Taxation

South Africa
(TX ZAF)
December 2020
Examiner’s report
The examining team share their observations from the
marking process to highlight strengths and
weaknesses in candidates’ performance, and to offer
constructive advice for those sitting the exam in the
future.

Contents
General Comments.............................................................. 2
Section A ............................................................................. 2
Example 1 ........................................................................ 3
Example 2 ........................................................................ 4
Section B ............................................................................. 4
Question 1 ........................................................................ 5
Question 2 ........................................................................ 6
Question 3 ........................................................................ 6
Question 4 ........................................................................ 7
Question 5 ........................................................................ 8
Question 6 ........................................................................ 9

Examiner’s report – TX ZAF December 2020 1

General Comments

There were two sections to the examination paper and all the questions were
compulsory. Section A consisted of 15 multiple choice questions of two marks each,
which covered a broad range of syllabus topics. Section B had four questions worth
10 marks each and two longer questions worth 15 marks, each testing the candidates’
understanding and application of South African taxation rules in more depth. The
following paragraphs report on each section and focus on some of the key learning
points. This report should be used in conjunction with the published exam.

Most candidates attempted all of the questions. Where parts of questions were left
unanswered by the candidates, this appeared to be due to a lack of knowledge or poor
exam technique, as opposed to time pressure.

Candidates performed particularly well on questions 2,3(a) and 6. The question

candidates appeared to find most challenging was question 4 on VAT which appeared
to be mainly due to a lack of technical knowledge and/or also a failure to read the
question requirements carefully.

A number of common issues arose as follows:

• Appearing to not read the question requirements and notes carefully, and
therefore providing sometimes irrelevant points which scored few marks
(throughout paper but especially question 1(c) and question 2).
• Not correctly showing the part of the question being answered (especially with
question 2 and question 4).
• Candidates appeared to struggle to provide layouts that effectively
communicated their answers.
• Candidates appeared to struggle particularly with narrative answers.

This report should be used in conjunction with the published exam which can be found
here. The following paragraphs report on each section and focus on some of the key
learning points.

Specific Comments

Section A

Section A questions seek to provide a broad coverage of the syllabus; accordingly,

candidates should study all areas of the TX-ZAF syllabus in order to be in a good
position to answer Section A questions correctly.

A good performance in section A greatly facilitates the task of obtaining an overall

pass in this exam as it accounts for 30% of the overall mark allocation.

The following questions are reviewed to provide a technical debrief with the aim of
giving future candidates an indication of the applied skill level required.

Examiner’s report – TX ZAF December 2020 2

Sample Question for Discussion

Example 1

Kusile (Pty) Ltd has sufficient cash resources to make a dividend declaration to its
shareholders. The company’s directors would like to minimise the amount of dividend
withholding tax.

Kusile (Pty) Ltd has five shareholders. Four of these shareholders are natural persons
(each with a shareholding of 12.5%) and one is the holding company (with a
shareholding of 50%). None of the natural persons qualify for reduced rates under the
terms of any double tax treaties.

The directors of Kusile (Pty) Ltd will pay a dividend of R3,000,000 in total to the four
natural person shareholders and will have R1,000,000 available as contributed tax
capital.

How much dividend tax must Kusile (Pty) Ltd withhold in respect of the dividend
paid to the four natural personal shareholders?

A R600,000
B R400,000
C R500,000
D R100,000

This computational question required candidates to calculate the correct amount of

dividends tax to withhold on payment of the dividend.

The correct answer is C R500,000, being (3,000,000 – 50% x 1,000,000) x 20%]. It

had to be remembered that contributed tax capital returned to shareholders is not a
dividend. Further, only 50% of the contributed tax capital is applicable to the natural
person shareholders and may therefore be used.

Option A assumed no return of contributed tax capital, thus 20% on R3,000,000.

Option B assumes all the contributed tax capital may be used, thus R400,000 is
withheld, calculated as (3,000,000 – 1,000,000) x 20%.

