Question

Tomy is a key customer of Rubber (Pty) Ltd (hereafter Rubber), a well-established South
African shoe sole provider. The two companies share the same year-end.
When Tomy experienced the sudden increase in sales, Rubber extended an interest-free loan
of R2 050 000 on 1 February 2020 in order to enable Tomy to cater for the increase in supply.
Tomy used the loan immediately as follows:
 Purchase of land – R350 000
 Construction of factory building on land purchased (completed 1 July 2020 and brought
into use immediately after completion) – R1 200 000
 Purchase of Machine B (new) – R800 000 (brought into use on 1 July 2020)
 Deductible expenditure – R200 000
 Purchase of Trading Stock – R500 000 ( R50 000 still on hand on 31 December 2020)
Tomy was able to justify the loan and repayments of the loan as the company signed a contract
with a local customer on 15 December 2019 and delivered R1 200 000 of takkies on
1 February 2020. The local customer informed Tomy during August 2020 that they were
liquidated and that Tomy will not receive any further payment from them. Tomy has written off
the outstanding debt as bad debts at the end of the financial year.
In an attempt to raise cash reserves, Tomy issued 100 000 ordinary shares on
18 August 2020, of which Rubber purchased 88 000 shares. Rubber did not own any of Tomy’s
shares before this date. Tomy now has 120 000 ordinary shares in issue.
Tomy approached Rubber as Tomy was not able to repay the amount due on the outstanding
loan. The total amount was still due. Rubber acknowledged that Tomy’s financial situation was
due to unforeseen circumstances and agreed to write off 80% of each of the balances owing
by Tomy, except for the land that Rubber agreed to write off the full amount owing on
30 December 2020.

REQUIRED
Calculate and motivate the income tax consequences of the above transactions and events
for Tomy for the year of assessment ended on 31 December 2020

Answer 1

The Tommy had Taken Interest Fee Loan from the Oustsider for the purpose of purchse of Capital assets .The Tommy will get the Benefit of Depreciation on Capital assets from the date of put to use for the purpose of business u/s 32(1)(a) of income tax act 1961 except for land.because the vale of land will depreciated rather than approation.

Purachse of land wil form a part of fixed assets block and the Factory building construction was completed on July 2020 so Depreciation benefit will get at a rate of 10% i.e 2,00,000*10% = 20000,And purchase of Machine will get deprecation of $ 120000(i.e 800000*15%) .The full depreciation rate will applicable if the asset is put to use for period more than 6 Months.

Further Inaddition to the Depreciation Benefit and allowable revenue expenditure is 200000 and Trading Stock value will form part of Current Assets.and Issue of ordinary share will form a part of Networth of the Company.The Capital Gain will arises at the time of date of Transfer.

The Loan which is Given bty the Rubber to Tommy before became a director of the company had written in his books of accounts. so the laibility whcih is exist in books oof accounts of company has to be revoked by way of debiting the loan payble amount and crediting to other income of the Company.Due to this aspect the profitability of the orgainization will increses to the exxtent of written off value of the Loan Amount