TAX 300: Taxation of Business Income – Advanced Study Notes (University of Pretoria BCom Taxation)

These advanced study notes are tailored for University of Pretoria (UP) BCom Taxation students, especially those preparing for TAX 300 / TAX 301 exam papers on taxation of business income. The focus is on South African income tax law as it applies to businesses, integrating principles commonly tested in UP Taxation modules and comparable courses at UNISA and CUT. The material emphasises exam‑style analysis, calculations, and interpretation relevant to the Income Tax Act 58 of 1962 and related SARS practice.

1. Core Framework: What Is “Taxable Business Income”?

A strong grasp of the structural framework is crucial for UP TAX 300 and TAX 301 exams. Questions almost always expect you to start with the formula for taxable income and then slot detailed rules into that framework.

1.1 The Taxable Income Formula for Businesses

For a company or close corporation carrying on a trade in South Africa, the basic structure is:

Gross income
– Exempt income
= Income
– Deductions under s 11 read with s 23
+/– Special inclusions / recoupments / allowances adjustments
= Taxable income
× Applicable tax rate (companies: 27%)
= Normal tax payable before rebates/credits

Key points for examination:

Gross income is defined in s 1 of the Income Tax Act and is central to most exam problems.
For companies, there are no primary or secondary rebates like for individuals.
Resident companies are taxed on worldwide income, while non-residents are taxed only on South African‑source income, unless a tax treaty alters this.

Always anchor your answer around this formula; then identify whether each item in the scenario is:

Included in gross income,
Exempt from tax,
Deductible (and if so, under which section), or
A capital item relevant to capital gains tax (CGT) rather than normal income.

1.2 Gross Income for Businesses: Key Elements

The statutory definition (simplified) states that “gross income” includes:

The total amount, in cash or otherwise,
Received by or accrued to the taxpayer,
During the year of assessment,
Excluding amounts of a capital nature,
But including specific items listed as special inclusions (such as recoupments, certain lease premiums).

For business taxation purposes, the following components are often tested:

Sales / fees / services income
- For a trading company, all revenue from sales of goods or services is gross income, usually of a revenue nature.
Interest and finance income
- For companies, interest is fully taxable; there is no interest exemption (which individuals may enjoy).
- The timing (when interest “accrues” or is “received”) can be tested. Accrual is generally when the taxpayer becomes unconditionally entitled to the amount.
Rentals and royalties
- Rental income from immovable property (e.g., factory building) or royalties from intellectual property is gross income, and usually revenue in nature unless the property is a capital asset and sold.
Dividends
- Local dividends received by resident companies are generally exempt income (s 10(1)(k)), but still included in gross income first and then deducted as exempt to get to “income”.
- Foreign dividends may be partially taxable depending on shareholding percentage and other conditions (advanced exam territory).
Fringe and unusual receipts
- Insurance payouts:
  - If related to trading stock or loss of profit → revenue in nature.
  - If related to a capital asset (e.g., plant destroyed) → may be capital in nature and/or trigger a recoupment/CGT issue.
- Government grants or COVID‑19 relief:
  - May be specifically exempt or taxable under special rules; exam will specify.

For TAX 300 exam purposes at UP, always start by classifying each receipt as likely capital or revenue. This determines whether it falls inside gross income or potentially only into CGT.

1.3 Capital vs Revenue: Critical Distinction

This distinction is repeatedly tested, and failures here can undermine the rest of the calculation. Use the core South African case law principles:

Nature of the asset:
- Trading stock and assets acquired for resale at a profit → revenue.
- Fixed assets used to produce income (machinery, buildings) → capital.
Intention of the taxpayer:
- Intention when acquiring the asset is key (but can change over time).
- A once‑off sale of a long‑held factory is typically capital;
- Frequent, systematic buying and selling of property is trading stock (revenue).
Recurrence and system:
- Regular, recurring profits indicate revenue activities.
- Once‑off windfall often suggests capital, though not always.
Case law references (good exam signals; cite briefly):
- CIR v George Forest Timber Co: fixed vs floating capital.
- Elandsheuwel Farming (Edms) Bpk v SIR: overall business context.
- CIR v Pick ‘n Pay Employee Share Purchase Trust: nature of receipts in trust context.

In UP exam answers, show your reasoning:
“Because the taxpayer bought and sold multiple properties in a systematic way, with the objective of reselling at a profit, the properties constitute trading stock; the resulting profits are of a revenue nature and therefore form part of gross income.”

1.4 Income, Exempt Income, and Special Inclusions

After calculating gross income, subtract exempt income to derive income.

