Multiple choice: / X / Calculator: / X / Open book examination: / X
COMPETENCY
ASSESSMENT: / SAMPLE PAPER / DESIGNATION/
LEVEL: / TAX
TECHNICIAN (SA)
duRATION: / 5 HOURS
maks: / 130 MARKS
tIME: / 09:00-14:00
INSTRUCTIONS:
1. This is an open book competency assessment – any notes or textbooks (excluding other persons) may be consulted during the assessment.
2. All the questions should be answered.
3. Your answers should include the law as at 31 December 2012, including the Taxation Laws Amendment Bill, 2012.
4. All questions of this competency assessment[1] must be answered online, click here.
SCOPE (OUTCOMES) OF ASSESSMENT:
1. Framework of the income tax system (including the capital gains tax framework)
2. Gross income, residence-based taxation, specific inclusions and specific exemptions from income
3. General deductions, specific deductions and capital allowances
4. Capital gains tax
5. Trading stock and share dealers
6. Income tax liability of individuals, including allowances and fringe benefits
7. Employees’ tax and provisional tax
8. Donations tax
9. Estate duty
10. Retirement benefits
11. Taxation of trusts
12. Value added tax and transfer duty
13. Ethics in tax practice (30 marks - 20% of total mark)
RECOMMENDED READING MATERIAL
1. Silke: South African Income Tax 2013
2. 2013 SAIT Legislation Compendium or 2013 Professional Tax Handbook
TECHNICAL ASSESSMENT
CASE STUDY 1 (30 marks, 90 minutes)
Amabokoboko (Pty) Ltd (‘Amabokoboko’) is a resident company with a February year end. The company is a manufacturer of sport equipment and the Commissioner has indicated that this process is regarded as a process of manufacture for Income Tax purposes.
Amabokoboko is a registered VAT vendor. It should be noted that all amounts reflected in the draft statement of comprehensive income (trial balance) below and in the notes that follow, exclude VAT unless indicated otherwise and Amabokoboko is in possession of all tax invoices where relevant. You may assume that all transactions were conducted with registered VAT vendors, unless indicated otherwise.
The detailed draft statement of comprehensive income of Amabokoboko for the financial year ended 28 February 2013 is set out below:
Notes / R / RSales / 16250 000
Less: Cost of sales / (8 100000)
Opening inventory / (5 525000)
Purchases / (18575000)
(24100000)
Less: Closing inventory / 16 000 000
Gross profit / 8 150 000
Add: Sundry income / 931 360
Dividend income (local – accrued on 30 May 2012) / 129 000
Insurance settlement received / 1 / 127 360
Profit on sale of Machine A / 3b / 675 000
9 081 360
Less: Expenditure / (8 112 100)
Bad debts / 2 / (207000)
Depreciation / 3 / (512 050)
Insurance premiums / 4 / (81000)
Interest on bank overdraft for operational expenses / (100 000)
Rentals / 5 / (675 000)
Restraint of trade / 6 / (660000)
Salaries, wages and benefits / (4 000000)
Other tax-deductible admin and marketing expenses / (1 877 050)
Net profit before tax / 969 260
Additional notes:
1. A road freight contractor had collected an order of sport equipment (trading stock) from Amabokoboko’s premises for delivery to a customer. On its way to its destination, the
road freight contractor’s delivery van, along with the trading stock, was stolen. On 15February 2013, Amabokoboko received an insurance settlement from its insurer of
R127360 for the stolen trading stock. The amount of the insurance settlement, including VAT, was recorded in the accounting records. The sale was never recorded as the stock did not reach the customer. Closing stock was already adjusted with the loss.
2. Bad debts written-off of R207000 consist of R180000 for trade debtors and a loan of R27000 to a supplier that has been liquidated. The loan (an interest-free loan) came about during the previous financial year of Amabokoboko when it lent the money to a supplier (not a connected party) who was experiencing liquidity problems. The supplier was liquidated on 1 December 2012 and Amabokoboko has been unable to recover any portion of the loan.
