Assignment 1 is compulsory and due - gimmenotes



TXN203D - summaryFramework for calculation of taxable income : RGross income xxx(gross income general definition & specific inclusions)less : exempt income(xx)Incomexxxless allowable deductions(xx)(general deduction formula, specific deductions & capital allowances)Taxable income xxx (from revenue activities)add Taxable Capital GainxxxTaxable income xxx If given amount including vat 100/114If want to calc vat owing on amount 14/114Output vat = vat levied on sold goodsInput vat = vat that can be claimed back from purchase of goods.Taxable supplyExempt supplyZero rated supplyStandard rate supply no vat0%14%Supplies listed in Section 12 of ActSupplies listed in Section 11 of ActSupplies that are not zero rated or exemptMicro business CAN’T register for vatVat only claimable if goods purchased for purpose of making taxable supplies. If only part used then can only claim part of input vat UNLESS 95% or more used for taxable supplies then can claim full input vat.Only fringe benefits and indemnity payments in output vat are apportioned.Vat levied on imported goods :customs value + 10% + customs duty + import charges x 14% = vat payableIf imported services then must pay vat on portion that is used for exempt supplies NOT if used for vatable suppliesIf vendor has paid vat on imported services then can’t claim it back as input tax – cos it is non-taxable supply.Zero-rated supplies export of movable goods overseas (if delivered overseas) or goods delivered to foreign ship or plane if for use on ship or planetransport overseas (passenger or goods)services rendered outside SA even if to residentsale of going concernsale of parts of enterprise if can operate separately and only for going concern part (must be more then 50% for purpose of going concern)small retailers vat package – pg 43/44 of t/book2010 world cup – only from one week before to straight after closing ceremony and only in championship sites. Also supply of organisation, staging or hosting event by local organising committee to FIFA. Vat free importing of goods for resale and consumption if by qualifying persongoods and services for farming or agriculturegold coins (i.e. Kruger Rands) by Reserve Bankbasic food stuffs e.g. milk. Brown bread, rice, veggies and fruitfuel / illuminating paraffingoods supplied to Industrial Development Zone (as designated by Minster of Trade and Industry)services for intellectual property rights outside SAmunicipal ratesgoods supplied to foreign company but delivered in SA to registered vendor and used to make taxable suppliesZERO-RATE IS TAXABLE SUPPLY SO CAN CLAIM BACK ALL THE INPUT VATEXEMPT NOT TAXABLE SUPPLY SO CAN’T CLAIM BACK INPUT VATExempt suppliesfinancial services (currency exchange, share or member issue or transfer, credit and interest, debt security, long term insurance policies – life or funeral – pensions, RA’s etc), but NOT financial costs (bank charges). If financial services outside SA then zero-rated!donated goods and services by association not for gainaccommodation – hire and letting but NOT commercial accommodation, hotels or hostelscommercial property if less then 28 days - NOT old age homes, hospice, children’s or handicapped homes or hotel, hostel or boarding house.If more then 28 days then must pay vat on 60% of the whole charge (from the 1st day onwards) but vendor can claim full input vatNOT if annual receipts are more then R 60 000 in 12 monthsresidential accommodationsale or letting of land outside SAservices by body corp when paid for by leviestransporting fare paying passengers and their personal items in bus or tax (NOT game viewing) on road or railway only – NOT courier companyeducational services by state, school or varsity that is PBOvarsity, school, technikon or college feestrade union membershipschild care services by crèche or after careDeemed supplies (so are vatable)ceasing to be vendor (vat must be paid on lessor of market or cost value of assets)indemnity payments = insurance payments. Must be apportioned if only partly used for vatable purposes. If insurance co. replaces goods instead of paying money then no vat payablesupplies to independent branches – if overseas then zerofringe benefits to employees but not for exempt or zero rated items (meals or entertainment). Vat paid on :assets given to employees either for free or at low costright of use of asset e.g. carservices for employee for private purposesrelease of employee from debtEmployee has right to use vehicle :Motor car (NO INPUT VAT WAS CLAIMED) :0.3% of value of car excluding vat and finance charges PER MONTH (so x 2 if for 2 months vat)Vehicle (INPUT VAT WAS CLAIMED)0.6% of value excluding vat and finance charges PER MONTHIf employee pays vatable expenses NOT if input tax is denied, then can deduct after percentage calculated.If employee pays all maintenance costs then deduct R 85 PER MONTHAnswer = output vat payable by the company.pg 70 to 72 of t/bookhigher payment then was charged – if not refunded in 4 months then output vat must be paid on excess amountVALUE OF SUPPLY = AMOUNT EXCLUDING VATCONSIDERATION FOR SUPPLY = AMOUNT INCLUDING VATInput vatIf only part of goods or services is used for taxable supplies then have to apportion the amount that can be claimed for input tax, BUT if more then 95% then can claim the full input vat.Turnover based method :Deductible input vat = Taxable, exempt and all other amounts received or accrued (even if not supplies e.g. dividend income) but NOT capital goods. NOT including vattotal amt of input tax x value of taxable supply during period value of all other supplies pg 86/7 of t/bookInput vat denied on :entertainment – food, drinks, accommodation, amusement, recreation or hospitality. Can claim if seminar or event for reward or if for bona fide promotion purposes to entertain clientsclub membership fees or subs – sporting, social or recreational clubs denied except for professional membership for employeemotor cars – NOT ambulance, game viewing vehicle or hearse. NOT denied if vendor is car dealer, rents cars or offers cars for prizes to people who aren’t employeesDeemed vat on second-hand goods can claim deemed input vat if bought from SA resident and goods are in SA. Includes antiques, but NOT gold coins or animals.Input vat is LOWER of purchase price or market value.If more then