Heels (Pty) Ltd (the company), a resident of the Republic, is a company engaged in the...

 
  

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Heels (Pty) Ltd ("the company"), a resident of the Republic, is a company engaged in the manufacture of shoes. The company's financial year ends on the last day of February. Heels (Pty) Ltd is not considered to be a small business corporation. During the 2020 year of assessment, the company embarked on an expansion project, in order to meet an increase in the demand for their shoes. The following transactions were entered into as part of their expansion initiative (ignore VAT for the purposes of this question): • Heels (Pty) Ltd conducts its manufacturing business from a building it purchased for R800 000 (of which R100 000 related to the land) on 1 June 2010. Due to the expansion project underway, a need arose to acquire additional premises. The company entered into a 20-year lease agreement on 1 January 2020 with the owner of the adjacent building, who is also a registered taxpayer. Heels (Pty) Ltd took occupation immediately and began production in the leased building. The terms of the lease, are as follows: o Heels (Pty) Ltd is required to pay a monthly rental of R20 000, payable on the first day of every month, from 1 January 2020. o A lease premium of R50 000 was payable by Heels (Pty) Ltd on 1 January 2020. O A clause in the lease agreement stipulated that the lessee is to effect improvements to the building at a cost of R75 000. The improvements were completed and brought into use on 1 February 2020, at a cost of R100 000. The improvements to the building are considered to be used in the process of manufacture. On 1 August 2019, five identical machines costing R20 000 each were acquired from Broke (Pty) Ltd, an independent (unconnected) resident company that also manufactured shoes that was shutting down. These machines were originally purchased new by Broke (Pty) Ltd and used in its process of manufacture. Heels (Pty) Ltd brought these machines into use in its process of manufacture from the date it commenced manufacturing in the leased premises (see above). The market value of each machine on the date of purchase was R25 000. On 1 December 2019, the company concluded a contract for the purchase of a new cutting machine that was to be used in the process of manufacture, at a cost of R250 000. The supplier of the machine agreed to a delivery date of 15 January 2020 but due to the supplier's employees going on strike, the machine was only delivered on 15 February 2020. Due to the delay, the supplier agreed to a lower selling price of R240 000. The contract was updated and the supplier invoiced Heels (Pty) Ltd for R240 000 which was paid via EFT on the date of delivery. Heels (Pty) Ltd paid an additional R5 000 for the installation of the machine which took place on 25 February 2020, and the machine was immediately brought into use on that date. New furniture was purchased for the leased premises at a cost of R42 000 on 1 January 2020 and immediately brought into use. A new delivery vehicle was purchased and brought into used on 1 February 2020 at a cost of R280 000. The company owns other two delivery vehicles which were purchased on 1 March 2012 at a cost of R120 000 each, which have been fully written-off for tax purposes. On 15 February 2020, one of these vehicles was sold for R50 000. Additional information: The Commissioner of SARS has approved the following write-off periods (on a straight-line basis): o Furniture – 6 years and o Delivery vehicles - 4 years. Required: Calculate the effects on Heels (Pty) Ltd's taxable income arising from each of the transactions listed above for the 2020 year of assessment. Round off to the nearest Rand. Show ALL workings. (35) Heels (Pty) Ltd ("the company"), a resident of the Republic, is a company engaged in the manufacture of shoes. The company's financial year ends on the last day of February. Heels (Pty) Ltd is not considered to be a small business corporation. During the 2020 year of assessment, the company embarked on an expansion project, in order to meet an increase in the demand for their shoes. The following transactions were entered into as part of their expansion initiative (ignore VAT for the purposes of this question): • Heels (Pty) Ltd conducts its manufacturing business from a building it purchased for R800 000 (of which R100 000 related to the land) on 1 June 2010. Due to the expansion project underway, a need arose to acquire additional premises. The company entered into a 20-year lease agreement on 1 January 2020 with the owner of the adjacent building, who is also a registered taxpayer. Heels (Pty) Ltd took occupation immediately and began production in the leased building. The terms of the lease, are as follows: o Heels (Pty) Ltd is required to pay a monthly rental of R20 000, payable on the first day of every month, from 1 January 2020. o A lease premium of R50 000 was payable by Heels (Pty) Ltd on 1 January 2020. O A clause in the lease agreement stipulated that the lessee is to effect improvements to the building at a cost of R75 000. The improvements were completed and brought into use on 1 February 2020, at a cost of R100 000. The improvements to the building are considered to be used in the process of manufacture. On 1 August 2019, five identical machines costing R20 000 each were acquired from Broke (Pty) Ltd, an independent (unconnected) resident company that also manufactured shoes that was shutting down. These machines were originally purchased new by Broke (Pty) Ltd and used in its process of manufacture. Heels (Pty) Ltd brought these machines into use in its process of manufacture from the date it commenced manufacturing in the leased premises (see above). The market value of each machine on the date of purchase was R25 000. On 1 December 2019, the company concluded a contract for the purchase of a new cutting machine that was to be used in the process of manufacture, at a cost of R250 000. The supplier of the machine agreed to a delivery date of 15 January 2020 but due to the supplier's employees going on strike, the machine was only delivered on 15 February 2020. Due to the delay, the supplier agreed to a lower selling price of R240 000. The contract was updated and the supplier invoiced Heels (Pty) Ltd for R240 000 which was paid via EFT on the date of delivery. Heels (Pty) Ltd paid an additional R5 000 for the installation of the machine which took place on 25 February 2020, and the machine was immediately brought into use on that date. New furniture was purchased for the leased premises at a cost of R42 000 on 1 January 2020 and immediately brought into use. A new delivery vehicle was purchased and brought into used on 1 February 2020 at a cost of R280 000. The company owns other two delivery vehicles which were purchased on 1 March 2012 at a cost of R120 000 each, which have been fully written-off for tax purposes. On 15 February 2020, one of these vehicles was sold for R50 000. Additional information: The Commissioner of SARS has approved the following write-off periods (on a straight-line basis): o Furniture – 6 years and o Delivery vehicles - 4 years. Required: Calculate the effects on Heels (Pty) Ltd's taxable income arising from each of the transactions listed above for the 2020 year of assessment. Round off to the nearest Rand. Show ALL workings. (35)