TAX3702: Taxation of Business Income Exam Pack – UNISA Study Guide

This exam pack provides comprehensive study notes for TAX3702: Taxation of Business Income for UNISA BCom Taxation students, with a focus on South African income tax principles. It is designed to support exam preparation for semester tests, exams, and supplementary assessments. The notes align with typical UNISA TAX3702 outcomes and also help students from CUT and other South African universities taking similar modules on the taxation of business income.

The guide emphasises examinable areas such as gross income, special inclusions, general and specific deductions, assessed losses, capital allowances, and the computation of taxable income for different business entities under the Income Tax Act 58 of 1962 (South Africa).

1. Overview of TAX3702 and the South African Tax Framework

1.1 Position of TAX3702 in the UNISA BCom Taxation curriculum

At UNISA, TAX3702 – Taxation of Business Income is a core module in the BCom in Taxation and often taken in the third year of study. It builds on earlier modules such as:

TAX2601 – Principles of Taxation
TAX2602 – Taxation of Individuals
FAC2601 / FAC2602 – Financial Accounting
MAC2601 – Management Accounting

TAX3702 focuses on the tax treatment of business income derived by:

Sole proprietors
Partnerships
Close corporations
Private and public companies
Certain trusts engaged in trade

For UNISA students searching for “TAX3702 exam pack”, “UNISA TAX3702 exam notes” or “BCom Taxation business income study guide”, this document targets the typical syllabus structure and past exam trends.

Other South African universities with similar modules include:

Central University of Technology (CUT) – e.g. TAX30AB: Taxation – Business Entities
University of Johannesburg (UJ) – TAX3A2: Business Taxation
North-West University (NWU) – TAXF 321: Taxation of Businesses

Although naming differs, the core concepts in the Income Tax Act remain broadly the same, making these notes useful also for CUT and UJ students searching for “CUT TAX30AB study notes” or “UJ TAX3A2 exam summary”, particularly where they deal with South African business income tax.

1.2 Sources of South African income tax law

Business income taxation in TAX3702 is grounded in several primary and secondary sources:

Primary sources:

Income Tax Act 58 of 1962 (ITA)
- Section 1 – Definitions (e.g. “gross income”, “trade”, “resident”)
- Section 11 – General deductions (e.g. s11(a), s11(e), s11(gC), s11(o))
- Section 23 – Prohibited deductions
- Sections 12C, 12E, 13, 13quin, etc. – Special allowances
- Eighth Schedule – Capital gains tax (CGT) rules (only as they interact with business income)
- Fourth Schedule – Employees’ tax (PAYE) for companies and trading entities
Tax Administration Act 28 of 2011 (TAA)
- Administrative provisions, assessments, objections and appeals.
Case law interpreting tax principles (e.g. CIR v Genn & Co (Pty) Ltd, Port Elizabeth Electric Tramway Co Ltd v CIR, Berea West Estates (Pty) Ltd v CIR).

Secondary sources:

SARS Interpretation Notes and Binding General Rulings
SARS Guides (e.g. Guide on Income Tax and the Small Business Corporations)
UNISA TAX3702 study material (study guides, tutorial letters)
Prescribed textbooks commonly used across South African universities.

In exam answers, citing the section numbers and key cases is crucial for full marks, especially in long-form questions.

1.3 Basic tax concepts revisited for business income

Before moving to business-specific issues, TAX3702 expects solid understanding of:

Resident vs non-resident (Section 1 definition and residence tests)
Year of assessment (normal year vs special year for some entities)
Gross income definition:

“Gross income, in relation to any year or period of assessment, means the total amount, in cash or otherwise, received by or accrued to or in favour of such resident… excluding receipts or accruals of a capital nature…”
Exempt income (Section 10)
Trade definition (very wide, includes professions, businesses, ventures, lettings, etc.)
Taxable income = Gross income – Exempt income – Deductions + Taxable capital gains.

For business entities, the same structure applies, but with more focus on complex receipts, special inclusions, capital allowances and assessed loss rules.

1.4 Structure of a typical TAX3702 exam

TAX3702 exams typically comprise:

One or two scenario-based questions (e.g. full tax computation for a company with multiple adjustments).
Short questions on:
- Distinguish revenue vs capital receipts
- Requirements of s11(a) and prohibitions in s23
- Application of s11(e) wear-and-tear allowance
- Treatment of recoupments and scrapping allowances
Possible theory on:
- Case law principles related to the “in the production of income” test
- Concepts of trading stock, disposals, opening and closing stock.
Calculations for:
- Small Business Corporations (SBCs) relief (s12E, where still relevant in syllabus)
- Assessed losses and their set-off against future income.

Time management is critical: answers must be logically presented, show all steps, and reference the ITA where appropriate.

