Reference no: EM13491608

Soccer Strip Suppliers (Pty) Ltd ('Soccer Strip') is a clothing manufacturer specialising in manufacturing kit (strip) worn by soccer teams. It also owns a number of local and offshore investments.
Soccer Strip is a resident of the Republic and its ownership is as follows:
• Kaizer Khumalo, a resident, owns 75% of its equity share capital.
• Philemon Radebe, who is not a resident, holds the remaining 25% of its equity share capital.

Soccer Strip is a Value-added Tax (VAT) vendor. Unless otherwise stated, all amounts are exclusive of VAT.

Soccer Strip's income statement (together with supporting notes) for the financial year ended 29 February 2008 included the following information:

SOCCER STRIP SUPPLIERS (PTY) LTD
EXTRACT FROM THE INCOME STATEMENT
FOR THE YEAR ENDED 29 FEBRUARY 2008
Notes
R
R
Operating income
8 272 421
Investments
1
660 000
Interest accrued on the loan to Chatsworth Canvas
(Pty) Ltd
3
30 000
Profit on the sale of Coventry Clowns Plc shares
1.6
55 000
Discount on purchase consideration for the
warehouse
5
128 250
9 145 671
Less
Loss on the liquidation of Iwisa Kings Ltd
1.7
40 000
Depreciation on second-hand sewing machine
2
20 000
Bad debt (loan to Chatsworth Canvas (Pty) Ltd written off)
3
690 000
Interest incurred on Philemon Radebe's loan
account
4
107 000
Registration of trade mark
6
8 000
865 000
Net income
8 280 671
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Notes
1 Investments
Investment receipts and accruals are made up as follows:
Notes
R
Arsenal Aces Plc
Dividends received
1.1
10 000
Liverpool Legends Plc
Dividends received
1.2
20 000
Manchester Magicians Plc
Dividends received
1.3
30 000
Chelsea Champs Plc
Dividends received
1.4
40 000
Everton Eagers Plc
Dividends received
1.5
50 000
Coventry Clowns Plc
Sale of shareholding
1.6
-
Iwisa Kings Ltd
Liquidation distribution
1.7
60 000
Amakhosi Ltd
Dividends received
1.8
70 000
Orlando Ltd
Repayment of share premium
1.9
80 000
Chiefs Collective investment scheme in property
Dividends and interest received
1.10
90 000
Pirates Collective investment scheme in securities
Dividends and interest received
1.11
100 000
Sundown Socks (Pty) Ltd
Dividends received
1.12
110 000
660 000
1.1 Arsenal Plc is an unlisted foreign company. Soccer Strip holds 20% of the equity share capital and voting rights in Arsenal Plc. South African residents hold less than 50% of the equity share capital and none of Arsenal's profits (out of which the dividend was declared) contain South African profits or South African company dividends.

1.2 Although Liverpool Legends Plc is not a resident of South Africa, its shares are quoted on the JSE Ltd in addition to being quoted on the stock exchange in its country of residence. Soccer Strip holds 3% of the equity share capital with a total of 11% held by South African residents. None of Liverpool Legends profits (out of which the dividend was declared) contained South African profits or South African company dividends.

1.3 Soccer Strip holds 3% of the unlisted foreign company Manchester Magicians Plc. South African residents hold less than 30% of this company. 30% of the profits (out of which the dividend was declared) contained South African profits.

1.4 The Soccer Strip holding in Chelsea Champs Plc is 12% of the equity share capital. Less than 50% of the equity share capital of this unlisted foreign company are held by South African residents. All the assets of Chelsea Champs Plc are dividend-yielding shares in other companies. 40% of the profits arose from dividends declared by South African resident companies. These dividends were subject to the Secondary Tax on Companies (STC).

1.5 A dividend equivalent to R50 000 accrued to Soccer Strip from Everton Eagers Plc (an unlisted foreign company). Soccer Strip holds 15% of the equity share capital of Everton Eagers Plc. Although Everton Eagers Plc is not a resident of South Africa, 75% of its equity share capital is held by South African residents. Everton Eagers Plc's net income (as envisaged in section 9D(2) and calculated in terms of section 9D(2A)) for its 2007 foreign tax year ended 31 December 2007 was equivalent to R1,2 million. Dividends were distributed out of this amount, but no exclusions (or exemptions) as 14 provided for in section 9D(9) have been taken into account in this amount. Of the R1,2 million, the equivalent of R300 000 is attributable to trading profits from its foreign business establishment and a further R180 000 has already been subject to tax in South Africa. Everton Eagers is subject to a flat tax of 30% on all amounts.

