Professional Documents
Culture Documents
Graded Questions On Income Tax in SA 2022 - Nodrm
Graded Questions On Income Tax in SA 2022 - Nodrm
Kevin Mitchell
BCom (Natal) BCom (Hons) (Cape Town) CA(SA)
Director of Mitchells Tax Consultants Company (Pty) Limited
Honorary Professor in the School of Law
University of KwaZulu-Natal.
Lindsay Mitchell
BCom MAcc DEcon (Natal) CA(SA)
Freelance tax lecturer, editor and writer.
The questions are based on the Income Tax Act 1962, the Tax Administration Act 2011, the Value-
Added Tax Act 1991, the Estate Duty Act 1955 and the Transfer Duty Act 1949 – incorporating
amendments up to and including the Rates and Monetary Amounts and Amendment of Revenue
Laws Bill of 2021 [B21 – 2021].
It does not include amendments as proposed for in the Taxation Laws Amendment Bill of 2021
[B22 – 2021], and the Tax Administration Laws Amendment Bill of 2021 [B23 – 2021]. And it
does not include the provisions in the Disaster Management Tax Relief Act 13 of 2020 and the
Disaster Management Tax Relief Administration Act 14 of 2020.
Suggested solutions to all the questions in the book are available only to those institutions who
prescribe it. Queries relating to these suggested solutions should be e-mailed to the Authors at
[email protected].
Certain questions from the South African Institute of Chartered Accountants’ past qualifying
examination papers have been adapted with its permission. The suggested solutions to these
questions are those of the authors and not those of the South African Institute of Chartered
Accountants who has had nothing to do with their preparation and who accept no responsibility for
them.
Suggestions as to improvements to the book would be welcomed and should be addressed to the
Publisher.
Published by:
LexisNexis
Box 792
Durban
4000
i
0HPEHUVRIWKH/H[LV1H[LV*URXSZRUOGZLGH
6RXWK$IULFD /H[LV1H[LV
ZZZOH[LVQH[LVFR]D
-2+$11(6%85*%XLOGLQJ&RXQWU\&OXE(VWDWH2IILFH3DUN:RRGODQGV'ULYH
:RRGPHDG
&$3(72:1)LUVW)ORRU*UHDW:HVWHUIRUG0DLQ5RDG5RQGHERVFK
'85%$13HWHU0RNDED5RDG1RUWK5LGJH5RDG0RUQLQJVLGH'XUEDQ
$XVWUDOLD /H[LV1H[LV&+$76:22'1HZ6RXWK:DOHV
$XVWULD /H[LV1H[LV9HUODJ$5'2UDF9,(11$
%HQHOX[ /H[LV1H[LV%HQHOX[$067(5'$0
&DQDGD /H[LV1H[LV&DQDGD0$5.+$02QWDULR
&KLQD /H[LV1H[LV%(,-,1*
)UDQFH /H[LV1H[LV3$5,6
*HUPDQ\ /H[LV1H[LV*HUPDQ\0h167(5
+RQJ.RQJ /H[LV1H[LV+21*.21*
,QGLD /H[LV1H[LV1(:'(/+,
,WDO\ *LXIIUq(GLWRUH0,/$1
-DSDQ /H[LV1H[LV72.<2
.RUHD /H[LV1H[LV6(28/
0DOD\VLD /H[LV1H[LV.8$/$/80385
1HZ=HDODQG /H[LV1H[LV:(//,1*721
3RODQG /H[LV1H[LV3RODQG:$56$:
6LQJDSRUH /H[LV1H[LV6,1*$325(
8QLWHG.LQJGRP /H[LV1H[LV/21'21
8QLWHG6WDWHV /H[LV1H[LV'$<7212KLR
,6%1 VRIWEDFN
HERRN
3ULQWHGE\3LQHWRZQ3ULQWHUV
LL
TABLE OF CONTENTS
CHAPTER Page
iii
APPENDIX
TABLE Page
1 Rates of Normal Tax for Natural Persons, Insolvent and Deceased Estates
and Special Trusts for the 2022 year of assessment ........................................................... 719
2 Rates of Tax on Retirement Fund Lump-Sum ‘Retirement’ Benefits ................................ 719
3 Rates of Tax on Retirement Fund Lump-Sum Withdrawal Benefits ................................. 720
4 Rates of Tax on Severance Benefits................................................................................... 721
5 Rebates for the 2022, 2021, 2020, 2019, 2018 and 2017 Years of Assessment ................. 722
6 Rates of Normal Tax for Natural Persons, Insolvent and Deceased Estates
and Special Trusts for the 2021 year of assessment ........................................................... 722
7 Trusts ................................................................................................................................. 722
8 Companies ........................................................................................................................ 723
9 Rate of Donations Tax ....................................................................................................... 724
10 Rate of Estate Duty ............................................................................................................ 725
11 The Expectation of Life and the Present Value of R1 per Annum for Life
Capitalised at 12% over the Expectation of Life of Males and Females of
Various Ages .................................................................................................................... 726
12 The Present Value of £1 per Annum Capitalised at 6% over Fixed Periods ...................... 728
13 The Present Value of R1 per Annum Capitalised at 12% over Fixed Periods ................... 729
14 Scale of Values – Right of Use of Motor Vehicles ............................................................ 729
15 Scale of Values – Travel Allowance .................................................................................. 730
16 The Regulation Standard Values of Livestock ................................................................... 731
17 Extracts from Transfer Duty Act and Securities Transfer Tax Act .................................... 732
18 Subsistence Amounts ......................................................................................................... 733
19 Prescribed Rates of Interest ............................................................................................... 738
20 Official Rate of Interest ..................................................................................................... 739
iv
ASSUMPTIONS
Unless specifically stated to the contrary, the following assumptions must be made when interpreting
the questions in this book:
• An amount is expressed in the currency of South Africa.
• A taxpayer is a resident of the Republic.
• The term ‘a resident of the Republic’ means a person or entity that is a ‘resident’ as defined in
section 1(1) of the Income Tax Act.
• A couple is married out of community of property.
• A taxpayer, a spouse, or a ‘qualifying’ child is not a ‘person with a disability’ as ‘defined’ in
section 6B(1).
• ‘Qualifying medical expenses’ means that they satisfy the requirements of section 6B.
• The age of the person given is his age on the last day of the year of assessment.
• A reference to a company or person being a ‘taxpayer’ means that if an amount is deemed to
accrue to it or him under ‘paragraph (h) of the definition of “gross income” in section 1(1)’, this
amount will constitute its or his income. In other words, it will not be exempt from normal tax.
• A reference to a local dividend means that it falls within the definition of a ‘dividend’ in
section 1(1).
• A reference to a foreign dividend means that it falls within the definition of a ‘foreign dividend’ in
section 1(1).
• Local interest means interest that is from a South African source.
• Local interest is not from a ‘tax-free investment’ as defined in section 12T(1).
• A reference to a ‘vendor’ means a person who is registered as a vendor under the Value-Added
Tax Act.
• When appropriate, an enterprise is a vendor.
• The cost of all purchases made by a vendor is net of the input tax deduction that he enjoys.
• The 2022 year of assessment for a non-corporate taxpayer is the year of assessment ending on
28 February 2022 and for a company its financial year ending during the period of 12 months
ending on 31 March 2022.
• A company or a close corporation is not a ‘small business corporation’ as defined in
section 12E(4)(a).
• A company or a close corporation is not a ‘personal service provider’ as defined in paragraph 1
of the Fourth Schedule to the Income Tax Act.
• Determinations of ‘taxable income’ are in rands only, cents are simply ignored. An amount is
neither rounded up nor down to the nearest rand.
• Except for section 6quat, determinations of ‘normal tax payable’ and ‘normal tax liability’ are in
rands and cents.
• An amount derived in a foreign currency is expressed in its equivalent value in the currency of
South Africa.
• ‘The Commissioner’ means the Commissioner for the South African Revenue Service.
• A non-resident means a person who is not a resident of the Republic.
• Section and paragraph references are to the Income Tax Act, unless a statement to another Act is
specifically made, for example, a statement to the Value-Added Tax Act, the Estate Duty Act or
the Tax Administration Act. In Chapter 28 the section and reference numbers are to the Estate
Duty Act. In Chapter 29 the section and paragraph references are to the Value-Added Tax Act.
• The cost price of a motor vehicle purchased does not include the cost of a motor plan.
• A reference to a minor child is to a minor child who has not obtained his majority on the grounds
of tacit emancipation.
v
ASSUMPTIONS (CONTINUED)
• A reference to a ‘gross local dividend’ means to the amount of the dividend declared and paid
before the withholding of dividends tax.
• A reference to a ‘gross foreign dividend’ means to the amount of the foreign dividends declared
and paid before the withholding of a non-residents shareholders tax and before the withholding of a
foreign tax.
• A reference to a ‘pure’ share capital or a ‘pure’ share premium indicates that the company’s
share capital or share premium is not tainted with capitalised profits. It is ‘contributed tax
capital’ as defined in section 1(1). In other words, the company has not had a bonus or
capitalisation issue that did not constitute a dividend at the time of the issue.
• The words ‘he’, ‘him’, ‘himself ’ and ‘his’ stand for a noun of an unspecified gender.
vi
CHAPTER 1
INTERPRETATION AND DISPUTES
1
2 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
• Sales tax.
• Wealth tax.
You are required to discuss each method of taxation setting out its advantages and disadvantages.
Dion Crookes’s taxable income for the 2022 year of assessment was R416 000 excluding these net
rentals.
Dion Crookes is 30 years old.
The 2022 year of assessment was the first year that rentals accrued to Dion Crookes. In previous
years of assessment he has not understated his taxable income.
You are required to determine what additional tax would be payable by Dion Crookes if the
Commissioner was to raise the provisions of sections 221 to 224 inclusive of the Tax
Administration Act, and then to determine what his total normal tax liability would be.
You were recently appointed as a Chairman of the tax board by the Minister of Finance. You have
read the ‘dossier’ on this case. And you heard evidence and argument from both Mant Shingelane
and from the Commissioner’s representative. Your problem is one of interpretation. You are unsure
whether you should follow a literal or strict approach or the so-called new approach to the
interpretation of fiscal legislation. You recently read an article written by Jonathan Silke entitled
‘The New Approach’ which was published in the journal, Tax Planning ((1995) 9 Tax Planning at
136). This article dealt with a less-rigid basis of interpretation.
The evidence revealed that the Commissioner had included the R9 500 in Mant Shingelane’s gross
income under paragraph (c) of the definition of ‘gross income’.
You are required to write your judgment to this appeal on the basis that you will adopt the so-
called new approach, if at all possible.
confirmed that the painting was not an original. It was a print, albeit a limited-edition print. And its
market value was only R3 000.
Since Walter Rein’s objection time limit had not yet elapsed, he immediately objected to his
assessment. In his letter of objection he indicated that the grounds of his objection would be
provided in a follow-up letter. He has ‘drafted’ these grounds as follows:
‘Included in my taxable income is R15 000 for a non-cash long-service award that I received.
The asset awarded to me was believed to have a market value of R20 000, and then R5 000 of
this amount was not subject to tax under paragraph 5(2)(b) of the Seventh Schedule of the
Income Tax Act.
‘It has now been established that the actual market value of the asset is only R3 000 (and not
R20 000). No amount should therefore have been included in my taxable income for my long-
service award.
‘Please will you reassess me by excluding from my taxable income the R15 000 included in it
for the taxable value of my long-service award.’
Walter Rein has consulted you in this regard. If his objection fails, he would like to ensure that his
objection in no way jeopardises the success of his appeal. He has informed you that he will appeal
against the Commissioner’s decision should his objection fail.
You are required to
1. ‘improve’ the grounds of Walter Rein’s objection so that the appeal procedure is not
jeopardised,
2. on the assumption that his objection is unsuccessful, state whether the tax court is competent to
hear this appeal if he takes this matter on appeal,
3. indicate the circumstances when a taxpayer may challenge a discretionary decision made by
the Commissioner,
4. state what limits are imposed upon the Commissioner’s right to withdraw, or amend, a decision
made by him in the exercise of his discretion, and
5. give your brief views as to whether his appeal would be successful.
CHAPTER 2
GROSS INCOME
9
10 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Harry Hollander’s joy was short-lived since Arthur Accountant refuses to honour the R2 000 bet.
Harry Hollander consults Lester Law, a lawyer, the next day, 28 February 2022, at an agreed fee of
R300 payable in 30 days’ time. Lester Law informs him that certain kinds of bets are not
enforceable at law and there is, therefore, little he can do about the R2 000.
Unbeknown to Harry Hollander, Zavier Hollander visits Lester Law on 1 March 2022 and arranges
to escort him (Lester Law) for the evening in return for him waiving the R300 consultation fee
owed by Harry Hollander.
While Zavier Hollander is out entertaining Lester Law, Arthur Accountant changes his mind, and
honours the bet by paying Harry Hollander the R2 000 he owes him.
Harry Hollander then uses R300 of the R2 000 to settle Lester Law’s account on 30 March 2022.
Gary Gullible
On 27 February 2022, Gary Gullible, a second-hand motor car dealer, sold a 1930 Pontiac (a motor
car) to Denis Darling for R90 000 payable by a post-dated agreement to 28 February 2022.
On 2 March 2022 Gary Gullible discovers that Denis Darling is insolvent and has left the country.
Gary Gullible does not attempt to enforce the agreement but pastes a print out of it as a feature on a
wall in his home. This wall has many similar items pasted on it.
Art Clerk
Art Clerk, a newly-qualified attorney who knows nothing, and cares even less, about tax, attended
an auction sale. At this auction sale he purchased complete sets of the
• South African Law Reports for R8 000, and
• South African Tax Cases Reports for R2 000.
Art Clerk was in the process of setting up a legal practice at the time when he purchased the
reports.
Since Art Clerk is, however, terrified of tax-type problems, he has vowed never to handle a tax
problem and never to allow an employee, or prospective partner, of his to give tax advice.
Shortly after Art Clerk had completed the setting up of his legal practice (that did not include ‘tax’
work), he was obliged to sell both sets of law reports to cover damages from a paternity suit (a case
deciding on the biological father of a child) that had been successfully brought against him.
Art Clerk then
• sold the South African Law Reports for R6 000, and
• after that, he sold the South African Tax Cases Reports for R7 000.
Art Clerk’s dislike of the tax authorities brought his transactions to the attention of the
Commissioner, who then included in his taxable income the profit of R5 000 (R7 000 – R2 000) he
had made from the sale of the South African Tax Cases Reports.
But the loss of R2 000 (R8 000 – R6 000) suffered by Art Clerk on the sale of the South African
Law Reports was not deductible in the determination of his taxable income.
The Commissioner had determined his taxable income on the basis that his
• profit enjoyed on the sale of the South African Tax Case Reports was of a revenue nature, and
• loss suffered on sale of the South African Law Reports was of a capital nature.
You are required to indicate in which year or years of assessment the amounts in question may be
said to have ‘accrued’ to the various taxpayers. Brief reasons should be furnished to support your
answer. And for Art Clerk you should briefly advise him about the correctness, or otherwise, of the
Commissioner’s actions.
12 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
‘It was common cause that the word “received” was not to be given its ordinary wide meaning
and that it had to be limited at least to meaning “received as part of the recipient’s patrimony”.’
‘Patrimony’ is defined in the Concise Oxford Dictionary as ‘property inherited from one’s father or
ancestors, heritage’.
Hefer JA who delivered the judgment of the Appellate Division of the Supreme Court (now the
Supreme Court of Appeal) in CIR v People’s Stores (Walvis Bay) Ltd (1990 (2) SA 353 (A), 52
SATC 9) stated that (at SATC 24)
‘the decision in the Lategan case reflects the law correctly’.
The principle involved in the determination of the date of accrual as established in Lategan v CIR is
that the date when the taxpayer becomes entitled to an amount is the date when it ‘accrues to’ him.
In the following 12 unrelated situations, a taxpayer has received an amount, or there has been an
accrual of an amount, that may constitute gross income:
Silas Iolaus
Silas Iolaus recently formed his own transport business. A BBE-approved financial institution
agreed to assist him with his new business venture. It has approved a medium-term loan. The
amount obtained from it will be used by him to finance the costs of setting-up his new business. On
1 March 2021 he obtained a loan of R250 000 from it.
Caesar Andrenymus Construction CC
Caesar Andrenymus Construction CC carries on the business of a building contractor specialising
in the erection of outdoor facilities. Its financial year ends on the last day of February.
On 31 January 2022 it completed the building of a butterfly park for the Pennington Municipality.
Under the building contract,
• 90% of the contract price is due and payable on completion of the butterfly park, and
• 10% of the contract price is to be retained as ‘retention moneys’ until a final certificate is issued
by the engineer six months after the completion of the building.
The contract price of the Pennington Municipality butterfly-park contract is R4 500 000.
Beulah, Daphne & Irene Property Consultants
The three Crysoritis sisters, Beulah, Daphne and Irene are the partners of a local estate agency
business. They collect rentals on behalf of a number of property owners. During the 2022 year of
assessment they received R4 000 000 from the tenants occupying the flats and houses belonging to
the property owners, and administered by them.
• They kept R240 000, being their commission on the rentals collected, and
• paid over the balance of R3 760 000 to the property owners.
Regina Colotis Designer Outfits CC
Regina Colotis Designer Outfits CC has a financial year that ends on the last day of February. It is
a distinctive ladies boutique. On 27 February 2022 it sold a ‘Lady Mallalieu Label’
businesswoman’s suit to Alexanra Barrister a customer for R9 000. Under this contract of sale, it
undertook to deliver the businesswoman’s suit to her one week later, on 5 March 2022. This suit
had cost it R3 600. The suit was delivered to her on 5 March 2022. The R9 000 was settled by her
in full on the same day.
Barbara Kedestes
Barbara Kedestes has two accounts with a bank. She has a
• call account that earns her interest at a rate of 5% a year, and
• current account that does not earn her interest, but on which she incurs interest should her
balance be overdrawn.
14 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Barbara Kedestes therefore deposits all amounts she receives in her call account. She then
withdraws funds from her call account when her current account is almost overdrawn. During the
2022 year of assessment she received R540 000 being the withdrawals from her call account that
she deposited into her current account.
Clara Dingara
Clara Dingara invested R2 000 000 in a 6,5% fixed-deposit investment on 1 February 2022 with a
financial institution for 12 months. Under this fixed deposit contract, she is entitled to interest only
on the completion of the 12-month period.
Stella Actizera (Pty) Limited
Stella Actizera (Pty) Limited sells fresh milk under the name ‘Butterfly Diaries’. (Its largest farm
has the name ‘Butterfly Farm’.) Its containers of milk are different from most other milk containers
in that they are beautiful styled glass bottles with a motif on them of five butterflies in flight.
A number of housewives collect these bottles for a variety of uses. The milk is also sold by Stella
Actizera (Pty) Limited only in the two-litre size.
During Stella Actizera (Pty) Limited’s 2022 year of assessment its milk was sold for a total price of
R50 with the price of the milk itself being R25,20 and the price of the bottle R24,80. The bottles
may be returned by customers. If they do so, they are refunded R24,80 for each bottle returned. Yet
most bottles are not returned. It, therefore, treats the sale of a bottle in the same way as the sale of
the milk.
During Stella Actizera (Pty) Limited’s 2022 year of assessment, it received R5 890 000 from the
sale of its bottles. And it paid out refunds of R980 000 for bottles returned to it.
Brutus & Caster Charaxes CC
Brutus & Caster Charaxes CC carries on a business of tomato farming. Its financial year ends on
the last day of February.
In January 2022 Brutus & Caster Charaxes CC sold, and delivered, tomatoes to a tomato-sauce
producer for R25 000. This amount due was settled with
• R15 000 being paid on delivery (on 29 January 2022), and
• the R10 000 balance being paid six months later (on 29 July 2022).
Petra Acraeal
Petra Acraeal was employed for a number of years as the late Lorenzo Coeliades’s housekeeper. On
his death, she received as a bequest,
• the oven that she had cooked his meals in (valued at R8 000), and
• cash of R150 000.
Shortly before Lorenzo Coeliades died he had also given Petra Acraeal
• R9 000 cash as a holiday bonus, and
• R6 000 cash as a birthday gift.
Serena Telchinia Spa CC
Serena Telchinia Spa CC’s financial year ends on the last day of February.
Ella Cigaritis signed a six-month contract with Serena Telchinia Spa CC on 1 February 2022 to use
its facilities for relaxing. It has a natural spa in the middle of a butterfly-filled and peaceful garden.
Since she had agreed to a six-month contract, she qualified for a discount. Under a condition in the
contract, she was to pay R300 a month prior to the seventh day of each month. (The normal tariff is
R400 a month.) A further condition in the contract provided that she was liable for R1 800 (six
months at R300) irrespective of whether she used its facilities for the entire six months or for a
lesser period.
GROSS INCOME 15
by him without improvements being made to them, and the position when they are first improved
by him, and then sold by him.
Thanda Zulu
Last month Thanda Zulu sold his business ‘lock, stock and barrel’ (in its entirety) to Royals
Limited. He had been trading as a sole trader. He sold all his business assets to it. He had been keen
to sell for some time. He originally wanted R1 000 000 for his business, but settled for a selling
price of R600 000, payable on the date of the sale and purchase agreement and an amount equal to
30% of the net after-tax income of his former business for each of its next three years of
assessment. Should it achieve its budgeted results, the total amount that he will receive will be
R1 000 000.
You are required to determine, and discuss, the amount to be included in Thanda Zulu’s 2022 to
2025 gross incomes as a result of him selling his business.
Moroka Bird
Moroka Bird emigrated from South Africa during the 2021 year of assessment.
• In the 2021 year of assessment he was physically present in South Africa for 60 days (and
absent from it for 305 days).
• In the 2020 year of assessment he was physically present in South Africa for 306 days (and
absent from it for 60 days).
• In the 2019 year of assessment he was physically present in South Africa for 335 days (and
absent from it for 30 days).
• In both the 2018 and 2017 years of assessment he was physically present in South Africa for the
entire years (and absent from it for no days).
In the 2022 year of assessment Moroka Bird was physically present in South Africa for 185 days
(and absent from it for 180 days).
You are required to determine if Moroka Bird will have his South African gross income
determined on the residence (so-called world-wide) or source basis.
Celtic Swallow
Celtic Swallow who is ordinarily resident in Durban purchased a flat in Cape Town. It is occupied
rent free by Bay Swallow, his minor daughter who is a full-time student at a university in Cape
Town.
During the university vacations Bay Swallow returns home (to Durban). She then lets the flat to
two of her friends who reside in Cape Town.
For the 2022 year of assessment Bay Swallow earned R9 000 from the letting of this flat.
You are required to discuss whether these rentals of R9 000 should be included in gross income
and, if so, then state in whose gross income.
Ajax Santos
Ajax Santos is employed in Spain by the South African Government as a translator. He is not a
resident of the Republic. Each year he works for
• 10 months in Spain,
• one month in South Africa, and
• the twelfth month is his annual vacation.
This year Ajax Santos spent his annual vacation in North America.
You are required to discuss the normal tax consequences of the salary Ajax Santos earns from the
South African Government.
18 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Platinum Limited
Platinum Limited is not a resident of the Republic. It owns two rent-producing properties, one
situated in South Africa and one situated outside South Africa:
• It earned net rentals from the property situated in South Africa in its 2022 year of assessment
(ended on 28 February 2022) of R100 000.
• It earned net rentals from the property situated outside South Africa in its 2022 year of
assessment the equivalent of R150 000.
The net rentals as determined above are after the deduction of deductible directors’ fees paid to the
directors for the running of Platinum Limited. Of these directors’ fees, R18 000 was paid to
Orlando Pirate who is a resident of the Republic. He attends to its South African transactions.
You are required to discuss what the South African normal tax consequences to both Platinum
Limited and Orlando Pirate are of the above amounts that they earned.
Mamelodi Manning
Mamelodi Manning, a resident of the Republic, retired nine years ago. His sole receipt or accrual is
R15 000 a month from Sundowns (Pty) Limited. He had always been employed by it. But he had
worked for it both in South Africa and in Italy. His employment history was as follows:
• 1 March 1972 to 28 February 1977 in South Africa.
• 1 March 1977 to 28 February 1983 in Italy.
• 1 March 1983 to 28 February 1989 in South Africa.
• 1 March 1989 to 28 February 1993 in Italy.
• 1 March 1993 to 28 February 2005 in South Africa.
• 1 March 2005 to 28 February 2011 in Italy.
• 1 March 2011 to 29 February 2012 in South Africa.
You are required to state how much of the R180 000 (12 months at R15 000 a month) would be
included in Mamelodi Manning’s South African income in the 2022 year of assessment.
During the 2021 year of assessment Tucker Bloggs received his first instalment of 1 000 shares. In
a letter accompanying his 2021 tax return, he disclosed that the shares were received by him
• half for services rendered, and
• half as payment for being restrained from competing with the chemical company, or doing
anything causing harm to it.
This latter half Tucker Bloggs therefore disclosed as a receipt of a capital nature. He was assessed
accordingly.
In the 2022 year of assessment Tucker Bloggs received his second instalment and disclosed it in his
2022 tax return as he had done in the 2021 year of assessment.
On assessment of Tucker Bloggs, however, the apportionment was not accepted by the
Commissioner. Instead, the entire amount was subjected to normal tax on the basis that it was for
services rendered.
An additional assessment was also issued to Tucker Bloggs for the 2021 year of assessment,
disallowing the apportionment in that year, and including the full amount in his gross income.
You are required to discuss whether the Commissioner was correct in disallowing the
apportionments to Tucker Bloggs in the 2021 and 2022 years of assessment.
In 2015 the Commissioner had agreed to postpone consideration of Frederick Farm Realisation Co
(Pty) Limited’s possible liability for normal tax until the entire property had been sold.
In 2019 only the last block of 50 hectares of Frederick Farm Realisation Co (Pty) Limited’s land
remained. Because of the great demand for property in the area, it sub-divided this block into small
building plots to sell them individually, rather than to sell the block as a whole to a developer as it
had previously done. By it selling individual plots a better price was realised. In December 2019
the first plot was sold, and on 30 November 2021 the last plot was sold by it.
Frederick Farm Realisation Co (Pty) Limited’s accountant has now determined that an overall
profit of R110 000 000 has been made by it on the sale of the 300 hectares of its original farmland.
She has warned the shareholders that this profit could be subjected to normal tax.
Andy Wilkinson, being the eldest of the grandchildren, was nominated to investigate the situation
and report back to the others. He consults you. He would like to know whether Frederick Farm
Realisation Co (Pty) Limited will be liable for normal tax on the profits made by it, and whether its
shareholders will be subject to tax on distributions made to them by it.
Andy Wilkinson also took this opportunity to investigate a personal matter. In November 2021 he
sold krugerrands that he had held since 2006. He made a profit of R100 000 on their sale. He would
like to know whether there are normal tax implications for him resulting from his sale of his
krugerrands.
You are required to advise Andy Wilkinson fully on these matters.
Midas McGreedy unsuccessfully objected to this assessment and has now appealed to the tax court.
He refused the offer to have this dispute resolved using the alternate dispute resolution process and
did not enter into a settlement agreement with the Commissioner.
Under the provisions of section 109(4) of the Tax Administration Act, due to the
‘legal principles related to [this] appeal’
a senior SARS official decided that this appeal should be heard by the tax court rather than the tax
appeals board.
You are required to prepare an argument on behalf of Midas McGreedy to be presented to the tax
court.
Matchmaker (Pty) Limited not only carried on the business as detailed above. It also owned certain
wedding assets that it let to the families hiring the halls at a market-related rental. It also acted as an
agent to obtain other items required by the families hosting the weddings. For these services it
either charged a service fee or earned a commission.
Matchmaker (Pty) Limited accounted in its journal for its transactions on the following basis:
Hiring of halls Dr 5 000
To School (Number 1 to 20) 5 000
Being the fee for use of a hall.
Family (hosting wedding) Dr 6 150
To Hiring of hall 5 000
To Service fee 1 000
To Output value-added tax 150
Being the recovery of the fee for the use of a hall and the service
charge due.
Cash (or bank) Dr 6 150
To Family (hosting wedding) 6 150
Being the advance payment received for the hiring of the hall and
for the services provided.
The turnover of headmasters and their secretaries in Chatsworth is fairly high. A result of this was
that Matchmaker (Pty) Limited was not always ‘billed’ by a school when its hall had been hired.
When a school had failed to ‘bill’ Matchmaker (Pty) Limited for the hiring of its hall, it ended up
with a credit balance in Matchmaker (Pty) Limited’s books. (As set out above, Matchmaker (Pty)
Limited had credited the school for the use of its hall prior to the ‘bills’ being received from the
school.) Matchmaker (Pty) Limited settled each school’s ‘account’ on the fifteenth of the month
following the month when the hall was hired.
On 16 January each year Matchmaker (Pty) Limited transferred credit balances on the ‘School
Accounts’ to a suspense account. This entry was recorded in its journal as follows:
School (Number 1 to 20) Dr [Balance]
To Suspense [Balance]
Being balance transferred to a suspense account as a result of a
‘bill’ never having been received.
In Matchmaker (Pty) Limited’s financial statements each year (its financial year ends on the last
day of February) the balance on its suspense account was reflected as one of its creditors.
Matchmaker (Pty) Limited had used all its surplus cash resources each year to purchase further
assets for use in its hiring business.
At 31 January 2022 the balance in Matchmakers (Pty) Limited’s suspense account was R2 400 000.
No portion of this amount was being claimed by a school participating in this arrangement. Of this
amount, R1 750 000 related to the hiring of halls that had taken place more than three years earlier.
Although the hall had been hired more than three years earlier, no claim against this amount has as
yet prescribed. Not wanting to reflect R2 400 000 in its creditors at 28 February 2022, it made the
following journal entry in its books:
Suspense Dr 1 750 000
To Statement of profit or loss and other comprehensive income 1 750 000
Being incorrect debits recorded in the books now being reversed.
In its 2022 tax return Matchmaker (Pty) Limited reflected the above R1 750 000 as a ‘non-taxable’
amount, giving the reason for it as being an accounting entry made simply to write off a balance held
in its suspense account.
The Commissioner included this R1 750 000 in the taxable income of Matchmaker (Pty) Limited in
its 2022 year of assessment. It then unsuccessfully objected against this R1 750 000 inclusion in its
26 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
taxable income. It has now appealed to the tax court. It refused the offer to have its dispute resolved
using the alternate dispute resolution process and it did not enter into a settlement agreement with
the Commissioner.
Under the provisions of section 109(4) of the Tax Administration Act, and due to the
‘legal principles related to [this] appeal’
a senior SARS official decided that this appeal should be heard by the tax court rather than the tax
appeals board.
You are required to prepare an argument on behalf of Matchmaker (Pty) Limited to be presented at
the tax court.
CHAPTER 3
RESIDENCE AND SOURCE
27
28 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
For a number of years Verity Winterton spent roughly six months of each year living in
Switzerland and the remaining six months living in South Africa. She prefers cooler weather and
therefore, as far as possible, she follows the winter months between the northern and southern
hemispheres.
But three years ago, Maxwell Carthill, Verity Winterton’s accountant, for tax reasons, advised her
to emigrate from South Africa. She officially emigrated from South Africa in December 2020.
During the 2022 year of assessment Verity Winterton visited South Africa on three different
occasions. As a result, she spent a total of 155 days in South Africa during the 2022 year of
assessment. All these trips had been to visit her grandchildren and friends in South Africa.
Verity Winterton’s income from South African sources for the 2022 year of assessment was as
follows:
• Local interest from local interest-bearing securities of R500 000. None of these local interest-
bearing securities is a ‘tax free investment’. All her local interest accrues, annually in arears, on
the last day of February.
• Local dividends of R300 000 from her shareholdings in various South African companies.
• Net rentals from rent-producing properties of R200 000. These rentals are collected by Brooke
Caris, an estate agent on her behalf. Brooke Caris is fully responsible for administering all her
rent-producing properties.
Verity Winterton declared in her 2022 tax return that the local interest she earned was exempt from
normal tax under the provisions of section 10(1)(h) of the Income Tax Act.
In assessing Verity Winterton for the 2022 year of assessment, the Commissioner included in her
income all the amounts earned by her with the exception of the R300 000 local dividends and
R34 500 local interest. He thus merely granted her the exemption from normal tax for local
dividends provided by section 10(1)(k) and the so-called basic local interest exemption from
normal tax under section 10(1)(i). He denied her the section 10(1)(h) exemption from normal tax.
Verity Winterton is now 66 years old.
You are required to give your views with reasons (and supported by relevant case law) as to
whether Verity Winterton may enjoy the section 10(1)(h) exemption from normal tax for the local
interest she earned.
• In the 2018 year of assessment Roy Cissus spent a total of 61 days outside South Africa.
• In the 2017 year of assessment Roy Cissus was physically present in South Africa for the entire
year of assessment, that is 365 days.
• In the 2016 year of assessment Roy Cissus was physically present in South Africa for the entire
year of assessment, that is 366 days.
Roy Cissus has been asked to work on a contract in South Africa during the 2022 year of
assessment. This will require him to be physically present in South Africa for 240 days during the
2022 year of assessment.
You are required to state whether Roy Cissus will be a resident of the Republic in the 2022 year of
assessment under the definition of a ‘resident’.
Polly Tea
Polly Tea is not a resident of the Republic. She is an airhostess employed by the South African
Airways. She is employed on its international flights. She was in South Africa for 146 days of the
2022 year of assessment. She earns R36 000 a month.
Paddy Row
Royalties the equivalent of R50 000 accrued to Paddy Row from the United Kingdom. These
royalties are for canoes being manufactured in the United Kingdom using a mould developed by
him in South Africa, when he was resident in South Africa. He is no longer a resident of the
Republic, having emigrated from South Africa five years ago. He does not have a permanent
establishment in South Africa.
You are required to state whether the above amounts, received by or accrued to the said taxpayers,
are from a South African source.
Razor Spikey
Razor Spikey, who is not a resident of the Republic, invented (in America) an automatic shaver
(razor) for men. This automatic shaver was so successful, that not only American manufacturers
used the design, but Treble Blades (Pty) Limited, a manufacturer in South Africa also now
manufactures it. He does not have a permanent establishment in South Africa. During the 2022 year
of assessment royalties of R40 000 accrued to him from Treble Blades (Pty) Limited and the
equivalent of R500 000 from the American manufacturers that use his design.
Jimmy Clerk
Cecil Bash, a partner in the Lesotho-based firm of chartered accountants, Tick & Bash, sent its
employee Jimmy Clerk to South Africa to investigate a fraud involving one of its clients. He took
three months to complete his investigation. His salary was R14 000 a month. He is not a resident of
the Republic.
You are required to determine how much of the amount received by or accrued to the taxpayer, in
each of the above situations, is included in his or its South African gross income.
On 30 June 2021 the Botswana Development Corporation banker’s acceptance matured and she
received 350 000 pula. On 1 July 2021 she purchased another Botswana Development Corporation
banker’s acceptance for 350 000 pula (face value 402 000 pula). On 31 December 2021 Susan
Hayward received the 402 000 pula. She invested this 402 000 pula in Johannesburg (it converted
into R310 000) in a one-year fixed deposit with a South African bank at 10% a year, capital and
interest payable on 31 December 2022. This fixed deposit is not a ‘tax free investment’.
You are required to state, with reasons, the amounts (if any) to be included in Susan Hayward’s
South African taxable income for the 2022 year of assessment arising from the above transactions.
(Assume R1 = 1,30 pula.)
into rands. On 5 April 2021 he received April’s rental of R4 280 (ǧ200) and on 7 May 2021 he
received May’s rental of R4 320 (ǧ200).
• Since William Gilbert had surplus funds available both in London and in South Africa he dealt
in shares on both the London and the JSE Securities Exchanges. He negotiated with Stuart
Surridge, a broker in London and Phillip van den Walt a broker in Johannesburg. From Durban,
where he was residing, he would telephone his two brokers. They would make recommendations
as to which shares he should purchase and sell. Over the telephone he would either confirm or
reject their proposals. During the period from 1 March 2021 to 31 May 2021 he realised profits
of R3 000 on his JSE Securities Exchange deals and the equivalent of R5 000 on his London
Stock Exchange deals. In addition, at the end of the 2022 year of assessment there existed
unrealised profits on the shares he held in the JSE Securities Exchange of R2 000 and unrealised
profits on the shares he held in the London Stock Exchange of the equivalent of R4 000.
• In April 2021 William Gilbert participated in a BBC Television debate on the future of cricket in
South Africa. The programme was produced in London with him being interviewed and
questioned by satellite while sitting in a television studio in Durban. BBC Television paid him
£500 for his contribution to the programme. The £500 was forwarded to him in South Africa and
his Durban bank credited his account with R10 700.
• While in Durban, William Gilbert met Tyrone Dacelo, a cricket-ball salesman from Australia.
They entered into a contract in Durban. It provided that Tyrone Dacelo would sell 50 dozen
cricket balls to William Gilbert. The cricket balls were manufactured in Australia. They were
delivered to William Gilbert in London during June 2021. By the end of the English cricket
season in September 2021, he had sold all the cricket balls he had received from Tyrone Dacelo.
He sold the cricket balls to the various counties that contest the English cricket championship at
a profit of £1 800 (the equivalent of R39 150).
• Black Willow (Pty) Limited, a Durban-based manufacturer of sports equipment, entered into an
agreement with William Gilbert. This agreement provided that his name would appear on all
cricket bats manufactured by it. He was to be paid a royalty for each cricket bat manufactured that
had his name on it. At the time of his departure from South Africa he had received R3 000 in
royalties from it. A further R5 000 accrued to him from it for cricket bats manufactured during the
period 16 June 2021 to 28 February 2022. The manufacturer had approached him to use his name
on its cricket bats as a result of his reputation of being one of the finest batsmen in the world.
• So as to help raise funds for the Chatsworth Cricket Club, William Gilbert agreed to raffle his
cricket bat that he used when he scored a century against South Africa in the Johannesburg test
held in February 2021. His arrangement with it was that the amount raised from the raffle would
be shared equally between him and it. Raffle tickets were sold during May 2021 and the prize
was awarded to the winner on 6 June 2021. His share of the amount raised by the raffle was
R750.
You are required to discuss the source of each amount that was received by William Gilbert, or
that accrued to him, during the 2022 year of assessment. You should also discuss whether any
amounts are exempt from normal tax. Ignore the possible application of a Double Taxation
Agreement.
40 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Quillin Gage
Quillin Gage is not a resident of the Republic. His receipts and accruals for the 2022 year of
assessment consisted of the following amounts:
• A pension the equivalent of R14 000 a month from Cambridge Corporation of America for
whom he worked in South Africa from 1 July 1983 to 31 December 1992, and in America from
1 January 1993 to 31 December 2000.
• A pension of R28 500 a month from the South African Government for whom he worked in
America from 1 January 2001 to 31 December 2013, and in South Africa from 1 January 2014
to 31 December 2017.
• An annuity of R120 000 (but being paid at the rate of R10 000 a month) purchased by him in
South Africa from a South African insurer for R900 000. The annuity is for a 10-year period.
You are required to determine Quillin Gage’s 2022 South African income.
Mirabella Plum
Mirabella Plum emigrated to South Africa from France 15 years ago. She has been ordinarily
resident in South Africa ever since.
Claude Reine de Bavay, Mirabella Plum’s father, who was never ordinarily resident in South
Africa, and who visited South Africa on only one occasion – to enjoy a two-month holiday in South
Africa – died during the 2022 year of assessment.
Under Claude Reine de Bavay’s will, Mirabella Plum inherited
• a rent-producing property situated outside South Africa, and
• dividend-yielding shares in companies registered outside South Africa.
Net foreign rentals and foreign dividends have accrued to Mirabella Plum from these inherited
assets. These foreign dividends are not exempt from normal tax under section 10B(2).
You are required to state whether Mirabella Plum must include in her South African income these
net foreign rentals and foreign dividends?
Julien Damson
Julien Damson, aged 70 years, emigrated from South Africa to America 10 years ago. He is now
ordinarily resident in America. He does not carry on business in South Africa. He does not have a
permanent establishment in South Africa. His blocked funds were invested in South Africa in
• a local rent-producing property, and
• in a local interest-bearing security. It is not a ‘tax free investment’.
For the 2022 year of assessment Julien Damson expects to earn from these sources,
• net rentals of R96 000, and
• local interest from the interest-bearing security of R54 500.
Julien Damson would like to know the amount of his South African taxable income for the 2022
year of assessment. He did not visit South Africa in the 2022 year of assessment.
You are required to determine Julien Damson’s 2022 South African taxable income.
Bryan Laxton
Bryan Laxton, a non-resident, played football for a local South African football club in the South
African domestic league for eight months of the 2022 year of assessment. He earned R60 000 a
month.
Bryan Laxton had no other receipts or accruals from a South African source. And he did not incur
any expenditure that is deductible in the determination of his South African taxable income.
You are required to determine the amount of tax payable by Bryan Laxton on the amount he
earned from a South African source.
42 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Royalties
Before emigrating to South Africa Rani Rajah had written a book of poems that was published in
India. This book is sold to members of the Hindu community living in India and living in South
Africa. Royalties the equivalent of R24 000 accrued to her for books sold in India during the 2022
year of assessment and royalties of R15 000 accrued to her for books sold in South Africa during
the 2022 year of assessment. The Indian tax authorities levied Indian tax the equivalent of R6 000
on the R24 000 equivalent royalty, but did not levy tax on the R15 000 royalty from sales made
within South Africa.
During the previous year of assessment Rani Rajah had written a book of prayers in South Africa
and that was published in South Africa. This book is sold to members of the Hindu community
living in India and living in South Africa. Royalties the equivalent of R14 400 accrued to her for
books sold in India during the 2022 year of assessment and royalties of R30 000 accrued to her for
books sold in South Africa during the 2022 year of assessment. The Indian tax authorities levied
Indian tax the equivalent of R3 600 on the R14 400 equivalent royalty.
Children’s interest
During the 2022 year of assessment local interest of R10 500 accrued to Hardick Rajah, their first-
born child, from a non ‘tax free investment’ and local interest of R8 750 accrued to Jasprit Rajah,
their second-born child from a non ‘tax free investment’ made out of the R100 000 amounts
donated to them by their mother (Rani Rajah).
You are required to determine Rani Rajah’s 2022 South African taxable income indicating the
source of each of her receipts and accruals.
During the 2022 year of assessment Harrison Evans’s receipts and accruals were as follows: (If
they were in a foreign currency they are expressed below in their rand-equivalent values.)
• A pension from Elaine Lancelot Plc’s, his former employer’s, pension fund
(administered in his native country) 300 000
• Net rentals from ‘his’ rent-producing property situated in his native country 60 000
• Foreign dividends from ‘his’ shares in companies registered in his native country –
none of these foreign dividends is exempt from normal tax under section 10B(2) 18 000
• Foreign interest from ‘his’ interest-bearing security ‘invested’ in his native country 33 450
• Net rentals from the ‘inherited’ rent-producing property situated in his native
country 48 000
• Annuity from Benjamin Evans’s, his late father’s, deceased estate 72 000
• Net rentals from a rent-producing property situated in South Africa 24 000
• Local interest from the Durban Building Society (not a ‘tax free investment’) 14 400
• Local interest from the KwaZulu-Natal Bank (not a ‘tax free investment’) 3 600
• Local dividends from South African listed companies 12 000
• Salary from part-time work he performed in Durban 27 000
During the 2022 year of assessment Harrison Evan’s expenses included the following:
• Interest incurred of R18 000 on a loan. The funds from this loan were used by him to purchase
shares in a foreign public company, as a long-term investment. No dividends were received by
or accrued to him from these foreign shares during the 2022 year of assessment.
• A ‘qualifying’ section 18A donation to an approved public benefit organisation of R33 000.
During the 2022 year of assessment Harrison Evans made the following capital gains and suffered
the following capital losses:
• Capital gain on the sale of South African listed shares 21 000
• Capital loss on the sale of South African listed shares 1 500
• Capital loss on the sale of his domestic motor car 45 000
• Capital gain on the sale of a krugerrand 500
• Capital gain on the sale of a holiday cottage (not his ‘primary residence’) 38 875
South Africa and Harrison Evans’s native country do not have a double taxation agreement.
You are required to determine Harrison Evans’s 2022 South African taxable income.
CHAPTER 4
SPECIAL INCLUSIONS
45
46 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
awards. Should the return from these investments be insufficient to make a R30 000 monthly
awards, then part of the capital of the trust would be used to finance the short fall.
In the 2022 year of assessment Doyenné du Comise was awarded R360 000 by Pyrus du Comise
testamentary trust. This R360 000 was financed to the extent of
• R330 000 from the return from the investments, and
• R30 000 out of the capital of the trust.
William Chretien
During the 2021 year of assessment William Chretien retired. During his working life he had
worked both in South Africa and in Namibia. He has investments in both countries:
• On 1 March 2021 William Chretien purchased an annuity from an insurer in Namibia. It
provides for the payment the equivalent of R30 000 a year, for 10 years. He used a cash lump
sum the equivalent of R200 000 to purchase this annuity.
• On the same day, 1 March 2021, William Chretien purchased an annuity from an insurer in
South Africa. It provides for the payment of R50 000 a year, for five years. He used a cash lump
sum of R187 500 to purchase this annuity.
In the 2022 year of assessment William Chretien was awarded
• the equivalent of the R30 000 annuity from Namibia, and
• the R50 000 annuity from South Africa.
William Chretien is a resident of the Republic.
Duchess Pitmaston
The assets of the Pear Trust consist of investments in local dividend-yielding shares and local interest-
bearing securities. This means that the receipts and accruals of the trust are in the form of local
dividends and local interest.
Under a provision contained in the Pear Trust deed, its trustees are required to distribute R240 000
each year to Duchess Pitmaston, one of its beneficiaries, for the remainder of her life. This they did.
She is at present 49 years old.
Using the discretion they had been granted under another provision of the Pear Trust deed , they also
made a lump-sum distribution of R60 000 to Duchess Pitmaston.
The receipts and accruals of the Pear Trust were from
• local dividends, to the extent of 60%, and
• local interest, to the extent of 40%.
Emile d’Heyst
Emile d’Heyst has been a gambler his entire life. On 28 February 2021 he retired from the
employment of Silver Circle Racing Limited after having served it loyally for the past two decades
(20 years). Having been Silver Circle Racing Limited’s promotions manager, its board of directors
were concerned that should he join an opposition business, he could harm its business. It therefore
entered into a restraint of trade agreement with him. The settlement offered was either
• a lump-sum award of R1 000 000, or
• R150 000 a year for the rest of his life.
Irrespective which settlement offer Emile d’Heyst chose, he was restrained from trading as a
promotions manager for a period of 10 years.
Emile d’Heyst chose the payment of R150 000 a year for the remainder of his life. In a sense he
entered into a gamble between himself and Silver Circle Racing Limited as to whether he would
live
• only a short time so that it would obtain a bargain, or
SPECIAL INCLUSIONS 47
• a long time and would obtain a total higher than the R1 000 000, being the amount payable
under the alternative offer.
In the 2022 year of assessment Emile d’Heyst’s first R150 000 restraint of trade award accrued to
him.
You are required to discuss whether the amounts received by (or which accrued to) the respective
taxpayer, in each of the above five situations, will constitute ‘income’ as defined.
Morgan Moore, who was 55 years old when he purchased the annuity, was awarded his first
R6 000 on 1 October 2021.
You are required to determine the minimum amounts that Morgan Moore must include in his
‘income’ from the above amounts that were awarded to him during the 2022 year of assessment.
Kelvin Gotcha’s monthly salary of R16 000, of which he had contributed 7,5% to the pension fund,
ceased on 31 August 2021.
On 1 September 2020 Kelvin Gotcha had invested R100 000 in a 6% a year local short-term loan
investment. This investment was not a ‘tax free investment’. It was for 12 months and provided that
the full amount of interest would accrue only on the date the investment matured.
Kelvin Gotcha’s other receipts and accruals during the 2022 year of assessment were
• local interest of R24 600 from investments in interest-bearing securities, and
• local dividends of R12 000 from investments in shares in South African companies.
None of the local interest-bearing securities that he invested in is a ‘tax free investment’.
You are required to determine Kelvin Gotcha’s taxable income for the 2022 year of assessment.
Hugh Fox had a liquidity problem since he needed cash to pay his second provisional tax payment
on 28 February 2022. He therefore sold his 10 000 shares in Wilddogs Limited to Sidney Wolf on
25 February 2022 for R30 000. He verbally agreed to endorse the dividend cheque in favour of
Sidney Wolf when he received it. Neither of them is a share-dealer. Hugh Fox and Sidney Wolf are
not connected persons.
You are required to discuss the normal tax implications arising out of the above transactions.
Sarah Lonely
Sarah Lonely, aged 66 years, was awarded R60 000 a month throughout the 2022 year of
assessment under the will of Kieran Lonlely, her late husband, who had been a resident of the
Republic his entire life.
After Kieran Lonlely’s death, she emigrated from South Africa and has not been a resident of the
Republic for the last five years.
The R60 000 a month awarded to Sarah Lonely was financed to the extent of
• 40% out of the local interest from non ‘tax free investments’ earned by Kieran Lonlely’s
deceased estate, and
• 60% from the sale of capital assets belonging to his deceased estate, but situated in Zimbabwe.
You are required to determine how much of the R60 000 a month is included in her income, giving
reasons for your answer.
Dee Maître
Dee Maître is an 18-year-old university student. She has worked as a waitress at a restaurant in
Durban throughout the university’s long-summer vacation. She would like to know whether she is
liable for normal tax taking into account her earnings and the various ‘perks’ that have accrued to
her. They are as follows:
• A basic salary paid to her on the nights she worked amounting to R36 000.
• A travel allowance of R400 to cover her taxi fare from her home to the restaurant and back again
each day.
• A uniform allowance of R2 100. She is required to wear a black skirt and a white blouse when
on duty as a waitress. She was required to use the R2 100 to purchase three black skirts and
three white blouses.
• Tips that she received from the restaurant’s customers amounted to R32 500.
The only other amount Dee Maître earned during the 2022 year of assessment was local interest of
R24 000 from an investment in an interest-bearing security. It is not a ‘tax free investment’.
You are required to determine whether Dee Maître is liable for the payment of normal tax.
Klaus Jackall
Klaus Jackall, a director of Black Backed Limited, a South African public company, was granted an
option on 31 March 2021 to purchase 10 000 shares of R10 each in it at their nominal value. At that
date the market value of a share in it was R12. There were no restrictions attached to the offer.
Klaus Jackall exercised his option to purchase the 10 000 shares on 31 August 2021 when the
market value of a share was R13.
The option was granted to Klaus Jackall on 31 March 2021 as a reward for 30 years of service he had
rendered to Black Backed Limited. Of these 30 years of employment, he had been employed for
• 10 years were spent by him at its United Kingdom branch, and
• the remaining 20 years were spent by him working for it in South Africa.
On 31 January 2022 a dividend of R1 a share was declared payable to all Black Backed Limited’s
shareholders registered on that date.
You are required to advise Klaus Jackall of the normal tax implications of his above transactions.
52 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Samuel Solomon
During the 2022 year of assessment Samuel Solomon, who is resident in England, and who is not a
resident of the Republic, was given R20 000 by James Downs, a friend of his who is a resident of
the Republic.
While Samuel Solomon was on holiday in South Africa, he had visited James Downs and had
found out that James Downs wished to sell his farm. It was situated in South Africa.
After returning to England, Samuel Solomon mentioned to a neighbour of his, who was emigrating
from England to South Africa, that James Downs’s farm was for sale. The friend subsequently
purchased James Downs’s farm.
The R20 000 in question was paid gratuitously to Samuel Solomon by James Downs. Samuel
Solomon had had no intention of seeking a financial reward when he informed his neighbour who
then purchased the farm from James Downs.
You are required to determine the source of the R20 000, and to discuss whether it must be
included in Samuel Solomon’s South African gross income.
Kane Ankoke
Kane Ankoke, a resident of the Republic, is the barman employed in the Cane Cutters Bar at
Sparkling Waters (Pty) Limited, a holiday hotel on the KwaZulu-Natal North Coast. In addition to
his basic salary of R8 000 a month, he is paid an allowance of R4 000 a month by it on condition
that he makes good stock shortages that may occur in his bar.
During the 2022 year of assessment Kane Ankoke was required to pay R10 000 to Sparkling
Waters (Pty) Limited for stock shortages in his bar.
In addition to Kane Ankoke’s above earnings, he was also awarded on 28 February 2022, R21 600
by Sparkling Waters (Pty) Limited, being an increase in his basic salary of R1 200 a month, back-
dated for one-and-a-half years.
You are required to determine the minimum amount that would be included in Kane Ankoke’s
2022 taxable income resulting from the above receipts, accruals, and payments.
Mark Lather
As one of the senior executives of Blue Soap Limited, Mark Lather was granted an option in 2018
to take up 25 000 shares in Blue Soap Limited at R20 a share, being the market value of a share in
it on that date. He paid R12 500 (50 cents a share) for the right to this option. The option was
subject to the condition that he could not sell the shares before his retirement.
One month before Mark Lather’s retirement, on 30 November 2021, Blue Soap Limited offered
him R160 000 to waive his rights for 80% of the shares he had been offered. He accepted this offer.
On that date a share in Blue Soap Limited had a market value R28.
On 31 December 2021, the date of Mark Lather’s retirement, the market value of a Blue Soap
Limited share was R27,50.
On 1 February 2022 Mark Lather ceded his right to take up the balance of the shares to Dick
Lather, his son for R10 000. The market value of a share was then R28,50.
On 27 February 2022, Dick Lather exercised his right to take up the remaining shares at R20 a
share, when a share in it had a market value of R27,50.
You are required to determine what amount will be included in the taxable income of Mark Lather
resulting from the above transactions for the 2022 year of assessment.
Kaydee (Pty) Limited
Kaydee (Pty) Limited’s issued share capital is 200 000 shares with a nominal value of R1 each. The
market value of a Kaydee (Pty) Limited share on 28 February 2021 (and on 1 March 2021) was R1,50.
On 1 March 2021 Kaydee (Pty) Limited issued a further 20 000 shares. These shares were issued as
part of its newly-created share incentive scheme. This scheme satisfies all the requirements of the
SPECIAL INCLUSIONS 53
definition of a ‘broad based share incentive scheme’ as set out in section 8B of the Income Tax Act.
It then sold
• 12 000 of these shares to Mutt Mongrel, and
• 8 000 of these shares to Innocent Umgodoyi,
two of its full-time employees, at their nominal value of R1 a share.
Because of the increase in the numbers of Kaydee (Pty) Limited’s shares, the market value of a
share in it dropped from R1,50 to R1,40.
No further transactions took place during the 2022 year of assessment.
You are required to determine the normal tax consequences of the above transactions as far as
they relate to both Mutt Mongrel and Innocent Umgodoyi.
restriction that applies to these equity shares is that they may not be sold before 1 March 2026,
unless an employee is retrenched, or resigns.
If an employee leaves the employment of Nestle Purina (Pty) Limited before 1 March 2026, he
must sell his equity shares back to it at their market value on the date of his departure.
Nestle Purina (Pty) Limited appointed a trust to administer its equity shares under the agreement.
Felix Friskies, an employee of Nestle Purina (Pty) Limited, left its employment on 31 December
2021. The market value of his equity shares in it was then R13 500. He did not sell his equity
shares back to it on 31 December 2021 since its administration division was closed for its annual
year-end holiday. Instead, two weeks later, on 14 January 2022, when he was no longer employed
by it, he then sold his equity shares in it back to it for R12 900 being their market value on
14 January 2022.
You are required to determine the normal tax consequences that arise out of the above information
for both Nestle Purina (Pty) Limited and Felix Friskies.
Garfield Limited
Garfield Limited’s financial year ends on the last day of February. It has 10 executives and
100 ‘rank-and-file’ employees.
On 1 June 2021 Garfield Limited awarded 3 000 of its equity shares to each of its 10 executives (its
‘fat cats’). (A ‘fat cat’ is a wealthy and powerful businessman.) Its equity shares have a nominal
value of R1 each. The market value of an equity share in it was R1,10 on 1 June 2021. The only
restriction that applies to these equity shares is that they may not be sold before 1 June 2026, unless
the recipient executive is retrenched or resigns. If an executive leaves its employment before 1 June
2026, he must sell his equity shares back to it at their market value on the date of his departure.
Garfield Limited appointed a trust to administer its equity shares under the agreement.
You are required to determine the normal tax consequences that arise out of the above information
for both Garfield Limited and its 10 executives.
Boris Barbury
Boris Barbury purchased a restricted equity share while employed by Lane Limited.
Citytales Limited then entered into an amalgamation agreement with Lane Limited. As part of the
amalgamation, Boris Barbury surrendered his restricted Lane Limited equity share in exchange for
a restricted Citytales Limited equity share.
You are required to determine the normal tax consequences to Boris Barbury that arise out of the
above information.
Dulcie Grimbold
On 1 February 2020 Dulcie Grimbold purchased a restricted equity option in Tabby Limited when she
was an employee of it. This option cost her R1 (when a Tabby Limited equity share had a market
value of R100). This option allowed her to purchase one restricted equity share in it for R100. On
31 January 2021 she sold her option to the Grimbold Trust (a connected person of hers). It paid R3 for
the option (when a Tabby Limited equity share had a R120 Market value). On 1 February 2022 it
exercised its option and purchased a Tabby Limited equity share for R100. On 1 February 2022 a
Tabby Limited equity share had a market value of R150. All restrictions were lifted.
You are required to determine the normal tax consequences to Dulcie Grimbold that arise out of
the above information.
Hermione Crookshanks
On 1 February 2018 Hermione Crookshanks purchased 1 000 restricted equity shares of
Harrypotters Limited for R100 000 when she was employed by it. On the same day she borrowed
R100 000 from it. She used the R100 000 from this loan to settle the purchase price of her
restricted equity shares in it. It provided her with a unilateral opportunity to cancel the purchase if
its equity shares declined in value and as long as she remained employed by it. On 31 January 2019
SPECIAL INCLUSIONS 55
she sold her equity shares to her spouse for R105 000. On 1 February 2020 her spouse ‘transferred’
the equity shares to his trust for R100 000. His trust is a connected person of hers.
On 31 December 2021 Hermione Crookshanks left Harrypotters Limited’s employment thereby
forfeiting her right to unilaterally cancel her purchase if the equity shares declined in value. The
market value of an equity share in it on 31 December 2021 was R150.
You are required to determine the normal tax consequences to Hermione Crookshanks that arise
out of the above information.
Dinah-Alice Cheshire
Dinah-Alice Cheshire is employed by Wonderland (Pty) Limited. On 1 February 2022 she
purchased 10 000 equity shares in it for R54 000 when their market value was R60 000. The
R6 000 (or 10%) ‘discount’ resulted from her having been in its employment for 20 years. These
equity shares do not contain a restriction.
You are required to determine the normal tax consequences to Dinah-Alice Cheshire that arise out
of the above information.
Dirk Edgewood
Dirk Edgewood is employed by Prism Limited. On 1 March 2018 he purchased 500 equity shares
in it for R20 000 (when they had a market value of R20 000). He was not allowed to sell these
equity shares until leaving its employment.
Dirk Edgewood sold the equity shares to an independent third party for R50 000 on 31 March
2021, the day that he left its employment.
You are required to determine the normal tax consequences to Dirk Edgewood that arise out of the
above information.
Garreth Jason
Garreth Jason is employed by Timecats Limited. On 1 February 2018 he purchased 2 000 equity
shares in it for R36 000 (when they had a market value of R36 000). He was not allowed to sell
these equity shares until leaving its employment.
Garreth Jason sold the equity share to an independent third party for R31 000 on 31 January 2022,
the day he left its employment.
You are required to determine the normal tax consequences to Garreth Jason that arise out of the
above information.
Gepetto Figaria
Throughout the 2020 year of assessment Gepetto Figaria was employed by Pinocchio Limited. He
entered into a forward contract for the purchase of 500 equity shares in it on 31 January 2020. On
31 January 2020 an equity share in it had a market value of R2 000. Under the forward contract, he
must purchase the 500 equity shares in it for R2 000 on 31 January 2022.
Gepetto Figaria then purchased the 500 equity shares for R2 000 on 31 January 2022 when they
had a market value of R3 500. They do not contain a restriction.
You are required to determine the normal tax consequences to Gepetto Figaria that arise out of the
above information.
Francis Felidae
Francis Felidae is employed by Feline Detectives Limited. On 28 February 2019 she purchased an
option from it for R1 000. This option allowed her to acquire 1 000 equity shares in it for R19 000
as long as she remained employed by it. The option is freely transferable, but the equity shares
purchased using the option, must be redeemed at their cost if she leaves its employment before
28 February 2022.
On 1 February 2021 Francis Felidae exercised her option and purchased 1 000 Feline Detectives
Limited equity shares for R19 000 when they had a market value of R26 000.
56 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
On 28 February 2022 Francis Felidae’s equity shares in Feline Detectives Limited had a market
value of R35 000. She was still in its employment on 28 February 2022.
You are required to determine the normal tax consequences to Francis Felidae that arise out of the
above information.
Clarence Copycat
Clarence Copycat is employed by Photocopier Limited. On 1 February 2020 she purchased
250 equity shares in it for R75 000 (their market value). She used the amount obtained from a
R75 000 loan from it to pay for the equity shares. She is not restricted from selling them. It may,
however, cancel its loan to her while she remains employed by it, and provided the market value of
its equity shares are less than her cost of them.
On 31 January 2022 she sold her 250 equity shares in Photocopier Limited to an independent third
party for their market value of R87 500.
You are required to determine the normal tax consequences to Clarence Copycat that arise out of
the above information.
Midnight Folk (Pty) Limited
Until 28 February 2021 John Masfield was the sole equity shareholder and director of Midnight
Folk (Pty) Limited. Both he and it are residents of the Republic. Its year of assessment ends on the
last day of February.
Midnight Folk (Pty) Limited’s issued equity share capital comprised 100 000 equity shares with a
nominal value of R1 each. The market value of an equity share in it on 28 February 2021 (and on
1 March 2021) was R5.
In addition to John Masfield, Midnight Folk (Pty) Limited has four full-time employees.
On 1 March 2021 Midnight Folk (Pty) Limited issued a further 20 000 equity shares. These equity
shares were issued as part of its newly-created equity share incentive scheme. This scheme satisfies
all the requirements of the definition of a ‘broad based equity share incentive scheme’ as set out in
section 8B of the Income Tax Act. It then sold these 20 000 equity shares to its four full-time
employees (other than John Masfield) at R1 an equity share:
• 12 000 equity shares were sold by it to Baxter Blackmalkon,
• 5 000 equity shares were sold by it to Chester Greymalkon,
• 2 000 equity shares were sold by it to Jules Witch, and
• 1 000 equity shares were sold by it to Morris Nibbins.
Because of the increase in the number of Midnight Folk (Pty) Limited’s equity shares from
100 000 equity shares to 120 000 equity shares, the market value of an equity share in it then
dropped to R4,20.
Each employee was given an interest-free loan by Midnight Folk (Pty) Limited to pay for his equity
shares in it.
The arrangement was recorded in the journal of Midnight Folk (Pty) Limited as follows:
Loan to Baxter Blackmalkon Dr 12 000
Loan to Chester Greymalkon Dr 5 000
Loan to Jules Witch Dr 2 000
Loan to Morris Nibbins Dr 1 000
To Equity share capital 20 000
Being the issue of equity shares under its ‘broad based equity share
incentive scheme’, the purchase price of the equity shares being
settled out of the proceeds of interest-free loans granted to the
qualifying employees.
SPECIAL INCLUSIONS 57
As far as employees Baxter Blackmalkon and Chester Greymalkon were concerned, no further
transactions took place during the 2022 year of assessment.
After a short illness, employee Jules Witch died on 31 August 2021. The market value of a
Midnight Folk (Pty) Limited equity share was then R2,75. John Masfield then purchased her equity
shares in it from her executor for R5 500. Her executor then repaid her R2 000 loan from Midnight
Folk (Pty) Limited.
Employee Morris Nibbins left Midnight Folk (Pty) Limited’s employment on 31 December 2021.
The market value of an equity share in it was then R3,10. He sold his 1 000 equity shares to John
Masfield for R3 100. He then repaid his R1 000 loan from Midnight Folk (Pty) Limited on
31 December 2021.
You are required to determine the normal tax consequences of the above transactions as far as they
relate to Midnight Folk (Pty) Limited, and its employees Baxter Blackmalkon, Chester
Greymalkon, Jules Witch and Morris Nibbins.
Randy Moneypenny
Randy Moneypenny, a cashier, was awarded an allowance of R1 000 a month from Honest Bank
(Pty) Limited, her employer in consideration of having to make good shortages of cash. During the
2022 year of assessment she had had to make good R2 500 for which she had been unable to
account for.
Punchy Samson
Punchy Samson, a cashier at Davenport Bank (Pty) Limited, a local financial institution, was
rewarded with R4 000 ‘cash’ for his brave action in preventing a hold up in its banking hall.
Ian Hush
Ian Hush was awarded R10 000 by Foulmouth (Pty) Limited, his former employer, for agreeing not
to sue it for defamation. Foulmouth (Pty) Limited had defamed him by informing some of its
clients of certain untrue information about him, so-called fake news.
You are required to comment on the gross income inclusions of the above 10 situations from the
viewpoint of the recipient individual. If an amount is exempt from normal tax or deductible in the
determination of the recipient’s taxable income, this needs to be mentioned in your commentary.
he thought she was too thin, and because she appeared hungry, he also gave her a substantial
breakfast at his home before she left. He estimates that it cost him R33 to provide her with this
breakfast.
Caveller King
Benson King is the captain of the local football team. He is also the organiser of the matches it plays.
After finalising the selection of the team for a match, he asks his wife, Caveller King, to telephone all
the players in the team and to provide them with the match details. At a recent meeting of the local
football club, the committee agreed to award her an honorarium (a voluntary payment for professional
services rendered without the normal fee) of R3 000 for the help she provided to the team during the
recent football season. The committee knew that she had paid increased telephone accounts each
month during this season, and in arriving at the R3 000 honorarium, this fact was taken into account.
Bhema Gudu
Intuthu Gudu, Bhema Gudu’s mother has worked as a housekeeper for the Rembrandt family for
25 years. Bhema Gudu, aged 22 years, has lived with her his entire life in the outbuildings of the
Rembrandt family house. Last year he passed his matric. This year he is registered as a student at
the local technikon. Van Rijn Rembrandt, Intuthu Gudu employer, paid his technikon fees
amounting to R36 000. He did this solely to help Bhema Gudu of whom, over the past 22 years, he
has become fond. No contractual arrangements were made for this R36 000 ‘donation’. But
Van Rijn Rembrandt may offer Bhema Gudu employment in his (Van Rijn Rembrandt’s) business
should he complete his diploma. Van Rijn Rembrandt has not, however, informed him of this
possibility.
You are required in each of the above situations, to discuss whether the amounts received by or
accrued to the taxpayer will be included in his or her gross income.
Edward Fine owns a cottage situated on a wine estate (a wine farm) in the Cape in South Africa.
Every year, without fail, he comes to South Africa to witness the annual wine harvesting. He spends
up to two-and-a-half months (but not more than 91 days) in South Africa. Most of this time he resides
in his cottage. (For the remaining nine-and-a-half months of the year this cottage is used by his family
and friends when they visit the area.) When he is in the Cape, he also travels to other centres in South
Africa to give talks to ‘wine’ clubs. He does charge for a talk. He pays his own expenses.
You are required to discuss whether Edward Fine is ordinarily resident in South Africa.
Richie Sightscreen
Richie Sightscreen is a professional cricketer. He is not ordinarily resident in South Africa. Spitting
Snakes (Pty) Limited, a resident of the Republic, employs him to play cricket in South Africa for its
team. He therefore spends considerable time in South Africa. All the work he performs for it he
carries out in South Africa.
During the 2022 year of assessment and the five previous years of assessment Richie Sightscreen
spent the following number of days in South Africa:
• in the 2022 year of assessment, 100 days,
• in the 2021 year of assessment, 101 days,
• in the 2020 year of assessment, 270 days,
• in the 2019 year of assessment, 122 days,
• in the 2018 year of assessment, 183 days, and
• in the 2017 year of assessment, 182 days.
In the 2022 year of assessment Richie Sightscreen was paid R145 000 by Spitting Snakes (Pty)
Limited for the services he had performed for it. In South Africa, it is his sole employer. He earned
no further amounts from a South African source. Including this R145 000, his total taxable earnings
world-wide for the 2022 year of assessment were the equivalent of R745 000.
You are required to discuss if the R145 000 that Richie Sightscreen earned will be included in his
South African gross income and then whether it will be exempt from normal tax.
Vernon Wicket
Vernon Wicket became a resident of the Republic for the first time only during the 2022 year of
assessment. He is 99 years old. His only receipts and accruals are from four annuities. These four
annuities are from sources outside South Africa. They are as follows:
• A war pension (or annuity) payable to him for having served his ‘former’ country during the
second world war.
• A pension (or annuity) payable by Lords Limited, his former employer, for whom he worked in
his ‘former’ country for a period of 40 years.
• A pension (or annuity) payable by his ‘former’ country because he qualifies for this pension
under its social security system.
• And an annuity from a testamentary trust under the will of Grace Gilbert, a late sister who died
10 years ago and who had been a resident of his ‘former’ country her whole life. This annuity is
a life-time annuity and is funded solely by foreign dividends.
You are required to discuss whether Vernon Wicket is subject to South African tax on these
annuities.
Kelvin Leg
Kelvin Leg has an ‘aged’ mother, Agnes Leg, who is ordinarily resident outside South Africa. She
is not a resident of the Republic.
Two years ago Kelvin Leg purchased a cottage in the country in which Agnes Leg is ordinarily
resident. He then donated this cottage to her.
62 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
During the 2021 year of assessment Agnes Leg moved into an ‘old age’ home. She has since then
let this cottage. She earned net rentals the equivalent of R72 000 from the letting of this cottage
during the 2022 year of assessment.
You are required to discuss whether there are South African normal tax consequences that arise out
of the net rentals earned by Agnes Leg?
Albert and Alice Ball
Albert and Alice Ball are both employed by Oval Limited. They are employed by it at its head
office in Durban. They are both residents of the Republic. It is also a resident of the Republic. It has
a branch in Zimbabwe. During the 2022 year of assessment they were both ‘seconded’ by its head
office to work for it at its Zimbabwe branch.
• Albert Ball worked at its Zimbabwe branch for the seven-month period from 1 April 2021 to
31 October 2021, while
• Alice Ball worked at its Zimbabwe branch for the five-month period 1 April 2021 to 31 August
2021.
Neither Albert, nor Alice Ball, returned to (visited) South Africa during the period 1 April 2021 to
31 August 2021. Yet at the end of September, Albert Ball returned to South Africa for a long
weekend (three days) to visit Alice Ball.
Albert Ball earned an annual remuneration of R240 000 (R20 000 a month) from Oval Limited for
the 2022 year of assessment. Alice Ball earned an annual remuneration of R180 000 (R15 000 a
month) from Oval Limited for the 2022 year of assessment.
You are required to discuss whether the above receipts and accruals of Albert and Alice Ball are
exempt from normal tax.
Rayner Silly
During the 2021 year of assessment Rayner Silly received an inheritance from his late grandmother.
Since his younger sister, Robyn, had not been a beneficiary under their grandmother’s will, he gave
her R50 000.
Robyn Silly, who is 16 years old and unmarried, invested the R50 000 in a local fixed-deposit
investment throughout the 2022 year of assessment. It is not a ‘tax free investment’. Local interest
of R4 000 accrued to her from this investment in the 2022 year of assessment.
You are required to determine in whose gross income the R4 000 local interest will be included.
And then state if it will be exempt from normal tax.
Simon Track
Simon Track retired 13 years ago. His sole receipt or accrual is now an annuity of R180 000 from
his former employer, Groundsman (Pty) Limited, (being awarded as a monthly amount of R15 000.
He had always been employed by it. But he had worked for it in both South Africa and the United
Kingdom. His employment history is as follows:
• 1 March 1969 to 28 February 1974 in South Africa,
• 1 March 1974 to 28 February 1980 in the United Kingdom,
• 1 March 1980 to 28 February 1986 in South Africa,
• 1 March 1986 to 28 February 1990 in the United Kingdom,
• 1 March 1990 to 28 February 2002 in South Africa,
• 1 March 2008 to 29 February 2008 in the United Kingdom, and
• 1 March 2008 to 28 February 2009 in South Africa.
You are required to state how much of this R15 000 monthly amount would be included in Simon
Track’s income in the 2022 year of assessment.
SPECIAL INCLUSIONS 63
Ali Boundary
Ali Boundary earned foreign interest the equivalent of R40 000 from an investment he made
outside South Africa. In the country in which this investment was made, this foreign interest is
subject to certain exchange control regulations. And under these regulations, this equivalent
R40 000 foreign interest is ‘blocked’ in this country for a three-year period. Once the three-year
period has passed, it may be freely used outside this country.
You are required to state whether Ali Boundary’s foreign interest is subject to tax in South Africa,
and if so, when is it taxable?
Oliver Pitch
Oliver Pitch became a resident of the Republic only during the 2022 year of assessment. He made
certain investments outside South Africa before he became a resident of the Republic for the first
time. From these investments he earns
• foreign net rentals,
• foreign interest, and
• foreign dividends.
None of Oliver Pitch’s foreign dividends is exempt from normal tax under section 10B(2).
You are required to state whether Oliver Pitch will be subject to tax in South Africa on these
foreign net rentals, foreign interest and foreign dividends.
Biddy Notrumps is concerned that she may be subject to normal tax on this prize.
What do you think?’
Michael Hilton
The following report appeared in the local newspaper under the heading ‘KZN Author Wins
Award’:
‘Potatoes, the story of a boy’s first year at an elite KZN boys’ school, has won the Booksellers’
Choice Award.
‘Written by Michael Hilton, Potatoes won the vote of booksellers across South Africa as the
book they most enjoyed promoting and reading in the past year.
‘Michael Hilton was born in Durban and educated at the said elite boy’s school and the
University of Natal. He has been a professional actor, playwright and producer since 2013. He
has won numerous awards. He is well-known for his satirical sketch shows.
‘The Booksellers’ Choice Award is open to all South African authors who are published in the
country.’
The above report does not indicate what form Michael Hilton’s award takes.
If it is a R100 000 cash prize, will Michael Hilton have to include this amount in his gross income?
Sue Doku
Sue Doku is employed as its quiz-master by a local newspaper.
A national newspaper chain ran a competition to determine the quiz-master who produced the most
challenging quizzes. Sue Doku entered and won this competition. Her prize was an abroad holiday
for two. It cost the national newspaper chain R50 000 to provide this prize.
Sue Doku was unable to proceed abroad because she was pregnant and was not allowed to travel by
air.
Sue Doku unsuccessfully requested the national newspaper chain to convert the prize into R30 000
‘cash’. It, however, agreed that she could sell the prize.
Sue Doku’ efforts to sell the prize to friends, relatives and work colleagues failed. She then
advertised the prize in the ‘For Sale’ section of the local newspaper. She finally sold it for R20 000,
being the best offer she received.
The Commissioner included R50 000 in Sue Doku’ taxable income for the 2022 year of assessment
being his (the Commissioner’s) value of the prize that she had won. Her assessment in which this
amount is included is dated 1 September 2022.
Sue Doku is aggrieved by this R50 000 inclusion in her gross income. She seeks your help in this
regard. She would like to know if the Commissioner was correct in including the R50 000 in her
gross income?
You are required to respond to the above questions. Make references to case law and legislation
when relevant.
through its bank account. And every e-mail sent was returned with ‘address no longer valid’
endorsed on the e-mail. Since this debt is believed to have prescribed, the R60 000 balance has
been ‘written back’ into its statement of profit or loss and other comprehensive income.
None of this large stock of soap suds that had been purchased by Olivepalm (Pty) Limited was on
hand when the R60 000 balance was ‘written back’ by it.
You are required to set out the normal tax consequences to Olivepalm (Pty) Limited that arise in its
2022 year of assessment as a result of its debt having prescribed.
Lifegirl (Pty) Limited
In its 2019 year of assessment Lifegirl (Pty) Limited purchased a second-hand industrial machine
from a supplier who was closing down. It deducted the section 12C capital allowance on this
machine at the rate of 20% in the determination of its taxable income in its 2019, 2020, and 2021
years of assessment.
Lifegirl (Pty) Limited paid a 10% ‘deposit’ on this machine on the date of delivery. It was due to
pay the 90% balance (R90 000) three months later. The electronic money transfer to the supplier
was, however, never presented for payment.
For the following three years Lifegirl (Pty) Limited tried unsuccessfully to settle the 90% balance
of the purchase consideration. Every e-mail sent was returned with ‘address no longer valid’
endorsed on the e-mail. And its electronic money transfers failed to go through its bank account.
Since this debt is believed to have prescribed, its R90 000 balance has been ‘written back’ into its
statement of profit or loss and other comprehensive income.
On the date that the debt was ‘written back’ by Lifegirl (Pty) Limited, the second-hand industrial
machine was still being used by it.
Lifegirl (Pty) Limited did not have an assessed capital loss in its 2021 year of assessment.
You are required to set out the normal tax consequences to Lifegirl (Pty) Limited that arise in its
2022 year of assessment as a result of its debt having prescribed.
Wise Owl (Pty) Limited
For many years Wise Owl (Pty) Limited has run a successful business undertaking. Its major client
has recently been a party to a merger. And as a result of this merger, its client has given notice that it
will no longer be using its services. The client is, however, prepared to purchase its business from it.
The proposed purchase and sale agreement is subject to the condition that its two shareholders (and
directors) continue to run the business for a one-year period on behalf of the client. During this one-
year period employees of the client will be taught how to run the business by its two shareholders.
The relevant clause in the proposed purchase and sale agreement records the above arrangement as
follows:
‘[The client] agrees to pay to Wise Owl (Pty) Limited [XYZ] rand for the imparting of, or the
undertaking to impart, commercial knowledge and information and to render assistance and
services in connection with the application and use of this knowledge and information.’
You have been approached by the two shareholders of Wise Owl (Pty) Limited as to the normal tax
consequences that will arise out of the above proposed purchase and sale agreement.
You are required to
1. explain the normal tax consequences to the two shareholders of Wise Owl (Pty) Limited that
arise out of the proposed purchase and sale agreement,
2. suggest an alternative method that could be used to embrace the purchase and sale agreement
that would be more tax efficient to Wise Owl (Pty) Limited, pointing out its normal tax
consequences, and
3. comment on the client’s (the purchaser’s) normal tax position under the proposed agreement
and ‘your’ revised agreement.
SPECIAL INCLUSIONS 67
using the alternate dispute resolution process. They also both decided not to solve their disputes by
way of a settlement agreement with the Commissioner.
Under the provisions of section 109(3) of the Tax Administration Act, due to the
‘legal principles related to [this] appeal’
a senior SARS official decided that this appeal should be heard by the tax court rather than the tax
appeals board.
You are required to prepare an argument to be presented by counsel for the Commissioner at the
tax court.
‘He said the police were negligent in not taking a female officer.
‘Even the police realised “Pussy” Galore’s anger, humiliation and embarrassment at being
forced to stand naked.
‘He said although the taking of the photographs of “Pussy” Galore without her consent was an
infringement of her dignity, it was part of the process of collecting evidence against her and so
was not unreasonable or unlawful.
‘He said police had argued that she “had no dignity to protect” because of the nature of sex work
and because she had been seen naked by “thousands of men”.
‘But even a “hobo on a park bench” had a claim to respect for his humanity.
‘He said the police action had indeed harmed the dignity of “Pussy” Galore and his “gut feeling”
was that she be awarded R75 000 and costs.
‘He said the deployment of three detectives, two constables, one sergeant and a fingerprint
expert in this operation was “difficult to rationalise”.
‘Magistrate Wisdom Fine said an almost “universal comment” about the case had been “what are
the police doing pursuing operations like this when there is so much rape, robbery and other crime
going on?”’
In March 2021, ‘Pussy’ Galore, who advertises in the local newspaper, was fined R1 000 or six
months in jail for soliciting sex, with half the sentence suspended for five years.
‘Pussy’ Galore’s legal expenses relating to this civil suit against the Minister of Safety and Security
were R18 000. The costs that she was awarded were only R10 000.
In ‘Pussy’ Galore’s 2022 return of income she deducted the R1 000 fine and her ‘net’ legal
expenses of R8 000 (R18 000 – R10 000 (see above)) from the income she earned from the sexual
favours she performed. She disclosed the R75 000 award (see above) as a ‘tax free’ amount that
had accrued to her.
The Commissioner included the R75 000 in ‘Pussy’ Galore’s gross income. He also refused to
allow the ‘net’ legal expenses of R8 000 and the R1 000 fine as deductions in the determination of
her taxable income. This meant that the Commissioner’s determination of her extra taxable income
was R80 000 higher than the taxable income that she was expecting.
‘Pussy’ Galore unsuccessfully objected to this extra R80 000 inclusion in her taxable income. She
has now appealed to the tax court. She refused to have her dispute solved by using the alternate
dispute resolution process. She also decided not to solve it by way of a settlement agreement with
the Commissioner.
Under the provisions of section 109(3) of the Tax Administration Act, due to the
‘legal principles related to [this] appeal’
a senior SARS official decided that this appeal should be heard by the tax court rather than the tax
appeals board.
You are required to prepare an argument to be presented on behalf of ‘Pussy’ Galore at the tax
court.
70 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
The Commissioner agreed that Peter Boulder met the conditions to qualify for the concession, but
maintained that it was unavailable to him, solely on the ground that the amount was included in his
gross income under the provisions of paragraph ( f ) of the definition of ‘gross income’.
Peter Boulder had in his correspondence indicated that he believed
• paragraph (c) of the definition of ‘gross income’,
• paragraph (d) of the definition of ‘gross income’, or
• paragraph ( f ) of the definition of ‘gross income’
could apply to his R288 000 award. He also believed that he could choose which of these
paragraphs should be applied to subject him to normal tax. And in this regard, he elected that
paragraph (d) be used to include the R288 000 award in his gross income. Should this be
impossible, he then elected that paragraph (c) be used to include the R288 000 award in his gross
income.
The correspondence finally came to an end when the Commissioner issued a ‘section 106(4) of the
Tax Administrative Act’ notice to Peter Boulder informing him that his objection was unsuccessful.
Peter Boulder has now appealed against this decision. He refused the offer to have this dispute
resolved using the alternate dispute resolution process. He did not enter into a settlement agreement
with the Commissioner.
Under the provisions of section 109(4) of the Tax Administration Act, due to the
‘legal principles related to [this] appeal’
a senior SARS official decided that this appeal should be heard by the tax court rather than the tax
board.
You are required to prepare an argument to be presented on behalf of Peter Boulder at the tax court.
Since neither the Natal English University Council nor Professor Power wished to incur
unnecessary legal expenses, they agreed to have the matter decided upon by an internal tribunal
comprised of three of its employees. This tribunal, referred to as the Arbitration Committee,
consisted of
• Professor Ledger, the Head of the School of Accountancy,
• Professor Law, the Head of the School of Business Law, and
• Professor Fairley, the Dean of the Faculty of Humanities.
After hearing evidence from Professor Power, the Natal English University’s Finance Officer and
five well-known, respected and senior employees of it, the Arbitration Committee awarded
Professor Power R300 000 in full and final settlement of his claim. It found that he had suffered not
only a loss of earnings as a result of the restructuring within the Natal English University, but that
his personal dignity and confidence also suffered as a result of the decision to do away with Vice-
Principals at the Natal English University. This R300 000 was awarded to him on 31 December
2021.
In Professor Power’s return of income for the 2022 year of assessment, he reflected the R300 000
award under the section marked ‘Receipts and Accruals not Included in Part 2’ being receipts and
accruals believed not to be subject to normal tax.
When assessing Professor Power for the 2022 year of assessment, the Commissioner did not agree
that the R300 000 was a tax-free receipt or accrual. He included it in his gross income. In addition
he did not allow an exemption, allowance or deduction against this inclusion with the result that the
entire R300 000 was included in his taxable income and subjected to normal tax at his marginal rate
of tax (41%).
Professor Power objected to this assessment on the following alternate grounds:
• First, he objected on the basis that the R300 000 award was of a capital nature and since none of
the so-called special inclusions of the definition of ‘gross income’ applied to it, it was not part of
his gross income.
• Secondly, he objected, in the alternative, that in the event of the amount being found to be gross
income, it should be subject to normal tax as a ‘severance benefit’.
Professor Power was 57 years old when he received the R300 000 award.
Professor Power’s objection failed on both grounds. He has now appealed to the tax court. He
refused the offer to have this dispute resolved using the alternate dispute resolution process. He did
not enter into a settlement agreement with the Commissioner.
Under the provisions of section 109(4) of the Tax Administration Act, due to the
‘legal principles related to [this] appeal’
a senior SARS official decided that this appeal should be heard by the tax court rather than the tax
board.
You are employed by the Commissioner as one of his team of advocates that represent him at the
tax court.
You are required to prepare an argument on behalf of the Commissioner to be presented at the tax
court.
CHAPTER 5
EXEMPT INCOME
73
74 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
• Local interest of R1 800 from a R30 000 ‘tax free investment’ earning interest at the rate of 6%.
Amounts earned in a foreign currency are stated in their rand-equivalent amounts.
You are required to determine Sister Susan’s income.
of this question assume that the 2022 tax legislation and rates applied in all the years of assessment
concerned.
Tristan Leach
Tristan Leach, aged 66 years, is the caretaker employed by Bird Boarding School. He is a
pensioner. He enjoys the following three pensions:
• A war pension or R1 200 a year for injuries he sustained during the war.
• A disability pension of R3 600 a year (paid under the provisions of the Workmen’s
Compensation Act) for injuries he sustained during his previous employment.
• A pension of R144 000 a year from his former employer’s pension fund for superannuation.
Tristan Leach is paid a salary of R72 000 a year as the caretaker of the school. He is also provided,
rent free, furnished, and with free power or fuel, an eight-roomed cottage (small house). His
‘remuneration proxy’ as defined in section 1(1) of the Income Tax Act is R84 000.
Richard Pipit
Richard Pipit is a science teacher employed by Bird Boarding School. On 1 March 2021 he
inherited R300 000 from Monty Pipit, his late grandfather. He invested R180 000 of it in local
interest-bearing securities and R120 000 of it in local dividend-yielding shares. None of the
interest-bearing securities is a ‘tax free investment’. During the 2022 year of assessment
• local interest of R16 200 accrued from his investment in interest-bearing securities, and
• local dividends of R7 200 accrued from his dividend-yielding shares.
Richard Pipit is 45 years old.
Cardinal Bennet
Cardinal Bennet is Bird Boarding School’s chaplain (a member of the clergy attached to a chapel in
a private institution). He commenced working at the school from 1 June 2021. Prior to working at
the school he had been unemployed for six months. For March, April and May 2021 he was
awarded R2 500 each month payable to him under the Unemployment Insurance Act.
Bird Boarding School incurred the following expenses on appointing him as one of its employees:
• R33 600 was paid to transport him and his household from his previous place of residence to
his new place of residence.
• R10 000 towards the costs he had incurred on selling his previous place of residence.
• R20 000 towards the costs he had incurred when settling into his new place of residence.
• And R18 900 being one month temporary accommodation in a nearby hotel while his
permanent residential accommodation was unavailable.
Fran Quail
Fran Quail is employed as a music teacher by Bird Boarding School. During the 2021 year of
assessment she and Colin Quail, her former husband ,were divorced. She was awarded custody of
their two young children. Throughout the 2022 year of assessment she has received R1 200
alimony and R1 600 maintenance (R800 for each child) monthly from Colin Quail.
Peter Finfoot
Peter Finfoot was the vice-principal at Bird Boarding School up to the time of his retirement at the
age of 60 years on 1 April 2021. He was awarded a golden handshake award of R90 000 by it as
compensation for the loss of his office. He used part of the R90 000 to purchase shares in a local
listed company:
• An interim local dividend of R1 500 from this shareholding accrued to him on
15 September 2021, and
• a final local dividend of R3 300 accrued to him on 15 February 2022.
EXEMPT INCOME 79
Natalie Robin
Natalie Robin was employed by Bird Boarding School as its organiser of its outward-bound
activities. While leading a group of boys on a walk on the estate she slipped and fell down a crevice
to her death. Because her death arose out of, and in the course of, her employment, a compensation
for death award of R325 000 was awarded by Bird Boarding School to Janfederick Robin, her
surviving spouse. This award made by it was in addition to compensation awarded to him, as her
surviving spouse, as a result of her death under the Workmen’s’ Compensation Act.
You are required to determine whether the amounts or benefits detailed in the above situations are
exempt from normal tax.
Lewis Mercedes was a member of the Intercity Express Deliveries CC Pension Fund. His
contribution for March 2021 was R960. As from 1 April 2021 he contributed R1 020 a month to its
pension fund. His contributions are based solely on his salary.
Following Lewis Mercedes’s death, Andela Mercedes, his surviving spouse was awarded the
following amounts:
• A lump sum of R750 000 from his pension fund. All his contributions to this pension fund had
been deductible in the determination of his taxable income.
• Commencing with the month of October 2021, R45 000 each month from his pension fund.
• R400 000 from Intercity Express Deliveries CC as a result of his death.
• A further R500 000 lump sum under the provisions of the Workmen’s Compensation Act.
• R33 000 compensation from Intercity Express Deliveries CC for leave due to him at
30 September 2021.
• R2 000 000 from a life insurance policy.
During the period 1 March 2021 to 30 September 2021,
• local interest from an non ‘tax free investment’ of R29 500, and
• local dividends of R3 000,
accrued to Lewis Mercedes.
You are required to determine Lewis Mercedes’s income (gross income less exempt income) for
his 2022 broken period of assessment.
• An annuity from a testamentary trust under the will of Julien Sweet, a late uncle, who died
10 years ago and who had been a resident of the Republic his whole life. This annuity is a life-
time annuity and is funded solely by local dividends.
Charlie Pecan
Charlie Pecan is a resident of the Republic. He is 66 years old. His sole receipt or accrual is a
pension (or annuity) payable by Ground Nuts (Pty) Limited, his former employer, for whom he
worked
• in South Africa for 27 years, and
• outside South Africa for nine years.
You are required to state if the annuities or pensions detailed above are included in the recipient’s
income (gross income less exempt income).
You are required to discuss whether this visit had adverse South African normal tax consequences.
Craig Royal
Six years ago, when Craig Royal attained the age of 65 years, he retired from his employment with
York Duke Limited. He had been employed solely in the United Kingdom where he had been
ordinarily resident his entire life. He then immigrated to South Africa from the United Kingdom.
He has been a resident of the Republic ever since. He is in receipt of two pensions,
• one from York Duke Limited, and
• the other from the United Kingdom social security service.
On 1 May 2021 Craig Royal’s aunt, Laura Kerr, died. He is one of the beneficiaries of her estate.
Being a beneficiary,
• net rentals from a rent-producing property situated in the United Kingdom,
• foreign dividends from United Kingdom registered shares, and
• an annuity,
now all accrue to him.
None of these amounts is being remitted to Craig Royal in South Africa. They are all being
‘reinvested’, on his behalf, in a foreign interest-bearing security with a United Kingdom bank.
You are required to discuss whether Craig Royal will be subject to normal tax on his two pensions,
on the net rentals, the foreign dividends, the annuity and the foreign interest that accrue to him from
the United Kingdom.
Sister Pentland-Crown
Sister Pentland-Crown is a resident of the Republic. She is a nursing sister employed by Queen
Edward Care (Pty) Limited, a private hospital. She commenced working for it on 1 June 2021.
Prior to that, she had been unemployed for six months. For March, April and May 2021 she was
awarded R2 500 each month that was payable to her under the Unemployment Insurance Act.
Queen Edward Care (Pty) Limited awarded to Sister Pentland-Crown R50 000 towards the costs
she had incurred on selling her previous place of residence and R40 000 towards the costs she had
incurred when settling into her new place of residence.
In addition to Sister Pentland-Crown’s monthly cash salary of R34 000, the private hospital also
awards her a R700 uniform allowance and a R300 shoe allowance each month.
You are required to discuss whether the amounts that Sister Pentland-Crown earned, or the benefits
she enjoyed, are subject to normal tax.
Kenny and Melody Russet-Birbank
Kenny and Melody Russet-Birbank separated and were divorced in 1983. Neither has since
remarried. Melody Russet-Birbank has never worked. She relies on the alimony that Kenny Russet-
Birbank pays her to finance her living costs. And in this regard he has never let her down.
Kenny Russet-Birbank died on 30 November 2021. Prior to his death, he had created a trust to
ensure that Melody Russet-Birbank would still be awarded her monthly alimony after his death.
During the 2022 year of assessment Melody Russet-Birbank was awarded
• R90 000 (nine months at R10 000 a month) alimony from Kenny Russet-Birbank, and
• R30 000 (three months at R10 000 a month) alimony from the Russet-Birbank Alimony Trust.
You are required to discuss whether the alimony awarded to Melody Russet-Birbank is exempt
from normal tax.
Itilosi and Beauty Mazambane
Itilosi and Beauty Mazambane are both employed by Yukon Gold Shipping (RSA) Limited. They
are residents of the Republic. They are both crew members of a ship. It does not, however, always
allocate them to duties on the same ship.
84 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Yukon Gold Shipping (RSA) Limited is engaged in the international transportation for reward of
goods and all its ships are used for this purpose.
During the 2022 year of assessment
• Itilosi Mazambane was outside South Africa for 190 days, while
• Beauty Mazambane was outside South Africa for 180 days.
Itilosi Mazambane earned a remuneration of R216 000 from Yukon Gold Shipping (RSA) Limited
for the 2022 year of assessment.
And Beauty Mazambane earned a remuneration of R192 000 from it for the 2022 year of
assessment.
You are required to determine the normal tax consequences that arise out of the amounts earned by
Itilosi Mazambane and Beauty Mazambane from Yukon Gold Shipping (RSA) Limited.
Lovisisa Ubhatata
Lovisisa Ubhatata, aged 55 years, is not a resident of the Republic. She, however, invested money
in South Africa. On 1 March 2021 she lent Sipo Tugela the equivalent of R2 000 000 at an interest
rate of 9% a year. The interest on this loan is paid annually in arrears. The loan agreement between
them was completed outside South Africa. The funds were made available by her to him outside
South Africa. These funds were then brought back to South Africa by him and used by him in his
business in South Africa.
During the 2022 year of assessment no capital was repaid by Sipo Tugela to Lovisisa Ubhatata, but
interest of R180 000 was paid by him to her.
During the 2022 year of assessment Lovisisa Ubhatata came to South Africa on a ‘game reserve’
tour. While in South Africa, her leg was bitten by a crocodile. A series of operations to her leg
followed, resulting in a total of R180 000 in ‘qualifying medical expenses’ being paid by her, and
causing her to stay in South Africa for a further seven months. In total, in the 2022 year of
assessment, she spent 240 days in South Africa.
You are required to discuss the South African normal tax consequences that arise out of the
interest earned by Lovisisa Ubhatata from her loan to Sipo Tugela.
Wonky Kneebone visited friends in South Africa from 1 February 2022 to 31 May 2022. He is
planning to visit South Africa again to undergo a knee operation. (An internationally-recognised
knee surgeon operates from a hospital in Durban.) He needs to stay in South Africa for four
months:
• Wonky Kneebone can arrive in South Africa on 1 October 2022 for an operation on 2 October
2022 and leave on 31 January 2023, or
• he can arrive in South Africa on 1 January 2023 for an operation on 2 January 2023 and leave on
30 April 2023.
Wonky Kneebone expects to earn from a South African source in the 2023 year of assessment, the
same amounts he earned from a South African source in the 2022 year of assessment.
Wonky Kneebone is a member of a medical scheme. It will pay all his medical expenses.
You are required to inform Wonky Kneebone of which trip he should make. Support your decision
with detailed determinations. Base your decision solely on the after-tax return that he will earn in
the 2023 year of assessment. In other words, he will elect the option which results in the greater
amount of exempt income. (Assume that the 2023 year of assessment tax legislation and rates are
the same as the 2022 year of assessment tax legislation and rates.)
The tour is for nine weeks in total. No player is allowed to return ‘home’ to South Africa during
this nine-week period. And all nine weeks fall in the current year of assessment.
What are the South African normal tax consequences of the salary Rufous Wabler-Wren will earn
when he is ‘working’ outside South Africa?
Victoria Wabler-Wren
Victoria Wabler-Wren is one of South Africa’s leading tennis players. She has been accepted to
play on the America circuit this year. She will be out of South Africa for eight months, all falling in
the current year of assessment. She will not return to South Africa during this eight-month period.
She is subject to normal tax as a professional tennis player. She ‘trades’ in her own name and her
taxable income consists mainly of her net winnings from the tournaments that she participates in.
Victoria Wabler-Wren is only 18 years old. Her parent’s home in South Africa is still her home.
Will Victoria Wabler-Wren be subject to normal tax in South Africa on her net winnings from the
American circuit?
You are required to answer the questions raised by the above taxpayers. Ignore the possible
application of an article in a double tax agreement.
is attributable to trading profits from its foreign business establishment. Its South African
taxable income is R180 000.
• A local liquidation distribution of R60 000 accrued to Goals Galore (Pty) Limited from Iwisa
Kings Limited (a resident of the Republic). Goals Galore (Pty) Limited had owned
10 000 shares in it. It was liquidated on 30 November 2021. On its liquidation, Goals Galore
(Pty) Limited received from it a first and final distribution of R6 a share. This distribution
comprised a return of its share capital (all contributed tax capital) of R1, a return of its capital
profits (for tax purposes) of R2 and a return of its revenue profits of R3 a share. Goals Galore
(Pty) Limited paid R4 a share when it had purchased its 10 000 shares in Iwisa Kings Limited on
1 October 2019. (See further note 2 below.)
• A local distribution of R70 000 accrued to Goals Galore (Pty) Limited from Amakhosi Limited
(a resident of the Republic). Goals Galore (Pty) Limited owns 5 000 shares in it. On
30 September 2021 it made a capital profit when certain vacant land belonging to it was sold for
an amount above its cost. It then distributed this capital profit to its shareholders after the
resulting ‘capital gains tax’ had been set-off against it. On 1 October 2021 a distribution of
R14 a share was made by it.
• A share premium repayment of R80 000 accrued to Goals Galore (Pty) Limited from Orlando
Limited (a resident of the Republic). Three years previously Goals Galore (Pty) Limited purchased
100 000 shares in it at R8,80 a share. On 31 October 2021 it repaid its share premium account (all
contributed tax capital). As a result, Goals Galore (Pty) Limited received R80 000.
• On 30 November 2021 a return of R90 000 accrued to Goals Galore (Pty) Limited from an
investment in Chiefs Real Estate Investment Trust. This return comprised
– local dividends of R85 500, and
– local interest of R4 500.
Chiefs Real Estate Investment Trust is a resident of the Republic.
• On 15 December 2021 a return of R100 000 accrued to Goals Galore (Pty) Limited from an
investment in the Pirates Collective Investment Scheme in Securities (a so-called equity unit
trust). This return comprised
– local dividends of R90 000, and
– local interest of R10 000.
Pirates Collective Investment Scheme in Securities is a resident of the Republic.
Notes
1. On 30 November 2021 Goals Galore (Pty) Limited sold its entire shareholding in Coventry
Clowns Plc, a foreign company, for the equivalent of R245 000. Goals Galore (Pty) Limited
had purchased 20 000 shares in it (being 20% of its equity shares) on 1 May 2020 for the
equivalent of R190 000, as an investment. But after not receiving a single dividend from it for
a period of 19 months, Goals Galore (Pty) Limited redeemed this investment by selling all its
shares in Coventry Clowns Plc to a non-resident.
2. Goals Galore (Pty) Limited had paid R40 000 when it purchased its 10 000 shares in Iwisa
Kings Limited on 1 October 2019 (see above). On 1 December 2021 it received R60 000 on
the liquidation of Iwisa Kings Limited (see above). It included the entire R60 000 received in
its statement of profit or loss and other comprehensive income. It then wrote off its investment
in Iwisa Kings Limited by ‘debiting’ its statement of profit or loss and other comprehensive
income with R40 000 (see above).
3. All Sundown Socks (Pty) Limited’s equity shares are held by Goals Galore (Pty) Limited. It
manufactures socks that are worn by soccer players. Its policy is to declare its entire after-tax
90 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
91
92 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
since election expenses normally have to be incurred at least every five years when a general
election is held.
You are required to discuss whether Koos van der Merwe may deduct the campaign and
election expenses he incurred from his ‘income’ earned as a Member of Parliament.
like to know if they are deductible in the determination of his taxable income. The expenses he has
incurred are as follows:
• He is a member of the Stream Country Club. He plays golf there nearly every Wednesday
afternoon. On every occasion at least one other player in his four ball is a client. He uses this
club solely to play golf. He incurred R10 800 in expenses in this regard during the 2022 year of
assessment.
• He is also a member of the Fitness Fanatic Gym where he trains under the supervision of
Charline Atlas, a personal instructor, for two hours each week day (normally between five and
seven in the morning). He is convinced that his fitness training program has a direct bearing on
his performance at work in that he is able to work more efficiently and for longer hours as a
result of his gym activities. He also believes it enhances his appearance for his many female
clients. For the 2022 year of assessment, his gym subscription expenses were R4 320, while the
services of Charline Atlas cost him R14 400.
• He believes that he must always look his best so as to win the confidence of his clients and to be
successful in business. He purchased two new suits during the 2022 year of assessment incurring
R19 200 in total. He has all his suits dry cleaned at least once a month. His dry cleaning
expenses were R3 015 for the 2022 year of assessment. He has his hair styled regularly and he
even had two facials during the 2022 year of assessment. His hair styling cost him R1 305 for
the 2022 year of assessment and his two facials cost him R1 170.
• He subscribes to De Rebus a journal devoted to the latest legal developments and to the South
African Law Reports. The combined annual subscription for those two journals that he incurred
during the 2022 year of assessment was R1 620. He has both the journal and the law reports
bound into permanent volumes. The binding of the books was done during February and he
received the bookbinder’s account for R270 on the last day of February. He settled it one week
later.
• Every now and then he is forced to see certain clients at his own home. He has furnished a
consulting room in his home that he uses exclusively for this purpose. He has, on a floor-area
basis, apportioned the annual costs of interest incurred on the mortgage bond, property rates and
electricity. To the portion relating to the consulting room he has added the costs of maintaining
this particular room. His total cost of this consulting room for the 2022 year of assessment is
R12 150.
• A local newspaper published the names of what was believed to be a list of members of a club
that was under examination by the police as possibly being a brothel (place where prostitutes
may be visited). Much to his shock, his name appeared on the list. He was not a member of it.
He had never been a member of it. He had, however, done certain legal work for Gary Walters,
its owner. The list was its mailing list, and not the list of its members. In an attempt to maintain
his good reputation in town, he had a local newspaper publish a ‘disclaimer’ that he had
prepared. A large and nice photograph of himself appeared in the newspaper along with his
‘disclaimer’. The cost of this notice that was incurred by him was R2 500.