2. Gross Income, Special Inclusions and Revenue vs Capital

2.1 Gross income for businesses

For a resident company or trading entity, gross income includes:

Sales of goods (turnover)
Fees for services (consulting, professional services)
Rental income from property
Royalties and licence fees
Interest received (from bank or debtors)
Foreign income (subject to double tax agreements where applicable)
Fringe benefits (in limited contexts, usually for individuals, but companies may be affected via employees’ tax)
Recoveries and recoupments (where specifically included).

In exam computations, the most common starting points for gross income are:

Accounting profit per income statement, then:
- Add back non-deductible items
- Subtract non-taxable items
- Adjust for capital vs revenue items
- Adjust for timing differences.
Detailed trial balance or list of receipts and payments, requiring classification into:
- Gross income
- Exempt income
- Capital receipts
- Not income (e.g. loans received).

2.2 Revenue vs capital: importance for TAX3702

The distinction between revenue and capital is critical, because:

Revenue receipts are generally included in gross income.
Capital receipts are excluded from gross income (but may be subject to CGT).
Revenue expenditure may be deductible under s11(a), subject to tests.
Capital expenditure is not deductible under s11(a), but may qualify for specific allowances (e.g. s12C, s13, s13quin).

Key case law principles generally used in UNISA and other South African universities:

Enduring benefit test – Expenditure that brings an enduring benefit is likely capital (e.g. purchase of machinery).
Creation vs use of income-earning structure – Outlays to create or acquire the structure (capital) vs day-to-day running costs (revenue).
Fixed vs floating capital – Fixed capital is usually capital in nature, while floating capital (e.g. trading stock) is revenue.
Once-off vs recurring – Once-off payments may indicate capital, but frequency alone is not decisive.

Classic cases often examined include:

Port Elizabeth Electric Tramway Co Ltd v CIR – outlined the “necessary concomitant of the trade” test for expenditure.
New State Areas Ltd v CIR – capital vs revenue distinction.
CIR v Genn & Co (Pty) Ltd – expenditure to dispose of a business; capital in nature.

In exam answers, always apply these principles to the facts, not merely state them.

2.3 Special inclusions in gross income for business entities

Besides the general definition of gross income in s1, certain specific amounts are deemed to be gross income through so-called special inclusions. For business entities, typical ones include:

Section 8(4)(a) – Recoupments: amounts received or accrued in respect of the disposal or recovery of an asset for which a deduction has been allowed previously (e.g. s11(e) allowances); included in income to the extent of past allowances.
Section 8(4)(k) – Recoveries of expenditure where deduction previously allowed.
Section 8(1) – Certain amounts received regarding leasehold improvements etc.
Section 22(8) – Amounts received for trading stock in a non-standard manner.
Certain fringe benefits and allowances for individuals engaged in trade, but these are primarily covered in individual taxation modules.

Example – Recoupment (s8(4)(a)):

Company X bought machinery for R200 000 in Year 1.
It claimed s11(e) wear-and-tear allowances totalling R120 000 over several years.
Tax value at start of Year 5: R80 000.
Machine is sold in Year 5 for R130 000.

Calculation:

Tax value before disposal: R80 000
Proceeds: R130 000
Excess over tax value: R50 000.

This R50 000 is a recoupment and must be included in income in Year 5 as a special inclusion (limited to total allowances previously claimed; in this case R120 000, so R50 000 is fully included).

If the proceeds had been R250 000, then:

Proceeds (R250 000) – Tax value (R80 000) = R170 000
Recoupment limited to previously allowed allowances (R120 000).
Remaining R50 000 is capital gain (subject to CGT in Eighth Schedule).

2.4 Practical classification examples for exams

Students often struggle to classify items quickly in exam conditions. The following are common receipts for a UNISA TAX3702-style scenario and their likely treatments:

Receipt / Amount	Likely Nature	Tax Treatment
Sales of trading stock	Revenue	Included in gross income
Rental income from commercial building	Revenue	Included in gross income
Proceeds from sale of manufacturing machine	Mixed: revenue (recoupment) + capital	Recoupment included in income; excess is capital gain
Refund from supplier (overcharged expenses)	Revenue	Included in gross income (may reverse a prior deduction)
Insurance proceeds for destroyed stock	Revenue	Included in gross income (replaces revenue asset)
Insurance proceeds for destroyed factory	Capital (subject to CGT)	Excluded from gross income; dealt with in CGT
Loan from bank	Non-income (liability)	Not included in gross income
Equity injection by shareholders	Capital (share capital)	Not included in gross income
Damages received for loss of profits	Revenue	Included in gross income
Damages received for loss of business asset	Capital	Likely capital; may trigger CGT

In your exam, always explain briefly why something is capital or revenue. A one-line reason referencing “income-earning structure” vs “profit-earning operations” can secure marks.

