TAXATION 3 (ATA311E / ATV311E)

NKUHLU DEPARTMENT OF ACCOUNTING TAXATION 3 (ATA311E / ATV311E) FINAL ASSESSMENT 3 JUNE 2010 ASSESSORS: MS L HIRSCHBECK CA(SA) MRS N STEVENS CA(SA) MODERATOR: MR J OLIVIER CA(SA) TIME: 3 HOURS MARKS: 150 THIS ASSESSMENT CONSISTS OF FOUR QUESTIONS ON NINE PAGES AND 1 ANNEXURE (front cover page included) SILENT NON-PROGRAMMABLE CALCULATORS ARE ALLOWED SHOW ALL CALCULATIONS START EVERY QUESTION AT THE TOP OF A PAGE SHOULD PENCIL OR TIPPEX BE USED ON YOUR ANSWER SHEET THEN IT WILL NOT QUALIFY FOR REMARKING SCRATCH OUT THE OPEN SPACES AND THE BLANK PAGES IN YOUR ANSWER BOOK 1

QUESTION 1 30 MARKS (36 MINUTES) During the 2010 year of assessment Boxer Stores (Pty) Ltd (a South African resident company and registered VAT vendor), a supermarket, commenced with an aggressive marketing campaign in order to increase its market share in the Eastern Cape. All amounts include VAT where applicable, unless stated otherwise. The company spent the following amounts on its various marketing campaigns: Notes R Donation to Peddie Disaster Relief Organisation 1 114 000 Erection of an advertising board 2 228 000 Short message service ( sms ) advertising 3 171 000 Notes: 1) On 15 February 2010 three hundred homes in Peddie were damaged by a storm. The marketing director donated basic foodstuffs to the flood victims (through a registered public benefit organisation), as he considered this to be a good corporate social investment. The public benefit organisation issued a tax certificate to Boxer Stores (Pty) Ltd for this donation. 2) Just before the new Boxer store was opened in Peddie, the company decided to erect an advertising board, which provided the directions and distance to the store. 3) Instead of taking out an advertisement in the local newspaper, Boxer Stores (Pty) Ltd entered into a contract with Sell-See Communications Limited, whereby all mobile phone users would receive an sms advertising the new store when they passed the advertising board. Boxer Stores (Pty) Ltd would pay for this advertising as and when it is used. REQUIRED Discuss the tax deductibility of each of the above expenses incurred by Boxer Stores (Pty) Ltd during the 2010 year of assessment. 2

QUESTION 2 80 MARKS (96 MINUTES) Zakumi Fever (Pty) Ltd is the sole owner of the marketing rights to the FIFA World Cup to be held in South Africa during 2010. The company is a registered VAT vendor and only makes taxable supplies. The company has a June year end. All amounts exclude VAT where applicable, unless stated otherwise. An extract of the company s financial records is provided below: Notes R Sales 2 183 456 Less: cost of sales 1 005 937 Opening stock 70 376 Purchases 1 3 498 652 3 569 028 Less: closing stock (2 563 091) Gross profit 1 177 519 Other income Dividends 3 57 000 Interest 4 2 038 Lease premium 5 40 000 Lease rentals 5 60 000 1 336 557 Less: expenses Advertising 6 45 987 Annuity dependant of former employee 2 13 000 Bad debts 7 20 000 Closing fee 8 23 762 Dividends 3 330 000 Depreciation 9 3 250 Electricity 276 Fine 10 200 Legal fees 11 10 131 Medical contributions 12 723 000 Pension fund contributions employer portion 13 150 000 Prepaid expenses 14 70 000 Provision for financial year end party 25 000 Restraint of trade 15 800 000 Net loss before tax (878 049) 3

