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Q1 Sol Part C

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54 views4 pages

Q1 Sol Part C

Uploaded by

nkosiamanda848
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Solution to Test 1 Part C

Requirement 1

The requirements of section 24BA(2)(a) are met since Lancing has acquired an asset in the
form of a welding machine from a person (Alfred Gore) in exchange for 16000 shares.
The requirements of section 24BA(2)(b) are not met since the market value of the asset of
R128 000 is not different to the market value of shares of R128 000 determined on an
armslength basis.
It would not be necessary to consider the provisions of section 24BA(4) since the provisions
of section 24BA(2)(b) are not met.
Conclusion: The provisions of section 24BA cannot apply to the transaction between
Lancing (Pty) Ltd and Alfred Gore on 1 March 2021

Requirement 2
Normal tax implications for Alfred
The 32% shareholding in Lancing acquired by Alfred is not deductible under section 11(a)
since Alfred acquired the shares for investment purposes and they are thus of a capital
nature.
In terms of section 42(2)(a)(i)(aa) Alfred is deemed to have disposed the welding machine for
an amount equal to its base cost (R80 000).

In terms of section 42(2)(a)(ii)(aa) Alfred is deemed to have acquired the equity shares in
Lancing for an amount equal to R80 000 (base cost of the asset) on 1 March 2021.
Alfred will thus not recognise any recoupment or capital gain on the disposal of the
welding machine to Lancing.

Normal tax implications for Lancing (Pty) Ltd

The issue of shares by Lancing in exchange for the welding machine also will not result in
any capital gains tax implications for Lancing as the issue of shares are regarded as a non-
disposal under paragraph 11(2)(b) of the Eighth schedule.
The welding machine would qualify as an "allowance asset" in terms of section 41(1) of
the Income Tax Act. Alfred and Lancing would be deemed to be one and same person in
determining any allowance available to Lancing in terms of section 42(3)(a)(ii) of the Income
Tax Act.

In terms of section 42(3)(a)(ii) Lancing is deemed to acquired the welding machine on 1


March 2019 and have benefited from claimed capital allowances of R20 000 in the 2020
year of assessment and R20 000 in the 2021 year of assessment.

Lancing will continue to claim tax allowances on the remaining useful life of the welding
machine based on the original acquisition cost of R120 000.
In terms of section 42(3A)(b) of the Income Tax Act the amount that Lancing received for
issuing of its shares for the purposes of the calculation of its contributed tax capital is
deemed to be the base cost of the welding machine at the date of disposal which is R80
000.

Requirement 3
800000
Preliminary taxable income
90000
Salary from Lancing (9 months x R10 000)
Recoupment on sale of welding machine 40000
(R128000 proceeds limited to cost - R80000 tax value)
Capital gains tax
Proceeds on sale of welding machine (R128000 - R40 000) - para 35(3) of the Eighth schedule
88000
Less base cost of welding machine (R120 000 - R40 000) - para 20(3) of the Eighth schedule
-80000
Sum of all gains and losses 8000
Less annual exclusion (para 5 of the Eighth schedule - R40 000 limited to sum of gains) -8000
Aggregate capital gain 0
Less capital loss brought forward 0
Net capital gain 0
Inclusion in taxable income@40% (para 10 of the Eighth schedule)
Taxable income 930000
Rand
800000
90000

40000

0
930000

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