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Tax Consequences for Businesses in 2025

The document presents three additional taxation questions related to capital assets for different businesses. It includes scenarios involving the destruction and sale of industrial ovens, machinery, and buildings, along with their respective tax consequences and calculations for the year of assessment. The document emphasizes the need to ignore VAT and Capital Gains Tax in the calculations.

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Zolile Kula
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5 views4 pages

Tax Consequences for Businesses in 2025

The document presents three additional taxation questions related to capital assets for different businesses. It includes scenarios involving the destruction and sale of industrial ovens, machinery, and buildings, along with their respective tax consequences and calculations for the year of assessment. The document emphasizes the need to ignore VAT and Capital Gains Tax in the calculations.

Uploaded by

Zolile Kula
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

TAXATION 201

Department of Taxation
Faculty of Economics and
Learning area 4 Management Science
Additional Question 1

On 1 August 2024 a fire destroyed three industrial ovens at the factory of Lesley
Brownies’ Bakery, a Gauteng-based organisation. Lesley Brownies’ Bakery is a
resident of the Republic and not a VAT vendor.

The remains of the ovens were sold to a scrap-metal dealer. Details of the
destroyed industrial ovens follow:

Oven 1 Oven 2 Oven 3

Originally acquired New New Used


1 Sep 2022 12 Dec 2023 1 Feb 2024

Original cash cost R50 000 R35 000 R15 000

Insurance proceeds received Nil R25 000 R13 000

Sale proceeds received from R2 500 R2 000 R3 500


scrap-metal dealer

The Commissioner has confirmed that Lesley Brownies’ Bakery carries on a


process of manufacture and has agreed that the industrial ovens are used
directly in the process. Lesley Brownies’ Bakery has its financial year-end on the
last day of February.

REQUIRED:
Calculate all the tax consequences for Lesley Brownies’ Bakery for the three
original industrial ovens for its 2025 year of assessment. IGNORE the effect of
Capital Gains Tax.

NB: Revisit this question after you have done Learning Area 5 (Capital Gains Tax).

1
TAXATION 201

Learning area 4 Department of Taxation


Additional Question 2 Faculty of Economics and
Management Science

Ruby Sunshine owns a manufacturing enterprise (as approved by SARS). She is a


registered VAT vendor. Ignore VAT for purposes of the question. The following
information is provided:

1. On 30 June 2024, machine A (directly used in the process of manufacture)


was destroyed by a fire. The cost price of the machine was R50 000
(second hand). The machine was originally bought and brought into use on
1 April 2022. The insurance paid out R55 000.

2. Ruby bought a new Mercedes on 19 September 2024 to be used in the


business. She has the sole right to utilise the vehicle. She calculated that
according to her logbook, she traveled a total of 36 200km for the year of
which 12 670km was for private purposes. The vehicle cost R410 400.

3. Machine B (directly used in the process of manufacture) was bought on the


same day as machine A. Machine B (a new machine) originally cost
R120 000. On 1 September 2024 the plant was revamped and the machine
was moved at a cost of R25 000.

4. The computer that is currently in use was bought and brought into use on
1 January 2022. The cost of the computer was R12 000.

5. All amounts exclude VAT.

6. Write-off periods allowed by SARS:


Passenger vehicle 5 years
Computer 3 years

REQUIRED:

Calculate the capital allowances/tax consequences for Ruby Sunshine for the year of
assessment ended 28 February 2025.

1
TAXATION 201

Learning area 4
Additional Question 3 Department of Taxation
Faculty of Economics and
Management Science

Luxury (Pty) Ltd (“Luxury”) manufactures luxurious soaps that are sold to international
retailers. SARS regards the process used to manufacture soap as a process of
manufacturing. Luxury is a South African tax resident.

Luxury has asked your assistance with their tax affairs regarding their capital assets. The
following information relates to the year ended 30 June 2025. Ignore VAT and CGT.
The taxable income before taking the below transactions into account, amounted to
R1 500 000.

1. Luxury sold one of its manufacturing machines. This machine (machine 1) was
purchased brand new on 1 September 2022 and was brought into use
immediately in the manufacturing of Luxury’s soap. It was purchased for an
amount of R500 000, and was sold during the 2025 year of assessment for
R1 100 000.

2. One of the manufacturing machines (machine 2): a brand-new machine used in


the production of soap was bought by Luxury on 1 August 2024 for R1 000 000.
Luxury could not use it until they had finalized the purchase of a soap bar design
to enable them to produce this range of soaps. This contract was finalized on
1 November 2024 and production commenced immediately. The rest of
Luxury’s manufacturing machinery was bought brand new on 1 September 2020
at a total cost of R1 300 000 and brought into use immediately.

3. Luxury purchased a second-hand machine (Machine 3) on 30 September 2024


for R35 000 as well as a delivery Bakkie for R158 000, to deliver the
manufactured soaps from Braamfontein to Pretoria. Both items were brought
into use immediately.

