2021 TUTORIALS –CAPITAL ALLOWANCE AND RECOUPMENT

QUESTION ONE (25 MARKS : 45 MINS)

Besta Ltd manufactures asbestos products and it is not a small business

corporation. The company's year of assessment ends on 28 February 2019. The
financial director of Besta Ltd calculated that the company’s taxable income, before
taking into account the items mentioned below, is R950 000. You have confirmed that
this amount is correct. All amounts exclude VAT, unless stated otherwise.

Additional information

1. Fixed assets on 1 March 2018 Cost

price
R
Land (purchased on 1 December 2002) 250 000
Furniture (purchased on 1 November 2016) (see note 3 below) 100 000
Manufacturing building 2 000 000

In terms of BGR No. 7, the write-off period for furniture is six years.

2. Fixed assets obtained during the year

 Extensions to the manufacturing building commenced on 1 April 2018 and were

completed on 31 July 2018 at a total cost of R300 000. The new wing was brought
into use immediately after completion.

 Separate administrative offices were built during the year. Construction

+commenced on 1 April 2019; the building was completed on 30 September 2018
and it was taken into use at this date. The building costs amounted to R400 000.
Interest paid on the loan to finance the building was as follows:
R
Before the occupation date 27
000
After the occupation date 32
000

 On 28 February 2018, second-hand manufacturing equipment was purchased for

R44 000 and was taken into use at this date.

 Machine C

Non-manufacturing machine C was leased under an operating lease agreement from

ABC Company for a period of forty months. The agreement expired on 31 October
 2018. ABC company then sold the machine at market value for R25 000 to Besta Ltd
on 1 November 2018. ABC Company originally purchased the machine on 1 July
2015 and immediately leased it to Besta Ltd.

During the duration of the operating lease, a total amount of R45 600 was payable
in forty monthly payments of R1 140 (including VAT) each.

In terms of BGR No. 7, the write-off period for machinery and equipment is five
years.

3. Fixed assets sold during the year

 On 1 November 2018, land acquired at a cost price of R50 000 was sold for R112
000. It was sold because it was no longer of use to the enterprise. A capital gain of
R62 000 resulted from the sale.

 On 30 November 2018, a manufacturing machine that cost R32 000 was sold for
R38 000. This machine was purchased on 30 June 2004. This item is not included in
note 1 above.

 On 30 November 2018, furniture that cost R20 000 and that was originally
purchased on 1 November 2016 was sold for R7 000. The furniture was sold
because it was no longer of use to the enterprise. This item is included in note 1
above.

REQUIRED MARKS
Calculate the income tax liability of Besta Ltd for the year of (25)
assessment ended 28 February 2019.

QUESTION TWO (25 marks : 45 mins)

MANUFACTURESA (PTY) LTD

On 1 July 2018 MANUFACTURESA (Pty) Ltd commenced trading. All of the shares of
MANUFACTURESA (Pty) Ltd are owned by Mr. Adrian Cadbury. Adrian Cadbury does not
own shares in any other company.
On the 30th June 2019, (year-end of company) Mr. Adrian Cadbury requested you to
assist in the calculation of its 2019 taxable income based on the following information
presented to you.

1) Sales for the year to its customers consisted of cash sales of R9 500 000 and
credit sales of R2 500 000.

2) On July 1 July 2018, the company purchased a plot of Land for R250 000. The
company constructed a factory building on this plot of land at a cost of R670
000. The factory was brought into use on 1 September 2018.

3) On 30 August 2018 the company purchased the ground floor of a New building
in the Pretoria CBD to serve as its offices and meeting venue. The purchase price
was R175 000.

4) On 1 September 2018 the company purchased two machines. A New

manufacturing machinery for R125 000 and a Second Hand manufacturing
machine for R62 000. A foundation was built at a cost of R25 000 on which the
second-hand machine was mounted on in order to function efficiently. Transport
cost of R5 000 was incurred to transport the New machine to its current location.

5) On 1 October 2018 the company purchased a computerized point-of-sale (POS)

system to handle its entire customer invoicing. The system cost R57 600. It was
available for use on the day of purchase but was brought into use on the 31
October 2018. The South African Revenue Service (SARS) allows a straight-line
write off over three for this system in terms of Section 11(e).

6) On 1 December 2018, the company reconfigured the layout of the inside of its
upholstery plant. As a result, the Second Hand manufacturing machinery (above)
had to be moved at a cost of R8 000.

7) On 1 January 2019, the company purchased twelve (12) newly developed

townhouses. This consisted of eight small units at a cost of R180 000 each, and
four (4) units at a cost of R420 000 each. All these units were immediately
brought into use.
 8) On 2 February 2019, the storm broke five windows at the company’s factory
building. MANUFACTURESA (Pty) LTD spent R40 000 to replace four of the
windows and a further R42 000 replacing the fifth window with a set of sliding
doors.

9) On 1 march 2019, the company purchased a delivery vehicle for R300 000. This
delivery vehicle was brought into use on the same day of purchase. The SARS
allows a five year write off on all delivery vehicles.

