QUESTION 1 (40 marks)

Tech Innovators (Pty) Ltd (‘Tech Innovators’), incorporated in South Africa in 2005, is a local technology company that specialises in developing innovative software and hardware products. They offer a wide range of services, including software development, IT consulting, and hardware design. Tech Innovators has a February financial year-end. The company is not a small business corporation as defined for normal tax purposes.

Below is an extract of the statement of profit or loss and other comprehensive income of Tech Innovators for its 2024 financial year-end.

Notes:

1. The R23 000 interest accrued is from the business bank account held with a South African bank.

2. Tech Innovators purchased a cutting-edge drone for its research and development team’s use on 1 June 2022 at a cost of R80 000 and was brought into use on the same date. The drone was an essential tool for testing and improving their aerial surveying software. On 31 January 2024, after extensive testing and upgrading of their technology, Tech Innovators decided to sell the drone to one of their top clients who specialises in aerial data analysis for R50
000. Assume that SARS allows a write-off period of 3 years for drones. For accounting purposes, the company depreciated the drone over 4 years.

3. The R30 333 depreciation expense was recognised in accordance with the accounting policy of Tech Innovators on the following assets:
A depreciation expense of R18 333 for the drone purchased (see note 2 above)
Tech Innovators purchased a new manufacturing machine to enhance their hardware design capabilities. The machine was purchased on 1 September 2023 for R120 000 and was immediately brought into use. This acquisition aligns with Tech Innovator’s commitment to advancing technical capabilities and delivering innovative solutions to their clients. For accounting purposes, the company depreciated the manufacturing machine over 5 years.

4. Tech Innovators developed groundbreaking proprietary software that revolutionises the field of artificial intelligence in various industries. Tech Innovators incurred capital expenditure of R250 000 in research and development costs. The Minister of Science and Technology approved this research and development expense under the provisions of section 11D(9).

5. On 31 July 2023, Tech Innovators was granted a South African patent for this invention and used this patent in their trade. To complete the patent registration process, Tech Innovators paid legal expenses amounting to R15 000, which was not recorded in their financial records. The patent protection grants Tech

Innovators exclusive rights to their software for a period of 20 years from the date of registration.

6. On 1 February 2024, Tech Innovators entered into a new lease agreement for their office space which is utilised for trading purposes. The agreement stipulates that Tech Innovators must pay the 12 months’ rent in advance on the date of signature of the contract. The monthly rental is R20 000. (R20 000 x 12 = R240 000)

7. Salaries and wages comprise the following:
a. The total amount paid to employees in net salaries and wages was R450 000.
b. Byte Bards joined Tech Innovators as a full-time learner on 1 January 2024, receiving a salary of R12 000 per month (which formed part of net salaries and wages expense in 7.a). Byte Bards has a disability and has an NQF level 7 qualification. Byte Bards entered into a registered learnership agreement with Tech Innovators for two years. The agreement adheres to all the specifications of the Skills Development Levies Act and is registered with the relevant SETA. No recording was done in Tech Innovator’s books for this learnership agreement transaction.

8. Speeding fines of R4 000 were deducted which the directors consider to be a normal business expense.

9. R200 000 was paid by Tech Innovators to Nova-Tech Solutions (Pty) Ltd (‘Nova- Tech Solutions’) (a local technology company) after signing an agreement that Nova-Tech Solutions will not open any of its stores within a 50 kilometres radius of Tech Innovators’ store. Nova-Tech Solutions is not a personal service provider as defined in par 1 of the Fourth Schedule.

10. On 1 March 2020, Tech Innovators purchased computer equipment for a total cost of R150 000. They decided to donate the computer equipment to “Little Coders,” an educational charity focused on teaching coding and technology skills to underprivileged children. The market value of the donated computer

equipment was assessed at R40 000 on 29 February 2024, the date of the donation. Tech Innovators obtained a section 18A receipt from Little Coders.

REQUIRED:

Calculate, with references to the relevant sections of the Income Tax Act where applicable, the taxable income of Tech Innovators (Pty) Ltd for the 2024 year of assessment. Start with the profit before tax of R2 105 000. Add back any accounting entries.
Please ensure that your response includes clear documentation or indication when no adjustments are required. Ignore any capital gains tax and VAT implications.

Please use the following structure to format your answer to Question 1:

QUESTION 2 (38 marks)

GreenTech (Pty) Ltd (“GreenTech) is a South African resident company specialising in the development and distribution of renewable energy technologies. GreenTech has a December year-end (and year of assessment).

You are a tax consultant assisting with the tax administration of GreenTech. You have been approached by Mr. Green the sole shareholder and director of the company, to assist with some tax-related queries.

GreenTech has concluded the following transactions for the year of assessment ending 31 December 2023:

1. Penalties and interest amounting to R150 000 because GreenTech failed to pay Unemployment Insurance Fund (UIF) contributions.

2. On 1 July 2023, GreenTech obtained the exclusive rights to distribute a cutting- edge solar energy technology product for a duration of three years within the Cape Town region. The procurement cost for this exclusive right amounted to R375 000.

