Leonardo
Tax Workbook
2023
Thirty-first Edition
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© 2022
ISBN
978 1 7761 7472 0 (softcover)
978 1 7761 7473 7 (e-book)
Copyright subsists in this work. No part of this work may be reproduced in any form or by any means
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damage suffered by any person as a result of the reliance upon the information contained therein.
Printed by CTP Printers Cape Town
Contents
Introduction ..................................................................................................................
Chapter 1
Taxation frameworks ............................................................................
Chapter 2
Gross income ........................................................................................
Chapter 3
Special inclusions..................................................................................
Chapter 4
Exemptions ............................................................................................
Chapter 5
The general deduction formula .........................................................
Chapter 6
Special deductions ..............................................................................
Chapter 7
Capital allowances and recoupments .............................................
Chapter 8
Individuals .............................................................................................
Chapter 9
Companies ...........................................................................................
Chapter 10 Company distributions .........................................................................
Chapter 11 Partners and Partnerships ....................................................................
Chapter 12 Trusts .......................................................................................................
Chapter 13 Non-residents ........................................................................................
Chapter 14 Trading stock.........................................................................................
Chapter 15 Farmers ..................................................................................................
Chapter 16 Retirement benefits ..............................................................................
Chapter 17 Fringe benefits ......................................................................................
Chapter 18 Employees’ tax and provisional tax ...................................................
Chapter 19 Capital gains tax ..................................................................................
Chapter 20 Donations tax........................................................................................
Chapter 21 Estate duty ............................................................................................
Chapter 22 Value-added tax..................................................................................
Appendix A Rates of normal tax ..............................................................................
Appendix B Scale of values: Travel allowance ......................................................
Appendix C Standard values of livestock ...............................................................
Appendix D Expectation of life and present value tables ....................................
v
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392
393
394
Introduction
The Tax Workbook has been designed to be used by students and lecturers, to
provide the maximum benefit to each user.
Each chapter deals with a specific topic or topics and the chapter contents
progress from relatively easy questions to more difficult questions dealing with
integrated problems. Each chapter contains examples with detailed solutions, which
students can use as an aid to their studies, and questions without answers, for the
use of lecturers. Lecturers who prescribe the workbook will be provided with a set of
solutions to all the questions.
The workbook will be updated annually. The users of the workbook should take
careful note of the following:
Assumptions relating to the examples and questions in this book
Unless specifically stated to the contrary, the following assumptions must be made
when interpreting the examples and questions:
• All amounts are expressed in the currency of the Republic.
• The use of the term “Republic” indicates the Republic of South Africa.
• All individuals and companies are residents unless otherwise stated.
• Unless otherwise stated, no Double Tax Agreements are in force between the
Republic and the foreign countries referred to in questions.
• All couples are married out of community of property.
• Where appropriate, enterprises are registered as vendors for value-added tax
purposes.
• Unless otherwise stated, all amounts had been adjusted for value-added tax.
• The taxpayer, his or her spouse or his or her child is a person; not a person with a
“disability” as defined.
• Ages given are the ages of persons on the last day of the year of assessment.
• The current year of assessment, in the case of an individual, is the year of
assessment ending on 28 February 2023 and, in the case of a company, its financial
year ending during the period of 12 ending on or before 31 March 2023.
• All determinations of “taxable income” are in rands only. Cents are ignored.
Calculations of “normal tax payable” and “normal tax liabilities” may be
expressed in rands and cents, or in rands only.
1
Tax Workbook
• The following abbreviations are used in the workbook:
The Commissioner for the South African Revenue Service
First-in, first-out
Value-added tax
Paragraph
Section
Kilometre/s
Close corporation
South African Revenue Service
The Commissioner
FIFO
VAT
para
s
km
CC
SARS
The solutions to examples and questions are based on legislation, regulations and
interpretation notes promulgated, published or issued up to 30 November 2022.
2
Chapter 1
Taxation frameworks
L Introduction
In this chapter, the basic principles of the determination of the normal tax liability of
a taxpayer are explained by using frameworks to determine the normal tax liability.
This chapter includes definitions from the various Acts to explain the frameworks.
These basic frameworks are applied in practical situations. The goal of this chapter is
to help a student of Taxation to orientate himself when different taxes are
concerned.
L Examination technique
If this Workbook is used properly, it will assist a student in mastering taxation at
graduate level. Work through all the examples and then attempt all the questions.
Then mark your attempts. This will help you to identify the issues that you do not
understand. The following technique is recommended when using the examples
and attempting to do questions:
Step 1: Read the required part.
At this stage the following should be identified:
• The type of question, that is, whether it is a determination question or a discussion
question or a combination of both. At graduate level the focus is more on
determination questions. The verb used (“determine” or “discuss”) will identify the
type of question. When attempting to answer a discussion question, provide one
short sentence for each mark. Discussion questions may also require
determinations to support the discussions. Remember, if you are required to
discuss something in a question and you provide only determinations, no marks
will be awarded.
• The outcome expected, for example, if you are required to determine all the tax
consequences for a given period, then all the relevant taxes that might be
applicable must be included. Remember that during your studies you will deal
with the Income Tax Act 58 of 1962 (which includes normal tax, withholding taxes
and donations tax), the Value-Added Tax Act 89 of 1991, the Estate Duty Act 45
of 1955 and the Tax Administration Act 28 of 2011. You further have to remember
that South Africa does not have a separate capital gains tax act and that the
taxable capital gain forms part of taxable income and is subject to normal tax. At
graduate level this information is usually provided, and an indication will be given
in the “Required” section, for example, to determine only the normal tax
liability of a taxpayer for a year of assessment.
continued
3
Tax Workbook
Step 2: Evaluate the way in which the information is provided.
• If the question consists of different short parts, it is an indication that you should
read through all the given information before attempting to answer the question.
If it is a discussion question, you will also have to read through all the information.
If it is a determination question with references to notes, you can complete it
while reading through the information at the same time. Be on the lookout for
notes that contain general information.
Step 3: Analyse and interpret the information.
• While reading through the information provided, you should commence thinking
about how to apply the information. Excess information is seldom given.
• Establish the critical aspects of the question, for example,
– identify the taxpayer,
– determine the age of a natural person on the last day of the year of
assessment (for example, natural persons who have attained the age of
65 years are treated more favourably and persons who have attained the age
of 75 years qualify for an additional rebate,
– identify whether the person is ordinarily resident in South Africa or deemed to
be a resident for normal tax purposes (different provisions regarding the
residence issue apply to the different forms of taxes),
– identify whether the taxpayer is a vendor for value-added tax purposes, and
– identify the tax period, for example, whether it is a year or period of
assessment (normal tax), or a value-added tax period (ranging from one
month, two months, four months, six months or yearly periods under the ValueAdded Tax Act).
Step 4: Plan the outlay of your solution.
• The following outlay is recommended for determination questions:
– Divide your page into three or more columns (refer to Example 1.9).
– In column one, write down the issue at stake. Use column two for determinations
and discussions, and in column three provide your final solution (refer to
Example 1.9).
– Leave enough space between issues.
– Always show your determinations.
• Start each solution on a new page.
• Write neatly.
The layout of the solutions in the Tax Workbook is in textbook format to make the use
of the Tax Workbook easier and to ensure a uniform style throughout the book.
Normally students are not required to explain answers, unless the question
specifically requires explanations to support the information provided.
L Contents
In this Tax Workbook the Income Tax Act 58 of 1962, the Value-Added Tax Act 89 of
1991, the Estate Duty Act 45 of 1955 and the Tax Administration Act 28 of 2011 are all
dealt with.
The table gives an indication of the time needed to complete the example or
question. The relevant sections or paragraphs, if applicable, that need to be studied
before attempting the example or question are provided and the level of the
example or question gives an indication of its difficulty.
4
Chapter 1
)
Example or Question
and time allocation
Taxation frameworks
Topic and relevant sections
Level
Example 1.1
(10 minutes)
• Taxable income
Basic
Example 1.2
(10 minutes)
• Normal tax liability
Basic
Example 1.3
(20 minutes)
• Normal tax due
Intermediary
Example 1.4
(15 minutes)
• Normal tax payable
Intermediary
Example 1.5
(10 minutes)
• Non-residents
Basic
Example 1.6
(15 minutes)
• Dividends tax and normal tax on
companies
Basic
Example 1.7
(10 minutes)
• Donations tax
Basic
Example 1.8
(5 minutes)
• Estate duty
Basic
Example 1.9
(10 minutes)
• Value-added tax
Basic
Question 1.1
(15 minutes)
• Normal tax due or refundable
Intermediary
Question 1.2
(30 minutes)
• Normal tax liability (married
community of property)
Question 1.3
(25 minutes)
• Normal tax
Intermediary
Question 1.4
(25 minutes)
• Normal tax
Intermediary
in
Intermediary
L Examples
The Income Tax Act deals not only with the taxation of receipts and accruals
(regardless of its nature) but also with donations tax, which is a tax on the transfer of
an asset. The Income Tax Act also deals with a tax on the distribution of dividends by
a company to its shareholders. Value-added tax is a tax on the consumption of
goods and services and estate duty is a tax on the transfer of property.
The Income Tax Act is arranged into different chapters, which are further divided
into different parts. Where the legislation dealing with a specific issue becomes too
cumbersome, schedules are used. These schedules form part of the main Act. This
Tax Workbook focuses on Chapter II of the Income Tax Act, which is divided into
several parts. The focus will be on Part I (Normal Tax), Part V (Donations Tax), and
Part VIII (Dividends Tax).
5
Tax Workbook
Normal tax
In the determination of the normal tax due in Part I, the following Schedules have
been used:
• First Schedule – dealing with the determination of taxable income derived from
farming activities.
• Second Schedule – dealing with the determination of gross income derived by
way of lump-sum benefits from pension, provident and retirement annuity funds.
• Fourth Schedule – dealing with amounts of employees’ tax to be deducted or
withheld by employers and provisional tax payments towards normal tax.
• Sixth Schedule – dealing with the determination of the normal tax liability of a
micro-enterprise electing to be subjected to tax on its turnover.
• Seventh Schedule – dealing with benefits or advantages derived by reason of
employment or holding of any office.
• Eighth Schedule – dealing with the determination of taxable capital gains and
assessed capital losses.
In the following section, the basic framework that should be used in the determination
of each of the different types of taxes is provided.
Normal Tax
Framework: The determination of taxable income
Amounts
“Gross income” as defined including
• lump-sum benefits from funds (Second Schedule), and
• fringe benefits (Seventh Schedule)
Less: Amounts exempt from normal tax
Gives: “Income” as defined
Less: Amounts deductible in the determination of taxable income
(excluding contributions to retirement funds)
Add: Taxable farming income (First Schedule). Remember that a
company can also carry on farming activities
Add: Certain allowances and advances not used for business purposes
to be included in taxable income
Add: Taxable capital gain (Eighth Schedule)
Less: Contributions to retirement funds (s 11F)
Less: Donations to certain public benefit organisations
(all taxpayers)
Gives: “Taxable income” as defined
6
-
-
-
-
Chapter 1
Taxation frameworks
Example 1.1
(10 minutes)
Richard Nkambi (66 years of age) had the following receipts and accruals during
the 2023 year of assessment:
R
Salary from employer (gross income)
450 000
Interest from local bank (exempt from normal tax up to R34 500)
35 500
Dividend from a South African company (exempt from normal tax)
5 000
Richard Nkambi incurred the following expenses during the 2023 year of assessment:
Pension fund contributions (deductible in the determination of taxable
income)
19 000
Household expenses (not deductible in the determination of taxable
income)
100 000
YOU ARE REQUIRED TO determine Richard Nkambi’s taxable income for the 2023
year of assessment.
Solution 1.1
Richard Nkambi’s taxable income for the 2023 year of assessment is as follows:
R
R
Salary from employment
450 000
Interest received or accrued
35 500
Dividends received or accrued
5 000
Gross income
Less: Amounts exempt from normal tax
– Interest received or accrued
– Dividends received or accrued
490 500
34 500
5 000
39 500
Income
Less: Amounts deductible in the determination of taxable
income
– Pension fund contributions
19 000
– Household expenses (private expenditure – not
deductible in the determination of taxable income)
_
451 000
Taxable income
432 000
19 000
Framework: Determination of amount payable or refundable
Taxable income
Schedule tax tables for natural persons and flat rates for companies (at 28%; or 27%
for years of assessment ending on or after 31 March 2023) and trusts (at 45% or
scales)
Normal tax payable
Less: Rebates (s 6 (only natural persons), medical scheme fees tax rebate (s 6A),
additional medical expenses tax credit rebate (s 6B) and s 6quat rebate (a resident
taxpayer to eliminate double taxation))
Gives: Normal tax liability
Less: Prepaid tax (employees’ tax and provisional tax)
Gives: Amount payable or refundable
7
Tax Workbook
Example 1.2
(10 minutes)
Nombi Classen (76 years of age) had the following receipts and accruals for the
2023 year of assessment:
R
Salary from employment (gross income)
590 000
Nombi Classen does not have any amounts that are deductible in the
determination of her taxable income.
Nombi Classen qualifies for the following s 6 normal tax rebates:
• A primary rebate of R16 425.
• A secondary rebate (age rebate – attained the age of 65 years) of R9 000.
• And a tertiary rebate (age rebate – attained the age of 75 years) of R2 997
YOU ARE REQUIRED TO determine Nombi Classen’s normal tax liability for the 2023
year of assessment.
Solution 1.2
Nombi Classen’s normal tax liability for the 2023 year of assessment is determined as
follows:
R
R
Salary from employer
590 000
Taxable income
590 000
Schedule tax payable on a taxable income of R590 000
On R488 700
On R101 300 (R590 000 – R488 700) at 36%
115 762
36 468
Normal tax payable
Less: Rebates
– Primary (natural person)
– Secondary (attained the age of 65 years)
– Tertiary (attained the age of 75 years)
Normal tax liability
152 230
16 425
9 000
2 997
28 422
123 808
Only rands are used in the determination of taxable income. Cents are simply
ignored. The determinations of normal tax payable and normal tax liability are,
however, in rands and cents.
Example 1.3
(20 minutes)
Franco Jussepe (46 years of age and a person with a ‘disability’ as defined in s 6B)
had the following receipts and accruals during the 2023 year of assessment:
R
Receipts and accruals from a restaurant operated in his own
name (gross income)
650 000
Salary earned from his part-time employment (gross income)
180 000
Dividends from South African companies ((exempt from normal tax))
50 000
Interest from a local bank (R23 800 is (exempt from normal tax))
43 800
continued
8
Chapter 1
Taxation frameworks
Interest on tax-free investment ((exempt from normal tax))
Taxable capital gain from the sale of an asset
Franco Jussepe incurred the following expenses and contributions
during the 2023 year of assessment:
Expenses incurred in the production of his restaurant’s gross income
Medical scheme contributions made
(Franco Jussepe and his wife are members of the medical scheme. Based
on his contributions, he qualifies for a medical scheme fees tax credit of
R694 a month and a s 6B medical expenses tax credit rebate of R604,73
at the end of the year of assessment.)
Franco Jussepe made the following pre-paid taxes:
Employees’ tax deducted from his part-time employment
Provisional tax
YOU ARE REQUIRED TO determine Franco Jussepe’s normal tax liability for
the 2023 year of assessment.
R
800
20 000
120 000
26 800
45 000
80 000
Solution 1.3
Franco Jussepe’s normal tax liability for the 2023 year of assessment is determined as
follows:
R
Gross income – restaurant
650 000
Salary
180 000
Dividends received or accrued
50 000
Interest received or accrued (R43 800 + R800)
44 600
Gross income
Less: Exemptions from normal tax
– Interest received or accrued on tax-free investment
– Interest received or accrued on other accounts
– Dividends received or accrued
Income
Less: Amounts deductible in the determination of taxable
income
– Amounts incurred in the production of his restaurant’s
gross income
924 600
800
23 800
50 000
74 600
850 000
120 000
Add: Taxable capital gain
730 000
20 000
Taxable income
750 000
Normal tax determination on a taxable income of R750 000
On R641 400
Add: R108 600 (R750 000 – R641 400) at 39%
170 734,00
42 354,00
Normal tax payable
213 088,00
continued
9
Tax Workbook
R
Less: Rebates
– Primary (natural person)
16 425,00
– Medical scheme fees tax credit rebate
8 328,00
(R694 × 12 months)
– Additional medical expenses tax credit rebate (s 6B)
(determined at 33,3% × (R26 800 – 3 × (R694 × 12
months)))
604,73
Normal tax payable
Less: Prepaid amounts
– Employees’ tax
– Provisional tax
25 357,73
187 730,27
45 000
80 000 125 000,00
Normal tax liability
62 730,27
Example 1.4
(15 minutes)
Determine the normal tax payable by each of the following taxpayers:
Nkanyezi Ltd
Nkanyezi Ltd is classified as a personal service company for income tax purposes. It
has a taxable income of R600 000 for its 2023 year of assessment (ended 31 March
2023). A personal service company is subject to normal tax at a flat rate of 27% of its
taxable income for a year of assessment ended on or after 31 March 2023.
Langa Ltd
Langa Ltd is classified as a small business corporation for normal tax purposes. It has
a taxable income of R320 000 for the 2023 year of assessment (ended 28 February
2023). A small business corporation is subject to normal tax on the following
cumulative sliding scale:
• 0% payable on the first R91 250 of taxable income,
• 7% payable on taxable income exceeding R91 250 but not exceeding R365 000,
• R19 163 plus 21% on taxable income exceeding R365 000 but not exceeding
R550 000, and
• R58 013 plus 28% on taxable income above R550 000.
Maru Ltd
Maru Ltd is classified as a micro-business for normal tax purposes and it elected to be
subjected to normal tax on its turnover. It has a turnover of R650 000 for its 2023 year
of assessment. The following sliding scale applies for the turnover tax:
Taxable turnover
Rate of tax
R0 – R335 000 .................................................
R335 000 – R500 000 ......................................
Rnil
1% of the amount by which the taxable turnover
exceeds R335 000
R1 650 plus 2% of the amount by which the taxable
turnover exceeds R500 000
R6 650 plus 3% of the amount by which the taxable
turnover exceeds R750 000
R500 000 – R750 000 ......................................
R750 000 and above ....................................
10
Chapter 1
Taxation frameworks
YOU ARE REQUIRED TO determine the normal tax payable for the 2023 year of
assessment for each of the above-mentioned taxpayers.
Solution 1.4
Nkanyezi Ltd’s normal tax liability for its 2023 year of assessment is determined as
follows:
R
Taxable income
600 000
Normal tax payable on its taxable income at 27%
162 000
Langa Ltd’s normal tax liability for the 2023 year of assessment is determined as
follows:
Taxable income
320 000
Normal tax on taxable income
On R91 250
Add: (R320 000 – R91 250) at 7%
–
16 012,50
Normal tax payable
16 012,50
Maru Ltd’s normal tax liability for the 2023 year of assessment is determined as
follows:
Turnover
650 000
Normal tax on a turnover of R650 000
On R500 000
1 650
Add: R150 000 (R650 000 – R500 000) at 2%
3 000
Normal tax payable
4 650
Normal Tax
Framework: Determination of the withholding tax on royalties and similar payments
payable to a “non-resident”
Gross royalty at 15%
Framework: Determination of the withholding tax on payments payable to a
“non-resident” entertainer or sportsperson
Gross amount at 15%
Framework: Determination of the withholding tax on interest payable to a
“non-resident”
Gross interest at 15%
11
Tax Workbook
Example 1.5
(10 minutes)
Part A
Palesa Banda is a “non-resident” and derived the following royalties from a source in
South Africa during January 2023:
• R100 000 gross royalties from Company A, and
• R250 000 gross royalties from Company B.
Both these royalties are gross income but then exempt from normal tax under
s 10(1)(l). These royalties are subject to a final withholding tax.
Palesa Banda also earned interest of R50 000 on a loan to her brother, a “resident”.
This interest is gross income but exempt from normal tax (s 10(1)(h). It is subject to a
final withholding tax.
YOU ARE REQUIRED TO determine Palesa Banda’s South African tax liability for the 2023
year of assessment.
Part B
George Pepper, a “non-resident” international singer, held a show at Sun City in
December 2022. He earned R400 000 from the show.
YOU ARE REQUIRED TO determine the amount that must be withheld from George
Pepper’s earnings for the 2023 year of assessment.
Solution 1.5
Part A
Determination of Palesa Banda’s South African tax liability for the 2023 year of
assessment:
R
R
Royalties from Company A
100 000
Royalties from Company B
250 000
Interest
50 000
Gross income
Less: Exemptions from normal tax
Royalties from Company A
Royalties from Company B
Interest
400 000
100 000
250 000
50 000
Taxable income and (normal tax payable)
400 000
–
Withholding tax on royalties
Company A (R100 000 at 15%)
Company B (R250 000 at 15%)
15 000
37 500
Withholding tax on interest (R50 000 at 15%)
Final South African tax liability
7 500
60 000
12
Chapter 1
Taxation frameworks
Part B
Determination of the amount of withholding tax that must be withheld from George
Pepper’s earning for the 2023 year of assessment:
Withholding tax on foreign entertainers and sportspersons
Amount received
400 000
Withholding tax rate
15%
Final tax liability
60 000
Dividends Tax
Framework: Determination of dividends tax
Dividends declared (excluding exempt from dividends tax dividends)
Amount withheld: Dividends tax levied at 20%
Example 1.6
(12 minutes)
Mthimkhulu (Pty) Ltd is a resident company with a March year end. The tax rate
applicable to normal tax for Mthimkhulu (Pty) Ltd is 27%. The following information is
provided for its year of assessment ending 31 March 2023 (all amounts have been
adjusted for value-added tax):
R
Sales (gross income)
1 500 500
Dividend accrued (note 1)
95 000
Income
Less: Amounts deductible in the determination of taxable income
Less: Dividends declared (note 2)
1 595 500
652 500
943 000
175 000
Retained income for year
768 000
Provisional tax paid
200 000
Notes
(1) The following dividend accrued to Mthimkhulu (Pty) Ltd:
R95 000 from a resident company (gross income but exempt from normal tax
under s 10(1)(k)).
(2) A dividend declared is not deductible in the determination of taxable income.
30% of Mthimkhulu (Pty) Ltd shares are owned by resident companies. The
remainder of its shares are owned by natural persons (all South African
residents). The R175 000 dividend was declared on 15 February 2023.
YOU ARE REQUIRED TO:
(1) Determine the normal tax liability and the amount due by or refundable to
Mthimkhulu (Pty) Ltd for its year of assessment ended 31 March 2023.
(2) Determine the dividends tax Mthimkhulu (Pty) Ltd must withhold and pay over to
SARS.
13
Tax Workbook
Solution 1.6
Part (1)
Determination of the normal tax liability and the amount due for the year of assessment
ending 31 March 2023:
R
Sales
1 500 500
Dividend accrued
95 000
Gross income
Less: Exemptions from normal tax (local dividend)
1 595 500
95 000
Income
Less: Amounts deductible in the determination of its taxable income
1 500 500
652 500
Taxable income
848 000
Normal tax payable on R848 000 at 27%
Less: Provisional tax
228 960
200 000
Amount due
28 960
Part (2)
Dividend tax that Mthimkhulu (Pty) Ltd must withhold and pay over to SARS:
R
Dividends declared
175 000
Less:
Exempt from dividends tax dividends: (30% × R175 000; declared to
resident company shareholders not subject to dividends tax)
52 500
Dividend subject to dividends tax
122 500
Dividends tax on R122 500 at 20%
24 500
Donations Tax
Framework: Determination of donations tax
Value of each property disposed of under a donation (excluding donations exempt
from donations tax)
Less: Donations valued at R100 000 for a natural person or R10 000 for a non-natural
person (each year of assessment)
Gives: Net value
Amount payable: Net value at 20% (or 25% if the aggregate value of donations after
1 March 2018 exceeds R30 000 000)
Example 1.7
(10 minutes)
Jabulani Dlamini made the following donations during the 2023 year of assessment:
• R50 000 cash to his wife on 15 March 2022 (a donation to a spouse is exempt from
donations tax),
• a flat with a market value of R240 000 to his brother on 25 May 2022, and
• a boat with a market value of R10 000 to his son on 25 December 2021.
YOU ARE REQUIRED TO determine Jabulani Dlamini’s donations tax liability for each
donation.
14
Chapter 1
Taxation frameworks
Solution 1.7
R
15 March 2022:
Donation to his wife – exempt from donations tax
25 May 2022: Donation to his brother:
Value of property
Less: Exemption from donations tax for a natural person each
year of assessment
100 000
Net value
140 000
–
240 000
Donations tax payable at 20%
25 December 2021
Donation to his son:
Value of property (note)
28 000
Donations tax payable at 20%
2 000
10 000
Note
Each donation must be evaluated on its own to establish whether donations tax is
payable. The R100 000 exemption from donations tax applies for a year of
assessment. This exclusion was enjoyed in full when Jabulani Dlamini made the
donation to his brother.
Estate Duty
Framework: Determination of estate duty
Value of property and deemed property
Less: Allowable deductions
Gives: Net value of estate
Less: R3 500 000 abatement
(can increase up to R7 000 000 in a limited situation)
Gives: Dutiable amount of the estate
Amount payable: 20% of dutiable amount up to R30 000 000 and 25% on the excess.
Example 1.8
(5 minutes)
Michael Zulu died on 5 November 2022. He left his entire estate to his daughter. He
had property with a market value of R5 000 400 at date of his death. His liabilities
amounted to R400 400 (all deductible in the determination of the dutiable amount
of his estate).
YOU ARE REQUIRED TO determine the estate duty payable on the estate of the late
Michael Zulu.
15
Tax Workbook
Solution 1.8
R
Value of property and deemed property
5 000 400
Less: Amounts deductible in the determination of the dutiable amount
of his estate
400 400
Net value of his estate
Less: Abatement
4 600 000
3 500 000
Dutiable amount of the estate
1 100 000
Estate duty at 20%
220 000
Value-Added Tax
Framework: Determination of Value-Added Tax
Output tax
Less: Input tax
Value-added tax payable or refundable
Example 1.9
(10 minutes)
Molapo Services CC is a registered vendor. It has to render value-added tax returns
every two months (February, April, June, August, October and December). The
following information is provided for its value-added tax period ending
December 2022:
R
Services rendered (including value-added tax of 15%)
115 000
Less:
Salaries (not subject to value-added tax)
29 900
Other goods and services acquired from vendors (including
value-added tax of 15%)
23 000
Entertainment (including value-added tax of 15% – but input
tax is disallowed in the Value-Added Tax Act)
1 380
Trading stock (not second-hand goods) purchased from
non-vendors (value-added tax was not levied)
1 725
YOU ARE REQUIRED TO determine the value-added tax payable by Molapo
Services CC or refundable to it for its value-added tax period ending
31 December 2022.
16
Chapter 1
Taxation frameworks
Solution 1.9
Output tax
Sales
Less: Input tax
Salaries
Goods and services
Entertainment
Trading stock from
non-vendors
Determinations, discussion and
reason
R
R
15 000
R115 000 × 15 / 115
Not subject to value-added tax
R23 000 × 15 / 115
Disallowed
No deduction since the amount
does not include value-added tax
Value-added tax
payable
–
3 000
–
–
3 000
12 000
L Questions
Question 1.1
(15 minutes)
Marinda Mokaba is 40 years old and unmarried. She had the following receipts and
accruals during the 2023 year of assessment:
R
Salary received from her employer (gross income)
680 000
Interest from a local bank (gross income, but a maximum of R23 800
is exempt from normal tax)
132 800
Gross rentals from the letting of a holiday home (gross income)
75 000
Dividend from South African company (gross income, but fully exempt
from normal tax)
50 000
Marinda Mokaba incurred the following expenses and made the following
contributions during the 2023 year of assessment:
Retirement annuity fund contributions (within the limits of s 11F and
fully deductible in the determination of her taxable income)
65 000
Rental expenses in relation to the holiday home incurred in producing
her gross rentals
64 000
Marinda Mokaba made the following prepaid taxes:
Employees’ tax
Provisional tax
169 363
5 000
YOU ARE REQUIRED TO determine Marinda Mokaba’s normal tax due or refundable
for the 2023 year of assessment.
17
Tax Workbook
Question 1.2
(30 minutes)
Unathi Molefe (32 years of age) and Mamorok Molefe (28 years of age) are married
in community of property. They had the following receipts and accruals during the
2023 year of assessment:
R
Unathi Molefe’s salary from employment (gross income)
880 000
Mamorok Molefe’s salary from employment (gross income)
830 000
Unathi Molefe’s gross receipts and accruals as an
estate agent operating in his own name (gross income)
225 000
Mamorok Molefe’s interest received or accrued from a local bank
90 000
Unathi Molefe’s interest received or accrued from a local bank
3 800
(Each natural person qualifies for a local interest exemption of R23 800)
Unathi Molefe incurred the following expenses and made the following contributions
during the 2023 year of assessment:
Expenses incurred in producing his estate agent gross income
62 100
Unathi Molefe made medical scheme contributions
30 600
(Unathi Molefe and Mamorok Molefe are members of the medical
scheme. Based on his contributions, Unathi Molefe qualifies for a
medical scheme fees tax credit rebate of R694 a month.
(They do not qualify for the additional medical expenses tax credit rebate.)
Unathi Molefe had employees’ tax deducted from his salary
240 382
Mamorok Molefe had employees’ tax deducted from her salary
228 111
YOU ARE REQUIRED TO determine Unathi Molefe’s and Mamorok Molefe’s normal
tax due or refundable for the 2023 year of assessment.
Question 1.3
(25 minutes)
You are working at an accounting firm and are responsible for answering other
employees’ questions. You received the following questions via e-mail:
To: Student
Regarding: Types of taxes
1. What is a direct tax? What is an example of this tax?
2. What is the difference between a progressive tax and a proportional tax?
3. The levy of taxation should comply with certain basic criteria or norms. Adam
Smith pronounced four canons (or principles) of taxation. What are these four
canons?
4. What are the three main sources of taxation from which the Government
obtains its revenues?
To: Student
Regarding: Tax rate
What is Gert Green’s marginal tax rate and average tax rate if he has a taxable
income of R610 000 for the 2023 year of assessment?
18
Chapter 1
Taxation frameworks
To: Student
Regarding: Tax rebates
1. What rebates can be deducted from normal tax?
2. When are rebates proportionally reduced?
3. Can the rebates be more than the normal tax?
YOU ARE REQUIRED TO answer each of the questions above.
Question 1.4
(15 minutes)
Gary Botha is 30 years old and married. He owns a business which trades as a close
corporation. His close corporation had the following receipts and accruals during its
2023 year of assessment (ended 28 February 2023):
R
Turnover (gross income)
It incurred the following expenses during its 2023 year of assessment:
880 000
Expenses incurred in producing its income
464 000
Gary Botha incurred domestic expenses (not deductible in the
determination of his taxable income)
223 000
When Gary Botha consulted his tax adviser, she told him that his close corporation is
a taxpayer and is subject to normal tax at 27%. While attending a small business
seminar he was told that different tax rates apply depending on how a business is
classified for normal tax purposes. Gary Botha asks you to explain this to him.
YOU ARE REQUIRED TO explain
(i) the requirements that must be met to be classified as one of the taxpayers
below; and
(ii) how its normal tax liability will be determined if it is classified accordingly:
(a) A personal service provider.
(b) A micro-enterprise.
(c) A small business corporation.
(d) And a close corporation.
19
Chapter 2
Gross income
L Introduction
In the determination of whether an amount is subject to normal tax in South Africa, it
is first necessary for it to be included in the taxpayer’s gross income as required by
the definition of “gross income” as set out in s 1(1) of the Income Tax Act. The
definition of “gross income” has the following three components:
• Its first component deals with residents of the Republic.
• Its second component deals with persons who are not residents of the Republic.
• And its third component deals with its so-called special inclusions.
If a person is a resident of the Republic, he is subject to normal tax on his world-wide
receipts and accruals. If he is not a resident, he is subject to normal tax on only his
receipts and accruals that are from a South African source.
A natural person is a resident of the Republic if he
• is ordinarily resident in South Africa, or
• complies with the so-called physical presence test.
A person other than a natural person will be a resident of the Republic if it
• is incorporated in South Africa,
• is established or formed in South Africa, or
• has its place of effective management in South Africa.
The examples and questions in this chapter are designed to illustrate and test the
various requirements of the definition of “gross income” for both natural persons and
persons other than natural persons, including receipts or accruals dealt with in its
paras (a) to (n).
To answer the examples and questions relating to the definition of “gross income”,
the key requirements of the definition of “gross income” must all be satisfied. The
requirements listed below must all be present for an amount to be included in a
person’s gross income:
Framework:
Key requirements of gross income include the following:
•
•
•
•
•
•
A total amount in cash or otherwise,
received by or accrued to,
during the year or period of assessment,
not of a capital nature,
for non-residents: from a source within South Africa, and
its so-called special inclusions.
21
Tax Workbook
L Contents
The following table gives an indication of the time that is needed to complete the
example or question. The relevant sections or paragraphs that need to be referred
to before attempting the example or question are provided. The level of the
example or question gives an indication of its difficulty.
)
Example or Question
and time allocation
Topic and relevant sections
Level
Example 2.1
(20 minutes)
• Section 1(1) – definition of “gross
income”.
• Resident.
Basic
Example 2.2
(30 minutes)
• Section 1(1) – definition of “gross
income”.
• Paragraph (a) of the definition of
“gross income” – annuities.
• Paragraph (c) of the definition of
“gross income” – services rendered.
Basic
Example 2.3
(15 minutes)
• Section 1(1) – definition of “gross
income”.
Basic
Example 2.4
(20 minutes)
• Section 1(1) – definition of “gross
income”.
• Paragraph (a) of the definition of
“gross income” – annuities.
Intermediate
Example 2.5
(20 minutes)
• Section 1(1) – definition of “gross
income”.
Basic
Example 2.6
(20 minutes)
• Section 1(1) – definition of “gross
income”.
Intermediate
Question 2.1
(25 minutes)
• Combined.
Advanced
Question 2.2
(60 minutes)
• Combined.
Advanced
Question 2.3
(20 minutes)
• Combined.
Advanced
L Examples
Example 2.1
(20 minutes)
Umhlaba Rentals CC trades as an agent for property owners who let their properties
to tenants. Its activities include collecting rentals and maintaining some properties
situated offshore.
One of the properties Umhlaba Rentals CC manages is a block of flats situated in
Malta. The separate units within this property belong to different persons.
The following persons each earned rentals of the equivalent of R85 000 during the
2023 year of assessment from this block of flats. Each person is concerned that he
may be liable for normal tax in South Africa.
22
Chapter 2
Gross income
The following information for each person may be relevant:
Bongani Zama
Bongani Zama lives in South Africa. He was on holiday in Australia for the last 92 days
of the 2023 year of assessment. This was the only occasion that he was outside South
Africa in the 2023 year of assessment.
Pedro Prado
Pedro Prado is a French citizen who is ordinarily resident in Italy. He is not ordinarily
resident in South Africa. During a working holiday in 2018 and 2019, he was in South
Africa from 1 April 2018 until 15 February 2019. He enjoyed his stay in South Africa. He
visited South Africa again from 1 June 2020 to 31 December 2020. During November
2021 and December 2021, he again visited South Africa for eight weeks (56 days).
During 2022, he visited South Africa once more, from 1 October 2022 to
31 December 2022.
Andrews Plc
Andrews Plc is registered in the United Kingdom. It has its place of effective
management in the United Kingdom. It was established and formed in the United
Kingdom. Its year of assessment ends on the last day of February.
Venicia Ltd
Venicia Ltd is incorporated in South Africa. It carries on business in Europe. Its place
of effective management is in Lucerne, Switzerland. Its year of assessment ends on
the last day of February.
YOU ARE REQUIRED TO indicate whether the above persons will be subject to normal
tax in South Africa for the 2023 year of assessment. (Ignore the provisions of a double
tax agreement that may be applicable.)
Solution 2.1
For a person to be subject to normal tax in South Africa, an amount received by or
accrued to him must be included in his gross income. For an amount to be included
in his gross income, it must comply with all the requirements of the definition of
“gross income” as set out in s 1(1).
For a resident, the total amount, in cash or otherwise, received by or accrued to him
during the year of assessment, excluding amounts of a capital nature, must be
included in his gross income.
When an amount is received by or accrued to a person other than a resident, the
total amount, in cash or otherwise, received by or accrued to the person from a
source in South Africa, during the year of assessment, excluding amounts of a
capital nature, must be included in this gross income.
The rentals earned satisfy the requirements of
• the total amount,
• received by or accrued to,
• during the year of assessment, and
• not of a capital nature.
23
Tax Workbook
In the determination of whether the rentals earned are subject to normal tax in
South Africa, the following questions must be answered:
• Is the person receiving the rentals a resident of the Republic?
• If he is not a resident of the Republic, are the rentals from a source in South Africa?
Each person is discussed in the determination of whether the rentals earned are
subject to normal tax in South Africa.
Bongani Zama
For Bongani Zama to be a resident of the Republic, it must first be decided if he is
ordinarily resident in South Africa. The Appellate Division of the Supreme Court (now
the Supreme Court of Appeal) has interpreted the term “ordinarily resident” to mean
the place where a person has his permanent place of residence (CIR v Kuttel 1992
(3) SA 242 (A), 54 SATC 298), or the place where he will return to after his wanderings
(CIR v Cohen 1946 AD 174, 13 SATC 362). Since he was only on holiday outside South
Africa and will return to South Africa after his wanderings, he is ordinarily resident in
South Africa. The rentals received by or accrued to him will therefore be included in
his South African gross income.
Pedro Prado
Pedro Prado is not ordinarily resident in South Africa. He can, however, be a resident
of the Republic based on his physical presence in South Africa. The following
requirements all have to be satisfied for him to be a resident of the Republic under
the so-called physical presence test:
• He must have been in South Africa for a period or periods exceeding 91 days in
aggregate during the current year of assessment (the 2023 year of assessment).
• He must have been in South Africa for a period or periods exceeding 91 days in
aggregate during each of the five years of assessment preceding the current
year of assessment (the 2018 to 2022 years of assessment).
• He must have been in South Africa for a period or periods exceeding 915 days in
aggregate during the five preceding years of assessment (the 2018 to 2022 years
of assessment).
Pedro Prado’s situation is as follows:
• During the 2023 year of assessment, he was in South Africa from 1 October 2022 to
31 December 2022. He was present in South Africa for 92 days (31 + 30 + 31). He
therefore meets the first requirement.
• He was not in South Africa during the 2018 year of assessment (ended 28 February
2018) or during the 2020 year of assessment (ended 29 February 2020). He
therefore does not meet the second requirement.
• He spent 591 days in South Africa during the previous five years of assessment:
2018:
2019:
2020:
2021:
2022:
Total:
no days
321 days
no days
214 days
56 days
591 days
24
Chapter 2
Gross income
The number of days spent by Pedro Prado in South Africa during the previous five
years of assessment is less than 915 days. He therefore does not meet the third
requirement to be a resident of the Republic under the so-called physical presence
test.
Since none of the three requirements is satisfied, Pedro Prado is not a resident of the
Republic under the so-called physical presence test. Nor is he ordinarily resident in
South Africa.
A non-resident is subject to normal tax in South Africa on only amounts received by
or accrued to him from a source in South Africa.
It is then necessary to determine if the rentals that accrue to Pedro Prado are from a
source within South Africa.
The provisions of s 9(2) do not apply to rentals. It is then necessary to consider the
relevant and binding, case law relating to the source of rentals.
In Rhodesian Metals Ltd, Liquidator v COT (1938 AD 282, 9 SATC 363) it was held by
the Appellate Division of the Supreme Court (now the Supreme Court of Appeal)
that the source of a rental received from an immovable property is the place where
the property is situated.
Pedro Prado’s property is situated in Malta. It is not in South Africa. There is no
provision that deems its source to be within South Africa. It follows then that the
rentals received by or accrued to him are not included in his South African gross
income (see also CIR v Lever Bros & Unilever Ltd 1946 AD 441, 14 SATC 44).
Andrews Plc
First it is necessary to determine if Andrews Plc is a resident of the Republic. A person
other than a natural person is a resident of the Republic, if it
• is incorporated in South Africa,
• is established or formed in South Africa, or
• has its place of effective management in South Africa.
Andrews Plc does not satisfy any of the above requirements that result in it being a
resident of the Republic.
The second question that has to be considered is if Andrews Plc’s net rentals are
from a source in South Africa.
The provisions of s 9(2) do not apply to rentals. It is then necessary to consider the
relevant and binding, case law relating to the source of rentals.
