ness corporation as defined in the Income Tax Act PM is a registered VAT vendor and all amounts are 40 ASSIGNMENT 2: SEMESTER 2 QUESTION 1 (40 marks, 72 minutes) This question comprises of two unrelated parts. PART A (38 marks, 68 minutes) Punch Master (Pty) Ltd (PM) is a South African company that manufactures mining equipment. The best pany has been approved as a manufacturer by SARS for Income tax purposes. PM is not a small buste exclusive of VAT, unless specifically stated otherwise. The company's year of assessment ended on 31 March 2020 You are presented with the following information by the financial director for the tax year ended on 31 March 2020 with the request to calculate the normal income tax liability of PM for the 2020 year of assessment: 1. The calculated taxable income for the 2020 year of assessment is R2 783 276 before the tax impli- cations of the items listed in 2 to 12 below have been taken into account 2. Trading stock comprised the following: 3. 4. Opening stock - 01/04/2019 Closing stock - 31/03/2020 Cost price R587 395 Cost price R689 261 Market value R572 451 Market value R693 215 Opening and closing stock were accounted for at the cost price thereof in the calculated taxable income for 2020 in note 1 above. PM contributed R355 000 towards the pension fund for all employees. PM has made a restraint of trade payment of R900 000 on 15 November 2019 to Mr. DJ Spanner, one of the mechanical engineers who has resigned on 30 October 2019 to start his own engineering consulting business. The restraint agreement between HP and Mr. DJ Spanner is effective from 1 December 2019 for five years. The full amount was taxable in the hands of Mr. DJ Spanner. The outstanding debtors balance as at 31 March 2020 was R250 000 after all write-offs were made. The financial manager drew up a list of doubtful debts as at 31 March 2020, which amounted to R127 000. PM Ltd does not use IFRS 9 accounting standards for financial reporting purposes and the debtors that have been in arrears as at 31 March 2020 are as follows: 5. 6. 60 days 90 days 120 days R25 000 R52 000 R63 000 During the 2019 year of assessment, SARS granted a doubtful debt allowance of R75 000 to PM. PM acquired a patent for manufacturing new hydraulic drills on 15 September 2019 at a total cost of R85 500 (including VAT). The patent was duly registered on 1 October 2019. PM donated R150 000 to a registered public benefit organization on 1 December 2019. The neces- sary section 18A income tax certificate was received on 15 January 2020. The full amount donated, was deducted in the calculation of the taxable income in note 1 above. 7 41 TAX3701/101 ASSIGNMENT 2 SEMESTER 2 (continued) 8 The following assets were purchased by PM and were still in use on 31 March 2019 New manufacturing machine, KP. was purchased on 5 May 2016 at a total cost of R450 000 (including VAT). A special platform had to be built at a total cost of R21 600 to mount machine KP Machine KP was brought into use on 1 June 2018 . Three second-hand computers were purchased on 1 July 2019 at a total cost of RB 500 each and were brought into use on the same day in the administration office PM commenced with the erection of a low-cost residential unit on 15 July 2018 at a cost of R260 000. On 1 February 2019 the unit was sold to an employee for R220 000 on an interest free loan account from PM. The employee repays R50 000 on 1 November 2019, SARS allows for the following write-off periods of capital assets in terms of Binding General Ruling No.7: Manufacturing equipment Computer equipment 4 years 3 years 9 PM continuously strive to improve the quality of its mining equipment manufactured On 1 September 2019. PM incurred initial research and development costs of R160 000 in designing a new robotic hydraulic press. The Minister of Science and Technology approved the research and development project on 1 October 2019. After this date, but before the close of the 2020 year of assessment, the following was expended by PM wholly or mainly for research and development: Salaries for research personnel - R250 000 New specialised computers purchased at a total cost of R120 000 A new building costing R1 350 000 was purchased on 1 November 2019 and 80% of this building is used for research purposes and 20% for administration purposes. . . 10. PM incurred the following legal expenses: . 11. R17 500 paid to Axe Attorneys to collect outstanding debtors R3 450 paid to Spade Attorneys to attend to a private issue for one of the company's directors. PM imported a new specialised manufacturing machine, Machine XP, from Germany at a total cost of 52 500 on 1 November 2019 (transaction date) and brought it into use on the same date. PM had to pay customs and excise duty of R25 750 on the importation of Machine XP PM made an Initial payment of 30 250 on 15 November 2019 and paid the balance of the purchase price on 31 January 2020. The following exchange rates applied: Date Exchange rate of Rand for 1 1 November 2019 R17.81 15 November 2019 R18,03 31 January 2020 R17,75 12. 