• In keeping with his image he prefers to drive a sports car. On the odd occasion he needs to call
on clients either at their homes or at their places of employment. As stated above, he also
completes a certain amount of work in his own home. He has kept fairly accurate records of his
‘business’ trips and these records reveal that he uses his car 40% of the time for business
purposes. The total costs of running the car, including its wear and tear, are R162 000 for the
2022 year of assessment. He has admitted that he could have used a cheaper car (for example, a
Golf or a Tazz) that would have been adequate for his business travel. He estimates that by
preferring to drive a sports car, his costs of running the car are increased by R86 400 each year.
• On 1 July 2022 he purchased for himself a top-of-the-range ‘notebook’ computer (a small and
portable computer) for R32 400. He takes it with him whenever he consults with clients out of
the office. He believes that his clients are most impressed when he is able to access and tailor
96 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
agreements and other standard documents during their consultation. He is also fanatical about
computer games and because of its size he is able to play these computer games on flights and
even in bed. He has estimated that he uses 20% of the time for recreational purposes (including
playing his computer games). The Commissioner has approved a three-year write-off period for
it under Interpretation Note 47 and Binding General Ruling 7. Other costs incurred on it during
the 2022 year of assessment are as follows:
– Repairs and maintenance of R1 850.
– Compact disks used solely for storing work documents and agreements of R2 250.
– Compact disks of computer games of R4 260.
• Jasmine Ceylon, the tea lady, was an employee of the firm of attorneys that he is a partner of for
many years. She retired at the age of 50 years during the 2022 year of assessment. Under a
binding agreement between her and the firm of attorneys, it agreed to award R12 000 a year to
her for the maintenance of her two minor children, for the next 10 years. Arnie Soupastar
supported this agreement since Jasmine Ceylon had brought him many cups of tea over the years
when she had been employed. He greatly appreciated being served tea by her. The first award of
R12 000 was incurred by his firm of attorneys in the 2022 year of assessment.
• Ivor Skivvy, a newly-qualified attorney, is Arnie Soupastar’s personal assistant. In this role, Ivor
Skivvy has worked with him on some of his biggest cases. Ivor Skivvy has therefore had access
to confidential client information. Ivor Skivvy has indicated that he intends to open his own
practice. Arnie Soupastar is concerned that Ivor Skivvy will use the confidential information he
has, to ‘steal’ some of his clients. As a result, Arnie Soupastar, in his personal capacity, paid
Ivor Skivvy R120 000, on 1 July 2021, in return for him agreeing not to open his own practice
for a period of four years, commencing on 1 March 2021.
• On 1 March 2021 Arnie Soupastar purchased a plot of land for R200 000. He paid cash for it.
He then erected on it a suite of offices (a commercial building). It cost R3 300 000 to erect. It
was completed on 31 December 2021. As from 1 January 2022 it was let at a market-related
rental of R22 500 a month to the firm of attorneys that he is a partner of. To help finance its cost
of erection, he had borrowed R3 000 000 at 13%. Interest incurred by him on this loan for the
10-month period from 1 March 2021 to 31 December 2021 was R325 000. Interest incurred by
him on this loan for the two-month period from 1 January 2022 to 28 February 2022 was
R65 000. The only other expense incurred by him on this rent-producing property investment
was property rates of R60 000 for the 2022 year of assessment.
You are required to discuss whether Arnie Soupastar will enjoy a deduction or a capital allowance
in the determination of his taxable income for the expenses he has incurred as detailed above.
expenses of R43 200 in travelling to and from the two race courses. Half the time he travels from
the race-card production division to the race course and the other half of the time from his home.
After the race meetings he always travels back home. He was paid to commentate on 1 000 races
during the 2022 year of assessment. He is also the part owner of eight race horses. He does not like
to commentate on a race in which one of his horses is running. Thus, with the permission of
Durban’s Racing Clubs, he pays, out of his own pocket, a stand-by commentator to commentate on
these races. This happened on 40 occasions during the 2022 year of assessment. He paid the stand-
by commentator R8 000 during the 2022 year of assessment.
Vistula Carpathian
Vistula Carpathian, aged 66 years, is a wealthy woman. She is a resident of the Republic. She
recently inherited substantial funds from Plock Carpathian, her late husband. She appointed Kei
Border to administer her following two investments:
• Plock Carpathian had built up, over a number of years, a large local share portfolio. The
administration of the local share portfolio includes monitoring the value of the portfolio,
collecting and reconciling local dividend receipts and accruals, and banking the local dividend
cheques into her personal bank account. For these services, she paid him an administration fee of
R2 400 for the 2022 year of assessment.
• She keeps large sums of money ‘on call’ with various banking institutions. The administration
of this money requires him to ‘move’ funds between various banking institutions to maximise
the interest earned by her. She paid him an administration fee of R3 600 to perform this service
for the 2022 year of assessment. None of the ‘call’ accounts that he invested her funds in, is a
‘tax free investment’.
Vistula Carpathian’s returns from these investments constituted her sole receipts and accruals in the
2022 year of assessment.
You are required to, in each of the above situations, determine whether the expenditure in question
will be deductible in the determination of the said taxpayer’s taxable income.
• R75 000 being the agent’s commission for the sale of Raymond Roberts’s house in Durban.
• R45 000 being the cost of the removal of his household furniture and effects from Durban to
Pretoria.
• And R60 000 being the transfer and bond costs in connection with his purchase of a house in
Pretoria.
Abraham Marcus claimed as a deduction in the determination of his taxable income his share of the
expenses incurred, amounting to R90 000 (half of the R180 000) on the grounds that this
expenditure was incurred by him solely in the production of his income.
You are required to discuss whether the R90 000 expenditure incurred by Abraham Marcus is
deductible in the determination of his taxable income.
Walter John has now reached retirement age. He has indicated to Michaelson (Pty) Limited that he
would like to retire. It would like to award him with either
• a lump-sum award on his retirement (a golden handshake award), or
• an annuity (broken down into a monthly amount) payable to him (or Glenda John, his surviving
spouse in the event of his death) for the rest of their lives.
Michaelson (Pty) Limited has never made a payment of this nature in the past. And since Walter
John was the only employee who did not join the provident fund, it is unlikely to make a similar
payment in the future.
Michaelson (Pty) Limited and Walter John have not entered into an employment agreement.
You are required to write a letter to Michaelson (Pty) Limited setting out the normal tax
consequences of it awarding Walter John a lump sum or an annuity. Your letter must state how the
proposed awards would affect the normal tax position of both Michaelson (Pty) Limited and Walter
John. You must also cover the situation of the annuity being awarded by it to Glenda John in the
event of his death.
• R12 000 in telephone calls, e-mails, internet rental, stationery and other expenses, and
• R66 000 for her travelling, accommodation and entertaining expenses.
You are required to discuss whether these expenses are deductible in the determination of Bob
Raggamuffin’s taxable income.
Don and Tiffany Sphynx
Don and Tiffany Sphynx, importers of exotic cats, make regular business trips to various parts of
the world. They trade in partnership sharing profits and suffering losses equally. Hearing that
airfares were to be increased by 20% as from 1 April 2022, they purchased, on 15 February 2022,
two weeks before their financial year end, at a cost of R144 000, eight return air tickets to various
destinations to be used by them for trips in the first half of the 2023 year of assessment.
You are required to discuss whether Don and Tiffany Sphynx can deduct the R144 000 in the
determination of their taxable incomes for the 2022 year of assessment.
Havana Persians CC
Havana Persians CC has an incentive scheme for its managers under which they enjoy share among
them, 25% of its net income after taxation. It was, however, payable only after the normal tax
charge had been established by the receipt of its assessment.
For Havana Persians CC’s year ended 28 February 2022 it provided R660 000 in its financial
statements for its normal tax liability, being the best estimate it was able to make. Its normal tax
liability turned out to be greater than the R660 000 that it had provided for, resulting in only
R550 000 being distributed to its managers.
You are required to discuss the effect of the above transactions on the determination of Havana
Persians CC’s 2022 and 2023 taxable incomes.
Siamese Manx (Pty) Limited
It is the policy of Siamese Manx (Pty) Limited, manufacturers of cat biscuits and other cat treats, to
present watches to its employees on the completion of 15 years of unbroken service to it.
Towards the end of Siamese Manx (Pty) Limited’s 2022 year of assessment (that ends on
28 February 2022) four of its employees qualified for watches.
Siamese Manx (Pty) Limited accordingly ordered four watches at R5 500 each. The jeweller then
offered it a discount of 10% if it purchased 10 watches. And since it will need additional watches in
its 2023 and 2024 years of assessment, it took up the ‘special’ offer and paid R49 500 (10 watches
at R4 950 each) to the jeweller on 31 January 2022.
You are required to discuss the deduction of the R49 500 in the determination of Siamese Manx
(Pty) Limited’s 2022 taxable income.
directors’ meeting held on 30 November 2021 it had been agreed to make the R50 000 award to
him as compensation for the loss of his office. His 25 years’ service to it was acknowledged by her.
Mitchell Forester
An insurance policy with a maturity value of R450 000 was awarded to Mitchell Forester who had
retired on 30 November 2021 at the age of 60 years. Exactly five years earlier, he had entered into
an agreement with it in which it was agreed that if he remained on the salary scale of R480 000 a
year, instead of the salary scale of R534 000 a year, for the last five years of his employment, he
would be awarded a lump sum of R450 000 on his retirement. So as to fund this R450 000 award, it
took out a ‘regulation’ insurance policy over his life. Shortly before he retired, he was visited by a
salesman employed by the insurer. This salesman persuaded him to keep the policy alive for a
further five years. He then agreed to pay an annual premium of R54 000. The insurer estimated that
he would be awarded R1 200 000 when the policy matured when he attained the age of 65 years.
For the first five years of this policy Birkenhead Beers (Pty) Limited had paid an annual premium
of R54 000.
Savannah Black
An e-mail confirming that an electronic transfer of a lump sum of R35 000 had been paid into
Savannah Black’s, the widow of a late employee’s bank account. Her husband, Hunter Black, had
been killed in a car accident on 5 November 2021 while on ‘company business’. He was only
29 years old when he died. Savannah Black is 25 years old.
Amber Lager
An annuity of R18 000 to Amber Lager the widow of another late employee. Her husband, Hans
Lager, had also been killed in the same car accident on 5 November 2021 that had also claimed the
life of Hunter Black (see above). He was 55 years old at the time of his death. (They had been
travelling together from Johannesburg to the Pretoria branch office when the accident had
occurred.) Amber Lager is 52 years old.
John Stone
A watch that had cost Birkenhead Beers (Pty) Limited R9 000 (excluding value-added tax) to John
Stone who had, on 30 November 2021, completed 20 years’ service with it. (Sabrina Miller
remarked that since he was only 40 years old, another 20 years’ service from him was expected.)
The watch had been specifically purchased by it be awarded to him.
Eastwood Country Club
Eastwood Country Club’s account was received by Birkenhead Beers (Pty) Limited five days after
the luncheon. It was for R20 700. It included R300 for breakages. To qualify for a 5% early
settlement discount, it was settled immediately by Birkenhead Beers (Pty) Limited.
You are required to discuss whether Birkenhead Beers (Pty) Limited will be entitled to a deduction
in the determination of its taxable income for the
• R50 000 paid to Ken Heini,
• insurance policy with a surrender value of R450 000 that it ceded to Mitchell Forester,
• R35 000 paid to Savannah Black,
• R18 000 paid to Amber Lager,
• R9 000 paid for the watch that was awarded to John Stone, and
• the R19 665 (R20 700 less a 5% discount of R1 035) paid to the Eastwood Country Club.
104 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
105
106 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
the year. It was alleged that these actions tended to deprave the morals of others or outraged the
public sense of decency or propriety. Her performance was before an audience of between
180 and 200 men.
When Belle Zsazsa was interviewed after her court appearance, she stated the following:
‘I believe stripping is an act like anything else in the theatre.’
Belle Zsazsa added that she had studied drama as her major subject for three years at university and
used her talents to work out an artistic show as an extension of the drama she had learned. Her act
had been worked out as a ‘one-[woman]’ show in that she appeared naked only by chance, and the
intention was not to shock anyone but to give an artistic performance.
Belle Zsazsa has appeared in court on five different occasions on charges of public indecency,
involving considerable legal expenditure. She intends deducting these expenses from her income as
a strip-tease artist.
A senior assessor employed by SARS had this to say when interviewed by a reporter from a local
newspaper:
‘The law does provide that legal expenses on court actions be deductible in certain
circumstances. But the action must have arisen in the ordinary course of the taxpayer’s business.
‘I don’t know if a criminal action can ever be said to arise out of an ordinary course (of the
taxpayer’s business). If Belle Zsazsa can show it is a feature of her business then she might
qualify for a deduction.’
You are required to consider whether the legal expenses incurred by Belle Zsazsa, and the fines
imposed on her, are deductible from her income as a strip-tease artist.
Kimberley Cullinan’s visitors purchased uncut diamonds in Cape Town. After being caught in a
police trap, they were convicted of the offence of illicit diamond buying. She was then rewarded
with R200 000 by the South African Police.
The Commissioner included this R200 000 in Kimberley Cullinan’s gross income in the 2019 year
of assessment.
Kimberley Cullinan unsuccessfully objected to this assessment. She then appealed to the tax court.
It was common cause that the R200 000 could not be subjected to normal tax under the opening
words of the definition of ‘gross income’ since it was of a capital nature. It was further common
cause that since there was no relationship of employer and employee between the police and
Kimberley Cullinan, it followed that the R200 000 also did not fall into her gross income under
paragraph (i) of the definition of ‘gross income’ and the Seventh Schedule.
Paragraph (c) of the definition of ‘gross income’, however, includes in gross income an
‘amount, including any voluntary award, received or accrued in respect of services rendered or
any amount . . . received or accrued in respect of or by virtue of any employment or the holding
of any office’.
The issue in dispute was whether the reward had been received by Kimberley Cullinan ‘in respect of
services rendered’ as provided for in paragraph (c) of the definition of ‘gross income’ (see above).
In the tax court it was decided that the furnishing of the information constituted ‘services rendered’.
But it was further held that the reward made to Kimberley Cullinan by the South African Police had
not been ‘in respect of ’ the rendering of a service by her to it, and was therefore not to be included
in her gross income.
Unhappy with this judgment, the Commissioner appealed to the appropriate provincial division of the
High Court. It reversed the decision of the tax court. It found that the R200 000 was to be included in
Kimberley Cullinan’s gross income under paragraph (c) of the definition of ‘gross income’.
The appeal to the tax court took place in March 2021. At this appeal, Kimberley Cullinan was
represented by her accountant. His fee for successfully representing her in the tax court was R15 000.
The appeal from the tax court heard in the High Court took place in December 2021. At this appeal,
Kimberley Cullinan was represented by her advocate. His fee for representing her, albeit
unsuccessfully, in the High Court was R55 000.
Kimberley Cullinan deducted the fees of these two professionals – the accountant’s fee of R15 000
and the advocate’s fee of R55 000 in the determination of her taxable income for the 2022 year of
assessment.
The Commissioner refused the deduction in the determination of Kimberley Cullinan’s taxable
income. She unsuccessfully objected on the grounds that the R70 000 in fees paid were deductible
in the determination of her taxable income under the provisions of section 11(c).
Kimberley Cullinan has now appealed to the tax court. She refused to have her dispute solved by
using the alternate dispute resolution process. She also decided not to solve her dispute by way of a
settlement agreement with the Commissioner.
Under the provisions of section 109(4) of the Tax Administration Act, that due to the
‘legal principles related to [this] appeal’
a senior SARS official decided that this appeal should be heard by the tax court rather than the tax
board.
The Judge President of the Provincial Division of the High Court has nominated and seconded you,
under section 119(1) of the Tax Administration Act, to be the President of the tax court having
jurisdiction in that Provincial Division.
You are required to write your judgment to this case. Do not write that part of the judgment that
deals with the facts and that part discussing the arguments of both parties. Write solely the part in
which your actual judgment is given.
108 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Chatsworth Manufacturers (Pty) Limited’s requests will be deductible in the determination of its
taxable income.
You are required to advise Lamontville Properties CC as requested, and to give it what you
consider may be helpful tax-planning advice relating to its proposed building renovations.
Repairs, renewals or improvements
Section 11(d) of the Income Tax Act provides that in the determination of at a taxpayer’s taxable
income, there is deductible from his income expenditure actually incurred by him during the year of
assessment on repairs of property occupied for trade purposes, or from which income is receivable.
You are required to discuss the basic principles outlined by the courts for distinguishing between
• a ‘repair’ (as contemplated by section 11(d)),
• a ‘renewal’, and
• an ‘improvement’,
in relation to fixed property occupied or used in the manner envisaged by section 11(d), and to
provide appropriate supporting comments in relation to each of them.
Marcel Slater
Marcel Slater owns a building from which he earns rentals. He was forced to replace its roof. The
original roof was made of corrugated iron and could have been replaced with the same material at a
cost of R144 000. But so as to improve its appearance, he replaced the roof with a tiled roof at a
cost of R189 000.
You are required to state whether the R189 000 will be deductible in the determination of Marcel
Slater’s taxable income, or whether the deductible amount will be limited to R144 000. Give
reasons to support your answer.
Mothers Clinic CC
Mothers Clinic CC incurred R2 000 000 in its 2022 year of assessment to effect changes to its
generator. Its operation capability was increased by 50% after these changes were effected.
Mothers Clinic CC capitalised the R2 000 000 it incurred for accounting purposes.
You are required to state whether the R2 000 000 will be deductible under the provisions of
section 11(d) in the determination of Mothers Clinic CC’s taxable income.
Ranger (Pty) Limited
The engine of a delivery vehicle belonging to Ranger (Pty) Limited had to be replaced because of a
fault. A new engine, with the same specifications as the replaced engine, was purchased from its
manufacturer and installed in its delivery vehicle.
Ranger (Pty) Limited’s delivery vehicle was then used in the same way as it had been before its
engine was replaced. The new engine cost R150 000.
You are required to state whether the R150 000 is deductible in the determination of Ranger (Pty)
Limited’s taxable income under the provisions of section 11(d).
Hilton Fogg
Hilton Fogg carries on farming operations. A fence around his property needed to be repaired. It
was already 10 years’ old. It was a necessary part of his property. It was recognised as a separate
asset in his asset register.
Hilton Fogg’s fence was repaired with a new and stronger material. It is estimated that the repaired
fence would last at least 10 years’ longer than when in its previous condition.
You are required to state whether the amount incurred by Hilton Fogg on repairing this fence be
deductible in the determination of his taxable income under the provisions of section 11(d).
110 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
• on what basis,
• over what write-off period, and
• whether a particular method is used for the determination.
In addition you should state what types of machinery, implements, utensils and articles do not
qualify for this capital allowance.
and reliable cashier. She finally commenced trading in this commercial building on 1 February
2022.
Marie Pyott does not own shares in Eastville Properties CC.
You are required to determine what allowances Marie Pyott may deduct in the determination of her
taxable income for the 2022 and 2023 years of assessment.
costing R1 440 000 would be erected on these four hectares, and if this commercial building was
not erected within three months of the completion of the compound, the lease on this four-
hectare portion would fall away.
Five years later, during Coal Mining Limited’s 2022 year of assessment, when its lease still had a
further 20 years to run, it commenced using 10-ton trucks for transport. It then incurred
• R3 600 000 on building the agreed-upon tar road, and
• R2 160 000 on rebuilding the bridge.
Since Coal Mining Limited’s was also about to employ more labour that would bring its total
labour force up to in excess of 150 employees, it
• erected the compound for R2 880 000 on the leased premises, and
• built a commercial building at a cost of R960 000.
During the erection of the compound the lease was amended to delete the reference to a price of not
less than R2 400 000 for its erection.
You are required to set out what amounts are deductible by Coal Mining Limited in the
determination of its taxable income, and how Alfred Bond’s taxable income is affected.
• Candyman Limited had purchased the patent used to produce Goaway Pain Pills which was for
a 15-year period for R300 000 on 1 March 2016. It was sold to Safedrugs (Pty) Limited for
R487 500 (being its current market value) on 1 July 2021 for the remainder of its registered time
period.
Candyman Limited’s entire share capital is held by Popular Pharmaceuticals Limited. And Popatab
Limited’s entire share capital is also held by Popular Pharmaceuticals Limited.
The equity shares in Safedrugs (Pty) Limited are held by
• Popular Pharmaceuticals Limited to the extent of 30%, and
• ‘Smokie’ Bungie to the extent of 70%.
Each company in the Popular Pharmaceuticals Group of companies has its financial year end on the
last day of February.
You are required to determine the resulting normal tax consequences to Candyman Limited,
Popatab Limited and Safedrugs (Pty) Limited of the sale and purchase of the patents used to
produce the Grandma Headache Tablets and Goaway Pain Pills.
Dr Lionel Kansa
Dr Lionel Kansa has a taxable income of R1 260 000 from his medical practice. He is not a
member of a pension or provident fund. He has no other receipts or accurals.
You are required to state how much Dr Lionel Kansa could contribute by way of a current
contribution to a retirement annuity fund and obtain a deduction for it in the determination of his
taxable income for the 2022 year of assessment.
Blackie Smoke
Blackie Smoke is a partner in a legal firm. Prior to becoming a partner he had worked as a
candidate attorney in the firm. His salary for the year of assessment immediately preceding him
becoming a partner was R50 400. During the 2022 year of assessment, his taxable income from the
partnership was R420 000. He also has a taxable income of R24 000 from sources other than the
partnership.
You are required to determine
1. Blackie Smoke’s maximum contribution to the pension fund that will be deductible in the
determination of his taxable income, and
2. the maximum contribution he could make to a retirement annuity fund that will also be
deductible in the determination of his taxable income.
Stompie Cravan
As a condition of his employment, Stompie Cravan was a member of a pension fund established by
his employer. Under its rules, when an employee is promoted to a managerial post, he may upgrade
his membership by making an additional contribution to the fund. This contribution is a fixed sum
representing a specified percentage of the difference between prior year contributions and the
contributions that he would have made, had he at all times been employed at the salary applicable
to his new post.
During the 2022 year of assessment, Stompie Cravan upgraded his membership. His pension fund
contributions were as follows:
• A standard contribution of R3 600 (being 6% of salary).
• An additional contribution of R4 800 (to up-grade his membership).
Stompie Cravan’s salary is his sole receipt or accrual.
You are required to state whether Stompie Cravan’s contributions to the pension fund are
deductible, either in whole, or in part, in the determination of his taxable income.
Roxanne Settee
Roxanne Settee is employed by Leisure Chairs Limited as a branch manageress. Its financial year
ends on 31 December.
On 31 January 2021 Leisure Chairs Limited’s financial results for its 2020 financial year were
determined. As a result of the contribution made to its profit by the branch managed by Roxanne
Settee, she was awarded a bonus of R44 000 on 31 January 2021.
During March 2021 the financial records of Leisure Chairs Limited were externally audited. It was
then established that its profit for its 2020 financial year had been incorrectly determined. A new
profit figure was then determined. This meant that Roxanne Settee had been overpaid by R11 000
when the R44 000 bonus was awarded to her by it.
On 31 March 2021 Roxanne Settee repaid Leisure Chairs Limited R11 000 of the R44 000 bonus
that had been awarded to her by it.
Morris Chesterfield
Morris Chesterfield, a resident of the Republic, was retrenched by Quinton Lyre CC, his employer
on 31 March 2020. He was 49 years old at the time he was retrenched. He knew many customers in
the local community who had previously been serviced by Quinton Lyre CC. If he became
employed by a ‘competing’ employer within the region it was possible that he would persuade
some of Quinton Lyre CC’s customers to become customers of his new employer. Quinton
Lyre CC therefore restrained him from working for a ‘competitor’ within the region. It paid him
R1 000 000 not to work for a ‘competitor’ within the region for five years.
Morris Chesterfield was also paid his salary of R16 000 for March 2020 by Quinton Lyre CC.
During February 2022 Morris Chesterfield did consultancy work for a ‘competitor’ of Quinton
Lyre CC. This was in contravention of his restraint of trade agreement. He was then required to
repay R250 000 to Quinton Lyre CC.
On 28 February 2022 Morris Chesterfield repaid Quinton Lyre CC R250 000 of his R1 000 000
restraint of trade award.
Chaise Longue
For the seventh-month period from 1 December 2017 to 30 June 2018 Chaise Longue had enjoyed
paid maternity leave from Cradels and Cots (Pty) Limited. Her son was born on 1 January 2018.
Chaise Longue’s maternity leave entitlement had been for six months. She should have returned to
work on 1 June 2018 but returned only a month later on 1 July 2018. She had then requested that
Cradels and Cots (Pty) Limited regard July 2018 as part of her paid maternity leave.
After much correspondence between Chaise Longue and Cradels and Cots (Pty) Limited over a
lengthy period of time, it finally agreed to treat two weeks of her July 2018 as extended paid
maternity leave.
Chaise Longue was then required to pay back the other two-weeks leave. On 31 March 2021 she
paid R7 500 to Cradels and Cots (Pty) Limited in this regard.
You are required to determine what effect the above transactions will have on the taxable incomes
of Sophie Couch, Roxanne Settee, Morris Chesterfield and Chaise Longue in the 2022 year of
assessment.
Richard Sweep’s share of profits for the 2022 year of assessment is R80 000. In addition
• net rentals of R12 000, and
• local interest of R24 500 accrued to him.
The local interest that accrues to Richard Sweep is not from a ‘tax free investment’.
When Richard Sweep had been an employee, he had contributed 8% of his remuneration to Dusty
Broome & Associates’s pension fund. On becoming a partner of it he elected to continue his
membership of its pension fund and still contributes to it.
Richard Sweep now wishes to join a retirement annuity fund. He would like to know what the
maximum amount is that he could contribute to a retirement annuity fund and enjoy a deduction
from his income in the determination of his taxable income for his contribution to it.
Richard Sweep is 23 years old.
You are required to determine the maximum amount that Richard Sweep could contribute to a
retirement annuity fund and enjoy a deduction for it in the determination of his taxable income.
In Westwood Distributors (Pty) Limited’s statement of profit or loss and other comprehensive
income it also provided for depreciation on its ‘replacement’ computer equipment of R2 800. This
amount was determined as follows:
R84 000 × 20% × 2 / 12 = R2 800.
Westwood Distributors (Pty) Limited’s statement of profit or loss and other comprehensive income
was also debited with finance charges of R800 from the suspensive-sale purchase of the
replacement computer equipment. This amount was determined as follows:
(R27 000 + (15 × R4 200) – R84 000) × 2 / 15 = R800.
Westwood Distributors (Pty) Limited would like to defer its normal tax liability if possible.
You are required to provide the necessary adjustments resulting from the above transactions that
need to be made to convert Westwood Distributors (Pty) Limited’s total profit or loss and other
comprehensive income into its taxable income.
policy. An addendum was added to this policy on 1 May 2012 to the effect that the provisions of
section 11(w) apply to it. The policy was acquired by cession from Saks Hollard during its 2021
year of assessment. The policy has at no stage been pledged.
• Safeguard Products Limited’s 2022 annual premiums of R4 800 paid for an insurance policy on
the life of Dirk Seker, its factory foreman. This is under his employment contract with it. He is
the owner of the policy. The beneficiary under this policy is Katrina Seker, Dirk Seker’s wife.
This policy was entered into on 1 March 2021.
You are required to state whether the above amounts paid by Safeguard Products Limited will be
deductible in the determination of its taxable income. Give reasons to support your answer.
• Deductible in the determination of its taxable income post-trade expenditure is R80 000.
• Gross income of R110 000.
No portion of Queen’s Tavern CC’s gross income is exempt from normal tax.
You are required to
1. discuss the provisions of section 11A,
2. determine Queen’s Tavern CC’s taxable income for its first (2022) year of assessment, and
3. determine, and discuss, whether an amount may be carried forward by it to its 2023 year of
assessment.
Exactly four years after Ponds and Pools (Pty) Limited’s second house was first occupied, it was
sold to the employee living in it for R240 000.
Ponds and Pools (Pty) Limited’s third house is still occupied by an employee of it.
After a request was received from certain of Ponds and Pools (Pty) Limited’s key shift employees,
it then erected a further four houses. These houses were erected on a site near its head office:
• The first of these houses was completed on 30 June 2021 at a cost of R500 000. It was occupied
by an employee of it from 1 July 2021.
• The second of these houses was completed on 31 August 2021 at a cost of R600 000. It was
occupied by an employee of it from 1 September 2021.
• The third of these houses was completed on 31 October 2021 at a cost of R700 000. It was
occupied by an employee of it from 1 November 2021.
• The erection of the fourth house commenced only on 1 November 2021. It was completed on
31 January 2022 at a cost of R220 000. It was occupied by an employee of it from 1 February
2022.
The above four houses, and the two erected in 2018 that Ponds and Pools (Pty) Limited still owns,
are the only houses owned by it.
You are required to determine
1. what amounts were deducted in the determination of Ponds and Pools (Pty) Limited’s taxable
income for its 2018 year of assessment,
2. what amount will be recouped and included in its gross income under either section 11(t) or
section 8(4)(a) in its 2022 year of assessment,
3. its capital gains tax consequences that arise when the second house was sold for R240 000, and
4. what amounts will be deducted in the determination of its taxable income for its 2022 year of
assessment for the four new houses that it erected.
Besides Sparkling Fountains (Pty) Limited’s above three prepaid expenses for insurance, rates and
its franchise licence, it has no other prepaid expenses. Details of these three prepaid expenses are as
follows:
• Sparkling Fountains (Pty) Limited pays the insurance premium for its trade assets annually in
advance. The premium paid was R120 000. It was paid on 29 October 2021. Its insured year is
from 1 November 2021 to 31 October 2022.
• Sparkling Fountains (Pty) Limited pays the property rates for its trade premises annually in
advance. The amount paid by it was R36 000. It was paid on 24 December 2021. Its property
rates year is from 1 January 2022 to 31 December 2022.
• Sparkling Fountains (Pty) Limited pays for its franchise licence annually in advance. The
franchise licence paid by it was R24 000. It was paid to the franchise owner. It was paid on
27 July 2021. It covers the year 1 August 2021 to 31 July 2022.
The following entry was also made in Sparkling Fountains (Pty) Limited’s journal as part of the
preparation of its financial statements:
Electricity and water (statement of profit or loss and other
comprehensive income ) Dr 4 200
To Sundry creditor for electricity and water (statement of financial
position) 4 200
Being an estimate of the electricity and water account for February
2022.
Sparkling Fountains (Pty) Limited purchases its electricity and water from the local municipality.
The local municipality determines the amount owing by it for its electricity and water usage at the
end of every third month. A pro forma (interim or advance) account is sent to it at the end of the
first month and the second month of each three-month determination period.
On 28 February 2022 Sparkling Fountains (Pty) Limited received a pro forma account of R4 200
from the local municipality for the first month of its three-month determination period (ending on
30 April 2022). It paid this pro forma account on 7 March 2022.
You are required to state, supported by workings if necessary, the necessary adjustments that must
be made to Sparkling Fountains (Pty) Limited’s accounting profit in the determination of its taxable
income for its 2022 year of assessment that arise from the above two journal entries.
The same journal entry was recorded in Gert Hammerkop’s journal each month for the months of
May, June, July, August, September, October, November, December, January and February.
Louis Zinn’s only other receipt or accrual is local interest of R28 800. It did not accrue to him from
a ‘tax free investment’.
You are required to determine Louis Zinn’s 2022 taxable income. Support your determination with
relevant explanations.
Keegan Landlord
During the 2013 year of assessment Keegan Landlord, a resident of the Republic, was transferred
by his employer from Pietermaritzburg to Durban. He did not sell his primary residence in
Pietermaritzburg. Instead, he used it as a rent-producing property investment. It is being let at a
market-related rental to a tenant. His tenant uses the property as residential accommodation. His
tenant is not related to him.
Keegan Landlord’s financial results from this rent-producing property investment were as follows:
Year of Rentals Deductible Profit
assessment earned expenses or loss
incurred
2013 15 000 12 000 3 000
2014 48 000 42 000 6 000
2015 60 000 45 000 15 000
2016 72 000 47 000 25 000
2017 78 000 57 000 21 000
2018 84 000 90 000 -6 000
2019 90 000 99 000 -9 000
2020 96 000 84 000 12 000
2021 102 000 120 000 -18 000
For the 2022 year of assessment Keegan Landlord has a taxable income of R1 800 000 before the
deduction of the R15 000 loss he has suffered on his rent-producing property investment. His rentals
earned were R108 000. But he incurred deductible expenses of R123 000 in producing these rentals.
You are required to determine Keegan Landlord’s taxable income for the 2022 year of assessment.
Support your determination with relevant explanations.
Earl Derby
Earl Derby, a resident of the Republic, retired in the 2013 year of assessment. Since then his
earnings have consisted of his pension, annuities and the return from his considerable investments.
His investments include rent-producing properties, dividend-yielding shares and local interest-
bearing securities.
None of Earl Derby’s local interest-bearing securities is a ‘tax free investment’.
Earl Derby used some of his retirement funds to purchase several race horses. He has since mid-
way through the 2013 year of assessment been carrying on business as a race-horse owner. He is
not a race-horse breeder. He is not a farmer.
Earl Derby’s race-horse owner business has resulted in the following profits or losses:
Year of Profit or
assessment loss
2013 -60 000
2014 150 000
2015 -75 000
2016 -190 000
2017 300 000
2018 30 000
2019 -90 000
2020 -45 000
2021 120 000
PARTICULAR DEDUCTIONS 133
In the 2022 year of assessment Earl Derby suffered a loss of R100 000 from his race-horse
owning business. His taxable income excluding this loss was R3 100 000 for the 2022 year of
assessment.
You are required to determine Earl Derby’s 2022 taxable income. Support your determination with
relevant explanations.
Devon Pilchard
Since the 2011 year of assessment Devon Pilchard, a resident of the Republic, has been collecting
and dealing in koi fish. (A koi fish is a large Japanese carp (an edible freshwater fish).) He also
breeds koi fish. He is not a farmer.
Although Devon Pilchard deals in koi fish, he purchases more koi fish than he sells. This has
caused him to suffer losses from his koi fish-dealing business.
Devon Pilchard’s financial results from his koi fish-dealing business have been as follows:
Year of Profit or
assessment loss
2011 -2 000
2012 3 000
2013 -4 000
2014 -6 000
2015 -10 000
2016 -20 000
2017 -30 000
2018 75 000
2019 25 000
2020 -40 000
2021 50 000
In the 2022 year of assessment Devon Pilchard’s taxable income was R1 676 600 prior to the
deduction of the R120 000 loss he suffered from his koi fish-dealing business.
You are required to determine Devon Pilchard’s 2022 taxable income. Support your determination
with relevant explanations.
Penny Pound
Penny Pound, a resident of the Republic, is both a numismatist (a collector of coins) and a coin
dealer. She purchases and sells valuable and scarce coins. But she is not a good businessman
(businesswoman) since she often pays more than she should for a particular coin.
Penny Pound’s results from this business since she commenced it in the 2010 year of assessment
have been as follows:
Year of Profit or
assessment loss
2010 1 000
2011 -3 000
2012 2 000
2013 3 000
2014 7 000
2015 10 000
2016 20 000
2017 30 000
2018 40 000
2019 -50 000
2020 -60 000
2021 -70 000
134 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Penny Pound again suffered a loss from this business in the 2022 year of assessment. This loss
amounted to R80 000. Prior to the deduction of this loss, her taxable income for the 2022 year of
assessment was R380 000.
You are required to determine Penny Pound’s 2022 taxable income. Support your determination
with relevant explanations.
Mark Hall
Mark Hall, aged 44 years, deals in silverware. He is a resident of the Republic. He purchases most
of his trading stock abroad. He sells it locally. As a result of the declining value in the rand, he has
often suffered losses from this business.
Mark Hall’s silverware-dealing business has had the following financial results since he
commenced it in the 2008 year of assessment:
Year of Profit or
assessment loss
2008 -20 000
2009 -30 000
2010 40 000
2011 -50 000
2012 60 000
2013 100 000
2014 -150 000
2015 200 000
2016 250 000
2017 300 000
2018 350 000
2019 -400 000
2020 -500 000
2021 -100 000
Mark Hall has again suffered a loss from this business in the 2022 year of assessment. This loss
amounts to R250 000.
Mark Hall also carries on business as an auctioneer. From this business he earned commissions of
R2 700 000 in the 2022 year of assessment. He had, however, incurred deductible expenditure of
R900 000 in earning these commissions.
Mark Hall also earned
• gross local interest of R38 800, and
• local dividends of R6 000,
in the 2022 year of assessment.
None of Mark Hall’s local interest is earned from a ‘tax free investment’.
You are required to determine Mark Hall’s 2022 taxable income. Support your determination with
relevant explanations.
• Secondly, since his transactions are carried out with independent third parties, they are carried
out on an arms-length basis.
You are required to discuss
1. if there is another provision that the Commissioner could use to prevent Murray-Brett
Spearman from deducting the loss from his original paintings business in the determination of
his taxable income, and
2. if his 2020 and 2022 original paintings business losses will be ‘ring-fenced’. In this regard,
assume that the Commissioner will examine the overall profits and losses of his original
paintings business (since its inception in the 2009 year of assessment) to determine if there is a
reasonable prospect of deriving a taxable income from it within a reasonable period.
damages paid were R10 000 and the legal expenses paid were R8 000 (the partners’ own legal
expenses of R3 000 and the neighbour’s of R5 000).
• On 1 June 2021 the partners purchased a second-hand truck for R60 000 to be used in their
swimming-pool business – to deliver materials to, and from, construction sites. But before using
this truck it was necessary to carry out major repairs to it. Alterations were also needed to be
made to it to enable it to transport long lengths of reinforced steel rods. The repairs cost R14 000
and the alteration cost R16 000. These took place during June, July and August 2021. It was
used for the first time on 1 September 2021. The Commissioner has agreed to a wear-and-tear or
depreciation capital allowance based on a four-year write-off period.
• The partnership charged the partners interest on their drawings. It earned R7 800 interest from
Brenton and R5 900 interest from Brian. And then since Brian’s capital account was in debit,
and in accordance with a condition contained in their partnership agreement, he was required to
pay to the partnership interest of R2 000. Brenton’s capital account remained in credit
throughout the 2022 year of assessment. He earned local interest of R7 500 from the partnership.
• The partners had imported special tiles for a particular contract. Before work on this contract
had commenced this client had been transferred to another town and requested that he be
released from this contract. The partners agreed to this request. The partners then sold the
imported special tiles at a profit of R11 000.
• Brenton Brooke had founded this business. Prior to becoming a partner, Brian had been an
employee of Brenton’s. And while Brian was an employee of Brenton’s, he (Brian) had become
a member of the pension fund (and is still a member). In the year of assessment prior to
becoming a partner, Brian had earned a remuneration of R120 000 of which he contributed
R7 200 to the pension fund. After becoming a partner he has remained a member of this pension
fund and he still contributes R7 200 a year to the pension fund. The partnership (the employer)
does not make a contribution on Brian’s behalf to the pension fund. Brian’s only other receipt or
accrual for the 2022 year of assessment was local interest of R25 800 from a local investment
that is not a ‘tax free investment’. Brian now wishes to join a retirement annuity fund.
You are required to
1. determine the partnership’s taxable income (commence your determination with the
partnership’s taxable profit of R600 000),
2. determine each partner’s taxable profit, and
3. inform Brian Brooke how much he may contribute to a retirement annuity fund and obtain a
deduction for it. Assume that he joins it on 1 March 2022 and that his taxable income for the
2023 year of assessment is identical to his 2022 taxable income.
During March 2020 Colin Crookes awarded the contract for the repainting of the Girls’ High
School building to Roland Painter, a local painting contractor. His tender had been the lowest of the
six tenders that had been submitted.
For the 20 months following, a further 30 painting contracts were offered by the Rocky Beach
Municipality. Twenty-four of these were awarded to Roland Painter even though on most occasions
his tender was not the lowest.
The suspicions of the internal auditors of the Rocky Beach Municipality were aroused when it
appeared to them that Colin Crookes was living way beyond his means. An investigation was
carried out during December 2021. It revealed that Colin Crookes was on Roland Painter’s payroll.
A charge of bribery was laid by the Rocky Beach Municipality against both Colin Crookes and
Roland Painter. On 25 February 2022 they were both found guilty in the Magistrates’ Court in
Rocky Beach. Colin Crookes was sentenced to imprisonment for two years, while Roland Painter
received a five-year-suspended sentence.
After Roland Painter had submitted his 2022 tax return, he received a letter from the Commissioner
asking him to provide details of the legal expenses he had incurred of R38 400 and also to provide
details of the amounts that he had paid to Colin Crookes during both the 2021 and the 2022 years of
assessment. He was also asked to state how these payments had been treated in his financial
statements.
Roland Painter replied by stating that the entire R38 400 had been fees paid to his legal adviser for
the case instituted against him by the State arising out of the claim made by the Rocky Beach
Municipality. He confirmed that he had paid R144 000 to Colin Crookes during the 2021 year of
assessment and R256 000 during the 2022 year of assessment. These amounts had been included in
his salaries total of R1 728 000 and R2 048 000 for the respective years of assessment. Both the
legal expenses and the salaries had been treated as expenses in his statement of profit or loss and
other comprehensive income.
Shortly after that, Roland Painter received a revised assessment for the 2021 year of assessment
that reflected an increase in his taxable income of R144 000. He also received his 2022 tax
assessment in which neither the R256 000 paid to Colin Crookes nor the R38 400 legal expenses he
had incurred had been deducted in the determination of his taxable income for this year of
assessment.
Roland Painter objected to both these assessments on the grounds that the amounts he paid to Colin
Crookes, and the legal expenses he had incurred, were deductible in the determination of his
taxable income.
The Commissioner disagreed and confirmed Roland Painter’s revised 2021 assessment and the
2022 assessment.
Roland Painter has now appealed to the tax court. He refused to have his dispute solved by using
the alternate dispute resolution process. He also decided not to solve his dispute by way of a
settlement agreement with the Commissioner.
Under the provisions of section 109(4) of the Tax Administration Act, due to the
‘legal principles related to [this] appeal’
a senior SARS official decided that this appeal should be heard by the tax court rather than the tax
appeals board.
You are required to discuss whether the amounts paid to Colin Crookes by Roland Painter and the
legal expenses he incurred are deductible in the determination of his taxable income.
CHAPTER 8
INCENTIVE ALLOWANCES
141
142 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
above) from R15 800 to R3 800. On 30 September 2021, it issued a credit note to the purchaser
of the ‘redundant’ machine for the R12 000 difference.
You are required to re-determine the effect on Pine Products Limited’s taxable income for its
2022 year of assessment.
of R171 000 on 1 March 2021 for R1 170 000. (It enjoyed a 2% annual capital allowance for this
factory building.) The market value of this factory on 1 October 2001 was R1 050 000. Dewes
Limited adopted this market value as its base cost under paragraph 26 of the Eighth Schedule.
Dewes Limited then entered into a 30-year lease agreement with Kingsley Landlord under which it
agreed to build a factory on his land at a cost of R6 000 000. This lease agreement was entered into
on 1 June 2021.
The erection of the factory commenced on this date (1 June 2021). It was completed at a cost of
R7 560 000 six months later. It was used by Dewes Limited directly in a process of manufacture as
from 1 December 2021.
Dewes Limited year of assessment ends on the last day of February. It will defer its liability for
normal tax if possible.
You are required to determine the resulting normal tax implications for the 2022 and 2023 years of
assessment to both Dewes Limited and Kingsley Landlord.
Adrian Po
Under a lease between Adrian Po (the lessee) and Riverhorse Properties CC, the owner–lessor, a
plot of land was leased for 20 years as from 1 April 2021. The lease agreement provides for a
• rental of R800 a month payable by Adrian Po to Riverhorse Properties CC from 1 April 2021,
• lease premium of R96 000 to be paid by Adrian Po to Riverhorse Properties CC on 1 April
2021, and
• six flats to be erected by Adrian Po on Riverhorse Properties CC’s land at a cost of R1 920 000.
Adrian Po recorded the following transactions in his journal:
Rental paid Dr 800
To Bank 800
Being rental for the month of April 2021.
The same journal entry was recorded in his journal each month for the months of May to December
of 2021, and for January and February of 2022.
Statement of profit or loss and other comprehensive income Dr 4 800
Amortisation of lease Dr 91 200
To Bank 96 000
Being a lease premium paid on 1 April 2021. It is being written
off over the 20-year lease period.
Flats Dr 2 400 000
To Bank 2 400 000
Being the cost of erecting six identical flats.
Bank Dr 32 000
To Rentals 32 000
Being rentals earned from letting four of the flats at R8 000 for
the month of January 2022.
The same journal entry was recorded in his journal for the month of February 2022.
This is the first occasion that Adrian Po has ‘invested’ in a rent-producing property. The remaining
two flats were also occupied from 1 January 2022. They are occupied by two of his bona fide full-
time employees, one being Jack Mule, his father-in-law. Both have the use of the flats rent free as
part of their salary packages.
Bank Dr 8 000
To Sundry creditor (rental received in advance) 8 000
Being a rental for March 2022 received in advance from a tenant
in February 2022.
You are required to state what amounts that arise out of the above lease agreement and the letting
and occupation of the flats are to be included in Adrian Po’s gross income and deducted from his
income for the 2022 year of assessment.
Bluff Manufacturers (Pty) Limited
On 1 February 2019 Bluff Manufacturers (Pty) Limited commenced the erection of four cottages
(small houses) for its plant supervisors on the premises adjacent to its factory.
By 28 February 2019, the end of its 2019 year of assessment, R18 000 in total, had been incurred
on the erection of these four cottages. They were completed on 31 July 2019 at a cost of R280 000
each.
Since Bluff Manufacturers (Pty) Limited needed to increase the number of its plant supervisors, it
erected a further two cottages. The erection of these cottages commenced on 1 November 2019.
They were completed on 31 March 2020 at a cost of R330 000 each. Of this R330 000 each,
R240 000 each was incurred up to 29 February 2020.
INCENTIVE ALLOWANCES 147
The above six cottages are the only cottages owned by Bluff Manufacturers (Pty) Limited, and used
by it for the purposes of its trade.
You are required to determine the amounts deductible under section 13sex in the determination of
Bluff Manufacturers (Pty) Limited’s taxable income for its 2019, 2020 and 2021 years of
assessment.
Geza Zeacher
Geza Zeacher entered into a two-year learnership agreement with Choose ‘n Charge Limited on
1 September 2021. (She is learning to become a scourer (cleaner) of pots and pans.) Under her
agreement of employment, she earns a salary of R6 000 a month. She is a person with a disability
as referred to in section 6B(3)(b) and as ‘defined’ in section 6B(1).
You are required to discuss the application of section 12H and then to determine the amount that
Choose ‘n Charge Limited may deduct under the provisions of section 12H in the determination of
its taxable income for its 2022 year of assessment.
• The other was insured. Its insurer awarded it R160 000 for its loss of this dining car.
On 1 December 2021 Rail Restaurant CC purchased two new dining cars to replace the two dining
cars that had been destroyed in the fire. The replacement dining cars were purchased for R200 000
each, and were used by it with immediate effect.
Rail Restaurant CC will take up an election that is available to it that will help defer its normal tax
liability.
You are required to
1. write a brief report on the section 12DA capital allowance, and
2. determine Rail Restaurant CC’s resulting normal tax (including capital gains tax)
consequences that arise out of the above transactions.
2020, 2021 and 2022 years of assessment. Also determine the recoupments of allowances that may
arise as a result of the sale of its building and its pilot plant. (Assume that the current version of
section 11D also applied in its 2019 and 2020 years of assessment.)
Employees’ housing
To house Iyeesee Limited’s additional employees required for its research and development
division, it purchased three plots of land on 1 December 2017 at a cost of R150 000 each. It then
incurred R2 250 000 on building three residential units (R750 000 each). The erection of these
residential units had commenced on 1 March 2018. They were completed on 31 August 2018. Its
payment of R2 250 000 was made to the building contractor on 1 August 2018. Its employees
occupied these residential units from 1 September 2018.
Iyeesee Limited already owned four other residential units. They had been purchased by it in its
2014 year of assessment. They are occupied by employees of it who are employed as printers:
• On 1 January 2022 one of the above houses was sold to the employee living in it for R1 080 000
(the price being R900 000 for the house and R180 000 for the land).
• On 1 February 2022 the second house was sold to a non-employee for R750 000 (the price being
R600 000 for the house and R150 000 for the land). The employee who had been occupying this
house had moved out of it on 31 January 2022.
• The third house was repaired at a cost of R720 000 after a runaway bull-dozer had completely
destroyed it. Fortunately no one was in the house at the time of the accident since the employee,
a shareholder in Iyeesee Limited since its incorporation and, who had occupied the house since
its completion, had moved out of it on 31 December 2021. This house was not occupied during
the months of January 2022 and February 2022 since it was being repaired.
You are required to set out the amounts that are deductible in the determination of Iyeesee
Limited’s taxable income and the other normal tax (including capital gains tax) consequences of the
above transactions for its 2019, 2020, 2021 and 2022 years of assessment. (Assume that the current
version of section 11D also applied in its 2020 and 2021 years of assessment.)
On 1 August 2021 a local building society lent Durban Manufacturers (Pty) Limited the funds
required to erect the cottages. A first mortgage bond was passed in its favour. Interest paid on this
mortgage bond to 31 December 2021 was R90 000, and R36 000 for the period 1 January 2022 to
28 February 2022.
Durban Manufacturers (Pty) Limited uses its factory wholly or mainly for a process of manufacture.
As part of the preparation of Durban Manufacturers (Pty) Limited’s financial statements for its
2022 financial year (that ended on 28 February 2022) the following transaction was recorded in its
journal:
Prepaid expenses (statement of financial position) Dr 96 000
To Insurance of plant (statement of profit or loss and other 96 000
comprehensive income )
Being that portion of the insurance premium that relates to its
2023 financial year.
Durban Manufacturing (Pty) Limited’s pays the insurance premium for its plant annually in
advance. The premium paid was R144 000. It was paid on 1 November 2021 for the ‘insurance’
year from 1 November 2021 to 31 October 2022.
On 1 November 2020 Durban Manufacturers (Pty) Limited had paid a premium of R157 500 for its
‘insurance’ year from 1 November 2020 to 31 October 2021.
Durban Manufacturers (Pty) Limited’s premium decreased from the R157 500 paid on 1 November
2020 to the R144 000 paid on 1 November 2021 since
• it enjoyed a no-claim concession, and
• the value of its plant had declined.
Insurance is Durban Manufacturing (Pty) Limited’s sole prepaid expense.
You are required to determine the amounts that arise out of the above information that are
deductible in the determination of Durban Manufacturers (Pty) Limited’s taxable income for its
2022 year of assessment.
Five residential plots were purchased by Feather Quilts (Pty) Limited at a cost of R45 000 each. On
each residential plot, a house was erected at a cost of R435 000. The houses were completed on
31 January 2022. They were occupied ‘rent free’ by the five immigrant technicians (now
employees of it) on 1 February 2022.
During January 2022 these five employees were accommodated in a local residential hotel. The
cost of this accommodation was R12 400 a person. It was paid by Feather Quilts (Pty) Limited.
Three of these employees are employed by Feather Quilts (Pty) Limited at a salary of R30 000 a
month, and the remaining two, at a salary of R7 400 a month.
A machine for the factory was ordered by Feather Quilts (Pty) Limited on 1 August 2021 (being the
date that the purchase agreement was signed). It arrived in South Africa on 31 October 2021. And it
was brought into use on 1 January 2022.
• It cost R440 000.
• The cost of transporting it to the factory was R17 250 (R15 000 plus R2 250 value-added tax).
• A further R11 500 (R10 000 plus R1 500 value-added tax) was incurred by Feather Quilts (Pty)
Limited for its installation on a new concrete foundation that had been specially constructed for
it at a cost of R28 750 (R25 000 plus R3 750 value-added tax).
When the machine was cleared through customs on its arrival in South Africa, value-added tax of
R67 760 was paid by Feather Quilts (Pty) Limited.
Feather Quilts (Pty) Limited’s duvets are manufactured under a design agreement that was entered
into with Claude Pannus, the designer, a resident of France. This design was purchased by it on
1 October 2021 for the equivalent of R6 000. The design gives the sole right of its use in South
Africa for a period of 10 years. Feather Quilts (Pty) Limited must also pay a monthly royalty to
Claude Pannus as a percentage of sales. On 31 January 2022 and 28 February 2022 royalties of
R3 000 and R5 000 respectively were paid by it to Claude Pannus.
Feather Quilts (Pty) Limited purchased a computer to be used by it for its accounting records on
1 December 2021. Since it did not have the necessary cash funds to purchase this computer on a
cash basis, it entered into a 60-month suspensive sale agreement on 1 December 2021. An extract
from this suspensive sale agreement follows:
Computer – at cash price 27 000
Add value-added tax 4 050
31 050
Add finance charges 12 150
Total due 43 200
Monthly instalment payable by Feather Quilts (Pty) Limited 720
(A yield of maturity of 1,15382% applies to this monthly accrual period.)
The computer was used by Feather Quilts (Pty) Limited for the first time on 1 January 2022. The
Commissioner has agreed to a write-off period of three years for this computer.
On 1 September 2021 Feather Quilts (Pty) Limited purchased second-hand office furniture for Ida
Down’s office at an auction sale for a ‘bargain’ price of R12 000. It insured this furniture at its
replacement cost of R21 000. This furniture was used by her in her office with immediate effect.
The Commissioner agreed to a write-off period of five years for this second-hand office furniture.
On 31 December 2021 Ida Down’s office was broken into and the office furniture was stolen. The
insurer awarded R21 000 to Feather Quilts (Pty) Limited on 28 February 2022 for its ‘stolen’ office
furniture. No replacement furniture had been purchased by it by the end of its period of assessment
(that ended on 28 February 2022).
Feather Quilts (Pty) Limited concluded learnership agreements with Charles Duvet and Victoria
Wheeler (a ‘disabled person’ as dealt with in section 6B(3)(b) and as ‘defined’ in section 6B(1)),
154 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
two of its employees. The learnership agreements have been registered with the relevant SETA (and
titles and codes have been allocated and issued by the Director-General: Department of Labour).
• Charles Duvet with an NQF level 6 qualification entered into a six-month learnership agreement
with Feather Quilts (Pty) Limited on 1 September 2021. He had been in its employment from
1 August 2021. His learnership agreement was successfully completed on 28 February 2022.
Under his agreement of employment, he enjoys a salary of R18 000 a month.
• Victoria Wheeler, also with an NQF level 6 qualification, entered into a learnership agreement
with it on 1 September 2021. This learnership agreement is for three years. She was not in its
employment prior to entering into this agreement. Under her agreement of employment with it,
she enjoys a salary of R24 000 a month.
You are required to determine
1. what effect each of the above transactions will have on the taxable income (or assessed loss) of
Feather Quilts (Pty) Limited for its 2022 period of assessment (ended 28 February 2022), and
2. the amount to be included in each of the five ‘immigrant’ employee’s gross income for
residential accommodation for the 2022 year of assessment. This includes their residential
accommodation in the local residential hotel in January 2022 and in the houses belonging to
Feather Quilts (Pty) Limited in February 2022.
Made-In-Soweto (Pty) Limited’s sale of this ‘traded-in’ machine was the only capital asset sold by
it in its 2022 year of assessment.
Advance rentals
Rentals of R96 000 appear as an expense in Made-In-Soweto (Pty) Limited’s statement of profit or
loss and other comprehensive income. These rentals are for offices leased by it for trade purposes.
Over and above the rental payments made for its 2022 financial year of R96 000, it paid ‘in
advance’, on 28 February 2022, the rental it owed for the months of March, April and May 2022 of
R27 000 (in total). It agreed to pay its rental in advance since its landlord needed cash to settle his
property rates due for his property. No portion of the R27 000 ‘advance’ rental payment was
expensed to its statement of profit or loss and other comprehensive income in its 2022 financial
year.
Registered learnership agreement
Salaries and benefits is reflected as an expense in Made-In-Soweto (Pty) Limited’s statement of
profit or loss and other comprehensive income. On 1 September 2021 it employed Zekile Esikhuba,
an apprentice (a ‘learner’) on a full-time basis at a salary of R15 000 a month. Zekile Esikhuba is a
person with a disability and has an NQF level 5 qualification. It entered into a two-year registered
learnership agreement with him in the course of its trade. The learnership agreement is registered
with the relevant SETA. It has complied with all the requirements of the Skills Development Levies
Act. The salary it paid to him and the levies it paid to the relevant SETA are included in its ‘salaries
and benefits’ total.
Restraint of trade
A restraint of trade payment of R600 000 is reflected as an expense on Made-In-Soweto (Pty)
Limited’s statement of profit or loss and other comprehensive income. It was paid to Umculi
Onekhono, a talented artist, who had been employed by it. He left its employment on 30 September
2021. The restraint of trade agreement is effective for two years commencing on 1 October 2021.
Patent
Made-In-Soweto (Pty) Limited developed a particular process used to produce stronger plastic
(ivory imitation) for some of its products. Solely in developing and perfecting this process, its
incurred capital expenditure of R21 760. The Minister of Science and Technology approved this
research and development under the provisions of section 11D(9). It was granted a South African
patent for this invention on 31 August 2021. It then used the patent in its trade. Its legal expenses
incurred to register this patent were R2 240. The expenditure of R21 760 and R2 240 have both
been expensed to its statement of profit or loss and other comprehensive income. The patent
confers protection for 20 years.
Commercial buildings in an ‘urban development zone’
Made-In-Soweto (Pty) Limited had not in the past retailed its products directly to the public. But when
a local curio shop was for sale at a bargain price, it purchased this retail shop and started retailing
certain of its products directly to the public. It purchased the business ‘lock, stock and barrel’ (in its
entirety) from Calabash Crafts CC on 31 December 2020. It did not purchase the equity shares in
Calabash Crafts CC from its shareholders, but, it purchased all the assets belonging to Calabash
Crafts CC from it. One of the assets it purchased from Calabash Crafts CC was its trading premises, a
retail shop built in an approved ‘urban development zone’. It then improved these trading premises
before commencing its retail business. The curio shop was therefore closed during January 2021 with
the result that no sales took place during this month. During January 2021 improvements were made
to the retail shop. Although the existing structure and exterior framework of the shop was preserved,
certain interior walls were demolished and the retail shop was converted to operate on a self-service
basis. The improvements to the retail shop cost it R300 000. It commenced trading from this shop on
1 February 2021.
156 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Trading stock
Also included in the ‘lock, stock and barrel’ sale of the curio shop from Calabash Crafts CC to Made-
In-Soweto (Pty) Limited was trading stock that had cost Calabash Crafts CC R400 000. It had a
market value on 31 December 2020 of R600 000. A price of R360 000 was allocated to this trading
stock in the purchase and sale agreement. Of this trading stock, R270 000 was on hand at 28 February
2021.The amounts in Made-In-Soweto (Pty) Limited’s statement of profit or loss and other
comprehensive income take the R270 000 cost of this trading stock into account. None of this trading
stock was on hand at 28 February 2022.
You are required to determine Made-In-Soweto (Pty) Limited’s taxable income for its 2022 year of
assessment.
Steel Properties (Pty) Limited has no other taxable income. It does not qualify for deductions or
allowances in the determination of its taxable income, with the exception of those resulting from
the above lease agreement.
Fencing (Pty) Limited will earn a taxable income of R800 000 for its 2021 year of assessment and
R500 000 for its 2022 and future years of assessment before taking into account the normal tax
implications resulting from the agreement it entered into with Steel Properties (Pty) Limited.
You are required to
1. determine the normal tax payable by Steel Properties (Pty) Limited for its 2021 and 2022 years
of assessment,
2. determine the normal tax payable by Fencing (Pty) Limited for its 2021 and 2022 years of
assessment,
3. redetermine the normal tax payable by Fencing (Pty) Limited assuming that it had erected the
factory for R1 000 000 on its own property, had itself purchased new machinery for R640 000,
had itself effected improvements costing R1 419 000 to its own property, and there was no
lease agreement at all, and
4. advise Tyron Steel, assuming he is sole shareholder in both companies, whether he should
trade through one or two companies.
Third option
A factory will be erected by Multi Properties Limited and then the site and the completed factory will
be sold to Manufacturers Limited on 1 February 2022 for R19 320 000 under a suspensive-sale:
• R4 800 000 will be payable by Manufacturers Limited to Multi Properties Limited in cash on
completion of the buildings, and
• R605 000 a month will be payable by Manufacturers Limited to Multi Properties Limited for
24 months commencing on the first day of the month following the date of completion.
Transfer will pass from Multi Properties Limited to Manufacturers Limited on payment of the final
instalment. (If the site and the completed factory were sold for cash as opposed to being sold on
suspensive-sale terms, the sale consideration would be R15 600 000 of which R12 000 000 will be
for the buildings.) The provision for unearned finance charges on this option would amount to
• R3 588 000 on 31 March 2022, and
• R1 716 600 on 31 March 2023.
(The finance charges represent a yield to maturity of 1,06769% a month.)
You are required to determine the effect of each of the three options on the taxable income of both
Multi Properties Limited and Manufacturers Limited, for each of their years of assessment ending
31 March 2022, 2023 and 2024.
within the group. Paper Money (Pty) Limited secures and arranges the funds required by all the
companies in the group. It borrows money from other companies in the group whenever they have
surpluses available. It lends money to other companies in the group whenever the position of the
group company concerned requires that to be done.
Serviettes (Pty) Limited had a cash-flow problem at the end of February 2021. (This was caused by
the settlement of its second provisional tax payment for its 2021 year of assessment.) It, therefore,
on 1 March 2021, entered into a sale-and-leaseback arrangement with Paper Money (Pty) Limited
for its ‘packaging’ plant. (Serviettes (Pty) Limited had qualified for a section 12C capital allowance
on this ‘packaging’ plant.)
Prior to entering into this arrangement, Serviettes (Pty) Limited had tried to sell this packaging
plant but the best offer it received was only R441 000 (excluding value-added tax).
The sale-and-leaseback agreement comprised Serviettes (Pty) Limited selling its ‘packaging’ plant
to Paper Money (Pty) Limited for R690 000 (R600 000 plus R90 000 value-added tax at 15%), and
for Paper Money (Pty) Limited to then lease this ‘packaging’ plant to Serviettes (Pty) Limited for a
three-year period at a rental of R28 750 a month (R25 000 plus R3 750 value-added tax at 15%).
On conclusion of the three-year period, Serviettes (Pty) Limited will be able to purchase this
packaging plant back from Paper Money (Pty) Limited for R1,15 (R1 plus 15 cents value-added
tax). Its market value is expected to be R60 000 (excluding value-added tax) at that point in time.
The original cost of this packaging plant to Serviettes (Pty) Limited was R510 000 (excluding
value-added tax). The contract for its purchase had been concluded on 1 March 2020.
Under Practice Note 47 and Binding General Ruling 7 the Commissioner allows for a four-year
write-off period for the wear-and-tear capital allowance on the packaging plant.
What are the resulting normal tax implications of all these transactions to both Paper Money (Pty)
Limited and Serviettes (Pty) Limited?
Dish Cloths (Pty) Limited
Until 31 August 2021, Dish Cloths (Pty) Limited carried on its ‘manufacturing’ business from
leased premises. Its lease expired on 31 August 2021. Its landlord refused to renew the lease.
Dish Cloths (Pty) Limited, being aware that its lease would not be renewed, purchased an industrial
site on 1 March 2021 for R517 500 (R450 000 plus R67 500 value-added tax at 15%). A building
contractor tendered a price of R3 415 500 (R2 970 000 plus R445 500 value-added tax at 15%) to
erect a factory on this industrial site. Erection commenced on 1 March 2021 and the factory was
completed on 31 August 2021.
Building escalation costs resulted in Dish Cloths (Pty) Limited paying the contractor a total of
R3 240 000 (excluding value-added tax) for the erection of this factory. It commenced trading from
its ‘new’ factory on 1 September 2021.
Dish Cloths (Pty) Limited, however, soon found that its ‘new’ factory was too small for its
operations. The factory next door owned by Mosliman Shemagh was vacant and was available to
be let. Mosliman Shemagh enjoyed the annual building allowance on this factory (at a rate of 2%).
This factory had cost him R900 000 (excluding value-added tax) to erect. Alterations and additions
were necessary before this factory was suitable for use by it. A lease agreement was drawn up by
his attorney and provided for the following:
• A 30-year term commencing on 1 September 2021.
• A monthly rental of R10 350 (R9 000 plus R1 350 value-added tax) to be paid by it to him with
a 20% escalation clause to operate every three years.
• A lease premium of R310 500 (R270 000 plus R40 500 value-added tax) payable by it to him on
1 September 2021.
• And an undertaking that it would effect improvements to his factory to the value of R4 016 250
(excluding value-added tax).
160 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
The erection of these improvements commenced on 1 September 2021. They were completed on
30 November 2021 at a cost of R4 417 875 (excluding value-added tax). Dish Cloths (Pty) Limited
commenced trading from this improved factory on 1 December 2021.
What are the resulting normal tax implications of all these transactions to Dish Cloths (Pty) Limited?
Tissues (Pty) Limited
Tissues (Pty) Limited is a new company in the Domestic Paper Group. It commenced trading as a
lessor on 1 March 2021. The following three assets were purchased by it on 1 March 2021 and then
immediately let by it:
Asset Cost Monthly rental Lessee
(excluding value- (excluding value-
added tax) added tax)
Industrial land 1 200 000 8 000 Nappy (Pty) Limited
Industrial plant 900 000 15 000 Dish Cloths (Pty) Limited
Office equipment 42 000 2 000 Paper Money (Pty) Limited
The industrial land and plant was purchased by Tissues (Pty) Limited for cash. The office
equipment was purchased by it under a three-year suspensive sale agreement commencing on
1 March 2021. The monthly instalment was R1 610. Had it purchased the office equipment for cash
it would have paid R49 680 (R43 200 plus R6 480 value-added tax). (A yield to maturity of
0,85819% applies to this monthly accrual period.)
Tissues (Pty) Limited incurred the following expenditure in its 2022 year of assessment. (All the
expenses are exclusive of value-added tax.)
Industrial Industrial Office
land plant equipment
Rates 28 000 – –
Legal expenses (capital) 4 000 – –
Legal expenses (revenue) 13 000 7 500 4 500
The Commissioner has agreed to a five-year write-off period for the wear-and-tear or depreciation
capital allowance on Tissues (Pty) Limited’s office equipment.
All rentals are banked by Tissues (Pty) Limited into its bank account. Bank charges for the year
were R6 000 (excluding value-added tax). It earned local interest of R40 000 from this account.
What is the effect of the above transactions on the taxable income of Tissues (Pty) Limited for its
2022 year of assessment?
Steel Wool (Pty) Limited
Dieter Gent, an investor and dealer in property, completed the erection of a factory on
31 August 2017. It cost him R9 000 000 (excluding value-added tax) to erect. He erected it on a
plot of land that had cost him R1 800 000 (excluding value-added tax).
On 1 September 2017 Dieter Gent let this factory to Steel Wool (Pty) Limited for five years. It
manufactures dishwashing accessories in this factory. It was let at a rental of R90 000 (excluding
value-added tax) a month.
Steel Wool (Pty) Limited was given the option by Dieter Gent to purchase the factory at any time
during the five-year lease period. The option purchase price was R16 200 000 (R13 500 000 for the
buildings and R2 700 000 for the land) less 50% of the rentals actually paid by it to him to the date
of purchase under the lease agreement. The amounts above of R16 200 000, R13 500 000 and
R2 700 000 are all exclusive of value-added tax.
On 1 September 2021 Steel Wool (Pty) Limited exercised its option and paid Dieter Gent
R14 040 000 in full settlement, under the option agreement, for the purchase of the factory and the
land on which it is erected. The market value of the factory and the land on which it is erected was
R18 900 000 (R15 750 000 for the building and R3 150 000 for the land) on 1 September 2021.
INCENTIVE ALLOWANCES 161
Eastern Jeans Manufacturers (Pty) Limited brought these sewing machines into use on 1 April
2021.
Factory premises
On 1 May 2021 Eastern Jeans Manufacturers (Pty) Limited purchased from a developer, namely,
Verulum Industrial Property Developers (Pty) Limited, a brand-new factory that had recently been
erected by it for R7 500 000, of which
• R6 600 000 was for the factory buildings, and
• R900 000 for the land on which it is erected.
‘Factory’ shop
On 1 June 2021 Eastern Jeans Manufacturers (Pty) Limited entered into a 12-year lease agreement
for land owned by the Verulum Municipality. This land, belonging to the Verulum Municipality, is
adjacent to its factory. This lease agreement provided for the following:
• A premium of R120 000 payable by Eastern Jeans Manufacturers (Pty) Limited to the Verulum
Municipality on 1 July 2021.
• A rental of R6 000 a month was payable by Eastern Jeans Manufacturers (Pty) Limited to the
Verulum Municipality.
• The erection by Eastern Jeans Manufacturers (Pty) Limited on Verulum Municipality’s land of a
building to be used as a ‘factory’ shop at a cost of R2 700 000.
The ‘factory’ shop cost Eastern Jeans Manufacturers (Pty) Limited R2 970 000 to erect. Its erection
had commenced on 1 June 2021. It was completed on 30 September 2021. It was used from
1 October 2021.
Administration offices
On 1 July 2021 Eastern Jeans Manufacturers (Pty) Limited entered into a 10-year lease agreement
with Hillary Edgecome for the lease of land on which a suite of offices would be erected. This lease
agreement stipulated that it was obliged to
• pay a premium of R84 000 to her on 1 July 2021,
• erect a suite of offices on her site at a cost of R2 784 000, and
• pay an annual rental in advance of R60 000 a year to her (subject to an annual escalation of R3 000
each year).
Eastern Jeans Manufacturers (Pty) Limited commenced with the erection of its suite of offices on
1 July 2021. It was completed on 31 October 2021. It was brought into use by Eastern Jeans
Manufacturers (Pty) Limited as its administrative offices the next day (on 1 November 2021). Its cost
was R3 062 400.
Trade mark
When it commenced trading Eastern Jeans Manufacturers (Pty) Limited simply sewed onto its jeans a
‘DDD’ emblem so as to distinguish its products from those of other producers of jeans. ‘DDD’ stands
for ‘Durban & Districts Denims’.
The jeans produced by Eastern Jeans Manufacturers (Pty) Limited are sought after in the whole of
KwaZulu Natal, in Johannesburg and in Cape Town. The ‘DDD’ emblem has become a means of
recognition and identification. So as to protect its ‘DDD’ emblem, it registered it as a trade mark
under the Trade Mark Act. Under this Act, the registration of this trade mark remains valid for as long
as it continues to use it in the course of its trade. The ‘DDD’ trade mark was registered from 1 August
2021.
To register this trade mark Eastern Jeans Manufacturers (Pty) Limited incurred legal expenses of
R7 200 and a registration fee of R800.
INCENTIVE ALLOWANCES 163
problem to Great Bear (Pty) Limited is that no administration building and premises suitable for the
factory shop are available.
This problem would be solved if Great Bear (Pty) Limited were to purchase the adjoining site
which is for sale at present. It could then erect its own administration building and factory shop on
this adjoining site.
Great Bear (Pty) Limited’s current leased premises comprise the
• factory to the extent of 60%,
• administration building to the extent of 30%, and
• factory shop to the extent of 10%.
The above ratio is most efficient for the carrying on of Great Bear (Pty) Limited’s operations.
A contractor has confirmed that it will be able to complete Great Bear (Pty) Limited’s required
administration building and factory shop within 18 months if construction commences within the
next two months.
Great Bear (Pty) Limited will finance all the above transactions using borrowed funds.
The normal tax consequences of the proposed transactions are of concern to Great Bear (Pty)
Limited. You have been consulted in this regard.
You are required to prepare a report to be submitted to Great Bear (Pty) Limited. In your report
you should discuss the normal tax consequences that arise out of the
• purchase of the factory from the developer,
• purchase of the land,
• erection of the administration building and factory shop, and
• interest incurred by it on its borrowed funds.
Yet other engineers and architects seem to be unaware of many of the capital allowance provisions
provided for in the Income Tax Act. Geustyn Inc’s own clients also do not usually enlighten them
until it is too late. In practice valuable time and vested interests make a change in design difficult to
achieve.
Sketch-planning is the stage when the client and designer need to discuss the tax design.
Forsyth Joubert, a shareholder and director of Geustyn Inc, has approached you, a tax consultant to
determine if the following sketch-plan is tax efficient:
The plan is for Dr Rubin Quack. He owns the land and will erect the building. It is a three-storey
building.
• The ground floor will be let by Dr Rubin Quack to tenants to be used as shops. (One of the
shops will be a pharmacy.)
• The first floor comprises four offices. These offices are all the same size. Two will be used by
him as his surgery. The third will be let to a chiropractor and the fourth will be let to an
optometrist.
• The top floor comprises one large flat (a penthouse). This flat will be occupied by his family and
himself.
You are required to draft a report to be forwarded to Forsyth Joubert. In your report you should
detail changes that should be made to the sketch-plan that would make it more tax efficient.
CHAPTER 9
DIVIDENDS AND RELATED ISSUES
167
168 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Shortfall Limited
On 31 May 2021 Shortfall Limited reduced its equity shares (all ‘pure’) by repaying one share in
every four shares held. At the same time it refunded its share premium account (also all ‘pure’). It
also distributed a realised capital profit.
Oscar Poplar, who owns 1 200 shares in Shortfall Limited, was awarded R2 100, made up as
follows:
Equity shares reduction: 300 R1 shares 300
Share premium refund 800
Capital profits distributed 1 000
2 100
Shortfall Limited has not had a capitalisation issue.
Overcapex Limited
On 30 November 2021 Oscar Poplar was awarded
• 500 R1 equity shares, and
• 500 non-participating R1 preference shares
from Overcapex Limited as part of a capitalisation issue. Half of the amount used by it to fund
these capitalisation shares (equity and preference shares) was from its share premium account (all
‘pure’) and the other half was from its revenue profits.
The non-participating R1 preference shares of Overcapex Limited do not carry rights to participate,
neither as respects dividends, nor as respects capital beyond their face value on liquidation.
You are required to determine how much of the above amounts that accrue to Oscar Poplar will
constitute a ‘dividend’ as defined.
The market value of a share in Burton Realisation Co (Pty) Limited on 1 October 2001 was
R585 000.
It will cost Burton Realisation Co (Pty) Limited R10 000 to be formally liquidated.
The shares in Burton Realisation Co (Pty) Limited are held equally by Grandfather Burton’s
12 grandchildren. But when it was formed, three of the grandchildren elected to hold their shares in
it through private investment companies that they own.
You are required to determine the dividend that will arise when Burton Realisation Co (Pty)
Limited is liquidated and the dividends tax to be withheld from it. Support your answer with
detailed determinations.
Line Limited
Line Limited distributed
• an interim dividend of 9 cents a share, and
• a final dividend of 12 cents a share
to its shareholders.
Grubber Lock owns 10 000 shares in Line Limited, having purchased them at R4 a share two years
ago. Line Limited funded these dividend distributions out of its revenue profits to the extent of 80%
and out of its capital profits to the extent of 20%.
Forwards Limited
Grubber Lock had owned 20 000 shares in Forwards Limited at the commencement of the 2022
year of assessment. He had paid R30 000 for these shares. They have a nominal value of R1 a
share. During its 2022 year of assessment Forwards Limited reduced its share capital from
R1 shares to 80-cent shares. Forwards Limited held an investment of 200 000 shares in Queens
Park Limited which it had purchased for R200 000. The reduction in share capital was carried out
by awarding its shareholders its shares in Queens Park Limited. This investment in Queens Park
Limited had a book and tax value of R200 000 but a market value of R500 000 when it was
awarded to shareholders. He received 4 000 shares in Queens Park Limited on Forwards Limited’s
capital reduction.
Tight & Loose Limited
Tight & Loose Limited had
• A class shares of R1 each, and
• B class shares of R3 each.
During Tight & Loose Limited’s 2022 year of assessment it reorganised its share capital by
cancelling both its A class and B class shares. New shares with a nominal value of R2 each were
issued to replace both its A class and B class shares. A cash payment of R1 a share was also made
to the holders of its former B class shares. At the commencement of the 2022 year of assessment
Grubber Lock owned
• 1 000 A class shares, and
• 1 000 B class shares
in Tight & Loose Limited.
Grubber Lock had paid
• R2 a share for the A class shares, and
• R5 a share for the B class shares.
During Tight & Loose Limited’s 2022 year of assessment Grubber Lock returned to Tight & Loose
Limited for cancellation, both his A class and B class shares, and in return he received from it
2 000 ‘new’ shares in it (Tight & Loose Limited) with a nominal value of R2 each but with a
market value of R3,60 each. He also received cash of R1 000 from it for the cancellation of the
B class shares he had held in it.
Left Wing Limited
Left Wing Limited was liquidated during the 2022 year of assessment. Prior to being liquidated, it
had sold all its assets to Right Wing Limited, who also took over all its liabilities. Had its liquidator
distributed cash to its shareholders he would have awarded them R10 for each share held. This R10
would have comprised a return of its
• share capital (all contributed tax capital) of R1,
• capital profits of R3, and
• revenue profits of R6.
DIVIDENDS AND RELATED ISSUES 171
But instead of awarding the shareholders a cash distribution he awarded them 10 shares in Right
Wing Limited for each share in Left Wing Limited. The nominal value of each Right Wing Limited
share was R1. This was also the market value of each share.
Three years ago Grubber Lock had purchased 6 000 shares in Left Wing Limited. He now owns
60 000 shares in Right Wing Limited.
Scrums Limited
Grubber Lock has for a number of years owned equity shares in Scrums Limited. During its 2021
year of assessment Scrums Limited had had a two-for-one bonus issue. He had received 12 000
bonus equity shares. This increased his total shareholding in it to 18 000 equity shares. It increased
its equity shares from 200 000 R1 shares to 600 000 R1 shares by this bonus issue. Its bonus issue
was funded by
• its share premium account (all contributed tax capital) to the extent of R100 000,
• a capital profit to the extent of R120 000, and
• by its revenue profits to the extent of R180 000.
During the 2022 year of assessment Scrums Limited collapsed. It then reduced its share capital
by 60%. A cash payment of R360 000 was made to shareholders. Grubber Lock received R10 800
cash, being his share of its capital reduction.
Flanks Limited
During September 2021 Grubber Lock was informed that it was likely that Flanks Limited would
soon be liquidated. He immediately purchased 10 000 R1 shares in it at R2,40 each. It ceased
trading on 24 December 2021. A first and final liquidation distribution comprising a return of its
• capital (all contributed tax capital) of R1 a share, and
• revenue profits of R3 a share
was paid out to shareholders. He received R40 000 from it for his shares in it.
Other information
Grubber Lock is 63 years old. He is retired. His receipts and accruals in addition to those
mentioned above for the 2022 year of assessment were as follows:
Monthly pension (12 × R39 000) 468 000
Local interest 38 800
Local dividend 15 000
Grubber Lock’s monthly pension is paid to him by Fifteenman Limited, his former employer, a
South African-based listed company. The local interest accrues to him from an investment that he
made in South Africa. It is not a ‘tax free investment’. The local dividend accrues to him from his
shareholding in Fifteenman Limited.
You are required to determine Grubber Lock’s 2022 income. But you must first determine his
gross income and then show which amounts that are included in it, are then exempt from normal
tax.
Anglo American Astronomers Limited is a resident of the Republic. Its year of assessment ends on
the last day of February. It is not a listed company.
Except for Anglo American Astronomers Limited’s two capital reductions that took place (see
below), throughout its 2022 year of assessment its shareholding remained unchanged as follows:
Shareholders %
Director Denzil Eugene and his minor son (equally) 12
Director Rudy Shoemaker and his wife (equally) 12
Director Abe Levy 12
Hans Shoemaker (brother of Rudy Shoemaker) 5
Ten other individuals, each have a 1% shareholding 10
Comet Limited (general public interest is 60%) 20
Jupiter (Pty) Limited (see below) 25
Anglo American Astronomers Limited Pension Fund 3
Anglo American Astronomers Limited Sporting and Social Club (an ‘approved’
recreational club) 1
100
Jupiter (Pty) Limited’s equity shares are held as follows:
Shareholders %
Ruben Shard (Director) 5
Giles Hubble (Director) 5
Regina Shard (sister of Director Ruben Shard) 10
Bernard Cape 15
Basil Canaveral 65
100
All the above shareholders of both Anglo American Astronomers Limited and Jupiter (Pty) Limited
are residents of the Republic. None of the relatives of the directors of the above companies has
exercised his rights independently of the directors.
An analysis of Anglo American Astronomers Limited’s share capital account reveals that its equity
shares had undergone a number of changes since its inception. The following journal entries are
relevant in this regard:
Notes
1. On 1 January 1972 the following journal entry was made in the books:
Revenue profits Dr 20 000
To Share capital 20 000
Being a one-for-one capitalisation issue made so as to correct
the imbalance between share capital and retained income.
2. On 1 January 1982 the following journal entry was made in the books:
Revenue profits Dr 10 000
Capital profit Dr 50 000
Share premium (contributed tax capital) Dr 20 000
To Share capital 80 000
Being a two-for-one capitalisation issue made so as to correct
the imbalance between share capital and retained income.
3. On 1 March 2011 the following journal entry was made in the books:
Share capital Dr 20 000
To Cash 20 000
Being a cash reduction of share capital.
DIVIDENDS AND RELATED ISSUES 173
4. On 31 August 2011 the following journal entry was made in the books:
Retained income Dr 20 000
To Share capital 20 000
Being a one-for-five capitalisation issue granted so as to avoid
the payment of the secondary tax on companies.
5. On 1 May 2021 as a result of certain ‘political’ rumours about the possible nationalisation of
large South African companies, Anglo American Astronomers Limited reduced its share
capital by 25%. A cash payment of R30 000 was used to settle this capital reduction.
6. On 1 July 2021 as a result of certain rumours relating to ‘Black’ empowerment, Anglo
American Astronomers Limited further reduced its share capital by 50%. Since it had
insufficient cash resources to make this capital reduction, shares in companies listed on the
stock exchange were awarded to its shareholders. These listed shares were being held as an
investment by it. They had been purchased by it for R45 000 and had a market value of
R70 000 on 1 July 2021.
Abe Levy has been a ‘tax’ client of yours for a number of years. He would like you to answer
certain questions that arise out of the above information and transactions. His questions are as
follows:
You are required to provide suitable answers to the following questions that Abe Levy has raised:
1. Is Anglo American Astronomers Limited a public or a private company for income tax purposes?
2. How much of the 25% capital reduction that took place on 1 May 2021 is a dividend?
3. What amount of dividends tax is payable on the 25% capital reduction that took place on 1 May
2021 and when should it have been paid? And state who is liable for this payment.
4. How much of the 50% capital reduction that took place on 1 July 2021 is a dividend?
5. What amount of dividends tax is payable on the 50% capital reduction that took place on 1 July
2021 and when should it have been paid? And state who is liable for this payment.
6. What is the ‘tax’ status of the equity shares in Anglo American Astronomers Limited after the
above two capital reductions have taken place?
7. If Anglo American Limited were to donate a telescope (valued at R500 000) to the University of
the South (an ‘approved’ public benefit organisation) and to donate R30 000 cash to Venus
Saturn (a lovely young friend of all three directors, and who needed the money to pursue her
hobby as a soothsayer (crystal-ball reader or star-gazer)), would donations tax be payable?
Fisherman’s Shack (Pty) Limited’s statements of financial position on 28 February 2021 and on
29 February 2020 follow:
2021 2020
Share capital 3 000 3 000
Retained income 225 000 221 000
Loan account – Grunter Salmon 400 000 400 000
628 000 624 000
Represented by
Land at cost 75 000 75 000
Hotel buildings at cost 465 000 465 000
Local investments at cost (see below) 80 000 80 000
Net current assets 8 000 4 000
628 000 624 000
Fisherman’s Shack (Pty) Limited’s local investments consist of the following:
Dividend-yielding shares 36 000 36 000
A real estate investment trust investment 18 000 18 000
Collective investment scheme in securities (a so-called equity unit trust) 26 000 26 000
80 000 80 000
Fisherman’s Shack (Pty) Limited’s statements of profit or loss and other comprehensive income for its
2021 and 2020 years of assessment were as follows:
2021 2020
Rentals – –
Local dividends 3 000 2 400
Local real estate investment trust return
– local dividends 1 520 1 200
– local interest 180 120
Collective investment scheme in securities (a so-called equity unit trust)
– local dividends 2 100 2 160
– local interest 200 180
7 000 6 060
Less administration expenses 2 240 2 340
Net income 4 760 3 720
The tax value of Fisherman’s Shack (Pty) Limited’s hotel buildings is R176 700. Grunter Salmon’s
loan account is an interest-free loan account. Fisherman’s Shack (Pty) Limited is not a dealer in
property, shares and collective investment schemes. Its investments in the shares, real estate investment
trust, and collective investment scheme in securities were purchased by it on 1 March 2019.
On 1 March 2021, Grunter Salmon in his capacity of managing director of Fisherman’s Shack (Pty)
Limited, accepted an offer of R990 000 for the purchase of its land and hotel buildings. This
R990 000 was made up of R190 000 for the land and R800 000 for the buildings. On the same day
Fisherman’s Shack (Pty) Limited sold its
• dividend-yielding shares for R45 000,
• real estate investment trust for R23 000, and
• collective investment scheme in securities investment for R32 000.
The market value of Fisherman’s Shack (Pty) Limited’s land and hotel buildings on 1 October 2001
was as follows:
Land 190 000
Hotel buildings 810 000
Fisherman’s Shack (Pty) Limited adopted these market values as their base cost for capital gains tax
purposes.
DIVIDENDS AND RELATED ISSUES 175
The market value of Grunter Salmon’s shares in Fisherman’s Shack (Pty) Limited on 1 October
2001 was R750 000. He adopted this market value as their base cost for capital gains tax purposes.
Grunter Salmon would now like to dispose of Fisherman’s Shack (Pty) Limited. The only expenses
that it will need to incur are certain administration costs of R1 500, certain other expenses in
connection with its winding up and its outstanding tax liabilities.
Grunter Salmon has been advised by his accountant to apply to the Registrar of Companies to have
Fisherman’s Shack (Pty) Limited deregistered. The cost of this deregistration will be R1 200.
Grunter Salmon who is in receipt of taxable income (including local interest) from a number of
other investments, suffers normal tax at the maximum marginal tax rate.
Fisherman’s Shack (Pty) Limited’s 2020 year of assessment provision for normal tax was R420 and
its 2021 year of assessment provision for normal tax was R532. Its two assessments for these years
of assessment had not been received by 1 March 2021. It did not have an assessed loss at the end of
its 2019 year of assessment.
The receipts and accruals and the expenditure incurred by Fisherman’s Shack (Pty) Limited
occurred on a regular basis (assume monthly) throughout its 2021 and 2020 years of assessment.
Fisherman’s Shack (Pty) Limited has never declared a dividend.
You are required to determine the net amount that Grunter Salmon will receive on the
deregistration of Fisherman’s Shack (Pty) Limited.
Springbok Logos Limited traded for two months in its 2022 year of assessment – the months of
March 2021 and April 2021. It conducts its business solely on a cash basis. It suffered a trade loss
of R50 000 in this period. (This R50 000 loss is before charging depreciation on its capital assets.)
It held a closing-down sale on 1 May 2021. It was then placed in voluntary liquidation. The
following information is relevant:
• Springbok Logos Limited’s trading stock on hand at 30 April 2021 was R800 000. Half this
trading stock was sold by it on its closing-down sale and a profit of R20 000 resulted.
• The other half of Springbok Logos Limited’s trading stock was awarded to its shareholders as a
dividend in specie on 2 May 2021. Even though this trading stock had been for sale on its
closing-down sale at its cost price (R400 000) it had not sold. Its market value was only
R300 000.
• Springbok Logos Limited’s plant and equipment was sold for R500 000. It had been purchased
after 1 October 2001.
• Springbok Logos Limited’s furniture and fittings was sold for R180 000. It had been purchased
after 1 October 2001.
• Springbok Logos Limited’s tax liabilities were then settled.
• After the above had taken place, Springbok Logos Limited’s only asset was cash. And it had no
liabilities. A final distribution of this cash was made to its shareholders on 30 June 2021.
The Commissioner has agreed with Springbok Logos Limited’s liquidator that the above events
constituted two liquidation distributions being made by it,
• one, on 2 May 2021, when its trading stock was distributed as a dividend in specie, and
• the other, on 30 June 2021, when its cash was distributed.
None of Springbok Logos Limited’s shareholders is an exempt beneficial shareholder.
You are required to determine what after-tax amount is received by its shareholders.
The market value of Cavesham Cottage (Pty) Limited’s land and building on 1 October 2001 was
R1 550 000.
Tweedie Gowan, Belle Gowan, and Cavesham Cottage (Pty) Limited are all residents of the
Republic.
On 1 March 2022 Tweedie Gowan died. The sole beneficiary of his estate was Belle Gowan. She
inherited his 900 000 shares in Cavesham Cottage (Pty) Limited and became its sole shareholder and
only director. Now in her seventies, she decided to sell the cottage and move into a retirement home.
The cottage was sold by Cavesham Cottage (Pty) Limited, and after the selling expenses had been
deducted, a net R3 050 000 was received. The purchaser had not desired to purchase the shares in it
and had therefore purchased the cottage from it.
Belle Gowan believing that the R3 050 000 was hers, deposited R3 000 000 of it into her bank
account on 1 April 2022. Most of it was then used to help pay for her retirement home.
In March 2023, after chatting to a retired chartered accountant who also resides in the retirement
home, Belle Gowan realised that her financial transactions in relation to Cavesham Cottage (Pty)
Limited’s cottage may have had income tax implications.
Belle Gowan has now consulted you in this regard.
You are required to write to Belle Gowan setting out your views on the income tax implications
that may arise out of the transactions that took place. In your letter suggest to her what actions
should be taken. (Assume that the ‘official rate of interest’ is 4,5%.)
On 31 July 2021 Jamaican Coffee (Pty) Limited determined that it had sufficient funds available to
make the R300 000 distribution. It then paid the dividend on this date.
You are required to determine the withholding date for dividends tax purposes of Jamaican Coffee
(Pty) Limited’s above dividend.
Kahlua (Pty) Limited
On 31 August 2021 Kahlua (Pty) Limited declared an interim dividend of R400 000 to be paid on
30 September 2021. But on 30 September 2021 it had insufficient funds to make this payment. It
therefore cancelled this dividend on 30 September 2021.
You are required to determine the withholding date for dividends tax purposes of Kahlua (Pty)
Limited’s cancelled dividend.
Tongaat Cane (Pty) Limited
During its 2021 year of assessment Tongaat Cane (Pty) Limited commenced trading. Its financial
year ends on the last day of February. It bottles, distributes and retails cane cocktails. Its equity
shares are held by Gavine Molasses.
Crystal Molasses, Gavine Molasses’s mother retired during the 2021 year of assessment at the age
of 60 years. To assist her son, Gavine Molasses, with Tongaat Cane (Pty) Limited’s trading
operations, she ‘invested’ R1 500 000 of her retirement lump-sum awards in it. She made this
‘investment’ in it on 1 April 2021:
• Crystal Molasses purchased 100 000 of Tongaat Cane (Pty) Limited equity shares from Gavine
Molasses for R100 000, being at their par and market value. She now holds 10% of its equity
shares.
• Crystal Molasses took up 300 000 5%-redeemable preference shares in Tongaat Cane (Pty)
Limited. These 5%-redeemable preference shares have a par value of R1 each and may be
redeemed only after five years. Dividends are payable monthly. She paid R300 000 for them.
They are not secured by a financial instrument.
• Crystal Molasses lent R200 000 to Tongaat Cane (Pty) Limited. Interest on this loan is at 3%.
Interest is payable monthly. After two years, that is on 1 April 2023, this loan will be converted
into 200 000 equity shares in Tongaat Cane (Pty) Limited. She will then hold 25% (300 000 out
of its 1 200 000 equity shares) of its equity shares. On 1 April 2021 it was determined that the
value of an equity share in it is likely to be in excess of R1,25 on 1 April 2023.
• Crystal Molasses took up 40 000 6%-redeemable preference shares in Tongaat Cane (Pty)
Limited. These 6%-redeemable preference shares have a par value of R10 each and must be
redeemed within two years. Dividends are payable monthly. She paid R400 000 for them.
• Crystal Molasses lent Tongaat Cane (Pty) Limited R500 000. Interest on this loan is at 9%.
Interest is payable monthly. This loan is secured by assets belonging to it.
You are required to discuss the normal tax and dividends tax consequences to Tongaat Cane (Pty)
Limited, Gavine Molasses and Crystal Molasses that arise out of the above transactions.
• 20% by non-residents from a country where the agreed tax rate on dividends cannot exceed 5%,
and
• 10% by a regulated intermediary.
On 31 March 2021 a dividend of R400 000 was declared by Whiskey Cocktails Limited. And on
28 February 2022 a dividend of R1 000 000 was declared by Whiskey Cocktails Limited.
You are required to determine the dividends tax withheld by Whiskey Cocktails Limited on the
dividends it declared on 31 March 2021 and 28 February 2022.
White Lady Plc
On 31 January 2022 Delilah Alexander received a net dividend the equivalent of R95 000 from
White Lady Plc, a non-resident company. Although it is not a resident of the Republic, its shares
have a secondary listing on the South African stock exchange.
The gross dividend that accrued to Delilah Alexander from White Lady Plc was the equivalent of
R100 000. But then White Lady Plc’s country of residence deducted a 5% non-residents’
shareholders tax (the equivalent of R5 000) from the gross dividend.
Under the double tax agreement between White Lady Plc’s country of residence and South Africa,
tax on dividends is limited to 7,5%. In this regard Delilah Alexander has submitted the required
declaration to White Lady Plc.
You are required to determine the South African dividends tax that Delilah Alexander is liable for
on the R95 000 equivalent dividend that she received from White Lady Plc.
Boilermaker Equity Unit Trust
The Boilermaker Equity Unit Trust is a collective investment scheme in securities (an equity unit
trust). With the exception of portion of a dividend of R900 000 from Porchcrawler Limited (see
below), it distributed all its receipts and accruals to its unit-holders within 12 months of their
receipt or accrual.
The Boilermaker Equity Unit Trust’s financial year ends on the last day of February.
The R900 000 dividend from Porchcrawler Limited accrued to and was received by the
Boilermaker Equity Unit Trust on 1 May 2021. On 31 March 2022, that is 11 months after its
receipt and accrual, the Boilermaker Equity Unit Trust distributed R400 000 of this R900 000
dividend to its unit holders.
From declarations received from the Boilermaker Equity Unit Trust’s unit-holders, it has
determined that
• 10% of them are recognised retirement funds,
• 20% of them are municipalities,
• 30% of them are resident companies, and
• 40% of them are resident natural persons.
The R500 000 balance of the Porchcrawler Limited dividend that was received by the Boilermaker
Equity Unit Trust on 1 May 2021 was distributed by it to its unit-holders on 31 July 2022, that is,
15 months after its receipt and accrual.
You are required to determine the normal tax and dividends tax consequences to the Boilermaker
Equity Unit Trust that arise out of the dividend that accrued to it from Porchcrawler Limited.
Wolfram Gin Distributors (Pty) Limited
Wolfram Gin Distributors (Pty) Limited is a registered micro business. Its financial year ends on
the last day of February. All its shares are held by Mickey Slim.
Wolfram Gin Distributors (Pty) Limited distributed the following dividends to Mickey Slim:
• On 30 September 2021 a dividend of R90 000.
182 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
• On 31 December 2021 an in specie dividend being a distribution of its trading stock. This
trading stock had cost R140 000 and had a market value of R210 000. Daisy Collins will try to
liquidate (convert) this trading stock into cash.
You are required to determine the normal tax (including capital gains tax) and dividends tax
consequences to both Bishop (Pty) Limited and Daisy Collins that result from the four dividend
distributions it made during its 2022 year of assessment.
2. discuss, and determine, if the interest-free loan to Lorraine Ramos from Gin Fizz (Pty) Limited
in the first suggestion above will result in a taxable fringe benefit to her,
3. determine her capital gain that would result if in implementing the second suggestion above,
she sold her 1 000 shares in Gin Fizz (Pty) Limited to Pink Gin (Pty) Limited for R1 000 000
(their market value) on 30 November 2021, and
4. indicate whether any other tax implications would arise out of the second suggestion above.
• This R150 000 amount it paid to him is considered to be reasonable having regard to the extent
of the services rendered by him to it.
A provision for normal tax at 28% of R30 800 was made by Grassgreen (Pty) Limited.
A dividend of R79 200 was declared by Grassgreen (Pty) Limited to Kearsney Green on
27 February 2022.
The country in which Kearsney Green is now ordinary resident and South Africa have agreed in a
double tax agreement that the maximum rate of tax to be on a dividend is 7,5%.
The Commissioner has advised, in writing, in a letter dated 31 January 2022, that he is applying the
provisions of section 31 to Grassgreen (Pty) Limited and that these provisions will be applied on
28 February 2022. He has indicated that he will follow the method as set out in SARS Practice
Note 2 and that the ‘acceptable’ rate of interest for the 2022 year of assessment is 12,5%.
Kearsney Green is 55 years old. During the 2022 year of assessment he did not spend any days in
South Africa. He does not have a permanent establishment in South Africa.
You are required to
1. set out the tax consequences of section 31 to Grassgreen (Pty) Limited, and
2. determine whether it would have been more tax efficient if Kearsney Green had invested
directly (in his own name) rather than indirectly (through Grassgreen (Pty) Limited) in this
rent-producing property.
3. Double Tee Limited’s capital reserve is made up of R5 000 from the revaluation of certain of
its fixed assets and R25 000 being a capital profit made on the sale of a vacant plot of land
(that was not held as trading stock). This plot of land was sold by it before 1 October 2001.
4. During Double Tee Limited’s 2022 and 2021 years of assessment it made a taxable profit. But
in its 2020 year of assessment it suffered a trade loss of R40 000. Its retained income balance
of R200 000 includes a R100 000 taxable profit for the year (see further below). No provision
for normal tax was made by it since it has an assessed loss of R340 000 to carry forward from
its 2021 year of assessment (see below in this regard).
5. Fatty Teagarden lent funds (in rands) to Double Tee Limited. The capital amount lent by him
to it at 1 March 2021 was R1 000 000. On 31 December 2021 it repaid R200 000 of this loan.
At 28 February 2022 the balance on his loan account to it was R800 000. Details of the interest
rate charged on it during its 2022 year of assessment were as follows:
• From 1 March 2021: R1 000 000 at 17,5%.
• From 1 January 2022: R800 000 at 13%.
6. On 1 March 2021 Double Tee Limited borrowed R500 000 from a local lender at 12%. No
portion of this loan was repaid during its 2022 year of assessment. Of the R500 000 from this
loan,
• R200 000 was used to purchase local dividend-yielding shares, and
• R300 000 was used to purchase foreign dividend-yielding shares.
Besides Double Tee Limited’s shareholding in Double Tee (Zimbabwe) Limited and Double
Tee (Malawi) Limited (see note 11), this was the first occasion that it had invested in shares in
other companies. Local dividends of R12 000 and ‘foreign dividends’ of R14 500 accrued to it
from these investments. A foreign withholding tax of R1 450 (10% of R14 500) was deducted
from the ‘foreign dividends’ that accrued to it with the result that it received a net dividend of
R13 050. Of the R14 500 ‘foreign dividends’ that accrued to it, R3 300 is exempt from normal
tax under the provisions of section 10B(2).
7. As a special concession, Fatty Teagarden lent Double Tee Limited R100 000 interest free on
1 February 2022 to enable it to purchase a new item of plant needed by it to up-grade and
improve its factory equipment.
8. Double Tee Limited also purchases trading stock from Fatty Teagarden (under an arm’s-length
transaction). If it does not settle the amount owing for this trading stock purchased within a
three-month period, the amount owing is charged with interest at 10%. On 1 November 2021 it
purchased R30 000’s worth of trading stock from him. Since this R30 000 debt was still
outstanding on 1 February 2022 interest of R250 was charged for the month of February. It
paid this R250 interest on 28 February 2022. This was the only amount of interest it incurred
on trade credit during its 2022 year of assessment.
9. Since Double Tee Limited carries out certain ‘international’ transactions it has a foreign bank
account. It endeavours not to have a bank overdraft. Yet on the odd occasion its current
accounts are overdrawn. This was the position in relation to its foreign bank account
throughout its 2022 year of assessment, and at 28 February 2022, the end of its year of
assessment. Of this particular bank overdraft, 60% is guaranteed by Fatty Teagarden. Its bank
overdraft balance in this current account remained at about R20 000 throughout the year of
assessment. A total of R4 000 interest was charged by the bank on this overdraft during its
2022 year of assessment.
10. Double Tee Limited’s provision for deferred taxation represents the difference between the
book and tax value of certain assets expressed at a 28% normal tax company rate.
DIVIDENDS AND RELATED ISSUES 187
An extract from Treble Tea (Pty) Limited’s ledger account for Joker Tee’s loan follows:
Loan from Joker Tee
Debit
1 February 2022 Cash CB 100 000
28 February 2022 Balance c/d 750 000
850 000
Credit
1 March 2021 Balance b/d 500 000
1 May 2021 Cash CB 100 000
1 September 2021 Cash CB 200 000
1 January 2022 Cash CB 50 000
850 000
No portion of Treble Tea (Pty) Limited’s bank overdraft is secured or guaranteed by Joker Tee.
Treble Tea (Pty) Limited made a taxable profit for its 2022 year of assessment of R100 000. This
profit is after the deduction of
• the interest it incurred of R165 625 (as detailed above), and
• the trading stock it purchased from its Sri Lanka supplier for R300 000 (see above).
Treble Tea (Pty) Limited has provided for normal tax of R28 000 (at a rate of 28%) for its 2022
year of assessment. Its retained income (revenue profits) has a balance of R85 000 at the end of its
2022 year of assessment.
The following information may be relevant:
• Treble Tea (Pty) Limited has no reserves other than its retained income.
• Treble Tea (Pty) Limited has never had a capitalisation issue.
• Treble Tea (Pty) Limited was ‘floated’ and commenced trading on 1 March 2011.
• Treble Tea (Pty) Limited has never held a share in another company.
• Treble Tea (Pty) Limited has never declared a dividend.
Glen Rose is the managing director of Treble Tea (Pty) Limited. Its other directors are Roy Bush
and Joker Tee.
The Commissioner has advised that he is applying the provisions of section 31 to Treble Tea (Pty)
Limited and that they will be applied on 28 February 2022. He has agreed that the prime rate of
interest applicable to its 2022 year of assessment is 12,5%. (The loan from Joker Tee to Treble Tea
(Pty) Limited was made in rands.) He has also indicated that he will use its ‘provisional’ results in
the determination of the section 31 adjustments. And he has advised that if the provisions of
section 31 are to be applied to it, the method as set out in SARS Practice Note 2 will be followed.
