TAX EXAM & NOTES PACKS

Skhothana (Pty) Ltd (Skhothana) is a South African company that imports luxury fashion clothing brands from overseas to resell locally. Skhothana is registered for Value-Added Tax (VAT) on the invoice basis and has a two-month tax period. The following amounts relate to receipts and payments for the two-month period ending 31 March 2014. Where applicable, all amounts are exclusive of VAT, unless otherwise stated. Receipts Notes R Cash sales 150 000 Credit sales 490 000 Rentals 1 140 400 Loan from Qhoma bank 2 100 000 Equity contributions from shareholders 2 150 000 Indemnity payment 3 80 000 Payments Import of stock 4 300 000 Purchase of land 5 100 000 Sundry payments 6 32 490 Notes: 1. Rentals Skhothana has excess floor space in its commercial buildings that it let to aspiring local designers. The rentals received from the designers amounted to R62 400 for the two-month period and constituted 8% of the total revenue of the company. As part of its remuneration package, the company lets residential accommodation to its employees at a discount to market value. The amount received for the period was R78 000 and makes up 10% of the total revenue of the company. 2. Loan from Qhoma Bank In March 2014, Skhothana opened two new stores locally. To finance the expansion, the company acquired a loan of R100 000 from Qhoma Bank and received equity contributions of R150 000 from the company’s shareholders. 3. Indemnity payment On 6 March 2014, a fire broke out at the Johannesburg branch and stock valued at R80 000 was destroyed. The insurance company indemnified the company with a cash payment of R80 000 (inclusive of VAT). 4. Import of stock On 28 February 2014, Skhothana imported the Ska-Vela brand of shoes from Italy. The cost price and value for customs duty purposes was R300 000. Import surcharges of R2 400 were levied. The date reflected on the Customs Billing of Entry is 4 March 2014. QUESTION 1 (continued) 5. Purchase of land Skhothana purchased a second-hand building from a non-vendor for a consideration equal to R100 000. The property was paid for in full and registered on 6 March 2014. The open market value on the date of registration was R120 000. 6. Sundry payments comprise of the following amounts inclusive of VAT: R Fuel cost 14 250 Bank charges 7 410 Maintenance costs 5 700 Insurance premium 3 990 Subscription fees 1 140 The fuel costs, bank charges and maintenance costs relate to the import business as well as the property rental business. The insurance premium and subscription fees only relate to the import business. The subscription fees are for the purchase of international magazines and membership with fashion trend forecasting agencies to ensure that the company stocks up on the latest trends. REQUIRED: Marks Calculate the VAT payable by or refundable to Skhothana (Pty) Ltd for the two-month tax period ending 31 March 2014. Note: Where an amount is nil, please indicate and provide a brief reason. 20 QUESTION 2 (40 marks, 48 minutes) Part A (35 marks, 42 minutes) Drum Rum (Pty) Ltd is not a small business corporation as defined and carries on business as a liquor manufacturer. The company operates mainly in South Africa and sells most of its liquor products on credit to liquor retailers in South Africa and neighbouring countries. The company is a registered vendor for VAT purposes and its year of assessment ends on 28 February 2014. All amounts exclude VAT, unless otherwise stated. The company has a taxable income of R6 758 631 before the following information has been taken into account: R 1. Export sales – cash 750 352 2. Dividends received – South African companies 13 750 3. Imported liquor ingredients used in the manufacturing process 588 535 4. Inventory at cost – 1 March 2013 Inventory at market value – 1 March 2013 5. Inventory at cost – 28 February 2014 Inventory at market value – 28 February 2014 291 250 289 750 319 760 325 753 6. Bad debts written off during the 2014 year of assessment 75 205 7. List of doubtful debts at 28 February 8. List of doubtful debts at 28 February 9. Personnel costs: - Incentive bonuses to all employees - Contributions to the pension fund on behalf of employees. The Commissioner has approved a remuneration of R2 000 000 for the purposes of pension fund contributions. 10. Legal expenses incurred: - Legal cost relating to collecting outstanding debtors - Legal cost paid on behalf of one of the company’s directors regarding a private issue 11. Advertising costs incurred: - Cost of advertising a vacant post in the Weekly Cape Mail - Cost of erecting a billboard close to the BR International Airport in Botswana 12. Drum Rum (Pty) Ltd purchased the following capital assets: A new brewing manufacturing machine B was purchased on 31 December 2013 at a total cost of R350 000 and was brought into use on the same date. Installation costs for machine B amounted to R14 250 (including VAT). 350 000 135 250 8 500 1 500 4 580 35 600 QUESTION 2 (continued) A second hand delivery vehicle was purchased on 30 June 2013 at a total cost of R125 000 to deliver the liquor products of Drum Rum (Pty) Ltd to its clients. Owing to technical problems, the delivery vehicle was only brought into use on 1 September 2013. A new manufacturing building was erected on 30 April 2009 and brought into use on 31 July 2009 at a total cost of R1 650 000. The building houses the whole liquor manufacturing process of Drum Rum (Pty) Ltd. 13. Drum Rum (Pty) Ltd received a sudden demand for one of its flagship products and was forced to look for additional manufacturing space. Bliss CC was approached and a lease agreement was signed on 1 July 2013, with a monthly rental payable of R15 000 as from 1 July 2013 for a period of five years with the option to extend the lease period for another five years. The lease agreement stipulated that Drum Rum (Pty) Ltd had to make leasehold improvements of at least R550 000 and had to pay a lease premium of R90 000. The lease premium was paid on 1 July 2013 and the leasehold improvements commenced on 1 August 2013 and were completed on 1 December 2013. The total cost of the leasehold improvements was R600 000 and the improvements was brought into use on 1 January 2014. 14. Drum Rum (Pty) Ltd sold a technologically outdated manufacturing machine on 1 February 2014 for R15 000. It was originally bought second hand on 30 April 2011 for R100 000 and brought into use on the same day. The company has elected a section 11(o) scrapping allowance. 15. The following costs were incurred relating to patents and trademarks: - Renewal of patent J on 1 August 2013 - Purchase a new trademark on 31 December 2013 16. Drum Rum (Pty) Ltd entered into an agreement with Label Brew, the former brew master, on 31 December 2013, the date on which he resigned, and paid him an amount of R580 000 as a restraint of trade payment for a period of five years. The agreement was effective from 1 January 2014 and the R580 000 was paid on 15 January 2014, only R550 000 of which was taxable in the hands of Label Brew for the 2014 year of assessment. 17. Drum Rum (Pty) Ltd donated R50 000 on 18 December 2013 to “Men in Orange” a public benefit organisation and received a section 18A income tax certificate on 31 January 2014. R 8 500 65 000 QUESTION 2 (continued) 18. Additional information: General binding ruling No. 7 allows for the following write-off periods for moveable assets: - Delivery vehicles – 4 years The company has an assessed loss brought forward from the 2013 year of assessment of R112 314. The company had also paid provisional tax of R1 351 584 for the 2014 year of assessment. Part B (5 marks, 6 minutes) Buildings Ltd, a resident company, declared a dividend of R850 000 on 15 February 2014. The shareholders comprise: ξ Alex Barnard (a natural person) - 25% ξ Roofs Ltd (a listed resident company) - 75% The contributed tax capital is R3 600 000. The company has an unutilised STC credit of R100 000 carried forward from the dividend cycle that ended immediately before the effective date. REQUIRED: Marks Calculate the net dividend received by each shareholder after the dividends tax was deducted.