FACULTY OF COMMERCE, HUMAN SCIENCES & EDUCATION

DEPARTMENT OF ECONOMICS, ACCOUNTING AND FINANCE

QUALIFICATION : BACHELOR OF ACCOUNTING (CHARTERED ACCOUNTANCY)

QUALIFICATION CODE: 07BACC LEVEL: 6
COURSE: TAXATION 201 COURSE CODE: TAX601Y

DATE: 26 APRIL 2023 SESSION: THEORY & CALCULATIONS

DURATION: 90 MINUTES MARKS: 60

ASSESSMENT OPPORTUNITY 2

EXAMINER: Mr G Jansen

MODERATOR: Mr A Ketjinganda

INSTRUCTIONS TO CANDIDATES

1. This paper consists of 5 pages (including cover page).

2. You are reminded that answers may NOT be written in pencil. NO tippex may be used.
3. The marks shown against the requirement(s) for every question should be regarded as an indication of the
expected length and depth of your answer.
4. Answer the questions by the use of:
- Effective structure and presentation; clear explanations.
- Logical arguments; and clear and concise language.
5. Show all calculations clearly. Round off calculated amounts to the nearest Rand.
Question Mark(s) Time allocated (minutes)
1 25 37.5
2 27 40.5
3 8 12.0
Total 60 90
QUESTION 1 (25
MARKS)
You are a tax consultant. The following information has been presented to you:
Elias (Pty) Ltd (‘Ellie’), a resident company, owns a hotel in the Garden Route area in the Western Cape.
Ellie had a contract with a resident company called Tyron Ltd (‘Tyri’) to provide accommodation and
meals for a period of six months for students from Argentina which does not have a double tax
agreement with South Africa. Tyri had a contract to train the students.
During September 2022, after staying at the hotel for only two months, the students left the hotel
without giving any reasons for their departure. They had caused extensive damage to the hotel rooms
they had occupied. Ellie sought legal advice on the matter and based on that advice, threatened to sue
Tyri unless it settled a claim for damages of R2 million.

The claim consisted of the following:

 R300 000 for meals and accommodation for the remaining four months of the contract.
 R700 000 to effect repairs to the hotel rooms; and
 R1 000 000 for loss of goodwill which Ellie suffered as a result of the events which led to the
claim.

On 15 November 2022 the parties agreed to settle the matter out of court.
Tyri paid Ellie R1 000 000 and Ellie undertook to abandon any rights it may have had for the damages
and any pending or contemplated court action against Tyri. The parties agreed that the R1 000 000
represented 50% of each of the three items in the claim.
Ellie incurred legal expenses of R15 000 in respect of this matter, which it settled during December
2022.
It also incurred R700 000 to effect repairs to the hotel rooms which it claimed as a deduction in terms of
section 11(d) and this amount is included in the net income of R2 500 000 (see below).
Ellie is not a small business corporation as defined.

In the completion of the tax return (IT14) of the company for its 2023 year of assessment ended 28
February 2023, the accountant of Ellie adjusted its accounting net income that included the R1 million
received for damages and R15 000 legal expenses paid, as follows:

RAND
Net Income 2 500 000
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 Less: Goodwill received (capital receipt) 500 000

2 000 000
Add: Legal expenses of a capital nature (50% of 15 000) 7 500
Taxable Income 1 992 500

The South African Revenue Service (SARS) queried the above treatment and stated that it was treating
the full R1 million damages received as being of a revenue nature and thus taxable, but that it would
allow the legal expenses in full in terms of section 11(c).

Note: Ignore Capital Gains Tax (CGT) for this question.

REQUIRED:

a.) Discuss, with reference to relevant case law and legislation, whether the accountant’s income
tax treatment of the damages receipt was correct. (21)
b.) Briefly, explain with reference to relevant case law and legislation, whether the accountant’s
income tax treatment of the legal expenses was correct. (4)

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QUESTION 2 (27
MARKS)
Elizabeth Ugulu (Pty) Ltd (“Uguli”) is a small retail outlet company selling various grocery items in small
suburb in Pretoria. Uguli is a registered VAT vendor and has an April financial year end. Below find a
summary of income and expenses (all amounts include VAT where applicable) for the year of
assessment:

Notes RAND
Revenue 1 1 725 000
Dividends 2 55 000
Interest Received 3 23 800
Purchases 4 498 000
Payment to IT specialist 5 500 000
Rent Expense & Legal expenses 6 ??
Repairs to the roof 6 ?
Bad debts (credit losses) 7 ??
Salaries 8 450 000
Fines and penalties 9 12 800
Donations 10 ??
Notes:

1. The majority of the amount relates to sales of groceries to regular customers, but R250 000 of
the amount was for trade inventory sold to tavern (shebeen) owners.
2. Uguli owns shares in a South African mining company and received gross dividends of R55 000
for the 2023 year of assessment.
3. During the year of assessment Uguli received interest from its local bank account held at
Standard Bank SA.
4. Purchases are from a wholesaler for trading inventory. All the trading inventory were sold by the
end of the year i.e. No closing inventory were on hand.
5. One of Uguli’s Information Technology (IT) personal that were heavily involved in the
development of the point-of-sale system that is used for the scanning of the groceries at the

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 check-out points decided to start his own business. Uguli paid him R500 000 (excluding VAT) on
1 April 2023 to restrict him from working in the Western Cape Province for the next 5 years.
6. Rental Paid amounted to R10 000 per month in terms of a contract signed on 1 May 2022 for 5
years. During an unfortunate flood that occurred, the roof of the shop was damaged. The
landlord refused to repair the roof and Uguli consulted with their lawyers on this matter. The
lawyer was successful, and the window was repaired by the landlord at a cost of R15 000. Uguli
incurred an amount of R17 250 in legal fees for the services rendered by the landlord in this
regard.
7. One of the customers that purchased inventory on account in the prior year of assessment is
experiencing financial difficulty and indicated that they will not be able to pay the amount
outstanding (R5 500). Uguli advanced a staff loan of R15 000 before the December 2022
holidays, and he did not return after the holidays. He informed Uguli that he will not repay the
loan.
8. Salaries for the year relates to both permanent and casual employment and Uguli contributed
R45 000 for the year to provident funds in respect of the permanent employees only.
9. Uguli received an assessment from SARS for its prior year income tax and fines and penalties was
levied for the late submission of the IT14 return on the e-filling system.
10. Uguli contributed R5 000 to the South African Cancer Association (SACA), an approved public
benefit organization. A Section18A certificate was issued to Uguli.

REQUIRED:

a) Differentiate between a repair, renewal and improvement for Income Tax purposes. (3)
b) Calculate the taxable income for Elizabeth Ugulu (Pty) Ltd for the tax year ending 30 April 2023.
If an amount has no effect on the calculation you have to provide a reason. (24)

QUESTION 3 (8
MARKS)
Consider the following independent scenarios below and answer the question that follows:

a.) A restraint of trade payment received by a natural person in respect of employment. (2)
b.) Compensation received by the lessee when asked to leave by the lessor to vacate the premises
before the expiry date of the lease. (2)

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 c.) Damages received by a wholesaler when a retailer of his finished goods was forced to cancel a
sales contract resulting from a change in ownership. (2)
d.) Unemployment Insurance Fund (UIF) received for being unemployed for three months. (2)
REQUIRED:
Indicate, with reasons, whether the receipts or accruals above will constitute gross income or not for
the respective taxpayers.
(8)

END OF ASSESSMENT 2