Graded Questions On Income Tax in SA 2022 - Nodrm

Graded Questions on
Income Tax in South Africa

2022
Forty-Third Edition
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
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TABLE OF CONTENTS
CHAPTER Page
1 INTERPRETATION AND DISPUTES ............................................................................................. 1

2 GROSS INCOME ....................................................................................................................... 9
3 RESIDENCE AND SOURCE ...................................................................................................... 27
4 SPECIAL INCLUSIONS ............................................................................................................ 45
5 EXEMPT INCOME ................................................................................................................... 73
6 GENERAL DEDUCTION FORMULA .......................................................................................... 91
7 PARTICULAR DEDUCTIONS .................................................................................................. 105
8 INCENTIVE ALLOWANCES ................................................................................................... 141
9 DIVIDENDS AND RELATED ISSUES ....................................................................................... 167
10 NATURAL PERSONS............................................................................................................. 211
11 REBATES............................................................................................................................. 231
12 SOLE TRADERS AND PARTNERSHIPS .................................................................................... 241
13 RATING APPLICATION AND SEVERANCE BENEFITS .............................................................. 265
14 COMPANIES......................................................................................................................... 277
15 FARMERS ............................................................................................................................ 315
16 FRINGE BENEFITS ............................................................................................................... 339
17 NON-RESIDENTS ................................................................................................................. 365
18 CAPITAL GAINS TAX .......................................................................................................... 383
19 SECTIONS 24, 24C, 24D, 24I, 24J AND 25D ........................................................................ 423
20 TRADING STOCK ................................................................................................................. 449
21 OTHER CLASSES OF TAXPAYERS ......................................................................................... 471
22 LUMP-SUM BENEFITS ......................................................................................................... 591
23 TAX AVOIDANCE ................................................................................................................ 515
24 ESTATES ............................................................................................................................. 539
25 TRUSTS ............................................................................................................................... 555
26 EMPLOYEES’ TAX AND PROVISIONAL TAX .......................................................................... 585
27 DONATIONS TAX................................................................................................................. 607
28 ESTATE DUTY ..................................................................................................................... 621
29 VALUE-ADDED TAX ........................................................................................................... 647
30 TAX PLANNING ................................................................................................................... 685
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
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
1.1 (30 minutes)

This question tests the types of taxes that a country could impose to collect its revenues.
Taxes may be broken down into two general categories, being direct taxes and indirect taxes.
You are required to distinguish between direct taxes and indirect taxes.
1.2 (10 minutes)

This question tests the construction of tax Acts as set out in Meyerowitz on Income Tax in § 3.25
and the judgment in Israelsohn v CIR (1952 (3) SA 529 (A), 18 SATC 247).
When in doubt with regard to provisions of the Income Tax Act, the contra fiscum rule must be
invoked.
You are required to discuss the contra fiscum rule and to state whether it will apply to every
provision of a fiscal statute.
1.3 (15 minutes)

This question tests the construction of tax Acts as set out in Meyerowitz on Income Tax in § 3.16 to
§ 3.24 and the judgments in Venter v Rex (1907 TS 910), Israelsohn v CIR (1952 (3) SA 529 (A),
18 SATC 247), CIR v Crown Mines Ltd (1923 AD 121) and Isaacs v CIR (1949 (4) SA 561 (A), 16
SATC 258).
Under the basic rules of interpretation of fiscal legislation, the courts have conferred a certain
latitude for
• anomalies,
• ambiguities,
• omissions (casus omissus), and
• double taxation (hardship).
You are required to discuss these canons of construction in relation to the interpretation of
statutory provisions.
1.4 (30 minutes)

This question tests certain economic concepts of taxation.
Arguments, both for and against, have been advanced in relation to each of the following methods
of taxation:
• Estate duty.
• Donations tax.
• Normal tax.
• Capital gains tax.
• Value-added tax.
• Excise duty.
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.
1.5 (20 minutes)

This question tests the distinction between the statute and case law.
When dealing with statutory provisions, the courts are faced with the task of interpreting the
statute.
You are required to distinguish between statutory and case law in South Africa, detailing the use of
case law.
1.6 (30 minutes)

This question tests the provisions of sections 101 to 141 of the Tax Administration Act.
If a taxpayer is aggrieved with the decision of the Commissioner he may, in accordance with the
provisions of the Tax Administration Act, object to it and then, if necessary, appeal against the
decision.
You are required to set out the obligations and rights of a taxpayer for an objection to an
assessment and an appeal against a decision made by the Commissioner.
1.7 (15 minutes)

This question tests the basic concept of review.
Some provisions of the Income Tax Act and other fiscal legislations provide for the exercise by the
Commissioner of his discretion.
You are required to discuss to what extent a decision of the Commissioner can be challenged or
revised.
1.8 (10 minutes)

This question tests the provisions of section 102 of the Income Tax Act and Chapter 8 and
section 190(1)(a) of the Tax Administration Act.
Raymond Byrne’s accounting and tax records were destroyed by a fire that occurred at his business
premises. By arrangement with the Commissioner, his taxable income for the 2022 year of
assessment in question was estimated at R690 000.
Subsequent to Raymond Byrne being assessed to normal tax, he found substantive evidence that
established that his taxable income for the 2022 year of assessment was only R572 000.
You are required to discuss what rights Raymond Byrne has to be reassessed to take into account
this additional information.
1.9 (15 minutes)

This question tests a person’s normal tax liability and sections 5 and 6 of the Income Tax Act and
sections 221 to 224 inclusive of the Tax Administration Act.
Dion Crookes failed to disclose net rentals of R96 000 that accrued to him during the 2022 year of
assessment in the income tax return he submitted to the Commissioner. The failure to disclose his
net rentals of R96 000 was done by him intentionally to reduce his normal tax liability.
INTERPRETATION AND DISPUTES 3
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.
1.10 (30 minutes)

This question tests the provisions of sections 108 to 115 inclusive of the Tax Administration Act.
The tax board (previously called the tax appeals board) has now been in operation for almost three
decades (30 years). A result of its existence is that an appeal to the tax court must in the first
instance be heard by this tax board unless objection to its jurisdiction to hear the appeal is made
before the commencement of the hearing of the appeal.
You are required to write a brief note on the tax board setting out how it operates and what its
relationship is with the tax court.
1.11 (10 minutes)

This question tests the provisions of sections 91 to 100 of the Tax Administration Act and the
judgment in ITC 1303 ((1979) 42 SATC 95).
Fifteen years previously, when Neil Morgan was assessed for the 2007 year of assessment, he had
not been subjected to normal tax on a profit made by him on an isolated property transaction. The
property had been purchased by him on a speculative basis, but he had, in disclosing details of the
sale in his tax return for that year, merely stated the following:
‘Property sold for R480 000: funds needed to finance additions to private dwelling.’
The Commissioner now has evidence of Neil Morgan’s speculative intent. This evidence was not in
his possession at the time the assessment was made.
You are required to discuss whether the Commissioner could reopen Neil Morgan’s 2007 tax
assessment.
1.12 (30 minutes)

This question tests the provisions of Chapter 9 Parts C and D of the Tax Administration Act
including sections 108 to 141.
If a taxpayer is dissatisfied with the decision of the Commissioner to his objection, he may appeal
either to a tax board or a tax court, both constituted in accordance with the Tax Administration Act.
An appeal from a decision of the tax board lies to the tax court. And an appeal from a decision of
the tax court lies to the Provincial Division of the High Court having jurisdiction in the area where
the sitting of the tax court was held, but will lie direct to the Supreme Court of Appeal, when the
President of the tax court has granted leave.
You are required to write a brief note discussing the court structure in South Africa as it relates to
income tax matters.
1.13 (60 minutes)

This question tests the alternative dispute resolution procedure.
Section 103(1) of the Tax Administration Act provide that the Minister of Finance may, after
consultation with the Minister of Justice, make ‘rules’ governing the procedures to be observed to
lodge an objection and to note an appeal against an assessment or ‘decision’. These rules also
provide the conduct and hearing of an appeal before a tax board or tax court. And then under
section 103(2) of the Tax Administration Act, the rules contemplated in section 103(1) of the Tax
Administration Act may provide for an alternative dispute resolution procedures under which the
Commissioner and the person aggrieved by an assessment may resolve a dispute.
In GN 550 of Government Gazette 37819 of 1 July 2014, the Minister of Finance promulgated the
rules prescribing, amongst other things, the procedures for an alternative dispute resolution.
You are required to
1. discuss the alternative dispute resolution procedure, and
2. set out the terms that govern the alternative dispute resolution procedure, in other words, the
procedure that is to be followed.
1.14 (30 minutes)

This question tests the provisions of sections 103(1), 104, 108 to 115 inclusive, 116 to 132
inclusive, 133 to 141 inclusive and 164 of the Tax Administration Act and the judgments in KBI v
Mabotsa (NCPD (1993) 55 SATC 98), CIR v B P Miller (1993 (C), 56 SATC 1), ITC 1306 ((1980)
42 SATC 139), ITC 1486 ((1990) 53 SATC 39) and ITC 1489 ((1990) 53 SATC 99).
Celeste Best recently received her 2022 tax assessment. She is aggrieved by it. She feels that
amounts have been included in her taxable income that ought not to have been included. It reflects
a substantial amount for normal tax due.
Celeste Best approaches you for advice on the following three queries:
Query 1
Celeste Best would like to object to the assessment.
Query 2
Should the Commissioner disallow Celeste Best’s objection, she would like to appeal this decision
to the tax board. She wants to know the correct procedure to follow, the relevant time limits that
apply, and what the effect would be if either she, or the Commissioner, does not arrive at the
hearing on the date of the hearing.
Query 3
Celeste Best is somewhat nervous about the apparent informality of the tax board, and therefore
would like to know, in general terms, what path an appeal from it would follow should she choose
to take it to the ‘highest’ court in the land, if necessary. She would like to know, as this procedure
is explained, which court decisions will bind other courts.
You are required to advise Celeste Best of her obligations and rights for an objection to an
assessment and a subsequent appeal that may result, as each of her three queries are answered.
1.15 (30 minutes)

This question tests the provisions of sections 103(1), 104, 108 to 115 inclusive, 116 to 132
inclusive, 133 to 141 inclusive and 164 of the Tax Administration Act and the judgments in KBI v
Mabotsa (NCPD (1993) 55 SATC 98), CIR v B P Miller (1993 (C), 56 SATC 1), ITC 1306 ((1980)
42 SATC 139), ITC 1486 ((1990) 53 SATC 39) and ITC 1489 ((1990) 53 SATC 99).
On 1 May 2021 Alex Bell married Pretty Nurse. He is employed by Telkom Limited and she is
employed by Prince Edward Hospital.
Alex Bell incorrectly included Pretty Nurse’s earnings from Prince Edward Hospital as part of his
earnings when completing his 2022 tax return.
Alex Bell recently received his 2022 tax assessment. It reflects that he owes the Commissioner a
substantial amount for normal tax due. An examination of the assessment revealed that Pretty
Nurse’s earnings had been incorrectly included in his taxable income.
Alex Bell has been informed that he made an error in disclosing Pretty Nurse’s earnings in his tax
return. He has now approached you and would like to know what he can do about his 2022 tax
assessment and the amount of normal tax due by him.
You are required to
1. inform Alex Bell of the rights and obligations conferred upon him by the Income Tax Act, and
2. draft a letter of objection to the Commissioner on his behalf.
1.16 (30 minutes)

This question tests the review procedure. It also tests the judgments from CIR v Butcher Bros (Pty)
Ltd (1945 AD 301, 13 SATC 21), Irvin & Johnson (SA) Ltd v CIR (1946 AD 483, 14 SATC 24),
ITC 892 ((1959) 23 SATC 358), ITC 936 ((1960) 24 SATC 361), KBI v Transvaalse
Suikerkorporasie Beperk (1985 (2) SA 666 (T), 47 SATC 34), Shidiack v Union Government
(Minister of the Interior) (1912 AD 642 651) and ITC 1400 ((1983) 47 SATC 169). It is suitable
for a student studying towards a Masters (or similar degree) specialising in taxation.
Givers Limited has for the past decade (10 years) been providing certain retiring ‘qualifying’
employees with golden handshake awards (deferred compensation awards). These awards have
been in cash and have been financed by its own surplus funds.
Five years ago Givers Limited had commenced financing these deferred compensation awards by
investing in insurance policies. These policies met the requirements of the Minister of Finance.
Their premiums paid by it were deducted by it in the determination of its taxable income under the
provisions of section 11(w).
Robert Stone, a ‘qualifying’ employee of Givers Limited, retired during the 2022 year of
assessment. Instead of receiving his deferred compensation award in cash, an insurance policy over
his life was awarded (ceded) by Givers Limited to him.
Robert Stone’s insurance policy had a surrender value of R900 000 at the time it was awarded to
him by Givers Limited. The Commissioner included R1 150 000 (and not R900 000) in his gross
income under paragraph (d)(iii) of the definition of ‘gross income’ for the cession of this insurance
policy to him on his retirement from its employment.
The Commissioner indicated that being a non-cash amount, it was his responsibility to ‘value’ the
amount concerned. This he had done by working out the present value of the future benefits of this
policy less the present value of the future premiums payable on it at a rate of 11%.
You are required to indicate the circumstances when a taxpayer may challenge a discretionary
decision made by the Commissioner. Also state what limits are imposed upon his right to withdraw,
or amend, a decision made by him in the exercise of his discretion.
1.17 (60 minutes)

This question tests the provisions of section 10(1)(nA). It also tests the judgments from ITC 1119
((1968) 30 SATC 159), Cape Brandy Syndicate v CIR ([1921] 1 KB 64), CIR v Simpson (1949 (4)
SA 678 (A), 16 SATC 268), Glen Anil Development Corporation Ltd v SIR (1975 (4) SA 715 (A),
37 SATC 319), CIR v Nemojim (Pty) Ltd (1983 (4) SA 935 (A), 45 SATC 241), Venter v R (1907
TS 910), Du Plessis v Joubert (1968 (1) SA 585 (A)), Summit Industrial Corporation v Claimants
against the Fund Comprising the Proceeds of the Sale of the MV Jade Transporter (1987 (2) SA
583 (A)) and ITC 1584 ((1994) 57 SATC 63). It is suitable for a student studying towards a
Masters (or similar degree) specialising in taxation.
Fifty professors of the University of Crimeville hire, at a monthly rental from the University,
covered parking space in the basement of a building situated on the campus.
After the fifth motor car was recently stolen from this basement, these 50 professors agreed to
contribute R150 a month each to pay a ‘security officer’ to patrol the basement each day.
They decided to do this since the University of Crimeville had repeatedly turned down their request
for one of its security officers to perform this duty. It also refused to employ a new officer to do
this work. But it stated that if these professors, in their personal capacity, employed a security
officer they would give this person three sets of security-officer uniforms valued at R9 500 (in
total).
The 50 professors employed Mant Shingelane, aged 25 years, as from 1 March 2021. They paid
him a salary of R7 500 a month throughout the 2022 year of assessment.
On 1 March 2021 the University of Crimeville gave Mant Shingelane three uniforms valued at
R9 500 (in total). The 50 professors made it a condition of his employment that he had to wear this
uniform while on duty. There is no doubt that this uniform is clearly distinguishable from ordinary
clothing.
In Mant Shingelane’s 2022 return of income he disclosed his salary earned from the 50 professors
for the year of assessment of R90 000 and the R9 500 value of the uniforms he received from the
University of Crimeville. He was required to render a return since he had earned interest in excess
of R23 800 during the 2022 year of assessment – this interest was also disclosed by him in his
return. He then disclosed that the R9 500, being the value of the uniforms he had been given by the
University of Crimeville, was not subject to normal tax since it was exempt from normal tax under
section 10(1)(nA) of the Income Tax Act.
The Commissioner included the R9 500 value in Mant Shingelane’s gross income but did not allow
him the section 10(1)(nA) exemption from normal tax on the grounds that the uniform had not been
given to him by his employer.
Section 10(1)(nA) reads as follows:
‘There shall be exempt from normal tax . . . where an employee is as a condition of his
employment required while on duty to wear a special uniform that is clearly distinguishable
from ordinary clothing, the value of any such uniform given to the employee by his employer, or
so much of any allowance made by the employer to the employee in lieu of any such uniform as
is reasonable.’
(Emphasis added.)
To qualify for this exemption from normal tax the Commissioner stated that
‘such uniform [had to be] given to the employee by his employer’,
and this was not the position with Mant Shingelane. The University of Crimeville was not his
employer, the group of the 50 professors was his employer. Thus he could not enjoy this exemption
from normal tax.
Mant Shingelane took this matter to the tax board after his objection failed. He had objected solely
on the grounds that he was entitled to this exemption from normal tax.
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.
1.18 (60 minutes)

This question tests the meaning of an ‘amount’, the provisions of section 3 and paragraph 2(a), 5(2)
and 17 of the Seventh Schedule to the Income Tax Act and sections 9(2) and 102 of the Tax
Administration Act. It also tests the judgments from CIR v Butcher Bros (Pty) Ltd (1945 AD 301,
13 SATC 21), Irvin & Johnson (SA) Ltd v CIR (1946 AD 483, 14 SATC 24), ITC 892 ((1959) 23
SATC 358), ITC 936 ((1960) 24 SATC 361), KBI v Transvaalse Suikerkorporasie Beperk (1985
(2) SA 666 (T), 47 SATC 34), Shidiack v Union Government (Minister of the Interior) (1912 AD
642 651) and ITC 1400 ((1983) 47 SATC 169). It is suitable for a student studying towards a
Battis (Pty) Limited will award an employee a long-service award when he completes 20 years of
employment with it. Its employment contracts with its employees provide that the value of the
long-service award cannot exceed R20 000. So as to take advantage of the provisions of
paragraph 5(2)(b) of the Seventh Schedule to the Income Tax Act, an employee is encouraged to
take his long-service award in a form other than money. Its qualifying employees normally select
units in a unit trust or watches as their long-service awards.
Walter Rein qualified for a long-service award from Battis (Pty) Limited in December 2021. He is
employed as a credit controller by it. He has occupied the same office in its administration block
for his entire employment with it – that is for 20 years.
Walter Rein’s wife had always admired a painting hanging on the wall in his office, believed to be
an original painting by a leading South African artist. This painting had been purchased by Battis
(Pty) Limited some 25 years earlier.
Walter Rein requested that this painting be awarded to him as his long-service award. Battis (Pty)
Limited then had it valued by a local art dealer. When she gave a R20 000 value to this painting, it
was agreed that it would be awarded to Walter Rein as his long-service award.
The painting was duly awarded to Walter Rein by Battis (Pty) Limited at its year-end luncheon.
Since the first R5 000 of this award is exempt from normal tax, Battis (Pty) Limited reflected
R15 000 as the taxable value of this long-service award to Walter Rein on his employee’s tax
certificate.
Walter Rein’s tax assessment for the 2022 year of assessment confirmed that the Commissioner
had included R15 000 in his taxable income for this award. The Commissioner simply accepted the
information that had been provided on his employee’s tax certificate by Battis (Pty) Limited. The
Commissioner did not enquire as to how the R15 000 taxable portion of the long-service award had
been determined by it.
Walter Rein’s wife hung the painting in the entrance hall of their home. It was admired by many of
their visitors. One visitor, however, who was familiar with paintings by this leading South African
artist was convinced that it was not one of his original paintings. An expert was then consulted. He
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
2.1 (30 minutes)

This question tests the definition of ‘gross income’ and, in particular, the meaning of the terms
‘period of assessment’ and ‘in cash or otherwise’. It also tests the judgment from Lace Proprietary
Mines Ltd v CIR (1938 AD 267, 9 SATC 349), CIR v Butcher Bros (Pty) Ltd (1945) AD 301, 13
SATC 21), C:SARS v Brummeria Renaissance (Pty) Ltd (2007 (6) SA 601 (SCA), [2007] SCA 99
(RSA), 69 SATC 205), CIR v Delfos (1933 AD 242, 6 SATC 92) and Stander v CIR (1997 (3) SA
617 (C), 59 SATC 212).
An extract from the opening words of the definition of ‘gross income’ in section 1(1) of the Income
Tax Act follows:
‘Gross income, in relation to any year or period of assessment, means, . . . in the case of any
resident, the total amount, in cash or otherwise, received by or accrued to or in favour of such
resident . . . in the case of any person other than a resident, the total amount, in cash or
otherwise, received by or accrued to or in favour of such person from a source within the
Republic, . . . during such year or period of assessment, excluding receipts or accruals of a
capital nature, but including, without in any way limiting the scope of this definition, such
amounts (whether of a capital nature or not) so received or accrued as are described hereunder,
namely . . ..’
You are required to
1. discuss what is meant by the term ‘period of assessment’,
2. indicate when a ‘period of assessment’ will be less or more than a year, and
3. set out what is meant by the term ‘in cash or otherwise’ and state the method used to value a
receipt or accrual that is not a cash receipt or accrual. (Do not deal with the situation of an
employer awarding an employee a fringe benefit that is not a cash receipt or accrual.)
2.2 (30 minutes)

This question tests the definition of ‘gross income’ and, in particular, the meaning of the term
‘received by or accrued to’. It also tests the judgments from Lategan v CIR (1926 CPD 203, 2
SATC 16), Hersov’s Estate v CIR (1957 (1) SA 471 (A), 21 SATC 106), CIR v People’s Stores
(Walvis Bay) Ltd (1990 (2) SA 353 (A), 52 SATC 9), CIR v Delfos (1933 AD 242, 6 SATC 92),
Isaacs v CIR (1949 (4) SA 5611 (A), 16 SATC 258), SIR v Silverglen Investments (Pty) Ltd (1969
(1) SA 365 (A), 30 SATC 199) and Milnerton Estates Ltd v C:SARS (2019 (2) SA 386 (SCA), 81
SATC 193).
The definition of ‘gross income’ in section (1)1 of the Income Tax Act requires the inclusion in it
of certain amounts ‘received by or accrued to’ a taxpayer.
You are required to set out in a clear and concise manner, in relation to this definition, the
1. generally accepted interpretation of the word ‘accrual’, and
2. relationship between a ‘receipt’ and an ‘accrual’.
9
2.3 (15 minutes)

This question tests the definition of ‘gross income’ and, in particular, the meaning of the term
‘received by or accrued to’. It also tests the judgment from COT v G (1981 (4) SA 167 (ZA), 43
SATC 159), CIR v Genn & Co (Pty) Ltd (1955 (3) SA 293 (A), 20 SATC 113) and Geldenhuys v
CIR (1947 (3) SA 256 (C), 14 SATC 419).
Jeremy Ringer occupied a position that entrusted him with funds for secret operations. Over a
period of four years, he appropriated funds to himself and, in total, stole R600 000 this way.
Ultimately he was caught, charged, convicted and ordered to repay the whole amount. This he
subsequently did.
Jeremy Ringer was subjected to normal tax on the amount he had stolen. He objected to this
assessment on the grounds that the amounts stolen were not ‘received by’ him within the meaning
of the term as used in the opening words of the definition of ‘gross income’.
You are required to discuss whether the amounts that were stolen by Jeremy Ringer were ‘received
by’ him.
2.4 (45 minutes)

This question tests the definition of ‘gross income’ and, in particular, the meaning of the terms
‘received by’ or ‘accrued to’ and ‘of a capital nature’. It also tests the provisions of section 11(o)
and the judgments from CIR v Richmond Estates (Pty) Ltd (1956 (1) SA 602 (A), 20 SATC 355)
and ITC 1538 ((1991) 54 SATC 387).
Mark Phillips
On 26 February 2022 Mark Phillips, a dealer in property, agreed to sell a country estate (a property)
to his ‘out of wedlock’ child, Felicity Tonkin, for its market value of R1 000 000. (He held this
property as part of his trading stock.) The purchase and sale agreement provided for
• an initial amount of R40 000 to be paid immediately, and
• 12 annual instalments of R80 000 each.
Anne Tonkin, Felicity’s mother, paid the R40 000 on Felicity’s behalf 11 days after it was due, this
being on 7 March 2022.
Merlin Magic
Merlin Magic presented ‘magic’ performances in South Africa in February 2022. He presented
10 performances up to and including one on 28 February 2022, and was paid R5 000 for each
performance. Part of each performance is to pick-pocket a R200 note from a member of the
audience.
Merlin Magic keeps this R200 note until the following day when he approaches his ‘victim’ and
bets R200 that the victim will be given R200 within three minutes. Although he has performed this
trick for 18 years throughout South Africa and the rest of the world all his victims accept the bet. At
that point in time he produces the R200 note that he had stolen the night before from his ‘victim’,
and gives it back to him.
Merlin Magic therefore wins the bet. As a result he keeps the R200 he would otherwise have had to
return.
Harry Hollander
Holding three tens and two fives (a poor hand) and unable to match the R2 000 stake money in a
game of poker, Harry Hollander, a professional poker player, arranges for the other player, Arthur
Accountant, to accept the escort services of Zavier Hollander (Harry Hollander’s wife) for an
evening if he loses the hand.
To Harry and Zavier Hollander’s delight, Arthur Accountant has only three nines and two kings (an
even-poorer hand) and Harry Hollander wins the R2 000.
GROSS INCOME 11
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.
2.5 (20 minutes)

This question tests the definition of ‘gross income’ and, in particular, the meaning of the term ‘of a
capital nature’.
Chaka Rock purchased a small farm adjacent to a village on the KwaZulu-Natal North Coast in
2015. He continued living and working in Durban, merely visiting the farm occasionally over
weekends.
In 2021 Chaka Rock sub-divided the farm into plots and then sold these plots as part of a township
development scheme. He expects to realise a substantial profit from the sale of the farm.
Chaka Rock has asked you what factors would be taken into account in deciding whether the profit
he makes will be subject to normal tax.
You are required to list, in point form, the relevant questions that would be asked by the
Commissioner so as to ascertain whether Chaka Rock’s receipts or accruals from the sale of the
plots are of a capital nature.
2.6 (20 minutes)

This question tests the term ‘not of a capital nature’ as used in the definition of ‘gross income’. It
also tests the judgment from John Bell & Co (Pty) Ltd v CIR (1976 (4) SA 415 (A), 38 SATC 87).
Pythans (Pty) Limited owns the Pythans cricket team. It recently sold two of its players, namely,
Slinger Yorker and Duckie Royal, to Coastal Cricket (Pty) Limited.
• Slinger Yorker was sold by it for R2 000 000, and
• Duckie Royal was sold by it for R20 000.
Slinger Yorker started playing for the Pythans cricket team five years ago in its under-19 team and,
after signing a life-service contract, had been coached by Pythans (Pty) Limited until he became the
best fast bowler in the country.
Duckie Royal had been snapped up by Pythans (Pty) Limited at a bargain price from Ordinary
Cricket Club for R12 000. When ‘purchasing’ Duckie Royal, the Pythans cricket team realised he
was unlikely to play in its first team, but anticipated being able to ‘sell’ him for a quick profit. This
it succeeded in doing, only eight weeks after purchasing him.
You are required to discuss what amount, if any, Pythans (Pty) Limited should include in its gross
income. Assume that its receipts and accruals are not exempt from normal tax. Ignore a possible
inclusion of an amount in its taxable income under section 26A (being the inclusion of a taxable
capital gain in its taxable income).
2.7 (60 minutes)

This question tests the definition of ‘gross income’. In particular it tests the term ‘received by’. It
also tests the judgments from Geldenhuys v CIR (1947 (3) SA 256 (C), 14 SATC 419), CIR v
Genn & Co (Pty) Ltd (1955 (3) SA 293 (A), 20 SATC 113), Brookes Lemos Ltd v CIR (1947 (2)
SA 976 (A), 14 SATC 295), Greases (SA) Ltd v CIR (1951 (3) SA 518 (A), 17 SATC 358) and
Pyott Ltd v CIR (1945 AD 128, 12 SATC 121).
The opening words of the definition of ‘gross income’ include the terms ‘received by’ or ‘accrued
to’. This means that a taxpayer is required to include in his gross income all amounts ‘received by’
him and all amounts that ‘accrue to’ him.
Fieldsend CJ who delivered the judgment in COT v G (1981 (4) SA 167 (ZA), 43 SATC 159),
made the following statement about the meaning of the word ‘received’ when it is used in the
definition of ‘gross income’ (at SATC 162):
GROSS INCOME 13
‘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.
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
Ella Cigaritis paid to Serena Trading Spa CC

• R300 on 2 February 2022,
• R300 on 2 March 2022,
• R300 on 5 April 2022, and
• R300 on 4 May 2022.
Ella Cigaritis did not use Serena Trading Spa CC’s facilities at all during June and July 2022. (At
this stage she had decided that her relaxing efforts had been in vain.) She resisted paying the
balance of R600 due, but was forced to do so, on 28 September 2022, to avoid a pending
appearance in the small claims court.
Natali Acraea Hotel (Pty) Limited
Natali Acraea Hotel (Pty) Limited trades as ‘The Butterfly Hotel’. Holidaymakers are required to
lodge a deposit with it when they make a reservation for a holiday. It operates a dual system of
deposits:
• The first system applies to reservations made outside the holiday season. These deposits are
refunded to a holidaymaker if he is unable for any reason to take his holiday at the reserved
time.
• The second system applies to reservations made during the holiday season. These deposits are
forfeited should a holidaymaker be unable to take his holidays at the reserved time.
Natali Acraea Hotel (Pty) Limited has opened a special bank account. In this bank account, it
maintains a minimum balance sufficient to cover all its refundable deposits.
On the last day of Natali Acraea Hotel (Pty) Limited’s 2022 year of assessment it had received
• refundable deposits of R25 000, and
• non-refundable deposits of R45 000.
The balance in Natali Acraea Hotel (Pty) Limited’s special bank account was R36 000.
Murray Thestor Motors CC
Murray Thestor Motors CC has a forecourt with nine fuel pumps. Its premises are situated on one
of the main routes into, and out of, a highly-populated suburb. It has a large turnover in fuel (petrol
and oil). Some customers purchase fuel on credit. Yet before being allowed to become a credit
customer of it, a potential credit customer is required to pay it a sum of money (a deposit) sufficient
to cover his monthly purchases of fuel.
Murray Thestor Motors CC deposits these amounts into a separate bank (or trust) account.
Withdrawals that are made from this account are made by Murray Thestor Motors CC only when a
credit customer wishes to close his account. His deposit is then refunded to him.
During Murray Thestor Motors CC’s 2022 year of assessment it deposited R54 000 into this
separate bank account and withdrew R9 000 from it. Interest of R3 600 was earned on this account.
This interest was withdrawn and used by it to improve its toilet facilities available for use by its
customers.
You are required to discuss whether the amounts referred to in the above 12 situations must be
included in the gross income of the respective recipient. For amounts that have accrued to a
taxpayer, the date of accrual must also be provided.
2.8 (45 minutes)

This question tests the definitions of ‘gross income’ and a ‘resident’. It also tests sections 7(3),
9(1)(e), 9(1)(g) and 10(1)(p). And it tests the judgments from John Bell & Co (Pty) Ltd v SIR (1976
(4) SA 415 (A), 38 SATC 87), CIR v Stott (1928 AD 252, 3 SATC 253), CIR v Paul (1956 (3) SA
335 (A), 21 SATC 1), Berea West Estates (Pty) Ltd v SIR (1976 (2) SA 614 (A), 38 SATC 43),
Natal Estates Ltd v SIR (1975 (4) SA 177 (A), 37 SATC 193), Lategan v CIR (1926 CPD 203, 2
SATC 16), ITC 1481 ((1988) 52 SATC 285), ITC 1348 ((1981) 44 SATC 46) and ITC 768 ((1953)
19 SATC 211).
You are employed as a manager in the Taxation Section in an accounting firm. Your
responsibilities include answering certain tax queries.
The following 10 queries need your response:
Iwisa Limited
Iwisa Limited carries on the business of a building contractor specialising in the erection of soccer
stadiums. On 31 January 2022 it completed the building of a pavilion for the Athlone Soccer Club.
Under the building contract, 90% of the contract price is due and payable on completion of the
pavilion 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
Athlone Soccer Club contract is R9 200 000.
Iwisa Limited’s year of assessment ends on the last day of February.
You are required to determine, and discuss, the amount to be included in Iwisa Limited’s 2022
gross income.
Bay Estate Agents CC
Bay Estate Agents CC collect rentals on behalf of a number of property owners. During its 2022
year of assessment it received R4 950 000 from the tenants occupying the flats and houses
belonging to the property owners. It kept R371 250, being its commission on the rentals collected,
and paid over the balance of R4 578 750 to the property owners.
Bay Estate Agents CC’s year of assessment ends on the last day of February.
You are required to determine, and discuss, the amount to be included in Bay Estate Agents CC’s
2022 gross income.
AmaXhosa (Pty) Limited
AmaXhosa (Pty) Limited is a hops (a climbing plant whose dried flowers are used in brewing to
give beer a bitter flavour) farmer. Its financial year ends on the last day of February. In
January 2022 it sold and delivered hops to an ‘African beer’ manufacturer for R75 000. An amount
of R45 000 was paid to it on delivery (on 31 January 2022) and the R30 000 balance was paid to it
six months later (on 31 July 2022).
You are required to determine, and discuss, the amount to be included in AmaXhosa (Pty)
Limited’s 2022 gross income.
Kaizer King
Kaizer King has been achieving a reasonable return from the letting of a block of 15 flats that he
purchased in 1992. He does not have a history of property dealing.
Kaizer King is aware that he can make a substantial profit by selling the flats individually rather
than selling the block. He has made application for a sectional-title register to be opened.
To make the flats more attractive to would-be purchasers Kaizer King is considering improving
them.
You are required to discuss, giving reasons, whether the receipts and accruals from the sale of
Kaizer King’s flats are of a revenue nature. Discuss the position when the flats are sold individually
GROSS INCOME 17
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 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.
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.
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.
2.9 (30 minutes)

This question tests the definition of ‘gross income’ and, in particular, the term ‘of a capital nature’.
It also tests the judgments from SIR v The Trust Bank of Africa Ltd (1975 (3) SA 652 (A), 37 SATC
87), Overseas Trust Corporation Ltd v CIR (1926 AD 444, 2 SATC 71) and Barnato Holdings Ltd
v SIR (1978 (2) SA 440 (A), 40 SATC 75).
Opotiki Share Speculation (Pty) Limited deals in shares and other negotiable instruments. It would
like to diversify its activities by purchasing shares in major industrial and financial listed
companies and retain them as investments (to yield dividends). But it will still continue with its
share-dealing business.
Since Opotiki Share Speculation (Pty) Limited has a history of share-dealing, it is worried that a
profit that it may make on the ultimate sale of an investment may be regarded as being of a non-
capital nature and included in its gross income.
You are required to state fully what steps should be taken, and what detailed procedures should be
followed by Opotiki Share Speculation (Pty) Limited, to ensure, as far as possible, that a profit
made on the ultimate sale of its proposed investment is not included in its gross income.
GROSS INCOME 19
2.10 (40 minutes)

It also tests the judgments from C:SARS v Wyner ([2003] 4 All SA 541 (SCA), 66 SATC 1), X v
COT, Y v COT, Z v COT (1978 (1) SA 605 (R), 40 SATC 21), ‘SAM’ v COT (1980 (2) SA 75 (ZR),
42 SATC 1), CIR v Paul (1956 (3) SA 335 (A), 21 SATC 1), CIR v Stott (1928 AD 252, 3 SATC
253), Marshall Industries Ltd v CIR (1951 (3) SA 581 (A), 17 SATC 378), Overseas Trust
Corporation Ltd v CIR (1926 AD 444, 2 SATC 71), COT v Levy (1952 (2) SA 413 (A), 18 SATC
127), Durban North Traders Ltd v CIR (1956 (4) SA 594 (A), 21 SATC 85) and Ropty (Edms) Bpk
v SBI (Appellate Division) (11 and 21 May 1981), 43 SATC 141.
Paulus Kruger farms in Northern KwaZulu-Natal. In 2007 he entered into a lease agreement with
the owner of a farm, named ‘Good Fortune’. Under the agreement, he leased the farm for a period
of 30 years at a rental of R60 000 a year. He was also granted an option to purchase the farm at any
time during the operation of the lease for R1 500 000.
Paulus Kruger had always hoped that one day he would accumulate sufficient funds to exercise this
option.
In March 2021 Coalcor (Pty) Limited, believing the farm to be rich in coal deposits, offered to
purchase ‘Good Fortune’ for R5 000 000. Paulus Kruger immediately exercised his option to
purchase it for R1 500 000. He then sold it to Coalcor (Pty) Limited for R5 000 000.
Paulus Kruger used the profits from this transaction to purchase his own farm. This farm, named,
‘Valleyview’ was 10 000 hectares in extent. He paid R450 a hectare (R4 500 000 in total). Since
this farm was too large for his own needs, he then sub-divided it and sold 3 000 hectares of it to his
brother-in-law, Joseph Maritz, for R3 750 000.
The Commissioner included the R5 000 000 from the sale of ‘Good Fortune’ and the 3 000 hectares
of ‘Valleyview’ sold by Paulus Kruger to Joseph Maritz in his (Paulus Kruger’s) gross income. The
Commissioner then allowed an appropriate deduction in the determination of his taxable income for
the cost of these properties that had been sold by him. The net effect was that
• R3 500 000 (R5 000 000 – R1 500 000), and
• R2 400 000 (R3 750 000 – R1 350 000 (3 000 hectares at R450 a hectare))
were included in Paulus Kruger’s taxable income for the 2022 year of assessment.
You are required to briefly list the factors and legal rules that would be relevant in the determination
of Paulus Kruger’s chances of successfully contesting the inclusion of these amounts in his taxable
income.
2.11 (30 minutes)

This question tests the definition of ‘gross income’ and, in particular, the term ‘of a capital nature’
and its paragraph (c) and (cB). It also tests the judgments from Tuck v CIR (1988 (3) SA 819 (A),
50 SATC 98), CIR v Lever Bros & Unilever Ltd (1946 AD 441, 14 SATC 1) and Maguire v
C:SARS ([2009] 2 All SA 347 (SCA)), 71 SATC 41).
Tucker Bloggs was the managing director of Bulldog Gus (Pty) Limited, a chemical company that
operated a management-incentive plan whereby shares were credited to a contingent-award
account. This incentive plan was designed to provide for awards to employees who contributed in a
substantial way to its success. It was subject to the following conditions:
• On retirement the shares in the employee’s contingent-award account would be delivered to him
in 10 equal annual instalments.
• He had to refrain from being a party to a business in competition with the company.
• He had to, if requested, make himself available to assist it.
• And he had to refrain from engaging in a deliberate action that could cause harm to it.
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.
2.12 (60 minutes)

It also tests the judgments from Realization Company v COT (1951 (1) SA 177 (SR), 1950 SR 182,
17 SATC 139), Berea West Estates (Pty) Ltd v SIR (1976 (2) SA 614 (A), 38 SATC 43), C:SARS v
Founders Hill (Pty) Ltd, ([2011] ZASCA 66, 73 SATC 183), Natal Estates Ltd v SIR (1975 (4) SA
177 (A), 37 SATC 193), ITC 1481 ((1988) 52 SATC 285), ITC 1348 ((1981) 44 SATC 46),
ITC 1355 ((1981) 44 SATC 132), ITC 1379 ((1983) 45 SATC 236), ITC 1543 ((1992 54 SATC
446), Nel v CIR ([1997] 4 All SA 310 (T), 59 SATC 349), ITC 1525 ((1991) 54 SATC 209) and
ITC 1526 ((1991) 54 SATC 216). This question is suitable for a student studying towards a Masters
(or similar degree) specialising in taxation.
Frederick Wilkinson, for the 40 years prior to his death in 2001, had farmed maize in Gauteng. His
farm, located just outside Johannesburg, was 300 hectares in extent. On his death, he bequeathed it
to his 15 grandchildren. His children had seen the hardship farmers often suffered and had,
therefore, discouraged their children (his grandchildren) from an interest in farming. As a result, his
grandchildren all had careers in medicine, law or business. They had no aptitude for farming when
their grandfather died. It was therefore necessary for them to employ a farm manager to run their
farm. There were, however, many problems. There was a high turnover in managers and each year
the losses increased. After 10 years the grandchildren decided that it would be best to sell the farm.
Unfortunately, the grandchildren could not find a purchaser for a farm this size. They were then
advised to have a township proclaimed and to sell the property in small lots to it. So as to do this, a
company, Frederick Farm Realisation Co (Pty) Limited, was formed in 2014. The farm which was
valued at R6 000 000 was then sold to Frederick Farm Realisation Co (Pty) Limited. Each of the
grandchildren who was a beneficiary in Frederick Wilkinson’s estate, held one share in Frederick
Farm Realisation Co (Pty) Limited.
In 2015 the development of the township commenced. Small blocks were developed at a time.
Roads, water supplies, etcetera were installed. The first few blocks were sold by Frederick Farm
Realisation Co (Pty) Limited to a developer as a whole. The receipts and accruals generated from
this sale enabled it to then develop the next few blocks.
In 2017 the Government expropriated an area of 75 hectares of Frederick Farm Realisation Co
(Pty) Limited’s land for a new station and warehousing facilities. It was paid R25 000 000 for the
expropriation of this land.
GROSS INCOME 21
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.
2.13 (15 minutes)

This question tests the definition of ‘gross income’.
Listed below are 30 amounts that a taxpayer has either received or that has accrued to him, in the
circumstances as indicated:
1. As a legacy.
2. As a gift.
3. As a sweepstake win.
4. As a prize from his employer for making the most sales.
5. Being cash stolen by a thief.
6. From the result of a bet on the result of a rugby match.
7. From the business of a bookmaker.
8. From backing the ‘July’ (a feature horse race) winner.
9. From backing many ‘winners’ at many KwaZulu-Natal race meetings.
10. From the sale of shares held as an investment.
11. From the sale of shares held as trading stock.
12. As a restraint of trade award from his former employer.
13. As compensation for damages to an office block owned by a property investor.
14. As a loss of profits insurance claim.
15. As compensation received by or accrued to the lender from the borrower when the borrower of
money repaid the loan before the due date.
16. As compensation received by or accrued to a lessee when he was required by the lessor to
vacate premises before the expiry of the lease.
17. As compensation received by or accrued to a farmer from the Government when his livestock
was forced to be destroyed under certain health regulations.
18. As damages received by or accrued to him as a result of a successful personal defamation

action instituted by him against a former working colleague.
19. As damages received by or accrued to a supplier when the seller of his finished goods was
forced to cancel a sale contract resulting from a change in ownership.
20. As a subsidy received by or accrued to a farmer from the Government towards the building
costs of a dam recently constructed by him.
21. As a subsidy received by or accrued to a suburban property owner from the Government
towards building a retaining wall outside his home recently built by him.
22. As a subsidy received by or accrued to a bakery based on the number of loaves of bread made by
it.
23. As an expropriation award received by or accrued to a timber farmer when part of his
plantation was expropriated.
24. As an expropriation award received by or accrued to a warehouse owner when one of his
warehouse was expropriated.
25. As a result of a favourable foreign exchange rate fluctuation when a loan was repaid by a
foreign borrower to a South African lender who was not carrying on the business of a money
lender.
26. As a reimbursement received by or accrued to a manufacturer from a supplier of raw materials
that were unusable.
27. As a share premium receipt.
28. As a lump-sum goodwill amount received by or accrued to a seller of a business.
29. From the Unemployment Insurance Fund received by or accrued to an unemployed former
employee while being unemployed for three months.
30. As interest received by or accrued to the taxpayer from his own business for personal funds
lent to his business – he trades in his own name as a sole trader.
You are required to establish whether each particular receipt or accrual will constitute gross
income. Divide your answer page into two sections, one headed ‘gross income’ and the other ‘not
gross income’, and then merely list the number of the receipt or accrual under either section.
2.14 (30 minutes)

This question tests the definition of ‘gross income’. In particular it tests the terms ‘received by’ and
‘accrued to’ and the provisions of paragraph (c). It also tests the judgments from Geldenhuys v CIR
(1947 (3) SA 256 (C), 14 SATC 419), CIR v Witwatersrand Association of Racing Clubs (1960 (3)
SA 291 (A), 23 SATC 380) and Taxpayer v Commissioner of Taxes, Botswana (Court of Appeal,
Botswana) (April 1980), 43 SATC 118). It is suitable for a student studying towards a Masters (or
similar degree) specialising in taxation.
‘Wizard’ Whipp, the South African champion jockey, stated in a recent television programme that
he intended to give all the jockey fees and prize money he earned during the KwaZulu-Natal
‘Winter Racing Season’ held in June, July and August 2021 to a charity.
This worthy gesture of ‘Wizard’ Whipp may result in him being out of pocket due to the resulting
tax implications.
You are required to discuss both the normal tax and donations tax implications that would arise for
‘Wizard’ Whipp should he carry out his gesture.
GROSS INCOME 23
2.15 (60 minutes)

This question tests the definition of ‘gross income’. It tests the terms ‘received by’ and ‘accrued to’
and the provisions of paragraph (c). It also tests sections 104, 129(2) and 190 of the Tax
Administration Act. And it tests the judgments from CIR v People’s Stores (Walvis Bay) Ltd (1990 (2)
SA 353 (A), 52 SATC 9), Lategan v CIR (1926 CPD 203, 2 SATC 16), Mooi v SIR (1972 (1) SA 675
(A), 31 SATC 1), Estate Dempers v SIR (1977 (3) SA 410 (A), 39 SATC 95), ITC 1488 ((1990) 53
SATC 56), Benson & another v Walters & others (1984 (1) SA 73 (A)), Geldenhuys v CIR (1947 (3)
SA 256 (C), 14 SATC 419), CIR v Genn & Co Ltd (1955 (3) SA 293 (A), 20 SATC 133), Challenor’s
Estate v CIR (1960 (1) SA 13 (N), 23 SATC 108), COT v G (1981 (4) SA 167 (ZA), 43 SATC 159),
CIR v Butcher Bros (Pty) Ltd ((1945) AD 301, 13 SATC 21) and ITC 1785 ((2004) 67 SATC 98). It is
suitable for a student studying towards a Masters (or similar degree) specialising in taxation.
The KwaZulu-Natal Law Society has reduced the fee charged by a firm of Durban attorneys for
representing an accused in a rape case by R250 000.
When a Phoenix man’s son was charged with rape, he sold his home for R600 000 to pay for his
legal costs. Part of the bill he had received was R325 000 charged by attorneys Midas
McGreedy & Associates for services that had been rendered by Midas McGreedy. The remaining
R200 000 was the amount due for the advocate’s fee.
The son was convicted in the Supreme Court in 2021 of rape after a six-day trial and sent to jail.
In January 2022 the father queried the amount he had to pay. The matter was referred to the KwaZulu-
Natal Law Society. Its assessment committee examined the fee charged by Midas
McGreedy & Associates. It decided that the fee should be reduced by R250 000 from R325 000 to
R75 000. Both parties appeared before a three-man assessment committee.
The father has asked that his name not be published since his son was now out of jail, had
employment and was trying to make a new life for himself. The father was helped by the Durban
Legal Resources Centre at the assessment hearing.
Midas McGreedy said he was the person who was required to send the bill to the Law Society’s
assessment committee. He confirmed that it had not altered the disbursements he incurred on behalf
of his client. He then stated that his firm had not yet been fully paid in this matter.
Midas McGreedy is a sole trader, trading under the name of Midas McGreedy & Associates.
In December 2021 Midas McGreedy & Associates had billed the father R525 000 being
• its own fee of R325 000, and
• the R200 000 advocate’s fee that it was recovering on behalf of the advocate who had been
briefed and who had appeared in this matter.
On 31 January 2022 the father had paid Midas McGreedy & Associates R362 500. The letter
accompanying the payment stated that the R362 500 was for the advocate’s fee (R200 000) and half
of the fee billed by its amounting to R162 500.
Shortly after receiving the R362 500 (and before 28 February 2022) Midas McGreedy & Associates
settled the R200 000 advocate’s fee. The remaining net R162 500 (R362 500 – R200 000) was then
deposited into its trust account.
During April 2022 Midas McGreedy submitted his income tax return. His gross fees included the
R525 000 he had billed the father. The R200 000 paid to the advocate was deducted in the
determination of his taxable income.
The KwaZulu-Natal Law Society’s assessment committee gave its judgment on 3 May 2022. A
week later Midas McGreedy & Associates refunded R87 500 (R162 500 – R75 000) to the father.
Midas McGreedy received his 2022 assessment on 24 May 2022. Included in his taxable income
was the R250 000 that his firm had been ordered to reduce its fees by.
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.
2.16 (60 minutes)

This question tests the definition of ‘gross income’. It tests the terms ‘received by’ and ‘accrued to’.
It also tests the judgments from CIR v Geldenhuys (1947 (3) SA 256 (C), 14 SATC 419), SIR v
Smant (1973 (1) SA 754 (A), 35 SATC 1) and CIR v People’s Stores (Walvis Bay) Ltd (1990 (2)
SA 353 (A), 52 SATC 9). It is a question that is suitable for a student studying towards a Masters
Until five years ago there was a shortage of suitable halls in which to hold weddings in Chatsworth.
Then a young ‘opportunist’, namely, Cupid Arrow, came up with an arrangement that resulted in
20 more suitable halls becoming available.
To carry out this arrangement Cupid Arrow formed Matchmaker (Pty) Limited. It carries on the
business of a letting agent of suitable ‘wedding’ halls in Chatsworth. He is its sole shareholder and
only director. It is a vendor.
Matchmaker (Pty) Limited entered into an agreement with the headmasters of 20 schools in
Chatsworth. Under this agreement, Matchmaker (Pty) Limited would let the school hall on behalf
of the ‘participating’ school. On average each school could let its hall on 99 occasions during
the year (45 weekends – on both the Saturday and the Sunday of the weekend – and on nine public
holidays) when the school itself was not using its hall.
All headmasters participating in this scheme were reluctant to take on the role of debt collectors
recovering the amounts due from the families who had hired their halls because their experience in
the suburb was that these hiring charges were often not settled. The agreement therefore provided
as follows:
• Matchmaker (Pty) Limited would recover the amounts due from the families who hired a hall.
• A participating school, under the agreement, ‘billed’ Matchmaker (Pty) Limited each time its
hall was hired.
• Matchmaker (Pty) Limited would ‘bill’ the families for the hiring of the hall and it would also
‘bill’ them its fee for providing the service of having secured a suitable hall for the wedding.
Because of Cupid Arrow’s power, standing and reputation in the community and because of the hiring
conditions that Matchmaker (Pty) Limited had imposed, it encountered no problems in recovering the
amounts due. On most occasions families hiring the hall paid the amount due prior to the hall being
used. As a direct result of this Matchmaker (Pty) Limited had no bad debts. The agreed rates were as
follows:
• The participating school would ‘bill’ Matchmaker (Pty) Limited R5 000 each time its hall was
hired for a wedding.
• Matchmaker (Pty) Limited would recover the R5 000 from the families hiring the hall and
would then charge them R1 000 for the service it had provided.
All 20 headmasters were keen participants in the arrangement since they could earn up to R495 000
a year in additional income for their schools.
GROSS INCOME 25
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
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
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
3.1 (30 minutes)

This question tests the definition of a ‘resident’ and, in particular, the meaning of the term
‘ordinarily resident’. It also tests the judgments from Cohen v CIR (1946 AD 173, 13 SATC 362),
CIR v Kuttel (1992 (3) SA 242 (A), 54 SATC 298) and ITC 1501 ((1989) 53 SATC 314).
Tommy Tosa has never married. He spent the first 40 years of his life in South Africa. He then
emigrated from South Africa. For the past 20 years he has been living outside South Africa.
Despite living outside South Africa he is still regarded as the ‘world expert’ on South Africa’s
indigenous plants (plants that are native to South Africa).
Tommy Tosa was the sole beneficiary of his grandfather’s estate and is an extremely wealthy man.
He is a ‘gentleman’ in that he has not worked since inheriting his grandfather’s estate 40 years ago.
He has numerous investments both inside and outside South Africa.
Tommy Tosa spends all his time pursuing his ‘hobby’, namely, South Africa’s indigenous plants.
Tommy Tosa owns a flat in Cape Town. Every year, without fail, he spends the months of December,
January, February and March in South Africa, residing most of the time in Cape Town in his flat. (For
the remaining eight months of the year this flat is not occupied – it is merely ‘locked-up’ awaiting his
return the next December.)
During the four months that Tommy Tosa is in South Africa he also travels to other centres in
South Africa to visit relatives and friends (with whom he stays) and to give talks to gardening
clubs. He does not charge for these talks. And he pays his own expenses.
You are required to discuss whether Tommy Tosa is ordinarily resident in South Africa.
3.2 (40 minutes)

This question tests the definition of a ‘resident’ and, in particular, the meaning of the term
‘ordinarily resident’. It also tests the provisions of section 10(1)(h) and the judgments from Cohen
v CIR (1946 AD 173, 13 SATC 362), CIR v Kuttel (1992 (3) SA 242 (A), 54 SATC 298), ITC 1501
((1989) 53 SATC 314) and ITC 1529 ((1991) 54 SATC 252).
When Creighton Winterton died he bequeathed his farm to his only son, Sunny Winterton, subject
to his wife’s (Verity Winterton’s) life-time use of a guest cottage situated on it.
Verity Winterton then moved out of the ‘main’ farmhouse into the guest cottage. Sunny Winterton
then moved into the ‘main’ farmhouse.
Because Creighton Winterton had bequeathed the farm to Sunny Winterton, to be equitable, he
bequeathed some of his investments to his only daughter, Alice Bulwer. The balance of his
investments he bequeathed to Verity Winterton.
After Verity Winterton’s husband’s death, her sole interest in life has been her grandchildren. She
has six grandchildren in total, the four children of Sunny Winterton and the two children of Alice
Bulwer.
Shortly after Alice Winterton’s marriage to Donny Bulwer, they had emigrated from South Africa.
They are now ordinarily resident in Switzerland. To enable Verity Winterton to visit her
grandchildren (their children), they erected a ‘granny’ cottage for her use at their domestic
residence in Switzerland.
Since Verity Winterton had surplus furniture resulting from her move out of the ‘main’ farmhouse
into the guest cottage, she shipped this excess furniture to Switzerland and furnished the granny
cottage situated at the Bulwer’s domestic residence in Switzerland.
27
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
• 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.
3.3 (40 minutes)

This question tests the definition of a ‘resident’. It also tests the provisions of sections 10(1)(h),
10(1)(i), 10(1)(k), 20, 20A and 50D and the judgments from Cohen v CIR (1946 AD 173, 13 SATC
362), CIR v Kuttel (1992 (3) SA 242 (A), 54 SATC 298), ITC 1501 ((1989) 53 SATC 314) and
ITC 1529 ((1991) 54 SATC 252).
William Webb-Ellis sold a prime beach-front property 25 years ago. The capital profit he made
provided him with a life-time wealth. Never needing to work again, he pursued his passion,
namely, rugby. He played rugby until he became too old to be a player, and then for the past
20 years he has been a rugby coach and a rugby critique.
Five years ago William Webb-Ellis emigrated from South Africa. Prior to emigrating he sold his
house in South Africa. With some of his blocked funds, he purchased a beach-front penthouse (flat
on the top floor of a tall building). When he visits South Africa he lives in this penthouse. It is not
let when he is not in South Africa. He lives in Northampton, England. He helps coach the
Northampton Under-21 rugby team. He is not paid for the coaching that he performs.
William Webb-Ellis has not, however, ceased following rugby in South Africa. He supports the
Springboks (the South African national team) and the Sharks. He often visits South Africa to watch
these teams play. When in Durban, he helps with the coaching of the Sharks – he is regarded as an
expert on scrumming techniques. He is not paid when he helps coach the Sharks.
RESIDENCE AND SOURCE 29
William Webb-Ellis does not have a permanent establishment in South Africa.

When William Webb-Ellis emigrated he invested the balance of his blocked funds in local
dividend-yielding shares, local interest-bearing securities and local rent-producing properties.
Details of the amounts William Webb-Ellis earned from these sources in the 2022 year of
assessment are as follows:
• Local dividends of R400 000.
• Local interest of R200 000. None of the local interest he earns is from a ‘tax free investment’.
All his local interest accrues, annually in arrears, on the last day of February.
• Net rentals of R660 000. These rentals are collected by Justice & Law, a firm of attorneys on his
behalf. Justice & Law is fully responsible for administering all his rent-producing properties.
Over the past two years this rugby ‘hobby’ of William Webb-Ellis has cost him a lot of money in
that he has only expenditure and no earnings.
Matthew Bloxam, a friend of William Webb-Ellis, has suggested to him that he should ‘convert’ this
‘hobby’ into a business by charging a fee for his coaching services. Although this fee will not cover
his costs, Matthew Bloxam, believes that the loss from this coaching business will be deductible in the
determination of his South African taxable income.
Due to William Webb-Ellis’s numerous visits to South Africa he spends almost half the year in
South Africa.
Thomas Harris, another friend of William Webb-Ellis has warned him that should he end up
spending more than half a year of assessment in South Africa this could have adverse tax
consequences in South Africa. Details of the time he spent in South Africa in the 2022 year of
assessment and in the five previous years of assessment were as follows:
Year Present Absent
2022 151 214
2021 182 183
2020 182 184
2019 182 183
2018 182 183
2017 182 183
Arnold Williams, a third friend of William Webb-Ellis is of the view that due to the ownership of
the penthouse in South Africa, and because of his regular visits to South Africa, he could be
regarded as being ordinarily resident in South Africa.
Jem Mackie, yet another friend of William Webb-Ellis, a fourth friend, has informed him that even
if Arnold Williams’s, view is incorrect, he may still be a resident of the Republic resulting from the
time he spends in South Africa.
William Webb-Ellis, who is at present 52 years old, would like to know if the views or concerns of
any of his four friends as detailed above are valid.
You are required to
1. discuss whether William Webb-Ellis is ordinarily resident in South Africa during the 2022 year
of assessment,
2. assuming he is not ordinarily resident in South Africa during the 2022 year of assessment,
determine whether he could still be a resident of the Republic during the 2022 year of
assessment, and
3. explain whether he is carrying on business in South Africa in the 2022 year of assessment.
Then, assuming he is not a resident of the Republic, explain whether it is advantageous to him
to be carrying on business in South Africa in the 2022 year of assessment.
3.4 (30 minutes)

This question tests the definition of a ‘resident’ and, in particular, its so-called physical presence
test and section 9H.
Chuck Brisket emigrated from South Africa during the 2022 year of assessment. He was ordinarily
resident in South Africa for the first 153 days (until 31 July 2021) of the 2022 year of assessment
and then not ordinarily resident for the remainder of the 2022 year of assessment. He emigrated
from South Africa on 31 July 2021.
• In the 2021 year of assessment Chuck Brisket was physically present in South Africa for
365 days (and absent from South Africa for no days).
You are required to
1. discuss the ‘physical presence’ aspect of the definition of a ‘resident’ as set out in section 1(1)
of the Income Tax Act, and
2. determine whether Chuck Brisket is a resident of the Republic for the 2022 year of assessment.
3.5 (50 minutes)

This question tests the definition of a ‘resident’ and, in particular, its so-called physical presence
test and section 9H.
Siyabonga Shibobo emigrated from South Africa on 31 March 2017. (Prior to 31 March 2017 he
had never been out of South Africa.) He ceased to be ordinarily resident from that date. He returned
to South Africa frequently for both business and holiday purposes. He was physically present in
South Africa as follows:
• In the 2018 year of assessment Siyabonga Shibobo was physically present in South Africa from
1 March 2017 to 31 March 2017 (before his emigration) (31 days) and from 1 July 2017 to
31 August 2017 (62 days).
1 July 2018 to 31 July 2018 (31 days) and from 1 November 2018 to 31 December 2018
(61 days).
(61 days).
(61 days).
(61 days).
You are required to determine whether Siyabonga Shibobo was a resident of the Republic in each
of the 2018, 2019, 2020, 2021 and 2022 years of assessment.
3.6 (20 minutes)

This question tests the definitions of ‘gross income’ and a ‘resident’ and the provisions of
section 10(1)(o).
Sandy Dunes carries on business as a painting contractor in his own name, as a sole trader. He is
ordinarily resident in South Africa. He was recently awarded a contract to paint a building in
Namibia. This contract will take seven months to complete. All seven months are in the 2022 year
of assessment.
Sandy Dunes, himself, will spend the entire seven months at the painting site in Namibia. He will
not return to South Africa at all during this seven-month period, not even over weekends. As a
result he will be physically absent from South Africa for this entire seven-month period.
Five of Sandy Dunes’s employees will be employed on the painting site in Namibia for this same
seven-month period. All these employees are residents of the Republic. Of these employees,
• two have agreed that they will not return to South Africa at all during this seven-month period –
they will be physically absent from South Africa throughout this period, and
• three have agreed that they will work on this contract in Namibia only if they are able to return
to South Africa (to visit their families and friends) for the last weekend of every month. With the
exception of their weekend trips ‘home’ once a month, these employees will be physically
absent from South Africa during this seven-month period.
For the last two months of this contract, Sandy Dunes will employ a roofing contractor as a
subcontractor to carry out the repair or replacement of the fascias, the barge boards and the gutters
of the building in Namibia. This roofing contractor trades as a South African-registered close
corporation. It is a resident of the Republic. Its financial year ends on the last day of February.
You are required to state if
1. Sandy Dunes will be subject to normal tax in South Africa on the profit he makes on this
Namibia contract,
2. his two ‘non-returning’ employees will be subject to normal tax in South Africa on the salaries
they earn while working in Namibia,
3. his three ‘returning’ employees will be subject to normal tax in South Africa on the salaries
they earn while working in Namibia,
4. the roofing subcontractor (the close corporation) will be subject to normal tax in South Africa
on the amount he pays it for the work it does in Namibia, and
5. on the assumption that the three ‘returning’ employees were each given six return trips by air
between Namibia and South Africa at a cost to Sandy Dunes of R4 400 for each return trip,
discuss the amount to be included in each employee’s gross income as a result of this
arrangement.
3.7 (30 minutes)

This question tests the definition of a ‘resident’ and, in particular, the so-called physical presence test.
Roy Cissus emigrated from South Africa on 31 October 2020. He has since become ordinarily
resident outside South Africa. He has not been back to South Africa.
• Throughout the period 1 March 2020 to 31 October 2020 (a total of 245 days) Roy Cissus was
physically present in South Africa.
• In the 2020 year of assessment Roy Cissus was physically present in South Africa for the entire
year of assessment, that is 366 days.
• In the 2019 year of assessment Roy Cissus was physically present in South Africa for the
entire year of assessment, that is 365 days.
• In the 2018 year of assessment Roy Cissus spent a total of 61 days outside South Africa.
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’.
3.8 (20 minutes)

This question tests the definition of a ‘resident’, in particular, its physical presence test. It also tests
the definition of ‘gross income’ and sections 10(1)(gC), (h), (i), (k), 11(a) and 11(d).
Cope Hagen is ordinary resident in a northern-hemisphere country. She has been retired for a
number of years. She is 69 years old.
Cope Hagen does not enjoy the cold northern-hemisphere winter and has therefore, each year,
travelled to Cape Town where she stays in a holiday cottage from 1 October each year until
31 March of the following year. She purchased this holiday cottage for this purpose since she
enjoys the warm weather that Cape Town experiences during that time of year. She made her first
trip to Cape Town in the 2016 year of assessment when she stayed in South Africa from 1 October
2015 till 31 March 2016. She has made the same trip every year since then.
Cope Hagen’s receipts and accruals for the 2022 year of assessment were as follows:
• A social security pension the equivalent of R210 000 from the country that she is resident of.
• An annuity the equivalent of R192 000 from her former employer as a result of the 30 years
employment that she had with it. None of these years were spent in South Africa.
• Rentals of R108 000. The rentals of R108 000 are earned from her holiday cottage in Cape
Town. She lets it to tenants at a market-related rental for the six months of the year that she is
not in Cape Town. For this six-month period, she incurred deductible expenditure in the
determination of her taxable income of R45 000 in earning these rentals. She also incurred
R75 000 on improving the kitchen in her holiday cottage in Cape Town.
• Local interest of R135 000 from a bank in South Africa. It is not from a ‘tax free investment’.
And the local interest accrues to her, annually in arrears, on the last day of February.
• Local dividends from listed South African companies of R51 000.
You are required to determine
1. if Cope Hagen is a resident of the Republic for the 2022 year of assessment, and
2. then her South African taxable income for the 2022 year of assessment.
3.9 (20 minutes)

This question tests the definition of a ‘resident’ and in particular how it applies to a person other
than a natural person.
Details for 10 taxpayers, who are not natural persons, of the place where they
• were established or formed,
• were incorporated (if it is a company), and
• have their places of effective management,
follow:
Orange Limited
Orange Limited was both established and formed in South Africa. It was incorporated in South
Africa. And its place of effective management is in South Africa.
Valencia Limited
Valencia Limited was both established and formed in South Africa. It was incorporated in South
Africa. Its place of effective management is, however, outside South Africa.
Clementine Limited
Clementine Limited was both established and formed in South Africa. It was not incorporated in
South Africa. And its place of effective management is also outside South Africa.
Navel Limited
Navel Limited was not established or formed in South Africa. It was not incorporated in South
Africa. And its place of effective management is outside South Africa.
Seville Limited
Seville Limited was both established and formed outside South Africa. But it was incorporated in
South Africa. Its place of effective management is outside South Africa.
Kumquat Limited
Kumquat Limited was both established and formed outside South Africa. And it was incorporated
outside South Africa. But its place of effective management is in South Africa.
Tangerine Trust
The Tangerine Trust was both established and formed in South Africa. And its place of effective
management is in South Africa.
Mandarin Trust
The Mandarin Trust was both established and formed in South Africa. But its place of effective
management is outside South Africa.
Satsuma Trust
The Satsuma Trust was both established and formed outside South Africa. But its place of effective
management is in South Africa.
Jaffa Trust
The Jaffa Trust was both established and formed outside South Africa. And its place of effective
management is also outside South Africa.
You are required to state, for each one of the above 10 entities, if it is a resident of the Republic.
3.10 (20 minutes)

This question tests the deemed source of a pension including sections 9(2)(h), 9(2)(i) and 10(1)(gC)(ii).
Stanley Stanger is a resident of the Republic. He has, since 1 March 2021, been enjoying a pension
of R63 000 a month. It is for services rendered by him to a foreign-registered company of which he
was formerly its South African branch manager until his retirement from it on 28 February 2021.
This pension is payable to him for the rest of his life.
He worked for this foreign-registered company from 1 March 1986 until 28 February 2021. He was
at the following places at the following times:
• 1 March 1986 to 28 February 1995 in London,
• 1 March 1995 to 28 February 1998 in Durban,
• 1 March 2006 to 28 February 2014 in Durban,
• 1 March 2020 to 28 February 2021 in Durban.
You are required to
1. determine to what extent Stanley Stanger’s pension is from a source within South Africa, and
would thus be included in his South African income, and
2. as for above, but when, instead of him being employed by the foreign-registered company, his
employer had been the South African Government.
3.11 (20 minutes)

This question tests source including sections 9(1) and 9(2)(c), (d), (e) and ( f ), 21 and 23I. It also
tests the judgment from CIR v Epstein (1954 (3) SA 689 (A), 19 SATC 221).
A non-resident taxpayer will include in his South African gross income only his receipts and
accruals from a source within South Africa.
Betavision Films (Pty) Limited
Betavision Films (Pty) Limited is not a resident of the Republic. From time to time, it carries on, in
South Africa, the business of filming and making television programmes. It does not have a
permanent establishment in South Africa.
During Betavision Films (Pty) Limited’s 2022 year of assessment, it prepared a documentary for a
South African client on enjoying a holiday on the Transkei Wild Coast. It was paid R900 000 for
this contract. All the filming for this documentary was done on the Transkei Wild Coast.
Joe Clarke
Joe Clarke, a trainee accountant and a resident of Namibia, was sent by Wind & Hoek Inc, the
accounting and auditing firm he was employed by in Namibia to do certain audit work in Cape Town,
South Africa. His salary is R16 200 a month and the audit work took him two months to complete.
Liz England
Liz England now ordinarily resident in London (and not a resident of the Republic) receives
alimony of R20 000 a month from Philip England, her ex-husband, who is also not a resident of the
Republic, but who derives a taxable income of R324 000 from South African sources. He pays her
the alimony out of his earnings that are from a South African source. They were divorced in
Zimbabwe on 1 December 1960.
Ivor Mast
Ivor Mast is not a resident of the Republic. He is a sailor employed by the South African Merchant
Navy. Throughout the 2022 year of assessment the ship that he was aboard did not visit a South
African port. His annual salary is R223 400.
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.
3.12 (30 minutes)

This question tests source including sections 9(2)(c), (e), ( f ), and (i), 10(1)(l ) and 49B. It also
tests the judgment from CIR v Epstein (1954 (3) SA 689 (A), 19 SATC 221).
Iris Lens
Iris Lens, an optician (a maker or seller of spectacles and contact lenses) who is ordinarily resident
in Germany, agreed to assist Glass Balls (Pty) Limited, a South African manufacturer in the
production of artificial eyeballs. She did not visit South Africa, but gave her advice by e-mail. For
the advice she gave during the 2022 year of assessment, she billed Glass Balls (Pty) Limited the
equivalent of R7 000. She does not have a permanent establishment in South Africa.
Cheep-Cheap (Pty) Limited
Cheep-Cheap (Pty) Limited is not a resident of the Republic. It carries on business as a car-hire
firm based in Zimbabwe. During its 2022 year of assessment, Ian Whenwee paid the equivalent of
R12 000 to it for the use of one of its cars for two weeks. The car was used by him in South Africa
during the first week and in Zimbabwe during the second week.
Dutch Brown
Dutch Brown is not a resident of the Republic. He is an employee of Ryan Dykes N.V. based in
Holland. He was sent by it to Cape Town to assist with the opening of a water-purification plant.
While he was in South Africa, he was paid the equivalent of R120 000 for his three-month’ work.
Greg Hadenuf
Greg Hadenuf who is not a resident of the Republic, enjoys an annuity the equivalent of R360 000
from Kerry Kingston Limited, his former employer, a business that has its head office in Ireland.
He had been employed by it for 20 years. He had worked for it in South Africa for only the last five
years of his employment. The annuity is based on his 20-years’ service.
Bruce Bully
On 1 March 2021 Bruce Bully emigrated from South Africa to Australia. Since he was unable to
sell his beach cottage located on the KwaZulu-Natal North Coast before his departure for a
reasonable price, he kept it, and let it. During the 2022 year of assessment net rentals of R68 800
accrued to him from his beach cottage. He is now ordinarily resident in Australia. He is no longer a
resident of the Republic.
Hugo Jumbo
Hugo Jumbo, who is not a resident of the Republic, is a pilot with South African Airways. He flies
aircrafts solely on international routes. During the 2022 year of assessment, he was in South Africa
for 146 days. His annual salary is R900 000.
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.
3.13 (40 minutes)

This question tests the definition of ‘gross income’ and, in particular, the issue of source. It also
tests sections 9(2), 10(1)(i), 10(1)(k), 10(2) and (3), 10B, 11(g) and 11(h).
Five separate case studies follow: (Ignore the application of a possible double taxation agreement.)
Abe Abrahamson
Abe Abrahamson, a handicapped person, is unable to support himself financially. He has always
lived in Israel. He is not a resident of the Republic. His brother, Hymie Abrahamson, emigrated
from Israel to South Africa 20 years ago, but before doing so prepared his will. It stated that upon
his death (Hymie’s death) all his assets should be sold, and the net amount obtained from their sale
must be used to purchase a life-time annuity for Abe Abrahamson.
Hymie Abrahamson enjoyed a comfortable living in South Africa. He died on 12 June 2021 not
having changed his will. The total of his net estate, R5 400 000, was duly used to purchase an
annuity from an insurer for Abe Abrahamson of R600 000 (to be awarded at a rate of R50 000 a
month) for life. Abe Abrahamson, at the time of his brother’s death, was 47 years old.
In the 2022 year of assessment, R400 000 (eight months at R50 000 a month) accrued to Abe
Abrahamson from this annuity. This was his only receipt or accrual from South Africa.
You are required to determine, with reasons, the amount of Abe Abrahamson’s South African
taxable income for the 2022 year of assessment.
Oono Boono
Oono Boono has always been ordinarily resident in Iceland. He is not a resident of the Republic.
Many years ago he visited South Africa on holiday. While in South Africa he purchased a plot of
land near Pinetown, KwaZulu-Natal. He did nothing with the plot until April 2021 when he was
surprised to receive a visit in person, in Iceland, by Koos van der Merwe who wished to purchase
the land for industrial purposes. They could not agree on a purchase price but eventually concluded
a deal in Iceland whereby Koos van der Merwe would lease the land from Oono Boono for
20 years. No rental would be paid, but Koos van der Merwe would erect a factory costing not less
than R9 600 000 on the plot of land.
The factory was duly erected by Koos van der Merwe. It was completed in January 2022 at a cost
of R8 640 000.
Oono Boono incurred no deductible expenses in the determination of his South African taxable
income.
You are required to determine, with reasons, Oono Boono’s South African taxable income for the
2022 year of assessment. (Base your answer solely on the above information.)
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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.)
3.14 (50 minutes)

This question tests the definition of ‘gross income’ and, in particular, the issue of source. It also
tests sections 9(2), 10(1)(h), 10(1)(k), 10(1)(l ), 11(e) and 49B and the judgments from CIR v Lever
Bros & Unilever Ltd (1946 AD 441, 14 SATC 1 Millin v CIR ((1928) AD 207, 3 SATC 170), CIR v
Black (1957 (3) SA 536 (A), 21 SATC 226) and Transvaal Associated Hide and Skin Merchants v
Collector of Income Tax (Botswana) (Court of Appeal, Botswana) (May 1967) (29 SATC 97).
William Gilbert was a member of an English cricket team that toured South Africa during the
2020–21 cricket season. The tour commenced on 1 December 2020 and ended on 28 February
2021. He is ordinarily resident in England. He did not return to England with the rest of the team
but remained in South Africa for the months of March, April and May 2021. During this three-
month period he carried out the following:
• William Gilbert accepted the position of cricket coach of the Chatsworth Cricket Club in
Durban. He was approached by it because of his excellent reputation as a cricket coach in the
United Kingdom. He had been employed as player-coach of the Kent Cricket Club in the United
Kingdom for the past 10 years. He was paid R138 000 by the Chatsworth Cricket Club.
• William Gilbert became a member of the KwaZulu-Natal ‘day-night’ cricket team. He played in
five games for this team, in various parts of South Africa, and was paid by the KwaZulu-Natal
Cricket Union at a rate of R100 a run scored and R500 a wicket taken. His selection for the
KwaZulu-Natal ‘day-night’ cricket team was a direct result of the good form that he displayed
when playing in South Africa for the English cricket team and for the Chatsworth Cricket Club.
He scored 225 runs and took nine wickets in the games that he played for the KwaZulu-Natal
‘day-night’ cricket team.
• Nicholas Gray, a fellow member of the KwaZulu-Natal cricket team offered William Gilbert an
investment in Night Equipment (Pty) Limited, a Durban-based business and a resident of the
Republic. It produces cricket kit for the local day-night league. He lent it, in Durban, £20 000,
that was immediately converted into R438 000 by it. He also purchased 5 000 shares in it at a
cost of R3 a share. Interest of R8 760 was paid to him on 31 May 2021, 31 August 2021,
30 November 2021 and on 28 February 2022. An interim dividend of R900 was paid to him
on 15 May 2021 and a final dividend of R1 200 on 15 November 2021. He left South Africa
on 15 June 2021 and did not return during the 2022 year of assessment.
• While in South Africa William Gilbert wrote a book entitled A Guide to Coaching Cricket in
Third-World Countries. Although he actually wrote the manuscript in South Africa, it was
submitted to a United Kingdom publisher, who published the book in the United Kingdom. As
at 28 February 2022 royalties of £15 000, of which £12 000 resulted from sales of his book in
South Africa had accrued to him. (Use an exchange rate of £1 equals R21,90.)
• Since William Gilbert had expected to be in South Africa for almost six months he let his flat in
London. His lessee had agreed to forward to him, in South Africa, the monthly rental payable.
On 6 March 2021 he received R4 240 being rental for the month of March at £200 converted
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.
3.15 (75 minutes)

This question tests source, the general deduction formula, exemptions from normal tax and the
taxation of foreign entertainers and sportspersons. It tests sections 9(2), 11(a), 23(g) and 47A
to 47K inclusive. It also tests the judgments from CIR v Lever Bros & Unilever Ltd (1946 AD 441,
14 SATC 1, CIR v Epstein (1954 (3) SA 689 (A), 19 SATC 221), Sub-Nigel Ltd v CIR (1948 (4)
SA 580 (A), 15 SATC 381), Port Elizabeth Electric Tramway Co Ltd v CIR (1936 CPD 241, 8
SATC 13), CIR v Pick ‘n Pay Wholesalers (Pty) Ltd (1987 (3) SA 453 (A), 49 SATC 132) and
Solaglass Finance Company (Pty) Ltd v CIR (1991 (2) SA 257 (A), 53 SATC 1). It is a question
that is suitable for a student studying towards a Masters (or similar degree) specialising in taxation.
On 21 November 2021, Rich Coyne, the Australian number-one tennis player, won the South
African Open Tennis Tournament that was played in Johannesburg. He was awarded R1 000 000
for winning this event.
At the press conference after the final Rich Coyne announced that he would use some of the prize
money he had won to sponsor the costs of two young South African tennis players who would attend
a three-week coaching clinic in Australia. One of the young players would be from an underprivileged
group.
In addition to the prize money that Rich Coyne won he also earned a further R500 000 for
appearance moneys and fees for assisting with various advertising campaigns. These appearances
took place in Durban and Cape Town and the various advertising campaigns took place in
Johannesburg.
You are required to discuss
1. in general, the question of taxation of amounts earned by visiting sportsmen, and in particular
the amounts earned by Rich Coyne, and
2. whether he will be enjoy a deduction in the determination of his South African taxable income
for the costs he will incur when he sponsors the two young tennis players to attend the
coaching clinic in Australia. Assume that he will actually incur the expenditure in question
before 28 February 2022. Ignore the possible application of a Double Taxation Agreement.
3.16 (30 minutes)

This question tests the definition of ‘gross income’ including the terms ‘received by or accrued to’,
‘from a source within or deemed to be within South Africa’ and ‘not of a capital nature’. It also
tests section 9(2) and 10(1)(lA) and sections 47A to 47K inclusive and the judgments from Millin v
CIR ((1928) AD 207, 3 SATC 170) and CIR v Epstein (1954 (3) SA 689 (A), 19 SATC 221).
Kirk Pershore
Damson Plum, a resident of the Republic, carries on business in partnership with Kirk Pershore,
who is a resident of Australia. Kirk Pershore is not a resident of the Republic.
Under the partnership agreement, Kirk Pershore obtains orders in Australia for the sale of marula
fruit that is harvested in South Africa, and then shipped to Australia.
The function of Damson Plum is to contact South African marula-fruit farmers and arrange for the
maruls fruit to be shipped directly to the Australian purchasers, in accordance with the contract of
sale entered into in Australia.
Kirk Pershore is credited at an Australian bank with his share of the partnership profits. Both the
Australian and South African authorities have subjected his profits to tax. He has consulted you
querying the correctness of the action of the South African Commissioner in subjecting his share of
the partnership profits to South African normal tax.
You are required to state, with reasons, the points that you would include in your response to Kirk
Pershore’s query indicating to him what you consider to be the source of his profit. A letter is not
required.
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.
3.17 (40 minutes)

This question tests the definition of ‘gross income’. It tests sections 7(2)(a), 7(3), 9(1)(b), 10(1)(k),
10B and 49B and the judgment from Millin v CIR ((1928) AD 207, 3 SATC 170).
Rani Maha emigrated from India to South Africa two months before her marriage to Raj Rajah in
Durban on 1 May 2011. Due to exchange control regulations she was forced to leave certain assets
in India.
On 1 March 2016 the executor of Dinesh Maha’s, Rani Rajah’s late father’s, deceased estate
awarded certain assets to her in accordance with his will. Due to exchange control regulations these
assets were not permitted to leave India.
Rani Rajah (née Maha) has never worked. Prior to her marriage she was maintained by her parents.
Since her marriage she has been maintained by Raj Rajah. Despite not working she earns a
considerable amount each year from her investments.
On 1 March 2012 Raj Rajah donated to Rani Rajah R500 000 in cash on the occasion of the birth of
Hardick Rajah, their first child. The cause of this donation was the birth of Hardick Rajah. On
receiving this donation, she immediately donated R100 000 to Hardick Rajah (their first child). Raj
Rajah invested this R100 000 in a local interest-bearing security on behalf of Hardick Rajah. It is
not a ‘tax free investment’.
And on 1 March 2014 Raj Rajah donated to Rani Rajah another R500 000 in cash on the occasion
of the birth of Jasprit Rajah, their second child. The reason why he made this donation was to save
him normal tax on the income he may have earned from this capital. He did not, however, state this
publicly but instead stated that he made this donation to be equitable to both his children. On
receiving this donation, she immediately donated R100 000 to Jasprit Rajah (their second child).
Raj Rajah invested this R100 000 in a local interest-bearing security on behalf of Jasprit Rajah. It is
not a ‘tax free investment’.
During the 2022 year of assessment Rani Rajah had the following receipts and accruals from her
investments: (Those that are earned in India are expressed in their rand equivalent.)
From Rani Rajah’s assets in India before she became a resident
• Net rentals of R11 000.
• Foreign interest of R21 000.
• And foreign dividends from foreign companies of R33 750.
The interest results from an investment made in a bank in India. The foreign dividends are not
exempt from normal tax under section 10B(2).
From Rani Rajah’s ‘inherited’ assets in India
• And foreign dividends from foreign companies of R36 000.
The foreign interest results from an investment made in a building society in India. The foreign
dividends are not exempt from normal tax under section 10B(2).
From the donation Rani Rajah received from Raj Rajah on 1 March 2012
• Local interest of R23 000 from a non ‘tax free investment’.
• And local dividends from local companies of R36 900.
From the donation Rani Rajah received from Raj Rajah on 1 March 2014
• And local dividends from local companies of R41 000.
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.
3.18 (60 minutes)

This question tests the definition of ‘gross income’ including source issues. It tests sections 9(2)(i),
10(1)(gC), 10(1)(i), 10B, 18A, and 26A and paragraphs 3, 4, 5, 8 and 10 of the Eighth Schedule.
Harrison Evans spent most of the first 60 years of his life in the country of his birth (his native
country). He had, however, worked for Elaine Lancelot Plc, his employer, at its agency in South
Africa for a three-year period in his last 10 years of employment with it. In total he worked for it
for 30 years, and with the exception of the three years when he worked in South Africa, he had
worked for it solely at its head office in his native country. He was a member of its pension fund
throughout his employment with it. He retired from its employment at the age of 60 years.
Harrison Evans then emigrated from his native country to South Africa. Due to exchange control
regulations in his native country, he was forced to leave a substantial amount of capital (blocked
funds) in it. He invested these blocked funds in
• a rent-producing property (situated in his native country),
• dividend-yielding shares (in companies registered in his native country), and
• in an interest-bearing security. (These funds were made available in his native country and the
‘debtor’ is a resident of it.)
Although this ‘capital’ is blocked in his native country, returns resulting from the investment of this
capital are not ‘blocked’ in it.
For the past six years Harrison Evans has been ordinarily resident in South Africa.
Three years ago Benjamin Evans, Harrison Evans’s father, died. Benjamin Evans had been
ordinarily resident in Harrison Evans’s native country his entire life. Harrison Evans inherited from
Benjamin Evans the following assets:
• A rent-producing property (situated in his native country).
• A life-time annuity from the estate of Steven Ford, Harrison Evans’s late grandfather (who had
been ordinarily resident in Harrison Evans’s native country his entire life). This annuity is
funded by assets invested in his native country and is being paid to him on a monthly basis.
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
4.1 (20 minutes)

This question tests paragraph (d) of the definition of ‘gross income’. It also tests sections 10(1)(i)
and 10A.
Benny Bootha retired on 31 May 2021, when he attained the age of 65 years. He had been
employed by A Akbar & Sons CC for the past 20 years. At the date of his retirement, he was
earning a salary of R30 000 a month.
On Benny Bootha’s retirement he was awarded the following amounts by A Akbar & Sons CC:
• A lump sum of R75 000 as compensation for the loss of his office, and
• R45 000 for leave due to him that he had been unable to take.
Benny Bootha had never joined a pension fund or provident fund, nor was he a member of a
retirement annuity fund.
Benny Bootha invested R50 000 in a 7,5% local interest-bearing security on 1 July 2021. It is not a
‘tax free investment’.
With R60 000 of the balance of the amounts that had been awarded to Benny Bootha, he purchased
an annuity from an insurer. He paid R60 000 cash to it, and it, in turn, agreed to pay him R535,32 a
month for the rest of his life, the first payment commencing on 1 September 2021.
You are required to determine Benny Bootha’s income for the 2022 year of assessment. (His life
expectancy is 14,01 years.)
4.2 (40 minutes)

This question tests the definition of ‘gross income’ including its paragraphs (a) and (cB),
sections 10(1)(i), 10(1)(k), 10(2)(b) and 10A and the judgments from Armstrong v CIR (1938 AD
343, 10 SATC 1), Tuck v CIR (1988 (3) SA 819 (A), 50 SATC 98) and Maguire v C:SARS ([2015]
2 All SA 347 (SCA), 71 SATC 41.)
Nelis Winter
Nelis Winter had for many years operated a successful greengrocery business. He had traded in his
own name. The business comprised two separate divisions, namely, a
• fruit business, and
• vegetable business.
For the past five years Nelis Winter’s two children helped him run the business. On 1 March 2021
he split his business into its two divisions. He sold the fruit business to Oliver Winter, his son. And
he sold the vegetable business to Ginger Allam, his daughter.
• Oliver Winter agreed to pay him R50 000 a year for 10 years as the purchase consideration for
the fruit business.
• And Ginger Allam agreed to pay him R500 000 for the vegetable business. He agreed with her
that the R500 000 would be settled in 10 equal instalments of R50 000 each, with an instalment
being paid each year.
Doyenné du Comise
Under the last will and testament of Pyrus du Comise, Doyenné du Comise’s late husband, she, his
widow, aged 69 years, enjoys R30 000 a month for the rest of her life from his testamentary trust.
The assets of the trust have been invested in local rent-producing properties and local
interest-bearing securities. The return from these investments will finance the R30 000 monthly
45
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.
4.3 (20 minutes)

This question tests paragraph (a) of the definition of ‘gross income’. It also tests section 10A.
Albert Askey
Throughout the 2022 year of assessment, Albert Askey, who is ordinarily resident in South Africa,
was awarded the equivalent of R10 000 a month. It had been bequeathed to him by Norman Askey,
his late father, who was ordinarily resident his entire life in the United Kingdom.
Bill Blewett
Throughout the 2022 year of assessment, Bill Blewett, who is ordinarily resident in Australia, and
not a resident of the Republic, was awarded R1 400 a month. It had been bequeathed to him by
Crispin Blewell, his late father ,who was a resident of the Republic his entire life. Bill Blewett is no
longer a resident of the Republic.
Cheryl Chapman
On 1 July 2021, when Cheryl Chapman was 56 years and 3 months old, she sold her business in
Durban and retired to Mauritius. The consideration for the sale was an annuity of R18 000 (payable
at the rate of R1 500 a month) for life. She is no longer a resident of the Republic.
Derek Dyer
In 2017, Derek Dyer, a resident of the Republic, purchased from Edsel Dyer, his brother, for a cash
purchase price of R300 000, an annuity of R66 000 for 10 years. In the event of Derek Dyer’s death
within this 10-year period, the annuity was to be paid to his widow, Freda Dyer, for the remainder
of the 10-year period or the remainder of her life, whichever period was shorter. The annuity is
being awarded at a rate of R5 500 a month.
Derek Dyer died on 30 September 2021.
Eric Eller
On 15 May 2021, Eric Eller, then aged 80 years and 10 months, purchased from an insurer in South
Africa for R400 000 cash, a life-time annuity of R120 000 (payable at a rate of R10 000 a month),
payable as from 1 June 2021.
Fanny Fraser
In May 2015, when Fanny Fraser was ordinarily resident in France, and 61 years and 7 months old,
she purchased from an insurer for the sum the equivalent of R300 000, a life-time annuity for the
equivalent of R40 000.
When Fanny Fraser attained the age of 65 years she emigrated from France to South Africa (and
became ordinarily resident in South Africa).
Fanny Fraser has since continued to enjoy the annuity in South Africa.
You are required to state, with reasons, in each of the above situations, the amount to be included
in each recipient’s South African income in the 2022 year of assessment.
4.4 (10 minutes)

This question tests the provisions of section 7A(2). It also tests the general deduction formula
(sections 11(a) and 23(g)) and the judgment from Sub-Nigel Ltd v CIR (1948 (4) SA 580 (A), 15
SATC 380).
On 31 January 2022, Lucky Payback was awarded a lump sum of R45 000 from
Coral & Hutch CC, his employer, for a salary increase with retrospective effect, of which
• R24 000 relates to the 2022 year of assessment,
• R12 000 relates to the 2021 year of assessment,
• R6 000 relates to the 2020 year of assessment, and
• R3 000 relates to the 2019 year of assessment.
1. Lucky Payback’s gross income inclusions of his R45 000 lump sum, and
2. whether Coral & Hutch CC with a last day of February financial year end, will enjoy a
deduction in the determination of its taxable income for the R45 000 lump-sum amount it
awarded to him.
4.5 (45 minutes)

This question tests the normal tax liability determination using the normal tax model and sections 5, 6
and 7A(2).
On 31 December 2021, Willie Waite finally received his salary increase.
Willie Waite had since 1 March 2018 been on the annual scale of R288 000. This salary is his sole
receipt or accrual from Patiece Pays (Pty) Limited, his employer. His increase took his annual
earnings up to R374 400, and came into effect from 1 December 2021.
Willie Waite was pleasantly surprised on 24 December 2021 when he was awarded by Patiece Pays
(Pty) Limited, together with his increased salary from if for the month of December 2021, a lump
sum of R201 600 representing a back payment of his increase to 1 August 2019.
Willie Waite is 40 years old.
Willie Waite’s only other receipt or accrual for the 2022 year of assessment is net rentals of
R120 000 from a property that he owns in Lesotho. He purchased this property on 1 March 2021.
(No rentals therefore accrued to him in the 2020 and 2021 years of assessment.)
You are required to inform Willie Waite of the best way he can arrange his tax affairs so as to
minimise his normal tax liability. Your answer must be supported by schedules showing what his
normal tax liability is under each of the options available to him. (For this purpose you must
assume that taxation rates and rebates are identical for the 2019, 2020 and 2021 years of
assessment, to the 2022 year of assessment.
4.6 (10 minutes)

This question tests paragraph (a) of the definition of ‘gross income’ and the exemption from
normal tax provided for in section 10A. It also tests the application of section 7A(2).
On 31 March 2021 Morgan Moore was granted R100 000 by Silver Acres Limited, his employer,
representing an increase in his salary of R5 000 a month retrospective to 1 August 2019.
On the following day Morgan Moore used R96 440, of the R100 000, to purchase a life-time
annuity of R12 000 from an insurer. The annuity is divided into two equal six-monthly payments of
R6 000 each. They will be paid to him on 1 April and 1 October each year.
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.
4.7 (45 minutes)

This question tests the normal tax model including sections 7A(4A), 8C, 9(2)(i), 10(1)(gC),
10(1)(i), 10(1)(k), 10A, 11F and 26A and paragraph 12A of the Seventh Schedule. It also tests
paragraphs 5, 6, 8, 10, 20 and 35 of the Eighth Schedule.
On 1 April 2021 Grace Gotcha, aged 57 years, died leaving cash of R2 000 000 to her sole
survivor, her husband, Kelvin Gotcha.
Kelvin Gotcha then entered into an agreement with an insurer whereby he purchased an annuity
from it for R2 000 000. It provided for a monthly amount of R15 000 to be paid to him for the rest
of his life. He was then 60 years old and his life expectancy was 15 years. The first monthly
amount was awarded to him on 30 June 2021.
On 31 August 2021 Kelvin Gotcha retired from Outfitters Limited. He had been employed by it
since 1991. His employment with it had been spent both in
• South Africa where its head office is situated, and
• Zimbabwe where it has a sales outlet (a branch).
Kelvin Gotcha’s movements between South Africa and Zimbabwe had been as follows:
• 1 September 1991 to 28 February 2003 in South Africa.
• 1 March 2003 to 29 February 2008 in Zimbabwe.
• 1 March 2012 to 28 February 2017 in Zimbabwe.
• And from 1 March 2017 to 31 August 2021 in South Africa.
Kelvin Gotcha was offered by Outfitters Limited, on 15 May 2020, an option either to take a bonus
of R40 000 cash or to take up 2 000 shares in it at their then current market price. The market price
of a share at the date the option was granted was R20. It was a condition of the offer that he could
not exercise his option before 15 May 2021. He exercised his option on 15 May 2021 and
purchased the shares. The market value at that date had increased to R50 a share. On 31 January
2022 he sold his 2 000 shares in it,
• 500 shares at R73 each, and
• 1 500 shares at R71 each.
Kelvin Gotcha had intended to retire at the age of 65 years but after the death of his wife his health
deteriorated. In addition, Outfitters Limited had amalgamated with Suits Limited on 1 August
2021. He had been encouraged to retire on 31 August 2021.
Kelvin Gotcha’s medical scheme settled most of his medical expenses, except for R6 720 which he
had to pay himself. For the six months up to the date of his retirement he contributed R900 to the
medical scheme each month. This contribution was for his membership of the medical scheme. His
employer also contributed R900 a month to the medical scheme for his membership.
On Kelvin Gotcha’s retirement he was awarded the following amounts:
• A lump sum from Outfitters Limited of R40 000 in compensation for the loss of his office.
• A leave gratuity from Outfitters Limited of R10 000.
• A monthly pension of R13 200 from Outfitters Limited’s Pension Fund, with the first accrual
being on 30 September 2021. (He did not qualify for a lump-sum award from the pension fund.)
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.
4.8 (60 minutes)

This question tests the normal tax model including the definition of ‘gross income’ and sections 5,
6, 7A(2), 8(1), 8(1)(a), 8A, 8B, 8C, 9(1)(gC), 10(1)(i), 10(1)(k), 10(1)(nA), 11(nB) and 23(m). It
also tests the judgments from Armstrong v CIR (1938 AD 343, 10 SATC 1), SIR v Kirsch (1978 (3)
SA 93 (T), 40 SATC 95) and ITC 938 ((1960) 24 SATC 375).
Vere Wolf
Vere Wolf, a resident of the Republic, having reached the age of 65 years, retired from employment
with Howlers Limited, his South African employer, on 31 December 2021 after 30 years’ service to
it,
• the first 8 years having been served in Holland,
• the following 12 years having been served in South Africa,
• the following eight years and six months having been served in Holland, and
• the last 18 months in South Africa.
Vere Wolf’s receipts and accruals during the 2022 year of assessment comprised
• a salary of R52 500 a month, and
• R135 000 being a retroactive increase in his salary of R7 500 a month for the 18-month period
1 July 2020 to 31 December 2021.
On Vere Wolf’s retirement he was awarded by Howlers Limited, a retirement gratuity of R99 000.
Vere Wolf commenced receiving a pension of R36 000 a month. The first pension was awarded on
31 January 2022.
On 31 December 2001 in recognition of Vere Wolf’s having completed 10 years of devoted service
to Howlers Limited since he had joined it on 1 January 1992, he was given the right to purchase, at
any time before he retired, 30 000 shares in it at R30 a share. On 31 December 2001 the market
value of a share was R35.
On the day of Vere Wolf’s retirement, when the market value of a share in Howlers Limited, was
R52, he exercised his right and purchased 30 000 shares in it.
You are required to determine Vere Wolf’s income for the 2022 year of assessment.
Hugh Fox
Hugh Fox owned 10 000 shares in Wilddogs Limited (a resident of the Republic). It declared a
final dividend of 15 cents a share on 10 February 2022 payable to all shareholders whose names
appeared in its share register on 15 February 2022. The dividend distributions were electronically
banked by it into its shareholders’ bank accounts on 5 March 2022.
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.
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
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.
4.9 (75 minutes)

This question tests the definition of ‘gross income’ including its paragraph (i) and sections 8A, 8B,
8C and section 11(lA).
Dick Whittington
On 1 February 2004 Dick Whittington was given an option by Londontown (Pty) Limited, his
employer, to purchase 20 000 equity shares in it at R10 an equity share, with a restriction that he
could not sell them in the 10 years following the exercising of this option. The market value of an
equity share in it on 1 February 2004 was R12.
Dick Whittington exercised his option for 15 000 equity shares on 30 April 2018, when the market
value of a Londontown (Pty) Limited equity share was R15. He elected to defer the normal tax on
his gain until 30 April 2021, when the market value of a share in it was R25 an equity share.
On 30 April 2021 Dick Whittington released Londontown (Pty) Limited from the option for the
remaining 5 000 equity shares. In consideration for this release he received R60 000.
You are required to determine the amount to be included in Dick Whittington’s income in the 2022
year of assessment.
Frank Whiskas
Big Kahuna (Pty) Limited’s year of assessment ends on the last day of February. It awarded
5 000 of its equity shares to each of its employees on 1 February 2021. Its equity shares have a
nominal value of R1 each. They had a market value of R1,20 each on 1 February 2021. The only
restriction that applies to these equity shares is that they may not be sold by its employees before
1 February 2026, unless an employee is retrenched, or resigns.
If an employee leaves the employment of Big Kahuna (Pty) Limited before 1 February 2026, he
must sell his equity shares back to it at their market value on the date of his departure.
Big Kahuna (Pty) Limited appointed a trust to administer its equity shares under the agreement.
Frank Whiskas, an employee of Big Kahuna (Pty) Limited, resigned from its employment on
31 January 2022. Under the terms of the agreement, and while he was still in its employment, he
sold his equity shares back to it (through the trust) on 31 January 2022 at their market value of
R7 500 (5 000 equity shares at R1,50 each).
You are required to determine the normal tax consequences that arise out of the above information
for both Big Kahuna (Pty) Limited and Frank Whiskas.
Felix Friskies
Nestle Purina (Pty) Limited’s year of assessment ends on the last day of February. It awarded
1 000 of its equity shares to each of its employees on 1 March 2021. Its equity shares have a
nominal value of R5 each. They had a market value of R12 each on 1 March 2021. The only
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.
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.
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
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.
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.
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.
4.10 (30 minutes)

This question tests paragraphs (c), (cB), (i) and (n) of the definition of ‘gross income’,
sections 8(1), 10(1)(i), 10(1)(nA), 23(b) and 23(m), paragraphs 5(3)(a), 5(3)(b) and 5(4) of the
Seventh Schedule and the judgments from SIR v Watermeyer (1965 (4) SA 431 (A), 27 SATC
117), CIR v Lunnon (1924 AD 94, 1 SATC 7) and ITC 1289 ((1979) 41 SATC 149).
Adam Brand
Adam Brand, an agent, was awarded R500 000 by Four Stripes (Pty) Limited, a manufacturing
concern, upon the cancellation by it of his exclusive right to sell its products.
Ringo Bell
Ringo Bell, a porter at Golden Mile Hotels (Pty) Limited, an exclusive hotel, was awarded R7 680
a year from his employer as a uniform allowance.
Beverley Ash
Beverley Ash, the widow of Daniel Marshall Ash, a deceased former employee of Mojo Caira (Pty)
Limited, a retailer, is awarded R36 000 a year by it. This amount is awarded wholly at its
discretion.
Derek Board
Derek Board, a director of Tiger Match Limited, was awarded R50 000 as an ex-gratia payment for
the costs incurred by him in attending its directors’ meetings.
Abbie Bank
Abbie Bank, aged 48 years, received R6 000 from Tom Spender. She had lent him R5 000 on the
condition that at the end of the one-year loan period, he would refund R6 000 to her. The increased
amount represented their estimate of the sum that, at the end of the loan period, would have had the
same purchasing power as the R5 000 had at the commencement of the loan period, after allowing
for the effect of inflation.
Tracey Sales
Tracey Sales was awarded shopping vouchers valued at R2 000 from Cemsaves (Pty) Limited, her
employer, a large retailer, as a Christmas gift.
Ticky Hands
A watch, valued at R5 250, was awarded to Ticky Hands, an employee, from Big Ben (Pty)
Limited, her employer to commemorate 25 years of service to it by her. Big Ben (Pty) Limited, had
paid R4 800 for this watch when it was purchased.
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.
4.11 (40 minutes)

This question tests paragraph (c) of the definition of ‘gross income’.
Chester Field
When Chester Field commenced his business, his father, Win Field, provided the security for his
bank overdraft facilities. After trading for six months he, had built up substantial cash reserves with
the result that his banker no longer needed the security. Win Field therefore withdrew his security.
In return for providing the necessary security for Chester Field’s overdraft facilities, he gave Win
Field a new set of golf clubs valued at R19 500.
Peter Stuyvesant
John Rolfe is a property developer and dealer. He recently purchased a plot of land and erected on
it 12 identical townhouses. He sold 11 of them at R1 300 000 each. The ‘twelfth’ townhouse he
gave to his brother-in-law, Peter Stuyvesant, in return for him (Peter Stuyvesant) having drawn-up
the plans for the development. Peter Stuyvesant, a retired architect, had drawn-up the plans free of
charge. Since Peter Stuyvesant was most comfortable in his own home he sold this ‘twelfth’
townhouse to Pearl Vogue, his recently-divorced daughter, for R1 000 000. He sold it to her at this
‘discounted’ price due to her poor financial situation.
Leigh Court
While attending a dinner party, Leigh Court heard another guest at the party, John Player, state that
he wished to sell his Mercedes 500 SEA ‘sports’ car. One week later she was at another dinner
party when she heard Winston Mall state that he wished to purchase a Mercedes ‘sports’ car. She
told him that John Player was selling his Mercedes ‘sports’ car. As a result of her giving this
information to him, he purchased John Player’s car. On the completion of this purchase and sale
• John Player gave Leigh Court a ‘spotters’s’ commission of R5 000, and
• Winston Mall gave her a box of imported liqueur chocolates valued at R300.
Not being a chocolate eater and not consuming alcohol, Leigh Court gave this box of chocolates to
Virginia Silke, the hostess of the next dinner party that she attended.
Kent Lexington
While Kent Lexington was on his way home, and feeling lonely and cold, one night, he ‘picked up’
Goldy Mills who was standing on a street corner. After a brief discussion she agreed to keep him
warm that night. She kept her side of this verbal agreement and the next morning he gave her R300
for spending the night with him, being what they had verbally agreed to do the night before. Since
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.
4.12 (75 minutes)

This question tests various aspects of the definition of ‘gross income’ and, in particular, the terms
‘received by or accrued to’, ‘not of a capital nature’ and its paragraph (cB). It also tests
sections 7(8), 9A, 10(1)(g), 10(1)(gC), 10(1)(i), 10(1)(o), 10A, 11(a), 23(g) and 23(o). And it tests
the judgments from John Bell & Co (Pty) Ltd v SIR (1976 (4) SA 415 (A), 38 SATC 87), CIR v
Stott (1928 AD 252, 3 SATC 253), CIR v Paul (1956 (3) SA 335 (A), 21 SATC 1), Natal Estates
Ltd v SIR (1975 (4) SA 177 (A), 37 SATC 193), Berea West Estates (Pty) Ltd v SIR (1976 (2) SA
614 (A), 38 SATC 43), ITC 1481 ((1988) 52 SATC 285), ITC 1348 ((1981) 44 SATC 46), Cohen v
CIR (1946 AD 173, 13 SATC 362), CIR v Kuttel (1992 (3) SA 242 (A), 54 SATC 298) and Port
Elizabeth Electric Tramway Co Ltd v CIR (1936 CPD 241, 8 SATC 13).
You are the partner responsible for tax matters in a large audit firm. Your senior partner’s role
within the firm is to look after existing clients and to seek new clients. His work entails a large
amount of entertainment. While fulfilling this role he is often asked ‘tax’ questions by the people
he entertains. He has asked you to answer the following 11 unrelated tax questions so that he can
reply to the client or potential client. Unless otherwise stated, all taxpayers are residents of the
Republic.
Barry Cricket
Barry Cricket has been achieving a reasonable return from the letting of a block of 15 flats that he
purchased in 2003. He does not have a history of property dealing. He is aware that he can make a
substantial profit by selling the flats individually. He has made application for a sectional-title
register to be opened. To make the flats more attractive to would-be purchasers, he is considering
improving them.
You are required to briefly discuss, giving reasons, whether Barry Cricket’s receipts or accruals
from the sale of the flats are of a revenue nature.
Midwicket, Covers and Thirdman

Lloyd Midwicket entered into a five-year lease agreement with Bradley Covers. Under this lease
agreement, he paid Bradley Covers a premium of R150 000 on 1 March 2021 for the right of
occupation of trade premises. He then traded from these premises. He also paid Bradley Covers a
monthly rental of R7 500.
On 28 February 2022 Lloyd Midwicket, with Bradley Covers’s consent, ceded all his rights,
interests and privileges in, and to, the lease agreement to a substituted lessee, namely, Steven
Thirdman, for R165 000. Steven Thirdman will use the property for trade purposes.
You are required to discuss how these transactions affect the gross income inclusions for 2022 year
of assessment of Lloyd Midwicket and Bradley Covers.
Adam Bail
Adam Bail became a resident of the Republic during the 2021 year of assessment. He made an
investment outside South Africa before he became a resident of the Republic for the first time. This
investment was in the form of a foreign purchased annuity from an insurer. This purchased annuity
is for a 10-year period. The ‘capital element’ of each annuity that accrues to him is 60%. The
insurer now remits this annuity to him in South Africa.
You are required to discuss whether Adam Bail will be subject to normal tax in South Africa on
this annuity, and if so, determine the amount that will be included in his taxable income.
Gully and Point
Fanie Gully carries on business in South Africa as a purchaser and seller of imported goods. He
met Bruce Point, a businessman from Australia (and a resident of Australia), in Namibia. They then
concluded a contract in Namibia. Under this contract, Fanie Gully purchased goods from Bruce
Point for R18 000. Fanie Gully subsequently sold these goods at a substantial profit in Zimbabwe,
during one of his occasional trips to Zimbabwe.
You are required to
1. discuss whether Fanie Gully will be subject to normal tax in South Africa on the profit that he
makes out of the purchasing and selling of these goods, and
2. determine the source of the R18 000 that accrues to Bruce Point.
Alan Bat
Alan Bat was retrenched by Moore & Gunn (Pty) Limited, his employer, on 31 March 2021. He
was 49 years old at the time he was retrenched. He knew many customers in the local community
who had previously been customers of Moore & Gunn (Pty) Limited. If he became employed by a
‘competing’ employer within the region, it was possible that he would persuade these customers to
become customers of his new employer, rather than customers of Moore & Gunn (Pty) Limited.
Moore & Gunn (Pty) Limited therefore found that it was necessary to restrain Alan Bat from
working for a ‘competitor’ within the region. It paid him R1 020 000 not to work for a ‘competitor’
within the region for five years.
Alan Bat was also paid a salary of R17 500 for March 2021 by Moore & Gunn (Pty) Limited.
You are required to discuss whether the amounts awarded to Alan Bat by Moore & Gunn (Pty)
Limited are to be included in his gross income.
Edward Fine
Edward Fine spent the first 50 years of his life in South Africa. He then emigrated from South
Africa, and for the past 10 years, he has been living outside South Africa.
Despite Edward Fine living outside South Africa, he is still regarded as an expert on South African
wines. He is a wealthy man. He has not worked since inheriting his late mother’s estate 10 years
ago. He has investments both inside, and outside, South Africa. He spends all his time pursuing his
‘hobby’, namely, South African wines.
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 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.
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 1986 to 28 February 1990 in the United Kingdom,
• 1 March 2008 to 29 February 2008 in the United Kingdom, and
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.
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.
4.13 (25 minutes)

This question tests recoupments and deemed recoupments including sections 8(5)(bA), 8(5)(bB),
11(a) and 11(e).
Mike de Mechanic has for years serviced transport fleets. He is tired of seeing others make money.
So he is planning to obtain a delivery vehicle of his own and to commence his own transport
business. He is considering leasing the delivery vehicle, but is concerned about the normal tax
implications that may arise at the end of the lease term.
Mike de Mechanic has been informed by a finance house that he has three options available to him
at the end of the lease term. It has provided him with the following details relating to the delivery
vehicle:
• Cash cost (excluding value-added tax): R300 000.
• Lease term: three years.
• Lease rental: R12 000 a month.
• Expected market value in three years’ time: R200 000.
Mike de Mechanic’s three options are as follows:
• He can continue leasing the vehicle on expiry of the lease term at a rental of R10 a month.
• He can continue leasing the vehicle on expiry of the lease term at a rental of R2 000 a month.
• He acquires the vehicle by purchasing it for R40 000, being 20% of its then market value.
You are required to consider the normal tax implications to Mike de Mechanic of each of the
above three options on the expiry of the initial lease term of three years, and to state what amounts
are deductible in the determination of his taxable income, after the initial three-year lease term has
expired.
4.14 (25 minutes)

This question tests recoupments and deemed recoupments including sections 8(5)(a), 8(5)(bA),
11(a), 11(e), and 23(g) and the judgment from ITC 1546 ((1992) 54 SATC 477).
On 31 October 2022, the two-year lease agreement on Dr Phil Tooth’s dental chair will terminate.
He has been paying a rental of R3 000 a month for this chair since the commencement of the lease.
Dr Phil Tooth had wanted to purchase the chair for its cash price of R57 500 including 15% value-
added tax. But this would have resulted in him ending up with a cash-flow problem. His only
alternative had been to enter into the lease agreement. This he did through a finance house.
Three possible options have been provided to Dr Phil Tooth on the termination of the lease. These
options are as follows:
• He can purchase the chair by paying R1,15 (R1 plus 15 cents value-added tax) for it.
• He can continue to lease the chair at an annual rental of R1,15 (R1 plus 15 cents value-added
tax).
• He can ‘trade-in’ this chair for the lease of a newer model of the chair. The new monthly-lease
rentals will be reduced by R2 000 a month for the first 24 months of the new lease.
The market value of a similar second-hand chair on 31 October 2022 is R55 200 (R48 000 plus
R7 200 value-added tax at 15%).
Dr Phil Tooth is a vendor.
You are required to determine what effect each of the three possible options will have on Dr Phil
Tooth’s taxable income. Discuss the normal tax implications
• prior to 31 October 2022,
• on 31 October 2022, and
• after 31 October 2022.
Assume that the 2023 year of assessment legislation is the same as the 2022 year of assessment
legislation.
4.15 (45 minutes)

This question tests the definition of ‘gross income’ and sections 7(3), 10(1)(h), 10(1)(i), 10(1)(k),
11(a) and 11(c). It also tests the judgments from Port Elizabeth Electric Tramway Co Ltd v CIR
(1936 CPD 241, 8 SATC 13), Joffe & Co Ltd v CIR (1946 AD 157, 13 SATC 354), Burmah
Steamship Co Ltd v IRC (1931 SC 156, 16 TC 67), Stander v CIR (1997 (3) SA 617 (C), 59 SATC
212), C:SARS v Brummeria Renaissance (Pty) Ltd (2010 (6) SA 601 (SCA), [2010] SCA 99
(RSA), 69 SATC 205, ITC 976 ((1961) 24 SATC 812), ITC 117 ((1928) 4 SATC 70), ITC 1346
((1981) 44 SATC 31), ITC 701 ((1950) 17 SATC 108) and ITC 976 ((1961) 24 SATC 812)).
You are the partner responsible for tax matters in a legal firm. You are sometimes asked ‘tax’
questions by people who are aware of your work responsibilities. The following three issues require
your attention:
Biddy Notrumps
Biddy Notrumps is one of those incredibly lucky persons – she always wins everything – she has
won the monthly draw at her bridge club more times than any other member.
Last month Biddy Notrumps entered a competition run by a local newspaper and won an overseas
holiday. It is worth the equivalent of R60 000. It was a competition in which entrants were required
to answer 20 questions based on the bridge column that appears in the local newspaper. She has an
outstanding memory. She has throughout her life been a fanatical follower of bridge.
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.
4.16 (60 minutes)

This question tests the definition of ‘gross income’ including its so-called special inclusions and
deemed recoupments. It also tests sections 11(a), 12C and 19.
Olivepalm (Pty) Limited
In Olivepalm (Pty) Limited’s 2019 year of assessment, it purchased a large stock of soap suds (one
of its raw materials) from a supplier who was closing down for R100 000. It settled 40% of the
purchase consideration (R40 000) on the date of delivery.
For the following three years Olivepalm (Pty) Limited tried unsuccessfully to settle the 60%
balance (R60 000) of the purchase consideration. Every electronic money transfer failed to go
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.
4.17 (60 minutes)

This question tests paragraphs (c) and (d) of the definition of ‘gross income’. It also tests
sections 10(1)(gB) and 10(1)(mB) of the Income Tax Act and section 102 of the Tax Administration Act
and the judgments from CIR v Hersov’s Estate (1957 (1) SA 471 (A), 21 SATC 106), CIR v Lunnon
(1924 AD 94, 1 SATC 7), Burmah Steamship Co Ltd v IRC (1931 SC 156, 16 TC 67), Taeuber and
Corssen (Pty) Ltd v SIR (1975 (3) SA 649 (A), 37 SATC 129) and WJ Fourie Beleggings CC v C:SARS
(2009 (5) SA 238 (SCA), [2009] JOL 23375 (SCA), 71 SATC 125). This question is suitable for a
student studying towards a Masters (or similar degree) specialising in taxation.
A freak accident occurred in the factory of Kyllhim & Koffup Limited on 30 January 2019. This
accident resulted in
• the death of William (Will) Lyss, one of its employees,
• in his young wife Penelope (Penny) Lyss becoming a widow, and
• leaving David (Dad) Lyss and Paul (Pa) Lyss, twin boys, aged 4 years, without a father.
At the time of Will Lyss’s death he was only 31 years old. Being relatively young he had done
nothing about retirement or financial planning in the event of his death. He was not a member of a
retirement fund (pension, provident, retirement annuity, pension preservation or provident
preservation fund) nor did he own a life policy or an endowment policy. In addition, Penny Lyss
had not insured her husband’s life.
At a special meeting held on 1 March 2019 the board of directors of Kyllhim & Koffup Limited
awarded Penny Lyss R24 000. It was further agreed that this award would be paid to her at a rate of
R2 000 a month. The decision to award her this amount was made solely on the grounds of her
desperate financial circumstances. Its board of directors did not agree to provide her with an annual
amount of R24 000. Yet they did agree to meet again after a year had elapsed to reconsider the
widow’s financial situation.
Kyllhim & Koffup Limited’s board of directors met again on 1 March 2020 and this time awarded
R60 000 (payable at a rate of R5 000 a month) to Penny Lyss.
On 1 March 2021, a similar meeting was held, with Kyllhim & Koffup Limited’s board of directors
awarded R120 000 (payable at a rate of R10 000 a month) to Penny Lyss.
The Commissioner included R24 000 in the gross income of the Estate Late Will Lyss in its 2020
year of assessment (under the provisions of paragraph (d) of the definition of ‘gross income’ in
section 1(1) of the Income Tax Act). And this gross income inclusion was subjected to normal tax
as a ‘severance benefit’.
The Commissioner included R60 000 in the gross income of the Estate Late Will Lyss in its 2021
year of assessment (under the provisions of paragraph (d) of the definition of ‘gross income’).
Against this gross income inclusion no exemption from normal tax was granted. The R60 000 was
again subjected to tax as a severance benefit.
In the 2022 year of assessment the Commissioner did not include an amount in the gross income of
Estate Late Will Lyss. But he included the entire R120 000 in the gross income of Penny Lyss. No
portion of the R120 000 was exempt from normal tax and her normal tax liability was not
determined using the table that applies to a severance benefit.
The executor of the Estate Late Will Lyss objected to the 2020 and 2021 assessments of the estate
on the grounds that the amounts received by Penny Lyss did not constitute its (the deceased
estate’s) gross income. These objections were unsuccessful.
Penny Lyss objected to her 2022 assessment on the grounds that the R120 000 did not form part of
her gross income. Her objection was unsuccessful.
Both the executor of the Estate Late Will Lyss and Penny Lyss have appealed to the tax court. Due
to the inter-relationship between these two appeals, all the parties involved in this matter have
agreed to treat these two appeals as one. Both taxpayers refused to have their disputes solved by
using the alternate dispute resolution process. They also both decided not to solve their disputes by
way of a settlement agreement with the Commissioner.
appeals board.
You are required to prepare an argument to be presented by counsel for the Commissioner at the
tax court.
4.18 (60 minutes)

This question tests paragraph (c) of the definition of ‘gross income’ and sections 11(c) and 23(o). It
also tests the judgments from Port Elizabeth Electric Tramway Co Ltd v CIR (1936 CPD 241,
8 SATC 13), ITC 1490 ((1990) 53 SATC 108), ITC 1289 ((1979) 41 SATC 149 at 152)), Burmah
Steamship Co Ltd v IRC (1931 SC 156, 16 TC 67) and WJ Fourie Beleggins CC v C:SARS (2009
(5) SA 238 (SCA), [2009] JOL 23375 (SCA), 71 SATC 125). It is suitable for a student studying
towards a Masters (or similar degree) specialising in taxation.
The following report appeared in a local newspaper on 5 May 2021.
‘In a landmark judgment yesterday, police will have to pay convicted prostitute Priscilla “Pussy”
Galore R75 000 for infringing her human dignity by photographing her naked during a raid at
her home by seven male vice squad officers.
‘Prostitutes were people, too, Magistrate Wisdom Fine said in closing: “The marginalised people
of society have a greater need for the protection of the law than the prosperous, secure, wealthy
and even the middle class.”
‘“Pussy” Galore, aged 26 years, was arrested in July 2020 for soliciting for sex and earlier this
year she instituted a civil suit against the Ministry of Safety and Security for R150 000 (R25 000
plus R125 000 (see below)) for the infringement of her privacy and dignity during the arrest.
‘During the trial, that made national headlines, the court heard how under-cover South African
Narcotics Bureau Officer, Rudy Player, photocopied money and visited “Pussy” Galore in her
suburban home to trap her into offering him sex.
‘Officer Rudy Player had been fitted with listening devices and his exchange with “Pussy”
Galore, that included a massage and her statement that “anything goes for R300 except anal
sex”, was monitored by officers in a vehicle outside the house.
‘At Officer Rudy Player’s cue of “Have you seen (the movie) Nine-and-a-half Weeks?”, his
feller male officers burst into “Pussy” Galore’s bedroom and took at least nine photographs of
her while she held a shirt to cover her.
‘Magistrate Wisdom Fine dismissed “Pussy” Galore’s R25 000 claim that her privacy had been
infringed when police listened to her conversation with Officer Rudy Player.
‘He said that because Officer Rudy Player had consented for the conversation to be taped, there
had been no invasion of privacy.
‘Magistrate Wisdom Fine did, however, partly uphold “Pussy” Galore’s R125 000 claim that her
dignity had been infringed when police searched her room for “videos, condoms and oil” while
she was naked, and had photographed her without clothes on.
‘He said he understood it was police policy that the accused in a crime be present during a
search of their property so they could not hide evidence or claim that police had planted
evidence.
‘Yet he found that “police policy cannot outweigh a naked woman’s desire to leave a room of
men and get dressed”.
‘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.
appeals board.
You are required to prepare an argument to be presented on behalf of ‘Pussy’ Galore at the tax
court.
4.19 (45 minutes)

This question tests paragraphs (c), (d) and ( f ) of the definition of ‘gross income’. It also tests the
definition of a ‘severance benefit’ and the judgments from SIR v Somers Vine (1968 (2) SA 138
(A), 29 SATC 179) ITC 267 ((1933) 7 SATC 156), ITC 341 ((1935) 8 SATC 366), ITC 599
((1945) 14 SATC 272), ITC 39 ((1925) 2 SATC 70)), De Villiers v CIR (1929 AD 227, 4 SATC
86), ITC 143 ((1929) 4 SATC 220), Isaacs v CIR (1949 (4) SA 561 (A), 16 SATC 258) and CIR v
Delfos (1933 AD 242, 6 SATC 92). It is suitable for a student studying towards a Masters (or
similar degree) specialising in taxation.
Johnrock (Pty) Limited carries on business as suppliers of building materials to the construction
industry. It employs on average between 50 and 60 employees.
Five years ago, a delegation of employees approached Michael Stone, the managing director and
major shareholder of Johnrock (Pty) Limited with a request that it introduced a deferred
compensation scheme for its retiring employees. Their request was to fund this scheme out of
forfeited possible salary increases during the last five years of an employee’s employment contract.
On this basis, the scheme would result in no additional cost to it.
It is the policy of Johnrock (Pty) Limited to increase its salary levels each year in line with the
inflation rate. Another policy of it, is to award cash lump sums to retiring employees who have
leave due to them on the date of their retirement. There is, however, a 183-day (six-month) limit on
the number of days that can be ‘converted’ into a cash lump sum in lieu of leave.
Michael Stone, on behalf of Johnrock (Pty) Limited, turned down the request from its employees to
introduce a deferred compensation scheme stating that he had read somewhere that a former
Minister of Finance (he thought it was Owen Horwood) had told fellow politicians that the normal
tax concessions relating to retirement lump-sum awards at that time could also be enjoyed against
lump sums awarded to employees in lieu of leave. There was, therefore, no need for it to introduce
a deferred compensation scheme. All an employee had to do was to ensure that he had sufficient
days leave due to him on his retirement date that could be converted into a severance benefit of a
maximum of R500 000.
Peter Boulder retired from the employment of Johnrock (Pty) Limited on 31 December 2021
shortly after attaining the age of 60 years, its mandatory retirement age of its employees. At the
time of his retirement he had 204 days leave due to him.
Under Peter Boulder’s service contract with Johnrock (Pty) Limited, 183 days of this leave due to
him was commuted into a cash lump sum of R288 000 in lieu of leave not taken by him during his
employment with it.
In Peter Boulder’s return of income for the 2022 year of assessment he disclosed the R288 000
lump sum under the section marked ‘Gratuities Received’. By asterisk (*) he indicated that this
R288 000 was a severance benefit.
When the Commissioner assessed Peter Boulder for the 2022 year of assessment he (the
Commissioner) included the R288 000 in Peter Boulder’s gross income but did not exempt any
portion of it from normal tax. In addition, he subjected the entire R288 000 to normal tax at Peter
Boulder’s ‘marginal’ rate of tax.
Peter Boulder objected to this assessment on the grounds that the R288 000 should have been
subjected to tax on the special table that applies to a severance benefit.
A fair amount of correspondence then flowed between the Commissioner and Peter Boulder. It
transpired that the Commissioner was adamant that the R288 000 had to be included in Peter
Boulder’s gross income under paragraph ( f ) of the definition of ‘gross income’. And then since
paragraph ( f ) was not linked to the definition of a ‘severance benefit’, the concession of being
subjected to normal tax on the table applicable to a severance benefit was unavailable to Peter
Boulder.
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.
board.
You are required to prepare an argument to be presented on behalf of Peter Boulder at the tax court.
4.20 (45 minutes)

This question tests paragraphs (c) and (d) of the definition of ‘gross income’ and the term ‘of a
capital nature’ as used in the definition of ‘gross income’. It also tests the definition of a ‘severance
benefit’ and the judgment from Burmah Steamship Co Ltd v IRC (1931 SC 156, 16 TC 67). It is
On 1 January 2018 Professor Power was appointed Vice-Principal at the Natal English University.
This appointment was for a five-year period. Prior to taking up this position, he had been employed
as a professor in the School of Politics.
At a Council Meeting of the Natal English University held in March 2020 it was decided to abolish
all its Vice-Principals’s positions with effect from 30 June 2020. This decision was taken in an
attempt to reduce its expenditure. The cause of this decision was the reduced subsidy that it was
being awarded to it by Government.
Vice-Principals could take early retirement or they could return to the Schools from where they had
come. In the event of a Vice-Principal returning to the School he came from, his salary would be
that of his former post, and not that relating to a Vice-Principal’s post.
Professor Power elected to return to the School of Politics. This decision resulted in the salary he
earned being reduced by R15 000 a month. (The other three former Vice-Principals elected the
early retirement option.)
At first Professor Power accepted what had happened with only a slight reservation. But when he
found that his standard of living was being compromised as a result of his reduced earnings he
decided to challenge the decision made by the Council of the Natal English University.
Professor Power requested that the Natal English University compensate him with R450 000
(30 months at R15 000 a month) as a result of the way he had been treated. Being the only person
in this position, no other compensation claims were made against the Natal English University.
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.
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
5.1 (30 minutes)

This question tests the definition of ‘gross income’ and the exemptions from normal tax contained
in sections 10(1)(a), 10(1)(c), 10(1)(cN), 10(1)(g), 10(1)(gB), 10(1)(i), 10(1)(k), 10(1)(m),
10(1)(mB), 10(1)(nA) and 10(1)(u) and a nil value fringe benefit in paragraph 8(3) of the Seventh
Schedule. It also tests the judgment from COT v G (1981 (4) SA 167 (ZA), 43 SATC 159.)
Kobus Kultcher, a milk-development entrepreneur, has attracted numerous potential investors to his
‘Ripoff ’ milk scheme by his ambiguous advert stating the following:
‘I will double your 2022 earnings that my accountant will guarantee are not subject to taxation.’
Kobus Kultcher has supplied the following list of 10 potential customers and details of some of
their earnings for the 2022 year of assessment. They are all residents of the Republic. He thinks that
these earnings will not be subject to normal tax:
Sorry Salary
Sorry Salary’s earnings were as follows:
• An award of R20 000 in compensation for a disease contracted.
• A uniform allowance of R1 900.
• An annuity of R18 000 accruing from the sale of his former business.
Regret Maintenance
Regret Maintenance, aged 51 years, had the following receipts and accruals:
• Alimony of R25 000 from her former husband for a divorce granted in 1997.
• Local interest of R24 000 from a non-tax free investment.
• A total of R45 000 cash stolen by her from her latest boyfriend to pay for her children’s
university fees.
Take Disability
Take Disability’s earnings were as follows:
• A pension of R14 000 awarded under the Workmen’s Compensation Act.
• A profit of R13 000 from cakes sold at a church bazaar (an event where people sell things to
raise money, especially for an organisation that helps other people).
• A local dividend of R12 000 from De Klerk Limited (a South African company).
Church of Science Theologists
The Church of Science Theologists had the following receipts and accruals:
• A R11 000 profit from a book sale.
• A special bequest from Ronald Hubbard of R10 000.
• Sunday takings of R9 000.
Widow B J Vorster
Widow B J Vorster enjoyed a Government pension of R360 000.
Mamelodi Rural Community Council
The Mamelodi Rural Community Council earned property rates of R7 000 000.
73
Amateur Mud Wrestling Club

The Amateur Mud Wrestling Club had the following receipts and accruals:
• Members’ subscriptions fees of R6 000.
• Wrestling prize money of R5 000 won by its team in the Best Dressed Mud Wrestlers Competition.
Dawn Toad
Dawn Toad enjoyed royalties the equivalent of R4 000 from her book Wind in the Wattles payable
from England.
Captain Cumando
Captain Cumando’s earnings were as follows:
• A salary of R180 000 from the South African Defence Force.
• Free uniforms (also from the South African Defence Force) valued at R15 000.
• Free rations (valued at R72 000) also provided by the South African Defence Force.
Laziboy Workless
Laziboy Workless’s sole receipt or accrual was an Unemployment Insurance Fund award of R5 000.
You are required to state what amounts relating to the 2022 receipts and accruals of the potential
investor
1. are not subject to normal tax. In other words, those amounts that are either exempt from
normal tax, or do not form part of the taxpayer’s gross income, and
2. may not be subject to normal tax (may be exempt from normal tax) if more information was
available. Provide details of what additional information is required.
5.2 (25 minutes)

This question tests the exemptions from normal tax contained in sections 10(1)(i), 10(1)(k),
10(1)(nA), 10B and 12T.
Sister Susan, aged 38 years, and a resident of the Republic, resigned from her employment with
Loving Care Private Hospital (Pty) Limited on 31 October 2021 so as to marry. She had been
employed by it as a nurse for the last 20 years. She was compensated by it for the loss of her office
with an award of R36 000. She earned from it, up to the date of her resignation, a salary of R160 000
(eight months at R20 000 a month) and was given by it a uniform allowance of R500 a month.
Over the past 20 years Sister Susan had accumulated a number of investments. The following
investment returns accrued to her:
• A foreign dividend of R1 000 from a foreign company. It is also listed on the JSE Securities
Exchange.
• A foreign dividend of R2 000 from a controlled foreign company.
• A foreign dividend of R3 000 from a foreign company. She holds 30% of its equity shares.
• A foreign dividend of R4 500 from a foreign company. Its receipts and accruals were solely
local dividends.
• A foreign dividend of R5 400 from a foreign listed company.
• A local dividend of R6 000 from a local listed company.
• A local dividend of R7 000 from a local public company.
• A local dividend of R8 000 from a local private company.
• A local dividend of R9 000 from a local close corporation.
• Local interest of R25 000 from a non-tax free investment.
EXEMPT INCOME 75
• 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.
5.3 (15 minutes)

This question tests the definition of ‘gross income’ and the exemptions from normal tax contained
in section 10(1)(h), section 10(1)(i) and section 10B. It also tests section 7(2).
Don Wimble
Don Wimble, aged 33 years, a resident of the Republic, received a foreign dividend the equivalent
of R6 701,62 (R7 245 – R543,38) from his shareholding in Wimbledon UK Limited, a United
Kingdom registered company. The foreign gross dividend that accrued to him was R7 245. A non-
resident shareholders tax the equivalent of R543,38 was deducted before it was forwarded to him.
These foreign shares had been bequeathed to him by Ace Service, his late uncle, who had been
ordinarily resident his entire life in the United Kingdom. This foreign dividend is not exempt from
tax under section 10B(2).
Bobby Wembley
Bobby Wembley, aged 22 years, who is a resident of the Republic, was donated a rent-producing
property situated in Wembley, London, in the United Kingdom by Murray Wembly, his father, who
was ordinarily resident in South Africa at the time of this donation. During the 2022 year of
assessment net rentals the equivalent of R90 000 accrued to him from this rent-producing property.
Ellis Park
Ellis Park, aged 11 years, who is a resident of the Republic, earned local interest of R25 000 from
‘government’ stock. It was donated to him by his mother, Elna Versveld (nèe Newlands and
formally Park), aged 35 years. It is not a ‘tax free investment’. During the 2021 year of assessment
Elna Versveld and Moses Park, his father, were divorced. Not long after her divorce, Loftus
Versveld, aged 39 years, married her.
Socca Boots
Socca Boots, aged 27 years, who is a resident of the Republic, acquired ‘municipal’ stock by
inheritance from Jakob Boots, his late father, who at the date of his death was ordinarily resident in
Switzerland. It is not a ‘tax free investment’. Local interest of R45 000 from him accrued to it
You are required to determine whether the four amounts referred to above would be included in the
recipient’s income (gross income less exempt income), giving reasons for your determination.
5.4 (20 minutes)

This question tests the normal tax exemptions contained in sections 10(1)(i), 10(1)(k), 10B and 12T.
Shane Lynn retired at the age of 60 years on 31 March 2021. His entire working career had been
served with PMB Bank Limited, his sole employer. It awarded him R390 000 as compensation for
the loss of his office.
Shane Lynn used this award to finance a number of investments in local interest-bearing securities
that yielded the following amounts during the 2022 year of assessment:
Pietermaritzburg Municipal Savings Certificates 8 200
Treasury Bills 2 200
Incorporated building society fixed deposit 12 200
Savings deposit with the Corporation for Economic Development Limited 350
PMB Bank Limited current account 1 750
None of Shane Lynn’s above investments is a ‘tax free investment’.

Shane Lynn also invested R25 000 in a ‘tax free investment’ and interest of R1 500 accrued to him
from it.
Shane Lynn’s salary from PMB Bank Limited for the month of March 2021 was R31 300.
During the past 30 years Shane Lynn had purchased, and held, foreign and local dividend-yielding
shares. Foreign and local dividends accrued from the following companies:
Shares in South African companies 2 400
Shares in non-South African companies purchased by Shane Lynn
• while working in South Africa, the equivalent of 2 250
• by donation from Dudley Lynn, his father, who was ordinarily resident in the
United Kingdom at the time of the donation, the equivalent of 900
• by inheritance from Helen Lynne, his late mother who had never been ordinarily
resident in South Africa, the equivalent of 1 350
None of the dividends from the non-South African companies is exempt from normal tax under
section 10B(2). And amounts in a foreign currency are stated in their rand-equivalent amounts.
You are required to determine Shane Lynn’s income (gross income less exempt income) for the
5.5 (45 minutes)

This question tests the determination of a person’s normal tax liability. It also tests sections 5, 6,
7A(3), 10(1)(i), 10(1)(nA) and paragraphs 8(3) and 9(3) of the Seventh Schedule.
Able Seaman Sandy Sailalong completed his compulsory military training on 31 December 2021.
He commenced working for Marine Lines Limited on 1 February 2022 and earned R21 750 for his
first month’s work.
Able Seaman Sandy Sailalong had served in the navy for a continuous period of 48 months, being a
compulsory period of 24 months and a further period of 24 months as contemplated in
section 22(6A) or section 44(5A) of the Defence Act, and as a result, was awarded a gratuity of
R432 000 that he had qualified for by completing the extra 24 months.
Throughout Able Seaman Sandy Sailalong’s military service he earned a monthly remuneration of
R8 100 and a monthly bonus of R900. He was given uniforms valued at R7 200 and was provided
with rations (meals) valued at R6 000 a month and lodgings (accommodation) valued at R9 000 a
month.
All Able Seaman Sandy Sailalong’s medical expenses were borne by the navy. He is single,
21 years old, and does not contribute towards a pension, provident or a retirement annuity fund.
On 31 August 2021, being the date Able Seaman Sandy Sailalong attained the age of 21 years, he
was given the following investments by Bali Taipei, his grandfather, a resident of Taiwan:
• Shares in Taiwanese companies – foreign dividends the equivalent of R7 200 accrued to him.
• A rent-producing property situated in South Africa – net-rentals of R64 800 accrued to him.
• An investment with a South African bank – local interest of R29 850 accrued to him. It is not a
Able Seaman Sandy Sailalong’s accruals are those that occurred during the six-month period
1 September 2021 to 28 February 2022. The foreign dividends from the Taiwanese companies are not
exempt from normal tax under section 10B(2).
You are required to advise Able Seaman Sandy Sailalong on how best he should arrange his
financial affairs so as to minimise his normal tax liability. Your answer must be supported by
schedules showing his liability for normal tax under each option available to him. For the purpose
EXEMPT INCOME 77
of this question assume that the 2022 tax legislation and rates applied in all the years of assessment
concerned.
5.6 (50 minutes)

This question tests the definitions of ‘gross income’ including its paragraph (c) and ‘income’,
sections 10(1)(g), 10(1)(gB), 10(1)(i), 10(1)(k)(i), 10(1)(nA), 10(1)(nB), 10(1)(mB), 10(1)(q)
and 10(1)(u).
Listed below are situations when a taxpayer has received a benefit or advantage (or a benefit or
advantage has accrued to a taxpayer) that may be exempt from normal tax:
Rufous Heron
Rufous Heron is the cricket coach at Bird Boarding School (an exclusive high school for boys). He
is, as a condition of employment, required to wear cricket clothes (a cream shirt and longs) to work
each day. During the 2022 year of assessment it paid him R9 600 as a ‘uniform allowance’ to
enable him to obtain and maintain his required work clothes.
Wilson Petrel
Wilson Petrel is a security-officer employed by Bird Boarding School as a night watchman. He is,
as a condition of employment, required to wear a navy and light blue security-officer’s uniform to
work each evening. During the 2022 year of assessment it gave him three uniforms that had cost it
R6 000 in total.
Olive Magpie
Olive Magpie is the art teacher employed by Bird Boarding School. She is not required to wear a
special uniform to work. Yet so as to preserve her civilian clothes, she has elected to wear a special
uniform to work. She had three floral smock-style dresses specially made for her at a cost of
R4 800. (A ‘smock’ is a loose dress or blouse with the upper part closely gathered in tight pleats. It
is sometimes worn to protect clothes.) Bird Boarding School agreed to cover this cost and
reimbursed her R4 800 during the 2022 year of assessment.
Martin Sand
Martin Sand is a cleaner employed by Bird Boarding School. So as to improve his communication
with his fellow employees he attended a course on how to speak and write English. This course
cost him R2 000. Bird Boarding School reimbursed him this R2 000. He was successful in the
examination held at the end of the course. He was awarded a diploma at a ceremony given by the
presenters of the course.
Lilly Trotter
Lilly Trotter is a housekeeper employed by Bird Boarding School. She also wished to improve her
communication skills and enrolled for the same course as Martin Sand (see above). She was also
reimbursed the R2 000 she had incurred by Bird Boarding School. But she was unsuccessful in the
examination held at the end of the course. She was not awarded a diploma. She was not required to
repay the R2 000 to it.
Marion Sheath
Marion Sheath is an administrative assistant employed by Bird Boarding School. Bill Sheath, her
10-year-old son, is a scholar at Treetops Senior Primary School. He was awarded a R19 600
bursary by Bird Boarding School during the 2022 year of assessment. Her ‘remuneration proxy’
from it is R352 000 for the 2022 year of assessment.
Stanley Bustard
Stanley Bustard is the bursar (accountant) employed by Bird Boarding School. Kori Bustard, his
15-year-old daughter, is a scholar at Treetops Girls High School. She was awarded a R18 000
bursary by Bird Boarding School during the 2022 year of assessment. His ‘remuneration proxy’
from it is R612 000 for the 2022 year of assessment.
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.
5.7 (20 minutes)

This question tests the definition of ‘gross income’ and the provisions of sections 6quat, 9(2), 9(4)
and 10(1)(i). It also tests the judgment from CIR v Lever Bros & Unilever Ltd (1946 AD 441, 14
SATC 1).
Three year’s ago Roland Garros, aged 55 years, immigrated to South Africa from France. Since
then he has been a resident of the Republic. He is carrying on business in South Africa.
During the 2021 year of assessment Eugène Adrien Georges Garros, Roland Garros’s father, passed
away. He inherited a substantial sum of money from Eugène Adrien Georges Garros’s estate.
(Eugène Adrien Georges Garros was ordinarily resident in France for his entire life.) He obtained
permission from the Exchange Control authorities in South Africa to leave a portion of his
inheritance in France. The equivalent of R200 000 was invested in a French bank. For the 2022
year of assessment foreign interest the equivalent of R36 000 accrued to him from this source. The
French tax authorities levied him the equivalent of R6 000 taxation (non-refundable) on his foreign
interest accrual the equivalent of R36 000.
You are required to discuss the South African normal tax consequences of Roland Garros’s
investment. Then answer the following two questions:
1. Would the South African normal tax consequences have been different if he had inherited the
money and made the investment in the French bank before he became a resident of the
Republic for the first time?
2. Assume the facts to be the same as (1) above, but that on 1 March 2021 he terminated the then
existing investment and re-invested the funds with another French bank on the same day. What
would the South African normal tax position now be?
Ignore the provisions of the Double Tax Agreement between South Africa and France when
answering this question.
5.8 (20 minutes)

This question tests the income of a taxpayer for a broken period of assessment. It tests a number of
exemptions from normal tax including sections 10(1)(gB), 10(1)(i) and 10(1)(k). It also tests the
definition of ‘gross income’ and certain paragraphs of the Second Schedule.
Lewis Mercedes, a resident of the Republic, was employed by Intercity Express Deliveries CC as a
driver. During the 2022 year of assessment he was employed by it from 1 March 2021 to
30 September 2021 (the date of his death).
On 31 August 2021 Lewis Mercedes had been involved in a car accident while making a delivery
from Durban to Pietermaritzburg. He died a month later. He died at the age of 48 years.
In March 2021 Lewis Mercedes’s salary from Intercity Express Deliveries CC was R16 000. From
1 April 2021 to 30 September 2021 he earned a salary of R17 000 a month from it. He was also
awarded a cell phone allowance of R500 a month by it.
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.
5.9 (25 minutes)

This question tests the exemption from normal tax as set out in sections 10(1)(g), 10(1)(gB),
10(1)(gC), and 10(1)(k). It also tests sections 9(2)(i), 10(2)(b) and 10B.
Linus Cashew
Linus Cashew became a resident of the Republic only during the 2021 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 Regal & Marron de Lyon (UK) 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 annuity
under its social security system.
• An annuity from a testamentary trust under the will of Hazel Walnut, a late aunt, 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.
Lucy Almond
Lucy Almond ceased to be a resident of the Republic during the 2021 year of assessment. She is
70 years old. Her only receipts and accruals are from three annuities. These three annuities are from
South Africa sources. They are as follows:
• A pension (or annuity) payable by Chestnuts Limited, her former employer, for whom she
worked in South Africa for 32 years and outside South Africa for eight years.
• A pension (or annuity) payable by the South African government since she qualifies for this
annuity under its social security system.
EXEMPT INCOME 81
• 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).
5.10 (40 minutes)

This question tests the normal tax exemptions contained in sections 10(1)(c), 10(1)(cN),
10(1)(d)(iv)(aa), 10(1)(g), 10(1)(gA), 10(1)(gB), 10(1)(h), 10(1)(nA) and 10(1)(o).
In the following 12 situations the amount received by or accrued to the taxpayer may be exempt
from normal tax:
Tandimali Owen
Tandimali Owen, a retired former Minister of Finance, enjoys an annuity of R900 000 from the
Government. The annuity is payable to him for the services he previously rendered to the
Government.
John Balthasar
John Balthasar, a retired former State President, enjoys an annuity of R720 000 from the Government.
The annuity is payable to him for the services he previously rendered to the Government.
Joe Hannes
Local interest of R223 800 accrued to Joe Hannes (aged 66 years) during the 2022 year of
assessment from a local interest-bearing security. It is not a ‘tax free investment’. The local interest
from this investment accrued to him on 28 February 2022. He made this investment in South Africa
prior to his emigration from South Africa in the 2020 year of assessment. He is now ordinarily
resident outside South Africa. He is not a resident of the Republic. And he did not visit South
Africa during the 2021 and 2022 years of assessment.
Merwyn Oz
Local interest of R120 000 accrued to Merwyn Oz (aged 33 years) during the 2022 year of
assessment from a local interest-bearing security. It is not a ‘tax free investment’. The local interest
from this investment accrued to him on 28 February 2022. He has never been ordinarily resident in
South Africa. He made this investment in South Africa while on a cricket tour in South Africa in
the 2020 year of assessment. He did not did not visit South Africa during the 2021 year of
assessment. But he spent 146 days in South Africa in the 2022 year of assessment.
Zona Bloem
Zona Bloem is an air-hostess employed by KwaZulu-Natal Airways on its internal flights. She is
required to wear the air-hostess’s uniform while on duty. During the 2022 year of assessment she
was given six uniforms by her employer at a total value of R18 000.
Avis Budget
Avis Budget is employed by Discount Car Hire Limited as a branch manageress at its kiosk at a
local airport. She is required to wear a pink skirt and white blouse while on duty. It awards her
R1 200 a month as a ‘uniform’ allowance. She is required to use this ‘uniform’ allowance of
R1 200 a month to purchase pink skirts and white blouses.
Kaiser Kings Limited

Kaiser Kings Limited is a top professional football side in South Africa. Its share of the gate-money
from the South African Knockout Final was R330 000.
University of Pietermaritzburg’s Hockey Club
Gate-money of R1 000 was awarded to the University of Pietermaritzburg’s Hockey Club, a
hockey team based in Pietermaritzburg, being its share of the gate-money from the final of the
Protea Inter-Varsity Hockey Championship.
Nigel Bridge
First Officer Nigel Bridge is employed as an officer by Durban Ships Limited, a local company,
carrying on the business of shipping. His annual remuneration is R360 000. He is a resident of the
Republic. During the 2022 year of assessment he was outside South Africa for 270 days. He is
employed as an officer on a ship engaged in the international transportation of goods for reward.
Gail Port
Second Officer Gail Port is employed as an officer by Durban Ships Limited, a local company,
carrying on the business of shipping. Her annual remuneration is R288 000. She is a resident of the
Republic. During the 2022 year of assessment she was outside South Africa for 73 days. She is
employed as an officer on a ship engaged in the international transportation of goods for reward.
Gus Sniff
During the 2022 year of assessment Gus Sniff retired on the grounds of ill-health after having been
infected by poisonous gasses at his place of employment. A pension of R144 000 accrued to him in
the 2022 year of assessment from New Germany Chemicals (Pty) Limited, his former employer, a
chemical manufacturer, trading from just outside Durban as a result of him retiring on grounds of
ill-health after having been infected by poisonous gasses at his place of employment.
Digger Underground
During the 2022 year of assessment Digger Underground retired on the grounds of ill-health after
having contracted a disease that is commonly contracted by persons employed in mining
operations. A pension of R96 000 accrued to him in the 2022 year of assessment from Town Deep
Limited, his former employer, a mining company, trading from just outside Johannesburg.
You are required to state whether the amounts that were received by or that accrued to the
taxpayers as detailed above are exempt from normal tax.
5.11 (30 minutes)

This question tests the exemptions contained in 10(1)(gC), 10(1)(h), 10(1)(i), 10(1)(k), 10(1)(mB),
10(1)(nA), 10(1)(nB), 10(1)(o) and 10(1)(u). It also tests the provisions of sections 5, 6, 6B and 9(2)
and the judgment from ITC 1584 ((1994) 57 SATC 63).
Six separate case studies follow. In each case study, a taxpayer has a receipt or an accrual that may
be exempt from normal tax.
Desirée Majestic
Desirée Majestic emigrated from South Africa five years ago. She is now ordinarily resident
outside South Africa. Since her emigration she has visited South Africa each year, and for a period
of 25 days each year. When she emigrated she invested her blocked funds in local dividend-
yielding shares, local interest-bearing securities and local rent-producing properties. None of the
local interest-bearing securities is a ‘tax free investment’. And the local interest earned on these
local interest-bearing securities accrues, annually in arrears, on the last day of February. She enjoys
a substantial return from these investments. She has attained the age of 65 years.
It was necessary for Desirée Majestic to come to South Africa for nine months during the 2022 year
of assessment to attend to a domestic matter.
EXEMPT INCOME 83
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.
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.
5.12 (20 minutes)

This question tests the section 10(1)(h) and 10(1)(i) exemptions. It also tests the normal tax liability
determination.
Wonky Kneebone, aged 61 years, emigrated from South Africa six years ago, a few months after
his wife had died. He is not a resident of the Republic.
Wonky Kneebone invested his blocked funds in
• a local interest-bearing security,
• local dividend-yielding shares, and
• a rent-producing property.
Wonky Kneebone’s local interest-bearing security is not a ‘tax free’ investment. And the local
interest from it accrues to him, annually in arrears, on the last day of February.
In the 2022 year of assessment Wonky Kneebone earned the following amounts from these
investments:
• Local interest of R133 800.
• And net rentals of R126 000.
EXEMPT INCOME 85
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.)
5.13 (50 minutes)

This question tests the exemptions from normal tax contained in sections 10(1)(h) and 10(1)(i).
Kirk and Shelley Swainson
Kirk and Shelley Swainson emigrated from South Africa five years ago. They are now ordinarily
resident outside South Africa. Since their emigration they have visited South Africa for a period of
25 days each year.
When Kirk and Shelley Swainson emigrated from South Africa they invested their blocked funds in
• local dividend-yielding shares,
• local interest-bearing securities, and
• local rent-producing properties.
None of the local interest-bearing securities is a ‘tax free investment’. And the local interest earned
from all these interest-bearing securities accrues annually on the last day of February.
They enjoy a substantial return from these investments. They have both attained the age of
65 years.
Frank Colin Swainsong, their only son, a resident of the Republic needs to proceed abroad for nine
months during the current year of assessment and would like his wife to accompany him. The
problem is their children. They need to stay in South Africa for education purposes.
Kirk and Shelley Swainson are willing to come to South Africa for this nine-month period to look
after their grandchildren.
Will this intended stay of theirs in South Africa have adverse South African normal tax
consequences?
Clifford Swallow
Clifford Swallow emigrated from South Africa five years ago. He was then 55 years old. He is now
ordinarily resident outside South Africa. Since his emigration he has visited South Africa each year,
and for a period of 25 days each year.
When Clifford Swallow emigrated from South Africa he invested his blocked funds in
• local dividend-yielding shares,
• local interest-bearing securities, and
• local rent-producing properties.

