UNIVERSITY EXAMINATIONS

Examiner: Mr Mhlanguli Nare

Oct/Nov 2024

TAX3701

Taxation of Business Activities

100 Marks
Duration 3 Hours

This paper consists of Fourteen (14) pages including Appendix A

IMPORTANT INSTRUCTIONS:

Assumptions:
1. The VAT rate changed from 14% to 15% on 1 April 2018.
2. All persons mentioned are residents of the Republic of South Africa unless
stated otherwise.
3. SARS = South African Revenue Service.

The answering of this paper:

1. This paper consists of five (5) questions.
2. All questions must be answered.
3. Each question must be commenced on a new (separate) page.
4. All workings, where applicable, must be shown. Where an amount is subject to a
limitation, clearly indicate the application of the limitation. Where any item has a
nil effect on any tax, this must specifically be indicated, and a short reason should
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be provided. All amounts must be rounded to the nearest Rand.

6. You are reminded that answers may NOT be written in pencil.
7. This is a closed book exam
8. Proposed timetable:
(As far as possible, try not to deviate from this timetable):

Question Topic Marks Minutes

1 Value-Added Tax 25 45
Turnover tax, taxation of a business and
2 22 40
general deduction formula
3 Normal income tax liability 35 63
4 Provisional tax 10 18
5 Dividends tax 8 14
TOTAL 100 180

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Submission instructions:
1. Go to myExams.

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2. Log in with your student number and password.

3. Select the module.
4. Follow the instructions on the screen.
5. You must upload your answer script in a single PDF file (answer script must not be
password protected or uploaded as “read only” files).
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7. NO emailed scripts will be accepted.
8. Students are advised to preview submissions (answer scripts) to ensure legibility and
that the correct answer script file has been uploaded.
9. Mark awarded for incomplete submission will be the student’s final mark. No
opportunity for resubmission will be granted.
10. Mark awarded for illegible scanned submission will be the student’s final mark. No
opportunity for resubmission will be granted.
11. Remember to tick the honesty declaration box when submitting to acknowledge
compliance with the Unisa examination rules and affirm that the work you are
submitting is your own.
12. You are provided with 30 minutes to submit your answer script after the official
examination time. Submissions made after the official examination time will be rejected
by the examination regulations and will not be marked.
13. Students experiencing technical challenges during the submission time are
encouraged to contact the CAS Exams desk (casexams@unisa.ac.za) or
TAX3701-24-S2@unisa.ac.za, or contact SCSC at 080 000 1870 within 30 minutes
of the exam start time. Any challenges relating to submission must be addressed to
the same contacts well in advance of the cut-off time (i.e within 30 minutes, not after)
to submit. ONLY communication from your myLife account will be considered.

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QUESTION 1 (25 marks, 45 minutes)

Part A (20 marks, 36 minutes)

Echo-5 (Pty) Ltd (“Echo”) is a South African resident company situated in Paarden Eiland,
Western Cape. The company specializes in the manufacturing of combative uniforms, gadgets
and machinery that is supplied to army services and special intelligence units in and outside South
Africa. Echo regularly has military personnel that walk into the store to purchase uniforms and
small gadgets. The company is registered for Value-Added Tax (VAT) on the invoice basis. The
South African Revenue Service is satisfied that Echo makes 70% standard-rated supplies and
30% zero-rated supplies and classified the company as a category A vendor.

As a newly appointed tax associate in Echo’s tax division, you have been provided with the follow-
ing list of transactions that took place during the two-month VAT period ended on 31 May 2024:

All amounts include VAT, unless stated otherwise. Where necessary, Echo obtained valid tax
invoices and the required documentation for all its transactions.

Notes Amount
(R)
Income
Income from local sales 1 1 960 000
Income from international sales 430 000
Proceeds from the sale of a photocopy machine 2 ?
Sale of land situated outside RSA 3 1 200 000

Expenditure
Municipality bill 4 51 840
Fabric 5 ?
Subsistence allowance 6 17 450
Debt paid on behalf of employee 3 270
German Shepherd dog 7 ?
Bad debts – International sales 35 000
– Local sales 15 000
Purchase of a minibus 8

Notes:

1. Excluded from the income from local sales is an amount of R88 000 (excluding VAT). The
amount relates to a sale that took place in May 2024. The payment in respect of the transaction
was received on 30 May 2024, but the invoice was only issued on 5 June 2024.