10) During the current year of assessment, the company incurred wages and salary
expense amounting to R896 000.

You are required to calculate the taxable income of MANUFACTURESA (Pty)

LTD for the 2019 year of assessment.

QUESTION THREE: CAPITAL ALLOWANCES (25 marks : 45 mins)

Plenty Business (Pty) Ltd is a business that produces clothing. The financial year end is
on 28 February.

The following transactions have taken place for the period of assessment ending 28
February 2019:

1. On 1 May 2018, the company purchased from a developer, a brand new factory
that had recently been erected by it for R7,500,000, of which
 R6 600 000 was for the factory building, and
 R900,000 for the land

2. On 1 January 2019 the company purchased a new heavy-duty sewing machine

that costed R8,400 cash.

3. On 1 September 2018, the company purchased a second hand delivery van for
R144,000. It was brought into use by it on the same day. It is used for
transport of the clothing.
 The commissioner allows delivery vans to be written off over a four-year period.
This second hand delivery van was one year old when it was purchased by the
company.

On 31 January 2019, rioting students at campus where one of the customers of

the company is, set fire to the delivery van. It was destroyed.

The insurance paid R160,000 to the company for the loss of its delivery van.

4. On 1 July 2018, the company decided to purchase vacant land for R3,000,000.
They built 10 bachelor flats that cost R150,000 per flat, and they also built 8
larget flats that cost R400,000 each.

REQUIRED:

Calculate the allowances, deductions and recoupments of ALL the above transactions
for Plenty Business for the year of assessment 28 February 2019. Provide brief
explanations and calculations to support your answer.

Place your answer in the following format:

Description Amount Calculation and explanation

QUESTION FOUR : CAPITAL ALLOWANCE (25 marks : 45 mins)

4.1 (18 marks : 32 mins)

In April 2017, Lolly (Pty) limited, which has a February year end) acquired and brought
into use in the process of manufacture a machine “A” (with a four year write off) which
cost R414 000 (including vat @ 15%). In December 2018 the machine was sold for
R300 000 (Vat inclusive). A new replacement machine “B” was acquired for R710 000
(net of vat). Lolly “Pty Ltd” elected that the provisions of paragraph 66 of the eight
schedule apply.

REQUIRED:
You are required to show how the amount of recoupment and claim in
respect of the assets will be dealt with in the 2019 year of assessment.

3.2 (7 marks : 13 mins)

Bongani bought a new motor Vehicle for use in his business. The cost of the vehicle
was R1 280 000 (including vat) The vehicle was brought into use on 1 June 2016. The
wear and tear was claimed at 20% per annum on cost using the straight line method.
REQUIRED:
You are required to calculate the amount that will be recouped and included
in the taxpayer’s income if the vehicle is sold for R660 000 (net of vat) on 28
February 2019 ( the taxpayer’s year end)

SOLUTION TO QUESTIONS ON CAPITAL ALLOWANCE:

QUESTION ONE: (25 marks)

Calculation of taxable income of Besta Ltd for the year of assessment ended 28
February 2019:
R
Taxable income before taking into account items mentioned below 950 000ü
Land (no allowance can be claimed for land)
-
Wear and tear on existing furniture – s 11(e) ((R100 000 – R20 000) / 6 years) (13 333)ü
Wear and tear on furniture sold – s 11(e) (R20 000 / 6 years x 9/12) (note 1) ü (2 500)ü
Manufacturing building – section 13 allowance (R2 000 000 x 5%) (100 000)ü
Improvements to manufacturing building – section 13 allowance (R300 000 x 5%)(15 000)ü
Administrative building – section 13quin allowance (R400 000 x 5%) (20 000)ü
Interest (before occupation date) – s 11A (deductible as soon as trade
commenced) (27 000)ü
Interest (after occupation date) – section 11(a) (32 000)ü
Manufacturing equipment purchased – s 12C (R44 000 x 20%) (Second-hand) (8 800)ü
Machine C (wear-and-tear allowance) – s 11(e) (R25 000/5 yrs. x 4/12) ü (note 2) (1 667)ü
Machine C – operating lease payments deductible, excluding VAT
(R1 140 x 100/114) x 8ü (8 000)ü

Disposal of assets R
- Disposal of land – capital (see below)
- Recoupment in respect of sale of manufacturing machine – s 8(4)( a)
Proceeds of sale (notes 3 & 4) 38 000ü
Less: Tax value (claimed in full) Nil
Recoupment 38 000ü
Limited to previous allowances 32 000ü
Scrapping allowance (furniture) – s 11(o)
Cost price 20 000
Less: Wear and tear: 2017 (R20 000 / 6 years x 4/12) ü (1 111)ü
Wear and tear: 2018 (R20 000 / 6) (3 333)ü
Wear and tear: 2019 (calculated above – note 1) (2 500)ü
Tax value at date of sale 13 056
Less: Sale proceeds (7 000)ü
Scrapping allowance (6 056) (6 056)

Capital gain on assets disposed of

Disposal of land – gain given (note 3) 62 000ü
Disposal of manufacturing machinery above cost (note 3) 6 000ü
Aggregate gain 68 000
Taxable capital gain at the inclusion rate of 80% 54 400ü
122 400
Taxable income 802 044

Notes
1. The calculation of wear and tear of the furniture and fittings acquired for R20 000 is done
separately because this amount is used to calculate its tax value when the asset is sold.

