SCHOOL OF ACCOUNTING, ECONOMICS AND FINANCEADVANCED TAXATION: ACCT7DT
TEST 2: 10 June 2022
INTERNAL EXAMINER/S: Ms. A Peerbhai CA(SA)
DURATION: 100 minutes (including reading time)
TOTAL MARKS: 50
PAGES: Six (6) including instructions
DATE: 10 June 2022
INSTRUCTIONS TO CANDIDATES:
1. The assessment OPENS on Friday, 10 June 2022 at 17h00 and CLOSES at 18h50.
Students are allocated 100 minutes of reading and writing time and a further 10 minutes
to scan and upload the submission via Learn only (no email submissions). It is your
responsibility, as a student, to ensure you stop writing at 18h40 to ensure you have
sufficient time for scanning and uploading your submission.
2. It is your responsibility to ensure that the device you use and your internet connection
are stable and conducive to completing this assessment.
3. Typed or handwritten submissions that are scanned and saved as a single PDF
document file will be accepted. No other file formats will be accepted. Should you be
handwriting you submission, please ensure that you write neatly and that the scanned
document is clear.
4. It is your responsibility as the student to ensure that the correct document is submitted
and that all answers are legible. There will be no submissions of documents allowed after
the assessment has closed due to any such errors on your part.
5. Students will only be allowed one submission for this assessment via Learn before the
closing time. Late submissions via email will NOT be accepted unless absolutely
necessary.
6. You are required to fill in the following information on the first page of your submission
document:
Student Number:
The total number of pages submitted including the cover page (Where applicable):
7. Your student number must also appear on every page of your submitted document
thereafter.
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8. Please note that you commit fraud if you present someone else’s work or ideas. This is
unacceptable, and if you are found guilty, you will become subject to the University’s
normal rules that apply in such circumstances. It is possible that disciplinary action will
be taken against you.
9. Declaration of Authenticity: By submitting your answer document, you hereby declare
that the content of the document is your own work and was completed by yourself. You
also declare that you have not divulged either your answers or the information contained
within this assessment to any person, whether a University of KwaZulu-Natal student or
otherwise.
10. Your attention is drawn to the necessity to provide suitable substantiating reasons and/or
workings in support of your answers. Where workings are presented separately from
your answer, these must be clearly referenced.
11. All questions are compulsory and MUST be attempted.
Question
Marks
Time
1
30
60
2
20
40
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QUESTION 1 (30 MARKS, 60 MINUTES)
Goodsoles (Pty) Ltd (“Goodsoles” or “the company”) is a South African resident company that is
engaged in the manufacture of shoes in the Durban area. The Commissioner of the South African
Revenue Service (SARS) is satisfied that this constitutes a process of manufacture. The company’s
financial year ends on 30 April. The company is a registered vendor for Value-Added Tax (VAT)
purposes and is engaged fully in the making of taxable supplies. It is not regarded as a “small
business corporation” as defined in section 12E of the Income Tax Act.
The following information is relevant (all amounts exclude VAT where applicable, unless otherwise
indicated and all transactions are with unconnected persons):
Trading stock
On 20 April 2022, stock with a cost price of R75 000 (and a market value of R100 000) was donated
to a community drive initiated by members of the public, to assist residents of the surrounding areas
whose homes and belongings were lost during the devastating floods that took place earlier in the
month.
The cost price of trading stock and consumables still on hand at the end of the year of assessment
was R1 247 000 and R2 780, respectively.
Capital assets
Import of manufacturing machine
On 1 March 2022, a new manufacturing machine was purchased at cost of $120 000 from a supplier
in the United States of America (USA), on credit. The machine was shipped free-on-board on
1 March 2022 and was delivered to the company’s premises on 15 March 2022. Import duties
amounted to R90 000 and VAT paid on importation amounted to R310 500. A special foundation
was required for the installation of the machine, which cost a further R65 000. The machine was
brought into use on 20 March 2022 and the $120 000 purchase price due to the supplier was settled
in full on 31 May 2022.
Goodsoles entered into a 3-month forward exchange contract (FEC) on 1 March 2022 to serve as a
hedge in respect of the debt due to the foreign supplier. The forward rate at this date was
$1 = R14.80.
The following exchange rates may be relevant:
Date
1 March 2022
15 March 2022
20 March 2022
31 March 2022
30 April 2022
31 May 2022
Spot rate
$1 = R14.78
$1 = R14.75
$1 = R14.73
$1 = R14.70
$1 = R14.80
$1 = R14.95
Market-related forward rate
$1 = R14.80 (3-month contract)
$1 = R14.90 (2-month contract)
$1 = R14.85 (1-month contract)
Delivery vehicles
One of the company’s delivery vehicles was involved in an accident on 31 July 2021 and was writtenoff. The vehicle was originally purchased from a VAT vendor, for R552 000 (incl. VAT) on
1 October 2020 and immediately brought into use. Insurance proceeds of R345 000 was received
on 18 August 2021, in full and final settlement of the claim. A 4-year write-off period (straight-line
basis) is provided for delivery vehicles in terms of Binding General Ruling 7. The proceeds were
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used to purchase a new replacement delivery vehicle from a VAT vendor on 1 September 2021, at
a cost of R483 000 (incl. VAT), which was immediately brought into use.
