Question 1 (Marks: 25)
HQ Connect (Pty) Ltd (referred to hereunder as HQC), is a resident company that sells various technological products, including smartphones and tablets. The company is a small business corporation as defined in the Income Tax Act and its financial year ends on the last day of March.
You are provided with an extract of the statement of profit or loss and other comprehensive income of HQ Connect (Pty) Ltd for the year of assessment ending 31 March 2024:
|Sales (60% cash and 40% credit)||3 200 000|
|Cost of sales||1||(900 000)|
|Gross profit||2 300 000|
|Other income||2||180 000|
|Compensation award||3||300 000|
|– Loss of profits||180 000|
|– Damage to machinery||120 000|
|Bad debts||4||(62 000)|
|Provision for doubtful debts increase||4||(7 000)|
|Marketing expenses||5||(323 000)|
|Restraint of trade||6||(500 000)|
|Trademark registration costs||8||(18 000)|
1. Cost of Sales
The cost of sales is made up as follows:
Opening stock (at cost price) R
Add: Purchases 980 000
Less: Closing stock (at cost price) (300 000)
Cost of sales 900 000
The market value of the opening stock is R200 000. The Commissioner accepts this market value as reasonable.
2. Other income
HQC received local dividends from a South African entity of R145 000. The company also received local interest of R35 000.
3. Compensation award
HQC’s compensation award of R300 000 resulted from a fire at its business premises on 20 December 2023. The machinery affected by the fire incurred severe damage and was
deemed irreparable. To replace the damaged machinery, HQC purchased new machinery for R200 000. On 29 February 2024, the new machinery was put into use for manufacturing purposes. The tax value and book value of its damaged machinery at the date of the fire was Rnil, having originally cost R150 000. The machinery had previously qualified for a section 12E(l) deduction equivalent to its full cost (100%) in the year that it was brought into use.
4. Bad debts
The company does not apply IFRS 9 for financial reporting purposes. The doubtful debts have been overdue for a period ranging from 60 days to 120 days. SARS approved an allowance for doubtful debts in the previous year of assessment.
|Total of doubtful debts|
|2024||450 000||26 000||52 000|
|2023||380 000||20 000||45 500|
5. Marketing Expenses
In a campaign to gain exposure and grow its sales, the company launched a campaign which was approved at the shareholders’ meeting. A billboard was erected on the busy highway at a cost of R300 000. The company also rented a billboard that is to be used in the outlying areas of KZN. The rental costs amounted to R23 000 in the current year of assessment.
6. Restraint of trade
On 25 March 2024, HQC made a restraint of trade payment of R500 000 to Mr Engelbrecht, one of their lead engineers. This payment was made to restrict Mr Engelbrecht from competing with the company for a period of two years starting from the date of the payment. However, only R450 000 out of the total payment will be considered as income in the hands of
HQC incurred a late payment penalty of R2 300 from the South African Revenue Service for paying their January 2024 PAYE after the due date.
A trademark was purchased for use over a four-year period for R220 000 during the 2020 year of assessment. The registration of this trademark was renewed on 1 January 2024 for four years at a cost of R18 000.
HQC donated 5 tablets with a cost price of R16 000 each and a market value of R33 000 each, to a local children’s organisation. The company received a valid section 18A receipt.
The depreciation relates to the following assets:
• Second-hand equipment purchased for R132 250 (including VAT) on 02 January 2024.
• Furniture for the company was purchased for a total value of R90 000 on 01 April 2022.
SARS allows the following write-off periods for purposes of section 11(e), according to Interpretation Note No. 47:
• Furniture – 4 years
• Equipment – 5 years
Assume that HQ Connect (Pty) Ltd would like to minimise its normal tax liability for the 2024 year of assessment. The company will make any available elections in order to achieve this and will also duly notify the Commissioner in writing of its election where applicable.
Q.1.1 Calculate the net normal tax payable by HQ Connect (Pty) Ltd for the year of assessment ended 31 March 2024.
Show all calculations and round off all amounts to the nearest rand. Include nil value items in your answer and provide a reason for doing so. (25)
Question 2 (Marks: 20)
Gerald De Beer is a 38-year-old vibrant, outgoing young man who has been employed as a digital artist at InnovateTech Solutions (Pty) Ltd (“InnovateTech”) since 1 May 2019.
Details of Gerald’s remuneration and expenses for the year ended 29 February 2024 are as follows:
• A cash monthly salary of R80 000.