In Rhodesian Metals Ltd, Liquidator, v COT (1938 AD 282, 9 SATC 363) it was held by
the Appellate Division that the source of a rental received from an immovable
property is the place where the property is situated. Andrews Plc’s property is
situated in Malta. It is not in South Africa. There is no provision that deems the source
of its rentals to be within South Africa. Its rentals are therefore not included in its
South African gross income.
Venicia Ltd
Venicia Ltd is a South African resident. A person other than a natural person is a
resident if it
• is incorporated in South Africa,
• is established or formed in South Africa, or
• has its place of effective management in South Africa.
25
Tax Workbook
Since Venicia Ltd is incorporated in South Africa, it is a resident of the Republic. This
means that its world-wide receipts and accruals are included in its South African
gross income. Its rentals are therefore included in its South African gross income
since they are not of a capital nature.
Example 2.2
(30 minutes)
The definition of “gross income” is an important definition in the determination of a
person’s taxable income. In the following situations, the inclusion of the relevant
amount within gross income needs to be determined. All the taxpayers are residents
of the Republic.
Kamo Mutwa
Kamo Mutwa carries on business as an author (a writer of books). She writes her
books in South Africa. During the 2023 year of assessment, a royalty of the equivalent
of R50 000 accrued to her from the sales in Zimbabwe of a book written by her.
Lucas Naho
Lucas Naho is employed as a salesperson by a retailer. During the 2023 year of
assessment he won a prize for being the retailer’s most productive salesperson of the
year. The prize was an all-inclusive two-week holiday at a seaside resort, valued at
R70 000 (this amount was also its cost to his employer).
Bud Costello
Bud Costello, who lives and works in Cape Town, inherited a house valued at
R2 500 000 in Johannesburg from his late grandfather. Since he will not move to
Johannesburg, he sold this house for R2 650 000.
Lou Abbott
Lou Abbott, a property developer living and trading in Pretoria, inherited on 3 March
2022 a block of flats in Pretoria, valued at R18 000 000, from a late uncle who also
lived in Pretoria. Since he was at that time selling two other blocks of flats under
sectional title, he immediately applied for sectional title rights on his inherited
property. By 28 February 2023, he had sold all the flats in his inherited property for
R19 000 000.
Shivan Govender
Shivan Govender carried on an estate agency business in Durban as an equal
partner until 1 March 2022. He then sold his share in the partnership for R300 000. This
R300 000 selling price is made up as follows:
• R100 000 for his share of the partnership’s trading debtors (at book value),
• R50 000 for his share of the furniture and fittings of the partnership, and
• R150 000 for goodwill.
The R100 000 for the partnership’s trading debtors and the R50 000 for its furniture
and fittings were paid for in cash. He agreed to accept an annual amount of
R20 000 for the rest of his life as settlement for his goodwill.
26
Chapter 2
Gross income
Paul du Plooy
On 1 May 2022, Paul du Plooy purchased a plot of land in Bryanston on which he
intended to erect a house for his family and himself to reside in. He was forced to
purchase a far larger property than he required since the seller of this plot was
unwilling to sell only a portion of it to him. Subsequent to his purchase of it, he
subdivided it. On 30 June 2022 he sold the excess portion of it at a profit of
R1 500 000.
Thomas Mokoena
Thomas Mokena holds deposits of R90 000 originating from tenants occupying flats in
his apartment block in Bloemfontein that he erected during the 2022 year of
assessment and that he let throughout the 2023 year of assessment. These deposits
are refundable to a tenant who vacates a flat, provided it is in the same condition
as it was in when he obtained the right to use it, and provided he has occupied it for
a period of at least six months.
Thomas Mokena deposited the R90 000 in a separate bank account. He will use the
R90 000 solely for the repayment of a deposit to a qualifying tenant.
Lenny Diver
Lenny Diver is a diving instructor employed by a local scuba-diving club. While
diving, he discovered the wreck of a ship in fairly shallow water off the coast of East
London. The ship sank more than 200 years ago, carrying a cargo of china. He
realised that this cargo of china was now valuable.
Lenny Diver then commenced a salvage operation, hiring a boat, equipment and
employing assistants for this purpose.
Lenny Diver received an advance payment of R5 000 000 for the china from a
museum in London, to whom he granted the sole right to purchase the entire cargo.
By the end of the 2023 year of assessment, Lenny Diver had sold china to the museum
in London for R6 500 000, but the museum has not yet paid him the R1 500 000 in
excess of its R5 000 000 deposit.
YOU ARE REQUIRED TO discuss if the amounts referred to in each situation above will
be included in the respective taxpayer’s gross income, giving brief reasons. Ignore
capital gains tax.
Solution 2.2
Kamo Mutwa
The definition of “gross income” includes all amounts received by or accrued to a
resident. A resident is subject to normal tax on his world-wide receipts and accruals.
A royalty is the “fruit” (revenue in nature) of the “tree” (copyright to the book and
capital in nature). She must therefore include the equivalent of R50 000 in her South
African gross income.
Lucas Naho
The winning of a prize would normally constitute a receipt of a capital nature, being
fortuitous and not arising out of an operation of business. In Lucas Naho’s situation,
however, the winning of the prize is closely connected with his employment. The
prize that he was awarded was a benefit of his employment. Its cost to his employer
will be the amount that is included in his gross income under para (i) of the definition
of “gross income” read with para 2(a) of the Seventh Schedule.
27
Tax Workbook
Bud Costello
The definition of “gross income” excludes most receipts or accruals of a capital
nature. An important test established by the courts in South Africa and elsewhere is
whether the taxpayer’s intention is that of speculation or investment. Since Bud
Costello inherited the property, he did not acquire it with a speculative intention. But
did his intention change to that of speculation at the time that it was sold? Did he
go over to the business of dealing in property, or embark on a scheme of selling it for
a profit (Natal Estates Ltd v SIR 1975 (4) SA 177 (A), 37 SATC 193)? He sold it after a
short holding period. Yet his reason for selling was not that he wished to speculate.
He wished to sell it since he did not need it. He did not enter into an extensive
advertising campaign to sell it. On the facts given, his receipt or accrual from its sale
would be of a capital nature and is therefore be excluded from his gross income.
Lou Albert
Since Lou Albert inherited the property, he did not acquire it with a speculative
intention. Did his intention change to that of speculation at the time that it was sold?
Did he embark on a scheme of selling it for a profit (Natal Estates Ltd v SIR 1975 (4)
SA 177 (A), 37 SATC 193)? He already carries on the trade of a property developer,
with a specialised knowledge of this trade. He applied for sectional title rights on it.
He then sold it at a substantial profit in a short time. The mere fact that an
application is made for sectional title rights would not necessarily indicate a
speculative intention, but in his situation he regularly enters into similar transactions.
The fact that he carries on the trade of a property developer could result in his
inherited property also being treated as his trading stock. The receipts or accruals
from its sale will then not be of a capital nature. They will then be included in his
gross income.
Shivan Govender
The R100 000 received in cash by Shivan Govender for the sale of his share of the
partnership’s trade debtors is an amount of a capital nature since the transactions
giving rise to the amounts owing by the debtors have already resulted in an
inclusion in his gross income in the years of assessment when the debts arose (that is,
when the credit sales were made). Therefore the amount is not included again in his
gross income.
The R50 000 received in cash by Shivan Govender for the sale of his share of the
partnership’s furniture and fittings is also a receipt of a capital nature since it forms
part of the fixed capital structure of his business. He may, however, have to include
in his gross income an amount “recouped” on the sale of this asset under s 8(4),
should its selling price exceed its tax value.
The sale of the goodwill of a business is also of a capital nature since goodwill forms
part of a taxpayer’s fixed capital structure. But when the purchase consideration is
payable as an annuity, it is included in gross income under para (a) of the definition
of “gross income”, even if it is capital in nature.
Paul du Plooy
Paul du Plooy’s intention when he purchased the property was not to enter into a
profit-making scheme. He was forced by circumstances to purchase a property in
excess of his needs. The profit that he made on the sale of the excess land was
28
Chapter 2
Gross income
fortuitous and not deliberately sought after or worked for (CIR v Pick ƌ Pay Employee
Share Purchase Trust 1992 (4) SA 39 (A), 54 SATC 271). The sale of this excess portion
of the property is a receipt or an accrual of a capital nature (Stott v CIR 1928 AD
252, 3 SATC 253). The amount is therefore excluded from his gross income.
Thomas Mokoena
It is necessary to consider whether the deposits were received by Thomas Mokoena
on his own behalf and for his own benefit (Geldenhuys v SIR 1947 (3) SA 252 (C),
14 SATC 419). If the deposits were not received for his benefit or on his behalf, there
can be no receipt for the purposes of the definition of “gross income”. The fact that
he deposited the amounts in a separate (trust) bank account confirms that he did
not treat them as his own property (see MP Finance Group CC (In liquidation) v
C:SARS 2007 (5) SA 141 (SCA), 69 SATC 141), when it was held that when a taxpayer
subjectively considered itself entitled to an amount, it received it within the meaning
of gross income). It was held by the Appellate Division in Pyott Ltd v CIR (1945 AD
128, 13 SATC 121) that, if a deposit is placed in a separate (trust) bank account
(being the situation here), it will probably not be gross income. The deposits will
therefore be excluded from his gross income.
Lenny Diver
Lenny Diver sold the salvaged china in the course of carrying on a business or in
pursuance of a profit-making scheme (Elandsheuwel Farming (Edms) Bpk v SBI 1978
(1) SA 101 (A), 39 SATC 163). His realisation of the value of the china, the extent of the
operations he has entered into, including the hiring of a boat, equipment,
employing assistants and negotiating a contract with the museum, all support a
business-like modus operandi, despite the fact that this is an isolated transaction
(Stephan v CIR (1919 WLD 1, 32 SATC 54)). It follows that any amounts that he
receives or that accrue to him from the salvaged china are not fortuitous, but are
deliberately sought after and worked for (CIR v Pick Ĝ Pay Employee Share Purchase
Trust 1992 (4) SA 39 (A), 54 SATC 271). The amounts from the sale of the china are
therefore not of a capital nature.
The R5 000 000 advance was received by Lenny Diver within the meaning of the
term “received by” as used in the definition of “gross income” since he received it
for his own use and benefit (Geldenhuys v SIR 1947 (3) SA 252 (C),14 SATC 419). Since
he granted the museum the sole right to purchase all the china, the R1 500 000 (the
difference between the R6 500 000 selling price of the salvaged goods and the
R5 000 000 advance payment) has “accrued to” him since he is entitled to it
(Peoples’ Stores (Walvis Bay) (Pty) Ltd v CIR 1990 (2) SA 353 (A), 52 SATC 9)). If the
museum imposed a condition (for example, an inspection of the goods and their
acceptance solely if they meet certain conditions) before it would accept liability
for them, accrual will take place only when these conditions are satisfied (Mooi v
CIR 1972 (1) SA 675 (A), 34 SATC 1)).
Example 2.3
(15 minutes)
When Jan Napier retired on 29 February 2020, he used the lump sum that accrued
to him on his retirement to purchase a rent-producing property. He believed that
the return from letting it would provide him with a better investment than an
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Tax Workbook
interest-bearing security in a bank. He purchased the property on 10 March 2020,
financing the balance of its purchase price out of the amount obtained from a
mortgage bond over it.
Jan Napier’s net receipts and accruals from the letting of this rent-producing
property provided him with a reasonable return on his investment.
Jan Napier has now received a good offer from another person for the purchase of
this rent-producing property. His decision to accept the offer will depend on
whether the amount he receives or that accrues to him from its sale will be included
in his gross income. He has approached you for advice in this regard.
YOU ARE REQUIRED TO explain some of the more important factors that will be taken
into account when deciding if the amount Jan Napier receives or that accrues to
him from the sale of this rent-producing property will be subject to normal tax. You
must briefly state whether the receipt or accrual from its sale will be included in his
gross income. Ignore capital gains tax.
Solution 2.3
Jan Napier’s primary purpose when he purchased the rent-producing property will
be an indication of whether his intention with it was that of speculation or investment
(Stott v CIR 1928 AD 252, 3 SATC 253). It is also necessary to determine if his intention
with it had subsequently changed by the time it is sold by him (Natal Estates Ltd v SIR
1975 (4) SA 177 (A), 37 SATC 193). It is necessary not only to consider his testimony as
to his intention, but also all the facts and circumstances of his specific situation.
These facts and circumstances would include, among others,
• the method of financing its purchase,
• the period for which it has been held,
• the activities relating to it during his holding period,
• the reason for its sale,
• the manner of its sale,
• the nature of his occupation, and
• his history of similar transactions.
Jan Napier’s property was purchased with the intention of letting it and not with a
speculative intention. It has been profitably let since its date of purchase. Its
purchase was financed out of his own funds, together with a mortgage bond over
it. Its return has been sufficient to cover his mortgage bond commitments (payment
of the interest due and part repayment of the capital) and to provide him with an
adequate return on his investment. There does not appear to have been a financial
need for him to sell it. No action has been taken by him to sell it. He has received a
fortuitous offer from someone who wishes to purchase it. The period during which it
was held by him, however, appears to be short. But he does not carry on business as
a dealer in property. He is a retired person. No information is given regarding any
similar transactions carried out by him in the past. On the information available, and
on a balance of probabilities, his receipt or accrual from its sale will be of a capital
nature and will therefore be excluded from his gross income.
30
Chapter 2
Gross income
Example 2.4
(20 minutes)
Tim Naidoo, a resident of the Republic, is employed by a gold-mining company in
the Free State. In April 2022 he was injured while on duty. On 15 February 2023 he
was awarded by his employer compensation of R900 000 for the loss of the use of his
left hand. It was awarded to him because of the negligence on the part of his
employer. He continued to be employed by the gold-mining company but in a
clerical position and at a lower salary.
To supplement his lower salary, Tim Naidoo purchased a mini-bus under a three-year
contract and ran a taxi business, using a hired driver. After a month his taxi driver
became concerned about his safety in the taxi business and failed to report for
duty, taking the mini-bus with him. This constituted a breach of the contract by
desertion. He successfully sued his driver and, on 31 August 2022, was awarded
R30 000 for the breach of his contract and R80 000 for the mini-bus (equal to its tax
value).
Exploiting his opportunities at the gold mine, Tim Naidoo worked for a crime syndicate
dealing in stolen gold. He received a commission of R140 000 for acting as a
“go-between”. He never physically received this money since he arranged for his
commission to be awarded directly to a local charity.
Tim Naidoo has a hobby of collecting model toys. On 30 April 2022 he sold two model
toys to another collector for R20 000.
YOU ARE REQUIRED TO discuss whether the above amounts will be included in Tim
Naidoo’s gross income. Ignore capital gains tax.
Solution 2.4
Lump-sum compensation
The lump-sum compensation award to Tim Naidoo of R900 000 from his employer for
the loss of the use of his left hand is a receipt or accrual of a capital nature. It is
therefore excluded from his gross income. He has lost part of his income-earning
capacity (CIR v Visser 1937 TPD 77, 8 SATC 271 and WJ Fourie Beleggings v C:SARS
2009 (5) SA 238 (SCA), [2009] JOL 23375 (SCA), 71 SATC 125).
Damages for breach of contract
The R30 000 in damages awarded to Tim Naidoo for the breach of the contract by
the driver of his taxi relates to a loss of his income during the year. It was not for a
permanent impairment of his capital structure. Since the R30 000 fills a “hole” in his
income, it is included in his gross income (WJ Fourie Beleggings v C:SARS 2009 (5) SA
238 (SCA), [2009] JOL 23375 (SCA), 71 SATC 125).
The R80 000 awarded to Tim Naidoo for the loss of his mini-bus is of a capital nature,
and also does not represent a recoupment of former capital allowances that were
deducted in the determination of his taxable income since the amount awarded
equals the mini-bus’s tax value. It will be excluded from his gross income because it
is capital in nature.
Commission
The commission of R140 000 awarded to Tim Naidoo by the crime syndicate dealing
in stolen gold is of a revenue nature (being for services rendered or to be rendered).
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Tax Workbook
Paragraph (c) of the definition of “gross income” includes in gross income all
amounts received or accrued for services rendered or to be rendered. The fact that
the R140 000 arises from an illegal activity does not mean that it will be excluded
from his gross income (MP Finance Group CC (In liquidation) v C:SARS 2007 (5) SA
521 (SCA), 69 SATC 141).
Whether the commission accrued to Tim Naidoo prior to its cession to a local charity
depends on the facts. He “arranged” for the commission to be awarded directly to
a charity. This may indicate that it was ceded before it accrued to him. For a
cession to be effective, the future income must accrue to the cessionary and the
cedent must have divested himself of the future income (CIR v Witwatersrand
Association of Racing Clubs 1960 (3) SA 291 (A), 23 SATC 380). But since he has
rendered a service, the commission is still included in his gross income under the
second proviso to para (c) of the definition of “gross income”.
Hobby
In pursuing his hobby, Tim Naidoo is not engaged in an operation of business in
carrying out a scheme of profit making (CIR v Pick ’n Pay Employee Share Purchase
Trust 1992 (4) SA 39 (A), 54 SATC 271). His intention is to enjoy his hobby, not to make
a profit from it. In addition, the sale of the two models was isolated. It did not result
from any form of continuity (CIR v Stott 1928 AD 252, 3 SATC 253). The R20 000 would
therefore be excluded from his gross income since it is capital in nature.
Example 2.5
(20 minutes)
In the following five situations, the inclusion of the relevant amount in “gross income”
is in question. All persons are residents of the Republic.
Thula Manzini
Thula Manzini carries on business as a second-hand motor car dealer. During the
2023 year of assessment he sold his private (family) motor car for R130 000.
Shezi Loatle
Shezi Loatle owns a furniture shop in Bloemfontein. During the 2023 year of
assessment she sold a bedroom suite to a customer for R5 000. The customer paid
R4 000 in cash and Shezi Loatle accepted the customer’s second-hand bedroom
suite as a “trade-in” for the balance of the purchase price of R1 000. Three days later
she sold this second-hand bedroom suite to another customer for R1 500.
Zimele Ltd
Zimele Ltd carries on the business of structural engineers specialising in the erection
of aviaries. On 14 February 2023, two weeks before the end of its year of assessment,
it completed the erection of an aviary for the Bird Rehabilitation Club. Under this
contract,
• 95% of the contract price was due and payable on completion of the aviary, and
• 5% of it is to be retained as “retention moneys” until a final certificate is issued by
the contract engineer, six months after the aviary’s erection.
The price of the contract between Zimele Ltd and the Bird Rehabilitation Club is
R100 000.
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Chapter 2
Gross income
Xibelani (Pty) Ltd
Xibelani (Pty) Ltd sells fashion garments. On 25 February 2023, it sold a collection of
evening outfits on credit to the Pretoria Model Agency for R60 000. Under this
contract of sale, it undertook to deliver the outfits to the Pretoria Model Agency on
3 March 2023. Its year of assessment ends on the last day of February. It then
delivered the collection of outfits to the Pretoria Model Agency on 3 March 2023.
Tirhisano Maluleke
Tirhisano Maluleke requires a deposit of 5% on orders placed by his customers for
fresh eggs and farm chickens. If a customer cancels the order, the deposit is
forfeited. During February 2023, he accepted deposits of R5 000 for deliveries of fresh
eggs and farm chickens to be made in March 2023.
YOU ARE REQUIRED TO determine, in each of the above situations, what amount will
be included in the “gross income” of the respective person for the 2023 year of
assessment. Ignore capital gains tax.
Solution 2.5
Thula Manzini
The opening words of the definition of “gross income” in s 1(1) exclude receipts and
accruals of a capital nature.
The sale by Thula Manzini of his private (family) motor car would be of a capital
nature since he would not be engaged in the operation of business in a scheme of
profit making (CIR v Pick n Pay Employee Share Purchase Trust 1992 (4) SA 39 (A), 54
SATC 271). He would merely be selling one of his private or domestic assets.
In Thula Manzini’s situation, his business involves the purchasing and selling of
secondhand motor cars. It is then possible that his private (family) motor car was
merged with his trading stock (indicating a change in intention in relation to his
private (family) car) and he sold it as part of his business operations. He would have
to prove that this was not the situation. If he was unable to prove that this was the
situation the R130 000 would not then be excluded from his gross income.
Section 102 of the Tax Administration Act 28 of 2011 provides that the burden of
proof is on Thula Manzini.
Shezi Loatle
The definition of “gross income” includes amounts that have been received by or
accrued to a person in the form of cash and in a form other than cash, provided
that the benefit in a form other than cash is capable of being valued and therefore
has a monetary worth or can be turned into money (CIR v Butcher Bros (Pty) Ltd
1945 AD 301, 13 SATC 21 and C:SARS v Brummeria Renaissance (Pty) Ltd & others
2007 (6) SA 601 (SCA), [2007] SCA 99 (RSA), 69 SATC 205). When a benefit is received
or accrued in a form other than cash, it would be included in the taxpayer’s gross
income, usually at its market value on the date it was received or accrued.
The R4 000 that was paid in cash to Shezi Loatle will be included in her gross income,
being a non-capital cash receipt for the sale of trading stock. The value of the
second-hand furniture will also be included in her gross income. This value would be
R1 500 and not the balance of the selling price of R1 000. The fact that the furniture
was sold within three days for R1 500 would confirm that R1 500 was its market value
on the date it was “traded in” by her customer and received by her.
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Tax Workbook
Zimele Ltd
The amount that accrued to Zimele Ltd to be included in its gross income is the
amount to which it became unconditionally entitled (Mooi v CIR 1972 (1) SA 675 (A),
34 SATC 1). It follows that R95 000 (95% of the R100 000) accrued to it on 14 February
2023.
The remaining R5 000 (5% of R100 000) accrues to Zimele Ltd only when the contract
engineer’s final certificate is issued. This will not take place before 14 August 2023. It
follows that it must include R95 000 in its 2023 gross income and R5 000 in its 2024
gross income.
Xibelani (Pty) Ltd
Xibelani (Pty) Ltd is entitled to the sale value of the evening outfits (of R60 000) as
soon as the contract of sale is entered into. There is an obligation on its part to deliver
the goods before it has a right to the R60 000. It delivered the goods on 3 March
2023. This is then the date of accrual for the inclusion of that amount in its gross
income. It must therefore include the R60 000 in its gross income in its 2024 year of
assessment. (The cost of the evening outfits would still be included in its gross income
as part of its closing stock at the end of its 2023 year of assessment.)
Tirhisano Maluleke
Deposits received by Tirhisano Maluleke represent amounts received by him. He
receives these deposits for his own benefit (Geldenhuys v SIR 1947 (3) SA 252 (C), 14
SATC 419). They are not subject to a condition, since his customers forfeit them should
they cancel their orders. The R5 000 has therefore been “received by” him under the
definition of “gross income” and will be included in his 2023 gross income.
Example 2.6
(20 minutes)
Tlou Taunyane, a resident of the Republic, operates a small business in South Africa,
making yellowwood and teak furniture. He also restores antiques. The following items
relate to the 2023 year of assessment:
• In March 2022, Tlou Taunyane sold furniture that he had manufactured in South
Africa to a furniture dealer in Zimbabwe for a cash price of R50 000.
• In February 2023, Tlou Taunyane was paid a non-refundable deposit of R20 000 by
a customer for furniture to be delivered to her in Johannesburg during March 2023.
• During May 2022, Tlou Taunyane restored antique furniture for a friend in Pretoria
in return for which his friend, a building contractor, made certain extensions to
Tlou Taunyane’s workshop to increase its productive capacity. The building
materials cost his friend R50 000. The normal cost of the friend’s labour would have
been R30 000. The lowest quotation Tlou Taunyane had received from other
builders for these essential improvements to his workshop was R150 000. Had he
charged his friend the normal rate for the restoration work he carried out, he
would have charged him R100 000.
• During June 2022, Tlou Taunyane travelled to Swaziland and carried out
restoration work on antique furniture belonging to a game farmer. The debt for his
work was still outstanding on 28 February 2023. It amounted to R10 000.
• While in Swaziland, Tlou Taunyane gambled at a local casino. His net winnings
were R500 000.
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Chapter 2
Gross income
• Tlou Taunyane invested R50 000 of his winnings in a six-monthly fixed deposit in a
financial institution in Swaziland. Interest for the six months ended 31 December
2022 was credited to his bank account in South Africa. This interest, determined at
the rate of 5% a year, amounted to R1 250. It is payable six monthly.
• Tlou Taunyane purchased a cottage (a small house) in Swaziland for R450 000 with
the balance of his winnings. During the 2023 year of assessment he received rentals
for the six-month period up to 31 January 2023 (at R5 000 a month) amounting to
R30 000. The R5 000 rental due to him for February 2023 was still outstanding on
28 February 2023.
• Tlou Taunyane sold some furniture that had been in his family for generations. He
had been using it in his home. He sold it for cash. It was sold for R200 000.
YOU ARE REQUIRED TO explain, giving full but brief reasons, whether the above
amounts will be included in Tlou Taunyane’s gross income for the 2023 year of
assessment. Ignore capital gains tax.
Solution 2.6
Offshore sale
The R50 000 for Tlou Taunyane’s sale of furniture to the furniture dealer in Zimbabwe
is included in his gross income (Tlou Taunyane is a resident of the Republic). It
accrued to him, and was received by him, during the 2023 year of assessment. It is
not of a capital nature.
Deposit
The deposit of R20 000 received by Tlou Taunyane will be included in his gross
income. It is not of a capital nature. It has been received by him under the meaning
of the term “received by” as used in the definition of “gross income”. Since it is
non-refundable, it has also “accrued to” him on the date it was “received by” him.
Barter transaction
The definition of “gross income” includes amounts “in cash or otherwise” received
by or accrued to a taxpayer during the year of assessment.
Since the extensions to Tlou Taunyane’s property were carried out by his friend in
return for services rendered, an amount must be included in his gross income for the
services he rendered to his friend. This amount is not of a capital nature. It has been
received by and it has accrued to him. For barter transactions, the amount to be
included in gross income is usually the market value of the benefit, that is, the arm’s
length value received from an independent third party. The amount to be included
in his gross income is then R150 000 (C:SARS v Brummeria Renaissance (Pty)
Ltd & others 2007 (6) SA 601 (SCA), [2007] SCA 99 (RSA), 69 SATC 205).
Swaziland work
The R10 000 for work done by Tlou Taunyane in Swaziland is included in his gross
income since it is not of a capital nature. Although the R10 000 has not yet been
“received by” him, it has “accrued to” him since he is unconditionally entitled to it
(CIR v People’s Stores (Walvis Bay) (Pty) Ltd 1990 (2) SA 353 (A), 52 SATC 9). Since he
is a resident his world-wide receipts and accruals are included in his gross income.
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Tax Workbook
Casino winnings
Tlou Taunyane’s casino winnings of R500 000 would be excluded from his gross
income since they are of a capital nature. He is not a professional gambler.
Fortuitous gains are normally of a capital nature (CIR v Pick ’n Pay Employee Share
Purchase Trust 1992 (4) SA 39 (A), 54 SATC 271).
Interest
The interest on the fixed deposit earned by Tlou Taunyane will be included in his
gross income since it is not an amount of a capital nature. Interest on a fixed deposit
does not accrue from day to day, but under the terms of the fixed-deposit contract,
unless the interest-accrual period exceeds a year. It is then deemed to accrue on a
yield-to-maturity basis under the provisions of s 24J. The interest of R1 250 on R50 000
at 5% a year represents interest for the period of six months. The interest on this fixed
deposit is payable six-monthly.
Rental received and accrued
The R30 000 in rental actually received by Tlou Taunyane, and the rental of R5 000
that has accrued to him from his rent-producing property situated in Swaziland,
will be included in his 2023 South African gross income since he is a resident. His
world-wide receipts and accruals are included in his gross income.
Private furniture
The R200 000 received by Tlou Taunyane from the sale of the furniture from his
private home would be of a capital nature. This R200 000 would therefore be
excluded from his gross income. It had been in his family for generations. He had
used it in his home. It did not form part of his trading stock. He did not purchase it to
sell it in the course of his business operations. He did not merge it with his other
trading stock (CIR v Pick n Pay Employee Share Purchase Trust 1992 (4) SA 39 (A), 54
SATC 271). The onus of proof that the amount is of a capital nature is, however, on
him (s 102 of the Tax Administration Act 28 of 2011).
L Questions
Question 2.1
(25 minutes)
James Jockey, the current South African champion jockey, stated in a recent
television interview that he intended to give all the riding fees and the prize money
he earned during the Gauteng Summer Racing Season held during November and
December 2022 and January 2023 to a local charity.
YOU ARE REQUIRED TO discuss, with reference to the Income Tax Act and relevant
court decisions, whether the riding fees and prize money that James Jockey earned
will be included in his gross income for the 2023 year of assessment. Also discuss
whether the specification of a local charity, or the ceding of the amounts to any
local charity, would make a difference to whether an amount will be included in his
gross income.
36
Chapter 2
Gross income
Question 2.2
(60 minutes)
Imbewu Produce (Pty) Ltd
Imbewu Produce (Pty) Ltd has for many years been carrying on the business of
growing fresh produce (mainly vegetables) on land that it owns. Its fresh produce is
then sold at the local municipal market. This is its sole business.
During Imbewu Produce (Pty) Ltd’s 2010 year of assessment, it purchased an
additional farm from a deceased estate at a favourable price. At that time, it did
not need additional land but nevertheless purchased the farm for the purpose of
using it to grow fresh produce at a later stage.
Economic conditions in the fresh-produce industry deteriorated and, during Imbewu
Produce (Pty) Ltd’s 2023 year of assessment, it decided that it no longer required this
additional land. It sold this farm it had purchased in its 2010 year of assessment as
land suitable for livestock farming.
Imbewu Produce (Pty) Ltd would like to know if the amount obtained from the sale
of this farm will be included in its gross income.
YOU ARE REQUIRED TO
(1) answer Imbewu Produce (Pty) Ltd’s above question, and
(2) state, giving reasons, whether your answer would be different if it had
developed the farm as a residential township, and then sold it as building plots.
Ivan Hesse
Ivan Hesse has been achieving a reasonable return from the letting of a block of
15 flats that he purchased in 19945. He does not have a history of property dealing.
Ivan Hesse is aware that he can make a substantial profit by selling the 15 flats
individually. He has made an application for a sectional title register to be opened.
Ivan Hesse is considering improving the 15 flats prior to their sale to make them more
attractive to potential buyers.
YOU ARE REQUIRED TO discuss, giving reasons, whether the amounts earned by Ivan
Hesse from the sale of his 15 flats are of a revenue nature. Consider the situation
when they are sold individually without the improvements’ being made, and the
situation when they are first improved and then sold. Ignore capital gains tax.
Berea Football (Pty) Ltd
Berea Football (Pty) Ltd owns the Berea Football Team. Recently it sold two players,
Ace Khune and King Mbhele, to Westville Football (Pty) Ltd. Ace Khune was sold for
R5 000 000 and King Mbhele for R25 000.
Ace Khune
Ace Khune started playing football eight years ago for Berea Football’s under-14
team. After signing a life-service contract with Berea Football (Pty) Ltd, he was
trained and coached by its coaches until he was considered the “number one”
striker in South Africa.
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Tax Workbook
King Mbhele
King Mbhele was “snapped up” by Berea Football (Pty) Ltd at a bargain price from
Hasbeen Football Club for R3 000. When purchasing him, it realised he would not suit
the style of play used by its team but anticipated being able to sell him at a “quick
profit”. This happened only eight weeks after purchasing him.
YOU ARE REQUIRED TO discuss what amounts, if any, Berea Football (Pty) Ltd should
include in its gross income from the above two sales it made. Assume that its receipts
and accruals are not exempt from normal tax. Ignore capital gains tax.
Question 2.3
(20 minutes)
Phumudzo Masia (a resident of the Republic) is employed by a computer business
as one of its consultants.
During April 2022, Phumudzo Masia inherited a citrus farm situated in the Letsitele
district from his late aunt. Since the oranges were ripe, he immediately sold them for
R75 000. Since he was not going to become a farmer, he then sold this inherited
citrus farm on 31 May 2022 for R6 000 000.
The R6 075 000 received by Phumudzo Masia from the above sales was invested by
him in local shares. For the 2023 year of assessment local dividends of R250 000
accrued to him from these local shares.
Phumudzo Masia also inherited a computer from his late aunt. He installed the latest
computer games on it. His friends enjoy playing these games. To play, he charges
them R25 an hour. The games are popular. He has made a net profit of R6 500 from
this venture of his.
During Phumudzo Masia’s leave period of three weeks, he visited friends in Mauritius.
While there, he was requested by a business in Mauritius to assist it with its computer
problems. He spent five days working for this Mauritian business in Mauritius and was
paid the equivalent of R5 000 for his services.
Phumudzo Masia also collects rental on behalf of his uncle who now lives outside
South Africa and who owns a block of flats in Pretoria. He received R800 000 from
the tenants occupying the flats. He then kept R80 000 of the R800 000, being his 10%
commission on the rentals he collected. He deposited the balance of R720 000 into
his uncle’s local bank account.
YOU ARE REQUIRED TO explain, giving full but brief reasons, whether the above
amounts will be included in Phumudzo Masia’s gross income for the 2023 year of
assessment. Ignore capital gains tax.
38
Chapter 3
Special inclusions
L Introduction
For an amount to be subject to normal tax in South Africa, it must, in the first instance,
comply with all the requirements of the definition of “gross income” as set out in
s 1(1) of the Income Tax Act 58 of 1962. Paragraphs (a) to (n) of the definition of
“gross income” include certain amounts in gross income that may not be included
in gross income under the opening words of the definition of “gross income”. The
reason for their non-inclusion under the opening words of the definition of “gross
income” is simply because they are of a capital nature. The capital versus revenue
issue therefore does not apply to these so-called special inclusions in the definition
of “gross income”.
The examples and questions in this chapter are designed to illustrate and test the socalled special inclusions that form part of the definition of “gross income”. Unless
stated otherwise, all taxpayers are residents of the Republic.
Framework:
Gross income consists of
• the opening words of the definition, and
• its so-called specific inclusions.
All receipts and accruals are added together, and the total constitutes gross income.
L Contents
The following table gives an indication of the time that is needed to complete the
example or question. The relevant sections or paragraphs that must be referred to
before attempting the example or question are also provided. The level of the
example or question gives an indication of its difficulty.
)
Example or Question
and time allocation
Topic and relevant sections
Level
Example 3.1
(10 minutes)
• Section 1(1) – definition of “gross
income”
• Paragraph (a) of the definition – annuities
Basic
Example 3.2
(5 minutes)
• Section 1(1) – definition of “gross
income”
• Paragraph (gA) of the definition –
know-how receipts or accruals
Basic
continued
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Tax Workbook
)
Example or Question
and time allocation
Topic and relevant sections
Level
Example 3.3
(5 minutes)
• Section 1(1) – definition of “gross
income”
• Paragraph (b) of the definition –
alimony
Basic
Example 3.4
(10 minutes)
• Section 1(1) – definition of “gross
income”
• Paragraph (c) of the definition –
services rendered
• Paragraph (cA) of the definition –
restraint of trade awards
Basic
Example 3.5
(10 minutes)
• Section 1(1) – definition of “gross
income”
• Paragraph (a) of the definition –
annuities
• Paragraph (e) of the definition –
lump-sum benefits
• Paragraph ( f ) of the definition –
amounts due under employment
contracts
Basic
Example 3.6
(10 minutes)
• Section 1(1) – definition of “gross
income”
• Paragraph (g) of the definition –
lease premiums
• Paragraph (h) of the definition –
leasehold improvements
Basic
Example 3.7
(15 minutes)
• Section 1(1) – definition of “gross
income”
• Paragraph (i) of the definition –
fringe benefits
• Paragraph (jA) of the definition –
manufactured assets
• Paragraph (k) of the definition –
dividends
Basic
Question 3.1
(20 minutes)
• Combined
Basic
Question 3.2
(15 minutes)
• Combined
Intermediate
Question 3.3
(45 minutes)
• Combined
Advanced
L Examples
Example 3.1
(10 minutes)
Mcebo Senzo
During the 2023 year of assessment, Mcebo Senzo sold his business, a fast-food
take-away business, for R1 200 000. Since the purchaser was unable to settle the
purchase consideration in cash, he agreed to receive R120 000 a year for the next
10 years in settlement of the amount due to him.
40
Chapter 3
Special inclusions
Tankiso Tefu
Tankiso Tefu agreed to sell to Keletso Vuma his business that manufactures barbecue
sauces and salad dressings. To help Keletso Vuma’s cash flow, it was agreed that he
would pay R100 000 annually to Tankiso Tefu for the rest of his life.
YOU ARE REQUIRED TO explain whether the above amounts will be included in the
gross incomes of the sellers.
Solution 3.1
Mcebo Senzo
Mcebo Senzo’s agreement for the sale of his business specified the selling price as
R1 200 000. He agreed that the R1 200 000 could be settled in instalments of R120 000
a year for 10 years. The annual instalment of R120 000 that is received by him in the
2023 year of assessment is not an annuity but an agreed payment in the reduction
of the purchase consideration of R1 200 000. In an annuity contract, no total debt is
mentioned (KBI & ’n ander v Hogan 1993 (4) SA 150 (A), 55 SATC 329).
The R120 000 is excluded from Mcebo Senzo’s gross income. The sale of a business
(capital asset) normally gives rise to a receipt or an accrual of a capital nature (tree
versus fruit), unless the taxpayer carries on business as a purchaser and seller of
businesses.
Tankiso Tefu
The R100 000 a year for the rest of his life that accrues to Tankiso Tefu from his
agreement with Keletso Vuma is an annuity. Even though it is capital in nature,
under para (a) of the definition of “gross income”, it is included in Tankiso Tefu’s
gross income each year, for the rest of his life.
Example 3.2
(5 minutes)
Dikeledi Seami agreed, in conjunction with a financial partner, Masimanyane (Pty)
Ltd, to promote a new magazine. She was issued shares worth R150 000 in it by it in
consideration for her concept. Before selling this concept to it, she researched and
developed her concept. In other words, it paid her for her commercial knowledge
and the information that she provided to it, and not for a copyright.
YOU ARE REQUIRED TO determine whether the R150 000 must be included in Dikeledi
Seami’s gross income.
Solution 3.2
Paragraph (gA) of the definition of “gross income” includes in gross income a
consideration received or accrued to a person for the imparting of information or
knowledge. This is regardless of whether this consideration is of a capital nature or
similar to a premium.
The R150 000 is therefore included in Dikeledi Seami’s gross income.
Example 3.3
(5 minutes)
Barbara Baardmannetjie and Bertie Baardmannetjie separated (and were then
divorced) during the 2021 year of assessment.
41
Tax Workbook
Barbara Baardmannetjie immediately emigrated from South Africa and is now a
resident of Canada. She is not a resident of the Republic. Under their divorce
agreement, she enjoys alimony of R180 000 a year from Bertie Baardmannetjie (her
former husband).
Bertie Baardmannetjie is still a resident of the Republic. He pays the R180 000 to
Barbara Baardmannetjie at a rate of R15 000 a month. This payment is made by
means of a stop order against his salary.
YOU ARE REQUIRED TO determine if the R180 000 (R15 000 each month) is included in
Barbara Baardmannetjie’s South African gross income.
Solution 3.3
Under para (b) of the definition of “gross income”, Barbara Baardmannetjie is
required to include in her gross income
“any amount payable to the taxpayer . . . by the spouse or former spouse of that taxpayer,
under any judicial order or written agreement of separation or under any order of divorce,
by way of alimony or allowance or maintenance of the taxpayer . . .”.
Therefore, Barbara Baardmannetjie must include the R180 000 in her gross income.
The fact that she now resides in Canada does not alter this situation. The source of
this R180 000 alimony is in South Africa, where their divorce agreement was
concluded.
Although it is included in her gross income, it is then exempt from normal tax under
the provisions of s 10(1)(u).
Example 3.4
(10 minutes)
Dimpho Lekau
Dimpho Lekau, a resident of the Republic, is a third-year arts student at a university
in Pretoria. While at the campus, she “spies” for the South African Police. At the end
of each term, she compiles a report on matters that took place on the campus that
she believes may be of interest to it. Upon receipt of her report, R25 000 accrues to
her from it. During the 2023 year of assessment, she filed four reports and earned
R100 000 in total for these four reports.
Conny Makwati
Conny Makwati was retrenched by her employer on 31 March 2022. She was
49 years old at the time of her retrenchment. She had befriended many customers
in the local community who had previously been serviced by her former employer. If
she became employed by a “competing” employer within the region, she could
possibly persuade customers who had previously been serviced by her former
employer to become customers of her new employer (rather than her former
employer). Her former employer therefore found it necessary to restrain her from
working for a “competitor” within the region. Her former employer awarded her
R360 000 not to work for a “competitor” within the region for five years.