2.5 Timing: when does income “accrue”?

For an amount to fall into gross income in a year, it must:

Be received by or accrue to the taxpayer during that year.

Received by – when the taxpayer actually or constructively receives the amount (e.g. cash or credited to bank account).

Accrues to – when the taxpayer becomes entitled to the amount, even if not yet received in cash (the “entitlement” principle).

Important for business income:

Credit sales: Income accrues when sale is concluded and debtor becomes liable, even if cash is received later.
Prepayments / deposits: Depends on whether there is an unconditional entitlement and legal right to retain the amount.
Long-term contracts: May require apportionment in line with IFRS, but the tax treatment follows when amounts become due and payable or when entitlement arises.

Exams may test timing by giving:

Invoices issued just before year-end, paid afterwards.
Advance receipts where services will be rendered next year.

Apply the “entitlement” test: once legally claimable, it has accrued.

3. General and Specific Deductions: Section 11(a), Section 23 and Related Allowances

3.1 The general deduction formula – Section 11(a)

Section 11(a) of the ITA provides the general deduction formula:

“For the purpose of determining the taxable income derived by any person from carrying on any trade, there shall be allowed as deductions from the income of such person so derived –
(a) expenditure and losses actually incurred in the production of the income, provided such expenditure and losses are not of a capital nature…”

The requirements are:

Expenditure and losses
- Must be real and not merely contingent.
- Can be in cash or in kind, but must have a monetary value.
Actually incurred
- A legal obligation must exist in the year of assessment (not just expected).
- Accrual basis: when liability is unconditional.
In the production of income
- Must be closely connected to the earning of income; the “necessary concomitant of trade” test applies (Port Elizabeth Electric Tramway Co case).
- Expenditure that is too remote (e.g. personal or domestic) will fail.
From trade
- Deduction allowed only if the taxpayer is carrying on a trade (very broad).
Not of a capital nature
- Capital vs revenue distinction summarised earlier.

If any of these elements is missing, s11(a) cannot apply (unless a specific deduction provision applies).

3.2 Prohibited deductions – Section 23

Section 23 lists prohibitions that often “override” potential deductions under s11(a). Key subsections for TAX3702:

s23(a) – No deduction for non-trade expenditure:
- Expenditure not laid out for the purposes of trade; personal or domestic expenses.
s23(b) – Private or domestic expenses not deductible.
s23(g) – Only expenditure “to the extent” that it is incurred in the production of income and for trade purposes is deductible. This is key for apportionment:
- Mixed-use expenses (e.g. cell phone, vehicle) must be apportioned based on business vs private use.
s23(h) – Provisions are generally not deductible until actually incurred (subject to specific exceptions).
s23(f) – Income that is exempt: expenditure relating to exempt income is not deductible.

In exam answers, when you decide that something is non-deductible, always mention Section 23 where appropriate.

3.3 Apportionment of mixed expenses (Section 23(g))

Businesses often incur expenditure serving both income-producing and non-income purposes. Under s23(g), only the portion used to produce income is deductible.

Example:

A sole trader uses one car 60% for business and 40% for private purposes.
Total fuel and maintenance for the year: R30 000.

Deductible portion:

R30 000 × 60% = R18 000 (deductible under s11(a) and limited by s23(g)).

Expenditures requiring apportionment in typical exam questions:

Telephone and internet (home office vs private)
Vehicle expenses
Rental of premises (partly used as home office)
General overheads where only part relates to the income-producing activity.

Always specify the basis used for apportionment (e.g. floor area, time, usage logs).

3.4 Specific deductions for business income (beyond s11(a))

While s11(a) is the “catch-all” deduction, many business-related expenses are governed by specific provisions in s11 and other sections. Common ones for TAX3702 include:

s11(c) – Legal expenses (in limited circumstances; not usually examined in depth here).
s11(d) – Repairs:
- Allows deduction for repairs to property used in trade.
- Must distinguish repairs (deductible) from improvements (capital and not deductible under s11(d)).
s11(e) – Wear-and-tear (discussed fully in Section 4).
s11(gC) – Prepaid expenditure (limited deduction; remainder deferred).
s11(i) – Lease premiums (apportioned).
s11(j) – Doubtful debts allowances.
s11(o) – Scrapping allowances (when asset is scrapped/disposed of for less than tax value).

Students must know and quote these provisions where appropriate.

3.5 Repairs vs improvements – Section 11(d)

Repairs:

Restoring an asset to its original condition.
Expenditure that maintains the asset’s income-producing ability.
Deductible under s11(d) if asset is used in trade.

