgical masks. Irene and Monica are its only two shareholders and directors.
On 05 April 2022, South Africa’s National State of Disaster was lifted. Irene got exempted from writing all of her exams because of the good marks she received. Consequently, as Irene did not have any exams, on 1 June 2022, she went home to Kenya to see her family for the whole of June. She returned to South Africa on 01 July 2022. She has not left South Africa ever since (1 July 2022 to date).
On 1 April 2022, Irenica declared and paid dividends of R20 000 to each, Irene and Monica. Due to a decline in the purchase of surgical masks, Irenica started operating at a loss. On 01 November 2022, Irene sold all her shares in Irenica to Roxanne Jacobs, a South African resident for R10 000.
Irene heard from her friend from Res that you are a law student and that you are currently enrolled for Tax Law. On 01 March 2023, she meets up with you at Adlers Restaurant for some tax advice.
WHAT IS REQUIRED OF YOU?
Based on the above set of facts, advise Irene on all of the South African income tax implications (if any) applicable to her for the 2022/2023 year of assessment.
QUESTION 2 (20 marks)
Queenie Zodwa is a 25-year old Venda woman originally from the Vhembe district in Limpopo, South Africa. Queenie moved to Pretoria when she was 20 years old to study Bcom Entrepreneurship at the University of Pretoria. Queenie’s mother is a retired agricultural worker who is dependent on social grants. During April 2022, Queenie graduated from the University of Pretoria. Since her first year, Queenie was a NFSAS student. In her first year, Queenie learned about the importance of savings and the detrimental effect of consumerism among young South Africans. Taking to heart what she has learned, Queenie never bought food on campus but packed a healthy lunch box. Furthermore, Queenie never partied, nor spent her money on clothes and gadgets. Instead, Queenie saved as much as possible. In her third year, Queenie worked as a tutor for the University of Pretoria. She invested her salary in an interestbearing account.
During May 2022, Queenie attended a Home-Makers Fair at Menlyn Mall where she got inspired to start her own business to make affordable Jam-Jar candles to compete against the very expensive equivalent Jam-Jar candles imported from the United States of America.
Queenie withdrew all her savings and commenced with business on 1 August 2022. Soon after commencing with business, Queenie entered a long-term supply agreement with Linen Avenue, a famous retail home décor outlet. In terms of the agreement, Queenie must deliver 200 000 units of Jam-Jar candles per month.
Queenie supplies the Jam-Jar candles, and Linen Avenue puts their own logos and designs on the jars. On the bottom of the jars the following words appear-
“Specially manufactured for Linen Avenue by Queenie Candles, South Africa”
Based on the success of her business, the elders from the Vhembe district reminded Queenie of her responsibilities towards the community. As a result, Queenie deposits an amount of R20 000 in her mother’s account every month as ‘black tax’.
On 1 September 2022, the trademark holder for the expensive Jam Jar candles imported from the United States of America instituted legal action against Linen Avenue and Queenie Candles for trademark infringement.
Queenie’s lawyers negotiated with the trademark holder that Queenie simply manufactured the candles in generic jam jars and that Queenie is in no way involved in the product signage, design, slogans, name, or marketing whatsoever. The trademark holder subsequently withdrew its case against Queenie.
After reaching a settlement with the trademark holder, Linen Avenue informed Queenie that they are, in terms of the settlement, prohibited from selling candles in jam jars. However, they still want to sell Queenie’s candles, just in a different container.
Queenie employed twenty additional staff to remove the candle wax from the jam jars and to put it in different glass containers. Unfortunately, because of the paraffin content in the candles, it could not be melted and removed from the jam jars. Each jam jar had to be broken, and the candle removed by hand. As a result, Queenie could not return the jam jars for a refund or reuse it for something else. However, a recycling depot agreed to buy the broken glass from her.
While putting the broken glass in a skip to take to the recycling depot, Queenie did not pay attention and she cut her hand. The glass damaged a major artery. As a result of load shedding, there was no mobile signal. The mobile network tower batteries were stolen the night before. Despite all their efforts, her staff could not stop the bleeding or get help. Queenie passed away on 15 November 2022.
WHAT IS REQUIRED OF YOU?
a) Shortly before her death, Queenie requested you for written advice on whether or not she may deduct the monthly payments to her mother from her gross income. [10 marks]
b) In her will, Queenie has appointed you as the executor for the estate and her mother as the only person to inherit. Explain how, for tax purposes, you will treat the following transaction-
On 1 November 2022, Queenie entered a rental agreement with Bottle-It for a bottle manufacturing machine so that she can manufacture her own unique candle jars. In terms of the agreement, Queenie must pay an ‘exclusivity’ fee of R100 000 for the machine to be set-up to manufacture the jars in Queenie’s unique design. As Bottle-It already set-up the machine and delivered it at Queenie’s warehouse, you were unable to cancel the agreement without incurring additional penalties. You paid the R100 000 on 11 December 2022. [10 marks]
QUESTION 3 (10 marks)
A new client, Mrs Naidoo comes to your office for a consultation. She has two separate matters that she needs your advice on as set out in QUESTION 3 and QUESTION 4.
Mrs Naidoo is a sole proprietor of a floral business, Blooming Beautiful. She specialises in unconventional and extravagant floral arrangements for weddings. She is a tax resident in South Africa. She shows you her Instagram page, which has a large following (152k followers). She mainly does weddings in the winelands in the Western Cape area and makes use of very unique and rare flowers in her floral arrangements.