None of Clifford Swallow’s local interest-bearing securities is a ‘tax free investment’. And the
local interest earned from all these local interest-bearing securities accrues to him annually on the
Clifford Swallow still enjoys a substantial return from these investments.
Clifford Swallow’s only daughter, Pearl Drake, took over his business when he emigrated. (He
traded in his own name and she now trade in her own name.) Since his departure this business has
not performed as well as it did at the time when he ran it. She needs him to come to South Africa
and to help her in this business for a four-month period during the current year of assessment. He
has agreed to help her but is concerned that his working in South Africa for this four-month period
during the 2022 year of assessment could have adverse South African normal tax consequences.
Pearl Drake could
• employ Clifford Swallow as a salaried employee in her business during this four-month period,
or
• they could enter into a joint venture sharing the profit made during this four-month period on a
50-50 basis.
Clifford Swallow has not carried on business in South Africa since he emigrated from South Africa.
What should they do?
The Wabler-Wren family
All three children in the Wabler-Wren family are talented sportsmen:
• The older son, Marsh Wabler-Wren is a top cricketer.
• His brother, Rufous Wabler-Wren, a top rugby player.
• And their sister, Victoria Wabler-Wren, a top tennis player.
Marsh Wabler-Wren
Marsh Wabler-Wren is ordinarily resident in South Africa. He is an employee of the United Cricket
Board (the board that controls cricket in South Africa). He has been selected to tour New Zealand,
Australia and England with the South African cricket team. He earns a monthly salary from the
United Cricket Board and will be paid his salary while ‘working’ (playing cricket) in New Zealand,
Australia and England.
The United Cricket Board is not regarded as an employer as contemplated in section 9(2)(h).
The tour is for seven months in total, the
• first two months are in New Zealand,
• next three months are in Australia, and
• last two months are in England.
There is a one-week gap in the tour between Australia and England. All the players will be
returning home to South Africa to visit family and friends during this week. This will be their sole
visit home during the tour. All seven months fall within the current year of assessment.
What are the South African normal tax consequences of the salary Marsh Wabler-Wren will earn
when he is ‘working’ outside South Africa?
Rufous Wabler-Wren
Rufous Wabler-Wren is ordinarily resident in South Africa. He is an employee of the South African
Rugby Board (the board that controls rugby in South Africa). He has been selected to tour Italy,
France, England, Wales, Scotland and Ireland with the South African rugby team. He earns a
monthly salary from the South African Rugby Board and will be paid his salary while ‘working’
(playing rugby) in Italy, France, England, Wales, Scotland and Ireland.
The South African Rugby Board is not regarded as an employer as contemplated in section 9(2)(h).
EXEMPT INCOME 87
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.
5.14 (30 minutes)

This question tests the normal tax exemption for a resident who works outside South Africa during
the year of assessment. It tests section 10(1)(o) and section 7B.
On 1 March 2021 Tom Tumbling, aged 45 years and a resident of the Republic, was ‘seconded’ by
Cherokee Purple (Pty) Limited, his South African-based employer, to work for it in Nigeria for an
eight-month period. He returned to South Africa on 31 October 2021.
Tom Tumbling is an expert on the growing of tomatoes. He earns a salary of R180 000 a month.
This was the first occasion that Cherokee Purple (Pty) Limited had required him to work for it
outside South Africa.
During this eight-month period, Tom Tumbling returned to South Africa for only the 21 day-period
from 1 August 2021 to 21 August 2021.
From 1 November 2021 to 30 November 2021 Tom Tumbling enjoyed his 30 days annual leave
from employment. Of his 30 days leave, 20 days leave entitlement accrued to his while he was
working in Nigeria. For November 2021 Cherokee Purple (Pty) Limited paid him his ‘leave pay’ of
R180 000.
A bonus of R240 000 was awarded to Tom Tumbling on 31 December 2021. His work throughout
the year (1 January 2021 to 31 December 2021) caused this bonus to be awarded to him.
On 28 February 2022 Tom Tumbling used R90 000 of his bonus to purchase shares in Cherokee
Purple (Pty) Limited, his employer company. These shares had a market value of R162 000 on this
day. The R72 000 ‘discount’ granted to his was because he is an employee of it who had served it
for a total of 20 years. He completed his twentieth year of employment with it on 28 February
2022. These shares are not subject to a restriction.
You are required to determine the South African income (gross income less exemptions from
normal tax) of the above receipts and accruals of Tom Tumbling for the 2022 year of assessment.
Support your determination with relevant information. Ignore the possible application of articles in
the double tax agreement between South Africa and Nigeria.
5.15 (40 minutes)

This question tests exemption from normal tax as provided for in section 10(1)(k) and section 10B.
It also tests the definitions of a ‘dividend’ and ‘gross income’, sections 9D, 25BA and 25BB.
Goals Galore (Pty) Limited is a resident of the Republic. Its year of assessment ends on last day of
February. It holds number of investments. For its 2022 year of assessment its investment receipts
and accruals are made up as follows:
Arsenal Aces Plc 10 000
Liverpool Legends Plc 20 000
Manchester Magicians Plc 35 000
Chelsea Champs Plc 42 000
Everton Eagers Plc 56 000
Coventry Clowns Plc (see further note 1 below) –
Iwisa Kings Limited (see further note 2 below) 60 000
Amakhosi Limited 70 000
Orlando Limited 80 000
Chiefs Collective Investment Scheme in Property 90 000
Pirates Collective Investment Scheme in Securities 100 000
Sundown Socks (Pty) Limited (see further note 3 below) 110 000
673 000
Further details relating to the above investment receipts and accruals are as follows:
• A foreign dividend the equivalent of R10 000 accrued to Goals Galore (Pty) Limited from
Arsenal Aces Plc (a foreign company). Goals Galore (Pty) Limited holds 10% of its equity
shares. The profits out of which it declared its dividend have not subjected to tax in South
Africa. Less than 50% of its equity shares are held by residents of the Republic.
Liverpool Legends Plc (a listed foreign company). Goals Galore (Pty) Limited holds 3% of its
equity shares. The profits out of which it declared its dividend have not been subjected to tax in
South Africa. Although it is not a resident of the Republic, its equity shares are listed on the
South African stock exchange, namely, the JSE Securities Exchange, in addition to being listed
on the stock exchange in its country of residence.
Manchester Magicians Plc (a foreign company). Goals Galore (Pty) Limited holds 3% of its
equity shares. Although it is not a resident of the Republic, it trades in South Africa. Of the
profits out of which its dividend was declared, 30% of them have already been subjected to
South African normal tax. Less than 50% of its equity shares are held by residents the Republic.
Chelsea Champs Plc (a foreign company). Goals Galore (Pty) Limited holds 6% of its equity
shares. Its assets are solely dividend-yielding shares in other companies. Of the dividends that
accrued to it, out of which its dividend was declared, 40% of them arose from local dividends
declared by South African resident companies. (These local dividends were subject to South
African dividends tax.) Less than 50% of its equity shares are held by residents of the Republic.
Everton Eagers Plc (a foreign company). Goals Galore (Pty) Limited holds 8% of its equity
shares. Although it is not a resident of the Republic, 75% of its equity shares are held by
residents the Republic. Its ‘preliminary’ net income (as envisaged in section 9D(2) and as
determined under section 9D(2A)) for its 2021 foreign tax year (ended 31 December 2021) out
of which its dividend was distributed was the equivalent of R1 200 000. Its ‘preliminary’ net
income the equivalent of R1 200 000 is before taking into account any exclusions (or
exemptions) as provided for in section 9D(9) and section 9D(9A). The equivalent of R300 000
EXEMPT INCOME 89
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 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
profit as a dividend. On 31 December 2021 it declared a dividend of R110 000. It is a resident

of the Republic.
You are required to determine Goals Galore (Pty) Limited’s income (gross income less exempt
income) resulting from its above receipts and accruals.
CHAPTER 6
GENERAL DEDUCTION FORMULA
6.1 (15 minutes)

This question tests the general deduction formula (section 11(a) and section 23(g)). It also tests the
definition of a ‘trade’, section 23(a), (b) and (e) and the judgments from Burgess v CIR (1993 (4)
SA 161 (A), 55 SATC 185), CIR v Felix Schuh (SA) (Pty) Ltd (1994 (2) SA 801 (A), 56 SATC 57),
Sub-Nigel Ltd v CIR (1948 (4) SA 580 (A), 15 SATC 380), CIR v Pick ‘n Pay Wholesalers (Pty)
Ltd (1987 (3) SA 453 (A), 49 SATC 132 and ITC 1641 ((1998) 60 SATC 493).
Fifteen statements on the general deduction formula follow:
1. Before a taxpayer may deduct an amount in the determination of his taxable income he must be
carrying on a ‘trade’ as defined.
2. A risky venture is a ‘trade’ as defined.
3. The receipt or accrual of a dividend or interest by an investor does not constitute a ‘trade’ as
defined being carried on.
4. The receipt or accrual of a rental by a property owner does not constitute a ‘trade’ as defined
being carried on.
5. A pensioner whose sole receipt or accrual is an annuity is not carrying on a ‘trade’ as defined.
6. Expenditure incurred outside South Africa is not deductible in the determination of taxable
income.
7. Expenditure incurred in the current year of assessment relating to income that will be produced
in the next year of assessment is deductible in the determination of taxable income only in the
next year of assessment.
8. Expenditure incurred in the current year of assessment relating to income that was produced in
the previous year of assessment is deductible in the determination of taxable income only in
the previous year of assessment.
9. An unrealised foreign exchange loss has been ‘actually incurred’.
10. An accounting provision created in the current year of assessment is deductible in the
determination of taxable income.
11. Before an expense may be deducted it must actually produce income.
12. ‘Income’ in the term ‘in the production of the income’ means gross income as defined less
exempt income.
13. An amount incurred by a taxpayer for a capital asset to be used by him in his trade will not be
deductible in the determination of his taxable income.
14. Since a man must eat to be able to work, the cost of his meals must be deductible in the
15. Dual purposes expenditure, partly for ‘trade’ as defined and partly for a domestic purpose, is
not deductible in the determination of taxable income.
You are required to answer true or false to the above 15 statements. Give a brief comment to
support your answer if necessary.
91
6.2 (25 minutes)

This question tests the general deduction formula (sections 11(a) and 23(g)) and, in particular, the
terms ‘actually incurred’ and ‘in the production of the income’, the definition of a ‘trade’ and
Practice Note 31. It also tests sections 23(e) and 23( f ) and the judgments from Schonegevel v CIR
(1937 CPD 258, 9 SATC 99), Sub-Nigel Ltd v CIR (1948 (4) SA 580 (A), 15 SATC 380), Port
Elizabeth Electric Tramway Co Ltd v CIR (1936 CPD 241, 8 SATC 13), CIR v Cathcart (1965 (1)
SA 507 (SRAD), 27 SATC 1), Solaglass Finance Company (Pty) Ltd v CIR (1991 (2) SA 257 (A),
53 SATC 1) and CIR v Pick ’n Pay Wholesalers (Pty) Ltd (1987 (3) SA 453 (A), 49 SATC 132).
The following extract has been taken from section 11(a) of the Income Tax Act:
‘For the purpose of determining the taxable income derived by any person from carrying on any
trade within the Republic, there shall be allowed as deductions from the income of such person
so derived . . . expenditure and losses actually incurred in the production of the income,
provided such expenditure and losses are not of a capital nature.’
‘Actually incurred’ and ‘in the production of the income’ are two terms that appear in the above
extract.
You are required to list 12 key points resulting from these two terms that should be taken into
account when considering whether an expense or loss is deductible under section 11(a) in the
determination of taxable income.
6.3 (40 minutes)

This question tests the general deduction formula (sections 11(a) and 23(g)). It also tests the
judgments from Lockie Bros Ltd v CIR (1922 TPD 42, 32 SATC 150), ITC 1242 ((1975) 37 SATC
306), COT v Rendle (1965 (1) SA 59 (SRAD), 26 SATC 326), ITC 1268 ((1977) 40 SATC 57),
ITC 184 ((1930) 5 SATC 268), ITC 894 ((1959) 23 SATC 475), X v COT (1960 (2) SA 682 (SR),
23 SATC 297) and ITC 815 ((1955) 20 SATC 487).
Losses suffered by a taxpayer as a result of theft or embezzlement may be deductible in the
determination of taxable income in certain circumstances.
Part 1
You are required to discuss the deduction in the determination of his taxable income of losses
suffered by a taxpayer as a result of theft or embezzlement. Your answer should refer to relevant
case law.
Part 2
You are required to apply the information that you have set out in your answer to Part 1 above, to
the following three situations, and then to determine whether the loss suffered by the taxpayer
would be deductible in the determination of its or his taxable income:
Margeworths Limited
Margeworths Limited, a publisher, suffered losses as a result of misappropriations by Rob Steel
and Bert Pinchmore, two of its clerks. The losses comprised
• thefts from petty cash,
• appropriations of money paid to them for its account,
• transfers of amounts from its bank account, and
• the ordering of goods in its name for their own personal use.
Leyland Chubb
Leyland Chubb, the senior partner in a firm of attorneys, Chubb & Lock, suffered his share of a
loss that was suffered by his firm when money in its safe belonging to a client, Harry Rich, was
stolen by burglars. It acts as his agent.
GENERAL DEDUCTION FORMULA 93
International Traders Plc

International Traders Plc, a United Kingdom registered company, suffered a loss of R25 250. The
money was embezzled by Manny Klepto, who was employed as its general manager of its South
African branch.
6.4 (25 minutes)

This question tests the general deduction formula (sections 11(a) and 23(g)). It also tests the
provisions of section 23(a) and (b). It also tests the judgment from Mallalieu v Drummond
(Inspector of Taxes) ([1983] 2 All ER 1095 (HL)).
During the 2022 year of assessment, Peggy Grunt and Hugh Grunt, her former husband, separated
on a permanent basis. She was granted custody of their two young children.
So as to supplement the alimony and maintenance money that Peggy Grunt was receiving from
Hugh Grunt, she took up the position of secretary with a local firm.
Peggy Grunt has incurred the following expenses since starting to work:
• Peggy Grunt has for the last seven months of the 2022 year of assessment placed their two
children in a crèche (nursery school) so that they will be looked after while she is earning her
salary. She pays R3 500 a month to the crèche for looking after them.
• Being a secretary to Lincoln Rodwell, the general manager, she must at all times look her best.
The clothes she previously wore as a housewife were unsuitable. She has been forced to
purchase a new wardrobe at a cost of R17 000.
• She has her hair styled once a week at an average cost of R80 a week. From the time she started
working to the end of the 2022 year of assessment she paid R2 240 to her hairdresser.
• She paid R980 to a night school for a course in shorthand. It had been many years since she had
previously used shorthand. She felt it was necessary to refresh her knowledge so as to be able to
do her work efficiently.
• She incurred travelling expenses of R3 360 for her trips to and from work. (She believes that this
amount must be deductible in the determination of her taxable income since if she did not go to
work then she would not be paid.)
• She was of the opinion that if she stayed on the right side of Lincoln Rodwell, she would soon
be promoted. She had, therefore, on a few occasions, entertained him in her home. She has
estimated that this probably cost her R2 160 during the 2022 year of assessment.
You are required to advise Peggy Grunt whether the above expenses that she has incurred will be
deductible from her salary in the determination of her taxable income.
6.5 (40 minutes)

This question tests the general deduction formula (sections 11(a) and 23(g)), the definition of a
‘trade’, sections 23(a), 23(b), 23(o), 23H, Practice Note 31 and the judgments from ITC 619
((1946) 14 SATC 486), ITC 1490 ((1990) 53 SATC 108), CIR v De Villiers (1929 AD 227, 4
SATC 86), Burgess v CIR (1993 (4) SA 161 (A), 55 SATC 185) and Reef Estates Ltd v CIR (1954
(2) SA 593 (T), 19 SATC 153).
Koos van der Merwe successfully campaigned for a seat in Parliament in a general election.
In Koos van der Merwe’s tax return for that year of assessment, he claimed as a deduction from his
salary as a Member of Parliament, the campaign and election expenses he had incurred.
Koos van der Merwe argued that this expenditure that he had incurred was not ‘once and for all’
expenditure, nor was it expenditure for the purpose of bringing into existence an enduring benefit,
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.
6.6 (25 minutes)

This question tests the general deduction formula (sections 11(a) and 23(g)), the provisions of
section 23(a) and the judgments from X v COT (1960 (2) SA 682 (SR), ITC 1490 ((1990) 53 SATC
108), ITC 658 ((1948) 15 SATC 498) and ITC 49 ((1926) 2 SATC 122).
Six case studies follow:
Riff-Raff
Riff-Raff, the local hairdresser, paid damages to two of his customers, namely, the Afro sisters,
Violet and Magenta. Both are suffering as a result of his faulty equipment:
• Violet Afro was burnt by a hairdryer of his, while
• Magenta Afro suffered an electric shock.
Ismail and Asmal
Ismail and Asmal, a firm of attorneys, paid compensation to a client for the maladministration of a
deceased estate.
Pineville Supermarket
Pineville Supermarket remained open on a public holiday. It was subsequently fined for trading.
Jayabalyn Naidoo, its proprietor, was also fined for contravening price control regulations.
Anil Simmahdri
Compensation was paid by Anil Simmahdri, the owner of a dry-cleaning business, to Kathryn
Sargent, one of his customers for the loss of two suits that had been entrusted to his care by her.
Rainbow Construction Limited
Ten years ago Rainbow Construction Limited erected a block of flats for Violet Indigo, a client in
accordance with his specifications. The block was completed and handed over to her. The contract
consideration was settled in full.
During Rainbow Construction Limited’s 2022 year of assessment the external walls of Violet
Indigo’s block revealed dampness. It was then discovered that the walls had not been built
according to specifications. She instituted an action against it for damages. It then settled the
damages.
Neville Pfuhl
Neville Pfuhl is involved in the retailing of gas and petrol lamps. He recently sold a lamp to
Redvers Byrne under a guarantee. This particular lamp exploded causing injuries to Redvers Byrne.
He then paid damages to Redvers Byrne.
You are required to, in each of the above situations, determine, giving full reasons, whether the
expenditure would be deductible from the respective taxpayer’s income.
6.7 (75 minutes)

This question tests the general deduction formula (sections 11(a) and 23(g)), sections 11(cA),
11(m), 23(a), 23(b) and 23(g) and the judgment from ITC 1381 ((1983) 46 SATC 75).
Arnie Soupastarr is a partner in a firm of attorneys who practise in Johannesburg. There are a total
of four partners in the firm. Profits are shared equally between them. He is 40 years old and
unmarried. He has incurred a number of expenses during the 2022 year of assessment. He would
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
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.
6.8 (45 minutes)

This question tests the general deduction formula (sections 11(a) and 23(g)), the definition of a
‘trade’, sections 11(cA), 23(a), 23(b) and 23( f ). It also tests Practice Note 31 and the judgments
from Mallalieu v Drummond (Inspector of Taxes) ([1983] 2 All ER 1095 (HL)), ITC 1381 ((1983)
46 SATC 75), Burgess v CIR (1993 (4) SA 161 (A), 55 SATC 185) and ITC 1490 ((1990) 53
SATC 108).
Doctor Able Hand and Doctor Wobblie Legg
Doctor Able Hand and Doctor Wobblie Legg are general practitioners who trade in partnership
sharing profits and losses equally. At a partners’ meeting held three years ago, they (the partners)
agreed that they would always wear white safari suits (with long trousers) to work. During the 2022
year of assessment Dr Able Hand purchased five replacement safari suits at a cost of R7 500 in
total.
Quickfix (Pty) Limited

Quickfix (Pty) Limited carries on the business of repairing motor vehicles. In total, it employs
25 mechanics. It leases overalls to be worn by them at work. On a Monday morning at 07h30 each
mechanic is handed a ‘clean’ overall. On a Friday afternoon at 15h30 each mechanic hands the now
‘dirty’ overall to the workshop manager. At 16h00 on a Friday the lessor of the overalls delivers
25 ‘clean’ overalls to the workshop manager and takes away the 25 ‘dirty’ overalls. For this service
it paid the lessor of the overalls R27 500 during its 2022 year of assessment.
Adam Bright
Adam Bright, aged 22 years, is a third-year full-time university student. On 1 March 2021 he was
granted a R300 000 student loan by a local bank. The loan is subject to interest at a rate of 6%. On
the same day he invested the entire R300 000 into a secure interest-bearing security earning interest
at a rate of 9% with a local financial institution. It is not a ‘tax free investment’. It was of such a
nature that absolutely no risk was attached to it. He incurred interest of R18 000 on this loan, while
R27 000 interest accrued to him from his investment.
Bill Chance
Bill Chance, aged 23 years, is a third-year full-time university student. On 1 March 2021 he was
granted a R300 000 student loan by a local bank. The loan is subject to interest at a rate of 6%. On
the same day he invested the entire R300 000 into a single-premium one-year insurance policy. It is
not a ‘tax free investment’. It guaranteed a return of 4%, but if the insurer performed well, the
return could have been as high as 15%. At the end of the one-year period this insurance policy
yielded a return of 7%. Bill Chance had no other receipts or accruals in the 2022 year of
assessment.
Classic Wines (Pty) Limited
Only one wine estate in South Africa, namely, Classic Wines (Pty) Limited, produces Burgundy a
red-wine blend. It is a top seller both locally and abroad. Baron Edelrood was employed as its
winemaker. During its 2022 year of assessment he resigned from its employment. And so as to
protect its Burgundy market, it paid him R3 000 000 in return for him agreeing not to make
Burgundy or a similar wine for another wine producer in South Africa within a period of five years.
John McBratt
John McBratt, South Africa’s second-best male tennis player was fined R5 000 for ‘racquet abuse’
during the final of the South African Closed Tennis Tournament played in Durban on 4 June 2021.
He was runner up in the tournament and earned prize money of R120 000.
Suede Nu-Buck
Suede Nu-Buck is a salesman who sells leather on a commission basis to footwear and clothing
manufacturers. He operates in the KwaZulu-Natal area. The more manufacturers he can call on, the
greater the commission he will earn. He therefore desires as little time as possible on the road when
calling on customers and potential customers. He drives like a ‘bat-out-of-hell’ and seldom keeps to
the speed limit. He has been fined for speeding on numerous occasions but maintains that it is
worth it, since by driving fast he manages to call on more customers and thereby earn more
commissions. In the 2022 year of assessment his fines amounted to R18 000 and his commissions
to R240 000.
Speedy Caveman
Speedy Caveman is employed by Durban Racing Clubs on
• a full-time basis in its race-card production division, and
• part-time basis as one of its race commentators.
Speedy Caveman is paid a salary by each division.
The race-card production division is in central Durban while the two race courses are in two of
Durban’s suburbs. During the 2022 year of assessment Speedy Caveman incurred travelling
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
Vistula Carpathian’s returns from these investments constituted her sole receipts and accruals in the
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.
6.9 (40 minutes)

This question tests the general deduction formula (sections 11(a) and 23(g)) and the judgments
from CIR v George Forest Timber Co Ltd (1924 AD 516, 1 SATC 20), New State Areas Ltd v CIR
(1946 AD 610, 14 SATC 155) and ITC 1255 ((1976) 39 SATC 27).
Abraham Marcus, an accountant, carried on practice in a two-man partnership in Pretoria until
March 2021, when his partner died. He then practised on his own, under the old firm name, until
May 2021. Then, in May 2021 he entered into a partnership agreement with Raymond Roberts,
admitting him as an equal partner into his accounting practice with effect from June 2021. Prior to
this time Raymond Roberts had practised as an accountant in Durban.
Their partnership agreement, provided as follows:
‘The parties agree that the firm shall pay on behalf of Raymond Roberts his expenses of moving
from Durban to Pretoria for the purpose of taking up the said partnership, which expenses shall
include
• the agent’s commission paid by him for the sale of his house in Durban,
• the cost of moving his household furniture and effects from Durban to Pretoria including
storage, if any, and delivery to his new residence in Pretoria, and
• the transfer and bond costs in connection with the purchase by him of a house in Pretoria.’
Pursuant to the above obligation, R180 000 was paid to Raymond Roberts by the partnership to
cover what was described, in the statement of profit and loss and other comprehensive income of
the partnership, as removal expenses. The R180 000 was determined as follows:
• 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
6.10 (35 minutes)

This question tests the general deduction formula (sections 11(a) and 23(g)), the provisions of
section 7A(2) and the judgments from CIR v Delfos (1933 AD 242, 6 SATC 92), Concentra (Pty)
Ltd v CIR (1942 CPD 509, 12 SATC 95) and SIR v Silverglen Investments (Pty) Ltd (1969 (1) SA
465 (A), 30 SATC 199), CIR v Pick ‘n Pay Wholesalers (Pty) Ltd (1987 (3) SA 453 (A), 49 SATC
132), Mallalieu v Drummond (Inspector of Taxes) ([1983] 2 All ER 1095 (HL) at 1100a), Usher’s
Wiltshire Brewery Ltd v Bruce (1915 AC 433), Sub-Nigel Ltd v CIR (1948 (4) SA 580 (A) at 592,
15 SATC 381), The Texas Co (Australasia) Ltd v The Federal Commissioner of Taxes ((1939–40)
63 CLR 382 at 427) and AGC (Advances) Ltd v The Commissioner of Taxation of the
Commonwealth of Australia ((1974–5) 132 CLR 175 at 197).
Due to losses resulting from foreign exchange fluctuations, Gold Dollars (Pty) Limited did not
award directors’ fees and remuneration to its two directors, Sterling Ailing and Penny Rand, in its
2021 year of assessment. In addition, no remuneration was paid to them during its 2021 year of
assessment.
During its 2022 year of assessment Gold Dollars (Pty) Limited obtained a profitable local agency.
Its financial position improved to such an extent that it was able to pay both directors, not only their
2022 fees and remuneration, but also R300 000 each for services rendered to it during its 2021 year
of assessment.
You are required to
1. comment on whether this R600 000 expenditure incurred by Gold Dollars (Pty) Limited is
deductible in the determination of its taxable income, and
2. state how Sterling Ailing and Penny Rand will be subject to normal tax on the R300 000 they
each received.
6.11 (35 minutes)

This question tests the general deduction formula (sections 11(a) and 23(g)), paragraph (a) of the
definition of ‘gross income’, the definition of a ‘severance benefit’, sections 11(m), 23B(3) and the
judgments from W F Johnstone and Co Ltd v CIR (1951 (2) SA 283 (A), 17 SATC 235) and
Provider v COT (1950 SR 161, 17 SATC 40).
Michaelson (Pty) Limited has traded as a hardware merchant in Pietermaritzburg for a number of
years. It started as a one-man business, but over the years, it has expanded into a large and
successful organisation.
Two years ago Michaelson (Pty) Limited implemented a provident fund scheme for its employees.
But due to one of the rules of this provident fund, an employee, namely, Walter John, 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 provident fund. He was at that stage 58 years old.
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.
6.12 (40 minutes)

This question tests the general deduction formula (sections 11(a) and 23(g)), sections 11(bA),
23(a), 23(b), 23(m), 23(o) and the judgments from ITC 1139 ((1968) 32 SATC 83) and ITC 1490
((1990) 53 SATC 108). It also tests section 104 of the Tax Administration Act.
Lange Tshabalala is a retired judge. He is now 85 years old. His income is made up of
• his pension,
• an annuity from a retirement annuity fund, and
• the returns from his various investments (taxable dividends and local interest).
Although retired, Lange Tshabalala is required, from time to time, to judge on certain issues,
usually as part of a tribunal (a group of three people to settle certain types of disputes). Since
judges are expected to provide services of this nature, he is not paid for them.
Lange Tshabalala lost his driver’s licence two years ago. His wife, Miarium Tshabalala, aged
78 years, has never driven a car. He is unable to use public transport. He therefore employs Royce
Rolls, on a full-time basis, as his chauffeur (a person employed to drive a car).
Royce Rolls’s employment contract with Lange Tshabalala entitles him to a
• cash salary,
• ‘free’ accommodation in a furnished three-roomed ‘granny’ flat situated at Lange Tshabalala’
residence,
• ‘free’ meals,
• free washing and ironing facilities,
• free use of a cellular telephone, and
• the infrequent or incidental use of Lange Tshabalala’s motor car.
Lange Tshabalala has determined that his total cost of employing Royce Rolls for the 2022 year of
assessment was R360 000. No portion of this expenditure has been deducted in the determination
of his taxable income. He has also determined that 20% of the time when he is being driven by
Royce Rolls, he is being driven to and from the tribunals that his is serving on.
You are required to discuss whether the R360 000 that Lange Tshabalala has incurred on
employing Royce Rolls, or a portion of it, should have been deductible in the determination of his
taxable income, and if a deduction was available, could it now be deducted, even if he has already
e-filed his 2022 tax return.
6.13 (30 minutes)

This question tests the general deduction formula (sections 11(a) and 23(g)), sections 10(1)(i), 18A
and 23H and the judgments from CIR v Pick ’n Pay Wholesalers (1987 (3) SA 453 (A), 49 SATC 132),
Sub-Nigel Ltd v CIR (1948 (4) SA 580 (A), 15 SATC 381) and Caltex Oil (SA) Ltd v SIR (1975 (1)
SA 665 (A), 37 SATC 1).
Listed below are six case studies. The expenses that have been incurred by the taxpayer may be
Rex Cornish
Rex Cornish, aged 44 years, carries on business in Johannesburg as a retailer of pets. He has four
pet shops. Because of the cost of insurance against theft had become most expensive, he
discontinued insuring against this risk two years ago. Instead, he created his own ‘insurance fund’,
by paying into a local investment account amounts equal to the premiums that he would have had
to pay to an insurer.
At 28 February 2021 Rex Cornish’s balance in this local investment account was R375 000. For the
2022 year of assessment his statement of profit or loss and other comprehensive income showed as
• an expense, R96 000 ‘insurance premiums’ being the amount paid into it, and
• income, R45 000 withdrawn from it for a burglary at one of his shops.
The balance in Rex Cornish’s local investment account at 28 February 2022 was R452 000
comprising R375 000 (the opening balance) plus R96 000 (see above) less R45 000 (see above),
plus local interest of R26 000 credited to it for the year.
You are required to state the effect of the above transactions on Rex Cornish’s taxable income for
the 2022 year of assessment.
Munchkins Catfoods Limited
Munchkins Catfoods Limited, a cat food supplier, advertised in supermarkets inviting a customer to
e-mail to it his contact details, and a list of his preferred foods purchased for his cat. It undertook to
pay R10 per e-mail received to the SPCA (Society for the Prevention of Cruelty to Animals). It
would report on its website each month how much it had paid to the SPCA.
You are required to discuss whether the amounts paid to the SPCA by Munchkins Catfoods
Limited are deductible in the determination of its taxable income.
Bob Raggamuffin
Bob Raggamuffin carried on a successful business in Johannesburg as a manufacturer and supplier
of sandboxes (a box filled with sand-type granules that absorbs moisture and odours that is used as
an indoor kitty toilet).
In 2018 his wife, Pixie Raggamuffin, was retrenched from her position as sales manager for a major
retailer. After that she was unsuccessful in obtaining new employment. Her resultant frustration
was causing marital problems. Bob Raggamuffin then offered her (and she accepted) the position in
his firm of national sales manager at a salary of R25 000 a month from 1 May 2021. Her duties
were to explore the commercial viability of supplying sand-boxes to sales outlets in all major
centres in South Africa.
Pixie Raggamuffin entered into her new employment with great enthusiasm, spending the first two
months ascertaining prevailing prices and trading conditions in various towns. She then travelled
across South Africa during the months of July, August and September endeavouring to obtain
orders for Bob Raggamuffin’s sandboxes.
Pixie Raggamuffin returned home in October without securing a single order. Bob Raggamuffin
then terminated her employment on 31 October 2021, the venture having cost him
• R150 000 on her salary,
• 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.
6.14 (60 minutes)

This question tests the definition of ‘gross income’ including its paragraphs (c), (d) and (m),
deferred compensation schemes for both the employer and the employee, the general deduction
formula (section 11(a) and section 23(g)), sections 11(m), 11(w) and 23B and the judgments from
CIR v Butcher Bros (Pty) Ltd (1945 AD 301, 13 SATC 21), W F Johnstone and Co Ltd v CIR (1951
(2) SA 283 (A), 17 SATC 235) and Provider v COT (1950 SR 161, 17 SATC 40).
Sabrina Miller, the managing director and major shareholder (there are four other shareholders), of
Birkenhead Beers (Pty) Limited made five awards at its end of year luncheon (held at the Eastwood
Country Club). She awarded the following:
Ken Heini
An e-mail confirming an electronic transfer for R50 000 into Ken Heini’s bank account who had
retired from Birkenhead Beers (Pty) Limited on 1 October 2021 at the age of 60 years. At a
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.
6.15 (30 minutes)

This question tests the general deduction formula (section 11(a) and section 23(g)). It tests the
judgments from Port Elizabeth Electric Tramway Co Ltd v CIR (1936 CPD 241, 8 SATC 13), CIR v
Genn & Co (Pty) Ltd (1955 (3) SA 293 (A), 20 SATC 113), CIR v African Oxygen Ltd (1963 (1)
SA 681 (AD), 25 SATC 67), CIR v Allied Building Society (1963 (4) SA 1 (AD), 25 SATC 343),
COT v Rendle (1965 (1) SA 59 (SRAD), 26 SATC 326), Joffe & Co Ltd v CIR (1946 AD 157, 13
SATC 354), Weinberg v CIR (1946 CPD 429, 14 SATC 210), CIR v Thor Chemicals SA (Pty) Ltd (62
SATC 208) and ITC 1837 ((2009) 71 SATC 177).
Cash Penn carries on business as a financial analyst. He writes on financial issues and he presents
financial seminars. He is extremely critical of many key players in financial circles. He has a
reputation of being negative. He is unknown to have written or said a kind word about anyone in
the financial industry.
At the conclusion of a recent seminar that Cash Penn presented, he offered to answer questions
from the media relating to his seminar topic. He was subjected to a barrage of questions from a
rather hostile media. During this session two or three questions were put to him at the same time by
different financial reporters.
When answering a question Cash Penn referred to a key government player in the financial industry
as an ‘arsehole’.
This remark by Cash Penn resulted in defamation charges being lodged against him. After several
court appearances, he was ordered to pay damages of R35 000 to the aggrieved party.
You are required to discuss whether the damages paid by Cash Penn are deductible in the
CHAPTER 7
PARTICULAR DEDUCTIONS
7.1 (45 minutes)

This question tests the provisions of sections 11(e) and 24J. It tests the so-called wear-and-tear or
depreciation capital allowance and the deduction in the determination of its taxable income for
finance charges incurred.
Agatha’s Tracing Agency CC purchased a new mainframe computer on 1 June 2021 under a
suspensive-sale contract. The agreement provided for the payment of 24 monthly instalments of
R4 000 each. Its cash purchase price on 1 June 2021 was R84 000. (A yield to maturity of
1,09703% applies to this monthly accrual period.) It was used for the first time on 1 July 2021.
Agatha’s Tracing Agency CC soon found that it needed to purchase a further printer so as to be
able to cope with the extra output now being achieved. Therefore, on 1 September 2021 it
purchased a laser printer. It was immediately brought into use. It was also purchased on a
suspensive-sale basis. This agreement provided for the payment of 12 monthly instalments of R480
each. (A yield to maturity of 1,00714% applies to this monthly accrual period.) It could have been
purchased for R5 400 if the transaction had been for cash.
The Commissioner allows Agatha’s Tracing Agency CC to write off its mainframe computer over a
five-year period and its laser printer over a three-year period. He does not consider it to be carrying
on a process of manufacture or a similar process.
You are required to determine all the amounts available to Agatha’s Tracing Agency CC for its
year of assessment ended 28 February 2022 resulting from its above two capital purchases that it
may deduct in the determination of its taxable income.
7.2 (15 minutes)

This question tests the provisions of the general deduction formula (section 11(a) and section 23(g))
and section 11(c) (the deduction in the determination of taxable income for legal expenses).
Saferide (Pty) Limited, a car-hire business, paid damages of R18 000 to Denton Fender, a
customer. The claim arose due to a fault in a hired car that was involved in an accident. Denton
Fender had suffered injuries and had claimed damages of R18 000. On the advice of its legal
adviser, it had not disputed the claim, but merely settled Denton Fender’s claimed amount of
damages. Legal costs incurred by it were R2 400.
You are required to state whether the R18 000 damages settled by Saferide (Pty) Limited and the
R2 400 legal expenses incurred by it would be deductible in the determination of its taxable
income.
7.3 (25 minutes)

This question tests the provisions of the provisions of the general deduction formula (section 11(a)
and section 23(g)) and section 11(c) (the deduction in the determination of taxable income for legal
expenses). It also tests the provisions of section 23(o) and the judgments from Port Elizabeth Electric
Tramway Co Ltd v CIR (1936 CPD 241, 8 SATC 13) and ITC 1490 ((1990) 53 SATC 108).
Belle Zsazsa, a strip-tease artist of Durban, pleaded guilty to a charge of public indecency in the
Pietermaritzburg Magistrates’ Court during the 2022 year of assessment. She was fined R10 000, or
three months in prison, and sentenced to a further six months in prison suspended for three years.
The charge against Belle Zsazsa arose as a result of her dancing naked with her pet dog and
committing other indecent acts during a performance at the Pietermaritzburg Sports Hall earlier in
105
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.
7.4 (50 minutes)

This question tests the provisions of the general deduction formula (section 11(a) and section 23(g))
and section 11(c). It also tests the provisions of sections 23(o) and 23B(3) and the judgments from
Port Elizabeth Electric Tramway Co Ltd v CIR (1936 CPD 241, 8 SATC 13), ITC 1058 ((1963) 26
SATC 305) and Joffe & Co Ltd v CIR (1946 AD 157, 13 SATC 354). It is suitable for a student
studying towards a Masters (or similar degree) specialising in taxation.
Kimberley Cullinan is a businesswoman. She runs a restaurant and a bed-and-breakfast establishment.
She trades in her own name.
Kimberley Cullinan was awarded R200 000 from the South African Police after giving it
information on the possibility of an illegal purchase of uncut diamonds.
Kimberley Cullinan was approached by visitors from abroad who were staying in her bed-and-
breakfast establishment. They were interested in obtaining diamond mining concessions. After she
had made some enquiries about these visitors, she suspected that something was amiss. She was
concerned that she might become connected with a criminal activity. She was also concerned that
she would be perceived to be in association with persons planning to engage in illegal diamond
transactions. She was advised by a friend employed by the police to disclose everything that had
transpired to the police. This she then did.
Although Kimberley Cullinan was aware that informers sometimes enjoy rewards from the police
for information leading to the arrest and conviction of persons involved in illicit diamond buying,
her reason for going to the police was to protect herself against an appearance of involvement in a
criminal activity and to safeguard her
• name,
• business, and
• standing in the community.
PARTICULAR DEDUCTIONS 107
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
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.
7.5 (20 minutes)

This question tests the provisions of section 11(cA). It also tests paragraphs (cA) and (cB) of the
definition of ‘gross income’ and section 23(l ). It tests the tax implications of restraint of trade
awards.
Housewife (Pty) Limited carries on the business of producing items that could be cooked by most
housewives (but which seldom occurs probably due to time constraints or perhaps laziness)
including, cakes, biscuits, muffins, pies, puddings, savouries, quiches, snacks, sauces, curds, jams,
preserves and pickles.
Until 1 March 2021, Housewife (Pty) Limited sold its products through
• its own sales outlet (a shop),
• a large supermarket chain operating in another suburb,
• a shop in yet another suburb selling ‘home-baked’ products supplied by many ‘housewives’ on a
commission basis, and
• a commission agent.
On 1 March 2021, Candy Snack, the sole shareholder and director of Housewife (Pty) Limited,
caused it to stop supplying its trading stock to the large supermarket, the home-baked products
shop and the commission agent. She believed that by having its trading stock sold at these other
outlets and by the agent distracted from the selling of its trading stock in its own shop. She believed
that it would improve its overall performance if it was recognised as an ‘exclusive’ supplier of its
own products. It therefore entered into the following three agreements:
• First, with Raps Limited, the large supermarket chain (trading as a public company) to the effect
that Raps Limited would not sell its trading stock for a period of five years commencing on
1 March 2021. In return for being unable to sell its trading stock for a period of five years, it
compensated Raps Limited by awarding it R90 000.
• Secondly, with the owner of the home-baked products shop, Cookie Deluxe (who carries on this
business as a sole trader) to the effect that she would not sell its trading stock for a period of four
years commencing on 1 March 2021. In return for being unable to sell its trading stock for a
period of four years, it compensated her by awarding her R60 000.
• And finally, with Lorraine Quiche, the commission agent, to the effect that she would not sell its
trading stock for a period of two years commencing on 1 March 2021. In return for being unable
to sell its trading stock for a period of two years, it compensated her by awarding her R30 000.
You are required to determine the amount that Housewife (Pty) Limited may deduct in the
determination of its 2022 taxable income for the above three ‘restraint’ payments it incurred.
7.6 (75 minutes)

This question tests the provisions of section 11(d), the deduction in the determination of taxable
income for repairs and maintenance expenditure. Amongst others, it also tests Rhodesia Railways Ltd
v Collector of Income Tax, Bechuanaland ([1933] AC 368, 6 SATC 225), Heerman’s Supermarket
(Pty) Ltd v Mona Road Investments (Pty) Ltd (1975 (4) SA 391 (D)), Clanwilliam Municipality v
Braude (1954 (3) SA 657 (C)), Natal Motor Industries Ltd v Crickmay (1962 (2) SA 93 (N)), Reilly v
British Transport Commission ((1956) 3 All ER 857), ITC 491 ((1941) 12 SATC 77), ITC 617
((1946) 14 SATC 474), ITC 709 ((1950) 17 SATC 227), B v COT (1955 (1) SA 404 (SR), 19 SATC
353), ITC 925 ((1959) 24 SATC 252) and ITC 1408 ((1985) 48 SATC 21).
Lamontville Properties CC
Lamontville Properties CC has been approached by Chatsworth Manufacturers (Pty) Limited, its
existing tenant of a factory building, to repair it (it is in desperate need of repair) and at the same time
to convert a portion of it into offices. It would like to know if the amounts incurred by it to carry out
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).
Hunt’s Holiday Homes CC

Hunt’s Holiday Homes CC owns a number of furnished and self catering beach cottages that it lets
as holiday homes to holidaymakers at a market-related rental.
To ensure that all its buildings do not become dilapidated, its policy is to repaint their exteriors
every five years. It had decided on this policy since all its buildings are situated close to the beach
front and regular painting helps preserve them. It will repaint a building even if it is not in need of
repainting. It repaints its buildings to maintain them.
You are required to state whether Hunt’s Holiday Homes CC’s repainting costs are deductible in
the determination of its taxable income under the provisions of section 11(d).
7.7 (20 minutes)

This question tests the provisions of section 11(d), the deduction in the determination of taxable
income for repairs and maintenance expenditure.
During Bamba Iqatha CC’s 2021 financial year, it suffered from numerous power failures. It was
then unable to prepare the food ordered by many customers who were dining in its restaurant.
As a result of this inconvenience and to prevent a further loss of revenue Bamba Iqatha CC
purchased its own generator (a machine for converting mechanical energy into electricity).
During Bamba Iqatha CC’s 2022 year of assessment it was forced to repair its generator with the
replacement of a major part.
Bamba Iqatha CC recorded the purchase of its generator in accordance with IAS 16 (Property,
Plant and Equipment). As far as the ‘repaired’ part is concerned, the following details as set out in
its Property, Plant and Equipment Account are relevant:
• The original cost of the part that had to be replaced was R80 000.
• Accumulated depreciation on it that was recognised for accounting purposes was R30 000, made
up of R20 000 in its 2021 financial year and R10 000 in its 2022 financial year.
• On its derecognition, R50 000 was reflected in its statement of profit or loss and other
comprehensive income as an impairment.
• The replacement part cost R90 000 and it was ‘capitalised’ into its Property, Plant and Equipment
Account.
• Depreciation on the replacement part for its 2022 year of assessment was R11 250.
As reflected in the information above, Bamba Iqatha CC’s statement of profit or loss and other
comprehensive income was expensed with R71 250,
• depreciation of R10 000 on the original part that had to be replaced,
• a loss of R50 000 suffered on the original part that had to be replaced, and
• depreciation of R11 250 on the replacement part.
On Bamba Iqatha CC’s statement of financial position the value of this part of its generator had
increased from R60 000 to R78 750 ((R60 000 – R10 000 – R50 000) + (R90 000 – R11 250)).
You are required to detail the correct tax treatment of Bamba Iqatha CC’s above transactions
supported by determinations when necessary. Also explain how its total comprehensive income
needs to be adjusted to determine its taxable income.
7.8 (45 minutes)

This question tests the provisions of section 23H (the tax implications of prepaid expenses). It also
tests the definition of ‘trading stock’, sections 11(a), 11(c), 11(d), 11(l ) and sections 24I, 24J, 24K
and 24L.
Under Burton Limited’s current assets section on its statement of financial position (for its financial
year ended 28 February 2022), R1 187 100 appears under the heading ‘prepaid expenses’. An
analysis of this R1 187 100 reveals the following:
Insurance
Burton Limited insures its trade assets on an annual basis. It pays a premium once a year. Its
insurance year runs from 1 October to 30 September. On 30 October 2021 it paid R72 000 as a
premium on the insurance cover of its trade assets to 30 September 2022.
Included in Burton Limited’s prepaid expenses in this regard is R42 000.
Advertisements
Burton Limited advertises its products on Radio City. It pays for a year of advertisements in
advance. On 1 July 2021 it paid R60 000 for advertisements that will be broadcasted on Radio City
until 30 June 2022.
Included under Burton Limited’s prepaid expenses is R20 000.
Legal transactions
Burton Limited uses the firm of Winters Vine & Partners to carry out all its legal transactions. It
pays Winters Vine & Partners an annual retainer to carry out this work. On 1 January 2022 it paid
Winters Vine & Partners its annual fee for the 2022 calendar year of R24 000.
Burton Limited included in its prepaid expenses account R20 000 of the R24 000 it paid to Winters
Vine & Partners.
Maintenance motor plan
On 1 March 2021 Burton Limited purchased a new motor car for R230 000 (including 15% value-
added tax of R30 000). It entered into a five-year maintenance motor plan for this motor car at a
cost of R103 500 (R90 000 plus R13 500 value-added tax at 15%). Under this maintenance motor
plan, it will not pay repairs and maintenance for this motor car until after 28 February 2026 or until
after it has travelled 150 000 kilometres (whichever event occurs first).
In Burton Limited’s prepaid expense account is R72 000 for this maintenance motor plan.
Garden maintenance
Burton Limited’s factory is surrounded by park-like gardens. It pays Pretti Border, a garden
maintenance contractor to maintain its gardens. She is paid on an annual basis. On 1 November
2021 it paid her R36 000 to maintain its gardens from 1 November 2021 to 30 October 2022.
Included in Burton Limited’s prepaid expenses is R24 000 in this regard.
Maintenance of lifts
Burton Limited administration block is a tower building, 12 stories high. On 1 May 2021 it paid
Slopes Elevator Limited R30 000 to maintain the lifts in its tower block from 1 May 2021 to
30 April 2022.
Burton Limited’s prepaid expense account includes R5 000 for its contract with Slopes Elevator
Limited.
Property rates
Property rates on both properties owned by Burton Limited – its factory and its administration
building – are payable on 31 January each year for the calendar year. On 31 January 2022 it paid its
property rates for the 2022 calendar year of
• R126 000 for its factory, and
• R162 000 for its administration building.

Included in Burton Limited’s prepaid expense account is R240 000 for its property rates.
Air tickets
On 1 February 2022 Burton Limited purchased 24 return air tickets between Johannesburg and
Durban at R4 050 a ticket (R97 200 in total) because of the announced increased prices in airfares to
apply from 1 March 2022. On average, an employee of it flies from Durban to Johannesburg (and
back) on two occasions each month. Two air tickets were used by it in February 2022.
Burton Limited’s cost of the remaining 22 tickets is R89 100 and this amount is included in its
prepaid expense account.
Computer stationery
So as to take advantage of a special offer, Burton Limited purchased computer stationery on
1 December 2021 for R40 000. At 28 February 2022, 25% of this stationery had been used by it.
Since it is not Burton Limited’s policy to include computer stationery on hand in its closing stock, it
therefore included R30 000 (75% of R40 000) in its prepaid expense account, for this computer
stationery that it still had on hand.
Warehouse rental
Burton Limited leased a warehouse in Johannesburg for a one-year period from 1 November 2021
to 30 October 2022. It paid an annual rental ‘in advance’ of R60 000 on 1 November 2021.
Burton Limited included R40 000 in its prepaid expense account for the rental of this warehouse.
Medical scheme contributions
Burton Limited and its employees contribute to a medical scheme on a rand-for-rand basis. It
however, makes its contribution on an annual basis. On 1 January 2022 it contributed R720 000 to
the medical scheme. This R720 000 was its contribution for the 2022 calendar year.
In this regard Burton Limited included R600 000 in its prepaid expense account.
Encroachment fee
As the concrete apron of the entrance to Burton Limited’s office block encroaches over municipal
property, it is required to pay an encroachment fee to the local municipality. On 1 February 2022 it
paid an encroachment fee of R6 000 to the local municipality for the 12-month period from
1 January 2022 to 31 December 2022.
Included in Burton Limited’s prepaid expense account is R5 000 in this regard.
You are required to determine the amount of each prepaid expense that is deductible by Burton
Limited in the determination of its taxable income for its 2022 year of assessment.
7.9 (30 minutes)

This question tests the provisions of section 11(e), the so-called wear-and-tear or depreciation
capital allowance.
The wear-and-tear or depreciation capital allowance amounts to ‘such sum’ as the Commissioner may
think just and reasonable as representing the amount by which the value of machinery, implements,
utensils and articles used by the taxpayer for the purpose of his trade has been diminished by reason of
• wear and tear, or
• depreciation
during the year of assessment.
You are required to list the key points that must be satisfied to qualify for a capital allowance
under this provision. You should also state
• how it is determined,
• 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.
7.10 (60 minutes)

This question tests the provisions of section 11( f ), 11(g) and paragraph (h) of the definition of
‘gross income’. It also tests sections 11(h), 11(k), 11A and 13(1) and the judgments from COT v
Ridgeway Hotel Ltd ((Federal Supreme Court) (November 1961), 24 STAC 616) and Professional
Suites Ltd v COT ((High Court Northern Rhodesia) (December 1960) 24 SATC 573).
Cookie Baker
Under an eight-year lease, Cookie Baker is required to pay Zigzag (Pty) Limited, the owner of a
machine, an annual rental of R20 000 and a premium of R12 000 for the right of its use.
Zigzag (Pty) Limited receipts and accruals constitute ‘income’ as defined.
You are required to determine the tax allowance that is deductible in the determination of Cookie
Baker’s taxable income for the 2022 year of assessment under section 11( f ).
Jacks (Pty) Limited
Jacks (Pty) Limited has a last day of February financial year end.
On 1 September 2020 Jacks (Pty) Limited entered into a 30-year lease agreement for certain
industrial property from Hill Properties (Pty) Limited.
On 1 March 2021 Jacks (Pty) Limited commenced, under the lease agreement, with the erection of
a factory building. This erection was obligatory under the lease. The stated value of the
improvements had been agreed at R5 400 000. On 1 September 2021 it brought the building into
use for a specified industrial purpose. Erection of the building had been completed the previous day
at a cost of R9 000 000.
You are required to determine the amount of any allowances that may be deducted by Jacks (Pty)
Limited in the determination of its 2022 taxable income.
James Peters
Under a property lease, John Paul, a lessee, was obliged to effect improvements to the property
leased by him from James Peters, the lessor. By mutual consent, they agreed to a variation in the
terms of the lease with the object of increasing the value of the improvements to be effected by
John Paul.
You are required to comment upon the normal tax implications to James Peters of this variation.
Marie Pyott
On 1 March 2016, Marie Pyott, a resident of the Republic, entered into a 30-year lease agreement
with Eastville Properties CC, also a resident of the Republic, whereby she would lease a
commercial site from it.
This agreement provided for an initial premium of R225 000 to be paid by Marie Pyott to Eastville
Properties CC on the signing of the agreement, in addition to the monthly rental of R5 000.
Marie Pyott intended to use this commercial site for the purpose of her trade (the selling of sweets and
biscuits). The agreement stated that she was obliged to erect a shop on the site at a cost of R612 500.
Due to certain problems encountered by Marie Pyott in obtaining approval from the local
municipality, the construction of the commercial building was delayed for a considerable period of
time. It was completed only on 31 August 2021. Costs had risen considerably since 2016 and the
commercial building was built at a cost of R857 500. She then had problems in obtaining an honest
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.
7.11 (45 minutes)

This question tests the provisions of sections 11( f ), 11(g), 11(h) and 11A. It also tests the definition
of ‘gross income’, the general deduction formula (section 11(a) and section 23(g)) and section 13(1).
On 1 February 2016, Sam South entered into a 30-year agreement with Nick North whereby he
would lease a building site from him. The agreement provided for an initial premium of R450 000
to be paid by Sam South to Nick North, in addition to a monthly rental of R10 000 to be paid by
Sam South to Nick North.
Sam South intended to use the building site for the purpose of his trade which is the manufacture of
compasses, weather vanes and sundials. The agreement stated that he would erect a factory on Nick
North’s building site at a cost of R3 700 000.
Due to certain problems encountered by Sam South in obtaining a trade licence, the construction of
the factory was delayed for a considerable period of time. It was completed only on 31 May 2021.
Costs had risen considerably since 2016 and it was erected at a cost of R4 810 000.
Sam South then had employee problems but finally commenced manufacturing from this factory on
1 December 2021.
You are required to
1. determine what amounts Sam South may deduct in the determination of his 2022 taxable income,
2. determine what amounts Sam South may deduct in the determination of his 2023 taxable
income, on the assumption that he is still trading in that year,
3. state what amounts Nick North must include in his gross income, and when they are required
to be included, and
4. state whether Nick North will qualify for any deductions or allowances in the determination of
his taxable income for any of the years of assessment covered by this question.
7.12 (30 minutes)

This question tests the provisions of section 11(g) and 11(h) and paragraph (h) of the definition of
‘gross income’. It also tests the judgment from COT v Ridgeway Hotel Ltd ((Federal Supreme Court)
(November 1961), 24 SATC 616).
Coal Mining Limited’s year of assessment ends on the last day of February. It discovered workable
quantities of coal on a farm in Northern KwaZulu-Natal. To be able to work this deposit efficiently,
it was necessary to have access from the adjoining farm, owned by Alfred Bond.
During Coal Mining Limited’s 2017 year of assessment a lease was entered into between Alfred
Bond and it under which certain portions of the farm were leased. It was a condition of the lease that
• if Coal Mining Limited commenced using trucks in excess of six tons it would lay down a tar
road and would rebuild a bridge over a river on the farm,
• if its labour complement exceeded 150 employees, a compound to house 50 employees would
be erected on Alfred Bond’s farm, this compound to be erected at a cost of not less than
R2 400 000, and
• a four-hectare portion of the farm adjoining the area earmarked for the compound was leased
with the condition that if a compound was erected, a commercial building (a trading store)
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.
7.13 (10 minutes)

This question tests the provisions of section 11(gB), the deduction in the determination of taxable
income for certain expenditure incurred on intellectual property.
Racing Binoculars (Pty) Limited’s year of assessment ends on the last day of February. It is involved
in the manufacturing and selling of binoculars (an instrument used for viewing distant objects).
During its 2022 year of assessment it incurred the following expenses for registering two designs:
• R2 500 for the renewal of its design, Biggerview. The 10-year period of this design had expired
on 31 August 2021 but was renewed for a further 10 years.
• R50 000, being the cost of registering its design, Betaview, for a second pair of binoculars that
will be available for sale before the end of its 2022 year of assessment. This design is also for a
10-year period, which commenced on 1 December 2021.
You are required to determine what portion of the above expenditure incurred by Racing
Binoculars (Pty) Limited on the registration and renewal of its designs will be deductible in the
determination of its taxable income for its 2022 year of assessment.
7.14 (30 minutes)

This question tests provisions of sections 8(4) and 11(gC). It also tests the definition of a
‘connected person’ and paragraphs 20, 30 and 35 of the Eighth Schedule.
Candyman Limited manufactures both scheduled and non-scheduled tablets. Its scheduled tablets
are retailed by pharmacists and its non-scheduled tablets are retailed by supermarkets.
Candyman Limited is one of the companies in the Popular Pharmaceuticals Group of companies.
Due to a change in the marketing policy of this group it was resolved that two registered patents
owned by Candyman Limited, namely, the patents used to produce Grandma Headache Tablets
and Goaway Pain Pills would be sold to two other companies in the group that specialise in the
manufacture of non-scheduled tablets.
• Candyman Limited had purchased the patent used to produce Grandma Headache Tablets which
was for a 10-year period for R120 000 on 1 March 2015. It was sold to Popatab Limited for
R156 000 (being its current market value) on 1 April 2021 for the remainder of its registered
time period.
• 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
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.
7.15 (30 minutes)

This question tests the provisions of section 11(i) and 11( j). It also tests the general deduction
formula (section 11(a) and section 23(g)) and the judgments from Plate Glass & Shatterprufe
Industries (Finance Company) (Pty) Ltd v SIR (1979 (3) SA 1124 (T), 41 SATC 103), Solaglass
Finance Company (Pty) Ltd v CIR (1991 (2) SA 257 (A), 53 SATC 1) and Burgess v CIR (1993 (4)
SA 161 (A), 55 SATC 185).
Glen Hill
Glen Hill is a resident of the Republic. He is 22 years old. He is a candidate attorney employed by a
legal firm. His receipts and accruals from employment for the 2022 year of assessment are
R117 000. To supplement his earnings, he borrowed R400 000 at a favourable interest rate, and lent
four amounts of R100 000 each at an interest rate in excess of that incurred by him. Local interest
of R12 500 accrued to him from each of the borrowers (R50 000 in total). He incurred R36 000
interest on his R400 000 loan.
Unfortunately for Glen Hill, R45 000 of one amount of R112 500 (R100 000 loan plus R12 500
local interest) owing proved irrecoverable.
You are required to set out, with full supporting reasons, the extent (if any) to which the R45 000
loss suffered by Glen Hill would be deductible in the determination of his taxable income.
Raj Reddy
Raj Reddy purchased some of the trade assets of Moodley’s Outfitters with effect from 1 March 2021
for R380 000. This R380 000 represented the payment for trading stock, debtors and goodwill.
For the 2022 year of assessment Raj Reddy deducted from his income the following amounts under
the heading ‘bad debts’:
• Debts of R2 800 that had arisen from a credit sale of trading stock by Moodley’s Outfitters
• Debts of R4 000 that arose from trading stock that he had purchased on 1 June 2021.
• A debt of R12 000 due from a loan to Nitin Naidoo, an employee, during the 2022 year of
assessment who has since left his employment and cannot be traced.
• A provision for doubtful debts of R2 600 (being 5% of his outstanding debtors at 28 February
2022).
You are required to discuss the deduction of these amounts by Raj Reddy from his income.
7.16 (15 minutes)

This question tests the provisions of section 11(j), the so-called doubtful debt allowance.
During Snaps Limited’s 2022 year of assessment its turnover was R4 125 000 of which R3 750 000
was from its credit sales. At 28 February 2022, its year end, its debtors were R900 000 before the
write off of bad debts of R52 500. Its total bad debts written off and recovered in its 2022 and five
previous years of assessment were as follows:
Year of Written Recovered Credit
assessment off turnover
2017 36 000 3 000 2 250 000
2018 37 500 1 500 2 400 000
2019 40 500 3 000 2 700 000
2020 42 000 4 500 3 000 000
2021 45 000 6 000 3 450 000
2022 52 500 7 500 3 750 000
Since the compilation of a detailed list of doubtful debts is often impracticable, the Commissioner
has indicated that the so-called doubtful debt allowance may be determined using the following
formula:
Y=M×N
In this formula
• Y is the allowance for doubtful debts,
• M is the average amount of bad debts written off less the amount of bad debts recovered for
the year of assessment and the four preceding years of assessment, expressed as a percentage of
the average credit turnover for the year of assessment and the four preceding years of
assessment, and
• N is outstanding debtors’ balances outstanding at the close of the current year of assessment less
the bad debts written off during the year.
When the formula Y = M × N is used for the determination of the doubtful debt allowance, only
credit turnover is taken into account, cash sales are excluded.
You are required to determine Snaps Limited’s section 11( j) doubtful debt allowance for its 2022
year of assessment.
7.17 (20 minutes)

This question tests the provisions of section 11(l ), an employer’s deduction in the determination of
its taxable income for contributions made by it to a recognised retirement fund and section 11F, an
employee’s deduction in the determination of his taxable income for contributions made by him to
a recognised retirement fund.
As chief financial officer of Ultra-White Forest Products Limited, you have been requested by its
Board of Directors to prepare a brief summary of the normal tax implications that would result if it
was to introduce either a pension or provident fund for all its employees.
You are required to prepare a memorandum setting out the normal tax implications flowing from
the establishment of a fund of this nature from the treatment of both Ultra-White Forest Products
Limited contribution and its employee’s contribution to a pension or provident fund.
7.18 (30 minutes)

This question tests the provisions of section 11(lA), an employer’s deduction in the determination
of taxable income for a contribution made to a ‘broad based share incentive scheme’. It also tests
sections 8B, 10(1)(nC), 54, 56 and 58.
Until 28 February 2021, Alto Ego was the sole shareholder and director of Countinginlatin (Pty)
Limited. Both of them are residents of the Republic.
Countinginlatin (Pty) Limited’s financial year ends on the last day of February.
Countinginlatin (Pty) Limited’s equity shares comprised 100 000 shares with a nominal value of
R1 each. The market value of a Countinginlatin (Pty) Limited share on 28 February 2021 (and on
1 March 2021) was R4,50.
In addition to Alto Ego, Countinginlatin (Pty) Limited has four full-time employees (see below).
On 1 March 2021 Countinginlatin (Pty) Limited issued a further 10 000 equity shares. These equity
shares were issued as part of its newly-created share incentive scheme. This scheme satisfies all the
requirements of the definition of a ‘broad based share incentive scheme’ as set out in section 8B of
the Income Tax Act.
Countinginlatin (Pty) Limited then sold these equity shares to each of its four full-time employees
(other than Alto Ego) at R1 a share. It sold
• 4 000 equity shares in it to Quarby Quat,
• 3 000 equity shares in it to Tina Ter,
• 2 000 equity shares in it to Bobby Bis, and
• 1 000 equity shares in it to Unis Uno.
Because of the increase in the number of Countinginlatin (Pty) Limited’s equity shares, the market
value of an equity share in it then dropped to R4,10.
Each employee was given an interest-free loan by Countinginlatin (Pty) Limited to pay for his or
her equity shares.
This arrangement was recorded in the journal of Countinginlatin (Pty) Limited as follows:
Loan to Quarby Quat Dr 4 000
Loan to Tina Ter Dr 3 000
Loan to Bobby Bis Dr 2 000
Loan to Unis Uno Dr 1 000
To Equity shares 10 000
Being the issue of equity shares under the ‘broad based share incentive
scheme’, the purchase price of the equity shares being settled out of the
proceeds of interest-free loans to the qualifying employees.
No further transactions took place during the 2022 year of assessment.
You are required to determine the normal tax and donations tax consequences of the above
transactions as far as they relate to Countinginlatin (Pty) Limited.
7.19 (45 minutes)

This question tests the provisions of section 11F, a member’s deductible contribution in the
determination of his taxable income to a retirement fund.
The following taxpayers would like to contribute to a pension fund or a retirement annuity fund, or
to both:
Quintin Pipe and Dave Cigar
Quintin Pipe and Dave Cigar are both employees of Healthy Smoking (Pty) Limited:
• Quintin Pipe’s remuneration from Healthy Smoking (Pty) Limited is R22 800 a year. He has no
other receipts or accruals.
• Dave Cigar’s remuneration from Healthy Smoking (Pty) Limited is R360 000 a year. He has no
You are required to determine the maximum amount that Quintin Pipe and Dave Cigar could
currently contribute to the Healthy Smoking Pension Fund and obtain a deduction in the
determination of their taxable incomes for their contribution.
Graeme Filter
Graeme Filter, a partner in the firm Velvettop & Partners, had pensionable emoluments in the
12 months preceding his admission as a partner of R50 000. His share of partnership profits for
• the 2021 year of assessment was R20 000, and
• for the 2022 year of assessment it was R660 000.
Graeme Filter had no other receipts or accruals.
You are required to determine the maximum amount that Graeme Filter could contribute and
obtain a deduction in the determination of his taxable income for current contributions made by
him to the pension fund for both the 2021 and 2022 years of assessment.
Claude Byrne
During the 2022 year of assessment, Claude Byrne, who is employed by the local municipality as a
fireman, contributed into the Statutory Organisations Pension Fund (a Government pension fund)
R11 520 by way of current contributions. His salary from this employment on which his pension
fund contributions were based was R144 000 for the 2022 year of assessment.
In addition to his current contributions of R11 520, Claude Byrne also contributed R12 000 for past
periods that are to be reckoned as part of his pensionable service.
Claude Byrne had no other receipts or accruals.
You are required to state how much of the amounts contributed by Claude Byrne to the pension
fund will be deductible in the determination of his taxable income for the 2022 year of assessment.
Bob Ash
Bob Ash is a director of a company. A director’s salary of R1 800 000 accrued to him during the
Bob Ash is a member of its pension fund to which he contributes 8% of his director’s salary.
Bob Ash’s sole other receipts and accruals are R200 000 taxable income from self-employment.
You are required to inform Bob Ash of the maximum amount he could contribute to a retirement
annuity fund that would be deductible in the determination of his taxable income for the 2022 year
of assessment.
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
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.
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
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.
7.20 (20 minutes)

This question tests the definition of ‘gross income’ and sections 11(nA) and 11(nB). It tests the
deduction in the determination of taxable income of certain amounts that have been repaid by an
employee.
Sophie Couch
From 1 July 2020 to 31 December 2020, Sophie Couch was on six-month’s ‘special’ leave from her
employment with Lawsons (Pty) Limited. She enjoyed her full salary of R33 000 a month during
this six-month period while on this ‘special’ leave. There were, however, conditions attached to her
‘special’ leave (see below).
After Sophie Couch returned from her special leave, she worked for Lawsons (Pty) Limited from
1 January 2021 to 31 March 2021 earning a salary of R33 000 a month. She then left its
employment on 31 March 2021 to commence her own business.
Since Sophie Couch failed to fulfil a condition relating to her ‘special’ leave, she was required to
repay R99 000 to Lawsons (Pty) Limited.
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.
7.21 (15 minutes)

This question tests the provisions of section 11F deduction in the determination of taxable income
for a member’s contribution to a retirement fund.
Prior to Richard Sweep becoming a partner in the firm of Dusty Broome & Associates, he had been
employed by it as a trainee earning an annual remuneration of R48 000.
Richard Sweep’s share of profits for the 2022 year of assessment is R80 000. In addition
• 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.
7.22 (20 minutes)

This question tests the provisions of the section 11F deductions in the determination of taxable
income for a member’s contribution to retirement funds.
On 1 March 2021 Gerald Gold (aged 31 years) and Raymond Rand (aged 29 years) were both made
junior partners in the firm of Kruger & Associates.
In the 12 months preceding their admission as partners, they had enjoyed pensionable emoluments
of R330 000 and R240 000 respectively.
On becoming partners they both agreed to retain their membership of the pension fund. They still
contribute 6% of their pensionable emoluments to the pension fund.
Both Gerald Gold’s and Raymond Rand’s taxable profits from the partnership for the 2022 year of
assessment are R1 200 000.
Gerald Gold’s only other receipt or accrual for the 2022 year of assessment is local interest of
R24 500 from an investment. It is not a ‘tax free investment’.
Raymond Rand earned
• local interest of R26 500, and
• net rentals of R180 000
The local interest that accrued to Raymond Rand is not from a ‘tax free investment’. He had no
other earnings in the 2022 year of assessment.
Gerald Gold and Raymond Rand do not qualify for deductions in the determination of their taxable
incomes other than those contained in the above information.
Both Gerald Gold and Raymond Rand would like to join a retirement annuity fund and would like
to know how much they could each contribute and obtain a deduction in the determination of their
respective incomes for it.
You are required to determine how much Gerald Gold and Raymond Rand could contribute to a
retirement annuity fund and obtain a deduction in the determination of their taxable incomes for it.
7.23 (15 minutes)

This question tests the provisions of section 11(m), a deduction in the determination of taxable
income for annuities paid to a former employee or his dependants.
Leslie Kindhart, a sole trader, made the following ‘special’ awards to five of his employees (or
their dependants) during the 2022 year of assessment:
• To Trudie Snuffit, widow of his deceased employee, Tom Snuffit, a gratuity of R24 000.
• To Quinton Passaway, widower of his deceased employee Queenie Passaway, a life-time annual
pension of R14 400.
• To Clyde Bedridden, who retired from his employment on grounds of ill-health, a lump-sum
gratuity of R36 000.
• To Harold Golddigger, who married a woman of considerable means and who then resigned
from his employment, R6 000 payable for 10 years.
• To Gordon Finalleg, who retired from his employment on grounds of old age, a life-time annual
pension of R120 000.
You are required to state what amounts are deductible from Leslie Kindhart’s income under the
provisions of section 11(m). You are not required to consider whether the amounts awarded will be
deductible from income under another provision, for example, under the general deduction formula.
7.24 (15 minutes)

This question tests the provisions of section 11(e) and section 11(o), the so-called wear-and-tear or
depreciation capital allowance and the scrapping or termination capital allowance that are
deductible in the determination of taxable income.
Westwood Distributors (Pty) Limited’s computer equipment qualifies for the section 11(e) capital
allowance (the so-called wear-and-tear or depreciation capital allowance). It qualifies for this
capital allowance over a five-year period determined on the straight-line basis.
Westwood Distributors (Pty) Limited’s computer equipment with an original cost on 1 March 2020
of R90 000, and a tax value (and carrying amount) on 28 February 2021 of R72 000, was destroyed
by an abnormal power surge on 31 December 2021. It recovered from its insurers R64 400 as
compensation for the loss of this computer equipment. (Possible value-added tax consequences
arising out of this compensation award have not yet been made.)
Westwood Distributors (Pty) Limited’s above computer equipment was replaced by it with new
computer equipment that would have cost R84 000 cash. But it was purchased under a suspensive-
sale agreement entered into on 1 January 2022 providing for
• a deposit of R27 000, and
• then 15 instalments of R4 200 a month.
(This agreement has a yield to maturity of 1,27795% a month.)
Westwood Distributors (Pty) Limited’s replacement computer equipment was brought into use on
1 January 2022. The first instalment was paid on 31 January 2022.
In Westwood Distributors (Pty) Limited’s statement of profit or loss and other comprehensive
income
• an impairment of R57 000 for its ‘destroyed’ computer was debited, and
• the R56 000 (R64 400 – R8 400) received from its insurer was credited.
income it also provided for depreciation on its ‘destroyed’ computer equipment of R15 000. This
amount was determined as follows:
R90 000 × 20% × 10 / 12 = R15 000.
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.
7.25 (15 minutes)

This question tests the provisions of sections 11(c) and 11(o) and 20B. It tests the deduction in the
determination of taxable income of the so-called scrapping or termination capital allowance. It also
tests legal expenses incurred.
Orange Vaal Limited carries on business as a cartage contractor.
On 30 November 2021 one of Orange Vaal Limited’s delivery vans was written off in an accident
when delivering goods for a client. Its original cost was R150 000. Its carrying amount and tax
value on 30 November 2021 was R60 000. It was sold to a scrap-metal dealer for R5 000.
Orange Vaal Limited’s claim against its insurer was disputed. The insurer claimed that the delivery
van’s driver had been driving recklessly at the time of the accident. (He had been charged for
reckless driving.) It took four months for the matter to be decided. And then finally, on 31 March
2022, a magistrate found that the driver was not guilty of reckless driving.
On 15 April 2022 Orange Vaal Limited’s insurer then awarded it R45 000 in full and final
settlement for its written-off delivery van.
Orange Vaal Limited’s financial year ends on the last day of February. For its 2022 financial year it
reflected a loss of R55 000 on the ‘scrapping’ of this delivery van. A note to its financial statements
then indicated that its claim for the loss of this delivery van was being disputed by its insurer.
Orange Vaal Limited’s legal expenses on defending its driver were R8 000 (R3 000 in its 2022
financial year and R5 000 in its 2023 financial year) and in ‘fighting’ its insurance claim were
R7 000 (R4 800 in its 2022 financial year and R2 200 in its 2023 financial year).
You are required to state what amounts are deductible in the determination of Orange Vaal
Limited’s taxable income for the loss it suffered and the expenditure it incurred, and to state when
they are deductible.
7.26 (15 minutes)

This question tests the provisions of section 11(w). It also tests the general deduction formula
(section 11(a) and section 23(g)). It tests the deduction in the termination of taxable income of certain
insurance premiums paid.
Included in the amounts deducted in the statement of profit or loss and other comprehensive
income of Safeguard Products Limited for its 2022 year of assessment (ended on 28 February
2022) for insurance premiums paid are the following:
• Safeguard Products Limited’s 2022 annual premium of R7 200 paid for the policy on the life of
Saks Hollard, one of its directors, the policy being its property. It is the beneficiary under this
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.
7.27 (50 minutes)

This question tests the provisions of section 11(w). It also tests the general deduction formula
(section 11(a) and section 23(g)). This question is suitable for a student studying towards a Masters
After a prolonged strike by most of Pluto Limited’s employees, it agreed with the relevant trade
union (whom its employees are members of) that it would provide certain benefits for its
employees. These benefits included group life insurance cover and funeral benefits:
• If an employee died while in the employment of Pluto Limited, it would award his beneficiaries
with an amount equal to three times his annual salary.
• If an employee or a ‘qualifying’ dependant of his died, R10 000 would be awarded by Pluto
Limited to its employee or his beneficiaries to help finance the cost of a funeral.
Pluto Limited is the owner of these two insurance policies. These policies are freestanding policies
and are independent of a registered and approved pension fund, provident fund or retirement
annuity fund.
Pluto Limited pays the premiums on these policies. These premiums are 3% of its salary bill.
Sixty employees of Pluto Limited are covered by these insurance policies.
When an employee or a ‘qualifying’ dependant dies, the insurer awards Pluto Limited with the
relevant amount. It then awards the employee, or his beneficiaries, with this same amount. This
arrangement limits the cost to it of providing these benefits to its employees to the premiums it pays.
1. whether the Commissioner could include a pro rata portion of the premium as an amount in an
employee of Pluto Limited’s annual taxable income as being a benefit of employment,
2. whether an employee (or a beneficiary) of Pluto Limited would be required to include an
amount in his gross income if an award is made to him (or his beneficiaries) under either of
these policies, and
3. the normal tax implications to Pluto Limited of the above arrangements.
7.28 (20 minutes)

This question tests the provisions of sections 11A and 20(1), pre-trade expenditure incurred.
Queen’s Tavern CC was formed by Pinkie Stshapa. She is its sole member. Due to problems
relating to the granting of its trade licence by the local municipality, it was forced to incur certain
expenditure before it commenced trading.
A summary of Queen’s Tavern CC’s results for its first financial year (ended 28 February 2022) is
as follows:
• Qualifying pre-trade expenditure is R70 000.
• 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.
7.29 (15 minutes)

This question tests the provisions of sections 11(gB) and 11D. It tests the deduction in the
determination of taxable income for research and development expenditure.
Bertie Briquette makes charcoal at a factory in Dundee, KwaZulu-Natal. He trades in his own name.
During the 2022 year of assessment Bertie Briquette developed a particular process used to produce
a longer-burning charcoal brick. In developing and perfecting this process, he incurred capital
expenditure of R21 760. The Minister of Science and Technology approved the creation of this
process used to produce a longer-burning charcoal brick. It is defined as an ‘invention’ in section 2
of the Patents Act 57 of 1978. He was granted a South African patent for this invention on
31 August 2021.
Bertie Briquette then used it (the patent) in his business. His legal costs incurred for registering this
patent were R2 240. The patent confers protection for 20 years.
Bertie Briquette also incurred expenditure of R6 000 on the renewal of the patent used for
producing ‘fire lites’ since its 20-year period had expired. The R6 000 he incurred, secured this
patent for a further 10 years.
You are required to state whether the above expenditure incurred by Bertie Briquette will be
7.30 (15 minutes)

This question tests the section 17A deduction. It tests the deduction of soil erosion expenditure
incurred by a landlord who lets property used for farming purposes.
Rent-A-Plot (Pty) Limited is engaged in the letting of agricultural and pastoral land. Its taxable
profit for its 2022 year of assessment (ended 28 February 2022) amounted to R295 000 made up of
• local interest of R140 000, and
• net rentals of R155 000.
During Rent-A-Plot (Pty) Limited’s 2022 year of assessment it incurred expenditure on the
prevention of soil erosion of R190 000, made up of
• general expenditure of a capital nature amounting to R30 000, and
• the construction of soil erosion works amounting to R160 000.
The later expenditure (the R160 000) incurred by Rent-A-Plot (Pty) Limited has been approved by
the Executive Officer under the Conservation of Agricultural Resources Act 43 of 1983.
You are required to determine Rent-A-Plot (Pty) Limited’s taxable income (or assessed loss) for its
7.31 (15 minutes)

This question tests the provisions of section 18A, the deduction from taxable income for ‘qualifying’
donations made to certain PBOs.
The following five taxpayers, all under the age of 65 years, have all made donations to the
University of Pietermaritzburg. They would now like to know what their taxable incomes will be.
Details of their receipts and accruals and expenditure follow:
Arthur Billy Colin David Eric
Director’s fees 13 000 80 000 42 300 34 000 350 000
Local interest 24 800 25 800 31 300 31 800 33 800
Assessed loss brought forward 103 000 30 000 10 000
Donation to university 8 000 1 200 2 500 900 40 000
None of the local interest earned by the above taxpayers is from a ‘tax free investment’.
You are required to determine each taxpayer’s taxable income or assessed loss for the 2022 year of
assessment.
7.32 (10 minutes)

This question tests the order of certain inclusions and deductions including the provisions of
sections 18A and 26A.
Goodwill Gulayo is a resident of the Republic. He is 44 years old. He is not a member of a medical
scheme.
Goodwill Gulayo’s taxable income before
• including his taxable capital gain (under section 26A),
• the deduction of his donation to a qualifying public benefit organisation, and
• his ‘qualifying medical expenses’ paid
is R270 000.
Goodwill Gulayo’s relevant amounts are as follows:
• His taxable capital gain is R40 000.
• His donation to the qualifying public benefit organisation was R33 000. He has received a
‘section 18A’ certificate (receipt) for this amount (R33 000).
• His ‘qualifying medical expenses’ paid of R20 000.
You are required to determine Goodwill Gulayo’s taxable income.
7.33 (30 minutes)

This question tests the provisions of sections 8(4)(a), 11(t), 13sex and 26A, and paragraphs 20 and 35
of the Eighth Schedule.
During Ponds and Pools (Pty) Limited’s 2018 financial year (ending 28 February 2018) it erected
three houses for its employees. The cost of erection was R160 000 for each house. Their erection
had commenced on 1 November 2017. They were completed on 31 January 2018 and were
immediately occupied.
During Ponds and Pools (Pty) Limited’s 2022 year of assessment, three-and-a-half years after the
erection of the houses, one house was let at a market-related rental by it to a tenant who is not its
employee.
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.
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.
7.34 (30 minutes)

This question tests the provisions of sections 11(a) and 23H.
Sparkling Fountains (Pty) Limited
Sparkling Fountains (Pty) Limited’s financial year ends on the last day of February. It is a resident
of the Republic. As part of the preparation of its financial statements for its 2022 financial year it
made the following entry in its journal:
Prepaid expenses (statement of financial position) Dr 120 000
To Insurance (statement of profit or loss and other comprehensive
income ) 80 000
To Property rates (statement of profit or loss and other
comprehensive income ) 30 000
To Franchise licence (statement of profit or loss and other
comprehensive income ) 10 000
Being that portion of the above expenses that relate to its 2023
financial year.
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.
7.35 (20 minutes)

This question tests the definition of ‘gross income’ and the general deduction formula. It also tests
sections 11( f ), 11(g), 11A and 13sex.
Under a lease between Gert Hammerkop (the lessee) and Sandford Londolozi (the owner-lessor), a
plot of land was leased by him for 20 years as from 1 April 2021. The lease agreement provides for
• a rental of R800 a month payable by him to Sandford Londolozi from 1 April 2021,
• a lease premium of R96 000 to be paid by him to Sandford Londolozi on 1 April 2021, and
• six cottages to be erected on the owner-lessor’s land at a cost of R1 989 000.
Gert Hammerkop 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 Gert Hammerkop’s 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 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.
Cottages Dr 2 400 000
To Bank 2 400 000
Being the cost of erecting six identical cottages.
Bank Dr 32 000
To Rentals 32 000
Being rentals earned from letting four of the cottages at R8 000
each for the month of October 2021.
The same journal entry was recorded in Gert Hammerkop’s journal for the months of November,
December, January and February.
This is the first occasion that Gert Hammerkop has ‘invested’ in a rent-producing property. His
remaining two cottages were also occupied from 1 January 2022. They are occupied by two
bona fide full-time employees of his, one of whom is Bunty Firr, his mother-in-law. Both have the
use of the cottages 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 received in advance from one of the
tenants in February.
You are required to state what amounts are to be included in Gert Hammerkop’s gross income, and
deducted from his income for the 2022 year of assessment, that arise out of the above lease
agreement, and his letting and the occupation of his cottages.
7.36 (90 minutes)

This question tests the deduction in the determination of taxable income of an assessed loss and an
assessed loss from a ‘suspect trade’. It tests section 20 and section 20A.
Meg Conshu
Meg Conshu is a resident of the Republic. Her sole receipt and accrual in the 2020 year of
assessment was a life-time pension of R20 000 a month.
During the 2021 year of assessment Meg Conshu entered into an unsuccessful business venture. It
resulted in her suffering a deductible trade loss in the determination of taxable income of R250 000.
Her assessment for the 2021 year of assessment reflected an assessed loss of R10 000. This amount
had been determined as follows:
Pension (annuity) 240 000
Less deductible trade loss 250 000
Assessed loss 10 000
Meg Conshu’s receipts and accruals for the 2022 year of assessment are
• her life-time pension of R240 000, and
• local interest of R37 500.
The local interest that accrues to Meg Conshu is not from a ‘tax free investment’.
Meg Conshu is 66 years old.

You are required to determine Meg Conshu’s 2022 taxable income. Support your determination
with relevant explanations.
Cape Bazaars (Pty) Limited
Cape Bazaars (Pty) Limited is a resident of the Republic. Its sole receipt or accrual for its 2021 year
of assessment (ended 28 February 2021) was local interest. It had ceased trading during its 2020
year of assessment.
Cape Bazaars (Pty) Limited’s trade assets were then liquidated and its liabilities settled. Its sole
asset was then a local interest-bearing security (a secure investment).
During Cape Bazaars (Pty) Limited’s 2022 year of assessment it entered into an unsuccessful
business venture. This resulted in it suffering a loss of R260 000. Its only other receipt or accrual in
its 2022 year of assessment was local interest of R180 000 from a local interest-bearing security (a
secure investment).
You are required to determine Cape Bazaars (Pty) Limited’s 2022 taxable income. Support your
determination with relevant explanations.
KwaZulu-Natal Bazaars (Pty) Limited
In KwaZulu-Natal Bazaars (Pty) Limited’s 2021 year of assessment (ended 28 February 2021) it, a
resident of the Republic, suffered a trade loss of R270 000 in the determination of its taxable income.
KwaZulu-Natal Bazaars (Pty) Limited’s trade assets were then liquidated and its liabilities settled.
Its sole asset was then a local interest-bearing security (a secure investment). Its 2021 assessment
reflected an assessed loss of R180 000. It had been determined as follows:
Local interest 90 000
Less trade loss 270 000
Assessed loss (carried forward) 180 000
KwaZulu-Natal Bazaars (Pty) Limited did not trade during its 2022 year of assessment. Its sole receipt
or accrual was local interest of R110 000 from a local interest-bearing security (a secure investment).
You are required to determine KwaZulu-Natal Bazaars (Pty) Limited’s 2022 taxable income.
Support your determination with relevant explanations.
Louis Zinn
Louis Zinn is a resident of the Republic. He is now aged 55 years. He has been carrying on tobacco
farming on a full-time basis for the past decade (10 years). His financial results for the 2012 to
2021 years of assessment are as follows:
Year of Farming Other Assessed Taxable
assessment profit or taxable loss income or
loss income brought assessed
forward loss
2012 90 000 10 000 – 100 000
2013 110 000 40 000 – 150 000
2014 -10 000 50 000 – 40 000
2015 -20 000 30 000 – 10 000
2016 -30 000 20 000 – -10 000
2017 -40 000 10 000 10 000 -40 000
2018 200 000 – 40 000 160 000
2019 -60 000 15 000 – -45 000
2020 -20 000 25 000 45 000 -40 000
2021 -80 000 5 000 40 000 -115 000
For the 2022 year of assessment Louis Zinn has again suffered a loss from his farming operations
of R90 000.
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
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
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
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
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
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
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
7.37 (45 minutes)

This question tests the so-called ring fencing of a trade loss suffered by a taxpayer when dealing in
a collectible as listed in section 20A(2)(b)(ii).
Murray-Brett Spearman, aged 55 years, is a wealthy man. He is a resident of the Republic. He has
not worked since inheriting his late father’s estate. He suffers normal tax at the maximum marginal
tax rate (of 45%). His taxable income is always in excess of R2 500 000, and it includes
• net rentals,
• foreign dividends, and

• taxable local interest.
Since the 2009 year of assessment Murray-Brett Spearman has been collecting valuable paintings
by South African ethnic artists including Ayanda Mabula. His financial results from his South
African ethnic art collection have been as follows:
Year of Profit
assessment or loss
2009 -25 000
2010 -130 000
2011 70 000
2012 110 000
2013 -10 000
2014 -20 000
2015 100 000
2016 -30 000
2017 -40 000
2018 90 000
2019 80 000
2020 -50 000
2021 120 000
2022 -80 000
Due to the number of Murray-Brett Spearman’s purchase and sale transactions that he has carried
out each year of assessment, since the 2009 year of assessment, his accountant informed him that
he was carrying on business as a dealer in original paintings (South African ethnic art). This meant
that
• receipts and accruals from the sales of his original paintings would have to be included in his
gross income, and
• his purchases of them would be deductible in the determination of his taxable income.
As a result of this information from Murray-Brett Spearman’s accountant, he has declared all his
relevant transactions in his tax return that he submits to SARS each year.
In both the 2020 and 2022 years of assessment, Murray-Brett Spearman’s section 11(a) deductions
in the determination of his taxable income for his purchases of original paintings, exceeded his
receipts and accruals from his sales of original paintings.
Murray-Brett Spearman conducts his original paintings business from his home. His sole employee
is Ajax Steyn, a part-time helper who ensures that his original paintings that are for sale are in an
immaculate condition.
All Murray Brett Spearman’s purchase and sale transactions are made on the internet. Before
selling an original painting, he photographs it. And once it has been sold, Ajax Steyn dispatches it
to its purchaser.
The Commissioner is concerned that the results from Murray-Brett Spearman’s original paintings
business are causing a loss to the fiscus. The Commissioner would like to prevent him from
reducing his taxable income by deducting the loss from his original paintings business in the
determination of his taxable income. Yet the Commissioner is reluctant to apply the provisions of
section 80B against him for two reasons:
• First, because in the years of assessment when Murray-Brett Spearman did make a profit from
his original paintings business, this profit was included in his taxable income and subjected to
normal tax.
• Secondly, since his transactions are carried out with independent third parties, they are carried
out on an arms-length basis.
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.
7.38 (15 minutes)

This question tests the section 21 reduction for alimony paid to a former spouse. It also tests
paragraph (b) of the definition of ‘gross income’ and the section 10(1)(u) normal tax exemption.
Sylvia Gray, aged 86 years, met Baldwin Scalp, aged 94 years, at the Parkside Old Age Home.
They married on 1 January 2021. They moved out of their single rooms at the Parkside Old Age
Home into a double room.
Both Sylvia Gray and Baldwin Scalp are residents of the Republic. They have both been married
before.
Baldwin Scalp was married before – Sylvia Gray is his second wife. He was divorced from his first
wife in 1961. In accordance with their divorce agreement, he pays R15 000 a month alimony to her.
Baldwin Scalp is entitled to a pension of R12 000 a month from his former employer’s pension
fund. By way of a stop order agreement against his pension, his former employer’s pension fund
pays his R12 000 pension directly to his former wife.
Baldwin Scalp’s only other receipts and accruals are local dividends. He pays the balance of the
alimony of R3 000 a month to his former wife out of these local dividends.
Sylvia Gray was married twice before. Baldwin Scalp is her third husband.
• She was divorced from her first husband in 1961. In accordance with their divorce agreement,
she enjoys alimony of R10 000 a month from him. Her first husband is a director of many
companies. Her alimony is paid by him out of his director’s fees.
• She was divorced from her second husband in 1976. In accordance with their divorce agreement,
she enjoys alimony of R20 000 a month from him. Her second husband is an owner of many
rent-producing properties. Her alimony is paid by him out of the net rentals that he has earned.
You are required to
1. determine the amount that Baldwin Scalp may reduce his taxable income by as a result of the
R15 000 a month alimony that he pays to his former wife,
2. state if the R10 000 a month alimony that is awarded to Sylvia Gray by her first husband must
be included in her income, and
3. state if the R20 000 a month alimony that is awarded to her by her second husband must be
included in her income.
7.39 (60 minutes)

This question tests the definition of ‘gross income’, the general deduction formula (section 11(a) and
section 23(g)), sections 8(4)(a), 11(c), 11(l ), 11(m), 11D, 11F, 12C and 26A and paragraphs 3, 4, 5, 6,
8, 10, 20 and 35 of the Eighth Schedule.
Brenton Brooke (aged 44 years) and his brother, Brian Brooke (aged 37 years), are both residents
of the Republic. They trade in partnership in South Africa as ‘Brooke Bros’ sharing profits and
losses equally. Their business is the building of swimming-pools. Their partnership has made a
taxable profit for the 2022 year of assessment of R600 000. This profit does not take into account
the transactions listed below:
• During the 2019 year of assessment, the partnership purchased shares in a local company as a
dividend-yielding investment using surplus cash funds that it then had available. This
investment was disappointing in that it did not yield the expected amount of dividends. A small
dividend was received in the 2020 year of assessment. And when no dividends were received in
the 2021 and 2022 years of assessment, it sold these shares for R100 000 more than it had paid
for them.
• Clayton Peat, a bricklayer, employed by Brooke Bros, slipped on the side of a recently-
constructed swimming-pool and fell into the swimming-pool and drowned. He was survived by
a young wife and two young children. It is not the policy of the partnership to award amounts to
the dependants of former employees, but due to the widow’s poor financial position, it
contracted to pay her R10 000 a month for a five-year period. The first monthly award was made
to her on 30 July 2021.
• All the partnership’s employees are members of a pension fund. An employee contributes 6% of
his remuneration to the pension fund. On behalf of their employees, the partners (as employers)
also make a contribution to this pension fund. But the partners’ (employer’s) contribution is
at 12% of the employees’ remuneration. The partnership contributed R270 000 to the pension
fund during the 2022 year of assessment.
• In the 2018 year of assessment the partners had incurred R20 000 on purchasing equipment for a
‘scientific research’ project they were carrying out. The research was to be the testing of the
chemicals added to the water in swimming-pools to establish whether they caused damage to the
walls of swimming-pools. If a suitable chemical was discovered, the partners would attempt to
‘patent’ it. The Minister of Science and Technology has approved this research. On 1 December
2018 further equipment costing R10 000 was purchased. No equipment was purchased in the 2020
year of assessment. In the 2021 year of assessment further equipment costing R30 000 was
purchased. And in the 2022 year of assessment the partners incurred R4 000 ‘capital’ expenditure
and R16 000 ‘revenue’ expenditure on this project.
• During the 2021 year of assessment the partnership purchased a new tile-cutting machine for
R100 000. Its old tile-cutting machine which had a tax value of R2 000 on 28 February 2021
(original cost of R15 000) was leased to a swimming-pool builder carrying on business in
Lesotho. (The Commissioner has agreed to a wear-and-tear or depreciation capital allowance
based on a write-off period of five years for tile-cutting machines.) For the first six months of
the 2022 year of assessment, rentals of R500 a month were received from the Lesotho
swimming-pool builder from this lease. On 31 August 2021 the partnership then sold this tile-
cutting machine to the Lesotho swimming-pool builder for R6 800. Both the lease agreement,
and the purchase and sale contract, were concluded in Maseru, Lesotho.
• During the 2022 year of assessment the partners had built a swimming-pool for a client. After it
had been built a crack developed. Water leaked causing damage to a neighbour’s property
(garden and veranda). An action was instituted by the neighbour in that damages were claimed
from the partnership on the grounds that the partners had been negligent in failing to take proper
precautions to ensure that an event of this nature would not occur. Judgment was given in favour
of the neighbour with costs. The partners duly paid the damages and the legal expenses. The
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.
7.40 (40 minutes)

This question tests the general deduction formula (section 11(a) and section 23(g)) and section 11(c)
and section 23(o). It also tests the application of section 102 of the Tax Administration Act and the
judgments from ITC 721 ((1951) 17 SATC 485), ITC 1065 ((1964) 27 SATC 111), Port Elizabeth
Electric Tramway Co Ltd v CIR (1936 CPD 241, 8 SATC 13), ITC 1058 ((1963) 26 SATC 305) and
Joffe & Co Ltd v CIR (1946 AD 157, 13 SATC 354). It is suitable for a student studying towards a
Colin Crookes was employed by the Rocky Beach Municipality as its buildings maintenance
supervisor. One of his responsibilities was to ensure that all its buildings did not become
dilapidated. Its policy was to regularly repaint the exterior of all its buildings. It had decided on this
policy since the majority of its buildings were situated close to the beach front and regular painting
helps preserve them.
The task of awarding the Rocky Beach Municipality’s contracts for the repainting of its buildings
was delegated to Colin Crookes.
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.
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
8.1 (60 minutes)

This question tests capital allowances, recoupments of them, capital gains and some deferred
recoupment provisions. It tests sections 8(4), 11(o) and 12C and paragraphs 20, 35 and 66 of the
Eighth Schedule.
Pine Products Limited is a manufacturer conducting its operations in a factory situated in Durban.
It is a resident of the Republic. Its financial year ends on the last day of February. Consider the
following five situations:
1. Pine Products Limited purchased a new and unused industrial machine on 1 September 2018
for R10 500. It qualified for the section 12C allowance at a rate of 40% in the first year and
after that 20% a year for the next three years. It was immediately brought into use for
manufacturing purposes. It has now become obsolete. It will be replaced by a new and unused
machine costing R15 000. This new machine is estimated to last eight years from the date of its
installation, being 1 February 2021. It will be brought into use on 1 February 2021. The old
machine can be sold for R6 000, provided it is delivered to its purchaser on 1 December 2020.
It will be used for the last time on 30 November 2020. Pine Products Limited will defer its
normal tax liability if possible.
You are required to determine the capital allowances that are deductible in the determination
of Pine Products Limited’s taxable income for its 2019, 2020, 2021 and 2022 years of
assessment, assuming that the replacement machine was ordered on 1 September 2020.
2. Assume that on 31 August 2020 prior to Pine Products Limited making the necessary
arrangements for replacing the above machine, a fire at the factory destroyed, amongst other
things, the machine in question. Its insurance cover had lapsed. Pine Products Limited raised
R1 000 from its sale, this being on 30 September 2020. A new and unused replacement
machine was supplied to Pine Products Limited only on 1 March 2021. On that day it was
brought into use for manufacturing purposes. This replacement machine cost R15 000.
You are required to determine the capital allowances that are deductible in the determination
of Pine Products Limited’s taxable income for its 2021 and 2022 years of assessment,
assuming that the replacement machine was ordered on 1 September 2020.
3. Further assume that on 30 September 2020 the insurer agreed to overlook the failure to pay the
premium and awarded Pine Products Limited R11 100. It was required to hand over the
damaged machine to its insurer.
You are required to re-answer Part 2 above taking this insurance award into account.
4. Assume that on 31 August 2021, following major changes in Pine Products Limited’s technical
developments relating to its manufacturing processes, it was necessary to sell the replacement
machine referred to in Part 2 above since it too had become obsolete. Assume that the
information in Part 3 above had occurred. It was sold for R15 800 on 31 August 2021. It will
not be replaced.
You are required to state how this will affect the determination of Pine Products Limited’s
taxable income for its 2022 year of assessment.
5. Further assume that following a dispute between Pine Products Limited and the purchaser of
the ‘redundant’ machine, its selling price of its replacement machine was reduced (see Part 4
141
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
8.2 (20 minutes)

This question tests capital allowances and recoupments of them, including some deferred recoupment
provisions. It tests sections 8(4) and 12C and paragraphs 20, 35 and 66 of the Eighth Schedule.
On 1 August 2021 Wholewheat Bakery (Pty) Limited’s striking employees destroyed three of its
industrial ovens by pouring petrol over them and setting them alight at its factory in Durban. It is a
The remains of Wholewheat Bakery (Pty) Limited’s ovens were sold to a scrap-metal dealer.
Details relating to them follow:
Oven 1 Oven 2 Oven 3
Originally acquired (after 1 October 2001) New New Used
Original cash cost 50 000 35 000 15 000
Total of tax allowances claimed to 28 February 2021 30 000 14 000 3 000
Insurance award Nil 25 000 14 000
Sale amount from a scrap-metal dealer 2 500 2 000 1 000
Date replaced 15 August 1 October 1 December
2021 2021 2021
Cash cost of replacement ovens
– Purchased new 60 000 24 000
– Purchased used 52 000
Date brought into use 1 September 1 November 1 January
2021 2021 2022
Wholewheat Bakery (Pty) Limited carries on a process of manufacture. And its industrial ovens are
used directly in this process. Its financial year ends on the last day of February. It will defer its
liability for normal tax if possible.
You are required to determine all the capital allowances, and recoupments of them, that are
deductible in the determination of Wholewheat Bakery (Pty) Limited’s taxable income for its three
original industrial ovens and their replacements for its 2022 year of assessment.
8.3 (25 minutes)

This question tests the allowances for premises and improvements. It also tests the definition of ‘gross
income’, sections 11(g), 11(h) and 13(1) and paragraphs 20, 35 and 66 of the Eighth Schedule.
Tim Textile and Leroy Manorhouse
Tim Textile agreed to effect improvements by building a factory at a cost of R7 110 000 on land
belonging to Leroy Manorhouse. This condition is part of a 20-year lease agreement that was entered
into between them on 1 September 2021.
The erection of the factory commenced on 1 September 2021. It was completed on 30 November 2021
at a cost of R8 532 000. It was used for the first time on 1 January 2022.
You are required to determine the resulting normal tax implications for the 2022 and 2023 years of
assessment to both Tim Textile and Leroy Manorhouse.
Dewes Limited and Kingsley Landlord
On 30 April 2021 Dewes Limited, after carrying on its process of manufacture in its own premises
for just over 30 years, sold its factory that had originally cost R450 000 and which had a tax value
INCENTIVE ALLOWANCES 143
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.
8.4 (30 minutes)

This question tests industrial capital allowances on buildings and lease rentals incurred to hire a
machine. It tests the general deduction formula (sections 11(a) and 23(g)) and sections 13(1) and 23C.
Indian Art (Pty) Limited, manufacturers of brass and copper idols, commenced production in
Durban in January 2011. It is a resident of the Republic. Its year of assessment ends on the last day
of February. When its business operations expanded, and the demand for its products grew, it
decentralised its production to the rural areas of KwaZulu-Natal.
Indian Art (Pty) Limited built its second factory at Umkomaas, a third factory at Richmond, and its
latest factory at Verulam.
Indian Art (Pty) Limited’s original factory was built on property purchased by it in November 2009
for R320 000. Its original factory was completed on 1 January 2011 at a cost of R2 560 000.
Indian Art (Pty) Limited was unable to purchase a site in Umkomaas but agreed to lease a river-
front property from Maha Investments (Pty) Limited for a 25-year period. This lease agreement,
dated 1 January 2021, provided that a premium of R240 000 was payable immediately by Indian
Art (Pty) Limited. It also provided for a factory to be erected by Indian Art (Pty) Limited at a cost
of R2 336 000.
Construction commenced on 1 February 2021. The factory was completed on 31 August 2021. It was
immediately used for manufacturing purposes. Its cost was R2 536 000. The cost incurred by Indian
Art (Pty) Limited to 28 February 2021 was R440 000.
The following particulars relate to Indian Art (Pty) Limited’s other two factories:
Richmond factory Verulam factory
Cost of land R480 000 R720 000
Erection commenced 1 April 2021 1 March 2021
Factory completed 30 November 2021 31 January 2022
First used 1 January 2022 1 February 2022
Purpose of use Manufacturing Manufacturing
Erection cost R1 920 000 R3 280 000
Indian Art (Pty) Limited is a vendor.
Indian Art (Pty) Limited upgraded its existing manufacturing machinery at its Durban factory by
acquiring a new machine. Since it did not have the necessary funds to purchase the machine
outright, a 36-months financial lease was entered into on 1 December 2021. A valid ‘tax invoice’
obtained from the lessor at the commencement of the lease contained the following information:
Cost of machine 1 440 000

Add value-added tax (at 15%) 216 000
Principal debt 1 656 000
Add finance charges 331 200
Total lease rentals 1 987 200
The lease rentals are payable by Indian Art (Pty) Limited in 36 monthly amounts of R55 200 each,
commencing on 1 December 2021. (A yield to maturity of 1,0207449% applies to this monthly
accrual period.)
The machine was used directly by Indian Art (Pty) Limited in its process of manufacture as from
1 December 2021.
The financial lease had been capitalised in Indian Art (Pty) Limited’s accounting records. (For
normal tax purposes this financial lease is treated as the lease of an asset and not as the purchase of
an asset.)
The journal entry used by Indian Art (Pty) Limited to record this transaction was as follows:
Fixed asset – machine (statement of financial position) Dr 1 440 000

Value-added tax input tax account Dr 216 000
Deferred finance charges Dr 331 200
To Sundry creditor (long-term lease obligation) 1 987 200
Being the capitalisation of the financial lease for the machine
purchased on 1 December 2021.
The financial lease also caused the following journal entries to be recorded:
Sundry creditor (long-term lease obligation) Dr 165 600

To Cash 165 600
Being the payment of three instalments of R55 200 each.
Finance charges (statement of profit or loss and other comprehensive Dr

income ) 27 600
To Deferred finance charges 27 600
Being that portion of the deferred finance charges that relates to
the 2022 financial year.
Depreciation (statement of profit or loss and other comprehensive Dr 90 000

income )
To Accumulated depreciation 90 000
Being depreciation on the machine (purchased on 1 December
2021) for three months in its 2022 financial year.
You are required to
1. determine all the capital allowances that are deductible in the determination of Indian Art (Pty)
Limited’s 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.
8.5 (75 minutes)

This question tests sections 11( f ), 11(g), 11(t), 12N, 13ter and 13sex. It also tests section 8(4) and
Bricks (Pty) Limited
Bricks (Pty) Limited, a resident of the Republic, completed the erection of 10 identical residential
units on 30 September 2021 on land belonging to it that it had purchased for R100 000. The total
cost of erection was R2 100 000 (R210 000 for each unit). Erection had commenced on
1 November 2020. On 1 October 2021, 10 of its bona fide full-time employees and their families
moved into these residential units rent free.
You are required to determine, with brief supporting reasons, the capital allowances that Bricks
(Pty) Limited may deduct in the determination of its taxable income for its 2022 year of assessment
(that ended on 28 February 2022).
Bob Stone
Bob Stone, a resident of the Republic, effected improvements to a property leased by him from
Rocky Owen by building eight identical residential units on it at a cost of R4 230 000 (R528 750
for each unit). Under the lease agreement, he was obliged to improve the leased property by the
erection on it of the eight residential units at a cost of R3 384 000. His extra cost of R846 000
resulted from the increased price of certain imported materials used in the construction caused by
an increase in the relevant foreign exchange rate. This lease agreement was for 25 years and was
entered into on 1 June 2020.
The residential units were completed on 30 November 2021. They were let by Bob Stone for the
first time on 1 December 2021.
You are required to determine, with brief supporting reasons, the capital allowances that Bob
Stone may deduct in the determination of its taxable income for the 2021, 2022 and 2023 years of
assessment.
Rock Properties (Pty) Limited
Rock Properties (Pty) Limited, a resident of the Republic, entered into a 20-year lease agreement
with the local municipality on 1 August 2021. Under this lease agreement, it was obliged to erect
20 identical residential units at a cost of R163 800 each on the leasehold property.
Erection commenced on 1 September 2021. The residential units were completed on 31 January
2022 and were each let at R1 800 a month for the first time from 1 February 2022. The total cost of
erection was R3 603 600 (20 residential units at R180 180 each).
You are required to determine, with brief supporting reasons, all the capital allowances that Rock
Properties (Pty) Limited may deduct in the determination of its taxable income for its 2022 year of
assessment (that ended on 28 February 2022).
Sands (Pty) Limited
Sands (Pty) Limited is a resident of the Republic. Its year of assessment ends on the last day of
February. It erected six identical residential units at a cost of R400 000 each during April, May and
June 2017. They were erected on land that had been purchased by it for R100 000 on 1 March
2017. These units were let by it as from 1 July 2017.
On 1 January 2021, Randy Stone, a shareholder and director of Sands (Pty) Limited, and his family
moved into one of the units and lived in it rent free. He is not a bona fide full-time employee of it.
On 1 January 2022, Sands (Pty) Limited sold the entire block of six units for R3 950 000 (being
R3 800 000 for the buildings and R150 000 for the land).
You are required to determine all the capital allowances and recoupments of them, that need to be
taken into account in the determination of Sands (Pty) Limited’s taxable income, for each of the
years of assessment covered in the question.
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
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.
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
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.
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.
8.6 (30 minutes)

This question tests sections 8(4), 23G, and 24J and paragraphs 20 and 35 of the Eighth Schedule.
Lever Sisters Limited
On 1 July 2021 Lever Sisters Limited, a manufacturer, sold an asset for R2 500 000 to its pension
fund, namely, the Lever Sisters Pension Fund (an exempt from normal tax entity). The original cost
of this asset was R300 000 and it had deducted in the determination of its taxable income ‘capital’
allowances on it of R240 000. It was purchased after 1 October 2001.
The Lever Sisters Pension Fund then let this asset back to Lever Sisters Limited at a rental of
R63 500 a month for a 60-month period.
You are required to set out the normal tax consequences that arise out of the above transaction, as
far as they relate to Lever Sisters Limited.
Tenth National Bank
City of Wattletown, a municipality, sold its ‘grass cutting and park maintenance’ equipment to the
Tenth National Bank at its current market value of R300 000. This equipment had originally cost
R500 000. It was purchased after 1 October 2001. Since the City of Wattletown’s receipts and
accruals do not constitute ‘income’ as defined, it (the City of Wattletown) was not entitled to
deduct any amounts on this equipment.
The Tenth National Bank then let this equipment back to the City of Wattletown at a rental of
R10 000 a month for a 36-month period.
You are required to set out the normal tax consequences that arise out of the above transactions as
far as they relate to the Tenth National Bank.
8.7 (50 minutes)

This question tests the provisions of section 12H, the so-called learnership allowance.
Choose ‘n Charge Limited trades as a supermarket. Its financial year ends on the last day of February.
During its 2022 year of assessment, it concluded learnership agreements with Chick Cooke, Penny
Till and Pippa Seed, three of its employees, who are employed in its restaurant division. They all hold
qualifications up to NQF level 6.
The relevant learnership agreements have been registered by Choose ‘n Charge Limited with the
relevant SETA (and titles and codes have been allocated and issued by the Director-General:
Department of Labour).
Chick Cooke
Chick Cooke entered into a nine-month learnership agreement with Choose ‘n Charge Limited on
1 April 2021. (She is learning to become a baker.) She completed this learnership agreement on
31 December 2021. Under her agreement of employment, she earns a salary of R8 100 a month.
Penny Till
Penny Till entered into an 18-month learnership agreement with Choose ‘n Charge Limited on
1 August 2020. (She is learning to become a cashier (a person dealing with cash transactions in a
shop).) Her learnership agreement was completed on 31 January 2022. Under her agreement of
employment, she earns a salary of R7 500 a month.
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.
8.8 (50 minutes)

This question tests the section 13quat so-called urban development zone building allowances and
the section 13quin commercial buildings allowance.
Solomon Plaatje sold his business 10 years ago. The capital profit he made provided him with life-
long wealth. Not desiring to work again, he invested his capital in several rent-producing
properties. He owns both commercial and residential tenants.
When a local retail shop was for sale at a bargain price Solomon Plaatje purchased it. He purchased
it from the retailer who had been trading out of these premises. It had been erected by this retailer
in 2005 for R4 400 000. The retailer had purchased the land on which it is erected for R600 000.
Solomon Plaatje purchased it on 30 November 2020 for R3 900 000 (R900 000 for the land and
R3 000 000 for the building).
Solomon Plaatje improved it before letting it to an already-secured tenant. The retail shop was
closed during April and May 2020 while it was being improved (see below) with the result that no
rentals were earned by him during this two-month period. This tenant had already entered into a
five-year lease agreement with him.
During this two-month period improvements were made to the retail shop by Solomon Plaatje. At
the request of the tenant, interior walls were demolished and the shop was converted to operate on a
self-service basis. The improvements to the shop cost him R300 000.
Solomon Plaatje’s retail shop is located in an approved urban development zone.
You are required to
1. write a brief note on the section 13quat so-called urban development zone allowance,
2. determine the section 13quat allowance that Solomon Plaatje may deduct in the determination
of his taxable income for the 2022 year of assessment, and
3. state whether he should rather claim the section 13quin allowance instead of the section 13quat
allowance.
8.9 (50 minutes)

This question tests the provisions of section 12DA. It also tests sections 8(4)(e) and 26A, paragraphs 20,
35 and 66 of the Eighth Schedule.
Rail Restaurant CC carries on business as a restaurant. It carries on its business from dining cars
(railway carriages equipped as a restaurant) on selected passenger trains. Its financial year ends on
On 1 March 2021 Rail Restaurant CC purchased 12 dining cars at a cost of R150 000 each. They
were used by it with immediate effect.
On 30 September 2021 two of the dining cars that had been purchased on 1 March 2021 by Rail
Restaurant CC (see above) were destroyed in a fire:
• One was not insured. Its remains were sold to a scrap-metal dealer for R15 000.
• 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.
8.10 (30 minutes)

This question tests the provisions of section 11D. It also tests section 13 and paragraphs 10(c), 20
and 35 of the Eighth Schedule.
On 1 October 2018 Nightballs (Pty) Limited set up its own research and development division in an
attempt to discover information in relation to one of its products.
Nightballs (Pty) Limited manufactures, amongst other things, white cricket balls that are used in
flood-lit cricket matches. These balls were being damaged by dew (tiny drops of moisture that form
on cool surfaces at night, when water vapour in the air condenses). The research and development
was to make the balls dew-resistant. The Minister of Science and Technology has approved this
research and development under section 11D(9).
Nightballs (Pty) Limited’s research and development division was initially ‘housed’ in a leased
building.
On 1 December 2018 Nightballs (Pty) Limited commenced with the erection of its own building. It
was completed on 31 May 2019 at a total cost of R2 000 000, of which R1 200 000 was incurred
before 28 February 2019 (the end of its financial year).
On 1 June 2019 Nightballs (Pty) Limited installed a pilot plant in the building at a cost of R400 000.
This pilot plant was used solely for purposes of research and development.
On 1 July 2019 Nightballs (Pty) Limited moved its research and development division out of the
leased building into the new building where it immediately continued with its scientific research.
On 1 March 2020 an additional pilot plant costing R200 000 was purchased by Nightballs (Pty)
Limited and installed in the building. This pilot plant was used solely for purposes of research and
development.
On 1 November 2020 Nightballs (Pty) Limited donated R80 000 to a ‘recognised’ university for
furtherance of scientific research connected with its trade. A ‘section 18A’ certificate was issued by
the university.
On 31 May 2021 Nightballs (Pty) Limited completed this research project. Its building together
with the pilot plant in it was sold for R3 000 000. The sale and purchase agreement indicated that
R2 500 000 was for its building and R500 000 for its pilot plant.
The following revenue expenditure was incurred by Nightballs (Pty) Limited in connection with its
research and development activities:
1 October 2018 to 28 February 2019 1 120 000
1 March 2019 to 29 February 2020 1 200 000
1 March 2020 to 28 February 2021 1 250 000
1 March 2021 to 31 May 2021 152 000
You are required to determine the allowances that Nightballs (Pty) Limited would be entitled to
deduct from its income under section 11D in the determination of its taxable income for its 2019,
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.)
8.11 (40 minutes)

This question tests the general deduction formula (sections 11(a) and 23(g)), sections 8(4), 11( f ),
11D, 13, 13sex and 18A and paragraphs 3, 4, 6, 8, 10, 20 and 35 of the Eighth Schedule.
Iyeesee Limited, a resident of the Republic, carries on business as a ballot-paper and token
vouchers printer. Its year of assessment ends on the last day of February.
Research and development
Iyeesee Limited needed to produce a token voucher that was fraud resistant. It therefore carried out
research into a new printing process. This research project was expected to last 10 years. It hoped
to create an invention as defined in the Patents Act and then to patent its more-efficient method of
printing fraud-resistant token vouchers. The Minister of Science and Technology approved this
research and development project under section 11D(9).
Iyeesee Limited paid a premium of R120 000 to obtain suitable premises from which to carry on its
printing business. It leased these premises for 10 years at a rental of R15 000 a month as from
1 December 2018. It used these leased premises for its printing trade as from 1 December 2018.
Iyeesee Limited’s existing premises were then converted into a laboratory for research and
development. Its research and expenditure commenced on 1 March 2019.
Iyeesee Limited’s expenditure on research and development and the amounts obtained from selling
certain of its assets were as follows:
2019 year of assessment
Alterations (partially completed) 34 000
Salaries – research employees 2 466 000
Alterations (completed) 66 000
Pilot plant (purchased on 1 November 2019) 40 000
Iyeesee Limited purchased a second-hand motor vehicle for R100 000. It immediately donated this
motor vehicle to the local university to be used solely by a research division at the local university
that was also carrying out research into fraud-resistant printing systems. The local university issued
it with a section 18A certificate (receipt) for R100 000 for its donation of this second-hand motor
vehicle.
Further alterations 200 000
Additional pilot plant purchased 100 000
Pilot plant sold for 115 000
Iyeesee Limited’s discontinued its research on 31 May 2021. Its pilot plant that had been used in its
laboratory was sold for R115 000 (see above). It had been purchased to be used solely in this
research and development project.
Iyeesee Limited’s laboratory was then let to a tenant at a market-related rental. Net rentals of
R81 000 accrued to it in its 2022 year 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.)
8.12 (20 minutes)

This question tests the general deduction formula (sections 11(a) and 23(g)), sections 11( f ), 11(g),
11A, 13ter, 13sex, 23H and 24J. It also tests the definition of a ‘low-cost residential unit’.
During Durban Manufacturers (Pty) Limited 2021 year of assessment it failed to renew its lease
agreement for the factory premises it occupied. It then agreed to build its own factory.
Therefore Durban Manufacturers (Pty) Limited purchased, on 1 March 2021, an industrial building
site. It paid R300 000 cash for this site. The erection of a factory commenced immediately. It was
completed on 30 June 2021 at a cost of R1 800 000. Production commenced a day later.
On 1 March 2021 Durban Manufacturers (Pty) Limited borrowed R1 800 000 at 10% a year so as
to finance the cost of its factory. At 28 February 2022 no portion of this loan had been repaid by it.
Since Durban Manufacturers (Pty) Limited’s new factory was situated on the outskirts of the town,
requests were made by certain of its factory employees for housing assistance.
On 1 August 2021 Durban Manufacturers (Pty) Limited entered into a 30-year lease agreement for
a vacant plot of land situated near to the factory with Virginia Bush. It provided for
• an initial premium of R90 000 to be paid by Durban Manufacturers (Pty) Limited to Virginia
Bush at the commencement of the lease,
• a monthly rental of R6 000 to be paid by it to Virginia Bush, and
• for it to effect improvements to Virginia Bush’s property in the form of 12 cottages (small
houses) to be erected on it at a cost of R120 000 each.
The cottages were completed by Durban Manufacturers (Pty) Limited at a cost of R180 000 each
on 31 December 2021. They were occupied by 12 of its bona fide full-time employees and their
families as from 1 January 2022.
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:
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
8.13 (60 minutes)

This question tests the general deduction formula (sections 11(a) and 23(g)), sections 10(1)(nB),
11(e), 11( f ), 11(g), 11(gA), 11A, 12C, 12H, 13, 13ter, 13sex and 24J and paragraph 9 of the Seventh
Schedule. It also tests paragraphs 3, 6, 8, 10, 20 and 35 of the Eighth Schedule and the judgments
from ITC 876 ((1959) 23 SATC 221) and ITC 1798 ((2011) 68 SATC 9).
On 1 March 2021 Feather Quilts (Pty) Limited was incorporated. Its entire share capital is held by
Ida Down. It is a vendor. It manufactures duvets (thick soft quilts, namely, bed-coverings used
instead of sheets and blankets).
On 1 July 2021 Feather Quilts (Pty) Limited commenced with the construction of a factory. It was
completed on 31 December 2021 at a cost of R5 400 000. It was brought into use on 1 January
2022, the day that it commenced its trade. This factory was built on land leased from Matt Counter-
Payne. The lease agreement is for 20 years. It was entered into on 1 July 2021.
• Under this lease agreement, a lease premium of R240 000 was paid by Feather Quilts (Pty)
Limited to Matt Counter-Payne on 1 July 2021.
• The lease agreement also required the lessor to improve Matt Counter-Payne’s property by
erecting a factory on it at a cost of R4 633 200.
• A rental of R25 000 a month payable by it to Matt Counter-Payne is also provided for in the
lease agreement.
Five technicians were recruited by Feather Quilts (Pty) Limited from abroad and were employed by
it as from 1 January 2022. Their relocation costs to South Africa of R300 000 were incurred by it.
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
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)),
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.
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.
8.14 (60 minutes)

This question tests the taxable income determination, sections 8(4)(eB), 11(a), 11(cA), 11(e),
11(gB), 11(i), 11D, 12C, 12H, 13ter, 23H and 26A, paragraph 7 of the Seventh Schedule and
paragraphs 5, 6, 8, 10, 20, 35 and 66(4) of the Eighth Schedule.
Made-In-Soweto (Pty) Limited is a resident of the Republic. It manufactures South African
souvenirs and related products. It sells its products to retailers. It also retails some of its products
direct to the public through a shop that it recently purchased (see further below). It is a vendor. Its
financial year ends on the last day of February.
Made-In-Soweto (Pty) Limited’s statement of profit or loss and other comprehensive income for its
financial year ended 28 February 2022 reflected a net profit before tax of R410 530. (Unless
specifically stated to the contrary, all amounts are exclusive of value-added tax.) The following
information may be relevant in the determination of its taxable income:
New machine
On 1 March 2020 Made-In-Soweto (Pty) Limited purchased a new machine on a cash basis under
an arm’s length transaction for R100 000. This machine was immediately brought into use in its
process of manufacture. On 31 August 2021 it ‘traded in’ this machine for a ‘more-advanced’
machine. Depreciation of R12 500 for the ‘traded-in’ machine was provided for in its statement of
profit or loss and other comprehensive income for its 2022 year of assessment. A ‘trade in’ price of
R130 000 was obtained by it for its ‘traded-in’ machine. Its carrying amount (book value) on
31 August 2021 was R62 500.
Also included in Made-In-Soweto (Pty) Limited’s statement of profit or loss and other
comprehensive income was the profit of R67 500 (R130 000 – R62 500) that was made when this
machine was ‘traded-in’.
The ‘more-advanced’ machine was purchased by Made-In-Soweto (Pty) Limited as a new and
unused machine on a cash basis under an arm’s length transaction for R150 000. This ‘more-
advanced’ machine was immediately brought into use in its process of 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 would like to defer its normal tax liability in its 2022 year of
assessment.
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.
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.
8.15 (45 minutes)

This question tests sections 11( f ), (g) and (h) and 13(1). It tests expenditure incurred on
improvements to leasehold property and the so-called industrial buildings allowance.
Tyron Steel, a resident of the Republic, has a shareholding of
• 100% in Steel Properties (Pty) Limited,
• 60% in Wire Industries (Pty) Limited, and
• 30% in Mesh (Pty) Limited.
On 1 March 2019 Fencing (Pty) Limited was incorporated. Its share capital is held by
• Wire Industries (Pty) Limited to the extent of 80%, and
• Mesh (Pty) Limited to the extent of 20%.
Steel Properties (Pty) Limited, Wire Industries (Pty) Limited, Mesh (Pty) Limited and Fencing
(Pty) Limited are all residents of the Republic. They all have financial years that end on the last day
of February.
On 1 June 2020 Steel Properties (Pty) Limited let the premises and machinery of its newly-erected
factory (used to manufacture wire fencing) to Fencing (Pty) Limited. The conditions of the lease
were as follows:
• The period of the lease was 12 years.
• An initial premium of R226 800 was payable by Fencing (Pty) Limited to Steel Properties (Pty)
Limited at the commencement of the lease (on 1 June 2020).
• A monthly rental of R10 000 would be payable by Fencing (Pty) Limited to Steel Properties
(Pty) Limited in advance on the first day of each month.
• Fencing (Pty) Limited was obliged to effect improvements to the factory to the value of
R1 269 000.
Steel Properties (Pty) Limited had erected the factory at a cost of R3 000 000. The erection of the
factory had commenced on 1 May 2019 and had been completed on 30 April 2020. It had
purchased the machinery which was new and unused at a cost of R640 000 on 1 May 2020.
Fencing (Pty) Limited commenced production in the factory on 1 September 2020. The
Commissioner regards the making of wire fencing as a process of manufacture. He has also agreed
to the wear-and-tear or depreciation capital allowance being determined over a five-year period on
its assets that qualify for this allowance.
The erection of these improvements by Fencing (Pty) Limited commenced on 15 June 2020. They
were completed at a cost of R1 419 000 on 31 August 2020. Production commenced in the
improved area of the factory one month later, on 1 October 2020. These improvements increased
the industrial capacity of the factory by 25%.
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.
8.16 (45 minutes)

This question tests sections 11( f ), 11(g), 11(h), 13, 24 and 24J. It also tests the definition of ‘gross
income’ and sections 8(4) and 8(5).
Multi Properties Limited is a resident of the Republic. Its financial year ends on 31 March. It owns
a number of industrial sites. It erects factories on these sites to clients’ specifications. It has been
dealing in both industrial sites and completed factories since its incorporation.
Manufacturers Limited is a resident of the Republic. It carries on a process of manufacture. It has
agreed, in principle, to acquire a site that cost Multi Properties Limited R1 800 000. It intends to
take occupation on completion of a factory that will cost R9 000 000 to erect and that will be
completed on 1 February 2022. The erection of the factory had commenced on 1 May 2021.
Manufacturers Limited’s financial year also ends on 31 March.
Manufacturers Limited is not a connected person of Multi Properties Limited.
Multi Properties Limited is prepared to enter into a contract with Manufacturers Limited on the
basis of one of the following three options:
First option
The site and erected factory will be leased by Multi Properties Limited to Manufacturers Limited
for 15 years with an option to purchase it on 31 January 2024 for R18 000 000 of which
R14 400 000 will be for the buildings. An amount equal to 50% of the monthly rentals (of
R150 000 a month) will be set off against the purchase price should it exercise its option. The first
rental payment and a lease premium of R1 800 000 must be paid in cash on the date of completion
of the factory. The lease agreement will be entered into on this date. It has indicated that should it
choose this option, it will purchase the property on 31 January 2024.
Second option
A sale of the site by Multi Properties Limited to Manufacturers Limited for R3 600 000 cash on
1 July 2021 simultaneously with a contract to erect a factory on it for R12 000 000. Payment for
construction will be made by Manufacturers Limited on the basis of progress payments, the last
payment being on the date of completion of the factory.
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.
8.17 (75 minutes)

This question tests the definition of ‘gross income’, the general deduction formula (sections 11(a) and
23(g)), sections 8(5), 11(e), 11( f ), 11(g), 12C, 13(1), 23A, 23D, 23J and 24J and paragraph 5(2) of
the Seventh Schedule. It also tests the judgment from ITC 1546 ((1992) 54 SATC 477).
You are employed as the tax manager of the Domestic Paper group of companies. Your
responsibilities include dealing with the numerous tax queries arising from the companies within
the group. These responsibilities are made extremely difficult by the fact that the group is
diversified as regards the nature of activities conducted by its various companies.
For the Domestic Paper group’s financial year ended 28 February 2022 (all companies in the group
have the same financial year and they are all residents of the Republic) you have received the
following five queries that require your urgent attention: (All companies in the group are vendors.)
Nappy (Pty) Limited
Nappy (Pty) Limited is a manufacturer and wholesaler of disposable nappies. Di Aper, its human
resources manager, retired on 28 February 2022 after 15 years service. Under company policy,
retiring employees may purchase their ‘company cars’ from it for the settlement amount owing
under the financial lease over the vehicle.
Nappy (Pty) Limited finances all its ‘company cars’ by means of financial leases. Di Aper’s
‘company car’ was financed under a three-year financial lease entered into on 1 May 2020. Its
‘cash’ cost on 1 May 2020 was R276 000 (R240 000 plus value-added tax at 15% of R36 000) and
the monthly lease instalment (payable on the first day of each month) is R11 250.
On 28 February 2022 Nappy (Pty) Limited settled the financial lease by paying the settlement
amount of R131 250. Di Aper then purchased her ‘company car’ (a motor car) from Nappy (Pty)
Limited for R131 250. At that date it had a carrying amount (book value) of R173 280 and a market
value of R187 500.
What are the resulting normal tax implications of these transactions for Nappy (Pty) Limited and
Di Aper?
Serviettes (Pty) Limited and Paper Money (Pty) Limited
Paper Money (Pty) Limited is the group’s financier. It has been the group’s policy for the past five
years to have its financial affairs served by a single finance company (Paper Money (Pty) Limited)
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).
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.
These market value amounts are exclusive of value-added tax.