• Gerald receives a monthly travel allowance of R5 000. He drives a Toyota Corolla sedan valued at R300 000 (including VAT). No logbook details were provided to InnovateTech as Gerald did not maintain an accurate logbook. On average, he drives a total of 3 100 kilometres per month, with approximately 2 200 kilometres for business purposes. No deduction will be allowed by SARS as a result of no logbook being maintained.
• InnovateTech provides gym membership benefits to its employees, including Gerald. As part of their wellness program, InnovateTech covers a portion of the gym membership fees for employees who choose to participate. Employees are responsible for a nominal monthly charge of R100, which is deducted directly from their payslip. Gerald was a member of a nearby fitness centre for the entire year of assessment, with a monthly membership cost of R550.
• In addition, Gerald contributes R2 400 per month to InnovateTech’s pension fund. The company also contributes R2 400 per month on Gerald’s behalf.
• Gerald discovered his talent for attentive listening and effectively addressing the concerns of his colleagues and clients. He completed a master course in life coaching in 2020. With his newfound expertise, Gerald started his own life coaching business in the same year, offering consultations both online and in person at a rented office in his local town.
Revenue relating to Gerald’s life coaching business amounted to R462 700 for the year ending 29 February 2024. During the year, Gerald incurred expenses directly related to his business amounting to R136 200.
• Gerald is a provisional taxpayer. He received his 2022 assessment with taxable income of
R1 060 000 on 01 September 2022 and the 2023 assessment was received on 1 December 2023 reflecting taxable income of R1 330 000.
• Gerald accurately calculated and paid his first provisional tax payment at R15 459.
Q.2.1 Calculate the monthly employees’ tax withheld by InnovateTech Solutions (Pty) Ltd from Gerald De Beer’s remuneration.
Show all calculations and round off all amounts to the nearest rand. Include nil value items in your answer, provide a reason for a nil value. (8)
Q.2.2 Calculate Gerald’s second provisional tax payment for the 2024 year of assessment, assuming that he based this payment on an estimated taxable
income of R1 200 000. (3)
Q.2.3 Calculate if any further tax payments are required by Gerald for the 2024 year of assessment and determine the final date of payment to avoid s89quat interest. (7)
Q.2.4 Determine whether any penalty with regards to an underestimate may be applied to Gerald. (2)
Bob Mofokeng (55 years old) created the Mofokeng Family Trust on 15 May 2020, an inter vivos trust to benefit his three children:
|Sara Dladla (married out of
community of property)
Josh Mofokeng (unmarried)
A property complex donated to the trust by Bob Mofokeng at its market value of R2 200 000, on the date of establishment.
Interest-bearing bonds issued by a local bank. These bonds were inherited by the trust from Bob’s late mother. The market value on the date of her death was R1 000 000.
2) The following income accrued to the trust during the 2024 year of assessment:
Net rental income 192 000
Local interest on bonds 128 000
3) The annual distributions approved by the trustee of the trust amounted to the following:
• Sara received an amount of R80 000, paid pro rata out of all trust income.
• Josh received an amount of R80 000, paid pro rata out of all trust income.
• Nelisiwe received a R2 375 monthly annuity, paid pro rata out of all trust income.
The balance of the income was retained in the trust.
4) The trust deed stipulates that any retained rental income vests in equal shares in beneficiaries alive at the end of each year of assessment and will be paid out to the beneficiaries in 2035. Should a beneficiary pass away before 2035, the rental income not yet distributed will be paid to the estate of the deceased person.
Q.3.1 Calculate the Mofokeng Family Trust’s tax liability for the year ended 29 February
Q.3.2 Calculate the taxable income of Bob Mofokeng for the 2024 year of assessment.
Assume that the taxpayers do not earn any other income apart from that provided above.
Show all inclusions and exclusions separately with reasons. (5)
Bob Mofokeng has approached you due to his recent diagnosis of a neurological disorder. He is currently updating his last will and testament and intends to distribute all his assets and related income generated, equally among his children in the event of his death.
He has heard about the potential tax benefits associated with a special trust and is interested establishing such a trust in his last will and testament.
Q.3.3 Advise Bob on whether he may establish a special trust in terms of his will. (3)
Q.3.4 Discuss any possible tax advantages of a special trust compared to an ordinary
Question 4 (Marks: 15)
Liam Patel is a 58-year-old South African resident, married out of community of property to Emily. The couple have been married for the past 20 years and live in Johannesburg. During the current year of assessment, Liam sold or donated the following assets:
1) On 01 August 2023, Liam received distressing news from his brother, Miguel, who was facing financial difficulties and sought Liam’s assistance. Instead of lending Miguel the money to settle his debt, Liam donated the following to his brother, with no expectation of repayment:
• On 10 August 2023, Liam generously donated gold coins with a market value of R300 000 and an original cost of R120 000, to his brother. Miguel had the option to either sell the coins or use them as collateral to secure a loan. Liam paid R40 000 in donations tax by the end of September 2023 with regards to this donation.
