Tax Paper

QUESTION 2 (16 marks; 24 minutes)

Mrs Rich is a South African resident and is employed by ABC Limited. She earns a monthly salary of R30 000 from her employer. She does not earn any commission income from her employer.

Mrs Rich also has her own business (a private practice) which she operates from her home. She uses her study, which is fully equipped and which is solely used by her for business purposes from 1 March 2008. The study room comprises 15% of the total space of her primary residence.

She originally purchased the house on 1 March 1995 for R750 000. A valuer determined the market value on 1 October 2001 at R1 200 000. She elected to use the market value as her valuation date value for any possible capital gains tax purposes. She improved the house during August 2002 with a total cost of R200 000 and again on 7 April 2005 with a total cost of R350 000.

REQUIRED:

Advise Mrs Rich regarding the following (provide reasons for your answers):

a) Can she claim part of the expenses (for example water and electricity and cleaning costs) that relates to the 15 % of her house that she uses for business purposes as deductions against the income earned from her private practice in terms of the Income Tax Act? (4)

b) If she is allowed to claim the expenses relating to the 15% of her house used for business purposes for income tax purposes (and you can assume that she does), what will be the implications in terms of any possible capital gains tax if she sells her primary residence at the end of her 2012 year of assessment for R1 980 000? Support your answers with calculations. (10)

c) If she uses her house solely for private purposes (i.e. 100% as her primary residence and does not claim expenses that relate to the 15% use for business purposes), what will the capital gains tax implications be if she sells her primary residence at the end of her 2012 year of assessment for R1 980 000? (2)