ACCA f6 taxation south africa 2011 jun answer

Answers Fundamentals Level – Skills Module, Paper F6 (ZAF) Taxation (South Africa) June 2011 Answers and Marking Scheme Note: The ACCA does not require candidates to quote section numbers or other statutory or case references as part of their answers Where such references are shown below [in square brackets] they are given for information purposes only Marks Mrs Mokomele (a) Employees tax calculation R Annual cash salary Monthly travel allowance R5,000 x 80% x 12 Employer contributions to medical aid (all taxable) R2,500 x 12 [p12A – 7th Schedule] Clothing allowance – not exempt [per s.10(1)(nA)] as not distinguishable from everyday clothing – R500 x 12 Bursary for son – fully taxable as Mrs Mokomele earns remuneration of more than R100,000 Subsistence amounts May allowance (no travel and not repaid) Remaining allowances No record of actual expenditure – use Government regulation rate – R276 x 25 Contribution to pension fund: Actual – R400,000 x 10% = R40,000 limited to greater of: R1,750 or 7·5% x R400,000 (being retirement funding employment income) = R30,000 Contribution to retirement annuity fund: Actual – R4,000 x 12 = R48,000 limited to greater of: R1,750; or R3,500 – R30,000 (negative therefore not applicable) 15% x R465,400 – R400,000 + R30,000 (being 15% of non-retirement funding income) = R14,310 Taxable income from employment trade for employees tax Tax per the tables – R114,750 + 38% x (451,090 – 431,000) Less rebate (primary only as less than 65 years of age) Total employees tax withheld (b) 31 August 2010 28 February 2011 R 400,000 48,000 ½ ½ 30,000 ½ 6,000 9,000 1,800 ½ 600 –––––––– 495,400 ½ 7,500 (6,900) –––––– ½ (30,000) –––––––– 465,400 ½ (14,310) –––––––– 451,090 –––––––– 122,384 (10,260) –––––––– 112,124 –––––––– ½ ––– 10 ––– ––– 11 Marks (c) R As the RAF deduction will have to be redetermined, begin with the taxable income before RAF contribution Subtract the travel allowance inclusion (as this must be redetermined) Travel allowance R5,000 x 12 Less business travel Fixed cost per kilometre (in cents) R116,012/26,000 kms x 100 Fuel (in cents per km) Maintenance (in cents per km) Cost per km Reduction: Business kms (5,000) x cost per km (R6·317) Investment income South African dividends received (other than from CIS) Dividend from CIS within 12 months of receipt by CIS: CIS treated as a conduit South African dividend exemption Distribution from CIS outside of 12 months since receipt by CIS Exemption as amount taxed in the CIS [s.10(1)(iB)] South African interest South African interest from CIS (within 12 months) South African interest exemption (limited to) 465,400 (48,000) –––––––– 417,400 ½ 446·2c 110·3c 75·2c –––––––– 631·7c –––––––– (31,585) –––––––– ½ ½ 35,000 10,000 (45,000) –––––––– 30,000 (30,000) –––––––– 80,000 40,000 (22,300) –––––––– Contribution to retirement annuity fund: Actual – R4,000 x 12 = R48,000 limited to greater of: R1,750; or R3,500 – R30,000 (negative therefore not applicable) 15% x R548,515 – R400,000 + R30,000 (being 15% of non-retirement funding income) = R26,777 Capital gain Less annual exclusion (as no other capital gains or capital losses for the current year ending 28 February 2011) Aggregate and net capital gain 28,415 –––––––– 445,815 ½ ½ 1 97,700 ½ ½ ½ 5,000 ½ –––––––– 548,515 (26,777) –––––––– 521,738 550,000 (165,000) –––––––– 385,000 ½ ½ (17,500) –––––––– 367,500 –––––––– ½ Inclusion at 25% 91,875 –––––––– 613,613 The taxable income figure confirms that the loss from Property B may not be used Tax per the tables – R160,730 + 40% x (613,613 – 552,000) Less rebate (primary only as less than 65 years of age) Normal tax Less employees tax withheld Final tax liability An assessed loss for Property B will be carried forward amounting to (R13,000 + R8,000) 12 ½ 60,000 Rental trade Profit from Property A Loss from Property B ring-fenced and may not be used here if taxable income finally determined remains over the threshold at which tax is levied at the maximum marginal rate Capital gains tax: Proceeds Base cost R ½ ½ 185,375 (10,260) –––––––– 175,115 (112,124) –––––––– 62,991 –––––––– 21,000 ½ ½ ½ ––– 18 ––– 30 ––– Marks Blend Co (Pty) Ltd (a) (b) As Blend Co (Pty) Ltd