Tax Test 2 2022 Question Paper

NKUHLU DEPARTMENT OF ACCOUNTING
TAXATION 2
ATA 221E
ASSESSMENT OPPORTUNITY 2
26 September 2022
ASSESSOR: Ms Simoné Bucher
MODERATOR : Mrs Gail Young (Internal)
TIME: 1 hour (plus 10 minutes reading time)
MARKS: 50
PAGES: 4 pages (including front page)
INSTRUCTIONS:
1. Answer all the questions.
2. Start each question on a new page.
3. Show all workings clearly – marks are allocated to workings.
4. Only answers in ink will be marked (including workings). Pages where pencil or
tippex were used will not qualify for remarking.
5. Only silent, non-programmable calculators are allowed.
6. Students that contravene the rules in the General Prospectus of the University
of Fort Hare will be disciplined in accordance with said rules.
QUESTION MARKS MINUTES

1 50 60
Page 1 of 5
QUESTION 1 50 MARKS (60
MINUTES)
PART A 39 MARKS (47

MINUTES)
New Spice (Pty) Limited (‘New Spice”) is a resident of the Republic and manufactures
deodorants. It sells its products to retailers.
The statement of profit and loss and other comprehensive income of New Spice for its
year ended 28 February 2022 reflected total comprehensive income before tax of
R1 577 150. New Spice is a VAT vendor and all transactions were with VAT vendors,
all amounts stated are exclusive of VAT unless otherwise indicated.
The following information may be relevant in the determinisation of New Spice’s

taxable income:
1. Included in its total comprehensive income before tax of R1 577 150 are the
following dividends that accrued to it during its 2022 year of assessment:
Local dividends from listed shares R25 000

Foreign dividends – the equivalent of R5 600
The foreign dividends are not exempt from normal tax in South Africa under the
provisions of section 10B(2).
2. On 1 May 2020, New Spice purchased a new machine on a cash basis under
an arm’s length transaction for R100 000. This machine was immediately
bought into use in its process of manufacture. On 31 August 2021 it traded in
this machine for a more advanced machine. Depreciation of R12 500 for the
traded-in machine was provided for in its statement of profit and loss and other
comprehensive income. A trade in price (‘proceeds’) of R80 000 was obtained
for the traded-in machine. Included in the statement of profit and loss and other
comprehensive income was the profit of R67 500 that was made when this
machine was traded in. The more advanced machine was purchased as a
second-hand machine for R150 000 and was immediately bought into use in its
process of manufacture. No depreciation has been provided for this machine in
the statement of profit and loss and other comprehensive income.
Page 2 of 5
3. Rental of R96 000 appear as an expense in the New Spice statement of profit
and loss and other comprehensive income. In addition, New Spice paid
R90 000 as a lease premium to occupy factory buildings for a period of 15
years. The lease agreement was entered into 1 June 2021. They were also
obligated to improve the buildings for a cost of R500 000. These improvements
were completed on 1 September 2021 at a R445 000. This premium and the
improvements were not recorded in statement of profit and loss and other
comprehensive income.
4. New Spice paid it annual insurance premium of R156 000 for their 2023
financial year on 15 February 2022. It did this on the advice if its insurance
broker who claimed early payment would secure a better rate. No portion of the
R156 000 prepayment was an expense to its statement of profit and loss and
other comprehensive income in its 2022 year of assessment.
5. A restraint of trade payment of R600 000 is reflected as an expense in New

Spice’s statement of profit and loss and other comprehensive income. It was
paid to Carolina Boss, a chemist, who has been employed by it. She left its
employment on 30 September 2021. The restraint of trade is effective for two
years commencing on 1 October 2021.
6. Salaries and benefits are reflected as an expense in New Spice’s statement of

profit and loss and other comprehensive income. On 1 September 2021, it
employed Jovan Lomani on a full-time basis at a salary of R12 000 a month. He
had not been previously employed by New Spice. New Spice entered into a
three-year learnership agreement with Jovan Lomani in the course of its trade.
The NQF level 6 course is registered with the relevant SETA . It has complied
with all the requirements of the Skills Development Levies Act. The salary paid
to Jovan Lomani and the levies paid to the relevant SETA are also included in
the ‘salaries and benefits’ total.
Page 3 of 5
7. New Spice donated R200 000 to a local charity and received the required
Section 18 A certificate. This has not been reflected in in its statement of profit
and loss and other comprehensive income.
PART A - REQUIRED: Marks
Calculate, with brief reasons, the tax liability of New Spice for the 2022 39
year of assessment. Show nil items.
PART B 11 MARKS (13

MINUTES)
There is currently a law suit involving a customer that used New Spice latest spray
‘Rose Cinnamon’. It caused an allergic reaction and she broke out with a rash which
has caused scarring. The case will be held in the High Court in Johannesburg on 30
March 2022. Upon the advice from their lawyers, it is likely that the company will win
the case as there was a warning on the can that an allergic reaction is possible. The
company has incurred R25 000 in legal fees so far in the 2022 year of assessment.
This amount has been correctly treated in the statement of profit and loss and other
comprehensive income and the taxable income calculation does not require
adjustment.
PART B - REQUIRED: Marks
Using section 11(a) and 11 (c), discuss whether the legal fees made by 11
New Spice will be deductible in New Spice’s taxable income in the 2022
year of assessment, use case law where necessary.
Page 4 of 5
Page 5 of 5

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NKUHLU DEPARTMENT OF ACCOUNTING

ASSESSOR: Ms Simoné Bucher

MODERATOR : Mrs Gail Young (Internal)

TIME: 1 hour (plus 10 minutes reading time)

PAGES: 4 pages (including front page)

QUESTION MARKS MINUTES

PART A 39 MARKS (47

The following information may be relevant in the determinisation of New Spice’s

Local dividends from listed shares R25 000

5. A restraint of trade payment of R600 000 is reflected as an expense in New

6. Salaries and benefits are reflected as an expense in New Spice’s statement of

PART A - REQUIRED: Marks

PART B 11 MARKS (13

PART B - REQUIRED: Marks

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