TAX2601 Assignment 5 Semester 1

QUESTION 1 (30 marks) You are a junior tax consultant at Easy Tax, a firm performing accounting and tax related services for its clients. You are currently assigned to the client SA Metals (Pty) Ltd (“SA Metals”) and your manager has asked you to complete the income tax liability calculation of the company. You obtain the following information about the company: SA Metals is a South African company that manufactures a wide range of steel products. The company has a corporate office in Johannesburg and two factories, one in Johannesburg and one in Gqeberha (in the Eastern Cape). The company’s year of assessment ends on 31 March 2023. It is not a small business corporation as defined in the Income Tax Act. The company accountant supplies you with a taxable income figure of R (assume correctly calculated) before taking the tax consequences for each of the assets/transactions below into account. The following information is provided to you for the company’s 2023 year of assessment: 1. Extract from the asset tax register Below is a summary of specific assets for which the income tax consequences have not been taken into account for the current year of assessment. Asset name Cost Date purchased and brought into use Additional information Manufacturing machine (SP10) R July 2022 SP10 was purchased new. Manufacturing machine (RT4) R August 2020 RT4 was purchased second hand. On 1 November 2022 it was moved from the Gauteng factory to the Gqeberha factory. Transport costs of R16 400 were incurred. Manufacturing machine (DP1) R July 2022 DP1 was purchased new and brought into use specifically for a research and development project SA Metals entered into on 1 July 2022 (refer to note 3 below). Printer R6 499 1 September 2022 New printer acquired for office use. Delivery van R380 000 1 September 2022 New delivery van purchased. Manufacturing machine (EB09) R October 2021 EB09 was purchased new. Machine EB09 no longer met the manufacturing specifications and was sold for R770 000 on 20 January 2023 to an unconnected person. Asset name Cost Date purchased and brought into use Additional information Heavy duty truck (HD1) R560 000 1 March 2022 A heavy-duty truck was purchased new and brought into use at the Gqeberha factory. On 28 February 2023 the truck was involved in an accident and totally written off. The truck was underinsured and the insurance company only paid out an amount of R95 000 to SA Metals on 31 March 2023. Suite of offices - Johannesburg R April 2019 SA Metals purchased a suite of offices situated in an office building in Johannesburg to accommodate the administration of its business. The building was erected by a developer in 2006, but SA Metals purchased these offices from the previous owner that used the offices for business purposes. Factory building - Johannesburg R3 700 000 1 March 2006 This building was purchased new. On 7 May 2022, an electric geyser burst and water damage occurred in the factory manager’s office. A wooden door, two wooden window frames and the carpet were replaced, at a cost of R84 000. Factory building - Gqeberha R (including refurbishment costs) 2 March 2021 and 1 November 2021 An old warehouse situated in an Urban Development Zone of Gqeberha was purchased on 2 March 2021 and totally refurbished (improved) by SA Metals during 2021. It was only brought into use for manufacturing on 1 November 2021. No structural or exterior changes were made to the warehouse. 2. Design and trademarks On 1 January 2023, Design A was registered at a cost of R30 000 and a trademark was acquired at a cost of R65 000. Both assets were brought into use in the business on the same date. 3. Research and development costs During the period 1 July 2022 until 30 November 2022 research and development costs (for which the necessary approval was obtained on 20 April 2022) relating to the innovation and improving a specifically designed steel pipe was incurred. It is envisaged that a registered design (Design B) will eventually result from these expenses. The expenses incurred consisted of the following: - Costs incurred relating to consumables used in the development amounted to R375 000 - Costs incurred relating to the sales promotion for Design B amounted to R158 000 Payment of traffic fines SA Metals paid traffic fines amounting to R26 800 during the year of assessment ending 31 March 2023. Additional information: Binding general ruling no. 7 makes provision for the following write–off periods, where applicable: Heavy duty trucks: 3 years Delivery vehicles: 4 years Office equipment: 5 years Furniture & fittings: 6 years REQUIRED: Calculate the normal tax liability of SA Metals (Pty) Ltd for the year of assessment ending 31 March 2023. Start your answer with the taxable income of R and provide brief reasons where amounts are not taxable or not deductible. SA Metals has elected the section 11(o) scrapping allowance, where applicable. Ignore all capital gains tax consequences. Calculation of SA Metals (Pty) Ltd's normal tax liability for the year ending 31 March 2023: Taxable income before taking into account assets and transactions: R