economics

2 Cook Lid is a newly registered value added tax (VAT) vendor and the directors have approached you for information on certain aspects of VAT as follows. The company does not acquire or sell second-hand goods. (a) The average value of each invoice raised by Cook Lid is R10,000 but the company sometimes raises invoices for amounts of around R3,000. Cook Lid's customers include both VAT and non-VAT vendors. (1) The directors wish to know what information is required to be presented on a full VAT invoice issued by the company. (3 marks) (ii) The directors have also heard that abridged VAT invoices may be issued in certain circumstances and wish to understand when such an invoice can be issued and what the difference is between this and a full VAT invoice. (2 marks) (b) Some customers only pay Cook Lid after 90 days. The directors wish to know when the VAT output will arise in respect of supplies to these customers. (1 mark) (c) The directors wish to understand the consequences of making a late payment of VAT to the South African Revenue Service (SARS). (1 mark) (d) Cook Lid's first two-month VAT period ended on 30 November 2015. During this period the following transactions occurred: A motor car for the company pool was acquired for R275,000 from a VAT registered car dealership. An invoice for R12,000 from the venue where the annual staff function was held was received and paid. A customer of Cook Lid was put into liquidation and a debt owing to Cook Lid from this customer of R45,600 was written off. The directors wish to understand whether any of these transactions will result in an input VAT claim. (3 marks) Required: Provide explanations to address each of the value added tax (VAT) queries (a) to (d) raised by the directors of Cook Ltd. Note: The split of the mark allocation is shown against each of the queries above. (10 marks)Section B - ALL SIX questions are compulsory and MUST be attempted Please write your answers to all parts of these questions on the lined pages within the Candidate Answer Booklet. 1 Jessica is 28 years old and recently completed her post-graduate studies. She left her former employer to start a new job on 1 March 2014 at an increased salary of R71,200 per month. Jessica's new employer deducted R255,000 in employees' tax evenly over the 2015 year of assessment. Jessica also has a hobby business which she carries out on weekends. The annual profit from the business (after deductible expenses) for the 2015 year of assessment was R245,600. Jessica had based her first provisional tax payment on the basic amount of R500,000 from the 2013 year of assessment when her hobby business had realised a loss. This estimate provided for a nil payment on submission of her return. Her second provisional tax payment was based on estimated taxable income of R850,000. As Jessica had not had time to reconcile the financial records of her hobby business, she had guessed that, at best, it would break even or make a small profit. Jessica was notified on 30 November 2015 of her assessment for the 2015 year of assessment via the electronic filing system. She noted that a penalty and interest on the amount owing had been levied. Required: (a) Calculate Jessica's second provisional payment based on her estimate of taxable income of R850,000. (2 marks) (b) Calculate Jessica's normal tax liability for the year of assessment ended 28 February 2015, excluding any penalties and interest. (3 marks) (c) Calculate the penalties and interest which would have been charged on Jessica in respect of the underestimate of provisional tax. Note: You should assume that the prescribed rate of interest is 8%. (5 marks) (10 marks)5 ProBore Lid is a company specialising in the drilling of wellpoints and boreholes. The company operates only in South Africa. ProBore Ltd is registered as a value added tax (VAT) vendor. The company is considered a small business corporation for income tax purposes. The Commissioner for the South African Revenue Service (SARS) considers the drilling of wellpoints and boreholes to be a process of manufacture. The company foremen are all trained to divine for water. The company guarantees that, if a foreman has successfully divined for water, water will be found. All amounts received are refundable if the company subsequently does not find water but deposits are not held separately from the company's other funds and the monies are used immediately in the business. The company requires an upfront deposit on acceptance of a quote. During the 2015 year of assessment, ProBore Lid recorded the following transactions. All amounts are stated exclusive of value added tax (VAT) where applicable. (i) Sales to customers in South Africa for completed boreholes and wellpoints amounted to R15,280,000. (ii) At the year end, teams were working on two jobs (Job A and Job B). The deposits received for the jobs prior to the year end amounted to R130,000 for Job A and R200,000 for Job B. (iii) At the end of the prior year of assessment (the 2014 year of assessment) one job was nearly complete. However, in April 2014, the foreman reported that he had hit rock formations. Consequently, the job was dismissed and the deposit of R120,000 was refunded to the customer during the 2015 year of assessment. (iv) During the year, a foreman was dismissed from the company as he had entered into a dishonest transaction with a friend. The foreman had drilled a borehole for his friend following receipt of a deposit and then notified the company that no water had been discovered. The company therefore refunded the deposit to the foreman's friend. On discovery that water had been found, the company dismissed the foreman and sued the foreman's friend for full payment. Total legal costs of R85,000 were incurred: R25,000 in respect of a claim of unfair dismissal by the foreman and the balance for the case against the customer. The company was successful in both cases and received the full proceeds of R189,000 from the foreman's friend (v) In another case, a customer claimed that ProBore Ltd's installation team had not taken due care to prevent the drilling slurry from reaching his swimming pool. After internal investigation, it was found that the team had not dug the drill pit deep enough and so it had overflowed into the customer's swimming pool. The company and the customer reached an out-of-court