LML4804 PORTFOLIO MEMO - MAY/JUNE 2023 - SEMESTER 1 - UNISA - (DETAILED ANSWERS - DISTINCTION GUARANTEED!)

LML4804 PORTFOLIO MEMO - MAY/JUNE 2023 - SEMESTER 1 - UNISA - (DETAILED ANSWERS - DISTINCTION GUARANTEED!) QUESTION 1 (GROSS INCOME) Mr Makubu is a South African resident who owns a panel beating (motor vehicle repair) business, His-Way Mechanics, in Pretoria. On 13 January 2023, Mr Makubu entered into a contract with Mr Naidoo whereby Mr Makubu was to purchase parts needed for the repair of vehicles in his business in Pretoria. The agreement provided that Mr Naidoo would be paid R10 000 upon conclusion of the contract and R30 000 upon delivery of parts. Mr Naidoo was paid the R10 000 on 13 January 2023 and the balance was paid when the parts were delivered on 15 March 2023. Mr Sithole worked as a motor mechanic for His-Way Mechanics for 10 years. In 2020 His- Way Mechanics engaged in a retrenchment exercise as part of the general policy to reduce their staff due to continuing poor performance of the business. As a result, Mr Sithole was retrenched on 30 November 2022. Mr Sithole received R500 000 upon retrenchment as compensation for the termination of his employment. He was also paid R15 000 in respect of a restraint of trade, in terms of which he was prohibited from engaging in any motor mechanic services and activities in and around Pretoria for two years after termination of his employment. WHAT IS REQUIRED OF YOU: With reference to relevant authorities, answer the following questions for 2022/2023 year of assessment: (a) Explain whether Mr Naidoo should include both amounts of R10 000 and the balance of R30 000 in his gross income for 2022/2023 year of assessment. [8 marks] (b) Does the lump sum payment received in respect of termination of services form part of Mr Sithole’s gross income? [5 marks] (c) Does any payment received in respect of a restraint of trade form part of Mr Sithole’s gross income? [2 marks] SUB-TOTAL FOR QUESTION 1 [15 marks] QUESTION 2 (DEDUCTIONS) 2.1 Mr Saki is a dealer in second hand motor vehicles. He trades under the name of Saki Cars. For purpose of his trade, he entered into a lease agreement with Moon Developments to rent a showroom from 1 March 2021 until last day of February 2022. The agreement is renewable annually. In terms of the rental agreement, rent is payable as follows: - R100 000 once off payable on 1 February 2021. This amount is payable on 1 February in each year that the agreement is renewed; - 10% of Saki Cars’ total annual turnover after finalisation of its audited financial statements. Saki Cars’ audited financial statements for the 2021/2022 year of assessment were finalised on 1 June 2022. Based on these statements, Saki Cars paid an amount of R757 450.13 to Moon Developments constituting rent payable in terms of the lease agreement. LML4804 MAY/JUNE EXAM 2023 WHAT IS REQUIRED OF YOU: Advise Mr Saki on the deductibility of the rent paid to Moon Developments in respect of the 2021/2022 year of assessment. [10 marks] 2.2 There are numerous cases heard by the Special Court in which it has been held that the Commissioner is entitled to disallow expenditure to the extent to which it is excessive. Write brief notes on the Commissioner’s right to disallow excessive expenditure with specific reference to the factors that must be taken into account to determine if expenditure incurred is excessive. [5 marks] SUB-TOTAL FOR QUESTION 2 [15 marks] QUESTION 3 (CAPITAL GAINS TAX) Mr Rob Mendy (“Rob”), an admitted attorney, worked for one of the law firms, ABC Incorporated (“ABC”), for ten years. Taking the opportunity presented by the government’s Broad Based Black Economic Empowerment (“BBBEE”) Programme, Rob obtained a tender to build a tar road for the Malegabe Thema Local Municipality in 2015. The tender comprised not only the building of a new tar road but also for the maintenance of that road for ten years. After a long discussion with his wife Irma, Rob decided to resign from ABC. WHAT IS REQUIRED OF YOU: 3.1 Discuss how the residency of the taxpayer influences his or her capital gains tax consequences. [5 marks] 3.2 Discuss the capital gains tax consequences should Rob receive R3m worth of shares and R5m as severance package from ABC. [5 marks] 3.3 Discuss the capital gains tax consequences should Rob use part of his R5m severance package to buy a penthouse in the CBD of Johannesburg. [3 marks] 3.4 Briefly provide an example to illustrate the difference between repairs and improvements for capital gains tax purposes. [2 marks] SUB-TOTAL FOR QUESTION 3 [15 marks] QUESTION 4 (TAX ADMINISTRATION AND TAX AVOIDANCE) Medupi Incorporated (“Medupi”} owns all the shares in Mahogany (Pty) (Ltd) (“Mahogany”), a South African resident company and Mahlangu CC, a close corporation incorporated in South Africa. In May 2021, Mahlangu CC concluded a ‘structured finance’ transaction with Mahogany in terms of which Mahogany purportedly lent Mahlangu CC R5 000 000. However, a net amount of R2 500 000 in cash was effectively made available. In terms of the loan agreement, the loan is payable within a period of three years and Mahogany will buy part of Mahlangu CC building at a reasonable amount. Mahlangu CC entered into this arrangement to eliminate the risk of capital loss when disposing the building as a result of wear and tear. For both the 2020/2021 and the 2021/2022 LML4804 MAY/JUNE EXAM 2023 years of assessments, Mahlangu CC claimed an interest deduction from income tax in respect of the R5 000 000 loan. In 2022, the Commissioner for South African Revenue Service (“the Commissioner”) issued an additional assessment in respect of the 2020/2021 year of assessment as well as the 2020/2021 year of assessment disallowing the interest deduction on the basis that the loan was a simulated transaction. Mahlangu CC objected to the additional assessments claiming that the interest deduction should be allowed and is valid. The Commissioner thereafter requested Mahlangu CC to submit all the documents pertaining to the loan agreement. Mahlangu CC failed to submit the requested documents for the 2020/2021 and 2021/2022 years of assessment due to the fact that the corporation destroyed all of the documents as it assumed the documents will not be required anymore. The Commissioner rejected the objection. WHAT IS REQUIRED OF YOU: Advise Mahlangu CC on the chances of success in an appeal against the additional assessment, with specific reference to the validity of the transaction/scheme arrangements for tax purposes. SUB-TOTAL FOR QUESTION 4 [15 marks] TOTAL FOR EXAM = 60