What are the normal tax implications to Steel Wool (Pty) Limited arising from the exercise of its
option to purchase the factory?
You are required to answer all the questions as posed above.
8.18 (60 minutes)

This question tests a number of capital allowances including those provided for in sections 11(e),
11(gB), 12C, 12H, 13(1), 13quin, 23J and 24J.
Eastern Jeans Manufacturers (Pty) Limited is a wholly owned subsidiary of Casual Clothing
Manufacturers Limited. It was established to
• take advantage of the high unemployment rate in the Verulum area, and
• produce denim jeans specifically styled for the young Indian males living in the greater Durban
area.
Eastern Jeans Manufacturers (Pty) Limited’s financial year ends on the last day of February. It is a
resident of the Republic. And it is a vendor.
During Eastern Jeans Manufacturers (Pty) Limited’s 2022 financial year it carried out, amongst
others, the following transactions:
(All these transactions have already been correctly dealt with for value-added tax purposes. In other
words, you may ignore value-added tax.)
Learnership agreements
On 1 March 2021 Eastern Jeans Manufacturers (Pty) Limited concluded registered learnership
agreements with 20 of its employees. The learnership agreements have been registered in
accordance with the Skills Development Act 97 of 1998 (and relevant titles and codes have been
allocated and issued). These learnership agreements were for a one-year period. All its ‘learners’
hold qualifications of an NQF level 6 or less.
Only 15 of Eastern Jeans Manufacturers (Pty) Limited’s employees successfully completed their
learnership agreements. One of the employees who successfully completed her learnership
agreement is a disabled person. These learnership agreements were concluded on 28 February
2022.
Two employees left Eastern Jeans Manufacturers (Pty) Limited’s employment on 31 May 2021:
• One of these employees then cancelled her learnership agreement.
• The other ex-employee joined another clothing manufacturer who took over her learnership
agreement. She successfully completed her learnership agreement.
Eastern Jeans Manufacturers (Pty) Limited’s other three employees who did not successfully
complete their learnership agreements failed their trade tests.
Second-hand machines
On 1 April 2021 Eastern Jeans Manufacturers (Pty) Limited purchased 25 industrial sewing
machines from Casual Clothing Manufacturers Limited for R75 000.
On 1 December 2019 Casual Clothing Manufacturers Limited had purchased these sewing
machines (that it used in its process of manufacture with immediate effect) for a cash cost of
R60 000. These sewing machines qualified for the ‘accelerated’ section 12C capital allowance.
Casual Clothing Manufacturers Limited’s year of assessment also ends on the last day of February.
Casual Clothing Manufacturers Limited and Eastern Jeans Manufacturers (Pty) Limited have
agreed that the provisions of sections 42 and 45 will not apply to transactions between themselves.
An independent valuation was made on 1 April 2021 of these sewing machines, and R66 000 was
confirmed as being their market value.
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.
Heavy-duty sewing machine

On 1 January 2022 Eastern Jeans Manufacturers (Pty) Limited purchased a new heavy-duty sewing
machine that would have cost R8 400 cash. But it was purchased under a suspensive sale agreement
entered into on a 1 January 2022 providing for
• a deposit of R2 700, and
• then 15 instalments of R420 a month.
A yield to maturity of 1,27795% applies to this monthly accrual period.
This heavy-duty sewing machine was brought into use by Eastern Jeans Manufacturers (Pty) Limited
on 1 January 2022.
The first instalment of R420 was paid by Eastern Jeans Manufacturers (Pty) Limited on 31 January
2022.
Delivery vans
On 1 October 2021 Eastern Jeans Manufacturers (Pty) Limited purchased a second-hand delivery van
for R288 000. It was brought into use by it on the same day. It is used to transport
• denim material from a factory situated about 80 kilometres from its own factory, and
• its finished goods (denim jeans) to local retail outlets and to the depot of a road transporter.
The Commissioner allows delivery vans to be written off over a four-year period. This second-hand
delivery vehicle was one year old when it was purchased by Eastern Jeans Manufacturers (Pty)
Limited.
On 31 January 2022 rioting students at a campus where one of Eastern Jeans Manufacturers (Pty)
Limited’s retailers is located, set fire to its delivery van. It was destroyed.
Eastern Jeans Manufacturers (Pty) Limited’s insurer awarded it R320 000 for the loss of its delivery
van.
On 14 February 2022 Eastern Jeans Manufacturers (Pty) Limited purchased a replacement delivery
van for R360 000. It was purchased new and was immediately brought into use (on 14 February
2022).
You are required to
1. determine the recoupments, allowances and deductions available to Eastern Jeans Manufacturers
(Pty) Limited that need to be taken into account in the determination of its taxable income that
arise out of the above transactions. When possible, it will defer its normal tax liability. Provide
brief explanations to support your determinations, and
2. the normal tax, including capital gains tax, consequences to Casual Clothing Manufacturers
Limited.
8.19 (50 minutes)

This question tests the provisions of sections 13(1) and 13quin. It is suitable for a student studying
towards a Masters (or similar degree) specialising in taxation.
Great Bear (Pty) Limited has always traded from leased premises. At a recent meeting of its
directors, it was agreed that it would move into its own premises when its current lease comes to an
end in 18 months’ time.
Great Bear (Pty) Limited’s operations require it to have a factory, an administration building, and a
factory shop. (It earns considerable amounts from selling its slightly-imperfect products to the public
from its factory shop.)
A developer is at present building factories in the area. (This area is not an urban development
zone.) An ideal factory will be available to be purchased from the developer in 18 months’ time. A
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.
8.20 (50 minutes)

This question tests the requirements of section 13quin the so-called commercial buildings capital
allowance. It tests the term ‘wholly or mainly’. It is suitable for a student studying towards a Masters
degree (or similar postgraduate course).
Section 13quin(1) provides that there will be deductible from the income of the taxpayer an
allowance equal to 5% of his cost of
• a new and unused building owned by him, or
• new and unused improvements to a building owned by him,
if it is wholly or mainly used by him during the year of assessment for the purposes of producing
income in the course of his trade.
The provision of residential accommodation is specifically excluded. Therefore, a taxpayer who
owns a block of flats for residential use cannot enjoy a deduction in the determination of his taxable
income for the building (except if it qualifies for the ‘housing project’ concession in section 13ter
or the ‘residential units’ concession in section 13quin).
The rate of the deduction is 5% (a 20-year straight-line write-off period). The value on which the
deduction is based is the cost of the building to the taxpayer.
Only new and unused buildings (and improvements) will give rise to capital allowances under this
provision. Buildings that have been used by the taxpayer prior to 1 April 2007 do not qualify for a
capital allowance. Buildings purchased by the taxpayer from a seller who used the building prior to
the sale, also do not qualify for a capital allowance.
Geustyn Inc, a firm of civil engineers, does not allow sketch-plans to leave its offices without a tax
consultant giving them the once-over.
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
9.1 (45 minutes)

This question tests the provisions of sections 10(1)(k), 10B and 25BB.
Most local dividends are exempt from normal tax. But some dividends are subject or partially
subject to normal tax.
You are required to list these ‘taxable’ dividends.
9.2 (15 minutes)

This question tests the normal tax model. It also tests the definition of a ‘dividend’, section 10(1)(i)
and Practice Note 31.
Glen Maple (aged 66 years) has a large share portfolio. Included in it are investments in collective
investment schemes in securities (so called equity unit trusts) and in real estate investment trusts.
He has instructed his accountant to handle all the transactions resulting from his shareholdings.
Glen Maple, who retired some five years ago, enjoys a pension of R45 000 a month and earns local
interest of R44 420 a year from local interest-bearing securities that are not ‘tax free investments’,
and dividends (as detailed below).
Glen Maple’s accountant has provided the following statement for his dividends for the 2022 year
of assessment:
Local dividends 36 000
Less expenses incurred
– Interest paid for funds borrowed to purchase units in a real estate
investment trust: R8 000 at 9% 720
– Costs of registration of shares into your name 150
– Brokerage paid 40
– Marketable securities tax paid 60
– Commission on collection of dividends on your behalf 3 600 4 570
Net amount transferred electronically into your bank account 31 430
Glen Maple’s accountants’ statement contains the following note:
‘Please note that the R36 000 local dividends are not entirely tax free. Included in this amount is
R12 000 that is taxable. This R12 000 consists of distributions made by a real estate investment
trust and the interest portion of distributions from a collective investment scheme in securities
(so-called equity unit trust).’
You are required to determine Glen Maple’s 2022 taxable income.
9.3 (15 minutes)

This question tests the definition of a ‘dividend’.
During the 2022 year of assessment the following amounts accrued to Oscar Poplar from his
shareholdings in various South African companies:
Finished Limited
On 30 April 2021 Oscar Poplar, who owned 500 shares in Finished Limited, with a nominal value
of R2 a share, was awarded 1 000 shares in Reconstructed Limited, a company that had taken over
the assets of Finished Limited, who was in the course of having its share capital reconstructed.
A share in Reconstructed Limited has a nominal value of R1, but a market value of R2,20.
167
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.
9.4 (30 minutes)

This question tests the definition of a ‘dividend’. It also tests sections 10(1)(k), 64D, 64E and 64F
and paragraphs 20, 27 and 35 of the Eighth Schedule.
Grandfather Burton died 30 years ago. A farm situated on the outskirts of Pietermaritzburg, the
major asset in his estate, was bequeathed to his 12 grandchildren.
Since none of the grandchildren wished to farm, and because developers desired to develop the
farm into a suburb of the rapidly-expanding Pietermaritzburg, they (the grandchildren) decided to
form a realisation company to facilitate the sale of the farm land that they had inherited.
Burton Realisation Co (Pty) Limited was thus formed. It is a resident of the Republic. The
township development was then successfully carried out by it. The profits made by it were not
included in its gross income by the Commissioner since they merely represented an inherited asset
being sold to best advantage. And since no profits accrued after 1 October 2001, they were also not
liable for capital gains tax. Investment income from the letting of certain land at a rental and the
investment of surplus cash resources in local interest-bearing securities resulted in it being subject
to normal tax on these receipts or accruals.
The 12 grandchildren would like to wind up Burton Realisation Co (Pty) Limited to enable them to
receive their share of the inheritance. The up-to-date statement of financial position of Burton
Realisation Co (Pty) Limited follows:
Share capital 12
Realised profits on the sale of farm land 6 000 000
Investment income less normal tax paid on it 3 300 000
9 300 012
Represented by cash 9 300 012
DIVIDENDS AND RELATED ISSUES 169
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.
9.5 (60 minutes)

This question tests the definition of a ‘dividend’. It also tests sections 10(1)(i), 10(1)(k) and 23( f ).
Grubber Lock is a resident of the Republic. For a number of years he has invested in South African
listed company shares. He regards the 2022 year of assessment as an exceptional one, since many
extraordinary events took place in relation to the local shares owned by him during the 2022 year of
assessment. These extraordinary events are as follows:
Front Rows Limited
Grubber Lock had owned 10 000 shares in Front Rows Limited. It was liquidated during the 2022
year of assessment. On its liquidation, he 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 capital profit (for tax purposes) of R2, and
• revenue profits of R3 a share.
Grubber Lock had paid R4 a share when he had purchased his 10 000 shares in Front Rows
Limited.
Hookers Limited
At the commencement of the 2022 year of assessment, Grubber Lock had owned 2 000 equity
shares in Hookers Limited. He had purchased 1 000 equity shares at R2 each eight years ago.
During the 2018 year of assessment Hookers Limited had had a one-for-one bonus issue and he
was awarded 1 000 equity shares. Hookers Limited used its revenue profits to fund this bonus
issue. During the 2022 year of assessment Hookers Limited was liquidated and a first and final
liquidation distribution of R11 a share was paid to shareholders. This distribution comprised a
return of its
• equity shares of R2,
• capital profits of R3, and
• revenue profits of R6 a share.
Half-Backs Limited
Grubber Lock owns 5 000 shares in Half-Backs Limited. During its 2022 year of assessment it
made a capital profit when certain vacant land belonging to it was sold at a price in excess of its
cost. It distributed this capital profit to its shareholders after its resulting ‘capital gains tax’ had
been set-off against it. A distribution of R3 a share was made.
Rucks Limited
Three years ago Grubber Lock had purchased 3 000 shares in Rucks Limited at R5 a share. During
the 2022 year of assessment it repaid its share premium account (all contributed tax capital). As a
result he received R600.
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.
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 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.
9.6 (50 minutes)

This question tests the definitions of a ‘dividend’ and ‘contributed tax capital’. It also tests the
classification of a company under section 38, donations tax (section 56) and including dividends
tax (including sections 64D, 64E, 64EA, 64F, 64FA, 64J and 64K).
On 1 March 2021 Abe Levy purchased 14 400 shares in Anglo American Astronomers Limited
from Martin Mars. Abe Levy then replaced Martin Mars on its board of directors. (The shares have
a nominal value of R1 each.)
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:
Capital profit Dr 50 000
Share premium (contributed tax capital) Dr 20 000
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.
4. On 31 August 2011 the following journal entry was made in the books:
Retained income Dr 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?
9.7 (60 minutes)

This question tests the definitions of a ‘dividend’ and ‘contributed tax capital’. It also tests the
determinations of normal tax and dividends tax. It tests sections 10(1)(k), 25BB, 64B, 64E and 64J
and paragraphs 3, 4, 6, 8, 10, 20, 27 and 35 of the Eighth Schedule.
Fisherman’s Shack was a small self-catering hotel situated on the KwaZulu-Natal South Coast in
close proximity to a well-known shad or elf (an edible fish) catching corner.
Grunter Salmon the owner of the hotel found that once the rules regarding the catching of shad
were introduced the number of visitors staying at the hotel declined. The Covid-19 regulations were
also a major problem. The situation became so bad that he was forced to close the hotel two years
ago.
The hotel buildings are owned by a private company called Fisherman’s Shack (Pty) Limited. Its
share capital is 100% owned by Grunter Salmon. It was floated by him 35 years ago. It is a
resident. Its year of assessment ends on the last day of February. Since it closed, the hotel buildings
have been standing vacant.
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.
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.
9.8 (40 minutes)

This question tests the definitions of a ‘dividend’ and ‘contributed tax capital’, including a dividend
in specie. It also tests the determinations of normal tax and dividends tax. It tests sections 10(1)(k),
22(8), 25BB, 64E, 64EA and 64J and paragraphs 3, 4, 6, 8, 10, 20, 27 and 35 of the Eighth
Schedule.
Springbok Logos Limited is a resident of the Republic. Its statement of financial position at
28 February 2021 was as follows:
Equity shares (100 000 R1 shares) 100 000
Capital profit (note 1) 100 000
Revenue profits 1 300 000
1 500 000
Represented by
Plant and equipment (note 2) 330 000
Furniture and fittings (note 3) 192 000
Trading stock 900 000
Net current assets (mainly cash) 78 000
1 500 000
Notes
1. Springbok Logos Limited’s capital profit arose when a vacant plot of land belonging to it had
been sold by it during its 1999 year of assessment for R100 000 more than its original cost. It had
originally intended to build its own factory on this plot of land, but changed its intention and sold
it, when it realised that its original expansion plans were unrealistic.
2. Springbok Logos Limited’s plant and equipment had originally cost R1 000 000. It had all
qualified for the section 12C capital allowance. It had a ‘nil’ tax value on 28 February 2021.
3. Springbok Logos Limited’s furniture and fittings qualifies for the wear-and-tear or
depreciation capital allowance and is being written off over a six-year period. It originally cost
R360 000 and it had a tax value of R240 000 on 28 February 2021.
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.
9.9 (40 minutes)

This question tests the ‘deemed dividend’ provisions under section 64E(4). It also tests the
provisions of paragraph 11 of the Seventh Schedule and the judgment from ITC 1626 ((1999) 60
SATC 17). And it tests paragraphs 3, 5, 6, 8, 10, 20, 26, 30 and 35 of the Eighth Schedule.
On 29 February 2016 Tweedie Gowan retired from employment. He was then 65 years old. He had
always lived in accommodation provided by his employer with the result that he had never
purchased a house of his own.
On 1 March 2016 Tweedie Gowan purchased a house – a cottage built on a smallholding in the
country – into which he and his wife moved. He used most of his retirement lump sums to finance
the purchase consideration of this cottage.
The cottage was owned by Cavesham Cottage (Pty) Limited who had used it as a rent-producing
investment. The smallholding had been purchased and the cottage erected on it by Cavesham
Cottage (Pty) Limited 10 years before valuation date.
So as to save transfer duty, Tweedie Gowan purchased the entire shareholding of Cavesham
Cottage (Pty) Limited instead of the house from it. As a result he paid stamp duty instead of
transfer duty.
Cavesham Cottage (Pty) Limited’s year of assessment ends on the last day of February. Its
statement of financial position at 28 February 2016 was as follows:
Share capital (900 000 R1 shares) 900 000

Revenue profits 22 500
922 500
Represented by
Land and buildings – at cost 900 000
Cash 22 500
922 500
Tweedie Gowan paid R2 700 000 for the 900 000 shares in Cavesham Cottage (Pty) Limited.
As from 1 March 2016 Cavesham Cottage (Pty) Limited no longer let its cottage since it was now
being occupied by its sole shareholder and only director, Tweedie Gowan, and his wife, Belle
Gowan.
Cavesham Cottage (Pty) Limited’s statement of financial position at 28 February 2022 was as
follows:
Share capital (900 000 R1 shares) 900 000

920 000
Represented by
Land and buildings – at cost 900 000
Cash 20 000
920 000
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%.)
9.10 (15 minutes)

This question tests the definitions of a ‘dividend’ and ‘contributed tax capital’ and the
determination of dividends tax.
Seashells Limited is a resident of the Republic. Its draft statement of financial position at
31 December 2020, its financial year end, reflected the following:
Share capital 200 000

Share premium 175 000
Non-distributable reserve 380 000
Total shareholders’ funds 1 218 500
The non-distributable reserve is from a capital profit arising from the sale of it of land and
buildings. This sale took place before 1 October 2001.
At 31 December 2020, Seashells Limited had 200 000 shares in issue.
Seashells Limited has had only one capitalisation issue, being a one-for-one issue in 2019. The
journal entry for this capitalisation issue had been as follows:

To Share premium (contributed tax capital) 150 000
Being a one-for-one capitalisation issue funded solely by revenue
profits.
On 15 April 2021 Seashells Limited bought back 110 000 of its shares (from its shareholders
registered on that date) at R6 a share. The shares bought back were then cancelled by it. In a notice
to its shareholders, it stipulated that, amongst other things, it would use its entire share premium
account to write off the premium of R5 a share over the R1 par value of the shares acquired. This
transaction was recorded as follows:
Share capital Dr 110 000

Share premium Dr 175 000
Non-distributable reserve Dr 375 000
To Bank 660 000
Being 110 000 shares bought back from shareholders at R6 a
share.
The following is an analysis of the amounts credited to the ‘dividends earned’ account of Seashells
Limited during the period 1 January 2021 to 15 April 2021:
Dividends from locally listed companies (see below) 110 000

Dividends from local private companies 40 000
Dividend from a local company enjoying a section 37H ‘tax holiday’ 50 000
Distribution from a collective investment scheme in securities (a so-called equity
unit trust), made up as follows:
– Dividends from locally listed companies 35 000
– Distribution from a real estate investment trust 7 500
– Local interest 2 500
245 000
The following amounts are included in Seashell Limited’s R110 000 dividends from locally listed
companies (see above):
• R17 000 being the value of capitalisation equity shares received,
• R31 000 being a repayment of share capital by a local company that Seashells Limited had
invested in. It repaid a portion of its share capital and share premium to its shareholders. It had
never previously made a capitalisation issue.
None of Seashell Limited’s shareholders is an exempt beneficial owner for dividends tax purposes.
You are required to determine the dividends tax to be withheld by Seashells Limited when it
bought back 110 000 of its shares from its shareholders at R6 a share on 15 April 2021, and state
when this dividends tax should be paid.
9.11 (45 minutes)

This question tests dividends tax. It tests sections 64B to 64N inclusive. It also tests the definition
of ‘gross income’, sections 8E, 8F, 10(1)(k), 10(2)(b), 11(a), 23(g), 24J and 25B. And it tests Potel
v IRC ([1971] 2 ALL ER 504 (Ch.D)) and Lagunas Nitrate Co Ltd v Schroeder ((1901) 85 LT 22).
You are employed in the Tax Section of a large firm of accountants. You have been allocated the
task of helping clients with queries relating to dividends tax (and related issues).
The following matters need your response:
Harvey Wallbanger Trust
The Harvey Wallbanger Trust was created under a condition contained in the will of the late
Harvey Wallbanger. It provides for the awarding of an annuity of R480 000 (at the rate of R40 000
a month) to Harrogate Wallbanger, the surviving spouse of Harvey Wallbanger.
The Harvey Wallbanger Trust’s sole asset is an investment of R12 000 000 in 6% preference shares
issued by Bloody Mary (Pty) Limited, a resident of the Republic. Local dividends on these
6% preference shares are payable monthly, on the last day of each month. Bloody Mary (Pty)
Limited used the funds from its 6% preference share issue to finance the purchase of a trade asset.
Bloody Mary (Pty) Limited has never held shares in another company.
Should the Harvey Wallbanger Trust’s accruals exceed R480 000, its trustees have the discretion to
award all, or part, of the excess to Harvey Wallbanger’s daughter, Rose Kennedy, who is not a
Under the double tax agreement between South Africa and Rose Kennedy’s country of residence,
dividends are subject to tax at a rate of 5%.
During the 2022 year of assessment (ended 28 February 2022) preference share dividends of
R720 000 accrued to the Harvey Wallbanger Trust. Its trustees then awarded,
• the monthly amount to Harrogate Wallbanger. This distribution was made on the last day of
each month, and
• using their discretion, R180 000 to Rose Kennedy on 28 February 2022. She had provided the
relevant declarations.
You are required to determine the normal tax and dividends tax consequences to Bloody Mary
(Pty) Limited, the Harvey Wallbanger Trust, Harrogate Wallbanger and Rose Kennedy that arise
out of the above transactions.
Baby Guinness Limited
On 1 March 2021 Baby Guinness Limited declared a dividend of R100 000 to the holders of its
equity shares that were registered in its share register on 31 March 2021. Its date of payment was
5 April 2021.
You are required to determine the withholding date for dividends tax purposes of Baby Guinness
Limited’s above dividend.
Black & White Russians Limited
On 1 March 2021 Black & White Russians Limited declared a dividend of R200 000 to the holders
of its equity shares that were registered in its share register on 30 April 2021. Its date of payment
was 6 May 2021.
You are required to determine the withholding date for dividends tax purposes of Black & White
Russians Limited’s above dividend.
Jamaican Coffee (Pty) Limited
Jamaican Coffee (Pty) Limited declared a dividend on R300 000 on 1 March 2021, subject to the
condition that it will be payable only when it has sufficient funds to distribute the R300 000.
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.
9.12 (40 minutes)

This question tests dividends tax. It tests sections 64B to 64N inclusive. It also tests section 25BA.
Your employer regards you as being up to date with the so-called second leg of company tax. The
following are five determinations that you need to complete:
Whiskey Cocktails Limited
Whiskey Cocktails Limited’s equity shares are held to the extent of
• 40% by beneficial owners who are not exempt from the dividends tax,
• 30% by beneficial owners who are exempt from the dividends tax,
• 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.
• On 31 January 2022 a dividend of R120 000.

You are required to determine the dividends tax consequences of the above two dividend
distributions.
Black Velvet Limited
On 31 May 2021 Black Velvet Limited declared a dividend of R500 000. It had received declarations
from 70% of its shareholders stating that they were exempt beneficial owners. It therefore withheld
dividends tax from its dividend that accrued to 30% of its shareholders.
At a trustees meeting of the Mimosa Pension Fund held on 30 September 2021 it was established that
dividends tax had been incorrectly deducted from the dividend from Black Velvet Limited that
accrued to it on 31 May 2021.
It was also established that Black Velvet Limited had not received the required declaration from it (the
Mimosa Pension Fund).
The Mimosa Pension Fund then furnished Black Velvet Limited with the required exempt beneficial
owner declaration. This, in turn, increased Black Velvet Limited’s shareholders who were exempt
beneficial owners to 75%.
On 31 October 2021 Black Velvet Limited refunded the Mimosa Pension Fund the dividends tax that
had been ‘incorrectly’ withheld from the dividend that accrued to it on 31 May 2021.
On 30 November 2021 Black Velvet Limited declared a dividend of R600 000.
On 24 December 2021 Black Velvet Limited paid an amount to the Commissioner. This payment
resulted from the dividend it declared on 30 November 2021.
1. the amount of dividends tax that Black Velvet Limited withheld from its 31 May 2021
dividend,
2. the refund it paid to the Mimosa Pension Fund on 31 October 2021, and
3. the amount paid to the Commissioner by Black Velvet Limited on 24 December 2021 resulting
from the dividend it declared on 30 November 2021.
9.13 (45 minutes)

This question tests normal tax (including capital gains tax) and dividends tax. It tests the definition
of ‘gross income’, sections 10(1)(h), 11(a), 22(8), 23(g), 64E, 64EA, and 64J and paragraphs 20, 35
Bishop (Pty) Limited’s entire equity share capital is held by Daisy Collins.
Bishop (Pty) Limited’s financial year ends on the last day of February. It holds shares in Cobbler
Limited, a resident company. It does not hold shares in any other company. Its previous dividend
cycle ended on 30 September 2011. In this dividend cycle its dividends accrued exceeded its
dividend declared by R5 000. Since the end of its previous dividend cycle (30 September 2011) and
before 1 April 2012, a dividend of R20 000 accrued to it. During the 10-year period from 1 April
2012 to 31 March 2022 no dividends accrued to it and no dividends were declared by it.
During Bishop (Pty) Limited’s 2022 year of assessment it declared the following dividends:
• On 31 March 2021 a ‘cash’ dividend of R100 000.
• On 30 June 2021 an in specie dividend being the distribution of its shareholding in Cobbler
Limited. Its shares in Cobbler Limited had been purchased by it as an investment (to earn
dividends) for R110 000 during its 2021 year of assessment. On 28 February 2021 they had a
market value of R107 500. On 30 June 2021 they had a market value of R120 000. Daisy Collins
will also hold her shares in Cobbler Limited as an investment (to earn dividends).
• On 30 September 2021 a ‘cash’ dividend of R130 000.
• 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.
9.14 (40 minutes)

This question tests dividends tax including a loan that is treated as a dividend under the provisions
of section 64E(4) and (5).
Lorraine Ramos bought the entire share capital of Gin Fizz (Pty) Limited on 1 March 2018 for
R675 000. Its financial year ends on the last day of February. The equity portion of its statement of
financial position was as follows (on its year-end dates as reflected below):
Last day of February 2021 2018

Share capital 1 000 1 000
Non-distributable reserve 49 000 49 000
Retained income (revenue profits) 950 000 700 000
1 000 000 750 000
Gin Fizz (Pty) Limited’s non-distributable reserve arose when it sold part of its trade premises on
30 November 1999 at a capital profit of R49 000.
Gin Fizz (Pty) Limited has never held shares in another company.
Lorraine Ramos needs R400 000 as a deposit on the purchase of a residence.
Gin Fizz (Pty) Limited has cash in excess of R400 000 available.
Lorraine Ramos wishes to take R400 000 cash from Gin Fizz (Pty) Limited and to use it as her
deposit. She is aware that there is legislation in the form of the dividends tax but refuses to pay
20% tax for using her own money.
Lorraine Ramos has consulted a local accountant on dividends tax. He has come up with the
following two suggestions:
• First, Gin Fizz (Pty) Limited lends R400 000 interest-free to Lorraine Ramos. She has no other
loan accounts in it.
• Secondly, Lorraine Ramos forms a new company, namely, Pink Gin (Pty) Limited. She is its
sole shareholder. She then sells all her shares in Gin Fizz (Pty) Limited to it for R1 000 000
(their market value). The purchase consideration of R1 000 000 is left owing as an interest-free
loan account in her favour. (Assume that the ‘official rate of interest is 4,5%.) Gin Fizz (Pty)
Limited then declares a dividend of R400 000 to Pink Gin (Pty) Limited. It uses the R400 000
cash from the dividend it receives to settle R400 000 of its R1 000 000 loan account owing to
Lorraine Ramos.
Lorraine Ramos earns a market-related salary of R720 000 for managing the business owned by
Gin Fizz (Pty) Limited. Her taxable income is R800 000. In addition to Lorraine Ramos, Gin Fizz
(Pty) Limited has another three full-time employees.
Assume that the transactions that arise out of the two suggestions will be completed by
30 November 2021.
You are required to
1. draft a memorandum setting out the dividends tax implications that may arise from the above
two suggestions,
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.
9.15 (40 minutes)

This question tests thin capitalisation and transfer pricing (section 31). It also tests dividends tax
and the normal tax liability determination including sections 5, 6, 10(1)(h) and 10(1)(k).
Kearsney Green emigrated from South Africa three years ago. He is now ordinarily resident outside
South Africa. He is not a resident of the Republic. He does not carry on business in South Africa.
Due to exchange control regulations he was, however, forced to leave funds in South Africa. These
‘blocked’ funds were invested in
• local interest-bearing securities,
• quoted local dividend-yielding shares, and
• in a property-owning company, namely, Grassgreen (Pty) Limited.
The reason why Kearsney Green had ‘invested’ indirectly through Grassgreen (Pty) Limited rather
than directly (with himself purchasing the rent-producing property) in the rent-producing property
was to ensure ‘tax-free’ local interest rather than ‘taxable’ rentals accrued to him from this
investment.
Kearsney Green’s three investments as detailed above (the local interest-bearing security, the
quoted local dividend-yielding shares, and the investment in Grassgreen (Pty) Limited) are the sole
investments that he has in South Africa. His only earnings from South Africa are the returns from
these investments and a director’s salary and fees (amounting to R15 000 in total – see below) that
he earns from Grassgreen (Pty) Limited.
Kearsney Green is the sole shareholder, and only director, of Grassgreen (Pty) Limited. A local
accountant carries out its transactions in South Africa.
Grassgreen (Pty) Limited owns a commercial property that is let to six tenants. Since it was erected
before 1 April 2007, it does not qualify for the section 13quin capital allowance.
Grassgreen (Pty) Limited is funded largely by an interest-bearing loan from Kearsney Green. The
interest on his loan account is not fixed – it varies according to the bank overdraft interest rate
levied by banks in the country where he is now ordinarily resident.
For Grassgreen (Pty) Limited’s 2022 year of assessment (year end 28 February 2022) it had
borrowed R1 000 000 (expressed as a weighted average over the year of assessment) from
Kearsney Green. It paid interest of R240 000 to him in its 2022 year of assessment for his loan to it.
Grassgreen (Pty) Limited’s share capital is R100 000. It has no capital profits. Its shares were not
issued at a premium, nor does it have preferential share capital.
Grassgreen (Pty) Limited’s revenue profits on 1 March 2021 were R90 000. Since its policy, in its
2022 year of assessment, was to declare its entire after-tax income as a dividend, its retained
income still had a R90 000 balance on 28 February 2022.
Grassgreen (Pty) Limited made a taxable profit of R110 000 in its 2022 year of assessment. This
R110 000 taxable profit is after the deduction of the R240 000 interest that it paid to Kearsney
Green and after the deduction of a director’s salary and fees (amounting to R150 000 in total) that it
also paid to him:
• The interest is incurred by it, annually in arrears, on the last day of its financial year.
• 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.
9.16 (40 minutes)

This question tests thin capitalisation and transfer pricing (section 31). It also tests the
determinations of normal tax and dividends tax. It tests sections 9D, 10(1)(k), 10B, 23( f ), 31
and 64E and Practice Note 2.
Double Tee Limited is a resident of the Republic. Its statement of financial position at the end of its
2022 financial year (28 February 2022) included the following:
Share capital (note 1) 100 000
Share premium 20 000
Redeemable preference shares (note 2) 10 000
Capital reserve (note 3) 30 000
Retained income (note 4) 200 000
Loan from Fatty Teagarden (note 5) 800 000
Local interest-bearing loan (note 6) 500 000
Interest-free loan from Fatty Teagarden (note 7) 100 000
Interest-bearing trade credit from Fatty Teagarden (note 8) 30 000
Foreign bank overdraft (note 9) 20 000
Provision for deferred taxation (note 10) 28 000
Notes
1. Fatty Teagarden owns 60% of Double Tee Limited’s share capital. He is not a resident of the
Republic. He does not carry on business in South Africa. The country in which he is now ordinarily
resident does not have a double tax agreement with South Africa. He does not have a permanent
establishment in South Africa. There has been no change in Double Tee Limited’s shareholding
since its incorporation.
2. The redeemable preference shares were issued by Double Tee Limited to finance the purchase of
a trade asset. It declares a 6% dividend on its redeemable preference shares on the last day of its
year of assessment. No portion of its redeemable preference shares is held by Fatty Teagarden.
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
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.
11. Double Tee Limited owns

• the entire share capital (100%) of Double Tee (Zimbabwe) Limited, and
• 90% of the equity shares in Double Tee (Malawi) Limited.
No portion of the net income of Double Tee (Zimbabwe) Limited and Double Tee (Malawi)
Limited is from a foreign business establishment. Double Tee (Zimbabwe) Limited suffered a
loss of the equivalent of R55 000 for its 2022 year of assessment (ended 28 February 2022). (If
it had been a resident it would have had an assessed loss of R48 000 for its 2022 year of
assessment.) Double Tee (Malawi) Limited has a net income (as determined under
section 9D(2A)) of R90 000 for its 2022 year of assessment (ended 28 February 2022). On
31 January 2022 Double Tee (Malawi) Limited declared a dividend of R70 000 to its
shareholders. This was the first dividend declared by it. Double Tee (Zimbabwe) Limited has
never declared a dividend.
Double Tee Limited made a taxable profit for its 2022 year of assessment of R100 000. Its
R100 000 taxable profit is after the deduction of interest incurred including
• the interest incurred on its loan from Fatty Teagarden (see note 5 above),
• the interest of R60 000 on its local loan (see note 6 above), and
• the R250 interest paid on its trade credit from Fatty Teagarden (see note 8 above)
but before the deduction of
• the withholding tax on the ‘foreign dividends’, and
• an assessed loss brought forward from the previous year of assessment of R340 000.
Double Tee Limited’s taxable profit of R100 000 does not include
• the local dividends of R12 000,
• the ‘foreign dividends’ of R14 500, and
• the dividend from Double Tee (Malawi) Limited that accrued to Double Tee Limited.
The adjustments needed to ‘convert’ Double Tee Limited’s R100 000 taxable profit into its taxable
income are those
• required to be made under section 31 of the Income Tax Act (thin capitalisation and transfer
pricing),
• relating to the interest it incurred on its local loan,
• arising out of the dividends that accrued to it,
• relating to the withholding tax of R1 450 paid by it on its ‘foreign dividends’, and
• from the application of section 9D.
Besides the dividend declared on Double Tee Limited’s redeemable preference shares, it has never
declared a dividend to its shareholders. Its last redeemable preference share dividend was declared
on 31 March 2021.
The weighted average of the South African prime rate was 12% for Double Tee Limited in its 2022
year of assessment.
The Commissioner has advised that if the provisions of section 31 are to be applied to Double Tee
Limited the method as set out in SARS Practice Note 2 will be followed.
You are required to determine Double Tee Limited’s
1. taxable income (or assessed loss) for its 2022 year of assessment, and
2. dividends tax that it may be liable for as a result of the information as detailed above.
9.17 (45 minutes)

This question tests thin capitalisation and transfer pricing (section 31). It also tests the determinations
of normal tax and some dividends tax provisions.
Treble Tea (Pty) Limited is a resident of the Republic. It carries on the business of importing tea
from Sri Lanka and purchasing local tea in South Africa. It then distributes tea bags in South
Africa. It trades solely in South Africa.
Treble Tea (Pty) Limited’s equity shares are made up of 500 000 R1 shares. An extract from its
share register follows:
Shareholder Address Number of
shares
Glen Rose 5 Tips Drive, Durban, South Africa 250 000
Roy Bush 2 Pitco Place, Pretoria, South Africa 100 000
Joker Tee 101 Leaves Road, Colombo, Sri Lanka 150 000
Joker Tee is not a resident of the Republic. He does not carry on business in South Africa. He does
not have a permanent establishment in South Africa.
Since Treble Tea (Pty) Limited has the sole rights to distribute tea under the label of ‘Five Daisies’,
it is compelled to purchase an ‘exclusive quality’ tea leaf from Sri Lanka.
During its 2022 year of assessment (ended on 28 February 2022) it purchased ‘exclusive quality’
tea leaves from a supplier in Sri Lanka for R300 000. (Had it been permitted to purchase the same
quality tea leaves from within South Africa it would have paid only R200 000 for them.) Its
supplier in Sri Lanka is not a ‘connected person’ of it as defined.
Treble Tea (Pty) Limited borrows funds from Joker Tee.
Treble Tea (Pty) Limited’s other ‘borrowings’ are from the bank when it goes into overdraft. An
extract from the ledger account named ‘Interest incurred’ follows:
Interest Incurred
Debit
31 March 2021 Cash (Joker Tee loan) CB 10 000
30 April 2021 Cash (Joker Tee loan) CB 10 000
31 May 2021 Cash (Joker Tee loan) CB 12 500
Bank (overdraft interest) CB 1 500
30 June 2021 Cash (Joker Tee loan) CB 12 500
31 July 2021 Cash (Joker Tee loan) CB 12 000
Bank (overdraft interest) CB 900
31 August 2021 Cash (Joker Tee loan) CB 12 000
30 September 2021 Cash (Joker Tee loan) CB 14 000
31 October 2021 Cash (Joker Tee loan) CB 14 000
30 November 2021 Cash (Joker Tee loan) CB 15 000
31 December 2021 Cash (Joker Tee loan) CB 15 000
31 January 2022 Cash (Joker Tee loan) CB 14 875
28 February 2022 Cash (Joker Tee loan) CB 13 750
165 625
Credit
28 February 2022 Statement of profit or loss and other J/E
comprehensive income 165 625
165 625
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
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’).
9.18 (60 minutes)

This question tests the concept of source and the provisions of sections 9D, 10(1)(h), 10(1)(i),
10(1)(k), 10(1)(l), 10A, 10B, 25BB and 49A.
Wendy Darling is 25 years old. She is a resident of the Republic. She invested ‘indirectly’ outside
South Africa by purchasing
• 60% of the equity shares of Peterpan (Plk) Limited,
• 5% of the equity shares of Neverland Plc, and
• 15% of the equity shares of Captain Hook.
Excluding Wendy Darling’s returns from the offshore investments, she has a taxable income from a
South African source of R700 000. Included in her R700 000 taxable income is local interest.
Peterpan (Plk) Limited
Peterpan (Plk) Limited’s year of assessment ends on the last day of February. It is not a resident of
the Republic. It is not a foreign business establishment. It is not a small business corporation. And
it is not a personal service provider. It owns a number of investments including two rent-producing
properties,
• one situated in South Africa, and
• the other situated outside South Africa.
During Peterpan (Plk) Limited’s 2022 year of assessment it earned
• net rentals of R36 000 from its South African property, and
• net rentals the equivalent of R60 000 from its non-South African property.
Peterpan (Plk) Limited owns the trade mark ‘Tinker Bell’. This trade mark is registered outside
South Africa. During its 2022 year of assessment the only royalties that were earned from this trade
mark were from its ‘non-resident’ customers, all of whom are outside South Africa, for the use of
this trade mark outside South Africa. These royalties were the equivalent of R30 000 (gross). The
equivalent of R6 000 ‘revenue’ expenditure was incurred by it in producing these royalties.
Peterpan (Plk) Limited also owns the trade mark ‘Tiger Lilly’. This trade mark is registered inside
South Africa. During its 2022 year of assessment the only royalties that were earned from this trade
mark were from its South African customers, all of whom are resident in South Africa, for the use
of this trade mark inside South Africa. These royalties were R10 000.
Peterpan (Plk) Limited earns interest from the following three loans:
• It lent funds in South Africa to Michael John, a resident of the Republic. He used these funds in
South Africa. From this loan R48 000 interest was earned by it during its 2022 year of assessment.
• It lent funds outside South Africa to Nanna (Pty) Limited, a resident of the Republic. Nanna
(Pty) Limited used these funds in South Africa. From this loan R72 000 interest was earned by it
during its 2022 year of assessment.
• It lent funds outside South Africa to Lost Boys Plc, a non-resident. Lost Boys Plc used these
funds outside South Africa. From this loan the equivalent of R108 000 interest was earned by it
Peterpan (Plk) Limited has
• an investment outside South Africa in a foreign collective investment scheme in securities (a so-
called equity unit trust), and
• an investment in South Africa in a real estate investment trust.
From these investments Peterpan (Plk) Limited earned in its 2022 year of assessment the following
amounts:
• The equivalent of R84 000 from its foreign collective investment scheme in securities (a so-
called equity unit trust) comprising foreign dividends to the extent of R70 000 and foreign
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.
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.
9.19 (60 minutes)

This question tests foreign dividends and controlled foreign companies. It tests the definition of a
‘dividend’ and sections 6quat, 9D, 10(1)(h), 10(1)(i), 10(1)(k), 10B, 23( f ) and 64E.
You are up-to-date with the fiscal legislation that applies to residents of South Africa who earn
amounts from offshore. The following are five queries that need your response:
Henrietta Poussin
Henrietta Poussin, a resident of the Republic, holds 60% of Capons Fowls & Chickens Limited’s
equity shares. The remaining 40% of its equity shares are held by non-residents. It was
incorporated outside South Africa. Its place of effective management is outside South Africa. It is
not a resident of the Republic. It is not a foreign business establishment.
Capons Fowls & Chickens Limited has investments in rent-producing properties and interest-
bearing securities. Details of all 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.)
Net rentals from a South African source 240 000

Net rentals from a non-South African source 580 000
Interest from a South African source 75 000
Interest from a non-South African source 290 000
In Capons Fowls & Chickens Limited’s country of residence it suffers tax at a rate of 20%.
Capons Fowls & Chickens Limited did not declare a foreign dividend during its 2022 year of
assessment. It does, however, wish to distribute its 2022 net earnings by way of a foreign dividend
Henrietta Poussin would like to know what effect Capons Fowls & Chickens Limited’s receipts and
accruals will have on her own 2022 taxable income. She would also like to know what effect the
foreign dividend that will accrue to her from it will have on her 2023 taxable income, if declared by
it during its 2023 year of assessment.
Tamarin Indica
Because of the weakening of the rand against the dollar and the pound, Tamarin Indica (aged 51 years
and a resident of the Republic) was advised to make certain investments offshore. She used R200 000
of her own funds and borrowed R550 000 (at 12%) so as to ‘move’ R750 000 offshore.
On 1 March 2021 Tamarin Indica invested half her own funds (R100 000) in foreign interest-
bearing securities and the other half (R100 000) in foreign dividend-yielding shares. The entire
R550 000 that she had borrowed she invested in foreign dividend-yielding shares. An offshore
investment adviser assisted her with the making of these investments. His fee for the services that
he provided to her was R12 000.
For the 2022 year of assessment the following amounts accrued to Tamarin Indica from these
investments:
(All amounts are expressed in their rand-equivalent values.)
Foreign interest (her ‘own’ funds invested) 15 000
Taxable foreign dividends (her ‘own’ funds invested) 8 100
Foreign dividends exempt from normal tax under section 10B(2) (her ‘own’ funds
invested) 1 600
Taxable foreign dividends (the ‘borrowed’ funds invested) 58 500
Foreign dividends exempt from normal tax under section 10B(2) (the ‘borrowed’ funds
invested) 6 000
89 200
Tamarin Indica incurred interest of R66 000 on the R550 000 she borrowed.
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.)
Share capital 120 000

Capital profit 24 000
324 000
An analysis of Hot Spices Plc’s profits reveals that no portion of the capital profit was subjected to
tax in South Africa, but that of the R180 000 revenue profits, R65 000 was the after-tax amount of
profits that had been subjected to tax (at a rate of 33%) in South Africa.
Ginger Cardamom suffers normal tax in South Africa at the maximum marginal tax rate. He needs
to know whether any South African tax consequences arise as a result of Hot Spices Plc paying the
equivalent of R180 000 on his behalf.
Cumin Fenugreek Cayenne Investments Plc
Cumin Fenugreek Cayenne Investments Plc was incorporated outside South Africa. Its place of
effective management is outside South Africa. It is not a resident of the Republic. It is not a foreign
business establishment. Its equity shares are held as follows:
Basil Cumin (a resident) 40%

Parsley Plc (a resident) 40%
Herb Fenugreek (not a resident) 15%
Rosemary Cayenne (a resident) 5%
100%
All the equity shares of Parsley Plc are held by Basil Cumin.
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.)
Net rentals from a South African source 180 000

Net rentals from a non-South African source 450 000
Interest from a South African source 60 000
Interest from a non-South African source 45 000
Taxable foreign dividends 140 000
Exempt from normal tax foreign dividends (under section 10B(2)) 10 000
Cumin Fenugreek Cayenne Investments Plc suffers tax at the rate of 20% in its country of
residence. Cumin Fenugreek Cayenne Investments Plc did not declare a dividend during its 2022
year of assessment.
Cumin Fenugreek Cayenne Investments Plc does not have a permanent establishment in South
Africa.
What effect do the receipts and accruals of Cumin Fenugreek Cayenne Investments Plc have on the
South African taxable incomes of itself, and its shareholders?
You are required to provide answers to all the questions raised in the five queries as set out above.
9.20 (75 minutes)

This question tests the provisions of sections 9D, 10(1)(h), 10(1)(i), 10(1)(k)(i) and 10B.
The following 10 queries relating to controlled foreign companies or foreign dividends need your
response. (You are not required to discuss the possible application of an article contained in any
double taxation agreement.)
Badam Limited
Badam Limited holds all (100%) of the equity shares of Ka Halwa Limited, Basundi Limited and
Kheer Limited. It also holds 60% of the equity shares of Phirini Limited.
Badam Limited is a resident of the Republic.
Ka Halwa Limited, Basundi Limited, Kheer Limited and Phirini Limited are all not residents of
South Africa.
All five companies have financial years that end on the last day of February.
For Badam Limited’s 2022 financial year it had a taxable income of R600 000. This R600 000 is
before applying the provisions of section 9D(2).
Applying the provisions of the South African Income Tax Act to Ka Halwa Limited, Basundi
Limited, Kheer Limited and Phirini Limited on the basis that they are deemed residents of South
Africa, the following taxable incomes or assessed losses for their 2022 financial years have been
determined:
• Ka Halwa Limited a taxable income of R200 000.
• Basundi Limited a taxable income of R300 000.
• Kheer Limited an assessed loss of R400 000.
• Phirini Limited a taxable income of R500 000.
No portion of the taxable income of Ka Halwa Limited, the taxable income of Basundi Limited, the
assessed loss of Kheer Limited and the taxable income of Phirini Limited is attributable to a foreign
business establishment.
Tax is levied in the country of residence of these companies as follows:

• Ka Halwa Limited at 15%.
• Basundi Limited at 18,9%.
• Kheer Limited at 20%.
• Phirini Limited at 0%.
You are required to
1. determine Badam Limited’s taxable income for its 2022 year of assessment, and
2. state what effect Kheer Limited’s assessed loss has on its net income.
Provide brief reasons to support your determination.
Gulab Jamun and Sweetmeats Limited
Sweetmeats Limited is not a resident of the Republic. All its equity shares are held by Gulab
Jamun, a resident of the Republic. It trades solely as a foreign business establishment. The rate of
tax in its country of residence is 17,5%. Most of its receipts and accruals are from its ‘active’
foreign business establishment transactions. Yet it does earn some amounts from financial
instruments. For its 2022 financial year its
• amounts from financial instruments were R24 000, and
• total of all amounts received by or accrued to it were R300 000.
You are required to determine the inclusion in Gulab Jamun’s South African income caused by the
application of section 9D(2). Provide brief reasons to support your determination.
Besan Burfi
Besan Burfi owns all the equity shares of Laddoo Limited and Boondi Ka Limited. He is a resident
of the Republic. Neither Laddoo Limited nor Boondi Ka Limited is a resident of the Republic.
Laddoo Limited and Boondi Ka Limited have financial years that end on the last day of February.
• Laddoo Limited ‘operates’ in a tax haven.
• Boondi Ka Limited does not ‘operate’ in a tax haven.
To ‘move’ profits out of Boondi Ka Limited where they would be subjected to tax at a rate of 35%,
into Laddoo Limited where they would be tax free, Besan Burfi structured the financial affairs of
‘his’ two companies so that
• Laddoo Limited let a rent-producing property to Boondi Ka Limited at a market-related rental,
and
• Laddoo Limited lent certain funds to Boondi Ka Limited at a market-related interest rate.
These transactions caused Boondi Ka Limited to pay rentals the equivalent of R300 000 and
interest the equivalent of R200 000 to Laddoo Limited.
Applying the provisions of the South African Income Tax Act to Laddoo Limited and Boondi Ka
Limited on the basis that they are deemed residents of South Africa, the following taxable income
and assessed loss for their 2022 financial years were determined:
• Laddoo Limited, a taxable income of R800 000.
• Boondi Ka Limited, an assessed loss of R100 000.
The above amounts are after the deduction of the said rentals (of R300 000) and interest (of
R200 000) in the determination of Boondi Ka Limited’s assessed loss and the inclusion of the said
rentals (of R300 000) and interest (of R200 000) in Laddoo Limited’s gross income.
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,
• 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,
• 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
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%,
• other residents to the extent of 44%, and

Karanji Plc is not a foreign business establishment and its shares are not listed on a stock exchange.
For Karanji Limited’s current foreign tax year (which ended on 31 December 2021), it made a
taxable profit the equivalent of R5 000 000. The country that it is a resident of charged it with a
non-refundable income tax the equivalent of R500 000. Its after-tax income, the equivalent of
R4 500 000, was then distributed by it as a dividend. As a result of this distribution, a foreign
dividend the equivalent of R225 000 accrued to Chanar Payesh.
But since Chanar Payesh is not a resident of the country that Karanji Plc is a resident of, this
country levied a non-refundable non-residents’ shareholders withholding tax of 10% on the foreign
dividend that accrued to him. As a result, a ‘net dividend’ the equivalent of R202 500 (R225 000 –
R22 500) was earned by him from his equity shares in it.
Excluding the foreign dividend from Karanji Plc, Chanar Payesh’s South African taxable income is
R882 200.
You are required to determine Chanar Payesh’s after-tax return of the R225 000 equivalent foreign
dividend that accrued to him from Karanji Plc.
Shahi Tukra
Shahi Tukra, aged 55 years, a resident of the Republic, suffers normal tax at the maximum marginal
tax rate. The following foreign dividends accrued to her during the 2022 year of assessment:
• A foreign dividend the equivalent of R45 000 from Pooris Plc. She holds 8% of its equity
shares. Less than 50% of its equity shares are held by residents of the Republic.
• A foreign dividend the equivalent of R33 750 from Simli Plc. She holds 15% of its equity
shares. Less than 50% of its equity shares are held by residents of the Republic.
• A foreign dividend the equivalent of R22 500 from Samosa Plc, a listed company. She holds 2%
of its equity shares. Although it is not a resident of the Republic, its shares are quoted on the
South African stock exchange, namely, the JSE Securities Exchange, in addition to being quoted
on the stock exchange in its country of residence.
• A foreign dividend the equivalent of R99 000 from Pista Plc. She holds 9% of its equity shares.
Although it is not a resident of the Republic, 55% of its equity shares are held by residents
of the Republic. Its net income (as envisaged in section 9D(2) and as determined under
section 9D(2A)) for its 2022 year of assessment out of which its dividend was distributed was
the equivalent of R2 000 000. No portion of its net income is attributable to a foreign business
establishment. It suffers normal tax in its country of residence at 25%.
You are required to determine the South African tax consequences of the above foreign dividends
that accrued to Shahi Tukra.
9.21 (50 minutes)

This question tests foreign dividends and controlled foreign companies. It tests sections 6quat, 9A,
9D, 10(1)(i), 10(1)(k), 10B, 11C, 23( f ) and 24I.
You have (almost) managed to keep up-to-date with the fiscal legislation that applies to residents of
South Africa who earn amounts from offshore. The following are four queries that need your
response:
Classic French Cultivars Plc
Classic French Cultivars Plc is not a resident of the Republic. It owns two rent-producing
properties,
• one situated in South Africa, and
• the other situated outside South Africa.
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.
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.
9.22 (60 minutes)

This question tests foreign dividends, controlled foreign companies, thin capitalisation, transfer
pricing, normal tax and dividends tax. It also tests the definitions of a ‘dividend’ and ‘contributed
tax capital’ and sections 9D, 10(1)(k), 10B, 31, 64E and 64J.
You are employed by a firm of chartered accountants as a manager in its Taxation Section. You are
often required to provide answers to queries from clients (including those relating to offshore
transactions).
Mercury (Pty) Limited
Mercury (Pty) Limited’s financial year ends on the last day of February. It is paying interest at 12%
on a bank overdraft of R300 000. This overdraft arose out of financing its working capital.
Mercury (Pty) Limited’s equity shares are held to the extent of 80% by residents and 20% by
Freddie Queen, a non-resident.
Freddie Queen is prepared to lend Mercury (Pty) Limited R300 000 at 9%. This R300 000 would
then be used by it to repay its bank overdraft. The equity and liability portion of its statement of
financial position would then be as follows:
Share capital (100 000 equity shares at R1 each (contributed tax capital)) 100 000
300 000
Loan from Freddie Queen (at 9% interest) 300 000
600 000
Mercury (Pty) Limited has never held shares in another company.
You are required to discuss, and determine, the normal tax and the dividends tax on consequences
that will arise if Mercury (Pty) Limited enters into this loan agreement with Freddie Queen. (For
the purpose of this discussion assume that if this transaction took place it would occur on 1 March
2021.) Further assume that if the Commissioner applies the provisions of section 31 he will do so
on 28 February 2022 and that he will follow the method as set out in SARS Practice Note 2.
Saturn (Pty) Limited
Saturn (Pty) Limited’s financial year ends on 31 March. It is a resident of the Republic. Its
shareholders are all residents of the Republic. It is being liquidated. Its statement of financial
position is as follows:
Share capital (note 1) 150 000
Share premium (note 2) 20 000
Capital profits (notes 3 and 4) 180 000
Revenue profits (note 4) 253 000
603 000
Represented by
Cash 603 000
Saturn (Pty) Limited’s liquidation took place on 31 May 2021.

Notes
1. On 1 March 2003 Saturn (Pty) Limited had had a one for two bonus issue. It used its revenue
profits to finance this bonus issue.
2. Saturn (Pty) Limited’s original shares were issued at a 20% premium.
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:
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
then distributed by it as a dividend. As a result of this distribution, a ‘foreign dividend’ the

equivalent of R139 500 accrued to Venus Mars. But since she is not a resident of the country that it
is a resident of, this country levied a non-residents’ shareholders withholding tax of 10% on the
‘foreign dividend’ that accrued to her. As a result, a ‘net dividend’ the equivalent of R125 550
(R139 500 – R13 950) was earned by her from her shareholding in it.
Before taking into account the foreign dividend of R139 500 that accrued to Venus Mars from
Uranus Plc, her South African taxable income was R770 200.
Venus Mars would like to know the after-tax return of the foreign dividend the equivalent of
R139 500 that accrued to her.
You are required to provide Venus Mars with the answer to her question.
Stars Limited
Stars Limited is a resident of the Republic. It trades in South Africa. It has a wholly owned
subsidiary that is not a resident of the Republic. It also has a branch trading in Zimbabwe. It, its
subsidiary and its branch have financial years that ends on the last day of February.
Stars Limited’s branch in Zimbabwe made a profit (and taxable income) the equivalent of
R600 000 for its 2022 year of assessment. The profit made by its branch in Zimbabwe was
subjected to tax at a rate of 35%.
Stars Limited’s subsidiary owns a single rent-producing property situated outside South Africa. The
letting of this rent-producing property is the sole activity that it carries out. It suffered a net loss the
equivalent of R300 000 for its 2022 year of assessment. Despite suffering a loss for its 2022 year of
assessment, out of its retained revenue profits, it declared a dividend the equivalent of R40 000 on
25 February 2022. Its retained revenue profits were its after-tax profits made outside South Africa in
earlier years of assessment. These profits were subjected to tax in its country of residence at a rate of
17,5%. The provisions of section 9D had applied to these profits in Stars Limited’s 2021 years of
assessment.
Stars Limited made a taxable profit (and taxable income) of R1 200 000 from its trading activities
within South Africa – this amount excludes the taxable profit the equivalent of R600 000 from its
Zimbabwe branch (see above), and it also excludes the foreign dividend the equivalent of R40 000
that accrued to it from its subsidiary (see above).
Stars Limited’s taxable profit (all taxable income) of R1 200 000 also excludes the equivalent of
R324 000 in foreign dividends from investments it had made in other foreign companies. Details of
these foreign dividends follow:
• A foreign dividend the equivalent of R30 000 from Vega Limited. Stars Limited holds 20% of
its equity shares. The profits out of which it declared its dividend have not been subjected to tax
in South Africa. Less than 50% of its equity shares are held by residents of South Africa.
• A foreign dividend the equivalent of R50 000 from Procyon Limited, a listed company. Stars
Limited holds 3% of its equity shares. The profits out of which it declared its dividend have not
been subjected to tax in South Africa. Although it is not a resident of the Republic, its shares are
quoted on the South African stock exchange, namely, the JSE Securities Exchange, in addition
to being quoted on the stock exchange in its country of residence. Less than 50% of its equity
shares are held by residents of South Africa.
• A foreign dividend the equivalent of R70 000 from Sirius Limited. Stars Limited holds 7% of its
equity shares. Although it is not a resident of the Republic, it trades in South Africa. Of the profits
out of which its dividend was declared, 25% of them have already been subjected to South African
normal tax. Less than 50% of its equity shares are held by residents of South Africa.
• A foreign dividend the equivalent of R84 000 from Arcturus Limited. Stars Limited holds 8% of
its equity shares. Its assets are solely dividend-yielding shares in other companies. Of the
dividends that accrued to it, out of which its dividend was declared, 10% of them arose from
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.
9.23 (45 minutes)

This question tests the winding-up of a company when more than one distribution is made to
shareholders including the definitions of a ‘dividend’ and ’contributed tax capital’, and normal tax
and dividends tax determinations.
Carissa (Pty) Limited did not qualify as a ‘small business corporation’ as defined in
section 12E(4)(a), since 30% of its receipts and accruals consisted of rentals earned from its rent-
producing property.
Martin Gulu is the sole shareholder and only director of Carissa (Pty) Limited. He believed that if it
were to sell its rent-producing property it would then qualify as a small business corporation.
After Martin Gulu had consulted various people, including his accountant and lawyer, he agreed
that Carissa (Pty) Limited should be liquidated:
• Carissa (Pty) Limited’s trading business would be sold ‘lock, stock and barrel’ (including
everything) to Num-Num CC, a close corporation that would be formed. Martin Gulu would be
its sole member.
• Carissa (Pty) Limited’s rent-producing property would be distributed to Martin Gulu as a
liquidation distribution in specie. He would then let this rent-producing property to its existing
tenant at its market-related rental.
On 28 February 2021 after selling Carissa (Pty) Limited’s trading business to Num-Num CC, and
after providing for all its liabilities (including normal tax (determined at the rate of 28%), but
excluding any dividends tax) arising on its liquidation distribution and excluding the normal tax
liability arising on the disposal of its rent-producing property) its equity was as follows:
Share capital (contributed tax capital) 100
Capital profits 600 000
1 500 100
Carissa (Pty) Limited’s assets were as follows:
Rent-producing property (at cost) 600 000
Cash 1 000 000
1 600 000
Carissa (Pty) Limited’s current liabilities (including its normal tax liability) were R99 900.
The rent-producing property was purchased by Carissa (Pty) Limited on 1 November 1995 for
R600 000 (five years and 11 months before valuation date). It was valued by an independent
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.
9.24 (30 minutes)

This question tests thin capitalisation (section 31). It is suitable for a student studying towards a
Simply Red (Pty) Limited’s business has suffered for many years from the lack of capital. It is now
critical for it to enter into an expansion programme if it is to survive.
Simply Red (Pty) Limited’s sole shareholder and only director is Larry Lurex. At the end of its
previous financial year (28 February 2021) its equity and liabilities included the following:
Share capital (100 000 R1 shares (all ‘pure’ share capital)) 100 000
Interest-free loan from Larry Lurex 200 000
Retained income (revenue profits) 300 000
600 000
Bank overdraft 400 000
1 000 000
Larry Lurex’s only daughter, Mary Everett (nèe Lurex) studied abroad. She did not return to South
Africa on the completion of her degree. Instead, she married Austin Everett, a wealthy foreigner.
Mary is no longer a resident of the Republic. Austin Everett also a non-resident, is prepared to help
Larry Lurex by investing in Simply Red (Pty) Limited.
It is proposed that Austin Everett will purchase 40 000 shares in Simply Red (Pty) Limited from
Larry Lurex for R160 000. He will also lend it R840 000 at an interest rate of 15%. It will use
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.
9.25 (120 minutes)

This question tests the so-called exit charges when a person ceases to be a resident (section 9H). It
also tests normal tax liability determinations that include taxable capital gains and the
determination of estate duty. It tests sections 9(2), 9H, 24J, and 64E and paragraphs 1, 2(2), 5, 6, 8,
10, 20, 30, 35, 53 and 55 of the Eighth Schedule.
Chase Shooter is a 61-year-old widower (a husband whose wife has died). He is a resident of the
Republic. He has a son and a daughter:
• Gay Stalker (nèe Shooter), his daughter, is married to Jack Knave, a compulsive gambler (a
person suffering from an addiction to gambling). She is not a resident of the Republic.
• Chubby Shooter, his son, a major, is at university and would like to enter the family business on
the completion of his degree.
Chase Shooter has often visited Gay Stalker outside South Africa.
Chase Shooter would like to retire soon, and may then emigrate. He has, however, not yet made
any definite plans.
Chase Shooter’s late wife’s aged father, in other words, his ex-father in law, namely, Al Cohol, has
limited means. Chase Shooter therefore supports him on a regular basis.
Chase Shooter needs to plan for his retirement since he is not a member of a retirement fund. He is
also not a member of a medical scheme.
When Chase Shooter retires, it is likely that his son, Chubby Shooter, will take over his position in
Doubletots (Pty) Limited (see below).
Assets
On 30 September 2021 Chase Shooter’s assets, together with their market values on that date, were
as follows:
Doubletots (Pty) Limited
Chase Shooter owns half of the issued equity shares of Doubletots (Pty) Limited, the ‘family’
business. It is a resident of the Republic. Its financial year ends on the last day of February. The
other half of its shares are held by his cousin, Sam Black. They (Chase Shooter and Sam Black) are
both full-time employees of it. They have a good working relationship. Sam Black’s wife, Ebony
Black, however, does not see eye to eye with Chubby Shooter.
The market value of Chase Shooter’s equity shares in Doubletots (Pty) Limited is R3 490 000.
Doubletots (Pty) Limited was formed by Chase Shooter and Sam Black seven years and nine
months before valuation date. Chase Shooter’s equity shares in Doubletots (Pty) Limited then had a
par, and market, value of R500 000.
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.
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,
• 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
10.1 (40 minutes)

This question tests the normal tax model (determination of taxable income). It tests the definition of
‘gross income’, exemptions from normal tax, the general deduction formula (sections 11(a)
and 23(g)) and sections 6A, 6B, 10(1)(i), 10(1)(k), 10B, 11F, 12T, 20 and 23( f ).
Listed below are details of the receipts and accruals and expenses of eight taxpayers for the 2022
year of assessment. They are all residents of the Republic. It may be assumed that a wife’s receipts
and accruals accrue independently of her husband’s business activities.
Edward and Edna Fair
Edward Fair, aged 40 years, suffers from a physical disability. He is a ‘person with a disability’ as
envisaged by section 6B(3)(b) and as ‘defined’ in section 6B(1) of the Income Tax Act. Edna Fair
is 36 years old. Their receipts, accruals and expenses are as follows:
Salary – Edward Fair – Wheelchair Manufacturers Limited 216 000
Local interest from a local savings account – Edward Fair 3 470
Salary – Edna Fair – University of East London 324 000
Regular annual award received monthly by Edna Fair from the United Kingdom estate
of a relative (the equivalent of) 144 000
Local interest from investments
– Edward Fair 26 820
– Edna Fair 18 850
Medical expenses paid by Edward Fair for
– himself – illness but not related to his disability 2 350
– Edna Fair – illness 1 800
Pension contributions relating to employment
– Edward Fair: R216 000 at 5% 10 800
Expenditure paid on his physical disability – Edward Fair 7 540
None of the interest earned by Edward Fair and Edna Fair is from a ‘tax free investment’
as defined in section 12T.
Frank Grey
Frank Grey is 15 years old. His receipts and accruals are as follows:
Dividends
– South African registered public companies 3 000
– South African registered private companies 3 600
– United Kingdom private companies – the equivalent of 11 250
All these shares were inherited by Frank Grey from a late uncle who was not
ordinarily resident in South Africa at the time of his death. The foreign dividends from
the United Kingdom private companies are not exempt from normal tax under
section 10B(2).
Local interest – fixed deposit investment 27 225
Frank Grey’s fixed deposit investment is not a ‘tax free investment’ as defined in
section 12T.
211
Ian and Inga Jade

Ian Jade is 72 years old. He is married to Inga Jade, aged 63 years. Their receipts, accruals,
expenses and losses are as follows:
Local interest from a loan to a neighbour – Ian Jade 46 600
Local dividends – Ian Jade 660 000
Trade loss – Ian Jade -9 600
Salary – Inga Jade – one month only 6 000
Net rentals earned from a rent-producing property owned by Inga Jade 184 000
Jack and Jessica Khaki
Jack Khaki is 61 years old. Jessica Khaki is 58 years old. Their receipts, accruals and expenses are
as follows:
Salary (Jack Khaki) – Khaki Material Manufacturers Limited 720 000
Directors’ fees – Jack Khaki 120 000
Value of company car usage – Seventh Schedule value – Jack Khaki 174 915
Employer’s contribution to medical scheme – Jack Khaki 18 600
Assessed loss brought forward – suffered by Jack Khaki -56 800
Local dividends from South African companies – Jack Khaki 2 400
Less non-capital expenditure incurred in producing them 3 900 -1 500
Local interest – Jack Khaki (not from a ‘tax free investment’) 40 285
Salary Jessica Khaki – Old Age Nursing Home at R10 800 a month 129 600
Uniform allowance – Jessica Khaki – nurse’s uniform at R500 a month 6 000
Trade profit – Jessica Khaki – Flower Boutique 126 880
Pension fund contributions – Jack Khaki 43 200
Pension fund contributions – Jessica Khaki 6 480
(Jack Khaki’s pension fund contributions are based solely on his salary of R360 000
and those of Jessica Khaki solely on her salary of R129 600.)
Medical scheme contributions – Jack Khaki 14 400
‘Qualifying medical expenses’ paid and not recovered from the medical scheme
– Jack Khaki 21 230
Jack Khaki’s membership of the medical scheme is for Jessica Khaki and himself.
Keegan Lime
Keegan Lime is 30 years old. His receipts and accruals and expenses are as follows:
Local interest (not from a ‘tax free investment’) 24 600
Retirement annuity fund contributions 1 200
You are required to determine the taxable income or assessed loss of each of the above taxpayers
for the 2022 year of assessment clearly indicating your reason for the inclusion in, or exclusion
from, taxable income of the given information.
10.2 (60 minutes)

This question tests the determination of the normal tax liability. It tests the definition of ‘gross
income’, exemptions, the general deduction formula (sections 11(a) and 23(g)) and sections 5, 6,
6A, 6B, 7(3), 10(1)(i), 10(1)(k), 10(2)(b), 12T and 23(a).
The following taxpayers are all residents of the Republic. Details of their receipts, accruals and
expenses, together with their personal particulars, for the 2022 year of assessment follow:
Richard Swan
Richard Swan is 30 years old. His sole receipt or accrual is his salary of R527 500.
NATURAL PERSONS 213
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
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
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 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.
10.3 (20 minutes)

This question tests a normal tax liability determination. It tests the definition of ‘gross income’ and
sections 5, 6, 6A and 11F.
Colin and Colleen Black are aged 68 years and 58 years respectively.
Colin Black is an immigrant who arrived in South Africa on 1 November 2021. He left Colleen
Black (his wife) in the United Kingdom pending his having found suitable employment for himself
and accommodation for both of them.
Colin Black commenced work in Pietermaritzburg on 1 January 2022 earning R48 600 a month
from which
• R11 410 was deducted each month by way of employees’ tax,
• R2 430 was deducted each month for current contributions to a recognised provident fund, and
• R670 each month for his medical scheme contributions for his membership of it. Colin Black is
the only member of his family of this medical scheme. Colleen Black is not a member of it.
Colin Black’s sole receipt or accrual from a non-South African source is a pension the equivalent of
R21 000 a month from the pension fund of his former employer. He worked for his former
employer solely in the United Kingdom.
Since the death of Colin Black’s aged uncle on 1 December 2020 he enjoys R12 000 a month as the
beneficiary under an insurance policy that his late uncle had taken out with the Durban branch of a
South African insurer. This insurer will award R12 000 a month to Colin Black for a 10-year
period. (In recent years, Colin Black had paid the premiums of R350 a month for this insurance
policy.)
During the 2022 year of assessment Colin Black also earned R29 860 in the form of consultancy fees
from a Durban manufacturer for whom he had performed an investigation during December 2021.
You are required to determine Colin Black’s 2022 South African normal tax liability. Also indicate
if he owes SARS an amount for his normal tax liability.
10.4 (20 minutes)

This question tests two normal tax liability determinations including the definition of ‘gross
income’ and sections 5, 6, 6B, 10(1)(i), 10(1)(k) and 11F.
Theobald St John is aged 38 years and his wife, Theodora St John, 35 years. They are both
residents of the Republic.
Theobald and Theodora St John’s earnings for the 2022 year of assessment were as follows:
Salary – Theobald St John 240 000
Local dividends – Theobald St John 21 200
Local interest (not from a ‘tax free investment’) – Theobald St John 47 400
Salary – Theodora St John 32 400
Local interest (not from a ‘tax free investment’) – Theodora St John 41 400
Theobald St John incurred and paid the following expenditure and made the following
contributions during the 2022 year of assessment:
• R24 000 towards the maintenance of his aged mother,
• R6 000 each towards the support of an invalid uncle and aunt,
• R3 000 to a retirement annuity fund,
• R14 400 to a pension fund (being 6% of his salary),
• R600 on life insurance premiums on his own life, and
• R20 465 ‘qualifying medical expenses’ (he is not a member of a medical scheme).
NATURAL PERSONS 215
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.
10.5 (25 minutes)

‘gross income’ and sections 8(4)(a), 10(1)(i), 10(1)(k), 11F and 20.
Terence Stalker was liable for normal tax in the 2020 year of assessment.
In the 2021 year of assessment he went into a partnership with his brother. This venture proved a
disaster and although he earned local interest of R19 600 from the capital he had invested in the
partnership, his share of its trading loss was R9 000. He ended up with less capital at the end of the
year compared with what he had started the year with.
Terence Stalker’s other earnings for the 2021 year of assessment had been
• a salary from part-time employment of R2 400 in total, and
• local dividends of R4 900 from South African registered companies.
Terence Stalker contributes R300 a month to a retirement annuity fund. He has been contributing to
this fund for the past five years.
Terence Stalker is married to Teresa Stalker.
Terence Stalker is 32 years old and Teresa Stalker is 33 years old. They are both residents of the
Republic. Their receipts and accruals for the 2022 year of assessment follow:
Terence Stalker
Salary from part-time employment (12 months at R4 000 a month) 48 000
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.
10.6 (20 minutes)

This question tests two normal tax liability determinations including the definition of ‘gross
income’ and sections 5, 6, 6B, 11F, 12T and 26A.
The following information relates to Harrison and Harriette Forrest, a married couple, both aged
40 years, for the 2022 year of assessment. They are both residents of the Republic. Their receipts,
accruals, contributions and expenses were as follows:
Harrison Forrest
Salary (for 12 months) 286 800
Annuity 72 000
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 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.
10.7 (30 minutes)

This question tests the determination of two normal tax liabilities including the definition of ‘gross
income’ and sections 5, 6, 10(1)(i), 10(1)(k), 10B, 11F and 12T.
Rowan and Rowena Plum are both under the age of 65 years. They are both residents of the
Republic. They returned the following information for the 2022 year of assessment:
Salary – Rowan Plum from Maroon Manufacturers Limited 142 200

Foreign dividend from a company in Namibia – Rowan Plum – the equivalent of (note 1) 2 800
Foreign dividend from a company in America – Rowan Plum – the equivalent of (note 1) 1 700
Local interest (not from a ‘tax free investment’) – Rowan Plum 27 300
Award from an endowment insurance policy on his life – not connected with services
rendered by him – Rowan Plum 200 000
Profit made as a result of backing the winner of the Durban July Handicap (a feature
horse race) – Rowan Plum 1 800
Reward received from the South African Police in connection with information
supplied by him that led to the arrest of a wanted criminal 10 000
Salary – Rowena Plum from the Royal Hotel Limited 216 000
Local interest (from a ‘tax free investment’) – Rowena Plum 2 400
Cash legacy received by Rowena Plum from the estate of her late father 400 000
Rowan Plum also incurred and paid the following expenses and made the following contributions
during the 2022 year of assessment:
Life insurance premium for a life policy on the life of his 10-year-old unmarried daughter 720
His contributions to a medical scheme (note 2) 21 000
His share of ‘qualifying medical expenses’ 20 419
Contributions to a pension fund at 5% of his salary 7 110
Contributions to a retirement annuity fund 6 000
Notes
1. The foreign dividends that accrued to Rowan Plum are not exempt from normal tax under
section 10B(2).
2. Rowan Plum’s membership of the medical scheme provides benefits for himself, his wife and
their daughter. His employer also contributed R21 000 to the medical scheme for Rowan’s,
Rowena’s and their daughter’s membership.
You are required to determine Rowan and Rowena Plum’s 2022 normal tax liabilities.
NATURAL PERSONS 217
10.8 (20 minutes)

This question tests the normal tax model, sections 5, 5(1A), 6, 6B and 11F.
Ruby Port has a ‘nine-to-five’ position with Cape Wine Distributors Limited. She is employed by it
as a wine promoter. She is required to work Mondays to Fridays. She has a one-hour lunch-break
each day.
Ruby Port’s husband, Tawny Port, is employed by Pino Riesling, a wine farmer, as an assistant and
as an extra farm hand. His earnings from this source together with Ruby’s earnings from Cape
Wine Distributors Limited are insufficient for their domestic needs.
So as to supplement their earnings Ruby Port works in the evenings. She is employed as a bar-maid
at ‘The Wine Cellar’, a local wine bar in the village situated near to their home. She works at ‘The
Wine Cellar’ each night, Mondays to Saturdays, from eight to midnight. She does not stop for a
break during the course of the evening.
Details of Tawny and Ruby Port’s receipts and accruals for the 2022 year of assessment follow:
Salary from Pino Riesling – Wine farmer – Tawny Port 180 000
Salary from Cape Wine Distributors Limited – Ruby Port 183 000
Salary from ‘The Wine Cellar’ – Ruby Port 129 600
Tips from wine drinkers at ‘The Wine Cellar’ – Ruby Port 12 750
The wine drinkers place the tips in a money-box at ‘The Wine Cellar’. It then distributes these tips
equally between all its bar-maids.
Ruby Port contributed R9 150, being 5% of her salary from Cape Wine Distributors Limited, into
its pension fund. She also paid R24 115 in ‘qualifying medical expenses’ during the 2022 year of
assessment.
Ruby Port is 35 years old, Tawny Port is 33 years old, and they have five unmarried school-going
children under the age of 10 years.
You are required to determine the normal tax liabilities of Tawny and Ruby Port for the 2022 year
of assessment.
10.9 (20 minutes)

This question tests the determination of the normal tax liabilities of two taxpayers including the
definition of ‘gross income’ and sections 5, 6, 6A, 6B, 11F, 23(a) and 23(b).
Jacques and Jacqueline Indigo, were married on 31 August 2021. They are both residents of the
Republic.
On 1 March 2021 Jacques Indigo attained the age of 63 years. Jacqueline Indigo (neé Greene)
attained the age of 60 years on 10 November 2021. Neither party had been married previously.
During the 12-month period ended 28 February 2022, both parties had no receipts and accruals
other than their salaries from employment. The amount of these salaries, and the respective
deductions from these salaries, being employees’ tax, contributions towards pension funds
(pension), a medical scheme (medical) and the Unemployment Insurance Fund (UIF) were as
follows for the 12-month period:
Salary Employees’ Pension Medical UIF
tax
Jacques Indigo (12 months to 28 February
2022) 396 000 74 400 19 800 18 000 3 960
Jacqueline Indigo (1 September 2021 to
28 February 2022) 102 600 11 700 – – 1 026
Jacqueline Heather (1 March 2021 to
31 August 2021) 102 600 11 700 – – 1 026
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).
10.10 (25 minutes)

This question tests the normal tax liability determination. It also tests the definition of ‘gross
income’, the general deduction formula (sections 11(a) and 23(g)) and sections 5, 5(1A), 6, 6A, 6B,
10(1)(k), 10(1)(i), 10(1)(mB), 10(2)(b), 11(d), 18A, 20 and 26A.
George Jaws, a 25 year-old local life-saver, and a resident of the Republic, lost his left leg to a
shark on 30 April 2021.
George Jaws’s employer, the Surf City Municipality, paid him his full salary of R21 600 for the
months of May, June and July, then half his salary for the next three months. (He had earned
R21 600 a month for the months of March and April 2021.)
George Jaws was, however, off work for a period of eight months. For two of those months, he was
awarded funds from the Unemployment Insurance Fund. In total, he was awarded R27 000 by it.
George Jaws was back on duty at the beach on New year’s day (1 January 2022). He is now
employed as a ‘lookout and life-saver supervisor’. He now has an artificial leg. He is still, however,
employed on the same salary scale (R21 600 a month).
George Jaws also has a third-share in a surf-board-manufacturing partnership. It suffered a loss in
the 2022 year of assessment of R9 900.
George Jaws’s elderly aunt recently passed away, leaving him the majority of her estate. He
received his inheritance before the commencement of the 2022 year of assessment. The following
amounts accrued to him during the 2022 year of assessment:
• Rentals of R43 200 from a property that he had inherited. But he had to pay rates of R5 600 and
repairs and maintenance of R2 040. His collecting agent also deducted 5% of the gross rentals as
its commission.
• He enjoys a monthly amount of R1 500 from his late aunt’s testamentary trust. (This R1 500 a
month will be paid to him for a five-year period.) It is being funded by local dividends.
• Local dividends of R75 400 accrued to him from the shares he had inherited.
George Jaws sold some of his inherited shares during the 2022 year of assessment. This sale gave
rise to a taxable capital gain of R8 300 in the 2022 year of assessment.
After his accident, George Jaws donated R25 000 to the Surf City University to be awarded by it to
a medical student involved in researching artificial limbs. It provided him with a section 18A
certificate (receipt) for the R25 000 he donated to it.
During the 2022 year of assessment George Jaws incurred and paid
• R18 660 in expenses on his physical disability, and
NATURAL PERSONS 219
• R2 292 on ‘qualifying medical expenses’,

that were not recovered from his medical scheme.
Throughout the year George Jaws contributed R750 a month to the medical scheme. His employer
also contributed R750 a month to the medical scheme for his membership.
George Jaws paid a premium of R450 a month on a life insurance policy on his life.
You are required to determine his 2022 normal tax liability.
10.11 (40 minutes)

This question tests the normal tax liability determination for two taxpayers. It also tests the
definition of ‘gross income’, the general deduction formula (sections 11(a) and 23(g)) and
sections 5, 5(1A), 6, 6B, 10(1)(k), 10(1)(mB), 10B, 10(2)(b), 11(d), 11F, 18A and 20.
Roderick Gibb, aged 33 years, is a resident of the Republic. He carries on the business of a private
detective specialising in marriage disputes when one spouse suspects the other spouse of
committing adultery.
Roderick Gibb likes to meet his clients in private so that they can disclose all the alleged facts in
complete confidence. He discovered that the best place to meet his clients was at a local club where
he is a member. He is given exclusive use of its private dining-room so that he may discuss his
client’s problems in private. Being an exclusive club its membership is limited. He pays R2 400 in
subscriptions for the year. His lunch bills for the year cost him R2 600. He uses this club solely for
business purposes.
For the 2022 year of assessment Roderick Gibb made a profit from his detective business of
R127 300 before taking into account the entertainment expenditure he incurred and paid as detailed
above.
Roderick Gibb also has a half share in ‘The Eastern Massage Parlour’. It has had a poor trading
year during the 2022 year of assessment. He thinks that his share of the loss of R2 300 (50% of
R4 600) that he suffered for the 2022 year of assessment was as a result of the Covid-19 restrictions
and the stiff competition that exists.
Two years previously Roderick Gibb married 30-year-old Beatrix (Trixie) Toolove, a former client
of his. (He had been consulted by her to investigate her first husband’s strange behaviour.) She is
also a resident of the Republic.
Trixie Gibb worked for three months during the 2022 year of assessment. She left employment on
account of her pregnancy. She is now on a year’s unpaid ‘maternity’ leave. She is employed by
Trick & Treat, a firm of advertising agents as an artist. She works mornings only from eight to one.
She earned R16 600 a month. As a condition of her employment, she contributed 5% of her gross
earnings to a pension fund.
Trixie Gibb enjoyed maternity benefits from the Unemployment Insurance Fund of R37 350.
Trixie Gibb also enjoyed a monthly amount of R22 500 throughout the year of assessment. This
amount is awarded to her in accordance with the last will and testament of her late grandfather. It is
payable to her for the rest of her life. It is being funded by foreign dividends. None of these foreign
dividends is exempt from normal tax under section 10B(2).
Roderick Gibb had assisted his wife in her divorce settlement from her former husband,
Ex Toolove. As a result of their persistence, Trixie Gibb was awarded her former primary residence
and 20 000 shares in Wedding Wholesalers Limited. These shares gave rise to local dividends of
R12 000 during the 2022 year of assessment. The property (her former primary residence) was
converted by her into a rent-producing property investment. It was let by her at a market-related
rental of R7 500 a month throughout the 2022 year of assessment. Property rates on it incurred by
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.
10.12 (30 minutes)

This question tests two normal tax liabilities determinations. It also tests the definition of ‘gross
income’ and sections 5, 6, 6A, 6B, 10(1)(k), 10(1)(nA), 11F, 20, 23(a), 23(b) and 23( f ).
Horris Good aged 63 years, is a resident of the Republic. He is a director of Goody Goody Gum
Drops (Pty) Limited. A salary of R512 000 and director’s fees of R60 000 accrued to him from it in
Horris Good enjoys the free private use of one of Goody Goody Gum Drops (Pty) Limited’s motor
vehicles. This saves his own pocket R180 000 a year in motor vehicle expenses. The Seventh
Schedule value for this motor vehicle is R84 000 for the 2022 year of assessment.
During the 2021 year of assessment, Horris Good had unsuccessfully tried a business venture in his
own name. Its failure had cost him money and resulted in him ending up with an assessed loss for
the 2021 year of assessment of R12 200.
Horris Good paid interest of R7 320 on funds he has borrowed so as to purchase shares in local
companies. The local dividends on these shares are paid to an investment adviser who then deducts
a 10% commission before reinvesting them in further local-dividend yielding shares on his behalf.
During the 2022 year of assessment local dividends of R24 000 accrued to Horris Good.
Horris Good’s wife, 60-year-old Dolly Good, is a part-time social worker. She is also a resident of
the Republic. She earned R8 000 a month throughout the 2022 year of assessment for the services
she rendered to it. While doing her social work she is required to wear a special uniform. It is
clearly distinguishable from ordinary clothing. She is awarded R1 000 a month (R12 000 for the
year) by her employer towards the cost of this uniform.
Dolly Good is the so-called sleeping partner in a florist shop run by her sister, Daisy Flower. Her
share of the profit from this partnership was R32 560.
Both Horris and Dolly Good have contributed to their employers’ pension funds and medical
schemes as a condition of their employments. Also deducted from their salaries by way of stop
orders were contributions to their own life insurance policies. Their contributions during the 2022
year of assessment were as follows:
Pension Medical Life
fund scheme insurance
Horris Good 25 600 10 800 6 000
Dolly Good 5 760 7 200 720
Their employers also contribute to the medical schemes:
• Goody Goody Gum Drops (Pty) Limited contributed R5 400 for Horris Good’s membership.
• Dolly Good’s employer contributed R7 200 for her membership.
Horris and Dolly Good are the sole members from their family of their medical schemes.
‘Qualifying medical expenses’ by Horris Good that were not recovered from his medical scheme
were R7 300 during the 2022 year of assessment.
NATURAL PERSONS 221
‘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.
10.13 (30 minutes)

This question tests a taxable income determination including the definition of ‘gross income’ and a
‘severance benefit’ and sections 5, 6, 6B, 10(1)(gA), 10(1)(i), 10(1)(k), 10B, 23( f ) and 26A and
paragraphs 3, 4, 5, 6, 8, 10, 20 and 35 of the Eighth Schedule.
Malcolm Lark, a resident of the Republic, and a ‘person with a disability’ (as envisaged in
section 6B(3)(b) and as ‘defined’ in section 6B(1)), retired on 31 August 2021 as a result of illness,
after 30 years of service to Mirafra Cantilians Sounds (Pty) Limited, his employer.
Mirafra Cantilians Sounds (Pty) Limited awarded Malcolm Lark
• a gratuity of R36 000 as compensation for the loss of his office, and
• R1 080 000 for an undertaking not to use his specialised knowledge to assist a competitor during
the next three years. Since he was only 54 years old, it needed for this protection even though he
had not rendered services in the past to a competitor.
Malcolm Lark furnished the following details in his return for the 2022 year of assessment:
Salary to 31 August 2021 180 000

Lump-sum award from Mirafra Cantilians Sounds (Pty) Limited (details above) 36 000
Restraint of trade award from Mirafra Cantilians Sounds (Pty) Limited (see above) 1 080 000
Legacy received on the death of an uncle 100 000
Honorarium as secretary of ‘The Birdwatchers Club’ 1 000
Return from his investments:
– Local dividends 36 000
– Foreign dividends that are not exempt from normal tax under section 10B(2) – the
equivalent of 1 800
– Local interest from an interest-bearing security (not from a ‘tax free investment’) 26 200
– Foreign interest that accrued from Robin Sparrow (note 2) 2 400
– Net rentals (note 1) 47 400
Loss on the sale of shares that he had purchased in 2017 for investment purposes 11 000
Profit on the sale of a rent-producing property (note 1) 57 000
Disability pension 14 400
Interest paid on an overdraft raised to purchase shares in some South African companies 3 000
Malcolm Lark furnished the following information in addition to the above details:
1. He had purchased a flat as an investment in 2017. After numerous complaints about the loud
noises made by his tenant from other residents in this block of flats, he sold it on 31 May 2021.
The net rentals as detailed above are the net rentals that accrued to him during the three-month
period from 1 March 2021 to 31 May 2021.
2. He lent R40 000 to Robin Sparrow, his brother-in-law, on 1 September 2021. He deposited this
R40 000 using an electronic transfer directly into Robin Sparrow’s bank account in London.
Interest at 12% a year is payable quarterly, but it accrues on a day-to-day basis. The R2 400 is
the rand-equivalent amount of the interest that accrued to him.
Ruby Lark, Malcolm’s wife, had no receipts or accruals during the 2022 year of assessment. She
has experienced poor health throughout the year. This has resulted in Malcolm Lark paying medical
expenses of R54 000 during the 2022 year of assessment.
You are required to determine the 2022 taxable income of Malcolm Lark.
10.14 (20 minutes)

This question tests the amount due to or a refund from SARS for a person’s normal tax liability. It
tests the definition of ‘gross income’, sections 5, 6, 6B, 10(1)(i), 10A, 11F, 12T and 26A.
On 31 March 2022 Daniel Mzolo died from a Covid-19 related illness. At the time of his death, he
had not yet submitted his 2022 tax return. He was survived by three wives and nine children. He
was 67 years old when he died. He had been a resident of the Republic for his entire life.
You are a tax practitioner. Wiseman Mzolo, Daniel Mzolo’s oldest son has consulted you. He would
like you to complete his late father’s tax return for the 2022 year of assessment. You have had
discussions, made certain inquiries and a number of telephone calls. You have determined that his
2022 tax return can be completed from the following five documents that are now in your possession:
• The receipt of Daniel Mzolo’s first provisional tax payment for the 2022 year of assessment.
This receipt reflects that R191 was paid on 29 August 2021.
• The receipt of Daniel Mzolo’s second provisional tax payment for the 2022 year of assessment.
This receipt reflects that R1 723 was paid on 21 February 2022.
• An ‘IRP5 – Employees’ Tax Certificate’ from the Department of Finance for the pension that
accrued to Daniel Mzolo during the 2022 year of assessment. This employees’ tax certificate
reveals a gross remuneration of R125 400 and employees’ tax of R792. He had been retired for
seven years at the time of his death.
• An ‘IRP5 – Employees’ Tax Certificate’ from an insurer for an annuity that Daniel Mzolo had
purchased from it. This annuity had been purchased by him in January 2019 for a cash
consideration of R50 704,16. It provides for an amount of R897,77 to accrue to him each month
for a period of 120 months. This employees’ tax certificate reveals a gross remuneration of
R10 773 but with a note, to the effect that R5 697 is the capital element of this annuity. It also
reveals that no employees’ tax was deducted from this annuity.
• An investment certificate (Form IT3(b)) from the Third National Bank for Daniel Mzolo’s
investments. This investment certificate reflects the following:
Investment Balance Interest
Savings 45 150 3 454
Fixed deposit 32 000 4 770
Tax-free investment 30 000 2 250
Short term 300 000 28 500
407 150 38 974
One year before retiring, Daniel Mzolo had paid R48 000 to the pension fund to ‘buy back’ his
pension contributions to the age of 18 years. His taxable income for the 2021 year of assessment
was R140 000.
Daniel Mzolo paid ‘qualifying medical expenses’ of R12 000 for the 2022 year of assessment.
Daniel Mzolo had no other receipts or accruals, nor does he enjoy any other exemptions from
normal tax and deductions in the determination of his taxable income for the 2022 year of
assessment.
Daniel Mzolo was deemed to dispose of certain of his assets moments before he died. This deemed
disposal resulted in a taxable capital gain of R27 300.
You are required to determine the amount due to, or from, SARS for Daniel Mzolo’s normal tax
liability for the 2022 year of assessment.
NATURAL PERSONS 223
10.15 (40 minutes)

‘gross income’ and sections 7(3), 10(1)(i), 10(1)(k), 10(2)(b), 10B, 11F and 26A.
Rocky Gardener was a shareholder and director of Growell Nurseries (Pty) Limited (a company
incorporated in South Africa) until his retirement from it on 31 August 2021. His shareholding in it
had been 20%. He had retired at the age of 53 years due to ill health. After his retirement, his health
deteriorated and he died on 30 November 2021. He left his widow, Iris Gardener (aged 48 years),
and four unmarried daughter. Relevant details of their four unmarried daughters follow:
• Lilly Gardener is 23 years old and a full-time university student living at home.
• Rose Gardener is 17 years old and is a candidate attorney with a local firm of attorneys. She also
lives at home.
• Poppy and Pansy Gardener are 15-year-old twins who are away from home at a boarding school
for most of the year.
The Gardener family members are all residents of the Republic. Details of their receipts and
accruals and expenditure for the 2022 year of assessment are as follows:
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
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
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.
1. 2022 taxable incomes of all the Gardener family members, and
2. normal tax liability of Iris Gardener.
10.16 (40 minutes)

This question tests the taxation of spouses married in community of property (section 7(2A)). It also
tests the normal tax model (definitions of ‘gross income’, ‘income’ and ‘taxable income’) including
sections 5, 10(1)(i), 11(a), 11F, 23(a) and 23(b).
Bill Huxtable and his wife, Vanessa Huxtable, are married in community of property. Bill
Huxtable, aged 68 years, is a retired paediatrician (a doctor specialising in children). Vanessa
Huxtable, aged 62 years, is a retired nurse. (At no stage did she work for him.) They are both
Bill Huxtable
Details of Bill Huxtable’s receipts and accruals for the 2022 year of assessment are as follows:
• An annuity of R195 000 from a retirement annuity fund. This annuity is awarded on a monthly
basis at a rate of R16 250 a month with payment being made to him on the twenty-fifth day of
each month.
• Net rentals of R43 200 from a rent-producing property that he had purchased on his retirement
from his medical practice in the 2019 year of assessment.
• Interest of R95 900 comprising R62 700 local interest from various fixed deposit investments, not
being ‘tax free investments’ with local banks and R33 200 foreign interest from a loan that he had
made to his brother while on holiday in Botswana. His brother is ordinarily resident in Botswana.
• Royalties from a book that he had written on Tuberculosis (a sickness that is common amongst
children of ‘third-world’ countries). His royalty is R5 for every copy of the book that is sold.
During the 2022 year of assessment,
– 1 800 books were sold in South American countries,
– 1 200 books in North Africa, and
– 800 books in South Africa.
NATURAL PERSONS 225
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.
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
10.17 (30 minutes)

This question tests the taxation of a couple married in community of property (section 7(2A)). It
also tests the normal tax model and sections 5, 6, 10(1)(i), 10(1)(k), 10A, 21 and 23(a) and (b).
Wiseman Mmela and Lomculi Mmela are married in community of property. He is an advocate.
She is a professional singer. He is 86 years old. She is 81 years old. They are both residents of the
Republic.
The following information relates to their financial affairs for the 2022 year of assessment:
Wiseman Mmela
Taxable profit from his practice as an advocate 480 000
Local interest from investments (not being a ‘tax free investment’) 56 900
Annuity from a retirement annuity fund (note 1) 60 000
Wiseman Mmela made the following payments during the 2022 year of assessment:
Life insurance premiums on his own life 24 000
Alimony (note 2) 18 000
Lomculi Mmela
Lomculi Mmela had the following receipts and accruals:
Salary 156 000
Local interest from a non ‘tax free investment’ 14 100
Net rentals (note 3) 72 000
Alimony (note 4) 12 000
Purchased annuity (note 4) 90 000
Notes
1. When Wiseman Mmela attained the age of 65 years his retirement annuity fund contract
matured. He elected to take the entire proceeds in the form of an annuity. Since that date, an
amount of R5 000 a month has accrued to him.
2. Wiseman Mmela was previously married – Lomculi Mmela is his second wife. He was
divorced from his first wife in 1961. In accordance with their divorce agreement, he pays her
alimony of R1 500 a month.
3. The net rentals accrue to Lomculi Mmela from a rent-producing property that she inherited
from her late father. A condition of this inheritance was that this rent-producing property, and
the rentals from it, would be excluded from Wiseman Mmela’s and Lomculi Mmela’s joint
estate.
4. Lomculi Mmela was also previously married – Wiseman Mmela is her second husband. She
was divorced from her first husband in 1961. In accordance with their divorce agreement, she
enjoys alimony of R1 000 a month from him.
NATURAL PERSONS 227
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.
10.18 (35 minutes)

This question tests the taxation of a couple married in community of property (section 7(2A)). It
also tests provisional tax determinations. It tests the normal tax model including sections 5, 6, 6B,
10(1)(i), 10(1)(k), 10A and 26A, paragraph 19 of the Fourth Schedule and paragraphs 3, 5, 6, 8, 10
Milan and Sicily Ravioli are married in community of property. They have been married for
45 years. He is 76 years old and she is 66 years old. Both of them are ‘retired’. They fund their cost
of living out of the pensions, annuities, and royalties that accrue to them and out of the returns from
their various investments. Their receipts and accruals for the 2022 year of assessment were as
follows:
Milan Ravioli
Pension from former employer’s pension fund 168 000
Annuity from an insurer (note 1) 14 400
Royalty from a ‘design’ created by him in South Africa 18 000
Sicily Ravioli
Annuity from a retirement annuity fund (note 5) 90 000
Annuity from her late father’s testamentary trust (note 4) 10 000
Local interest from a special savings account 12 000
Local interest from a fixed-deposit investment (not a ‘tax free investment’) (note 5) 18 000
Local dividends (note 5) 25 000
Capital gain (note 6) 82 582
Notes
1. On Milan Ravioli’s retirement, when he attained the age of 60 years, a lump sum of R90 000
accrued to him from his employer as a deferred compensation award. He used R84 153,60 of it
to purchase a life-time annuity from an insurer. At the time of his purchase of it his life
expectancy was 14,61 years. The annuity is R14 400 and is being paid to him at a rate of
R1 200 a month.
2. On his retirement, Milan Ravioli was also awarded a lump sum from his employer’s pension
fund. He used most of this lump sum to purchase a rent-producing property. His rentals accrue
from this rent-producing property.
3. Three years ago Sicily Ravioli’s father died. He bequeathed his townhouse to her subject to the
condition that this property would be excluded from their joint estate. This bequest was also
subject to the condition that if she were to let this property, the rentals earned would also be
excluded from their joint estate.
4. Sicily Ravioli’s father’s will also provided that certain local shares were bequeathed to a trust.
The beneficiaries of the trust are Sicily Ravioli and her brother. Under a clause in the trust
deed, her brother and herself each receive an annuity of R10 000 from the trust. (The receipts
and accruals of this trust come solely from local dividends from these local shares.)
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.)
10.19 (35 minutes)

This question tests the normal tax model in relation to returns from investments including the
definition of a ‘trade’, sections 10(1)(i), 10(1)(k), 11(a) and 26A and paragraphs 5, 8 and 10 of the
Eighth Schedule.
Bull Pitt, aged 51 years, is a resident of the Republic. Most of his receipts and accruals are in the
form of rentals, local dividends and interest. During the 2022 year of assessment he had the
following receipts and accruals:
• Rentals of R103 000 from a rent-producing properties owned by him. Expenses incurred in
producing these rentals amounted to R15 000.
• A return of R5 000 from a real estate investment trust investment comprising local dividends of
R4 500 and local interest of R500.
• A return of R4 000 from a collective investment scheme in securities (a so-called equity unit
trust) comprising local dividends of R3 900 and local interest of R100.
• Local interest of R51 625 from his ‘call’ account with a local bank. This ‘call’ account is not a
• In addition to the above investments, he has a R20 000 fixed deposit investment. It was made on
1 April 2021, is for a one-year period, and earns local interest at a rate of 6% a year. It provides
that the local interest will be paid annually in arrears. It is also not a ‘tax free investment’.
During the 2022 year of assessment Bull Pitt sold five krugerrands and made a profit of R18 000
(R139 500 – R121 500). He had purchased these five krugerrands on 1 October 2020. He also made
a profit of R11 000 (R36 000 – R25 000) on the sale of an original painting. This particular original
painting he had purchased on 1 December 2020. He collects original paintings and when he finds a
more-valuable painting, he is often forced to sell an existing painting to help pay for the more-
valuable painting.
NATURAL PERSONS 229
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
You are required to determine Bull Pitt’s 2022 taxable income.
10.20 (45 minutes)

This question tests the taxable income determination (normal tax model), sections 7A(2),
10(1)(gB), 10(1)(i), 10(1)(k)(i), 11(a), 11F, 18A, 20 and 23(m) and Practice Note 31.
Rosemary Rogers, a resident of the Republic, was employed by Playhouse Productions (Pty)
Limited as a professional dancer. During the 2022 year of assessment she was employed by it from
1 March 2021 to 30 September 2021 (the date of her death following a freak accident – while
rehearsing for a show she fell off the stage into the orchestra pit). She was 33 years old when she
died.
From 1 April 2021 to 30 September 2021 Rosemary Rogers earned a salary of R22 500 a month
from Playhouse Productions (Pty) Limited. In March 2021 her salary was R20 500. She was also
awarded a cell phone allowance by it of R500 a month.
She was a member of the Playhouse Productions (Pty) Limited Pension Fund. As from 1 April
2021 she contributed R1 350 a month to it. Her contribution for March 2021 was R1 230. Her
contributions are based solely on her salary.
Rosemary Rogers was also a member of a retirement annuity fund. On 1 April each year she made
an annual contribution of R3 000 to it.
After Rosemary Rogers’s death, her executor received the following lump sums:
• R600 000 from the pension fund. (All her contributions to this pension fund had been deductible
in the determination of her taxable income.)
• R250 000 from the retirement annuity fund. (All her contributions to this retirement annuity
fund had been deductible in the determination of her taxable income.)
• R50 000 from Playhouse Productions (Pty) Limited for compensation for the loss of her office.
• R310 000 compensation from Playhouse Productions (Pty) Limited because her death arose out
of and in the course of her employment.
• R500 000 compensation under the provisions of the Workmen’s Compensation Act.
• R1 000 000 from a life insurance policy.
On 31 March 2021 Rosemary Rogers was awarded a lump sum of R36 000 from Playhouse
Productions (Pty) Limited 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 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
231
11.2 (15 minutes)

This question tests the provisions of section 6(2) and (4) and section 9H. It tests the primary,
secondary and tertiary rebates. It also tests rebates for a broken period of assessment.
Eton Milliner
Eton Milliner attained the age of 75 years on 21 February 2022.
You are required to determine his rebate entitlement as provided for in section 6(2).
Gary and Glenor Bonnet
On 30 August 2021 Gary and Glenor Bonnet were involved in a car accident.
Glenor Bonnet died instantly, on 30 August 2021. She was 58 years old when she died.
Gary Bonnet died on 5 October 2021. He was 64 years old when he died. He would have attained
that age of 65 years on 25 February 2022.
You are required to determine the rebate entitlements of both Gary and Glenor Bonnet.
Bailey Tophat
Bailey Tophat, aged 69 years, and not a member of a medical scheme, ceased to be a resident
of the Republic on 1 June 2021.
You are required to determine Bailey Tophat’s rebate entitlements.
11.3 (15 minutes)

This question tests the provisions of sections 5 and 6. It tests normal tax payable, rebates and
normal tax liability.
Bibi Turban
Bibi Turban has a normal tax payable of R93 195 (as determined under the provisions of section 5).
She is 39 years old.
You are required to determine Bibi Turban’s normal tax liability.
Sherlock Deerstalker
Sherlock Deerstalker has a taxable income of R517 500. He is 73 years old.
You are required to determine Sherlock Deerstalker’s normal tax liability.
11.4 (30 minutes)

This question tests the provisions of sections 5, 6, 6A and 6B. It tests the rebates including the
medical scheme fees tax credit rebate and the additional medical expenses tax credit rebate. It also
tests the normal tax payable and normal tax liability determinations.
Barbie Bellhop
Barbie Bellhop, aged 27 years, is a resident of the Republic.
Barbie Bellhop is a member of her employer’s medical scheme. For the 2022 year of assessment,
on a rand-for-rand basis, she and her employer each contributed R10 800 to this medical scheme.
From her family, she is the only member of this medical scheme.
Barbie Bellhop paid ‘qualifying medical expenses’ of R30 655 during the 2022 year of assessment.
She was reimbursed by the medical scheme that she is a member of R15 130 of the medical
expenses that she had paid.
Barbie Bellhop’s taxable income for the 2022 year of assessment is R236 200.
You are required to determine Barbie Bellhop’s normal tax liability for the 2022 year of
assessment.
REBATES 233
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.
11.5 (40 minutes)

This question tests the provisions of sections 5, 6, 6A and 18. It tests the medical scheme fees tax
credit rebate and the additional medical expenses tax credit rebate.
Tom O’Shanter, Montgomery Mantle, Helmet Chapel, Gibson Bollinger and Fedora Fontage are all
residents of the Republic. They are all under the age of 65 years. They are all members of a medical
scheme. No member of a family is a ‘person with a disability’ as envisaged by section 6B(3)(b) and
as ‘defined’ in section 6B(1).
Details of their earnings, medical scheme contributions and membership, and medical expenses
follow:
Tom Montgomery Helmet Gibson Fedora
O’Shanter Mantle Chapel Bollinger Fontage
Cash salary 200 000 222 160 238 000 250 000 262 000
Employer’s contribution to the
medical scheme 18 000 21 840 21 600 18 000 –
Employee’s contribution to the
medical scheme – 10 920 21 600 36 000 66 000
Number of members of the
medical scheme 1 2 3 4 5
‘Qualifying medical expenses’
paid and not reimbursed by the
medical scheme 16 686 20 592 30 474 31 748 31 526
The above taxpayers have no other earnings. And they do not enjoy any exemptions from normal
tax. No amount is deductible in the determination of their taxable incomes.
You are required to determine for each member of the medical scheme as detailed above, his
• section 6A medical scheme fees tax credit rebate, and
• section 6B additional medical expenses tax credit rebate,
that he may deduct from his normal tax payable in the determination of his normal tax liability.
11.6 (40 minutes)

This question tests the provisions of section 6B.
Basher Beret
Basher Beret, a retired businessman, was 55 years old on the last day of the 2022 year of
assessment. When he found that he had difficulty in reading, he visited an ophthalmologist who
advised him of the necessity to undergo a minor operation to his eyes, and of the need to wear
spectacles.
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
11.7 (15 minutes)

This question tests the provisions of section 6B, the so-called additional medical expenses tax
credit rebate.
Barr Capp
Barr Capp, a blind person, aged 56 years, incurred and paid expenditure to R11 520 on keeping a
guide dog. He is a ‘person with a disability’ as envisaged by section 6B(3)(b) and as ‘defined’ in
section 6B(1) of the Income Tax Act.
A pension of R18 000 a month has accrued to Barr Capp throughout the 2022 year of assessment.
Barr Capp’s only other receipt or accrual is local interest from an investment. It is not a ‘tax free
investment’ as defined in section 12T(1). Local interest of R25 800 accrued to him during the 2022
year of assessment.
Barr Capp incurred and paid ‘qualifying medical expenses’ of R12 480 during the 2022 year of
assessment. At 28 February 2022 he still owed R300 for dental expenses that he had incurred
during January 2022.
You are required to determine Barr Capp’s 2022 normal tax liability.
Gus Peak
Gus Peak, a 59-year-old bachelor, is in poor health. He suffers from a physical disability as referred
to in section 6B(3)(b) of the Income Tax Act. It is a ‘disability’ as ‘defined’ in section 6B(1).
Due to Gus Peak’s physical disability he paid the following expenses:
• ‘Revenue’ expenses of R10 800.
• ‘Capital’ expenses of R13 600.
Gus Peak also paid a further R2 600 on medical expenses unrelated to his physical disability but
that are expenses that satisfy the provisions of the definition of ‘qualifying medical expenses’ as set
out in section 6B(1).
Details of Gus Peak’s earnings and expenses for the 2022 year of assessment follow:
• His gross income amounts to R365 500.
• His exempt income is R23 800.
• His deductions amount to R3 600.
You are required to determine Gus Peak’s 2022 normal tax liability.
11.8 (15 minutes)

This question tests the provisions of section 6B, the so-called additional medical expenses tax
credit rebate.
The three Bates brothers, Monty, Cristy and Trilby enjoy dressing up in formal clothes. They
always wear hats.
• Monty Bates attained the age of 65 years during the 2022 year of assessment.
• Cristy Bates attained the age of 63 years during the 2022 year of assessment.
• Trilby Bates attained the age of 61 years during the 2022 year of assessment.
Cristy Bates is a ‘person with a disability’ as envisaged in section 6B(3)(b) and as ‘defined’ in
section 6B(1) of the Income Tax Act.
The three Bates brothers have never worked. Their father was a wealthy man and they each enjoy
an annuity from his testamentary trust. Their taxable incomes comprise the annuity and the taxable
portion of the returns from their various investments.
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.
11.9 (10 minutes)

This question tests the normal tax model including sections 5, 6, 10(1)(k), 10(1)(i) and 12T. It tests
gross income, exempt income, income and taxable income. It also tests the normal tax payable,
rebates and the normal tax liability for a broken period of assessment.
Annie Hall was born on 14 May 2021.
Annie Hall has a vested right to the receipts and accruals of a testamentary trust set up for her
benefit by her late grandfather.
For the 293-day period from 14 May 2021 to 28 February 2022, the following amounts accrued to
Annie Hall from her late grandfather’s trust:
• Local interest of R2 500 from a ‘tax free investment’.
• And net rentals of R120 000.
Annie Hall had no other receipts or accruals in the 2022 year of assessment.
You are required to determine Annie Hall’s normal tax liability.
11.10 (10 minutes)

This question tests the provisions of sections 5, 6 and 6quat. It tests the rebate available to a
resident for a non-refundable tax paid to a foreign country.
Abraham Yarmulke is a resident of the Republic. He is 45 years old.
Abraham Yarmulke’s taxable income for the 2022 year of assessment is R1 756 600. It is made up
of
• R1 656 600 from South African sources, and
• the equivalent of R100 000 from an off-shore source.
Abraham Yarmulke paid a non-refundable foreign tax the equivalent of R25 000 to a foreign
government on his off-shore taxable income the equivalent of R100 000.
You are required to determine Abraham Yarmulke’s South African normal tax liability.
11.11 (30 minutes)

This question tests the normal tax liability determination including a section 6quat rebate. It also
tests the provisions of sections 5, 6, 10(1)(i) and section 10B. It tests a normal tax liability
determination that includes a rebate for foreign taxes paid.
Eugenie Balaclava is a resident of the Republic. She is 44 years old.
Eugenie Balaclava owns 5% of the equity shares of Handmade Knitted Headgear Limited, a foreign
REBATES 237
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).
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.
11.12 (15 minutes)

This question tests the provisions of sections 5, 6 and 6quat. It tests the rebate available to a
resident for non-refundable taxes paid to a foreign country. In particular it tests the ‘aggregate’
limit required by section 6quat(1B).
Paja Panama is a resident of the Republic. He is 37 years old.
Paja Panama’s taxable income for the 2022 year of assessment is R500 000. It is made up of
• R400 000 from South African sources, and
• the equivalent of R100 000 from off-shore sources.
Paja Panama’s off-shore sourced equivalent of R100 000 is made up of a taxable income the
equivalent of
• R70 000 from Off Shore Country 1, and
• R30 000 from Off Shore Country 2.
Paja Panama paid non-refundable taxes to
• Off Shore Country 1 the equivalent of R28 000, and
• Off Shore Country 2 the equivalent of R3 000.
You are required to determine Paja Panama’s South African normal tax liability.
11.13 (10 minutes)

This question tests the provisions of sections 5, 6, 6quat and 9D. It tests the rebate available to a
resident for non-refundable taxes paid to a foreign country. It also tests the rebate available to a
resident member of a controlled foreign company that has paid a tax to a foreign country.
Charlotte Corday is a resident of the Republic. She is 33 years old.
For the 2022 year of assessment Charlotte Corday’s South African taxable income was R400 000.
This R400 000 is all from a South African source. It is before taking into account the provisions of
section 9D.
Charlotte Corday holds 25% of the equity shares of Cardinal Investments Plc, a controlled foreign
company. For its foreign tax year that falls within the 2022 year of assessment, it had a net income
of the equivalent of R160 000. It paid non-refundable taxes to the country in which it is resident the
equivalent of R32 000, on its net income the equivalent of R160 000.
You are required to determine the normal tax liability of Charlotte Corday.
11.14 (30 minutes)

This question tests the provisions of sections 5, 6 and 6quat. It tests the rebates available to a
resident who has paid tax to a foreign country on both foreign- and locally-sourced income.
Wiseman Mortar, aged 56 years, is a resident of the Republic. He carries on business in South
Africa, in the Limpopo region. He has a non-resident client in Botswana, namely, Lobatse
Cap & Helmet Manufacturers (Pty) Limited.
Details of Lobatse Cap & Helmet Manufacturers (Pty) Limited’s relevant financial transactions are
e-mailed to Wiseman Mortar in South Africa. From these e-mails, he then produces monthly
reports for it.
Included in Wiseman Mortar’s 2022 gross income is R125 000 from Lobatse Cap & Helmet
Manufacturers (Pty) Limited. He has determined that of his R480 400 taxable income for the 2022
year of assessment, R90 000 was a result of the R125 000 gross income he earned from Lobatse
Cap & Helmet Manufacturers (Pty) Limited.
Botswana has deducted a non-refundable withholding tax the equivalent of R25 000 (20% of
R125 000) from the management fee that Wiseman Mortar charged Lobatse Cap & Helmet
Manufacturers (Pty) Limited for the services that he rendered in South Africa to it.
Lobatse Cap & Helmet Manufacturers (Pty) Limited is a foreign company. He holds 7,5% of its
equity. The remaining 92,5% of its equity is held by non-residents.
During the 2022 year of assessment, Wiseman Mortar received a net foreign dividend the
equivalent of R27 000 from Lobatse Cap & Helmet Manufacturers (Pty) Limited. Botswana has
deducted a non-refundable withholding tax the equivalent of R6 750 (20% of R33 750) from this
foreign dividend. Since he was unsure of the local normal tax consequences of this foreign
dividend, he included the R27 000 that he received in his R480 400 taxable income for the 2022
year of assessment. This foreign dividend is not exempt from normal tax under section 10B(2).
Also included in Wiseman Mortar’s R480 400 taxable income is R40 000 for services he rendered
outside South Africa. This R40 000 taxable income results from a gross fee of R60 000 less
R20 000 in expenses incurred in producing it. Non-refundable foreign tax of R9 000 has been
levied on this non-South African-sourced R40 000 taxable income.
Yet another inclusion in Wiseman Mortar’s R480 400 taxable income is R10 000 being the total
amount he received from his investments in unit trusts. This R10 000 is made up as follows:
• A ‘qualifying distribution’ from a real estate investment trust of R4 000 financed by local rentals
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). This distribution was made up of local dividends of R5 700 and local interest of
R300.
Wiseman Mortar also earned interest of R18 800. But he did not include this interest of R18 800 in
his R480 400 taxable income for the 2022 year of assessment, since it was less than the maximum
exempt from normal tax amount of not otherwise exempt from normal tax local interest.
You are required to determine Wiseman Mortar’s normal tax liability for the 2022 year of
assessment. Ignore the possible implications of an article in the South African-Botswana double tax
agreement.
REBATES 239
11.15 (20 minutes)

This question tests the provisions of sections 5, 6 and 6quat. It tests the rebates available to a
resident who has paid tax to a foreign country on both foreign- and locally-sourced income.
Darren Homburg, aged 48 years, and Madison Boater, aged 41 years, are civil engineers. From
1 March 2021 they carried on business in partnership sharing profits and losses in the ratio of
• Darren Homburg 60%, and
• Madison Boater 40%.
For the 2022 year of assessment their partnership made a taxable profit of R3 600 000. This taxable
profit is before the deduction of the R720 000 withholding tax on management fees (see below).
Included in the partnership’s total receipts and accruals is R2 400 000 in management fees for a
project that is taking place in central Africa. Some of the management work on this contract is done
on site (in central Africa) while the rest of it is done in the partnership’s offices in South Africa.
The relevant amounts for the 2022 year of assessment are as follows:
• For work done on site: R800 000 (one-third), and
• for work done in South Africa: R1 600 000 (two-thirds).
The central African country’s government has deducted a non-refundable R720 000 (30% of the
gross R2 400 000) by way of a withholding tax on this management fee.
Darren Homburg and Madison Boater’s have determined that the R2 400 000 management fee
included in the partnership’s gross income has resulted in a R600 000 inclusion in its taxable
income (in other words, expenditure incurred in producing this management fee of R2 400 000
amounted to R1 800 000).
Neither Darren Homburg, nor Madison Boater, has receipts or accruals from sources other than
their partnership.
Up to 28 February 2021, Madison Boater had been a sole trader. Although she is an excellent civil
engineer, she is a bad businesswoman and at 28 February 2021 she had an assessed loss of
R970 000.
You are required to determine Darren Homburg’s and Madison Boater’s normal tax liabilities for
11.16 (15 minutes)

This question tests the provisions of sections 6quat, 10(1)(i), 10B and 23( f ).
Toquilla 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
• Sombrero Straw, a resident of the Republic, to the extent of 30%, and
On 31 December 2021 Toquilla Plc distributed the equivalent of R562 500 as a dividend. As a
result of this distribution, a foreign dividend the equivalent of R168 750 accrued to Sombrero
Straw (30% of R562 500). This foreign dividend is not exempt from normal tax in South Africa
under section 10B(2).
Since Sombrero Straw is not a resident of the country that Toquilla Plc is a resident of, this country
levied a non-residents’ shareholders tax of 6% on the foreign dividend that accrued to him. It is a
withholding tax on a dividend. As a result, a net foreign dividend the equivalent of R158 625
(R168 750 – R10 125) was earned by him from his shareholding in Toquilla Plc.
Sombrero Straw’s taxable income excluding the foreign dividend from Toquilla Plc is R807 200.
You are required to determine the after-tax return of Sombrero Straw’s foreign dividend from
Toquilla Plc.
11.17 (15 minutes)

This question tests the provisions of sections 64F and 64L. It also tests section 64E. It tests the
rebate available to a non-resident who has paid dividends tax in South Africa.
Fairbanks Plc, a non-resident, holds 20% of the equity shares in Ascot (Pty) Limited, a resident of
the Republic. These shares were ceded to it by Derby Plc, another non-resident.
On 30 June 2021 Ascot (Pty) Limited declared a dividend of R600 000. Of this R600 000dividend,
R120 000 (20% of R600 000) accrued to Fairbanks Plc. Dividends tax of R12 000 (10% of
R120 000) was withheld by Ascot (Pty) Limited. (The double tax agreement between South Africa
and Fairbanks Plc’s country of residence confirms that the two countries have agreed to a
maximum rate of 10% to be levied on dividend receipts and accruals.) A net dividend of R108 000
(R120 000 – R12 000) was then distributed to Fairbanks Plc.
On 31 December 2021 Ascot (Pty) Limited declared a dividend of R900 000. Of this R900 000
dividend, R180 000 (20% of R900 000) accrued to Fairbanks Plc. Dividends tax of R18 000 (10%
of R180 000) was withheld by Ascot (Pty) Limited. A net dividend of R162 000 (R180 000 –
R18 000) was then distributed to Fairbanks Plc.
Fairbanks Plc had no other receipts or accruals from a South African source.
You are required to determine Fairbanks Plc’s South African normal tax and dividends tax
liabilities for its 2022 year of assessment. Its financial year ends on the last day of February.
11.18 (30 minutes)

This question tests the normal tax liability determination including a section 6quat rebate. It also
tests the provisions of sections 5, 6, 6B and 10(1)(i). It tests a normal tax liability determination
that includes a rebate for foreign taxes paid.
Gable and Juliet Pillbox are married in community of property. They are both residents of the
Republic. They are both 40 years old.
Juliet Pillbox owns 5% of the equity shares of White House Hats Limited, a foreign company.
During the 2022 year of assessment White House Hats Limited declared a dividend the equivalent
of R22 500 (amount before the deduction of the relevant withholding tax). The withholding tax
payable in the foreign country on this foreign dividend declared to her was the equivalent of
R2 250. This foreign dividend is not exempt from normal tax under the provisions of
section 10B(2).
Juliet Pillbox earned a salary of R210 000 from which R23 202 employees’ tax was deducted.
In addition, Gable and Juliet Pillbox earned local interest of R59 600 on an investment in a local
interest-bearing security. It is not a ‘tax free investment’.
You are required to determine the amount
1. due to the fiscus, or from the fiscus, for Juliet Pillbox’s normal tax liability for the 2022 year of
assessment, and
2. that she can carry forward to the 2023 year of assessment as a foreign tax credit.
CHAPTER 12
SOLE TRADERS AND PARTNERSHIPS
12.1 (40 minutes)

This question tests the determination of taxable income using the normal tax model. It also tests the
definition of ‘gross income’ and sections 6B, 7(3), 10(1)(i), 10(1)(k), 10B, 11(a), 11(g), 11F, 12T,
18A and 25B(2).
On 1 March 2020 Sidney Sirius, aged 60 years, and a widow, named, Penny Farthing, aged
45 years were married. She has two unmarried children, Jake Farthing and Janine Farthing.
• Jake Farthing, aged 22 years is a full-time university student.
• Janine Farthing, aged 17 years, is at school.
They are all residents of the Republic.
Penny Sirius has an interior decorating business. She operates it from leased premises with the part-
time assistance of Lisa Moaner, an art student. Her gross income from this business was R764 000
for the 2022 year of assessment. Her expenditure was as follows:
Cost of goods sold 596 300
Costs relating to her leased premises (see below) 155 400
Salary paid to Lisa Moaner 21 000
Salary paid to Janine Farthing for helping on a part-time basis 3 000
Other expenses deductible in the determination of her taxable income 6 000
Penny Sirius’s business premises were leased by her from Vincent Monet for five years from 1 July
2021 at a monthly rental of R3 000. A lease premium of R27 000 was paid by her on the signing of
the lease. In addition, he obliged her to effect improvements to his premises to the value of
R104 400. These were completed on 31 August 2021 at the agreed upon cost of R104 400. The
premises were used by her for trade purposes from 1 July 2021.
Further details of the family’s receipts and accruals and expenditure for the 2022 year of
assessment are as follows:
Salary earned by Sidney Sirius 150 000
Local interest accrued on investments that are not ‘tax free investments’ – Sidney Sirius 25 000
Award from an endowment policy taken out by Sidney Sirius many years ago. It
matured when he attained the age of 60 years 500 000
Dividends and foreign dividends accrued to
• Sidney Sirius on South African public company shares 7 500
• Penny Sirius on Australian company shares that she had inherited from Victoria
Ballarat, her late mother, who had been ordinarily resident in Australia her entire
life. These foreign dividends are not exempt from normal tax under section 10B(2). 3 825
Local interest accrued on non-tax free investments made by Penny Sirius
• in a ‘tax free investment’ in the name of Jake Farthing 375
• in a ‘tax free investment’ in the name of Janine Farthing 375
• in her own name 22 000
Commission earned by Penny Sirius for the sale of recipe books, that she pursues in her
spare time 2 100
Distributions from a trust set up by Bob Farthing, Penny Sirius’s late husband, and
payable at the discretion of its trustee out of local dividends earned by it 6 000
Salary earned by Jake Farthing from vacation employment – two months’ work at
R4 000 a month on a part-time basis 8 000
241
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.
12.2 (50 minutes)

sections 8(4)(a), 10(1)(k), 11(a), 11(c), 11(e), 11(i), 11(o), 11F, 12H, 22(1), 22(2), 22(8), 23( f ),
and 23(o).
Redvers Sparks, aged 50 years, is a resident of the Republic. He is a sole trader carrying on the
business of selling and repairing electrical goods and fittings at his appliance shop. He trades as
‘Red Sparks Appliance Shop’. His trading account and statement of profit or loss and other
comprehensive income for the 2022 year of assessment are as follows:
Trading Account
Opening stock 31 500 Sales and fees 2 267 230
Purchases 549 700 Closing stock 36 300
Gross profit – carried down 1 722 330
2 303 530 2 303 530
Statement of Profit or Loss and Other Comprehensive Income
Bad debts (note 1) 1 200 Gross profit – brought down 1 722 330
Bribe (note 2) 5 000 Discounts received 1 470
Depreciation – fixtures and fittings Profit on sale of cash register
(note 3) 5 240 (note 11) 900
Donations to street children 300 Local dividends (note 5) 6 300
Fine (note 4) 750
Interest incurred (note 5) 900
Legal expenses (note 6) 1 500
Loss on sale of display cabinet (note 7) 360
Printing and stationery 1 200
Rentals – shop premises 3 600
Rentals – air conditioning unit 810
Salary – Redvers Sparks 288 000
Tea expenses 450
Telephone 1 350
Travelling expenses (note 9) 32 100
Salaries (note 10) 787 090
Net income for the year 601 150
1 731 000 1 731 000
Notes
1. Included in Redvers Sparks’s bad debts of R1 200 (see above) is R300 that he lent to
Tandamali Kakhula, a former employee of his, who has since disappeared.
SOLE TRADERS AND PARTNERSHIPS 243
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
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.
12.3 (40 minutes)

definition of ‘gross income’ and sections 10(1)(i), 11(a), 11(d), 11(e), 11(i) and 22(1).
During the 2022 year of assessment Juba Mabele worked as a driver for Beer Bottle Store (Pty)
Limited from 1 March 2021 to 31 January 2022, the date of his resignation. Throughout this period
he was paid a salary of R18 000 a month. He is a resident of the Republic.
On 1 March 2021 Juba Mabele had commenced a part-time business. He carries on this business in
his own name. It is a shebeen (an unlicensed liquor sales outlet). He would either buy or pinch
beers from Beer Bottle Store (Pty) Limited, deliver them to a nearby squatter-camp to a relative of
his (Uncle Twala), who would then sell them (on his behalf) to the residents of the squatter-camp.
Beer was sold to Juba Mabele at 150% of its cost price.

Juba Mabele had entered into an agreement with the manager of Beer Bottle Store (Pty) Limited
whereby he would ‘hire’ its delivery vehicle during his lunch hour each day. For a payment
determined with reference to the number of kilometres he travelled in it, he could use it to transport
his beer purchases (or thefts) to the squatter-camp.
Juba Mabele’s receipts or accruals from this business during the 2022 year of assessment were as
follows:
Cash received from beer sales 182 080
Amounts owing at 28 February 2022 for beers sold
– Regarded as being recoverable 500
– Regarded as being irrecoverable 1 000
Customers change ‘stolen’ by Uncle Twala (and then donated to Juba Mabele) 600
Trading stock on hand at 28 February 2022
– Purchased beers (at cost) 240
– Stolen beers (at cost if they had been purchased) 120
Rentals earned for hiring out compact disks (CDs) 510
Juba Mabele’s expenses actually incurred during the 2022 year of assessment were as follows:
Cost of beers 112 600
Cost of setting up the business. This included the cost of glasses, a cooler bag, a
calculator, a CD player and CDs. Loud music is played at the shebeen. 900
Cost of replacing certain of the above items that had been broken by his customers 150
Replacement batteries for the CD player 120
Salary paid to Uncle Twala 26 400
Delivery vehicle hire fees paid to Beer Bottle Store (Pty) Limited 5 500
Cost of truck (see below) 72 000
Running expenses of this truck 6 200
During the 2022 year of assessment, Juba Mabele stole the following items from Beer Bottle Store
(Pty) Limited:
• Beers – the price they would have cost had they been purchased was R8 400.
• A deep freeze (gas power) – with a market value of R6 000 on 31 December 2021 – the day it
was stolen by him. (When it was purchased by Beer Bottle Store (Pty) Limited it had originally
cost R10 000 and it had a tax value of R4 000 on the day it was stolen.) He used this deep freeze
in his business with immediate effect.
From the records that Juba Mabele has kept, he has determined that beer that would have sold for
R2 040 has been stolen from his shebeen during the 2022 year of assessment.
During January 2022 the manager of Beer Bottle Store (Pty) Limited suspected that Juba Mabele
may have been involved in the theft of the deep freeze and in the beer stock shortages. When he
was questioned, he immediately resigned and left its employment on 31 January 2022.
The Commissioner has agreed to a wear-and-tear or depreciation capital allowance over a five-year
write-off period for the assets used by Juba Mabele in his shebeen business. But he is not prepared
to grant the wear-and-tear or depreciation capital allowance on assets if their replacement cost is
deductible in the determination of Juba Mabele’s taxable income.
On 1 October 2021 Juba Mabele attained the age of 55 years. And as a result, a lump sum of
R225 000 being an award from an endowment insurance policy accrued to him (and was received
by him). He deposited this R225 000 lump sum into his savings account. After his resignation, he
withdrew R72 000 to pay for a second-hand truck that he purchased and brought into use on
1 February 2022. The Commissioner has agreed that he uses this truck for business purposes to the
extent of 60%.
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.
12.4 (60 minutes)

This question tests the determination of a normal tax liability. It tests the rates of tax applicable to
different entities. It also tests the definition of ‘gross income’, sections 5, 6, 10(1)(i), 10(1)(k),
11(a), 11( f ), 11(g), 11(gB), 11F, 12C, 13(1), 23H, 26A and 64E and paragraphs 3, 5, 6, 8 and 10
of the Eighth Schedule.
Bessie Thimble, a widow aged 53 years, and a resident of the Republic, started making patch-work
quilts as a hobby five years ago.
Recent changes in fashion have resulted in there being a huge demand for Bessie Thimble’s patch-
work quilts. Resulting from this huge demand, she now produces her quilts on a commercial basis.
Since the demand for her product keeps on and on increasing, she was forced to expand her
manufacturing activities during the 2022 year of assessment.
On 1 March 2021 Bessie Thimble entered into an agreement whereby she would lease from
Bernina Varmax a property, being unimproved industrial land, for a period of 12 years. Under this
lease agreement, she was obliged to erect a factory on it to the value of R3 150 000. The erection of
the factory commenced on 1 March 2021. It was completed on 30 June 2021 at a total cost of
R4 200 000. Production commenced in it on 1 September 2021.
The move to the new factory resulted in Bessie Thimble incurring the following expenditure:
• A lease premium of R270 000 was paid by her to 1 March 2021 Bessie Thimble entered into an
agreement whereby she would lease from Bernina Varmax on the signing of the lease agreement
on 1 March 2021.
• A rental of R7 500 was paid by her to Bernina Varmax each month by her commencing on
1 March 2021.
• Additional new machinery to assist with the increase in production was purchased by her for
R120 750 (cash cost of R105 000 plus 15% value-added tax of R15 750). At the end of this
value-added tax period, Bessie Thimble deducted the input tax of R15 750. This machinery was
brought into use by her in a process of manufacture on 1 November 2021.
• A premium of R21 000 on a new insurance policy insuring the factory buildings and the new
machinery was paid by her. This premium covers the 12-month period from 1 November 2021
to 31 October 2022.
• On 1 September 2021 she paid R50 000 to register a 20-year patent over a new type of
bedspread that she has designed.
• The cost of moving her existing business into the new factory was R55 000. This cost is made
up of
– R45 000 for transporting and re-installing her machinery, and
– R10 000 for moving her stock of raw materials and finished goods.
Bessie Thimble’s move was completed in time for her to commence production in the new factory
on 1 September 2021. All the machinery that was moved qualifies for the section 12C capital
allowance, and had been 40% written off.
Bessie Thimble made a net income of R1 238 000 before taking into account any of the expenditure
detailed above. In addition, she earned local interest of R26 200 from interest-bearing securities.
None of these interest-bearing securities is a ‘tax free investment’.
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.
12.5 (60 minutes)

This question tests the determination of taxable income using the normal tax model. It tests the
definition of ‘gross income’ and sections 10(1)(i), 10(1)(k), 10A, 11(a), 11(c), 11(e), 11( f ), 11(g),
11(i), 11(m), 11F, 23(g) and 26A. It also tests paragraphs 3, 5, 6, 8 and 10 of the Eighth Schedule.
Miriam Moosa, aged 55 years, has for a number of years run a take-away food shop at Clairwood,
Durban, called ‘The Golden Samoosa’.
Miriam Moosa’s husband, Mahomed Moosa, who attained the age of 58 years on 1 December
2021, had retired on 31 December 2020 from Triangle Industries Limited after serving as its
storeman for 40 years. When he retired he was awarded a lump-sum gratuity of R42 000. He used
R24 000 of this lump-sum gratuity to purchase an annuity from an insurer. The annuity provided
for R302,66 a month to be paid to him for the rest of his life. The annuity contract was concluded
during January 2021. The first monthly amount accrued to him on 31 January 2021.
Since the commencement of the 2022 year of assessment (1 March 2021) Mahomed Moosa has
been employed by Miriam Moosa to grow dhania (coriander), mint and green chillies, some of the
ingredients used by her in her samoosas (see below).
They are both residents of the Republic.
Miriam Moosa, who trades from her own premises, expanded her take-away business so as to
include the sale of samoosa ingredients to her customers. To do this, it was necessary for her to take
over the premises of the neighbouring shop. She entered into a 12-year lease agreement with Ghee
Maida, the owner of the neighbouring shop. The lease agreement provided for the following:
• A premium of R57 600 payable by her to him on 1 July 2021, the commencement date of the
lease.
• A rental of R4 000 a month (see below) to be paid by her to him for the first year, and after that
increasing by R500 a month in each subsequent year.
• Improvements of R141 000 to be effected by her to his property.
The improvements involved incorporating the two shops into one. They were completed on
30 September 2021 at a cost of R171 000. The new ‘green grocery’ section of Miriam Moosa’s
shop opened to the public on 1 October 2021. This was the first time that the leased property was
used by her for trade purposes.
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
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
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
net profit before tax of R69 462 (as reflected on her statement of profit or loss and other
comprehensive income (see above)).)
12.6 (20 minutes)

This question tests certain issues relating to the taxation of partners, including the definition of
‘gross income’, sections 8(4)(a), 11(a), 11(i), 23(g) and 24H.
Ascot, Tyrolean and Bonnet
Cuffley Ascot, Hunter Tyrolean and Moral Bonnet were in partnership sharing profits and losses
equally. On 28 February 2021 Moral Bonnet retired from the partnership. On 1 March 2021Tam
O’Shanter was then admitted as a junior partner. A new profit sharing ratio of Cuffley Ascot 40%,
Hunter Tyrolean 40%, and Tam O’Shanter 20% was agreed upon.
During the 2022 year of assessment, two debts ‘went bad’, namely,
• R3 000 owing by Bob Rasta, and
• R2 000 owing by Bella Cloche,
and were not recovered. Both debts arose from credit sales made by the partnership. Bob Rasta had
purchased goods during the 2021 year of assessment. Bella Cloche had purchased goods on
15 August 2021.
You are required to state what amount Moral Bonnet and each of the three partners in the ‘new’
partnership may deduct for these bad debts in the determination of their 2021 taxable incomes.
Tarboosh and Toque
Fez Tarboosh had been carrying on business as a sole trader for many years. Due to the expansion
of his business he entered into a partnership with Kris Toque on 1 March 2021. His entire business
was ‘transferred’ to their partnership on 1 March 2021.
The partnership agreement provided that Kris Toque would enjoy one-third of the net profits, or
would suffer one-third of the net losses, as determined after a salary of R540 000 had been paid to
him. Fez Tarboosh would enjoy two-thirds of the profits, or would suffer two-thirds of the losses.
The statement of profit or loss and other comprehensive income of the partnership for the year of
assessment ended 28 February 2022 included the following:
• Life assurance premiums of R21 600 paid – the policies had been taken out by the partnership
on the lives of the partners.
• A bad debt of R900 previously written off by Fez Tarboosh during the 2019 year of assessment
was recovered during the 2022 year of assessment.
• An amount of R2 100 owing to the partnership from a credit sale made during the 2021 year of
assessment proved to be irrecoverable and was written off as a bad debt.
• A salary of R540 000 was paid to Kris Toque. The partnership agreement expressly provides that
this salary is payable in consideration of services rendered. It does not provide that he would only
receive a salary if profits were made or that, if a loss was suffered, it would have to be repaid.
You are required to explain how each of the above items will be treated in the determination of
each partner’s taxable income.
12.7 (15 minutes)

‘gross income’, sections 8(4)(a), 11(a), 23(g) and 24H. It also tests the judgment from Sacks v
CIR (1946 AD 31, 13 SATC 343).
Casquette, West & Helmet
Denim Casquette, Fulani West and Pith Helmet were equal partners in a partnership operating
under the name Casquette, West & Helmet.
Denim Casquette sold his share in the partnership to Mitre Abbot with effect from 1 September
2021. Not to take stock at that stage, it was agreed that Mitre Abbot would be mentioned in the
partnership agreement only as from 1 March 2021, but that he will enjoy one half of Denim
Casquette’s share of the partnership’s profit for the year ended 28 February 2022. In turn, Mitre
Abbot agreed to make a cash payment of R200 000 to Denim Casquette on 1 October 2021, for his
profit entitlement. The partnership’s profit for the year ended 28 February 2022 was R660 000.
You are required to consider the normal tax implications of the above transaction.
12.8 (20 minutes)

‘gross income’, sections 11(a), 23(g) and 24H. It also tests the judgments from Sacks v CIR
(1946 AD 31, 13 SATC 343), CIR v Epstein (1954 (3) SA 689 (A), 19 SATC 221) and CIR v
Lever Bros & Unilever Ltd (1946 AD 441, 14 SATC 1).
Breton & Fedora
Fidel Breton, a resident of the Republic, earned R500 000 being his share of profits from a
partnership that he is a member of. His equal partner, Frank Fedora, is resident in Malawi. The
partnership is engaged in the supply of raw materials from Malawi to South Africa.
You are required to determine whether the R500 000 would be included in Fidel Breton’s South
African taxable income. And would Frank Fedora’s R500 000 share of the profits be included in his
South African taxable income?
Kippah Yarmulke
Kippah Yarmulke is a partner in a partnership that has a financial year end on the last day of the
calendar year (31 December).
You are required to state the date of accrual of Kippah Yarmulke’s share of the partnership profits.
12.9 (40 minutes)

This question tests the normal tax liability determination of partners. It also tests the definition of
‘gross income’, sections 5, 6, 8(4)(a), 10(1)(i), 10(1)(k), 11(a), 11(i), 11F, 23(g) and 26A and
Ian Handle and David Charge, two attorneys, are partners sharing profits and losses in the ratio of
60% to 40%. They are both residents of the Republic. An extract of their partnership’s 2022
statement of profit or loss and other comprehensive income for the year ended 28 February 2022
follows:
Net fees (note 2) 1 626 000

Capital profit on the sale of shares (note 3) 70 000
Bad debts recovered (note 4) 5 000
1 745 000
Less:
Partners salaries
– Ian 595 000
– David 572 500
Local interest on capital accounts
– Ian 4 500
– David 9 000
Insurance premiums paid (note 1) 15 750
Donation to charity 2 250 1 199 000
Partnership profit for the year 546 000
Ian Handle’s share 327 600
David Charge’s share 218 400
546 000
Notes
1. The insurance premium paid by the partnership is on its policy on the joint lives of its partners.
2. In the determination of the net fees from trading, R5 000 (R2 500 for each partner) was
deducted for entertainment expenditure. The actual amount incurred on entertainment was
R9 000. This expenditure was incurred directly in the production of the partnership’s income.
3. The capital profit made by the partnership of R70 000 on the sale of some shares held by it as
an investment equals its capital gain as determined under the Eighth Schedule to the Income
Tax Act.
4. During the 2022 year of assessment the partnership recovered R5 000 from Tom Singleton, a
client of theirs. In the 2021 year of assessment the partners had assisted him with his divorce
agreement and had charged him R6 000. He had paid only R1 000 of the amount due at the end
of the 2021 year of assessment when he informed them that he was in financial difficulties and
would probably be unable to settle his account. The partners, who were then sharing profits
and losses in the ratio Handle to Charge, 70% to 30%, had written off its R5 000 balance
outstanding as a bad debt.
5. Ian Handle is under the age of 65 years. Local interest of R39 900 accrued to him from his
investments. None of this local interest accrues to him from a ‘tax free investment’. He has an
assessed capital loss of R500 brought forward from the 2021 year of assessment.
6. David Charge, aged 40 years, is married and has two children, both single and under the age of
18 years. His wife, Denise Charge, aged 39 years, earned an annual salary of R360 000, from
which 8% was deducted, being her contribution to a recognised pension fund. They earned
R48 800 local interest on their joint-investment account. None of this local interest accrues to
them from a ‘tax free investment’. David Charge does not have an assessed capital loss to
bring forward from the 2021 year of assessment.
You are required to determine the 2022 normal tax liabilities of Ian Handle, David Charge and
Denise Charge.
12.10 (75 minutes)

This question tests the determination of taxable income of partners using the normal tax model. It
tests the definition of ‘gross income’ and sections 8(4)(a), 10(1)(i), 10(1)(k), 11(a), 11(c), 11(d),
11(e), 11( f ), 11(g), 11(i), 11(m), 11F, 13sex, 18A, 20A and 23(g).
Piet Tick (aged 29 years) and Arthur Bird (aged 28 years) carry on business as accountants and
auditors. They practise under the name ‘Tick & Bird Chartered Accountants’. They share profits
and losses equally. They are both residents of the Republic. Their bookkeeper has prepared the
following statement of profit or loss and other comprehensive income for their partnership for the
year ended 28 February 2022:
Gross profit 3 910 000
Bad debt recovered (note 1) 3 500
Dividends accrued (note 2) 4 500
Local interest accrued from a non ‘tax free investment’ 18 800
Commissions 2 250
3 939 050
Less expenditure
Annuities paid (note 3) 38 000
Computer purchased (note 5) 36 000
Computer-users course costs (note 6) 4 500
Computer programs purchased 10 000
Donation made (note 10) 35 000
Depreciation – office fittings at 10% (note 5) 4 500
Depreciation – boardroom furniture at 10% (note 5) 2 250
Goodwill paid (note 11) 30 000
Insurance paid (note 12) 36 500
Parking bay costs (note 8) 11 250
Premium paid (note 7) 30 000
Rental paid (note 7) 60 000
Retirement annuity fund contributions
– Piet Tick 15 000
– Arthur Bird 12 000
Salaries of employees 1 572 000
Shares purchased (note 2) 60 000
Other expenses deductible in the determination of taxable income 25 100
Stationery and printing 32 450
Taxation paid (provisional tax payments)
– Piet Tick 50 000
– Arthur Bird 37 500 2 114 050
Net profit 1 825 000
Net profit – Piet Tick 912 500
Net profit – Arthur Bird 912 500
1 825 000
Notes
1. The bad debt recovered by the partnership of R3 500 was recovered from a former debtor of
Piet Tick’s when he had been trading on his own, two years previously.
2. During the 2022 year of assessment the partnership invested surplus funds in 6 000 shares in
Glittering Gold Limited, a Republic registered listed company, at a cost of R10 a share. A
dividend of R4 500 accrued from these shares on 31 December 2021.
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.
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.
12.11 (45 minutes)

This question tests the determination of taxable income of a partner using the normal tax model. It
also tests the definition of ‘gross income’ and sections 10(1)(i), 10(1)(k), 11(e), 11( f ), 11(i), 11F,
18A, 23(b), 23( f ) and 23(g).
Dickie Hart had been practising as a specialist surgeon on his own for the past five years. On
1 March 2021 he admitted Ish Liver as an equal partner.
Ish Liver paid Dickie Hart R300 000 as goodwill for his half share of the partnership.
Dickie Hart owns the surgery that the partnership uses to carry on its trade in. To cope with the
additional patients it was necessary to expand this surgery. Dickie Hart entered into an agreement
with the partnership (Ish Liver and himself) whereby the partnership would effect additions to his
premises to the value of R420 000. The lease agreement was for 12 years. It provided for a
premium of R120 000 to be paid by the partnership to him and for a market-related monthly rental
of R8 000 to be paid by the partnership to him. It was entered into on 1 March 2021. The additions
were completed on 30 June 2021 at the agreed cost of R420 000. Trading on the premises
continued during the construction process.
Despite being the landlord and being a partner of the tenant, the Commissioner advised Dickie Hart
that he could enjoy an allowance under section 11(h).
The statement of profit or loss and other comprehensive income of the partnership for its year
ended 28 February 2022 was as follows:
Fees earned 2 832 000
Net dividends (note 1) 66 000
2 898 000
Less
Additions to surgery (see above) 420 000
Donation to university (note 3) 24 000
Entertainment (note 4) 13 600
Local interest incurred (note 1) 6 000
Insurance (note 5) 22 000
Lease of motor vehicles (note 6) 306 000
Premium (see above) 120 000
Rentals (see above) 96 000
Replacement of medical equipment (note 7) 6 600
Salaries of employees 222 000
Subscriptions to medical journals (note 8) 15 800
Travelling expenses (note 9) 54 000
Wear and tear or depreciation of medical books (note 10) 12 000 1 344 000
Net income for the year 1 554 000
Other relative partnership information is as follows:
Dickie Hart Ish Liver
Salaries 720 000 720 000
Local interest on capital 40 836 28 800
Drawings 288 000 240 000
Notes
1. The partnership invested surplus funds in local dividend-yielding shares. On 1 September 2021
R120 000 was borrowed at 10% to purchase more shares in listed gold mining companies.
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.
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.)
12.12 (75 minutes)

This question tests normal tax liability determinations. It tests the rates of tax applicable to various
entities. It tests the definition of ‘gross income’ and sections 8(4)(a), 10(1)(i), 10(1)(k), 11(a), 11(e),
11(g), 11(i), 11( j), 11(w), 13quin, 22(8), 23(a) and 23(g) and paragraph 2(k) and paragraph 12C(1) of
the Seventh Schedule.
Red Lamb and his wife, Mary Lamb, are equal partners running a chain of butchery shops in the
Durban area. He is 46 years old. She is 43 years old. They are both residents of the Republic. They
are both active in the running of their business. The profit and loss sharing ratio is in accordance
with the services they render to their partnership.
Their partnership has a taxable profit of R554 837 for the 2022 year of assessment (ended
28 February 2022). Yet the following transactions have not been taken into account in the
determination of its taxable profit of R554 837:
• On 1 December 2020 their partnership had entered into a 10-year lease agreement with Southern
Suburbs Shops (Pty) Limited for the lease of premises to be used as one of their butchery retail
outlets. Under this contract, the partnership had to incur expenditure of R95 000 to convert the
shop premises into a butchery. The erection of these improvements commenced on 1 January
2021. They were completed on 31 May 2021 at a cost of R106 500. The additional cost was
incurred for the housing of the large refrigeration plant. The housing of the large refrigeration
plant was not required under the lease agreement.
• During the 2018 year of assessment the partnership had erected a house for Chuck Shanks, their
chief blockman (a person employed in a butchery whose duties are the cutting, dressing and
preparation of meat, but may also include attending to customers). The cost of erecting the house
was R1 080 000. The land had been purchased by the partnership for R120 000. No capital
allowance was available on this house. It was occupied for the first time on 1 February 2020. On
31 January 2022 Chuck Shanks purchased the house (and land) from the partnership for
R1 485 000.
• The partnership insured the life of Chuck Shanks. Premiums paid by the partnership on a policy
on his life during the 2022 year of assessment were R4 900. They were included in Chuck
Shanks’s gross income as a taxable fringe benefit.
• The partnership also insured Mary Lamb’s life for R500 000. He did this since she does a lot of
travelling in the KwaZulu-Natal midlands, visiting farmers with a view to purchasing super-
grade animals for slaughter. Premiums paid by the partnership on this policy during the 2022
year of assessment were R8 000. This insurance policy is not limited to an event arising solely
out of and in the course of her employment.
• 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).
12.13 (60 minutes)

This question tests the taxation of partners including section 24H. It also tests the definition of
‘gross income’ and sections 10(1)(h), 10(1)(i), 11(a) and 23(g). This question is suitable for a
student studying towards a Masters (or similar degree) specialising in taxation.
During February 2021 George Hunt, then aged 55 years, emigrated from South Africa. He is no
longer a resident of the Republic. He does not have a ‘permanent establishment’ in South Africa.
Due to exchange control regulations he was forced to leave funds in South Africa.
Prior to George Hunt’s departure from South Africa he entered into a partnership with Alan Beagle
and Edward Foxon. They are both residents of the Republic. This partnership commenced trading
as an ‘English-style’ pub on 1 March 2021. The three partners made different contributions to this
partnership:
• George Hunt’s contribution to this partnership was its capital of R2 000 000.
• Alan Beagle’s contribution to this partnership was its trading premises.
• And Edward Foxon’s contribution to this partnership was his labour.
In effect George Hunt and Edward Foxon are ‘sleeping’ partners.
So as to accommodate the different contributions to the partnership, the partners agreed that
• George Hunt would be paid interest on his capital at a market-related interest rate,
• Alan Beagle would be paid rentals for the use of his premises at a market-related rental, and
• Edward Foxon would be paid a salary for the services he provided to the partnership at a market-
related salary.
After the above payments had been made a profit that remained or loss suffered would be shared
equally between the three partners.
The ‘English-style’ pub traded under the name of ‘The Fox and the Hound’. It made a ‘taxable’
profit of R600 000 after paying
• R240 000 interest to George Hunt on his capital,
• R240 000 rentals to Alan Beagle for the use of his premises, and
• R240 000 to Edward Foxon as his salary.
All three partners had no other receipts or accruals to be included in their South African gross
incomes other than those from ‘The Fox and the Hound’ partnership.
• Alan Beagle’s assessment for the 2022 year of assessment reflected a taxable income of
R440 000 made up of rentals of R240 000 and a partnership profit of R200 000.
• Edward Foxon’s assessment for the 2022 year of assessment reflected a taxable income of
R440 000 made up of a salary of R240 000 and a partnership profit of R200 000.
• George Hunt’s assessment for the 2022 year of assessment reflected a taxable income of
R200 000 made up entirely of a partnership profit of R200 000. His gross income also included
interest of R240 000 but it was then exempt from normal tax under the provisions of
section 10(1)(h).
As from 1 March 2021 George Hunt had become ordinarily resident in a country that does not have
a double tax agreement with South Africa. He did not visit South Africa during the 2022 year of
assessment. His interest of R240 000 from his capital account in the partnership accrued to him on
28 February 2022.
One month after receiving the above assessments, all three partners received revised assessments.
All three revised assessments reflected taxable incomes of R440 000 made up solely of partnership
profits. The partnership profit was R1 320 000 and it was split equally between the three partners.
George Hunt’s unsuccessfully objected to his assessment on the ground that his partnership profit of
R440 000 included interest of R240 000 that was exempt from normal tax under section 10(1)(h).
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.
12.14 (45 minutes)

This question tests the taxation of partners including section 24H. It also tests the definition of
‘gross income’ and sections 6B, 10(1)(i), 11(a), 11A, 11F, 20, 23(g), 25BA and 25BB.
Dolly Varden and her mother, Blanche Counterpane, trade in partnership sharing profits and losses
in the ratio
• Dolly Varden to the extent of 90%, and
• Blanche Counterpane to the extent of 10%.
Their partnership is involved in the manufacture and selling of bedroom furniture and accessories. It
moved to new premises during its 2022 year of assessment (that ended on 28 February 2022) since its
previous premises had become too small for its operations. It trades under the name ‘Sweetdreams’.
Sweetdreams made a profit for its 2022 year of assessment of R556 700 before taking into account
the following:
• On 1 March 2021 Sweetdreams entered into a lease agreement with Barnaby Rudge, whereby it
would lease an industrial site from him for 20 years. The agreement provided for
– an initial premium of R90 000 to be paid by it to him on the commencement of the lease,
which was signed on 1 March 2021,
– a monthly rental of R3 000 to be paid by it to him, to be increased by R200 a month after
every completed year of the lease, and
– a clause stating that it was obliged to erect a factory on the leased site at a cost of
R3 480 000.
The erection of the factory commenced on 1 March 2021. It was completed at a cost of
R3 770 000 on 31 October 2021. Production in it commenced on 1 November 2021.
• On a portion of the leased property was a dilapidated house. This house was demolished and the
area was converted into parking bays for its customers. Sweetdreams’s cost of demolishing the
house was R12 600.
• A machine that manufactured single beds was sold by Sweetdreams since there was no demand
for them. This machine, which was out of date, was sold to a scrap-metal dealer for R200. Its tax
value at the date of sale was R1 600.
• Paige Steele, a teller, employed by Sweetdreams was ‘caught with her fingers in the till’
(pinching money) and was ‘encouraged’ to resign. The auditors established that R6 000 was
missing from the takings for the month. No recovery has yet been made.
• Dickie Charles, a salesman employed by Sweetdreams had borrowed R9 000 interest free from
it. After repaying R4 000, he vanished and cannot be traced. A firm of attorneys was engaged to
recover the balance of his loan. Although it had not recovered any portion of the R5 000 still
owing to it by him, it billed Sweetdreams R1 600 for costs that it had incurred to date.
• On 1 December 2021, Reynold Lotus, the driver of Sweetdreams’s delivery van, ran down Olele
Umphuphi. a customer when delivering goods. Under the court order, it had to pay compensation
and damages of R7 200 to her. Able Barrister, an advocate, was paid R8 800 by it for his services
rendered to it relating to the above matter.
• 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 interest of R400.
unit trust) made up of
– 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:
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.
12.15 (40 minutes)

This question tests the normal tax model (the definitions of ‘gross income’, ‘income’ and ‘taxable
income’). It tests gross income, exemptions from normal tax and deductions in the determination of
taxable income including the general deduction formula (section 11(a) and section 23(g)) as they
apply to a partnership. It also tests sections 8(4), 10(1)(i), 11( f ), 11(g), 11(gB), 11(i), 12C, 13,
13ter, 22, 24H and 26A and paragraphs 10, 20 and 35 of the Eighth Schedule.
Jack Panama, aged 33 years, and his brother-in-law, Montague Bates, carry on business in
partnership, sharing profits and losses in the ratio
• 60% for Jack Panama, and
• 40% for Montague Bates.
They trade under the name ‘Sunhats’. Their hats protect the heads and faces of both men and
women from the sun.
In its 2022 year of assessment ‘Sunhats’ made a net profit before tax of R377 137 after taking into
account depreciation of R327 000 but before taking into account the following:
• ‘Sunhats’ leased premises became too small, so it entered into a 15-year lease agreement with a
taxpayer for a factory. In addition to a premium of R75 000 that was payable by it to him at the
commencement of the lease on 1 March 2021, it was required, under the lease agreement, to
effect improvements to the factory of R150 000. The leased premises were used by it from
1 March 2021. The erection of the improvements commenced on 1 March 2021. They were
completed on 31 May 2021 at a cost of R175 000. The improvements increased the industrial
capacity by 40%. They were brought into use by it in its process of manufacture on 1 June 2021.
• On 1 March 2021 a new imported machine was purchased by ‘Sunhats’ to be used by it to
manufacture a new type of hat. This machine cost the equivalent of R80 000. It was brought into
use on 1 April 2021. Import duties and landing charges paid on this new machine were R12 000.
And R3 000 was incurred on transporting the machine to the factory. It cost a further R7 000 to
be installed.
• On 31 May 2021 an electrical surge caused damage to a sewing machine owned and used by
‘Sunhats’. The damage was to an extent that it could no longer be used. It was sold for scrap for
R5 000. ‘Sunhats’ insurer compensated it R25 000 for the loss of this sewing machine. It had
originally cost R66 000. It had been purchased new and brought into use on 1 March 2020. It
qualified for the section 12C allowance at 40% in the first year, and at 20% in the next three
years. A new replacement sewing machine was purchased by ‘Sunhats’ on 1 August 2021 and
immediately brought into use. This replacement sewing machine cost R72 000.
• ‘Sunhats’s’ other machinery, being second-hand machinery, and used in its process of
manufacture, and brought into use by it on 1 March 2020, cost R500 000. These machines had
useful lives of six years.
• ‘Sunhats’ erected five small dwellings (places of residence) in a nearby township for five of its
employees. It had purchased the land on which they were erected in the previous year of
assessment for R150 000 (five plots at R30 000 each). They were completed on 30 September
2021 at a cost of R120 000 each. They were occupied by the employees and their families from
1 October 2021.
• On 1 August 2021 ‘Sunhats’ registered the trade mark ‘Sun-Protector’ for a 10-year period. The
total cost incurred by it in registering this trade mark was R6 000.
• Christy Bates is employed by ‘Sunhats’ as its full-time bookkeeper. (Christy Bates is the older
sister of Jack Panama and the wife of Montague Bates.) She had little accounting experience and
was unsure how to account for packing materials. She eventually ‘expensed’ the costs incurred
in purchasing packing materials but did not take into account, as trading stock, packing materials
on hand at the end of its financial year. The value of packing materials on hand was
– R15 000 on 28 February 2021, and

– R17 000 on 28 February 2022.
• In December 2021 Jack Panama and Montague Bates each took items out of ‘Sunhats’s’ trading
stock to give as Christmas gifts to friends and family. The trading stock taken by Jack Panama
had cost R10 000 (and had a market value of R13 000) and the trading stock taken by Montague
Bates had cost R5 000 (and had a market value of R6 500).
• When hats were required by ‘Sunhats’s’ employees (when proceeding on holidays or over
weekends), hats that cost R14 000 (market value of R19 500) were removed from its trading
stock and were awarded to them.
• ‘Sunhats’ donated hats that cost it R22 000 to manufacture (market value of R28 600) to a
‘qualifying’ public benefit organisation. These hats had been specifically manufactured to be
donated to it.
• A manufacturer in Australia is producing hats under the ‘Sun-Protector’ trade mark. ‘Sunhats’
earned royalties from this Australian manufacturer of R150 000 during its 2022 financial year.
• ‘Sunhats’ has surplus cash invested in an offshore bank (a ‘foreign’ bank). The equivalent of
R9 000 foreign interest accrued to it from this investment during its 2022 financial year.
Since Christy Bakes was experiencing financial problems, Jack Panama and Montague Bates
‘helped her’ out by causing ‘Sunhats’ to pay her a ‘higher than normal’ salary. She should have
been paid a salary of R6 000 a month for the services that she renders to it. But she was paid
R10 000 a month by it. She was employed by it for its entire 2022 financial year. Her salary of
R120 000 has been taken into account in the determination of its net profit before tax of R377 137.
You are required to determine Jack Panama’s normal tax liability for the 2022 year of assessment.
CHAPTER 13
RATING APPLICATION AND SEVERANCE BENEFITS
13.1 (15 minutes)

This question tests the normal tax liability determination using the section 5(10) rating formula. It
tests sections 5(1), 5(9), 5(10) and 6.
Rusty Orr is a resident of the Republic. He is a member of a mine ‘proto team’ on the Free State
goldfields. He earns a salary of R252 000 a year. During the 2022 of assessment he also earned
R48 400 as remuneration as a member of the ‘proto team’. He has no other receipts or accruals or
expenses. He is under the age of 65 years.
You are required to determine Rusty Orr’s 2022 normal tax liability.
13.2 (25 minutes)

tests sections 5, 5(9), 5(10), 6, 6B, 10(1)(i), 10(1)(k), 11F and 26A.
Bruce Coleman, aged 25 years, is a resident of the Republic. He is employed as a mining engineer
in Gauteng. He is also employed as a member of the regional mine ‘proto team’. His earnings for
the 2022 year of assessment were as follows:
Salary as mining engineer 360 000
Fees for services rendered as a member of the mine ‘proto team’ 20 000
Taxable capital gain from the sale of shares held by him as an investment 6 320
Bruce Coleman contributes 6% of the salary he earns from being a mining engineer to a recognised
pension fund.
Bruce Coleman’s local interest received by or accrued to by him is not from a ‘tax free investment’.
Bruce Coleman is not a member of a medical scheme. He paid ‘qualifying medical expenses’
during the 2022 year of assessment of R28 847.
You are required to determine Bruce Coleman’s 2022 normal tax liability.
13.3 (30 minutes)

also tests the definition of a ‘severance benefit’, sections 5, 6, 10(1)(k) and 20.
Ray Rice resigned from employment on 31 May 2021 so as to go farming on a farm that had been
bequeathed to him by his late grandfather. He is 24 years old. He is a resident of the Republic.
Ray Rice’s relevant details for the 2022 year of assessment were as follows:
Salary (three months) 22 500
Cash compensation on his resignation for leave not used 45 000
Local dividends on shares in South African registered companies also inherited by him
from his late grandfather 33 600
Loss from farming operations 25 000
Ray Rice paid no medical expenses nor did he pay any life insurance premiums during the 2022
year of assessment.
265
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.
13.4 (20 minutes)

This question tests the taxation of a severance benefit. It also tests sections 5, 6 and 20.
Charles and Camilla Queen are both aged 34 years. They are both residents of the Republic.
Charles Queen earned a salary by Kings Limited of R96 000 for the four-month period 1 March
2021 to 30 June 2021. He was retrenched by it on 30 June 2021. On his retrenchment, he was
awarded a lump sum of R100 000 by it.
Charles Queen then commenced a business venture, in his own name, for the remaining eight
months of the 2022 year of assessment. For this eight-month trading period, he suffered a loss of
R99 000. This loss is deductible in the determination of his taxable income.
Camilla Queen earned net rentals of R477 500 in the 2022 year of assessment. She inherited the
rent-producing property from her late father.
You are required to determine Charles Queen’s and Camilla Queen’s 2022 normal tax liabilities.
13.5 (30 minutes)

This question tests the taxation of lump-sum awards. It also tests sections 5, 6, 10(1)(i) and the
Second Schedule.
John-John Majors retired from employment on 28 February 2022 after 25½ years’ service at the
age of 65 years.
On the date of John-John Majors’ retirement he was awarded a lump sum of R600 000 by his
employer as compensation for the loss of his office.
On the same day, John-John Majors was also awarded R295 000 by his employer’s pension fund.
He had been a member of this fund throughout his 25½ years’ service.
John-John Majors’ salary for his last two working years was fixed at R432 000 a year. He
contributed 5% of his salary to the pension fund.
John-John Majors’ only other receipt or accrual for the year was local interest of R47 700. It is not
from a ‘tax free investment’.
You are required to
1. determine John-John Majors’ 2022 normal tax liability, and
2. redetermine his 2022 normal tax liability on the basis that he was awarded a lump sum of
R600 000 by his employer on 31 January 2022 as compensation for the impending loss of his
office on 28 February 2022 and that he was awarded R295 000 by his employer’s pension fund
on 28 February 2022.
RATING APPLICATION AND SEVERANCE BENEFITS 267
13.6 (30 minutes)

This question tests the normal tax liability determination when a taxable income includes a
‘severance benefit’ and is required to be determined using the section 5(10) rating formula. It also
tests sections 9(2)(i), 10(1)(gC) and 10A.
On 31 March 2021, Jay Abalan, a resident of the Republic, retired from Tamil, Nadu Inc, an
incorporated partnership, he had worked for since 1981. He had worked for it both in South Africa
and at its head office in India.
Jay Abalan’s employment movements between South Africa and Tamil, Nadu Inc’s head office had
been as follows:
• 1 April 1981 to 31 March 2002 in South Africa,
• 1 April 2002 to 31 March 2007 in India,
• 1 April 2007 to 31 March 2011 in South Africa,
• 1 April 2011 to 31 March 2016 in India, and
• 1 April 2016 to 31 March 2021 in South Africa.
On Jay Abalan’s retirement, his monthly salary of R15 000 was replaced by a monthly amount of
R9 000 payable to him for the rest of his life.
Jay Abalan was also awarded by Tamil, Nadu Inc a lump sum of R63 000 on his retirement. This
comprised a leave gratuity of R18 000 and a compensation award for the loss of his office of
R45 000.
On the day Jay Abalan attained the age of 57 years, that is, on 30 May 2021, he purchased an
annuity of R6 000 (payable at a rate of R500 a month) for life. The cash consideration paid by him
for this annuity was R54 516. His first monthly amount of R500 accrued to him on 31 May 2021,
and after that, R500 accrued to him on the last day of each month.
The balance of Jay Abalan’s lump sum was used by him to settle the mortgage bond loan balance
over his home.
Dadi Abalan, Jay Abalan’s father has been a mango farmer his entire life. Three years ago, George
Abalan, his brother, and himself were made partners of Dadi Abalan in this mango-farming
business. For the 2022 year of assessment his share of the farming profit was R190 000. He has
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. His ‘average’ farming profit for the 2022 year of
assessment is R40 000.
Jay Abalan has no other receipts or accruals.
You are required to determine Jay Abalan’s 2022 normal tax liability.
13.7 (50 minutes)

‘severance benefit’. It also tests the definition of ‘gross income’, sections 5, 6, 6B, 9(2)(i),
10(1)(gC), 10(1)(i), 10(1)(k), 10A and 11F, the Second Schedule and paragraphs 2(a) and 5 of the
Seventh Schedule.
During February 2021, Jill Page died. Her sole survivor was her husband, Jack Page, then aged
61 years. He is a resident of the Republic.
Early in April 2021, Jack Page, as beneficiary, received R300 000 from a life insurance policy on
Jill Page’s life. He then purchased an annuity of R45 000 (payable at a rate of R3 750 a month) for
life from an insurer. For this annuity he paid a cash consideration of R252 180.
Jack Page’s first monthly amount of R3 750 accrued to him on 30 April 2021, and after that,
R3 750 accrued to him on the last day of each month.
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
You are required to determine Jack Page’s 2022 normal tax liability.
13.8 (30 minutes)

tests a severance benefit and sections 5, 5(9), 5(10), 6, 10(1)(g), 10(1)(i) and 10(1)(k).
Shafty Sinkmoore, a resident of the Republic, was forced to give up his career as a mining foreman
on 31 August 2021 having contracted pneumoconiosis, a disease that is common among mining
employees. He is at present 41 years old.
Shafty Sinkmoore’s employer Town Deep Mines Limited (also a resident of the Republic) awarded
the following amounts to him on his retirement:
• A lump sum of R33 000 as compensation for the loss of his office.
• A lump sum of R9 000 for leave due to him at his date of retirement.
• A life-time award of R18 000 a month. The first R18 000 accrued to him on 30 September 2021.
• 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
You are required to determine Shafty Sinkmoore’s 2022 normal tax liability.
13.9 (40 minutes)

This question tests the normal tax liability determination on a taxable income that includes a
severance benefit. It also tests the definitions of ‘gross income’ and a ‘resident’ and sections 5, 6,
6B, 11(a), 11F, 12T and 23(g).
Fuzzy Foreball, a resident of the Republic, is now a professional golfer. He is also a director of
Three Stripes (Pty) Limited. It manufactures sports goods.
Fuzzy Foreball was retrenched by Birdie & Albertros (Pty) Limited, his previous employer, on
31 March 2021. He then became a professional golfer.
During the 2022 year of assessment Fuzzy Foreball had the following receipts and accruals, and
incurred the following expenses:
Receipts and accruals
Salary for the month of March from Birdie & Albertros (Pty) Limited 27 000
Cash-compensation lump-sum benefit from Birdie & Albertros (Pty) Limited for his
leave entitlement not enjoyed on his retrenchment 50 000
Director’s fees from Three Stripes (Pty) Limited 22 000
Fees for acting as the golf professional at the Natal South Country Club 190 000
Fee for the promotion of Pilson Wing Golf Products’ goods 10 000
Voluntary award from the sponsor based on his exceptional performance in the
South African Open Golf Tournament 5 000
Winnings at various tournaments
– In South Africa 35 400
– In Zimbabwe (the equivalent of) 28 200
– In England (the equivalent of) 17 400
Rentals
– South African property 10 800
– Non-South African property (note 1 – the equivalent of) 2 200
Local interest from an 8% ‘tax free investment’ (note 2) 25 220
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
‘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.
13.10 (60 minutes)

severance benefit. It also tests the definition of ‘gross income’, sections 5, 6, 6B, 8(1), 10(1)(i),
11(a), 11F, 12T, 23(a), 23(b), 23(g) and 26A, paragraphs 1, 2, 3 and 5 of the Second Schedule and
paragraph 10 of the Eighth Schedule.
On 31 January 2021 Dicky Flight, a resident of the Republic, who was then 52 years old, was killed
in an aircraft accident. He was survived by his wife, Enid Flight, and two married children.
Subsequent to Dicky Flight’s death, Naatjie Limited, his employer, awarded his executor a lump
sum of R175 000 as compensation for the loss of his office. It was paid to the executor of his
deceased estate, who in turn, paid it to Enid Flight, the beneficiary of his deceased estate.
A lump sum of R500 000 was awarded as compensation for Dicky Flight’s death under the
Compensation for Occupational Injuries and Diseases Act. This amount was supplemented by
Naatjie Limited to the extent of R250 000. Both these compensation awards accrued on 31 January
2021. They were paid to his executor.
The executor of Dicky Flight’s deceased estate has approached you to help with the completion of
Dicky Flight’s final tax return. He has given you the following four documents:
• An IRP5 form (employees’ tax certificate) from Naatjie Limited.
• An investment tax certificate for Dicky Flight from a local building society.
• A certificate from Dicky Flight’s medical scheme.
• A certificate from an insurer for Dicky Flight’s retirement annuity fund contribution.
An examination of these four documents revealed the following:
IRP5 form
The IRP5 form revealed the following:
• Eleven-months’ salary of R60 000 a month.
• An annual bonus of R60 000.

