F6 Progress Test 2 - 2018

F6 Progress Test 2 – 2018

Question 1 10 marks
Question 2 15 marks
Question 3 10 marks
Question 4 15 marks
Question 5 10 marks
Total 60 marks

QUESTION ONE

Alan Jackson is employed by a large corporation as a sales manager. His employment package for
the 2018 year of assessment is given below:

1. Alan received a cash salary of R560,000.

2. Alan made medical aid contributions for himself, his spouse and his two minor children of
R8,000 per month in total. His employer did not make any contributions.

3. Alan was also provided with a travel allowance of R6,000 per month as he was required to
visit the sales representatives in the region under his management. Alan used his personal
motor car to make these journeys, which had cost him R350,000 in 2015. The company
reimburses Alan for business fuel per the logbook. His logbook reflected that he had travelled
40,000 kilometres in the 2018 year of assessment, of which 30,000 kilometres had been for
business purposes. Alan’s car was still under a maintenance plan, so no maintenance costs
were incurred, apart from R6,000 for new tyres.

4. Total employees tax withheld by Alan’s employer amounted to R55,000.

Required:
(a) Calculate the amount of the travel allowance which will be included in Alan’s taxable
income for normal tax purposes for the 2018 year of assessment.
Note: You should indicate by the use of zero (0) any items not taken into account in the calculation.
(6 marks)
(b) Calculate Alan’s normal tax payable for the 2018 year of assessment.
Note: You should indicate by the use of zero (0) any items not taxable or not deductible. (4 marks)
(10 marks)

QUESTION TWO

Cool Fruit Ltd (Cool Fruit) is a company which manufactures ice cream. It is not a small business
corporation. The process is considered to be one of manufacture by the South African Revenue Service
(SARS).
During the year of assessment ended 31 March 2018, Cool Fruit recorded the following transactions.

All amounts are stated exclusive of value added tax (VAT) where applicable.
1. The sales of ice cream are made to large retail customers. The pricing varies based on the
storage and packaging required by the customer. Total sales for the year amounted to
R28,000,000, including the disputed revenue from the sale in (3) below.

2. Customer W requires its ice cream to be stored at Cool Fruit’s premises at a specific
temperature with special cargo doors to enable its trucks to collect the ice cream. Due to
increased orders from Customer W, Cool Fruit added a new refrigeration room to the end of
the production line in its factory building. This new refrigeration room cost Cool Fruit R1,500,000

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to construct and the refrigeration units cost a further R500,000. The refrigeration room and units
form part of Cool Fruit’s factory building. The end of one of the production line conveyor belts,
which had been purchased and installed on 1 May 2016 for R150,000, also had to be moved
to the new refrigeration room at a cost of R21,000.

3. Customer P sent back an entire shipment of ice cream with a sales price of R240,000 (cost of
R150,000) to Cool Fruit claiming a refund. It was discovered that the truck sent by Customer P
had broken down and the ice cream melted and was spoiled. Cool Fruit disputed the claim,
holding Customer P liable for the invoice. Legal fees of R10,000 were incurred by Cool Fruit in
successfully disputing the claim by Customer P. The invoice has still not yet been paid and
Cool Fruit has charged R3,000 interest on the amount unpaid as it is outside of the terms of
credit offered to Customer P. Cool Fruit considers the payment of the invoice and interest to be
doubtful and has provided for these amounts as at 31 March 2017. No other debts are
considered doubtful for the 2018 year of assessment.

4. Bad debts written off amounted to R56,000, which was the amount of the accounting provision
for the year of assessment ended 31 March 2017. The Commissioner for SARS permits
doubtful debts at 25% of the list value.

5. The stock on hand on 1 April 2017 amounted to R8,000,000, manufactured products amounted
to R12,000,000 and closing stock on hand at 31 March 2018 amounted to R9,000,000 (the
closing stock includes stock of R400,000 which has a market value of R370,000).

6. One of Cool Fruit’s mixing machines broke down on 1 August 2017. The machine had originally
cost R300,000 on 1 May 2015. Cool Fruit’s insurance policy covered the machine for
replacement value and paid the company R450,000. Cool Fruit acquired a new machine for
R470,000 on 5 August 2017.

7. Wages and salaries paid amounted to R3,500,000.

Required:
Calculate the taxable income of Cool Fruit Ltd for the 2018 year of assessment.
Note: You should list all of the items referred to in the question, indicating by the use of a zero (0) any items of
income which are exempt or amounts which are not tax deductible.
(15 marks)

QUESTION THREE

Ree Ntuli is an engineer. His employer, ES Ltd, requires him to be at or near the engineering site during
the construction phase of each project he is working on. He is therefore required to move regularly. Ree
receives a monthly cash salary of R71,000.

