TAX2601/201/1/2015

Tutorial letter 201/1/2015

Principles of Taxation

TAX2601
Semester 1

Department of Taxation
QUESTIONS AND SUGGESTED
SOLUTIONS
ASSIGNMENT 3 (exam paper)

Bar code
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Dear Student

This tutorial letter contains assignment 3, which are the questions and updated solutions for a
previous exam paper. This assignment is not compulsory; however, it will assist you in your
preparation for the exam. The solution for Assignment 1 will be provided in tutorial letter 202
and the solution for assignment 2 will be provided in tutorial letter 203.

Best wishes for your preparation for the exam.

Kind regards

TAX2601 Lecturers

Telephonic contact with lecturers:

The lecturers who are available to
assist you are:

Prof AP Swanepoel
Ms MSI Wentzel 012 429 4133
Ms R Matenche (this is a hunting line – you will need to let it
Ms C Cass ring so that the exchange can find a free
Ms C Stedall extension)
Mr A Swanepoel
Mr M van Dyk
Ms R Moosa
Ms H van der Merwe
Ms E Doussy

Departmental cell phone number: 079 365 1124

[email protected] (semester 1)
E-mail contact with lecturers: [email protected] (semester 2)
Course contact tab on myUnisa
Fax numbers: (Department of Taxation) 012 429 4902 or 012 429 4443

Ms P Mohase (Administrative assistant) 012 429 4918

 3 TAX2601/201

This assignment is based on an examination paper. This is a self-

assessment assignment.

These are the instructions that will also appear on your examination paper. Read
them now and make sure that you understand what we require from you. We
also suggest that you try to do this assignment like a proper examination, under
examination conditions, to see how much you know and what you need to spend
time on.

This paper consists of seven (7) pages plus the annexures (pp i – ii).

IMPORTANT INSTRUCTIONS:

1. All amounts exclude VAT unless stated otherwise.

2. All persons mentioned are residents of the Republic of South Africa unless stated
otherwise.
3. SARS = South African Revenue Service
The answering of this paper:
1. This paper consists of four (4) questions.
2. Answer all the questions.
3. Start each question on a new (separate) page.
4. Show all workings, where applicable. Where an amount is subject to a limitation,
clearly indicate the application of the limitation. Where any item is exempt from tax
or not allowable as a deduction, this must be indicated. All amounts must be roun-
ded to the nearest rand.
5. Please complete the cover page of the answer book in full.
6. You are reminded that answers may NOT be written in pencil.
7. Principle errors will be marked negatively.
8. Proposed timetable (try as far as possible not to deviate from this timetable):

Question Topic Marks Minutes

1 Tax liability of a company 23 28
2 Capital allowances 26 31
3 Capital gains tax 25 30
4 Gross income and general deduction 26 31
TOTAL 100 120
 4

QUESTION 1 (23 marks, 28 minutes)

Rashupi Trailers (Pty) Ltd (Rashupi) is a company that manufactures and sells trailers. The
company is not a small business corporation as defined in the Income Tax Act and its financial
year ends on 31 March.

The company’s accountant calculated the taxable income of R4 781 142 without taking into
account the transactions that took place in February and March 2015. The following is a sum-
mary of the transactions that took place in the last two months of the year of assessment ended
on 31 March 2015:

Income Notes R R
Sales 800 000
Local dividends 150 000
Interest 355 000

Expenditure
Trading stock 1
- opening stock 244 000
- purchases 486 000
- closing stock (457 000)
- cost of sales (273 000)
Dividends paid 2 (250 000)
Salaries (455 000)
Doubtful debts - 2015 3 (54 000)
Restraint of trade 4 (450 000)
Depreciation 5 (36 111)
Contribution by employer 6 (57 630)
Leave pay provision (45 247)

Notes:

1. The accountant had not taken trading stock into account in calculating the taxable income
of R4 781 142. The information in the table below relates to the trading stock.