• A lump sum of R175 000 as compensation for the loss of his office (see above).
• A lump sum of R360 000 for six-months leave that was due to him at the time of his death. It
accrued on 31 January 2021.
• A lump sum of R250 000 as compensation for his death (see above).
• A travel allowance of R9 000 a month. He owned a motor car. It cost him R368 000 including
R48 000 value-added tax at 15%. During the 11-month period 1 March 2021 to 31 January 2022 he
travelled 27 500 kilometres in it. He did not, however, keep records on the actual costs of running
it. But he did keep an analysis of business and private kilometres travelled. And of his total
distance travelled of 27 500 kilometres, 16 500 kilometres were for private purposes.
• A monthly entertainment allowance of R400. Naatjie Limited did not inform him who to entertain.
But it expected him to use the allowance to entertain certain customers and people connected to its
business. Up to the time of his death, he had actually incurred R4 100 on entertainment
expenditure.
• His contributions to the medical scheme of R1 350 a month for his and Enid Flight’s
membership.
• Naatjie Limited’s contribution to the medical scheme also of R1 350 a month for his and Enid
Flight’s membership.
• An amount of R600 a month was deducted from his salary to pay an insurer with whom his life
was insured for R2 000 000. Enid Flight expects to receive the R2 000 000 from this policy in
the near future as a result of his death.
Investment tax certificate
Dicky Flight’s investment certificate reflected the following:
• Savings account local interest was credited at the end of each month. Up to 31 January 2022,
interest of R12 261 had been credited.
• A R100 000 fixed-deposit investment earning interest of 8% matured on 31 August 2021 with
R8 000 local interest accruing on this date. This R100 000 was not re-invested in another fixed
deposit.
• Local interest of R2 250 from a paid-up fixed period investment was declared and received (by
his executor) on 10 February 2022. He had invested R60 000 in a 7,5% paid-up fixed period
investment on 10 September 2021. Local interest on this investment accrues every six months.
• He had R80 000 invested in an indefinite period investment. Local interest accrued to him on
1 May 2021 and 1 November 2021. On each occasion R2 800 accrued to him.
• He had R30 000 invested in a 6% ‘tax free investment’. He made this investment on
1 September 2021. Up to 31 January 2021, interest of R825 had accrued to him. This is the only
‘tax free investment’ that he had, in other words, none of his savings account, fixed deposit,
paid-up fixed period and indefinite period investments is a ‘tax free investment’.
The conditions of Dicky Flight’s investments with this building society are that no amount accrues
to him until the agreed date of accrual. This means that he was not entitled to interest for the period
from the last actual accrual date to the date of his death. All his investments have been bequeathed
to Enid Flight. She will receive the interest due on each investment when it accrues.
Medical scheme
After Dicky Flight’s accident he was rushed to hospital. But he died the following day. His
executor paid R94 000 to the hospital for the medical treatment he had received. The medical
scheme reimbursed R57 897. Enid Flight was responsible for the balance of R36 103. She paid this
amount (the R36 103) on 27 February 2022. Other ‘qualifying medical expenses’ paid by him and
not recovered from his medical scheme reflected on his medical scheme tax certificate were
R26 378.
Retirement annuity fund

Fifteen years ago Dicky Flight had joined a retirement annuity fund. On 31 December each year he
paid by way of a current contribution R6 000 to it. Upon his death, on 31 January 2021, a lump sum
of R90 000 accrued to him from it. This lump sum was paid to his executor. From 28 February
2022 Enid Flight will enjoy a monthly award of R500 for the rest of her life from this retirement
annuity fund.
Notes
1. Dicky Flight had for the past six years earned an annual salary of R600 000. He received a
bonus of R50 000 each year. The travel allowance and the entertainment allowance were,
however, awarded to him from only 1 March 2022.
2. Since Dicky Flight was deemed to dispose of some of his assets moments before he died, a
taxable capital gain of R41 000 is deemed to accrue to him for his 2022 period of assessment.
3. Dicky Flight had not previously received a compensation for loss of office benefit from Naatjie
Limited or a former employer. He did not belong to a pension fund or provident fund.
You are required to determine Dicky Flight’s 2022 normal tax liability.
13.11 (60 minutes)

This question tests the normal tax liability determination including the section 5(10) rating formula,
sections 6, 6B, 7A(2), 8(1), 10(1)(gB), (i) and (k), 11(a) and 11(nA), 11F, 18A, 20, 23( f ) and (m)
and 26A.
Xavier Hooker, a resident of the Republic, was employed by Elegant Escort Services CC as a
professional escort (a person who accompanies a member of the opposite sex to a social event).
During the 2022 year of assessment she was employed by it from 1 March 2021 to 30 September
2021 (the date of her death after being assaulted by a client of her employer). She was 27 years old
when she died.
From 1 April 2021 to 30 September 2021 Xavier Hooker earned a salary of R18 000 a month from
Elegant Escort Services CC. In March 2021 her salary was R16 000 (but see below for her
retroactive salary increase). She also enjoys a cell phone allowance from it of R1 000 a month.
Xavier Hooker and her daughter (see below) were members of the medical scheme operated by
Elegant Escort Services CC. It, and her, each contributed R1 500 a month to this fund.
Xavier Hooker was also a member of the Elegant Escort Services CC Pension Fund. As from
1 April 2021 she contributed R1 080 a month to this pension fund. Her contribution for
March 2021 was R960. Her contributions are based solely on her salary.
Xavier Hooker was also a member of a retirement annuity fund. On 1 April each year she made an
annual contribution of R3 000 to it.
Following upon Xavier Hooker’s death, her executor received the following lump sums:
• R600 000 from the pension fund.
• R250 000 from the retirement annuity fund.
• R50 000 from Elegant Escort Services CC as compensation for the loss of her employment.
• R400 000 as compensation paid under the Compensation for Occupational Injuries and Diseases
Act 130 of 1993.
• R380 000 from Elegant Escort Services CC as compensation for her death in the course of her
employment.
• And R1 000 000 from a life insurance policy.
The above lump sums all accrued on Xavier Hooker’s death, on 30 September 2021.
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.
13.12 (60 minutes)

This question tests a normal tax liability determination using section 5(10), the so-called rating
formula. It also tests sections 5, 6, 10(1)(k)(i), 11(a), 11(d), 11F, 13sex and 24J.
In the 2021 year of assessment Delia Wheeler, a resident of the Republic, earned R390 000 from
employment. This R390 000 was a salary of R30 000 a month and a December bonus of R30 000.
On 1 November 2020 Delia Wheeler purchased a vacant stand of land for R300 000 cash. On the
same day she commenced with the erection on it of five townhouses. They were completed on
31 January 2021 at a total cost of R1 500 000. They were let to tenants at a market-related rental of
R5 000 a month each as from 1 February 2021.
Delia Wheeler had made this rent-producing property investment so as to provide herself with a
‘pension’ on her retirement. She had done this because she was not a member of a pension fund or
provident fund.
Delia Wheeler financed the erection of the five townhouses using borrowed funds. She borrowed:
• R400 000 on 1 November 2020,
• a further R600 000 on 1 December 2020, and
• the final R500 000 on 1 January 2021.
The entire R1 500 000 was borrowed at 12%. All interest due by her was settled in full by her.
Delia Wheeler’s property rates for the month of February 2021 were R4 000, her repairs and
maintenance were R1 200 and her sundry expenses deductible in the determination of her taxable
income were R1 800 for the 2021 year of assessment.
All five townhouses were let by Delia Wheeler for the month of February 2021 at a market-related
rental. No portion of her R1 500 000 loan was repaid during the 2021 year of assessment.
Delia Wheeler is a so-called armchair farmer. She has elected to be subjected to tax on the so-called
average basis under paragraph 19 of the First Schedule to the Income Tax Act. For the 2021 year of
assessment she suffered a loss of R21 000 from her farming operations.
The only other receipt or accrual that Delia Wheeler enjoyed in the 2021 year of assessment was
local interest of R26 800 from a non ‘tax free investment’. No amounts are deductible in the
determination of her taxable income for the 2021 year of assessment other than those that arise out
of the above information.
On 30 June 2021 Delia Wheeler attained the age of 60 years and retired from employment.
From 1 March 2021 to 30 June 2021 Delia Wheeler earned R30 000 a month. On 30 June 2021 a
R15 000 bonus was awarded to her, being half of the annual bonus that would have been awarded
had she been in employment on 31 December 2021.
On 30 June 2021 Delia Wheeler’s employer compensated her for the loss of her office with a cash
award (golden-handshake) of R1 000 000.
On 1 July 2021 Delia Wheeler made a R90 000 single-premium contribution to a retirement
annuity fund that she had now become a member of.
Delia Wheeler’s actual taxable income from farming operations for the 2022 year of assessment
was R25 000. Her average farming taxable income for the 2022 year of assessment was R1 750.
Each townhouse was let by Delia Wheeler at a market-related rental of R5 000 a month throughout
the 2022 year of assessment. Her property rates were R48 000, her repairs and maintenance were
R12 000 and her sundry expenses deductible in the determination of her taxable income were
R9 000 for the 2022 year of assessment.
On 31 July 2021 Delia Wheeler repaid R900 000 of the R1 500 000 loan. All interest due on this
loan was settled in full.
Local interest of R20 900 from a non ‘tax free investment’ and local dividends of R4 000 accrued
to Delia Wheeler in the 2022 year of assessment.

No amounts are deductible in the determination of Delia Wheeler’s taxable income for the 2022
year of assessment other than those that arise out of the above information.
You are required to determine Delia Wheeler’s 2022 normal tax liability.
CHAPTER 14
COMPANIES
14.1 (15 minutes)

This question tests the classification of a company under section 38. It also tests section 56(1)(n).
Explode Limited made a large donation to Floyd Golfex’s, its managing director’s, golf club, as
part of his personal celebration that it (Explode Limited) had recently been listed on the
JSE Securities Exchange. It is a resident of the Republic.
The equity and preference shares of Explode Limited were held on 28 February 2022 (the last day
of its year of assessment) as follows:
Preference Ordinary
shares shares
Floyd Golfex – the managing director 10 000 10 000
Gregory Hater – the financial director – 5 000
Benjamin Closer – the production manager – 5 000
Gayle Hater – the wife of Gregory Hater – 2 000
Gary Hitter – the golf club secretary – 5 000
Pro American Limited – a public company for income tax purposes 10 000 20 000
Buffelsfontein Limited – a listed gold mining company – 12 000
Greens (Pty) Limited – held as to – 20 000
– Ernest Driver: 20%,
– Benjamin Closer: 10%,
– Gary Hitter: 10%, and
– Ivan John: 60%.
Isobel John – the wife of Ivan John – 1 000
Total 20 000 80 000
The sole movement on Explode Limited’s above shareholdings during its 2022 year of assessment
was on 1 October 2021 when Pro American Limited purchased 18 000 ordinary and
5 000 preference shares from Gayle Hater.
Explode Limited’s preference shares entitle their holders to a fixed dividend and a fixed repayment
of capital when it is liquidated.
You are required to establish whether Explode Limited will be liable for donations tax on its
donation to its managing director’s golf club.
14.2 (30 minutes)

This question tests the classification of a company under section 38.
Paceattack Limited
Paceattack Limited is a resident of the Republic. Its equity shares are not listed on a recognised stock
exchange. Its directors are Harvey Inducker and Winston Yorker.
Throughout Paceattack Limited’s 2022 year of assessment its equity shares were held as follows:
Shareholders %
Director Harvey Inducker, his wife and his minor child (equally) 3
Director Winston Yorker 3
Alan Beamer and his wife (equally) 16
Other sundry individuals 8
Speed Limited (an ‘unlisted’ company) 70
100
277
Speed Limited’s equity shares were held as follows:

%
Seam Limited (general public interested to the extent of 75%) 18
Ambrose Bouncer (sole director) 22
Inswingers (Pty) Limited 60
100
Inswingers (Pty) Limited’s equity shares were held as follows:
%
Director Winston Yorker (also a director of Paceattack Limited ) 30
Director Ryan Short-Pitched and Ruth Short-Pitched, his wife (equally) 20
Rolf Slinger (brother-in-law of director Winston Yorker) 20
Quinton Reverseswinger 20
Queenie Reverseswinger (Quinton Reverseswinger’s minor daughter) 10
100
All the relatives of the directors have exercised their rights as shareholders independently of the
directors.
You are required to determine if Paceattack Limited is a public company for income tax purposes.
Spinattack Limited
Spinattack Limited is a resident of the Republic. It is a listed company. Its equity shares were held
throughout its 2022 year of assessment as follows:
%
Director Bradley Cutter 7
Director Arnold Armball 7
Director Burt Chinaman 7
Chase Dooshra 6
Christine Dooshra (wife of Chase Dooshra) 6
Colette Dooshra (minor daughter of Chase Dooshra) 6
Spinattack Pension Fund 21
Offbreaks Limited (general public interest of 60%) 10
Legbreaks (Pty) Limited 30
100
Legbreaks (Pty) Limited’s equity shares were held throughout its 2022 year of assessment as
follows:
%
Director Arnold Armball (also a director of Spinattack Limited (see above)) 10
Director Reuben Seekreeper 10
Evander Flipper 60
Frances Googalee 20
100
Spinattack Limited’s financial year ends on the last day of February.
You are required to determine if Spinattack Limited is a public company for income tax purposes.
14.3 (30 minutes)

Forest & Woods Limited, Elm Limited and Trees (Pty) Limited are associated companies all
engaged in the timber trade. They all have financial years that end on the last day of February. They
are all residents of the Republic.
COMPANIES 279
The directors of these three companies are as follows:

• Forest & Woods Limited – Alec Ash and his wife, Amy Ash.
• Elm Limited – Byron Beech and Franklin Fir.
• Trees (Pty) Limited – Alec Ash (also a director of Forest & Woods Limited (see above)) and
Byron Beech (also a director of Elm Limited (see above)).
At all relevant times the percentage shareholdings in these three companies have been held as
follows:
Forest & Woods Limited Elm Trees (Pty)
Shareholder Preference Ordinary Limited Limited
Alec Ash 10 30 – 10
Byron Beech – 5 20 10
Clive Cedar – 5 20 10
Trees (Pty) Limited – 10 – –
Elm Limited 10 5 – 10
Franklin Fir (brother-in-law of Alec Ash, who
exercises his rights independently of
Alec Ash) 40 20 – 10
Amy Ash (wife of Alec Ash) 10 5 – –
Briar Beech (wife of Byron Beech) – 5 – –
Clarice Cedar (wife of Clive Cedar) – 5 – –
Arlene Ash (major daughter of Alec Ash) 30 5 – –
Bunty Beech (minor daughter of Byron Beech) – 5 – –
Gideon Gum – – – 10
Numerous individual members of the general
public (all holding minimal shareholdings) – – 60 40
100 100 100 100
Forest & Woods Limited’s preference shares entitle their holders to a 6% dividend and a fixed
repayment of capital on its liquidation.
You are required to
1. determine whether each company is classified as a public company for income tax purposes,
2. for a company that is classified as a private company for income tax purposes, indicate what it
needs to do so as to be re-classified as a public company, and
3. on the assumption that Forest & Woods Limited is a private company for income tax purposes,
state whether it would become a public company if Alec Ash were to sell his 30% ordinary
shareholding in it to members of the general public either before 28 February 2021, or after
28 February 2021.
14.4 (30 minutes)

Edco Limited was listed on the JSE Securities Exchange for the first time on 1 March 2022. It is a
resident of the Republic. At 31 March 2022 (the end of its year of assessment) its issued capital was
as follows:
R1 equity shares 4 000 000
R2 preference shares (dividend restricted to 6% a year) 2 000 000
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
14.5 (20 minutes)

This question tests the rates of normal tax applicable to different classes of companies. It also tests
the withholding of dividends tax.
North Limited
North Limited is a resident of the Republic. It is not a small business corporation. It is not a
‘personal service provider’ as defined in paragraph 1 of the Fourth Schedule. Its year of assessment
ends on the last day of February.
North Limited’s taxable income for its 2022 year of assessment was R1 000 000. On 28 February
2022 it declared a dividend of R600 000 out of its after-tax income. It does not own shares in
another company. None of its shareholders is an exempt beneficial owner.
South Plc
South Plc is not a resident of the Republic. Its year of assessment ends on the last day of February.
South Plc’s South African taxable income for its 2022 year of assessment was the equivalent of
R1 000 000. On 28 February 2022 it declared a dividend the equivalent of R600 000 out of its after-
tax income. It does not own shares in another company. It is not listed on the local stock exchange.
East (Pty) Limited
East (Pty) Limited is a resident of the Republic. It is a ‘personal service provider’ as defined in
paragraph 1 of the Fourth Schedule. Its year of assessment ends on the last day of February.
East (Pty) Limited’s taxable income for its 2022 year of assessment was R1 000 000. On
28 February 2022 it declared a dividend of R600 000 out of its after-tax income. It does not own
shares in another company. None of its shareholders is an exempt beneficial owner.
West CC
West CC is a resident of the Republic. It is a ‘small business corporation’ as defined in
section 12E(4)(a). Its year of assessment ends on the last day of February.
West CC’s taxable income for its 2022 year of assessment was R1 000 000. On 28 February 2022 it
declared a dividend of R600 000 out of its after-tax income. It does not own shares in another
company. None of its shareholders is an exempt beneficial owner.
You are required to determine the South African normal tax liabilities of the above four
companies. Also determine the amount of dividends tax to be withheld by each company from the
dividend it declares and pays.
14.6 (45 minutes)

This question tests the normal tax liability of a small business corporation. It also tests the
withholding of dividends tax. It tests the definition of ‘gross income’ and sections 10(1)(k), 11(a),
11(c), 11( f ), 11(g), 11(i), 11(m), 11(o), 13(1), 23(g) and 64E.
Happie Nappie Chappie CC retails products and accessories used for babies. It is a resident of the
Republic. Its financial year ends on the last day of February. It is a small business corporation. Its
sole member is Di Aper, also a resident of the Republic.
Happie Nappie Chappie CC moved to new retail premises during its 2022 year of assessment since
its previous premises had become too small for its operations.
Happie Nappie Chappie CC made a net income for its year of assessment of R175 000 before
taking into account the following:
• On 1 March 2021 it entered into a lease agreement with Bamboo Boom (Pty) Limited whereby it
would lease a site from hit for 20 years. The agreement provided for
– an initial premium of R30 000 to be paid by Happie Nappie Chappie CC to Bamboo Boom
(Pty) Limited on the commencement of the lease (on 1 March 2021),
– 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.
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
Happie Nappie Chappie CC declared a dividend of R37 500 on 28 February 2022.

You are required to determine Happie Nappie Chappie CC’s
1. normal tax liability for its year of assessment that ended on 28 February 2022,
2. the dividends tax it deducted from the dividend it declared on 28 February 2022.
14.7 (30 minutes)

This question tests tax rates applicable to natural persons and companies. It tests the dividends tax.
It tests the definition of ‘gross income’ and sections 10(1)(k), 11(a), 23(g) and 64E.
Rasher Gammon, aged 51 years, is a resident of the Republic. He is the sole member of Hock CC,
also a resident of the Republic. It owns a small shopping centre – there are six tenants. He earns a
taxable income of R480 000 from sources other than it. He is its sole employee. He attends to all its
requirements.
Hock CC has made net rentals of R100 000 for its 2022 year of assessment. (Its year of assessment
ends on the last day of February.) Its taxable income for its 2022 year of assessment is the net
rentals of R100 000. This R100 000 is, however, before the payment of an amount to Rasher
Gammon for the services that he has rendered to it.
If a third party were to do the work Rasher Gammon does for Hock CC, it would pay this third-
party a salary of R1 500 a month. He would, however, like to pay himself a salary of R2 000 a
month.
Rasher Gammon discussed the quantum (amount) of his salary from Hock CC with his accountant,
one of your partners, who suggested that a R1 000 salary a month was the most tax-efficient salary
to pay.
Rasher Gammon was unhappy with the suggestion from your partner. He has now been referred to
you by your partner for a second opinion on this matter.
You are required to determine the most tax-efficient salary that Hock CC should pay Rasher
Gammon for the services he renders to it for the 2022 year of assessment.
14.8 (50 minutes)

This question tests the normal tax liability of a corporate taxpayer. It also tests dividends tax. It
tests the definitions of ‘gross income’ and a ‘resident’ and sections 9H, 10(1)(h), 10(1)(i), 10(1)(k),
11(a), 12C, 13(1), 13sex, 57, 64E and 64J.
Ten years ago 10 wealthy North Coast residents formed North Coasters Limited, an investment
company. It has 10 equity shares of R1 each, with each investor owning one share. It is a resident
of the Republic.
North Coasters Limited’s 10 shareholders are Reggie Stanger, Dale Blyth, Alice Beach, Steven
Tinley, Leslie Manner, Thomas Salt, Paul Rock, Chaka Bay, Barbara Ballito and Dilip Desai.
North Coasters Limited’s shareholders each lent it whatever amount they wished to invest in it. It
then purchased dividend-yielding shares with these funds. Its shareholders are paid interest on their
loan accounts. This interest accrues to them, six monthly in arrears, on 31 August and the last day
of February. They also enjoyed an interim and a final dividend from it depending on its profit for
the year.
Reggie Stanger, Thomas Salt, Paul Rock and Chaka Bay were appointed directors of North
Coasters Limited. It does not meet the requirements that would permit it to be listed on a
recognised stock exchange.
Over the years North Coasters Limited’s profits improved and its reserves built up. But during its
2020 year of assessment the dividends received by or accrued to it were the worst ever. It then
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:
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:
– 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.
14.9 (60 minutes)

This question tests normal tax and dividends tax. It tests the definition of ‘gross income’, the
general deduction formula (sections 11(a) and 23(g)), sections 8(4)(m), 9(2), 10(1)(k), 11(cA),
11( f ), 11(g), 11(gA), 12C, 13(1), 18A, 19, 22, 23( f ), 23G, 24I, 24J, 64B, 64E and 64J and
paragraphs 3, 5, 6, 8, 10, 12A, 20 and 35 of the Eighth Schedule.
Shiney Aluminium Limited is a public company. It is registered and carrying on business in South
Africa. It is a resident of the Republic. It manufactures aluminium products. Its statement of profit or
loss and other comprehensive income for its financial year ended 28 February 2022 was as follows:
Trading profit 763 114

Local interest on investments 21 400
Dividend accrued from its subsidiary (a local company – on 1 May 2021) 150 000
Subsidy for training of employees for skilled work (note 1) 6 000
Profit on asset sold to its pension fund (note 6) 244 000
Unrealised foreign exchange gain on ‘second’ forward exchange contract (note 7) 5 000
1 189 514
Less
Trading expenditure (notes 1, 2 and 9) 358 500
Interest incurred on loan to finance purchase of shares in its subsidiary
company 10 500
Abroad travelling expenses (note 3) 53 160
Donation to university 18 000
Interest incurred on Aussie Aluminium (Aus) Limited’s loan (note 4) 14 400
Restraint of ex-factory manager (note 5) 223 440
Rental of asset from its pension fund (note 6) 50 800
Unrealised foreign exchange loss – American supplier (note 7) 14 000
Realised foreign exchange loss on ‘first’ forward exchange contract
(note 7) 8 000 750 800
Net income 438 714
Notes
1. Shiney Aluminium Limited undertook certain training of its skilled employees. This training
cost R12 000 and is included in its trading expenditure of R358 500 (see above). It successfully
applied for a subsidy in this regard and received R6 000 from a fund established under the
Manpower Training Act (also see above).
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
Loss on ‘first’ forward exchange contract Dr 8 000

To Bank 8 000
Being ‘first’ forward exchange contract at R1 566 000 yielding
R1 558 000 on 31 December 2021.
Foreign exchange contract financial asset Dr 5 000
To Statement of profit or loss and other comprehensive income 5 000
Being unrealised gain on the ‘second’ forward exchange
contract (R1 585 000 – R1 580 000).
To Creditor 14 000
Being translation of creditor at 28 February 2022 from
R1 550 000 to R1 564 000.
8. On 1 January 2019 Shiney Aluminium Limited purchased a second-hand manufacturing
machine at a liquidation sale for R20 000. In its 2019, 2020, 2021 and 2022 years of
assessment it enjoyed a section 12C capital allowance of R4 000 each year (see note 2 above).
Shiney Aluminium Limited paid the seller of this machine a 10% deposit of R2 000 on 1 January
2019. It attempted, on numerous occasions, to pay the balance of the purchase consideration of
R19 000 but has been unable to trace the seller. Since its R19 000 liability prescribed on
31 December 2021, the following journal entry was made by it at 28 February 2022:
Supplier (for machine purchased) Dr 19 000

To Non-distributable reserve 19 000
Being a liability that prescribed. It was therefore transferred to
the non-distributable reserve (under the agreement passed at a
directors’ meeting held on 28 February 2022).
Shiney Aluminium Limited’s second-hand manufacturing machine is still being used by it.
9. Under an obligation under a lease that was entered into by Shiney Aluminium Limited with
Merlin Hillside in May 2021, it had to effect improvements to the value of R3 000 000 to his
property. The improvements cost R3 750 000. They were brought into use on 1 December
2021. They increased the industrial capacity of its factory. The agreement provided for an
occupation right of 10 years from the date of completion of the improvements, and a renewal
option for a further five years. No provision has been made for the relevant capital and other
allowances for the improvements to its factory.
10. Shiney Aluminium Limited has an assessed loss of R30 817 brought forward from its 2021
year of assessment. It does not have an assessed capital loss to bring forward from its 2021
year of assessment.
11. On 28 February 2022 a R180 000 dividend was declared and paid by Shiney Aluminium Limited.
12. The shares in Shiney Aluminium Limited were held throughout the year of assessment by
– Aussie Aluminium (Aus) Limited to the extent of 20%, and
– shareholders who are residents of the Republic, none of whom are its directors, all family
units holding not more than 15% of its shares, to the extent of 80%.
13. Other than what has been detailed in the notes above, all trading expenditure of Shiney
Aluminium Limited is deductible in the determination of its taxable income.
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%.
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.
14.10 (30 minutes)

This question tests the definition of a ‘personal service provider’ (as defined in paragraph 1 of the
Fourth Schedule) and the provisions of sections 11(a), 11(e), 12H, 23(g) and 23(k).
Ariel Tumble-Turner, a resident of the Republic, competed as a professional swimmer for many
years. On 31 December 2018 she retired from her professional swimming career.
Ariel Tumble-Turner was 29 years old when she retired. She then formed Medley Swimming
Academy CC. It is a resident of the Republic. It provides the services of a swimming instructor.
Ariel Tumble-Turner is its sole member and its sole full-time employee. It commenced trading on
1 March 2019. Its financial year ends on the last day of February.
The statement of profit or loss and other comprehensive income of Medley Swimming
Academy CC for its financial year ended 28 February 2022 was as follows:
Fee income (note 1) 898 000
Local interest earned 28 500
926 500
Less expenses and allowances
Accounting fees 10 000
Secretarial services (note 2) 3 000
Bank charges 3 200
Motor vehicle expenses (note 3)
– Depreciation 46 000
– Fuel 39 600
– Insurance 9 400
– Repairs and maintenance 12 300
– Licence 700
Hire of swimming pool (note 4) 6 000
Replacement of swimming equipment (note 5) 1 800
Member’s salary and fees 484 000
Salary (note 6) 48 000
Clothing (note 7) 7 500 671 500
Net income 255 000
Notes
1. Medley Swimming Academy CC works almost exclusively for the Crawl High School. Ariel
Tumble-Turner coaches swimmers from Craw High School until 17h00 each weekday. Then,
each evening, from 17h00 to 18h00, Medley Swimming Academy CC offers Ariel Tumble-
Turner’s services to swimmers who are not pupils from Crawl High School. Of its total fee
income of R898 000 (see above), R720 000 was paid to it by Crawl High School.
2. Medley Swimming Academy CC pays R250 a month to the Crawl High School so that a
secretary employed at the school can take messages on its behalf.
COMPANIES 289
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
14.11 (30 minutes)

This question tests the normal tax liability determination of a small business corporation including
the provisions of sections 5, 6, 10(1)(i), 10(1)(k)(i), 11(o) and 12E. It also tests a capital gain and a
capital loss.
Robert Taunton is a ‘landlord’. He owns a number of rent-producing properties. And he owns the
entire share capital of three private companies that own rent-producing properties. All his
companies and himself are residents of the Republic.
Robert Taunton’s gross income consists of rentals, dividends and local interest. His taxable income
consists of net rentals and local interest. And his taxable income is in excess of R1 656 600.
Prior to the commencement of the 2021 year of assessment, most of Robert Taunton’s investments,
either direct or indirect, had been in residential properties.
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.
14.12 (60 minutes)

This question tests the normal tax liability determination of a small business corporation including
the provisions of sections 5, 6, 10(1)(k)(i) and 12E.
Dougall Bell, a resident, aged 49 years, is a locksmith. He runs a successful business in his own
name, trading as Emergency Key Services. He is actively involved in this business. He employs
four full-time employees. They are not his connected persons.
Dougall Bell’s gross income is R3 600 000 and his taxable income is R960 000. This taxable
income is solely from his locksmith business.
Dougall Bell has been advised that it would be tax efficient for him to incorporate his business and
to pay himself a salary of R660 000.
Dougall Bell is at present neither a shareholder of a company, nor a member of a close corporation.
On its incorporation, Emergency Key Services will become Emergency Key Services CC.
You are required to
1. set out the requirements to be classified as a small business corporation,
2. state if there are favourable tax consequences to being classified as a small business corporation,
3. determine the normal tax liabilities of Dougall Bell and his close corporation on the ‘advised’
taxable incomes of R660 000 for himself and R300 000 (R960 000 – R660 000) for
Emergency Key Services CC, and
4. determine if he will save normal tax by incorporating his locksmith business into a close
corporation.
COMPANIES 291
14.13 (45 minutes)

This question tests the normal tax and dividends tax determinations of a corporate taxpayer. It also
tests the definition of ‘gross income’, sections 8(4)(eB), 8(4)(m), 10(1)(k), 10B, 11(a), 11(cA),
11(gC), 11(i), 12H, 13(1), 13quat, 19, 22, 23(g), 23H, 24J, 26A, 64E and 64J, and paragraphs 3, 4,
6, 8, 10, 12A and 66 of the Eighth Schedule.
Mnumzane (Pty) Limited is a resident of the Republic. It manufactures deodorants for men. It sells
its products to retailers. It is a vendor. Its financial year ends on the last day of February.
The statement of profit or loss and other comprehensive income of Mnumzane (Pty) Limited for its
financial year ended 28 February 2022 reflected a total comprehensive income before tax of
R157 150. (Unless specifically stated to the contrary all amounts are exclusive of value-added tax.)
Mnumzane (Pty) Limited declared a dividend of R89 900 on 28 February 2022. The previous
dividend it had declared had been on 31 March 2021.
The following information may be relevant in the determination of Mnumzane (Pty) Limited’s
taxable income:
• Included in its total profit or loss and other comprehensive income before tax of R157 150 are
the following dividends that accrued to it during its 2022 year of assessment:
Local dividends from listed shares (in South Africa) 9 900
Foreign dividends – the equivalent of 5 600
15 500
The foreign dividends are not exempt from normal tax in South Africa under the provisions of
section 10B(2).
During its 2022 year of assessment Mnumzane (Pty) Limited sold some of its local
shareholdings and made a capital gain of R65 000 (as determined in accordance with the Eighth
Schedule to the Income Tax Act). This R65 000 is not included in its total profit or loss and
other comprehensive income before tax.
• In Mnumzane (Pty) Limited’s 2019 year of assessment it had purchased a large stock of
consumable stores for R25 000 from a producer that was closing down. It paid R5 000 (being
20% of the purchase consideration) on the date of delivery. For the following three years it tried
to pay the 80% balance of the purchase consideration (of R20 000). Every electronic transfer
was returned with ‘account no longer exits’ endorsed on it. Since this debt is believed to have
prescribed, the R20 000 balance owing has been ‘written back’ in its statement of profit or loss
and other comprehensive income. None of these consumable stores was on hand when the
balance owing was written back.
• Bad debts of R65 000 have been written off in Mnumzane (Pty) Limited’s statement of profit or
loss and other comprehensive income. This R65 000 is made up of R28 000 for trade debtors
and a loan of R37 000 to a supplier who had been liquidated. During its 2021 financial year it
had lent R37 000 to a supplier of one of its raw materials because it (the supplier) was
experiencing a liquidity problem. On 1 December 2021 this supplier was liquidated. It was
unable to recover its loan.
• On 1 March 2020 Mnumzane (Pty) Limited purchased a new machine on a cash basis under an
arm’s length transaction for R100 000. This machine was immediately brought into use in its
process of manufacture. On 31 August 2021 it ‘traded in’ this machine for a ‘more-advanced’
machine. Depreciation of R12 500 for the ‘traded-in’ machine was provided for in its statement
of profit or loss and other comprehensive income. A ‘trade in’ price of R130 000 was obtained
for the ‘traded-in’ machine. Its carrying amount (book value) on 31 August 2021 was R62 500.
Also included in its statement of profit or loss and other comprehensive income was the profit of
R67 500 that was made when this machine was ‘traded-in’. The ‘more-advanced’ machine was
purchased as a new machine on a cash basis under an arm’s length transaction for R150 000.
This ‘more-advanced’ machine was immediately brought into use by it in its process of
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
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.
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.
14.14 (60 minutes)

This question tests normal tax and dividends tax liabilities of a small business corporation. It tests
the definition of a ‘connected person’ and sections 11(a), 11(e), 11(o), 12E, 22, 40CA and 64E.
There are 650 boys attending Jacksonhouse, an exclusive boys private boarding school, situated in
the KwaZulu-Natal Midlands. All boys must be boarders.
On average a boy uses 55 items of clothing while at boarding school each year. He also has five
pairs of shoes including those used for his sporting activities. He has three carry bags. He has his
personal sporting equipment. He uses about 25 exercise books a year. Some boys have musical
equipment. Most have laptop computers and cell phones.
Now every item of clothing, shoes, books and equipment must have the boy’s name on it.
Sabastian Tagg, aged 49 years, has for a number of years had the contract to label every item of
clothing, all shoes, books and equipment belonging to the boys attending Jacksonhouse. Some
sewing repairs are also carried out by him. He traded in his own name. His contract with
Jacksonhouse produces 95% of his income.
On 1 March 2021 Sabastian Tagg sold his business to Taggs and Labels CC, a newly-formed close
corporation. He is its sole member.
The following entry was made in Taggs and Labels CC’s journal on 1 March 2021:
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.
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
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
14.15 (60 minutes)

This question tests the normal tax and dividends tax. It tests the definition of ‘gross income’, the
general deduction formula (sections 11(a) and 23(g)) and sections 9C, 10(1)(k), 10B, 12C, 13(1),
23( f ), 24I, 31 and 64E and paragraphs 3, 4, 7, 9, 20 and 35 of the Eighth Schedule. It also tests the
judgment from CIR v Rand Selections Corporation Ltd (1956 (3) SA 124 (A), 20 SATC 390).
Harlequin Limited and its holding company, Old Grey Limited, are both residents of the Republic.
The main business of Harlequin Limited is share-dealing, money-lending and the letting of assets at
a market-related rental. Its abbreviated trial balance and supporting notes for its year of assessment
ended 31 March 2022 follow:
Share capital and share premium (note 1) 2 800 000
Non-distributable reserve (note 2) 800 000
Retained earnings (note 3) 2 640 000
Net operating profit before tax (note 6) 160 000
Long-term liabilities (note 4) 25 280 000
Current liabilities (note 5) 4 800 000
Fixed assets (note 14)
11 136 000
Current assets (shares and loans) 25 344 000
36 480 000 36 480 000
The bookkeeper of Harlequin Limited is unfamiliar with recent income tax amendments and has
therefore approached you to assist it with its normal tax and dividends tax determinations for its
Notes
1. During February 2021 Barrier Reef Limited, an Australian company and not a resident of the
Republic, became a shareholder of Harlequin Limited by purchasing 30% of its equity shares
for R1 600 000. Old Grey Limited has maintained a shareholding of 55% in it since 2018. The
remaining 15% of its equity shares are held by natural persons who are all residents of the
Republic.
Under the South African double tax agreement with Australia, the agreed rate of tax on
dividends is 15% unless the shareholder is a company and it holds at least 10% of the other
company’s voting rights. Then the rate is 5%.
2. Harlequin Limited’s non-distributable reserve consists of a capital profit of R800 000 realised
in 2019 on the sale of a long-term investment.
3. Harlequin Limited has had a five-year positive profit history. The R2 640 000 represents its
accumulated trading profits up to 31 March 2021. For its year ended 31 March 2022 it has
made a net operating profit before tax of R160 000 (see above and note 6 below).
4. The long-term liabilities of Harlequin Limited are as follows:
Interest rate Lender Date advanced Amount
15% Barrier Reef Limited 1 June 2021 4 800 000

12% Perth Bank – Australia 31 March 2021 18 080 000
10% Cape Town Bank – South Africa 1 July 2021 2 400 000
25 280 000
Perth Bank loan
The loan from Perth Bank is A$1 600 000. It is denominated in Australian dollars. It is
repayable on 31 March 2023. To hedge the settlement of the foreign creditor a 12-month
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:
Date Spot rate Forward rate and period

31 March 2021 A$1 = R11,30
1 July 2021 A$1 = R11,70 A$1 = R11,78 (12 months)
31 March 2022 A$1 = R11,95 A$1 = R12,04 (three months)
Other loans
All Harlequin Limited’s other loans are rand-denominated loans and interest is incurred and
paid monthly.
Prime bank rates
The average prime bank rates during the financial year were 10,5% in South Africa and 8% in
Australia.
5. Harlequin Limited’s current liabilities are as follows:
Barrier Reef Limited trade creditor account (bearing interest at 17% a year) 2 000 000
South African trade creditors 2 240 000
Provisions 560 000
4 800 000
All Harlequin Limited’s trade creditors are rand denominated. The year-end value is
representative of the weighted-average value for the year. Its provisions for expenditure still to
be incurred increased from R320 000 at 31 March 2021 to R560 000 at 31 March 2022.
6. The following items have already been taken into account in the determination of Harlequin
Limited’s net operating profit before tax of R160 000:
Net interest incurred (note 7) 1 917 600
Net loss on shares sold (note 8) 932 000
Dividends accrued (note 9) 1 256 000
Profit on liquidation of Celtic Limited (note 10) 20 000
Lease income (note 11) 880 000
Depreciation (note 12) 220 000
Administration expenses (note 13) 336 000
7. Net interest incurred by Harlequin Limited of R1 917 600 (see note 6 above) consists of the
following receipts and accruals and expenses:
Long-term liabilities
Barrier Reef Limited 600 000
Perth Bank 2 169 600
Cape Town Bank 180 000
Short-term liabilities
Barrier Reef Limited 340 000
Other creditors 128 000
Total interest incurred 3 417 600
Less interest accrued on loans to South African companies 1 500 000
Net interest incurred 1 917 600
COMPANIES 297
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.
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.
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.
14.16 (60 minutes)

This question tests normal tax and dividends tax. It tests the definition of ‘gross income’, the
general deduction formula (sections 11(a) and 23(g)), sections 6quat, 8(4)(a), 10(1)(k), 11(c),
11(m), 11(w), 12C, 18A, 19, 23B, 26A, 38, 56, 57, 64B, 64E and 64J and paragraphs 3, 5, 8, 10,
12A, 20 and 35 of the Eighth Schedule. It also tests the judgment from Sub-Nigel Ltd v CIR (1948
(4) SA 580 (A), 15 SATC 380).
Satintip Limited, a resident of the Republic, carries on business as a wholesale distributor of
tobacco products. Its operations extend throughout South Africa and Zimbabwe. For its 2022
financial year ended 28 February 2022 it submits the following summarised statement of profit or
loss and other comprehensive income:
COMPANIES 299
Profit on trading in South Africa 6 040 900

Local dividend from Cigars (Pty) Limited (note 4) 48 000
Awards from a policy on the life of a director (note 5) 100 000
Net profit (after tax) from its Zimbabwe branch (note 6) 138 000
‘Prescribed’ debt (note 7) 6 000
6 332 900
Less
Salaries 3 319 220
Insurance (note 5) 18 000
Depreciation on office buildings at 2% (note 8) 38 600
Depreciation on motor vehicles at 20% (note 9) 15 870
Depreciation on office furniture and equipment at 10% (note 9) 4 000
Loss on sale of motor vehicle (note 10) 33 330
Compensation paid (note 11) 17 500
Allowances to retired employees (note 12) 66 000
Other expenses (note 13) 5 430
Donation to Kent Benson’s, its managing director’s, tennis club 4 000
Donation to a university for the purpose of it purchasing laboratory
equipment (note 14) 27 500
Marketing expenses (note 15) 18 000 3 577 900
Profit before tax 2 755 000
The following additional information is available:
1. The equity shares in Satintip Limited comprise 480 000 equity shares of R1 each. They have at
all relevant times been held as follows:
• Pallmall Limited – a United Kingdom registered public company carrying on
business solely in the United Kingdom 30%
• Grayson Ash – a resident of the Republic 50%
• Amber Burn – who is not a resident of the Republic and who does not carry
on business in South Africa 15%
• Baccie Cough – who is ordinarily resident in Zimbabwe. He is not a resident
of the Republic. He also earns income from a business in Johannesburg in
which he is an active partner 5%
100%
Satintip Limited’s equity shares are not listed on a recognised stock exchange.
2. Satintip Limited declared a dividend of R60 000 on 31 December 2021. No other dividends
were declared by it during the period under review. Under the double tax agreement between
South Africa and the United Kingdom, it has been agreed that the rate of tax on dividends is
5% when there is a minimum holding of 10% of the capital by a beneficial owner that is a
company. Otherwise it is 20%.
And under the double tax agreement between South Africa and Zimbabwe, no provision has
been made relating to the rate of tax on dividends.
3. Satintip Limited’s trading stock control records reveal that some cartons of cigarettes were
stolen during its 2022 financial year. The cost of this stolen trading stock is R4 500. It would
have sold for R6 750. Because this trading stock was not on hand at the end of its financial
year, its closing stock excluded this amount. No entry was made for this stolen trading stock in
its financial statements.
4. Cigars (Pty) Limited is an 80%-owned subsidiary of Satintip Limited. It is a resident of the
Republic. It is the policy of Cigars (Pty) Limited to declare its entire after-tax profit as a
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.
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.
14.17 (30 minutes)

This question tests the tax implications of purchasing the shares in a property-owning company or
purchasing the property from it. It tests the definitions of a ‘dividend’ and ‘gross income’, the
general deduction formula (sections 11(a) and 23(g)) and sections 10(1)(k) and 64E.
Lew Prinz is a resident of the Republic. He is an investor in property. His taxable income is in
excess of R1 656 600. It comprises net rentals from the various properties he owns and local
interest from his investments in local interest-bearing securities and certain loan accounts.
Lew Prinz would like to purchase two further rent-producing properties. He has R6 000 000
available for this purpose. He is interested in two properties that are for sale at approximately
R3 000 000 each. Both properties are at present owned by companies. One is owned by Six
Pammie Road CC and the other by Nine Andy Road (Pty) Limited.
The most recent statement of financial position of Six Pammie Road CC is as follows:
Member’s interest 1
Member’s loan account at 12% 1 800 000
Retained income 120 000
1 920 001
Represented by
Land and buildings at cost 1 800 000
Cash on hand 120 001
1 920 001
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
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.
14.18 (60 minutes)

This question tests the normal tax and dividends tax liabilities, the definition of ‘gross income’, the
general deduction formula (sections 11(a) and 23(g)), sections 8(5)(bA), 10(1)(k), 10B(2), 11(cA),
11(e), 11(i), 11( j), 22, 23H, 24I, 25BB , 31, 64B, 64E and 64J and paragraphs 4, 7, 9, 20 and 35 of
the Eighth Schedule.
Olympic Designs (Pty) Limited is a resident of the Republic. It designs and supplies gifts and
promotional items for its customers. It does not manufacture its trading stock. It either purchases its
trading stock from selected manufacturers or ‘sub-contracts’ their manufacturing to a third party. It
suffers normal tax at the rate of 28%. It is a vendor.
The equity shares of Olympic Designs (Pty) Limited are held equally by Sidney and Sheila Cairns.
During August 2020 Sidney Cairns and Sheila Cairns were divorced:
• Sidney Cairns emigrated from South Africa and is now ordinarily resident in Australia. He is not
a resident of the Republic.
• Sheila Cairns remained in South Africa. She is a resident of the Republic. She is the managing
director of Olympic Designs (Pty) Limited.
Sidney Cairns agreed to sell his 50% shareholding in Olympic Designs (Pty) Limited to Sheila
Cairns once she has sufficient funds to pay him for his shares and loan account.
Sidney Cairns lent Olympic Designs (Pty) Limited R400 000 in its 2020 financial year prior to his
departure from South Africa. This loan has no fixed terms of repayment and interest is charged at
5% above the prevailing prime overdraft rate. No portion of his loan of R400 000 was repaid during
its 2021 financial year.
COMPANIES 303
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:
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
Local dividends South African listed shares 3 700

A distribution from a real estate investment trust (this ‘distribution’ comprised
local dividends of R2 000 and local interest of R750) 2 750
9 250
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
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
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%.
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.
14.19 (90 minutes)

This question tests the definition of ‘gross income’, the general deduction formula (sections 11(a)
and 23(g)) and sections 8C, 10(1)(k), 10(1)(yA), 11(e), 11(i), 11( j), 11(l ), 11D, 12C, 13sex, 22,
23(n) and 23H.
Miracle Muthi Limited manufactures a tonic made from the African potato (the Hypoxis
hemerocallidea plant, also known as ‘inkomfe’), garlic and olive oil. This tonic helps build up the
immune system of HIV sufferers. It manufactures this tonic from its own factory situated in the
Valley of a Thousand Hills (a semi-rural area between Durban and Pietermaritzburg). It is a
resident of the Republic. Its financial year ends on a last day of February. Its 2022 statement of
profit or loss and other comprehensive income reflects a pre-tax profit of R1 234 500.
In preparation of Miracle Muthi Limited’s financial statements a number of entries were made in its
journal. Some of these journal entries were as follows:
Investment in rent-producing property

Investment (rent-producing) property Dr 250 000
To Statement of profit or loss and other comprehensive income (fair
value adjustment) 250 000
Being an investment in a rent-producing property valued at its fair value
under Statement IAS 40.
Explanation: Miracle Muthi Limited purchased a rent-producing property two years ago for
R600 000. It is a four-bedroomed house. It is subject to an annual fair value adjustment. On
28 February 2022 its market value (fair value) was R1 050 000. (On 28 February 2021 its market
value (fair value) was R800 000.) It had adopted the fair value model under Statement IAS 40.
Rentals
Cash Dr 48 000
To Rentals 16 000
To Income received in advance (creditors) 32 000
Being six months rentals received including four months in advance.
Explanation: Miracle Muthi Limited lets its investment (rent-producing) property (see above) at a
market-related rental. Since its tenant was abroad for the first six months of the 2022 year of
assessment, he paid R48 000 to it on 7 January 2022 as rental for the six-month period 1 January
2022 to 30 June 2022. Rentals for the four months that fall in its 2023 financial year have therefore
been included in its creditors.
Investment in locally listed shares
Investment in a local listed company Dr 180 000
To Cash 180 000
Being an investment in a local listed company.
Statement of profit or loss and other comprehensive income (fair value
adjustment) Dr 11 000
To Investment in a local listed company 11 000
Being an investment in a local listed company restated at its fair value
(market value).
Explanation: On 1 September 2021 Miracle Muthi Limited purchased shares in a local listed
company as an investment for R180 000. It does not deal in shares. The market value of this
investment was R169 000 on 28 February 2022. In accordance with Statement IAS 39, it classified
this investment as ‘fair value through profit and loss’.
Local dividend
Cash Dr 16 000
To Statement of profit or loss and other comprehensive income (sundry
income: local dividend) 16 000
Being a local dividend received from its investment in the local listed
company.
Explanation: On 31 January 2021 Miracle Muthi Limited received a local dividend of R16 000
from its investment in the local listed company (see above). This was the only dividend that
accrued to it in its 2022 financial year.
Capitalised financial lease
Computer Dr 300 000
Value-added tax input account Dr 45 000
To Lease liability 345 000
Being a computer purchased under a finance lease.
COMPANIES 307
Lease liability Dr 125 000

To Bank 125 000
Being settlement of the first annual lease rental under the finance
lease.
Statement of profit or loss and other comprehensive income (finance
charges) Dr 786
To Lease liability 786
Being interest for one month (to 28 February 2022) determined as
follows: ((R345 000 – R125 000) × 4,2878361% × 1 / 12).
Statement of profit or loss and other comprehensive income
(depreciation) Dr 5 000
Being depreciation on the computer for the 2022 financial year
determined as follows: R300 000 × 20% for one month.
Explanation: On 1 February 2022 Miracle Muthi Limited leased a computer for a three-year period
at a lease rental of R125 000 a year payable annually in advance. It capitalised this finance lease in
its accounting records. The lease agreement reflects a cash cost for the computer of R300 000,
value-added tax at 15% of R45 000 and finance charges of R30 000. On 1 February 2022 it settled
its first annual rental of R125 000.
Impaired plant
(depreciation)
To Accumulated depreciation (depreciation) 30 000
Being depreciation on the ‘plastic bottle’ plant at 20% a year
determined using the straight-line basis.
(impairment loss)
To Accumulated impairment 25 000
Being the ‘plastic bottle’ plant now reflected at its market value.
Explanation: Miracle Muthi Limited previously sold its tonic in plastic bottles. To comply with
certain environmental requirements it ceased using plastic bottles. Its plant that was used to fill the
plastic bottles with tonic is now occasionally used by it (solely for a ‘special’ export order). Due to
the decline in popularity of plastic bottles the value of this plant has also declined. After providing
for depreciation of R30 000 for its 2022 financial year, the carrying amount of this plant was
R30 000. Its original cost had been R150 000 and depreciation has been provided at a rate of 20%
determined using the straight-line basis. It qualified for the section 12C capital allowance and its
tax value was ‘nil’ on 28 February 2021. Its market value is now R5 000 being its scrap value. This
R5 000 value is also its recoverable amount. To reduce its value in the financial statement to its
market value, an impairment loss of R25 000 was charged to its statement of profit or loss and
other comprehensive income.
New plant
Plant Dr 750 000
To Bank 750 000
Being the purchase on 1 September 2021 of a tablet-making plant.
Bank Dr 150 000
To Plant 150 000
Being a grant received from the Government towards the cost of the
tablet-making plant.

(depreciation) Dr 60 000
Being depreciation on the tablet-making plant at 20% for its 2022
financial year determined as follows: R600 000 × 20% for six months.
Explanation: Miracle Muthi Limited now sells its tonic also in a tablet form. It needed to purchase
plant to ‘convert’ its tonic into tablets. Since Government is pleased with the success being
achieved by Miracle Muthi Limited’s product (tonic), it donated R150 000 to Miracle Muthi
Limited to help pay for the cost of its tablet-making plant. The tablet-making plant was new and
unused when it was purchased by Miracle Muthi Limited on 1 September 2021. Its accounting
policy is to treat asset-based government grants as a reduction of the relevant asset’s cost.
Defined benefit pension fund
Defined benefit pension liability Dr 432 000
To Bank 432 000
Being Miracle Muthi Limited’s (the employer’s) contribution to the
pension fund.
Statement of profit or loss and other comprehensive income (defined
benefit pension expense) Dr 253 000
To Defined benefit pension liability 253 000
Being the charge to the statement of profit or loss and other
comprehensive income for the net pension expense for its 2022
financial year.
This amount has been determined as follows:
Current service costs 225 000
Add interest cost on pension obligation 610 000
835 000
Less return on pension plan assets 570 000
265 000
Less actuarial gains recognised 12 000
Charge to statement of profit or loss and other comprehensive income 253 000
Explanation: Employees of Miracle Muthi Limited contribute 6% of their salaries to its pension
fund. It contributes to the pension fund on the basis of two rand for each rand contributed by an
employee – in other words it contributes 12% of its employees’ salaries to the pension fund. Its
contribution is debited to its defined benefit pension liability account. Its pension fund is a defined
benefit fund. At the end of its financial year an actuary performs a determination of its pension
fund’s assets and liabilities. It provides for a defined benefit pension liability under
Statement IAS 19. On 1 March 2021 the balance of its defined benefit pension liability was
R1 000 000.
Prepaid expenses
To Statement of profit or loss and other profit or loss and other
comprehensive income (insurance) 60 000
To Statement of profit or loss and other profit or loss and other
comprehensive income (rates) 22 500
To Statement of profit or loss and other comprehensive income
(Medical Council levy) 7 500
Being that portion of the above expenses that relate to its 2023
financial year.
Explanation: Miracle Muthi Limited pays the insurance premium for its business assets annually in
advance. The premium paid was R90 000. It was paid on 29 October 2021. The insured period is
COMPANIES 309
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
(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’
(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
(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
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.
(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
(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 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
(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
(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.
(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.
14.20 (60 minutes)

This question tests the general deduction formula (section 11(a) ad 23(g)), sections 11(cA), 11(e),
11( f ), 11(g), 11(i), 11( j), 11(m), 13(1), 23(e) and 24J, paragraphs 3, 12(5), 20 and 35 of the Eighth
Schedule and the judgments from W F Johnstone & Co Ltd v CIR (1951 (2) SA 283 (A), 17 SATC
235), Provider v COT (1950 SR 161, 17 SATC 40) and ITC 876 ((1959) 23 SATC 221).
You are partner in an audit firm. The following memorandum has been received by you from the
audit manager responsible for the audit of a client, namely, Winners (Pty) Limited, a manufacturer
of sporting equipment:
‘Tax implications of certain transactions undertaken by Winners (Pty) Limited

‘Winners (Pty) Limited is a resident of the Republic. Its financial year ends on the last day of
February. Your help is needed regarding the tax implications that arise out of the following
transactions:
‘Factory land and buildings
‘Winners (Pty) Limited agreed that when its existing lease expired on 30 November 2021 it
would not be renewed. It would move into its own premises.
‘On 31 March 2021 a vacant plot of land was purchased by Winners (Pty) Limited for
R750 000. Legal fees of R75 000 were incurred in registering the property in its name. A
factory was constructed on it at a cost of R9 000 000. The construction of this factory
commenced on 1 April 2021 and it was completed on 31 August 2021. Winners (Pty) Limited’s
existing business moved to the new premises on 30 November 2021. Production commenced in
the new factory the next day.
‘What deductions and capital allowances arise out of the above transactions?
‘Administration building
‘The land that was purchased by Winners (Pty) Limited (see above) was insufficient for all its
required buildings. But then Grace Noble, who owns one of the adjacent premises, leased her
land to it. The conditions of the lease included the following:
• The lease was for a period of 20 years commencing on 1 September 2021.
• An initial rental of R25 000 a month was payable by Winners (Pty) Limited to Grace Noble.
• A lease premium of R100 000 was payable by Winners (Pty) Limited to Grace Noble on
1 September 2021.
• Winners (Pty) Limited was obliged to construct an administration building on Grace Noble’s
premises at a cost not exceeding R7 110 000.
‘The administration block was completed on 30 November 2021 at a cost of R7 900 000. It was
immediately occupied. It is one-third of the size of its factory building.
‘What deductions and allowances arise out of the above lease?
‘Warranty provision and expenses
‘Winners (Pty) Limited offers a two-year warranty on all its products sold. Based upon
historical data, it raises a warranty provision at the end of its financial year to reflect its
potential future liability for warranty expenses on products that have been sold and that are still
covered by the warranty period. When incurred, warranty expenses are debited to its warranty
provision account. A reconciliation of its warranty provision is as follows:
Balance at 1 March 2021 (and 28 February 2021) 158 070

Less warranty expenditure actually incurred 60 000
98 070
Add increase in the provision 128 640
Balance at 28 February 2022 226 710
‘The Commissioner did not approve a section 24C allowance in Winners (Pty) Limited’s 2021
and 2020 years of assessment.
‘What deductions and allowances arise out of the above transactions?
‘Computer
‘On 1 November 2021 Winners (Pty) Limited, entered into a two-year suspensive sale
agreement for the purchase of a computer. The instalment payable was R4 250 a month. Had it
been purchased for cash it would have cost R90 000. (A yield to maturity of 1,02652% applies
to this monthly accrual period.)
COMPANIES 313
‘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.
‘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
15.1 (15 minutes)

This question tests the definition of ‘gross income’, sections 11(e), 12B, 12C and 20, paragraphs 2,
3, 12, 13A, 15 and 19 of the First Schedule and the judgments from CIR v D & N Promotions (Pty)
Ltd (1995 (2) SA 296 (A), 57 SATC 178) and CIR v Zamoyski (1985 (3) SA 145 (C), 47 SATC 50).
Fifteen statements on the taxation of a farmer follows:
1. Land rentals that accrue to a farmer do not constitute ‘farming’ income.
2. Grazing fees that accrue to a farmer do not constitute ‘farming’ income.
3. Local interest earned that is directly linked to the sale of farm produce will constitute ‘farming’
gross income.
4. The value of dairy cows, being the capital assets of a dairy farmer, must be included in his
opening and closing stock values of livestock.
5. A farmer who plays polo (a game played by teams of players on horseback using mallets with
long flexible handles to drive a wooden ball through goalposts) and who keeps polo ponies
(horses used for playing polo) on his farm solely for polo playing will include the value of
these polo ponies in his opening and closing stock values of livestock.
6. A farmer will deduct in the determination of his farming taxable income the section 12B
capital allowance on a tractor that he purchases for farming purposes.
7. A farmer will deduct in the determination of his farming taxable income the section 12C
capital allowance on a plough that he purchases for farming purposes.
8. A farmer will deduct in the determination of his farming taxable income the section 11(e)
capital allowance (the ‘wear-and-tear’ or depreciation capital allowance) on a computer that he
purchases to be used in connection with his farming operations.
9. Capital development expenditure incurred by a farmer is deductible in the determination of his
farming taxable income without any limit being placed on the deductible amount.
10. The farmer’s housing allowance that forms part of his capital development expenditure is the
actual cost of the house but limited to R5 000 per employee.
11. Corporate taxpayers trading as farmers may elect to have their normal tax liabilities determined
on an average basis.
12. A farmer’s average farming income for the purposes of paragraph 19(1) of the First Schedule
is an average determined from the five preceding years of assessment.
13. A plantation farmer’s average plantation farming income for the purposes of paragraph 15(3)
of the First Schedule is an average determined from the three preceding years of assessment.
14. To qualify for the ‘tax holiday’ available to a farmer who invests an amount from the forced
sale of his livestock due to drought in an investment with the Land and Agricultural Bank of
South Africa, the investment period must not be less than six months.
15. An assessed loss brought forward by the farmer is deducted in the determination of his taxable
income only after the deduction of his qualifying capital development expenditure.
315
15.2 (15 minutes)

This question tests paragraphs 2, 3, 4, 5, 6, 12 and 19 of the First Schedule.
Michael Moneybags, a wealthy speculator, heard from his accountant that farming has many
normal tax advantages. Since he neither understands what he terms ‘accounting talk’ nor trusts
accountants, he has asked you to give him a brief idea of how, if at all, becoming a farmer may
have normal tax advantages for him.
You are required to give Michael Moneybags a brief report of the normal tax advantages relating
to farming. Provide an example as to how he might benefit (normal-tax wise) from farming. He
does not enjoy reading long reports and has therefore requested that you keep your report as brief
as possible.
15.3 (45 minutes)

This question tests the normal tax and dividends tax liabilities for a company carrying on farming
operations. It tests sections 10(1)(k), 11(d), 12B, 22 and 64E and paragraphs 2, 3, 11 and 12 of the
First Schedule. It also tests the determination of the opening and closing trading stock valuation of
livestock.
Beef Brand (Pty) Limited is a resident of the Republic. Its receipts and payments account of for its
year of assessment ended 28 February 2022 follows:
Receipts
Opening bank balance 19 400
Sales of livestock
– Cows (note 2) 2 400 000
– Oxen (note 2) 160 000
Alfalfa (cattle feed) sold 120 000
Milk sales 936 600
Subsidies received for the following expenses incurred:
– Local interest incurred 1 200
– Soil erosion 900
– Dam construction 7 900
Tractor sold (note 6) 24 000
Sundry receipts
– Local interest from investments 6 400
– Grazing fees earned 12 000
– Land rentals 24 000
3 720 000
Payments
Dam construction expenses 72 000
Fuel 13 600
Farming expenses (deductible in the determination of its taxable income) 358 600
Fences erected 6 600
Residential units for five farm labourers erected 216 000
Livestock expenses 567 200
Purchases
– Alfalfa (cattle feed) 9 600
– Cows (note 2) 1 440 000
Repairs to fences 1 440
Total carried forward 2 700 040
FARMERS 317
Total brought forward 2 700 040

Rations purchased 4 800
Soil erosion expenses 1 800
Plough purchased (note 5) 4 800
Salaries 900 600
Closing bank balance 107 960
3 720 000
Notes
1. Beef Brand (Pty) Limited’s livestock on hand on 1 March 2021 and the market and standard
values of each category were as follows:
Livestock Standard Market Opening stock
category value value number of head
Bulls 50 16 000 28
Oxen 40 9 600 60
Cows 40 12 000 1 200
Tollies and heifers 20 6 000 900
Calves 5 1 600 960
2. Changes in Beef Brand (Pty) Limited’s livestock during the year were as follows:
• 1 080 calves were born, of which 24 died,
• 36 cows died,
• 100 cows were purchased by it,
• 18 cows were slaughtered by it and used as rations for its labourers,
• six cows were given by it to a local ‘approved’ public benefit organisation for a fund-raising
event that it was holding. (Although this public benefit organisation is approved as an
exempt from normal tax taxpayer, it is not approved as a ‘qualifying’ entity for the purposes
of section 18A donations.)
• 216 cows were sold. Of these 216 cows, 36 were sold on account of the drought that
occurred during the winter. The amount received from the sale of these 36 cows was
R288 000. It deposited R240 000 (of this R288 000) in an investment with the Land and
Agricultural Bank of South Africa one month after receiving the R288 000. Local interest of
R21 600 had accrued on this investment at 28 February 2022,
• 10 oxen were sold,
• two stud bulls were given to it by its managing director to be used to improve the breed of
the herd,
• 84 cows were sent by it to graze on a farm in Zimbabwe for the first three months of the
2022 calendar year, that is from 1 January 2022 to 31 March 2022. They will return when
the grazing facilities improve in South Africa,
• 936 calves matured to become tollies and heifers,
• 900 heifers matured to become cows, and
• five of its bulls were castrated (had their testicles removed). In other words, they became
oxen.
3. Beef Brand (Pty) Limited used alfalfa it had grown as cattle feed during the year. Its value
used was R18 000 and its cost of production was R14 400. At the end of its 2022 year of
assessment, the estimated market value of the crop not yet reaped was R6 000 while a further
R3 500 (market value but with a R2 400 cost) worth of alfalfa was reaped and stored in its
storeroom.
4. The interest incurred by Beef Brand (Pty) Limited was on a short-term loan that was granted to
it to enable it to purchase some of its livestock (see above).
5. Beef Brand (Pty) Limited’s balance of capital development expenditure unredeemed at

1 March 2021 was R25 000. An old tractor that had originally been purchased by it for
R60 000, and that had a ‘nil’ tax value, was sold by it for R24 000 on 2 March 2021. A second-
hand plough was purchased by it on 1 April 2021 for R4 800 and was immediately brought
into use by it.
Other than Beef Brand (Pty) Limited’s receipts as detailed in its receipts and payments account and
the local interest that has accrued to it on its Land and Agricultural Bank of South Africa
investment, no other amounts accrued to it in its 2022 year of assessment. And other than its
payments as detailed in its receipts and payments account, no other amounts were incurred by it in
It is the policy of Beef Brand (Pty) Limited to declare a dividend shortly after the last day of its
year of assessment:
• On 31 March 2021 it declared and paid a dividend of R8 000.
• On 2 March 2022 it declared and paid a dividend of R90 000.
You are required to determine Beef Brand (Pty) Limited’s
1. 2022 normal tax liability, and
2. the amount of dividends tax and that it is required to withhold from the dividend that it
declared and paid on 2 March 2022. None of its shareholders is an exempt beneficial
shareholder.
15.4 (50 minutes)

This question tests the normal tax model as it applies to a farmer. It tests sections 11(a), 12B,
13sex, 22 and 23(g) and paragraphs 2, 3, 4, 11 and 12 of the First Schedule.
Fred Friesland, aged 55 years, has been farming in the Underberg district for the past 35 years. He
is a resident of the Republic. He is married with two sons and two daughters. Both his sons are at
present full-time students, the older, aged 24 years, at a university, and the younger, aged 22 years,
at an agricultural college. His older daughter who is 19 years old is a nurse while the younger one,
aged 17 years, is still at school.
Fred Friesland’s major farming activity is his dairy farming. This he supplements by potato,
vegetable and poultry farming.
Fred Friesland’s older son is in the commerce faculty at university and has, during his university
vacation, prepared the following departmental trading accounts and statement of profit or loss and
other comprehensive income for his father’s trading activities the 2022 year of assessment.
Dairy Trading Account
25 dairy cows purchased (see note 1) 300 000 Milk and cream sales 344 400
1 bull purchased 60 000 10 dairy cows sold – normal 192 000
Trading profit 496 400 25 dairy cows sold – abnormal
(see note 4) 320 000
856 400 856 400
‘Other’ Farming Trading Account
Farm operating expenses (deductible) 124 900 Potato sales 450 000
Casual labour 114 500 Vegetable sales 110 800
Trading profit 442 600 Fowl and egg sales 66 600
Produce sold 54 600
682 000 682 000
FARMERS 319
Statement of Profit or Loss and other Comprehensive Income

Cattle feed 124 000 Government subsidies received
Veterinary expenses 16 000 – 25 cows sold (see note 4) 30 000
Seeds and fertiliser 30 000 – Irrigation scheme 12 000
Railage on milk and cream 4 000 – Road making 8 000
Other expenses (deductible) 1 600 – Interest incurred 7 750
Salaries 485 000 Land rentals 60 000
Manager’s salary 180 000 Hire of tractors 18 000
Depreciation of farm implements (at Grazing fees 6 000
10%) (see note 10) 18 000 Dairy trading profit 496 400
Vehicle running costs 37 400 Other farming trading profit 442 600
Repairs to farm implements 18 100
Administration costs 18 500
Eradication of noxious plants 12 000
Interest incurred on Land and
Agricultural Bank of South Africa
loan 18 000
Net profit 118 150
1 080 750 1 080 750
Notes
1. Of the 25 cows that were purchased by Fred Friesland at R12 000 each, 10 were purchased in
lieu of the cows sold on account of the drought (see note 4). The remaining 15 cows had been
purchased in the ordinary course of his farming operations.
2. Details of the numbers of livestock owned by Fred Friesland and their movements follow:
Bulls Cows Tollies and Calves
heifers
Stock at 1 March 2021 5 80 30 20
Purchases 1 25 – –
Births – – – 40
Inherited – 20 – –
Sales – 35 – –
Thefts – – – 10
Deaths 1 9 10 –
Donation made – 1 – –
During the year 30 calves matured to become tollies and heifers, while 20 heifers matured to
become cows.
3. The following unit values apply to Fred Friesland’s livestock.
Livestock Regulation Market

category value value
Bulls 50 60 000
Cows 40 12 000
Tollies and heifers 30 9 000
Calves 4 5 000
4. The abnormal sale by Fred Friesland of 25 cows for R320 000 (in total) was a result of the
severe drought conditions that occurred during the 2022 year of assessment. A subsidy of
R30 000 was received by him from the Government on account of this sale.
5. Produce consumed by Fred Friesland and his family during the year cost R16 650 (market
value R24 975), while that used for rations for his employees cost R54 000 (market value
R81 000). Produce used for feeding his livestock cost R72 000 (market value R108 000). His
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:
Prevention of soil erosion 18 000

Road making 26 000
New fencing 4 800
New tractor 155 000
Bulldozer (used exclusively for road making) 75 000
At the beginning of the year of assessment Fred Friesland owned two other tractors. One of
these was written off in an accident but the other is still in use. Each tractor had a ‘nil’ tax
value on 1 March 2021.
7. Fred Friesland had a balance of unredeemed capital development expenditure at 1 March 2021
of R47 050.
8. On 1 December 2021 a new house was erected by Fred Friesland at a cost of R275 000, into
which Dick Turner, his farm manager, moved. Since 1 January 2011 Dick Turner had been
living in a cottage (small house) that Fred Friesland had erected for him on the farm. This
cottage has now been converted by Fred Friesland into a guest cottage for visitors. It originally
cost R160 000 to build. Over the years Fred Friesland has erected housing for his employees.
Including Dick Turner’s house, Fred Friesland has now erected a total of seven houses for his
employees.
9. Fred Friesland is a member of a medical scheme contributing R3 000 a month. His wife, their
three children, and himself are beneficiaries under this medical scheme. Medical expenses not
paid by his medical scheme were R17 550.
10. Farm implements were purchased by Fred Friesland for R180 000 on 1 April 2017 and were
brought into use by him immediately for farming purposes.
Fred Friesland has not as yet elected to be subject to normal tax under paragraph 19(5) of the First
Schedule.
You are required to determine the 2022 taxable income of Fred Friesland.
15.5 (60 minutes)

This question tests the normal tax liability determination of a farmer who has elected to be
subjected to normal tax on the ‘average’ basis. It tests the normal tax model including the definition
of ‘gross income’ and the definition of a ‘severance benefit’, the general deduction
formula (sections 11(a) and 23(g)), sections 5, 5(10), 6, 8(4)(a), 10(1)(i), 10(1)(k), 10(1)(nA),
11(e), 11F and 12B, paragraphs 2, 3, 8, 11, 12 and 19 of the First Schedule, the Second Schedule
and paragraphs 20 and 35 of the Eighth Schedule.
Cocky Bantam, a resident of the Republic, retired from his position of employment with Thunder
Chickens Limited, at the age of 56 years on 30 June 2021.
Cocky Bantam had purchased a farm in the 2021 year of assessment. He had employed a manager
to run the farm on which he is growing fruit and raising cattle.
Chic Bantam, Cocky Bantam’s wife, a qualifying nurse, works as an assistant to a veterinary
surgeon. She is required as a condition of her employment to wear a special uniform which is
similar to that worn by a nurse. Her salary and her uniform allowance are her only receipts and
accruals for the 2022 year of assessment.
FARMERS 321
The following information relates to Cocky Bantam’s 2022 year of assessment:
Salary at R31 700 a month (for four months) 126 800

Retirement gratuity from Thunder Chickens Limited (accrued to him on 30 June 2021) 45 000
Lump sum from its pension fund (accrued to him on 21 July 2021) 560 000
Monthly amount from its pension fund – R23 600 a month (for eight months) 188 800
Local interest from investments – not ‘tax free investments’ 26 040
Interest incurred on the mortgage bond over the farm 16 000
Less interest subsidy received from the Government 4 000 12 000
Cost of erecting new fences 2 600
Twelve cows purchased at R12 000 each 144 000
One bull purchased 20 000
Donation received from his brother – three cows with a market value of R12 000 each –
Donation made by him to the local church function – one cow at a cost price of R7 200
(purchased during the 2021 year of assessment) and a market value of R12 000 –
Cost of a compound erected by him to house 15 farm labourers 553 600
Costs incurred in preventing soil erosion 1 950
Cost of building a new dam that was completed on 1 April 2021 11 400
New tractor purchased and brought into use by him on 1 July 2021 180 000
Second-hand truck purchased by him on 1 September 2021 exclusively for farm
business use 77 000
Cost of erecting a cottage (small house) by him for his farm manager 390 000
Farming operating expenses (all deductible in the determination of his farming taxable
income) 188 900
Contributions to the pension fund at 5% of his salary 6 340
Fruit sales 507 510
Ten cows sold at R12 500 each 125 000
Value of harvested fruit crop – at 1 March 2021 26 370
Value of harvested fruit crop – at 28 February 2022 29 840
Sale of second-hand tractor by him on 30 June 2021 (its original cost was R12 000
in the 2021 year of assessment) 6 000
The following information relates to Chic Bantam for the 2022 year of assessment:
Salary at R20 600 a month (for 12 months) 247 200

Allowance received towards her uniform 4 800
Notes
1. On 1 March 2021 Cocky Bantam’s opening stock figures and relevant values for each
livestock category were as follows:
Livestock Quantity Cost Market Standard
category price value value
Cows 50 4 500 12 000 40
Bulls 1 7 200 15 000 50
During the 2022 year 20 calves were born. No livestock died. The relevant values of all his
livestock at 28 February 2022 was as follows:
Livestock Market Standard
category value value
Cows 12 000 40
Calves 5 000 4
Bulls 20 000 50
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
15.6 (40 minutes)

This question tests the normal tax model as it is applied to a farmer. It tests sections 10(1)(i),
10(1)(k), 11(a), 11(d), 12B, 13sex, 22, 26 and 26A, paragraphs 2, 3, 8, 11 and 12 of the First
Schedule and paragraphs 4, 5, 6, 8, 10, 20 and 35 of the Eighth Schedule.
James Jersey, aged 38 years and a resident of the Republic, submitted the following information to
the Commissioner in support of his return of income for the 2022 year of assessment:
• Livestock sold by James Jersey to Blade Slaughter on 1 February 2022 for R67 500. Since
Blade Slaughter had insufficient funds available, James Jersey agreed to accept a bill due on
1 June 2022.
• Some livestock was sold by James Jersey as a direct result of the prolonged drought for
R75 000. Of this R75 000 amount, R60 000 was invested in the Land and Agricultural Bank of
South Africa on 31 October 2021. This investment is not a ‘tax free investment’. The balance of
this investment was R63 000 at 28 February 2022 – the interest earned on it being capitalised
monthly. He withdrew R20 000 from this investment on 31 May 2022, and the balance when he
closed this investment on 30 September 2022.
• Rentals of R6 000 from livestock leased by James Jersey to Ram Dexter, his brother-in-law,
(note 1).
• Rentals of R18 000 earned by James Jersey from his farm in the Free State. The lessee found it
necessary to construct a farm road and a bridge. James Jersey allowed him to deduct their cost of
R10 500 from his rentals, leaving a net rental of R7 500.
• A flock of sheep was sold by James Jersey for R351 000.
• Twenty bales of wool (valued at average cost of production of R14 250) were railed by James
Jersey to Wool Brokers Limited, East London, on 10 February 2022. They were sold by it on
10 March 2022 for R22 500.
• A crop of potatoes was sold by James Jersey for R425 000. This amount includes the equivalent
of R37 500 for potatoes that he sold in Zimbabwe.
• Government subsidies were received by James Jersey in December 2021 for
– 10 cattle condemned by the State Veterinarian of R14 250, and
– a dam to be built during the 2023 year of assessment of R12 000.
• A total of 100 000 bags of wheat were sold by James Jersey during the year of assessment to
Farmers’ Co-operative Limited. The statement of account received by him from it reads as
follows:
FARMERS 323
Sales: 100 000 bags of wheat 346 000

Deduct the purchases you made for the following items as
detailed below:
– Pumping engine 31 500
– Jute bags, seed, fodder and spare parts 28 500
– Fruit trees 4 500
– Railage for wheat 600
– Hail insurance premium 900 66 000
Net amount deposited into your bank account 280 000
• Director’s fees of R24 000 were awarded to James Jersey by Farmers’ Co-operative Limited.
Expenses
James Jersey’s expenses incurred were as follows:
Purchase of a stud bull 45 000

Hotel and travelling expenses incurred in connection with an abroad trip
undertaken for the sole purpose of purchasing the above stud bull 26 250
Farm salaries
– Foremen and permanent farm labourers 529 250
– Bookkeeper 76 800
– Casual labour for the construction of irrigation furrows 68 825
Livestock purchased in Botswana and brought to his KwaZulu-Natal farm 63 000
Cost to date of new cow-shed still under construction 31 500
Cost of converting old cow-shed into quarters for 10 farm labourers 128 500
Repairs to farm implements 14 500
Repairs to grain shed 6 634
Cost of erection of foremen’s houses
– For Jack Stallion, his ‘livestock’ foreman 252 500
– For Timothy Hay, his ‘crops’ foreman 270 500
Notes
1. James Jersey’s 2021 income tax assessment revealed that the tax value of his livestock on hand
at 28 February 2021 was R8 000. At the close of the 2022 year of assessment he owned the
following livestock:
• One stud bull at a cost price R45 000 (see above). The market value of the bull is R52 500.
Its standard value is R50.
• One thoroughbred bull calf. Its standard value is R4 and its market value is R4 500.
• 150 cows. The standard value of a cow is R40. Because of the prolonged drought
conditions, on 30 September 2021, 100 of these cows were leased to Ram Dexter, James
Jersey’s brother-in-law in Gauteng (see above). The market value of a cow is R12 000.
2. James Jersey’s 2021 assessment also indicates that as at the end of that year, he had a credit for
capital development expenditure of R139 000.
3. A tractor that had originally been purchased by James Jersey for R63 000 on 1 December 2016
and which had a ‘nil’ tax value was sold by him on 31 August 2021 for R65 400. It had
qualified for the section 12B capital allowance. A new tractor was purchased for R115 350 and
brought into use by him on the same day.
4. Neither of the farm foremen is related to James Jersey. Jack Stallion is a bachelor. Timothy
Hay is married. Poppy Hay, his wife, is employed by James Jersey as the farm bookkeeper.
She is paid a salary of R76 800 for the services she performs (see above).
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.
15.7 (30 minutes)

This question tests the paragraph 19(5) election made by a farmer.
Boer Farmer, aged 45 years, is a resident of the Republic. He commenced farming five years
previously. For the 2022 year of assessment he has now made the election to be subjected to
normal tax on the so-called average basis under paragraph 19(5) of the First Schedule. Details of
his taxable income follow:
Year of Taxable Farming Other
assessment income
2017 123 000 105 000 18 000
2018 130 000 120 000 10 000
2019 42 000 -8 000 50 000
2020 69 000 -1 000 70 000
2021 150 000 130 000 20 000
2022 315 000 320 200 -5 200
Boer Farmer’s other taxable income above is net of all other exemptions from normal tax that he
enjoys and amounts deductible in the determination of his taxable income.
You are required to
1. determine Boer Farmer’s normal tax liability for the 2022 year of assessment,
2. determine the three items listed below for each year of assessment, on the assumption that he
had first made the paragraph 19(5) election in the 2020 year of assessment:
• his average farming income for each year of assessment,
• his ‘rating income’ (represented by ‘B + D – C’ in the section 5(10) ‘rating formula’) for
each year of assessment,
• state whether the formula would apply, and
3. re-determine his normal tax liability for the 2022 year of assessment assuming that he had not
made the paragraph 19(5) election.
15.8 (60 minutes)

This question tests the paragraph 13 (government livestock reduction schemes), paragraph 15
(plantation) and paragraph 19 (‘averaging’) elections. It tests the normal tax model including
sections 5, 5(10), 6, 10(1)(i) and 11F, paragraphs 2, 3, 15 and 19 of the First Schedule and the
Second Schedule.
At the end of the 2015 academic year Rusty Barnes, a resident of the Republic, returned home to
his parents’ farm after completing two years at an agricultural training college. On 1 March 2016
he was made a partner with his father Bill Barnes in their farming activities. They share profits and
losses on an equal basis.
FARMERS 325
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
Purchases
– 100 head at R9 500 each (note 1) 950 000
Sales 1 689 000
Donations to charity
– At standard value 640
– At estimated cost 3 000
Used for labourers rations
– At estimated cost 4 000
Consumed by Bill and Rusty Barnes (note 2)
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.
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).
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.
15.9 (50 minutes)

This question tests the paragraph 13 (government livestock reduction schemes) election and the
paragraph 13A (deposits in the ‘Land and Agricultural Bank of South Africa’) election. It tests the
normal tax model applied to a farmer including sections 5, 5(1), 6, 10(1)(i), 10(1)(k), and 11F and
paragraphs 2, 3, 8, 12, 13, 13A and 19 of the First Schedule.
Les Land
Due to drought conditions, Les Land was forced to sell his entire flock of sheep during August
2021. This forced sale inflated his gross income by R160 000, resulting in him having a farming
taxable income of R425 000 for the 2022 year of assessment. He incurred no capital development
expenditure during the 2022 year of assessment.
On the advice of Arthur Golby, Les Land’s accountant, he invested the entire R160 000 with the
Land and Agricultural Bank of South Africa on 1 September 2021. Yet so as to make his second
provisional tax payment, he withdrew R20 000 on 28 February 2022. After this withdrawal, the
balance in this account was R143 600, the difference being local interest that had accrued to him.
This investment is not a ‘tax free investment’.
Les Land’s R425 000 farming taxable income includes the R160 000 from the sale of his flock of
sheep, but does not take into account the local interest that accrued to him.
Details of Les Land’s non-farming receipts, accruals and expenses for the 2022 year of assessment
follow:
Director’s fees from Wool Co-Operative Limited 36 000

Local interest from other investments – also not ‘tax free investments’ 26 750
Income portion of a purchased annuity 2 450
Les Land, who is 45 years old, has made the election to be subject to normal tax on the so-called
average basis under paragraph 19(5).
FARMERS 327
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:
Five cows sold 59 000

One bull sold 30 000
Milk sales 995 250
Other general farming receipts and accruals 108 000
Local interest accrued from a non ‘tax free investment’ 34 800
Fred Forbes’s expenses 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
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.
15.10 (50 minutes)

This question tests the paragraph 19 (average basis) so-called election. It tests the normal tax model
applied to a farmer including sections 5, 5(1), 6, 6A, 6B, 11(d) and 12B and paragraphs 2, 3, 8, 11,
12, 13A, 14, 15 and 19 of the First Schedule.
Gerry Herd, a widower, aged 62 years, is a resident of the Republic. He farms in the KwaZulu-
Natal Midlands. He breeds beef cattle and grows various grain crops for the local and Zambian
markets. In addition, every seven years, he fells the timber on his farm and sells it to a local wood-
dealer.
Gerry Herd submits the following information for his receipts and accruals and expenditure for the
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
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
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.
15.11 (45 minutes)

This question tests the normal tax liability determination of a farmer. It tests sections 5, 5(10), 6,
6B, 12B, 18A, 23(a) and 23(b) and paragraphs 2, 3, 11, 12, 13 and 19 of the First Schedule.
Hamish Hogg, aged 50 years, and a resident of the Republic, is a pig farmer. The following
information is relevant for the 2022 year of assessment:
Pigs sold 948 200
Pig manure (dung used for fertilising land) sales 408 000
Subsidy received from the Government toward interest incurred on funds borrowed from
the Land and Agricultural Bank of South Africa (note 3) 15 000
Bonus from the Colenso Co-operative Society based on its turnover from pigs supplied
to it by Hamish Hogg 130 000
Expenses
Pigs purchased (note 2) 660 000
Salaries – farm employees 376 500
Veterinary expenses (note 4) 22 000
Hire of farming equipment 6 000
Pig feed purchased (note 5) 251 400
Dipping tank constructed 48 300
Donation to a ‘qualifying’ university 30 000
Medical scheme contributions (note 6) 54 480
‘Qualifying medical expenses’ paid and not recovered from his medical scheme 41 146
Notes
1. On 1 December 2019 Hamish Hogg had purchased a tractor for R120 000.
2. Details of Hamish Hogg’s livestock are as follows:
Pigs Over six Under six
months months
(older) (young)
Standard value 12 6
Market value 750 300
Opening stock (number) 300 350
Closing stock (number – unavailable, but see below) ? ??? ? ???
The following livestock events took place during the 2022 year of assessment:
• 50 older pigs and 100 young pigs died of natural causes.
• 1 100 older pigs were purchased for R660 000. Of these, 900 were purchased to replace
older pigs, that he had sold three years earlier because of a livestock disease. He elected that
the provisions of paragraph 13(1)(a) of the First Schedule be applied to him. The other
200 older pigs were purchased in the ordinary course of his farming operations.
• 3 400 young pigs were born.
• 1 550 young pigs matured into older pigs.
• 10 older pigs were slaughtered for consumption by his family and himself. These were the
only items of livestock that were consumed.
• 1 590 older pigs were sold.
FARMERS 331
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.
15.12 (30 minutes)

This question tests the normal tax liability of a plantation farmer. It tests the normal tax model
including sections 5, 5(10), 6, 8(4)(a), 10(1)(i), 10(1)(k), 12B and 20 and paragraphs 12, 14 and 15
of the First Schedule.
Timba Sensible is 65 years old. He is a resident of the Republic. He resides on a farm situated on
the lower KwaZulu-Natal South Coast. He carries on plantation farming.
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
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
15.14 (45 minutes)

This question tests the normal tax liability determination of a farmer who has elected to be
subjected to tax on the ‘average’ basis. It tests the normal tax model including the definition of
‘gross income’, the general deduction formula (sections 11(a) and 23(g)), sections 5, 5(10), 6,
8(4)(a), 10(1)(i), 10(1)(k), 10(1)(nA), 11(e) and 12B, paragraphs 2, 3, 8, 11, 12 and 19 of the First
Schedule, the Second Schedule and paragraphs 20 and 35 of the Eighth Schedule.
Savannah Skilderbok, aged 55 years, is a resident of the Republic. She has been farming goats for
the past 20 years. And she also has a well-established nut orchard (land planted with fruit trees).
Savannah Skilderbok’s receipts and accruals for the 2022 year of assessment were as follows:
Nuts sold 822 600
Goats sold 980 000
Bonus from a customer (based on the quantity of nuts supplied to it) 15 800
Subsidy from the Government for the prevention of soil erosion 8 500
Subsidy from the Government for interest on a loan. She used these borrowed funds to
finance the planting of her new nut orchards 9 500
Local interest earned from investments not being ‘tax free investments’ 43 800
Grazing fees earned 35 000
Rentals earned from letting part of her farm to a neighbour for six months 40 000
Amount obtained by her from the sale of a tractor. (It was sold on 31 January 2022.) 50 000
(It had been purchased by her for R130 000 on 1 March 2020.)
Sale of part of her farm to a neighbour (note 1) 500 000
Expenditure
The expenditure Savannah Skilderbok incurred during the 2022 year of assessment was as follows:
Purchases of goats 375 000
Salaries paid to farm employees 577 880
Clearing of land for the planting of a new nut orchard 75 000
Trees purchased to be planted in the new nut orchard 146 000
Interest incurred on a loan. She used these borrowed funds to finance the planting of
the new nut orchard 12 500
Erection of a compound (a block of flats) and a house for her employees (note 3) 950 000
Purchase of new tractor (on 1 May 2021) 140 000
Cost of packaging nuts 12 460
New dipping tanks 99 500
Fodder purchased 15 000
Veterinary expenses 5 600
Repairs to fences 25 000
Notes
1. On 30 September 2021 Savannah Skilderbok sold the north-east corner of her farm (consisting
of undeveloped land and a dam) for R500 000. She had previously let this north-east corner to
her neighbour. Of the R500 000 selling price, R100 000 was for the dam. The base cost of the
dam was R75 000 and the base cost of the undeveloped land was R120 000.
2. Savannah Skilderbok’s livestock and produce was as follows:

Details of goats Cost price Market value Standard value
Goats on hand
28 February 2021 580 000 1 780 000 7 120
28 February 2022 660 000 2 450 000 9 800
Nuts
28 February 2021
– Harvested 170 000 310 000
– Unharvested 195 000 339 000
Nuts
28 February 2022
– Harvested 180 000 360 000
– Unharvested 220 000 440 000
Savannah Skilderbok donated 10 goats to the local mosque for a charitable function.
Savannah Skilderbok slaughtered 12 goats as rations for her employees. She slaughtered two
goats for her own consumption. Each goat had a cost price of R180, a market value of R750,
and a standard value of R4.
Savannah Skilderbok inherited 220 goats during the 2022 year of assessment. Each inherited
goat had a market value of R750 and a standard value of R4. The value of these goats is
included in the value of livestock on hand at 28 February 2022.
3. Savannah Skilderbok erected a compound (a block of flats) to provide housing for seven of her
employees. Its cost of erection was R350 000. She also erected a house for her farm manager.
Its cost of erection was R600 000. The erection of the compound and the house had
commenced on 1 June 2021. Both buildings were completed on 31 January 2022 and occupied
by her employees as from 1 February 2022.
4. Savannah Skilderbok’s balance of capital development expenditure brought forward from the
2021 year of assessment is R37 000.
5. Savannah Skilderbok has elected to be subject to normal tax under paragraph 19 of the First
Schedule. During the previous five years of assessment her taxable income (or deductible loss)
from farming was as follows:
Year of Taxable farming
assessment income or loss
2021 -2 000
2020 62 500
2019 -40 500
2018 -10 000
2017 7 000
You are required to determine Savannah Skilderbok’s 2022 normal tax liability.
15.14 (40 minutes)

This question tests the livestock purchases limit (paragraph 8 of the First Schedule). It tests the
normal tax model applied to an ‘arm-chair’ farmer. It tests sections 5, 6 and 11(a) and paragraphs 2,
3 and 8 of the First Schedule.
Part 1
Flip Grafton-Everest a resident of the Republic, and an ‘armchair farmer’, purchased Princess
Chesterfield, a broodmare, on 1 June 2021 under a 10-year suspensive sale agreement for R78 800.
FARMERS 335
This cost is made up of her

• cash cost of R50 000, and
• finance charges of R28 800 for the 10-year period.
The purchase consideration is being repaid at the rate of R240 a month. (The R28 800 represents a
yield to maturity of 0,83855% on a monthly accrual basis.)
Princess Chesterfield was sent by Flip Grafton-Everest to a stud farm where she was successfully
covered. Her foal is expected to be born in September 2022. This is the first farming venture
entered into by him. No farming income was received by or accrued to him in the 2022 year of
assessment.
Part 2
Assume that Princess Chesterfield was sent by Flip Grafton-Everest to a stud farm, and after
unsuccessful attempts to put her in foal, it was established that she was barren and would not
produce any progeny.
Unfortunately for Flip Grafton-Everest the insurance policy that he had taken out for Princess
Chesterfield did not cover this eventuality.
Although Flip Grafton-Everest is selling Princess Chesterfield, no offers of purchase had been
received by him by 28 February 2022. It is expected that she would sell for R1 000.
Part 3
Assume that Princess Chesterfield had been sent to a stud farm where she was struck by lightning
and killed.
Flip Grafton-Everest was then awarded R45 000 by the insurers with whom he had insured Princess
Chesterfield’s life.
Flip Grafton-Everest settled his suspensive sale debtor on 28 February 2022. As a result of this
early settlement, a rebate of finance charges of R24 480 was enjoyed by him.
Part 4
Bob Brood and Sid de Mare entered into an equal partnership for the first time in the 2022 year of
assessment as breeders of race horses. They are both residents of the Republic.
For the 2022 year of assessment the partnership’s receipts and accruals and expenses were as
follows:
Sale of Wingback (see note below) 300 000
Expenditure
Purchase of Wingback, the first broodmare 200 000
Purchase of Chez Lounge, the second broodmare 600 000
Boarding fee and keep charges 20 000
Farrier’s fee 1 000
Foaling fee 400
Management fee 1 000
Registration fee 300
Sales preparation 800
Selling expenses 200
Service fee 75 000
Veterinary expenses 700
Notes
1. Three months after purchasing the two broodmares, the partners were approached by another
breeder who made them an offer for Wingback which they were unable to refuse.
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.
15.15 (40 minutes)

This question tests the definition of ‘gross income’, sections 11(a) and 23(g), and the First
Schedule and the judgment from Afrikaanse Verbond Begrafnis Onderneming Beperk v CIR (1950
(3) SA 209 (A), 16 SATC 40). It is suitable for a student studying a masters’ degree (or similar
course) on taxation.
Tiny-Tim Tomaccio carries on both farming and manufacturing operations. He grows tomatoes
both on his own property and on leased land. He manufactures tomato chutney in a leased factory.
Once Tiny-Tim Tomaccio’s tomatoes are harvested, they are classified into ‘quality’ tomatoes and
‘inferior’ tomatoes:
• His ‘quality’ tomatoes are then sold as ‘fresh’ tomatoes to a large supermarket chain.
• His ‘inferior’ tomatoes are then delivered to his tomato-chutney factory to be made into tomato
chutney.
Tiny-Tim Tomaccio has an insufficient quantity of ‘inferior’ tomatoes for his tomato-chutney
manufacturing business. He therefore purchases quantities of ‘inferior’ tomatoes from other tomato
farmers in the region. These ‘purchased’ tomatoes are solely for the manufacture of tomato
chutney.
Piet Marwick, Tiny-Tim Tomaccio’s former accountant, recently died. One of your partners has
now been appointed as his accountant.
Being the partner in the firm who is regarded as being knowledgeable on tax matters, he has
consulted you on the tax consequences (or transactions) that arise when Tiny-Tim Tomaccio (the
farmer) delivers his own ‘inferior’ tomatoes to Tiny-Tim Tomaccio (the manufacturer) to be made
into tomato chutney. If he is, in fact, dealing with himself, can this transaction, for normal tax
purposes, be regarded as a sale by him (as a farmer) and a purchase by him (as a manufacturer)?
And if so, at what price does this transaction take place?
You are required to prepare a memorandum to be sent to your partner providing the required
answer to his query relating to Tiny-Tim Tomaccio.
15.16 (60 minutes)

This question tests a farmer’s trading stock including section 22 and paragraph 3 of the First
Schedule. It tests the judgments from Smith v Anderson ((1880) 15 CLD 247), Modderfontein Deep
Levels Ltd v Feinstein (1920 TPD 228), Platt v CIR (1922 AD 42, 32 SATC 142) and COT v
Swaziland Ranches Ltd ((Swaziland Court of Appeal) (July 1978), 40 SATC 232. This question is
For years it has been the policy of the Overberg Farmers’ Co-Operative Society to hold sales of its
products in the last week of February and June each year.
Most farmers’ years of assessment end on the last day of February. A founder member of the co-
operative believed that it was tax advantageous for a farmer to make purchases of farm
FARMERS 337
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.
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
16.1 (15 minutes)

This question tests the taxation of fringe benefits including the definition of ‘gross income’,
sections 8(1) and 10(1)(mB) and paragraphs 2, 5, 7 and 9 of the Seventh Schedule.
Fifteen statements on the taxation of fringe benefits follow:
1. If a fringe benefit is subject to normal tax under paragraph (i) of the definition of ‘gross
income’ it is not subject to normal tax under paragraph (c) of the definition of ‘gross income’.
2. If a fringe benefit has a ‘nil’ value under paragraph (i) of the definition of ‘gross income’ it is
not subject to normal tax under paragraph (c) of the definition of ‘gross income’.
3. A bravery award will have a taxable value if it is in the form of a cash award.
4. A ‘long-service’ award as defined will have a ‘nil’ taxable value if it is a non-cash award and
its cost to the employer was not more than R5 000.
5. Determined value for purposes of the use of motor vehicle fringe benefit excludes value-added
tax.
6. Determined value for the purposes of the travel allowance includes value-added tax.
7. The factor used in the determination of the taxable benefit for the use of a motor vehicle fringe
benefit is reduced to 3,25% a month when the motor vehicle is the subject of a maintenance
plan.
8. The value of the taxable benefit for the use of a motor vehicle fringe benefit is reduced on
assessment when the employee travels in it for business purposes.
9. When an employer provides an employee with the free use of residential accommodation that
is owned by the employer, the value of this fringe benefit is determined using the formula:
(A – R87 300) × C / 100 × D / 12.
10. When an employer provides an employee with holiday accommodation that is owned by it
employer, the value of the fringe benefit is R300 per person per day.
11. It is tax inefficient to pay an employee who earns remuneration other than a commission, an
entertainment allowance.
12. Business kilometres for purposes of the travel allowance are those ranging between
10 000 kilometres and 30 000 kilometres a year.
13. If the travelling expenses (actual or deemed) exceed the travel allowance, the employee may
deduct this ‘loss’ in the determination of his taxable income.
14. For an employee who is away from home on business in South Africa for at least a night, his
employer may award him R435 a day ‘tax free’.
15. An employer may provide a transferred employee hotel accommodation at his new place of
employment for 183 days without this benefit becoming subject to normal tax.
339
16.2 (15 minutes)

This question tests the fringe benefits as recognised in paragraph 2 of the Seventh Schedule.
Many employers have offered their employees the option of taking non-cash benefits in lieu of
salary increases. These non-cash benefits can take the form of the acquisition of assets by an
employee, the use of an asset, or the receipt or accrual of an allowance.
The fringe benefit legislation seeks to subject an employee to normal tax on these non-cash benefits
received or accrued by virtue of his employment. The relevant legislation, most of which, is set out
in the Seventh Schedule, performs the following functions:
• It identifies the benefit, and
• then quantifies this benefit.
You are required to list the benefits that the legislation has identified in the Seventh Schedule as
being taxable benefits.
16.3 (75 minutes)

This question tests the fringe benefits contained in paragraphs 5(3A) (purchase of immovable
property), 8 (meals) and 9 (residential accommodation) of the Seventh Schedule.
The following taxpayers are all residents of the Republic. They are receiving accommodation
benefits from their employers. These benefits have been received throughout the 2022 year of
assessment. With the exception of the accommodation being provided to Redwood Brown (see
below), each employer owns the accommodation that is being occupied by his employee.
• Tracey Usher is employed as a receptionist at a local hotel. She is provided free of charge with
three meals and two teas a day, and with a furnished bedroom en suite. Her remuneration proxy is
R84 000. The average cost of a meal to her employer is R75 while the average cost of tea to her
employer is R10. Prior to becoming an employee of it, she used to lease a bachelor flat at a rental
of R4 750 a month. It could let her furnished bedroom en suite at a rental of R1 245 a night.
• Quinton Porter is employed as a doorman at a local hotel. He is provided free of charge with three
meals and two teas a day, and with a furnished bedroom en suite. His remuneration proxy is
R84 600. The average cost of a meal to his employer is R75 while the average cost of tea to his
employer is R10. Prior to becoming an employee of it, he used to board at a boarding house at a
cost of R3 900 a month. It could let his furnished bedroom en suite at a rental of R1 245 a night.
• Wayne Stuart is employed as a waiter at a local hotel. He is provided free of charge with three
meals and two glasses of wine a day, and with a furnished bedroom en suite. His remuneration
proxy is R90 000. The average cost of a meal to his employer is R75 while the average cost of a
glass of wine to his employer is R15. Prior to becoming an employee of it, he owned his own
flat. This flat cost him R6 350 in expenses each month to maintain. It could let his furnished
bedroom en suite at a rental of R1 245 a night.
• Gilbey Cane is employed as the barman at a local hotel. He is provided free of charge with three
meals and two drinks a day, and with a furnished bedroom, lounge and a bathroom. His
remuneration proxy is R96 000. The average cost of a meal to his employer is R75 while the
average cost of a drink to his employer is R18. Prior to becoming an employee of it he lived
with his girlfriend at her flat. He used to give her R2 750 a month towards his living costs. It
could let his furnished bedroom, lounge and bathroom at a rental of R1 550 a night.
• Dee Maitre is employed as an assistant manager at a local hotel. She is provided free of charge
with three meals and two teas a day, and with a furnished flat consisting of two bedrooms, a
lounge, a dining-room and a bathroom. This flat also comes with free fuel and power. Her
remuneration proxy is R144 000. The average cost of a meal to her employer is R75 while the
average cost of tea to her employer is R10. Prior to becoming an employee of it, she owned her
FRINGE BENEFITS 341
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-
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
• Royal Brick Pavings Limited purchased a plot of land for R110 000. It then erected on it a four-
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
• Royal Brick Pavings Limited purchased a plot of land for R80 000. It then erected on it a one-
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
• 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.
16.4 (40 minutes)

This question the tests ‘broad based share incentive scheme’ (section 8B) and paragraph 11 of the
Seventh Schedule.
Until 28 February 2021 Iris Lilywhite was the sole shareholder and director of Transformer (Pty)
Limited. Both it and her are residents of the Republic.
Transformer (Pty) Limited’s issued share capital comprised 100 000 equity shares with a nominal
value of R1 each. The market value of a Transformer (Pty) Limited equity share on 28 February
2021 (and on 1 March 2021) was R5.
In addition to Iris Lilywhite, Transformer (Pty) Limited has four full-time employees.
On 1 March 2021 Transformer (Pty) Limited issued a further 10 000 equity shares. They were
issued as part of its newly-created share incentive scheme. This scheme satisfies all the
requirements of the definition of a ‘broad based share incentive scheme’ as set out in section 8B of
the Income Tax Act.
Transformer (Pty) Limited then sold these 10 000 equity shares to each of its four full-time
employees (other than Iris Lilywhite) at R1 an equity share. Because of the increase in the number
of its equity shares, the market value of an equity share in it dropped to R4,55.
Transformer (Pty) Limited’s four qualifying employees were then given an interest-free loan by it
to pay for their equity shares in it.
FRINGE BENEFITS 343
The arrangement was recorded in the journal of Transformer (Pty) Limited as follows:
Loan to Kunye Dr 4 000

Loan to Kubili Dr 3 000
Loan to Kuhlanu Dr 2 000
Loan to Kune Dr 1 000
scheme’, the purchase price of these equity shares being settled out of
the amount obtained from interest-free loans advanced to the four
qualifying employees.
As far as employees Kunye and Kubili were concerned no further transactions took place during
After a short illness, employee Kuhlanu died on 31 August 2021. The market value of a
Transformer (Pty) Limited equity share was then R4,50. Iris Lilywhite purchased her 2 000 equity
shares in it from her executor for R9 000. Her executor then repaid her R2 000 loan from it.
Employee Kune left Transformer (Pty) Limited’s employment on 31 December 2021. The market
value of an equity share in it was then R5,10. She sold her 1 000 equity shares in it to Iris Lilywhite
for R5 100. On the same day, she repaid her R1 000 loan from it.
You are required to determine the normal tax consequences of the above transactions as far as they
relate to Transformer (Pty) Limited, employee Kunye, employee Kubili, employee Kuhlanu and
employee Kune.
16.5 (40 minutes)

This question tests the fringe benefits ‘allowances’ (section 8(1)), ‘residential accommodation’
(paragraph 9), ‘low-interest loans’ (paragraph 11) and ‘employee’s debts’ (paragraph 13) of the
Seventh Schedule.
Austin Bentley’s remuneration does not include commission. He enjoys five fringe benefits as part
of his salary package. These fringe benefits are
• an entertainment allowance,
• a travel allowance,
• a low-interest loan,
• residential accommodation, and
• certain telephone benefits.
Details of these allowances enjoyed by Austin Bentley are as follows:
Entertainment allowance
An entertainment allowance of R1 000 is awarded to Austin Bentley each month by Walter Horace
(Pty) Limited, his employer. He has kept detailed records of his entertainment expenses. They were
R9 300 in the 2022 year of assessment. Included in this R9 300 is his
• entrance fee of R2 400, and
• annual membership subscription of R850,
both paid to the local country club.
Travel allowance
Austin Bentley is awarded R18 500 a month by Walter Horace (Pty) Limited as a travel allowance
as part of his salary package.
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
16.6 (30 minutes)

This question tests the normal tax model including the fringe benefits ‘travel allowance’
(section 8(1)) and ‘residential accommodation’ (paragraph 9) of the Seventh Schedule. It also tests
sections 5, 6 and 11F.
Greg Plant, a factory production manager, wishes to relocate to Durban. He has been offered the
following two positions in Durban:
• The first is with Pink Circle Limited, a large organisation. It offers a cash salary of R700 000 a
year. It is not prepared to structure his salary package.
• Secret Spy Limited, the second organisation cannot match the R700 000 but is prepared to pay him
a package that amounts to R600 000. It is prepared to structure his salary package in any way that
might be to his advantage.
Greg Plant envisages incurring, amongst other things, the following expenditure, should he relocate to
Durban:
• The use of an unfurnished flat owned by Secret Spy Limited. (He will be responsible for
electricity and water.) The cost to it of this flat is R12 000 a month. This amount will be factored
into his salary package. To let a similar flat would cost him R14 000 a month.
• Car lease rental of R10 600 a month.
• Fuel and oil of (on average) R9 000 a month.
• Car maintenance and insurance of R36 400 a year.
• And retirement annuity fund contributions of R18 800 a year.
Greg Plant is at present leasing a car and does not wish to cancel this lease. (Had he purchased this
car for cash it would have cost R552 000 (R480 000 plus R72 000 value-added tax at 15%) at the
time he commenced leasing it.) He will keep a detailed logbook of all his trips undertaken. He
estimates that he will travel a total of 27 500 kilometres a year in this car. His private travelling will
be 16 500 kilometres.
Greg Plant is 28 years old. He is a resident of the Republic.
You are required to advise Greg Plant on a tax efficient manner to structure his proposed salary of
R600 000. And then, assuming the amount of work involved in the two positions offered is equal,
advise him which position he should accept.
16.7 (75 minutes)

This question tests the fringe benefits ‘travel allowance’ (section 8(1)) and ‘use of motor vehicle’
(paragraph 7) of the Seventh Schedule.
Maurice Laurel
Maurice Laurel has the free use of a motor car that cost Lance (Pty) Limited, his employer,
R276 000 inclusive of value-added tax at 15% when it was purchased on 1 March 2021. He is
allowed to take the motor car home each day and has unlimited use of it at weekends. It is fully
maintained by Lance (Pty) Limited. He is not required to contribute anything towards its
maintenance and running costs. Lance (Pty) Limited’s records reveal the following for it for the
Wear and tear on the motor car – R276 000 × 1 / 5 55 200
Fuel and oil 101 440
Repairs and maintenance 11 070
Insurance and licences 17 460
Other sundry expenses including parking and speeding fines 4 830
190 000
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:
Capital allowance and expenses Lewis Maxine

Limited Leyland
Wear and tear – five-year write-off period 70 380 –
Fuel and oil 105 225 –
Repairs and maintenance – 16 905
Tyres and tubes – 8 280
Insurance and licences 22 264 –
Membership of the Automobile Association – 276
Parking costs 4 140 –
202 009 25 461
Maxine Leyland travelled a total of 40 000 kilometres in this car during the 2022 year of assessment.
Of these 40 000 kilometres that she travelled, 30 000 kilometres were for her private use.
Estcourt Ford
Estcourt Ford is awarded a travel allowance of R12 000 a month by Estaban CC, his employer,
towards the business use of his own private motor car. He leases a motor car at a rental of R6 900 a
FRINGE BENEFITS 347
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
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
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.)
16.8 (25 minutes)

This question tests the fringe benefits ‘meals’ (paragraph 8), ‘residential accommodation’
(paragraph 9) and ‘cheap services’ (paragraph 10) of the Seventh Schedule. It also tests
section 10(1)(q) and Interpretation Note 17.
Dusty Chalk is employed by Johnhouse, an exclusive private boys’ boarding school situated on the
KwaZulu-Natal North Coast, as a teacher and as a housemaster. He is 43 years old. He is a resident
of the Republic. He has a wife, Grace Chalk, and they have two children, Hylton Chalk, a son and
Anne Chalk, a daughter.
As a housemaster at the school, Dusty Chalk is provided with an eight-roomed flat adjacent to the
boarding establishment. He and his family live in it free of charge. The flat is provided unfurnished.
All power and fuel costs for the flat are paid by Johnhouse. (The flat is owned by it.)
Hylton Chalk is a pupil at Johnhouse and is not, under the school rules, allowed to stay at home. He
(the son) has to live in the boarding establishment.
Anne Chalk’s daughter lives in the flat with him and his wife. She attends school in Durban, about
a half-hour’s drive from Johnhouse’s campus. Johnhouse transports Anne Chalk to and from school
each day free of charge. The cost of providing this service by it is estimated to cost R90 000 a year.
Nine other daughters of staff members also make use of this transport service.
Hylton Chalk was awarded a bona fide scholarship from Johnhouse resulting in him being provided
with free education and boarding by it. Parents of other pupils attending the school have to pay
R360 000 a year for school fees. The bursar employed by Johnhouse has estimated that the
marginal cost of providing children of its employees with free education amounts to R60 000 a
year, for each child.
Every meal consumed by the Chalk family is provided by the school free of charge. The bursar has
estimated that the average cost per person of each meal consumed at the school is R75. The Chalk
family are away on leave for 31 days of the year.
Dusty Chalk’s ‘remuneration proxy’ is R255 000 for the 2022 year of assessment. His basic salary
for the 2022 year of assessment is R180 000.
You are required to determine the amount to be included in Dusty Chalk’s income for the 2022
year of assessment, from his employment with Johnhouse.
16.9 (60 minutes)

This question tests the fringe benefits ‘allowances’ (section 8(1)), ‘vesting of equity instruments’
(section 8C), ‘use of a motor vehicle’ (paragraph 7), ‘residential and holiday accommodation’
(paragraph 9), ‘use of assets’ (paragraph 6), ‘employee’s debts’ (paragraph 13) of the Seventh
Schedule, section 6B and the exemption from normal tax contained in section 10(1)(nB).
David Samuels, a resident of the Republic, is currently employed as an advertising consultant by
Design Studio (Pty) Limited. Despite numerous requests made by him to it, it refuses to ‘structure’
his remuneration package to include fringe benefits.
David Samuels has recently been approached by Sellmore (Pty) Limited, a competitor of Design
Studio (Pty) Limited to take up full-time employment with it as its advertising consultant. The
remuneration package being offered by Sellmore (Pty) Limited includes a cash portion and certain
allowances and non-cash ‘perks’.
FRINGE BENEFITS 349
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).
16.10 (40 minutes)

This question tests the normal tax model including the fringe benefits ‘use of motor vehicle’
(paragraph 7), ‘residential accommodation’ (paragraph 9), ‘contribution to a medical scheme’
(paragraph 12A) and an ‘employee’s debts’ (paragraph 13) of the Seventh Schedule. It also tests the
sections 5, 6, 6B, 11F and 23(m).
Keith Lawn, aged 26 years, is a resident of the Republic. He recently qualified as a horticulturist.
His speciality is the maintenance of sports grounds. He has been offered two contracts of
employment:
• The first is from the University of Pinetown-Eastville as its ‘groundsman’.
• The other is from the Charcoalville Turf Club as its Track and Grounds Manager.
Keith Lawn is unsure which contract of employment to accept. Relevant details follow:
University of Pinetown-Eastville
Solely a ‘cash’ salary of R390 000 will be paid to Keith Lawn by the University of Pinetown-
Eastville. The following amounts will be deducted from it:
• A pension fund contribution at 6% of his ‘cash’ salary. (The University of Pinetown-Eastville
contributes on a rand-for-rand basis to this pension fund on behalf of its employees.)
• A medical scheme contribution at the rate of R750 a month. (The University of Pinetown-Eastville
contributes on a rand-for-rand basis to this medical scheme on behalf of its employees.) He will be
the only person from his family that will be a member of this medical scheme.
No other benefits are provided for in this contract of employment from the University of Pinetown-
Eastville.
Keith Lawn will have to accommodate himself and this will cost him R9 000 a month.
Keith Lawn is a registered horticulturist and his annual membership fee is R1 000.
Charcoalville Turf Club
Keith Lawn’s salary package from the Charcoalville Turf Club will be as follows:
• A ‘cash’ salary or R192 000.
• The ‘free’ use of a medium-sized truck. The Charcoalville Turf Club will purchase it at a cost of
R207 000 (R180 000 plus value-added tax at 15% of R27 000) to give its use to him. He
believes that this benefit will save him R10 500 a month. He will use this truck for business
purposes for 40% of its total use.
• The ‘free’ use of a furnished seven-roomed ‘cottage’ situated on the Charcoalville Turf Club’s
premises. Free fuel and power will also be provided by this employer to him. It is owned by the
Charcoalville Turf Club.
• Non-contributory membership of the Charcoalville Turf Club’s provident fund and its medical
scheme. It will contribute 12% of his ‘cash’ salary to its provident fund for his membership. And
it will contribute R1 100 a month to its medical scheme for his membership.
• The payment by the Charcoalville Turf Club of his membership fee for him to be a registered
horticulturist.
Assume that Keith Lawn will commence working on 1 March 2022. Also assume that he will pay
‘qualifying medical expenses’ that will not be recovered from the medical scheme of R26 506 in
You are required to determine which contract of employment provides Keith Lawn with a better
after-tax return. (Use 2022 tax legislation and rates.)
FRINGE BENEFITS 351
16.11 (45 minutes)

This question tests the fringe benefits ‘allowances’ (section 8(1)), ‘use of assets’ (paragraph 6), ‘use
of motor vehicle’ (paragraph 7), ‘residential accommodation’ (paragraph 9), ‘contributions to a
medical scheme’ (paragraph 12A) and ‘contributions to a retirement fund’ (paragraph 12D) of the
Seventh Schedule. It also tests the general deduction formula (sections 11(a) and 23(g)) and
sections 6A, 11F and 23(m).
Penny Smiles is a resident of the Republic. She is 41 years old. She is employed as a presenter by
NNC Television Limited. She is a co-presenter of ‘Up-Front’, a television programme that
addresses controversial and topical issues. Her duties include
• researching potential stories for reporting,
• ‘shooting’ sequences for television screening, and
• appearing weekly as a co-presenter of ‘Up-Front’.
Under Penny Smiles’s employment contract with NNC Television Limited, her remuneration
package for the 2022 year of assessment is made up as follows:
• She contributes 7,5% of her monthly cash salary to NNC Television Limited’s pension fund. On
a rand-for-rand basis, it contributes a like amount to its pension fund for her membership.
• An entertainment allowance of R1 000 a month. Her duties regularly and necessarily involve
entertaining to seek potential ‘stories’ for ‘Up-Front’. For the 2022 year of assessment she
incurred entertainment expenditure of R10 800.
• The free use of a motor car that was purchased by NNC Television Limited for R310 500
(including value-added tax at 15% of R40 500). It bears the full cost of maintenance. She is,
however, required to pay for the fuel for her private use of the motor car. Since she also owns a
sports car that she uses in the evenings and on weekends, she has maintained full records of her
use of its motor car. According to her records, from the logbook that she kept, she travelled only
7 500 ‘private’ kilometres in its motor car out of a total of 20 000 kilometres travelled in its
motor car during the 2022 year of assessment. She incurred R31 200 paying for the fuel for her
private use of its motor car.
• The free use of a fully-furnished three-bedroomed flat owned by NNC Television Limited.
Although she does not pay any rental for the use of its flat, she is obliged to pay for the
electricity and water. Her ‘remuneration proxy’ is R210 000. She incurred R50 400 in the 2022
year of assessment paying for electricity and water.
• A ‘grooming’ allowance of R2 300 a month to cover her clothing, facials and hairstyling costs
for her weekly television appearances. She is expected to appear ‘groomed’ for each appearance
that she makes on television. During the 2022 year of assessment she spent R14 400 on clothing,
R3 640 on hairstyling and R2 400 on facials.
• The use of a cellular telephone that cost NNC Television Limited R2 070 (including value-
added tax at 15% of R270). Rental and call charges paid by it during the 2022 year of
assessment were R5 760. She is on call when she is not in the office and the cellular telephone is
essential to fulfil that obligation. Her private use of the cellular telephone is incidental to her
business use of it.
• A ‘reimbursement’ allowance of R500 a month. She is often required to pay ‘cash’ amounts to
‘helpers’ when ‘shooting’ on site. These amounts paid are on the instruction of NNC Television
Limited and for the furtherance of its trade. She is required to prove to this expenditure to it. She
incurred R6 000 during the 2022 year of assessment on wholly incurring expenditure of this nature.
• She was invited to participate in NNC Television Limited’s share incentive scheme. On 1 June
2021 she was offered, and agreed to purchase, 10 000 shares in it at their current market value of
R5 each. There are no restrictions attached to these shares. They vested in her. She paid R40 000
of the purchase price on 1 June 2021. The balance of R36 000 was left owing as a loan
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.
16.12 (30 minutes)

This question tests fringe benefits as recognised in paragraph 2 of the Seventh Schedule. In
particular, it tests ‘allowances’ (section 8(1)), ‘use of motor vehicles’ (paragraph 7), ‘holiday
accommodation’ (paragraph 9(4)), an ‘interest-free loan’ (paragraph 11), ‘contributions to a
medical scheme’ (paragraph 12A) and an ‘employee’s debts’’ (paragraph 13) of the Seventh
Schedule. It also tests sections 10(1)(nB) of the Income Tax Act and sections 2, 17(2) and 18(3) of
the Value-Added Tax Act.
New Horizons Limited, a resident of the Republic, has a financial year that ends on the last day
of February. It manufactures greeting cards from a factory in Pinetown, KwaZulu-Natal. Its
human resources manager has requested your assistance regarding the normal tax and value-
added tax implications for certain fringe benefits being provided to George Hope, a newly-
appointed employee.
George Hope will be emigrating from the United Kingdom to South Africa to join New Horizons
Limited as its production director, with effect from 1 April 2022. From this date he will be a
As part of George Hope’s remuneration package he will be awarded the following benefits by
New Horizons Limited:
• The use of a double cab light delivery vehicle that cost R322 000 (R280 000 plus value-added
tax at 15% of R42 000). All petrol and maintenance expenses for this motor vehicle will be
paid by it. Due to the cost of this motor vehicle chosen by him he will be required to pay it
R1 200 a month for its use. Of the kilometres travelled in this motor vehicle by him, 20% will
be for business purposes.
• The use by Gwenyth Hope, his wife of a ‘second’ motor car. It cost R165 600 (R144 000 plus
value-added tax at 15% of R21 600). All petrol and maintenance costs of this motor car are to
be borne by him. Of the kilometres travelled in this car, 100% will be for private purposes.
• Temporary accommodation in a hotel for the months of April and May 2022 for George and
Gwenyth Hope (they have no children) until they are able to take occupation on 1 June 2022
FRINGE BENEFITS 353
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.
16.13 (20 minutes)

This question tests the fringe benefit of an employer providing a bursary or a similar educational
benefit to an employee. It tests sections 6B, 10(1)(q) and 10(1)(qA).
Country Manor College is a private high school for boys (a recognised educational institution). It
provides a qualification up to NQF level 4.
Sons of full-time employees of Country Manor College may attend the school at a favourable price.
It charges (debits) the employee concerned with the full school fees for the year, then partly settles
(credits) the employee’s fee account with a bursary. The full fee less the bursary results in the
employee paying an amount equal to the so-called marginal cost incurred for his son to attend the
school.
Daughters of full-time employees of Country Manor College are not allowed to attend the school. It
then grants a full-time employee of it a bursary to cover most of the cost of his daughter attending
Flamingo Girls High, a private high school for girls (a recognised educational institution).
Buff Fynbos-Geel
Buff Fynbos-Geel is a full-time teacher employed by Country Manor College. His 13-year-old son,
Rustic Fynbos-Geel, commenced attending it from 20 January 2022. On this day, it charged Buff
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.
16.14 (60 minutes)

This question tests the fringe benefits ‘cheap assets’ (paragraph 5), ‘use of motor vehicles’
(paragraph 7), ‘holiday accommodation’ (paragraph 9(4)), a ‘low-interest loan’ (paragraph 11) and
‘employee’s debts’ (paragraph 13) of the Seventh Schedule. It also tests the normal tax payable on
a retirement lump-sum retirement benefit and a severance benefit. It tests sections 5, 6,
(including 6(5)), 10(1)(i), 10(1)(nA), 11(a), 11F and the Second Schedule.
On 31 December 2021 Charles Royal retired from Crown Jewels (Pty) Limited having reached its
mandatory retirement age of 65 years. He had joined it, a jewellery manufacturer, on
31 January 2005. Upon his retirement he was awarded the following:
• R14 000 from Crown Jewels (Pty) Limited in lieu of accumulated leave that he had been unable
to use before his retirement. This amount accrued to him on 31 December 2021.
FRINGE BENEFITS 355
• 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.
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.
16.15 (40 minutes)