4. Luxury owned a building in which their manufacturing activities were carried out.
They purchased this building brand new on 1 August 2020 for an amount of
R600 000. This building was largely destroyed in a fire during the current year
of assessment. Luxury was able to sell the building to the municipality for
R100 000 on 21 August 2024 (a week after the fire broke out).

5. Luxury entered into a lease agreement with Bubbles Ltd to lease a factory
building on 1 September 2024 for a period of 20 years. Luxury started using the
building immediately for their manufacturing activities. The agreement provided
1
for the payment of a lease premium of R80 000 on the signing of the contract.
The contract also provided that Luxury had to effect improvements to the building
at a cost of R150 000. The improvements commenced on 15 September 2024
and were completed (at a cost of R200 000) and brought into use by
31 December 2024.

6. Luxury paid lease rentals of R15 000 per month in respect of the new factory
building (see Note 5), (thus, R150 000). R120 000 rent for the period 1 July
2025 to 1 February 2026 was paid on 15 June 2025 (this amount is not included
in the R150 000).

7. Luxury uses two telephones in their business. The one telephone was purchased
on 1 May 2024 for an amount of R4 800. The other phone was purchased on
1 April 2025 for an amount of R8 500 – this phone has a fax, a phone, as well a
Web cam function which Luxury found very helpful in communicating with their
international clients. Both of these phones are used 100% for business purposes.

8. The warehouse in Braamfontein was not sufficient for the administration section
of the business. Luxury purchased the entire 1st floor of a five (5) storey building
at a cost of R2 500 000 on 1 March 2025 and moved in on 1 April 2025. The
building is brand new and was never previously used.

SARS allows the following write off periods:


Telephones 2 years
Manufacturing machines 6 years
Delivery vehicles 4 years

REQUIRED:
Calculate Luxury (Pty) Ltd.’s taxable income for the year ended 30 June 2025. Round all
amounts off to the nearest rand. Provide a brief reason where an item has a nil effect on
the calculation. Ignore VAT and CGT.

Common questions

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A building leased and improved significantly affects tax liabilities through allowable depreciation and spreading of associated improvement expenses over the asset's useful life. For a R2,500,000 floor purchase, SARS write-off policies for real estate direct the tax calculations concerning deductions and asset valuations.

Insurance proceeds cover capital assets' losses and may lead to taxable recoupment if amounts exceed undepreciated value. Ruby Sunshine received R55,000 for a machine worth R50,000, resulting in R5,000 potentially subject to tax, impacting overall taxable income.

Factors include business vs. private mileage, affecting proportional deduction claims. With total 36,200 km traveled and 12,670 km private, a formula deriving from the ratio driven, cost of the vehicle (R410,400), and standard depreciation impacts the final amount claimable against taxable income.

Machine A involves a calculation of recoupment or scrapping allowance. Purchased for R50,000, with R55,000 received as insurance, it results in a gain of R5,000, which has tax implications. Machine B is eligible for regular wear and tear allowances. The Mercedes requires a deduction based on business vs. private usage; it traveled 36,200 km, with 12,670 km for private purposes, impacting the allowable vehicle deductions.

Lesley Brownies' Bakery must consider the insurance proceeds and scrap sales in calculating the tax consequences. Oven 1 provides no insurance proceeds but generates R2,500 from scrap sales. Oven 2 yields R25,000 in insurance proceeds and R2,000 from scrap sales. Oven 3 accounts for R13,000 in insurance and R3,500 from scrap. The tax consequences stem from the deduction of losses or the inclusion of any income resulting from these proceeds during the tax assessment, excluding capital gains tax considerations.

Considerations include capital versus revenue expenditure determination, depreciation schedules affected by upgrades or relocation costs (e.g., R25,000 spent moving machine B). Proper categorization influences assessable income by affecting deduction eligibility, impacting cash flow and strategic inventory or capital asset decisions.

Acquisition date and initial use determine commencement of depreciation for tax purposes. The date sets tax years for deductions, influences capitalizing versus expense recognition, and impacts scheduling benefits. In Luxury’s case, deferred machine use delays corresponding deductions and financial recognition.

The two telephones qualify for depreciation under SARS's write-off periods. With periods set at 2 years for phones, both acquired in 2024 and 2025, depreciation for the tax year matches usage proportions, benefiting tax calculations as they are exclusively for business use.

Lease premiums are amortizable over the lease period, impacting annual expenses. An R80,000 premium is allocated over 20 years. Additionally, R150,000 initially budgeted for improvements grew to R200,000, qualifying as capital expenditure with potential deductible depreciation based on tax regulations.

The sale of a manufacturing machine, purchased on 1 September 2022 for R500,000 and sold for R1,100,000, results in recoupment of allowances previously claimed, and an income inclusion. The difference of R600,000 (sale minus purchase price) could represent recoupment plus a capital profit if exclusions apply, as capital gains are ignored for this task.

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