Improvements:

Enhancing the asset beyond its original capacity or condition.
May extend the life of the asset or increase efficiency.
Usually capital in nature, not deductible under s11(d); may qualify for capital allowances (e.g. s13quin for building improvements).

Example:

A business owns a commercial building:

Repainting interior and fixing leaks: repairs → deductible under s11(d).
Adding a new conference wing: improvement → capital, not deductible under s11(d), may increase base cost for CGT or qualify under other allowance sections.

In exam questions, always look for phrases like “repairs and maintenance” and then break down what they consist of; some parts may be repairs (deductible), others improvements (capital).

3.6 Prepaid expenditure – Section 11(gC)

Businesses often pay expenses in advance (e.g. 24 months’ insurance). To prevent excessive early deductions, s11(gC) restricts deduction of certain prepaid expenditure by non-small business corporations:

Deduction limited to the portion relating to the current year of assessment.
Remainder is deducted in subsequent years as the benefit relates to those years.

Example:

Company with a 12-month year of assessment (1 March 2024 – 28 February 2025).
On 1 September 2024, pays R120 000 for a 24-month maintenance contract, covering 1 September 2024 – 31 August 2026.

In the 2025 year:

Period falling into current year: 1 September 2024 – 28 February 2025 = 6 months.
Deductible this year: R120 000 × 6/24 = R30 000 (under s11(gC)).
Remaining R90 000 is deducted in the two subsequent years (R60 000 in 2026; R30 000 in 2027, assuming straight-line apportionment).

UNISA exams may present prepaid expenses that must be time-apportioned and refer to s11(gC).

3.7 Doubtful debts – Section 11(j)

Businesses can sometimes deduct an allowance for doubtful debts:

s11(j) allows an allowance in respect of doubtful debts, subject to SARS practice (usually % of trade receivables).
Actual bad debts written off are deductible under s11(a) or s11(i), depending on context.

Example:

Trade receivables at year-end: R500 000.
Based on past experience, 4% is doubtful: R20 000.

If SARS or prescribed policy allows, the company may claim R20 000 as s11(j) allowance. If the previous year’s allowance was R15 000, only the increase of R5 000 is an additional deduction this year; if the allowance decreases, the difference is recouped and included in income.

Exams sometimes test movement in allowance instead of the full amount.

3.8 Exam-style approach to applying s11(a) and s23

When addressing a deduction item in a TAX3702 exam:

Identify the nature of the expense (e.g. advertising, salaries, legal fees).
Apply s11(a) requirements (briefly mention each requirement).
Check s23 for any prohibition (e.g. private portion, non-trade).
Consider if there is a specific deduction section that applies instead:
- Repairs? s11(d)
- Wear-and-tear? s11(e)
- Prepaid? s11(gC)
- Doubtful debts? s11(j)
Conclude: fully deductible / partially deductible (with apportionment) / non-deductible / capital in nature.

A structured answer earns more marks than a simple “yes/no” approach.

4. Capital Allowances, Wear-and-Tear, Trading Stock and Recoupments

4.1 Overview of capital allowances

Many business assets are capital in nature and therefore not deductible under the general deduction formula. Instead, the ITA provides capital allowances to grant relief over time.

Common allowances for business entities in TAX3702 include:

s11(e) – Wear-and-tear allowance for qualifying movable assets.
s12C – Allowance for certain machinery and implements used in manufacturing or certain trades.
s13 – Buildings used for manufacturing.
s13quin – Commercial building allowance.
s13sex – Residential housing for employees (depending on syllabus).
s11(o) – Scrapping allowance (when asset is scrapped or sold below tax value).

The concept of tax value is central:
Tax value = Cost – Cumulative allowances claimed.

4.2 Wear-and-tear – Section 11(e)

s11(e) allows a deduction for the depreciation of movable assets used for trade (e.g. machinery, equipment, vehicles, furniture, computers).

Key points:

Asset must be owned by the taxpayer (not leased under typical operating lease).
Asset must be used in trade to produce income.
The deduction is typically calculated using:
- SARS prescribed write-off periods (in practice, an interpretation issue).
- Straight-line over the estimated useful life.

Example – Simple s11(e) calculation:

Company buys a computer for R30 000 on 1 March 2024.
SARS guideline: 3-year write-off.

Annual wear-and-tear = R30 000 ÷ 3 = R10 000 per annum.

If company’s year of assessment is 1 March 2024 to 28 February 2025, the full-year allowance is R10 000, if used for the full year.

Partial-year use:

If asset acquired and brought into use on 1 September 2024 (mid-year):

Year 1 allowance: R30 000 ÷ 3 × 6/12 = R5 000.
Subsequent years: R10 000 until cost is fully written off.