The following additional information is provided: 1) Trading stock The company received a large shipment of mascots from a Chinese supplier. The managing director took trading stock for his private use. The trading stock taken by the managing director cost R41 200 (including VAT) and had a market value of R34 200 (including VAT). 2) Annuity Mrs Olding (the wife of a former employee, who was killed in a delivery accident) receives an annuity of R13 000 per annum from the company. Mrs Olding is disabled and was dependent on her husband. 3) Dividends Information on the dividends received and paid by Zakumi Fever (Pty) Ltd is shown below: Dividends received R Dividends received from Jordan Limited (a South African company) on 1 July 2009 20 000 Dividends received from Splatter Limited (a Swiss company) on 28 September 2009. These dividends were not exempt from normal tax under section 10(1)(k)(ii), and not excluded from foreign dividends under section 12 000 64B(3A)(d). Dividends received from Soccer Fun (Pty) Ltd (a South African company) on 14 December 2009 10 000 Total dividends received 42 000 Dividends paid and accrued R Interim dividend declared on 15 July 2009 to all shareholders registered on 31 July 2009 10 000 Preference dividend declared and paid to all shareholders registered on 20 000 28 February 2010 Final dividend declared on 30 December 2009 to all shareholders registered on 28 February 2010 300 000 4

Total dividends paid and accrued 330 000 The last dividend (in the previous dividend cycle) was declared on 1 July 2009. The company has an STC credit of R5 000 carried forward from the previous dividend cycle. 4) Interest The company received R2 038 from SARS on a VAT overpayment. 5) Lease The company owns a warehouse which it leases to Tiger Dots CC. Tiger Dots CC paid a lease premium of R40 000 to Zakumi Fever (Pty) Ltd when it signed the long-term lease agreement on 1 January 2010. In terms of the lease agreement with Tiger Dots CC, leasehold improvements (to the value of R400 000) were completed by 30 June 2010. The monthly lease charge is R10 000 and the period of the lease is six years. 6) Advertising Included in the advertising expense is a donation of R450 to a children s home, DetiDom CC. A section 18A tax certificate was not issued by DetiDom CC. 7) Bad debts Bad debts comprise: R General provision for doubtful debts 15 000 Employee loan the employee died on 28 May 2010, and the human resources manager decided to write off the deceased s loan 2 000 Bad debts relating to an insolvent debtor 2 500 Bad debts the financial manager forgot to write off these bad debts in the 2009 year of assessment 500 20 000 8) Closing fee The closing fee is for a bribe paid to a sales manager at a FIFA outlet to ensure that Zakumi Fever (Pty) Ltd s stock was offered to foreign tourists before any other competing brands. 9) Depreciation This is the final depreciation charge on an i-pod. Tax allowances on the i-pod were allowed in full in the previous tax year. 5

10) Fine This is an amount paid to the Buffalo City Municipality Traffic Department for the managing director exceeding the speed limit on the North East Expressway on the way to a FIFA meeting. 11) Legal fees Legal fees comprise: R Conveyancing fees for transferring a property purchased by Zakumi Fever 2 750 (Pty) Ltd Fees paid to a debt collection company 7 381 10 131 12) Medical contributions The company paid R723 000 towards post-retirement medical aid contributions. This was a lumpsum payment directly to Mr Subo, a retired employee, for his post-retirement medical aid contributions. 13) Pension fund The company paid a once-off payment lumpsum of R150 000 to a pension fund on behalf of its employees during the current year of assessment. The total salary costs (approved remuneration) of the company s employees amounted to R1 300 000. 14) Prepaid expenses The annual insurance premium (due for renewal on 1 July 2010) of R79 800 (including VAT) was paid in advance to SureSure Brokers Limited on 30 June 2010. 15) Restraint of trade payments a) A restraint of trade payment of R300 0000 was made to Chinkumi Limited. Chinkumi Limited is a Chinese company that agreed not to make soccer world cup mascots for a period of two years. b) A further restraint of trade payment of R500 000 was made to Dotty Katz (a former employee). This restraint of trade agreement stipulates that Dotty Katz will not open a mascot shop anywhere in South Africa for a period of five years. 6

16) Assessed loss The company has an assessed loss of R823 508 carried forward from the 2009 year of assessment. REQUIRED 1) Calculate Zakumi Fever (Pty) Ltd s STC liability on the above dividends declared. Your answer must state clearly the reasons for the inclusion or exclusion of the dividend in the calculation. Clearly indicate the start and end dates of each dividend cycle and state the date that each STC payment is due to be paid to SARS. (14) 2) Discuss and calculate the normal tax liability of Zakumi Fever (Pty) Ltd for the 2010 year of assessment. Start your calculation with net loss before tax. Where an amount has no effect on taxable income, it should clearly be indicated with a NIL. You should provide brief reasons for each of your adjustments to net loss before tax. (59) [Round your answers to the nearest Rand] 3) Write a short letter to Zakumi Fever (Pty) Ltd regarding the provisional tax payments that it should make for the 2010 year of assessment. Also indicate the due dates for these provisional tax payments. (7) 7

