TAX3701 Assignment 2 (DETAILED ANSWERS) Semester 1 2026 - DISTINCTION GUARANTEED

TAX3701 Assignment 2 (DETAILED ANSWERS) Semester 1 2026 - DISTINCTION GUARANTEED - DISTINCTION GUARANTEED - DISTINCTION GUARANTEED Answers, guidelines, workings and references.. Thabo Manufacturing (Pty) Ltd (TM) is a South African company located in Durban, South Africa and manufactures a wide range on concrete products. TM’s year of assessment ends on 31 March 2026, is a registered VAT vendor and not a small business corporation as defined. All amounts stated excludes VAT, unless specifically stated otherwise. SARS has approved TM’s process of manufacturing. The managing director has provided you with the following information for the year of assessment ended on 31 March 2026 to calculate the normal income tax liability for the 2026 year of assessment: QUESTION 2 (continued) 1. Sales amounted to R. Included in this amount is an amount of R22 520 being sales made to a client on 22 November 2025. TM has received a letter from DC Attorneys confirming that the client has been finally liquidated on 15 March 2026. 2. The cost of sales comprised the following: a. Opening stock on 1 April 2025 R3 785 261 (The market value is R3 825 250) b. Purchases of raw material R c. Closing stock on 31 March 2026 R4 252 879 (The market value is R4 213 246) 3. Salaries and wages comprised the following: • Salaries and wages of all staff members – R2 250 150. • Pension fund contributions for all staff members – R525 350. • An annuity of R52 750 paid to the spouse of Mr. P Matabula, who passed away on 24 February 2026. Downloaded by Edge Tutor () lOMoARcPSD| 4 4. Bad debts and doubtful debts • Refer to note 1 above regarding the client that was finally liquidated on 15 March 2026. • The list of doubtful debts on 31 March 2026 is R250 800. 75% of the list of doubtful debts on 31 March 2026 is in arrears for more than 90 days, but less than 120 days. TM does not apply IFRS 9. The doubtful debt allowance granted by SARS in the 2025 year of assessment amounted to R31 250. QUESTION 2 (continued) 5. Restraint of trade payment TM made a restraint of trade payment of R225 000 on 1 November 2025 to Mr. B. Mkiza, the marketing manager, who has retired on 31 December 2025. Mr. Mkiza is restricted for four years from the date of payment to compete with TM. Only R200 000 of the amount paid was taxable in the hands of Mr. Mkiza. 6. Learnership agreements TM entered into the following learnership agreements: • On 1 February 2025 TM entered into a learnership agreement with an employee with a NQF level 5 qualification for a period of 12 months. The employee completed the learnership training on 31 January 2026. The employee has a disability as defined. • On 1 May 2025 TM entered into a learnership agreement with an employee with a NQF level 8 qualification for a period of 24 months. The employee was still in the employment of TM on 31 March 2026. 7. Legal expenses TM incurred the following legal expenses during the 2026 tax year: • R12 700 paid to Abel Attorneys for collecting outstanding trade debtors. • R7 520 paid to Naidoo Attorneys for representing an employee in a divorce case. Downloaded by Edge Tutor () lOMoARcPSD| 5 8. Donations TM made the following donations during the 2026 year of assessment: • R156 500 to Pink Ladies, a public benefit organisation, and the necessary section 18A tax certificate was received on 15 March 2026. • R7 500 local charity organisation. This organisation is not a registered public benefit organisation. QUESTION 2 (continued) 9. TM paid the annual insurance of R360 000 for the period from 1 November 2025 to 31 October 2026 on 31 October 2025. 10. TM has an assessed loss of R1 215 800 brought forward from the 2025 year of assessment. 11. TM held the following non-current assets on 31 March 2026: • TM purchased manufacturing machine ZX new on 1 June 2025 for an amount of R644 000 (including VAT) and brought it into use on 1 July 2025. TM also had to mount machine ZX on a special foundation costing R75 000 that was paid on 15 June 2025. • TM purchased three delivery trucks at a total cost of R1 350 000 on 1 April 2025, and brough them into use on 1 May 2025. On 1 February 2026 one of the delivery trucks was involved in an accident causing the truck to be written off by the insurer on 12 February 2026. The insurer paid TM an amount of R360 000 on 25 February 2026 for the delivery truck that was written off. • TM bought new computers for a total cost of R180 000 for the factory and the administrative office on 1 July 2024 and brought them into use on the same day. 12. TM incurred the following costs related to rent: Downloaded by Edge Tutor () lOMoARcPSD| 6 • TM signed a new lease agreement with PT Investments (Pty) Ltd on 1 June 2025 for a period of ten years with the option to extend the lease agreement for another five years. The monthly rent payable as from 1 June 2025 is R28 750. A lease premium of R285 000 was also paid to PT Investments (Pty) Ltd on 1 June 2025. • The new lease agreement signed with PT Investments stipulated that TM had to make improvements to the existing factory building on the leased land. The leasehold improvements should at least be R2 250 000. TM started with the leasehold improvements on 1 July 2025 and completed the improvements on QUESTION 2 (continued) 31 December 2025 at a total cost of R2 520 000 and brought it into use on 1 January 2026. 13. TM purchased part of a new commercial building on 1 August 2025 for a total amount of R2 472 500 (including VAT) and brought it into use on 1 September 2025. The part of the new commercial building acquired will be used by the sales and marketing personnel of TM. 14. Binding general ruling 7 provides for the following write-off periods: • Delivery trucks – four years. • Computer equipment – three years. 15. TM received the following other income during the 2026 year of assessment: • Interest of R17 780 from South African banks. • Dividends of R114 520 from South African companies. • Dividends of R145 200 from a foreign company. TM only holds 3% of the equity shares in the foreign company. REQUIRED MARKS Downloaded by Edge Tutor () lOMoARcPSD| 7 Calculated the normal income tax liability for Thabo Manufacturing (Pty) Ltd for the year of assessment ended on 31 March 2026. Please provide reasons should any amount be excluded from gross income or not qualify as an income tax deduction. You can assume that TM will make use of any permissible tax deduction to legally reduces it’s 2026 income tax liability.