In September 2021, a bride from New Delhi, India contacted Mrs Naidoo. The bride engaged with Mrs Naidoo to do the flowers for her wedding at Blaauwklippen wine farm in Stellenbosch which is scheduled from 4 March 2022. The wedding was a three-
day Indian inspired wedding, with different flower arrangements for each day of celebrations.
Mrs Naidoo is very proud of the wedding flowers and she shows you a photo, from her Instagram of the flower arrangements that she has made for the reception.
Before the wedding, Mrs Naidoo considered the potential of meeting potential wealthy clients. She figured that, in order to win over potential clients, she must create a professional impression. For this purpose, in February 2022, prior to the wedding, she has her teeth whitened for R4 500, she has her hair highlighted and cut for R2 000 and she purchased a brand-new outfit at a designer store in Sandton for R4 000. She claimed these expenses as deductions in her tax return for the 2022 year of assessment.
On 8 June 2023, Mrs Naidoo is at a braai and strikes up a conversation with a stranger. She finds out that his name is Mr. Sibandu and that he works in the SARS audit team. She starts telling him about her business and how she got many new clients from an Indian wedding she did last year and that the costs she incurred to look her best at the wedding really paid off. “Luckily it was deductible for tax purposes”, she says breezily. Mr. Sibandu directs that, just based on what she told him, those expenses sound like
personal expenditure and if they were not expended for purposes of her trade, it would constitute non-deductible expenditures. He further points out that she could face interest and penalties due to these erroneous deductions claimed. They don’t have a chance to finish the conversation as Mr. Sibandu is called away by the host to carve the lamb spit braai.
Mrs Naidoo was concerned after the conversation with Mr Sibandu at the braai. When she asks the host if he can share Mr Sibandu’s work email address so that she can request further advice on the matter, she finds out that he is no longer employed at SARS, he resigned the following Wednesday after the braai.
She decides to do her own research on how she can correct the matter. She sees an option on SARS’ website where one can request to enter into a voluntary disclosure programme (“VDP”) with SARS in terms of section 226 of the Tax Administration Act. She is, however, hesitant as to whether this is a successful option for her matter and has, therefore, booked this consultation with you.
You point out that you agree with what Mr. Sibandu had said to her at the braai regarding her expenditure being private expenditure and that she incorrectly deducted it in the relevant tax return. Mrs Naidoo accepts this answer and asks for your professional advice regarding resolving the error.
WHAT IS REQUIRED OF YOU?
Advise Mrs Naidoo, with reference to relevant case law and legislation, if a VDP would be a valid option, and advise her on the chances of SARS accepting her application to enter into a VDP. DO NOT DISCUSS THE DEDUCTIBILITY OF HER EXPENDITURE SHE HAD CLAIMED.
QUESTION 4 [30 MARKS]
Given the previous matter that Mrs Naidoo consulted you on, she is disinclined to do her own future tax returns without the sign-off by a qualified tax attorney.
She asks for your advice and assistance regarding her personal taxable capital gain for the 2022/2023 year of assessment.
She shares the following information with you in this regard:
a) Mrs Naidoo sold her house in Bryanston on 15 October 2022 for R4 700 000. She originally purchased the house in 2007 for R1 900 000. During the period she lived there, she had redone/upgraded the kitchen and bathrooms for R200 000, replaced all the window frames in the house for R80 000 and installed solar panels for R170 000.
b) Mrs Naidoo transferred 1000 listed shares to her husband, Mr. Naidoo with whom she is married out of community of property. She bought the shares in 2019 for R15 per share. The market value of the share on the date she transfers it is R28 per share. Mr. Naidoo is a South African tax resident.
c) For their anniversary, the Naidoo’s went to Sun City and stayed in the Palace hotel from 2 December 2022 – 5 December 2022. They went gambling at the Sun City casino one night and Mrs. Naidoo won R32 000 on the slot machines.
d) Mrs. Naidoo’s work computer “crashed” on 19 September 2022 and she did not want to spend money to replace it so she decided to start using her personal laptop as her new work computer from 21 September 2022. The market value of the laptop on that date is R18 000.
e) Mrs Naidoo sold her 12-meter boat on 6 August 2022. She and her husband solely used the boat for recreational purposes. She initially purchased it for R950 000 in 2018 and she sold it to a third party for R1 400 000.
f) Mrs Naidoo is a beneficiary of a South African trust, the Naidoo Family Trust. The Naidoo Trust, in turn, is a beneficiary of another Trust, the Thaba Nchu Trust. During April 2022, the Thaba Nchu Trust sold certain of its trust owned assets. The disposal of these assets triggered a capital gain of R1 200 000 in the hands of the Thaba Nchu Trust. The Thaba Nchu Trust distributed the capital gain to the Naidoo Family Trust, who, in turn, distributed the gain to its beneficiary, Mrs Naidoo, in the same tax period. She is unsure if she should declare the gain received in her own tax return.
WHAT IS REQUIRED OF YOU?
Advise Mrs. Naidoo on the capital gains tax implications on each of these separate transactions with reference to relevant legislation, and where applicable, case law.
Answers to Above Questions on Law
Answer 1: Based on the information given above in relation to Irene, the South African Income Tax implications that are applicable or discussed as follows:
Residential status: An analysis of the given case of Irene indicates that Irene is not a resident of South Africa for tax purpose and is considered as a resident of Kenya. And is considered as a resident of Kenya. However she is in South Africa for an extended period, and based on this, she can be considered as deemed to be residence for tax purposes in South Africa.
Get completed answers on the above questions on taxation as offered by the accounting assignment help South Africa experts of Student Life Saviour.
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