settlement of R90,000 to restore the pool. No external legal costs were incurred. (vi) The company conducted research and development activities with respect to a new type of drilling rig for drilling boreholes. The rig is fully automated to allow continuous drilling. The Department of Science and Technology has approved the development as a research and development project. The development costs incurred by ProBore Lid in the 2015 year of assessment included the following: (a) The salaries of the development team of R750,000; (b) Three prototypes built for testing purposes at a cost of R2,300,000; (c) The salaries of the security staff at the development warehouse of R220,000. (vii) The company acquired a new rig for R1,500,000 in May 2014 and a new digging machine for R3,000,000 in July 2014 for larger commercial jobs. The new rig replaced an older rig which had been acquired in April 2005 for R560,000. The new rig is larger and much more efficient. The old rig was sold in August 2014 for R570,000 to a competitor. (vili) Additional items of office equipment were acquired for R150,000, of which R25,000 was for items which were not part of a set and which individually cost less than R7,000. ProBore Lid also owns existing office equipment which was acquired in July 2013 at a cost of R130,000. ProBore Lid has an assessed capital loss brought forward of R55,000 from the 2014 year of assessment. 16 Required: Calculate the taxable income of ProBore Ltd for the year of assessment ended 31 March 2015 and show any losses carried forward to the year of assessment 2016. Note: Indicate clearly any items of income which are exempt or expenses which are not deductible by the use of a zero (0). (15 marks)4 Joseph incorporated a company, Baby Goods (Pty) Lid, in November 2013 and registered the new company for value added tax (VAT). Baby Goods (Pty) Lid will sell products for babies and infants. Following incorporation, Baby Goods (Pty) Lid started to acquire inventory for resale. As Baby Goods (Pty) Ltd had not yet secured shop premises, Joseph stored the inventory, which cost R500,000, in his garage at his home. On 15 February 2014, Baby Goods (Pty) Lid signed a lease agreement for a shop which took effect from 1 March 2014. The lease provides for a monthly rental payment of R15,000. The monthly rental is subject to annual review and the lease period is five years. The lease also specified that shop fittings to the value of R45,000 had to be installed by Baby Goods (Pty) Lid as the tenant. Joseph, representing the company, began working on the premises in March 2014 with a view to opening the store to the public on 1 April 2014. The shop fittings were completed on 31 March 2014 for a total cost of R50,000. Joseph moved Baby Goods (Pty) Lid's inventory into the store on 31 March 2014 and the company began trading on 1 April 2014. The Commissioner for the South African Revenue Service (SARS) has accepted that 1 April 2014 is the date when Baby Goods (Pty) Lid commenced to trade. In the period ended 28 February 2015, Baby Good (Pty) Lid made sales of R1,700,000 and acquired additional inventory of R550,000. Baby Goods (Pty) Lid also paid wages to the store manager of R250,000. An annual insurance premium of R70,000 was paid by Baby Goods (Pty) Lid on 2 April 2014 to insure the shop fittings and the inventory until 1 April 2015. On 28 February 2015, the value of Baby Good (Pty) Lid's closing inventory was R100,000. All values given are exclusive of VAT, where applicable. Apart from the sales, all other transactions took place with VAT vendors. Required: (a) Explain the treatment for income tax purposes of the expenditure incurred by Baby Goods (Pty) Led prior to 1 April 2014. (2 mark) (b) Calculate the taxable income of Baby Goods (Pty) Ltd for the period 1 April 2014 to 28 February 2015. Note: You should indicate clearly any items of income which are exempt or any expenses which are not deductible by the use of a zero (0). (6 marks) (c) Before signing the lease agreement for the shop premises, Baby Goods (Pty) Lid had been in discussions with another landlord. The terms of the alternative lease agreement were identical to the one eventually signed by Baby Goods (Pty) Lid except for the payment terms. Under the alternative lease agreement, Baby Goods (Pty) Lid would have been required to pay a premium of R200,000 on 1 March 2014 and a monthly rental of R10,000. Required: Calculate the tax deductions available in respect of the lease for the period 1 April 2014 to 28 February 2015 if Baby Goods (Pty) Ltd had signed this alternative agreement. (2 marks) (10 marks)3 (a) Explain the THREE possible methods which may be used to determine the base cost of a pre-valuation date asset including the circumstances in which a company is likely to use each of these. (3 marks) (b) Cape Town Advertising (Pty) Lid provides a number of advertising services. The company has recently moved from focusing on advertising services via posters and billboards to advertising online via social media. The company does not qualify as either a micro business or a small business corporation for the purposes of income tax. The company sold a billboard on its premises on 17 July 2014. The billboard had been damaged during a storm and insurance proceeds of R75,000 were received from the company's insurance provider prior to sale to cover the value lost as a result of the damage. The billboard was then sold to a scrap merchant for R50,000. The billboard had cost R150,000 on 12 January 2000. No capital allowances were claimed on this asset. On 29 June 2007, the company had installed lights on the billboard which illuminated the advertisement and provided a much better service to its customers to whom the advertising space was sold. These lights originally cost R20,000 and were still considered to add value to the billboard at the date of sale. The billboard was valued at R156,000 on 1 October 2001. Cape Town Advertising (Pty) Lid has no intention of replacing the billboard as their shift to advertising services via social media has largely replaced the need for a billboard for its customers. Required: Calculate Cape Town Advertising (Pty) Ltd's taxable capital gain or assessed capital loss for the 2015 year of assessment in respect of the billboard, using the time-apportioned base cost (TABC) method. (7 marks) (10 marks)