Question $125$ Marks

Study the scenario and complete the question that follows:

You are a junior tax consultant at a firm of accountants and your supervisor has asked you to attend to the following query from a client:

Farmer Henk

Henk Marlow farms cattle and maize on his farm in the Eastern Cape. His bookkeeper has prepared the following statement of income and expenditure for his farming operations for the $2024$ year of assessment and she has asked you to calculate Henk$$s taxable income. Henk is registered as a VAT vendor. All amounts exclude VAT unless otherwise stated.

R

Income

Sales:

Cattle $1285000$

Maize $1550000$

$2835000$

Expenditure

Salaries and wages $665000$

Cost of transporting cattle to the abattoir $26900$

Electricity and fuel $267000$

Feed for animals $193000$

Seed and fertiliser $145000$

Other farm expenses $($all tax deductible$)139719$

Soil erosion prevention $65675$

New dam $85000$

Farm office conversion $68750$

Purchase of personal computer $60000$

Purchase of bus $999000$

Purchase of combine harvester $1428000$

Interest on land bank loan $160000$

$4303044$

Notes:

$1.$ In August $2023,$ Henk was forced to sell $30$ heads of cattle because of severe drought conditions. He received R$425000$ from the sale, which is included in the amount of R$1285000$ shown above as income from cattle sales. The remaining cattle sales were made to the local abattoir.

$2.$ During May $2023,$ Henk decided to build an additional dam on his farm. The total cost of the dam was R$145000$ and Henk received a subsidy of R$60000$ from the government towards the cost of the dam.

$3.$ Henk had an old, disused cottage on the farm that was built at a cost of R$75000$ in $2001.$ Henk decided to convert it into a farm office. The conversion was completed, and the office was brought into use on $1$ November $2023.$

$4.$ The opening and closing stock of livestock and produce, which is not included in the income and expenditure statement above, was as follows:

Opening stock Closing stock

Bulls $105$

Cows $15090$

Heifers $320105$

$5.$ The standard values and market values of the livestock are as follows:

Standard value

Market value per head

R R

Bulls $50100000$

Cows $4030000$

Heifers $3018000$

$6.$ On $28$ February $2023,$ the market value of harvested maize on hand was R$610000$ and the cost of production was R$250000.$ The market value of maize not yet harvested on $28$ February $2023$ was R$850000$ and the cost of production was R$260000.$

On $29$ February $2024,$ the market value of harvested maize on hand was R$745000$ and the cost of production was R$275000.$ The market value of maize not yet harvested on $29$ February $2024$ was R$980000$ and the cost of production was R$285000.$

$7.$ The bookkeeper has advised you that during the $2024$ year of assessment Henk inherited $7$ bulls. He donated $2$ cows to the local school $($not a PBO$)$ for its fete, $3$ bulls were slaughtered for rations for farm labourers and $2$ bulls were slaughtered for consumption by Henk and his family. The slaughtered bulls had been purchased at a cost of R$63000.8$ cows died from natural causes.

$8.$ The new personal computer brought into use on $1$ December $2023$ and is used in the farm office for preparing financial and other records for the farm.

$9.$ Henk purchased a $20-$seater bus at a cost of R$999000($including VAT$),$ for use in transporting farm workers from their homes to the farm and back again. The bus was brought into use on $1$ July $2023.$

$10.$ On $25$ February $2023$ Henk purchased and brought into use a new combine harvester for R$1428000($including VAT$).$ The bookkeeper has not calculated any allowances on the combine harvester.

$11.$ Henk raised a loan from the Land Bank to fund his capital purchases. Interest on the loan for the year is R$160000.$ Henk did not make any repayments on the loan during the year.

SARS accepts the following write$-$off periods $($BGR $7)$:

Type of asset Write off period

$($years$)$

Personal computers $3$

Combine harvesters $6$

Passenger buses $4$

Source: Arendse, J$.2024$

Required:

Calculate the taxable income of Henk Marlow for the year of assessment ended $29$ February $2024.$

$(25$ Marks$)$