QUESTION 2- Suggested solution
Discuss, with reference to the Income Tax Act No. 58 of 1962 and applicable case law,
whether Trial Trailers (Pty) Ltd will be entitled to a deduction of R600 000 for the
warranty provision, in determining its taxable income for the 2023 year of assessment.
a) Marks
There is no specific deduction for the warranty provision. 1.0
Consideration is given to the general deduction formula (s11(a)) definition, read with
s23(g). 1.0
In terms of s102 of the Tax Administration Act the burden of proof that an amount is
deductible rests with Trial Trailers (Pty) Ltd (the taxpayer). 1.0
The issue is whether the expenditure was actually incurred. 1.0
If there is no definite and absolute liability during the year of assessment to pay an
amount, expenditure has not been actually incurred (Nasionale Pers) OR
If the payment is conditional on the happening of an event, the expense is only incurred
once the condition has been met (Unconditional legal obligation) (Edgars Stores) 2.0
The warranty provision does not constitute an expenditure or loss ‘actually incurred’ during
its 2023 year of assessment. The warranty provision is only a conditional liability at the
end of its 2023 year of assessment. 1.0
It is dependent upon events that may not occur in the subsequent year of assessment and
is merely an estimate. Trial Trailers does not have an unconditional legal obligation at the
end of its 2023 year of assessment to incur R600 000 in warranty expenses. 1.0
Conclusion:
The uncertain event has not yet happened and the condition has not been met . The
amount of R600 000 has therefore not yet been actually incurred and not deductible in
terms of s11(a). 1.0
Available 9.0
Maximum 7.0
Total 7.0
Calculate the taxable income of Trial Trailers (Pty) Ltd for the financial year ended 30
June 2023.
Start your answer with the net profit before tax.
Clearly indicate nil effects. All nil effects must be supported with reference to a section
b) number.
Profit before tax - Given 742,500
1 Sales - complies with s1 gross income definition - no adjustment necessary - 1.0
1.1 Gross Income - Acrrued to means they became entitled to amount on 29 June 2021. 245,000 1.0
2 Off-road trailers manufactured - s11(a) - no adjustment necessary - 1.0
2.1 Opening stock - s22(2) - Opening stock deducted from income (925,000) 1.0
2.2 Trading stock to sales marketing manager s22(8) Recoupment at market value 245,000 1.0
2.3 Closing stock - s22(1) - Closing stock included in income (5 + 62 - 58 - 1- 1) = 7 x 185 000 1,295,000 1.0
3. Operating expense s 11(a) no adjustment - 0.5
Waranty expense - not deductable, therefore add back 710,500 0.5
Mark awarded as per conclusion above.
3 Depreciation - Add back accounting entry 549,500 0.5
3.1 Lease payments - Manufacturing plant - Add back accounting entry 474,000 0.5
2022: Lease payment: s23H limited deduction in in prior year (474 000 x 9/12) (355,500) 1.0
2023 Lease payment: Current year s11(a) (474 000 x 1.1) x 3/12 (130,350) 1.0
s23H Limits deduction in current year - period > 6 months (9 months) amount >R100 000 (474 000 x 1.1) x 9/12 = 391 050 - 2.0
Leasehold improvements - s11(g) - 10 years lease, pro rata (3 650 000 / 9,583333) * 10/12 (317,391) 1.0
Alternative: 3650 000/(115 months) x 10 months
R3 990 000 - R3 650 000 = R340 000 x
Factory improvements - s13(1) - Improvement spend greater than contract price 5% (17,000) 1.0
3.2 Delivery vehicles - s11(e) allowance on remaining 4 (4 x 280 000) / 4 (280,000) 1.0
Delivery vehicles - s11(e) Sold to connected person 280 000 / 4 * 10/12 (58,333) 1.0
Disposal of an allowance asset - s8(4)(a) Recoupment 116,667
Proceeds limited to cost - s8(4)(a) 280,000 1.0
Less Tax Value 163,333
Cost 280,000 1.0
Allowances 2022 yoa: (280 000/ 4 * 10/12) (58,333)
Allowances 2023 yoa calculated above (58,333) 1.0
Capital Gain on disposal
Proceeds 168,333 1.0
Selling Price 285,000
Recoupment (116,667)
less: Base cost 163,333 1.0
Cost 280,000
Allowances (116,667)
Capital Gain / Loss (see below) 5,000
Taxable capital gain - s26A Included at 80% 80% 4,000 1.0
4 Lease payments - Manufacturing machine s11(a) -R7000 x 12months = R84k No adjustment necessary - 1.0
5 Provision for doubtful debts - s11(j) (113,000)
120 days or more @ 40% - (R120 000 x 40%) (48,000) 1.0
60 days or more @ 25% - (R270 000 - R10 000) x 25% (65,000) 1.0
Previous year allowance - add back 50,000
60 days or more @ 25% - (R200 000 x 25%) 50,000 1.0
Taxable income 2,235,592
Available 26.00
Maximum 25.00
Discuss, with reference to relevant legislation, the income tax consequences for the
second hand machine purchased by Caravan Home (Pty) Ltd for the 2023 year of
assessment.
c) Support your answer with calculations. Marks
The manufacturing machine is a capital asset and therefore capital of nature. 1.0
The manufacturing machine will be allowed an allowance under section 12C of the Income
Tax Act as the machine was brought into use on 1 September 2021 (previous year of
assessment) in the manufacturing process. 1.0
The machine is second hand and will therefore qualify for a 20% deduction in the 2021 -
2025 year of assessment. 1.0
s12C allowances are not apportioned (not pro rata) for part of the year of assessment.
The allowance will be calculated on the lessor of actual cost (R1 500 000) or market value
(R1 650 000) 1.0
Installation cost of R30 000 is included in the calculation of the s12C allowance. 1.0
Moving cost of R42 000 shall be deducted over the remaining useful life of the machine,
namely 3 years (2023 -2025). 1.0
s12C allowance for 2023 on the machine: (R1 500 000 + 30 000) x 20% = R306 000. 1.0
Moving cost for 2023: R42 000 / 3 years = R14 000 1.0
Available 8.00
Maximum 8.00