Typical exempt income items in business context:

Local dividends (s 10(1)(k));
Certain government grants specifically exempted;
Some foreign employment income (less relevant for companies).

Then adjust with special inclusions in gross income such as:

Lease premiums (s 8(c));
Amounts received for restraint of trade (s 9C in some contexts and case law);
Recoupments dealt with under s 8(4)(a) (commonly seen as part of the deduction/allowance adjustment rather than initial gross income, but conceptually they are income).

In calculations, exam markers for UP TAX 300 expect clear structure:

Gross income
Less: Exempt income
Equals: Income
Less: Allowable deductions (s 11)
Plus: Recoupments, taxable allowances adjustments
Equals: Taxable income
Multiply by rate.

2. Deductibility Principles: General Deductions and Limitations

Once gross income and income are understood, the core challenge in business taxation is which expenses are deductible. For UP BCom Taxation students, mastery of s 11(a) (the general deduction formula) and its relationship with s 23 (prohibitions) is central.

2.1 Section 11(a): The General Deduction Formula

Section 11(a) allows the deduction of:

“Expenditure and losses actually incurred in the production of income, provided such expenditure and losses are not of a capital nature and are laid out or expended for the purposes of trade.”

Break this into examinable elements:

Expenditure and losses
- Includes money paid and certain accrued obligations (e.g., unpaid but incurred expenses).
- “Losses” can include theft, bad debts, and other economic losses.
Actually incurred
- The liability must have arisen; mere intention to spend or future commitments are insufficient.
- Example: An unpaid invoice for electricity already consumed before year‑end is “actually incurred.”
In the production of income
- There must be a causal link between the expenditure and the income‑earning operations.
- Use the “closer connection” test from Port Elizabeth Electric Tramway Co v CIR.
Not of a capital nature
- Expenditure on fixed assets (land, buildings, major plant) is capital, not deductible under s 11(a), though it may qualify for some capital allowances (s 11(e), s 13, etc.).
- Repairs vs improvements: repairs are generally revenue; improvements are capital.
For the purposes of trade
- The taxpayer must be carrying on a trade (widely defined – includes any profession, vocation, business, farming, letting of property, etc.).
- Expenses for starting up a business may be problematic if the trade has not yet commenced.

Exam technique:

For each expense in a scenario, test it systematically against each requirement of s 11(a).
Provide one or two sentences reasoning referencing relevant cases (e.g., Sub‑Nigel Ltd v CIR, Port Elizabeth Electric Tramway).

2.2 Section 23: Prohibited Deductions

Section 23 acts as a counterbalance to s 11 by disallowing certain deductions even if they appear to qualify under the general deduction formula.

Key prohibitions for business income:

s 23(g): Not laid out for the purposes of trade
- No deduction for expenditure not laid out for purposes of trade, or more than the part that is for trade.
- Apportionment is allowed for mixed‑purpose expenditure.
- Example: A company CEO’s travel that is partly business, partly private – only the business portion is deductible.
s 23(b): Domestic or private expenditure
- Expenses of a private/domestic nature are not deductible.
- In owner‑managed businesses, strict separation is crucial (e.g., personal groceries are never deductible).
s 23(e): Income not included in taxable income
- Expenditure relating to exempt income (e.g., expenses to earn local dividends) is not deductible.
s 23(f):
- Prohibits deductions of certain taxes (e.g., income tax itself is not deductible; VAT may be a different story depending on input/output tax regime).
s 23(h) and others:
- May limit deductions for prepaid expenditure beyond a certain period; exam questions might briefly touch this in advanced levels.

Be aware: The exam may require you to apportion expenses where part relates to taxable income and part to exempt income (e.g., mixed‑use assets, joint income streams).

2.3 Common Business Deductions: Detailed Treatment

In UP TAX 300/301 style questions, expect a mix of typical business expenses. Here is how to handle the main categories.

2.3.1 Staff Remuneration and Benefits

Deductible items include:

Salaries and wages;
Employer contributions to pension/provident funds, subject to statutory limits (the details matter more for individuals but still relevant at entity level);
Bonuses and leave pay once actually incurred (e.g., provision for leave is generally only deductible when leave is taken or paid, subject to case law and specific SARS practices);
Fringe benefits tax (PAYE on fringe benefits) is not itself deductible as an expense, but the underlying benefit cost usually is.

Exam angle:

Ensure the timing of deduction is correct.
Distinguish between provisions (often not deductible) and actual liabilities.

