2 HTAX331-1-Jul-Dec2021-SA1-SUPP-JM-V3-24012021 QUESTION 1 (32 marks) Monica and Samantha, both South African residents, have been friends since kindergarten. They attended university together and both became successful businesswoman. With the tourism industry booming in the Cape Town area and the number of tourists looking for places to stay in South Africa's summer months, the two ladies decided to form a partnership in 2018 in which they purchased a block of flats close to Bloubergstrand costing R1 300 000. The appropriation of the profits ratio was Monica 45% and Samantha 55%. The purchase price of this block of flats was financed according to this ratio as well. The block of flats is rented out to overseas visitors mostly in the summer months. Samantha recently started a family and realised the administration of the partnership was too much for her. She decided to sell her 55% share in the block of flats to another one of their energetic university friends, Rachel, on 28 February 2019. The selling price was R4 400 000 and represented 55% of the market value of the block of flats (R6 500 000) and the goodwill of the partnership (R1 500 000). The conditions per the sales agreement between Samantha and Rachel are as follows: Rachel must pay R2 250 000 in respect of the block of flats in cash and - Rachel must pay R800 000 in respect of the goodwill in the form of an annuity of R80 000 per year for a period of 10 years. 3 HTAX331-1-Jul-Dec2021-SA1-SUPP-JM-V3-24012021 The statement of profit and loss of the partnership for the year of assessment ended 29 The statement of profit and loss of the partnership for the year of assessment ended 29 February 2021 is as follows: INCOME Rent received Note Interest on fixed deposit of partnership Capital profit 1 Bad debts recovered 2 R 5 846 500 245 310 1 604 000 85 000 EXPENSES Salaries and wages 3 2 130 000 Repairs and maintenance 4 41 000 Depreciation 5 243 050 Bad debts written off 2 124 840 Other allowable expenditure 304 700 NET PROFIT NOTES 4 937 220 1. A holiday house that was bought and renovated in June 2018, was being rented to an elderly couple from Rome. They purchased the house from the partnership on 1 August 2020 for R5 400 000. The original cost price of the house was R2 100 000. 2. The bad debts written off and subsequent bad debts recovered were as a result of debtors that were outstanding/arose when Monica and Samantha still had the partnership. 3. Salaries and wages expense consists out of the following costs: Salary to Monica Salary to Rachel Salaries to other employees Bonus to Monica R 315 000 385 000 640 000 180 000 HTAX331-1-Jul-Dec2021-SA1-SUPP-JM-V3-24012021 Bonus to Rachel 220 000 Bonuses to employees 244 500 Partnership contributions to pension fund on behalf of partners and employees (7.5% of their salaries) 100 500 45 000 Annuity to former employee's dependents (A former employee died on 1 March 2020 and the partners decided to pay an annuity of R45 000 to the employee's wife to help with the maintenance of their three minor children.) 4. The block of flats needed a new coat of paint, therefore Rachel organised painters to paint the block during November 2020. 4 partnership. 3. Salaries and wages expense consists out of the following costs: Salary to Monica Salary to Rachel Salaries to other employees Bonus to Monica R 315 000 385 000 640 000 180 000 HTAX331-1-Jul-Dec2021-SA1-SUPP-JM-V3-24012021 Bonus to Rachel 220 000 Bonuses to employees 244 500 Partnership contributions to pension fund on behalf of partners and employees (7.5% of their salaries) 100 500 45 000 Annuity to former employee's dependents (A former employee died on 1 March 2020 and the partners decided to pay an annuity of R45 000 to the employee's wife to help with the maintenance of their three minor children.) 4. The block of flats needed a new coat of paint, therefore Rachel organised painters to paint the block during November 2020. 5. Depreciation was calculated on the washing machines in the flats. According to Interpretation Note 47, the write-off period is 5 years. The policy of the partnership is to depreciate assets in line with the various write-off periods as indicated in Interpretation Note 47. Required 1.1 Demonstrate to Samantha, by using calculations and references to the Act(s), what the tax implications will be in relation to the block of flats and goodwill when selling her share in the partnership to Rachel. You can assume Samantha has some tax background, so you won't need to explain everything in layman's terms. (10 marks) 1.2 Calculate the taxable income of the partnership that will need to be apportioned to Monica and Rachel for the 2021 year of assessment and what each partner must include as their portion of the taxable partnership profit. Substantiate your answers and calculations with references to the Act(s). (15 marks) 1.3 Show the total effects of the bad debts written off and bad debts recovered on Monica and Rachel's calculation of their taxable income for the 2021 year of assessment. (7 marks) 5 HTAX331-1-Jul-Dec2021-SA1-SUPP-JM-V3-24012021