YOU ARE REQUIRED TO state whether the above amounts will be included in the
recipient taxpayer’s gross income.
42
Chapter 3
Special inclusions
Solution 3.4
Dimpho Lekau
The R25 000 that accrues to Dimpho Lekau for each report is for services that she
rendered to the South African Police. Under para (c) of the definition of “gross
income”, the R100 000 (four at R25 000 each) is included in her gross income. There is
no need for an employer-employee relationship to exist for the provisions of para (c)
to apply. All that is necessary, is that there must be a causal relationship between
the services rendered and the award that results.
Conny Makwati
A restraint of trade award is normally capital in nature (since it is an award for the
sterilisation of a capital asset whereby its recipient can no longer freely trade or
work). Notwithstanding this, para (cB) of the definition of “gross income” includes in
the gross income of a natural person an amount received by or accrued to him as
consideration for a restraint of trade imposed on him, provided it was awarded for
or by virtue of his employment or holding of an office or as a result of his past or
future enrolment or the holding of an office.
Conny Makwati must therefore include the R360 000 in her gross income. The entire
amount is subject to normal tax in the year of assessment in which it accrues.
Example 3.5
(10 minutes)
Dudu Buthelezi
Dudu Buthelezi’s services were terminated by her employer on 31 March 2022 for
non-performance. Under the service agreement with her employer, she should have
been given one term’s notice (a period of three months). In lieu of this notice that
should have been given to her, she was awarded a lump sum of R39 000 from her
employer on the termination of her services (on 31 March 2022).
Lenah Zondo
Lenah Zondo attained the age of 60 years on 30 April 2022. She retired on the same
day. She earned a salary of R18 000 a month in both March 2022 and April 2022. A
lump sum of R450 000 accrued to her from the pension fund that she had been a
member of on 30 April 2022. She had been a member of it for 20 years. All her
contributions to it had been deductible in the determination of her taxable income.
She did not invest any portion of this R450 000 lump sum in another “qualifying”
retirement fund. On the last day of each month, commencing with May 2022,
R16 000 accrued to her from the pension fund.
Zama Shongwe
Zama Shongwe, a 19-year-old second-year social science student at a university in
Pretoria, received a lump sum of R150 000 from her late father’s employer. Her
mother died five years ago. Her father was her sole relative. He died on 31 March
2022, at the age of 53 years, from a Covid-19-related illness. On his death, his former
employer awarded R150 000 to her.
Zama Shongwe invested the R150 000. Local interest of R15 750 accrued to her from
this investment up to the end of the 2023 year of assessment.
YOU ARE REQUIRED TO state if the amounts referred to in the above three situations
are included in the gross income of the recipient taxpayers.
43
Tax Workbook
Solution 3.5
Dudu Buthelezi
Under para ( f ) of the definition of “gross income”
“[a]ny amount received or accrued in commutation of amounts due under any contract of
employment or service”
must be included in the recipient’s gross income.
Dudu Buthelezi must therefore include the R39 000 in her gross income.
Lenah Zondo
Under para (e) of the definition of “gross income”, Lenah Zondo must include
R450 000 in her gross income, being the taxable portion of a lump sum that has
accrued to her from a pension fund.
Lenah Zondo will also include her salary of R18 000 a month for the months of March
2022 and April 2022 in her gross income. This inclusion will either be in accordance
with the opening words of the definition of “gross income” or under its para (c),
being amounts received or accrued for services rendered.
The R16 000 that accrues to Lenah Zondo each month from the pension fund is an
annuity and is therefore included in her gross income under para (a) of this
definition.
Zama Shongwe
Since the award was made to Zama Shongwe upon the death of Mr Shongwe (her
late father), the R150 000 received by her is deemed to have accrued to him
immediately prior to his death. Under proviso (bb) to para (d) of the definition of
“gross income”, it must be included in his gross income.
The local interest of R15 750 accrues to Zama Shongwe and must be included in her
gross income under the opening words of the definition of “gross income” since it is
a receipt or an accrual of a revenue nature (or under s 24J(3)).
Example 3.6
(10 minutes)
Hendrik Houtkapper owns a double plot of land in the Magaliesberg. He inherited it
from his late grandfather. A condition of this inheritance was that he could not sell it.
On one of the two plots, he erected a holiday home (berg or country cottage) for
his family’s and his own use. On the other plot, he entered into a lease agreement
with Herman Hadida that included the following conditions:
• Herman Hadida was to pay Hendrik Houtkapper a premium of R50 000 on the
signing of the agreement. This was carried out on 1 June 2022. (This payment was
made.)
• The lease was for a 30-year period.
• A monthly rental was payable by Herman Hadida to Hendrik Houtkapper. For the
first two years of the lease, the rental agreed upon was R2 500 a month. (After
that an agreed escalation formula would apply.)
• Herman Hadida was obliged to erect a particular four-bedroom house on the site.
It was agreed that a minimum of R1 800 000 was to be spent by him on erecting
this particular house. (A particular house was agreed on, but not the R1 800 000.)
The four-bedroom house was completed at a cost of R1 920 000 on 30 November
2022. It was occupied immediately for the long summer holiday by Herman
Hadida and his family.
44
Chapter 3
Special inclusions
YOU ARE REQUIRED TO state whether the amounts referred to above will be included
in Hendrik Houtkapper’s gross income.
Solution 3.6
Hendrik Houtkapper must include in his gross income
• the premium of R50 000 (under para (g) of the definition of “gross income”) on
the signing of the agreement,
• the rentals as they accrue each month (under the opening words of the definition
of “gross income”), and
• R1 920 000 (being the value of improvements effected to his property by Herman
Hadida (under para (h) of the definition of “gross income”)). Since it was a
particular building that was agreed to, with a minimum cost also being agreed to,
it is the actual cost incurred of the building of R1 920 000 that para (h) requires to
be included in his gross income. The R1 920 000 will have to be included in full (no
spreading of it) in his gross income at the time when the improvements were
completed. Although there is an accrual when the agreement is entered into on
1 June 2022, the quantum of this accrual is, on that date, unknown. Some relief is
possible under s 11(h). It provides for the Commissioner to grant a special
discretionary allowance to be deducted in the determination of his taxable
income.
Example 3.7
(15 minutes)
Kobus Krombek
Kobus Krombek is now a resident of the Republic, having emigrated two years ago
from the Netherlands to South Africa. He still owns a number of shares in foreign
companies. The foreign dividends from these foreign shares are forwarded to him in
South Africa. During the 2023 year of assessment, foreign dividends the equivalent of
R31 500 accrued to him from his shareholdings in foreign companies.
Izaak Ibis
During the 2023 year of assessment, Izaak Ibis completed 25 years of service to his
employer. In appreciation of his long and devoted service to it, it awarded him a
cell phone valued at R7 500 (which cost it R6 000 – it enjoyed a 20% discount on the
cell phone’s purchase price since it fairly often buys similar cell phones) and an
award for R50 000 (being 25 years’ service at R2 000 a year). The taxable value of
the cell phone under the Seventh Schedule is R1 000.
Tshixwadza & Sons Ltd
Tshixwadza & Sons Ltd is a resident of the Republic. It manufactures motor vehicles.
Of the motor vehicles that it manufactures, 95% are sold to its franchise dealers. The
remaining 5% are manufactured for its own use. They are given as “company cars”
to certain of its employees. When a “company car” is 11 months old, the qualifying
employee who has had the use of it has the option to purchase it from
Tshixwadza & Sons Ltd at its current market value. If the qualifying employee does
not purchase it, it is then sold by Tshixwadza & Sons Ltd at its current market value to
the public as a used motor vehicle. During its 2023 year of assessment (ended
28 February 2023), Tshixwadza & Sons Ltd earned, amongst others, the following
amounts:
• R850 000 from sales of motor vehicles to its employees.
• R1 290 000 from sales of used motor vehicles to members of the public.
45
Tax Workbook
YOU ARE REQUIRED TO state whether the amounts referred to in the above situations
are included in the gross incomes of the respective taxpayers.
Solution 3.7
Kobus Krombek
Under the provisions of para (k) of the definition of “gross income”, local dividends
and foreign dividends are required to be included in the shareholder’s gross
income. Therefore, the equivalent of R31 500 must be included in Kobus Krombek’s
South African gross income. It is only when the income (gross income less exempt
income) of the taxpayer is determined that exempt from normal tax amounts are
then excluded.
Izaak Ibis
A cash award for services rendered forms part of the recipient’s gross income. Under
para (c) of the definition of “gross income”, R50 000 is therefore included in Izaak
Ibis’ gross income. Non-cash awards are defined as a taxable fringe benefit
(para 2(a) of the Seventh Schedule) and come into gross income under para (i) of
the definition of “gross income”.
Although the cell phone valued at R7 500 is a taxable benefit that has been
awarded to Izaak Ibis by his employer and is required to be included in his gross
income (para (i) of the definition of “gross income”), it is included in his gross income
at its taxable value of R1 000 (R6 000 (R7 500 × 80%) less a R5 000 long-service
concession).
Tshixwadza & Sons Ltd
Under para (jA) of the definition of “gross income”, an amount received by or
accrued to a person during the year of assessment from the disposal of an asset
manufactured, produced, constructed or assembled by him, that is similar to another
asset manufactured, produced, constructed or assembled by him for purposes of
manufacture, sale or exchange by him, or on his behalf, must be included in his
gross income.
Tshixwadza & Sons Ltd is therefore required to include, amongst others, the following
amounts in its gross income:
• R850 000 for sales of its motor vehicles to its employees.
• R1 290 000 for sales of its motor vehicles to members of the public.
L Questions
Question 3.1
(20 minutes)
Tsepo Letsoalo
Tsepo Letsoalo is a farmer. He farms sugar cane in Mpumalanga. During the 2023
year of assessment, he incurred R15 000 in eradicating large growths of lantana
(a noxious plant) that was posing a threat to his sugar cane plantations. Since the
Government is campaigning against this noxious plant, it subsidised this expense.
During the 2023 year of assessment, he was awarded a subsidy of R6 000 from the
Government in this regard.
46
Chapter 3
Special inclusions
Loerie Rugby Club
The Loerie Rugby Club is an association of persons formed and established in South
Africa. On 1 January 2023 the Loerie Rugby Club was awarded R240 000 by its
Provincial Union (being a non-profit company carrying on a sporting activity under a
code of sport administered and controlled by a national federation as contemplated
in s 1 of the National Sport and Recreational Act 110 of 1988).
Tshakuma Dzamba
Tshakuma Dzamba operates a manufacturing business in his own name. He is the
owner of a death, disability or illness policy on his production supervisor. This policy
was entered into before 1 March 2012. On 31 August 2012 an addendum to the
effect that s 11(w) applies to premiums paid for it was added.
The insurer awarded Tshakuma Dzamba R100 000 as a result of his production
supervisor’s illness. He then used this R100 000 to pay a replacement production
supervisor while his production supervisor was on sick leave, caused by his illness.
The premiums paid on this insurance policy by Tshakuma Dzamba were deducted in
the determination of his taxable income.
Nhlangano Coco
Nhlangano Coco farms in the southern Free State and in Lesotho. He has two farms,
one in Ficksburg (in the Free State) and the other near Maseru (in Lesotho).
Four years ago he purchased a tractor for his Free State farm for R150 000. He used it
on this farm for three years. He then ‘transferred’ it to his Lesotho farm. At the time of
its ‘transfer’ to Lesotho, which was during the 2022 year of assessment, it had a Rnil
tax value.
During the 2023 year of assessment, a fire damaged Nhlangano Coco’s Lesotho
farm, destroying the tractor (amongst other assets). His insurer awarded him R100 000
in full settlement of the loss of this tractor.
YOU ARE REQUIRED TO state whether the amounts referred to in the above situations
are included in the gross incomes of the respective taxpayers.
Question 3.2
(15 minutes)
Lumka Temba, aged 60 years and a resident of the Republic, was dismissed in June
2022 by her employer. If the incident that gave rise to her dismissal were to become
public, it would potentially harm not only her, but also her employer. Therefore, to
keep the matter as quiet as possible, she was awarded R50 000 “hush money” by
her employer.
Lumka Temba’s employer also agreed to pay her a termination package
comprising the following amounts:
• For leave due to her, R24 000 under her employment contract.
• In lieu of three months’ notice, R63 000 under her employment contract.
• The surrender value of a deferred compensation award of R45 000. It has an
established policy under which these awards are conferred upon certain of its
employees when they retire or leave its employment. It was obliged to make this
payment to her under her employment contract.
47
Tax Workbook
To prevent Lumka Temba from becoming an employee of her former employer’s
competitors, she was also awarded by it R300 000 not to work in a similar industry for
a five-year period.
YOU ARE REQUIRED to determine Lumka Temba’s 2023 “income” as defined.
Question 3.3
(45 minutes)
Prior to the 2023 year of assessment, Dr Mohale, a general practitioner, practised on
his own for 30 years. During the last 20 years, he conducted his practice from his
home.
Dr Mohale’s home was a double-storey house. His practice was situated on the
lower floor and he lived upstairs (with his wife).
With a view to Dr Mohale’s retirement (in five years’ time), he admitted two partners,
Dr Lekota and Dr Shitola, into his practice in the 2023 year of assessment. The
partners share profits and losses in the following ratio:
• Dr Mohale 40%,
• Dr Lekota 30%; and
• Dr Shitola 30%.
The partnership practises under the name “Drs Mohale, Lekota & Shitola, General
Practitioners”.
To accommodate the partnership practice, Dr Mohale and his wife moved out of
the upstairs floor of their home. It was then altered into consulting rooms.
Prior to the alterations commencing, a five-year lease agreement was entered into
between Dr Mohale and the partnership. The following conditions were provided for
in this lease agreement:
• The partnership would pay Dr Mohale a lease premium of R150 000 on the signing
of the lease agreement (on 1 January 2023). (A lease premium was agreed upon
since he needed cash to fund his move to his new house.)
• The partnership was obliged to improve the property to the extent of R1 500 000
by converting the upstairs floor into consulting rooms. The actual cost of the
improvements was R1 575 000.
• The partnership would pay a monthly rental to Dr Mohale. The rental would
be R18 000 a month for the first two years of the lease agreement. After that an
escalation clause would come into operation, with the amount of the monthly
rental payable to be determined in accordance with an agreed-upon formula.
This rental would, however, be payable only from the date that the alterations
were completed. (They were completed on 30 April 2023 and the first rental (of
R18 000) was paid to him on 1 May 2023.)
When Dr Mohale was assessed for the 2023 year of assessment, the Commissioner
included
• the premium of R150 000 that he received,
• R1 500 000 for the “improvements”, and
• R36 000 for two months’ rental
in his gross income.
48
Chapter 3
Special inclusions
In the determination of Dr Mohale’s taxable income, no amounts were deducted
from these inclusions in his gross income.
Dr Mohale objected to this assessment on the grounds that
• only R90 000 (being 60% of the R150 000 lease premium) had been received by
(or accrued to him) for “gross income” purposes,
• no amount accrued to him for the “improvements” clause in the 2023 year of
assessment, and
• no rentals were received by him or accrued to him in the 2023 year of assessment.
Dr Mohale’s alternate ground was that if an amount for the “improvements” clause
was to be included in his gross income for the 2023 year of assessment, it was limited
to R900 000, being 60% of the agreed-upon value of R1 500 000.
Dr Mohale’s objection failed on all grounds. He then appealed against this decision.
The dossier revealed that in the partnership accounts for its two-month trading period
to 28 February 2023, (the partners had agreed upon a last day of February year-end),
no amounts were deducted under the general deduction formula for the lease
premium, the improvements and the rentals. But a “s 11( f )” allowance of R5 000
(R150 000 ÷ 5 years × 2 / 12) was deducted in the determination of the partnership’s
taxable income for its 2023 year of assessment.
Due to the legal issues involved, the appeal was not heard by the tax board but
was referred directly to the tax court.
Dr Mohale refused the offer to have this dispute resolved using the alternate dispute
resolution process. He also did not enter into a settlement agreement with the
Commissioner.
YOU ARE REQUIRED TO prepare an argument on behalf of the Commissioner to be
presented at the tax court.
49
Chapter 4
Exemptions
L Introduction
If an amount falls within the definition of “gross income” as set out in s 1(1) of the
Income Tax Act it is included in the taxpayer’s gross income. In certain situations, an
amount of gross income is then exempt from normal tax. These exempt from normal
tax amounts need to be deducted from a taxpayer’s gross income in the
determination of his “income”. Section 10 contains most of these exemptions from
normal tax. Other exemptions from normal tax are contained elsewhere in the
Income Tax Act. Receipts and accruals of certain taxpayers are exempt from
normal tax owing to the status of the taxpayer. Certain amounts, or portions of a
receipt or an accrual, are exempt from normal tax as a result of their nature. In
these instances, the nature of the amount, and not the status of the taxpayer, is
used in the determination of whether the amount is exempt from normal tax.
The examples and questions in this chapter illustrate and test the identification of
amounts that are exempt from normal tax and that have to be deducted from a
person’s gross income in the determination of his “income”.
Framework:
Gross income
Less: Receipts or accruals exempt from normal tax
Equals: Income
L Contents
The following table gives an indication of the time that is needed to complete the
example or question. The relevant sections or paragraphs that need to be referred
to before attempting the example or question are provided. The level of the
example or question gives an indication of its difficulty.
)
Example or Question
and time allocation
Topic and relevant sections
Level
Example 4.1 (10 minutes)
• Section 10(1)(nB) – fringe benefits
Basic
Example 4.2 (10 minutes)
• Section 10(1)(o)(ii) – employment
outside South Africa
Basic
continued
51
Tax Workbook
)
Example or Question
and time allocation
Topic and relevant sections
Level
Example 4.3
(10 minutes)
• Section 10(1)(o)(i) – employment outside
South Africa
Basic
Example 4.4
(15 minutes)
• Section 10(1)(g) – war pensions and
diseases
• Section 10(1)(h) – interest earned
by non-residents
• Section 10(1)(i) – Local interest
exemption
• Section 10(1)(zB) – training of employees
Intermediate
Example 4.5
(10 minutes)
• Section 10(1)(gC) – foreign pensions
• Section 10(1)(nA) – uniforms
Basic
Question 4.1
(20 minutes)
• Combined
Intermediate
Question 4.2
(10 minutes)
• Combined
Intermediate
Question 4.3
(25 minutes)
• Combined
Intermediate
L Examples
Example 4.1
(10 minutes)
Mukhetwa Rampudi and Mukhatshwa Rampudi moved from Richards Bay to
Pretoria during the 2023 year of assessment. They are both employed by Die Eerste
Nasionale Bank, and they were both transferred by it to Pretoria. From 1 April 2022,
Mukhetwa Rampudi worked at its Pretoria branch. Two months later, from 1 June
2022, Mukhatshwa Rampudi worked at its Pretoria branch.
Mukhetwa Rampudi lived at the Centurion Holiday Hotel (near Pretoria) from 1 April
2022 to 31 October 2022, and Mukhatshwa Rampudi lived with him at the same
hotel from 1 June 2022 to 31 October 2022.
On 1 November 2022, Mukhetwa Rampudi and Mukhatshwa Rampudi moved into
their own home in Pretoria.
Die Eerste Nasionale Bank paid all their hotel accommodation costs. Centurion
Holiday Hotel levied Mukhetwa Rampudi R35 625 a month for the months of April
2022 and May 2022 and then levied Mukhetwa and Mukhatshwa Rampudi R44 400
a month for the months of June 2022, July 2022, August 2022, September 2022 and
October 2022.
YOU ARE REQUIRED TO determine whether the above amounts are exempt from
normal tax.
Solution 4.1
Section 10(1)(nB)(iii) states that the following are exempt from normal tax
hiring residential accommodation in a hotel or elsewhere for the employee or members of
his household during the period ending 183 days after his transfer took effect or after he took
up his appointment, as the case may be, if such residential accommodation was occupied
temporarily pending the obtaining of permanent residential accommodation
52
Chapter 4
Exemptions
when incurred by an employee who has been transferred from one place of
employment to another. The exemption applies to the period ending 183 days after
his transfer.
In Mukhetwa Rampudi’s situation, the exemption from normal tax would be as follows:
Month
Number of days
Cost
R
April 2022
30
35 625
May 2022
31
35 625
June 2022
30
22 200 (50% of R44 400)
July 2022
31
22 200 (50% of R44 400)
August 2022
31
22 200 (50% of R44 400)
September 2022
30
22 200 (50% of R44 400)
183
160 050
Half of Mukhetwa Rampudi’s October 2022 accommodation total charge of R44 400,
amounting to R22 200, is not exempt from normal tax since the exemption period
ending 183 days after his transfer has been exceeded. This R22 200 will then be
included in his “income”.
The entire cost of accommodating Mukhatshwa Rampudi at the Centurion Holiday
Hotel is exempt from normal tax, since her total stay at the hotel was less than
183 days from the date of her transfer.
Example 4.2
(10 minutes)
Bradfield Oestervange and Grys Oestervanger are both employed by Southwest
Limited. They are employed at its head office situated in Johannesburg. It has a
branch in Windhoek, Namibia. During the 2023 year of assessment, both of them
were “seconded” by it to work at its Windhoek branch.
Bradfield Oestervanger worked at its Windhoek branch for the seven-month period
from 1 April 2022 to 31 October 2022, while Grys Oestervanger worked at its
Windhoek branch for the five-month period from 1 April 2022 to 31 August 2022.
Neither of them returned to (visited) South Africa during the period from 1 April 2022
to 31 August 2022. But, at the end of September 2022, Bradfield Oestervanger
returned to South Africa for a long weekend (three days) to visit Grys Oestervanger.
Bradfield Oestervanger earned remuneration of R720 000 from Southwest Limited for
the 2023 year of assessment. Grys Oestervanger earned remuneration of R540 000
from Southwest Limited for the 2023 year of assessment.
YOU ARE REQUIRED TO determine whether the above amounts are exempt from
normal tax.
Solution 4.2
Section 10(1)(o)(ii) provides that there will be exempt from normal tax certain
remuneration received by or accrued to a person during a year of assessment for
services rendered outside South Africa by him for or on behalf of an employer, if he
was outside South Africa
• for a period or periods exceeding 183 full days in aggregate during a 12-month
period, and
• for a continuous period exceeding 60 full days during that period of 12 months,
and those services were rendered during that period or those periods.
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Tax Workbook
Bradfield Oestervanger’s situation is as follows:
Month
Total number of days
April 2022
30
May 2022
31
June 2022
30
July 2022
31
August 2022
31
September 2022
27
October 2022
31
Total
211
Continuous
30
31
n/a
n/a
n/a
n/a
n/a
61
Since Bradfield Oestervanger was outside of South Africa for a period exceeding
183 full days and a continuous period exceeding 60 full days, he satisfies both
conditions. This means that of his R720 000 salary for the 2023 year of assessment,
R420 000 (7/12 of R720 000) is exempt from normal tax. This is less than the maximum
exempt amount under this exemption of R1 250 000 for a year of assessment.
Since Grys Oestervanger was not outside South Africa for 183 full days (she was
outside South Africa for only 153 full days), no portion of her salary is exempt from
normal tax.
Example 4.3
(10 minutes)
Mandla Makhathini and Mbuso Makhathini are both employed by Richards Bay
Shipping Limited. Both of them are crew members on a ship. They are not, however,
always allocated to duties on the same ship.
Richards Bay Shipping Limited is engaged in the international transportation of goods
for reward. All its ships are used for this purpose.
During the 2023 year of assessment, Mandla Makhathini was outside South Africa for
190 full days, while Mbuso Makhathini was outside South Africa for 180 full days.
Mandla Makhathini earned a remuneration of R432 000 from Richards Bay Shipping
Limited for the 2023 year of assessment, while Mbuso Makhathini earned a
remuneration of R288 000 for the 2023 year of assessment.
YOU ARE REQUIRED TO determine whether the above amounts earned by Mandla
Makhathini and Mbuso Makhathini are exempt from normal tax.
Solution 4.3
Section 10(1)(o)(i) exempts from normal tax
any form of remuneration . . . derived by any . . . crew member of a ship engaged . . . in the
international transportation for reward of passengers or goods . . . if such person was outside
the Republic for a period or periods exceeding 183 full days in aggregate during the year of
assessment.
Mandla Makhathini’s remuneration of R432 000 will be exempt from normal tax since
he was outside South Africa for 190 full days (exceeded 183 full days) during the 2023
year of assessment.
Mbuso Makhathini’s remuneration of R288 000 will, however, not be exempt from
normal tax since she was outside South Africa for only 180 full days (did not exceed
183 full days) during the 2023 year of assessment.
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Chapter 4
Exemptions
Example 4.4
(15 minutes)
Vuyo Jonga
Vuyo Jonga is a retired miner. Two pensions accrued to him during the 2023 year of
assessment:
• First, a pension of R24 000 a month for past services rendered.
• Secondly, a pension of R22 500 a month for having contracted pneumoconiosis,
a disease often contracted by a person employed in mining operations. (The
pension of R22 500 a month is payable under the law relating to the payment of
compensation for diseases contracted by persons employed in mining operations.)
Noma Gamanda
Noma Gamanda, aged 56 years, an ambassador to a foreign country, is stationed
in South Africa. She is not ordinarily resident in South Africa. She earned a salary of
R720 000 and emoluments of R180 000 for the 2023 year of assessment. She invested
her surplus cash in a South African financial institution and earned R30 000 local
interest during the 2023 year of assessment. Her investment with the financial
institution was not a “tax free investment” as defined in s 12T(1). This local interest
accrued to her on 28 February 2023.
Major Ndovhuya Ramudzuli
Major Ndovhuya Ramudzuli earns a salary of R189 000 a year from the South African
National Defence Force. He also enjoys a war pension of R90 000 a year.
Tsakani Mulalo
Tsakani Mulalo recently obtained a master’s degree in Agricultural Engineering from
a recognised university. As a result of obtaining this degree, he was awarded a
gratuity of R30 000 from Malamulela Limited, his employer.
YOU ARE REQUIRED TO state, in each of the above situations, what amounts are
exempt from normal tax.
Solution 4.4
Vuyo Jonga
The monthly pension of R24 000 that accrues to Vuyo Jonga for services rendered
must be included in his gross income since it is a payment for past services rendered.
No exemption from normal tax is available.
Vuyo Jonga’s pension for having contracted pneumoconiosis (a mining disease),
although included in his gross income, is then exempt from normal tax under
s 10(1)(g).
Noma Gamanda
Noma Gamanda, aged 55 years, is a non-resident. She earns a salary of R720 000
and emoluments of R180 000. Since she is in South Africa solely as an ambassador of
a foreign country and owing to the fact that she is not ordinarily resident in South
Africa, both her salary and emoluments are exempt from normal tax in South Africa
under s 10(1)(c)(iii).
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Tax Workbook
Noma Gamanda also earned local interest of R30 000 from a South African financial
institution. Under the provisions of s 9(2)(b), the source of this local interest is in South
Africa. This means that it is subject to normal tax in South Africa. Since she is ordinarily
resident outside South Africa, the full amount (R30 000) of it could have been
exempt from normal tax under s 10(1)(h). Yet this exemption from normal tax is
unavailable to her since she was not physically absent from South Africa for at least
183 days in the 12-month period preceding its date of receipt or accrual. The first
R23 800 of it is, however, exempt from normal tax under the provisions of s 10(1)(i).
Ndovhuya Ramudzuli
Ndovhuya Ramudzuli’s salary of R189 000 is included in his gross income. There is no
exemption from normal tax for a salary earned by a person employed by the South
African National Defence Force. Although the South African National Defence Force
is itself exempt from normal tax, s 10(3)(a) states that the exemptions from normal
tax provided by s 10(1) are not extended to payments made out of the receipts,
accruals, amounts or profits of these exempt from normal tax entities.
Ndovhuya Ramudzuli’s war pension, although included in his gross income, is exempt
from normal tax under s 10(1)(g).
Tsakani Mulalo
Even though the R30 000 awarded to Tsakani Mulalo for obtaining a degree is a
voluntary award, it is still for services rendered or to be rendered. There is a causal
relationship between his services and the award he received. Therefore the R30 000
forms part of his gross income under para (c) of the definition of “gross income”. It is
not a bursary. This means that the s 10(1)(q) exemption from normal tax is
unavailable to him.
Example 4.5
(10 minutes)
Patrys Nimmersat and Nellie Nimmersat
Patrys Nimmersat and Nellie Nimmersat are both employed by Polsmoor Alarms (Pty)
Ltd. He is a security officer, while she is employed in its control office.
Patrys Nimmersat is required to wear a navy-blue security officer’s uniform, including
a helmet and epaulettes (ornamental shoulder pieces on a coat), while at work.
Nellie Nimmersat is required to wear a navy-blue skirt with a plain white blouse while
at work. She is not required to wear a helmet. There are no epaulettes on her blouse,
nor are there markings on the pockets or elsewhere on her clothes.
Patrys Nimmersat was given three sets of uniforms by Polsmoor Alarms (Pty) Ltd
during the 2023 year of assessment. Each set cost it R9 900.
Nellie Nimmersat was given a clothing allowance of R9 000 a month by Polsmoor
Alarms (Pty) Ltd. She is required to purchase her work clothing out of this allowance.
Gans Grasmeerle and Fret Grasmeerle
Gans Grasmeerle and Fret Grasmeerle emigrated from Germany to South Africa
during the 2022 year of assessment. They are both now residents of the Republic.
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Chapter 4
Exemptions
Gans Grasmeerle enjoys a pension equivalent to R300 000 a year from his former
employer. He worked for it for a total of 30 years. Of the 30 years that he worked for
it, he worked in South Africa (at its South African branch) for five years. Four of these
five years of working in South Africa were in the last 10 years that he was employed
by it.
Fret Grasmeerle enjoys a pension equivalent to R60 000 a year from the German
social security system.
Prior to moving to South Africa, neither Gans Grasmeerle nor Fret Grasmeerle was
ordinarily resident in South Africa.
YOU ARE REQUIRED TO state, in each of the above situations, what amounts are
exempt from normal tax.
Solution 4.5
Patrys Nimmersat and Nellie Nimmersat
Section 10(1)(nA) exempts from normal tax
where an employee is as a condition of his employment required while on duty to wear a
special uniform which is clearly distinguishable from ordinary clothing, the value of any such
uniform given to the employee by his employer, or so much of any allowance made by the
employer to the employee in lieu of any such uniform as is reasonable.
Patrys Nimmersat’s uniform is clearly distinguishable from ordinary clothing, and, since
it is a condition of his employment that he wear it while on duty, the R29 900 value of
the sets of uniforms (three uniforms at R9 900 each) given to him by his employer is
exempt from normal tax.
Nellie Nimmersat’s uniform is not clearly distinguishable from ordinary clothing. The
R9 000 a month clothing allowance she enjoys from her employer will therefore not
be exempt from normal tax.
Gans Grasmeerle and Fret Grasmeerle
Section 10(1)(gC)(ii) provides that a lump sum, pension or annuity received by or
accrued to a resident from a source outside South Africa as consideration for past
employment outside South Africa is exempt from normal tax.
Gans Grasmeerle worked in South Africa (at his employer’s South African branch) for
five years. Four of these five years of working in South Africa were in the last 10 years
that he was employed by it.
The provisions of s 9(2)(i) apply to the pension enjoyed by Gans Grasmeerle. Under
this provision, R250 000 (25/30 of R300 000) of his pension is not from a South African
source. It is this R250 000 that is then exempt from normal tax under s 10(1)(gC)(ii)
(see above).
Section 10(1)(gC)(i) provides that an amount received by or accrued to a resident
under the social security system of another country is exempt from normal tax. Since
the pension of R60 000 enjoyed by Fret Grasmeerle accrues from the German social
security system, the entire R60 000 is exempt from normal tax in South Africa.
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Tax Workbook
L Questions
Question 4.1
(20 minutes)
Hester Hamerkop, aged 61 years, emigrated from South Africa six years ago, a few
months after her husband died. She is not a resident of the Republic. She invested
her blocked funds in
• an interest-bearing security,
• local dividend-yielding shares, and
• a rent-producing property.
In the 2023 year of assessment, Hester Hamerkop expects to earn the following
amounts from these investments:
R
Local interest
90 000
Local dividends
30 000
Local net rentals
180 000
The local interest will accrue to Hester Hamerkop on 28 February 2023. The local
interest-bearing security is not a “tax free investment” as defined in s 12T(1).
Hester Hamerkop visited friends in South Africa from 1 January 2022 to 30 April 2022
(a total of 120 days, of which 61 days are in the 2023 year of assessment). She is
planning to visit South Africa again to attend a wedding. It will take place in
December 2022.
An airline is offering a discount flight on a four-month return trip. Hester Hamerkop
can either take the flight that arrives in South Africa on
• 1 October 2022 and leaves South Africa on 31 January 2023, or
• 1 November 2022 and leaves South Africa on 28 February 2023.
YOU ARE REQUIRED TO inform Hester Hamerkop which flight she should take. Give
reasons for your decision, together with a detailed determination. Base your decision
solely on the after-tax return that she will earn from a South African source in the 2023
year of assessment.
Question 4.2
(10 minutes)
Fikile Mabuza is a nursing sister at the Pretoria Academic Hospital. She commenced
working for it on 1 June 2022.
Prior to that, Fikile Mabuza had been unemployed for six months. For the months of
March 2022, April 2022 and May 2022, she was awarded R6 000 a month, payable to
her under the Unemployment Insurance Act.
Pretoria Academic Hospital incurred the following expenses in appointing Fikile
Mabuza as an employee:
• R25 600 was paid to transport her and her household from her previous place of
residence to her new place of residence.
• R25 000 was awarded to her towards the cost she had incurred on selling her
previous place of residence.
• R50 000 was awarded to her towards the cost she had incurred when settling into
her new place of residence.
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Chapter 4
Exemptions
• R16 740 was paid to a residential hotel for one month’s temporary
accommodation for her before she moved into her new place of residence.
YOU ARE REQUIRED TO determine whether the amounts or benefits enjoyed by Fikile
Mabuza, as detailed above, are exempt from normal tax.
Question 4.3
(25 minutes)
Listed below are six situations when a taxpayer has enjoyed a benefit or advantage
that may be exempt from normal tax:
Quinton Qabe
Quinton Qabe is a cleaner employed by a local university. To improve his
communication with his fellow employees, he attended a course on how to speak
and write English. The course cost him R1 200. His employer reimbursed him for the
R1 200 he had incurred. He was successful in the examination held at the end of the
course. He was awarded a diploma at a ceremony given by the presenters of the
course.
Queenie Queque
Queenie Queque is also employed by a local university. She also desired to improve
her communication skills and therefore enrolled for the same course as Quinton
Qabe (see above). She was also reimbursed by her employer for the R1 200 she
incurred. But she was unsuccessful in the examination held at the end of the course.
She was not awarded a diploma. And she was not required to repay the R1 200 to
her employer.
Valda Vink
Valda Vink is a nursing sister employed by Kurrichane Hospital Ltd. Her remuneration
from it is R240 000 for the 2023 year of assessment. Her 14-year-old son is a pupil at
Kurrichane High School. It offers qualifications up to and including NQF level 4. Her
son was awarded a R18 000 bursary by Kurrichane Hospital Ltd during the 2023 year
of assessment.
Quincy Qubana
Quincy Qubana is employed by Kurrichane Hospital Ltd as its chief financial officer.
His remuneration from it is R660 000 for the 2023 year of assessment. His 17-year-old
unmarried daughter is a student at Kurrichane Technikon, which offers qualifications
including those of NQF level 7 and above. She was awarded a R50 000 bursary by
Kurrichane Hospital Ltd during the 2023 year of assessment.
Astrid Akkedis
During the 2022 year of assessment, Astrid Akkedis and her former husband were
divorced. She was awarded custody of their two children. Throughout the 2023 year
of assessment, she was awarded R1 800 alimony and R2 700 maintenance (R1 350
for each child) monthly from her former husband. He is employed by Kurrichane
Hospital Ltd as an admissions clerk. His remuneration from it is R378 000 for the 2023
year of assessment.
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Tax Workbook
Daniela Duif
Daniela Duif retired from her employment with Kurrichane Hospital Ltd at the age of
60 years on 31 March 2022. She was awarded a golden handshake of R90 000 by it
as compensation for the loss of her office. She used part of her golden handshake
award to purchase shares in a local company. An interim local dividend of R2 000
from this shareholding accrued to her on 15 September 2022, and a final local
dividend of R4 500 accrued to her on 15 February 2023.
YOU ARE REQUIRED TO determine whether the amounts or benefits detailed above
are exempt from normal tax.
60
Chapter 5
The general deduction formula
L Introduction
The examples and questions in this chapter illustrate and test the provisions of the
so-called general deduction formula, contained in the Income Tax Act. It consist of
the
• opening words to s 11,
• s 11(a), being the so-called positive test,
• s 23( f ) and s 23(g), being the so-called negative tests, and
• the remaining s 23(a) to s 23(r).
Section 23H is also dealt with in this chapter.
To answer the examples and questions relating to the general deduction formula, it
is necessary to take all its components into account. They must all be present for an
expense incurred or loss suffered to be deductible in the determination of the
taxpayer’s taxable income.
For interest incurred, the relevant provision for its deduction in the determination of
the taxpayer’s taxable income is s 24J. With the exception of not being of a capital
nature, all its other requirements are identical to those of the general deduction
formula.
Framework
Key concepts of the general deduction formula are as follows:
• Carrying on a trade.
• Expenditure or losses.
• Actually incurred.
• During the year of assessment.
• In the production of the income.
• Not of a capital nature.
• Laid out or expended for the purposes of trade.
L Contents
The following table gives an indication of the time that is needed to complete the
example or question. The relevant sections or paragraphs that must be referred to
before attempting the example or question are provided. Its level gives an
indication of its difficulty.
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Tax Workbook
)
Example or Question
and time allocation
Topic and relevant sections
Level
• Section 1(1) – definition of “trade”.
• Section 11(a) – general deduction
formula positive test.
• Section 23(a) – maintenance of family.
• Section 23(b) – domestic or private
expenses.
• Section 23(d) – interest, taxes, duties or
levies.
• Section 23(g) – negative test.
• Section 23(h) – notional interest.
Intermediate
Example 5.2
(15 minutes)
• Section 1(1) – definition of “trade”.
• Section 1(1) – definition of “gross
income”.
• Section 11(a) – general deduction
formula positive test.
• Section 23(g) – general deduction
formula negative test.
• Practice Note 31.
Intermediate
Example 5.3
(15 minutes)
• Section 11(a) – general deduction
formula positive test.
• Section 23( f ) – expenses incurred in
producing exempt income.
• Section 23(g) – general deduction
formula negative test.
• Section 23H – prepaid expenses.
• Section 11A – pre-trade expenditure.
Intermediate
Example 5.4
(20 minutes)
• Section 11(a) – general deduction
formula positive test.
• Section 23(b) – domestic or private
expenses.
• Section 23(d) – interest, taxes, duties or
levies.
• Section 23(g) – general deduction
formula negative test.
• Section 23H – prepaid expenses.
Intermediate
Example 5.5
(20 minutes)
• Section 11(a) – general deduction
formula positive test.
• Section 23(c) – recoverable under an
insurance contract.
• Section 23(g) – general deduction
formula negative test.
Advanced
Example 5.6
(20 minutes)
• Section 11(a) – general deduction
formula positive test.
Advanced
Example 5.7
(20 minutes)
• Section 11(a) – general deduction
formula positive test.
• Section 11(cA) – restraint of trade.
• Section 23(k) – labour broker.
• Section 23(l) – restraint of trade.
• Section 23(m) – employment of office.
Advanced
Example 5.1
(25 minutes)
Intermediate
continued
62
Chapter 5
)
Example or Question
and time allocation
The general deduction formula
Topic and relevant sections
Level
Question 5.1
(30 minutes)
• Combined.
Advanced
Question 5.2
(45 minutes)
• Combined.
Advanced
Question 5.3
(30 minutes)
• Combined.
Advanced
L Examples
Example 5.1
(25 minutes)
Are the following 15 statements correct? Give brief reasons for your answers.
(1) The term “actually incurred” in relation to an amount that is deductible in the
determination of taxable income means an amount actually paid or an amount
for which there is a commitment to pay in the future.
(2) No tax, duty, levy or interest on the late payment of tax or on penalties may be
deducted in the determination of taxable income.
(3) Whether it is necessary to incur the expense will determine whether it is
deductible in the determination of taxable income under the general
deduction formula.
(4) Certain provisions for future expenditure or losses qualify for a deduction in the
determination of taxable income under s 11(a).
(5) One of the tests established by the courts to distinguish capital expenditure
from non-capital expenditure is whether the expenditure incurred fills a “hole”
in the taxpayer’s capital structure.