R 1 000 then must have name, ID number and declaration from supplierIf cash and under R 50 then don’t need any documentation.If buy second-hand goods and claim the deemed input vat and then export those goods then have to pay output vat the SAME amount as was claimed IRRESPECTIVE of the selling price (even if sold for less then what you bought for).pg 92/3 of t/bookInstallment credit agreements (suspensive sales and financial leases)Input vat claimed on cash value of sales NOT including finance charges cos they are exempt. If there is a cooling-off period or if it is a suspensive sale then the time of supply is only after that time.Fixed property and real rights in fixed propertyOf second hand fixed property then can claim deemed input vat LIMITED to the transfer duty amount that was paid. If only portion used for taxable purposes then must apportion the vat amount AND also the transfer duty amountpg 98/9 of t/bookAdjustment rule (if item was bought for one purpose and is now used for something else)- if now 100% non-taxable use (private use) – then must pay output vat at market value at time of adjustment- if was non-taxable use and now taxable use – then can claim input vat at LOWER of cost or market vale at time of adjustment x % of use at time of taxable purposes(remember if more then 95% then 100% vat can be claimed).If fixed property then limited to transfer duty paid x % of taxable use- if taxable use changes annually then must adjust vat by % of change but ONLY if more then R 40 000 and not if increase or decrease is 10% or less. No adjustment if vat is denied (i.e. motor car) :if adjustment % is less then the original % used for input vat then must pay the difference as output vatif adjustment % is more then original % used for input vat then can claim the additional input vat.pg 106 of t/bookGame viewing vehicle / hearseIf vehicle is converted then can claim input vat at the time of conversion LESS any input vat that has already been claimed.If sell vehicle after conversion then output vat is payable on market value at the time of the sale.Going concernif 95% to 100% taxable use and sold as going concern then output vat = 0% and no input vat can be claimedif more then 50% taxable usage as going concern then ALL assets deemed to be part of going concern and is zero-ratedpg 109/110 of t/bookif less then 50% of taxable usage but sold as going concernpg 111 of t/bookBad / irrecoverable debt – can claim full amount as input vat.16 zero-rated supplies :exported goodsexported servicesgoing concernFIFA world cup 2010good and services for agricultural and other farming purposesgold coinscertain basic foodstuffs – e.g. brown bread, mielie meal etcfuels e.g. petrol diesel & biofuelsilluminating paraffin / kerosenecustoms-controlled area business or Industrial Development Zone (IDZ) operator customs-controlled area stipulated by the Minister of Trade & Industrysupply of controlled animals or when compensation is received in terms of the Animal Diseases Actservices to land or improvements to land or movable goods situated in an export countryservices relating to intellectual property rightsservices of vocational training for employees for employer who is not resident or a vendorrates charged by municipalitysome goods supplied by a vendor to a foreign country.11 exempt supplies :financial servicesdonated goods or servicesaccommodation letting of leasehold land that is used for accommodationsale or letting of land outside SAtransport of fare paying passengers and their personal effects by road or railway in a bus or taxi, but not in a game-viewing vehicle (unless the service is subject to vat at zero rate)supplying qualifying education services by the State, school or public higher educations institution or by PBOschool/ varsity / technikon / college fees, tuition fees or payment for board and lodgingmembership contributions to employee organisations (trade unions)childcare services by a crèche or after-school care centresupply of services by a body corporate, share block company or housing development scheme if the cost of supply the services comes out of levies some home-owners associationsOutput vat – deemed suppliers :ceasing to be a vendorindemnity paymentssupplies to independent branchesfringe benefitspayments exceeding considerationcredit agreementgoing concern salebetting and gamblingsome company formation transactionsIf single supply of goods or services are partly charged at standard rate and partly at zero rate, then each of the supplies are deemed to be separate supplies. Time of supply – connected persons either :at time of removal of goodsorwhen they are made available to recipientorwhen the services are performed.Time of supply – rental agreement either :date on which payment is dueordate on which payment is receivedValue of supply rule – connected personIf vendor supplies goods to connected person for no consideration or consideration less then the open-market value and the connected person not be able to claim a full input tax credit, then the consideration of the supply deemed to be the open-market valueValue of supply rule - entertainmentIf supplier makes a supply of entertainment and no input tax can be claimed for these goods or services cos they are for entertainment, then the value of supply is Rnil.For tax stock valuation can only use FIFO or weighted average.Purchased trading stock is tax deductible If manufacturer then as per GAAP andstock-in-trade = cost of materials + labour + fixed and variable overheads needed to get stock to present condition and locationSection 22 says :salesplusclosing stock incomeless opening stock deducted form income (tax deductible)lesspurchases Closing stock taken at LOWER of :cost price (cost for purchasing and cost to get to existing condition and occupation)ordecrease in market value less damage less deteriationRecoupment :if stock used for private / domestic use or donated = cost priceif stock is dividend, redemption or preference shares or no longer holding it as trading stock = market valuebuilder or engineer – if improves property that doesn’t own then materials deemed to be trading stock until contract is completed and cost of trading stock = total costs of materials + labourlessprogress payments made to datelessretention payment (limited to 15% of the total contract)less loss to dateLIMITED TO