FACULTY OF MANAGEMENT COMMERCE AND LAW

DEPARTMENT OF ACCOUNTANCY

PRE CLASS-ASSIGNMENT

Module Code : STX4300/4000

Module Name : TAXATION S4
Total Marks : 70
Internal Examiner(S) : Mr P Rambuda

MODULE-SPECIFIC INSTRUCTIONS
▪ The marks shown against the requirement(s) for every question should be regarded
as an indication of the expected length and depth of your answer.
▪ Answer the questions by the use of:
o effective structure and presentation.
o clear explanations.
o logical arguments; and
o clear and concise language.
▪ Show all calculations clearly.
▪ Round all amounts to the nearest Rand.
▪ All open spaces must be crossed out with a pen. Failure to cross out the open
spaces will disqualify you from handing in your script for a remark.
▪ Typed answer must be converted to PDF and uploaded on MOODLE
▪ Email assignment will not be accepted
QUESTION 1 70 MARKS
Mbatha Trading (Pty) Ltd (“Mbatha Trading”) is a South African resident company which
manufactures soccer boots called Laduma in its factory in Polokwane, Limpopo. Mbatha
Trading is a registered category-B vendor and has 31 December year end.
The commissioner of South African Revenue Services has approved the company’s
production process as a “process of manufacture”.
Mbatha Trading manufactures 2 types of Laduma soccer boots.
▪ Laduma King. These boots are designed for hard ground
▪ Laduma Flare. These studs’ boots are designed for artificial grass fields
Due to the relationship, it has built with its customers over the years, Mbatha Trading offers
credit sales to its customers, and it charges interest in all its credit sales.
SARS has accepted the following apportionment for VAT purposes:
▪ Sale of soccer boots – 90%
▪ Interest from credit sales (exempt supply) – 10%
The following incomes and expenses are relevant to Mbatha Trading’s 2023 year of
assessment. All amounts EXCLUDE VAT unless specified otherwise.
1. Total revenue for the year of assessment was R12 600 000 (calculated in accordance
with IFRS):
▪ R440 000 of this revenue relates to gift vouchers purchased by customers
during the year. The company policy allows 36 months after the issue of the
voucher to be redeemed. R130 000 worth of the gift vouchers were redeemed
in the 2023 year of assessment. R80 000 worth of gift vouchers from previous
years expired in the current year of assessment.
▪ Thalente Mbatha, is the sole shareholder of Mbatha Trading. Thalente
purchased boxes of Laduma King for his soccer team for R66 700 (incl. VAT).
It is the company policy to allow shareholders and employees to purchase
laduma soccer boots at a 40% discount to their normal selling price. This
transaction has not yet been recorded in Mbatha Trading accounting records.
Thalente Mbatha is not a VAT vendor.

2. On 31 December 2023, the cost of closing stock as calculated by IAS 2 was R580 000
(2022: R666 000). Purchases of stock (correctly part of closing stock) cost R2 980 000
during 2023.
▪ During the current year, Mbatha Trading’s Chief Financial Officer took a box
Laduma Flare, with a cost of R4 000, home for personal use. She did not pay
for this.
▪ On 30 November Mbatha Trading donated 3 boxes of Laduma Flare, with a
cost of R70 000 (Market value R95 000), to a local school in Seshego. The
school did not issue a s18A certificate.

3. Mbatha Trading purchased the following vehicles in the current year of assessment:
a) An 18-seater Iveco for R782 000 (incl. VAT) on 1 January 2023. This Vehicle is
used to transport employees from their home to Mbatha Trading’s factory and back
home at no charge. The vehicle is kept at Mbatha Trading’s business premises.
 b) A BMW 1 Series (a “motor car”, as defined) for R483 000 (incl: VAT). Mbatha
Trading’s sales manager was given the use of the vehicle from the 1 November
2023 and is responsible for all cost relate to the vehicle.
In terms of Binding General Ruling 7 and Interpretation Note 47, motor
vehicles have an estimated useful life of 5 years.

4. On 1 December 2023, Mbatha Trading purchase Special Machinery to be used in the

process of manufacture from a supplier in China for R560 000 (this amount has been
correctly translated from Dollars), this amount is also the custom duty value. Customs
duties of 10% were levied by SARS.
In terms of Biding General Ruling 7 and Interpretation Note 47, Machinery has
an estimated useful life of 6 years.

5. On 1 December 2023, Mbatha Trading purchased a storage garage (land and

buildings) for R1 450 000 and paid R10 500 in transfer duties. In terms of the purchase
agreement, Mbatha Trading had to make a deposit of R700 000 by 31 December 2023.
As at 31 December 2023, despite paying the deposit, the property had not yet been
registered in Mbatha Trading’s name. The seller is a non-vendor who use the storage
garage to store personal items.
6. Employee cost totaled R3 800 000. This includes:
▪ A provision for bonuses of R360 000, which is due to be paid on 28 February 2024
after the financial results have been audited.
▪ A restraint of trade payment of R280 000 paid to one of the Mbatha Trading Quality
Assurers, Deon Timm, to prevent him from working for a competitor of Mbatha
Trading for a period of 2 years Period from 1 September 2023.
7. On 1 December 2023, Mbatha Trading’s old manufacturing machine was damaged
when it experienced a mechanical fault. The machine was fixed at a cost of R30 400
but, on 28 December 2023, Mbatha Trading sold it for its market value of R1060 000
with the intention of obtaining a new machine in January. The old machine had been
purchased new on 1 February 2021 for R2 000 000.

Mbatha Trading’s management team is trying to decide whether to replace the machine
by either buying a new one for R2 689 000 on 1 January 2024, or leasing a machine
under the following terms:
▪ Lease term: 48 months, commencing 1 January 2024
▪ Lease Payments: R58 500 per month in advance, starting on 1 January 2024
▪ Lease premium: R300 000 payable once off on 1 January 2024
▪ Machine ready for use: 1 February 2024, after installation is complete.
In terms of Binding General Ruling 7 and Interpretation Note 47, similar
machinery has an estimated useful life of 6 years.
8. Bad debts amounted to R114 600 and included R34 000 relating to an employee study
loan that was written off to zero when the employee resigned.
9. Other expenditure amounts to R987 500 and includes:
▪ Photocopy machine rental of R198 000 for 12 months, paid annually in advance
on 1 November 2021.
▪ Travel expenses of R85 000 incurred by the head of development, Monnapule
Makhaula, he attended a FIFA innovation conference in Dubai during August 2023.
He managed to network with several production design experts and return to South
Africa with various ideas for new products.
REQUIRED
a) Explain how output VAT should be calculated by Mbatha Trading on the sale of the
boxes of Laduma King sold to Thalente Mbatha Trading (Note 1 bullet 2). Following
your explanation, calculate the VAT output amount related to this transaction. (6)
b) With reference to Note 2, explain and calculate Mbatha Trading’s VAT implication for
its 2-month VAT period ended 31 December 2023 relating to its
▪ Iveco (4); and
▪ BMW 1 Series. (7)
c) Calculate the input VAT that Mbatha Trading can claim on the Specialised Machinery
it purchased from China (Note 4). (5)
d) Related to the purchase of the storage garage (Note 5), discuss and calculate Mbatha
Trading’s (4):
▪ VAT implications, and
▪ Timing of supply
e) With reference to Note 6, explain and calculate the impact of the restraint of trade
receipt and payment on the taxable income of Deon Timm and Mbatha Trading for their
respective 2023 years of assessment. (3)
f) With reference to Note 7, calculate the income tax impact on Mbatha Trading’s 2024
taxable income if it:
I. Purchases a replacement machine (3); or
II. Leases a replacement machine (3)
g) Discuss whether Mbatha Trading can deduct Monnapule Makhaula travel expenditure
in its 2023 year of assessment (Note 9) (Discuss in the Production of Income and
Capital in nature only). (8)
h) Calculate Mbatha Trading’s tax liability for its 2023 year of assessment assuming that:
▪ The replacement machine is purchased, not leased (Note 7).
▪ The travel expenditure is not deductible (Note 9).
If you consider an item to be exempt or not to impact your calculation, provide a brief
reason. (27)