(6) In the determination of a taxpayer’s taxable income, “home study” expenses
incurred by him are deductible in the determination of his taxable income if he
conducts his business from his home or earns a commission.
(7) Capital expenditure is expenditure giving rise to an enduring benefit.
(8) When an act is performed in the production of the income, expenditure
attendant upon that act qualifies for a deduction in the determination of
taxable income under s 11(a).
(9) Only expenses incurred in South Africa are deductible in the determination of
a taxpayer’s taxable income.
(10) A domestic or private expense incurred by a taxpayer is not deductible in the
determination of his taxable income under the general deduction formula.
(11) The terms “business income” and “trade income” do not necessarily have the
same meaning.
(12) Expenses must be incurred in the production of the “gross income” for them to
be deductible in the determination of taxable income.
(13) If expenditure is excessive, no amount will be deductible in the determination
of the taxpayer’s taxable income under the general deduction formula.
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Tax Workbook
(14) Expenses not wholly and exclusively laid out by a taxpayer for purposes of his
trade do not qualify for deduction in the determination of his taxable income
under the general deduction formula.
(15) Notional interest may, in limited circumstances, be deducted in the
determination of a taxpayer’s taxable income.
Solution 5.1
(1) Incorrect. The term “actually incurred” means amounts paid and amounts for
which there is a liability to pay (Port Elizabeth Electric Tramway Co Ltd v CIR
1936 CPD 241, 8 SATC 13 and KBI v Nasionale Pers Bpk 1984 (4) SA 551 (C), 46
SATC 83). A further requirement is that there must be an unconditional legal
liability to pay the amount (Nasionale Pers Bpk v KBI 1986 (4) SA 549 (A), 48 SATC
55, CIR v Edgars Stores Ltd 1988 (3) SA 876 (A), 50 SATC 81 and CIR v Golden
Dumps (Pty) Ltd 1933 (4) SA 110 (A), 55 SATC 198). The word “commitment”
conveys a less stringent requirement.
(2) Incorrect. Section 23(d) prohibits the deduction of a tax imposed under the
Income Tax Act or interest or penalty imposed under any other Act administered
by the Commissioner. It does not prohibit the deduction of value-added tax, the
skills development levy and unemployment insurance fund contributions in the
determination of taxable income to the extent that they are part of a deductible
expense in the determination of taxable income and are irrecoverable.
(3) Incorrect. The requirement is whether the expenditure was actually incurred in
the production of a taxpayer’s income. The necessity of an expense is
irrelevant. Whether the taxpayer conducts his business extravagantly is also
irrelevant (Port Elizabeth Electric Tramway Co Ltd v CIR 1936 CPD 241, 8 SATC 13
and Joffe & Co (Pty) Ltd v CIR 1946 AD 157, 13 SATC 354).
(4) Incorrect. A provision for a future expenditure or loss is not an expense actually
incurred or a loss actually suffered, nor is it an expense “actually incurred”. An
expense that has actually been incurred, but not yet paid must be
distinguished from a provision for possible future expenditure or losses. The
deduction in the determination of taxable income of provisions is also
prohibited under s 23(e). The Income Tax Act does, however, contain special
provisions (for example, s 11( j), the so-called doubtful debt allowance, and
s 24C for allowances for future expenditure) to be deductible in the
determination of taxable income.
(5) Incorrect. The test of “filling a hole in the taxpayer’s capital structure” relates to
distinguishing capital from non-capital receipts and accruals. A similar test for
capital expenditure is that it should not give rise to an “enduring” benefit.
(6) Incorrect. Expenditure incurred on a taxpayer’s private dwelling or premises is
deductible in the determination of taxable income only for that part of the
premises occupied for the purposes of trade, provided it is
• used regularly and exclusively for that purpose, and
• specifically equipped for that purpose
(s 23(b)).
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Chapter 5
The general deduction formula
While employment constitutes a trade as defined, s 23(b) restricts the
deduction in the determination of taxable income for persons in employment
or occupying an office, as follows:
• His income must be derived mainly from commissions or other variable
amounts based on his work performance and his duties must be performed
predominantly elsewhere other than in an office provided by his employer,
or
• his duties must be performed predominantly in that part of his private
dwelling used for trade purposes.
(7) Correct. Whether expenditure gives rise to an enduring benefit is only one of
the tests applied in the determination of whether an expense incurred or loss
suffered is of a capital nature. (Refer to the answer to (5) above.)
(8) Incorrect. The test from Port Elizabeth Electric Tramway (Pty) Ltd v CIR (1936
CPD 241, 8 SATC 13) is as follows:
The purpose of the act entailing the expenditure must be looked into. If it is
performed for the purpose of earning income, then the expenditure attendant upon
it is deductible . . . The other question is, what attendant expenses can be deducted?
How closely must they be linked to the business operation . . . [A]ll expenses attached
to the performance of a business operation bona fide performed for the purpose of
earning income are deductible whether such expenses are necessary for its
performance or attached to it by chance or are bona fide incurred for the more
efficient performance of such operation, provided they are so closely connected to
it that they may be regarded as part of the cost of performing it.
This means that the expense must be incurred bona fide and must be closely
connected to the activities of the business for it to be deductible in the
determination of the taxpayer’s taxable income.
(9) Incorrect. To be deductible in the determination of a taxpayer’s taxable
income, an expense must, amongst other things, be incurred in the production
of the income. It does not matter where (inside or outside South Africa) the
expenditure is actually incurred – expenses that comply with all the
requirements of the general deduction formula irrespective of where they are
incurred will be deductible in the determination of taxable income.
(10) Incorrect. The deduction of a domestic or private expense in the determination
of a taxpayer’s taxable income is prohibited by s 23(a). It is, therefore, not
deductible in the determination of taxable income under the general
deduction formula, except for the use of a private dwelling for trade purposes
(s 23(b)).
(11) Correct. The definition of a “trade” is wide and includes
every profession, trade, business, employment, calling, occupation or venture,
including the letting of property and the use of or the grant of permission to use any
patent . . . or any design . . . or any trade mark . . . or any copyright . . . or any other
property which is of a similar nature.
A “business” is included in the above definition of a “trade”. But a “trade” is far
wider than a “business”, since it includes many other things, for example,
employment, the letting of property and the earning of royalties from intellectual
property.
(12) Incorrect. Section 11(a) provides for a deduction in the determination of a
taxpayer’s taxable income of expenses not of a capital nature that are
actually incurred in the production of the taxpayer’s “income” (as defined).
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Tax Workbook
Income, by definition, is the amount remaining after amounts exempt from
normal tax have been deducted from “gross income”. Expenses incurred in the
production of amounts that are exempt from normal tax therefore do not
qualify for a deduction in the determination of taxable income. Their
deduction in the determination of taxable income is also prohibited by the
provisions of s 23( f ).
(13) Incorrect. “Excessive” expenditure is not deductible in the determination of
taxable income on the grounds that it is inspired by some motive other than the
production of the income or is not expended for the purposes of trade
(Tobacco Father v COT 1951 SR, 17 SATC 395). In most instances, expenditure
held to be excessive is remuneration (to directors or members of close
corporations or to family members), interest and payments for management
services by a company in a group of companies. It is the Commissioner’s
practice to disallow the excessive portion of the expenditure, but to include in
the gross income of the recipient the full amount of the receipt or accrual
(s 23(g)). This means that only the “market-related” or a “reasonable” portion of
the excessive expenditure will be deductible in the determination of taxable
income, but the recipient includes in his gross income the full amount of the
receipt or accrual.
(14) Incorrect. Section 23(g) allows the deduction of expenditure in the
determination of the taxpayer’s taxable income to the extent that moneys
have been expended for the purposes of trade, thereby sanctioning
apportionment of a dual-purpose expense into a deductible portion and a
non-deductible portion in the determination of taxable income. The opening
words of s 11 also sanction the apportionment of a dual-purpose expense.
(15) Incorrect. Section 23(h) prohibits the deduction in the determination of taxable
income of interest that might have been made on capital employed in trade.
Example 5.2
(15 minutes)
Jake Naidoo
Jake Naidoo owns a house in America that he lets for the equivalent of R40 000 a
month. Since he lives in South Africa, he appointed an agent in America to collect
his rental from this house and to deposit it into an American bank account on his
behalf. He pays this agent the equivalent of R3 000 a month.
Jillie Bean
Jillie Bean, a recently-divorced mother of two young children, needs to work. She
obtained employment as a typist. From 1 September 2022 she paid fees of R1 500 a
month to the Baby Bee Crèche for its taking care of her children while she is at work.
Sono Motsamai
Sono Motsamai does part-time work in the evenings, capturing the assignment results
of students from a local university on a computer. On 1 May 2022 she purchased a
computer for R13 500.
Steve Sport
Steve Sport is a tennis coach. During the 2023 year of assessment he attended a
course for tennis coaches so as to be up to date with the latest coaching methods
and techniques. To attend this course he incurred R11 200.
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Chantel Cronjé
Chantel Cronjé successfully passed a swimming instructor’s course on 25 February
2023. She can now “officially” give swimming lessons. From 25 to 28 February 2023,
she advertised her services. Her first lesson was, however, given only on 3 March
2023. She incurred R15 800 on the swimming instructor’s course and R4 250 on her
advertisements.
Petunia Madika
Petunia Madika, who is not a moneylender, borrowed R30 000 at an interest rate of
10%. She lent it to her aunt at an interest rate of 7%. During the 2023 year of
assessment, she incurred interest of R3 000 on the amount she had borrowed. Local
interest of R2 100 accrued to her from her aunt.
YOU ARE REQUIRED TO determine, in each of the above situations, whether the
expense incurred is deductible under the general deduction formula in the
determination of the relevant taxpayer’s taxable income for the 2023 year of
assessment.
Solution 5.2
Jake Naidoo
The letting of property is included in the definition of “trade” in s 1(1) of the Income
Tax Act. The equivalent of R3 000 a month incurred by Jake Naidoo is deductible in
the determination of his taxable income under s 11(a) since it satisfies the “in the
production of the income” requirement. His gross rental is included in his gross
income under the opening words of the definition of “gross income”. The expense
satisfies all the necessary requirements of the general deduction formula and is
therefore deductible in the determination of his taxable income.
Jillie Bean
Although the fees of R1 500 a month paid by Jillie Bean to the Baby Bee Crèche for
the care of her two young children is likely to satisfy all the requirements of s 11(a),
the deduction of domestic expenses in the determination of taxable income is
prohibited by s 23(b). Her expense is of a domestic nature and is therefore not
deductible in the determination of her taxable income.
Sono Motsamai
Sono Motsamai is conducting a trade. The expenditure of R13 500 on the purchase
of her computer was actually incurred by her. It was purchased by her to enable
her to earn income. This R13 500 expenditure is, however, of a capital nature since it
forms part of her income-producing structure. Its cost is, therefore, not deductible in
the determination of her taxable income under s 11(a).
Steve Sport
Steve Sport conducts a trade. He actually incurred R11 200 when paying for his
coaching course. The purpose of his expense was to earn his income. The expense is
not of a capital nature since coaching methods are continually changing. No
enduring benefit will, therefore, be derived by him from this expense. The R11 200
expense is therefore deductible under s 11(a) in the determination of his taxable
income.
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Tax Workbook
Chantel Cronjé
The R15 800 paid by Chantel Cronjé for the swimming instructor’s course does not
qualify for deduction in the determination of her taxable income since it is an
expense of a capital nature. She created an income-producing asset when
incurring this expense.
The R4 250 paid by Chantel Cronjé for the advertisements qualifies for a deduction
in the determination of her taxable income since it complies with all the
requirements of the general deduction formula, and specifically with the “in the
production of the income” requirement. An expense is not deductible in the
determination of taxable income only when income is produced. All that is
necessary is that the expenditure be incurred for the purpose of producing income
(Sub-Nigel Ltd v CIR 1948 (4) SA 580 (A), 15 SATC 381). Her trade commenced on
26 February 2023, or even earlier, when she started advertising her services, and not
when she started earning income.
Petunia Madika
The local interest of R2 100 accruing to Petunia Madika would be included in her
“gross income”. She is able to enjoy the s 10(1)(i) so-called basic local interest
exemption from normal tax for not otherwise exempt local interest against this local
interest.
If Petunia Madika had already fully enjoyed this exemption from normal tax during
the 2023 year of assessment against other local interest received or accrued, her
“income” arising out of the interest on the loan to her aunt would be R2 100. (A
more equitable basis of enjoying the normal tax local interest exemption against her
gross interest earned would be on a pro rata or similar basis.)
The interest incurred on the loan Petunia Madika raised to make the loan to her
aunt is not deductible in the determination of her taxable income since she does
not conduct the trade of a moneylender (the earning of interest on an investment is
not included in the definition of a “trade” in s 1(1)). She is therefore unable to
deduct the interest expense of R3 000 that she incurred in the determination of her
taxable income under s 11(a) or under any other provision, for example, s 24J.
Under Practice Note 31, the Commissioner will allow a taxpayer in this situation to
deduct interest incurred in the determination of his taxable income up to the amount
of interest accrued that is “income” arising from the loan on which the interest was
incurred. In Petunia Madika’s situation, R2 100 will be deductible in the
determination of her taxable income, but only if the local interest she earned was
not exempt from normal tax.
Example 5.3
(15 minutes)
Mabje-a-goro (Pty) Ltd entered into the following transactions during its 2023 year of
assessment (ended on 28 February 2023):
• On 31 January 2023, it paid R76 500 for electricity for the six-month period from
1 February 2023 to 31 July 2023 relating to the property it occupies for the
purposes of its trade.
• On 1 October 2022, one of its employees lost his finger while operating a machine
in its factory. In January 2023, a court ordered that it had to award this employee
compensation of R100 000. It awarded this compensation to him in April 2023.
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• On 15 November 2022, it entered into a contract to purchase a vacant plot of
land adjoining its factory, to be used as a parking bay for its customers. The cost of
the vacant land was R700 000. It was settled in cash on 15 February 2023.
• It borrowed money on 1 March 2022 to purchase shares in a South African listed
company to be held as an investment. Interest of R5 000 is payable annually in
arrears on this loan.
• On 1 December 2022, it had issued 70 000 debentures of R100 each, bearing
interest at 10% a year to finance the purchase of the vacant plot of land (see
above). A new factory will be erected on it. Interest of R70 000 is payable
annually, in arrears, to the debenture holders.
• On 1 September 2022, it acquired the exclusive right, for a period of five years, to
sell a certain product in the area in which its business is situated. The cost of this
exclusive right was R150 000, payable in five equal annual instalments of R30 000
each.
YOU ARE REQUIRED TO discuss the deduction under the general deduction formula,
or for interest incurred under s 24J, of the amounts incurred by Mabje-a-goro (Pty)
Ltd in the above transactions in the determination of its taxable income. Give
reasons for your answers. Refer to relevant case law.
Solution 5.3
Electricity account
Of the electricity account of R76 500 paid by Mabje-a-goro (Pty) Ltd, R12 750 (1/6 of
R76 500) relates to February 2023, falling within its 2023 year of assessment. The
balance of R63 750 (5/6 of R76 500) relates to the following five months – thus to its
2024 year of assessment – and is therefore a prepaid expense. To be deductible in
the determination of taxable income under the general deduction formula, an
amount must be “actually incurred” during the year of assessment in question, in the
production of the income, it must not be of a capital nature, and must be laid out
for purposes of trade.
The R76 500 satisfies all the above requirements of this formula. But it is still necessary
to determine whether it has been “actually incurred”.
In Port Elizabeth Electric Tramway (Pty) Ltd v CIR (1936 CPD 241, 8 SATC 13), it was
held by the Cape Provincial Division of the Supreme Court (now the High Court) that
the term “actually incurred” means not only amounts actually paid, but includes
amounts for which the taxpayer is legally liable. It has also been held by the
Transvaal Provincial Division that an amount has been “actually incurred” when the
taxpayer has an unconditional legal liability to pay it (CIR v Edgars Stores Ltd (1988
(3) SA 876 (T), 50 SATC 81)).
Mabje-a-goro (Pty) Ltd has actually paid the R76 500 and has an on-going legal
liability to pay that amount. The only condition is that it continues to occupy the
premises for its trade purpose. The entire R76 500 has been “actually incurred”, even
though the total amount might not have been due and payable on the date of
payment, and it is, therefore, deductible in full in the determination of its 2023
taxable income.
When applicable, s 23H may delay the deduction in the determination of taxable
income of certain prepaid expenses until the following year of assessment. There
are, amongst other things, two situations when s 23H will be inapplicable
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(that is the prepaid portion can be deducted in the determination of taxable
income claimed in full in the year of assessment that it was paid):
• The first is when the total (in this instance unknown) of the taxpayer’s prepaid
expenses does not exceed R100 000.
• The second is when the services are rendered to the taxpayer within six months of
the end of the year of assessment of incurral (which applies in this situation, since
its prepaid amount is for only five months).
The provisions of s 23H therefore do not apply to the electricity account paid by
Mabje-a-goro (Pty) Ltd on 31 January 2023. The R76 500 is therefore deductible in full
in the determination of its taxable income for its 2023 year of assessment.
Compensation paid
In addition to satisfying the other requirements of the general deduction formula, for
an expense to be deductible in the determination of taxable income, it must be
incurred in the production of the income.
In Port Elizabeth Electric Tramway (Pty) Ltd v CIR (1936 CPD 241, 8 SATC 13), it was
held by the Cape Provincial Division that this requirement refers not only to expenses
that actually produced income or that were incurred for the purpose of producing
income, but also encompasses expenses so closely connected with the taxpayer’s
income-earning operations that they could be considered to be part of those
operations. In Port Elizabeth Electric Tramway (Pty) Ltd v CIR a tram-driver died
following an accident after he had lost control of the tram and then crashed. The
Cape Provincial Division held that the type of business carried on by the taxpayer
involved risks of this nature. This meant that payment of the compensation was
sufficiently closely connected with the production of its income. It therefore enjoyed
a deduction in the determination of its taxable income.
For the compensation paid by Mabje-a-goro (Pty) Ltd, the risk of injury to its
employees operating machines in its factory is equally closely connected to the
production of its income to render the amount deductible in the determination of its
taxable income. In other words, the expense is an “inevitable concomitant” of its
type of business (Joffe & Co (Pty) Ltd v CIR (1946 AD 157, 13 SATC 354)).
Although the expense was only paid in Mabje-a-goro (Pty) Ltd’s 2024 year of
assessment, its liability had been fixed by the court. An unconditional liability had
been incurred in January 2023 and, therefore, the R100 000 is deductible in the
determination of its taxable income for its 2023 year of assessment.
Vacant plot of land
The R700 000 incurred by Mabje-a-goro (Pty) Ltd to purchase the vacant plot of land
is an expense of a capital nature, since the land forms part of its income-earning
structure and is not connected to its income-earning operations (New State Areas
Ltd v CIR (1946 AD 610, 14 SATC 155)). The R700 000 was incurred as part of the fixed
capital of its business rather than its floating capital. The expense is, therefore, not
deductible in the determination of its taxable income.
Loan to purchase listed shares
The loan that Mabje-a-goro (Pty) Ltd entered into was to purchase listed shares that
would produce local dividends. To be deductible in the determination of its taxable
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Chapter 5
The general deduction formula
income, the expense must be incurred to produce “income” as defined in the Act –
that is, gross income less amounts that are exempt from normal tax. Since local
dividends are exempt from normal tax (s 10(1)(k)(i)), the interest on the loan is not
incurred in the production of its income and is, therefore, not deductible in the
determination of its taxable income. Section 23( f ) reinforces this by prohibiting the
deduction of expenses that do not produce “income” as defined.
Debenture interest
The debentures were issued by Mabje-a-goro (Pty) Ltd to finance the purchase of a
vacant plot of land on which a factory will be built. Since the interest on the
debentures is incurred in the purchase of an asset, the vacant plot of land, which
will not be used for trade purposes until the new factory has been completed and
brought into use, the expense is not deductible in the determination of its taxable
income for its 2023 year of assessment. Only when the asset is brought into use by
Mabje-a-goro (Pty) Ltd for trade purposes, will the interest be deductible in the
determination of its taxable income under the provisions of s 24J.
The pre-trade portion of the interest incurred by Mabje-a-goro (Pty) Ltd may,
however, still be deductible in the determination of its 2023 taxable income under
the provisions of s 11A, read with Interpretation Note 51.
Exclusive right to sell
The R150 000 incurred by Mabje-a-goro (Pty) Ltd for the exclusive right to sell
the product in its trading area for a period of five years relates to the establishment
of an income-producing asset (as opposed to the cost of performing its
income-earning operations). The expense is of a capital nature (New State Areas
Ltd v CIR (1946 AD 610, 14 SATC 155)). The fact that the expense is being settled in
instalments does not change its capital nature. The expense is not deductible in the
determination of its taxable income.
Example 5.4
(20 minutes)
Jill Chef
Jill Chef, a caterer, works from her home. She uses her home kitchen that occupies
10% of the floor area of her home, to prepare the food for her catering business.
Jill Chef has built an additional storeroom to store only the ingredients used for her
trading activities. The interest incurred on funds borrowed by her to build this
storeroom is R4 500 for the 2023 year of assessment. During the 2023 year of
assessment she repaid R5 000 on the capital outstanding on these borrowed funds.
Two-thirds of Jill Chef’s account at the local supermarket relates to her catering
business. This account is always settled at the end of the month following the month
when the purchases were made. Her account is R22 400 a month.
The interest portion of Jill Chef’s mortgage loan repayments on the mortgage bond
on her home is R7 200 for the 2023 year of assessment.
Jill Chef pays R13 600 a month to a full-time assistant in her catering business. She
also paid her teenage son R6 000 for the 2023 year of assessment for assisting as a
waiter at some functions. Had she hired a waiter, she would have had to pay him
R8 000.
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Tax Workbook
Sam Speedy
Sam Speedy operates a business making deliveries between Pretoria and
Johannesburg. A driver of one of his delivery vehicles committed a speeding traffic
offence and, on 1 May 2022, Sam Speedy paid the resulting fine of R1 000.
Sam Speedy also neglected to submit his skills development levy return. He had to
pay a penalty of R200 on 31 October 2022.
Jan Motaung
Jan Motaung, a sole trader, paid an insurance premium of R12 500 on 1 July 2022 to
insure his shop against fire damage for the 12-month period ending on 30 June 2023.
Jan Motaung also pays a monthly premium of R4 800 for insurance against the loss
of his trading stock and a monthly premium of R1 350 for a life insurance policy on
his own life.
Mary Msimang
Mary Msimang manufactures leather shoes. Because of cash-flow problems, she was
unable to pay the R80 000 due for her latest purchase of leather (a raw material).
She offered this creditor one of her delivery vehicles with a market value of R84 000
in settlement of the R80 000 she owed to it. Her offer was accepted by it.
Petrus Mofokeng
Petrus Mofokeng entered into an agreement on 1 December 2022 for the lease of a
property from which to conduct his ceramics business. On 1 December 2022, he paid
R36 000 to the lessor for 12 months’ rental in advance. The lessor has the option to
cancel the lease and repay the unused portion of the rental.
Albatross Ltd
Albatross Ltd paid R8 400 to transport a machine to be used in a manufacturing
process from the premises of its supplier to its factory.
Maredi Ltd
Maredi Ltd paid R100 000 for audit and secretarial fees for its 2023 year of assessment.
YOU ARE REQUIRED TO discuss the deduction in the determination of the relevant
taxpayer’s taxable income of the above amounts under the general deduction
formula, giving brief reasons for your answers.
Solution 5.4
Jill Chef
Jill Chef may deduct the following amounts in the determination of her taxable
income:
• Two-thirds of her total grocery account for expenses incurred during the 2023 year
of assessment are deductible from her income under s 11(a), read with s 23(g).
They were actually incurred. They are deductible from her income in the year of
assessment when they were incurred, not in the year of assessment of payment.
They were incurred in the production of her income. They are also not of a capital
nature. The portion of them relating to the carrying on of her trade is, therefore,
deductible in the determination of her taxable income.
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• She may not deduct from her income, under s 23(b), that portion of the interest
incurred on her mortgage bond relating to the floor area occupied by her
kitchen since, although it was occupied for the purposes of her trade, the kitchen
was not used exclusively for that purpose.
• The interest of R4 500 that she incurred on the loan used to fund the building of
her storeroom is deductible in the determination of her taxable income under the
provisions of s 24J. This deduction is not prohibited by s 23(b), since the storeroom
is used exclusively for her trade. The R5 000 capital repayments made by her are
not deductible in the determination of her taxable income since they are of a
capital nature. They are linked to her income-producing structure and not her
income-producing operations.
• The R13 600 a month paid to her catering assistant is deductible in the
determination of her taxable income since it is incurred in the production of her
income.
• The R6 000 paid to her teenage son during the 2023 year of assessment for his
assistance as a waiter at certain income-earning functions is also deductible in
the determination of her taxable income since it satisfies all the requirements of
the general deduction formula, and it is not excessive. (She would have had to
pay a non-related waiter R8 000 for the same services.) Had the amount been
excessive, s 23(g) and the opening words of s 11 would have prohibited the
deduction from her income of the excessive portion on the grounds that it had
not been laid out for the purposes of her trade but for some other motive, for
example, generosity or family sentiment. The R6 000 will be included in her son’s
gross income.
Sam Speedy
Sam Speedy would have to prove that the speeding traffic offence for which the
fine was paid was closely connected with his income-producing operations to qualify
for a deduction in the determination of his taxable income under the general
deduction formula. But, in any event, under s 23(o), no deduction in the
determination of his taxable income is permitted for fines, bribes or penalties arising
from unlawful activities. He may not deduct the fine of R1 000 that he incurred in the
determination of his taxable income.
The penalty of R200 paid by Sam Speedy for neglecting to submit his skills
development levy return on time is not deductible in the determination of his
taxable income. Section 23(d) specifically prohibits, amongst other things, the
deduction of interest or penalties imposed under any Act administered by the
Commissioner. The Skills Development Levies Act is an Act administered by the
Commissioner.
Jan Motaung
Jan Motaung may deduct in the determination of his taxable income, both the
• annual premium of R12 500 for the insurance of his factory against fire, and
• monthly premium of R4 800 for insurance against the loss of his trading stock,
under the provisions of the general deduction formula, even though the premium
for the insurance of his factory relates to a capital asset (Sub-Nigel Ltd v CIR (1948
(4) SA 580 (A), 15 SATC 381)). Although the premium of R12 500 relates to a period
extending beyond the end of the 2023 year of assessment, the expenditure was
actually incurred during the 2023 year of assessment and is deductible in full in the
2023 year of assessment.
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Tax Workbook
In Jan Motaung’s situation, the services are rendered to him within six months of the
end of the 2023 year of assessment, therefore, the provisions of s 23H do not apply to
this prepaid expense.
The premium of R1 350 a month paid by Jan Motaung on a life insurance policy on
his own life is a private or domestic expense and its deduction in the determination
of his taxable income is specifically prohibited by s 23(b).
Mary Msimang
Expenses and losses include not only amounts payable in cash, but also liabilities
that may be settled in kind, as long as the consideration given has a determinable
monetary value.
The cash equivalent of the value of the asset used by Mary Msimang to settle a
liability represents the expense that has been incurred. Under the provisions of the
general deduction formula, she is able to deduct R84 000 in the determination of
her taxable income for the purchase price of the leather (one of her raw materials,
being her trading stock).
Petrus Mofokeng
The rental of R36 000 incurred by Petrus Mofokeng is an expense “actually incurred”.
It is not of a capital nature since rental is a payment for the use of an asset (the
tenant does not acquire ownership of it but merely the right to use it). The entire
R36 000 “actually incurred” by him is, therefore, deductible in the determination of
his taxable income under the provisions of the general deduction formula. The total
of all his prepaid expenses for a year of assessment must not exceed R100 000. If the
total of all his prepaid expenses exceeds R100 000 for a year of assessment, then the
provisions of s 23H will apply. Then only the portion of the expense that relates to the
2023 year of assessment will be deductible in the determination of his 2023 taxable
income.
Albatross Ltd
Expenditure incurred by Albatross Ltd in transporting its capital asset is closely
connected to the income-producing structure of its business and is, therefore, of a
capital nature. It follows then that it is not deductible under the general deduction
formula in the determination of its taxable income.
Maredi Ltd
The audit and secretarial fees “actually incurred” by Maredi Ltd are not incurred in
the production of its income. But it is the practice of the Commissioner to allow the
deduction in the determination of taxable income of these expenses on the grounds
that they are repetitive in nature, even though they are not incurred in the
production of the income. In C:SARS v Mobile Telephone Networks Holdings (Pty) Ltd
(Supreme Court of Appeal – 18 February and 7 March 2014, 76 SATC 205), a portion
of audit fees incurred, determined on a pro rata basis relating to the taxpayer’s relevant receipts and accruals, was held by the Supreme Court of Appeal to be
deductible in the determination of its taxable income.
Example 5.5
(20 minutes)
In the following situations, the deduction of an expense or loss under the general
deduction formula in the determination of the relevant taxpayer’s taxable income is
in question.
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Lesela Outfitters (Pty) Ltd
On 1 July 2022, Lesela Outfitters (Pty) Ltd renewed its lease agreement for premises
in a shopping centre in which it carries on its business. The agreement provided for
• a monthly “basic” rental of R20 000, and
• an annual “turnover” rental determined at 10% of its turnover in excess of
R2 400 000 during each 12-month period, commencing on 1 July of each year.
For Lesela Outfitters (Pty) Ltd's year of assessment ended 28 February 2023, it
deducted the following amounts in the determination of its net income:
• A “basic” rental of R160 000 (R20 000 a month for eight months).
• A provision for its “turnover” rental of R20 000 (10% of its R1 800 000 turnover for the
period, less its “basic” rental).
Energy CC
Energy CC manufactures gymnasium equipment. In December 2022 it sponsored a
national weightlifting championship with prize money of R150 000.
Energy CC's year of assessment ends on the last day of February.
Kgari Ltd
During Kgari Ltd's 2023 year of assessment, it incurred
• R250 000 on the cost of an ornamental statue erected in front of the main
entrance to its head office (the statue has improved its image), and
• interest of R5 000 on a loan raised to finance the cost of erecting this ornamental
statue.
Kgari Ltd's year of assessment ends on the last day of February.
Polokegong (Pty) Ltd
Polokegong (Pty) Ltd’s trading stock, valued at R250 000, was destroyed on
15 December 2022 in a fire in its warehouse. On 15 May 2023, its insurer awarded it
R150 000 for the loss of this trading stock.
Polokegong (Pty) Ltd’s year of assessment ends on the last day of February.
Lebone Ltd
Messrs Mokgorosi and Morena, respectively the managing director and production
director of Lebone Ltd, travelled to America in November 2022 for the purpose of
purchasing new machinery for its factory. They found that the machinery was
unsuitable. They then returned to South Africa without having made a purchase.
Lebone Ltd incurred R60 000 in this regard.
Lebone Ltd's year of assessment ends on the last day of February.
Mohumi Batho
After Mohumi Batho’s shop had been broken into on a number of occasions, he
purchased a watchdog. He paid R5 000 for it. He spent R800 a month on its food.
During the 2023 year of assessment he paid R3 000 in veterinary fees for it.
YOU ARE REQUIRED TO discuss the deduction of the above amounts in the
determination of the relevant taxpayer’s taxable income.
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Tax Workbook
Solution 5.5
Lesela Outfitters (Pty) Ltd
The rentals incurred by Lesela Outfitters (Pty) Ltd constitute non-capital trade
expenses closely connected to its income-producing activities. The problem to be
addressed is whether both its “basic” rental and its “turnover” rental constitute
expenses that are “actually incurred” in its 2023 year of assessment under s 11(a).
Lesela Outfitters (Pty) Ltd has an unconditional legal liability under its lease to pay its
“basic” rental.
Lesela Outfitters (Pty) Ltd’s liability to pay its “turnover” rental is conditional upon its
turnover for the 12-month period commencing on 1 July each year exceeding
R2 400 000. At 28 February 2023, its turnover had not yet exceeded this amount and
there is no certainty that it will do so. The premises may burn down, or it may cease
trading or be declared bankrupt. Its R20 000 “turnover” rental is, therefore,
conditional. An expense has not yet been actually incurred.
Had Lesela Outfitters (Pty) Ltd’s turnover already exceeded R2 400 000 by
28 February 2023, liability of the turnover rental would no longer be conditional for
that portion of its turnover in excess of R2 400 000.
Lesela Outfitters (Pty) Ltd’s basic rental of R160 000 (8 months at R20 000 a month)
incurred by it is deductible in the determination of its taxable income, while its
provision for its turnover rental of R20 000 is not deductible in the determination of its
2023 taxable income.
Energy CC
Energy CC is conducting a trade. Expenditure of R150 000 was actually incurred by
it for the purpose of producing its income. This expenditure is of a non-capital nature
since no enduring benefit will be created by the sponsorship. The expense is
therefore deductible in the determination of its 2023 taxable income.
Kgari Ltd
The R250 000 incurred by Kgari Ltd when it erected the ornamental statue in front of
the main entrance to its head office is not deductible in the determination of its
taxable income since it is an expense of a capital nature. The expenditure is
incurred by it to improve its image. It is therefore capital in nature due to the
enduring benefit that should result.
The interest incurred by Kgari Ltd on the loan used to finance the erection of its
ornamental statue is deductible in the determination of its taxable income under
the provisions of s 24J, for the following reasons:
• In CIR v Genn (1955 (3) SA 293 (A), 20 SATC 113), the principle was established by
the Appellate Division of the Supreme Court (now the Supreme Court of Appeal)
that interest incurred on funds borrowed for the purposes of a trade is an expense
incurred in the production of the income, irrespective of whether the borrowed
funds are used for the purchase of fixed or current assets.
• In Port Elizabeth Electric Tramway Co Ltd v CIR (1936 CPD 241, 8 SATC 13), it was
held by the Cape Provincial Division of the Supreme Court (now the High Court)
that the purpose of the transaction giving rise to the expense must be taken into
account. If the purpose was undertaken to earn income, the associated expense
is deductible in the determination of taxable income.
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The transaction undertaken by Kgari Ltd was the raising of the loan. The purpose of
this transaction was to improve its image by the erection of an ornamental statue.
The direct result of this should be an increase in its income (CIR v Standard Bank of
SA Ltd (1985 (4) SA 485 (A), 47 SATC 179)).
Kgari Ltd’s expense arising from this transaction (the interest) is therefore deductible
in the determination of its taxable income since it was incurred “in the production of
the income”.
Polokegong (Pty) Ltd
The loss suffered by Polokegong (Pty) Ltd of its trading stock destroyed in a fire, is a
loss of a non-capital nature. It is incurred in the production of its income due to the
fact that it is an inevitable concomitant of its trade. It is, therefore, deductible in the
determination of its taxable income.
Section 23(c), however, prohibits the deduction in the determination of taxable
income of a loss or expense to the extent that it is recoverable, amongst other
things, under an insurance contract.
Therefore, only R100 000 of the loss of R250 000 suffered by Polokegong (Pty) Ltd is
deductible in the determination of its taxable income. For its 2023 year of assessment,
being its year of assessment when the loss was suffered by it, it would deduct the
loss, even if it was unable to quantify this loss at that stage, since an amount may be
deducted only in the year of assessment when it is actually incurred. By the time its
2023 return is submitted, the loss suffered would probably have been quantified.
Lebone Ltd
No portion of the travelling expenses “actually incurred” by Lebone Ltd is deductible
in the determination of its taxable income. The travelling expenses were incurred for
the purpose of purchasing a capital asset. The expense is of a capital nature and,
consequently, not deductible in the determination of its taxable income.
Mohumi Batho
The R800 a month for dog food and the R3 000 veterinary fees that were incurred by
Mohumi Batho are deductible expenses in the determination of his taxable income.
They are “inevitable concomitants” of his trade and repetitive by nature. They are,
therefore, deductible in the determination of his taxable income.
The watchdog was purchased by Mohumi Batho for purposes of his trade. The
cost of his watchdog (R5 000) is a capital expense since it is a once-off expense
giving rise to an enduring benefit for him. It is, therefore, not deductible in the
determination of his taxable income under the general deduction formula. (A
so-called wear-and-tear or depreciation allowance under s 11(e) of R5 000 is,
however, available on his watchdog. The so-called wear-and-tear or depreciation
allowance is determined at 100% since the asset cost less than R7 000 (Interpretation
Note 47 in § 4.3.5 and Binding General Ruling 7 also in § 4.3.5).)
Example 5.6
(20 minutes)
Mashooro (Pty) Ltd
Mashooro (Pty) Ltd incurred the following expenses during its year of assessment
ended on 28 February 2023:
• A fee of R30 000 paid by it to a consultant for advice on ways of streamlining its
production process. This expense will not increase its income from the sale of its
products, but should result in a decrease in its production costs.
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Tax Workbook
• Compensation of R12 000 paid by it to a supplier of raw materials for the
cancellation of a contract. This expense enables it to purchase, during April 2023,
its next batch of raw materials from another supplier, at R5 000 less than that
which would have been payable to its original supplier. The raw materials should
last for six months of its normal production.
• Compensation of R10 000 paid by it to the producer of a similar product to that
supplied by it, in consequence of it having infringed the patent rights of that other
producer. In return for this payment, the producer of the similar product agreed
not to sue it or the patent infringement and to allow it to continue producing the
offending product for a further 12 months.
YOU ARE REQUIRED TO discuss the deduction of these expenses incurred by
Mashooro (Pty) Ltd in the determination of its 2023 taxable income.
Movha (Pty) Ltd
Movha (Pty) Ltd is a dealer in used motor vehicles. It incurred the following expenses
during its 2023 year of assessment (ended on 28 February 2023):
• A bribe of R10 000 paid by it to an official at the local vehicle-testing grounds to
expedite the issue of roadworthy certificates for second-hand cars (its trading
stock) it had sold.
• A refund of R15 000 made by it to a customer relating to the purchase price of a
second-hand car that she had purchased during its 2022 year of assessment. This
second-hand car proved to have a serious fault.
• It paid a contractor R10 000 for the erection of a large billboard displaying an
advertisement of the “superior” second-hand cars it offers for sale. It also paid the
local municipality a fine of R1 500 for the billboard’s obstruction of the flow of
pedestrians on the pavement. It then paid the contractor a further R2 000 to move
this large billboard to a more suitable location.
YOU ARE REQUIRED TO discuss, giving reasons, whether these expenses incurred by
Movha (Pty) Ltd are deductible in the determination of its 2023 taxable income.
Solution 5.6
Mashooro (Pty) Ltd
The position regarding the deduction of the expenditure incurred by Mashooro (Pty)
Ltd in the determination of its 2023 taxable income is as follows:
• The fee of R30 000 paid by it to the consultant is an expense incurred for the
purposes of its trade and, although it will not produce income, it will reduce costs.
Contrary views have been expressed about the deduction in the determination
of taxable income of expenses that will not produce income but that will prevent
losses or reduce future costs (Port Elizabeth Electric Tramway Co Ltd v CIR (1936
CPD 241, 8 SATC 13)). But since the expense is closely connected with its incomeearning operations it may, therefore, qualify for deduction in the determination of
its taxable income. The R30 000 paid by it to the consultant may, however, give
rise to an enduring benefit and would, therefore, be of a capital nature and not
deductible under the positive aspect of the general deduction formula (s 11(a))
in the determination of its taxable income.
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• The R12 000 paid by it to the previous supplier of raw materials is a trade expense
that has actually been incurred by it. Again, while it will not directly produce
income, it will reduce the cost of its trading stock (which is of a non-capital
nature, being part of its income-earning operations and not its income-earning
structure). It is, therefore, closely connected with the production of its income. This
payment does not create an enduring benefit since the raw materials service
only six months of its normal production. The expense is therefore deductible in
the determination of its 2023 taxable income.
• The compensation of R10 000 was paid by it to prevent it from being sued for a
patent infringement and to enable it to continue manufacturing the offending
product for a further 12 months. Had it been sued for the infringement of a patent
and been forced to pay compensation as a result, this expense would not have
been incurred in the production of its income, nor could this expense be said to
be closely connected to its income-earning operations, since it is not part of its
business to infringe patents (Port Elizabeth Electric Tramway Co Ltd v CIR (1936
CPD 241, 8 SATC 13) and Joffe & Co (Pty) Ltd v CIR (1946 AD 157, 13 SATC 354)).
This payment also enables it to continue earning income from the manufacture of
the offending product for a further 12 months. It is a non-capital payment since it
does not create an enduring benefit. It follows then that this R10 000 expense has
been incurred for a dual purpose (to prevent it being sued and to allow its
production to continue) and, although s 23(g) and the opening words of
s 11sanction the apportionment of an expense incurred for a dual purpose, it is
impossible to apportion this R10 000 expense. Therefore, no portion of the R10 000
it incurred is deductible in the determination of its 2023 taxable income.
