Bachelor of Commerce Honours (Accounting) Test Number 1 Distance Learning One-Year Advanced Programme Question 3 40 marks 60 minutes You are a tax consultant with a local firm of chartered accountants. You have received the following value-added tax (VAT) queries from nine of your clients (all registered VAT vendors and all residents of the Republic) that require your comment. (Bunny Chow CC’s query (see below) concerns both VAT and normal tax implications.) Jagger & Watts (Pty) Limited Jagger & Watts (Pty) Limited is disposing of certain assets because it is moving to new premises. The financial manager would like to know whether Jagger & Watts (Pty) Limited is required to levy VAT on the selling price of the following assets: A pattern-cutting machine used in its factory. The machine was acquired new by Jagger & Watts (Pty) Limited in 1989. No VAT was paid on the purchase of this machine as the VAT legislation applied only from 30 September 1991. A delivery van used to transport Jagger & Watts (Pty) Limited’s products to its customers. The delivery van was acquired new in 2006. A microwave oven located in the employees’ kitchen. The microwave oven was acquired new in 2007. (6 marks) Is Jagger & Watts (Pty) Limited required to levy VAT on these disposals? Stoneage (Pty) Limited Harley Davidson, the new site supervisor of Stoneage (Pty) Limited, a construction contractor, chose the free use of a motor cycle as part of his salary package. Stoneage (Pty) Limited purchased a motor cycle for R91 200 (R80 000 plus VAT of R11 200). It gave the use of this motor cycle to Harley Davidson from the beginning of this month. Harley Davidson does not pay any consideration for the right to use this motor cycle. Stoneage (Pty) Limited bears the full cost of fuel and maintenance of this motor cycle. What are the VAT consequences to Stoneage (Pty) Limited? Pillar & Post Limited Pillar & Post Limited, a firm of structural engineers, gives all its valued customers a small gift in December each year to show its appreciation for their continued support. Pillar & Post Limited has been provided with the following two ideas for gifts that it is currently considering: (4 marks) A food hamper consisting of wine, dried fruit, nuts and chocolates. Each hamper will cost Pillar & Post Limited R250,80 (R220 plus VAT of R30,80). A leather diary. Each diary will cost Pillar & Post Limited R262,20 (R230 plus VAT of R32,30). The accountant of Pillar & Post Limited would like to know whether Pillar & Post Limited will be entitled to an input tax credit for the above two gifts? (2 marks) Mooney and Evans Incorporated Mooney and Evans Incorporated, a firm of legal advisers, purchased a second-hand notebook computer and a portable printer from an employee (a non-vendor) who was emigrating to Australia. He did not wish to take the computer and printer with him. Mooney and Evans Incorporated paid R6 500 for the notebook computer and R2 000 for the portable printer. The market value of the notebook computer was only R4 000, while the market value of the portable printer was only R1 500. The reason Mooney and Evans Incorporated ‘overpaid’ for these two items was that it wished to ‘help’ this employee as a result of his five years loyal service to it. The bookkeeper of Mooney and Evans Incorporated would like to know whether there are any VAT implications arising from the purchase of the notebook computer and portable printer? (5 marks) Trendy Designs (Pty) Limited Trendy Designs (Pty) Limited, a clothing manufacturer, purchased a batch of fabric from a local supplier on 1 January 2008. The fabric arrived at Trendy Designs (Pty) Limited’s factory on 24 January 2008 together with a valid tax invoice for the purchase. Due to an oversight on the part of the creditors clerk the tax invoice was not processed through the accounting records of Trendy Designs (Pty) Limited in January 2008. This meant that the input tax credit was omitted from the VAT return submitted for the tax period ending on 31 January 2008. The bookkeeper of Trendy Designs (Pty) Limited would like to know whether Trendy Designs (Pty) Limited may still claim the input tax credit in the following tax period, ending on 31 March 2008 (Trendy Designs (Pty) Limited has a two-monthly tax period.) (2 marks) Pedantic (Pty) Limited In January 2008 Pedantic (Pty) Limited bought some raw materials for R34 200 (R30 000 plus VAT of R4 200) from a local