QUESTION 3 23 MARKS (28 MINUTES) Gotcha CC, a South African resident, is a manufacturing enterprise based in East London (South Africa) that commenced trading on 1 March 2009. Mr Billabong is the only member and manager of the business. He does not own shares in any private or public companies. The CC is a registered VAT vendor and only makes taxable supplies. Gotcha CC is not a small business corporation as defined for tax purposes. Gotcha CC would like to defer the payment of tax wherever possible. All amounts include VAT where applicable, unless otherwise stated. Mr Billabong provides you with the following information relating to transactions that occurred during the CC s financial year ended 28 February 2010: 1. Sales comprise both cash (R400 000) and credit sales (R500 000). Both amounts exclude VAT. 2. South African interest received on a fixed deposit, R1 500. 3. Manufacturing machines: 3.1 Machine A was destroyed in a fire (which occurred in the factory) on 1 June 2009. The original cost (paid in cash) on 1 March 2009 (purchased second-hand from a non-vendor) was R297 540 and the machine was brought into use immediately. Insurance proceeds of R342 000 were received by Gotcha CC on 1 September 2009. 3.2 On 1 January 2010 a new machine (Machine B) was purchased to replace Machine A. This machine was purchased under a 36-month suspensive sale agreement from a local dealer who was also a registered VAT vendor. The monthly instalment was R15 000. Had the CC purchased the machine for cash, it would have paid R433 200. The machine was brought into use directly in a process of manufacturing on 1 February 2010 to replace machine A that was destroyed. (A yield-to-maturity of 1,24331% applies to this monthly accrual period). REQUIRED Discuss and calculate the VAT and normal tax implications relating to Machines A and B. Provide reasons for your calculations. (23) [Round to the nearest Rand]. 8

QUESTION 4 17 MARKS (20 MINUTES) The Property Company (Pty) Ltd, a South African resident, is involved in different activities within the property industry. It comprises Divisions A, B and C. Division A performs an estate agency function (searches for relatively inexpensive residential and commercial properties and resells them at a profit). Division B is involved in property development (in and around the Eastern Cape). Division C is the commercial division, comprising properties used as shopping complexes and office buildings. All the divisions within the company are separately registered as VAT vendors. The company makes both taxable and non-taxable supplies. The different divisions operate from one premises (based in Queenstown, South Africa), but are managed on different accounting systems and operate different bank accounts. The company has a February year end. During the 2010 year of assessment, The Property Company (Pty) Ltd s tax consultant died and they require your knowledgeable advice on the following property-related transaction. All amounts include VAT where applicable, unless otherwise stated. The Property Company (Pty) Ltd purchased a block of six flats in Queenstown on 5 September 1995 on auction. The property was severely dilapidated (falling apart) and as a result, all tenants had left the building. The flats originally cost the company R500 000 in total. The Property Company (Pty) Ltd paid transfer duty of R45 000 on this amount at the time of purchase. The market value of the property on 1 October 2001 was R1 300 000. In March 2007, the company started repairing and improving the flats and let it to tenants. The company replaced all the cupboards and windows (which were rotten) and the roof (which was damaged in a hailstorm) at a total cost of R100 000. The Property Company (Pty) Ltd improved this property by building a swimming pool at a cost of R60 000. The Property Company (Pty) Ltd eventually sold this property on 30 September 2009 for only R900 000 (due to the current property market conditions in Queenstown). The property was not trading stock for income tax purposes. REQUIRED Discuss and calculate the income tax implications for The Property Company (Pty) Ltd on the disposal of this property. [Round to the nearest Rand] 9

ANNEXURE 1 PRESENT VALUE OF R1 PER ANNUM CAPITALISED AT 6% OVER FIXED PERIODS Years Amount 0.5 0.971 1 0.943 1.5 0.916 2 0.890 2.5 0.864 3 0.840 3.5 0.816 4 0.792 4.5 0.769 5 0.747 5.5 0.726 6 0.705 6.5 0.685 7 0.665 7.5 0.645 8 0.627 8.5 0.609 9 0.592 9.5 0.575 10 0.558 10