Movha (Pty) Ltd
The position regarding the deduction of the expenditure incurred by Movha (Pty)
Ltd in the determination of its 2023 taxable income is as follows:
• Under s 23(o), fines, bribes or penalties arising from unlawful activities are not
deductible in the determination of taxable income. The R10 000 bribe incurred by
it is, therefore, not deductible in the determination of its taxable income.
• The R15 000 refund made by it is not an expense incurred in the production of its
income. But it will qualify for deduction in the determination of its taxable income
provided the refund it made is closely connected to the conduct of its trade. This
refund is not the same as an early-payment discount granted as a normal part of
a taxpayer's trading operations. It is a loss that has been suffered from the sale of
a faulty product. Dealing in second-hand cars carries with it the concomitant risk
of a second-hand car having an unseen fault. It follows then that, for this reason,
the refund is deductible in the determination of its 2023 taxable income.
• The R10 000 that it incurred on the advertising sign is an expense of a capital
nature. While advertising is normally a deductible non-capital expense in the
determination of taxable income, the large billboard itself is a capital asset and
the advertisement on this large billboard is designed to give rise to an enduring
benefit. (The cost of the advertising billboard also does not qualify for the
so-called wear-and-tear or depreciation capital allowance under s 11(e) since it
is a permanent structure.)
Under s 23(o), fines, bribes or penalties arising from unlawful activities are not
deductible in the determination of taxable income. The fine of R1 500 that it
incurred is therefore also not deductible in the determination of its taxable
income.
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Tax Workbook
The further R2 000 incurred by it in moving the large billboard is also not deductible
in the determination of its taxable income since it was paid for a capital asset.
Example 5.7
(20 minutes)
Khayalethu (Pty) Ltd
Khayalethu (Pty) Ltd manufactures and sells caravans and mobile homes. All
products it sells are subject to a one-year warranty agreement whereby it will repair
or replace, free of charge, defective products. Based on prior years’ experience, it
estimates that 5% of the selling price of each product is incurred in replacing, or
repairing, defective products under the relevant warranty agreement.
For accounting purposes, Khayalethu (Pty) Ltd raises a warranty provision at the
end of its financial year, based on 5% of the products sold that are still under their
one-year warranty period.
Will Khayalethu (Pty) Ltd's warranty provision of R125 000 raised at the end of its year
of assessment (that ended on 28 February 2023) be deductible in the determination
of its taxable income?
Swan, Drake and Duck
During the 2022 year of assessment, the accountancy partnership of Swan, Drake
and Duck was terminated when Reginald Swan left the partnership.
Reginald Swan agreed that he would not practise in competition with his former
partners. During the 2023 year of assessment, however, he breached this contract
by performing work for certain clients of his old practice. He did this even though he
knew that his former partners would seek compensation against him under the
arbitration clause in their partnership dissolution agreement. His reason for doing this
work was because he needed to earn a living.
Reginald Swan’s former partners then instituted arbitration proceedings against him.
The arbitrator awarded damages and costs of R107 580 against him.
Is the R107 580 that Reginald Swan incurred deductible in the determination of his
2022 taxable income?
Zola Mahamba
Zola Mahamba is a labour broker. For the 2023 year of assessment he incurred
• expenses of R200 000 in the production of his income, and
• R1 000 000 for remuneration paid to his employees.
Are these amounts incurred by Zola Mahamba deductible in the determination of
his 2023 taxable income?
Sam Mkhabela
Sam Mkhabela is employed as the branch manager of a large retail store. He
incurred expenses of R4 950 when entertaining his employer’s clients. As branch
manager he is expected by his employer to entertain certain of its clients. The retail
group is of the opinion that it is part of the duties of its branch managers to regularly
and necessarily entertain existing suppliers and prospective customers.
Sam Mkhabela also made contributions to a pension fund and a retirement annuity
fund.
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An audit on the various amounts reflected on Sam Mkhabela’s tax certificates has
been carried out and all amounts are correct. The following is a summary of the
information contained on his tax certificate:
• The gross remuneration Sam Mkhabela earned is R230 520.
• Included in Sam Mkhabela’s gross remuneration of R230 520 is an entertainment
allowance of R3 600.
• Sam Mkhabela’s pension fund contributions (based on his “cash” salary of
R180 000) amount to R10 800.
• Sam Mkhabela’s current retirement annuity fund contributions amount to R9 600.
YOU ARE REQUIRED TO explain to each of the above taxpayers, giving brief reasons,
whether the amounts referred to above qualify for deduction under the general
deduction formula in the determination of the relevant taxpayer’s taxable income.
For Sam Mkhabela, also state whether his expenditure is deductible in the
determination of his taxable income under any other provision.
Solution 5.7
Khayalethu (Pty) Ltd
Khayalethu (Pty) Ltd may not deduct its warranty provision of R125 000 raised for
accounting purposes in the determination of its taxable income for its 2023 year of
assessment. This warranty provision does not constitute an expenditure or loss
“actually incurred” during its 2023 year of assessment. It is only a conditional liability
at the end of its 2023 year of assessment, dependent on events that may not occur
in a subsequent year of assessment. It does not have an unconditional legal
obligation at the end of its 2023 year of assessment to incur R125 000 in warranty
expenses. It has merely estimated the potential cost of the future warranty expenses
that it may incur.
In the determination of Khayalethu (Pty) Ltd's 2023 taxable income, only the warranty
expenses “actually incurred” by it during that year of assessment can be deducted.
Section 23(e) also disallows the deduction from income of an amount that is
transferred to a reserve fund or otherwise capitalised.
Reginald Swan
Reginald Swan’s actions, including his contravention of his agreement that he would
not practise in competition with his former partners that resulted in the arbitration
award against him, was motivated solely by his intention to earn an income. The
damages and costs of R107 580 were, thus, incurred by him in the production of his
income. They are also not of a capital nature. They are therefore deductible in the
determination of his 2023 taxable income.
Zola Mahamba
Under s 23(k), an expense incurred by a labour broker (other than a labour broker to
whom a certificate of exemption has been issued), other than an expense that
constitutes an amount paid or payable to an employee of his, which amount is, or
will be, taken into account in the determination of that employee’s taxable income,
is not deductible in the determination of his taxable income. This prohibition
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Tax Workbook
is most restrictive since all non-capital administrative expenses, other than the
remuneration of an employee, are not deductible in the determination of Zola
Mahamba’s taxable income.
It follows that the R1 000 000 remuneration paid by Zola Mahamba is “actually
incurred” by him and is deductible in the determination of his 2023 taxable income.
But the R200 000 expenses incurred in the production of his income are not
deductible in the determination of his 2023 taxable income.
Sam Mkhabela
Under s 23(m), an expense, loss or allowance relating to employment of or an office
held by a person deriving remuneration (as defined in the Fourth Schedule) is not
deductible in the determination of his taxable income. But the following expenses
for a salaried person are specifically deductible in the determination of his taxable
income:
• Contributions to a pension or a retirement annuity fund under s 11F.
• Legal expenses (s 11(c)), the so-called wear-and-tear or depreciation capital
allowance (s 11(e)), bad debts (s 11(i)) and the doubtful-debt allowance (s 11( j )).
• Amounts deductible in the determination of taxable income under s 11(nA) or
s 11(nB) (these are amounts received by the taxpayer that are then refunded by
him).
• Rentals, repairs or expenses in connection with a salaried person’s dwelling house
or domestic premises. These expenses must qualify for deduction in the
determination of his taxable income under s 11(a) or s 11(d) to the extent that the
amount is not prohibited from being deductible in the determination of taxable
income under s 23(b) (private and domestic expenses).
Thus, Sam Mkhabela is unable to deduct the entertainment expenses he incurred in
the determination of his taxable income. He enjoys a deduction in the
determination of his taxable income for his pension fund and retirement annuity
fund contributions amounting to R20 400 (R10 800 plus R9 600) in total (these
amounts are not deductible in the determination of his taxable income under
s 11(a), but are deductible in the determination of his taxable income under s 11F).
There are, however, limits on the amount deductible in the determination of taxable
income for a year of assessment under s11F.
Also, non-deductible amounts in a year of assessment are deemed to be
contributions made in a subsequent year of assessment for a possible deduction in
the determination of taxable income for that subsequent year of assessment.
L Questions
Question 5.1
(30 minutes)
Dorothy Nkosi
Dorothy Nkosi is, amongst other things, a television presenter on “Morning Edition”, a
local television show. She appears live every weekday from 06h00 to 08h00. To look
her best for her morning presentations, she incurred the following expenses during
the 2023 year of assessment:
• A weekly standing appointment with her beautician. She incurs R500 for each
appointment.
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The general deduction formula
• Appointments with her personal trainer (three times a week) to regain her figure
after recently having given birth to a baby. She incurs R200 for each
appointment.
• Purchase of suitable classic “daywear” by her to wear during her live
presentations on “Morning Edition”. She incurs in this regard R7 500 a month on
credit (on her clothing accounts).
Dorothy Nkosi believes that these expenses are essential to her performing her role
as a presenter on local television. She is not an employee of the television station.
She presents for it on a freelance (self-employed) basis.
YOU ARE REQUIRED TO discuss, giving reasons, whether the above expenses incurred
by Dorothy Nkosi qualify for deduction in the determination of her taxable income
under the general deduction formula.
Renske Haynes
Renske Haynes is a retired lawyer. She now conducts a small conveyancing
practice from her home. She needs to know whether the following expenses that
she has incurred during the 2023 year of assessment are deductible from her
income:
• Expenses of R15 400 incurred by her relating to her office in her home.
• Administration of her “local” share portfolio. She paid an administration fee of
R5 000 to an asset manager.
• Administration of her call accounts with various banking institutions to maximise
the local interest that she earned. No portion of the local interest that she earns
from these investments is exempt from normal tax. An administration fee of R3 500
was paid to her broker for his help in this regard.
• An extra amount paid to her housekeeper. Her housekeeper takes messages if
she is unavailable to receive a call. She estimates that it costs her an extra R350 a
month to employ the housekeeper to perform this additional task of taking
messages. For the 2023 year of assessment the additional amount paid to her
housekeeper was R4 200.
• On 2 January 2023, she paid the property rates of R216 000 for her home for the
2023 calendar year.
• On 1 February 2023, she took advantage of a special offer on paper that is used
by her in her printer and purchased a large quantity of it for R3 800 (only 10% of it
was used by her during February 2023).
YOU ARE REQUIRED TO discuss, giving reasons, whether the above expenses incurred
by Renske Haynes are deductible from her income under the general deduction
formula.
Question 5.2
(45 minutes)
The following situations involve an expenditure incurred or loss suffered that may
qualify for deduction in the determination of taxable income under the general
deduction formula:
Rulani Mokwevho
During the 2022 year of assessment Rulani Mokwevho, an information technology
specialist, purchased, as an investment, two rent-producing townhouses situated in
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Tax Workbook
a suburb in Pretoria. He financed the purchase with R750 000 cash and the balance
out of borrowed funds.
During the 2022 and 2023 years of assessment, Rulani Mokwevho suffered rental
losses of R12 450 and R10 950 respectively on the letting of these two townhouses.
Hulani Hlungwani
Hulani Hlungwani is the author of articles on cookery that appear in food
magazines. She is not employed by the publishers of these magazines. They are her
clients.
Hulani Hlungwani has confirmed that at least half the meals she prepares at home
are “experimental” meals that she might “write-up” in future articles.
Hulani Hlungwani paid R231 080 for the ingredients she used in preparing meals
during the 2023 year of assessment.
Carin Jacobs
Carin Jacobs is a full-time lecturer in law at a university. Her income consists of her
salary from the university and fees for writing articles. Her duties are to
• present lectures,
• provide student support during fixed consulting hours, and
• spend a third of her time on research.
Carin Jacobs is currently studying towards a doctorate. The office provided by the
university is inadequate since she shares it with two other lecturers. She therefore
uses her study at home for one-third of her working time to prepare her lectures,
give her students support, carry out research and work on her doctorate. In this
regard, she has incurred the following expenses:
• Expenses in maintaining a study at home of R5 465.
• Periodicals (law related) and stationery of R2 950.
• Photocopies and faxes of R1 350.
Mangi Moyo
Mangi Moyo is the owner of a delicatessen and coffee shop. The use of a cold meat
slicing machine is available to customers shopping in his delicatessen. One of his
customers lost a finger when slicing some cold meat that she was about to
purchase. He was liable to pay her compensation of R250 000 for the loss of her
finger.
Jess Jakes
An accountant, Jess Jakes, failed in the discharging of his duties for one of his clients.
To
• protect his name as a professional,
• avoid legal proceedings, and
• prevent the undesirable publicity that may have arisen out of his poor
administration of the client’s affairs,
he made a cash settlement of R60 000 to this client.
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The general deduction formula
Buhlebuyeta & Co
A partnership of attorneys, Buhlebuyeta & Co, paid damages of R24 000 to a client
as a consequence of the misappropriation of his funds by one if its employees.
Walker & Seymor (Pty) Ltd
To secure a contract, Walker & Seymor (Pty) Ltd gave a guarantee to a customer. It
was then unable to fulfil this guarantee.
Walker & Seymor (Pty) Ltd then had to pay damages of R9 000 to the customer as
a result of its guarantee.
YOU ARE REQUIRED TO discuss, in each of the above situations, whether the loss
suffered or expenditure incurred is correctly deductible in the determination of the
relevant taxpayer’s taxable income.
Question 5.3
(30 minutes)
Bastina Baloy and Spike Spilloon have the following tax-related questions that need
to be answered:
Bastina Baloy
Bastina Baloy is disabled. She employs a driver-companion to assist her at home and
in her business. In addition to paying him a salary of R108 000 a year, she provides
him with free accommodation in her home and food, at an estimated market value
of R192 000 a year.
Bastina Baloy is an architect and leases an office in town. She incurred travelling
expenses of R93 600, travelling from her home to the office and from the office to
clients. She also paid several parking fines during the 2023 year of assessment
amounting to R7 200 in total. In each instance, because of her disability, she
needed to park close to the client’s premises.
Bastina Baloy attended two seminars during the year of assessment to ensure that
she was up to date with the latest developments in building design for disabled
users, at a cost of R5 000 each. She also attended lectures in the evenings during
the year, at a cost of R20 000, and obtained a structural engineering qualification
that will assist her in her business.
Spike Spilloon
Spike Spilloon is a private detective who undertakes a variety of investigations.
During the 2023 year of assessment, Spike Spilloon’s office was burgled and
confidential files were stolen.
Shortly afterwards, Spike Spilloon was contacted by a blackmailer demanding the
payment of a large amount of money. He paid the amount to prevent the loss of
certain valuable clients and the potential forfeiture of fee income. He may even
have faced claims from his clients for damages.
In the burglary, Spike Spilloon's computer equipment was stolen and his office
wasbadly damaged.
Spike Spilloon purchased replacement computer equipment for R30 000. He paid for
it out of an award from his insurer.
Spike Spilloon replaced the computer software programs that were not fully insured,
at a cost of R15 000, using R7 000 out of the award from his insurer and R8 000 of his
own funds.
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Tax Workbook
The wife of one of Spike Spilloon’s clients sued him for damages. On 1 January 2023,
he voluntarily paid her R10 000. She was still dissatisfied, however, and pursued the
matter further in court. A settlement of R15 000 was finally ordered in December
2023. Spike Spilloon then paid her the additional R5 000.
YOU ARE REQUIRED TO advise Bastina Baloy and Spike Spilloon as to whether the
expenses that they incurred are deductible in the determination of their taxable
incomes.
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Chapter 6
Special deductions
L Introduction
In this chapter, certain expenditure that qualifies for a special deduction under the
Income Tax Act 58 of 1962 is dealt with. The general deduction formula that is used
for many deductions and losses is contained in s 11(a). Even if an amount does not
comply with its requirements, it may qualify for a special deduction or allowance
under s 11(c) to s 37H. These so-called special deductions (or allowances) are then
deducted in the determination of taxable income. Section 23 (prohibited
deductions) and s 23A to s 23O (limitation of deductions) must also be taken into
account.
Framework:
The following structure is used to determine taxable income:
Gross income
Less: Amounts exempt from normal tax
Gives: Income
Less: Amounts to be deductible in the determination of taxable income
Add: Amounts to be included in taxable income (portion of allowances not
incurred for business purposes)
Add: Taxable capital gain
Less: Assessed loss
Less: Retirement fund contributions deduction in the determination of taxable
income
Less: Section 18A deduction in the determination of taxable income
Gives: Taxable income
The following broad summary assists in finding questions and examples relating to
deductions and allowances not dealt with in this chapter:
Chapter 7
Capital
allowances
Sections 11(e), (f), (g), (gB), (gC) and (o), 11D, 12C, 13,
13sept, 13sex, 13quin, and 24J
Chapter 8
Individuals
Sections 11(nA) and (nB), 11F and 20A
Chapter 9
Companies
Sections 12E, 24, 24BA, 24C, 24I, and 24J and revision of
deductions and allowances
Chapter 14
Trading stock
Section 22
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Tax Workbook
L Contents
The examples and questions in this chapter illustrate the taxation of persons who
carry on a trade. They are all residents.
The table gives an indication of the time that is needed to complete the example or
question. The relevant sections or paragraphs that must be known before
attempting an example or question are provided. The level of the example or
question gives an indication of the difficulty of the example or question.
)
Example or question
and time allocation
Topic and relevant sections
Level
Example 6.1
(15 minutes)
• Section 11(c) – legal expenses
• Section 11(d) – repairs and maintenance
• Section 23H – prepaid expenditure
Basic
Example 6.2
(15 minutes)
• Section 8(4)(a) – recoupment
• Section 11(cA) – restraint of trade
awards
• Section 11(i) – bad debts
• Section 11(j) – doubtful debts
Basic
Example 6.3
(15 minutes)
• Section 11(gB) – registration and
renewals
• Section 11(gC) – patents, designs, trade
marks and copyrights
• Section 11D – research and
development
• Section 12C(1)(gA) – capital allowance
• Section 12M – medical lump-sum
payments
Intermediate
Example 6.4
(10 minutes)
• Section 11(lA) – shares issued under a
broad-based employee share plan
• Section 11(m) – annuities to former
employees and their dependants
Basic
Example 6.5
(20 minutes)
• Section 11A – pre-trade expenditure and
losses
• Section 12H – learnership agreements
• Section 18A – donations to public benefit
organisations
Intermediate
Example 6.6
(35 minutes)
• Section 11(i) – bad debts
• Section 11(j) – doubtful debts
• Section 23H – prepaid expenditure
Advanced
Example 6.7
(15 minutes)
• Section 11D – research and
development
• Section 18A – donations to public benefit
organisations
• Section 20 – assessed losses
• Section 23H – prepaid expenditure
Basic
Question 6.1
(25 minutes)
• Section 11(a) – general deduction
formula
• Section 11(d) – repairs and maintenance
Intermediate
continued
88
Chapter 6
)
Example or question
and time allocation
Special deductions
Topic and relevant sections
Level
• Section 11(m) – annuities to former
employees and their dependants
• Section 11(gC) – patents, designs, trade
marks and copyrights
• Section 11(i) – bad debts
• Section 11(m) – annuities to former
employees and their dependants
• Section 11D – research and
development costs
• Section 12C(1)(gA) – capital allowance
• Section 13(1)(d) – capital allowance
• Section 18A – donations to public benefit
organisations
• Section 23(o) – scrapping and
termination capital allowance
Question 6.2
(15 minutes)
• Section 11(a) – general deduction
formula
• Section 11(c) – legal expenses
• Section 11(i) – bad debts
• Section 11(j) – doubtful debts
• Section 11(m) – annuities to former
employees and their dependants
Basic
Question 6.3
(15 minutes)
•
•
•
•
Section 7B – variable remuneration
Section 11(c) – legal expenses
Section 11(d) – repairs and maintenance
Section 11(cA) – restraint of trade
awards
• Section 11 (lA) broad-based employee
shares
• Section 12C – capital allowance
Intermediate
L Examples
Example 6.1
(15 minutes)
Bonsai (Pty) Ltd incurred the following expenses during its financial year ended
January 2023:
Legal expenses
The following legal expenses of R40 000 were paid to attorneys Kloppers and Nkwe:
• R5 000 was for debt collection.
• R15 000 related to the drawing up of a restraint of trade agreement for an
employee who had resigned to set up his own business.
• R20 000 related to a dispute when one of Bonsai (Pty) Ltd’s clients sued it for
supplying inferior products. Kloppers and Nkwe successfully defended this action
when it was proved that the client did not follow the required instructions.
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Tax Workbook
Repairs and maintenance
• Bonsai (Pty) Ltd pays a maintenance contractor to maintain the four koi ponds
(fish ponds) located on its premises. The maintenance contractor is paid on an
annual basis. On 1 November 2022, it paid him R90 000 to maintain the koi ponds
from 1 November 2022 to 31 October 2023. This is the only prepaid expense
incurred by Bonsai (Pty) Ltd in its 2023 year of assessment.
• Bonsai (Pty) Ltd paid R750 to Geoff Handyman (an electrician) for repairing an
electrical point that was damaged by lightning during an electrical storm.
YOU ARE REQUIRED TO determine the deductions in the determination of the
taxable income of Bonsai (Pty) Ltd for its 2023 year of assessment. Provide reasons
for your answers.
Solution 6.1
Legal expenses
R
• Debt collection – deductible under s 11(c)
• Restraint of trade agreement – of a capital nature
• Successful dispute – deductible in the determination of its taxable
income under s 11(c) since it was incurred in the ordinary course of
its trade. If he dispute had been unsuccessful in defending this action, the
resulting damages payable would still have been deductible in the
determination of its taxable income since they arose as inevitable
concomitant of its trade.
5 000
–
20 000
Repairs and maintenance
• Maintenance expenditure of the koi ponds is deductible in the determination of
its taxable income under the provisions of s 11(d). The “prepaid” period of this
maintenance contract extends beyond six months after the end of Bonsai (Pty)
Ltd’s 2023 year of assessment. It extends to 31 October 2023, being nine months
beyond the end of Bonsai (Pty) Ltd’s 2023 year of assessment.
The provisions of s 23H will, however, not apply, since the prepaid amount of
R67 500 (R90 000 / 12 × 9) is less than R100 000 (cumulative limit for all pre-paid
expenses not otherwise deductible). The full amount of R90 000 paid, is deductible
in the determination of its taxable income in Bonsai (Pty) Ltd’s 2023 year of
assessment
• The R750 paid to Geoff Handyman for repairing an electrical point that was
damaged by an electrical storm will be deductible in the determination of its
taxable income under s 11(d). A new asset was not created.
Example 6.2
(15 minutes)
Part A
Sindzawonye CC, which has a 30 June financial year-end, provides specialised
IT services. It entered into an agreement with one of its employees who resigned
from its employment on 1 March 2022.
Under this agreement, the ex-employee was restrained from rendering her services
anywhere in Gauteng for a period of five years commencing on 1 March 2022. In
90
Chapter 6
Special deductions
return for being restrained from rendering her services for a period of five years,
Sindzawonye CC compensated her by awarding her R450 000 on 1 March 2022.
YOU ARE REQUIRED TO determine and briefly discuss the deduction (or allowance)
that Sindzawonye CC will be entitled to in the determination of its taxable income
for this restraint of trade award for its 2022 year of assessment.
Part B
Ihawu Ltd has a 31 March financial year-end.
The following bad debts were written off during its 2023 year of assessment:
R
• Trade debtors (note 1)
84 000
• Loan to supplier (note 2)
120 000
The following bad debts were written off during its 2022 year of assessment and were
recovered during its 2023 year of assessment:
R
• Trade debtors
50 000
• Investment in a pyramid scheme (the liquidators paid 5 cents for each
rand invested)
5 000
Notes
(1) The accounting provision (according to a prepared list) for doubtful debts
amounted to R190 000 on 31 March 2022 (consisting of R150 000 for trade
debtors, R40 000 for a loan to an employee (Elsie Bent)) and R220 000 on
31 March 2023 (consisting of R180 000 for trade debtors and R40 000 for a loan to
an employee (Elsie Bent)).
Assume in this instance that IFRS 9 was not applied and that 25% of the
accounting provision on trade debtors are deductible in the determination of
taxable income under s 11(j)(ii)(bb).
(2) The loan was granted to relieve the financial difficulties of the supplier. Ihawu Ltd
is not in the business of providing loans.
YOU ARE REQUIRED TO determine and discuss the deduction in the determination
Ihawu Ltd’s taxable income of its above transactions. Ignore capital gains tax.
Solution 6.2
Part A
The R450 000 paid to the ex-employee is of a capital nature and is therefore not
deductible in the determination of its taxable income under the general deduction
formula (s 11(a)), but it will give rise to a s 11(cA) deduction in the determination of
its taxable income to the payer of this amount (Sindzawonye CC). The amount
constitutes income of the employee under para (cB) of the definition of ‘gross
income’. The amount deductible in the determination of its taxable income is the
lesser of
• R450 000 divided by the five-year restraint period, amounting to R90 000, and
• one-third of R450 000, amounting to R150 000.
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Tax Workbook
The lesser amount, being R90 000, is the amount of the deduction in the
determination of Sindzawonye CC’s taxable income for its 2022 and the following
four years of assessment.
Part B
Bad debts and doubtful debts provision
Under the provision of s 11(i), an amount is deductible in the determination of
taxable income when it is a bad debt, and provided it was included in the
taxpayer’s income in the current year of assessment (or was included in a previous
year of assessment).
Deduction of bad debts
Trade debtors (deductible in the determination of Ihawu Ltd’s taxable
income)
Loan to supplier (not deductible in the determination of its taxable income
since this amount was not included in Ihawu Ltd’s income).
It may, however, have capital gains tax consequences.
R
84 000
–
Provision for doubtful debts
Under s 11(j), an allowance will be granted only for debts that would be deductible
in the determination of Ihawu Ltd’s taxable income if they became bad. Therefore,
only its trade debts would qualify for the s 11(j) allowance.
Add: Doubtful debt allowance from 2022
37 500
Less: Deduct the doubtful debt allowance for 2023 (R180 000 × 25%)
45 000
Bad debts recovered
Under s 8(4)(a), there must be included in the taxpayer’s income all amounts
allowed to be deducted in the determination of taxable income and subsequently
recouped. The bad debts of R50 000 were deducted in the determination of Ihawu
Ltd’s taxable income under s 11(i) and must be added to its income. The investment
was never deducted in the determination of its taxable income since it is of a
capital nature. The recoupment of the investment may have capital gains tax
implications.
Add: Bad debt recovered
50 000
Example 6.3
(15 minutes)
Camagu Ltd invests in trade marks and patents (intangible assets). It grants the right
of use of these intangible assets to universities in exchange for royalties.
Camagu Ltd has a 31 March year-end. It is a South African resident and is listed on
the JSE Limited Exchange.
Camagu Ltd also has a department that specialises in scientific research and
development to invent intangible assets for its use. These assets can help certain
students in obtaining their qualification.
The following are some of the transactions entered into by Camagu Ltd during its
2022 and 2023 years of assessment:
• It purchased a trade mark (Stop-Stress-Immediately) on 15 August 2022 and a
patent (Learn-Tax-Quickly) on 1 February 2023. The purchase price of the
trademark was R327 000 and of the patent was R850 000.
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Chapter 6
Special deductions
• One of its trade marks (Breathing Techniques during Examinations) was purchased
for trade purposes during its 2013 year of assessment for R180 000 (to be used over
its remaining registered period until 30 June 2023). The registration of this trade
mark was renewed for a further four-year period at a cost of R48 000.
• Camagu Ltd paid R10 000 000 to retired employees as a compensation for the
variation of their employment contracts. The amount is paid as the final
settlement of its liability to provide for post-retirement medical scheme benefits. Its
employees must use the amount to provide for their own future medical scheme
contributions.
YOU ARE REQUIRED TO determine the deductions (or allowances) deductible in the
determination of Camagu Ltd’s taxable income for its 2023 year of assessment that
arise out of the above transactions.
Solution 6.3
The following amounts are deductible in the determination of Camagu Ltd’s taxable
income for its 2023 year of assessment:
R
Trade mark: Stop-Stress-Immediately – no deduction in the
determination of taxable income if a trade mark is acquired from
another person (s 11(gC)(iv))
Patent: Learn-Tax-Quickly – s 11(gC) (R850 000 × 5%)
Renewal costs – s 11(gB)
Medical lump-sum payment – s 12M
Example 6.4
–
42 500
48 000
10 000 000
(10 minutes)
Mickey & Duck Ltd, a South African resident company, conducts business as a
retailer of toys. It concluded the following transactions in connection with its
90 permanent employees during its financial year ended 31 March 2023.
Share scheme
On 5 January 2023, it granted 3 000 shares to each one of its 90 permanent
employees at a consideration of R0,50 a share. These shares have a nominal value
of R1 each. Their market value was R5 a share on the date that the grants were
approved. No restrictions apply to these shares. The plan under which the shares
were issued by it qualifies as a broad-based employee share plan under s 8B.
Annuities
Mickey & Duck Ltd paid the following annuities to former employees:
• R45 000 to an ex-employee who retired due to old age during its 2023 year of
assessment, and
• R20 000 a year for the next 10 years to the dependants of an ex-employee (who
had died in a motor vehicle accident when delivering toys to a client).
YOU ARE REQUIRED TO discuss the deductions in the determination of
Mickey & Duck Ltd’s taxable income for its 2023 year of assessment of the amounts
involved in the above transactions, giving reasons for your answers.
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Tax Workbook
Solution 6.4
Share scheme
For a broad-based employee share plan under s 8B, the amount of the shares at
market value, but limited to R10 000 a year for qualifying equity shares granted to a
single employee, is deductible in the determination of the taxable income of the
employer (s 11(lA)).
The deduction for each employee amounts to R13 500 (3 000 shares × (R5,00 –
R0,50)). This is more than the limit of R10 000 a year for a single employee. Mickey &
Duck Ltd will deduct in the determination of its taxable income only R900 000
(90 employees × R10 000) for the shares issued in its 2023 year of assessment. The
remaining R315 000 (90 employees × R3 500) will be deductible in its 2024 year of
assessment.
Annuities
Annuities paid to a former employee who retired on the grounds of old age are
deductible in the determination of taxable income in full, under s 11(m)(i). The
R45 000 is therefore deductible in the determination of its taxable income.
An annuity paid to the dependants of an ex-employee (who died in a motor
vehicle accident when delivering toys to a client) are deductible in the
determination of its taxable income under s 11(m)(iii). The R20 000 is therefore
deductible in the determination of its taxable income.
Example 6.5
(20 minutes)
Case A
Dumela (Pty) Ltd has a taxable income of R350 000 for its 2023 year of assessment,
before allowing a deduction for a donation under s 18A. Dumela (Pty) Ltd made a
cash donation of R28 000 to a public benefit organisation approved by the
Commissioner under s 30, and received a “s 18A receipt” from it.
YOU ARE REQUIRED TO determine Dumela (Pty) Ltd’s taxable income for its 2023
year of assessment.
Case B
On 1 October 2022, Siya Vuma commenced operating a business (selling handmade
mosaic mirrors) trading as a close corporation. The close corporation, Masala
Mosaic CC, was registered in October 2022. Masala Mosaic CC has a 31 January
financial year-end. Trading did not commence until 1 January 2023. But Masala
Mosaic CC incurred certain expenditure before 31 December 2022. The expenditure
it incurred from 1 October 2022 to 31 December 2022 was as follows:
R
• Raw materials purchased
24 000
• Two months’ rental for its trade premises
6 000
• Electricity and water, rates and insurance for its
above premises
17 000
During its financial year ended 31 January 2023, Masala Mosaic CC had a gross
income of R150 000 and closing stock (to be included in its gross income) of
R130 000.
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Chapter 6
Special deductions
The expenditure incurred by it from 1 January 2023 to 31 January 2023 was as
follows:
• Raw materials purchased
• Rental of its trade premises
• Electricity and water, rates and insurance for its
above premises
145 000
3 000
8 500
YOU ARE REQUIRED TO determine Masala Mosaic CC’s taxable income for its year of
assessment ended 31 January 2023. Masala Mosaic CC is not a small business
corporation.
Case C
Jose’s Clothing (Pty) Ltd entered into registered learnership agreements with Kwena
Mohlala and Riad Chetty. The learnership agreements fulfil all the criteria of s 12H.
Jose’s Clothing (Pty) Ltd has a 30 September financial year-end.
Kwena Mohlala
On 1 October 2022, Jose’s Clothing (Pty) Ltd employed Kwena Mohlala as a
“learner” on a full-time basis, with a level 6 NQF qualification. Under the registered
learnership agreement, the learnership agreement will be completed after two
years.
Riad Chetty
On 1 February 2023, Jose’s Clothing (Pty) Ltd employed Riad Chetty (a disabled
person as defined in the Employment Equity Act 55 of 1998) as a “learner” on a
part-time basis, with a level 7 NQF qualification. Under the registered learnership
agreement, the learnership agreement will be completed after six months
(26 weeks).
Solution 6.5
Case A
Dumela (Pty) Ltd has a taxable income of R350 000 before the s 18A deduction.
The deduction allowed under s 18A will be
• R28 000 in the determination of its taxable income (the qualifying donation),
• limited to a maximum of R35 000 (10% of R350 000).
Dumela (Pty) Ltd will thus be able to deduct R28 000 in its 2023 year of assessment.
Dumela (Pty) Ltd’s taxable income for its 2023 year of assessment will, therefore, be
R322 000 (R350 000 – R28 000).
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Tax Workbook
Case B
2023 year of assessment
R
150 000
130 000
280 000
Gross income
Add: Closing stock
Less: Amounts deductible in the determination of taxable
income
Raw materials purchased – s 11(a)
Rental of trade premises – s 11(a)
Electricity and water, rates and insurance for the
above trade premises – s 11(a)
Taxable income from trade
Raw materials purchased – pre-trade expenditure under s 11A
Two months’ rental of trade premises – pre-trade expenditure –
s 11A
Electricity and water, rates and insurance – pre-trade
expenditure – s 11A
Taxable income
145 000
3 000
8 500
156 500
123 500
24 000
6 000
17 000
47 000
76 500
Note
The deductions in the determination of taxable income under s 11A may not
exceed the income from that specific trade during that year of assessment.
Case C
Kwena Mohlala
Jose’s Clothing (Pty) Ltd will be able to deduct R40 000 in the determination of its
taxable income for the 2023 year of assessment as a “commencement” deduction.
Riad Chetty
Jose’s Clothing (Pty) Ltd will be able to deduct R25 000 (R50 000 × 6 / 12) in the
determination of its taxable income since a “disabled” learner was a party to a
registered learnership agreement during the year (but apportioned since the
agreement was less than 12 months). Jose’s Clothing (Pty) Ltd will also be able to
deduct R50 000 as a “completion” allowance in its 2023 year of assessment.
Example 6.6
(35 minutes)
Sizophumelela Ltd, a resident of the Republic, manufactures perfumes designed to
last for up to 10 hours without re-application. Its manufacturing plant is situated in
KwaZulu-Natal. Its financial statements indicate that it made a net income before
tax of R4 500 000.
96
Chapter 6
Special deductions
The financial year of Sizophumelela Ltd ends on the last day of February. The
following journal entries were recorded during its year ending 28 February 2023:
(1) Finance lease
Right of use: Computers
Value-added tax input account
To: Lease liability
Being computers acquired under a finance lease
Lease liability
To: Bank
Being the first annual payment of lease liability
Finance charges (statement of profit or loss and other
comprehensive income)
To: Lease Liability
Being interest for the month ending 28 February 2023
Depreciation (statement of profit or loss and other
comprehensive income)
To: Right of use: Computers
Being depreciation for its 2023 financial year:
R340 000 / 5 × 1 / 12 on the assumption that computers will be
transferred to Sizophumelela Ltd at the end of lease term)
Dr
340 000
51 000
147 119
2 740
5 667
Cr
391 000
147 119
2 740
5 667
Additional information
Sizophumelela Ltd leased computers for a three-year period at an annual rental of
R147 119. The lease commenced on 1 February 2023. Binding General Ruling No 7
makes provision for a write-off period of three years for computers.
(2) Prepaid expenses
Dr
Prepaid expenses (statement of profit or loss and other
comprehensive income)
To: Insurance (statement of profit or loss and other
comprehensive income)
To: Lease expenses for offices (statement of profit or loss and
other comprehensive income)
To: Licence fee payable annually under legislation
Being expenses relating to its 2023 financial year
Cr
75 000
33 500
38 000
3 500
Additional information
Sizophumelela Ltd voluntarily prepaid its insurance premiums and office lease
payments. It was obliged to pay the licence fee annually in advance. The prepaid
insurance and licence fee relate to the 10 months ending 31 December 2023. The
office lease payments relate to the four months ending 30 June 2023.
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Tax Workbook
(3) Doubtful debts
Dr
Provision for doubtful debts
To: Decrease in provision for doubtful debts (statement of profit
or loss and other comprehensive income)
Being the adjustment of the provision of doubtful debts for its
2023 financial year from R46 000 to R41 500
Cr
4 500
4 500
Additional information
Assume in this instance that IFRS 9 was not applied and that 25% of the accounting
provision on trade debtors are allowable under s 11(j)(ii)(bb) as a deduction in the
determination of taxable income.
(4) Bad debts
Dr
Bad debts expense (statement of profit or loss and other
comprehensive income)
To: Loan to employee
To: Trade debtors
Being amounts not recoverable written off as bad
52 100
Cr
34 100
18 000
Additional information
One of Sizophumelela Ltd’s employees needed extra funds. It then granted her a
loan of R50 000 at a market-related interest rate. The employee repaid R19 300 of
this loan on 31 December 2021. In 2022, the employee resigned and disappeared.
Sizophumelela Ltd wrote off the outstanding capital amount and the interest owing
of R3 400 (included in the total amount of R34 100).
YOU ARE REQUIRED TO determine the taxable income of Sizophumelela Ltd for its
2023 year of assessment. Commence with its net income before tax of R4 500 000.
Solution 6.6
R
Net income before tax
(1) Finance lease
Add: finance charges (reversal of accounting treatment since
the lease payments are deductible in the determination of
taxable income)
Add: depreciation (Sizophumelela Ltd is not the legal owner
and therefore not entitled to a capital allowance)
Less: Lease payments (excluding VAT) are deductible in the
determination of taxable income under s 11(a)
• R147 119 – (1 / 3 × R51 000) = R130 119
• Limited under s 23H (prepaid portion of R119 276 (being
R130 119 × 11 / 12) exceeds R100 000): R130 119 × 1 / 12
R
4 500 000
2 740
5 667
4 508 407
10 843
10 843 4 508 407
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Chapter 6
Special deductions
(2) Prepaid expenses
Insurance
The prepaid portion extends 10 months into its next year of
assessment, but because the total prepaid expenses under
s 23H exceeds R100 000 (including the prepaid lease
payments), only the expenditure relating to its current year of
assessment is deductible in the determination of its taxable
income. The deductible expenditure in the determination of its
taxable income has already been debited to the statement of
profit or loss and other comprehensive income and therefore
no adjustment is required for in the determination of its taxable
income.
R
R
–
Lease rentals
The prepaid portion extends four months into its next year of
assessment. Since this period does not exceed the required six
months under s 23H, the full expenditure is deductible in the
determination of its taxable income. The expenditure relating to
its 2023 financial year has already been debited to its statement of profit or loss and other comprehensive income, and
therefore an adjustment must be made only for the prepaid
portion.
38 000
Licence fees
The provisions of s 23H does not apply to an amount imposed
by legislation, therefore the expenditure is deductible in the
determination of its taxable income in full. The expenditure
relating to its 2023 financial year has already been debited to
its statement of profit or loss and other comprehensive income
and an adjustment must be made for the prepaid portion.
3 500
(3) Doubtful debts
Reversal of the accounting provision
Allowance under s 11(j): deduction in the determination of its
taxable income for the current year (R41 500 × 25%)
Add back allowance from the previous year (R46 000 × 25%)
4 500
10 375
67 218
4 441 189
11 500
4 452 689
(4) Bad debts
Deduction in the determination of its taxable income available
under s 11(i)
Loan to employee
The loan is of a capital nature and was not previously included
in its income. The interest is deductible in the determination of
its taxable income under s 11(i). Since this expenditure was
already debited to its statement of profit and loss and other
comprehensive income, a correction is required (R34 100 –
R3 400).
99
30 700
Tax Workbook
Trade debtors
Since the amount was previously included in income, a
deduction in the determination of its taxable income is
allowed. It was already debited to its statement of profit and
loss and other comprehensive income and therefore no
adjustment is required.