01/04/2014 31/03/2015
Cost Price Market Cost Price Market Value
Value
Trailers
R244 000 R350 000 R457 000 R420 000

2. Rashupi paid a dividend of R250 000 to its shareholders.

3. The following table relates to the doubtful debts:

01/04/2013 – 31/03/2014 01/04/2014 – 31/03/2015

List of doubtful debts R78 000 R54 000
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QUESTION 1 (continued)

4. Dieketseng Moloi, the former Chief Executive Officer of Rashupi, was paid R450 000 on
15 January 2015 to restrain her from working for the competition for a period of 24 months.

5. Depreciation was calculated as follows:

Date
Description Date of brought Cost Depreciation
purchase into use R R
Manufacturing machines -
new and unused 05/02/2015 01/03/2015 350 000 11 667

Trucks - new and unused 01/05/2010 01/06/2010 440 000 24 444

36 111

The accountant was not sure how to account for the transaction for taxation purposes and
did not take the capital allowances into consideration when calculating the taxable income
of R4 781 142.

Binding general ruling No 7 makes provision for the following write-off period:
 Trucks – 4 years

6. Rashupi made contributions of R57 630 to a medical aid scheme for the benefit of its
employees. The remuneration approved by the Commissioner in this regard was
R480 000.

7. Rashupi had an assessed loss of R274 145 in the previous year of assessment. The
company also made a provisional tax payment of R976 214 for the current year of assess-
ment.

REQUIRED: MARKS

Calculate Rashupi Trailers (Pty) Ltd’s normal tax liability for the year of assess-
ment ended 31 March 2015 by starting with the taxable income of R4 781 142. 23
 6

QUESTION 2 (26 marks, 31 minutes)

Bear Cut & Drill (Pty) Ltd is a South African company that manufactures a wide range of steel
products for the building industry. The company is not a small business corporation as defined
in the Income Tax Act and its tax year ends on 31 March 2015.

The accountant has approached you to assist with the income tax calculation for Bear Cut &
Drill (Pty) Ltd for the 2015 year of assessment. The company has an accounting profit of
R2 676 387 for the 2015 year of assessment before the following has been taken into account:

1. Repairs and maintenance

On 31 October 2014, a severe hailstorm caused damage to the factory roof. Bear Cut & Drill
(Pty) Ltd repaired the damaged roof on 30 November 2014 at a total cost of R72 000 of which
R65 000 was covered by an insurance policy.

During the period the factory roof was repaired, Bear Cut & Drill (Pty) Ltd also enlarged the
factory floor space to increase its production capacity. The total cost of the additions to the
factory building was R250 000 and was completed on 30 November 2014 and brought into use
on 2 December 2014.

2. Factory machinery
On 15 August 2014 Bear Cut & Drill (Pty) Ltd purchased a new steel bending machine at a total
cost of R450 000 to be used directly in its process of manufacturing steel products. Installations
costs of R20 000 were incurred and the machine was brought into use on 5 September 2014.

Bear Cut & Drill (Pty) Ltd decided to sell a steel drill machine, which it originally purchased
second hand on 30 June 2012 for R120 000 and brought into use on the same date. The steel
drill machine was sold for R80 000 on 28 February 2015.

3. Other assets purchased and sold

Bear Cut & Drill (Pty) Ltd had the following non-manufacturing assets on hand at 31 March
2015:

 A delivery truck that was purchased new on 30 June 2014 at a total cost of R185 000 and
brought into use on 1 August 2014.
 Two laptop computers that were purchased on 31 May 2013 at a total cost of R15 000 and
brought into use on the same date.
Bear Cut & Drill (Pty) Ltd sold one of its passenger vehicles that was damaged during the hail
storm on 31 October 2014 for R59 500. This vehicle was originally purchased for R90 000 on
1 April 2014 and brought into use on the same date.