Option D deducts the appropriate share of contributed tax capital, but from dividend
withholding tax on R3,000,000 i.e. (3,000,000 x 20% – 1,000,000 x 50%), leaving a
withholding of R100,000.

Careful knowledge of the definition of ‘contributed tax capital’ would have provided
candidates with the necessary information for the calculation when read with the
dividends tax provisions.

Examiner’s report – TX ZAF December 2020 3

Example 2

Which of the following statements concerning the submission of provisional tax

returns is NOT correct?

A. Compulsory provisional tax returns are submitted twice within each relevant
year of assessment
B. A third voluntary provisional return may be submitted between the end of each
relevant year of assessment and submission of the annual tax return
C. All compulsory provisional tax returns are due on 31 August and 28 February
(29 February in a leap year) for each relevant year of assessment
D. Payment of provisional tax is due the same date as the return is submitted for
each relevant year of assessment

The correct answer is C as only taxpayers with years of assessment ending in

February have provisional tax returns (and payments) which are due on 31 August
and 28 February (29 February in a leap year) for each relevant year of assessment.
Taxpayers with years of assessment ending on (say) 31 December would have
provisional returns due on 30 June and 31 December with a voluntary third top-up
return on 30 June of the following year.

Option A is true as only two provisional returns are compulsory. The third is voluntary.

Option B is true as the third provisional return is only submitted if the taxpayer has not
filed and wishes to avoid interest charges against unpaid taxation.

Option D is true as the payment is due on the same date as the return.

Careful reading of the requirement was needed for candidates to assess which
statement was NOT true. This was also emphasized in the paper so should have
alerted candidates to be cautious. Careful reading of the narrative options was then
required.

Section B

This section had a standard coverage of topics. Questions 1 to 4 were short questions
for a total of 40 marks, and questions 5 and 6 were long questions for a total of 30
marks.

Most candidates attempted all six questions, and there was little evidence of time
pressure. Where questions were left unanswered or not as well answered as expected
by candidates (such as questions 3 (b) (ii) and 4 (a) (ii) and (c)), this appeared to be
due to a lack of knowledge. These parts were mostly narrative questions and
appeared to present a significant challenge to candidates for this exam.

Examiner’s report – TX ZAF December 2020 4

Question 1

This ten-mark question covered the topics of a basic VAT calculation (part (a)), VAT
penalties (part (b)), and VAT invoicing (part (c)), and the candidates’ overall
performance was good.

For part (a):

A few candidates incorrectly accounted for input tax on the services from non-VAT
registered DJs. No VAT would have been charged and a service cannot be a second-
hand good. Thus, no VAT was in fact claimable.

While the business was entertainment, the input would not be claimable where the
consumer of such entertainment was the staff of the company (for the staff party).
However, many candidates did not identify that the costs of the DJ for the staff party
as ‘entertainment’ as defined and therefore incorrectly accounted for input tax in this
regard.

Many candidates incorrectly accounted for input tax VAT on the importation of the
headsets. Output tax should have been accounted for in terms of section 7 of the VAT
Act. No input VAT in this regard was accounted for in the memo as it may arguably be
only claimed in the next VAT period.

For part (c):

Candidates are reminded to utilse the correct technical language throughout their
answers. For example, many candidates referred to ‘invoice number’ instead of
‘individualised serial number’.

Candidates are advised to take great care to read and apply the question
requirements. This question asked for the “missing” information, but many candidates

Examiner’s report – TX ZAF December 2020 5

included information already supplied on the invoice and therefore no marks were
applicable for such information.

Question 2

This ten-mark question required the calculation of employees tax (in part (a)), and then
the normal tax liability (in part (b)). The performance was not particularly strong by
candidates on this question. The features distinguishing employees tax from normal
tax were not demonstrated by many candidates. For example, many candidates
provided for the additional medical expense rebate in calculating employees tax. Such
application is incorrect as this rebate is only applicable against the normal tax
calculation. Many candidates then omitted to credit the employees tax (as calculated
in part (a)) against the normal tax to determine the final liability.