2. Besta Ltd acquired machine C after the expiry of the operating lease agreement at its
market value of R25 000. The taxpayer will be entitled to claim wear and tear under section
11(e) from the date of acquisition, that is, on 1 November 2017.

The operating lease payments that are deductible must exclude VAT because the VAT was
claimed as input tax.

3. The disposal of the land resulted in a capital gain of R62 000, which is subject to capital
gains tax. Note that there is no recoupment in respect of the disposal, as no previously
claimed allowances can be recouped. The R6 000 on the disposal of the manufacturing
machine above cost price is a capital gain and it is also subject to capital gains tax. You will
see that once you have worked through learning unit 7 on capital gains tax, you should be
able to calculate the gains as follows: Proceeds – Base cost = Gain.

Land
Proceeds = R112 000
Less: Base cost = (R 50 000)
Capital gain = R 62 000

Machine
Proceeds (R38 000 – R32 000) = R6 000 (adjusted proceeds with recoupment)
Less: Base cost (R32 000 – R32 000) = (0) (cost price less allowances claimed)
Capital gain = R6 000
The taxable capital gain must be included in taxable income. The inclusion rate for
companies is 80%.

4. Take note that the format of this solution is not that of income less expenses. Each line item
is either added as income, or shown as deductible, using brackets. It is of the utmost
importance when you write an examination, to indicate clearly whether an amount should
be added to income, because you regard it as income, or whether it should be deducted by
using brackets.

QUESTION 2 : MANUFACTURESA (PTY) LTD

CAPITAL ALLOWANCE & RECOUPMENTS (25 marks : 45 mins)

1) Total trade income (cash sales R9 500 000 + credit sales R2 500 000) = R12 000 000PP

2) Cost of purchase land (capital in nature) -P

Factory building (R670 000 x 5%) (33 500) P

3) Section 13 quin purchase commercial building (R175 000 x 55% x 5%) (4 813) PP

4) Section 12C New machine (R125 000 + R5 000 X 40%) (52 000) P

Section 12C Second-hand machine (R62 000 + R25 000 X 20% (17 400) PP

5) Section 11(e) computer equipment (R57 600/3 x 8/12) (12 800) P

6) Section 12C moving cost (R8 000/5) remaining useful life of used machine (1 600) P

7) Section 13sex normal Townhouses (R420 000 x 4 x 5%) (84 000) P

Section 13sex Low-cost units (R180 000 X 8 X 10%) (144 000) PP

8) Repair to the four broken window (section 11(d)) (40 000) P

Section 13quin: improvement to factory building (R42 000 x 5%) (2 100) P

9) Section 11(e) wear and tear on delivery vehicle (R300 000/5 x 4/12) (20 000) PP
10) Salary/wages expense paid the employees (section 11(a) (896 000)
Income before the deduction of taxation for the current year R10 691 787PP

QUESTION THREE: ATTEMPT THE QUESTION ON YOUR OWN AND ASK IF YOU ENCOUNTER ANY
PROBLEM
QUESTION FOUR: CAPITAL ALLOWANCE (25 marks : 45 mins)

4.1 (18 marks : 32 mins)

Cost of machine “A” : (R414 000 * 100/115)√ R360 000√

Allowance : 2018 year of assessment = (40% * 360 000) :√ (144 000)√

Allowance : 2019 year of assessment = (20% * 360 000):√ (72 000)√

Tax value at 28th February 2019 = 144 000√

Proceeds from sale of machine “A” (R300 000 * 100/115): 260 870√

Recoupment 116 870√

If taxed in terms of para. “66”, therefore ;

Cost of replacement machine “B” R710 000√

Less: Section 12C allowance (40% * 710 000) (R284 000)√

Tax Value at 2019 year of assessment R426 000√

Amount to be included in taxable income in 2019 year of assessment:

(284 000/710 000 *116 870) R46 748√√

Amount to be claimed against taxable income in 2019 year of assessment :

Section 12C allowance (40% * 710 000) (R284 000)√

4.2 (7 marks : 13 mins)

Cost of Vehicle :1 June 2016 (1 280 000 * 100/115)√ R1 122 807√

Wear and tear : 29 Feb. 2017 (20/100 * 9/12 * R1 122 807)√(R168 421)√√

Wear and tear : 28 Feb. 2018 (20% * 1 122 807 * 12/12 )√ (R224 561)√√

Wear and tear : 28 Feb. 2019 (20% * 1 122 807 * 12/12)√ (R224 561)√
-------------
Tax value 505 264√

Proceeds from sale of scrapped vehicle 660 000√

Recoupment in terms of section 8(4a) 154 736√