2021 October Portfolio - Tax Law (LML4804)

1.1 Without considering the different years of assessments, discuss the capital gains tax consequences of the assets belonging to Mario. [10 marks] 1.2 Discuss the capital gains tax consequences of an asset belonging to Buhle. [5 marks] SUB-TOTAL FOR QUESTION 1 [15 marks] LML4804 September/November 2021 QUESTION 2 (TAX ADMINISTRATION, TAX AVOIDANCE AND TAXPAYER) Lousie is employed as a sales agent and car mechanic for T&K Motors Ltd (“T&K Motors”). She earns R650 000.00 per annum. On 20 March 2020, Lousie received a notice of assessment from the South African Revenue Service (“SARS”) regarding her earnings as she has constantly failed to submit her tax returns on her earnings and investments. Lousie lodged an objection with the Commissioner which was subsequently refused. She subsequently lodged an appeal against the Commissioner’s decision with the Tax Board against the assessment, claiming that she was not correctly assessed as she qualified for certain tax deductions. Pending her appeal, SARS directed Bank of Africa to debit R300 000.00 from Lousie’s bank account and pay the funds over to SARS in order to settle her debt. Bank of Africa carried out the instructions of SARS, debiting an amount of R300 000.00 from Lousie’s bank account and transferring the funds to SARS. Upon noticing that her bank account has been debited, Lousie immediately rushed to the nearby branch to request the funds to be reversed. After the branch manager told her that the Bank of Africa could not reverse the funds transferred, Lousie threatened the manager that she would sue the bank for illegally withdrawing her funds. WHAT IS REQUIRED OF YOU? Lousie approaches you as tax consultant. With reference to relevant authority, briefly explain whether the Commissioner of SARS is empowered to demand payment of tax due while there is an appeal against the Commissioner’s decision and to approach the taxpayer’s bank for the payment of the tax due. SUB-TOTAL FOR QUESTION 2 [15 marks] QUESTION 3 (GROSS INCOME) 3.1 Desiree worked as a chef for Homemade Delicious, a restaurant outlet specialising in local cuisine in Pretoria, for 10 years. Due to the COVID-19 National lockdown in 2020, Homemade Delicious was forced to close from 27 March 2020 to 30 September 2020. In April 2021, Homemade Delicious engaged in a retrenchment exercise as part of a general policy to reduce its staff due to continuing COVID-19 restrictions on the restaurant sector. As a result, Desiree was retrenched on 30 October 2021. Desiree received R500 000 upon retrenchment as compensation for the termination of her employment. In addition, Desiree was also paid R15 000 in respect of a restraint of trade, in terms of which she was prohibited from engaging in any chef related services and activities in and around Pretoria for two years after termination of her employment. LML4804 September/November 2021 WHAT IS REQUIRED OF YOU? To discuss whether the lump sum payment received in respect of termination of services and the R15 000 in respect of a restraint of trade form part of Desiree’s gross income? [10 marks] 3.2 Lethabo is a South African resident and he owns vacant land in Pretoria West. Lethabo concluded a lease agreement with the YoungBoys Football Club (“YoungBoys”) during the 2020/2021 year of assessment wherein they will lease the land for their training club for 10 years. Clause 6.1 (Lessee improvements) of the lease agreement states the following: The Lessee shall cause, at the lessee’s expense, the construction of one or more buildings and/or parking structures, a football field and other improvements as it deems desirable (the "lessee improvements") consistent with the permitted use in the premises equal to a minimum of R3 000 000.00 (three million Rands). The Lessor agrees to cooperate with the Lessee in obtaining necessary governmental approvals for construction and operation of such improvements and to execute such applications, consents as may be required by government authorities or lessee’s lenders. Advise Lethabo on the impact of clause 6.1 in the lease agreement with the YoungBoys Football Club on her gross income. [5 marks] SUB-TOTAL FOR QUESTION 3 [15 marks] QUESTION 4 (DEDUCTIONS) 4.1 Mrs Naidoo was an investment broker until she took an early retirement package at the age of 55. She now keeps herself busy by visiting her grandchildren and taking part in the neighbourhood watch in Mogale City. Mrs Naidoo invested most of her savings in interest-bearing securities. For the 2020/2021 year of assessment, Mrs Naidoo received R195 700 in interest from her interest-bearing securities. Mrs Naidoo incurred the following expenditure in earning her interest: Telephone and Internet: R1 500 Printing costs: R1 000 Investment advice: R5 000 LML4804 September/November 2021 WHAT IS REQUIRED OF YOU? With reference to relevant case law and sections in the Income Tax Act 58 of 1962, briefly discuss the circumstances under which expenditure incurred in the production of income derived solely from interest-bearing securities may be deducted from the taxpayer’s gross income. [7 marks] 4.2 During August 2020, Mrs Naidoo opened up a deli named “Soet” in Mogale City. She bought an old house and restored it. The purchase price of the house amounted to R3.5 million. She furthermore bought equipment and furniture for an amount of R700 000.00. Before she opened the doors to their customers, her attorney, Mr Fanz assisted her with the application for a business license. The application fee for the license payable to the municipality amounted to R4 500.00. Mr Fanz’s account for attorney’s fees amounted to R8 000.00. After opening the deli up for business, Mrs Naidoo soon realized that the business would need a personalised computer system. Mrs Naidoo paid IT Solutions an amount of R15 700.00 for the development of the software. It was a term of the agreement between Mrs Naidoo and IT Solutions that because of the personalised nature of the computer system Mrs Naidoo would own the software. WHAT IS REQUIRED OF YOU? Advise Mrs Naidoo on the deductibility of each of the expenses she incurred during the 2020/2021 year of assessment. [