is not held by natural person shareholders, it cannot be a small business corporation (as defined) ––– Income tax effects R (i) Machine A Manufacturing machine allowance [s.12C] R500,000 x 20% (year and last of the allowance) Recoupment [s.8(4)(a)] Selling price R40,000 limited to cost (R500,000) Less Tax Value: R500,000 – R200,000 (40%: 2008) – R100,000 (20%: 2009) – R100,000 (20%: 2010) – R100,000 (above) (100,000) 40,000 –––––––– Capital gain or capital loss: Proceeds Less recoupment 40,000 (40,000) –––––––– Less base cost: Expenditure Less allowances granted 500,000 (500,000) –––––––– Capital gain/capital loss (ii) R Machine B: Purchase price of machine from Test Limited to connected person rule [s.23J]: Acquisition cost of connected person Less allowances claimed by connected person R400,000 x 20% per year as second hand x years Add recoupment for connected person Market value R175,000 limited to cost (R400,000) 175,000 Less Tax Value: R400,000 – R240,000 = R160,000 (160,000) –––––––– Add capital gain multiplied by inclusion rate of 50% Proceeds (175,000) less recoupment (R15,000) 160,000 Less: Expenditure (R400,000) less allowances (R240,000) (160,000) –––––––– Connected person value Manufacturing machinery allowance [s.12C] R175,000 x 20% (second-hand acquisition) ½ ½ 40,000 ½ ½ –––––––– –––––––– ½ ½ 250,000 400,000 ½ ½ (240,000) 15,000 ½ ½ –––––––– 175,000 –––––––– ½ ½ (35,000) ½ (600,000) ½ (103,448) (25,000) (126,000) ½ (12,500) ½ (3,000) ½ (80,000) (vi) The warehouse is not a manufacturing building and does not qualify for the manufacturing building allowance ½ The warehouse also predates the commercial building allowance No allowance was therefore claimed on the old warehouse ½ (iii) Lease and lease improvement Monthly lease payments – R50,000 x 12 Leasehold improvement – deduction is limited to value stipulated in the lease spread over the remaining lease term or 25 years (whichever the lesser) R1,500,000/(10 years less months) x months Excess cost above R1,500,000 was incurred for a manufacturing building Lessee entitled to claim manufacturing building allowance on such excess Manufacturing building allowance – 5% x (R2,000,000 – R1,500,000) Manufacturing allowance for Machine D [s.12C] R630,000 x 20% (year 2) Moving costs of Machine D – spread over remaining tax life of the asset moved [s.12C(6)] 37,500/3 years (iv) Renewal of patent is fully deductible [s.11(gB)] (v) The finger loss is in the nature of risks closely aligned with the type of business that Blend conducts As a result, the amount should be fully deducted [see PE Tramways case for reference] Note: If a candidate applies the new legislation to the old warehouse [s.13quin] credit should still be given No additional credit will be given for the adjusted capital gains tax calculation 13 Marks Tutorial note: No election can be made to defer the capital gain As a voluntary disposal of a building and a building that was not a depreciable asset, the qualifying criteria are not met R Capital gain: Proceeds Base cost 1,200,000 (800,000) ––––––––– 400,000 ––––––––– Capital gain The new warehouse qualifies for the commercial building allowance [s.13quin] at a rate of 5% per annum 5% x R2,300,000 Capital gains inclusion: Total capital gains (0 + 400,000) Total capital losses ½ ½ (115,000) 400,000 ––––––––– 400,000 ––––––––– Aggregate and net capital gain Inclusion at 50% (c) R ½ 200,000 For the purposes of trade Expenditure actually incurred In the production of income Not of a capital nature ½ ½ ½ ½ Expenditure incurred in the production of exempt income is not permitted as a deduction [s.23(f)] ½ It is understood from the scenario that the audit fees relate to the company and its income as a whole ½ Dividends from the South African companies are exempt from gross income and therefore not income as defined This implies that the audit fees should not be fully permitted as a deduction as some of the fee charged relates to the audit of the dividend income stream ½ The audit fees also relate to the preparation of consolidated financial statements and not exclusively to the generation of income However, such consolidated financial statements may be used to obtain credit from financial institutions