uestion
2

(
3
0
Marks
)
Wendy House
(
Pty
)
Ltd manufactures and sells wooden houses and is not a small business corporation as defined. The following is a draft statement of comprehensive i

Question

uestion 
2
 
(
3
0
 ﻿Marks
)
 ﻿Wendy House 
(
Pty
)
 ﻿Ltd manufactures and sells wooden houses and is not a small business corporation as defined. The following is a draft statement of comprehensive income for its year of assessment ending 
3
1
 ﻿March 
2
0
2
2
.
 ﻿All amounts exclude VAT, unless stated otherwise: Sales 
6
 
8
8
3
 
2
1
2
 ﻿Less: Cost of sales 
(
note 
1
)
 
(
1
 
8
7
9
 
5
0
0
)
 ﻿Gross profit 
5
 
0
0
3
 
7
1
2
 ﻿Other income Interest received 
1
5
0
 
0
0
0
 ﻿Insurance proceeds 
(
note 
4
)
 
4
5
 
0
0
0
 ﻿Less: Expenses Depreciation 
(
note 
5
)
 
1
4
8
 
8
7
8
 ﻿Interest paid on mortgage bond 
6
0
 
0
0
0
 ﻿Other expenses 
(
deductible for tax purposes
)
 
4
7
3
 
6
9
8
 ﻿Loss of profits from machinery sold 
1
5
 ﻿months ago 
3
6
0
 
0
0
0
 ﻿Notes: 
1
)
 ﻿Purchases amounted to R
1
 
9
7
3
 
0
0
0
;
 ﻿opening stock and closing stock were R
2
0
2
 
5
0
0
 ﻿and R
2
9
6
 
0
0
0
 ﻿respectively. The market value of the stock has never been below its cost. 
2
)
 
“
Local
”
 ﻿interest of R
1
5
0
 
0
0
0
 ﻿accrued during the 
2
0
2
2
 ﻿year of assessment. 
3
)
 ﻿The company sold an office building on 
3
0
 ﻿December 
2
0
2
1
 ﻿for R
5
 
5
0
0
 
0
0
0
.
 ﻿This office bu

VIPSolutions · Accepted Answer

# Wendy House (Pty) Ltd – Tax Calculation for Year Ended 31 March 2022

This solution calculates the taxable income and tax liability of Wendy House (Pty) Ltd for the year ended 31 March 2022, based on the draft statement provided and relevant South African tax principles.

---

## 1. **Calculate Taxable Income**

### **A. Adjusted Gross Income**

#### **1. Sales**
- **Sales:** R6,883,212

#### **2. Cost of Sales (Note 1)**
- **Purchases:** R1,973,000
- **Opening stock:** R202,500
- **Closing stock:** (R296,000)

**Cost of Sales Calculation:**  
$$
\text{Cost of Sales} = \text{Opening Stock} + \text{Purchases} - \text{Closing Stock}
$$
$$
= 202,500 + 1,973,000 - 296,000 = 1,879,500
$$

#### **3. Gross Profit**
$$
\text{Gross Profit} = \text{Sales} - \text{Cost of Sales} = 6,883,212 - 1,879,500 = 5,003,712
$$

#### **4. Other Income**
- **Interest received:** R150,000
- **Insurance proceeds** (Note 4): R45,000  
  - **Breakdown:** Loss of profits = R28,000; Loss of stock = R17,000

**Total Income:**  
$$
5,003,712 + 150,000 + 45,000 = 5,198,712
$$

---

### **B. Less: Expenses**

#### **1. Depreciation (Note 5)**
- **Depreciation per accounts:** R148,878
- **Replace with capital allowances (see below).**

#### **2. Interest Paid**
- **Interest paid on mortgage bond:** R60,000 (deductible)

#### **3. Other deductible expenses**
- **Other expenses:** R473,698

#### **4. Loss of profits from machinery sold 15 months ago:**  
- **R360,000**  
- **Not deductible**: Only capital loss may be considered for CGT if asset disposed, not "loss of profits" (revenue loss not allowed).

---

### **C. Capital Gains Tax (CGT) Calculation (Note 3)**

#### **Office Building Disposal**
- **Proceeds:** R5,500,000
- **Acquisition cost:** R2,800,000
- **Transfer cost:** R125,000
- **Valuation cost:** R55,000
- **Improvements:** R780,000

**Base Cost:**  
$$
2,800,000 + 125,000 + 55,000 + 780,000 = 3,760,000
$$

**Capital Gain:**  
$$
5,500,000 - 3,760,000 = 1,740,000
$$

**Inclusion rate for companies:** 80%  
$$
1,740,000 \times 80\% = 1,392,000
$$
- **Include R1,392,000 in taxable income.**

---

### **D. Insurance Proceeds (Note 4)**

#### **Loss of profits:** R28,000 – Taxable (replaces profits)
#### **Loss of stock:** R17,000 – Taxable (stock destroyed, compensation received)

---

### **E. Depreciation vs Wear and Tear Allowance (Note 5)**

#### **Assets:**
- Delivery vehicle (purchased 5 June 2020)
- Delivery vehicle (purchased 1 November 2021)

#### **Tax Allowance Calculation:**

##### **Depreciation replaced by wear & tear (Section 11(e)):**

Assume straight-line over 5 years (20% per annum), unless otherwise stated.