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QUESTION 1 (continues)

2. On 22 April 2024, Echo sold one of the company’s photocopy machines for R25 000 to a buyer
situated in Botswana. The photocopy machine was originally purchased second-hand for
R30 000 on 15 January 2024, from a seller that is not registered for VAT. The market values
of the photocopy machine on the respective dates were as follows:

Date Market value

15 January 2024 R35 000
22 April 2024 R31 000

3. On 12 October 2022, Echo acquired a plot of land in Ghana. The land was acquired as part
of a strategy to expand operations and increase the company’s client base in the region. The
land was acquired for R975 000. On 1 May 2024, the land was disposed of to a Ghanaian
buyer for R1 200 000.

4. The municipality bill was paid on 17 April 2024, and the amount comprised the following:

• Water and electricity R39 500

• Environmental levies R 4 200
• Interest on overdue account R 8 140
Total R51 840

5. On 15 May 2024, fabric with a cost price of R120 300 was purchased from a supplier situated
in Morocco. The fabric was transported to South Africa through a cargo ship and non-refund-
able surcharges amounting to R6 200 were paid on the transaction. The cargo ship myste-
riously exploded a few kilometers before reaching the South African harbour, damaging all the
goods it was transporting, including Echo’s fabric.

6. The subsistence allowance was paid to cover meals and incidental costs of employees when
they had to work out of town from 6 May 2024 to 10 May 2024.

7. Echo’s business premises are located in a high crime area. To mitigate the risk of safety, a
German Shepherd dog was acquired for R5 100 (excluding VAT) from Dogs-R-Us Ltd (Dogs-
R-Us). Dogs-R-Us is not a VAT vendor and are not connected persons in relation to Echo.
The market-related selling price of the dog on the day of the acquisition amounted to R4 200.

8. A minibus for transporting employees to and from work was purchased for R380 000 on
1 May 2024.

Additional information:

The following transactions have not been included in the above list:

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QUESTION 1 (continues)

• On 18 January 2024, a customer paid an excess amount of R10 000 (excluding VAT) on
the purchase of a combative uniform. Echo’s finance team has since been trying to trace
the customer and make a refund of the excess payment. As of 31 May 2024, the client was
still not traceable, and the R10 000 was still not refunded.

• On 2 February 2024, Echo entered into a lease agreement for the lease of an office building
from Occupus Limited, a property rental company incorporated in South Africa. In terms of
the lease, the following terms applied:

Rental R12 500 per month payable in arrears.

Improve- Echo had to effect lease improvements to the total value of R450 000.
ments The improvements were completed on 28 May 2024 at a total cost of
R375 000.

Of the R375 000, the following total cost was incurred during the two
months ended on 31 May 2024:
• Building material purchased R82 000

Echo registered on the SARS e-filing platform on 1 January 2023 and has since then been paying
all its taxes due on the platform.

REQUIRED: MARKS
(a) Calculate the VAT payable by/ refundable to Echo (Pty) Ltd for the two-month
VAT period ended on 31 May 2024. 18

Provide reasons where a transaction results in a zero effect on the VAT pay-
able/refundable.

(b) Assuming that your answer in part (a) above indicates a VAT payable, advise,
supported with a reason, Echo (Pty) Ltd’s due date for the submission of the 2
VAT201 tax return and payment of the amount due in respect of the two months
VAT period ended on 31 May 2024.
TOTAL 20

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Part B (5 marks, 9 minutes)

Echo-5 (Pty) Ltd (“Echo”), is considering importing specialized materials from suppliers in BLNS
countries to enhance their product offerings. As a VAT-registered entity in South Africa, Echo-5
needs to understand the VAT implications of these imports.

