Summary TAX2601 SUMMARISED EXAM NOTES

TAX2601 USING TL, SG & NOTES FROM LECTURERS AND STUDENTS Annuities paid to former employees on retirement SG page 19 Textbook page 103 Errata: Provisional tax calculation – Change in the periods that determine the basic amount (section 3.9.1 in tutorial letter 102) Currently, the basic amount is deemed to be as follows: 1. The taxable income assessed by the Commissioner, for the‖ latest preceding year of assessment‖ less—  taxable capital gain included in terms of section 26A 2. The ―Latest preceding year of assessment‖ is deemed to be:  the assessment relating to preceding year of assessment  where a notice issued by the Commissioner of such an assessment is more than 14 days before the date on which the current period estimate is submitted to the Commissioner 3. If the assessed amount for the latest preceding year of assessment was assessed  more than 18 months AND  in respect of a period that ends more than one year after the end of such preceding year of assessment, then the basic amount must be increased by 8% per annum of that assessed amount, from the end of such latest year to the end of the current year of assessment in respect of which the estimate is made. The 18 month-period refers to the date on which the previous year’s assessment was received up to the date on which the first provisional payment is due. Refer to the timelines provided on page 5 of this document for an illustration of this principle. STUDY UNIT 1 1. An example of a tax that is levied on income is: Income tax 2. An example of a tax that is levied on consumption is: Customs Duty 3. Taxes can be levied on income or consumption or wealth or other 4. Consumption taxes are taxes that are levied on the: sale or use of commodities 5. Wealth taxes are taxes that are levied on: the transfer of property eg capital gains tax, estate duty, donations tax 6. Other taxes are generally levied on: specific transactions eg transfer duty, marketable securities tax, fuel levy, dividend tax 7. Income tax on natural persons is an example of what method of tax?: Progressive tax 8. There are three methods that can be used to calculate tax, they are: Proportional tax, progressive tax and regressive tax 9. A Direct tax tax is a tax where the same person who earns the income pays the tax 10. Where the seller bears the impact of the tax and the consumer pays, this is known as: Indirect Tax eg. VAT STUDY UNIT 2 1. A taxpayer has to submit an income tax return if registered as a taxpayer – True 2. Any person (individual, company or trust) who becomes liable for any normal tax at any time should register as taxpayer with SARS within how many days: 21 days 3. Any person may request information from SARS about another taxpayer – False 2 4. The source document used as the basis for the assessment process is called: Tax return 5. The purpose of a tax assessment (ITA34) is: To indicate the calculation of normal taxable income & to indicate the normal tax for the year of assessment & To indicate the amount of any tax due by or refundable to a taxpayer 6. Before a taxpayer can lodge an objection a tax assessment should have been issued: True 7. When a taxpayer is dissatisfied with the result of the objection, the next step is to go to court: False 8. A taxpayer may settle a dispute with the Commissioner when intentional tax evasion or fraud is present in a specific case: False 9. An entity like a trust, company or close corporation has to have a representative taxpayer being approved by the Commissioner: True Study Unit 3 1. Calculate the tax liability for a small business corporation, as defined, with a taxable income of R89 200.00 = first R67111 = 0% tax then 7% of amount above R67111 thus R22089 x 7% = R1,546.23 2. What is the tax rate of a company? 28% 3. If a company has a March year-end, when must the second provisional tax payment be made? March next year. There are two obligatory provisional tax payments, the first is due on or before the last day of the sixth month of the year of assessment and the second is due on or before the last day of the year of assessment. 4. What is the tax rate of a close corporation? 28% 5. Public and private companies qualify as small business corporations – False A “small business corporation” is defined in section 12E(4) as any close corporation, co-operative or any private company in terms of the Companies Act and can therefore never be a public company. There are additional requirements that an entity must satisfy for it to be a small business corporation as defined in s12E(4) - please ensure you are familiar with these requirements. 6. In order for a company to be classified as a small business corporation, the definition states that investment income and income from a personal service cannot make up more than 10% of the revenue receipts and capital gains of the company – False the answer is 20% - In order for a company to be classified as a small business corporation, the definition states that investment income and income from a personal service cannot make up more than 20% (and not 10%) of the revenue receipts and capital gains of the company. 