Question 3

Examiner’s report – TX ZAF December 2020 6

This ten-mark question was largely focussed on the determination of the value of the
asset as at 1 October 2001 for capital gains tax purposes. In making such
determination, the time apportioned base cost had to be calculated. This part carried
significant marks and this allocation should have alerted candidates to the necessity
to perform this calculation. Many candidates either did not calculate the time
apportioned base cost or did not do so by following the formulaic steps, resulting in
disappointing performances in this question.

Selling costs were sometimes incorrectly deducted from proceeds, instead of being
added to the base cost of the asset. This possibly indicates confusion in the use of
selling costs in the determination of time apportioned base cost relative to the actual
final determination of the capital gain or capital loss.

Question 4

This ten-mark question focussed on the sale (and replacement) of kitchen equipment,
assuming the bakery business is:
(i) a small business corporation or
(ii) a micro business
Candidates’ performance for this question overall was generally good. However, a
number of candidates accounted for the small business allowance for the micro
business,which would be inapplicable for this turnover based tax.

In part (i), some candidates calculated the recoupment incorrectly. This lead to a
capital gain which some candidates opted to defer. Whilst this would be acceptable
treatment for such an outcome, the matching deferral of the recoupment was then
often omitted. This appears to demonstrate a lack of clear understanding of the
application of this deferral relief mechanism.

Part (ii) was generally well answered by candidates, with only a few candidates not
accounting for the 50% of proceeds inclusion for the sale of the kitchen equipment in
the determination of the taxable turnover.

Examiner’s report – TX ZAF December 2020 7

Question 5

This 15-mark question entailed the determination of the normal tax liability of an
individual who earned renumeration for foreign services rendered outside South
Africa.

In part (a) some candidates correctly accounted for the exemption for foreign services
rendered. However, some candidates accounted for the new R1 million limitation
(amended to R1.25 million before application) on such exemption. However, such
limitation was not applicable for the individual’s year of assessment, as it ended on 29
February 2020, and the limitation only took effect on 1 March 2020.

For investment income, some candidates did not separate the various investment
income streams which is a necessary step to correctly apply the relevant exemption
(especially where such exemption is limited). A few candidates appeared to
demonstrate a fundamental lack of understanding that dividends tax, as separate from
normal tax, results in an exemption from normal tax. This resulted in some candidates
including dividend amounts net of dividends tax. For normal tax purposes, the gross
dividend forms part of gross income with the exemption then being applicable to
remove the normal tax application. Some candidates also applied an exemption to
foreign interest, however no such exemption exists.

Finally, a few candidates exempted the entire R23,800 interest exemption limit rather
than assessing whether the interest was below this threshold. This is a
misunderstanding as to the application of an exemption, which does not create a
negative inclusion.

Part (b) was well answered, but candidates appeared to struggle with narrative style
answers.

Examiner’s report – TX ZAF December 2020 8

Question 6

This 15-mark question focused on the calculation of taxable income for a company
involving basic VAT considerations and the disposals (and acquisitions) of capital
assets. Overall, the performance was very good for this question.

For part (a) a few candidates incorrectly accounted for input VAT being denied on the
acquisition of the motor car, which had an implication in the allowance on such asset
being inclusive of VAT. Since the amounts in the question were VAT exclusive, this
candidate error did not carry into part (b). Many candidates accounted for the VAT
output charge on the fringe benefit granted.
For part (b), many candidates did not adequately keep track of, and therefore did not
account for, all the tax consequences on the disposal (and replacement) of the broken
ovens, and the acquisition of the new production line. Some candidates only
accounted for one of the items. Some candidates also did not account for the reduction
to the wear and tear allowance of the output VAT charge on the fringe benefit granted.
Lastly, most candidates appeared to demonstrate an understanding of the tax
consequences of doubtful debts and bad debts.

For part (c) it appears candidates were not aware of the definition of “research and
development” as contained in the fiscal legislation. Candidates are reminded that
failure to utilise the statutory definition can result in a loss of marks.

Examiner’s report – TX ZAF December 2020 9