3. Depreciation is made up as follows: (Note)
Motor car (a) R 37 050
Machine A (b) R125 000
Machine B (b) R187 500
Other machinery and depreciable assets (c) R162 500
R512050
a. On 1 June 2012, a motor car (as defined for VAT purposes), used by Amabokoboko sales staff for visits to customers, was purchased for R296400 (including VAT) and immediately brought into use. SARS provides for a five-year write-off period for motor vehicles in terms of section 11(e).
b. On 1 March 2011, Amabokoboko purchased a new machine (Machine A) for cash in an arm’s length transaction for R1 000000. Machine A was immediately brought into use in its process of manufacture. On 31 August 2012, Machine A (with a carrying amount of R625 000) was traded in for a more advanced machine (Machine B). A trade-in price of R1 300000 was obtained for Machine A .Machine B was purchased as a new machine for cash in an arm’s length transaction for R1500000 and was immediately brought into use in the process of manufacture.
c. All other machinery and depreciable assets had a nil tax value on 1 March 2012.
4. Insurance premiums of R81000 relating to the 2013 year of assessment were paid by Amabokoboko. In addition, on the advice of its insurance broker, Amabokoboko paid insurance premiums of R88750 covering the period 1 March 2013 to 31 May 2013. No portion of the advance insurance premium amount was expensed to its statement of comprehensive income for the 2013 year of assessment.
5. The rentals paid are paid monthly for the use of an office building that is leased by Amabokoboko for trade purposes.
6. The restraint of trade payment of R660000, which is effective for two years commencing on 1 October 2012, was paid to a sport equipment engineer who had been employed by Amabokoboko. He left the company’s employment on 30September2012.
YOU ARE REQUIRED TO:
Answer questions 1.1 to 1.20.
CASE STUDY 2 (38 marks, 114 minutes)
This question consists of two related parts. Ignore VAT for purposes of this question.
PART 1 (20 marks, 60 minutes)
Kitty Scuffles, aged 55, was ordinarily resident in South Africa until she and her husband (married out of community of property) immigrated to Australia on 31 August 2012. The day before her immigration she sold the following assets:
1. On 1 October 2001, Kitty acquired a farm (100 hectares of which 2 hectares were used by Kitty for domestic purposes). The land and the farmhouse were acquired for R3 million. The purchase price can be allocated as follow:
Land (100 hectares) R2 500000
Farmhouse R 500 000
The proceeds on date of sale can be allocated as follows:
Land (100 hectares) R4 200000
Farmhouse R2 100 000
Kitty practiced as a beauty consultant over weekends. She used 20% of the farmhouse as a consultation room, but never claimed any expenses relating to the house for normal tax purposes. Kitty lived in this house with her husband until their immigration.
2. Kitty acquired a holiday home in Langebaan (South Africa) on 1 March 2000 for
R500 000. A valuator valued this house for capital gains tax purposes on valuation date at R900 000. She elected this value as valuation date value for this house.
3. Kitty acquired an aircraft on 1 March 2004 that she used only when on holiday. She sold this aircraft at the market value of R500 000 to a third party.
4. Kitty held a block of flats (with only four flats) as an investment. She purchased this rent-producing property for R360000 on 31 August 2000 and by the end of
August 2002, improvements to the block of flats were completed at a total cost of
R1800000 and the flats were rented out immediately until the date of her immigration. The market value of the block of flats on valuation date was R2 400 000. She did not select a valuation method for this investment, but indicated that the most favourable option must be selected. As from 1 January 2012 until Kitty’s immigration, the monthly rental received per flat remained constant at R4500.
5. Kitty made a capital loss of R400 000 in the 2012 year of assessment when she sold a property to her best friend. This was her only disposal during the 2012 year of assessment.
YOU ARE REQUIRED TO:
Answer questions 2.1.1 to 2.1.6.
PART 2 (18 marks, 54 minutes)
You can assume that Kitty did not earn any income of a South African source after her immigration.
The following additional information is relevant up until the date of Kitty’s immigration:
Employment
Kitty was a full-time employee of Braby Ltd (“Braby”) until her immigration. Relevant information is as follows:
RBasic salary (R39 727 x 6 months) / 238 362
Medical scheme contributions (R1 600 x 6 months)
Kitty was the main member of the medical scheme, with her husband registered as her only dependant. Up until 31 August2012 Braby paid 70% of her total monthly contributions of R1600. All Kitty’s medical costs were covered by the medical scheme. / 9 600
Contributions to Braby Pension Fund (until 31 August 2012).