Binding general ruling No. 7 allows for the following write-off periods where applicable:

 Delivery trucks – 4 years

 Laptop computers – 3 years
 Passenger vehicles – 5 years
 7 TAX2601/201

QUESTION 2 (continued)

4. Factory building
The factory building that houses the whole manufacturing process of Bear Cut & Drill (Pty) Ltd
was originally erected on 31 July 2011 at a total cost of R3 600 000 and brought into use on
1 August 2011. Several windows of the factory building were damaged by a hailstorm on
31 October 2014 and had to be replaced at a cost of R61 000 on 2 November 2014, of which no
amount was covered by the company’s insurance policy.

5. Commercial building
Bear Cut & Drill (Pty) Ltd purchased a used commercial building at a total cost of R350 000 on
31 August 2014 and brought it into use on 15 September 2014. The building was used mainly
to house the debtors and creditors administration of Bear Cut & Drill (Pty) Ltd from the date the
building was brought into use.

6. Other information
Loose CC, one of Bear Cut & Drill (Pty) Ltd’s debtors, was liquidated on 15 November 2014 and
owed Bear Cut & Drill (Pty) Ltd R18 000 (excluding any finance charges). The liquidators
managed to recover R2 000 of the outstanding balance of R18 000 on 17 February 2015 and
remitted that amount to Bear Cut & Drill (Pty) Ltd on 19 February 2015.

Bear Cut & Drill (Pty) Ltd claimed a doubtful debt allowance of R42 500 for the 2014 year of
assessment. The list of doubtful debtors on 31 March 2015 amounts to R212 000.

The monthly rental for the telephone and security system of R4 000 for March 2015 was not
accounted for in the accounting records. The rental invoice dated 1 March 2015 was only
received via e-mail on 15 April 2015.

Bear Cut & Drill (Pty) Ltd has incurred an assessed tax loss of R181 697 during the 2014 year
of assessment.

REQUIRED: MARKS

Calculate the income tax liability of Bear Cut & Drill (Pty) Ltd for the year of
assessment ended 31 March 2015. Start your calculation with the accounting
profit of R2 676 387 as provided. 26
 8

QUESTION 3 (25 marks, 30 minutes)

PART A (17 marks, 20 minutes)

Aerostar (Pty) Ltd manufactures and sells sports cars. Aerostar (Pty) Ltd has a February year-
end and an assessed capital loss brought forward from the previous year of assessment of
R64 500.

The following capital transactions took place during the 2015 year of assessment:

Transaction one

Factory A was sold on 12 January 2015 to an unconnected person for R780 000. Factory A
was purchased on 15 July 1999 for R250 000 and was brought into use on the same date
directly in the process of manufacturing the sports cars. Transfer costs of R25 000 were incur-
red on the purchase price of Factory A. The total capital allowances claimed on Factory A was
R220 000 up to the date of disposal.

Other information applicable to Factory A:

Market value on 1 October 2001 R350 000

Time-apportionment base cost (TAB) R 98 125

Transaction two

Aerostar (Pty) Ltd sold manufacturing machine C on 18 May 2014. The capital gain on this
machine was R50 000.

REQUIRED: MARKS

Calculate the taxable capital gain/capital loss of Aerostar (Pty) Ltd for the year of
assessment ended on 28 February 2015. 17

PART B (8 marks, 10 minutes)

Aerostar (Pty) Ltd had a taxable income of R1 150 622 for the 2013 year of assessment and the
date of the assessment was 30 July 2013. The company’s 2014 tax assessment was issued on
15 June 2014 and reflected a taxable income of R1 320 564. The actual calculated taxable
income for the 2015 year of assessment was R1 055 877. Aerostar (Pty) Ltd is a small busi-
ness corporation as defined and the company has a February year-end.

