Payroll and Tax Administration Assignment - UCT

Assignment Task

Question

1.  On Yer Bike (Pty) Ltd is a company specialising in the manufacture and retail of bicycles and accessories. They want to calculate their tax liability for the year of assessment, and have provided the following information from the tax year:

• Their total sales for the year amounted to R2.1million.
• Salaries and sales commissions totalled R650,000 for the year.
• On the first day of the tax year in question, the company sold a bakkie they had used for deliveries that they had bought exactly two years previously. It cost them R90,000 when they bought it, and they sold it for R63,000.
• Marketing and advertising expenses averaged R12,000 a month.
• They bought a new frame manufacturing machine for R700,000 on 31 January.
• Water, electricity and consumables came to R29,000 for the year.
• After receiving an offer they couldn’t refuse, the company sold the industrial building it owned and had been operating out of. Bought in 2007 for R1.3million, they sold it for R3.8million during the year. After selling it, they rented a factory in the same industrial park (they moved in on 1 October) - the rental for this was R14,000 a month.
• Phone and communications costs totalled R36,000 for the year.
• They sell to a number of customers on credit. While all of their customers are still operating, after reviewing their customers’ accounts, they’ve realised that, on average, R150,000 worth of accounts are 90 days overdue.
• They spent R42,000 on new desktop computers for the office at the beginning of the year, and feel that these should last four years before needing to be replaced.
• A new smartphone was also bought for the marketing department to allow mobile access when out with clients. This cost R6,000, and is estimated to last two years.

Due to shareholding issues, On Yer Bike (Pty) Ltd does not qualify as a Small Business Corporation. You can also ignore any building allowances, inventory valuation issues, employees’ tax, and any VAT implications for the purposes of this question. Please note that the Interpretation Note 47 (see pages 19–22) can be found in the Module 4 assignment topic section of the Learning website.

1.1 Using the information provided, and assuming that the company takes advantage of any deductions or allowances available to minimize its tax dues, calculate the taxable income of On Yer Bike (Pty) Ltd. You need only calculate from a tax perspective (with taxable income being your final result), and not an accounting one (so, no income statement reconstructions are required). Please use the general format used in the notes (with the numbers and figures in a column down the right-hand side), and show any workings below your calculation.

1.2 With the taxable income calculated in Q1.1, what would the company’s tax liability for the year be?

1.3 Assume that accounting profit (before tax) was the same as taxable income. If, after paying tax, the directors decided to pay out half of the remaining net profit as dividends, what would the total dividend amount be? Also, would there be any extra taxes to consider? If so, how much would the shareholders receive in total?

2.  Some friends, spotting an opportunity in the school sports market, decided to start a business supplying smaller-sized sports equipment and accessories. They operate as a close corporation, Just-A-Game cc and, because of a number of factors, only began operating on 1 January 2022 (their year-end is the end of February). The business exceeded all expectations, and took off at a tremendous rate. Just-A-Game cc achieved a total VAT-inclusive turnover of R1,464,900 for the tax year and is registered for VAT (Category B). They have been told by their bookkeeper that their qualifying tax deductions are R1,048,800 for the same period, that this number is inclusive of VAT, and that there were no capital purchases or expenditures.

Based on this scenario, answer the questions below. Ignore any timing issues with regard to when VAT should be paid.

2.1 How much of their turnover figure is VAT, and how much should be regarded as revenue for the company?

2.2 What block number would the turnover figure be reflected in on their VAT201 return?  And what block number would the VAT from that be reflected in?

2.3 Assuming that all of their deductions carry VAT, how much of their deductions figure is VAT, and what proportion should be regarded as expenses for the company?

2.4 What block number would the VAT from expenses be reflected in, on their VAT201 return?

2.5 Using your answers above, what is the net VAT position for the VAT period, and is it a net VAT output, or a net VAT input?

3.  Samson and Delilah are the two members of a close corporation, Headstrong cc, and run a small shop selling gym supplements and hair products. They are committed to this business, and aren’t involved in any others. They are not registered for VAT, and their year-end is at the end of February. Their turnover for the tax year was R800,000, and their total expenses were R430,000.

3.1 They have heard of two tax concessions for small businesses, namely Small Business Corporations and Turnover Tax, and have approached you to find out more. What are the respective qualifying criteria for the two tax concession regimes?

3.2 Regardless of you answer to 3.1, assuming that they qualified as an SBC, what would their tax liability for the year have been under this regime?

3.3 Similarly, assuming that they qualified for Turnover Tax, what would their tax liability have been under this regime?

3.4 Which of the two schemes would they pay less tax under? Do you think this is a blanket rule that would apply to all small business (that they would pay less tax under that specific scheme compared to the other)?  Give a short reason or two to substantiate your answer.

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