You are required to
1. determine the normal tax liability of Treble Tea (Pty) Limited for its 2022 year of assessment,
2. determine the dividends tax that must be withheld by it from its section 31 ‘adjustments’ that
were made on 28 February 2022, and
3. redetermine its normal tax and dividends tax liabilities for its 2022 year of assessment on the
basis that it had been Joker Tee who had supplied it with the ‘exclusive quality’ tea leaves at
R300 000 (and not the Sri Lankan ‘supplier’).
190 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
interest to the extent of R14 000. The foreign dividends are not exempt from normal tax under
section 10B(2).
• R96 000 from its real estate investment trust comprising local dividends of R81 000 and local
interest of R15 000.
During Peterpan (Plk) Limited’s 2021 year of assessment it purchased a 10-year annuity of
R120 000 (payable at the rate of R10 000 a month) from an insurer in South Africa for R660 000. It
paid the R660 000 in cash.
Peterpan (Plk) Limited’s only other receipt or accrual is from an annuity that it purchased outside
South Africa from a foreign insurer. It purchased this annuity during its 2021 year of assessment.
This purchased annuity is for a 10-year period and the ‘capital’ element of each annuity (of the
equivalent of R30 000) that accrues to it is 60% (amounting to R18 000) of the R30 000 annuity.
After providing for Peterpan (Plk) Limited’s taxes in the country where it is registered being the
equivalent of R102 000 (they are levied at a rate of 15%), it declared its after-tax return to its
shareholders in the form of a dividend. Wendy Darling therefore received her return from her
investment in it in the form of a foreign dividend. A foreign dividend the equivalent of R180 000
accrued to her from it on 25 February 2022.
Neverland Plc
Neverland Plc is not a resident of the Republic. None of its receipts and accruals is from a South
African source. Its shares are held by
• Wendy Darling to the extent of 5%,
• other residents to the extent of 44%, and
• non-residents to the extent of 51%.
Neverland Plc is not a foreign business establishment. Its shares are not listed on a stock exchange.
For Neverland Plc’s current foreign tax year (that ended on 31 December 2021) it made a taxable
profit the equivalent of R3 000 000. The country that it is a resident of charged it with a non-
refundable income tax the equivalent of R750 000. Most of its after-tax income the equivalent of
R2 250 000 was then distributed by it as a dividend. As a result of this distribution, a foreign
dividend the equivalent of R112 500 accrued to Wendy Darling. But since she is not a resident of
the country that it is a resident of, this country levied a non-refundable withholding tax of 10% on
the foreign dividend that accrued to her. As a result a ‘net foreign dividend’ the equivalent of
R101 250 (R112 500 – R11 250) was earned by her from her shareholding in it. This foreign
dividend is not exempt from normal tax under section 10B(2).
Captain Hook Plc
Captain Hook Plc is an unlisted foreign company. It is not a resident of the Republic. Its remaining
equity shares (85%) are held by non-residents.
Captain Hook Plc has a net income the equivalent of R2 000 000. It paid non-refundable foreign tax
the equivalent of R400 000 on its net income in its country of residence. Out of its after-tax income
of R1 600 000, it declared a foreign dividend the equivalent of R1 000 000. The equivalent of
R150 000 (15% of R1 000 000) therefore accrued to Wendy Darling. Since she is not a resident of
its country of residence, a non-refundable withholding tax the equivalent of R15 000 was deducted
from the R150 000 equivalent foreign dividend that accrued to her.
You are required to determine
1. the South African taxes payable by Peterpan (Plk) Limited, and
2. Wendy Darling’s normal tax liability.
You are not required to discuss the possible application of an article contained in a double taxation
agreement.
192 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
On 1 March 2021 the rand-value of Tamarin Indica’s foreign investments capital (her foreign
investment portfolio) was R750 000. The return from all her investments, the equivalent of
R89 200 (see above), was re-invested in her foreign investment portfolio. The rand-value of her
foreign investment portfolio was R889 200 on 28 February 2022.
Tamarin Indica would like to know what effect these transactions will have on her 2022 and future
South African taxable incomes.
Chilli Tabasco
Chilli Tabasco, aged 49 years, is a resident of the Republic. He suffers normal tax at the maximum
marginal tax rate. He earned gross foreign dividends the equivalent of R70 000 during the 2022
year of assessment. Of these gross foreign dividends the equivalent of R70 000, the equivalent of
R2 500 is exempt from normal tax under section 10B(2). Foreign countries deducted withholding
taxes the equivalent of R8 400 from these gross foreign dividends (the equivalent of R70 000). The
withholding tax deducted from the ‘exempt’ foreign dividend was the equivalent of R425. He
received net foreign dividends of R61 600.
Chilli Tabasco needs to know his after-tax return from this investment.
Ginger Cardamom
Ginger Cardamom, aged 33 years, holds 75% of the equity shares of Hot Spices Plc. He is a resident
of the Republic. It is not a resident of the Republic. It is not listed on the local stock exchange.
Ginger Cardamom, in his own name, owed a foreign government the equivalent of R180 000 in tax
on amounts that he had earned in that country. Since he did not have funds available to settle this
liability, it was paid on his behalf by Hot Spices Plc. The equivalent of R180 000 was paid to the
foreign government by it on 28 February 2022, being the last day of its 2022 foreign tax year.
Hot Spices Plc treated the equivalent of R80 000 of this payment of the equivalent of R180 000, as
a repayment of Ginger Cardamom’s loan account to it. The balance of the equivalent of R100 000
was recorded in its statement of financial position as an interest-free loan from it to him.
On 28 February 2022 the equity of Hot Spices Plc was as follows: (The amounts are expressed in
their rand-equivalent values.)
Rosemary Cayenne is not a connected person of either Basil Cumin or Parsley Plc.
Cumin Fenugreek Cayenne Investments Plc has investments in rent-producing properties, dividend-
yielding shares and interest-bearing securities. Details of its receipts and accruals, and expenses for
its foreign tax year ended 28 February 2022 follow: (All amounts are expressed in their rand-
equivalent values.)
No portion of the taxable income of Laddoo Limited and the assessed loss of Boondi Ka Limited is
attributable to a foreign business establishment.
You are required to determine the amount to be included in Besan Burfi’s South African income as
a result of him holding equity shares in both Laddoo Limited and Boondi Ka Limited. Provide
reasons in support of your determination.
Kulfi Limited
Kulfi Limited’s equity shares are held by
• non-residents to the extent of 45%,
• Kheer Makhana, a resident of the Republic, to the extent of 6%, and
• Channa Dal Payasam, a resident of the Republic, to the extent of 49%.
Kulfi Limited is not a resident of the Republic. In its country of residence the corporate tax rate is
17,5%. Its net income determined in accordance with the provisions of section 9D(2A) is
R1 000 000. No portion of this net income is attributable to a foreign business establishment.
You are required to determine what effect Kulfi Limited’s net income will have on the incomes of
Kheer Makhana and Channa Dal Payasam.
Sandesh Seviya and Jalebi Limited
Jalebi Limited is not a resident of the Republic. Its financial year ends on the last day of February.
On 1 March 2021
• 60% of its equity shares were held by non-residents, and
• 40% by Sandesh Seviya a resident of the Republic.
On 31 May 2021 Jalebi Limited declared a dividend of the equivalent of R500 000. As a result a
foreign dividend of R200 000 (40% of R500 000) accrued to Sandesh Seviya.
On 17 December 2021 Sandesh Seviya purchased from a non-resident a further 20% of the equity
shares of Jalebi Limited. This meant that for the last 73 days of its financial year,
• 40% of its equity shares were held by non-residents, and
• 60% by Sandesh Seviya.
Jalebi Limited’s net income determined in accordance with the provisions of section 9D(2A) was
R1 500 000 for its financial year ended 28 February 2022. In its country of residence the corporate
tax rate is 15%. Its financial records reveal that its net income determined in accordance with the
provisions of section 9D(2A) was
• R1 190 000 for the 292-day period from 1 March 2021 to 17 December 2021, and
• R310 000 for the 73-day period from 18 December 2021 to 28 February 2022.
No portion of Jalebi Limited’s net income is attributable to a foreign business establishment.
You are required to determine the inclusion in Sandesh Seviya’s income that results from holding
equity shares in Jalebi Limited. Assume that he will elect the most favourable option available to
him. Provide brief reasons to support your determination.
Pak Doodh and Peda Limited
Peda Limited was not a resident of the Republic. Its financial year ends on the last day of February.
On 1 March 2021,
• 30% of its equity shares were held by non-residents, and
• 70% by Pak Doodh, a resident of the Republic.
On 1 July 2021 Peda Limited’s place of effective management moved to South Africa.
Peda Limited’s net income determined in accordance with the provisions of section 9D(2A) was
R1 800 000 for its financial year ended 28 February 2022. In its country of residence the corporate
DIVIDENDS AND RELATED ISSUES 197
tax rate is 15%. Its financial records reveal that its net income determined in accordance with the
provisions of section 9D(2A) was
• R660 000 for the four-month period from 1 March 2021 to 30 June 2021, and
• R1 140 000 for the eight-month period from 1 July 2021 to 28 February 2022.
On 31 December 2021 Peda Limited declared a dividend the equivalent of R270 000. As a result, a
dividend of R189 000 (70% of R270 000) accrued to Pak Doodh.
No portion of Peda Limited’s net income is attributable to a foreign business establishment.
You are required to determine what effect the above transactions will have on the income of Pak
Doodh. Assume that he will elect the most favourable option available to him. Provide brief
reasons to support your determination.
Rabri Limited and Rasmalai Limited
Rasmalai Limited is not a resident of the Republic. Its equity share capital is owned by
• non-residents to the extent of 40%, and
• Rabri Limited, a resident of the Republic, to the extent of 60%.
Rasmalai Limited’s earnings for its financial year that ended on 28 February 2022 were as follows:
• Net rentals of R125 000 from a rent-producing property situated in South Africa.
• Net rentals the equivalent of R275 000 from a rent-producing property situated outside South
Africa.
• Foreign dividends the equivalent of R95 000. Of these foreign dividends, R11 000 are exempt
foreign dividends under the provisions of section 10B(2).
• Local dividends the equivalent of R90 000. Of these local dividends, R25 000 are not exempt
under the provisos to section 10(1)(k)(i).
• Interest from a non-South African source the equivalent of R172 000.
• Interest from a South African source of R114 000.
In Rasmalai Limited’s country of residence the corporate tax rate is 15%.
You are required to determine the inclusion in Rabri Limited’s income as a result of it holding
equity shares in Rasmalai Limited. Provide brief reasons to support your determination.
Gajjar Limited
Gajjar Limited is not a resident of the Republic. Its equity shares are held by
• Crullers Limited to the extent of 75%, and
• Puran Poli Insurers Limited in its individual policyholder fund to the extent of 25%.
Both Crullers Limited and Puran Poli Insurers Limited are residents of South Africa.
Both Gajjar Limited and Crullers Limited have financial years that end on the last day of February.
Applying the provisions of the South African Income Tax Act to Gajjar Limited on the basis that it
was a deemed resident of the Republic, it had a taxable income of R700 000 for its 2022 year of
assessment. Included in its R700 000 taxable income is a taxable capital gain of R200 000. No
portion of its taxable income is attributable to a foreign business establishment.
In Gajjar Limited’s country of residence the corporate tax rate is 17,5%.
You are required to determine the inclusions in the South African incomes of Crullers Limited and
Puran Poli Insurers Limited as a result of them holding equity shares in Gajjar Limited.
Chanar Payesh and Karanji Plc
Karanji Plc is not a resident of the Republic. None of its receipts and accruals are from a South
African source. Its equity shares are held by
• Chanar Payesh, a resident of the Republic, to the extent of 5%,
198 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Classic French Cultivars Plc earned net rentals from the property situated in South Africa in its
2022 year of assessment (which ended on 28 February 2022) of R125 000.
Classic French Cultivars Plc earned net rentals from the property situated outside South Africa in
its 2022 year of assessment the equivalent of R187 500. It paid non-refundable foreign tax, the
equivalent of R37 500, on this equivalent of R187 500.
Classic French Cultivars Plc’s net rentals as determined above are after the deduction of directors’
fees paid to its directors for the services they rendered to it. Of these directors’ fees, R18 000 was
paid to Alsace Bordeaux who is a resident of the Republic. She attends to its South African
transactions.
Alsace Bordeaux holds 75% of the equity shares in Classic French Cultivars Plc.
You are required from the above information, to discuss the South African normal tax
consequences to both Classic French Cultivars Limited and Alsace Bordeaux.
Beau Jolais
Beau Jolais is a resident of the Republic. During the 2021 year of assessment he obtained permission
from the South African Reserve Bank to invest R700 000 ‘offshore’ (outside South Africa).
On 1 March 2021 Beau Jolais invested R700 000 in a foreign collective investment scheme in
securities (a so-called equity unit trust) and a foreign real estate investment trust:
• A foreign distribution the equivalent of R44 100 (consisting of foreign dividends the equivalent of
R27 900, foreign interest the equivalent of R14 355 and the equivalent of a foreign dividend from a
foreign real estate investment trust the equivalent of R1 845) accrued to Beau Jolais from the
foreign collective investment scheme in securities (a so-called equity unit trust) during the 2022
year of assessment.
• A return the equivalent of R70 000 (consisting of foreign dividends the equivalent of R63 000
and foreign interest the equivalent of R7 000) accrued to Beau Jolais from the foreign real estate
investment trust during the 2022 year of assessment.
The above amounts that were earned by Beau Jolais from this R700 000 investment were paid into
his foreign bank account. The equivalent of R5 775 foreign interest was earned on the funds
invested in this bank account during the 2022 year of assessment.
At 28 February 2022 the market value of this investment of Beau Jolais was R770 000. The
increase in value was caused to the extent of
• R43 750 by the increase in the market value of the shares in the collective investment scheme in
securities (a so-called equity unit trust) and the investment in the real estate investment trust, and
• R26 250 by changes in the rates of exchange between the currency of South Africa and the
foreign currencies.
You are required to discuss if Beau Jolais is subject to South African tax on the above amounts
that result from the R700 000 investment made by him outside South Africa.
Val de Loire
Val de Loire is a resident of the Republic. During the 2021 year of assessment she obtained
permission from the South African Reserve Bank to ‘invest’ R750 000 outside South Africa.
On 1 March 2021 Val de Loire invested R600 000 in various investments outside South Africa.
In the 2022 year of assessment the following amounts accrued to Val de Loire from these
investments:
• Foreign interest the equivalent of R33 000.
• Foreign dividends the equivalent of R20 250. These foreign dividends are not exempt from
normal tax under section 10B(2).
• Net rentals the equivalent of R20 000.
200 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
No amounts were actually received by Val de Loire – all earnings were re-invested on her behalf.
The country in which Val de Loire’s investment in the rent-producing property was made has
legislation in the form of currency restrictions and limitations. As far as the rentals earned are
concerned, they are ‘blocked’ in this country for a period of three years from the end of the year of
assessment in which they accrue. They may be remitted to a foreign investor only after the
expiration of this three-year period.
Val de Loire’s foreign interest and foreign dividends earned are not subject to exchange control
regulations.
On 1 March 2021 Val de Loire forwarded R150 000 to Rhona Burgundy, a stockbroker and a member
of a foreign stock exchange, with instructions to deal in shares on the foreign stock exchange on her
behalf. Her intention was not to purchase shares to earn dividends but to make a profit on the resale of
shares. Her reason for using Rhona Burgundy was because Rhona Burgundy had immediate access to
information that was not readily available in South Africa.
From these foreign share-dealings, Val de Loire
• made a net realised profit the equivalent of R45 000 in the 2022 year of assessment,
• enjoyed a net unrealised profit the equivalent of R7 500 at the end of the 2022 year of assessment,
and
• earned foreign dividends of R5 400 during the 2022 year of assessment. These foreign dividends
are also not exempt from normal tax under section 10B(2).
The majority of the transactions on the foreign stock exchange were effected by Val de Loir’s only
after Rhona Burgundy had discussed a sale or purchase with her online.
Val de Loire does not deal in shares on the JSE Securities Exchange.
You are required to discuss the South African normal tax consequences to Val de Loire that arise
out of the amounts she earned outside South Africa as detailed above.
Jean-Claude Champagne
Three years ago Jean-Claude Champagne invested the equivalent of R200 000 in foreign dividend-
yielding shares. He used the services of a foreign stockbroker to assist with this investment. He
gave her an open mandate allowing her, amongst other things, to deal in shares on his behalf.
For the 2022 year of assessment Jean-Claude Champagne’s foreign stockbroker provided him with
a ‘tax’ certificate. It shows that he earned some exempt foreign dividends but that the majority of
his earnings were in the form of taxable foreign dividends. It also shows that he made a small profit
on share dealings and that a limited amount of foreign interest accrued to him. A fee for her
services rendered was deducted by her from his gross earnings. His net earnings were then
reinvested by her on his behalf in further foreign dividend-yielding shares.
Jean-Claude Champagne’s tax certificate shows that foreign dividends the equivalent of R25 500
accrued to him. This R25 500 is after the deduction of withholding taxes of R4 500. Included in
these foreign dividends is a gross foreign dividend of R2 100 that is exempt from normal tax under
the provisions of section 10B(2). The withholding tax on this ‘exempt’ foreign dividend the
equivalent of R2 100 was the equivalent R315.
You are required to discuss if Jean-Claude Champagne will be subject to tax in South Africa on the
foreign dividends, his profit on the share dealings and the foreign interest. And if the foreign
dividends are taxable, on how much will he be subjected to tax? His South African taxable income
before the inclusion in it of the foreign dividends of the equivalent of R25 500 was R475 100.
Finally, will the fee he pays to the foreign stockbroker be deductible in the determination of his
taxable income?
You are required to provide brief answers to the questions raised in the above four queries. You
are not required to discuss the possible application of an article contained in any double taxation
agreement.
DIVIDENDS AND RELATED ISSUES 201
3. Saturn (Pty) Limited’s capital profits are made up of a capital profit of R100 000 that arose in
its 1999 year of assessment, and a capital profit of R80 000 that arose in its 2018 year of
assessment.
4. Saturn (Pty) Limited’s sale of the asset that gave rise to the capital profit of R80 000 in its
2018 year of assessment also caused an inclusion in its taxable income of a taxable capital gain
of R10 000. This, in turn, caused its normal tax liability to increase by R2 800 in that year. No
portion of its normal tax liability was debited to its capital profits.
Saturn (Pty) Limited has never held shares in another company.
You are required to determine the tax payable by Saturn (Pty) Limited’s shareholders on its
liquidation. None of them is an exempt beneficial owner.
Neptune (Pty) Limited
Neptune (Pty) Limited’s financial year ends on the last day of February. It is not thinly capitalised.
It does, however, borrow funds from Brian May, one of its non-resident shareholders:
• On 1 March 2021 Neptune (Pty) Limited’s loan from Brian May was R400 000 at an interest
rate of 15,5%.
• On 1 July 2021 Brian May lent Neptune (Pty) Limited a further R300 000 at 15%. It used the
R300 000 from this loan to pay for a capital asset that it had purchased.
• On 31 August 2021 Brian May lent Neptune (Pty) Limited a further R200 000 at 14,5%. It used
the R200 000 from this loan to pay its first provisional tax payment for its 2022 year of
assessment.
• On 30 September 2021 Brian May lent Neptune (Pty) Limited a further R100 000 at 12%. It
used the R100 000 from this loan to pay its third provisional tax payment for its 2021 year of
assessment.
• No portion of Brian May’s loan was repaid by Neptune (Pty) Limited during its 2022 financial
year.
The Commissioner has approved a rate of 14% (prime of 12% plus 2%) under the provisions of
section 31. He has also indicated that interest incurred that is not deductible in the determination of
Neptune (Pty) Limited’s taxable income under a provision other than section 31, is to be excluded
from the amount of ‘financial assistance’ (as ‘defined’ in section 31(1)). And he has indicated that
he will apply the provisions of section 31 on 28 February 2022 and that he will follow the method
as set out in SARS Practice Note 2.
On 28 February 2022 Neptune (Pty) Limited recorded the following journal entry in its books:
Statement of profit or loss and other comprehensive income Dr 111 500
To Interest incurred 111 500
Being interest for the year due to the non-resident shareholder on his
loan account to it determined on a monthly basis.
Neptune (Pty) Limited has never held shares in another company.
You are required to determine how much of the R111 500 interest incurred by Neptune (Pty)
Limited on its loan from Brian May is not deductible in the determination of its taxable income,
and to determine the resulting taxes payable.
Uranus Plc and Venus Mars
Uranus Plc is not a resident of the Republic. None of its receipts and accruals is from a South
African source. Its equity shares are held by Venus Mars, a resident of the Republic, to the extent
of 7,5% and by non-residents to the extent of 92,5%. It is not a foreign business establishment.
For Uranus Plc’s 2021 ‘foreign tax year’ (which ended on 31 December 2021), it made a taxable
profit the equivalent of R2 200 000. The country that it is a resident of charged it with income tax
the equivalent of R330 000. Almost all of its after-tax income the equivalent of R1 870 000 was
DIVIDENDS AND RELATED ISSUES 203
dividends declared by South African resident companies. Less than 50% of its equity shares are
held by residents of South Africa.
• A foreign dividend the equivalent of R90 000 from Polaris Limited. Stars Limited holds 15% of
its equity shares. Although it is not a resident of the Republic, 60% of its equity shares are held
by South African residents. Its ‘preliminary’ net income (as envisaged in section 9D(2) and as
determined under section 9D(2A)), for its 2022 foreign tax year (ended 28 February 2022) out of
which its dividend was distributed was the equivalent of R1 250 000. This ‘preliminary’ net
income the equivalent of R1 250 000 is before taking into account any exclusions (or
exemptions) as provided for in section 9D(9). The equivalent of R250 000 is attributable to
trading profits from its foreign business establishment. Its South African taxable income is
R100 000. It paid foreign tax the equivalent of R250 000 on its net income. Stars Limited
purchased its 15% shareholding in Polaris Limited on 1 March 2020. The foreign dividend the
equivalent of R90 000 is the first dividend that accrued to Stars Limited from Polaris Limited.
You are required to determine Stars Limited’s South African taxable income.
qualified third party at R750 000 on 1 October 2001. Its market value on 28 February 2021 (and on
1 March 2021) was R1 300 000. It did not qualify for a capital allowance.
The 100 shares in Carissa (Pty) Limited are ‘contributed tax capital’ since it has never had a
capitalisation or bonus issue. These 100 shares have always been held by Martin Gulu. It was
incorporated on 1 November 1989 (11 years and 11 months before valuation date). These shares
were valued by the same independent qualified third party at R625 000 on 1 October 2001.
Carissa (Pty) Limited does not have an assessed loss or an assessed capital loss to bring forward
from its 2021 year of assessment. It distributed its rent-producing property to Martin Gulu on
1 March 2021 (19 years and five months after valuation date). Then it carried out the following
transactions:
• On 31 March 2021 Carissa (Pty) Limited settled its current liabilities of R99 900.
• On 30 April 2021 Carissa (Pty) Limited settled its dividends tax liability arising out of its
1 March 2021 distribution.
• On 31 May 2021 Carissa (Pty) Limited distributed its cash on hand to Martin Gulu.
Martin Gulu has a taxable income in excess of R1 656 600 from sources other than Carissa (Pty)
Limited. Included in this taxable income in excess of R1 656 600 is local interest and a taxable
capital gain.
The Commissioner has indicated that he will regard both distributions (being the distribution of the
rent-producing property and then the cash) made by Carissa (Pty) Limited to Martin Gulu as being
distributions in the course or anticipation of the liquidation or winding up or deregistration of a
company.
You are required to determine the
1. normal tax liability of Carissa (Pty) Limited that arises when it distributes its rent-producing
property to Martin Gulu as a liquidation distribution in specie,
2. dividends tax liability that arises when it distributes its rent-producing property to him as a
liquidation distribution in specie, and
3. his normal tax and dividends tax liabilities caused by its liquidation.
R400 000 of this loan from him to repay its bank overdraft. (The bank overdraft was caused by
financing its operating expenses.) It will use the balance of R440 000 to finance its much-needed
expansion and development programme.
Simply Red (Pty) Limited has never declared a dividend. And it is unlikely to do so in the near
future since it desires to keep all its after-tax profits to help with its expansion and development
programme.
Simply Red (Pty) Limited has never owned shares in another company.
The Commissioner has advised that when he applies the provisions of section 31, he will follow the
method as set out in SARS Practice Note 2.
You are required to discuss whether Simply Red (Pty) Limited’s proposed financial arrangements
will have adverse tax consequences.
On 1 October 2001 (valuation date), Chase Shooter’s equity shares in Doubletots (Pty) Limited had
a market value of R1 300 000.
Land and buildings
The premises (land and buildings) that the business of Doubletots (Pty) Limited trades from are
owned by Chase Shooter. Their market value is R1 980 000.
Chase Shooter purchased the land on 1 October 1994 for R100 000. He then erected a factory on it
at a cost of R900 000. It was completed on 31 July 1995. And it was let by him to Doubletots (Pty)
Limited from 1 August 1995 at a market-related rental.
From the 1996 year of assessment Chase Shooter has enjoyed a section 13(1) capital allowance on
his factory determined at a rate of 5% (on its cost of R900 000).
Downdown CC
Chase Shooter has a one-third members’ interest in Downdown CC. It is a resident of the Republic.
It owns six residential units. Its financial year ends on the last day of February.
The market value of Chase Shooter’s members’ interest in Downdown CC is his one-third share of
its net asset value.
Chase Shooter has an interest-free loan account from Downdown CC of R1 200 000. On 1 March
2021 he urgently needed cash to pay for a liability that Chubby Shooter had incurred. Since it had
cash available, he borrowed R1 200 000 interest free from it. He is not an employee of it.
Chase Shooter purchased his one-third members interest in Downdown CC on 1 March 2015 for
R2 000 000.
Downdown CC paid R900 000 for the land on which its six residential units are erected. It cost
Downdown CC R5 700 000 to erect its six residential units. They were completed on 30 November
2015 and were let by it to tenants at a market-related rental from 1 December 2015.
The cost of Downdown CC’s land and buildings was financed out of
• its members’ interest to the extent of R6 000 000, and
• an interest-bearing loan from Gay Stalker of R600 000.
The market value of Downdown CC’s land and buildings on 30 September 2021 is R7 500 000. Its
only other assets are its
• R1 200 000 interest-free loan to Chase Shooter (see above), and
• cash of R300 000.
No portion of Gay Stalker’s loan had been repaid by Downdown CC at 30 September 2021. Interest
on the loan is payable to her, annually in arrears, on the last day of February.
Farm
Chase Shooter owns a fruit and livestock farm (a permanent establishment) with a market value of
R4 840 000. Included in its R4 840 000 market value, are moveable capital assets with a
• tax value of nil,
• cost of R1 200 000, and
• market value of R500 000.
The farm’s market value of R4 840 000 excludes the livestock on it (see below).
The farm was purchased by Chase Shooter for R5 000 000 on 1 March 2019. No portion of its
purchase price qualified for a deduction in the determination of his taxable income under the
provisions of paragraph 12 of the First Schedule.
Chase Shooter commenced farming operations on 1 March 2019.
Chase Shooter has not made the election to be subject to normal tax on the so-called average basis
of taxation as provided for in paragraph 19 of the First Schedule.
208 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Chase Shooter suffered a loss from farming operations of R60 000 in the 2020 year of assessment.
His farming activities have resulted in a ‘nil’ taxable income for the 2021 year of assessment. He
also has a R200 000 balance of farming capital development expenditure that may be deducted
against future farming profits.
Livestock
Chase Shooter owns livestock with a market value of R1 800 000. On 1 March 2021 his livestock
had a standard value of R4 500. His livestock had cost him R720 000. His livestock that was
purchased by him was purchased by him during the 2020 and 2021 years of assessment. Other
livestock on his farm was livestock that was born on his farm.
Dividend-yielding listed shares
Chase Shooter owns a portfolio of dividend-yielding listed shares with a market value of
R2 060 000. All the shares in it had been purchased by him after valuation date. In total, they had
been purchased for R1 705 500.
Cash
Chase Shooter has cash of R400 000 in an investment call account. It is not a ‘tax free investment’.
Personal-use assets
Chase Shooter has personal-use assets as recognised in paragraph 53(2) and paragraph 53(3) of the
Eighth Schedule with a market value of R3 300 000. They had been purchased by him after
valuation date for R5 500 000.
Life insurance policy
Chase Shooter has a life insurance policy with an estimated maturity value of R2 400 000. He has
paid premiums of R720 000, in total, on this life insurance policy.
Liabilities
On 30 September 2021 Chase Shooter’s liabilities were R1 010 000. This R1 010 000 excludes his
normal tax liability, and a possible increase in it, that could arise if he were to die, or emigrate.
Earnings
Chase Shooter enjoys earnings from
• his salary, benefits and net rentals from Doubletots (Pty) Limited,
• local dividends on his listed shares, and
• local interest from his call-account investment.
As indicated above, Chase Shooter’s farming activities have resulted in a ‘nil’ taxable income for
the 2021 year of assessment. He has a R200 000 balance of farming development expenditure that
may be deducted against future farming profits.
Assessed capital loss
Chase Shooter has an assessed capital loss of R184 400 brought forward from the 2021 year of
assessment.
You are required to
1. discuss the dividends tax consequences to Chase Shooter and Downdown CC that arise out of
its interest-free loan to him (assume that the relevant ‘official rate of interest’ is 4,5%),
2. discuss the normal tax consequences to Chase Shooter and Downdown CC that may arise out
of its interest-free loan to him,
3. determine Chase Shooter’s normal tax liability for his broken period of assessment ending on
31 January 2022, if he were to emigrate on 1 February 2022. Assume that
• the values of his assets and liabilities remain unchanged from their values on 30 September
2021,
DIVIDENDS AND RELATED ISSUES 209
• on his emigration, his farm manager would continue with the fruit farming activities. But he
will cease livestock farming and will sell his livestock as soon as possible after emigrating,
and
• his taxable income excluding amounts to be included in it, or to be deducted in its
determination, resulting directly from his emigration amounts to R982 200. It includes his
net rentals which have been determined after taking into account the section 13(1) capital
allowance that he enjoys,
4. determine the normal tax consequences to Chase Shooter if, on 8 February 2022, that is, one
week after his emigration, his livestock is sold for R1 650 000,
5. determine the estate duty payable by Chase Shooter’s estate should he not emigrate, but if he
were to die on 31 January 2022. Assume that the values of his assets and liabilities remain
unchanged from their values on 30 September 2021. Also assume that the master’s and
executor’s fees and his last illness expenses amount to R743 986,
6. determine the shortfall in liquidity in Chase Shooters’s estate, and if there is an insufficient
amount to settle the resulting estate duty payable, suggest how this shortfall should be provided
for, including the amount needed,
7. state if Gay Stalker’s interest that accrued to her on 28 February 2022 from her loan account to
Downdown CC will be liable for tax in South Africa. She was not in South Africa during the
2021 and 2022 years of assessment. She does not have a permanent establishment in South
Africa. She does not carry on business in South Africa,
8. discuss if the interest incurred by Downdown CC on its loan from Gay Stalker will be
deductible in the determination of its taxable income, and
9. discuss important financial considerations that arise from the Chase Shooter family situation.
CHAPTER 10
NATURAL PERSONS
211
212 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Felicity Gosling
Felicity Gosling is 16 years old. She is the daughter of Freda Gosling (see below). Her receipts and
accruals are as follows:
Local interest on investments bequeathed to her by her late father (not from a ‘tax free
investment’) 29 800
Local interest on funds donated to her by Freda Gosling, her mother, (not from a ‘tax
free investment’) 3 700
Fees earned as a part-time model employed by a fashion designer 99 000
Ronald Sparrow
Ronald Sparrow is 40 years old. His receipts and accruals and expenses are as follows:
Salary 228 000
Annual bonus 11 800
Net rentals 108 000
‘Qualifying medical expenses’ of R30 785 were paid by Ronald Sparrow for his family during the
2022 year of assessment.
Freda Gosling
Freda Gosling is 46 years old. She has one child, Felicity Gosling (see above). Freda Gosling’s
receipts and accruals are as follows:
An award of R30 000 a month from a trust established by her late husband, payable to
her for the rest of her life. It is funded by local dividends. 360 000
Local interest (not from a ‘tax free investment’) 88 400
Dudley Eagle
Dudley Eagle is 21 years old. His sole receipt or accrual is his salary of R210 000 (R17 500 a month).
Dudley Eagle and his sister, Doreen Eagle, aged 15 years and still at school, were orphaned some
years previously. He is the sole supporter of her. He contributes R4 500 a month towards her
maintenance.
Elvis and Elizabeth Falcon
Elvis Falcon is 71 years old. His receipts and accruals and expenses are as follows:
Local interest (not from a ‘tax free investment’) 93 500
Local dividends from equity shares held as an investment 117 500
Gross rentals from rent-producing properties 204 000
Expenses incurred in producing these rentals 36 800
Elizabeth Falcon is 58 years old. Her sole receipt or accrual is her salary of R216 000.
Bartholomew Albatross
Bartholomew Albatross is a widower aged 58 years. He is a resident of the Republic. He has a
taxable income of R199 000 prior to the following amounts that he incurred and paid during the
2022 year of assessment:
Medical scheme contributions 18 720
‘Qualifying medical expenses’ incurred and paid and not recovered from his medical
scheme 16 141
Life insurance premiums for a policy on his life 1 080
Bartholomew Albatross’s employer does not contribute to the medical scheme. His contribution is
solely for his membership.
You are required to determine the South African normal tax liability of each of the above
taxpayers.
214 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Theodora St John was employed on a part-time basis and worked for only three months during the
2022 year of assessment earning R10 800 a month (see above).
You are required to determine the 2022 normal tax liabilities of Theobald and Theodora St John.
Terence Stalker
Salary from part-time employment (12 months at R4 000 a month) 48 000
Local interest (not from a ‘tax free investment’) 22 000
Local dividends 6 990
His share of a bad debt recovered from the partnership with his brother 500
(This comprises his share of the credit sale and his share of the interest that had been
charged on the overdue account – his share of the credit sale was R450 and his share of
the interest was R50.)
Teresa Stalker
Salary (12 months at R33 600 a month) 403 200
Monthly amount received (eight months at R5 000 a month – see below) 40 000
Teresa Stalker’s uncle had passed away in South Africa during May 2021 and, under
his last will and testament, she has been enjoying R5 000 on the first day of each month
since 1 July 2021, and will continue to do so for the rest of her life.
You are required to determine Terence and Teresa Stalker’s 2022 taxable incomes.
Harrison Forrest
Salary (for 12 months) 286 800
Annuity 72 000
Local interest (not from a ‘tax free investment’) 38 510
Harrison Forrest contributed R4 200 to a retirement annuity fund and R21 510 to a pension fund,
being 7,5% of his salary. During the 2022 year of assessment he paid ‘qualifying medical expenses’
of R27 549. Neither he nor Harriette is a member of a medical scheme.
Harriette Forrest
Net rentals 175 600
Local dividends 45 000
Local interest (from a ‘tax free investment’ as defined in section 12T)) 1 800
Harriette Forrest sold her dividend-yielding shares during the year of assessment. This resulted in a
taxable capital gain of R2 400.
You are required to determine the normal tax liabilities of Harrison and Harriette Forrest.
Prior to his marriage, Jacques Indigo contributed R1 050 a month to the medical scheme. After his
marriage he contributed R1 950 a month to the medical scheme. The increased contribution was to
cover his wife, Jacqueline Indigo’s, membership. His employer contributed on a rand-for-rand basis
for his and then their membership of the medical scheme.
Jacques Indigo incurred and paid ‘qualifying medical expenses’ of R57 469 during the 2022 year of
assessment. He recovered R24 000 of these expenses from the medical scheme.
Prior to their marriage, Jacqueline Indigo had contributed R3 000 a month towards the maintenance
of Violet Greene, her aged mother.
Jacques Indigo continued to assist Violet Greene subsequent to his marriage to Jacqueline Indigo –
his monthly contribution was R3 000.
You are required to determine the normal tax liabilities of Jacques and Jacqueline Indigo (neé
Greene).
her were R7 400 and repairs and maintenance of it incurred by her were R8 710 for the year. These
expenses were settled by her.
During the 2022 year of assessment Roderick Gibb donated R15 000 to the University of
Crimeville for the creation of the ‘Gibb Criminology Bursary’ to be granted by it to a promising
criminology student.
Roderick Gibb paid ‘qualifying medical expenses’ of R16 832 during the 2022 year of assessment.
He is not a member of a medical scheme.
You are required to determine Roderick and Trixie Gibb’s normal tax liabilities for the 2022 year
of assessment.
‘Qualifying medical expenses’ incurred and paid by Dolly Good that were not recovered from her
medical scheme were R13 362 during the 2022 year of assessment.
You are required to determine Horris and Dolly Good’s 2022 normal tax liabilities.
Lilly Gardener
Local interest on a building society fixed deposit (not from a ‘tax free
investment’) invested for her on her eighteenth birthday by her father – this
interest accrued on 30 September 2021 23 490
Salary from vacation employment – July 2021 6 810
Rose Gardener
Salary at R15 700 a month 188 400
Local interest on a building society fixed deposit (not from a ‘tax free
investment’) invested for her on her sixteenth birthday by her father – this
interest accrued on 30 September 2021 8 700
Poppy and Pansy Gardener
A local dividend of R6 000 accrued to both Poppy and Pansy Gardener on 1 November 2021 from
shares in a South African company bequeathed to them by their late grandfather.
Rocky Gardener
Salary to the date of his retirement 186 000
‘Golden handshake’ award from Growell Nurseries (Pty) Limited on his
retirement 57 000
Local interest (not from a ‘tax free investment’) 17 200
Dividends on his shares in Growell Nurseries (Pty) Limited 3 000
Foreign dividends on his shares in
• English Country Gardens Limited, a British company that he inherited from
his late father, who was ordinarily resident in the United Kingdom all his
life, the equivalent of 1 968
• Fleur-De-Lis Limited, a French company that he had purchased out of
previous dividends earned on the British shares above, the equivalent of 3 422
Contributions to a medical scheme 7 200
‘Qualifying medical expenses’ paid and not recovered from the medical scheme 3 500
‘Qualifying medical expenses’ paid by his executor relating to his last illness 18 078
Contributions to the maintenance of Bella Gardener, his aged mother at the rate
of R1 000 a month 9 000
224 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Growell Nurseries (Pty) Limited contributed R15 600 to the medical scheme for Rocky Gardener’s
membership and the membership of Iris, Lilly, Poppy and Pansy. Their membership ceased on
31 August 2021 when he retired.
Rocky Gardener’s foreign dividends are not exempt from normal tax under section 10B(2).
Since Rocky Gardener was deemed to have sold certain assets on 30 November 2021 (moments
before he died), a taxable capital gain of R27 500 is to be included in his taxable income under the
provisions of section 26A for his 2022 period of assessment.
Iris Gardener (his wife)
Salary at R2 000 a month (part-time employment two mornings a week) 24 000
Local interest on a R20 000 investment in an incorporated building society
subscription deposit (not from a ‘tax free investment’) – this interest accrued to
her on 30 September 2021 1 200
An amount of R17 500 a month from a trust established by Reginald Crane, her
late father – payable to her for the remainder of her life (see below) 210 000
Contributions to a pension fund at R200 a month 2 400
Personal accident insurance premium paid on 31 August 2021 540
The monthly amount being awarded to Iris Gardener by Reginald Crane’s trust is being funded out
of local dividends that accrued to it.
You are required to determine the
1. 2022 taxable incomes of all the Gardener family members, and
2. normal tax liability of Iris Gardener.
Bill Huxtable had written the book in South Africa during the 2021 year of assessment after his
retirement from his medical practice.
• Net fees of R13 500 earned for a two-week locum (a temporary period of service) he performed
for a fellow paediatrician who underwent surgery and was unable to conduct his medical
practice during that period. The R13 500 is the amount he received from the medical practice
after it had deducted 25% employees’ tax.
• A bad debt recovered of R3 000 from a debtor of his former medical practice. This amount is his
share of the recovery of a debt that his practice had written off as being bad prior to his
retirement.
• A repayment of R2 500 from his former secretary. He had lent her R2 000 interest free out of his
own funds when she was going through a divorce during the 2019 year of assessment. He had
never expected her to repay this amount. The extra R500 she paid him was to compensate him
for the amount of interest he had been unable to earn.
Bill Huxtable incurred the following expenses:
• A new motor car for himself that cost R287 500. He purchased it on 1 September 2021.
• A new dress suit that cost R3 600 to enable him to attend the Annual Paediatricians’ Dinner at
which he was awarded a Certificate of Commendation for his services to the medical profession.
• A R1 000 ‘spotter’s’ commission paid to an estate agent for having found him (Bill) a suitable
rent-producing property in which he had planned to invest. He failed to make this investment
after the seller decided that he no longer wished to sell the rent-producing property.
• A fee note of R3 000 from an accountant for the preparation and submission of their tax returns.
The accountant had charged him R2 000 for his returns and R1 000 for Vanessa’s returns.
Vanessa Huxtable
Details of Vanessa Huxtable’s receipts and accruals for the 2022 year of assessment are as follows:
• A monthly pension of R8 000 from the statutory (Government) pension fund, of which she had
been a member when employed as a nurse at a Government hospital prior to her retirement in
the 2021 year of assessment. This pension is paid to her on the last day of each month.
• Net rentals of R38 400 from a rent-producing property that she had inherited from her late father
in the 2021 year of assessment. Under the will of her late father, this rent-producing property
and the rentals derived from it are excluded from the joint estate of Vanessa and Bill Huxtable.
• Local interest of R14 900 from an interest-bearing security, not being a ‘tax free investment’.
• Cash of R6 000 for selling roses (flowers) to a local florist. Her hobby is the growing of roses.
After the local florist had been let down by a supplier of roses, she approached Vanessa for help
and Vanessa reluctantly agreed to sell her the roses. The arrangement entered into is that the local
florist calls at Vanessa’s home twice a week and picks the flowers from Vanessa’s rose bushes.
• A prize of R1 000 cash for the most beautiful rose on the Durban Spring Flower Show.
Vanessa Huxtable incurred the following expenses:
• Five new outfits at a cost of R5 000. She wears them in her garden when attending to her roses.
• Travelling and accommodation expenses of R39 000 when she travelled abroad to visit her
daughter and a newly-born granddaughter.
• Entrance fees of R1 000 and an annual membership fee of R250 to join the Rose Growers Club.
• A competition entry fee of R100 when she exhibited her roses at the Durban Spring Flower
Show.
• A pension of R500 a month to her former housekeeper and cook who had retired from their
employment after Vanessa had ceased working.
226 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Bill and Vanessa Huxtable have five children, four of whom are married with children of their own.
Their youngest child, Marigold (see further below), aged 22 years, and not married, was a full-time
student during the 2021 academic year. She still lives at her parent’s home.
Marigold Huxtable
As from 1 February 2022 Marigold Huxtable was employed in full-time employment earning a
salary of R14 800 a month of which 5% is contributed into her employer’s pension fund. She had
no other receipts or accruals during the 2022 year of assessment.
You are required to determine the taxable incomes of Bill, Vanessa and Marigold Huxtable for the
2022 year of assessment.
5. When Lomculi Mmela attained the age of 60 years, on 1 April 2000, she purchased an annuity
of R90 000 (payable at a rate of R7 500 a month) for life from an insurer. The cash
consideration paid by her was R676 080. The first monthly amount accrued to her on 30 April
2000 and since then she has had an accrual regularly on the last day of each month.
You are required to determine Wiseman Mmela’s and Lomculi Mmela’s 2022 normal tax
liabilities.
5. When Sicily Ravioli attained the age of 65 years her retirement annuity fund matured. A lump
sum and an annuity accrued to her. She used her entire lump sum to finance investments in a
fixed deposit and in local dividend-yielding shares.
6. During the 2022 year of assessment Sicily Ravioli sold some of her local dividend-yielding
shares since the yield was less than what she had expected. She invested the amount obtained
from this sale in further local dividend-yielding shares. A capital gain of R98 800 arose when
she sold these shares.
Milan Ravioli paid his first provisional tax payment for the 2022 year of assessment of R3 230.
And Sicily Ravioli paid her first provisional tax payment for the 2022 year of assessment of
R10 000. Both payments were made on estimates using their basic amounts and were made
timeously.
Employees’ tax of R8 400 was deducted from Milan Ravioli’s pension during the 2022 year of
assessment. But no employees’ tax was deduced from Sicily Ravioli’s annuity from the retirement
annuity fund during the 2022 year of assessment. And no employees’ tax was deduced from their
other receipts and accruals.
At 28 February 2022 Milan Ravioli had a basic amount of R230 000 and Sicily Ravioli had a basic
amount of R206 000. For their second provisional tax payments for the 2022 year of assessment,
they estimated their taxable incomes at an amount equal to their basic amounts.
Milan Ravioli paid ‘qualifying medical expenses’ of R1 009 and Sicily Ravioli paid ‘qualifying
medical expenses’ of R20 823 during the 2022 year of assessment.
You are required to determine the amounts of provisional tax paid by Milan Ravioli and Sicily
Ravioli on 28 February 2022 and on 30 September 2022. (Their September provisional tax
payments must not give rise to interest being levied.)
Bull Pitt leases a small office from where he watches over his investments. He incurred the
following expenses in the 2022 year of assessment in relation to his office, and the watching over
of his investments:
Bank charges 60
Stationery 1 070
Internet charges 1 170
Telephone and rentals 1 160
Secretarial fees 840
Depreciation or wear and tear – office furniture 1 180
Office rental 4 000
Entertainment and gifts 1 300
Travel and motor expenses 6 590
Post box rental 130
17 500
Bull Pitt had no other receipts and accruals. And he has no other amounts that are deductible in the
determination of his taxable income.
You are required to determine Bull Pitt’s 2022 taxable income.
increased from R20 500 a month to R22 500 a month (see above). She advised the Commissioner
that she would like the section 7A(2) option relating to her ‘back pay’ to be applied to the R36 000
she had been awarded.
During the 2021 year of assessment Rosemary Rogers had inherited a rent-producing property. For
the seven-month period 1 March 2021 to 30 September 2021 she earned net rentals of R6 048 from
it.
Local interest of R31 400 from an investment that was not a ‘tax free investment’ and local
dividends of R3 000, accrued to Rosemary Rogers during the seven-month period 1 March 2021 to
30 September 2021. She used borrowed funds to finance the purchase of her local interest-bearing
security and local dividend-yielding share investments. Interest incurred by her on these borrowed
funds was R25 120. They had been used to the extent of 60% to finance her local interest-bearing
security investment and 40% to finance her local dividend-yielding share investment.
Rosemary Rogers incurred R2 800 on business calls made from her cell phone. She settled these
expenses out of her cell phone allowance.
Rosemary Rogers made a R1 000 ‘qualifying’ donation to a public benefit organisation. She
received the required certificate from it.
Up to the time of Rosemary Rogers’s death, she had paid R6 000 in ‘qualifying medical expenses’.
After her death her executor paid a further R31 559 of ‘qualifying medical expenses’ incurred by
her.
During the 2021 year of assessment Rosemary Rogers and her mother, Virginia McMath (neè
Fredericks and previously Rogers) had operated a ‘dirty’ dancing business in partnership.
(Rosemary Rogers was a ‘silent’ partner in this business.) This business failed, and as a result, she
ended up with an assessed loss of R27 000 for the 2021 year of assessment. This assessed loss must
still be adjusted by the Commissioner when the provisions of section 7A(2) are applied. (Rosemary
Rogers had a taxable income in the 2020 year of assessment.)
You are required to determine Rosemary Rogers’s 2022 taxable income.
CHAPTER 11
REBATES
11.1 (10 minutes)
This question tests the rebates that are provided for in section 6, 6A and 6B and that are deducted
from the taxpayer’s normal tax payable in the determination of his normal tax liability.
Fifteen statements relating to rebates follow:
1. Every natural person enjoys a primary rebate of R15 714 for the 2022 year of assessment.
2. In the determination of a natural person’s normal tax liability, the total of the rebates that he is
entitled to under section 6, section 6A and section 6B are deducted from his normal tax payable.
3. It is the taxpayer’s age on the last day of February that is relevant for him to qualify for the
secondary and tertiary rebates.
4. If a taxpayer dies during the year of assessment, it is his age on the date of his death that is
relevant for him to qualify for the secondary and tertiary rebates.
5. For a broken period of assessment, the taxpayer’s total rebate entitlement is reduced on a
pro rata basis.
6. To qualify for the medical scheme fees tax credit rebate provided for in section 6A, it is
necessary for the taxpayer to make a contribution to a medical scheme.
7. If a taxpayer’s total rebate entitlement exceeds the normal tax payable by him, the excess will
be refunded to him by the fiscus.
8. A child that is born during the year of assessment enjoys the primary rebate.
9. The amount of the medical scheme fund tax credit rebate that a taxpayer enjoys, is dependent
on the number of members of his family that are members of his medical scheme.
10. If a taxpayer’s taxable income is made up solely of a lump-sum retirement benefit, then the
total of his rebates are deducted from the normal tax payable on his lump-sum retirement
benefit.
11. To qualify for the additional medical expenses tax credit rebates it is necessary for the taxpayer
to be a member of a medical scheme.
12. For a taxpayer who has attained the age of 65 years, his total contributions to a medical scheme
and medical expenses paid equal his additional medical expenses tax credit rebate.
13. In the determination of a physically-disabled taxpayer’s additional medical expenses tax credit
rebate, his medical scheme contributions are reduced by three times his medical scheme fees
tax credit rebate.
14. A taxpayer who is under the age of 65 years and who is not a person with a disability has his
medical scheme contributions reduced by four times his medical scheme fees tax credit rebate
in the determination of his additional medical expenses tax credit rebate.
15. A disabled taxpayer does not enjoy any form of tax relief for the expenditure he incurs on his
physical disability.
You are required to answer true or false to the above 15 statements. Give a brief explanation to
support your answer if necessary.
231
232 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Marie Stuart
Marie Stuart, aged 49 years, is a resident of the Republic. She is a widow.
Marie Stuart is a member of her employer’s non-contributing medical scheme. For her membership,
and that of her two minor children, her employer contributes R4 500 a month, to this medical scheme.
Marie Stuart paid ‘qualifying medical expenses’ of R54 685 during the 2022 year of assessment.
She was reimbursed by the medical scheme that she is a member of R28 026 of the medical
expenses that she had paid.
Marie Stuart’s taxable income before the inclusion of the value of the fringe benefit of being a
member of her employer’s non-contributing medical scheme is R303 800.
You are required to determine Marie Stuart’s normal tax liability for the 2022 year of assessment.
In consequence, Basher Beret, who is not covered by a medical scheme, nor an insurance of a
similar nature, incurred, and paid, the following expenditure:
Ophthalmologist – examinations 600
Ophthalmic surgeon – operation 5 000
Clinic and Anaesthetist 6 600
Optician – spectacles 2 800
Other ‘qualifying medical expenses’ paid by Basher Beret during the 2022 year of assessment
amounted to R10 750.
Basher Beret is not a ‘person with a disability’ as envisaged by section 6B(3)(b) and as ‘defined’ in
section 6B(1).
Basher Beret’s only receipts and accruals for the 2022 year of assessment were
• a monthly rental of R7 500, and
• a monthly amount of R10 000 from a testamentary trust.
You are required to determine Basher Beret’s additional medical expenses tax credit rebate that
may be deducted from his normal tax payable in the determination of his normal tax liability.
Roger Stetson
Roger Stetson is a resident of the Republic. He is married. He is under the age of 65 years. He has
two children. He, his wife and their two children are members of a medical scheme. No member of
the family is a ‘person with a disability’ as envisaged by section 6B(3)(b) and as ‘defined’ in
section 6B(1).
Details of Roger Stetson’s earnings, medical scheme contributions and his medical expenses for the
2022 year of assessment follow:
Salary 320 200
His employer’s contribution to the medical scheme 27 600
His contribution to the medical scheme 27 600
‘Qualifying medical expenses’ paid by himself 24 777
Roger Stetson has no other earnings. He does not enjoy any exemptions from normal tax. No
deductions or allowances are available to him in the determination of his taxable income.
You are required to determine Roger Stetson’s 2022 normal tax liability.
Adam Bowler
Adam Bowler is a resident of the Republic. He is married. He is under the age of 65 years. He has
two children. He, his wife and their two daughters are members of a medical scheme. His older
daughter is a ‘person with a disability’ as envisaged by section 6B(3)(b) and as ‘defined’ in
section 6B(1).
Adam Bowler’s medical scheme is a ‘non contributory’ medical scheme in that solely his employer
contributes to it.
Details of Adam Bowler’s earnings, his employer’s medical scheme contributions and his medical
expenses for the 2022 year of assessment follow:
Salary 300 000
His employer’s contribution to the medical scheme 42 000
‘Qualifying medical expenses’ paid by himself 38 032
Adam Bowler has no other earnings. He does not enjoy any exemptions from normal tax. No
deductions or allowances are available to him in the determination of his taxable income.
You are required to determine Adam Bowler’s 2022 normal tax liability.
REBATES 235
The three Bates brothers’ taxable incomes and ‘qualifying medical expenses’ paid for the 2022 year
of assessment were as follows:
Taxpayer Taxable ‘Qualifying medical
incomes expenses’ paid
Monty Bates 872 200 40 000
Cristy Bates 623 600 32 000
Trilby Bates 357 800 29 835
You are required to determine the three Bates brothers’ 2022 normal tax liabilities.
company. During the 2022 year of assessment it declared to her a foreign dividend the equivalent
of R36 000 (amount before the withholding tax). The withholding tax payable in the foreign
country on this foreign dividend declared to her was the equivalent of R6 300. This foreign
dividend is not exempt from normal tax under the provisions of section 10B(2).
Eugenie Balaclava earned a salary of R192 000.
In addition, Eugenie Balaclava earned local interest of R46 600 on an investment in a local interest-
bearing security. It is not a ‘tax free investment’ as defined in section 12T(1).
You are required to determine the
1. normal tax liability of Eugenie Balaclava, and
2. amount that she can carry forward to the 2023 year of assessment as a foreign tax credit.
241
242 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Contribution to Sidney Sirius’s employer’s pension fund at 8% of his R150 000 salary 12 000
Retirement annuity fund contributions made by Sidney Sirius 8 000
Contributions to a medical scheme for the entire family – paid by Sidney Sirius 19 200
Contributions to a medical scheme for the entire family – paid by Sidney Sirius’s
employer 28 800
‘Qualifying medical expenses’ paid and not recovered from the medical scheme – paid
by Sidney Sirius 5 437
Donation made by Sidney Sirius to the university at which Jake Farthing is a student 18 000
Entertainment expenses incurred by Penny Sirius that she considers necessary for the
success of her interior decorating business 3 250
You are required to determine the 2022 taxable incomes of Sidney and Penny Sirius.
2. The bribe was paid by Redvers Sparks to Rishvat Pillay, an employee of a supplier, to ensure
that certain trading stock that was scarce (in short supply) would be delivered to him.
3. The Commissioner will allow the depreciation of R240 on his fixtures and fittings as the wear-
and-tear or depreciation capital allowance under section 11(e).
4. The fine was paid by Redvers Sparks as an admission of guilt for trading during a lockdown
period.
5. The interest incurred by Redvers Sparks is on a loan that was raised by him to purchase some
of his local dividend-yielding shares.
6. The legal expenses were incurred by Redvers Sparks when a new five-year lease agreement for
his shop premises was entered into.
7. Redvers Sparks’s display cabinet was sold for R840. It had originally cost him R8 000. It had a
tax value on the date of its sale of R1 200.
8. Redvers Sparks took electrical appliances costing R900 (selling price R1 350) for his own use.
9. Redvers Sparks’s delivery vehicle is used by himself for both private purposes and for business
purposes. During the 2022 year of assessment he travelled 51 000 kilometres in it of which
17 000 kilometres were for his own private travelling.
10. Throughout the 2022 year of assessment Franklin Faraday, an employee of Redvers Sparks,
was registered as a trainee under an approved three-year training contract. He had entered into
this training contract on 1 March 2021. He has an NQF level 5 qualification. His salary for the
year of R42 000 is included in the salaries total of R787 090.
11. Details of Redvers Sparks’s cash register that he sold are as follows:
Tax Carrying
value amount
Original cost 9 400 9 400
Less wear and tear or depreciation 7 960 9 160
Value at date of sale 1 440 240
Realised 1 140 1 140
Loss / profit on sale 300 900
12. Redvers Sparks is a member of a retirement annuity fund. He contributed R6 000 to it during
the 2022 year of assessment.
Redvers Sparks’s other receipts and accruals for the 2022 year of assessment are local interest of
R24 940 from a non ‘tax free investment’ and gross rentals of R56 100. He paid the rental-
collecting agents R3 240 for its services rendered to him during the year.
You are required to determine Redvers Sparks’s 2022 taxable income. You must commence your
determination of his taxable income with his net income of R601 150 for the year. You are not
required to determine his normal tax liability.
The only other amount that accrued to (or was received by) Juba Mabele during the 2022 year of
assessment was local interest of R28 500 from his savings account, not being a ‘tax free investment’.
He incurred no other expenses that are deducible in the determination of his taxable income.
You are required to determine Juba Mabele’s 2022 taxable income.
Bessie Thimble’s only other receipt or accrual in the 2022 year of assessment was local dividends
of R20 000 from South African public company shares. She incurred interest of R5 000 during the
2022 year of assessment on funds borrowed by her to purchase these shares.
During the 2022 year of assessment Bessie Thimble contributed R2 400 to a retirement annuity
fund. She is due to receive the benefits from it when she attains the age of 65 years.
You are required to
1. determine the normal tax liability of Bessie Thimble,
2. advise her (purely from a normal tax position) on whether she should incorporate her business,
in other words to trade as a company. Her company will pay normal tax at the rate of 28%. If
she did trade as a company, a salary of R660 000 a year would be a reasonable salary for it to
pay to her for the services she renders to it,
3. advise her, if she does form a company, whether she should sell her dividend-yielding investments
to it at their market value of R200 000. Their market value on 1 October 2001 was R150 000. She
will earn interest at a rate of 9% on the R200 000 the company will owe to her, and
4. state what effect the formation of a company, and the trading in it of the business and the
holding of the dividend-yielding investments in it, would have upon her retirement annuity
fund contributions.
The following is an extract from the statement of profit or loss and other comprehensive income of
Miriam Moosa, trading as ‘The Golden Samoosa’, for the year ended 28 February 2022:
Trading profit 438 842
Foreign and local dividends (note 1) 1 440
Foreign and local interest (note 2) 20 200
460 482
Less
Allowances paid (note 3)
– Corn Curry’s surviving spouse (eight months at R1 100 a month) 8 800
– Mince Mustard (eight months at R1 700 a month) 13 600
– Spud Amazambane 5 000
Bad debts (note 4) 2 320
Compensation paid (note 5) 4 000
Cash lost (note 6) 12 400
Depreciation on her kitchen equipment (note 7) 6 000
Legal expenses (note 8) 5 000
Loss on sale of her cash register (note 9) 100
Travelling expenses abroad (note 10) 34 800
Trade mark expenses (note 11) 9 200
Rentals 32 000
Retirement annuity fund contributions (note 12) 7 600
Salary paid to Mahomed Moosa 180 000
Local travelling expenses (note 13) 70 200 391 020
Net profit before tax 69 462
Notes
1. During the 2015 year of assessment Miriam Moosa inherited 1 000 shares in the British East
Indian Food Co Limited, a United Kingdom registered company, from Naan Chhena, her late
grandfather, who had been ordinarily resident in India his entire life. The market value of these
shares when she inherited them was the equivalent of R4 000. Foreign dividends the equivalent
of R1 080 on these shares accrued to her during March 2021. (These foreign dividends are not
exempt from normal tax under section 10B(2).) On 1 August 2021 she sold her British East
Indian Food Co Limited, shares for the equivalent of R59 000 and then purchased 4 000 shares in
Three Cornered Cakes Limited, a South African registered company. In February 2022 she
received a local dividend of R369 from it.
2. Miriam Moosa also inherited from Naan Chhena a certain amount of cash. Due to exchange
control regulations, she had been unable to transfer the funds to South Africa and had therefore lent
these funds to a relative in India. Local interest the equivalent of R4 200 (earned at a rate of R350 a
month) accrued to her. She also earned local interest of R16 000 from the short-term investment of
cash that she had available. This short-term investment is not a ‘tax free investment’.
3. On 30 June 2021, an electrical fault in the kitchen at Miriam Moosa’s trade premises resulted
in a fire. Three employees were burnt. They were unable to continue working. She agreed to
award them the following amounts:
• Corn Curry, a chef, suffered second-degree burns and died shortly after the fire. His
surviving spouse is being paid by her R1 100 a month.
• Mince Mustard, an assistant chef, is being paid by her R1 700 a month.
• Spud Amazambane, a vegetable peeler, was paid a lump sum by her of R5 000.
4. Miriam Moosa had been responsible for the catering at a wedding held during March 2021.
Poda Paneer, the bride’s father had since gone insolvent. She received only R480 for the
R2 400 due to her. The balance of her bad debts of R400 resulted from her interest-free loan to
248 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Spud Amazambane (see note 3 above). She feels since he is no longer her employee, that the
R400 that he owes her will not be recovered.
5. Bugs Eatmore, a regular customer of Miriam Moosa, broke two teeth when eating a samoosa
that had been made in its kitchen. A portion of a knife blade was discovered inside the
samoosa. It had caused the damage. She then awarded him R4 000 as compensation for his two
teeth that had been broken.
6. On 1 March 2021 Miriam Moosa forwarded R12 400 to India together with an order for a
samoosa-making machine that was being sold in India. In December 2021 she was informed by
the relevant authorities in India that no such machine existed and that her money was lost (as a
result of this fraud).
7. The Commissioner allows Miriam Moosa a wear-and-tear or depreciation capital allowance on
her kitchen equipment, determined over a five year write-off period. The ‘tax’ cost of this
equipment was R36 000 on 1 March 2021.
8. Miriam Moosa incurred legal expenses of R4 000 when she successfully eliminated the
possible threat of competition by a competitor who tried to open a similar take-away shop a
block away called ‘The Three Cornered Curry Cake Take Away’. The additional legal
expenses of R1 000 were incurred by her when she agreed to compensate Bugs Eatmore for his
two broken teeth.
9. A cash register was purchased by Miriam Moosa during July 2021 for R1 380. It was sold by
her a week later for R1 280 after she had discovered that its drawer did not lock and the theft
of cash was possible.
10. Mahomed Moosa travelled to the Far East on behalf of Three Cornered Curry Cake Take
Away’. The additional legal expenses of R1 000 were incurred by her when she agreed to
compensate Bugs Eatmore for his two broken teeth.
9. A cash register was purchased by Miriam Moosa to establish a market for exporting the dhania
(coriander) that she was selling. His travelling expenses incurred of R34 800 were paid by her.
11. Miriam Moosa’s samoosas have always been sold under the trade mark The Delicious
Triangle. On 1 June 2021 this trade mark was renewed for a further five years. The cost to
renew it was R1 200. On 1 September 2021 she registered a new trade mark, namely, The
Tasty Triangle for her vegetable samoosas. This trade mark was registered for a 10-year
period. It cost her R8 000 to be registered.
12. Miriam Moosa contributed R7 600 by way of current contributions to a retirement annuity
fund.
13. The R70 200 appearing as an expense in Miriam Moosa’s for local travelling expenses
represents the total running costs, including wear and tear, on her motor vehicle. This motor
vehicle is used mainly by her for business purposes. But she has estimated that one-sixth of the
time it is used by her for private purposes.
14. When the fire occurred in the kitchen at Miriam Moosa’s trade premises, trading stock of
ingredients that had cost R2 400 and finished goods that would have been sold for R4 800 were
destroyed. Finished goods are sold at 200% of their cost price.
15. During the 2022 year of assessment Miriam Moosa earned R10 000 for assisting with the
preparation of an oriental cook book.
The only other receipt or accrual now derived by Mahomed Moosa is R15 000 a month paid to him
by Miriam Moosa in the form of a salary for growing the ingredients for the samoosas (see above).
This amount is commensurate with the services he renders to her business.
You are required to determine the 2022 taxable incomes of Mahomed and Miriam Moosa. (In the
determination of Miriam Moosa’s taxable income, you must commence your determination with her
SOLE TRADERS AND PARTNERSHIPS 249
net profit before tax of R69 462 (as reflected on her statement of profit or loss and other
comprehensive income (see above)).)
3. The following annuities were paid by the partnership during the year to dependants of
deceased former employees:
Widow File and her two children 14 500
Widow Greene and her minor daughter 20 500
Widow Bhala 3 000
38 000
It is not the policy of the partnership to make payments of this nature. Yet these payments were
made so as to assist the recipients who were all in need of financial assistance.
4. Of the R4 500 bad debts written off by the partnership, R2 000 relates to debts that the partners
took over when they purchased the business from Caster Ledger, its former owner. The
balance of the bad debts is for clients who have failed to pay accounts for services that were
rendered by the partnership to them during the 2022 year of assessment.
5. The Commissioner will grant the wear-and-tear or depreciation capital allowance over a 10-year
period on both the partnership’s office fittings and its boardroom furniture. He has also agreed to
grant the wear-and-tear or depreciation allowance on the partnership’s computer over a three-year
period. The depreciation claimed in the partnership’s statement of profit or loss and other
comprehensive income has been determined using the reducing balance method for both its office
fittings and its boardroom furniture. Both were purchased on 1 March 2020. No depreciation has
been provided in the partnership’s statement of profit or loss and other comprehensive income for
the partnership’s computer. It was purchased and brought into use on 1 May 2021.
6. To keep up to date with new accounting requirements and developments, Piet Tick attended a
computer-users course given by the South African Institute of Chartered Accountants in
Johannesburg. His expenses were paid by the partnership. They were as follows:
Course costs 1 000
Travelling expenses 2 450
Hotel accommodation 1 050
4 500
7. On 1 March 2021, the partnership entered into an agreement with Ernestine Young to lease
from her office premises together with the vacant land situated adjacent to the office premises.
The lease agreement was for 10 years. It provided for
– a premium of R30 000 to be paid by the lessee to the lessor at the commencement of the
lease,
– a monthly rental of R5 000 to be paid by the partnership to her for the office premises, and
– contained an improvement clause whereby the partnership must effect improvements to her
property to the value of R1 062 000.
The partnership’s leased office premises were used by it as from 1 March 2021 while the
improved section was used by it from 1 May 2021, once the improvements had been
completed at the said cost on 30 April 2021.
8. After the improvements had been completed, the remainder of the land was cleared by the
partnership and turned into a parking area for its customers and employees at a cost of
R11 250.
9. An examination of the partnership’s legal expenses revealed that R2 500 was for drawing up
the lease agreement with Ernestine Young for the office premises and land, and R5 000 was for
the collection of outstanding fees.
10. During the 2022 year of assessment the partnership donated R35 000 to the local university to
establish a bursary to be awarded to a promising accountancy student needing financial
assistance. A section 18A certificate (receipt) was obtained from the local university.
254 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
11. Goodwill paid by the partnership of R30 000 is for the final instalment due to Caster Ledger for
the purchase consideration.
12. Premiums paid by the partnership during the year were for the following insurance policies:
Professional indemnity 6 000
Loss of profits 12 250
Fire 3 250
Partnership survivorship 15 000
36 500
Other relative partnership information is as follows:
Piet Tick Arthur Bird
Salaries payable 410 000 410 000
Local interest on capital accounts 19 000 16 000
Drawings 360 000 300 000
In September 2014 Arthur Bird had purchased a large house situated within walking distance from
the campus of the local university. Using borrowed funds, he then converted it into five residential
units suitable to be let at a rental to five or more responsible students. The conversion cost him
R800 000. From 1 March 2015 he has carried on the trade as a landlord. For the 2016 year of
assessment he suffered a small rental loss from his rent-producing property. But then for the 2017
to 2020 inclusive years of assessment he enjoyed rental profits from his rent-producing property.
The Covid-19 lockdown period in the 2021 year of assessment caused him to suffer a rental loss of
R25 000 from this rent-producing property (see below).
The Covid-19 lockdown period in the 2022 year of assessment again caused him to suffer a rental
loss from this rent-producing property. It amounted to R54 000 (see below).
All rentals due for March 2021 were settled by his five tenants. Then for the three-month period
from 1 April 2021 to 30 June 2021 he received only reduced rentals from his five tenants. After that
for the six-month period from 1 July 2021 to 31 December 2021 he received no rentals from four of
his tenants. His fifth tenant continued to pay a reduced rental during this six-month period. From
1 January 2022 he was again able to let all five of his units at a full rental. A student who occupied
one of the units in January 2022, however, returned to her native country, not having settled her
rental due for the month. His R54 000 loss was determined as follows:
Gross rentals from tenants 67 500
Interest earned on bank current account 900
68 400
Property rates 33 000
‘Deductible’ repairs and maintenance 10 800
Electricity and water 21 000
Bad debt (see above) 3 000
‘Deductible’ legal expenses 1 200
Interest on borrowed funds to purchase the property 30 000
Security expenditure 14 400
Cleaning expenses 7 800
Bank charges 1 200 122 400
Net rental loss for the year 54 000
You are required to determine the taxable income of Piet Tick and Arthur Bird for the 2022 year of
assessment.
SOLE TRADERS AND PARTNERSHIPS 255
Their dividend receipts and accruals for the year were reflected in a statement from their stock
broker. It contained the following information:
Gross dividends 74 000
Less stock broker fees 8 000
66 000
2. The bad debts are patients’ accounts not paid of R26 000. Of this amount, R8 400 is for a
patient who had been operated on during the 2021 year of assessment. (His family refused to
pay the account because the patient died shortly after the operation.)
3. The partnership donated R24 000 to the Faculty of Health Sciences at the local university
during the 2022 year of assessment. A section 18A certificate (receipt) was issued by the
university.
4. Dickie Hart incurred expenditure of R8 000 on entertainment at the local country club. Ish
Liver incurred similar expenditure of R5 600. A reason for their membership of the local
country club was to retain existing patients and to establish new patients for the partnership.
The partnership paid these expenses.
5. Insurance premiums on policies on the lives of the doctors were paid by the partnership, Dickie
Hart’s premium was R12 000 and Ish Liver’s premium was R10 000.
6. The partners each leased a motor vehicle. These cars are used primarily for business purposes.
Dickie Hart leased a Jaguar at a lease rental of R12 000 a month while Ish Liver leased a
Mercedes Benz at a lease rental of R13 500 a month. These lease rentals were paid by the
partnership.
7. The partnership agreement provided that costs incurred in replacing medical equipment would
be borne by the partnership. Cost of replacement equipment was R6 600 for the year.
8. The partnership subscribes to most medical journals that are available locally to help the
partners become aware of the latest developments and methods used in the medical profession.
Subscriptions incurred during the 2022 year amounted to R15 800.
9. In addition to the lease rentals, travelling expenses were incurred by the partners when
travelling between their homes and the surgery. For Dickie Hart his travelling expenses were
R25 200 and for Ish Liver his travelling expenses were R28 800. These expenses were paid by
the partnership. The Commissioner has agreed that the motor vehicles are used by the partners
to the extent of 80% for business purposes.
10. The partnership’s medical books form a professional library. The Commissioner approved a
wear-and-tear or depreciation capital allowance on these books over a three-year period. The
R12 000 in the statement of profit or loss and other comprehensive income is the approved
amount for the 2022 year of assessment.
During Ish Liver’s annual leave he worked as a locum for a country doctor. He was paid R60 000
for the month. He agreed with Dickie Hart that these earnings of his would not be included in the
partnership’s income.
Dickie Hart travelled to the United States to attend a course on organ transplants. He incurred the
following expenses:
• Travelling to and from the course 42 000
• Living expense incurred while attending the course 19 600
• Cost of the course 30 000
91 600
Since Ish Liver had been unable to attend the course, Dickie Hart agreed to personally pay these
expenses.
Both doctors see patients at their homes. They have rooms that have been converted into surgeries.
SOLE TRADERS AND PARTNERSHIPS 257
The costs incurred of keeping their home surgeries during the 2022 year of assessment were
• R9 000 by Dickie Hart, and
• R10 000 by Ish Liver.
Current contributions made by the partners to a retirement annuity fund were
• R79 000 by Dickie Hart, and
• R180 000 by Ish Liver.
Ish Liver had no other earnings.
Dickie Hart earned R47 000 during the year of assessment for assisting as a dancing teacher at a
friend’s dancing school.
Dickie Hart is 45 years old. Ish Liver is 39 years old.
You are required to determine each partner’s taxable income. (Commence your determination with
the partnership’s net income for the year of R1 554 000.)
• A new meat-slicing machine was purchased and brought into use on 1 July 2021. Its cash cost
was R9 900. The Commissioner does not regard the business of a butcher as a process similar to
a process of manufacture (see Interpretation Note 42). Under Interpretation Note 47 and Binding
General Ruling 7, the meat-slicing machine may be written off over a six-year period.
• A donation of meat with a market value of R4 750 (cost of R3 000) was made by the partnership
to a local amateur sporting club for its annual dinner. Acknowledgements were given on the
menu and displayed on bill boards at the venue to the effect that the meat had been supplied by
the partnership. The local newspaper also acknowledged this donation.
• Peter Prime, a former blockman at one of the butcheries, owed the partnership R1 850. The debt
consisted of R550 for meat purchased, R1 200 for a loan granted by the partnership to him
during the year, and R100 for interest due on the loan. He is no longer in the partnership’s
employment and all attempts to trace him have failed. This debt is considered to be bad.
• The Commissioner is prepared to allow a deduction in the determination of the partnership’s
taxable income of R2 125 as the doubtful debts allowance. In the 2021 year of assessment,
R2 013 was approved and deducted as the doubtful debt allowance in the determination of the
partnership’s taxable income.
The partnership’s taxable profit of R554 837 was determined after deducting a salary of R480 000
for Red Lamb and a salary of R480 000 for Mary Lamb and interest on their capital accounts. Local
interest is paid to them on their capital accounts at a market-related interest rate. For the 2022 year
of assessment local interest of
• R32 800 was paid to Red Lamb, and
• R34 500 was paid to Mary Lamb.
The only other amounts that Red and Mary Lamb received or that accrued to them were
• R1 200 local dividends from shares in South African listed companies registered in the name of
Red Lamb, and
• R6 300 local interest from a fixed-deposit investment in the name of Mary Lamb. It is not a ‘tax
free investment’, and
• gross rentals of R108 000 from a rent-producing owned by Mary Lamb. She incurred tax
deductible expenses of R152 400 in producing these gross rentals.
You are required to
1. determine the normal tax liabilities of Red and Mary Lamb for the 2022 year of assessment,
2. redetermine the income tax liabilities of Red Lamb, Mary Lamb, and a private company, on the
assumption that they had conducted their business through the means of a private company that
paid them (Red and Mary Lamb) salaries of R600 000 each. The Commissioner has confirmed
that a salary of not exceeding R600 000 each will be deductible in the determination of taxable
income as being commensurate with the services that Red and Mary Lamb render to it. The
company would suffer normal tax at the rate of 28%. It would then distribute its entire after-tax
profit to them as a dividend,
3. redetermine the income tax liabilities of Red Lamb, Mary Lamb and a so-called trading trust,
on the assumption that they had conducted their business through the means of a so-called
trading trust that paid them (Red Lamb and Mary Lamb) salaries of R600 000 each. The
Commissioner has confirmed that a salary of not exceeding R600 000 each will be deductible
in the determination of taxable income as being commensurate with the services that Red and
Mary Lamb render to it. The trust would not distribute its after-tax income, and
4. advise the Lambs on whether they should trade through the means of a company, or a so-called
trading trust, or to continue trading in partnership (as they do at present).
SOLE TRADERS AND PARTNERSHIPS 259
Georg Hunt has now appealed to the tax court. He refused the offer to have this dispute resolved
using the alternate dispute resolution process and he did not enter into a settlement agreement with
the Commissioner. Due to the nature of this dispute, permission to bypass the tax appeals board
was granted.
You are required to prepare an argument on behalf of the Commissioner to be presented at the tax
court.
• As a result of the accident, Reynold Lotus retired on account of ill health. Although it does not
have a practice of making these awards, it then awarded its ‘retired’ driver a monthly amount of
R900. The first award was made to Reynold Lotus in January 2022.
• During January 2022 Sweetdreams participated in a trade fare. The cost of its exhibition was
R10 600.
Sweetdreams’s profit of R556 700 for its 2022 year of assessment is after taking into account the
following amounts that had accrued to it:
• Local dividends from listed companies of R18 000.
• Local interest of R12 000 from an investment in a debenture in a local listed company. This
debenture is not a ‘tax free investment’.
• A dividend of R6 000 from an investment in preference shares in a local listed company.
• A distribution from a real estate investment trust of R4 000 made up of
– local dividends of R3 600, and
– local interest of R400.
• A distribution of R6 000 from a collective investment scheme in securities (a so-called equity
unit trust) made up of
– local dividends of R5 700, and
– local interest of R300.
Sweetdreams’s profit of R556 700 for its 2022 year of assessment is after taking into account the
following amounts that it had incurred:
• A salary of R540 000 paid to Dolly Varden (see below) under the partnership agreement.
• Local interest of R36 000 paid to Dolly Varden (see below) and R24 000 paid to Blanche
Counterpane on their capital accounts.
Blanche Counterpane is a ‘sleeping’ partner in Sweetdreams. Her earnings from it are
• her 10% of its profits, and
• the interest earned on her capital account.
Dolly Varden is the active partner in Sweetdreams. She had the following receipts and accruals
during the 2022 year of assessment:
Cash salary (Sweetdreams) 540 000
Local interest (Sweetdreams) 36 000
Local dividends (gross – but see below) 27 000
Local interest from investments that are not ‘tax free investments’ 24 400
Dolly Varden incurred the following expenses:
Retirement annuity fund contributions 36 000
Medical expenses paid 33 250
Non-capital expenditure incurred in the production of the local dividends 3 900
Dolly Varden has a trade loss of R291 600 resulting from an unsuccessful attempt at a curtain-
making business. And she has an assessed capital loss of R40 000 resulting from the sale of the
capital assets that formed part of her curtain-making business.
You are required to determine Dolly Varden’s 2022 taxable income.
262 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
265
266 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Ray Rice has not made the election to be subjected to normal tax on the so-called average basis
under paragraph 19 of the First Schedule to the Income Tax Act.
You are required to
1. determine his 2022 normal tax liability, and
2. redetermine his 2022 normal tax liability on the basis that he had not resigned from his
employment, but had been retrenched by his employer, and that the R45 000 lump-sum
compensation award had been a retrenchment award.
After Jill Page’s death, his own health deteriorated. He then retired early, on 31 July 2021, when he
attained the age of 62 years.
On Jack Page’s retirement, on 31 July 2021, the following amounts accrued to him from
International Stationers (Pty) Limited, his employer:
• A lump sum of R37 000 in compensation for the loss of his office.
• Compensation of R5 000 for leave that was due to him.
• A life-time award of R24 000 a month, the first award being on 31 August 2021.
• For the long service he had provided to it, a set of bowls together with a carry bag that cost it
R4 500.
On the date of Jack Page’s retirement, he had been employed by International Stationers (Pty)
Limited for 20 years. For five of these years he had been employed by it at its United Kingdom
branch.
Jack Page used most of the funds he was awarded on his retirement to purchase South African
listed shares. His intention with regard to the shares was to
• hold them to earn dividends, or
• sell them, if their market price rose sufficiently.
By the end of the 2022 year of assessment the results of Jack Page’s share transactions were as
follows:
• Local dividends of R3 400 had accrued to him.
• Profits made on sales of shares by him were R21 100.
Jack Page invested his surplus cash in a local call account and local interest of R26 250 accrued to
him on 28 February 2022. This local call account is not a ‘tax free investment’.
On 31 December 2021 Jack Page became entitled to the benefits from his retirement annuity fund.
He elected to take one-third in the form of a lump sum. This lump sum was R660 000. The balance
provided him with a life-time monthly amount of R15 000, the first monthly amount accruing to
him on 31 January 2022. Up to December 2021, he had contributed R150 a month to this retirement
annuity fund.
Jack Page used most of his lump sum to purchase a holiday house for himself. He hoped that his
health would improve if he spent portion of the year at a holiday house.
Up to the time of Jack Page’s retirement, he had earned a salary of R36 000 a month.
Jack Page’s poor health resulted in him paying ‘qualifying medical expenses’ of R29 110 for the
2022 year of assessment.
You are required to determine Jack Page’s 2022 normal tax liability.
• A pension of R3 000 a month for him having contracted pneumoconiosis. The first R3 000 was
awarded to him on 30 September 2021. It is payable to him under the ‘law relating to the
payment of compensation for diseases contracted by persons employed in mining operations’.
On 1 September 2021 Shafty Sinkmoore used R40 000 of the lump sums that had accrued to him to
purchase 10 000 shares in Town Deep Mines Limited. On 1 January 2022 a dividend of 12 cents a
share was paid by it to all its shareholders.
From 1 March 2021 up to the time of Shafty Sinkmoore’s retirement, he earned R28 000 a month.
In June 2021, in addition to his salary, a R25 000 gratuity accrued to him for the services he had
rendered as a member of the mine’s proto team.
Shafty Sinkmoore’s only other receipts or accruals for the 2022 year of assessment were
• local interest of R32 800 from a local investment, not being a ‘tax free investment’, and
• net rentals of R53 800 from a rent-producing property.
As a result of Shafty Sinkmoore suffering from pneumoconiosis, he has paid ‘qualifying medical
expenses’ of R15 800. In addition, he paid other ‘qualifying medical expenses’ of R16 297 during
the 2022 year of assessment.
You are required to determine Shafty Sinkmoore’s 2022 normal tax liability.
Expenditure
Entertainment expenses (note 3) 3 100
Travelling expenses, to and from, tournaments and accommodation
– In South Africa 13 180
– In Zimbabwe (the equivalent of) 6 120
– In England (the equivalent of) 15 000
Local interest on funds borrowed to purchase the South African rent-producing 12 000
property
Retirement annuity fund contributions 2 400
‘Qualifying medical expenses’ paid 22 379
Notes
1. On 1 December 2021 Fuzzy Foreball inherited the equivalent of R475 000 from Mark Price, a
late uncle, who had lived his entire life in Zimbabwe. He used these inherited funds and his net
winnings from Zimbabwe to purchase a bachelor flat in Zimbabwe. This flat is occupied by
Nick McNaulty, a tenant, and net rentals the equivalent of R2 200 accrued to Fuzzy Foreball
from this bachelor flat during the 2022 year of assessment.
2. Fuzzy Foreball made his investment in the 8% local ‘tax free’ investment on 1 March 2021.
3. The Commissioner has accepted that Fuzzy Foreball’s entertainment expenses were incurred
directly in the production of his income.
Fuzzy Foreball is 29 years old.
You are required to determine Fuzzy Foreball’s 2022 normal tax liability.
All Xavier Hooker’s contributions to both the pension fund and the retirement annuity fund were
deductible in the determination of her taxable income.
On 31 March 2021 Xavier Hooker was awarded a lump sum of R36 000 from Elegant Escort
Service CC as a result of her salary increase being backdated for 18 months. No portion of this
R36 000 was contributed to the pension fund. On 1 March 2021 her salary had been increased from
R16 000 a month to R18 000 a month (see above). She advised the Commissioner that she would like
the section 7A(2) option relating to her ‘backpay’ to be applied to the R36 000 she had received.
During the 2021 year of assessment Xavier Hooker had inherited a sugar farm and a rent-producing
property from one of her employer’s clients:
• A farm manager runs the sugar farm on her behalf. For the seven-month period 1 March 2021 to
30 September 2021 she made a farming taxable income from it of R120 000. This farming
taxable income was, however, inflated by R40 000 since she was, as a result of a fire, forced to
sell a sugar crop that was due to be sold in the following year of assessment. She had not made
the election to be subjected to normal tax on the so-called average basis under paragraph 19 of
the First Schedule to the Income Tax Act.
• From 1 March 2021 to 30 September 2021 Xavier Hooker earned net rentals of R23 340 from
this rent-producing property.
Local interest of R29 750 from an interest-bearing security and local dividends of R3 000 from
local dividend-yielding shares accrued to Xavier Hooker during the period 1 March 2021 to
30 September 2021.
Xavier Hooker used borrowed funds to finance her local interest-bearing security and local
dividend-yielding share investments. Local interest incurred on these borrowed funds was R21 000.
The borrowed funds had been used to the extent of 60% to finance the local interest-bearing
security investment, and 40% to finance the local dividend-yielding share investment. The local
interest-bearing security is not a ‘tax free investment’.
Xavier Hooker incurred R3 000 on business calls made from her cell phone. She settled these
expenses out of her cell phone allowance.
Xavier Hooker made a R1 000 ‘qualifying’ donation to a public benefit organisation. She received
the required ‘section 18A’ certificate from it.
Up to the time of her death, Xavier Hooker had paid R6 000 in ‘qualifying medical expenses’. She
recovered R4 900 from the medical scheme. After her death, her executor paid a further R59 742 of
‘qualifying medical expenses’ incurred by her. He recovered R36 120 from her medical scheme.
During the 2021 year of assessment Xavier Hooker and her sister, had operated a massage parlour
in partnership. (Xavier Hooker was a ‘silent’ partner in this business.) This business failed and as a
result she ended up with an assessed loss of R73 330 for the 2021 year of assessment. This assessed
loss must still be adjusted by the Commissioner when the provisions of section 7A(2) are applied.
(She had a taxable income of R168 000 in the 2020 year of assessment.)
For the seventh-month period from 1 December 2018 to 30 June 2019 Xavier Hooker had enjoyed
paid maternity leave. Her daughter was born on 1 April 2019. Her maternity leave entitlement had
been for six months. She should have returned to work on 1 June 2019 but returned only a month
later, on 1 July 2019. She had then requested that Elegant Escort Services CC regard July 2019 as part
of her paid maternity leave. After much correspondence over a lengthy period of time, it finally
agreed to treat two weeks of July 2019 as extended paid maternity leave. She was then required to pay
back, in cash, the other two-weeks leave. On 31 March 2021 she paid R7 500 to it in this regard.
Xavier Hooker’s estate was bequeathed to her daughter. As a result of the deemed disposals that
occurred immediately prior to her death, a taxable capital gain of R50 000 is required to be
included in her taxable income.
You are required to determine Xavier Hooker’s normal tax liability for the 2022 year (period) of
assessment.
274 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
277
278 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Originally Edco Limited had issued 2 000 000 ordinary shares, held as follows:
Directors
Eton Fred 200 000
Steven Ted 200 000
Bevan Ced 200 000
Alvin Bed 200 000
Others
Agnes Bed (the wife of director Alvin Bed (see above)) 200 000
Wed (Pty) Limited (see below) 600 000
Ned Limited (a public company for income tax purposes) 400 000
Agnes Bed exercises her rights as a shareholder independently of Alvin Bed.
On 1 April 2021 Edco Limited had made a pro rata capitalisation issue of 1 000 000 ordinary and
1 000 000 preference shares to its existing shareholders.
On 1 August 2021 a further 1 000 000 ordinary shares were issued by Edco Limited by a private
placement. The conditions of this private placement stipulated that no issue
• was allowed to a company,
• of more than 100 000 shares, was allowed to an individual, and
• was allowed to existing shareholders or their relatives.
On 1 March 2022 the four directors and Agnes Bed each sold 20% of their holdings on the stock
exchange. A total of 300 000 shares were sold by them (20% of (1 000 000 original shares plus
500 000 ‘capitalisation’ shares)). None of these shares was purchased by Edco Limited’s existing
shareholders. Other than this transaction, no shares changed hands after their original issue by it.
Shareholders in Wed (Pty) Limited are as follows:
%
Alvin Bed (also a director of Edco Limited (see above)) 10
Agnes Bed 10
Bryce Cot (the step-brother of Alvin Bed) 30
Divan (Pty) Limited 50
100
Both Agnes Bed and Bryce Cot have at all times exercised their rights as shareholders of Wed (Pty)
Limited independently of Alvin Bed.
Shareholders of Divan (Pty) Limited are as follows:
%
Rastus Sheet 10
Brandon Cover 90
100
Brandon Cover purchased the 300 000 shares in Edco Limited sold by its four directors and Agnes
Bed on 1 March 2022 (see above). Brandon Cover’s wife and minor son each purchased
100 000 shares in Edco Limited when it made its private placement issue in August 2021 (see
above).
Shareholders in Ned Limited are as follows:
%
Bevan Ced (also a director of Edco Limited (see above)). 10
Elton Fred (also a director of Edco Limited (see above)). 10
Other individual shareholders (each one hold less than 5% of the shares) 80
100
You are required to determine if Edco Limited is a public company at 31 March 2022.
COMPANIES 281
– a monthly rental of R1 000 to be paid by Happie Nappie Chappie CC to Bamboo Boom (Pty)
Limited to be increased by R200 a month after every completed year of the lease payable,
and
– an obligation on Happie Nappie Chappie CC to erect a retail premises on the leased site at a
cost of R1 160 000.
The erection of the retail premises commenced on 1 March 2021. They were completed at a cost
of R1 260 000 on 31 October 2021. Trading in them by Happie Nappie Chappie CC commenced
on 1 November 2021.
• On a portion of the leasehold property was a dilapidated house. This house was demolished
during April 2021. The area was then converted into parking bays for Happie Nappie
Chappie CC’s customers and employees. It incurred R21 000 in demolishing the house.
• On 31 May 2021 Miranda Dirham, a teller, employed by Happie Nappie Chappie CC was
‘caught with her fingers in the till’ (pinching money) and was ‘encouraged’ to resign with
immediate effect. Its auditors established that R25 000 was missing from the takings for the
month. No funds have yet been recovered.
• After Miranda Dirham’s resignation it was discovered that the locking devise to Happie Nappie
Chappie CC ‘s till was damaged. It could not be repaired. It was therefore abandoned on 31 May
2021. Its tax value on 31 May 2021 was R1 600. It had originally cost R9 600.
• On 1 July 2021 Omani Rials, an employee of Happie Nappie Chappie CC, had borrowed
R10 000 interest free from it. After repaying half his interest-free loan from it (R5 000), he did
not return to work after 30 November 2021. He cannot be traced. Barrister Law Inc, a firm of
attorneys, was engaged by it to recover the R5 000 balance of his interest-free loan from it.
Although Barrister Law Inc has not recovered any money, on 28 February 2022, it billed Happie
Nappie Chappie CC R1 000 for the costs that it had incurred to date.
• On 1 December 2021 a gondolier belonging to Happie Nappie Chappie CC and used by it in its
shop collapsed and broke both legs of a customer. Under the court order that followed, it had to
pay compensation and damages of R11 800 to this customer. Justice Ummeli ,an advocate, was
paid R13 200 by it on 31 January 2022 for his services relating to the above matter.
• As a result of the accident, Geraldine Atric, another employee of Happie Nappie Chappie CC,
who was close to its gondolier when it collapsed, retired on 31 December 2021 on account of ill
health. It now awards Geraldine Atric a monthly amount of R2 500. The first award was made
by it to her in January 2022. It does not have a practice of making awards of this nature.
• During January 2022 Happie Nappie Chappie CC participated in a trade fare. The cost of its
exhibition was R10 600.
Happie Nappie Chappie CC’s net income is after taking into account the following amounts that
had accrued to it:
• Local dividends from listed companies of R18 000.
• Local interest of R12 000 from an investment in debentures in a local listed company. It is not a
tax free investment.
• A local dividend of R6 000 from an investment in preference shares in a local listed company.
• A distribution from a real estate investment trust of R4 000 made up of local dividends of
R3 900 and local interest of R100.
• A distribution of R6 000 from a collective investment scheme in securities (a so-called equity
unit trust) made up of local dividends R5 300 and local interest to the extent of R700.
It is the policy of Happie Nappie Chappie CC to declare a dividend once a year. It declares this
dividend on the last day of its year of assessment.
COMPANIES 283
decided to diversify its activities. It used the cash that it had accumulated to purchase a plot of land
on the North Coast.
On 1 March 2021 North Coasters Limited borrowed R9 000 000 from the North Coast Building
Society. It erected six residential units on the plot of land that it had purchased. These were let to
tenants for the first time on 1 July 2021. The total cost of building the six residential units, which
were identical units, was R9 000 000.
On 31 August 2021 Barbara Ballito, aged 44 years, married a foreigner and emigrated from South
Africa. She is no longer a resident of the Republic. She did not return to South Africa during the
2022 year of assessment. She left a large sum of capital in South Africa. On 1 September 2021 she
lent R6 000 000 to North Coasters Limited. Local interest on this loan accrues every six months, in
arrears. For income tax purposes she was classified as not being a resident and not carrying on
business in South Africa as from 1 September 2021. She does not have a permanent establishment
in South Africa. Charles Dawin, her husband, who is not a resident of the Republic, has no earnings
from a South African source. Under the double tax agreement between South Africa and the
country where she is now a resident, a dividends tax rate of 10% has been agreed upon.
North Coasters Limited used the funds from Barbara Ballito to open a carpet-manufacturing
business on the inland portion of the plot of land that it had purchased. A small factory was erected
at a cost of R4 200 000. It was completed on 31 December 2021. The remaining R1 800 000 of her
loan to it, was used by it to purchase the carpet-making machines. They were purchased new and
brought into use on 1 January 2022.
As a direct result of North Coasters Limited’s diversified interests, Dilip Desai was appointed as a
bona fide full-time working director from 1 January 2022. His family and himself moved into one
of the residential units on a permanent basis on 1 January 2022.
North Coasters Limited’s statement of profit or loss and other comprehensive income for its
financial year ended 28 February 2022 was as follows:
Local dividends 900 000
Gross rentals 828 000
Trading profit from carpet business 1 141 560
2 869 560
Less interest incurred
– Shareholders’ loan accounts (note 4) 270 000
– Building society loan account 720 000
– Barbara Ballito’s ‘new’ loan account 240 000 1 230 000
1 639 560
Less expenses incurred in producing the following:
– Local dividends 18 000
– Rentals 36 000
– Carpet business trading profit 90 000 144 000
1 495 560
Less depreciation on carpet making machines
– R1 800 000 at 20% for two months (note 1) 60 000
Less donation to the North Coast Golf Club (note 2) 30 000 90 000
Profit for the year 1 405 560
Less interim dividend paid on 31 October 2021 300 000
Less final dividend to be paid on 30 June 2022 450 000 750 000
Profit retained 655 560
Notes
1. North Coasters Limited’s carpet-making business is a process of manufacture.
2. North Coasters Limited’s directors are all members of the North Coast Golf Club. It was
agreed at a directors’ meeting that North Coasters Limited would donate R30 000 to the golf
COMPANIES 285
club as a contribution towards the upgrading of its change-room facilities. (The purpose of the
donation was done solely to benefit the shareholders of North Coasters Limited who are all
members at the club.)
3. The salary paid by North Coasters Limited’s to Dilip Desai for January 2022 and February
2022 is included under the expenses incurred in producing its receipts and accruals.
4. Of the interest of R270 000 incurred by North Coasters Limited on its shareholders’ accounts
(see above), R27 000 accrued to Barbara Ballito. On 31 August 2021, R13 500 interest accrued
to her and on 28 February 2022, another R13 500 interest accrued to her.
You are required to
1. determine all the taxes payable by North Coasters Limited for, and during, its 2022 year of
assessment. For its normal tax liability, commence your taxable income determination with its
R1 405 560 profit for the year, and
2. discuss Barbara Ballito’s income tax position for the dividends and interest that accrued to her
from it during the 2022 year of assessment.
2. The income tax and book value (carrying amount) of Shiney Aluminium Limited’s used
machinery at 28 February 2021 was R165 000. Depreciation has been included under ‘trading
expenditure’ and is in accordance with the relevant capital allowances. On 1 February 2022, a
new machine, costing R102 600 was purchased by it and brought into use by it. This cost of
R103 500 is its cash cost of R90 000 and value-added tax at 15% of R13 500. No amounts have
been deducted on this new machine.
3. Abroad travelling expenses of R53 160 were incurred by Shiney Aluminium Limited for
trading stock purchases of R26 350 and R26 810 for a director of it to attend an exhibition on
new machinery suitable for manufacturing aluminium products.
4. Interest incurred by Shiney Aluminium Limited of R14 400 was on a loan from Aussie
Aluminium (Aus) Limited. These borrowed funds were used by it to finance the purchase of
raw materials. Aussie Aluminium (Aus) Limited is registered in Australia. It is also managed
and controlled in Australia. It sold certain shares it previously held in a South African listed
company. The funds that it obtained from the sale of these listed shares were then lent to
Shiney Aluminium Limited during its 2021 year of assessment by its South African agent.
Interest accrues on the first day of each month. To date no capital has yet been repaid.
5. The R223 440 was paid by Shiney Aluminium Limited to Leroy Steele, its ex-factory manager
on 1 March 2021 for him agreeing not to start a similar business in South Africa similar to its
business within a period of two years.
6. On 1 July 2021 Shiney Aluminium Limited sold an asset to its pension fund for R250 000. The
original cost of this asset to it was R30 000. It had enjoyed capital allowances of R24 000 on
this asset. It had purchased this asset after 1 October 2001. It then leased this asset back from
its pension fund at a lease rental of R6 350 a month for 60 months. Eight months of rental at
R6 350 a month were incurred and paid by it during its 2022 year of assessment.
7. On 1 October 2021 Shiney Aluminium Limited purchased trading stock from an American
supplier at a cost of $100 000. Under the purchase contract, it was given three months in which
to settle the amount owing. So as to hedge the settlement of this debt, it took out a three-month
forward exchange contract on 1 October 2021. For accounting purposes it recorded its
purchases of trading stock and its creditor at the spot rate.
Shiney Aluminium Limited re-negotiated its credit facilities with its supplier who agreed to a
further three-months credit (a total of six months) with settlement now being agreed as being
on 31 March 2022. To hedge this later settlement date, it took out a second three-month
forward exchange contract on 1 January 2022. For accounting purposes it ‘translated’ its
creditor at the end of its year of assessment (28 February 2022) at the spot rate.
Relevant ruling rates of exchange were as follows:
Date Spot rate Forward rate
1 October 2021 $1 = R15,50 $1 = R15,66 (three-month contract)
31 December 2021 $1 = R15,58
1 January 2022 $1 = R15,60 $1 = R15,80 (three-month contract)
28 February 2022 $1 = R15,64 $1 = R15,85 (market-related forward rate for a two
month contract)
31 March 2022 $1 = R15,88
The ‘average exchange rate’ for a year of assessment ending on 28 February 2022 was
$1 = R15,40.
Shiney Aluminium Limited recorded the above transactions in its journal as follows:
Purchases Dr 1 550 000
To Creditor 1 550 000
Being purchases from abroad, with the purchases and the
creditor recorded at the spot rate.
COMPANIES 287
14. The agreed rate of tax on dividends under the double tax agreement between South Africa and
Australia is 5% when there is a minimum holding of 10% of the voting power by a beneficial
owner that is a company. Otherwise it is 15%.
You are required to determine
1. Shiney Aluminium Limited’s normal tax liability,
2. the amount of dividends tax to be withheld from its dividend declaration on 28 February 2022,
and
3. the South African taxes payable by Aussie Aluminium (Aus) Limited.
3. Medley Swimming Academy CC owns a motor car. Ariel Tumble-Turner is its sole driver. It is
used to transport her from her home to the Crawl High School’s swimming pool, and then from
the its swimming pool, to other swimming pools in town where galas are being hosted. She
uses it for her domestic purposes outside normal working hours. The Commissioner has
accepted that its domestic use by her is a taxable fringe benefit being granted to her by her
employer (Medley Swimming Academy CC). It had been purchased second-hand by Medley
Swimming Academy CC on 1 March 2019 for R138 000 (R120 000 plus value-added tax at
15% of R18 000). It was two years old when Medley Swimming Academy CC purchased it.
Ariel Tumble-Turner has had its sole use since its date of purchase. In the 2022 year of
assessment she travelled a total of 25 000 kilometres in it. Her kilometres travelled in it for
business purposes were only 5 000 kilometres.
4. Medley Swimming Academy CC pays R500 a month to Crawl High School to use its
swimming pool from 17h00 to 18h00 each evening.
5. When Medley Swimming Academy CC commenced trading it purchased swimming
equipment, including kicker-boards, pool buoys, flippers (fins), goggles, life jackets, stop
watches, whistles, a large water-proof clock (a pace clock), and a whiteboard for a total of
R9 000. Instead of claiming depreciation on this swimming equipment, it deducts the
equipment replacement costs as an expense.
6. Medley Swimming Academy CC employs a part-time swimming instructor to assist Ariel
Tumble-Turner. This part time swimming instructor was paid R48 000.
7. Medley Swimming Academy CC purchased three outfits for R7 500 to be worn exclusively by
Ariel Tumble-Turner. Each outfit consists of a swimming costume, shorts, a vest and a track
suite. Embroidered on each item is the initials ‘MSAC’. The outfits were a maroon colour.
(Maroon is Ariel Tumble-Turner’s favourite colour.)
8. The water in the Crawl High School’s swimming pool is too cold for many of the swimmers
who swim in it. The Crawl High School claimed that it had insufficient funds to purchase a
heater for its swimming pool. So, on 1 June 2021, Medley Swimming Academy CC, at its own
expense, purchased a pool blanket to be used by it to warm the water in the Crawl High School
swimming pool. This pool blanket cost R90 000. No amount has been deducted in its statement
of profit or loss and other comprehensive income for the wear and tear or depreciation of its
pool blanket. In Interpretation Note 47 and in Binding General Ruling 7, the Commissioner
allows ‘heating equipment’ to be written off over a six-year period.
You are required to determine the normal tax liability of Medley Swimming Academy CC for its
2022 year of assessment.
On 28 February 2021 Robert Taunton sold a small block of flats that was becoming dilapidated for
almost R2 000 000. He had owned this block for 15 years. He now has in excess of R1 800 000
available to invest in another property.
Robert Taunton has found a property that he would like to purchase. It is a small shopping centre. It
is at present owned by Clarendon Shopping Centre (Pty) Limited, a vendor. It yields net rentals of
R216 000 a year from its commercial tenants. Clarendon Shopping Centre (Pty) Limited would like
to sell him its shares, but is prepared to sell him its property, if this method is necessary for the sale
to take place.
Clarendon Shopping Centre (Pty) Limited has 100 equity shares of R1 each. It has a 9%
shareholder’s loan account of R1 000 000. Its equity shares are for sale at R8 000 each and its loan
account is to be taken over at R1 000 000.
Clarendon Shopping Centre (Pty) Limited’s rent-producing property is reflected in its financial
statements at its original cost to it of R1 200 000. Its only other asset is R10 000 cash.