to on-lend to the group companies 1½ Apportionment on the basis of income earned may therefore not be appropriate An appropriate apportionment must be determined examining all the facts and on a balance of probabilities basis It is clear, however, that the full audit fee is not deductible as some of the fee relates to the audit of the exempt income stream (dividends) Tutorial note: Further information may be found in ITC 1842 72 SATC 118 which discusses the usual principles pertaining to the deductibility of an expense (a) ½ ––– 17 ––– The deduction of the audit fees by Tea Co Holdings Ltd requires the audit expense to be: – – – – ½ ––– ––– 25 ––– Holiday Home No disposal at date of emigration as property is immovable property in South Africa Date of disposal is therefore November 2010 ½ ½ Furniture and fittings As movable assets, these are deemed to be disposed of on emigration, being 30 June 2010 Subsequent disposal when Mrs Mpotulo is in Australia is irrelevant for South African capital gains tax 1 Motor car Movable asset would result in a deemed disposal on emigration, 30 June 2010 ½ Kruger rands Disposal was before emigration – date of sale is the date of disposal, being May 2010 14 ½ ––– ––– Marks (b) Holiday Home R Proceeds (actual on sale) Less Base Cost: Valuation date value: (i) 20% x (Proceeds – post Oct 2001 expenditure) = 20% x (3,750,000 – R250,000) (ii) Market value on October 2001 (iii) Time apportioned base cost: R = 3,750,000 – 187,500 B = 320,000 A = 250,000 R 3,750,000 700,000 N/A ½ ½ ½ P = R x B/(A + B) P = 2,000,000 N=4 T = 10 1 Y = B + ((P – B) x N)/(T + N) Valuation date value chosen – highest Post October 2001 expenditure: Extension Selling costs 800,000 –––––––––– –––––––––– 800,000 250,000 187,500 –––––––––– Capital gain Furniture and fittings Proceeds (market value on emigration) Less base cost 400,000 (750,000) –––––––––– (350,000) Capital loss Disregard capital loss – personal use asset 57,000 (23,000) –––––––––– 34,000 Capital gain Total capital gains (not disregarded) Total capital losses (not disregarded) 2,546,500 –––––––––– 2,546,500 (17,500) –––––––––– 2,529,000 (100,000) –––––––––– 2,429,000 –––––––––– Less annual exclusion Aggregate capital gain Less assessed capital loss brought forward Net capital gain Taxable capital gain at 25% = 2,429,000 x 25% = ½ ½ ½ ½ ½ Kruger rands Proceeds (actual on sale – preceded emigration) Less base cost ½ ½ ½ Motor car Proceeds (market value on emigration) Less base cost (a) 1,237,500 –––––––––– 2,512,500 1,600,000 (1,500,000) –––––––––– 100,000 Capital gain Disregard capital gain – personal use asset ½ ½ ½ ½ ½ ½ 607,250 ½ ––– 16 ––– 20 ––– Where the total value of taxable supplies exceeds R1 million over a 12-month period, the person becomes liable to register for value added tax (VAT) at the end of the month in which the turnover exceeds R1 million ½ Within 21 days from the month end in which the person becomes liable, an application must be made for registration as a value added tax (VAT vendor) ½ The taxable supplies considered for the registration threshold stipulated in (1) above does not include the amounts received on replacement of capital assets ½ 15 Marks The sale by Dr Daniels of the furniture, while still a taxable supply, is not considered for the purposes of the registration threshold ½ If his other taxable supplies made regularly and continuously in the course or furtherance of his enterprise remains below R1 million, he does not have to apply for registration as a vendor A full VAT invoice must include the following: – – – – – – – (b) The words ‘Tax Invoice’ prominently displayed Name, address and VAT number of Dr Daniels Name, address and, where the patient is a VAT vendor, the VAT number of such patient A serialised invoice number and the date of issue of the invoice A proper description of the services and goods supplied The quantity or volume of the goods or services Either: – The value of the supply, the amount of tax charged and the consideration for the supply; or – The total consideration value and either the amount of tax charged or the rate at which the tax was charged Bad debts generate a VAT input claim Effectively the output VAT charged is reversed in the VAT period