Part (d) Discuss the VAT and normal tax consequences, supported with calculations, of the transactions under section 5 for Intellect’s 2021 year of assessment. Do not address the date of tax payments to SARS.
ANSWER
VAT Consequences
Phone for fire chief
Insurance payout (R345,000)
Direct repairs by insurer
Normal Tax Consequences
No deduction for estimated losses
Phone for fire chief: The cost of the phone is a bribe and is not tax deductible under Section 23(o)(i).
Building repairs
Lost stock (chargers)
Delivery vehicle
VAT Consequences
Phone for fire chief: No VAT can be claimed on the phone's cost because it's considered a bribe and not a business expense.
Insurance payout (R345,000): This is a "deemed supply" under VAT law. The company must pay output VAT on this amount. The VAT is R345,000 x 15/115 = R45,000.
Direct repairs by insurer: No VAT is charged on the repairs to the building (R57,500) because Intellect didn't receive the money.
Normal Tax Consequences
No deduction for estimated losses: The company cannot deduct "estimated" or "notional" losses from the fire. Deductions are only for actual costs incurred.
Phone for fire chief: The cost of the phone is a bribe and is not tax deductible under Section 23(o)(i).
Building repairs: The repair costs paid directly by the insurer are not tax deductible for Intellect, as the company didn't incur them.
Lost stock (chargers): The insurance money received for the lost chargers (R300,000) is considered a recoupment and must be added to Intellect's taxable income.
Delivery vehicle: The destruction of the vehicle is a disposal for tax purposes. The insurance proceeds are considered the sale price. The company will need to calculate any recoupment (if proceeds are more than the book value) or capital gain/loss based on the vehicle's tax value and the insurance money received.
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