2.3.2 Repairs, Maintenance, and Improvements

Repairs: restoring an asset to its original condition → generally revenue in nature and deductible under s 11(a).
Improvements/additions: enhance the asset beyond its original condition → capital; disallowed under s 11(a) but may get capital allowances.

Example:

Repainting the walls of a factory is a repair.
Adding a new wing to the factory is a capital improvement.

Study tip: Markers often test whether you can distinguish between repairs (deductible) and improvements (capital).

2.3.3 Legal and Professional Fees

Classification depends on the nature of the underlying transaction:

Legal fees for collecting trade debts → revenue, deductible.
Legal fees related to defending title to a capital asset (e.g., land ownership dispute) → capital, not deductible.
Fees to acquire new share capital → capital.
Fees for general advisory services in the course of trade → revenue.

Apply the s 11(a) and capital/revenue analysis to each fee.

2.3.4 Interest Expenditure

Interest is usually deductible under s 24J or s 11(a) if:

The borrowing is used to produce income or for trade purposes; and
The expenditure is not of a capital nature (constructive approach: interest is generally revenue).

Be aware of interest limitation rules (thin capitalisation, interest‑limitation regimes etc.) in more advanced settings—TAX 300 at UP may mention them, though often in less computational detail.

Example:

Interest on a loan used to buy a rental property (income‑producing) is deductible.
Interest on a loan used to buy shares that only generate exempt local dividends – may not be deductible due to s 23(f).

2.3.5 Bad Debts and Doubtful Debts

Bad debts:
- Irrecoverable trade debts (e.g., customers not paying) can be deducted under s 11(i) (specifically dealing with bad debts) if they are written off during the year.
Doubtful debts:
- Certain provisions for doubtful debts may qualify under s 11(j), subject to SARS rules.

You must distinguish clearly between:

Trade debts (arising from ordinary business sales) vs
Loan debts / shareholder loans (may not qualify as trade debts).

2.4 Apportionment of Expenses

Many business expenses have mixed purpose – partially relating to taxable income, partially to exempt income or private use.

The exam may require apportionment methods such as:

Time‑based apportionment:
- For assets used partly for business, partly for private purposes (e.g., company car partially used privately by owner).
Income‑based apportionment:
- If an expense generates two types of income (taxable vs exempt) with no straightforward time basis.

General rule: Apportion on a fair and reasonable basis. Always explain briefly which method you use and why it is appropriate.

3. Capital Allowances, Recoupments and Capital Gains Tax (CGT)

Capital items are not deductible under s 11(a), but the Act provides numerous capital allowances to spread the cost of income‑producing assets over time. This section is heavily tested in TAX 300 at UP and is frequently combined with questions on recoupments and CGT when assets are disposed of.

3.1 Depreciation vs Tax Capital Allowances

In financial accounting, companies record depreciation on fixed assets. However, for tax purposes:

Accounting depreciation is not deductible.
Instead, use tax allowances under sections like s 11(e) (wear and tear), s 12C, s 13, s 13quin, etc.

Typical exam trap: Students mistakenly deduct accounting depreciation instead of (or in addition to) tax allowances. Always add back accounting depreciation in a tax computation and then deduct the correct tax allowance.

3.2 Section 11(e): Wear and Tear Allowance

Section 11(e) allows an annual wear and tear (W&T) allowance on certain movable assets used in trade.

Key features:

Applies to machinery, equipment, vehicles, computers, etc.
SARS issues a binding list of write‑off periods for common assets.
If no SARS guideline, use useful life estimate.

Basic computation:

Cost price of asset
÷ write‑off period (in years)
× portion of the year used in trade
= Annual allowance.

Example:

A delivery vehicle costing R300 000, SARS write‑off period 5 years, acquired on 1 March (for a year ending 28 February):
- Annual allowance: R300 000 ÷ 5 = R60 000 (full year if used for entire year of assessment).
If asset is used partly for private purposes, apportion accordingly.

Important: In exam answers, clearly show:

Cost,
Write‑off period,
Time apportionment,
Any private use apportionment.

3.3 Section 12C: Manufacturing, Plant, and Machinery

Section 12C provides an accelerated allowance for certain plant and machinery used in a process of manufacture or similar.

Typical pattern (if the asset qualifies):

20% in year of acquisition,
20% in each of the next four years,
Total: 100% of cost over five years (for qualifying new and unused assets).
There are variations (e.g., 40/20/20/20) in some instances; always check the exam fact pattern and current legislation as provided in your UP TAX 300 materials.