REQUIRED: MARKS

a) Calculate the first provisional tax payment for the 2015 year of assessment
and clearly state on which date the payment must be made to SARS.
8
b) Calculate the second provisional tax payment for the 2015 year of assess-
ment and clearly state on which date the payment must be made to SARS.
Note: All amounts must be rounded to the nearest Rand.
 9 TAX2601/201

QUESTION 4 (26 marks, 31 minutes)

XYZ Trust is a resident of the Republic for tax purposes and its year of assessment ends on
28 February 2015. The trust has several investments (that produce interest and dividends), as
well as a business that sells electric chainsaws.

Seven electric chainsaws were sold to a timber company (the customer) for R14 000 in total on
2 December 2014. XYZ Trust supplied the customer with a warranty against any mechanical
failure of these seven chainsaws. This means that XYZ Trust will replace any faulty chainsaw
without charging any costs to the customer. The warranty is applicable for a period of six
months from the date of sale.

XYZ Trust originally purchased the chainsaws for R1 500 each from their supplier. The auditors
made a warranty provision of R10 500 at year-end (debit: warranty expense, credit: provision).

The accountant calculated the following amounts for the 2015 year of assessment for the trust
(you can assume that the calculations are correct):

Taxable income = R1 253 000

Qualifying turnover = R1 798 000
Taxable turnover = R1 120 000

REQUIRED: MARKS

(a) Explain the difference between direct and indirect taxes. Give an example
of a tax that will classify as a direct tax and an indirect tax. 4

(b) Provide two reasons why XYZ Trust will not qualify as a micro business. 2

(c) State when a legal entity will be classified as a resident of the Republic for
tax purposes. 3

(d) Shortly discuss what the implication for tax purposes is if a legal entity is a
resident of the Republic. 1

(e) State the two types of tests that the courts have established to assist in
deciding whether income is of a capital nature or not. 2

(f) Name one of the court cases that are applicable to the “received by,
accrued to, or in favour of” requirement of the gross income definition. 1

(g) Discuss whether the warranty expense would be deductible or not by XYZ
Trust for the 2015 year of assessment in terms of the general deduction
formula section 11(a) and section 23 (prohibited deductions) of the Income
Tax Act:
13
List the requirements of the general deduction formula and briefly discuss
each element at the hand of the given information. Make a brief reference
to the relevant case law to strengthen your argument.
 10

ANNEXURE A: EXTRACT FROM THE INCOME TAX ACT (ACT 58 OF 1962, AS AMENDED)
– EIGHTH SCHEDULE

25. Determination of base cost of pre-valuation date assets. - The base cost of a pre-
valuation date asset (other than an identical asset in respect of which paragraph 32(3A) has
been applied), is the sum of the valuation date value of that asset, as determined in terms of
paragraph 26, 27 or 28 and the expenditure allowable in terms of paragraph 20 incurred on or
after the valuation date in respect of that asset.

26. Valuation date value where proceeds exceed expenditure or where expenditure in
respect of an asset cannot be determined. - (1) Where the proceeds from the disposal of a
pre-valuation date asset (other than an asset contemplated in paragraph 28 or in respect of
which paragraph 32(3A) has been applied) exceed the expenditure allowable in terms of
paragraph 20 incurred before, on and after the valuation date in respect of that asset, the
person who disposed of that asset must, subject to subparagraph (3), adopt any of the following
as the valuation date value of that asset-

(a) the market value of the asset on the valuation date as contemplated in paragraph 29;

(b) 20 per cent of the proceeds from disposal of the asset, after deducting from those pro-
ceeds an amount equal to the expenditure allowable in terms of paragraph 20 incurred on or
after the valuation date; or

(c) the time-apportionment base cost of the asset as contemplated in paragraph 30.

(2) Where the expenditure incurred before valuation date in respect of a pre-valuation date
asset cannot be determined by the person who disposed of that asset or the Commissioner,
that person must adopt any of the following as the valuation date value of that asset-

(a) the market value of the asset on the valuation date as contemplated in paragraph 29; or

(b) 20 per cent of the proceeds from disposal of the asset, after deducting from those pro-
ceeds an amount equal to the expenditure allowable in terms of paragraph 20 incurred on or
after the valuation date.