7. In terms of the Sixth Schedule to the Income Tax Act, a trust cannot qualify as a micro business – True. In terms of the Sixth Schedule to the Income Tax Act, a trust cannot qualify as a micro business. 8. In terms of turnover tax rules, qualifying turnover (as defined), includes 50% of all receipts of a capital nature – False p187 Qualifying turnover is defined in par 1 of the 6th Schedule as: Total receipts from carrying on business activities excluding any amount of a capital nature, and excluding any amounts exempt from tax in terms of certain sections - In terms of the turnover tax rules, any amount of a capital nature received from conducting business must be excluded from qualifying turnover. 9. A company that is registered as a micro business in terms of the Sixth Schedule must have its year of assessment ending on 28/29 February – True - As per the turnover tax rules, a company, close corporation and co-operative is disqualified as a micro business if its year of assessment ends on a date other than the last day of February 10. The taxable income of a trust for the 2014 year of assessment is R625 000. How much tax must the trust pay? 40% currently R250,000.00 Study Unit 4 - Gross Income Definition 1. Which one of the following statements is correct? A person other than a natural person is a resident of the Republic if it ? . Is incorporated, established or formed in the Republic or has its place of effective management in the Republic A person other than a natural person (in other words a business entity such as a company or a close corporation) is a resident of the Republic if it is:  incorporated, established or formed in the Republic, or  has its place of effective management in the Republic 2. Indicate whether the following statement is true or false: Amounts of a capital nature do not form part of gross income 3 True 3. Which one of the following statements is correct? The year of assessment for a company with a financial year-end of 30 June 2014 is ? . 1 July 2013 to 30 June 2013 4. Indicate whether the following statement is true or false: Dividends are specifically included in gross income True 5. Which one of the following taxpayers is not exempt from tax? Any company that trades in shares Study Unit 5 General and specific deductions Question 1 Dumela (Pty) Ltd has taxable income of R350 000 for its 31 January 2014 year of assessment, before allowing a deduction for donations in terms of section 18A. Dumela (Pty) Ltd made a donation of R38 000 to a public benefit organisation approved by the Commissioner under section 30 and received a section 18A certificate from it. What is Dumela’s taxable income amount (after taking the donation into account) for the year of assessment? Taxable Income R350 000 Donation Actual R38 000 Allowed only 10% Taxable Income of R350 000, thus only R35 000 claimable. Thus taxable Income after donation deduction R315 000 =R315 000 That is correct! In terms of s18A, a deduction for donation to a PBO is limited to 10% of taxable income. In this example, the deduction is R38 000 limited to R35 000 (10%*R350 000). The taxable income of Dumela after taking the s18A deduction into account is therefore R315 000 (R350 000 - R35 000) Question 2 Minnie and Daisy (Pty) Ltd is a well know toy store in South Africa. The company concluded the following transactions with its 90 employees during the financial year ended 31 March 2014. Salaries paid to employees were R. Its contributions to provident and medical aid funds on behalf of its employees were R1 200 000. What is the deduction that Minnie and Daisy (Pty) Ltd can claim in respect of the salaries and contributions to provident and medical aid funds in arriving at taxable income? =R Well done, that is correct. Section 11(l) provides for the deduction of any sum contributed by an employer during the year of assessment for the benefit of his employees to any pension, provident or medical fund. The deduction is however subject to certain conditions - refer to your textbooks for these conditions Question 3 4 Mundoball Ltd has a provision for doubtful debts of R1 420 000. It has written off bad debts of R432 000 for the current year. What is the amount SARS will allow as deduction for the provision for doubtful debts in the current year of assessment? =R355 000 The answer is R355 000 (R1 420 000*25%). Remember the Commissioner grants an allowance of 25% of the total doubtful debts Question 4 On 28 February 2014, Moukki Furniture (Pty) Ltd paid an amount of R120 000 for its elevator maintenance contract for the next 12 months from 1 March 2014 to 28 February 2015. Moukki (Pty) Ltd has a 31 March 2014 year end. What is the prepaid amount in respect of the maintenance contract