• On 15 September 2023 Liam donated R200 000 in cash to his brother. Liam paid a further R40 000 in donations tax by end of October 2023 with regards to this donation.
2) Liam purchased dividend-yielding shares on 08 November 2020 at a cost of R250 000. He purchased them as an investment. He sold them on 31 December 2023 for R400 000.
3) Liam realised a profit of R15 000 from the sale of a Krugerrand, which he had acquired as a hedge against inflation. He sold it because he required cash to purchase an essential asset.
4) Liam acquired the new Havel H22 vehicle for his long-weekend family trips, purchasing it for R480 000. However, he soon discovered that the vehicle’s fuel consumption was less economical than expected. He decided to sell the vehicle, hoping to obtain a reasonable price. Despite his efforts, Liam faced difficulty in securing a satisfactory offer. Eventually, on
15 January 2024, he sold the asset to a general motor dealer for R300 000.
5) On 01 April 2005, Liam purchased a residence for R1 500 000. He used it solely as a primary residence. He sold this house on 01 February 2024 for R4 800 000. Liam and Emily had decided that it was time for them to downsize to a smaller property and purchased another unit in a Sandton complex for R2 500 000.
Q.4.1 Calculate the taxable capital gain to be included in Liam Patel’s taxable income
for the 2024 year of assessment. Provide reasons for any nil effects. (15)
Question 5 (Marks: 20)
The following is an excerpt from a media release issued by the South African Revenue Services on 3 April 2023:
“The South African Revenue Service (SARS) is pleased to announce its preliminary revenue collection results for the 2022/2023 financial year, which reflects a significant growth trajectory over the past few years……”
“The 2023 financial year end results are an important indicator of SARS’ commitment to implementing its legal mandate of collecting all revenue due, promoting a culture of compliance and facilitating legitimate trade……”
“As we start the new financial year, SARS will continue to explore all avenues of revenue collection. The ever-evolving world of work is presenting new opportunities. This changed environment was never anticipated when we designed products to respond to the challenges in the economy.
Naturally, the enabling legislative framework will be amended to keep pace with this new environment. We are therefore, among others, refining our tools to cater for the Gig economy and other areas of the digital economy, including looking at the role of media influencers.”
Sam Brown and Jerry Black are fitness and wellness influencers with a significant online presence. They have amassed a substantial following on TikTok, YouTube, and their personal blog, where they share workout routines, healthy recipes, and lifestyle tips. Throughout the year they earned commissions through affiliate marketing for fitness-related products. They collaborated with various fitness brands for sponsored posts, featured products in their videos and blog posts.
Sam and Jerry sometimes opt for a barter arrangement, exchanging their services for high-end fitness equipment, equivalent in value to their usual sponsored post compensation.
However, the primary source of their income comes from a single fitness company, “FitLife (Pty) Ltd,” with whom they have an exclusive long-term sponsorship deal. More than 80% of their total earnings for the year are derived from this contract with FitLife.
They have decided to formalise their business arrangements and establish themselves as a professional entity. Initially they will employ a social media manager and a bookkeeper.
They are unsure of whether they should operate their business as a company or a partnership, and they want to ensure they are compliant with all relevant tax laws and regulations.
Q.5.1 Discuss the gross income implications of the barter transactions for Sam Brown and Jerry Black. (4)
Q.5.2 Discuss the possibility of Sam and Jerry’s company being a personal service provider, with reference to the definition of a personal service provider. (5)
Q.5.3 If Sam and Jerry’s company meets the definition of a personal service provider, what tax obligation does FitLife (Pty) Ltd have? (2)
Q.5.4 List two (2) measures that SARS could implement to encourage social media influencers to accurately report their income and expenses. (4)
Q.5.5 If Sam and Jerry registered their business as a partnership, would they qualify for the primary tax rebate applicable to individuals? Motivate your answer. (3)
Q.5.6 Briefly explain the purpose of the primary tax rebate. (2)
Answers to Above Questions on Taxation
Answer 1: The calculation of the net normal tax payable by HQ Connect (Pty) Ltd for the year of assessment ended 31 March 2024 is performed as follows:
Get completed answers on the questions above on taxation from the accounting assignment help South Africa experts of Student Life Saviour.
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