Clarendon Shopping Centre (Pty) Limited has no liabilities other than its shareholder’s loan
account. It has revenue profits of R209 900.
If Robert Taunton purchases the property from Clarendon Shopping Centre (Pty) Limited, its
purchase price is R1 800 000. This amount is before the payment of any duty.
You are required to advise Robert Taunton as to whether he should purchase the shares and the
loan account in Clarendon Shopping Centre (Pty) Limited, or whether he should purchase the
property from it. Support your advice with detailed determinations.
manufacture. Depreciation of R18 750 for this ‘more advanced’ machine was provided for in its
statement of profit or loss and other comprehensive income. (It will elect any option that is
available to it that may defer its normal tax liability for its 2022 year of assessment.) The sale of
this ‘traded-in’ machine and some of its local shareholdings (see note 1 above) were the only
capital assets sold by it during its 2022 year of assessment.
• Rentals of R96 000 appear as an expense in Mnumzane (Pty) Limited’s statement of profit or
loss and other comprehensive income. These rentals are for a warehouse leased by it for trade
purposes. Over and above the rental payments made for its 2022 financial year of R96 000, it
paid ‘in advance’, on 28 February 2022, the rental for the months of March, April and May 2022
of R27 000 (in total). It agreed to pay this rental in advance because the landlord needed cash to
settle the rates due for the property. No portion of the R27 000 ‘advance’ rental payment was
expensed to its statement of profit or loss and other comprehensive income in its 2022 financial
year.
• On 1 March 2021 Mnumzane (Pty) Limited purchased a plot of land for R600 000 cash. It then
erected on this plot of land its administrative block (a commercial building). This building cost
R9 900 000 to erect. It was completed on 31 December 2021. As from 1 January 2022 it was
occupied by its administrative employees. To help finance the cost of erection of its
administration block it had borrowed R9 000 000 at 13%. Interest incurred on this loan for the
10-month period from 1 March 2021 to 31 December 2021 was R975 000. Local interest
incurred on this loan for the two-month period from 1 January 2022 to 28 February 2022 was
R195 000. The only other expense incurred by it relating to this property was rates of R180 000
for the 2022 year of assessment. The following amounts were deducted in arriving at its total
profit or loss and other comprehensive income before tax of R157 150:
– Depreciation on the land and buildings of R525 000 (R10 500 000 at 5%).
– Interest incurred on the borrowed funds of R390 000.
– Rates of R180 000.
• Mnumzane (Pty) Limited paid its annual insurance premiums of R156 000 for its 2023 financial
year on 15 February 2022. It did this on the advice of its insurance broker who claimed that this
early payment would secure ‘cheaper’ insurance. No portion of the R156 000 ‘advance’
insurance premiums was expensed to its statement of profit or loss and other comprehensive
income in its 2022 financial year.
• Salaries and benefits is reflected as an expense in Mnumzane (Pty) Limited’s statement of profit
or loss and other comprehensive income. On 1 September 2021 it employed Jovan Lomani, an
apprentice (a ‘learner’), with a NQF level 4 qualification on a full-time basis at a salary of
R12 000 a month. (Jovan Lomani had not been previously employed by it.) It entered into a
three-year registered learnership agreement with Jovan Lomani in the course of its trade. The
learnership agreement 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.
• A restraint of trade payment of R600 000 is reflected as an expense in Mnumzane (Pty)
Limited’s statement of profit or loss and other comprehensive income. It was paid to Carolina
Boss, a chemist, who had been employed by it. She left its employment on 30 September 2021.
The restraint of trade agreement is effective for two years commencing on 1 October 2021.
• On 1 December 2021 Mnumzane (Pty) Limited renewed its trade mark ‘Nuka’ at a cost of
R100 000. This trade mark gives it the exclusive right in South Africa to produce the range of
‘Nuka’ products. This renewal extends this exclusion right for a five-year-period. The R100 000
has been expensed to its statement of profit or loss and other comprehensive income in its 2022
financial year.
COMPANIES 293
Mnumzane (Pty) Limited does not have an assessed loss, or an assessed capital loss, to carry
forward from its 2021 year of assessment.
You are required to determine the
1. taxable income of Mnumzane (Pty) Limited for its 2022 year of assessment (commence your
determination with its total comprehensive income before tax of R157 150), and
2. the dividends tax that it must withhold from the dividend it declared and paid on 28 February
2022 and state when it will be required to pay this dividends tax to the Commissioner. None of
its shareholders is an exempt beneficial owner.
Equipment Dr 45 000
Trading stock Dr 55 100
Goodwill Dr 1 900 000
To Members interest 100
To Loan from Sebastian Tagg 2 000 000
Being the ‘lock, stock and barrel’ (including everything) purchase
of Sebastian Tagg’s business at its current market value.
The equipment consists of industrial sewing machines, engraving equipment, industrial staplers and
rivet guns. It had cost Sabastian Tagg R100 000. Its tax value to him was R60 000 on 28 February
2021. Since it is second-hand equipment, the Commissioner agreed that Taggs and Labels CC
could write it off over a three-year period. The Commissioner does not regard the activities carried
out by it to be a process similar to a process of manufacture.
Trading stock comprised all the consumable stores of the business. It was valued at its cost.
The goodwill was determined at the expected net profit of the business for the next two years. The
Commissioner was satisfied with this determination of goodwill.
Sabastian Tagg’s loan is interest-bearing at a rate of 9% a year.
294 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Taggs and Labels CC will make a net profit of R1 200 000 for its 2022 year of assessment (ended
28 February 2022). (Its gross income was R3 000 000. It did not have a capital gain.) This net
profit is after
• paying salaries to its three full-time employees (none of the employees is a relative) who are
employed on a full-time basis, and
• providing R15 000 wear and tear on its equipment,
but before
• the interest incurred of R180 000 on his loan account to it, and
• providing a salary for him for the services he renders to it. He works on a full-time basis
managing and running its business.
Sabastian Tagg also has investments in
• dividend-yielding shares in local listed companies,
• collective investment schemes in securities (so-called equity unit trusts),
• local interest-bearing securities that are not ‘tax free investments’, and
• a rent-producing property.
Sabastian Tagg does not hold shares in a non-listed company. Other than his membership of Taggs
and Labels CC, he is not a member of a close corporation. He earned local interest from his non
‘tax free investments’ in excess of R23 800 in the 2022 year of assessment. His gross income from
sources other than Taggs and Labels CC is R73 800 for the 2022 year of assessment.
Taggs and Labels CC has no investments. It earned local interest on its bank current account of
R9 000 in its 2022 year of assessment.
After settling its normal tax liability, Taggs and Labels CC will distribute its entire after-tax income
to Sabastian Tagg.
You are required to
1. determine if Taggs and Labels CC is a small business corporation,
2. state if Sabastian Tagg and it are connected persons,
3. discuss the tax consequences to him that arise out of the sale of his business to it,
4. determine if it should take up the option in section 12E(1A) and have the capital allowance on
its equipment determined under its provisions,
5. discuss the tax consequences that arise out of the entry made in its journal on 1 March 2021
(see above),
6. determine the most tax-efficient amount that it should pay him as his salary for managing and
running its business,
7. determine its normal tax liability,
8. determine the amount of dividends tax to be withheld from the distribution of its entire after-
tax profit to him,
9. determine his normal tax liability on the assumption that he had still carried on his business in
his own name (as a sole trader),
10. determine the combined taxes payable by it and him, and
11. determine if forming it resulted in an overall tax saving for him and it, and to indicate the
amount of this tax saving.
COMPANIES 295
forward exchange contract was entered into on 1 July 2021. Local interest at 12% a year on the
loan is payable on 31 March each year. The interest incurred for its year ended 31 March 2022
has been correctly accounted for in the determination of its net operating profit of R160 000
for the year. The bookkeeper had recorded the initial loan transaction at a spot rate of
A$1 = R11,30. He has, however, not passed any accounting entries relating to its forward
exchange contract. No account has been taken of any foreign exchange differences in the
determination of its net operating profit. Relevant exchange rates were as follows:
The Commissioner has accepted that none of the interest incurred by Harlequin Limited was to
produce dividends.
8. The trading stock of Harlequin Limited includes a share portfolio. The following profits and
losses were recorded on the sale of shares for its year ended 31 March 2022:
Profit Loss
Sale of shares listed on the JSE Securities Exchange
– Shares held for longer than three years but not pre-valuation date
assets 368 000 1 560 000
– Shares held for less than three years 440 000 180 000
808 000 1 740 000
Net loss suffered by Harlequin Limited (R808 000 – R1 740 000) 932 000
The net loss of R932 000 (see above) suffered by Harlequin Limited is the difference between
the amount received or accrued on the sale of the shares and their original cost. There were no
holding costs for these shares.
9. Dividends accrued are from both local companies and foreign companies.
Harlequin Limited’s local dividends accrued to shareholders registered on the following dates:
1 June 2021 260 000
1 September 2021 108 000
1 January 2022 360 000
Declared on 31 March 2022 but payable to shareholders registered on 15 April
2022 288 000
1 016 000
Harlequin Limited’s foreign dividends accrued to shareholders registered on the
following dates:
3 May 2021 (from a company registered in France) 80 000
31 January 2022 (from a company registered in Hong Kong) 160 000
1 256 000
Harlequin Limited’s foreign dividends from the non-resident companies are not exempt from
normal tax under section 10B(2).
10. Harlequin Limited purchased shares in Celtic Limited, a resident of the Republic, in May 2021
for R60 000 in anticipation of its liquidation. Harlequin Limited subsequently received from it
a liquidation distribution of R80 000 – being a return of equity shares of R30 000 and a return
of revenue profits of R50 000.
11. Harlequin Limited developed the unused portion of its land, which prior to being developed
housed only an office building. It entered into an agreement on 1 December 2020 with
Wanderers Manufacturing (Pty) Limited (the lessee) on the following terms:
• Harlequin Limited would construct a factory building on the property that, once completed,
would be leased by Wanderers Manufacturing (Pty) Limited,
• Harlequin Limited would also purchase and install in the factory, manufacturing machinery
for use by Wanderers Manufacturing (Pty) Limited,
• The lease is for a period of 20 years from the date on that Wanderers Manufacturing (Pty)
Limited would take occupation of the premises.
298 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
The erection of the factory commenced on 1 January 2021. It was completed on 31 May 2021
at a cost of R9 000 000. Machinery was installed at a cost of R1 320 000. Wanderers
Manufacturing (Pty) Limited occupied the premises from 1 June 2021. It commenced
manufacturing on the same date. Harlequin Limited and Wanderers Manufacturing (Pty)
Limited are not ‘connected persons’.
Wanderers Manufacturing (Pty) Limited paid the following lease rentals to Harlequin Limited
during the year:
• Rentals of R720 000 for the factory for 10 months.
• Rentals of R160 000 for the machinery for 10 months.
12. Harlequin Limited’s depreciation of R220 000 for the year is for its fixed assets referred to
under note 14 (see below).
13. Administration expenses incurred by Harlequin Limited relating to all its activities were
R336 000. Of these administration expenses, 1% is attributable to ‘affected assets’ for purposes
of section 23A. It has been agreed with the Commissioner that 10% of the administration
expenses are attributable to earning its dividends.
14. Harlequin Limited’s fixed assets are as follows:
Land and office building at cost less accumulated depreciation 1 080 000
Factory constructed for lessee at cost (R9 000 000) less accumulated 8 920 000
depreciation
Machinery let to its lessee at cost (R1 320 000) less accumulated depreciation 1 136 000
11 136 000
15. Harlequin Limited declared the following dividends payable to its shareholders registered on
the dates shown below:
• On 30 September 2021 an interim dividend of R20 000.
• On 31 March 2022 a final dividend of R1 240 000.
16. The Commissioner has indicated that if the provisions of section 31 apply to Harlequin
Limited, he will apply them to it on 31 March 2022, and that when he applies them the method
as set out in SARS Interpretation Note 2 will be followed.
You are required to determine
1. the taxable income or assessed loss of Harlequin Limited for its year of assessment ended
31 March 2022, and
2. the dividends tax to be withheld by it on the dividends it declared and paid during its 2022 year
of assessment and from any dividend deemed to be declared by it.
dividend. And in accordance with this policy, it declared a dividend of R60 000 on 31 October
2021. Cigars (Pty) Limited trades solely in South Africa.
5. Insurance incurred by Satintip Limited includes R6 000 paid for premiums on a loss of profits
policy and R4 800 paid for premiums on a policy on the life of Eve Camal, one of its directors.
The policy on Eve Camal’s life was taken out by it during May 2021. Eve Camal died in
January 2022, and the R100 000 in the statement of profit or loss and other comprehensive
income represents the amount awarded to Satintip Limited under this policy. The premiums
paid on this policy of R4 800 were included in Eve Camal’s gross income as a taxable fringe
benefit. At no stage had funds been borrowed on the strength or security of this policy. The
remaining R7 200 included in its expense ‘insurance’ is the premium paid on its assets.
6. Zimbabwe taxation payable on the Zimbabwe profit is the equivalent of R92 000.
7. In its 2019 year of assessment Satintip Limited had purchased a large quantity of cigars
(trading stock) for R15 000 from a manufacturer that was closing down. It paid R9 000 (being
60% of the purchase consideration) on the date of delivery. For the following three years it
tried to pay the 40% balance of the purchase consideration of R6 000. Every electronic transfer
was returned with ‘account no longer exits’ endorsed on it. Since this debt is believed to have
prescribed the R6 000 balance owing has been ‘written back’ in its statement of profit or loss
and other comprehensive income. All these cigars had been sold by 28 February 2022.
8. Satintip Limited purchased its office building (a used building) in 2015 for R1 930 000. The
land on which it is erected was purchased for R482 500.
9. Depreciation on motor vehicles (as deducted in its statement of profit or loss and other
comprehensive income) is acceptable to the Commissioner as the wear-and-tear or depreciation
capital allowance. This also applies to depreciation of office furniture and equipment.
10. When Satintip Limited sold its motor vehicle its carrying amount (book value) was R134 005. It
had originally cost R230 000. It had been purchased in 2020. The Commissioner had allowed
R184 000 wear and tear or depreciation capital allowances on it up to the time of its sale.
11. The compensation of R17 500 paid by Satintip Limited was for the consequential loss arising
out of inferior tobacco supplied to Sahawi Sharp (Pty) Limited, a customer. It was negligent in
allowing this inferior tobacco to slip through its quality-control checking procedures. Legal
expenses in this regard incurred by it were R7 500. They are included in the R10 450 shown in
its statement of profit or loss and other comprehensive income. The balance of legal expenses
it incurred are charges relating to the recovery of trade debts.
12. Satintip Limited’s allowances to retired employees’ comprise the following amounts:
• R36 000 to Redman Smokealot, an employee who retired because of ill-health.
• R18 000 to Bronwyn Cancer, the widow of a former employee (Killian Cancer).
• And R12 000 to Brittany Cancer, aged 27 years, the disabled daughter of a former employee
(Killian Cancer – see above).
Although this is the first year these disbursements have been made by Satintip Limited, it has
contracted itself to make annual payments of like amounts to the ‘qualifying’ employees or
their dependants. It has now made it one of its policies to make payments of this nature to its
employees and their dependants in comparable circumstances. And it wishes to obtain
recognition of this new policy. If necessary, new service contracts will be entered into with its
employees. It will, under these new service contracts, be obliged to make these payments.
13. Other expenses incurred by Satintip Limited are all deductible in the determination of its
taxable income. No expenses are to be apportioned against the profit from its Zimbabwe
branch. (Its Zimbabwe branch is run as an entirely separate entity.)
14. The university provided Satintip Limited with a ‘section 18A’ receipt for its R27 500 donation
made to it.
COMPANIES 301
15. Satintip Limited ‘marketing expenses’ of R18 000 are made up of expenditure relating to the
appointment of agents outside South Africa consisting of
– capital expenditure incurred abroad the equivalent of R6 000,
– revenue expenditure incurred abroad the equivalent of R2 000, and
– revenue expenditure in South Africa relating to the research into and obtaining information
for the possible sale of goods in foreign markets of R10 000.
Satintip Limited does not manufacture goods (tobacco products) – it is merely a distributor of
them. When it appointed its agents outside South Africa, it did so on its own accord – and not
in the capacity as an authorised agent for a tobacco-product manufacturer.
16. So as to facilitate travel for Satintip Limited’s directors and other executives (it is hired out
when not being used by it), an aircraft was purchased by it for R9 000 000 and brought into use
by it on 1 April 2021. No depreciation on this aircraft has been provided in its statement of
profit or loss and other comprehensive income for its 2022 year of assessment.
17. Nine months before valuation date, Satintip Limited purchased a vacant plot of land for
R100 000. Its intention was to build a warehouse on it. On valuation date this plot of land had a
market value of R105 000. This valuation had been obtained by it from an independent
valuator. On 31 January 2022 it sold the vacant plot of land for R480 000. Under its articles of
association, it was not permitted to distribute this R380 000 (R480 000 – R100 000) profit. It
therefore recorded this R380 000 profit as a non-distributable reserve (profit) in its financial
records. Besides this vacant plot of land and its motor vehicle (see note 8 above), it did not sell
any other of its capital assets during its 2022 financial year.
You are required to determine the
1. South African normal tax payable by Satintip Limited for its year of assessment ended
28 February 2022 (commence your determination with its profit before tax of R2 755 000), and
2. the dividends tax withheld from its dividend declared and paid on 31 December 2021.
The most recent statement of financial position of Nine Andy Road (Pty) Limited is as follows:
Share capital – 1 800 000 R1 shares 1 800 000
Retained income 180 000
1 980 000
Represented by
Land and buildings at cost 1 800 000
Cash on hand 180 000
1 980 000
Both properties will yield gross rentals of R360 000 (net of value-added tax) a year. Property rates,
repairs and maintenance and other deductible expenses in the determination of taxable income will
amount to R60 000 a year for each property.
The property owned by Six Pammie Road CC is a small shopping centre. The property owned by
Nine Andy Road (Pty) Limited is a small office block. Neither property qualifies for a capital
allowance.
Six Pammie Road CC and Nine Andy Road (Pty) Limited are both vendors. They both suffer
normal tax at the rate of 28%.
Lew Prinz can purchase the small shopping centre from Six Pammie Road CC for R2 800 000
(excluding value-added tax) or he can purchase the member’s interest in it (Six Pammie Road CC)
for R1 000 000 and purchase the member’s loan account to it for R1 800 000.
Lew Prinz can purchase the small office block from Nine Andy Road (Pty) Limited for R2 900 000
(excluding value-added tax) or he can purchase its entire share capital for R2 880 000 (1 800 000
shares at R1,60 each).
You are required to inform Lew Prinz of which is the better method of purchasing each property.
Base your determinations using the rates of tax applicable to the 2022 year of assessment.
The statement of profit or loss and other comprehensive income of Olympic Designs (Pty) Limited
for its financial year ended 31 December 2021 is as follows:
Sales 6 195 000
Cost of sales
– Opening stock 345 000
– Purchases (note 1) 1 685 000
2 030 000
– Less closing stock (note 1) 405 000 1 625 000
Gross profit 4 570 000
Add sundry income
– Local and foreign dividends (note 2) 9 250
– Insurance settlement (note 3) 18 400 27 650
4 597 650
Less expenditure and allowances
– Bad debts (note 4) 22 700
– Depreciation (note 5) 103 075
– Finance charges (note 6) 2 200
– Rental (note 7) 45 000
– Insurance premiums (note 8) 81 000
– Salaries and benefits (note 9) 4 215 750
– Local interest (note 10) 78 000
– Other expenses deductible in the determination of its taxable income 27 600 4 575 325
Net profit before tax 22 325
Notes
1. On 1 December 2021, Olympic Designs (Pty) Limited concluded a contract to import a batch
of international flags from a supplier in Australia. The batch consisted of 10 000 flags at a cost
of AUS$2 each. The batch was shipped ‘free-on-board’ on 1 December 2021 but had not
arrived in South Africa by 31 December 2021. Being concerned with the fluctuation of the
exchange rate, it took out a two-month forward exchange contract on 1 December 2021 to
cover the settlement of the creditor. This was expected to take place on 31 January 2022. It has
not, in its 2021 financial year, processed any accounting entries for this batch of trading stock.
It complies with generally accepted accounting practice for its foreign exchange transactions.
Ruling rates of exchange follow:
Date Spot rate Forward rate and period
1 December 2021 AUS$1 = R11,80 AUS$1 = R11,98 (two months)
31 December 2021 AUS$1 = R11,85 AUS$1 = R12 (one month)
31 January 2022 AUS$1 = R11,90
The ‘average exchange rate’ for a year of assessment ending on 31 December 2021 is
AUS$1 = R11,75.
2. The following local and foreign dividends accrued to Olympic Designs (Pty) Limited during its
2021 year of assessment:
These foreign dividends are not exempt from normal tax under section 10B(2). They accrued
on 31 May 2021.
The distribution from the so-called real estate investment trust accrued on 31 July 2021.
3. Olympic Designs (Pty) Limited had delivered a batch of T-shirts to a supplier to be dyed and
screen printed. When a fire occurred in the factory of this supplier, its T-shirts were destroyed.
On 30 September 2021 was awarded an insurance settlement from its insurer of R18 400 for
the cost of its destroyed T-shirts.
4. Bad debts written off by Olympic Designs (Pty) Limited of R30 200 is made up of
• R12 200 for trade debtors who had been unable to pay for their purchase, and
• R18 000 being a loan to Strip (Pty) Limited. It lent R18 000 to Strip (Pty) Limited (a
manufacturer of clothing including T-shirts and caps) since it was experiencing a cash-flow
problem. On 1 November 2021 Strip (Pty) Limited was liquidated. Olympic Designs (Pty)
Limited was unable to recover its loan.
The decrease in Olympic Designs (Pty) Limited’s provision for doubtful debts of R7 500 has
been deducted from the bad debts total of R30 200 resulting in a net amount of R22 700.
Olympic Designs (Pty) Limited’s accounting provision for doubtful debts at 31 December 2021
was R32 500. The Commissioner has agreed to a doubtful debt allowance equal to 25% of its
accounting provision.
5. Olympic Designs (Pty) Limited’s depreciation of R73 075 is for the following assets:
• A delivery van that was purchased and brought into use on 1 December 2020 at a cost of
R345 000 (R300 000 plus value-added tax at 15% of R45 000). Interpretation Note 47 and
Binding General Ruling 7 provide a four-year write-off period for delivery vehicles.
Depreciation of R60 000 has been provided for on this delivery van.
• A motor car that was purchased and provided as a ‘company car’ to Sheila Cairns on
1 April 2021. It cost R299 000 (R260 000 plus value-added tax at 15% of R39 000).
Interpretation Note 47 and Binding General Ruling 7 provide a five-year write-off period
for motor cars. Depreciation of R37 375 has been provided for on this motor car. All its fuel
and maintenance are paid by Olympic Designs (Pty) Limited and are included under
‘salaries and benefits’.
• A computer leased under a two-year financial lease from a financial institution. This financial
lease was capitalised for accounting purposes. The computer cost the financial institution
R19 665 (R17 100 plus value-added tax at 15% of R2 394). The finance charges in the lease
were R4 335. The final lease rental of R1 000 was paid on 30 September 2021. On 1 October
2021 the financial institution simply abandoned this computer to Olympic Designs (Pty)
Limited without the payment of consideration. Its market value on 1 October 2021 was
R11 500 (R10 000 plus value-added tax at 15% of R1 500). Despite being two-years old, this
computer was still in good working order. It was used by Olympic Designs (Pty) Limited for
its entire 2021 year of assessment. Interpretation Note 47 and Binding General Ruling 7
provide a three-year write-off period for computers. Depreciation of R5 700 has been provided
for on this computer.
6. Finance charges expensed to Olympic Designs (Pty) Limited’s statement of profit or loss and
other comprehensive income of R2 200 are for the financial lease rentals for the computer (see
above).
7. Rentals incurred by Olympic Designs (Pty) Limited are for an administration building and a
warehouse leased by it for trade purposes. Over and above the rental payments made for its
2021 financial year of R45 000, it paid ‘in advance’, on 31 December 2021, the rental for the
months of January, February and March 2022 of R12 000 (in total). It agreed to pay this rental
in advance since the landlord was experiencing a cash-flow problem and required cash to settle
the rates due for the property. No portion of the R12 000 ‘advance’ rental payment was
COMPANIES 305
expensed to its statement of profit or loss and other comprehensive income in its 2021 financial
year.
8. Insurance premiums of R81 000 were incurred by Olympic Designs (Pty) Limited for its 2021
year of assessment. It paid its annual insurance premiums of R126 000 for its 2022 financial year
on 15 December 2021. It did this on the advice of its insurance broker who claimed that this early
payment would secure ‘cheaper’ insurance. No portion of the R126 000 ‘advance’ insurance
premiums was expensed to its statement of profit or loss and other comprehensive income in its
2021 financial year.
9. Included in Olympic Designs (Pty) Limited’s salaries and benefits total of R4 215 750 is a
restraint of trade award of R360 000 and a leave pay provision of R4 750:
The restraint of trade award of R360 000 was made by Olympic Designs (Pty) Limited to
Pierre Baron, a designer employed by it who left its employment on 30 September 2021. The
restraint of trade award agreement is effective for two years commencing on 1 October 2021.
Olympic Designs (Pty) Limited’s leave pay provision was increased by R4 750 in its 2021
financial year. The closing balance on the leave pay provision at 31 December 2021 was
R27 250.
10. Interest incurred by Olympic Designs (Pty) Limited on the loan from Sidney Cairns for its
2021 financial year was R78 000. The Commissioner has advised that he is applying the
provisions of section 31 to Olympic Designs (Pty) Limited. They will be applied on
31 December 2021. He has indicated that he will use its ‘provisional results’ in the
determination of the section 31 adjustment. He has also indicated that the method provided for
in SARS Interpretation Note 2 will be followed.
The prime overdraft rate in South Africa for its 2021 financial year was 14,5%.
Olympic Designs (Pty) Limited’s share capital at 31 December 2021 was R10 000.
Olympic Designs (Pty) Limited has no reserves other than its retained income. Its retained
income was R50 000 on 1 January 2021.
11. Olympic Designs (Pty) Limited declared and paid a dividend of R50 000 on 31 December 2021.
12. Under the double tax agreement between South Africa and Australia, the rate of tax on a
dividend that accrues to a natural person is 15%.
You are required to determine
1. the normal tax liability of Olympic Designs (Pty) Limited for its 2021 year of assessment, and
2. the dividends tax to be withheld by it from its 31 December 2021 dividend and its deemed
dividend on 31 August 2022.
1 November 2021 to 31 October 2022. It pays the property rates for its trade premises annually in
advance. The amount paid was R27 000. It was paid on 24 December 2021. The rates period is
1 January 2021 to 31 December 2022. It pays a levy to the Medical Council annually in advance.
The levy paid was R18 000. It was paid on 27 July 2021. It covers the period 1 August 2021 to
31 July 2022. Besides these prepaid expenses for insurance, rates and its levy, it has no other
prepaid expense. There were no prepaid expenses at 28 February 2021.
Doubtful debts
Statement of profit or loss and other comprehensive income
(increase in the provision for doubtful debts) Dr 9 000
To Provision for doubtful debts 9 000
Being the adjustment necessary to increase the provision for doubtful
debts from R33 000 to R42 000.
Explanation: Miracle Muthi Limited makes a provision on the basis that 10% of its debtors are
unlikely not to pay the amount owing to it. The above journal entry recorded the increase in its
provision for doubtful debts for its 2022 financial year. The Commissioner has agreed that only 25%
of its provision for doubtful debts may be deducted in the determination of its taxable income under
the provision of section 11( j). The same agreement applied in its 2021 year of assessment.
Bad debt
The following journal entry was also put through Miracle Muthi Limited’s journal on 28 February
2022:
Bad debt (statement of profit or loss and other comprehensive
income) Dr 27 200
To Loan to Employee Sweli Mali 27 200
Being the amount owing by Employee Sweli Mali written off as a
bad debt.
Explanation: Miracle Muthi Limited is not a moneylender. But on 1 March 2019 it lent employee
Sweli Mali R20 000 to partly finance the cost of his study expenses. The loan was at an interest rate
of 12% a year. For three years Sweli Mali did not repay this loan from his employer nor did he pay
the interest due on it. He is unable to repay the amount owing to it. This amount has therefore been
written off by it as a bad debt. But since it regards him as a valuable employee who carries out his
work in a responsible way, it has retained his services as an employee.
Provision for thirteenth ‘cheques’
Statement of profit or loss and other comprehensive income
(employees costs – thirteenth ‘cheques’) Dr 240 000
To Provision for thirteenth ‘cheques’ (statement of profit or loss and
other comprehensive income) 240 000
Being that portion of potential thirteenth ‘cheques’ that relates to a
period served in the 2022 financial year.
Provision for thirteenth ‘cheques’ Dr 210 000
To Statement of profit or loss and other comprehensive income
(employees costs – thirteenth ‘cheques’) 210 000
Being the reversal of the 2021 financial year’s provision.
Explanation: Miracle Muthi Limited awards an employee a thirteenth ‘cheque’ at the end of the
month when he completes a year’s service to it. But a thirteenth ‘cheque’ is not awarded for a
period of less than a year. In other words, an employee becomes entitled to a thirteenth ‘cheque’
only after serving it for a full year. If an employee left its employment, for example, after
11 months service, he is not entitled to a thirteenth ‘cheque’. And if an employee left its
employment, for example, after 13 months service, he is awarded his thirteenth ‘cheque’ after
12 months service, but is not awarded anything for the thirteenth month that he served it. At the end
of its financial year it estimates its liability for thirteenth ‘cheques’ taking into account the months
310 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
an employee has served in the financial year and on the assumption that the employee will serve
that full 12 month period. For example, if an employee is due to be awarded a bonus of R12 000 on
31 March 2022, it will provide on 28 February 2022 for a bonus of R11 000 to be awarded to him.
Actual thirteenth ‘cheques’ paid are expensed to its employees cost account.
Cottages for employees
Buildings (10 cottages) Dr 1 500 000
To Bank 1 500 000
Being the erection of 10 cottages at R150 000 each.
Bank Dr 1 500 000
To Debentures 1 500 000
Being funds borrowed to pay for the erection of its cottages.
Buildings (pre-production interest on the 10 cottages capitalised) Dr 67 500
To Bank 67 500
Being the debenture interest paid for the first six months.
Buildings (pre-production interest on the 10 cottages capitalised) Dr 22 500
Statement of profit or loss and other comprehensive income (interest
incurred) Dr 45 000
To Bank 67 500
Being the debenture interest paid for the second six months.
Statement of profit or loss and other comprehensive income
(depreciation of building) Dr 26 500
To Accumulated depreciation buildings 26 500
Being depreciation on this building provided for under
Statement IAS 16 and determined as follows:
((R1 500 000 + R67 500 + R22 500) × 5% × 4 / 12).
Explanation: On 1 March 2021 Miracle Muthi Limited commenced with the erection of 10 cottages
(10 low-cost residential units) on its own premises. These cottages were completed at a cost of
R150 000 each on 31 October 2021. They were occupied rent-free by 10 of its employees as from
1 November 2021. To finance the entire cost of these cottages it had issued 9% debentures on
1 March 2021. Local interest on the debentures is payable six monthly.
Share option
Statement of profit or loss and other comprehensive income
(employees costs – share based payments) Dr 37 500
To Equity (share options) 37 500
Being the cost of the equity settled options of the third and final year
of the vesting period recognised as follows:
(50 × 1 000 × R3) = (50 × 1 000 × R3 × 27 / 36 (previously
recognised up to 28 February 2021)).
Loan to employees Dr 500 000
Equity (share options) Dr 150 000
To Share capital 50 000
To Share premium 600 000
Being 50 000 shares with a nominal value of R1 each issued to
employees under the share option scheme.
Loan to employees Dr 20 000
To Statement of profit or loss and other comprehensive income
(interest accrued) 20 000
Being interest accrued on the loan to employees at a rate equal to the
dividend declared.
COMPANIES 311
Explanation: On 1 December 2018 Miracle Muthi Limited granted share options to 50 of its
employees for each of them to purchase 1 000 shares in it at R10 a share (being the market value of
a share on that date (1 December 2018). The par value of a Miracle Muthi Limited share is R1.
Each option had a fair value of R3 on the grant date. Each grant is conditional on the employee
remaining in its employment until 30 November 2021. During its 2019, 2020 and 2021 financial
years it was estimated that no employee would leave its employment before the vesting date
(30 November 2021). All 50 employees were still employed on 30 November 2021 and exercised
their options on this date (30 November 2021). The value of a share in it was then R16. It granted
loans to its employees so that they could purchase their shares. (Each employee was lent R10 000.)
These loans are charged with interest at a rate equal to the dividend that accrues to the employee
from his shareholding in it. On 28 February 2022 a dividend of R400 accrued to each of the
50 employees who had exercised their options. (This share option scheme is not a ‘broad-based
employee share plan’ as envisaged by section 8B and section 11(lA).)
Research and development
Statement of profit or loss and other comprehensive income
(research costs) Dr |60 000
Development costs (statement of financial position) Dr 180 000
To Bank 240 000
Being research and development costs incurred when establishing
the viability of producing tonic in tablet form.
Statement of profit or loss and other comprehensive income
(amortisation of development costs) Dr 18 000
To Development costs (statement of financial position) 18 000
Being capitalised development costs being written off over a five-
year period but commencing on 1 September 2021.
Explanation: Before Miracle Muthi Limited commenced manufacturing its tonic in tablet form, it
had researched this possibility. Its research and development was approved by the Minister of
Science and Technology as required by section 11D(9). It then commenced development work on
this ‘new’ form of its product. In accordance with Statement IAS 38, it capitalised the development
costs incurred. The intangible asset arising out of this development work was available for use on
1 September 2021 and is being amortised over a five-year period. These development costs are for
prototype or pilot plant as listed in section 11D(2)(b), created solely for the process of research and
development and that will not be used for production purposes after the research and development
has been completed.
You are required to determine Miracle Muthi Limited’s taxable income for its 2022 financial year.
Your determination must be supported with reasons as to why you have made an adjustment to its
pre-tax profit of R1 234 500.
‘The computer was delivered to Winners (Pty) Limited’s administration offices on 1 November
2021, but was not used until 1 February 2022. The reason for this delay was that a new
computer programmer needed to be employed to operate it.
‘During January 2022, Del Acer, a suitably-qualified computer programmer was employed by
Winners (Pty) Limited (see below). She used it for the first time on 1 February 2022 being her
first day of work for her new employer.
‘The Commissioner has agreed to a wear-and-tear or depreciation capital allowance determined
on the straight-line basis over a period of three years for this computer.
‘What deductions and capital allowances arise out of the above transactions?
‘Appointment costs
‘Del Acer, the most suitable applicant for Winners (Pty) Limited’s new position of computer
programmer (see above) was previously employed some 500 kilometres from its premises. The
cost to it of moving her household furniture and effects including storage, and delivery to her
new residence was R45 000.
‘Will the R45 000 it incurred be deductible in the determination of its taxable income?
‘Restraint of trade
‘Winners (Pty) Limited entered into an agreement with Lofty Lock (a resident of the Republic),
its former commission agent, to the effect that he would not sell sporting equipment
manufactured by its competitors for a period of two years commencing on 1 March 2021. In
return for being unable to sell sporting equipment of a competitor for a period of two years, it
compensated him by awarding him R300 000.
‘Is this restraint of trade payment deductible in the determination of its taxable income?
‘Bad debts
‘During its 2021 year of assessment, Winners (Pty) Limited sold its ‘camping’ division to
Royal Ducks (Pty) Limited.
‘Since Royal Ducks (Pty) Limited was to conduct the trading operations formerly conducted by
Winners (Pty) Limited, it was agreed that Royal Ducks (Pty) Limited would purchase the net
current assets of this division at book value. Included in these net current assets were a number
of trade debts. In view of the fact that extended terms of credit are customary in this trade, it
was impossible, at the time of the take-over, to determine the soundness of the ‘taken-over’
debts.
‘The agreement between Winners (Pty) Limited and Royal Ducks (Pty) Limited included the
following clause:
“Winners (Pty) Limited guarantees that the book debts taken over will be paid in full and
that it [Winners (Pty) Limited] will be liable to Royal Ducks (Pty) Limited for debts that
might become bad.”
‘In Winners (Pty) Limited’s 2022 year of assessment certain of these debts became bad. Royal
Ducks (Pty) Limited then re-ceded these debts to it, and charged it under the agreement, with
the amounts that had become bad.
‘Are these bad debts of Winners (Pty) Limited deductible in the determination of its taxable
income?
‘Deferred compensation
‘Ten years previously Winners (Pty) Limited implemented a provident fund scheme for its
employees. But due to one of the rules of this fund, an employee, namely, John Bat, was not
permitted to become a member. This particular rule was that an employee must not have
attained the age of 50 years at the time of joining the fund. He was then 55 years old.
314 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
‘John Bat has now reached retirement age (65 years) and has indicated that he would like to
retire from Winners (Pty) Limited’s employment. It would like to award him with either
• a lump-sum award on his retirement (a so-called golden handshake award), or
• an annuity (broken down into a monthly amount) payable to him (or his surviving spouse in
the event of his death) for the rest of their lives.
‘Winners (Pty) Limited has never made a payment of this nature in the past. And since John Bat
was the only employee who did not join its provident fund, it is unlikely to make similar
payments in the future.
‘Also, Winners (Pty) Limited and John Bat have not entered into an employment agreement.
‘Will Winners (Pty) Limited be entitled to a deduction in the determination of its taxable
income for either a lump sum or an annuity if it is awarded by it to John Bat, or to his wife?
‘Loan written off
‘On 1 March 2007 Winners (Pty) Limited lent Employee Tandamali Sigidi R50 000 to partly
finance the cost of erection of his dwelling (private house). As a result of this loan, it deducted
in the determination of its taxable income under section 11(t), the so-called housing capital
allowance, of R6 000 in its 2008 year of assessment. The loan was at an interest rate of 8%
a year (above the ‘official rate of interest’).
‘For 15 years Tandamali Sigidi did not repay his loan from Winners (Pty) Limited. And he did
not pay the interest due on it. The interest owing at 28 February 2022 was R60 000 (but limited
under the in duplum rule to R50 000 (the capital amount)).
‘Tandamali Sigidi occupied this dwelling from 1 June 2007 (the date that it was completed)
until 30 November 2021. He had substantial liabilities caused by a number of family problems.
He therefore sold his dwelling on 30 November 2021. He used most of the amount obtained
from the sale of his dwelling to settle some of his personal liabilities. But he did not pay the
amount owing to Winners (Pty) Limited.
‘It has now become clear that he is unable to pay Winners (Pty) Limited the amount owing to it.
On 28 February 2022, it therefore wrote off the R100 000 (R50 000 loan plus R10 000 interest)
owing to it from Tandamali Sigidi as a bad debt. But since it regards him as a valuable
employee who carries out his work in a responsible way, it has retained his services as an
employee.
‘What are the normal tax, including capital gains tax consequences that arise for Winners (Pty)
Limited when it wrote off the R100 000 owing to it by Tandamali Sigidi?’
You are required to prepare a reply memorandum to be submitted to Winners (Pty) Limited setting
out the answers to all your audit manager’s questions.
CHAPTER 15
FARMERS
315
316 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
produce on hand at the end of the 2022 year of assessment cost R12 000 (market value
R18 000) while at the beginning of the year his produce on hand cost R10 800 (market value
R16 200).
6. Expenditure on farming development and improvements incurred by Fred Friesland during
the year of assessment was as follows:
The following information relates to Chic Bantam for the 2022 year of assessment:
Cows 12 000 40
Calves 5 000 4
Bulls 20 000 50
322 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
2. Cocky Bantam’s taxable income for the 2021 year of assessment was R120 000. His taxable
income from farming operations included in this R120 000 was ‘nil’ and a balance of capital
development expenditure of R18 860 was assessed by the Commissioner.
3. The Commissioner allows a wear-and-tear or depreciation capital allowance over a five-year
write-off period on all Cocky Bantam’s items qualifying for this capital allowance.
4. Cocky Bantam has advised the Commissioner that he has elected to be subjected to normal tax
under the provisions of paragraph 19(5) of the First Schedule.
5. The pension fund was the only fund that Cocky Bantam had ever belonged to. His membership
of it was for 30 years. His total contributions to it to the commencement of the 2022 year of
assessment were R140 800. They had all been deductible in the determination of his taxable
income.
You are required to determine the normal tax liabilities of Cocky Bantam and Chic Bantam for the
2022 year of assessment.
5. James Jersey and his family consumed farm produce that cost R37 380 (market value R56 070)
during the 2022 year of assessment. Farm produce at a cost of R52 500 (market value
R78 750) was supplied by him to his farm labourers as rations.
6. Other amounts received by or accrued to James Jersey were local dividends of R1 350 from
Wool Brokers Limited (incorporated in the Republic) and local interest from a bank savings
account (not a ‘tax free investment’) of R22 800.
You are required to determine James Jersey’s taxable income (or assessed loss) for the 2022 year
of assessment. Also determine the balance of capital development expenditure that may be carried
forward to the 2023 year of assessment.
The net farming taxable incomes for the Barnes family partnership (father and son) since the
commencement of the partnership are as follows:
Year of Partnership’s farming
assessment taxable income
2017 94 000
2018 168 000
2019 210 000
2020 214 000
2021 198 000
The following information relates to the farming partnership for the 2022 year of assessment:
Livestock details
Opening stock
– At standard value 50 000
– At market value 250 000
Closing stock
– At standard value 65 000
– At market value 340 000
Purchases
– 100 head at R9 500 each (note 1) 950 000
Sales 1 689 000
Donations to charity
– At standard value 640
– At market value 10 000
– At estimated cost 3 000
Used for labourers rations
– At standard value 740
– At market value 11 000
– At estimated cost 4 000
Consumed by Bill and Rusty Barnes (note 2)
– At standard value 720
– At market value 66 000
Expenses incurred in connection with their livestock including cattle feed and
veterinary expenses 209 000
Other farming activities have resulted in a net profit to the partnership of R38 000.
The partnership’s net profit from plantation farming (note 3) is R40 000.
Notes
1. Purchases of livestock by the partnership include 30 cows that were purchased to replace those
sold due to a government livestock reduction scheme during the 2019 year of assessment. This
sale inflated the partnership’s taxable income in the 2019 year of assessment by R150 000.
2. The consumption of livestock by Bill and Rusty Barnes consisted of six oxen purchased during
the 2022 year of assessment. They each ‘consumed’ three oxen.
3. This is the first year that plantations have been sold by the partnership. It commenced
plantation farming three years ago. This is the first year that it has made a profit from these
operations.
Rusty Barnes
Rusty Barnes is 35 years old. He recently found out that it is possible to be subject to normal tax on
the so-called average basis. As a result, he made the election under paragraph 19(5) of the First
Schedule in the 2022 year of assessment.
326 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Local interest of R23 500 accrued to Rusty Barnes during the 2022 year of assessment (R22 000
accrued during the 2021 year of assessment). This local interest is not from a ‘tax free investment’.
He had no other receipts or accruals in all the years of assessment applicable in this question.
Bill Barnes
Bill Barnes, a resident of the Republic, attained the age of 65 years on 30 June 2021. As a result of
his farming activities, he had served as a director of the Berg Agricultural Co-Operative Society.
He retired from this position when he attained the age of 65 years. A lump sum of R552 000
accrued to him from its pension fund. He had joined it as a member 30 years ago. His directors’
fees from this co-operative society were R10 000 a month. He contributed 4% of his directors’ fees
to this pension fund. He has never belonged to another retirement fund.
During the 2022 year of assessment Bill Barnes paid R7 015 in ‘qualifying medical expenses’.
Being aware that there is a special tax concession available on account of Bill Barnes having
participated in a government livestock reduction scheme (see note 1 above), he made the election
under paragraph 13 of the First Schedule in the 2019 year of assessment.
Bill Barnes has not made the election to be subject to normal tax under paragraph 19(5).
You are required to determine
1. Rusty Barnes’s normal tax liability for the 2022 year of assessment, and
2. Bill Barnes’s normal tax liability for the 2022 year of assessment.
Details of Les Land’s taxable income since the 2017 year of assessment follow:
Year of Farming Non- Total
assessment farming
2017 150 000 10 000 160 000
2018 -10 000 14 000 4 000
2019 -40 000 48 000 8 000
2020 200 000 16 000 216 000
2021 175 000 20 000 195 000
You are required to determine Les Land’s 2022 normal tax liability.
Fred Forbes
Due to drought conditions, Fred Forbes was forced to sell his entire herd of dairy cattle (60 cows)
during January 2020. This forced sale inflated his gross income by R606 000, resulting in him
having a taxable income of R686 000 for the 2020 year of assessment.
Fred Forbes carried on restricted farming activities during the 2021 year of assessment, and his
taxable income of R100 000, consisted of local interest and a small profit from general farming
activities.
On 1 April 2021 Fred Forbes again obtained a ‘quota’ from the Dairy Co-Operative Society to
supply milk to it. He immediately purchased an entire dairy herd from Shakes Parkinson, another
farmer, who had retired from farming operations due to poor health. The entire herd, consisting of
70 cows and 10 bulls, was purchased by him for R966 000. The price of each cow was R10 500.
Fred Forbes’s receipts and accruals for the 2022 year of assessment were as follows:
General farming expenses (all deductible in the determination of his farming taxable
income) 105 000
Livestock purchases (as detailed above) 966 000
Farming development expenditure 25 500
Fred Forbes is 40 years old. He is a resident of the Republic. He does not have life insurance or
medical-scheme membership and he has not paid ‘qualifying medical expenses’ over the past three
years of assessment.
Fred Forbes has not as yet made the election to be subject to normal tax on the so-called average
basis under paragraph 19(5) of the First Schedule. And he is not going to make the election for the
2022 year of assessment.
The elected standard value for a bull is R50 and for a cow it is R40.
You are required to establish if Fred Forbes should take up the option that is available to him under
paragraph 13. Assume that current legislation and rates were applicable in the 2021 and 2020 years
of assessment.
328 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Grain sales (local of R617 000 and Zambian of R22 500) 639 500
Sales of livestock
– 20 cows at R9 900 each 198 000
– 300 sheep at R1 200 each (note 3) 360 000
Local interest accrued from the Land and Agricultural Bank of South Africa (note 3) 12 782
Deductible in the determination of his farming taxable income operating expenses 574 600
(note 4)
Cost of erecting a new cottage (small house) for his farm manager and his farm
manager’s wife 372 000
Value of products grown on the farm and given as rations to his labourers
– At cost price 12 580
– At market value 14 515
Donation of two cows to the local church fête – at cost (2 × R11 100) 22 200
Cost of repairing fences 1 485
Purchase of livestock – 10 cows at R10 200 each 102 000
Prevention of soil erosion expenses incurred 2 815
Cost of new borehole 11 640
Cost of water storage dam 13 600
Purchase of a printer for his farm office on 1 December 2021 1 920
Purchase of a new tractor on 1 July 2021 144 000
Expenses incurred in marketing grain in Zambia 4 800
Sale of timber 78 000
Felling and maintenance expenses incurred 6 000
Stumping and land clearing expenses incurred 2 000
Cost of replanting the trees 5 000
Annuity from a testamentary trust that accrued to him 6 000
Local interest from a non tax free fixed deposit investment that accrued to him 15 018
‘Qualifying medical expenses’ paid by him that were not recovered from
his medical scheme 33 060
Contribution to a medical scheme (solely his membership) 17 376
Life assurance premiums paid on his own life 2 520
Value of home-grown produce consumed by him
– At cost price 7 608
– At market value 11 412
FARMERS 329
Notes
1. Gerry Herd’s livestock on hand at 28 February 2022 consisted of 60 cows, eight calves and one
bull. The eight calves were born during the 2022 year of assessment. The relative values
applicable to his livestock are as follows:
Livestock category Standard value Market value
Cow R40 12 800
Calf R4 3 600
Bull R50 24 000
Sheep – rams and ewes R6 1 350
2. Gerry Herd’s taxable income from farming during the previous five years of assessment was as
follows:
Year of assessment General farming Plantation farming Total farming
2017 120 000 10 000 130 000
2018 113 000 -400 112 600
2019 127 300 – 127 300
2020 116 500 -600 115 900
2021 132 100 3 600 135 700
He has not as yet elected to be subjected to normal tax under the so-called averaging
provisions of paragraph 19(5) of the First Schedule, but he is at present considering the option.
3. Gerry Herd invested R360 000 from the sale of his 300 sheep in an investment that is not a tax
free investment with the Land and Agricultural Bank of South Africa. He had been forced to
sell them due to the severe drought conditions that had prevailed at the time.
Gerry Herd received the following statement from it:
1 September 2021: Deposit 360 000
Add local interest earned at 9% 8 100
368 100
30 November 2021: Withdrawal of capital 160 000
208 100
Add local interest earned at 9% 4 682
Balance at 28 February 2022 212 782
4. Gerry Herd’s farm manager’s wife is employed by him as the farm’s typist. Both her salary
and that of her husband are included in the operating expenses total of R574 600 that is
deductible in the determination of his farming taxable income. He has, over the years, now
erected a total of seven houses that are occupied by his employees.
5. A wear-and-tear or depreciation capital allowance, determined over a five-year period, is
deductible in the determination of Gerry Herd’s farming taxable income for all equipment
qualifying for it.
You are required to
1. determine the normal tax liability of Gerry Herd for the 2022 year of assessment on the basis
that he does not make the paragraph 19(5) election,
2. determine his normal tax liability for the 2022 year of assessment on the basis that he does
make the paragraph 19(5) election, and
3. advise him whether he should make the election.
330 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Although Hamish Hogg did a physical stock count of his pigs on hand on 28 February 2022, a
large male pig ate his stock sheets. The closing stock number of pigs will therefore have to be
determined from the birth, death, purchase, sale, consumption and maturity details as set out
above.
3. Hamish Hogg borrowed funds from the Land and Agricultural Bank of South Africa to help
finance the purchase of the older pigs. The Government awarded him a subsidy towards the
interest that he had incurred on this loan.
4. Veterinary expenses of R22 000 include R2 000 for an operation to his polo pony. The pony (a
type of horse) is used by Hamish Hogg when he plays polo (a game played by teams on
horseback, with players using long-handled mallets to drive a wooden ball into a goal). The
balance of the expenditure was for the pigs.
5. Hamish Hogg’s pig food on hand on 28 February 2022 was R6 400 (at cost). And he had no
pig feed on hand on 28 February 2021.
6. Hamish Hogg is a member of a medical scheme. He is the sole contributor to it. (He does not
have an employer.) Medical cover is provided for his wife, their two minor children and
himself.
7. Many years ago Hamish Hogg built a house on the farm for an employee (the foreman) at a
cost of R250 000. The employee resigned on 1 April 2021. He let the house to a non-employee
from 1 May 2021 at a market-related rental of R4 500 a month. He incurred deductible
expenses of R5 000 in producing these rentals.
8. The balance of Hamish Hogg’s capital development expenditure brought forward from the
2021 year of assessment is R151 700.
Twenty years ago Hamish Hogg exercised the option to be subjected to normal tax under
paragraph 19 of the First Schedule.
Hamish Hogg’s taxable income (or loss) from farming for the past five years of assessment (after
the adjustment was made for the 900 older pigs purchased) was as follows:
Year of Farming taxable
assessment income or loss
2021 -21 000
2020 396 000
2019 175 000
2018 150 000
2017 90 000
You are required to determine Hamish Hogg’s normal tax liability for the 2022 year of assessment.
The following particulars relate to Timba Sensible’s plantation farming activities for the 2022 year
of assessment:
Wattle Gum Pine
Gross proceeds from the sale of forest produce 140 000 787 500 1 406 425
The following expenses were incurred:
– Purchase of new trees 125 000 185 000
– Selling and distribution costs 8 900 6 725 28 000
– Maintenance costs 20 000 12 800 –
Timba Sensible purchased the gum plantation on 1 August 2021 together with the land on which it
was growing for R1 200 000. The purchase price of the plantation was R900 000.
On 1 October 2021 a fire ravaged part of Timba Sensible’s pine plantation. He therefore felled and
milled more timber than planned. Included in his gross proceeds from the sale of the forest produce
from the pine plantation of R1 406 425 (see above), is R515 000 being the amount he obtained
from the sale of the burnt pine trees. He had not planned to cut and mill these burnt pine trees until
the 2023 year of assessment.
A tractor that had originally been purchased by Timba Sensible for R200 000 nine years ago was
traded-in on the purchase of a new tractor. A trade in price of R150 000 was obtained by him.
The new tractor was purchased by Timba Sensible for R600 000 on 31 August 2021. It was brought
into use on the 1 September 2021.
In the 2021 year of assessment, Timba Sensible incurred capital development expenditure of
R260 000 on constructing a bridge to be used in his farming operations.
Timba Sensible’s other receipts and accruals for the 2022 year of assessment were as follows:
• Net rentals from a rent-producing property of R270 000.
• Local interest from investments of R64 500. None of these investments is a ‘tax free
investment’.
• And local dividends of R122 500.
This is the first year of assessment that Timba Sensible has earned net rentals. In February 2021
Maple Cedar (nèe Sensible), his sister died at the age of 71 years. She bequeathed her home to him.
He then used her home as a rent-producing property investment.
Other non-farming amounts that are deductible in the determination of Timba Sensible’s taxable
income for the 2022 year of assessment is R25 000.
Timba Sensible’s taxable income for the preceding five years of assessment was made up as
follows:
Year of Taxable Plantation Non-
assessment income farming farming
2021 -75 000 -180 000 105 000
2020 60 000 – 60 000
2019 137 500 70 000 67 500
2018 390 000 337 500 52 500
2017 270 000 225 000 45 000
Timba Sensible has not made the election to be subject to normal tax on the so-called average basis
under paragraph 19(5).
You are required to determine Timba Sensible’s normal tax liability for the 2022 year of assessment.
FARMERS 333
2. On 28 February 2022 Chez Lounge had a market value of R200 000. Her standard value was
R30.
Bob Brood has a non-farming taxable income of R180 000 for the 2022 year of assessment. He has
not made the election to be subject to normal tax under the provisions of paragraph 19(5) of the
First Schedule and he is not going to make it in the 2022 year of assessment. He is 66 years old.
You are required to determine the resulting normal tax implications arising from the transactions
that took place, in each of the above parts, for the 2022 year of assessment. Also determine Bob
Brood’s normal tax liability for the 2022 year of assessment.
requirements in the last week of his year of assessment. Sale figures recorded by the co-operative
confirm that these dates are popular for farmers making purchases.
Billy Goat has been farming in the Overberg district for a number of years. His year of assessment
ends on the last day of February. He carries on both dairy and general farming activities.
On 28 February 2022 he purchased the following items from the Overberg Farmers’ Co-Operative
Society at its ‘February-year-end’ sale:
• Fuel.
• Fertiliser.
• Veterinary products.
• First-aid kits and medicines.
• Blankets.
• Cattle feed – unprocessed (raw produce).
• Cattle feed – processed.
• Irrigation equipment.
• Day-old chickens.
• Pecan nut trees.
• School stationery.
• Overalls and farm clothing.
The fuel is to be used by Billy Goat for his farm tractors (he has three of them) and for his
generator.
The fertilizer is to be used by Billy Goat to make his farm land more fertile to improve the
production of his crops. His crops are used mainly as cattle feed for his dairy herd.
The veterinary products are to be used by Billy Goat almost exclusively for his dairy herd. He is a
polo player (a person who plays polo). He keeps three polo ponies on the farm with the result that a
portion of the veterinary products could be used for these polo ponies.
The first-aid kits and medicines are used by Billy Goat to treat his unwell farm labourers (and their
families who reside on the farm).
For a number of years Billy Goat has purchased blankets on the co-operative sale. He then ‘on-
sells’ them to his employees at cost. If an individual farm labourer were to purchase a single
blanket from the co-operative it would cost him more than the price Billy Goat charges for the
blanket. His intention when buying the blankets is to assist his farm labourers by ensuring that they
will also be able to buy blankets relatively cheaply.
The day-old chickens are ‘fattened-up’ by Billy Goat and then, when they are at an edible weight,
he gives them to his farm labourers as part of their rations. His family and himself consume, on
average, one ‘fattened’ chicken a week.
The Overberg district is suitable for pecan nut farming. At the co-operative sale Billy Goat
purchased 500 young pecan nut trees. He had prepared an area on his farm for a pecan-nut orchid.
And the young pecan nut trees were planted in the orchid in the autumn (two months after they had
been purchased). He had read that this was the suitable time for them to be planted.
A building on Billy Goat’s farm has always been used as a school for his farm labourers’ children.
His wife teaches at this school on a voluntary basis one day a week. The school stationery
purchased by him at the co-operative sale was donated (given) by him to the school principal (a
farm labourer’s wife) one week after the sale.
Of the overalls purchased by Billy Goat, one will be worn exclusively by him. And of the farm
clothing purchased by him, five khaki shirts and five khaki longs will be worn exclusively by him.
All the remaining overalls and farm clothing will be distributed to his farm labourers for their use.
338 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Some farmers in the Overberg district have recently had their tax affairs investigated by the South
African Revenue Service. Billy Goat is therefore anxious that his tax affairs are in order and has
approached you in this regard.
Billy Goat would like to know the normal tax consequences of the purchases he made at the co-
operative sale. He also needs to know whether any of the items purchased need to be included in
the value of his closing stock. He is also concerned with the normal tax implications that arise from
himself and members of his family
• using the generated electricity for private purposes,
• being administered by some of the contents of the first-aid kit,
• consuming the now ‘fattened’ chickens,
• using some of the school stationery, and
• wearing the overalls and farm clothing.
You are required to draft a report to Billy Goat setting out the required answers to his requests.
CHAPTER 16
FRINGE BENEFITS
339
340 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
own house. This house cost her R9 950 in expenses each month to maintain. It could let her
furnished flat at a rental of R1 850 a night.
• Ivan Hand is employed as a farm hand by a local farmer. He is provided free of charge with a
furnished bachelor flat on the farm. The flat consists of three rooms. Fuel and power are also
provided to him free of charge. His remuneration proxy is R107 300. Prior to becoming a farm
hand, he had lived at home with his parents. The board and lodging he paid to his parents was
R3 000 a month. The bachelor flat on the farm could be let at a rental of R2 500 a month.
• Steven Rancher is employed as a farm manager by a local farmer. He is provided free of charge
with a furnished cottage on the farm. It consists of five rooms. Fuel and power are also provided
free of charge. His remuneration proxy is R96 000. He used to have his own farm. He has
estimated that the cost of maintaining his own home on his farm was R18 350 a month. The
farm cottage could be let at a rental of R2 800 a month.
• Piet Plant is employed as a foreman by a local manufacturer. He is provided free of charge with
a house. It consists of 10 rooms. It comes without furniture and without fuel and power. His
remuneration proxy is R192 000. Before becoming an employee of the local manufacturer, he
used to stay at a residential hotel paying R5 400 a month. The house he occupies at present
could be let at a rental of R7 500 a month.
• Trevor Shift is employed as a foreman by a local manufacturer. He is provided free of charge
with a house. It consists of 10 rooms. It comes with furniture but without fuel and power. His
remuneration proxy is R144 000. Before becoming an employee of the local manufacturer, he
used to lease a flat at a rental of R4 675 a month. The house he occupies at present could be let
at a rental of R8 600 a month.
• Abel Worker is employed as a foreman by a local manufacturer. He is provided free of charge with
a house. It consists of 10 rooms. It comes with furniture and with fuel and power. His remuneration
proxy is R240 000. Before becoming an employee of the local manufacturer, he used to be a
student. He had lived at home with his parents where he had not been required to pay board or
lodging. The house he occupies at present could be let at a rental of R8 000 a month.
• Hugh Boss is employed as the managing director of a local manufacturer. He is provided free of
charge with a house. It consists of 15 rooms. It comes with furniture and with fuel and power.
His remuneration proxy is R1 800 000. The house he occupies at present could be let at a rental
of R15 000 a month. Prior to becoming an employee of the local manufacturer, he owned his
own house. It cost him R39 800 in expenses each month to maintain.
• Royal Brick Pavings Limited purchased a plot of land for R90 000. It then erected on it a two-
bedroomed house at a cost of R300 000. On its completion, on 1 September 2021, it sold this
house (land and buildings) to Roan Bergandal, one of its employees, for its cost of R390 000
(R90 000 plus R300 000), despite its current market value being R425 000. His ‘remuneration
proxy’ is R240 000.
• Royal Brick Pavings Limited purchased a plot of land for R100 000. It then erected on it a three-
bedroomed house at a cost of R330 000. On its completion, on 1 September 2021, it sold this
house (land and buildings) to Matt De Hoop, one of its employees, for its cost of R430 000
(R100 000 plus R330 000), despite its current market value being R450 000. His ‘remuneration
proxy’ is R312 000.
• Royal Brick Pavings Limited purchased a plot of land for R110 000. It then erected on it a four-
bedroomed house at a cost of R400 000. On its completion, on 1 September 2021, it sold this
house (land and buildings) to Montrose Grey, one of its employees, for its cost of R510 000
(R110 000 plus R400 000), despite its current market value being R550 000. Her ‘remuneration
proxy’ is R180 000.
• Royal Brick Pavings Limited purchased a plot of land for R80 000. It then erected on it a one-
bedroomed house at a cost of R180 000. On its completion, on 1 September 2021, it sold this
342 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
house (land and buildings) to Coral Travertine, one of its employees, for its cost of R260 000
(R80 000 plus R180 000), despite its current market value being R240 000. Her ‘remuneration
proxy’ is R250 000.
• Royal Brick Pavings Limited purchased a plot of land for R250 000. It then erected on it a five-
bedroomed house at a cost of R750 000. On its completion, on 1 September 2021, it gave the
use of this house (land and buildings) rent-free to Nala Wolkberg, the foreman employed by it at
its Sandstone Quarry. It was provided unfurnished. But Royal Brick Pavings Limited pays for
the cost of electricity and water (power or fuel) relating to it. Had Royal Brick Pavings Limited
sold this house (land and buildings) it would have sold for R1 200 000. His ‘remuneration
proxy’ is R1 887 300. Due to the situation of this house, not far from the quarry, and in an urban
area, if it was not occupied by him, Royal Brick Pavings Limited would have found it difficult
to find a suitable tenant to whom it could be let. It is likely that if Royal Brick Pavings Limited
were to let it, a rental of R15 000 a month for it would be its market-related rental.
• Royal Brick Pavings Limited purchased a plot of land for R75 000. It then erected on it a one-
bedroomed house at a cost of R225 000. It has a total of five rooms. On its completion, on
1 September 2021, it gave the use of this house (land and buildings) rent-free to Opal Agate, the
tea maker employed by it at its Sandstone Quarry. It was provided unfurnished. But Royal
Mining Limited pays for the cost of electricity and water (power or fuel) relating to it. Had
Royal Brick Pavings Limited sold it, it would have sold for R330 000. Her ‘remuneration proxy’
is R128 300. Due to the situation of this house, not far from the quarry, and in an urban area, if it
was not occupied by her, Royal Brick Pavings Limited would find it difficult to have found a
suitable tenant to whom it could be let. It is likely that if it were to let this house, a rental of
R2 000 a month for it would be its market-related rental.
• Redwood Brown commenced working for Royal Brick Pavings Limited on 1 December 2021.
He earns a cash salary from it of R18 000 a month. He also enjoys a housing benefit from it. But
since it did not have accommodation available for him, it then leased a furnished bachelor flat,
consisting of three rooms, situated on a nearby farm at a rental of R4 500 a month. The farmer
pays the cost of electricity and water (power or fuel).
You are required to determine the amount to be included in each taxpayer’s gross income for the
benefits of accommodation that were provided.
The arrangement was recorded in the journal of Transformer (Pty) Limited as follows:
On 1 March 2021 he purchased a motor car for R805 000 (R700 000 plus value-added tax of
R105 000). His actual expenses incurred on this motor car for the 2022 year of assessment were as
follows:
License 900
Insurance 27 000
Tracker security costs 3 000
Maintenance 18 000
Fuel (petrol and oil) 149 100
198 000
During the 2022 year of assessment Austin Bentley travelled a total of 39 000 kilometres in this
motor car. He has kept accurate data of his private travelling and can prove that his private
travelling for the 2022 year of assessment was 9 750 kilometres.
The Commissioner has confirmed that he will allow Austin Bentley to deduct travel expenses
against his travel allowance on one of the follow two methods:
• Actual kilometres with actual costs.
• Actual kilometres with deemed costs.
Austin Bentley will elect the method that is the most tax efficient to him in the 2022 year of
assessment.
Low-interest loan
On 1 March 2021, Austin Bentley borrowed R120 000 for domestic purposes from Walter Horace
(Pty) Limited at an interest rate of 3%. The loan, together with interest due on it, is repayable in
three equal instalments, on 30 June 2021 on 30 October 2021, and on 28 February 2022. (Assume
that the relevant ‘official rate of interest’ is 4,5%. And the relevant factor is XYZ.)
Residential accommodation
Austin Bentley enjoys the free use of a four-bedroomed house purchased by Walter Horace (Pty)
Limited for R1 960 000 for himself and his family. The mortgage bond instalments incurred by his
employer during the 2022 year of assessment were R172 800 (interest of R160 000 and capital
repaid of R12 800). All water and electricity costs are settled by Walter Horace (Pty) Limited in
full. These costs were R43 200 for the 2022 year of assessment. Walter Horace (Pty) Limited spent
R124 000 on appliances and furniture for the house.
Austin Bentley enjoyed a ‘once-off ’ allowance of R30 000 on 1 March 2021 from his employer to
enable him to purchase certain additional ‘soft furnishings’ (curtaining and linen) for this house.
These items are his property.
Austin Bentley’s remuneration proxy is R540 000.
Telephone benefits
Walter Horace (Pty) Limited settles his monthly home telephone account. During the 2022 year of
assessment it paid R18 600 (incurred evenly over the year). He has estimated that 60% of his home
telephone account is for business calls.
Austin Bentley also has the free use of a cellular phone owned by Walter Horace (Pty) Limited.
Rental and call expenses incurred by it during the 2022 year of assessment were R14 400. These
expenses were incurred evenly over the year. Although he uses his cellular phone for private
purposes, it does not charge him for these private calls, since his private use of this cellular phone is
incidental to his business use of it.
You are required to determine the taxable portion of the above fringe benefits to be included in
Austin Bentley’s taxable income.
FRINGE BENEFITS 345
Austin Morris
Austin Morris is entitled to the exclusive use of a motor car that cost Antonoi Max CC, his
employer, R372 600 inclusive of value-added tax at 15% when it was purchased on 1 March 2021.
Although he is allowed to use it for private purposes, he is required to replenish the fuel on a
Monday morning at his own expense to cover the cost of his private use of it. He does not pay for
other expenses for it. Costs incurred for it for the 2022 year of assessment are as follows:
Expenses Antonoi Austin
Max CC Morris
Fuel and oil 88 400 54 000
Repairs and maintenance 42 400 –
Insurance and licences 23 200 –
Other costs 1 000 –
155 000 54 000
Austin Morris travelled a total of 36 000 kilometres in this car during the 2022 year of assessment.
Of these 36 000 kilometres he travelled in it, 12 000 kilometres were for his private use.
Antonoi Max CC deducted a wear-and-tear or depreciation capital allowance of R74 520 on this
motor car in the determination of its taxable income for its 2022 year of assessment, determined on
a five-year write-off period.
Roland Royce
Roland Royce, the managing director of the Purple Cow group of companies, is provided with the
full-time free use of a motor car that cost Pierre Limited, his employer R1 288 000 inclusive of value-
added tax at 15%. A chauffeur comes with the car and drives him and his wife, Rosemary, wherever
they wish to go. (He cannot remember when he last drove a motor car.) The cost to Pierre Limited of
maintaining and running this motor car is R336 000 a year. This excludes the salary of the chauffeur,
who earns an annual salary of R99 000. The chauffer has estimated that he drives the Royces in it on
‘private’ trips for 13 200 kilometres out of the 33 000 total kilometres travelled in it.
Maxine Leyland
Lewis Limited, Maxine Leyland’s employer, has provided her with a motor car that cost it
R351 900 inclusive of value-added tax at 15% on 1 March 2021. She enjoys the exclusive use of it.
She is allowed to take it home each night and over weekends. She does not have to pay for petrol or
oil, but is required to pay the full cost of its maintenance.
Details of its capital allowance and expenses for the motor car that Maxine Leyland has the use of
for the 2022 year of assessment are as follows:
month. Its ‘determined value’ is R207 000. He has kept all dockets, and details of expenses, that he
incurred during the 2022 year of assessment for it. He has prepared the following summary:
Lease rentals paid 82 800
Petrol and oil account – total for the year 96 600
Repairs and maintenance 6 670
New tyres 4 140
Licences 690
Insurance premiums paid 12 420
Fines 1 380
Parking costs 1 242
205 942
Estcourt Ford has kept a record of the kilometres the motor car has travelled during the year and of
the nature of each trip undertaken. His records reveal the following:
• Business use of it was 17 500 kilometres, or 70%, and
• private use of it was 7 500 kilometres, or 30%.
Sharon Fox
Sharon Fox, aged 36 years, and a resident of the Republic, was recently promoted by Nikita (Pty)
Limited, her employer to a more senior position. She now enjoys a motor car as a benefit included in
her employment contract. Nikita (Pty) Limited has asked her to choose between a motor car supplied
by it or a travel allowance.
The motor car that Sharon Fox has selected has a cost of R603 750 (R525 000 and value-added tax
at 15% of R78 750).
Sharon Fox’s actual expenses for the year will be as follows:
Lease rental – based on a three-year lease period (R19 780 a month) 237 360
(A yield to maturity of 0,96239% applies to this monthly accrual period.)
Licences and insurance (a year) 37 245
Fuel (a year) 89 700
Maintenance (a year) 18 400
Total actual expenses for the year 382 705
Sharon Fox’s travelling during the year of assessment will be as follows:
Business kilometres 27 000
Private kilometres 9 000
Total kilometres 36 000
Sharon Fox has confirmed that she will keep a detailed logbook recording all her travelling. She
will also keep detailed cost records.
Sharon Fox’s employment benefit is either
• a travel allowance of R32 000 a month, or
• the total free use of a motor car given to her by her employer (that is, her employer will pay all
the expenses including the running costs of the motor car).
If Sharon Fox selects the travel allowance she will then lease the motor car. But if she decides on
the free use of the motor car, then Nikita (Pty) Limited will lease the motor car.
Sharon Fox expects to have a taxable income of R1 656 600 for the 2022 year of assessment. This
R1 656 600 excludes the taxable income that will result from the motor car benefit.
Under both options the motor car does not become Sharon Fox’s property at the end of the three-
year period.
You are required to determine in each of the above situations the amount to be included in the
employee’s gross income for the 2022 year of assessment. And for Sharon Fox, inform her which
348 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
option she should choose. (Assume that she enjoys the motor car benefit from 1 March 2022 and
that the 2022 tax legislation and rates remain unchanged in the 2023 year of assessment.)
Your comments on the normal tax consequences of the remuneration package being offered to David
Samuels by Sellmore (Pty) Limited are needed. Details of this remuneration package are as follows:
• A cash salary of R12 000 a month.
• Membership of Sellmore (Pty) Limited’s ‘non-contributory’ medical scheme. The monthly
contribution to the medical scheme by it for his membership will be R1 500. He will not
contribute to this medical scheme.
• The free use of a motor car that was acquired by Sellmore (Pty) Limited 15 months earlier at a
cost of R218 500 (R190 000 plus value-added tax at 15% of R28 500). It was used for the past
15 months by another employee (its previous advertising consultant) who has since left its
employment and emigrated. All fuel and maintenance costs are borne by it. This motor car will
be used by him for business purposes to the extent of 20% of its total usage.
• A reimbursive entertainment allowance. His position will require him to entertain Sellmore (Pty)
Limited’s clients on a regular basis on its behalf. Entertainment expenses incurred by him will be
reimbursed to him by it on a monthly basis. He will be required to submit to it a claim form
together with proof of the expenditure he has incurred.
• Sellmore (Pty) Limited will pay his annual subscription of R2 400 for his membership of the
‘Institute of Marketers’. It is a condition of his employment that he belongs to the ‘Institute of
Marketers’.
• Should he achieve targets set by Sellmore (Pty) Limited, he will be eligible to participate in its
share scheme. Under the rules of this share scheme, ‘qualifying’ employees are given an option
to purchase a specified number of shares at a price that is 20% less than the ruling market value
of the share on the date of purchase. The option is valid for six months from the date it is
granted. Once the option is exercised, an employee is prohibited from selling his shares for three
years from the date of exercising his option. Should an employee resign, retire, die or otherwise
leave its employment he will be obliged to sell his shares (at the ruling market value) on the date
that his employment terminates.
• The free use of a four-bedroomed house purchased by Sellmore (Pty) Limited for R1 920 000 for
the person employed as its advertising consultant. The mortgage bond instalments that will be
incurred by it during the 2022 year of assessment are likely to be R172 800 (interest of
R160 000 and a capital repayment of R12 800). Water and electricity costs will be settled in full
by it. These costs have been estimated at R61 600 for the 2022 year of assessment. It incurred
R124 000 on appliances and furniture for this house. He will be given a ‘once-off ’ allowance of
R90 000 to enable him to purchase certain additional ‘soft furnishings’ (curtaining and linen).
• Sellmore (Pty) Limited will settle his monthly home telephone account subject to a maximum
limit of R620 a month. It has been estimated that 60% of his home telephone account will be for
business phone calls.
• He will also be given the free use of a cellular phone owned by Sellmore (Pty) Limited. Rental
and call expenses will be incurred by it, but are subject to a maximum limit of R380 a month.
Although he will be able to use this cellular phone for private purposes, it will not charge him
for these private calls since his private use of it will be incidental to the business use of it.
• He will be given the free use of Sellmore (Pty) Limited’s holiday accommodation. He is entitled
to enjoy a seven-day stay at this holiday accommodation during each year. If it is not using this
holiday accommodation for its own employees, it is let to non-employees at a daily rate of R500
per person. (Only six people may stay in this holiday accommodation at one time.)
You are required to prepare a report to David Samuels setting out the normal tax consequences that
arise out of each of the benefits contained in the remuneration package being offered to him (as
detailed above).
350 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
repayable in 10 years’ time, and bearing interest at the prime overdraft rate. The interest charge
was, however, limited to the dividends awarded on her 10 000 shares each year. The prime
overdraft rate for the relevant period was 9%. Local dividends of R1 500 accrued to her from her
10 000 shares in it. (Assume that the relevant ‘official rate of interest’ is 4,5%.)
• Since she sometimes carries out NNC Television Limited’s work from her home, it purchased a
personal computer to be kept at her home, and solely for her use. She has estimated that she uses
this computer to the extent of 40% for its work. This personal computer cost it R12 000.
• So that she could access her work e-mails from her home, NNC Television Limited also
provided her with a communication service. This communication service cost it R225 a month.
She has enjoyed the benefit of this communication service since 1 December 2021. She has
estimated that she uses this communication service to the extent of 60% for its work.
Penny Smiles’s other receipts, accruals, contributions and expenses for the 2022 year of assessment
are as follows:
• Contributions of R750 a month to the NNC Television Limited’s medical scheme. On a rand-
for-rand basis, it contributes a like amount to this medical scheme as a result of her membership.
From her family, she is the sole member of this medical scheme. She also paid ‘qualifying
medical expenses’ of R25 515, being her share of the ‘qualifying medical expenses’ that she had
incurred.
• Local interest of R38 241 accrued to Penny Smiles from a savings investment account, not being
a ‘tax free investment’.
You are required to determine the 2022 taxable income of Penny Smiles.
of the house they have purchased. The hotel accommodation for two months will cost New
Horizons Limited R42 090 (R36 600 plus value-added tax at 15% of R5 490).
• Membership of a non-contributory medical scheme. It will pay the full monthly contribution
of R1 500 (R1 500 plus value-added tax of Rnil). George and Gwenyth Hope will be members
of this medical scheme.
• Payment of his annual subscription to a professional institute that he is required to be a
member of under his employment contract. The subscription is R2 070 (R1 800 plus value-
added tax at 15% of R270).
• An interest-free loan of R24 000 will be granted to him by it on 1 April 2022. He needs to
know the local legislation that applies to manufacturers. He will therefore have to enrol for a
professional qualification available on a correspondence basis by a university. The R24 000
from the loan will be used by him to settle the tuition fees of R20 000 for this qualification
and to purchase textbooks for R4 000. He is required to settle the loan at the rate of R2 000 a
month (this amount will be deducted from his ‘after-tax’ earnings by it). (Assume that the
relevant ‘official rate of interest’ is 4,5%.)
• A cell phone allowance of R1 000 a month will be awarded to him by it since he is expected
to use his personal cell phone for business purposes. He is likely to incur total expenditure of
R16 800 on his cell phone in the 2023 year of assessment. He has estimated that one-third of
the time that he will use his cell phone is likely to be for business purposes.
• The free use of a holiday cottage owned by it. Use of the holiday cottage has been allocated to
him for 10 days during December 2022. George and Gwenyth Hope are likely to enjoy a
vacation in it. If it is not used by an employee of New Horizons Limited, it is let to a non-
employee at a daily rate of R750. (A maximum limit of two adults and three children are
allowed to occupy the holiday cottage at any one time.)
You are required to draft a report to the human resources manager of New Horizons Limited
setting out
1. the normal tax implications for George Hope of the benefits listed above that will be granted to
him under his employment contract, and
2. the value-added tax implications for New Horizons Limited of providing these benefits.
Assume that the 2022 year of assessment legislation remains unchanged in the 2023 year of
assessment.
Fynbos-Geel R120 000 for Rustic Fynbos-Geel’s school fees. On 31 January 2022 it then credited
his fee account with R90 000.
Buff Fynbos-Geel’s ‘remuneration proxy’ as defined in section 1(1) of the Income Tax Act is
R390 000.
Rose Stormberg
Rose Stormberg is a full-time teacher employed by Country Manor College. Her 15-year-old
daughter, Montana Stormberg, commenced attending Flamingo Girls High from 20 January 2022.
It provides a qualification up to NQF level 4. On this day, Flamingo Girls High charged Rose
Stormberg R75 000 for Montana Stormberg’s school fees. On 31 January 2022 Country Manor
College awarded a R75 000 bursary to Rose Stormberg to pay for Montana Stormberg’s school fees
at Flamingo Girls High.
Montana Stormberg is a person with a disability as defined in section 6B(1).
Rose Stormberg’s ‘remuneration proxy’ is R270 000.
Opal Namaque
Opal Namaque is employed by Country Manor College on a full-time basis as its gardener. Her 11-
year-old daughter, Onyx Namaque, attends the Village Primary School (a recognised educational
institution). It provides a qualification up to NQF level 4. On 31 January 2022 Country Manor
College awarded Opal Namaque a bursary of R25 200 to help pay for Onyx Namaque’s school fees
at the Village Primary School.
Opal Namaque’s ‘remuneration proxy’ is R144 000.
Sapphire Wild
Sapphire Wild is employed by Country Manor College on a full-time basis as its chef. She is not
yet married, and does not have any children.
Country Manor College conducts a ‘bridging’ programme to help its pupils that come from
disadvantaged backgrounds.
Country Manor College then allowed Sapphire Wild to participate in this ‘bridging’ programme
since she desired to improve her education qualifications. It charges a fee of R25 000 for pupils
who participate in its ‘bridging’ programme.
On 31 January 2022, Country Manor College awarded Sapphire Wild a bursary of R25 000 so that
she could participate in its ‘bridging’ programme. Should she not complete this ‘bridging’
programme, she will be required to reimburse her employer (Country Manor College) for the
R25 000 bursary that it provided her with.
Sapphire Wild’s ‘remuneration proxy’ is R180 000.
You are required to state if the bursaries or benefits awarded to the full-time employees of Country
Manor College result in an amount being included in their incomes.
• A lump-sum gratuity of R96 000 from Crown Jewels (Pty) Limited as compensation for the loss
of his office. This amount accrued to him on 31 December 2021.
• R677 200 from Crown Jewels (Pty) Limited’s provident fund (he has been a member of the fund
since joining Crown Jewels (Pty) Limited). His contributions to the provident fund during his
membership were R160 200. His contributions to the provident fund of R160 200 include
R10 800 contributed in each of the 2017, 2018, 2019, 2020 and 2021 years of assessment and
R9 000 in the 2022 year of assessment. They are based solely on his monthly cash salary (see
below). Crown Jewels (Pty) Limited did not contribute to this provident fund. This amount
accrued to him on 21 January 2022.
• A wrist watch that had cost Crown Jewels (Pty) Limited R4 800 to manufacture, in appreciation
of his long service to it. The normal wholesale price of the wrist watch when it is sold to
jewellery retailers is R9 000. These retailers then sell their trading stock of wrist watches at a
50% mark up. This wrist watch was given to him on 31 December 2021.
For the past six years, Charles Royal had not taken salary increases, preferring to structure his
remuneration package in the form of fringe benefits.
Charles Royal’s other receipts, accruals and expenses for the 2022 year of assessment follow:
• A cash salary of R18 000 a month from Crown Jewels (Pty) Limited.
• The use of a motor car that cost Crown Jewels (Pty) Limited R372 600 (R324 000 cash price
plus value-added tax at 15% of R48 600). All maintenance costs were paid by it. He paid all fuel
costs for his private use of R3 600 a month. He travelled a total of 24 000 kilometres in it during
the 2022 year of assessment. Of these total kilometres travelled, 6 000 kilometres were for
business purposes. On his retirement, he ceased to have the use of this motor car.
• A 10-day holiday at a beach cottage owned by Crown Jewels (Pty) Limited. The accommodation
is let to non-employees at a rate of R150 a person a day. Charles Royal and his wife, Camilla
Royal, invited another couple who then joined them at the beach cottage for 10 days.
• Crown Jewels (Pty) Limited pays 25% of his monthly home telephone account. The total
amount it paid during the 2022 year of assessment was R2 250. He paid the balance of this
account each month. He is required to make the occasional business call from his home.
• A loan from Crown Jewels (Pty) Limited of R360 000 at an interest rate of 2,5% a year. The
R360 000 from this loan was used by him to purchase a flat. The flat has been let by Charles
Royal to tenants for the entire year of assessment at a monthly rental of R11 600. On his
retirement, he was required to repay his loan from Crown Jewels (Pty) Limited. He did this by
using funds that he had obtained of a mortgage bond that he had taken out on the flat. Interest
incurred by him on the mortgage bond for January and February 2022 was R18 000 in total.
(Assume that the relevant ‘official rate of interest’ is 4,5%.)
• Charles Royal ‘invested’ R18 000 of his retirement lump sums in a retirement annuity fund on
1 February 2022. The R18 000 was treated by it as a current contribution in the form of a
‘single’ premium.
• Local interest of R36 236 from a 32-day-call account. It is not a ‘tax free investment’. He
invested the balance of his retirement lump sums (after making the R18 000 contribution to the
retirement annuity fund) in this call account pending a decision on how best to invest it on a
long-term basis.
Charles Royal’s wife, Camilla Royal, retired during the previous year of assessment at the age of
55 years. Since her monthly pension of R9 500 was insufficient for her needs, she worked from
1 March 2021 as a receptionist at a doctor’s practice. She works mornings only, Mondays to
Fridays inclusive, from eight to one, and earns a salary of R13 600 a month. She also enjoys a
uniform allowance of R500 a month from the doctor’s practice to enable her to purchase the white
‘nurses’ uniform she is required to wear at work.
356 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
During the 2022 year of assessment, Camilla Royal inherited R60 000 from a late uncle. She
invested this inheritance in a local interest-bearing security, not being a ‘tax free investment’. It
earned her local interest of R4 800 during the 2022 year of assessment.
You are required to determine the normal tax liabilities for the 2022 year of assessment of Charles
Royal and Camilla Royal.
that his estimates of R17 024 and R12 413 respectively are accurate.
• Five years ago, when he was 50 years old, he had joined the deferred compensation scheme run
by Casa Nova Designs. He forfeited a salary notch increase to join the scheme. Its deferred
compensation scheme provides for two ‘golden handshake’ awards to be made to retiring
employees, the first being awarded five years before retirement when the employee attains the
age of 55 years, and the second on retirement, at the age of 60 years. He received his first
‘golden handshake’ award during the 2022 year of assessment of R150 000.
You are required to determine Donovan Jayson’s 2022 taxable income that arises out of his
earnings from Casa Nova Designs.
Fuel and maintenance expenses of all three motor vehicles are borne by Buildam (Pty) Limited.
• The free use of two residences. For his site visits in Empangeni, he is provided with a furnished
garden flat (consisting of four rooms) that Buildam (Pty) Limited hires at a rental of R3 000 a
month. All electricity and water costs are borne by it. These costs were R23 040 during the 2022
year of assessment. Delia Waters, their three minor children and himself are provided with an
unfurnished four-bedroomed residence in Umhlanga Rocks. He joins her and their children in
Umhlanga Rocks on his return from his site visits. Buildam (Pty) Limited pays a monthly rental
of R15 000 for this residence. He is obliged to bear all the electricity and water expenses of his
Umhlanga Rocks residence. These costs were R100 400 in the 2022 year of assessment.
• A subsistence allowance of R425 a day for each day spent at the construction site. The
subsistence allowance is paid to him to cover the cost of meals and other incidental costs while
he is working at the construction site. For the 2022 year of assessment he enjoyed a total
subsistence allowance of R51 000 (being 120 days at R425 a day). He has kept no detailed
records of his expenditure in this regard.
• The free use of a cellular phone that Buildam (Pty) Limited purchased on 1 June 2021 for
R2 760 (R2 400 plus value-added tax at 15% of R360). Rental and call expenses incurred by it
during the 2022 year of assessment were R8 100. These expenses were incurred evenly during
the nine-month period. Although he makes the occasional private call, it does not charge him for
these private calls since his private use is incidental to the business use of the cellular phone.
• On 1 January 2022 Buildam (Pty) Limited paid his annual subscription of R6 800 to the South
African Institute of Engineers. It is a condition of his employment that he belongs to this
professional body to enable to sign the necessary certificates issued by it.
• He was given the free use of Buildam (Pty) Limited’s luxury holiday cottage near the Umfolozi
game reserve. Delia Waters, their three children and himself enjoyed a four-day stay at the
holiday cottage during the last week of September 2021. When the cottage is not being used by
Buildam (Pty) Limited directors, it is let to non-employees at a daily rate of R900.
• He was obligated to become a member of Buildam (Pty) Limited’s pension fund as from his
effective date of employment. He contributes 7,5% of his cash salary (excluding bonuses) to the
pension fund each month.
• Delia Waters, their three minor children and himself are members of Buildam (Pty) Limited’s
‘non-contributory’ medical scheme. Contributions made to the medical scheme by it in the 2022
year of assessment for them were R36 000 (being R4 000 a month for nine months).
In addition to the amounts listed above, John Waters had the following receipts and accruals, profit
and loss during the 2022 year of assessment:
• Local interest of R37 304 that accrued to him from a non ‘tax free investment’.
• Local dividends of R10 400.
• A trading loss of R168 974 from his consulting practice for the three-month period 1 March
2021 to 31 May 2021.
• A profit of R410 000 on the sale of his previous primary residence that he had occupied before
joining Buildam (Pty) Limited. It was sold for R2 400 000.
John Waters also contributes R1 000 a month to a retirement annuity fund that he became a
member many years ago when he was self-employed.
Johan Waters paid R47 663 in ‘qualifying medical expenses’ during the 2022 year of assessment.
He was able to recover R19 396 from the medical scheme.
You are required to determine John Waters’s taxable income for the 2022 year of assessment.
FRINGE BENEFITS 359
Henrietta Spangled-Roundhead is the owner of two gamecocks that are kept by her at their house.
As a goodwill gesture, the South African Gamefowl Society has paid their fight-preparation costs.
These amounted to R6 600 for the 2022 year of assessment.
It is a condition of Pollo Spangled-Roundhead’s employment that he belongs to his employer’s
pension fund. He contributed 8% of his monthly salary to it. The South African Gamefowl Society
also contributed to it on a rand-for-rand basis.
The South African Gamefowl Society also contributed R2 460 a month for his family and himself
to be members of its medical scheme. Henrietta Spangled-Roundhead, their two children and
himself are all members of the medical scheme.
Pollo Spangled-Roundhead’s share of ‘qualifying medical expenses’ of R2 160 for the 2022 year of
assessment was paid by the South African Gamefowl Society. These expenses were incurred evenly
throughout the 2022 year of assessment.
Since Pollo Spangled-Roundhead is occasionally required to make business calls from his home
telephone during his off-duty hours, the South African Gamefowl Society also paid his home
telephone account of R11 400 for the 2022 year of assessment. These expenses were incurred
evenly throughout the 2022 year of assessment.
Pollo Spangled-Roundhead’s only other receipts and accruals for the 2022 year of assessment were
• local dividends of R9 000, and
• local interest of R29 072 from a non ‘tax free investment’.
You are required to determine Pollo Spangled-Roundhead’s 2022 taxable income.
the 2022 year of assessment he incurred fuel costs of R25 200. (He has proof that he incurred
these costs.) During his two-month assignment in Australia he ‘returned’ his ‘company car’ to
Sunday Newspapers Limited so that it could be used by another employee who required
transport during that period. In the 10-month period that he used it, he travelled a total of
25 000 kilometres in it of which 15 000 kilometres were for his private purposes.
• A subsistence allowance of AUS$12 200 (being 61 days at AUS$200 a day). The rand
equivalent of this subsistence allowance is R136 640. The subsistence allowance paid to him
was for his meals, drinks and other incidental expenses. (His employer, Sunday Newspapers
Limited, bore all the accommodation expenses for his two-month stay in Australia.) Since he has
relatives living in Australia he spent only AUS$8 200 of his subsistence allowance. He invested
the balance of AUS$4 000 in a bank account in Australia (see below for further details).
• The free use of a new notebook computer purchased by Sunday Newspapers Limited shortly
before his departure to Australia for R20 700 (R18 000 plus value-added tax at 15% of R2 700).
The use of this notebook computer was given to him to enable him to write articles in Australia and
to e-mail them to The Naked Truth in South Africa. On his return to South Africa, he was given the
option to purchase this notebook computer from Sunday Newspapers Limited for R13 800
(R12 000 plus value-added tax at 15% of R1 800) being its carrying amount (book value) in its
accounting records. He took up this option and purchased this notebook computer because he knew
its market value was R18 400 (R16 000 plus value-added tax at 15% of R2 400) having seen a
similar second-hand notebook computer advertised for sale by a local computer shop.
• On returning from his assignment in Australia, Sunday Newspapers Limited offered him the free
use of a time-share unit (holiday accommodation) owned by it. He accepted the offer, and for
10 days during December 2021 Gizelda Kamp-Staaldraad, his wife, Petra Kamp-Staaldraad,
their daughter and himself enjoyed a vacation. If the time-share unit is not being used by an
employee of Sunday Newspapers Limited, it is let by the time-share management on a
commercial basis, at a daily rate of R750. (A maximum limit of four adults and four children are
allowed to occupy the time-share unit at any one point in time.)
• An interest-free loan of R24 000 granted by Sunday Newspapers Limited to him on 1 January
2022. After his writing success in Australia, he furthered his studies by enrolling in a
professional-writing qualification offered on a correspondence basis by a university situated in
America. The R24 000 was used by him to settle the tuition fees (the equivalent of R20 000) and
to purchase the necessary text books (at the equivalent of R4 000). He is required to settle the
loan at the rate of R2 000 a month (this amount being deducted from his ‘after-tax’ earnings by
Sunday Newspapers Limited). He repaid R4 000 of this loan during the 2022 year of assessment
(R2 000 on 31 January 2022 and R2 000 on 28 February 2022). (Assume that the relevant
‘official rate of interest’ is 4,5%.)
• He is a member of Sunday Newspapers Limited’s medical scheme. Under the rules of this medical
scheme, the employer and employee are each liable for 50% of the monthly contribution. For the
2022 year of assessment, his total monthly contribution was R3 600 (of which he paid R1 800, and
it the other R1 800). Gizelda Kamp-Staaldraad, Petra Kamp-Staaldraad and himself are members
of this medical scheme. He also paid ‘qualifying medical expenses’ of R34 897 during the 2022
year of assessment, R21 400 of which he was reimbursed by the medical scheme.
• He is also a member of Sunday Newspapers Limited’s ‘non-contributory’ provident fund.
Contributions made to the provident fund for his membership by Sunday Newspapers Limited
during the 2022 year of assessment were R32 400.
In addition to the amounts listed above, Commander Kamp-Staaldraad had the following receipts
and accruals during the 2022 year of assessment:
• Local interest of R31 565 from his investments with a local bank. One of these investments is a
‘tax free investment’. From it, local interest of R1 350 accrued to him. The other investments are
not ‘tax free investments’.
362 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
• Foreign interest (the equivalent of R840) from a bank account he opened in Australia. He
deposited his ‘surplus’ subsistence allowance of AUS$4 000 (see above) into this bank account
before returning to South Africa.
• Royalties (the equivalent of R31 500) from a publisher in Australia. During his two-month
assignment in Australia, he was able to conduct a number of interviews with both successful and
unsuccessful players and coaches. He compiled extracts from these interviews into a book
entitled Springboks Up and Down Downunder. An Australia publisher agreed to publish this
book. In the 2022 year of assessment he earned gross royalties (the equivalent of R16 500) from
the sales of his book in Australia. Australian tax (the equivalent of R3 300) was withheld from
these gross royalties. He did not remit these royalties to South Africa, but deposited them into
his Australian bank account (see above for details).
You are required to determine Commander Kamp-Staaldraad’s 2022 taxable income.
• His entrance fee of R5 000 and the annual subscription of R3 000 to join the Westwood Country
Club in Durban. On the odd occasion, he uses its premises for Whisky (Pty) Limited’s business.
Jimmie Daniels
In compliance with its transformation policy, Whisky (Pty) Limited appointed Jimmie Daniels as
Arthur Bell’s replacement in Johannesburg. To help Jimmie Daniels with his family’s and his own
development, it awarded
• a bursary of R30 000 to him to help pay for his study expenses. He is studying on a correspondence
basis towards a marketing degree, and
• a bursary of R25 000 to Israel Daniels, his minor son, who is in Grade 11 at a Johannesburg high
school.
Whisky (Pty) Limited pays Jimmie Daniels an annual remuneration of R564 000.
Campbell Clan
Campbell Clan is employed by Whisky (Pty) Limited as its financial officer. He must, every two
weeks, visit its Durban branch. Each visit is for two days. Since his home is in Johannesburg, he
requires one-night’s accommodation in Durban for each visit. On some occasions he stays with
Rosslyn Sinclair (née Clan), his sister who has a home in Durban. On the remaining occasions he
stays in a Durban hotel. During the 2022 year of assessment Whisky (Pty) Limited paid
• him R9 000 subsistence for the 15 occasions that he stayed with Rosslyn Sinclair in Durban,
• the Patio Hotel in Durban R12 000 for the 10 occasions that he occupied one of its suites, and
• him R2 000 subsistence for the 10 occasions that he stayed at the Patio Hotel. It paid him the
R2 000 subsistence when he stayed at the Patio Hotel since the only meal it provided him with
was breakfast.
Glen Parker
Most of Whiskey (Pty) Limited’s work is carried out in the KwaZulu-Natal and Gauteng provinces.
But during its 2022 year of assessment it entered into two projects outside these provinces. It
entered into a project in Upington (Northern Cape) and another in Windhoek (Namibia). Two of its
Johannesburg-based employees, Glen Parker and Grant MacQueen, were ‘seconded’ out of
Johannesburg to manage these particular projects:
Glen Parker moved to Upington for the six-month period from 1 May 2021 to 31 October 2021
(184 days). While in Upington, he ‘enjoyed’ the following benefits from Whisky (Pty) Limited:
• Four return trips by air (Johannesburg-Upington return). Each return trip cost it R3 300.
• Accommodation and meals in Upington in a dinner, bed and breakfast establishment. This cost it
R36 000 for the six-month period.
• A return air trip for Christine Parker, his wife (to visit him in Upington for a long weekend).
This return trip cost it R3 500.
The distance between Johannesburg and Upington is 730 kilometres.
Grant MacQueen
Grant MacQueen moved to Windhoek (in Namibia) for the seven-month period from 1 June 2021
to 31 December 2021 (214 days). While in Windhoek, he ‘enjoyed’ the following benefits from
Whisky (Pty) Limited:
• Five return trips by air (Johannesburg-Windhoek return). Each return trip cost it R4 400.
• Accommodation and meals in Windhoek in a dinner, bed and breakfast establishment. This cost
it R35 000 for the seven-month period.
• A return air trip for Steffany MacQueen his wife (to visit him in Windhoek for a long weekend).
This return trip cost it R4 500.
364 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
From 1 September 2021 to 6 November 2021 (a total of 66 days) Grant MacQueen did not return to
South Africa. During this 66-day period he was in Windhoek.
The distance between Johannesburg and Windhoek is 723 kilometres.
Tandaphuza Ugologo
Tandaphuza Ugologo is employed by Whisky (Pty) Limited as its messenger. He is required to
collect and deliver certain items (mainly documents) on its behalf. To carry out his duties, he uses a
motor cycle that belongs to it. This motor cycle cost it R92 000 (R80 000 plus R12 000 value-
added tax at 15%) when it was purchased on 1 March 2020.
During the week (Monday, Tuesday, Wednesday and Thursday afternoons) Tandaphuza Ugologo
uses this motor cycle to travel from Whisky (Pty) Limited’s premises to his home in a township
(45 kilometres from its premises) and then back to work again the following morning. In the 2022
year of assessment he used this motor cycle on 200 occasions to travel between his work premises
and his home (and back again).
Tandaphuza Ugologo is not allowed to use this motor cycle over weekends. He therefore uses public
transport (a taxi service) to travel to work on a Monday morning and home on a Friday afternoon.
Whisky (Pty) Limited awarded him a taxi-fare allowance of R100 a month to pay for these taxi trips.
He paid R1 350 for his taxi trips to and from work during the 2022 year of assessment.
Whisky (Pty) Limited pays for all the fuel used by its delivery motor cycle. It also maintains its
delivery cycle.
You are required to discuss, supported by determinations when necessary, the normal tax
consequences to the employee when the above fringe benefits are enjoyed by them. (All amounts
are exclusive of value-added tax. In other words value-added tax may be ignored.)
365
366 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
• Local interest of R29 200 payable outside South Africa on funds made available in South Africa
to a South African company for the purpose of financing its commercial activities. This
investment is not a ‘tax free investment’. And the local interest from it accrues to him on the last
day of February.
• The taxable portion of the trade profit from International Starsigns, a business that he operates
from an establishment in Johannesburg was R690 600. He often flies from America to South
Africa to supervise the operations of this business. In the 2022 year of assessment he spent, in
total, 92 days in South Africa.
• Gross dividends of R93 600 from Star Enterprises (SA) (Pty) Limited, a resident of the
Republic. These dividends were paid directly to him in America. A total of 80% of its net profits
were derived from within South Africa. The double tax agreement between South Africa and
America provides for a rate of tax on dividends of 15% when a dividend accrues to a non-
corporate shareholder.
You are required to determine Twinkle Pluto’s South Africa income tax liability for the 2022 year
of assessment. (Except for the dividends tax rate of 15% (see above), ignore the possible
application of the double tax agreement between South Africa and America.)
The $12 000 000 accrues to Ryan Shrew on a month by month basis during the completion of his
performances.
Vasanti Weevil
A South African film producer filmed part of a movie in Chatsworth, Durban in South Africa. The
entire movie took 60 weeks to film. Vasanti Weevil, the leading actress, who is a non-resident,
came to South Africa to ‘shoot’ this part of the movie for the five weeks that ended on
30 November 2021. She was paid $12 000 000 by the South African film producer to appear in the
entire movie.
The $12 000 000 accrues to Vasanti Weevil on a month by month basis on completion of her
performances.
Ebraheim Docrat
Ebraheim Docrat, a non-resident international cricketer, played cricket for a South African
provincial team in the South African domestic league for seven months of the 2021 year of
assessment. He earned R65 000 a month.
You are required to determine the amount of South African tax payable by the above non-resident
sportspersons or entertainers on the amounts that they earned from a South African source.
Zululand Marula CC also produces marula fruit pulp and marula essential oil:
• Marula fruit pulp contains four times more valuable vitamin C than oranges do. And it has a
delicious and unique flavour.
• Marula essential oil is an effective skin conditioner. Its cosmetic and anti-oxidant properties
soften, soothe and re-hydrate the skin.
To extend Zululand Marula CC’s business to be able to make the edible marula oil, it will need to
carry out an expansion programme. To assist it with this exercise, Pomongwe Cave Products
Limited has agreed to
• lend it R4 000 000 at an interest rate of 12%, and
• purchase 20% of its share capital for R2 000 000.
The remaining 80% of Zululand Marula CC’s share capital is held by Savannah Veldman.
Of these borrowed funds, Zululand Marula CC will use
• R1 500 000 to purchase a commercial building site, and
• R2 500 000 to build a new sales outlet on it.
Market research has indicated that it is likely that olive oil and sunflower-seed oil producers in
South Africa will enter into similar royalty agreements with Pomongwe Cave Products Limited.
Should this occur, then Pomongwe Cave Products Limited will open a permanent establishment in
South Africa. All its royalty-earning activities in South Africa will then be the responsibility of its
permanent establishment in South Africa. In other words, South African edible marula oil
producers (including Zululand Marula CC) will pay their royalties to its permanent establishment in
South Africa. And this royalty-producing asset will be effectively connected to it.
You are required to
1. discuss the source and normal tax implications to Pomongwe Cave Products Limited of the
royalties, interest and dividends that will accrue to it from Zululand Marula CC if these
amounts are paid directly to it in Zimbabwe,
2. discuss the tax implications to Pomongwe Cave Products Limited of the royalties, interest and
dividends that will accrue to it from Zululand Marula CC and other South African edible
marula oil producers if these amounts are paid to Pomongwe Cave Products Limited’s
permanent establishment in South Africa. They will be banked into its permanent
establishment’s bank account in South Africa. They will then be remitted to Zimbabwe, from
time to time, when required by Pomongwe Cave Products Limited in Zimbabwe,
3. state whether the royalties and interest incurred by a South African edible marula oil producers
will be deductible in the determination of their taxable incomes,
4. provide details of the tax consequences that will result when Zululand Marula CC declares a
dividend to its shareholders (including Pomongwe Cave Products Limited),
5. indicate if there are tax concessions available to Zululand Marula CC on the
– commercial building site that it will purchase (for R1 500 000), and
– sales outlet that it will erect on it (at a cost of R2 500 000), and
6. discuss the capital gains tax consequences to Pomongwe Cave Products Limited as a result of
it opening a permanent establishment in South Africa.
From the plans and specifications, Jodi van der Merwe has already received enquiries from certain
businesses interested in purchasing the completed office complex. From these enquiries and a
review of prices for office complexes of a similar nature, its market value once completed will be
R11 150 000.