Echo-5 is looking to import high-grade ballistic nylon, which is used in the manufacturing of bullet-
proof vests. They have two potential suppliers: one located in Lesotho and another in Germany.

The cost of materials is roughly the same for both suppliers, and Echo-5 will incur an import cost
of R500 000 from either country.

REQUIRED: MARKS
Discuss the VAT implications for Echo-5 when importing goods from a BLNS coun-
try, specifically:

1. Explain how VAT is applied to imports from BLNS countries compared to 5

imports from non-BLNS countries like Germany.
2. What is the difference between the time of supply for importation of goods
from a BLNS vs a non-BLNS country?

QUESTION 2 (22 marks, 40 minutes)

Question 2.1 (10 marks, 18 minutes)

Mfanafuthi Mthethwa started a garden service business, called Nyambose Landscaping (Pty) Ltd
(‘Nyambose Landscaping”) on the 1st of April 2023 to provide garden services to residents of the
prestigious, The Little Hills Lifestyle Estate, in Grassfontein, Pretoria. Mfanafuthi is the only share-
holder of Nyambose Landscaping, and this is the only private company Mfanafuthi holds shares
in. The company’s financial year ends on the last day of February.

The following is the extract from the financial records of Nyambose Landscaping for the year
ended on 29 February 2024.

Item Amount
Revenue from garden service fees R1 100 000
Debtors A quarter of the service fees
are still to be collected.
Sale of old Hyundai H1 2-ton bakkie used exclusively in the R90 000
garden service business on 1 January 2024.
Income from investments:
Interest received on a credit balance of Cetipac Bank R45 000
Dividend income from NTM, a company listed on the JSE R77 000

Nyambose Landscaping (Pty) Ltd is not a personal service provider or a labour broker as defined.

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REQUIRED: MARKS
2.1.1 Calculate the turnover threshold that will be used to determine whether
Nyambose Landscaping (Pty) Ltd will qualify to register as a Micro Busi-
ness. 1
2.1.2 Calculate the qualifying turnover for Nyambose Landscaping (Pty) Ltd for
its 2024 year of assessment. 3
2.1.3 Discuss whether Nyambose Landscaping (Pty) Ltd qualifies to register as
a Micro Business. 6

Question 2.2 (10 marks, 18 minutes)

Drone Boyz (Pty) Ltd (“Drone Boyz”) is a manufacturer of drones based in Morningside, Durban.
Drone Boyz was established by Rahim Naran, the only shareholder of Drone Boyz, on
1 April 2023. Drone Boyz is a resident of South Africa for income tax purposes and has a January
year-end. The Commissioner of South African Revenue Service approved the process of manu-
facturing toys as a process of manufacture.

Rahim Naran is contemplating registering his business as a Small Business Corporation.

Drone Boyz commenced with its trade on 1 April 2023. The following are the receipts and accruals
of Drone Boyz for its 2024 year of assessment:

• Drones Sold R13 456 233

• Local interest R113 250

Rahim Naram does not own shares/interests in any other private company. Drone Boyz is not a
personal service provider and does not provide any personal services as defined.

REQUIRED: MARKS
2.2 Discuss whether Drone Boyz (Pty) Ltd qualifies to be classified as a Small
Business Corporation as defined for its 2024 year of assessment. You may 10
ignore any VAT implications.

Question 2.3 (2 marks, 4 minutes)

REQUIRED: MARKS
2.3 Define, with reference to case law, what ‘actually incurred’ means in terms of
the general deduction formula and support your discussion with a relevant 2
court case.

