FACULTY OF COMMERCE, HUMAN SCIENCES & EDUCATION

DEPARTMENT OF ACCOUNTING, ECONOMICS AND FINANCE

QUALIFICATION : BACHELOR OF ACCOUNTING (CHARTERED ACCOUNTANCY)

QUALIFICATION CODE: 07BACC LEVEL: 6

COURSE: TAXATION 201 COURSE CODE: TAX601Y

DATE: 1 JUNE 2023 SESSION: THEORY & CALCULATIONS

DURATION: 120 MINUTES MARKS: 75

ASSESSMENT OPPORTUNITY 3 SOLUTION

EXAMINER: Mr G Jansen

MODERATOR: Mr A Ketjinganda

MEMORANDUM
QUESTION 1 (25 MARKS)
a)

The repayments on a private mortgage bond is normally private and domestic expenses. Section (1)
23(b) prohibits the deduction of private and domestic expenditure.
However, in light of the fact that the workshop was specifically equipped and exclusively used (1)
for Smart Alert’s trade purposes, this prohibition will not apply to the extent of its use for trade
purposes.
Since Smart Alert is conducting his business from his workshop, which comprises 10% of the total (1)
floor area of his residence, an allocation of 10% of his expenses to the business should be
deductible, provided the expenses satisfy the requirements of section 11(a), i.e. incurred in the
production of income in carrying on such trade and not of a capital nature. (1)
Interest of R10 000 (10% of total interest of R100 000) paid on the mortgage bond is thus (1)
deductible in terms of section 11(a).
The remaining 90%, however, is private in nature and its deduction is prohibited. Therefore, the (1)
remaining interest of R90 000 paid does not qualify for a deduction.
The capital repayments of R20 000 are not deductible as they are of a capital nature and merely (1)
a repayment of the amount initially borrowed. (1)
(Bonus mark: New State Areas case).
Total (8)
Max (6)

b)

The salary of R18 000 (R24 000 – R6 000) paid to Smart Alert’s housekeeper is a private and (1)
domestic expense and thus prohibited as a deduction by section 23(b).
Alternative: the R6 000 is not a private expense.
However, Smart Alert pays an additional amount of R6 000 per annum specifically for business (1)
related services.
Provided this constitutes a reasonable allocation, he will be entitled to deduct the R6 000 in (1)
the determination of his taxable income in terms of section 11(a) (the general deduction
formula), read with section 23(g). (1)

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Alternative: he will be entitled to deduct the R6 000, as it was actually incurred, in the production
of income, it is not of a capital nature and was incurred in the course of carrying on Smart’s
trade.
Total (4)

c)

In order for the medical expenses and compensation payment to be deductible in terms of (1)
the general deduction formula (section 11(a)), all the requirements of section 11(a) must be
met, i.e. the expenses must have been actually incurred, in the production of Smart Alert’s
income, incurred in carrying on his trade, and the expenses must not be of a capital nature
(mark can also be awarded if all the requirements are mentioned).
The most likely requirement to be challenged is the “in the production of income” (1)
requirement. The medical expenses and compensation payment would be deductible if they (1)
are so closely linked to Smart Alert’s business operations to be regarded as part of the cost (1)
of performing such operations.
Alternative: the expenses must be an “inevitable/necessary concomitant” of the type of
business. (Bonus mark for either PE Electric Tramway Company Ltd or Joffe). (2)
In Smart Alert’s type of business, where they visit clients’ premises (both industrial areas and (1)
private residences) where the guarding of premises by a dog(s) is a common and familiar sight,
the risk of being attacked by a dog and sustaining injuries in the process, can reasonably be
expected.
As a necessary consequence, Smarty Alert Alarms will have to bear the cost of the resultant
medical expenses and compensation paid for any injuries sustained by his assistant. (1)
The medical expenses and compensation payment can therefore be considered to be (1)
sufficiently closely connected to Smart Alert’s business to render the amount deductible.
The requirement “in the production of income” will thus be met. (1)p
Furthermore, the payment of the medical expenses and compensation has not created any (1)
enduring benefit. (1)
Alternative: the payment of the medical expenses and compensation is more closely connected
to the income-earning operations of Smart Alert, as opposed to the income-earning structure.
(Bonus mark: New State Areas case). (1)