New design and contract
On 10 April 2022, Goodsoles entered into a contract with a new customer for the supply of a bulk
order of a specially designed orthopedic shoe produced by the company. Goodsoles had acquired
this new design from an independent third-party for R145 000 on 1 June 2021 – it was immediately
brought into use and is registered for a period of 15-years.
The new contract was for a total price of R2 500 000 (net of VAT), of which 50% was received on
15 April 2022. The balance is due on delivery of the order to the customer, which in terms of the
contract, will be on 31 August 2022. The total estimated costs to produce the order is R1 800 000
(also net of VAT). As at 30 April 2022, production of the order had not yet commenced, and no
expenses have yet been incurred in relation thereto.
Required: Question 1
MARKS
(a)
(b)
(c)
Discuss and calculate the income tax effects relating to the information given
for trading stock, for the 2022 year of assessment.
You do not need to consider any potential VAT consequences
5
Calculate the income tax effects relating to the information given for capital
assets, for the 2022 and 2023 years of assessment.
Marks are allocated as follows:
• Import of manufacturing machine (9 marks)
• Delivery vehicles (8 marks)
You may assume that the 2022 tax legislation remains unchanged and the
taxpayer wishes to elect any favourable tax treatment available to it. No assets
were disposed of during the 2023 year of assessment.
17
Discuss and calculate the income tax consequences for the new design and
contract for the 2022 and 2023 years of assessment.
Marks are allocated as follows:
• New design (2 marks)
• New contract (6 marks)
You may assume the following:
• the 2022 tax legislation remains unchanged;
• the design continued to be used during the 2023 year of assessment;
• the order was successfully delivered on 31 August 2022; and
• the expected costs of R1 800 000 were actually incurred in the 2023
year of assessment.
8
Refer to the relevant sections in the Income Tax Act in your answer for all parts of this question.
Total: Question 1
30
Page 4 of 6
QUESTION 2 (20 MARKS, 40 MINUTES)
Case study 1
Deez (Pty) Ltd (“Deez” or “the company”) is a resident company operating as a wholesaler of
cleaning products. The company’s financial year ends on the last day of February. The company is
not a registered VAT vendor.
As the lease over the current warehouse ended on 31 May 2021, Deez entered into a new lease
agreement over a warehouse situated in a better location. The lessor is a tax-paying entity and is
not a connected person in relation to Deez. The 15-year lease agreement commenced on 1 June
2021 and provided as follows:
•
•
A monthly rental of R25 000 is payable on the first day of every month, commencing from
1 June 2021.
Deez is required to build an extension to the warehouse at a cost of R250 000.
Deez moved all stock into the new warehouse on commencement of the lease. The extension was
completed at a total cost of R320 000 on 31 August 2021 and brought into use on 1 September
2021. The warehouse continued to be used by Deez during the period in which improvements were
being completed.
Case study 2
Earl Grey (aged 52) is a resident of the Republic. He owns a few retail stores and conducts business
as a sole proprietor. Earl has been experiencing cash-flow problems owing to his debtors not selling
their accounts timeously. Earl does not apply IFRS 9 for financial reporting purposes. The debtors’
age analysis as at 28 February 2022 is detailed below:
R
Current
30 days
60 days
90 days
120 days
Total debtors
225 000
392 000
495 100
362 500
468 800
1 943 400
Earl borrowed R1 000 000 (from an unconnected financier) on 1 January 2022 to purchase trading
stock. The terms of the loan agreement provides that Earl must repay R1 300 000 on 31 December
2023. The loan is not repayable on demand. Earl has elected an annual accrual period (refer below).
The cash flows under the loan agreement are as follows:
Date
1 January 2022
31 December 2022
31 December 2023
Cash flows (R)
1 000 000
-1 300 000
-300 000
The R300 000 represents a yield to maturity of 14.0175% on an annual accrual period.
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Required: Question 2
MARKS
Case study 1:
(a) Calculate the income tax effects for Deez (Pty) Ltd arising from the new lease
agreement, for the 2022 year of assessment. Round off to the nearest Rand.
(b)
(c)
4
Discuss and calculate the income tax implications for Deez (Pty) Ltd, if at the
end of the lease period, Deez exercises an option to acquire the leased land and
buildings at its market value less 20% of the lease rentals paid over the term of
the lease. For the purposes of this required, assume that the lease rentals remain
fixed over the entire term of the lease and the market value of the property at the
date the option is exercised is R5 000 000.
You are not required to consider any capital gains tax implications or the tax
implications for the lessor.
4
Discuss and calculate how your answer to requirement (a) above would be
different if the lessor was the Provincial Government.
You are not required to consider the tax consequences that may arise on
termination of the lease.
7
Case study 2:
Discuss and calculate the deductions that Earl Grey may claim for the 2022 year of
assessment, in respect of his outstanding debtors and the loan agreement. Round off
to the nearest Rand.
You are not required to consider any deductions in respect of the trading stock
purchased with the loan received.
5
Refer to the relevant sections in the Income Tax Act in your answer for all parts of this question.
Total: Question 2
20
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