Assets qualifying:

Manufacturing machinery in a factory;
Certain assets used in farming or mining;
Certain renewable energy assets (sometimes under other sections like s 12B or s 12L, depending on the exam year).

Non‑qualifying assets:

Office furniture, general admin equipment (often s 11(e) instead).
Motor vehicles not used directly in a manufacturing process.

3.4 Buildings and Improvements: Sections 13 and 13quin

Some buildings qualify for capital allowances:

Section 13:
- For industrial buildings used for manufacturing processes.
- Allows a building allowance on the cost of construction or purchase of a new building (or improvements).
- Typical rate: 5% per annum over 20 years (for qualifying industrial buildings), though this can vary.
Section 13quin:
- Deals with certain commercial buildings; rates and conditions differ.
- Often used for buildings in certain designated areas or specific business sectors; check exam notes.

Exam approach:

Determine whether the building is used for trade and qualifies under the relevant section.
Calculate allowance based on cost excluding the land portion (land is not depreciable).
Adjust for part‑year use if applicable.

3.5 Recoupments: Section 8(4)(a)

When a taxpayer disposes of an asset on which tax allowances have been claimed, there may be a recoupment (recovery) of those allowances if the sales proceeds (or deemed proceeds, including insurance compensation) exceed the tax value (written down value) of the asset.

Recoupment formula:

Recoupment = (Lesser of)
– Amount received or accrued from disposal;
– Original cost of asset;
minus
– Tax value (cost minus cumulative allowances).

Where:

If the sale price exceeds the tax value, the difference up to the original cost is recouped as taxable income.
Any amount above original cost may fall under CGT as a capital gain (for capital assets).

Example (simplified):

Machine cost: R200 000
Total allowances claimed to date: R120 000
Tax value at date of sale: R80 000
Sold for: R190 000

Recoupment calculation:

Amount received: R190 000
Original cost: R200 000 → lesser is R190 000
Recoupment: R190 000 – R80 000 = R110 000 (income, included in gross income via s 8(4)(a)).
Since sale price (R190 000) is below cost (R200 000), there is no capital gain; entire gain over tax value is treated as recoupment.

In exam answers, you must:

Show the tax value,
Compute recoupment,
Distinguish clearly between recoupment and capital gain.

3.6 Capital Gains Tax (CGT) for Companies

CGT applies when a capital asset is disposed of and there is a capital gain or loss.

Basic steps for companies:

Identify a disposal event (sale, donation, scrapping, expropriation, etc.).
Determine proceeds (amount received or accrued).
Determine base cost (acquisition cost + improvements + certain transaction costs).
Capital gain or loss = Proceeds – Base cost.
Sum all capital gains/losses for the year → aggregate capital gain or assessed capital loss.
For companies, only 80% (check current inclusion rate from exam guidelines) of the net capital gain is included in taxable income as a “taxable capital gain.”

Important features:

Capital vs revenue classification is crucial. If an asset is actually trading stock, any profit is revenue, not subject to CGT but normal tax.
Corporate CGT interacts with recoupments:
- First, calculate recoupment (up to cost).
- Then, if proceeds exceed cost, the excess is considered for CGT.

Example:

Cost of factory building (qualifying as capital asset): R2 000 000
No building allowances claimed (for simplicity).
Sold for R2 600 000.
Capital gain: R600 000.
If inclusion rate for companies is 80%: taxable capital gain = R600 000 × 80% = R480 000, added to taxable income.

UP exam questions may combine:

Section 11(e) and/or s 12C allowances,
Recoupment when selling machinery,
Capital gain/loss on the sale of a property.

Always separate these components clearly.

3.7 Integrated Example: Asset Life‑Cycle

Consider Rapid Manufacturing (Pty) Ltd, a resident South African company:

Year end: 28 February 2026.
Purchased a machine on 1 March 2024 for R500 000 (qualifying for s 12C – manufacturing).
Claimed 20% s 12C allowance in the 2025 year and 20% in the 2026 year.
On 1 December 2025, sold the machine for R450 000.

Steps:

Tax allowances claimed:
- 2025: 20% × R500 000 = R100 000
- 2026: full‑year allowance normally R100 000, but check if year of sale requires pro‑rata according to the Act and UP notes (in many exam scenarios, full year is allowed; follow given instructions).
- Assume full year allowed: total allowances = R200 000.
Tax value at sale:
- Cost R500 000 – R200 000 allowances = R300 000.
Recoupment (s 8(4)(a)):
- Amount received: R450 000;
- Original cost: R500 000 → lesser: R450 000;
- Recoupment: R450 000 – R300 000 = R150 000 (ordinary income).
Capital gain:
- Since sale price (R450 000) < cost (R500 000), there is no capital gain – entire gain above tax value is recoupment only.

