LML4804 ASSIGNMENT 1 MEMO - SEMESTER 2 - 2022 - UNISA

LML4804 ASSIGNMENT 1 MEMO - SEMESTER 2 - 2022 - UNISA QUESTION 1: (GROSS INCOME) 1.1 Nana (Pty) Ltd (‘Nana’) is a high street retailer in cosmetics, over-the-counter medicine, prescription medicine, and general merchandise. Nana also sells gift cards to customers which can later be redeemed for goods. Nana is concerned that sections 63 and 65 of the Consumer Protection Act 68 of 2008 (‘CPA’) specifically states that any receipt in respect of a gift card must be held in separate ‘trust’ on behalf of the bearer of the gift card until it is redeemed for goods and services, or until the gift card expires. When Nana sells gift cards at the respective branches, the cash and EFT slips are put in the cash registers. At the end of the branches monthly financial cycle, the branch reports the value of gift cards sold to the financial officer. The financial officer makes a ledger entry of the transactions. Thereafter, the financial officer transfers the total value that constitutes gift cards to a separate bank account. During the 2021/2022 year of assessment, Nana has sold gift cards to a value of R650 000. By 28 February 2022, R601 000 has not been redeemed for goods or services. WHAT IS REQUIRED OF YOU? Advise Nana if the value of the gift cards sold but not yet redeemed on 28 February 2022 must be included in their gross income for the 2021/2022 year of assessment. [15 marks] 1.2 In 2019, Peter Car Mechanics CC (‘PCM’) and ABC Couriers (‘ABC’) concluded a contract in terms of which PCM undertook to repair the vehicles belonging to ABC for a fee of R120 000 per annum. Moreover, they agreed that PCM will repair the vehicles of ABC as and when the need arises and that PCM will receive R10 000 every month. They further agreed that the contract between them will only be terminated in writing and any disputes that may arise in the contract will be subjected to arbitration. In 2020, three of ABC vehicles were involved in an accident and the insurance company submitted a report to ABC that the vehicles got damaged as a result of 1 mechanical negligence by PCM. ABC send a letter of termination to PCM and instructed PCM to immediately stop repairing all its vehicles in its workshop and immediately return them to ABC premises. PCM referred the matter for arbitration and after the arbitrator received two independent reports from accident experts, the arbitrator concluded that the accident was as a result of the negligence of the drivers. The arbitrator made an award in favour of PCM with an order that ABC pay compensation of R80 000 to PCM for damages resulting from the termination of the contract. In 2021, ABC took the matter to court, (and not acted in accordance with the arbitrator’s order) however, before the matter was placed on the roll for hearing, the insurance company revoked its report that was sent to ABC and decided that it will pay ABC’s claim for an amount of R150 000. ABC accepted the compensation from the insurance company, and paid PCM R70 000 as a settlement amount out of court. WHAT IS REQUIRED OF YOU? With reference to the Income Tax Act and case law, advise the Commissioner of the South African Revenue Service (SARS) on the tax implications of the facts. [10 marks] Sub-total [25 marks] QUESTION 2: (DEDUCTIONS) Mr Maponya just graduated from the University of the Free State as a plant pathologist. Mr Maponya opened a laboratory in Kuruman from where he will do soil analysis, plant analysis, and weather analysis for the local farming community. In addition, he will do crop-failure investigations for insurance companies and he will assist two seed producing companies to genetically modify maize to grow under severe drought conditions. WHAT IS REQUIRED OF YOU? Advise Mr Maponya, with reference to case law and relevant legislation, on the deductibility of the following expenditure: 2.1 On 1 March 2021, Mr Maponya purchased an old house in Kuruman which he transformed into an office and laboratory. The house cost him R750 000 including estate agent’s commission and transfer costs. On 10 March 2021, Mr Maponya paid Kuruman Building Contractors R525 000 to transform the house into an office and a laboratory. Mr Maponya also purchased a set of text books on plant pathology at a 2 cost of R39 500. On 1 September 2021, Mr Maponya commenced with business. [18 marks] 2.2 On 16 November 2021, Mr Maponya issued a report to insurance company in respect of a certain farmers’ insurance claim, on the reasons for why the farmer’s crop failed. In his report, Mr Maponya states that the farmer applied too much fertilizer to the plants which caused the roots to burn and rot. As a result, the plants died before they could produce any fruits. Based on the outcome of Mr Maponya’s report, the insurance company refused to pay out the farmer’s claim. The farmer obtained an independent report which states that the plants were infected by a microscopic organism that causes root rot. The farmer instituted a claim for damages against the insurance company, Mr Maponya, and the seed producing company. Mr Maponya spent R98700 in legal fees. © UNISA 2022 3 [7 marks] Sub-total [25 marks] GRAND TOTAL [50 marks]