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QUESTION TWO (a) Specify the rules relating to payment of Income tax under the Pay As You earn rules. (5 marks) (ii) What are the consequences of failure to deduct and pay tax under PAYE? (3 marks) b) You are provided with the following details: 1. Installing a system of ventilation in the factory. 2. Legal expenses incurred when acquiring a new building 3. Giving the factory a fresh cost of plant 4. Replacing 200 tiles on a roof damaged by wind 5. Expenditure incurred in demolishing part of a wall to make room for a recently purchased machine. Required: (a) From an Income Tax perspective indicate for each of the above items whether it is capital or revenue expenditure. Explain. (5 marks) (b) Explain the role and functions of a Value Added Tax tribunal. (4 marks) 6 WePack (Pty) Lid (WePack) is a company which bulk washes and packs fruit and vegetables for farmers of the Western Cape region. The process is considered to be one of manufacture by the South African Revenue Service. During the year of assessment ended 31 March 2016, WePack recorded the following transactions. All amounts are stated exclusive of value added tax (VAT) where applicable. 1. Packing services invoiced for the 2016 year of assessment of R50,000,000. 2. One of the shunting machines (Machine A) broke down on 2 January 2016 and was beyond repair. Machine A had cost R400,000 when purchased on 1 May 2013. Machine A was insured and the insurance receipt was R250,000. A new shunting machine (Machine B) was purchased at a cost of R550,000. The insurance paid out a further R200,000 for the partially insured risk against damage or loss to farmer's produce. Farmer D's fruit had been damaged when the old shunting machine broke down and WePack paid him R350,000 as compensation for the loss of his produce. 3. One of the farmers (Farmer E) who uses WePack's services did not pay after one year and WePack wrote off his debt of R45,000 on 1 April 2015. WePack's doubtful debts list as at 31 March 2015 was R240,000 and as at 31 March 2016 was R220,000. The Commissioner for the South African Revenue Service (CSARS) permits doubtful debts at 25% of the list value. 4. Other assets held for the entire 2016 year of assessment were: (1) Office furniture costing R2,400,000 (spread over six years by the CSARS). (ii) Computer equipment costing R3,000,000 (spread over three years by the CSARS). (ili) Other machinery in its third year of use in a process of manufacture, which had cost R60,000,000. 5. On 1 November 2015, an office desk was purchased for the managing director, who is also a major shareholder in the company. The desk cost R27,000 and was immediately brought into use. The desk did not match the colour scheme in the office and on 1 February 2016 it was distributed as a dividend in specie to the managing director in his capacity as a shareholder. As a result of the increase in cost of solid wood, the market value of the desk on the date of its distribution was R30,000. 6. WePack paid provisional tax of R8,500,000 during the 2016 year of assessment. Required: Calculate the income tax and dividends tax liabilities of WePack (Pty) Ltd for the 2016 year of assessment. Note: You should list all of the items referred to in the question, indicating by the use of zero (0) any items of income which are exempt or amounts which are not tax deductible. (15 marks)5 The following information relates to Joe Entrepreneur and his ventures for the 2016 year of assessment. Employment Joe works in a full-time position as a manager of a large corporation. He earns a salary of R70,000 per month. There are no fringe benefits with this position. Employees tax of R250,000 was withheld by his employer for the 2016 year of assessment. Rental trade Some years ago, Joe began trying to earn additional income from renting out a house which he had inherited. His rental trading results for the 2013 to 2016 years of assessment have been as follows: 2016 2015 2014 2013 Rental income 120,000 75,000 100,000 30,000 Running costs (73,000) (65,000) (50,000) (25,000) Repairs (75,000) (20,000) (3,000) (12,000) Taxable income/assessed loss (28,000) (10,000) 47,000 (7,000) The losses for the 2015 and 2013 years of assessment were utilised against Joe's other income. Joe has made no submissions to the South African Revenue Service with respect to any of the losses from his rental trade. Plumbing trade After making a profit from the rental trade in the 2014 year of assessment, Joe decided to train as a plumber and offer emergency after-hours service. His training was completed in 2014 and since then he has been acquiring tools, a vehicle and the branding for Joe's Plumbing'. Joe started trading as a plumber in March 2015. He is not registered for value added tax (VAT). To buy some of the initial equipment for this trade, Joe borrowed R200,000 from his bank on 1 May 2014. On 1 June 2014, he spent R75,000 in acquiring plumbing tools (none of which cost less than R7,000 as all are parts of sets). On 1 October 2014, Joe purchased a vehicle for R170,000. The branding for the vehicle, completed in February 2015, cost a further R30,000. For the 2015 year of assessment, interest on the loan amounted to R15,600. Although during the 2016 year of assessment Joe's business started slowly, by February 2016, he was working most weekends and for the 2016 year of assessment he earned R55,000. He purchased further tools costing R30,000 (all loose tools costing less than R7,000) during the 2016 year of assessment. Interest on the loan for the 2016 year of assessment was R15,700. The Commissioner allows vehicles to be written off over four years and plumbing tools over five years. Required: (a) Calculate the balance of pre-trade expenditure qualifying for deduction by Joe Entrepreneur on 1 March 2015, when he began trading as a plumber. (3 marks) (b) State, giving reasons, whether the loss from Joe's rental trade for the 2016 year of assessment must be ring fenced or is available to be set off against income from other trades. (2 marks) (c) Calculate Joe's income tax liability for the 2016 year of assessment, giving a brief explanation of the treatment of any losses. (10 marks) (15 marks)