13 PM has an assessed loss of R46 237 carried forward from the 2019 year of assessment. MARKS REQUIRED: Calculate the normal income tax liability of Punch Master (Pty) Ltd for the year of assessment ended 31 March 2020 by starting with the taxable income amount of R2 783 276. Please provide a brief reason when adjusting/reversing a transaction. Round all amounts off to the nearest Rand. 38 ness corporation as defined in the Income Tax Act PM is a registered VAT vendor and all amounts are 40 ASSIGNMENT 2: SEMESTER 2 QUESTION 1 (40 marks, 72 minutes) This question comprises of two unrelated parts. PART A (38 marks, 68 minutes) Punch Master (Pty) Ltd (PM) is a South African company that manufactures mining equipment. The best pany has been approved as a manufacturer by SARS for Income tax purposes. PM is not a small buste exclusive of VAT, unless specifically stated otherwise. The company's year of assessment ended on 31 March 2020 You are presented with the following information by the financial director for the tax year ended on 31 March 2020 with the request to calculate the normal income tax liability of PM for the 2020 year of assessment: 1. The calculated taxable income for the 2020 year of assessment is R2 783 276 before the tax impli- cations of the items listed in 2 to 12 below have been taken into account 2. Trading stock comprised the following: 3. 4. Opening stock - 01/04/2019 Closing stock - 31/03/2020 Cost price R587 395 Cost price R689 261 Market value R572 451 Market value R693 215 Opening and closing stock were accounted for at the cost price thereof in the calculated taxable income for 2020 in note 1 above. PM contributed R355 000 towards the pension fund for all employees. PM has made a restraint of trade payment of R900 000 on 15 November 2019 to Mr. DJ Spanner, one of the mechanical engineers who has resigned on 30 October 2019 to start his own engineering consulting business. The restraint agreement between HP and Mr. DJ Spanner is effective from 1 December 2019 for five years. The full amount was taxable in the hands of Mr. DJ Spanner. The outstanding debtors balance as at 31 March 2020 was R250 000 after all write-offs were made. The financial manager drew up a list of doubtful debts as at 31 March 2020, which amounted to R127 000. PM Ltd does not use IFRS 9 accounting standards for financial reporting purposes and the debtors that have been in arrears as at 31 March 2020 are as follows: 5. 6. 60 days 90 days 120 days R25 000 R52 000 R63 000 During the 2019 year of assessment, SARS granted a doubtful debt allowance of R75 000 to PM. PM acquired a patent for manufacturing new hydraulic drills on 15 September 2019 at a total cost of R85 500 (including VAT). The patent was duly registered on 1 October 2019. PM donated R150 000 to a registered public benefit organization on 1 December 2019. The neces- sary section 18A income tax certificate was received on 15 January 2020. The full amount donated, was deducted in the calculation of the taxable income in note 1 above. 7 41 TAX3701/101 ASSIGNMENT 2 SEMESTER 2 (continued) 8 The following assets were purchased by PM and were still in use on 31 March 2019 New manufacturing machine, KP. was purchased on 5 May 2016 at a total cost of R450 000 (including VAT). A special platform had to be built at a total cost of R21 600 to mount machine KP Machine KP was brought into use on 1 June 2018 . Three second-hand computers were purchased on 1 July 2019 at a total cost of RB 500 each and were brought into use on the same day in the administration office PM commenced with the erection of a low-cost residential unit on 15 July 2018 at a cost of R260 000. On 1 February 2019 the unit was sold to an employee for R220 000 on an interest free loan account from PM. The employee repays R50 000 on 1 November 2019, SARS allows for the following write-off periods of capital assets in terms of Binding General Ruling No.7: Manufacturing equipment Computer equipment 4 years 3 years 9 PM continuously strive to improve the quality of its mining equipment manufactured On 1 September 2019. PM incurred initial research and development costs of R160 000 in designing a new robotic hydraulic press. The Minister of Science and Technology approved the research and development project on 1 October 2019. After this date, but before the close of the 2020 year of assessment, the following was expended by PM wholly or mainly for research and development: Salaries for research personnel - R250 000 New specialised computers purchased at a total cost of R120 000 A new building costing R1 350 000 was purchased on 1 November 2019 and 80% of this building is used for research purposes and 20% for administration purposes. . . 10. PM incurred the following legal expenses: . 11. R17 500 paid to Axe Attorneys to collect outstanding debtors R3 450 paid to Spade Attorneys to attend to a private issue for one of the company's directors. PM imported a new specialised manufacturing machine, Machine XP, from Germany at a total cost of 52 500 on 1 November 2019 (transaction date) and brought it into use on the same date. PM had to pay customs and excise duty of R25 750 on the importation of Machine XP PM made an Initial payment of 30 250 on 15 November 2019 and paid the balance of the purchase price on 31 January 2020. The following exchange rates applied: Date Exchange rate of Rand for 1 1 November 2019 R17.81 15 November 2019 R18,03 31 January 2020 R17,75 12. 13 PM has an assessed loss of R46 237 carried forward from the 2019 year of assessment. MARKS REQUIRED: Calculate the normal income tax liability of Punch Master (Pty) Ltd for the year of assessment ended 31 March 2020 by starting with the taxable income amount of R2 783 276. Please provide a brief reason when adjusting/reversing a transaction. Round all amounts off to the nearest Rand. 38