Taxable income for its 2023 year of assessment
Example 6.7
–
4 483 424
(15 minutes)
Malemela (Pty) Ltd is a resident of the Republic. It manufactures garden furniture. Its
financial director provides you with the following information for its 2023 year of
assessment (ended on 28 February 2023):
R
Net income from manufacturing operations (excluding items listed below) 1 200 000
Rental in advance (for the factory premises two months (note 1))
280 000
Insurance premiums (note 2)
108 000
Administrative expenses (note 3)
26 000
Research and development expenditure (note 4)
1 160 000
Notes
(1) Malemela (Pty) Ltd entered into a new lease agreement for its factory premises
on 1 March 2022. The agreement stipulates that Malemela (Pty) Ltd must pay the
rental two months in advance on the 25th day of each month.
(2) The insurance premiums have been paid. They consist of the following:
R
• Loss of profits insurance
90 000
• Fire and storm insurance for its factory building and equipment
18 000
108 000
(3) Administrative expenses consist of the following:
Legal expenses for the collection of irrecoverable debts
Speeding fines that the directors consider to be a normal business
expense
Cash donation to the University of Pretoria Bursary Fund
(a s 18A receipt was obtained)
R
6 000
4 000
16 000
26 000
(4) Malemela (Pty) Ltd conducts qualifying technological research and
development activities. The research activities were approved by the Minister of
Science and Technology under s 11D(9). Operating expenses for the 2023 year
of assessment were R360 000. New and unused research machines (but not pilot
plant) used in the research activities were purchased on 30 June 2022 for
R800 000. They were brought into use on the same date.
Malemela (Pty) Ltd suffered an assessed loss of R80 000 during its 2022 year of
assessment.
YOU ARE REQUIRED TO determine the taxable income of Malemela (Pty) Ltd for its
2023 year of assessment.
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Chapter 6
Special deductions
Solution 6.7
Taxable income of Malemela (Pty) Limited for its 2023 year of assessment:
R
R
Net income
1 200 000
Less: Amounts deductible in the determination of taxable
income
Rentals (note 1)
280 000
Insurance premiums paid (note 2)
• Loss of profits
90 000
• Fire and storm cover
18 000
Administrative expenses
• Legal expenses
6 000
• Speeding fines (s 23(o)(ii))
–
Research and development expenses (s 11D)
• Operating expenses (R360 000 × 150%) (s 11D(2)(a))
540 000
• Machine (R800 000 × 50%) (s 12C(1)(gA))
400 000
1 334 000
Loss for the year
Add: Assessed loss brought forward (s 20)
134 000
80 000
214 000
Less: Donation (s 18A)
University – actual donation of R16 000 – limited to 10% of
taxable income (note 3)
Assessed loss for its 2023 year of assessment
–
214 000
Notes
(1) The prepaid portion extends two months into the next year of assessment. Since
this period does not exceed the six months required by s 23H, the full expenditure
is deductible in the determination of taxable income.
(2) The insurance paid for the loss of profits and fire and storm cover is deductible in
the determination of taxable income under s 11(a) since it was incurred in the
production of the income.
(3) The portion of the donation of R16 000 not allowed as a deduction in the
determination of taxable income, will be carried forward to its 2024 year of
assessment but subject to the same limits.
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Tax Workbook
L Questions
Question 6.1
(25 minutes)
Nonyana (Pty) Ltd manufactures bird and poultry feed at a factory situated in
Midrand. It is not a “small business corporation” as defined. Its accountant presents
the following information for its 2023 financial year (ended on 28 February 2023):
R
Net income from manufacturing operations (this amount does not
include the items of income and expenditure that follow):
1 217 296
Annuities paid (note1)
38 000
Insurance premiums paid (note2)
34 039
Selling and administration expenses (note 3)
22 000
Rentals incurred for factory – R6 000 a month payable on the first day of
each month
72 000
New patent (note 4)
106 400
Expenditure on scientific research (note 5)
1 482 100
Dividend paid to holders of its shares on 31 January 2023
9 000
Notes
(1) During Nonyana (Pty) Ltd 2023 year of assessment, two of its employees died as
a result of an accident in the factory. At a directors’ meeting, it was decided
that, as a special concession, the payment of the following annuities would be
made to the families of the two deceased employees. This procedure would not
become new company policy. Payment is to be made on an annual basis,
commencing in December 2022:
R
Lindi Ntshalo – a life-time annuity
12 000
Linda Ntshalo, her minor son – an annuity for a period of 10 years
4 400
Khumo Kgomo – a life-time annuity
21 600
38 000
(2) Insurance premiums paid comprised the following:
Loss of profits insurance
Fire and storm insurance for its factory building and equipment
R
16 600
17 439
34 039
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Chapter 6
Special deductions
(3) Selling and administration expenses comprised the following:
R
Parking fines that the directors considered to be a normal business
expense
Donation to the local university Rag fund (no s 18A receipt was
obtained)
Interest on overdraft raised to finance the payment of a dividend
Repairs to its delivery vehicles
Donation to a public benefit organisation (the prescribed s 18A receipt
was obtained)
Sundry expenses deductible in the determination of its taxable income
300
1 000
600
5 800
11 000
3 300
22 000
(4) Nonyana (Pty) Ltd purchased the patent for a new blend of bird food from an
independent third party for R106 400. It was brought into use on 1 September
2022.
(5) Scientific research in connection with its products commenced during the year
in a special laboratory that was erected. The requirements of s 11D and other
relevant sections in the Income Tax Act have been satisfied. The expenditure was
incurred as follows:
R
Cost of laboratory brought into use on 1 December 2022
New and unused machine (but not pilot plant) for its laboratory
brought into use on 1 December 2022
Research assistants’ salaries for the period 1 December 2022 –
28 February 2023
Materials used during the period 1 December 2022 – 28 February
2023
900 000
116 000
346 800
119 300
1 482 100
YOU ARE REQUIRED TO determine Nonyana (Pty) Ltd’s normal tax liability for its 2023
year of assessment.
Question 6.2
(15 minutes)
Gagu Mabasa carries on a trade (as sole trader) as a manufacturer of toys. She sells
her toys under the name Gagu Toys. The following information relates to the
2023 year of assessment:
Gross profit
Her gross profit for the year was R1 910 000.
103
Tax Workbook
Bad and doubtful debts
Included in her debtors outstanding at the end of the 2023 year of assessment are
the following amounts:
R
Trade debtors that are irrecoverable
25 500
Loan to an ex-employee who absconded
8 350
Trade debtors that are considered to be doubtful (half of these debtors
have been outstanding for more than 120 days while the other half of
these debtors have been outstanding for more than 60 days but less
than 120 days)
62 000
A doubtful debt allowance of R17 000 was deducted in the determination of her
2022 taxable income under s 11(j).
Legal expenses
Legal expenses of R9 000 were incurred on an appeal to the tax court against
certain expenses not being deducted in the determination of her 2016 taxable
income. The tax court found that the expenses incurred were of a capital nature.
Legal expenses of R7 500 were incurred resulting from a claim by the parents of a
child who developed an allergy after playing with a toy painted with a toxic paint.
Gagu Mabasa settled the claim. It amounted to R35 000.
Annuities
The following annuities were incurred:
R
To the wife and two daughters of an employee who died during an
accident in her factory, R3 000 each
9 000
To a retired employee who was injured in the same accident
5 500
(It is not Gagu Mabasa’s policy to make payments of this nature but she decided to
make an exception in these two instances.)
Operating expenses
Gagu Mabasa’s operating expenses for the 2023 year of assessment were
R1 258 000. These expenses are all deductible in the determination of her taxable
income.
YOU ARE REQUIRED TO determine Gagu Mabasa’s taxable income for the 2023 year
of assessment
Question 6.3
(20 minutes)
Qhawe Engineering (Pty) Ltd is in the business of consulting, research and
manufacturing. Its head office is situated in Johannesburg and it has branches in
Cape Town and Durban. Qhawe Engineering (Pty) Ltd is registered as a vendor. All
amounts exclude value-added tax.
During Qhawe Engineering (Pty) Ltd’s year of assessment ended 28 February 2023, it
incurred, amongst other things, the following expenses:
R
Repairs (note 1)
165 000
Restraint of trade agreement (note 2)
2 000 000
Legal fees (note 3)
150 000
Gardening services (note 4)
120 000
Share incentive scheme (note 5)
700 000
Bonuses (note 6)
400 000
104
Chapter 6
Special deductions
Notes
(1) A secretary employed by Qhawe Engineering (Pty) Ltd overheard a comment
by a client that its offices look dilapidated and did not fit its professional image.
It therefore decided to improve the appearance of the building and to repair
the building where necessary. The architect’s fees amounted to R20 000. The
building contractor met his budget and the actual costs incurred were as
follows:
R
Building contractor
• Building façade (the principal front of a building, that faces on to
a street or open space)
70 000
• Painting interior walls
60 000
Repairs to fixtures (for example, wall plugs) damaged or not working
properly and replaced if necessary
15 000
(2) Qhawe Engineering (Pty) Ltd and Butho (Pty) Ltd went into a joint venture to
commence a research project. The goal with this research project was to
develop a sun heater wheel barrow to be used in rural areas where people do
not have tap water and electricity. Butho (Pty) Ltd lost interest in this project and
stopped financing it. Both parties knew that this was as breach of contract by
Butho (Pty) Ltd, but after negotiations, an agreement was reached, and it was
decided that Qhawe Engineering (Pty) Ltd would repay Butho (Pty) Ltd’s
investment. Although Qhawe Engineering (Pty) agreed, the payment will be
subject to a restraint of trade agreement applicable for five years from 1 April
2022.
(3) The legal costs relate to the restraint of trade agreement (refer to note 2).
(4) Garden and Cleaning Services CC have an excellent reputation and can pick
and choose their clients. The contract that Qhawe Engineering (Pty) Ltd entered
into with it states that the fees are paid upfront for one year. The amount was
paid on the first business day in January 2023.
(5) All Qhawe Engineering (Pty) Ltd’s full-time senior personnel, representing 40% of
its employees, were given the opportunity to take up shares in it at no cost per
share. According to an independent valuator, the market value of a share in it
was R7 a share at that date. There are no restrictions on the shares. The value of
the shares taken up by the senior personnel was R700 000.
(6) Qhawe Engineering (Pty) Ltd’s management paid bonuses to all full-time
employees in its 2023 year of assessment. The bonuses were paid on 31 March
2023.
YOU ARE REQUIRED TO determine the amounts that Qhawe Engineering (Pty) Ltd
may deduct in the determination of its taxable income for its year of assessment
ending 28 February 2023.
105
Chapter 7
Capital allowances
and recoupments
L Introduction
Section 11(a) of the Income Tax Act 58 of 1962 as amended does not allow the
deduction of expenditure and losses of a capital nature. Expenditure and losses are
of a capital nature if they relate to the income-earning structure (rather than the
income-earning operations). The Act provides elsewhere for the deduction of
expenditure and losses of a capital nature. Examples of types of expenditures and
legislation that apply to the income-earning structure and which will be dealt with in
this chapter, are:
• Fixed assets, including lease improvements and lease premiums in terms of
ss 11(e), (cA), (f), (g), (h), (o), 11A, 12C, 13, 13sept, 13sex and 13quin. Examples of
fixed assets are buildings, machinery, implements (including vehicles) and articles.
Remember that if the taxpayer held any of the above-mentioned assets as
trading stock, the trading stock is part of the income-earning operations. The
intention is to speculate with the asset and not to hold it as part of the incomeearning structure.
• Intellectual property (patents, models, trademarks, copyrights, etc.) in terms of ss
11(gB), (gC) and 11D.
In terms of s 11(e), the Commissioner must prepare a list of periods of use for different
assets. This list of write-off periods is provided in Binding General Ruling No. 7.
All amounts exclude VAT, unless stated otherwise.
L Contents
The table gives an indication of the time needed to complete the example or
question. The relevant sections or paragraphs that need to be known before
attempting an example or question are provided, and the level of the example or
question gives an indication of the difficulty of the question.
)
Example/Question
and time allocation
Topic and/or relevant sections
Level
Example 7.1
(5 minutes)
• Section 11(e)
Basic
Example 7.2
(10 minutes)
• Section 11(e)
Basic
continued
107
Tax Workbook
)
Example/Question
and time allocation
Topic and/or relevant sections
Level
Example 7.3
(10 minutes)
• Section 23C(1)
• Section 12C
Basic
Example 7.4
(10 minutes)
• Section 13(1)
Basic
Example 7.5
(20 minutes)
• Section 11(a), (f) and (g)
• Section 11A
• Section 13(1)
Intermediate
Example 7.6
(15 minutes)
• Section 13sex
• Section 13sept
Intermediate
Example 7.7
(10 minutes)
• Section 11(o)
• Section 12C
Basic
Example 7.8
(60 minutes)
• Section 8(4)(e)
• Section 11(a), (cA), (d), (e), (f), (g),
(gB) and (i)
• Section 12C and 12H
• Section 13(1) and 13quin
Advanced
Question 7.1
(30 minutes)
•
•
•
•
Intermediate
Question 7.2
(20 minutes)
• Section 12C
• Section 13(1)
Intermediate
Question 7.3
• Section 11(a), (c), (cA), (gA), (gB)
• Section 12C
• Section 13(1), 13sex and 13quin
Advanced
(20 minutes)
Section 12C
Section 8(4)(e) and (eB)
Section 13(1)
Section 24J
L Examples
Example 7.1
(5 minutes)
On 1 July 2022, Thuso Mngani, an attorney carrying on business in the Republic,
entered into a two-year instalment sale agreement for the purchase of a personal
computer. An instalment of R450 was payable each month. Had he purchased the
personal computer for cash, he would have paid R9 000. Interest of R952 is incurred
in terms of s 24J during his 2023 year of assessment.
The personal computer was delivered to his offices on 1 July 2022 and immediately
brought into use.
A three-year write-off period on personal computers is allowed for income tax
purposes. Thuso Mngani’s practice is not registered for VAT.
YOU ARE REQUIRED TO determine what effect the purchase of the personal
computer will have on Thuso Mngani’s taxable income for the 2023 year of
assessment.
108
Chapter 7
Capital allowances and recoupments
Solution 7.1
R
Finance charges
Finance charges in terms of s 24J for the 2023 year of assessment
Wear-and-tear allowance (s 11(e))
On “cash” cost of R9 000
Over a three-year period for eight months: R9 000 × 1 / 3 × 8 / 12
2 000
Total deductions from Thuso Mngani’s taxable income
2 952
Example 7.2
952
(10 minutes)
Xolani Zemvelo, a resident of the Republic, trades as a retailer in stationery. He
purchased a new printer at a cash cost of R32 000. Delivery and transport charges
were R1 000 and installation costs amounted to R750. The installation costs were
incurred when an electrical power point had to be relocated to provide power to
the printer, at a cost of R750, and when the floor had to be strengthened to hold the
weight of the printer, at a cost of R1 500. Xolani Zemvelo is not registered for VAT.
YOU ARE REQUIRED TO discuss which amount Xolani Zemvelo can claim a s 11(e)
allowance on.
Solution 7.2
Section 11(e) allowance
An allowance for wear-and-tear is available to Xolani Zemvelo on the cash cost of
the printer. The cash cost to Xolani Zemvelo is made up as follows:
R
Purchase price
32 000
Delivery and transport
1 000
Electrical installation
750
Foundation alterations
1 500
35 250
This cash cost to a taxpayer is defined in proviso (vii) to s 11(e). This cost is the cost is
the true cash cost including other direct costs incurred in the installation or erection
of the asset. The costs were incurred in bringing the asset to a state where it can be
used to produce income, costs including, for example, the electrical installation,
form part of the cost of the asset. Delivery and transport fall into the same category
as the electrical installation, but the foundation specifically forms part of the cost of
the asset in terms of proviso (iiA).
In this instance wear-and-tear would be allowed on R35 250, calculated for the period
from the date that the printer was actually brought into use for trade purposes.
Example 7.3
(10 minutes)
Nene Ltd, a VAT vendor, purchased new machinery. It concluded the transaction
for the purchase of this machinery on 1 June 2022 and committed itself to a
purchase consideration of R230 000 (R200 000 plus R30 000 VAT).
109
Tax Workbook
The supplier of this machinery was unable to supply the machinery on the contracted
delivery date of 31 August 2022. (The supplier’s employees had been on strike and
all delivery dates had to be revised.) Nene Ltd received the machinery on
30 November 2022. As a result of this delay, the supplier agreed to a reduced
consideration of R207 000 (R180 000 plus R27 000 VAT) and issued an invoice for the
amount.
Nene Ltd brought this machinery into use in a process of manufacture on
1 December 2022. On 31 January 2023 it paid R207 000 to the supplier.
Nene Ltd’s year of assessment ends on the last day of February.
YOU ARE REQUIRED TO discuss and calculate the capital allowances that Nene Ltd
is entitled to (or will be entitled to).
Solution 7.3
The cost for the s 12C allowance is the lesser of:
• the cash arm’s length cost on the date on which the transaction for the purchase
of the asset was in fact concluded; and
• the actual cost.
Therefore, the cost to Nene Ltd is R180 000. The VAT is excluded because Nene Ltd
will obtain an input tax credit for the R27 000 VAT paid (s 23C(1)).
The allowance is:
• R72 000 (40% of R180 000) in its 2023 year of assessment; and
• R36 000 (20% of R180 000) in its 2024, 2025 and 2026 years of assessment.
The s 12C allowance is not apportioned if the period of use is less than a full year of
assessment.
Example 7.4
(10 minutes)
Juba Ltd has always carried on its manufacturing business in leased premises. It
commenced with the erection of its own factory on 1 December 2021. As at
28 February 2022 (the company’s year-end), R3 000 000 (excluding VAT) had been
incurred on the construction of the factory.
The factory was completed on 31 December 2022 at a total cost of R18 000 000
(excluding VAT). Juba Ltd used the factory for the first time in January 2023.
YOU ARE REQUIRED TO calculate the capital allowances for Juba Ltd, a VAT vendor,
for the 2022 and 2023 years of assessment.
Solution 7.4
Cost of factory at 28 February 2022
No tax allowances are available during the 2022 year of assessment
because the factory has not yet been used for trade purposes.
Cost of factory when complete
Date brought into use: January 2023
Allowance: The s 13(1) annual allowance at a rate of 5%:
R18 000 000 × 5% (for the 2023 year of assessment)
110
R
3 000 000
18 000 000
900 000
Chapter 7
Capital allowances and recoupments
The s 13 allowance is not apportioned if the period of use is less than a full year of
assessment.
Example 7.5
(20 minutes)
Rifumu Mathebula carries on a manufacturing business as a sole trader. He had to
expand the production capacity of his business. After all options were investigated
his financial adviser advised him to lease the adjacent plot and to conclude a lease
agreement with his neighbour.
Under a lease between Rifumu Mathebula (the lessee) and the owner-lessor, a
taxpayer, a plot of land was leased by him for 20 years from 1 April 2022. Rifumu
Mathebula is a vendor, and you may assume that all amounts exclude VAT where
applicable.
The lease agreement provides for:
• a rental of R2 000 a month, payable from completion date;
• a lease premium of R96 000 to be paid on 1 April 2022; and
• an industrial building to be erected on the land at a cost of R1 920 000.
The industrial building was duly erected at a cost of R2 400 000. It was completed on
31 August 2022 and brought into use a day later on 1 September 2022.
YOU ARE REQUIRED TO calculate the amounts to be deducted in the determination
of Rifumu Mathebula’s 2023 taxable income, arising from the above lease
agreement.
Solution 7.5
Amounts deductible in the determination of taxable income
Rental incurred (under s 11(a)): R2 000 a month for six months
Lease premium allowance (in terms of s 11(f )) (note 1):
R96 000 / 20 years × 6 / 12 since it is used for the carrying on of a trade
for only six months (see the opening words of s 11)
Obligatory improvements allowance (in terms of s 11(g)):
R1 920 000 / 19 years and 7 months × 6 / 12 since it is used for the
carrying on of a trade for only six months (see the opening words of
s 11)
Industrial building allowances
Cost
Less: Section 11(g) allowances (in total)
R
12 000
2 400
49 021
2 400 000
(1 920 000)
480 000
Section 13 allowance (5% on R480 000)
24 000
Note 1: It is submitted that s 11A does not apply because Rifumu Mathebula is
already trading, and the premium does not relate to a new trade.
111
Tax Workbook
Example 7.6
(15 minutes)
Anzani Limited bought 10 flats on 19 April 2022 (date on which ownership was
transferred) in a newly erected building from the developer, at a total cost of
R200 000 each. The flats are rented out to bona fide employees for R1 000 a month
and were occupied on 1 May 2022. The employees have the option to buy a flat for
R200 000. The purchase will be financed by an interest-free loan from the employer.
The loan is repayable in six-monthly instalments of R10 000. Only one employee
exercised this option, and ownership was transferred on 1 August 2022. The
employee repaid R10 000 of the loan on 31 January 2023.
YOU ARE REQUIRED TO discuss and calculate the deductions that Anzani Limited
may claim for the year of assessment ending 31 March 2023.
Solution 7.6
Anzani Limited qualifies for a s 13sex allowance on the flats rented out. The taxpayer
owns at least five new and unused residential units that are situated in the
Republic and are used for trade purposes. All ten residential units qualify for the
deduction because the unit was not sold during a previous year. The taxpayer
qualifies for the 5% allowance as well as a further 5% allowance, because the units
qualify as low-cost residential units. A low-cost residential unit is defined as an
apartment the cost of which does not exceed R350 000 and the owner of which
does not charge rentals of more than 1% of that cost. Because the flats are part of a
building that was erected by the developer, the allowances are based on 55% of
the cost price.
The s 13sex deduction is calculated as follows:
R200 000 × 10 units × (5% + 5%) × 55% (part of building purchased) = R110 000.
(The sale of a unit to an employee will result in a s 8(4)(a) recoupment.)
The s 13sept allowance on the low-cost residential unit sold to the employee
(financed by an interest-free loan) is calculated on the outstanding loan amount at
the end of the year of assessment, at 10% of the outstanding amount. The
deduction amounts to:
R190 000 (R200 000 – R10 000) × 10% = R19 000.
(Repayments of the loan by the employee in any subsequent year will result in a
recoupment in terms of s 13sept(4) of the lesser of the amount repaid or the
aggregate of all amounts allowed as a deduction in terms of s 13sept.)
Example 7.7
(10 minutes)
Ukhozi (Pty) Ltd’s financial year ends on the last day of February. All amounts
exclude VAT where applicable. On 1 January 2021, Ukhozi (Pty) Ltd purchased a
new machine under a cash arm’s length transaction for R100 000. On the same day
it brought this machine into use in a process of manufacture.
On 31 August 2022, Ukhozi (Pty) Ltd ceased using this machine after it was burnt due
to an electrical fault. On the same day its remains were sold to a scrap-metal dealer
for R1 000. Ukhozi (Pty) Ltd then claimed for the loss of this machine from its insurer.
On 15 February 2023, its insurer awarded it R15 000 as full and final settlement for its
claim.
YOU ARE REQUIRED TO calculate the normal tax consequences, including capital
gains tax consequences, arising out of the purchase and sale of this machine.
112
Chapter 7
Capital allowances and recoupments
Solution 7.7
Normal tax
Cost of machine
Less: Section 12C capital allowance (at 40%)
R
100 000
40 000
Tax value on 28 February 2021
Less: Section 12C capital allowance (at 20%)
60 000
20 000
Tax value on 28 February 2022
Less: Section 12C capital allowance (at 20%)
40 000
20 000
Tax value on 31 August 2022
20 000
Proceeds
Sold for
Insurance settlement (ex VAT)
Less: Tax value
1 000
15 000
(20 000)
Scrapping allowance (in terms of s 11(o))
(4 000)
Capital gains tax
Proceeds (R16 000 – recoupment of Rnil)
Less: Base cost (R100 000 – R80 000 – R4 000)
Capital gain (capital loss)
16 000
16 000
–
Example 7.8
(60 minutes)
Gagasi Ltd (a resident company) manufactures different brands of breakfast
cereals in the Republic. The company is registered for VAT purposes.
The following preliminary income statement of the company for the financial year
1 October 2021 to 30 September 2022 is at your disposal. All amounts exclude VAT,
unless stated otherwise.
Note
R
Sales
282 500 200
Less: Cost of sales
(107 400 300)
Gross profit (taxable)
Add: Other income
Interest received
Profit on sale of asset
175 099 900
1
2
Income
Less: Operating expenses
Repairs and moving costs
Depreciation
Leasehold improvements and related expenses
Bad debts – trade debtors
Salaries and wages
Scientific research expenditure
Trade mark
Other tax-deductible expenditure
Net profit before tax
5 160 000
500 000
180 759 900
3
2
4
5
6
7
445 000
9 248 256
23 620 000
125 000
33 344 759
1 705 000
38 800
96 844 000 (165 370 815)
15 389 085
113
Tax Workbook
Notes
(1) Gagasi Ltd earned interest on investments at local financial institutions.
(2) Profit on sale of fixed asset and depreciation provided:
• Machine B (with a tax value of Rnil) was sold for R360 000 (less than the original
cost) on 30 November 2021 to a non-connected party.
• Manufacturing machine C (new) was purchased on 1 June 2022 for R2 500 000
(including all related qualifying costs) and brought into use on 1 July 2022 in
the new industrial building in Cape Town.
• Two delivery trucks were purchased for R420 000 each on 1 June 2022 and
were immediately bought into use. The approved write-off period on trucks in
terms of Binding General Ruling No. 7 is four years.
• The industrial (factory) building was erected in Gauteng during 2010 at a total
cost of R20 255 000 and brought into use on 1 September 2010.
• A contract was concluded on 1 July 2021 to erect a new office block at a
cost of R8 000 000 in Gauteng. The office block was brought into use on
1 February 2022.
• Depreciation on motor vehicles and office equipment amounts to R6 900 250
and corresponds with the allowable write-off periods as stated in Binding
General Ruling No. 7.
(3) Repairs and moving costs consist of:
R
• Machine D (fully written off for tax purposes) was upgraded, and
the machine now produces twice its former production output.
The machine is as good as new. The cost of the original machine
amounted to R200 000. The cost of the R275 000 upgrade qualifies
for a 40% allowance in terms of s 12C
275 000
• Machine E (fully written-off for tax purposes) was moved to the
new factory in Cape Town (note 4) and brought into use on
1 July 2022.
120 000
• Foundation relating to machine E
50 000
445 000
(4) On 31 October 2021, the company signed a 20-year lease contract with
immediate effect. In terms of the contract, Gagasi Ltd had to erect another
industrial building at a cost of R20 000 000 on the same premises. The lessor gave
no further specifications. The building was completed on 30 June 2022 at a cost
of R23 000 000 and brought into use on 1 July 2022. The lease premium of
R500 000 was paid on the signing of the contract, and the monthly rental of
R15 000 was payable from the signing of the lease contract. The original
industrial building was occupied and brought into use immediately after the
signing of the lease agreement.
(5) The following transactions relate to the amount of salaries and wages deducted
in the income statement:
• One of the research assistants resigned due to differences between herself
and the supervisor. She accepted an amount of R90 000 as part of a restraint
of trade agreement. The restraint of trade agreement is valid for a two-year
period, and the amount was paid on 31 August 2022.
114
Chapter 7
Capital allowances and recoupments
• On 1 February 2022, Gagasi Ltd entered into a six-month registered learnership
agreement with one of its existing disabled employees on an NQF level 7, Bran
Brown. Gagasi Ltd complies with all the requirements set by the Commissioner
with regards to learnership agreements, in terms of s 12H.
• All other amounts included in salaries and wages are tax deductible.
(6) Gagasi Ltd conducts qualifying technological research and development
activities. The research activities were approved by the Department of Science
and Technology.
The management of Gagasi Ltd decided to employ a team of experts, in order
to create a new nutritious, affordable breakfast cereal. A patent would
ultimately be registered in terms of the Patents Act. The following amounts were
spent during the period 1 May 2022 to 30 September 2022:
R
Cost of laboratory (exclusively used for this research), brought
into use for the first time on 1 May 2022
900 000
New and unused machinery (exclusively used for this research)
for the laboratory, brought into use on 2 May 2022
350 000
Research assistants’ salaries
440 000
Materials consumed
15 000
1 705 000
(7) During the year, Gagasi Ltd registered its environmentally friendly logo as a trade
mark to be included on all future product packaging. The cost of registering the
trade mark amounted to R38 800.
YOU ARE REQUIRED TO calculate the taxable income of Gagasi Ltd for its year of
assessment ending on 30 September 2022, starting with the net profit before tax of
R15 389 085.
Solution 7.8
Description
Net profit before tax
Gross profit
Interest received
Profit on sale of asset,
depreciation and
moving costs
Machine A
Depreciation
Repairs and moving costs
Recoupment – machine B
(s 8(4)(e))
Machine C (s s 12C)
Delivery trucks
(s 11(e))
Factory building
(s 13(1))
Calculation/reason
No adjustment – taxable (information
provided)
No interest exemption for companies
Deduct accounting profit
Add back accounting depreciation
Add back accounting entry
R2 500 000 × 40%
(R420 000 × 2) / 4 years × 4 / 12
R20 255 000 × 5%
R
15 389 085
–
–
(500 000)
9 248 256
445 000
360 000
(1 000 000)
(70 000)
(1 012 750)
continued
115
Tax Workbook
Office block
(s 13quin)
Other assets (s 11(e))
Machine D (s 12C)
Machine E (s 12C) Moving
costs
Machine E Foundation
Leasehold improvements
Lease premium
(s 11(f))
Lease improvements
(s 11(g))
Factory building
(s 13(1)) on excess
Rentals (s 11(a))
Bad debts (s 11(i))
Salaries and wages:
Restraint of trade
(s 11(cA))
Learnership agreements
(s 12H)
Scientific research
expenditure
(s 11D, 12C(1)(gA)
and s 13(1)(d))
Trade mark
(s 11(gB))
Other expenditure
Taxable income
R8 000 000 × 5%
(400 000)
Amount provided
(6 900 250)
R275 000 × 40% (as the repairs leads to increase in capacity it needs to be
capitalised. The amount qualifies for the
(110 000)
s 12C allowance on the cost)
Deductible in full because there is no
remaining write-off period for the machine
(120 000)
Deductible in full because there is no
remaining write-off period for the machine
(50 000)
Add back accounting entry
23 620 000
R500 000 / 20 years × 11 / 12
R20 000 000 /
(19 years and 4 months) × 3 / 12
R3 000 000 × 5%
R15 000 × 11 months
Trade debtors written off – deductible as
previously included in taxable income and
taken into account in calculating the net
profit before tax
(22 917)
(258 621)
(150 000)
(165 000)
–
Add accounting entry
90 000
Deduction limited to the lesser of:
R90 000 / 2 years = R45 000; or
R90 000 / 3 = R30 000, therefore
(30 000)
Allowance on a registered learnership
agreement entered into by Gagasi Ltd, with
a disabled learner (Bran Brown), who at the
time of entering into that agreement was
employed by Gagasi Ltd. Commencement
allowance: R50 000 × 6 / 12
(25 000)
Completion allowance
(50 000)
1 705 000
Reverse accounting treatment
Cost of laboratory (exclusively used for this
research), brought into use for the first time
on 1 May 2022:
5% × R900 000
(45 000)
New and unused machinery (exclusively
used for this research) for the laboratory,
brought into use on 2 May 2022:
R350 000 × 50%
(175 000)
Section 11D expenses incurred
(R440 000 + R15 000) × 150% deduction
(682 500)
Registration of trade mark – deductible in
full
–
Tax deductible – given
–
39 090 303
116
Chapter 7
Capital allowances and recoupments
L Questions
Question 7.1
(30 minutes)
The following information relates to Bantam Manufacturing Ltd, a resident of the
Republic, for its 2023 year of assessment (which ended on 28 February 2023).
Bantam Manufacturing Ltd is a VAT vendor and all amounts exclude VAT where
applicable. Bantam Manufacturing Ltd will elect any option available to it that will
defer its normal tax liability.
• A factory machine was destroyed by fire on 31 May 2022. It cost R70 000 on
1 February 2021. Its tax value at 28 February 2022 was R28 000. (It qualified for the
s 12C capital allowance.) Proceeds from its insurer were R82 500 (excluding VAT),
and it was replaced by a new machine, purchased under a 36-month instalment
credit sale agreement on 1 September 2022, at a cash price of R112 500 plus finance
charges of R31 500. The payments amounted to R4 000 per month from
1 September 2022 to 31 August 2025. This new replacement machine was brought
into use on 1 January 2023. In terms of s 24J, the interest was R6 096 for the first
four months and R2 838 for the next two months.
• Another manufacturing machine was also destroyed by the same fire on 31 May
2022. It had cost R35 250 on 1 November 2020. Its tax value at 28 February 2022
was R14 100. (It qualified for the s 12C capital allowance at a rate of 20%.)
Proceeds from its insurer were R27 000. This machine was replaced by a used
machine, which was purchased for R90 000 cash on 1 July 2022 and brought into
use on the same day.
• An additional factory building was erected at a cost of R7 700 000. It was brought
into use on 1 November 2022. The erection of this building commenced on
1 November 2021.
• A further factory building, which cost R8 000 000, was brought into use on
1 February 2023. The erection of this building commenced on 1 July 2022.
The value-added tax consequences of each transaction have been correctly
accounted for.
YOU ARE REQUIRED TO calculate the inclusions in, and deductions from, the gross
income of Bantam Manufacturing Ltd for its 2023 year of assessment. Also, calculate
any capital gain or loss that will be taken into account in the determination of
Bantam Manufacturing Ltd’s aggregate capital gain or loss for its 2023 year of
assessment.
Question 7.2
(30 minutes)
Umcebo Ltd is a resident of the Republic with a February year-end. Umcebo Ltd is a
VAT vendor. It manufactures chicken breeding batteries from a factory situated in
Pietermaritzburg. The land that the factory is erected on belongs to Umcebo Ltd. It
erected the factory building on this land. It also erected a large warehouse on the
same premises. This warehouse is a separate building from the factory building. The
warehouse did not qualify for any capital allowances.
After a feasibility study had been carried out, it was agreed that Umcebo Ltd would
now also manufacture cattle-feed troughs. A factory was needed to house the
cattle-feed troughs. As the warehouse was being under-utilised, it was altered into
the required factory.
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Tax Workbook
Alterations and additions commenced on 1 May 2022. The buildings were
completed on 31 October 2022, at a cost of R600 000. The warehouse had originally
cost R150 000 to erect. Production commenced in this factory building (the
converted warehouse) on 1 November 2022. The industrial capacity of this factory
was considerably increased as a result of its conversion from a warehouse.
The following four machines were ordered by Umcebo Ltd on 1 September 2022 for
its cattle-feed trough division:
• Machine 1 was brought into use on 1 November 2022. It was purchased new and
cost R51 750 (R45 000 plus R6 750 VAT) cash.
• Machine 2 was brought into use on 1 December 2022. It was purchased as a
second-hand machine and cost R34 500 (R30 000 plus R4 500 VAT) cash.
• Machine 3 was brought into use on 1 February 2023. It was purchased as a
second-hand machine and it cost R42 750. As Machine 3 was purchased from a
non-vendor, no VAT was paid on the purchase consideration. Umcebo Ltd,
however, qualified for a notional input tax deduction for VAT purposes of R5 250
on the purchase consideration.
• A further machine, Machine 4 (a second-hand machine), was given (donated) to
Umcebo Ltd by a manufacturer who had recently ceased business. Had Umcebo
Ltd purchased this machine it would have had to pay R15 000 (excluding VAT) for
it. Machine 4 was brought into use on 1 December 2022. Because the machine
does not have a cost price, the company qualifies for a deduction in terms of
s 11(e). The acceptable write-off period in terms of Binding General Ruling No. 7 is
four years on the value of the machine.
YOU ARE REQUIRED TO calculate all the tax allowances and deductions that
Umcebo Ltd is entitled to in its 2023 year of assessment, arising out of the
transactions it entered into with the establishment of its cattle-feed trough
manufacturing division.
Question 7.3
(20 minutes)
Nghwazi Engineering (Pty) Ltd designs and manufactures machinery according to
client’s specifications. Nghwazi Engineering (Pty) Ltd is not a small business
corporation enterprise as defined in s 12E. The budget for the cost of capital
investment for the year of assessment ending 28 February 2023 was as follows:
R
Industrial building and plant (note 1)
25 000 000
Housing for employees (note 2)
2 640 000
Administrative offices (note 3)
9 000 000
Design and register trademark (note 4)
500 000
Acquisition of design as defined in the Designs Act 195 of 1993 (note 5)
700 000
Restraint of trade agreement (note 6)
5 000 000
Cost machine manufactured by Engineering (Pty) Ltd for own use
(note 7)
118
900 000
Chapter 7
Capital allowances and recoupments
Notes
(1) R18 000 000 will be spent on the new and unused plant to expand the
production line. The industrial building must be altered and improved to make
provision for the plant as mentioned above. The estimated cost of the
improvements to be made to the building is R7 000 000.
(2) The estimated housing costs are made up as follows:
• Housing on premises will consist of two residential units. It was decided to
make provision for the plant managers and security personnel to live on the
premises when on duty. Their hours are not fixed, and they cannot be
expected to travel from their home at short notice. The units will be basic
apartments and provided free of charge. Two residential units will be built at a
cost of R300 000 each.
• Three apartments will be bought from a developer within walking distance
from the office. The cost of each apartment will be R680 000. The apartments
will be used for housing of non-resident contractors.
(3) The administrative office will be bought from a developer.
(4) All its competitors have brand names and logos. It was thus important to follow
this trend. An advertising company will devise the logo and brand name. It will
be registered as a trade mark under the Trademark Act.
(5) The company is in the process of buying a design from a young engineering
student for R700 000. The directors know that his design is worth a lot of money.
The student is ecstatic and accepted the offer of R700 000.
(6) The company entered into a restraint of trade agreement in the prior year with
one of its competitors, Muhali CC. The contract stipulates that R5 000 000 will be
payable over a five-year period. At the end of the end of each year it will be
established if there was a breach of contract before any payments are made.
(7) The market value of a similar machine is R1 200 000.
YOU ARE REQUIRED to calculate the deductions and allowances that Nghwazi
Engineering (Pty) Ltd may claim, if the estimates are assumed to be correct, for the
year of assessment ending 28 February 2023. Round all amounts off to the nearest
thousand rand.
119
Chapter 8
Individuals
L Introduction
The examples and questions in this chapter illustrate the taxation of a natural person
(who is a resident of the Republic) for his/her 2023 year of assessment. Further aspects
covered include the following:
• receipts and accruals (excluding fringe benefits, dealt with in chapter 17, and
lump sums, dealt with in chapter 16);
• exemptions;
• deductions relating to sole traders;
• deductions relating only to individuals, for example, pension, provident and
retirement annuity fund contributions;
• donations to certain qualifying public benefit organisations;
• section 6 and 6quat rebates;
• section 6A and 6B tax credits.
To answer the examples and questions, it is necessary to keep in mind the
framework for the calculation of the normal tax liability and the amount payable or
due to the taxpayer.
Framework
The basic framework for calculating taxable income is as follows:
“Gross income” as defined
Less: Exempt income
Gives: “Income” as defined
Add: Portion of allowances not used for business purposes (s 8)
Less: Deductions and allowances (All s 11 and other deductions except for ss 11F
and 18A)
Add: Taxable capital gain (Eighth Schedule)
Less: Section 11F contributions to any retirement fund
Less: Donations to qualifying public benefit organisations
Gives: “Taxable income” as defined
Calculation of amount payable or refundable:
Normal tax payable in accordance with the tax table (natural persons)
Less: Rebates (s 6 (natural persons only) and s 6quat (resident taxpayers))
Less: Credit (s 6A (medical scheme fees tax credit))
Less: Credit (s 6B (additional medical expenses tax credit))
Gives: Normal tax liability
Less: Prepaid tax (employees’ tax and provisional tax)
Gives: Amount payable or (refundable)
121
Tax Workbook
L Contents
The table gives an indication of the time that is needed to complete the example or
question. The relevant provisions (sections or paragraphs of the legislation) that must
be known before attempting the example or question are provided. The level of the
example or question gives an indication of the difficulty of the question.