In exam answers, show each step systematically; partial marks are often given even if final answer has minor errors.

4. Entities and Special Regimes: Companies, SBCs, Turnover Tax and Partnerships

University of Pretoria BCom Taxation modules such as TAX 300 and TAX 301 test not only generic company taxation but also special regimes and different entities. Understanding these structures and rates is vital for calculation and theory questions.

4.1 Companies: Standard Tax Treatment

For resident companies:

Tax rate: Generally 27% on taxable income (verify for the relevant year of assessment as per exam materials).
No rebates (unlike individuals).
No interest exemptions or similar.
Dividends tax (20%) generally applies when the company distributes dividends to shareholders, but this is a separate tax from the company’s normal tax.

In an exam, always:

Compute taxable income first,
Then apply the company rate.
If asked about dividends, mention dividends tax but clarify that it is not borne by the company directly (it is a withholding tax, though the company administers it).

4.2 Small Business Corporations (SBCs)

South African tax law offers a favourable regime for Small Business Corporations (SBCs), often tested in both UNISA and UP taxation courses but especially relevant in UP BCom Taxation due to entrepreneurial focus.

To qualify as an SBC, a company must:

Be a resident company or close corporation.
Have shareholders/members that are natural persons only.
Not be a personal service provider, unless it employs at least three full‑time non‑shareholder employees.
Have gross income not exceeding a specified threshold (e.g., R20 million – confirm threshold in exam information).
Not earn more than a certain percentage (typically 20%) from investment income and personal services (combined), subject to detailed statutory tests.

If an entity qualifies:

It enjoys reduced progressive tax rates up to a threshold and only pays 27% on income above the top SBC bracket.
This can result in significant tax savings.

Exam approach:

Test qualification explicitly:
- “All members are natural persons, the company is resident, the gross income is R5 million (below threshold), and less than 20% is derived from investment income or personal services; therefore it qualifies as an SBC.”
Apply SBC rates to taxable income, rather than the normal 27%.
Mention potential disqualification conditions (e.g., if one shareholder is a company, SBC status is lost).

4.3 Turnover Tax for Micro Businesses

Turnover tax is a simplified regime for very small micro‑businesses. While not always a major focus at UP, it can appear in theory questions.

Eligible micro‑businesses:

Have qualifying turnover below a specified amount (e.g., R1 million – verify threshold in exam year).
Can be individuals, partnerships, companies or CCs, subject to conditions.
Elect into the turnover tax system.

Key characteristics:

Tax is levied on turnover, not on taxable income.
Many normal deductions and allowances do not apply in the usual way.
CGT, VAT, and normal tax interactions are simplified.

Turnover tax is usually more favourable when the business has low profit margins but relatively small compliance capacity; in exam contexts, you may be asked to:

Compare normal tax vs turnover tax outcomes,
Identify whether a micro‑business should elect for turnover tax.

4.4 Partnerships (including Professional Firms)

A partnership is not a separate taxpayer under South African law. Instead:

The partnership computes its taxable income as if it were a separate entity.
But the income/loss is then allocated to the partners in agreed profit‑sharing ratios.
Each partner then includes their share in their own taxable income (if they are individuals, companies, etc.).

Steps in exam calculations:

Compute partnership “taxable income” (using the same rules as for any business).
Allocate to partners based on partnership agreement (e.g., A: 60%, B: 40%).
For each partner, adjust for specific items that may be treated differently (e.g., partners’ salaries or interest on partners’ capital/accounts are often just allocation mechanisms, not expenses).

Special notes:

Assets owned by the partnership are treated collectively, but for CGT and recoupments, gains/losses are eventually attributed to partners.
Partnerships are common in professional services (e.g., law, accounting firms).

In UP TAX 300, exam questions might present a partnership trading scenario, ask you to compute the firm’s profit, and then show each partner’s taxable share, with attention to s 11(a) and capital allowance rules.

4.5 Personal Service Providers (PSPs) and Labour Brokers

The concept of a Personal Service Provider (PSP) is intended to prevent individuals from using companies merely to disguise employment income as business income.

A company is a PSP if:

It renders services through any person who would, but for the existence of the company, be regarded as an employee of the client; and
The company does not employ at least three or more full‑time employees who are not shareholders/members; and
Additional statutory criteria are met (consult exam summary).

Consequences:

The PSP may be taxed at higher effective rates or denied certain deductions.
Specific rules limit the deduction of expenses (generally limited to expenses that an employee would be allowed).