for the 2014 year-end? =R110 000 Well done, that is correct. The answer is R110 000 (R120 000*(11/12)) The 2014 year of assessment ends on 31 March 2014. The maintenance contract commenced on 1 March 2014 meaning at the end of the 2014 year of assessment, services for March were received and an expense incurred. The remaining 11 months (1 April 2014 to 28 February 2015) fall into the 2015 year of assessment Question 5 Assume the same details relating to Moukki (Pty) Ltd as the above question. What amount may be deducted in respect of the maintenance contract, by Moukki (Pty) Ltd to arrive at taxable income for the year of assessment 31 March 2014? =R10 000 Well done, that is correct. The answer is indeed R10 000 (R120 000*(1/12)). Remember that the 2014 year of assessment ends on 31 March 2014. The maintenance contract commenced on 1 March 2014 meaning at the end of the 2014 year of assessment, services for March were received and an expense incurred. No amount for the prepayment can be claimed in the 2014 year of assessment, as the prepayment is more than 6 months (11 months) and more than R100 000 (R110 000). Question 6 Assume the same details relating to Moukki (Pty) Ltd as the above question, except that Moukki (Pty) Ltd has a 31 July 2014 year end. What is the prepaid amount in respect of the maintenance contract? =R70 000 That is correct! The answer is indeed R70 000 (R120 000 x 7/12). The 2014 year of assessment ends on 31 July 2014. The maintenance contract commenced on 1 March 2014, meaning at the end of the 2014 year of assessment, services for 5 months (March 2013 to July 2014) were received and an expense incurred. The remaining 7 months (from August 2014 to February 2015 ) will be prepaid Question 7 Assume the same details relating to Moukki (Pty) Ltd as the above question, (i.e. a 31 July 2013 year end) and Moukki (Pty) Ltd has no other prepaid expenses. What amount may be deducted in respect of the maintenance contract, by Moukki (Pty) Ltd to arrive at taxable income for the year of assessment 31 July 2013? =R120 000 The correct answer is R120 000 (R50 000 (actually incurred in the current year per s11(a)) + R70 000 (prepayment deductible according to rules per s23H)). The maintenance contract commenced on 1 March 2013, so at the end of the 2013 year of assessment (31 July 2013), services for 5 months were received and an expense of R50 000 incurred. The prepaid expense can also be deducted, as the prepayment is for 5 less than R100 000 (R70 000), although it is for more than 6 months (7 months) )(remember only one of the requirements need to be met for the prepayment to be deducted). Question 8 In terms of the general deduction formula, specifically section 11(a) of the Income Tax Act, which parts of the below section 11(a) are incorrect? “...there shall be allowed as deductions from the income of such person so derived- • expenditure and losses, • actually paid, • in the production of income, • provided such expenditure and losses are of a capital nature.”  Actually paid; provided such expenditure and losses are of a capital nature. Well done, that is correct. The general deduction formula per s11(a) allows a deduction for expenditure and losses actually incurred in the year of assessment in the production of income that is NOT of a capital nature Question 9 In terms of the general deduction formula, specifically section 11(a) of the Income Tax Act, what is meant when an expense has been “actually incurred”?  the expense is an unconditional expense The term "actually incurred" means the expense is an unconditional expense Question 10 In terms of the general deduction formula, certain tests may be applied to determine whether the expenditure is “not of a capital nature”. The courts have established certain tests or norms which are of assistance in determining the capital or revenue nature of certain item or class of expenditure. Determining whether an asset or advantage is a once off or recurring expense is one such test Question 11 In terms of the general deduction formula, it’s required that a trade be carried on by the taxpayer. Which of the following is not included in the “trade” definition?  Hobby Well done, that is correct. A hobby is not a trade is defined in s1 of the Act. A trade as defined in s1 of the Act includes: "every profession, trade, business, employment, calling, occupation or venture, including the letting of any property and the use of or the grant of permission to use any patent...or any design...or any trademark...or any copyright...or any other property which is of a similar nature" Question 12 If R65 000 is incurred to purchase a patent, which one of the following amounts would be deducted as an allowance in determining taxable income in a particular year of assessment? =R3 250 A deduction of 5% of the expenditure (that exceeds R5 000) is allowed for patents developed after 1/1/2004. Therefore the deduction allowed in th