The following information is relevant for the 2018 year of assessment:

Period from 1 March to 30 June 2017

(i) ES Ltd provided Ree with a family home near Engineering Site 1 for which the company paid rentals
of R25,000 per month.
(ii) ES Ltd paid school fees for David’s children amounting to R7,500 per month.

Period from 1 July 2017 to 28 February 2018

(iii) On 1 July 2017, ES Ltd relocated Ree to a new project.
(iv) ES Ltd provided him with a fully-furnished family home near Engineering Site 2. The company owns
this home consisting of seven rooms and pays for all the running costs. The remuneration proxy has
been accepted by the Commissioner for the South African Revenue Service (SARS) as R850,000. As
the location of the property is near to the beach, Ree asked ES Ltd if he could buy the property from
the company. The company agreed that the property could be purchased at a future date for its market
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value of R9,000,000 as at 1 December 2017 (the date of the agreement). Until the future purchase date,
the agreement stipulated that Ree would pay the company rental equivalent to 1% of the purchase price
of the property as at 1 December 2017.
(v) ES Ltd paid school fees for David’s children at the new location amounting to R5,500 per month.
(vi) Costs of R120,000 were incurred by ES Ltd in relocating Ree and his family.

Required:
(a) Calculate the amount to be included in David’s taxable income with respect to the fringe
benefits, in (i) and (iv) above, supplied by ES Ltd during the 2018 year of assessment. Give brief
explanations where appropriate.
(5 marks)
(b) Assuming Ree purchases the property on 1 December 2018, explain whether any further
fringe benefit arises if the market value on that date is R10,000,000. (1 mark)

(c) Calculate David’s normal tax payable (before tax credits) for the 2018 year of assessment.
(4 marks)
(10 marks)

QUESTION FOUR (15 Marks)

Solar Energy Ltd is a company which specialises in the manufacture and fitting of solar panels as an
off-grid system.
Solar Energy Ltd also carries on operations via a foreign branch.

During the 2018 year of assessment, Solar Energy Ltd recorded the following transactions. All amounts
are stated exclusive of value added tax (VAT) where applicable:

(i) Sales in South Africa of solar systems amounted to R10,500,000.

(ii) A successful outcome in a court case. The case began as a customer claimed that Solar
Energy Ltd’s installation team had caused their roof to collapse due to careless installation of
solar panels. The customer lost the case after evidence that the internal roof structure had been
altered after the installation to increase loft space. The customer was ordered to pay Solar
Energy Ltd’s legal costs. Legal costs of R30,000 had been incurred by the company in the 2017
year of assessment and of R55,000 in the 2018 year of assessment.
(iii) Additional legal costs of R45,000. These costs were incurred in filing patents in respect the
solar panels produced. The patents are to run for a period of ten years. The (non-legal) patent
costs were R162,000.
(iv) Development work on a new form of solar panel. This solar panel is 20% more efficient than
any other on the market globally. The Department of Science and Technology has approved
the development of this panel as a research and development project. The development costs
incurred by Solar Energy Ltd in the 2018 year of assessment include:
(a) the salaries of the development team (R250,000);
(b) the machine designed and built to produce the prototypes (R450,000). It is
anticipated that this machine will ultimately be used in the main production process (a
process of manufacture) if the solar panel is successfully developed;
(c) interest (R35,000) on a loan to fund the construction of the above machine.
(v) A new lease agreement. The premises in which Solar Energy Ltd had been operating had
become too small. As no buildings were available for purchase, the company entered into a
lease agreement for ten years. The agreement requires Solar Energy Ltd to pay a premium of
R50,000 and to TNW improvements to the value of R450,000 to the leased building. The
monthly rental payments are R30,000. The lease was signed on 1 July 2017 and the
improvements were completed on 1 August 2017 at a total cost of R480,000. The building is
used mainly for the manufacture of components for the solar systems.

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(vi) Sale of the old premises. These were sold for R5,000,000 on 1 November 2017. The
premises had been purchased for R3,400,000 and were first brought into use on 1 April 2006.
Solar Energy Ltd has an assessed loss brought forward of R300,000 from the 2017 year of
assessment. The foreign branch recorded a loss from its trading operations of R250,000 in the
2018 year of assessment. Prior to this, the foreign branch had always been profitable.

Required:
Calculate the taxable income of Solar Energy Ltd for the year of assessment ended 31 March
2018.
Note: Indicate clearly any items of income which are exempt or amounts which are not deductible by the use of a
zero (0) and include a brief explanation of your treatment, where necessary.
(15 marks)

QUESTION FIVE (10 Marks)

TNW Ltd is not a small business corporation. It is registered for value added tax (VAT) but calculates
all VAT consequences separately.
The following information is relevant to TNW Ltd for its year of assessment ended 31 March 2018. All
amounts exclude VAT where applicable.

