QUESTION 3

Fabulous Fashion (Pty) Limited ('Fabulous Fashion'), a resident of the Republic of South Africa, manufactures high-quality, fashionable garments and is a wholly owned subsidiary of HipHop Limited. During Fabulous Fashion's 2023 year of assessment, which ended on 28 February 2023, Fabulous Fashion carried out the following transactions: Factory premises On 1 May 2022 Fabulous Fashion purchased a brand-new factory from a property developer. The factory was erected at a cost of R8 400000 , of which: - R7 200000 was for the factory buildings, and - R1 200000 for the land on which the factory was erected. Heavy-duty sewing machine On 1 January 2023 Fabulous Fashion purchased a new heavy-duty sewing machine at a cost of R34 000 . This sewing machine was brought into use by Fabulous Fashion on the same day. Second-hand machines On 1 April 2022 Fabulous Fashion purchased 14 industrial sewing machines from HipHop Limited at R28 000 each. Fabulous Fashion brought these sewing machines into use on that same day. An independent valuation was made on 1 April 2022 of the 14 industrial sewing machines, and it was confirmed that the total market value of these machines was R350 000. HipHop Limited purchased these sewing machines (which were used in HipHop Limited's manufacturing process with immediate effect) for a total cash cost of R336 000 on 1 June 2020. HipHop Limited's year of assessment also ends on the last day of February. HipHop Limited and Fabulous Fashion agreed that the provisions of sections 42 and 45 will not apply to transactions between themselves. 64 HTAX331-1-Jan-June2023-FA1-V3-ELK-08122022 ANNEXURE F: FORMATIVE ASSESSMENT 1 Imported machine Fabulous Fashion stays up to date with the latest technology and therefore imported a brand new, state of the art sewing machine on 31 December 2022. The cash cost of this sewing machine was R70 000 and it was brought into use on 1 January 2023. In addition to the cash cost, Fabulous Fashion also paid the following expenses in relation to the import of the machine: - Customs and excise duty of R9 000; - Transport cost of R2 700 and - Installation cost of R3 900 to install the new machine. Delivery van On 1 October 2022 Fabulous Fashion purchased a new delivery van for R256 000. This delivery van was brought into use on the same day. Fabulous Fashion uses this delivery van to transport finished goods from the factory to local retail outlets. The Commissioner allows delivery vans to be written off over a four-year period. Administration offices On 1 July 2022 Fabulous Fashion entered into a 10-year lease agreement with a property agent for the lease of land on which offices would be erected. This lease agreement stipulated that Fabulous Fashion will lease these offices from the property agent and was obliged to: sections 42 and 45 will not apply to transactions between themselves. 64 HTAX331-1-Jan-June2023-FA1-V3-ELK-08122022 ANNEXURE F: FORMATIVE ASSESSMENT 1 Imported machine Fabulous Fashion stays up to date with the latest technology and therefore imported a brand new, state of the art sewing machine on 31 December 2022 . The cash cost of this sewing machine was R70 000 and it was brought into use on 1 January 2023. In addition to the cash cost, Fabulous Fashion also paid the following expenses in relation to the import of the machine: - Customs and excise duty of R9 000; - Transport cost of R2 700 and - Installation cost of R3 900 to install the new machine. Delivery van On 1 October 2022 Fabulous Fashion purchased a new delivery van for R256 000. This delivery van was brought into use on the same day. Fabulous Fashion uses this delivery van to transport finished goods from the factory to local retail outlets. The Commissioner allows delivery vans to be written off over a four-year period. Administration offices On 1 July 2022 Fabulous Fashion entered into a 10-year lease agreement with a property agent for the lease of land on which offices would be erected. This lease agreement stipulated that Fabulous Fashion will lease these offices from the property agent and was obliged to: - Pay an annual premium of R92 000 from 1 July 2022 and - Erect a suite of offices on this land at a cost of R2 940000. Fabulous Fashion commenced with the erection of the suite of offices on 1 July 2022. It was completed on 30 November 2022 at a cost of R3 650000 . It was brought into use by Fabulous Fashion as administrative offices the next day, on 1 December 2022. 65 HTAX331-1-Jan-June2023-FA1-V3-ELK-08122022 ANNEXURE F: FORMATIVE ASSESSMENT 1 REQUIRED: For all of the above transactions, calculate the capital allowances that need to be taken into account in the calculation of Fabulous Fashion (Pty) Ltd's taxable income for the 2023 year of assessment. Support your answer with references to the Income Tax Act. Round to the nearest rand. Ignore any capital gains tax and VAT implications. (35 marks)