TOTAL COST (no negative costs allowed)Can only claim expenses for trading stock in the year when stock is disposed of or when value of trading stock in included in closing stock on hand.Staff cost deductions :Salaries and wages deductible cos used in production of income but can also deduct :contributions to funds – pensions etc, limited to 10% of salary qualifying equity shares – limited to R 10 000 per employee balance c/f to following yearannuities for former employeespremiums on insurance policies for key employees – limited to 10% of employee’s remuneration but NOT c/f to next year, but is included as “E” in formula for lump sumsrestraint of trade if is income in hands of recipient – LESSOR of 1/3 of amount or amt divided by number of years the restraint is effectivelearnership agreements :allowance of R 30 000 pro-rated for year of beginning of learnershipallowance of R 30 000 for each consecutive 12 monthsin final year R 30 000 per year of the qualifying learnership (so if 3 years and finishes in 3rd year then will claim the R 30 000 per year and also R 90 000 allowance cos learnership finished then).Disabled allowance is R 50 000leave pay when paid or becomes due to employeeTrade debtor deductions :bad debts deductible if were originally income but NOT staff loans or if recoverable from someone else under guarantee or suretyshipdoubtful debt allowance of 25% but provision must be reversed in income the following year. Is all doubtful debts and also finance charges relating to those doubtful debtsallowance on credit sales (debtor’s allowance) – if credit sales that have been added to gross income then can use gross profit (NO finance charges or vat) to calc Section 24 allowance, which is :gross profit % x (debtor’s balance less doubtful debts allowance)Limited to taxable income and must be reversed in the following year. pg 216/7 of t/bookPreproduction interest – if loan was to finance asset and interest was incurred BEFORE asset was in use. Can deduct total interest at once and in full, but as soon as asset is used then it is a normal interest deduction in terms of Section 11.Summary of capital expenditure deductions : Trademark Patent Copyright DesignPurchased : after 02/11/06No deductionLess then R5000 – deduct in fullMore then R5000 - 5% of expenditureLess then R5000 – deduct in fullMore then R5000 - 5% of expenditureLess then R5000 – deduct in fullMore then R5000 - 10% of expenditureRenewed : after 01/01/06 Deduct in fullDeduct in fullDeduct in fullDeduct in fullResearch & Development :after 01/01/06 No deductionNon capital expenditure – deductible in the year incurred Capital allowance – 40%, 20%, 20% & 20%Non capital expenditure – 150% of expenditure incurred (funded research) Capital allowance – 50%, 30% & 30%685800127000pg 24 of notesLegal expensesAs long as expense that caused legal fees can be claimed then the fees can also be claimed – so NOT for capital assets, claims for damages or compensation or defending claim against SARS.Donations – only if :to PBO in SA limited to 10% of the taxable income government, provincial or local authority CANNOT increase a loss (then is R nil)and must get official receiptUIF – exempt so NOT deductible Future expense on contracts – if receive deposit for contract work then can use allowance to reduce tax paid on the deposit. Allowance calc’d by :total budgeted profit on contract = gross profit total income on contract allowance = 100% - gross profit percentage x income receivedless actual expenses already paid (subtract from amount received as deposit) = deductible allowancepg 239 of t/bookForex transactionsSpot rate = exchange rateAverage exchange rate = on SARS website for any year of assessmentTranslation date = any date after transaction date and before realisation date translation datetransaction date realisation dateExchange item = foreign currencyExchange difference = forex gain or loss during year of assessment. Only during year when asset is brought into use and must be in taxable income for that year. gain / loss = exchange item x difference between ruling / translation & pymt date depending when debt paidPrepaid expenses – only deductible if :more then R 80 000 but paid for less then 6 monthsless then R 80 000 no matter how long the prepayment is for More then R 80 000 and prepayment for longer then 6 months NOT deductiblePre-trade expensesCan deduct all start up costs before trade starts in the year that trading commences (doesn’t matter when the costs were incurred).Loss can be carried forward and offset against income from same trade in later yearsCompany CANNOT offset loss against non-trade income (others can but NOT if for trade carried on outside of SA.)Cannot carry forward loss if not carrying on trade during the year.Is asset is for environmental treatment and recycling then allowance of 40% during year brought into use and 20% for following 3 yearsEnvironmental waste disposal asset = allowance of 5% per year from time that asset is brought into use.Environmental restoration of land (forests, mines) isn’t in production of income but can be deducted if expense would have been allowed if was still trading.No depreciation for tax purposes – have to add back and then deduct wear-and-tear provision.Capital allowances include cost of improvements to capital asset but EXCLUDES cost of repairs to restore asset to original state.Actually occurred, during yr of assessment & trade income derived from it. Can be claimed if own the lease or not.Calculating a capital allowance :Step 1is amount deductible in terms of general deduction formula or as a repair?Yes – deduct itWhat is the nature of the lease amount being paid :monthly rentallease premiumleasehold improvementStep 2does taxpayer own or lease the asset?Step 3 determine the cost of the assetStep 4does the asset constitute a building? No YesStep 5 determine the wear-and-tear rate (what is the tax status of the taxpayer and what is the asset used for?)small business corporation – manufacturing asset (full amt in 1st yr)small business corporation – other asset (50 : 30 : 20 for 3 yrs)manufacturing co. – new manufacturing asset (40 : 20 : 20 : 20) manufacturing co. – used manufacturing asset (20% 1st yr NOT pro-rated, then 20% for next 4 yrs)manufacturing co. – other asset (normal wear & tear pro-rated)other companies (normal wear & tear