Exam questions often involve a mix of:

Acquisition dates
Disposals mid-year
Apportionment for private vs business use.

4.3 Manufacturing allowances – Section 12C and Section 13

Where the syllabus includes manufacturing allowances, distinguish between:

s12C – New and unused plant and machinery used directly in a process of manufacture (or certain other qualifying trades). Typically:
- 40% in year of assessment in which asset is brought into use.
- 20% in each of the next three years (total 100%).
s13 – Buildings used for manufacturing:
- Deduction is usually 5% per annum on cost (over 20 years), while building is used for qualifying manufacturing.

Example – s12C allowance:

Company Y acquires a new machine for R500 000 on 1 April 2024.
Asset is brought into use in a process of manufacture on same date.
Year of assessment: 1 March 2024 – 28 February 2025.

Year 1 allowance (2025 year): 40% × R500 000 = R200 000.
Years 2–4: 20% × R500 000 = R100 000 per year.

Such questions test:

Correct identification of a qualifying asset.
Correct rate and apportionment.
Distinction from s11(e) assets.

4.4 Commercial buildings – Section 13quin

s13quin provides an allowance for commercial buildings used in the taxpayer’s trade (other than residential accommodation, subject to exceptions). Key aspects:

Building must be new and unused when acquired.
Must be used wholly or mainly for trade.
Allowance is 5% per year (on cost).

Example:

Trading company constructs a new office building for R3 000 000.
Brought into use on 1 July 2024.
Year of assessment: 1 March 2024 – 28 February 2025.

Annual allowance: 5% × R3 000 000 = R150 000.
Apportionment for first year (8 months out of 12): R150 000 × 8/12 = R100 000.

Allowances reduce the effective cost over 20 years; any subsequent disposal may give rise to recoupments or capital gains.

4.5 Scrapping allowance – Section 11(o)

If an asset used in trade is scrapped, destroyed or disposed of for an amount less than its tax value, s11(o) may allow a scrapping allowance:

s11(o) deduction = Tax value – Scrap proceeds (if any).

Example:

Company has machinery with:
- Cost: R300 000
- Cumulative allowances: R180 000
- Tax value: R120 000
Machine is scrapped and sold as scrap metal for R20 000.

Scrapping allowance (s11(o)) = R120 000 – R20 000 = R100 000 (deductible).

If scrapping occurs due to a factory fire and the machine is not replaced, the scrapping allowance still applies, but exam questions may also involve insurance proceeds and possible recoupment interactions.

4.6 Trading stock – Section 22

Trading stock is at the heart of business taxation. s22 deals with:

Opening stock value
Closing stock value
Consumption of stock in determining taxable income.

Basic principle:

Cost of sales for tax purposes = Opening stock + Purchases – Closing stock.

For tax, cost is generally the lower of cost or net realisable value, depending on circumstances, but for many exam questions assume cost unless told otherwise.

Example – Trading stock:

A trading company’s records:

Opening stock (1 March 2024): R200 000
Purchases during year: R600 000
Closing stock (28 February 2025): R250 000

Cost of sales = 200 000 + 600 000 – 250 000 = R550 000.

The difference between opening and closing stock (net increase of R50 000) effectively increases taxable income, because more stock remains unsold.

In exam calculations:

Ensure that trading stock is adjusted correctly.
If closing stock is undervalued or certain items are omitted, SARS may deem amounts included under s22(8) or other provisions.

4.7 Obsolete and scrapped trading stock

If trading stock becomes obsolete or is scrapped:

Write-down or write-off may affect taxable income.
s22 provides mechanisms to adjust stock values appropriately.

Example:

Opening stock includes items costing R40 000 that become obsolete and are sold as scrap for R5 000 during the year.
Remaining stock at year-end is valued accordingly; write-off of R35 000 (R40 000 – R5 000) may effectively reduce taxable income.

Exams may require explaining or adjusting such write-offs.

4.8 Recoupments revisited – Section 8(4)(a)

As explained earlier, if an asset (non-trading stock) for which allowances were previously claimed is sold for more than its tax value:

The excess (to the extent of previous allowances) is recouped and included in income.

Full example tying together s11(e), trading stock and recoupment:

Assume ABC (Pty) Ltd:

Year of assessment: 1 March 2024 – 28 February 2025.
Opening tax value of machinery: R400 000 (cost R700 000, cumulative allowances R300 000).
New machinery purchased: R300 000 (qualifying for s11(e) with 5-year write-off).
One old machine sold for R150 000; its tax value was R100 000.

