Model Answers

Model answers

AAT Accounting Qualification

Diploma pathway

Diploma level

Preparing Business Taxation

Computations– South Africa (BTC-SA)

2003 Standards

June 2008

Note:

The model answers may, in parts, be longer than would be expected of candidates in the exam. The fuller version is given for teaching purposes.

Section 1

Task 1.1

(a) Capital allowances to 28 February 2007:

Plant and machinery – May 2006 (100%)240,680

Car purchased for Dean – June 2006 – section 12E (not 11(e)) (50%)75,150

Other equipment – September 2006 – section 12E (50%)22,550

Plant and machinery – December 2006 (100%)120,450

Total capital allowances458,830

(b) Capital allowances and recoupments to 29 February 2008:

From 2007:

Car purchased for Dean (2nd year of allowance) (30%)45,090

Other equipment (2nd year of allowance) (30%)13,530

New in 2008:

Plant and machinery (cost R80,100; market value was R82,000) lower at 100%80,100

Other equipment (new) (50%)19,750

Total allowances158,470

Recoupment:

Selling price R60, 970 (not limited to cost as cost is greater) less tax value R060,970

Task 1.2

(a) Taxable income for DeeDee CC for the period ended 28 February 2007:

Taxable income before adjustments1,490,261

Capital allowances - Task 1.1 (a)(458,830)

Less: salaries paid to Dean and Dorothy R150,000 x 2 x 10/12(250,000)

Taxable income781,431

(b)

Taxable income (from above)781,431

Tax payable:

R26,000 plus 29% of taxable income above R300,000 R165,615

Taxable income after tax (R781,431 – 165,615)R615,816

STC is 12.5/112.5 x R615,816R68,424

Task 1.3

(a) Taxable income for DeeDee CC for the year ended 29 February 2008:

Taxable income before adjustments2,580,060

Capital allowances - Task 1.1 (b)(158,470)

Add: recoupment - Task 1.1 (b)60,970

Less: salaries paid to Dean and Dorothy R150,000 x 2(300,000)

Taxable income2,182,560

(b)

Taxable income (from above)2,182,560

Tax payable:

R25,700 plus 29% of taxable income above R300,000 R571,642

Taxable income after tax (R2,182,560 – 571,642)R1,610,918

STC is 10/110 x R1,610,918R146,447

Task 1.4

From:
To:
Sent: 17 June 2008
Subject: Help
I am more than happy to provide you with details on what the tax implications would be if you sell the office, using the figures you have provided.
Firstly, the determination of the base cost is made.As the proceeds exceed your expenditure, you can use as your valuation date value the higher of: market value on 1 October 2001; time apportioned base cost; 20% of the proceeds (after subtracting the post 1 October 2001 expenditure).As you have no subsequent qualifying expenditure, your valuation date value is the base cost.As it does not appear that you had the property valued at 1 October 2001, the most appropriate value appears to the be time apportioned base cost, determined as follows:
750,000 + ((1,500,000 – 750,000) x 1/(1+7) = 843,750
Based on your figures, your capital gain would be:
R
Proceeds 1,500,000
Less cost 843,750
Capital Gain 656,250
From this figure, you would also be entitled to an annual exclusion of R16,000.
Lastly, only 25% of this net figure will be taxed in your hands (amounting to R160,062).Assuming you pay tax at the maximum marginal rate, your tax liability on this gain would be R64,025.
Therefore, given that you will receive R1,500,000 from the sale of the office, the total tax liability should not be too high.
I hope this information helps you with your decision.
Regards
AAT student

Section 2

Task 2.1

R14,000,000 x 5% (not apportioned) = R700 000

Task 2.2

RR

Net profit3,581,477

Add back:

Depreciation560,050

Speeding fine (not deductible s23(o))1,000

Staff entertainment (Provider – incentive for staff)-

Gifts of wine8,000

Gifts of stationery (act as advertisement)-

Restraint of trade (limited to 1/3)220,000

Donation to PBO 12,000801,050

4,382,527

Less:

Dividend exemption (40,500+50,400+20,250)111,150

Capital allowances3,200,225

Building allowance 700,0004,011,375

359,152

Less assessed loss brought forward1,800,100

Loss1,440,948

Less donation deduction (R12,000 ltd to 10% of 0)0

Add: taxable capital gain: 50% x 60,70030,350

Loss for year of assessment to carry forward1,410,598

Task 2.3

RR

Dividend cycle 1:

Dividend declared30,000

Less dividend accrued (received)40,500

Dividend credit carried forward10,500

Dividend cycle 2:

Dividend declared100,000

Less: dividend accrued brought forward10,500

Less: April 2007 dividend received50,400

Less: November 2007 dividend received20,250

Net amount18,850

STC at 10%1,885

Task 2.4

From:
To:
Sent: 17 June 2008
Subject: Assets
I am more than happy to offer you some information on this topic.
The main issue here is called rollover relief.Unfortunately, rollover relief does not apply to the voluntary disposal of buildings.
As you have claimed allowances against the building, the recoupment you will have to recognise (being limited to the allowances previously claimed) may be offset against the cost of the new building instead of being immediately recognised.While this reduces the allowance on the new building, it effectively spreads the recognition of the recoupment.If you sold the building today, the recoupment to be offset against the cost of the new building would amount to R2,100,000 (being 3 years at 5% on R14,000,000).
The capital gains implication will have to be recognised.You will have a capital gain of R4,000,000 of which 50% is included in taxable income resulting in tax of R580,000. This means that you will have R17,420,000 to utilise for the new building and will only have to obtain funding for a further R5,580,000.
The allowance on the new building would be (R23,000,000 – R2,100,000) x 5% = R1,045,000.
Regards
AAT student

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