Solcom $($Pty$)$ Ltd $($Solcom$)$ is a company that trades as a manufacturer of solar panels in South Africa and is not

a Small Business Corporation as defined in the Income tax Act. The company imports most of the parts for its

manufacturing process from China. The company commenced trading in $2020$ and has a $28$ February financial

year$-$end.

The accountant of Solcom is not sure how to handle some items for income tax purposes and requested your

assistance with the transactions listed in notes $17$ below. The taxable income of Solcom for the $2024$ year of

assessment $($before taking the information provided below into account, unless stated otherwise$)$ amounts to

R$7960000.$

$1.$ Trading stock

The trading stock of manufactured solar panels $($finished goods$)$ have been correctly taken into account in

the taxable income of R$7960000.$ The accountant was, however, not sure whether the parts imported for

the manufacturing process must be included in the calculation of the taxable income and if so$,$ then at which

values.

The following extract from the financial records is available:

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Parts for manufacturing solar panels:

Cost price of purchases of imported parts during the $2024$ financial year $2760000$

Opening stock on $1$ March $2023$ @ cost price including import duties $1865000$

Opening stock on $1$ March $2023$ @ cost price excluding import duties $1640000$

Opening stock on $1$ March $2023$ @ market value $(*$note$)1720000$

Closing stock on $28$ February $2024$ @ cost price including import duties $785000$

Closing stock on $28$ February $2024$ @ cost price excluding import duties $624000$

Closing stock on $28$ February $2024$ @ market value $1872000$

$*$ note $$ Some of the parts included in closing stock consisted of $$outdated technology$.$

In June $2023$ Solcom donated solar panels with a manufacturing cost of R$20000$ and a market value of

R$30000$ to a local children$$s home. The children$$s home is a registered PBO in terms of both Part I and

Part II of the Ninth Schedule to the Income Tax Act and Solcom received a valid section $18$A certificate for

this donation on $30$ June $2023.$ The donation was made purely with charitable intentions and no

advertisement benefit was received. $($You must assume that the manufacturing cost of the donated solar

panels has already been deducted in the taxable income calculation of R$7960000$ in terms of the general

deduction formula$).$

At the end of the previous year of assessment, Solcom had a balance of donations that qualified for a

deduction $($in terms of s$18$A$),$ that was not allowed as a deduction due to the fact that it exceeded the annual

limitation$.$ The amount carried forward was R$52000.$

$2.$ Insurance

On $1$ December $2023$ Solcom renewed its annual short$-$term insurance contract $($Contract A$)$ that provides

insurance cover for the business and all the assets against losses due to fire, theft or destruction for a

period of $12$ months. The insurance was payable for the $12-$month period in advance on the inception of

the contract. Solcom paid the insurance amount of R$265000$ on $1$ December $2023.$

Unfortunately, Solcom was informed on $28$ January $2024$ that the insurance company was placed under

liquidation and that no services or a refund of the amount already paid will be received. Solcom urgently

had to take out another short$-$term insurance contract $($Contract B$)$ at a different insurer and on

TAX$2601/2024/$Semester $1/$Assessment $5$

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$4$

QUESTION $($continue$)$

$31$ January $2024$ paid R$294000$ for short$-$term insurance for the period $1$ February $2024$ until

$31$ January $2025$

$3.$ Rent paid for warehouse

Due to the planned construction of Factory Building B $($note $7\mathrm{.}3$ below$),$ Solcom entered into a lease

agreement with the owner of a warehouse to rent warehouse space to store finished products close to the

property where the factory will be erected. The lease agreement was for $12$ months commencing from

$1$ August $2023.$ Due to having excess cash available, Solcom decided to pay the full $12$ months rent on

$1$ August $2023.$ The full amount for the $12-$month period amounted to R$300000.$

$4.$ Employee remuneration

The following information is available form the financial records of Solcom:

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$4\mathrm{.}1$ Net salaries and wages paid to employees $832000$

$4\mathrm{.}2$ Pension fund contributions deducted from salaries and paid to pension funds $82000$