1.6 On 30 November 2007 Soccer Strip sold its entire shareholding in Coventry Clowns Plc, an unlisted foreign company, for the equivalent of R245 000. Soccer Strip had purchased 20 000 shares in Coventry Clowns Plc (representing 20% of its equity share capital and voting rights) on 1 May 2006 for the equivalent of R190 000, as an investment. But after not receiving a single dividend from Coventry Clowns Plc for a period of 19 months, Soccer Strip disposed of this investment by selling all its shares in Coventry Clowns Plc to a non-resident. Coventry Clowns was never a controlled foreign company.

1.7 Soccer Strip owned 10 000 shares in Iwisa Kings Ltd (a resident of the Republic), for which it paid R4 per share. Iwisa Kings Ltd was liquidated on 1 February 2008 and Soccer Strip received a liquidation distribution of R60 000, being a first and final distribution of R6 per share. The distribution was made up as follows:
R per share
Return of share capital (none containing capitalised reserves)
1,00
Return of capital profits (for tax purposes)
2,00
'Pre-CGT' capital profits
1,50
'Post-CGT' capital profits
0,50
Growth in value in the capital asset
From acquisition date to valuation date
0,20
From valuation date to date of disposal
0,30
Return of revenue profits
3,00
Total
6,00
Soccer Strip paid R40 000 for 10 000 shares in Iwisa Kings Ltd on 1 October 2005 and received the above R60 000 when Iwisa Kings Ltd was liquidated. It included the entire amount in its income statement and then wrote off its investment in Iwisa Kings Ltd.

1.8 A distribution of R70 000 accrued to Soccer Strip from Amakhosi Ltd (a resident of the Republic). Soccer Strip owns 5 000 shares in Amakhosi Ltd. During the 2008 year of assessment Amakhosi Ltd made a capital profit when it sold vacant land at a price above its cost. Its board of directors resolved to distribute this capital profit to shareholders after the resulting capital gains tax had been deducted. A distribution of R14 per share was made.

1.9 Three years ago Soccer Strip purchased 100 000 shares in Orlando Ltd (a resident of the Republic) at R8,80 per share. During the 2008 year of assessment Orlando Ltd repaid its share premium account (which did not contain capitalised reserves). Soccer Strip received R80 000.

1.10 A return of R90 000 accrued to Soccer Strip from an investment in the Chiefs Collective investment scheme in property (a resident of the Republic). This return comprised section 11(s) dividends of R85 500 and interest of R4 500.

1.11 A return of R100 000 accrued to Soccer Strip from an investment in the Pirates Collective investment scheme in securities (a resident of the Republic). R90 000 of this return consisted of local dividends, R4 000 of section 11(s) dividends and R6 000 of interest.
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1.12 The entire equity share capital of Sundown Socks (Pty) Ltd (a resident of the Republic) is held by Soccer Strip. The policy of Sundown Socks (Pty) Ltd is to declare its entire after-tax profit as a dividend, and on 29 February 2008 it declared a dividend of R110 000. It elected under the provisions of section 64B(5)(f ) that this dividend be exempt from STC.

2 Second-hand machinery purchased from subsidiary

On 1 November 2004 Sundown Socks (Pty) Ltd purchased an industrial sewing machine for a cash cost of R200 000. The machine was brought into use in its process of manufacture with immediate effect. The machine qualified for the accelerated section 12C allowance. On 31 October 2007 Sundown Socks (Pty) Ltd sold this machine to Soccer Strip for R240 000. An independent valuation on 31 October 2007 confirmed that R220 000 was the market value of the machine.

Soccer Strip brought the machine into use in its process of manufacture on 1 November 2007.

3 Loan to Chatsworth Canvas (Pty) Ltd

Chatsworth Canvas (Pty) Ltd ('Chatsworth') is a company that manufactures sport bags for Soccer Strip. On 1 March 2005 Soccer Strip lent R600 000 to Chatsworth at an interest rate of 10% per annum for a 30-month period. Interest is payable every six months. Chatsworth used the proceeds from the loan to purchase some of its raw materials. Chatsworth's financial year ends on the last day of February.
The following interest payments were made on its loan for each six-month period:
Date
R
31 August 2005
30 000
28 February 2006
30 000
31 August 2006
-
28 February 2007
-
On 28 February 2007 the following journal entry was recorded in the journal and books of Soccer Strip:
R
R
Loan to Chatsworth
Interest income
Being interest accrued for the 2007 financial year on the loan to Chatsworth
60 000
60 000
By 31 August 2007, the date on which the loan to Chatsworth was due to be repaid, a total of R690 000 was owing (R600 000 capital plus interest of R60 000 for its 2007 year of assessment and interest of R30 000 for the first six months of its 2008 year of assessment).
Chatsworth is in liquidation and unable to repay any portion of the amount owing to Soccer Strip. On 31 August 2007 Soccer Strip wrote off the full amount. Soccer Strip and Chatsworth are not connected persons.
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4 Loan from Philemon Radebe