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QUESTION 3 (35 marks, 63 minutes)

HomeTech (Pty) Ltd (“HomeTech”) is the largest manufacturer and distributor of a range of domes-
tic appliances (i.e., refrigerators, stoves, washing machines, etc.). The company was founded by
Mr Langa in 1980 and incorporated in South Africa. HomeTech is not a small business corpo-
ration as defined in section 12E of the Income Tax Act, and its financial year ends on 30 April
2024. The company is a registered Value-Added Tax (VAT) vendor making 97% taxable supplies.
Where necessary, HomeTech obtained valid tax invoices and the required documentation for all
its transactions. All amounts exclude VAT where applicable, unless specifically stated otherwise.
You are the newly appointed taxation clerk at HomeTech and have been provided with the below
extract of the Statement of Profit or Loss and Other Comprehensive Income by the company’s
accounting division:

HomeTech (Pty) Ltd

Extract: Statement of Profit or Loss and Other Comprehensive Income for the year ended
30 April 2024
Note R
Revenue 1 3 250 500
Cost of sales 2 (1 081 400)
Gross profit 2 169 100

Other income 3 29 000

Administrative expenses 4 (565 000)
Other expenses 5 ?

Profit before tax 1 633 100

Notes:
1. Included in revenue is a refundable deposit of R90 000 paid by a customer to secure an order
of a limited-edition refrigerator that was in the final stages of manufacturing but would not be
ready for sale by 30 April 2024. Upon receipt of the deposit, HomeTech sent the customer a
confirmation email with a promise that the amount would be fully refunded if the order is can-
celled before delivery of the refrigerator. The deposited amount was kept in a separate bank
account and will remain in that bank account until the delivery of the refrigerator takes place.

2. The accounting division did not account for the following in respect of the costs of sales
amount of R1 081 400:

2.1. The final trading stock valuation for the 2024 financial year revealed that the market
value of the closing stock amounts to R523 000, which is R76 800 below the closing
stock value accounted for in the cost of sales figure.

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2.2. On 27 April 2024, spare parts costing R115 000 were purchased for use in the manu-
facturing of domestic appliances. Due to shipment delays experienced by the supplier,
the spare parts where not yet delivered to HomeTech by 30 April 2024.

2.3. During the 2024 financial year, trading stock with a cost of R33 500 and a market value
of R45 000 was donated to Green Peace, a public benefit organisation that houses the
elderly. HomeTech received the necessary income tax certificate in respect of this
donation.

3. Other income comprised of dividends received in respect of equity shares held in Mumbai
Solutions, a company effectively managed in India. The equity shares were acquired on
2 November 2023 for R350 000, representing a 12% equity shareholding and voting rights in
Mumbai Solutions. HomeTech incurred legal costs amounting to R15 000 in respect of the
legal advice obtained before making this investment and the legal costs were capitalized to
the investment.

4. Administrative expenses include:

Employee costs:

4.1. Salaries and wages of employees amounting to R522 000.

4.2. Annuities totalling R43 000 were paid to Ms. Shazia, an employee who resigned during
the 2024 financial year.

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QUESTION 3 (continues)

Omitted from administrative expenses are the following:

4.3. HomeTech entered into a rental lease agreement for an office building from Mkhaya
Property Rentals Limited on 1 September 2023 The terms of the lease were as follows:
• Monthly rental amounting to R15 000 had to be paid in arrears.
• The lease was for a period of 10 years.
• Structural improvements worth R500 000 had to be effected on the office building.
The improvements were completed on 31 January 2024at a total cost of R450 000
and brought into use at the same date.

5. The other expenses amount was not yet calculated at the time of availing the above statement
to you. You were, however, informed that the amount would include the following:

5.1. Depreciation expense amounting to R295 700 in respect of the following assets:

Asset Asset information

Heavy-duty electric The electric screwdriver was purchased on 17 July 2023 for
screwdriver R3 600.
Delivery vehicles HomeTech owns five delivery vehicles which were all acquired
on 1 December 2022 at a cost of R350 000 each.

On 31 October 2023, one of the delivery vehicles was stolen,

and the company received an insurance payout of R325 000
in respect of the loss.
Metal laser cutting The metal laser cutting machine is used in the manufacturing
machine of appliances with a metal exterior. The machine was acquired
new and unused for R237 000 (including VAT) on 1 January
2021.
New office building In anticipation of the end of the lease in point 4.3 above,
HomeTech acquired a new and unused part of an office build-
ing in a nearby office park for use as the company’s new office
space. Costs incurred on this acquisition amounted to
R1 200 000, and the building was brought into use on
1 September 2023.
Dishwashing On 1 February 2024, HomeTech acquired a design of a tech-
machine design nologically advanced dishwashing machine from another
household appliance manufacturer that is a resident of South
Africa. The cost of the design amounted to R80 000.
Office furniture Office furniture acquired for R119 000 on 1 April 2015 was
disposed of on 15 April 2024. A capital gain of R11 000 was
realised on this disposal.

