QUESTION 2 (40 marks)

You have been asked to assist the tax department with the tax calculation of Horizon (Pty) Ltd (Horizon). Horizon is a company that manufactures office equipment and they have a March year-end. They import certain items used in the manufacturing process. You are presented with the following Statement of Comprehensive Income for the year ended 31 March 2021:

	NOTE	R
GROSS PROFIT		3 950 750
OTHER INCOME:
FOREIGN DIVIDEND RECEIVED	1	74 000
INTEREST RECEIVED (LOCAL BANK ACCOUNT)	2	6 800
RENTAL INCOME	3	10 400
PROFIT WITH SALE OF VEHICLE	6.4	12 500
OTHER EXPENSES:
FOREIGN TAXES IN RESPECT OF FOREIGN DIVIDEND	1	- 6 000
RENT PAID	4	- 307 200
SALARIES AND WAGES	5	- 700 000
DEPRECIATION	6	- 485 000
OPERATING EXPENDITURE(DEDUCTIBLE FOR TAX PURPOSES)		- 123 000
IRRECOVERABLE DEBT	7	- 63 000
INSURANCE	8	- 218 400
PROFIT BEFORE TAX		2 151 850

Notes:

1. Horizon acquired an 8% shareholding in Canon (Pty) Ltd, an unlisted Botswana company, on 20 March 2019. Canon (Pty) Ltd declared and paid a dividend to its shareholders on 19 May 2020. Horizon consequently received a net dividend of R68 000 (correctly converted to Rand), representing the net dividend after Canon (Pty) Ltd deducted withholding tax of R6 000, which was paid to Botswanas tax authority.

2. Interest earned on business bank account with a bank in the RSA.

3. Horizon decided to purchase a new and unused shop (building) in October 2020 to assist with the walk-in purchases, at a price of R1 105 000. A portion of this building is leased out to an accountant at R5 200 per month.

4. Horizon rents a piece of land for R25 600 per month from 1 April 2020 for 10 years. In terms of the lease agreement, they are required to erect a factory on the piece of land for the value of R1 990 000. They spent R1 860 000 during 2021 on the erection of the building. The building was completed and brought into use on the 31 October 2020.

5. Salaries and wages consist of the following amounts:

5.1.Net salaries and wages amounting to R579 000 paid to employees.

5.2.Employees tax amounting to R121 000 in respect of salaries and wages paid to SARS.

6. Depreciation was recognised in accordance with the accounting policy of Horizon on the following assets:

6.1.Horizon acquired tools on 1 March 2018 as a donation, at no cost, from one of the former directors. The tools had a market value of R124 500 on acquisition and has been applied exclusively in the manufacturing of furniture since 1 March 2018.

6.2.Horizon acquired a new fuel-powered portable generator, at R183 000 on 1 October 2020, in an attempt to limit the impact of load shedding on the manufacturing of furniture and administrative functions.

6.3.A new machine was purchased at R580 000 on 1 August 2020 and was only brought into use in the manufacturing process on 30 August 2020.

6.4.Horizon purchased a passenger vehicle and granted the right of use to the Sales Director. The vehicle was bought 1 June 2019 for R235 000. Horizon sold the vehicle to the Sales Director on 31 January 2021 for R165 000. At that time, the market value of the vehicle was R190 000.

7. Horizon purchased another companys debtors list to the value of R420 000 during October 2020, with the intention of recovering such debt as soon as possible to realise a profit. Horizon could only succeed in collecting 70% of this purchased debtor list by 31 March 2021. It was decided to write off the remaining 30% of the purchased debtors list as irrecoverable debt on 31 March 2021.

8. Horizon paid R218 400 to Outsure insurers for their premium for the period 1 July 2020 to 30 June 2021.

Required:

Calculate Horizon (Pty) Ltds taxable income for the year ending 31 March 2021. Show all your calculations and state the reason for why an amount is included or excluded. Include in your answer references to the specific Acts. (40 marks)