If Jodi van der Merwe undertakes to develop the property himself, building will commence on
1 May 2022 with its estimated date of completion being 20 December 2022. The office complex
will be sold on 1 January 2023.
Jodi van der Merwe has been warned that the Commissioner is likely to treat the receipt or accrual
from the sale of the developed property as gross income and will then permit a deduction in the
determination of his taxable income for the costs incurred by him in developing it. The
Commissioner will also allow the original cost of the property as a deduction in the determination
of his taxable income. This means the Commissioner will treat the property as trading stock, and
not as a capital asset.
Jodi van der Merwe’s other South African investments will yield the following amounts for the
2023 year of assessment:
• Local interest of R2 020 000.
• Local dividends of R60 000.
• And royalties of R48 000 (R4 000 a month).
The royalties accrue to Jodi van der Merwe each month. The dividends are declared and paid to
him in two equal instalments on 31 August and the last day of February.
Jodi van der Merwe is 39 years old. He is not a resident of the Republic in the 2023 year of
assessment.
You are required to
1. determine the South African tax payable on the R500 000 Jodi van der Merwe earned for
driving in the Formula A race in Johannesburg on 3 March 2022. Provide brief reasons to
support your determinations, and
2. advise him as to whether he should sell his property to the property development syndicate or
to develop it himself into an office complex prior to selling it. (Your answer should be based
on a net earnings analysis for the 2023 year of assessment.)
Ignore the possibility of the provisions of a double tax agreement applying. (Assume that the tax
legislation and rates in the 2023 year of assessment are the same as those that applied in the 2022
year of assessment.)
• in a local interest-bearing security not being a ‘tax free investment’ (she made these funds
available in South Africa).
For the past six years Elaine Stevens has been ordinarily resident outside South Africa.
Two year’s ago Elaine Stevens’s mother died. Her late mother had been ordinarily resident in South
Africa her entire life. She inherited from her late mother the following assets:
• A rent-producing property situated in Pietermaritzburg.
• An investment in a South African collective investment scheme in securities (a so-called equity
unit trust).
• An investment in a South African real estate investment trust.
• A purchased annuity being awarded by an insurer. It is for R54 000, but it is being awarded at
the rate of R4 500 a month. Her late mother had purchased it from an insurer in South Africa
using a cash lump sum. It was to be awarded to her mother for a period of 10 years. If her
mother died during this 10-year period, it was then to be awarded to Elaine Stevens for the
remainder of its duration. Her mother enjoyed this annuity for six years and then died. Under the
agreement, it is now being awarded to Elaine Stevens for a four-year period. When it was
awarded to her late mother, only 40% of it was subject to normal tax, 60% being exempt from
normal tax under section 10A.
During the 2022 year of assessment Elaine Stevens’s receipts and accruals were as follows: (If they
were in a foreign currency they are expressed below in the rand equivalent.)
Net rentals from her rent-producing property situated in Durban 48 000
Local dividends from South African registered companies 90 000
Local interest from her municipal stock and local interest-bearing security not
being a ‘tax free investments’ 22 100
Net rentals from her ‘inherited’ rent-producing property situated in 36 000
Pietermaritzburg
Distributions from her ‘inherited’ investment in a South African collective
investment scheme in securities of 15 000
(These distributions comprised local dividends to the extent of 90% and local
interest to the extent of 10%.)
Amount from the sale of some of her units in the collective investment scheme in
securities 120 000
(The market value of the units that she sold was R45 000 at the time she inherited
them.)
Returns from her ‘inherited’ investment in a South African real estate investment
trust of 12 000
(These returns comprised local dividends of R10 800 and interest of R1 200.)
The ‘inherited’ purchased annuity (R4 500 a month for 12 months) 54 000
A pension from her former employer’s pension fund 66 000
(She had worked for her former employer in South Africa for 30 years and for it in
Zimbabwe for six years. She had been a member of its pension fund the entire time
she had worked for it.)
An annuity from a retirement annuity fund. She had entered into this contract in
South Africa when she was 30 years old and the benefits under this fund became
payable to her when she attained the age of 60 years 24 000
A salary from part-time work performed in her ‘new’ country 18 000
Net rentals from a rent-producing property situated in her ‘new’ country 30 000
Foreign interest from an investment account in a bank in her ‘new’ country 960
Elaine Stevens visited South Africa for 90 days during the 2022 year of assessment. She did not
visit South Africa in the 2021 year of assessment.
378 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Besides the sale of some of Elaine Stevens’s ‘units’ in the collective investment scheme in
securities (see above), she did not sell any other assets during the 2022 year of assessment. She
does not have an assessed capital loss brought forward from the 2021 year of assessment.
South Africa and Elaine Stevens’s ‘new’ country have not yet entered into a double taxation
agreement.
You are required to determine
1. Elaine Stevens’s 2022 South African taxable income, and
2. the other South African taxes that she is liable for.
3. assuming he does not lend her the money, but instead, accepts the partnership offer.
For the purpose of this question you may assume that the 2022 taxation legislation applies to all
future years of assessment. Also assume that if he lends Terri Rowntree the funds, he does so on
the first day of the year of assessment and that the interest will accrue to him annually in arrears.
A note to Washington (Pty) Limited’s statement of profit or loss and other comprehensive income
states that the market value of the property is R8 700 000.
Washington (Pty) Limited’s rent-producing property is administered by a local property agent.
Washington (Pty) Limited itself is administered by a local accountant.
The R800 000 interest that accrued to Johannes Washington from his loan account to Washington
(Pty) Limited was forwarded to him in the country where he is now ordinarily resident. This
country does not have a double tax agreement with South Africa.
The balance of Johannes Washington’s blocked funds he had invested in local dividend-yielding
shares that yield local dividends of R30 000 a year, and in local interest-bearing securities that are
not ‘tax free investments’. Local interest of R25 000 will accrue to him from these local interest-
bearing securities in the 2022 year of assessment.
You are required to discuss
1. how the sale of the rent-producing property by Johannes Washington to Washington (Pty)
Limited reduced the amount of South African taxes payable by him. Support your discussion
with detailed determinations, and
2. potential normal tax problems to Washington (Pty) Limited that could arise in this tax-saving
arrangement.
Sangome Scorerer
Sangome Scorerer has no receipts or accruals from South Africa. She did, however, earn certain
‘investment’ returns and ‘passive’ amounts from New Zealand. Details of her earnings for the 2022
year of assessment follow (all amounts earned are expressed in their South African currency
equivalent):
1 March 2021 to 30 November 2021
Foreign interest 14 800
Net foreign rentals 90 000
Foreign dividends 27 000
Annuity from a former foreign employer 36 000
1 December 2021 to 28 February 2022
Foreign interest 3 000
Net foreign rentals 30 000
Foreign dividends 2 250
Annuity from a former foreign employer 12 000
Annuity from her late father’s trust (see below) 30 000
Foreign interest earned on her inherited funds investment (see below) 1 600
Net foreign rentals from her inherited property (see below) 22 000
Manuka Koromiko, Sangome Scorerer’s father, who had been a resident of New Zealand for his
entire life, died on 31 December 2021. She inherited from him
• a rent-producing property situated in New Zealand with a market value the equivalent of
R1 780 000, and
• cash the equivalent of R600 000.
Sangome Scorerer invested the cash in New Zealand, in an interest-bearing security.
Under Manuka Koromiko will, Sangome Scorerer also enjoys an annuity the equivalent of
R180 000 (being paid to her at a rate of the equivalent of R15 000 a month).
The foreign dividends that accrue to Sangome Scorerer are not exempt from normal tax under
section 10B(2). She holds less than 10% of the equity shares in these foreign companies.
Sangome Scorerer did not pay ‘qualifying medical expenses’ during the 2022 year of assessment.
Sangome Scorerer does not have an assessed capital loss brought forward from the 2021 year of
assessment.
You are required to determine the South African tax liabilities of Herb Scorerer and Sangome
Scorerer for the 2022 year of assessment. (Ignore the possible application of the double tax
agreement between New Zealand and South Africa.)
CHAPTER 18
CAPITAL GAINS TAX
383
384 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Brandy Caramel
Brandy Caramel has made a profit of R80 000 on the sale of listed shares that she held as a long-
term investment.
Belinda Caithness
Belinda Caithness has made a profit of R40 000 on the sale of listed shares that she held as trading
stock.
Cedric Dice
Cedric Dice has made a profit of R50 000 on the sale of a motor car that he inherited from his late
uncle who had died in February 2022. He sold it for R50 000. Because it had no cost to him, he
made a profit of R50 000. He is not a dealer in motor cars. Since his own motor car was only one-
year old at the time when he inherited his late uncle’s car, he sold the inherited motor car.
Cassandra Dust
Cassandra Dust has made a profit of R30 000 on the sale of a second-hand motor car that she held
as trading stock. Cassandra Dust is a dealer in second-hand motor cars.
Elliot Flake
Elliot Flake has made a profit of R7 000 on the sale of an antique that he had used in his home for a
number of years. He collects antiques. He does not deal in antiques. He sold this particular antique
because he had recently purchased a similar, but even older, and more-valuable antique.
Fran Garniture
Fran Garniture has made a profit of R8 000 on the sale of a diamond ring. Her fiancé had broken
their engagement to be married. They were engaged to be married for five months. Throughout this
five-month period she wore this engagement ring on the ‘ring’ finger of her left hand. Her fiancé
did not want the engagement ring that he had given her back. She therefore sold it.
Franklin Glaze
Franklin Glaze has made a profit of R2 900 on the sale of a krugerrand. He had purchased it as a
hedge against inflation. He sold it solely because he needed cash to finance the purchase of an
essential asset.
Floyd Gratin
Floyd Gratin has made a profit of R2 000 on the sale of a krugerrand. He had purchased it because
he had no faith in the South African currency. He does not deal in krugerrands. He sold this
krugerrand solely because he needed cash to finance the purchase of an essential asset.
Fergus Grill
Fergus Grill has made a profit of R2 100 000 on the sale of his primary residence. It cost him
R900 000 and he sold it for R3 000 000.
Ingrid Julienne
Ingrid Julienne has made a profit of R120 000 on the sale of all her gold jewellery. Her beautician
had advised her that gold was an unsuitable colour for her to continue wearing, and using. Her
beautician advised her to change to silver.
Ian Knead
Ian Knead has made a profit of R740 000 on the sale of his micro-light aircraft (its empty mass
does not exceed 450 kilograms). He sold it after a friend had been killed in a micro-light aircraft
accident. He used to fly his micro-light aircraft at weekends and on public holidays as a sport (or
hobby).
386 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Kane Lard
Kane Lard has made a profit of R740 000 on the sale of his four-seater aircraft (its empty mass
exceeded 450 kilograms). He sold it as a ‘trade in’ for a newer model of this particular make of
aircraft. He flies it at weekends and on public holidays as a sport (or hobby).
Lance Marinade
Lance Marinade has made a profit of R1 500 000 on the sale of his 12-seater aircraft (its empty
mass exceeds 450 kilograms). He sold it as a ‘trade in’ for a newer model of this particular make of
aircraft. He carries on a passenger transport by air business.
Oswold Panade
Oswold Panade has made a profit of R1 600 on the sale of his four-metre canoe. He competes in
canoe races as a sport. He sold this canoe because he had recently purchased a new, lighter and
even faster, canoe.
Owen Pit
Owen Pit has made a profit of R17 000 on the sale of his 12-metre yacht. He sold it because he had
recently purchased a new, and safer, yacht. He sails his yacht at weekends and on public holidays
as a form of relaxation.
Percival Roux
Percival Roux made a profit of R18 000 on the sale of an original painting. He is a collector of
original paintings. He sold this particular painting because he needed funds to purchase an even
more-valuable painting. The painting he sold had been displayed in his lounge for many years.
Randal Salmis
Randal Salmis made a profit of R7 900 on the sale of an original painting. He deals in original
paintings.
Rex Stock
Rex Stock made a profit of R20 000 on the sale of his motor car. He had used this motor car for
both business purposes (to the extent of 60%) and for private purposes (to the extent of 40%). His
employer awarded him a travel allowance to cover the cost of the business use of it.
You are required to state whether the profit made by each of the above taxpayers is a capital gain
that is subject to capital gains tax or whether it may be disregarded.
Chantel Devil
Chantel Devil has suffered a loss of R40 000 on the sale of listed shares that she held as trading
stock.
Cameron Dredge
Cameron Dredge has suffered a loss of R50 000 on the sale of a motor car that he owned and used
for six years.
Emma Flame
Emma Flame has suffered a loss of R30 000 on the sale of a second-hand motor car that she held as
trading stock. She is a dealer in second-hand motor cars.
Fulton Grate
Fulton Grate has suffered a loss of R7 000 on the sale of an antique that he had used in his home
for a number of years. He collects antiques. He does not deal in antiques. He sold this particular
antique because he had recently purchased a similar, but even older and more-valuable antique.
Fabian Grease
Fabian Grease has suffered a loss of R8 000 on the sale of a diamond ring. His fiancé had broken
their engagement to be married. She did not want to keep the engagement ring that he had given
her. She gave it back to him three months after he had given it to her. During the three-month
period that they were engaged, she wore this ring on her ‘ring’ finger on her left hand. He then sold
it for R8 000 less than he had paid for it. He does not deal in diamond rings.
Kelvin Lardons
Kelvin Lardons has suffered a loss of R2 900 on the sale of a krugerrand. He had purchased it as a
hedge against inflation. He sold it because he needed funds to purchase an essential asset.
Oscar Poach
Oscar Poach has suffered a loss of R2 000 on the sale of a krugerrand. He had purchased it since he
had no faith in the South African currency. He does not deal in krugerrands. He sold this
krugerrand since he needed funds to purchase an essential asset.
Omar Pound
Omar Pound has suffered a loss of R2 100 000 on the sale of his primary residence. He had
purchased it for R4 000 000. He sold it for R1 900 000.
Rebecca Scald
Rebecca Scald has suffered a loss of R120 000 on the sale of all her silver jewellery. Her beautician
had advised her that silver was an unsuitable colour for her to continue wearing, and using. Her
beautician advised her to change to gold.
Reginald Score
Reginald Score has suffered a loss of R130 000 on the sale of his micro-light aircraft (its empty
mass does not exceed 450 kilograms). He sold it after a friend had been killed in a micro-light
aircraft accident. He used to fly his micro-light aircraft at weekends and on public holidays as a
sport (or hobby).
Rhett Sear
Rhett Sear has suffered a loss of R740 000 on the sale of his four-seater aircraft (its empty mass
exceeded 450 kilograms). He sold it as a ‘trade in’ for a newer model of this particular make of
aircraft. He flies his aircraft at weekends and on public holidays as a sport (or hobby).
Richard Sift
Richard Sift has suffered a loss of R1 500 000 on the sale of his 12-seater aircraft (its empty mass
exceeds 450 kilograms). He sold is as a ‘trade in’ for a newer model of this particular make of
aircraft. He carries on a passenger transport by air business.
388 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Rowan Simmer
Rowan Simmer has suffered a loss of R1 600 on the sale of his four-metre canoe. He competes in
canoe races as a sport. He sold it because he had recently purchased a new, lighter and faster,
canoe.
Rufus Sliver
Rufus Sliver has suffered a loss of R17 000 on the sale of his 12-metre yacht. He sold it because he
had recently purchased a new, and safer, yacht. He sails his yacht at weekends and on public
holidays as a form of relaxation.
Rayner Stir
Rayner Stir suffered a loss of R18 000 on the sale of an original painting. He is a collector of
original paintings. He sold this particular painting because he needed funds to purchase an even
more-valuable painting. The painting he sold had been displayed in his lounge for many years.
Vivienne Whisk
Vivienne Whisk suffered a loss of R7 900 on the sale of an original painting. She deals in original
paintings.
York Zest
York Zest suffered a loss of R20 000 on the sale of his motor car. He had used this motor car for
both business purposes (to the extent of 60%) and private purposes (to the extent of 40%). His
employer awarded him a travel allowance to cover the cost of the business use of it.
You are required to state whether the loss suffered by each of the above taxpayers is to be taken
into account for capital gains tax purposes or whether it may be disregarded.
Losses
The losses suffered by Quintin Ruban were as follows:
• A loss of R49 500 on the sale of 50 000 shares in Lasanta Limited. He had purchased them as a
long-term investment.
• A loss of R1 000 on the sale of his cell phone. He had used this cell phone for both business
purposes (to the extent of 60%) and private purposes (to the extent of 40%). His employer
awarded him an allowance to cover the cost of its business use.
Quintin Ruban has an assessed capital loss of R9 500 to bring forward from the 2021 year of
assessment.
You are required to determine the taxable capital profit to be included in Quintin Ruban’s taxable
income for the 2022 year of assessment. Please provide brief reasons to support your
determinations.
• A profit of R25 000 on the sale of a diamond ring. Her husband and her had separated and then
they were divorced. Not wanting to keep the engagement ring that he had given her, she sold it
for R25 000.
Losses
The losses suffered by Jill Daniels were as follows:
• A loss of R1 000 on the sale of her cell phone. She had used this cell phone for both business
purposes (to the extent of 30%) and private purposes (to the extent of 70%). Her employer
awarded her an allowance to cover the cost of its business use.
• A loss of R63 000 on the sale of her 50% share of a beach cottage that her ex-husband and her
had jointly owned. It had been purchased by them for R4 926 000. They sold it for R4 800 000.
Jill Daniels has an assessed capital loss of R5 900 to bring forward from the 2021 year of
assessment.
You are required to determine the taxable capital profit to be included in Jill Daniels’s taxable
income for the 2022 year of assessment.
Martin Remy did not use it for trade purposes. On 31 January 2022 he sold it for R9 900 000.
You are required to determine the capital loss that results from Martin Remy’s purchase and sale of
this aircraft.
Cognac CC
In Cognac CC’s 2007 year of assessment a delivery van that had been purchased by it for R120 000
was stolen. Its tax value on the date that it was stolen was R72 000. It was unable to enjoy the so-
called scrapping allowance under section 11(o) (before it was amended) when it was stolen since the
delivery van had not been ‘scrapped’. The delivery van was not insured. Cognac CC successfully
deducted a capital loss of R72 000 on the theft of this delivery van in its 2007 year of assessment.
During its 2022 year of assessment the police recovered Cognac CC’s now badly-damaged delivery
van. Its market value was now R12 000.
You are required to determine the capital gains tax consequences for Cognac CC that arise on the
recovery of its stolen delivery van.
Melody Wood
Melody Wood purchased a beach cottage on 1 December 2020 for R1 450 000. After purchasing it,
a latent defect was discovered in it. The seller had not informed her of this problem. She then sued
the seller for misrepresentation.
After that Melody Wood sold this beach cottage on 1 February 2021 for R1 365 000, thereby
suffering a loss of R85 000 (R1 365 000 – R1 450 000).
After a two-year legal dispute between the seller and herself, she was finally awarded, during the
2022 year of assessment, a 20% discount on her purchase price. (This discount amounted to
R290 000 (20% of R1 450 000) and resulted in R290 000 being refunded to her.)
Melody Wood does not deal in beach cottages. She used this beach cottage as her holiday home.
You are required to determine the capital gains tax consequences for Melody Wood that arise
when the R290 000 discount was awarded to her.
Brandy van Ryn
Brandy van Ryn purchased a plot of land for R1 500 000 on 1 November 2020.
On 1 February 2021 Brandy van Ryn ‘swopped’ it for a holiday flat with a market value of
R1 650 000.
On 31 January 2022 Brandy van Ryn sold this holiday flat for R1 710 000.
Brandy van Ryn does not deal in properties. She did not use the holiday flat as her primary
residence.
You are required to determine the capital gains consequences to Brandy van Ryn that arise out of
the above transactions.
Glen Elgin
Glen Elgin purchased a plot of land 24 years prior to valuation date for R200 000. His intention had
been to build a shopping centre on it, and then to keep it as a rent-producing property investment.
After many years of being unable to raise the required finance, he sold it 20 years after valuation
date for R2 000 000. He incurred no other expenditure on it during his ownership of it. He did not
determine its market value on valuation date. He has therefore adopted the time-apportionment
basis in the determination of its valuation date value.
You are required to determine Glen Elgin’s capital gain that arises on the disposal of this plot of
land.
Glen Fiddick
Glen Fiddick purchased a plot of land many years before valuation date. Neither he, nor the
Commissioner, could establish its original cost. He effected improvements to it on 1 February 2021
at a cost of R75 000. He sold it for R5755 000 on 1 December 2021. No deductions or capital
allowances in the determination of his taxable income were enjoyed by him on it. The R575 000
was not included in his gross income.
You are required to determine Glen Fiddick’s capital gain resulting from the sale of this asset.
Glen Grant
Glen Grant sold a pre-valuation date asset for R900 000 on 30 November 2021. Its market value
was R1 200 000 on valuation date. ThisR1 200 000 market value had been determined and adopted
by him. It had been purchased by him for R700 000. Prior to valuation date he had incurred no
other costs on it. But he had incurred R125 000 on improving it on 1 December 2020. No
deductions or capital allowances in the determination of his taxable income were enjoyed by him
on it. The R900 000 was not included in his gross income.
You are required to determine the capital gains tax consequences to Glen Grant that arise on his
sale of this asset.
Glen Kinchie
Glen Kinchie purchased an asset 12 years before valuation date for R600 000. He sold it 20 years
after valuation date for R480 000. Its market value was R720 000 on valuation date. No deductions
or capital allowances in the determination of his taxable income were enjoyed by him on it. The
R480 000 was not included in his gross income.
You are required to determine the capital gains tax consequences that arise for Glen Kinchie on his
sale of this asset.
Glen Livet
Glen Livet purchased an asset six years before valuation date for R800 000. He sold it 20 years
after valuation date for R664 000. Its market value was R720 000 on valuation date. No deductions
or capital allowances in the determination of his taxable income were enjoyed by him on it. The
R664 000 was not included in his gross income.
You are required to determine the capital gains tax consequences that arise for Glen Livet on the
sale this asset.
Glen Morgangie
Glen Morgangie sold a pre-valuation date capital asset after valuation date. Its market value had
been adopted at valuation date. Its proceeds do not exceed its market value. Other relevant
information and amounts follow:
• Expenditure before valuation date was R400 000.
• Expenditure after valuation date was R100 000.
• Its market value on valuation date was R750 000.
• Its proceeds on disposal were R600 000.
CAPITAL GAINS TAX 393
No deductions or capital allowances in the determination of his taxable income were enjoyed by
him on it. The R150 000 was not included in his gross income.
You are required to determine Glen Morgangie’s capital gain made or capital loss suffered
resulting from the sale this pre-valuation date asset.
Glen Ord
Glen Ord purchased a plot of land 22 years prior to valuation date for R1 400 000. A year before
valuation date he erected a supermarket on it at a cost of R35 000 000. He did not obtain a
valuation of its market value on valuation date. A year after valuation date he effected
improvements to the supermarket at a cost of R9 100 000.
Glen Ord sold the supermarket (together with the land on which it is erected) 20 years after
valuation date for R98 000 000. He held this asset as a rent-producing property. No deductions or
capital allowances in the determination of his taxable income were enjoyed by him on it. The
R98 000 000 was not included in his gross income.
You are required to determine Glen Ord’s capital gain that arises on the sale this land and the
supermarket built on it.
financed the purchase consideration out of the amount he borrowed from a bank. During the 2022
year of assessment he incurred interest on this bank loan of R16 200.
You are required to state whether the R16 200 interest incurred by Ben Riach may be added to the
base cost of his shares in Malt Limited.
Duff Town
Duff Town acquired a 40-metre (in length) yacht by donation from his grandfather when its market
value was R1 000 000. The donations tax due by his grandfather was R180 000. It was determined
as follows:
Market value of the asset donated 1 000 000
Less section 56(2)(b) annual exemption from donations tax 100 000
900 000
Donations tax due at 20% 180 000
When Duff Town’s grandfather failed to pay the donations tax within the prescribed period, he
became liable for the payment of R180 000 under section 59 of the Income Tax Act.
Duff Town’s grandfather was liable for capital gains tax on a gain of R250 000 as a result of his
donation of the yacht to him.
You are required to determine how much of the donations tax that Duff Town paid may be added
to the base cost of his yacht.
Jack Gentleman
Jack Gentleman carries on business in his own name as the owner and operator of a tavern. He owns
these premises. The city council attempted to expropriate these premises. He incurred R32 000 in
legal expenses in successfully defending its attempt to expropriate these premises.
You are required to state whether the R32 000 legal expenses incurred by Jack Gentleman form
part of the base cost of his tavern’s premises.
Justina Brooks
On 1 March 2001 Justina Brooks paid R100 000 for a 20-year option to purchase a holiday cottage for
R500 000. On valuation date (on 1 October 2001) the market value of this option was R101 000.
Justina Brooks exercised her option on 1 February 2022 and purchased the holiday cottage for
R500 000. Its market value on 1 February 2022 was now R990 000.
You are required to determine the base cost of Justina Brooks’s holiday cottage.
Whinnie Dall
Whinnie Dall borrowed funds to purchase a beach-front holiday home. When it is not being used
by herself, she lets it at a market-related rental.
You are required to state whether the interest incurred by Whinnie Dall on the borrowed funds
may be added to the base cost of her beach-front holiday home.
Crag Ganmore
Crag Ganmore purchased a vacant plot of land. He intends to build a factory on it. He financed its
purchase by means of his bank overdraft. After purchasing it he won money on the local lottery. He
used part of these winnings to repay his bank overdraft. After losing the balance of his winnings
when betting at the horse races, he was forced to use his bank overdraft to finance the purchase of a
domestic motor car.
You are required to state whether the interest incurred by Crag Ganmore on his bank overdraft may
be added to the base cost of his vacant plot of land.
Reg Chivas
Reg Chivas incurred interest on a loan. He had used the amount obtained from this loan to pay for
repairs, maintenance and insurance he had incurred on a rent-producing property that he owns.
396 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
These expenses that he had incurred were deducted in the determination of his taxable income. This
rent-producing property is one of his many investments.
You are required to state whether the interest incurred by Reg Chivas in financing these expenses
incurred by him that were deductible in the determination of his taxable income may be added to
the base cost of his rent-producing property.
Grant Piper
Grant Piper incurred interest when financing the purchase of a vacant plot of land. He purchased it
for the purpose of erecting a commercial property on it.
You are required to state whether the interest Grant Piper has incurred may be added to the base
cost of this vacant plot of land.
Alice Bell
Alice Bell purchased a vacant plot of t land for R500 000. She intends to build a factory on it. She
financed its purchase out of a R500 000 loan bearing interest at 9%. After six months a second
lender offered her a R500 000 loan at 7,5%. She therefore entered into the second loan, and repaid
the first loan with the R500 000 obtained from the second loan.
You are required to state whether the interest on the ‘second’ loan incurred by Alice Bell may be
added to the base cost of her vacant plot of land.
On 1 October 2001 the market value of Dayle Hill’s plot of land was R660 000.
On 30 June 2021 Dayle Hill was transferred to another town by her employer. Since she would no
longer build her primary residence on this plot of land, she sold it on 30 September 2021 for
R966 000. She sold the plot of land privately to avoid paying an agent commission.
Dayle Hill paid rates of R92 000 for this plot of land during the period that she owned it.
Dayle Hill is a resident of the Republic. She is not a vendor.
You are required to determine Dayle Hill’s capital gain under each of the options available to her.
The market value of Four-Star Chardonnay CC’s land and buildings is R680 000. The market value
of its plant and machinery is R125 000.
You are required to determine whether Louise Chavant will be liable for capital gains tax on the
sale of her members interest in Four-Star Chardonnay CC if its members loans had been used by it
to partly finance the purchase of its
1. land and buildings, or
2. plant and machinery.
On 1 September 2021 Jonty Duck subdivided the property. He then sold the inland plot on
30 September 2021 for R390 000. He adopted the time-apportionment basis to determine its base
cost.
You are required to determine the capital gains made by Rupert Rothschild and Jonty Duck on the
sale of parts of their respective properties.
Beryl Emerald
Beryl Emerald purchased a primary residence for R900 000 on 1 April 2016. She incurred R100 000
on converting part of it into a surgery. Some of her patients consult her in her ‘home’ surgery in the
evenings and over weekends. On a pro rata basis the surgery now comprises 25% of her primary
residence. She sold her primary residence on 30 September 2021 for R2 900 000.
Crystal Flourite
Crystal Flourite purchased a primary residence for R1 000 000 on 1 May 2016. She practices as an
attorney. She incurred R50 000 on converting part of her primary residence into a consulting room.
Some of her clients consult her in her home consulting room in the evenings and over weekends.
On a pro rata basis the consulting room comprises 10% of her primary residence. On 30 April
2020 she moved out of this primary residence. On 1 May 2020 she moved into a new primary
residence that she had purchased. From 1 May 2020 to 31 October 2021 she then let her ‘former’
primary residence at a market-related rental and earned a net rental of R11 000 a month. On
31 October 2021 she sold her ‘former’ primary residence for R3 250 000.
Jade Nephrite
Jade Nephrite purchased a primary residence for R1 100 000 on 1 June 2016. She lived in it until
she died on 30 November 2021. She bequeathed it to Jasper Nephrite, her surviving spouse. Its
market value on 30 November 2021 was R3 400 000. She was 65 years old when she died. On
30 November 2021 Jasper Nephrite was 69 years old.
Amber Resin
Amber Resin purchased a primary residence for R1 200 000 on 1 July 2016. She lived in it until
she died on 31 December 2021. She bequeathed its
• usufruct to Garnet Resin, her surviving spouse, and
• bare dominium to Topaz Stone, their daughter.
Its market value on 31 December 2021 was R4 800 000.
On 31 December 2021, Garnet Resin was 69 years old and Topaz Stone was 39 years old.
You are required to determine the capital gain that arises out of the sale of each of the above
primary residences and to indicate how much of it can be disregarded.
The normal tax relating to the taxable capital gain being included in Pierre Jourdan’s taxable
income was R450 000. This was after taking into account the ‘increased’ annual exclusion of
R300 000 resulting from his death. The R450 000 has been determined as follows:
Capital gain (R3 000 000 – R200 000) 2 800 000
Less ‘increased’ annual exclusion 300 000
2 500 000
Inclusion in taxable income at 40% × 40%
Extra taxable income 1 000 000
Maximum marginal tax rate (45%) × 45%
Extra normal tax liability 450 000
You are required to discuss, and determine, if an heir of Pierre Jourdan may qualify to defer
payment of part of his R450 000 extra normal tax liability.
Rhonda Spreader
Rhonda Spreader purchased a property in Durban for R1 100 000 on 1 October 2019. She used it as
her primary residence until she emigrated from South Africa on 28 February 2021. She sold it for
R2 420 000 on 28 February 2022. From 1 March 2021 to 28 February 2022 she had let this
property at a market-related rental.
You are required to determine, and discuss, what portion of her capital gain will be subject to
capital gains tax.
Elton Fisheater
Elton Fisheater’s employer transferred him from Cape Town to Durban. He had owned a house in
Cape Town for 20 years. On his transfer, he did not sell it, but allowed his son, a full-time student,
to live in it for no consideration. He and his wife moved to Durban where they leased a house.
Since he had only two years to serve until he retired, he did not purchase a house in Durban. They
spent their holidays in Cape Town and stayed in their house. On his retirement he and his wife
intend returning to their house in Cape Town. Their son may then move out of the house.
You are required to state whether Elton Fisheater’s house in Cape Town is, for his full period of
ownership of it, his primary residence.
Royale Spooner
Ruth Spooner owns a house in Johannesburg in which she and her husband, Royale Spooner, spend
most of their time. They are both employed in Johannesburg. They are married out of community
of property. He owns a house in Umhlanga Rocks which he lived in for three years before he
moved to Johannesburg, and before they were married. He had lived in Johannesburg for two years
at the time when capital gains tax was implemented. His house in Umhlanga Rocks was then used
as a holiday home by them. They spent their annual leave there. It stood vacant for the rest of the
year. When moving to Johannesburg, he employed an armed response service in Umhlanga Rocks
to attend to the security of his house. He believes that this house was his primary residence. On
31 October 2021 he sold his house in Umhlanga Rocks.
You are required to discuss whether Royale Spooner’s Umhlanga Rocks house can be regarded as
his primary residence.
Odette Pastry
Odette Pastry purchased a house on 1 November 2017 for R1 350 000. She lived in it for four
years. During this time she carried on her commission agency business from it. Approximately
35% of its floor space was used by her for business purposes. She successfully deducted 35% of
her repairs and maintenance costs of the house in the determination of her taxable income as a
business expense.
On 31 October 2021 Odette Pastry sold it for R3 150 000. Improvements and all other expenses
that were not deducted in the determination of her taxable income associated with the purchase and
sale of her house were R250 000.
You are required to determine, and discuss, the capital gain that arises when Odette Pastry sells her
house.
Claude Demitase
Claude Demitase purchased a house on 1 October 2017 for R1 350 000. He lived in it for two years.
During this time he also carried on his medical practice from it. Approximately 30% of its floor space
was used by him for business purposes. He successfully deducted 30% of his repairs and maintenance
costs of the house in the determination of his taxable income as a business expense.
On 1 October 2019 Claude Demitase purchased another house in which to live. He then converted
his old house solely into business premises. He let part of it to a dentist and the remainder of it to a
herbalist.
CAPITAL GAINS TAX 403
On 31 March 2021 Claude Demitase sold the house that he had purchased on 1 October 2017 for
R4 700 000. Improvements, alterations and other expenses that were not deducted in the
determination of his taxable income associated with this house cost him R1 250 000.
You are required to determine the capital gain that arises when Claude Demitase sells this house?
Goldie Collinson has an assessed capital loss of R45 000 to bring forward from the 2021 year of
assessment.
From 1 March 2021 to 31 March 2021 she did not sell an asset. Her receipts and accruals during
this one-month period were as follows:
Sale of an original painting on 22 March 2021 40 000
– Its cost and opening stock value was included in the opening stock value of
R4 800 000.
Sale of an original painting on 22 March 2021 30 000
– Its cost and opening stock value was included in the opening stock value of
R4 800 000.
Foreign dividends – the equivalent of 63 000
(These foreign dividends are not exempt from normal tax under 10B(2).)
Rentals 12 000
Expenses incurred by her in producing these rentals were 2 000
An honorarium for being secretary of the local suburb’s wine-tasting club 1 000
Martin Collinson
After Goldie Collinson’s death, Martin Collinson lived in the primary residence that he had
inherited from her until 30 June 2021. On 1 July 2021 sold it for R2 909 000.
Martin Collinson mainly invests in shares. But he does occasionally deal in shares. On 1 August
2019 he purchased several shares with the intention of selling them at a profit. By the end of the
2020 year of assessment he had sold all, but three, of these shareholdings at a profit. The three that
he still held shares in were
• On the Rocks Limited,
• Twist of Lime Limited, and
• Brandy Art Studios Limited.
On the Rocks Limited
On 1 August 2019 Martin Collinson purchased 300 shares (as trading stock) in On the Rocks
Limited for R21 600. On 28 February 2020 the market value of a share in it was R66. On 31 March
2020 he was pleasantly surprised when he received an unexpected dividend from it of R2 140. On
28 February 2021 the market value of a share in it was R80. Another unexpected dividend from it
of R1 512 accrued to him on 31 March 2021.
As a result of these generous dividend yields, Martin Collinson ‘transferred’ his 300 shares in On
the Rocks Limited out of his share-dealing business into his investment business on 1 June 2021.
The market value of a share in it on 1 June 2021 was R85, and on 28 February 2022, it was R90.
He still held 300 shares in it on 28 February 2022.
Twist of Lime Limited
On 1 March 2020 Martin Collinson had in his opening stock 1 200 shares in Twist of Lime Limited
(a listed company) valued at their original cost of R9 600. On 1 March 2021 these 1 200 shares in it
had been held by him for two years and seven months.
On 31 May 2021 Martin Collinson sold his 1 200 shares in Twist of Lime Limited shares for
R5 500.
Brandy Art Studios Limited
On 1 March 2021 Martin Collinson had in his opening stock 1 000 shares in Brandy Art Studios
Limited (a listed company) valued at their original cost of R14 400 (on 1 August 2019). On
1 March 2021 these 1 000 shares in it had been held by him for two years and seven months.
On 31 January 2022 Martin Collinson sold his 1 000 Brandy Art Studios Limited shares for
R108 000.
406 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
x A loss of R8 000 on the sale of a diamond ring. His fiancé had broken their engagement to be
married. She did not want to keep the engagement ring that he had given her. She gave it back to
him. He then sold it for R8 000 less than he had paid for it.
x A loss of R1 000 on the sale of his cell phone. He had used this cell phone for both business
purposes (to the extent of 60%) and private purposes (to the extent of 40%). His employer
awarded him an allowance to cover the cost of its business use.
x A loss of R108 000 on the sale of his beach cottage.
Pre-valuation date asset
Guy Spinnaker sold only one of his pre-valuation date assets during the 2022 year of assessment. It
was a flat that he held as an investment (in other words, another rent-producing property (see
above)). Exactly 15 years and five months before valuation date (1 October 2001) he had purchased
it for R300 000. He does not deal in properties. On 15 September 2021 he sold it for R2 100 000.
Its market value on valuation date was R1 050 000. (He will elect the option available to him that
will result in the most favourable tax consequence.)
Assessed capital loss
Guy Spinnaker has an assessed capital loss of R360 000 to bring forward from the 2021 year of
assessment.
You are required to determination the taxable capital profit to be included in Guy Spinnaker’s
taxable income for the 2022 year of assessment.
Tessa Sashimi’s executor closed the sushi-bar with immediate effect. He then arranged for the
trading stock on hand to be sold to another sushi-bar restaurant. It was sold by him for R405 000.
The insurer awarded him R160 000 for her trading stock that had been stolen.
Tessa Sashimi was a widower. The residue of her estate was bequeathed to her sister.
You are required to discuss, supported by determinations, the normal tax, including capital gains
tax, consequences for Tessa Sashimi and the Estate Late Tessa Sashimi that arise out of all the
above transactions.
Rose Salmon
Rose Salmon ceased to be a resident of the Republic on 30 April 2021. Her 20% shareholding in
Sake (Pty) Limited, a local company, was ‘bought back’ from her by it (Sake (Pty) Limited) since
her fellow shareholders in it did not have the necessary funds available to purchase them from her.
Sake (Pty) Limited recorded this ‘buy back’ transaction in its journal as follows:
Share capital (pure) Dr 40 000
Share premium (pure) Dr 20 000
Capital profits Dr 60 000
Revenue profits Dr 80 000
To Cash 200 000
Being the buying back of 40 000 shares with a par value of
R1 each from Rose Salmon at their market value of R5 a share.
Rose Salmon had paid R60 000 for her 40 000 shares in Sake (Pty) Limited. She had purchased
these shares in 2014 as an investment when it had been ‘floated’.
Prior to her emigration, Rose Salmon ‘converted’ her primary residence into a rent-producing
property investment. It had been purchased by her in 2013 for R1 100 000. Its market value on the
day it was ‘converted’ into a rent-producing property (being 31 March 2021) was R2 750 000. She
still holds this property. Its market value on 29 April 2021 was still R2 750 000.
When Rose Salmon left South Africa she did not sell her investment in a portfolio of ‘locally’ listed
dividend-yielding shares. Its base cost was R400 000. Its market value was R610 000 on 29 April
2021.
Rose Salmon sold all her personal-use assets and suffered a capital loss on their sale of R120 000.
Rose Salmon did not sell her five krugerrands. She took them with her. They had cost her
R139 000 in 2014. She purchased them as a ‘hedge against inflation’, in other words, to sell them at
some time in the future at a profit. Their market value was R154 000 on 29 April 2021. During her
holding of them their value was always in excess of R139 000.
You are required to discuss, supported by determinations, the normal tax, including capital gains
tax, consequences for Rose Salmon that arise out of all the above transactions.
Ginger Wasabi
On 31 March 2016 Ginger Wasabi, a resident of the Republic, attained the age of 60 years. He
retired from his employment on the same day. On his retirement his membership of his employer’s
provident fund ceased. A lump sum of R1 750 000 accrued to him from this provident fund. Under
the Second Schedule to the Income Tax Act, R507 500 of this lump-sum award (of R1 750 000)
was not subject to taxation.
On his retirement (on 31 March 2016) the benefits of Ginger Wasabi’s deferred compensation
scheme with his employer also accrued to him. In lieu of a cash award of R350 000, he took over
the ownership of a life insurance policy on his life (see below) that had been taken out by his
employer (to fund his deferred compensation award). On 31 March 2016 this policy had a surrender
value of R242 000. The premiums paid by his employer had been deductible in the determination
of its taxable income under the provisions of section 11(w).
CAPITAL GAINS TAX 409
On 31 March 2021 Ginger Wasabi attained the age of 65 years. On this day the following amounts
accrued to him:
• A lump sum of R660 000 and an annuity of R66 000 (payable at the rate of R5 500 a month)
from a retirement annuity fund. All his contributions to this retirement annuity fund had been
deducted in the determination of his taxable income.
• An amount of R674 000 from an insurance policy. He had paid premiums of R180 000 (R36 000
a year for five years) on this policy. He was its second owner, it had been previously owned by
his employer (see above).
You are required to discuss, supported by determinations, the normal tax (including capital gains
tax) consequences for Ginger Wasabi of the amounts that accrued to him on 31 March 2021.
Basashi New & Used Cars (Pty) Limited
Basashi New & Used Cars (Pty) Limited deals in new and used motor vehicles. It also services and
repairs motor vehicles. Its financial year ends on the last day of February.
Basashi New & Used Cars (Pty) Limited owns three ‘courtesy’ cars. They are used to transport its
customers from its workshop premises to their homes or places of work (and vice versa).
On 31 January 2022 Basashi New & Used Cars (Pty) Limited ‘transferred’ a ‘courtesy’ car to it
used-car showroom. This car had cost R120 000. Its tax value (and carrying amount) was R24 000
on 31 January 2022. It is for sale as a used car for R39 999. It was not sold during February 2022.
On 1 February 2022 Basashi New & Used Cars (Pty) Limited ‘removed’ a new car from its new-car
showroom to be used as a ‘courtesy’ car. This car had cost R150 000. It was for sale at R195 000.
The Commissioner allows Basashi New & Used Cars (Pty) Limited to write off its ‘courtesy’ cars
over a five-year period under section 11(e) (the so-called wear-and-tear or depreciation allowance).
You are required to discuss, supported by determinations, the normal tax, including capital gains
tax, consequences for Basashi New & Used Cars (Pty) Limited that arose out of all the above
transactions.
Constance Peddler
On 1 February 1992 Constance Peddler purchased a property for R685 000. She used it as her primary
residence from 1 February 1992 until 28 February 2014. She had retired from her employment on
31 December 2013. On 28 February 2014 she moved out of it into a retirement home.
Constance Peddler incurred R75 000 on improvements to her primary residence prior to valuation
date (1 October 2001). Its market value on 1 October 2001 was R1 125 000.
Constance Peddler incurred a further R120 000 on improvements to her primary residence over the
12 years five months period from valuation date until 28 February 2014. Its market value on
28 February 2014 and 1 March 2014 was R2 400 000.
From 1 March 2014 Constance Peddler changed her property from her primary residence into a
rent-producing property-investment. She let it at a market-related rental from 1 March 2014.
On 28 February 2022 Constance Peddler sold this rent-producing property investment at its market
value of R2 400 000. After settling the selling expenses of R90 000 she had incurred, she received a
net R2 310 000.
You are required to determine the capital gains tax consequences of Constance Peddler’s
transactions as detailed above.
St John Fancourt
On 1 February 1977 St John Fancourt invested in a retirement annuity fund operated by an insurer
trading as a mutual society.
On 1 December 1998 this insurer ‘demutualised’ into a listed company. As a result of St John
Fancourt being a member of its retirement annuity fund, he was awarded by the ‘new’ listed
410 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
company, free of charge, 5 000 shares in it. A share in it had a par value of R1 and a market value
of R6 on 1 December 1998.
On valuation date, 1 October 2001, a share in the listed company had a market value of R9.
On 1 November 2021 St John Fancourt sold his 5 000 shares in the listed company for R350 000.
St John Fancourt used the R350 000 that he obtained from this sale to settle some of his personal
liabilities.
You are required to determine St John Fancourt’s minimum capital gain resulting from his above
transactions.
• Trading stock that Amber Black purchased from Vincent White for R330 000 was sold by him
for R330 000.
• And trading stock that Amber Black purchased from Vincent White for R110 000 was sold by
him for only R50 000.
In Amber Black’s 2022 statement of profit or loss and other comprehensive income he wrote off
R40 000 of the R400 000 goodwill that he paid to Vincent White.
To be able to purchase Vincent White’s business, Amber Black sold some of his assets:
• Amber Black sold his shares in Coal & Charcoal Products Limited. He is an investor in shares.
He does not deal in shares. It is one of the companies that he had invested in by purchasing its
shares. On 1 December 2019 he had purchased 45 000 shares in it at R15 each as a long-term
investment. On 28 February 2020 the market value of a share in it was R23,80. And on
28 February 2021 the market value of a share in it was R24. The market value of a share in it
never dropped below the R15 that he purchased it for. On 30 April 2021 he sold all 45 000
shares it for R1 089 000 (at R24,20 a share).
• Amber Black sold his primary residence. He had purchased it for R800 000 on 1 June 2009. On
1 August 2019 an electrical fault had caused a fire in its kitchen. Its kitchen, laundry and pantry
all burnt down. While these rooms were being repaired, he moved out of his primary residence
and lived in a residential hotel for the six months that it took for the kitchen, laundry and pantry
to be rebuilt. The cost of these repairs, amounting to R150 000, in total, were paid by his insurer.
At the same time the repairs were being carried out, he improved his primary residence by
building a television room. It cost him R100 000. On 31 May 2021 he sold his ‘improved’
primary residence for R3 020 000.
• Amber Black sold a plot of vacant land. He had purchased it on 20 September 1999. He had
planned to build a holiday home on this vacant plot of land. He had purchased the land from a
property developer and paid R399 000 (R350 000 plus R49 000 value-added tax at 14%) for it.
He had immediately built a brick wall around the vacant plot of land. The wall was completed
on 30 November 1999. It cost him R45 600 (R40 000 plus R5 600 value-added tax at 14%). On
1 October 2001 the market value of the plot of land was R500 000. He sold his plot of land on
15 June 2021 for R750 000. He sold the plot of land privately to avoid paying an agent
commission. He had paid property rates of R100 000 for this plot of land during the period that
he owned it.
Amber Black has an assessed capital loss of R49 000 to bring forward from the 2021 year of
assessment.
You are required to
1. determine the normal tax, including capital gains tax, consequences for Vincent White that
arise when he sells his business to Amber Black,
2. discuss, supported by determinations, the normal tax, including capital gains tax, consequences
for Amber Black that arise when he purchases Vincent White’s business, and
3. determine Amber Black’s taxable capital gain for the 2022 year of assessment.
412 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
2. state what amounts must be included in March Limited’s gross income and provide details of
when they accrue,
3. state whether March Limited qualifies for a deduction in the determination of its taxable
income against any of the inclusions in its gross income and determine the amount of this
deduction. (The present value of R1 discounted at 6% for 12 years is R0,496 969), and
4 determine the capital gains tax consequences to Equinox Limited that arise out of all the
improvements it made to March Limited’s property. (The present value of R1 discounted at 6%
for 12 years is R0,496 969.)
On 1 November 2021 Daisy Barberton then used R790 000 of it to purchase a residential unit in a
retirement village at its current market value. On the same day she donated this residential unit to
Arnold and Aster Livingstone, her aged parents.
Share option
On 30 November 2016 Hilton Barberton completed 20 years’ service with his employer company.
As a result, he was granted the option to purchase 10 000 shares in it (his employer company) at
R30 a share, being the market value of a share on 30 November 2016. A condition attached to this
option was that he could exercise it only after five years (that is after 25 years’ service with his
employer company).
On 30 November 2021 Hilton Barberton exercised his option and purchased 10 000 shares in his
employer company for R300 000. The market value of a share in his employer company on
30 November 2021 was R50. He immediately sold 6 000 shares in his employer company for
R300 000 (to pay for their purchase consideration). On 28 February 2022 he still held 4 000 shares
in his employer company. The market value of a share in his employer company on 28 February
2022 was R49.
Share-dealing transactions
Hilton Barberton seldom deals in shares. But on 1 June 2019 he purchased several shares with the
intention of selling them at a profit. By the end of the 2019 year of assessment he had sold all, but
three, of these shareholdings at a profit. The three he still held were shares in
• Everlasting Limited,
• Gazania Limited, and
• Clanwilliam Limited.
Everlasting Limited
On 1 June 2019 Hilton Barberton purchased 250 shares (trading stock) in Everlasting Limited for
R15 000. On 28 February 2020 the market value of a share in it was R55. On 31 March 2020 he
was pleasantly surprised when he received an unexpected dividend from it of R1 485. On
28 February 2021 the market value of a share in it was R66. Another unexpected dividend from it
of R1 050 accrued to him on 31 March 2021.
As a result of these generous dividend yields, Hilton Barberton ‘transferred’ his 250 shares in
Everlasting Limited out of his share-dealing business into his investment business on 1 April 2021.
The market value of a share in it on 1 April 2021 was R70 and on 28 February 2022 it was R75. He
still held his 250 shares in it on 28 February 2022.
Gazania Limited
On 1 March 2021 Hilton Barberton had in his opening stock 1 500 shares in Gazania Limited (a
listed company) valued at R12 000 (their original cost was R13 500 on 1 June 2019). On 1 March
2021 his shares in it had been held by him for two years and nine months.
On 31 March 2021 Hilton Barberton sold his shares in Gazania Limited shares for R6 900.
Clanwilliam Limited
On 1 March 2021 Hilton Barberton had in his opening stock 1 000 shares in Clanwilliam Limited
(a listed company) valued at their original cost of R60 000 (on 1 June 2019). On 1 March 2021 his
shares in it had been held by him for two years and nine months.
On 30 November 2021 Hilton Barberton sold his Clanwilliam Limited shares for R99 000.
Other capital gains
In addition to the gains made on the sale of the assets as detailed above, he also made capital gains
on the sale of the following assets:
• R80 000 from a rent-producing property,
416 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
acting as agent for the motor-car dealer, then received nine krugerrands from her. On 1 October
2021 a broker in Johannesburg sold these krugerrands on behalf of the motor-car dealer and paid
the amount resulting from the sale to him.
The sale of the nine krugerrands realised R247 500, and resulted in a profit of R244 980
(R247 500 – R2 520 (nine at R280 each)) to Brittany Cocksfoot.
The market value of nine krugerrands on 1 October 2001 was R24 750 (nine at R2 750 each).
You are required to discuss the normal tax and capital gains tax consequences of the profit made
by Brittany Cocksfoot on the sale by her of nine krugerrands. Support your discussion with
determinations if necessary.
Dean Eragrostic
Dean Eragrostic, a resident of the Republic and a director of a local public company, was granted an
option on 1 October 2020 to purchase 10 000 shares of R10 each (nominal value) in it (the public
company) at R10 a share. At that date the market value of each share was R12,50. There were no
restrictions attached to his offer. His offer was not part of a broad-based employee share plan.
Dean Eragrostic exercised his option on 31 August 2021 and purchased the shares when the market
value of a share was R13.
The above option was granted to Dean Eragrostic on 1 October 2020 as a reward for the 30 years of
service that he had rendered to it. Of these 30 years of employment, he had spent 10 years at his
employer’s Namibian branch, the remaining 20 years being served in South Africa.
On 31 January 2022 a local dividend of R1 a share was declared by the public company payable to
all shareholders registered on that date.
On 1 February 2022 Dean Eragrostic sold his 10 000 shares in the public company for R150 000
(10 000 shares at R15 each). He needed cash to purchase a new motor car. He does not deal in
shares.
You are required to inform Dean Eragrostic of the normal tax and capital gains tax implications of
each of the above transactions. Support your information with determinations if necessary.
Rudolf Smuts
Rudolf Smuts died on 31 March 2021. He was a resident of the Republic his entire life. He was
59 years old at the time of his death. He was still in employment when he died. After his death the
following awards were made to Reine Smuts, his surviving spouse:
• A lump sum from a non-contributory provident fund of R850 000.
• A lump sum from a life insurance policy of R500 000. She is the original beneficial owner of
this life insurance policy.
• A lump sum of R50 000 awarded posthumously (after his death) by his former employer as
compensation for the loss of his office.
• An award of R100 000 from his former employer for leave that was due to him at the date of his
death.
You are required to discuss both the normal tax and capital gains tax consequences of the four
awards as detailed above. Support your discussion with determinations if necessary.
Wheeping Lovegrass Limited
Wheeping Lovegrass Limited is a resident of the Republic. It carries on the business of property
investment. It derives rentals from various properties that it owns. It does not deal in properties.
On 1 January 2021 Wheeping Lovegrass Limited purchased a building located in the centre of town.
The ground floor of this building comprised 10 shops that were let to various retailers. The 10 floors
above the shopping area comprised offices that were let to various tenants. All the tenants remained in
the building after its purchase by Wheeping Lovegrass Limited.
418 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
The purchase price for the building was R46 000 000. It was payable to the seller in two
instalments of R23 000 000 each, on 15 February 2021 and 15 March 2021. The seller of the
building was not a vendor. Wheeping Lovegrass Limited paid transfer duty of R5 570 000 on
16 March 2021 when the transfer of the property was registered in its name in the deeds registry.
On 30 September 2021, as a result of the upgrading of the city centre, Wheeping Lovegrass
Limited’s building was expropriated by the local municipality. In compensation for the loss of its
building, it was awarded R57 500 000 by the local municipality.
On 1 December 2021 Wheeping Lovegrass Limited used the funds it received from the
expropriation of its building to purchase a replacement building. The replacement building
comprised solely offices that were fully let. All the tenants remained in the building after its
purchase by Wheeping Lovegrass Limited. The seller of the replacement building was a vendor.
The sale of the replacement building was treated as a going concern by the seller and value-added
tax was levied at a rate of 0%. The transfer was registered on 22 December 2021. The purchase
price for the replacement building was R59 800 000 and was paid in full on 12 January 2022.
Wheeping Lovegrass Limited is a vendor. It has a monthly value-added tax period.
You are required to discuss the value-added tax and capital gains tax consequences to Wheeping
Lovegrass Limited of the above transactions. Support your information with determinations if
necessary.
Sorghum CC
Sorghum CC is a resident of the Republic. Its financial year ends on the last day of February. It
carries on a process of manufacture.
On 1 June 2018 Sorghum CC entered into a 36-month lease agreement for the lease of a delivery
van. The lease rental was R14 950 a month. This lease rental was determined from the cash cost of
the delivery van of R378 000, value-added tax at 15% of R57 600, and R103 500 interest (or
finance charges).
On 31 May 2021 Sorghum CC’s 36-month lease of this delivery van came to an end. On 1 June
2021 it purchased this delivery van from the lessor for R103 500 (R90 000 plus value-added tax at
15% of R13 500). Its market value on 1 June 2021 was R187 355 (R162 000 plus value-added tax
at 15% of R24 300).
Since Sorghum CC’s delivery van was already three years old, the Commissioner agreed that it
could enjoy the wear-and-tear or depreciation allowance on this delivery vehicle over a two-year
period.
On 30 November 2021 Sorghum CC’s delivery van was stolen. Its insurer awarded it R160 425 in
full and final settlement for its stolen delivery van.
Sorghum CC is a vendor. It has a monthly value-added tax period.
You are required to determine the normal tax, including capital gains tax and value-added tax
consequences to Sorghum CC of all the above transactions.
CAPITAL GAINS TAX 419
market-related rental. He had originally purchased it on 1 November 2019 for R2 400 000. Its
market value on 30 December 2021 was R2 950 000.
• Oscar Putter did not sell a flat that he had inherited from his late mother. He had inherited it on
1 December 2019. Its market value on 1 December 2019 was R580 000. As from 1 December
2019 he had let it to a tenant at a market-related rental. Its market value on 30 December 2021
was R950 000.
• Oscar Putter did not sell his dividend-yielding shares. He had purchased them on 1 February
2020 for R120 000. Their market value on 30 December 2021 was R163 000. He does not deal
in dividend-yielding shares.
• Oscar Putter did not sell certain of his personal-use assets. He took them with him when he left
South Africa. They had cost him R240 000 and had a market value on 30 December 2021 of
R233 000.
• Oscar Putter did not sell his ocean-going yacht (18 metres in length). In fact he sailed from
South Africa in it. He did not have a record of its cost. Its market value on 1 October 2001 was
R2 600 000. (It had been valued by a qualified independent third party.) Its market value on
30 December 2021 was R2 575 000.
Oscar Putter does not have an assessed capital loss to bring forward from the 2021 year of
assessment.
You are required to determine the taxable capital gain to be included in Oscar Putter’s taxable
income for the 2022 year of assessment.
Olga Ping
On 1 November 2019 Olga Ping was employed by Used Golf Clubs CC. It was believed that within
one year, provided her employment with it was satisfactory to both parties, she would take up a
40% shareholding in it.
Olga Ping lent Used Golf Clubs CC R180 000 on 1 November 2019 at a market-related interest
rate. It used these borrowed funds to purchase trading stock.
Before Olga Ping had completed her first year of employment with Used Golf Clubs CC, she
realised that she did not wish to be part of it on a long-term basis. She then did not purchase shares
in it. On 31 July 2021 she left its employment.
From 1 August 2021 to 31 January 2022 Olga Ping unsuccessfully tried to recover from Used Golf
Clubs CC her loan to it and the interest due on this loan. On 31 January 2022 she wrote off her loan
to it (of R180 000), and the interest (of R38 080) due on it as a bad debt.
Details of interest earned by Olga Ping and of the so-called basic local interest exemption from
normal tax available to her for the 2020, 2021 and 2022 years of assessment were as follows:
The official rate of interest was 4,5% for the 2022 year of assessment.
You are required to discuss and determine the normal tax, donations tax and capital gains tax
consequences that arise out of all the above transactions.
CHAPTER 19
SECTIONS 24, 24C, 24D, 24I, 24J AND 25D
423
424 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Aichpee Limited debits its customer with the full amount of finance charges liable under the
relevant suspensive sale agreement. It then recognises finance charges earned based on their
amortisation over the period of the agreement, with reference to the outstanding balance of the
capital, in accordance with generally accepted accounting practice.
The R778 000 (and R290 000) above for finance charges earned by Aichpee Limited has been
determined on this basis. It is made up of finance charges earned from agreements concluded by it
during its
• 2021 year of assessment of R282 000, and
• 2022 year of assessment of R506 000.
Aichpee Limited’s cash received from its debtors of R2 262 000 during its 2022 year of assessment
was from its
• 2021 debtors of R912 000, and
• 2022 debtors of R1 350 000.
Under section 24J(3), R788 000 is deemed to accrue to Aichpee Limited for finance charges. (In its
2021 year of assessment its section 24J(3) accrual was R290 000.)
You are required to determine Aichpee Limited’s taxable income for its 2022 year of assessment.
Assume it has no receipts or accruals or expenditure (and allowances) other than those that arise out
of the above information. (Also assume that the ‘finance charges’ in all the above transactions are
deemed to be ‘interest’.)
An extract from Bright Copper Kettles (Pty) Limited’s trading account for its suspensive sale
trading is as follows:
2022 2021
Sales at cash price 1 518 750 1 312 500
Less cost of sales 1 222 500 1 050 000
296 250 262 500
An extract from the debtors section of Bright Copper Kettles (Pty) Limited’s statement of financial
position is as follows:
2022 2021
Suspensive sale debtors
Balance per ledger 825 000 600 000
Less unearned finance charges 187 500 112 500
637 500 487 500
Less provision for doubtful debts 90 000 60 000
547 500 427 500
Suspensive sale finance charges debited for Bright Copper Kettles (Pty) Limited’s 2022 sales were
R281 250 (in 2021, R225 000 was debited).
Under section 24J(3), R168 750 interest is deemed to accrue to Bright Copper Kettles (Pty) Limited
for finance charges earned in its 2022 year of assessment.
You are required to determine the taxable income of Bright Copper Kettles (Pty) Limited for its
2022 year of assessment.
• All plots are sold by the partnership on a suspensive sale basis. No finance charges are, however,
levied on its suspensive sale agreements. At least 25% of the amount payable under each
suspensive sale agreement only becomes due and payable to it on or after the expiry of a 12-
month period from the date of the agreement.
• A letter from the Commissioner agreeing to a 5% section 11( j) allowance.
• A statement from the road building contractor reflecting that it will need a further R75 000 to
complete its contract when it returns to the site in three months’ time. It has been paid in full for
the work it has done to date.
• All other contracts for the development of the suburb by the partnership have been completed
and settled in full.
• A copy of the partnerships’ 2021 taxable income determination as prepared by the accountant
(who has since emigrated). An extract follows:
Sales of 18 plots at R250 000 each 4 500 000
Less cost of sales – land 1 800 000
2 700 000
Less actual development expenditure incurred 1 125 000
1 575 000
Add local interest accrued 150 000
1 725 000
Less administration expenses 70 000
Less accounting fees 5 000 75 000
1 650 000
Less deductions in the determination of its taxable income
– Section 11( j) at 5% 157 500
– Outstanding debtors at 40% 1 197 000
– Contingent developers 225 000 1 579 500
Taxable income 70 500
You are required to determine the 2022 taxable income of the partnership.
Surf City (Pty) Limited’s statement of profit or loss and other comprehensive income for its year
ended 28 February 2022 reflected the following:
Salaries 375 000 Amount obtained from the sale
Sales commission 210 000 of plots – three hectares 4 500 000
Rates 380 000 Local dividends 60 000
Sundry deductible expenses 117 000 Rentals 390 000
Directors’ fees 75 000
Depreciation (see below)
– Furniture and fittings 18 000
– Motor vehicles 30 000
Donations (charitable) 15 000
Estimated total development
expenditure on sales 1 620 000
Cost of land sold 1 260 000
Net income 850 000
4 950 000 4 950 000
An extract from Surf City (Pty) Limited’s statement of profit or loss and other comprehensive
income reflected the following:
2022 2021
Cost of land unsold – (five hectares) 2 100 000
(previous year – eight hectares) 3 360 000
Development expenditure account
Expenditure incurred to date 4 200 000 3 150 000
Less amounts written off against sales 2 700 000 1 080 000
1 500 000 2 070 000
Suspensive sale debtors 3 150 000 2 250 000
Plots sold by Surf City (Pty) Limited to date have been sold at the original estimated selling price
per hectare. They were of equal cost per hectare. The estimated future development expenditure is
taken into account when charging its statement of profit or loss and other comprehensive income,
the amount charged being credited to the ‘development expenditure’ account as indicated in its
statement of profit or loss and other comprehensive income.
The special debtors allowance, a doubtful debts allowance of 10% and the contingent development
expenditure allowance were deducted in the determination of Surf City (Pty) Limited’s taxable
income for its 2021 year of assessment and may again be deducted in the determination of its
taxable income for its 2022 year of assessment.
The Commissioner allows the depreciation to be deducted in the determination of Surf City (Pty)
Limited’s taxable income as its wear-and-tear or depreciation capital allowance.
Surf City (Pty) Limited’s 2021 taxable income was R645 000.
You are required to determine Surf City (Pty) Limited’s 2022 taxable income.
2022 2021
Number of plots unsold 7 18
Total cost of unsold land 420 000 1 080 000
Development expenditure incurred to date 2 100 000 1 120 000
Amount obtained from the sale of plots during year 3 300 000 1 800 000
Outstanding debtors for its instalment sales 1 326 000 930 000
Allowance under section 11( j) 6% 5%
Local interest accrued 14 400 10 800
Deductible administration expenses incurred during the year 424 400 180 800
Sandy Valley consists of 24 saleable plots of equal size and the same selling price. The total
development expenditure is estimated at R105 000 a plot.
Newtons (Pty) Limited sells all its plots on a suspensive sale basis. No finance charges are,
however, levied on its suspensive sale agreements. No more than 75% of the amount payable to it
for each plot may be payable within 12 months of the sale taking place.
For the 2021 year of assessment Newtons (Pty) Limited had a taxable income or assessed loss of
R??? ???.
You are required to determine Newtons (Pty) Limited’s 2022 taxable income. (In the
determination of its 2022 taxable income, you will need to determine its 2021 taxable income (see
above, R??? ???).)
The cash flows relating to this investment made by Regular Bank Limited are as follows:
Date Cash flows
1 January 2022 (R10 000 000 less the R1 200 000 discount) -8 800 000
30 June 2022 200 000
31 December 2022 200 000
30 June 2023 200 000
31 December 2023 (R10 000 000 plus interest of R200 000) 10 200 000
2 000 000
The R2 000 000 represents a yield to maturity on a six-monthly accrual period of 5,417%.
You are required to determine the amounts to be included in Regular Bank Limited’s gross income
for its 2022, 2023 and 2024 years of assessment that arise out of this particular financial instrument.
The R200 000 represents a yield to maturity of 10,6498% on an annual accrual basis.
You are required to determine the amounts to be included in the gross income of Rand Choices
Limited for its 2022 and 2023 years of assessment that arise out of this deal.
Cent Selections Limited
Cent Selections Limited is a resident of the Republic. Its financial year of ends on 30 June. It
purchased government stock on 1 December 2021 for R188 317. This government stock earns
interest of 7,5% a year payable six monthly. It matures on 31 May 2022 at its face value of
R200 000.
Cent Selections Limited sold this government stock on 12 August 2022 for R185 776.
The cash flows of this government stock that was held by Cent Selections Limited are as follows:
Date Cash flows
1 December 2021 -188 317
31 May 2022 7 500
30 November 2022 7 500
31 May 2023 7 500
30 November 2023 7 500
31 May 2024 7 500
30 November 2024 7 500
31 May 2022 (R200 000 plus R7 500 interest) 207 500
Total ‘interest’ 64 183
The R64 183 represents a yield to maturity of 4,7504% on a six-monthly accrual basis.
You are required to determine all the normal tax consequences of these transactions for Cent
Selections Limited in its 2022 and 2023 years of assessment.
Mercantile Limited
Mercantile Limited is a resident of the Republic. Its financial year ends on 31 August. It borrowed
R1 000 000 on 1 June 2022 at 11,5%. Its loan agreement stipulates that the loan is repayable within
six months, in six monthly instalments of R172 300 each.
Mercantile Limited has provisionally used the following four methods to determine its interest
incurred for its 2022 year of assessment. These four methods are
• the weighted outstanding capital and interest, if any, at the end of each month during the term of
the loan,
• a straight-line spreading of interest,
• by applying the rate and instalments under the agreement, and
• the yield to maturity determined under the provisions of section 24J.
All four methods are in accordance with IFRS.
The interest incurred is R33 800 ((6 × R172 300) – R1 000 000). It represents a yield to maturity of
0,9581% over the six-month loan agreement.
You are required to state if the above methods that have been used by Mercantile Limited are
acceptable for the purposes of section 24J.
Elbe Limited
Elbe Limited’s financial year ends on the last day of February. It is a resident of the Republic.
On 1 January 2020 Elbe Limited borrowed R2 000 000 from a financial institution repayable on
31 December 2022. It used the R2 000 000 from this loan to finance its working capital.
Under this loan agreement, Elbe Limited is required to make interest payments of 5% of the face
value of the loan (R2 000 000) on 31 December each year. The balance of the compounded interest
will be settled together with the repayment of the loan on 31 December 2022.
SECTIONS 24, 24C, 24D, 24I, 24J AND 25D 431
The cash flows for this loan agreement entered into by Elbe Limited are as follows:
Date Cash flows
1 January 2020 – issue price 2 000 000
31 December 2020 – interest -100 000
31 December 2021 – interest -100 000
31 December 2022 – interest and repayment -2 650 000
-850 000
The R850 000 represents a yield to maturity, applying an annual accrual period, of 13,0667%.
On 30 June 2021 Elbe Limited was approached by another lender offering it a more-competitive
borrowing rate than that currently granted by the financial institution. To benefit from this
preferential borrowing rate, it immediately settled its existing loan with the financial institution on
30 June 2021. Under an early-settlement provision included in this loan agreement, it was required
to pay the financial institution a redemption payment of R2 250 000. This redemption payment
comprised a repayment of the loan capital of R2 000 000 and accrued interest of R250 000.
Elbe Limited recorded the above transactions during its 2020 and 2021 financial years as follows:
Cash Dr 2 000 000
To Loan 2 000 000
Being a loan from a financial institution on 1 January 2020.
Finance charges Dr 100 000
To Cash 100 000
Being interest paid on the loan on 31 December 2020.
Elbe Limited recorded the above transactions during its 2022 financial year as follows:
Loan Dr 2 000 000
Finance charges Dr 250 000
To Cash 2 250 000
Being repayment of loan and interest incurred on it on 30 June
2021.
You are required to state, supported by determinations, the adjustments that must be made to Elbe
Limited’s accounting profit that arise from the above journal entries so as to determine its taxable
income for its 2022 year of assessment.
The R241 565 represents a yield to maturity on an annual accrual period of 9%.
You are required to determine the amounts to be included in Jim Nemo’s gross income in the
2020, 2021, 2022, 2023 and 2024 years of assessment that arise out of this loan.
6. All foreign exchange debts must be valued at the end of the year of assessment (the translation
date) and an ‘unrealised’ difference that results is either included in the taxpayer’s gross
income or is deductible from his income in the determination of his taxable income.
7. When a foreign exchange debt is settled, the realised foreign exchange gain or realised foreign
exchange loss (adjusted for an amount previously included in gross income or deducted in the
determination of taxable income) is included in the taxpayer’s gross income or deductible from
his income in the determination of his taxable income.
8. Capital allowances that are enjoyed on assets purchased from abroad will be based on their
rand-equivalent cost on the date the transaction was concluded.
9. The value of a forward exchange contract to be taken into account on translation date is its
market value.
10. Under a foreign currency option contract, the ruling exchange rate is a ‘nil’ amount on the date
the contract is entered into.
11. If an asset that a foreign exchange gain or loss relates to, has not been yet brought into use by
the end of the taxpayer’s year of assessment, the foreign exchange gain is included in his gross
income, or the foreign exchange loss is deductible from his income in the determination of his
taxable income, only in the year of assessment when it is brought into use.
12. The taxation of a foreign exchange gain or loss applies only on a ‘realised’ basis when the
parties to the transaction are connected persons.
13. It has been held that a foreign exchange unrealised loss has not been ‘actually incurred’ and is
therefore not deductible in the determination of taxable income under the provisions of the
general deduction formula and under any other provision of the Income Tax Act.
14. The value of trading stock purchased from abroad must include a difference (foreign exchange
gain or foreign exchange loss) resulting from a movement in the foreign exchange rates.
15. Since the provisions of section 24I(6) overrule all other provisions of the Income Tax Act, the
Caltex principle is no longer applied in the determination of the section 11(a) deduction in the
determination of taxable income for trading stock purchased from abroad.
You are required to answer true or false to the above 15 statements. Give a brief comment to
support your answer if necessary.
The Commissioner has agreed to a wear-and-tear or depreciation capital allowance determined over
a five-year period for motor cars used by it for the purpose of carrying on its trade.
Bottle-topping machine
A ‘bottle-topping’ machine was purchased by it from Japan on 1 November 2021 (the transaction
was concluded on this date) at a rand-equivalent cash price of R390 000. It was delivered on
1 December 2021. (The rand-equivalent price at that date being R396 000.) Due to problems
experienced with the installation of the machine, it was brought into use only on 1 April 2022
(rand-equivalent price then being R425 000). Value-added tax of R65 250 was paid when this
‘bottle-topping’ machine was imported into South Africa.
At the end of Kei Bottling (Pty) Limited’s 2022 year of assessment, the purchase price had still not
been settled, R405 000 being the rand-equivalent amount owing.
With the deterioration in the exchange rate, Kei Bottling (Pty) Limited concluded a three-month
forward exchange contract on 1 March 2022 to hedge the settlement of the creditor on 1 June 2022.
Under the forward exchange contract, it would purchase, on 1 June 2022, sufficient foreign
currency to settle the full amount owing to the creditor on that date for R410 000. The liability was
settled on 1 June 2022. Had it not concluded a forward exchange contract, R420 000 would have
been required to settle the liability on that date.
Loan from American financier
Kei Bottling (Pty) Limited had during its 2021 year of borrowed the equivalent of R540 000 from
an American financier at a rate of 15% a year. The R540 000 from this loan were used to the extent
of
• 60% to finance the cost of its trading stock, and
• 40% for its capital expenditure.
Had this loan been repaid by it on 28 February 2021 it would have needed R631 000 to settle this
liability. Had the loan been repaid on 28 February 2022 it would have needed R675 000 to settle
this liability.
Local interest incurred
Local interest on the loan is payable by Kei Bottling (Pty) Limited monthly in dollars. During its
2021 year of assessment, interest of R43 000 was incurred – February 2021’s interest being paid on
5 March 2021 with R7 200 being paid. Had it been paid on 28 February 2021, R7 000 would have
had to be paid. Its 2021 financial statements (reflecting interest of R43 000) took into account the
R7 000 and not the R7 200.
During Kei Bottling (Pty) Limited’s 2022 year of assessment R91 000 (including the interest
for February 2022 mentioned below) was needed to settle the interest due. February’s interest was
settled by it on 5 March 2022 with R7 900 being paid. Had the interest been paid on 28 February
2022, R7 800 would have been paid. Its 2022 financial statements took into account the R7 800 and
not the R7 900.
The capital asset that was purchased by Kei Bottling (Pty) Limited was used in its trade for the
entire 2022 year of assessment.
Equity shares and loan
On 1 June 2020, Kei Bottling (Pty) Limited had invested in Botswana Bottling Limited:
• It had purchased 18% of the equity shares of Botswana Bottling Limited.
• In addition it lent, for a five-year term to Botswana Bottling Limited, in the currency of
Botswana, the rand equivalent of R625 000 at an interest rate of 20%.
Loan
The R625 000 was made available by Kei Bottling (Pty) Limited in Botswana. The purpose of the
loan was to provide Botswana Bottling Limited with working capital to finance the purchase of Kei
Bottling (Pty) Limited’s trading stock.
SECTIONS 24, 24C, 24D, 24I, 24J AND 25D 435
No portion of the capital amount of the loan has been repaid to Kei Bottling (Pty) Limited by
Botswana Bottling Limited. But if Botswana Bottling Limited had repaid this loan account on
28 February 2021, Kei Bottling Limited would have received R637 000. Had the loan been repaid
by Botswana Bottling Limited on 28 February 2022, Kei Bottling (Pty) Limited would have
received R567 000.
Trading stock
Since Botswana Bottling Limited was experiencing difficulty in obtaining certain raw materials,
Kei Bottling (Pty) Limited supplied these for R96 000 on 31 January 2021. The purchase
consideration was settled by Botswana Bottling Limited on 30 April 2021 when R105 600 was
received by Kei Bottling (Pty) Limited. (The rand value of the debt at 28 February 2021 was
R99 600.)
Dividends
During its 2022 year of assessment dividends of R72 000 accrued to Kei Bottling (Pty) Limited
from Botswana Bottling Limited. These dividends are exempt from normal tax under
section 10B(2)(a). They were paid one month after they accrued, and R79 200 was received by Kei
Bottling (Pty) Limited.
Interest accrued
Interest accrued of R125 000 was recorded by Kei Bottling (Pty) Limited on its loan to Botswana
Bottling Limited, but due to favourable exchange rate movements, R141 000 interest was received
by it.
You are required to determine what effect the above transactions would have on Kei Bottling (Pty)
Limited’s
• gross income,
• exemptions from normal tax, and
• allowances and deductions in the determination of its taxable income,
for its 2022 and 2023 years of assessment.
28 February 2022. When this amount was settled by Club Chic on 31 March 2022, it received
R14 125.
Loan
During Border Drinks (Pty) Limited’s 2020 year of assessment, an agreement was made with Club
Chic whereby it converted Club Chic’s account for soft-drinks purchased into a two-year loan. At that
stage the equivalent of R62 500 had been owing to it by Club Chic. Had this loan been settled on
28 February 2021 it would have received R62 000. During its 2022 year of assessment this loan was
repaid in full by Club Chic, and R60 000 was received by it.
Equipment
A storage tank with a ‘nil’ tax value was sold by Border Drinks (Pty) Limited on 30 September
2021 to a bottler in Malawi for the equivalent of R18 000. This storage tank had originally cost
R30 000. Due to movements in the exchange rates, when the debt was eventually settled by the
bottler in Malawi on 31 December 2021, R20 500 was received by it.
Colourant trading stock
During Border Drinks (Pty) Limited’s 2021 year of assessment a quantity of soft-drink colourant
was imported by it from America. It did not pay cash for this purchase of raw materials. This debt
was still outstanding at 28 February 2021. The colourant had cost the equivalent of R36 000 at the
date the debt was incurred. At delivery date the rand equivalent of this liability was R36 500 and at
the end of its 2021 year of assessment the equivalent of R36 600 was owing. It paid R37 000
during its 2022 year of assessment to settle the liability for this colourant that it had purchased.
At the end of Border Drinks (Pty) Limited’s 2021 year of assessment, 80% of this soft-drink
colourant was on hand. And at the end of its 2022 year of assessment, 10% of this soft-drink
colourant was on hand.
Additive trading stock
A quantity of ‘sugar-free’, a revolutionary new sugar additive used by Border Drinks (Pty) Limited
in its process, was imported by it during February 2022. The purchase consideration was not for
cash. It had still not been settled at the end of its 2022 year of assessment. This liability
• at the date of incurring the debt was the equivalent of R45 000,
• at delivery date the equivalent of R48 500, and
• at the end of its 2022 year of assessment the equivalent of R49 200.
The purchase consideration was settled in full by Border Drinks (Pty) Limited on 31 May 2022.
This required a payment of R49 800.
At the end of Border Drinks (Pty) Limited’s 2022 year of assessment, 90% of this additive was still
on hand.
Bottling machine
Border Drinks (Pty) Limited purchased a second-hand ‘bottling’ machine from France. The
equivalent cash price of the machine was R150 000 on 1 August 2021, being the date when the
contract was concluded. It was delivered on 30 September 2021. It was brought into use in a
process of manufacture on 1 October 2021. On both these dates the rand-equivalent cash price for
the machine was R140 000. The purchase consideration was settled by it on 1 December 2021 with
R125 000 being paid.
You are required to determine what effect the above transactions would have on Border Drinks
(Pty) Limited’s gross income, exemptions from normal tax, and deductions in the determination of
its taxable income for its 2022 year of assessment.
SECTIONS 24, 24C, 24D, 24I, 24J AND 25D 437
By 28 February 2022, all this trading stock had been sold by Madeinusa Limited.
The ruling rates of exchange were as follows:
Date Spot rate Forward rate
1 October 2021 $1 = R14,50 $1 = R14,65 (three-month contract)
31 December 2021 $1 = R14,58
1 January 2022 $1 = R14,60 $1 = R14,80 (three-month contract)
28 February 2022 $1 = R14,64 $1 = R14,85 (market-related forward rate for a
one-month contract)
31 March 2022 $1 = R14,88
The average exchange rate for a year of assessment ending on 28 February 2022 was $1 = R14,25.
You are required to determine all the resulting normal tax implications to Madeinusa Limited that
arise out of the above information for its 2022 and 2023 years of assessment.
On 30 November 2021, and under this forward exchange contract, Woollen Mittens (Pty) Limited
purchased $100 000 from this local bank for R1 440 000. The spot rate was $1 = R14,39 on
30 November 2021.
Woollen Mittens (Pty) Limited’s financial year ends on the last day of February.
The ‘average exchange rate’ for a 28 February 2022 year of assessment is $1 = R14,60.
You are required to determine all the resulting normal tax implications to Woollen Mittens (Pty)
Limited that arise out of the above transactions.
Foreign interest
On I June 2021 Rosie Raindrops invested, the final 100 000 of her 250 000, inheritance in an
interest-bearing security for a period of five years. Local interest of
• 1 500 (1,5%) is payable six monthly on 31 May and 30 November, and
• 30 000 (representing further interest) is payable on 31 May 2025.
The cash flows under this arrangement are as follows:
Date Cash flows
1 June 2021 -100 000
30 November 2021 1 500
31 May 2022 1 500
30 November 2022 1 500
31 May 2023 1 500
30 November 2023 1 500
31 May 2023 1 500
30 November 2023 1 500
31 May 2024 1 500
30 November 2024 1 500
31 May 2025 ( 100 000 plus 30 000 + 1 500) 131 500
Total interest 45 000
This 45 000 represents a yield to maturity of 3,99886% on a six-monthly basis.
Exchange rates
Relevant exchange rates follow:
• On 30 April 2021 (and on 1 June 2021) the spot rate was 1 = R16,15.
• On 31 May 2021 the spot rate was 1 = R16,10.
• On 30 November 2021 the spot rate was 1 = R17.
• On 31 December 2021 the spot rate was 1 = R16,75.
• On 31 January 2022 the spot rate was 1 = R16,60.
• On 28 February 2022 (and 1 March 2022) the spot rate was 1 = R16,50 and the average
exchange rate for a year of assessment ending on 28 February 2022 was 1 = R16,80.
• On 31 May 2022 the spot rate was 1 = R16,55.
Under section 25D(3), Rosie Raindrops will elect to translate her foreign receipts and accruals
using the average exchange rate if this is her more tax-efficient option.
Other information
The above receipts and accruals are the sole foreign receipts and accruals that were received by or
accrued to Rosie Raindrops during the 2022 year of assessment. Her taxable income from a South
African source is R424 590.
Rosie Raindrops does not have an assessed capital loss brought forward from the 2021 year of
assessment.
You are required to determine Rosie Raindrops’s normal tax liability for the 2022 year of
assessment.
442 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
They are merely banked into his normal business account. And are on some occasions they are,
even spent by him before he starts work on the contract to which they relate.
Wisdom Wise has few business expenses. They have not exceeded 10% of his gross receipts and
accruals over the past few years of assessment. During February 2022 he received R10 000 as a
deposit on a new business contract. He commenced work on this contract in March 2022.
Concerned Construction CC
So as to keep Concerned Construction CC’s employees busy during a recession, it accepted a
contract at a price that would cover only costs. In fact, when taking into account an allocation of the
capital allowances on the assets to be purchased by it, and to be used by it on this contract, it would
suffer a deductible loss on the contract of 20%.
Concerned Construction CC’s financial year end on the last day of February. It received R500 000
for this contract during February 2022. Deductible expenses in the determination of its taxable
income of R60 000 had been incurred by it on this contract up to 28 February 2022. Capital
allowances of R30 000 may also be deducted by it in the determination of its taxable income from
this contract in its 2022 year of assessment.
Rudy Snaps
Rudy Snaps publishes Gameboy, a monthly magazine for male readers. He trades in his own name.
Readers who subscribe on an annual basis receive their copy of it at a discount price. To qualify for
this concession, its readers must pay him by 31 January each year.
During January 2022 Rudy Snaps received R60 000 for annual subscriptions to cover the January
2022 to December 2022 inclusive issues.
Rudy Snaps achieves a trade profit of 35% from this business. But after taking into account a
deductible assessed loss brought forward, his taxable income from this business will be only 25%.
Sallywood (Pty) Limited
Sallywood (Pty) Limited was formed to develop a small residential suburb. Land was purchased by
it for R1 260 000 and was divided into 20 saleable plots. All plots are the same size, and are for
sale at the same price, of R180 000 a plot. It estimated that R900 000 was needed to develop this
suburb.
On 1 February 2022 Comfort Homes Limited purchased eight plots from Sallywood (Pty) Limited
and paid cash of R1 440 000 in full settlement.
Sallywood (Pty) Limited made no further sales in its 2022 year of assessment (ended 28 February
2022).
Actual development expenditure of R420 000 was incurred by Sallywood (Pty) Limited on
developing this township up to 28 February 2022.
You are required to
1. determine the section 24C, or similar allowance, that the taxpayer may deduct in the
determination of his, or its, taxable income in each of the above situations, and
2. state whether it would be wise from a tax-planning point of view for a taxpayer to deduct the
section 24C allowance in the determination of his taxable income for the 2022 year of
assessment.
Part 3
Under section 24D, a taxpayer may deduct an amount in the determination of its taxable income for
certain security expenditure that it has incurred during the year of assessment. Even capital
expenditure may qualify for this deduction in the determination of taxable income.
SECTIONS 24, 24C, 24D, 24I, 24J AND 25D 445
During Liquid-Ice (Pty) Limited’s 2022 year of assessment (ended on 28 February 2022), it
incurred R990 000 on building a security wall around its storage tanks.
You are required to
1. list the taxpayers who may qualify for the section 24D concession,
2. state the type of expense that would qualify, and
3. set out the procedure that Liquid-Ice (Pty) Ltd should follow so as to qualify for the
section 24D deduction in the determination of its taxable income for the R990 000 expenditure
it has incurred on building the security wall around its storage tanks.
Following a tax audit of Micromanix LLC in 2010, the Commissioner notified its directors that he
considered that it was effectively managed in South Africa and that it was therefore a ‘resident’ for
South African tax purposes. As a result, it has been subject to normal tax in South Africa as a South
African resident since the commencement of its 2010 year of assessment.
On 1 January 2014 Micromanix LLC’s contributed tax capital was R500 000. There have been no
share issues or buy-backs since that date.
As part of Micromanix LLC’s expansion plan, its directors opened a new factory and head office in
Dubai. Its head office and its senior management then moved to Dubai. This move took place in
September 2021. Its new head office was opened on 1 October 2021. As a result of its relocation, it
ceased to be a ‘resident’ of South Africa for South African tax purposes on 1 October 2021. Its
South African operations remain as permanent establishments in South Africa.
An independent valuator valued both Micromanix LLC and its assets. She determined that the
market value of all the shares in it was R35 000 000 on 30 September 2021.
Micromanix LLC’s Dubai factory was opened and commenced production on 1 January 2022. Its
South Africa and Swaziland factories have continued to operate as previously, each now under the
supervision of a local factory manager who reports to a member of the Dubai-based senior
management team.
Micromanix LLC’s fixed asset register reflects the following details for its assets used in each factory:
Date pur- Cost Market
chased and price value on
brought 30 Septem-
Asset
into use ber 2021
Gauteng factory
Factory property (comprising land and building)
– Land 1 July 2005 1 500 000 4 700 000
– Building 1 July 2005 3 500 000 1 900 000
Plant and machinery (new and unused) 1 July 2013 5 000 000 300 000
Swaziland factory
Factory property (comprising land and building)
– Land 1 June 2010 600 000 1 900 000
– Building 1 June 2010 2 100 000 1 200 000
Plant and machinery (second hand) 1 February 2018 9 500 000 3 380 000
Swaziland has a source-based tax system and its double tax agreement with South Africa provides
that income from Micromanix LLC’s factory in Swaziland may be subjected to tax in Swaziland.
Micromanix LLC’s 2020 assessment from the Swaziland Revenue Authority reflected an assessed
loss of R380 270. No normal tax was payable in Swaziland for its years of assessment ended
31 December 2020 or 31 December 2021.
The taxable income earned by Micromanix LLC from its Gauteng and Swaziland factories from
1 January 2021 to 31 December 2021 before taking into account any capital allowances on the
factory assets or any of the other information shown above is as follows:
Gauteng factory R950 000
Swaziland factory R700 000
The taxable incomes earned by Micromanix LLC from its Gauteng and Swaziland factories were
earned evenly over the year.
Investment in Benova
Micromanix LLC purchased 15% of the shares in Benova Plc, an unlisted company incorporated in
the Isle of Man, a self-governing British Crown dependency, for $150 000 on 1 April 2013. It is not
a controlled foreign company as defined in section 9D(1) of the Income Tax Act. It has in every
SECTIONS 24, 24C, 24D, 24I, 24J AND 25D 447
year since Micromanix LLC purchased shares in it, distributed a dividend to its shareholders on the
last day of its financial year (31 December). The dividends declared and paid by it are not
deductible in the determination of its taxable income in the Isle of Man.
Benova Plc declared and paid the following dividends between 2015 and 2019:
Date Total dividend paid to all shareholders
31 December 2015 $2 000 000
31 December 2016 $2 200 000
31 December 2017 $2 500 000
31 December 2018 $2 100 000
31 December 2019 $2 400 000
On 31 August 2020 Micromanix LLC sold all its shares in Benova Plc to Phi Investments, a
company not resident in South Africa, and not a connected person in relation to it, at their market
value of $285 000.
Relevant further information
The following further information may be relevant:
• All Micromanix LLC’s capital assets were purchased by it from non-connected persons under
arm’s length transactions.
• There is no double tax agreement between South Africa and the United Arab Emirates or
between South Africa and the Isle of Man.
• The relevant rand-dollar exchange rates were as follows:
Date Rand to dollar spot rate
1 April 2015 $1 = R8,0963
31 December 2016 $1 = R8,1842
31 December 2017 $1 = R8,4744
31 December 2018 $1 = R10,4287
31 December 2019 $1 = R11,5706
30 September 2020 $1 = R13,9194
31 December 2020 $1 = R15,5159
30 September 2021 $1 = R15,4525
1 October 2021 $1 = R15,4428
31 December 2021 $1 = R15,5335
Average exchange rate for a year ended 31 December
2015 $1 = R8,2517
2016 $1 = R7,2531
2017 $1 = R8,2099
2018 $1 = R9,6502
2019 $1 = R10,8444
2020 $1 = R12,7507
2021 $1 = R14,2818
The write-off periods provided for in Interpretation Note 47 and Binding General Ruling 7 are
six years for Micromanix LLC’s furniture and fittings and three years for its office equipment.
• All exchange control requirements have been complied with and the taxpayers concerned will
apply the tax legislation so as to minimise their current year tax liabilities.
You are required to determine the South African normal tax liability of Micromanix LLC for its
period of assessment ended on 30 September 2021. Provide brief reasons for your treatment of its
capital gain and the foreign dividend that accrued to it. Dividends tax consequences and value-
added tax may be ignored.
(SAICA adapted.)
CHAPTER 20
TRADING STOCK
449
450 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Tim Tompkins then purchased other vintage cars that he also restored in his workshop.
By the end of the 2022 year of assessment Tim Tompkins had sold
• two of his original four vintage cars,
• his aunt Teresa Selby’s vintage car, and
• one other vintage car.
You are required to discuss the normal tax implications of Tim’s business venture.
During Too Little Limited’s 2022 year of assessment it sold this trading stock for R220 000.
You are required to determine the taxable incomes, as far as they relate to the above transactions,
of both Too Little Limited and Too Much Limited for both their 2021 and 2022 years of
assessment.
The income received by or accrued to Mason Stone under the John Fante contact was R900 000
(being 30% of the total contract price that was paid to him ‘upfront’ on 6 January 2022) for the
period from 6 January 2022 to 28 February 2022. It was the sole amount that he received or that
accrued to him during this period for this contract.
Under the John Fante contract, R300 000 (10% of R3 000 000) is to be withheld as a retention until
30 September 2023 (being 12 months after the 30 September 2022 contracted and expected
completion date of this contract).
Mason Stone estimated to make a R750 000 profit out of the John Fante contract. On 28 February
2022 he revised his expected profit to R690 000.
You are required to determine the amount to be included as work in progress to be included in
Mason Stone closing stock value for the 2022 year of assessment from his contract with John
Fante.
The average exchange rate for a year of assessment that ends on 31 December 2021 is
$1 = R15,60.
• Once a week, on a Wednesday afternoon, Bogie Eagle plays golf with three of his friends (a four
ball). This four ball bets on the outcome of their game. The losers of the bet are required to settle
the winners of the bet. This settlement is made in golf balls (not in cash). During each round of
golf, Bogie Eagle, on average, uses three golf balls (he loses two golf balls each week by hitting
them out of bounds or into the bush). Every Wednesday when he leaves the factory he ‘helps
himself ’ to six golf balls from its finished goods section, three to use, and three to bet with. A
golf ball sells at R60. Its cost to Albatros (Pty) Limited is R36.
• In November 2021 Bogie Eagle caused Albatros (Pty) Limited to donate a bag of golf clubs with
a market value of R9 000 (and a cost of R6 000) to his golf club for its end-of-year fund-raising
raffle. In return for this gesture, the club displayed a notice in its foyer acknowledging the gift of
the bag of golf clubs from Albatros (Pty) Limited. Its contact details were also provided in the
acknowledgement. The raffle was won by a lady member. The ‘donated’ bag of golf clubs was
for a man to use. Albatros (Pty) Limited therefore exchanged the prizewinner’s prize for a bag of
ladies’ golf clubs with a market value of R7 200 (and a cost of R4 800). On its return to Albatros
(Pty) Limited, the bag of mens’ golf clubs no longer looked ‘brand new’. Albatros (Pty) Limited
is now offering this bag of golf clubs for sale in its factory shop at a discount price of R5 999.
Unless stated to the contrary, all the above amounts are exclusive of value-added tax.
You are required to discuss the effect each of the above issues has on the normal tax determination
of Albatros (Pty) Limited for its 2021 year of assessment.
The House of Dion still had 100 metres of this imported fabric on hand at 28 February 2022. Since
the accountant did not know how to value it, he did not include its value in the closing stock value
of raw materials. Exchange rates that applied at the abovementioned dates were as follows:
1 June 2021 $1 = R15,90
31 July 2021 $1 = R16
31 August 2021 $1 = R15,95
The average exchange rate for a year of assessment ending on 28 February 2022 is $1 = R15,25.
The House of Dion debited its purchases account for the imported fabric purchased with
R1 590 000 ($100 000 at R15,90 a dollar). Its purchases account was also debited with the
import duties of R280 000 and the transport costs of R5 000. The American supplier was
credited by it with R1 590 000. The value-added tax paid was debited to its value-added tax
control account with the credit being to its bank account. The R1 595 000 paid to settle the
American supplier was debited to the American supplier with the result that this creditor is
reflected with a debit balance of R5 000 on the statement of financial position.
• The House of Dion gave 10 tuxedos (a suit worn on ‘black tie’ (formal) occasions) to the local
boys’ school. Their use is to be granted to 10 financially-disadvantaged matric pupils to enable
them to attend the matric dance. While they are not in use (or being dry-cleaned) they are
displayed in the glass show-case in the school’s foyer, with a notice indicating their origin. The
cost to manufacture a tuxedo is R550, while its selling price is R950. No entry was made in the
books to record the gift of the 10 tuxedos to the school. Yet because they were not on hand at
the end of the year, they were not included in the closing stock value of finished goods.
• The House of Dion took advantage of a liquidation sale and purchased the following:
– 20 boxes of zips at R10 a box,
– 100 boxes of cotton at R50 a box, and
– 80 rolls of fabric at R200 a roll.
The House of Dion paid cash for these purchases. The cost of the zips, the cotton and the cost of
the rolls of fabric were debited to purchases. At 28 February 2022 there were still
– 18 boxes of zips,
– 70 boxes of cotton, and
– five rolls of fabric
on hand.
Of The House of Dion’s five rolls of fabric on hand, one roll was badly damaged and probably
unusable. The estimated market value of this roll of fabric in its damaged condition is R20.
These zips, cotton and the five rolls of fabric on hand have not been included in the value of raw
materials on hand at the end of the year of assessment.
• Dion Bumsandboobs needed a new shirt for himself so he took one out of The House of Dion’s
stock room. The cost of this shirt was R110 and it was for sale at R180. No entry was made in
the books to record that this shirt that had been taken by him for his domestic use. Since this
shirt was not on hand at the end of the year, it was not included in the closing stock value of
finished goods.
• The House of Dion purchased, on credit, spare parts for its manufacturing machinery on
31 January 2022 for R180 000. The supplier’s invoice contained an error on it and was therefore
returned to it by The House of Dion. This transaction was recorded only when the replacement
(and correct) invoice arrived. This replacement invoice had not been received by 28 February
2022 with the result that no entry was made in the books in the 2022 financial year. During
February, R25 000 of these spare parts were fitted to one of its machines. The balance of these
spare parts were on hand at 28 February 2022 and are not included in the closing stock value of
spare parts.
456 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
• The House of Dion purchased a new pattern cutting machine on 1 August 2021 for R900 000. It
was paid for in cash. Its cost was debited to its manufacturing machinery account and the credit
was to its bank account. No capital allowances have been deducted on this new pattern cutting
machine in its financial statements. It was used for the first time on 1 August 2021.
You are required to determine The House of Dion’s taxable income for its year of assessment
ended 28 February 2022.
On 9 February 2022 Victor Lane agreed to carry out certain alterations and additions to Augustus
Lane’s, his brother’s, house. They agreed that he would not mark up the cost of the materials he
used when completing the alterations and additions. They also agreed that Augustus Lane would
pay him for his labour at a rate of R1 200 a day. On 26 February 2022 he purchased materials to be
used in the alterations and additions to Augustus Lane’s house at a cost of R96 000. The supplier
delivered these materials directly to Augustus Lane’s house on 27 February 2022. He commenced
working at Augustus Lane’s house on 1 March 2022. No work had been done on 26, 27 and
28 February 2022.
Because Victor Lane’s own home was sold in May 2021, his family and himself have since lived in
leased premises.
You are required to discuss all the normal tax implications to Victor Lane that arise out of the
above transactions.
in specie had cost R3 000. Its market value was R4 500. He will use these planks of Oregon-Pine
wood in his business.
You are required to discuss the income tax implications that arise to Thomas Teakwood
• out of the transfer of his woodwork equipment out of his ‘hobby’ and into his new business
venture,
• when he used some of his trading stock to make Cherry Teakwood a birthday gift, and
• when he received trading stock as a dividend in specie.
Also discuss the income tax consequences of Oregon-Pine Limited when it distributes part of its
trading stock as a dividend in specie to its shareholders.
Ludwig Limited
On 1 March 2021 Harold Watson had in his opening stock 3 000 shares in Ludwig Limited (a listed
company) valued at their original cost of R54 000 (on 1 June 2018). On 1 March 2021 these shares
had been held by him for two years and nine months.
On 31 March 2021 Harold Watson sold his shares in Ludwig Limited shares for R27 600.
Benvie Limited
On 1 March 2021 Harold Watson had in his opening stock 2 000 shares in Benvie Limited (a listed
company) valued at their original cost of R24 000 (on 1 June 2018). On 1 March 2021 these shares
had been held by him for two years and nine months.
On 30 November 2021 Harold Watson sold his Benvie Limited shares for R180 000.
Patrick Porter Limited
On 1 February 2020 Harold Watson had purchased as an investment – not as trading stock – 4 000
dividend-yielding shares in Patrick Porter Limited for R48 000. Not a single dividend was,
however, received from it during the 2021 year of assessment. And when no dividend was received
for the first nine months of the 2022 year of assessment, he ‘transferred’, on 1 December 2021,
these shares out of his investment business into his share-dealing business. On 1 February 2022 he
sold 3 000 of them for R45 000.
A Patrick Porter Limited share had a market value of
• R11,50 on 29 February 2020,
• R12,50 on 28 February 2021,
• R13,20 on 1 December 2021, and
• R15,40 on 28 February 2022.
Harold Watson still held 1 000 shares in Patrick Porter Limited on 28 February 2022.
You are required to determine the normal tax and capital gains tax consequences to Harold Watson
that arise out of the above transactions.
On 28 February 2022 Maximilian Dunlop still held 7 000 shares in Goodyear Limited, and the
market value of a share in it was R9,70.
Bridgestone Limited
On 1 February 2020 Maximilian Dunlop had purchased as an investment – not as trading stock –
2 000 dividend-yielding shares in Bridgestone Limited for R26 400. Not a single dividend was,
however, received from it during the 2021 year of assessment. And when no dividend was received
for the first nine months of the 2022 year of assessment, he ‘transferred’, on 1 December 2021,
these shares out of his investment business into his share-dealing business.
On 1 February 2022 Maximilian Dunlop sold 1 500 shares in Bridgestone Limited for R24 750.
A Bridgestone Limited share had a market value of
• R12,65 on 29 February 2020,
• R13,75 on 28 February 2021,
• R14,50 on 1 December 2021, and
• R17 on 28 February 2022.
Maximilian Dunlop still held 500 shares in Bridgestone Limited on 28 February 2022.
Firestone Limited
On 2 January 2021 Maximilian Dunlop purchased 250 shares (trading stock) in Firestone Limited
for R33 000. On 28 February 2021 the market value of a share in it was R145. On 31 March 2021
he was pleasantly surprised when he received an unexpected dividend of R3 250 from it. Another
unexpected dividend from it of R2 310 accrued to him on 30 September 2021.
As a result of these generous dividend yields, Maximilian Dunlop ‘transferred’ his 250 shares in
Firestone Limited out of his share-dealing business, into his investment business on 1 October
2021.
The market value of a Firestone Limited share on
• 1 October 2021 was R155, and
• 28 February 2022, it was R165.
Maximilian Dunlop still held 250 shares in Firestone Limited on 28 February 2022.
Continental Limited
On 1 April 2021 Maximilian Dunlop purchased 50 shares in Continental Limited (trading stock) for
R110 000.
On 1 May 2021 when the value of a Continental Limited share was R2 400, Joy Keter, Maximilian
Dunlop’s niece, attained the age of 21 years. Since he had forgotten to buy her a birthday present,
he gave her 21 of his 50 shares in Continental Limited.
On 1 June 2021 Maximilian Dunlop sold 19 of his Continental Limited shares for R50 000.
On 28 February 2022 Maximilian Dunlop still had 10 Continental Limited shares on hand and the
market value of a share in it was R2 750.
Barum Limited
On 1 February 2021 Maximilian Dunlop purchased 100 shares in Barum Limited (trading stock)
for R1 300. On 28 February 2021 he still held all 100 shares in it and the market value of a share in
it was R11.
For most of the 2022 year of assessment the market value of a Barum Limited share remained
about R11 a share. But as from 1 January 2022 its market value increased.
On 28 February 2022 Maximilian Dunlop still held 100 shares in Barum Limited and the market
value of a share in it was R13,75.
462 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
BF Goodrich Limited
On 1 July 2021 Maximilian Dunlop purchased 10 000 shares in BF Goodrich Limited (trading
stock) for R150 000. On 31 July 2021 it had a one-for-five bonus issue and he was awarded
2 000 bonus equity shares in it. (The market value of a share in it on 31 July 2021 was R14.) It
funded this bonus issue to the extent of
• 75% from its revenue profits, and
• 25% from its share premium account (contributed tax capital).
On 31 August 2021 Maximilian Dunlop sold 9 500 BF Goodrich Limited shares for R114 000.
On 28 February 2022 he still held 2 500 shares in BF Goodrich Limited and the market value of a
share in it was R15.
Michelin Limited
On 1 October 2021 Maximilian Dunlop purchased 20 000 shares in Michelin Limited (trading
stock) for R220 000.
On 31 October 2021, and under the relevant provision of the Companies Act, Michelin Limited
bought back 40% of its issued equity shares. For the 8 000 shares that he sold back to it, he
received cash of R96 800. In total, it purchased back 400 000 of its shares. The entry recording this
transaction in its journal was as follows:
Share capital (contributed tax capital) Dr 400 000
Share premium (contributed tax capital) Dr 200 000
Capital profit Dr 450 000
Retained income (revenue profits) Dr 3 790 000
To Cash 4 840 000
Being the purchase ‘back’ of 40% of its equity shares.
