QUESTION 1

You are a tax lecturer at an academic institution as well as a part time tax consultant registered as a tax practitioner with the South African Revenue Service (SARS). The following queries have been referred to you for advice.

Query 1

Advance Ltd, a registered VAT vendor, is considering the acquisition of two buildings for investment purposes.
The first building is owned by a non-vendor and the purchase consideration is R2 500 000. The three-storey building comprises shops and offices on the ground floor and residential flats on the other two storeys. SARS has accepted that on the basis of rental income, the building is intended to be used 40% for commercial letting activities.

The second building is owned by a registered VAT vendor. The purchase consideration is R2 850 000 (including VAT). The building comprises mainly shops and offices but 10% is let for residential purposes. If the company does purchase this building, it will convert the residential section so that it is suitable for commercial letting activities immediately upon acquisition.

Both buildings are fully occupied.

REQUIRED

Discuss the VAT implications of the purchase of each of the buildings from the perspective of Advance Ltd.

Query 2

Maluti (Pty) Ltd, a registered VAT vendor which only provides taxable supplies, has a number of delivery trucks which it uses to transport products for clients. Recently one of its delivery trucks was hijacked. The delivery truck, which had originally cost R96 900 (including VAT) during 2004, was never recovered and Maluti (Pty) Ltd received an indemnity payment of R114 000 from its insurance company. The R114 000 comprises R68 400, being the market value of the truck, and R45 600 as compensation for client products which were in the truck when it was hijacked. The accounting carrying value and tax value of the delivery truck was R61 000. The indemnity payment was used to pay compensation of R40 000 to the client. No contract of insurance exists between the client and Maluti (Pty) Ltd.

REQUIRED

Discuss the VAT and income tax implications of the following from the perspective of Maluti (Pty) Ltd:
• The indemnity payment received; and
• The compensation paid to the client.

Query 3

The human resources manager of Rich Ltd has the following two queries on VAT issues:

The first query concerns a luxury motor car that is owned by Rich Ltd, which it acquired for R450 000 (including VAT) on 1 February 2005 and used from that date. The free use of the motor car was given to the managing director on 1 March 2007 as part of his employment package. The repair, maintenance, petrol and running costs, are borne by Rich Ltd.

The second query concerns one of the Rich Ltd salesmen, who lives in Johannesburg and flew to Cape Town on a two-day business trip. He is a full-time employee of the Johannesburg branch of Rich Ltd. For the first day he was away, the company awarded him the R196 a day subsistence allowance in terms of section 8(1)(c) of the Income Tax Act. The company paid for his airfare as well as for his accommodation and meals at a large hotel in Cape Town.

REQUIRED

Discuss the VAT implications of the two matters for the company.