(3) Where a person has adopted the market value as the valuation date value of an asset, as
contemplated in subparagraph (1) (a), and the proceeds from the disposal of that asset do not
exceed that market value, that person must substitute as the valuation date value of that asset,
those proceeds less the expenditure allowable in terms of paragraph 20 incurred on or after the
valuation date in respect of that asset.

ANNEXURE B: ADDITIONAL INFORMATION

The income tax rates applicable to a small business corporation are as follows:

 0% on taxable income not exceeding R70 700

 7% on taxable income exceeding R70 700, but not exceeding R365 000
 R20 601 plus 21% on taxable income exceeding R365 000, but not exceeding R550 000
 R59 451 plus 28% on taxable income exceeding R550 000
 11 TAX2601/201

The income tax rates applicable to micro businesses:

Turnover Rates of tax

R
0 – 150 000 Nil
150 001 – 300 000 1% of the amount over R150 000
301 000 – 500 000 R1 500 + 2% of the amount over R300 000
500 001 – 750 000 R5 500 + 4% of the amount over R500 000
750 001 – 1 000 000 R15 500 + 6% of the amount over R750 000

ANNEXURE C: INCOME TAX MONETARY THRESHOLDS SUBJECT TO PERIODIC LEGISLATIVE

CHANGE (extract)

Description Reference to Income Tax Monetary

Act, 1962 amount
Additional employer deductions for learnerships:
Employers receive additional deductions for learnerships depending on the circum-
stances
Monetary ceiling of additional deduction for the employer Section 12H(1) R30 000
when entering into a learnership agreement with an
existing employee
Monetary ceiling of additional deduction for the employer Section 12H(2) and (3) R30 000
when entering into a learnership agreement with a new
employee
Monetary ceiling of additional deduction for the employer Section 12H(4) +R20 000
in the case of completing a learnership agreement (all
employees)
Small-scale intellectual property: Paragraph (aa) of the R5 000
Intellectual property with a cost below the amount indica- proviso to section 11(gC)
ted is immediately deductible
Urban development zone: Section 13quat (10A) R5 million
Developers undertaking projects in excess of the amount
indicated must provide special notice to the Commis-
sioner.
Prepaid expenses: Paragraph (bb) of the R100 000
Limit of prepaid expenses that will not be deferred until proviso to section 23H(1)
delivery of goods, services or benefits
Small business corporations: Section 12E(4)(a)(i) R20 million
Corporations qualify for tax incentives if gross income
does not exceed the amount referred to
Housing associations: Section 10(1)(e) R50 000
Housing associations investment income is exempt up to
the amount indicated
 12

SUGGESTED SOLUTION
QUESTION 1

R R

Taxable income (given) 4 781 142

Sales 800 000 (1)
Local dividends 150 000 (1)
Dividend exemption (150 000) (1)
Interest 355 000 (1)
5 936 142
Expenditure
Trading stock (sec 22)
- opening stock at cost (lower of cost/MV) (244 000) (1)
- closing stock at market value (lower of cost/MV) 420 000 (1)
- purchases (486 000) (1)
Dividends paid - no deduction Nil (1)
Salaries (455 000) (1)
Doubtful debts (sec 11(j)) - 2014 78 000 x 25% 19 500 (1)
- 2015 54 000 x 25% (13 500) (1)
Restraint of trade (sec 11(cA)):
The lesser of: (1)
R450 000/2 = R225 000
R450 000/3 = R150 000 (150 000) (1)
Depreciation - no deduction can be claimed Nil
Manufacturing machine (sec 12C) - R350 000 x 40% (140 000)
(1)
Trucks (sec 11(e)) - (R440 000/4) x (2/12) (18 333)
(3)
Contribution to medical aid scheme (sec 11(l)) 57 630
Limited to 10% of approved remuneration 48 000 (48 000) (2)
Leave pay provision - not actually incurred and prohibited
Nil (1)
deduction
4 820 809
Assessed loss brought forward (274 145) (1)

