Lavant Limited's Current Tax Expense Calculation

The following information relates to Lavant Limited, a chemical manufacturer, which commenced operations on 1 January 2018.

1. Plant purchases and sales were as follows: Date Cost Sales 1/1/2018 R300 000 Sold 31 December 2020 for R350 000. 30/6/2019 R400 000 Plant costing R100 000 was sold on 31 December 2020 for R70 000. 1/1/2020 R800 000 -
2. The company traded profitably in 2018. In 2019 although the company reported a profit before tax of R30 000, the 2019 yearend tax computation showed a tax loss of R70 000 to be carried forward to 2020.
3. Depreciation is calculated at 10% per annum straight line whereas the South African Revenue Services allows Lavant Limited to claim a S12C allowance on its plant of 20% per annum.
4. The company’s accounting profit was R950 000 for the year ending 31 December 2020 before depreciation and dividends received and before any other adjustments in respect of the above items.
5. The company provides for deferred tax on all temporary differences and tax losses.
6. Assume taxation was levied at the following rates: Year ended Normal tax 31/12/2018 30% 31/12/2019 30% 31/12/2020 28% Assume that capital gains tax has always been in effect in South Africa at an inclusion rate of 60% of the capital gain.
7. There are no other sources of differences between accounting profit and tax profit other than those apparent from the information.
8. Dividends received and paid by the company for the last 3 years were as follows: 20.6 20.5 20.4 Dividends received 10 000 10 000 10 000 Dividends paid – 30 November 50 000 - - An amount of dividend withholding tax of R7 500 was paid to SARS on 31 December 2020. You are required to: 1.1.Calculate the current tax expense of Lavant Limited for the year ended 31 December 2020 (15) Start your tax computation with the profit before tax figure.

To calculate the current tax expense for Lavant Limited for the year ended 31 December 2020, we will follow these steps:

1. Start with the accounting profit before tax.
2. Adjust for temporary differences and tax losses.
3. Calculate the taxable income.
4. Apply the relevant tax rate to determine the current tax expense.

Step 1: Start with the accounting profit before tax

The accounting profit before tax for the year ending 31 December 2020 is given as R950,000.

Step 2: Adjust for temporary differences and tax losses

2.1: Depreciation

• Accounting Depreciation:

  • Plant purchased on 1/1/2018: R300,000
    • Depreciation for 2020: R300,000 * 10% = R30,000
  • Plant purchased on 30/6/2019: R400,000
    • Depreciation for 2020: R400,000 * 10% = R40,000
  • Plant purchased on 1/1/2020: R800,000
    • Depreciation for 2020: R800,000 * 10% = R80,000
  • Total Accounting Depreciation for 2020 = R30,000 + R40,000 + R80,000 = R150,000

• Tax Depreciation (S12C Allowance):

  • Plant purchased on 1/1/2018: R300,000
    • Tax Allowance for 2020: R300,000 * 20% = R60,000
  • Plant purchased on 30/6/2019: R400,000
    • Tax Allowance for 2020: R400,000 * 20% = R80,000
  • Plant purchased on 1/1/2020: R800,000
    • Tax Allowance for 2020: R800,000 * 20% = R160,000
  • Total Tax Allowance for 2020 = R60,000 + R80,000 + R160,000 = R300,000

2.2: Tax Losses

• The tax loss carried forward from 2019 is R70,000.

Step 3: Calculate the taxable income

Taxable Income Calculation:

1. Start with accounting profit: R950,000
2. Less: Accounting Depreciation: R150,000
3. Add: Tax Allowance: R300,000
4. Less: Tax Loss carried forward: R70,000

Taxable Income: [ \text{Taxable Income} = R950,000 - R150,000 + R300,000 - R70,000 = R1,030,000 ]

Step 4: Apply the relevant tax rate

The tax rate for the year ended 31 December 2020 is 28%.

Current Tax Expense Calculation: [ \text{Current Tax Expense} = \text{Taxable Income} \times \text{Tax Rate} = R1,030,000 \times 28% = R288,400 ]

Conclusion

The current tax expense of Lavant Limited for the year ended 31 December 2020 is R288,400.