QUESTION

Bontlefela (Pty) Ltd (Bontlefela) is a South African resident company that specialises on the

manufacture and distribution of swimwear in and around South Africa. The company is registered

as a category B vendor on the invoice basis for Value Added Tax (VAT) purposes. The company

makes 90% taxable supplies. The South African Revenue Service (SARS) considers Bontlefelas

swim wear manufacturing process as an approved process of manufacture. Bontlefela is not a

Small Business Corporation as defined and its financial year ends on 30 April every year.

All amounts exclude VAT unless stated otherwise.

Below is Bontlefelas draft income and expenditure statement for the year of assessment ending

on 30 April 2022:

Description Amount

R

Note

Income

Sales 2 800 900 1

Dividends received 179 000 2

Interest income 32 000

Profit on sale of asset ? 3

Expenses

Cost of sales (920 360) 4

Credit losses (80 000) 5

Penalty (18 230) 6

Salaries and wages 7

Other deductible expenses 350 870 8

Notes:

1. The sales amount excludes the following transactions:

1.1. On 1 December 2021, Bontlefela received an order for swim wear worth R36 800 (including

VAT) from Mr Mpendulo, a resident of South Africa and one of Bontlefelas

long-standing clients. On 8 December 2021 Mr Mpendulo made an e-wallet payment

of R38 600 to Bontlefela in respect of the swim wear purchased. It is a company policy

to refund clients within six months of purchase. Bontlefela had not refunded the excess

payment as at 30 April 2022.

1.2. On 29 April 2022, Bontlefela sold swim wear to a client in Lesotho for a total consideration

of R23 000. Delivery of the swim wear took place on 30 April 2022 and payment

was received on the same day.

2. The dividends were received from an investment that Bontlefela made in the share capital

of Orlia (Pty) Ltd, a company incorporated in England. Bontlefela holds a 6% interest in the

company.

4

ASSIGNMENT 2: SEMESTER 1 (continued)

3. The profit on sale of asset relates to the following disposal:

Asset Details

Machine JKN A second-hand Machine JKN was acquired on 26 August 2019 at its

market value of R384 000 and was immediately brought to use in the

manufacturing of swim wear. Given the escalating demand for swim

wear and the increasing sophistication in technology, on 30 June 2021

Bontlefela disposed of machine JKN to Mr Gwebu, a 22% shareholder

of the company for R88 000 (excluding VAT) in order to acquire a larger

and more sophisticated machine. The market value of the machine on

the date of disposal was R140 000 excluding VAT.

A new and unused machine NEO was acquired on 15 July 2021 for

R480 000 to replace machine JKN. Bontlefela incurred an amount of

R24 000 to assemble the machine and a further R62 000 for installation

and mounting. The machine was brought to use on 30 July 2021.

4. The cost of sales figure is arrived at before taking the following transactions into account:

4.1. On 15 April 2022, Bontlefela purchased swim wear material costing $19 200 from a

company situated in the United States of America. The material was shipped free-onboard

on 19 April 2022 and arrived at the Durban harbour, South Africa, on 22 April

2022. Delivery of the material at Bontlefelas business premises took place on 28 April

2022. As per Bontlefelas agreement with the supplier, the total purchase price of the

material is payable within 30 days from date of purchase. By 30 April 2022, the full

purchase price was still outstanding.

The applicable exchange rates were as follows:

Date Rate

15 April 2022 1$ = R16,05

19 April 2022 1$ = R16,25

22 April 2022 1$ = R16,00

28 April 2022 1$ = R15,95

30 April 2022 1$ = R15,83

14 May 2022 1$ = R16,12

4.2. On 27 April 2022, swim wear with a cost of R38 000 (excluding VAT) was received by

way of a donation from a well-known swim wear store as a token of appreciation for the

contribution that Bontlefela is doing in the swim wear industry. The market value of the

swim wear on 27 April 2022 amounted to R41 000. This swim wear was still on hand

as at 30 April 2022.

4.3. On 30 April 2022 swim wear with a cost of R9 500 (excluding VAT) was distributed to

Bontlefelas shareholders as a dividend in specie. The market value of the swim wear

amounted to R10 450 on the date of the distribution. Bontlefelas accountant correctly

removed this swim wear from the closing stock balances but that was the only entry

made during the 2022 year of assessment.

5 TAX3701/2022

ASSIGNMENT 2: SEMESTER 1 (continued)

5. The credit losses amount only includes trade credit losses actually written off during the

2022 year of assessment. On 30 April 2022, Bontlefelas debtors list showed a balance of

R203 000 in respect of debt that was in arrears for more than 120 days and R55 000 in

respect of debt that was in arrears for 60 days. The company does not apply IFRS 9 to

account for debtors balances. During the 2021 year of assessment, Bontlefela correctly

claimed an allowance for credit losses amounting to R61 200 for tax purposes.

6. The penalty is in respect of the late submission of a VAT return.

7. Salaries and wages exclude an amount of R50 000 that Bontlefela contributed to CAMAF

retirement annuity fund on behalf of the late Mr Zungus dependants.

8. Other deductible expenses include a payment of R105 000 made to MTN in respect of data

bundle costs for the period 1 March 2022 to 30 November 2022.

Additional information

The following information was not considered in the above draft statement of income and expenditure:

On 30 September 2021 Ms Kraai, a disabled employee, completed a 24-months learnership

agreement that she had entered into with Bontlefela. Ms Kraai was in possession of an NQF

level 7 qualification when entering into the learnership agreement.

On 31 August 2021, Bontlefela purchased Ingwe Estate, an enclosed land consisting of 25

readily built apartments at its market value of R2 700 000 (i.e. R200 000 for the land and

R2 500 000 for the apartments). The apartments were leased to students of a nearby swim

academy from 1 September 2021 at a monthly rental amount of R3 200.

REQUIRED: Marks

Calculate the normal tax liability of Bontlefela (Pty Ltd for the year of assessment

ending on 30 April 2022.

Provide brief reasons where amounts have a nil effect on normal tax.

40

END OF ASSIGNMENT 2

BONTLEFELA

ASSIGNMENT - SMESTER) en catam Michra. Acom here more ardop waccal Julio VATI From Mr Mpangun, a rokket of so On 27 April 2022 erantutan natin kawin.wimwear store as a concleopreciation Sarawapril 2022 amounted sa R41000. This wir wear was END OF ASSIGNMEN 1.3. Op 30 Apl shareholders to undon the date of be distribution made during the 2022 year of assessment ASSIGNMENT - SMESTER) en catam Michra. Acom here more ardop waccal Julio VATI From Mr Mpangun, a rokket of so On 27 April 2022 erantutan natin kawin.wimwear store as a concleopreciation Sarawapril 2022 amounted sa R41000. This wir wear was END OF ASSIGNMEN 1.3. Op 30 Apl shareholders to undon the date of be distribution made during the 2022 year of assessment