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Feb 26, 2024

Assignment Task

Objective and purpose

The assignment will focus on an advisory opinion associated with the setting up of a proposed structure. The trainee will be expected to assess various technical risks and outcome probabilities.

Background

Your name is John Snow and you are employed as a Tax Manager by Icepiercer (Pty) Ltd (‘Icepiercer’). Icepiercer is a firm of chartered accountants situated in Paarl. Your firm has a new client that operates a food franchise in Paarl, Western Cape.

Issue a formal opinion to Mr Round where you address all his questions raised. NYC/SC/C

Student identified minimal or none of the technical issues and prepared a tax opinion that is poorly laid out and is written in poor language giving rise to ambiguities. Tax opinions are not sufficiently supported by valid facts and laws and does not contain the appropriate language that complies with the TAA. (Student rated as NOT YET COMPETENT (NYC) in opinion writing skills).

Student identified many of the technical issues and prepared a tax opinion that is reasonably laid out. The language is appropriate but contains some ambiguities. Tax opinions are largely supported by valid facts and laws. The opinion contains the appropriate language that complies with the TAA. (Student rated as having SOME COMPETENCY (SC)in opinion writing skills).

Student identified most of the technical issues and prepared a tax opinion that is well laid out and is written in professional and understandable English without ambiguity. Tax opinions are supported by valid facts and laws and contains the appropriate language that complies with the TAA. (Student rated as COMPETENT (C) in opinion writing skills).

Background

  • The Freeze Group operates as a food franchise in Paarl (Western Cape).
  • Freeze Queen is a listed investment company with a diverse range of assets. When it launched the Freeze brand in South Africa, its strategy was to house each separate outlet in a different private company, to be held by an intermediate 5 holding company (Freeze King). There are currently 5 such companies (the Store Companies), all of which are wholly owned subsidiaries of the Freeze King.
  • Freeze King is held 80% by Big Boss (Pty) Ltd, which is a 100% subsidiary of Bigger Boss (Pty) Ltd, itself a 100% subsidiary of the Freeze Queen. Freeze Queen also holds all the shares in the group’s management company, Freeze Castle. (See the diagram below.)

To fund the launch of the relevant stores, Freeze Queen provided loan funding to Freeze Castle who in turn provided loan funding to the Freeze King. Freeze King provided loan finding to each of the store companies. The value of the loan amounts as at 30 June 2021 are as follows:

  • Loan owing by Freeze Castle to the Freeze Queen amounts to R900 000.
  • Loan owing by the Freeze King to Freeze Castle amounts to R450 000.
  • Loans owing by the Store Companies to the Freeze King amounts to R400 000.
  • The loans to Freeze King and the Store Companies were primarily used for startup costs e.g., allowance assets, trading stock and associated expenditure. It is specifically noted that trading stock that was acquired using the loan funding has since either been sold or scrapped. There is no trading stock so acquired, that is still held and not disposed of immediately prior to the proposed transaction.
  • The Store companies acquired machinery amounting to R100 000 using the startup loan funding 3 years ago. The wear and tear of these machinery is 5 years.
  • As the Store Companies are still in their start-up phase, they have incurred expenditure resulting in assessed losses. The losses incurred to date across Freeze King and the Store Companies are approximately R300 000. Freeze King assessed loss is currently R100 000 and the Store Companies’ cumulative losses comes to R200 000.
  • The aggregate the tax value of all the allowance assets of the Store Companies, totals R80 000.

Proposed Transaction

The Freeze Group is currently undergoing a corporate restructuring and is therefore forced into the following sequence of events on 30 October 2021:

  1. Freeze Queen will advance an amount equal to the debt owed by each Store Company to Freeze King (Step 1 loans). In aggregate, these amounts total R400 000.

  2. Each of the Store Companies will use that advance to repay their shareholder loans owing to Freeze King

  3. Freeze King will use the funds in step 2 to repay portion (R400 000) of its loan owing to Freeze Castle.

  4. An amount of R50 000 remains outstanding on the loan owing to Freeze Castle.

  5. Freeze Castle uses the funds received in step 3 to repay that portion (R400 000) of its loan owing to the Freeze Queen.

  6. An amount of R450 000 remains outstanding on the loan owing to the Freeze Queen.

  7. Freeze Queen waives the Step 1 loans to the Store Companies; and

  8. The Store Companies transfer all of their assets (other than assets it elects to use to settle any debts incurred by it in the ordinary course of its trade) to Freeze King, in anticipation of or in the course of liquidation, winding up or deregistration.

Advice required

  1. What are the tax implications for the Store Companies in respect of their assessed losses, the reduction of the loans and allowance assets?

  2. What are the tax implications for Freeze Queen in relation to the above proposed transaction?

  3. What is the tax implication for the transfer of the Store Companies assets to Freeze Queen?

  4. What are the VAT implications of the repayment of the loan between Freeze Castle and Freeze Queen?

  5. What remedies in the Act can the Freeze Group rely on should SARS have an opposing view to the above opinions and impose an understatement penalty against the Freeze Group during a SARS audit?

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