TAX2601 - MOCK EXAM 2020
QUESTION 1 (25 marks, 30 minutes)
Bestvita (Pty) Ltd (“Bestvita”) is a South African company and manufactures high quality vitamins and
nutritional supplements. The company’s year of assessment ends on 31 March 2020. It is not a small
business corporation as defined in the Income Tax Act. The manufacturing of vitamins meets the
requirements of a manufacturing process.
The company’s taxable income before taking into account the tax consequences of each of the following
transactions is R16 345 000. The following information is provided to you for the company’s current
year of assessment:
1. Capital allowances on assets
Buildings
• Bestvita owns a factory building where the manufacturing process occurs. It was purchased
new on 1 June 2012 for R2 400 000.
• The company has rented a three-storey warehouse building in Pretoria from 1 July 2012 up
to 30 June 2019 and paid rent of R65 000 per month. The property owner constructed a
new portion to the building and on 1 July 2019, Bestvita purchased the entire building and
took occupation of the new section. The cost of the “old” and “new” part of the building was
R3 000 000 and R1 400 000 respectively.
Machinery
• Machine BV8 was purchased second hand on 1 December 2017 for R180 000 and is still in
use. Major repairs and maintenance work of R17 000 was incurred on 20 January 2020.
• Machine BV10 was purchased new for R70 000 and brought into use on 1 May 2018. On
21 March 2020, the machine caught alight due to a faulty switch and was completely dama-
ged by fire. Bestvita received an insurance pay-out of R55 000 on 27 March 2020.
Delivery vehicle
• A new delivery vehicle was purchased for R380 000 and brought into use on
1 November 2019.
Printer
• A new printer was purchased for R4 999 and brought into use on 1 February 2020.
2. Research and development expenditure
Bestvita conducted research during the year that relates to the development of a new range of
supplements. All costs incurred meet the qualifying criteria for research and development costs
in terms of section 11D of the Income Tax Act. The Department of Science and Technology
received the necessary application by Bestvita on 3 May 2019 and the Minister of the Department
of Science and Technology approved it on 14 June 2019.
The costs were as follows:
• Operating costs incurred of R88 000 on 5 April 2019 and R780 000 on 30 November 2019,
• New and unused machinery purchased on 1 June 2019 costing R1 600 000.
[TURN OVER]
, 2 TAX2601
Mock exam 2020
QUESTION 1 (continued)
3. Restraint of trade
The head scientist (an employee of Bestvita) was paid R1 500 000 to restrain her from working
for a competitor for a four-year period after she resigned on 1 February 2020. This payment will
be included in the income of the ex-employee for the 2020 tax return.
4. Inventory
Raw materials of R5 230 000 was purchased during the year. The closing stock as at 31 March
2019 was accounted for at R3 890 000. The stock take figures as at 31 March 2020 indicated a
cost price of R2 300 000, which had a market value of R3 400 000.
5. Intellectual property
Bestvita purchased a design for R300 000 on 1 June 2019 and incurred costs relating to the resto-
ration of a patent of R120 000 on 8 July 2019.
Other information:
The write-off period of assets according to the Binding General Ruling no.7 is as follows:
Delivery vehicles: 4 years
Printer: 3 years
REQUIRED: MARKS
Calculate the income tax liability of Bestvita (Pty) Ltd for the year of assessment ending
31 March 2020. Start your answer with the taxable income of R16 345 000. 25
[TURN OVER]
QUESTION 1 (25 marks, 30 minutes)
Bestvita (Pty) Ltd (“Bestvita”) is a South African company and manufactures high quality vitamins and
nutritional supplements. The company’s year of assessment ends on 31 March 2020. It is not a small
business corporation as defined in the Income Tax Act. The manufacturing of vitamins meets the
requirements of a manufacturing process.
The company’s taxable income before taking into account the tax consequences of each of the following
transactions is R16 345 000. The following information is provided to you for the company’s current
year of assessment:
1. Capital allowances on assets
Buildings
• Bestvita owns a factory building where the manufacturing process occurs. It was purchased
new on 1 June 2012 for R2 400 000.
• The company has rented a three-storey warehouse building in Pretoria from 1 July 2012 up
to 30 June 2019 and paid rent of R65 000 per month. The property owner constructed a
new portion to the building and on 1 July 2019, Bestvita purchased the entire building and
took occupation of the new section. The cost of the “old” and “new” part of the building was
R3 000 000 and R1 400 000 respectively.
Machinery
• Machine BV8 was purchased second hand on 1 December 2017 for R180 000 and is still in
use. Major repairs and maintenance work of R17 000 was incurred on 20 January 2020.
• Machine BV10 was purchased new for R70 000 and brought into use on 1 May 2018. On
21 March 2020, the machine caught alight due to a faulty switch and was completely dama-
ged by fire. Bestvita received an insurance pay-out of R55 000 on 27 March 2020.
Delivery vehicle
• A new delivery vehicle was purchased for R380 000 and brought into use on
1 November 2019.
Printer
• A new printer was purchased for R4 999 and brought into use on 1 February 2020.
2. Research and development expenditure
Bestvita conducted research during the year that relates to the development of a new range of
supplements. All costs incurred meet the qualifying criteria for research and development costs
in terms of section 11D of the Income Tax Act. The Department of Science and Technology
received the necessary application by Bestvita on 3 May 2019 and the Minister of the Department
of Science and Technology approved it on 14 June 2019.
The costs were as follows:
• Operating costs incurred of R88 000 on 5 April 2019 and R780 000 on 30 November 2019,
• New and unused machinery purchased on 1 June 2019 costing R1 600 000.
[TURN OVER]
, 2 TAX2601
Mock exam 2020
QUESTION 1 (continued)
3. Restraint of trade
The head scientist (an employee of Bestvita) was paid R1 500 000 to restrain her from working
for a competitor for a four-year period after she resigned on 1 February 2020. This payment will
be included in the income of the ex-employee for the 2020 tax return.
4. Inventory
Raw materials of R5 230 000 was purchased during the year. The closing stock as at 31 March
2019 was accounted for at R3 890 000. The stock take figures as at 31 March 2020 indicated a
cost price of R2 300 000, which had a market value of R3 400 000.
5. Intellectual property
Bestvita purchased a design for R300 000 on 1 June 2019 and incurred costs relating to the resto-
ration of a patent of R120 000 on 8 July 2019.
Other information:
The write-off period of assets according to the Binding General Ruling no.7 is as follows:
Delivery vehicles: 4 years
Printer: 3 years
REQUIRED: MARKS
Calculate the income tax liability of Bestvita (Pty) Ltd for the year of assessment ending
31 March 2020. Start your answer with the taxable income of R16 345 000. 25
[TURN OVER]
