Tax Case Study: HOD Pty Ltd & Special Trust Implications

QUESTION 1                                                                                                                  [70 MARKS]

A South African company, House of Dragons (HOD) Pty Ltd, produces and sells dragon fire sweets known as Dragon Eggs. The company is a Category A VAT Vendor. The year of assessment of the company is 30 June.

New Accountant

On 01 January 2024, the HOD hired an accountant, Viserys (30), to work in their finance department. The cost to company is R48,430 comprising of:

• Cash salary: R38,000
• Travel Allowance: RS,000
• Company contributions to medical aid: R1,100
• Company pension fund contribution (3.5% on salary)

1. Viserys drives a Nissan Magnite, which he acquired on 01 March 2023 at a cost of R359,100 (inclusive of VAT).
   1. On 30 January 2024, he had travelled 550km, 480km of which were for business. (He kept an accurate logbook)
   1. Viserys’s total medical aid contribution is R2,925; his wife is his only dependant. He contributes 4% of his salary to pension fund.
   1. He had no other deductions other than statutory deductions (PAYE and UIF)

HOD Tax Liability

Assume that the taxable income of HOD before considering the following incidences amounted to R582,800:

1. On 12 July 2024, there was a fire at the HOD warehouse. Machine A was destroyed in the fire. This pre-owned machine was purchased for R475,000 (including VAT). The insurance company paid out R512,500 (including VAT). The HOD used this money to purchase Machine B.

• The HOD entered into the following learnership agreements:

Agreements with 3 learners in possession of NQF level 4 certificates (none were disabled and 1 of the three completed their learnership ).

Agreements with 3 learners in possession of NQF level 8 certificates (1 is disabled)

(a) Calculate the take home amount of the new accountant.

(b) Calculate the tax liability of the HOD. Start your calculation with the taxable income                                                                                                                                  (45) of R582,800. Assume that the HOD will take advantage of all allowances and incentives in the Income Tax Act to reduce tax liability.

QUESTION 2                                                                                                                    [10 MARKS]

Alicent Hightower, a resident of South Africa, established a trust with her husband Cristian Cole in 2012 for the benefit of their children Aemond, Helena and Aegon. Alicent, Cristian and Mr. Otto are the appointed trustees. Mr. Otto has his own accounting practice, to which he is a sole practitioner. Income of the trust is distributed at the discretion of the trustees.

Alicent started a company CrazyGreens Pty (Ltd) on 28 February 2003, which offers interior designs to high-end customers. Alicent sold all her shares in CrazyGreens to the trust; she was the sole shareholder and sole director. On 01 September 2023, on the instruction of the trustees, CrazyGreens paid the outstanding monthly trustees fees of R48,000 due to Mr. Otto for the period 01 March to 30 September 2023. The Trust will not be required to repay this amount to the company.

• Discuss the tax consequences for CrazyGreens Pty (Ltd) of the payment made to Mr Otto by the company. Ignore VAT. (8)

• Assume that the trust established is a special trust. Would the implication in the previous question be different? Provide a reason for your answer. (2)

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Taxation Assignment Answers: Expert Answers on Above Taxation Questions

Answer 1(a) Calculation of Take Home Pay

Salary Calculations: Salary Details Gross salary 38,000 Travel allowance 5,000 Medical aid (company contribution) 1,100 Total Cost to Company R48,430

Deductions Calculation: Deduction Type Amount (R) Employee pension fund contribution (4%) R1,520  UIF (1% of salary) R380

To calculate take home calculations, PAYE calculation is performed as follows:

Annual Taxable Income: R504000

Tax amount: R108890 (from tax tables)

Monthly Paye: R9074

Take Home Pay: Salary + travel allowance – PAYE – pension-uif = R38000+R5000-R9074-R1520-R380

=R32026

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