pro-rated)specific assetStep 5 determine the allowance rate – what is the building used for?factory / manufacturing building - 5% annual write down & deduct all costs of erections & improvementscommercial building - NEW & UNUSED 5% p/yr. If part of new building 55% of purchase price, if improved 30% of purchase price then 5% per yearresidential units - NEW & UNUSED 5% p/yr & extra 5% if low cost. If part of new building 55% of price, if improved 30% of purchase price then 5% per yearlow-cost residential housing - 10% of amt owing by employee at yr-end for max 10 yrs. Interest-free loanurban-development zone building - 20% 1st yr then 8% for 10 yrs for new building, 20% 1st yr & 20% for 4 yrs if improving existing building, 25% 1st yr and 25 for 3 yrs if low-cost residential units, 55% for 1st yr & if purchased from developer then 30% of new building or 30% of purchase price if improved by developer Step 7calculate the allowance – multiply the cost of the asset by the rate of the rate of the allowanceStep 8deduct the allowance from income.Small Business CorporationNEW or USED manufacturing plant and machinery can be claimed in FULL during year when brought into use.Other assets – deduct 50% in 1st year, 30% in 2nd year and 20% in 3rd year.Other entities New manufacturing assets – 40% in 1st year and 20% for next 3 years – NOT pro-rated.Used assets – 20% in first year (NOT pro-rated) when brought into use and 20% for 4 years after that.Any moving costs of machinery are deducted in equal installments over remaining write-off period.In manufacturing company and NOT manufacturing asset then normal wear and tear rates and IS pro-rated from time of purchase. If less then R 7 000 then write-off in full.Manufacturing businessFactory allowance = 5% annual allowance. Can deduct costs of erection and improvements (NOT repairs!!!) and includes architect’s fees and leveling landCommercial buildingsOnly on NEW or UNUSED buildings and NOT residential buildings = 5% per year (NOT pro-rated)If not built by taxpayer but still new or unused then can use 55% of purchase price and then claim 5% per annum deduction.If only improved then can claimed 30% of the purchase price and then 5% deduction allowance. NOT residential buildings and can only use this Section (13quin) if can’t claim any other deductions (so if there is leasehold improvement deduction available then have to use that and this Section NOT applicable.)Residential unitsNEW or UNUSED with or improvements to the unit if taxpayer owns at least 5 units in SA and is only for the purpose of trade (i.e. renting).5% per year on cost and extra 5% if low-cost residential units where a flat is not rented for more then R 2 500 per month and house for not more then R 2 000 per month).NOT pro-ratedIf only bought part then limited to 55% of the purchase price or 30% of the price if was improvement.Low cost housing Sale to employees if on interest-free loan and no profit made on the house, then can claim allowance of 10% for any amount owing to taxpayer at end of year of assessment for maximum of 10 years. NOT pro-rated.Urban development zoneMust be more then 1 000 square metres and only for purposes of trade.If for new building, extensions or additions = 20% of cost for year brought into use and 8% for next 10 yearsImprovements to existing buildings = 20% of cost for year brought into use and 20% for next 4 yearsImprovements to low-cost buildings = 25% of cost when first brought into use and 25% for next 3 yearsIf building or part of building bought from developer = 55% if building was built by developer and 30% if was just improved by developer.Cost doesn’t include any finance costs and only for cost of buildings or improvement NOT cost of land.Moveable assets owned by taxpayer (e.g. machinery, plant)CAPITAL ALLOWANCES :What is the tax status of the taxpayer?Manufacturing businessAll other businessesSmall Business CorporationAll assets – time based (Section 11(e)Manufacturing assets : new – 40:20:20:20Used – 20:20:20:20:20Other assets – time based (Section 11(e)Non-manufacturing assets : 50:30:20Manufacturing assets : 100% in year 1Immoveable assets owned(e.g. buildings)What is the building used for?Urban- development zoneLow-cost residential unitsResidentialCommercial buildingManufacturing business20% for year 18% for 10 years and 10% in year 1 if low-cost residential allowances10% for 10 years5% for 20 years5% for 20 years5%Disposal of asset – either :recoupment (added to income if selling price is higher then tax value). scrapping allowance (deduction if selling price is less then tax value)and if profit on sale then can be capital gain.Scrapping allowance disposal allowance = proceeds (ex vat) - (cos of asset and location costs) + capital allowances to date NOT land or building or if sold to connected person.ONLY for monies received or accrued for sale of assetRecoupment tax value of asset = cost - capital allowances to daterecoupment = proceeds - costNOT MORE THEN CAPITAL ALLOWANCE IN PREVIOUS YEARS. Might be CGT. ADDED TO INCOME.Replacement asset recoupment If capital asset is replaced then would have to pay high recoupment taxation so can spread recoupment allowance over same time as capital allowance or wear and tear of new asset.(so basically deferring the recoupment tax until later.)If replacement asset sold then any remaining recoupment tax must be paid over thenpg 305/306 of t/bookLimitation of assets Asset held by connected person any time during previous 2 years then purchase price is limited to :cost of asset for connected person - allowed or deemed deductions allowed for connected person + recoupment included in connected person’s income + CGT for connected person at 50%Limitation allowance for lessors :If rent asset then can only claim allowance that is the same as the taxable income that you are getting from the asset. So rental income from asset - expenses for that asset = MAXIMUM amount that can be claimed but balance can be claimed in the following year.If person sells asset to someone but then leases it back again then :for lessee – if not income then limited to interestfor lessor – if not income then limited to allowance for lease premiumsLeased asset expenses :rent paid – only when asset brought into uselease premium – paid up front at start of lease as lump sum and then smaller monthly rental premiums. FROM