Vusi Ngubane and Danny Chetty are residents of the Republic. They have been friends from childhood, and always had a plan to start their own business. As Vusi and Danny had a passion for the mens clothing business, they decided to open a mens clothing boutique. They registered a company called Exclusive Mens Boutique (Pty) Ltd (EMB). The company will trade mainly as a retailer. In addition, they will trade partly as a wholesaler since Vusi had his contacts in Italy exclusively source branded shoes and clothing which are top quality at competitive prices. They have decided to also wholesale the clothing and shoes to other clothing businesses with shops which trade in towns in which EMB does not trade. Vusi is an excellent strategist, and he exercised his negotiation skills to rent a two-storeybuilding near an upmarket shopping mall. There is an upmarket residential area near this two-storey building. In the short term, Vusi and Danny decided to utilise the ground floor of the two-storey building for the business. The first floor of the building remained empty at that time. EMB commenced business on 1 June 2022 and it was immediately a huge success. The customers were really excited about the range of clothes EMB sold. In addition, the opening of the store attracted various wholesalers for mens clothes and shoes who werevery excited about the super range of clothes it sold. EMBs sales to the retail customers for the months of June 2023 and July 2023 were R478,055. EMB also signed contracts with 10 wholesalers in September 2022 to supply clothes and shoes monthly for an amount of R10,000 (excluding VAT) per wholesaler per month. Set out below are the transactions that took place during the months of June 2023 and July 2023. EMB is registered on the invoice basis for VAT purposes: 1. EMB purchased a cab and a half delivery bakkie for R345,000 (including VAT) froma local car dealership. This bakkie was used for delivery of the clothes and shoes to the wholesalers. 2. EMB received a tax invoice from Interior Designers Limited for an amount of R1,280,027 (including VAT) on 3 June 2023 for the renovation of the store as a result of storm water damage. They were unfortunately not insured for flooding damages. 3. EMB needed a vacuum cleaner for cleaning the floors of the business. The vacuum cleaner was purchased from Bargain Shop (Pty) Ltd who issued a tax invoice for an amount of R2,606.67 (including VAT). 4. On 13 June 2023, the company driver was hijacked while delivering the clothes to the wholesalers and the hijackers stole the companys Isuzu double cab bakkie. Thankfully, the driver was not injured. Danny immediately submitted an insurance claim for the loss and an indemnity award of R460,000 was received from the insurance company on 30 June 2023 in full settlement of the double cab bakkie stolen. 4 On 1 July 2023, Danny and Vusi decided to rent out the first floor of the building to a doctor who was going to use it as a medical practice. The rental charged was R11,500 (incl. VAT) per month and the first rental payment due was on 31 July 2023. In addition, the doctor was required to immediately pay a deposit of R10 000, which he paid on 2 July 2023. 5 On 19 July 2023, EMB received a tax invoice from Interior Designers Limited for an amount of R575,000 (including VAT) for the renovation of the first floor prior to renting it out to the doctor. 6 Due to EMBs outstanding advertising campaign, a customer from Botswana on 30 June 2023 sent a truck (owned by the Botswana company) to pick up an order for mens shoes, trousers and shirts. This order by the Botswana company was for goods to be sold at its upmarket store in a Botswana mall. The total order was R31,150 and EMB duly provided a tax invoice in this regard. 7 As transport costs are very high because of the fuel price increases, and instead of paying employees extra cash to cover their transport costs to and from work, EMB purchased bus coupons. These bus coupons are distributed to its employees on a monthly basis. During June and July 2023, EMB incurred R3,084 on purchasing the bus coupons. 8 Vusi and Danny realised on 30 June 2023 that they needed to purchase a hi-tech surveillance system for the clothing store. As Vusi and Danny are well versed with structured finance issues, they realised that obtaining a loan from a local bank to finance the surveillance system was a more prudent form of financing. Armed with this knowledge and facts, they decided to approach a local bank for a loan to finance the surveillance system. The bank was impressed with EMBs cash flow and impressive first few months of trading results and granted a loan amounting to R400,000 on 1 July 2023. The following are payments made to the bank on 31 July 2023: Capital repayment for the loan: R10,000 Interest: R1,000 9 On the night of 30 June 2023, thieves broke into the premises and stole the company computer which was used by the accountant and the microwave oven which was used by EMBs employees to heat up their food during the lunchbreak. The insurance company replaced the computer at a cost of R15 960 (inc VAT) and also paid out R2,180 for the microwave oven stolen. 10 On 31 July 2023, EMB received the monthly bank statement from Alpha Bank South Africa Limited. The following charges appeared on the bank statement for July 2023: Description of charge Amount-R (including VAT) Service fees (bank charges) 115.00 Internet banking fee 115.00 Interest on bank overdraft 100.00 Interest received on positive bank balance 1140.00 14 As Vusi and Danny wish to increase sales of clothes, they went on business trip to Italy during the last week of June 2023. This was to purchase the latest range of mens clothing. The return air ticket to Italy purchased from SAA amounted to R26,860. This cost from SAA included a flight from Durban to Johannesburg and then from Johannesburg to Italy and back. The cost of a return air ticket from Durban to Johannesburg costs R3,460. 15 Danny did several trips to Johannesburg to promote new sales. Danny drove up to Johannesburg and incurred the following expenses which he paid and claimed back from the company upon presenting all the vouchers: Fuel R11,300, toll fees R1,725, airfares R3 400, accommodation for at least 3 nights each time he went to Johannesburg R52,500, included in this amount are payments to bed and breakfast establishments which are not registered for VAT purposes and which invoiced Danny R10,500,meals and refreshments R10,526 andhire of a car to travel around Johannesburg R8,648. Required Marks a. Discuss whether or not EMB was liable to register as a vendor for VAT purposes with the South African Revenue Services (SARS) and if it did have to register, when it should have registered? (4) b. Calculate the net VAT due to SARS or refundable by SARS to EMB for the above transactions assuming a two-month tax period ending 31 July 2023. (Remember that the VAT 201 will have to be submitted to SARS by 31 August 2023 for tax periods June 2023 and July 2023 as EMB is registered for efiling). Please support your answer by calculations as well as brief reasons for not claiming input VAT or not accounting for output VAT, ie. when the VAT amount is Nil. (30) c. Assume that EMB did not rent out part of the building to the medical doctor but instead rented it out to a family and as a consequence a residential tenant/landlord agreement was signed. Discuss the VAT treatment of this transaction. (4) Income Tax d. Vusi and Danny are unsure about whether they can claim a deduction for income tax purposes of the R575,000 spent on renovations of the first floor of the building for rental to the doctor. Advise Vusi and Danny about the different components of the general deduction formula that need to be considered in terms of section 11(a) of the Income Tax Act, in order to claim the deduction for income tax purposes. (12)