Steps:

Recoupment:
- Proceeds (R150 000) – Tax value (R100 000) = R50 000.
- Include R50 000 in gross income as recoupment (s8(4)(a)).
Wear-and-tear (s11(e)):
- New machinery: R300 000 ÷ 5 = R60 000 allowance.
- Remaining machinery (old): Suppose their combined tax value is R300 000 (after sale).
- Using same 5-year method, if appropriate, allowances claimed accordingly (not fully detailed here).
Trading stock:
- If any machinery is held as trading stock (e.g. dealer), different rules apply; but here, they are capital assets.

Exam questions might require a detailed schedule of:

Opening tax values
Additions
Disposals (with recoupments and scrapping allowances)
Closing tax values.

Always present these calculations in tabular form to save time and ensure clarity.

5. Assessed Losses, Business Entities, and Comprehensive Tax Computations

5.1 Assessed losses: carry forward and set-off

A tax loss for a year of assessment is commonly called an assessed loss. For companies and close corporations, an assessed loss:

Can be carried forward indefinitely, provided the company continues to trade and is not caught by limitation rules (e.g. anti-avoidance and ring-fencing provisions, some of which target individuals more than companies).

For exam purposes in TAX3702:

Opening assessed loss (from previous year) is usually given.
Current year taxable income or loss is calculated.
Then:
- If current taxable income > 0 and there is an opening assessed loss:
  - Set off as much of the loss as possible against current taxable income.
  - Remaining balance is carried forward.
- If current year is a loss, it combines with previous loss to form a new assessed loss.

Example – Assessed loss:

Opening assessed loss (1 March 2024): R120 000.
Current year (2025) income before loss set-off: R150 000.

Set-off:

Taxable income before loss set-off: R150 000.
Less opening assessed loss: R120 000.
Result: Taxable income after loss set-off = R30 000.
No remaining assessed loss (fully utilised).

If current income had been R80 000:

Taxable income before set-off: R80 000.
Less assessed loss (limited to R80 000) → taxable income = 0.
Remaining loss to carry forward: R120 000 – R80 000 = R40 000.

UNISA exam questions often test the order of applying assessed losses and the impact on taxable income.

5.2 Taxation of different business entities

In TAX3702, main entity types are:

Sole proprietors – Taxed as individuals (in TAX2602), but business income principles from TAX3702 apply.
Partnerships – Partnership is not separately taxed; partners are taxed on their share of partnership taxable income.
Companies (incl. private (Pty) Ltd and public) – Taxed at corporate tax rates, with specific rules.
Close corporations (CCs) – Treated similarly to companies for tax.
Trusts engaged in trade – Have special rules but core business income concepts still apply.

This exam pack focuses primarily on companies and CCs, in line with typical UNISA TAX3702 guidance.

5.3 Corporate tax rate and basic computation structure

As at recent years (students must confirm latest rates from study material):

Standard corporate tax rate: around 27% for years of assessment ending on or after 31 March 2023 (used in many updated modules).
For exam purposes, UNISA usually specifies the rate (e.g. 27%).

Typical tax computation structure for a company:

Net profit before tax per financial statements.
Adjust for:
- Non-deductible expenses (add back).
- Non-business expenses (add back).
- Capital items incorrectly expensed (add back).
- Income not taxable (subtract).
- Capital receipts (subtract; may go to CGT, not always in TAX3702 depth).
Adjust for capital allowances vs accounting depreciation:
- Add back depreciation (non-deductible).
- Deduct tax allowances (s11(e), s12C, etc.).
Arrive at taxable income before assessed loss.
Deduct assessed loss b/f (if any).
Net result: Taxable income (or assessed loss).
Apply corporate tax rate to taxable income to find normal tax due.

5.4 Typical exam-style comprehensive computation (UNISA TAX3702)

Consider XYZ (Pty) Ltd, a South African resident company engaged in manufacturing. Year of assessment: 1 March 2024 – 28 February 2025. Summarised trial balance:

Sales revenue: R3 500 000
Cost of sales (accounting): R1 800 000
Gross profit: R1 700 000
Other income:
- Interest received (local bank): R40 000
- Insurance proceeds (for damaged machine): R60 000
Expenses:
- Salaries and wages: R600 000
- Rent (factory and offices): R240 000
- Repairs and maintenance: R120 000
- Depreciation: R180 000
- Advertising: R95 000
- Legal fees (to defend patent): R30 000
- Penalties and fines (traffic fines): R12 000
- Donations to approved PBO: R20 000
- Bad debts written off (trade debtors): R25 000
- Provision for doubtful debts (increase): R5 000
- Entertainment (business lunches with clients): R40 000

Additional information:

Depreciation relates to machinery costing R900 000. Tax allowances (s12C) for the year amount to R220 000.
Insurance proceeds of R60 000 relate to damage to a machine with tax value R150 000; machine was repaired at a cost of R40 000 included in repairs and maintenance.
Rent: R200 000 relates to factory (wholly used for manufacturing) and R40 000 to office space.
Repairs: Of the R120 000, R40 000 is for repainting the building; R80 000 was spent to add a new mezzanine level in the factory (improvement).
Donations: PBO donation (Section 18A) – status confirmed; limited deduction to 10% of taxable income before donation.
Opening assessed loss on 1 March 2024: R50 000.