While detailed PSP computation may be more heavily tested at UNISA, UP TAX 300 students should still know:

How to identify a PSP scenario.
That normal business deductions may be restricted.
The role of section 23(k) and related provisions.

5. Integrated Exam‑Style Application: Computation and Analytical Issues

The final piece for TAX 300: Taxation of Business Income revision is combining all the above elements into a cohesive exam‑style computation and analysis. This section outlines key exam strategies and a detailed worked example aligned with expectations of BCom Taxation students at the University of Pretoria.

5.1 Exam Strategy for Long‑Form Business Tax Questions

Most UP TAX 300 papers feature at least one integrated question where you must:

Read a detailed fact pattern about a company’s financial year;
Identify all tax‑relevant items (income, expenses, capital gains, allowances, recoupments);
Compute taxable income and normal tax payable;
Justify major adjustments with brief references to sections and case law.

A structured approach:

Start with accounting profit (if given).
Add back:
- Non‑deductible expenses (e.g., accounting depreciation, fines, private expenses, income tax).
- Exempt income (to reconcile to “gross income” if starting from net profit).
Adjust for capital allowances:
- Replace accounting depreciation with correct tax allowances (s 11(e), s 12C, etc.).
Include recoupments as income.
Compute capital gains separately and then add taxable capital gain to taxable income.
Apply specific deduction rules (bad debts, repairs vs improvements).
Check for special status (e.g., SBC rates) and apply correct rate.

Always layout workings logically; marks are often given per step.

5.2 Common Pitfalls and How to Avoid Them

Confusing depreciation and wear & tear
- Solution: Always add back depreciation and calculate a separate wear and tear or capital allowance.
Forgetting recoupments when assets are sold
- Solution: Whenever you see sale or scrapping of an asset that received allowances, calculate tax value vs proceeds.
Incorrectly classifying capital vs revenue
- Solution: Always consider intention, frequency, and nature of the asset. Briefly quote capital vs revenue case law.
Mixing CGT and ordinary income
- Solution: Do a separate CGT schedule, then bring only the taxable capital gain into the main computation.
Ignoring s 23 prohibitions
- Solution: For each major expense category, ask: “Could this be private? Related to exempt income? Capital?” and adjust accordingly.
Wrong or missing apportionments
- Solution: Look for words like “partly used privately”, “mixed use”, “personal use by director” and apportion reasonably.

5.3 Comprehensive Worked Example

Assume the following scenario, framed in the style of a University of Pretoria TAX 300 exam:

Data:

Taxpayer: Silverline Engineering (Pty) Ltd, a resident company.
Year of assessment: 1 March 2025 – 28 February 2026.
Engaged in manufacturing of metal components.
Income statement (accounting) for year ended 28 Feb 2026:

Item	Amount (R)
Sales revenue	8 500 000
Local dividends received	120 000
Interest received from SA bank	40 000
Total income	8 660 000
Cost of sales (all deductible)	(4 200 000)
Salaries and wages	(1 600 000)
Employer contributions to pension funds	(160 000)
Repairs and maintenance	(90 000)
Legal fees (see details below)	(70 000)
Rent for factory premises	(360 000)
Accounting depreciation	(300 000)
Interest paid on loan (see details)	(120 000)
Provision for doubtful debts	(40 000)
Income tax expense	(450 000)
Net profit before tax	1 270 000

Additional information:

Legal fees of R70 000 consist of:
- R30 000 to collect overdue trade debtors.
- R40 000 relating to legal dispute over ownership of a piece of land held as a factory site (capital asset).
Interest paid of R120 000:
- R80 000 on a loan used to purchase manufacturing machinery (qualifying s 12C assets).
- R40 000 on a loan used to acquire 100% of the shares in another South African company that pays only exempt local dividends.
Fixed assets and allowances:
- Machine A:
  - Cost: R600 000; acquired 1 March 2024; used directly in manufacturing; qualifies for s 12C at 20% per year.
  - Silverline claimed R120 000 allowance in year ended 28 Feb 2025.
- Machine B:
  - Cost: R400 000; acquired 1 September 2025; qualifies for s 12C at 20% per year.
- Office equipment:
  - Cost: R150 000; acquired 1 March 2023; s 11(e) wear and tear over 5 years per SARS schedule.
During the year, Machine A was sold on 1 January 2026 for R550 000.
Debtors and bad debts:
- The provision for doubtful debts (R40 000) is an accounting provision; the actual specific bad debts written off during the year amounted to R25 000 (included in cost of sales above).
- SARS allows a 25% allowance on identified doubtful trade debts of R80 000 at year‑end under s 11(j), subject to apportionment.
The local dividends of R120 000 and the interest received of R40 000 are correctly recorded.
Silverline is owned by two shareholders (both natural persons) and has gross income under SBC threshold; less than 10% of its income is from investment income. It does not provide personal services and employs more than 10 workers. Assume it qualifies as an SBC for this year and apply a simplified assumed SBC tax table (for illustrative purposes only):

