University of South Africa - TAX 1501 TAX1501_2020_TL_201_1_E. Self- assignment 3 Solution – assignment 3

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QUESTION | TOPIC | MARKS | MINUTES 1 | Value-Added Tax (VAT) | 25 | 30 2 | Net normal tax liability | 30 | 36 3 | Fringe benefits and Travel Allowance | 25 | 30 4 | Gross Income and C... apital Gains Tax | 20 | 24 Total | 100 | 120 4 TAX1501/201/1 QUESTION 1 (25 marks, 30 minutes) Forever Diamonds (Pty) Ltd carries on a business as a manufacturer of jewelry and is also a jewelry retailer. The company runs its manufacturing operations in Johannesburg and has three retail stores located in Far City, Home-way and Wow Shopping Centres. The company is a vendor for Value-Added Tax (VAT) purposes and is registered on the invoice basis. The company had the following income and expenditure for the two-month tax period ending on 31 March 2020. All amounts include VAT at 15%, unless otherwise stated. R Income Bad debts recovered | 76 667 Cash sales | 966 000 Insurance payout on stolen stock | 843 334 Interest earned on current account held with SABA Bank | 46 000 Invoices of credit sales | 230 000 Sale of glass jewelry display counters | 184 000 Sale of jewelry exported to foreign customers | 575 000 Expenditure Auditor’s fees | 23 000 Bank charges | 8 050 Credit note issued to customers on a sale previously included in income | 2 300 Depreciation | 50 000 Entertainment of customers | 15 000 Fees for exchanging currency | 3 000 Fuel expenses | 9 500 Municipal electricity | 11 500 Printing and stationery | 9 200 Purchase of second hand cellphones from a non-vendor | 1 | 28 750 Rental of coffee machine for employees’ use | 4 500 Rental of the three retail store’s space in shopping malls | 582 284 Salaries and wages | 450 000 Stock purchased | 862 500 Telephone | 5 750Additional information: 1. R28 750 was paid in cash for second hand cellphones purchased from a non-VAT vendor. The market value of the second hand cellphones on the date of purchase was R30 000. REQUIRED: | Marks Determine the value added tax payable by / refundable to Forever Diamonds (Pty) Ltd for the two-month tax period ending 31 March 2020. (Please provide reasons for not claiming input VAT or not accounting for output VAT). | 25 5 TAX1501/201/1 QUESTION 2 (30 marks, 36 minutes) Lenny (35 years old) is the sales manager for a chain of hardware stores. He is married out of community of property to Lucia and has a three-year-old child. Lenny’s receipts, benefits and expenses for the 2019 year of assessment are listed below: Notes | R RECEIPTS/BENEFITS Salary | 420 000 Bonus | 18 000 Use of a laptop | 1 | ? Dividends received – South African listed company | 60 000 Foreign dividends received (not from a tax-free investment) | 5 000 Foreign interest received (not from a tax-free investment) | 22 000 Local interest received (not from a tax-free investment) | 85 000 EXPENSES Meals | 2 | 5 300 Current pension fund contributions | 3 | 32 000 Current retirement annuity fund contributions | 3 | 130 000 Medical expenses | 4 | 36 000Notes: 1. Lenny’s employer granted him the right of use of a company owned laptop from 1 June 2019 to 31 December 2019. Lenny had to pay R100 per month for the use thereof. The laptop cost the employer R12 500 on 1 April 2019 and the market value on the date Lenny received the right of use of the laptop was R11 500. 2. Lenny is a diabetic and has to eat specific meals at regular intervals. Lenny spent R5 300 on meals while he was required to work overtime. 3. Lenny’s total contributions to a pension fund, from 1 March 2019 until the end of the year of assessment amounted to R32 000. Lenny also contributed an amount of R130 000 to a retirement annuity fund during the year of assessment. Lenny’s employer did not contribute to any of these funds on Lenny’s behalf. You may assume that his remuneration for the 2020 year of assessment amounted to R449 306. 