Denzo (Pty) Ltd (“Denzo”) manufactures and supplies spark plugs to the local automotive industry. Denzo has a February year-end and is not a Small Business Corporation, as defined in the Income Tax A

Denzo (Pty) Ltd (“Denzo”) manufactures and supplies spark plugs to the local automotive industry.  Denzo has a February year-end and is not a Small Business Corporation, as defined in the Income Tax Act. The company accountant has performed a basic tax computation and requires your assistance in calculating the company’s taxable income for the 2021 year of assessment. The accountant has recorded the taxable income as R22 750 000. He has made no allowance for any of the points listed below:

1. Legal fees of R20 000 were paid to attorneys Ngubane Inc. for debt collection.

2. Eddie Hamilton, an employee that resigned during the year, was paid an amount of

R4 000 000. The agreement stipulated that Mr Hamilton was unable to work for any of

Denzo’s competitors for a period of four years. The R4 000 000 was included in Mr

Hamilton’s taxable income.

3. Denzo conducts qualifying technological research and development. Approval was

obtained from the Minister of Science and Technology before the research activities

commenced and the requirements of section 11D were satisfied. The following research

costs were incurred:

Research building erected (brought into use on 1 September 2020) R5 000 000

New equipment (brought into use on 1 September 2020) R1 000 000

Operating costs (for the period 1 September 2020 to 28 February 2021) R200 000

4. Annuity of R2 000 per month was paid to a former employee, Michael Patrick, who retired

on 1 February 2020 due to old age.

5. Interest of R1 500 was paid on an overdraft bank account used to finance the payment of a

dividend.

6. Denzo has an agreement with a contractor to maintain the factory machinery. The mainte nance contractor is paid R75 000 on an annual basis for the period 1 July 2020 to

30 June 2021.

7. The following information relates to trading stock:

The closing stock value accounted for in the 2020 year of assessment for tax purposes was

R4 500 000. Closing stock for the 2021 year of assessment is as follows:

Stock on hand 28 February 2021

Cost R5 195 000

Market value R4 700 000

Spark plugs were removed from trading stock and donated to the Rally Club (not an appro ved Public Benefit Organisation), with a cost price of R10 000 and a market value of

R15 000. This stock is included in the opening stock amount above but not in the closing

stock amount above. 8. Denzo purchased a new truck at a cost of R1 200 000 which was brought into use on

1 October 2020. According to the Binding General Ruling no. 7, a delivery vehicle is written

off over four years.

9. Denzo purchased a new machine on 1 January 2021 at a cost of R1 500 000 and brought it

into use on the same date in a process of manufacture.

10. Denzo purchased a second-hand machine on 1 May 2019 at a cost of R900 000 and brought

it into use on the same date in a process of manufacture. The current year’s capital

allowance for this machine has not been included in the accountant’s calculation yet.

11. A specialised personal computer system was stolen on 1 June 2020. The computer system

was originally purchased for R150 000 on 1 June 2019 and the insurance company indemni fied Denzo with R60 000 on 1 July 2020. Binding General Ruling no. 7 allows computer

systems to be written off over three years. Denzo has elected to apply the section 11(o)

scrapping allowance.

12. On 8 September 2020, Denzo purchased and brought into use the new and unused ground

floor of a sectional title office block from a developer at a cost of R7 000 000 to be used for

the purposes of trade.

13. Denzo donated R1 000 000 to the Nelson Mandela’s Children’s Fund (a registered Public

Benefit Organisation) and obtained a section 18A receipt.

REQUIRED:

Calculate the income tax liability of Denzo (Pty) Ltd for the 2021 year of assessment