)
Example/Question
and time allocation
Topic and/or relevant sections
Level
Example 8.1
(15 minutes)
• Section 18A – donations to public
benefit organisations
Example 8.2
(30 minutes)
• Section 6B – additional medical
expenses tax credit
Intermediate
Example 8.3
(30 minutes)
• Section 11(a) – general deduction
formula
• Section 11(c) – legal costs
• Section 11(e) – wear-and-tear or
depreciation
• Section 23(b) – home office
• Section 23(g) – apportionment of
private and business expenses
• Section 23(m) – limitation of
deductions by employees
Intermediate
Example 8.4
(30 minutes)
• Section 10(1)(i) and (k) – certain
exemptions
• Section 11F – pension fund and
retirement annuity fund contributions
• Section 11(nA) – income refunded
• Section 23(f) – prohibited deductions
• Section 26A – taxable capital gain
Intermediate
Example 8.5
(45 minutes)
• Section 6 – personal rebates
• Section 6A – medical scheme fees tax
credit
• Section 6B – additional medical
expenses tax credit
• Section 6quat – foreign taxes rebate
• Section 7(2) – deemed accrual for
spouses
• Section 10(1)(i) – interest exemption
• Section 11F – retirement annuity fund
contributions
• Section 18A – donations to public
benefit organisations
Advanced
Example 8.6
(20 minutes)
• Section 20A – ring-fencing of assessed
losses
Question 8.1
(20 minutes)
Combined question
Intermediate
Question 8.2
(40 minutes)
Combined question
Intermediate
Question 8.3
(45 minutes)
Combined question
Advanced
Question 8.4
(45 minutes)
Combined question
Advanced
122
Chapter 8
Individuals
L Examples
Example 8.1
(15 minutes)
The following three taxpayers, all of whom are under the age of 65 years, have made
donations to a qualifying public benefit organisation. The necessary s 18A receipts
were obtained. These taxpayers would now like to know what their taxable incomes
will be.
Details of their receipts and accruals and expenditure:
Arthur
R
613 000
17 500
2 000
Billy
R
880 000
21 500
–
Colin
R
550 000
28 800
1 500
Arthur
R
613 000
17 500
Billy
R
880 000
21 500
Colin
R
550 000
28 800
(17 500)
2 000
(2 000)
(21 500)
–
–
(23 800)
1 500
(1 500)
613 000
–
880 000
(900 000)
555 000
–
Taxable income before s 18A allowance
Section 18A allowance
Actual donation, limited to 10% of taxable
income before s 18A
Arthur: R800 limited to 10% × R613 000
Billy: R1 000 limited to Rnil
Colin: R20 000 limited to 10% × R555 000
Less: Section 18A allowance (see above)
613 000
(20 000)
555 000
Taxable income/(assessed loss)
612 200
Director’s fees
Interest from taxable investments
Interest from “tax free investment”
Assessed loss from a failed business venture,
brought forward from 2022 (not ring-fenced)
–
900 000
–
Donation to an approved public benefit
organisation
800
1 000
20 000
YOU ARE REQUIRED TO determine each taxpayer’s taxable income or assessed loss
for the 2023 year of assessment.
Solution 8.1
Director’s fees
Interest from taxable investments
Less: Exempt first R23 800 in terms of
s 10(1)(i), but limited to actual
Interest from “tax free investment”
Less: Exempt in full in terms of s 12T
Less: Assessed loss brought forward
(800)
–
(20 000)
(20 000)
535 000
Note: The disallowed donation made by Billy as a result of the actual donation
exceeding the 10% limit may be carried forward to the 2024 year of assessment. The
excess shall be deemed to be a donation actually paid in that year of assessment.
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Tax Workbook
Example 8.2
(30 minutes)
Listed below are six case studies concerning medical expenses incurred and paid
by taxpayers during the 2023 year of assessment. You may assume that the taxpayers
and their dependants were members of their respective medical schemes
throughout the year of assessment, and no person is a person with a “disability” as
defined (unless stated otherwise).
(1) Annie Adams is 40 years old and self-employed. She, her husband and their two
minor children are members of a registered medical scheme. She contributed
R5 500 a month to the medical scheme. In addition, she paid qualifying medical
expenses of R10 500 that were not reimbursed by the medical scheme. Her
taxable income was R250 000.
(2) Betty Black is 50 years old. She, her husband and their three minor children are
members of a registered medical scheme. Her employer made monthly
contributions of R3 500 to the medical scheme, while she also contributed R3 500
a month. The employer’s monthly contributions resulted in a benefit of R42 000 in
terms of paragraph 12A of the Seventh Schedule. She paid qualifying medical
expenses of R10 500 that were not reimbursed by the medical scheme. Her
taxable income was R280 000.
(3) Cathy Cohen is 70 years old and retired. She and her husband are members of a
registered medical scheme. She contributed R1 500 a month to the medical
scheme. She also paid qualifying medical expenses of R20 000 that were not
reimbursed by the medical scheme. Her taxable income was R140 000.
(4) David Devine is 40 years old and self-employed. He, his wife and his four minor
children are members of a registered medical scheme. His wife is a person with
a “disability” as defined. He contributed R6 500 a month to the medical scheme.
He also paid qualifying medical expenses of R10 500 that were not reimbursed
by the medical scheme. His taxable income was R360 000.
(5) Eric Edison is 75 years old and retired. He is a member of a registered medical
scheme. Since his retirement, his previous employer has continued to contribute
R5 000 a month to the medical scheme for his membership of it. He does not
contribute to the medical scheme. He paid qualifying medical expenses of
R25 000 that were not reimbursed by the medical scheme. His taxable income
was R180 000.
(6) Fran Ferguson is 45 years old. She, her husband and her minor child are members
of a registered medical scheme. Her employer contributed R3 700 a month to
the medical scheme. She contributed R500 a month to the scheme. The taxable
benefit relating to her employer’s contribution to the medical scheme,
calculated according to the provisions of paragraph 12A of the Seventh
Schedule, was R3 700 a month. She paid qualifying medical expenses of R11 590
that were not reimbursed by the medical scheme. Her taxable income before
the inclusion of the above taxable fringe benefit was R247 400.
YOU ARE REQUIRED to calculate the s 6B additional medical expenses tax credit of
each of the above taxpayers for his/her 2023 year of assessment.
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Chapter 8
Individuals
Solution 8.2
(1) Annie Adams
Section 6B: Additional medical expenses tax credit
Contributions to medical scheme of R66 000 (R5 500 × 12);
Less: 4 × s 6A credit (4 × (R694 + (R234 × 2)) ×12)
Add: Qualifying expenses not reimbursed by medical scheme
Reduced by R18 750 (7,5% of taxable income of R250 000)
R
R
66 000
(55 776)
10 224
10 500
20 724
(18 750)
1 974
Section 6B tax credit (R1 974 × 25%)
494
(2) Betty Black
Section 6B: Additional medical expenses tax credit
Contributions to medical scheme of R84 000, being own
contributions of R42 000 (R3 500 × 12) and fringe benefit of
R42 000.
Less: 4 × s 6A credit (4 × (R694 + (R234 × 3)) × 12)
Add: Qualifying expenses not reimbursed by medical scheme
Reduced by R21 000 (7,5% of taxable income of R280 000)
R
R
84 000
(67 008)
16 992
10 500
27 492
(21 000)
6 492
Section 6B tax credit (R6 492× 25%)
1 623
(3) Cathy Cohen
Section 6B: Additional medical expenses tax credit
Contributions to medical scheme R1 500 × 12 months
Less: 3 × s 6A credit (3 × (R694 × 12))
Add: Qualifying expenses not reimbursed by medical scheme
R
R
18 000
(24 984)
–
20 000
20 000
Multiplied by 33,3% equals the s 6B tax credit
(4) David Devine
Section 6B: Additional medical expenses tax credit
Contributions to medical scheme (R6 500 × 12)
Less: 3 × s 6A credit (3 × (R694 + (R234 × 4)) × 12)
Add: Qualifying expenses not reimbursed by medical scheme
6 660
R
R
78 000
(58 680)
19 320
10 500
29 820
Section 6B tax credit (R29 820 × 33,3%)
9 930
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Tax Workbook
(5) Eric Edison
R
Section 6B: Additional medical expenses tax credit
Contributions to medical scheme (not applicable because
the contribution by his employer has a nil value under para
12A(5)(a) and also no s 6A credit)
Add: Qualifying expenses not reimbursed by medical scheme
R
–
25 000
25 000
Section 6B credit (R25 0000 × 33,3%)
8 325
(6) Fran Ferguson
R
R
Section 6B: Additional medical expenses tax credit
Contributions to medical scheme (own contributions of R6 000
(R500 × 12 months) and fringe benefit of R44 400)
Less: 4 × s 6A credit (4 × (R694 + R234) × 12)
50 400
(44 544)
Add: Qualifying expenses not reimbursed by medical scheme
5 856
11 590
Reduced by R21 885 (7,5% of taxable income of R291 800
(R247 400 plus fringe benefit of R44 400))
17 446
(21 885)
–
Section 6B credit (Rnil × 25%)
–
Example 8.3
(30 minutes)
Mpho Madlala is employed by an insurer to sell life insurance policies. He earns a
fixed salary of R440 000 a year, and also receives an entertainment allowance of
R5 000 a month to be used to entertain future policyholders on behalf of his employer
(see below). He does not earn commission. During the 2023 year of assessment,
Mpho also earned R400 000 in his spare time as a freelance computer programmer.
Mpho is not a vendor.
Mpho incurred the following expenses during the 2023 year of assessment in respect
of his employment:
R
• Lunches enjoyed with future policyholders (including Mpho’s lunches,
costing R6 000)
• Tickets for sporting events presented to managers of businesses
in the area who may be persuaded to invest in “key-man” policies
48 000
30 000
He funded the above expenses out of his entertainment allowance to the extent of
R60 000, and out of his own pocket to the extent of R18 000.
126
Chapter 8
Individuals
To promote his computer programming activities, Mpho incurred the following
expenses during the 2023 year of assessment:
R
• Entrance fee to join the local squash club, where he hopes to meet
business contacts
5 000
• Annual membership fee at the local squash club
24 000
• Drinks and snacks at the club with other members (including Mpho’s
own costs of R4 000)
21 000
• Ballpoint pens advertising his computer-programming services,
presented to fellow squash players
3 000
Mpho has been conducting his computer programming business from his home since
1 July 2021. His office at home occupies 10% of the total floor area of his home. He
also uses the television room (which occupies 5% of the floor area) as an office
during the day. Both rooms have been specifically equipped for business purposes.
He incurred the following expenses during the 2023 year of assessment on his home:
•
•
•
•
•
Mortgage bond repayments (R23 000 relating to capital repayments)
Cleaning and maintenance
New built-in cupboards installed in his office at home
Electricity, water and rates
Telephone (80% of its use being for his business). The Commissioner
accepts this apportionment as being reasonable in terms of s 23(g).
R
240 000
60 000
40 000
66 000
17 600
Mpho purchased computer equipment on 1 July 2022 at a cost of R112 500, which
was brought into use immediately. (The acceptable write-off period of the
equipment is three years.)
During the 2023 year of assessment, Mpho incurred legal expenses in connection
with:
R
• a court dispute with the local municipality relating to his right to use
his home for business purposes (the decision was given in his favour);
• the recovery of his trade debtors; and
• attempting to recover R5 000 in cash stolen from his computer
programming receipts by his assistant during December 2022, and a
loan of R20 000 she still owed him at the time of her disappearance.
She earned R30 000 a month for the two months that she was employed.
50 000
10 000
4 000
YOU ARE REQUIRED TO explain to Mpho whether the above expenses are
deductible in determining his taxable income for the 2023 year of assessment.
Solution 8.3
Entertainment expenditure
Entertainment expenditure incurred in respect of his employment is not deductible.
As his remuneration is not normally derived mainly in the form of commission, the
entertainment expenditure incurred by him of R78 000 (R48 000 and R30 000) is not
deductible in terms of s 23(m). The fact that he receives an entertainment
127
Tax Workbook
allowance does not alter this fact. The entertainment allowance must be included
in taxable income in full. (Please note that had Mpho, however, received a
reimbursement or an advance for expenditure to be incurred on the instruction of
his employer, and proof was provided to the employer that such expenditure was
wholly incurred as aforesaid, it would not be taxable.)
The deduction of the entertainment expenditure incurred in respect of his
programming activities is subject to the provisions of s 11(a), and Mpho must prove
that the non-capital costs were incurred in the production of his income. The initial
entrance fee at the squash club is therefore not deductible, because it is of a
capital nature, while the membership fee (R24 000), drinks and snacks (including his
own) of R21 000, are deductible – provided that he can submit proof that the
expenses were incurred in the production of income.
Advertising expenditure
The R3 000 incurred for the ballpoint pens is an advertising expense (and not
entertainment). It was incurred in the production of his income from his computer
programming activities and is therefore deductible in terms of s 11(a).
Home office expenditure
He may deduct the cost of the expenses on his home, in proportion to the floor area
occupied by his office at home as a percentage of his total floor area, because his
office at home is specifically equipped for the purposes of his trade and is regularly
and exclusively used for this purpose (s 23(b)). Expenses relating to the television
room are not deductible, as the room was not used exclusively for this purpose,
although it was specifically equipped for it.
The following other expenses may be claimed in terms of ss 11(a) and 23(g):
• Mortgage bond repayments (interest portion only)
• Cleaning and maintenance
• Built-in cupboards (capital expense and no s 11(e) allowance
as they form part of the permanent structure of his home)
• Electricity, water and rates
R
217 000
60 000
–
66 000
343 000
Deduction: 10% (in relation to the “trade” floor area)
Telephone (80% × R17 600 for trade use)
34 300
14 080
48 380
Wear-and-tear allowance
A wear-and-tear allowance on computer equipment may be claimed in terms of
s 11(e). The allowance is R25 000 (R112 500 / 3 years × 8 / 12) for the 2023 year of
assessment.
Legal expenses
• Legal expenses relating to the right to use his home for business purposes are
incurred for the purpose of attaining an enduring trade benefit, therefore of a
capital nature and not deductible.
• Legal expenses of R10 000 for the collection of his trade debts are deductible in
terms of s 11(c).
128
Chapter 8
Individuals
• Legal expenses incurred in recovering the cash stolen is deductible in terms of
ss 11(a) and 23(g), while the legal costs incurred in recovering the outstanding
loan of R20 000 is not deductible. The deductible portion of the R4 000 legal fees is
thus R800 (R5 000 / R25 000 × R4 000).
It can be argued that cash is floating capital and not fixed capital, and that
there is a close connection between Mpho’s business operations and the risk of
petty theft of this nature. Also, the actual loss of R5 000 is tax deductible.
The legal expenses relating to the irrecoverable loan of R20 000 are, however, of
a capital nature as Mpho is not a moneylender. Also, the bad-debt deduction in
terms of s 11(i) is unavailable, as the debt never formed part of his income. (The
salary paid to his assistant of R60 000 (R30 000 × 2 months) is deductible in terms of
s 11(a).)
Example 8.4
(30 minutes)
Listed below are details of the receipts and accruals and expenditure of four
taxpayers for the 2023 year of assessment. Ignore the provisions of any double tax
agreements.
Khokho Mosea
Khokho Mosea is 25 years old and married out of community of property.
Receipts and accruals
Salary
Interest from a local bank (not a “tax free investment” as per s 12T)
Dividends on share investments in
– Republic private companies
– Republic public companies
– United Kingdom public companies (note), the equivalent of
Expenditure
Interest incurred on a loan raised to purchase the shares in the Republic
private companies
R
204 000
19 150
700
300
3 800
1 000
Note
The shares in the United Kingdom public companies were bequeathed to Bernard
Apple by his father, who was not a resident of the Republic. The dividends on these
shares are not exempt from normal tax in terms of s 10B(2).
Themba Mnisi
Themba Mnisi is 29 years old and not married.
Receipts and accruals
Salary
Amount in lieu of leave not taken during the year
Annual bonus from employer
Interest on Malawian Government bonds – the equivalent of
Interest on a fixed deposit with a bank in the Republic
Rental from rent-producing property in Malawi – the equivalent of
R
144 000
4 800
12 000
3 320
9 440
36 280
continued
129
Tax Workbook
Expenditure
Interest incurred on a mortgage bond (loan) to finance the purchase
of his private residence
Medical expenses paid by Themba Mnisi. He is not a member of a
medical scheme
Pension contributions (based solely on his salary)
Maintenance and rates on the Malawian rent-producing property
– the equivalent of
12 480
19 155
7 200
8 400
Lebo and Sarah Pule
Lebo Pule is 28 years old and his wife, Sarah Pule, is 25 years old. They are married out
of community of property.
Receipts and accruals
R
Salary (Lebo) – Government
298 200
Salary (Sarah) – Greens Limited
281 250
Interest (not from “tax free investment”) (Lebo)
29 500
Local dividends (Sarah)
2 800
Taxable capital gain (i.e. after applying the inclusion rate of 40%) (Sarah)
2 250
Expenditure
Retirement annuity fund contributions (Lebo)
50 000
Repayment of salary (Sarah) (note)
56 250
Note
During the last three months of the year of assessment Sarah was on maternity leave,
during which she received 75% of her normal salary. When she resigned on
28 February 2023, she was obliged to repay this amount to her employer (Greens
Limited).
YOU ARE REQUIRED TO calculate the taxable income or assessed loss of the above
taxpayers for their 2023 years of assessment.
Solution 8.4
Khokho Mosea
Age (on the last day of the year of assessment): 25 years
Salary
Foreign dividends (not exempt in terms of s 10B(2))
Less: Exemption (s 10B(3)) R3 800 × 25 / 45
R
3 800
(2 111)
Interest from a local bank
Less: Exemption (s 10(1)(i)), R23 800 limited to actual
19 150
(19 150)
“Local” dividends (R700 + R300)
Less: Exemption (s 10(1)(k)(i))
Less: Interest incurred (deduction prohibited in terms
of s 23(f))
1 000
(1 000)
Taxable income
R
204 000
1 689
–
–
–
205 689
130
Chapter 8
Individuals
Themba Mnisi
Age (on the last day of the year of assessment): 29 years
Salary
Leave pay (“gross income” paragraph (c) for services rendered
or to be rendered (including a voluntary award))
Bonus (“variable remuneration” as contemplated in s 7B)
R
144 000
R
4 800
12 000
Remuneration
Interest on Malawian Government bonds (not exempt)
Interest on fixed deposit
Less: Exemption (s 10(1)(i)), R23 800 limited to actual)
160 800
3 320
9 440
(9 440)
–
Rentals
Less: Related expenses (s 11(a))
36 280
(8 400)
27 880
Less: Pension fund contributions (less than maximum – note 2)
192 000
(7 200)
Taxable income
184 800
Notes
(1) Interest incurred on a mortgage bond (loan) over a private residence is not tax
deductible – s 23(a) or (b). Had the proceeds of the loan been employed for
trade purposes in the production of the income, the interest might have been
deductible (ss 23(g) and 24J).
(2) Determination of maximum deduction allowed for pension fund contributions:
Contributions made are deductible, but limited to the lesser of:
• R350 000;
• 27,5% of the greater of remuneration (R160 800) or taxable income (R192 000).
Thus 27,5% × R192 000 = R52 800; or
• R192 000, namely Conrad’s taxable income before the s 11F deduction and
any taxable capital gain (if any)
The maximum limit for the pension fund contributions deduction is thus R52 800,
being the lesser of R350 000, R52 800 and R192 000, but limited to actual
contributions of R7 200.
(3) Themba will be entitled to a s 6B medical expenses tax credit of R1 324,
calculated as 25% × (R19 155 – (7,5% × R184 800)).
Lebo Pule
Age (on the last day of the year of assessment): 28 years
Salary
Interest
Less: Exempt portion in terms of s 10(1)(i)
R
29 500
(23 800)
R
298 200
5 700
Less: Retirement annuity fund contributions (note)
303 900
(50 000)
Taxable income
253 900
131
Tax Workbook
Note
His retirement annuity fund contributions were R50 000, the maximum deductible
amount is limited to the lesser of:
• R350 000,
• 27,5% of R303 900, being the greater of remuneration (R298 200) or taxable income
(R303 900). Thus, 27,5% × 303 900 = R83 573, or
• R303 900: Lebo’s taxable income before 11F and any taxable capital gain (if any).
The full actual contributions of R50 000 may therefore be deducted since it is less
than the maximum of R83 573.
Sarah Pule
Age (on the last day of the year of assessment): 25 years
R
Salary
“Local” dividends
Less: Dividend exemption (s 10(1)(k)(i))
Less: Repayment of salary (s 11(nA))
21 800
(21 800)
R
281 250
–
(56 250)
Taxable income before the inclusion of the taxable capital gain
Add: Taxable capital gain
225 000
2 250
Taxable income
227 250
Example 8.5
(45 minutes)
Maxi Brummer is a resident of the Republic. She is 30 years old. She is married in
community of property. Her husband did not earn any passive income. The following
information relates to the 2023 year of assessment.
Income from a Republic source
• A salary of R420 000.
• Net rentals of R40 000 were earned from a beach cottage.
• Interest of R24 000 was earned from a fixed deposit.
Foreign income
• Foreign dividends of $760, before a withholding tax of 10% was deducted. These
dividends are not exempt in terms of s 10B(2).
• Interest of ɉ165 on an investment inherited from her aunt. The inheritance and the
income on it are excluded from their joint estate. This interest was not subject to a
withholding tax.
• Assume the average exchange rates for the 2023 year of assessment were $1 : R15
and ɉ1 : R18 respectively. In terms of s 25D(3), she elected that her foreign
receipts and accruals be translated into rand by applying the average exchange
rate.
132
Chapter 8
Individuals
Expenditure
• She did not belong to a pension fund or a provident fund.
• She contributed R40 000 to an approved retirement annuity fund.
• She contributed R5 800 a month to a medical scheme for herself and her
husband. She did not pay any medical expenses.
• A donation of R2 500 was made by her to a qualifying university. She obtained the
s 18A receipt.
YOU ARE REQUIRED TO calculate Maxi Brummer’s 2023 normal tax liability.
Solution 8.5
Calculation of Maxi Brummer’s 2023 normal tax liability
Republic
source
R
Salary
420 000
Net rentals (R40 000 / 2) (note 1)
20 000
Interest (R24 000 / 2) (note 1)
12 000
Foreign dividend (note 2)
–
Foreign interest (note 3)
–
Foreign
source
R
–
–
–
5 700
2 970
Total
R
420 000
20 000
12 000
5 700
2 970
452 000
–
(12 000)
8 670
(3 167)
–
460 670
(3 167)
(12 000)
440 000
5 503
445 503
(39 506)
(494)
(40 000)
Subtotals
Less: Donation – s 18A (note 7)
400 494
(2 469)
5 009
(31)
405 503
(2 500)
Taxable income
Schedule tax payable R403 003
On R353 100
On R49 903 at 31%
398 025
4 978
403 003
Less: Section 10B(3) exemption (note 4)
Less: Section 10(1)(i) exemption (note 5)
Subtotals to be used for the
s 6quat(1B)(a)(i) calculation
Less: Retirement annuity fund contribution
s 11F (note 6)
73 726
15 470
89 196
(16 425)
(8 328)
(1 516)
(570)
Less: Section 6 primary rebate
Less: Section 6A credit (note 8)
Less: Section 6B credit (note 9)
Less: Section 6quat rebate (note 10)
Normal tax liability
62 357
133
Tax Workbook
Notes
(1) Maxi is married in community of property. In terms of s 7(2A), half the net rentals
and local interest are deemed to accrue to her spouse.
(2) She has elected in terms of s 25D(3) that the foreign dividends are converted
into rand at the average rate of $1 = R15. Because she is married in community
of property, she includes R5 700 ($760 × R15/$1 divided by two) in her gross
income. The withholding tax paid by her is then R570 (10% × R5 700).
(3) The foreign interest is excluded from the joint estate. She must include foreign
interest of R2 970 (ɉ165 × R18/ɉ1) in her gross income.
(4) Section 10B(3) exemption: 25 / 45 × R5 700 = R3 167
(5) The maximum exemption she may claim against local interest is R23 800 but is
limited to the R12 000 actually included in her gross income.
(6) The deduction for the retirement annuity fund contribution of R40 000 is limited to
the lesser of:
• R350 000, or
• 27,5% of R445 503, being the greater of remuneration (R420 000) or taxable
income (R445 503). Thus, 27,5% × 445 503 = R122 513
• R445 503, being the taxable income before the 11F deduction and before any
taxable capital gain (if any).
The maximum limit for the retirement annuity fund contributions deduction is
R122 513, being the lesser of R350 000, R122 513 and R445 503, but limited to
actual contribution of R40 000.
The R40 000 deductible contributions must be deducted from the
Republic-source income and non-Republic-source income as follows:
Attributable to Republic-source income: R440 000 / R445 503 × R40 000 = R39 506
Attributable to non-Republic-source income: R5 503 / R445 503 × R40 000 = R494.
(7) The s 18A deduction is calculated on her taxable income before her s 18A
deductions are made. She may claim R2 500 (the full amount of the donation),
because her maximum deductible donation limit is R40 550(10% × R405 503). The
deductible donation must be deducted from Republic and non-Republic
income as follows:
Attributable to Republic-source income: R440 000 / R445 503 × R2 500 = R2 469.
Attributable to non-Republic-source income: R5 503 / R445 503 × R2 500 = R31.
(8) A medical scheme fees tax credit of R8 328 (R694 × 12) is deductible from the
normal tax payable in terms of s 6A.
(9) The additional medical expenses tax credit is R2 188, calculated as follows:
Contributions to medical scheme (R5 800 × 12)
69 600
Less: 4 × s 6A credit (4 × (R694 × 12))
(33 312)
Less: 7,5% of taxable income of R403 003
36 288
(30 225)
6 063
Multiplied by 25% equals the s 6B tax credit
134
1 516
Chapter 8
Individuals
(10) The foreign tax applicable to her portion of the foreign dividend is R570 (note 2
above). This amount need NOT be reduced to take into account the exempt
portion of the foreign dividend (s 6quat(1A) proviso (ii)):
Section 6quat rebate is the lesser of:
• R570; and
• the Republic taxation attributable to foreign source income being R1 102
(R4 978 / R403 003 × R89 196).
Example 8.6
(20 minutes)
Part 1
Joseph Malongwane is 55 years old. The following information relates to his 2023
year of assessment:
R
Balance of assessed loss brought forward from the 2022 year
of assessment
(24 000)
Salary
1 650 000
Interest accrued from a local bank (not from a “tax free investment”)
67 300
Taxable capital gain from the disposal of a rent-producing
fixed property (calculated as R515 000 (capital gain) less R40 000
(annual exclusion) multiplied by 40% (inclusion rate for a natural person)) 190 000
Rental loss incurred
(65 000)
Pension fund contributions (7,5% of his salary)
(123 750)
YOU ARE REQUIRED TO discuss whether s 20A applies to the rental loss suffered by
Joseph Malongwane in the 2023 year of assessment. Assume that the rental loss
arose from a suspect trade and that the provisions of s 20A(3) do not apply.
Part 2
Beauty Tshabalala (45 years old) commenced carrying on a bed and breakfast
business from her home during 2021. The area of her house that she trades with,
expressed as a percentage of the total area of the house, is 33,3%. The following
information relates to the 2021, 2022 and 2023 years of assessment:
Year of assessment
2021
2022
2023
Taxable income
(before
business loss)
Business loss
R
1 682 400
1 300 300
1 790 360
R
(45 600)
(56 870)
(52 580)
The amount at which
the maximum
marginal rate of
tax is chargeable
R
1 577 300
1 656 600
1 731 600
YOU ARE REQUIRED TO discuss whether Beauty Tshabalala’s business losses incurred
in the 2021, 2022 and 2023 years of assessment are ring-fenced in terms of s 20A.
Provide detailed reasons for your answer.
135
Tax Workbook
Solution 8.6
Part 1
Joseph Malongwane’s taxable income for the 2023 year of assessment, before
taking the rental loss and balance of assessed loss brought forward from the 2022
year of assessment into account, is calculated as follows:
R
Income from employment
1 650 000
Interest accrued
67 300
(23 800)
Less: Interest exemption (s 10(1)(i))
Income
Add: Taxable capital gain
1 693 500
190 000
Less: Pension fund contribution (note)
1 883 500
(123 750)
Taxable income
1 759 750
The R1 759 750 represents the taxable income of Joseph Malongwane’s before
deducting the current year’s loss, and an assessed loss brought forward from the
2022 year of assessment. This amount represents the taxable income for purposes of
determining whether the requirement in s 20A(2) has been met. Because this
amount exceeds R1 731 600, the amount at which the maximum marginal rate of
tax is chargeable for natural persons for the 2023 year of assessment, the
requirement in terms of s 20A(2) is satisfied.
Because the rental loss suffered arose from a suspect trade, and s 20A(3) does not
apply, the rental loss incurred is ring-fenced in terms of s 20A.
Note
Section 11F deduction is limited to the lesser of R350 000 or 27,5% of the greater of
remuneration (R1 650 000) or taxable income (R1 883 500); or taxable income before
11F and taxable capital gain (R1 693 500). The full contribution of R123 750 is
therefore deductible.
Part 2
2021 year of assessment
• Beauty Tshabalala’s taxable income (before taking the assessed loss into account)
for the 2021 year of assessment) of R1 682 400 exceeds R1 577 300 , the amount at
which the maximum marginal rate of tax is chargeable for a natural person for
the 2021 year of assessment. The requirement in terms of s 20A(2) is therefore
satisfied.
• The bed and breakfast business is a suspect trade in terms of s 20A(2)(b)(iii),
because Beauty Tshabalala does not let at least 80% of the residential
accommodation and the loss incurred will therefore be ring-fenced in terms of s
20A.
• Beauty Tshabalala’s taxable income for the 2021 year of assessment is R1 682 400
and the loss of R45 600 is carried forward to the 2022 year of assessment.
2022 year of assessment
• Beauty Tshabalala’s taxable income (before taking the assessed loss into account)
for the 2022 year of assessment of R1 300 300 does not exceed R1 656 600, the
136
Chapter 8 Individuals
amount at which the maximum marginal rate of tax is chargeable for a natural
person for the 2022 year of assessment. The requirement in terms of s 20A(2) is
therefore not satisfied. The loss of R56 870 will not be ring-fenced.
• Beauty Tshabalala’s taxable income for the 2022 year of assessment is R1 243 430
(R1 300 300 – R56 870).
• The loss of R45 600 brought forward from the 2021 year of assessment may not be
set off against her 2022 taxable income, because it is ring-fenced and can only be
off-set against profits from the bed-and-breakfast income. This loss is carried
forward to the 2023 year of assessment.
2023 year of assessment
• Beauty Tshabalala’s taxable income (before taking the assessed loss into account)
for the 2023 year of assessment of R1 790 360 exceeds R1 731 600, the amount at
which the maximum marginal rate of tax is chargeable for a natural person for
the 2023 year of assessment. The requirement in terms of s 20A(2) is therefore
satisfied.
• The bed and breakfast business is a suspect trade (see 2020 year of assessment),
and the loss suffered will be ring-fenced in terms of s 20A.
• Beauty Tshabalala’s taxable income for the 2023 year of assessment is R1 790 360.
A loss of R98 180 (R52 580 (2023 year of assessment) + R45 600 (2021 year of
assessment)) is carried forward to the 2024 year of assessment.
L Questions
Question 8.1
(20 minutes)
Primrose Maepe (25 years old and unmarried) resigned from her employment as a
secretary with effect from 30 November 2022. She started her own catering business
on 1 December 2022 after she had been awarded a contract to provide lunches for
a local company. Primrose runs her business as a sole proprietor. She is not a vendor.
Primrose provides the following information relating to the 2023 year of assessment:
Receipts and accruals
R
Salary (1 March to 30 November 2022)
150 000
Lump sum accrued from a provident fund (note 1)
284 750
From her business (1 December 2022 to 28 February 2023)
74 297
Contributions and expenses
Provident fund contributions while employed (note 1)
6 750
Contributions to a retirement annuity fund (note 2)
7 200
Business expenditure (all deductible)
31 500
Medical expenditure (note 3)
26 500
137
Tax Workbook
Notes
(1) Lump sum from provident fund
Primrose contributed to this provident fund when she was employed. During the
2023 year of assessment up to her resignation, she contributed R750 a month
(based on her salary) which was deductible in full under the provisions of s 11F.
On 30 November 2022, R284 750 accrued to her, of which R71 250 was
deductible in terms of the provisions of the Second Schedule relating to
contributions made prior to the introduction of s 11F.
(2) Contributions to a retirement annuity fund
As from 1 December 2022 Primrose contributed R2 400 a month to a retirement
annuity fund.
(3) Medical scheme contributions and expenses
Primrose was a member of a medical scheme for the entire 2023 year of
assessment. She contributed R1 000 a month to the medical scheme’s hospital
plan. She paid R14 500 for medical expenses not covered by the medical
scheme.
YOU ARE REQUIRED TO:
(1) calculate Primrose's total taxable income for the 2023 year of assessment; and
(2) calculate the s 6B additional medical expenses tax credit that Primrose will be
entitled to deduct from her normal tax payable.
Question 8.2
(30 minutes)
Listed below are details of the receipts, accruals and payments of four taxpayers for
the 2023 year of assessment. It may be assumed that a wife’s income accrues
independently of her husband’s business activities. They are married out of
community of property. Ignore the provisions of the double tax agreement between
South Africa and the United Kingdom.
George and Gina Fair
George Fair, aged 40 years, is a person with a “disability” as defined in s 6B. Neither
he nor Gina belongs to a medical scheme.
R
Salary – George Fair – Wheelchair Manufacturers Limited
208 000
Interest on current account – George Fair
10 770
Salary – Gina Fair – University of East London
254 000
Annuity payable monthly to Gina Fair from the United Kingdom estate of a
relative – the equivalent of
7 200
Interest on fixed-deposit investments (not “tax free investments”)
– George Fair
13 720
– Gina Fair
850
Qualifying medical expenses paid by George Fair for
– himself – illness not related to disability
2 350
– himself – relating to his disability
33 740
– Gina Fair – illness
1 800
Pension fund contributions relating to employment
– George Fair: R208 000 at 5%
10 400
138
Chapter 8 Individuals
Lionel and Lillian Khaki
Lionel Khaki is 59 years old, and Lillian Khaki is 56 years old.
R
Salary (Lionel Khaki) – Khaki Material Manufacturers Limited
480 000
Directors’ fees – Lionel Khaki
120 000
Value of company-car usage – per Seventh Schedule – Lionel Khaki
21 600
Assessed loss brought forward – attributable to Lionel Khaki
(9 525)
Interest – Lionel Khaki (not from a “tax free investment”)
35 725
Salary (Lillian Khaki) – Old-Age Nursing Home at R8 800 a month
105 600
Uniform allowance – Lillian Khaki – nurse’s uniform at R200 a month
2 400
Trade profit – Lillian Khaki – Flower Boutique
22 200
Pension fund contributions (Lionel Khaki: R24 000; Lillian Khaki: R5 280)
29 080
(Lionel Khaki’s pension fund contributions are based solely on his salary
of R480 000, and those of Lillian Khaki on her salary of R105 600 from the
Old-Age Nursing Home.)
Qualifying medical expenses paid – Lionel Khaki
15 982
Lionel and Lillian are not members of a medical scheme.
YOU ARE REQUIRED TO calculate the taxable income or assessed loss of the above
taxpayers for the 2023 year of assessment, clearly indicating your reasons for the
inclusion or exclusion of any of the given information. Also calculate the s 6B credits
that they will be entitled to (if any).
Question 8.3
(45 minutes)
Mark Sipiwe (aged 76 years) and Beauty Sipiwe (aged 56 years) are married in
community of property. They are residents of the Republic. Mark retired from his
full-time employment at a manufacturing company in the 2018 year of assessment,
while Beauty retired from her position on 31 March 2022. Ignore the provisions of any
double tax agreement.
Details of Mark’s receipts and accruals for the 2023 year of assessment are as
follows:
• A pension of R24 000 a month accrues to him from the pension fund he had been
a member of during his employment with the manufacturing company. This
pension is paid to him on the 25th day of each month.
• During his employment Mark developed a computer program that analysed
monthly results and produced useful statistics and ratios for use by senior
management. Mark registered a patent over this computer program. Royalties of
R18 000 accrued to him from the use of this patent.
• Interest of R59 800 accrued to Mark from various interest-bearing investments he
has made in South Africa.
• Since his retirement Mark has become a beekeeper. He is now a dealer in honey.
He operates this business from their home, from where he sells honey to members
of the general public. This business venture has far exceeded Mark’s
expectations, and his taxable profit for the 2023 year of assessment was R139 200
before taking Beauty’s monthly salary of R5 200 for her limited assistance in his
honey business since 1 April 2022 (see below) into account.
139
Tax Workbook
• During October 2022, Mark was in Zimbabwe for two weeks. While in Zimbabwe,
he was paid the equivalent of R15 700 for advising a Zimbabwean honey
producer on how to maximise his production.
• Mark purchased shares in Honey International Ltd, a company that is not a
resident of the Republic. On 28 February 2023 a foreign dividend amounting to
the equivalent of R12 136 accrued to him from it. This dividend is not exempt in
terms of s 10B(2).
• Mark’s monthly contributions to the medical scheme for him and his wife were
R5 500. Mark paid qualifying medical expenses of R13 900 during the 2023 year of
assessment. Mark also incurred an additional qualifying medical expense of
R1 200 when he consulted his doctor on 25 February 2023. He settled this R1 200
on 6 March 2023.
Details of Beauty’s receipts and accruals for the 2023 year of assessment follow:
• A salary of R25 600 for the month of March 2022 from her employment.
• Rentals from a building that she inherited from her father many years ago. Her
gross rentals from this building were R36 000. She incurred tax-deductible
expenditure of R8 400 on earning these rentals. This inheritance was not excluded
from their joint estate.
• A monthly pension of R15 400 since her retirement from the pension fund that she
had been a member of while being employed.
• An annuity from an insurer. In the 2022 year of assessment Beauty purchased a
lifetime annuity of R3 600 (payable at a rate of R300 a month) from an insurer. The
cash consideration paid by her was R24 000. Assume that her life expectancy for
purposes of the calculation of the expected return of this annuity contract was 15
years.
• Commencing as from 1 April 2022, a monthly salary of R5 200 from Mark’s honey
business (see above). Beauty’s involvement in the business is limited to taking
orders over the telephone from members of the general public. She does this
work only on Wednesdays. The going rate for the services she renders is R2 300 a
month.
YOU ARE REQUIRED TO calculate the normal tax liabilities of Mark and Beauty Sipiwe
for the 2023 year of assessment.
Question 8.4
(45 minutes)
Jim Fredericks, a resident of the Republic, was employed by Blue Birds Ltd as its
transport manager. During the 2023 year of assessment he was employed from
1 March 2022 to 30 September 2022 (the date of his death). He died in an accident
at the age of 33 years.
In March 2022 his salary was R22 500. On 31 March 2022, his monthly salary was
increased to R24 500 with effect from 1 April 2022 and he was also awarded a lump
sum of R36 000 from Blue Birds Ltd, as a result of his salary increase being backdated
for 18 months. No portion of this R36 000 was contributed to the pension fund. Jim
Fredericks advised the Commissioner that he would like the s 7A(2) option to be
applied to the back-pay of R36 000 he had received.
He was also paid an entertainment allowance by Blue Birds Ltd of R500 a month.
140
Chapter 8 Individuals
He was a member of the Blue Birds Pension Fund. His contribution for March 2022
was R2 250. As from 1 April 2022 he contributed R2 450 a month to this pension fund.
(You may accept that these contributions do not exceed the limit in s 11F).
Following upon his death, his surviving spouse, Nona (to whom he was married out
of community of property), received a lump sum of R750 000 from the pension fund.
In terms of the Second Schedule to the Income Tax Act, R450 000 of this amount is
taxable. Commencing with the month of October 2022, she was awarded R14 500
each month.
During the previous year of assessment, Jim Fredericks had inherited a rentproducing property. For the period 1 March 2022 to 30 September 2022, Jim
Fredericks earned net rentals of R26 200 from this rent-producing property. This rentproducing property was bequeathed to Nona. From 1 October 2022 to 28 February
2023, Nona earned net rentals of R22 500 from this rent-producing property.
Interest of R24 500 and local dividends of R3 000 accrued to Jim Fredericks during
the period 1 March 2022 to 30 September 2022. Jim Fredericks used borrowed funds
to finance his interest-bearing security and local dividend-yielding share investments.
Interest incurred on these borrowed funds was R14 000. The borrowed funds had
been used to the extent of 60% to finance the interest-bearing security investment,
and 40% to finance the local dividend-yielding share investment.
Jim Fredericks incurred entertainment expenditure of R2 800 in relation to his trade
(as transport manager). He settled these entertainment expenses out of the
proceeds of his entertainment allowance (see above).
Jim Fredericks made a R1 000 qualifying donation to a public benefit organisation.
He received the required certificate from it.
Up to the time of his death, Jim Fredericks had paid R6 000 in qualifying medical
expenses. After his death his executor paid a further R11 644 of qualifying medical
expenses incurred by Jim Fredericks. Jim and Nona were not members of a medical
scheme.