This question tests certain fringe benefits including ‘allowances’ (section 8(1)), ‘use of motor
vehicles’ (paragraph 7), ‘residential and holiday accommodation’ (paragraph 9) and ‘low-interest
loan’ (paragraph 11) of the Seventh Schedule. It also tests the definition and taxation of a
‘severance benefit’ and sections 11(a), 11(d) and 23(m).
Donovan Jayson is a resident of the Republic. He is employed by Casa Nova Designs as its
marketing director. He recently attained the age of 55 years.
Donovan Jayson’s salary package from Casa Nova Designs comprises cash amounts and certain
employment benefits. His earnings from it for the 2022 year of assessment were as follows:
• A basic salary of R180 000 a year.
• Sales commissions of R72 000.
• He enjoys an entertainment allowance of R950 a month. He has kept a file of all his receipts
from his entertaining activities. The total of his receipts for the 2022 year of assessment is
R12 000.
• A loan of R60 000 at 3%. Since he did not own a home of his own that he would ultimately live
in, he purchased a flat for R300 000 on 1 March 2021. He paid for this flat in cash – he had
R240 000 cash of his own and he used the R60 000 from his loan from Casa Nova Designs. For
the 2022 year of assessment he earned rentals of R35 200 from this flat, paid a levy (covering
the property rates and other deductible expenses in the determination of his taxable income) of
R9 600, incurred repairs and maintenance of R2 400, and paid the interest on his loan from Casa
Nova Designs. He did not, however, repay any of the capital of his loan from Casa Nova
Designs. (Assume that the relevant ‘official rate of interest’ is 4,5%.)
• He is provided rent free with a three-bedroomed house owned by Casa Nova Designs to live in. It
costs Casa Nova Designs R64 000 a year to provide him with this house. It could be let to an
independent third party at an annual rental of R72 000. Prior to moving into this house, he had
leased a flat at a rental of R7 500 a month. The house is provided unfurnished and he is personally
responsible for the payment of electricity and water. His ‘remuneration proxy’ is R225 000.
• The use of Casa Nova Designs beach-front cottage. It is let to non-employees of it at a rate of
R500 a day and to its employees and their families rent free. He spent 14 days at its beach-front
cottage during the 2022 year of assessment.
• The free use of a motor vehicle. It cost Casa Nova Designs R174 800 (R152 000 plus R22 800
value-added tax at 15%) on 1 March 2021. During the 2022 year of assessment he travelled
21 000 kilometres in it, of which 7 000 kilometres were for private purposes. He has kept a
detailed logbook of his travelling details.
• He personally owns a convertible sports car. When the weather is good he uses it instead of his
‘company car’. His employer is happy with this arrangement and awarded him a travel
allowance of R3 650 a month. He travelled 21 500 kilometres in the convertible sports car
during the 2022 year of assessment. Of these 21 500 kilometres travelled, 6 000 kilometres were
for private purposes. He has kept a detailed logbook of all his travelling details. The convertible
sports car cost him R59 584 (R53 200 plus R6 384 general sales tax on 1 March 1988). Running
costs of the convertible sports car were about R17 024 and standing charges were about R12 413
during the 2022 year of assessment. He did not keep detailed cost records, but is of the opinion,
FRINGE BENEFITS 357
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.
16.16 (45 minutes)

This question tests certain fringe benefits including ‘allowances’ (section 8(1)), ‘use of assets’
(paragraph 6), ‘use of motor vehicles’ (paragraph 7), ‘residential and holiday accommodation’
(paragraph 9), ‘contributions to a medical scheme’ (paragraph 12A) and ‘employee’s debt’
(paragraph 13) of the Seventh Schedule. It also tests the definition of ‘gross income’, sections 6B,
10(1)(i), 11F, 11(n) and 20 and paragraph 45 of the Eighth Schedule.
John Waters, aged 39 years, is a resident of the Republic. He is qualified structural engineer. For
a number of years he had conducted a consultancy business in his own name. In March 2021 his
major client was liquidated. Since this client owed him a significant amount in outstanding fees,
his financial affairs were placed under extreme pressure. He therefore took up an offer from
Buildam (Pty) Limited on 1 June 2021. He joined it as its (Buildam (Pty) Limited’s) technical
and operational director.
Buildam (Pty) Limited specialises in the building of bridges and dams. In March 2021 it
commenced a five-year contract to erect a new dam near Empangeni in KwaZulu-Natal. Its head
office is located in Umhlanga Rocks, also situated in KwaZulu-Natal.
John Waters’s involvement in this project requires him to spend three days a week at the
construction site and the remaining two days at Buildam (Pty) Limited’s head office. Since the
distance between the construction site and the head office is great, it has hired a garden flat in
Empangeni that he occupies for three nights each week when he is working at the construction site
(see below for details regarding this residential accommodation).
Under John Waters’s contract of employment (effective 1 June 2021), his remuneration package
from Buildam (Pty) Limited includes the following benefits:
• A cash salary of R30 000 a month. A ‘thirteenth’ cheque is paid by it to its employees on
31 December each year (Buildam (Pty) Limited’s financial year end) but is pro-rated for the
number of months service rendered by an employee during the financial year.
• An entertainment allowance of R1 000 a month. He must entertain certain Government
employees to ensure continued work from the Government. He has kept detailed records of his
entertainment expenses. For the 2022 year of assessment they were R10 460. Included in this
R10 460 is his entrance fee of R3 900 and annual membership subscription of R1 950 to the
country club in Empangeni.
• The free use of three motor vehicles. For the purposes of his work at the construction site
Buildam (Pty) Limited purchased a new truck on 1 June 2021 for R276 000 (R240 000 plus
value-added tax at 15% of R36 000). For his duties at the head office and for his use on the
weekends, he was given the use of the previous technical director’s ‘company car’ from 1 June
2021. This motor car was purchased by it on 1 August 2019 for R414 000 (R360 000 plus value-
added tax at 15% of R54 000). The Commissioner is satisfied that he uses both motor vehicles
primarily for business purposes. It also provides Delia Waters, his wife, with the free use of a
motor car. It purchased a second-hand motor car for her use on 1 June 2021 for R112 000. No
value-added tax was payable on the purchase of this motor car since the seller was not a vendor.
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’.
• 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
16.17 (50 minutes)

This question tests the normal tax model, the definition of the ‘official rate of interest’ and
‘remuneration proxy’, sections 6B, 8(1)(a), 10(1)(i), 10(1)(k)(i), 10(1)(q) and 11F, paragraphs 7, 8,
9, 11, 12A, 12D, 13 and 16 of the Seventh Schedule and Interpretation Note 17.
Pollo Spangled-Roundhead, aged 39 years, and a resident of the Republic, was appointed by the
South African Gamefowl Society as its cockpit manager. His position requires him to organise a
cock fight almost every Wednesday night. He took up appointment in this position on 1 March
2021. His ‘remuneration package’ comprised the following:
• A monthly salary of R30 000.
• A ‘thirteenth’ cheque of R30 000 to be awarded in December each year.
• The exclusive use of a motor car that cost his employer a ‘cash cost’ of R253 000 (R220 000
plus R33 000 value-added tax at 15%).
• The free occupation of a nine-roomed house owned by his employer.
• R1 000 a month towards various entertainment activities.
Pollo Spangled-Roundhead, his wife, Henrietta Spangled-Roundhead and their two children moved
into the house on 1 March 2021. They moved out of the duplex flat they had been leasing at a rental
of R9 600 a month. It costs the South African Gamefowl Society R15 000 a month to own the
house. During February 2020 it had been offered a rental of R17 500 a month by a third party who
wanted to lease the house. It had, however, declined this offer since it requires its cockpit manager
to live on the cock-fighting premises. The house is furnished and the cost of electricity of R4 850 a
month is paid by the employer.
The running costs of the motor car are financed in full by the South African Gamefowl Society.
Pollo Spangled-Roundhead determined that he used the motor car for business purposes for
6 000 kilometres of the 24 000 kilometres he travelled in it during the 2022 year of assessment. He
has kept a detailed logbook of the motor car’s usage. Running costs and standing charges including
wear and tear and depreciation for this motor car were R155 400 for the 2022 year of assessment.
The South African Gamefowl Society requires Pollo Spangled-Roundhead to spend R1 000 a
month on entertaining cock-fighting patrons. He has kept a detailed record of all the entertainment
expenditure he has incurred by using a credit card solely for this purpose. His actual expenses for
the 2022 year of assessment in carrying out entertainment on its instructions were R10 200.
There is no cock-fighting in South Africa from early December to late January each year. During
this period Pollo Spangled-Roundhead took his family abroad on holiday for six weeks. On
1 January 2022 he borrowed R60 000 from his employer at an interest rate of 2% a year to settle
some of his travel expenses. He repaid the loan and the interest due on it on 31 March 2022.
(Assume that the relevant ‘official rate of interest’ is 4,5%.)
When Pollo Spangled-Roundhead returned from his holiday abroad he needed a local holiday to
recover. His two children moved into the boarding establishment at their school. The South African
Gamefowl Society agreed to pay for these extra schooling costs. It paid R1 800 in this regard. It
also allowed Henrietta Spangled-Roundhead and himself to spend 14 days at the beachfront cottage
that it owns. On the odd occasion when this beach cottage is not being occupied by one of its
employees, it is let to a non-employee at a rate of R250 a day per adult.
The South African Gamefowl Society hosts cock-fights on 45 occasions during the year. On every
occasion that it hosts cock-fights, the Spangled-Roundhead family are provided with a free lunch
and supper. Henrietta Spangled-Roundhead and himself dine with the other members of the
management team in the restaurant section located in the north-east corner of the cock-fighting hall,
while the children have their meals at their house. The catering manager has estimated the cost of
each meal at R90 a person. Henrietta Spangled-Roundhead is not an employee of the South African
Gamefowl Society, but is expected to be present on cock-fighting evenings. Four cock-fights were
hosted in March 2021.
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.
16.18 (40 minutes)

This question tests certain fringe benefits including ‘allowances’ (section 8(1)), ‘cheap assets’
(paragraph 5), ‘use of assets’ (paragraph 6), ‘use of motor vehicles’ (paragraph 7), ‘holiday
accommodation’ (paragraph 9(4)), ‘low-interest loan’ (paragraph 11), ‘contributions to a medical
scheme’ (paragraph 12A) and ‘contributions to a retirement fund’ (paragraph 12D)), of the Seventh
Schedule. It also tests the definition of ‘gross income’ and sections 6A, 6B, 10(1)(i), 11F and 12T.
Commander Kamp-Staaldraad, aged 32 years, is a resident of the Republic. He was a member of
South Africa’s permanent defence force. He was also a former South African rugby player. On his
retirement from rugby, and after he had been dishonourably discharged from the army, he
completed a diploma in journalism. He has, since 2019, been employed as a full-time rugby
correspondent for The Naked Truth (a leading Sunday newspaper in South Africa).
The 2022 year of assessment was a special one for Commander Kamp-Staaldraad. He was selected
to attend, on behalf of The Naked Truth, the 2021 South African (Springbok) rugby tour to
Australia. This assignment resulted in him being away from home for a period of two months (from
1 October 2021 to 30 November 2021). During these two months he attended all the matches. He
also interviewed the players and their coaches. He prepared articles that he e-mailed daily to The
Naked Truth for publication in South Africa.
For the 2022 year of assessment, Commander Kamp-Staaldraad’s remuneration package from his
employer, namely, Sunday Newspapers Limited, the publisher of The Naked Truth, included the
following benefits:
• A cash salary of R18 000 a month. During his two months in Australia, his salary was paid into
his bank account in South Africa.
• A cash bonus of R27 000 awarded to him in December 2021 on his return to South Africa in
recognition of some outstanding articles he had written for The Naked Truth while in Australia.
• The use of a motor car that was purchased by Sunday Newspapers Limited during the 2021 year
of assessment for R207 000 (R180 000 plus value-added tax at 15% of R27 000). Sunday
Newspapers Limited bears all its maintenance costs. He is required to pay for the fuel. During
FRINGE BENEFITS 361
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’.
• 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.
16.19 (60 minutes)

This question tests certain Seventh Schedule fringe benefits including paragraphs 2(a), (b), (e)
and (h), 5, 7, 10 and 13. It tests allowances provided for in section 8(1) and the section 10(1)(nB),
10(1)(o) and 10(1)(q) exemptions from normal tax.
So as to comply with certain employment equity requirements, Whisky (Pty) Limited employed
two disabled employees. It employed
• James On who has impaired sight, and
• Jenny Walker who is hard of hearing.
James On
To enable James On to carry out his duties at work effectively, Whisky (Pty) Limited purchased a
large-monitor (a 21-inch screen as opposed to a 14-inch screen) personal computer. Since he often
carries out its work from his home, it purchased a second large-monitor (21-inch screen) personal
computer to be housed at his home and for his exclusive use.
So that he could access his work e-mails from his home, it also provided him with a communication
service.
Each large-monitor personal computer cost Whisky (Pty) Limited R12 500. The communication
service costs it R225 a month.
Jenny Walker
Whisky (Pty) Limited purchased a hearing aid to be used solely by Jenny Walker. It cost Whisky
(Pty) Limited R4 500. She uses it both at work and at home. Because of the personal nature of a
hearing aid, Whisky (Pty) Limited has indicated that she will not have to return it should she leave
its employment.
Arthur Bell
Arthur Bell was transferred by Whisky (Pty) Limited from its Johannesburg head office to its
branch in Durban. It assisted him with his move to Durban by reimbursing him for the following
expenses that he had incurred:
• A sales commission of R140 000 paid to the estate agent who sold his Johannesburg residence.
• Transfer duty of R121 000 paid when he purchased his Durban residence.
• The cost of curtaining amounting to R60 000 for his Durban residence.
• The cost of school uniforms amounting to R6 000 for the school in Durban that Aaron Bell, his
son and Carillon Bell, his daughter were now attending.
• A hotel bill (amount) for R27 000 for his one-month’s accommodation in a residential hotel in
Durban. He had moved to Durban one month before his Durban residence became available, and
before his family joined him.
FRINGE BENEFITS 363
• 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.
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.)
16.20 (60 minutes)

This question tests the definition of ‘gross income’, in particular, its paragraph (c) and
paragraphs 2(a), 5(2) and 5(4) of the Seventh Schedule. It also tests the judgment from SIR v
Watermeyer (1965 (4) SA 431 (A), 27 SATC 117). It is suitable for a student studying towards a
Holy Sisters is a girl’s high school in central Durban. It is not a vendor since it makes only exempt
supplies. It enjoys an absolute exemption from normal tax under section 10(1)(cN).
During the 2022 year of assessment Katherine Chipps, its vice-principal, completed 25 years’
service to it.
Arthur Service, its principal, decided that it would be appropriate to reward her for her long,
dedicated and outstanding service to the school.
Arthur Service then wrote to the parents of the 800 girls who were the pupils at the school. He
invited them to contribute cash to be used towards a gift to be awarded to Katherine Chipps. A total
of R12 500 in cash was received from the parents.
Arthur Service believed that R12 500 was too small an amount to award to Katherine Chipps. He
then approached the school board. It agreed that the school would match the contribution made by
the parents, and use R12 500 of its own funds, to increase the award to be made to her to R25 000.
A member of the school board queried the tax consequences of the award. He suggested that the
award should be made in the most tax-efficient way. His concern was not for the school, but for
Katherine Chipps. The other members of the school board supported his suggestion.
Katherine Chipps is 48 years old.
You have now been consulted by the bursar of the school.
You are required to write a report to the school setting out the way the award should be made to
Katherine Chipps to ensure that it is tax efficient.
CHAPTER 17
NON-RESIDENTS
17.1 (15 minutes)

This question tests the definition of ‘gross income’ and sections 5, 6, 9, 10(1)(h), 10(1)(k), 10(1)(l),
10(1)(lA), 10(2)(b), 47B, 49B and 50B.
Fifteen statements relating to the taxation of a ‘non-resident’ (a taxpayer who is a not resident of
the Republic) follow:
1. A local dividend that accrues to a ‘non-resident’ must be included in his South African gross
income.
2. A ‘non-resident’ property owner will be exempt from South African normal tax on the rentals
that he earns from a South African source.
3. A ‘non-resident’ will be subject to normal tax in South Africa only if he carries on business in
South Africa.
4. Royalties that accrue to a ‘non-resident’ for the use of a royalty-producing asset in South
Africa are subject to the withholding tax on royalties levied by section 49B of the Income Tax
Act.
5. Since the non-residents’ tax on interest that was levied under a previous version of section 64A
of the Income tax Act was abolished with effect from 16 March 1988, a ‘non-resident’ will not
be liable for tax on interest that accrues to him from a South African source.
6. Being a non-executive director of a company, a ‘non-resident’ taxpayer will not be carrying on
business in South Africa if he earns solely director’s fees from a South African company.
7. There is no limit on the amount that a ‘non-resident’ can invest free from normal tax in South
African investments.
8. When an annuity funded by local dividends accrues to a ‘non-resident’ it is subject to normal
tax.
9. It is possible for a ‘non-resident’ who derives rentals from a South African source to earn these
rentals without becoming liable for the payment of a South African tax on them.
10. A ‘non-resident’ who enjoys royalties from the use of his royalty-producing asset in South
Africa is subject to tax at 15% on the gross royalty.
11. A ‘non-resident’ entertainer who earns an amount for performing in South Africa is subject to
South African normal tax on the amount he earns.
12. The ‘exceeding 183-day’ requirement in section 10(1)(h) applies only to an emigrant.
13. The payer of a royalty that is subject to the provisions of section 49B must deduct a tax
determined at the rate of 15% of the gross royalty from the gross royalty and pay it over to
SARS as a final tax payment on the royalty.
14. When a ‘non-resident’ taxpayer has interest from a South African source included in his gross
income he does not enjoy the exemption for the first R23 800 (or R34 500 if he has attained the
age of 65 years) of not otherwise exempt from normal tax local interest.
15. A ‘non-resident’ taxpayer is not entitled to normal tax rebates when his normal tax liability is
determined.
You are required to answer true or false to the 15 statements as set out above. Give a brief
comment to support your answer if necessary.
365
17.2 (45 minutes)

This question tests the normal tax model as it applies to three non-residents. It also tests sections 5,
6, 9(1)(b), 10(1)(h), 10(1)(i), 10(1)(k), 10(1)(l ), 10(2)(b), 12T, 49B, 50B, 50D, 64E and 64G.
Rufus Lark
Rufus Lark, aged 60 years, is not a resident of the Republic. He did not carry on business in South
Africa in the 2022 year of assessment. He does not have a permanent establishment in South
Africa. His receipts and accruals from a South African source were as follows:
Director’s fees 192 000
Gross local interest from a non ‘tax free investment’ 21 500
Annuity (funded by local dividends) 24 000
Gross local dividends 30 000
Rufus Lark did not visit South Africa during the 2021 and 2022 years of assessment.
Under the double tax agreement between South Africa and the country where Rufus Lark is a
resident, the agreed upon rate of tax on dividends is 7,5%.
You are required to determine Rufus Lark’s liability for income tax in South Africa.
Winston Wellington
Winston Wellington, aged 28 years, has at all relevant times been ordinarily resident in New
Zealand. He is not a resident of the Republic. During the 2022 year of assessment he derived the
following amounts from a South African source:
Rentals from a property situated in South Africa 186 900
Local interest on funds made available in South Africa to a South African business
for the purpose of financing its South African business activities (not a ‘tax free
investment’). This local interest accrues to him on the last day of February. 66 800
Winston Wellington did not visit South Africa during the 2021 and 2022 years of assessment.
Winston Wellington paid no ‘qualifying medical expenses’ during the 2022 year of assessment.
The double tax agreement between South Africa and New Zealand provides for a rate of tax on
dividends of 15% when the dividend accrues to a non-corporate shareholder.
You are required to
1. determine Winston Wellington’s liability for all South African income taxes payable by him
during the 2022 year of assessment, and
2. on the assumption that he had not earned R186 900 in rentals, but had derived a R186 900 net
taxable profit from a business carried on by him through a permanent establishment in South
Africa, and that he was physically present in South Africa for 213 days during the 2022 year of
assessment to help run this business, redetermine his liability for all South African income
taxes payable by him during the 2022 year of assessment.
Twinkle Pluto
Twinkle Pluto, aged 48 years, is ordinarily resident in America. He was born in South Africa and
spent the first 10 years of his life in South Africa. He is not a resident of the Republic. During the
2022 year of assessment, he derived the following amounts from within South Africa:
• Gross royalties of R250 000 from the use within South Africa of a patented manufacturing
process. This royalty-earning asset was created and developed by him in America. He incurred
R96 000 during the year by way of non-capital expenditure for the purpose of earning the
R250 000 gross royalty from this patented manufacturing process.
• Gross royalties of R3 600 for the use within South Africa of copyright literary material. This
copyright was created by him in America.
NON-RESIDENTS 367
• 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.)
17.3 (30 minutes)

This question tests the tax levied on foreign entertainers and sportspersons. It also tests the
withholding tax on payments made to non-resident sellers of immovable property. It tests
sections 35A and 47A to 47K inclusive. It also tests the normal tax model including the definitions
of ‘gross income’ and ‘income’ and sections 5, 6 and 10(1)(lA).
The following six non-residents have earnings from a South African source:
Queenie Rodent
Queenie Rodent, a non-resident, purchased a house in Hermanus on 1 November 2015 for
R1 800 000. She lived in it when she visited South Africa for the four-month period from
1 December to 31 March each year. On 31 October 2021 she sold it to Virat Tendulker, also a non-
resident, for R4 100 000.
Elton Fieldmouse
Elton Fieldmouse, a non-resident, was the winner of a tennis tournament that was sponsored by a
South African bank (a resident). It was held in South Africa during late November and early
December 2021. His prize of $1 000 000 was awarded to him on 3 December 2021. The exchange
rate on 3 December 2021 was R14,80 to the dollar.
George Hamster
George Hamster, a non-resident singer, and his seven non-resident band members performed in
South Africa in April 2021. The total amount paid by a South African promoter for this once-off
performance was R2 000 000.
• Of this R2 000 000 amount, R1 000 000 was paid to an off-shore management company.
• The balance was paid to George Hamster and the members of his band.
George Hamster and his seven band members split the balance of R1 000 000 equally, that is,
R125 000 accrued to each of them.
Ryan Shrew
An American film producer filmed part of a movie in Cape Town in South Africa. The entire movie
took 48 weeks to film. Ryan Shrew, the leading actor, who is a non-resident, came to South Africa
to ‘shoot’ this part of the movie for the four weeks that ended on 30 November 2021. He was paid
$12 000 000 by the American film producer to appear in the entire movie.
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.
17.4 (20 minutes)

This question tests the South African taxes payable by a non-resident. It tests sections 9(1)(b),
10(1)(h), 10(1)(l ), 49B and 50B.
During the 2021 year of assessment Myles Rover, 40 years old, emigrated from South Africa. He
was ordinarily resident outside South Africa throughout the 2022 year of assessment. He did not
visit South Africa in the 2022 year of assessment. And he is not a resident of the Republic.
Certain amounts still, however, accrue to Myles Rover from South Africa. For the 2022 year of
assessment, the following amounts accrued to him from South Africa:
• A royalty of R40 000 from the use in South Africa of a patented process developed by him when
he was ordinarily resident in France.
• A royalty of R20 000 from the use in South Africa of a patented process developed by him when
he was resident in South Africa.
• Local interest of R54 000 from a R600 000 loan advanced to a South African business by him
when he was ordinarily resident in South Africa. This investment is not a ‘tax free investment’.
And the interest from it accrues to him on the last day of February.
• Local interest of R18 000 from a R200 000 loan to Piet Maritz who is a resident of the Republic.
He had lent the R200 000 to Piet Maritz outside South Africa when Piet Maritz had been outside
South Africa on a business trip. Piet Maritz brought the R200 000 back to South Africa and used
it in South Africa. This investment is not a ‘tax free investment’. And the interest from it accrues
to Myles Rover on the last day of February.
Myles Rover had no other receipts or accruals from South Africa in the 2022 year of assessment.
The only expense he incurred in the 2022 year of assessment in relation to his South African
earnings was R3 300 that he paid to an agent who is responsible for the collection of his royalties.
You are required to determine all the South African income tax payable by Myles Rover. (Ignore
the provisions of a double taxation agreement.)
NON-RESIDENTS 369
17.5 (30 minutes)

This question tests the South African taxes payable by a non-resident. It tests the normal tax model
and sections 5, 6, 6quat, 9(1)(b), 9H, 10(1)(l ) and 49B. It also tests the judgment from Millin v CIR
((1928) AD 207, 3 SATC 170).
Ian Venter earns his living from royalties on inventions that he conceives, designs and patents from
time to time, and from fees for articles published in technical journals. He was born in South
Africa, but has lived in many countries. From 1 May 2021 he became ordinarily resident again in
his native land (South Africa).
From 1 March 2021 to 30 April 2021 he was not ordinarily resident in South Africa. And, during
this two-month period he was not physically present in South Africa. His receipts and accruals for
this two-month period were as follows:
• Royalties the equivalent of R62 600 from a manufacturer in Australia on a pump that he
invented in Tanzania when he was ordinarily resident in Tanzania.
• Royalties the equivalent of R9 300 from a manufacturer in Brazil on an engine that he invented
in South Africa when he was previously ordinarily resident in South Africa. Brazilian tax
withheld was the equivalent of R930.
• Royalties of R4 000 from a South African manufacturer on a valve that he invented in South
Africa when he was ordinarily resident in South Africa.
• Royalties of R3 300 from a South African manufacturer on the pump he invented in Tanzania
when he was ordinarily resident in Tanzania.
From 1 May 2021 to 28 February 2022 Ian Venter was ordinarily resident in South Africa. His
receipts and accruals for this 10-month period were as follows:
• Royalties the equivalent of R241 500 from a manufacturer in Australia on a pump that he
invented in Tanzania when he was ordinarily resident in Tanzania.
• Royalties the equivalent of R18 200 from a manufacturer in Brazil on an engine that he invented
in South Africa when he was previously ordinarily resident in South Africa. Brazilian tax
withheld was the equivalent of R1 820.
• Royalties of R5 000 from a South African manufacturer on a valve that he invented in South
Africa when he was ordinarily resident in South Africa.
• Royalties of R2 000 from a South African manufacturer on the pump he invented in Tanzania
when he was ordinarily resident in Tanzania.
• A fee the equivalent of R2 700 for an article published in a technical journal in the United
Kingdom. It was written by him in Tanzania when he was ordinarily resident in Tanzania.
• A fee of R600 for an article published in a technical journal in South Africa. It was written by
him in the United Kingdom when he was ordinarily resident in the United Kingdom.
Ian Venter is 61 years old. He made no contributions to a retirement fund or a medical scheme. He
incurred no ‘qualifying medical expenses’.
You are required to determine Ian Venter’s normal tax liability for the 2022 year of assessment
and the amount of any other South African tax that he may be liable for. (Disregard the provisions
of any double taxation agreement.) State for each of the above accruals, whether it is subject to
South African tax. And provide reasons for your statements.
17.6 (40 minutes)

This question tests the normal tax liability of a person who emigrated during the year of
assessment. It tests the definition of ‘gross income’ and sections 5, 6, 6quat, 9H, 10(1)(h), 10(1)(i),
10(1)(k), 10(1)(l ), 11(a), 11(c), 23( f ), 35 and 64E. It also tests the judgment from SIR v Cadac
Engineering Works (Pty) Ltd (1965 (2) SA 511 (A), 27 SATC 61).
Professor Ridemore, aged 55 years, left the University of Pietermaritzburg on 30 June 2021 when
he emigrated to take up a position at an offshore university. He left South Africa on 1 July 2021. In
the 2022 year of assessment he was physically absent from South Africa from 2 July 2021 to
28 February 2022.
While Professor Ridemore was in South Africa, he had designed a ‘new’ type of carburettor that
resulted in a considerable saving in fuel when fitted to many makes of motor vehicles. This type of
carburettor of his is now manufactured both in South Africa and in Japan under a royalty agreement
with him. For the 2022 year of assessment he earned the following gross royalties:
• From the South African manufacturer R14 000. Of these royalties, R6 000 accrued up to 30 June
2021, and R8 000 accrued after 30 June 2021.
• From the Japanese manufacturer the equivalent of R19 200. Non-refundable tax the equivalent
of R6 000 was levied on this royalty by the Japanese tax authorities. Of these royalties, net
royalties of R3 500 (gross R5 000 less tax of R1 500) accrued up to 30 June 2021, and net
royalties of R9 700 (R14 200 less R4 500) accrued after 30 June 2021.
Professor Ridemore was successful in defending a copyright infringement brought against him by a
South African motor-vehicle manufacturer. He did, however, incur legal expenses in this regard of
R2 800. He incurred these legal expenses on 30 April 2021.
Professor Ridemore also incurred non-capital expenditure of R3 200 on 30 November 2021 in
producing his South African royalties.
Professor Ridemore left certain funds in South Africa. He did not sell his former primary residence
and has, since leaving South Africa up to the end of the 2022 year of assessment, earned net rentals
of R165 000 from it. (The Commissioner has ‘correctly’ confirmed that he does not consider this
activity to be the carrying on of a business.)
On 1 June 2021 Professor Ridemore lent R300 000 to Rod Perch, his son-in-law, (who is a resident
of the Republic) so that that he (Rod Perch) could start a business venture in South Africa. Local
interest is payable monthly at the rate of 8% a year.
Professor Ridemore also purchased shares in South African listed companies. Gross local dividends
accruing on these shares were R33 840 in the period 2 July 2021 to 28 February 2022.
Administration handling fees and collection charges of R1 015 were incurred when earning these
local dividends.
When Professor Ridemore was resident outside South Africa, he designed and patented a fuel-
saving carburettor to be fitted to motorcycles. At present this carburettor is manufactured under a
royalty agreement only in South Africa. Gross royalties paid to him from a South Africa
manufacturer for the 2022 year of assessment were R20 000. Revenue expenditure incurred by him
in connection with this patent was R2 000.
From 1 March 2021 to 30 June 2021 Professor Ridemore earned a salary of R36 000 a month.
The country where Professor Ridemore is now ordinarily resident does not have a double tax
agreement with South Africa.
You are required to determine Professor Ridemore’s 2022 South African income tax liability.
NON-RESIDENTS 371
17.7 (30 minutes)

This question tests the section 10(1)(h) exemption. It also tests the normal tax model, the definition
of ‘gross income’ and sections 5, 6, 10(1)(i) , 10(1)(k), 50B and 64E.
Alan Mutton, aged 33 years, is a talented sportsman. He left South Africa four years ago to pursue
his career as a professional cricketer. For income tax purposes he is not a resident of the Republic
and he is not carrying on business in South Africa.
During the 2021 year of assessment Alan Mutton earned the following amounts from the capital he
had invested in South Africa:
• Local interest on a participating mortgage bond of R785 000.
• Local interest on municipal stock of R745 000.
• And local dividends from South African listed company shares of R150 000.
The local interest on both the participating mortgage bond and municipal stock accrues to Alan
Mutton on 31 August and the last day of February. All the dividends that accrue to him, accrue
(and are paid to him) during the months of November, December and January each year.
Alan Mutton has been offered a contract by the KwaZulu-Natal Cricket Club under which he will
be paid a basic fee of R100 000 to play cricket for it in South Africa during the seven-month period
from 1 August 2021 to 28 February 2022. He will act as an independent contractor under his
contract with it. Since certain incentive awards and bonuses may be paid to him by his sponsors, his
earnings for playing cricket for the KwaZulu-Natal Cricket Club could be in excess of the basic fee
of R100 000. (For the purpose of this question assume that these incentive awards will be R20 000
in total for this seven-month period.)
Under the double tax agreement between South Africa and the country where Alan Mutton is a
resident, the rate of tax on dividends is 15%.
You are required to advise Alan Mutton, purely from a net earnings point of view in the 2022 year
of assessment, whether he should accept the contract. Support your advice with schedules of net
earnings.
17.8 (60 minutes)

This question tests the receipts and accruals of various amounts that accrue to a non-resident. It
tests the application of sections 49B, 49C and 49D for a non-resident that does, or does not, have a
permanent establishment in South Africa. It also tests sections 10(1)(h), 10(1)(k), 10(1)(l), 13quin
and 24J and paragraph 2(1)(b) of the Eighth Schedule.
A recent addition to the range of marula products produced by Pomogwe Cave Products Limited is
a refined edible marula oil. It ranks among ‘new’ oils for its high nutritional value, heat resistance
and stability. It contains up to 28% protein and some iodine and compares favourably with extra
virgin olive oil. It has received publicity on fashionable TV cuisine shows. Gourmet chefs have
tried the edible marula oil and found it to be both palatable and suitable for stir frying and baking.
Pomogwe Cave Products Limited is not a resident of the Republic. It is a resident of Zimbabwe.
Zululand Marula CC, a resident of the Republic, has entered into a royalty agreement with
Pomongwe Cave Products Limited. Under this royalty agreement, Zululand Marula CC pays
Pomogwe Cave Products Limited a royalty for each litre of edible marula oil that it produces using
Pomogwe Cave Products Limited’s recipe. It is anticipated that a royalty of in excess of
R1 000 000 will accrue to Pomongwe Cave Products Limited from Zululand Marula CC.
Zululand Marula CC is an eco-friendly, low-tech enterprise designed to uplift women in rural
communities and provide a sustainable income for families in the tribal lands of the Mkusi valley.
Marula products are fairly traded and directly benefit rural villages. These marula products also
encourage the protection of the marula trees in their natural environment.
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.
17.9 (20 minutes)

This question tests the after-tax return of certain investments made by an emigrant from South Africa.
It tests the definition of ‘gross income’ and sections 5, 6, 9H, 10(1)(h), 10(1)(k), 50B and 64E.
Humphrey Gloom, aged 48 years, will soon be emigrating from South Africa. He is leaving a
substantial capital sum in South Africa. Three possible investments are being considered by him.
NON-RESIDENTS 373
The three investments are as follows:

• First, an investment in a rent-producing property.
• Secondly, an investment in local dividend-yielding shares.
• And finally, an investment in a local interest-bearing security. It is not a ‘tax free investment’.
Details of these three possible investments follow:
• Net rentals of R117 000 a year will accrue from the rent-producing property.
• Local dividends of R90 000 a year will accrue from the local dividend-yielding shares.
• Local interest of R114 000 a year will accrue from the local interest-bearing security.
Assume the following:
• He makes the investment on 1 March 2022.
• He emigrates from South Africa on 1 March 2022.
• He has no other receipts or accruals from a South African source.
• Other than exemptions from normal tax and deductions arising out of the above investments, he
does not enjoy any other exemptions from normal tax, or deductions from his income in the
Under the double tax agreement between South Africa and the country where Humphrey Gloom is
going to be a resident, a dividends tax rate of 15% has been agreed upon.
You are required to determine which investment gives Humphrey Gloom the best after-tax return.
Comment on other relevant factors in this investment decision. (Assume that the 2023 year of
assessment tax legislation and rates are identical to those that applied in the 2022 year of assessment.)
17.10 (25 minutes)

This question tests sections 9(2)(b) and (d), 10(1)(h), 10(1)(i), 10(1)(k), 10(1)(l ), 10(1)(m), 49B,
64D and 64E.
Neptune Limited is not a resident of the Republic. It does not carry on business in South Africa.
Yet it earns certain amounts from South Africa.
Neptune Limited’s receipts and accruals from South Africa for its 2022 year of assessment (ended
on 28 February 2022) consist of the following:
• Royalties derived from the use in South Africa of patents and copyrights.
• Local interest on loan stock issued by the City of Pietermaritzburg.
• Local interest on a deposit with The Honest Bank, Durban.
• Local dividends from a subsidiary company – Rocket Associates (Pty) Limited, a resident of the
Republic. Neptune Limited holds 80% of its equity shares. Under the double tax agreement
between South Africa and the country where Neptune Limited is resident, a dividends tax rate of
5% has been agreed upon.
• Interest on deposits with Universal Bank, a foreign registered bank and not a resident of the
Republic. But these deposits were made in South Africa out of the net amounts it earned from
within South Africa.
None of the above interest accrues to Neptune Limited from a ‘tax free investment’.
You are required to set out how the determination of Neptune Limited’s South African income tax
liability would differ from that applied to a South African registered company deriving the self-
same receipts and accruals during its 2022 year of assessment (ended on 28 February 2022).
17.11 (45 minutes)

This question tests the normal tax liability of a non-resident. It tests the normal tax model and
sections 10(1)(h), 10(1)(i), 10(1)(k), 10(2)(b) and 25BB.
Five years ago, unhappy with the unrest in South Africa, Hennie Chickenrun (then aged 55 years)
emigrated from South Africa. He became ordinarily resident outside South Africa. He is not a
resident of the Republic. The country in which he is now ordinarily resident does not have a double
tax agreement with South Africa.
Since leaving South Africa, Hennie Chickenrun has not carried on business in South Africa. He
does not have a permanent establishment in South Africa.
During the 2022 year of assessment Hennie Chickenrun derived the following amounts from a
South African source:
• Local interest of R27 300 from an investment that is not a ‘tax free investment’.
• Local dividends of R150 000 from South African quoted companies.
• An annuity of R60 000 from the testamentary trust of a late relative. The annuity arises from a
will that was executed in South Africa. The assets belonging to the testamentary trust are also
situated in South Africa. The receipts and accruals of the testamentary trust that fund the annuity
were derived to the extent of 70% from local dividends, 20% from local rentals and 10% from
local interest.
• A distribution from a real estate investment trust of R3 000. The components of this distribution
were local dividends of R2 700 and local interest of R300.
• A distribution from a collective investment scheme in securities (a so-called equity unit trust) of
R2 000. The components of this distribution were local dividends of R1 200 and local interest of
R800.
• Local interest of R120 000 from government stock. It is not a ‘tax free investment’.
Hennie Chickenrun and his wife had been unhappy in the country where they are now ordinarily
resident. They miss South Africa. And they would love to return, and once again become ordinarily
resident in South Africa. But he is concerned that by becoming a resident of the Republic it could
have an adverse effect on the South African tax he pays on the amounts he earns from a South
African source.
Assume Hennie Chickenrun’s earnings for the 2023 year of assessment to be identical to those in
the 2022 year of assessment. And further assume the following:
• If he does return to South Africa he will do so on 1 March 2022.
• He has no other receipts or accruals from a South African source.
• He does not enjoy any other exemptions from normal tax and deductions from his income in the
determination of his South African taxable income.
• Tax legislation and rates in the 2023 year of assessment are identical to those that applied in the
You are required to determine the after-tax return from the amounts Hennie Chickenrun earns from
South Africa on the basis,
• first, that he does not return to South Africa, and
• secondly, that he again becomes ordinarily resident in South Africa.
NON-RESIDENTS 375
17.12 (60 minutes)

This question tests the section 10(1)(h) exemption. It also tests the definition of ‘gross income’, in
particular, the ‘capital nature’ issue. It tests sections 5, 6, 10(1)(h), 10(1)(k), 10(1)(l ), 10(1)(lA),
13quin, 13sex, 23( f ), 26A, 47B, 49B and 50B. It also tests paragraphs 2, 3, 5, 6, 8, 10, 20 and 35
of the Eighth Schedule and the judgment from CIR v Stott (1928 AD 252, 3 SATC 253).
Jodi van der Merwe is no longer a resident of the Republic. He emigrated from South Africa five
years ago to pursue a career in Formula One motor racing. He was successful on the world racing
circuit. But his involvement in a collision during the Monaco Grand Prix in December 2021 has
forced him out of Formula One motor racing for at least 12 months.
Due to exchange control regulations, Jodi van der Merwe had been forced to leave capital behind in
South Africa when he emigrated. This capital is invested in
• a rent-producing property (see below),
• local interest-bearing securities that are not ‘tax free investments’. The interest on these local
interest-bearing securities accrues, annually in arrears, on the last day of February, and
• ‘local’ dividend-yielding shares.
Jodi van der Merwe also earns royalties from South Africa. These royalties accrue to him from a
South African manufacturer of shock absorbers under a registered patent. He created the royalty-
producing asset in Italy shortly after emigrating from South Africa. He pays an agent in South
Africa R2 500 each year, in December, to administer the collection of his royalties.
Jodi van der Merwe does not have business interests in South Africa. He does not have a permanent
establishment in South Africa. His receipts and accruals from South Africa are from his
• royalty-producing asset,
• local investments as mentioned above, and
• for driving in the race on 3 March 2022 (see below).
Jodi van der Merwe visited South Africa in February and March 2022 to enjoy a three-week
holiday at an exclusive game lodge in the Mpumalanga Province. While in South Africa, he was
approached by the South African manager of its Formula A motor racing team to drive in a race for
South Africa. He obliged, and drove in this race. It was held in Johannesburg on 3 March 2022. He
earned R500 000 for driving in this race.
Jodi van der Merwe was also approached by a property-development syndicate interested in
purchasing his rent-producing property at its market value of R3 750 000. The property is a residential
house that he lets to students at a market-related rental which, net of expenses, is R17 500 a month.
He purchased this residential house on 1 July 2005 for R1 600 000. His intention at the time of
purchasing it was to hold it as an investment (to earn rentals). It has, however, recently been granted
business rights resulting in an increase in its market value. If he were to sell it to the property-
development syndicate, the effective date of sale would be 1 May 2022.
Jodi van der Merwe made no other capital gains and suffered no capital losses during the 2023 year of
assessment. He does not have an assessed capital loss brought forward from the 2022 year of
assessment.
The increased interest in Jodi van der Merwe’s rent-producing property has led him to consider
developing it himself into an office complex. He has consulted an architect who has prepared detailed
plans and a full costing of the proposed development. The total cost of developing it into an office
complex is R4500 000 and is based on the assumption that Jodi van der Merwe will be actively
involved in the development. He will visit South Africa every six weeks to check on the progress of
the project. He will also be involved in marketing and negotiating its final sale. He will fund the
development with bridging finance from a local bank. The cost of this bridging finance is R375 000
and has been included in the R4 500 000 cost as determined by the architect. He estimates that this
involvement will cause him to be in South Africa for 210 days during the 2023 year of assessment.
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
• Local interest of R2 020 000.
• 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.)
17.13 (40 minutes)

This question tests the normal tax model as it applies to a non-resident. It tests the definition of
‘gross income’ and sections 9(2)(i), 10(1)(gC), 10(1)(h), 10(1)(k), 10A and 26A and paragraphs 2,
3, 5, 6, 8, 10, 20 and 35 of the Eighth Schedule.
Elaine Stevens spent the first 60 years of her life in southern Africa. She spent
• 54 years in South Africa, and
• six years in Zimbabwe (see below).
Elaine Stevens retired from employment at the age of 60 years, and then emigrated from South
Africa.
Elaine Stevens left capital in South Africa. She invested it in
• a rent-producing property situated in Durban,
• in South African registered local dividend-yielding shares,
• in municipal stocks not being a ‘tax free investment’, and
NON-RESIDENTS 377
• 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.
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.
1. Elaine Stevens’s 2022 South African taxable income, and
2. the other South African taxes that she is liable for.
17.14 (30 minutes)

This question tests some investment options available to a non-resident. It tests the normal tax
model and sections 5, 6, 9(2), 10(1)(h) and 10(1)(k).
Angus York, a retired South African businessman, emigrated from South Africa on 28 February
2021. His wife had died six months earlier and he joined his two sons, his only children, in
America where they are both ordinarily resident. For the 2022 year of assessment he is not a
On Angus York’s emigration, he left a substantial amount of capital behind in South Africa.
Since Angus York’s retirement, when he attained the age of 60 years, five years ago, a monthly
pension of R20 000 has accrued to him. This pension is awarded to him by a South African
manufacturer for whom he had worked for a total of 40 years. During his employment with it, he
had spent the last eight years at its branch in Zimbabwe. The remainder of his employment had
been in South Africa. His monthly pension is remitted to him in America.
With the lump sum that was awarded to Angus York on his retirement, he purchased a number of
shares in South African listed companies. On average, he earns local dividends of R60 000 a year
from these shares. He did not sell these shares when he emigrated from South Africa. The Double
Tax Agreement between South Africa and America provides for a rate of tax on dividends of 15%
when the dividend accrues to a non-corporate shareholder.
Angus York still has R2 500 000 in South Africa. This R2 500 000 is at present in trust with an
attorney in South Africa.
Terr1 Rowntree, Angus York’s niece, has recently started a chocolate manufacturing business in
Lesotho and would like to borrow the R2 500 000 from him. She has offered to pay interest at a
rate of 12,5% a year. She will use the borrowed funds in Lesotho. Should he lend this R2 500 000
to her, he is unsure whether
• he should instruct his attorney to first transfer the funds to Lesotho, and then to make these
funds available to her in Lesotho, or
• he should ask her to come to South Africa, and to instruct his attorney to make the funds
available to her in South Africa.
Angus York has also been offered a half share in a successful stained glass manufacturing
partnership that operates solely in South Africa. He has been guaranteed a net return of R400 000 a
year after all expenses have been paid by this partnership. But, since the success of the partnership
depends to a large extent upon his active involvement in the running of its business, he will be
forced to spend at least two months a year in South Africa (but not more than 91 days in South
Africa). To secure his half share in the partnership he would have to contribute R2 500 000 to it.
You are required to determine Angus York’s likely annual South African income tax liability
1. assuming that he lends Terri Rowntree the money, and it is made available to her in Lesotho,
2. assuming that he lends her the money, and that she collects the money from his attorney in
South Africa, and
NON-RESIDENTS 379
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.
17.15 (45 minutes)

This question tests the section 10(1)(h) exemption. It also tests the definition of a ‘trade’, the normal
tax model and sections 5, 6, 10(1)(h), 10(1)(k), 11(a), 11(d) and 23(g) and the judgments from
ITC 1292 ((1979) 41 SATC 163), ITC 1385 ((1984) 46 SATC 111) and ITC 1401 ((1985) 48 SATC
6). It is suitable for a student studying towards a Masters (or similar degree) specialising in taxation.
To take advantage of the section 10(1)(h) exemption from normal tax in the Income Tax Act,
Johannes Washington, aged 45 years, an emigrant from South Africa, but who is no longer a
resident of the Republic, sold a rent-producing property situated in South Africa to Washington
(Pty) Limited, a resident of the Republic. He is its sole shareholder. The property had been
originally purchased by him with some of his South African funds.
The transaction (purchase and sale) took place at the market value of the property. Immediately
after Washington (Pty) Limited had purchased the rent-producing property from Johannes
Washington, its statement of financial position was as follows:
Share capital 3 000 000
Johannes Washington’s loan account 8 000 000
11 000 000
Represented by
Rent-producing property at cost 10 800 000
11 000 000
Washington (Pty) Limited’s statement of profit or loss and other comprehensive income for its
first year of operations (that ended on 28 February 2022) was as follows:
Rentals 760 000
Less expenditure incurred in producing these rentals
– Local interest on Johannes Washington’s loan account at 10% 800 000
– Property rates 64 000
– Repairs and maintenance 9 600
– Administration expenses 14 400
– Audit fee 12 800
– Insurance 19 200 920 000
Loss for the year -160 000
Washington (Pty) Limited’s statement of financial position as at 28 February 2022 was as follows:
Share capital 3 000 000
Johannes Washington’s loan account 8 000 000
11 000 000
Less accumulated loss 160 000
10 840 000
Represented by
Rent-producing property at cost 10 800 000
Cash on hand 40 000
10 840 000
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.
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.
17.16 (45 minutes)

This question tests the South African tax liabilities of taxpayers who were both residents and non-
residents during the year of assessment. It tests the provisions, amongst others, of section 9H.
Herb Scorerer and his wife, Sangome Scorerer, were ordinarily resident in South Africa until
30 November 2021. On 1 December 2021 they left South Africa. (They ceased to be residents of
the Republic on 1 December 2021.) They moved into their new home in New Zealand on
29 December 2021.
Herb Scorerer is 63 years old and Sangome Scorerer is 66 years old.
On 1 January 2022 Herb Scorerer commenced working for Mystic Medicines in New Zealand as a
muthi (a medicine made from animal parts, herbs or barks) mixer.
Two decades (20 years) ago, while still resident in South Africa, Herb Scorerer had developed a
healing tonic using a combination of bones and roots.
This healing tonic is made only by the Wisdom Natural Products (Pty) Limited, a resident of New
Zealand. It is sold under the name ‘Occult Spirit’. It is made solely in New Zealand by Wisdom
Natural Products (Pty) Limited. It is made under a royalty agreement with Herb Scorerer. A royalty
based on each 500 ml-bottle of healing tonic produced by it is paid by it to him. This royalty
agreement was entered into by them in South Africa 19 years’ ago.
When Herb Scorerer and Sangome Scorerer left South Africa they did not sell their assets. He
‘converted’ his primary residence into a rent-producing property investment. All their assets had
been purchased after 1 October 2001 (valuation date). Relevant details of their assets follow (all
amounts are in rands or their rand-equivalent value):
NON-RESIDENTS 381
Cost Market value Market value

on on
30 November 28 February
2021 (and 2022
1 December
Herb Scorerer’s assets 2021)
‘Occult Spirit’ registered intellectual property 10 000 1 200 000 1 250 000
Root Products Limited shares 660 000 960 000 750 000
Pongoland Municipal Stock not a ‘tax free
investment’ 1 350 000 1 500 000 1 500 000
Local interest-bearing security with the Traditional
Bank, Pongoland, not a ‘tax free investment’ 200 000 200 000 200 000
Primary residence 1 900 000 3 100 000 3 000 000
Personal-use assets 100 000 60 000 50 000
Sangome Scorerer’s assets
Foreign bank account (see note below) 400 000 375 000 240 000
Foreign rent-producing property 1 000 000 1 600 000 1 540 000
Foreign shares 120 000 160 000 175 000
Foreign interest-bearing security (inherited funds) – – 600 000
Foreign rent-producing property (inherited funds) – – 1 800 000
Motor car 305 000 195 000 180 000
Personal-use assets 910 000 610 000 650 000
Krugerrands (not held as trading stock) 25 000 65 000 69 000
Sangome Scorerer’s R400 000 amount reflected under the foreign bank account as its cost was its
balance on 1 March 2021. The R375 000 reflected under the foreign bank account as its market
value on 30 November 2021 (and 1 December 2021) was its balance on those dates. And the
R240 000 reflected under the foreign bank account as its market value on 28 February 2022 was its
balance on that date.
Herb Scorerer
Details of Herb Scorerer’s receipts and accruals 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
Royalty from the Wisdom Natural Products (Pty) Limited 75 000
Dividend from Root Products Limited (a resident of the Republic) 18 000
Local interest from Pongoland Municipal Stock not a ‘tax free investment’ 67 500
Local interest from Traditional Bank, Pongoland not a ‘tax free investment’ 1 700
Salary from Pongoland Municipal Stock (eight months at R22 500 a month) 180 000
1 December 2021 to 28 February 2022
Royalty from the Wisdom Natural Products (Pty) Limited 30 000
Dividend from Root Products Limited (a resident of the Republic) 9 000
Local interest from Pongoland Municipal Stock not a ‘tax free investment’ 22 500
Local interest from Traditional Bank, Pongoland not a ‘tax free investment’ 2 100
Salary from Mystic Medicines (two months at R32 500 a month) 65 000
Net rentals from his former primary residence 27 000
Herb Scorerer did not pay any ‘qualifying medical expenses’ during the 2022 year of assessment.
Herb Scorerer has an assessed capital loss brought forward from the 2021 year of assessment of
R100 000.
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
18.1 (15 minutes)

This question tests the provisions of sections 5(10), 18 and 26A and paragraphs 5, 6, 7, 10, 15, 45,
53(3), 55 and 60 of the Eighth Schedule.
Fifteen statements on capital gains tax follow:
1. If a natural person’s sum of all capital gains and losses for the year is positive, that is, his
capital gains made exceed his capital losses suffered, he must disregard the first R40 000 of it.
2. If a natural person’s sum of all capital gains and losses for the year is negative, that is, his
capital losses suffered exceed his capital gains made, he must increase this ‘overall’ loss by
R40 000.
3. A special trust enjoys an annual exclusion of R40 000.
4. A company enjoys an annual exclusion of R40 000.
5. In the period of assessment when a natural person dies, his annual exclusion is R300 000.
6. A natural person’s taxable capital gain is 40% of his net capital gain.
7. A company’s taxable capital gain is 80% of its net capital gain.
8. A trust’s taxable capital gain is 80% of its net capital gain.
9. A taxable capital gain is excluded when a taxpayer’s average rate of tax is determined, to be
used when certain concessionary receipts and accruals are subjected to tax.
10. A taxable capital gain is taken into account when the reduction clause is applied to ‘qualifying
medical expenses’ in the determination of the amount of the section 6B additional medical
expenses tax credit.
11. The first R2 000 000 of a capital gain made by a natural person on the disposal of a primary
residence for more than R2 000 000 must be disregarded.
12. A capital gain made on the disposal of a krugerrand held as a personal-use asset is disregarded.
13. A capital loss suffered by a taxpayer on the disposal of his personal-use 15-metre boat is
deductible in the determination of his aggregate capital gain or aggregate capital loss.
14. A prize from the South African National Lottery is subject to capital gains tax.
15. An amount from a life insurance policy awarded to the spouse of the deceased policy holder is
subject to capital gains tax.
You are required to answer ‘true’ or ‘false’ to the above 15 statements. Give a brief comment to
18.2 (15 minutes)

This question tests the provisions of section 26A and paragraphs 3 to 10 of the Eighth Schedule.
To arrive at a taxable capital gain, the following terms are all relevant:
• Capital gain.
• Capital loss.
• Aggregate capital gain.
• Aggregate capital loss.
• Sum of all capital gains and losses for the year.
• Annual exclusion.
383
• Net capital gain.

• Assessed capital loss.
• Inclusion rate.
• Taxable income.
These terms appear in paragraphs 1 to 10 of the Eighth Schedule.
You are employed in the technical division of the tax section of a large accounting practice. A
flowchart is needed to explain these terms to its employees studying capital gains tax.
You are required to prepare a flowchart illustrating the relationship between all the above terms.
18.3 (15 minutes)

This question tests paragraphs 3, 5, 6, 7, 8, 9, 20 and 35 of the Eighth Schedule.
The following four taxpayers are residents of the Republic. They have completed transactions that
may have capital gains tax consequences. Details of these transactions follow:
John Jameson
John Jameson purchased dividend-yielding shares on 1 March 2019 for R40 000. He does not deal
in shares. He purchased them as an investment. He sold them on 31 December 2021 for R70 000.
You are required to determine John Jameson’s capital gain.
Daniel Jack
During the 2022 year of assessment Daniel Jack made a capital gain of R90 000 on the sale of his
holiday house. He also suffered a capital loss of R47 500 on the sale of certain dividend-yielding
shares.
You are required to determine Daniel Jack’s aggregate capital gain for the 2022 year of
assessment.
Thomas Gray
Thomas Gray has an aggregate capital gain for the 2022 year of assessment of R100 000. He has an
assessed capital loss brought forward from the 2021 year of assessment of R70 000.
You are required to determine Thomas Gray’s net capital gain for the 2022 year of assessment.
Jill Beam
Jill Beam, an investor in shares, has an aggregate capital loss for the 2022 year of assessment of
R50 000. She has an assessed capital loss brought forward from the 2021 year of assessment of
R90 000.
You are required to determine Jill Beam’s assessed capital loss for the 2022 year of assessment.
18.4 (60 minutes)

This question tests the normal tax model, section 26A, the definition of a ‘boat’ in paragraph 1 and
Each of the following resident taxpayers has made a profit on the sale of an asset:
Aidan Baker
Aidan Baker has made a profit of R300 000 on the sale of a rent-producing property that he held as
an investment.
Arthur Baste
Arthur Baste has made a profit of R400 000 on the sale of a property that he held as trading stock.
CAPITAL GAINS TAX 385
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).
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.
18.5 (60 minutes)

This question tests the normal tax model, section 11(o), the definition of a ‘boat’ in paragraph 1 of
the Eighth Schedule and paragraphs 4, 15, 20, 35 and 45 of the Eighth Schedule.
Each one of the following resident taxpayers has suffered a loss on the sale of an asset:
Aubrey Bard
Aubrey Bard has suffered a loss of R300 000 on the sale of a rent-producing property that he held
as an investment.
Archibald Batter
Archibald Batter has suffered a loss of R400 000 on the sale of a property that he held as trading
stock.
Alice Broil
Alice Broil has suffered a loss of R80 000 on the sale of listed shares that she held as a long-term
investment.
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.
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.
18.6 (20 minutes)

This question tests the definitions of ‘gross income’ (in section 1(1)) and a ‘boat’ (in paragraph 1 of
the Eighth Schedule), the determination of a natural person’s taxable capital gain including
sections 11(a) and 26A and paragraphs 5, 6, 8, 10, 20, 35, 45 and 53 of the Eighth Schedule.
Quintin Ruban, aged 55 years, a resident of the Republic, made the following profits and suffered
the following losses on the sale of some of his assets during the 2022 year of assessment:
Profits
The profits made by Quintin Ruban were as follows:
• A profit of R180 000 on the sale of a rent-producing property that he held as an investment.
• A profit of R40 000 on the sale of 400 shares in Single Malt Limited that he held as trading
stock.
• A profit of R5 100 on the sale of an antique. 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.
• A profit of R1 900 on the sale of a krugerrand. He had purchased it as a hedge against inflation.
• A profit of R2 120 000 on the sale of his primary residence. He had purchased it for R1 370 000.
He sold it for R3 490 000.
• A profit of R17 000 on the sale of his 12-metre yacht. He sold it because he had recently
purchased a new, and faster, yacht. He sails his yacht at weekends and on public holidays as a
form of relaxation.
• A profit of R3 900 on the sale of an original painting. He deals in original paintings.
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.
18.7 (25 minutes)

This question tests the definitions of ‘gross income’ (in section 1(1)) and a ‘boat’ (in paragraph 1 of the
Eighth Schedule), the determination of a natural person’s taxable capital gain including sections 11(a)
and 26A and paragraphs 5, 6, 8, 10, 20, 35, 45 and 53 of the Eighth Schedule.
Jill Daniels is a resident of the Republic. She both invests and deals in shares.
• During the 2022 year of assessment, from the shares Jill Daniels held as investments, she earned
local dividends of R90 000. She sold shares in Sour Mash Limited (held as an investment) at a
profit of R30 000. She suffered a loss of R48 000 on the sale of shares in Sugar-Maple Charcoal
Limited (held as an investment). The value of her share portfolio held as investments decreased
by R95 000 during the 2022 year of assessment.
• From the shares Jill Daniels held as trading stock, she earned local dividends of R21 000. She
sold shares in Rye Limited at a profit of R80 000, while she suffered a loss of R44 000 on the
sale of shares in Tennessee Limited (held as trading stock). The opening stock value of the
shares that she deals in was R260 000. Its closing stock value was R198 000. These opening and
closing stock values are at their cost.
In addition to the profits Jill Daniels enjoyed and losses suffered on her two categories of shares,
she enjoyed the following profits and suffered the following losses on the sale of some of her other
assets during the 2022 year of assessment:
Profits
The profits made by Jill Daniels were as follows:
• A profit of R120 000 on the sale of a rent-producing property that she held as an investment.
• A profit of R150 000 on the sale of a 15-metre yacht that she inherited in July 2021. She
immediately sold this inherited yacht since she was no longer interested in sailing. She never
used it. Her ex-husband an herself had spent many happy hours sailing at a local dam. But after
they divorced, she gave up sailing. Its market value was R145 000 on the day that she inherited
it. She sold it for R150 000. The profit was R150 000 because it had not cost her anything.
• A profit of R700 on the sale of a coin. She is a numismatist (a collector of coins). She does not
deal in coins. She sold this particular coin because she had recently purchased a duplicate of it,
and the duplicate was in a better condition.
• A profit of R900 on the sale of a krugerrand. She had originally purchased it to be given to a
niece as a birthday present. After her niece had disappointed her, she changed her mind about it
being an appropriate birthday present.
• A profit of R2 111 000 on the sale of her primary residence. It had been purchased by her for
R489 000. She sold it for R2 600 000.
• 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
18.8 (40 minutes)

This question tests the basic capital gains tax model including paragraphs 3, 5, 6, 7, 8, 9, 11, 15, 53
The following six resident taxpayers have queries that relate to capital gains tax:
Wellington Martell
On 1 February 2021 Wellington Martell suffered a capital loss of R50 500 on the sale of
5 000 shares in Vintage Brandy Limited that he had held as an investment. This was the only
transaction of his in the 2021 year of assessment that was subject to the provisions of the Eighth
Schedule.
On 1 February 2022 Wellington Martell sold a rent-producing property that he had held as an
investment at a profit of R90 000.
You are required to
1. determine Wellington Martell’s net capital gain or assessed capital loss for the 2022 year of
assessment, and
2. on the assumption that he had suffered a capital loss of R131 000 (and not R50 500) on the sale
of his Vintage Brandy Limited shares that he had held as an investment, determine his net
capital gain or assessed capital loss for the 2022 year of assessment.
Bertram Hennessy
For the 2021 year of assessment Bertram Hennessy had an assessed capital loss of R90 000. In the
2022 year of assessment he had an aggregate capital gain of R150 000.
You are required to
1. determine Bertram Hennessy’s net capital gain for the 2022 year of assessment, and
2. on the assumption that he had an aggregate capital loss for the 2022 year of assessment of
R70 000 (and not an aggregate capital gain of R150 000), determine his assessed capital loss
for the 2022 year of assessment.
Martin Remy
On 1 February 2021 Martin Remy purchased an aircraft (with an empty mass exceeding
450 kilograms) for R10 000 000. He used it to travel between his
• primary residence in Ballito Bay, and
• holiday home in the Drakensberg.
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.
18.9 (90 minutes)

This question tests capital gains and losses that arise on the disposal of pre-valuation date assets
including paragraphs 20, 25, 26, 27 and 30 of the Eighth Schedule.
The following eight resident taxpayers have sold pre-valuation date ‘capital’ assets:
Glen Dower
Glen Dower purchased a plot of land four years before valuation date for R700 000. He sold it
20 years after valuation date for R580 000. Its market value was R920 000 on valuation date. No
deductions or capital allowances in the determination of his taxable income were enjoyed by him
on this asset. The R580 000 was not included in his gross income.
You are required to determine Glen Dower’s capital loss that arises out of the purchase and sale of
this asset.
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.
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.
18.10 (30 minutes)

This question tests the normal tax model, the basic capital gains tax model, sections 11(a), 9C
and 22(2).
Gordon Tanqueray is a resident of the Republic. He is both a dealer and an investor in shares.
Henrik’s Wet Limited
• On 1 December 2000 Gordon Tanqueray purchased 45 000 shares in Henrik’s Wet Limited at
R30 each as a long-term investment.
• On 1 October 2001 the market value of a Henrik’s Wet Limited share was R45. This was
confirmed in the Gazette notice issued by the Commissioner (under paragraph 29(1)(a)(i) of the
Eighth Schedule to the Income Tax Act).
• On 30 November 2021 Gordon Tanqueray sold his 45 000 shares in Henrik’s Wet Limited for
R2 250 000 (at R50 a share).
Gilbey’s Dry Limited
• On 1 April 2018 Gordon Tanqueray purchased 40 000 shares in Gilbey’s Dry Limited at R10
each. These shares were not purchased as a long-term investment but as part of his share-dealing
business.
• On 28 February 2020 the market value of a Gilbey’s Dry Limited share was R25. Its market
value has not dropped below R10.
• On 28 February 2021 the market value of a Gilbey’s Dry Limited share was R27. Its market
value has not dropped below R10.
• On 30 April 2021 Gordon Tanqueray sold his 40 000 shares in Gilbey’s Dry Limited for
R1 200 000 (at R30 a share).
No other capital gains or losses were made by Gordon Tanqueray during the 2022 year of
assessment. He has, however, an assessed capital loss brought forward from the 2021 year of
assessment of R15 000.
You are required to determine what amounts must be included in Gordon Tanqueray’s 2022 taxable
income. Your determination must illustrate his capital gain under each of the three options available to
him.
18.11 (20 minutes)

This question tests certain special provisions that apply to capital losses that arise when shares are
sold including paragraphs 19 and 42 of the Eighth Schedule.
Jose Cuervo (Pty) Limited and Tequila (Pty) Limited suffered capital losses on the sale of certain
shares. They are both residents of the Republic. They would like to know if these losses qualify as
deductible losses for capital gains tax purposes.
Jose Cuervo (Pty) Limited
Jose Cuervo (Pty) Limited, who is not a share-dealer, purchased 1 000 shares in Premium Black
Limited on 1 January 2021 for R100 000. A dividend of R3 000 accrued to it on 1 July 2021.
Jose Cuervo (Pty) Limited sold its 1 000 shares in Premium Black Limited for R80 000 on
1 February 2022.
You are required to determine Jose Cuervo (Pty) Limited’s capital loss that results from the
purchase and sale of its 1 000 shares in Premium Black Limited.
Tequila (Pty) Limited
On 1 November 2020 Tequila (Pty) Limited purchased 2 000 shares in Sauza Hornitos Limited (a
listed company on a recognised stock exchange) for R120 000 as an investment. It does not deal in
shares.
Tequila (Pty) Limited sold these 2 000 Sauza Hornitas Limited shares on 28 February 2021 for
R90 000.
On 1 April 2021 Tequila (Pty) Limited again purchased 2 000 shares in Sauza Hornitos Limited,
this time for R99 000.
You are required to determine the capital loss suffered by Tequila (Pty) Limited on the disposal of
its ‘first’ 2 000 shares in Sauza Hornitos Limited.
18.12 (40 minutes)

This question tests the base cost of assets including sections 11(d), 24J and 59, paragraph 20 of the
Eighth Schedule and the judgments from ITC 1619 ((1996) 59 SATC 309) and ITC 1020 ((1962)
25 SATC 414).
The following 10 resident taxpayers have incurred certain expenditure on assets that they own.
They would like to know if the expenditure incurred qualifies for inclusion as part of the base cost
of the relevant asset.
Joanna Walker
Joanna Walker purchased, as an investment, a rent-producing property for R750 000 on
1 November 2019.
During the 2020 year of assessment Joanna Walker incurred expenditure of R30 000 in repairing its
kitchen. This R30 000 was deducted in the determination of her taxable income.
On 1 March 2021 Joanna Walker installed a security system in this rent-producing property at a
cost of R20 000. In October 2021 she built a swimming pool at this rent-producing property at a
cost of R60 000. But in February 2022, after the tenant’s child had nearly drowned in it, she
‘converted’ it into a herb garden.
You are required to determine the base cost of Joanna Walker’s rent-producing property.
Ben Riach
On 1 March 2021 Ben Riach purchased 2 000 shares in Malt Limited, a local company listed on the
JSE Securities Exchange, for R180 000 as a long-term investment. He does not deal in shares. He
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.
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.
18.13 (60 minutes)

This question tests the capital gain arising out of the disposal of pre-valuation date assets including
paragraphs 20, 25, 26, 27, 28, 30 and 35 of the Eighth Schedule.
Sally Williams
Sally Williams owned a rent-producing property in Durban. She had purchased this property on
1 August 1991 as an investment. She let it at a market-related rental to a tenant until she sold it on
30 October 2021. All expenses that she incurred in maintaining this property over the years, she
successfully deducted in the determination of her taxable income from the gross rentals she earned
from the property.
This property cost Sally Williams R564 722. She also paid transfer duty of R35 278 at the time of its
purchase.
In January 2002 Sally Williams obtained a valuation of this property for the purpose of the
determination of its capital gain or capital loss. This valuation was performed by a qualified property
valuator, who charged her R1 500 for the services he rendered. Its market value on 1 October 2001
was determined by him to be R800 000.
In January 2020 Sally Williams improved this rent-producing property by building an extra bathroom
at a cost of R90 000.
Sally Williams sold this rent-producing property on 1 February 2022 for a gross R2 100 000. She
paid a commission of R136 500 to the agent who sold it on her behalf.
You are required to determine Sally Williams’s capital gain under each of the three options
available to her.
Dayle Hill
Dayle Hill purchased a plot of vacant land on 1 August 2000. She planned to build her primary
residence on it. She purchased it from a property developer and paid R570 000 (R500 000 plus
value-added tax at 14% of R70 000).
Dayle Hill built a brick wall around this vacant plot of land. It was completed on 30 November
2000. It cost her R57 000 (R50 000 plus value-added tax at 14% of R7 000).
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.
18.14 (15 minutes)

This question tests the definition of a ‘connected person’, capital gains and losses arising out of
‘connected person’ transactions including paragraphs 38 and 39 of the Eighth Schedule.
Bushmills Limited and Ballantines (Pty) Limited are both residents of the Republic. Their
financial years end on the last day of February.
• On 1 December 2018 Bushmills Limited sold shares in Royal Salute Limited with a base cost of
R400 000 to Ballantines (Pty) Limited, its wholly owned subsidiary, at their market value of
R240 000.
• On 1 May 2019 Bushmills Limited sold shares in Black Bush Limited with a base cost of
R200 000 and a market value of R180 000 to Ballantines (Pty) Limited for R500 000.
• On 1 June 2020 Bushmills Limited sold shares in Irish Whiskey Limited with a base cost of
R1 500 000 to Ballantines (Pty) Limited at their market value of R1 650 000.
• On 1 February 2021 the shares held by Bushmills Limited in Ballantines (Pty) Limited were
sold to a non-resident (not connected to Bushmills Limited). These shares had a base cost of
R6 600 000. They were sold for R7 500 000.
• On 1 July 2021 Bushmills Limited sold shares in Scotch Cask Limited that had been purchased
by it at a base cost of R700 000 to Ballantines (Pty) Limited at their market value of R750 000.
None of the shares held by Bushmills Limited was held by it as trading stock.
You are required to determine, and discuss, the capital gains tax consequence to Bushmills Limited
of the above sales it made.
18.15 (20 minutes)

This question tests a capital gain arising out of an ‘indirect’ holding of a property by a non-resident
including paragraph 2(2) of the Eighth Schedule.
Louise Chavant is not a resident of the Republic. She owns a 25% members interest in Four-Star
Chardonnay CC. It is a resident of the Republic. Its statement of profit or loss and other
comprehensive income was as follows at 28 February 2022:
Members interest 4
Members loans 199 996
600 000
Represented by
Land and buildings 360 000
Plant and machinery 240 000
600 000
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.
18.16 (15 minutes)

This question tests the definition of ‘identical assets’, the different methods used to determine the
base cost of an identical asset including paragraph 32 of the Eighth Schedule.
Alexandria Fontein held the following shares in Chenin Blanc Limited as a long-term investment:
Date purchased Number Cost Cost
of units per unit
1 November 2021 1 000 R15 15 000
1 December 2021 2 000 R16 32 000
1 January 2022 3 000 R17 51 000
1 February 2022 4 000 R14 56 000
10 000 154 000
On 28 February 2022 Alexandria Fontein sold 4 500 shares of her 10 000 shares in Chenin Blank
Limited. Her records reveal that she sold
• the 2 000 shares she purchased on 1 December 2021, and
• 2 500 of the 3 000 shares she purchased on 1 January 2022.
You are required to determine the base cost of Alexandria Fontein’s 4 500 shares in Chenin Blanc
Limited that she sold using the
1. ‘first in first out’ method,
2. weighted average method, and
3. specific identification method.
18.17 (20 minutes)

This question tests part sales including paragraphs 20, 30, 33 and 35 of the Eighth Schedule.
Both Rupert Rothschild and Jonty Duck have sold part of an asset.
Rupert Rothschild
Rupert Rothschild owned a three-hectare plot of vacant land as a pre-valuation date capital asset.
He sold one hectare (a-third) of it for R500 000. Before selling it an estate agent had valued this
entire property at R1 200 000. The market value of the entire property on 1 October 2001 was
R720 000. He elected to adopt the market value basis to determine its base cost on valuation date.
Jonty Duck
Jonty Duck purchased adjoining plots of land seven years prior to valuation date. He incurred
• R90 000 for the inland plot, and
• R150 000 for the sea-facing plot.
Jonty Duck then consolidated them into a single property.
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.
18.18 (60 minutes)

This question tests the primary residence exclusion provision for capital gains tax purposes. It also
tests section 9HB and paragraphs 5, 10, 31(d) and (e), 45, 46, 47, 48 and 49 of the Eighth Schedule.
Precious Stone
Precious Stone purchased a primary residence for R400 000 on 1 November 2014. She sold it on
31 March 2021 for R2 600 000.
Rose Quartz
Rose Quartz purchased a primary residence for R500 000 on 1 December 2015. It was erected on a six
hectare plot of land. Although the purchase consideration was the single amount of R500 000, a
reasonable apportionment would have been
• R120 000 for the land, and
• R380 000 for the buildings.
Rose Quartz sold it on 31 April 2021 for R2 100 000. Again, on a reasonable apportionment basis, this
R2 100 000 could be apportioned as to
• R300 000 for the land, and
• R1 800 000 for the buildings.
Diamond Gemstone
Diamond Gemstone purchased a primary residence for R600 000 on 1 January 2016. She lived in it
until 28 February 2020. She was transferred by her employer to work in another town (situated
more than 250 kilometres away from her primary residence). So from 1 March 2020 she then let it
to a tenant at a market-related rental. She earned a net rental of R9 000 each month. She lives in
hired accommodation in this other town. She then sold her primary residence to her tenant on
31 May 2021 for R2 900 000.
Pearl Mollusk-Shell
Pearl Mollusk-Shell purchased a primary residence for R700 000 on 1 February 2016. On the same
day she purchased a berg cottage for R400 000. She lived in her primary residence during the week
and some weekends. But most weekends she spent at her berg cottage. On 28 February 2019 she
retired from employment. As from 1 March 2019 she used her berg cottage as her primary
residence. She kept her house in town. She visits town at least once a month for five days on
average. She stays in her house when she is in town. On 30 June 2021 she died. She bequeathed all
her assets, including her two houses to her daughter. The market value of her house in town was
R2 650 000 on 30 June 2021. And the market value of her berg cottage was R1 700 000 on 30 June
2021.
Ruby Corundum
Ruby Corundum purchased a primary residence for R800 000 on 1 March 2016. An electrical fault
caused a fire in its kitchen. Its kitchen, laundry and pantry all burnt down. While these rooms were
being repaired, she moved out of her primary residence and lived in a residential hotel. It took six
months for its kitchen, laundry and pantry to be rebuilt. The cost of these repairs, amounting to
R150 000, in total, were paid by her insurer. At the same time the repairs were carried out, she
improved her primary residence by building a breakfast room. It cost R100 000. On 31 August
2021 she sold her now ‘improved’ primary residence for R3 000 000.
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.
18.19 (20 minutes)

This question tests a special concession available to an heir relating to the payment of capital gains
tax including sections 9HA and 25.
Pierre Jourdan, a resident of the Republic, died on 31 October 2021. At the time of his death he
held a share portfolio as a long-term investment. He had purchased it for R200 000. It had a market
value of R3 000 000 on 31 October 2021. He had always held this share portfolio as an investment.
Pierre Jourdan had borrowed R2 500 000 on the security of this share portfolio. Most of the amount
obtained from this loan had been paid to his ex-wife as part of their divorce settlement. The
remainder of it he had spent prior to his death.
The net value of Pierre Jourdan’s estate after allowable deductions (excluding the capital gains tax
on the increased value of his share portfolio) was R500 000.
Pierre Jourdan’s taxable income for the period of assessment ending with his death exceeded
R1 656 600. As a result, any additional taxable income of his is subject to normal tax at the
maximum marginal tax rate of 45%.
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.
18.20 (60 minutes)

This question tests the primary residence exclusion provision for capital gains tax purposes. It tests
paragraphs 2(1), 45, 46, 47, 48 and 49 of the Eighth Schedule.
The following eight ‘resident’ taxpayers own, or owned, primary residences:
Byron Carver
On 1 November 2019 Byron Carver purchased a residence for R1 500 000. He used it solely as his
primary residence. On 1 February 2022 he sold it for R3 750 000 so as to purchase another primary
residence. He suffers normal tax at the maximum marginal tax rate of 45%. He had no other capital
gains or capital losses in the 2022 year of assessment.
You are required to determine Byron Carver’s additional normal tax liability that arises as a result
of the capital gain he realised.
Royston Steel
Royston Steel was born on the KwaZulu-Natal South Coast. He spent the first 25 years of his life in
Durban. On 1 October 2018 he purchased a house in Durban for R1 700 000 and a house in
Johannesburg for R1 900 000. He owns a business that operates in both Durban and Johannesburg.
He spends six months of the year in each house. He remains a ‘Natalian’ at heart. Most of his
friends and family live in Durban. (He supports the ‘Sharks’ at rugby and the ‘Dolphins’ at cricket.)
On 1 February 2022 he retired. He sold both his houses. The Durban house was sold by him for
R3 100 000 and the Johannesburg house for R3 600 000. He then purchased a retirement house.
You are required to determine the capital gains subject to capital gains tax that arise when Royston
Steel sells his Durban and Johannesburg houses.
Kelvin Ladle
On 1 November 2020 Kelvin Ladle purchased a three-hectare smallholding for R4 100 000 (the
cost of the land was R3 400 000 and the cost of the residential building was R700 000). He
occupied it as his primary residence throughout the period of his ownership. He sold it on
1 February 2022. Over his period of ownership, improvements of R140 000 (R110 000 to the land
and R30 000 to the residential building) were effected to the property. Repairs of R18 000 (to the
residential building) had also been carried out. It was sold by him for R6 600 000 (the land for
R5 500 000 and the residential building for R1 100 000). An agent’s commission of R480 000 was
paid by him. The entire property had been used mainly for domestic purposes in association with
the primary residence.
You are required to determine the amount subject to capital gains tax that results from the sale by
Kelvin Ladle of his smallholding.
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.
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?
18.21 (75 minutes)

This question tests the ‘kink’ rule relating to the sale of pre-valuation date assets including
paragraphs 20, 26, 27 and 30 of the Eighth Schedule.
A property developer purchased a vacant plot of land on the corner of Gray-Smith Road and Maxed
Avenue (in Newlands). Over a few years he built 12 townhouses on this plot of land. He named the
development ‘Oval Park’. During April 2021 a squatter camp developed in close proximity to Oval
Park. This resulted in a fall in the prices of properties in the area and a desire for those people
living in the area to move out of the area.
Stuart Gunn
On 1 September 1998 Stuart Gunn purchased a townhouse (1 Oval Park) for R1 570 000 as an
investment. He let it to a tenant at a market-related rental. On 1 October 2001 its market value was
R1 600 000. This valuation was obtained from a recognised valuator. On 31 August 2021 he sold it
for R1 585 000.
Lara Moore
On 1 September 1999 Lara Moore purchased a townhouse (2 Oval Park) for R1 610 000 as an
investment. She let it to a tenant at a market-related rental. On 1 October 2001 its market value was
R1 600 000. This valuation was obtained from a recognised valuator. On 31 August 2021 she sold
it for R1 595 000.
Roxanne Surridge
On 1 September 2000 Roxanne Surridge purchased a townhouse (3 Oval Park) for R1 620 000 as
an investment. She let it to a tenant at a market-related rental. On 1 October 2001 its market value
was R1 600 000. This valuation was obtained from a recognised valuator. On 31 August 2021 she
sold it for R1 605 000.
Edith Fearnley
On 1 April 2001 Edith Fearnley purchased a townhouse (4 Oval Park) for R1 632 000 as an
investment. She let it to a tenant at a market-related rental. She failed to obtain its market value on
1 October 2001. On 31 August 2021 she sold it for R1 590 000.
Duncan Gray
On 1 June 2001 Duncan Gray purchased a townhouse (5 Oval Park) for R1 590 000 as an investment.
He let it to a tenant at a market-related rental. On 1 October 2001 its market value was R1 600 000.
This valuation was obtained from a recognised valuator. On 31 August 2021 he sold it for
R1 576 000.
Avril Bellingham
On 1 August 2001 Avril Bellingham purchased a townhouse (6 Oval Park) for R1 605 000 as her
primary residence. On 1 October 2001 its market value was R1 600 000. This valuation was
obtained from a recognised valuator. On 31 August 2021 she sold it for R1 525 000.
You are required to determine the capital gain or capital loss that arises out of each of the above
transactions.
18.22 (60 minutes)

This question tests the determination of a natural person’s taxable capital gain including
sections 9HA, 22(1) and 22(2) and paragraphs 5(2), 20, 25, 26, 30, 35, 38 and 53(3) of the Eighth
Schedule.
Goldie Collinson
Goldie Collinson, a resident, died on 31 March 2021. Her assets were bequeathed as follows:
Goldie Collinson’s husband, Martin Collinson, (they had been married by ante-nuptial contract)
was awarded the following assets:
• Goldie Collinson’s primary residence. It had been purchased by her on 1 April 2013 for
R900 000. Its market value moments before her death was R2 150 000.
• Goldie Collinson’s household effects. They had been purchased by her on 1 May 2013 for
R750 000. Their market value moments before her death was R690 000.
• Goldie Collinson’s motor car. It had been purchased by her on 1 June 2016 for R310 000. Its
market value moments before her death was R170 000.
Goldie Collinson’s daughter was awarded the following assets:
• Goldie Collinson’s krugerrands. They had been purchased by her on 1 July 2020 for R390 000.
Their market value moments before her death was R420 000. She did not deal in krugerrands.
• Goldie Collinson’s holiday cottage in the berg. It had been purchased by her on 1 August 2020
for R800 000. Its market value moments before her death was R985 000.
• Goldie Collinson’s jewellery. It had been purchased by her on 1 September 2020 for R900 000.
Its market value moments before her death was R975 000.
• Goldie Collinson dealt in original paintings. Her original paintings had cost her R4 800 000.
(They had all been purchased after 1 October 2001.) Their market value on 28 February 2021,
and on 1 March 2021, was R4 920 000. Their market value moments before her death was
R4 850 000. Their cost moments before death was R4 775 000.
Goldie Collinson’s son was awarded the following assets:
• Goldie Collinson’s beach cottage. It had been purchased by her on 1 October 2020 for
R1 100 000. Its market value moments before her death was R1 085 000.
• Goldie Collinson’s investment in local and foreign shares. They had cost her R3 300 000. (They
had all been purchased after 1 October 2001.) Their market value moments before her death was
R3 180 000.
Goldie Collinson’s other assets that were sold (liquidated) by her executor were
• her shares in White Gold Brandy (Pty) Limited, a private ‘family’ company, and
Goldie Collinson held both these assets as capital assets:
• Goldie Collinson’s had purchased her shares in White Gold Brandy (Pty) Limited for R100 000
on 1 November 2014. Under a shareholders’ agreement, they were sold on 31 March 2021 to her
brother for R100 000 (their nominal value). Their market value moments before her death as
determined by the White Gold Brandy (Pty) Limited’s external auditor was R990 000. Their
market value on 28 February 2021 (being White Gold Brandy (Pty) Limited’s previous financial
year end) was R890 000.
• Five years and six months before valuation date, Goldie Collinson’s had purchased a rent-
producing property for R300 000. She does not deal in properties. On 15 April 2021 her
executor sold this rent-producing property for R2 100 000. Its market value on valuation date
was R1 500 000. Its market value moments before her death was R2 100 000.
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.
(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.
Other capital gains

In addition to the capital gains made by Martin Collinson on the sale of his primary residence and
the assets as detailed above, he also made capital gains on the sale of the following assets:
• R80 000 from a rent-producing property,
• R16 000 from his other dividend-yielding shares,
• R5 000 from units in a real estate investment trust, and
• R20 000 from a six-metre yacht.
Martin Collinson did not deal in the above assets.
Capital losses
Martin Collinson did not suffer any capital losses during the 2022 year of assessment. He does not
have an assessed capital loss to bring forward from the 2021 year of assessment.
You are required to determine, and discuss,
1. the effect that the above transactions will have on Goldie Collinson’s 2022 taxable income for
the 31-day period of assessment (that ended with her death), and
2. the normal tax (including capital gains tax) consequences as far as they relate to Martin
Collinson for the 2022 year of assessment.
18.23 (30 minutes)

This question tests the determination of a natural person’s taxable capital gain, section 25, the
definition of a ‘boat’ in paragraph 1 and paragraphs 6, 8, 10, 20, 25, 26, 30, 35, 40, 45 and 53 of the
Eighth Schedule.
Guy Spinnaker is a resident of the Republic. He made the following profits and suffered the
following losses on the sale of certain assets during the 2022 year of assessment:
Post-valuation date assets
Profits
x A profit of R96 400 on the sale of a rent-producing property that he held as an investment.
x A profit of R4 000 on the sale of listed shares that he held as trading stock.
x A profit of R50 000 on the sale of a motor car that he inherited from a late uncle. Since his own
motor car was only one-year old when he inherited his late uncle’s car, he sold the inherited
motor car. Its market value was R45 000 on the day that he inherited it. His profit was R50 000
since he sold it for R50 000 and it had no cost to him.
x A profit of R7 000 on the sale of an antique. 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.
x A profit of R1 900 on the sale of a krugerrand. He had originally purchased it to be given to a
nephew as his twenty-first birthday present. After his nephew had disappointed him, he changed
his mind about it being an appropriate twenty-first birthday present, and he then sold it.
x A profit of R2 120 000 on the sale of his primary residence. Its selling price was R3 020 000 and
its base cost was R900 000.
x A profit of R2 700 on the sale of his 12-metre yacht. He sold this yacht because he had recently
purchased a new, and faster, yacht. He sails his yacht at weekends and on public holidays as a
form of relaxation.
x A profit of R3 900 on the sale of an original painting. He deals in original paintings.
Losses
x A loss of R18 000 on the sale of shares in a private company that he held as an investment.
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.)
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
18.24 (60 minutes)

This question tests a number of normal tax and capital gains tax issues including the definitions of a
‘dividend’ and ‘gross income’, sections 9H, 9HA, 10(1)(k), 11(a), 11(e), 22, 23(g), 25, 35, and 64B,
provisions in the Second Schedule and paragraphs 5, 6, 7, 8, 10, 11, 12, 20, 49, 53, 54, and 55 of the
Eighth Schedule, and the judgment from Transvaal Associated Hide and Skin Merchants v Collector of
Income Tax, Botswana ((Court of Appeal Botswana) (May 1967) 29 SATC 97 at 107).
often required to provide answers to queries on normal tax (including capital gains tax). The
following six queries from resident taxpayers need your response: (All amounts have been adjusted
to take into account their value-added tax consequences, in other words, value-added tax may be
ignored when answering these five queries.)
Tessa Sashimi
Tessa Sashimi, aged 61 years, a resident of the Republic died on 2 March 2021. She traded in her
own name as a sushi-bar operator. She was shot dead when she was opening her trade premises in a
shopping centre early on Tuesday evening. She died instantly. Some of her trading stock was then
stolen. The robber (her killer) fled when a neighbouring shopkeeper sounded the alarm.
On Sunday night, 28 February 2021, and assisted by a trainee accountant from Tessa Sashimi’s
auditor, she had counted her trading stock. It had a market value of R880 000 and it had cost her
R400 000. Her insurer determined that trading stock with a market value of R220 000 had been
stolen. It arrived at this amount as follows:
Market Cost
value
On hand on 28 February 2021 (Sunday night) 880 000 400 000
Less sales on 1 March 2021 (Monday) 66 000 30 000
814 000 370 000
Less on hand on Tuesday 2 March 2021 (after the theft) 594 000 270 000
Trading stock stolen 220 000 100 000
No trading stock was purchased by Tessa Sashimi on Monday, 1 March 2021.
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
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.
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).
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).
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
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.
18.25 (60 minutes)

This question tests the normal tax and capital gains tax consequences to both the seller and the buyer
when a business is sold. It tests the definition of ‘gross income’, sections 8(4), 11(a), 11(e), 11(i),
13quin, 22 and 26A and paragraphs 5, 6, 7, 8, 10, 20, 30, 35, 45 and 48 of the Eighth Schedule.
Vincent White
Vincent White who had successfully traded for three-and-a-half years sold his business lock, stock
and barrel (in its entirety) on 30 June 2021 to Amber Black for R4 800 000. He had traded in his
own name. (He had commenced trading on 1 January 2018.) He is 33 years old. He had sold his
business because he had recently inherited a farm from his late grandfather and had commenced
farming operations. Although the price of R4 800 000 was for the entire business and no assets
were separately sold, in arriving at this amount a value was allocated to each asset. The R4 800 000
included R400 000 for goodwill. Details of the assets sold are as follows:
Original Tax Allocated
cost value on price on
30 June 30 June
2021 2021
Trade premises (land and a commercial building) –
original cost on 1 January 2018 – the commercial
building had been erected in 2002 2 750 000 2 750 000 2 900 000
Fittings and fixtures – original cost on 1 January
2018 120 000 20 000 125 000
Office equipment – original cost on 1 January 2018 60 000 10 000 25 000
Trading stock 1 000 000 950 000 990 000
Trade debtors 400 000 400 000 360 000
Goodwill – – 400 000
4 330 000 4 130 000 4 800 000
Amber Black
The trade debtors that Amber Black paid R360 000 to Vincent White to ‘take over’ (see above) had
a face value of R400 000. In total Amber Black collected R365 000 from these trade debtors:
• For debtors with a face value of R300 000 (and for which he paid R270 000) Amber Black
collected the entire R300 000.
• For debtors with a face value of R100 000 (and for which he paid R90 000) Amber Black
collected only R65 000.
The trading stock that Amber Black purchased from Vincent White for R990 000 (see above) had
originally cost Vincent White R1 000 000:
• Trading stock that Amber Black purchased from Vincent White for R550 000 was sold by him
for R835 000.
• 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.
18.26 (60 minutes)

This question tests the definition of ‘gross income’, sections 8(4)(a), 11(d), 11(g), 11(h), 12C, 13quin
and 22, paragraphs 20, 30, 35, 33 and 66 of the Eighth Schedule and the judgments from CIR v Stott
(1928 AD 252, 3 SATC 253) and CIR v Paul (1956 (3) SA 335 (A), 21 SATC 1).
often required to provide answers to queries on normal tax (including capital gains tax). The
following five queries from resident taxpayers need your response: (Unless indicated to the
contrary, all amounts have been adjusted to take into account their value-added tax consequences,
in other words, value-added tax may be ignored when answering these five queries.)
Four Seasons CC
Four Seasons CC’s financial year ends on the last day of February. It is not a small business
corporation. On 1 January 2021 it purchased a new machine under a cash arm’s length transaction
for R200 000. On the same day it brought this machine into use in a process of manufacture. This
machine qualifies for the ‘accelerated’ section 12C allowance granted at the rate of 40% in the year
that is brought into use for the first time, and 20% in the three subsequent years.
Ten months later, on 31 October 2021, Four Seasons CC ceased using this machine. On the same
day it was sold for R155 000.
To replace this machine, Four Seasons CC purchased a new machine under a cash arm’s length
transaction for R220 000. This new machine was purchased and brought into use in a process of
manufacture on 1 November 2021. This machine qualifies for the ‘accelerated’ section 12C
allowance granted at the rate of 40% in the year that is brought into use for the first time, and 20%
in the three subsequent years.
You are required to determine Four Seasons CC’s normal tax, including capital gains tax,
consequences that arise for only its 2022 year of assessment out of the purchase and sale of the
machine that was purchased on 1 January 2021 and sold on 31 October 2021. Assume that it would
elect an option that would defer its tax normal liability in its 2022 year of assessment.
Rusty Autumn
Since Rusty Autumn needed additional land for grazing his dairy cattle, he purchased, on 1 May
2021, part of the land of a neighbouring farm (to his own farm) for R400 000. It was 200 hectares
in extent. He needed only 150 hectares for his farming purposes. (He had unsuccessfully tried to
purchase only 150 hectares from his neighbour.)
On 31 July 2021, only three months after Rusty Autumn had purchased this land from his
neighbour, he sold 50 hectares of it for R125 000.
You are required to discuss, and support with workings Rusty Autumn’s the normal tax, including
capital gains tax, consequences that arise out of the purchase of the 200 hectares of land and his
subsequent sale of 50 hectares of it.
Redmond Summer
Redmond Summer, aged 33 years, had successfully traded for three-and-a-half years. He sold his
business lock, stock and barrel (in its entirety) on 30 June 2021 to Vanessa Winter for R2 800 000.
He had traded in his own name. (He had commenced trading on 1 January 2017.) He sold his
business solely because he had recently inherited a farm from his late grandfather and had
commenced farming operations. Although the price of R2 800 000 was for the entire business and
no assets were separately sold, in arriving at this amount, a value was allocated to each asset. The
R2 800 000 included R400 000 for goodwill.
Details of the assets Redmond Summer’s sold are as follows:

Original Tax Allocated
cost or value on price on
balance on 30 June 30 June
1 March 2021 2021 2021
Trade premises (land and building) – original cost on
1 January 2017 – no capital allowance was available
on the building purchased 750 000 750 000 900 000
Fittings and fixtures – original cost on 1 January 2017 120 000 20 000 125 000
Office equipment – original cost on 1 January 2017 60 000 10 000 25 000
Trading stock 1 000 000 950 000 990 000
Trade debtors 400 000 400 000 360 000
Goodwill – – 400 000
2 330 000 2 130 000 2 800 000
The R1 000 000 for trading stock and R400 000 for trade debtors as set out in the first column
above are their opening balance amounts on 1 March 2021.
You are required to determine the normal tax, including capital gains tax, consequences for
Redmond Summer that arise when he sells his business to Vanessa Winter.
Ryan Spring
Four-and-a-half years before valuation date, Ryan Spring purchased 10 000 shares in May-Day
Limited for R50 000. He purchased these shares so as to earn dividends (as an investment). It was
not his intention to resell them at a profit (deal in them).
Nineteen-and-a-half years after valuation date, Ryan Spring sold his 10 000 shares in May-Day
Limited for R120 000. His reason for selling them was because they had not yielded the anticipated
dividends. He invested the entire R120 000 obtained from their sale in further dividend-yielding
shares.
The market value of a May-Day Limited share on valuation date was R6.
You are required to discuss the normal tax, including capital gains tax consequences that arise
when Ryan Spring both purchases and sell his 10 000 shares in May-Day Limited. He will elect the
option that results in the least amount of normal tax being payable. Support your discussion with
determinations when necessary.
March Limited
March Limited carries on business as a lessor of commercial property. Equinox Limited carries on
business as a discount store. They are not ‘connected persons’. They both have financial years that
end on the last day of February.
On 1 March 2021 March Limited let a commercial property to Equinox Limited under a 12-year
lease agreement at a market-related rental. Under this lease agreement, Equinox Limited was
obliged to spend R276 000 on improving the leased property. It completed these obligatory
improvements on 31 August 2021 at a cost of R289 800. It traded from the improved area as from
1 September 2021. (It had traded from the original leased premises as from 1 March 2021.
Not under the lease, but solely to comply with its own ‘brand’ and ‘marketing’ policies, Equinox
Limited incurred a further R206 200 on improving the leased premises. These ‘voluntary’
improvements were carried out at the same time that the ‘obligatory’ improvements had been
carried out. The ‘voluntary’ improvements were used for trade purposes as from 1 September 2021.
The R206 200 incurred on the ‘voluntary’ improvements is of a capital nature.
You are required to
1. discuss, supported by determinations, the capital allowances for normal tax purposes that arise
out of the lease agreement that are available to Equinox Limited in its 2022 and 2023 years of
assessment,
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.)
18.27 (60 minutes)

This question tests the normal tax and capital gains tax consequences of a number of transactions. It
tests the definitions of a ‘connected person’ and a ‘resident’, sections 8A, 8C, 9B, 10(1)(k), 11(a),
11(i), 22, 23(a), 23(b), 23(g), 24I, 24J, 56 and section 64. It tests paragraphs 5, 6, 8, 10, 11, 12(3),
20, 30, 35, 38, 43(1), 53(3) and 60(2)(b) of the Eighth Schedule.
Hilton and Daisy Barberton are married out of community of property. They are both residents of
the Republic.
Hilton Barberton
Krugerrands
Hilton Barberton purchased 10 krugerrands for R275 000 on 1 April 2021. (A krugerrand is a coin
that is made mainly from gold and its market value is mainly attributable to the gold that it is made
from.) He intended to give them to Daisy Barberton as her fiftieth birthday present. He does not
deal in krugerrands.
But on 1 May 2021 Daisy Barberton’s motor car was stolen. And when it was not recovered Hilton
Barberton was forced to buy her a new motor car for her to use. To finance the cost of the new
motor car, he sold the 10 krugerrands for R282 500. He then gave her the new motor car as her
fiftieth birthday present.
Bad debt
On 1 September 2019 Hilton Barberton invested R250 000 in what seemed to be a secure and
generous investment that was being offered by Charles Ponzie Investments (Pty) Limited. The
investment was in a two-year interest-bearing security. Under the investment agreement, interest at
18% was payable in arrears on the conclusion of the two-year investment period. On 31 August
2021 he should have received R340 000 (his R250 000 capital invested and R90 000 interest earned
on this investment). (This return represents a yield to maturity of 16,619%.) But he received
nothing. This investment turned out to be an illegal pyramid scheme. It has been confirmed by the
liquidator of Charles Ponzi Investment (Pty) Limited that investors will not receive anything back
from their investments.
Winnings from offshore gambling
During September 2021 Hilton Barberton and Daisy Barberton visited family in the United
Kingdom. On 11 September 2021 Hilton Barberton waged (bet) £20 on the British Football Pools.
(On 11 September 2021 the spot rate was £1 = R20,55.) Most of his predictions were correct and
on 14 September 2021 he won £80 020. (On 14 September 2021 the spot rate was £1 = R20,50.)
On his return to South Africa he deposited the £80 020 into his local bank account. As a result of
this deposit his account was credited with R1 660 275. (The average exchange rate for the 2022
year of assessment is £1 = R20,30.)
Donations
Hilton Barberton shared his good fortune from his win on the British Football Pools (see above)
with Daisy Barberton by donating R800 000 to her on 1 October 2021.
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:
• R7 000 from other dividend-yielding shares,

• R2 009 000 from his primary residence (its cost was R891 000 and it was sold for R2 900 000),
• R20 000 from a six-metre yacht.
Hilton Barberton did not deal in the above assets.
Hilton Barberton has an assessed capital loss of R81 500 brought forward from the 2021 year of
assessment.
Daisy Barberton
Daisy Barberton suffered a capital loss of R145 000 on the theft of her motor car (see above).
Two-and-a-half years before valuation date, Daisy Barberton purchased 10 000 shares in
Namaqualand Limited for R50 000. She purchased these shares so as to earn dividends. It was not
her intention to resell them at a profit.
Nineteen-and-a-half years after valuation date Daisy Barberton sold her 10 000 shares in
Namaqualand Limited for R105 000. Her reason for selling them was because they had not yielded
the anticipated dividends. She invested the entire R105 000 that she obtained from their sale in further
dividend-yielding shares.
The market value of a Namaqualand Limited share on valuation date was R6.
Daisy Barberton will elect the option which results in the least amount of tax.
You are required to
1. discuss the normal tax (including capital gains tax) and donations tax consequences to Hilton
Barberton and Daisy Barberton that arise in the 2022 year of assessment out of the above
transactions. Support your discussion with determinations when necessary, and
2. determine their taxable capital gains for the 2022 year of assessment.
18.28 (60 minutes)

This question tests the definition of ‘gross income’ including its paragraphs (d) and (e),
sections 5(10), 8(4), 8(5), 10(1)(k)(i), 10(1)(x), 11(a) and 11(e), paragraph 3 of the Second
Schedule, paragraphs 3, 20, 30, 35, 54, 55 and 65 of the Eighth Schedule, sections 7(1), 16(3),
17(1) and 18A of the Value-Added Tax Act, section 9(15) of the Transfer Duty Act and the
judgments in Barnato Holdings Ltd v SIR (1978 (2) SA 440 (A), 40 SATC 75), SIR v Kirsch (1978
(3) SA 93 (T), 40 SATC 95), CIR v Nel ([1997] 4 All SA 310 (T), 59 SATC 349) and ITC 1525
((1991) 54 SATC 209).
often required to provide answers to queries on normal tax (including capital gains tax) and value-
added tax. The following five queries need your response:
Brittany Cocksfoot
On 1 October 1977 Brittany Cocksfoot, a resident of the Republic, purchased 250 krugerrands at
R280 each with surplus cash that she had available. Her intention was to hold them as a long-term
investment. She did not plan to sell them and thought that her daughter would inherit them.
Although she had many opportunities to sell them, she never did so, and it never entered her mind
to do so.
In September 2021 Brittany Cocksfoot urgently needed to buy a new motor car. Since she had no
liquid funds available, she was advised by her auditor to exchange some of her krugerrands for a
motor car. The motor-car dealer had agreed to accept nine krugerrands in payment of the purchase
price of the motor car on condition that the auditor would assist him in selling them. The auditor,
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.
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.
18.29 (60 minutes)

This question tests the definition of ‘gross income’, sections 5(10), 8(4)(eB), 8(4)(m), 8(5), 9H,
11(a), 11(i) and 12C and paragraphs 2, 3, 5, 6, 8, 10, 12, 15, 20, 35, 45, 49, 53 and 66 of the Eighth
Schedule.
often required to provide answers to questions on capital gains tax (and related normal tax)
provisions. The following five questions need your response:
Vaughan Wood
Vaughan Wood is a resident of the Republic. He trades in his own name. He carries on a process of
manufacture.
On 1 March 2020 Vaughan Wood purchased a new machine on a cash basis under an arm’s length
transaction for R100 000. This machine was immediately brought into use in his process of
manufacture.
On 31 August 2021 Vaughan Wood ‘traded in’ the above machine for a more-advanced machine. It
was purchased as a new machine on a cash basis under an arm’s length transaction for R150 000. A
‘trade in’ price of R125 000 was obtained for his ‘traded-in’ machine. This more-advanced
machine was immediately brought into use in his process of manufacture.
You are required to determine both Vaughan Wood’s normal tax and capital gains tax
consequences of the above transactions for the 2021 and 2022 years of assessment. Assume that he
will elect any option that is available to him that may defer his normal tax liability in the 2022 year
of assessment.
Hamilton Iron
Hamilton Iron is a resident of the Republic. He has an assessed capital loss of R12 000 brought
forward from the 2021 year of assessment. During the 2022 year of assessment he suffered a capital
loss of R45 000 on the sale of his domestic motor car.
Hamilton Iron made capital gains on the sale of the following capital assets:
• R7 000 from dividend-yielding shares,
• R20 000 from a six-metre yacht (a personal-use asset).
Hamilton Iron does not deal in the above assets.
You are required to determine Hamilton Iron’s taxable capital gain for the 2022 year of assessment.
Vernon Wedge
On 1 December 2020 Vernon Wedge, a resident of the Republic, purchased a primary residence for
R2 300 000. He used the granny flat portion of this primary residence as his consulting rooms. (In
other words, he traded from this portion of his primary residence.) The granny flat portion of his
primary residence comprises 20% of his total primary residence.
Vernon Wedge lived in this primary residence and practised from its granny flat for the 14-month
period from 1 December 2020 until 31 January 2022.
On 1 February 2022 Vernon Wedge sold his primary residence for R4 000 000.
You are required to determine the capital gains tax consequences that result from the purchase and
sale by Vernon Wedge of his primary residence.
Oscar Putter
On 31 December 2021 Oscar Putter ceased to be a resident of the Republic. Before emigrating he
liquidated some, but not all, of his assets. The following information is relevant:
• Oscar Putter did not sell his primary residence. As from 1 January 2022 he let it to a tenant at a
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
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:
Year of Accrued from Accrued Total Less basic Taxable

assessment Used Golf from other interest local interest portion of
Clubs CC’s loan investments exemption interest
2020 6 480 20 940 27 420 23 800 3 620

2021 16 200 11 800 28 000 23 800 4 200
2022 15 400 13 600 29 000 23 800 5 200
Olga Ping does not have any foreign investments.
Used Golf Clubs CC’s year of assessment ends on the last day of February. For its 2021 year of
assessment it had an assessed loss of R200 000.
You are required to determine the normal tax and capital gains tax consequences that arise out of
all the above transactions.
18.30 (45 minutes)

This question tests the normal tax, donations tax and capital gains tax provisions that apply to a trust,
its creator and its beneficiaries. It tests sections 7(3) and 7C and paragraphs 38, 39, 45, 68, 69, 70,
71, 72, 73 and 80 of the Eighth Schedule.
Poppy Brindle-Muffin formed a trust in South Africa. It and her are residents of the Republic.
The beneficiaries of her trust are
• Chelsea Bun (a major) and Ginger Brindle-Muffin (a minor), Poppy Brindle-Muffin’s children,
• Bran Brindle-Muffin, her spouse, and
• certain ‘approved’ public benefit organisations.
Ginger Brindle-Muffin and Bran Brindle-Muffin are residents of the Republic. Chelsea Bun is no
longer a resident of the Republic, having emigrated from South Africa with her husband during the
The trustees of Poppy Brindle-Muffin’s trust have been given a discretion regarding the vesting in a
beneficiary, of its
• receipts and accruals,
• assets, or
• capital gains from the disposal of its assets.
The trustees of Poppy Brindle-Muffin’s trust are also empowered by its trust deed to revoke the
vesting of an asset in a beneficiary within a period of two years after vesting.
When Poppy Brindle-Muffin created her trust she sold the following assets to it for R5 000 000 in
total:
Market Base
value cost
Shares in Banana Limited 800 000 200 000
Shares in Breakfast Limited 200 000 250 000
Undeveloped immovable property 500 000 100 000
Rent-producing property 900 000 600 000
Poppy Brindle-Muffin’s primary residence 2 600 000 2 220 000
5 000 000 3 370 000
The purchase consideration of R5 000 000 was settled by the trust out of the amount it obtained
from a R5 000 000 interest-free loan to it from Poppy Brindle-Muffin. This loan is repayable on
demand. Because it could have obtained a loan from a bank under an arm’s length transaction at an
interest rate of 9% a year, it saved R450 000 interest for the year (R5 000 000 at 9% for one year),
being the amount of interest that it would have had to pay under an arm’s length loan.
The following events occurred in the 2022 year of assessment (being the first year of her trust’s
existence):
• Her trust earned net rentals of R48 000 and local dividends of R12 000.
• Its trustees exercised their discretionary powers prior to the end of the 2022 year of assessment
and vested the R60 000 (net rentals of R48 000 and local dividends of R12 000) in Ginger
Brindle-Muffin.
• Poppy Brindle-Muffin’s ‘former’ primary residence was vested by the trustees of her trust in
Bran Brindle-Muffin. Its market value was then R2 660 000.
• The undeveloped property was sold by the trustees of her trust to a third party for R740 000.
• Shares in Banana Limited with a market value of R620 000 (and with a base cost to the trust of
R500 000) were vested by the trustees of her trust in Chelsea Bun.
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
19.1 (20 minutes)

This question tests the suspensive sale allowance and sections 11(i), 11( j), 24 and 24J.
Time To Settle (Pty) Limited is a resident of the Republic. It trades as a furniture dealer. Most of its
sales are suspensive sales. All suspensive sale agreements provide that at least 25% of the amount
payable under its agreed provisions becomes due and payable on or after the expiry of a period of
not less than 12 months after the date it was entered into.
The following entry appears on the credit side of Time To Settle (Pty) Limited’s statement of profit
or loss and other comprehensive income for its 2022 year of assessment.
‘Finance charges earned on suspensive sale transactions 300 000’
Time To Settle (Pty) Limited’s suspensive sales were R5 250 000 (at their cash prices) for its 2022
year of assessment. Finance charges on these sales debited to the suspensive sale debtors were
R375 000. The cost of sales was R3 750 000. In its 2021 year of assessment it obtained the same
gross profit percentage.
The maximum allowances are deducted by Time To Settle (Pty) Limited in the determination of its
taxable income. But it does not make a provision in its financial statements for any unearned gross
profit.
An extract from Time To Settle (Pty) Limited’s statement of financial position follows:
2022 2021
Suspensive sale debtors 2 362 500 681 750
Less unearned finance charges 105 000 30 000
2 257 500 651 750
Add open debtors 862 500 1 087 500
3 120 000 1 739 250
Less provision for doubtful debts (open debtors only) 120 000 154 500
3 000 000 1 584 750
You are required to set out how the above entries ought to be dealt with in the normal tax liability
determination of Time To Settle (Pty) Limited. (Assume that ‘finance charges’ in the above
transactions are deemed to be ‘interest’ as defined under section 24J.)
19.2 (20 minutes)

This question tests the suspensive sale debtors allowance and sections 11(i), 11( j), 24 and 24J(3).
Aichpee Limited is a resident of the Republic. Its entire business is carried on a suspensive sale
basis. It commenced trading on 1 March 2020. Its financial year ends on the last day of February.
Aichpee Limited’s sale agreements are structured in such a way that at least 25% of the amount
payable only becomes due and payable on or after the expiry of a period of not less than 12 months
after the date of the agreement.
Details of the financial results of Aichpee Limited for its 2022 and 2021 years of assessment follow:
2022 2021
Sales (excluding finance charges debited) 3 000 000 2 000 000
Cost of sales 1 800 000 1 200 000
Finance charges debited to debtors 700 000 736 000
Cash received from debtors 2 262 000 684 000
Finance charges earned 788 000 290 000
423
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’.)
19.3 (20 minutes)

This question tests the suspensive sale allowance and sections 11( j), 24 and 24J(3).
Bright Copper Kettles (Pty) Limited, a resident of the Republic, has a financial year that ends on
the last day of February. It deals in household appliances. And from 1 March 2020, it has
conducted a substantial portion of its business on a suspensive sale basis.
Bright Copper Kettles (Pty) Limited’s accounting policy is that of debiting the customer with the
full amount of finance charges leviable under each suspensive sale agreement. At the end of its
financial year, a credit is then transferred to its statement of profit or loss and other comprehensive
income of so much of the finance charges debt that relates to that portion of the suspensive sale
contract duration falling within that particular financial year.
No more than 75% of the amount payable under a suspensive sale agreement entered into with
Bright Copper Kettles (Pty) Limited, may be paid within 12 months of the agreement being entered
into.
Bright Copper Kettles (Pty) Limited’s profit for its 2022 financial year (ending on 28 February
2022) was R243 225. This profit must still be adjusted in the determination of its taxable income
for its suspensive sale deals. No other adjustments need be made to determine its taxable income
from this profit.
Bright Copper Kettles (Pty) Limited’s taxable income for its 2021 year of assessment prior to the
deduction in the determination of its taxable income of its
• section 11( j) doubtful debtors allowance, and
• section 24 allowance,
was R117 500.
The Commissioner has approved that 5% of Bright Copper Kettles (Pty) Limited’s suspensive sale
debtors will be doubtful of recovery, by virtue of the nature of its trade dealings.
SECTIONS 24, 24C, 24D, 24I, 24J AND 25D 425
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
19.4 (20 minutes)

This question tests the definition of ‘gross income’ and the normal tax model being applied to a
township developer including sections 11(a), 11( j), 22 and 24.
Two years ago Sam Street and Fred Field entered into partnership sharing profits and suffering
losses on a 50-50 (equal) basis for the sole purpose of developing a small suburb known as
Streetfield Park. They are both residents of the Republic.
The partnership’s taxation determination for its nine-month period ended 28 February 2021 was
prepared by an accountant who has since emigrated. The partners require your assistance in the
completion of the partnership’s taxation determination for its 2022 year of assessment.
Sam Street has been responsible for the banking account of the partnership. He has analysed its
bank transactions for the year as follows:
Receipts
Collected from debtors (last years and this years) 2 137 500
Local interest earned 60 500
Payments
Roadbuilding contractor 200 000
Stormwater drains cost 40 000
Payments to ESKOM 60 000
Local accountant 5 000
Administration expenses 59 625
Fred Field is responsible for the correspondence and documentation duties of the partnership. He is
of the opinion that the following information and correspondence will be useful to you:
• Five plots were sold during the 2022 year of assessment. All 30 plots in the suburb are of equal
size and sell for the same price.
• 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.
19.5 (25 minutes)

Surf City (Pty) Limited was formed to purchase land and other investments and to develop a
township on the KwaZulu-Natal South Coast. It is a resident of the Republic.
Surf City (Pty) Limited sold its plots for cash or under suspensive sale agreements, whereby it is
agreed that transfer will be passed only after receipt by it of the whole of the amount payable under
the agreement. 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. The original area for
sale was 10 hectares.
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
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.
19.6 (25 minutes)

Newtons (Pty) Limited was formed on 1 November 2019 for the purpose of developing a township
known as Sandy Valley. It is a resident of the Republic. It commenced business on 1 March 2020.
The following information relates to its activities for its financial years ended on 28 February 2022
(and 28 February 2021).
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??? ???).)
19.7 (15 minutes)

This question tests the determination of deemed interest incurred under section 24J.
Stan Barclay, a resident of the Republic, borrowed R1 000 000 on 1 January 2022. He used this
R1 000 000 to purchase his trading stock.
Stan Barclay must repay R1 250 000 on 31 December 2023.
The cash flows under Stan Barclay’s above loan agreement are as follows:
Date Cash flows
1 January 2022 1 000 000
31 December 2022 0
31 December 2023 -1 250 000
-250 000
The R250 000 represents a yield to maturity on an annual accrual period of 11,8034%.
You are required to determine the amounts to be deducted by Stan Barclay in the determination of
his taxable income for the 2022, 2023 and 2024 years of assessment arising out of his loan
agreement.
19.8 (30 minutes)

This question tests the determination of deemed interest accrued under section 24J.
Regular Bank Limited is a resident of the Republic. Its financial year ends on 30 June.
Regular Bank Limited invested R8 800 000 in a R10 000 000 financial instrument with a term of
two years at a discount of R1 200 000 on 1 January 2022. Local interest is receivable six monthly,
determined at 2% on its face value (R10 000 000).
This financial instrument’s maturity date is 31 December 2023 when Regular Bank Limited will
receive its face value of R10 000 000.
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.
19.9 (45 minutes)

Bob Banks is a resident of the Republic. He invested R150 000 on 1 April 2020 for a period of
five years. Local interest of R4 500 (3%) is payable to him annually on 31 March and R49 500
(representing interest) is payable on 31 March 2022.
The cash flows under this investment of Bob Banks are as follows:
Date Cash flows
1 April 2017 -150 000
31 March 2018 4 500
31 March 2019 4 500
31 March 2020 4 500
31 March 2021 4 500
31 March 2022 (R150 000 plus R49 500) 199 500
Total interest 67 500
This R67 500 represents a yield to maturity of 8,1032% on an annual accrual basis.
You are required to determine the interest to be included in Bob Banks’s gross income in the 2018,
2019, 2020, 2021, 2022 and 2023 years of assessment that arise out of this investment.
19.10 (60 minutes)

This question tests the determination of actual interest and deemed interest accruals and incurrals
under the provisions of section 24J.
Rand Choices Limited
Rand Choices Limited is a resident of the Republic. Its year of assessment ends on 31 July. It is a
dealer in financial instruments. It purchased an instrument on 1 August 2021 for R920 000. This
instrument will be redeemed on 31 July 2023 for R1 000 000. Local interest of R60 000 a year is
receivable by it.
Rand Choices Limited sold the instrument on 20 September 2022 for R981 000. This R981 000
included accrued interest.
The cash flows of this instrument that was held by Rand Choices Limited are as follows:
Date Cash flows
1 August 2021 -920 000
31 July 2022 60 000
31 July 2023 (R1 000 000 plus interest of R60 000) 1 060 000
200 000
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.
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.
19.11 (40 minutes)

On 1 March 2019 Jim Nemo, a resident of the Republic, lent R500 000 to Number One Investments
Limited. This R500 000 loan earns interest at 9% a year, compounded and capitalised annually.
The R500 000 plus capitalised interest was due to be repaid to Jim Nemo by Number One
Investments Limited on 28 February 2021, but the agreement was amended by extending the date
of repayment to 28 February 2024. The accrued interest due on 28 February 2021 of R94 050 was,
however, paid to him by it on that date.
The cash flows of Jim Nemo’s loan to Number One Investments Limited are now as follows:
Date Cash flows
1 March 2019 -500 000
28 February 2020 –
28 February 2021 (interest of R45 000 and R49 050) 94 050
28 February 2024 (R500 000 capital and R147 515 interest) 647 515
241 565
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.
19.12 (15 minutes)

This question tests the adjustments required to convert an accounting profit into taxable income for
an investor in a financial investment including the provisions of section 24J.
On 1 February 2022, Brown Paper Packages (Pty) Limited, a resident of the Republic, invested
R108 000 to purchase a financial instrument with a term of two years at a discount of R12 000.
Local interest is receivable by it six-monthly determined at 1% a year on the financial instrument’s
R120 000 face value. Its maturity date is 31 January 2023 when R120 000 will be received by
Brown Paper Packages (Pty) Limited. The yield to maturity on a six-monthly-compounding basis
is 3,7379%.
Brown Paper Packages (Pty) Limited’s financial year ends on the last day of February. It does not
deal in financial instruments – it invests in them.
Brown Paper Packages (Pty) Limited recorded the above transaction in its journal as follows:
Investment Dr 120 000
To Cash 108 000
To Sundry income – discount 12 000
Being an investment made on 1 February 2022.
In Brown Paper Packages (Pty) Limited’s 2022 financial statements it provided for interest accrued
on its above investment by recording the following entry in its journal:
Debtor (for investment) Dr 100
To Sundry income – interest accrued 100
Being interest accrued for its 2022 financial year on its 1 February
2022 instrument (investment) determined as follows:
R120 000 × 1% × 1 / 12 = R100.
You are required to state, supported by determinations, if necessary, the adjustments that must be
made to Brown Paper Packages (Pty) Limited’s accounting profit that arise from the two journal
entries so as to determine its taxable income for its 2022 year of assessment.
19.13 (15 minutes)

This question tests certain foreign exchange transactions including the provisions of section 24I.
Fifteen statements on the taxation of foreign exchange gains and losses follow:
1. Under the provisions of section 24I, only realised foreign exchange differences are included in
the taxpayer’s gross income or deductible from his income in the determination of his taxable
income.
2. The provisions of section 24I apply only to payments being made in a foreign currency.
3. Under the provisions of section 24I, a ‘capital’ foreign exchange gain or loss is not included in
the taxpayer’s gross income or deductible from his income in the determination of his taxable
income.
4. The section 11(a) deduction in the determination of taxable income for trading stock being
purchased from abroad will be its rand-equivalent cost on the transaction date.
5. To convert the purchase price of trading stock purchased from abroad into rands, the spot rate
must be used, unless a forward exchange contract has been entered into to hedge the debt.
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.
19.14 (50 minutes)

This question tests the taxation consequences of certain foreign transactions. It tests the definition
of ‘gross income’, the general deduction formula (sections 11(a) and 23(g)) and sections 10B(2),
11(e), 12C, 22, and 24I of the Income Tax Act and section 17(2) of the Value-Added Tax Act.
Kei Bottling (Pty) Limited, a resident of the Republic, makes soft drinks for the Eastern Cape
Region. Its year of assessment ends on the last day of February. Certain of its ingredients need to
be imported from abroad. It also wholesales and retails its products. It retails drinks directly to its
customers through sales outlets in Umtata and East London. It is currently involved in the
broadening of its operating base and is looking for more sale outlets.
During Kei Bottling (Pty) Limited’s 2022 year of assessment it carried out the following
transactions, all of which involved foreign exchange:
Motor car
On 1 August 2021 a new motor car was ordered by it from Germany at a rand-equivalent cost of
R450 000. (The transaction was concluded on this date.) It was delivered on 30 November 2021
and brought into use by its managing director as his ‘company car’ (a benefit of his executive
package) on 1 December 2021. On both these dates the rand equivalent of the debt was R409 500.
The purchase consideration was finally settled on 31 December 2021, with R399 000 being paid.
Value-added tax of R67 500 was paid when the motor car was imported into South Africa.
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.
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.
19.15 (40 minutes)

This question tests the taxation consequences of certain foreign transactions. It tests the definition
of ‘gross income’, the general deduction formula (sections 11(a) and 23(g)) and sections 8(4)(a), 22
and 24I.
Border Drinks (Pty) Limited is a resident of the Republic. It makes soft-drinks in the Eastern Cape
region. Certain of its ingredients need to be imported from abroad. Its factory is situated near East
London. It also wholesales and retails its products. It retails drinks directly to customers through
trading stores in the Border region. It also supplies soft drinks to Club Chic in Mauritius.
During Border Drinks (Pty) Limited’s 2022 year of assessment (which ended on 28 February 2022)
it carried out the following transactions:
Debtor
Soft-drinks are supplied by it to Club Chic on an on-going basis. Club Chic settles its liability for
soft-drinks purchased shortly after the end of each month. Club Chick is billed and settles its
liability in rupees. At the end of February 2021, Club Chic owed it the equivalent of R14 250 for
soft-drinks purchased in the month of February 2021. On 15 March 2021 it settled February 2021’s
account by paying the rupees owing, which on conversion amounted to R14 650. Amounts received
from Club Chic in Mauritius and converted into rands during its 2022 year of assessment amounted
to R140 000. These amounts were received during the period 16 March 2021 to 28 February 2022.
(The R14 650 referred to above is not included in the R140 000.) At the end of its 2022 year of
assessment, the equivalent of R15 000 was owing to it by Club Chic for sales made to it on
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.
19.16 (30 minutes)

This question tests the provisions of section 11(a), 22, 24I and 25D.
Durban Importers Limited, a resident of the Republic, purchased trading stock from abroad at a
cost of $100 000. The transaction date was 1 December 2020. Its year of assessment ends on the
The foreign creditor from whom this trading stock was purchased by Durban Importers Limited had
not been settled on 28 February 2021. The full purchase consideration (of $100 000) was paid by it
on 31 May 2021.
The following ruling rates of exchange may be relevant:
1 December 2020 $1 = R13,37 $1 = R13,49 (six months)
1 February 2021 $1 = R13,40 $1 = R13,50 (three months)
1 February 2021 $1 = R13,40 $1 = R13,51 (four months)
28 February 2021 $1 = R13,45 $1 = R13,52 (three months)
1 March 2021 $1 = R13,46 $1 = R13,53 (three months)
30 April 2021 $1 = R14,06
31 May 2021 $1 = R14,17
The average exchange rate for a year of assessment that ends on 28 February 2022 was
$1 = R14,25 and for the year of assessment ended 28 February 2021 it was $1 = R13,10.
Of the above trading stock purchased by Durban Importers Limited, 40% was on hand at the end of
its year of assessment.
You are required to set out all the resulting normal tax implications to Durban Importers Limited
in each of the following circumstances:
1. No forward cover was taken by Durban Importers Limited.
2. No forward cover was initially provided for, but then on 1 March 2021 to hedge the debt, a
three-month forward exchange contract was entered into by Durban Importers Limited.
3. No forward cover was initially provided for by Durban Importers Limited. But on 1 February
2021, not as a hedge (but for speculation purposes), a three-month forward exchange contract
was entered into by it. The market-related forward rate of this three-month forward exchange
contract was R1 352 000 on 28 February 2021.
19.17 (15 minutes)

This question tests the taxation consequences of certain foreign exchange transactions. It tests the
sections 24I and 25D.
Madeinusa Limited is a resident of the Republic. It has a February year-end. It purchased trading
stock from abroad at a cost of $100 000 on 1 October 2021. Under the purchase contract, it was
given three months to settle the amount owing.
So as to hedge the settlement of this $100 000 debt, Madeinusa Limited took out a three-month
forward exchange contract on 1 October 2021. For accounting purposes it recorded the purchases
of trading stock and the creditor at the spot rate.
Madeinusa Limited re-negotiated its credit facilities with its supplier. It 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’ the creditor at the end of its year of
assessment (28 February 2022) at the spot rate.
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.
19.18 (15 minutes)

This question tests the taxation consequences of certain foreign exchange transactions. It tests the
sections 11(i), 24I and 25D.
Outward Bound (Pty) Limited is a manufacturer of African curios. It has a financial year ending on
On 1 October 2020 Outward Bound (Pty) Limited concluded a contract to sell a container of
African curios to a customer in the United Kingdom for £15 000. Payment for this container was
due to take place on 31 December 2020.
On finalising Outward Bound (Pty) Limited’s financial results for its year ended 28 February 2021,
its auditors determined that the customer in the United Kingdom was insolvent. On the advice of its
auditor, it wrote off the full amount owing to it from this sale at 28 February 2021.
On the liquidation of the customer, a first and final liquidation distribution of £2 500 was awarded
to Outward Bound (Pty) Limited on 30 June 2021.
Ruling rates of exchange follow:
Date Spot rate
1 October 2020 £1 = R18,70
31 December 2020 £1 = R18,72
28 February 2021 £1 = R18,80
30 June 2021 £1 = R19,15
28 February 2022 £1 = R20,27
The average exchange rates for a year of assessment ending on 28 February were as follows:
• On 28 February 2021: £1 = R17,50.
• On 28 February 2022: £1 = R19,25.
You are required to determine all the resulting normal tax implications to Outward Bound (Pty)
Limited that arise out of the above transactions for its 2021 and 2022 years of assessment.
19.19 (20 minutes)

This question tests the normal tax provisions relating to a foreign currency option and an ‘affected
contract’. It tests the provisions of sections 11(a), 22(3)(a), 24I and 25D.
Kitten Whiskers (Pty) Limited
On 1 August 2021 Kitten Whiskers (Pty) Limited, a resident of the Republic, purchased trading
stock from abroad for $200 000. It was paid for on 31 January 2022. The spot rate on 1 August
2021 was $1 = R14,25.
Kitten Whiskers (Pty) Limited purchased a foreign currency option from a local bank for $200 000
for a six-month period at a strike price of R14,35. For this option, it paid a premium of R100 450
(3,5% of R2 870 000 ($200 000 × R14,35)) on 1 August 2021.
On 31 January 2022 the spot rate was $1 = R14,33. As a result, Kitten Whiskers (Pty) Limited let
its foreign exchange option expire, and instead, purchased the $200 000 dollars at the spot rate of
R14,33. With the amount it obtained it then settled its creditor.
Kitten Whiskers (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
1. determine all the resulting normal tax implications to Kitten Whiskers (Pty) Limited arising out
of the above transactions, and
2. redetermine all the resulting normal tax implications to it arising out of the above transactions
if on 31 January 2022 the spot rate was $1 = R14,50 and it exercised its option and purchased
the $200 000 at the strike price of $1 = R14,35. With the amount it obtained, it then settled its
creditor.
Moon-Flying Wild Geese CC
On 9 January 2022 Moon-Flying Wild Geese CC, a resident of the Republic, entered into a loan
agreement. The funds that it borrowed under this loan agreement were provided to it only on
1 June 2022. Under this loan agreement, $70 000 interest was incurred by it and will be payable on
31 August 2022.
Moon-Flying Wild Geese CC purchased a foreign currency option contract on 9 January 2021
under which it obtained the right to purchase $70 000 on 31 August 2022, at a rate (the option
strike rate) of R15,10 to $1. The purchase price of this foreign currency option contract was
R5 000, and was paid by Moon-Flying Wild Geese CC on 9 January 2021.
Moon-Flying Wild Geese CC’s year of assessment ends on the last day of February.
You are required to determine the effect the above transactions will have on Moon-Flying Wild
Geese CC’s taxable income for its 2022 year of assessment (year end 28 February 2022).
19.20 (10 minutes)

This question tests the normal tax provisions relating to a forward exchange contract. It also tests the
provisions of sections 22(3)(a), 24I and 25D.
On 1 September 2021 Woollen Mittens (Pty) Limited, a resident of the Republic, purchased trading
stock from abroad for $100 000. The spot rate was $1 = R14,35 and the three-month forward cover
rate was $1 = R14,40 on 1 September 2021. The purchase consideration was to be settled on
30 November 2021.
On 1 September 2021 Woollen Mittens (Pty) Limited entered into a three-month forward exchange
contract with a local bank for $100 000.
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.
19.21 (45 minutes)

This question tests the translation of foreign transactions into the South African currency. It tests the
definition of ‘gross income’ and sections 5, 6, 10(1)(i), 10B, 11(a), 23(g), 24I, 24J, 25D and
paragraph 43 of the Eighth Schedule.
Rosie Raindrops is a resident of the Republic. She is aged 55 years. She inherited 250 000 from her
late grandmother on 31 May 2021.
Foreign dividends
On 1 June 2021 Rosie Raindrops used 50 000, of her 250 000 inheritance, to purchase shares in
• Cream Coloured Ponies Plc,
• Favourite Things Plc, and
• Blue Satin Saches Plc.
For the 2022 year of assessment the following foreign dividends accrued to Rosie Raindrops from
these foreign shares:
• A foreign dividend of 450 accrued to her from Cream Coloured Ponies Plc (an unlisted foreign
company on) on 30 November 2021. She holds 6% of its equity shares. Her sister, also a resident
of the Republic, also holds 6% of its equity shares. The profits out of which it declared its dividend
have not been subjected to tax in South Africa. Less than 50% of its equity shares are held by
residents of South Africa. A non-refundable withholding tax of 45 ( 450 × 10%) was levied by
the offshore country on this foreign dividend.
• A foreign dividend of 540 accrued to her from Favourite Things Plc (an unlisted foreign
company) on 31 December 2021. She holds 10% of its equity shares. The profits out of which it
declared its dividend have not been subject to tax in South Africa. Less than 50% of its equity
shares are held by residents of South Africa. A non-refundable withholding tax of 64,80
( 540 × 12%) was levied by the offshore country on this foreign dividend.
• A foreign dividend of 675 accrued to her from Blue Satin Saches Plc (a listed foreign company)
on 31 January 2022. She holds 9% of its equity shares. The profits out of which it declared its
dividend have not been subject to tax in South Africa. Although it is not a resident of the Republic,
its shares are listed on the South African stock exchange, namely, the JSE Securities Exchange, in
addition to being listed on the stock exchange in its country of residence. A non-refundable
withholding tax of 33,75 ( 675 × 5%) was levied by the offshore country on this foreign
dividend.
Foreign rentals
Rosie Raindrops invested 100 000, of her 250 000 inheritance, in a rent-producing property.
She made this investment in the foreign country on 1 June 2021. Its terms provided for a 4 000
rental to be paid every six months in arrears, on 30 November and 31 May. There are no currency
restrictions or limits on the remission of this rental to South Africa.
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.
19.22 (45 minutes)

This question tests the translation of foreign transactions into the South African currency. It tests
sections 9A, 10(1)(i), 10B, 24I, 25D and para 43 of the Eighth Schedule.
On 1 May 2019 a foreign dividend of ǧ10 000 accrued to Norman Scott a resident of the Republic
(aged 45 years) from Gaelic Conquests Plc. Under section 25D(1), he elected to translate the
ǧ10 000 using the spot rate. (On 1 May 2019 the exchange rate (spot rate) was ǧ1 = R15,75.) And
he had elected to use the spot rate for translation purposes in the 2019 and 2020 years of
assessment. This foreign dividend is not exempt from normal tax neither under section 10(1)(k)(ii)
nor under section 10B(2). Exchange control regulations in the company’s domestic country
‘blocked’ this dividend from being distributed to Norman Scott for two years.
Since Norman Scott was unable to remit the ǧ10 000 foreign dividend to South Africa, he invested
it in a fixed-deposit interest-bearing security. He made this investment in the foreign country on
1 May 2019. Its terms provided for ǧ400 interest to be paid every six months as follows:
• On 31 October 2019. On this date the exchange rate (the spot rate) was ǧ1 = R15,90.
• On 30 April 2020. On this date the exchange rate (the spot rate) was ǧ1 = R17,90.
• On 31 October 2020. On this date the exchange rate (the spot rate) was ǧ1 = R18,20.
• On 30 April 2021. On this date the exchange rate (the spot rate) was ǧ1 = R18,50.
There are no currency restrictions or limitations on the remission of this interest by Norman Scott
to South Africa. Yet he arranged for this interest to be paid into a bank account in the foreign
country.
On 30 April 2021 Norman Scott’s ǧ10 000 fixed deposit matured. The ǧ10 000 was paid into this
bank account. He then closed this bank account. Its balance of ǧ11 690 was transferred to South
Africa. He received R261 265 (ǧ11 690 × R18,50) from this bank account. Local interest of ǧ90
was earned from this bank account. It accrued as follows:
• On 28 February 2020, ǧ10.
No further foreign dividends accrued to Norman Scott from his foreign shareholding in Gaelic
Conquests Plc. On 31 May 2021 he therefore sold these shares for ǧ150 000. He had inherited them
from his late grandfather on 1 August 2018. They had a market value of ǧ120 000 on 1 August
2018. His grandfather had purchased them for ǧ100 000 on 1 March 2015. (On 1 August 2018 the
spot rate was ǧ1 = R14,60 and on 31 May 2021 it was ǧ1 = R18,10.)
Relevant ‘average exchange rates’ follow:
• On 28 February 2018 (and 1 March 2018): ǧ1 = R13,40 (average exchange rate) and
ǧ1 = R14,55 (the spot rate).
• On 29 February 2019: ǧ1 = R14,90 (average exchange rate) and ǧ1 = R15,50 (the spot rate).
In the 2020, 2021 and 2022 years of assessment Norman Scott did not earn any other foreign
dividends, nor did he earn foreign interest.
Norman Scott does not have an assessed capital loss brought forward from the 2019 year of
assessment. Other than a capital loss that arises out of the above information, he has no other
capital gains and capital losses in the 2020, 2021 and 2022 years of assessment.
You are required to determine the South African taxable income consequences to Norman Scott of
the above transactions for the 2020, 2021 and 2022 years of assessment.
19.23 (60 minutes)

This question tests the section 24C allowance for future expenditure on contracts, including the
definition of ‘gross income’ and sections 11(a), 24 and 24C and the judgments from ITC 1527
((1991) 54 SATC 227), ITC 1601 ((1995) 58 SATC 172), ITC 1660 ((1999) 61 SATC 249),
ITC 1667 ((1999) 61 SATC 439) and ITC 1697 ((1997) 63 SATC 146). It also tests the provisions
of section 24D. It provides a deduction in the determination of taxable income for certain security
expenditure incurred by a qualifying taxpayer.
Part 1
Under section 24C, a taxpayer may deduct an amount in the determination of his taxable income
for an advance payment received by him. But this amount, once deducted in the determination of
his taxable income, must be added to his income in the following year of assessment.
Before a deduction in the determination of taxable income will be granted under section 24C, the
taxpayer must have included in gross income an amount either received by or accrued to him under
a contract. He must be able to prove that ‘future expenditure’, as defined in section 24C(1), will be
incurred by him after the end of the year of assessment, and that this expenditure will be financed
in whole or in part by the relevant receipt or accrual.
A building contractor is likely to qualify for this section 24C allowance in the determination of his
taxable income. Yet another taxpayer who fulfils the above two prerequisites will also qualify.
You are required to
1. list receipts and accruals that may give rise to a section 24C deduction in the determination of
taxable income, and
2. state what is meant by the term ‘future expenditure’.
Part 2
The following six taxpayers have all received amounts during the 2022 year of assessment that
relate either to work that will be completed during the 2023 year of assessment or to expenses that
will be incurred in the 2023 year of assessment. They are all residents of the Republic:
Kreepee Crawley
Kreepee Crawley carries on the business of maintaining swimming-pools. Some of his customers
pay him on an annual basis. He charges R750 a month to maintain a pool. His January 2022
receipts included R180 000 for contracts for the entire 2022 calendar year. His February 2022
receipts included R99 000 for annual contracts to run until 31 January 2023. He has kept accurate
records of his costs, and on average, he makes a profit (and taxable income) of R300 a pool a
month.
Morgan Owens
Morgan Owens holds a property for investment purposes. His receipts and accruals and payments
relating to this property for the 2022 year of assessment follow:
Rentals (1 March 2021 to 28 February 2022) 12 at R8 000 96 000
Rentals received in advance for the period from 1 March 2022 to 30 June 2022 32 000
128 000
Less
– Interest incurred on mortgage bond 60 000
– Property rates 17 600
– Maintenance contract cost 4 000
– Insurance on property 4 800 86 400
Net rental for the year 41 600
Wisdom Wise
Wisdom Wise is a business consultant. He requires his clients to pay him a deposit before he
commences doing work on their behalf. The deposits that he receives are not kept in trust by him.
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.
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.
19.24 (20 minutes)

This question tests the section 24C deduction in the determination of taxable income for future
expenditure to be incurred under a long-term construction contract.
Constructos (Pty) Limited is a resident of the Republic. Its three contracts as set out below were in
progress at 28 February 2022, its year end. All three contracts are expected to be completed during
Details of these contracts of Constructos (Pty) Limited are as follow:
Contract I Contract II Contract III
Total contract price 5 000 000 2 500 000 4 000 000
Work certified (see below) 4 000 000 1 200 000 2 800 000
Cash received (see below) 3 800 000 1 000 000 2 400 000
Cost to date 3 400 000 1 000 000 2 000 000
Estimated costs to complete 850 000 2 000 000 1 200 000
Constructos (Pty) Limited’s work certified is subject to a 10% retention, payable one year after
completion of the contract.
Included in the cash received by Constructos (Pty) Limited of R3 800 000 for its Contract I (see
above), is R100 000 that was paid by the client as a bonus in recognition of the high standard of
work it had completed to date.
Constructos (Pty) Limited enjoyed a section 24C deduction of R30 000 in the determination of its
2021 taxable income.
Constructos (Pty) Limited’s taxable income from all other contracts completed during its 2022 year
of assessment and from its receipts and accruals from other sources, the exemptions from normal
tax it enjoys and after the deduction of amounts deductible from its income in the determination of
its 2022 taxable income is R500 000. It was liable for normal tax in its 2021 year of assessment.
You are required to determine the 2022 taxable income of Constructos (Pty) Limited.
19.25 (45 minutes)

This question tests the normal tax liability for a corporate taxpayer that ceases to be a resident
during the year of assessment. It tests capital allowances, foreign exchange gains and loans,
dividends tax and provisions in double tax agreements.
Micromanix LLC was incorporated in Dubai, United Arab Emirates, in 2005. It has a 31 December
financial year end.
Wiseman Zungu, a South African resident, subscribed for 40% of Micromanix LLC’s equity shares
when it was formed. The remaining shareholders are not resident in South Africa. They are also not
his connected persons. Micromanix LLC’s manufactures electronic computer boards that are used
globally in various industries. Its first factory was established in the Gauteng in 2005. A second
factory was opened in Swaziland a few years later.
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
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
20.1 (15 minutes)

This question tests the concept of trading stock (opening and closing stock), the definition of
‘trading stock’ and section 22.
Fifteen statements on the taxation of trading stock follow:
1. A taxpayer may not value his closing stock on a last-in-first-out basis.
2. A corporate share-dealer must value its trading stock of shares at cost.
3. A non-corporate share-dealer must value his trading stock of shares at cost.
4. The value of a taxpayer’s closing stock is included in his gross income.
5. The value of a taxpayer’s opening stock is deductible in the determination of his taxable
income.
6. Consumable stores on hand at the end of the year of assessment constitute trading stock.
7. When a taxpayer’s fixed asset is converted into his trading stock, its cost is deductible in the
8. Trading stock is valued at the lower of its cost or market value.
9. When a taxpayer donates trading stock, its cost is included in his gross income.
10. Trading stock on hand at the end of the taxpayer’s year of assessment that was acquired by him
for no consideration is included in his closing stock at its cost price. And its cost price is
deemed to be its market price on the day it was acquired by him.
11. Trading stock consumed by the taxpayer is included in his gross income at cost, provided this
cost can be readily determined.
12. Trading stock awarded as a distribution in specie is included in the distributing taxpayer’s
gross income in the year of assessment in which it was distributed, at its market value.
13. A contractor’s work-in-progress forms part of his trading stock.
14. A lawyer’s work-in-progress forms part of his trading stock.
15. Last year’s closing stock equals this year’s opening stock.
20.2 (15 minutes)

This question tests various issues relating to trading stock. It tests the definition of ‘trading stock’,
sections 11(a), 22(1), 22(2)(b) and 22(3)(a)(ii) and paragraph 12(2)(c) of the Eighth Schedule. It
also tests the judgment from Ernst Bester Trust v C:SARS (2008 (5) SA 279 (SCA), 70 SATC 151).
Tim Tompkins, a resident of the Republic, is a vintage car enthusiast. Over a number of years he
purchased four vintage cars that were in a poor condition. After thousands of hours of labour in his
garage at home, and by finding or fashioning himself the necessary replacement parts, he restored
them to a pristine condition. He took part in various vintage car rallies where his cars were much
admired.
In the 2022 year of assessment Tim Tompkins went into the business of buying, restoring and
selling vintage cars. For this purpose, he leased premises that he used as a workshop and
showroom. His four cars were his initial stock. Added to which his aunt, Teresa Shelby, gave him,
as a present, a car in immaculate condition. He then placed the five cars in the showroom.
449
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.
20.3 (20 minutes)

This question tests the definition of ‘gross income’ including its paragraph (c), the normal tax
consequences that arise when trading stock is disposed of otherwise than by way of a sale. It tests
sections 11(a), 18A and 22(8) and paragraphs 2 and 5 of the Seventh Schedule to the Income Tax
Act.
Cristo Rudman is a resident of the Republic. He is a sole trader, trading as a tobacconist (a retailer
in tobacco and tobacco-related products, including cigars, cigarettes and gifts). He also retails
newspapers and magazines. He is not a vendor.
Cristo Rudman has queried the normal tax implications of the following four transactions:
‘Pensioners’ day’
Each Friday is ‘pensioners’ day’ at Cristo Rudman’s shop. He supplies, free of charge, a cigar to
each one of his customers who has attained the age of 60 years. He does this to encourage
pensioners to visit his shop and purchase his trading stock. He has determined that each cigar that
he gave away, cost him R9. He sells this particular cigar for R25,50.
Donation
At the request of the local old-age home, Cristo Rudman donated to it 10 cartons of cigarettes. The
old-age home provided him with a section 18A certificate for his donation. A carton of cigarettes
normally sells in his shop for R180, representing a 150% mark-up on its cost.
Birthday present
Cristo Rudman recently attended the birthday party of Herman Upmann, a friend of his. He took a
book containing ‘naughty’ and ‘rude’ photographs from his shop as a birthday present for Herman
Upmann. This book was for sale in his shop for R100, representing a 150% mark-up on its cost.
Stolen trading stock
Because of the nature of Cristo Rudman’s trading stock, he does a physical stock take every three
months. At his most recent stock take he established that four imported pipes were missing from his
shop (due to theft). An imported pipe normally sells in his shop for R120, representing a 100%
mark-up on its cost.
You are required to discuss the normal tax implications that arise for Cristo Rudman as a result of
the four transactions as detailed above.
20.4 (10 minutes)

