TAX3701: MOCK EXAM PAPER: SUGGESTED SOLUTION
QUESTION 1 (30 marks)
PART A (25 marks)
Calculation of the taxable income of Woody’s (Pty) Ltd for the year of assessment ended 31/03/2020
R R
Provisional taxable income (given) 4 261 000
Inventory
Opening stock (s 22(2)) MV is lowest (594 000)√ (1)
Closing stock (s 22(1)) CP is lowest 586 000 √ (1)
Purchases (s 11(a)) CP is lowest (1 462 000)√ (1)
Employee related expenses
Salaries (s 11(a)) Alt: (R390 000)√√ (345 000)√ (1)
Pension fund contributions (s 11(l)) (45 000)√ (1)
Income from investments
Local interest – no exemption for a company (1)
11 340 √
Alt: (Nil)√√ 48 200 √ (1)
Local dividends – exempt (s 10(1)(k))
(48 200)√ (1)
Assets
Machine B (second-hand)
*Allowances (s 12C) – 2020 345 000 x 20%√ (69 000) (1)
Machine A (new)
Cost price 380 000
*Allowances (s 12C): 2018 (R380 000 x 40%√) (152 000) (1)
2019 (R380 000 x 20%√) ( 76 000) (1)
2020 (R380 000 x 20%) ( 76 000) (76 000)√ (1)
Tax value 76 000
Less: Selling price (124 000√) (1)
Recoupment 48 000
Recoupment (s 8(4)(e)) 48 000 x 20%√ 9 600 (1)
2 650 000 - 550 000√ x
Manufacturing building (s 13) 5%√ (105 000) (2)
Vehicles (s 11(e)) 280 000/4√ x 10/12√ (58 333) (2)
Research and development
Research costs (s 11D) (322 000 x 150%√) (483 000) (1)
Administration staff (40 000 x 100%) (40 000)√ (1)
Lesser of 200 000/4√ or
Restraint of trade (s 11(cA)) 200 000/3√ (50 000)√ (3)
Taxable income before assessed loss 1 540 607
Assessed loss brought forward (s 20) (680 367)√ (1)
Sub-total 860 240
Taxable liability for 2020 R860 240 x 28%√ 240 867 (1)
Total [25]
*No mark if apportioned in any way
PART B (5 marks)
Distribution paid 200 000 √ (1)
Beneficial holder of shares portion of contributed tax capital R170 000√ x (51 000) (2)
30%√
Dividend (R496 667 x 30%) or (R200 000 - R51 000) 149 000 √ (1)
Dividends tax to be withheld (R149 000 x 20%√) 29 800 (1)
Total [5]
, QUESTION 2 (18 marks)
Identifying general deduction formula√ (1)
Definition Application Marks
Carrying on any trade√ Medic Alert is carrying on a trade, as it operates a medical re-
sponse business with several ambulances and medical response
vehicles√ (2)
Expenditure or losses Medic Alert paid an amount of R115 250 to the hospital and
medical specialists. (1)
Actually incurred The R115 250 was paid on 25 March 2020. (1)
During the year of The expense was incurred on 25 March 2020√ and it therefore
assessment falls within the current year of assessment√ ending on
31 March 2020. (1)
In the production of The risk that a patient or a staff member may be injured or contract
income√ a disease due to the nature of the work conducted by Medic Alert
(Pty) Ltd is closely-connected to the income-earning operations√
(Port Elizabeth Electric Tramway)√ (4)
The expenditure must be ‘a necessary concomitant’√ of the busi-
ness operations. (1)
Therefore, the expenditure is in the production of income. (1)
Not of a capital nature The expense relates to the income-earning operations√ and there-
fore it is not of a capital nature√. No enduring benefit√ has been
derived. (Sub-Nigel)√ (3)
Sec 23(c) prohibition√ In terms of section 23(c) only the portion not covered by the insu-
rance company will be allowed as a deduction√. (2)
Although the payment was only made on 17 April 2020 (after year-
end, the insurance company had a legal obligation√ to pay the
amount of R75 350 to Medic Alert, as they legally confirmed this (1)
on the 31st of March 2020√.