On 30 November 2021 Maximilian Dunlop sold 7 000 shares in Michelin Limited for R92 400.
On 28 February 2022 Maximilian Dunlop still held 5 000 shares in it and each share in it had a
market value of R13,60.
Hankook Limited and Pirelli Limited
On 1 March 2021 Maximilian Dunlop had in his opening stock 1 000 shares in Hankook Limited (a
listed company) at their original cost of R20 000 and 2 000 shares in Pirelli Limited (also a listed
company) valued at their original cost of R26 000.
On 1 March 2021 the Hankook Limited and Pirelli Limited shares had both been held by
Maximilian Dunlop for exactly two-and-a-half years.
On 1 March 2021, a Hankook Limited share had a market value of R17,50 and a Pirelli Limited
share had a market value of R33.
On 31 May 2021 Maximilian Dunlop sold his 1 000 shares in Hankook Limited for R15 200.
On 30 November 2021 Maximilian Dunlop sold 1 500 of his Pirelli Limited shares for R58 500.
On 28 February 2022 Maximilian Dunlop still held 500 shares in Pirelli Limited and each share in
it had a market value of R36.
Velocity Limited and Kelly Limited
On 1 January 2021 Maximilian Dunlop had purchased 100 000 shares in Velocity Limited (trading
stock) for R660 000.
Two weeks later, Maximilian Dunlop sold his 100 000 shares in Velocity Limited to Goldshield
(Pty) Limited for R725 000. It paid him
• cash of R500 000, and
• awarded him 100 000 shares in Kelly Limited with a market value of R225 000 (each share had
a market value of R2,25).
TRADING STOCK 463
On 28 February 2021 he held all 100 000 shares in Kelly Limited. A share in it then had a market
value of R2,20.
On 30 September 2021 Maximilian Dunlop sold 60 000 Kelly Limited shares for R138 000.
On 28 February 2022 Maximilian Dunlop still held 40 000 Kelly Limited shares and each share in
it had a market value of R2,40.
Grabber Limited
On 1 February 2021 Maximilian Dunlop was informed by Vrede Stein, another dealer in shares,
that Grabber Limited would soon be placed in liquidation. On the same day (1 February 2021) he
therefore purchased 150 000 shares in it (as trading stock) for R750 000.
On 28 February 2021 Maximilian Dunlop still held all 150 000 shares in Grabber Limited and each
share in it had a market value of R4,80.
On 31 March 2021 Grabber Limited was liquidated. Maximilian Dunlop received R800 000 as a
first and final liquidation distribution from it. His liquidation distribution from it of R800 000
comprised the following:
Share capital (contributed tax capital) 300 000
Share premium (contributed tax capital) 60 000
Capital profit 240 000
Revenue profits 200 000
800 000
Yokohama Limited
Daytoni Potenza, Maximilian Dunlop’s accountant, prepares his financial statements once a year.
He also attends to the submission of all tax returns that he is required to submit.
On 28 February 2022 Maximilian Dunlop awarded Daytoni Potenza 1 000 shares in Yokohama
Limited with a market value of R15 each in return for the services that she had rendered to him.
Maximilian Dunlop’s 1 000 Yokohama Limited shares had been purchased by him for R11 000 on
1 December 2021. They had been purchased by him as part of his share-dealing business.
You are required to determine the effect each of the above transactions will have on Maximilian
Dunlop’s taxable income. For those shares that form part of his closing trading stock, you must also
give their value to be included in his gross income.
• Tassies is made from cabernet sauvignon, cinsaut, merlot, pinotage, shiraz and tinta barocca
grapes.
Alexander de Muscat buys grapes mainly from January to April. He makes wine thought out the
year. On the last day of February his trading stock consists of
• raw materials (grapes in various forms),
• finished goods (wine), and
• consumable stores (bottles and fuel).
Alexander de Muscat has asked you to help him determine the tax consequences of certain
transactions that took place during the 2022 year of assessment. He also needs to know the value of
his closing stock in his wine-making business. In the determination of his closing stock value, he
uses the first-in-first-out basis of valuation. His particular problems in this regard are the following:
• On 1 February 2022 Pedro Ximénez, a neighbour, retired and ceased wine-farming operations.
He donated to Alexander de Muscat 10 tons of chardonnay grapes. A ton of chardonnay grapes
had a market value of R7 500 (and a cost of R4 500) on 1 February 2022. All these grapes were
on hand, albeit in a different form, on 28 February 2022. They now had a market value of
R88 000.
• On 31 March 2021 Franc Hermitage, Alexander de Muscat’s nephew, attained the age of
21 years. As his birthday present, Alexander de Muscat gave his 21 cases of Tassies with a
market value of R6 300 (and a cost of R3 780).
• Each night during summer Alexander de Muscat drinks a bottle of Libbies with his supper. Each
night during winter he drinks a bottle of Tassies with his supper. The cost of the bottles of wine
he drunk during the 2022 year of assessment was R5 575. They had a market value of R9 125.
• Certain of Alexander de Muscat’s employees are rewarded by being given a case of wine at the
end of each month. During the 2022 year of assessment he gave 60 cases of wine to his
employees. The cost of these 60 cases was R10 000 and they had a market value of R18 000.
The most-rewarded employee was Herman Uys, the manager of his bottling division. In the
2022 year of assessment he was awarded 12 cases of wine with a market value of R1 500 (and a
cost of R900).
• On 1 March 2021 Alexander de Muscat borrowed R200 000 from Perold de Muscat, his older
brother, a retired businessman. Perold de Muscat agreed that in lieu of interest,
Alexander de Muscat would give him seven cases of wine each month. The borrowed funds
were used by Alexander de Muscat in his wine-making business. A total of 84 cases with a
market value of R25 200 (and a cost of R15 120) were given by him to Perold de Muscat in lieu
of paying interest on his loan account.
• Both Libbies and Tassies are sold in 750 ml bottles. Each bottle is purchased by
Alexander de Muscat for R2. On 1 October 2021 he removed 2 500 bottles from his warehouse
and used them to build a feature wall in his renovated showroom (a wine cellar and bar). He
does not sell empty bottles. But if he were to do so, he would sell them for R5 each.
• For many years Alexander de Muscat has built up a private collection of bottles of good quality
red-wine cultivars. Some of these bottles of wine were about to become too old to drink. He
therefore took them out of his private collection and moved them into his wine cellar on
1 January 2022 where they are on sale to the public. These bottles of red wines had cost him
R7 500 and had a market value of R37 500. None of these bottles of red wine had been
purchased before 1 October 2001. By 28 February 2022, 40% of these bottles of red-wine had
been sold by him for R16 000.
• On 14 February 2022 Alexander de Muscat purchased three tons of riesling grapes for R15 000.
By 28 February 2022 it had been established that there was a shortage of riesling grapes in the
wine-making industry. The market value of these grapes was now R24 000. They were all on
hand, albeit in a different form, on 28 February 2022. They now had a market value of R27 000.
TRADING STOCK 465
• On 21 February 2022 Alexander de Muscat purchased four tons of merlot grapes for R22 000.
He then discovered that these grapes were contaminated. He sold them on 2 March 2022 for
R1 000.
• Alexander de Muscat uses a diesel-drawn fork-lift vehicle in his wine-making business. On
10 February 2022 he purchased 500 litres of diesel at R15 a litre. In the Minister of Finance’s
Budget speech given in mid-February, he announced a decrease in fuel prices. On 28 February
2022 the price of a litre of diesel was now R11. Alexander de Muscat had 400 litres of diesel on
hand on 28 February 2022.
• On 31 December 2021 Paula Cluver had completed 20 years’ service to Alexander de Muscat.
She was employed by him as his wine promoter and sales person. As a long-service award, he
gave to her 20 cases of wine with a market value of R6 000 (and a cost of R3 600).
• On 1 December 2021 Alexander de Muscat donated 10 cases of wine (five cases of Libbies and
five cases of Tassies) to a local public benefit organisation for its annual fund-raising dinner.
The five cases of Libbies had a market value of R1 200 and a cost of R900. The five cases of
Tassies contained wine that had been made in 2020. They had a market value of R3 000, a cost
of R720 and an opening stock value of R600. The local public benefit organisation provided him
with an appropriate section 18A certificate.
You are required to
1. discuss and determine the effect each of the above transactions will have on
Alexander de Muscat’s taxable income. For those items that form part of his trading stock, you
must give their value to be included in gross income, and
2. determine the amount to be included in the gross incomes of Herman Uys and Paula Cluver for
the above fringe benefits that they enjoyed.
buildings were then demolished during November 2021 at a cost of R40 000. The vacant plot of
land is for sale at R400 000. It had not been sold on 28 February 2022.
• On 1 February 2018 Myles Yard, Morgan Yard’s younger brother, had purchased a plot of land
in this ‘developing’ suburb for R90 000. It was Myles Yard’s intention to build his primary
residence on it. But before construction had commenced, Myles Yard had emigrated from South
Africa. On Myles Yard’s emigration, on 31 May 2021, he donated this plot of land to Morgan
Yard. Its market value was then R140 000 and its ‘fair market value’ as defined in section 55(1)
is also R140 000. Morgan Yard has it for sale at R200 000. It was still on hand on 28 February
2022. Myles Yard was not a vendor.
• One of the plots that Morgan Yard had purchased was adjacent to the local primary school.
(‘Dumpie’ Rhynland, his grandson attends this primary school.) Since the school did not have a
tennis court, and did not have land on which a tennis court could be built, he donated this plot of
land to the school on 30 June 2021. It had cost him R100 000. Its market value on the date of his
donation was R175 000. Its ‘open market value’ under section 3(1)(b) of the Value-Added Tax
Act was R201 250. The school issued a section 18A certificate to him for this donation.
• Part of a plot that Morgan Yard had paid R110 000 for was expropriated by the local
municipality on 31 July 2021. In extent, 25% of this plot was expropriated. The local
municipality needed the land to widen the road at a dangerous corner. The plot had a market
value of R200 000 when it was expropriated. He received R40 825 from the local municipality
for the expropriation of 25% of this plot. The market value of the remainder of the plot then
declined. It is now for sale at R145 000. It was still on hand on 28 February 2022.
• On 1 February 2022 Rose Yard, Morgan Yard’s second daughter married. As a wedding present
to her and Dylan Lewis, his son-in-law, he gave them a plot of land. It had cost him R120 000
and it had a market value of R210 000 on 1 February 2022. Its ‘open market value’ under
section 3(1)(b) of the Value-Added Tax Act was R241 500.
• During the 2022 year of assessment it was discovered that a plot which had been purchased by
Morgan Yard for R120 000 was unsuitable for a building to be erected on it. Recently it was
confirmed that an underground stream ran through the middle of this plot. He is offering it for
sale at R25 000. No offers had, however, been received by 28 February 2022.
Unless stated to the contrary, it should be noted that all the above amounts are exclusive of value-
added tax.
You are required to determine the normal tax (including capital gains tax), donations tax and
value-added tax consequences to Morgan Yard that result from the above transactions. Also
determine the capital gains tax and donations tax consequences to Myles Yard.
He spent R20 000 on improving this 2019-model used car. On 31 May 2021 he gave this 2019-
model used car to Martin Bentley, his son, as an eighteenth birthday present. Martin Bentley is a
first-year student at the local university. Had he not given this 2019-model used car to Martin
Bentley, he would have offered it for sale at R175 000.
• Royce Bentley does not deal in used spare parts. As a special favour to assist another used-car
motor dealer, on 1 June 2021 he sold parts of a 2011-model used car to this used-car dealer for
R50 000. He sold the remainder of this 2011-model used car to a second-hand spare parts dealer
for R30 000. He had purchased this 2011-model used car for R90 000. And he was trying to sell
it for R135 000.
• On 1 August 2021 Royce Bentley donated a 2018-model used car (a used micro bus) to a
children’s home (a public benefit organisation). It uses this micro bus to transport its children
between its premises and the local school. He had purchased this 2018-model micro bus for
R110 000 in the previous year of assessment. It was included in his opening stock value at
R82 500 (R110 000 × 75% (see further below under the heading ‘closing stock’)). It was for sale
at R137 500. The school gave him a ‘section 18A’ receipt for R125 000 as a result of his
donation of the 2018-model micro bus to it. On both sides and on the back of this micro bus was
painted ‘Donated by Royce Bentley Motors’. His telephone number was also painted on it.
• On the morning of 1 September 2021, when Royce Bentley opened his trade premises he found
a ‘stray’ 2013-model used car parked near his showroom door where he displayed his used cars
that were for sale. He immediately reported its presence to the local police. Nothing happened.
On nine further occasions he again reported its presence to the local police. Still nothing
happened. So on 1 November 2021 he moved this ‘stray’ 2013-model used car into his
showroom. He spent R10 000 on replacing its locks and in improving its appearance. He has it
for sale at R80 000.
• Royce Bentley has found that his used cars are more likely to sell if they are clean, shiny and
smell nice. His consumable stores include cleaning liquids and both interior and exterior motor-
car polishes. On 1 October 2021 he took a bottle of cleaning liquid and a tin of interior-car
polish out of his consumable stores and used them to clean the furniture and windows in the two
offices located in the corner of his showroom. The cost of a bottle of cleaning liquid and a tin of
interior-car polish amounted to R40. When he had purchased them, he had purchased them at a
trade discount of 20%.
• Royce Bentley’s policy is to ‘treat’ himself to a newer-model used car every three years. On
1 December 2021 he took out of his trading stock a 2020-model used car. It had cost him
R180 000 and was for sale at R225 000. On the previous night (30 November 2021), he had
returned into his trading stock the 2017-model car that he had been using. His 2017-model car
had cost him R120 000 in the 2019 year of assessment. It had been for sale for R150 000 on
1 December 2018 (when he took it out of his trading stock). Up to 30 November 2021, Royce
Bentley had been granted wear-and-tear or depreciation capital allowances of R72 000
(including R18 000 in the 2022 year of assessment) on his 2017-model used car (see further
below under the heading ‘Motor Car’). The Commissioner has approved a five year write-off
period for passenger cars. On 30 November 2021 its market value was R65 000. On 31 January
2022 it was sold to a customer for R65 000.
• On 1 January 2022, while on holiday in America, Royce Bentley purchased a ‘foreign’ 2021-
model used car for the equivalent of R70 000. This ‘foreign’ 2021-model used car was then
shipped to South Africa at a cost to him of R30 000. But it seems to have disappeared. No one
has been able to find it despite numerous searches for it. Not being trading stock held by him on
28 February 2022, it has been excluded from the closing stock value of his trading stock. He had
planned to sell this ‘foreign’ 2021-model used car for R195 000.
• On 1 February 2022 Royce Bentley entered into a conditional sale with Leyland McLaren for a
2010-model used car for R750 000. Leyland McLaren plans to give it to Mercedes Lotus, his
girlfriend, as an anniversary present on 11 March 2022. If she accepts this gift, then he will pay
468 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Royce Bentley the R750 000 owing for this 2010-model used car. This 2010-model used car had
been purchased by Royce Bentley on 1 April 2021 for R600 000. Since it was not ‘not disposed
of ’, in other words, it was disposed of, it has been excluded from the closing stock value of his
trading stock. And since no amount was received by him (not unconditionally entitled to the
R750 000), no amount has been included in his gross income for this conditional sale.
Motor car used partly for domestic purposes
Royce Bentley uses his motor car for trade purposes to the extent of 60%. Total costs incurred by
him in the 2022 year of assessment for running the two motor cars (the 2017-model for nine
months and the 2020-model for three months) amounted to R192 000. This R192 000 excludes the
wear-and-tear or depreciation capital allowance. Royce Bentley does not make a payment to his
business for his 40% private use of the motor car.
Closing stock
Royce Bentley determined the value of his closing stock at 75% of the amount he had paid to
purchase the used motor cars that he has for sale. He has used this valuation method for many
years. But he then sells most of his used cars for 125% of their cost price.
You are required to discuss, supported by determinations when necessary,
1. the normal tax consequences for the 2022 year of assessment to Royce Bentley of the above
transactions carried out by his used-car motor-dealing business during the 2022 year of
assessment,
2. the normal tax consequences for the 2022 year of assessment of his 40% private use of his
motor car, and
3. the donations tax consequences of the birthday present given to his son and the donation made
to the children’s home.
studding the surface of quiet wayside pools almost hiding the small, lancet shaped leaves. It has a
thick, fleshy bulb that is edible, but is rarely used, the flower buds being much preferred. Bundles
of these can still be purchased on the Cape Town Parade and sometimes in the streets from
itinerant hawkers, four bunches making a kooksel, or sufficient for an average dish. The flowers
must be fresh, partly-opened, with the calyces bright green, if the buds are old and mahogany
coloured, they should be rejected. They will keep fairly well in a cool place for a couple of days.’
The wateruintjie is also known as the waterblommetjie.
Ginger Hawthorn is a resident of the Republic. He has been a wine farmer in the Cape region for
over three decades (30 years).
The north-west corner of Ginger Hawthorn’s farm had never been cultivated because it consisted of
swamps and wayside pools. During the 2022 year of assessment he discovered that vast quantities
of waterblommetjies were growing in these swamps and wayside pools. With the demand for
waterblommetjies that exists, he extended his farming activities to include the farming of
waterblommetjies.
This ‘veldkos’ is sought after by restaurants specialising in traditional Cape cuisine and by
members of the Malay community. It is an essential ingredient in Waterblommetjie Bredie, a
famous South African dish.
To gain access to the waterblommetjies, Ginger Hawthorn had to further develop his farm. He
incurred costs in clearing parts of the farm that had never been used for farming purposes before.
He also had to build a new farm road and a new bridge over a river that flows into the swamps. All
these expenses were capitalised into his accounting records.
By the end of the 2022 year of assessment Ginger Hawthorn’s waterblommetjie farming was
almost fully operational. Although a lot of waterblommetjies had been gathered, sorted, graded and
packed, he was yet to make his first sale. Expenses incurred in gathering, sorting, grading and
packing have also been capitalised.
Most waterblommetjies are sold at a fresh produce market. Farmers forward their waterblommetjies
to the market where they are auctioned.
Ginger Hawthorn determined that the stock of his waterblommetjies was in the following four
places at the end of the year of assessment:
• Waterblommetjies still growing.
• Waterblommetjies stored in shed waiting to be sorted, graded and packed.
• Waterblommetjies stored in a warehouse waiting to be delivered to the market.
• Waterblommetjies stored at the market waiting to be auctioned.
You are required to discuss all the normal tax implications for Ginger Hawthorn arising out of the
above information.
471
472 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
with it for fixed periods and that it purchases (or sells) the commercial rights relating to these
players.
Commercial rights give a soccer club the exclusive image rights of a player. They include
• public events that a player is required to attend to represent the club,
• his participation in radio broadcasts or television programs, and
• the use of his face and name on marketing material and merchandise.
A player that was purchased by it on 1 May 2021 was Cristiano Shabalala. Details of this purchase
have been included below.
Apart from the above revenue-earning transactions, of Real Pirates (Pty) Limited, it also earns
revenue from the following activities:
• Sale of tickets for games played at its Bacca Stadium (see below).
• Sponsorships.
• Participation in the national South African soccer league.
• Various amounts from the sporting body managing the national league in which it participates.
These amounts reflect the revenue arrangements that the national league has made with
broadcasters of soccer games on radio and television. This revenue is then distributed to all the
clubs that participate in the national league. These distributions are usually twofold: first, a fixed
‘solidarity’ component, determined at the commencement of the soccer season, to compensate
each club for participation in the national championship, and secondly, a variable component,
that depends on the club’s final ranking in the league.
• Various other income streams, including the sale of soccer kits and other merchandise from its
retail store (also see below) and rentals from its Bacca Stadium.
Covid-19 regulations
The Covid-19 outbreak that affected most parts of the world also had a negative impact on South
Africa. The strict lockdown regulations included limits on group gatherings, for example, sporting
events (including games played at its Bacca Stadium) and prohibited the sale of non-essential items
until 31 May 2022. These restrictions had also negatively affected the cash flows of Real Pirates
(Pty) Limited.
Cristiano Shabalala
Cristiano Shabalala, an outstanding soccer player has a large social media following. He first
played for Chappies Mamelodi Soccer Club (Pty) Limited. He was then recruited at the
commencement of the 2019-2020 season by Chiefs United (Pty) Limited, on a three-year contract.
It paid R1 200 000 for his transfer. When it purchased him, it had no intention of selling his image
rights it had acquired during the three-year term of the contract. Neither Chappies Mamelodi
Soccer Club (Pty) Limited nor Chiefs United (Pty) Limited are recreational clubs approved by the
Commissioner under section 30A.
Real Pirates (Pty) Limited approached Chiefs United (Pty) Limited during January 2021 with an
offer to purchase Cristiano Shabalala. After that it then purchased him on a four-year contract on
1 May 2021. Under this contract, it incurred R2 000 000 to Chiefs United (Pty) Limited for the
transfer of his commercial rights to it and a further R1 000 000 to transfer his membership
registration to it. This contract gave it exclusive rights to use his image rights, with the exception of
some existing smaller sponsorship agreements that he already had in place for many years.
Chiefs United (Pty) Limited classified the R3 000 000 received upon its sale of Cristiano Shabalala
to Real Pirates (Pty) Limited as income in nature for normal tax purposes and included this amount
in its gross income. It paid him a monthly salary while he was contracted to it, which was deducted
in the determination of its taxable income under section 11(a) of the Income Tax Act. The reason
why it sold his rights was because it needed the money for its operations.
474 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Cristiano Shabalala had been a top player in the South African soccer league for the past five
soccer seasons. And Real Pirates (Pty) Limited expected to attract more spectators to games played
at its Bacca Stadium because of his participation. It also expected the use of a picture of his face
and his name on its merchandise to increase its merchandise sales by 33%.
Under Cristiano Shabalala’s contract with Real Pirates (Pty) Limited, he would receive a 15%
royalty on the sales of its merchandise that had a picture of his face and his name on it.
Real Pirates (Pty) Limited would pay him an annual salary of R5 000 000 and, an additional,
R350 000 a month towards his living expenses. He also earned other amounts from various other
sponsors in addition to providing marketing on his social media platform, where he had more than
3 000 000 active followers.
The sale by Real Pirates (Pty) Limited of merchandise with a picture of Cristiano Shabalala’s face
and name on it commenced on 1 June 2021 and amounted to the following:
• From 1 June 2021 to 31 July 2021: R800 000.
• From 1 August 2021 to 31 October 2021: R1 150 000.
• From 1 November 2021 to 30 April 2022: R1 356 000.
Cristiano Shabalala suffered a heart attack during a training session and died on 31 July 2021. He
had bequeathed his image rights to his parents in his will. They are married in community of
property. His image rights, and the income derived from these rights, would form part of their joint
estate. His image rights were registered in their names on 1 November 2021.
Ticket sales
Real Pirates (Pty) Limited sells tickets for its home games (played at its Bacca Stadium) in the
following three ways:
• First, season tickets: It obtains cash from the sale of season tickets for league games at the
commencement of a new soccer season. Season-ticket holders receive access to all its 15 home
games of the regular soccer league season, and the right to sit in a pre-selected seat. A season-
ticket holder does not receive a refund if a home game is cancelled for whatever reason or if he
does not attend a game. A season-ticket holder enjoys a 10% discount, except during its annual
sale, when he purchases club merchandise from its retail store for the duration of the season. A
2021-2022 season ticket sold for R900. Real Pirates (Pty) Limited determined that R750 related
to access to the games and R150 to the discount on merchandise.
• Secondly, individual tickets: These tickets for league games are purchased at the gate by non-
season-ticket holders on the day of the match.
• Thirdly, cup game tickets: These are tickets for home games that are not part of the regular
soccer league, including national cup games or trophy games, and have to be purchased
separately by supporters. The prices of these tickets vary, depending on the popularity of the
game.
The following information is available on ticket sales by Real Pirates (Pty) Limited for its 2022
financial year:
Sponsorship
On 1 May 2019, Real Pirates (Pty) Limited had signed a five-year sponsorship agreement with
Spud Limited. Under this deal, Spud Limited agreed to award an
• up-front R3 000 000 to it, and
• additional annual amount of R10 000 000 a season, if it finished in the first two places of the
league at the end of that particular season. It receives this amount only three months after a
season has ended. It finished second in the league during the 2020-2021 season and the
R10 000 000 due was received during its 2022 financial year. The 2021-2022 soccer season was
not completed by 30 April 2022, due to the disruptions caused by the Covid-19 pandemic.
In exchange, for this five-year sponsorship agreement Real Pirates (Pty) Limited agreed that Spud
Limited’s name and logo would
• appear on its soccer team’s shirts and shorts, and
• be displayed on 10 of the total of 50 fixed advertisement boards located in its Bacca Stadium.
Other amounts
Real Pirates (Pty) Limited obtained the following additional amounts:
• On 15 May 2021, the majority shareholder of Real Pirates (Pty) Limited donated R20 000 000
to it since it had cash-flow problems. The donation is not subject to any conditions being met.
• Total sales of Real Pirates (Pty) Limited’s merchandise with a picture of Cristiano Shabalala’s
face and name on it amounted to R3 306 000 for its 2022 financial year. No discounts were
granted on these sales.
• Total sales of Real Pirates (Pty) Limited’s other merchandise using their normal selling prices
(that is, before any discounts) were R14 870 000 for its 2022 financial year. Of this amount, 7%
related to sales to season-ticket holders, while 5% related to sales during its annual discount sale
(see below).
• Real Pirates (Pty) Limited’s retail store holds its annual discount sale during the week before
Christmas. During this annual discount sale merchandise is sold at a 70% discount. Season-
ticket holders are not entitled to use their 10% discount during its annual discount sale.
Sale and leaseback agreement
Real Pirates (Pty) Limited experienced financial difficulties since the lockdown regulations were
put into place. While it had commenced its 2022 financial year with R70 000 000 in its bank
account, it ended the financial year with a R30 000 000 overdraft. In total, it had debts of about
R40 000 000 (including unpaid taxes) at year end (30 April 2022).
Real Pirates (Pty) Limited is proposing to leverage off the current market value of its Bacca
Stadium to raise funds. It constructed the Bacca Stadium at a cost of R86 000 000. The Bacca
Stadium was brought into use on 1 June 2010. The Bacca Stadium is a building for normal tax
purposes. Bacca Stadium represents more than half of its assets. The Bacca Stadium was partially
financed by a loan from Ball Bank Limited at a fixed interest rate of 9,5% a year.
Real Pirates (Pty) Limited’s capital structure currently consists of equity (estimated cost of equity
is 16%) and debt (estimated cost is 9% before tax), bringing the total weighted average cost of
capital to 14%.
An option that Real Pirates (Pty) Limited is considering to help end its financial problems, is to
enter into a sale and leaseback agreement. Under this agreement its Bacca Stadium will be sold to
Group Q, an independent alternative investment firm, for R102 000 000 on 1 August 2021 and then
immediately leased back to it. If this option were selected, its Bacca Stadium would be registered in
Group Q’s name on 1 August 2021 and the full selling price would be received by it on the same
date.
Total annual lease payments of R7 200 000 will be payable in advance by Real Pirates (Pty)
Limited for 10 years, with its first payment being on 1 August 2021. At the end of the lease
476 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
The transactions that Teal Drake ‘managed’ during the 2022 year of assessment included
• interviewing tenants,
• collecting deposits,
• collecting rentals,
• recovering bad debts,
• issuing receipts,
• investing surplus funds,
• paying salaries to her two assistants, five caretakers, and herself,
• appointing and paying artisans to repair and maintain the flats,
• paying a garden-maintenance contractor,
• settling expense accounts for electricity, telephone and property rates,
• evicting defaulting tenants,
• communicating with a firm of attorneys, and
• providing a local accountant with details of all relevant financial transactions.
Leo Swan is aware that if he had appointed either the firm of attorneys or the local accountant (or
even a local estate agent) he may have earned a slightly better net-rental return. Yet he is prepared
to enjoy a slightly reduced return so as to provide the otherwise-unemployed Teal Drake with full-
time employment.
Leo Swan is 55 years old. He did not visit South Africa during the 2021 and 2022 years of
assessment. The country that he is now a resident of does not have a double tax agreement with
South Africa.
You are required to discuss whether Leo Swan’s desire to help Teal Drake has resulted in him
having a permanent establishment in South Africa, and if so, whether it has unfavourable South
African tax consequences for him.
deductions in the determination of its taxable income that arise out of the information provided
below:
• Hotel Howard (Pty) Limited entered into an agreement with Senza Ngakhona, the owner of a
hotel site, whereby it leased from him the hotel site for a period of 25 years, with effect from
1 September 2020. The terms of their agreement provided that it would erect hotel buildings on
his site to the value of R8 400 000 within 12 months. The building plans were approved on
15 October 2020. It accepted a tender of R9 600 000 for the erection of the hotel buildings.
Erection commenced on 1 November 2020. The hotel buildings were completed at the agreed
price on 31 August 2021.
• On 1 May 2021 Hotel Howard (Pty) Limited purchased furniture and soft furnishings for use in
its hotel. These items were all delivered in the last week of July 2021, and brought into use by it
on the commencement of its trading.
Office and Guest Employees’
reception area accommo- accommo-
and lounges dation dation
Carpeting and curtains 40 000 1 260 000 120 000
Furniture and equipment 40 000 1 280 000 240 000
Linen and blankets – 60 000 10 000
80 000 2 600 000 370 000
The Commissioner will allow the wear-and-tear or depreciation capital allowance determined
over a five-year period on those assets that qualify for it.
• Hotel Howard (Pty) Limited’s hotel was registered as a hotel under the Hotels Act on
1 November 2021. It was awarded a three-star grading on 1 December 2021.
• In November 2021, in view of the excessive demand for Hotel Howard (Pty) Limited
accommodation, it converted its existing employees’ accommodation into guest accommodation.
Premises for employees’ accommodation were hired with effect from 1 December 2021. The new
‘leased’ employees’ accommodation was equipped with new furnishings at a cost of R148 000.
The furnishings etcetera used in connection with the original employees’ accommodation were
now used for guest accommodation as from 1 December 2021.
• In the early hours of the morning of 1 January 2022, a fire occurred in Hotel Howard (Pty)
Limited’s hotel. It destroyed part of the roof of the building. Its insurer assessed the damages,
and on 31 January 2022, an award of R520 000 was made to it in full, and final, settlement of its
claim.
• The lowest tender received by Hotel Howard (Pty) Limited for the repairs to its roof was
R560 000. Since it was incurring R560 000 on repairing its damaged roof, it improved the
building at the same time, by extending the overhang of the roof. A tender by the same building
contractor for R720 000, representing the cost of the repairs (the R560 000) and the charge for
the additional work (R160 000), was accepted. The work was completed on 15 February 2022.
• An examination of the ‘sundry hotel expenses account’ in Hotel Howard (Pty) Limited’s ledger
at 28 February 2022 disclosed the following items that have already been deducted in the
determination of its R1 312 000 profit referred to above:
Glassware replaced 8 000
Additional rubbish bins purchased 1 200
Replacement uniforms for waiters 6 400
Brooms and brushes replaced 2 400
You are required to determine the 2022 taxable income of Hotel Howard (Pty) Limited.
486 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
4. It is Lucy Huis’s policy to keep a constant stock value of the crockery and linen. The
Commissioner has agreed to this arrangement.
5. On 1 March 2021 Lucy Huis had entered into a 12-year lease agreement with Morgan Yard,
her neighbour, for the lease of his outbuildings. Under the lease agreement, she was required to
• pay a rental of R2 400 a month to him,
• pay a premium of R86 400 on 1 March 2021 to him,
• improve his outbuildings by altering them into four bedrooms and four bathrooms at a cost
of R414 000, and
• pay half the legal costs of drawing up their lease agreement.
The cost of drawing up their lease agreement was R1 800. The alterations commenced on
1 March 2021 and were completed on 31 August 2021 at a cost of R483 000. They were
occupied by lodgers for the first time on 1 September 2021. New furniture and fittings for
these rooms were purchased by Lucy Huis on 31 August 2021 for R74 000. These items were
used by her in her trade from 1 September 2021.
6. Lucy Huis’s boarding house is not registered under the Hotels Act.
7. Sonnet Huis works as a waitress in the dining room each evening and is paid R7 000 a month
by Lucy Huis for this service. The R602 560 for employees’ salaries includes the R84 000 paid
to Sonnet Huis.
8. The Commissioner has assessed the benefit of Lucy Huis and Sonnet Huis having their meals
and enjoying other benefits at the boarding house at R36 000 each for the 2022 year of
assessment.
You are required to determine Lucy Huis’s 2022 taxable income.
cost of R4 440 000. Due to certain problems encountered in obtaining a suitable building
contractor, the construction of the hotel was completed on only 31 May 2020. (Erection had
commenced on 1 September 2019.) Costs had risen considerably since 2015 and the hotel was
erected at a cost of R5 772 000. The hotel opened to the public on 1 June 2020.
6. Peak View Hotel (Pty) Limited keeps a small herd of dairy cows so as to provide guests
staying at the hotel with fresh milk, cream and butter. In addition, it sells milk to the residents
living in a nearby village. For its 2022 year of assessment it earned R87 200 from its milk
sales. A number of riding horses are also owned by it. They are used by the hotel guests for
mountain rides in the surrounding areas.
Their details are as follows:
Opening Closing
stock stock
Number of head of livestock on hand
– Dairy cows 24 26
– Riding horses 25 30
Elected standard values
– Dairy cows 40 40
– Riding horses 30 30
Cost
– Dairy cows 144 000 160 000
– Riding horses 125 000 187 500
Market value
– Dairy cows 360 000 416 000
– Riding horses 100 000 150 000
7. Peak View Hotel (Pty) Limited has an assessed loss of R4 230 to bring forward from its 2021
year of assessment. It also has deemed trade expenditure of R640 000 brought forward under
the provisions of section 11A from its 2021 year of assessment.
You are required to determine Peak View Hotel (Pty) Limited’s taxable income for its 2022 year
of assessment.
CHAPTER 22
LUMP-SUM BENEFITS
491
492 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Copper Tan’s salary over the period of her employment with Island Holidays Limited follows:
Joe Plumtree
Joe Plumtree, a resident of the Republic, retired from Translimpopo Limited on 31 May 2021. He
had commenced working for it on 1 March 1981.
• For the first 10 years of his employment with Translimpopo Limited he had been employed at its
Zimbabwe branch.
• On 1 March 1991 he had been transferred to its head office in Johannesburg. From this date to
his retirement date he was employed at its head office.
On the day Joe Plumtree commenced working for Translimpopo Limited he joined its provident
fund. Up to the time of his transfer to South Africa, he had contributed R58 750 to it. His
contributions were at 6% of his salary.
At the time of Joe Plumtree’s retirement he had been a member of the provident fund for 40 years
and three months. This resulted in him being awarded a lump sum of R3 195 000 on his retirement.
While a resident of the Republic, he had contributed R645 000 to this provident fund. Only
R125 000 of these R645 000 ‘South African’ contributions to it had been deductible in the
determination of his taxable income.
Joe Plumtree has never belonged to another ‘retirement’ fund.
You are required to determine how much of the lump sum of R3 195 000 is subject to tax in South
Africa.
Jack Union received back from this pension fund R75 000 being his own contributions of R66 000,
plus interest of R9 000. All his contributions to this pension fund had been deducted in the
determination of his taxable income.
Jack Union then joined a retirement annuity fund. He then contributed R5 000 of his refund to it.
2. The salary earned by Atcha Pickle to the date of his retirement of R32 400 represents three
months at R10 800 a month.
3. The lump-sum gratuity was a voluntary award made by Purejuice (Pty) Limited on Atcha
Pickle’s retirement on 31 May 2021 as compensation for the loss of his office. (He had not
received a similar gratuity in the past.)
4. On 7 June 2021 Atcha Pickle elected to be awarded a lump sum and an annuity from the
pension fund It then awarded him a lump sum of R544 000 on 21 June 202. And commencing
with the month of June 2021, R7 200 a month accrued to him.
5. The interest of R8 320 that accrued to Atcha Pickle is from funds that he advanced to Mandura
Tenggara, his brother-in-law, who is ordinarily resident in Indonesia. The advance was made
to Mandura Tenggara in South Africa when he was visiting family in South Africa. Mandura
Tenggara used the funds he had borrowed from Atcha Pickle in South Africa.
6. The local interest of R27 910 that accrued to Atcha Pickle was from surplus funds invested in a
call account with the bank. It is not a ‘tax free investment’.
7. Local dividends of R3 000 that accrued to Atcha Pickle are from South African private
companies of R1 000 and from South African listed companies of R2 000.
8. Net rentals the equivalent of R120 000 accrued to Atcha Pickle from a rent-producing property
situated in Indonesia. He had inherited this property from Timor Pickle, his late father, who
had been ordinarily resident in Indonesia his entire life.
You are required to determine Atcha Pickle’s 2022 normal tax liability.
Upon Edgar Green’s retirement, on 30 November 2021, he became entitled to his benefits from
Nature in Harmony (Pty) Limited’s provident fund. A lump-sum award from it of R646 000
accrued to him. He had joined it on 1 January 2004. Under its rules, he elected to ‘buy-back’
six years additional service (membership) on joining it. His contributions to it during his
membership (and including the ‘buy-back’ contribution) were R126 000 at 30 November 2021. (Of
the R126 000 total contributions to it, R7 200 was contributed by him each year in the 2017, 2018,
2019, 2020 and 2021 years of assessment and R5 400 was contributed by him in the 2022 year of
assessment.) He has never been a member of another retirement fund.
Edgar Green’s other receipts, accruals and expenses for the 2022 year of assessment were as
follows:
• A cash salary of R12 000 a month.
• Local interest from a call account with a local bank of R46 000. It is not a ‘tax free investment’.
He had invested his retirement awards in this call account (R9 100 of this R46 000 interest
accrued in February 2022).
• Rental of R12 500 from his primary residence (see further below).
• Net rentals of R66 000 (R5 500 a month) from his ‘inherited’ flat (see further below).
• Medical scheme contributions of R6 750 (being the nine months up to 30 November 2021 at
R750 a month). Up to 30 November 2021 Nature in Harmony (Pty) Limited also contributed
R750 a month to the medical scheme for his membership. (His membership is only for himself.)
And then from 1 December 2021 to 28 February 2022 it contributed R1 500 a month to the
medical scheme for his membership. This was in accordance with its policy to fund the entire
medical-scheme contributions of its retired employees.
• Edgar Green paid ‘qualifying medical expenses’ of R31 226 during the 2022 year of assessment
of which R25 000 was recovered from the medical scheme. Of the R31 226 ‘qualifying medical
expenses’ paid, R2 500 was paid in February 2022. And of the R25 000 recovered from the
medical scheme, R2 000 was recovered in February 2022.
During the months of December 2021 and January 2022 Edgar Green did not work. During this
period he prepared for his emigration from South Africa. He left South Africa on 1 February 2022.
As from 1 February 2022, he was no longer ordinarily resident in South Africa. Before emigrating
he liquidated some, but not all, of his assets:
• He did not sell his primary residence. As from 1 February 2022 he let it to a tenant at R12 500 a
month (a market-related rental). He had originally purchased it on 1 November 2018 for
R1 400 000. Its market value on 31 January 2022 was R1 650 000.
• He did not sell a flat that he had inherited from his late mother. He had inherited this flat on
1 December 2018. Its market value on 1 December 2018 was R480 000. As from 1 December
2018 he had let this flat to a tenant at a market-related rental. Its market value on 31 January
2022 was R550 000.
• He did not sell his dividend-yielding shares. He had purchased them on 1 February 2019 for
R120 000. Their market value on 31 January 2022 was R138 000. He does not deal in shares.
• He did not sell certain of his personal-use assets. He took them with him when he left South Africa.
They had cost him R40 000 and had a market value on 31 January 2022 of R33 000.
• He did not sell his ocean-going yacht (18 metres in length). In fact, he sailed from South Africa
in it. He did not have a record of its cost. Its market value on 1 October 2001 was R3 600 000.
(It had been valued by a qualified and independent third party.) Its market value on 31 January
2022 was R2 575 000.
• From the assets that he sold, he made a capital gain of R47 000.
LUMP-SUM BENEFITS 499
Edgar Green does not have an assessed capital loss to bring forward from the 2021 year of
assessment.
You are required to determine all the South African taxes payable by Edgar Green for the 2022
year of assessment.
You are required to determine how much of the lump-sum benefits will be included in Earl
Doubell’s gross income for all the years of assessment mentioned below (including the 2022 year
of assessment), assuming
1. he retires from the provident fund on 31 May 2023 and is awarded R1 562 500. His contributions
to the provident fund to 31 May 2023 are R565 350 (R285 700 to 29 February 2016, R94 700
from 1 March 2016 to 30 April 2021 and R184 950 from 1 May 2021 to 31 May 2023), or
2. he dies on 1 May 2025 and his deceased estate is awarded a lump sum of R1 475 000. His
contributions to the provident fund from 1 May 2021 to the date of death are R141 600. In the
determination of the lump sum of R1 475 000, the period from his date of death to the expected
date of his retirement was taken into account – this being in accordance with the rules of the
provident fund.
• In lieu of three months’ notice, R63 000 (under her employment contract).
• The ‘surrender’ value of a deferred compensation award of R45 000. It has an established policy
under which deferred compensation awards are conferred upon certain of its employees when they
retire from, or leave, its employment. It was also obliged to make this deferred compensation
award to her under her employment contract.
In addition, a lump sum of R453 000 was awarded to Loire Massif by Biscay Bay Limited’s
pension fund on her resignation from it. All her contributions to this pension fund had been
deductible in the determination of her taxable income.
Biscay Bay Limited produces bottled water. Loire Massif is an expert on purifying water. To
prevent her from becoming an employee of its sole competitor, it agreed to pay her R900 000 not to
work in a similar industry within South Africa for a five-year period (commencing on 1 July 2021).
Biscay Bay Limited’s financial year ends on the last day of February.
You are required to state how the amounts that accrued to Loire Massif, and the amounts incurred
by Biscay Bay Limited, will be treated for normal tax purposes. State what amounts will be
included in her gross income and what amounts will be deductible in the determination of its
taxable income.
watch for her, it had also purchased another five watches for other retiring employees. As a result
of this bulk purchase, it was granted a discount that resulted in the cost of her watch being R4 845.
• A set of books entitled The Shakespeare Collection was given to her by her fellow employees.
They had contributed towards the R5 900 cost of this gift.
After 20 years’ service Victoria Borrowdale qualified to purchase shares in Daily Mail Limited.
From 1 April 2001 she could then purchase 10 000 shares in Daily Mail Limited at their then
market value of R3 a share. The shares have a nominal value of R1 each. Two conditions were
attached to this share offer,
• first, the employee had to take up the offer within a 10-year period, and
• secondly, she was entitled to sell them (to the Daily Mail Share Trust Fund) only on her
resignation, retirement or death (and in this situation, her executor would sell them).
On 31 March 2010 Victoria Borrowdale purchased 10 000 shares in Daily Mail Limited at R3 a
share (their market value was then R8 a share).
On 31 March 2021 Victoria Borrowdale sold her 10 000 shares in Daily Mail Limited to its share
trust for R140 030. In the 2011 year of assessment She had provided the Commissioner with a
written statement to the effect that she had elected not to be subject to tax on the gain until she was
entitled to dispose of the shares – this election being under the provisions of section 8A(1)(b)
and (c).
Victoria Borrowdale invested the amount she obtained from the sale of the shares and the lump
sums she had awarded in dividend-yielding shares in South African listed companies and in
interest-bearing securities. (See below for further details.)
Victoria Borrowdale also enjoys an accrual of two royalties from royalty-producing assets that
belong to her. Details of these royalties follow:
• She had invented in Zimbabwe a word game entitled The Wordgame in 1986 while ordinarily
resident in Zimbabwe.
• She had written a book in Zimbabwe entitled Clues to Solving the Wordgame in 1988 while
ordinarily resident in Zimbabwe.
Royalties from these two royalty-producing assets are paid to Victoria Borrowdale for their use in
Zimbabwe and in South Africa. (See below for further details.)
After Victoria Borrowdale’s retirement, she enjoyed a 21-day holiday in the United Kingdom, and
then on 1 September 2021 she emigrated from South Africa back to Zimbabwe. She did this
because most of her family live there. She did not sell her primary residence in South Africa, but let
it at a market-related rental to a tenant as from 1 September 2021. She did not return to South
Africa in the 2022 year of assessment.
Victoria Borrowdale was in South Africa for the entire 2021 year of assessment.
Victoria Borrowdale’s receipts and accruals for the 2022 year of assessment follow:
1 March to 1 September to
31 August 28 February
2021 2022
Salary 15 600 –
Lump sum from pension fund 663 000 –
Annuity (monthly pension) from the pension fund 62 400 74 880
Golden handshake award 57 000
Watch – valued at 5 100
The Shakespeare Collection – valued at 5 900
Amount obtained from the sale of her shares 140 030
Local dividends 15 000 60 000
Local interest from a non ‘tax free investment’ (see below) 34 680 24 500
LUMP-SUM BENEFITS 503
1 March to 1 September to
31 August 28 February
2021 2022
Royalties
The Wordgame from Zimbabwe (the equivalent of, but see
below) 1 000 1 000
The Wordgame from South Africa 2 000 2 000
Clues to Solving the Wordgame from Zimbabwe (the
equivalent of, but see below) 1 500 1 500
Clues to Solving the Wordgame from South Africa 3 000 3 000
Net rentals – 27 000
Local interest of R36 668 accrued and was paid to Victoria Borrowdale on 31 August 2021 and
local interest of R24 500 accrued and was paid to her on 28 February 2022.
The Zimbabwe Government subjected Victoria Borrowdale to tax on all the royalties that she
earned from Zimbabwe (these amounted to the equivalent of R5 000 in total (see above)). It levied
her with non-refundable taxes the equivalent of R1 500 on these royalties.
Victoria Borrowdale has no receipts or accruals other than those mentioned above. She does not
enjoy exemptions from normal tax and deductions in the determination of her taxable income, other
than those mentioned above.
You are required to determine Victoria Borrowdale’s liability for all South African taxes.
Neville Baulers
Brands Hatch (Pty) Limited, a resident of the Republic, was ordered to close down one of its
divisions since it was manufacturing an illegal substance. On the closure of this division, certain
employees who worked in it were retrenched by it on 31 December 2021. Neville Baulers was one
of these employees.
Neville Baulers was only 39 years old when he was retrenched by Brands Hatch (Pty) Limited. On
his retrenchment he was awarded
• R39 000 by it as compensation for the loss of his office, and
• R872 500 by its provident fund being his members’ interest. His contributions to it had been
R353 300. He had contributed R282 500 to it prior to 1 March 2016 and R70 800 after that.
On Neville Baulers’s retrenchment Brands Hatch (Pty) Limited bought back from him his 10%
shareholding in it. The par value of his 10% shareholding in it was R10 000. He had purchased this
10% shareholding for R25 000 on 1 March 2010. It bought back his 10% shareholding for R40 000.
In its journal, it recorded this buy-back transaction as follows:
‘Pure’ share capital Dr 10 000
Revenue profits Dr 30 000
To Bank 40 000
Being the buyback of 10 000 shares from Neville Baulers at their
current market value of R40 000.
This is the first occasion that Brands Hatch (Pty) Limited has bought back its share capital.
No previous lump-sum benefit has accrued to Neville Baulers from a recognised retirement fund.
You are required to discuss the normal tax consequences that arise to Neville Baulers out of the
above transactions. Support your discussion with relevant determinations.
Paul Ricard
Paul Ricard was also retrenchment by Brands Hatch (Pty) Limited on 31 December 2021. He did
not hold shares in it. And he was not, and has never been, a director of it.
On his retrenchment he was awarded R1 120 000 by the Brands Hatch (Pty) Limited Provident
Fund. His contributions to it had been R461 000. He had contributed R380 000 to it prior to
1 March 2016 and R81 000 after that. He was 49 years old when he was retrenched.
This is the first occasion that a lump sum has accrued to Paul Ricard from a recognised retirement
fund.
You are required to determine the amount of normal tax payable by Paul Ricard on his R1 120 000
retrenchment award.
Jose-Carlos and Paulo Pace
Paulo Pace is a determined and successful businesswomen. For years she climbed the so-called
corporate ladder. Her endeavours were always supported by her husband, Jose-Carlos Pace.
After Jose-Carlos Pace’s own business had failed he stayed at home and looked after their children.
He was an organised ‘house husband’. This arrangement suited the Paces,
• she was the breadwinner, and
• he maintained their house and looked after their children.
After the Paces’s children had finished their studies and left home they experienced marital
problems which ultimately ended in them being divorced. Jose-Carlos Pace was 51 years old when
they were divorced.
Not having worked for many years, Jose-Carlos Pace had no money. As part of their divorce
settlement, he was awarded R2 500 000 out of Paulo Pace’s member’s interest in her employer’s
provident fund.
506 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Hockenheimring Limited and Herman Rodrigues are both residents of the Republic.
During the 2022 year of assessment Herman Rodrigues attained the age of 60 years, the mandatory
retirement age for Hockenheimring Limited’s employees. He therefore retired on 31 December 2021.
Herman Rodrigues had served Hockenheimring Limited for over 25 years and in accordance with
its established and recognised policy he was awarded a watch for his ‘long service’. The cost of this
watch was R5 500 but since it obtained a 10% cash discount when the watch was purchased, it cost
R4 950.
A golden handshake award of R120 000 also accrued to Herman Rodrigues from Hockenheimring
Limited.
Herman Rodrigues’s position had entitled him to the free use of a ‘company car’. For the 10-month
period from 1 March 2021 to 31 December 2021, he travelled a total of 28 000 kilometres in it. His
log book confirms that of the 28 000 kilometres he travelled in it, 7 000 kilometres were for
business purposes.
Herman Rodrigues had a total of two months leave due to him on his retirement date. The salary
division of Hockenheimring Limited had confirmed that he was entitled to a cash compensation of
R36 000 for leave due but not used as at his retirement date. After hearing about his leave-
compensation award, he requested that instead of receiving the R36 000 in cash, he be allowed to
take over his ‘company car’.
Hockenheimring Limited agreed that Herman Rodrigues would be awarded his ‘company car’ in
full settlement of the leave he was entitled to as at 31 December 2021. For this purpose, the
‘company car’ was valued at R36 000.
Hockenheimring Limited’s tax value and carrying amount (book value) of the ‘company car’ was
R57 500 at 31 December 2021. Its original cost had been R387 500 (R250 000 plus value-added
tax at 15% of R37 500). Shortly before Herman Rodrigues’s retirement, he had his ‘company’ car
valued at R80 000 by an independent second-hand motor dealer.
You are required to discuss the normal tax consequences to Herman Rodrigues that arise out of the
above transactions. Support your discussion with relevant determinations.
Valencia Aintree
Valencia Aintree and Albert Aintree, her second husband, parted on 31 March 2020. Their divorce
was finalised on 30 September 2020. Under their divorce agreement, she elected to receive a lump-
sum benefit from his member’s interest in a provident fund. On 31 October 2020 a lump sum of
R825 000 accrued to her from it. He had contributed R280 000 to it, R220 000 prior to 1 March
2016 and R60 000 after that. This was the first lump sum that accrued to her.
On 1 November 2020 Valencia Aintree used R700 000 of it to purchase a primary residence for
herself. The R125 000 balance she invested into a provident preservation fund.
On 31 December 2021 she attained the age of 60 years. Under her retirement annuity fund contract,
its benefits became payable to her:
• A lump sum of R1 200 000 accrued to her on 31 December 2021.
• An annuity of R360 000 (payable at a rate of R300 000 a month) also accrued to her on
31 December 2021. The first R30 000 monthly amount was paid to her on 31 January 2022.
All Valencia Aintree’s contributions to this retirement annuity fund had been deductible in the
determination of her taxable income. She invested R1 000 000 of her retirement annuity fund lump
sum in her provident presentation fund. No portion of this R1 000 000 contribution was deductible
in the determination of her taxable income.
On 28 February 2022 Valencia Aintree retired from her provident preservation fund. A lump sum
of R1 155 000 accrued to her.
You are required to determine the normal tax payable on the two lump sums that accrued to
Valencia Aintree during the 2022 year of assessment.
508 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
For the last six years of George Prince’s employment with Phakisa (Pty) Limited, he was seconded
by it to manage its branch in Malawi, that is from 1 March 2016 to 28 February 2022. This was the
first and only occasion that he had worked outside South Africa.
During this six-year period, George Prince returned to South Africa for a five-week period
(35 days) during December and early-January each year. These were the sole trips he made into
South Africa.
George Prince retired from Phakisa (Pty) Limited’s employment on 28 February 2022. He had
attained the age of 65 years on 21 February 2022.
The following information is relevant relating to George Prince’s last six years of employment:
Not all Darryl Allam’s contributions to the retirement annuity fund had been deductible in the
determination of her taxable income. Her total non-deductible in the determination of her taxable
income contributions were,
• R15 000 on 28 February 2017,
• R23 000 on 31 December 2021, and
• R24 000 on 14 February 2022.
You are required to determine the normal tax payable on the two lump sums that accrued to Darryl
Allam in the 2022 year of assessment.
Aldo Scribante
On 31 December 1978 Aldo Scribante’s parents emigrated from South Africa. She did not go with
them. She remained in South African in 1979 to complete her schooling. She attended boarding
school in 1979 and stayed with relatives during the school holidays. She emigrated from South
Africa on 31 December 1979.
From 1 January 1980 to 28 February 2014 Aldo Scribante was ordinarily resident outside South
Africa. She did not visit South Africa during this period.
On 1 March 2014 she returned to South Africa and commenced working for the Grosvener
Municipality. On 28 February 2018 she resigned from its employment. On her resignation from it, a
lump-sum withdrawal benefit of R330 000 accrued to her from its pension fund. All her contributions
to this pension fund had been deductible in the determination of her taxable income. No portion of this
lump-sum withdrawal benefit was reinvested into another ‘qualifying’ retirement fund.
From 1 March 2018 Aldo Scribante was employed by the Gosforth Town Council. She retired from
its employment on 28 February 2022. On her retirement from it, a lump sum of R600 000 accrued
to her from its provident fund.
You are required to determine the normal tax payable on the
• R330 000 withdrawal lump-sum benefit that accrued to Aldo Scribante on 28 February 2018,
and
• R600 000 retirement lump-sum benefit that accrued to her on 28 February 2022.
Killarney Kyalami
Killarney Kyalami and Tony Kyalami parted on 31 March 2020. Their divorce was finalised on
30 November 2020. Under their divorce agreement, she elected to receive a lump-sum benefit from
his member’s interest in a pension fund. On 31 December 2020 a lump sum of R1 500 000 accrued
to her from it. All her ex-husband’s contributions to it had been deductible in the determination of
his taxable income. This was the first lump sum that accrued to her.
On 1 January 2021 Killarney Kyalami used R1 200 000 of it to purchase a primary residence for
herself. The R300 000 balance she invested into a provident preservation fund.
On 30 November 2021 Killarney Kyalami attained the age of 65 years. Under her retirement
annuity fund contract, its benefits became payable to her:
• A lump sum of R800 000 accrued to her on 30 November 2021.
• An annuity of R240 000 (being awarded at a rate of R20 000 a month) also accrued to her on
30 November 2021. The first R20 000 monthly amount was awarded to her on 31 December 2021.
All Killarney Kyalami’s contributions to this retirement annuity fund had been deductible in the
determination of her taxable income. She invested R720 000 of her retirement annuity fund lump
sum in her provident presentation fund.
On 28 February 2022 Killarney Kyalami retired from her provident preservation fund. A lump sum
of R1 220 000 accrued to her.
You are required to determine the normal tax payable on the two lump sums that accrued to her
during the 2022 year of assessment.
512 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
• In a rent-producing property. Net rentals of R6 000 are expected to accrue from this
rent-producing property each month.
You are required to determine which investment Sunny Gamble should make (assume he makes
the investment on 1 April 2022) solely on the basis of the after-tax return in the 2023 year of
assessment. (Assume that tax legislation in the 2023 year of assessment is identical to that which
applied in the 2022 year of assessment.)
Deon Benade therefore took early retirement on 31 October 2021. He received the following
cumulative payslip for the eight-month period 1 March 2021 to 31 October 2021:
Code Description Amount
3601 Salary (R60 000 a month for eight months) 480 000
3901 Severance benefit lump-sum gratuity awarded to him by Pine Jel (Pty) Limited 500 000
3605 Severance benefit leave pay paid to him by Pine Jel (Pty) Limited 20 000
3810 Medical scheme contributions paid to by Pine Jel (Pty) Limited on his behalf 28 800
Deon Benade’s retirement package and accumulated leave were paid by Pine Jel (Pty) Limited to
him by means of a single electronic transfer on 31 October 2021.
Under Deon Benade’s employment contract with Pine Jel (Pty) Limited, it has to continue to pay
the monthly contributions to the medical scheme for both him and Deanna Benade, his wife, after
his retirement. Its contributions for the 2022 year of assessment amounted to R1 800 a month for
him and R1 800 a month for her.
All the medical expenses of Deon Benade and Deanna Benade were paid by the medical scheme.
Deon Benade did enjoy any other lump sums from Pine Jel (Pty) Limited. Yet, when he left his
previous employment and joined it in May 2017, a lump sum of R100 000 was awarded to him
from his previous pension fund. The normal tax paid on that lump sum amounted to R13 950. He
used R75 000 of this R100 000 lump sum to purchase his 4% interest in Pine Jel (Pty) Limited on
1 June 2017. He has not enjoyed any other lump-sum benefits from retirement funds. His intention
is to retire from his current retirement fund on 1 March 2022, the date that he will attain the age of
62 years.
Deon Benade informed Pine Jel (Pty) Limited that he would like to sell his shares in it. Neither it,
nor its other shareholders, was interested in purchasing the shares from him. It was agreed that his
4% interest in it was worth R400 000. It then offered to ‘buy back’ its shares from him when its
cash-flow situation improved.
Deon Benade was interested in buying an off-road vehicle for his personal use. Pine Jel (Pty)
Limited had an off-road vehicle. It agreed that it would purchase his shares in it in exchange for its
off-road vehicle. An independent valuer valued its off-road vehicle at R395 000 on 30 November
2021. On that date he accepted this off-road vehicle in exchange for his 4% interest in it. It
provided him with a letter indicating that its contributed tax capital had been reduced by R500 as a
result of this transaction.
Deon Benade did not sell any other assets. He did not earn any other amounts during the 2022 year
of assessment.
You are required to
1. draft a memorandum to Abel Cele explaining to him whether the interest he incurred on his
mortgage bond will be deductible in the determination of his taxable income. Refer to case law
when relevant,
2. discuss the normal tax consequences for Pine Jel (Pty) Limited resulting from its settlement
agreement with National Bank Limited,
3. discuss the value-added tax consequences, if any, for both parties, of the settlement agreement
between Pine Jel (Pty) Limited and National Bank Limited, and
4. determine the normal tax liability of Deon Benade for the 2022 year of assessment.
(SAICA adapted.)
CHAPTER 23
TAX AVOIDANCE
515
516 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Laurence Marks and Jacky du Barrie had agreed that the rental payable for the farming land would
be R30 000 (excluding value-added tax) and that the rental payable for the livestock would be
R20 000 (again, excluding value-added tax).
Gail du Barrie prepared the tax invoices for the lease agreement between Laurence Marks and her
husband. An extract from her March 2021 tax invoice follows:
Lease of farm land 20 000
Lease of livestock 30 000
50 000
Add value-added tax (at 15%) 7 500
Total rental due for March 2021 57 500
Jacky du Barrie has for many years suffered a loss from his farming generations. But he has a
taxable income as a result of letting portions of his farm land and a return from his investments.
Gail du Barrie deliberately transposed the two rentals amounts (see above). The increased rentals
from the livestock would reduce her husband’s farming loss for the year. And the reduced rentals
from the land would reduce his non-farming taxable income.
Laurence Marks did not notice that the two rentals had been transposed since he enjoys a deduction
for both rentals in the determination of his farming taxable income. Both rentals are correctly
deductible from his farming income.
You are required to discuss
1. if the value-added tax treatment on the March 2021 tax invoice is correct,
2. whether the Commissioner could successfully employ the so-called general anti-avoidance
provisions of the Income Tax Act against Jacky du Barrie,
3. whether the Commissioner could successfully employ the so-called general anti-avoidance
provisions of the Income Tax Act against Laurence Marks,
4. if SARS is able to take action against Gail du Barrie, and indicate what it is likely to do, and
5. if SAICA is able to take action against Gail du Barrie, and indicate what it is likely to do.
close of its 2021 year of assessment. During its 2022 year of assessment it purchased, from an
independent person, a number of income-producing assets that it now uses for its own benefit.
Vleis Braai
Vleis Braai has successfully operated an illegal cookie business for a number of years. (An illegal
cookie business is one that includes a banned substance as an ingredient in the cookie.) He had
applied for a licence on 10 occasions, but his applications had always failed.
Sout Ribbertjie is the sole shareholder of Bredie (Pty) Limited. It had also run a cookie business on
an illegal basis. It had, however, ceased trading nine months earlier. It had an assessed loss at the
end of its 2021 year of assessment.
Vet Koek, with the help of some ‘friends’, was a successful applicant for a cookie licence that he
obtained on behalf of Sosatie (Pty) Limited. He is its sole shareholder and its managing director.
For the past three years it has traded as a legal cookie producer. He is, however, unfriendly to the
hungry visitors who visit its premises. As a result, at the end of its 2021 year of assessment, it also
had an assessed loss.
Vleis Braai purchased all the equity shares in both Bredie (Pty) Limited and Sosatie (Pty) Limited.
He then immediately sold half of his successful cookie business to Bredie (Pty) Limited, and the
other half to Sosatie (Pty) Limited.
Pop Stywe
Pop Stywe has for several years conducted a successful breakfast-food business in his own name.
During the 2020 year of assessment Pop Stywe purchased all the equity shares in Mealie Meal
(Pty) Limited, a manufacturer of breakfast foods. Since it manufactured ‘old-fashioned’ cereals, it
had suffered trade losses in its 2019, 2020 and 2021 years of assessment and had a substantial
accumulated assessed loss at the end of its 2021 year of assessment.
Two years after purchasing all the equity shares in Mealie Meal (Pty) Limited, that is in the 2022
year of assessment, Pop Stywe sold his successful breakfast-food business to it.
Cookie Sisters
Cookie Sisters is the sole shareholder in Melkterts (Pty) Limited. It conducts a profitable business
as a baker of cakes.
Cookie Sisters, trading in her own name, is in business, baking and selling rusks. She has not,
however, chosen popular recipes for her rusks. They are not selling. As a result of the loss suffered
by her rusk-baking business, she had an assessed loss for the 2021 year of assessment.
In the 2022 year of assessment Melkterts (Pty) Limited sold its profitable bakery business to
Cookie Sisters. After that, she caused it to be placed in voluntary liquidation. The profitable
business formerly conducted by it is now conducted by her, in her own name.
You are required to consider the above situations and to state (with suitable supporting reasons)
whether the provisions of section 103(2) could be successfully invoked by the Commissioner in
each situation.
commencement of the 2022 year of assessment they incorporated their business. The reasons
why they incorporated their business were
• first, to limit their personal liabilities,
• secondly, to give the business an opportunity for perpetual succession,
• thirdly, to be able to admit new partners (now new shareholders) into their business,
• fourthly, to be able to change their profit or loss sharing ratios, and
• finally, in an attempt to reduce their personal normal tax liabilities.
‘Their business’s market value was in excess of its net asset value. This meant that a goodwill
account was created in the company. They then lent funds to “their” company so it could pay the
partnership for the business. The creation of the “new” taxpayer – the company – caused both of
them to save normal tax.
‘Under section 80J(1), the Commissioner has written to both of them informing them that he is
going to raise the provisions of section 80A against them on the grounds that the incorporation
of their partnership business was an impermissible tax avoidance arrangement.
‘There are two important, and binding, judgments in which the taxpayers concerned were able to
prove that the provisions of section 103(1) did not apply when they incorporated their
businesses. Which of the four prerequisites did the taxpayers in those cases use to successfully
prove that the provisions of section 103(1) did not apply? Do not give me a detailed explanation
of the provisions of section 80A. All that is needed, in brief form, are details of the two
prerequisites that were successfully used by the taxpayers in the two said cases to prove that the
provisions of section 103(1) did not apply to them.
‘And could Peter Rhine and Paul Rhone use either of these defences to defend the section 80A
attack.’
You are required to prepare a reply memorandum to your fellow partner setting out your answer
to his question.
Industries Pension Fund and Sprint Limited are residents of the Republic. They both have
financial years that end on the last day of February.
Grant Hunt
So as to freeze the value of Grant Hunt’s rapidly-growing estate, he sold his investments in local
dividend-yielding shares at their current market value to an inter vivos trust that he had recently
formed. The trust is a resident of the Republic. Its beneficiaries are his three adult children (they are
not minors) and himself.
The sole purpose of Grant Hunt’s sale was to eliminate the growth in his estate. Because local
dividends received or accrued are exempt from normal tax, the purpose of the sale was not to save
normal taxation. In fact, the receipt or accrual of the local dividends resulted in the withholding of
dividends tax at a rate of 20%.
The purchase consideration payable by the trust to Grant Hunt was left owing as an interest-free
loan. No security was provided for, and no terms of repayment of the amount owing were stated.
The beneficiaries of the trust have a vested right to its annual receipts and accruals.
Grant Hunt and his three adult children are all residents of the Republic.
The trust’s year of assessment ends on the last day of February.
Derby (Pty) Limited
Derby (Pty) Limited is a resident of the Republic. During its 2021 year of assessment its business
collapsed and it lost a lot of money. It ended up with an assessed loss of R1 500 000 for its 2021 of
assessment.
At the commencement of Derby (Pty) Limited’s 2022 year of assessment it entered into a new
business venture. Since it needed to finance this new business venture it approached Guineas Bank
Limited, a resident of the Republic, for the required funds.
Rather than providing Derby (Pty) Limited with a loan, Guineas Bank Limited applied, and was
allotted, R500 000 4,5% redeemable preference shares in it. It is obliged to redeem, in whole or in
part, these redeemable preference shares within two years from their date of issue.
During Derby (Pty) Limited’s 2022 year of assessment no part of these redeemable preference
shares were redeemed. It declared and paid dividends of R22 500 to Guineas Bank Limited.
Vivo Cup
Vivo Cup is a resident of the Republic. He is of the opinion that the government does not spend the
money it collects in the form of its various taxes wisely. He has for a number of years endeavoured
to pay as little tax as possible. He is forced to pay value-added tax since he has to purchase certain
goods for his domestic needs (although he cheats on value-added tax payments if an opportunity
presents itself).
Vivo Cup is retired. He is over the age of 75 years. The majority of his receipts and accruals are
from his investments. He manages to pay no normal tax by ensuring that his ‘disclosed’ taxable
income for a year of assessment does not exceed his tax threshold for that year. His ‘undisclosed’
earnings come from interest that he earns from funds lent on a short-term basis to persons who are
unlikely to declare that they had paid him interest.
At the commencement of the 2022 year of assessment, Vivo Cup redeemed all his ‘disclosed’ and
‘undisclosed’ local investments and invested the amounts he obtained in local dividend-yielding
shares. He did this solely to avoid paying normal tax. He was also aware that his ‘undisclosed’
investments were becoming extremely risky and dangerous. And he was aware that local dividends
were exempt from normal tax. Although local dividends declared were subject to a 20%
withholding tax, this was not of concern to him because this transaction took place at the ‘company
level’, and he did not therefore regard it as being a tax paid by himself.
TAX AVOIDANCE 523
Plate Limited
On 1 March 2021 the Racing Industries Provident Fund ceded the right to receive R150 000 in
local dividends a year to Plate Limited. On the same day, Plate Limited ceded the right to receive
R200 000 net rentals a year to the Racing Industries Provident Fund. Both cession agreements were
for a two-year period. Provision was made for either party to terminate the agreements at one
months’ notice. A liability for damages would arise and would be payable by the party who
terminated the agreement within the two-year period. Plate Limited does not have an assessed loss.
Both the Racing Industries Provident Fund and Plate Limited are residents of the Republic. They
both have years of assessment that end on the last day of February.
Oaks (Pty) Limited
Oaks (Pty) Limited is a resident of the Republic. Its year of assessment ends on the last day of
February. During its 2021 year of assessment its business collapsed and it lost a lot of money. It
ended up with an assessed loss of R2 000 000 for its 2021 year of assessment.
On 1 March 2021 Oaks (Pty) Limited entered into a new business venture. Since it needed to
finance this new business venture, it approached St Ledger Bank Limited, a resident of the
Republic, for the required funds.
Rather than providing Oaks (Pty) Limited with a loan, St Ledger Bank Limited applied, and was
allotted, R600 000 4,5% redeemable preference shares in it. It is obliged to redeem, in whole or in
part, these redeemable preference shares within four years from the date of their issue.
The conditions and terms relating to the preference shares are such that Oaks (Pty) Limited is not
permitted to redeem a part of them until after three years from the date of issue has passed, and that
St Ledger Bank Limited is not entitled to demand redemption or partial redemption within this
three-year period. In addition, St Ledger Bank Limited also does not have a right of disposal for
these redeemable preference shares.
During Oaks (Pty) Limited’s 2022 year of assessment no part of these redeemable preference
shares were redeemed. It declared and paid dividends of R27 000 to St Ledger Bank Limited.
Steeplechase Limited
On 1 April 2021 Steeplechase Limited issued interest-bearing debentures to Gilbert Hurdle. Each
debenture is convertible into one ordinary equity share in it at the option of its holder at any time
from 1 June 2022. The debentures were traded off-market. They were issued at R100 each.
The market value of an ordinary equity share in Steeplechase Limited is likely to exceed R150 on
1 June 2022.
You are required to briefly discuss whether the Commissioner could successfully employ the
anti-avoidance provisions of the Income Tax Act against the taxpayers as detailed in the eight
situations above. In your answer you should consider the possible application of
sections 7(3) to 7(8), section 8E, section 8F, section 80A and sections 103(2) and 103(5). If a
provision is inapplicable, you should briefly mention why it does not apply.
• 20% (0% plus 20% effective dividends tax) on its first R87 300 taxable income,
• 25,6% (7% plus 18,6% effective dividends tax) on its next R277 700 (R365 000 – R87 300)
taxable income,
• 36,8% (21% plus 15,8% effective dividends tax) on its next R185 000 (R550 000 – R365 000)
taxable income, and
• 42,4% (28% plus 14,4% effective dividends tax) on its taxable income in excess of R550 000,
are less than the top marginal rate 4,5% applicable to a natural person.
Gulliver Lilliput was suffering normal tax at 39% on his taxable income in excess of R613 600 up
to R782 200 and then at 41% on his taxable income in excess of Gulliver Lilliput’s accountant. He
had a taxable income of R1 250 000 in the 2021 year of assessment. And he expects to have a
similar taxable income in the 2022 year of assessment. Ernestine Young has informed him that he
should limit his own taxable income to R613 600 and to arrange for any amount in excess of
R613 600 to accrue a small business corporation.
Gulliver Lilliput proposes to sell his business to a company that he will form. He will be its sole
shareholder and sole director. The business will be sold at its market value including an amount for
its goodwill. The purchase consideration will be settled using the funds out of its equity share issue
and the proceeds of a loan that he will advance to ‘his’ company. This loan will be at a market-
related interest rate. Interest of R100 000 a year is expected to accrue to him from it.
Once the company is carrying on the business, Gulliver Lilliput will be paid a salary of R513 600
(R42 800 a month) for his services to it as its managing director. This amount is considerably less
than the net profit he currently makes from his business. To maintain his current standard of living
he will cause the company to distribute a local dividend to him.
Gulliver Lilliput’s accountant believes that if the above arrangement is implemented, he will
substantially reduce his present normal tax liability.
You are required to discuss whether the Commissioner could successfully raise the provisions of
section 80B against Gulliver Lilliput.
Massey Holland, John Fergusson’s accountant, has suggested that Betalaval (Pty) Limited should
cease farming operations, sell its business to John Fergusson at its market value, and that he (John
Fergusson) should then carry on the farming operations in his own name.
If this occurred, then the purchase price of the farming business would be settled out of the amount
obtained from an interest-bearing loan that John Fergusson will obtain from the Land and
Agricultural Bank of South Africa. After Betalaval (Pty) Limited sells its business to John
Fergusson, its remaining asset (the cash received for the sale of its business) would be distributed to
John Fergusson. Out of this distribution, John Fergusson would then repay the loan he obtained
from the bank.
The above suggestion has been made solely in an attempt to save tax. Massey Holland stated the
following:
• Should the farm run at a loss, this loss could then be deducted in the determination of John
Fergusson’s taxable income from his non-farming income and thereby reduce his normal tax
liability. In addition, he would no longer be earning the farm manager’s salary.
• Should the farm make a profit, then, if John Fergusson has elected to be subject to tax on the so-
called average basis, and he recommends that he should make this election, less normal tax will
be payable.
A limited amount of dividends tax will be payable by John Fergusson as a result of Betalaval (Pty)
Limited distributing a capital profit resulting from the sale of its farm to him as part of its winding up.
John Fergusson would like to follow the suggestion made by his accountant, but is concerned about
the possible successful application of section 80A against either himself, or Betalaval (Pty)
Limited, or both of them, should he purchase the farming business from it.
You are required to discuss whether the Commissioner could successfully employ the provisions
of section 80A against either John Fergusson, or Betalaval (Pty) Limited, or both of them.
At the commencement of their 2022 year of assessment the following plan was put into action:
It had been resolved that all printing in the group was to be done by one set of printers. For no
particular reason, it was resolved that Morning Glory Limited would be responsible for the printing.
All the plant belonging to Evening Sundowner Limited was then sold to Morning Glory Limited on
1 March 2021. It was sold at its market value which was considerably less than its original cost, but
R200 000 more than its book value, and R300 000 more than its tax value. (The transfer of assets
was not carried out as part of an approved intra-group transaction under section 45.)
After the above plan was carried out, Morning Glory Limited levied Evening Sundowner Limited
with a printing fee for the cost of printing the evening newspaper determined at the going
commercial rate.
As a direct result of this change in the printing policy of the two newspapers, the ‘group of
companies’ are likely to make a greater profit for is 2022 year of assessment. Yet the ‘group’s’
2022 normal tax liability is likely to be considerably less. Evening Sundowner Limited is likely to
record a taxable trading profit for the year. Yet Morning Glory Limited’s taxable income will be
somewhat less than in previous years. Its reduced taxable income will be largely attributable to the
extra capital allowances now being enjoyed by it.
You are required to
1. discuss whether the provisions of section 103(2) could be successfully raised against the above
taxpayers,
2. discuss whether the provisions of section 80A could be successfully raised against the above
taxpayers, and
3. list the capital allowances, and recoupments of them, that arose when the above transaction
was carried out.
A direct result of TaggwaterflatBarrel entering into this learnership agreement with Paige Ledger
was that its partners qualified for a section 12H allowance of R40 000 a year for five years, after
she became registered as a learner. A further allowance of R200 000 was granted in year five when
she successfully completed her learnership agreement.
Since Colin Small enjoys 40% of TaggwaterflatBarrel’s profits, his taxable income was reduced by
R16 000 (R40 000 × 40%) and his normal tax liability by R6 400 (R16 000 × 40%) for the first two
years of Paige Ledger’s learnership agreement, by R6 560 (R16 000 × 41%) in the next two years
of her learnership agreement and by R43 200 (R240 000 × 40% × 45%) in the fifth year of her
learnership agreement as a result of the learnership allowance being granted to it for her.
When assessing Coin Small, the Commissioner did not, however, allow him the learnership
allowance as a deduction in the determination of his taxable income. The Commissioner agreed that
he, and his fellow partners, satisfied the requirements to qualify for the allowance (under
section 12H), but since TaggwaterflatBarrel had deliberately sought this allowance by altering
Paige Ledger’s employment contract with it, this amounted to a tax avoidance arrangement. He (the
Commissioner) was then obliged to assess its partners under the provisions of section 80B.
The Commissioner viewed that the altering of Paige Ledger’s employment contract was an
‘arrangement’ entered into wholly or mainly to avoid taxation. He believed that in substance, as
opposed to in form, she was still employed as a bookkeeper in TaggwaterflatBarrel’s bookkeeping
division, and not as a trainee accountant.
Colin Small unsuccessfully objected to his tax assessment. He refused the offer to have this dispute
resolved using the alternate dispute resolution process. He did not enter into a settlement agreement
with the Commissioner. He now needs to decide whether he should appeal to the tax board or the
tax court. He has consulted you in this regard.
You are required to discuss whether Colin Small will be able to successfully defend the provisions of
section 80B being applied to him to deny him the deduction in the determination of is taxable income
of his effective proportion of the section 12H learnership allowance.
of this fringe benefit is R60 648.) These amounts are less than the net profit he currently makes
from this business. To maintain his current standard of living he will then cause his company to
partly repay his interest-free loan account to it.
Skip Rink believes that if the above plan is implemented, he will reduce his present normal tax
liability.
Skip Rink is, however, unsure of all the tax implications that arise on the sale of his motor car to
his company. Once it is owned by his company, the free use of it will be given to him as a fringe
benefit of his employment contract. All costs relating to running and maintaining it will be borne
by his company.
Skip Rink’s distribution business is at present a vendor, and ‘his’ company will also be a vendor.
You are required to discuss
1. the normal tax and value-added tax consequences to Skip Rink that arise when he sells his
motor car to ‘his’ company,
2. the normal tax and value-added tax consequences to ‘his’ company that arise when it purchases
the motor car from him,
3. the normal tax, and value-added tax consequences that arise to both of them when ‘his’
company gives the use of the motor car to him as a fringe benefit of his employment contract,
and
4. whether the Commissioner could successfully raise the provisions of section 80B against Skip
Rink.
• Ale Stout recorded a normal profit from the ‘dumpies’ sold – normal in the sense that he did not
score or lose from the change in excise duty.
• Bitter Stout agreed to maintain himself for the following year out of the R120 000 profit he had
made. And Ale Stout agreed not to maintain Bitter Stout during this period.
Bitter Stout had no other receipts or accruals during the 2022 year of assessment.
Ale Stout recorded a taxable income in excess of R1 656 600 for the 2022 year of assessment.
You are required to discuss whether the Commissioner could successfully raise the provisions of
section 80B against either Bitter Stout or Ale Stout, or against both of them.
• loan repayment,
were all part of his business profits, and included the sum of these three amounts in Earl Butler’s
gross income.
Earl Butler unsuccessfully objected against this assessment.
You are required to discuss whether Earl Butler would be able to successfully have this decision
reversed on appeal.
3. provide the transaction that should be implemented between Elizabeth London and East Port
Investments (Pty) Limited to improve the tax efficiency of the arrangement, in other words, to
ensure that it is no longer ‘thinly’ capitalised,
4. determine the amount of normal tax that would have been payable by Elizabeth London in the
2022 year of assessment had she invested directly (instead of indirectly through East Port
Investments (Pty) Limited) in the rent-producing property, and
5. discuss whether the Commissioner could successfully apply the provisions of section 80B to
this perceived tax-saving arrangement entered into by Elizabeth London and East Port
Investments (Pty) Limited when she formed it, and it invested in the rent-producing property.
available and thereby to create a deductible loss out of his investment in the rent-producing
property.
In a letter to the Commissioner, Judas Lord has confirmed that the erection of the four ‘additional’
townhouses was undertaken solely to make his investment in the rent-producing property more tax
efficient.
Judas Lord wishes to take this matter on appeal and has consulted you in this regard.
You are required to give your opinion as to whether
1. the rental loss is deductible in the determination of his taxable income, and
2. the Commissioner could successfully employ the provisions of section 80B on the basis that
the four ‘additional’ townhouses were erected by him solely to create a tax benefit in the form
of a deductible loss.
no profit arose and no loss was suffered. It used its own cash resources and the amount from a
loan from him to settle the R8 000 000 purchase consideration.
• The rent-producing property was then used by it to provide security for its R3 000 000 loan from
him.
After the above transactions had been carried out the statement of financial position of Fifty Loop
Street (Pty) Limited was as follows:
Share capital (contributed tax capital):1 000 000 R1 shares 1 000 000
Loan from Joe Strange 3 000 000
Non-distributable reserve 3 871 200
Provision for normal tax (see below) 128 800
Retained earnings 400 000
8 400 000
Represented by
Rent-producing property (at its new cost) 8 000 000
Cash 400 000
8 400 000
Fifty Loop Street (Pty) Limited’s normal tax liability determination for its 2022 year of assessment
(which ended on 28 February 2022) was as follows:
Gross rentals 660 000
Less:
Interest on loan from Joe Strange 360 000
Property rates 82 000
Repairs and maintenance 60 000
Bank charges 3 600
Accounting fees 14 400 520 000
Net income before tax 140 000
Add taxable capital gain 320 000
Taxable income 460 000
Normal tax at 28% 128 800
Since Joe Strange’s departure on 20 February 2021, he has not carried on business in South
Africa – his investment in Fifty Loop Street (Pty) Limited being his sole asset in South Africa. He
does not have a permanent establishment in South Africa. He did not visit South Africa during the
2022 year of assessment. A local accountant administers all its financial activities in South Africa.
On Joe Strange’s emigration from South Africa, he was forced to leave certain blocked funds in
South Africa. These funds have been invested in ‘passive’ investments in South Africa, resulting in
a South African taxable income in excess of R1 656 600 accruing to him. His taxable income
includes local interest.
You are required to
1. explain why Joe Strange purchased all the equity shares of Fifty Loop Street (Pty) Limited
instead of purchasing the rent-producing property from it,
2. discuss whether the Commissioner could successfully raise the provisions of section 80A
against Joe Strange or Fifty Loop Street (Pty) Limited as a result of the above transactions
having been carried out,
3. give the value-added tax and transfer duty implications of all the above transactions carried out
by both Fifty Loop Street (Pty) Limited and Joe Strange. It is a vendor, but he is not a vendor,
and
4. comment on the value-added tax and transfer duty position assuming the rent-producing
property had been a block of residential flats and not a block of offices.
536 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
the actual net rentals earned during the three-month period 1 March 2021 to 31 May 2021, further
rentals that accrued to him would have made him liable for normal tax in South Africa at the rate of
45%. But if interest accrued to him, because he qualifies for the section 10(1)(h) exemption from
normal tax, the full amount earned is exempt from normal tax, but then liable for the withholding
tax on interest, at a rate of 15%.
Van Zyl Kruger is using the property solely for domestic purposes and whether he paid an
occupational rental or occupational interest was of not of concern to him. Being a domestic
expense, no matter what form it took, it is not deductible in the determination of his taxable
income.
You are employed as a legal adviser at the local SARS’S office. The amendment that was made to
the purchase and sale agreement between Randall Hudson and Van Zyl Kruger has come to the
attention of a colleague, namely, Killie Byrne, one of the assessors. She would like to subject
Randall Hudson to normal tax on the occupational interest. But she does not wish to apply the
provisions of section 80B against Randall Hudson – she seems to think that her chances of
successfully applying this provision are not good. She would like to know if there is another
method that could be employed by the Commissioner that would result in Randall Hudson’s
occupational interest being included in his South African taxable income.
You are required to write to Killie Byrne, the assessor, informing him of a method that he could
follow, that could result in Randall Hudson’s occupational interest being included in his South
African taxable income.
CHAPTER 24
ESTATES
539
540 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Benjamin Shave also owned 100 cows. On 1 April 2019, 99 of them were purchased by him for
R990 000. The remaining cow was purchased by him on 1 April 2021 for R12 000.
The standard value of a cow is for R40. The market value of a cow on 31 October 2021 was
R15 000.
You are required to determine the effect that section 9HA(1) will have on Benjamin Shave’s
taxable income for his 2022 period of assessment. He had sufficient income from farming
operations to make the provisions of paragraph 8 of the First Schedule inapplicable.
On 28 February 2022 Matt Plascon’s deceased estate had on hand the primary residence and what
remained of the fixed deposit.
You are required to determine the normal tax payable by Matt Plascon’s deceased estate for the
period of assessment that ended on 28 February 2022.
At the time of John Doe’s death, Jane Doe would have been 65 years old on her next birthday.
The market value of the farm on date of John Doe’s death was R5 000 000.
You are required to discuss the capital gains tax implications for
• John Doe,
• Jane Doe, and
• the John Doe Family Trust.
Justine Gedee and Walter Gedee entered into a redistribution agreement under which
• he took over the farm and paid R4 500 000 into his late father’s estate for her benefit, and
• she took over the share portfolio.
You are required to discuss the capital gains tax consequences for
• the late Julian Gedee,
• Justine Gedee, and
• Walter Gedee.
children, conditional on the children accepting responsibility for his overdraft (see below). (Each
child received the same return on capital for these shares.)
Franklin Stevenson’s wife, Chiffon Stevenson, was to receive a cash sum of R6 000 000 and the
children R1 200 000 each on completion of the winding up of his estate. And on that date, the
residue of the estate was to be transferred to a trust.
This trust provided for an annuity of R480 000 (payable at the rate of R40 000 a month) to be
distributed out of its receipts and accruals to Chiffon Stevenson for the remainder of her life. The
balance of its receipts and accruals was to be divided equally between the children with the proviso
that an amount in excess of R60 000 a year (or proportionate share of R60 000 when the period
involved is less than a year) accruing to a child who is under the age of 21 years, was to be
accumulated by the trustees on his behalf and paid over to him when he attained the age of
21 years, or if he died before attaining the age of 21 years, was to be divided equally between his
surviving brothers or sisters. An amount for each child, aged under 21 years, not accumulated was
to be paid over to Chiffon Stevenson to use for the benefit of the child. She was not compelled to
account to the trustees for the expenditure.
At the time of Franklin Stevenson’s death, he was employed at a fixed annual salary of R900 000 a
year, payable to him at a rate of R75 000 a month. He had earned this salary since 1 January 2019.
Up to the commencement of the 2022 year of assessment, all Franklin Stevenson’s contributions to
the pension fund had been deductible in the determination of his taxable income. From 1 March
2021 he contributed 10% of his salary to the pension fund. He was due to retire from this pension
fund on 31 May 2023.
From 1 March 2021 to 31 May 2021 Franklin Stevenson earned R39 000 local interest from a
short-term call account.
Franklin Stevenson’s assets and liabilities at his death was as follows:
• An insurance policy award of R8 100 000.
• Rent-producing properties, valued at R9 000 000. Gross annual rentals are R1 080 000 and
annual expenses incurred in producing these rentals are R360 000.
• Shares in South African companies valued at R3 000 000. Annual local dividends are R108 000.
• An overdraft of R1 800 000 raised to purchase the shares in South African companies. Interest
incurred on this overdraft for the period 1 March 2021 to 31 August 2021 was R67 500 (six
months at R11 250 a month). The overdraft was repaid (settled) on 31 August 2021.
• An option to purchase 25 000 shares in the holding company of his employer-company for
R300 000 (see further below). Their market value is R720 000.
• Shares in foreign companies inherited from his father who had never lived in South Africa,
valued at the equivalent of R4 200 000. Gross annual foreign dividends are the equivalent of
R360 000. These foreign dividends are not exempt from normal tax under the provisions of
section 10B(2).
• A lump-sum award of R630 000 to his estate by his employer under his (Franklin Stevenson’s)
service contract.
• A lump sum to his estate from his pension fund of R3 006 250. (This fund provided for a
pension (lump sum and annuity) from the age of 65 years, but in the event of death before the
age of 65 years, only a lump sum was payable.)
As a result of the application of section 9HA, Franklin Stevenson has a net capital gain for his 2022
period of assessment of R375 000.
Included in Franklin Stevenson’s shares in South African companies (see above), were 25 000
shares valued at R720 000 in the holding company of his employer-company. These shares had
been purchased by him on 1 August 2020 for R300 000 at a time when their market value was
R650 000 under an option, to subscribe for 50 000 shares at R12 each granted to him on 1 January
2019 by his employer, at which time the market value of a share was R12. Under this option, he
ESTATES 547
was not permitted to sell the shares for a year after he purchased them. No normal tax was paid on
this gain in the 2021 year of assessment. Their market value was R27 a share on 31 May 2021.
They became freely transferable seven days after his death. Their market value was R27,50 a share
on 7 June 2021 (being seven days after his death).
The executor of Franklin Stevenson’s estate exercised the balance of the option (see above) and
purchased the remaining 25 000 shares on 30 June 2021 for R300 000 (R12 each) when their market
value was R28,80 a share. He then sold them on 1 August 2021 for R750 000 before any dividends
accrued.
Franklin Stevenson’s estate was wound up on 31 August 2021. Its assets were distributed on
31 August 2021. Local interest of R90 000 accrued to the estate during its winding up. Expenses in
earning this local interest were R18 000. Estate duty and other charges (not deductible in the
determination of taxable income) were R720 000.
Chiffon Stevenson was lent R300 000 on 10 June 2021 by the executor against the lump sum due to
her on the completion of the winding up. The balance of cash on hand was paid over to the trustees
who invested it in shares in South African companies. Local dividends of R180 000 accrued before
28 February 2022. The annuity payable to Chiffon Stevenson by the trust was awarded to her in
equal monthly instalments. The trust closed its accounts on 28 February 2022. It made the other
distributions due under Franklin Stevenson’s will on that day.
You are required to determine the taxable income of all the taxpayers mentioned in this question.
Except when clearly indicated otherwise, you may assume that all receipts and accruals and all
expenses incurred, were accrued or incurred on a proportionate time basis during the year of
assessment.
• His son Cashmere Jotun and daughter Polly Screed are to inherit one half of the shares each, but
subject to Cashmere Jotun surviving to the age of 25 years. If he dies before that age, she will
immediately become entitled to her portion of the shares, but his portion will devolve upon
Velvet Jotun’s, or upon Polly Screed, if Velvet Jotun is no longer alive at that date, or upon a
specified charity if both Velvet Jotun and Polly Screedare no longer alive at that date. Local
dividends on these shares (after the awards to Cashmere Jotun provided for below) are to be
accumulated and distributed to whoever is entitled to the shares, only when Cashmere Jotun
attains the age of 25 years or dies, whichever occurs first. The awards provided for are as
follows:
– R60 000 to Cashmere Jotun, to be awarded out of the local dividends each year until transfer
of the shares takes place. (If the local dividends earned are insufficient to meet this award
some of the shares must be sold to raise the required funds.)
– An additional sum of up to R30 000 a year may be awarded out of the local dividends to
Cashmere Jotun entirely at the discretion of the executor should his educational needs
warrant it, and if sufficient funds have been received in a particular year.
• His wife Velvet Jotun is to inherit all his remaining assets.
From 1 July 2021 to 28 February 2022 the executor of Duram Jotun’s estate had not yet finalised
the estate accounts or transferred any of its assets. But he had
• earned rentals of R98 400 from Duram Jotun’s rent-producing property, and incurred R26 400
non-capital expenditure in earning these rentals,
• received local dividends on Duram Jotun’s shares of R90 000. Out of these local dividends he
awarded Cashmere Jotun the R60 000 specified in the will, and a further R25 000 under his
discretionary power,
• been awarded a lump-sum death benefit of R900 000 from the provident fund that Duram Jotun
had been a member of. This award accrued on 1 July 2021. It was based on contributions by him
up to the date of his death of R232 800 (his employer had contributed a like amount) over a
period of membership of 25 years. Of his total contributions to the provident fund of R232 800,
R180 000 had not been deducted in the determination of his taxable income. And of his total
contributions to the provident fund of R232 800, R4 800 was contributed to it in his 2022 period
of assessment,
• received R500 000 on an insurance policy on Duram Jotun’s life, and
• earned local interest of R26 800 by investing surplus funds (other than the dividends) on call.
(He had closed Duram Jotun’s local interest-bearing security investment on 1 July 2021.)
As a result of the application of paragraph 40 of the Eighth Schedule to the Income Tax Act,
Duram Jotun has a net capital gain for his 2022 period of assessment of R25 000.
From 1 March 2021 to 28 February 2022, Velvet Jotun
• was awarded a lump sum of R600 000 from Duram Jotun’s former employer who made the
payment under his service contract. This amount accrued on 30 June 2021,
• received no other amounts, and no other amounts accrued to her, and
• paid an insurance premium of R300.
From 1 March 2021 to 28 February 2022, Polly Screen
• earned a salary of R219 900,
• earned non-tax free local interest of R24 100, and
• received no other amounts, and no other amounts accrued to her.
ESTATES 549
Under section 53 of the Value-Added Tax Act, Tyrone Landis and his deceased estate are deemed
to be one and the same person.
Tyrone Landis’s business was sold as a going concern by his executor to an unrelated person (a
vendor) for R6 370 000 on 30 September 2021. The purchase and sale agreement allocated the
following amounts to the purchase consideration.
Trading stock 4 600 000
Goodwill 1 770 000
Total selling price 6 370 000
The liabilities of Tyrone Landis’s business of R1 000 000 were not taken over. But they were
settled by his executor on behalf of his estate. The lease agreement, with the consent of the lessor,
was taken over by the purchaser of his business. The market value of goodwill was valued at
R1 700 000 on 31 August 2021.
Landis Trust
The Landis Trust was created by Perry Landis in 1989 with an initial cash donation of R100. Its
beneficiaries are his grandchildren. With the exception of Aimee Jackson, who is a resident of New
Zealand, all his grandchildren are residents of the Republic.
On Perry Landis’s death, he bequeathed the following assets to the Landis Trust:
• A commercial property in Pietermaritzburg.
• A flat in Durban (used as a holiday home).
• Shares in Stinkwood Limited, a local company.
• Shares in Jacaranda Plc, a foreign company.
The following is an extract from the accounting records of the Landis Trust for the year ended
28 February 2022:
Rental from its Pietermaritzburg commercial property 378 000
Rental from its block of flats in Hillbrow 324 000
Rental from its holiday home in Durban –
Local interest 54 000
Local dividends 216 000
Foreign dividends (the equivalent of) 108 000
Income 1 080 000
Less expenditure
Repairs and maintenance of the Pietermaritzburg commercial property 135 000
Repairs and maintenance of the block of flats in Hillbrow 90 000
Trustee remuneration (note 2) 27 000
Audit fees (note 2) 54 000
Distribution of air tickets and travel costs of beneficiaries to attend
Tyrone’s funeral (note 3) 72 000
Annuities awarded (note 4) 105 000 483 000
597 000
Notes
1. The above extract includes all receipts and accruals and expenditure of the Landis Trust,
except for the interest incurred of R75 000 on Tyrone Landis’s loan to it for the period
1 March 2017 to 31 August 2017.
2. The trustee remuneration and audit fees must be apportioned on the basis of the gross amounts
received by or accrued to the Landis Trust.
552 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
3. Under the trust deed, the trustees are granted the discretion to distribute or expend its receipts
and accruals on behalf of the beneficiaries. They agreed that their travel costs to attend Tyrone
Landis’s funeral be paid by it. They paid these air tickets and travel costs out of the net rentals
of the Pietermaritzburg commercial property.
4. Under Perry Landis’s last will and testament, the trustees of the Landis Trust are required to
distribute an annuity of R15 000 to each beneficiary alive at the end of each year of assessment
out of the net rentals of the Pietermaritzburg commercial property bequeathed to it. At the end
of the 2018 year of assessment, R15 000 was therefore distributed by the trustees to each of the
seven beneficiaries.
Distribution
Under Perry Landis’s last will and testament, the flat in Durban (used as a holiday home) was
vested in Aimee Jackson (see above) upon her attaining the age of 45 years. She attained the age of
45 years on 19 September 2021. Its market value was then R480 000. Perry Landis had purchased it
for R90 000 on 1 October 2009. At the time of his death its market value was R130 000.
You are required to
1. determine Tyrone Landis’s taxable income for the period of assessment up to the date of his
death,
2. discuss the estate duty and normal tax implications of the waiver of Tyrone Landis’s loan
account to the Landis Trust for himself, his estate and the Landis Trust,
3. briefly outline the normal tax implications of the trading operations of Tyrone Landis’s
businesses and the sale of its assets subsequent to his death for his deceased estate and the
Landis Trust,
4. discuss the value-added tax consequences of the sale of it Tyrone Landis’s business by his
executor, and
5. determine the taxable income of the Landis Trust for its 2022 year of assessment.
(SAICA adapted)
Flash Flytohigh had an assessed loss of R150 000 brought forward from the 2021 year of
assessment.
You are required to determine the taxable incomes of Flash Flytohigh and his insolvent estate for
the 2022 year of assessment.
555
556 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Claude March
Taxable profit from his business 690 000
Local interest from a non ‘tax free investment’ 43 800
Claudia March
Net rentals 114 000
Local interest from a non ‘tax free investment’ 34 300
Claude March donated the rent-producing property to Claudia March on 1 March 1991. The sole
reason why he donated the rent-producing property to her was to save normal tax.
You are required to determine the normal tax liabilities of Claude and Claudia March.
Bernard and Bernadette April
Bernard and Bernadette April are both residents of the Republic. They are both under the age of
65 years. Their receipts and accruals for the 2022 year of assessment were as follows:
Bernard April
Taxable profit from his business 690 000
Local interest from a non ‘tax free investment’ 43 800
Net rentals 9 500
Bernadette April
Net rentals 104 500
Local interest from a non ‘tax free investment’ 34 300
Bernard April donated the rent-producing property to Bernadette April on 1 April 2021. The sole
reason why he donated the rent-producing property to her was to save normal tax.
You are required to determine the normal tax liabilities of Bernard and Bernadette April.
Dean and Deanna Darling
Dean and Deanna Darling are both 40 years old. They are both residents of the Republic.
Deanna Darling has always worked for her husband, Dean Darling. He trades in his own name. His
taxable income prior to providing a payment to her for the services she renders to his business, is
expected to be R880 000 for the 2022 year of assessment.
If Dean Darling was to employ an independent third party to render the services that Deanna
provides in his business he would pay her R90 000 a year.
After Dean Darling had examined the progressive tax table applicable to natural persons, he paid
Deanna a salary of R120 000 for the services she rendered to his business during the 2022 year of
assessment.
Dean and Deanna Darling have no other receipts or accruals and they do not enjoy exemptions
from normal tax and deductions in the determination of their taxable incomes.
You are required to
1. Dean and Deanna Darling’s normal tax liabilities for the 2022 year of assessment, and
2. suggest what they should have done to end up in a more favourable tax position. (Support your
suggestion with determinations.)
Louis and Louisa Love
Louis and Louisa Love are both 40 years old. They are both residents of the Republic.
Louisa Love has always worked for her husband, Louis Love. He trades in his own name as a
farmer. But financially he has been unsuccessful. His taxable income prior to providing a payment
to her for the services she renders to his farming business is expected to be a loss of R180 000 for
the 2022 year of assessment.
TRUSTS 557
If Louis Love was to employ an independent third party to render the services that Louisa Love
provides to his farming business he would pay her R90 000 a year. Because of his assessed loss for
the 2022 year of assessment he did not pay her a salary.
Louis and Louisa Love have no other receipts or accruals and they do not enjoy exemptions from
normal tax and deductions in the determination of their taxable incomes.
You are required to
1. Louis and Louisa Love’s normal tax liabilities for the 2022 year of assessment, and
2. suggest what they should have done to end up in a more favourable tax position. (Support your
suggestion with determinations.)
Hemraj Govender
Hemraj Govender donated R50 000 and R30 000 respectively to Krishna and Prakash Naidoo, the
minor sons of his business colleague, Prem Naidoo.
Hemraj Govender’s own two sons, Shunmugam (aged 19 years) and Udhandra (aged 16 years)
Govender, in turn, received donations of R40 000 each from Prem Naidoo.
All the donations were made on 1 March 2021 and are invested in local investment accounts
earning 6% local interest. These investment accounts are not a ‘tax free investment’ accounts.
Mace Masala
Mace Masala is a resident of the Republic. He has an ‘aged’ mother, Mary Masala, who is ordinarily
resident in India. (She is not a resident of South Africa.) Five years ago he purchased a cottage in
India. He then donated it to his ‘aged’ mother. She lived in this cottage for five years.
During the 2021 year of assessment Mary Masala moved out of this cottage and into an ‘old age’
home. She has, since then, let the cottage at a market-related rental.
Mary Masala earned net rentals the equivalent of R54 000 from the letting of the cottage during the
2022 year of assessment.
Evergreen Parsley
During the 2021 year of assessment, Evergreen Parsley married Violet Lavender. She had been
married before and has a 10-year-old daughter, Rose Lavender, from her previous marriage.
On 1 March 2021 Evergreen Parsley made a local fixed-deposit investment of R400 000 earning
local interest at 7% in Rose Lavender’s name. Under this local fixed-deposit investment agreement,
the local interest is to accrue to her on an annual basis. It is not a ‘tax free investment’.
Major Peel
Major Peel made the following donations on 1 March 2021:
• R60 000 to his son Ginger Peel (aged 30 years),
• R30 000 to his grandson Basil Chiles (aged 17 years), and
• R30 000 to his granddaughter Rosemary Chiles (aged 15 years).
Basil and Rosemary Chiles, neither of whom is married, are the children of Marjory Chiles (née
Peel), Major Peel’s deceased daughter. Under the deed of donation, all three amounts must be
invested in local interest-bearing securities. On average, 7% local interest was earned on all three
investments during the 2022 year of assessment. None of these local investments is a ‘tax free
investment’.
Vanilla Tarragon
On 27 November 2018, when Vanilla Tarragon attained the age of 15 years, she received R200 000
from her father. On 1 December 2018 she invested the R200 000 in a five-year local fixed deposit
earning local interest at 8% a year, payable half yearly in arrears. It is not a ‘tax free investment’.
During the 2022 year of assessment local interest of R16 000 accrued to Vanilla Tarragon from this
investment.
Peppermints CC
Black Pepper and Kat Mint who had each married a daughter of Course Salt, formed
Peppermints CC, an investment close corporation. It is a resident of the Republic.
They each lent R50 000 interest free to Peppermints CC. It then invested R100 000 in local
dividend-yielding shares.
During the 2022 year of assessment all dividends received by Peppermints CC were distributed by
it to its members. It has two members, being
• Black Pepper’s 15-year-old unmarried son, and
• Kat Mint’s 14-year-old unmarried daughter.
TRUSTS 559
Bay Cloves
On Bay Cloves’s fifteenth birthday two years ago, she was given an organ valued at R20 000 and a
cash donation of R330 000 by her father:
• Throughout the 2022 year of assessment the R330 000 was invested in a local non ‘tax free
investment’ earning 7,5% local interest a year.
• Bay Cloves, who is a scholar, is also a professional musician. She plays the organ over
weekends at weddings and similar functions. From this ‘business’ of hers she earned a net profit
of R48 000 in the 2022 year of assessment.
Jeera Dhania
During the 2019 year of assessment Jeera Dhania and his former wife, Tamarind Dhania, were
divorced. At first he paid her maintenance for their two minor children. But then he stopped paying.