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The expenses of R1 500 are therefore not of a capital nature and Smart Alert can deduct the (1)
entire amount for normal tax purposes.
Total (14)
Max (10)

d)
Smart Alert would have been able to deduct the loss of R580 in terms of section 11(a), but for (1)
the provisions of section 23(c).
Section 23(c) prohibits the deduction to the extent that the loss/ expense is recoverable under (1)
a contract of insurance, guarantee, security or indemnity.
Since he had insurance cover for stolen goods and will thus recover his loss once the insurance (1)
claim is paid out, section 23(c) prohibits the deduction of the loss of R580 and he cannot claim
it as a deduction in the calculation of his taxable income.
Total (3)
Max (2)

e)

Costs incurred in transporting a capital asset is more closely connected to the income-earning (1)
structure than to the income-earning operations of the business and is therefore of a capital (1)
nature and not deductible in terms of section 11(a).
It can be added to the cost of the asset and will form part of the capital allowance under (1)
section 11(e) to be claimed over the remainder of the asset’s useful life.
Total (3)

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QUESTION 2 (10 MARKS)
A small business corporation is defined in section 12E(4)(a). (1)
The following applies to TG (Pty) Ltd:
TG is a private company, and all the holders of shares are natural persons. Section 12E(4)(a). (2)
The gross income of the company (R6 531 120) is less than R20 million rand. Section (1)
12E(4)(a)(i).
Neither Tim nor Gerome holds any shares in any other company, except: (Section 12E(4)(a)(ii))
- in a listed company. Section 12E(4)(a)(ii)(aa) (½)
- in a company that has never traded and own assets of which the total market value does not (½)
exceed R5 000. (Section 12E(4)(a)(ii)(hh)(A) and (B))
TG is not a personal service provider (provided) (section 12E(4)(a)(iv)) (1)
Not more than 20% of the total receipts, accruals and capital gains may consist collectively (1)
of investment income and income from the rendering of a personal service. Section
12E(4)(a)(iii).
The turnover (R5 570 230) from accounting services rendered will be regarded as a personal service,
as:
- it is services rendered in the field of accounting (section 12E(4)(d)) (1)
- the services are performed personally by Tim and Gerome (the only holders of shares in TG) (1)
- the company did not throughout the year of assessment employ three or more full-time (1)
employees who are not connected persons to Tim or Gerome (section 12E(4)(d)(ii))
- Only two non-connected full-time employees were employed throughout the year of (1)
assessment as the third employee was only employed for part of the year.
The interest received (R110 540) as well as the rental received (R850 350) is investment (1)
income. Section 12E(4)(c)(i) and (ii).
Therefore, all the income (R6 531 120) of the company is regarded as either investment (1)
income and/or income from the rendering of a personal service.
Conclusion: The requirements of section 12E(4)(a)(iii) are not satisfied and TG does not
qualify as a small business corporation. (1)
(12)
Available (14)
Maximum (10)

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QUESTION 3 (40 MARKS)
a) Olenga (Pty) Ltd
Taxable income for the year of assessment ended 31 March 2023
Nr Item Reason/Calculations RAND RAND
Net profit before tax 12 949 200
1. Less: Closing Stock Accounting entry reversed (3 980 300) (1)
Add: Closing Stock Section 22(1)(a) - closing stock 3 100 850 (1)
valued at lower of cost or market
value.

Opening stock No adjustment required. Section 20. - (1)

2. Dividends received
Less: Dividend exempt Section 10(1)(k)(i) (209 000) (1)

Add: Interest earned on Section 24J (3) deemed as gross 285 700 (1)
foreign investment income.

3. Less: Accounting profit Accounting entry reversed (22 000) (1)

from sale of machinery
Add: Recoupment on Selling price R724 500 x 600 000 (1)
sale of 100/115 = R630 000, but limited to
Machine C105 original cost
(1)
Less: Tax value 0

Recoupment (s 8(4)(e) &

(1)
par 66 of the 8th Schedule) 600 000 600 000

4. Net salaries No adjustment - deductible in full in - (1)

terms of s 11(a) –

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 Employees’ tax paid to Deduction of PAYE not prohibited by - (1)
SARS section 23(d) as this is not a tax
payable by the company, but rather
part of its total salary expense.
UIF contributions - Deduction of UIF not prohibited by - (1)
personnel section 23(d), but rather part of its
total salary expense.

