Alistair Murphy studied medicine and qualified as a general practitioner (GP). He then worked abroad for two years to enable him to pay off his study debt of R180 000. On his return to South Africa he took up employment at a hospital where he worked for 15 years. With the approval of the hospital he also performed some locum (contract) work for a GP.

When the GP reached retirement age, he offered to sell his practice to Dr Murphy, who was 44 years old at that stage. The terms of the agreement between Dr Murphy and the practitioner were that Dr Murphy would register as a vendor for value-added tax (VAT) and acquire the practice of the GP on 1 March 1999 as a going concern in his own name.
The following values were agreed between Dr Murphy and the GP:
R
Goodwill
600 000
Debtors
165 000
Office and medical equipment
75 000
Residential property (60% utilised as consulting rooms)
1 250 000
Total purchase consideration (VAT included at 0%)
2 090 000
In terms of the agreement Dr Murphy paid the goodwill portion of the purchase price off over a period of five years, the outstanding debtor amounts were paid over once collected and Dr Murphy financed the balance of the purchase consideration by raising a bond over the property.
Dr Murphy transferred the accumulated benefit of his pension fund to an approved pension preservation fund when he resigned from his employment at the hospital in 1999.
The accruals and expenses of Dr Murphy for the period 1 March 2009 to 28 February 2010 and the period 1 March 2010 to 30 April 2010 were as follows:
Details
12 months ended
28 February 2010
2 months ended
30 April 2010
Excluding VAT levied
Including VAT levied (where applicable)
Professional fees
The annual value of professional fees has been in excess of R2 500 000 since 2008. The amount excludes the overpayments and fees for Zambian medical services (see below).
3 200 000
558 201
Overpayment by funds and/or patients
Overpayments arise regularly when patients pay an account that the medical scheme subsequently also pays directly to Dr Murphy. Dr Murphy's staff are normally able to identify the particular patient and a refund is generally made within a period of two months after the date of receipt.
10 000
Details
12 months ended
28 February 2010
2 months ended
30 April 2010
Excluding VAT levied
Including VAT levied (where applicable)
In December 2009 Dr Murphy received an overpayment of R11 400 (including VAT), but his accountant was unable to identify the patients to whom this amount related. The patients to whom refunds were due were identified in May 2010 and the amounts were refunded in that month.
Fees for Zambian medical services
Dr Murphy occasionally provides medical services in Zambia. In November 2009 he spent a week in Zambia and received US $2 500 for services performed there (spot rate on transaction date = R7,47687). South Africa has sole taxing rights on this amount in terms of a double tax agreement with Zambia.
Dr Murphy did not elect to apply the average exchange rate.
• The amount (US $2 500) converted at spot rate
18 692
• The amount converted at the bank rate (realised value)
18 354
• Exchange difference
338
Fees from public benefit organisation
Dr Murphy also offers his services to an approved local public benefit organisation free of charge. These services are rendered in January of each year. If Dr Murphy charged his normal rates for these services, he would have been entitled to an amount of R5 700.
0
Interest received
112 500
12 500
Assets used for trade purposes
• Computer equipment
• : Acquired and brought into use on 1 May 2009 at a cost of R6 000 plus VAT of R840
Generator
: Acquired and brought into use on 1 June 2008 at a cost of R36 000 plus VAT of R5 040
Interpretation Note 47 allows for a three-year write-off period on computer equipment and five years on generators.
Municipal account on Dr Murphy's residential property
• Property rates
50 400
8 700
• Water, electricity and sanitation
39 000
7 926
In terms of a binding private ruling obtained by Dr Murphy he is entitled to claim 60% of the monthly input tax on this account. The balance is considered to be for private use and not acquired for purposes of making taxable supplies.
Details
12 months ended
28 February 2010
2 months ended
30 April 2010
Excluding VAT levied
Including VAT levied (where applicable)
Communication expenses
Office and cellular phone (96% of the calls were for business purposes)
45 600
Conferences and staff training expenses
Dr Murphy spent R12 000 on training of staff and recovered R8 000 from the Skills Fund.
12 000
8 000
Locums (contractors)
Dr Murphy makes use of locum GPs when he is on leave or working in Zambia. These doctors are all independent practitioners and invoiced Dr Murphy for the services rendered. None of these GPs are VAT vendors.
120 000
Medical supplies
Dr Murphy used these medicines in his medical practice and procured them from a single supplier who sold them to him at a discount of 20% on their market value.
• Total expense incurred on acquisition of medicines
55 000
7 980
• Supplies on hand at year end - valued at cost
22 000
Insurance expenditure
• Office and medical malpractice
68 000
13 680
• Personal life
32 000
Staff related costs
15% of the approved remuneration may be used for the deduction in terms of section 11(l)
• Salaries paid to staff members (net of amounts below)
800 000
• Contributions to medical scheme
216 000
• Retirement annuity fund contributions paid by Dr Murphy on behalf of his staff members
80 000
• Unemployment insurance fund contributions (UIF) - the employer's contribution
8 000
• Employees' tax
144 000
• Skills development levies (SDL)
8 000
Retirement annuity
Dr Murphy's contributions to a South African retirement annuity fund for himself. An amount of R220 000 was not allowed as a deduction in previous years.
150 000
12 000
Details
12 months ended
28 February 2010
2 months ended
30 April 2010
Excluding VAT levied
Including VAT levied (where applicable)
Retirement funding
Dr Murphy and his wife had always intended to move to the coast when he reached normal retirement age on 1 May 2010. While they were on their annual holiday they made an offer to purchase a residence. The offer was accepted.
The total price of the residential property (inclusive of transfer duty) was R2 750 000 and was paid on 12 February 2010, the day of the transfer
2 750 000
To finance this he withdrew an amount of R950 000 from his pension preservation fund on 1 February 2010
950 000
The balance of the purchase price was funded from his savings.
Sale of medical practice
After 28 February 2010 Dr Murphy put his practice up for sale and received an offer from a newly qualified GP with an effective date of 30 April 2010, which he accepted. As the transaction met all the requirements of section 11(1)(e) of the VAT Act, the total purchase consideration included VAT at a rate of 0%.
The purchase price was allocated as follows:
• Goodwill
: The goodwill was valued at R900 000 on 1 October 2001 and Dr Murphy will adopt this value as his valuation date value for capital gains tax (CGT) purposes
750 000
• Accounts receivable
: The accounts receivable comprise trade debtors, which were not transferred. The new GP will pay the amounts collected over to Dr Murphy as they are collected
450 000
• Computer, office and medical equipment (sold for less than original cost)
120 000
• Generator
30 000
• Residential property (60% utilised as consulting rooms) not valued on 1 October 2001 (assume that the section 18A output adjustment on acquisition equalled the section 16(3)(h) input adjustment on the sale of the property)
2 800 000
• Medical supplies
14 000
Details
12 months ended
28 February 2010
2 months ended
30 April 2010
Excluding VAT levied

Including VAT levied (where applicable)

On 1 May 2010 Dr Murphy retired from both retirement funds and received the following:

• From the pension preservation fund, a lump sum of R20 000 and a monthly pension of R10 000.

• From the retirement annuity fund, a lump sum of R1 100 000. Two-thirds of the fund was used to acquire a living annuity in terms of which

Dr Murphy will receive a monthly annuity of R40 000.

Dr Murphy did not have any assessed capital loss carried forward from the 2009 year of assessment.