Taxable income range (R)	SBC tax payable (R)
0 – 95 750	0
95 751 – 365 000	7% of amount above 95 750
365 001 – 550 000	18 905 + 21% of amount above 365 000
550 001 and above	59 495 + 27% of amount above 550 000

Required:
Calculate the taxable income and normal tax payable for Silverline Engineering (Pty) Ltd for the year of assessment ending 28 Feb 2026, clearly indicating all adjustments, assuming SBC status as described.

5.3.1 Step 1: Start from Net Profit and Reverse Non‑Tax Items

Net profit before tax: R1 270 000

Add back non‑deductible / incorrectly deducted items:

Income tax expense: R450 000 → not deductible (s 23(f)).
Accounting depreciation: R300 000 → replaced by tax allowances.
Legal fees – capital portion: R40 000 (land ownership dispute – capital, not deductible under s 11(a)).
Provision for doubtful debts: R40 000 (only specific bad debts plus allowable doubtful debt allowance are deductible).
Interest relating to exempt income: R40 000 on shares loan (s 23(f) – linked to exempt dividends).

Total add‑backs:

450 000 + 300 000 + 40 000 + 40 000 + 40 000 = R870 000

Adjusted profit:

1 270 000 + 870 000 = R2 140 000

5.3.2 Step 2: Adjust for Exempt Income

The local dividends are exempt (s 10(1)(k)), but they were included in accounting income.

Subtract:

Local dividends: R120 000 (exempt income).

Adjusted amount:

2 140 000 – 120 000 = R2 020 000

5.3.3 Step 3: Tax Capital Allowances and Recoupments

(a) Machine A – s 12C and recoupment

Cost: R600 000.
Allowances claimed:
- Prior year (2025): R120 000 (20% of 600 000).
- Current year (2026): 20% of R600 000 = R120 000 (full allowance allowed in year of sale unless exam states otherwise).
Total allowances claimed to date: R240 000.
Tax value at date of sale: R600 000 – 240 000 = R360 000.
Amount received on sale: R550 000.

Recoupment:

Lesser of amount received (R550 000) and original cost (R600 000) = R550 000.
Recoupment = R550 000 – R360 000 = R190 000 (income).

Because proceeds (R550 000) < cost (R600 000), there is no capital gain.

For current year, we must:

Add recoupment as income.
Deduct the current‑year s 12C allowance of R120 000.

(b) Machine B – s 12C allowance

Cost: R400 000.
Acquired: 1 September 2025 (within the year).
Qualifies for 20% s 12C.

Assume full 20% allowed in year of acquisition (no time apportionment, per standard s 12C treatment):

s 12C allowance = 20% × R400 000 = R80 000.

(c) Office equipment – s 11(e) wear and tear

Cost: R150 000.
SARS write‑off period: 5 years → annual allowance = R150 000 ÷ 5 = R30 000 per year.
Asset acquired on 1 March 2023, so full year in 2026 year: R30 000 W&T.

Total tax allowances for current year:

Machine A (s 12C): R120 000
Machine B (s 12C): R80 000
Office equipment (s 11(e)): R30 000
Total = R230 000

Adjustment to profit:

Recall, we already added back accounting depreciation of R300 000. We now deduct the actual tax allowances of R230 000.

Adjusted amount (before recoupment):

2 020 000 – 230 000 = R1 790 000

Now add recoupment from Machine A:

Recoupment: R190 000.

New adjusted amount:

1 790 000 + 190 000 = R1 980 000

5.3.4 Step 4: Deduct Allowable Doubtful Debts and Confirm Bad Debts

We added back the provision for doubtful debts (R40 000) already. Now:

Specific bad debts written off: R25 000 included in cost of sales (which we have not adjusted; cost of sales was allowed as a lump sum). Since they are trade debts and actually written off, they are deductible and already reflected in cost of sales – no further adjustment is required.
Allowance for doubtful debts:
- SARS allows 25% of identified doubtful trade debts (R80 000).
- Allowable deduction: 25% × 80 000 = R20 000, under s 11(j).

