FTX4010F - Finance and Taxation Assignment 2 - University of Cape Town

Assignment Task

Question

Please note, for the purposes of this question, VAT and the General Anti- Avoidance Rules (GAAR) is to be ignored.

The date is 20 February 2024 and you are working as a tax consultant in a boutique tax firm that prides itself on managing family businesses and providing an all-inclusive approach to tax and accounting. One of your client’s is Ms Tyla Tlholo (“Tyla” who is 39 years old) and you are responsible for the accounting and tax obligations of all of Tyla’s related financial interests which are described in more detail below:

• Tyla has earned fame over the years from performing as the vocalist of various pop She has now retired from performing as musician but her inspirational background story has enabled her to pursue a career as a motivational speaker.
• Some years ago, Tyla founded the Morning Song Trust (“MST”). The initial donation to found the trust was for R1,000 which was spent on the initial administration Since then, Tyla has loaned a cumulative amount of R14,160,000 to MST. This money has been used to fund various investments that are described in more detail in the extracts of the draft financial statements and related emails. Tyla and her wife, Bettina Tlholo (“Bettina” who is 42 years old) are trustees of MST. There is an independent fiduciary services firm called “Trustme Fiduciary” that act as independent trustees and administrators of MST. Tyla, Bettina and their two adopted minor children are all beneficiaries of MST. MST is a discretionary inter vivos trust and income or capital can only be distributed to any of the beneficiaries if there is an unanimous resolution from all the trustees.
• One of the investments owned by MST is a 100% holding in the equity of a company called Swansong Proprietary Limited (“Swansong”). Swansong has a February year-end and invests in various immovable property interests. Tyla is the sole director of Swansong.

You are currently working on the calculations necessary to submit the IRP6 returns for MST and Swansong. The accounting department in your firm has sent you an email with some queries and a draft Statement of Financial Position and a draft Statement of Comprehensive Income for MST and Swansong. Each note shown on the draft statements, correspond to a query in on the email from the accounting department. Furthermore, you have received an email from Tyla with a number of specific queries that need to be addressed.

Queries with respect to Swansong

1. Below is a breakdown of the Investment Properties owned by Swansong:

The only movement currently shown in the draft financial statements is a revaluation that was processed on the Gauteng Property of R750,000. All properties were financed by mortgage bonds.

2. Tyla has sent us a sale agreement for the Makhanda Property. The sale agreement has been concluded for an amount of R2,000,000 and the estate agent’s commission has been negotiated at 5% of the sale price. However, the sale is conditional on the buyer being approved for a It is unclear at this stage whether the bond will be approved before or after 29 February 2024 (if at all). At this stage we are thinking it may be prudent to calculate the provisional tax for Swansong with two options. Option 1 being the situation where the bond is approved and Option 2 being the situation where the bond is not approved. This sale has not been included in the draft financial statements.

3. In order to keep a close watch over late-paying tenants, the accounting policy of Swansong is to raise a provision for doubtful debts for any debts that are more than 30 days outstanding. As Swansong applies IFRS for SMEs, they are not required to, and do not, apply IFRS9 to their debt for financial reporting purposes.

Below a summary of the trade receivables and related provision for doubtful debts as at the current date:

Below is a summary of the Debtors Age Analysis for the relevant years:

4. All taxes related to 2023 have been settled after the 2023 tax return was submitted and assessed in July 2023. And thus the tax receivable amount in 2024 relates strictly to the first provisional payment made in August The tax expense for the 2024 year has not yet been accounted for in the draft financial statements.

5. Included in the expenses is an administration fee that is charged on an annual basis by Bettina as an independent contractor. This is a fixed fee and Tyla has explained to us that as Bettina does not earn any other money in her personal capacity, it is helpful to get some income transferred to Bettina to save on taxes. Bettina does provide some administrative services in that she handles the appointments of all the letting agents that are utilized to place tenants in the respective properties.

Queries with respect to MST

6. There are two assets held by MST. The first is a Cape Town property and the second is cash invested in a call

7. A summary of the loans payable is shown below:

All three of the loans represent amounts owed to Tyla. She loaned R10,000,000 to MST in 2019 in order to purchase a property in Cape Town where Tyla, Bettina and their children have lived since it was purchased. This is considered their primary residence. At times, there have been improvements made to this property. The most recent was completed on 1 July 2023 and Tyla advanced a further R500,000 to MST on this date to pay for the improvements.

On the first day of every month Tyla pays R30,000 to MST and this is recorded as a loan. The funds are invested in a Call account which earns interest at a fixed rate of 8% NACM.

8. MST have never made any distributions to any of the beneficiaries. The trustees are considering making a distribution of the full interest income earned by MST to the two They have not resolved to make such a distribution yet however as they would like to understand the tax consequences. As you can see in the statement of comprehensive income, there are not many transactions that go through this trust. The only income earned is from the call account and the only expenses are fees paid to our firm for accounting and tax compliance services.

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