**1. Delivery Vehicle 1 (purchased 5 June 2020):**
- Cost: Not stated, only depreciation R85,000 given for the year, but we need original cost.
- If R85,000 is depreciation for full year, tax allowance is R85,000.

**2. Delivery Vehicle 2 (purchased 1 Nov 2021):**
- Cost: R120,000  
- Used 5/12 months in 2022 tax year:  
  $$
  R120,000 \times 20\% \times \frac{5}{12} = R10,000
  $$

**Total Wear & Tear Allowance:**  
$$
85,000 + 10,000 = 95,000
$$

**Add back accounting depreciation (R148,878), deduct tax allowance (R95,000):**
- **Add back:** R148,878
- **Deduct:** R95,000
- **Net add-back:** R53,878

---

### **F. Assessed Loss Brought Forward (Note 6)**
- **Assessed loss from previous year:** R260,000  
- **Deductible from this year's taxable income.**

---

## 2. **Taxable Income Calculation Table**

| Description                              | Amount (R)   |
|-------------------------------------------|-------------:|
| Gross profit                             |   5,003,712  |
| Add: Interest received                   |     150,000  |
| Add: Insurance proceeds                  |      45,000  |
| Add: Capital gain (CGT inclusion)        |   1,392,000  |
| **Total Income**                         |   6,590,712  |
| Less: Deductible expenses:               |              |
| - Interest paid                          |     (60,000) |
| - Other deductible expenses              |    (473,698) |
| - Accounting depreciation add back       |    (148,878) |
| - Tax allowance (wear & tear)            |      95,000  |
| **Net add back (Depreciation)**          |     (53,878) |
| **Total expenses**                       |    (587,576) |
| Less: Assessed loss brought forward      |    (260,000) |
| **Taxable Income**                       |  5,743,136   |

---

## 3. **Tax Calculation**

- **Taxable Income:** R5,743,136
- **Tax rate:** 28%
$$
\text{Tax Due} = 5,743,136 \times 28\% = R1,608,078
$$

---

## 4. **Summary Table**

| Step                               | Amount (R)      |
|-------------------------------------|----------------:|
| Taxable income                     |     5,743,136   |
| Tax @ 28%                          |     1,608,078   |
| Less: Provisional tax refund owed  |       (25,000)  |
| **Net tax payable to SARS**         |  1,583,078      |

---

## 5. **Final Summary**

**Wendy House (Pty)

VIPSolutions · Answer

# Summary of Tax Calculation Steps for Wendy House (Pty) Ltd

## 1. Calculate Taxable Income

### A. Adjusted Gross Income
Wendy House (Pty) Ltd's total sales amounted to R6,883,212, with a cost of sales calculated at R1,879,500. This results in a gross profit of R5,003,712, and after adding other income, the total income reaches R5,198,712.

### B. Less: Expenses
The company incurred various deductible expenses, including R60,000 in interest and R473,698 in other expenses. The loss of profits from machinery sold is not deductible, while depreciation is adjusted to reflect capital allowances.

### C. Capital Gains Tax (CGT) Calculation
The company realized a capital gain of R1,740,000 from the sale of an office building, with an inclusion rate of 80%. This leads to an additional taxable amount of R1,392,000 included in the total income.

### D. Insurance Proceeds
The insurance proceeds include R28,000 for loss of profits and R17,000 for stock loss, both of which are taxable. These amounts contribute to the overall income for tax purposes.

### E. Depreciation vs Wear and Tear Allowance
The depreciation for the year is replaced with a wear-and-tear allowance, calculated at R95,000. This adjustment leads to a net add-back of R53,878 for tax purposes.

### F. Assessed Loss Brought Forward
Wendy House (Pty) Ltd has an assessed loss carried forward of R260,000 that will be deducted from the current year's taxable income. This reduces the overall taxable income for the year.

## 2. Tax Calculation
The final taxable income, after all adjustments, is calculated at R5,743,136. Applying the corporate tax rate of 28% results in a tax liability of R1,608,078.

## 3. Summary Table
The summary table outlines the taxable income and tax due, along with adjustments for provisional tax refunds. The net tax payable to SARS after considering the refund is R1,583,078.

## 4. Final Summary
Wendy House (Pty) Ltd must pay SARS R1,583,078 for the 2022 year of assessment. This figure reflects all income, deductions, and adjustments pertinent to the tax calculation.

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