QUESTION 1 PART I ITC JUNE 2019
PAPER 1 SUGGESTED SOLUTION
Part (a) Discuss the income tax implications for SA Solar in respect of the sale of trading
stock to The Power Store for the 2018 year of assessment. Refer to case law Marks
principles.
1 Issue
1.1 As SA solar sold trading stock on credit subject to a condition being met. In terms of the gross 1
income definition in section 1 inclusion takes place at the earlier of receipt or accrual.
The issue is thus when does the R160 000 (R139 130 VAT excluding) accrue to SA Solar? 1
2 Case law principles
2.1 Accrued to means entitled to. An amount is included in gross income when a person is entitled 1
to it and not only when the amount is received after the end of the year of assessment (People's
Stores).
2.2 Accrued means unconditionally entitled to (Mooi). 1
2.3 The onus of proof is on the taxpayer in terms of section 102 of the TAA 1
3 Application to issue
3.1 The sale agreement came into effect on 23 February 2018, (also the date of delivery of the
trading stock) but subject to a condition as the finance application must be approved by Investor 1
Bank, i.e. a third party.
3.2 The sale condition was only met on 1 March 2018 (2019 year of assessment) and this is the
date on which SA Solar is unconditionally entitled to the R160 000 (or R139 130 if accepted 1
that VAT was included in the sales amount).
4 Conclusion
4.1 No accrual takes place in the 2018 year of assessment, as the amount accrues in 2019.
1
Therefore there is no inclusion in gross income in 2018 i.r.o. the sale of trading stock to The
Power Store
Available 8
Maximum 5
Total for part (a) 5
Part (b) Discuss whether SA Solar would qualify as a small business corporation and
calculate the taxable income of SA Solar for the 2018 year of assessment, on the
assumption that it does qualify as a small business corporation.
Marks
Start with taxable income of R1 222 759.
Provide reasons where no tax implications arise.
1
All shareholders must be natural persons: Phumlani is the sole shareholder and is a natural
1
person.
1
The entity must be a CC or private company: Solar SA is a private company.
The gross income of Solar SA is R18 760 000 for the year of assessment (less than R20 million).
1
2 The shareholders must not hold any shares or has any interest in the equity of any other
company: Phumlani has no dividend or interest-bearing investments. 1
3 SA Solar does not derive more than 20% in investment income and personal services income,
as its income is derived solely from manufacturing and 1
SA Solar is not a personal services provider. 1
3.1 Conclusion: SA Solar will qualify as a ‘small business corporation’. 1
Amount
Calculations CGT Income tax
4 Taxable income 1 222 759
4.1 Conditional sale
Not accrued to in 2018 tax year,
subject to a condition 0 1
Paper 1 Question 1 1 © SAICA 2019
Suggested solution part II
QUESTION 1 PART I ITC JUNE 2019
PAPER 1 SUGGESTED SOLUTION
Alt: Argued that amount accrued in a) 160 000 1
4.2 Laminating machines
Recoupment – Machine 1
Selling price limited to original cost 499 999 1
Less: Tax value 0
Cost 499 999
Less: section 12E 100% allowance (499 999) 1
Recoupment ito s 8(4)(e) (new machine not
1
brought into use in 3 years –par 66) 499 999
Alt: The full proceeds were used to fund the purchase the replacement
machine and assume brought into use within 3 year, section 8(4)(e) will 1
apply and recoupment is deferred. nil
Capital gain
Proceeds 250 000
Selling price 749 999
Less: recoupment (499 999) 1P
Less: Base cost
Cost (par 20(3) 499 999
1P
Less: allowances (499 999) 0
Capital gain (new machine not brought
1
into use in 3 years) 250 000
Alt: The full proceeds were used to fund the purchase the replacement
machine and assume brought into use within 3 year par 66 of the Eighth 1
Schedule applies– the capital gain is deferred. nil
Allowance – Machine 2
Less: section 12E 100% allowance (499 999) 1
4.3 Aluminium cutting machine
No allowance as not yet brought into
1
use nil
4.4 Second-hand automatic
laminating machine
Less: section 12E 100% allowance as s 12E
available on second-hand machinery
If brought from non-vendor: R250 000 x 100/115 e
