TUTORIAL 12
Information relating to Rubber Roadsters (Pty) Ltd (“RR”)
Rubber Roadsters (Pty) Ltd (“RR”) is a supreme world-class fitment services centre,
specialising in providing local customers with a diverse range of products from leading
premium brands in tyres to mag wheels (wheels made from lightweight magnesium
steel) and accessories at affordable prices. RR has a year-end of 31 May.
RR is a registered Category A VAT vendor and you may assume that all of RR’s
suppliers are registered VAT vendors (unless stated otherwise) and that RR is in
possession of all valid documentation required in terms of the VAT Act unless stated
otherwise. All amounts exclude VAT unless it is not applicable or apparent from the
facts and circumstances.
RR’s financial director has indicated that the company will elect any provision of the
Income Tax Act to minimise its tax liability. There are 11 shareholders and their
shareholding is as follows:
Shareholder Percentage shareholding
Frank Kluge (founder of the company) 70%
10 South African residents (natural persons)* 3% each
* One of the shareholders, Mrs Maimela also owns shares in Leather Legends (Pty) Ltd (“LL”)
which she started in 2019 and has grown its operations steadily every year since its
incorporation.
Frank Kluge is a registered VAT vendor. None of the other shareholders are VAT
vendors.
The following transactions took place during the 2024 financial year
1. On 1 June 2022, RR entered into an agreement with AutoGood (Pty) Ltd
(“AutoGood”), a car dealership, where RR delivered 392 tyres to the dealership.
AutoGood agreed to pay the total purchase consideration of R540 960 (including
VAT) over the next 2 years. The instalment credit agreement contained the
following terms and conditions:
• Date of purchase: 1 June 2022
• Total cash value of the tyres: R540 960 (including VAT)
• Deposit: 7.75% of the total purchase price (payable immediately)
• Interest rate: 12% per annum
• Payment period: 2 years
• Instalments: R95 197 (including VAT) payable in arrears every 4 months
(30 September, 31 January and 31 May).
• Ownership of the tyres will pass to AutoGood on payment of the deposit.
Per internal documentation, the acquisition cost of these tyres during the 2023 year
of assessment amounted to R305 760. The amortisation table correctly indicates
the amounts due in terms of the agreement:
Date Instalment Interest VAT Capital
(R) (R) (R) outstanding
(excluding VAT)
(R)
1 June 2022 433 944
30 September 2022 95 197 19 961 9 813 368 522
31 January 2023 95 197 16 952 10 206 300 483
31 May 2023 95 197 13 822 10 614 229 722
30 September 2023 95 197 10 567 11 039 156 131
31 January 2024 95 197 7 182 11 480 79 593
31 May 2024 95 197 3 661 11 939 0
571 182 72 145 65 092
2. On 1 May 2023, RR entered into an agreement with Machines Galore Limited to
acquire a brand-new fitment machine. The fitment of tyres has been approved by
SARS as a process similar to a process of manufacture. Since this machine was
the first of its kind, the purchase price in terms of the contract was set at
R1 600 000 with an additional R184 300 payable should 10 000 fitments be
completed within the first 2 months of its use. At the end of the 2023 year of
assessment and first month of use, only 4 000 tyres had been fitted. In June 2023,
RR fitted a further 7 000 tyres.
3. On 1 May 2024, RR paid R25 000 in connection with the renewal of its registered
trademark for the next 10 years with the Companies and Intellectual Property
Commission (CIPC).
4. RR earned interest on local bank accounts amounting to R30 000 during the year
of assessment. RR also paid bank charges amounting to R2 500 during the year
of assessment.
5. RR paid security services of R120 000 upfront, on 1 March 2024 for a twelve month
period.
Page 2 of 5
REQUIRED:
1 Briefly discuss why Rubber Roadsters (Pty) Ltd is not a small
business corporation as defined in section 12E(4) of the Income
Tax Act. 2
2 Calculate the effect of transactions 1 to 5 on the taxable income
of Rubber Roadsters (Pty) Ltd for its year of assessment ended
31 May 2024. 15
• Support your answer with reference to legislation.
• Give reasons for nil effects.
• Round amounts to the nearest Rand.