4. Lenny is a member of a registered medical scheme. His wife and child are registered as his dependents on the scheme. His wife has a disability as defined. The following are details from Lenny’s medical scheme statement for the year of assessment: Medical scheme contributions for the year | R 22 000 Medical expenses not re-imbursed by the medical scheme and paid by Lenny | 14 000 Total medical costs for the year | 36 000In addition to the above medical scheme contributions, Lenny’s employer also contributed R11 000 to the medical scheme, on his behalf. REQUIRED: | MARKS Calculate Lenny’s net normal tax liability for the year of assessment ended 29 February 2020. | 30 6 TAX1501/201/1 QUESTION 3 (25 marks, 30 minutes) Bill Obed is 43 years old and is employed at Media Originators (Pty) Ltd. On 1 March 2019, he was promoted to Senior Account Executive Manager. His promotion allows him to restructure his remuneration package. His employer gave him the option to either choose: 1. A travel allowance of R 12 500 per month for the full year of assessment, or 2. The free use of a company car for the full year of assessment Bill will keep a detailed logbook of all kilometres travelled and accurate records of all expenses that he will incur. Bill’s estimated kilometres travelled: km Total kilometres | 40 000 Private kilometres | 15 000OPTION 1: Travel allowance (17 marks, 20 minutes) A travelling allowance of R12 500 per month for the use of his own car with effect from 1 March 2019 for the full year of assessment. Bill will purchase the vehicle for R 500 000 (including VAT). Bill’s estimated vehicle expenses are: R Licence and insurance | 15 200 Fuel expenses | 30 300 Maintenance costs | 15 000OPTION 2: Use of a company car (8 marks, 10 minutes) If Bill elects the right of use a company-owned vehicle, the company will purchase the vehicle for R500 000 (including VAT and a three-year maintenance plan). All expenses in relation to his travel will be borne by his employer. REQUIRED: | MARKS You are required to calculate the most favourable tax benefit of the two options for the year of assessment ending 29 February 2020. Hint: Calculate the taxable portion of both the options and draw a conclusion. | 25 7 TAX1501/201/1 QUESTION 4 (20 marks, 24 minutes) PART A Mark is employed by an international estate agent company specialising in property. During the 2020 year of assessment the company donated a house to Mark, valued at R2 500 000, to reside in with his family. The house was registered in Mark’s name during the 2020 year of assessment. REQUIRED: | MARKS Discuss with reference to the gross income definition, whether the receipt of the house should be included or excluded from Mark’s gross income for the 2020 year of assessment. | 6PART B Pebo Hadebe sold the following asset during the 2020 year of assessment. Primary residence Pebo sold his primary residence for R3 500 000 on 30 September 2019. The sales commission on the property amounted to R175 000. He purchased the property on auction on 1 February 2000 for R1 250 000. In 2010, Pebo spent R10 000 on repairs to the geyser and R150 000 on improvements to the kitchen. The property was valued at R1 500 000 on 1 October 2001. The time apportionment base cost is R1 300 000. Other capital gains amounted to R600 000 for Pebo for the 2020 year of assessment. REQUIRED: | MARKS Calculate the taxable capital gain/capital loss of Pebo Hadebe for the 2020 year of assessment. | 14 8 TAX1501/201/1 SCHEDULES A. 2020 – TAX TABLES (i) Persons (other than companies and trusts) Taxable income | Rates of tax Where the taxable income does not exceed R195 850 | 18% of each R1 of the taxable income; exceeds R195 850 but does not exceed R305 850 .... | R35 253 plus 26% of the amount by which the taxable income exceeds R195 850; exceeds R305 850 but does not exceed R423 300 .... | R63 853 plus 31% of the amount by which the taxable income exceeds R305 850; exceeds R423 300 but does not exceed R555 600 .... | R100 263 plus 36% of the amount by which the taxable income exceeds R423 300; exceeds R555 600 but does not exceed R708 310 .... | R147 891 plus 39% of the amount by which the taxable income exceeds R555 600; exceeds R708 310 but does not exceed R1 500 000 . | R207 448 plus 41% of the amount by which the taxable income exceeds R708 310; exceed R1 500 000 .................................................... | R532 041 plus 45% of the amount by which the taxable income exceeds R1 500 000.B. FRINGE BENEFIT TABLES (i) Employee–owned vehicles (section 8(1)) SCALE OF VALUES Where the value of the vehicle | Fixed cost R | Fuel cost c | Maintenance cost c does not exceed R85 000............................................. exceeds R 85 000 but does not exceed R170 000 ....... exceeds R170 000 but does not exceed R255 000 ...... exceeds R255 000 but does not exceed R340 000 ...... exceeds R340 000 but does not exceed R425 000 ...... exceeds R425 000 but does not exceed R510 000 ...... exceeds R510 000 but does not exceed R595 000 ...... exceeds R595 000 | 28 352 50 631 72 983 92 683 112 443 133 147 153 850 153 