PART A North Point Limited (hereafter North Point) is an unlisted company incorporated in South Africa with a 31 December financial year end North Point has three streams of revenue from three divisions Property development and sale of residential and commercial properties (retail, office and industrial use), Commercial Property Rental income, Estate Agent Academy Tuition North Point is a VAT vendor All amounts include VAT unless otherwise stated All suppliers are domestic suppliers and are VAT vendors, unless otherwise stated The three divisions are not separate vendors for VAT purposes Property development and sale division During the 2019 year of assessment, North Point acquired a portion of land in order to build residential townhouses on the land The plan was to build 85 units of the same size and structure North Point managed to complete 85 units by the end of the year Out of the 85 completed units, 60 units have been sold by the end of the year and the owners had taken occupation of the units One completed unit is used by North Point as show unit (a unit used by the developer to exhibit to prospective buyers how the other units will look like) The plan is to also sell the show unit at discounted price once all the other units have been sold The cost of land was equally allocated to each unit Unit Type Cost of Constructing the unit (including land portion) Selling Price Units completed Units sold TYPE A R747 500 R971 750 85 60 In addition to the above, North Point had other properties which cost R18 700 000 (excluding VAT) which were still on hand at the end of 2018 Included in the closing cost were the following A building which was previously acquired on 20 June 2017 in order to develop and sell as separate residential units The cost of the building was R3 192 000 (excluding VAT) On 12 May 2019, North Point decided to donate this building to the University of Johannesburg (before any development was made) in order for the building to be used as student accommodation by the University of Johannesburg The market value of the building at the date of donation was R2 415 000 (excluding VAT) North Point received a section 18A receipt in respect of this donation Excluded from the closing cost number, due to uncertainty of the actual value was A small residential complex Riverfield which had 10 units The cost of this complex was R18 126 000 and it was completed on 30 January 2016 North Point has been struggling to sell these units as the banks are not willing to finance any potential customers who would like to buy the units The contracted builder involved in constructing this complex did not comply with some of the technical requirements of the National Home Builders Registration Council (NHRBC) North Point estimated that the value of the complex had depreciated to R8 million (excluding VAT) at 31 December 2018 The loan to finance the erection of the residential complex Riverfield was obtained from Mazakhele Limited who financed the loan The directors of Mazakhele Limited decided to write off the balance of the loan due to cash flow difficulties experienced by North Point as a result of failure to sell the units The balance of the loan written off was R9 700 000 Sales Manager, Susan Moonsamy, resigned on 31 March 2019 North Point paid her a lump sum amounting to R320 000 with the condition that she does not work in real estate in the next two years North Point currently has two (2) intern estate agents under their learnership programme The contracts with all intern estate agents are registered with Services SETA The details of the contracts are as follows Name of the learner NQF Level Contract start date Contract duration Completion date Salary per month Nomonde Mnguni (always been disabled) 7 1 June 2017 24 months 31 May 2019 R6 000 Stephen Beukes (no disability) 6 1 March 2019 36 months 28 February 2022 R5 000 Nomonde Mnguni successfully completed her learnership programme on 31 May 2019 and was not offered permanent employment by North Point PART A A Property development and sale division Calculate, with reasons where necessary, the Income Tax implications arising from transactions in the property development and sale division of North Point Limited for the 2019 year of assessment Make reference to section numbers in the Income Tax Act in your answer Donations tax must be ignored (23) Residential complex in Riverfield Briefly discuss the circumstances that North Point and the Commissioner would have considered to correctly value the closing stock value of the Riverfield complex (5)

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Jul 26, 2024

PART A North-Point Limited (hereafter North-Point) is an unlisted company incorporated in South Africa with a 31 December financial year-end. North-Point has three streams of

PART A

North-Point Limited (hereafter North-Point) is an unlisted company incorporated in South Africa with a 31 December financial year-end. North-Point has three streams of revenue from three divisions:

Property development and sale of residential and commercial properties (retail, office and industrial use),
Commercial Property Rental income,
Estate Agent Academy Tuition.

North-Point is a VAT vendor. All amounts include VAT unless otherwise stated. All suppliers are domestic suppliers and are VAT vendors, unless otherwise stated. The three divisions are not separate vendors for VAT purposes.

Property development and sale division

During the 2019 year of assessment, North-Point acquired a portion of land in order to build residential townhouses on the land. The plan was to build 85 units of the same size and structure. North-Point managed to complete 85 units by the end of the year. Out of the 85 completed units, 60 units have been sold by the end of the year and the owners had taken occupation of the units. One completed unit is used by North-Point as show unit (a unit used by the developer to exhibit to prospective buyers how the other units will look like). The plan is to also sell the show unit at discounted price once all the other units have been sold. The cost of land was equally allocated to each unit.

Unit Type	Cost of Constructing the unit (including land portion)	Selling Price	Units completed	Units sold
*TYPE A*	R747 500	R971 750	85	60

In addition to the above, North-Point had other properties which cost R18 700 000 (excluding VAT) which were still on hand at the end of 2018. Included in the closing cost were the following:

A building which was previously acquired on 20 June 2017 in order to develop and sell as separate residential units. The cost of the building was R3 192 000 (excluding VAT). On 12 May 2019, North-Point decided to donate this building to the University of Johannesburg (before any development was made) in order for the building to be used as student accommodation by the University of Johannesburg. The market value of the building at the date of donation was R2 415 000 (excluding VAT). North-Point received a section 18A receipt in respect of this donation.

Excluded from the closing cost number, due to uncertainty of the actual value was:

A small residential complex Riverfield which had 10 units. The cost of this complex was R18 126 000 and it was completed on 30 January 2016. North-Point has been struggling to sell these units as the banks are not willing to finance any potential customers who would like to buy the units. The contracted builder involved in constructing this complex did not comply with some of the technical requirements of the National Home Builders Registration Council (NHRBC). North-Point estimated that the value of the complex had depreciated to R8 million (excluding VAT) at 31 December 2018.

The loan to finance the erection of the residential complex Riverfield was obtained from Mazakhele Limited who financed the loan. The directors of Mazakhele Limited decided to write-off the balance of the loan due to cash flow difficulties experienced by North-Point as a result of failure to sell the units. The balance of the loan written off was R9 700 000.

Sales Manager, Susan Moonsamy, resigned on 31 March 2019. North-Point paid her a lump-sum amounting to R320 000 with the condition that she does not work in real estate in the next two years.

North-Point currently has two (2) intern estate agents under their learnership programme. The contracts with all intern estate agents are registered with Services SETA. The details of the contracts are as follows:

Name of the learner

NQF Level

Contract

start date

Contract duration

Completion

date

Salary per month

Nomonde Mnguni

(always been disabled)

1 June 2017

24 months

31 May 2019

R6 000

Stephen Beukes

(no disability)

1 March 2019

36 months

28 February 2022

R5 000

Nomonde Mnguni successfully completed her learnership programme on 31 May 2019 and was not offered permanent employment by North-Point.

PART A

A. Property development and sale division

Calculate, with reasons where necessary, the Income Tax implications arising from transactions in the property development and sale division of North-Point Limited for the 2019 year of assessment. Make reference to section numbers in the Income Tax Act in your answer. Donations tax must be ignored. (23)
Residential complex in Riverfield: Briefly discuss the circumstances that North-Point and the Commissioner would have considered to correctly value the closing stock value of the Riverfield complex. (5)