But we currently have no deduction in relation to doubtful debts (we added back the accounting provision of R40 000). We now deduct the allowable R20 000.

Adjusted amount:

1 980 000 – 20 000 = R1 960 000

5.3.5 Step 5: Interest Deduction Assessment

We have already added back R40 000 of interest related to the share acquisition (exempt dividends). That portion remains non‑deductible.

The remaining R80 000 interest on the loan used to purchase manufacturing machinery:

Used to produce income (the machinery is used in trade).
Not of a capital nature.

Therefore, R80 000 is deductible, and it has already been deducted in the income statement. We do not adjust further, since the initial add‑back only disallowed the R40 000 portion.

5.3.6 Step 6: Legal Fees – Confirm Division

We added back R40 000 capital legal fees (land dispute).

The remaining R30 000 for trade debt collection is revenue in nature, incurred in the production of income, thus deductible and correctly included as an expense in the income statement. No further adjustment.

5.3.7 Step 7: Check for Any CGT Events

Only Machine A was sold, and we already determined there is no capital gain (proceeds below cost; excess over tax value is treated as recoupment).

Assume no other disposals → no CGT to add.

5.3.8 Step 8: Confirm Exempt Income and Interest Income

We already adjusted for local dividends (exempt).
Interest received (R40 000) from a South African bank is fully taxable for companies; it remains included in gross income and no exemption applies. No adjustment needed.

5.3.9 Step 9: Final Taxable Income

After all adjustments, we have:

Taxable income = R1 960 000

Check for reasonableness:

Starting from net profit of R1 270 000, we:
- Added back non‑deductible items,
- Replaced depreciation with tax allowances,
- Adjusted for exempt dividends,
- Included recoupment,
- Added allowable doubtful debts deduction.

The result of R1 960 000 is plausible, especially given the large recoupment and interest limitation.

5.3.10 Step 10: Calculate Normal Tax Payable Using SBC Rates

Silverline qualifies as an SBC and taxable income is R1 960 000.

Use the assumed SBC tax table:

For the first R95 750: tax = R0.
For income from R95 751 to R365 000:
- Tax = 7% of (365 000 – 95 750)
- 365 000 – 95 750 = 269 250
- 7% × 269 250 = 18 847.50
- Rounded (for exam, may round to nearest rand): R18 848
For income from R365 001 to R550 000:
- Base tax given in table: R18 905 + 21% of amount above R365 000.
- Range amount: 550 000 – 365 000 = 185 000
- 21% × 185 000 = 38 850
- Tax for this band: 18 905 + 38 850 = 57 755
For income above R550 000 up to R1 960 000:
- Apply last band: 59 495 + 27% of amount above 550 000.
- Excess above 550 000: 1 960 000 – 550 000 = 1 410 000
- 27% × 1 410 000 = 380 700
- Tax for this band: 59 495 + 380 700 = 440 195

However, observe the structure of the SBC table carefully: the last row replaces the earlier brackets, not adds to them. The table is cumulative. So we should:

Because taxable income (1 960 000) is in the highest bracket (550 001 and above), tax is only:

Tax = 59 495 + 27% of (1 960 000 – 550 000)
= 59 495 + 27% of 1 410 000
= 59 495 + 380 700
= R440 195

Thus, normal tax payable for Silverline Engineering (Pty) Ltd is R440 195.

In exam scripts, clearly note:

“Because Silverline qualifies as an SBC and its taxable income exceeds R550 000, the SBC rate of 59 495 + 27% of taxable income above R550 000 applies, giving tax of R440 195.”

If the question instead asked to tax the company at the standard 27% corporate rate, you would compute:

27% × 1 960 000 = R529 200

This comparison can demonstrate the tax benefit of SBC status.

5.4 Analytical Takeaways for Exam Success

Structure your answer around the taxable income formula and stepwise adjustments.
Justify classifications of capital vs revenue, deductions vs disallowed items.
Always reconcile accounting depreciation to tax allowances, and handle recoupments carefully.
Separate CGT from normal income, then bring across only the taxable capital gain.
When special regimes like SBC apply, highlight qualification criteria and show that you have applied the correct rate.
Practise multiple end‑to‑end computations to build fluency, which is essential for time‑pressured TAX 300 and TAX 301 exams at the University of Pretoria.

By mastering these integrated principles and computation techniques, BCom Taxation students at UP will be well‑prepared to tackle complex questions on the taxation of business income, from ordinary companies and SBCs to asset disposals, capital allowances, and CGT implications.