$4\mathrm{.}3$ Pension fund contributions contributed for the benefit of the employees to pension

funds $($company contributions$)75000$

$4\mathrm{.}4$ Loan made to an employee who absconded from Solcom$$s employment. The loan

was written off as irrecoverable on $28$ February $2024.40000$

$4\mathrm{.}5$ Employees$$ tax $($PAYE$)$ deducted from gross salaries and paid over to SARS $267000$

$5.$ Traffic fines paid

Solcom$$s cost accountant calculated that it is better to overload the delivery trucks and exceed the weight

limit on the national roads, due to the high fuel prices, as it costs less to rather pay the fines than to buy

and operate more delivery trucks. Consequently, Solcom has paid R$35000$ towards traffic fines during the

$2024$ year of assessment. The accountant argues that the expense is a necessary concomitant of the

business of Solcom, incurred in the production of income and not of a capital nature. Therefore, it qualifies

as a deduction in terms of the general deduction formula.

$6.$ Expenditure relating to patents

On $1$ November $2023$ Solcom paid R$285000$ for the extension of the term of the patent that the company

uses in its manufacturing process for a further $12$ months.

$7.$ Assets and related expenses and receipts

$7\mathrm{.}1$ Factory building A was purchased new and unused from a developer and brought into use on

$1$ November $2020$ at a cost of R$2850000.$ Transfer duty of R$111100$ and transfer costs of R$62000$

was also paid. Factory A is not situated in an Urban Development Zone. On $31$ October $2023$ a

thunderstorm severely damaged the roof of the building. Solcom had to incur costs of R$120000$ to

effect repairs which was finished on $20$ January $2024.$ The repairs consisted of replacing the damaged

corrugated iron roofing sheets on the damaged portion of the roof with new rust free polycarbonate

roofing sheets which is more expensive. Factory building A was however sold on $15$ February $2024$

for R$2750000.$ Solcom$$s insurer indemnified the company on $8$ January $2024$ against the damages

to the roof of the factory suffered during the $31$ October $2023$ storm for an amount of R$100000.$

$7\mathrm{.}2$ The storm of $31$ October $2023$ also damaged Solcom$$s network computer system beyond repair and

the system was scrapped by the insurer. On $8$ January $2024$ Solcom also received R$75000$ from the

insurer to indemnify the company for this loss. The computer network was purchased and brought

into use on $1$ December $2021$ at a cost of R$259200.$ This asset qualified for a $3-$year write$-$off period

in terms of Binding General Ruling No$.7($Issue $4).$

TAX$2601/2024/$Semester $1/$Assessment $5$

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$5$

QUESTION $($continue$)$

$7\mathrm{.}3$ Construction on a new larger Factory building B$,$ situated in an Urban Development Zone $($as certified

by the local Municipality$),$ commenced on $10$ February $2023.$ The building has a floor area of $1100$m$2$

$.$

The factory was completed and brought into use on $25$ January $2024$ at a total construction cost of

R$4620000$ and is solely used by Solcom for the manufacturing of solar panels.

$7\mathrm{.}4$ Machine $101$ was purchased new at a cost of R$2680000$ and brought into use on $5$ January $2021$ in

the process of manufacturing. The machine was moved from Factory building A to Factory building B

during January $2024$ and brought into use again on $25$ January $2024.$

$7\mathrm{.}5$ A specialist moving company moved Machine $101$ from Factory A to Factory B$.$ The moving company

invoiced Solcom on $20$ January $2024$ for an amount of R$140000$ which was paid by Solcom on

$25$ Januray $2024.$

REQUIRED MARKS

Calculate the taxable income of Solcom $($Pty$)$ Ltd for its $2024$ year of assessment.

Ignore any capital gains tax consequences.

Show amounts that are deductible in terms of different sections of the Income Tax Act in

separate lines in the answer.

Assume that Solcom will make any selection available in terms of the Income Tax Act to

legally minimise their liability for normal tax.

Provide brief reasons for any amount that is not taxable or not deductible. Also provide brief

reasons in the body of your calculation $($not as a separate note elsewhere in your answer$)$

for the treatment of transactions $2,3,4\mathrm{.}4,4\mathrm{.}5,5$ and $7\mathrm{.}5.$ No references to the Income Tax

Act are required.