It should be noted that Soccer Strip is not 'thinly capitalised'. On 29 February 2008 it had shareholders' equity in excess of R8 million. During the 2007 financial year Soccer Strip borrowed funds from Philemon Radebe, its non-resident shareholder, on three occasions:
• On 1 March 2007 it borrowed R400 000 at an interest rate of 15,5% per annum. The proceeds were used to finance a capital asset purchased during its previous year of assessment.
• On 1 July 2007 the company borrowed a further R300 000 at an interest rate of 15% per annum, which was used to finance working capital requirements.
• On 30 September 2007 Soccer Strip again borrowed R300 000, at an interest rate of 12% per annum. The proceeds were used to partially pay the company's third provisional tax payment for its 2007 year of assessment. The remainder of the funds were set aside in case penalties for normal tax were incurred.
No portion of these loans was repaid during Soccer Strip's 2008 financial year.
The SARS rulings on the matter are as follows:
• An interest rate of 14% per annum (prime of 12% per annum plus 2%) is approved under the provisions of section 31(2).
• Interest incurred that is not deductible prior to the application of section 31, is to be excluded from the amount of financial assistance (as defined in section 31(3)).
If the provisions of section 31(2) are applicable, they will be applied as at 29 February 2008.
5 Warehouse
On 1 June 2006 Soccer Strip purchased a warehouse, which is not a depreciable asset, from a person who is not a VAT vendor for R513 000. No tax allowances are claimable on this asset. Soccer Strip paid transfer duty of R41 040 when it purchased this warehouse. On 30 June 2006 it paid the seller R384 750, being 75% of the purchase consideration. The balance of R128 250 was to be settled by 30 September 2006.
Shortly after purchasing the warehouse a dispute arose between Soccer Strip and the seller of the warehouse, which resulted in Soccer Strip refusing to pay over the outstanding amount of R128 250. The dispute lasted for more than a year. The matter was resolved when the seller agreed to reduce the purchase consideration for the warehouse to R384 750.
6 'SSS' logo
When it first commenced trading Soccer Strip sewed the 'SSS' logo onto its kit so as to distinguish its products from those of other producers (suppliers). The kit is now sought after both locally and internationally and its logo has become a means of recognition and identification. Soccer Strip accordingly registered the logo as a trade mark from 1 June 2007 in terms of the Trade Mark Act, 1993. In terms of this Act the registration of this trade mark remains valid for as long as Soccer Strip uses it in the course of its trade. The registration entailed legal expenses of R7 200 and a registration fee of R800.
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7 Loan to Kaizer Khumalo
On 29 February 2008 Mr Khumalo needed funds to pay his second provisional tax payment for the 2008 year of assessment. Because he had insufficient funds of his own, he used R100 000 of Soccer Strip's funds. Although he is reflected as a debtor on Soccer Strip's 2008 balance sheet, he has no intention of repaying this amount.
8 Dividends declared
Soccer Strip's previous dividend was declared on 28 February 2007. The company did not pay any STC on this dividend, because the dividends accrued in this dividend cycle exceeded the dividend declared by R120 000. Of the foreign dividends received during the current dividend cycle, only R16 000 qualify as 'dividends accrued' for the purposes of determining 'net amount'.
On 29 February 2008 the company declared a dividend of R1,5 million.
Assume an STC rate of 10%.
Ignore any VAT consequences.

REQUIRED

(a) Calculate the normal tax payable (before tax credits) by Soccer Strip Suppliers (Pty) Ltd for its year of assessment ended 29 February 2008. The company would like to pay the minimum normal tax possible.
• Start your calculation with the net income of R8 280 671 as reflected in the extract from the income statement.
• Provide brief reasons to support your calculations
• You are NOT required to calculate any section 6quat rebate.

(b) Calculate the STC payable by Soccer Strip Suppliers (Pty) Ltd on the dividend and deemed dividends declared on 29 February 2008.