UIF contributions - Deduction of UIF not prohibited by - (1)

company section 23(d), but rather part of its
total salary expense.

5.1. Add: Depreciation – Accounting entry reversed 44 000 (1)

Machine C207
5.1. Less: Allowance on Cost (1/11/2022) 1 600 000 (1)
(1)
Machine Add: Special Foundation 58 000
C207 1 658 000
Section 12C allowance
R1 658 000 x 40% (663 200) (1)

Add: Interest paid on Accounting entry reversed 73 000 (1)

new machine
Less: Interest paid / R14 600 x 4 = R58 400 not deductible - (1)
Finance charges – machine only brought into use on
1 March 2023.

Section 11A not applicable as it is (14 600) (1)

not an expense before the
commencement of a trade
Section 24J (R14 600 x1)

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5.2. Add: Depreciation Accounting entry 39 600 (1)
computers
Less: Wear-and-tear Cost price (1/06/2022) 198 100 (1)
(1)
on computers Add: Freight and insurance 30 000
(1)
Add: Import duty 10 000
Cost price (01/10/2022) 238 100

Wear-and-tear (R238 100 / 3 x 6/12)

(s11(e)) (39 683) (1)

5.3. Add: Depreciation – Accounting entry reversed. 525 000 (1)

factory building
Less: Allowance on Section 13
factory building R15 740 000 x 100% x 5%) (As >50%
of the factory building is used for
manufacturing - allowance allowed
in full) (787 000) (1)

Add: Depreciation – Accounting entry reversed. 78 350 (1)

office building
Less: Allowance on Section 13quin (R2 350 600 x 5%) (117 530) (1)
new office building

6.1. Repairs - parking area Accounting entry reversed 82 000 (1)

Amount does not qualify for
deduction under section 11(d) =
improvement. No capital allowances
available.
6.2. Add: Repairs - Accounting entry reversed - No 850 500 (1)
extension to deduction under section 11(a) or (d),
factory building as expense is of a capital nature and
constitutes an improvement.

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 Less: Allowance on Section 13(1) allowance
extension to factory (R850 500 x 5%)
building (42 525) (1)

7. Add: Dividends Accounting entry reversed. Not 867 000 (1)

declared deductible
8. Add: Fines and Accounting entry reversed. Not 12 350 (1)
penalties deductible
Taxable income before 13 631 712
Donation
9. Donations No adjustment – Section 18 A - (1)
deduction allowed.

10% of taxable income 13 631 712 =1

363 171
Limited to R7 500
10. Less: Assessed loss Section 20 (395 000) (1)
brought
forward
Taxable Income 13 236 712
Available 37
Max 36

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 b) Repairs

Note 6.1 - deduction of repairs to parking area in terms of section 11(d):

Repair - restoration by renewal or replacement of a subsidiary part of the whole asset. (1)
The materials used in effecting repairs need not be identical to the materials being replaced although
the use of other materials could indicate that the work does not merely amount to repairing
damage/deterioration of the asset, but in fact aims to improve such asset.

Repairs must be distinguished from improvements.

The test is whether a new or better asset has been created, resulting in an increase in the income-
earning capacity, or whether the work undertaken merely represents the cost of restoring the asset to
a state in which it will continue to earn income as before. (1)
In this case a renewal of the whole asset took place as the current materials (gravel) were replaced by
a tar surface due to the fact that the gravel surface was damaged. (1)
However, at the same time the income-earning capacity of the asset was increased, as the restoration
resulted in a better asset. (1)
Conclusion: Thus, this is an improvement and not a repair under s 11(d).

Note 6.2 - extension to current factory building:

Not deductible in terms of either section 11(a) or section 11(d). (1)
The extension to the factory building increased the income-earning capacity of the factory building.
Therefore it is an expense of a capital nature. (1)
Court Case: New State Areas (bonus mark).
Available (6)
Max (4)

END OF MEMORANDUM

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