DATE OF RIGHT TO USE OF ASSET – pro-rated.Must be income for lessortotal lease premium (lump sum) no of yrs of lease (MAX 25)leasehold improvements – on property but limited to :total ORIGINAL cost in contract (NOT actual cost) of improvements no of yrs of use (MAX 25) - time that it took to do the improvementsPRO-RATED and MUST be income in hands of lessorpg 314 of t/bookLessor’s allowance On value of improvements included in his income but amount in agreement NOT actual price of improvements less amount at 6% over period of leasepg 315 of t/bookexam examples pgs 317 to 323 of t/bookCapital gains tax is any increase in value in assets from 1st October 2001 to date of sale – levied at 50% and added to income tax calculation.Framework for calculation of taxable capital gains : RProceeds xxxless : base cost(xx)gives : gain / (loss)xxxless specific exclusions(xx) xxxplus : other capital gains or (losses)xxx total : capital gain / (loss) xxxless : capital loss b/f from previous year(xx)Net capital gain / (loss c/f to next year) xxxMultiply : inclusion rate 50% (for companies)Taxable capital gains XXX(added to normal income tax) Assessed capital loss c/f to next year NOT offset against taxable income.NO annual exclusion for companies – R 17 500 for natural persons and special trustsDoesn’t have to actually sell the asset – can be deemed disposal if trading stock is used for personal use (then “sold” at LOWER of cost, net realisable value or market value and person using them “buys” them at same value) or if debt owed to creditor has been reduced or discharged by the creditor. Also for donation or connected person transactions.For EACH disposed asset : RProceeds (selling price adjusted for CGT purposes)xxxless : Base cost (cost price adjusted for CGT purposes)(xx)Capital gain / (loss)xxxChange of ownership : Event by which change of ownership effectedTime of disposal of the eventAgreement subject to suspensive conditionDate on which condition is satisfiedAgreement without suspensive condition Date of the agreement Distribution of asset of a trust by trustee to beneficiary so that beneficiary has vested interest in assetDate on which the asset vestsDonation of an assetDate of compliance with legal requirements of donation Expropriation of an assetLast date on which person receives full compensation or when final compensation determined by competent tribunal or courtConversation of assetDate on which asset is convertedGranting, renewal or extension of an option Date on which option is granted, renewed or extendedExercise of an option Date on which option is exercisedTermination of an option granted by company to person to acquire a share, unit or debenture of the companyDate on which the option terminatesAny other caseDate of change of ownershipAssets involved in other transactions : Event by which change of ownership effectedTime of disposal of the eventExtinction of asset by forfeiture, termination, redemption, cancellation, surrender, discharge, release, waiver, renunciation, expiry or abandonmentDate of the extinction of the assetScrapping, loss or destruction of an asset for paymentDate when full compensation is receivedScrapping, loss or destruction of asset if no compensation is receivedLATER of dates when either scrapping, loss or destruction was discovered or date when it is established that no compensation will be receivedDistribution of asset by company to shareholder (dividend in specie)Date when distribution is approved by directors or person of authorityOccurrence of event that is treated as deemed disposal (NOT assets transferred by insurer or debts reduced or discharge by person’s creditor)Date immediately before the day on which the event occursEvent where asset is no longer a personal-use assetDate on which event occursReduction of a debt owing by a person to the creditorDate on which event occursDisposal of interest in an asset of the partnershipDate that the proceeds accrue to individual partnersDisposal of asset amount must be adjusted by amount that was shown in taxable income of taxpayer – i.e. wear-and-tear and recoupment allowance.If some money only paid after date of assessment, then deemed to have accrued in current year.34290071120228600-236220Base cost – anything that was deducted from the taxpayer’s income must be DEDUCTED from the base cost of asset. (e.g. wear-and-tear and expenses like valuing the asset, transfer costs / duties, installation costs & donations tax).NOT included in base cost = interest, repairs and maintenance, insurance, rates and taxes and vat). Valuation date value = HIGHER of :market value of asset on 1st October 2001time-apportionment base cost of asset – use time apportionment formula to get time apportioned base cost and add costs after the valuation date20% rule – 20% of the value of the proceeds of sale of asset less expenses after valuation datebase cost of asset = valuation date value + costs incurred on or after valuation dateAsset purchased before 1st October 2001 :divide costs between before and after valuation datededuct ALL wear and tear (from before and after valuation date)determine if Section 26 or Section 27 are applicable – i.e. if the asset was sold for less then market value on valuation date or less then the costs incurred for assetchoose HIGHER of time apportionment / tab-cost20% rulemarket valuecalculate valuation date value = all costs of assets + increase in value up to 30th September 2001calculate base cost = valuation date value + costs incurred after 1st October 2001Section 26 – if valuation date value is LESS then the expenditure or if the expenditure on an asset can’t be determinedIf adjusted proceeds > total base cost (as calculated) then valuation date value = HIGHER of :market value 20% ruleortab-cost (time apportionment base cost)If pre-01/10/01 portion of base cost can’t be determined then valuation date value =market valueor20% ruleIf market value used and proceeds smaller then or equal to market value then valuation date value = adjusted proceeds minus section 20 costs (base cost) incurred on or after valuation date pgs 359 to 361 of t/bookSection 27 – valuation date value where proceeds don’t exceed expenditureIf adjusted proceeds < or equal to total base cost (as calculated) then valuation date value :tab-cost (time apportionment base cost)If market value determined and :cost