Step 1: Start with accounting profit

We need net profit before tax (not given directly). Compute:

Gross profit: R1 700 000
Add other income: R40 000 + R60 000 = R100 000
Total income: R1 800 000

Less expenses (accounting):

Salaries: R600 000
Rent: R240 000
Repairs: R120 000
Depreciation: R180 000
Advertising: R95 000
Legal fees: R30 000
Penalties/fines: R12 000
Donations: R20 000
Bad debts: R25 000
Provision for doubtful debts (increase): R5 000
Entertainment: R40 000

Total expenses = 600 000 + 240 000 + 120 000 + 180 000 + 95 000 + 30 000 + 12 000 + 20 000 + 25 000 + 5 000 + 40 000
= R1 367 000.

Accounting profit before tax:

R1 800 000 – R1 367 000 = R433 000.

Step 2: Adjust for non-deductible expenses and capital items

We now adjust from accounting profit to taxable income.

(a) Depreciation (R180 000) – Non-deductible
Add back: +R180 000.

(b) Penalties and fines (R12 000) – Traffic fines are non-deductible (s23(o))
Add back: +R12 000.

(c) Donations to PBO (R20 000) – Potentially deductible under s18A, but as a rebate-type deduction from taxable income, often handled separately after taxable income is computed; for normal tax computation, it is not a deduction under s11(a). In exam context, two approaches exist depending on syllabus treatment; if donations are deductible as a taxable income deduction (pre-tax), treat as allowable within 10% limit.
Initially, add back full donation: +R20 000, then later deduct allowable portion.

(d) Repairs and maintenance (R120 000):

R40 000 for repainting – repairs (revenue, s11(d)), deductible.
R80 000 for new mezzanine – improvement (capital, not deductible under s11(d)).

The full R120 000 was expensed; we need to add back the capital portion:

Add back capital improvement: +R80 000.

(e) Provision for doubtful debts (R5 000):

Increase of provision: allowed if falls under s11(j). Assuming this increase meets SARS and exam rules, it is deductible.
Since it was deducted in accounting, no adjustment if fully allowed.
However, many examiners require you to treat them separately: add back and then add allowed deduction. For clarity:
- Add back R5 000.
- Then allow s11(j) deduction of R5 000 (net zero effect).
If exam states the allowance is acceptable, you can leave as is.

Here, assume it is allowed; no net adjustment.

(f) Legal fees (R30 000):

Defending a patent: likely capital (protecting an enduring, capital right) – not deductible under s11(a).
No specific deduction may apply (depending on level of syllabus).
Add back: +R30 000.

(g) Entertainment (R40 000):

Business entertainment is generally non-deductible under s23(b) and related provisions for individuals but for companies, there is no blanket prohibition; however, some modules treat client entertainment as not in production of income or as a policy disallowance.
UNISA TAX3702 often disallows a portion or all such entertainment unless clearly advertising or promotional.
Conservatively, assume entertainment is non-deductible (unless otherwise specified).
Add back: +R40 000.

(h) Repairs relating to machinery from insurance:

Repair costs of R40 000 are part of repairs (deductible under s11(d)).
Already considered.

(i) Bad debts written off (R25 000):

Trade debts written off are deductible (s11(a) or specific bad debt provisions).
No adjustment needed.

Step 3: Consider additions and deductions for capital allowances vs depreciation

We already added back full depreciation (R180 000).

Now we deduct tax allowances (s12C):

Given: s12C allowance for year = R220 000.
Deduct R220 000.

Step 4: Consider insurance proceeds and possible recoupment

Insurance proceeds of R60 000 for damage to a machine:

Machine not disposed of; only damaged and repaired.
No disposal; generally, no recoupment under s8(4)(a) because the asset is still used and capital allowances continue.
R60 000 is a revenue receipt? It compensates for damage to a capital asset, not loss of profits. Under case law, damages or insurance for loss of capital assets are often capital receipts, not gross income (subject to CGT).
So likely capital in nature; exclude from gross income.

Thus:

Subtract R60 000 from accounting profit (it was included but is non-taxable capital receipt).

Step 5: Recompute taxable income before assessed loss

Start with accounting profit before tax: R433 000.