supplier. Pedantic (Pty) Limited claimed an input tax credit of R4 200 in its tax period 1 December 2007 to 31 January 2008. Pedantic (Pty) Limited encountered quality problems with these raw materials and paid the supplier only R27 360 (R24 000 plus VAT of R3 630) on 31 January 2008. It refused to settle this account until the quality problems were resolved. Thirteen months later, on 28 February 2009, R6 840 (R6 000 plus VAT of R840) was still outstanding despite numerous letters of demand having been received from the supplier. Are there any VAT consequences that arise out of this account having been outstanding for thirteen months? (2 marks) Sardine Spotters CC Sardine Spotters CC operates a tourist business on the KwaZulu-Natal South Coast. During winter many large shoals of sardines (fish) are seen, and caught, along this coast. Sardine Spotters CC transports tourists to the beaches where they may see, and catch, the sardines. Sardine Spotters CC purchased the following two motor vehicles: A ‘fourteen-seater’ microbus that cost R171 000 (R150 000 plus VAT of R21 000). The microbus is used to transport tourists to and from the beaches. A one-ton ‘bakkie’ that cost R141 360 (R124 000 plus VAT of R17 360). Because the ‘bakkie’ was purchased for the purposes of transporting its more adventurous tourists onto the beaches, Sardine Spotters CC immediately spent R14 820 (R13 000 plus VAT of R1 820) on having three rows of comfortable seats built into the carriage area of the ‘bakkie’. As a result of this modification, ten guests can be transported on the back of the ‘bakkie’ at any one time. This ‘bakkie’ is used by Sardine Spotters CC exclusively for this purpose. The costs of modifying the ‘bakkie’ were capitalised into the cost of the motor vehicle. The accountant of Sardine Spotters CC would like to know whether it will be entitled to an input tax credit for the purchase and modification of these two motor vehicles? (3 marks) Victoria Tudor Victoria Tudor is a practising architect. She accounts for VAT on a two-monthly basis. Her bookkeeper is abroad on holiday and will not be back at work for at least two weeks. For Victoria Tudor’s tax period ended 31 March 2009, her bookkeeper was not able to complete the VAT return prior to leaving the country. Victoria is concerned about the implications if the VAT return for that tax period is not submitted on time. It is expected that the bookkeeper will return to work on 2 May 2009 and that the VAT return for the tax period ending 31 March 2009 should be ready for submission on 5 May 2009. Victoria pays her VAT each tax period by cheque. When should the VAT return for the tax period ending 31 March 2009 be submitted? Are there any penalties or interest that could arise if the VAT return for the tax period ending 31 March 2009 is submitted on only 5 May 2009? (3 marks) Bunny Chow CC Bunny Chow CC carries on business as a fast-food distributor. It employs three full-time employees in addition to its sole member, Sam Moosa. These three employees enjoy the following employment ‘perks’: Bunny Chow CC agreed with a local taxi operator that he would provide these three employees with transport to and from its trading premises. Bunny Chow CC covers the cost of this transport. This taxi operator drives an eighteen-seater minibus. These three employees are given a ‘free’ drinks and a ‘free’ lunch each day. Bunny Chow CC pays for the full cost of these drinks and lunches. The lunches are usually left-over meals that have been prepared for sale to its customers. Once a year, Bunny Chow CC purchases six uniforms for each employee. These uniforms are the ‘standard’ chef ’s (the chief cook) uniform. They are purchased from a local catering supplier. The employees are required to wear these uniforms while on duty. At the commencement and end of each day the three employees have the use of a change room at Bunny Chow CCs trade premises. The change room includes a shower with hot and cold water. Soap, shampoo and clean towels are provided by Bunny Chow CC. On most days the three employees have a hot shower before going home. On some days they even have a shower before commencing work. What are the normal tax implications to the three employees of the above employment ‘perks’? And what are the VAT implications for Bunny Chow CC for providing the above employment ‘perks’? (13 marks) You are required to provide answers to the nine queries as detailed above.