3. As a leader in advanced solar panel technology, GreenTech conducts workshops to educate customers about solar panel installation. Negligence on GreenTech’s part led to a participant’s severe hand injury during a workshop. An investigation found inadequate safety measures caused the accident. GreenTech was held liable and had to pay R80 000 for medical expenses and damages to the injured individual.

4. One of the wind turbines of GreenTech started showing signs of reduced performance due to prolonged use and exposure to varying weather conditions. The turbine’s blades showed slight wear and a buildup of debris, affecting its energy capture efficiency. GreenTech’s maintenance team promptly repaired these damages, ensuring the blades were restored to their original condition. The cost of repairing the components amounted to R120 000. GreenTech also decided to upgrade the turbine’s control system with advanced sensors and monitoring technology amounting to an additional cost of R100 000.

5. In December 2022, GreenTech provided renewable energy equipment to a client on credit, valuing the transaction at R40 000. Unfortunately, the client defaulted on payment, leading GreenTech to classify the amount as a bad debt. GreenTech did not claim the bad debt amount as a deduction during the 2022 year of assessment. GreenTech claimed the bad debt deduction of R40 000 during the 2023 year of assessment.

6. GreenTech ordered essential components amounting to R80 000 for one of their solar power systems in December 2023. The invoice was generated on 10 December 2023, however, due to logistical considerations, the delivery of the components only occurred on 25 January 2024. The payment was made on 31 January 2024.

7. GreenTech contributed R380 000 on behalf of its employees to a pension fund during the 2023 year of assessment.

8. GreenTech erected housing facilities on one of their renewable energy farms. Five residential apartments were erected to accommodate the plant managers responsible for overseeing the operations of the technologies due to the impracticality of them commuting from their homes on short notice. GreenTech offered these residential apartments free of charge to the managers. The cost for each residential apartment amounted to R300 000.

REQUIRED:

Discuss briefly, with reference to the relevant sections of the Income Tax Act, separately the deductibility and the value of all the expenses (notes 1 – 7) incurred by GreenTech (Pty) Ltd for the 2023 year of assessment.
Ignore any capital gains tax and VAT implications.

Discuss the allowance that GreenTech may claim for the year of assessment ending 31 December 2023, arising from Note 8.
Support your answer with calculations.
Support your answer with references to the Income Tax Act.
Remember to first state the relevant requirements of the Income Tax Act, whereafter you apply the requirements to the facts of the scenario. (10 marks)

QUESTION 3 (7 marks)

HydroFlow Ltd (‘HydroFlow’) is a dynamic water technology company that pioneers innovative solutions for water management and conservation. Founded by a team of visionary experts, the company’s cutting-edge technologies address global water challenges.

During the 2023 year of assessment, SARS allowed HydroFlow Ltd to claim a doubtful debt allowance of R95 000.

During the 2024 year of assessment a total impairment loss allowance (IFRS 9 loss allowance) of R300 000 was determined by HydroFlow in terms of IFRS 9. It consisted of R100 000 measured at an amount equal to the lifetime expected credit loss and R200 000 measured at an amount equal to the 12-month expected credit loss. HydroFlow has never received any income from lease contracts.

REQUIRED:

Calculate the effect on taxable income in respect of the doubtful debt allowance in terms of section 11(j) of the Income Tax Act for HydroFlow Ltd for the 2024 year of assessment. (7 marks)

QUESTION 4 (15 marks)

Sunrise Artistry (Pty) Ltd (‘Sunrise Artistry’), a resident of South Africa, manufactures exquisite home decor items. The 2024 year of assessment of Sunrise Artistry ended on 29 February. Throughout the 2024 year of assessment, the company carried out the below transactions. Sunrise Artistry will elect any option available that will defer its normal tax liability.

Factory premises
An additional factory building was erected by Sunrise Artistry at a cost of R4 000 000 and was brought into use on 1 December 2023.

Administration offices
As a result of the expansion of Sunrise Artistry’s team, the company acquired a new administrative office space from a property developer for a total cost of R3 500 000 on 1 October 2023.

Manufacturing machines
A manufacturing machine, (Machine A) was destroyed by a fire on 30 June 2023. The second-hand machine A was originally purchased for a cost of R80 000 on 1 January 2023. The insurance payment received was R60 000. This machine was replaced by a new machine, (Machine B), which was purchased for R70 000 on 1 August 2023 and brought into use on the same day.

REQUIRED:
For all of the above transactions, calculate the capital allowances that need to be taken into account in the calculation of Sunrise Artistry (Pty) Ltd’s taxable income for the 2024 year of assessment.

Support your answer with references to the Income Tax Act. Round to the nearest rand.
Ignore any capital gains tax and VAT implications.

Answers to Above Questions on Taxation of Business Activities

Answer 1: The taxable income of Tech Innovators (Pty) Ltd for the 2024 year of assessment is calculated as follows:

Get answers on the taxation questions above from do my assignment South Africa experts of Student Life Saviour.