Therefore, only R39 900√ will be deductible. (1)
Conclusion√ All the requirements for the general deduction formula are met,
and the expense of R39 900 will therefore qualify as a deduction
for tax purposes for the 2020 year of assessment. (1)
Pervasive skill Clarity of expression (1)
Available [21]
Total [18]
QUESTION 1 (30 marks)
PART A (25 marks)
Calculation of the taxable income of Woody’s (Pty) Ltd for the year of assessment ended 31/03/2020
R R
Provisional taxable income (given) 4 261 000
Inventory
Opening stock (s 22(2)) MV is lowest (594 000)√ (1)
Closing stock (s 22(1)) CP is lowest 586 000 √ (1)
Purchases (s 11(a)) CP is lowest (1 462 000)√ (1)
Employee related expenses
Salaries (s 11(a)) Alt: (R390 000)√√ (345 000)√ (1)
Pension fund contributions (s 11(l)) (45 000)√ (1)
Income from investments
Local interest – no exemption for a company (1)
11 340 √
Alt: (Nil)√√ 48 200 √ (1)
Local dividends – exempt (s 10(1)(k))
(48 200)√ (1)
Assets
Machine B (second-hand)
*Allowances (s 12C) – 2020 345 000 x 20%√ (69 000) (1)
Machine A (new)
Cost price 380 000
*Allowances (s 12C): 2018 (R380 000 x 40%√) (152 000) (1)
2019 (R380 000 x 20%√) ( 76 000) (1)
2020 (R380 000 x 20%) ( 76 000) (76 000)√ (1)
Tax value 76 000
Less: Selling price (124 000√) (1)
Recoupment 48 000
Recoupment (s 8(4)(e)) 48 000 x 20%√ 9 600 (1)
2 650 000 - 550 000√ x
Manufacturing building (s 13) 5%√ (105 000) (2)
Vehicles (s 11(e)) 280 000/4√ x 10/12√ (58 333) (2)
Research and development
Research costs (s 11D) (322 000 x 150%√) (483 000) (1)
Administration staff (40 000 x 100%) (40 000)√ (1)
Lesser of 200 000/4√ or
Restraint of trade (s 11(cA)) 200 000/3√ (50 000)√ (3)
Taxable income before assessed loss 1 540 607
Assessed loss brought forward (s 20) (680 367)√ (1)
Sub-total 860 240
Taxable liability for 2020 R860 240 x 28%√ 240 867 (1)
Total [25]
*No mark if apportioned in any way
PART B (5 marks)
Distribution paid 200 000 √ (1)
Beneficial holder of shares portion of contributed tax capital R170 000√ x (51 000) (2)
30%√
Dividend (R496 667 x 30%) or (R200 000 - R51 000) 149 000 √ (1)
Dividends tax to be withheld (R149 000 x 20%√) 29 800 (1)
Total [5]
, QUESTION 2 (18 marks)
Identifying general deduction formula√ (1)
Definition Application Marks
Carrying on any trade√ Medic Alert is carrying on a trade, as it operates a medical re-
sponse business with several ambulances and medical response
vehicles√ (2)
Expenditure or losses Medic Alert paid an amount of R115 250 to the hospital and
medical specialists. (1)
Actually incurred The R115 250 was paid on 25 March 2020. (1)
During the year of The expense was incurred on 25 March 2020√ and it therefore
assessment falls within the current year of assessment√ ending on
31 March 2020. (1)
In the production of The risk that a patient or a staff member may be injured or contract
income√ a disease due to the nature of the work conducted by Medic Alert
(Pty) Ltd is closely-connected to the income-earning operations√
(Port Elizabeth Electric Tramway)√ (4)
The expenditure must be ‘a necessary concomitant’√ of the busi-
ness operations. (1)
Therefore, the expenditure is in the production of income. (1)
Not of a capital nature The expense relates to the income-earning operations√ and there-
fore it is not of a capital nature√. No enduring benefit√ has been
derived. (Sub-Nigel)√ (3)
Sec 23(c) prohibition√ In terms of section 23(c) only the portion not covered by the insu-
rance company will be allowed as a deduction√. (2)
Although the payment was only made on 17 April 2020 (after year-
end, the insurance company had a legal obligation√ to pay the
amount of R75 350 to Medic Alert, as they legally confirmed this (1)
on the 31st of March 2020√.
Therefore, only R39 900√ will be deductible. (1)
Conclusion√ All the requirements for the general deduction formula are met,
and the expense of R39 900 will therefore qualify as a deduction
for tax purposes for the 2020 year of assessment. (1)
Pervasive skill Clarity of expression (1)
Available [21]
Total [18]