Taxable Income 4 546 664

Normal tax liability at 28% 1 273 066 (1)

Provisional tax paid (976 214) (1)

Normal tax payable to SARS 296 852

Marks [23]
 13 TAX2601/201

QUESTION 2

R R
Accounting profit – (given) 2 676 387
Repairs to factory building (sec 11(d)) (72 000) (1)
Less: Recovered from insurance (sec 23) 65 000 (7 000) (1)
Addition to factory building (sec 13) (R250 000 x 5%) (12 500) (1)
New steel bending machine (sec 12C)
((R450 000 + R20 000) x 40%) (188 000) (2)
Drill machine sold
Cost 120 000
Section 12C allowance: 2013 (R120 000 x 20%) (24 000) (1)
2014 (R120 000 x 20%) (24 000) (1)
2015 (R120 000 x 20%) (24 000) (24 000) (1)
Tax value 48 000 (1)

Proceeds 80 000
Recoupment (sec 8(4)(a)) 32 000 32 000 (1)
Delivery truck (sec 11(e)) (R185 000/4 x 8/12) (30 833) (2)
Laptop computers (sec 11(e)) (R15 000/3) (5 000) (1)
Damaged vehicle sold
Cost 90 000
Wear & tear (sec 11(e)): 2015 (R90 000/5 x 7/12) (10 500) (10 500) (1)
Tax value 79 500
Proceeds 59 500 (1)
Section 11(o) scrapping allowance 20 000 (20 000) (1)
Building allowance (sec 13) (R3 600 000 x 5%) (180 000) (1)
Repair of damaged windows (sec 11(d)) (61 000) (1)
Commercial building (sec 13quin) (Not new, no allowance) Nil (1)
Bad debts (sec 11(i)) (18 000) (1)
Less: Amount recovered 2 000 (16 000) (1)
Doubtful debt allowance (sec 11(j)) – 2014 42 500 (1)
Doubtful debt allowance – 2015 (R212 000 x 25%) (53 000) (1)
Telephone and security system rental (sec 11(a))
- March 2015 (4 000) (1)
Sub-total 2 139 054
Less: Assessed loss from 2014 (181 697) (1)
Taxable income for 2015 1 957 357
Income tax (R1 957 357 x 28%) 548 060 (1)

MARKS [26]
 14

QUESTION 3

PART A

Transaction one - Factory A R R

Tax value
Cost price 250 000
Add: Transfer costs 25 000 (1)
275 000
Less: Capital allowances (given) (220 000) (1)
Tax value on date of sale 55 000 (1)
Recoupment
Selling price 780 000 (1)
Less: Tax value (55 000) (1)
Recoupment 725 000
Limited to previous allowances 220 000 (1)

Adjusted proceeds
Proceeds 780 000
Less: Recoupment (220 000)
Adjusted proceeds 560 000 (1)

Calculate valuation date value (VDV)

Total expenditure = R55 000 (tax value)
Adjusted proceeds = R560 000
Paragraph 26 is applicable because proceeds > expenditure (1)
VDV is the greater of: (1)
1. Market value as at 1 October 2001 350 000 (1)
2. Time Apportionment base cost (TAB) 98 125 (1)
3. 20% - rule: Adjusted proceeds 560 000 (1)

Less: Expenditure incurred after 1 October 2001 Nil

560 000
R560 000 x 20% 112 000 (1)

Market value is the highest, VDV is therefore R350 000

Base cost = VDV + Cost after 1 Oct 2001 = R350 000 + Rnil = R350 000

Capital gain
Proceeds (adjusted) 560 000
Less: Base cost (350 000)
210 000 (1)
 15 TAX2601/201

QUESTION 3 (continued)

Calculation of taxable capital gain

R
Factory A 210 000
Manufacturing Machine C 50 000
Aggregate capital gain 260 000 (1)
Less: Assessed capital loss (64 500) (1)
Net capital gain 195 500
Taxable capital gain at an inclusion rate of 66.6% 130 203 (1)
Marks [17]