1. Machine A
Machine A, a large manufacturing machine, was sold for R880,000 on 15 January 2018. Machine A
had originally cost R650,000 when purchased new on 1 August 2016 and had been used in a process
of manufacture.

2. Machine B and Machine C

Spare parts for Machine B were acquired for R350,000 on 20 November 2016. During the year of
assessment ended 31 March 2018, Machine C broke down and one of the spare parts acquired for
Machine B, with a cost of R40,000, was used to repair Machine C.

3. Machine D
Machine D was sold for R250,000 to a related company, when its market value was R750,000.
Machine D had originally been acquired second-hand for R800,000 on 1 December 2015 and had
been used in a process of manufacture.

Required:
(a) With respect to TNW Ltd for its year of assessment ended 31 March 2018:

(i) Calculate any recoupment or scrapping allowance on the disposal of Machine A.

(3 marks)

(ii) Calculate the income tax effects of holding and using the spare parts for Machine
B. (1 mark)

(iii) Calculate any recoupment or scrapping allowance on the disposal of Machine D.

(3 marks)

(b) Recalculate your answers to parts (i) and (iii) above on the basis that TNW Ltd was
classified as a small business corporation, giving a brief explanation as to why the revised
answer is either the same or different from the original answer. (3 marks)
(10 marks)

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Advanced Taxation – South Africa (ATX-ZAF) (P6) – June and December 2018

TAX RATES AND ALLOWANCES

The following tax rates and allowances are to be used in answering the questions.
Year ended 28 February 2018/31 March 2018

Rebates
Primary rebate R13,635
Secondary rebate (over 65) R7,479
Tertiary rebate (over 75) R2,493

Interest exemption
Under 65 R23,800
Over 65 R34,500

Foreign dividend exemptions

Fully exempt where 10% or more of the equity shares and voting rights are held.
Fully exempt where received by a company from a foreign company resident in the same
country as the recipient.
To the extent of any controlled foreign company inclusions (net of applicable foreign tax)
To the extent that the foreign dividend is from a company listed on the JSE
To the extent that the above do not apply:
For individuals 25/45ths of the dividend is exempt
For companies 8/28ths of the dividend is exempt

Medical aid contribution tax rebate rates

Single member R303
Member plus one dependant R606
Each subsequent dependant R204

Additional medical expenses tax rebate

Persons 65 or older or persons younger than 65 if that person, his or her spouse or his or
her child is a person with a disability:
((Medical contributions – (medical aid contribution tax rebate x 3)) + other qualifying
medical expenses) x 33.3%

Persons younger than 65:

((Medical contributions – (medical aid contribution tax rebate x 4)) + other qualifying
medical expenses) as exceeds 7.5% of taxable income x 25%

Trusts (other than a special trust) 45%

Dividends tax 20%

Companies
Normal tax rate 28%

Donations tax 20%

Estate duty 20%

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Official rate of interest (assumed) 8%

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 F6 Progress Test 2 - 2018

Rates of normal tax payable by persons (other than companies)

for the year of assessment ended 28 February 2018

Where taxable income:

does not exceed R189,880 18% of each R1 of the taxable income
exceeds R189,880 but does not exceed R296,540 R34,178 plus 26% of the amount over R189,880
exceeds R296,540 but does not exceed R410,460 R61,910 plus 31% of the amount over R296,540
exceeds R410,460 but does not exceed R555,600 R97,225 plus 36% of the amount over R410,460
exceeds R555,600 but does not exceed R708,310 R149,475 plus 39% of the amount over R555,600
exceeds R708,310 but does not exceed R1,500,000 R209,032 plus 41% of the amount over R708,310
Exceeds R1,500,000 R533,625 plus 45% of the amount over R1,500,00

Tax rates for small business corporations

for the year of assessment ended 31 March 2018

Where taxable income:

does not exceed R75,750 Nil
exceeds R75,750 but does not exceed 7% of the amount over R75,750
R365,000
exceeds R365,000 but does not exceed R20,248 plus 21% of the amount over
R550,000 R365,000
exceeds R550,000 R59,098 plus 28% of the amount over
R550,000

Turnover tax rates for micro businesses

for the year of assessment ended 28 February 2018

Where taxable turnover:

does not exceed R335,000 Nil
exceeds R335,000 but does not exceed 1% of the amount over R335,000
R500,000
exceeds R500,000 but does not exceed R1,650 plus 2% of the amount over
R750,000 R500,000
exceeds R750,000 but does not exceed R6,650 plus 3% of the amount over
R1,000,000 R750,000

Car allowance
Maximum vehicle cost for actual expenses R595,000

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Fringe benefit (company car)

