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TAXATION 302
QUESTION ONE
Refer to the six (6) situations below and answer the questions that follow:
Roya Salon
Roya Salon, the local hairdresser, paid damages to two of his customers. Both are suffering as a result of his faulty equipment.
- Maude was burnt by a hairdryer, while
- Mary suffered an electric shock
Workman Attorneys
Workman Attorneys a firm of attorneys, paid compensation to a client for the maladministration of a family trust account.
Hyper Store
Hyper Store remained open on a public holiday. It was subsequently fined for trading. Mike Singh, its proprietor, was also fined for contravening price control regulations.
Volane Dry Cleaners CC
Compensation was paid to one of his customers by Volane CC, the owner of a dry-cleaning business, for the loss of two suits that had been entrusted to his care by this customer.
Stone Construction Limited
Ten years ago Stone Construction Limited erected a block of flats for a client in accordance with the client’s specifications. The block was completed and handed over to the client. The contract consideration was settled in full.
During Stone Construction Limited’s 2018 year of assessment the external walls of the block revealed dampness. It was then discovered that the walls had not been built according to specifications. Its client instituted an action against it for damages. It then settled the damages.
Bold Gas Supplies
Bold Gas Supplies is involved in the retailing of gas and petrol lamps. They recently sold a lamp to Chester under a guarantee. This particular lamp exploded causing injuries to Chester. He then paid damages to Chester.
Required:
In each of the above situations, determine, giving full reasons, whether the expenditure would be deductible from the respective taxpayer’s income.
QUESTION TWO
Taxes may be broken down into two general categories, being direct taxation and indirect taxation.
You are required to distinguish between direct taxation and indirect taxation and provide examples for each category.
QUESTION THREE
You have been approached by a friend of the family, Lucas, who has asked you to assist in providing some tax advice.
Lucas emigrated from South Africa in 2001 fearing the country would end up in turmoil. He runs a very successful tyre business in Australia. He visits South Africa on an occasional basis but has no intention of returning permanently to South Africa. He enjoys the summers here, and has spent the following time in South Africa since emigrating:
| 2012 | – 32 days |
| 2013 | – 92 days |
| 2014 | – 89 days |
| 2015 | – 204 days |
| 2016 | – 92 days |
| 2017 | – 108 days |
| 2018 | – 257 days |
| 2019 | – 265 days |
He expects to spend 91 days in South Africa in the 2020 tax year.
He also purchased a piece of vacant land in Camps Bay for R1 million in 2012. The property is fairly large (1 acre) and Lucas wanted to build a modest house. He had the intention of using the house for three to five months in the summer months and letting it for the other months of the year. He is also 26 in South Africa regularly on business. Whilst holidaying here in January 2019, he was discussing the worsening crime situation, and the increase in security estates.
He decided that he could subdivide the property, secure the perimeter of the property, and build six homes. These would then be marketed as secure clusters with ocean views at R1 million each. Lucas estimates that the cast of subdividing and securing the perimeter would be R1.2 million. All costs would be funded by borrowing from a bank.
Required:
Draft a letter to Lucas detailing:
- Whether Lucas is a resident for tax purposes in South
- Whether the development of the property would result in income of a revenue or capital
- Whether he would be able to deduct all his costs from any profit
- Whether the effect that Lucas’ residence status may have on the property transaction in 3.2.
QUESTION FOUR
- John Doe is a resident of the republic. He has an assessed capital loss of R13 000 brought forward from the 2018 year of assessment. During the 2019 year of assessment he suffered a capital loss of R45 000 on the sale of his domestic motor
He made capital gains on the sale of the following capital assets:
- R80 000 from a rent-producing property;
- R7 000 from dividend yielding shares;
- R5 000 from units in a so-called real estate investment trust; and
- R20 000 from a six-metre yacht (a personal-use asset).
It must be noted that John Doe does not deal in the above assets.
On 1 December 2017 Suvi Singh, a resident of the republic, purchased a primary residence for R2 300 000. She used the granny flat portion of her primary residence as her consulting rooms. (In other words, she traded from a portion of her primary residence.) The granny flat portion of this primary residence comprises 20% of the total primary residence.
She lived in this primary residence, and practiced from its granny flat, for the 14 month period from 1 December 2017 until 31 January 2019. On 1 February 2019 she sold her primary residence for R4 000 000.
Required:
Determine the capital gains tax consequences that result from the purchase and sale by Suvi Singh of her primary residence.
QUESTION FIVE
Read the scenarios below and answer the question that follows:
Maggie Hirsch
On 26 February 2019 Maggie Hirsch, a dealer in property, agreed to sell a country estate (a property) to his “out of wedlock” child, Nelly Tailor, for its market value of R1 000 000. (Maggie Hirsch, held this property as part of his trading stock.) The purchase and sale agreement provided for
- An initial amount of R40 000 to be paid immediately, and
- 12 annual instalments of R80 000 each.
Nelly’s mother paid the R40 000 on Nelly’s behalf 11 days after it was due, this being on 07 March 2019.
Indicate in which year or years of assessment the amounts in question may be said to have “accrued” to the various taxpayers. Brief reasons should be furnished to support your answer.