Total
Page 3 of 5
PART B (28 marks, 56 minutes)
Information relating to Frank Kluge
Frank Kluge, founder and majority shareholder of Rubber Roadsters (Pty) Ltd (“RR”),
is 54 years old and ordinarily resident in South Africa. Alongside his business
endeavours, Frank is a well-known athletics and Comrades Marathon coach who has
run his coaching business as a sole proprietor since 2024. He employs four other
coaches and a secretary and rents an office at the athletics track where he coaches.
Frank is registered as a category A VAT vendor with regard to his coaching business
and makes 100% taxable supplies.
The following notes relate to donations and disposals Frank made during the
2024 year of assessment in chronological order:
1. On 1 March 2023, Frank donated 3% of the total shares in RR to one of his
childhood friends, Buhle, who is experiencing financial constraints. Before this
donation, Frank had 73% interest in RR (now 70%) with the remaining shares held
by 9 (now 10) other independent shareholders (refer to Part A). The total market
value of RR’s shares on 1 March 2023 amounted to R520 000. You may assume
that Frank’s base cost for the shares is R1 000.
2. On 8 May 2023, Frank donated Kruger coins (mainly made from gold) to his son,
John. The coins had a market value of R150 000 on the date of donation and Frank
purchased it 7 years ago for R116 000.
3. Frank’s mother had to undergo a hip replacement surgery and she needed a full-
time nurse for 6 months after the surgery. Frank donated R75 000 to his mother on
10 July 2023 to cover the cost of the nurse and some other necessary expenditure.
A market related salary for a full-time nurse is regarded as R11 000 a month.
4. Frank owns a three-story house in Hartbeespoort which he purchased new from a
developer on 1 August 2008 for R1 600 000 inclusive of VAT. Frank resided in the
residence since the date of purchase until 31 July 2017 when he moved to Pretoria
(64.3km from his Hartbeespoort home) to assist his mother with the care of his sick
father.
He stayed in Pretoria with his parents from 31 July 2017 to 31 July 2020, before
returning to his Hartbeespoort home (on 1 August 2020) after his father’s death
and after the COVID-19 restrictions were lifted slightly. During the 3-year stay with
his parents, he rented the Hartbeespoort home to an unconnected couple. Upon
moving back into the house, he turned one of the bedrooms (25% of the total floor
space) into his home office as he then started working more from home due to the
Page 4 of 5
COVID-19 restrictions. SARS allowed income tax deductions for any trade
expenditure relating to this home office.
During June 2023, Frank decided to put his primary residence up for sale and within
a few days received an offer of R4 200 000. The property was sold on 31 July 2023
(3 years after he moved back in). Frank incurred the following expenses with regard
to the property:
• R860 000 interest on the mortgage bond in relation to the mortgage amount of
R1 600 000 (purchase price).
• R5 200 with regard to the electricity and gas certificate of compliance (COC) in
relation to the disposal of the house.
5. As Frank sold his house in Hartbeespoort, he did not see the need to keep his
12 metre boat on the Hartbeespoort dam. He normally used the boat for his own
personal use with the occasional family function or wedding. He, however, always
provided the use of the boat for free to his family. He purchased the boat for
R289 000 just over 5 years ago and disposed of it on 31 October 2023 for
R210 000.
6. Frank did not have any assessed capital loss brought forward from the 2023 year
of assessment.
REQUIRED
1 Briefly discuss, supported with calculations, the donations tax
consequences, if any, for Frank for each of the donations listed in
notes 1, 2 and 3 and indicate by when it is payable to SARS. 9
• No reference to legislation is required.
2 With regard to note 4, explain to Frank why he paid VAT on the
purchase of his residence in 2008 and not transfer duty and also
explain why he was not able to claim the VAT amount back from
SARS. 3
3 With regard to note 4, the disposal of the residence, calculate
the capital gain/loss which should be added to the sum of Frank’s
other gains and losses. 7
• Show consideration where necessary.
• Only provide reasons with legislation references for nil effects
and any specific exclusions applicable.
4 With regard to note 1 to 6, calculate the taxable capital gain
to be included in the taxable income of Frank Kluge for his 2024
year of assessment. 9
• Assume the capital gain (after possible exclusions) from the
disposal of the residence in required 3 is R648 700.
• Only provide legislation references for nil effects.
Total 28
Page 5 of 5