1
R217 391 (250 000)
Alt: No allowance as not yet brought into use nil 1
4.5 Pre-payments
Insurance premium
Services rendered within six months of the end of
1
the year of assessment, s 23H will not apply. (79 512)
Machine maintenance
Services not rendered within 6 months but within
the R100 000 limit (98 319) 1
4.6 Stock imported
Trading stock
No deduction, ¥100 000 x R2,50 = 250 000 1
no inclusion in closing stock (s 23F(1)), as stock has not arrived nil 1
Import duties
No section 11(a) deduction as cost not incurred in the 2018
year of assessment. nil 1
Debt
Paper 1 Question 1 2 © SAICA 2019
Suggested solution part II
QUESTION 1 PART I ITC JUNE 2019
PAPER 1 SUGGESTED SOLUTION
Exchange difference: ¥100 000 x (R2,50 - R2,28) 1
gain (section 24I) 22 000 1
4.7 Marketing and entertainment
Family holiday trip,
not in the production of income for purposes of
trade (s 11(a) read with s 23(g)) nil 1
Alt: Seen as a fringe benefit ito 7th
Schedule or 1P
R248 663 x 105/100 = R261 096 (248 663)
Bribe - deduction prohibited (s 23(o))
as an activity defined in Chapter 2 of
the Prevention and Combating of 1
Corrupt Activities Act nil
4.8 Bonuses and commissions
Assume: Paid March 2017 and March 2018 respectively:
Accrual for 2017: actual payment deducted under section 7B
1
Accrual for 2018: deductible in 2019 as employer is deemed to incur the (155 915)
1
expenditure on the date on which the amount is paid to the employees nil
Alt: Assume: Paid March 2018, deductible in 2019 (not deductible in
2018) because the employer is deemed to incur the expenditure on the 1
date on which the amount is paid to the employees (s 7B) i.e. 2019. nil 1
Aggregate capital gain 250 000
x inclusion rate x 80%
No mark if candidate applied annual 1
exclusion 200 000
Alt: The full proceeds were used to fund the purchase the replacement
machine and assume brought into use within 3 year par 66 of the 1
Eighth Schedule applies– the capital gain is deferred. 0
Taxable income before donation 861 013
4.9 Donation
Limited to 10% of taxable income (s
18A) R861 013 x 10% = (86 101) 1P
Note: The balance of R163 899 is carried forward to the next
year of assessment (2019) since any amount disallowed in
terms of s 18A can be forwarded (proviso to s 18A(1)(B)
Alt; If candidate argued that there is no valid receipt for s18A
donation. 1
Taxable income 774 912
Available 30
Maximum 30
Communication skills – presentation; clarity of expression 2
Total for part (b) 32
Paper 1 Question 1 3 © SAICA 2019
Suggested solution part II
QUESTION 1 PART I ITC JUNE 2019
PAPER 1 SUGGESTED SOLUTION
Part (c) Discuss the ethical concerns you may have regarding the conduct of Phumlani, his
tax practitioner and SA Solar. Include any actions that SARS may take against Marks
these parties.
1 The ethical concerns regarding the conduct of Phumlani, his tax practitioner and SA
Solar
1.1 In a broad sense, ethical behaviour entails what is good/beneficial to the majority of parties
1
involved and not only considering yourself.
1.2 Bribery and the claim of private expenses is unethical behaviour of SA Solar (and directly
1
Phumlani as he is the only shareholder of this company).
1.3 This could negatively impact on the reputation of all of the parties involved (loss of jobs etc) 1
and is in contravention of good corporate citizenship.
1.4 The parties should have been aware that it is contravention of tax legislation to claim the 1
deduction. Due diligence was not applied
2 Ethical concerns: SA Solar and Phumlani (as sole shareholder):
2.1 As the company claimed expenses (private expenses and a bribe), the result will be that that
its will be beneficial for SA Solar (indirectly to Phumlani as sole shareholder) as it claims more 1
tax deduction,
2.2 But detrimental to SARS will receive less revenue/taxes 1
3 Ethical concerns: Tax practitioner:
3.1 The tax practitioner can lose his accreditation as a member of the Law Society and as a tax
practitioner 1
4 The actions that SARS may take against SA Solar/Phumlani
4.1 SARS will disallow the deductions that SA Solar wrongfully claimed (private expenses and 1
bribes) and issue an additional assessment.
