Hlasela (Pty) Ltd (“Hlasela”) is a company incorporated in South Africa with a 30 April financial year end. The company manufactures and distributes weight management supplements to pharmacies and retail food stores in and around South Africa. The South African Revenue Service (SARS) regards Hlasela’s manufacturing process as an approved process of manufacture. Hlasela is a registered vendor for Value-Added Tax (VAT) purposes making only taxable supplies and is not a Small Business Corporation as defined in section 12E of the Income Tax Act.
All amounts exclude VAT unless otherwise stated.

Hlasela’s preliminary taxable income was correctly calculated as R2 340 000 before taking the following transactions into account:
1. Hlasela made the following investments during the 2023 financial year:

Preference shares
On 15 June 2022, 500 10% preference shares were acquired for R175 000 from Agro Ltd, a South African resident company. During the 2023 financial year, dividends amounting to R34 870 were received in respect of the shares. Investment in a fixed deposit account Five years ago, Hlasela invested R100 000 in a fixed deposit account. This investment yielded interest amounting to R15 800 for the 2023 financial year.

Ordinary shares - Ordinary shares with a total share price of R500 000 (correctly converted to South African rands) were acquired from Prazioh Plc, a foreign company. The ordinary shares translate to a 5% shareholding and voting rights in Prazio Plc. During the 2023 financial year, dividends amounting to R108 000 accrued to Hlasela in respect of the shares.

2. On 28 February 2023, Hlasela acquired a new processing machine for use in manufacturing processes from a supplier based in America. The machine was acquired for $40 000 and shipped on a free-on-board basis. The machine was loaded on a ship at the American harbor on 6 March 2023 and arrived at a South African harbour on 17 March 2023. Additional costs amounting to R15 000 were incurred for assembling and mounting the machine. The machine was brought into use on 1 April 2023. The American supplier was only settled on 15 May 2023.
The following exchange rates apply for the period of the transaction:
 

Date                             Spot rates
28 February 2023      $1 = 18.41
6 March 2023             $1 = 18.13
17 March 2023           $1 = 18.39
31 March 2023          $1 = 17.90
1 April 2023                $1 = 17.79
30 April 2023              $1 = 18.28
15 May 2023              $1 = 19.29

3. Hlasela leased Building 111 from Properties ltd to house its manufacturing processes. The lease contract stipulated the following:
• Commencement date 1 February 2011.

• Lease term of 12 years, without an option for extension.
• Lease premium of R55 000 payable in full on the commencement date of the lease.
• Annual rental of R85 000 payable in arrears, subject to a 10% escalation after every 6 years.
• Improvement values at R480 000 had to be effected on Building 111 in the first year of the lease. The improvements commenced on 10 February 2011 and were completed on 31 March 2011 at a total cost of R550 000. The whole building was brought into use on 1 April
2011.

Only R40 000 of the lease premium was included in the lessor’s gross income.

4. On 30 November 2022, Hlasela lost one of its delivery trucks in a hijacking. The delivery truck was acquired on 2 May 2022 for R600 000 (including VAT). An indemnity payment of R650 000 was received from BLT insurers as compensation for the loss. To meet Hlasela’s demand, on 1 January 2023, a new delivery truck had to be acquired at a cost of R680 000 to replace the hijacked one. The new delivery truck was brought into use on 1 February 2023.

5. On 30 April 2023, Hlasela assessed stock items that were still on hand and found that their market value was R25 000 lower than the cost taken into account in the preliminary taxable income provided above.

6. On 13 April 2023, weight management supplements with a cost price of R14 300 were sold for R19 000. R10 000 of the selling price will accrue before the end of the 2023 year of assessment, while the remainder of the balance will accrue in the 2024 year of assessment. On 27 April 2023, the customer paid R10 000 of the outstanding balance. The cost price of R14 300 is already accounted for in the preliminary taxable income provided above.

7. On 1 January 2023, Hlasela entered into a 36 months learnership agreement with Sam Smith, an employee that has a physical and communication impairment. Sam Smith had an NQF level 8 at the signing of the agreement.

8. An annual insurance premium of R150 000 was paid on 31 March 2023 in respect of the period 1 April 2023 to 31 March 2024.

9. Hlasela has been experiencing challenges with the collection of outstanding debts. During the 2023 financial year, the list of doubtful debts reflected an amount of R186 000 and 100% of the amount has been in arrears for more than 5 months. The doubtful debts allowed as a deduction in the 2022 financial year amounted to R42 000.

Additional information:
• Binding general ruling 57 provides for the following write-off periods:
- Trucks……………………………….. 6 years
• Hlasela elected to apply par 65 of the 8th schedule where applicable.
• Hlasela incurred an assessed capital loss of R11 000 during the 2022 year of assessment.
• Hlasela does not apply IFRS 9 for financial reporting purposes.

Required

Calculate the taxable income of Hlasela (Pty) Ltd for the 2023 year of assessment.
Provide reasons for amounts that have a nil effect on taxable income.

Answer rating: 100% (QA)

Solution To calculate the taxable income of Hlasela Pty Ltd for the 2023 year of assessment we need to consider the following items 1 Preference shares investment The dividends received from Agro Ltd ... View the full answer