This question tests the provisions of section 22. It also tests the judgment from Ernst Bester Trust v
C:SARS (2008 (5) SA 279 (SCA), 70 SATC 151).
Too Little Limited and Too Much Limited are both residents of the Republic. They are not
‘connected persons’.
During Too Little Limited’s 2021 year of assessment it acquired trading stock from Too Much
Limited, that had cost Too Much Limited R200 000 (and with a market value of R215 000), for no
consideration.
TRADING STOCK 451
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.
20.5 (30 minutes)

This question tests the tax consequences arising out of the sale of trading stock. It tests the
definition of ‘gross income’ and sections 11(a), 18A, 22(1) and 22(8) and paragraphs 4, 7, 9, 20
Luxdev Limited is a resident of the Republic. It erects luxury apartments and other buildings. On
completion of a development, it sells of the individual apartments as sectional title units. Its
financial year ends on 31 December.
Query 1
On 1 November 2021 Luxdev Limited sold the penthouse apartment of its most-recently completed
development to Megacon Limited, also a resident of the Republic.
Megacon Limited had recently had its shares listed on the local stock exchange. It purchased the
luxury apartment for the use of its directors during ‘out-of-town’ business trips. The total cost of
the penthouse apartment to Luxdev Limited was R3 750 000. Under the purchase and sale
agreement, Megacon Limited paid cash of R4 000 000 and awarded 50 000 of its shares (Megacon
Limited shares) to Luxdev Limited for the balance of the purchase consideration. The market value
of a share in Megacon Limited was R40 on 1 November 2021. (The nominal value of a share in
Megacon Limited is R1.)
Murray Roberts, the chairman of the group that Luxdev Limited is a member of, reprimanded its
directors for entering into this arrangement. He had been informed on reliable information that a
Megacon Limited share was grossly overvalued. This information was confirmed by the slump in the
market value of a Megacon Limited share to R30 on 31 December 2021.
Luxdev Limited then sold its 50 000 Megacon Limited shares on 1 March 2022 for their market price
of R24 a share.
What are the normal tax implications to Luxdev Limited arising out of the transactions detailed
above?
You are required to inform Luxdev Limited of the normal tax implications that arise out of its
above transactions.
Query 2
Luxdev Limited erected a resource centre at a local school for handicapped children using excess
(left-over) building materials purchased for some of its recent development projects.
The erection of the resource centre by Luxdev Limited was completed on 15 August 2021 at a cost
of R860 000 (comprising materials of R620 000 and labour of R240 000). The resource centre was
officially opened by the chairman of the group on 1 October 2021. In her acceptance speech,
Agatha Trunchbull, the headmistress of the school, highlighted the fact that if the school had
commissioned a contractor to erect the resource centre, the cost to the school would have been
R1 840 000 (including value-added tax).
At the official opening ceremony, a section 18A certificate was presented by Agatha Trunchbull on
behalf of the school to Luxdev Limited for its generous donation to it.
You are required to set out the resulting normal tax implications to Luxdev Limited of its above
donation made by it.
20.6 (30 minutes)

This question tests trading stock under a ‘completed contract’ transaction. It tests the definitions of
‘gross income’ and ‘trading stock’ and sections 11(a), 22 and 24C. It also tests the determination of
the value of work in progress of a construction contractor.
Custom-Built CC
Custom-Built CC is a resident of the Republic. It manufactures quality furniture to customers’
specifications. Its financial year ends on the last day of February. In the determination of its net
income for its 2022 financial year (year end 28 February 2022) it had valued its opening and
closing stock of work-in-progress and finished goods on a first-in-first-out basis, including factory
overheads.
On 3 January 2022 Custom-Built CC commenced work on the ‘Amalgamated Audit Firms’
Boardroom Contract’. The contract for R400 000 had been concluded (by the signing of it by both
parties to it) on 3 January 2022. The following provisions were agreed to:
• R300 000 was payable to Custom-Built CC, and was in fact paid, on 3 January 2022.
• R60 000 was payable to Custom-Built CC on completion of the contract, expected to be
26 April 2022. The contract was actually completed two weeks late, on 10 May 2022, and the
R60 000 was paid on 10 May 2022.
• R40 000 held back as a retention. It is payable to Custom-Built CC only one year after the
completion of the contract.
Custom-Built CC’s estimated cost of this contract is R240 000. It was the first contract of this
nature undertaken by it. And for accounting purposes, it agreed to account for this contract on the
‘completed contract method’.
The R300 000 received on 3 January 2022 was credited by Custom-Built CC to an account labelled
‘Contract-in-Progress’. (A copy of this ledger account is set out below.)
Custom-Built CC’s costs of this contract incurred during the period 3 January 2022 to 28 February
2022 were R120 000. They were debited to this same account (see below). The balance of
R180 000 on this account has been included in its sundry creditors in its statement of financial
position at 28 February 2022.
Ledger Account: Contract-in-Progress
Costs incurred 120 000 Cash received 300 000
Balance, carried down 180 000
300 000 300 000
Balance, brought down 180 000
You are required to state what effect the above transactions will have on Custom-Built CC’s
Mason Stone
Mason Stone is a building contractor. He trades in his own name. The cost to him of material used
by him in effecting improvements to a contact that he had entered into with John Fante and that he
had commenced on 6 January 2020 amounted to R120 000 for the period from 6 January 2022 to
28 February 2022.
Further costs incurred by Mason Stone as in accordance with IFRS that are to be regarded as
having been incurred directly in connection with the John Fante contract amounted to R30 000 for
the period from 6 January 2022 to 28 February 2022.
The portion of any other costs incurred by Mason Stone in connection with the John Fante contract
and other contracts that in accordance with IFRS are regarded as having been incurred in
connection with the John Fante contract amounted to R20 000 for the period from 6 January 2022
to 28 February 2022.
TRADING STOCK 453
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.
20.7 (40 minutes)

This question tests the taxation consequences of certain transactions including trading stock. It tests
the definition of ‘gross income’ and sections 11(a), 22, 23C and 24I. It also tests the judgment from
Ernst Bester Trust v C:SARS (2008 (5) SA 279 (SCA), 70 SATC 151).
You are the auditor of Albatros (Pty) Limited, a resident of the Republic. It is a manufacturer of
golf clubs and golfing accessories. Part of your responsibility is the completion of its trading stock
audit. While completing this responsibility for its year of assessment ended 31 December 2021, the
following four issues have come to your attention:
• Bogie Eagle, the managing director and major shareholder in Albatros (Pty) Limited carried on a
business in his own name of importing and distributing plastic golf tees. On 1 August 2021 he
ceased his importing business to concentrate his efforts on the management of Albatros (Pty)
Limited. His stocks of plastic golf tees on hand at 1 August 2021 were given by him to it for no
consideration. It manufactures and sells as part of its golf accessories, wooden golf tees. Because
of the cessation of his importing activities, it took over these activities from 1 January 2022. The
original cost of these plastic golf tees to Bogie Eagle was R15 000 (excluding value-added tax).
Their market value on 1 August 2021 was R25 000. At 31 December 2021, 60% of the plastic
golf tees had been sold by Albatros (Pty) Limited while 40% was still on hand. No entries were
put through its accounting records to record either, the acquisition of the plastic golf tees at no
cost, or the balance of them on hand at 31 December 2021.
• During its 2021 year of assessment Albatros (Pty) Limited entered into a contract with an
American supplier to import a new type of golf club. On 1 November 2021 a batch of these
clubs was ordered from the American supplier at a cost of $10 000. This batch arrived in South
Africa on 30 December 2021. In accordance with the contract, settlement of the purchase
consideration was on 31 January 2022. Import duties of R17 200 and value-added tax of
R37 500 were incurred on clearing this batch through customs on 30 December 2021. Albatros
(Pty) Limited had counted its closing trading stock on 29 December 2021. This trading stock
was therefore excluded from its statement of financial position figure. Apart from the receipt of
this imported batch on 30 December 2021, there were no other trading stock movements after
the stock count on 29 December 2021. Rates of exchange follow:
1 November 2021 $1 = R15,70
30 December 2021 $1 = R15,75
31 December 2021 $1 = R15,78
31 January 2022 $1 = R15,80
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.
20.8 (30 minutes)

This question tests the tax values of opening and closing trading stock. It also tests the provisions
of sections 11(a), 12C, 18A, 22, 23B and 24I.
Dion Bumsandboobs is a resident of the Republic. He is a sole proprietor, trading as a manufacturer
and retailer of fashion clothing. His clothing factory is situated in an industrial area just outside of
Durban. His retail outlet is situated on the Berea in Durban. (He hires both premises.) He trades
under the name of ‘The House of Dion’. It is a vendor.
The trading stock of The House of Dion (as reflected on its statement of financial position at
28 February 2022 (and 28 February 2021)) was as follows:
2022 2021
Raw materials 600 000 550 000
Finished goods 440 000 950 000
Work-in-progress 635 000 510 000
Consumable stores 11 900 8 750
Spare parts for manufacturing machinery 4 450 6 900
Packing materials 176 000 154 000
1 867 350 2 179 650
The House of Dion has determined its net income for its year of assessment ended 28 February
2022 to be R746 000. It may, however, have to be adjusted for the following transactions:
• The House of Dion ordered 1 000 metres of fabric at a cost of $100 000 from an American
supplier on 1 June 2021. The transaction date was 1 June 2021. The fabric arrived in Durban on
31 July 2021. On clearing the fabric through customs, it paid import duties of R280 000 and
value-added tax of R308 000. Transport costs incurred by it from the Durban harbour to its
factory were R5 000. The American supplier was settled on 31 August 2021.
TRADING STOCK 455
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.
• 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.
20.9 (45 minutes)

This question tests the definitions of ‘trading stock’ and ‘gross income’, the general deduction
formula (sections 11(a) and 23(g)) and sections 22(1), 22(2), 22(2A), 22(3) and 22(4). It also tests
the judgments from CIR v Stott (1928 AD 252, 3 SATC 253), Natal Estates Ltd v SIR (1975 (4) SA
177 (A), 37 SATC 193) and Berea West Estates (Pty) Ltd v SIR (1976 (2) SA 614 (A), 38 SATC 43).
On 1 March 2001 Victor Lane purchased a cottage (a small house) situated at 11 Cobble Road,
District Eight, Durban for R270 000, as a house for his family and himself to live in.
Victor Lane is a resident of the Republic. He is a bricklayer by trade. From 1 January 1991 to
28 February 2021 he had been employed by a construction contractor.
During the 20 years that Victor lived at 11 Cobble Road he made a number of improvements (not
repairs) to the cottage. Being a bricklayer by trade he did all the labour himself, but he spent
R290 000 on the materials used in the improvements. Had the labour been provided by another
person it would have cost R120 000.
During January 2021 Bentley Street, Victor Lane’s father-in-law, died and he inherited the cottage
situated at 13 Cobble Road, District Eight, Durban. This property was valued in Bentley Street’s
estate at R750 000. It was transferred into Victor Lane’s name on 1 March 2021. He also inherited
R1 000 000 cash from Bentley Street.
Victor Lane resigned from the employment of the construction contractor on 28 February 2021. He
commenced his own business the following day. He trades in his own name, and carries on the
business of a property developer.
During the 2022 year of assessment Victor Lane purchased the cottages situated at 15 Cobble Road,
17 Cobble Road, 19 Cobble Road and 21 Cobble Road.
Victor Lane renovated these four cottages, in addition to his late father-in-law’s cottage. He then
sold all five cottages. He also sold his own home.
Details of the cottages purchased and sold follow:
Address Cost Cost of Selling
price improvements price
11 Cobble Road 270 000 290 000 700 000
13 Cobble Road – 250 000 1 080 000
15 Cobble Road 760 000 260 000 1 090 000
17 Cobble Road 720 000 280 000 1 050 000
19 Cobble Road 780 000 320 000 1 200 000
21 Cobble Road 750 000 300 000 1 120 000
The cost of improvements is the expenditure incurred by Victor Lane on materials and labour. He
did not pay himself a salary.
During December 2021 and January 2022 Victor Lane enjoyed a holiday.
On 2 February 2022 he purchased the cottage situated at 23 Cobble Road for R770 000. By
28 February 2022 he had incurred R230 000 on renovating it. He expects to complete the
renovations during April 2022. He will then attempt to sell it.
TRADING STOCK 457
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.
20.10 (30 minutes)

This question tests the definition of ‘trading stock’ and sections 11(a), 12C, 22, 23(g), 64E
and 64EA and paragraphs 12(2)(c) and 53(1)(c) of the Eighth Schedule.
Thomas Teakwood is a resident of the Republic. He retired from employment on 28 February 2021.
He had been employed as branch manager of Ted Bank Limited, a commercial bank, in Durban.
Thomas Teakwood has always ‘relaxed’ at home over weekends by ‘fiddling around’ in his
beautifully-equipped workshop. His hobby was to make replicas of antique furniture out of quality
wood.
Thomas Teakwood’s relatives and friends of had on numerous occasions begged him to make a
particular item of furniture for them. He had always declined saying he would think about it once
he retired.
By 31 May 2021 Thomas Teakwood was bored with retirement. The next day he started a
furniture-making business.
Thomas Teakwood spent two hours on the telephone on the morning of 1 June 2021 speaking to
those relatives and friends who had begged him to make furniture for them. By midday he had
orders for 20 pieces of furniture to be custom built. He has not looked back. His business has
boomed. He is no longer bored.
At the time Thomas Teakwood commenced his business (on 1 June 2021) his woodwork
equipment was insured for R300 000. It had cost him, over a number of years, R180 000 in total.
On average, it was 10 years old on 1 June 2021. Its insured value is a fair reflection of its market
value.
All Thomas Teakwood’s woodwork equipment was purchased as part of his hobby. At the time of
its purchase he had not intended to use it in a business venture.
When Thomas Teakwood commenced his furniture-making business he did not transfer his own
stocks of wood into the business. His clients either supplied him with the wood, or he purchased the
required wood.
On 18 February 2022 Thomas Teakwood used ‘business’ wood, that had cost him R900, to make
an oak hat stand that he presented to Cherry Teakwood (nèe Birch), his wife, as her birthday gift.
He estimated that the cost of his own labour in making this hat stand was R2 700.
On 25 February 2022 Thomas Teakwood received a dividend in specie from Oregon-Pine Limited
(a resident of the Republic). This in specie dividend consisted of planks of Oregon-Pine wood,
being part of its trading stock. The trading stock that was distributed to him by it as his dividend
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.
20.11 (20 minutes)

This question tests sections 11(a), 11(e), 12B, 12C, 12E, 22(1), 22(2A), 22(3) and 22(3A).
Makaranga (Pty) Limited is a resident of the Republic. It manufactures ceramic garden pots and
garden ornaments. During its financial year that ended on 28 February 2022, it moved to new
premises. The total cost of its move was R33 000, made up as follows:
Transportation and re-installation of plant 25 500

Removal of office furniture 2 700
Removal of stocks of both raw material and finished goods 4 800
33 000
As a result of Makaranga (Pty) Limited’s move to its new premises, its all-round efficiency has
been substantially increased. Is the R33 000 expenditure it has incurred deductible in the
determination of its taxable income?
You are required to prepare a report for Makaranga (Pty) Limited setting out the normal tax
implications of the R33 000 cost of its move.
20.12 (20 minutes)

This question tests sections 11(a), 11(e), 22(1), 22(2A), 22(3) and 22(3A).
Kildare (Pty) Limited is a resident. Its financial year ends on the last day of February. It
manufactures plastic garden furniture. It is a vendor. It makes solely taxable supplies. It is not a
small business corporation.
Under Interpretation Note 47 and Binding General Ruling 7, the write-off period for plastic garden
furniture is six years.
On 1 November 2020, Kildare (Pty) Limited removed one of its manufactured garden sets (four
chairs and a table) from its trading stock to be used as a capital asset in its administration office.
This garden set was set up in the north-west corner of a balcony. From 1 November 2020 it was
used as a smoking area for its employees who enjoy (or are addicted) to smoking.
The cost to manufacture this garden set (incurred during Kildare (Pty) Limited’s 2021 year of
assessment) was R2 400 (excluding value-added tax). Its market value on
• 1 November 2020 was R4 200 (excluding value-added tax), and
• 28 February 2021 was R4 250(excluding value-added tax).
On 30 October 2021, Kildare (Pty) Limited established that single most employee were working
from home and that the north-west corner of a balcony was no longer being used. It therefore sold
this garden set for R4 945 (including value-added tax of R645).
You are required to determine what effect the above transactions have on Kildare (Pty) Limited’s
taxable income for its 2021 and 2022 years of assessment.
TRADING STOCK 459
20.13 (25 minutes)

This question tests the provisions of section 9B. It also tests paragraphs 20 and 35 of the Eighth
Schedule and sections 9C, 11(a), 22(1) and 22(2)(a).
Kirsten Bosch, a resident of the Republic, has been a share-dealer for a number of years. With the
exception of her shareholdings in Bedford Limited and Sandhurst Limited, she has never held
shares for longer than three years. Details of the cost and the market value of his shareholdings in
these two companies are as follows:
Bedford Sandhurst
Date Limited Limited
1 August 2018 (date of purchase) – cost R50 000
1 November 2018 (date of purchase) – cost R40 000
28 February 2019 – market value R55 000 R39 000
1 July 2021 – market value R45 000 R70 000
Kirsten Bosch has decided to sell both these shareholdings. On the assumption that their market
values on 1 July 2021 (see above) will be their selling prices, she would like you to advise her as to
when she should sell each shareholding.
You are required to advise Kirsten Bosch on what date she should sell each shareholding, what
election she should make – if an election exists – and what effect the selling of these shares will
have on her 2022 taxable income.
20.14 (30 minutes)

This question tests the change in nature of an asset from trading stock into a capital asset and vice
versa. It tests sections 9C, 10(1)(k), 11(a), 22(1), 22(2) and 22(8)(b) and paragraph 12(3) of the
Eighth Schedule.
Harold Watson is a resident of the Republic. He invests in shares. He seldom deals in shares. But
on 1 June 2018 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, were shares in were
• Wylie Limited,
• Ludwig Limited, and
• Benvie Limited.
Wylie Limited
On 1 June 2018 Harold Watson purchased 500 shares (trading stock) in Wylie Limited for
R60 000. On 28 February 2019 the market value of a share in it was R114. And on 29 February
2020 the market value of a share in it was R110. On 31 March 2020 he was pleasantly surprised
when he received an unexpected dividend from it of R5 940. On 28 February 2021 the market value
of a share in it was R132. Another unexpected dividend from it of R4 200 accrued to him on
31 March 2021.
As a result of these generous dividend yields, Harold Watson ‘transferred’ his 500 shares in Wylie
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 R140, and
• 28 February 2022 it was R150.
Harold Watson still held 500 shares in Wylie Limited on 28 February 2022.
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.
20.15 (75 minutes)

This question tests the definition of ‘gross income’, the general deduction formula and the trading
stock provisions relating to a share-dealer including opening and closing stock values and
sections 9B, 10(1)(k)(i), 11(a), 22(1), 22(2), 22(3), 22(4) and 22(8) and paragraphs 12(1), 12(2)(c),
12(3) and 20 of the Eighth Schedule and the judgment from Ernst Bester Trust v C:SARS (2008 (5)
SA 279 (SCA), 70 SATC 151).
Maximilian Dunlop is a resident of the Republic. He is both an investor and a dealer in shares. He
maintains separate records for each activity. The Commissioner has accepted, and recognised, that
he holds certain shares as trading stock and others as capital assets.
Maximilian Dunlop has asked you to help him determine the normal tax consequences of certain
transactions that took place during the 2022 year of assessment. And he would also like you to
determine the value of his closing stock from his share-dealing 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 as follows:
Goodyear Limited
On 1 April 2021 Marshall Dunlop, Maximilian Dunlop’s older brother, died. He inherited
5 000 shares in Goodyear Limited from Marshall Dunlop. They had each purchased (as trading
stock) 5 000 shares in it for R33 000 on 1 March 2021. On 1 April 2021 the market value of a share
in it was R7,70.
On 1 December 2021 Maximilian Dunlop sold 3 000 shares in Goodyear Limited for R26 950.
TRADING STOCK 461
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.
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
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
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.
20.16 (60 minutes)

This question tests the definition of ‘gross income’, the general deduction formula (sections 11(a)
and 23(g)) and the trading stock provisions including opening and closing stock values and
sections 22(1), 22(2), 22(3), 22(4) and 22(8) and paragraphs 12(1), 12(2)(c), 12(3) and 20 of the
Eighth Schedule and the judgment from Ernst Bester Trust v C:SARS (2008 (5) SA 279 (SCA), 70
SATC 151).
Alexander de Muscat has carried on business as a winemaker for a number of years. He buys
surplus grapes from wine farmers. He produces two kinds of wines,
• a dry white blend, that sells under the name ‘Libbies’, and
• a red blend, that sells under the name ‘Tassies’.
Only Alexander de Muscat knows how to make both Libbies and Tassies. He keeps his recipe a
secret. Both wines are popular among the indigenous people of the Cape. They are also enjoyed by
full-time students. They are inexpensive. Their drinkers know that they are blends made from many
cultivars (types of grapes) including the following:
• Libbies is made from chardonnay, chenin blanc, colombard, riesling, sauvignon blanc and
semillion grapes.
• 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.
20.17 (45 minutes)

This question tests various transactions including trading stock. It tests the definition of ‘gross
income’ and sections 11(a), 18A, 22, 56, 59 and 64 and paragraphs 12(1), 12(3), 20(1)(a), 20(2)(c)
and 38 of the Eighth Schedule. It also tests the definition of a ‘supply’ and sections 3(1)(b), 7
and 18(1) of the Value-Added Tax Act and sections 1 and 5(b) of the Transfer Duty Act.
Morgan Yard deals in land (he purchases and sells land). With the exception of the land that
‘houses’ his office (see below), he does not hold land as a capital asset. He is a vendor.
A few years ago, but after valuation date, Morgan Yard purchased a number of plots in a suburb
where he anticipated that there would soon be a demand for residential plots. Value-added tax was
paid and successfully deducted as input tax on all plots that were purchased. The market value of a
plot has not dropped below its purchase price. The demand for plots has now occurred, and he has,
during the 2022 year of assessment, sold a number of them, each at a substantial profit.
The following unusual events took place regarding Morgan Yard’s trading stock during the 2022
year of assessment:
• Morgan Yard used one plot for his office to be erected on it. It had cost R80 000. It had a market
value of R180 000 when he transferred it out of his trading stock. It cost R2 320 000 to erect his
office on it. He moved into his new office on 1 December 2021.
• Morgan Yard moved out of his ‘old’ office on 31 October 2021. All the timber in the office was
rotten. It was also situated on the ‘wrong’ side of town. It had been purchased for R155 000
(land R50 000 and building R105 000) by him three years and three months before valuation
date. Its market value on valuation date was R180 000 (land R60 000 and buildings R120 000).
On 31 October 2021 its market value was R265 000 (land R154 000 and buildings R111 000).
Prior to moving out of his ‘old’ office, he had decided to demolish the office building and to sell
the vacant plot of land. He transferred it into his trading stock on 31 October 2021. The
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.
20.18 (75 minutes)

This question tests the definition of ‘trading stock’, the opening and closing values of the trading
stock of a farmer, sections 11(a) and 22 and paragraphs 2, 3, 4 and 12(1) of the First Schedule.
Royce Bentley is a used-car motor dealer. He trades in his own name. He is a vendor. Amongst
others, he carried out the following transactions during the 2022 year of assessment:
(Unless stated otherwise, all amounts are exclusive of value-added tax. In other words you may
ignore value-added tax.)
• On 1 March 2019 Royce Bentley sold a 2012-model used car to Granny Rolls for R100 000. On
31 March 2021 her driver’s licence was cancelled after she had committed numerous traffic
offences. No longer being allowed to drive and not having any relatives, she donated her 2012-
model used car to him on 1 April 2021. Its market value was then R40 000. He then sold this
2012-model used car on 31 May 2021 for R40 000.
• On 1 May 2021 Royce Bentley purchased a 2019-model used car as a ‘trade-in’ from a
customer, a non-value-added tax vendor, for R138 000 (R138 000 plus value-added tax of nil).
TRADING STOCK 467
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
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.
20.19 (45 minutes)

This question tests the definition of ‘trading stock’, the opening and closing values of the trading
stock of a farmer, sections 11(a) and 22 and paragraphs 2, 3, 4 and 12(1) of the First Schedule.
‘Veldkos’ is food produced by or derived from the veld. Louis Leipoldt in his book entitled
Leipoldt’s Cape Cookery describes ‘veldkos’ as follows:
‘In this chapter “veldkos” means edible uncultivated wild foodstuffs that are made eatable
according to the old Cape recipes.
‘The earliest travellers relate how wonderfully prolific in “herbs and plants” were the flat lands
round Table Bay in winter and spring after the early rains. Jacquin, the famous gardener of
Schonbrun wrote about a Cape sorrel . . . in 1653 . . . . Before that date, however, ships sailing
around the Cape had landed sailors to collect baskets of sorrel that, made into a stew, was
regarded as a prophylactic against and a cure for scurvy.
‘Jan van Riebeeck found fine examples of wild asparagus, “as good as anything in the
homeland”, growing on the slopes of Table Mountain. From his time onwards travellers have
mentioned various wild plants that were used as foodstuffs by both colonists and Africans.
‘Some of them are so rare, so local and little-known that they must be regarded as curiosities
with that only a few cooks are acquainted. Others were, and to some extent still are, popular and
comparatively easy to procure. [Veldkos] could all be had in season on the Cape Town market at
the end of the past century, when dishes made from them could be readily obtained at one or
other of the hotels or boarding houses that specialised in Cape dishes. Today most of them
would have to be procured through the intervention of some kindly farmer friend although, as a
matter of fact, some of them are to be found within walking distance of Cape Town. . . .
‘[The] Wateruintjie [is] undoubtedly the most popular of all the edible wild plants, and anyone
who travels by road through the country will notice its beautiful white, strongly-scented flowers
TRADING STOCK 469
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.
20.20 (60 minutes)

This question tests the conversion of trading stock into a capital asset. It tests paragraph (jA) of the
definition of ‘gross income’ and sections 11(a), 11(e), 22(3), 22(8) and 23(g) and paragraphs 3, 4,
12(3), 20 and 35 of the Eighth Schedule. It also tests Interpretation Note 11.
Ivan Klue is an art dealer who trades in his own name. He is a vendor. He is an expert on paintings
by controversial South African artists. He sources these paintings, restores them if necessary, and
then sells them from his gallery.
Trading stock into a capital asset and visa versa
On 1 November 2020, Ivan Klue removed one of his original paintings from his trading stock to be
used as a display feature in his office. The cost of this painting was R60 000 (excluding value-
added tax). Its market value on
• 1 November 2020 was R90 000 (excluding value-added tax), and

• 28 February 2021 was R100 000 (excluding value-added tax).
On 30 October 2021, Ivan Klue moved another original painting from his gallery into his office to
be used as a display feature. He returned the previous original painting from his office into his
gallery.
On 30 November 2021 Ivan Klue sold the original painting that was previously displayed in his
office for R120 750 (including value-added tax of R15 750).
Manufactured trading stock
When Ivan Klue is in the mood to paint and if he has time available he paints a painting. He sells
his paintings from his gallery. His family members sometimes visit him in his gallery. If they like a
painting of his, he then removes it from his gallery and takes it home.
On 1 September 2020, he removed one of his own paintings from his trading stock to be used as a
personal-use asset in his home. The manufactured cost of this painting was R300 (excluding value-
added tax). Its market value on
• 1 September 2020 was R45 000 (excluding value-added tax), and
• 28 February 2021 was R50 000 (excluding value-added tax).
On 31 August 2021, Ivan Klue took home another one of his own painting from his trading stock to
be used as a personal-use asset. He therefore brought back into his gallery his own painting that he
had taken home on 1 September 2020.
On 31 January 2022 Ivan Klue sold it for R75 900 (including value-added tax of R9 900).
Under Interpretation Note 47 and Binding General Ruling 7 the write-off period for a painting is
25 years.
You are required to
1. determine what effect the above transactions have on Ivan Klue’s taxable income for the 2021
2. redetermine what effect the above transactions have on his taxable income for the 2021 and
2022 years of assessment using the provisions of Interpretation Note 11, and
3. summarise Interpretation Note 11 indicating aspects of it that need to be amended by the
Commissioner.
CHAPTER 21
OTHER CLASSES OF TAXPAYERS
21.1 – 21.3 CLUBS AND ASSOCIATIONS
21.4 – 21.5 CO-OPERATIVE SOCIETIES
21.6 – 21.11 DOUBLE TAXATION AGREEMENTS
21.12 – 21.13 MINING
21.14 – 21.15 SHIPS AND AIRCRAFTS
21.16 – 21.20 HOTELS
21.1 (15 minutes)

This question tests the taxation of a club including the application of sections 10(1)(cO), 10(1)(cN),
30(3) and 30A.
The Spades Club
The Commissioner has approved the Spades Club as a recreational club under section 30A. Its
receipts and accruals consist of entrance fees, annual subscriptions, rentals from the letting of its
buildings that are used to play various indoor sports and local interest from the investment of its
surplus funds.
You are required to discuss whether the Spades Club will be liable for normal tax on its net
earnings for the year.
The Aids-Line Organisation
The Aids-Line Organisation was formed for the specific purpose of bringing together people who
have a family member suffering from Aids. It is considered to be an organisation formed for a
purpose beneficial to the public, or a section of the public. It has been approved by the
Commissioner as a public benefit organisation under section 30(3).
The Aids-Line Organisation made a net surplus for its year of assessment that ended on
28 February 2022 of R30 000. Its receipts and accruals from members were R180 000. It also
earned a net R20 000 from functions held at its premises. It earned local interest of R6 000 from its
investments.
You are required to discuss whether Aids-Line Organisation is liable for normal tax.
21.2 (15 minutes)

This question tests the taxation of a club including the application of sections 10(1)(cO) and 30A.
The Businesswomen’s Club was established to provide social and recreational amenities for the
exclusive use of the businesswomen of Durban.
New members wishing to join the Businesswomen’s Club have to be sponsored by two existing
members. New members pay an entrance fee of R10 000. All members, new and old, pay an annual
subscription of R5 000. Under its constitution, these entrance fees are credited to a fund that is used
to extend its facilities.
The Businesswomen’s Club has been approved by the Commissioner under section 30A.
The Businesswomen’s Club’s financial year ends on the last day of February.
The following details relate to the Businesswomen’s Club receipts and accruals and expenditure for
its 2022 year of assessment (ended 28 February 2022):
471

Entrance fees (12 new members) 120 000
Subscriptions 750 000
Local interest on overdue amounts owing by its members 30 000
Distribution from a collective investment scheme in securities (a so-called equity unit
trust (note 1) 18 000
Local interest from participating mortgage bonds 90 000
Rentals (note 2) 44 000
Expenditure
Administrative expenses, supplies, etcetera (including depreciation) 580 000
Notes
1. The advice that the Businesswomen’s Club obtained from the collective investment scheme in
securities discloses that the R18 000 distribution comprised
• 80% local dividends, and
• 20% local interest.
2. The rentals of R44 000 that accrued to the Businesswomen’s Club were from a bridge school
who hires its club hall once a week for an afternoon of bridge (R15 600) and from an
organisation who hired its foyer for four months to display a trade exhibition (R28 400).
3. Expenditure incurred by the Businesswomen’s Club includes adjustments for opening and
closing food and bar stocks. Also included in its expenditure is R4 000 being the cost of
stationery purchased on 25 February 2022 and that was unused at the end of its year of
assessment. Its policy is to purchase stationery at the same time each year. At the end of its
2021 year of assessment, the value of its stationery on hand was R2 500. All other expenditure
is deductible in the determination of its taxable income.
4. The Businesswomen’s Club has been approved by the Commissioner under section 30A.
You are required to
1. determine the Businesswomen’s Club’s taxable income for its 2022 year of assessment, and
2. set out the basis for the determination of its normal tax liability.
21.3 (75 minutes)

This question tests certain tax implications relating to a club that not been recognised as an
approved recreational club under section 30A of the Income Tax Act. It tests, among other things,
the application of the definition of ‘gross income’, sections 8(4), 11(a), 13quin, 23(g), 23G, 23H,
25(1)(b) and 26A (and related capital gains tax provisions). And it tests a sale and leaseback
arrangement.
Real Pirates (Pty) Limited is a soccer club that owns a soccer team and a stadium called ‘Bacca
Stadium’ situated in the southern suburbs of Johannesburg. It is not a recreational club approved by
the Commissioner under section 30A of the Income Tax Act. Its ‘Bacca Stadium’, which has a
maximum capacity of 50 000 seats for supporters, also has a clubhouse and a retail store that retails
soccer jerseys, tracksuits, soccer boots, bags and jackets (merchandise). It is a vendor and it makes
100% taxable supplies. Its financial year ends on 30 April.
A soccer season in South Africa normally runs from 1 August to 30 April of the following year.
The 2021-2022 soccer season in South Africa thus ran from 1 August 2021 to 30 April 2022.
Revenue streams
Real Pirates (Pty) Limited purchases soccer players from other soccer clubs. It also sells soccer
players to other soccer clubs. These transactions generally mean that these players are contracted
OTHER CLASSES OF TAXPAYERS 473
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.
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:
Number of Average price

Type of game
tickets a ticket Total received
League game season tickets 10 000 R900 R9 000 000
League game individual tickets 420 000 R75 R31 500 000
Cup game tickets 375 000 R75 R28 125 000
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
contract, it will be required to repurchase the Bacca Stadium at an agreed-upon market-related

price. Capital appreciation is expected to be 4% a year.
Real Pirates (Pty) Limited has in the past and will continue to use only 80% of the Bacca Stadium.
Under the proposed lease, it will retain its exclusive use of 80% of the Bacca Stadium.
The remaining 20% use of the Bacca Stadium, that is not used by Real Pirates (Pty) Limited, is
used by Marita Burg, an events organiser. She pays an annual rental of R2 000 000 to Real Pirates
(Pty) Limited, payable in arrears. This rental is expected to increase by 12% on 1 August 2026. If it
enters into the sale and leaseback agreement, the contract with Marita Burg will be taken over by
Group Q on the same terms, effective from 1 August 2021.
If Real Pirates (Pty) Limited does not to enter into the sale and leaseback agreement, an alternative
would be to raise loan funding using its Bacca Stadium as security. Its original bond with Ball
Bank Limited was settled using amounts earned during successful earlier seasons and donations
from its majority shareholder.
Ball Bank Limited is willing to provide a loan to Real Pirates (Pty) Limited of up to R102 000 000
(the market value of its Bacca Stadium), with equal annual repayments of R15 000 000, payable in
arrears, over 10 years.
You are required to
1. critically discuss the normal tax position taken by Chiefs United (Pty) Limited for the amount
that accrued to it on its sale of Cristiano Shabalala,
2. determine the normal tax implications for Real Pirates (Pty) Limited if it sells its Bacca
Stadium to Group Q under the sale and leaseback agreement. Assume that it will not have any
other capital gains or losses for that year of assessment. Further assume that the tax legislation
will remain unchanged,
3. discuss the normal tax consequences of only the royalty income that accrued before and after
Cristiano Shabalala’s death, for him, his deceased estate and his parents,
4 determine and discuss whether Real Pirates (Pty) Limited should enter into the sale and
leaseback agreement of its Bacca Stadium to Group Q or rather enter into the loan agreement
with Ball Bank Limited. Use the internal rate of return method. And ignore all tax
consequences.
(SAICA adapted.)
21.4 (15 minutes)

This question tests the normal tax liability of a co-operative society including the provisions of
section 27.
The following particulars relate to Bulk Buyers Co-Operative, a co-operative trading society. It is
regarded as a ‘closed’ society for normal tax purposes:
Financial year ended 28 February 2022 2021
Gross sales – members 3 000 000 2 350 000
Gross sales – non-members 250 000 150 000
Cost of sales expressed as a percentage of total gross sales 80% 80%
Local interest earned on loans advanced to members 75 000 60 000
Provision for bonus to members – the proposed bonus was distributed
on 31 August following its year end 60 000 50 000
Administrative overheads 640 000 480 000
You are required to determine the taxable income of Bulk Buyers Co-operative for its 2022 year of
assessment.
21.5 (30 minutes)

This question tests the normal tax liability of a co-operative society including sections 10(1)(k),
11(a), 11(c), 23(d) and 27(2).
The following is Vaal Co-Operative Society’s statement of profit or loss and other comprehensive
income for its year of assessment ended 28 February 2022:
Gross profit 950 000
Local dividends from Vrystaat Co-Operative Society 12 000
Local interest on fixed deposit investment – Republic Bank 7 500
Local interest on loans to members 30 000
999 500
Less:
Depreciation
– Buildings at 2,5% (note 3) 12 500
– Motor vehicles at 20% 24 000
– Furniture at 5% 3 000
Donations to the Vaal rugby team 20 000
Other expenses deductible in the determination of its taxable income 21 000
Salaries 380 000
Bad debts for trading stock sold 6 000
Rental of office 18 000
Normal tax settled for its 2021 year of assessment 72 000 565 500
Net income 434 000
Notes
1. Although one-third of Vaal Co-Operative Society’s trading is with non-members, the Registrar
of Co-Operative Societies is prepared to regard it as ‘closed’ for normal tax purposes.
2. A bonus of R375 000 is to be paid by Vaal Co-Operative Society to its members for their
purchases of R2 500 000 from it during its 2022 year of assessment. The 2021 year’s bonus
(paid during its 2022 year of assessment) was R270 000. The value of trade from its members
was R1 800 000 in its 2021 year of assessment.
3. Vaal Co-Operative Society’s buildings are its trade premises. They were purchased by it in
2014 for R600 000 (R500 000 for the building and R100 000 for the land). They do not qualify
for a capital allowance.
4. Vaal Co-Operative Society’s legal expenses consist of R7 200 incurred by it as the result of an
unsuccessful action for damages instituted against it for the alleged infringement of a trade
mark and R1 800 for the recovery of its debts.
5. No dividends were distributed by Vaal Co-Operative Society during its 2022 year of
assessment.
6. Vaal Co-Operative Society does not have an assessed loss to bring forward from its 2021 year
of assessment.
You are required to
1. determine the normal tax payable by Vaal Co-Operative Society for its 2022 year of
assessment,
2. state what the position would have been, had the Registrar of Co-Operative Societies refused to
recognise it as ‘closed’, and
3. redetermine the normal tax payable assuming it was a farmer’s special co-operative company.
21.6 (15 minutes)

This question tests articles 7 and 21 of the double tax agreement between South Africa and the
United Kingdom.
Natal Cane Spirits Limited is a resident of the Republic. It is a manufacturing concern. It is
registered, managed and controlled in South Africa.
Natal Cane Spirits Limited operates a branch office in London, United Kingdom. This branch
office is responsible for
• soliciting orders from its United Kingdom customers, and
• processing these orders out of consignment stocks forwarded to it from South Africa.
All Natal Cane Spirits Limited’s contracts with its United Kingdom customers are concluded in the
United Kingdom. Its branch office then forwards the net amount from these sales (that is after the
deduction of its operating expenses incurred) to its South African head office each month.
You are required to comment on the South African normal tax implications of the transactions
between Natal Cane Spirits Limited’s head office and its United Kingdom branch.
21.7 (20 minutes)

This question tests sections 9(2), 10(1)(h), 10(1)(lA), 10B and 47B and articles 6, 7 and 10 of the
double tax agreement between South Africa and the United Kingdom.
Grass Courts Limited
Grass Courts Limited, a United Kingdom registered company (and not a resident of the Republic),
has its head office in London. It operates a branch in Johannesburg. During its year of assessment
ended 28 February 2022, the statement of profit or loss and other comprehensive income of its
Johannesburg branch resulted in a net income of R200 000 after the deduction of an administration
fee the equivalent of R100 000 had been charged by it for management services provided for it in
the United Kingdom.
Banana Distributors (Pty) Limited
Banana Distributors (Pty) Limited, a South African registered company (and a resident of the
Republic), purchased a 40% equity local interest in Strawberries & Bananas Plc, a United Kingdom
registered company (and not a resident of the Republic), so as to ensure deliveries of certain
products. On 31 December 2021, Strawberries & Bananas Plc declared a dividend of R140 000
payable to shareholders registered on 31 January 2022. Banana Distributors (Pty) Limited’s 2022
year of assessment ends on 28 February 2022.
Ellis Park Souvenirs Limited
Wimbledon Souvenirs Plc is a United Kingdom registered company. It is also managed and
controlled in the United Kingdom. It is not a resident of the Republic. It owns all the issued equity
shares in Ellis Park Souvenirs Limited, a South African registered company, and a resident of the
Republic, carrying on business in Johannesburg. During Ellis Park Souvenirs Limited’s year of
assessment ended 28 February 2022, it incurred interest of R75 000 on funds advanced by
Wimbledon Souvenirs Plc to it for use in South Africa.
Ace Volley
Ace Volley, a professional tennis player, who is ordinarily resident in the United Kingdom, visited
South Africa for the purpose of playing in six exhibition tennis matches for which he was paid a fee
of R720 000. He was in South Africa for 10 days. He is not a resident of South Africa.
You are required to consider, and discuss, how the provisions of the double taxation agreement
between South Africa and the United Kingdom apply to the taxation of the above receipts and
accruals, and the deductions of expenditure in the determination of taxable income, in each of the
above situations.
21.8 (15 minutes)

This question tests the normal tax model being applied to a non-resident. It tests articles 11 and 23
of the double tax agreement between South Africa and the United Kingdom. It also tests sections 5,
6, 10(1)(i), 10(1)(k), 50B, 50D and 64E of the South African Income Tax Act.
Maxwell London is 50 years old. He is ordinarily resident in the United Kingdom. He was
ordinarily resident in South Africa for the first 10 years of his life. He is no longer a resident of the
Republic. But he carries on business in South Africa through a permanent establishment.
Maxwell London earned the following amounts from a South African source during the 2022 year
of assessment:
Trade income from a business carried on in South Africa 267 500
Local dividends on shares in South African companies 5 100
Local interest that is effectively connected to his permanent establishment in
South Africa 28 400
Maxwell London’s local dividends and local interest are both subject to United Kingdom tax.
You are required to determine the net South African taxes payable by Maxwell London for the
21.9 (15 minutes)

This question tests the normal tax model being applied to a non-resident and articles 11 and 23 of
the double tax agreement between South Africa and the United Kingdom. It also tests sections 5, 6,
10(1)(i), 10(1)(k) and 64E of the South African Income Tax Act.
Clyde Brighton is 40 years old. He is ordinarily resident in the United Kingdom. He was at one
stage of his life ordinarily resident in South Africa. He is no longer a resident of the Republic.
For the 2022 year of assessment, Clyde Brighton’s receipts and accruals from within South Africa
comprised the following:
Taxable profit from a business carried on in South Africa 357 800
Local dividends from South African companies (subject to United Kingdom tax) 18 000
Interest on funds lent in South Africa to a South African resident. This investment is
not a ‘tax free investment’. The interest is payable in the United Kingdom and is
subject to United Kingdom tax 44 200
You are required to
1. determine the South African taxes payable by Clyde Brighton for the 2022 year of assessment,
and
2. indicate how your answer to (1) above would have differed had he sold his South African
business on 28 February 2021 and invested the amount obtained from this sale in shares in
South African listed companies to give gross local dividends of R31 000 in addition to the
R18 000 local dividends from South African companies (subject to United Kingdom tax).
21.10 (20 minutes)

This question tests articles 7, 10, 11 and 12 of the double tax agreement between South Africa and
the United Kingdom. It also tests the definition of ‘gross income’, sections 9(4) and 10(1)(k) of the
South African Income Tax Act.
Lookwell Health Laboratories Limited is a resident of the Republic. It is registered in South Africa.
It carries on business in Durban.
On 1 March 2021 Lookwell Health Laboratories Limited opened a branch in London (United
Kingdom) for the following purposes:
• To manufacture certain health products for the European market.

• To act as its European marketing division.
• To act as its agent in the United Kingdom for the collection of various royalties derived by it
from the use in the United Kingdom of certain patented intellectual property developed by it in
South Africa.
• To collect and remit dividends distributed by Sunfull Suppliers Plc to it. Sunfull Suppliers Plc is
a United Kingdome company. It is not a resident of the Republic. Of the equity shares of Sunfull
Suppliers Plc, 20% are held by it. Sunfull Suppliers Plc supplies it with certain health
compounds used by it in South Africa for the manufacture of a tonic that is sold to people
employed in the mining industry in South Africa.
The following particulars relate to the activities of the London branch of Lookwell Health
Laboratories Limited for its financial year ending 28 February 2022:
Gross profit from manufacturing and selling 664 000
Less administrative expenses
– Incurred in the United Kingdom 214 000
– Incurred in South Africa 120 000
Less local interest on debentures (see below) 90 000 424 000
Net profit from manufacturing and selling 240 000
Royalties 10 000
Less amounts remitted to Head Office 10 000 –
Dividends 15 000
Less amounts remitted to Head Office 15 000 –
Net income for year 240 000
The debenture interest represents interest at the rate of 9% on R1 000 000, five-year debentures,
raised by Lookwell Health Laboratories Limited in South Africa to finance its United Kingdom
branch.
You are required to discuss the normal tax implications to Lookwell Health Laboratories Limited
or its debenture holders of each of the following items:
1. Industrial and commercial profits.
2. Interest on debentures.
3. Royalties.
4. Dividends.
21.11 (60 minutes)

This question tests the definitions of a ‘permanent establishment’ and a ‘trade’ and the
section 10(1)(h) exemption from normal tax. It also tests the judgments from CIR v Kuttel ((1992)
(3) SA 242 (A), 54 SATC 298), ITC 1529 ((1991) 54 SATC 252) and ITC 1501 ((1989) 53 SATC
314). It is suitable for a student completing a Masters (or similar degree) specialising in taxation.
Before emigrating from South Africa, Leo Swan purchased five blocks of flats in Durban as an
investment. When all his flats are occupied he has 120 tenants. His only other receipts and accruals
from a South African source are
• local interest from local interest-bearing securities that are not ‘tax free investments’, and
• local dividends from shares in South African public and private companies.
Since Teal Drake (née Swan), Leo Swan’s daughter, a divorcee, was unemployed, he appointed her
to manage his five blocks of flats. He converted a ground-floor flat in the most-central block of
flats into an office. She manages his flats from this office. She is assisted by a cashier and a girl
‘Friday’. All three are full-time employees of his.
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.
21.12 (15 minutes)

This question tests the normal tax liability determination of a taxpayer carrying on mining
operations and section 15.
Towndeep (Pty) Limited is a resident of the Republic. It mines coal near Ladysmith, KwaZulu-
Natal. The following particulars relate to its year of assessment ended 28 February 2022:
Sales 20 000 000
Costs incurred in producing the sales 12 500 000
Current capital expenditure incurred 3 000 000
Previous capital expenditure recouped 350 000
Assessed loss at 28 February 2021 1 100 000
On 1 March 2021 Towndeep (Pty) Limited had an unredeemed balance of capital expenditure of
R1 350 000.
Towndeep (Pty) Limited pays normal tax at a rate of 28%.
You are required to determine the normal tax liability of Towndeep (Pty) Limited for its 2022 year
of assessment.
21.13 (15 minutes)

This question tests the normal tax liability determination of a taxpayer carrying on mining
operations and section 15.
The following information relates to Coalfields Limited, a resident of the Republic. It carries on the
business of coal mining. It commenced shaft sinking during its financial year that ended
28 February 2021:
Capital expenditure on shaft sinking 4 750 000
Mining equipment 4 500 000
Mining buildings 1 500 000
Headgear 2 750 000
Pumping station (also mining equipment) 1 800 000
Conveyor equipment 1 200 000
Recoupments – second-hand machinery – no longer required for shaft sinking 300 000
Coalfields Limited commenced production on 1 September 2021. On this date, the life of its mine
was established to be 12 years. The following expenditure was incurred, and a recoupment
received, during its 2022 year of assessment:
Additional expenditure on shafts 3 750 000
Equipment and ore bins 3 500 000
Headgear 3 500 000
Crusher plant 1 500 000
Recoupments – inadequate pumps 1 400 000
Coalfields Limited has made a taxable profit of R16 500 000 for its six-month trading period prior
to the deduction in the determination of its taxable income for its capital expenditure.
You are required to determine Coalfields Limited’s balance of its unredeemed capital expenditure.
21.14 (20 minutes)

This question tests the capital allowances (and recoupments of them) available to a ship owner. It
tests sections 8(4), 12C and 12Q.
Inhlanzi (Pty) Limited is a resident of the Republic. It is an ‘international shipping company’. And
it earns ‘international shipping income’. It ordered a trawler on 1 October 2011. Its cost was
R8 000 000. Its purchase price was settled as to 25% with the order, then the balance in three equal
instalments, the first a year after the order was placed, which was also the date of its delivery, and
then the remaining two instalments on the first, and second, anniversaries of its delivery date.
The trawler was delivered on 1 November 2012. It was used for the first time by Inhlanzi (Pty)
Limited on 1 April 2013 when it secured a reliable person to skipper it.
On 30 April 2016 Inhlanzi (Pty) Limited’s trawler was badly damaged in a storm and was
scrapped.
A replacement trawler (a South African ship) was ordered by Inhlanzi (Pty) Limited at a cost of
R11 600 000. It arrived on 1 January 2017. It was immediately brought into use. Its purchase
consideration was settled largely by R8 400 000 that Inhlanzi (Pty) Limited had been awarded by
its insurer for its damaged trawler.
Inhlanzi (Pty) Limited’s replacement trawler was lost at sea on 31 December 2021. It was then
awarded R12 000 000 by its insurer.
Inhlanzi (Pty) Limited’s year of assessment ends on the last day of February.
You are required to determine the capital allowances (and their recoupments) that Inhlanzi (Pty)
Limited may deduct for its two trawlers in the determination of its taxable income for all its years
of assessment from 2012 to 2022.
21.15 (20 minutes)

This question tests the capital allowances (and recoupments of them) available to an aircraft owner.
Businessflites Limited is a resident of the Republic. It was formed on 1 March 2018 with the sole
purpose of transporting businessmen as quickly and comfortably as possible by air between all the
major business centres in South Africa.
Businessflites Limited’s year of assessment ends on the last day of February.
Businessflites Limited purchased a passenger aircraft on 1 December 2018 for R35 000 000 and
immediately brought it into use.
On 31 August 2019 this aircraft was traded in by Businessflites Limited for a new, and larger,
aircraft. This new, and larger, aircraft was brought into use by it on 1 September 2019. Its new and
larger aircraft cost R36 000 000. Its purchase price was reduced by R25 000 000 for the ‘trade-in’
of its old aircraft.
Businessflites Limited’s new aircraft crashed on 31 March 2021. It was completely destroyed. It
had been insured on a replacement value basis and R45 000 000 was awarded by its insurers.
You are required to determine the capital allowances (and their recoupments) that Businessflites
Limited can deduct in the determination of its taxable income for all its years of assessment
covered in the question.
21.16 (25 minutes)

This question tests the capital allowances (and recoupments of them) available to a hotel keeper. It
tests the definition of ‘gross income’ and sections 11(a), 11( f ), 11(g), 11(h), 11A and 13bis.
Sparkling Hotels (Pty) Limited is a resident of the Republic. It entered into an agreement with
Garnet Stone on 1 January 2016 whereby it would lease from him a beach-front site on the lower
KwaZulu-Natal South Coast. The terms of the lease agreement were as follows:
• The commencing date of the lease agreement was 1 March 2016.
• The lease was for a period of 30 years.
• A premium of R360 000 was payable by Sparkling Hotels (Pty) Limited to Garnet Stone at the
commencement of the lease.
• An annual rental of R288 000 was payable by Sparkling Hotels (Pty) Limited to Garnet Stone
monthly in advance from 1 March 2016. The rental agreement provides for an escalation clause
stating that the rental would increase by R14 400 a year after each completed year.
• A hotel was to be erected by Sparkling Hotels (Pty) Limited on Garnet Stone’s property at a cost
of R4 455 000.
The hotel buildings were completed by Sparkling Hotels (Pty) Limited at a cost of R5 040 000 on
31 May 2021. The hotel commenced trading on 1 June 2021. (These erections had commenced on
1 January 2020.)
Sparkling Hotels (Pty) Limited’s hotel was named ‘The Gem Holiday Resort’. It was registered
under the Hotel Act and was graded with a two star grading on 31 December 2021.
You are required to
1. determine all the capital allowances that Sparkling Hotels (Pty) Limited may deduct in the
determination of its taxable income for its first trading period ending on 28 February 2022 (its
financial year end),
2. state what amounts Garnet Stone would have to include in his gross income for the 2022 year,
or earlier years, of assessment, and
3. comment on whether he qualifies for a deduction in the determination of his taxable income
resulting from the amounts included in his gross income.
21.17 (30 minutes)

This question tests the capital allowances (and recoupments of them) available to a hotel keeper. It
also tests sections 8(4)(a), 11(g), 11(h), 11A and 13bis and paragraphs 3, 6, 8, 10, 20 and 35 of the
Eighth Schedule.
Funcity (Pty) Limited was formed to erect, and operate, a luxury hotel on the lower KwaZulu-Natal
South Coast near the Transkei Wild Coast. It is a resident of the Republic. Its financial year ends on
On 1 July 2018 Funcity (Pty) Limited purchased a suitable plot of land for R150 000.
On 1 August 2018 erection of Funcity (Pty) Limited’s hotel buildings commenced. On
31 December 2018 the hotel buildings were completed at a cost of R5 850 000. The hotel, called
‘Funcity Holiday Hotel’, commenced trading the following day. It was registered under the Hotels
Act a few weeks later. It was awarded a four star grading on 28 February 2019. There has been no
variation in the level of grading since that date.
On 1 October 2019 Funcity (Pty) Limited effected substantial improvements and extensions to its
hotel buildings. Erection of these improvements and extensions commenced on 1 October 2019 and
they were completed on 31 March 2020 at a cost of R2 250 000.
On 1 September 2020, a large hotel group purchased Funcity (Pty) Limited’s land and hotel
buildings from it for R9 450 000 (R9 200 000 for the buildings and R250 000 for the land).
Funcity (Pty) Limited elected that the provisions of section 13bis(6) be applied to the recoupment
arising out of the sale of its first hotel.
Funcity (Pty) Limited immediately secured a 25-year lease of a vacant plot of ground near the
Lesotho border at Ficksburg from a taxpayer. A condition of the lease was that the lessee was
obliged to erect a hotel building (meeting certain minimum standards, as specified in that lease)
costing R5 400 000. The building was to revert to the lessor at the conclusion of the lease.
Funcity (Pty) Limited commenced with the erection of the specified hotel building on 1 December
2020. It was completed, and used for the purposes of trade, on 1 September 2021. The total cost of
erecting the hotel building was R7 650 000. It was registered under the Hotels Act in November
2021.
This hotel, called the ‘Golden View Hotel’, was graded by the Hotel Board on 28 February 2022. It
was awarded a four-star status in that year, but was down-graded to a two-star status with effect
from its 2023 year of assessment.
1. the capital allowances that Funcity (Pty) Limited may deduct in the determination of its taxable
incomes for in its 2019, 2020, 2021, 2022 and 2023 years of assessment for the hotel buildings
used by it for the purpose of its trade, and
2. the capital gain or capital loss that results when the land and buildings of the ‘Funcity Holiday
Hotel’ was sold by it to the large hotel group.
21.18 (45 minutes)

This question tests the normal tax model as it applies to a hotel keeper. It also tests sections 11(d),
11(e), 11(g), 12C, 13bis and 23(c).
Hotel Howard (Pty) Limited, a resident of the Republic, was formed during 2020 for the purpose of
erecting, and running, a ‘small and exclusive’ hotel on the KwaZulu-Natal North Coast.
Hotel Howard (Pty) Limited commenced trading on 1 September 2021. For its year of assessment
ended 28 February 2022 it made a profit of R1 312 000 on catering, bar-trading and
accommodation before the deduction of depreciation, wear and tear and other capital allowances or
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.
21.19 (45 minutes)

This question tests the normal tax model as it applies to a keeper of a boarding house. It tests
sections 10(1)(i), 10(1)(k), 11(a), 11(d), 11( f ), 11(g), 11(o), 12C and 23(d).
Lucy Huis, a divorcee aged 58 years, is the owner of a boarding house situated near to the local
university campus. She is a resident of the Republic.
Details of Lucy Huis’s receipts and accruals and payments for the 2022 year of assessment follow:
Board and residence fees received (note 1) 1 998 840
From the sale of kitchen refuse 26 780
From the sale of furniture (note 2) 1 750
Alimony and maintenance from Basher Huis, her former husband (note 3) 21 600
Payments, losses and provisions
Electricity and water 98 440
Municipal property rates 124 200
Repairs to buildings 62 420
Plumber’s expenses 15 300
Replacement of crockery and linen (note 4) 18 792
Capital additions to crockery and linen for additional lodgers purchased on 1 June
2021 12 400
Installation costs of additional electrical plug points installed on 1 June 2021 5 000
Supermarket accounts 595 600
Greengrocer’s accounts 183 160
Employees’ salaries (note 7) 602 560
Laundry of linen 66 120
Legal expenses – new lease agreement (note 5) 900
Rentals – new lease agreement (note 5) 28 800
Lease premium (note 5) 86 400
Improvements made to leasehold property (note 5) 483 000
New furniture and fittings purchased (note 5) 74 000
Bad debt – a lodger left without paying – this amount is not included in the board
and residence fees received of R1 998 840 (see above). 520
Depreciation on furniture and fittings (note 2 and note 5) 8 400
Donations to homeless beggars 320
2021 normal tax liability paid 2 880
Life insurance premiums paid – Lucy Huis’s life 1 200
Domestic expenses – Lucy Huis and Sonnet Huis, her daughter, aged 26 years, a full-
time university student 224 000
University fees paid – Sonnet Huis 91 000
Notes
1. Board and residence fees received by Lucy Huis include R8 400 owing to her by lodgers on
28 February 2021. On 28 February 2022, R11 600 was owing to her by lodgers.
2. The tax value of Lucy Huis’s furniture and fittings on 1 March 2021 was R33 000 (original
cost R55 000). A bedroom suite that had been purchased on 1 March 2020 at a cost of R9 000
(and with a tax value of R7 200 on 1 March 2021) was sold for R1 750 on 28 February 2022.
3. Lucy Huis and Basher Huis were divorced during December 1999. Under their divorce
agreement, she receives from him maintenance of R1 000 a month for Sonnet, their daughter
(see above), and alimony of R800 a month for herself.
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.
21.20 (45 minutes)

This question tests the normal tax model as it is applied to a hotel keeper. It tests sections 11(e),
11(g), 12C, 13bis, 13sex and 23(o).
Peak View Hotel (Pty) Limited is a resident of the Republic. It is a three-star hotel trading in the
beautiful Blue Berg Mountains. The following is an extract from its statement of profit or loss and
other comprehensive income for its 2022 year of assessment which ended on 28 February 2022:
Catering profit 357 800
Milk sales (note 6) 87 200
Bar profit 310 000
Accommodation profit 230 000
Functions profit 15 000
1 000 000
Less expenses incurred
Game-room loss 20 000
Depreciation on all hotel equipment 155 000
Laundry expenses 130 000
Fines paid (note 1) 7 500
Legal expenses incurred (note 2) 3 500
Replacement of stocks
– Crockery 14 000
– Glassware 21 500
– Linen and bedding 24 500
Totals carried forward 376 000 1 000 000
Totals brought forward 376 000 1 000 000

Rental of leasehold property 120 000
Purchases
– Dairy cows 32 000
– Riding horses 37 500
Sundry expenses (deductible in the determination of its taxable income) 90 000 655 500
Net income for the year 344 500
Notes
1. During Peak View Hotel (Pty) Limited’s 2022 year of assessment, and after a complaint had
been lodged by a hotel guest, an inspection was carried out. Alcohol on the premises was
found to have been diluted by one of its barmen. He was subsequently dismissed. But it still
had to pay a fine of R5 000.
In November 2021, following a business dinner held in Peak View Hotel (Pty) Limited’s
dining room a ‘banned’ (an unapproved) ‘blue’ movie was shown with the prior approval of
the hotel’s management. The film show was raided and it was fined R2 500.
2. In contesting the above fines, Peak View Hotel (Pty) Limited incurred legal expense of R3 500
of which R2 500 was for the diluted-alcohol dispute, and R1 000 for the blue-movie dispute.
3. Peak View Hotel (Pty) Limited erected the following buildings during its 2022 year of
assessment:
• Two squash courts, at a cost of R550 000 (R275 000 each).
• A cottage (small house) for a duty manager, at a cost of R485 000.
• A pool to capture the hot water springs situated on its premises, at a cost of R360 000.
The erection of these buildings had commenced on 1 April 2021 and they were completed on
30 July 2021. After the erection of the above cottage, Peak View Hotel (Pty) Limited now
owns five residential units that are occupied by its employees.
So as to make Peak View Hotel (Pty) Limited’s ‘games’ room more suitable for certain games
(that were previously illegal) improvements costing R50 000 were effected to it. These
alterations commenced on 1 May 2021. They were completed on 30 June 2021. They did not
extend the existing exterior framework of its hotel building.
4. Details of Peak View Hotel (Pty) Limited’s hotel equipment and fittings as at 1 March 2021
are as follows:
Original Tax value Wear-and-
cost 1 March tear write
2021 off period
Furniture and fittings 390 000 234 000 –
Carpets and curtaining 130 000 78 000 –
Kitchen and cleaning 275 000 165 000 –
Office furniture 55 000 44 000 10 years
Bedding and linen 240 000 240 000 –
Cutlery, crockery and glassware 160 000 160 000 –
Riding horses 40 000 32 000 5 years
Bedding and linen and cutlery and crockery are not depreciated but replacements are written
off as an expense.
5. On 1 February 2015, Peak View Hotel (Pty) Limited had entered into a 30-year lease
agreement with a taxpayer whereby it would lease the berg site from him. The agreement
provided for an initial premium of R450 000 to be paid by it in addition to a monthly rental
payable by it of R10 000. This rental would be reviewed for a possible increase after five
years. In addition, the agreement stated that a hotel building must be erected on the site at a
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
Elected standard values
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
22.1 (15 minutes)

This question tests the definition of ‘gross income’ including its paragraphs (a) and (cA), the
definition of a ‘severance benefit’, sections 5(10), 9(2)(i), 11(cB) and 1 (m) and certain paragraphs
of the Second Schedule.
Fifteen statements on the taxation of ‘retirement benefits’ follow:
1. The special tax tables that apply to retirement awards provide for taxation on a per taxpayer
per lifetime basis.
2. A retrenchment award is subject to normal tax as a severance benefit.
3. Section 11(m) allows an employer a deduction in the determination of his taxable income for a
lump sum that he has awarded to an employee on his retirement.
4. The deductible limit in the determination of taxable income under the provisions of
section 11(m) when an employer awards an annuity to the dependants of a deceased former
employee is R2 500 (per employee) a year.
5. A restraint of trade award granted by an employer to a former employee is not deductible in the
determination of the employer’s taxable income.
6. A restraint of trade award received by or accrued to an employee will not be included in his
gross income.
7. For a retirement fund lump-sum withdrawal benefit, R25 000 of it is subject to taxation at the
rate of 0%.
8. For a retirement fund lump-sum ‘retirement’ benefit, R500 000 of it is subject to taxation at the
rate of 0%.
9. The tax liabilities on a retirement fund lump-sum withdrawal benefit and a retirement fund
lump-sum ‘retirement’ benefit is determined on a cumulative basis.
10. The section 5(10) so-called rating formula applies only to a lump-sum benefit received by the
taxpayer from his employer.
11. A limited amount of the taxpayer’s golden handshake award qualifies for the section 5(10) so-
called rating formula concession.
12. The entire taxable portion of a pension, pension preservation, provident, provident
preservation, or retirement annuity fund lump-sum award qualifies for the section 5(10) so-
called rating formula concession.
13. When a member of a pension fund has worked both inside and outside South Africa, the
provisions of section 9(2)(i) must be applied to the taxable portion of his lump-sum award as
determined under the provisions of the Second Schedule.
14. A taxpayer who retires from a ‘Government-type’ provident fund and who is awarded a lump
sum will enjoy a total exemption from normal tax on the amount that is awarded to him.
15. An annuity accruing to a taxpayer from a pension, pension preservation, provident, provident
preservation, or retirement annuity fund is subject to the provisions of the Second Schedule.
491
22.2 (10 minutes)

This question tests the determination of the taxable portion of certain lump-sum benefits using the
provisions of the Second Schedule.
Sammy Summers
Sammy Summers is a resident of the Republic. On reaching his employer’s retirement age, he
retired from employment after 27 years of service to it. He had been a member of its pension fund
since he commenced his employment with it. All his contributions to this pension fund had been
deductible in the determination of his taxable income. He was awarded a lump sum of R1 800 000
by this pension fund.
You are required to state what portion of this lump sum will be included in Sammy Summers’s
gross income.
Winston Winter
On its maturity date, being the date Winston Winter attained the age of 60 years, he, a resident of
the Republic, commuted one-third of his retirement annuity fund benefits for a lump sum of
R658 000. He had been a member of it for 22 years. All his contributions to it had been deductible
in the determination of his taxable income.
You are required to state what portion of this lump sum will be included in Winston Winter’s gross
income.
Fred Fall
Fred Fall, a resident of the Republic, died four years before he was due to retire. His estate was
awarded R664 000 by a provident fund that he had been a member of. He had been a member of it
for 26 years. He had contributed R140 000 to it. Of his total contributions to it of R140 000, only
R90 000 had been deducted in the determination of his taxable income.
You are required to state what portion of this lump sum is deemed to be included in Fred Fall’s
gross income.
Sid Spring
Sid Spring was a resident of the Republic for his entire lifetime. On his death, R2 526 000 accrued
to his deceased estate from a retirement annuity fund. His contributions to it had all been deducted
in the determination of his taxable income. He had been a member of it for 15 years.
You are required to state how much of the lump sum is deemed to be included in Sid Spring’s
gross income.
22.3 (20 minutes)

This question tests the after-tax returns of a resignation and a retirement benefit.
Copper Tan, a resident of the Republic, entered into employment with Island Holidays Limited on
1 March 2012. It was a condition of her employment that she became a member of its provident
fund. Her monthly contribution was 6% of her salary.
Copper Tan is due to retire from her position on 31 March 2022. Yet she feels that if she resigns
from it on 28 February 2022, she could set up her own travel agency business as from 1 March
2022.
Copper Tan has been advised by the provident fund that as a member, the lump-sum benefit she
will enjoy will be
• R615 000 at 28 February 2022, and
• R625 000 at 31 March 2022.
This fund is the only fund that Copper Tan has been a member of.
LUMP-SUM BENEFITS 493
Copper Tan’s salary over the period of her employment with Island Holidays Limited follows:
Year of Annual Provident fund

assessment salary contributions
2013 108 000 6 480
2014 120 000 7 200
2015 132 000 7 920
2016 144 000 8 640
2017 156 000 9 360
2018 180 000 10 800
2019 204 000 12 240
2020 228 000 13 680
2021 252 000 15 120
2022 276 000 16 560
2023: 1 March 2022 to 31 March 2022 25 000 1 500
From 1 March 2016, that is, from the commencement of the 2017 year of assessment, provident
fund contributions have been deductible in the determination of taxable income.
You are required to determine the after-tax amount that Copper Tan will enjoy from the provident
fund that she is a member of if she
• resigns from her employment with Island Holidays Limited on 28 February 2022, or
• retires from her employment with it on 31 March 2022.
22.4 (20 minutes)

This question tests the determination of the taxable portion of a lump-sum benefit using the Second
Schedule and sections 9(2)(i), 10(1)(gC) and 11F.
Karel Krynauw
Karel Krynauw, a resident of the Republic, died on 5 January 2022 at the age of 63 years, after
40 years’ service to Crow Meadow Cape Dutch Furniture Manufacturers (Pty) Limited, of which
his
• first 24 years were spent in South Africa,
• next six years were spent in Zambia,
• next three years were spent in South Africa, and
• final seven years were spent in Zimbabwe.
Karel Krynauw’s full period of service plus a further period of two years, being the additional
period he would have served had he survived his expected retirement date, were taken into account
in the determination of the benefits to be paid by the pension fund that he had been a member of.
On 1 February 2022 Katelyn Krynauw, his surviving spouse, was awarded by Karel Krynauw’s
pension fund a lump sum of R5 555 000 and an annuity of R468 000 (being awarded as a monthly
amount (from February 2022) of R39 000). She is also a resident of the Republic. She is 54 years
old.
Of Karel Krynauw’s contributions to the pension fund, R1 141 000 had not been deducted in the
You are required to
1. determine how much of the lump sum of R5 555 000 is subject to normal tax,
2. state in whose gross income the lump sum must be included, and
3. state whether the monthly amount of R39 000 is subject to normal tax.
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
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.
22.5 (20 minutes)

This question tests the normal tax liability of a person to whom a resignation lump-sum benefit has
accrued. It tests paragraph 6 of the Second Schedule and sections 5, 6 and 11F.
Rolly Moss, aged 33 years, is a resident of the Republic. He resigned from the employment of
Stones Limited with effect from 31 October 2021 (which was before his retirement date) to take up
employment with Gathers Limited. An amount of R51 800 accrued to him from Stones Limited’s
Pension Fund on 31 October 2021. It comprised his contributions to the pension fund and interest
on these contributions. All his contributions to this fund had been deducted in the determination of
his taxable income.
Rolly Moss used part of the R51 800 to finance a short holiday.
On 30 November 2021 he was informed by Gathers Limited’s Pension Fund that he could pay his
refund from his previous pension fund into its pension fund. He paid R16 800 (the balance of his
refund) into the Gathers Limited’s Pension Fund on 1 December 2021. (Gathers Limited’s Pension
Fund treated this R16 800 contribution made by him as a contribution towards ‘buying-back’
service.)
Rolly Moss’s taxable income for the 2022 year of assessment, excluding his pension fund refund
and the R16 800 contribution to his new pension fund, is R333 000.
You are required to determine Rolly Moss’s 2022 normal tax liability.
22.6 (20 minutes)

This question tests the normal tax liability of a person to whom a ‘resignation’ lump-sum benefit
has accrued. It tests paragraph 6 of the Second Schedule and sections 5, 6, 6B, 10(1)(i), 10(1)(k),
and 11F.
Jack Union, aged 48 years, is a resident of the Republic. He was employed by the South African
branch of Flags Limited up to 31 December 2021, the time it ceased its South African operations.
The pension fund established by it for its South African employees also closed down.
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
Jack Union then joined a retirement annuity fund. He then contributed R5 000 of his refund to it.
Salary from Flags Limited 360 000

Fees from Flags Limited 72 000
Other director’s fees earned 93 000
Local dividends from South African companies 30 000
Pension fund contributions at 6% of his salary (see above) 21 600
Retirement annuity fund contributions (see above) 5 000
You are required to determine Jack Union’s 2022 normal tax liability.
22.7 (45 minutes)

This question tests the normal tax liability of a person to whom certain lump-sum benefits have
accrued. It tests the definition of ‘gross income’, sections 5, 5(10), 6, 10(1)(i), 10(1)(k) and 11F and
the Second Schedule and paragraph 19(1) of the First Schedule.
Atcha Pickle, aged 60 years, who is a resident of the Republic, carries on the business of a mango
farmer (on a part-time basis) on the KwaZulu-Natal South Coast. He has made the election under
paragraph 19(5) of the First Schedule to be subjected to normal tax on the so-called average basis.
Atcha Pickle had, until 31 May 2021, the date he attained the age of 60 years, also worked as the
bookkeeper of Purejuice (Pty) Limited, a company owned by Tjampore Pickle, his brother. It is a
manufacturer of fruit juices.
It was a condition of Atcha Pickle’s employment to belong to Purejuice (Pty) Limited’s pension
fund. On 31 May 2021, the date of his retirement and the date he attained the age of 60 years, he
had been a member of it for 35 years. He had been contributing to it at a rate of R810 a month for
the past two years. All his contributions were deducted in the determination of his taxable income.
His final contribution was made on 31 May 2021.
Atcha Pickle’s receipts and accruals for the 2022 year of assessment follow:
Mango farming profit (note 1) 12 000

Salary to the date of his retirement (note 2) 32 400
Lump-sum award from Purejuice (Pty) Limited (note 3) 31 800
Lump sum from the pension fund (note 4) 544 000
Annuity from the pension fund from June 2021 to February 2022 inclusive – (nine
months at R7 200 a month – note 4) 64 800
Interest accrued from Mandura Tenggara, his brother-in-law (note 5) 8 320
Local interest – bank call account (note 6) 27 910
Local dividends (note 7) 3 000
Net rentals (note 8) – the equivalent of 120 000
Notes
1. Atcha Pickle’s previous taxable incomes from his mango farming activities were as follows:
• 2021 year of assessment 16 000
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.
22.8 (60 minutes)

This question tests the normal tax liability of a person to whom retirement benefits have accrued. It
tests the definition of ‘gross income’ including its paragraph (cB), the general deduction formula
(sections 11(a) and 23(g)) and sections 5, 5(10), 6, 6B, 9(1)(g), 10(1)(gC), 10(1)(i), 11(cA), 11F,
23(a), 23(b) and 23(l ) the Second Schedule.
Gammy Legg, a resident of the Republic, was a sales manager of Limpalot Limited, a large private
manufacturer. He retired on 30 September 2021 as a result of illness. Due to a problem with one of
his legs (see below), he was finding it difficult to move between its various divisions and buildings.
On 30 September 2021, for Gammy Legg’s 40 years’ service to Limpalot Limited, it awarded him a
lump-sum gratuity of R550 000. On 30 September 2021 it also awarded him an additional
R150 000 for undertaking not to use his specialised sales knowledge to assist a competitor during
the next five years. (Since he was only 58 years old, his employer felt the need for this protection
even though he had not rendered a service in the past to a competitor.) The R550 000 award is the
only lump-sum gratuity awarded to him from an employer.
Of Gammy Legg’s 40 years’ service to Limpalot Limited,
• the first 24 years were spent by him in South Africa,
• the next six years in Mauritius,
• the following three years in Zimbabwe, and
• the last seven years back in South Africa.
It was a condition of Gammy Legg’s employment with Limpalot Limited that he belong to its
pension fund. On the date of his retirement he had been a member of this fund for 40 years. On
15 October 2021 a lump sum of R1 020 000 accrued to him from it. An annuity of R162 000, being
awarded at a rate of R13 500 a month, commencing on 25 October 2021, also accrued to him.
At 28 February 2021 a total of R70 000 of Gammy Legg’s contributions to the pension fund had
not been deductible in the determination of his taxable income.
Gammy Legg earned a basic salary of R27 000 a month from 1 March 2021 to 30 September 2021.
He contributed 9% of it to Limpalot Limited’s pension fund. In addition, he earned a sales

commission of R80 000 from it during the 2022 year of assessment. (No portion of this commission
was contributed to the pension fund.)
Gammy Legg earned R34 748 local interest from a local fixed deposit during the 2022 year of
assessment. It is not a ‘tax free investment’.
On 1 March 2019 Gammy Legg was granted an option to purchase 25 000 shares in Limpalot
Limited at R5 each. The market value of a share was then R8. This option was subject to the
condition that he could not sell these shares until he left its employment. He purchased these
25 000 shares on 1 March 2020 (for R125 000) when the market value of a share was R9. On
30 September 2021 (his date of retirement) the market value of a share was R6. At 28 February
2022 the market value of a share was R4,50. Due to the drop in value of his shares, Gammy Legg
did not sell them. He still held them on 28 February 2022.
Gammy Legg was injured in a motor car accident four years ago. This has resulted in him
permanently requiring a crutch for walking purposes. He is a person ‘with a disability’ as ‘defined’
in section 6B(1). During the 2022 year of assessment it was necessary for him to pay expenses of
R27 000 as a result of his physical disability. He also paid further ‘qualifying medical expenses’ of
R17 222. He was not a member of a medical scheme.
Throughout the 2022 year of assessment Gammy Legg contributed R320 a month for a life
assurance policy on his life.
On 1 December 2021 Gammy Legg purchased a new motor car for R224 250 (R195 000 plus
value-added tax at 15% of R29 250). He suffered a capital loss of R70 000 on the ‘trade-in’ of his
previous motor car. He had no capital gains and suffered no further capital losses during the 2022
year of assessment.
You are required to
1. determine Gammy Legg’s normal tax liability for the 2022 year of assessment, and
2. discuss whether Limpalot Limited will enjoy a deduction in the determination of its taxable
income for the lump-sum gratuity of R550 000 and the additional R150 000 awarded to him.
22.9 (75 minutes)

This question tests the normal tax liability of a person to whom certain ‘retirement’ benefits have
accrued. It tests sections 5, 5(10), 6, 6A, 6B, 9H, 10(1)(i), 11F and 26A the Second Schedule,
paragraphs 5(2) and 12A of the Seventh Schedule and paragraphs 2, 3, 4, 5, 6, 8, 10, 12(1)(a), 15,
20, 35 and 53(1) of the Eighth Schedule.
Edgar Green is a resident of the Republic. On 30 November 2021, having attained the age of
65 years two weeks earlier, he retired from his position as production manager of Nature in
Harmony (Pty) Limited, a manufacturer of gardening products including composts, fertilisers and
garden-irrigation systems. He was first employed by it on 1 January 2004.
On Edgar Green’s retirement from Nature in Harmony (Pty) Limited, on 30 November 2021, he
was awarded the following amounts by it:
• A lump-sum gratuity of R119 500 as compensation for the loss of his office.
• R10 500 in lieu of accumulated leave that he had been unable to take.
Because of Edgar Green’s long and devoted service to Nature in Harmony (Pty) Limited, it
awarded to him, on 30 November 2021, an irrigation system (for his garden at home). This
irrigation system was manufactured by it at a cost of R4 800. An irrigation system of this type is
normally sold by it to retailers for R7 200.
Edgar Green’s colleagues at Nature in Harmony (Pty) Limited gave him a R1 500 gift voucher
redeemable at the local garden nursery.
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:
• 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.
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.
22.10 (20 minutes)

This question tests the taxation of a ‘death’ benefit from a provident fund. It tests the normal tax
model including sections 5, 6, 11F and 26A and provisions of the Second Schedule.
On 31 December 2021, one year before Brandy Gin was due to retire, a freak accident claimed her
life. (She drowned in a bowl of punch at a New Year’s Eve party.) She had always been a resident
of the Republic. For the past five years she had been the sales manager of Spirits Limited, a Cape-
based spirit and wine distributor.
Under Brandy Gin’s contract of employment, from the time of her promotion to sales manager, she
enjoyed a monthly salary of R22 500, and retained her membership of Spirits Limited’s provident
fund.
This provident fund is the only fund of that Brandy Gin has been a member. Her contributions for
the 2022 year of assessment (up to 31 December 2021) were R13 500. Up to the time of her death,
she had contributed R185 000 in total to it. Of her total contributions of R185 000 to it, R106 750
had not been deducted in the determination of her taxable income.
Up to the time of Brandy Gin’s death, she had been a member of the provident fund for the past
21 years. On her death, a lump-sum award of R1 125 000 became payable to her estate. In the
determination of this R1 125 000, the year from the date of death to the expected date of retirement
was taken into account, this determination being in accordance with the rules of the provident fund.
Brandy Gin was 59 years of age at the date of her death. Apart from the above amounts, she had no
other receipts and accruals during the 2022 year of assessment.
Under paragraph 40 of the Eighth Schedule, Brandy Gin was deemed to have sold most of her
assets moments before she died. This deemed sale resulted in a taxable capital gain of R30 000
being included in her 2022 taxable income (under the provisions of section 26A).
You are required to determine Brandy Gin’s South African normal tax liability for the period of
assessment that ended with her death.
22.11 (20 minutes)

This question tests ‘double’ funds (membership of more than one retirement fund), a retirement and
a death lump-sum benefit, including certain provisions of the Second Schedule.
Earl Doubell, a resident of the Republic, has for many years belonged to both a provident fund and
a pension fund.
On 30 April 2021 a lump sum of R2 900 000 was awarded to Earl Doubell from the pension fund
determined on service and contributions made by him from 1 April 1986. All his contributions to
the pension fund had been deductible in the determination of his taxable income.
Earl Doubell is due to retire from the provident fund on 31 May 2023. He had joined this fund on
1 June 1999 and has contributed R375 000 up to 28 February 2021. These contributions represent
6% of his salary. His salary increases by R30 000 (for the entire year) on 1 March each year. His
salary level from 1 March 2021 is R540 000 a year.
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.
22.12 (30 minutes)

This question tests the normal tax consequences of a lump sum with an annuity or solely a lump
sum. It tests the normal tax model and sections 5, 6 and 10A and provisions of the Second
Schedule.
Alex Forbes, a resident of the Republic, has been contributing R450 a month to a retirement
annuity fund since he was 30 years old.
Alex Forbes has now attained the age of 60 years and has become entitled to his benefits from the
retirement annuity fund. It has a maturity value of R1 305 000. All his contributions to it were
Alex Forbes has the option to take either
• an annual pension of R302 400 for the rest of his life, or
• a lump-sum cash award of R522 000 and an annual pension of R201 600 for the rest of his life.
Should Alex Forbes elect the second option, he will use the entire lump sum of R522 000 and a
further R30 258 from his savings to purchase an annuity from an insurer. (The cost of the annuity is
R552 258.) The annuity contract provides that he will be awarded a guaranteed monthly amount of
R8 400 for the rest of his life.
Alex Forbes must make his decision on 1 March of the current year of assessment. His other
taxable income, which includes local interest, is expected to be R360 000 each year.
You are required to advise Alex Forbes which option he should choose. Your answer should be
supported by schedules showing his earnings net of taxation both for the current year of assessment
and future years of assessment. (You may assume that the taxation legislation and rates that apply
in the 2022 year of assessment will remain in force in future years of assessment.)
22.13 (30 minutes)

This question tests the normal tax consequences of ‘dismissal’ awards to both the employer and the
employee. It tests the definition of ‘gross income’, the definition of a ‘severance benefit’, the
general deduction formula (sections 11(a) and 23(g)), and section 11(cA) and paragraph 6 of the
Second Schedule.
Loire Massif, aged 56 years, and a resident of the Republic, was dismissed in June 2021 by her
employer, Biscay Bay Limited. If the incident that gave rise to her dismissal became public it
would potentially harm both parties (her and it). Therefore so as to keep the matter as quiet as
possible, she was awarded R250 000 ‘hush’ money by it.
In addition, Biscay Bay Limited agreed to pay Loire Massif a termination package of R132 000
(before normal tax) made up as follows:
• For leave due to her, R24 000 (under her employment contract).
• 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.
22.14 (90 minutes)

This question tests the retirement benefits of a person who emigrated after her retirement. It tests
sections 5, 5(10), 6, 6quat, 8A, 9(2)(c), (d) and (i), 9(4), 9H, 10(1)(h), 10(1)(i), 10(1)(k), 10(1)(l ),
10(1)(o), 11F, 26A, 49B, 50B, 50D and 64E. It also tests the Second Schedule, paragraph 5(2) of
the Seventh Schedule and paragraphs 3, 5, 6, 8, 10, 20, 30 and 35 of the Eighth Schedule.
Victoria Borrowdale, a journalist and author, retired on 31 March 2021, shortly after having
attained the age of 60 years.
Victoria Borrowdale has had only one employer, Daily Mail Limited. She commenced working for
it on 1 April 1981 in Zimbabwe. On the day she commenced working for it she joined the Daily
Mail Pension Fund. Her contributions to this fund were always at 5% of her cash salary.
After 10 years of service in Zimbabwe, Victoria Borrowdale was transferred to South Africa on
31 March 1991 where she commenced working in Durban from 1 April 1991 and where she
worked ever since.
Since the Daily Mail Pension Fund operates both inside and outside South Africa, Victoria
Borrowdale’s transfer from Zimbabwe to South Africa did not result in her having to give up her
membership of the fund – she merely changed her address. At the time of her transfer to South
Africa, she had contributed R23 000 to this fund.
For the month of March 2021 Victoria Borrowdale earned a salary of R15 600. She had been on
this salary scale for the three years immediately prior to her retirement.
On 14 April 2021 a lump sum of R663 000 and an annuity of R149 760 accrued to Victoria
Borrowdale from the Daily Mail Pension Fund. The annuity of R149 760 is being awarded to her at
a rate of R12 480 a month with the award being made on the last day of each month. The first
monthly amount was paid to her on 30 April 2021.
Five years before Victoria Borrowdale’s retirement she had joined the deferred compensation
scheme offered by Daily Mail Limited. This meant declining a possible salary increase in return to
qualify for a possible golden handshake award. On 31 March 2021 she was compensated with
R57 000 by Daily Mail Limited for the loss of her office.
At a farewell party given in Victoria Borrowdale’s honour she was presented with the following gifts:
• A watch valued at R5 100 by Daily Mail Limited. The policy of it is to present all retiring
employees who have served it for at least 25 years with these watches. When it purchased the
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 interest from a non ‘tax free investment’ (see below) 34 680 24 500
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.
22.15 (45 minutes)

This question tests when a taxpayer should retire. It tests the normal tax model including the
definitions of ‘gross income’ and a ‘severance benefit’, sections 5 and 6.
Duze Madala, a widower, who recently attained the age of 65 years, is planning to retire on
31 December 2021. He is a resident of the Republic.
Mnumzane (Pty) Limited, Duze Madala’s employer, will be awarding him a compensation for loss
of office award of R1 200 000 in return for his 45 years’ service to it.
In addition, Duze Madala will be retiring from Mnumzane (Pty) Limited’s pension fund. Under its
rules, he must commute one-third of his annuity for a lump sum.
On Duze Madala’s retirement his present salary of R31 200 a month, which has been awarded to
him since 1 January 2021, will be replaced by a pension of R23 400 a month.
Mnumzane (Pty) Limited has offered to delay Duze Madala’s retirement for a period of three
months. But he must retire by 31 March 2022.
If Duze Madala wishes, he can retire on 1 March 2022. And if he does retire then, he will earn R1 560
for working on 1 March 2022. But his monthly pension for March 2022 will be reduced to R22 620.
You are required to inform Duze Madala when he should retire, purely from a net-earnings point
of view. Support your answer with determinations that could be presented to him as part of your
advice. For the purpose of this question you must assume the following:
• That Duze Madala’s other earnings equal his exemptions from normal tax and the deductions in
the determination of his taxable income.
• That the full amount of the lump sum received by Duze Madala will either be spent, or will be
invested in ‘tax-free’ local dividend-yielding shares.
• And that the taxation legislation and rates in future years of assessment will be identical to the
2022 tax legislation.
22.16 (75 minutes)

This question tests the normal tax consequences of various lump-sum benefits. It tests the
definitions of a ‘dividend’ and ‘gross income’, sections 7(11) and 11F, paragraphs 2, 5 and 6 of the
Second Schedule and paragraphs 5 and 7 of the Seventh Schedule.
Glen Watkins
Glen Watkins, aged 49 years, is a resident of the Republic. He resigned from the employment of
Caesars Castle Limited with effect from 31 December 2021 (which was before his retirement date)
to take up employment with De Monaco Limited. An amount of R64 750 accrued to him from
Caesars Castle Limited’s Pension Fund on 31 December 2021. It comprised his contributions to the
pension fund and benefits earned on these contributions. All his contributions to this pension fund
had been deductible in the determination of his taxable income.
Glen Watkins used part of the R64 750 to finance a short holiday.
On 1 February 2022 Glen Watkins was informed by De Monaco Limited’s Pension Fund that he
could pay his refund from his previous pension fund into its pension fund. He paid R34 750 (the
balance of the refund) into the De Monaco Limited’s Pension Fund on 28 February 2022. (It treated
this R34 750 contribution made by him as a contribution towards ‘buying-back’ service.)
Glen Watkins’s 2022 taxable income prior to the section 11F deduction in the determination of his
taxable income was R300 000.
You are required to discuss the normal tax consequences to Glen Watkins that arise out of the
above transactions. Support your discussion with relevant determinations.
Oscar Galves
On 31 December 2021 Oscar Galves retired from Monza Limited having reached its mandatory
retirement age of 60 years. He had joined its employment on 1 February 2007. On his retirement,
on 31 December 2021, he was awarded the following amounts:
• R21 000 by Monza Limited in lieu of accumulated leave that he had been unable to take.
• A lump-sum gratuity of R144 000 by Monza Limited as compensation for the loss of his office.
• R850 000 from Monza Limited’s provident fund (he has been a member of the fund since
joining its employment). His contributions to the provident fund during his membership were
R181 000. Of his R181 000 contributions, R115 000 had been contributed by him to it prior to
1 March 2016. His contributions to it were based solely on his monthly cash salary.
• A pair of leather dress shoes that had cost Monza Limited R4 800 to manufacture, in
appreciation of his long service to it. The normal wholesale price of a pair of leather dress shoes
when sold to retailers is R9 000. These retailers then sell their trading stock of leather shoes at a
50% mark up.
You are required to discuss the normal tax consequences to Oscar Galves that arise out of the
Albert Park and Adelaide Street
Albert Park is the father of Adelaide Street’s child. For years he defaulted with his maintenance
payments.
After many years of being unable to obtain Adelaide Street’s maintenance money from Albert Park,
she obtained a court order against his member’s interest in a pension fund.
Under this court order, Adelaide Street was awarded R250 000 out of Albert Park’s member’s
interest in his pension fund. The employees’ tax on this award was R31 743. It was also deducted
from his member’s interest in his pension fund, and then paid to SARS.
You are required to discuss the resulting normal tax consequences of the above transactions to both
Albert Park and Adelaide Street.
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
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
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.
Jose-Carlos Pace used this award as follows:

• He purchased a flat for R950 000.
• He purchased a motor car for R250 000.
• He invested R500 000 in a local interest-bearing security.
• He invested R800 000 in a provident preservation fund.
This is the first occasion that a lump sum has accrued to Jose-Carlos Pace from a recognised
retirement fund.
You are required to discuss the normal tax consequences that arise for Jose-Carlos and Paulo Pace
resulting from the lump-sum award. Support your discussion with relevant determinations.
Sylvia Stone
On 31 May 2020 Sylvia Stone, aged 33 years, left the employment of Donington Limited (having
handed in her resignation a month earlier). Her resignation caused her to cease being a member of
its pension fund. She was awarded R550 000 by its pension fund. This amount was made up of
• her contributions to it of R170 000,
• her employer’s contributions to it of R170 000, and
• R210 000 being that portion of the provident fund’s investment returns that was allocated to her.
All Sylvia Stone’s contributions to this pension fund had been deducted in the determination of her
taxable income.
This is the first occasion that a lump sum has accrued to Sylvia Stone from a recognised retirement
fund.
On 1 June 2020 Sylvia Stone became employed by Bremgarten & Bahrain (Pty) Limited. She was
required to join its provident fund. On 1 July 2020 she made a lump-sum contribution of R300 000
to its provident fund. This contribution was funded by her pension fund award (see above).
On 31 January 2022 Sylvia Stone left the employment of Bremgarten & Bahrain (Pty) Limited
(having handed in her resignation a month earlier). Her resignation caused her to cease being a
member of its provident fund. She was awarded R590 000 by its provident fund. This amount was
made up of
• her lump-sum contribution to it of R300 000 (see above),
• her ‘monthly’ contributions to it of R45 000. These contributions had been at the rate of 6% of
her remuneration,
• her employer’s contributions to it of R90 000, and
• R155 000 being that portion of its investment returns that was allocated to her.
On 1 February 2022 Sylvia Stone commenced her own business (trading in her own name). She
used R500 000 of her provident fund award to purchase trade assets for her business. She then
invested the balance of her provident fund award (of R90 000) in a provident preservation fund.
Sylvia Stone has a taxable income for the 2022 year of assessment prior to a section 11F deduction
of R330 000. This R330 000 amount is also prior to a gross income inclusion for her retirement
fund lump-sum withdrawal benefit and prior to the inclusion in her taxable income of a R70 000
taxable capital gain.
You are required to discuss the normal tax consequences that arise for Sylvia Stone out of the
Herman Rodrigues
During the 2022 year of assessment Hockenheimring Limited instituted a pension fund for its
employees. But one of its employees, namely, Herman Rodrigues, was too old to join the pension
fund. It therefore decided that when he retired, he would be awarded a golden handshake in
recognition of his long and devoted service.
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
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.
22.17 (30 minutes)

This question tests the normal tax liability of a person to whom ‘death’ benefits are deemed to
accrue. It tests the definition of a ‘severance benefit’ and the normal tax model including sections 5
and 6, membership of more than one fund, and provisions of the Second Schedule.
On Darby Jones’s way to work on 1 March 2021, one year before he was due to retire, he was
killed in a motor car accident. He was 64 years old at the date of his death (he had attained the age
of 64 years a week before on 21 February 2021).
At the time of Darby Jones’s death he was employed as production director of Greener Pastures
(Pty) Limited.
The following two amounts were awarded to Darby Jones posthumously (after his death) by
Greener Pastures (Pty) Limited:
• A lump-sum gratuity of R49 500 under his deferred compensation agreement with it. He had
joined it on 1 June 1996 as a production foreman and through hard work he had secured the
position of production director on 1 March 2011.
• Cash of R8 250 in lieu of accumulated leave that he had been unable to take.
Darby Jones was a member of two retirement funds at the time of his death. His expected date of
retirement for both these funds was 1 March 2022. The following two amounts from these
retirement funds were awarded to the executor of his deceased estate:
• A lump sum of R720 000 from the Greener Pastures Pension Fund. Darby Jones had been a
member of the pension fund since joining Greener Pastures (Pty) Limited on 1 June 1996. All
his contributions to the pension fund had been deductible in the determination of his taxable
income.
• A lump sum of R7800 000 from the Greener Pastures Provident Fund, a non-contributory
provident fund. Darby Jones had been a member of the provident fund since his promotion to
production director on 1 March 2011. Contributions of R250 000 were made by Greener
Pastures (Pty) Limited to the provident fund. Of these contributions of R250 000 in total,
R120 000 prior to 1 March 2016 and R130 000 after that.
An annuity of R72 000 (being awarded at a monthly rate of R6 000) was awarded to Darby Jones’
wife, Dayle Jones, by Greener Pastures Pension Fund. The annuity will be awarded to her on the
25th day of each month. The first award was made on 25 March 2021.
Since Darby Jones’ promotion to production director, he had been awarded a 10% annual salary
increase on 1 March each year. On 1 March 2021 his salary was due to increase to R33 000 a
month. He did not, however, receive a salary for the month of March 2021 because of his death on
1 March 2021.
Apart from the above amounts, Darby Jones had no other receipts or accruals for the 2022 year of
assessment nor did he incur other expenses.
The executor of Darby Jones’ deceased estate has recovered the various lump-sum awards from
Greener Pastures (Pty) Limited and its pension and provident funds. He is unsure of what the
normal tax implications are. He is also uncertain about the tax implications of the annuity being
awarded to Dayle Jones. He has therefore requested your assistance in this matter.
You are required to draft a report to the executor of Darby Jones’ estate setting out the normal tax
implications arising from the lump-sum awards awarded by Greener Pastures (Pty) Limited, the
pension fund and the provident fund. Support your answer with detailed determinations. In
addition, discuss the normal tax treatment of the annuity being awarded to Dayle Jones each month.
22.18 (60 minutes)

This question tests the normal tax payable on retirement benefits. It also tests the normal tax
consequences of the accrual of a living annuity, the normal tax consequences of a lump sum with
an annuity or solely an annuity, the proviso to section 9(2)(i) and the normal tax payable on
retirement lump sum benefits when the taxpayer has more than one accrual of a lump-sum benefit.
And it tests the estate duty consequences of retirement fund lump-sum benefits.
Roydon Hesketh
On 31 May 2021 Roydon Hesketh was forced to take early retirement due to ill health. He was then
only 51 years old.
On 31 May 2021 a lump sum of R792 000 accrued to Roydon Hesketh from a pension fund.
Instead of a guaranteed life annuity, Roydon Hesketh elected to receive a living annuity. It
amounted to R288 000 (and is payable at a rate of R24 000 a month). Under his living annuity
contract, on his death, the R288 000 living annuity (payable at a rate of R24 000 a month) is then
payable to Tarlton Hesketh, his wife, for the rest of her life.
This was the first lump-sum benefit that accrued to Roydon Hesketh. All his contributions to the
pension fund had been deductible in the determination of his taxable income.
Roydon Hesketh used the entire R792 000 lump sum to settle his liabilities (including those for the
medical expenses he had to pay).
On 31 January 2022 Roydon Hesketh died.
Roydon Hesketh was also a member of a retirement annuity fund. Under his retirement annuity
fund contract, he was due to obtain his benefits from it when he attained the age of 65 years.
All Roydon Hesketh’s contributions to this retirement annuity fund had been deductible in the
As a result of Roydon Hesketh’s death, his benefits under his retirement annuity contract were
deemed to accrue to him on 31 January 2022 (and not on the agreed date in the contract, being
when he attained the age of 65 years). Also, since it was a ‘death’ benefit, the full amount of his
member’s interest in it was awarded as a lump sum. It amounted to R1 800 000. It was deemed to
accrue to him on 31 January 2022. It was paid by the retirement annuity fund to his executor on
21 February 2022.
Roydon Hesketh’s executor then used R75 000 of this R1 800 000 to pay his medical and last
illness expenses. They were paid by his executor on 30 April 2022.
You are required to
1. determine the normal of normal tax payable on the two lump-sum awards that accrued to
Roydon Hesketh during his 11-month period of assessment that ended with his death on
31 January 2022,
2. discuss the normal tax consequences of the living annuity (being paid at the rate of R24 000 a
month) accruing to Tarlton Hesketh, his surviving spouse,
3. state if the medical expenses paid by Roydon Hesketh and the executor of his deceased estate
will be taken into account in the determination of his, Tarlton Hesketh’s, or his deceased
estate’s additional medical expenses tax credit rebate, and
4. discuss what effect the living annuity from Roydon Hesketh’s pension fund and the lump-sum
award from the retirement annuity fund will have on the net value of his estate (for estate duty
purposes).
George Prince
George Prince was employed for a total of 30 years by Phakisa (Pty) Limited. Throughout this 30-
year period of employment with it he belonged to its pension fund. His employer and himself
contributed to its pension fund on a rand-for-rand basis.
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:
Year Remuneration earned From other His pension Phakisa (Pty)

of assessment from Phakisa (Pty) investments fund Limited’s pension
Limited contributions fund contributions
2017 R600 000 R2 000 R45 000 R45 000
2018 R660 000 R3 000 R49 500 R49 500
2019 R690 000 R4 000 R51 750 R51 750
2020 R720 000 R5 000 R54 000 R54 000
2021 R750 000 R6 000 R56 250 R56 250
2022 R780 000 R7 000 R58 500 R58 500
Prior to George Prince’s secondment, all his contributions to the pension fund had been deductible
in the determination of his taxable income.
On 28 February 2022 his member’s interest in the pension fund was R4 200 000. He has the option
to have an accrual of
• a lump sum of R1 400 000 and an annuity of R403 200 (awarded at the rate of R33 600 a month),
or
• no lump sum and an annuity of R588 000 (awarded at a rate of R49 000 a month).
If George Prince elects the lump sum, it will be the first lump-sum benefit that accrues to him.
The first monthly amount will accrue to George Prince on 31 March 2022.
You are required to discuss, supported by determinations, the normal tax consequences of the two
options that George Prince has, resulting from his member’s interest in his pension fund.
Darryl Allam
On 14 February 2017 Darryl Allam, a resident of the Republic attained the age of 60 years. On
28 February 2017 she retired from her employment with Brandkop Limited. On 28 February 2017 a
lump sum of R480 000 accrued to her from its pension fund. And from 1 March 2017, an annuity
of R144 000 also accrued to her from its pension fund. It is being awarded to her as a monthly
amount of R12 000 on the last day of each month. All her contributions to this pension fund had
been deductible in the determination of her taxable income.
On 1 March 2017 Darryl Allam commenced working for Sacks & Snell (Pty) Limited. She retired
from its employment on 31 December 2021.
When Darryl Allam joined Sacks & Snell (Pty) Limited’s employment, on 1 March 2017, she was
too old to become a member of its retirement fund. On her retirement on 31 December 2021, it
therefore awarded her a lump sum of R250 000 as compensation for the loss of her office.
From 1 January 2022, Darryl Allam was no longer employed.
On 14 February 2022 a lump sum of R750 000 and an annuity of R225 000 accrued to her from a
retirement annuity fund. The annuity is being awarded to her at the rate of R18 750 a month on the
last day of each month. The first R18 750 was awarded to her on 28 February 2022.
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
22.19 (60 minutes)

This question tests the after-tax position of certain investments being made by a retired taxpayer. It
tests the normal tax model including sections 5, 6, 10(1)(i), 10(1)(k) and certain provisions of the
Second Schedule.
Sunny Gamble retired early in the 2021 year of assessment (on 1 March 2020). On his retirement a
lump sum of R650 000 accrued to him from a pension fund that he had been a member of for the
past 30 years. All his pension fund contributions had been deductible in the determination of his
taxable income. He is also a member of a retirement annuity fund (see below for further details).
From his date of retirement, a pension of R30 000 has accrued to him each month. This pension is
payable to him for the rest of his life.
Sunny Gamble was also compensated for the loss of his office by Chislett Cottages (Pty) Limited,
his former employer. As compensation he was awarded a cash lump sum of R150 000. He was paid
a salary of R1 000 for working on 1 March 2020. His salary for the 2020 year of assessment was
R480 000.
Sunny Gamble used most of the R800 000 (R650 000 plus R150 000) to settle his liabilities. He
settled the mortgage bond over his home, a private loan that he had raised and a debt that he owed
to his bookmaker.
On 25 March 2022 Sunny Gamble attained the age of 65 years. On this day he became entitled to
the benefits under his retirement annuity fund contract. He had been a member of this fund for
25 years. All his contributions to this fund had been deducted in the determination of his taxable
income. He did not make a contribution to this fund during the 2023 year of assessment. He elected
a lump sum in lieu of one-third of the annuities payable to him under this contract. On 31 March
2022 a lump sum of R1 000 000 and an annuity of R120 000 accrued to him from this fund. The
annuity is being awarded to him at a rate of R10 000 a month with it being awarded to him on the
last day of each month. The R10 000 (less employees’ tax on it) he received on 31 March 2022 was
the first monthly award that he received.
Sunny Gamble would like to invest R1 000 000. He has approached you for help. You have
obtained the following information:
• Dawn Gamble, his wife has no receipts or accruals. Between them they will use his entire
monthly receipts to finance their living expenses.
• At present he enjoys an annual local dividend accrual of R95 000 and an annual local interest
accrual from a non ‘tax free investment’ of R33 700.
• He does not enjoy any normal tax exemptions and deductions in the determination of his taxable
income, other than those that arise out of the furnished information.
The following four investments are being considered by Sunny Gamble. To invest the R1 000 000
as follows:
• In dividend-yielding shares. Local dividends of R69 000 will accrue in the 2023 year of
assessment from this investment,
• In a 9% mortgage bond. It is not a ‘tax free investment’. Local interest will accrue and will be paid
monthly,
• In a combination of investments in a collective investment scheme in securities (a so-called
equity unit trust) and a real estate investment trust (a so-called property unit trust). The expected
return from these investments for this period (1 April 2022 to 28 February 2023) will be a
distribution of R45 000 (consisting of local dividends of R30 000 and interest of R15 000) from
the collective investment scheme in securities and a distribution of R30 000 (being local
dividends of R27 500 and interest of R2 500) from the real estate investment trust, or
• 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.)
22.20 (90 minutes)

This question tests the normal tax liability determination of a retrenched employee. It also tests the
deduction of interest incurred on borrowed funds, the normal tax and value-added tax consequences
of a debt being written off. And it tests the judgments from Burgess v CIR (1993 (4) SA 161 (A),
55 SATC 185) and C:SARS v Scribante Construction (Pty) Ltd (2002 (4) SA 835 (SCA), 64 SATC
379). It also tests section 19 and paragraph 12A of the Eighth Schedule.
Pine Jel (Pty) Limited, a vendor, manufactures and sells consumables to mining companies. Its year
of assessment ends on 31 December.
The Covid-19 lockdown periods and the labour unrest in the mining sector during the past two
years had a negative financial impact on Pine Jel (Pty) Limited. As a result, it entered into a
restructuring plan. This included reducing its liabilities and closing a division.
Building liabilities
Pine Jel (Pty) Limited purchased a new and unused commercial building for R11 500 000
(R10 000 000 plus value-added tax of R1 500 000) from National Bank Limited, a vendor, on
31 July 2018. It paid a deposit of R1 000 000 and the balance of R10 500 000 remained due by it to
National Bank Limited. The building was brought into use by it on 1 August 2018.
At 30 September 2021 R5 520 000 remained outstanding by Pine Jel (Pty) Limited to National
Bank Limited. This comprised the original amount owing of R11 500 000 less the deposit of
R1 000 000 (see above) and less capital repayments made of R5 440 000 plus an additional
R460 000 lent by National Bank Limited to it on 1 May 2019 to fund repairs to its building. The
repairs had been undertaken by a third party, a vendor. His fee was settled using the R460 000 from
these additional borrowings. All interest due on both liabilities has been paid in full.
Pine Jel (Pty) Limited was generating insufficient cash flows to meet its repayment commitments
on its liabilities. In August 2021 it therefore issued shares to third parties to raise funds to settle
these liabilities. On 30 September 2021 it reached a settlement agreement with National Bank
Limited to pay a capital amount of R4 140 000 in full and final settlement of its R5 520 000
liability. National Bank Limited reluctantly agreed to waive R1 380 000, which included a
complete waiver of the R460 000 that had been borrowed to fund the building repairs.
Retrenchment and severance costs
To fund Pine Jel (Pty) Limited’s retrenchment and severance costs, one of its major shareholders,
Abel Cele, lent funds to it. He raised a mortgage bond over his personal residence and lent the
required fields to it at a rate 100 basis points higher than his mortgage bond rate. This was done to
enable him to enjoy a profit on the transaction and to compensate him for the unsecured nature of
his loan to it.
Retrenchment of Deon Benade
Deon Benade, a 61-year-old employee of Pine Jel (Pty) Limited, held a 4% interest in it. He
managed one of its divisions. During the labour unrest, striking workers attacked him and he had to
be hospitalised. He was so traumatised by the event that he was unable to continue working. His
doctor advised him that he must not return to work on the grounds of ill health.
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
23.1 (15 minutes)

This question tests sections 8E, 80A, 80L, 89quat, 103(2) and 103(5). It tests the judgments from
Glen Anil Development Corporation Ltd v SIR (1975 (4) SA 715 (A), 37 SATC 319), CIR v
Standard Bank of SA Ltd (1985 (4) SA 428 (A), 47 SATC 179), Hicklin v SIR (1980 (1) SA 481
(A), 41 SATC 179) and CIR v Louw (1983 (3) SA 551 (A), 45 SATC 113).
Fifteen statements on the legislation applicable to tax avoidance arrangements follow:
1. An impermissible avoidance arrangement exists when four prerequisites are all present.
2. The Commissioner is allowed to presume that the purpose of the arrangement was the
avoidance of a tax imposed under a law that he administers.
3. For section 80A to apply it is necessary for there to be a tax benefit.
4. The contra fiscum rule applies to section 80A transactions.
5. It is necessary for shares in a company to change hands before the provisions of section 103(2)
could apply.
6. For a taxpayer to be able to successfully defend a so-called section 103(2) attack it is necessary
for him to prove that he had a valid business reason other than the use of the assessed loss
when entering into the transaction.
7. Should a section 80A arrangement fail, the taxpayer is no worse off.
8. Should a section 103(2) arrangement fail, the taxpayer is no worse off.
9. The provisions of section 8E apply if redeemable preference shares are repayable in whole, or
in part, within four years from their date of issue.
10. The provisions of section 103(5) apply to ‘local dividend-rental’ swap arrangements.
11. A commercial bank investing in local redeemable preference shares will not enjoy a deduction
in the determination of its taxable income for all the interest it has incurred or paid to its
investors since some of the funds have been used to produce exempt income.
12. When the provisions of section 103(5) apply the Commissioner must determine the liability for
normal tax of the taxpayer as if the cession had not taken place.
13. When independent persons are the parties to an agreement, their transaction will be carried out
at arm’s length.
14. When connected persons are the parties to an agreement, their special relationship must be
taken into account in the determination of the nature of the transaction.
15. An impermissible avoidance arrangement for the purposes of section 80A must be a
‘transaction’ that is carried out for less than an adequate consideration.
515
23.2 (90 minutes)

This question tests sections 80A and 105A of the Income Tax Act and sections 239 to 243 inclusive
of the Tax Administration Act. It also tests the application of section 7(2)(a) to a transaction
between spouses and the normal tax model including sections 5 and 6. And it tests the term “misuse
or abuse’ as used in section 80A.
Precious Legugu
At the commencement of the 2022 year of assessment Precious Legugu was advised not to renew a
fixed deposit investment, not being a ‘tax free investment’, but to invest in local ‘tax-free’
dividend-yielding shares. As a direct result, her taxable income was lower in the 2022 year of
assessment when compared with the 2021 year of assessment.
You are required to
1. state whether the Commissioner would be able to raise the provisions of section 80A in
relation to the above arrangement,
2. consider whether his section 80A attack would be successful, giving reasons for your
conclusion, and
3. state whether he could bring the provisions of sections 239 to 243 inclusive of the Tax
Administration Act into force against her adviser.
Conglomerate Limited
Conglomerate Limited is a resident of the Republic. It carries on a manufacturing business. It
recently formed three subsidiary companies, a
• manufacturing company,
• transport company, and
• distribution company,
to which it ‘transferred’ its various activities.
The sole purpose of this arrangement by Conglomerate Limited was to give more of its employees
the opportunity of becoming directors of a company within the group.
You are required to consider whether Conglomerate Limited’s above arrangement would fall foul of
the provisions of section 80A.
Advocate Abel
For the 2021 year of assessment Advocate Abel had a taxable income of R1 100 000 consisting of
net rentals of R180 000 and a taxable profit of R920 000 from his practice at the bar.
Advocate Abel’s wife Eve, has never worked and has never had a taxable income.
On 28 February 2021 Advocate Abel and Eve were divorced. She was awarded the rent-producing
property as her share of the divorce settlement.
Advocate and Eve Abel had been married for 25 years. They are still very much in love. They still
live together as husband and wife, in every respect, except the legal aspect. The sole reason why
they got divorced was to reduce the amount of normal tax payable by Advocate Abel.
Advocate and Eve Abel are both 50 years old. They have two married daughters and a 15-year-old
son. Their son is not married. He is a scholar at a private boarding school. During school holidays
he lives with Advocate and Eve Abel in their home.
You are required to discuss whether
1. the provisions of section 7(2)(a) could apply to Advocate Abel’s and Eve Abel’s above tax-
saving arrangement, and
2. the Commissioner could successfully apply the provisions of section 80B to Advocate Abel, or
Eve Abel, or both of them, as a result of their tax-saving arrangement.
TAX AVOIDANCE 517
Match (Pty) Limited

Match (Pty) Limited, a resident of the Republic, trades as a departmental store. It has branches
(shops) in most large towns in South Africa. It requires all its employees to wear bright pink shirts
and black longs (men or women) or black skirts (women) to work. It provides these outfits to its
employees.
In the determination of the amount of employees’ tax to be deducted from the remuneration earned
by an employee of Match (Pty) Limited it values the fringe benefit of providing him or her with
these outfits at nil since it regards these outfits to be a uniform.
Match (Pty) Limited recently failed an employees’ tax audit by SARS on the grounds that the outfits
it awarded to its employees were not distinguishable from ordinary clothing and were therefore not
exempt from normal tax. Their value should have been included in an employee’s balance of
remuneration and then subject to employees’ tax.
Match (Pty) Limited then contracted with the supplier of its pink shirts to add black epaulettes
(ornamental shoulder pieces of a military uniform) to the shoulder of a shirt and to embroider the
name ‘Match’ on the pocket of each shirt. It then provided its employees with new shirts. It
believed that the clothing worn by its employees to work now constituted a uniform as recognised
by section 10(1)(nA) of the Income Tax Act. It then continued to provide its ‘uniforms’ to its
employees free from employees’ tax.
You are required to discuss if the Commissioner could successfully apply the provisions of
section 80B against Match (Pty) Limited on the grounds that it has ‘misused or abused’ a provision
contained in the Income Tax Act.
23.3 (45 minutes)

This question tests sections 7(3) to 7(8), 8E, 8F, 10(1)(k), 10(1)(i), 10(2)(b), 80A, 103(2)
and 103(5). It tests the judgments from Armstrong v CIR (1938 AD 343, 10 SATC 1) and Hicklin v
SIR (1980 (1) SA 481 (A), 41 SATC 179).
During the 2021 year of assessment Bertram Caster passed away. In accordance with his last will
and testament, a trust was created. And under a condition contained in this trust deed, his surviving
spouse, Belinda Caster, is to receive R360 000 a year for the rest of her life. She is 61 years old.
She is a resident of the Republic.
On 1 March 2021 Belinda Caster ceded the right to receive this annual R360 000 to the Sugarhill
Municipality (a body exempt from normal taxation under the provisions of section 10(1)(b)). On
the same day, it ceded the right to receive R340 000 in local dividends to her.
Both cession agreements were for a two-year period and provision was made for either party to
terminate the agreements at one month’s notice. A liability for damages of R20 000 would arise
and would be payable by the party who terminated the agreement within the two-year period.
The R360 000 payment to Belinda Caster (that had been ceded by her to the Sugarhill
Municipality) was funded out of
• rentals received by or accrued to the trust of R54 000,
• local dividends received by or accrued to the trust of R90 000,
• local interest received by or accrued to the trust from a non ‘tax free investment’ of R180 000, and
• the capital of the trust to the extent of R36 000.
Belinda Caster had no other receipts or accruals during the 2022 year of assessment.
You are required to
1. determine if normal tax is saved by Belinda Caster as a result of entering into this cession
arrangement. Assume none of the anti-avoidance provisions of the Income Tax Act apply, and
2. briefly discuss whether the Commissioner could successfully employ an anti-avoidance

provision of the Income Tax Act against her or the Sugarhill Municipality. In your answer you
should consider the possible application of sections 7(3) to 7(8), section 8E, section 8F,
section 80A, section 103(2) and section 103(5). If a provision is inapplicable, you should
briefly mention why.
23.4 (60 minutes)

This question tests Chapter 5 Part C (sections 50 to 58 inclusive), Chapter 15 (sections 208 to 220
inclusive), Chapter 16 (sections 221 to 233 inclusive), Chapter 17 (sections 234 to 238 inclusive)
and Chapter 18 (sections 239 to 243 inclusive) of the Tax Administration Act. It also tests if an
arrangement is an impermissible tax avoidance arrangement. It tests, amongst others, the so-called
‘misuse and abuse’ prerequisite. It tests sections 80A and 105A of the Income Tax Act. And it tests
the application of section 7(2)(a) to a transaction between spouses and the normal tax model
including sections 5 and 6.
Innocent Dube
You are a partner in an auditing practice. Although you carry out a limited amount of audit work
most of your time is spent dealing with clients’ tax matters.
Innocent Dube has been a client of the firm for a number of years. You have completed his
provisional and final tax returns for the past three years. This work which is done by your firm for
him results from a verbal request made by him. Your firm does not hold an audit appointment in
relation to his work.
During March 2022 you were requested by another client to prepare IT 3(b) forms ‘Return of
Income from Investments, Property, Rights and Royalties’ on its behalf. While completing this
request, you established that rentals of R120 000 had been paid by this client to Innocent Dube
during the 2022 year of assessment for a property belonging to him.
You immediately contacted Innocent Dube and asked him about this property and the income that
resulted from it. You queried why he has not informed your firm about it.
Innocent Dube replied by saying that he had inherited this property from his late father five years
ago and since, as far as he understood, inheritances were tax free, he failed to see the necessity to
provide you with this information.
After informing Innocent Dube of the correct tax position in relation to the income earned from this
inherited property, he asked you what you are going to do about it. He would also like to know
what the Commissioner is likely to do about it, should he come to find out about it.
You are required to inform Innocent Dube of
1. the duties and responsibilities you must fulfil in relation to this matter, and
2. what the Commissioner could do about this matter.
Laurence Marks and Jacky du Barrie
Laurence Marks and Jacky du Barrie are neighbours. Both are full-time farmers. And both are
vendors.
Laurence Marks needed to lease both livestock and farming land. Jacky du Barrie had both
livestock and farming land available.
They then entered into a lease agreement on 1 March 2021 whereby Laurence Marks would lease
from Jacky du Barrie livestock and farming land at a rental of R57 500 (R50 000 plus value-added
tax of R7 500) a month.
Gail du Barrie, Jacky du Barrie’s wife is a qualified chartered accountant. She conducts a small
accounting practice from an office on her husband’s farm that she leases from him. She provides
accounting services to many farmers in the area including her husband.
TAX AVOIDANCE 519
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.
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.
23.5 (30 minutes)

This question tests sections 103(2) and 103(4). It tests the judgments from CIR v Ocean
Manufacturing Ltd (1990 (3) SA 610 (A), 52 SATC 15), ITC 1123 ((1968) 31 SATC 48) and
Conshu (Pty) Limited v CIR (1994 (4) SA 603 (A), 57 SATC 1).
Section 103(2) of the Income Tax Act was introduced to counter the tax-avoidance arrangement of
trading through a company that has an assessed loss.
Five case studies are set out below: The taxpayers detailed in these case studies are all residents of
the Republic.
Bob Otie
Bob Otie has for a number of years conducted a profitable business in his own name. During
Boerewors (Pty) Limited’s 2022 year of assessment, Bob Otie purchased all its equity shares. It
had, in its previous year of assessment, ceased operations. At that stage it had a ‘nil’ taxable income
and no assessed loss brought forward. He then immediately sold his existing profitable business to
it.
Frikka Dels
Frikka Dels is the sole shareholder in Smoorsnoek (Pty) Limited. It has been conducting an
unsuccessful business undertaking. This has resulted in it having an assessed loss of R60 000 at the
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.
23.6 (30 minutes)

This question tests the ‘abnormality’ and ‘purpose’ prerequisites of section 80A. It tests the
judgments from SIR v Geustyn, Forsyth and Joubert (1971 (3) SA 567 (A), 33 SATC 113) and CIR
v Louw (1983 (3) SA 551 (A), 45 SATC 113).
An extract from a memorandum that you received from a fellow partner follows:
‘Peter Rhine and Paul Rhone, both residents of the Republic, had for many years successfully
operated a business in partnership. They had shared profits and suffered losses equally. At the
TAX AVOIDANCE 521
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.
23.7 (75 minutes)

This question tests the provisions of sections 7(3) to 7(8), 8E, 8F, 45, 80A, 80B, 80L, 103(2)
and 103(5) and the judgments in CIR v Louw (1983 (3) SA 551 (A), 45 SATC 113), Hicklin v SIR
(1980 (1) SA 481 (A), 41 SATC 179) and ITC 963 ((1961) 24 SATC 705).
Stakes Limited
The ‘Racing’ group of companies are all residents of the Republic. The group qualified for an
exemption from marketable securities tax, stamp duty and transfer duty on the purchase or
acquisition of certain assets by companies within its group under intra-group transactions (as
defined in section 45 of the Income Tax Act).
Stakes Limited, one of the companies in the group, was selected to be the company that would
operate the restructured group. One of the reasons why it was selected, was because it had at the
end of its previous year of assessment an assessed loss of R5 000 000.
During Stakes Limited’s 2022 year of assessment as a direct result of the transfer of the assets to it,
income of R600 000 accrue to it.
Sprint Limited
On 1 March 2021 the Racing Industries Pension Fund ceded the right to receive R150 000 in local
dividends to Sprint Limited. On the same day, Sprint Limited ceded the right to receive R200 000
interest to the Racing Industries Pension Fund. Both cession agreements were for a one-year period.
Provision was also made for either party to terminate the agreements at two months’ notice. A
liability for damages would arise and would be payable by the party who terminated the agreement
within the one-year period. Sprint Limited does not have an assessed loss. Both the Racing
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.
23.8 (60 minutes)

This question tests the application of section 80A to a private company and its sole shareholder. It
tests the judgment from SIR v Geustyn, Forsyth and Joubert (1971 (3) SA 567 (A), 33 SATC 113).
Gulliver Lilliput has for a number of years successfully traded as a travel agent. He trades in his
own name. When he had commenced this business, Ernestine Young, his accountant, had advised
him that to trade in his own name was the most tax-efficient method to trade.
After Ernestine Young had studied the definition of a ‘small business corporation’ in
section 12E(4)(a), she informed Gulliver Lilliput that he (Gulliver Lilliput) would now save a
substantial amount of normal tax each year by incorporating his business. This tax saving will be
caused because the effective company tax rates of a ‘small business corporation’ of
• 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.
23.9 (40 minutes)

This question tests the application of section 80A to a private company and its sole shareholder. It
also tests the judgment from SIR v Geustyn, Forsyth and Joubert (1971 (3) SA 567 (A), 33 SATC
113).
John Fergusson inherited all the equity shares in Betalaval (Pty) Limited from Deere Fergusson, his
late father.
Deere Fergusson had been a farmer his entire life. Ten years before he died, he had sold his farming
business to Betalaval (Pty) Limited. He had done this as part of his estate-planning exercise. The
farm land could not legally be subdivided and John and Paddy Fergusson, his two sons, to whom
he wished to bequeath the farm, were both in full-time employment (in town). They had shown no
interest in farming. Mahindra Sanalika, the family lawyer, had suggested the incorporation of the
farm with the view that the sons would each inherit half the equity shares in it. They could then
employ a farm manager to run the farm on behalf of their company.
A few months before Deere Fergusson died, Paddy Fergusson had been tragically killed in an
accident. (John Fergusson believed that Deere Fergusson never recovered from Paddy Fergusson’s
death and believed that this was the major cause of Deere Fergusson’s death.) As a result of his
Paddy Fergusson’s death, Deere Fergusson’s will was altered. John Fergusson then inherited all the
equity shares in Betalaval (Pty) Limited.
John Fergusson and Betalaval (Pty) Limited are both residents of the Republic.
After Deere Fergusson’s death, John Fergusson gave up his employment in town and became the
farm manager employed by Betalaval (Pty) Limited.
TAX AVOIDANCE 525
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.
23.10 (40 minutes)

This question tests sections 80A and 103(2). It also tests sections 8(4)(a), 11(e), 12B, 12C and 80G.
During the 2021 year of assessment the three Mail brothers formed Durban Newspapers Limited.
• Shortly after it had been incorporated, Durban Newspapers Limited purchased the entire
shareholding of Morning Glory Limited.
• Three months later, it purchased the entire shareholding of Evening Sundowner Limited.
Morning Glory Limited carries on the business of publishing a newspaper known as The Morning
Glory. It is on sale every morning except Sundays. A marketing policy of its editor was ‘never on a
Sunday’.
Evening Sundowner Limited publishes an evening newspaper selling under the name The Evening
Sundowner. It is also not published on a Sunday.
The Mail brothers in their capacity as the new owners of the two newspapers agreed that they
would not alter the marketing policies of the two newspapers. Each newspaper would still be
published every day except Sundays.
All three companies are residents of the Republic. They have their financial year ends on the last
day of February. Their taxable incomes or assessed losses for their 2021 year of assessment were as
follows:
Durban Newspapers Limited Nil
Morning Glory Limited 500 000
Evening Sundowner Limited -300 000
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.
23.11 (60 minutes)

This question tests the application of section 80B to a ‘learnership-allowance’ arrangement
(section 12H). It also tests the judgments from IRC v Duke of Westminster ([1936] AC1), CIR v
Estate Kohler & others (1953 (2) SA 584 (A), 18 SATC 354), Hicklin v SIR (1980 (1) SA 481 (A),
41 SATC 179) and CIR v Conhage (Pty) Ltd (formerly Tycon (Pty) Ltd) (1999 (4) SA 1149 (SCA),
61 SATC 391).
TaggwaterflatBarrel is a partnership of chartered accountants practicing as accountants and
auditors. Its senior partner is Colin Small. He enjoys 40% of its profits and suffers 40% of its
losses. He is a resident of the Republic.
For over a decade (10 years) Paige Ledger had been employed in TaggwaterflatBarrel’s
bookkeeping division – its division that writes up (keeps) the books of certain of its clients. The
work within this division keeps her busy for three weeks a month. It therefore requires her to work
as an audit clerk for the remaining one week a month.
Five years ago, and after section 12H had been introduced into the Income Tax Act,
TaggwaterflatBarrel registered a learnership agreement between Paige Ledger and itself with
FASSET, the appropriate SETA for it as contemplated in section 17(3) of the Skills Development Act.
To comply with the learnership requirements of FASSET, Paige Ledger was now employed by
TaggwaterflatBarrel as a trainee accountant. But, by and large, her work responsibilities have
hardly changed. She still worked in both its bookkeeping and audit divisions. She did, however,
now spend more time than she previously had done in its audit division. Although her salary should
have been reduced when she became a trainee accountant, because of her domestic circumstances
TaggwaterflatBarrel obtained permission from the relevant provincial division of the South African
Institute of Chartered Accountants for her to continue to be employed at her ‘bookkeeper’s’ salary.
TAX AVOIDANCE 527
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.
23.12 (60 minutes)

This question tests sections 8(4)(a), 11(e), 11(o), 80A and 80L, paragraph 7(4) of the Seventh
Schedule of the Income Tax Act and sections 8(14) and 17(2) of the Value-Added Tax Act. It also
tests the judgments from SIR v Geustyn, Forsyth and Joubert (1971 (3) SA 567 (A), 33 SATC 113)
and CIR v Louw (1983 (3) SA 551 (A), 45 SATC 113).
Skip Rink has for a number of years successfully traded as a distributor of sporting equipment and
clothes used by men and women bowlers. He trades in his own name. When he had commenced
this business, Kitty Jack, his accountant, had advised him that to trade in his own name was the
most tax-efficient method to trade.
Skip Rink owns a motor car that he uses 80% of the time for business purposes. This motor car is
his major ‘business’ asset.
After studying the tax tables applicable to the 2022 year of assessment that were published at the
time of the 2021 Budget speech, Skip Rink realised that he would save normal tax by incorporating
his ‘distribution’ business. This tax saving will be caused because the effective company tax rate of
42,4% (normal tax at 28% and dividends tax at an effective 14,4% (20% of (100% – 28%))) is less
than the top marginal rate of 45% applicable to a natural person.
Skip Rink proposes to sell his business to a company that he will form. He will be its sole
shareholder and sole director. His business will be sold at its market value including an amount for
goodwill. The purchase consideration will be settled using the funds it will obtain from an interest-
free loan that he will advance to ‘his’ company.
Once his company is carrying on the business, Skip Rink will be paid a salary of R1 595 952 and
be given use of ‘company car’ for his services to it as its managing director. (Assume that the value
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.
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.
23.13 (45 minutes)

This question tests the application of section 80A to a tax-saving arrangement between a father and
a major son. It also tests sections 5, 6 and 103(4).
On the eight o’clock television news on Tuesday night, 2 November 2021, the Minister of Finance
announced that the excise duty on a 350 ml bottle (the so-called dumpy) of beer was to be increased
by 10 cents per bottle. And that this increased excise duty would apply from midnight that night.
Ale Stout is the sole proprietor of a bottle store. Of his sales, 90% comes from beer sales.
Ale Stout who was divorced two years ago, and who has not remarried has only one child, a son,
named Bitter Stout, a 22-year-old full-time university student, studying economics. He is not
married and is wholly dependent upon his father (Ale Stout) for his maintenance. (Bitter Stout is
planning to be a full-time student for at least another three years.)
Bitter Stout had an inkling (a suspicion) that the Minister of Finance was going to increase the excise
duty on beer. Thus, two weeks before the announcement was made, he entered into an agreement with
Ale Stout (his father). This agreement resulted in the following transactions taking place:
• Bitter Stout purchased 50 000 cases of beer ‘dumpies’. (That is 1 200 000 ‘dumpies’.)
• These ‘dumpies’ were stored by Ale Stout in his bottle store.
• Once the increased ‘dumpy’ price came into operation, Ale Stout (on behalf of Bitter Stout) sold
these ‘dumpies’ to his customers.
• Bitter Stout paid to Ale Stout an amount equal to the gross profit that Ale Stout would have
made had he purchased these ‘dumpies’ at the new higher cost price and sold them at the new
higher selling price. This amount was paid by Bitter Stout to Ale Stout to cover storage and
selling costs.
• Bitter Stout recorded a profit from this arrangement of R120 000 (1 200 000 ‘dumpies’ at 10 cents
each).
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• 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.
23.14 (40 minutes)

This question tests the application of section 80A to an arrangement between family members.
Edward Port is a 66-year-old widower. He is not a father. His only relative is his younger sister,
Marge Port, who is also his neighbour.
Marge Port is a 55-year-old spinster. She is not a mother. She has never worked and lives off the
local dividends that accrue to her from shares that she inherited from their late father.
Marge Port also inherited from her late father, the house that she lives in. Edward Port inherited the
house next door.
Edward Port owned a block of flats on the lower KwaZulu-Natal South Coast. The development of
a popular holiday resort and a large entertainment centre nearby has resulted in an increase in its
value. The price of property in the area will continue to increase in future years.
In an attempt to limit the amount of estate duty payable on Edward Port’s death, he donated his
block of flats to Marge Port. He made this donation on 28 February 2021.
Edward Port could have bequeathed this block of flats to Marge Port, but he chose to donate it to
her for the following four reasons:
• First, while they were both alive the rentals would accrue to her rather than to him. This would
result in an overall saving of the combined normal tax payable by them. When the rentals
accrued to him they were all subject to normal tax at the maximum marginal tax rate applicable
to a natural person. And since she had no other taxable receipts or accruals, most of the rentals
when they accrued to her, were subject to normal tax at a rate lower than 45%.
• Secondly, the amount of donations tax, transfer duty and the conveyancing fees payable and the
once-off extra normal tax payable by him caused by a capital gain arising when he made the
donation, were relatively small when compared with the potential future savings in normal tax
and estate duty.
• Thirdly, no value-added tax was payable on the donation of the block of flats since it is used for
residential accommodation.
• Fourth and finally, due to the R3 500 000 abatement that is available for estate duty purposes,
less estate duty will be payable with the block of flats being owned by her instead of by him.
Prior to the 2022 year of assessment Edward Port had his evening meal at Marge Port’s house.
Each month he had given her an allowance towards the costs incurred by her in preparing his
evening meal. Since his donation of the block of flats to her, he has ceased to give her this monthly
allowance.
Throughout the 2022 year of assessment rentals accrued to Marge Port instead of to Edward Port. A
substantial saving in normal tax resulted.
Not happy with this arrangement, the Commissioner raised the provisions of section 80B and
issued both Edward Port and Marge Port with revised assessments with the rentals being
• included in his gross income, and
• excluded from her gross income.