After many months of not receiving maintenance from him, she obtained a court order against the
provident fund that he is a member of.
The provident fund then paid out of Jeera Dhania’s minimum individual reserve
• R30 000 to Tamarind Dhania for her maintenance arrears, and
• R6 000 to SARS, being the employees’ tax payable on her R30 000 award.
You are required to determine, in each of the above situations, in whose income the receipts or
accruals in question will be included. Assume that the minor children referred to in this question
have not gained their majority on the grounds of being tacitly emancipated.
• R80 000 local interest from non ‘tax free investments’, and
• R60 000 rentals.
Red Pimento
On 1 March 2021 Red Pimento invested R500 000 cash in trust for the benefit of Garam Masala,
his mother-in-law. An express condition in the trust deed is that he is permitted at any time to
substitute Garam Masala as both its ‘income’ and ‘capital’ beneficiary. He believed that by
awarding this type of benefit to Garam Masala she would be less inclined to interfere with the way
he looked after his family.
Throughout the 2022 year of assessment the R500 000 was invested in a local non ‘tax free
investment’ security earning local interest at 8% a year.
‘Sticks’ Cinnamon
When ‘Sticks’ Cinnamon registered at university for the first time, Quill Cinnamon, his grandfather
set aside R200 000 in trust for him subject to the condition that he would receive the R200 000
together with the accumulated receipts and accruals from it only when he completed his degree.
During the 2022 year of assessment ‘Sticks’ Cinnamon completed his second year of study. He
should complete his degree at the end of the following year.
The R200 000 earned local interest of R13 000 during the 2022 year of assessment. It is not from a
‘tax free investment’.
Dill Coriander
On Dill Coriander’s seventeenth birthday which was on 1 March 2021, she was given a motor car
valued at R220 800 by Pod Coriander, her father. A month later, on 1 April 2021, she won the
Miss Wet T-Shirt competition and her prize was a sports car valued at R736 000.
Since Dill Coriander was unable to use both motor cars, she let the motor car given to her by her
father at a rental of R12 900 a month from 1 May 2021 to the end of the year of assessment.
Ricarda Saffron
Ricarda Saffron formed the Saffron Trust by an initial donation of a rent-producing property. The
net rentals earned by the trust are to be distributed to Crocus Saffron, his grandson. He has,
however, retained the right to substitute Bronze Saffron, his grand-daughter, if he believes that
Crocus Saffron is making insufficient progress with his university studies.
During the 2022 year of assessment the Saffron Trust earned rentals of R16 800. This entire
amount was then distributed to Crocus Saffron by the trustees. His grandchildren and himself, are
all residents of the Republic.
Chilli Green
Chilli Green donated a rent-producing property to a trust. Under a condition contained in the trust
deed, the net rentals from this property are to be distributed to Beulah Capsicum, his major
daughter. She was divorced during the 2020 year of assessment. The distribution of the net rentals
to her is either for
• 10 years, or
• until she remarries,
whichever is the shorter period. When Beulah Capsicum remarries, or when the 10-year period
ends, the trust will terminate, and the rent-producing property will revert to Chilli Green.
During the 2022 year of assessment net rentals of R108 000 were earned by the trust, and in
accordance with the condition as detailed above, the R108 000 was distributed to Beulah
Capsicum.
TRUSTS 561
Both Chilli Green and Beulah Capsicum are residents of the Republic.
You are required to determine, in each of the above situations, in whose income the receipt or
accrual in question will be included. Assume that the minor children referred to in this question
have not gained their majority on the grounds of being tacitly emancipated.
The local interest was paid monthly to Kay Weed to enable her to maintain herself.
On 31 May 2021 Frederick Weed and Hazel Weed separated on a permanent basis. Their divorce
was finalised on 31 August 2021.
Throughout the 2022 year of assessment Kay Weed earned R5 000 local interest a month.
Corin and Ian Ander
On 1 March 2021 Corin and Ian Ander commenced trading as partners in a partnership named
‘Coriander Taxi’.
• Corin is Ian’s father, and
• Ian is Corin’s 16-year-old unmarried son.
Corin Ander’s contribution to the partnership was a micro-bus. Ian Ander’s contribution to the
partnership is his labour – he is the taxi driver’s assistant.
By the end of the 2022 year of assessment the ‘Coriander Taxi’ partnership had made a taxable
profit of R130 000. Corin Ander and Ian Ander share profits and losses equally. (It was Corin
Ander who taught Ian Ander all the tasks necessary to be a taxi driver’s assistant.)
Herbie Seed
During February 2021 Herbie Seed commenced his studies at the local high school. He was from
out of town and needed accommodation. When his efforts to obtain accommodation in the high
school dormitory failed, his father, Pip Seed, purchased a flat in close proximity to the high school.
The purchase consideration of R660 000 was settled in full by Pip Seed and the flat was registered
in his name (Pip Seed’s name). For nine months of the 2022 year of assessment Herbie Seed
occupied the flat. He was not required to pay a rental. Had Pip Seed let the flat to a non-family
member he would have charged a rental of R5 500 a month.
Herbie Seed ‘sublet’ the flat for the three months while he was away from school on holiday. He
earned net rentals of R16 500 in total. He is 16 years old. He is not married.
Tamarin Thyme
Tamarin Thyme is a resident of the Republic. She is aged 33 years. Two years ago Zest
Worcestershire, her maternal grandfather (her mother’s father) died and the following assets were
bequeathed to her:
• Three rent-producing properties situated outside South Africa,
• foreign dividend-yielding shares, and
• foreign interest-bearing securities.
The foreign dividends that Tamarin Thyme earned from the above inherited foreign dividend-
yielding shares are not exempt from normal tax under the provisions of section 10B(2).
Lorraine Thyme, Tamarin Thyme’s mother was not a beneficiary of Zest Worcestershire’s her
father’s estate. Her mother is not a resident of South Africa.
During the 2022 year of assessment Lorraine Thyme’ was in financial difficulties. Tamarin Thyme
therefore donated to her mother two of the rent-producing properties that she had inherited from her
maternal grandfather. Her mother now lives in the one property, and she earns a rental from the
letting of the other property.
Ginger Root
Ginger Root, a father, gratuitously invested funds for the benefit of his five children. For the 2022
year of assessment, local interest from a non ‘tax free investment’ of
• R5 000 accrued to Cocoa Root, aged 13 years, a daughter (by his first marriage),
• R4 000 accrued to Basil Root, aged 16 years, a married son (by his first marriage),
• R3 000 accrued to Dukka Root, aged 23 years, a son (by his first marriage),
• R2 000 accrued to Chillie Enzymes, aged 10 years, a step-son (by his wife’s first marriage), and
TRUSTS 563
Seventeen years ago, when his daughter, Tamar, was born, he decided that her birthday present
from him each year would be an amount determined by multiplying her age by R2 000. Therefore
• on her first birthday he gave her R2 000, and
• on her second birthday he gave her R4 000, and
• these birthday gifts have continued on the same basis ever since.
Tamar Solomon attained the age of 17 years on 1 March 2021. She received R34 000 from her
father as her birthday present. Although to some the value of this birthday present would seem
excessive, to Samuel Solomon it could be considered as mere ‘petty cash’ when valued against his
wealth and earnings. All the birthday presents received by her from him have been invested on her
behalf.
During the 2022 year of assessment the following amounts accrued to Tamar Solomon from her
capital that had been invested:
• Net rentals from seven flats of R604 800.
• Local dividends from South African listed companies amounting to R90 000.
• And local interest of R24 000, from a local interest bearing security, not being a ‘tax free
investment’.
The seven flats that are owned by Tamar Solomon are all in the same block of flats consisting of
eight flats in total. The owner of the remaining flat wished to sell it, and she, wishing to have
ownership of the entire block, was a keen purchaser. She had sufficient cash on hand to pay the
deposit of R100 000. She also arranged a 9% a year mortgage bond to cover the R900 000 balance
of the purchase consideration. But before the mortgage bond was registered, her father Samuel
Solomon insisted on lending her the R900 000. He required her to pay interest at 3% a year, being
equivalent to the return he was enjoying on this particular investment prior to it being liquidated to
provide her with the cash.
Tamar Solomon earned a net rental from this flat of R90 000 (from 1 June 2021 to 28 February
2022). The R90 000 net rental is after the deduction of expenses incurred in producing the gross
rental, but before the deduction of the interest she incurred on her loan from Samuel Solomon. She
paid him interest of R20 250 during the 2022 year of assessment. The flat was transferred into her
name on 1 June 2021.
Tamar Solomon who is not married is a scholar. She earned no other amounts during the 2022 year
of assessment.
You are required to discuss all the normal and donations tax implications to both Samuel Solomon
and Tamar Solomon that arise out of the above transactions.
die before attaining the age of 21 years, the capital and the accumulated interest, is to be donated to
an ‘approved’ public benefit organisation.
You are required to discuss both the income tax and donations tax implications to both Crystal
Grantia and Coffee Jacobs arising out of the above transactions assuming that 2022 legislation and
rates applied to all the years of assessment mentioned above.
Owen Pegg
Owen Pegg donated assets to a trust for the benefit of his
• minor grandson, Arnold Simons,
• major grandson, Brendan Simons, and
• married grand-daughter, Corinne Frost.
The trust deed provided that its annual earnings are to vest in the beneficiaries, but that they will be
entitled to receive them only
• on Owen Pegg’s death, or
• when they attain the age of 30 years,
whichever happens first. Provision was made in the deed for the devolution of the trust capital.
From the terms of the trust deed, the beneficiaries do not have a vested right to the capital.
Notwithstanding the provisions for accumulation of the trust’s annual receipts and accruals, the
trustees have been given a discretionary power as to whether to distribute to the beneficiaries
during a year, a portion, or all, of its receipts and accruals. There must, however, be a minimum
annual distribution of R100 000 to each beneficiary.
Owen Pegg has reserved to himself (in the trust deed) the right at any time to confer Corinne Frost’s
right to receive an amount on Arnold and Brendan Simons in equal shares. To date he has not yet
exercised this right.
During the 2022 year of assessment the trustees earned R900 000 from the investment of the trust
assets. Under a condition contained in the trust deed (see above), they awarded R300 000
(R100 000 to each beneficiary) and accumulated the balance of R600 000.
Owen Pegg, Arnold Simons, Brendan Simons and Corinne Frost are all residents of the Republic.
You are required to determine in whose gross income the R900 000 will be included. Suitable
supporting reasons are required to be furnished in support of your determinations.
On 30 November 2021 the Len Baumann Trust sold its house for R3 300 000. It then used the
R3 300 000 from this sale to purchase a house located in Pretoria. Len Baumann had been
transferred by his employer from Port Alfred to Pretoria.
Under a clause contained in the Len Baumann Trust deed, Len Baumann has a vested right in
capital gains made by it, but not in its assets.
You are required to discuss the capital gains tax consequences that result from the Len Baumann
Trust buying and selling the house located in Port Alfred.
Marie Weston Trust
When Marie Weston, a widow died on 1 May 2014, certain of her assets were bequeathed to the
Marie Weston Trust for the benefit of her married daughter, Grace Whyte, then aged 22 years.
On 31 May 2021 Grace Whyte attained the age of 30 years. Under Marie Weston’s will, the Marie
Weston Trust was dissolved on this day (31 May 2021). Its assets were then vested in Grace
Whyte.
The assets bequeathed by Marie Weston to the Marie Weston Trust had a market value of
• R2 500 000 on 1 May 2014, and
• R3 600 000 on 31 May 2021.
You are required to discuss the capital gain tax consequences that arise out of the Marie Weston
Trust’s transactions.
Aiden Baker Trust
The trustees of the Aiden Baker Trust have certain discretionary powers including being able to
change its investments.
During Aiden Baker Trust’s 2022 year of assessment it changed one of its dividends-yielding share
investments. On the sale of these dividend-yielding shares, it made a capital gain of R180 000.
No beneficiary has a vested right to this capital gain.
The Aiden Baker Trust is an inter vivos trust. Its receipts, accruals and capital gains are caused by a
‘donation, settlement or other [similar] disposition’ made by its ‘creator’, Aiden Baker.
You are required to discuss the capital gain tax consequences of the R180 000 capital gain made
by the Aiden Baker Trust.
William Hay Trust
The trustees of the William Hay Trust have certain discretionary powers including being able to
change its investments.
During William Hay Trust’s 2022 year of assessment it changed one of its dividends-yielding share
investments. On the sale of these dividend-yielding shares, it made a capital gain of R270 000.
Romany Hay is a beneficiary of the William Hay Trust. She has a vested right to the capital gains
that it makes. She is a non-resident.
William Hay, the ‘creator’ of the William Hay Trust, is a resident of the Republic.
The William Hay Trust is an inter vivos trust. Its receipts, accruals and capital gains are caused by a
‘donation, settlement or other [similar] disposition’ made by its ‘creator’, William Hay.
You are required to discuss the capital gain tax consequences of the R270 000 capital gain made
by the William Hay Trust.
John Pyott Trust
The trustees of the John Pyott Trust have certain discretionary powers including being able to
change its investments.
During John Pyott Trust’s 2022 year of assessment it changed one of its dividends-yielding share
investments. On the sale of these dividend-yielding shares it made a capital gain of R360 000.
TRUSTS 567
Frederick Pyott, a resident, is a beneficiary of the John Pyott Trust. He is 23 years old and a full-
time university student. He has no receipts or accruals. He does not have a vested right to its capital
gains. But under a condition in its trust deed, its trustee may vest a capital gain in him.
The John Pyott Trust is a testamentary trust.
You are required to discuss what the trustees of John Pyott Trust should do so as to minimise the
normal tax payable on its capital gain of R360 000. Support your discussion with determinations.
Pierce Clarke Trust
The Pierce Clarke Trust is an offshore trust. It is not a resident of the Republic. It has no receipts,
accruals or deemed accruals from a South African source. It is not liable for normal tax in South
Africa. It is a resident of a so-called tax haven. It therefore pays no foreign income taxes.
Maurice Posner is a beneficiary of the Pierce Clarke Trust. She is a resident of the Republic. She
has only a contingent right to its receipts, accruals and capital gains.
To enable Maurice Posner to commence a business venture, the Pierce Clarke Trust awarded her
the equivalent of R5 000 000. Its trustees made this award to her out of a capital gain made by it in
a previous year of assessment that had been retained by it, this amount now being an amount
representing its capital.
You are required to discuss the South African capital gain tax consequences of the award of the
now ‘capitalised’ capital gain the equivalent of R5 000 000 made by the Pierce Clarke Trust to
Maurice Posner.
Johann Westmead Trust
The Johann Westmead Trust is an inter vivos trust. Its assets were purchased out of a R1 200 000
loan to it from its creator, Johann Westmead. This loan is at an interest rate of 3%. (A market-
related interest rate would be 9%.)
In Johann Westmead Trust’s 2022 year of assessment (ended 28 February 2022), it
• had receipts and accruals of R60 000, and
• made a capital gain of R90 000 on the sale of one of its investments.
The beneficiary of the Johann Westmead Trust is Dixi Westmead, the minor daughter of Johann
Westmead. She has a vested right to its receipts and accruals and its capital gains.
The Johann Westmead Trust, Johann Westmead and Dixi Westmead are all residents of the
Republic.
You are required to discuss the normal tax including capital gains tax consequences that apply to
the Johann Westmead Trust’s receipts, accruals and capital gains in its 2022 year of assessment.
Under a condition contained in the trust deed, Clifford Brown could terminate the payment of the
monthly award at any time, and in the event of this termination, the trust was to be dissolved in his
favour.
On 31 July 2021, after five awards of R25 000 a month in the 2022 year of assessment had been
made to Claire Bisset, Clifford Brown terminated the award of the monthly amount.
Borraine Trust
The Borraine Trust was formed under the last will and testament of the late William Borraine. The
beneficiary under the trust is his grandson, Morris Lane. It is stipulated that the receipts and accruals
of the trust are to be accumulated each year, and in the event of Morris Lane attaining the age of
21 years, it is to be dissolved and its total capital and accumulated earnings awarded to him. Should he
die prior to attaining the age of 21 years, it is to be dissolved, and the total capital and the accumulated
earnings are to be awarded to a specified educational institution.
On 15 July 2021 Morris Lane attained the age of 21 years. The total capital and accumulated earnings
of the Borraine Trust were awarded to him. During the period 1 March 2021 to 14 July 2021 it earned
local interest from a non ‘tax free investment’ of R22 600.
Richard Allison Trust
Under a condition contained in the trust deed of the Richard Allison Trust, its trustees may, at their
sole discretion, distribute its receipts and accruals to its beneficiaries.
For the Richard Allison Trust’s year of assessment ended 28 February 2022 its receipts and
accruals consisted solely of net property rentals of R203 500.
During the Richard Allison Trust’s year of assessment ended 28 February 2022, its trustee awarded
Brian Allison (aged 22 years), a stated beneficiary of it,
• a monthly allowance of R10 000, and
• R36 000 for him to pay for his university fees,
amounting to R156 000 in total.
The Richard Allison Trust’s remaining receipts and accruals were accumulated within it as part of
its funds. The property was originally donated to it by Richard Allison, the father of Brian Allison.
No beneficiary has a vested right to its receipts or accruals or capital.
Richard Allison is still alive.
Martha Parish Trust
A condition contained in the deed of trust of the Martha Parish Trust, created under the will of the
late Martha Parish, provided that its entire annual receipts and accruals were to be awarded to her
husband (John-Paul Parish), its sole beneficiary.
For Martha Parish Trust’s 2022 year of assessment, John-Paul Parish (aged 73 years) was awarded
R360 000 from it, comprising:
• local dividends of R67 500,
• net rentals of R189 000, and
• local interest from a non ‘tax free investment’ of R103 500.
Nile Trust
The Nile Trust was formed under the last will and testament of the late Manfred Nile. It earned
• local dividends of R840 000, and
• local interest from a non ‘tax free investment’ of R280 000,
during its 2022 year of assessment.
Under a stipulation contained in the Nile Trust deed, R48 000 a month was awarded to Cleopatra Nile,
aged 55 years, the surviving spouse of the late Manfred Nile. This R48 000 a month is awarded to her
for the rest of her life or until the date of her remarriage, whichever event occurs first.
TRUSTS 569
Under another stipulation contained in the Nile Trust deed, R20 000 a month was awarded to
Beresford Nile, aged 24 years, the second son of Manfred Nile. This award is to be made to him
until he attains the age of 30 years. He is not a resident of South Africa.
In addition, the trustees of the Nile Trust used their discretionary powers to distribute
• R144 000 to Albert Nile, aged 30 years, Manfred’s oldest son, and
• R72 000 to Cecil Nile, aged 16 years, Manfred’s youngest son.
The balance of the Nile Trust’s receipts and accruals were retained by it and reinvested. Its capital
and accumulated receipts and accruals are to vest in Manfred’s first grandson. (At present no
grandson has yet been born.)
None of the above beneficiaries has yet enjoyed any portion of the so-called basic local interest
exemption.
You are required to indicate, for each of the above situations, how, and in whose hands, the
amounts referred to would be subject to normal tax in the 2022 year of assessment. Assumptions
made should be stated, and your determination should be suitably substantiated with valid reasons.
Vernon Wise is happy with the education and knowledge that Bright Wise is gaining, but he is tired
of financing his studies out of his after-tax earnings. Therefore on 1 March 2021, Vernon Wise,
being a man of considerable means, created the Bright Wise Education Trust by donating to it an
investment of R5 000 000 that earns interest of 7% a year. This is not a ‘tax free investment’.
Under a condition contained in the Bright Wise Education Trust deed, its trustees are required to
award to Bright Wise an amount sufficient to cover all his education costs and to supply him with a
reasonable monthly allowance to cover his living expenses.
The trustees of the Son’s Education Trust have estimated that they will award R270 000 a year for
these commitments. Local interest retained in the trust will be capitalised and reinvested.
The Bright Wise Education Trust will be dissolved when Bright Wise completes his fourth degree.
The capital and capitalised interest will be awarded to Bright Wise so as to provide him with the
capital he may need to enable him to start his own business. But if he does not complete his fourth
degree within five years, it will be dissolved and its capital and its capitalised interest will again
become the property of Vernon Wise.
You are required to state in whose income the local interest earned by the Bright Wise Education
Trust will be included, giving reasons to support your answer.
Cyril Severn
Cyril Severn died seven years ago. Under his will, the assets in his estate were ‘transferred’ to a
trust and invested in local interest-bearing securities. They are not ‘tax free investments’. It is a
resident of the Republic.
A distribution of R840 000 (being distributed at the rate of R70 000 a month) out of the capital
assets of the trust is awarded annually to Fay Severn, Cyril Severn’s widow, for the remainder of
her life.
The annual earnings of the trust are accumulated in favour of their son, Ian Severn, at present aged
27 years. They will be awarded to him when he attains the age of 30 years. There are, however, two
conditions to this instruction:
• First, if the trustees were of the opinion that funds are needed by Ian Severn for educational
purposes, they could award him sufficient funds to cover these education costs.
• Secondly, if he was to die before attaining the age of 30 years, the children of Richard Severn
(Cyril Severn’s brother) would inherit its annual earnings accumulated to the date of his death.
During the 2022 year of assessment the trustees of the trust
• distributed R840 000 to Fay Severn out of its capital assets, and
• awarded R70 000 to Ian Severn out of the R270 000 local interest earned by it.
The R370 000 was awarded to Ian Severn for his educational purposes. And the R222 000 balance
of the local interest earned by the trust was reinvested by its trustees.
You are required to
1. discuss the normal tax implications arising out of the above transactions, and
2. redetermine the normal tax implications that would have arisen had Ian Severn died on
27 February 2022, being after he had been awarded the R70 000.
• A rent-producing property.
• Local dividend-yielding shares.
• A local interest-bearing security. It is not a ‘tax free investment’.
They were sold at their current market value. The purchase consideration was left owing as a loan
from him to it with interest at a rate of 3% a year being provided for. (If the purchase consideration
was owing to an independent third-party, interest at a rate of 9% a year would have been levied.)
No security was provided for. The Commissioner has confirmed that the ‘disposition’ is equal to
the amount of interest incurred that was saved by paying interest at 3% instead of 9%.
The Jewell Trust deed caters for three beneficiaries,
• Ruby Jewell, wife of Diamond Jewell, and
• Garnet Jewell and Pearl Jewell, their two children:
– Garnet Jewell is a full-time university student. He attained the age of 18 years on 31 May
2021. His receipts and accruals are only those from the Jewell Trust.
– Pearl Jewell is a full-time scholar. She is 16 years old. Her receipts and accruals are only
those from the Jewell Trust.
In accordance with a condition contained in the Jewell Trust deed, its trustees are required to make
the following awards to the three beneficiaries for the five-year period from 1 March 2021 to
28 February 2026:
• Ruby Jewell is to be awarded R54 000 a month,
• Garnet Jewell, R27 000 a month, and
• Pearl Jewell, R13 500 a month.
Over and above the monthly amounts to be awarded by the Jewell Trust to its beneficiaries, its
trustees have the discretion to make further awards to any of them.
The Jewell Trust’s receipts and accruals for its 2022 year of assessment amounted to R2 430 000,
consisting of:
• net rentals of R1 215 000,
• local dividends of R243 000, and
• local interest of R972 000.
Out of the Jewell Trust’s receipts and accruals, its trustees paid the R540 000 interest due on the
outstanding purchase consideration for its assets. This interest was paid at a rate of R45 000 a month.
In accordance with the above condition contained in the Jewell Trust deed, the monthly amounts,
amounting to R1 134 000 in total for its 2022 year of assessment, were awarded by its trustees as
follows:
• To Ruby Jewell a total of R648 000 (12 × R54 000).
• To Garnet Jewell a total of R324 000 (12 × R27 000).
• To Pearl Jewell a total of R162 000 (12 × R13 500).
In addition, in accordance with the discretionary powers that the Jewell Trust’s trustees had been
granted for its annual receipts and accruals in excess of R1 134 000, they made the following
awards:
• Garnet Jewell was awarded R108 000 on 1 May 2021 and R135 000 on 1 August 2021.
• Pearl Jewell was awarded R81 000 on 1 November 2021 and R54 000 on 1 January 2022.
The amount not distributed was reinvested by the trustees. From the trust deed, none of the
beneficiaries has a vested right to its retained receipts and accruals or to its capital.
Diamond Jewell died on 30 November 2021 at the age of 55 years. All his assets, including his loan
to the trust, were bequeathed to Ruby Jewell. The Commissioner confirmed with the trustees of the
TRUSTS 573
Jewell Trust that they could regard its receipts and accruals to have been earned evenly throughout
the year of assessment for apportionment purposes.
Excluding all amounts that are deemed to accrue to Diamond Jewell, he had a taxable income in
excess of R1 656 600 for the period of assessment that ended with his death. (This taxable income
includes local interest.)
Ruby Jewell, aged 45 years, also has a taxable income in excess of R1 656 600 including local
interest.
You are required to determine the 2022 normal tax liabilities of each taxpayer mentioned above for
the amounts that were received by or accrued or deemed to accrue to them as a result of all the
above transactions.
Chief Kok
The Kok Trust was created by initial cash donations of
• R2 700 000 from Chief Kok (aged 45 years), and
• R900 000 from his father, Grandfather Kok (aged 69 years).
Chief Kok then sold an established sugar cane farm to the Kok Trust at its current market value of
R9 00 000. Its purchase price of R9 000 000 was settled by the Kok Trust out of the amount
obtained from a long-term loan from Chief Kok to it bearing interest at 4% (the current interest rate
on a similar loan is 9%).
The sole beneficiary of the Kok Trust is Adam Kok, Chief Kok’s only son (who is a minor). From
the Kok Trust deed, Adam Kok has a vested right to both its capital and its annual receipts and
accruals.
During the 2022 year of assessment the Kok Trust earned a net amount from the sugar cane farm of
R2 376 000. Out of this net amount, interest due of R360 000 (R9 000 000 at 4%) was paid by its
trustees to Chief Kok. In addition, local dividends of R216 000 and interest of R90 000 were earned
by it from investing the amounts from the initial donations made to it by Chief Kok and
Grandfather Kok.
No distributions were made by the Kok Trust to Adam Kok during the 2022 year of assessment. All
amounts earned were reinvested by its trustees.
Chief Kok has other investments that yield local interest in excess of R23 800 a year. These
investments are not ‘tax free investments’.
Adam Kok has no other receipts or accruals.
Hillstone Ayliff
Six years ago Hillstone Ayliff donated a rent-producing property (that is situated in Durban) to the
Ayliff Trust. He intended that it purchase an adjacent property using the original property as
security.
The sole beneficiary is intended to be his daughter, Anne Ayliff, who is at present 24 years old, a
full-time university student and who is not married. Since he is concerned about some of the friends
she keeps at university, he has retained the right to alter the trust deed to exclude her at some future
point in time (but only for the original property donated). She will always have a vested right to the
purchased property (see below) and the amounts that accrue from it.
Five years ago the Ayliff Trust purchased from a property developer the property adjacent to the
original one at its market value. The full purchase consideration was settled out of the amount
obtained from a loan from a financial institution that it had entered into.
During the 2022 year of assessment net rentals of R300 000 accrued to the Ayliff Trust. The net
rentals from its
• original property were R240 000, and
• purchased property were R60 000.
The Ayliff Trust’s R60 000 net rentals from its purchased property is after the settlement of the
interest due on its loan from the financial institution.
The Ayliff Trust’s net rentals of R300 000 were distributed by its trustees to Anne Ayliff during the
2022 year of assessment.
Kirby Frere
Four years ago, Kirby Frere and Donald Frere, twins, patented a new feed bin that is used in
livestock farming. Royalties accrue to them from this intellectual property (their patent over this
feed bin).
TRUSTS 575
On Donald Frere’s death two years ago, he bequeathed his half-share of the patent (earning a half-
share of the royalties) to the Frere Trust for the equal benefit of Henry and Bartle Frere, his two
nephews (Kirby Frere’s twin sons who are both minors).
Since Kirby Frere was happy with this bequest, he then sold his half-share of the patent to the Frere
Trust for R250 000. (Its market value was R2 000 000.)
During the 2022 year of assessment royalties of R400 000 accrued to the Frere Trust. From the
trust deed, Henry and Bartle Frere share equally in its income and its capital which vests in them.
Bizana Senior
On 1 March 2021 Bizana Junior (aged 13 years) and his father Bizana Senior (aged 39 years) each
donated R1 500 000 to the Bizana Trust. (Bizana Junior funded his donation out of his winnings when
gambling on a slot machine at the Wild Coast Casino Sun.)
The Bizana Trust’s trustees then used the R3 000 000 to purchase local dividend-yielding shares
and local interest-bearing securities. These interest-bearing securities are not ‘tax free investments’.
During the 2022 year of assessment the Bizana Trust earned
• R300 000 local interest, and
• R200 000 local dividends.
In accordance with a clause contained in the Bizana Trust deed, a distribution of R30 000 a month
was made to Bizana Junior. (The Bizana Trust trustees are required to distribute R30 000 a month to
him for a period of 60 months.) In addition an ‘educational’ trip undertaken by him costing
R20 000 was financed by the trust.
These distributions which totalled R380 000 (R360 000 (12 at R30 000) and the R20 000) are
within the R450 000 maximum limit that the Bizana Trust’s trustees are allowed to distribute to
Bizana Junior each year. The balance of R100 000 was retained in it.
From the Bizana Trust deed, Junior Bizana has a vested right to both its capital and its receipts and
accruals.
Neither Bizana Junior nor Bizana Senior earned local interest during the 2022 year of assessment.
You are required to reply to each of the above clients setting out how you would determine the
resulting tax implications of the receipts and accruals and distributions of the trusts.
The balance of Fred Frame’s interest-free loan account to the Frame Flat Trust on 28 February
2022 was still R3 780 000. In other words, it had not repaid any portion of its loan from him.
Fred Frame’s only other receipt or accrual is net rentals of R1 800 000 a year from another South
African property.
You are required to state whether
1. the section 7 provisions of the Income Tax Act could be applied to the net rentals that accrued
to the Frame Flat Trust,
2. Fred Frame would be liable for donations tax on the sale of his rent-producing property to it,
and if so, how much he would have to pay. He did not make any other donations in the 2022
year of assessment. Assume that the ‘official rate of interest’ is 4,5%, and
3. the Commissioner could successfully raise the provisions of section 80B of the Income Tax
Act.
Dene Harding has a taxable income of R1 760 000 before taking into account amounts that accrued to
him from the trust. This taxable income is entirely in the form of foreign rentals.
Norma Harding’s only receipt or accrual for the 2022 year of assessment is the R316 000 lump sum
that was distributed to her from the trust (see above).
Frank Harding earned R600 000 from his share in a South African partnership. He visits South
Africa from time to time to carry out his partnership duties. In the 2022 year of assessment he was
physically present in South Africa from 23 August 2021 to 28 February 2022, a total of 190 days.
Glenor Richmond (née Harding) sole receipts and accruals are the amounts that accrue to her from
the trust.
Lyn Harding’s sole receipts and accruals are the amounts that accrue to her from the trust.
You are required to determine the South Africa taxable incomes of each of the above taxpayers.
Cue Pool is a scholar. The distributions from the Cue Pool Trust are his sole receipts and accruals.
Pocket Pool’s income comes solely from his investments and includes local interest.
The Commissioner has indicated to Pocket Pool that he is prepared to accept apportionment for the
purpose of section 7 on the basis that the saving in the amount of interest payable caused by the
difference in the rates of interest (6% vs 9%) is the amount of the disposition. The result is that
• in the 2021 year of assessment, R54 000 of the gross rentals earned will be deemed to be his
income, and
• in the 2022 year of assessment, R108 000 of the gross rentals earned will be deemed to be his
income.
Cue Pool, Pocket Pool and the Cue Pool Trust are all residents of the Republic.
You are required to determine
1. the taxable incomes of Cue Pool and the Cue Pool Trust for the 2021 and 2022 years of
assessment, and
2. what effect the transactions of the trust will have on the determination of the taxable income of
Pocket Pool for the 2021 and 2022 years of assessment.
On 28 February 2022 Spinning Properties Limited declared and paid a dividend of R600 000.
Stella Reel, a resident, holds 200 units in Spinning Properties Limited. For the 2022 year of
assessment she earned from it
• local debenture interest of R1 125 000, and
• a local dividend of R80 000.
Excluding Stella Reel’s return from her investment in Spinning Properties Limited, she has a
taxable income in excess of R1 656 600.
Rod Fly, a non-resident holds 60 units in Spinning Properties Limited. For the 2022 year of
assessment he earned from it
• local debenture interest of R337 500, and
• a local dividend of R24 000.
Rod Fly has no other receipts and accruals from a South African source.
You are required to
1. determine the normal tax payable by Spinning Properties Limited,
2. the normal tax and dividends tax payable by Stella Reel on her return from her investment in it,
and
3. the normal tax and dividends tax payable by Rod Fly on his return from his investment in it.
Farmgate Properties Limited
Farmgate Properties Limited is a ‘property company’ as defined in section 25BB. It owns the
Farmgate Shopping Centre. This is its sole asset. It purchased the Farmgate Shopping Centre on
1 November 2020 for R60 000 000 (R5 000 000 for the land and R55 000 000 for the buildings)
from the developer who erected it.
Its erection had commenced on 1 May 2016 and was completed on 30 October 2020. It cost the
developer R49 000 000 to erect it.
It was new and unused when it was purchased by Farmgate Properties Limited.
For Farmgate Properties Limited’s 2022 year of assessment (ended 28 February 2022) it had the
following receipts and accruals:
• Gross rentals of R4 800 000.
• Local interest of R700 000.
And it incurred the following expenses:
• Property rates of R720 000.
• Electricity and water amounting to R300 000.
• Security expenditure of R360 000.
• Clearing expenditure of R120 000.
• Management and administration expenditure of R600 000.
• Repairs and maintenance of R78 000.
• Insurance premiums of R72 000.
On 28 February 2022 Farmgate Properties Limited declared a dividend of R500 000.
You are required to determine Farmgate Properties Limited’s taxable income for its 2022 year of
assessment.
582 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
On the day that the Small Family Trust was formed, Elizabeth Small sold all her shares in Dream
Design (Pty) Limited to it at their market value. The purchase price was settled out of a loan that
she had made to it. This loan was settled in 2015 out of dividends received from Dream Design
(Pty) Limited.
The Small Family Trust’s receipts and accruals were dividends from Dream Design (Pty) Limited
and local interest from the reinvestment of amounts not distributed by it.
On 28 February 2021 the trustees distributed all amounts that had accrued to or been received by
the Small Family Trust to that date.
Jonathan Small is a general medical practitioner who is employed by a local hospital. He owned the
family home. It was originally financed by a mortgage bond from the Second Divisional Bank, but
it had been settled by 2011. In that year he took out a second mortgage bond secured against the
family home to purchase a rent producing property as an investment for R3 000 000. He has
included the rentals earned each year in his gross income. But since the interest incurred on the
mortgage bond was almost equal to these rentals, the effect on his taxable income was minimal.
Since Jonathan Small needed to minimise the estate duty liability that would arise on his death and
because he also needed to protect his personal assets from possible professional claims against him,
he sold his rent-producing property to the Small Family Trust for no consideration on 1 March
2021. The market value of this rent-producing property was R5 500 000 on that date. The second
mortgage bond over the family home was retained in his name. And since there was no cash
available in the Small Family Trust, he paid the transfer duty and transfer costs on its behalf. It is
obliged to repay these amounts to him.
In the Small Family Trust’s 2022 year of assessment, amongst other things, the following
transactions took place in its bank account:
Dividend received from Dream Design (Pty) Limited. It was declared on 1 October
2021 and paid on 15 October 2021. This was the only dividend for the year. 700 000
Rentals earned 325 000
Local interest from the investment of its cash balance. Of this R16 000 interest,
R9 000 results from the dividend receipt retained in its bank account. 16 000
A fee for trustee services of R2 000 a month was paid to Chris Hosking for the
five-month period 1 October 2021 to 28 February 2022 10 000
Market-related interest incurred on transfer duty and transfer costs 14 000
Repayment of the transfer duty and transfer costs to Jonathan Small out of the
dividend it received.
Property rates incurred on the rent-producing property 60 000
There was no rental outstanding on 28 February 2021. But a rental of R5 000 was outstanding on
28 February 2022.
The Small Family Trust repaid the transfer duty and transfer fees to Jonathan Small out of the
dividend it received (see above). This payment to him included a market-related interest charge of
R14 000 (also see above).
The trustees of the Small Family Trust, acting within their mandate, vested the following amounts
in its beneficiaries on 28 February 2022:
• From its rentals: R150 000 to Jonathan Small, and R25 000 each to Sarah and Herbie Small.
• From its dividend: R200 000 to Elizabeth Small.
On 1 October 2021 Dream Design (Pty) Limited, on the instruction of the trustees of the Small
Family Trust, paid the outstanding monthly trustees fees of R12 000 due to Chris Hosking for the
seven-month period from 1 March 2021 to 30 September 2021. The Small Family Trust is not
required to repay this amount to Dream Design (Pty) Limited.
584 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Dream Design (Pty) Limited exhibits each year at the South African Design Indaba. For the July
2021 event it was approached by the organisers of the Indaba with the following proposal:
If Dream Design (Pty) Limited were to provide its services to the Indaba free of charge to assist
with the theme, décor and planning of the event, the Indaba would waive its standard fee of
R50 000 for providing it with a stand at the event.
Dream Design (Pty) Limited agreed to the proposal, which was then carried out as planned. It
estimates that it could have charged R40 000 for the services it provided to the Indaba. At its
financial year end it had not received or issued any invoices for this transaction. Peta Golby, its
accountant is of the view that the transaction effectively has a net balance of zero and therefore has
no normal tax or value-added tax consequences. She does not intend pursuing this matter any
further.
Jonathan Small is in the process of completing his tax return for the 2022 year of assessment. His
determinations are as follows:
Salary from employment 660 000
Rentals distributed to him by the Small Family Trust 150 000
810 000
Less interest incurred on the second mortgage bond 160 000
Estimated taxable income 650 000
No donations were made by Jonathan Small during the 2022 year of assessment.
The capital loss on Jonathan Small’s sale of his rent-producing property to the Small Family Trust
was R3 000 000.
Jonathan Small has an assessed capital loss of R169 091 brought forward from the 2021 year of
assessment.
Jonathan Small submitted his taxable income determination and supporting documents to Amara
Singh, who helps him to compile his annual tax returns. She called him shortly after receiving it
and said the following to him:
‘You should never have sold your rent-producing property to the trust for no consideration.
You and it would have been better off both for normal tax and estate planning purposes if the
rent-producing property had been purchased by it originally.’
You are required to
1. determine Jonathan Small’s taxable income for the 2022 year of assessment. Commence your
determination with his estimated taxable income of R650 000 (see above),
2. critically discuss Amara Singh’s comment to him,
3. discuss the tax consequences to Dream Design (Pty) Limited of the R12 000 payment it made
to Chris Hosking, and
4. discuss, with reasons, both the normal tax and value-added tax consequences for Dream
Design (Pty) Limited of it entering into the arrangement with the South African Design Indaba.
(SAICA adapted.)
CHAPTER 26
EMPLOYEES’ TAX AND PROVISIONAL TAX
585
586 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
• Rayner Sole’s ‘other’ deduction (see above) is an alimony payment to Regina Sole, his first
wife. He pays her R300 a month. He had no other receipts or accruals in the 2022 year of
assessment. He does not enjoy exemptions from normal tax and deductions in the determination
of his taxable income, other than those that arise out of the above information.
• Simon Toecap’s ‘other’ deduction (see above) is a donation to a ‘qualifying’ section 18A public
benefit organisation.
• Rex Slipon was employed by Dress Shoes Limited only for the months of January 2022 and
February 2022. For the first 10 months of the 2022 year of assessment he was unemployed. He
had no other receipts or accruals and did not incur expenditure that would give rise to a
deduction in the determination of his taxable income.
• Greer Heel’s ‘other’ deduction (see above) is an insurance premium on a remuneration
continuation policy in the event of her illness, injury, disability or unemployment.
Dress Shoes Limited, and its employees who contribute to the medical scheme, do so on a rand-for-
rand basis:
• Kelly Last and four members of his family are members of the medical scheme.
• Rayner Sole and Rex Slipon each have one family member in addition to themselves as a
member of the medical scheme.
• Katelyn Lace is not a member of the medical scheme.
• All the other employees have only themselves as members of the medical scheme.
The medical scheme provides 100% medical cover.
You are required to determine
1. Kelly Last’s taxable income, and
2. the employees’ tax to be deducted from each employee’s February 2022 salary.
estimated his taxable income for the 2022 year of assessment at R450 000 for his second estimate. His
returned estimate for his first provisional tax payment was R720 000.
Fumé Duette
Fumé Duette, with a salary of R144 000 and other taxable income from investments of R46 000,
had declined to make an estimate of her taxable income, and therefore failed to make provisional
tax payments. She was assessed for the 2022 year of assessment on 1 June 2022. Employees’ tax of
R10 200 was deducted on an even basis throughout the 2022 year of assessment. Her 2021 year’s
assessment was received on 1 June 2021 and reflected a taxable income of R158 400.
Ned Edelrood
Ned Edelrood’s taxable income for the 2021 year of assessment was R240 000. His assessment was
received on 5 July 2021. His taxable income for the 2022 year of assessment was R480 000. He
had estimated his taxable income for the 2022 year of assessment at R270 000 for his second
provisional tax payment. He timeously paid his second provisional tax payment based on his
estimated taxable income. (His provisional tax form reflected his 2021 taxable income of
R240 000.)
Blanc Fonternel
Blanc Fonternel had a taxable income for the 2021 year of assessment of R1 110 000. Her
assessment was received on 18 June 2021. Her taxable income for the 2022 year of assessment was
R1 200 000. She had estimated her taxable income for the 2022 year of assessment at R840 000 for
her second provisional tax payment. (Her provisional tax form reflected her 2021 taxable income of
R1 110 000.) No portion of her taxable income is from ‘remuneration’ as defined. She timeously
paid a first provisional tax payment of R179 100. And she timeously paid her second provisional
tax payment based on her estimated taxable income.
Stein Grunberger
Stein Grunberger had a taxable income for the 2021 year of assessment of R1 080 000. His
assessment was received on 1 August 2021. His taxable income for the 2022 year of assessment
was R840 000. He had estimated his taxable income at R600 000 for his second provisional tax
payment, but was required by the Commissioner to increase it to R760 000. (His provisional tax
form reflected his 2021 taxable income of R1 080 000.) He then timeously paid his second
provisional tax payment on the increased taxable income as required by the Commissioner (of
R760 000).
You are required to determine, in relation to their second provisional tax payments, the penalties, if
any, payable by the above provisional taxpayers. (For Fumé Duette also determine the penalty
payable by her on her first provisional tax payment.)
• His 2022 tax return (form IT 12) was submitted on 1 May 2022.
• His 2022 tax assessment has not yet been received.
No portion of Justin Tyme’s taxable income is from ‘remuneration’ as defined. His taxable income
comprises solely business profits and investment income.
You are required to
1. determine the amount of each provisional tax payment to be made by Justin Tyme for the 2022
year of assessment. The payment must be the minimum payment he is required to make so as
to avoid penalties and interest, and
2. state by when he must make each provisional tax payment.
• His 2021 assessment was received during September 2021. It reflected a taxable income of
R675 000 and an amount due to the Commissioner to be settled on 30 September 2021. He
settled the amount due on 25 September 2021.
Jan Augustus’s 2022 tax return was e-filed on 31 July 2022. The following information was
included in the return:
Under Almanac (Pty) Limited’s employer-owned income-protection risk policy, the premium
payable is based on the value of its employee’s income that must be replaced. The employee is
the named beneficiary under this insurance policy. It relates to the death, disability or illness of
an employee for his direct benefit.
Almanac (Pty) Limited paid premiums of
• R5 400 for its death or permanent disability insurance policy for Jan Augustus’s benefit,
and
• R16 200 for his income-protection risk insurance policy.
5. At 31 August 2021 Jan Augustus had paid employees’ tax of R93 360. By 31 August 2022 he
had paid employees’ tax of R96 000.
You are required to
1. determine Jan Augustus’s 2022 normal tax liability,
2. state by when his first provisional tax payment for the 2022 year of assessment must be paid,
and determine how much must be paid,
3. state by when his third provisional tax payment for the 2021 year of assessment must be paid,
and to state whether it is necessary for him to make a payment,
4. state by when his second provisional tax payment for the 2022 year of assessment must be
paid, and determine how much must be paid,
5. state by when his first provisional tax payment for the 2023 year of assessment must be paid,
and determine how much must be paid (use the 2022 tax rates and rebates), and
6. state by when his third provisional tax payment for the 2022 year of assessment must be paid,
and determine how much must be paid.
1 November 2020.) It was made on the basis to ensure no interest, penalties or offences would be
payable.
On 30 September 2021, Ernest Old made a third provisional tax payment for the 2021 year of
assessment. The amount he paid was the minimum amount necessary to avoid paying interest. His
first provisional tax payment for the 2021 year of assessment had been nil, and his second
provisional tax payment for the 2021 year of assessment was R14 000. His taxable income for the
2021 year of assessment was R420 000. Employees’ tax of R63 000 had been deducted from the
remuneration he earned in the 2021 year of assessment.
Ernest Old received his 2021 tax assessment on 1 December 2021. It reflected that the sum of his
employees’ tax deductions and provisional tax payments equalled exactly his normal tax liability.
On 28 February 2022 he paid his second provisional tax payment for the 2022 year of assessment.
It was based on an estimated taxable income of R900 000. When he was assessed for the 2022 year
of assessment his taxable income was R1 200 000.
Ernest Old is 27 years old. He is a resident of the Republic. On 30 November 2021 he married
Winnie Arthur, aged 22 years.
Winnie Old (née Arthur) completed her studies at university at the end of the 2021 academic year.
She commenced working as a candidate attorney as from 1 January 2022 earning a salary of
R9 200 each month. Being a candidate attorney, she was required to join the local legal society.
This she did in February 2022, paying an annual membership fee of R180.
Two years ago Peta Anderson, Winnie Arthur’s grandmother, had died. She had inherited cash from
Peta Anderson’s estate. She had invested her inheritance in local dividend-yielding shares and in a
local interest-bearing security. Her investment in the local interest-bearing security is not a ‘tax free
investment’. Local dividends of R3 000 and local interest of R8 800 accrued to her in the 2022 year of
assessment.
You are required to
1. determine the amount of employees’ tax deducted from the remunerations payable by Ernest
Old to his employees during the 2022 year of assessment. (Use the schedule tax table to
determine the amount of employees’ tax to be deducted and to determine the provisional tax
payments (see Parts 5 and 6 below)),
2. briefly detail all the duties that it is required to perform under the provisions of the Fourth
Schedule to the Income Tax Act in his role as an ‘employer’ as defined,
3. determine the amount of his third provisional tax payment for the 2021 year of assessment (use
the 2021 year of assessment rates and rebates for this determination),
4. determine his first provisional tax payment for the 2022 year of assessment,
5. determine his second provisional tax payment for the 2022 year of assessment,
6. determine any penalty (additional tax) that may result from his second provisional tax payment
for the 2022 year of assessment, and
7. determine Winnie Old’s (née Arthur’s) normal tax liability for the 2022 year of assessment.
Danube CC’s journal reflected the following entries for its 2022 year of assessment provisional tax
payments:
On 31 August 2021:
SARS Dr 81 200
To Bank 81 200
Being its first provisional tax payment for its 2022 year of assessment.
On 28 February 2022:
SARS Dr 81 200
To Bank 81 200
Being its second provisional tax payment for its 2022 year of assessment.
On 31 October 2022:
SARS Dr 97 600
To Bank 97 600
Being its third provisional (or top-up) tax payment for its 2022 year of
assessment.
On 16 November 2022:
Bank Dr 35 419
To SARS 35 419
Being a refund received from SARS.
Danube CC received its 2022 assessment on 23 November 2022. It had been prepared on
16 November 2022 and on the same day R35 419 was paid into its bank account (see above). Its
assessment reflects a due date of 1 December 2022 and a second date of 31 December 2022.
Under paragraph (b) of the definition of the ‘prescribed rate’ the relevant prescribed rate of interest
is 7%. And under paragraph (a) of the definition of the ‘prescribed rate’ the relevant prescribed rate
of interest is 3%.
You are required to determine how much should have been refunded to Danube CC.
In August 2022 when Winston Knowit-All, Roger Knowit-All’s son, who was studying a course on
taxation at university, asked him a question regarding provisional tax, he panicked. Winston
Knowit-All informed him that he may now be liable for penalties and interest on his second
provisional tax payment for the 2022 year of assessment. He, however, did not know how to
determine these amounts. He also did not know how to determine the amount of a third provisional
tax payment that may have been due for the 2022 year of assessment.
Winston Knowit-All helped Roger Knowit-All with the determination of the amount that he had to
pay on 30 September 2022 so as to settle the full amount due and thereby avoid any further
problems with his provisional tax payments for the 2022 year of assessment.
Roger Knowit-All’s taxable income for the 2022 year of assessment was R165 000.
You are required to determine the amount that Roger Knowit-All paid on 30 September 2022 so as
to settle his total liability for normal tax (including penalties and interest) for the 2022 year of
assessment. Under paragraph (b) of the definition of the ‘prescribed rate’ the relevant prescribed
rate of interest is 7%.
May March’s 2022 refund was prepared on 20 November 2022. It was deposited into her bank
account on 20 November 2022.
Under paragraph (b) of the definition of the ‘prescribed rate’ the relevant prescribed rate of interest
is 7%. And under paragraph (a) of the definition of the ‘prescribed rate’ the relevant prescribed rate
of interest is 3%.
You are required to determine
1. May March’s first provisional tax payment paid on 31 August 2021,
2. her second provisional tax payment paid on 28 February 2022,
3. her third provisional tax payment paid on 30 September 2022,
4. her fourth provisional tax payment paid on 31 October 2022, and
5. the amount that was deposited into her bank account by the Commissioner on 20 November
2022.
Rusty Fall is an investor in rent-producing properties. The major portion of his taxable income is
made up of net rentals. He does earn some remuneration and employees’ tax deducted for the
period 1 March 2021 to 31 August 2021 was R595. He took this amount into account in the
determination of his first provisional tax payment.
Rusty Fall received his 2021 assessment on 1 November 2021. It reflected a taxable income of
R400 000 and an amount due to the Commissioner. He settled the amount due within the required
time period.
On 20 February 2022 Rusty Fall submitted and paid his second provisional tax payment for the
2022 year of assessment. His provisional tax form (IRP 6) reflected a taxable income for the 2021
year of assessment of R400 000. In the determination of his second provisional tax payment he had
estimated his taxable income at R375 000. Employees’ tax deductions of R4 235 for the period
1 March 2021 to 28 February 2022 were taken into account by him when he determined the amount
payable for his second provisional tax payment.
Rusty Fall made, and paid, his first provisional tax payment for the 2023 year of assessment on
31 August 2022. He estimated his taxable income at R400 000 and took into account employees’
tax deductions for the period 1 March 2022 to 31 August 2022 of R1 163.
Rusty Fall prepared his 2022 tax return (form IT 12) during October 2022. His determinations
revealed that he had a taxable income of R450 000 for the year. Yet when he was assessed by the
Commissioner for the 2022 year of assessment, his taxable income for the year was actually
R500 000. (Rusty Fall had made an error in the determination of his taxable income.)
Rusty Fall did not make a third provisional tax payment by 30 September 2022. But on 31 October
2022 he paid a third provisional tax payment. In the determination of the amount he paid, he took
into account the R450 000 taxable income that he had determined (incorrectly) and his employees’
tax deductions and provisional tax payments for the year.
Rusty Fall received his 2022 tax assessment on 25 November 2022. It had a 1 December 2022 date of
assessment and a second date of 31 December 2022. He settled the amount due by him on
24 December 2022.
Under paragraph (b) of the definition of the ‘prescribed rate’ the relevant prescribed rate of interest
is 7%.
You are required to
1. determine the amount of Rusty Fall’s first provisional tax payment for the 2022 year of
assessment that he paid on 30 September 2021,
2. determine any penalty payable by him for his first provisional tax payment,
3. determine the interest payable by him on his first provisional tax payment,
4. determine the amount of his second provisional tax payment for the 2022 year of assessment
that he paid on 20 February 2022,
5. determine any penalty payable by him for his second provisional tax payment,
6. determine the interest payable by him on his second provisional tax payment,
7. determine the penalty (additional tax) payable by him on his second provisional tax payment,
8. determine his first provisional tax payment for the 2023 year of assessment that he paid on
31 August 2022,
9. determine his third provisional tax payment for the 2022 year of assessment that he paid on
31 October 2022,
10. determine the interest payable by him on his third provisional tax payment,
11. determine the amount paid by him on 24 December 2022, and
12. discuss whether he may deduct in the determination of his taxable income the penalties
(additional taxes) and interest that he is liable for.
600 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Under paragraph (b) of the definition of the ‘prescribed rate’ the relevant prescribed rate of interest
is 7%. And under paragraph (a) of the definition of the ‘prescribed rate’ the relevant prescribed rate
of interest is 3%.
You are required to determine
1. each grandson’s amount due or credit balance as at 31 October 2022 for normal taxes payable
taking into account interest, penalties or additional tax that he may be liable for. You may
assume that the August 2021 provisional tax payments were correctly made, and
2. the amount of each grandson’s first provisional tax payment for the 2023 year of assessment.
(Use 2022 tax rates and rebates.)
Jacques Coquilles paid his second provisional tax payment for the 2022 year of assessment
timeously (before 28 February 2022). He had estimated his taxable income at R620 000 despite his
basic amount being R650 000. (He thought that his royalties were going to be less than what they
were in previous years.)
Jacques Coquilles’s taxable income for the 2022 year of assessment is R790 000. His tax return
was submitted to SARS by way of its e-filing system on 28 September 2022. He had not been
assessed by 30 September 2022.
Jacques Coquilles’s credit amount (as defined in section 89quat(1)) is made up of
• R109 125 employees’ tax deducted from his pension,
• his first provisional tax payment of R15 875, and
• his second provisional tax payment as determined on his estimated taxable income of R620 000.
Jacques Coquilles would like to make a third provisional tax payment on 30 September 2022
sufficient to cover his normal tax liability for the 2022 year of assessment including any penalties
and interest that he may be liable for.
Jacques Coquilles has determined that his total cost of employing Izaak Walton-Pike for the 2022
year of assessment was R186 000. No portion of this expenditure has been deducted in the
determination of his R780 000 taxable income (see above).
You are required to
1. determine the employees’ tax that Jacques Coquilles must deduct from Izaak Walton-Pike’s
remuneration each month,
2. determine the third provisional tax payment to be made by him on 30 September 2022
sufficient to cover his normal tax liability for the 2022 year of assessment including any
penalties and interest that he may be liable for. Under paragraph (b) of the definition of the
‘prescribed rate’ the relevant prescribed rate of interest is 7%,
3. discuss whether the R186 000 that he has incurred on employing Izaak Walton-Pike, or a
portion of it, would be deductible in the determination of his taxable income, and
4. if a deduction is available, could it be deducted by him in the determination of his taxable
income for the 2022 year of assessment, despite him having already e-filed his tax return to
SARS.
On 31 August 2021 Charles Glass paid his first provisional tax payment for the 2022 year of
assessment. His estimated taxable income equalled his ‘basic amount’ of R250 000. At 31 August
2021 employees’ tax of R16 300 had been deducted from the remuneration he earned from the
university.
On 1 September 2021 Charles Glass received his 2021 tax assessment. It was dated 1 September
2021. He settled the amount due on 30 September 2021. His 2021 taxable income was R270 000.
On 28 February 2022 Charles Glass made his second provisional tax payment for the 2022 year of
assessment. His provisional tax return form reflected a taxable income of R270 000. He estimated
his taxable income at an amount equal to his basic amount.
The following information is relevant to Charles Glass’s 2022 year of assessment:
The sum of Augustus De Cade’s employees’ tax deductions and his first and second provisional tax
payments is R1 200.
You are required to inform Augustus De Cade of a method to follow that will
• ensure that he will earn interest on any overpayment, and
• also avoid any shortfall on which interest would be payable.
Support your information with detailed determinations including interest determinations. In
answering this question assume that the date of his assessment will be 1 December 2022 and that
this will be the date that any amount that he is entitled to is refunded to him. Under paragraph (a) of
the definition of the ‘prescribed rate’ the relevant prescribed rate of interest is 3%.
annuity fund. It took both their contributions into account for employees’ tax purposes. After the
termination of his employment, he contributed R3 000 a month to the retirement annuity fund. Up
to 31 August 2021 he had not retired or withdrawn from this or any other retirement fund.
Marvin Maartens had also taken out an income-protection insurance policy. He paid premiums of
R800 a month on this policy up to and including August 2021. Under this policy, he is
compensated R10 000 a month for six months in the event of becoming unemployed. He was
awarded R10 000 from the policy in September 2021, and R10 000 each month for the remainder
of the 2022 year of assessment.
Team-building event
On 9 and 10 June 2021 (a Wednesday and Thursday), Speak Easy Limited held a corporate team-
building event at a conference venue, northwest of Johannesburg. It paid R359 950 for
accommodation and R200 100 for food and beverages for 100 employees (including Marvin
Maartens) for the two nights. It also provided these employees with new company-branded golf
shirts in different colours for different teams. These golf shirts were returned after the event. It
purchased them in May 2021 from a South African subsidiary company, for an agreed
consideration of R138 each, when their market value was R207 each. After the event, Marvin
Maartens specifically requested, and was allowed, to purchase 15 of them from it for R92 each. He
then donated them to a homeless shelter and received a valid receipt under section 18A of the
Income Tax Act from it for his donation to it.
Non-resident employee
Speak Easy Limited’s foreign operations needed restructuring. For this purpose, it brought Juba
Adeyemi, the chief executive officer of its Nigerian operations to South Africa for nine months
from 1 September 2021. She is not a South African resident and had not previously visited South
Africa. It incurred the following for her family and her during her stay in South Africa:
• R20 000 rental a month (including electricity) for a fully-furnished four-bedroomed house in
Midrand in a security complex. The landlord, who is not a connected person in relation to it,
pays the property rates and water accounts.
• R1 900 a month towards the security at the complex.
• R6 000 a month for school fees at an ‘international’ school for Junior Adeyemi, her minor son.
Compensation claim
In April 2021, Marvin Maartens while performing routine maintenance of Alexa Bell’s, a
customer’s, mast late one night in the rain failed to properly close the unit he was working on
resulting in rainwater causing significant damage to its circuit board.
Alexa Bell sued Speak Easy Limited for damages to her mast, which it defended on the basis that
she knew that it was raining when she requested the maintenance to be performed. Based on the
legal advice it received, it recognised a provision of R250 000 for this possible claim in its June
2021 annual financial statements.
In July 2021 Speak Easy Limited, through Atticus & Finch , its lawyers, approached Alex Bell and
offered to pay her R250 000 in full and final settlement, if he agreed to drop the case. She agreed to
this on 21 July 2021. The R250 000 was paid on 16 August 2021. On the same date, it submitted a
claim to its insurers, who awarded it R187 500 on 31 August 2021, being 75% of the settlement
amount.
Additional information
Speak Easy Limited transacts only with vendors unless otherwise indicated. All amounts provided
above include value-added tax when applicable, and in all instances it obtained valid tax invoices.
You are required to
1. discuss whether Speak Easy Limited, and if so when, will be allowed to deduct the R250 000
related to the settlement for damages in the determination of its taxable income,
606 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
607
608 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Harold Generous
In December 2021 Harold Generous, who will be 70 years old on his next birthday, donated a
house valued at R1 600 000 to Oswald Norse, his nephew, now aged 30 years, but subject to a life
usufruct in favour of Isobel Hastings, his niece, who will be 45 years old on her next birthday. He
did not make any other donations during the 2022 year of assessment.
You are required to determine the donations tax payable by Harold Generous on the above
donation, showing the value to both Oswald Norse and Isobel Hastings.
Louis Kind
Louis Kind gave an annuity of R300 000 (payable at the rate of R25 000 a month) to Frank Kind, his
brother who is unemployed. It is for 14 years and three months, that is, up to Frank Kind’s sixtieth
birthday. This was the only donation made by Louis Kind during the 2022 year of assessment.
Louis Kind will be 50 years old on his next birthday.
You are required to determine the donations tax payable by Louis Kind.
• Adam Angel gave R10 000 cash to Joy Michael, his niece on the occasion of her twenty-first
birthday.
• Adam Angel gave diamond earrings valued at R5 000 to Ariel Angel, his wife as a birthday gift.
• Adam Angel donated a two-bedroomed flat that had cost him R202 000 but which now has a
market value of R750 000 to Angela Lucifer, his aged mother-in-law. She had always resided in
England but after being recently widowed she moved to South Africa to be closer to Ariel
Angel, her only daughter.
• Adam Angel gave R50 000 cash to his only son Raphael Angel to help him set up his own
business.
• Adam Angel gave cash bonuses of R8 000 each to both Corrine Haniel, his chef (cook) and Joel
Gabriel, his chauffeur (driver) as voluntary awards for outstanding services rendered by them to
his family and himself.
Adam Angel would like to know if he must pay donations tax on the above donations that he made.
He would also like to know how much donations tax he has to pay. For those donations that are not
liable for donations tax, he would like to know the reason why no donations tax is payable.
You are required to determine the amount of donations tax (if any) payable on each donation made
by Adam Angel. Also state which of the above donations are not subject to donations tax and the
reason why they are not subject to donations tax.
• On 1 February 2022 he donated to Danny Collins and Emma Collins a rent-producing property
(a half-share each), subject to a usufructuary interest in it. The usufructuary interest in it he gave,
on the same day, to his sister Hetty Russel (née Collins). The rent-producing property, including
the land, cost him R700 000 three years ago. Its current market value is R900 000. Net rentals
from this rent-producing property are R6 000 a month.
Dates of birth are as follows:
• Barney Collins – 1 June 1966.
• Althea Collins – 14 October 1969.
• Charlie Collins – 1 December 1964.
• Danny Collins – 10 March 2001.
• Emma Collins – 24 September 1996.
• Widow Farmer – 4 May 1954.
• Hetty Russel – 4 March 1968.
You are required to determine the donations tax payable by Barney Collins on each of the above
transactions carried out by him. State in each situation the date by which the donations tax must be
paid.
• Marigold Strike paid her fortune teller, Wiseman Marvel (see above), R60 000 as a voluntary
bonus for the advice that he had given to her. He often receives similar amounts from other
satisfied clients.
• Marigold Strike she gave her flat in London, United Kingdom (worth the equivalent of
R2 000 000) to her elderly mother, Antonina Villageend. She had purchased this flat for
£200 000 (then the equivalent of R400 000) before she arrived in South Africa for the first time.
You are required to
1. determine the donations tax payable for the 2022 year of assessment on the above transactions,
and
2. state who is liable for its payment.
Situation 5
Orben Webb dies and his 10 000 equity shares in Nature’s Garden Nursery (Pty) Limited are
sold for R55 000 by the executor of his deceased estate four years after he had purchased them,
and
3. the donations tax consequences of the above transactions as far as they relate to Nature’s
Garden Nursery (Pty) Limited and Orben Webb.
• In the Lynx Offshore Trust’s third year of assessment no foreign interest and no foreign
dividends were earned. But it enjoyed a capital gain of R3 000 000 from the sale of some of its
foreign shares.
• In the Lynx Offshore Trust’s fourth year of assessment, no foreign interest and no foreign
dividends were earned by it. Most of its capital assets had been sold by it resulting in a large
capital gain (see above). It used some of the amount obtained by it from the sale of its capital
assets that resulted in its large capital gain to repay its R10 000 000 loan from Kite Lynx.
The official rate of interest is 4,5%.
You are required to discuss the tax consequences
1. if no interest is charged on Kite Lynx’s R10 000 000 loan account to the Lynx Offshore Trust
allowing the deeming provisions of section 7(8), section 7C and section 31 to apply, and
2. if interest is charged on his R10 000 000 loan account to it at the relevant interest rate of 6%
ensuring that the deeming provisions of section 7(8), section 7C and section 31 do not apply.
CHAPTER 28
ESTATE DUTY
621
622 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
40 years old, their only nephew. The property has deteriorated in value owing to ‘squatters’ settling in
the area. Twenty years ago it was worth R950 000, whereas it is now worth R800 000.
You are required to determine the estate duty payable as a result of Honey Scukkel’s death and to
indicate who would be liable for its payment.
• A house valued at R2 100 000. He had inherited it five years earlier from Thembelani Mkhize’s,
his father’s, estate. On Thembelani Mkhize’s death, the house was valued at R1 187 500
constituting 25% of his net estate. Estate duty of R250 000 was paid on Thembelani Mkhize’s
estate.
Expenses incurred by Tandamali Mkhize’s execution in winding up his estate were as follows:
• Last illness 71 228
• Funeral 32 500
• Debts owing by him (Tandamali Mkhize) 102 851
• Valuation fees 5 000
• Executor’s remuneration 63 137
• Master’s fees 600
Tandamali Mkhize died intestate.
You are required to determine the amount of estate duty payable by the estate of Tandamali Mkhize.
Merlin Wise
Merlin Wise is a resident of the Republic. He is a 55 year old widower (a husband whose wife has
died) with the following three sons:
• Arthur Wise, his eldest son, is married to a golddigger (a woman who forms a relationship with
a man purely to extract money from him). He lives in Australia. He is not a resident of South
Africa.
• Barnabis Wise, his second son, a major, is at university and would like to enter the family
business on the completion of his degree.
• Cameron Wise, his youngest son, is also at university. He is a talented sportsman and is unlikely
to go into the family business.
Merlin Wise has often visited Australia. He has discussed retiring early, so as to emigrate from
South Africa to Australia, and to live there. But he has not yet made any definite plans.
Wisdom Wise, Merlin Wise’s aged father has limited means. Therefore Merlin Wise supports him.
Merlin Wise’s assets are as follows:
• Half of the issued share capital of Wise Bros (Pty) Limited, the family business. It is a resident
of South Africa. The other half of the shares are held by his brother, Wise. Merlin Wise and
Kingsley Wise are full-time employees of it. They have a good working relationship. (Kingsley
Wise’s wife, Chastity Wise, however, does not see eye to eye with Merlin Wise and his sons.)
The market value of Merlin Wise’s shares is R3 300 000.
• The total issued share capital of Magic Merlin (Pty) Limited. It is a resident of South Africa. It
owns the premises that the business of Wise Bros (Pty) Limited trades from. The market value
of the shares in Magic Merlin (Pty) Limited is R1 980 000.
• The total issued share capital in King Avenue Properties CC. It is a resident of South Africa. It
owns eight residential units. The market value of his members interest in King Avenue
Properties CC is R7 432 000. He has a loan account from it of R500 000.
• A farm with a market value of R4 840 000. Its ‘fair market value’ as defined in section 1(1) of
the Estate Duty Act is R3 388 000 (70% of R4 840 000).
• A herd of sheep with a market value of R1 800 000.
• A listed share portfolio with a market value of R1 060 000.
• Cash on call account of R400 000. This cash is from the recent realisation by Merlin Wise of
part of his listed share portfolio to forestall what he saw as a coming drop in certain sectors of
the market. He accordingly did not wish to remain fully invested.
• A life insurance policy with an estimated maturity value of R2 400 000.
• Liabilities of R750 000 including his normal tax liability. His taxable income that gave rise to
this normal tax liability included a taxable capital gain that resulted from the sale of part of his
listed share portfolio (see above).
Merlin Wise currently enjoys an annual income of R990 000 before tax from
• his salary and benefits from Wise Bros (Pty) Limited,
• local dividends on the listed shares, and
• local interest.
Merlin Wise’s farming activities have resulted in a ‘nil’ taxable income. He has a large balance of
farming development expenditure that may be deducted against his future farming profits.
Merlin Wise is anxious to plan for his retirement since he is not a member of a pension fund. It is
likely that Arthur Wise will take over his position in Wise Bros (Pty) Limited when he retires.
The Master’s fees, executor’s fees and last illness and similar expenses would amount to R510 000
if Merlin Wise were to die now.
ESTATE DUTY 627
When Merlin Wise’s wife, Marion Wise died, in the determination of the deductible value of her
estate, a section 4A abatement of R2 500 000 (being its then value) was deducted.
You are required to
1. determine the estate duty payable by Merlin Wise’s estate should he die now,
2. determine the shortfall in liquidity in Merlin Wise’s estate, and
3. discuss important considerations that could arise from the Merlin Wise family situation.
15 September 2021. The price that could be obtained between a willing buyer and willing seller
upon a sale of the farm on the date of his death was R3 700 000. The value of the usufruct is
R3 282 878 for estate duty purposes.
• Cash invested in a call account of R8 000 000.
Liabilities
Buzz Lightyear’s liabilities were as follows:
• Deathbed and funeral expenses of R180 000.
• A normal tax liability of R780 000 for the period of assessment that ended on his death.
• Master’s fee and executor’s remuneration of R1 193 422.
• Outstanding mortgage bond on his flat in Australia amounting to R1 200 000. His executor used
a part of the amount realised on the sale of the shares in the Australian company to settle the
amount due.
You are required to determine the estate duty payable by the Buzz Lightyear Deceased Estate.
Provide reasons for assets or liabilities that should be excluded in the estate duty determination.
(SAICA adapted.)
• The market value of the house on the island of Mykonos in Greece donated to Aristotle
Konstantinis was the equivalent of R3 000 000.
• The market value of the shares donated to Pythagoras Konstantinis was R380 000.
• Debts owed by her were R94 936, funeral expenses were R65 800, and the costs of winding-up
her estate were R67 500.
• She bequeathed R20 000 cash to a South African registered political party and the residue of her
estate equally to Iliana Konstantinis, her daughter, and Aristotle Konstantinis and Pythagoras
Konstantinis, her two sons (see above).
You are required to determine the estate duty payable by Kitty Konstantinis’s estate.
There were no liabilities in Sam Applesamy’s estate. His funeral expenses of R15 000 were settled.
In his will, Sam Applesamy bequeathed the use of the domestic residence to Dhania Applesamy
(age next birthday was still 65 years) for her lifetime and the entire remainder of his estate to
Gopaul Applesamy (age next birthday was still 43 years).
You are required to
1. determine the donations tax payable on the donations made by Sam Applesamy,
2. determine the estate duty payable by his estate, and
3. state who is liable for the payment of the estate duty and the amounts payable by the respective
persons.
children, discuss whether these savings could be effected in his situation and whether it is
preferable to sell or to donate his assets.
bungee-jump it would revert to him (Ben Jamine). On 31 March 2021 it was valued at
R300 000. On 4 July 2021 it was valued at R280 000.
• On 1 April 2021 he gave R10 000 to the Professional Bungee-Jumping Sporting Association
(not an ‘approved’ public benefit organisation) by way of an electronic funds transfer. On
15 April 2021 his transfer was not honoured by his bank. He then contacted the Treasurer of the
Professional Bungee-Jumping Sporting Association indicating that he had a cash-flow problem
and could not, at that point in time, honour the transfer.
• On 1 May 2021 he awarded an annuity of R24 000 (payable at a rate of R2 000 a month) to his
brother, Byron Jamine, who had attained the age of 80 years, two days earlier on 29 April 2021.
• He gave R35 000 cash to his ex-wife, Beth Jamine, on her seventieth birthday on 18 May 2021.
• On 1 June 2021 he gave R125 000 cash to Merle Jamine, representing R5 000 for every year of
their marriage. (See further below.)
• He lent R50 000 interest free to Isaac Jamine on 1 March 2021. On 30 June 2021 Isaac Jamine
repaid him R10 000. Ben Jamine then waived his right to the R40 000 balance.
• He donated R100 000 to the Council for Scientific and Industrial Research (an ‘approved’ public
benefit organisation) on 1 July 2021.
On 1 July 2021, Merle Jamine used R110 000 of the R125 000 cash that Ben Jamine had given to
her on 1 June 2021 (see above), and gave it (the R110 000 cash) to Rachel Jacobs, her mother.
The executor of Ben Jamine’s estate ascertained the following facts regarding his financial affairs:
• Ben Jamine held a fiduciary interest in a time-share unit. He had inherited it from Rex Jamine,
his late father (who had died on 4 May 2018), on the condition that it would go to his brother,
Brian Jamine, on his death. Brian Jamine was the only fideicommissary. Ben Jamine is exactly,
to the day, three years younger than Brian Jamine. On 27 June 2021 Brian Jamine was killed in a
car accident. The time-share unit was valued at R160 000 on 4 May 2018, at R175 000 on
27 June 2021 and on 4 July 2021 at R176 000. The Commissioner is satisfied that Ben Jamine
paid estate duty of R9 000 on this time-share unit when Rex Jamine died.
• Ben Jamine had also enjoyed an annual annuity of R5 000, payable under Rex Jamine’s will.
Under a condition in Rex Jamine’s will, on Ben Jamine’s death, this annuity was to be awarded
to Ben Jamine’s grandson, Peter Yamin. This annuity will be payable to Peter Yamin until he
attains the age of 25 years. Peter Yamin was born on 28 September 1998.
• Amounts from three ‘domestic’ insurance policies were paid out on Ben Jamine’s death:
– Policy ‘A’ paid out R1 880 000. Ben Jamine had taken this policy out on his own life. He had
paid all the premiums on it amounting to R150 000. Interest at 6% a year on the premiums
paid by Ben Jamine is R50 000.
– Policy ‘B’ paid out R200 000. It was paid to Isaac Jamine under a duly registered post-
nuptial contract between Ben Jamine and Merle Jamine. Isaac Jamine had paid all the
premiums on it amounting to R20 000 and interest at 6% a year on these premiums is R6 500.
– Policy ‘C’ paid out R500 000. Merle Jamine was the beneficiary under this insurance policy.
Ben Jamine had paid premiums on it amounting to R25 000 and interest at 6% a year on these
premiums is R7 000. Merle Jamine had also paid premiums on it amounting to R16 000 and
interest at 6% a year on these premiums is R5 500.
• Ben Jamine owned a bachelor-flat in Argentina that Rex Jamine had given to him as a
‘Christmas’ present on 25 December 2016. Rex Jamine was ordinarily resident in South Africa
at the date of this donation. On 25 December 2016 it was valued at the equivalent of R245 000.
On 4 July 2021 it was valued at the equivalent of R320 000.
• On 18 August 1998, Basil Canaan, Ben Jamine’s grandfather, who had carried on bona fide
farming operations in South Africa, bequeathed to him a fiduciary interest in a farm on the
condition that this fiduciary interest would go to Isaac, on his death. If this farm had been sold
ESTATE DUTY 635
by a willing seller to a willing purchaser under an arm’s length transaction it would have
changed hands at R950 000 on 18 April 1998 and at R1 500 000 on 4 July 2021.
• Ben Jamine collected works of art. Under a notarial deed executed on 1 July 2018, these works
of art were lent to the South African Government for a period of 35 years. He had enjoyed net
receipts from these works of art as follows:
– From 1 July 2018 to 30 June 2019 of R24 000.
– From 1 July 2019 to 30 June 2020 of R36 000.
– From 1 July 2020 to 30 June 2021 of R48 000.
In the course of liquidation the executor sold krugerrands and furniture and household effects that
had belonged to Ben Jamine for R359 000. He settled all his liabilities, including his normal tax
liability that included a taxable capital gain that had arisen because of his death. These liabilities
amounted to R741 206 in total.
Ben Jamine executor paid funeral and death-bed expenses of R45 000. Master’s fees and
administration costs paid by his executor were R35 615.
Ben Jamine had cash on hand of R200 000. He bequeathed this R200 000 to a registered political
party.
You are required to
1. determine the donations tax payable by Ben Jamine on all the donations that he made during
his 2022 period of assessment,
2. determine the donations tax payable by Merle Jamine on the donation that she made during the
2022 year of assessment,
3. determine the estate duty payable by Ben Jamine’s estate, and
4. determine who is liable for the estate duty payable by Ben Jamine’s estate, and the amount
payable by the respective persons.
On 17 June 2008, which was Mercedes Martin’s twenty-seventh birthday, Bentley Carr and her
were married. They are married out of community of property without the accrual system.
• On 15 March 2011 their first son, Reynold Carr, was born.
• On 18 December 2013 their second son, Leland Carr, was born.
On 20 October 2021 Bentley Carr made the local news headlines yet again. This time it was as a
result of his death. He died of a Covid-19 related illness in the early hours of the morning on
20 October 2021. Their youngest son, Royce Carr, had died a week previously of the same disease
(it had reached epidemic proportions in the area).
Up to the time of Bentley Carr’s death, he had divested himself of the following assets:
• On 20 October 2019 he had sold the bare dominium in his sports car to his son Morris Carr for
R100 000. Its market value on 20 October 2019 was R1 175 000. On 20 October 2021 its market
value was R1 475 000. (He had retained the usufruct of the sports car for himself.)
• On 20 October 2019 he gave Carmen Carr a motor car, on the occasion of her birthday. Its
market value was R88 170. Its original cost was R220 340.
• On 20 October 2019 he gave Royce Carr a motor car on the occasion of his birthday. Its market
value was R289 000. Its original cost was R362 250.
• On 18 December 2019, on the occasion of Leland Carr’s birthday, he gave him the bare
dominium of his (Bentley Carr’s) double cab motor vehicle. He gave its usufruct to Mercedes
Carr (née Martin). Its market value was R581 690. Its original cost was R839 500.
• On 15 March 2020, on the occasion of Reynold Carr’s birthday, he gave him a piano. It was a
‘special’ piano, being a famous musician’s piano that he had purchased at an auction sale in
London for the equivalent of R1 500 000. Its market value was also R1 500 000.
• On 17 June 2020 he gave Mercedes Carr (née Martin) a luxury motor car on the occasion of her
birthday. He had purchased it for R527 045. Its market value was R458 350. He also deposited
R500 000 into her bank account since it was their twelfth wedding anniversary.
• On 28 August 2020 he gave Austen Carr a two-door motor car on the occasion of his birthday.
He had purchased it for R540 500. Its market value was R470 000.
• On 20 September 2020 he competed in a motor car race. He told Morris Carr that if he (Bentley
Carr) was killed in the motor car race, then Morris Carr could have his racing car. Its market
value was R2 358 000 on 20 September 2020 and R2 620 000 on 20 October 2021. Its original
cost was R2 280 000.
• On 30 September 2020 he donated a flat situated in France, to Maecelle Citroen, his sister, on
the occasion of her fiftieth birthday. He had inherited this flat from Ralph Carr, his late father,
who had been ordinarily resident in France his entire life. Ralph Carr died at the age of 88 years
on 30 September 2016. Its market value was the equivalent of R1 875 000 on 30 September
2016 and the equivalent of R2 437 500 on 30 September 2020.
• On 30 November 2020 he donated his wine farm situated in the Cape to the Riesling family. The
Riesling family were entitled to this farm under the Land Reform Programme. And the Minister
of Land Affairs, in consultation with the Commissioner had approved its donation to the
Riesling family. It would have sold for R900 000 under an arm’s length transaction between a
willing purchaser and willing seller.
• On 3 December 2020 he gave R500 000 to a recognised university, to assist it with its research
into HIV and Aids.
• On 13 December 2020 he gave R300 000 to a professional sporting association to assist it with the
erection of a new building (a gymnasium). It is not an ‘approved’ public benefit organisation.
The executor of Bentley Carr’s estate ascertained the following regarding his affairs:
• Bentley Carr had the equivalent of R4 200 000 cash in a bank account in the Cayman Islands.
He bequeathed this cash to Mercedes Carr (née Martin).
ESTATE DUTY 637
• Bentley Carr had sundry liquid assets of R2 080 000 in South Africa. He bequeathed them to
Mercedes Carr (née Martin).
• Bentley Carr had enjoyed an annuity of R18 000 (payable to him at a rate of R1 500 a month)
from an insurer. This annuity ceased on his death.
• Bentley Carr had furniture and household effects valued at R874 500. He bequeathed them to
Mercedes Martin.
• Bentley Carr enjoyed an annuity of R48 000 (payable to him at the rate of R4 000 a month) from
a trust created under the last will and testament of Ralph Carr. On his death this annuity ceased.
• Bentley Carr enjoyed a fiduciary interest in a property in Greece. Portia Carr, his late mother,
who had been ordinarily resident in Greece her entire life, died in Greece on 20 October 2020 at
the age of 89 years. She bequeathed the fiduciary interest in this property to him. On his death,
the fiduciary interest was to pass to Royce Carr. The rand equivalent of its market value on
20 October 2020 was R720 000 and on 20 October 2021 it was R800 000.
• Bentley Carr also enjoyed a fiduciary interest in a game farm in South Africa. Hunter Carr, his
late brother who had been a resident of the Republic his entire life, died on 16 December 2020 at
the age of 55 years. Hunter Carr had bequeathed the fiduciary interest in this game farm to him
(Bentley Carr). On his death, the fiduciary interest passed to Reynold Carr. Its market value on
16 December 2020 was R3 700 000 and on 20 October 2021 it was R4 000 000.
• Bentley Carr had a ‘domestic’ insurance policy on his life. The pay out from this policy was
R2 200 000. It was awarded to Mercedes Carr (née Martin) under a duly registered ante-nuptial
contract.
• Bentley Carr had a holiday house valued at R2 900 000. He bequeathed it to Mercedes Carr (née
Martin).
• Bentley Carr had a residential property valued at R1 000 000 that he bequeathed to Carmen
Carr. He had inherited this property from Lola le Mans, another sister of his, who died exactly
five years previously, at the age of 62 years. It was valued at R780 000 at the time of Lola
le Mans’s death. (The Commissioner is satisfied that he paid estate duty of R116 000 on this
property when he had inherited it.)
• Bentley Carr had shares valued at R2 050 000.
• Bentley Carr had a motor vehicle valued at R529 000 that he bequeathed to the Centre for the
Rehabilitation of Wild Life, an ‘approved’ public benefit organisation.
• Bentley Carr had clothing and personal effects valued at R365 500.
• On 31 October 2021 a competition run by a bank officially closed. Bentley Carr had entered this
competition. The winner was determined by the bank’s auditors on 1 November 2021, 12 days
after his death. The auditors drew his entry and he was declared the winner of a prize valued at
R500 000.
The executor of Bentley Carr’s will settled the following amounts:
• Funeral and death-bed expenses of R48 000.
• Administration costs (including the Master’s fee and executor’s fees) of R820 000.
• A credit card liability of R25 000.
• Other liabilities of R800 000.
You are required to
1. determine the donations tax payable by Bentley Carr on any donation or deemed donation that
arose in the above transaction,
2. determine the estate duty payable by Bentley Carr’s estate, and
3. state who is liable for the payment of the estate duty, and the amount payable by the respective
persons.
638 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
The usufruct and bare dominium were created on 1 May 2016 by Jack Relax (born on 24 June
1986).
On 1 May 2016 the holiday cottage had a market value of R560 000. Mike Rest was then 59 years
old.
You are required to determine the amount (if any) to be included in the total value of property in
Mike Rest’s estate for this usufruct.
Charles Walker
On 1 January 2013 Charles Walker entered into a notarial deed whereby he lent his original Anton
van Wouw painting to the State Library for a period of 40 years. He died on 31 October 2021. The
average net receipts derived by him for the three years ended 31 December 2012 from this painting
were R48 000. (He had let this painting at a monthly rental.) Its market value on 31 October 2021
was R900 000.
You are required to indicate whether this painting will be included as property in the estate of
Charles Walker, and if so, determine its net value.
Jim Horsfield and Geoff Gannon
Jim Horsfield and Geoff Gannon are equal shareholders in Port Vale Busgate (Pty) Limited.
• Jim Horsfield took out an insurance policy on Geoff Gannon’s life.
• And Geoff Gannon took out an insurance policy on Jim Horsfield’s life.
Their purpose of taking out these insurance policies was to enable the surviving shareholder to
purchase the deceased shareholder’s shares in Port Vale Busgate (Pty) Limited. (The pay out from
the insurance policy would finance the purchase consideration.) No premiums on either of these
insurance policies have been borne by the shareholders – instead they had been paid by in Port Vale
Busgate (Pty) Limited itself. The amount due and recoverable under each policy is R540 000. Jim
Horsfield needs to know the estate duty implications of the life policy that Geoff Gannon effected
on his (Jim Horsfield’s) life.
You are required to indicate whether the insurance policy on Jim Horsfield’s life will be included
as deemed property in his estate, and if so, determine its net value.
Claude Brown
Claude Brown died on 1 June 2021, seven years after his father, Andrew Brown. Andrew Brown
had bequeathed his portfolio of listed shares to Claude Brown. On 1 June 2014 it was valued at
R900 000. On 1 June 2021 it was valued at R1 200 000. Claude Brown (as residual heir) paid estate
duty (for this portfolio of listed shares) of R120 000 in Andrew Brown’s estate on the listed shares
that were bequeathed to him. The dutiable value of Claude Brown’s estate (including the portfolio
of listed shares) is R15 000 000.
You are required to determine the estate duty payable by Claude Brown’s estate.
Ben Epps won the race and then donated his winnings of R500 000 to the Cape Town Children’s
Home. This was indeed a worthy gesture since he had paid R48 000 out of his own pocket on
expenses directly related to swimming in this race.
You are required to briefly discuss whether
1. Ben Epps will be required to include an amount in his gross income for the prize money he
won and then donated,
2. he is liable for donations tax on his donation made to the Cape Town Children’s Home, and
3. he will be enjoy a deduction in the determination of his taxable income for the R500 000
donation made by him and the R48 000 expenditure incurred by him.
York Kennedy
York Kennedy has been a resident of the Republic his entire life. He is 56 years old. It has been
confirmed that he is suffering from a terminal illness and is likely to die within a year. He is at
present in hospital.
York Kennedy joined Idlewild Airways Limited’s, his employer’s, deferred compensation scheme
a year ago. He is due to be awarded a lump sum from it of R640 000 on his retirement, scheduled to
be when he attains the age of 60 years. This deferred compensation award is being funded by an
insurance policy on his life. Should he die before attaining the age of 60 years, Idlewild Airways
Limited will receive a minimum of R300 000 from this insurance policy, being the life-cover
element of this insurance policy. It will then award whatever amount it receives from this insurance
policy to Jacqueline Kennedy, York Kennedy’s surviving spouse.
York Kennedy is not a member of a retirement fund.
You are required to
1. discuss whether York Kennedy (or Jacqueline Kennedy) will be required to include the above
amount in his (or her) gross income, and
2. state whether the above amount will be included in the dutiable value of the estate of York
Kennedy if he were to die.
Ciampino Rome
Ciampino Rome was formerly a resident of the Republic. He is currently ordinarily resident in
Italy. He is not a resident of South Africa. Exchange control restrictions prevailing at the time of
his departure from South Africa compelled him to leave shares in South African registered
companies valued at R400 000 (and currently worth R600 000) under the control of an accountant.
During the 2022 year of assessment Ciampino Rome donated these shares to a trust that had been
formed in South Africa. Its sole beneficiary is Giovan Battista, his 15-year old resident nephew. Up
until now, the only donations made by Ciampino Rome were of an essentially casual nature,
mainly, gifts.
Casual donations made by Ciampino Rome in the 2022 year of assessment, prior to the donation to
the trust, were the equivalent of R7 000.
You are required to determine the donations tax payable on the donation of the shares by Ciampino
Rome to the trust.
Shivaji Chattrapati
Shivaji Chattrapati, a resident of the Republic, died on 19 October 2021 at the age of 32 years. She
had been a member of a mutual retirement annuity fund. On its demutualisation 3 000 free shares in
Sahar International Airways Limited, a listed company, were awarded by it (the mutual retirement
annuity fund) to her. The Sahar International Airways Limited’s shares were awarded on 1 March
2021 when they had a nominal value of R10 a share but a market value of R11 a share. They had a
market value of R12,95 a share on 19 October 2021.
ESTATE DUTY 641
A lump-sum death benefit of R1 800 000 was awarded by the retirement annuity fund on Shivaji
Chattrapati’s death. And an annuity of R144 000 (payable at a rate of R12 000 a month) payable
from 30 November 2021 was awarded to Bhonsale Chattrapati, her husband, for the remainder of
his life. Her husband was 29 years old when she died.
On 31 December 2021 a dividend of R2 a Sahar International Airways Limited share accrued from
them.
You are required to state whether the above items or assets are to be included in the total value of
Shivaji Chattrapati’s estate.
Heath Row
Heath Row, a resident of the Republic, died on 20 October 2021. The following information relates
to insurance policies that existed or were paid out at the time of his death:
• A policy on Heath Row’s life taken out by his wife, Elizabeth Row. Their pre-nuptial contract
did not include this policy. She was the sole beneficiary in the policy and had paid all the
premiums on it. It paid out R1 000 000. The premiums paid by her on it (plus interest at 6%)
amounted to R380 000.
• A home owner’s insurance policy on Heath Row’s house. In the event of the house being
destroyed, the policy would have pay out its R2 000 000 replacement cost.
• A policy on his life taken out by Brighton Gatwick, Heath Row’s partner in a business venture.
Brighton Gatwick paid all the premiums. The premiums plus interest amounted to R550 000.
The sole beneficiary of this policy is Brighton Gatwick. Its pay-out is to be used at his
discretion. It paid out R1 500 000. Heath Row and Brighton Gatwick were not related.
• A policy on Heath Row’s life to cover the outstanding balance of the mortgage bond over his
house. The premiums paid by him (plus interest at 6%) amounted to R100 000. At the time of
his death the outstanding balance of his mortgage bond was R420 000.
You are required to determine the value of deemed property arising out of the above four insurance
policies that should be included in the total value of Heath Row’s estate. Show your determinations
for each item and give reasons for items to be excluded.
Charlotte de Gaulle
Charlotte de Gaulle, a resident of the Republic, died on 21 October 2021 at the age of 49 years. She
is survived by Charles de Gaulle, her husband, aged 51 years, and André Joseph Marie de Gaulle,
their son, aged 23 years.
At the time of Charlotte de Gaulle’s death, she had had the use of a holiday house awarded to her in
2011 upon the death of Jean Bastien-Thiry, her brother, then aged 45 years. The bare dominium at
the date of Jean Bastien-Thiry’s death was given to André Joseph Marie de Gaulle. The value of the
property decreased from R900 000 in 2011 to R750 000 on the day Charlotte de Gaulle died.
You are required to determine the amount to be included in the total value of all property included
in Charlotte de Gaulle’s estate.
Jackson Hartsfield
Jackson Hartsfield, a resident of the Republic, died on 22 October 2021. He was 87 years old when
he died. At the time of his death he enjoyed an annuity of R42 000 (being paid to him at a rate of
R3 500 a month). It was funded out of the net rentals of a property that was held in a trust.
After Jackson Hartsfield’s death the annuity was awarded to George Atlanta, his grandson, for the
rest of his life. His grandson is 27 years old.
You are required to determine the amount to be included in the total value of all property included
in Jackson Hartsfield’s estate.
642 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Logan Boston
Logan Boston, a resident of the Republic, died on 23 October 2021. Shares in American Massport
Drones Limited, a foreign company owned by him were sold by his executor for the equivalent of
R250 000. American Massport Drones Limited is listed on a stock exchange in New York.
Six years ago Logan Boston had inherited these shares in American Massport Drones Limited from
the estate of Hilton Boston, his late father, who was ordinarily resident in South Africa. In Hilton
Boston’s estate, the estate duty payable on the shares was R25 000. The American Massport
Drones Limited shares were valued at R100 000 on the date of Hilton Boston’s death. Logan
Boston paid the R25 000 estate duty.
The net value of Logan Boston’s estate was R3 700 000. Its dutiable amount was R200 000, and
the estate duty payable before the set off of the so-called quick succession rebate was R40 000.
You are required to determine the amount of the quick succession rebate available to reduce the
estate duty payable by Logan Boston’s estate.
Vegas McCarran
Vegas McCarran, a resident of the Republic, died on 24 October 2021, at the age of 84 years. He
was married in community of property to Las McCarran (also aged 84 years).
Vegas McCarran had inherited an original painting from Patricia Antoinette Nevada, his late
grandmother, who died 15 years earlier. Patricia Antoinette Nevada’s will did not stipulate that this
painting must be excluded from Vegas McCarran’s and Las McCarran’s joint estate. It was valued
at R460 000 at the date of Patricia Antoinette Nevada’s death. Vegas McCarran paid estate duty of
R26 300 on it in Patricia Antoinette Nevada’s estate. It was valued at R745 000 on 24 October
2021. Vegas McCarran bequeathed his share of the painting to Las McCarran.
You are required to determine the amount to be included in the net value of Vegas McCarran’s estate.
Dulles Washington
Dulles Washington, a resident of the Republic his entire life, died on 25 October 2021. He was
57 years old when he died.
A fixed property in London owned by Dulles Washington was sold for the equivalent of
R2 300 000 by the executor of his estate. It had been donated to him on 1 October 2000 by Jolene
Foster, his grandmother, who was ordinarily resident in London.
You are required to determine the amount to be included in the net value of Dulles Washington’s
estate.
Seeley Brennan’s aged ex father-in-law, Max Sweet, has limited means. Seeley Brennan has
therefore been supporting him each month.
When Seeley Brennan retires, it is likely that Jack Brennan (see above) will take over his position
in B & B (Pty) Limited (see below).
Assets
On 31 January 2022 Seeley Brennan’s assets, together with their market values on that date, were
as follows:
B & B (Pty) Limited
Half of the issued equity shares of B & B (Pty) Limited, a business that manufactures bone-handle
kitchen appliances. It is a resident of South Africa. The other half of its shares are held by his
former brother-in-law, Lance Booth. Seeley Brennan and Lance Booth had married sisters, namely,
Camille Sweet and Angela Sweet.
Seeley Brennan and Lance Booth are both full-time employees of B & B (Pty) Limited. They have
a good working relationship. Lance Booth’s wife, Angelo Booth, however, dislikes both Seeley
Brennan and Jack Brennan.
The market value of Seeley Brennan’s equity shares in B & B (Pty) Limited is R3 360 000.
B & B (Pty) Limited was formed by Seeley Brennan and Lance Booth six years and nine months
before valuation date. Seeley Brennan’s equity shares in it then had a par, and market, value of
R500 000.
On 1 October 2001 (valuation date), Seeley Brennan’s equity shares in B & B (Pty) Limited had a
market value of R1 600 000.
Land and buildings
The land and buildings (a small factory) that the manufacturing business of B & B (Pty) Limited is
carried on from. Its market value is R1 980 000.
Seeley Brennan had purchased the land on 1 October 2010 for R100 000. He had then erected a
factory on it at a cost of R900 000. It was completed on 31 July 2011. And it was let by him to
B & B (Pty) Limited from 1 August 2011 at a market-related rental.
From the 2011 year of assessment Seeley Brennan has enjoyed a section 13(1) capital allowance on
his factory, determined at 5% of its cost of erection.
Brennan Edison Hodgins Properties CC
A one-third member’s interest in Brennan Edison Hodgins Properties CC. It is a resident of South
Africa. It owns six residential units. The market value of his member’s interest in it is a one-third
share of its net asset value.
Seeley Brennan purchased his one-third member’s interest in Brennan Edison Hodgins
Properties CC on 1 March 2016 for R2 000 000.
Brennan Edison Hodgins Properties CC paid R900 000 for the land on which its six residential
units are erected. It cost it R5 700 000 to erect its six residential units. They were completed on
30 November 2016 and were let to tenants at a market-related rental from 1 December 2016.
The cost of Brennan Edison Hodgins Properties CC’s land and buildings was financed out of
• its member’s interest to the extent of R6 000 000, and
• an interest-bearing loan from a financial institution of R600 000.
The market value of Brennan Edison Hodgins Properties CC’s land and buildings on 31 January
2022 is R7 500 000. Its only other assets are
• dividend-yielding shares, and
• cash of R300 000.
644 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Brennan Edison Hodgins Properties CC’s dividend-yielding shares cost it R1 200 000. On
31 January 2022 their market value was R2 100 000.
No portion of Brennan Edison Hodgins Properties CC’s loan from the financial institution had been
repaid by it at 31 January 2022.
Farm
A farm with a market value of R4 840 000. Included in this R4 840 000 market value, are moveable
capital assets with
• a tax value of nil,
• a cost of R1 200 000, and
• a market value of R500 000.
The farm was purchased by Seeley Brennan for R5 000 000 on 1 March 2019. No portion of its
purchase price qualified for a deduction under the provisions of paragraph 12 of the First Schedule.
Seeley Brennan commenced farming operations on 1 March 2019. He made the election to be
subject to normal tax on the so-called average basis of taxation as provided for in paragraph 19 of
the First Schedule.
Seeley Brennan suffered a loss from farming operations of R60 000 in the 2020 year of assessment.
Livestock
Livestock with a market value of R1 800 000. On 1 March 2021 Seeley Brennan’s livestock had a
standard value of R4 500. His livestock had cost him R720 000. All livestock that was purchased
by him, was purchased during the 2020 and 2021 years of assessment.
Seeley Brennan’s farming activities for the 11-month period from 1 March 2021 to 31 January
2022 have resulted in a ‘nil’ taxable income.
On 31 January 2022 Seeley Brennan’s has a R200 000 balance of capital development expenditure
that may be deducted against future farming profits.
Dividend-yielding listed shares
A portfolio of listed dividend-yielding shares with a market value of R2 145 000. All the shares in
Seeley Brennan’s portfolio of listed dividend-yielding shares had been purchased by him after
valuation date. In total, they had cost him R1 810 500.
Cash
Cash of R400 000 in an investment in a non-tax free call account.
Personal-use assets
Personal-use assets, as recognised in paragraph 53(2) and paragraph 53(3) of the Eighth Schedule,
with a market value of R3 900 000. They had all been purchased by Seeley Brennan after valuation
date for R5 800 000.
Life insurance policy
A life insurance policy with an estimated maturity value of R2 400 000. Seeley Brennan had paid
premiums of R720 000, in total, on this life insurance policy.
Liabilities
On 31 January 2022 Seeley Brennan’s liabilities were R2 550 000. This R2 550 000 excludes his
normal tax liability for the 2022 year or period of assessment, and a possible increase in it that
could arise, if he were to die, or emigrate.
Earnings
Seeley Brennan’s earnings for the 2022 year of assessment are from
• his salary and benefits from B & B (Pty) Limited,
• his net rentals from his land and buildings (his small factory),
ESTATE DUTY 645
647
648 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Sedgwick Darnley’s turnover in January 2022 was R80 000. In February it increased to R100 000.
All indications are that Sedgwick Darnley’s turnover will not decrease in the future, except for the
three-month period from June to August when grass is unlikely to grow. It is expected to be
approximately R50 000 a month during this three-month period.
Sedgwick Darnley’s debtors pay their accounts within 30 days after invoice date.
Sedgwick Darnley’s purchases are all on credit. He settles his creditors 60 days after invoice date.
Sedgwick Darnley has not yet registered as a vendor. He is unaware of the value-added tax
registration limit.
Sedgwick Darnley is now concerned that he has made default under the Value-Added Tax Act. He
has therefore approached you for help.
You are required to
1. provide Sedgwick Darnley with details of the registration requirements as provided for in the
value-added tax legislation, and inform him on what date he became, or will become, liable for
registration,
2. inform him about what accounting bases to account for value-added tax are available to him, and
3. suggest the accounting for value-added tax basis, supported by reasons, that he should apply for.
• During March 2021 it purchased chlorine, acid, chemicals and other pool maintenance items –
these items all constitute part of its trading stock – for R10 695 (R9 300 plus R1 395 value-
added tax at 15%).
• During April 2021 it purchased chlorine, acid, chemicals and other pool maintenance items –
these items all constitute part of its trading stock – for R14 490 (R12 600 plus R1 890 value-
added tax at 15%).
You are required to
1. record all the above transactions that took place during the months of March 2021 and April
2021 in the journal of Sparkling Pools CC. Your answer must deal with all the transactions
discussed above and be supported by brief narrations, explanations or determinations, and
2. determine the net value-added tax due to, or from, SARS for it for its two-month tax period
ended 30 April 2021.
• Advertising Dr 4 500
Input value-added tax Dr 675
To Creditors 5 175
Being the catering costs incurred, but not yet settled, for a
promotion function that was held for selected customers for
the launch of a new product range.
You are required to prepare a schedule of the correcting journal entries and explanations for the
five journal entries as set out above.
• A new notebook computer was purchased by it in December 2021 for R20 700 (R18 000
plus value-added tax at 15% of R2 700) to replace the notebook computer that was stolen
(note 1). The notebook computer is used by employees in the accounting department to
process its financial information.
No depreciation has been provided by Travel Line (Pty) Limited in this two-month tax period
for its trucks and busses since they have been depreciated in full (that is they have a ‘nil’ book
value).
4. Insurance premiums were incurred by Travel Line (Pty) Limited for the motor car used by its
managing director, the notebook computer, the trucks and the busses operated by it. The
insurance premium on the motor car used by its managing director was R1 610.
5. Maintenance costs were incurred by Travel Line (Pty) Limited for the trucks and busses
operated by it.
6. Office equipment rentals were incurred by Travel Line (Pty) Limited for the following assets:
Facsimile machine (a ‘fax’ machine) 3 680
Photostat machine 2 415
Cappuccino machine (a machine that provides coffee with a frothy-milk topping) 1 610
7 705
7. Employees’ subsistence includes tea, coffee, sugar, milk and biscuits purchased by Travel Line
(Pty) Limited and provided to its employees during working hours.
You are required to determine the net amount of value-added tax due to, or from, SARS for Travel
Line (Pty) Limited’s two-month tax period ended 31 December 2021.
3. Confident Limited’s input tax of R8 625 on non-capital goods and services includes R330
incurred on ‘entertainment’ as defined.
4. During this two-month tax period Confident Limited provided its managing director with the
following fringe benefits:
• The free private use of a motor car it had purchased on 1 January 2022 for R161 000
(R140 000 plus R21 000 value-added tax (see above)). Its retail market value is R161 000.
• The free use of a nine-roomed house. Confident Limited hires this house at a rental of
R6 325 a month. He furnished the house himself and he personally pays for electricity and
water.
• An entertainment allowance of R230 a month. He is not restricted in whom he is allowed to
entertain.
• The payment of his private telephone account amounting to R1 265 for the two-month
period. This R1 265 comprised of R690 for January and R575 for February.
• A clothing (a suit) allowance of R1 035 a month. He is required to wear a suit whenever he
is carrying out ‘company’ business.
The only other amount earned by Confident Limited’s managing director from it was a ‘cash’
salary of R50 000 a month.
No other employee of Confident Limited was awarded a fringe benefit by it.
5. On 31 January 2022 a computer belonging to Confident Limited was stolen. Three weeks later
it was awarded R3 450 by its insurer in full and final settlement of its claim for the stolen
computer. (No portion of the R3 450 is included in the amounts as detailed above.)
You are required to determine the
1. net amount of value-added tax due to, or from, SARS for Confident Limited’s first tax period,
and
2. managing director’s taxable income earned from Confident Limited for the 2022 year of
assessment.