850 | 95,7 106,8 116,0 124,8 133,5 153,2 158,4 158,4 | 34,4 43,1 47,5 51,9 60,9 71,6 88,9 88,9 9 TAX1501/201/1 (ii) Employer owned vehicles (Paragraph 7(4) of the Seventh Schedule) Scale of values Value of private use per month, vehicle not subject to maintenance plan = 3.5% x determined value Value of private use per month, vehicle subject to maintenance plan = 3.25% x determined value (iii) Subsistence allowance as per Government Gazette No. 39724 Daily allowance for incidental cost is R134 per day. Daily allowance for food and incidental cost is R435 per day. C. REBATES Persons under 65................................................................................................................. R14 220 Persons 65 and under 75 (R14 220 + R7 794) .................................................................... R22 014 Persons 75 and over (R14 220 + R7 794 + R2 601 ) ........................................................... R24 615 D. MEDICAL AID TAX CREDITS Main member R310 Main member with one dependant (R310 + R310) R620 Main member with two dependants (R310 + R310 + R209) R829 Each additional dependant qualifies for a further rebate or credit of R209. 10 TAX1501/201/1 E. INCOME TAX MONETARY THRESHOLDS SUBJECT TO PERIODIC LEGISLATIVE CHANGE: Description | Reference to Income Tax Act, 1962 | Monetary amount Exemption for interest and certain dividends: In respect of persons 65 years or older, exemption for interest from a source within the Republic which are not otherwise exempt | Section 10(1)(i)(i) | R34 500 In respect of persons younger than 65 years, exemption for interest from a source within the Republic which are not otherwise exempt | Section 10(1)(i)(ii) | R23 800 Annual donations tax exemption: Exemption for donations made by individuals | Section 56(2)(b) | R100 000 Capital gains exclusions: Annual exclusion for individuals and special trusts | Paragraph 5(1) of Eighth schedule | R40 000 Exclusion on death | Paragraph 5(2) of Eighth schedule | R300 000 Exclusion for the disposal of a primary residence | Paragraph 45 Schedule (1)(a) of Eighth | R2 million Exclusion in respect of disposal of primary residence (based on amount of proceeds on disposal) | Paragraph 45(1)(b) of Eighth Schedule | R2 million Maximum market value of all assets allowed within the small business definition on disposal when person 55 years or older | Definition of “small business” in paragraph 57(1) of Eighth Schedule | R10 million Exclusion amount on disposal of small business when person 55 years or older | Paragraph 57(3) of Eighth schedule | R1 800 000 Retirement savings thresholds: Deductible retirement fund contributions: Members of retirement funds may deduct their contributions subject to certain percentage or monetary ceilings Monetary ceiling for total contributions to retirement funds | Proviso to section 11(k)(i) | R350 000 Deductible business expenses for individuals: Car allowance: Individuals receive an annual vehicle allowance to defray business travel expenses, including deemed depreciation on the vehicle. Ceiling on vehicle cost | Section 8(1)(b)(iiiA)(bb)(A) | R595 000 Ceiling on debt relating to vehicle cost | Section 8(1)(b)(iiiA)(bb)(B) | R595 000 11 TAX1501/201/1 Description | Reference to Income Tax Act, 1962 | Monetary amount Employment–related fringe benefits Exempt scholarships and bursaries: Employers can provide exempt scholarships and bursaries to employees and their relatives, subject to annual monetary ceilings. Annual ceiling for employees | Paragraph (ii)(aa) of the proviso to section 10(1)(q) | R600 000 Annual ceiling for employee relatives Annual ceiling for employee relatives with a disability | Paragraph (ii)(bb) of the proviso to section 10(1)(q) | R60 000 & R20 000 R90 000 & R30 000 Awards for bravery and long service: | Paragraphs (a) and (b) of the further proviso to paragraph 5(2) of Seventh Schedule | R5 000 Employee accommodation: | Paragraph 9(3)(a)(ii) of Seventh Schedule | R78 150 Exemption for de minimus employee loans: | Paragraph 11(4)(a) of Seventh Schedule | R3 000 Administration Exemptions from provisional tax: In the case of a natural person not carrying on a business | Paragraph 18(1)(c)(i) of Fourth Schedule | Taxable in come below threshold In the case of a natural person not carrying on a business | Paragraph 18(1)(c)(i) of Fourth Schedule | Taxable in come from interest, fo reign divi dends and rental in come does not exceed R30 000 [Show More]

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