Question
Coolies (Pty) Limited which manufactures cool drinks purchased Competitor (Pty) Ltd, a competitor company (also a manufacturer of cool drinks) which had an assessed loss
Coolies (Pty) Limited which manufactures cool drinks purchased Competitor (Pty) Ltd, a
competitor company (also a manufacturer of cool drinks) which had an assessed loss of R20 million. Within two weeks of purchasing the shares of Competitor, the marketing director of Coolies informed the board of directors that Coolies would not have sufficient
manufacturing capacity to supply the market with the demand for Coolies production
expected at Christmas.
At the meeting, the board of directors decided that the excess manufacturing capacity of
Competitor would be used to manufacture Coolies products.
The financial director of Coolies who had recently completed the Advanced Programme
in Taxation at Unisa recommended the following to the board:
a) Coolies would enter into an agreement with Competitor whereby Competitor
would be appointed an authorised manufacturer of Coolies products.
b) Competitor would also be appointed the sole distributor of Coolies products
(including other products manufactured by Coolies).
c) The profit accruing to the company over the next twelve months as a result of (a)
above is estimated to amount to R12 million whilst the profit accruing as a result
of (b) above would be in the region of R8 million.
50
d) The effect of the agreements would be that the Coolies Group would be able to
reduce the tax payable in the next financial year by some R5,6 million.
e) When the assessed loss had been utilised in full the manufacturing and sole
distributorship rights of Competitor would be cancelled and the business of
Competitor would then become a division of Coolies.
The board agreed to the financial director's proposal and the proposal was
implemented.
In the year after Competitor became a division of Coolies, the Commissioner attacked
the scheme under section 103(2).
YOU ARE REQUIRED TO:
Discuss the nature and extent of the defences, if any, that Competitor and Coolies could
invoke in objecting to an assessment in which the Commissioner applies the provisions
of section 103(2) of the Income Tax Act to the transactions.
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