Mike Jaddoo
Mike Jaddoo presented “magic” performances in South Africa in February 2019. He presented 10 performances up to and including one on 29 February 2019 and was paid R5 000 for each performance. Part of each performance is to pick pocket a R200 note from a member of the audience. This R200 note he keeps until the following day when he approaches his “victim” and bets R200 that the victim will be given R200 within three minutes. Although Mike has performed this trick for 18 years throughout South Africa and the rest of the world all his victims 28 accept the bet. At the point in time he produces the R200 note that he had stolen that night before from “his” victim and gives it back to him.
Mike therefore wins the bet. As a result, he keeps the R200 he would otherwise have had to return. Indicate in which year or years of assessment the amounts in question may be said to have “accrued” to the various taxpayers. Brief reasons should be furnished to support your answer.
QUESTION 6
Darius (Pty) Ltd owns a small double-storey building on the outskirts of a large city. The building is used for mixed purposes in that it has 4 shops on the ground floor (taxable supplies) and 2 large residential apartments on the top floor (exempt supplies). Shops are rented for R 12 000 each (plus VAT @ 15%) and apartments for R 8 000 each per month (no VAT). There are no separate meters for water and electricity and these expenses are paid by Darius (Pty) Ltd in terms of the lease agreements. An extract from the company’s annual financial statements for the 2020 financial year (tax year) indicates the following income and expenditure items:
STATEMENT OF COMPREHENSIVE INCOME OF DARIUS (PTY) LTD FOR THE YEAR ENDING 28 FEBRUARY 2020
Income R
| Rental of apartments (exempt) | 192 000 |
| Rental of shops (taxable) | 576 000 |
| Total income
Expenses |
768 000 |
| New geysers for apartments | 5 000 |
| New glass for shop-fronts | 16 000 |
| Painting of entire building | 120 000 |
| Electricity | 48 000 |
| Water | 63 000 |
| Telephone | 6 000 |
| Rates & taxes | 100 000 |
| 29 |
| Wages | 35 000 |
| Insurance on building | 66 000 |
| Total expenses | 459 000 |
| Net Profit | 309 000 |
Required:
Calculate VAT Output, VAT Input and Net VAT Paid/ Refundable.
END OF QUESTION PAPER
TAXATION TABLES AND RATES
INCOME TAX SMALL BUSINESS CORPORATIONS 2019
0 – 78 150 0% of taxable income
78 151 – 365 000 7% of taxable income above 78 150
365 001 – 550 000 20 080 + 21% of taxable income above 365 000
550 001 and above 58 930 + 28% of taxable income above 550 000
INCOME TAX SMALL BUSINESS CORPORATIONS 2018
0 – 75 750 0% of taxable income
75 751 – 365 000 7% of taxable income above 75 750
365 001 – 550 000 20 248 + 21% of taxable income above 365 000
550 001 and above 59 098 + 28% of taxable income above 550 000
TURNOVER TAX FOR MICRO BUSINESSES 2018/2019
0 – 335 000 0% of taxable turnover
335 001 – 500 000 1% of taxable turnover above 335 000
500 001 – 750 000 1 650 + 2% of taxable turnover above 500 000
750 001 and above 6 650 + 3% of taxable turnover above 750 000
TAX TABLES (Individuals)
For the year ended 28 February 2019
| 0 | – 195 850 | 18% of income | |
| 195 851 | – 305 850 | 35 253 + 26% of income above | 195 850 |
305 851 – 423 300 6 3 8 53 + 31% of income above 305 850
423 301 – 555 600 100 263 + 36% of income above 423 300
555 601 – 708 310 147 891 + 39% of income above 555 600
708 311 – 1 500 000 207 448 + 41% of income above 708 310
1 500 001 and above 532 041 + 45% of taxable income above 1 500 000
For the year ended 28 February 2018
0 – 189 880 18% of income
189 881 – 296 540 34 178 + 26% of income above 189 880
296 541 – 410 460 59 314 + 31% of income above 296 540
410 461 – 555 600 93 135 + 36% of income above 410 460
555 601 – 708 310 149 619 + 39% of income above 555 600
708 311 – 1 500 000 209 032 + 41% of income above 708 310
1 500 001 and above 533 625 + 45% of taxable income above 1 500 000
| REBATES
Primary |
2019
R14 067 |
2018
R13 635 |
| Secondary Rebate (Persons of 65 and older)
Third Rebate (>75 years) |
R 7 713
R 2 574 |
R 7 479
R 2 493 |
|
EXEMPT INCOME |
||
| Total interest exemption | ||
| including foreign interest | ||
| Below 65 | R23 800 | R23 800 |
| 65 and over | R34 500 | R34 500 |
CAPITAL GAINS TAXATION (CGT) – 2019 Year of Assessment
Inclusion rates
- Individuals, special trusts and individual policyholder funds 3%
- Other taxpayers 66.6% Exclusions
- Individuals (annual non-cumulative): R40 000
- Individuals in year of death: R300 000
- Primary residence exclusion on the disposal of a primary residence: R2million gain/loss
- Small business assets (when a person is over age 55): 8 million
| MEDICAL SCHEME CREDIT (monthly) | 2019 | 2018 |
| Main member | R310 | R303 |
| Main member with one dependant | R620 | R606 |
| Main member with two dependants | R829 | R810 |
Each additional dependant qualifies for a further rebate or credit of R209 (2018: R204) per month