You are required to discuss, if Edward Port’s objection is overruled, and if he ends up having to
appeal to the tax board or tax court, whether his appeal will be successful.
23.15 (60 minutes)

This question tests the general anti-avoidance provision as set out in section 80A. It also tests the
definitions of a ‘connected person’ and ‘gross income’ and sections 11(a), 11(o) and 12C.
Greendale (Pty) Limited owns all the equity shares in Pencaster (Pty) Limited. They both carry on a
process of manufacture. And they are both are residents of the Republic and have years of
assessment that end on the last day of February.
During their 2022 years of assessment and to improve the production efficiency of both
manufacturers, Greendale (Pty) Limited intended to sell a machine to Pencaster (Pty) Limited for
its current market value of R25 000. This machine had cost Greendale (Pty) Limited R100 000 and
its tax value was R40 000 on the date it was to be sold.
It was, however, established that the intended sale of the machine by Greendale (Pty) Limited to
Pencaster (Pty) Limited would result in a capital loss that would not be deducted in the
determination of Greendale (Pty) Limited’s taxable income:
• The loss would be of a capital nature and would therefore not be deductible in the determination
of its taxable income under the so-called general deduction formula (section 11(a) read with
section 23(g)).
• It would also not be deductible in the determination of its taxable income under the provisions of
section 11(o) (the so-called scrapping or termination capital allowance) since its intended sale
was to its connected person.
A capital loss under the Eighth Schedule of the Income Tax Act to Greendale (Pty) Limited would
result. But since it had not made a capital gain during its 2022 year of assessment, this capital loss
would become an assessed capital loss (and be carried forward to its next year of assessment). This
capital loss would also be a so-called clogged loss since it arose out of a sale between connected
persons and its set off would be available only against a capital profit resulting from the sale by it
of another asset to Pencaster (Pty) Limited.
To ensure that Greendale (Pty) Limited qualified for the section 11(o) deduction, the machine was
sold to Pat Postman, a dealer in second-hand machinery, for its current market value of R25 000.
He is neither a connected person of Greendale (Pty) Limited, nor Pencaster (Pty) Limited.
A day after Pat Postman purchased the machine from Greendale (Pty) Limited, he sold it to
Pencaster (Pty) Limited for R27 500 (being 110% of its cost price to him).
The above transactions resulted in the following:
• Greendale (Pty) Limited qualified for a deductible loss in the determination of its taxable
income of R15 000 ((R40 000 – R25 000) under section 11(o)).
• Pencaster (Pty) Limited purchased a second-hand machine for R27 500 (that is at a premium of
R2 500) from Pat Postman.
• Pat Postman made a profit of R2 500 (R27 500 – R25 000) on the purchase and sale of this
second-hand machine.
By interposing Pat Postman between Greendale (Pty) Limited and Pencaster (Pty) Limited for the
sale of the machine, the group accountant believed that the transaction had resulted in tax benefits
to both of them.
You are required to
1. determine if the above arrangement was tax beneficial to Greendale (Pty) Limited,
2. determine if the above arrangement was beneficial to Pencaster (Pty) Limited, and
TAX AVOIDANCE 531
3. discuss if the above arrangement is an ‘impermissible avoidance arrangement’ (as defined in

section 80L and as dealt with in section 80A).
23.16 (40 minutes)

This question tests the application of section 80A to a tax-saving transaction between a father and
his three sons.
For the past three decades (30 years) Earl Butler had successfully traded in his own name as an
exclusive men’s clothing retail and rental outlet. His trade name was Butlers.
With a view to Earl Butler’s own semi-retirement at first, and after that his retirement, and as a
means to allow his three sons to take over his business, he carried out the following transactions
during February 2021:
• He sold Butlers to Butlers Bros (Pty) Limited, a company that he had recently formed, with a
share capital of R6, made up of six R1 shares.
• The sale consideration was at the current market value of the business.
• Since this current market value of the business exceeded the net asset value of his business, a
goodwill account was created.
• The purchase consideration was settled out of the amount obtained from a loan to Butlers Bros
(Pty) Limited from Earl Butler.
• This loan bears interest at a market-related interest rate.
• Earl Butler then donated one share in Butler Bros (Pty) Limited to each of his sons. (He then
settled the resulting donations tax that was payable.)
The purpose of creating Butler Bros (Pty) Limited and the transfer of his business to it, was to
facilitate his semi-retirement (and after that his retirement) and to give its ownership to his sons on
his death. Under his will, his sons will each receive a further share in Butler Bros (Pty) Limited on
his death.
Earl Butler’s purpose of funding Butlers Bros (Pty) Limited by means of a shareholder’s loan
account was to enable him, after his retirement, to earn a ‘pension’ from his business in the form of
interest on his loan account. On his death, under his will, each son will receive one-third of the
balance of his loan account.
Butler Bros (Pty) Limited made a ‘nil’ taxable income for its 2022 year of assessment (that ended
on 28 February 2022). This ‘nil’ taxable income was after paying
• market-related salaries to Earl Butler and his three sons who are all employed on a full-time
basis in its business, and
• Earl Butler the interest due on his loan account.
During its 2022 year of assessment Butler Bros (Pty) Limited also repaid part of Earl Butler’s loan
account.
Earl Butler’s taxable income was less in the 2022 year of assessment than it had been in the 2021
year of assessment. His salary and the interest he earned in the 2022 year of assessment from Butler
Bros (Pty) Limited was less than the business profit made by Butlers in the 2021 year of
assessment. The total amount of cash that he received from the business was, however, greater as a
result of the loan repayment that he received.
When assessing Earl Butler for the 2022 year of assessment, the Commissioner raised the provisions
of section 80B on the basis that the incorporation of Earl Butler’s business constituted an
impermissible avoidance arrangement. He subjected Earl Butler to normal tax on the basis that his
• salary,
• interest, and
• 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.
23.17 (60 minutes)

This question tests the application of section 80A to an arrangement that resulted in net rentals
being ‘converted’ into interest. It also tests thin capitalisation (section 31) and dividends tax
(section 64E). It also tests the judgments from CIR v Louw (1983 (3) SA 551 (A), 45 SATC 113)
and SIR v Geustyn, Forsyth and Joubert (1971 (3) SA 567 (A), 33 SATC 113).
Prior to Elizabeth London’s emigration from South Africa and in an attempt to convert ‘taxable’
rentals into ‘tax-free’ interest, she formed East Port Investments (Pty) Limited. It is a resident of the
Republic. Its entire share capital of R1 000 000 is held by her. She also lent it R5 000 000 at an
interest rate equal to the net rentals it earned. The interest on this loan account accrues to her,
annually in arrears, on the last day of February.
On 1 March 2021 East Port Investments (Pty) Limited purchased a rent-producing property situated
in South Africa for R6 000 000.
During East Port Investments (Pty) Limited’s 2022 year of assessment (ended 28 February 2022) it
• earned taxable rentals of R540 000,
• incurred deductible expenses of R90 000 in producing these rentals, and
• paid interest of R450 000 to Elizabeth London for her loan to it.
Elizabeth London’s investment adviser informed her that the above structure and the income earned
and payments made would result in no South African normal tax being payable by either East Port
Investments (Pty) Limited or herself.
Since 1 February 2021 Elizabeth London has been ordinarily resident outside South Africa. During
the 2022 year of assessment she spent only 21 days in South Africa. She does not have a permanent
establishment in South Africa.
As a result of the return from the investment of Elizabeth London’s other ‘blocked funds’ she has a
South African taxable income in excess of R1 656 600.
The Commissioner has indicated that he believes that East Port Investments (Pty) Limited is
‘thinly’ capitalised. He has also stated that the ‘acceptable’ rate of interest for the 2022 year of
assessment is 15%.
Prior to Elizabeth London buying the shares in East Port Investments (Pty) Limited for R1 000 000
and lending it R5 000 000, this R6 000 000 had been invested by her in a non ‘tax free’ interest-
bearing security.
You are required to
1. state whether her investment adviser’s view, that no South African taxes are payable on the
rentals of R540 000, is correct,
2. determine the normal tax liability of East Port Investments (Pty) Limited for its 2022 year of
assessment on the assumption that the Commissioner applies the provisions of section 31 of
the Income Tax Act (tax payable on international transactions to be based on an arm’s length
basis). Assume that when he applies the provisions of section 31, he does so on 28 February
2022 and that he will follow the method as set out in SARS Practice Note 2,
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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.
23.18 (60 minutes)

This question tests the application of section 80A to an arrangement involving a housing project (under
section 13ter). It tests the judgments from ITC 1292 ((1979) 41 SATC 163), ITC 1385 ((1984) 46 SATC
111), ITC 1404 ((1985) 48 SATC 1), IRC v Duke of Westminster ([1936] AC 1), CIR v Estate
Kohler & others (1953 (2) SA 584 (A), 18 SATC 354), Hicklin v SIR (1980 (1) SA 481 (A), 41 SATC
179) and CIR v Conhage (Pty) Ltd (formerly Tycon (Pty) Ltd) (1999 (4) SA 1149 (SCA), 61 SATC 391).
As part of Judas Lord’s retirement plan, he invested in a rent-producing property. He purchased a
dilapidated house (and the land that it was erected on) for R720 000. He paid R80 000 to have this
house demolished and for the site to be cleared.
Judas Lord was about to commence with the erection of four townhouses on this property when
Arthur Marwick, his accountant, advised him that it was tax inefficient to erect only four
townhouses, at least five townhouses had to be erected for the project to become tax efficient.
Judas Lord then unsuccessfully applied to the appropriate local government body for permission to
erect five townhouses on this site.
As a result Judas Lord then purchased the property adjacent to this site. It cost him R1 050 000 and
a further R150 000 to demolish the house erected on it (also in a dilapidated condition) and to clear
the site.
The two sites were consolidated into one site (at a cost of R50 000). Judas Lord then proceeded to
erect eight townhouses on this consolidated site.
Judas Lord had planned to finance the cost of erection of the four townhouses out of cash that he
had invested. But when the project doubled in size to eight townhouses, he borrowed funds to
supplement his own funds, to finance the project.
Since their completion, all eight townhouses have been occupied by rent-paying tenants. These are
the only units owned by Judas Lord that are used by him for the purposes of his ‘landlord’ trade.
Because of the interest Judas Lord incurred on the borrowed funds, he suffered a loss from the
letting of these townhouses in the 2021 year of assessment. In the 2022 and in the 2023 years of
assessment he is likely to again suffer losses from the letting of these townhouses. But after that, he
will repay most of the borrowed funds, and will make a profit from the letting of these townhouses.
Judas Lord deducted this loss from the letting of the townhouses against his other taxable earnings
in the determination of his taxable income for the 2021 year of assessment. The Commissioner
refused to allow this loss as a deduction in the determination of his taxable income. He objected to
this assessment. His objection was unsuccessful.
From the correspondence between the Commissioner and Judas Lord, the Commissioner will
• recognise that Judas Lord is trading with his rent-producing property (the eight townhouses)
only when it starts making a profit, or
• employ the provisions of section 80B against him on the basis that the erection of the four
‘additional’ townhouses was undertaken solely by him to cause a capital allowance to become
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.
23.19 (60 minutes)

This question tests the application of section 80A to an investment made so that the resulting return
qualified for the section 10(1)(h) exemption from normal tax.
On 31 December 2020 Joe Strange, aged 55 years, ceased working in South Africa. He spent the
month of January liquidating his assets. He emigrated on 20 February 2021. He is no longer a
Prior to Joe Strange’s emigration, he purchased the entire share capital of Fifty Loop Street (Pty)
Limited for R8 400 000. He could have purchased the rent-producing property from it, but instead
chose to purchase all its equity shares since he had been informed that this was a more tax-efficient
way of acquiring the property.
Fifty Loop Street (Pty) Limited owns a single rent-producing property (a small block of offices). Its
statement of financial position as at 28 February 2021 was as follows:
Share capital (contributed tax capital): 4 000 000 R1 shares 4 000 000
Retained earnings 400 000
4 400 000
Represented by
Rent-producing property (at its original cost) 4 000 000
Cash 400 000
4 400 000
On the instruction of Joe Strange, Fifty Loop Street (Pty) Limited then carried out the following
transactions on 1 March 2021:
• It sold the rent-producing property to Joe Strange at its current market price of R8 000 000.
Since Fifty Loop Street (Pty) Limited is an ‘investor’ in property and not a ‘dealer’ in property
the R4 000 000 profit was transferred to a capital reserve. The difference in its value between
1 October 2001 and 1 March 2021 resulted in a capital gain of R400 000. A provision for tax of
R89 600 (R400 000 × 80% × 28%) was debited to this capital reserve. He settled the R8 000 000
purchase consideration in cash. Under its memorandum and articles of association, this capital
reserve is a non-distributable reserve.
• It then reduced its share capital by R3 000 000 (from R4 000 000 to R1 000 000). Some of the
amount it obtained from the sale of its property was used by it to finance its share capital
reduction. All the relevant provisions of the Companies Act were complied with.
• It then borrowed R3 000 000 from Joe Strange at an interest rate of 12%. Interest on this loan
account is payable, annually in arrears, on the last day of February.
• It then purchased the rent-producing property back from Joe Strange at its current market price
of R8 000 000. Since he had purchased the property for R8 000 000, and sold it for R8 000 000,
TAX AVOIDANCE 535
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:
Less:
Interest on loan from Joe Strange 360 000
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.
23.20 (60 minutes)

This question tests whether the principle of substance over form could be applied to a tax-avoidance
arrangement. It tests the judgments from Tuck v CIR (1988 (3) SA 819 (A), 50 SATC 98), Erf
3183 / 1 Ladysmith (Pty) Ltd v CIR (1996 (3) SA 942 (A), 58 SATC 229), Kilburn v Estate Kilburn
(1931 AC 50), Dadoo Ltd & others v Krugersdorp Municipal Council (1920 AD 530), Zandberg v
Van Zyl (1910 AD 302), Commissioner of Customs and Excise v Randles, Brothers & Hudson Ltd
(1941 AD 369) and Essential Sterolin Products (Pty) Ltd v CIR (1993 (4) SA 859 (A), 55 SATC 357).
It is suitable for a student completing a Masters (or similar degree) specialising in taxation.
On 1 March 2021 Randall Hudson emigrated from South Africa. He is no longer ordinarily resident
in South Africa. He did not visit South Africa at all during the 2022 year of assessment. Nor did he
carry on business in South Africa during the 2022 year of assessment. He does not have a
permanent establishment in South Africa.
An annuity accrues to Randall Hudson from a South African source. It causes any additional
taxable income earned by him from a South African source to suffer normal tax at the maximum
marginal rate.
Some of Randall Hudson’s funds remained in South Africa. To ensure that he would not be liable
for normal tax in South Africa at the maximum marginal rate on the return from the investment of
these so-called blocked funds, he invested them in local dividend-yielding shares and in local
interest-bearing securities. Although the returns from these investments were from a South African
source, and were therefore included in his South African gross income they were then exempt from
South African normal tax under
• section 10(1)(k) (for the local dividends), and
• section 10(1)(h) (for the local interest).
Instead, Randall Hudson’s local dividends were liable for dividends tax at 20% and his local
interest for the withholding tax on interest at 15%.
At the time of Randall Hudson’s departure from South Africa (that is, on 1 March 2021) he had
been unable to sell his former primary residence. It was therefore let by an estate agent on his
behalf at a monthly rental. Van Zyl Kruger, his tenant, had been given an option to purchase the
property.
On 31 May 2021 Van Zyl Kruger exercised his option and purchased the property from Randall
Hudson. For the three-month period 1 March 2021 to 31 May 2021 net rentals accrued to Randall
Hudson from the letting of this property.
The purchase and sale agreement between Randall Hudson and Van Zyl Kruger provided that the
purchaser would pay the seller the purchase consideration only when the property was registered in
the purchaser’s name. It also initially provided that the purchaser (the tenant) would pay the seller
(Randall Hudson) an occupational rental as from 1 June 2021 to the date that the property was
registered into the purchaser’s name. The occupational rental payable would be determined with
reference to the market-related rental for the property.
When it became apparent that the property was unlikely to be registered in Van Zyl Kruger’s name
before 30 November 2021, an amendment was made to the purchase and sale agreement between
Randall Hudson and Van Zyl Kruger. All references to an ‘occupational rental’ were altered to
‘occupational interest’. Since the amount changing hands each month had already been agreed
upon, the amount of the occupational interest therefore equalled the amount of the occupational
rental.
This, in turn, meant that the occupational interest that accrued to Randall Hudson was not a factor
of the capital amount owing to him for the purchase consideration of his property.
The sole reason why the purchase and sale agreement between Randall Hudson and Van Zyl
Kruger had been altered was to ensure that interest and not rentals accrued to him. Since Randall
Hudson had already enjoyed the benefit of his tax threshold being set off against his annuity and
TAX AVOIDANCE 537
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
24.1 (15 minutes)

This question tests the provisions of sections 9HA and 25. It also tests the concepts of receipts and
accruals.
In William Sherwin’s capacity as the executor of certain deceased estates, he has received the
following amounts:
• Directors’ fees voted to a director’s after his death for services rendered by him prior to his death.
• Royalties paid to an author of a book after her death, based on sales of her book, when
entitlement to them arose both prior to her death, and subsequent to her death.
• Bad debts recovered subsequent to the deceased’s death that had been deducted in the
determination of his taxable income in the year of assessment prior to his death.
• Fees from a professional’s business received after his death when he was, under an approval
granted many years ago by the Commissioner, allowed to submit, for normal tax purposes, his
accounts on solely a cash (receipts only) basis.
• Fees from a professional’s business received after his death when he furnished accounts for
normal tax purposes on the receipts and accrual basis.
The above persons who had died were all residents of the Republic prior to their deaths.
You are required to indicate in whose gross income the above amounts received by William
Sherwin (in his capacity as the executor of the deceased estate) will be included.
24.2 (30 minutes)

This question tests a number of provisions including paragraphs (c) and (d) of the definition of
‘gross income’, sections 5(10), 7A(4A) and 25 and the judgment from SIR v Watermeyer (1965 (4)
SA 431 (A), 27 SATC 117).
On 5 March 2021, shortly after the commencement of Chalk Paints (Pty) Limited’s 2022 year of
assessment, it lost two of its employees to Covid 19. One of its stock controllers, namely, Elvis
Tjhoko (aged 51 years), and one of its representatives (salesmen), namely, Simon Amon (aged
58 years), died within hours of each other. They were both married, with the result that their wives,
became widows. They were both residents of the Republic.
The following awards were made by Chalk Paints (Pty) Limited:
• Lebo Amon (widow of Simon Amon) was awarded R300 000. It made this award to her since
after her husband’s death she had insufficient wealth to enable her to maintain the life style that
she had been accustomed to while he had been alive. He had not carried out any form of estate
planning prior to his untimely death. It, when agreeing to award the R300 000 to her, made it
clear that the award did not relate to the services he had rendered to it. The sole reason for its
award to her was her insufficient wealth. It also agreed that it would, in a year’s time, again
consider whether a similar award should be made to her.
• Dumiso Tjhoko (widow of Elvis Tjhoko) was awarded a lump sum of R250 000 by it. It made
this award to her in appreciation of the services rendered by Elvis Tjhoko to it during his
lifetime.
You are required to comment on the normal tax consequences of the lump sums awarded to Lebo
Amon and Dumiso Tjhoko respectively, by Chalk Paints (Pty) Limited. (Do not discuss the normal
tax consequences to Chalk Paints (Pty) Limited Limited.)
539
24.3 (10 minutes)

This question tests the provisions of section 7 and the judgment from CIR v Polonsky (1942 TPD
249, 12 SATC 11).
Under Octavia Black’s father’s will, she enjoys the residue of his estate. His will provided that her
share should not be paid over to her, but must be retained in a trust to be administered by trustees
who have the discretion to determine how much of its receipts and accruals should be awarded to
her, and how much should be reinvested.
From the terms of Octavia Black’s late father’s will, she has a vested right to both the trust’s capital
and its annual earnings.
Upon Octavia Black attaining the age of 30 years, the trust will be terminated and all its assets
distributed to her.
During the 2022 year of assessment R360 000 was awarded to Octavia Black by the trustees out of
the receipts and accruals of the trust. The balance of R240 000 was retained by the trustees and
reinvested.
You are required to determine in whose gross income the R360 000 and the R240 000 will be
included.
24.4 (20 minutes)

This question tests the application of sections 8(4) and 9HA.
Gerald Hammerite purchased a helicopter in 2019 for R10 000 000.
Gerald Hammerite had deducted in the determination of his taxable income capital allowances on it
of R6 000 000 up to the time of his death, on 31 December 2021.
Gerald Hammerite’s helicopter’s market value on 31 December 2021 was R12 000 000.
You are required to determine Gerald Hammerite’s normal tax consequences relating to his
helicopter that arise on his death.
24.5 (15 minutes)

This question tests the application of sections 9HA and 25.
Under Octavia Black’s father’s will, she enjoys the residue of his estate. His will provided that her
Hamilton Woodguard died on 31 January 2022.
Hamilton Woodguard bequeathed his primary residence with a market value of R1 900 000 to his
wife, Helen Woodguard. It had been purchased by him after 1 October 2001 for R700 000.
The remainder of Hamilton Woodguard’s assets, none of which qualified for any exclusions from
his estate, were purchased by him for R900 000 and had a market value of R1 600 000 on
31 January 2022. They were bequeathed to his brother, Marvin Woodguard. They were all
purchased after 1 October 2001.
You are required to determine the normal tax consequences that arise on the death of Hamilton
Woodguard.
24.6 (20 minutes)

This question tests the application of section 9HA.
On 31 October 2021 when Benjamin Shave died, he owned a bull that had been purchased by him
in April 2019 for R500 000. In the determination of his taxable income for the 2020 and 2021 years
of assessment, this bull was included in his closing and opening stock values at its standard value
of R50. Its market value on 31 October 2021 was R700 000.
ESTATES 541
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.
24.7 (30 minutes)

Cade Dulux died on 10 June 2021 at the age of 61 years.
Under Cade Dulux’s will, he bequeathed his farm land and buildings and his farming business to
his family trust. He bequeathed his personal effects to a charity.
The residue of Cade Dulux’s estate, being his primary residence in the nearby village and his fixed
deposit investment was bequeathed by him to Claudia Dulux, his wife.
Cade Dulux’s assets on 10 June 2021 were as follows:
• Farm land and buildings, at market value 8 000 000
• Farm implements, at market value 1 200 000
• Farming livestock, at market value 2 500 000
• Primary residence in the nearby village, at market value 2 000 000
• Fixed deposit 1 100 000
• Personal effects, at market value 900 000
• Total assets, at market value 15 700 000
The base cost of Cade Dulux’s farm land and buildings was R2 400 000. The tax value of his farm
implements was nil (original cost was R2 100 000). The standard value of his livestock was
R4 100. And the cost of his primary residence in the nearby village was R435 000, having been
purchased on 1 September 2002.
From 1 March 2021 to 10 June 2021, Cade Dulux suffered a farming loss of R90 000.
The only other amount earned by Cade Dulux for his 2022 period of assessment (1 March 2021 to
10 June 2021) was local interest of R22 000 from a non-tax free investment.
You are required to determine the normal tax payable by Cade Dulux for his period of assessment
that ended on 10 June 2021.
24.8 (30 minutes)

This question tests the application of section 9HA and paragraphs 15, 45, 53, 55 and 62 of the
Eighth Schedule.
Casper de Kade died on 31 May 2021 leaving the following assets. Their base costs and their
market values on the date of his death were as follows:
Base cost Market value
Primary residence 1 500 000 3 600 000
Holiday home 850 000 950 000
Household furniture and effects 600 000 900 000
Yacht (11 metres in length) 700 000 600 000
Endowment policy (he was the original beneficial owner of it) 100 000 750 000
Second-hand endowment policy 500 000 600 000
Listed shares 400 000 700 000
In Casper de Kade’s will, he bequeathed his

• holiday home to Coleen de Kade, his surviving spouse,
• endowment policy to Carol de Kade, his only child, and
• his second-hand endowment policy to a registered public benefit organisation.
Casper de Kadee’s remaining assets were to be sold and the amount obtained from their sale was to
be split equally between Coleen de Kade and Carol de Kade.
You are required to determine the taxable capital gain that arises on the death of Casper de Kade.
24.9 (60 minutes)

Matt Plascon died on 10 May 2021. He was 63 years old when he died.
Under Matt Plascon’s will, he bequeathed his farm land and buildings and his farming business to
his family trust. He bequeathed his personal effects to a charity. The residue of his estate and his
primary residence were bequeathed by him to his wife, Olivia Plascon.
Matt Plascon’s assets on 10 May 2021 were as follows:
• Farm land and buildings at their market value of 15 000 000
• Farm implements at their market value of 900 000
• Farming livestock (5 000 cows) at their market value of 6 000 000
• Primary residence at its market value of 1 900 000
• A non-tax free fixed deposit investment 12 500 000
• Personal effects at their market value of 900 000
The base cost of Matt Plascon’s farm land and buildings was R5 000 000. The tax value of his farm
implements was nil (original cost was R2 500 000). The standard value of his livestock was
R200 000. The cost of his primary residence was R550 000, having been purchased by him on
1 October 1997. Its market value on 1 October 2001 (valuation date) was R950 000.
The executor of Matt Plascon’s deceased estate continued his farming operations. The following
transactions occurred for its period of assessment ended 28 February 2022:
• Local interest earned on the non-tax free fixed deposit 750 000
• Purchase of livestock (15 cows) 135 000
• Sales of livestock (600 cows) 9 000 000
• Farming expenses (revenue in nature) 292 000
• Construction of a dipping tank for the cows 58 000
• Property rates and insurance on his primary residence 40 000
On 8 February 2022 the executor of Matt Plascon’s deceased estate transferred all the farming
assets (land and buildings, implements, dipping tank, and livestock) and the cash arising from the
farming transactions (after providing for normal tax on the farming transactions) to the family trust.
There were 4 250 cows and 1 250 calves on hand at the time of this transfer. The market value of a
cow was R15 000 and the market value of a calf was R3 000.
Due to the construction of a dipping tank for the cows and as a result of a recent slight increase in
property prices the market value of his farm land and buildings had increased to R15 300 000 on
8 February 2022. The farm implements that had a market value of R900 000 on 10 May 2021 had
declined in value as a result of their use by the executor of Matt Plascon’s deceased estate to a
market value of R750 000 on 8 February 2022.
On 24 December 2021 Matt Plascon’s personal effects had been given by his executor to a charity.
Since his deceased estate is a ‘deemed’ natural person there was no capital gain or capital loss on
their donation to this charity.
ESTATES 543
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.
24.10 (20 minutes)

This question tests section 25(1) and paragraph 40 of the Eighth schedule.
Steve Richardson died on 31 December 2020 at the age of 62 years.
Under Steve Richardson’s will, certain of his assets were not bequeathed to specific heirs and were
sold by his executor over two years of assessment.
In the 2021 year of assessment the following assets were sold by Steve Richardson’s executor:
• Personal effects with a base cost of R400 000 were sold for R450 000.
• His primary residence with a base cost of R2 900 000 was sold for R3 100 000.
In the 2022 year of assessment the following assets were sold by Steve Richardson’s executor:
• Listed shares with a base cost of R1 200 000 were sold for R1 400 000.
• A rent-producing property with a base cost of R1 650 000 was sold for R1 700 000.
You are required to determine Steve Richardson’s taxable capital gain that arises in both the 2021
24.11 (15 minutes)

This question tests section 25(3)(b).
Jane Poppins
Jane Poppins late father’s estate comprised of a house with a market value of R1 500 000 on the
date of his death. It was ‘bonded’ to the extent of R1 400 000. She informed her late father’s
executor that she was prepared to take over his bond. With the lender’s consent, it was awarded to
her by her late father’s executor.
You are required to determine Jane Poppins’s base cost of the house.
James Butler
Under the last will and testament of James Butler’s late father, he inherited the family farm subject
to the condition that he awards an annuity of R600 000 a year (payable at the rate of R50 000 a
month) to his mother for the remainder of her life. It had a market value on the date of his late
father’s death of R9 000 000 disregarding the annuity obligation.
You are required to determine James Butler’s base cost of the farm.
24.12 (30 minutes)

This question tests sections 9HA and 25.
John Doe and Jane Smith were married in community of property in 1987. They entered into a joint
will that provided for the massing of their estates.
Under their joint will, Jane Doe (née Smith) is to receive a usufruct for her remaining life over the
family farm, while the bare dominium in it is left to the John Doe Family Trust. It was purchased
by their joint estate for R1 000 000 in 2013. Their primary residence is not on the farm.
John Doe died on 31 January 2021. Jane Doe then adiated (accepted the terms of the joint will).
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.
24.13 (30 minutes)

This question tests sections 9HA and 25 and paragraphs 20 and 35 of the Eighth Schedule.
Robert Ross died on 31 July 2019. He bequeathed his estate to his two sons Jock Ross and Darren
Ross in equal shares.
On the date of Robert Ross’s death, his estate comprised
• 100 shares in Lemkus Limited worth R1 000 000 (and a base cost of R200 000), and
• a bank balance of R100 000 available for distribution.
During the 2021 year of assessment Jock Ross and Darren Ross had entered into a redistribution
agreement. At that time the 100 shares in Lemkus Limited had a market value of R1 200 000.
Darren Ross agreed to exchange his 50 shares in Lemkus Limited worth R600 000 in return for a
cash payment of R600 000. Jock Ross paid R100 000 of his own funds into his late father’s estate
to complete this transaction.
During the 2022 year of assessment Robert Ross’s liquidation and distribution account was
finalised. It reflected that
• Jock Ross was to receive 100 shares in Lemkus Limited, while
• Darren Ross was to receive R1 100 000 in cash.
You are required to discuss the capital gains tax consequences for
• the late Robert Ross,
• Darren Ross,
• Jock Ross, and
• Robert Ross’s deceased estate.
24.14 (20 minutes)

This question tests sections 9HA and 25 and paragraph 20 of the Eighth Schedule.
Under Julian Gedee’s last will and testament, he bequeathed his
• farm valued at R8 000 000 to his wife, Justine Gedee, and
• share portfolio valued at R2 500 000 to his son Walter Gedee.
Julian Gedee’s base cost of his
• farm was R1 500 000, and
• share portfolio, R700 000.
Both Julian Gedee’s farm and the shares were purchased by him after valuation date. There is no
residence on the farm.
ESTATES 545
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.
24.15 (20 minutes)

This question tests section 25(6) of the Income Tax Act.
Kyle Shaw died on 31 January 2021. He was 69 years old when he died. The net value of his estate
before any capital gains tax liability was as follows:
Assets
Share portfolio (base cost of R400 000) 3 000 000
Private motor vehicle 120 000
Cash at bank 50 000
3 170 000
Liabilities
Bank loan secured over his share portfolio 2 500 000
Sundry creditors 350 000
2 850 000
The net value of Kyle Shaw’s estate before capital gains tax liability was therefore R320 000
(R3 170 000 – R2 850 000).
The sole heir of Kyle Shaw’s estate, Richard Shaw informed the executor that he would like to take
over his late father’s share portfolio. To facilitate this transfer he was, if possible, also prepared to
take over any remaining liabilities of the estate, and to pay the cost of winding it up.
Kyle Shaw was suffering normal tax at the maximum marginal rate at the time of his death.
Richard Shaw indicated that since he was experiencing a liquidity problem, he would like to take
the maximum advantage of section 25(6) of the Income Tax Act.
You are required to determine that portion of the late Kyle Shaw’s normal tax liability resulting
from a taxable capital gain from the deemed disposal of his assets that was included in his taxable
income that can be taken over by Richard Shaw.
24.16 (40 minutes)

This question tests the normal tax model (the definitions of ‘gross income’, ‘income’ and ‘taxable
income’) as far as it applies to a taxpayer who died during the year of assessment. It also tests
sections 9HA, 10(1)(k)(i), 10(2)(b), 10B, 11(k), 25 and 26A and a retirement fund lump-sum death
benefit.
After a short Covid 19-related illness, Franklin Stevenson died on 31 May 2021, aged 63 years,
leaving his widow, Chiffon Stevenson, and three unmarried children aged 23 years, 16 years and
13 years respectively. The eldest child, a married daughter, Pearl Hunt, is not a resident of the
Republic, and she does not carry on business through a permanent establishment in South Africa. The
remaining members of the family are all residents of the Republic.
Under Franklin Stevenson’s will, all the shares in his estate, excluding his unexercised option in the
holding company of his employer-company, were to be divided equally between their three
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.
24.17 (45 minutes)

This question tests the normal tax liability determination including a severance benefit and the
normal tax payable by a deceased estate and sections 5, 6, 9HA, 10(1)(i), 10(1)(k)(i), 10(2)(b), 11F,
25 and 26A.
Duram Jotun, a resident of the Republic, died on 30 June 2021 at the age of 64 years. He was
survived by his wife,
• Velvet Jotun (aged 59 years),
• Polly Screed, a divorced daughter (aged 22 years with no children), and
• an unmarried son, Cashmere Jotun (aged 15 years).
The following particulars relate to Duram Jotun for the period from 1 March 2021 to the date of his
death:
• He earned a salary of R24 000 a month.
• On 1 March 2021 he was awarded a retirement gratuity of R39 000 by his employer in view of
his impending retirement on 30 November 2021, when he would have attained the age of
65 years (his employer’s official retirement age).
• He earned local dividends of R45 000.
• He earned gross rentals of R60 000 from a rent-producing property. Non-capital expenditure
incurred in earning these rentals was R12 480.
• Local interest of R35 780 accrued to him from his investment in a non-tax free interest-bearing
security.
• He contributed R1 200 a month to a provident fund.
Duram Jotun’s will provides for the following:
• His daughter Polly Screed is to inherit the rent-producing property.
• 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
From 1 March 2021 to 28 February 2022, Cashmere Jotun

• received the R85 000 (R60 000 plus R25 000) mentioned above from the executor,
• earned a salary from part-time employment of R30 000, and
• earned non-tax free local interest of R24 000.
You are required to determine the taxable incomes all the above taxpayers, including the Estate
Late Jotun. They are all residents of the Republic.
24.18 (90 minutes)

This question tests the taxable income determinations of a deceased, his deceased estate and a trust.
It also tests the normal tax and value-added tax implications of a sale of a business.
Tyrone Landis, a 56-year-old resident of the Republic, died on 31 August 2021. At the time of his
death he owned the following assets and held the following investments:
Loan to the Landis Trust
On 30 July 2017 Tyrone Landis sold a small block of flats in Hillbrow on ‘loan account’ to the
Landis Trust for its market value of R1 500 000. This loan earns interest at a market-related rate of
10% a year. No repayments of the capital amount of this loan have been made by the Landis Trust.
The interest on this loan was paid as incurred. Under his will, the loan owing by the Landis Trust
was waived.
Tyrone Landis did not earn any other interest in the 2022 year of assessment other than the interest
on his loan account to the Landis Trust.
Retirement annuity fund benefit
Tyrone Landis’s death benefit from the retirement annuity fund that he was a member of at
31 August 2021 was R4 500 000. Contributions of R400 000 had not been deducted in the
determination of his taxable income up to 28 February 2021. He contributed R90 000 to this
retirement annuity fund from 1 March 2021 to 31 August 2021.
The beneficiaries of this death benefit are Tyrone Landis’s three children. Although they could
have received the entire R4 500 000 as a lump-sum award (R1 500 000 each), they elected to
receive a combination of a lump sum and an annuity. A lump sum of R900 000 (R300 000 each)
and an annuity of R180 000 was then awarded. The annuity is being awarded in the form of a
monthly payment. An amount of R15 000 a month (R5 000 each) has been awarded to his three
children from 1 December 2021.
Shares in Acacia Limited
Acacia Limited is a listed company in South Africa. Perry Landis, Tyrone Landis’s late father, had
purchased these shares for R90 000 on 1 November 2005. On his death, Tyrone Landis inherited
them. At that time they had a market value of R975 000. Their market value on Tyrone Landis’s
death was R1 265 000.
Local dividends of R4 000, after subtraction of the 20% dividend withholding tax, accrued to
Tyrone Landis in his 2022 period of assessment that ended with his death.
These shares in Acacia Limited were bequeathed by Tyrone Landis to Tiffany Landis, his surviving
spouse.
Shares in Cedar Plc
Cedar Plc is a foreign listed company. Tyrone Landis purchased his shares in it for £9 000 on
30 June 2009. They a market value of £97 500 on the date of his death.
Relevant rates of exchange are as follows:

Spot rate on 30 June 2009 £1 = R15,20
Average exchange rate for the 2010 year of assessment £1 = R15,35
Spot rate on 31 August 2021 £1 = R20,30
Average rate for the period of assessment ended 31 August 2021 £1 = R19,70
Tyrone Landis received a foreign dividend from Cedar Plc, after the deduction of a 15%
withholding tax, with a rand-equivalent of R153 000 on 30 July 2021. It is not exempt from normal
tax under section 10B(2) of the Act.
No other dividends were paid by Cedar Plc. Tyrone Landis’s executor has indicated that when
completing his tax return, the most tax-efficient option will be chosen.
These shares in Cedar Plc were bequeathed by Tyrone Landis to the Landis Trust.
Cash on hand
Some of Tyrone Landis’s cash on hand of R5 000 000 was used to settle his estate duty liability,
funeral expenses, executor’s remuneration and normal tax liability. The balance of his cash on hand
was bequeathed by him to the Landis Trust.
Other information relating to the period 1 March 2021 to 31 August 2021
Tyrone Landis had been carrying on business as a sole trader, under the name ‘Keen Surfing’ for
the last 13 years. His business manufactured surfboards. They were sold both locally and abroad.
His business was a vendor with a two-month tax period.
The following information was extracted from the accounting records of his business for the period
1 March 2021 to 31 August 2021. All amounts are exclusive of value-added tax unless otherwise
stated.
Sales (note 1) 6 620 000
Cost of sales (note 2) 4 680 000
Other expenditure deductible in the determination of his taxable income 240 000
Profit before normal tax and leasing charges (note 3) 1 700 000
Notes
1. Export sales amounting to R4 380 000 are included in sales.
2. Cost of sales was determined as follows:
Opening trading stock (at cost) 2 150 000
Add purchases of raw materials 2 863 000
Add labour costs 2 400 000
7 413 000
Less closing trading stock (at cost) 2 733 000
4 680 000
His trading stock had never been valued ‘below its cost’ or at ‘less than its cost’. It had a
market value of R4 600 000 on 31 August 2021.
3 Apart from expenses relating to the lease, that have not yet been recorded, there were no other
expenses. The expenses and details relating to the lease are as follows:
Under a 10-year lease concluded by Tyrone Landis and the lessor on 1 March 2014 a monthly
rental of R34 500 (including 15% value-added tax) was payable. On its inception, a lease
premium of R115 000 (including 15% value-added tax) was paid by Tyrone Landis to the
lessor. This lease contract has no market value on 31 August 2021.
Subsequent to Tyrone Landis’s death, the executor of his estate continued to operate his business
until its sale. Under his will, his executor was to sell his business as soon as possible subsequent to
his death. The net amount obtained was bequeathed by him to the Landis Trust.
ESTATES 551
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 –
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.
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)
24.19 (10 minutes)

This question tests the taxation of an insolvent, his insolvent estate and the provisions of section 25C.
Flash Flytohigh’s estate was sequestrated on 30 June 2021. The trustee of his insolvent estate
carried on his business for the benefit of his creditors for the remainder of the 2022 year of
assessment. Its statement of comprehensive income for this eight-month period follows:
Gross profit for trading 408 000
Expenses incurred
Salaries (see further below) 216 000
Commissions 18 000
Office expenses 48 000
In producing the rentals 78 000
Flash Flytohigh was employed by the trustee of his insolvent estate to help run the business. He
was paid a salary of R18 000 a month. The R144 000 paid to him during this eight-month period is
included in the salaries total of R216 000 above.
For the four-month trading period (1 March 2021 to 30 June 2021) Flash Flytohigh had suffered a
trade loss of R240 000.
ESTATES 553
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
24.20 (10 minutes)

This question tests the taxation of an insolvent, his insolvent estate and the provisions of section 25C.
During the 2020 year of assessment Runt Ofast’s estate was sequestrated. At the date of his
sequestration he had an assessed loss of R500 000.
His business undertaking was transferred to the trustee of his insolvent estate. The trustee carried
on this business undertaking and recorded a taxable income of
• R50 000 in the 2020 year of assessment, and
• R300 000 in the 2021 year of assessment.
At the commencement of the 2022 year of assessment Runt Ofast’s order of sequestration was set
aside.
For the remainder of the 2020 year of assessment, and throughout the 2021 year of assessment,
Runt Ofast worked as an employee. He earned a taxable income from his employment of
• R75 000 in the 2020 year of assessment, and
• R180 000 in the 2021 year of assessment.
Runt Ofast derived a taxable income of R200 000 in the 2022 year of assessment before the set-off
of an assessed loss.
You are required to determine the taxable incomes of Runt Ofast and his insolvent estate for the
2020, 2021 and 2022 years of assessment.
CHAPTER 25
TRUSTS
25.1 (15 minutes)

This question tests the definition of a ‘company’ and sections 5, 6, 7(3), 7(5), 10(1)(i), 10(2)(b),
25B and 25BA. It also tests the judgments from Joss v SIR (1980 (1) SA 674 (T), 41 SATC 206)
and Ovenstone v SIR (1980 (2) SA 721 (A), 42 SATC 55).
Fifteen statements in relation to the taxation of trusts follow:
1. All discretionary trusts are inter vivos trusts.
2. It is the practice of the Commissioner to apply the provisions of section 7(5) to an amount that
is retained in a trust.
3. Income accruing to a minor child resulting partly from a disposition by his parent, and partly
from a transaction carried out at full value, may be apportioned.
4. Receipts and accruals that flow through a trust retain their identity.
5. If the beneficiary has a vested right to an amount, then it (the amount) has accrued to the
beneficiary.
6. Section 7(3) applies to all amounts that are received by or that accrues to a minor child from a
trust.
7. A trust enjoys the primary rebate.
8. A trust enjoys an exemption from normal tax of the so-called first R23 800 of not otherwise
exempt from normal tax for the local interest from a non ‘tax free investment’ content of its gross
income.
9. A trust pays normal tax on its taxable income according to the schedule tax table applicable to
a natural person.
10. The provisions of section 7(5) apply to the receipts and accruals retained in a testamentary trust.
11. A collective investment scheme in securities (a so-called equity unit trust) is a trust for income
tax purposes.
12. A contingent right to an amount in a discretionary trust becomes a vested right when the
trustees exercise their discretion and agree to award this amount to a beneficiary.
13. If gross rentals are deemed to accrue to a trust, then non-capital expenses incurred in producing
these gross rentals will be deductible in the determination of the trust’s taxable income.
14. It is impossible for a trust to end up with an assessed loss for a year of assessment.
15. It is impossible for a beneficiary with a vested right to the income of a trust to end up with an
assessed loss from the trust’s transactions in a year of assessment.
25.2 (60 minutes)

This question tests the application of section 7(2). It also tests the normal tax model applied to a
married couple.
Four separate case studies follow:
Claude and Claudia March
Claude and Claudia March 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:
555
Claude March
Taxable profit from his business 690 000
Claudia March
Net rentals 114 000
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
Net rentals 9 500
Bernadette April
Net rentals 104 500
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
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.)
25.3 (60 minutes)

This question tests the application of section 7 (deemed accruals) to certain receipts and accruals,
including the judgments from CIR v Berold (1962 (3) SA 748 (A), 24 SATC 729) and Barnett v
COT (1959 (2) SA 713 (FC), 22 SATC 326). It also tests dividends tax including section 64D, 64E,
64EA and 64F.
Listed below are 12 situations when an amount has been received by or has accrued to a person.
Yet this amount may be included in some other person’s income due to the deeming accrual
provisions contained in the Income Tax Act. All ‘donors’ are residents of the Republic.
Pierre Parris
Pierre Parris formed Par (Pty) Limited and Rus (Pty) Limited. Both companies are residents of the
Republic. Par (Pty) Limited holds the majority of the equity shares in Rus (Pty) Limited. Pierre
Parris then lent Rus (Pty) Limited R500 000 interest-free to finance an investment programme.
The net income earned by Rus (Pty) Limited was paid out as a local dividend – the majority of
which was distributed to Par (Pty) Limited.
Par (Pty) Limited, in turn, distributed the majority of the local dividend it had received from Rus
(Pty) Limited as a local dividend to its shareholders, James Parris and John Parris, the minor
children of Pierre Parris.
No other transactions were conducted by Par (Pty) Limited or Rus (Pty) Limited in the 2022 year of
assessment.
Olive Noel
Olive Noel donated a local fixed deposit investment of R100 000 to her minor son Graeme Noel. It
is not a ‘tax free investment’. The return that accrued from this investment for the 2022 year of
assessment was local interest of R7 500.
Graeme Noel also earned R98 000 from his business as a part-time backyard mechanic repairing
motorcycles for his friends.
Gordon Fisher
Gordon Fisher donated a local interest-bearing investment of R300 000 to Jane Fisher, aged
5 years, his niece. It is not a ‘tax free investment’. During the 2022 year of assessment local interest
of R18 000 accrued to her from this investment.
Gilbert Forbes
Gilbert Forbes, a grandfather of three, donated R200 000 to a trust that he had created for the
benefit of his minor grandchildren. The trust earns R15 000 local interest from the investment of
this donated capital. It is not a ‘tax free investment’. His minor grandchildren, Ian, Ailsa and Mary
Forbes were each awarded R5 000 of this local interest by the trustees of his trust.
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
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
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.
25.4 (40 minutes)

This question tests the application of section 7 (deemed accruals) to certain receipts and accruals and
the judgments from CIR v Berold (1962 (3) AD 748 (A), 24 SATC 729) and Barnett v COT (1959 (2)
SA 713 (FC), 22 SATC 326).
Listed below are eight situations when an amount has been received by or has accrued to a person.
provisions contained in the Income Tax Act. All ‘donors’ are residents of the Republic.
Lavender Sage
During the 2021 year of assessment Lavender Sage, a widow, invested R500 000 in a local non ‘tax
free investment’ in the name of Mace Sage, her minor son. On 1 March 2021, she married Herb
Thyme.
The R500 000 remained invested throughout the 2022 year of assessment, and Mace Sage earned
local interest of R40 000 for the year.
Rue Fennel
Rue Fennel, a wealthy spinster, donated a rent-producing property to Meg Fennel, her aged mother.
She made this donation since Carum Fennel, her aged father’s earnings, solely a pension, were
insufficient for their living costs.
During the 2022 year of assessment net rentals of R69 400 accrued to Meg Fennel from this rent-
producing property.
Primrose Tumeric
Primrose Tumeric inherited R1 500 000 from Nordic Malabar, her late grandfather. His will,
however, stipulated that the actual receipt of her inheritance would be withheld until she attained
the age of 30 years. Should she not fulfil this condition, then her inheritance was to form part of her
estate. Until she attained the age of 30 years the inheritance was to be invested on her behalf. The
resulting income is subject to the same conditions as the inheritance.
During the 2022 year of assessment the investment of this inheritance earned
• 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
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
25.5 (60 minutes)

This question tests the application of section 7 (deemed accruals) to certain receipts and accruals
and the judgments from Joss v SIR (1980 (1) SA 674 (T), 41 SATC 206) and Ovenstone v SIR
(1980 (2) SA 721 (A), 42 SATC 55). It also tests the taxation of foreign dividends including
section 10B.
Listed below are eight situations when an amount has been received by or has accrued to a person.
provisions that are found in the Income Tax Act. All ‘donors’ are residents of the Republic.
Ground Cloves
Ground Cloves won R300 000 in a charity competition. He gave
• R100 000 to his wife, Betty Cloves, and
• R100 000 to his 14-year-old unmarried son, Cecil Cloves.
Ground Cloves kept the remaining R100 000 for himself. He did not give anything to his 16-year-
old unmarried daughter, Dee. (Ground Cloves and Dee Cloves have been aggrieved with each other
for the past two years since he does not approve of most of her friends.)
Betty Cloves was most distressed by Ground Cloves’s behaviour and she therefore gave her
R100 000 to Dee Cloves. All these gifts were made on 1 March 2021.
Cecil Cloves’s R100 000 and Dee Cloves’s R100 000 were both invested in 6% local interest-
bearing securities, that are not ‘tax free investments’, throughout the 2022 year of assessment.
Poppy Rosemary
Poppy Rosemary has for a number of years run a florist business. She trades in her own name.
After her 16-year-old unmarried daughter, Blossom Rosemary, had failed standard seven for the
second time, Poppy Rosemary employed Blossom Rosemary in her business. She spent two months
teaching Blossom Rosemary how to arrange the flowers. She did not charge her for these lessons –
she does, however, charge other pupils for similar lessons.
As from 1 March 2021 Blossom Rosemary has been employed by Poppy Rosemary. She earned a
salary of R7 500 a month, being a total of R90 000 for the 2022 year of assessment.
Edward Allspice
On 1 March 2021 Edward Allspice, aged 16 years, borrowed R150 000 at 9% from a financial
institution to finance a business venture that he had entered into. Berry Allspice, his father was
impressed with his business venture. On 31 August 2021 Berry Allspice therefore gave Edward
Allspice R150 000. He used this R150 000 it to settle his R150 000 loan from the financial
institution. Out of his business profits he also settled the R6 750 interest due.
For the 2022 year of assessment Edward Allspice made a taxable profit (that is after the deduction
of the R6 750 interest he had incurred) of R90 000.
Frederick Weed
Frederick Weed and his wife Hazel Weed had experienced matrimonial problems for a number of
years. They had remained together solely to give their only child, Kay Weed, a 16-year-old
daughter, a home in which to live.
On 1 March 2021 Frederick Weed and Hazel Weed each donated R400 000 to Kay Weed. The
R800 000 was invested in a 7,5% local interest-bearing security. It is not a ‘tax free investment’.
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
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• R1 000 accrued to Juniper Root, aged 8 years, an adopted daughter.

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
25.6 (20 minutes)

This question tests the application of section 7(3) to the receipts and accruals, of a minor child. It
tests the judgments from Ovenstone v SIR (1980 (2) SA 721 (A), 42 SATC 55) and Joss v SIR
(1980 (1) SA 674 (T), 41 SATC 206). It also tests donations tax.
Bobby Albertros is a resident of the Republic. He is a successful businessman. He trades in his own
name. The current market value of his business is R5 000 000.
Bobby Albertros’s 16-year-old unmarried son, Alfred Albertros, is a talented golfer. He was the
leading ‘rookie’ (young player) at the end of the current Sunshine Circuit having earned over
R150 000 in prize money.
Alfred Albertros was keen to campaign abroad but Bobby Albertros wanted him to remain in South
Africa to help him with his business. Bobby Albertros also knew that Alfred Albertros was most
unlikely to make the grade as an ‘international’ golfer.
Therefore, on 1 March 2021, Bobby Albertros sold 20% of his business to Alfred Albertros. The
agreed purchase consideration was R150 000. Alfred Albertros used cash from his golf winnings to
settle the purchase consideration. Bobby Albertros was happy with the selling price since he had
achieved his objective of keeping Alfred Albertros in South Africa.
Alfred Albertros was made a junior manager of the business. He attends a managers’ meeting each
month. He also works three mornings a week, spending the remainder of normal working hours on
the golf course. During the 2022 year of assessment he earned
• a manager’s fee of R12 000,
• a salary of R60 000, and
• a share of profits of R75 000 (from his 20% share in the business).
The Commissioner is satisfied that since this arrangement was not carried out solely or mainly for
the purposes of the avoidance or the postponement of liability for the payment of a tax, duty or levy
collected by him, he could not successfully raise the provisions of section 80B.
1. the resulting normal tax implications of the amounts earned by Alfred Albertros during the
2022 year of assessment, and
2. whether donations tax will be payable on any of the transactions.
25.7 (60 minutes)

This question tests the application of section 7(3) to the receipts and accruals of a minor child. It
tests the judgments from Ovenstone v SIR (1980 (2) SA 721 (A), 42 SATC 55), CIR v Estate
Kohler & others (1953 (2) SA 584 (A), 18 SATC 354), CIR v Widan (1955 (1) SA 226 (A), 19
SATC 341), CIR v Berold (1962 (3) SA 748 (A), 24 SATC 729) and Joss v SIR (1980 (1) SA 674
(T), 41 SATC 206). It is suitable for a student completing a Masters (or similar degree) specialising
in taxation.
Samuel Solomon is a resident of the Republic. He is a wealthy man who suffers normal tax at the
maximum marginal tax rate.
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.
25.8 (30 minutes)

This question tests the provisions of sections 7(5), 7(6), 25B and 56(1) and the judgment from
ITC 823 ((1956) 21 SATC 77).
Crystal Grantia
Crystal Grantia, a wealthy spinster, is a resident of the Republic. Two years previously, R980 000
was donated by her to a trust for the benefit of her niece, Coffee Jacobs, who is now 16 years old.
She is also a resident of the Republic.
Local interest of R90 000 a year has been earned from this investment. It is not a ‘tax free
investment’.
Of the interest, R54 000 was, under the discretionary powers granted in the trust deed, awarded by
the trustee to Coffee Jacobs. The balance of R36 000 was accumulated for her benefit. This
accumulated benefit will be distributed to her only when she attains the age of 21 years. Should she
TRUSTS 565
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.
25.9 (60 minutes)

This question tests the capital gains made or capital losses suffered by a trust. It tests the tax
consequences of these capital gains or capital losses to the trust, its creator or its beneficiaries. It
tests apportionment and the so-called attribution provisions and the trust provisions contained in
paragraphs 68 to 73 and 80 to 83 of the Eighth Schedule.
You are employed by a firm of chartered accountants as a manager in its Tax Section. You are
often required to provide answers to queries on normal tax (including capital gain tax). The
following seven queries need your response: (All amounts have been adjusted to take into account
their value-added tax consequences, in other words, value-added tax may be ignored when
answering these seven queries.)
Len Baumann Trust
On 1 March 2011 Len Baumann formed the Len Baumann Trust. On 1 April 2011 he lent it
R1 000 000. On 1 April 2005 it used the R1 000 000 to purchase a house located in Port Alfred.
Len Baumann is the beneficiary of the Len Baumann Trust. As its beneficiary he is allowed to
occupy the house rent free. He is, however, responsible for all expenses relating to this house
including its repairs and maintenance. As from 1 April 2011 he used this home as his primary
residence.
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
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
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.
25.10 (40 minutes)

This question tests the provisions of sections 7 and 25B.
Isaacs Family Trust
Ilona Isaacs donated a local fixed deposit interest-bearing investment to the Isaacs Family Trust on
the condition that the local interest from this local investment would accrue to the beneficiaries
only from the date of her death. This local interest-bearing investment is not a ‘tax free investment’.
The beneficiaries of the trust are Ilona Isaacs’s two major sons, Leon and Manfred Isaacs, who live
with her and Abe Isaacs, her husband (their parents) in South Africa. Local interest of R90 000 on
this local fixed deposit investment was earned in the 2022 year of assessment.
Clifford Brown Trust
For several years Claire Bisset has been awarded R25 000 a month from the Clifford Brown Trust.
It had been formed by Clifford Brown, her grandfather, by the donation to it of investments in
South Africa listed companies, for the purpose of maintaining her for her lifetime.
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 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 interest from a non ‘tax free investment’ of R280 000,
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.
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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.
25.11 (15 minutes)

This question tests the normal tax model applied to the creator of a trust, two different trusts and a
beneficiary. It tests sections 5, 6, 7(3), 10(1)(k) and 25B.
Wiseman Kunene is a 16-year-old full-time scholar. He had no receipts during the 2022 year of
assessment. But he is a beneficiary in two trusts, his
• father’s inter vivos trust, and
• grandfather’s testamentary trust.
Wiseman Kunene’s father’s inter vivos trust provides that its receipts and accruals vest in him, but
that the actual physical payment of them to him, will take place only when he attains the age of
25 years. For the 2022 year of assessment its receipts and accruals were rentals of R300 000. The
rent-producing property was donated to the trust by his father. (His father suffers normal tax at the
maximum marginal tax rate.)
Wiseman Kunene’s grandfather’s testamentary trust provides that its receipts and accruals are to be
retained by it and will be awarded to him if, and when, he attains the age of 25 years. From a
condition contained in the trust deed he does not have a vested right either to its capital or its
annual receipts and accruals until he attains the age of 25 years.
For the 2022 year of assessment the receipts and accruals of Wiseman Kunene’s grandfather’s trust
were R500 000 consisting of
• R200 000 net rentals,
• R175 000 local dividends, and
• R125 000 local interest from a local investment that is not a non ‘tax free investment’.
You are required to determine the 2022 normal tax liabilities of all the taxpayers mentioned above,
to the extent that they arise out of the above transactions. Support your determination with reasons
as to why you have dealt with an amount in a particular way.
25.12 (30 minutes)

This question tests the provisions of sections 10(1)(k)(i), 25B(3) and 25B(5).
On 31 March 2020 Ginger Sorbet died. He bequeathed his investments in
• local dividend-yielding shares, and
• local interest-bearing securities that are not ‘tax free investments’,

to the Prune Sorbet Trust (that was formed in accordance with an instruction in his will). It has a
year of assessment that ends on the last day of February. Its beneficiary is Prune Sorbet, Ginger
Sorbet 19-year-old unmarried grand-daughter. From a clause in the trust deed, she has only a
contingent right to both its income and its capital.
The trustees of the Prune Sorbet Trust have been given discretionary powers in relation to the
trust’s receipts and accruals and may award all, or some, of them to Prune Sorbet.
On 31 August 2020 Prune Sorbet’s mother, Brandy Sorbet, sold a rent-producing property to the
Prune Sorbet Trust at its current market value. Using the interest and dividends earned by the trust,
R180 000 of the purchase consideration was settled by it, in cash. The balance of the purchase
consideration was settled out of the amount obtained from a loan from a financial institution. This
loan bears interest at the current market rate. Normal security and repayment conditions are
contained in this loan agreement.
A different clause in the Prune Sorbet Trust deed applies to this investment. From this clause,
Prune Sorbet has a vested right to both the net rentals from this rent-producing property and to the
rent-producing property itself. But no rentals may be distributed to her until she attains the age of
25 years.
The receipts, accruals and expenses of the Prune Sorbet Trust for its 11-month financial period
ended 28 February 2021 and its financial year ended 28 February 2022 are as follows:
2021 2022
Local interest from non ‘tax free investments’ 28 000 180 000
Rentals 56 000 108 000
324 000 576 000
Less expenses incurred in producing the rentals 27 200 24 000
296 800 552 000
Less interest paid to the financial institution 96 000 180 000
200 800 372 000
Less local interest distributed to Prune Sorbet 12 000 156 000
188 800 216 000
Less local dividends distributed to Prune Sorbet 4 000 48 000
184 800 168 000
Less amount paid to Brandy Sorbet for the purchase of the rent-
producing property 180 000 –
4 800 168 000
Less financial institution loan repayment – 120 000
Retained 4 800 48 000
Prune Sorbet is a full-time university student. She is a resident of the Republic. The distributions
from the Prune Sorbet trust are her sole receipts and accruals.
You are required to determine the taxable incomes of Prune Sorbet and the Prune Sorbet Trust for
the 2021 and 2022 years of assessment.
25.13 (30 minutes)

This question tests definition of ‘gross income’ including its paragraph (a) and the provisions of
sections 7(3), 7(5), 7(6), 25B and 80A.
Vernon Wise
Bright Wise, Vernon Wise’s only son, is a professional university student. He is now 31 years old
and has recently commenced studying towards his fourth degree. He is a resident of the Republic.
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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
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.
25.14 (75 minutes)

This question tests the normal tax liability determination of a number of taxpayers including the
creator of a trust, the trust itself, his deceased estate and the beneficiaries of the trust. It tests the
apportionment issue and sections 5, 6, 7, 10(1)(i), 10(1)(k), 10(2)(b) and 25B.
On 1 March 2021 the Jewell Trust was created by Diamond Jewell. On the same day he sold to it
the following three assets:
• 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 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
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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.
25.15 (60 minutes)

This question tests the apportionment of certain ‘sections 7’ receipts and accruals. It tests the
definition of ‘gross income’ and sections 7, 10(1)(i), 10(1)(k), 10(2)(b), 11(a) and 25B and the
judgments from Ovenstone v SIR (1980 (2) SA 721 (A), 42 SATC 55) and Joss v SIR (1980 (1) SA
674 (T), 41 SATC 206).
As an accountant and a tax consultant in the KwaZulu-Natal southern districts, your task is to
service the changing needs of your established client base. This includes keeping your clients
informed of the latest case law relating to taxation and its implications on their personal tax
planning.
Certain recent developments have caused concern among some of your clients, a few of whom have
e-mailed you requiring clarification on the tax implications of circumstances as outlined by them.
The real cause for concern is the issue of apportionment being applied to income that may be
subject to the provisions of section 7. In this regard, the cases of Joss v SIR and Ovenstone v SIR
when the principle of possible apportionment was discussed, is of particular relevance.
Five clients, all residents of the Republic, have referred the following matters to you for
consideration and comment:
Milton Felixton
The Felixton Trust was created by an initial cash donation of R3 000 000 from the estate of the late
Grandfather Felixton.
Milton Felixton, the son of Grandfather Felixton, then sold an established sugar cane farm to the
Felixton Trust at its current market value of R9 000 000. Its purchase price of R9 000 000 was
settled to the extent of R3 000 000 from the initial donation made to the Felixton Trust and out of a
R6 000 000 long-term loan from Milton Felixton to it bearing interest at 3% (the current interest
rate on similar loans is 9%).
The sole beneficiary of the Felixton Trust is Blyth Felixton, Milton Felixton’s only son (who is a
minor). From the Felixton Trust deed, Blyth Felixton has a vested right to both its capital and its
annual receipts and accruals.
During the 2022 year of assessment the Felixton Trust earned a net amount from the sugar cane
farm of R1 980 000. Out of this net amount, interest due of R180 000 (R6 000 000 at 3%) was paid
by its trustees to Milton Felixton.
No distributions were made by the Felixton Trust to Blyth Felixton during the 2022 year of
assessment. All amounts received were reinvested by its trustees.
The Commissioner will 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 (3% vs 9%) is the
amount of the ‘disposition’ made by Milton Felixton when he sold the sugar cane farm to the Felixton
Trust.
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
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.
25.16 (60 minutes)

This question tests the taxation of an inter vivos trust including sections 5, 6, 7, 7C, 18, 25B, 54, 56,
64 and 80A and the judgments from CIR v Berold (1962 (3) SA 748 (A), 24 SATC 729) and SIR v
Geustyn, Forsyth and Joubert (1971 (3) SA 567 (A), 33 SATC 113).
On 1 March 2021 Fred Frame, a widower, aged 76 years, and a resident of the Republic, sold a
rent-producing property at its market value of R3 780 000 to the Frame Flat Trust that he had
recently formed. The purchase consideration was not settled, and the resulting loan account was not
charged with interest.
The beneficiaries of the Frame Flat Trust are his five grandsons and Fred Frame, himself. From the
trust deed, none of these beneficiaries has a vested right to its capital (or its annual earnings).
The Frame Flat Trust’s rent-producing property is bond free and gross rentals received by or
accrued to it for the 2022 year of assessment were R750 000. Deductible expenditure incurred by it
in producing these rentals was R120 000 during the 2022 year of assessment.
The trustees of the Frame Flat Trust distributed R540 000 (being six-sevenths of the net rentals
derived by it) equally to them. Each beneficiary was awarded R90 000.
Fred Frame’s five grandchildren are all minors and have no other receipts or accruals. They are all
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.
25.17 (75 minutes)

This question tests the normal tax model applied to a trust, its creator and its beneficiaries. It tests
apportionment and sections 7, 10(1)(h), 10(1)(i), 10(2)(b) and 25B.
Dene Harding, his wife Norma Harding,, and their daughters, Glenor Richmond (nèe Harding) and
Lyn Harding, immigrated to South Africa 12 years ago. He is at present 61 years old and she is
51 years old. They have three children:
• Frank Harding – at present aged 26 years, single and living outside South Africa. He has never
been ordinarily resident in South Africa.
• Glenor Richmond – at present aged 22 years, married and living with Duke Richmond, her
husband, in South Africa.
• Lyn Harding – at present aged 16 years, single, a scholar and living with her parents in South
Africa.
During the 2021 year of assessment and as part of Dene Harding’s estate plan, he created a trust.
He donated his investments in South African rent-producing properties to it. At the time of the
donation these properties had a market value of R10 800 000. In addition, he lent R1 200 000 cash
to it at an interest rate of 4% (the relevant market rate is 9%). The Commissioner has indicated to
him 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 rates of interest (4% vs 9%) is
the amount of the disposition.
At the same time, Glenor Richmond donated R3 600 000 to the trust. She had received an
inheritance from Iris Byrne, her late grandmother, and part of this inheritance, was used to finance
her donation to the trust.
The trust invested the R4 800 000 (R1 200 000 plus R3 600 000) cash in a local participating
mortgage bond. It is not a ‘tax free investment’.
During the 2022 year of assessment the trust had the following receipts and accruals:
• Rentals from South African properties of R960 000.
• Local interest from the participating mortgage bond of R528 000.
Under a condition contained in the trust deed, its trustees were required to award R144 000 a year
(at the rate of R12 000 a month) to each of the children. These monthly amounts were distributed
out of its combined net receipts and accruals.
In addition, in accordance with their discretionary powers, its trustees made the following lump-
sum distributions which awarded on 28 February 2022:
• To Frank Harding, R216 000.
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• To Glenor Richmond, R72 000.

• To Lyn Harding, R120 000.
• To Norma Harding, R312 000.
These lump sums were also financed out of the combined net receipts and accruals of the trust. The
balance of its receipts and accruals was retained, and after settling its interest liability, was reinvested.
Its trustees prepared the following receipts and accruals, payment and distribution schedule for it:
Total Rentals Local
interest
Receipts and accruals (see further below) 1 488 000 960 000 528 000
Less interest incurred 48 000 – 48 000
1 440 000 960 000 480 000
Less distributions
Annuities
– Frank Harding 144 000 96 000 48 000
– Glenor Richmond 144 000 96 000 48 000
– Lyn 144 000 96 000 48 000
Lump sums
– Frank Harding 216 000 144 000 72 000
– Glenor Richmond 72 000 48 000 24 000
– Lyn Harding 120 000 80 000 40 000
– Norma Harding 312 000 218 000 104 000
1 152 000 768 000 384 000
Net receipts and accruals (see above) 1 440 000 960 000 480 000
Retained and reinvested 288 000 192 000 96 000
For the local interest distributed, retained and reinvested by the trust, the trustees prepared the
following summary:
Total From From
(see above) Glenor Dene
Richmond’s Harding’s
donation loan
Amount earned 528 000 396 000 132 000
Less expenditure incurred 48 000 – 48 000
Interest available for distribution 480 000 396 000 84 000
Less distributions
Annuities
– Frank Harding 48 000 39 600 8 400
– Glenor Richmond 48 000 39 600 8 400
– Lyn Harding 48 000 39 600 8 400
Lump sums
– Frank Harding 72 000 59 400 12 600
– Glenor Richmond 24 000 19 800 4 200
– Lyn Harding 40 000 33 000 7 000
– Norma Harding 104 000 85 800 18 200
384 000 316 800 67 200
Retained 96 000 79 200 16 800
480 000 396 000 84 000
The trust’s capital and its reinvested amounts are to devolve equally upon the children who are
alive at the time of Dene Harding’s death. Should no children be alive at the time of his death, its
capital and its reinvested amounts would be awarded to an educational institution.
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.
25.18 (45 minutes)

This question tests the sections 25B and, in particular, the provisions of sections 25B(4), 25B(5)
and 25B(6). It also tests the normal tax model and sections 7, 10(1)(i), 10(1)(k) and 25B.
On 31 March 2020 Billiard Pool died. He bequeathed his investments in local dividend-yielding
shares and interest-bearing securities to the Cue Pool Trust. It had been formed in accordance with
an instruction in his will. It has a year of assessment that ends on the last day of February.
The beneficiary of the Cue Pool Trust is Cue Pool, the 16-year-old grandson of Billiard Pool. From
a clause in the trust deed, he has only a contingent right to its receipts and accruals and its capital.
Its trustees have been given discretionary powers in relation to its receipts and accruals and may
award all, or some, of them to him.
On 1 September 2020 Cue Pool’s father, Pocket Pool, sold a rent-producing property to the Cue
Pool Trust at its current market value. Using the interest and local dividends earned by it, R300 000
of the purchase consideration was settled by it, in cash. The balance of the purchase consideration
was left owing as a loan to it by him. This loan bears interest at a rate of 6%. (An arm’s length rate
would be 9%.)
A different clause in the Cue Pool Trust deed applies to this investment, and from this clause, Cue
Pool has a vested right to both the net-rentals from this rent-producing property and to the rent-
producing property itself. But no rentals may be distributed to him until he attains the age of
25 years.
The receipts, accruals and expenses of the Cue Pool Trust for its eleven-month financial period
ended 28 February 2021 and its financial year ended 28 February 2022 are as follows:
2021 2022
Local interest 60 000 120 000
Rentals 84 000 162 000
504 000 714 000
Less expenses incurred in producing the rentals 47 400 54 000
456 600 660 000
Less interest paid to Pocket Pool at 6% 108 000 216 000
348 600 444 000
Less interest distributed to Cue Pool 36 000 108 000
312 600 336 000
Less local dividends distributed to Cue Pool 6 000 102 000
306 600 234 000
Less amount paid to Pocket Pool for the rent-producing property 300 000 –
Retained 6 600 234 000
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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.
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.
25.19 (75 minutes)

This question tests the normal tax and dividends tax consequences of a real estate investment trust
and of local and non-resident unit-holders in it. It also tests the tax provisions relating to an equity
unit trust and its unit-holders. It tests sections 10(1)(i), 10(1)(k), 10B, 25BA, 25BB, 64E and 64F.
Spool Properties Limited
Spool Properties Limited’s shares are listed on the local stock exchange as shares in a real estate
investment trust. It is a resident. It had the following receipts and accruals for its 2022 year of
assessment (ended 28 February 2022):
Foreign dividends, the equivalent of 48 000
Foreign interest, the equivalent of 96 000
Local rentals 1 632 000
Foreign rentals, the equivalent of 408 000
2 400 000
Spool Properties Limited made capital gains of R7 600 (R47 600 – R40 000) on the sale of some of
its share investments and suffered capital losses of R2 800 (R21 200 – R24 000) on the sale of
other share investments.
Spool Properties Limited incurred the following expenses during its 2022 year of assessment:
Fees paid to its asset manager 120 000
Administration fees (deductible in the determination of its taxable income) 192 000
In the production of its local rentals 112 000
In the production of its foreign rentals 8 000
Of Spool Properties Limited’s foreign dividends, the equivalent of R48 000 (see above) that were
received by or accrued to it, the equivalent of R3 200 is exempt from normal tax under the
provisions of section 10B(2).
If some of the local rent-producing properties were owned by a taxpayer other than a real estate
investment trust, the following capital allowances would have been available:
• Under section 13(1), R400 000.
• Under section 13bis, R320 000.
• Under section 13quat, R240 000.

• Under section 13quin, R160 000.
• And under section 13sex, R80 000.
On 28 February 2022 Spool Properties Limited distributed a dividend of R1 900 000 to its unit
holders. As a result of this dividend distribution,
• Mitchell Penn, a local investor who, has a 9% interest in it, was awarded a dividend of
R171 000, and
• Coffee Grinder, a non-resident investor, who has a 3% interest in it, was awarded a dividend of
R57 000.
You are required to
1. determine the normal tax payable by Spool Properties Limited for its 2022 year of assessment,
2. the South African tax consequences to both Mitchell Penn and Coffee Grinder resulting from
their investment in Spool Properties Limited.
Spinning Properties Limited
Spinning Properties Limited is a resident of the Republic. Its equity shares are listed on the local
stock exchange. Its year of assessment ends on the last day of February.
Spinning Properties Limited owns a number of rent-producing properties. Its newer properties
qualify for the section 13sex capital allowance.
Spinning Properties Limited’s equity is structured on a linked unit basis. Each unit comprises a
share with a nominal value of R100 and a debenture with a nominal value of R900.
For Spinning Properties Limited’s 2022 year of assessment its financial records revealed the
following:
Gross rentals 12 000 000
Expenses and allowances
Expenses in producing the rentals 1 875 000
Debenture interest incurred 8 437 500
Deductible in the determination of taxable income administration expenses 600 000
Deductible in the determination of taxable income management fees 937 500
Section 13sex capital allowances 375 000
Section 11(e), the so-called wear-and-tear or depreciation capital allowance, on
its office equipment 31 250
Capital gains and losses
Capital gains
Rent-producing property (R4 625 000 – R3 875 000) 750 000
Local dividend-yielding shares (R887 500 – R812 500) 75 000
Office equipment (R200 000 – R187 500) 12 500
Capital losses
Rent-producing property (R2 350 000 – R2 500 000) 150 000
Local dividend-yielding shares (R237 500 – R262 500) 25 000
When Spinning Properties Limited sold its office equipment, in addition to the capital gain of
R12 500 that resulted (see above), a recoupment of its wear-and-tear and depreciation capital
allowance of R93 750 arose.
TRUSTS 581
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.
Alwaysfair Equity Unit Trust Limited

Alwaysfair Equity Unit Trust Limited’s financial year ends on the last day of February. For its
financial year ended 28 February 2022,
• local dividends of R6 000 000,
• foreign dividend the equivalent of R1 050 000, and
• local interest of R450 000,
accrued to it, and were received by it.
On 28 February 2022 Alwaysfair Equity Unit Trust Limited made a distribution to its unit-holders
of R6 750 000. This distribution was financed on a pro rata basis out of its ‘own’ accruals.
The R750 000 retained by Alwaysfair Equity Unit Trust Limited, resulted in
• local dividends of R600 000 not been distributed within a 12-month period of their accrual to,
and receipt by it,
• foreign dividends the equivalent of R120 000 not been distributed within a 12-month period of
their accrual to and receipt by it, and
• local interest of R30 000 not been distributed within a 12-month period of its accrual to, and
receipt by it.
Of the R750 000 Alwaysfair Equity Unit Trust Limited retained, it used R675 000 to settle the
following amounts it owed:
• To its asset manager of R450 000.
• For administration fees of R225 000 incurred by it.
Clarice Harvard is a unit-holder in the Alwaysfair Equity Unit Trust Limited. As a result of its
distribution of R6 750 000 to its unit-holders on 28 February 2022, she received R810 000.
You are required to
1. determine the normal tax payable by Alwaysfair Equity Unit Trust Limited, and
2. the normal tax and dividends tax payable by Clarice Harvard on her return from her investment
in it.
25.20 (90 minutes)

This question tests the taxable income determination of the ‘creator’ of a trust, distributions made
and expenses incurred by a trust, estate planning considerations and the application of section 7C of
the Income Tax Act. It also tests some value-added transactions.
Jonathan Small and his wife, Elizabeth Small, are married out of community of property. He is
52 years old and she is 47 years old. They have two children,
• Sarah Small, their daughter, is a 22-year-old full-time student, and
• Herbie Small, their son, is 15 years old, and still at school.
All family members are residents of the Republic.
In 2004 Elizabeth Small founded Dream Design (Pty) Limited. It carries on an interior decorating
business. She was its sole shareholder (see below) and is its managing director. It employs three
decorators and a general administrator. It has a February year end. It is a vendor.
In 2008 Jonathan Small and Elizabeth Small consulted an independent accountant, namely, Chris
Hosking, to assist them in setting up the Small Family Trust. He runs his own accounting practice
as a sole practitioner. He is not a vendor. They and him were appointed as its trustees. The three of
them are mandated to administer its assets and to provide for the financial needs of Jonathan Small,
Elizabeth Small and their children out of its receipts and accruals at their discretion.
TRUSTS 583
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.
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
26.1 (15 minutes)

This question tests issues relating to employees’ tax and provisional tax. It tests section 89quat and
paragraphs 2(1), 2(4), 6(1), 18(1)(c)(ii), 20, 21, 23 and 27 of the Fourth Schedule. It also tests
sections 187, 188 and 189 of the Tax Administration Act.
Fifteen statements on employees’ tax and provisional tax follow:
1. Employees’ tax is determined by an employer on an employee’s balance of remuneration.
2. An employer must pay the deducted employees’ tax to the local SARS’S office by the seventh of
the month following the month in which it was deducted.
3. A late payment to the local SARS’S office of deducted employees’ tax by an employer will be
subjected to both a 10% penalty and interest.
4. An employer may deduct less employees’ tax than he is required to do if the employee has
requested him to do so in writing.
5. An employee who has attained the age of 65 years should provide his employer in writing with
a statement to this effect.
6. To be a provisional taxpayer a taxpayer must earn a taxable income from interest, foreign
dividends or property rentals in excess of R30 000.
7. The first provisional tax payment is a voluntary payment.
8. The penalty tax provision – paragraph 27 – applies only to the second provisional tax payment.
9. If the second provisional tax payment is not made by the last day of the year of assessment a
penalty (additional tax) is levied at 20%.
10. If the estimate of taxable income used for the second provisional tax payment is less than the
taxpayer’s ‘elected’ basic amount and less than 90% of his taxable income for the year of
assessment, a penalty (additional tax) is levied at 20%.
11. Late provisional tax payments are subject to interest.
12. A corporate taxpayer with a taxable income in excess of R50 000 is subject to the legislation
that applies to the third provisional tax payment.
13. To be included in the ‘credit amount’ of a third provisional taxpayer, a third provisional tax
payment must be made within a seven-month period (February-year-end taxpayers) or a
six-month period (non-February-year-end taxpayers) from the end of the taxpayer’s year of
assessment.
14. Interest incurred on provisional tax payments is deductible in the determination of the
provisional taxpayer’s taxable income.
15. Interest that accrues to a third provisional taxpayer because his ‘credit amount’ exceeded his
normal tax for the year is to be included in his ‘income’.
You are required to decide whether the 15 statements above are true or false. Give a brief reason to
support your answer, if necessary.
585
26.2 (60 minutes)

This question tests issues relating to employees’ tax and provisional tax. It tests section 89quat
and paragraphs 1 (definition of an ‘employee’, an ‘employer’, a ‘provisional taxpayer’ and
‘remuneration’), 2, 13, 14, 15, 19, 20, 27, 28 and 30 of the Fourth Schedule. It also tests
sections 187, 188 and 189 of the Tax Administration Act.
Ten questions on employees’ tax and provisional tax follow:
1. When is a director of a private company a provisional taxpayer?
2. Is a gold mining company a provisional taxpayer?
3. Briefly, what are the duties of an employer as set out in the Fourth Schedule to the Income Tax
Act?
4. Should a company that has an assessed loss be a provisional taxpayer?
5. What additional tax, interest, and penalties may be imposed by the Commissioner on a
provisional taxpayer who fails to make provisional tax payments as required by paragraphs 17
to 27 of the Fourth Schedule to the Income Tax Act?
6. Must an educational institution register as an ‘employer’?
7. What does the legislation provide for an excess payment made by a provisional taxpayer?
8. What does the legislation provide for an excess payment made by a taxpayer who derives all
his receipts and accruals in the form of remuneration?
9. Would a foreign insurer with no employees in South Africa have to register as an ‘employer’?
10. Should employees’ tax be deducted from
• a bonus,
• local interest,
• an annuity,
• a legacy, and
• a rental?
You are required to provide brief answers to the above 10 questions.
26.3 (20 minutes)

This question tests the definition of a ‘personal service provider’ and the three provisional tax
payments. It also tests the provisions of section 23(k).
On 28 February 2022 Evan Sosmooth, a resident of the Republic, resigned from the employment of
KwaZulu-Natal Airways Limited. He had been in its employment for the six years prior to his
resignation. He was employed as its media manager. At the time of his resignation he was earning a
salary of R900 000 a year.
Shortly before Evan Sosmooth’s resignation, he formed a private company, Smooth Services (Pty)
Limited, also a resident of the Republic. It offers the services of a public relations officer for a fee.
He is its sole shareholder, sole director and sole employee. Its financial year ends on the last day
of February.
On 1 March 2022 KwaZulu-Natal Airways Limited awarded the contract for its public relations
work to Smooth Services (Pty) Limited. The fee for this contract was R1 200 000.
Smooth Services (Pty) Limited then paid a fee of R1 200 000 to Evan Sosmooth for being its
manager for its 2023 year of assessment.
You are required to discuss the employees’ tax and provisional tax implications that arise out of
the above transactions in the 2023 year of assessment. (Assume that the 2023 year of assessment
legislation is the same as the 2022 year of assessment.)
EMPLOYEES’ TAX AND PROVISIONAL TAX 587
26.4 (60 minutes)

This question tests the employees’ tax deductions from remuneration earned by certain employees.
An extract from the salaries book of Dress Shoes Limited for the month of February 2022 follows:
Name Gross Pension Provident Medical Other

salary fund fund scheme deductions
contributions contributions contributions
Kelly Last 45 000 – 3 600 2 700 750
Kyle Leather 22 500 – 1 800 1 200 450
Katelyn Lace 9 000 540 – – –
Rayner Sole 12 000 720 – 750 300
Simon Toecap 15 500 930 – 600 250
Rex Slipon 18 600 – – 450 –
Greer Heel 10 000 – – 600 100
A summary from the salaries book of Dress Shoes Limited for the 2022 year of assessment
(1 March 2021 to 28 February 2022) follows:
Name Gross Pension Provident Medical Other

salary fund fund scheme deductions
contributions contributions contributions
Kelly Last 585 000 – 43 200 32 400 9 000
Kyle Leather 292 500 – 21 600 14 400 5 400
Katelyn Lace 58 500 3 240 – – –
Rayner Sole 144 000 8 640 – 9 000 3 600
Simon Toecap 186 000 11 160 – 7 200 3 000
Rex Slipon 37 200 – – 900 –
Greer Heel 120 000 – – 7 200 1 200
Simon Toecap has attained the age of 65 years. All the other employees are under the age of
65 years. All employees are residents of the Republic.
Other relevant points are as follows:
• Kelly Last and Kyle Leather are members of a provident fund. They contribute 8% of their gross
salaries to it.
• Kelly Last’s ‘other’ deductions are his contributions to a retirement annuity fund. He contributes
R750 a month to this fund. Other than his bonus (see below), he had no other receipts or
accruals during 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
information contained in the ‘salaries’ book.
• Kyle Leather’s ‘other’ deductions (see above) are the premiums on his endowment policy. He
pays R450 a month.
• Kelly Last and Kyle Leather were each awarded a bonus during the year of assessment equal to
one month’s gross salary. No portion of this bonus was contributed to the provident fund. Their
bonuses were paid to them in December 2021.
• Katelyn Lace, Rayner Sole and Simon Toecap are all members of a pension fund. They
contribute 6% of their gross salaries to it.
• Katelyn Lace was employed by Dress Shoes Limited for only six months during the 2022 year
of assessment. She received a non-pensionable bonus during the year of assessment equal to half
a month’s gross salary. It was paid to her in December 2021.
• 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.
1. Kelly Last’s taxable income, and
2. the employees’ tax to be deducted from each employee’s February 2022 salary.
26.5 (60 minutes)

This question tests the penalty (additional tax) that is levied under paragraph 20 of the Fourth
Schedule when a provisional taxpayer has made default with his second provisional tax payment. It
also tests the paragraph 27 ‘penalty’.
None of the following provisional taxpayers has attained the age of 65 years. They are all residents
of the Republic:
Muscat Alexandrie
Muscat Alexandrie’s taxable income for the 2021 year of assessment was R540 000. His taxable
income for the 2022 year of assessment was assessed at R720 000. He had based his first two
provisional tax payments for the 2022 year of assessment on an estimated taxable income of
R630 000. (His provisional tax forms reflected his 2021 taxable income of R540 000.)
Tinta Baroccas
Tinta Baroccas estimated his 2022 year’s taxable income at R300 000 for his second provisional
tax payment, despite his last assessed taxable income (which was for the 2021 year of assessment)
being R360 000. (His provisional tax form reflected his 2021 taxable income of R360 000.) His
assessed taxable income for the 2022 year of assessment was R600 000. No portion of his taxable
income is from ‘remuneration’ as defined. He timeously paid a first provisional tax payment of
R33 300 determined on an estimated taxable income equal to his basic amount. He timeously paid
his second provisional tax payment based on his estimated taxable income.
Red Cabernet
Red Cabernet’s last assessed taxable income (which was for the 2021 year of assessment) was
R720 000. His taxable income for the 2022 year of assessment (as assessed) was R480 000. He had
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.)
26.6 (20 minutes)

This question tests the determination of the first, second and third provisional tax payments.
Justin Tyme, aged 35 years, and a resident of the Republic, is adamant that he must not become
liable for interest and penalties on all his provisional tax payments. He endeavours to pay the
correct amount of provisional tax, and he makes sure that the required payment is made by the
correct date.
Certain details of Justin Tyme’s tax transactions follow:
• His 2020 taxable income was R600 000.
• His 2020 tax assessment was received on 1 November 2020.
• His 2021 taxable income was R675 000.
• His 2021 tax assessment was received on 1 October 2021.
• His 2022 taxable income is R810 000.
• 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.
26.7 (40 minutes)

This question tests the penalties (additional tax) and interest that result when a provisional taxpayer
fails to make provisional tax payments.
Victoria Mountbatten is aged 55 years. She is a resident of the Republic. She carries on business in
her own name as a dealer in antiques. For the 2021 year of assessment she made a taxable profit
from her antique business of R310 000. She had no other receipts or accruals. She does not enjoy
any exemptions from normal tax or deductions in the determination of her taxable income, other
than those already deducted in arriving at her taxable profit for the year.
Victoria Mountbatten received her 2021 assessment on 1 August 2021. It reflected a taxable
income of R310 000.
Victoria Mountbatten’s taxable income for the 2022 year of assessment, consisting solely of the
taxable profits from her antique business, was R480 000.
Since Victoria Mountbatten is sick and tired of corrupt government officials misappropriating the
taxes she pays she did not make any provisional tax payments for the 2022 year of assessment. In
addition, she did not make her first provisional tax payment for the 2023 year of assessment that
was due no later than 31 August 2022. She was assessed on 1 November 2022, and her assessment
form confirmed her R480 000 taxable income.
You are required to determine the amount due to or from the Commissioner on 1 November 2022
for Victoria Mountbatten’s normal tax liability. Your answer must include penalties and interest
that may be due by her. Under paragraph (b) of the definition of the ‘prescribed rate’ the relevant
prescribed rate of interest is 7%.
26.8 (60 minutes)

This question tests the normal tax model being applied to a provisional taxpayer including
sections 5, 6, 6A, 6B, 8(1), 10(1)(i), 11F and 89quat, paragraph 21 of the Fourth Schedule and
paragraph 12A of the Seventh Schedule.
When Jan Augustus was made a director of Almanac (Pty) Limited, his employer, he requested you
to take over full responsibility of his own personal tax matters. Since he was then earning directors’
fees, certain fringe benefits, net rentals from a rent-producing property that he had recently
inherited, and because he had become a provisional taxpayer, he believed that his own tax affairs
were now too complicated for him to handle himself.
Jan Augustus is 55 years old. He is a resident of the Republic.
Details of Jan Augustus’s previous assessments follow:
• His 2020 assessment was received during August 2020. It reflected a taxable income of
R550 000 and an amount due to the Commissioner.
• 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:
Gross remuneration 882 948

This gross remuneration included the following amounts:
– Basic salary (code 3601) 540 000
– Sales achievement bonus (code 3605) 32 400
– Directors’ fees (code 3615) 118 000
– Use of motor car (code 3802) (note 1) 136 448
– Employer’s contributions to medical scheme (code 3810) (note 3) 22 500
– Premiums paid by his employer on insurance policies (note 4) 21 600
– Entertainment allowance (code 3706) (note 2) 12 000
Local interest from a non ‘tax free investment’ (code 4201) 34 078
Net rentals (code 4210) 46 200
His medical-scheme contributions (code 4005) (note 3) 21 000
‘Qualifying medical expenses’ paid but not recovered from the medical
scheme (code 4486) 60 988
Pension fund contributions at 7% of R540 000 (code 4001) 37 800
Retirement annuity fund contributions (code 4006) 1 680
Entertainment expenses actually incurred (note 2) 13 200
Fuel cost incurred for the private use of the motor car (note 1) 7 800
Employees’ tax (code 4103) (note 5) 208 800
Notes
1. Jan Augustus enjoyed the use of a motor car, that cost Almanac (Pty) Limited
R324 875 (R282 500 cash price plus value-added tax at 15% of R42 375), from 1 March 2021.
All maintenance costs are paid by it, but he paid all fuel costs for his private use amounting to
R3 900 a month. During the 2022 year of assessment he travelled a total of 20 000 kilometres
in this motor car, of which 6 000 were for business purposes.
2. Jan Augustus is expected to entertain certain of Almanac (Pty) Limited’s clients. He is
awarded R1 000 a month by it towards this entertainment. His actual expenditure incurred for
the 2022 year of assessment was R13 200.
3. Jan Augustus, and Julie Augustus, his wife and Octavia Augustus, their youngest child, are
members of the medical scheme. He and his employer each contributed R22 500 to the medical
scheme for their membership.
4. Almanac (Pty) Limited took out two insurance policies for the benefit of its employees, or for
their dependants or nominees. These two insurance policies are as follows:
• An employer-owned death or permanent disability risk policy through an insurance policy
with it being the policyholder.
• An employer-owned income-protection risk policy.
Both Almanac (Pty) Limited’s insurance policies award amounts upon the death, disability or
illness of an employee.
Under Almanac (Pty) Limited’s employer-funded death or permanent disability risk policy, the
award is made to it. A further arrangement then exists so that it is obligated to award the
amount of the insurance award to the employee.
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.
26.9 (60 minutes)

This question tests the employees’ tax to be deducted from the remuneration earned by certain
employees. It also tests the normal tax liability of a provisional taxpayer and his first, second and
third provisional tax payments. It tests sections 5, 6, 10(1)(i), 10(1)(k), 11(a) and 23(m) and
paragraphs 1, 2, 13, 14, 15, 20 and 21 of the Fourth Schedule.
After Ernest Old had worked as an audit manager for a firm of chartered accountants for a number
of years, he resigned on 28 February 2021 and commenced with his own practice the following
day.
For the months of March and April 2021, Ernest Old’s sole employee was his secretary, Paula
Helpbringer. Polly Kettle, a tea maker and messenger, joined his employment on 1 May 2021. Then
on 1 August 2021 he employed Kim Ledger as a bookkeeper. She keeps the books of certain of his
clients and also keeps his own books. The only other employee to become employed by him during
the 2022 year of assessment was Frank Greenpen. He was employed as a trainee accountant, and
was employed as from 1 September 2021.
The above employees’ are all under the age of 65 years. They are all residents of the Republic.
They each work a seven-and-a-half hour day. And they are all paid on a monthly basis. Details of
their salaries are as follows:
• Paula Helpbringer earned a salary of R25 500 a month.
• Polly Kettle earned a salary of R7 500 a month.
• Kim Ledger earned a salary of R18 000 a month.
• Frank Greenpen earned a salary of R24 000 a month.
On 31 August 2021 Ernest Old paid his first provisional tax payment for the 2022 year of assessment.
His ‘basic amount’ was his 2020 taxable income of R310 000. (His 2020 tax assessment was dated
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.
26.10 (30 minutes)

This question tests interest incurred by or interest accrued to a third provisional taxpayer including
sections 5, 6 and 89quat(1) and paragraph 23A of the Fourth Schedule and sections 187 and 188 of
the Tax Administration Act.
Bulla January is a provisional taxpayer. He is 30 years old, and is a resident of the Republic. His
taxable income for the 2022 year of assessment is R880 000.
Bulla January’s basic amount when he made his first and second provisional payments is based on
his previous year’s taxable income of R720 000.
Bulla January’s credit amount is made up of

• employees’ tax of R200 817,
• a first provisional tax payment of R11 104, and
• a second provisional tax payment of R5 552.
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 the amount due to the Commissioner, or refund due from the
Commissioner, in each of the situations that follow:
Situation 1
Bulla January fails to make a third provisional tax payment. He receives his assessment on
23 November 2022. It reflects a due date of 1 December 2022 and a second date of 31 December
2022.
Situation 2
Bulla January makes a third provisional tax payment on 30 September 2022 of R20 000. He
receives his assessment on 23 November 2022. It reflects a due date of 1 December 2022 and a
second date of 31 December 2022.
Situation 3
Bulla January makes a third provisional tax payment on 30 September 2022 of R44 000. He
receives his assessment on 23 November 2022. It had been prepared on 16 November 2022 and on
the same day an amount had been deposited into his bank account. It reflects a due date of
1 December 2022 and a second date of 31 December 2022.
Situation 4
Bulla January fails to make a third provisional tax payment by 30 September 2022. Shortly
afterwards, however, he establishes what his tax liability will be, and makes a third provisional tax
payment of R36 000 on 31 October 2022. He receives his assessment on 23 November 2022. It
reflects a due date of 1 December 2022 and a second date of 31 December 2022.
Situation 5
Bulla January fails to make a third provisional tax payment by 30 September 2022. But he makes a
third provisional tax payment of R16 000 on 31 October 2022. His assessment reflects a due date of
1 December 2022 and a second date of 31 December 2022.
Situation 6
Bulla January fails to make a third provisional tax payment by 30 September 2022. But he makes a
third provisional tax payment of R56 000 on 31 October 2022. He receives his assessment on
23 November 2022. It had been prepared on 16 November 2022 and on the same day an amount
had been deposited into his bank account. It reflects a due date of 1 December 2022 and a second
date of 31 December 2022.
26.11 (20 minutes)

This question tests the determination of interest under the provisions of section 89quat and the
amount due for an overpayment made on a late third-provisional tax payment.
Danube CC is a resident of the Republic. Its financial year ends on the last day of February. Its taxable
income was R800 000 for its 2022 year of assessment.
Danube CC’s basic amount, when it made its first and second provisional tax payments, is based on
its previous year’s taxable income of R580 000.
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.
of interest is 3%.
You are required to determine how much should have been refunded to Danube CC.
26.12 (30 minutes)

This question tests a late payment of the second provisional tax payment including penalties and
interest.
Roger Knowit-All, aged 48 years, is a resident of the Republic. He is a provisional taxpayer. No
portion of his taxable income is from ‘remuneration’ as defined.
Roger Knowit-All provisional tax returns and payments were previously completed by his
accountant. After he received his accountant’s last fee note, which he thought was excessive, he
decided to do his own provisional tax payments. He believed that the determinations were not too
difficult.
Roger Knowit-All paid his first provisional tax payment for the 2022 year of assessment on time
and his estimated taxable income was not less than his basic amount. This first provisional tax
payment was R1 016. He was pleased with himself and the money he had saved by completing his
own provisional tax payment.
Roger Knowit-All’s taxable income for the 2021 year of assessment was R150 000. He received his
2021 assessment on 20 November 2021 – it had a due date of 1 December 2021 and a second date
of 31 December 2021. He carefully filed this assessment so he could refer to it for his second
provisional payment for the 2022 year of assessment.
Unfortunately Roger Knowit-All completely forgot about his second provisional payment for the
2022 year of assessment and therefore did not complete a provisional tax return and he did not
make a second provisional tax payment. He also forgot to submit his 2022 income tax return.
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%.
26.13 (40 minutes)

This question tests the first, second and third provisional tax payments. It also tests interest incurred
and accrued relating to the third provisional tax payment.
May March, aged 61 years, is a resident of the Republic. She has provided you with the following
information in relation to the 2022 year of assessment:
Gross remuneration earned in the 2022 year of assessment 180 000

Non remuneration earned in the 2022 year of assessment 50 000
Taxable income for the 2022 year of assessment 230 000
Employees’ tax deductions: 1 March 2021 to 31 August 2021 7 012
Employees’ tax deductions: 1 September 2021 to 28 February 2022 6 674
May March’s 2020 tax assessment was received on 1 November 2020.
Taxable income – 2020 year of assessment 180 000
Her first provisional tax payment for 2022 year of assessment was paid and submitted
on 31 August 2021. She used an estimated taxable income of 180 000
Disclosed taxable income on the form 180 000
Amount of provisional tax paid ?? ???
May March’s 2021 tax assessment was received on 1 October 2021.
Taxable income – 2021 year of assessment 198 000
Her second provisional tax payment for the 2022 year of assessment was paid and
submitted on 28 February 2022. She used an estimated taxable income of 198 000
Disclosed taxable income on the form 198 000
Amount of provisional tax paid ?? ???
May March’s third provisional tax payment for the 2022 year of assessment was paid
and submitted on 30 September 2022. She used an estimated taxable income of 225 000
Amount of provisional tax payment ?? ???
May March’s fourth provisional tax payment – 2022 year of assessment was paid and
submitted on 31 October 2022. She used an estimated taxable income of 240 000
Amount of provisional tax payment ?? ???
May March’s 2022 tax assessment was received by her on 25 November 2022.
It confirmed that her taxable income was R230 000.
Its due date was 1 December 2022.
Its second date was 31 December 2022.
May March’s 2022 refund was prepared on 20 November 2022. It was deposited into her bank
account on 20 November 2022.
of interest is 3%.
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.
26.14 (40 minutes)

This question tests the first and second provisional tax payments including two penalties and
interest being incurred on the second provisional tax payment.
June March, aged 62 years, is a resident of the Republic. She has provided you with the following
information for the 2022 year of assessment:
Gross remuneration earned in the 2022 year of assessment 920 000
Gross non-remuneration earned in the 2022 year of assessment 330 000
Taxable income for the 2022 year of assessment 1 250 000
Employees’ tax deductions: 1 March 2021 to 31 August 2021 138 000
Employees’ tax deductions: 1 September 2021 to 28 February 2022 132 000
June March received her 2020 tax assessment on 1 October 2020.
Her taxable income for the 2020 year of assessment was 960 000
June March’s first provisional tax payment for the 2022 year of assessment was paid
by her on 31 August 2021.
The estimated taxable income used by her was 960 000
The disclosed taxable income on the form was 960 000
The amount of provisional tax that she paid was ?? ???
June March received her 2021 tax assessment on 1 September 2021.
Her taxable income for the 2021 year of assessment 1 020 000
June March’s second provisional tax payment for the 2022 year of assessment was
paid by her on 31 March 2022.
The estimated taxable income used by her was 960 000
The disclosed taxable income on the form was 1 000 000
The amount of provisional tax that she paid was ?? ???
June March’s 2022 tax assessment was received by her on 25 July 2022.
June March’s 2022 tax assessment’s due date is 1 August 2022.
June March’s 2022 tax assessment’s second date is 31 August 2022.
June March’s 2022 tax assessment’s amount due by her was settled by her on 31 August 2022.
You are required to determine the amount that June March paid on 31 August 2022 to settle her
2022 normal tax liability including any penalties (additional tax) and interest that she may be liable
for. Under paragraph (b) of the definition of the ‘prescribed rate’ the relevant prescribed rate of
interest is 7%.
26.15 (60 minutes)

This question tests the first and second provisional tax payments including two penalties and
interest being incurred on the second provisional tax payment. It also tests the third provisional tax
payment being overpaid, but being late.
Throughout the 2022 year of assessment, Megan Bucks, aged 45 years, and a resident of the
Republic, earned a salary of R30 000 a month. Employees’ tax of R5 140 was deducted from her
salary each month.
For the period 1 March 2021 to 31 August 2021 local interest of R37 800 accrued to Megan Bucks.
Besides her salary and this local interest no other amounts were received by or accrued to her
during this period. She did not make a first provisional tax payment for the 2022 year of assessment
by 31 August 2021.
On 1 September 2021 Megan Bucks purchased a rent-producing property. Net rentals of R41 000
accrued to her during the period 1 September 2021 to 28 February 2022. During this same period
local interest of R5 000 accrued to her – the decline in it was a direct result of her using most of her
savings to finance the purchase of her rent-producing property.
Megan Bucks did not make a second provisional tax payment by 28 February 2022. But she did
make a second provisional tax payment on 31 March 2022. In the determination of the amount of
this payment, she estimated her taxable income at R365 000.
Megan Bucks had received her 2021 assessment on 1 November 2021. A taxable income of
R375 000 was reflected on it and it revealed that an amount was due to the Commissioner.
The form Megan Bucks used to submit her second provisional tax payment for the 2022 year of
assessment (the IRP 6 form) indicated her taxable income for the latest preceding year of assessment
at R375 000.
Megan Bucks did not make a further voluntary provisional tax payment by 30 September 2022. But
she did make voluntary provisional tax payments of R20 000 on 31 October 2022 and R2 203 on
30 November 2022.
Megan Bucks received her 2022 tax assessment on 24 December 2022. It had been prepared on
20 December 2022 and on this day an amount had been deposited into her bank account by the
Commissioner. The assessment had a due date of 1 January 2023 and a second date of 31 January
2023.
At no stage had Megan Bucks been notified by the Commissioner that she was a provisional
taxpayer.
You are required to determine how much was deposited into Megan Bucks’s bank account on
20 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%.
26.16 (60 minutes)

This question tests the first provisional tax payment including a penalty, the second provisional tax
payment including penalties and interest and the third provisional tax payment including interest.
The taxpayer made default with all three of his provisional tax payments.
Rusty Fall is 55 years old. He is a resident of the Republic.
Rusty Fall submitted and paid his first provisional tax payment for the 2022 year of assessment on
30 September 2021. His provisional tax form (IRP 6) reflected a taxable income for the 2020 year of
assessment of R300 000. He had received his 2020 assessment on 1 January 2021. In the determination
of his first provisional tax payment he had estimated his taxable income at R250 000.
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.
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.
26.17 (60 minutes)

This question tests the first, second and third provisional tax payment including penalties and interest.
Tom, Dick, Harry and Bob are grandsons of the late William Smith. They are all residents of the
Republic. They each inherited R400 000 on the death of their grandfather. Under his last will and
testament, they are not permitted to use the capital they inherited until they attain the age of
21 years. Their respective fathers were appointed as asset managers to take care of the capital and
to invest it on their behalf. A summary of the information obtained from their fathers follows:
Tom Dick Harry Bob

Age (at present) in years 17 16 16 15
Inheritance awarded 800 000 800 000 800 000 800 000
2020 taxable income 120 000 115 000 100 000 130 000
2021 taxable income 110 000 110 000 99 000 120 000
2022 taxable income 104 000 105 000 106 000 110 000
August 2021 – provisional tax payment 2 863 716 505 3 763
February 2022 – provisional tax payment 2 870 220 Nil 3 770
August 2022 – first provisional tax payments
for the 2023 year of assessment ? ??? ? ??? ? ??? ? ???
September 2022 – third provisional tax
payments for the 2022 year of assessment 2 273 Nil Nil Nil
2022 rebate entitlement 15 714 15 714 15 714 15 714
Employees’ tax deductions Nil Nil Nil Nil
Notes
1. The taxable incomes of Tom, Dick, Harry and Bob consist solely of investment income.
2. Dick Smith’s second provisional tax payment for the 2022 year of assessment was determined
as follows:
Last available taxable income (2021) 110 000

But since interest rates had dropped, his 2022 taxable income was estimated at 92 500
Schedule tax payable on a taxable income of R92 500
On R92 500 at 18% 16 650
Normal tax payable 16 650
Less rebate 15 714
Normal tax liability 936
Less first provisional tax payment 716
Second provisional tax payment 220
3. Since Harry Smith’s taxable income had dropped to below R100 000 in the 2021 year of
assessment, his father was under the impression that he no longer needed to complete
provisional tax returns. His father thus decided not to make an estimate of his taxable income
and not to submit a return on or before 28 February 2022.
4. Bob Smith’s second provisional tax payment was based on an estimated taxable income of
R100 000.
5. Bob Smith’s father decided not to make a third provisional tax payment. He hopes that the
assessment will soon arrive to enable him to settle an amount that may be due.
6. None of the grandsons had received his 2022 tax assessment by 31 October 2022. The 2022
taxable incomes disclosed are those as determined by Grant Stevens, an accountant. They are
correct.
of interest is 3%.
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.)
26.18 (40 minutes)

This question tests certain fringe benefits. It also tests employees’ tax. And it tests provisional tax
payments and the judgments from ITC 1785 ((2005) 67 SATC 98) and ITC 1824 ((2008)
70 SATC 27).
Jacques Coquilles is a retired university professor. He is now 87 years old. His taxable income is
made up of his pension and the returns from his various investments including taxable dividends
and local interest and royalties from a prescribed university text book.
Jacques Coquilles lost his driver’s licence two years ago. Mary Coquilles his wife, aged 85 years,
has never driven a car. He is unable to use public transport. He therefore employs Izaak Walton-
Pike on a full-time basis as his chauffeur (a person employed to drive a car).
Izaak Walton-Pike’s employment contract with Jacques Coquilles provides for the following
benefits:
• A cash salary of R9 000 a month (for the 2022 year of assessment).
• ‘Free’ accommodation in a furnished three-roomed ‘granny’ flat situated at Jacques Coquilles’
residence. (It comes with free power or fuel.) Jacques Coquilles owns his residence. This
‘granny’ flat could be let on an arm’s length basis at a rental of R5 500 a month. Jacques
Coquilles has determined that Izaak Walton-Pike’s use of the ‘granny’ flat costs him (Jacques
Coquilles) R600 a month.
• ‘Free’ meals. They are prepared by Jacques Coquilles’s housekeeper and are served to Izaak
Walton-Pike in the ‘granny’ flat. Mary Coquilles has estimated that it costs R3 600 a month to
feed Izaak Walton-Pike.
• Free washing and ironing facilities. This service costs Jacques Coquilles R200 a month.
• The free use of a cellular telephone. It is used wholly or mainly by him for business purposes
(Jacques Coquilles telephones Izaak Walton-Pike when he needs to be driven to, or fetched
from, a venue). Izaak Walton-Pike has, however, the incidental use of it. It costs Jacques
Coquilles R850 a month to provide Izaak Walton-Pike with this cell phone.
• The infrequent and incidental use of Jacques Coquilles’s motor car. It cost R343 850 (R299 000
plus value-added tax at 15% of R44 850) on 1 March 2021. Jacques Coquilles has determined
that the free for use of his motor car by Izaak Walton-Pike costs him (Jacques Coquilles) R1 250
a month.
Izaak Walton-Pike’s ‘remuneration proxy’ is R90 300.
Izaak Walton-Pike is 39 years old. His earnings (and benefits) from Jacques Coquilles are his sole
receipts and accruals. No amounts are deductible in the determination of his taxable income.
Jacques Coquilles paid his first provisional tax payment for the 2022 year of assessment timeously
(before 31 August 2021). He had estimated his taxable income at an amount equal to his basic
amount of R625 000.
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.
26.19 (60 minutes)

This question tests all three provisional tax payments with the amount of the third provisional tax
payment being sufficient so as to not disadvantage the taxpayer. It also tests sections 5, 6, 6A,
10(1)(i), 11F, 20 and 89quat and paragraph 12A of the Seventh Schedule. It tests the accrual of
interest under the provisions of section 89quat(4) for a provisional taxpayer who may not be a
‘third’ provisional taxpayer.
Charles Glass
Charles Glass is 35 years old. He is a resident of the Republic. He is employed as a tutor at a local
university.
Three years ago Charles Glass married. Amber Glass, his wife, and himself moved into a house that
he had purchased. Instead of selling the flat that he had previously lived in, he kept it as an
investment. As a result of earning ‘net’ rentals, he became a provisional taxpayer in the 2020 year
of assessment.
Charles Glass opened a ‘beer tavern’ near the campus during March 2021 in an attempt to
supplement his earnings from the university. It trades from leased premises and is run by ‘senior’
university students who he employs on a part-time basis.
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:
Gross salary 258 000

Pension fund contributions (at 5% of salary) 12 900
Medical scheme contributions 14 400
Employees’ tax deductions 28 600
Net rentals earned 13 900
Gross local interest earned from a non ‘tax free investment’ 29 400
‘Qualifying medical expenses’ paid and not recovered from the medical scheme 20 652
Net tax-deductible loss from his ‘beer tavern’ business 39 000
Charles Glass’s employer also contributed R14 400 to the medical scheme for the membership of
Amber Glass and himself.
Under paragraph (a) of the definition of the ‘prescribed rate’ the relevant prescribed rate of interest
is 3%.
You are required to determine the amount of Charles Glass’
1. first provisional tax payment for the 2022 year of assessment,
2. second provisional tax payment for the 2022 year of assessment,
3. first provisional tax payment for the 2023 year of assessment on the assumption that he had not
been assessed for the 2022 year of assessment by 31 August 2022 and that the employees’ tax
deducted from his remuneration for the 2023 year of assessment was R11 800 at 31 August
2022, and
4. ‘third’ provisional tax payment for the 2022 year of assessment that should be paid on
30 September 2022 to ensure he is not prejudiced under the ‘third provisional tax’ system.
Augustus De Cade
Augustus De Cade, aged 33 years, is due to make his third provisional tax payment on
30 September 2022. He has determined his taxable income for the 2022 year of assessment to be
R48 000. In the determination of this R48 000 taxable income, he has deducted a R42 000 loss that
he has suffered as a result of participating in a tax-avoidance arrangement. It is unclear whether the
R42 000 is ‘correctly’ deductible in the determination of his taxable income. The success of this
particular tax-avoidance arrangement is dependent on a number of questionable issues.
Augustus De Cade’s problem is as follows:
• If he makes a third provisional tax payment based on R90 000 and his taxable income when
assessed is R48 000 he will not earn interest on the overpayment since he would fall outside the
‘third provisional’ tax system.
• If he fails to make a third provisional tax payment, and if his assessed taxable income is
R90 000, he will be liable for the payment of interest under the provisions of section 89quat(2).
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%.
26.20 (90 minutes)

This question tests the many fringe benefits including the use of a motor vehicle, free meals, cheap
assets, contributions to retirement funds and residential accommodation. It also tests a severance
benefit, the general deduction formula and some value-added tax provisions. And it tests the
judgments from Port Elizabeth Electric Tramway Co Ltd v CIR (1936 CPD 241, 8 SATC 13), CIR
v Golden Dumps (Pty) Ltd (1993 (4) SA 110 (A), 55 SATC 198) and CIR v Lever Bros & Unilever
Ltd (1946 AD 441, 14 SATC 1).
Speak Easy Limited is listed on the Johannesburg Stock Exchange. It was formed in South Africa
in 2008. It has subsequently expanded its operations internationally, with branches and subsidiaries
in a number of other African countries, including Kenya and Nigeria. It has a 30 June financial year
end. It is managed in South Africa. It is a Category B vendor.
Speak Easy Limited specialises in the maintenance and repairing of cell phone masts. It provides its
services to a number of major cellular communications providers. In all towns in which it operates,
it employs a number of technicians, whose responsibility is to maintain its customers’ cell phone
masts in that area. To perform their duties, it provides each technician with the use of a single-cab
light delivery vehicle. Each technician has full business and private use of it. This use is granted to
him from the date that it is purchased until it is replaced after five years or until he no longer
qualifies to use it.
Marvin Maartens
Marvin Maartens, a 59-year-old South African resident, was employed as a technician with
responsibility for the maintenance of the cell phone masts of Speak Easy Limited’s customers in
the Midrand area, close to where he lived. He is not a vendor. The current light delivery vehicle he
has use of had been purchased, with a maintenance plan, by Speak Easy Limited under a suspensive
sale agreement on 4 January 2021. Its retail market value on this date was R333 500 (R290 000
plus value-added tax at 15% of R43 500). It is Speak Easy Limited’s policy to brand its light
delivery vehicles used by its employees by having its name and other marketing material painted on
its light delivery vehicles.
Marvin Maartens travelled 10 000 kilometres a month in the light delivery vehicle that he has use
of. He kept a logbook which was reviewed on a monthly basis by John Duff, Speak Easy Limited’s
internal auditor. He travelled a total of 11 400 kilometres in it for private purposes over the six-
month period from 1 March 2021 to 31 August 2021. He paid for all its fuel costs. Its open market
value on 31 August 2021 was R280 000.
On 31 August 2021 Marvin Maartens was summoned to a disciplinary hearing, following which his
employment with Speak Easy Limited was terminated with immediate effect. He was paid his final
month’s cash salary of R30 000. He was also paid R60 000 in lieu of his notice period. This is the
only lump-sum amount he has ever received from an employer.
Marvin Maartens had planned for his retirement by contributing R1 500 (5% of his cash salary) to a
retirement annuity fund. Speak Easy Limited had matched his contribution to this retirement
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,
2. determine, with supporting reasons, Marvin Maartens’s balance of remuneration for

employees’ tax purposes for June 2019,
3. discuss the normal tax consequences for Marvin Maartens in the 2022 year of assessment of
• the R60 000 paid to him by Speak Easy Limited on 31 August 2021, and
• his income-protection insurance policy.
4. draft a memorandum to Speak Easy Limited providing, with reasons, all the value-added tax
consequences for it for the tax period ending 30 June 2021 of the following:
• its ‘company-branded’ light delivery vehicles,
• the refreshments, accommodation and golf shirts purchased for its team-building event, and
5. advise Juba Adeyemi on the South African normal tax consequences for her of the payments
made for her by Speak Easy Limited. Her remuneration proxy is R787 300. Ignore double tax
agreements.
(SAICA adapted.)
CHAPTER 27
DONATIONS TAX
27.1 (15 minutes)

This question tests the donations tax legislation as set out in Part V of the Income Tax Act
including sections 54 to 64 inclusive.
Fifteen statements on donations tax follow:
1. Donations tax is payable on a progressive tax basis.
2. Donations tax is payable on a life-time cumulative basis.
3. Donations tax is levied at a flat rate of 20%.
4. Donations tax is payable on the cost price of the donated property.
5. Donations tax is payable on the value of the donated property.
6. A public company is exempt from donations tax.
7. A private company is exempt from donations tax.
8. A close corporation is exempt from donations tax.
9. A corporate taxpayer may make casual gifts each year of assessment up to the value of
R10 000 free from donations tax.
10. A natural person may make donations each year of assessment up to the value of R100 000
free from donations tax.
11. Donations made by a wife are deemed to be made by her husband.
12. For donations tax purposes a husband and wife are two separate taxpayers.
13. If a body corporate makes a donation at the instance of a person, it is deemed to be made by
that person.
14. A sale of property at a price below its true market value is deemed to be a donation to the
extent of the advantage gained by the purchaser.
15. Donations tax is payable on a ‘disposition’ when the word ‘disposition’ is given its case law
meaning in relation to the term ‘donation, settlement or other [similar] disposition’ as used in
section 7 of the Income Tax Act.
You are required to give a true or false answer to the above 15 statements. Support your answer
with a brief reason, if necessary.
27.2 (25 minutes)

This question tests the valuation of certain limited interests that have been donated. It tests
sections 54, 56, 62 and 64.
Hamish Givalot
On 30 November 2021 Hamish Givalot donated a property valued at R2 500 000 to James Givalot,
his only son, subject to a usufruct for life in favour of Harriet Givalot, his wife.
Hamish Givalot will be 60 years old on his next birthday, Harriet Givalot will be 51 years old on
her next birthday, and James Givalot 30 years old on his next birthday.
This was the only donation made by Hamish Givalot during the 2022 year of assessment.
You are required to determine the donations tax payable by Hamish Givalot.
607
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.
27.3 (20 minutes)

This question tests the determination of donations tax payable or exemptions from donations tax on
donations made by a natural person including sections 54, 56, 62 and 64.
On 31 October 2021, Sesame Millet, a resident of the Republic, retired from farming. He attained
the age of 69 years on 31 October 2021. As a result of his retirement he made the following
donations to his friends and family:
• On 1 November 2021, he donated his farm to Barley Millet, his son, and Rye Millet, his
grandson. He donated the farm to Rye Millet (21 years of age), subject to its use being given to
Barley Millet (44 years of age), for the rest of his (Barley Millet’s) life. If it had been sold by a
willing seller to a willing purchaser under an arm’s length transaction on 1 November 2021 it
would have been sold for R6 000 000.
• On 5 November 2021, he donated a tractor with a market value of R86 000 to Bran Kelloggs, his
neighbour. It originally cost him R120 000 when he had purchased it three years ago. It had a
‘nil’ tax value.
• On 12 November 2021, he donated five cows with a market value of R80 000 (R16 000 each) to
Umalusi IZinkomo, an employee in return for his long and dedicated service. They had no cost
to Sesame Millet since they had been born on the farm.
• On 30 November 2021, he donated his holiday cottage near Port Shepstone to Rosemary Millet,
his wife, aged 66 years on her next birthday. It had a market value of R1 840 000 on
30 November 2021.
• On 5 December 2021, he donated an annuity of R60 000 (payable at the rate of R5 000 a month)
to his sister Lavender Sorghum (58 years of age). It is payable until 5 December 2030 or until
the date of her death, whichever date occurs first.
You are required to determine the amount of donations tax payable by Sesame Millet on each of
the above donations.
27.4 (20 minutes)

Adam Angel who is a resident of the Republic made the following donations during the 2022 year
of assessment:
• Adam Angel donated cash of R5 000 to the local university’s charity rag fund.
DONATIONS TAX 609
• 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.
27.5 (30 minutes)

Barney Collins who has been a resident of the Republic his entire life carried out the following
transactions during the 2022 year of assessment:
• On 10 April 2021 he exchanged (swapped) his motor car valued at R250 000 for Charlie
Collins’s motor car valued at R210 000. Charlie Collins is his older brother.
• On 12 April 2021 he gave his wife, Althea Collins, as a birthday present, a pair of diamond
earrings that he had purchased for R3 000 at an auction sale some years ago and that he had kept
to give to her on a suitable occasion. These earrings were on 12 April 2021 insured at their
estimated replacement and market value of R8 000.
• On 26 June 2021 he gave his son, Danny Collins, a motorcycle valued at R30 000. He had
promised him this gift if he passed his half-year examinations.
• On 27 June 2021 he gave his daughter, Emma Collins, furniture no longer required in their
family home to enable her to set up her own flat. This furniture had cost him R55 000 some
years ago and would now have sold for R39 000 if he had sold it under an arm’s length
transaction.
• During September 2021 he learnt that an ex-employee, Freddy Farmer, who had retired from his
service five years earlier, had died and that his widow was in difficult financial circumstances.
He contracted on 27 September 2021 to award her R1 000 a month for life as from 1 October
2021. He had never before awarded a similar amount.
• On 25 December 2021 he gave Christmas presents to
– Althea Collins – an ornament that had cost him R6 000,
– Danny Collins – a surfboard that had cost him R12 000, and
– Emma Collins – a puppy (a young dog) that had cost him R4 000.
• On 25 December 2021 he attended a Christmas service at a local church. At this service he
donated R1 000 to it.
• 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.
27.6 (40 minutes)

donations made by a natural person including sections 54, 56, 59, 60, 62 and 64.
After Marigold Strike consulted Wiseman Marvel, a fortune-teller (a person who claims to predict
future events in a person’s life) on 23 March 2021, she purchased lotto tickets twice every week.
She then won a prize of R1 000 000 on 1 August 2021.
To ensure that Marigold Strike would win this prize she had given R60 000 to Able Khulu, a ‘witch
doctor’ (a tribal magician), on 1 May 2021. This was done on the instructions of Sipho Masilele,
another ‘witch doctor’, whom she had consulted. Able Khulu had not been consulted by her. She
had paid R5 000 to Sipho Masilele for the services he rendered to her.
From 1 March 2021 to 1 May 2021 neither Peter Strike nor his wife, Marigold Strike, made any
donations.
All members of the Strike family other than Peter Strike and Marigold Strike have their birthdays
in June.
On 7 June 2021 Peter Strike incurred R108 000 on purchasing birthday gifts for members of the
family and Marigold Strike incurred R53 000 on purchasing birthday gifts for members of the
family.
Overjoyed at Marigold Strike’s success in the lotto competition (see above), she celebrated by
carrying out the following transactions on 15 September 2021:
• Marigold Strike donated R100 000 to her ex-husband, Lucky Miser.
• Marigold Strike donated R20 000 to her current husband, Peter Strike.
• Marigold Strike donated R30 000 to their younger son, Richard Strike.
• Marigold Strike cancelled an acknowledgement of debt of R50 000 from her elder son, Tim
Miser. She had lent him R50 000 interest-free to enable him to complete a university degree.
• Marigold Strike donated R70 000 to an ‘approved’ public benefit organisation.
• Marigold Strike settled her account with Hank Rub, her masseur (a person who provides a
massage professionally). She owed him R40 000.
DONATIONS TAX 611
• 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.
27.7 (25 minutes)

donations made by a natural person including sections 54, 55 (definition of a ‘donation’), 56, 58, 62
and 64.
Gift Gazu is a generous man. During the 2022 year of assessment he carried out the following (in
the following order):
• Gift Gazu allowed Gogo Gazu, his aged mother, to live in his home free of charge. He estimated
that allowing her to do so cost him R97 200 for the year.
• Gift Gazu paid for a six-month holiday abroad undertaken by Mfundo Gazu, his son, who had
recently graduated from the local university. This gesture cost him R63 000.
• Gift Gazu purchased a second-hand motor car from a used-car dealer for R103 500 (R90 000
plus value-added tax of R13 500) for Precious Gazu, his daughter, who was a first-year full-time
student at the local technikon.
• Gift Gazu gave Beauty Gazu, his wife, silver jewellery on their twenty-first wedding
anniversary. It cost him R15 000.
• Gift Gazu spent R15 000 on Christmas gifts for his family members, including Beauty Gazu’s
Christmas gift that cost him R4 000.
• Gift Gazu sold his golf clubs with an open market value of R5 000 to Umgadli Wegalofu, his
nephew, a keen young golfer for R500.
• Gift Gazu wrote off a R2 000 interest-free loan to Baba Omwcane, his half-brother.
• Gift Gazu gave Kuhlan Zekile, his neighbour’s son R5 200 for washing his (Gift Gazu’s) motor
car every Sunday.
• Gift Gazu gave the usufruct in a property valued at R500 000 to Baba Omwcane (aged 40 years
on the date of this donation), and the bare dominium in it to his Mfundo Gazu (aged 20 years on
the date of this donation). He was 45 years old when he made these two donations.
• Gift Gazu gave his Mfundo Gazu (who was then aged 20 years) one-fifth of the profits of his
(Gift Gazu’s) business for the remainder of Iziqu Gazu life. On the same day, he gave Precious
Gazu (who was then aged 18 years), the one-fifth share in his business subject to Mfundo
Gazu’s entitlement to the profits from it. Its average annual profit, before tax, over the past three
years was R1 000 000. It was valued by an independent third party on the date of the donation at
R3 500 000. He was 46 years old when he made these two donations.
You are required to determine the amount of donations tax payable on each donation Gift Gazu
made during the 2022 year of assessment.
27.8 (15 minutes)

This question tests the comparison between an outright donation and a donation of limited interests.
It tests sections 54, 56, 62 and 64.
On 1 March 2021 Stinkin Rich, a wealthy man, donated the usufruct on a rent-producing property
owned by him to his son, Harry Rich, and the bare dominium in it to his grandson, Nicky Rich. At
the date of the donation, the rent-producing property had a market value of R8 000 000, and
• Stinkin Rich was 65 years old,
• Harry Rich was 40 years old, and
• Nicky Rich was 15 years old.
Stinkin Rich has no other children or grandchildren and has not made a donation in the past.
You are required to
1. determine the donations tax payable by Stinkin Rich on the donations of the usufruct and the
bare dominium,
2. determine the donations tax payable if Stinkin Rich had
– donated the full ownership of the rent-producing property to his son, Harry Rich, or
– donated the full ownership of the rent-producing property to his grandson, Nicky Rich, and
3. comment on the result obtained by him by making simultaneous donations of the usufruct and
the bare dominium in the rent-producing property.
27.9 (20 minutes)

This question tests the determination of donations tax or exemptions from donations tax on
donations made by a natural person including sections 54, 56, 59, 62 and 64.
During the 2022 year of assessment James Joner made the following donations in the following
order:
• On 1 March 2021, James Joner donated R45 000 in cash to Jill Fever, his severely ill sister, to
enable her to undergo medical treatment that she could not otherwise afford.
• On 2 May 2021, James Joner donated R5 000 in cash to Pheka Geza, his faithful domestic
employee, as a result of many years of devoted service.
• On 3 June 2021, James Joner donated investments valued at R30 000 (original cost R18 000) to
his wife, Joan Joner.
• On 4 July 2021, James Joner donated R110 000 cash to his son, Andrew Joner.
• On 5 August 2021, James Joner donated to the Barry Joner Trust, cash of R7 500 000. It was
created by him to provide a fund for the education and maintenance of the three minor children
of his deceased son, Barry Joner, who had died in March 2021.
• On 6 September 2021, James Joner donated a plot of land to a church. Its fair market value was
R960 000 (original cost R500 000).
• On 7 October 2021, James Joner donated a motor car valued at R80 000 (original cost
R300 000) to his older brother, Harold Joner.
On 8 November 2021 Joan Joner (James Joner’s wife) made a donation of R200 000 to Angus
Joner, her grandson (the son of Andrew Joner (see above)), so as to assist him in purchasing a
property.
You are required to determine the total amount of donations tax payable by James Joner and Joan
Joner on the donations they made during the 2022 year of assessment.
DONATIONS TAX 613
27.10 (20 minutes)

This question tests the determination of donations tax or exemptions from donations tax on donations
made by a natural person including sections 54, 55 (definition of ‘fair market value’), 56, 62 and 64.
Garfield Fyfe died on 20 February 2022, aged 65 years. He was survived by Savannah Fyfe, his
wife, and Bengal Fyfe and Selkirk Fyfe, their two sons. The following donations were made by him
during the last year of his life:
• On 25 February 2021, Garfield Fyfe donated R20 000 to Sike Tshani, his loyal gardener on the
date of his retirement.
• On 27 February 2021, Garfield Fyfe donated R110 000 cash to Bengal Fyfe, then aged 39 years,
to enable him to set up his own business.
• On 1 May 2021, Garfield Fyfe donated R30 000 in cash to Savannah Fyfe.
• On 2 June 2021, Garfield Fyfe donated R4 000 in cash to a political party.
• On 3 January 2022, Garfield Fyfe donated to Savannah Fyfe an insurance policy on his life
under a duly registered post-nuptial contract. Its surrender value was R1 000 000.
• On 4 February 2022, Garfield Fyfe donated to Bengal Fyfe, then aged 40 years, the usufruct on a
rent-producing property valued at R1 500 000 (original cost R900 000). The net rentals from it
are R85 000 a year.
• On 5 February 2022, Garfield Fyfe donated to Selkirk Fyfe, the bare dominium on his farm,
retaining its usufruct for himself. If it was sold by a willing seller to a willing purchaser under an
arm’s length transaction it would sell for R12 000 000 (original cost R3 000 000).
Garfield Fyfe attained the age of 65 years on 2 February 2022. Selkirk Fyfe attained the age of
38 years on 10 January 2022.
You are required to determine the donations tax payable by Garfield Fyfe on the above donations.
27.11 (30 minutes)

This question tests the determination of donations tax or exemptions from donations tax on
After Karl Gaat’s spectacular tackle was shown on television programmes around the world, he
earned the equivalent of R3 500 000 on a modelling assignment done in America for Gamegirl (an
American magazine for female readers).
Karl Gaat, a Free State rugby supporter, had run onto the field naked during a Currie Cup Rugby
Match between Western Province and Free State and had tackled a Western Province player who
was about to score a try.
Since Karl Gaat felt the Western Province rugby team had had a ‘raw deal’ as a result of his action,
he spent part of the R3 500 000, on 1 November 2021, as follows:
• Karl Gaat incurred R230 000 on an all-expenses paid holiday for the entire team to Bear
Bottom’s Health Resort.
• Karl Gaat incurred R4 000 on a gold-plated basket for Dropper Ball.
• Karl Gaat incurred R6 000 on a ticket for a year’s worth of rides on ‘dodgems’, an arcade-
amusement game, for Luckless Lock.
• Karl Gaat incurred R8 000 on fur-lined diamond-encrusted non-slip gloves for Butter Fingers.
These gloves were given for the ‘services’ Butter Fingers provided to Free State in knocking-on
several passes. The Commissioner will include the R8 000 in Butter Fingers’s 2022 gross
income.
• Karl Gaat incurred R2 000 on a personalised picture album of the KwaZulu-Natal Sharks for
Blackie White. It was returned by him with a polite note rejecting it five months after its receipt.
In addition Karl Gaat made the following donations on 1 November 2021:

• Karl Gaat donated R1 000 000 to Dolly Gaat, his wife.
• Karl Gaat donated R60 000 each, to Att-Horak Gaat and Motheo Gaat, his two minor sons.
• Karl Gaat donated R9 400 to the Bloemfontein Police Widows’ Fund, a ‘recognised’ public
• Karl Gaat donated R120 000 to the Bloemfontein Police Trust, a trust that he had set up for the
benefit of the Bloemfontein Police. The Bloemfontein Police Trust is not a ‘recognised’ public
• Karl Gaat donated the use of his motor car, valued at R60 000 to his brother, Koos Gaat (born
1 April 1988) with its bare dominium being donated to another brother, Kobus Gaat (born
1 April 1998).
Karl Gaat was born on 1 April 1983.
You are required to determine the amount of donations tax that Karl Gaat may be liable for. He
made no other donations during the 2022 year of assessment.
27.12 (40 minutes)

This question tests the donations tax and normal tax consequences that arise out of certain
donations and other transactions made by a private company. It tests the definition of ‘gross
income’ and sections 10(1)(q), 11(a), 18A, 54, 56, 57, 59, 60 and 64.
Naidoosons (Pty) Limited carries on business in South Africa as a manufacturer of health foods. Its
financial year end on the last day of February. Its equity shares are held as follows:
%
Ganas Naidoo 51
Sylvie Naidoo (his wife) 25
Arulsivanathan Naidoo (major son) 10
Krishnamurthie Naidoo (major son) 10
Varadappa Naidoo (minor son) 4
100
Naidoosons (Pty) Limited’s five shareholders are also its directors.
Ganas Naidoo is its managing director. On his instructions the following donations were made by
Naidoosons (Pty) Limited during its 2022 year of assessment and were deducted by it in the
determination of its 2022 taxable income.
• Naidoosons (Pty) Limited donated R7 500 a month in cash to Arulsivanathan Naidoo. This
amount is to enable him to attend the University of Pinetown-Eastville to obtain a Bachelor of
Commerce degree before entering Naidoosons (Pty) Limited’s employment.
• Naidoosons (Pty) Limited donated health food to the Chatsworth Community Centre, a
‘recognised’ public benefit organisation. The purpose of this gift was both to help it and to
popularise its health food in Chatsworth. The cost price of the donated food is R4 000 and it
would have sold for R6 000.
• Naidoosons (Pty) Limited donated R20 000 to the Chatsworth Brag Club (a social club where its
members play card games) as prize money for a feature tournament. Ganas Naidoo is one of its
members.
• Naidoosons (Pty) Limited donated R25 000 to the University of Pinetown-Eastville (a
‘recognised’ university).
• Naidoosons (Pty) Limited donated a peacock with a market value of R500 (original cost of
R150 000) to the local Hindu temple, a ‘recognised’ religious organisation.
DONATIONS TAX 615
Ganas Naidoo personally made a donation of R70 000 to Varadappa Naidoo.

You are required to set out in detail the normal tax and donations tax consequences arising from
the above donations, both in the hands of the donor and in the hands of the donee.
27.13 (45 minutes)

This question tests the donations tax and normal tax consequences that arise out of certain
donations and other transactions. It tests the definition of ‘gross income’ and sections 10(1)(q),
11(a), 18A, 54, 56, 57, 59, 60 and 64.
Nature’s Garden Nursery (Pty) Limited’s issued share capital comprises 100 000 equity shares with
a nominal value of R1 each. It has a last day of February year end. The market value of an equity
share in it on 28 February 2021 (and on 1 March 2021) was R4,40.
On 1 March 2021 Nature’s Garden Nursery (Pty) Limited issued a further 10 000 equity shares.
These equity shares were issued as part of its newly-created share incentive scheme. This scheme
satisfies all the requirements of the definition of a ‘broad based share incentive scheme’ as set out
in section 8B of the Income Tax Act. It then sold these equity shares to Orben Webb a full-time
employee for R1 an equity share. As a result of the increase in the number of its equity shares, the
market value of an equity share in it then dropped to R4.
Orben Webb was then given an interest-free loan by Nature’s Garden Nursery (Pty) Limited to pay
for his equity shares.
The arrangement was recorded in Nature’s Garden Nursery (Pty) Limited’s journal as follows:
Interest-free loan to Orben Webb Dr 10 000
scheme’, the purchase price being settled out of the amount obtained
from an interest-free loan granted to the qualifying employee.
You are required to
1. determine the normal tax consequences of the above transactions as far as they relate to
Nature’s Garden Nursery (Pty) Limited,
2. determine the normal tax consequences of the above transactions as far as they relate to Orben
Webb, in each of the situations that follow:
Situation 1
Orben Webb sells his 10 000 equity shares in Nature’s Garden Nursery (Pty) Limited for
R75 000 after seven years.
Situation 2
R7 500 after seven years.
Situation 3
R55 000 after three years.
Situation 4
R35 000 after three years.
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.
27.14 (25 minutes)

This question tests the application of sections 7C, 56 and 60.
Velvet Hairy-Field formed a South African discretionary trust and an offshore discretionary trust:
• On 1 March 2021 she lent the equivalent of R30 000 000 to her offshore trust at an interest rate
of 2%. The interest is paid in cash each month. An arm’s length interest rate would have been
2,5%.
• On 1 March 2021 she lent R6 000 000 interest free to her South African trust.
Both Velvet Hairy-Field’s loans are repayable on demand. No loan repayments were made during
For the 2022 year of assessment, the official rate of interest for Velvet Hairy-Field’s South African
loan is 4,5% and it is 3% for the offshore loan.
Velvet Hairy-Field and Sica Hairy-Field, her daughter, are the sole beneficiaries of both trusts.
They are both residents of the Republic.
Velvet Hairy-Field made no other donations during the 2022 year of assessment. And she did not
make a taxable donation in the three-year period from 1 March 2018 to 28 February 2021.
You are required to determine the donations tax payable by Velvet Hairy-Field.
27.15 (15 minutes)

This question tests the application of section 7C to a loan between trusts. It also tests section 64E.
Daddy Long-Leggs, a resident of the Republic, lent R3 000 000 to the Long-Leggs Trust, a
discretionary South African trust. He and his two sons, Slim Long-Leggs and Martin Long-Leggs,
are its beneficiaries. It invested the R3 000 000 lent to it by him in dividend-yielding shares.
The Spider Discretionary Trust was created by Rachel Spider for the benefit of her family. The
Spider Discretionary Trust lent R3 000 000 to Spider (Pty) Limited of which it was the sole
shareholder. Rachel Spider, the Spider Discretionary Trust and Spider (Pty) Limited are all
residents of the Republic
Spider (Pty) Limited does not have any liabilities.
Both the above loans are interest free.
Rachel Spider replaced Spider (Pty) Limited indebtedness to the Spider Discretionary Trust with an
indebtedness to Daddy Long-Leggs, on the same terms and conditions.
In return, the Long-Leggs Trust became indebted to the Spider Discretionary Trust. This was done
by means of a cession and assignment of loans between the parties.
You are required to suggest an alternative method to the above transactions that may have been
more tax efficient. For the 2022 year of assessment, the official rate of interest is 4,5%
DONATIONS TAX 617
27.16 (20 minutes)

This question tests the application of sections 7C, 31 and 56.
Aiden Button holds 51% of the equity shares in Button (Pty) Limited, a foreign company with a
December year end. Adele Button, his wife, holds 39% of the equity shares in it. The remaining
10% of its equity shares are held by Ariel Button, their daughter. They are all residents of the
Republic.
On 1 January 2021 Button (Pty) Limited lent the equivalent of R6 000 000 to the Button Offshore
Discretionary Trust. It then used this equivalent of R6 000 000 to purchase a residence in France. It
is used by Aiden Button, Adele Button and Ariel Button. It does not produce any income.
Button (Pty) Limited’s R6 000 000 loan to the Button Offshore Discretionary Trust was made at
the instance of Aiden Button. Neither Adele Button, nor Ariel Button, had any influence on the
making of this loan by Button (Pty) Limited.
Button (Pty) Limited’s R6 000 000 loan to the Button Offshore Discretionary Trust was repaid by it
on 5 August 2021. No interest was charged on it. The official rate of interest on this offshore loan is
2,25%.
Aiden Button made no donations during the 2021 year of assessment. He made donations in South
Africa of R79 000 during the 2022 year of assessment.
Adele Button made no donations during the 2021 and 2022 years of assessment.
You are required to determine the donations tax payable by
1. Aiden Button for the 2021 and 2022 years of assessment, and
2. Aiden Button for the 2022 year of assessment, on the assumption that the facts are the same as
above, except that the loan was made at the instance of both Adele Button and himself.
27.17 (20 minutes)

This question tests the application of sections 7C and 64E.
On 1 March 2021 Felix Ground-Crab lent R1 200 000 interest free to Ground-Crab (Pty) Limited.
Its year of assessment ends on the last day of February. On the same day, and at his instance, it then
lent R1 200 000 interest free to the Ground-Crab Trust. A market-related interest rate for these
loans would have been 6%.
Neither loan was repaid during the 2022 year of assessment.
The Ground-Crab Trust holds all the equity shares in Ground-Crab (Pty) Limited.
Felix Ground-Crab has a vested right to the receipts and accruals of the Ground-Crab Trust.
All parties are residents of the Republic.
For the 2022 year of assessment the official rate of interest is 4,5%.
1. donations tax payable by Felix Ground-Crab,
2. dividends tax, if any, payable by Ground-Crab (Pty) Limited, and
3. donations tax payable that would have been payable by Felix Ground-Crab if he had lent
R1 200 000 directly to the Ground-Crab Trust.
27.18 (20 minutes)

This question tests the application of sections 7(8), 7C, 31 and 56.
Sempisi Isicabucabu is a resident of the Republic.
On 1 March 2021 Sempisi Isicabucabu made an interest-free loan of R18 000 000 to the
Isicabucabu Discretionary Trust (also a resident of the Republic). A market-related interest rate
would have been 6%.
This loan was outstanding for the entire 2022 year of assessment.
The relevant official rate of interest is 4,5%.
The Isicabucabu Discretionary Trust invested the R18 000 000 in a rent-producing property. It
earned rentals of R720 000 for the 2022 year of assessment.
Sempisi Isicabucabu made no donations during the 2022 year of assessment.
The aggregate value of taxable donations made by Sempisi Isicabucabu during the three-year
period from 1 March 2018 to 28 February 2021 was R30 000 000.
You are required to determine the donations tax payable by Sempisi Isicabucabu.
27.19 (30 minutes)

This question tests the application of sections 7(8), 7C and 31.
Giftig Spinnekop, a resident of the Republic, made an interest-free loan the equivalent of
R6 000 000 to the Spinnekop Discretionary Trust that had been set up offshore. No portion of the
loan was repaid during the 2022 year of assessment. A market-related interest rate for this loan
would have been 2,5%.
The Spinnekop Discretionary Trust invested the equivalent of R6 000 000 that it had received from
Giftig Spinnekop’s interest-free loan in a rent-producing property. It earned net rental the
equivalent of R480 000 from this rent-producing property for the year to 28 February 2022.
Giftig Spinnekop has made donations in excess of R100 000 during the 2022 year of assessment.
And the aggregate value of taxable donations made by him during the three-year period from
1 March 2018 to 28 February 2021 exceeded R30 000 000.
The official rate of interest is 4,5%.
You are required to
1. determine the resulting South African tax consequences, and
2. redetermine the resulting South African tax consequences on the assumption that rentals the
equivalent of R120 000 (and not the equivalent of R480 000) accrued to the Spinnekop
Discretionary Trust from its rent-producing property.
27.20 (40 minutes)

This question tests the application of sections 7(8), 7C and 31.
Kite Lynx, a resident of the republic, with a taxable income in excess of R1 656 600, lent the Lynx
Offshore Trust, a discretionary offshore trust, R10 000 000. It then used this R10 000 000 to
purchase a range of portfolio of interest-bearing and dividend-yielding investments. The relevant
market-related interest rate is 6%.
• In the Lynx Offshore Trust’s first year of assessment it earned R120 000 foreign interest and
R60 000 foreign dividends.
• In the Lynx Offshore Trust’s second year of assessment it again earned R120 000 foreign
interest and R60 000 foreign dividends. And it also enjoyed a capital gain of R240 000 from the
sale of some of its foreign shares.
DONATIONS TAX 619
• 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
28.1 (15 minutes)

This question tests the rules of intestacy.
The four situations that follow all involve intestate estates:
Benjamin Able
Benjamin Able died, leaving an estate of R1 200 000 after all liabilities had been settled. He was
survived by
• his wife, Bee Able,
• their son, Very Able,
• their daughter, Quite Power, and
• their two grandchildren, Hope Able and Joy Able, the children of their predeceased son, Justin
Able.
Very Able and Quite Power each have two children.
Benjamin Able and Bee Able were married out of community of property.
Creighton Baker
Creighton Baker is married in community of property to Pie Baker. They have one child, Susie
Cooke.
Assume that at the date of Creighton Baker’s death the joint estate is as follows:
• R1 400 000,
• R620 000, or
• R90 000.
Donald Charlie
Donald Charlie died. He was married to Daisy Charlie out of community of property (with accrual).
They have one child, a son, Ronald Baker.
Assume that his estate is as follows:
• R410 000, or
• R650 000.
Under the accrual, Daisy Charlie has a claim against Donald Charlie’s estate of R110 000.
Elizabeth Dolittle
Elizabeth Dolittle, who is a widow, has no descendants but is survived by Rex Downey, her father,
and two brothers, Robert Downey and John Downey. She died leaving an estate of R412 000.
You are required to determine, in each of the above situations, how the estate will be divided.
28.2 (15 minutes)

This question tests the model used for the determination of estate duty. It tests sections 2, 3, 4, 4A
and 5 of the Estate Duty Act.
Honey Scukkel, an 83-year-old spinster, died leaving an estate of R3 000 000 excluding the usufruct
interest in Jack Scukkel’s, her late brother’s, home that she has enjoyed for the last 20 years.
The use of this home had been awarded to Honey Scukkel 20 years earlier when Jack Scukkel, died.
The bare dominium in this property, at the time of his death, was given to William Scukkel, then aged
621
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.
28.3 (15 minutes)

This question tests the property and deemed property of a deceased estate. It tests section 3 of the
Estate Duty Act.
The executor of late Aunt Mildred’s estate discovered the following:
• Aunt Mildred enjoyed an annuity of R10 000 from a trust created by Mortimer Mildred, her late
husband. This annuity ceased on her death. The trust, however, continues to operate.
• Aunt Mildred enjoyed a pension of R8 000 a month from the civil service. It ceased on her
death.
• At the time of her death Aunt Mildred owned immovable property in South Africa with a market
value of R1 800 000. She had purchased this property when she was living in England, before
she became ordinarily resident in South Africa for the first time.
• At the time of her death Aunt Mildred had immovable property in England with a market value
the equivalent of R4 200 000. She had purchased this property when she was living in England,
before she became ordinarily resident in South Africa for the first time.
• Aunt Mildred had insured her life for R500 000. The R500 000 award from this policy was paid
to her nephew, Charles Moorecraft.
You are required to indicate which of the above items would constitute property or deemed
property in Aunt Mildred’s estate. Brief reasons should be given.
28.4 (30 minutes)

Tandamali Mkhize died on 30 June 2021, the day after attaining the age of 50 years, leaving his
surviving spouse Thandi Mkhize, to whom he was married by antenuptial contract, and his two
sons, Tandasizwe Mkhize and Sandile Mkhize. Mlondi Mhlama, his daughter, had predeceased him
but Victor Mhlama, her husband, who had not remarried, survived.
Tandamali Mkhize left the following in his estate:
• Shares in Goldmali (Pty) Limited. These were valued at R950 000 by the auditor but were taken
over by Samuel Gold under the shareholders’ agreement for no consideration.
• Shares on the JSE Securities Exchange. They had a market value at the date of his death of
R191 000, but were realised by the executor for a net R188 000, that is, after the deduction of a
R3 000 brokerage fee.
• A usufruct over a flat valued at R400 000. This usufruct was now to pass to Phando Gcwabe, his
sister (born 13 April 1991) who is the holder of its bare dominium. The usufruct was created
in May 2018 when the flat was valued at R360 000.
• An insurance policy for R500 000 on Andile Mkhize’s, his brother’s, life. This had a surrender
value of R103 050.
• An insurance policy on his life for R268 555. He had ceded this policy two years earlier to
Ayabonga Mkhize, his mother, who still survives him.
• Local municipal stock with a face value of R80 000 was sold for R90 000.
ESTATE DUTY 623
• 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.
28.5 (20 minutes)

Ramapaj Pillay and his wife Sushie Pillay were married out of community of property and without
the accrual system. She passed away on 16 March 2021. She left the following estate:
• A house in Isipingo Heights, with a market value of R1 320 000.
• Listed shares with a market value of R925 000 at the date of her death. A week after her death
the share market devalued and they are now worth only R835 000.
• Shares in Naidoo & Sons (Pty) Limited, with a market value of R800 000. The executor sold the
shares to the remaining shareholders under its articles of association for R600 000.
• Personal and sundry assets valued at R158 100.
Expenses in Sushie Pillay’s estate (all deductible for estate duty purposes) of R71 004 were paid by
the executor of her estate.
Other than the shares in Naidoo & Sons (Pty) Limited (see above), none of the other assets in
Sushie Pillay’s estate was sold during the course of winding up.
Shameel Naidoo, Sushie Pillay’s father, who was born on 1 January 1944, made the following
donations on 1 May 2005:
• To Sushie Pillay, a usufruct over a small shopping centre situated in Isipingo. At the time of the
donation its market value was R1 200 000.
• To Sushie Pillay’s half-brother, Vinesh Naidoo, the bare dominium interest in the small
shopping centre.
Vishnu Naidoo, who survived Sushie Pillay, was born on 21 January 1991. Sushie Pillay was born
on 13 February 1964. At the date of her death the market value of the shopping centre was
R5 800 000.
Under Sushie Pillay’s last will and testament,
• Ramapaj Pillay is to receive R350 000 in cash, and
• the residue of her estate is bequeathed to a discretionary trust. Its beneficiaries include Ramapaj
Pillay, and their descendants.
You are required to determine the estate duty payable by the estate of Sushie Pillay.
28.6 (30 minutes)

This question tests the model used for the determination of estate duty. It tests sections 2, 3, 4, 4A and
5 of the Estate Duty Act. It also tests the determination of donations tax or exemptions from donations
tax on donations made by a natural person including sections 54, 56, 62 and 64 of the Income Tax
Act.
Zakhele Zwane was born on 1 April 1959. He died on 1 July 2021. He was survived by his wife,
Zethu Zwane, and their son, Zenzele Zwane.
Zakhele Zwane had been ordinarily resident in South Africa his entire life. Zakhele Zwane and
Zethu Zwane were married out of community of property.
The assets in Zakhele Zwane’s estate were as follows:
• An immovable property with a market value at the date of his death of R3 200 000.
• Government stock that cost him R51 500 but with a market value at the date of his death of
R50 000.
• Sundry assets with a market value at the date of his death of R345 000.
During his life time Zakhele Zwane had enjoyed the earnings of a testamentary trust created under
the will of Conrad Mfuse, an uncle. Conrad Mfuse was born on 1 March 1949 and died on 1 June
2014. When the trust was created the assets were valued at R400 000. Zakhele Zwane did not pay
any of the estate duty payable on Conrad Mfuse’s estate. The earnings are now to pass to Zinhle
Xala, a niece of Zakhele Zwane, who is the holder of the bare dominium in the trust. Zinhle Xala
was born on 1 September 1988. On 1 July 2021 the assets of the trust had a market value of
R550 000.
Zakhele Zwane had taken out an insurance policy on his life with his son Zenzele Zwane as its
beneficiary. The total premiums paid by Zakhele Zwane were R9 000 and interest at 6% on these
premiums is R1 000. The insurer awarded R53 500 to Zenzele Zwane.
Zakhele Zwane made the following cash donations:
• In 1984 to Madala Zwane, his older brother, R25 000.
• In 1992 to his wife, Zethu Zwane, under their antenuptial contract, R35 000.
• In 1998 to a church – a ‘recognised’ public benefit organisation, R34 000.
• In 2006 to Madala Zwane, R34 000.
• And in 2021 to Zenzele Zwane, R115 000.
Madala Zwane had died on 1 August 2013.
Deductible expenditure including executor’s remuneration and other costs of winding up Zakhele
Zwane’s estate amounted to R41 419.
The residue of Zakhele Zwane’s estate was left to Zenzele Zwane.
1. donations tax payable on each donation made by Zakhele Zwane, assuming that the present
legislation was applicable in all the years of assessment referred to above. The so-called annual
donations tax exemption provided by section 56(2)(b) was R50 000 up to 28 February 2013.
Prior to that it was R30 000 from 1 March 2001 until 28 February 2007, and prior to 1 March
2001 it was R25 000 (from 28 February 1980), and
2. estate duty payable by Zakhele Zwane’s estate.
ESTATE DUTY 625
28.7 (75 minutes)

This question tests the model used for the determination of estate duty. It tests sections 1, 2, 3, 4,
4A and 5 and the First Schedule of the Estate Duty Act. It also tests rates of tax applicable to
various entities and dividends tax. It tests the definition of ‘gross income’ and sections 7C,
10(1)(k), 11(a), 23(g) and 64E. It also tests the liquidity of a deceased estate.
Cyril Bigge
Cyril Bigge owns the following property:
• A business valued at R2 100 000.
• A residence valued at R1 720 000.
• Motor cars, furniture, etcetera, valued at R821 570.
• Paintings and sculptures valued at R900 000.
• The life-time use of a holiday flat at Plettenberg Bay valued at R780 000. It was purchased by
Cornelius Burger on 2 February 2018 for R650 000 with the help of a loan from Cyril Bigge.
This loan has since been repaid. In gratitude for Cyril Bigge’s financial assistance, Cornelius
Burger gave him the right to use it until his death. Its right of use will then pass to Kane Bigge,
Cyril Bigge’s son.
Cyril Bigge has no liabilities but has little in cash resources. In addition to the receipts and accruals
from his business, R5 000 a month accrues to him from a retirement annuity fund – this amount
will cease on his death.
Cyril Bigge wishes to leave his entire estate to Kane Bigge. He is concerned that there will be little,
or no, cash in it to settle the estate duty. He is considering investing in a life insurance policy to
provide sufficient funds to pay the estate duty.
Dates of birth are as follows:
• Cyril Bigge on 4 April 1965,
• Cornelius Burger on 10 June 1987, and
• Kane Bigge on 12 August 1989.
You are required to
1. determine the insurance cover Cyril Bigge requires for his estate to meet his estate duty liability,
assuming no change in the value of his assets, and assuming he dies on 31 December 2021, and
2. state if there is anything he can do to reduce the estate duty payable, apart from leaving part or
all of his estate to someone other than Kane Bigge.
Kelvin Wiseman
Kelvin Wiseman has been warned by his estate adviser that he will create an estate duty problem on
his death, unless he can prevent the growth of his assets.
Kelvin Wiseman has been advised to ‘transfer’ a rent-producing property (that is growing in value)
out of his own name. He is considering selling it at its present market value of R2 400 000 to a
company. (The company will suffer normal tax at a rate of 28%.)
This rent-producing property will earn net rentals of R300 000 in the 2022 year of assessment.
Kelvin Wiseman would like to use the net rentals remaining after taxation and will therefore
withdraw them from the company in the cheapest possible way. (A salary of R12 000 a year would
be a reasonable salary to pay an independent third party to run the company.)
Kelvin Wiseman has a taxable income in excess of R1 656 600 excluding the net rentals. Included
in his taxable income is local interest.
You are required to determine all the taxes payable if the rent-producing property is sold by Kelvin
Wiseman to a company.
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.
28.8 (30 minutes)

Buzz Lightyear died on 15 September 2021. He was 58 years old at the time of his death. He was
married out of community of property, without accrual, to Jessie Lightyear (née Moon). She was
56 years old at the time of his death. They were ordinarily resident in Australia and, after
immigrating to South Africa in 2017, became ordinarily resident in South Africa for the first time.
Prior to Buzz Lightyear’s death he had been employed by the Toon World Entertainment Group as
its chief operating officer. It is a South African creative media and entertainment group involved in
the production and distribution of animated movies and television series. It has been trading since
1994. It was listed on the Johannesburg Stock Exchange in 2017.
Buzz Lightyear had also been a director of Toon World Entertainment Holdings Limited since
2017.
According to the executor of the Late Buzz Lightyear’s Deceased Estate, his assets (at their market
values) and liabilities were as follows as at 15 September 2021:
Assets
Buzz Lightyear’s assets were as follows:
• A flat in Australia that he had purchased while he was still an Australian resident and before he
was married. It was purchased by him in 2014. Its market value on 15 September 2021 was
R4 750 000.
• Shares in Toon World Entertainment Holdings Limited. On 15 September 2021 the market value
of a share in Toon World Entertainment Holdings Limited was R300 a share. During its 2018
financial year each of its executive directors had purchased 10 000 shares in it for R150 a share
when the market value on the date of purchase was R280 a share. They could sell their shares
only in 2023.
• Shares in an Australian unlisted company. He had purchased them in 2020. Under his last will
and testament, his executor was to sell them to help settle the liabilities of his estate. On
15 September 2021 they were valued at R4 750 500 and were subsequently sold by his executor
for R6 665 000.
• Motor cars and other sundry personal assets. Their market value on 15 September 2021 was
R7 800 000.
• A house in Johannesburg, which was his primary residence. It was bequeathed by him to Jessie
Lightyear. Its market value on 15 September 2021 was R12 700 000.
• A domestic life insurance policy. His brother, Mike Lightyear, took out this policy on Buzz
Lightyear’s life. A R10 100 000 award from this policy was made to Mike Lightyear upon Buzz
Lightyear’s death. The premiums and the 6% interest on the policy amounted to R215 000 and
were all paid by Mike Lightyear.
• A bare dominium in a farm in the Free State: At the time of Buzz Lightyear’s life death he
owned the bare dominium in this farm on which bona fide farming operations were taking place.
The usufruct over the farm was held by Mike Lightyear (his brother), who was 52 years old on
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.)
28.9 (45 minutes)

Kitty Konstantinis was born on 5 May 1948. She died on 9 September 2021. She was throughout
her life ordinarily resident in South Africa.
Her husband, Theo Konstantinis, had died on 31 May 2018. They had been married under an ante-
nuptial contract.
The following donations were made by Kitty Konstantinis during her lifetime:
• On 17 November 2018 to her elder son, Aristotle Konstantinis (born 4 April 1974), her house on
the island of Mykonos in Greece, subject to her retaining the use of it until she died. The cost of
the house in 2015 was the equivalent of R630 000 and its market value on 17 November 2018
was the equivalent of R2 100 000. Transfer duty paid by Aristotle Konstantinis was the
equivalent of R75 000.
• On 18 November 2018, to her younger son, Pythagoras Konstantinis (born 27 October 1976),
South African listed shares, subject to her continuing to receive the dividends from them until
she died. The cost of the shares was R107 000 and their market value on 18 November 2018 was
R240 000. Securities transfer tax paid by Pythagoras Konstantinis was R2 400.
• On 9 February 2021, to her cousin Clara Tsimikas (born 16 March 1944), an annuity of R6 000
(payable at the rate of R500 a month) for the remainder of her (Clara Tsimikas’s) life.
• On 1 July 2021, to her niece Olga Argiros, her jewellery valued at R60 000, subject to her right
to take back the jewellery at any time, but on her death, Olga Argiros was to have it.
On her death, Kitty Konstantinis left the following assets, liabilities, and bequests:
• A residence in Kloof, Durban. It was sold for R2 780 000. The purchaser paid transfer duty of
R121 800. She had inherited this residence from Costa Konstantinis, her late husband when its
value was R2 300 000. In the determination of the dutiable value of Costa Konstantinis’s
deceased estate, a section 4A abatement of R3 500 000 was deducted.
• Furniture, pictures, and other household items, valued at R64 719.
• A fixed deposit of R80 000. Its interest was used to fund the R6 000 annuity payable to Clara
Tsimikas (see above).
• Cash of R37 814.
ESTATE DUTY 629
• 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.
28.10 (45 minutes)

and 5 of the Estate Duty Act. It also tests the determination of donations tax or exemptions from
donations tax on donations made by a natural person including sections 54, 56, 62 and 64 of the
Income Tax Act.
Sam Applesamy, who had always been ordinarily resident in South Africa, made the following
payments and dispositions during the period 1 March 2021 to 17 September 2021:
• R40 000 to Pure Apple Juice Limited, his former employer, (a public company) to be used by it
to build a cricket net for use by its employees.
• An annuity of R6 000 payable to his ex-domestic employee, Chilli Corriander, for the remainder
of her life (her age next birthday was 67 years) in recognition of past services rendered.
• His fruit and vegetable business, with a current market value R900 000, to his son, Gopaul
Applesamy, (age next birthday was then 43 years), subject to its net profit being paid to Sam’s
wife, Dhania Applesamy (age next birthday was then 65 years) to whom he was married out of
community of property, without the accrual system, for the remainder of her life. The average
annual net profits of the business for the previous three years was R190 000.
Sam Applesamy was born on 1 October 1951. He died on 17 September 2021.
Assets in Sam Applesamy’s estate were as follows:
• A domestic residence valued at R1 980 000.
• Farm land that is leased to a construction firm that uses it as a depot for its vehicles and
equipment. The current market value of the land is R910 000.
• Books and paintings valued at R460 000. They are housed in an outbuilding situated at his
domestic residence. He charged members of the local community to view these items and his
average net profit from this source for the previous three years was R2 500 a year.
• A house in India valued at the equivalent of R640 000, that had been given to him as a gift by
Venolin Moonsamy, an uncle 12 years ago. At that time Venolin Moonsamy had been ordinarily
resident in South Africa, but had died five years ago when ordinarily resident in India.
• Jewellery that he had inherited from Rose Applesamy, his mother, who had been ordinarily
resident in South Africa for the last 45 years of her life. She died on 14 May 2016. Its value at
that time was R330 000. Its market value is now R520 000. When inheriting it, Sam Applesamy
paid estate duty of R16 000.
• Cash and listed shares amounting to R1 555 567 in total.
• A domestic insurance policy on his life, on which he had paid the premiums, paid out R450 000.
His daughter, Marigold Applesamy, was awarded R150 000 and his son, Gopaul Applesamy,
was awarded R300 000.
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.
28.11 (30 minutes)

This question tests the model used for the determination of estate duty. It also tests sections 2, 3, 4,
4A and 5 and the First Schedule of the Estate Duty Act and the determination of donations tax or
exemptions from donations tax on donations made by a natural person including sections 54, 55
(definition of ‘fair market value’) and sections 62 and 64 of the Income Tax Act. It also tests
section 7 and paragraphs 69 and 70 of the Eighth Schedule to the Income Tax Act.
Grandpa Dynasty, who is a resident of the Republic has approached you for advice regarding his
estate duty problem.
Grandpa Dynasty was born on 1 January 1953. He is a widower. He has one son, namely, Daddy
Dynasty, and one grandson, namely, Sonny Dynasty. Daddy Dynasty is aged 42 years and Sonny
Dynasty is aged 17 years.
Grandpa Dynasty’s estate consists of the following:
• Shares in listed companies valued at R2 270 000.
• A house valued at R1 480 000.
• Furniture and household goods valued at R340 000.
• A farm valued at R1 800 000.
• Farm implements and trading stock valued at R560 000.
• An insurance policy on his life that will yield R750 000 on his death. It was taken out by Gillian
Dynasty, his late wife in 1993. Grandpa Dynasty donated R100 000 to her at that date. She
invested this R100 000 in an interest-bearing security and then used the earnings from this
investment to pay the premiums on the policy, which together with interest at 6% a year amount
to R150 000 in total.
• Debts due of R590 000.
In the determination of the dutiable value of Grandpa Dynasty’s estate, a section 4A abatement of
R3 500 000 was deducted.
The terms of Grandpa Dynasty’s will are that all his assets are to go to Daddy Dynasty on his death
with, the wish that he will, in turn, bequeath them to Sonny Dynasty.
You are required to
1. determine how much estate duty would be payable if Grandpa Dynasty were to die, assuming
that executor’s remuneration and other deductible expenses in winding up his estate amount to
R120 000,
2. state whether the fact that Daddy Dynasty is the sole heir could have disadvantages, and if so,
to give suggestions as to how he should bequeath his estate to his family (give reasons for your
suggestions), and
3. since Grandpa Dynasty has been told that major savings of tax and estate duty could be
achieved by selling or donating assets during his lifetime to a trust for the benefit of his
ESTATE DUTY 631
children, discuss whether these savings could be effected in his situation and whether it is
preferable to sell or to donate his assets.
28.12 (45 minutes)

Robert A V (Bob) Dove, who was born on 1 December 1930, died on 1 August 2021. He owned
the following assets:
• A motor car valued at R200 000 on 1 August 2021 that he bequeathed to his grandson, Charles
Dove. On 15 December 2021 it was sold for R2 000 as scrap after it was involved in an
accident.
• A wooden box manufacturing business that he bequeathed to his grandson, Donald Dove. The
business was valued at R1 500 000 prior to Robert A V (Bob) Dove’s death and at R1 300 000
on his death.
• Shares in companies listed on the stock exchange valued at R1 000 000. These shares were
bequeathed to Donald Dove. Robert A V (Bob) Dove’s auditor believed that they were over-
valued due to the fall in the gold price and that their real value was R500 000.
• Shares in a private company were also bequeathed to Donald Dove. He was obliged, under a
condition relating to a shareholder’s death, to sell them to his uncle, Walter Oakleigh, for
R400 000. Its auditor valued them at R600 000.
• His private residence valued at R2 000 000. He bequeathed the use of this to his wife, Betty
Dove (born 1 November 1950), and the bare dominium to his son Edwin Dove (born
1 November 1975).
• Land and buildings valued at R800 000 (the land valued at R100 000 and the buildings valued at
R700 000). They were bequeathed to a friend, Fernandes Martin, who had erected the buildings
on the land while Robert A V (Bob) Dove was alive.
• A sculpture valued at R4 500 000, that he bequeathed to Betty Dove.
• R100 000, that he bequeathed to a registered political party.
• The balance of his estate, valued at R3 000 000, he bequeathed to his two friends, John Doe and
Jack Reid (see below), in equal shares.
On Robert A V (Bob) Dove’s death his executor discovered the following:
• Robert A V (Bob) Dove enjoyed a usufruct over a R3 000 000 property. This was created one
year prior to his death by a friend, John Doe (born 1 December 1940), when he donated the
usufruct to Robert A V (Bob) Dove and sold the bare dominium to Jack Reid (born 1 December
1945) for R100 000. The property has not changed in value in the last five years.
• Robert A V (Bob) Dove had donated a Bonsai tree worth R1 000 to his Japanese mentor, Yuki
Soni, in contemplation of his death, one month before he died.
• An annuity of R400 000 that Robert A V (Bob) Dove enjoyed prior to his death, accrued to his
ex-wife, Samantha Hearse (born 1 December 1940), on his death.
There were no liabilities in Robert A V (Bob) Dove’s estate, but it cost R247 116 to wind it up.
You are required to
1. determine the estate duty payable by Robert A V (Bob) Dove’s estate,
2. state how much of this estate duty each person is liable for, and
3. list five key issues that should be taken into account when an estate plan is finalised.
28.13 (60 minutes)

This question tests the model used for the determination of estate duty. It tests sections 2, 3, 4, 4A,
5 and the First Schedule of the Estate Duty Act. It also tests the determination of donations tax or
exemptions from donations tax on donations made by a natural person including sections 54, 56,
58, 62 and 64 of the Income Tax Act.
Florence Southpaw is married out of community of property without the accrual system to Leftie
Southpaw. They have been ordinarily resident in South Africa since 2019. (This was the first time
that they became ordinarily resident in South Africa.)
Florence Southpaw is 28 years old and Leftie Southpaw is 33 years old.
Leftie Southpaw had been a professional boxer. He retired after he ‘lost’ an ear in his last fight.
During the 2022 year of assessment the following transactions took place (in the following order):
• Leftie Southpaw donated his boxing gloves valued at R800 000 to Mighty Punch Boxing Club
(an amateur sporting association and an ‘approved’ public benefit organisation).
• Leftie Southpaw sold his gold-plated boxing belt valued at R1 500 000 to Rocky Sylvestor, a
friend, for R1 000 000.
• Leftie Southpaw gave Florence Southpaw a new motor car on the occasion of her twenty-eighth
birthday. The car was valued at R220 000.
• Leftie Southpaw gave Finnian Green, his gardener, a bonus of R12 000 (in addition to his
normal salary) for having maintained their garden in a perfect condition.
• Leftie Southpaw gave the life use of his townhouse valued at R2 500 000 to Marcel Southpaw,
his father, on the occasion of Marcel Southpaw’s seventy-fifth birthday. Simultaneously, he
gave the bare dominium of this townhouse to Florence Southpaw.
• Florence Southpaw donated R10 000 to the Wildlife Conservation Trust Fund (an ‘approved’
public benefit organisation).
• Florence Southpaw gave R110 000 to Simone Glover, her sister, as her fortieth birthday present.
• Florence Southpaw gave her beach cottage valued at R1 500 000 to Cecilia Shields, her mother.
She had purchased this beach cottage for R600 000 nine years ago.
• Florence Southpaw gave Harriet Henry, Leftie Southpaw’s twin sister, the use of a second-hand
motor car valued at R48 000 for the rest of Harriet Henry’s life. It was bequeathed to Leftie
Southpaw in the event of Harriet Henry predeceasing him. Its value at the date of Harriet
Henry’s death (see below) was R47 500, and at the date of Leftie Southpaw’s death R46 000
(see below).
• Florence Southpaw gave R50 000 to the Clinique Hospital Group. Two months after making this
donation, she revoked it after having heard that to the Clinique Hospital Group was being
investigated for fraud.
Leftie Southpaw’s health deteriorated after his last fight. He was soon in hospital on a life-
supporting machine. The shock of Harriet Henry’s twin brother’s state of health was so great to her,
that she died after suffering a heart attack.
Three weeks later Leftie Southpaw died. He was survived by Florence Southpaw, and his parents,
Marcel Southpaw and Claressa Southpaw.
The executor of Leftie Southpaw’s estate discovered the following:
• He had been enjoying an annuity of R12 000 (payable at the rate of R1 000 a month) from the
Boxers’ Benefit Fund. After his death the annuity is to be paid to Florence Southpaw for the rest
of her life.
• He had taken out a domestic insurance policy on his own life under a duly registered ante-
nuptial contract. On his death this policy paid out R2 000 000. It was awarded to Florence
Southpaw.
ESTATE DUTY 633
• An investment of R2 750 000 in an interest-bearing security with a commercial bank.