incurred before 01/10/01 < or equal to adjusted proceeds and > market value then valuation date = HIGHER of market value or adjusted proceeds minus section 20 base costs incurred on or after valuation dateabove is not applicable then valuation date value = LESSOR of market value ortab cost (time apportionment base cost)Adjusted proceeds minus section 20 base costs incurred on or after valuation dateIf cannot determine market value then valuation date value = time apportionment base costPartially disposed assets – if can determine value for the part sold then use formula market value of portion of asset sold valuation date value or TAB x total market value of assetIf using 20% rule then = 20% x (selling price of portion of asset less expenditure for that portion after 01/10/01)If identical assets then must use either specific identification, FIFO or weighted average method (only for financial instruments, valuable coins or shares). CAN’T use time-apportionment base cost!! valuation date value Then valuation date value = number of units heldExclusions for CGT :primary residence – NOT companies or any other entitypersonal-use assets disposal of small business assets – to max of R 750 000 in person’s lifetime if over 55 and owns at least 10% equitydisposal of registered micro business assetsexercising optioncompensation for defamation / personal injury etcgambling, games or competitions exempt persons (if don’t pay tax then don’t pay CGT)ASSETS THAT PRODUCE EXEMPT INCOME donations and bequests to PBOaward for restitution in terms of Land Rights or government scrapping paymentsLimitation of CGT loss :capital loss from disposal of asset to connected person or beneficiary of trustlarge non-personal assets (e.g. planes / boats)ASSESSED CGT LOSS NOT OFFSET AGAINST TAXABLE INCOME, BUT CARRIED FORWARD TO FOLLOWING YEAR OF ASSESSMENT!!Roll over = CGT can be rolled over to future date if asset is replaced (within a year) or sold involuntarily – so when asset finally sold will pay CGT on difference between proceeds and base cost. cost of specific replacement assetIf more then 1 replacement asset then : capital gain per asset = total gain x total cost of all replacement assets Inclusion rate = 50% for companies, CC’s and trustsEffective tax rate = 14% (28% x 50%)exam examples pgs 385 to 392 of t/bookSteps to calculate capital gains tax :PROCEEDS(adjusted with recoupment)BASE COSTAsset acquired after 1st October 2001Asset acquired before 1st October 2001Determine valuation date value – either :market valuetime-apportionment base cost20% of proceeds ruleadd up total costs incurred (adjusted with allowances) :pre 01/10/01 and post 01/10/01then see if paragraph 26 or 27 appliesand choose valuation date valuecosts incurred after 01/10/01Valuation date value + costs incurred after 01/10/01 BASE COSTBASE COSTGAIN / LOSS = PROCEEDS LESS BASE COST Add other gains or losses= TOTAL GAIN / LOSSDeduct capital loss from prior yearNET CAPITAL GAINMultiply by inclusion rate (50%)TAXABLE CAPITAL GAINPartnershipsMin 2 people, max 20. Partners taxed on partnership profit in personal capacity, but can also offset partnership’s loss against other income during the year OR can be c/f to next year of assessment.Joint return for partnership submittedFirst calculate partnership’s taxable income (less deductions like wear-and-tear) and calc profit share for each partner as per profit share-ratio. Then add this profit to other income partner has earned.Then deduct partners personal expenses and calc tax payable NOT for partnership :INTEREST RECEIVED so each partner can claim the interest exemption orDONATIONS TO EDUCATIONAL INSTITUTIONS donation deduction (subject to normal limitations)PARTNERSHIPS :Calculation of taxable income of partner for year ended …….Partnership RIncome XXXXXFees xxxxxxInterest received for individual partnersBad debt recovered (relates to period prior partnership) only for period of partnershipless : Expenses (XXXXX)Annuities paid xxxxxWear & Tear only for vehicles owned by partnershipDrawings of partners NOT deductedBad debts only if for period of partnership (and only in split as per partnership agreement – rest is lost) & NOT staff loansConsumables xxxxContributions to funds (limited to 20% of retirement remuneration)Premium on keyman insurance policy only on employees NOT partnersDonation for individual partnersWear & tear - Generator (R? / yrs x month / 12) xxxxxFax machine (<R5 000 – written off) xxxxxLegal costs (capital in nature) not if for capital costsSalaries xxxxxRA contributions for partners xxxxxWages xxxxxDrawing (capital in nature) not includedPartnership net profit XXXXXXDistribution split :Partner’s order of deductions :general & other allowancespension fund contributionsRA contributionsdonations to PBO’smedical expensesPartner A (50%) XXXXXX / 2Partner B (50%) XXXXXX / 2Partner A : RInterest received (full amount x 50%) less : interest exemption(21 000) xxxxxxRecoupment of bad debt (full amt x 50%) xxxxxxSalary from partnership xxxxxxPension fund contributions (limited to HIGHER of 7.5% or R 1 750)RA contribution by partnership (limited to HIGHER of R 1 750 or 15%)Consumables for private use (at cost) xxxxxx xxxxxxless : bad debt (full amount x 50%) (xxxx)less : annuity paid to former employees / ptns x 50% (not to current partners)less : donation (full amount x 50%) (limited to 10% of taxable income so far)less : medical expenses (xxxx)Taxable incomeXXXXXCannot have LIMITED partnership – EVERY partner deemed to be part of business and if income received by partnership then deemed to have been to EVERY partner according to profit share ratio no matter what is in the partnership agreement.Any partner cannot receive more from partnership then value that creditors can hold him responsible to the partnership.exam examples pgs 419 to 426 of t/bookTrustsSeparate legal entity so separate taxpayer. 