PART B
R
st
a 1 provisional tax payment (payable on 31 August 2014) (1)
Taxable income assessed in 2014 (Basic amount) 1 320 564 (1)
(2014 assessment is more than 14 days old)

Tax on R1 320 564 =

(R1 320 564 – R550 000 = R770 564 x 28% = R215 758) + R59 451 * 275 209 (2)

x 50% for the first payment 137 605 (1)

b 2nd provisional tax payment (payable on 28 February 2015)

Lower of: Basic amount (2014 assessment) 1 320 564
Actual estimated taxable income 1 055 877 (1)
Actual estimated taxable income for 2015 1 055 877 (1)

Tax on R1 055 877 =

(R1 055 877 – R550 000 = R505 877 x 28% = R141 646) + R59 451 * 201 097
Less: 1st provisional tax payment (137 605) (1)
Amount payable to SARS 63 492
Marks [8]

* The amount used in the DVD (R59 702) is based on the old 2014 tax table. The amounts
used in this tutorial letter are the correct ones. The method and principles remain unchan-
ged.
 16

QUESTION 4

PART A

Difference between direct and indirect tax:

Direct tax: The same person who earns the income pays the tax e.g. income tax,
dividends tax and capital gains tax. (2)
Indirect tax: The seller bears the impact of the tax while the consumer pays the tax /
This is tax imposed upon a taxable sales transaction e.g. VAT (2)

PART B

XYZ Trust will not qualify as a micro business:

The qualifying turnover for the 2015 year of assessment exceeds R1 million. (1)
A trust cannot qualify as a micro business. (1)

PART C

Legal entity classified as a resident for tax purposes:

A person other than a natural person (in other words a business entity such as a
company or a close corporation) is a resident of the Republic if it is:
incorporated, established or formed in the Republic, or (2)

has its place of effective management in the Republic (1)

PART D

Implication for an entity of being a resident:

Residents are taxed on worldwide (all) income. (1)

PART E

Two types of tests - income is of a capital nature or not:

Subjective tests. (1)

Objective tests (1)
 17 TAX2601/201

QUESTION 4 (continued)

PART F

Court case that is applicable to the “received by, accrued to, or in favour of” requirement:

Geldenhuys v CIR (1)

CIR v People's Stores (Walvis Bay) (Pty) Ltd (1)
Lategan v CIR (1)
Name any one Max
(1)

PART G

The requirements of the general deduction formula are:

 Trade (1) – XYZ carries on a trade of selling electric chain saws (1)
 Expenditure or loss (1) – in this case there could be expenditure of R1 500 (1) per
chain saw that is returned, although there was no expense at year-end (1).
 Actually incurred (1) – an expense is only incurred if a chain saw is returned (1) and
needs to be replaced. The expense is therefore conditional (1) and is not actually
incurred (1). (Edgars Stores (1))
 In the year of assessment (1) – no chain saws were returned on 28 February 2015,
therefore no expense was incurred in the 2015 year of assessment (1).
 In the production of income (1) – the chain saws are XYZ Trust’s trading stock and the
replacement of a stock item relates to earning income from selling chain saws, as it forms
part of the sale agreement. It is closely connected to (or is an inevitable concomitant)
(1) of the income producing operations (1) (Port Elizabeth Electric Tramway Com-
pany Ltd (1)) and the replacement of a chain saw is thus in the production of income.
 Not of a capital nature (1) – The expenditure relates to the Trust’s trading stock and is
not of a capital nature (1).

Section 23 prohibits this deduction (1).

Conclusion (1): The expense does not meet all the requirements of the general deduction
formula, on the basis that there is no amount actually incurred at year-end, and will not be
deducted for income tax purposes.

(Total 19; Max 13)

Unisa
LW/(as)
TAX2601_2015_TL_201_1_E.docx