An analysis of Otto Stern’s receipts and accruals and expenditure for his two-month tax period
ending 30 September 2021 is set out below. Unless otherwise stated, all amounts are inclusive of
value-added tax when applicable:
Receipts and accruals
Sales of jewellery 322 000
Repairs of jewellery 29 900
Interest on current account 5 175
Indemnity award received (note 1) 51 750
Fashion award (note 2) 25 300
Expenditure
Bad debts (note 3) 13 325
Bank charges 920
Depreciation (note 4) 16 560
Flowers (note 5) 2 530
Insurance premiums (note 6) 3 450
Petrol 1 495
Printing and stationery 1 610
Purchases (note 7) 160 425
Salaries 41 400
Refreshments (note 8) 1 380
Rentals (note 9) 13 340
Notes
1. The indemnity award of R51 750 was awarded for two expensive items of jewellery (trading
stock) that were stolen from Otto Stern’s shop in June 2021.
2. Otto Stern was voted ‘Jewellery Designer of 2021’ by a leading fashion magazine. He was
awarded R25 300 by it for this achievement.
3. Otto Stern’s bad debts written off of R13 325 comprise the following:
• R10 350 owing by a long-standing customer of his as a result of a credit sale (not being the
normal policy of his business). This customer has since emigrated and he has been unable to
trace her.
• R2 875 was lent to an employee who left town without repaying the loan.
4. Depreciation (for the two-month tax period) is charged for the following assets owned by Otto
Stern:
Manufacturing equipment that was purchased in a previous tax period for R276 000
(R240 000 plus value-added tax of R36 000) 11 500
A computer that was purchased on 1 August 2021 for R16 560 (R14 400 plus value-
added tax of R2 160) 920
A motor car that was purchased on 1 September 2021 for R310 500 (R270 000 plus
value-added tax of R40 500). He has its sole use. (He maintains accurate records of
his business travelling and can prove that his business travelling is 40% of his total
travelling.) 4 140
16 560
5. Fresh flowers at a cost of R2 530 in total are purchased twice a week by Otto Stern and
displayed in the shop.
VALUE-ADDED TAX 655
6. Insurance premiums of R3 450 were incurred by Otto Stern for the following assets:
Manufacturing equipment 460
Office computer 230
Motor car 1 035
Trading stock 1 725
3 450
7. Purchases made by Otto Stern of R160 425 are made up as follows:
Purchases of raw materials (all from registered vendors) 126 500
Second-hand jewellery purchased from registered vendors 17 250
Second-hand jewellery purchased (and paid for) from non-registered vendors 16 675
160 425
Otto Stern purchases second-hand jewellery from both registered vendors (for example,
auctioneers) and from non-registered vendors (for example, private individuals and deceased
estates). He displays and sells second-hand jewellery in his shop.
8. Refreshments that cost Otto Stern R1 380 include coffee, tea and biscuits are provided to his
employees and certain customers.
9. Rentals of R13 340 incurred by Otto Stern are for the following items:
Shop premises 10 925
Cash register 1 495
Coffee machine (located in the shop for the use of his customers) 920
13 340
10. In August 2020 Otto Stern purchased jewellery (trading stock) for R24 150 (R21 000 plus
value-added tax at 15% of R3 150) from a local supplier. He enjoyed an input tax deduction of
R3 150 in his tax period 1 August 2020 to 30 September 2020. He then encountered quality
problems with this trading stock and paid the supplier only R19 320 (R16 800 plus value-
added tax at 15% of R2 520) on 30 September 2020. He refused to settle this account until the
quality problems were resolved. At 30 September 2021, R4 830 (R4 200 plus value-added tax
at 15% of R630) was still outstanding despite numerous letters of demand having been
received by him from his supplier.
You are required to determine the net value-added tax due to, or from, SARS for Otto Stern’s two-
month tax period ended 30 September 2021.
• Skep Skop is also a member of Sports Net (Pty) Limited’s ‘non-contributory’ provident fund.
Contributions made to the provident fund for his membership by it during the 2022 year of
assessment were R20 700.
You are required to discuss the value-added tax consequences (if any) to Sports Net (Pty) Limited
(a vendor) that arise when it provides Skep Skop with
• the use of its ‘company car’,
• a subsistence allowance,
• the use of its notebook computer,
• the sale of its notebook computer to him,
• the use of its holiday cottage,
• an interest-free loan by it to him,
• medical scheme contributions made by it, and
• provident fund contributions made by it.
residence. (The downstairs area comprises 60% of its area and the upstairs area comprising the
remaining 40%.) It is being sold by an elderly widow (a non-vendor) for R1 630 000. Should she
purchase it she will be liable for transfer duty of R26 550.
Are there value-added tax consequences to Nancy O’Brien that may arise out of her possible
purchase of this house?
Wheels (Pty) Limited
After many complaints were made to Wheels (Pty) Limited (a manufacturer of tyres) from its
employees about the lack of transport facilities, it purchased a new 18-seater minibus for the
purposes of transporting them to and from its business premises to the nearest central taxi rank. The
minibus cost it R765 900 (R666 000 plus value-added tax of R99 900). The monthly insurance
premium for the minibus is R3 312 (R2 880 plus value-added tax of R432).
Will Wheels (Pty) Limited enjoy an input tax deduction for the purchase of the minibus and its
monthly insurance premium? And are there other value-added tax consequences that arise from the
provision by it of this transport facility to its employees?
Miles Ahead (Pty) Limited
Miles Ahead (Pty) Limited carries on a car rental business. It purchases passenger vehicles that it
then hires on a short-term basis to members of the public. Sherry Avis is employed by it as its
marketing and promotional manager in the KwaZulu-Natal area. As a ‘perk’ of her employment, it
purchases her a new ‘company car’ every 12 months. After 12 months her ‘company car’ is
returned by her to it and is then used by it in its business as a rental vehicle. She elected as her new
‘company car’ a motor car that cost it R333 500 (R290 000 plus value-added tax of R43 500). All
the running expenses of this ‘company car’ are borne by it.
What are the value-added tax consequences that arise from the purchase of this motor car by Miles
Ahead (Pty) Limited and its use by Sherry Avis?
Trendy Trailers (Pty) Limited
Trendy Trailers (Pty) Limited awards Jeffrey Hudson, its sales manager, an entertainment
allowance of R1 242 a month. His remuneration is normally derived mainly in the form of
commissions based on his sales. He usually incurs expenditure in excess of the allowance awarded
to him when entertaining potential customers.
What are the value-added tax consequences that arise from Trendy Trailers (Pty) Limited awarding
Jeffrey Hudson an entertainment allowance?
Musculus Limited
Musculus Limited has a financial year that ends on the last day of February. It purchased a new
motor car for Goliath Buttock, its managing director on 1 June 2021 for R322 000, inclusive of
value-added tax. He has had its exclusive use since 1 June 2021. He travelled 18 000 kilometres in
it during this nine-month period in the 2022 year of assessment. He kept a logbook recording
the distances travelled for business purposes. During this nine-month period he travelled
10 800 kilometres for business purposes. It incurred running expenses of R65 300 (inclusive of
value-added tax) on this motor car. This amount is made up as follows:
• Annual licence: R710 (R710 plus value-added tax of Rnil).
• Annual insurance: R11 040 (R9 600 plus value-added tax of R1 440).
• Fuel: R43 200 (R43 200 plus value-added tax of Rnil).
• Repairs: R10 350 (R9 000 plus value-added tax of R1 350).
According to Interpretation Note 47 and Binding General Ruling 7 the Commissioner will permit a
five-year write-off period for a passenger car.
What are the normal tax and value-added tax consequences of these transactions for Musculus
Limited for its year of assessment ended 28 February 2022?
660 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
George Shady
Despite not being authorised to, George Shady, its stock controller, ‘helped’ himself to trading
stock that cost it R575 (R500 plus R75 value-added tax) and which has a market value of R805
(R700 plus R105 value-added tax). Since he is its stock controller, he believed that he was entitled
to this ‘perk’ because of the long hours he has to work.
You are required to determine the amount
1. to be included in the respective employee’s income for the fringe benefits awarded during this
tax period, and
2. of value-added tax that Happy ’n Contented Limited is liable for on the fringe benefits it
granted to its employees during this tax period. Give reasons why certain fringe benefits (if
any) are excluded from the ‘deemed’ supply provisions.
Restaurant
At Rainbow Limited’s out-of-town factory a canteen for its employees was established on 1 May
2021 since there was no place in that area where employees could have lunch. The transaction
recording the purchase of the canteen equipment was as follows:
Canteen equipment Dr 57 500
To Bank 57 500
Being purchase of equipment for the employees’ canteen.
For a number of reasons Rainbow Limited’s employees’ canteen failed. Its employees’ canteen was
then converted into a fully-fledged restaurant. This happened on 2 January 2022, and from all
reports, this move seems to have been successful. The market value of the canteen equipment on
2 January 2022 was R48 300. Being the only restaurant in that area, it is used not only by its
employees but also employees from other factories in close proximity. A small amount of
restaurant equipment was needed to be purchased to supplement the existing canteen equipment.
This transaction was recorded as follows:
Restaurant equipment Dr 10 000
Value-added tax input account Dr 1 500
To Bank 11 500
Being the purchase of equipment for the restaurant.
No adjusting journal entry has been made for the change of use of the canteen equipment (into
restaurant equipment).
Are these journal entries correct, and if not, what should the correcting journal entry or entries be?
Assets sold
Rainbow Limited sold the following three fixed assets to three of its employees on 28 February
2022:
• A microwave oven used by employees in its administration office was sold to a creditors’ clerk
for R897. It had originally cost Rainbow Limited R3 220 (including value-added tax at 15%)
and had a book value on 28 February 2022 of R1 073. Its market value on 28 February 2022 was
R1 311.
• A personal computer that had been used by its technical director was sold to his secretary (for
her children’s’ use) for R1 817. It had originally cost Rainbow Limited R10 350 (including
value-added tax at 15%) and had a book value on 28 February 2022 of R3 000. Its market value
on 28 February 2022 was R2 415.
• A motorcycle used by Rainbow Limited’s messenger was sold to a factory employee for R5 060.
The motorcycle had originally cost Rainbow Limited R17 600 (including value-added tax at
10%) many many years ago and had a nil book value on 28 February 2022.. Since it is in need of
repair the trade-in valuation received by Rainbow Limited for it was R1 150. The employee was
prepared to pay R1 495 for it since he is able to repair it himself at a nominal cost.
The following journal entry was used to record the sale of the three fixed assets:
Bank (R897 + R1 817 + R1 495) Dr 4 209
Accumulated depreciation – furniture and fittings Dr 2 147
Accumulated depreciation – computer equipment Dr 6 000
Accumulated depreciation – motor cycle Dr 16 000
To furniture and fittings 3 220
To computer equipment 9 000
To motor cycle 16 000
Profit on sale of fixed assets 136
Being the sale of various fixed assets to employees.
Is this journal entry correct, and if not, what should the correcting journal entry or entries be?
666 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Home telephone
Under Rainbow Limited’s employment contract with Violet Indigo, its managing director, it is
required to pay half the cost of his home telephone. She pays her own home telephone account each
month but is then reimbursed 50% of it at the end of Rainbow Limited’s year of assessment. The
following journal entry has been made to record this arrangement:
Salaries Dr 9 000
Value-added tax input tax account Dr 1 350
To Managing director’s loan account 10 350
Being 50% of the managing director’s home telephone account
reimbursed under her employment contract.
Is this correct, and if not, what should the correcting journal entry be?
Retail outlet
Rainbow Limited purchased a small retail outlet, to be used as its ‘factory shop’, on 15 January 2022.
The seller was a non-vendor and the purchase consideration was R1 794 000. The property was
transferred into its name on 15 February 2022. It paid transfer duty of R36 390 on this day. The
following three journal entries were made in its books for these transactions:
Land and buildings Dr 1 794 000
To Cash 1 794 000
Being a retail outlet purchased for cash.
Land and buildings Dr 36 390
To Cash 36 390
Being the transfer duty paid on the above purchase.
Value-added tax input account Dr 234 000
To Land and buildings 234 000
Being the ‘deemed’ input tax on this transaction.
Are these journal entries correct, and if not, what should the correcting journal entry or entries be?
Cape Town trip
Another benefit included in Violet Indigo’s contract of employment is an all-expenses-paid three-
week holiday for herself and her family anywhere within South Africa. This year she took her holiday
in Cape Town. This holiday cost Rainbow Limited her families’ airfares, the car hire and the hotel
account. After this three-week holiday her family returned to Durban but she stayed on in Cape Town
for a week’s business. She stayed on at the hotel and continued to lease the hired car. All expenses
covering the holiday and the week of business were still outstanding at the end of Rainbow Limited’s
year of assessment. The following journal entries were recorded in its books:
Salaries Dr 37 800
Travelling and subsistence Dr 6 000
Value-added tax input account Dr 6 570
To Hotel creditor 50 370
Being a 21-day holiday taken by Violet Indigo, her husband and
their two children and a five-day business trip taken by her.
Salaries Dr 10 438
Travelling and subsistence Dr 2 490
Value-added tax input account Dr 1 404
To Car hire creditor 14 332
Being the car hire account for the 26-day period resulting from the
managing director’s holiday and business trip comprising car
rental of R10 140 (R8 970 plus R1 170 value-added tax), insurance
of R2 490 (R2 080 plus R312 value-added tax), and fuel of R3 568
(R3 568 plus Rnil value-added tax). The R2 490 debited to
VALUE-ADDED TAX 667
2. During September 2021, so as to clear old stock, Frosties (Pty) Limited allowed its employees
to purchase fridges and freezers from it at a discount. ‘Old’ stock was sold to its employees at a
selling price of R21 275 (R18 500 plus value-added tax of R2 775). This ‘old’ stock had a cost
of R23 345 (R20 300 plus value-added tax of R3 045 at 15%) and would normally have been
sold to customers for R26 680 (R23 200 plus value-added tax of R3 480).
3. On 1 September 2021 Frosties (Pty) Limited sold a commercial property that it had held as an
investment for a number of years and that had been used by it to make solely taxable supplies.
The purchaser is to settle the purchase price of R862 500 (R750 000 plus value-added tax of
R112 500) in three instalments of R287 500 (R250 000 plus value-added tax of R37 500) each.
The first instalment of R287 500 was received by it on 30 September 2021. The registration of
transfer has not yet taken place.
4. On 15 September 2021 Frosties (Pty) Limited sold its old delivery van to a second-hand car
dealer, a vendor, for R48 300.
5. On 20 September 2021 Frosties (Pty) Limited sold old tables and chairs to a sports club for
R3 450. These tables and chairs had been purchased by it for its employees’ canteen that
provides subsidised meals to its employees. Its canteen is frequently used by its employees. It
was ‘upgraded’ and revamped. This included the replacement of these old tables and chairs.
6. Output tax of R920 was provided for by Frosties (Pty) Limited on the interest earned by it on
its current account.
7. On 25 September 2021 an indemnity award of R70 150 was received by Frosties (Pty) Limited
from its insurer for Whitney Snow’s, a sales representative’s, ‘company car’, a motor car, that
was stolen on 22 July 2021. Of the indemnity award, R68 149 relates to the motor car, R1 196
relates to sales catalogues, and R805 relates to a cellular phone. The sales catalogues and the
cellular phone were both in the motor car at the time of the theft.
8. Jack Frost, the managing director of Frosties (Pty) Limited, was given the free use of a motor
car as part of his salary package. It had purchased this motor car for R241 500 (R210 000 plus
value-added tax of R31 500). It bears the full cost of its fuel and maintenance.
9. Frosties (Pty) Limited owns a residential property that it let to a tenant at a market-related
rental for the first time as from 1 September 2021. The R6 900 rental charged for the month
of September 2021 was received on the 2 September 2021.
10. Frosties (Pty) Limited purchases some of its raw materials from Cold Parts (Pty) Limited.
Being a major customer of Cold Parts (Pty) Limited, it qualifies for a favourable settlement
discount. On 30 September 2021 it paid Cold Parts (Pty) Limited R186 300 (R162 000 plus
value-added tax of R24 300) being the settlement of its purchases made during August 2021 of
R207 000 (R180 000 plus value-added tax of R27 000).
11. On 5 January 2021 Frosties (Pty) Limited sold stock to Slippery Ice (Pty) Limited for R57 500
(R50 000 plus value-added tax at 15% of R7 500) on credit. In March 2021 Slippery Ice (Pty)
Limited went into liquidation. Frosties (Pty) Limited wrote off the entire R57 500 owing to it
as a bad debt. On 27 September 2021 R10 350 was received by it from the liquidator of
Slippery Ice (Pty) Limited.
12. On 6 August 2020 Frosties (Pty) Limited purchased trading stock for R23 940 (R21 000 plus
value-added tax at 15% of R3 150) from a local supplier. It enjoyed an input tax of R3 150 in
its tax period 1 August 2020 to 31 August 2020. This trading stock approved to be defective so
it paid the supplier only R19 320 (R16 800 plus value-added tax at 15% of R2 520) on
31 August 2020. It refused to settle this account until the defective trading stock was replaced.
On 30 September 2021, R4 830 (R4 200 plus value-added tax at 15% of R630) was still
outstanding despite numerous letters of demand having been received by it from the supplier.
13. Queenie Ice is the sole shareholder of Frosties (Pty) Limited. On 28 September 2021 she
removed a fridge out of its trading stock for her personal use. She needed it for her kitchen at
VALUE-ADDED TAX 669
her home. It had a cost of R2 875 (R2 500 plus value-added tax of R375) and it had a market
value of R5 750 (R5 000 plus value-added tax of R750).
You are required to determine the revised output tax amount for Frosties (Pty) Limited’s tax period
1 September 2021 to 30 September 2021. Your determination must deal with each transaction
listed, and the errors you have identified. Your corrections must be supported by brief explanations.
• It purchased a large quantity of glue (used to stick the inner soles in its gumboots) from another
shoe manufacturer that was having a disbursement sale. This shoe manufacturer (who is not a
vendor) was selling its raw materials at low prices since its business was being liquidated.
Wellingtons (Pty) Limited purchased this large quantity of glue for R22 500 (excluding value-
added tax). Had the same quantity of glue been purchased from its normal supplier, the cost
would have been R41 400 (R36 000 plus value-added tax of R5 400).
From 16 May 2021 to 18 May 2021 Wellingtons (Pty) Limited held a training course for its sales
employees at a local hotel. Five employees from its sales department were accommodated at this
hotel for the duration of the course. The hotel account (in the form of a ‘tax invoice’) was received
on 25 May 2021 and paid on 31 May 2021. The hotel account of R12 650 is made up as follows:
• Hotel accommodation of R8 050 (R7 000 plus value-added tax of R1 050).
• Meals and drinks of R4 600 (R4 000 plus value-added tax of R600).
One of the five above employees is from its sales office in another town. Wellingtons (Pty) Limited
then paid the following amounts during May 2021 for this employee:
• Domestic airfare of R3 335 (R2 900 plus value-added tax of R435).
• Car hire of R764 (see below).
This ‘out-of-town’ employee’s hotel accommodation and meals and drinks costs are included in the
amounts above. These costs were incurred equally among its five employees. That is, his costs
amount to one-fifth of the above amounts.
The car hire expense of R764 that Wellingtons (Pty) Limited incurred is made up of
• a motor car rental (for a ‘motor car’ as defined) of R345 (R300 plus value-added tax of R45),
• insurance on the hired motor car of R69 (R60 plus value-added tax of R9), and
• fuel used in the hired motor car of R350 (R350 plus value-added tax of Rnil).
You are required to draft a memorandum to the financial accountant of Wellingtons (Pty) Limited
setting out the input tax deductions available to it for the expenses it incurred as detailed above.
The amount due by Quarry Tiles (Pty) Limited of R410 400 is repayable in 48 monthly instalments
of R8 550 each. (A yield to maturity of 0,732010% applies to this monthly accrual period.) It used
its new delivery vehicle as from 1 December 2021.
VALUE-ADDED TAX 671
On 1 December 2021 Quarry Tiles (Pty) Limited entered into a 36-month financial lease for an
industrial tile-cutting machine. A copy of the tax invoice from the supplier of the industrial tile-
cutting machine dated 1 December 2021 is set out below:
Quarry Tiles (Pty) Limited’s total liability of R39 600 is repayable in 36 monthly rentals of R1 100
each, commencing on 1 December 2021. (A yield to maturity of 0,7650867% applies to this
monthly accrual period.) It used its new industrial tile-cutting machine as from 1 December 2021.
Quarry Tiles (Pty) Limited’s other input tax deductions for this two-month period amounted to
R375 000. This R375 000 amount excludes the input tax on the new delivery vehicle (see above)
and the new industrial tile-cutting machine (also see above) but includes the input tax of R2 295
paid to hire a motor car (see below). This tax invoice from the supplier of the hired car contained
the following information:
Car rental 14 200
Fuel 4 840
Insurance 960
20 000
Add value-added tax 2 274
Total amount incurred 22 274
The above expense of R22 274 was incurred by Quarry Tiles (Pty) Limited a result of the motor car
used by Eaton Klinker, its sales consultant, being damaged in an accident. He used the hired car
while its motor car, that he had the use of, was being repaired.
It cost Quarry Tiles (Pty) Limited R57 500 (R50 000 plus value-added tax of R7 500) to repair the
motor car that Eaton Klinker had the use of. Its insurer paid most of this amount. It was required to
pay only the so-called excess. It amounted to R5 000 and was paid by it on 20 December 2021. No
amount was included in the input tax total of R375 000.
Eaton Klinker is allowed to use the motor car provided to him by Quarry Tiles (Pty) Limited for his
private use. It had paid R230 000 (R200 000 plus value-added tax at 15% of R30 000) when it was
purchased on 1 March 2020. He has had the use of this motor car from this date (1 March 2020). It
pays all expenses including fuel in relation to this motor car. He is its sole employee that enjoys the
fringe benefit ‘use of a motor car’.
Since the inspectors will also examine Quarry Tiles (Pty) Limited’s output tax for this two-month
period, confirmation is needed that its output tax of R313 080 is correct. Details of its output tax for
this two-month period follow:
Sales (note 1) 300 000
Sales to employees (note 2) 6 900
Sale of delivery vehicle (note 3) –
Interest on current account (note 4) 1 380
Settlement discount received (note 5) 2 700
Recovery of bad debt (note 6) 2 100
Weenen Clay CC (note 7) –
Trading stock taken by the shareholder (note 8) –
313 080
672 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Notes
1. Quarry Tiles (Pty) Limited sells tiles to both local and foreign customers. A review of the sales
for this two-month period revealed gross sales of R1 910 000 (excluding value-added tax) to
local customers and gross sales of R90 000 (excluding value-added tax) to foreign customers.
2. During December 2021, to clear old stock, Quarry Tiles (Pty) Limited allowed its employees
to purchase tiles at a discounted price. ‘Old’ trading stock was sold to its employees at a selling
price of R52 900 (R46 000 plus value-added tax of R6 900). This ‘old’ trading stock had a cost
of R58 075 (R50 500 plus value-added tax at 15% of R7 575) and would normally have been
sold to customers for R79 350 (R69 000 plus value-added tax of R10 350).
3. On 5 December 2021 Quarry Tiles (Pty) Limited sold its old delivery vehicle for R48 300.
4. Output tax of R1 380 was provided for by Quarry Tiles (Pty) Limited on the interest earned by
it during this two-month period on its current account.
5. Quarry Tiles (Pty) Limited purchases some of its trading stock from Rustic Red (Pty) Limited.
Being a major customer of Rustic Red (Pty) Limited, it qualifies for a favourable settlement
discount. On 30 November 2021 it paid Rustic Red (Pty) Limited R186 300 (R162 000 plus
value-added tax of R24 300) being the settlement of its purchases made during October 2021
of R207 000 (R180 000 plus value-added tax of R27 000).
6. Two years previously, Quarry Tiles (Pty) Limited sold tiles to Nutmeg (Pty) Limited for
R17 250 (R15 000 plus value-added tax at 15% of R2 250) on credit. Shortly after this credit
sale, Nutmeg (Pty) Limited was reported to be in financial difficulties. On 28 February 2021
Quarry Tiles (Pty) Limited therefore wrote off the entire R17 250 owing to it by Nutmeg (Pty)
Limited as a bad debt. On 22 December 2021 R5 175 was received by Quarry Tiles (Pty)
Limited from the liquidator of Nutmeg (Pty) Limited.
7. On 15 October 2020 Quarry Tiles (Pty) Limited purchased trading stock for R24 150 (R21 000
plus value-added tax at 15% of R3 150) from Weenen Clay CC, a local supplier. Quarry Tiles
(Pty) Limited enjoyed an input tax deduction of R3 150 in its tax period 1 September 2020 to
31 October 2020. It then encountered quality problems with this trading stock and paid
Weenen Clay CC only R14 490 (R12 600 plus value-added tax at 15% of R1 890) on
31 October 2020. It refused to settle Weenen Clay CC’s account until the quality problems
were resolved. On 31 December 2021, R9 660 (R8 400 plus value-added tax at 15% of
R1 260) was still outstanding despite numerous requests for payments having been received by
it from Weenen Clay CC.
8. Tim Bevarty is the major shareholder of Quarry Tiles (Pty) Limited. On 24 December 2021 he
took a crate of tiles (out of its trading stock) for Ginger Bevarty’s, his wife’s, Christmas
present. She needed these tiles to have a veranda at their home tiled. These tiles had cost
R4 600 (R4 000 plus value-added tax of R600) and had a market value of R5 750 (R5 000 plus
value-added tax of R750).
You are required to determine Quarry Tiles (Pty) Limited’s refund for its two-month tax period
from 1 November 2021 to 31 December 2021. Your answer must deal with each transaction listed,
and must be supported by brief explanations.
car belonging to it and a boot full of Love Potion Number Nine roll-on deodorants that were about
to be delivered to a supermarket chain. All attempts to trace Ralph de Parfum failed. Its insurers
finally agreed to honour its claim. It was awarded R48 300 this month by its insurer. This amount
comprises
• the full and final settlement for its motor car of R34 500, and
• the full and final settlement of its Love Potion Number Nine roll-on deodorants that had been
stolen of R13 800.
Are there value-added tax implications to Handle Bros Limited for the R48 300 it received?
Patio Products (Pty) Limited
Patio Products (Pty) Limited is a manufacturer of ‘patio’ furniture. Its four directors are all nature
enthusiasts who enjoy camping with their families over weekends and during holidays. After a
recent directors’ meeting, Patio Products (Pty) Limited purchased a caravan for R189 750
(R165 000 plus value-added tax of R24 750) for the use of it by its four directors. Each director is
entitled to use the caravan one weekend a month. Its holiday use is allocated on a rotational basis.
What are the value-added tax implications to Patio Products (Pty) Limited of its purchase of this
caravan and the use of it by its four directors?
Rolls Roger Limited
Rolls Roger Limited manufactures and retails luxury motor cars. It recently held a four-day ‘selling
skills’ training course for its sales consultants at Big Five Hotels (Pty) Limited, a remote game
lodge located near the Kruger National Park. It is unsure of the correct value-added tax treatment
applicable to the following expenses incurred for the four-day training course:
• To transport its employees to and from the training venue, it hired five 12-seater mini-buses
from a rental operator at a cost of R11 385 (R9 900 plus value-added tax of R1 485). Included in
the total charge of R11 385 is R1 035 (R900 plus value-added tax of R135) for insurance on the
mini-buses.
• It hired Martin McLaren, an ‘outside’ consultant, at a fee of R20 700 (R18 000 plus value-added
tax of R2 700) to conduct the four-day training course to its employees. Martin McLaren is a
self-employed natural person.
• The total cost of accommodation and meals incurred by it for the duration of the four-day
training course was R143 520 (R124 800 plus value-added tax of R18 720). This amount
represents a daily charge of R690 (R600 plus value-added tax of R90) a person. In total
52 people (51 sales employees and Martin McLaren) were accommodated at Big Five Hotels
(Pty) Limited for the four-day period.
• To encourage and motivate teamwork among its employees, each participant (including Martin
McLaren) was given a tracksuit bearing the ‘Rolls Roger’ logo to wear at their own discretion
during the four-day training course. The tracksuits were specifically manufactured for it at a cost
of R8 970 (R7 800 plus value-added tax of R1 170).
Can input tax be deducted on the expenses Rolls Roger Limited incurred as detailed above?
You are required to draft a brief reply memorandum to each one of your eight partners.
VALUE-ADDED TAX 675
longer being recognised by it (despite numerous letters of demand having been received by it from
Sub-Standard (Pty) Limited).
Insurance award
Cash Dr 184 000
To Delivery van 63 250
To Sales 23 000
To Motor car 97 750
Being the insurance award for its delivery van, trading stock and its
motor car that had been stolen.
Explanation: One evening when Vors Boere, its managing director, was working overtime, his
‘company car’ and a delivery van both belonging to Skottels CC were stolen from the parking lot at
its trade premises. The delivery van contained an order of trading stock for delivery to a customer
early the next morning. Its insurer settled R63 250 for the delivery van, R23 000 for the trading
stock and R97 750 for the ‘company car’.
Purchase of motor vehicles
Delivery van Dr 150 000
Motor car Dr 280 000
Value-added tax input account Dr 64 500
To Creditor (new motor-vehicle dealer) 494 500
Being the purchase of a replacement delivery van and a replacement
new motor car (for the exclusive use by Vors Boere (see above)).
Explanation: Replacement vehicles were purchased by Skottels CC. The delivery van cost
R172 500 (R150 000 plus value-added tax of R22 500) and Vors Boere’s new ‘company car’ cost
R322 000 (R280 000 plus R42 000).
‘Tearoom’ assets
Tea urn Dr 3 000
Coffee machine Dr 4 000
Value-added tax input account Dr 1 050
To Creditor 8 050
Being the purchase of a new tea urn and a new coffee machine.
Explanation: After numerous requests from Skottels CC’s employees, a ‘tearoom’ was established
at its trade premises. Employees help themselves to tea or coffee during the day.
Employees’ contribution towards ‘tearoom’ costs
Employees A to Z Dr 575
To Tea and coffee expenses 575
Being a nominal charge to employees for the use of the self-service
‘tearoom’.
Explanation: Employees who make use of the self-service tea room are charged a fee of R23 a
month towards costs. This amount is recovered from them by way of a deduction from their
monthly salaries.
Out-of-town trip
Travelling and accommodation Dr 4 680
Value-added tax input account 702
To Bank 5 382
Being the costs incurred when Piet Retief, its sales representative,
travelled on an out-of-town trip.
678 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Explanation: When Piet Retief, its sales representative, travelled to Johannesburg the following
amounts were incurred by Skottels CC:
• R3 105 for his airfare. This amount comprised R2 250 for the airfare, R450 for the airport tax
and value-added tax of R405.
• R897 for his car hire. This amount comprised fuel of R230, insurance of R92 and a rental charge
of R575.
• R1 380 for his hotel accommodation.
Letting of storeroom
Debtor: Gourmet Gas Gems (Pty) Limited (a neighbour) Dr 6 900
To Rentals 6 900
Being the letting of 25 square metres of its storeroom.
Explanation: Gourmet Gas Gems (Pty) Limited, a neighbour, was in need of storage space for its
finished goods. Since a corner of Skottels CC’s storeroom was not being used, it let this corner of
its storeroom to Gourmet Gas Gems (Pty) Limited at a market-related rental of R6 900 a month.
Foreign customer
Debtor: Gert Maritz Dr 1 449
To Sales 800
To Delivery charges 460
To Value-added tax output account 189
Being the sale of trading stock to a foreign customer.
Delivery charges Dr 540
Value-added tax input account Dr 81
To Bank 621
Being the delivery charges incurred on the delivery of trading stock to
Gert Maritz.
Explanation: Gert Maritz had emigrated from South Africa five years ago. To be able to host a
braaivleis in the country where he is now ordinarily resident, he ordered a braai stand and certain
braai accessories from Skottels CC. He also agreed to pay towards their delivery costs.
Bus coupons
Salaries Dr 360
Value-added tax input account Dr 54
To Bank 414
Being the purchase of bus coupons.
Explanation: Instead of Skottels CC’s giving Dingaan Shisayainyama, an employee, cash to cover
his transport expenses to and from work, it purchased bus coupons that it distributes to him on a
weekly basis. During the month of September 2021 it incurred R414 on purchasing bus coupons for
him.
Financial lease
Machine Dr 1 200 000
Value-added tax input account Dr 180 000
Deferred finance charges Dr 204 000
To Sundry creditor (long-term lease obligation) 1 584 000
Being the capitalisation of the financial lease for the machine
acquired on 1 September 2021.
Explanation: Skottels CC acquired a new machine costing R1 368 000. Since it did not have the
necessary funds to purchase the machine for cash, a 36-month financial lease was entered into on
VALUE-ADDED TAX 679
1 September 2021. A valid ‘tax invoice’ was obtained from Stainless Steel Products Limited, the
lessor, at the commencement of the lease. It contained the following information:
Cost of machine 1 200 000
Add value-added tax 180 000
Principal debt 1 380 000
Add finance charges 204 000
Total long-term lease obligation 1 584 000
Lease obligation
Stainless Steel Products Limited (long-term lease obligation) Dr 44 000
To Cash 44 000
Being the payment of the first instalment of R44 000.
Explanation: Skottels CC’s total long-term lease obligation to Stainless Steel Products Limited is
repayable in 36 monthly rentals of R44 000 each, commencing on 1 September 2021. The machine
was used by it directly in its process of manufacture as from 1 September 2021.
‘Discount’ sale to employee
Employee Paul Kruger Dr 10 672
To Sales 9 280
To Value-added tax output account 1 392
Being the sale of an all-inclusive braai set to an employee.
Explanation: Six months earlier an all-inclusive braai set had been for sale by Skottels CC to its
customers for R13 340 (R11 600 plus value-added tax at 15% of R1 740) was sold to its employee
Paul Kruger for R10 672 (R9 280 plus value-added tax at 15% of R1 392). Its cost to Skottels CC
was R11 700 (R10 200 plus value-added tax at 15% of R1 530).
Fringe benefit
Salaries Dr 735
To Value-added tax output account 735
Being output value-added tax raised on the deemed supply that
arises on Vors Boere’s fringe benefit ‘use of company car’.
Explanation: Vors Boere, the managing director and sole shareholder of Skottels CC, enjoys the
free use of a motor car as part of his salary package. This particular motor car had been purchased
by it on 15 September 2021 for R322 000 (R280 000 plus value-added tax of R42 000 (see above)).
It bears the full cost of its fuel and maintenance. The R735 had been determined as follows:
R322 000 × 3,5% × 15% / 115% × 15 / 30 (days used in September 2021) = R735.
Purchases
Purchases Dr 50 000
Value-added tax input account Dr 7 500
To Sundry creditor (Always Reliable (Pty) Limited frequent
supplier) 57 500
Being purchases for the month of September.
Explanation: Skottels CC purchases large quantities of raw materials from a particular supplier. It is
billed at the end of each month and settles the full amount due within 30 days.
Volume discount
Cash Dr 17 250
To Discount received 17 250
Being a ‘volume’ discount received for purchases made from
Always Reliable (Pty) Limited, a frequent supplier.
Explanation: Always Reliable (Pty) Limited offers a volume discount in the form of a cash refund
when a required level of purchases is made. Skottels CC exceeded its required level with its
680 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
September 2021 purchases and received a cash ‘volume’ discount of R17 250 from Always
Reliable (Pty) Limited.
Land purchased
Land Dr 1 500 000
To Bank 1 500 000
Being the purchase of a vacant plot of land.
Explanation: On 12 September 2021 Skottels CC purchased a vacant plot of land from Dayle Hill, a
non-vendor. The purchase price of R1 500 000 was paid by it on the registration of transfer of the
land on 26 September 2021.
Transfer duty on land
Land Dr 18 750
To Bank 18 750
Being the transfer duty paid on the purchase of the above vacant
plot of land.
Explanation: Transfer duty of R18 750 was also paid Skottels CC on 26 September 2021 for the
transfer of Dayle Hill’s property into its name. It intends to erect its own factory on the land in its
next financial year.
You are required to prepare journal entries, with brief explanations, that should be put through
Skottels CC’s journal to correct possible errors captured in the above journal entries.
Botswana contract
In 2020 the Botswana government launched a tender process for consulting engineers to provide
water solutions for a dry area in Botswana. William Mortimer, a senior engineer employed by
Sparkling Waters (Pty) Limited attended a tender briefing in Botswana to gather more information
about this contract. He stayed in Botswana for three nights and four days from 8 to 11 December
2020, during which time he undertook some initial feasibility studies. Upon his return to South
Africa, he prepared and submitted the tender. The expenses incurred by it in pula relating to his
visit were as follows:
Hotel accommodation in Botswana (inclusive of value-added tax at 16%) 4 582
Car rental (inclusive of value-added tax at 16%) 2 088
Meals and beverages (inclusive of value-added tax at 16%) 1 218
Sparkling Waters (Pty) Limited won the contract for 10 000 000 pula on 5 March 2021. The
consulting services required to provide the water solutions will be rendered from its head office in
Pietermaritzburg.
Botswana levies a 15% withholding tax on consulting and technical fees.
As a goodwill gesture, Sparkling Waters (Pty) Limited invited Amsulwa Amanzi, one of the senior
Botswana officials, to visit its head office in Pietermaritzburg, to verify the progress being made on
the contract. His costs relating to his two-night, three-day visit to South Africa in April 2021 were
as follows:
Hotel accommodation (inclusive of value-added tax at 15%) 4 025
Meals and beverages (inclusive of value-added tax at 15%) 2 530
On 31 May 2021, Sparkling Waters (Pty) Limited invoiced the Botswana government with
2 816 000 pula for work done to date. This amount was still outstanding on 30 June 2021.
Exchange rates
Date Spot rate
On 30 June 2022 Sparkling Waters (Pty) Limited invoiced Masinga Reservoirs Limited for
14 000 000 kenyan shillings for work done to date.
One of these three employees, namely, Reine Wells, a South African resident, has been an
employee of Sparkling Waters (Pty) Limited for the last 10 years. She negotiated the following
rand-equivalent package with it for the work to be done by her in Kenya, over and above her
normal salary of R50 000 a month:
• Monthly rental paid by it for a fully furnished apartment for her in Kenya – the equivalent of
R10 000.
• Monthly rental of a motor car under an operating lease (as envisaged by section 23A of the
Income Tax Act), inclusive of value-added tax at 16% for her use in Kenya and paid for by
Sparkling Waters (Pty) Limited – the equivalent of R8 004.
• A subsistence allowance the equivalent of R500 a day for her meals and incidental costs. She did
not keep any documentation of the expenditure that she incurred. ‘Deemed’ subsistence
expenditure for travel from South Africa to Kenya is $138 a day. On 28 February 2022 the spot
rate for a dollar was $1 = R15. And the average exchange rate for the year ended 28 February
2022 was $1 = R14,50.
• The right to participate in its share option scheme. This scheme is available only to selected
employees. Under this scheme, she was able to purchase 10 000 shares in it at R1 a share on
1 February 2022, when the market value of a share in it was R10. There are no restrictions on
the shares. She intends to hold the shares for six years. She estimated that a share in it will then
be worth R25.
Reine Wells was responsible for the fuel used in the leased motor car. It amounted to the equivalent
of R2 800 a month. She kept an accurate logbook of distances travelled in the leased motor car. It
confirmed a total of 3 000 kilometres were travelled by her in it during February 2022, of which
2 700 kilometres were for business purposes. According to her logbook, her total kilometres
travelled during her nine months in Kenya were 26 000 kilometres, of which 17 000 kilometres
were for business purposes.
Reine Wells is a member of the Professional Provident Society. Her premium on an income-
protection policy against dreaded diseases and disability is R4 000 a month. She has been a
member of it for the past 15 years.
Reine Wells earned foreign interest on money invested in America. She inherited funds from her
late grandfather and invested them in an American bank. The foreign interest, which accrues
annually on the last day of February, was $3 500 for the 2022 year of assessment.
Relevant exchange rates are as follows:
Date Spot rate
1 February 2022 R1 = 7,85 kenyan shillings
28 February 2022 R1 = 7,80 kenyan shillings
30 June 2022 R1 = 8,00 kenyan shillings
The average exchange rate for the year ending 30 June 2022 was R1 = 7,50 kenyan shillings.
‘Deemed’ subsistence expenditure for travel from South Africa to Kenya is $138 a day. On
28 February 2022 the spot rate for a dollar was $1 = R15. And the average exchange rate for the
year ended 28 February 2022 was $1 = R14,50.
Article 20 (Technical Fees) of the double taxation agreement between South Africa and Botswana
provides as follows:
‘1. Technical fees arising in a contracting state which are derived by a resident of the other
contracting state may be taxed in that other state.
‘2. However, such technical fees may also be taxed in the contracting state in which they arise,
and according to the laws of that state, but where such technical fees are derived by a resident
VALUE-ADDED TAX 683
of the other contracting state who is subject to tax in that state in respect thereof, the tax
charged in the contracting state in which the technical fees arise shall not exceed 10% of the
gross amount of such fees.’
You are required to
1. advise Sparkling Waters (Pty) Limited on the value-added tax implications of all the
transactions and expenses relating to its Botswana contract,
2. advise Sparkling Waters (Pty) Limited on the value-added tax treatment of the invoice issued
to the Botswana government for the advice given by Henry Fancourt, the Cape Town civil
engineer, from its Cape Town office and on the expenses relating to his hotel accommodation
and meals for his visit,
3. advise Sparkling Waters (Pty) Limited on the possible South African income tax treatment of
the withholding tax on consulting fees that the Botswana tax authorities will withhold,
4. briefly discuss the normal tax implications of all the transactions and expenses relating to
Sparkling Waters (Pty) Limited’s Botswana contract for its 2021 year of assessment. The
treatment of the withholding taxes must not be discussed again (see above). And relevant court
cases need not be provided in support of the required discussion,
5. advise Sparkling Waters (Pty) Limited on the value-added tax implications of its Kenyan
contract. The value-added tax consequences relating to Reine Wells’s salary packages must not
be dealt with, and
6. determine Reine Wells’s taxable income the 2022 year of assessment. She returned to South
Africa after nine months in Kenya.
(SAICA adapted.)
685
686 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
• 7% local savings account provided he makes and maintains this investment in its Zimbabwe
branch.
Instead of the above investments Bernard Klever may invest his R200 000 in 6% local redeemable
preference shares to be issued by Wallet Blockchain Limited (a resident of the Republic) and a
client of the Local Building Society.
Bernard Klever is a resident of the Republic. He is 45 years old. His existing taxable income is
R623 600. At present he earns local interest in excess of R23 800 from other local interest-bearing
securities.
This R200 000 investment that Bernard Klever is planning to make will be made by him on
1 March 2022. Dio Smart, an investment adviser from the Local Building Society has advised that
the minimum time duration of all four investments will be identical. He has further advised that
should Bernard Klever need cash while the investment is in force, the Local Building Society will
provide him with a loan of up to 90% of his capital invested, at a 1,5% penalty.
You are required to
1. determine Bernard Klever’s after-tax return from investing the R200 000 in each of the four
possible investments, and
2. advise him how he could maximise his after-tax return from the R200 000 he has available to
invest. A combination of the possible investments should not be overlooked when giving this
advice.
(Assume that the 2023 year of assessment tax legislation and rates are identical to those that applied
in the 2022 year of assessment.)
It is the intention of the partners to sell the motor cars after four years. The motor dealer is of the
opinion that they will sell for R200 000 each in four years’ time. The receipt or accrual from the
sale of these motor cars will be paid into the partnership.
If the partners lease the motor cars, they will take over their ownership at the end of the lease for no
cost. (That is, they will purchase the motor cars for a ‘nil’ amount.)
The partners will use these motor cars 60% of the time for business purposes.
The Commissioner has agreed to grant the partners a wear-and-tear or depreciation capital
allowance determined over a five-year write-off period.
The three partners all suffer normal tax at the maximum marginal rate of normal tax of 45%.
Assume that this rate will apply throughout the four-year period.
You are required to advise the partners whether they should purchase or lease the motor cars.
It is an established policy of Rand, Coin & Partners to provide certain of its employees with so-
called golden handshake awards. These awards are made under existing service contracts that have
been entered into with them (the said employees).
Joe Kruger, who will remain on his present salary scale of R50 000 a month until his retirement, is
entitled to a golden handshake award of R660 000.
Rand, Coin & Partners will finance this lump-sum award to be made to Joe Kruger by taking out an
endowment policy on his life. The insurers are offering two types of policies to it:
• The first policy is one that meets all the requirements for it to qualify for a deduction in the
determination of its taxable income for the premiums it pays under the provisions of
section 11(w).
• The second policy fails to comply with the requirements for it to qualify for a deduction in the
determination of its taxable income for the premiums it pays under the provisions of
section 11(w).
Both policies will have a surrender value of R660 000 when Joe Kruger retires. The premiums on
both policies are R90 000 a year.
Both policies make provision for the policy to be ceded by Rand, Coin & Partners to Joe Kruger.
And if Joe Kruger continues to pay the monthly premiums for a further six years after his
retirement, each policy will have a maturity value of R2 250 000.
You are required to
1. state how the golden handshake award is subject to normal tax when received by Joe Kruger.
Discuss when it is received in cash or when a policy is ceded to him, and
2. discuss the normal tax consequences of the payments being made by Rand, Coin & Partners to
him under both options, being when the policy is cashed, or when it is ceded to him.
• The investment Gordon Holmes makes will be in local dividend-yielding shares and will be
made on 1 March each year. A dividend yield of 6% a year (before dividends tax) is expected.
Assume the dividends will be received on 1 March each year.
• Gordon Holmes will settle his normal tax liability each year on the last day of the year of
assessment.
• Gordon Holmes will invest the entire lump sum he receives in local dividend-yielding shares on
1 April 2024.
• Once Gordon Holmes has retired, his earnings, other than the dividends, will be the R36 000 a
month that he will spend in full each month.
• Gordon Holmes’s 2022 taxable income under his proposed new contract is R648 000 (R360 000
plus R288 000) comprising solely his remuneration from his employer.
You are required to compare the two alternatives available to Gordon Holmes by determining his
financial position under each alternative and advise him what action he should take. (Assume that
taxation legislation in future years of assessment will be identical to the 2022 year of assessment.)
Chatsworth Caterers (Pty) Limited’s tax value and carrying amount of his ‘company car’ was R55 200
(original cost of R276 000 (R240 000 plus value-added tax at 15% of R36 000)) at 31 December
2021.
Shortly before Korma Vindaloo’s retirement he had his ‘company’ car valued at R80 000 by an
independent second-hand motor dealer.
During January and February 2022 many regular customers of Chatsworth Caterers (Pty) Limited
complained about the taste of certain eastern delights that they had ordered from it.
Chatsworth Caterers (Pty) Limited realised that it needed the services of Korma Vindaloo. Since it
could not employ him due to its mandatory retirement age rule, it hired his services on a
consultancy basis.
After Korma Vindaloo had been approached by Chatsworth Caterers (Pty) Limited to work for it on
a consultancy basis, he agreed to commence his own business as an executive chef. He will offer
his services on a consultancy basis to it, and other customers. But he will spend most of his time
working for it, at its premises.
Korma Vindaloo will use most of his golden handshake award to finance his new business venture.
He is, however, concerned about a number of issues relating to his new business venture. He needs
to know the answers to the following seven questions:
1. If he were to ‘house’ his consultancy business in a close corporation, what would be the
resulting tax consequences of the profit being made by it, it paying a salary to him, and then
distributing its after-normal tax profit to him as a dividend.
2. Will there be any tax disadvantages of having Chatsworth Caterers (Pty) Limited as his major
client?
3. Will working at its premises give rise to any special tax issues?
4. He needs to employ one employee on a full-time basis to help with the running of his new
business venture. Does his number of employees give rise to any special tax consequences?
5. He is neither a shareholder of a company, nor a member of a close corporation at present. If his
new business venture were ‘housed’ in a close corporation and he was its sole member, would
any tax issues result?
6. So as to minimise his and his close corporation’s (if his business was ‘housed’ in it and it were
neither a small business corporation nor a personal service provider) normal tax liabilities,
what salary should it pay him for the services that he renders to it?
7. He will need to purchase some minor capital assets to use in his trade as a consultant. No asset
is likely to cost more than R7 000. Are any capital allowances available on these assets needed
for his consultancy business?
Korma Vindaloo’s other receipts and accruals for the 2022 year of assessment were local dividends
of R9 000 and local interest from a non ‘tax free investment’ of R35 840. He did not incur any
expenses that are deductible in the determination of his taxable income.
In the determination of Chatsworth Caterers (Pty) Limited’s profit of R900 000 for its year of
assessment, it deducted the
• cost price of the watch of R4 950,
• R80 000 golden handshake award it made to Korma Vindaloo, and
• his R72 000 leave-compensation award.
Chatsworth Caterers (Pty) Limited’s taxable profit of R900 000 includes a profit of R16 800 on the
sale of Korma Vindaloo’s ‘company car’.
694 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Chatsworth Caterers (Pty) Limited’s financial year ends on the last day of February.
You are required to
1 discuss the normal tax implications of the above transactions between Chatsworth Caterers
(Pty) Limited and Korma Vindaloo as far as they relate to both of them,
2. determine their 2022 normal tax liabilities. Support your answer with explanations when
necessary, and
3 provide brief answers to the seven questions that he would like to be answered.
• The business they wish to purchase is a saw mill. When they purchase the business they will be
purchasing the trading stock of logs, a smallholding with two buildings erected on it, and an
undercover area where the logs are cut into wood. The price allocated to each asset is as follows:
Stock of logs 1 800 000
Land 1 125 000
Building – housing the mill office 450 000
Building – available for residential accommodation 900 000
Undercover area 225 000
4 500 000
• All plant and machinery used in the business at present, is leased by the existing owners of the
business. Alan and Vincent have agreed to take over the leases.
• The annual profit prior to the payment of interest will be R7 500 000.
• Alan Branch and Vincent Wood will let the residential building to a tenant at a market-related
rental. Gross rentals are R180 000 a year. This amount is included in the R7 500 000 profit
above.
Neither Alan Branch nor Vincent Wood is too concerned about the perpetual succession or limited
liability aspects of the business. Their main concern is the minimisation of their normal tax
liabilities.
You are required to write a letter to Alan Branch and Vincent Wood setting out your views as to
how they should structure their business so as to be able to cope with the various aspects of this
venture they are planning on entering into.
Holeguard (Pty) Limited’s journal entry used to record this transaction was as follows:
Fixed asset – machine (statement of financial position) Dr 1 500 000
Value-added tax input tax account Dr 225 000
Deferred finance charges Dr 345 000
To Sundry creditor (long-term lease obligation) 2 070 000
Being the capitalisation of the financial lease for the lease for
the new machine acquired on 1 June 2022
The financial lease also caused the following journal entries to be recorded by Holeguard (Pty)
Limited:
Sundry creditor (long-term lease obligation) Dr 517 500
To Cash 517 500
Being the payment of nine instalments of R57 500 each.
Finance charges (statement of profit or loss and other
comprehensive income) Dr 86 250
To Deferred finance charges 86 250
Being that portion of the deferred finance charges that relates
to its 2022 financial year.
Depreciation (statement of profit or loss and other
comprehensive income) Dr 300 000
To Accumulated depreciation 300 000
Being depreciation on the machine (acquired on 1 June 2021)
for its 2022 financial year.
You are required to
1. determine all the capital allowances and deductions that Holeguard (Pty) Limited will take into
account in the determination of its taxable income for its 2022 year of assessment, and
2. detail the adjustments that must be made to its accounting profit that arise from the above
journal entries in the determination of its taxable income for its 2022 year of assessment.
Chukka Holeman
Under a lease between Chukka Holeman (the lessee) and Candice Mentoor, the owner-lessor, a plot
of land was leased by him from her for 20 years as from 1 April 2021. The lease agreement
provided for the following:
• A rental of R4 000 a month payable by Chukka Holeman to Candice Mentoor from 1 April
2021.
• A lease premium of R480 000 to be paid by him to her on 1 April 2021.
• And a block of six flats to be erected by him on her plot of land at a cost of R97 020 000.
Chukka Holeman recorded the following transactions in his journal:
Rent paid Dr 4 000
To Bank 4 000
Being rental for the month of April 2021.
The same journal entry was recorded in his journal each month for the months of May, June, July,
August, September, October, November, December, January and February.
Statement of profit or loss and other comprehensive income Dr 24 000
Amortisation of lease Dr 456 000
To Bank 480 000
Being a lease premium paid on 1 April 2021. It is being
written off over the 20-year lease period.
Flats Dr 12 127 500
TAX PLANNING 697
Terrence Terblanche’s property rates of R31 900 are the property rates applicable to the property
for the 11-month period it was owned by him. They are levied monthly.
No portion of Terrence Terblanche’s borrowed funds was repaid by him during the 2021 year of
assessment.
Terrence Terblanche’s taxable income for the 2021 year of assessment was R112 500 prior to the
deduction of the R66 300 rental loss as detailed above.
On 31 March 2021 Terrence Terblanche retired. He earned from Right Wing Backlash Limited a
cash salary of R27 000 for March 2021. In addition, he enjoyed the following benefits from it
during March 2021:
• The use of a motor car that had cost it R345 000 (R300 000 plus value-added tax at 15% of
R45 000). He has had the use of it from when Right Wing Backlash Limited purchased it. All its
fuel and maintenance costs are borne by Right Wing Backlash Limited. He travelled
3 600 kilometres in it during March 2021. Of these 3 600 kilometres that he travelled in it, only
720 kilometres were for business purposes.
• On his retirement, he took up the option to purchase this ‘company car’ from Right Wing
Backlash Limited for its book value of R69 000. After using the motor car for 10 days, he then
sold it to Eugene Allan, a friend (who had recently had his motor car stolen) for R125 000. This
amount of R125 000, is after setting off a gambling debt of R15 215 that he had owed Eugene
Allan after an unsuccessful horse-racing bet they had jointly taken.
• A free lunch-time meal each day that is served to him and key employees in Right Wing
Backlash Limited’s canteen. During March 2021 he ate and enjoyed 20 lunch-time meals in its
canteen. Each meal costs his employer R69 (R60 plus value-added tax at 15% of R9).
• He is a member of Right Wing Backlash Limited non-contributory medical scheme.
Contributions made to the medical scheme for Jani Terblanche, his wife and his, membership by
it were R18 000 for the 2022 year of assessment. This R18 000 represents contributions to the
medical scheme for the entire year of assessment (being R1 500 for 12 months). It is the policy
of Terblanche to provide medical-scheme membership to former employees for one year after
retirement. During this one-year period it is once again the sole contributor to the fund. He paid
‘qualifying medical expenses’ of R21 000 during the 2022 year of assessment after falling off a
horse. He recovered from his medical scheme R9 000 of the R21 000 he had paid.
Terrence Terblanche was also compensated with a cash lump sum of R54 000 from his employer in
lieu of four months leave due to him on his retirement date.
On 31 March 2021 R750 000 accrued to Terrence Terblanche from his employer from his deferred
compensation agreement with it.
The property rates for Terrence Terblanche’s property for the 2022 year of assessment are R31 500
and insurance premiums are R27 000. Repairs and maintenance will not exceed R4 200.
Administration expenses will not exceed R5 250. The five residential units will continue to be let to
tenants at the same market-related rental as levied in the 2021 year of assessment.
The following two suggestions have been made to Terrence Terblanche relating to the ‘investment’
of the R750 000 that was awarded to him from his deferred compensation scheme with it:
• He uses the R750 000 to partly repay the R1 200 000 he borrowed to finance the erection of the
residential units.
• He invests the entire R750 000 in local dividend-yielding shares. A dividend yield of R67 500 is
likely to result. (In this situation he would not repay any portion of the R1 200 000 loan.)
Assume that if Terrence Terblanche repays the loan account or a portion of it, he does so on 1 April
2021. Also assume that the interest rate of 9% remains fixed throughout the 2022 year of assessment.
TAX PLANNING 701
Terrence Terblanche has no other receipts and accruals and does not enjoy exemptions from normal
tax and deductions in the determination of his taxable income, other than those that arise out of the
above information.
You are required to determine which suggestion Terrence Terblanche should follow. Support your
answer with detailed determinations when appropriate.
Income
Fee income
– First-year students: 800 students for one course at R700 a course 560 000
– Second-year students: 500 students for one course at R800 a course 400 000
– Third-year students: 200 students for four courses at R900 a course 720 000
– Honours students: 120 students for four courses at R1 000 a course 480 000
Commission from textbook suppliers 55 000
Commission from vending machines and jukebox 75 000
Interest on investment of funds on call 66 000
2 356 000
Expenditure
Salaries paid to full-time employees 120 000
Fees paid to part-time tutors 225 000
Rental of administration building 60 000
Hire of classrooms 100 000
Hire of parking bays 30 000
Printing and stationery 71 000
606 000
Budgeted profit (R2 356 000 – R606 000) 1 750 000
Lakeside Heights Primary School will, as lessor, pay all electricity and water costs that arise as a
result of the Local School of Accounting letting part of its premises. These premises are also
furnished meaning that the Local School of Accounting will have no expenses in this regard. Since
students attend ‘at their own risk’ the Local School of Accounting will not incur expenditure on
insurance.
Deekay Pillay has approached you and would like answers the following 24 questions:
Entity
The following three questions relate to the entity to be used by Deekay Pillay for this business:
• Through which entity should the Local School of Accounting trade – a company, close
corporation, trading trust or in Deekay Pillay’s own name? It is his intention that initially he
would be the sole ‘owner’ of this business. Konar & Partners, a local accountant, has ‘clean’ and
unused companies and close corporations for sale at R1 000 each. At this stage these entities
simply have a R1 equity (share capital or member’s interest) represented by R1 cash.
• How should the equity of this entity be structured? Equity shares? Loan capital? And in what
ratios?
• How should the budgeted profit be split between the possible trading entities?
Deekay Pillay’s current taxable income is R240 000 comprising solely the salary he earns from his
employer.
Value-added tax
Deekay Pillay needs answers to the following eight questions relating to value-added tax:
• Will the Local School of Accounting have to register as a vendor?
• Will it have to raise output tax on its fee income?
• Will the commission it earns from the book suppliers be subject to value-added tax?
• Will the commission it earns from the vending-machine owner be subject to value-added tax?
As far as he can establish, the vending-machine owner is not a vendor, but should be one.
• Will the interest earned from the investment of funds on call be subject to value-added tax?
TAX PLANNING 703
• Are there value-added tax consequences relating to the amounts paid to both the full-time and
part-time employees?
• Can input tax be deducted on the rentals paid to the Lakeside Heights Primary School?
• Can input tax be deducted on the amounts paid to the Printing Division of the Pinetown-East
University for the printing and stationery purchased?
Normal tax
Deekay Pillay’s questions relating to normal tax are as follows:
• Are all the budgeted amounts of income subject to normal tax?
• Are all the budgeted expenses deductible in the determination of taxable income?
Employees’ tax
Deekay Pillay needs answers to the following four questions relating to employees’ tax:
• Will the Local School of Accounting be required to be registered as an employer for employees’
tax purposes?
• How will the employees’ tax be determined on the salaries paid to the full-time employees?
• How will the employees’ tax be determined on the fees paid to the part-time tutors?
• As an employer, what are the Local School of Accounting’s responsibilities relating to
employees’ tax.
Provisional tax
Deekay Pillay has the following three questions on provisional tax:
• Will the Local School of Accounting have to register as a provisional taxpayer?
• And if so, when will it have to pay provisional tax payments?
• How will these provisional payments be determined?
Skills development levy
Deekay Pillay’s final four questions relate to the skills development levy. They are as follows:
• Must the Local School of Accounting register as a skills development levypayer?
• Is the Local School of Accounting liable for this levy?
• On what amounts is this levy payable?
• If this levy is payable, is it deductible in the determination of taxable income?
You are required to provide answers to the 24 questions that Deekay Pillay has put to you (as set
out above).
The journal of his newly-formed Fenton Ventures (Pty) Limited recorded this transaction as
follows:
Goodwill Dr 40 000
Office equipment Dr 30 000
Furniture and fittings Dr 20 000
Trading stock Dr 10 000
To Equity share capital 10 000
To Loan from Adam Gray 90 000
Being the ‘lock, stock and barrel’ purchase of Adam Gray’s
business from him at its current market value.
An equity share in Fenton Ventures (Pty) Limited has a par value of R10.
On 31 January 2022 the tax values and other relevant details of Adam Gray’s business assets were
as follows:
Asset Cost Wear-and-tear Tax Approved write-off period
capital value Used Remaining
allowances
Office equipment 60 000 36 000 24 000 3 2
Furniture and fittings 45 000 15 000 30 000 2 4
Adam Gray had purchased his office equipment on 1 February 2019 and his furniture and fittings
on 1 February 2020.
The trading stock sold by Adam Gray to Fenton Ventures (Pty) Limited had cost him (Adam Gray)
R8 000. It has been purchased during the 2022 year of assessment.
On valuation date (1 October 2001) the goodwill of his business had a market value of R7 500. He
had commenced his business four years and seven months before valuation date.
Adam Gray earns local interest on his loan to Fenton Ventures (Pty) Limited at a market-related
rate. His loan will be repaid whenever it has surplus funds available.
Adam Gray is engaged on a full-time basis in Fenton Ventures (Pty) Limited’s business. In other
words, he is one of its full-time employees.
It is likely that Adam Gray’s taxable income will be less in future years of assessment than it was
previously since instead of earning a taxable profit from his business, he will now earn a salary,
local interest on his loan account to Fenton Ventures (Pty) Limited and receive a capital loan
repayment. He could also enjoy a dividend from it. He already earns an exempt local dividend from
another private company. He had inherited the shares from which this dividend accrues from
Walter Harlow , his late grandfather.
You are required to
1. discuss, supported by determinations, the normal tax consequences to both Adam Gray and
Fenton Ventures (Pty) Limited if the ‘lock, stock and barrel’ sale is not dealt with under the
provisions of section 42(1) (asset-for-share transactions) of the Income Tax Act,
2. discuss, supported by determinations the normal tax consequences to both of them if the ‘lock,
stock and barrel’ sale is dealt with under the provisions of section 42. If the position under
Requirement 1 above does not change when the provisions of section 42 are applied, it must be
stated as to why there is no change, and then there is no need to again discuss the normal tax
treatment relating to these particular assets, and
3. state whether the Commissioner could use the provisions of section 80B to prevent him from
saving normal tax.
TAX PLANNING 705
determined. He queried this matter with Teresa Greenpen, the head of its internal audit division,
and its audit committee.
Diet Drinks Limited’s audit committee was, however, adamant that the transaction had been
properly dealt with for financial accounting, value-added tax and normal tax purposes. As a result,
no change was made to its normal tax liability as reflected in its financial statements.
You are required to provide answers to the eight requirements as detailed below. The first four
concern tax-related issues to Diet Drinks Limited, and the remaining four concern auditing issues:
1. Briefly discuss how this lease should have been treated by Diet Drinks Limited for both normal
tax and value-added tax purposes,
2. determine all the amounts that are deductible in the determination of its taxable income for its
2022 year of assessment (ended 28 February 2022),
3. detail, supported by determinations when necessary, the adjustments that must be made to its
accounting profit that arise out of the above journal entries in the determination of its taxable
income for its 2022 year of assessment,
4. on the assumption that the asset had not been leased, but had been purchased under a
suspensive sale agreement, determine all the amounts that are deductible in the determination
of its taxable income for its 2022 year of assessment (ended 28 February 2022),
5. discuss, with reference to the information provided, concerns that its external auditor would
have about its compliance with its corporate governance responsibilities. Confine your answer
to the following areas:
• Organisational status of its internal audit division,
• Membership and competence of its audit committee,
6. in light of the audit committee’s attitude towards its findings related to its financial lease, state
how Teresa Greenpen, the head of its internal audit division should proceed, explain, from the
perspective of the external auditor, how the existence of an audit committee is beneficial for
the external audit function, and
7. assuming that the external auditor becomes aware of the incorrect determination of its normal
tax liability only after its annual financial statements have been released, state how he should
proceed.
purchased this bulldozer second-hand on 30 June 2019 for R850 000 from a third party who is not a
connected person in relation to it. On 30 June 2019 the bulldozer had a market value of R800 000.
Under the sale and leaseback agreement, Kingdom Bank purchased the bulldozer from Ukwaka
Construction (Pty) Limited for R1 200 000 on 31 July 2021. It, in turn, then leased the bulldozer
back from Kingdom Bank at R35 000 a month for four years. After that the bulldozer is to be
returned to Kingdom Bank.
Ukwaka Construction (Pty) Limited currently leases all its other heavy duty equipment under
operating leases.
Initiative 2
Lungisa Rani invited Odwa Xula, his brother in law, an engineer, to subscribe for shares in Ukwaka
Construction (Pty) Limited. He will also take up the position of its chief engineer.
Since Ukwaka Construction (Pty) Limited has been suffering losses for the past four years, Odwa
Xula offered to pay R450 000 for a 15% shareholding in it. He believes that his offered amount of
R450 000 is the market value of a 15% shareholding in it after the subscription. He strongly
believed that his involvement in its management would help to return it to profitability.
Yet Lungisa Rani, Ukwaka Construction (Pty) Limited’s chief financial officer, estimated that a
15% shareholding in it after subscription was worth R575 000. He then put forward the following
proposal to Odwa Xula:
Odwa Xula would subscribe for a 15% shareholding in Ukwaka Construction (Pty) Limited in
exchange for it assuming ownership of his truck, with a market value of R500 000. He had
purchased this truck for R632 500 (R550 000 plus value-added tax of R82 500) and he had used it
for private purposes. It will be used by Ukwaka Construction (Pty) Limited’s construction site
manager as his ‘company car’.
Odwa Xula accepted Lungisa Rani’s proposal on 30 June 2021.
Ukwaka Construction (Pty) Limited’s board of directors passed a resolution to the effect that it had
determined that the subscription was for adequate consideration. Odwa Xula and it agreed in
writing that the provisions of section 42 of the Income Tax Act would not apply to this transaction.
The subscription and issue of shares also took place on 30 June 2021.
Initiative 3
Ukwaka Construction (Pty) Limited tendered for a number of provincial and national government
construction projects. The government practice of paying a substantial portion of the tender price
upfront will further improve its liquidity and position it for growth in the years to come.
On 30 November 2021 the South African National Roads Agency confirmed that Ukwaka
Construction (Pty) Limited had been awarded the contract to construct a bridge over the Mzimvubu
River as part of the new Wild Coast toll-road project.
Under this contract, the South African National Roads Agency paid R12 000 000 (60% of the total
contract price of R20 000 000) upfront to Ukwaka Construction (Pty) Limited on 31 December 2021.
The remaining 40% is payable six months after the commencement of construction. Construction is
scheduled to commence on 1 May 2022. And it is estimated that the bridge will take 18 months to
construct.
Ukwaka Construction (Pty) Limited prepared the following direct cost estimate for the construction
of this bridge over the Mzimvubu River:
Labour (see below) 4 500 000
Materials 8 000 000
Rental of equipment 3 500 000
Total 16 000 000
Of this total labour cost of R4 500 000 (see above), R500 000 was incurred in the preparation of the
contract and on its site survey during its 2022 year of assessment.
708 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Ukwaka Construction (Pty) Limited is a member of the Eastern Cape Builders Association and paid
its annual membership subscription of R140 000 for the year 1 October 2021 to 30 September 2022
on 25 September 2021. The Eastern Cape Builders Association acts as a provincial industry body.
Membership of it is voluntary.
Further information
The following further in formation may be relevant:
• Interpretation Note 47 and Binding General Ruling 7 give a three-year write-off period for a
bulldozer and a four-year write-off period for a truck.
• The construction of buildings and roads is a process similar to a process of manufacture under
Practice Note 42.
• The remaining useful life of the bulldozer at the date of the sale to Kingdom Bank was equal to
the length of the lease period.
• Kingdom Bank also has a 31 December financial year end.
• SARS has accepted that the gross profit method may be used in the determination of future
expenditure on contracts.
You are required to
1. determine the normal tax implications for both Kingdom Bank and Ukwaka Construction (Pty)
Limited resulting from the sale and leaseback transaction entered into on 1 August 2021.
Provide brief reasons for each item in your determination,
2. discuss and determine the normal tax implications under the Income Tax Act for both Odwa
Xula and Ukwaka Construction (Pty) Limited of the subscription for a 15% shareholding by
him in it in exchange for his new truck on the assumption that
• his R450 000 valuation of the shareholding is equal to the arm’s length value, and
• Lungisa Rani’s R575 000 valuation of the shareholding is equal to the arm’s length value,
and
3. discuss the normal tax implications for Ukwaka Construction (Pty) Limited of the up-front
receipt of R12 000 000 from the South African National Roads Agency for the contract to
build a bridge over the Mzimvubu River and the R140 000 paid to the Eastern Cape Builders
Association on 25 September 2021.
(SAICA adapted.)
year of assessment one of its largest clients, Stutterheimers Limited, a well-known South African
clothing retailer, went into business rescue.
At that time, Stutterheimers Limited owed Uhuru (Pty) Limited R2 200 000 for social media
management services. It was unable to repay this amount to Uhuru (Pty) Limited, with a resultant
negative financial impact on Uhuru (Pty) Limited that contributed to a significant working capital
shortage. To alleviate these pressures, Nomzamo Dhlomo has since 1 March 2021 provided a loan
to Uhuru (Pty) Limited, with interest payable at the prime rate of interest.
Nomzamo Dhlomo financed her loan to Uhuru (Pty) Limited by increasing her mortgage bond over
her home with Zuma Bank Limited. The amount was paid directly into Uhuru (Pty) Limited’s bank
account by Zuma Bank Limited. Her mortgage bond incurs interest at prime less 1,5% a year.
Aisha Alexander
In December 2021 Uhuru (Pty) Limited was contracted by Bushbashers (Pty) Limited, a South
African lifestyle supplier to market and launch its new range of sandals called ‘Copacabanas’.
Nomzamo Dhlomo took the lead in the design of this marketing brief. On her advice, Uhuru (Pty)
Limited accordingly entered into an agreement with Aisha Alexander, a well-known celebrity and a
South African resident, to showcase the ‘Copacabanas’ on various social media platforms. To
enhance the marketability of the product, it sent her on a seven-day trip to Brazil, to take
photographs of herself wearing the ‘Copacabanas’. She had to post her photographs on social
media platforms while she was in Brazil. Her trip cost it
• R21 700 for her flight, and
• R45 000 for her all-inclusive package at a five-star hotel.
Under the agreement between Uhuru (Pty) Limited and Aisha Alexander, she would be entitled to
R5 000 per photograph of her wearing the ‘Copacabanas’ and a further R13 for each ‘like’ received
for a photograph. The agreement required that the photographs be taken spontaneously, while
having fun and enjoying the sights of Brazil. This was the first time that she had been to Rio
de Janeiro. Her time spent there was solely for the purposes of this agreement.
The ‘Copacabanas’ were launched in Durban in February 2022 following the success of Aisha
Alexander’s Brazilian trip. Once again, Uhuru (Pty) Limited entered into an agreement with Aisha
Alexander for her services, on the same terms as for the Brazilian trip. She spent four days in
Durban as part of the marketing campaign. Her flight to Durban cost Uhuru (Pty) Limited R4 025
(value-added tax of R525 included). In addition to the cost of her flight, it made the following
payments on her behalf:
• R1 196 on meals (R506 of this expense relates to food and drinks for Uhuru (Pty) Limited’s
clients, and
• R2 300 on taxi fares.
During Aisha Alexander’s Durban trip she took seven photographs that attracted 13 760 ‘likes’.
Since her Durban trip was not fully funded, Uhuru (Pty) Limited also paid her an allowance of
R900 a day towards her incidentals.
The two agreements that Uhuru (Pty) Limited entered into with Aisha Alexander were temporary
employment contracts for her visits to Brazil and Durban, and the payment from it to her for both
was based on amounts earned during these two visits.
Urban sub-economic housing
In January 2022 Uhuru (Pty) Limited purchased 15 flats in a new block of flats in Cape Town.
Since it was conducting marketing and social media services for the property developer, each flat
was sold by this property developer to it for R400 000, instead of the usual open market value of
R445 000. The 15 flats were purchased by it with the intention of selling them to its marketing
assistants and who were based in Cape Town.
710 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Uhuru (Pty) Limited recognised the need for affordable housing in inner cities throughout South
Africa, and in particular, sought to alleviate the challenges faced by its employees travelling long
distance from outlying areas to city centres. The 15 flats were then sold by it to its marketing
assistants for R50 000 each on 31 January 2022.
Uhuru (Pty) Limited’s marketing assistants earn remuneration of between R8 000 and R20 000 a
month. For purposes of the Seventh Schedule, these amounts can be used as its marketing
assistants’ ‘remuneration proxies’.
Siphokazi Dhlomo
Siphokazi Dhlomo, a 61-year-old South African resident is employed by Uhuru (Pty) Limited as its
chief strategy officer. She is Nomzamo Dhlomo’s mother. She joined Uhuru (Pty) Limited’s
employment on 1 January 2022. She was previously employed by Stutterheimers Limited until her
retirement from it on 31 December 2021. A salary of R57 578 a month is awarded to her by Uhuru
(Pty) Limited. This is the same salary as the one that she earned while in the employment of
Stutterheimers Limited. She is a member of, and contributed to, the Uhuru (Pty) Limited Provident
Fund.
Siphokazi Dhlomo had been a member of a medical scheme up to the date of her retirement from
Stutterheimers Limited. It was the sole contributor to this medical scheme for both Sanele Dhlomo,
her husband and herself. After her retirement, she continued to make the full contribution to this
medical scheme on behalf of Sanele Dhlomo and herself.
Siphokazi Dhlomo had paid ‘qualifying medical expenses’ of R35 103 that were not recovered
from the medical scheme.
On 31 December 2021, the date of Siphokazi Dhlomo’s retirement from Stutterheimers Limited, a
retirement fund lump-sum benefit of R2 242 528 accrued to her from the Stutterheimers Limited
Provident Fund. At that date R203 866 of her contributions to this provident fund had not been
deducted in the determination of her taxable income. Under a tax directive issued by SARS,
R684 418 was withheld from her retirement fund lump-sum benefit as employees’ tax.
A severance benefit of R600 000 had accrued to Siphokazi Dhlomo from a previous employer in
the 2019 year of assessment. Employees’ tax of R51 300 had been withheld from it by her previous
employer.
On 7 July 2022 Siphokazi Dhlomo submitted her completed ITR 2 tax return for the 2022 year of
assessment. On the same day she was issued with an ITA 34 Notice of Assessment. It ‘shocked’ her
since it reflected a net amount payable by her of R701 050,32. The following is an extract from it:
Deductions allowed
Code Description Determinations Amount
and adjustments assessed
Retirement fund contributions (13 183)
4004 Current provident fund
contribution deduction (limited to
the amount contributed) equal to
the least of R350 000 or 27,5% of
the higher of remuneration or
taxable income or taxable income 13 183 (13 183)
Taxable income
Code Description Determinations Amount
and adjustments assessed
Taxable income – subject to normal tax 720 951
Taxable income – subject to retirement fund lump-sum
withdrawal benefit table 2 038 662
Tax determination
Code Description Determinations Amount
and adjustments assessed
Normal tax 205 201,89
Rebates – Primary 15 714 (15 714,00)
Retirement fund lump-sum
withdrawal benefit tax liability 693 418,32
Total assessed taxes 882 906,21
Less taxes already paid
Employees’ tax (181 855,89)
4102 Pay As You Earn 181 855,89
Net amount payable under this assessment 710 050,32
Masego Marks
Masego Marks is a 28-year-old South African resident. He has been employed at Uhuru (Pty)
Limited as a key accounts manager since 2018.
Under Uhuru (Pty) Limited’s employment contracts with its key account managers, they all enjoy a
cash salary of R40 000 a month and an annual percentage commission based on the amount it
earned from their client portfolios. A commission of R127 000 was authorised for Masego Marks
on 31 December 2021 and paid to him in January 2022.
Uhuru (Pty) Limited’s key account managers also enjoy the use of an ‘employer-owned’
smartphone that may also be used by them for private purposes. Each key account manager is
responsible for purchasing prepaid vouchers for his phone. When a new model is released every
year, it replaces its employees’ smartphones with the new model. From 1 November 2020 until
31 October 2021 Masego Marks had the right of use of an ‘employer-owned’ model 6 smartphone.
It had an open market value of R13 566. His usage was considered to be for a major portion of its
useful life. It was replaced by a new smartphone, a model 7 smartphone. It had a cost price of
R9 545 on 1 November 2021. He estimated that about 20% of his phone calls on both the model 6
and 7 smartphones were for business purposes.
712 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
In June 2021 Uhuru (Pty) Limited entered into a monthly lease agreement with Siva (Pty) Limited.
It provides vehicle fleet management services. Uhuru (Pty) Limited leased 20 Mini 3-door hatch
motor cars from it at R4 500 a month for each motor car. These lease agreements must be renewed
by the 25th of the month or the motor cars have to be returned to it. These lease agreements are not
operating leases as defined in section 23A(1) of the Income Tax Act. They are held by Uhuru (Pty)
Limited and their ownership Uhuru (Pty) Limited will be acquired by it on the termination of the
lease. A year later, on 1 June 2022, each motor car had a retail market value of R290 500.
As a key account manager Masego Marks was allowed the use of one of these motor cars from
1 June 2021. He bore the full cost of all fuel and kept accurate records of expenditure, totalling
R13 500. His logbook confirmed that he travelled a total of 20 000 kilometres during the 2022 year
of assessment in it, of which 4 800 kilometres were for his private purposes.
Since Uhuru (Pty) Limited does not offer post-retirement benefits to its key account managers, it
encourages them to join a retirement annuity fund of their own choice. It then contributes the same
amount as the contributions made by its employees to their retirement annuity funds.
Masego Marks is a member of a retirement annuity fund and made contributions of R45 000 to it
during the 2022 year of assessment. Under this arrangement, Uhuru (Pty) Limited also made
contributions of R45 000 to it during the 2022 year of assessment.
You are required to
1. advise Nomzamo Dhlomo on whether the interest incurred by her on her mortgage bond over
her home would be deductible in the determination of her 2022 taxable income,
2. discuss the possible normal tax consequences, if any, for the marketing assistants on the flats
sold to them by Uhuru (Pty) Limited during the 2022 year of assessment,
3. discuss the normal tax implications for Aisha Alexander under her temporary employment
agreement with Uhuru (Pty) Limited for the marketing of the Copacabanas in Brazil for the
2022 year of assessment,
4. determine the amounts that qualify as input tax deductions in Uhuru (Pty) Limited’s value-
added tax return relating to Aisha Alexander’s trip to Durban in February 2022. Provide
reasons for any amounts not included in your determinations,
5. identify and correct the errors in the normal tax assessment that was issued to Siphokazi
Dhlomo for the 2022 year of assessment, and
6. determine the amounts to be included in Masego Marks’s 2022 gross income.
(SAICA adapted.)
AAA Nama (Pty) Limited had constructed the factory building for R13 300 000 (excluding value-
added tax). It was completed and brought into use on 1 February 2016. If a similar factory building
had been purchased by it on that date, it would have cost R13 800 000 (R12 000 000 plus
R1 800 000 value-added tax).
Second-hand production machinery, that had been purchased by AAA Nama (Pty) Limited on
1 February 2021 for R600 000 from a non-vendor under an arm’s length transaction, was also
completely destroyed in the fire.
AAA Nama (Pty) Limited’s management considered with regard to its financial year ended
31 December 2021, if there were any indicators of impairment on the carrying amount of its
factory, and if so, whether it should recognise any associated impairment. Its management
concluded that since its insurance award sufficiently covered the loss of its factory, no impairment
was required.
Construction of a new factory
The compensation of R14 950 000 received from AAA Nama (Pty) Limited’s insurer for its
destroyed factory (see above) was used to pay a third party (not a connected person in relation to
AAA Nama (Pty) Limited) to construct a new factory. It was completed at a cost of R12 500 000
(excluding value-added tax) and brought into use on 1 November 2020.
During its construction AAA Nama (Pty) Limited attempted to speed up the building process to
ensure completion by 1 November 2020, and as a result, was fined R100 000 (which is not included
in the R12 500 000) for contravening certain building construction regulations. It settled this fine
on 1 October 2020.
AAA Nama (Pty) Limited purchased flats in a newly-constructed block of flats to be used as
accommodation for its factory workers. It purchased 20 flats of the 100 available flats for R851 000
(including value-added tax) each on 1 June 2021. It paid for the flats in cash on that date. As part of
management efforts to speed up construction of the factory, it allowed the construction workers to
occupy all 20 flats rent-free from this date (1 June 2021) to 31 October 2021. At this date the
construction workers then moved out of all 20 flats.
From 1 November 2020 the flats were leased by AAA Nama (Pty) Limited at R3 000 a month each
to 20 of its factory workers. The rental was payable monthly in advance, on one-year lease
agreements. All monthly rentals for its 2020 financial year were received on their due dates.
Lease of production machinery
The production machinery destroyed in the fire was replaced by leased machinery. Under this lease
agreement, AAA Nama (Pty) Limited pays LeaseLet (Pty) Limited R17 250 (R15 000 plus R2 250
value-added tax) a month for a period of five years, commencing on 1 November 2020. This lease
agreement is an instalment credit agreement and the arm’s length cash cost of the machinery on this
date was R575 000 (R500 000 plus R75 000 value-added tax).
Purchase of shares in Landic (Pty) Limited
AAA Nama (Pty) Limited needed to use an existing storage facility that is situated on a site next to
its new factory. Landic (Pty) Limited owns and lets out the storage facility at a rental. It refused to
sell its premises. But, instead, its shareholders sold all their shares in it to AAA Nama (Pty)
Limited for R4 600 000. AAA Nama (Pty) Limited purchased them on 1 November 2021 and
immediately used the storage facility. The purchase price was determined on the basis that 60%
related to the storage facility and 40% to the land.
AAA Nama (Pty) Limited borrowed R4 600 000 from Squared Bank Limited on 1 November 2021
to fund its purchase of the shares in Landic (Pty) Limited (see above). No transaction costs were
incurred. Interest incurred on the loan for the two-month period 1 November 2021 to 31 December
2021 was R92 000 and was settled in cash by it on 31 December 2021.
On 1 November 2021 AAA Nama (Pty) Limited signed a 15-year lease with Landic (Pty) Limited
for use of the storage facility. Under this lease agreement, AAA Nama (Pty) Limited incurs
714 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
R20 700 a month, in arrears, to Landic (Pty) Limited. This is a market-related rental. No transaction
costs were incurred. Landic (Pty) Limited is not a vendor.
Expansion into the vegetarian-meat-substitute market
Research and development of a new product
Taylor Selebi, the founder, majority shareholder and managing director of AAA Nama (Pty)
Limited, was intrigued by an article published in a scientific journal highlighting the success of
meat substitutes in America. These were quoted as being ‘almost indistinguishable from real meat’.
He started researching the scientific requirements and processes required to produce plant-based
meat substitutes.
On 1 January 2019, after performing extensive research and having developed a workable design,
he leased a laboratory in Stellenbosch, to undertake research and testing of a plant-based meat
substitute, for a period of five years. The initial rental was R14 950 a month. It excludes water and
electricity. This rental increases by 5% a year on the anniversary of the lease. In the event of an
early termination, a cancellation fee of R179 400 is payable.
AAA Nama (Pty) Limited employed four new employees on 1 January 2019 to work on this new
project. It then registered a trade mark and copyright for the names vMeat© and vBeef© on
31 October 2021. After discussing possible marketing strategies, it used vMeat© as its go-to market
brand.
Production and distribution during the trial period
AAA Nama (Pty) Limited decided on a three-year production trial for the vMeat© product, with a
commencement date of 1 January 2023.
AAA Nama (Pty) Limited’s new factory owned and used by it in the processing of its traditional
meat products has a large unused space that could be used for the production of the vMeat©
product. This space is otherwise expected to remain unused for the foreseeable future. It does not
intend sub-letting the space. It would be available for the entire trial period. A market-related rental
for a similar space is R24 150 a month.
A part of the building wall is unstable due to damage to it caused by a tractor. This wall needs to be
reinforced immediately and also rebuilt before this part of the building could be used. AAA Nama
(Pty) Limited obtained two quotes to reinforce and rebuild the wall.
• The first was from a builder with extensive building knowledge and expertise for R506 000.
• The second was a cheaper quote from a newly-qualified builder with limited experience for
R402 500.
AAA Nama (Pty) Limited felt it would be preferable to use the more-experienced builder to ensure
that the wall was completed by 31 December 2022.
Additional information
The following information may be relevant:
• The processing of meats as well as the production of meat substitutes is a process of
manufacture.
• AAA Nama (Pty) Limited has not made an application to the Department of Science and
Technology under section 11D of the Income Tax Act.
• It accounts for property, plant and equipment and investment property using the cost model.
• Write-off periods under Binding General Ruling 7 are as follows:
• Production machinery: six years.
• Delivery vehicles: four years.
TAX PLANNING 715
• Depreciation under the accounting policies of AAA Nama (Pty) Limited are as follows:
• All buildings: 30 years.
• Production machinery: four years.
• Delivery vehicles: four years.
• AAA Nama (Pty) Limited will make use of all possible tax benefits and will therefore elect any
option available to it that will minimise or defer its normal tax liability.
You are required to
1. discuss the tax consequences for AAA Nama (Pty) Limited of its purchase and financing of
shares in Landic (Pty) Limited for the year of assessment ended 31 December 2021,
2. determine its taxable income for its year of assessment ended 31 December 2021 based on all
the available information provided above, but ignore all items relating to its researching the
scientific requirements and processes required to produce plant-based meat substitutes, and
3. discuss whether the R506 000 incurred by it to rebuild the wall would be deductible in the
determination of its taxable income for its year of assessment ended 31 December 2022.
(SAICA adapted.)
TABLES
TABLE Page
1 Rates of Normal Tax for Natural Persons, Insolvent and Deceased Estates
and Special Trusts for the 2022 year of assessment ........................................................... 719
2 Rates of Tax on Retirement Fund Lump-Sum ‘Retirement’ Benefits ................................ 719
3 Rates of Tax on Retirement Fund Lump-Sum Withdrawal Benefits ................................. 720
4 Rates of Tax on Severance Benefits .................................................................................. 721
5 Rebates for the 2022, 2021, 2020, 2019, 2018 and 2017 Years of Assessment ................. 722
6 Rates of Normal Tax for Natural Persons, Insolvent and Deceased Estates
and Special Trusts for the 2021 year of assessment ........................................................... 722
7 Trusts ................................................................................................................................. 722
8 Companies ........................................................................................................................ 723
9 Rate of Donations Tax ....................................................................................................... 724
10 Rate of Estate Duty ............................................................................................................ 725
11 The Expectation of Life and the Present Value of R1 per Annum for Life
Capitalised at 12% over the Expectation of Life of Males and Females of
Various Ages .................................................................................................................... 726
12 The Present Value of £1 per Annum Capitalised at 6% over Fixed Periods ...................... 728
13 The Present Value of R1 per Annum Capitalised at 12% over Fixed Periods ................... 729
14 Scale of Values – Right of Use of Motor Vehicles ............................................................ 729
15 Scale of Values – Travel Allowance .................................................................................. 730
16 The Regulation Standard Values of Livestock ................................................................... 731
17 Extracts from Transfer Duty Act and Securities Transfer Tax Act .................................... 732
18 Subsistence Amounts ......................................................................................................... 733
19 Prescribed Rates of Interest ............................................................................................... 738
20 Official Rate of Interest ..................................................................................................... 739
717
TABLES 719
Table 1
Rates of Normal Tax for Natural Persons, Insolvent and Deceased Estates and Special Trusts
Year of assessment ending on 28 February 2022
Taxable income
But does Rates of schedule tax
Exceeds not exceed
R R R R
– 216 200 18% of each R1 –
216 200 337 800 38 916 + 26% of the excess over 216 200
337 800 467 500 70 532 + 31% of the excess over 337 800
467 500 613 600 110 739 + 36% of the excess over 467 500
613 600 782 200 163 335 + 39% of the excess over 613 600
782 200 1 656 600 229 089 + 41% of the excess over 782 200
1 656 600 – 587 593 + 45% of the excess over 1 656 600
Table 2
would be leviable on the person under the above table for a taxable income comprising the
aggregate of
x retirement fund lump-sum withdrawal benefits received by or accrued to him on or after
1 March 2009 and prior to the accrual of the above retirement fund lump sum benefit,
x retirement fund lump-sum ‘retirement’ benefits received by or accrued to him on or after
1 October 2007 and prior to the accrual of the above retirement fund lump sum benefit, and
x severance benefits received by or accrued to him on or after 1 March 2011 and prior to the
accrual of the above retirement fund lump-sum benefit.
Table 3
Table 4
Rate of Tax on Severance Benefits
For a severance benefit that accrues to a person in a year of assessment commencing on or after
1 March 2021, the rate of tax to be levied on him on his taxable income comprising the aggregate
of
x that severance benefit,
x severance benefits received by or accrued to him on or after 1 March 2011 and prior to the
accrual of the above severance benefit,
x retirement fund lump-sum withdrawal benefits received by or accrued to him on or after
1 March 2009 and prior to the accrual of the above severance benefit, and
x retirement fund lump-sum ‘retirement’ benefits received by or accrued to him on or after
1 October 2007 and prior to the accrual of the above severance benefit,
is set out in the table below:
The amount of tax levied under the above table must be reduced by an amount equal to the tax that
would be leviable on the person under that item for a taxable income comprising the aggregate of
x severance benefits received by or accrued to him on or after 1 March 2011 and prior to the
accrual of the above severance benefit,
x retirement fund lump-sum ‘retirement’ withdrawal benefits received by or accrued to him on or
after 1 March 2009 and prior to the accrual of the above severance benefit, and
x retirement fund lump-sum benefits received by or accrued to him on or after 1 October 2007 and
prior to the accrual of the above severance benefit.
722 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Table 5
Rebates
Years of assessment ending on the last day of February 2022, 2021, 2020, 2019, 2018 and 2017
Primary
Natural persons 15 714 14 958 14 220 14 067 13 635 13 500
Table 6
Rates of Normal Tax for Natural Persons, Insolvent and Deceased Estates and Special Trusts
Year of assessment ending on 28 February 2021
Taxable income
But does Rates of schedule tax
Exceeds not exceed
R R R R
– 205 900 18% of each R1 –
205 900 321 600 37 062 + 26% of the excess over 205 900
321 600 445 100 67 144 + 31% of the excess over 321 600
445 100 584 200 105 429 + 36% of the excess over 445 100
584 200 744 800 155 505 + 39% of the excess over 584 200
744 800 1 577 300 218 139 + 41% of the excess over 744 800
1 577 300 – 559 464 + 45% of the excess over 1 577 300
Table 7
Trusts
For the 2022 year of assessment the rate of tax applicable to a trust, other than a special trust and a
testamentary trust created for the benefit of minor children (see Table 1), is 45 cents on each rand
of taxable income.
For the 2021, 2020, 2019 and 2018 years of assessment it was also 45 cents on each rand. But for
the 2017 year of assessment it was 41 cents on each rand of taxable income.
TABLES 723
Table 8
Companies
Companies other than those detailed below
Table 8
(continued)
Long-term insurance companies
Table 9
Rate of Donations Tax
On donations made on or after 1 March 2018
Donations tax is levied at a flat rate of 20% on the value of the property donated as does not exceed
R30 000 000 and 25% on property that exceeds R30 000 000 during the immediate preceding
12-month period.
• The first R100 000 of property donated in each year by a natural person is exempt from
donations tax.
• For a taxpayer who is not a natural person, exempt donations are limited to casual gifts not
exceeding R10 000 a year in total.
• Disposition between spouses, South African group companies and donations to certain public
benefit organisations are exempt from donations tax.
In the 2018 year of assessment a flat rate of 20% was levied on the value of all property donated.
TABLES 725
Table 10
Rate of Estate Duty
Applying to any person who died or dies on or after 1 March 2018
Estate duty is levied at a rate of 20% on property as does not exceed R30 000 000 and 25% on
property that exceeds R30 000 000
• of residents, and
• South African property of non-residents.
A basic deduction of R3 500 000 is deductible in the determination of an estate’s liability for estate
duty.
Also deductible are
• liabilities,
• bequests to public benefit organisations, and
• property accruing to a surviving spouse.
In the 2018 year of assessment a flat rate of 20% was levied on all property.
Provided that where duty becomes payable upon the value of any movable or immovable property
or on a value determined by reference to the value of any movable or immovable property, and duty
has, upon the death of any person (hereinafter referred to as the first-dying person), who died
within 10 years prior to the death of the deceased, become payable upon the value of that moveable
or immovable property or upon a value determined by reference to the value of that moveable or
immovable property (or any movable or immovable property for which the Commissioner is
satisfied that that movable or immovable property has been substituted), the duty attributable to the
value of that movable or immovable property or, as the case may be, the value determined by
reference to the value of that movable or immovable property, but not exceeding (in either case) an
amount equal to the value on which duty has become payable on the death of the first-dying person,
shall be reduced by a percentage according to the following scale–
x if the deceased dies within two years of the death of the first-dying person 100%
x if the deceased dies more than two years, but not more than four years after the death
of the first-dying person 80%
x if the deceased dies more than four years, but not more than six years after the death
of the first-dying person 60%
x if the deceased dies more than six years, but not more than eight years after the death
of the first-dying person 40%
x if the deceased dies more than eight years, but not more than 10 years after the death
of the first-dying person 20%
subject to a maximum reduction equal to so much of the duty previously payable upon the death of
the first-dying person as is attributable to the value of that movable or immovable property or, as
the case may be, to an amount equal to the value determined by reference to the value of that
movable or immovable property, and as is proved to the satisfaction of the Commissioner to have
been borne by the deceased.
726 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Table 11
The Expectation of Life and the Present Value of R1 per Annum for Life Capitalised at 12%
over the Expectation of Life of Males and Females of Various Ages
Table 11
(continued)
Table 11
(continued)
Table 12
Present Value of £1 per Annum Capitalised at 6% over Fixed Periods
Table 13
Present Value of R1 per Annum Capitalised at 12% over Fixed Periods
Table 14
days in such part of a month bears to the number of days in the month in which such part
falls.’
Table 15
‘Simplified method
‘Where–
(a) the provisions of section 8(1)(b)(iii) are applicable in respect of the recipient of an
allowance or advance; and
(b) no other compensation in the form of a further allowance or reimbursement (other than
for parking or toll fees) is payable by the employer to that recipient,
that rate per kilometre is, at the option of the recipient, equal to 382 cents per kilometre [it was
398 cents per kilometre for the 2021 year of assessment].
‘Effective date
‘The rate per kilometre determined in terms of this Schedule applies in respect of years of
assessment commencing on or after 1 March 2021.’
TABLES 731
Table 16
Table 17
Extracts from Transfer Duty Act and Securities Transfer Tax Act
Transfer Duty Act
Section 2(1), which is subject to section 2(5), provides that subject to the provisions of section 9, there
is levied for the benefit of National Revenue Fund a transfer duty (referred to as the duty) on the value
of a property (which value is determined in accordance with the provisions of section 5, section 6,
section 7 and section 8) acquired by a person on or after the date of commencement of this Act by
way of a transaction or in another manner, or on the amount by which its value is enhanced by the
renunciation, on or after the said date, of an interest in or restriction upon the use or disposal of it, at
the rate of
x 0% of so much of the said value or the said amount as does not exceed R1 000 000,
x 3% of so much of the said value or the said amount as exceeds R1 000 000 but does not exceed
R1 375 000,
x 6% of so much of the said value or the said amount exceeds R1 375 000 but does not exceed
R1 925 000,
x 8% of so much of the said value or the said amount as exceeds R1 925 000 but does not exceed
R2 475 000,
x 11% of so much of the said value or the said amount as exceeds R2 475 000 but does not exceed
R11 000 000, and
x 13% of so much of the said value or the said amount as exceeds R11 000 000.
A table that has been prepared from section 2(1) of the Transfer Duty Act follows:
Value of property Rate
0 – R1 000 000 0%
R1 000 000 – R1 375 000 3% of the value above R1 000 000
R1 375 000 – R1 925 000 R11 250 + 6% of the value above R1 375 000
R1 925 000 – R2 475 000 R44 250 + 8% of the value exceeding R1 925 000
R2 475 000 – R11 000 000 R88 250 + 11% of the value exceeding R2 475 000
R11 000 000 and above R1 020 000 + 13% of the value exceeding R11 000 000
Table 18
Subsistence Amounts
The Commissioner has issued a notice in the Gazette fixing the following amounts of deemed
expenditure for the year of assessment commencing on 1 March 2021 (the 2022 year of assessment):
7$%/(6
• :KHQWKHDFFRPPRGDWLRQWRZKLFKWKHDOORZDQFHRUDGYDQFHUHODWHVLVLQ6RXWK$IULFDDQGWKH
DOORZDQFHRUDGYDQFHLVSDLGRUJUDQWHGWRGHIUD\LQFLGHQWDOFRVWVRQO\LWLV5DGD\,WZDV
5DGD\IRUWKHDQG\HDUVRIDVVHVVPHQW
• :KHQLWLVJUDQWHGWRGHIUD\WKHFRVWRIPHDOVDQGLQFLGHQWDOFRVWVLWLV5DGD\,WZDVDOVR
5LQWKH\HDURIDVVHVVPHQW%XWLWZDV5DGD\IRUWKH\HDURIDVVHVVPHQW
• $QGZKHQWKHDFFRPPRGDWLRQWRZKLFKWKHDOORZDQFHRUDGYDQFHUHODWHVLVRXWVLGH6RXWK$IULFD
DQGWKHDOORZDQFHRUDGYDQFHLVSDLGRUJUDQWHGWRGHIUD\WKHFRVWRIPHDOVDQGLQFLGHQWDOFRVWV
LWLVDQDPRXQWGHWHUPLQHGLQDFFRUGDQFHZLWKWKHWDEOHDVVHWRXWEHORZIRUWKHFRXQWU\LQZKLFK
WKHDFFRPPRGDWLRQLVORFDWHG,IWKHFRXQWU\LVQRWOLVWHGEHORZLWLVDGD\,WZDVDOVR
DGD\LQWKHDQG\HDUVRIDVVHVVPHQW
7DEOH'DLO\$PRXQWIRU7UDYHORXWVLGH6RXWK$IULFD
Amount
Country Currency Year of assessment
2022 2021 2020
$OEDQLD (XUR¼
$OJHULD (XUR¼
$QJROD 86
$QWLJXDDQG%DUEXGD 86
$UJHQWLQD 86
$UPHQLD 86
$XVWULD (XUR¼
$XVWUDOLD $XVWUDOLDQ
$]DUEDLMDQL 86
%DKDPDV 86
%DKUDLQ %'LQDUV
%DQJODGHVK 86
%DUEDGRV 86
%HODUXV (XUR¼
%HOJLXP (XUR¼
%HOL]H 86
%HQLQ (XUR¼
%ROLYLD 86
%RWVZDQD 3XOD
%UD]LO 5HDOV
%UXQHL 86
%XOJDULD (XUR¼
Amount
Country Currency Year of assessment
2022 2021 2020
%XUNLQD)DVR &)$)UDQFV
%XUXQGL (XUR¼
&DPERGLD 86
&DPHURRQ (XUR¼
734 GRADED QUESTIONS ON INCOME TAX IN SOUTH AFRICA 2022
Mongolia US $ 69 69 69
Montenegro Euro € 94 94 94
Morocco Dirhams 970 970 970
Mozambique US $ 128 128 128
Myanmar (Burma) US $ 123 123 123
Namibia RSA Rand 950 950 950
Nauru Australian $ 278 278 278
Nepal US $ 64 64 64
Netherlands Euro € 117 117 117
New Zealand New Zealand $ 191 191 191
Nicaragua US $ 90 90 90
Niger Euro € 75 75 75
Nigeria US $ 242 242 242
Niue New Zealand $ 252 252 252
Norway NOK 1 760 1 760 1 760
Oman Rials Omani 77 77 77
Pakistan Pakistani Rupees 6 235 6 235 6 235
Palau US $ 252 252 252
Palestine US $ 147 147 147
Panama US $ 105 105 105
Papa New Guinea Kina 285 285 285
Paraguay US $ 76 76 76
Peru US $ 139 139 139
Philippines US $ 122 122 122
Poland Euro € 88 88 88
Portugal Euro € 87 87 87
Qatar Qatar Riyals 715 715 715
Republic of Congo Euro € 149 149 149
Reunion Euro € 164 164 164
Romania Euro € 85 85 85
Russia Euro € 330 330 330
Rwanda US $ 101 101 101
Samoa Tala 193 193 193
Sao Tome and Pinciple Euro € 160 160 160
Amount
Country Currency Year of assessment
2022 2021 2020
Saudi Arabia Saudi Riyal 517 517 517
Senegal Euro € 113 113 113
Serbia Euro € 83 83 83
Seychelles Euro € 275 275 275
Sierra Leone US $ 90 90 90
Singapore Singapore $ 232 232 232
Slovakia Euro € 102 102 102
TABLES 737
Table 19
Prescribed Rates of Interest
Set out below are the ‘prescribed rates’ that have applied in the 2020, 2021 and, thus far, the 2022
years of assessment:
The rate applicable to ‘section 89quat(4)’ interest determinations is as follows:
x From 1 March 2019 to 31 October 2019 – 6,25%.
x From 1 November 2019 to 30 April 2020 – 6%.
x From 1 May 2020 to 30 June 2020 – 5,75%.
x From 1 July 2020 to 31 August 2020 – 3,75%.
x From 1 September 2020 to 31 October 2020 – 3,25%.
x From 1 November 2020 – 3%.
The rate applicable in situations other than ‘section 89quat(4)’ interest determinations is as
follows:
x From 1 March 2019 to 31 October 2019 – 10,25%.
x From 1 November 2019 to 30 April 2020 – 10%.
x From 1 May 2020 to 30 June 2020 – 9,75%.
x From 1 July 2020 to 31 August 2020 – 7,75%.
x From 1 September 2020 to 31 October 2020 – 7,25%.
x From 1 November 2020 – 7%.
TABLES 739
Table 20
Official Rate of Interest
This is the rate of interest to be used in the determination of the amount of a fringe benefit granted
to an employee. It is also used to determine the amount of a dividend for dividends tax purposes
under the provision of section 64E(4)(b) and (d).
Set out below are the ‘official rates of interest’ that have applied during the 2020, 2021 and, thus
far, the 2022 years of assessment:
x From 1 December 2018 to 31 July 2019 – 7,75%.
x From 1 August 2019 to 31 January 2020 – 7,5%.
x From 1 February 2020 to 31 March 2020 – 7,25%.
x From 1 April 2020 to 30 April 2020 – 6,25%.
x From 1 May 2020 to 31 May 2020 – 5,25%.
x From 1 June 2019 to 31 July 2020 – 4,75%.
x From 1 August 2020 – 4,5%.