4.2 1
As SA Solar's intention was to evade tax, the behaviour is intentional tax evasion
(onus on SARS to proof this behaviour).
1
4.3 SARS may impose an understatement penalty (and interest) on income tax on SA Solar / 1
Phumlani for the addition tax deductions claimed
4.4 It is likely that Phumlani’s employees certificate did not reflect the fringe benefit from the 1
overseas trip (if received as an employee) that was paid by the company and an
underpayment of PAYE, took place
4.5 SARS may impose penalties and interest for the understatement or non-declaration of
1
remuneration for provisional tax (PAYE) purposes.
4.6 If Phumlani received the overseas trip in his capacity as shareholder, it would be a dividend
1
in specie and SA Solar under paid the dividends tax
5 The actions SARS may take against the tax practitioner:
5.1 A senior SARS official may lodge a complaint (s 241 of the Tax Administration Act).with the 1
Law Society of South Africa, because
5.2 the tax practitioner assisted the taxpayer to evade tax /due diligence was not applied. 1
Available 16
Maximum 9
Communication skills – appropriate style 1
Total for part (c) 10
Paper 1 Question 1 4 © SAICA 2019
Suggested solution part II
QUESTION 1 PART I ITC JUNE 2019
PAPER 1 SUGGESTED SOLUTION
Part (d) Calculate the taxable income of Phumlani for the 2018 year of assessment. Provide
Marks
reasons where no tax implications arise in respect of a specific item.
Amount
ALTERNATIVE A Calculations CGT Income tax
GROSS INCOME
Income deemed to accrue only to Phumlani,
s 7(2A)(a)(i)
Salary, gross income 150 000 x 12 1 800 000 1
Fringe benefit: medical aid par. 2(i)
and 12A 1 500 x 12 18 000 1
Fringe benefit: provident fund 1 800 000 x
(par. 2(l) and 12D) 10% 180 000 1P
‘Fringe benefit’ - holiday trip to
Dubai (par. 10, 7th Schedule) or 248 663
Alt. Dividend in specie nil 1
Total remuneration 2 246 663
Alt. total remuneration 1 998 000
Deemed dividend on loan:
Dividend in specie in terms of s 64E(4), for which 1
the company is liable for dividends tax.
It is thus not included in the gross income of
Phumlani. Nil 1
Interest income deemed to accrue to both
spouses equally, s 7(2A)(b)
Interest received 30 000 x 50% 15 000 1
Annual exemption of interest (s
10(1)(i) - R23 800, limited to (15 000) 1P
Income 2 246 663
Alt. Income 1 998 000
Net capital gain 100 000
Taxable capital gain included at
40% 40 000 1
Taxable income after capital gain 2 286 663
Alt. Taxable income after capital
gain 2 038 000
Less: deductions
S 11F: Actual contributions: 1 800 000 x
Employee contribution 7,5% 135 000 1P
1 800 000 x
Employer contribution
10% 180 000 1P
315 000
Deduction limited to lesser of
three:
R350 000; or 350 000; or 1
27,5% of the higher of
remuneration (2 246 663) or 27,5% x 1P
taxable income after capital gain 2 286 663 =
(R2 286 663); or 628 832; or
Taxable income before s11F
and inclusion of taxable capital
gain 2 246 663 1P
Paper 1 Question 1 5 © SAICA 2019
Suggested solution part II
QUESTION 1 PART I ITC JUNE 2019
PAPER 1 SUGGESTED SOLUTION
Therefore R350 000 is the lesser
but limited to actual contributions (315 000) 1P
Taxable income before rental
income 1 971 663
Alt. Taxable income before rental
income 1 723 000
Residential letting
Deemed to accrue in equal shares,
section 7(2A)(b) 19 888 x 50% 1
Loss from residential letting,
section 20A 9 944
Taxable income is equal to or
exceeds the amount at which the
maximum marginal rate applies,
which is R1 500 001, and 1P
Residential letting is a suspect
trade (to only a relative) 1
Ringfence loss for current year (s
20A(2)(b)), can only be set off in
future against this trade nil 1
Taxable income 1 971 663
Available 19
Total for part (d) 18
Total for part I 65
Paper 1 Question 1 6 © SAICA 2019
Suggested solution part II