40% flat rate of tax on any undistributed income, but if profit is distributed to beneficiary then the company doesn’t pay tax as beneficiary is taxed instead.Any profit not distributed to beneficiary stays in the trustNO primary or secondary rebate for trust or interest exemption.Income earned from trust = conduit pipe principle (so keeps its character – so interest stays interest and beneficiary can claim interest rebate).Loss in trust CANNOT be offset against beneficiary’s other incomeTrust tax liability normally either :beneficiarytrustee (for the trust)donor of assetsIncome either distributed to beneficiary or to which they have a vested right (whether paid out or not) MUST be included in income from other sources.Year end is ALWAYS end of FebImportant to know who is liable for tax on the income of trust :Section 7 – if donor distributes income or assets in a way that means he doesn’t own the assets anymore more, but still receives the benefits (so has no tax liability)If person has vested right to income then taxed on it even if not actually paid out (even if capitalised in name of beneficiary or credited to account in beneficiary’s favour). If reliant on future event that hasn’t occurred yet, then no vested right until event happens.Spouses married in community of property – deemed to be accrued to other spouse if main reason for disposal was for purpose of reducing or deferring taxTransactions between parents and child – any income received by or accrued to minor child either directly or indirectly from father or mother must be included tax return of each parent (so income of child is income of parent!)Cross donation – made to another family’s child by donor to try and avoid tax. Person who makes donation will be liable for the tax even if it is not for his child.Donation linked to condition – if any stipulation, condition or event then person who donates the money is taxed on the income until the event happens or condition / stipulation is met (always donor taxed no matter who sets the stipulation / condition).Donation when control is retained – if donor gives beneficiary the right to receive the income but donor keeps the right to change right or to transfer it to someone else, then person who has the right is taxed (even if the person doesn’t exercise the right). If donation is made to trust, but donor has right to change the beneficiary of the trustDonation of income – if person cedes income of asset to another person but still retains the right of ownership then deemed to be received by donor (basically if not for donation then that person would still have been taxed on the income of the asset, so then is still taxed)Donations between resident and non-resident – resident donor still taxed on income, even if donation made to trustAsset sold at consideration less then fair market value – then difference in value deemed to be donationSection 25B – if none of section 7 applies then states that income of the trust is taxable in hands of beneficiary if has vested right to the incomeIf no beneficiary with vested right then income is taxable in hands of trust (40% flat rate)Basically trust is taxed on the full retained income if there is no beneficiary with a vested right to the income.Interest free loan to trust – NOT donation rather free disposition so no donations tax but interest deemed to be income in hands of donor.If income goes to minor child and interest earned is over the more then market-related rate then the difference deemed to go to the minor child and they are taxed on it.pg 575 t/bookDividends distributed from trust is exempt but not if distributed as annuity – then NOT exempt.If amounts are earned and only paid out in following years then aren’t taxed again (conduit pipe principle NOT applicable)Beneficiary taxable income :If has vested right to any amounts in trust then beneficiary can also claim all deductions for expenses for that right.BUT can’t offset trust’s loss against other taxable income.Trust expenses are deducted from the income of the trust. Any expenses that exceed the income can be deducted by beneficiary in next year of assessmentCannot claim trustee remuneration paid to beneficiary (if same person) or interest due to beneficiates claimed in the trust as an expense.Taxable income of donors :Income – any amounts that the donor has vested right to (or if he retains the right to asset or to change beneficiary). If income was paid out of capital from prior year then not taxed again.(if community of property spouses then passive income divided equally – interest etc)lessExpenses – any costs against the revenue received by donorlessany applicable interest or dividend exemptionsTaxable income of beneficiaries :Income – not taxed on any amounts that have already been taxed with the donor. Any amount paid to beneficiaries or any amount accrued due to a vested right (even if not distributed). Check no residue that must be included. Income distributed from capital in the prior year is not taxed again.(if community of property spouses then passive income divided equally – interest etc)lessExpenses – any costs against the revenue received by beneficiarylessany applicable interest or dividend exemptionsTaxable income of trust :Income – any amounts that have not been taxed with donor or beneficiary. (So where no-one has a vested right to the income or if the donor is dead.)lessExpenses – any costs against the revenue received by donorpgs 582 to 593 t/bookCapital gains either in hands of donor, beneficiary or trust. Still calc’d using base cost, proceeds and anti avoidance stipulations / limitation of loss rules.Trust pays CGT at 50%NO primary residence exclusion if house in name of trust – even in natural person is beneficiary and is taxed.Attribution rule – states that cos income earned cos of donation is deemed to be for donor, any capital gain is also taxable in hands of donor (NOT a capital loss – remains in the trust and used for total loss or gain for trust). Any capital gain for donor is limited to the value of the market value of any loan or donation made by donor (balance paid by trust)pg 595 t/book and exam questions pgs 597 to 605see Section B additional questions with solutions from page 112 of study guide see Section C additional questions in study guide with solutions in tutorial letter 202/2/2010 CompaniesNon-resident & Personal Service ProviderMicroBusinessesSmall Business CorporationsSA Companies and Close CorporationsFlat rate : 33%Flat rate : 33%Sliding scaleFlat rate : 28% Taxable incomeRates of taxR0 – R 54 200given in the examNilR54 201 – R 300 00010% of the amount above R 54 200R 300 001 +R 24 580 + 28% of the amount above R 300 000If given taxable income to date and then adjustments then must set out as below and only adjust items that are treated differently for