USING SECTION 12C SOUTH AFRICAN TAX

QUESTION 2(25 marks, 30 minutes)

1. PART A(11 marks, 13 minutes)

Martin's Closet (Pty) Ltd (MC) is a company that manufactures clothing.The company is not a small business corporation as defined in the Income Tax Act and its financial year ends on 31 March. The accountant is unsure how to treat the following transactions for taxation purposes:

1. Transaction 1 (4 marks)

MC made a restraint of trade payment of R108 000 to a retiring executive, Mr Makgonatsohle, on 1 October 2020. Mr Makgonatsohle was restrained from competing with the company for two years from the date of the payment.

1. Transaction 2 (4 marks)

MC purchased raw materials from a local supplier, Local Fabrics (LF), but then realised afterwards that some of the raw materials were damaged.

Because LF refused to accept liability for the damaged goods, MC is suing LF for a refund. MC appointed Mr Machancer, a local attorney, to recover the money. MC paid Mr Machancer a retainer fee (an advance payment for future services or work to be rendered) of R100 000 before he commenced work. He had invoiced MC R14 500 for three days' work by 31 March 2021. The balance of Mr Machancer fee is being kept in his attorney's trust account. It is expected that Mr Machancer will send his next invoice to MC only on 31 May 2021.

1. Transaction 3 (3 marks)

MC donated R300 000 to a public benefit organisation (PBO) on 1 December 2020.The PBO issued MC with a section 18A tax deduction certificate.

REQUIRED:	MARKS
Discuss the normal tax consequences of transaction 1 to 3 with MC's accountant. Note: No calculations are necessary.	11

1. PART B(14 marks, 17 minutes)

Superstar Cupboards (Pty) Ltd (Superstar) is a company that manufactures and sells kitchen cupboards. The company is not a small business corporation as defined in the Income Tax Act and its financial year ends on 31 March.

The company's accountant calculated the taxable income of R6 205 700 without taking into account the following transactions for the year of assessment ended on 31 March 2021:

1. Superstar received local dividends of R150 000.

1. The information in the table below relates to the trading stock.

Finished cupboards	01/04/2020	31/03/2021
Cost Price	Market Value	Cost Price	Market Value
R244 000	R350 000	R457 000	R420 000