in which the debt is considered irrecoverable 1 ––– ––– The supply by the website company of the electronic books is an imported service [as defined in s.1 of the VAT Act], being a supply by a non-resident to a resident who will use the supply other than for purposes of making taxable supplies As Dr Daniels is using the books for recreational purposes, this purchase meets the definition The time of supply for such imported service is the earlier of issuance of an invoice or when payment is made Since the foreign company does not issue invoices the time of supply must therefore be the date of payment, being 15 May 2011 The value is the open market value or actual consideration, whichever is greater The only value supplied is that of R2,310 and must be the appropriate value The transaction must be declared by Dr Daniels to the Commissioner in the prescribed form within 30 days of the time of supply (15 May 2011) Dr Daniels will have to pay VAT on the imported service of 14% x R2,310 = R323 Tutorial Note: The definition of days is derived from the Interpretation Act and is reckoned by including the first day (i.e 15 May 2011) and excluding Saturdays, Sundays and public holidays For this reason the exact date is not expected in the solution (but for reference would be 27 June 2011) ½ ½ ½ ½ ½ ½ ––– ––– 15 ––– Max Green (a) The service is mainly to residential customers (who themselves are not VAT vendors) ½ By registering as a VAT vendor, Max will have to charge VAT on his services, increasing the costs to his non-VAT vendor customers while producing no further revenue for himself Stated differently, Max may have to charge more than the competition in this industry who are not registered for VAT ½ Much of the cost in Max’s business is likely to be labour in the collection and sorting of the recycling collected from the residential customers ½ As the payment of wages does not result in a VAT input claim, there is no advantage to Max to register the business for VAT (b) As Max is under 65 years of age and earning income other than remuneration (such as his salary) he is a provisional taxpayer Tutorial note: As he is ‘carrying on a business’ he does not qualify for the passive taxable income exemption from provisional tax, which provides that persons under 65 not carrying on a business may have other taxable income from interest, dividends or rental but not exceeding R20,000 to avoid registration as a provisional taxpayer 16 ½ ––– ––– ½ Marks Persons qualifying as provisional taxpayers must apply for registration within 30 days of becoming a provisional taxpayer ½ Max became a provisional taxpayer on 15 April 2010 when he began earning income from carrying on a business ½ He therefore must register as a provisional taxpayer within 30 days after 15 April 2010 ½ Tutorial Note: The definition of days is derived from the Interpretation Act and is reckoned by including the first day (i.e 15 April 2010) and excluding Saturdays, Sundays and public holidays For this reason the exact date by which Max must register is not expected in the solution (but for reference would be 28 May 2010) (c) R Salary 12,000 x 12 Interest earned Interest exemption for under 65s 30,000 (22,300) Business income Pre-trade expenditure [s.11A] Deductible revenue expenditure 450,000 (20,000) (200,000) –––––––– Taxable income Tax per the tables: 70,650 + 35% x (381,700 – 305,000) Rebate Tax liability before tax credits Employees tax Provisional tax Total tax liability 17 R 144,000 7,700 –––––––– 230,000 –––––––– 381,700 –––––––– 97,495 (10,260) –––––––– 87,235 (15,940) (25,000) –––––––– 46,295 –––––––– ––– ––– ½ ½ ½ ½ ½ ½ ½ ½ ––– ––– 10 ––– ...Fundamentals Level – Skills Module, Paper F6 (ZAF) Taxation (South Africa) June 2011 Answers and Marking Scheme Note: The ACCA does not require candidates to quote section numbers... CIS Exemption as amount taxed in the CIS [s.10(1)(iB)] South African interest South African interest from CIS (within 12 months) South African interest exemption (limited to) 465,400 (48,000)... (R6·317) Investment income South African dividends received (other than from CIS) Dividend from CIS within 12 months of receipt by CIS: CIS treated as a conduit South African dividend exemption