Kitty has always contributed 8% of her basic salary to this fund. Total contributions not claimed for income tax purposes up until 28 February 2012 amounted to R16 250. / 19 068
Lump sum received from Braby Pension Fund - paid to Kitty’s on 31 August 2012. Kitty has never received a lump sum from any fund during her lifetime. / 350 000
Part-time beauty consulting service
Up until Kitty’s immigration, Kitty carried on a part time business as a beauty consultant.
You obtained the statement of comprehensive income for this business for the period 1March 2012 to 31August 2012 from Kitty:
RNet fee income / 150 000
Interest earned on fixed deposit investment / 25 000
Less: Cash donation to a PBO (section 18A receipt was obtained) / (6 000)
Net income for the period / 169 000
YOU ARE REQUIRED TO:
Answer questions 2.2.1 to 2.2.13.
CASE STUDY 3 (12marks, 36 minutes)
Lilly Green, aged 53, is ordinarily resident in South Africa. She created the Pond Trust on 1 August 2011 by way of donating a complex of townhouses with a market value of
R1500000 to the Pond Trust. The complex of townhouses is rented out and the rental income that is not distributed is reinvested by the trustees in local shares and in money market funds. You may assume that the causal link between the reinvestment of the rental income attributable to the original donation of the complex of townhouses and the income of these investments (dividends and interest) has been broken. (In other words, there is
no link between the original donation of the complex of townhouses and the dividends and interest earned by the trust.). The Trust is a resident trust.
The trust deed provides for three trustees, namely Lilly, her husband Max Green (married out of community of property) and their accountant.
The following relevant items are contained in the trust deed:
1. The beneficiaries of the Trust are:
· Rose Green (28 years old) – Lilly’s oldest daughter, living permanently in Switzerland.
· Palm Green (25 years old) – Lilly’s second daughter (a South African resident), married to Frik on 30 April 2009.
· Bush Green (4 years old) – Lilly’s son (a South African resident).
2. The complex of townhouses must be rented out by the trustees to earn rental income.
3. Rose is entitled to receive an annuity of R5 000 per month paid pro rata out of the various net receipts and accruals of the Trust.
4. Lilly retained the right to name another beneficiary in Palm’s place at any time she wants, because she dislikes Frik and does not want him to obtain a share of the family assets.
5. Trustees may pay out any additional amounts during the year according to their discretion, pro rata out of the various net receipts and accruals of the Trust, to the beneficiaries.
6. The amounts not distributed must be reinvested by the trustees in local shares and in money market funds.
Detail of the Pond Trust’s income and distributions for the 2013 year of assessment:
Rose, Palm and Bush received no other income other than their distributions from the Trust during the 2013 year of assessment.
Excluding all amounts that are deemed to accrue to Lilly from the Trust, she received a salary of R400 000 for the 2013 year of assessment.
YOU ARE REQUIRED TO:
Answer questions 3.1 to 3.11.
CASE STUDY 4 (12 marks, 30 minutes)
Green Innovation (Pty) Ltd (“Green Innovation”) is a company that was established in South Africa by the agricultural-, chemical- and engineering students of a South African university. Green Innovation manufactures bio-diesel, which is considered “fuel levy goods” for purposes of the VAT Act by means of a combination of mealie rice (qualifies as a zero rated supply) and the remanufacturing of used ethanol. The mealie rice is purchased from local farmers, who are all VAT-vendors, and the used ethanol (accept that it does not qualify as “fuel levy goods” for purposes of the VAT Act) is purchased from the Chemistry department of the university, which is not a VAT-vendor.
Green Innovation is a Category B VAT-vendor. For purposes of this question, all amounts include VAT (where applicable).You can assume that Green Innovation (where applicable) is in possession of valid tax invoices for goods and services received and rendered. All transactions were incurred with registered VAT vendors, unless specifically mentioned otherwise.
Income and expenses for the tax period ending 31 March 2013:
Description / Notes / AmountIncome:
Sale of bio-diesel to local clients / R91 200
Sale of machine A to an Australian (assume correctly converted to rand) / 1 / R39 900
Expenses:
Purchase of mealie rice / R34 200
Purchases of used ethanol from the Chemistry department at market value / R9 120
Purchase of barrels (to store bio-diesel in) / R12 540
Salaries / R17 000
Purchase of machine B / 2 / R67 200
Purchase of delivery vehicle / 3 / ?
Notes: