TAX3702/203/2/2020

Tutorial letter 203/2/2020

The Taxation of Individuals
TAX3702
Semester 2

Department of Taxation

Solution – Assignment 2

Bar code
 2

Dear Student

Enclosed is the solution to Assignment 2/1/2017. Please work through the solution alongside the assign-
ment and your answers. This is a significant part of the learning process. Note that it is very important to
understand why a specific answer is correct while other options are not.

You should identify any problem areas early in the semester and make every effort to understand all
aspects of the work that you have studied.

We hope that you have found the assignment stimulating.

Kind regards

LECTURERS: TAX3702

Pleases see myUnisa landing page for updated contact details.

 3
TAX3702/203

ASSIGNMENT 2 – SOLUTION

CASE STUDY 1 (48 marks)

a) Calculation of Sophia’s tax payable for the year of assessment ended 29 February 2020

R R
Salary 1 400 000
Bonus 200 000 (1)
Use of employer motor vehicle:
(R450 000 x 1.14 (1) x 85% x 85% (2) x 3.25% (1) x 11 months(1)) 132 505
Less: Reduction due to business use
(R132 505 x (21 000km - 7 000km)/21 000km) (1) (88 337)
44 168
Less: Payments by Sophia (R1 500 x 11 months) (1) (16 500)
27 668
Less: Payment towards repairs
(7 000km/21 000km x R5 000) (1) (1 667)
Private fuel cost (7 000km x R1.335) (1) (9 345) 16 656 (1)
Award from employer, not for long service or bravery 6 000 (1)
Entertainment allowance 18 000 (1)
Low interest loan:
[R30 000 x ((7% + 1%) (1) - 5%) x 6/12 (1)] 450
[(R30 000 - R15 000) (1) x ((7% + 1%) - 5%) x 6/12] 225
Holiday accommodation (R1 000 x 2 persons x 7 nights) – (R1 000) 13 000 (2)
Subsistence allowance (R400 x 10) (1) 4 000
Less: Greater of deemed or actual expenses
Deemed: (R435 x 10) = R4 350 (1)
Actual: R3 500 (1)
Used deemed as it is greater (4 350) nil (1)
Foreign dividend 11 360
Less: Partial exemption (R11 360 x 25/45) (6 311) 5 049 (1)
Interest received 25 563 (1)
Less: Interest exemption (23 800) 1 763 (1)
Medical fringe benefit (R144 000 x 60%) 86 400 (1)
1 747 543
Entertainment expenses, prohibited in terms of s23(m) taxpayer did
not earn commission income (1) -
Less: Contributions to retirement funds:
(R112 000 + R88 000 = R200 000) (1), limited to
The lesser of:
➢ R350 000 or
➢ R1 747 543 (taxable income before this deduction) or
➢ 27.5% of greater of remuneration or taxable income (1)
• 27.5% x R1 750 000 (1) = R481 250, or
• 27.5% x R1 747 543 = R480 574 (1),
The limit is therefore R350 000 and the contributions can be allowed in full (200 000) (1)

Taxable income 1 547 543

 4

CASE STUDY 1 (continued) R R

Net normal tax on taxable income:

[(R1 547 543 - R1 500 000) x 45%] + R532 041 553 435
Less: Rebate (14 220) (1)
Less: Medical scheme fees tax credit (R310 x 2 x 12 months) (7 440) (1)
Less: Additional qualifying medical expense tax credit
Contribution by Sophia (R144 000 x 40%) 57 600
Medical aid fringe benefit 86 400
144 000 (1)
Less: Medical scheme fees tax credit x 4
(R310 x 2 x 12) x 4 (1)) (29 760)
114 240
Medical expenses not reimbursed by medical scheme 20 000 (1)
Medical expenses not reimbursed by medical scheme, paid during
March 2020, not allowed in current year - (1)
134 240
Less:(1) 7.5% x R1 547 543 (1) (116 066)
18 174
Additional qualifying medical expense tax credit (R18 174 x 25%) (1) (4 544)
Net normal tax 527 231

b) Tax on taxable portion of Fivas' lump sums:

Lump sum received from employer pension fund 1 500 000

Less: Allowable deductions
Current pension fund contributions disallowed – prior years (40 000) (1)
Disallowed current pension fund contributions – current year (6 000) (1)
Past period pension fund contributions disallowed – prior years (3 000) (1)
Past period pension fund contributions disallowed – current
year (1 000) (1)
Taxable portion of retirement lump sum 1 450 000 1 450 000
Retirement annuity lump sum received in 2016 700 000 (1)

Total taxable lump sums 2 150 000

Tax payable on taxable portion of lump sums:
[(R2 150 000 - R1 050 000) x 36%] + R130 500 526 500 (1)
Less: Deemed tax on retirement annuity lump sum
[(R700 000 - R500 000)] x 18% (36 000) (2)
Tax payable 490 500
 5
TAX3702/203

CASE STUDY 2 (12 marks)

Calculation of Scotty’s taxable capital gain/(assessed capital loss) for the year of assessment
ended 29 February 2020

R R
Proceeds 3 925 000
Less: Base cost (1 650 400)
Valuation date value – Market Value (1 380 000) (1)
Proceeds > expenditure before and after 1/10/2001,
use highest of:
(Eighth Schedule par 26):
• TAB – R1 250 000; or (1)
• Market value – R1 380 000; or
• 20% rule = R769 000
Use Market Value as it is higher
Addition of garage – before 1 October 2001 - (1)
Conversion of garage (18 000) (1)
Tiles – repairs not allowed – para 20(2)(b) - (1)
Selling costs (252 400) (1)
Capital gain 2 274 600
Portion in respect of period not used as primary residence
(R2 274 600 x 16yrs/18yrs* (1) = R2 021 867) (2 021 867) 2 021 867 (2)
Capital gain in respect of period used as primary residence 252 733
Primary residence exclusion (R2 000 000 limited to R252 733) (1) (252 733)
Capital gain in respect of primary residence 0 0

Total capital gain 2 021 867

Less: Annual exclusion (40 000) (1)
Aggregate capital gain 1 981 867

Taxable capital gain (x 40% (1)) 792 747

* The asset was held for 18 years from 2001 when capital gains tax was introduced,
for 2 years the asset was used as a primary residence and then converted to a
business, which means that it was not a primary residence for 16 years.