Question

Dan & Eric have been friends since high school, they then left the country for the neighboring South Africa, to attend varsity "their best times of their lives" they enrolled at the renowned Rhodes University, Grahamstown, in the eastern cape. Dan pursued the "CA dream" & enrolled for a post graduate diploma in accountancy, whilst Eric, an astute, debater enrolled for a postgraduate in political science as he sees himself as the future president of the republic of Namibia.

After living their dream in varsity, they came back to their native Namibia to take on the corporate challenge, Dan had to complete his training contract (ie. articles), with one of the top audit firms in the country. He has gone on to become a qualified CA, however Eric on the other side, Eric had to pursue business as he could not find the relevant employment for his craft. He has therefore gone to establish OFEI enterprises, a business that ventures into automotive parts & repairs. The business operates from a rented premise in the southern industrial business hub of Windhoek. The company has 31 December year end.

OFEI enterprises employs, 40 employees & has grown significantly but however come under scrutiny from the tax authorities as it has not been registered for tax purposes.

Eric, has thus consulted Dan on the tax compliant matters & he had the following queries after the chat with his longtime friend:

• What is Gross income?

• What is a trade in terms of the income tax act?

• General deductions formula in terms of the income tax Act?

• What is the difference between a general deduction & a specific deduction??

The following information relates to the 2019 year of assessment in relation to

OFEl enterprises:

The company imports all its parts from a franchise dealer in George, South Africa, the cost breakdown of the parts was as follows: All amounts are VAT exclusive, unless otherwise stated.

Oil products - N$670,000

Windscreens - N$845,000

Tyres N$ 567,000

Secondhand engines - N$ 880,000

Salaries & wages - N$ 1,400,000.

Premises Rentals - N$ 460,000

Tyres - N$ 567,000

Secondhand engines - N$ 880,000

Salaries & wages - N$ 1,400,000

Premises Rentals - N$ 460,000

Accounting system fee (monthly) - N$ 3,500

Wheel pressing machine - N$ 340,000

Wheel balancing equipment - N$549,000 (including VAT)

Legal fees (Refer to note 1 below)

Telephone expenses - N$ 2,100, (per month, including VAT)

Sales-Auto parts 3,500,000

Sales - Repairs of Automotive & Engines - N$ 2,800,000

 

Other income (Refer to note 2)

NOTE: 1

On the 28 May 2019, OFEI enterprises was sued by a rival repair dealer in relation to a slogan they used in an ad campaign they undertook, the rival claimed that the ad was in breach of the competition act, as the ad portray the exact same terminology as the one that the rival had used prior to OFEI's ad. OFEI, incurred a cost of N$ 150,000 in defending the legal suit.

Note: 2

In terms of the repair parts imported, OFEI has insured their goods in case of an event of tragedy. In, September 2019, the truck enrooted to Windhoek via Johannesburg, the delivery truck was hijacked & the company lost stock worth N$430,000, On the 4th December 2019, the company received insurance proceeds in favour of the hijacked stock to the value of N$400,000 as per the agreement of the insurance policy.

Required:

a) In relation to the above-mentioned matters, advice Eric accordingly? (16 marks including 2 presentation marks)

b) As far as the information permits, state with explanation the amounts to be included in Gross income for OFEI enterprises for the 2019 year of assessment? (A brief but conclusive reference must be made in relation to the matter in note 2) (14 marks)

Answer 1

1.

Gross income is the revenue generated from a business's sales and services. Gross income — also known as gross profit, pre-tax income or before-tax income — measures total income and revenue from all sources. Gross income has slightly different meanings for companies and individuals. For companies, gross income is total revenue minus the cost of goods sold. For individuals, it means total income before tax deductions and tax charges.

 

2.

Trade involves the transfer of goods or services from one person or entity to another, often in exchange for money. Foreign trade is exchange of capital, goods, and services across international borders or territories.

 

3.

The essential elements of the general deduction formula may be summarised as follows:

- Carrying on any trade

- Deducted from the income

- Expenditure and losses

- Actually incurred

- In the production of income

- Not of a capital nature

- To the extent not laid out for the purposes of trade.

All these requirements must be met for an expense or loss to be deductible. Failure to meet any of the requirements will result in a disallowance of the expenditure for taxation purposes.

 

4.

“General” deduction is a loss or outgoing that has a relevant connection with income producing activities (eg. business or investment activities), and that is not of a capital, private or domestic nature. A “specific” deduction, on the other hand, is an amount that a provision other than the general deduction provision allows as a deduction as per Income Tax Act (eg. Donation etc.)

 

Legal Suit

On the 28 May 2019, OFEI enterprises was sued by a rival repair dealer in relation to a slogan they used in an ad campaign they undertook, the rival claimed that the ad was in breach of the competition act, as the ad portray the exact same terminology as the one that the rival had used prior to OFEI’s ad. OFEI, incurred a cost of N$ 150,000 in defending the legal suit.

As per Provisions of Income Tax, this should be allowed as deduction while computing Income chargeable to Tax as it is an actual expense that has been incurred by the company.