• A motor car valued at R170 000. He bequeathed it to Claressa Southpaw, his mother.
• After he had become ordinarily resident in South Africa, he inherited an immovable property in
Los Angeles, America, valued at the equivalent of R4 800 000, from York Washington, his late
uncle. York Washington had been ordinarily resident in Los Angeles his entire life.
• A double cab motor vehicle valued at R250 000. He bequeathed it to Marcel Southpaw, his
father.
• An investment in a collective investment scheme in securities (a so-called equity unit trust)
valued at R49 000.
• Shares valued at R34 800. He had inherited these shares three years previously when his brother,
Clayton Southpaw, died. The shares were then valued at R26 000. The Commissioner is
satisfied that he paid estate duty of R2 600 on these shares when Clayton Southpaw died.
• Household furniture and contents valued at R2 400 000.
• A residential property valued at R15 800 000 that he bequeathed to Florence Southpaw.
• Cash on hand of R1 400 000 that he bequeathed to Mighty Punch Boxing Club (an amateur
sporting association and an ‘approved’ public benefit organisation).
• Liabilities of R300 000 including his final normal tax liability that was ‘inflated’ since he was
deemed to have made certain capital gains moments before his death.
• Master’s fees were R600.
• Administration and liquidation costs were R1 500 000.
You are required to
1. determine the donations tax payable on the donations made by Leftie Southpaw and Florence
Southpaw,
2. determine the estate duty payable by his estate, and
3. state who is liable for the payment of the estate duty in his estate, and the amounts payable by
the respective persons.
28.14 (60 minutes)

This question tests the model used for the determination of estate duty, the definition of ‘fair
market value’ in section 1(1) and sections 2, 3, 4, 4A, 5 and the First Schedule of the Estate Duty
Act. It also tests the determination of donations tax or exemptions from donations tax on donations
made by a natural person including sections 54, 56, 62 and 64 of the Income Tax Act.
On 4 July 2021 Ben Jamine died unexpectedly after suffering a heart attack. He was born in Durban
on 2 January 1947. He had been ordinarily resident in South Africa his entire life.
At the time of Ben Jamine’s death, he was married out of community of property to his second
wife, Merle Jamine.
Up to the time of Ben Jamine’s death he had divested himself of various assets:
• On 1 March 2021 he sold the bare dominium in a flat to his son, Isaac Jamine, for R250 000. Its
market value was then R1 500 000. On 4 July 2021 it had a market value of R1 750 000. Isaac
was 42 years old at the time when he purchased the bare dominium from Ben Jamine. (Isaac
Jamine was born on 29 April 1978.) (Ben Jamine had retained the usufruct of the property for
himself.)
• On 31 March 2021 he attempted bungee-jumping for the first time. He always had the fear that
he would not survive the jump on account of his weak heart. In contemplation of his death, he
donated his motor car to Isaac Jamine, on condition that if he (Ben Jamine) survived the
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.
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.
28.15 (75 minutes)

and 5 and the First Schedule of the Estate Duty Act. It also tests the determination of donations tax
and exemptions from donations tax on donations made by a natural person including sections 54,
56, 62 and 64 of the Income Tax Act.
Bentley Carr attained the age of 50 years on 20 October 2006. His wife, Carmen Carr, to whom he
had been married for 28 years, attained the age of 45 years on the same date. They were both born
in KwaZulu-Natal. They have both been residents of the Republic their entire lives.
Bentley Carr was a respected and well-known businessman. On 20 October 2006 he made local
news when it was discovered that he was having an affair with his secretary, Mercedes Martin. She
has been a resident of the Republic her entire life.
Carmen Carr, immediately commenced divorce proceedings. On 15 December 2006 they were
divorced. Under the court order, he was required to pay her maintenance as follows:
• R1 500 a month for their son, Morris Carr, who was born on 20 September 1992,
• R1 250 a month for their son, Austen Carr, who was born on 28 August 1997, and
• R1 000 a month for their son, Royce Carr, who was born on 20 October 2001.
The maintenance for each minor son is to be paid until he attains the age of 21 years or dies,
whichever event occurred first.
In addition to the maintenance of their three minor sons, Bentley Carr was ordered to pay alimony
of R2 000 a month to Carmen Carr until she either remarried or died whichever event occurred
first. She is still alive and has not yet remarried.
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.
28.16 (40 minutes)

This question tests the determination of certain amounts used in in the determination of the dutiable
estate of a deceased person and the amount of estate duly payable. It tests sections 3, 4 and the First
Schedule of the Estate Duty Act.
You are a partner in a firm of accountants. You are in charge of the estate duty and estate planning
division. The following eight unrelated matters have been referred to you:
Ivor Kanser
Ivor Kanser has been ordinarily resident in South Africa for his entire life. He is 56 years old. It has
been confirmed that he is suffering from a terminal illness and is expected to die within six to
18 months. He is at present in hospital. His wife, Naomi Kanser (to whom he is married out of
community of property and without the accrual system) is concerned about his potential estate duty
liability. She would like to know the estate duty consequences of a rent-producing property situated
in England that he inherited 11 years ago (in 2011) from Chelsey Westminster , a relative who had
been ordinarily resident in England her entire life. It then had a market value the equivalent of
R300 000. It now has a market value the equivalent of R2 500 000. Under his will, this property is
bequeathed to his children.
You are required to indicate whether the rent-producing property will be included as property in
Ivor Kanser’s estate when he dies, and if so, indicate its net value to be included.
Stan Hope
Stan Hope is to receive an annuity of R28 000 from an insurer for a 10-year period. If he dies
during this period, the annuity will be paid to Sharon Hope, his surviving spouse, to whom he is
married out of community of property and without the accrual system, for the remainder of the
10-year period. Should they both die during its duration, the annuity will be paid (equally) to their
surviving children for the remainder of the 10-year period.
You are required to indicate whether this annuity will be included as property in the estate of Stan
Hope if he were to die now, and if so, indicate how its net value will be determined.
George Bend
George Bend has been enjoying R1 000 a month from a trust created under the last will and
testament of Reginald Bend, his late father. The trust deed provides for R1 000 a month to be
awarded to him for his lifetime. Reginald Bend was ordinarily resident in South Africa for his
entire life. On George Bend’s death this monthly amount will cease.
You are required to indicate whether this monthly amount will be included as property in the estate
of George Bend when he dies, and if so, indicate how its net value will be determined.
Aleck Smart
Aleck Smart joined Hoag Solutions Limited’s, his employer’s, deferred compensation scheme a
year ago. He is 56 years old. He is due to receive a lump sum from Hoag Solutions Limited of
R228 000 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, Hoag
Solutions Limited will receive a minimum of R96 000 from this insurance policy, being its life-
cover element. It will then award whatever amount it receives from this insurance policy to Betty
Smart, Aleck Smart’s wife, to whom he is married out of community of property and without the
accrual system.
You are required to indicate whether the above amount will be included as deemed property in the
estate of Aleck Smart if he were to die now, and if so, indicate its net value.
Mike Rest
Mike Rest died on 20 January 2022, on his sixty-fifth birthday. Up to his death he had enjoyed a
usufruct in a holiday cottage. It had a market value of R700 000 on 20 January 2022. On his death
this usufruct passed to John Rush (born on 13 April 1989), who is the holder of its bare dominium.
ESTATE DUTY 639
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.
28.17 (60 minutes)

This question tests sections 3, 4, 4A, 5 and the First Schedule of the Estate Duty Act. It also tests the
definitions of ‘gross income’ and a ‘severance benefit’, the general deduction formula (sections 11(a)
and 23(g)) and sections 54 and 56 of the Income Tax Act.
Set out below are 10 queries relating to normal tax, donations tax or estate duty:
Ben Epps
Shortly before the commencement of the Two Oceans Swimming Race, Ben Epps, the top long-
distance professional South African swimmer announced through the means of the press, that if he
were to win this race, he would donate his prize money to a local charity. He is a resident of the
Republic.
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.
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.
28.18 (75 minutes)

This question tests the liquidity of a deceased estate. It tests the model used for the determination of
estate duty including sections 2, 3, 4, 4A and 5 of the Estate Duty Act. It also tests a normal tax
liability determination.
Seeley Brennan is a 62-year-old widower (a man whose wife has died). He is a resident of the
Republic. He has two children, namely,
• Daisy Wicks, his daughter. She is married to a compulsive gambler who has a poor reputation.
She is not a resident of South Africa, and
• Jack Brennan, his son, a major, and a full-time student at university. He would like to enter the
family business (see below) on the completion of his degree.
Seeley Brennan has often visited Daisy Wicks outside South Africa.
Seeley Brennan would like to retire soon. He may then emigrate from South Africa. But he has not
yet made any definite plans. He needs to plan for his retirement since he is not a member of a
retirement fund. He is also not a member of a medical scheme.
ESTATE DUTY 643
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.
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
• local dividends on his listed shares, and

• interest from his non-tax free call-account investment.
Expenses
The Master’s fees, his executor’s fees and his last illness and similar expenses would amount to
R675 018 if Seeley Brennan were to die on 31 January 2022.
Seeley Brennan has an assessed capital loss of R814 500 bought forward from the 2021 year of
assessment.
You are required to
1. determine Seeley Brennan’s normal tax liability if he were to die on 31 January 2022. Assume
that his taxable income excluding amounts to be included in his income, or to be deducted from
his income, in its determination of his taxable income, resulting directly from his death
amounts to R595 000. It includes his net rentals that have been determined after taking into
account the section 13(1) capital allowance,
2. determine the estate duty payable by his deceased estate should he die on 31 January 2022,
3. determine the shortfall in liquidity in his deceased 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, and
4. discuss important financial and other considerations that could arise out of the his family
situation.
CHAPTER 29
VALUE-ADDED TAX
29.1 (15 minutes)

This question tests the definitions of ‘input tax’ and ‘prescribed rate’ and sections 7(1), 8(8), 11(1),
16(3), 17(1), 17(2), 18(3), 23(1) and 28(1) of the Value-Added Tax Act and section 23C of the
Income Tax Act.
Fifteen statements on value-added tax follow:
1. Value-added tax is levied at two rates, either 0% or 15%.
2. An enterprise that makes exempt supplies does not enjoy input tax deductions.
3. An enterprise that makes zero-rated supplies does not enjoy input tax deductions.
4. An enterprise that makes both exempt and taxable supplies does not enjoy 100% input tax
deductions for the value-added tax it has paid.
5. To avoid being penalised, a value-added tax return that is not submitted electronically must be
received by the local SARS’s office by the twenty-fifth day of the month following the end of
the relevant tax period.
6. To avoid being penalised, any value-added tax due must be paid to the local SARS’s office by
the twenty-fifth day of the month following the end of the tax period.
7. A notional input tax deduction for second-hand goods purchased from a non-vendor will be
available only if they have been paid for.
8. Input tax is not deductible on the value-added tax paid when a ‘motor car’ as defined is
purchased.
9. Input tax is not deductible on the value-added tax paid when a vendor incurs ‘entertainment’
expenditure as defined.
10. A vendor who grants an employee a fringe benefit in the form of the use of a motor vehicle is
required to pay a deemed output tax on the value-added tax-determined value of this benefit.
11. A vendor who receives an indemnity award from an insurer is required to pay a deemed output
tax on the indemnity award received.
12. A late value-added tax payment due to the Commissioner is subject to interest levied at a rate
of 1,2% a month.
13. A late value-added tax refund from the Commissioner will earn the vendor interest at a rate
of 12%.
14. If a vendor enjoys an input tax deduction for an expense he has incurred, the value of the
expense for normal tax purposes is its cost excluding value-added tax.
15. A person is required to register as a vendor if the value of his taxable supplies exceeds
R500 000 in a 12-month period.
29.2 (20 minutes)

This question tests the registration requirements and the bases of accounting for value-added tax
including sections 15 and 23 of the Value-Added Tax Act.
On 1 January 2022, Sedgwick Darnley commenced trading as a mower of lawns, in other words, he
cuts grass as his trade.
647
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.
29.3 (40 minutes)

This question tests how transactions should be recorded in compliance with the value-added tax
legislation. It also tests the determination of a vendor’s value-added tax liability and the definitions
of an ‘enterprise’, a ‘motor car’ and ‘input tax’ and sections 7(1), 8(8), 11(h), 12(g), 16(3)
and 18(3) of the Value-Added Tax Act.
Sparkling Pools CC commenced trading on 1 March 2021. When it commenced trading, it
immediately registered as a vendor. It provides swimming pool maintenance services.
Set out below are Sparkling Pools CC’s transactions that took place during the months of March
and April 2021. All amounts include value-added tax when applicable unless stated to the contrary.
• On 1 March 2021 it secured 50 annual swimming pool maintenance contracts. It invoiced its
customers in both March 2021 and April 2021 at a fee of R500 (excluding value-added tax) a
swimming pool a month. This monthly fee is fixed for the year.
• During March 2021 it carried out various pool-maintenance services for other customers and
invoiced them R10 000 (excluding value-added tax) in total.
• On 1 March 2021 it employed four employees (three labourers and a supervisor). The labourers
were paid R5 600 each a month and the supervisor was paid a monthly salary of R7 000.
• On 1 March 2021 it purchased for cash a second-hand truck. This truck was purchased from a
non-vendor for R161 000. The use of this truck was given to the supervisor as his ‘company car’
as from 1 March 2021. It paid R690 for its licence. It bears this truck’s full cost of fuel and
maintenance. During March 2021 the fuel for this truck cost R5 060. An insurance premium of
R805 (including value-added tax), being the truck’s insurance cost for the month of March 2021
was paid on 25 March 2021. This truck was stolen on 31 March 2021. An indemnity award of
R149 500 was received from its insurers on 21 April 2021. This truck has not yet been replaced.
• Instead of paying its employees extra cash to cover their transport expenses to and from work, it
purchased taxi coupons. These taxi coupons are distributed to its employees on a weekly basis.
During March and April 2021 it incurred R1 265 on purchasing bus coupons.
• It purchased for cash second-hand pool-maintenance equipment from a non-vendor during
March 2021 for R33 120. The purchase price was settled in four instalments of R8 280 each.
The first three instalments were settled on 15 March, 1 April and 15 April 2021. (The last
instalment was settled on 1 May 2021.)
VALUE-ADDED TAX 649
• 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.
29.4 (25 minutes)

This question tests the definition of ‘second-hand goods’ and sections 2(1)(d), 7(1), 11(1)(a), 16(3),
17(2) and 18(3) of the Value-Added Tax Act.
You are a trainee accountant with a firm of chartered accountants. Because of your special interest
in tax you have been sent to perform a value-added tax review at Lever Sisters Limited, a client of
the firm. The objective of this value-added tax review is to identify weaknesses that may exist in its
accounting system or its processing of value-added tax entries.
Accompanying you on this value-added tax review is a trainee accountant of the firm who has some
experience with value-added tax issues. He has identified, as a result of his review, five journal
entries that may contain an incorrect value-added tax treatment. The five journal entries are as
follows:
• Debtor (in the United Kingdom) Dr 27 025
To Sales 23 500
To Output value-added tax 3 525
Being the sales of goods invoiced and delivered to a foreign
customer.
• Bank Dr 5 750
Accumulated depreciation on computer Dr 3 000
To Computer equipment 5 000
To Profit on sale of fixed assets 3 750
Being the sale of a computer (previously used in the creditors’
department) to an employee for R5 750 (R5 750 plus value-
added tax of Rnil).
The computer could have been sold under an arm’s length transaction for R7 475 (R6 500 plus
value-added tax of R975).
• Investment Dr 60 000
Input value-added tax Dr 9 000
To Bank 69 000
Being the purchase of listed shares for investment purposes.
• Motor vehicle Dr 155 250
To Bank 155 250
Being the purchase of, and payment for, a second-hand
delivery vehicle purchased from a non-vendor for R155 250
(R155 250 plus value-added tax of Rnil).
• 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.
29.5 (30 minutes)

This question tests the determination of a vendor’s value-added tax liability including the definition
of ‘entertainment’ and sections 11(1)(h), 12, 17(2) and 18(3) of the Value-Added Tax Act.
Travel Line (Pty) Limited, a transport contractor, derives its income from the transport of goods (by
truck) and the transport of fare-paying passengers (by bus). Since it makes both taxable and exempt
supplies for value-added tax purposes, the Commissioner has agreed to an output basis of
apportionment to arrive at an acceptable input tax ratio of 75%.
An analysis of its receipts and accruals and expenditure for its two-month tax period ending
31 December 2021 is set out below. Unless otherwise stated, all amounts are inclusive of value-
added tax when applicable:
Fares from transporting goods 805 000
Fares from transporting passengers 287 500
Interest levied on overdue accounts 10 465
Indemnity award (note 1) 16 100
Expenditure
Bank charges 1 380
Computer (notes 1 and 3) 20 700
Insurance premiums (note 4) 17 480
Maintenance (note 5) 20 125
Office equipment rentals (note 6) 7 705
Salaries 379 500
Employees’ subsistence (note 7) 2 530
Petrol 121 900
Notes
1. The indemnity award of R16 100 was awarded for a notebook computer (a portable computer)
that was owned by Travel Line (Pty) Limited and stolen from its premises in September 2021.
On receipt of the indemnity award in December 2021, a new notebook computer was
purchased by Travel Line (Pty) Limited (note 3).
2. The bad debts written off by Travel Line (Pty) Limited of R24 150 all relate to debtors from
transporting goods.
3. Depreciation is charged on the following two assets owned by Travel Line (Pty) Limited:
• A motor car that is used by its managing director. It was purchased in January 2021 for
R264 500 (R230 000 plus value-added tax at 15% of R34 500). Its managing director has
had sole use of this motor car for the entire tax period.
VALUE-ADDED TAX 651
• 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.
29.6 (40 minutes)

This question tests the determination of a vendor’s value-added tax liability. It also tests the value of
certain fringe benefits enjoyed by a managing director. It tests the definitions of ‘entertainment’ and
‘input tax’ and sections 7(1), 11(1), 12(c), 16(3)(a) and 18(3) of the Value-Added Tax Act. It also
tests the definition of ‘gross income’, sections 8(1), 11(a) and paragraphs 7, 9 and 13 of the Seventh
Schedule.
Confident Limited commenced trading on 1 January 2022. As it anticipated an annual turnover in
excess of R1 000 000 it immediately registered as a vendor.
For its first tax period that ended on 28 February 2022 its accounting records revealed the
following:
Supply of goods or services at the standard rate 86 250
Supply of goods or services at the zero rate 10 350
Supply of exempt goods or services 21 660
Input tax on capital goods (note 2) 25 500
Input tax on non-capital goods and services (note 3) 8 625
‘Deemed’ input tax on the cash purchase of second-hand goods 150
Value of fringe benefits subject to value-added tax (note 4) ???
Credit note issued (R1 500 plus R225 value-added tax) 1 725
Credit note received (R1 000 plus R150 value-added tax) 1 150
Notes
1. Being a juristic person, Confident Limited accounts for value-added tax on the invoice basis.
The Commissioner has agreed to a ‘turnover-based’ method of apportionment and 85% has
been agreed as the percentage applicable to the making of taxable supplies.
2. Confident Limited’s input tax on capital goods of R25 500 includes R21 000 incurred on a
‘motor car’ as defined.
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.)
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.
29.7 (30 minutes)

This question tests the definitions of ‘entertainment’ and of a ‘motor car’ and sections 8(8), 12(a),
12(h) and 17(2)(a) of the Value-Added Tax Act. It also tests paragraphs 5 and 6 of the Seventh
Schedule to the Income Tax Act.
You are the audit manager in charge of the audit of Festive Forever (Pty) Limited, a manufacturer
of fireworks and other novelty items. Your audit clerk has queried the accuracy of the value-added
tax treatment in the following journal entries that were processed through its accounting records on
28 February 2022, being its financial year end:
• Salaries Dr 25 000
To Bank 28 750
Being the settlement of an employee’s university fees.
The employee did not have cash available to pay for his university fees (he is studying part time)
and requested that Festive Forever (Pty) Limited pay them on his behalf. In return, he would
waive his right to his annual salary increase.
Salaries Dr 3 750
To Value-added tax output account 3 750
Being the output value-added tax on the deemed supply arising
from the settlement of an employee’s debt, being a Seventh
Schedule fringe benefit (R28 750 × 15 / 115).
VALUE-ADDED TAX 653
• Bad debts Dr 15 000

To Debtors 17 250
Being the write off of the debt owing by Novelty Wholesalers
Limited (a local customer).
This debtor has gone into liquidation. The R17 250 owing by it comprises the original credit sale
to it of R14 375 and interest of R2 875 levied by Festive Forever (Pty) Limited on the overdue
amount.
• Motor vehicles Dr 552 000
To Creditors 634 800
Being the purchase of an 18-seater minibus for transporting
employees to and from work on a daily basis.
The factory of Festive Forever (Pty) Limited is located in an outlying area. Public transport
facilities are therefore unavailable for employees requiring transport to and from its factory.
• Bank Dr 3 680
To Sales 3 680
Being sales of fireworks (trading stock) to employees.
Employees are entitled to purchase trading stock at its manufactured cost.
• Bank Dr 54 625
To Insurance award 54 625
Being the receipt of an indemnity award.
Festive Forever (Pty) Limited’s insurer awarded it R54 625 for the damage caused to a
warehouse when an explosion occurred resulting from the storage of a defective firework.
• Employees’ subsistence Dr 9 600
To Bank 11 040
Being the purchase of a pool table (a table that a ball-game is
played on) for its employees’ canteen.
Because of the remote location of Festive Forever (Pty) Limited’s factory, many employees
remain on its premises during their lunch break and entertain themselves in the employees’
canteen.
You are required to provide Festive Forever (Pty) Limited with a schedule of journal entries
(supported by brief explanations) that should be put through its books so as to correct possible
errors contained in the above journal entries. If no adjustment is required, indicate why, and support
it with a brief explanation.
29.8 (40 minutes)

This question tests the determination of a vendor’s value-added tax liability including the
definitions of ‘entertainment’ and a ‘motor car’ and sections 8(1), 8(8), 11(1)(h), 12(a), 16(3)(a),
17(2), 18(3) and 23(3) of the Value-Added Tax Act.
Otto Stern is a manufacturing jeweller. He manufactures and retails his jewellery from a shop he
leases in an up-market shopping centre in Durban. He is a sole proprietor. He is registered for
value-added tax on the invoice basis.
After a recent query regarding Otto Stern’s value-added tax affairs from the local SARS office, he
has requested your assistance in completing his value-added tax return for the two-month tax period
1 August 2021 to 30 September 2021.
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:
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
Bank charges 920
Flowers (note 5) 2 530
Insurance premiums (note 6) 3 450
Petrol 1 495
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.
29.9 (45 minutes)

This question tests the definitions of ‘entertainment’ and a ‘motor car’ and sections 2(1), 8(8),
16(3)(a), 17(2), 18(1), 18(3) and 22 of the Value-Added Tax Act and paragraph 5(2) of the Seventh
Schedule to the Income Tax Act.
Your audit clerk has queried the accuracy of the following journal entries that were processed one
day before Unihandle Limited’s financial year end (28 February 2022). His concern is that the
value-added tax implications of these journal entries may have been incorrectly dealt with by it.
The journal entries are as follows:
• Land and buildings Dr 5 000 000
To Creditor 5 750 000
Being a purchase on credit of an existing block of offices.
Transfer and payment is to take place in three months’ time. The creditor is not a vendor.
• Bad debt Dr 28 750

To Debtor 28 750
Being the write off of the debt owing by Run Toofast for goods
purchased by him on credit on 31 May 2021.
• Bank Dr 155 250
To Insurance award 155 250
Being an award received from an insurer in settlement of a
claim made for a delivery van stolen five months earlier.
• Director’s salary Dr 805
To Stationery 805
Being computer stationery taken by the director for his home
(private) printer that is used solely by his two children who are
both full-time university students.
Unihandle Limited purchases computer stationery at a 20% discount because of the large
quantities it buys. The supplier of the stationery does not grant a special discount to its other
customers.
• Entertainment Dr 9 000
To Creditor 10 350
Being an accrual for the year-end luncheon for employees held
at a local hotel.
• Employees’ loan accounts Dr 3 680
To Interest 3 200
To Value-added tax output account 480
Being interest raised on employees’ loan accounts outstanding
at the end of the financial year.
• Accommodation and meals Dr 4 950
Airfares Dr 5 100
Car hire Dr 600
To Creditor 12 249
Being an accrual for a three-day ‘out-of-town’ business trip
undertaken by its managing director during the last week of
February.
The car hire rate (for a motor car) of R230 a day (R200 plus value-added tax of R30) includes
an insurance charge of R69 a day (R60 plus value-added tax of R9).
• Bank Dr 34 500
Accumulated depreciation – motor vehicles Dr 60 000
To Motor vehicles 80 000
To Profit on the sale of fixed assets 14 500
Being the sale of a delivery vehicle to an ‘ex’ employee.
This employee resigned on 28 February 2022 to commence his own business the next day. On
28 February 2022 he purchased this delivery vehicle from Unihandle Limited. Its market value
on 28 February 2022 was R43 700 (R38 000 plus value-added tax of R5 700).
You are required to provide Unihandle Limited with a schedule of journal entries (supported with
brief explanations) that should be put through its books so as to correct possible errors contained in
the above journal entries.
VALUE-ADDED TAX 657
29.10 (40 minutes)

This question tests the deemed output tax that is payable on certain fringe benefits under
section 18(3).
Sports Net (Pty) Limited selected Skep Skop, one of its commentators, to be its commentator on
the South Africa Rugby Team’s participation in the Rugby Championships in Australia during
September and October 2021.
Skep Skop, who is a full-time employee of Sports Net (Pty) Limited, enjoyed the following benefits
from it during the 2022 year of assessment:
• The use of a motor car. This motor car was purchased by Sports Net (Pty) Limited during the
2021 year of assessment at a cost of R299 000 (R260 000 plus value-added tax at 15% of
R39 000). It bears all the maintenance costs for this motor car. He is required to pay for all the
fuel costs. During the 2022 year of assessment he paid R34 500 for fuel. He has proof that he
paid R34 500. During his two-month assignment in Australia he ‘returned’ his ‘company car’ to
Sports Net (Pty) Limited (at its request) so that it could be used by other commentators who
needed transport during that period.
• A subsistence allowance of Australian $4 140 (being 61 days at Australian $60 a day). The rand
equivalent of this subsistence allowance is R43 844. The subsistence allowance awarded to Skep
Skop was for his meals, drinks and other incidental expenses. (Sports Net (Pty) Limited paid all
his accommodation expenses during his two-month stay in the United Kingdom.) Because he
has family living in Australia he spent only Australian $2 760 of his subsistence allowance.
(This deemed amount of subsistence expenditure for Australia is Australian $230 a day.)
• The free use of a new notebook computer purchased by Sports Net (Pty) Limited prior to Skep
Skop’s departure to Australia at a cost of R20 700 (R18 000 plus value-added tax of R2 700).
The use of this notebook computer was given by it to him to enable him to prepare his
broadcasts including a summary of all the results.
• On his return from Australia to South Africa, Skep Skop was given the option to purchase this
notebook computer from Sports Net (Pty) Limited for R13 800 (R12 000 plus value-added tax
of R1 800) being its book value in the accounting records. He took up this option and purchased
it because he knew its market value was R18 400 (R16 000 plus value-added tax of R2 400)
having read an advertisement for a similar second-hand notebook computer in a local
newspaper.
• On Skep Skop’s return from Australia to South Africa, Sports Net (Pty) Limited offered him the
free use of its holiday cottage. He accepted the offer and for 10 days during December 2021 and
his wife and himself enjoyed a vacation. If the holiday cottage is not used by its employees it is
let to non-employees at a daily rate of R759. (A maximum limit of four adults and four children
are allowed to occupy the holiday cottage at any one point in time.)
• An interest-free loan of R24 840 was granted by Sports Net (Pty) Limited to Skep Skop on
1 January 2022. Since he is likely to move into a management position with it he enrolled for a
professional-management qualification offered on a correspondence basis by a university. The
R24 840 was used by him to settle the tuition fees of R20 424 and to purchase text books for
R4 416. He is required to settle the loan at the rate of R2 070 a month (this amount being
deducted from his ‘after-tax’ earnings by it). He repaid R4 140 during the 2022 year of
assessment (R2 070 on the last day of both January 2022 and February 2022).
• Skep Skop is a member of Sports Net (Pty) Limited’s medical scheme. Under its rules, the
employer and employee are each liable for 50% of the monthly contribution. For the 2022 year
of assessment, his total monthly contribution is R920 (he paid R460 and it the other R460). His
membership is for only himself.
• 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.
29.11 (60 minutes)

This question tests the definitions of ‘entertainment’ and a ‘motor car’ and sections 2(1)(j), 8(8),
10(2)(b), 11(2)(a), 12(g), 16(3)(a), 17(2) and 18(3) of the Value-Added Tax Act. It also tests the
general deduction formula (sections 11(a) and 23(g)) and sections 11(e) and 23C of the Income Tax
Act.
You are a tax consultant with a local firm of chartered accountants. You have received the
following value-added tax queries from your clients (all of whom are vendors). These queries
require your comment:
Friendly Stores (Pty) Limited
Friendly Stores (Pty) Limited is restructuring the remuneration packages of all its employees. As
part of this restructuring process it is ‘converting’ its medical scheme into a non-contributory fund.
The effect of this ‘conversion’ is that it will be liable for 100% of the monthly contribution to the
medical scheme for each employee. For all its employees a taxable fringe benefit will arise under
the provisions of paragraph 12A of the Seventh Schedule.
Are there value-added tax consequences that arise from this medical scheme restructuring?
Fashion Setters (Pty) Limited
Fashion Setters (Pty) Limited, as an incentive to its sales force, awarded five trips abroad to attend
the 2021 Rugby Championships played in Australia to its five top-performing sales representatives.
Each award consisted of the following:
• Two return air-tickets to Australia (for the employee and his chosen partner). Each air ticket cost
it R24 150 (R24 150 plus value-added tax of Rnil).
• Cash of R24 380 to cover accommodation, meals and other incidental costs for a 10-day period.
• A video camera to record their experiences. The video cameras were purchased by it at a
discounted price of R3 680 (R3 200 plus value-added tax of R480) each from one of its
customers. These video cameras normally sell for R4 370 (R3 800 plus value-added tax of
R570).
What are the value-added tax consequences that arise from the awards provided by Fashion Setters
(Pty) Limited to its five qualifying employees?
Nancy O’Brien
Nancy O’Brien is a general practitioner in private practice. She is considering purchasing a double-
storey house that is for sale in a residential area. If she purchases it, she will use the downstairs area
as consulting rooms and a surgery. The upstairs area will be occupied by her family and herself as a
VALUE-ADDED TAX 659
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?
Chesterfield Couches (Pty) Limited

Chesterfield Couches (Pty) Limited’s delivery van was written off in an accident. It was insured at
its replacement value. During its current tax period ended 31 October 2021 it was awarded
R207 000 by its insurer as compensation for the loss of its delivery van.
What are the value-added tax consequences to Chesterfield Couches (Pty) Limited that arise out of
this insurance award?
You are required to draft a reply to each of the above queries that you have received from your
clients.
29.12 (30 minutes)

This question tests sections 11(e), 39, 57D, 58, 59, 60, 61, 62, 63 and 73 of the Value-Added
Tax Act and sections 59, 74(1), 221 to 224 inclusive, 235 and 239 to 243 inclusive of the Tax
Administration Act.
Ricket Execom, a vendor, is contemplating entering into an ‘arrangement’ that is likely to save him
a substantial amount of value-added tax.
Ricket Execom is, however, concerned about the merits of this ‘arrangement’. His concern is its
validity. He is unsure whether it constitutes tax evasion or tax avoidance.
Ricket Execom is aware of the existence of penalty provisions in the Value-Added Tax Act and the
Tax Administration Act but does not know their details. He has also been informed that the value-
added tax legislation contains a tax avoidance provision similar to section 80A of the Income Tax Act.
You are required to write a letter to Ricket Execom setting out the difference between tax evasion
and tax avoidance, listing the various penalty provisions contained in the Value-Added Tax Act and
in the Tax Administration Act and discussing the possible application of section 73 of the Value-
Added Tax Act – being its tax avoidance provision.
29.13 (15 minutes)

This question tests sections 11(e), 39, 57D, 58, 59, 60, 61, 62, 63 and 73 of the Value-Added
Tax Act and sections 59, 74(1), 221 to 224 inclusive, 235 and 239 to 243 inclusive of the Tax
Administration Act. It also tests section 9(15) of the Transfer Duty Act.
You are a tax consultant in private practice. A client of yours, Justice Jaggers, an attorney, has
asked you to review an extract (see below) from a sale agreement he has drafted for the sale of a
small shopping complex. The shopping complex is leased to a number of tenants who will retain
occupancy of their shops under their lease agreements. The purchase consideration for the shopping
complex is R41 400 000. Both the seller and purchaser are registered vendors. The effective date of
the sale agreement is 1 March 2022.
An extract from the draft sale agreement follows:
‘The seller and purchaser both agree that the shopping complex is disposed of as a going
concern. The seller and purchaser further agree that the shopping complex will be an income-
earning activity on the date of transfer and that the assets necessary for carrying on the
enterprise are disposed of by the seller to the purchaser.
‘The consideration for the sale of the shopping complex is R41 400 000, payable by the
purchaser to the seller on registration of transfer.
‘The transfer duty payable for this sale shall be borne by the purchaser.’
Justice Jaggers has requested your comments regarding the treatment of the value-added tax and
transfer duty for this sale.
You are required to comment on whether the value-added tax and transfer duty treatment contained
in the draft agreement as set out above are correct.
VALUE-ADDED TAX 661
29.14 (30 minutes)

This question tests the value-added tax payable by, or refundable to, a Category A vendor that
operates a branch (depot) outside South Africa. It tests standard rated and zero-rated supplies. It
also tests the definitions of an ‘enterprise’, an ‘export country’ and ‘exported’ and sections 2, 11,
12 and 17 of the Value-Added Tax Act.
Domkrag Padloper (Pty) Limited is a resident of the Republic. It carries on business as a retailer
from its head office in South Africa. It also operates a depot in Namibia, from where sales are made
to customers living in Namibia. Its depot in Namibia is not regarded as an independent branch. It is
registered as a Category A vendor.
The following amounts that relate to Domkrag Padloper (Pty) Limited include value-added tax,
when applicable:
September October November
2021 2021 2021
Cash sales of supplies to ‘local’ customers from its South
African head office 484 794 595 125 528 195
Payment received in advance from a ‘local’ customer for
supplies delivered and invoiced on only 6 October 2021 9 200
Cash sales from its depot in Namibia to customers in Namibia.
This trading stock was forwarded to its depot on 15 September
2021 and was all sold by 31 October 2021 46 575 50 025 70 725
Indemnity award for an insurance claim for trading stock
stolen in transit to a ‘local’ customer 23 529
Interest earned on a loan to a subsidiary company in South
Africa 7 245
Expenditure
Salaries 139 725 127 650 144 210
Property rates on its trade premises 2 116 2 116 2 116
Electricity and water 2 760 2 944 2 576
Telephone 1 173 1 380 1 035
Purchases of trading stock 265 650 248 400 286 350
Cost of entertaining potential customers at various restaurants
in Uppington, South Africa 2 714
Purchase of a new delivery vehicle:
– Cash cost 414 000
– Finance charges paid 11 040 11 040
Purchase of a new motor car on 1 November 2021. Its use has
been given to Stella Vryburg, its sales manager as a fringe
benefit from its date of purchase (all costs relating to it are
paid by Domkrag Padloper (Pty) Limited). 483 000
Fuel for delivery vehicles and Stella Vryburg’s motor car 3 000 8 050
Maintenance of delivery vehicles and Stella Vryburg’s motor car 8 625 2 990
You are required to determine the value-added tax payable by, or refundable to, Domkrag Padloper
(Pty) Limited for its latest tax period.
29.15 (15 minutes)

This question tests both the normal tax and value-added tax consequences to both the employer and
the employee on the fringe benefit ‘use of a motor car’ awarded to the employee by the employer.
On 1 March 2021, Hingeback CC, a resident of the Republic, purchased a ‘motor car’ as defined
for R431 250 (R375 000 plus R56 250 value-added tax at 15%) cash. On the same day, the
exclusive use of this motor car was given to Olive Ridley, its managing director.
Olive Ridley used this motor car throughout the 2022 year of assessment.
Hingeback CC incurred the following expenses in relation to it:
Annual insurance (R18 000 plus R2 700 value-added tax at 15%) 20 700
Fuel (R98 900 plus Rnil value-added tax) 98 900
Repairs (R9 000 plus R1 350 value-added tax at 15%) 10 350
Licence (R966 plus Rnil value-added tax) 966
Olive Ridley travelled a total distance of 19 500 kilometres during the 2022 year of assessment in
this motor car, of which 7 800 kilometres were for business purposes.
Hingeback CC’s financial year ends on the last day of February.
You are required to determine all the resulting normal tax and value-added tax consequences of the
above transactions, for both Hingeback CC and Olive Ridley.
29.16 (60 minutes)

This question tests section 18(3) (a deemed supply) of the Value-Added Tax Act, the definition of
‘gross income’, sections 8(1), 10(1)(nA), 10(1)(nB) and 10(1)(q) and paragraphs 5, 6, 7, 8, 9, 10,
11, 12 and 13 of the Seventh Schedule to the Income Tax Act. It also tests the judgment from COT
v G (1981 (4) SA 167 (ZA), 43 SATC 159).
In Happy ’n Contented Limited’s two-month ‘tax period’ that ended on 31 January 2022, it
provided the following fringe benefits to certain of its employees:
Sampson Strong
A bravery award of R4 999 cash to Sampson Strong as a result of him saving the weekly wages
from being stolen in a hold-up at its trading premises.
Larry Longserving
A wrist watch that it had purchased for R4 025 (R3 500 plus R525 value-added tax) was given to
Larry Longserving in appreciation of his 25 years’ service to it.
Neville Balance
The free home use of a computer granted to Neville Balance, its accountant. He needs a computer
at home since he often prepares budgets (for work) at home. It hires this computer at a rental of
R460 (R400 plus R60 value-added tax) a month under an agreement of lease. He uses this
computer to the extent of 40% for business purposes and 60% for private (domestic) purposes.
Nelson Good
The free use of a motor car to Nelson Good, its managing director. This motor car cost it R345 000
(R300 000 plus R45 000 value-added tax at 15%) on 1 December 2019. During the 2022 year of
assessment he travelled a total of 30 000 kilometres in it. Of the 30 000 total kilometres travelled by
him in it, 12 000 kilometres were for business purposes.
Bee Good, Nelson Good’s wife was given the use of a ‘second’ motor car, for the two-month period.
This motor car cost it R165 600 (R144 000 plus R21 600 value-added tax at 15%) on 1 December
2019. All petrol and maintenance costs of this ‘second’ motor car are borne by Nelson Good. For the
• it cost him R12 000 to maintain this ‘second’ motor car, and
VALUE-ADDED TAX 663
• he incurred R36 000 on fuel for it.

During the 2022 year of assessment BeeGood travelled a total of 24 000 kilometres in it. Of the
24 000 total kilometres she travelled in it, no kilometres were for business purposes.
Free lunches
Ninety semi-skilled employees of it were given free lunches in its ‘employees’ canteen on 36 days
during this tax period. The average cost of a meal to it is R46.
Uniforms
Its 90 semi-skilled employees were also given by it three uniforms each. They are ‘standard’ blue
overalls that they are required to wear at work while on duty. They cost it in total R62 100
(R54 000 plus R8 100 value-added tax).
Free transport
Fifty of its employees were provided by it with free transport to and from work. It has an agreement
with a local taxi operator who provides these employees with the transport in three 18-seater
minibuses. It paid the local taxi operator R690 per employee per month during this two-month
period.
Stiffie Disc
The free use of its beach cottage (that it had purchased for R1 380 000) to Stiffie Disc – its
computer manager – and his family (a wife and their two minor children) for the month of
December. When this beach cottage is let by it to a non-employee it is let at a daily rate of R345 a
person.
James Love
It granted a R1 000 000 loan at 4% to James Love, an employee of it who had recently married and
who needed the R1 000 000 to help finance the cost of erecting a home for Juliet Love, his wife,
and himself.
Florence Helpbringer
A subsidy of R1 403 a month was granted by it to Florence Helpbringer towards the mortgage bond
repayment of the home belonging to her. She is its managing director’s personal secretary.
Tiny Commission
An entertainment allowance of R460 a month was granted by it to Tiny Commission – its sales
manager. He is free to entertain whom he likes.
Arnold Owl
It paid Arnold Owl’s home telephone account of R414 in December and R391 in January. He is its
director of security and needs a telephone at home in the event that there is an emergency at its
premises.
Samuel Wise
A bursary of R27 600 under a ‘closed’ bursary scheme was granted by it to Alan Wise, the son of
Samuel Wise, its financial manager. The bursary is to cover the tuition fees levied by the university
where Alan Wise is a second-year student. (Samuel Wise enjoys a remuneration proxy of R620 000
from it.)
Vernon Charm
The free use of a four-bedroomed furnished apartment that it hired at a cost of R529 a day, was
given by it to Vernon Charm for the month of January. He was appointed as its personnel manager
with effect from 1 January 2022. He relocated from Durban to Johannesburg to take up the
position. He had purchased a house that was available for occupation only from 1 February 2022. It
therefore agreed to provide this temporary accommodation for his family and himself. He was
responsible for settling all water and electricity costs. His remuneration proxy is R660 000.
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.
29.17 (60 minutes)

This question tests the definitions of ‘input tax’ and ‘second-hand goods’ and sections 8(8), 8(14),
8(16), 17(2) and 18(3) of the Value-Added Tax Act.
You are a partner in an auditing firm. Most tax work, including value-added tax that is not of a
general nature is carried out by yourself. A fellow partner of yours is busy finalising the audit of a
major client, a diversified company, namely, Rainbow Limited. Its year of assessment ended on
28 February 2022. The following inter-office memorandum has been received by you from him:
To: You
From: Him
Date: 15 March 2022
‘Tax problems with the Rainbow Limited audit’
Insurance awards
In January 2022 a motor car (as defined in the Value-Added Tax Act) belonging to Rainbow
Limited was written off in an accident. The other motor car involved in this accident was also
written off. Rainbow Limited’s driver was the guilty party in this accident. An amount of R92 000
was awarded to it by its insurer for its written-off motor car. This transaction was recorded in its
journal as follows:
Bank Dr 92 000
To Motor car 80 000
Being the proceeds awarded by the insurer for the motor car that
was written off.
Rainbow Limited’s insurer awarded the other party involved in the accident R150 000 for her claim
for his motor car that was written off in the accident. She had claimed R167 250 for her written-off
motor car. Wishing to maintain its good public image, it agreed to pay the difference of R17 250 to
her. It did this by an electronic transfer out of its bank account. It recorded this payment in its
journal as follows:
Motor car expenses Dr 15 000
To Bank 17 250
Being a settlement award made to the other party involved in the
accident.
Are these journal entries correct, and if not, what should the correcting journal entry or entries be?
VALUE-ADDED TAX 665
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
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).
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?
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
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.
To Land and buildings 234 000
Being the ‘deemed’ input tax on this transaction.
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
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
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
travelling and subsistence was for five days business-related usage

of the hired car and consists of car rentals of R1 500, insurance of
R300, and fuel of R690.
Salaries Dr 13 500
To Travel agent creditor 20 700
Being the airfare account resulting from Violet Indigo’s holiday
and business trip.
Salaries Dr 8 053
To value-added tax output account 8 053
Being the deemed output tax on this fringe benefit determined as
follows:
R61 738 (R37 800 + R10 438 + R13 500) × 15 / 115 = R8 053.
Are these correct, and if not, what should the correcting journal entry or entries be?
You are required to provide your partner with correcting journal entries and explanations in
response to his queries.
29.18 (60 minutes)

This question tests the definitions of ‘entertainment’ and a ‘motor car’ and sections 2, 8(8), 8(14),
9(3), 10(7), 11(1), 12(a), 12(c), 16(4), 18(1), 18(3), 22(1), 22(2) and 23(3) of the Value-Added Tax
Act.
Frosties (Pty) Limited is a refrigerator (fridge) and deep freeze (freezer) manufacturer based in
Durban, KwaZulu-Natal. It is a resident of the Republic. Its accountant has been on sick leave and
its bookkeeper attempted to prepare its value-added tax return for its tax period 1 September 2021
to 30 September 2021. She is unfamiliar with the value-added tax treatment applied to the receipts
and accruals and expense items posted to the value-added tax output account. She has therefore
requested your assistance in checking the accuracy of the output tax amount.
A detailed analysis, with explanations of Frosties (Pty) Limited’s output tax amount of R181 469
for its tax period 1 September 2021 to 30 September 2021 follows:
Sales (note 1) 45 000
Sales to employees (note 2) 2 775
Sale of fixed property (note 3) 112 500
Sale of delivery van (note 4) –
Sale of tables and chairs (note 5) 450
Interest on current account (note 6) 920
Indemnity award (note 7) 9 150
‘Company car’ fringe benefit (note 8) 94
Rentals (note 9) 900
Settlement discount received (note 10) 2 700
Recovery of bad debt (note 11) 7 500
Long-outstanding creditor (note 12) –
Fridge taken by the shareholder (note 13) –
181 989
Notes
1. Frosties (Pty) Limited sells fridges and freezers to both local and foreign customers. A review
of the sales for the period 1 September 2021 to 30 September 2021 revealed gross sales of
R210 000 (excluding value-added tax) to local customers and gross sales of R90 000
(excluding value-added tax) to foreign customers.
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.
29.19 (50 minutes)

This question tests the definitions of ‘input tax’ and a ‘motor car’ and sections 11(1)(h), 16(3)(a)
and 17(2) of the Value-Added Tax Act.
Wellingtons (Pty) Limited was established on 1 May 2021 to manufacture gumboots (for both the
local and export markets) at a factory situated in an outlying rural area. It is a wholly owned
subsidiary of Footronics (Pty) Limited. Both companies are residents of the Republic. The financial
year end of Wellingtons (Pty) Limited is the last day of February.
Wellingtons (Pty) Limited is a vendor and has a two-month tax period.
Due to the remote location of Wellingtons (Pty) Limited’s factory it erected a number of houses on
a plot of land near to its factory. These houses are let as domestic dwellings to those employees
(and their families) who are not from the local community and who do not wish to travel long
distances to and from its factory each day. The rentals charged for the houses are market related.
In the determination of Wellingtons (Pty) Limited’s value-added tax input tax deductions, the
Commissioner has agreed that it can apply the ‘turnover-based’ method of apportionment to those
input tax deductions that cannot be directly attributed to a particular supply. The following
‘turnover’ ratio has been agreed:
• Standard-rated supplies – 75%.
• Zero-rated supplies – 10%.
• Exempt supplies (being the letting of residential property to its employees) – 15%.
For Wellingtons (Pty) Limited’s first tax period, being 1 May 2021 to 30 June 2021, it purchased
the following five items: (Its financial accountant is, however, unsure if an input tax deduction is
available for these purchases. She has requested your assistance.)
• A new 18-seater minibus is used to transport, to and from its factory, those employees not
wishing to take up accommodation in the houses erected near to it. This minibus cost R690 000
(R600 000 plus value-added tax of R90 000).
• A new desktop computer and printer was purchased for its accounting department. They are
used to process all its transactions (including the rental and related expenses of the domestic
houses). Their total cost was R17 020 (R14 800 plus value-added tax of R2 220).
• Due to the remote location of its factory, employees are also unable to access shops to purchase
food. It therefore operates a canteen on its factory premises to provide a lunch-time meal to its
employees. Its canteen is run on a subsidised basis (that is, the amount it charges the employees
for a meal does not cover all its direct and indirect costs). So as to equip its canteen it purchased
crockery and cutlery for R14 375 (R12 500 plus value-added tax of R1 875), kitchen equipment
for R32 430 (R28 200 plus value-added tax of R4 230) and chairs and tables for R8 740 (R7 600
plus value-added tax of R1 140). Standard-rated food and beverages purchased during the two-
month period were R18 975 (R16 500 plus value-added tax of R2 475) and zero-rated purchases
were R9 300.
• A second-hand moulding machine was purchased by it for its factory from a non-vendor. The
purchase price of this machine was R36 000. Under the purchase agreement, it is obliged to
settle the R36 000 in four equal instalments of R9 000 payable on the first day of each month,
commencing on 1 June 2021. It settled its first instalment on 1 June 2021 in accordance with its
purchase agreement.
• 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.
29.20 (60 minutes)

This question tests the definitions of ‘entertainment’, ‘input tax’, a ‘motor car’ and ‘second-hand
goods’ and sections 8(8), 11(1), 16(3), 17(2), 18(3), 18(5) and 18(6) of the Value-Added Tax Act.
Quarry Tiles (Pty) Limited is a vendor. It has a two-month tax period. It recently submitted a value-
added tax return for the period 1 November 2021 to 31 December 2021 that resulted in a substantial
refund. This refund was caused largely by an input tax deduction resulting from the purchase of a
new delivery vehicle under a suspensive sale agreement.
Quarry Tiles (Pty) Limited is concerned that it will now be subjected to a value-added tax audit to
be carried out by inspectors employed by the Commissioner.
A copy of Quarry Tiles (Pty) Limited’s tax invoice from the motor dealer dated 30 November 2021
is set out below:
Cost of delivery vehicle 300 000
Principal debt 345 000
Total amount owing 410 400
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:
Cost of industrial tile-cutting machine 30 000

Principal debt 34 500
Total amount owing 39 600
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
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
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.
29.21 (45 minutes)

This question tests both the normal tax and value-added consequences that apply to certain
transactions including the definitions of ‘entertainment’, ‘input tax’ and a ‘second-hand good’ in
section 1(1), section 8(8), 11(1), 16(3), 17(2), 18(3), 18(5) and 18(6) of the Value-Added Tax Act.
You are one of nine partners in an auditing firm. Most tax matters are handled by yourself. The
following eight memorandums have been received by you, one from each of your partners. All
eight memorandums relate to value-added tax issues applicable to certain clients (who are all
vendors).
VALUE-ADDED TAX 673
Mayville Properties (Pty) Limited

Mayville Properties (Pty) Limited used to let both residential and commercial properties. Last
month it sold all its residential properties and it now lets only commercial properties. Exactly one
year earlier, it had purchased a computer for R115 000 (R100 000 plus value-added tax at 15% of
R15 000). This computer was used solely to maintain the records of all its tenants. At the time the
computer was purchased the supply of residential accommodation was 40% of its business. This
change of use of the computer occurred in its two-month tax period ending 30 November 2021. The
computer’s market value at the time of change of use was R60 000. Its book and tax value at this
date was R66 667. Mayville Properties (Pty) Limited’s year of assessment ends on the last day
of February. The market value of the computer at 28 February 2022 was R50 000. Its book and tax
value on this date was R58 334. Mayville Properties (Pty) Limited always ends its value-added tax
periods on the last day of the month. What are the resulting value-added tax consequences now that
its computer is used solely to maintain records of its commercial tenants?
Flash Limited
Alan Barrie, the new managing director of Flash Limited chose the free use of a motor car as part
of his salary package. It purchased a motor car for R345 000 (R300 000 cash price plus R45 000
value-added tax). It gave the use of this motor car to Alan Barrie from the beginning of this month.
What are the value-added tax consequences to Flash Limited?
Manufacturing Man Limited
Manufacturing Man Limited moved to new premises this month. It sold its ‘old’ factory for
R3 450 000 (R3 000 000 plus R450 000 value-added tax). It purchased a ‘new’ factory for
R4 600 000 (R4 000 000 plus R600 000 value-added tax). It had purchased its old factory many
many years ago under the 13%-sales-tax regime for R2 500 000. What are the value-added tax
consequences to it of the selling of its ‘old’ factory and the purchase of its ‘new’ factory?
As-Good-As-New (Pty) Limited
As-Good-As-New (Pty) Limited is a second-hand furniture dealer. It buys old furniture, restores it,
and then sells it. It buys most of its trading stock from non-vendors for cash. It buys this trading
stock at the market value of the second-hand item of furniture. It has now recently secured an
agreement with Appliance Agreements (Pty) Limited, a large furniture retailers (a vendor). Under
this agreement, As-Good-As-New (Pty) Limited will buy all the furniture that Appliance
Agreements (Pty) Limited repossesses from its defaulting suspensive-sale customers. The payment
terms of this agreement are that As-Good-As-New (Pty) Limited will settle Appliance Agreements
(Pty) Limited 90 days after it has taken delivery of the repossessed furniture. What are the value-
added tax implications to As-Good-As-New (Pty) Limited of its new agreement? And please
confirm the value-added tax implications when it purchases its trading stock from a non-vendor?
Alpha Shoes (Pty) Limited
As a result of a strike and subsequent meetings with a trade union, Alpha Shoes (Pty) Limited now
operates a canteen. Employees requested a ‘free’ lunch at work rather than a pay increase. It cost
Alpha Shoes (Pty) Limited R142 600 (R124 000 plus R18 600 value-added tax) to convert a former
factory building into a canteen. In addition it cost Alpha Shoes (Pty) Limited R69 000 (R60 000
plus R9 000 value-added tax) to equip, and R57 500 (R50 000 plus R7 500 value-added tax) to
furnish its canteen. The cost of the luncheon ingredients for the month was R13 800 (R12 000 plus
R1 800 value-added tax). And its electricity account increased by R575 (R500 plus R75 value-
added tax) as a result of running the canteen. What are the value-added tax consequences to Alpha
Shoes (Pty) Limited of the above transactions?
Handle Bros Limited
Handle Bros Limited carry on a wholesale business. It sells men’s cosmetics. Love Potion
Number Nine is one of the brands it sells. Six months ago Ralph de Parfum, a salesman employed
by it to market the Love Potion Number Nine range of cosmetics disappeared along with a motor
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
29.22 (45 minutes)

This question tests both the normal tax and value-added consequences that apply to trading stock
that is disposed of otherwise than by a sale including sections 22(8)(a) and 22(8)(A) of the Income
Tax Act and sections 17(2)(a) proviso (i)(aa)(i) and 18(1) of the Value-Added Tax Act.
Catocrest Tavern CC
Catocrest Tavern CC carries on business as a retailer of beer. It is a vendor. Every Friday evening
from 17h00 to 18h00 is ‘Happy Hour’ at its tavern. For every ‘quart’ of beer purchased, it supplies,
free of charge, another quart of beer to the customer. It does this to encourage the township
dwellers to visit its premises and purchase its trading stock.
A quart of beer costs Catocrest Tavern CC R23 (R20 plus value-added tax of R3). A quart of beer
is sold by it for R34,50 (R30 plus value-added tax of R4,50).
During Catocrest Tavern CC’s two-month value-added tax period ended on 30 November 2021 it
‘gave away’, free of charge, 960 quarts of beer during its ‘Happy Hour’.
You are required to state what the normal tax and value-added tax consequences are of Catocrest
Tavern CC supplying quarts of beer, free of charge, during its ‘Happy Hour’.
Jacques St Coquilles
Jacques St Coquilles, a resident of the Republic, operates a beach guesthouse (a small hotel) in his
own name. He has queried the normal tax and the value-added tax implications of the following
two transactions:
• Each Sunday the guesthouse provides a ‘buffet’ (serve yourself) lunch to guests at a price of
R184 (R160 plus value-added tax of R24) a head. Since Jacques St Coquilles is normally ‘on
duty’ in the guesthouse on a Sunday he eats the left-overs off the ‘buffet’ table once its dining
room has closed (normally late in the afternoon). He has indicated that he is unable to arrive at a
cost for a meal off the ‘buffet’ table.
• Once a week (in the evening) Urchin St Coquilles, Jacques St Coquilles’s wife, attends a so-
called book club. To avoid having to cook a meal for himself at home he works late at the
guesthouse and orders a mixed seafood platter from the ‘a la carte’ (prepared to request) menu in
the restaurant. The price of a mixed seafood platter on the menu is R230 (R200 plus value-added
tax of R30). He has estimated that the cost of a mixed seafood platter meal is R138 (R120 plus
value-added tax of R18). Because he is not ‘on duty’ this evening he normally orders a particular
bottle of dry white wine to drink with his meal. The price of this bottle of wine off the wine list
is R172,50 (R150 plus value-added tax of R22,50). The mark-up applied to all wine by his
guesthouse is 200% on cost.
Jacques St Coquilles is a vendor.
You are required to discuss the normal tax and value-added tax implications to Jacques
St Coquilles that arise out of the two transactions as detailed above.
Kane Dunhill
Kane Dunhill owns the local bottle store. He trades in his name. He is a vendor. His bottle store
trades from nine in the morning to six in the evening, seven days a week. It makes solely taxable
supplies.
Each night when Kane Dunhill goes home he takes with him a nip of cane spirits (a small quantity
of spirits), a litre of coke and a box of cigarettes. Net of value-added tax these items cost him R90.
He would have sold them to a customer for R138 (R120 plus value-added tax of R18). He has not
‘accounted’ for these items. In other words, other than debiting ‘purchases’ when he purchased
them, no other entries have been made in his books (and financial records).
You are required to state what the normal tax and value-added tax consequences to Kane Dunhill
are of him taking home his trading stock.
29.23 (60 minutes)

This question tests the definitions of ‘entertainment’, ‘goods’, ‘input tax’, ‘instalment credit
agreement’, a ‘motor car’ and a ‘supply’ and sections 2, 8(8), 8(14), 8(27), 9(3), 10(7), 11(1),
12(a), 12(c), 12(g) 16(4), 17(2), 18(1), 18(3), 22(1), 22(2) and 23(3) of the Value-Added Tax Act.
Skottels CC manufactures braai stands. It retails them to the public through retail outlets situated in
most larger towns in South Africa. It also retails certain braai accessories including water-spray
bottles, torches, lamps, tongs, knives, long-forks, grids, trays brushes, gloves, charcoal lumps,
briquettes, wood (rooikrans and candelthorn), half-drums, boxes of matches, candles, fire-lites and
disc-wheels.
Skottels CC’s financial year ends on 30 September. It is a resident of the Republic. It recently
employed a new bookkeeper whose value-added tax knowledge is suspect. It renders a monthly
value-added tax return. Some of its journal entries from the month of September 2021 follow:
Bad debt recovered
Cash Dr 10 350
To Bad debts recovered 2 850
Being R10 350 recovered on a bad debt that was written off.
Explanation: The original debt arose from a credit sale to Lennie Marcus, a customer, on
14 February 2021. It was for R57 500 (R50 000 plus value-added tax at 15% of R7 500). The
R57 500 had been written off on 30 September 2021.
Overpayment from debtor
Debtors Dr 16 100
To Creditors 16 100
Being a transfer from debtors to creditors.
Explanation: Half-Drum Barrels CC, a local customer, had settled its account in full on 31 March
2021 for R16 100 (R14 000 plus value-added tax of 15% of R2 100). It had settled this same
account again on 30 April 2021 when it paid another R16 100.
Insurance premium
Insurance Dr 124 500
Value-added tax input account (R18 000 – R4 500) Dr 13 500
To Cash 138 000
Being payment of its annual insurance premium. The insurance
premium of R4 500 for its motor cars has, however, been excluded
from the value-added tax input account.
Explanation: This insurance premium is for Skottels CC’s trade assets used to make solely taxable
supplies. This insurance premium of R138 000 includes R34 500 (R30 000 plus value-added tax of
R4 500) for its motor cars.
Overdue creditor
Sub-Standard (Pty) Limited (a poor-quality supplier) Dr 4 830
To Purchases 4 830
Being the amount owing to a creditor for the supply of inferior goods
no longer being accepted as owing.
Explanation: In August 2020 Skottels CC purchased trading stock for R24 150 (R21 000 plus
value-added tax at 15% of R3 150) from a local supplier. It enjoyed an input tax deduction of
R3 150 in its tax period 1 August 2020 to 31 August 2020. It 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. It refused to settle this account until the quality problems were
resolved. On 30 September 2021 R4 830 (R4 200 plus value-added tax at 15% of R630) is no
VALUE-ADDED TAX 677
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
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
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.
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
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
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:
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
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
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
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
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.
29.24 (90 minutes)

This question tests the value-added tax consequences of certain ‘entertainment’ expenditure
incurred. It also tests fringe benefits, foreign exchange gains or losses, exemptions from normal tax,
deductions in the determination of taxable income, rebates and a taxable income determination.
And it tests a provision in a double tax agreement.
Sparkling Waters (Pty) Limited is managed and controlled in South African. It provides
infrastructure consulting engineering solutions for the building environment in Africa. It has a
balanced mix of
• specialised multidisciplinary engineering skills,
• advanced technology,
• appropriate experience, and
• understanding of social issues.
This enables Sparkling Waters (Pty) Limited to meet the challenges posed for infrastructure
development. Its range of expertise, amongst others things, includes areas of
• water,
• wastewater and effluent treatment,
• hydrology, and
• flood protection.
Sparkling Waters (Pty) Limited has built up a good reputation in the water sector in South Africa
and is now extending it into the international arena, and specifically Africa. Projects range from
feasibility studies and consulting services to engineering and project management of large water
infrastructure projects.
Sparkling Waters (Pty) Limited is a vendor. It has a 30 June financial year end. It recently secured
two new contracts, namely, one in Botswana, and the other in Kenya.
VALUE-ADDED TAX 681
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
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
8 to 11 December 2020 R1 = 0,85 pula

5 March 2021 R1 = 0,70 pula
31 May 2021 R1 = 0,80 pula
30 June 2021 R1 = 0,88 pula
The average exchange rate for the year ended 30 June 2021 was R1 = 0,75 pula.
Civil construction advice
The Botswana government requested that some expert advice be provided by Henry Fancourt, a
civil engineer, from Sparkling Waters (Pty) Limited’s Cape Town office. He visited its
Pietermaritzburg office for three days and two nights in April 2021 to provide the necessary
engineering advice, incurring the following expenses. These expenses paid by it were as follows:
Hotel accommodation (inclusive of value-added tax at 15%) 4 140
Sparkling Waters (Pty) Limited invoiced the Botswana government R150 000, exclusive of value-
added tax, for the advice offered during this three-day period.
Kenya contract
In October 2021, Masinga Reservoirs Limited, a Kenyan company, approached Sparkling Waters
(Pty) Limited for assistance with the project management of a large water infrastructure project in
Kenya. The contract amounted to 24 000 000 Kenyan shillings. Since this was a project
management contract, it had to second (send) three of its employees to the actual water
infrastructure site in Kenya. It accordingly sent these three employees to Kenya on 1 February
2022. They will remain in Kenya for nine months before returning to South Africa.
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.)
29.25 (60 minutes)

This question tests the value-added tax and normal tax implication for a lessee.
You are a trainee accountant at Green Ink Inc, a firm of registered auditors. You have been
assigned to the audit of Second Leasing (Pty) Limited. Green Ink Inc has been its auditors since
2013. You are currently busy with its audit for its 30 September 2021 financial year end.
Green Ink Inc uses the latest available audit software to assist with the performance of its audit
procedures. This is to ensure that it makes optimal use of available time and resources to carry out
the most effective and efficient audits possible.
Audit workpaper for Second Leasing (Pty) Limited
The following workpaper has been prepared and is available for your review:
Client: Second Leasing (Pty) Limited Year end: 30 September 2021 H 650
Prepared by: Junior Accountant Date: 4 November 2021
Reviewed by: Date:
Subject: Lease contract with Regal (Pty) Limited
On 1 July 2020 Second Leasing (Pty) Limited entered into a contract with Regal (Pty) Limited.
Under this contract, Regal (Pty) Limited received the right to use, at its discretion, a fleet of
100 motor cars for a period of three years. These motor cars are ‘motor cars’ as defined in
section 1(1) of the Value-Added Tax Act, and are of a similar model and size.
Second Leasing (Pty) Limited has a one-year extension option that will most likely be exercised by
Regal (Pty) Limited.
In addition, Regal (Pty) Limited has the option to purchase the motor cars at the end of the contract
term. At inception, it was unlikely it will exercise its option to purchase them.
The contract between them stipulates that

• Second Leasing (Pty) Limited accepts the full risk of destruction or loss of the motor cars and
assumes all obligations for insurance,
• Regal (Pty) Limited accepts the full risk of maintenance and repairs and is required to reimburse
Second Leasing (Pty) Limited for insurance.
The 100 motor cars are identified by registration numbers in the contract. Unless requested to do so
by Regal (Pty) Limited, Second Leasing (Pty) Limited may not substitute a motor car in the fleet
for another one.
Regal (Pty) Limited will pay R414 000 (including value added tax at 15%) at the end of each
month as consideration for the use of the motor cars.
Neither Regal (Pty) Limited nor Second Leasing (Pty) Limited incurred any initial direct costs for
the lease. The incremental rate of borrowing for Regal (Pty) Limited is 11,5% a year and the day-
1 cash equivalent for the 100 motor cars was R14 904 000 (including value-added tax at 15%). A
total finance cost of R5 214 784 is stipulated in the contract.
The contract was concluded and delivery of the motor cars took place on 1 July 2020. The first
instalment was paid by Regal (Pty) Limited on 31 July 2020 and all subsequent payments have
been made on the respective due dates.
Regal (Pty) Limited estimates the useful life of the motor vehicles to be five years. It used all
100 motor cars evenly throughout the year.
Regal (Pty) Limited provides short-term vehicle rental solutions. It is a registered Category B
vendor. It makes solely taxable supplies.
Regal (Pty) Limited has a 30 June year end. Under its accounting policy, assets with an individual
value of less than R25 000 are regarded as low-value assets.
You are required to discuss, supported with determinations when necessary, the following for the
contract entered into by Regal (Pty) Limited with Second Leasing (Pty) Limited:
1. The value-added tax implications for Regal (Pty) Limited as a result of the lease agreement for
its July 2020 and August 2020 value-added tax periods.
2. The normal tax implications for Regal (Pty) Limited arising for its 2021 year of assessment
(ended 30 June 2021). Discuss the normal tax implications of the lease agreement if it is an
instalment credit agreement under paragraph (b) of the section 1(1) definition of an ‘instalment
credit agreement’ and if it is a rental agreement.
3. The normal tax implications for Regal (Pty) Limited arising for its 2021 year of assessment
(ended 30 June 2021). Discuss the normal tax implications of the lease agreement if it is an
instalment credit agreement under paragraph (a) of the section 1(1) definition of an ‘instalment
credit agreement’ and if it is a rental agreement.
Provide reasons when no tax implications arise.
(SAICA adapted.)
CHAPTER 30
TAX PLANNING
30.1 (15 minutes)

This question tests the definitions of a ‘company’, a ‘dividend’, ‘gross income’ and a ‘trade’,
sections 9(2), 10(1)(h), 10(1)(i), 10(1)(k), 10B, 13ter, 25B and 64F and the judgments from CIR v
Nel ([1997] 4 All SA 310 (T), 59 SATC 349), Armstrong v CIR (1938 AD 343, 10 SATC 1),
ITC 1355 ((1981) 44 SATC 132), ITC 1379 ((1983) 45 SATC 236) and ITC 1543 ((1992) 54 SATC
446).
Fifteen statements on the tax consequences of making certain investments follow:
1. Local dividends from mutual building societies are subject to the same normal tax treatment as
local dividends from shareholdings in companies.
2. There is no difference in the determination of taxable income for local dividends received or
accrued from public companies and from private companies.
3. A profit made on the sale of a krugerrand will be gross income while a loss suffered will be
deductible in the determination of taxable income.
4. A husband investor and a wife investor may each enjoy the exemption for the first R23 800 (or
R34 500 local interest if they have attained the age of 65 years) of not otherwise exempt from
normal tax local interest.
5. Interest accruing from an investment made anywhere in the world must be included in South
African gross income when it accrues to a resident of the Republic.
6. Rentals accruing from an investment in a rent-producing property situated anywhere in the
world must be included in South African gross income when it accrues to a resident of the
Republic.
7. If an investor invests in a rent-producing property he is carrying on a ‘trade’ as defined in
section 1(1) of the Income Tax Act.
8. A non-resident who carries on business through a permanent establishment in South Africa
during the 2022 year of assessment will not enjoy the section 10(1)(h) exemption from normal
tax on his interest receipts and accruals.
9. A taxpayer who is not a resident of South Africa and who invests in a local interest-bearing
security will not pay South African normal tax on the interest that accrues to him from this
investment.
10. If a corporate taxpayer could invest funds in a taxable interest-bearing security earning local
interest at 9% it would be better off than investing in local dividend-yielding shares with a
return of 6% a year.
11. If a natural person paying normal tax at a marginal tax rate of 45% could invest funds in a
taxable local interest-bearing security earning interest at 9%, he would be better off than
investing in local dividend-yielding shares with a return of 6% a year.
12. Foreign dividends from a dual-listed foreign company are exempt from normal tax.
13. An investment resulting in R1 000 normal tax being payable on its return is a better investment
than an investment resulting in R1 500 normal tax being payable on its return.
14. Units in a collective investment scheme in securities (a so-called equity unit trust) give a return
of interest and dividends.
15. Units in a real estate investment trust give a return of interest and dividends.
685
30.2 (60 minutes)

This question tests the tax implications of various investments including the definition of ‘gross
income’, the general deduction formula (sections 11(a) and 23(g)), sections 9(2), 10(1)(i), 10(1)(k),
11(a), 20 and 23( f ), Practice Note 31 and the judgment from CIR v Lever Bros & Unilever Ltd
(1946 AD 441, 14 SATC 1).
You are employed as an investment adviser by a firm of chartered accountants. It offers as a service
to its clients, expert investment advice. The following five matters have been referred to you for
comment:
Nicholas Harry
Nicholas Harry, a resident of the Republic, aged 41 years, who suffers normal tax at the maximum
marginal rate of normal tax at 45%, has recently inherited R1 500 000. At present he has no
investments. He has been offered an investment in a 6% local interest-bearing security. It is not a
‘tax free investment’. He is, however, also considering the possibility of investing in a4% local
You are required to determine the investment, or combination of investments, that would give
Nicholas Harry the best after-tax return.
Maximilian Rocky
Maximilian Rocky, a resident of the Republic, aged 35 years, has at present a R100 000 fixed-
deposit investment with a local building society that is earning 7,5% interest. It is not a ‘tax free
investment’. It is for a five-year period, with the interest accruing annually. He is not allowed to
redeem this investment within this five-year period. But he is allowed to borrow against this
investment. He is therefore planning to take a R90 000 loan against this investment and to invest
the R90 000 in 4,5% local dividend-yielding shares. He will be required to pay interest at 9% on his
loan from the building society. In addition to the above interest, he will also earn more than
R23 800 local interest on his special savings account with the building society, also not a ‘tax free
investment’. He suffers normal tax at the maximum marginal rate of normal tax at 45%.
You are required to
1. comment on Maximilian Rocky’s proposed investment plan pointing out a problem that he
may encounter, and
2. explain to him, using an example to illustrate your explanation, how a taxpayer can increase
his rate of return by investing through a ‘tax-free’ investment.
Sylvester Feller
Sylvester Feller, a resident of the Republic, aged 29 years, has been offered a loan of R100 000 at
an interest rate interest of 4%. He would like to invest R40 000 of the R100 000 from the loan in
7% indefinite period shares in a local mutual building society, not being a ‘tax free investment’.
The remaining R60 000 he is planning to invest in a participating mortgage bond that will earn him
7,5% local interest a year, also not a ‘tax free investment’. He has other investments that yield more
than R23 800 local interest a year. He suffers normal tax at the maximum marginal rate of normal
tax at 45%.
You are required to
1. advise Sylvester Feller of a possible disadvantage that may exist with his proposed investment
plan, and
2. determine what effect these new investments would have on his normal tax liability.
Kruger Million
Kruger Million is a resident of the Republic. He is a dealer in shares. He does not invest in shares.
He has decided to sell his 20 000 shares in Gold Limited and can sell them for either
• R6 a share, or
TAX PLANNING 687
• R6,60 a share if they are sold by him ‘cum-div’.

A dividend of 60 cents a share has been proposed by Gold Limited but has not yet been declared.
Kruger Million paid R4 a share when he originally purchased the Gold Limited shares.
Kruger Million is planning to purchase shares in Silver Limited with most of the amount that he
obtains from the sale of his Gold Limited shares. He would like to purchase 40 000 Silver Limited
shares. A dividend of 30 cents a Silver Limited share has recently been proposed by Silver Limited
and its price a share is
• R2,50 if sold ‘cum-div’, or
• R2,20 if sold ‘ex-div’.
Kruger Million suffers normal tax at the maximum marginal rate of normal tax at 45%.
You are required to advise Kruger Million on how he should
• sell his shares in Gold Limited, and
• purchase his shares in Silver Limited.
(Assume that the market price of a Silver Limited share is R2,40 on 28 February 2022.)
Lucas Matanzima
Lucas Matanzima is a resident of the Republic. He is 48 years old. He has a number of investments
yielding dividends and interest. He has enjoyed in full the so-called basic local interest exemption
from normal tax for the first R23 800 of not otherwise exempt from normal tax local interest. He
suffers South African normal tax at the maximum marginal tax rate of 45%.
On 1 March 2021 Lucas Matanzima travelled by car from his home in South Africa to Lesotho. In
the boot of his car were three suitcases, one of which was full of R200 notes. The other two
contained his clothing. Later the same day while in Lesotho he made the following four
investments:
• He deposited R100 000 in a savings account with the Lesotho National Bank. It earns interest of
10% a year.
• He deposited R100 000 in a savings account with the Lesotho Building Society. It earns interest
of 9% a year.
• He lent R100 000 at 12% a year to Mhlolo Mvuzo, his neighbour from South Africa, who had
also travelled to Lesotho so as to borrow the money from him.
• He increased his loan account by R100 000 in a partnership that he has with George Kaiser, his
brother-in-law, who is a resident of Lesotho. This partnership carries on a manufacturing
business in Lesotho. The interest he earned from his loan account has increased from R6 000 to
R15 500 as a result of this R100 000 increase in his loan account.
By 28 February 2022 no portion of either of Lucas Matanzima’s loan accounts had been repaid and
no withdrawals or deposits had taken place in his two savings accounts.
You are required to explain the South African normal tax consequences of these four investments
made by Lucas Matanzima.
30.3 (40 minutes)

This question tests the after-tax return of four possible investments available to an investor. It tests
sections 5, 6, 10(1)(k) and 11(a) and Practice Note 31.
The Local Building Society, an incorporated building society, has offered the following three
investments to Bernard Klever. He has R200 000 to invest. These investments are as follows:
• 7,5% paid-up fixed period deposits. It is not a ‘tax free investment’.
• 8% local fixed deposit. It is also not a ‘tax free investment’.
• 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.)
30.4 (15 minutes)

This question tests the meaning of an ‘annuity’ and paragraph (a) of the definition of ‘gross income’.
Annie Higga-Hogen, a client of yours, is considering taking out a 20-year-term insurance policy. It
provides that the insurer will pay R4 000 a month from the death of the insured to the end of the
term.
The total amount to be paid if the insured was to die immediately would be R960 000 (R48 000 a
year for 20 years).
This obligation of the insurer can be expressed in the following two ways:
• The insurer will pay R4 000 a month from the date of the insured’s death till the end of the term.
• The sum insured is a capital sum of R960 000 reducing by R4 000 a month till the death of the
insured, the balance of the capital sum owing at death being payable after death at a rate of
R4 000 a month.
You are required to set out the normal tax consequences that would result on Annie Higga-
Hogen’s receipt or accrual of the R4 000 a month under both the above options.
30.5 (25 minutes)

This question tests the after-tax returns of the options of buying or leasing a motor car partly used
for trade purposes.
Cant Caste, Nev Balance, Ree Port & Partners practice in partnership as auditors. The partnership
has agreed to purchase a motor car for each partner. (There are three partners.)
The partners can either purchase the motor cars for a cash price of R575 000 each or they may be
leased on a four-year lease at R15 870 a month each. This cost of R575 000 is the cash cost of
R500 000 plus 15% value-added tax of R75 000.
TAX PLANNING 689
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.
30.6 (25 minutes)

This question tests the after-tax return of the option of purchasing or leasing a motor car partly used
for trade purposes.
Sandy Rhodes is a resident of the Republic. He recently qualified as a civil engineer. He has
become a partner in a practice in Johannesburg. Since he will be travelling a lot by road he needs a
new motor car. The motor car that he has chosen has a cost of R621 000 (R540 000 plus
value-added tax of R81 000).
Sandy Rhodes would like to know which of the following two alternatives, as presented to him by a
finance house, is the best method of acquiring this motor car:
• Option 1 – purchase the motor car under a suspensive sale agreement. The contract will be for
36 months. The monthly payment will be R14 250, after an initial deposit of R186 300. (A yield
to maturity of 0,88456% applies to this monthly accrual period.)
• Option 2 – lease the motor car at a rental of R20 900 a month for 36 months. At the end of the
lease he may purchase the motor car by paying R1. The expected market value of this motor car
in three years’ time is R330 000.
The Commissioner has agreed to a wear-and-tear or depreciation capital allowance over a five-year
period determined on the straight-line method.
Sandy Rhodes estimates that he will use the motor car 80% of the time for business purposes and
20% for private purpose. (The Commissioner has accepted this.)
Sandy Rhodes expects that his marginal rate of normal tax will be 45% for all the years of
assessment under consideration.
You are required to advise Sandy Rhodes as to the best method of acquiring the motor car. Support
your recommendation with detailed determinations. (The time value of money must be ignored.)
Assume that he acquires the motor car on 1 March 2022 and assume that in the later years of
assessment the tax legislation is identical to that of the 2022 year of assessment.
30.7 (25 minutes)

This question tests the tax consequences of a deferred compensation scheme award to both the
employer and the employee. It tests the definition of ‘gross income’ including its paragraph (d), the
general deduction formula (sections 11(a) and 23(g)) and section 11(w).
Joe Kruger will be retiring in four years’ time from his position with Rand, Coin & Partners, a
partnership involved in selling krugerrands and other gold coins, when he attains the age of
60 years.
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.
30.8 (30 minutes)

This question tests the after-tax returns of an employee who has been offered a deferred
compensation scheme. It tests the definitions of ‘gross income’ and a ‘severance benefit’,
sections 5, 6, 10(1)(i) and 11(w) and paragraph 2(k) and 12C of the Seventh Schedule.
Solong Fairwell is at present 55 years old. He is due to retire from the employment of Cherry O
Limited on 29 February 2028. His present salary package is R540 000 a year. In accordance with
his existing employment contract, his present salary package is due to increase to R612 000 a year
from 1 March 2023, and to remain at this amount until his retirement date.
As an alternative to his existing employment contract, Cherry O Limited has offered Solong
Fairwell a new employment contract. This new contract provides that his salary remain at R540 000
a year for the five-year period from 1 March 2023 to 29 February 2028 but, that he will also be
awarded, on 29 February 2028, a so-called golden handshake award of R720 000.
Cherry O Limited would take out an insurance policy on Solong Fairwell’s life. It would pay a
premium of R72 000 a year for this insurance policy. And on 29 February 2028 the insurance
policy would mature with R720 000 being awarded to Cherry O Limited. The same day it would
then award him the R720 000 as a compensation for the loss of his office (a golden handshake
award).
Solong Fairwell expects to earn R10 600 taxable income each year from his investments. This
R10 000 taxable income includes local interest. No dividends will accrue to him. He will have no
TAX PLANNING 691
Solong Fairwell is not a member of a retirement fund.

You are required to determine if Solong Fairwell will obtain a better after-tax return from the new
proposed employment contract when compared with the existing employment contract? Support your
answer with schedules showing the expected after-tax return under both employment contracts.
(Assume that 2022 tax legislation applies to all the years of assessment covered in this question.
And use the rates of tax and rebates that apply in to the 2022 year of assessment in all your
determinations.)
30.9 (75 minutes)

This question tests the after-tax returns of an employee who has been offered a deferred
compensation scheme. It tests the definitions of ‘gross income’ and a ‘severance benefit’,
sections 5, 6, 10(1)(i) and 11(w) and paragraphs 2(k) and 12C of the Seventh Schedule.
Gordon Holmes is due to retire on 31 March 2024, at the age of 65 years. Under his contract of
employment, he will be awarded a lump sum on his retirement.
Gordon Holmes’s employer has asked him whether he would like to cancel his existing contract of
employment and enter into a new employment contract offering him a larger lump sum on his
retirement. It has suggested that the new offer is more tax efficient.
The additional lump sum will be financed by Gordon Holmes’s employer reducing his present salary
and by waiving future salary increases.
Gordon Holmes has earned R60 000 a month since 1 March 2022. If he accepts this new
employment contract his salary will decrease to R48 000 a month.
Gordon Holmes is not a member of a pension, provident or retirement annuity fund.
Irrespective of which employment contract applies, Gordon Holmes’s employer has agreed to pay
him a life-time annuity of R432 000, (payable at a rate of R36 000 a month) after he retires, the first
payment to be made on 30 April 2024.
Gordon Holmes must inform his employer before 31 August 2022 whether he wishes to enter into
this new contract or not.
A comparison schedule drawn up by Gordon Holmes’s employer is set out below:
Existing Proposed
contract contract
From 1 September 2022 – six months at R60 000 / R48 000 360 000 288 000
2024 year of assessment 864 000 576 000
Retires on 31 March 2024 – therefore only one month’s salary 90 000 48 000
Lump sum 2 880 000 3 834 000
Total earnings under contract 4 194 000 4 746 000
Extra earnings under new contract (R4 746 000 – R4 194 000) 552 000
Additional information that may be relevant is as follows:
• Gordon Holmes’s earnings from his employer equal his taxable income each year. That is, other
amounts he earns equal the exemptions from normal tax that he enjoys and the amounts
• From 1 March 2022 up to the time of Gordon Holmes’s retirement, he will be able to live on an
after-tax income of R36 000 a month. He will invest all amounts in excess of R36 000. Should
his earnings in a year be insufficient to cover his cost of living, the shortfall will be financed
from his existing investments.
• 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.)
30.10 (60 minutes)

This question tests the after-tax returns of an employee who has been awarded a lump-sum benefit
by his employer on his retirement. It tests the definitions of ‘gross income’ and a ‘severance
benefit’, sections 5, 6, 10(1)(i) and 11(w).
Three years ago Chatsworth Caterers (Pty) Limited instituted a pension fund for its employees. But
one of its employees, namely, Korma Vindaloo, was too old to join the pension fund. It therefore
decided that when he retired he would be awarded a ‘golden handshake’ in recognition of his long
and devoted service to it.
Chatsworth Caterers (Pty) Limited and Korma Vindaloo are both residents of the Republic.
During the 2022 year of assessment Korma Vindaloo attained the age of 60 years, the mandatory
retirement age of Chatsworth Caterers (Pty) Limited’s employees. He therefore retired on
31 December 2021. He had been employed by it as its executive chef (main cook).
Korma Vindaloo had served Chatsworth Caterers (Pty) 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 Chatsworth Caterers (Pty) Limited obtained a
10% cash discount the watch was purchased by it for R4 950.
Korma Vindaloo earned a salary of R18 000 each month for the 10-month period from 1 March
2021 to 31 December 2021. A golden handshake award of R80 000 accrued to him.
Korma Vindaloo’s position had entitled him to the use of a ‘company car’, a motor car. For the 10-
month period from 1 March 2021 to 31 December 2021, he travelled a total of 25 000 kilometres in it.
Of these 25 000 kilometres he travelled in it, 10 000 kilometres were travelled by him for business
purposes.
Korma Vindaloo had a total of four months leave due to him on his retirement date. The salary
division of Chatsworth Caterers (Pty) Limited had confirmed that he was entitled to a cash
compensation of R72 000 for leave due but not used as at his retirement date.
After hearing about Korma Vindaloo’s leave-compensation award, he asked that instead of being
paid out the R72 000 in cash, he be allowed to take over his ‘company car’.
At Chatsworth Caterers (Pty) Limited’s 1 October 2021 directors’ meeting, Korma Vindaloo’s
request was discussed. It was agreed that he would be awarded his ‘company car’ in full and final
settlement of the leave he was entitled to as at 31 December 2021. For this purpose, it was agreed
that his ‘company car’ would be valued at R72 000.
TAX PLANNING 693
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’.
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.
30.11 (15 minutes)

This question tests the tax differences between investments made by a company and a natural person.
It tests the definition of ‘gross income’ and sections 5, 10(1)(i), 10(1)(k), 20, 22(1) and 64E.
Five years ago, 15 trainee accountants formed the ‘Tick Investment and Dealing Syndicate. (For
normal tax purposes a syndicate is treated as a partnership and its members are subject to normal
tax as its partners.)
Every month, each syndicate member of the Tick Investment and Dealing Syndicate contributed a
certain amount to it. These contributions were then used by it to deal in shares on the local stock
exchange.
Most of these trainee accountants who became members of the Tick Investment and Dealing
Syndicate have now qualified as chartered accountants. They are all residents of the Republic. They
are all under the age of 30 years. But some now wish to leave South Africa.
It has been suggested that, so as to make the Tick Investment and Dealing Syndicate more
permanent, a company should be formed. This company would be financed by shareholders’ loan
accounts.
The Tick Investment and Dealing Syndicate, whose portfolio of local shares now has a market
value of R2 250 000, has always been a share-dealer.
You are required to advise the members of the Tick Investment and Dealing Syndicate the
resulting tax implications that would arise if a company took over the ownership of its portfolio.
30.12 (60 minutes)

This question tests the rates of tax payable by a company and by its shareholders. It tests the
definitions of ‘gross income’, the general deduction formula (sections 11(a) and 23(g)) and
sections 5, 10(1)(k) and 64E.
Alan Branch (aged 51 years) and Vincent Wood (aged 48 years) were retrenched from the
construction contractor they had been employed by. They have decided to go into business together.
They need guidance on how to structure their business. They are both residents of the Republic.
Alan Branch and Vincent Wood have provided the following information which may be relevant:
• Both Alan Branch and Vincent Wood have annual taxable incomes of R120 000 a year from
sources outside this business venture. Both own shares in local private companies.
• Alan Branch has R300 000 cash available that he would invest in the business. Vincent Wood
has no cash available.
• The business they wish to purchase is available at a purchase price of R4 500 000.
• They have borrowed R4 500 000 from a financial institution at 9% a year.
TAX PLANNING 695
• 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.
30.13 (60 minutes)

This question tests certain capital allowances, prepaid expenses, interest incurred, share buy-backs,
dividends tax, lease rentals and repairs.
You are employed by an accounting firm, as a manager in its Taxation Section. Your
responsibilities include answering certain queries. The following six queries need your response:
Holeguard (Pty) Limited
Holeguard (Pty) Limited, a manufacturer of swimming-pool accessories, commenced production in
January 2011. It is a resident of the Republic. Its year of assessment ends on the last day of
February. It is a vendor.
It upgraded its existing manufacturing machinery at its factory by acquiring a new machine costing
R1 500 000. Since it did not have the necessary funds to purchase the machine outright, a 36-month
financial lease was entered into on 1 June 2022. A valid ‘tax invoice’ obtained from the lessor at
the commencement of the lease contained the following information:
Total lease rentals 2 070 000
The lease rentals are payable by Holeguard (Pty) Limited in 36 monthly rentals of R57 500 each,
commencing on 1 June 2022. The machine was used directly in its process of manufacture by
Holeguard (Pty) Limited as from 1 June 2022. (A yield to maturity of 1,02074% applies to this
monthly accrual period.)
The financial lease had been capitalised in Holeguard (Pty) Limited’s accounting records. (For
normal tax purposes this financial lease is treated as the lease of an asset, and not as the purchase of
an asset.)
Holeguard (Pty) Limited’s journal entry used to record this transaction was as follows:
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:
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
Being that portion of the deferred finance charges that relates
to its 2022 financial year.
Depreciation (statement of profit or loss and other
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
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.
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
To Bank 12 127 500

Being the cost of erecting six identical flats.
Bank Dr 64 000
To Rentals 64 000
Being rentals earned from letting four of the flats at R16 000
for the month of January 2022.
The same journal entry was recorded in his journal for the month of February.
This is the first occasion that Chakka Holeman 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 of whom is Paul Meth, his father-in-law. Both employees have
the use of these flats rent free as part of their salary packages.
Bank Dr 16 000
Being a rental for March 2022 received from one of the
tenants in February 2022.
You are required to state what amounts are to be included in Chukka Holeman’s gross income, and
deducted from his income, for the 2022 year of assessment, that arise out of the above lease
agreement and the letting, and occupation of the flats.
Capoff Creations (Pty) Limited
During Capoff Creations (Pty) Limited’s 2021 year of assessment (ended 28 February 2021) it
failed to renew its long-term agreement for the factory premises it occupied since it had agreed to
build its own factory.
On 1 March 2021 Capoff Creations (Pty) Limited then purchased an industrial building site. It paid
R1 500 000 cash for this site. The erection of its factory commenced immediately. It was completed
on 30 June 2021 at a cost of R9 000 000. Production in its new factory commenced a day later.
On 1 March 2021 R9 000 000 was borrowed by Capoff Creations (Pty) Limited at 9% a year so as
to finance the cost of this factory. At 28 February 2022 no portion of this loan had been repaid by
it.
Capoff Creations (Pty) Limited used its factory wholly or mainly for a process of manufacture.
As part of the preparation of Capoff Creations (Pty) Limited’s financial statements for its 2022
financial year, the following transaction was recorded in its journal:
To Insurance of manufacturing plant (statement of profit or
loss and other comprehensive income)
94 000
Being that portion of the insurance premium that relates to its
Capoff Creations (Pty) Limited pays the insurance premium for its trade assets annually in advance.
A premium of R141 000 was paid on 1 November 2021 for its ‘insurance’ year 1 November 2021
to 31 October 2022.
On 1 November 2020 Capoff Creations (Pty) Limited had paid a premium of R184 500 for the
‘insurance’ year 1 November 2021 to 31 October 2021.
Capoff Creations (Pty) Limited’s premium had decreased from the R184 500 it paid on
1 November 2020 to the R141 000 it paid on 1 November 2021 since
• it enjoyed a no-claim concession,
• some of its trade assets had been sold, and
• the value of its remaining trade assets had declined.
This is Capoff Creations (Pty) Limited’s sole prepaid expense.

You are required to determine the amounts that are deductible in the determination of Capoff
Creations (Pty) Limited’s taxable income that arise out of the above information for its 2022 year
of assessment (that ended on 28 February 2022).
Drive Up Motors (Pty) Limited
During Drive Up Motors (Pty) Limited’s 2021 year of assessment (that ended on 28 February
2021), and as a result of suffering from numerous power failures, it purchased its own generator
(a machine for converting mechanical energy into electricity).
During Drive Up Motors (Pty) Limited’s 2022 year of assessment it was forced to repair its
generator with the replacement of a major part.
Drive Up Motors (Pty) Limited had recorded the purchase of its generator in accordance with
IAS 16 (Property, Plant & Equipment).
As far as the ‘repaired’ part is concerned, the following details from Drive Up Motors (Pty)
Limited’s Property, Plant & Equipment Account are relevant:
• The original cost of the part that had to be replaced was R96 000.
• Accumulated depreciation that was recognised for accounting purposes on it was R36 000, made
up of R24 000 in its 2022 financial year and R12 000 in its 2021 financial year.
• On its derecognition, R60 000 was reflected in its statement of profit or loss and other
comprehensive income as a loss on disposal.
• The replacement part cost R108 000. It was ‘capitalised’ into the generator’s Property,
Plant & Equipment Account.
• Depreciation on the replacement part for its 2022 financial year was R13 500.
You are required to determine what amounts Drive Up Motors (Pty) Limited can deduct in the
determination of its taxable income for its 2022 year of assessment that arise out replacing this
major part of its generator.
Major Waterpolo
On 1 October 2021 Major Waterpolo, a shareholder, purchased 20 000 shares in Swimoff Limited
(trading stock) for R100 000. On 31 October 2021, and under the relevant provisions of the
Companies Act, Swimoff Limited bought back 40% of its issued equity shares.
For the 8 000 shares that Major Waterpolo sold back to Swimoff Limited, he received cash of
R44 000.
In total, Swimoff Limited purchased back 40% of its equity shares. The entry recording this
transaction in its journal was as follows:
Share capital (contributed tax capital) Dr 800 000
Retained income (revenue profits) Dr 700 000
To Cash 2 200 000
Being the purchase ‘back’ of 40% of equity shares.
On 30 November 2021 Major Waterpolo sold 7 000 shares in Swimoff Limited for R42 000.
On 28 February 2022 he still held 5 000 shares in Swimoff Limited. Each share in it had a market
value of R6,20 on 28 February 2022.
You are required to detail what effect the above transactions relating to the Swimoff Limited
shares will have on Major Waterpolo’s taxable income.
TAX PLANNING 699
Fetchers (Pty) Limited

On 15 December 2021 Fetchers (Pty) Limited purchased a small retail outlet, to be used as its
‘factory shop’. The seller was a non-vendor. The purchase consideration was R2 500 000.
The property was transferred into Fetchers (Pty) Limited’s name on 15 January 2022. It paid
transfer duty of R91 000 on this day. The following three entries were made in its journal for these
transactions:
Land and buildings Dr 2 500 000
To Bank 2 500 000
Being a retail outlet purchased for cash.
Land and buildings Dr 91 000
To Bank 91 000
Being a transfer duty paid on the above purchase.
To Land and buildings 91 000
Being the ‘deemed’ input tax deduction on this transaction of
R326 087 (R2 500 000 × 15 / 115) but limited to the R91 000
transfer duty paid.
You are required to state whether these journal entries of Fetchers (Pty) Limited are correct, and if
not, what should the correcting journal entry or entries be?
30.14 (75 minutes)

This question tests the tax consequences of an arrangement used to reduce a taxpayer’s normal tax
liability. It tests the definitions of ‘gross income’, a ‘low cost residential unit’ and a ‘severance
benefit’, the general deduction formula (sections 11(a) and 23(g)) and sections 5, 6, 6A, 6B,
10(1)(k), 11A, 13sex and 20, the Second Schedule and paragraphs 4, 7, 8 and 12A of the Seventh
Schedule.
On 31 March 2020 Terrence Terblanche attained the age of 60 years. An endowment policy that he
owned matured on this date and he was awarded R300 000.
Sixty years old is the normal retirement age required by Right Wing Backlash Limited, Terrence
Terblanche’s employer. But since it regarded him as a key employee, and because he was still
economically active, it requested him to remain in its employment for a further 12 months. He
agreed to this request.
On 1 April 2020 Terrence Terblanche purchased a vacant plot of land for R180 000 cash. He
erected five residential units on it at a cost of R1 350 000 (R270 000 each). Their erection
commenced on 1 May 2020. They were completed on 20 October 2020. The cost of erection was
financed largely by borrowed funds. They were let to five tenants at a market-related rental from
1 November 2020.
Terrence Terblanche’s accountant prepared the following statement of profit or loss and other
comprehensive income for his investment in this property for the 2021 year of assessment:
Rentals 90 000
Insurance 17 200
Interest on loan – R1 200 000 at 9% for 10 months 90 000
Administration expenses (deductible in the determination of his taxable
income) 4 500 156 300
Loss for the year -66 300
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.
30.15 (60 minutes)

This question tests the normal tax, value-added tax, employees’ tax, provisional tax and skills
development levy consequences of a business venture.
Due to its critical shortage of suitably-qualified academics in the Department of Accounting and
Auditing at the Pinetown-East University, the entire tutorial system administered by this
Department had to be discontinued.
Deekay Pillay, a trainee accountant, who had completed all his studies but who has still one year of
his trainee contract to complete, took up an opportunity caused by the closure of the accounting
tutorial system at Pinetown-East University. He formed the Local School of Accounting.
Deekay Pillay also made a number of other arrangements:
• He agreed to let from the Lakeside Heights Primary School an administration building that it
was not using.
• He also agreed to hire 10 classrooms from it, from 15h00 to 21h00 each day, Mondays to
Thursdays each week.
• And he agreed to hire from it 300 parking bays for the same duration of time as the classrooms.
Lakeside Heights Primary School and the Pinetown-East University occupy adjacent premises.
Each hired classroom is furnished and equipped for use by 50 pupils (or students).
• He arranged with the textbook suppliers (vendors) to sell their tutorial books on a consignment
basis. He did not buy books from them and then sell them. Instead he sold the books on their
behalf entitling himself to a commission.
• He allowed an owner of vending machines and jukeboxes (coin-operated compact-disc players
that plays selected recordings from their lists) to place five vending machines (enabling students
to purchase cool drinks, chips, popcorn, chocolates, sweets, cigarettes, condoms and other items
commonly purchased by students) and a jukebox (from which popular music could be played) in
the ‘common room’ area of the administration building he had agreed to let. In return for
allowing the vending-machine owner to install his ‘machines’ in his ‘common room’, he would
earn a commission on each sale made.
• He secured the services of 26 part-time tutors and two full-time administration assistants.
• He obtained permission to be a customer of the Printing Division of the Pinetown-East
University. He paid it for all his printing and stationery requirements.
• He prepared, and then distributed, a brochure to all students registered in the Department of
Accounting and Auditing at the Pinetown-East University.
Deekay Pillay had an ‘unbelievable’ response to his brochure. The following registrations resulted:
• 800 first-year students,
• 500 second-year students,
• 200 third-year students, and
• 120 honours students.
Based on these registrations, Deekay Pillay prepared the following budgeted income and
expenditure account (all amounts exclude value-added tax):
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
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).
30.16 (60 minutes)

This question tests the incorporation of a sole trader business into a company. It also tests the ‘asset-
for-share transaction’ provisions as set out in section 42 (part of the so-called special corporate
provisions).
Adam Gray had successfully traded in his own name for many years. Recently, however, the
nature of his customers changed. His business was not as secure as it was previously. Far more
risks are now involved.
So as to protect Adam Gray’s personal assets and his family, he incorporated his business on
1 February 2022. He formed Fenton Ventures (Pty) Limited. He holds all its equity shares. He then
sold his existing business ‘lock, stock and barrel’ (in its entirety) to it at its current market value. Its
financial year ends on the last day of February. Its first trading period was for only the month of
February 2022.
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
30.17 (60 minutes)

This question tests the normal tax and value-added tax differences between a lease and a suspensive
sale. It also tests the responsibilities of the internal auditor and the audit committee of a company.
Diet Drinks Limited is a resident of the Republic. It is a vendor. Its financial year ends on the last
day of February. It is a manufacturer of sugar-free cola-tasting soft drinks. It is listed on the local
stock exchange.
During Diet Drinks Limited’s 2022 financial year it upgraded its existing manufacturing activities.
It acquired a new machine for R1 656 000. Since it did not have the necessary funds to purchase
this machine for cash, a 36-month financial lease was entered into on 1 January 2022.
A valid ‘tax invoice’ was obtained from the lessor at the commencement of the lease. It contained
the following information:

Add value-added tax at 15% 216 000
Total long-term lease obligation 1 980 000
The total long-term lease obligation is repayable in 36 monthly rentals of R55 000 each, commencing
on 1 January 2022. (A yield to maturity of 0,9996948% applies to this monthly accrual period.)
The machine was used by Diet Drinks Limited directly in its process of manufacture as from
1 January 2022.
The financial lease was capitalised in its accounting records. The journal entry used to record this
transaction was as follows:

acquired on 1 January 2022.
Diet Drinks Limited’s financial lease also caused the following journal entries to be recorded by it:

To Cash 110 000
Being the payment of two instalments of R55 000 each.
Finance charges (statement of profit or loss and other
Being that portion of the deferred finance charges that relate
to its 2022 financial year.
Depreciation (statement of profit or loss and other
Being depreciation on the machine (acquired on 1 January
2022) for its 2022 financial year.
Phakathi Hlola, the internal auditor employed by Diet Drinks Limited believed that for normal tax
purposes this financial lease should have been treated as the lease of an asset and not as the
purchase of an asset. He therefore stated that its normal tax liability had been incorrectly
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.
30.18 (60 minutes)

This question tests, amongst other things, an asset for shares transaction, a sale and leaseback
transaction, prepaid expenses, a long-term contract and future development expenses.
Lungisa Rani, a South African resident, has a diverse portfolio of investments, both in South Africa
and abroad. He takes an active role in the management of some companies that he has invested in.
He holds at least a 40% stake in the companies that he invests in. Currently he is focusing his
attention particularly on his investment in Ukwaka Construction (Pty) Limited, a resident company
based in the Eastern Cape.
Ukwaka Construction (Pty) Limited operates in the construction industry. Although initially a
profitable business, it has been suffering losses for the past four years.
Lungisa Rani is a 50% shareholder of Ukwaka Construction (Pty) Limited and a director of it. He
caused it to carry out the following three initiatives. He believes they will help alleviate the
pressure on its liquidity and return it to profitability:
Initiative 1
Lungisa Rani approached Kingdom Bank to raise further finance. It suggested that Ukwaka
Construction (Pty) Limited enter into a sale and leaseback transaction for its bulldozer. It had
TAX PLANNING 707
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.
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.)
30.19 (75 minutes)

This question tests, amongst other things, the deduction in the determination of taxable income of
interest incurred, several fringe benefits, a normal tax liability reconciliation, lump-sum benefits,
foreign earnings and some value-added tax input deductions.
Uhuru (Pty) Limited is a resident of the Republic. It is a vendor. It was founded in 2016 by its chief
executive officer, Nomzamo Dhlomo, a 38-year-old resident of the Republic. She is still its
majority shareholder. Its financial year ends on 31 December.
Uhuru (Pty) Limited is a digital marketing agency. It specialises in social media, content creation
and branding. It employs more than 85 people. It has key account managers who are responsible for
the execution and delivery of its clients’ marketing briefs. Each account manager is supported by a
marketing assistant.
Stutterheimers Limited
Amongst others, the clothing sector in South Africa has been under severe pressure over the past
two years as a result of Covid 19 lockdowns and regulations. During Uhuru (Pty) Limited’s 2021
TAX PLANNING 709
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.
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:
Code Description Determinations Amount

and adjustments assessed
Employment income (IRP5 / IT3(a)) 734 134
3601 Income – taxable 575 779 575 779
3601 Income – taxable 115 155 115 155
3810 Medical scheme fringe benefit 43 200 43 200
Retirement fund lump-sum withdrawal benefit received 2 038 662
3920 Retirement fund lump-sum
withdrawal benefit 2 038 662 2 038 662
TAX PLANNING 711
Deductions allowed
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
Taxable income – subject to normal tax 720 951
Taxable income – subject to retirement fund lump-sum
withdrawal benefit table 2 038 662
Tax determination
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.
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.)
30.20 (75 minutes)

This question tests a taxable income determination of a corporate manufacturer It tests capital
allowances and recoupments of them, interest incurred, repairs, rentals accrued and incurred, research
and development expenditure and the purchase of capital assets. It also tests transactions between
connected persons.
AAA Nama (Pty) Limited is a meat supplier trading in Stellenbosch. It is a vendor. Its business is
the processing of meat. It subscribes to fair treatment of animals and fair trade with its suppliers. It
has a 31 December financial year end. Its taxable income for its year of assessment ended
31 December 2021, excluding the effects of the following information, was R15 604 000.
Destroyed factory
Since 2016, AAA Nama (Pty) Limited has conducted its meat-processing operations from a factory
situated in Stellenbosch. On 1 May 2021 a fire occurred in this factory and completely destroyed it.
None of its factory workers was injured during the incident. On 1 June 2021 its insurer awarded it
compensation of R14 950 000 for its factory building and R230 000 for its machinery.
TAX PLANNING 713
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
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
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
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
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
Rates of Tax on Retirement Fund Lump-Sum ‘Retirement’ Benefits

For a retirement fund lump sum ‘retirement’ 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 retirement fund lump-sum ‘retirement’ 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 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.
is set out in the following table:
Taxable income from lump-sum [and Rate of tax

severance] benefits
Not exceeding R500 000 0% of taxable income
Exceeding R500 000 but not exceeding 0 plus 18% of taxable income exceeding
R700 000 R500 000
Exceeding R700 000 but not exceeding R36 000 plus 27% of taxable income exceeding
R1 050 000 R700 000
Exceeding R1 050 000 R130 500 plus 36% of taxable income
exceeding R1 050 000
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 the above table for a taxable income comprising the
aggregate of
1 March 2009 and prior to the accrual of the above retirement fund lump sum benefit,
1 October 2007 and prior to the accrual of the above retirement fund lump sum benefit, and
accrual of the above retirement fund lump-sum benefit.
Table 3
Rates of Tax on Retirement Lump-Sum Withdrawal Benefits

For a retirement fund lump-sum withdrawal benefit that accrues to a person in 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 retirement fund lump-sum withdrawal 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 retirement fund lump-sum withdrawal 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 withdrawal benefit, and
accrual of the above retirement fund lump-sum withdrawal benefit,
is set out in the table below:
Taxable income from lump-sum [and Rate of tax
severance] benefits
Not exceeding R25 000 0%
Exceeding R25 000 but not exceeding 18% of taxable income exceeding R25 000
R660 000
Exceeding R660 000 but not exceeding R114 300 plus 27% of taxable income exceeding
R990 000 R660 000
Exceeding R990 000 R203 400 plus 36% of taxable income exceeding
R990 000
would be leviable on the person under the above table on the of 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 withdrawal 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 withdrawal benefit, and
accrual of the above retirement fund lump-sum withdrawal benefit.
TABLES 721
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,
accrual of the above severance benefit,
1 March 2009 and prior to the accrual of the above severance benefit, and
1 October 2007 and prior to the accrual of the above severance benefit,
is set out in the table below:
Taxable income from [lump-sum and] severance Rate of tax

benefits
Exceeding R500 000 but not exceeding R700 000 0 plus 18% of taxable income exceeding
R500 000
Exceeding R700 000 but not exceeding R36 000 plus 27% of taxable income
R1 050 000 exceeding R700 000
Exceeding R1 050 000 R130 500 plus 36% of taxable income
exceeding R1 050 000
would be leviable on the person under that item for a taxable income comprising the aggregate of
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.
Table 5
Rebates
Years of assessment ending on the last day of February 2022, 2021, 2020, 2019, 2018 and 2017
2022 2021 2020 2019 2018 2017

R R R R R R
Primary
Natural persons 15 714 14 958 14 220 14 067 13 635 13 500
Persons over 65 years

Special rebate 8 613 8 199 7 794 7 713 7 479 7 407
Persons over 75 years
Special rebate 2 871 2 736 2 601 2 574 2 493 2 466
Medical scheme fees tax credit
One member 332 319 310 310 303 286
Two members 664 638 620 620 606 572
Each additional member 224 215 209 209 204 192
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 –
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
Taxable income Rate of tax

All taxable income 28% of the taxable income
Small business corporations

Exceeding R87 300 but not exceeding 7% of taxable income above R87 300
R365 000
Exceeding R365 000 but not exceeding R19 439 plus 21% of taxable income above
R550 000 R365 000
Exceeding R550 000 R58 289 plus 28% taxable income above
R550 000
Gold mining companies

On gold mining taxable income Under a formula
On non-gold mining taxable income 28% of the taxable income
On recovery of capital expenditure Greater of average rate or 28% of the taxable
income
Public benefit organisation companies and trusts

All taxable income 28% of the taxable income
Corporate personal service providers

All taxable income 28% of taxable income
Registered Micro Business
Taxable turnover Rate of tax

Not exceeding R335 000 0% of taxable turnover
Exceeding R335 000 but not exceeding R500 000 1% of taxable turnover exceeding R335 000
Exceeding R500 000 but not exceeding R750 000 R1 650 plus 2% of taxable turnover exceeding
R500 000
Exceeding R750 000 R6 650 plus 3% of taxable turnover exceeding
R750 000
Table 8
(continued)
Long-term insurance companies

Taxable income of individual policyholder 30% of taxable income
fund
Taxable income of company policyholder fund 28% of taxable income
Taxable income of corporate fund 28% of taxable income
Taxable income of risk policyholder fund 28% of taxable income
Non-resident companies

All taxable income from a South African 28% of taxable income
source
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
x if the deceased dies more than six years, but not more than eight years after the death
x if the deceased dies more than eight years, but not more than 10 years after the death
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.
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
Expectation of Life Present Value of R1 per Annum for Life

Age Male Female Male Female Age
0 64,74 72,36 8,327 91 8,331 05 0
1 65,37 72,74 8,328 28 8,331 14 1
2 64,50 71,87 8,327 76 8,330 91 2
3 63,57 70,93 8,327 14 8,330 64 3
4 62,63 69,97 8,326 44 8,330 33 4
5 61,69 69,02 8,325 67 8,329 99 5
6 60,74 68,06 8,324 80 8,329 61 6
7 59,78 67,09 8,323 81 8,329 18 7
8 58,81 66,11 8,322 71 8,328 69 8
9 57,83 65,14 8,321 46 8,328 15 9
10 56,85 64,15 8,320 07 8,327 53 10
11 55,86 63,16 8,318 49 8,326 84 11
12 54,87 62,18 8,316 73 8,326 08 12
13 53,90 61,19 8,314 80 8,325 22 13
14 52,93 60,21 8,312 65 8,324 27 14
15 51,98 59,23 8,310 29 8,323 20 15
16 51,04 58,26 8,307 70 8,322 03 16
17 50,12 57,29 8,304 89 8,320 71 17
18 49,21 56,33 8,301 80 8,319 26 18
19 48,31 55,37 8,298 41 8,317 64 19
20 47,42 54,41 8,294 71 8,315 84 20
21 46,53 53,45 8,290 61 8,313 83 21
22 45,65 52,50 8,286 13 8,311 61 22
23 44,77 51,54 8,281 17 8,309 12 23
24 43,88 50,58 8,275 64 8,306 33 24
25 43,00 49,63 8,269 59 8,303 26 25
26 42,10 48,67 8,262 74 8,299 81 26
27 41,20 47,71 8,255 16 8,295 95 27
28 40,30 46,76 8,246 77 8,291 71 28
29 39,39 45,81 8,237 37 8,286 97 29
30 38,48 44,86 8,226 94 8,281 70 30
31 37,57 43,91 8,215 38 8,275 83 31
32 36,66 42,96 8,202 57 8,269 30 32
33 35,75 42,02 8,188 36 8,262 10 33
34 34,84 41,07 8,172 62 8,254 00 34
TABLES 727
Table 11
(continued)

35 33,94 40,13 8,155 36 8,245 09 35
36 33,05 39,19 8,136 47 8,235 17 36
37 32,16 38,26 8,115 58 8,224 26 37
38 31,28 37,32 8,092 74 8,211 99 38
39 30,41 36,40 8,067 81 8,198 66 39
40 29,54 35,48 8,040 30 8,183 86 40
41 28,69 34,57 8,010 67 8,167 62 41
42 27,85 33,67 7,978 44 8,149 83 42
43 27,02 32,77 7,943 44 8,130 12 43
44 26,20 31,89 7,905 47 8,108 81 44
45 25,38 31,01 7,863 80 8,085 27 45
46 24,58 30,14 7,819 24 8,059 56 46
47 23,79 29,27 7,771 09 8,031 19 47
48 23,00 28,41 7,718 43 8,000 26 48
49 22,23 27,55 7,662 36 7,966 17 49
50 21,47 26,71 7,602 01 7,929 50 50
51 20,72 25,88 7,537 13 7,889 67 51
52 19,98 25,06 7,467 48 7,846 46 52
53 19,26 24,25 7,393 87 7,799 65 53
54 18,56 23,44 7,316 31 7,748 34 54
55 17,86 22,65 7,232 34 7,693 55 55
56 17,18 21,86 7,144 14 7,633 63 56
57 16,52 21,08 7,051 78 7,568 96 57
58 15,86 20,31 6,952 25 7,499 27 58
59 15,23 19,54 6,850 04 7,423 21 59
60 14,61 18,78 6,742 06 7,341 35 60
61 14,01 18,04 6,630 10 7,254 57 61
62 13,42 17,30 6,512 32 7,160 20 62
63 12,86 16,58 6,393 01 7,060 46 63
64 12,31 15,88 6,268 22 6,955 37 64
65 11,77 15,18 6,137 89 6,841 61 65
66 11,26 14,51 6,007 26 6,723 93 66
67 10,76 13,85 5,871 65 6,598 93 67
68 10,28 13,20 5,734 03 6,466 35 68
69 9,81 12,57 5,591 82 6,328 18 69
70 9,37 11,96 5,451 65 6,184 66 70
71 8,94 11,37 5,307 75 6,036 07 71
72 8,54 10,80 5,167 44 5,882 78 72
73 8,15 10,24 5,024 37 5,722 22 73
74 7,77 9,70 4,878 76 5,557 43 74
Table 11
(continued)

75 7,41 9,18 4,734 90 5,388 93 75
76 7,07 8,68 4,593 54 5,217 27 76
77 6,37 8,21 4,446 63 5,046 79 77
78 6,41 7,75 4,303 09 4,870 92 78
79 6,10 7,31 4,158 98 4,693 89 79
80 5,82 6,89 4,024 40 4,516 47 80
81 5,55 6,50 3,890 51 4,343 99 81
82 5,31 6,13 3,768 02 4,173 15 82
83 5,09 5,78 3,652 76 4,004 82 83
84 4,89 5,45 3,545 46 3,839 88 84
85 4,72 5,14 3,452 32 3,679 21 85
86 4,57 4,85 3,368 64 3,523 71 86
87 4,45 4,58 3,300 66 3,374 26 87
88 4,36 4,33 3,249 07 3,231 75 88
89 4,32 4,11 3,225 97 3,102 96 89
90* 4,30 3,92 3,214 38 2,989 12 90*
The above table has been extracted from Government Gazette 5746 of 23 September 1977.
Table 12
Present Value of £1 per Annum Capitalised at 6% over Fixed Periods
Years Amount Years Amount Years Amount Years Amount

£ £ £ £
1 0,94 16 10,11 31 13,93 46 15,52
2 1,83 17 10,48 32 14,08 47 15,59
3 2,67 18 10,83 33 14,23 48 15,65
4 3,47 19 11,16 34 14,37 49 15,71
5 4,21 20 11,47 35 14,50 50 15,76
6 4,92 21 11,76 36 14,62 51 15,81
7 5,58 22 12,04 37 14,74 52 15,86
8 6,21 23 12,30 38 14,83 53 15,91
9 6,80 24 12,55 39 14,95 54 15,95
10 7,36 25 12,78 40 15,05 55 15,99
11 7,89 26 13,00 41 15,14 56 16,03
12 8,38 27 13,21 42 15,22 – –
13 8,85 28 13,41 43 15,31 – –
14 9,29 29 13,59 44 15,38 – –
15 9,71 30 13,76 45 15,46 99 16,61
TABLES 729
Table 13
Present Value of R1 per Annum Capitalised at 12% over Fixed Periods
Years Amount Years Amount Years Amount Years Amount

1 0,892 9 26 7,895 7 51 8,307 6 76 8,331 8
2 1,690 0 27 7,942 6 52 8,310 4 77 8,332 0
3 2,401 8 28 7,984 4 53 8,312 8 78 8,332 1
4 3,037 4 29 8,021 8 54 8,315 0 79 8,332 3
5 3,604 8 30 8,055 2 55 8,317 0 80 8,332 4
6 4,111 4 31 8,085 0 56 8,318 7 81 8,332 5
7 4,563 8 32 8,111 6 57 8,320 3 82 8,332 6
8 4,967 6 33 8,135 4 58 8,321 7 83 8,332 6
9 5,328 2 34 8,156 6 59 8,322 9 84 8,332 7
10 5,650 2 35 8,175 5 60 8,324 0 85 8,332 8
11 5,937 7 36 8,192 4 61 8,325 0 86 8,332 8
12 6,194 4 37 8,207 5 62 8,325 9 87 8,332 9
13 6,423 6 38 8,221 0 63 8,326 7 88 8,333 0
14 6,628 2 39 8,233 0 64 8,327 4 89 8,333 0
15 6,810 9 40 8,243 8 65 8,328 1 90 8,333 0
16 6,974 0 41 8,253 4 66 8,328 6 91 8,333 1
17 7,119 6 42 8,261 9 67 8,329 1 92 8,333 1
18 7,249 7 43 8,269 6 68 8,329 6 93 8,333 1
19 7,365 8 44 8,276 4 69 8,330 0 94 8,333 1
20 7,469 4 45 8,282 5 70 8,330 3 95 8,333 2
21 7,562 0 46 8,288 0 71 8,330 7 96 8,333 2
22 7,644 6 47 8,292 8 72 8,331 0 97 8,333 2
23 7,718 4 48 8,297 2 73 8,331 2 98 8,333 2
24 7,784 3 49 8,301 0 74 8,331 4 99 8,333 2
25 7,843 1 50 8,304 5 75 8,331 6 100 8,333 2
The above table has been extracted from Government Gazette 5746 of 23 September 1977.
Table 14
Scale of Values – Right of Use of Motor Vehicle

From 1 March 2021
Paragraph 7(4) of the Seventh Schedule provides as follows:
‘Subject to subparagraph (10), the value to be placed on the private use of such vehicle shall be
determined for each month or part of a month during which the employee was entitled to use the
vehicle for private purposes (including travelling between the employee’s place of residence and
his . . . place of employment) and the said value shall–
(a) as respects each such month . . . be an amount equal to 3,5% of the determined value of
such motor vehicle: Provided that where the motor vehicle is the subject of a maintenance
plan at the time the employer acquired the motor vehicle or the right of use thereof, that
amount shall be reduced to an amount equal to 3,25% of the determined value of the motor
vehicle . . .; and
(b) as respects any such part of a month, be an amount which bears to the appropriate amount
determined in accordance with item (a) . . . for a month the same ratio as the number of
days in such part of a month bears to the number of days in the month in which such part
falls.’
Table 15
Scale of Values: Travel Allowance

GN 174 Government Gazette 44229 of 5 March 2021notice provides the following information relating
to the travel allowance:
Rates per kilometre that may be used in the determination of the amount deductible for business travel
against an allowance or advance when no records of actual costs are kept are determined by using the
following table:
Fixed Fuel Main-

When the value of the vehicle– cost cost tenance
cost
R c / km c / km
does not exceed R95 000 29 504 104,1 38,6
exceeds R95 000 but does not exceed R190 000 52 226 116,2 48,3
exceeds R665 000 156 711 172,4 99,6
‘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
The Regulation Standard Values of Livestock

For the purpose of paragraph 6 of the First Schedule to the Act, the standard value applicable to any
class of livestock shall in the case of every farmer who is required to account for such value be as
set out hereunder:
Standard
Classification values
Cattle– R
Bulls 50
Oxen 40
Cows 40
Tollies and Heifers–
Two to three years 30
One to two years 14
Calves 4
Sheep–
Wethers 6
Rams 6
Ewes 6
Weaned lambs 2
Goats–
Fully grown 4
Weaned kids 2
Horses–
Stallions, over four years 40
Mares, over four years 30
Geldings, over three years 30
Colts and fillies, three years 10
Colts and fillies, two years 8
Colts and fillies, one year 6
Foals, under one year 2
Donkeys–
Jacks, over three years 4
Jacks, under three years 2
Jennies, over three years 4
Jennies, under three years 2
Mules–
Four years and over 30
Three years 20
Two years 14
One year 6
Ostriches, fully grown 6
Pigs–
Over six months 12
Under six months (weaned) 6
Poultry, over nine months 1
Chinchillas, all ages 1
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,
R2 475 000,
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
Securities Transfer Tax Act

Section 2(1) provides that a tax, to be known as the securities transfer tax, must be levied and paid
for the benefit of the National Revenue Fund, on every transfer of a security issued by
x a company or close corporation incorporated, established or formed inside the Republic, or
x a company incorporated, established or formed outside the Republic and listed on an exchange
at the rate of 0,25% of its taxable amount.
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

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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
$]DUEDLMDQL 86
%DKDPDV 86
%DKUDLQ %'LQDUV
%DQJODGHVK 86
%DUEDGRV 86
%HODUXV (XUR¼
%HOJLXP (XUR¼
%HOL]H 86
%HQLQ (XUR¼
%ROLYLD 86
%RWVZDQD 3XOD
%UD]LO 5HDOV
%UXQHL 86
%XOJDULD (XUR¼
Amount
2022 2021 2020
%XUNLQD)DVR &)$)UDQFV
%XUXQGL (XUR¼
&DPERGLD 86
&DPHURRQ (XUR¼

Canada Canadian $ 167 167 167

Cape Verde Islands Euro € 65 65 65
Central African Republic Euro € 94 94 94
Chad Euro € 121 121 121
Chile US $ 128 128 128
China (People’s Republic) US $ 127 127 127
Colombia US $ 94 94 94
Comoro Island Euro € 122 122 122
Cook Islands New Zealand $ 211 211 211
Cote D’Ivoire Euro € 119 119 119
Costa Rica US $ 116 116 116
Croatia Euro € 102 102 102
Cuba US $ 124 124 124
Cyprus Euro € 117 117 117
Czech Republic Euro € 90 90 90
Democratic Republic of Congo US $ 164 164 164
Denmark Danish Kroner 2 328 2 328 2 328
Djibouti US $ 99 99 99
Dominican Republic US $ 99 99 99
Ecuador US $ 163 163 163
Egypt US $ 118 118 118
El Salvador US $ 98 98 98
Equatorial Guinea Euro € 166 166 166
Eritrea US $ 109 109 109
Estonia Euro € 92 92 92
Ethiopia US $ 92 92 92
Fiji US $ 102 102 102
Finland Euro € 171 171 171
France Euro € 128 128 128
Gabon Euro € 172 172 172
Gambia Euro € 74 74 74
Georgia US $ 95 95 95
Germany Euro € 120 120 120
Ghana Euro € 130 130 130
Greece Euro € 134 134 134
Grenada US $ 151 151 151
Amount
2022 2021 2020
Guatemala US $ 114 114 114
Guinea Euro € 78 78 78
Guinea Bissau Euro € 59 59 59
Guyana US $ 118 118 118
Haiti US $ 109 109 109
TABLES 735
Honduras US $ 186 186 186

Hong Kong Hong Kong $ 1 000 1 000 1 000
Hungary Euro € 89 89 89
Iceland ISK 25 466 25 466 25 466
India Indian Rupee 5 852 5 852 5 852
Indonesia US $ 86 86 86
Iran US $ 120 120 120
Iraq US $ 125 125 125
Ireland Euro € 139 139 139
Israel US $ 209 209 209
Italy Euro € 125 125 125
Jamaica US $ 151 151 151
Japan Yen 16 275 16 275 16 275
Jordan US $ 201 201 201
Kazakhstan US $ 141 141 141
Kenya US $ 138 138 138
Kiribati Australian $ 233 233 233
Korea Republic Korean Won 187 735 187 735 187 735
Kuwait (State of) Kuwait Dinars 51 51 51
Kyrgyzstan US $ 172 172 172
Laos US $ 92 92 92
Latvia US $ 150 150 150
Lebanon US $ 158 158 158
Lesotho RSA Rand 750 750 750
Liberia US $ 112 112 112
Libya US $ 120 120 120
Lithuania Euro € 154 154 154
Macao Hong Kong $ 1 196 1 196 1 196
Macedonia (former Yugoslav) Euro € 100 100 100
Madagascar Euro € 59 59 59
Madeira Euro € 290 290 290
Malawi Kwacha 31 254 31 254 31 254
Malaysia Ringgit 382 382 382
Maldives US $ 202 202 202
Mali Euro € 178 178 178
Amount
2022 2021 2020
Malta Euro € 132 132 132
Marshall Islands US $ 255 255 255
Mauritania Euro € 97 97 97
Mauritius US $ 135 135 135
Mexico Mexican Pesos 1 313 1 313 1 313
Moldova US $ 117 117 117
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
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
Slovenia Euro € 106 106 106

Solomon Islands Sol Islands $ 1 107 1 107 1 107
South Sudan US $ 265 265 265
Spain Euro € 112 112 112
Sri Lanka US $ 100 100 100
St. Kitts & Nevis US $ 227 227 227
St. Lucia US $ 215 215 215
St. Vincent & The Grenadines US $ 187 187 187
Sudan US $ 200 200 200
Suriname US $ 107 107 107
Swaziland RSA Rand 818 818 818
Sweden Swedish Krona 1 317 1 317 1 317
Switzerland S Franc 201 201 201
Syria US $ 185 185 185
Taiwan New Taiwan $ 3 505 3 505 3 505
Tajikistan US $ 97 97 97
Tanzania US $ 129 129 129
Thailand Thai Baht 4 956 4 956 4 956
Togo CFA Francs 64 214 64 214 64 214
Tonga Pa’anga 251 251 251
Trinidad & Tobago US $ 213 213 213
Tunisia Tunisian Dinar 198 198 198
Turkey Euro € 101 101 101
Turkmenistan US $ 125 125 125
Tuvalu Australian $ 339 339 339
Uganda US $ 111 111 111
Ukraine Euro € 131 131 131
United Arab Emirates UAE Dirhams 699 699 699
United Kingdom British Pounds £ 102 102 102
Uruguay US $ 144 144 144
USA US $ 146 146 146
Uzbekistan Euro € 80 80 80
Vanuatu US $ 166 166 166
Amount
2022 2021 2020
Venezuela US $ 294 294 294
Vietnam US $ 146 146 146
Yemen US $ 94 94 94
Zambia US $ 119 119 119
Zimbabwe US $ 123 123 123
Other countries not listed US $ 215 215 215
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%.

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1 INTERPRETATION AND DISPUTES ............................................................................................. 1

1.1 (30 minutes)

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2.1 (30 minutes)

2.2 (30 minutes)

2.3 (15 minutes)

2.4 (45 minutes)

2.5 (20 minutes)

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2.7 (60 minutes)

Ella Cigaritis paid to Serena Trading Spa CC

2.8 (45 minutes)

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2.10 (40 minutes)

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2.12 (60 minutes)

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18. As damages received by or accrued to him as a result of a successful personal defamation

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3.1 (30 minutes)

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3.3 (40 minutes)

William Webb-Ellis does not have a permanent establishment in South Africa.

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4.2 (40 minutes)

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