QUESTION 1 (50 Marks : 75 Minutes) Hilton Manufacturers (Pty) Limited, a resident of the Republic, was formed by Stephen Manning a South African resident who holds 75% of the shareholding. Five of Stephen's business friends each own 5% shareholding in Hilton Manufacturing (Pty) Limited, making up the 100% shareholding. Of the five minor shareholders, one is a full-time employee of Hilton Manufacturing (Pty) Limited. Hilton Manufacturing (Pty) Limited is not regarded as a small business corporation. The following information was extracted from the financial statements for the financial year ended 28 February 2021: Please note that all amounts exdude VAT. Please ignore VAT completely. Net income before adjusting for the following transactions) R1 280 000 Advertising (note 1) 112 000 Interest received from local investments & bank account 36 000 Interest incurred (note 2) 149 800 Cost of additional factory (note 3) 2 430 000 Bad debts (note 4) 6 300 Rentals incurred (note 5) 20 000 Premium incurred (note 5) 72 000 Improvements to leased property (note 5) 585 750 Annuity paid (note 6) 6 600 Foreign marketing expenditure (note 7) 25 940 Directors' salaries and fees paid (note 8) 496 000 Dividend dedared to members on 31 December 2020 20 000 Local investment dividend received on 30 November 2020 12 000 Drawings taken by Stephen Manning (note 9) 7 700 Notes: 1. Advertising expenditure consisted of advertising on TV and in local newspapers but also included an advance payment of R20 000 paid to a television network for a series of advertisements, due to appear throughout the 2022 year of assessment Induded in the R112 000 are the costs to produce the television advert which amounted to R42 000 and 3 digital Billboards which were erected at a cost of R12 000 each. 2. Interest (local) is made up of: R18 000 on a loan from Stephen Manning to finance machinery purchased R9 000 on a loan from Stephen Manning to finance the purchase of raw materials and trading stock R1 600 on a loan raised to finance the payment of the dividend R1 200 on a loan raised to finance the purchase of Machine A and interest was payable at a rate of R200 a month from 1 March 2020 to 31 August 2020 . R120 000 on a loan to finance the erection of the additional factory building, 3. On 31 May 2020 Hilton Manufacturing (Pty) Limited completed the additional factory which cost R2 430 000. The land in Pinetown was purchased in the 2020 year of assessment at a cost of R750 000. 4. Bad debts comprised the following: Trade debtor went insolvent during the year R5 200 A manager who left without repaying a loan | 300 A trade debtor who is rumoured to be in financial difficulty 800 R6 300 The Commissioner allows a 25% deduction of doubtful debts. 5. On 1 May 2020 Hilton Manufacturing (Pty) Limited entered into a 12-year lease agreement for factory premises adjacent to its own factory. The monthly rental was R2 000 but a lease premium of R72 000 was payable at the commencement of the lease. Hilton Manufacturing (Pty) Limited was obliged to effect improvements to this factory valued at R532 500. The improvements were completed on 30 June 2020 at a cost of R585 750. Although the factory was brought into use on 1 May 2020, the improvements which increased the industrial capacity of the factory by 25% was brought into use on 30 June 2020. 6. Hilton Manufacturing (Pty) Limited awarded an annuity of R7 200 (R600 per month) from 1 April 2020 to the widow of an employee who was killed in a freak accident. It is not the policy to award annuities but due to the widow's financial position, management agreed. 7. During the 2021 year of assessment, Hilton Manufacturing (Pty) Limited registered as an exporter. The following expenditure was incurred in relation to the export trade: Advertising in Namibia (trade journal) 340 Participating in a trade fair in Botswana 1 800 Capital costs to set up an agency in Turkey 25 940 8. Of the directors' salaries, Stephen Manning earned a salary of R288 000 and fees of R72 000. 9. Stephen Manning advanced Hilton Manufacturing (Pty) Limited certain interest-free loans. Certain expenses paid by Hilton Manufacturing (Pty) Limited on behalf of Stephen Manning are then deducted off these interest free loans as follows: Medical expenses 3 800 Retirement annuity fund contributions Life insurance premiums (personal) Domestic expenses 7 700 23 800 2 700 840 360 10. The fixed assets register revealed the following: Plant and machinery, all of which qualify for a section 12C allowance at a rate of 20% had a tax value of R150 000 on 1 March 2020 with an original cost of R250 000. Induded in this tax value of R150 000 was a machine that had cost R15 000 with a tax value of R10 000 on 1 March 2020 which was destroyed in a freak accident early on 1 March 2020. The machine had been purchased on 1 February 2019 and the insurance proceeds were R14 000. Machine A was purchased new for R18 000 on 31 March 2020. It was brought into use on 1 May 2020 after incurring additional installation costs of R2 500. A new delivery vehide was purchased at a cost of R176 000 and brought into use on 1 June 2020. It replaced the existing delivery vehicle that had a tax value of R8 000 (original cost R32 000, purchased on 1 March 2017) that was sold on 31 May 2020 for RS 000. The Commissioner approved a four-year write-off period for the delivery vehicle. YOU ARE REQUIRED TO 1. Calculate the normal tax liability of Hilton Manufacturing (Pty) Limited for the 2021 year of assessment Briefly explain why amounts are included or excluded from the calculation. (39 marks) 2. Calculate Stephen Manning's income tax payable for the 2021 year of assessment. Assume he has no other receipts and accruals and is 50 years old. (11 