Hi. You are a tax practitioner, will you please give a detailed breakdown of the following "Lulu Brown wants your tax advice on her planned venture. Due to her illness, she decided to sell all her businesses and pursue her hobby of making pottery (ceramics). She plans to give pottery classes and sell ceramics that she will make herself. The property they bought already had a studio that the previous owner used for the same purposes. However, the previous owner removed most of the assets. She estimated that she will incur the following costs namely: 1) Purchase clay and paint for her lessons 2) Buy a Kiln (to harden the clay) 3) Salary of domestic worker. (The domestic worker will spend 40% of her time cleaning the studio and making tea and coffee for the students, and the rest of her time will be spent cooking and cleaning their house. REQUIRED: Start preparing a preliminary report for Lulu in which you discuss the deductions that she will be able to claim for tax purposes for each of the transactions. (You must motivate your opinion with reference to relevant legislation and case law.)". The response must follow the following explanantion or logic "Identifying the problem/s The most logical, and important, starting point is to establish what issues are involved in the tax scenario under discussion. Are there receipts and accruals, and therefore could the question revolve around gross income? Is expenditure involved, and might some discussion of the general deduction formula be required? Or does the problem deal with a more specific deduction or form of income – lease premiums or a particular allowance, for example? Do both parties to a transaction – seller/purchaser or lessor/lessee – need to be discussed? If that is the case, then discussing the issues of inclusions in gross income and general and specific deductions may be required. Introduction Having established the essential issues, it can be worthwhile – but not necessarily essential – to open your discussion with a brief introductory paragraph in which you outline, in your own words, what the fundamental tax problems are that need to be addressed. The opening paragraph can provide a useful ‘big picture’ overview of the core issues that need to be examined, without reaching any conclusions – which obviously come later. Legislation: Laying the foundation The basis of resolving or clarifying any tax problem is the relevant underlying legislation, supported by case law. After establishing and briefly describing the fundamental issues in your introduction, go on to outline what the relevant legislation has to say, early on in your discussion. It is important to note here that the quoted legislation should be concise and relevant. A common error made by students is to quote extracts of legislation (relevant or otherwise) that are far too long. Remember that ‘more’ does not necessarily mean ‘better’. If necessary, make use of an ellipsis […] so that only the wording of the most pertinent parts of a particular section of the Act is cited. In addition, where the quoted legislation is fairly complex, it may be helpful to clarify and explain the key points in your own words, in language that is plain and understandable – and which indicates your understanding of the law’s effects and implications. Application Having provided a solid legislative background, go on to apply the facts of the question to the legislation that you have already outlined. In what way are the facts of the case affected by the legislation, and in what way are they not? Methodically analyse – in your own words – the taxpayer’s circumstances, in the context of the legislation that you have already cited. The same methodical approach should be used regardless of whether the taxpayer is an individual, company or trust. Does the legislation indicate that there could be deemed recoupment for Company A? Does a section of the Act show that certain income is taxable in Trust B, or is it taxable in the hands of the trust’s founder and beneficiaries? Is a particular expense in the production of income, and can Taxpayer C claim it as a tax deduction? The application part is where many students have difficulties and where they tend to gloss over the discussion. It is particularly important here to discuss the facts and the legislation in plain and clear language, which demonstrates your understanding of the taxpayer’s key issues, and your ability to explain how they tie into the relevant legislation. This is not the place for extended quotes from the Income Tax or VAT Acts. Conclusion A concise final paragraph is usually sufficient to conclude on the topics discussed above. Once again, it should be in your own words. This is where you arrive at your conclusions – based on what you have already discussed – on whether an amount is taxable or tax deductible, or on whatever the topic was that needed to be addressed. Some additional points to consider • There should be a logical flow from one paragraph to the next. Ensure that you have completed one aspect of your discussion before moving onto the next. Raising points in a haphazard way is confusing to read and indicates an inability to communicate and clarify your thoughts and arguments. • When dealing with both sides of a transaction – for instance, seller and purchaser – it is usually makes for a more comprehensible structure if one party is dealt with first [Introduction/Legislation/Application/Conclusion] before separately dealing with the second party in a similar manner [Introduction/ Legislation/Application/Conclusion]. • Tax legislation has numerous provisos and exclusions. After applying the facts of the case to the relevant legislation it may be necessary to consider whether there are any provisos to the main enactment that also need to be examined and discussed. This can be done in a separate paragraph or woven into your general discussion. • To further bolster and motivate your arguments, consider whether it may be appropriate to cite some additional sources such as a SARS Practice Note or an authoritative textbook. Once again, the use of any quotations should be selective and well judged. • Where a question is broken down into separate parts, you may have to apply a briefer, more abbreviated, version of the above structure. • In some cases, a question divided into separate parts may deal with different aspects of the same section of legislation. It should be unnecessary to repeat the wording of the legislation in each part of the answer. Providing the legislation text in the first part should suffice. In subsequent parts, a brief reference in your own words to the legislation that has already been quoted, should be enough."

**Identifying the Problem** Lulu Brown's tax scenario involves determining the deductibility of expenses related to her new pottery business. The key issues include whether the costs for clay and paint, the purchase of a kiln, and the salary of a domestic worker are deductible business expenses under the Income Tax Act. The focus is on whether these expenses meet the criteria for deductions under the general deduction formula and any specific provisions applicable to business expenses. **Introduction** Lulu Brown is transitioning from her previous businesses to a new venture in pottery, which involves teaching classes and selling ceramics. The primary tax issues revolve around the deductibility of her business-related expenses. Understanding which expenses can be deducted will impact her taxable income and overall tax liability. **Legislation: Laying the Foundation** Under the Income Tax Act, Section 11(a) allows for the deduction of expenses incurred in the production of income, provided they are not of a capital nature. Section 23(g) disallows deductions for private or domestic expenses. The key is to determine if the expenses are incurred wholly and exclusively for business purposes. **Application** 1. **Clay and Paint**: These are direct materials used in the production of ceramics and teaching pottery classes. As they are integral to generating business income, they qualify as deductible expenses under Section 11(a). 2. **Kiln Purchase**: The kiln is a capital asset used in the production process. While the purchase cost itself is not deductible, Lulu can claim capital allowances under Section

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