accounting and tax purposes :Taxable income for current year of assessment (ended on …) R Taxable income before adjustments XXXAdjustments :plusdepreciationxxxless accounting profit on insurance claim(xx)lesssection 12C allowance (xx)plus lease premium paid (total)xxxlesslease premium allowance R? / yrs x month/12)(xx)plus recoupment xxless recoupment deferred(xx)lesswear-and-tear(xx)plus donation (if taxpayer donated) xxlessdonation recoupment(xx)plusany expense not used in process of manufacture xxTaxable income XXXTaxable income of a company for year ended ……. RSalesxxxxxxxxxManufacturing costs & purchases(xxxxxxxx)Closing stock xxxxxxDonation at market value xxxxxxless :Opening stock at cost (xxxxxxx)Restraint of trade payment – (xxxxx) min over 3 yrs or divided by no of yrs applicableMachine – Section 12C wear & tear allowance (xxxx)Machine – recoupment & wear & tear allowanceCostxxxxxless : s12C wear & tear allowance for each yr since bought x %(xxxxx)Tax valuexxxxxxProceeds(xxxxx)Recoupment(xxxxx) xxxxxxFactory – section 13 building allowance (R? x 5%)(xxxxxx)Doubtful debt allowance (R? x 25%)(xxxxxx)Taxable incomeXXXXXXTaxable income of CCCalculation of taxable income of ….. CC for yr ended …… RTaxable incomeXXXXXXXFactory Building (owned by taxpayer)Building allowance (Section 13) (R? x 5%) (xxxxxx)Rental received (R? x ? mths) xxxxxFactory Building Rental paid (R? x ? months) (xxxxx)Lease premium (R? / ?yrs x months / 12) (xxxx)Leasehold improvements (R? / ? yrs ? mths) x mths / 12 (xxxx)Building allowance (Section 13) (R? – R?) x 5% (xxxx)Manufacturing machinery:Section 12C allowance ((R? x 100/114) x 40% (xxxxx)Passenger vehicle: Section 11(e) allowance (R? x ? / ?yrs x months / 12) (xxxx)Legal fees (xxxx)Bad & doubtful debts:Loan to former employee / staff no deduction (not in production of income)Trade debtors Section 11(i) (xxxxx)Doubtful debt allowance (R? x 25%) (xxxxx)Insurance:If from date brought into use then section 23H isn’t applicable (xxxxxx)Taxable income before Section 11A XXXXXless : Pre-trade expenditure Section 11A (insurance) (xxx)Taxable income XXXXXCapital Gains TaxTransaction 1 Divide costsPre 1 October 2001 costs = R xxxxxPost 1 October 2001 costs = R xxxxValuation date value (1 Oct 2001) :HIGHER of:Market value = R ? orProceeds less costs incurred after 1 Oct 2001xxxxxxx (xxxx) xxxxxxSo valuation date value is the higher amount.Base cost is valuation date value plus costs incurred after 1 October 2001:( market value + R ? = R xxxxxx)Calculate capital gain / loss :proceedsxxxxxxxxless : base cost(xxxxxxx)Capital loss(xxxxxxx)orIncome tax calculation - determine recoupmentSelling pricexxxxxxxxless: tax value on date of saleCostxxxxxxxless: building allowancefor all the years – R? x 5 % (xxxxx)Tax value on date of sale(xxxxxx)Possible recoupment (limited to previous allowances)xxxxxxx Transaction 2Proceeds calculation :Proceedsxxxxxxxxless : Adjusted with recoupment (xxxxxx)Proceeds to be used xxxxxxxBase cost calculation :Base costxxxxxxxxless : allowances (xxxxxx)xxxxxxxxCapital gains tax calculation :Proceedsxxxxxxxless : Base cost (xxxxx)GainxxxxxxxAggregate capital gain for the yearTransaction 1 : capital loss(xxxxxx)Transaction 2 : capital gain xxxxxxTotal capital gainxxxxxxxCapital loss brought forward from previous year (xxxxx)Net capital gain XXXXXTaxable capital gain x 50% XXXXSmall business corporationCalculation of income tax payable by ….. for yr ended RSalesxxxxxxxxMachine : Cost pricexxxxxxxless : Section 12E Wear & tear allowance (R? x 100%)(xxxxx) (xxxxxx)Tax value xxxxxx Selling price – Machine Axxxxxxxless : Tax value (xxxxx)Recoupment xxxxxxTaxable portion of recoupment :par 66 (100% x R387 600) xxxxxxMachine :Cost pricexxxxxSupporting structure xxxxxTotal Cost xxxxxxSection 12E wear & tear allowance (R? x 100%) (xxxxxx)Patent(R? x 5%) (xxxxx)Trademark Section 11(gB) (xxxxx)Salaries - administration staff (xxxxx) - research staff (R? x 150%) (xxxxx)if entity conducts research & Operating research expenses (R? x 150%) (xxxxxx)has registered a patent / trademarkBuilding improvements:Research facility - Section 11D (R? x 80%) x 50% (research) (xxxxx)Section 13quin (? x 20%) x 5% (0ffice) (xxxxx)Office furniture (R? x 50%) (xxxxx)Taxable income XXXXXTax due (taxable income – provisional payments) x 28% XXXXVAT payable or refundableCalculation of VAT payable or refundable for 2 month period ending …………….Output tax RCommercial rentals (R? x 14/114)xxxxxxResidential rentals exempt supplyInterest levied on overdue rentals from commercial tenantsfinancial service - exemptInterest on current account exempt supplyIncome from sales (R? x 14/114)xxxxxxExport sales zero-ratedIndemnity award received (R? x 14/114) deemed supplySale of going-concern zero-ratedFringe benefit – vehicleR? x 100/114 x 0,3% or 0.6% x 14/114 x 2 months x 60% xxxInsurance settlement :replaced goods by insurance company no cash receivedinsurance cash payout (R36 000 x 14/114) xxxxxxTotal Output VAT xxxxxInput VATBank charges (R1 710 x 14/114 x % for commercial use) xxxInterest on overdraft exempt supplyAudit fees (R? x 14/14 x % for commercial use) xxxFinance lease (R? x 14/114) xxxDelivery vehicle purchased in prior year vat claimed in prior periodDouble cab bakkie purchased motor car – vat deniedPurchase of truck (R? x 14/114 x % of commercial use) xxxxDepreciation :-computer (R? x 14/114 x % of commercial use) xxxPetrol account for delivery vehicle zero ratedEntertainment prohibited supply / vat input deniedSalariesnot a supplyRepairs (R? x 14/114) xxxMaintenance (R? x 14/114 x % of commercial use) xxxWater & electricity – office (R? x 14/114 x % of commercial use) xxxWater & electricity – residential exempt supplyCOS (RX x 14/114) xxxxxxRent for warehouses (R? x 14/114) xxxxxBad debtsDebtors (R? x 14/114) xxxLoan to employee not supplyCredit note issued (R? x 14/114) xxxInsurance premiumsManufacturing equipment (R? x 14/114) xxComputer (R? x 14/114) xxTrading stock (R? x 14/114) xxxOffice equipment rentalsMachines (R? x 14/114) xxxxCoffee machine (entertainment)deniedRefreshments (entertainment)deniedOverseas air ticket zero ratedHotel accom & meals (R? x 14/14 x % of commercial use) xxxxxxTotal input VAT xxxxxxVAT payable to the commissioner :Output vat - input vatXXXXX ................
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