Exam (elaborations)
TAX3701 EXAM PACK 2023
- Institution
- University Of South Africa
TAX3701 EXAM PACK 2023
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TAX3701EXAM
PACK
2023
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TAX3701
Sept – Nov 2021
QUESTION 1 (30 marks, 54 minutes)
Pharma Clinic (Pty) Ltd (“Pharma”) is a company that manufactures and sells pharmaceutical products to
local and other African country customers. The company is based in Potchefstroom, South Africa. Pharma
is a registered category B VAT vendor, making 100% taxable supplies and has a financial year that ends
on the last day of June each year. Pharma is not a ”small business corporation” as defined in section
12E(4) of the Income Tax Act. SARS approves the manufacturing of pharmaceutical products as a process
of manufacture.
Pharma concludes transactions with registered VAT vendors only, unless otherwise stated. Where rele-
vant, Pharma is in possession of valid tax invoices, unless otherwise stated or the context indicates other-
wise. All amounts exclude VAT, unless otherwise stated.
During the financial year ended 30 June 2021, the financial accountant of Pharma calculated the prelimi-
nary taxable income to be R6 980 000, before taking the following transactions into account:
1. Sales
1.1 Total sales to local customers for the financial year amounted to R14 470 352 has been taken into
account in the calculation of the preliminary taxable income as stated above.
1.2 On 28 June 2021, a customer in Namibia made an enquiry and a quotation for pharmaceutical pro-
ducts valued at R400 000 was given to the customer. The order was placed by the customer for the
products on 1 July and the goods valued at R400 000, were only delivered to the customer on 5 July
2021 and invoiced on 6 July 2021. The customer settled the debt on 30 July 2021 (this amount is
not included in the sales amount in 1.1 above).
2. Cost of sales
The cost of sales was calculated as follows:
R
Opening stock (at cost price) 1 842 014
Plus: Purchases of raw materials 8 856 454
Less: Closing stock (at cost price) (927 879)
Cost of sales 9 770 589
The market value of the opening stock and closing stock was R1 658 987 and R1 120 000 respectively.
3. Employees’ cost
Employees cost for financial year ended on 30 June 2021 consisted of the following:
R
Salaries and wages 1 200 000
Employer’s contributions to provident
fund for the benefit of employees 120 000
Provision for leave pay 70 000
Total 1 390 000
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QUESTION 1 (continued)
4. Lease agreement
Pharma entered into an agreement with Property Rentals (Pty) Ltd for the lease of its land on 1 August
2020. The lease is for a period of 20 years. In terms of the lease agreement, Pharma is obliged to erect
an administrative building on the land to the value of R1 500 000 and is obliged to pay a monthly lease
payment of R15 000 for the use of the land. Pharma completed the construction of the administrative
building on 1 April 2021 at a cost of R1 700 000 and it was brought into use on the same day.
5. Investment income
Investment income consists of local interest of R35 000 and dividends of R64 000 in respect of a 40%
holding in Ciskor Ltd (a South African company). A declaration and written undertaking for exemption was
submitted by Pharma to Ciskor Ltd.
In addition, dividends received (gross before any withholding tax) from a foreign company, Addida Plc (a
company that is incorporated and effectively managed in Spain) of R245 000 (correctly converted to South
African rand). Pharma holds 8% interest in Addida Plc and Addida Plc is listed on the Johannesburg Stock
Exchange. The shareholding refers to equal interest in equity shares and voting rights.
6. Prize won
Pharma won a prize of R500 000 in the annual South African Pharmaceutical Awards in recognition of the
company’s outstanding contribution to the field of pharmaceutical practice and science.
7. Donation of trading stock
During the financial year ended 30 June 2021, Pharma donated pharmaceutical products (blood pressure,
diabetes and hypertension medication) to an old age home, Legae-La-Bagodi, a registered Public Benefit
Organisation (PBO). The cost of manufacturing the stock was R22 000 (this was correctly taken into
account in the calculation of e the preliminary taxable income amount) and Pharma would have sold the
products for R27 500. Pharma received a valid tax receipt for the donation.
8. Legal fees
Pharma incurred legal fees amounting to R150 000 of which R50 000 was paid to the attorney that was
following up on Pharma's outstanding debtor balances and the other R100 000 was incurred to collect
long-outstanding staff loans.
9. Assets held
Pharma owned the following assets at the start of the 2021 financial year (all assets were brought into use
on the same date of purchase):
Description Date of purchase Purchase price Accounting Note
(excluding VAT) useful life
Manufacturing 11 June 2009 R3 200 000 20 years
building
Delivery truck 5 February 2019 R480 000 6 years 9.1
Machine A0063 12 March 2020 R275 000 4 years 9.2
9.1 Pharma uses the delivery truck for trading purposes. The write-off period for delivery trucks is four
years in terms of Binding General Ruling No. 7.
9.2 Machine A0063 was bought second-hand and is used in the process of manufacturing. The write-
off period for machines similar is four years in terms of Binding General Ruling No.7.
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QUESTION 1 (continued)
REQUIRED: MARKS
Calculate the normal tax liability of Pharma Clinic (Pty) Ltd for the 2021 year of assessment.
Provide brief reasons for treatment of all amounts excluded or exempted.
30
Please start your calculation with the preliminary taxable income of R6 980 000.
Note: Pharma Clinic (Pty) Ltd will always elect any option available to legally minimise its
normal tax liability.
QUESTION 2 (25 marks, 45 minutes)
Aluminium Works (Pty) Ltd (“Aluminium Works”) is a company that manufactures and sells aluminium
windows and doors. The company is situated in Johannesburg CBD, South Africa. The company was
founded in 2010 by two friends, Bongani and Bongiwe, that each hold 30% of the issued share capital of
the company. The remaining shares are held by Steel & Glass (Pty) Ltd (“Steel & Glass”). Aluminium
Works supplies aluminium windows and doors to building materials stores and property developers in
South Africa and abroad. The financial year of the company ends on the last day of February each year.
The financial accountant of Aluminium Works has estimated on 20 August 2021 the taxable income of the
company to be R850 000 for the financial year ended 28 February 2021. The assessment for the 2020
year of assessment was issued by SARS on 21 August 2020 and had an assessed taxable income of
R990 000. The actual taxable income for 2021 is not yet available.
The 2019 tax assessment was issued on 12 August 2020 and reflected an assessed taxable income of
R880 000 for the year of assessment ended 28 February 2019. Included in the taxable income is a taxable
capital gain of R65 000 that was realised from the disposal of capital assets during the 2019 year of
assessment.
During the director’s meeting that was held on 5 January 2021, the directors decided to distribute
R3 500 000 in cash to its shareholders as the company had not made any distribution in the past two
years. The company secretary notified all shareholders to submit the necessary declarations and written
undertakings stating that they are exempt from dividends tax by 12 February 2021, when the payment will
be made to the shareholders on the next day. The distribution was paid into the shareholders’ bank ac-
counts on 13 February 2021 after no declaration and written undertakings were received from any of the
shareholders stating that they are exempt from dividends tax.
REQUIRED: MARKS
a) Discuss the first and second provisional tax payments that Aluminium Works (Pty)
Ltd is required to make for the 2021 year of assessment to avoid being liable for any
interest or penalties.
15
Support your discussion with calculations and show dates or periods in which
provisional tax payments need to be made in your answer.
b) Discuss the normal income and dividends tax consequences for Aluminium Works
(Pty) Ltd of the distribution made to Steel & Pipes (Pty) Ltd during the year of assess-
ment ended 28 February 2021. 10
Support your discussion with calculations.
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