Add backs:

Depreciation: +R180 000
Penalties/fines: +R12 000
Donations: +R20 000
Capital portion of repairs (improvement): +R80 000
Legal fees – defending patent: +R30 000
Entertainment – non-deductible: +R40 000

Total add backs: 180 000 + 12 000 + 20 000 + 80 000 + 30 000 + 40 000
= R362 000.

Adjusted figure: 433 000 + 362 000 = R795 000.

Less:

Insurance proceeds (capital): –R60 000
Tax allowances (s12C): –R220 000

Adjusted = 795 000 – 60 000 – 220 000 = R515 000.

At this stage, this is taxable income before assessed loss and any s18A donation deduction.

Step 6: Apply assessed loss brought forward

Opening assessed loss: R50 000.

Taxable income before loss set-off: R515 000.

Set off assessed loss: –R50 000.

Taxable income before s18A donation limits = R465 000.

Step 7: Apply s18A donation limit (if treated as deduction)

If syllabus treats approved PBO donations as deductible limited to 10% of taxable income before donation, then:

10% of R465 000 = R46 500.
Actual donation: R20 000.
Deductible: R20 000 (since below 10% cap).

Taxable income after donation deduction: 465 000 – 20 000 = R445 000.

Step 8: Calculate normal tax

If corporate rate is 27%:

Normal tax = 27% × R445 000 = R120 150.

In exam answers, show the structure clearly. Even if minor classification assumptions differ from model solution, method marks are awarded.

5.5 Partnership and sole proprietor nuances

TAX3702 may briefly test the impact of business income rules on non-corporate entities.

Partnerships:

Partnership income is calculated as if the partnership is a single “entity”.
Then, the net taxable income is divided among partners according to the partnership agreement.
Each partner includes his/her/its share in own taxable income.

Example:

Partnership AB (trading) – taxable income R300 000.
Partner A: 60%; Partner B: 40%.
A includes R180 000, B includes R120 000 in respective tax returns.

Sole proprietors:

Business results are combined with individual’s other income (employment, investment).
Business expenses are claimed against business income under same principles as companies (s11(a), s23, etc.).
Personal/domestic expenses remain non-deductible.

5.6 Small Business Corporations (SBCs) – high-level awareness

Many South African modules (UNISA, CUT, etc.) include Small Business Corporations (SBCs), though treatment changes over years. For exam purposes, be aware of:

SBCs must meet qualifying criteria:
- Gross income below specified threshold.
- Shareholders only natural persons.
- Not rendering certain professional services as main income, and other restrictions.
SBCs may receive:
- Accelerated capital allowances on plant/machinery (e.g. 100% write-off in year 1 for certain assets).
- Preferential tax rates on lower income brackets.

Exam questions might:

Ask you to identify if company qualifies as SBC.
Adjust allowances and tax rates accordingly.

Always follow the latest rules in the study guide for current thresholds and percentages.

5.7 Common exam pitfalls and how to avoid them

Confusing capital vs revenue:
- Carefully read what the receipt or expenditure relates to.
- Ask: Does it affect the income-earning structure or daily operations?
Ignoring apportionment:
- Mixed-use expenses (vehicle, cell phone, offices) must be apportioned if facts indicate private/non-trade use.
Forgetting to reverse accounting entries:
- Depreciation vs tax allowances.
- Provisions vs actual expenses.
Neglecting assessed losses:
- Always check if an assessed loss brought forward exists.
- Apply it in correct sequence.
Ignoring limits and caps:
- s18A donations limited to 10% of taxable income before donation.
- Prepaid expenditure limited under s11(gC).
Poor presentation:
- Untidy computations cost “presentation” marks.
- Use columns, headings, sub-totals and section references.
Not stating assumptions:
- If information is ambiguous, state a reasonable assumption and apply it consistently.

5.8 Quick revision checklist for TAX3702 exam

Before the exam, ensure understanding of:

Definition of gross income and trade, with examples for business entities.
Revenue vs capital principles and key case law.
Section 11(a) conditions and section 23 prohibitions.
Treatment of:
- Repairs vs improvements (s11(d)).
- Wear-and-tear (s11(e)) and other allowances (s12C, s13, s13quin).
- Trading stock (s22) and its effect on taxable income.
- Recoupments (s8(4)(a)) and scrapping allowances (s11(o)).
- Prepaid expenditure (s11(gC)) and doubtful debts (s11(j)).
Calculation and use of assessed losses.
Structure of a company tax computation:
- Starting from accounting profit.
- Adjusting to taxable income.
- Applying assessed losses and donations.
- Calculating normal tax.
High-level awareness of SBC rules (if in syllabus).
Ability to apply concepts to long scenario questions, keeping track of multiple adjustments.

Mastering these areas places UNISA TAX3702 students, as well as learners from CUT, UJ, NWU and other South African universities, in a strong position for exams focusing on the taxation of business income.