QUESTION ONE

Bytes (Pty) Ltd (Bytes or the company is a manufacturer of laptops. Bytes is a resident of the Republic and is not considered to be a small business corporation. The company has a February financial year end.

The following information was extracted from the Statement of Comprehensive Income of Bytes (Pty) Ltd for the year ended 29 February 2020 (Ignore VAT):

(40 marks)

Sales Less: Cost of Sales Gross profit Add: Other income -Local Dividends (Note 1) -Interest -Profit on sale of plant and machinery (Note 2)

Less: Manufacturing overheads and administrative expenses -Insurance (Note 3) -Leave pay expense and provision (Note 4) -Salaries (Note 5)

-Pension fund contributions (Note 6) -Payment to retired employee (Note 7) -Travelling expenses (Note 8) -Legal expenses (Note 9)

-Damages and compensation (Note 10) -Depreciation (Note 11) -Other deductible expenses Net profit before interest and tax

Less: Interest incurred -Bank overdraft Net profit before tax

15 000 7 410 18 700

109 800 34 780 725 000 43 500 20 000 8 300 12 000 51 000 180 350 108 230

33 910

7 752 000 4 251 000 3 501 000

41 110 3 542 110

RR

1 292 960 2 249 150

________ 2 215 240

Notes:

1. Dividends were received from local companies.

2. The profit on sale of plant and machinery of R18 700 arose from the sale of a machine for R35 300. At the date of sale on 1 January 2020, the machine had a book value for accounting purposes of R16 600, an original cost of R30 000 and a tax value of R6 000. It was purchased (new and unused on 1 January 2018 and brought into use on the same day in the process of manufacturing. The tax value above has been correctly computed after taking into account all capital allowances. However, for the purposes of the 2020 tax computation, the capital allowance for the current year must still be processed.

3. The insurance expense of R109 800 recorded in the Statement of Comprehensive Income is made up as follows:

   Premium from 1 March 2019 to 31 December 2019: R90 000 (R9 000 x 10 months) Premium from 1 January 2020 to 29 February 2020: R19 800 (R9 900 x 2 months)

   The companys insurance cover runs from 1 January to 31 December each year, and annual premiums are payable upfront on 1 January each year.

   On 1 January 2020, the company paid R118 800 (relating to cover from 1 January 2020 to 31 December 2020). The prepaid portion of R99 000 (R9 900 x 10 months) has been included in Accounts Receivable in the 2020 Statement of Financial Position, and R19 800 was recognised as an expense (see above breakdown).

   The comparative prepaid insurance for the year ended 28 February 2019 was R90 000 (R9 000 x 10 months), which was paid on 1 January 2019.

   This is the only prepaid expense the company has for both the 2019 and 2020 years of assessment.

4. The leave pay expense of R34 780 is broken down as follows:

   Leave pay actually paid to employees R21 780 Increase in leave pay provision R13 000

   The leave pay provision is based on an accurate calculation of the leave entitlement of each employee multiplied by his current salary rate.

5. The salaries expense includes the annual salary relating to an employee who entered into a learnership contract for a period of 24 months commencing on 1 September 2019. The learnership was registered in accordance with the appropriate legislation. The employee is not disabled and holds an NQF level 6 qualification.

6. The company contributes 6% of employees remuneration to its pension fund.

7. An annuity of R20 000 is paid to a former employee of the company who had to retire after being diagnosed with cancer. He is undergoing treatment and is unable to work for this reason.

8. Travelling expenses are in respect of a trip to Cape Town to test a new machine the company was interested in purchasing. The machine did not meet the expected standards of quality and was therefore not purchased.

9. Legal expenses of R12 000 were incurred when a competitor company took legal action against Bytes, claiming that one of the computers manufactured infringed a copyright held by the competitor company. Bytes could not successfully defend this claim and the court found the company guilty of copyright infringement and ordered them to pay an amount for compensation and damages to the competitor company (see further Note 10).

10. The company paid R51 000 to the competitor company as ordered by the court on being found guilty of infringing a copyright (see note 9).

11. Depreciation of R180 350 has been determined as follows:

Land Factory building Office building Plant and machinery Office equipment

TOTAL

Cost

175 000 775 000 850 000

1 075 000 78 500 ________ 2 953 500

Current year depreciation

- 31 000 34 000 107 500 7 850 _______ 180 350

Book value as at 29 February 2020

175 000 632 000 598 000 698 750

35 500 ________ 2 139 250

The construction of the factory and office buildings commenced on 1 July 2013. Both buildings were completed on 30 October 2013 and occupied for the purposes of trade from that date. The buildings were not constructed on the same site. The relevant allowances under section 13(1) and section 13quin are both granted at a rate of 5%.

The cost of plant and machinery is made up as follows:

• Machine 1 (a used machine) cost R170 000. It was acquired second-hand in December 2017 and brought into use for the first time on 1 January 2018.

• Machine 2 (new) cost R281 000. It was acquired in June 2018 and brought into use for the first time on 1 July 2018.

• Machine 3 (new) cost R180 500. It was acquired and brought into use for the first time on 15 January 2020.

• Sundry items of plant and machinery costing R443 500 in total. They were acquired more than eight years ago and have been written-off in full for tax purposes.

  The 2020 wear and tear allowance (for tax purposes) on office equipment has been calculated as R10 500 by the financial accountant, in accordance with the write-off periods allowed by the Commissioner of SARS.

12. On 29 February 2020 the company declared and paid a dividend of R50 000 to its shareholders. All shareholders of the company are natural persons who are not regarded to be exempt from dividends tax.

Required:

1. Calculate the tax liability of Bytes (Pty) Ltd for the 2020 year of assessment. Commence your calculation with the net profit before tax of R2 215 240. Round off your calculations to the nearest Rand. (38 marks)

2. Calculate the dividends tax required to be withheld by Bytes (Pty) Ltd from the dividend paid to its shareholders.