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QUESTION 3 (continues)
5.2. HomeTech prides themselves in taking care of their employees. They provide staff
loans to employees that may be in need. Mr Sithole was approved for a loan of R30
000 but sadly passed away before he could repay the loan amount. The amount was
proven to be irrecoverable.

Additional information:
Binding General Ruling: No. 7 makes provision for the following write-off period:
• Delivery vehicles………………………………………………………… 6 years
• Office furniture…………………………………………………………… 5 years

An assessed capital loss of R3 500 was carried forward from the 2023 year of assessment.

REQUIRED: MARKS
Calculate the normal income tax liability of HomeTech (Pty) Ltd for the 2024 year
of assessment. Provide brief reasons where an amount or transaction has no
effect on normal income tax. 35

Please start your answer with the profit before tax of R1 633 100.
Note: HomeTech (Pty) Ltd will make use of any possible election(s) that would
legally minimise its normal income tax liability.

QUESTION 4 (10 marks, 18 minutes)

Maporisa (Pty) Ltd (“Maporisa”) is a South African company specializing in the manufacture and
export of innovative outdoor camping equipment. Maporisa has a 31 December year end. Due to
a strategic decision to diversify its product offerings, Maporisa decided to dispose one of its main
manufacturing buildings to a potential company that they were to merge with. The manufacturing
building was originally acquired on 1 October 2002 for R250 000. They received proceeds for the
building that amounted to R1 178 000 in total. They also incurred legal fees of R86 000 for the
sale as well as R67 900 for repairs that they had to do prior to the sale.

On 20 March 2024, they received an assessment from SARS based on their 2021 year of
assessment. The assessment reflected a taxable income of R8 008 000 which included the tax-
able gain on the disposal of the manufacturing building.

REQUIRED: MARKS

Calculate the first provisional tax payment for Maporisa, due on 30 June 2024. 10

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QUESTION 5 (8 marks, 14 minutes)

Makukhanye (Pty) Ltd (“Makukhanye”) is a resident company that manufactures and distributes
portable power stations to be used during loadshedding around South Africa. Below is the register
of ordinary shareholders of Makukhanye (Pty) Ltd:

Name of the Shareholder % Shareholding

Thabang Lesufi, a resident 60%
Vukuzenzele Charities, an approved PBO 15%
Maboneng Limited, a resident company 15%
Sizanani Elite Stokvel, a portfolio of a collective investment scheme 10%
in securities in the Republic of South Africa

Makukhanye (Pty) Ltd declared a cash dividend of R165 000 relating to its ordinary shares.

The shareholders submitted the written declarations and undertakings required for the dividends
tax exemption to Makukhanye (Pty) Ltd.

REQUIRED: MARKS
5.1. Calculate the dividends tax that Makukhanye (Pty) Ltd must withhold from
each shareholder based on their respective shareholdings on the total cash
dividend declared of R165 000. 6
Please provide reasons where no dividends tax is withheld.
5.2 What would the dividends tax be on the dividend declared to Thabang Lesufi
be if Makukhanye (Pty) Ltd was a registered micro business. 2

©
Unisa
2024

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ADDENDUM A

A. 2024 – TAX TABLES

(i) Tax on small business corporations

Taxable income from benefit Rate of Tax

R0 – R95 750.......................................................... 0 per cent of the taxable income
Exceeding R95 751 but not exceeding R365 000 ... 7% of taxable income exceeding R95 750
Exceeding R365 001 but not exceeding R550 000. R18 848 plus 21% of taxable income exceeding
R365 000
Exceeding R550 001............................................... R57 698 plus 27% of taxable income exceeding
R550 000

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