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SUGGESTED SOLUTION TO EXERCISE 12.61 Page only
Ascot, Tyrolean, Bonnet and O’Shanter
Cuffley Hunter Moral Tam
Ascot Tyrolean Bonnet O’Shanter
Profit sharing ratio (1:1:1)
Debt of R3 000 – accrual +1 000 +1 000 +1 000
New ratio (4:4:2)
Debt goes bad – R3 000 (Bob Rasta) –1 200 – 200 –600
Deduction in the determination of taxable income – limited to previous inclusions
in income (section 11(i)), therefore –1 000 –1 000 –
Debt of R2 000 – accrual (included in income in the ratio of 4:4:2) +800 +800 +400
Debt goes bad – R2 000 (Bella Cloche) –800 –800 –400
Deduction in the determination of taxable income limited to previous inclusions in
income (section 11(i)), therefore –800 –800 –400
2022 deductions in the determination of taxable income (total) 1 800 1 800 – 400
Fez Tarboosh and Kris Toque
Life assurance premiums
The life insurance premium paid of R21 600 is a capital expense. Since it is not deductible in the determination of taxable income,
it would have to be added to the partnership’s profit in the determination of each partner’s individual taxable income in their profit
or loss sharing ratio. This means that
• Basil Allspice’s taxable profit is increased by R14 400, and
• Kris Toque’s taxable profit is increased by R7 200.
Bad debt recovered
The bad debt recovered of R900 must be excluded from the partnership profit since it is not gross income to the partnership.
• Fez Tarboosh must include R600 in his own gross income as a recoupment of an allowance previously deducted in the
determination of his taxable income (section 8(4)(a)).
• Kris Toque is, however, not required to include the R300 in his gross income since he did not enjoy to a deduction in the
determination of his taxable income on any portion of the original bad debt.
Bad debt written off
The bad debt written off of R2 100 must be added to the partnership’s profit. Then
• Fez Tarboosh can deduct R1 400 of it in the determination of his taxable income since the original credit sale formed part of
his taxable income (section 11(i)), but
• Kris Toque does not enjoy to a deduction in the determination of his taxable income for his share of this bad debt (R700) since
this amount has never been included in his income.
A way to ensure that the full amount is deductible in the determination of taxable income would be to have a clause in the
partnership agreement whereby the ownership of all debts taken over, and subsequently proving to be irrecoverable, would revert
to the seller, who could then deduct the full amount in the determination of his taxable income.
Salary
No adjustment to the partnership’s profit is needed since the salary of R540 000 paid to Kris Toque is a deductible expense in the
production of its income (section 11(a)).
Kris Toque would include this R540 000 salary in his gross income (definition of ‘gross income’).
Because a partnership is not legally a separate entity from its partners, and because the relationship between partners is one of
agency and not of master and servant, the question may well be asked whether Kris Toque’s salary is
• on the one hand a ‘salary’ properly so called, and therefore expenditure incurred by the partnership, or
• on the other hand (as Meyerowitz on Income Tax in §16.83 submits is the situation) merely drawings by the partner against
expected profits, and therefore not expenditure to the partnership.
On this question, Voet (17-2-19) states that under ordinary circumstances, and in the absence of an agreement to the contrary, a
partner is not entitled to claim remuneration for services rendered by him to the partnership. Voet goes on to say that there is
nothing, however, that prevents partners from agreeing, or a court from ordering, that one of them should receive a ‘fee’ in
consideration of his taking a larger or more skilled share in the management of the partnership affairs.
,**2022**
, SUGGESTED SOLUTION TO EXERCISE 12.7
1 Page only
Casquette, West & Helmet
Profits of R220 000 each accrue to Denim Casquette, Fulani West, and Pith Helmet. These profits are included in their taxable
income since there has been no variation in the partnership agreement and because they are the partners at the profit-determination
date.
Since Denim Casquette is a partner for the full year, R220 000 of the partnership profit accrue to him. Yet the provisions of
section 24H(5) have the effect of deeming the receipts and accruals of a partnership to accrue on a day-to-day basis and not on an
annual basis. The agreement entered into between Denim Casquette and Mitre Abbot does not provide that the profits be split on
the basis
• 1 March 2021 to 31 August 2021, and
• 1 September 2021 to 28 February 2022,
but on the basis of half of the profit for the (entire) year. Thus, Denim Casquette is subject to normal tax on the R220 000 accruing
to him, without regard to the R110 000 profits distributed by him subsequent to their accrual.
The position would have been different had Denim Casquette ceded the rights to half of his profits for the year to Mitre Abbot.
The R200 000 received by Denim Casquette from Mitre Abbot is a capital receipt, being an amount received in return for him
selling his rights to a one-third share of the profits of the partnership for the year to 28 February 2022.
Mitre Abbot has purchased R110 000 in profits for R200 000. He will include in his gross income the R110 000. And then the
R200 000 he incurred is not deductible in the determination of his taxable income since it is capital in nature expenditure incurred
by him to acquire the right to those profits.
**2022**
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