Benefit percentage (where no maintenance plan exists) 3.5%
Benefit percentage (where a maintenance plan exists) 3.25%
General business reduction: Benefit value x business kms/total kms (as per logbook)
Private fuel reduction: Private fuel (R) x private kms/total kms (as per logbook)
Private maintenance reduction: Private maintenance (R) x private kms/total kms (as per
logbook)

Subsistence allowances
Deemed expenditure for meals and incidental costs (per Government regulation) R397 per
day (local travel)
Deemed expenditure for incidental costs only (per Government regulation) R122 per day
(local travel)
Deemed expenditure for meals and incidental costs (foreign travel) – (per published
tables) will be supplied in the question where relevant

Common capital allowances

New and unused manufacturing plant and equipment 40%/20%/20%/20%
Used or leased manufacturing plant and equipment 20% each year for five tax years
New or unused plant or machinery used for research and development (where it does not
qualify for the research and development accelerated allowance) 50%/30%/20%
Small business corporation manufacturing plant and equipment 100%
Small business corporation (other assets) – unless wear and tear provides a greater
deduction 50%/30%/20%

Wear and tear (based on Binding General Ruling 7) will be supplied in the question
where relevant
Manufacturing building allowance (unless seller’s rate supplied) 5%
New or unused commercial building (not a manufacturing building) 5%
• No deduction where another section of the Act applies to the building
• Where part of a building is acquired, 55% of the acquisition price is “cost”
• Where an improvement to the building is acquired, 30% of the acquisition price of the
improvement is “cost”

Research and development (R&D) expenditure 150%

Costs related to immovable property, machinery, plant, implements, utensils or articles
(excluding any prototype or pilot plant created solely for the purpose of the process of
research and development) are not claimed as research and development expenditure.
Financing, and administrative or compliance costs may not be claimed as research and
development expenditure.

Capital gains tax

Annual exclusion (while alive) R40,000
Annual exclusion (in year of death) R300,000
Primary residence exclusion R2,000,000
(where proceeds are R2 million or less, the full gain is excluded for the portion
of the property used for domestic purposes as a primary residence)
Inclusion rate (natural persons) 40%
Inclusion rate (non-natural persons) 80%

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Time apportioned base cost formulae:

Y = B + [(P – B) x N / (T + N)]
P = R x B/(B + A)
Where deductible enhancement expenditure has been incurred after the valuation date,
the time apportioned base cost formulae change to:
Y = B + [(P1 – B1) x N / (T + N)]
P1 = R1 x B1 / (A1 + B1)

Travel allowance table

for years of Fixed Fuel Maintenance
assessment cost cost cost
commencing on or
after 1 March 2017
Value of the vehicle
(including value
added tax (VAT) but
excluding finance
charges or interest)
R R pa c/km c/km

0 - 85,000 28,492 91.2 32.9

85,001 - 170,000 50,924 101.8 41.2

170,001 - 255,000 73,427 110.6 45.4

255,001 - 340,000 93,267 118.9 49.6

340,001 - 425,000 113,179 127.2 58.2

425,001 - 510,000 134,035 146.0 68.4

510,001 - 595,000 154,879 150.9 84.9

Exceeds 595,000 150.9 84.9

154,879
Note: Where reimbursement is based on actual business kilometres travelled and no
other compensation is paid to such employees and the kilometres travelled for business
does not exceed 12,000, the prescribed rate is R3.55 per kilometre.

Transfer Duty Rates

for the year of assessment ended 28 February 2018

Where the acquisition price:

does not exceed R900,000 Nil
exceeds R900,000 but does not exceed 3% of the amount over R900,000
R1,250,000
exceeds R1,250,000 but does not exceed R10,500 plus 6% of the amount over R1,250,000
R1,750,000
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exceeds R1,750,000 but does not exceed R40,500 plus 8% of the amount over R1,750,000
R2,250,000
exceeds R2,250,000 but does not exceed R80,500 plus 11% of the amount over
R10,000,000 R2,250,000
exceeds R10,000,000 R933,000 plus 13% of the amount over
R10,000,000

Tax rates of normal tax retirement lump sum and severance benefits
in respect of the year of assessment ended 28 February 2018

Where taxable portion of lump sum:

does not exceed R500,000 Nil

exceeds R500,000 but does not exceed R700,000 18% of the amount over R500,000

exceeds R700,000 but does not exceed R36,000 plus 27% of the amount over R700,000
R1,050,000
exceeds R1,050,000 R130,500 plus 36% of the amount over
R1,050,000

Tax rates of normal tax withdrawal lump sum benefits

in respect of the year of assessment ended 28 February 2018

Where taxable portion of lump sum:

does not exceed R25,000 Nil

exceeds R25,000 but does not exceed R660,000 18% of the amount over R25,000

exceeds R660,000 but does not exceed R114,300 plus 27% of the amount over R660,000
R990,000
exceeds R990,000 R203,400 plus 36% of the amount over R990,000

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