marks) QUESTION 1 (50 Marks : 75 Minutes) Hilton Manufacturers (Pty) Limited, a resident of the Republic, was formed by Stephen Manning a South African resident who holds 75% of the shareholding. Five of Stephen's business friends each own 5% shareholding in Hilton Manufacturing (Pty) Limited, making up the 100% shareholding. Of the five minor shareholders, one is a full-time employee of Hilton Manufacturing (Pty) Limited. Hilton Manufacturing (Pty) Limited is not regarded as a small business corporation. The following information was extracted from the financial statements for the financial year ended 28 February 2021: Please note that all amounts exdude VAT. Please ignore VAT completely. Net income before adjusting for the following transactions) R1 280 000 Advertising (note 1) 112 000 Interest received from local investments & bank account 36 000 Interest incurred (note 2) 149 800 Cost of additional factory (note 3) 2 430 000 Bad debts (note 4) 6 300 Rentals incurred (note 5) 20 000 Premium incurred (note 5) 72 000 Improvements to leased property (note 5) 585 750 Annuity paid (note 6) 6 600 Foreign marketing expenditure (note 7) 25 940 Directors' salaries and fees paid (note 8) 496 000 Dividend dedared to members on 31 December 2020 20 000 Local investment dividend received on 30 November 2020 12 000 Drawings taken by Stephen Manning (note 9) 7 700 Notes: 1. Advertising expenditure consisted of advertising on TV and in local newspapers but also included an advance payment of R20 000 paid to a television network for a series of advertisements, due to appear throughout the 2022 year of assessment Induded in the R112 000 are the costs to produce the television advert which amounted to R42 000 and 3 digital Billboards which were erected at a cost of R12 000 each. 2. Interest (local) is made up of: R18 000 on a loan from Stephen Manning to finance machinery purchased R9 000 on a loan from Stephen Manning to finance the purchase of raw materials and trading stock R1 600 on a loan raised to finance the payment of the dividend R1 200 on a loan raised to finance the purchase of Machine A and interest was payable at a rate of R200 a month from 1 March 2020 to 31 August 2020 . R120 000 on a loan to finance the erection of the additional factory building, 3. On 31 May 2020 Hilton Manufacturing (Pty) Limited completed the additional factory which cost R2 430 000. The land in Pinetown was purchased in the 2020 year of assessment at a cost of R750 000. 4. Bad debts comprised the following: Trade debtor went insolvent during the year R5 200 A manager who left without repaying a loan | 300 A trade debtor who is rumoured to be in financial difficulty 800 R6 300 The Commissioner allows a 25% deduction of doubtful debts. 5. On 1 May 2020 Hilton Manufacturing (Pty) Limited entered into a 12-year lease agreement for factory premises adjacent to its own factory. The monthly rental was R2 000 but a lease premium of R72 000 was payable at the commencement of the lease. Hilton Manufacturing (Pty) Limited was obliged to effect improvements to this factory valued at R532 500. The improvements were completed on 30 June 2020 at a cost of R585 750. Although the factory was brought into use on 1 May 2020, the improvements which increased the industrial capacity of the factory by 25% was brought into use on 30 June 2020. 6. Hilton Manufacturing (Pty) Limited awarded an annuity of R7 200 (R600 per month) from 1 April 2020 to the widow of an employee who was killed in a freak accident. It is not the policy to award annuities but due to the widow's financial position, management agreed. 7. During the 2021 year of assessment, Hilton Manufacturing (Pty) Limited registered as an exporter. The following expenditure was incurred in relation to the export trade: Advertising in Namibia (trade journal) 340 Participating in a trade fair in Botswana 1 800 Capital costs to set up an agency in Turkey 25 940 8. Of the directors' salaries, Stephen Manning earned a salary of R288 000 and fees of R72 000. 9. Stephen Manning advanced Hilton Manufacturing (Pty) Limited certain interest-free loans. Certain expenses paid by Hilton Manufacturing (Pty) Limited on behalf of Stephen Manning are then deducted off these interest free loans as follows: Medical expenses 3 800 Retirement annuity fund contributions Life insurance premiums (personal) Domestic expenses 7 700 23 800 2 700 840 360 10. The fixed assets register revealed the following: Plant and machinery, all of which qualify for a section 12C allowance at a rate of 20% had a tax value of R150 000 on 1 March 2020 with an original cost of R250 000. Induded in this tax value of R150 000 was a machine that had cost R15 000 with a tax value of R10 000 on 1 March 2020 which was destroyed in a freak accident early on 1 March 2020. The machine had been purchased on 1 February 2019 and the insurance proceeds were R14 000. Machine A was purchased new for R18 000 on 31 March 2020. It was brought into use on 1 May 2020 after incurring additional installation costs of R2 500. A new delivery vehide was purchased at a cost of R176 000 and brought into use on 1 June 2020. It replaced the existing delivery vehicle that had a tax value of R8 000 (original cost R32 000, purchased on 1 March 2017) that was sold on 31 May 2020 for RS 000. The Commissioner approved a four-year write-off period for the delivery vehicle. YOU ARE REQUIRED TO 1. Calculate the normal tax liability of Hilton Manufacturing (Pty) Limited for the 2021 year of assessment Briefly explain why amounts are included or excluded from the calculation. (39 marks) 2. Calculate Stephen Manning's income tax payable for the 2021 year of assessment. Assume he has no other receipts and accruals and is 50 years old. (11 marks)