During the previous year of assessment, Jim Fredericks and his brother, Dave
Fredericks, had operated a retail business in partnership. (Jim Fredericks was a silent
(but not a limited) partner in this business.) This business failed, and as a result Jim
Fredericks ended up with an assessed loss of R44 000 for the 2022 year of
assessment. This assessed loss must still be adjusted by the Commissioner when he
applies the provisions of s 7A(2).
Nona Fredericks did not work while Jim was alive. But on 1 November 2022, she
commenced working at a salary of R5 000 a month. Besides this salary, the R14 500
monthly amount from the pension fund (see above) and the net rentals of R22 500
(see above), she had no other receipts or accruals during the 2023 year of
assessment.
Nona Fredericks is 31 years old. She is a resident of the Republic.
YOU ARE REQUIRED TO calculate the normal tax liabilities of the late Jim Fredericks
and his widow, Nona Fredericks, for the 2023 year (or period) of assessment.
141
Chapter 9
Companies
L Introduction
This chapter includes examples and questions on the following classes of taxpayers
that trade:
• companies; and
• close corporations.
Dividends that are paid by these entities may result in a dividend tax liability of 20%.
Dividends tax is dealt with in chapter 10.
In order to answer the examples and questions, keep the following framework in
mind.
Framework: Normal tax
Calculation of taxable income:
“Gross income” as defined
Less: Exempt income
Gives: “Income” as defined
Less: Allowable deductions and allowances
Add: Taxable capital gain (Eighth Schedule)
Less: Donations to certain public benefit organisations
Gives: “Taxable income” as defined
Calculation of normal tax and amount payable/(refundable):
Fixed tax rates on taxable income
Normal tax payable
Less:
Rebate (s 6quat (only to resident taxpayers))
Gives: Normal tax liability
Less:
Prepaid tax
Gives: Amount payable/(refundable)
In this chapter, the principles of various capital allowances and the following sundry
provisions of the Income Tax Act 58 of 1962 as amended are illustrated and tested:
• Section 24: A debtors allowance is calculated in terms of s 24. This provision is
applicable when a seller enters into an agreement in terms of which the full
amount payable in terms of the agreement accrues to him on the date when
the agreement is entered into, but the buyer settles the amount over a period. If
more than 25% of the amount payable in terms of the agreement is payable 12
months after the agreement is entered into, s 24 provides for a debtors
allowance for the seller. This allowance is calculated as the seller’s gross profit
that is included in his outstanding debtors at the end of a year of assessment.
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Tax Workbook
• Section 40CA: Section 40CA deems a company to have actually incurred an
amount of expenditure for the acquisition of an asset equal to the market value
of the shares immediately after the acquisition when the company acquires an
asset in exchange for shares issued by the company. (If a deemed capital gain
arises on the transaction because of a mismatch in values (s 24BA), then the
deemed capital gain is also treated as expenditure actually incurred, but this
anti-avoidance rule is outside the scope of this book.)
• Section 24C: Section 24C provides for an allowance for future expenditure that
will be incurred in future years of assessment if the taxpayer’s income includes
amounts received or accrued that will be used to finance such future
expenditure. To claim a deduction under this provision a link must exist between
the future expenditure and a contract.
• Section 24I: Exchange differences on exchange items are calculated in terms of
s 24I. These exchange differences are then included or deducted from a
taxpayer’s income.
• Section 24J: Section 24J provides for the inclusion or deduction of accrued or
incurred interest in or from a taxpayer’s income.
L Contents
The table gives an indication of the time that you will need to complete the
example or question. The relevant sections or paragraphs that you need to know
before attempting the example or question are provided, and the level of the
example or question gives an indication of the difficulty of the question.
)
Example/Question
and time allocation
Topic and/or relevant sections
Level
Example 9.1
(10 minutes)
• Normal tax rates for different types
of companies
• Section 23(k) – labour brokers and
personal service providers
Basic
Example 9.2
(6 minutes)
• Section 6quat – rebate for foreign
taxes
Basic
Example 9.3
(30 minutes)
•
•
•
•
•
•
Section 11(e)
Section 12C
Section 13
Section 24C
Section 24I
Section 24J
Intermediate
Example 9.4
(40 minutes)
•
•
•
•
•
•
Section 8(4)(a)
Section 11(a), (e), (f ), (g) and (o)
Section 12C
Section 13
Section 22
Section 24J
Advanced
Example 9.5
(30 minutes)
• Section 24J – incurral and accrual
of interest
Intermediate
Example 9.6
(20 minutes)
• Section 22 – trading stock
• Section 24I – foreign exchange
Intermediate
continued
144
Chapter 9
)
Example/Question
and time allocation
Companies
Topic and/or relevant sections
Level
Example 9.7
(20 minutes)
• Section 24 – credit agreements and
debtors allowance
Intermediate
Example 9.8
(15 minutes)
• Section 24C – allowance in respect
of future expenditure on contracts
Intermediate
Example 9.9
(15 minutes)
• Section 40CA – transactions where
assets are acquired in exchange for
shares issued
Basic
Question 9.1
(30 minutes)
• Section 24 – suspensive sale debtors
allowance
Intermediate
• Section 24C – allowance in respect
of future expenditure on contracts
Question 9.2
(30 minutes)
• Section 22 – trading stock
• Section 24I – foreign exchange
Intermediate
Question 9.3
(20 minutes)
•
•
•
•
•
Section 9C
Section 11(e)
Section 12E
Section 23(f )
Section 23H – integrated question
Intermediate
Question 9.4
(40 minutes)
•
•
•
•
•
•
•
•
Paragraph (m) – “gross income”
Section 6quat
Section 8(4)(a)
Section 11(d), (e), (i), (j) and(w)
Section 12C
Section 13
Section 22
Sections 24 and 24J – integrated
question
Advanced
Question 9.5
(50 minutes)
•
•
•
•
•
•
•
•
•
•
Section 8(4)(a)
Section 11(o)
Section 12E
Section 13
Section 13quin
Section 18A
Section 22(8)
Section 24I
Section 24J
Section 26A – integrated question
Advanced
L Examples
Example 9.1
(10 minutes)
Company A’s taxable income for the year of assessment ending 31 March 2023 was
R400 000.
YOU ARE REQUIRED TO discuss and calculate the normal tax payable by the
company, if:
(1) it is registered, managed and controlled in the United Kingdom and operates
through a branch in the Republic;
145
Tax Workbook
(2) it is registered in the United Kingdom, but has its place of effective management
in the Republic;
(3) it is a “personal service provider” as defined in the Fourth Schedule. The taxable
income was calculated after deducting an expense of R40 000, that is not
allowed in terms of s 23(k); and
(4) it is a qualifying “small business corporation” as defined in s 12E(4).
Solution 9.1
At the time of publication of this Workbook, the Rates and Monetary Amounts and
Amendment of Revenue Laws Bill 21 of 2022 had not been promulgated. Once it is,
Schedule 1 of the resultant Act will provide the various rates of normal tax payable
(refer Appendix A).
(1) The company is not a “resident” (as defined in s 1) but will pay normal tax at the
same rate as a resident company which is 27%. The normal tax payable by
Company A will thus be R108 000 (R400 000 at 27%).
(2) The company is a “resident” (as defined in s 1). Paragraph (b) of the definition of
“resident” determines that a person (other than a natural person) which is
incorporated, established or formed in the Republic or which has its place of
effective management in the Republic, will be regarded as a resident. The rate
applicable to resident companies is 27%. The normal tax payable is R108 000
(R400 000 at 27%).
(3) A “personal service provider” (PSP) is defined in the Fourth Schedule. Section
23(k) prohibits the deduction of any expenses incurred by a PSP other than any
expense which constitutes an amount paid or payable for services rendered,
legal fees (s 11(c)), bad debts (s 11(i)), contribution to funds (s 11(l)), refunded
amounts (s 11(nA) or (nB)), and expenses in respect of premises, finance
charges, insurance, repairs, fuel and maintenance in respect of assets, if such
premises or assets are used wholly and exclusively for purposes of trade. The
normal tax payable is R118 800 ((R400 000 + R40 000) × 27%).
(4) The rate of tax levied on a “small business corporation” (as defined in s 12E) is
based on a sliding scale. The normal tax payable amounts to R26 513,
calculated as R19 163 + ((R400 000 – R365 000) × 21%).
Example 9.2
(6 minutes)
Apart from foreign rental, Mvela (Pty) Ltd trades solely in the Republic. Mvela (Pty)
Ltd is neither a “small business corporation” nor a “personal service provider” as
defined. Mvela (Pty) Ltd’s taxable income for its year of assessment ending 31 March
2023, before taking the following rentals into account, amounted to R4 400 000. Net
rentals (the rand equivalent) of R200 000 from a property located abroad, accrued
to the company during its 2023 year of assessment. Foreign tax of R60 000, which is
not recoverable, was paid on the rentals and no double tax agreement (DTA) exists
between South Africa and the foreign country.
YOU ARE REQUIRED TO calculate Mvela (Pty) Ltd’s normal income tax liability for its
year of assessment ending 31 March 2023.
146
Chapter 9
Companies
Solution 9.2
Calculation of the normal tax liability of Mvela (Pty) Ltd for its year of assessment
ending 31 March 2023:
R
Taxable income before taking the rentals into account
4 400 000
Rental income
200 000
Taxable income
4 600 000
Normal tax at 27% on R4 600 000
Less: Section 6quat rebate (note)
1 242 000
(54 000)
Normal tax liability
1 188 000
Note
The maximum deduction from normal tax payable in the Republic is the tax
applicable to the inclusion of the foreign income, which is 27% × R200 000 = R54 000
or alternatively:
R200 000
× R1 242 000
= R54 000
R4 600 000
The excess of R6 000 (R60 000 – R54 000) can be carried forward to the next year.
Example 9.3
(30 minutes)
Toshaba Ltd is a manufacturing enterprise with activities throughout the Republic. The
following information is applicable to its year of assessment ending 31 March 2023.
(All amounts exclude VAT, unless stated otherwise.)
Note
R
Sales
1
28 793 210
Less: Cost of sales
16 771 872
Gross profit
Other income
Dividends earned
Expenditure
Exchange rate differences
Depreciation
Lease payments
Instalment sale payments
Other deductible expenditure
12 021 338
2
150 700
3
4
5
6
?
1 655 875
510 000
184 800
2 835 900
Notes
(1) Included in sales is an advance payment of R300 000 in respect of an order for
goods still to be manufactured. The quoted selling price is R800 000, and it
should cost R500 000 to manufacture the goods. Assume that the Commissioner
will allow a s 24C allowance on the following basis:
Future expenditure
× Advance payments
Selling price
(2) “Local” dividends of R150 700 accrued during the 2023 year of assessment.
147
Tax Workbook
(3) On 18 December 2022 Toshaba Ltd took out a forward exchange contract (FEC)
on a foreign order. The FEC was taken out in dollars to cover the order. The
customer ordered goods to the value of $81 301 on 18 December 2022, to be
delivered immediately (FOB). The debt was paid on 18 April 2023. The rand
equivalent at the appropriate exchange rate for tax purposes had already
been taken into account in sales. The following exchange rate information is
applicable:
Spot rate
FEC rate
18 December 2022
$1:R16,15
$1:R16,55
28 February 2023
$1:R16,45
31 March 2023
$1:R16,60
$1:R16,70 (remaining period)
18 April 2023
$1:R16,85
No entries have been made in respect of any exchange rate differences on the
debt owed to Toshaba Ltd or the FEC.
(4) The company owns the following assets:
Date brought into use Cost price
R
Factory
1 June 2006
25 800 000
Machine A (second-hand)
31 May 2018
102 500
Machine B (new)
31 July 2019
390 800
Machine C (new)
15 December 2022
970 200
(5) The company leases its delivery vehicles in terms of finance leases (right-of-use
asset). The instalments are all payable over 36 months. The relevant information
is as follows:
R
Instalments for the year (including VAT)
430 543
Interest paid for the year
135 512
Depreciation for the year
225 000
VAT element in instalments for the year
45 000
(6) All its passenger cars were replaced on 1 May 2022 with passenger cars acquired
under instalment sale agreements.
R
Cost price
480 000
VAT @ 15%
72 000
Less: Deposit
(55 200)
Finance charges
496 800
175 200
Total debt
672 000
The debt is payable over 48 months at R14 000 a month. The finance charge
component, calculated according to s 24J, amounted to R65 826 for the 2023
year of assessment.
(7) Toshaba Ltd did not make a taxable capital gain.
Please note that binding general ruling (BGR) 7 allows a write-off period of four years
for delivery vehicles and five years for passenger cars, for purposes of s 11(e).
YOU ARE REQUIRED TO calculate the taxable income of Toshaba Ltd for the year of
assessment ending 31 March 2023.
148
Chapter 9
Companies
Solution 9.3
1.
Sales
Section 24C
2.
3.
4.
5.
6.
7.
R500 000
R800 000
R
28 793 210
× R300 000
(187 500)
Cost of sales
Dividends – gross income but exempt (s 10(1)(k)(i))
Currency difference on debtor (s 24I)
Gain: $81 301 × (R16,60 – R16,15)
Currency difference FEC (s 24I)
Loss: $81 301 (R16,70 – R16,55)
Section 13: Factory R25 800 000 × 5%
Section 12C: Machine A R102 500 × 20%
Machine B R390 800 × 20%
Machine C R970 200 × 40%
Lease rentals (R430 543 – R45 000) (s 11(a))
Wear and tear (R480 000 + 72 000) / 5 × 11/12 (s 11(e))
Finance charges (s 24J)
Other deductible expenses
(16 771 872)
–
36 585
(12 195)
(1 290 000)
(20 500)
(78 160)
(388 080)
(385 543)
(101 200)
(65 826)
(2 835 900)
Taxable income
6 693 019
Example 9.4
(40 minutes)
Morutsi (Pty) Ltd manufactures and sells wooden houses and is not a small business
corporation as defined. The following is a draft statement of comprehensive income
for its year of assessment ending 31 March 2023. All amounts exclude VAT, unless
stated otherwise:
R
R
Sales
6 883 212
Less: Cost of sales (note 1)
(1 879 500)
Gross profit
Other income
Dividends (note 2)
Profit on sale of factory (note 3)
Insurance proceeds (note 5)
Less: Expenses
Lease premium and payments (note 4)
Depreciation (note 6)
Finance charges on lease of machine (note 6)
Interest paid (note 7)
Other expenses (deductible for tax purposes)
Net income
5 003 712
150 000
500
45 000
480 000
148 878
12 020
60 000
473 698
(1 174 596)
4 024 616
149
Tax Workbook
Notes
(1) Purchases amounted to R1 973 000; opening stock and closing stock were
R202 500 and R296 000 respectively. The market value of the stock has never
been below its cost.
(2) “Local” dividends of R150 000 accrued during the 2023 year of assessment.
(3) During its 2017 year of assessment, the company purchased a factory (industrial
building) at a cost of R1 000 000. The seller was entitled to a 5% per annum
allowance in terms of s 13. As a result of rapid development this factory became
too small to meet the company’s needs, and it was sold on 31 October 2022 for
R1 000 000. The company did not make any taxable capital gain for the current
year of assessment.
(4) After the old factory was sold, and as from 1 November 2022, Morutsi (Pty) Ltd
leased a new factory for a period of 20 years. In terms of the lease agreement, a
lease premium of R80 000 had to be paid, and rental of R80 000 a month was
payable. The new factory was occupied from 1 November 2022. Morutsi (Pty)
Ltd was obliged to make improvements to the factory at a cost of R1 500 000.
The improvements were completed on 1 March 2023, but their actual cost
amounted to R2 100 000. The improvements increased the production capacity
of the factory.
(5) In the early hours of the morning of 1 April 2022 a fire destroyed Machine A. The
following amounts (net of the relevant output tax) were received from the insurer:
R
Loss of profits due to the fire
Loss of Machine A – destroyed during the fire
The cost price of Machine A was R50 000 and its tax value on 1 April
2022 was R20 000 (refer to note 6 for details on Machine B, which
replaced Machine A). Morutsi (Pty) Ltd will choose the application of
s 11(o) if possible.
28 000
17 000
45 000
(6) Depreciation was calculated as follows on the following assets:
Cost price
(excluding
VAT)
R
Machine B (purchased new and brought into use on
2 November 2022)
Leased machine C (market value R25 000, see below)
Computer printer purchased and brought into use on 1 August 2022
Delivery vehicle on hand as at 1 April 2022 (tax value R42 500)
Delivery vehicle purchased and brought into use on
1 November 2022
150
100 000
25 000
959
85 000
120 000
Chapter 9
Companies
From 1 July 2019, Machine C was leased to Morutsi (Pty) Ltd under a finance
lease for a period of 40 months. When the agreement expired on 31 October
2022, Morutsi (Pty) Ltd bought the machine from the lessor at its market value of
R25 000 on that date and continued using it in its process of manufacture. The
details of the lease agreement were as follows:
R
Cost price
50 000
VAT (15% on 1 July 2019)
7 500
Finance charges
15 000
72 500
The total amount was payable in 40 monthly instalments of R1 812,50 each.
The write-off periods in terms of BGR 7 are as follows:
Computer printers:
3 years
Machinery and equipment:
5 years
Delivery vehicle:
4 years
(7) Morutsi (Pty) Ltd may claim interest incurred, calculated according to s 24J, to
the amount of R116 225 – based on the information below. (You do not have to
recalculate the amount and you may accept that the amount of R116 225 is
deductible.) Morutsi (Pty) Ltd obtained a loan on 1 April 2022 by way of a
debenture issue for a period of two years at a discount of 12%. The face value of
the debentures is R1 000 000. Interest is payable at six-monthly intervals,
calculated at a rate of 3% of the face value. The debenture’s expiry date is
31 March 2024, on which date R1 000 000 must be repaid. Compounded
six-monthly, the yield to maturity is 6,50308% per accrual period.
YOU ARE REQUIRED TO calculate the normal tax liability of Morutsi (Pty) Ltd for its
year of assessment ending 31 March 2023.
151
Tax Workbook
Solution 9.4
Calculation of normal tax liability of Morutsi (Pty) Ltd
Per the framework (as set out in the beginning of the chapter)
Sales
Dividend received
Recoupment on the sale of the factory (note 1)
Insurance claim (note 2)
Closing stock (s 22)
R
R
6 883 212
150 000
350 000
28 000
296 000
Gross income
Less: Exempt income
Dividends (s 10(1)(k))
7 707 212
Income
Less: Allowable deductions
Opening stock (s 22)
Purchases (s 11(a))
Lease premium: R80 000 / 20 years × 5 / 12
Rental: R80 000 × 5 months
R1 500 000
1
Lease improvements:
×
19 years 8 months
12
Capital allowances, wear-and-tear and s 11(o)
allowance (note 3)
Lease of machine (note 4)
Interest paid (note 5)
Other deductible expenses
7 557 212
(150 000)
202 500
1 973 000
1 667
400 000
6 355
159 792
11 375
116 225
473 698
(3 344 612)
Taxable income
4 212 600
Normal tax at 27%
1 137 402
continued
152
Chapter 9
Companies
Start with net income
(this method is used when completing a tax return)
Net income
Sales – no adjustment
Cost of sales (purchase, opening and closing stock) –
no adjustment
Dividends received – exempt
Profit on sale of factory (note 1)
Recoupment on factory (note 1)
Lease premium and improvements
Lease premium: R80 000 / 20 years × 5 / 12
Rental: R80 000 × 5 months
R1 500 000
1
Lease improvements:
×
19 years 8 months
12
Insurance claim – loss of profits (no adjustment)
Insurance claim – machine A (note 2)
Depreciation
Wear-and-tear (note 3)
Lease of machine – accounting
– taxation (note 4)
Interest paid
– accounting
– taxation (note 5)
Other deductible expenses – no adjustment
R
Deduct
150 000
500
1 667
400 000
R
Add back
4 024 616
–
–
350 000
480 000
6 355
–
17 000
159 792
11 375
116 225
862 914
148 878
12 020
60 000
–
5 075 514
Taxable income (R5 075 514 – R862 914)
4 212 600
Normal tax at 27%
1 137 402
Notes
(1) Morutsi (Pty) Ltd did not make a capital gain to be included in taxable income.
Proceeds = R1 000 000 (selling price) – R350 000 (recoupment); Base cost =
R1 000 000 (cost price) – R350 000 (s 13 allowances); thus no capital gain. There
is, however, a s 8(4)(a) recoupment of the industrial building allowances
previously claimed on the factory. For the years of assessment from 2017 until
2023 (that is for seven years), an allowance of 5% a year has been claimed. The
recoupment is therefore R1 000 000 × 5% × 7 = R350 000. (See note 3 for the
current year’s allowance on the factory building.)
(2) Machine A was not used during the year of assessment and therefore does not
qualify for a capital allowance. The proceeds from the insurance claim are less
than the tax value, and therefore the machine qualifies for a s 11(o) allowance
at the option of the taxpayer. If elected, then proceeds = R17 000; Base cost =
R50 000 – R30 000 (s 12C allowances) – R3 000 (s 11(o) allowance); thus no
capital gain or loss. Paragraph 65 of the Eighth Schedule will therefore not be
applicable because no recoupment and/or capital gain arise(s). (See note 3 on
the s 11(o) allowance.) The amount received in respect of the loss of profits is
gross income because it is an amount received that is not of a capital nature
(that is, to fill a hole in operating income).
153
Tax Workbook
(3) Capital allowances, wear-and-tear and s 11(o) deductions:
Old factory: 5% × R1 000 000
New factory: 5% × (R2 100 000 – R1 500 000)
Machine A: (not used during the year)
Machine B: 40% × R100 000
Machine C: R25 000 / 5 years × 5 / 12 (As it was not brought into use by
the taxpayer for the first time, s 12C may not be claimed, but only
s 11(e) wear and tear. The Commissioner may agree to a shorter writeoff period because machine C was used previously under the lease
agreement.)
Computer printer: (R959 is less than R7 000)
Delivery vehicles: R85 000 / 4 years
New delivery vehicle: R120 000 / 4 years × 5 / 12
Section 11(o) allowance on machine A: R17 000 – R20 000
R
50 000
30 000
–
40 000
2 083
959
21 250
12 500
3 000
159 792
(4) There is no recoupment at the end of the lease period, as Machine C was sold
to Morutsi (Pty) Ltd at its market price.
The finance lease payments that are deductible must exclude VAT, because the
VAT was claimed as input tax.
The deductible payment is therefore:
R
(R1 812,50 – VAT of R187,50 × 7 months) =
11 375
The VAT portion is calculated as (R7 500/R72 000)× R1 812,50 or R7 500/40.
(5) The interest payable is deductible as follows in terms of s 24J:
01/04/2022 – 30/09/2022
R880 000 × 6,50308%
57 227
01/10/2022 – 31/03/2023
(R880 000 + R57 227 – R30 000) × 6,50308%
58 998
116 225
Example 9.5
(30 minutes)
Part 1
Leruo (Pty) Ltd, a trader in financial instruments, acquired a bond from Eskom on
1 January 2022 at its face value of R1 000 000. The bond matures on 31 December
2024 at a premium of 10%. Interest on the bond is calculated at 8% a year on its
face value and is receivable annually in arrears. The yield to maturity of the bond is
10,9924%. Leruo (Pty) Ltd has a 30 June financial year-end.
YOU ARE REQUIRED TO calculate the interest that accrued to Leruo (Pty) Ltd in
accordance with s 24J for its 2022 and 2023 years of assessment.
Part 2
On 1 March 2022, InvBank Ltd lent R5 000 000 to Motheo (Pty) Ltd in terms of a
three-year loan. Interest on the loan is calculated at 12,5% a year. Interest and
capital are payable in arrears in six-monthly instalments, on 31 August and on the
last day of February respectively. The instalment on the loan is R1 024 814. The yield
to maturity is 6,25% per six-month accrual period. Motheo (Pty) Ltd has a 31
December financial year-end.
YOU ARE REQUIRED TO calculate the interest that Motheo (Pty) Ltd incurred on the
loan in accordance with s 24J for its year of assessment ended 31 December 2022.
154
Chapter 9
Companies
Solution 9.5
Part 1
Accrual amount for first accrual period (1 January 2022 – 31 December 2022):
A = B × C (B: Yield to maturity; C: Adjusted initial amount)
A = 10,9924% × R1 000 000
R
109 924
Accrual amount for second accrual period (1 January 2023 – 31 December 2023):
R
C: Adjusted initial amount
Initial amount
1 000 000
Plus: Accrual amounts during previous accrual periods (see above)
109 924
1 109 924
Less: Payments received by Leruo (Pty) Ltd during all previous accrual
periods
(80 000)
1 029 924
A = 10,9924% × R1 029 924
113 213
Amount accrued during its 2022 year of assessment:
R109 924 (see above) × 181 / 365 (1 January 2022 – 30 June 2022)
54 510
Amounts accrued during its 2023 year of assessment:
R109 924 (see above) × 184 / 365 (1 July 2022 – 31 December 2022)
R113 213 (see above) × 181 / 365 (1 January 2023 – 30 June 2023)
55 414
56 141
111 555
Part 2
Incurral amount for first accrual period (1 March 2022 – 31 August 2022):
A = B × C (B: Yield to maturity; C: Adjusted initial amount)
A = 6,25% × R5 000 000
R
312 500
Incurral amount for second accrual period (1 September 2022 – 28 February 2023):
R
A = B × C (B: Yield to maturity; C: Adjusted initial amount)
C: Adjusted initial amount
Initial amount
5 000 000
Plus: Incurral amount during previous accrual periods
312 500
Less: Payments made by Motheo (Pty) Ltd during the previous accrual
periods
5 312 500
(1 024 814)
4 287 686
A = 6,25% × R4 287 686
267 980
155
Tax Workbook
Amounts accrued during its year of assessment ended 31 December 2022:
R
First accrual period (see above)
312 500
Second accrual period (R267 980 (see above) × 122 / 181)
180 627
493 127
Example 9.6
(20 minutes)
Part 1
Limpho (Pty) Ltd (Limpho) is a South African retailer. It imports trading stock from
suppliers in London. This trading stock is then sold in South Africa. Limpho has a
31 March financial year-end.
On 1 January 2023, Limpho ordered trading stock from a supplier in London. The
cost price of the trading stock was £16 650 (inclusive of shipping costs of £1 650). The
trading stock was shipped free-on-board on 12 January 2023. It arrived in South
Africa on 23 January 2023. In terms of an agreement with the supplier, the account
had to be settled in full on 10 April 2023. All the trading stock was still on hand on
31 March 2023. To hedge itself against currency fluctuations, Limpho entered into a
forward exchange contract (FEC) with a bank. In terms of this FEC, Limpho agreed
to purchase £16 650 from the bank on 10 April 2023 at a forward rate of £1:R19,30.
(On 31 March 2023, the market-related forward rate for a similar FEC for the
remainder of the period was £1:R19,37.) The relevant rates of exchange are as
follows:
Date
ɉ
:
R
1 January 2023
12 January 2023
23 January 2023
31 March 2023
10 April 2023
1
1
1
1
1
:
:
:
:
:
18,30
18,65
18,78
19,15
19,03
YOU ARE REQUIRED TO calculate the effect of the above transactions on Limpho’s
taxable income for its year of assessment ending 31 March 2023. Round off to the
nearest rand. Ignore VAT.
Part 2
Seedat Fashions CC has a 31 March year-end. On 12 February 2023, Seedat Fashions
CC ordered trading stock from a supplier in Japan. The cost price of the trading
stock was ¥130 000, and the transaction date was 26 February 2023. Half the
supplier’s account was settled on 12 March 2023 and the remaining half on 12 April
2023. All the trading stock was still on hand on 31 March 2023. To hedge itself against
currency fluctuations, Seedat Fashions CC entered into a forward exchange
contract (FEC) with a bank. In terms of this FEC, Seedat Fashions CC agreed to
purchase ¥65 000 from the bank on 12 April 2023 at a forward rate of R1:¥9,70. (On
31 March 2023, the market-related forward rate for a similar FEC for the remainder of
the period was R1:¥9,83.)
156
Chapter 9
Companies
The relevant rates of exchange are as follows:
Date
R
:
¥
12 February 2023
14 February 2023
26 February 2023
12 March 2023
31 March 2023
12 April 2023
1
1
1
1
1
1
:
:
:
:
:
:
9,39
9,45
9,67
9,89
9,56
9,86
YOU ARE REQUIRED TO calculate the effect of the above transactions on Seedat
Fashions CC’s taxable income for its year of assessment ending 31 March 2023.
Round off to the nearest rand. Ignore VAT.
Solution 9.6
Part 1
Acquisition of trading stock from a supplier in London (s 11(a))
(£16 650 × R18,65) (note 1)
Exchange difference on outstanding debt on 31 March 2023
(translation date)
(£16 650 × (R18,65 – R19,15)) (s 24I) (note 2)
Exchange difference on FEC on 31 March 2023 (translation date)
(£16 650 × (R19,30 – R19,37)) (s 24I) (note 3)
Trading stock: Closing stock value on 31 March 2023 (note 4)
Effect on taxable income
R
(310 523)
(8 325)
1 166
310 523
(7 159)
Notes
(1) In terms of s 25D(1), the expense incurred must be translated to the currency of
the Republic by applying the spot rate on the date on which the expense was
incurred. As the trading stock was shipped free-on-board, the expense was
incurred on 12 January 2023. The shipping costs are included in the cost price of
trading stock (s 22(3)(b)).
(2) The transaction date is 12 January 2023, the date on which the trading stock
was shipped free-on-board. The exchange difference on the loan is calculated
using the foreign currency amount multiplied by the difference between the
ruling exchange rate on transaction date (12 January 2023: spot rate) and the
ruling exchange rate on translation date (31 March 2023: spot rate).
(3) The exchange difference on the forward exchange contract is calculated using
the foreign currency amount multiplied by the difference between the ruling
exchange rate on transaction date (forward rate) and the ruling exchange rate
on translation date (31 March 2023: market-related forward rate for the
remaining period of the contract).
157
Tax Workbook
Part 2
R
Acquisition of trading stock from a supplier in Japan (s 11(a))
(¥130 000 × R1/¥9,67) (note 1)
(13 444)
Exchange difference on debt settled on 12 March 2023 (realisation date)
(¥65 000 × (R1/¥9,67 – R1/¥9,89)) (s 24I) (note 2)
149
Exchange difference on outstanding debt on 31 March 2023 (translation date)
(¥65 000 × (R1/¥9,67 – R1/¥9,56)) (s 24I) (note 2)
(78)
Exchange difference on FEC on 31 March 2023 (translation date)
(¥65 000 × (R1/¥9,70 – R1/¥9,83)(s 24I) (note 3)
(89)
Trading stock: Closing stock value
13 444
Effect on taxable income
(18)
Notes
(1) In terms of s 25D(1), the expense incurred must be translated to the currency of
the Republic by applying the spot rate on the date on which the expense was
incurred.
(2) The exchange difference on the loan is calculated using the foreign currency
amount multiplied by the difference between the ruling exchange rate on
transaction date (26 February 2023: spot rate) and the ruling exchange rate on
translation date (31 March 2023: spot rate) (or spot rate on realisation date, for
the debt paid on 12 March 2023).
(3) The exchange difference on the forward exchange contract is calculated using
the foreign currency amount multiplied by the difference between the ruling
exchange rate on transaction date (forward rate) and the ruling exchange rate
on translation date (31 March 2023: market-related forward rate for the
remaining period of the contract).
Example 9.7
(20 minutes)
Kgwekgwe Hardware (Pty) Ltd (Kgwekgwe Hardware) trades in building materials.
The company has a last day of February financial year-end. Kgwekgwe Hardware
maintains a profit percentage of 20% on the cost price of its trading stock. One of
Kgwekgwe Hardware’s customers is entitled to settle its account over a period of
24 months. Interest is charged monthly in arrears at 15% a year on the outstanding
capital amount. On 1 October 2022, this customer purchased goods with a cash
selling price of R912 000 (the cost price of the goods was R760 000). The monthly
instalment payable by this customer was R44 220. The first instalment was due on
31 October 2022. The following table sets out the outstanding capital amounts and
outstanding interest amounts on the relevant dates:
1 October 2022
(R)
28 February 2023 (after
payment of instalment)
(R)
Outstanding capital
912 000
743 747
Outstanding interest
149 280
96 433
1 061 280
840 180
Total amount outstanding
158
Chapter 9
Companies
YOU ARE REQUIRED TO calculate the effect the above transactions have on
Kgwekgwe Hardware’s taxable income for its 2023 year of assessment, if:
(a) VAT is ignored; and
(b) it is assumed that Kgwekgwe Hardware is a registered VAT vendor and that the
trading stock’s selling price of R912 000 and cost price of R760 000 are inclusive
of VAT @ 15%.
Assume that the Commissioner will agree to an allowance in terms of s 24.
Solution 9.7
(a)
Taxable income:
Sales
Opening stock or purchases
Section 24 allowance (note)
Interest accrued (R149 280 – R96 433)
R
912 000
(760 000)
(123 958)
52 847
80 889
Note
The s 24 allowance allowed for its 2023 year of assessment is calculated as follows:
R
743 747
Outstanding capital amount on 28 February 2023
Section 24 allowance (R743 747 × 20% / 120%)
123 958
(b)
Taxable income:
Sales (R912 000 × 100 / 115)
Opening stock (R760 000 × 100 / 115)
Section 24 allowance (note)
Interest accrued (R149 280 – R96 433)
R
793 043
(660 870)
(107 790)
52 847
77 230
Note
The s 24 allowance allowed for the 2023 year of assessment is calculated as follows:
R
743 747
Outstanding capital amount on 28 February 2023
Less: VAT (R743 747 × 15 / 115)
(97 010)
646 737
Section 24 allowance (R646 737 × 20% / 120%)
159
107 790
Tax Workbook
Example 9.8
(15 minutes)
Tshaba Electronics (Pty) Ltd (Tshaba Electronics) manufactures cellphone
components. It has a 30 June financial year-end. On 1 June 2023, a customer
entered into an agreement with Tshaba Electronics for the manufacture of certain
cellphone components over the following two years. The total contract price was
R10 000 000. In terms of the agreement, the customer had to pay 80% of the
contract price in advance on 1 June 2023 in order to finance the expenditure
Tshaba Electronics has to incur in terms of the agreement. The balance of the
contract price is payable on 1 June 2024, subject to certain conditions. Tshaba
Electronics commenced with the manufacturing of these cellphone components
during July 2023. Tshaba Electronics maintains a gross profit percentage of 25% on
the selling price of its manufactured goods.
YOU ARE REQUIRED TO calculate the effect of the above transactions on Tshaba
Electronics’ taxable income for its 2023 year of assessment. Assume that the
Commissioner will agree to an allowance in terms of s 24C. Ignore VAT.
Solution 9.8
Taxable income:
Amount received (R10 000 000 × 80%) (note)
Less: Section 24C allowance:
Advanced payment received
Less: Profit component of the advance payment
(R8 000 000 × 25%)
Expected future expenditure (75% x R8 000 000)
R
R
8 000 000
8 000 000
(2 000 000)
(6 000 000)
2 000 000
Note
Tshaba Electronics is not unconditionally entitled to the remaining 25% of the
contract price (R2 500 000), because its payment is subject to certain conditions.
The remaining part of the contract price did not therefore accrue to Tshaba
Electronics during its 2023 year of assessment.
Example 9.9
(15 minutes)
Tyutyu (Pty) Ltd (Tyutyu) is a South African resident. It manufactures and distributes
personal computers. Its financial year ends on 30 June. The company was founded
by its two shareholders, Jakes and James Ngogo when 100 000 ordinary shares were
issued at R1 each to Jakes and James.
On 1 August 2022, Tyutyu entered into an agreement with IT4U (Pty) Ltd for the
acquisition of a new and unused manufacturing machine. The market value of the
machine was R2 760 000 at that time. In terms of the agreement, Tyutyu issued 30 000
of its shares to IT4U (Pty) Ltd in exchange for the manufacturing machine. The market
value of a Tyutyu share was R92 after the transaction.
The machine was brought into use on 4 August 2022 in a manufacturing process.
YOU ARE REQUIRED TO discuss the taxation consequences of the above transactions
for Tyutyu, in its 2023 year of assessment. Ignore VAT.
160
Chapter 9
Companies
Solution 9.9
In terms of s 40CA, Tyutyu is deemed to have incurred an amount of expenditure for
the acquisition of the manufacturing machine equal to the market value of the
shares after the transaction (R92 × 30 000 = R2 760 000).
For its 2023 year of assessment, Tyutyu is entitled to a s 12C capital allowance of
R1 104 000 (R2 760 000 × 40%).
L Questions
Question 9.1
(30 minutes)
Exquisite Designs (Pty) Ltd (Exquisite Designs) manufactures and sells office furniture.
It is a resident and a registered Category C VAT vendor. The company has a
31 March financial year-end. Exquisite Designs maintains a gross profit percentage
of 331/3% on its selling price. The following two transactions relate to its 2023 year of
assessment:
Transaction 1
One of Exquisite Designs’ valued customers is entitled to settle its account over a
period of 24 months. Interest is charged monthly in arrears at 5% per annum on the
outstanding capital amount. On 1 July 2021 the customer purchased goods with a
cash selling price of R342 000 (including VAT of 15%). The monthly instalment
payable by the customer is R15 004 (the VAT was also financed). The first instalment
was due on 31 July 2021.
On 31 March 2022, the outstanding finance charges calculated in terms of s 24J were
R7 328. The outstanding finance charges are for accrual periods 10 to 24.
On 31 March 2023 the outstanding finance charges calculated in terms of s 24J
were R373. The outstanding finance charges are for accrual periods 22 to 24.
Transaction 2
On 1 March 2023, a customer entered into an agreement with Exquisite Designs for
the manufacture of 1 200 office desks over the next two years. The total contract
price is R3 036 000 (including VAT @ 15%). In terms of the agreement, the customer
had to pay 60% of the contract price in advance on 1 March 2023 in order to finance
expenditure that Exquisite Designs would have to incur in terms of the agreement.
The balance of the contract price will only accrue to Exquisite Designs on
28 February 2024. Exquisite Designs commenced with the manufacturing only during
April 2023.
YOU ARE REQUIRED TO calculate and discuss the normal tax consequences of the
above two transactions for Exquisite Designs’ 2023 year of assessment. Assume that
the Commissioner will agree to allowances in terms of ss 24 and 24C.
Question 9.2
(30 minutes)
SportShoe (Pty) Ltd (SportShoe) trades in athletic equipment. It commenced trading
on 1 June 2021 and has a 31 May financial year-end.
SportShoe imports all its trading stock. It has a contract with Old Balance Ltd shoe
manufacturers, in terms of which it has a 12-month credit agreement, without interest
implications.
161
Tax Workbook
SportShoe ordered 15 000 pairs of shoes at $50 a pair on 1 June 2021 ($750 000 in
total). The shoes were sent free-on-board to South Africa on 1 July 2021.
To hedge itself against currency fluctuations, SportShoe entered into a forward
exchange contract (FEC) with National Bank on 1 July 2021. In terms of the FEC,
SportShoe had to settle the full amount owing to Old Balance Ltd on 1 July 2022 at
an exchange rate of $1:R13,30. The market-related forward rate on 31 May 2022 for
the remaining period of the contract was $1:R13,49.
SportShoe neglected its marketing. By 31 May 2022 it had sold only 2 500 pairs of
shoes. During its 2023 year of assessment, it sold the remaining 12 500 pairs of shoes.
The shoes were sold at a mark-up of 50% on cost.
SportShoe did not have cash available to purchase the foreign exchange amount
from National Bank on 1 July 2022. Bandit Bank helped by providing a R9 975 000
loan. In terms of the loan, SportShoe borrowed the R9 975 000 on 1 July 2022 and
had to pay Bandit Bank the full amount of the loan plus interest of R1 500 000 on
30 June 2023. Interest on the loan for the period 1 July 2022 to 31 May 2023,
calculated in terms of s 24J, is R641 142.
The following exchange rates are provided:
Date
$
:
1 June 2021
1 July 2021
31 May 2022
1 July 2022
1
1
1
1
:
:
:
:
R
11,30
11,20
13,20
13,43
YOU ARE REQUIRED TO calculate the effect of the above transactions on SportShoe’s taxable income for its 2022 and 2023 years of assessment.
Question 9.3
(20 minutes)
Phephani (Pty) Ltd is a “small business corporation” as defined in s 12E and
manufactures parts.
The taxable income of the company for the year of assessment ending 31 March
2023 amounts to R850 300, before taking the following transactions into account:
(1) A two-year lease on a delivery vehicle expired on 30 November 2022. The cash
cost of the vehicle at the commencement of the lease was R300 000, excluding
VAT. On 30 November 2022 Phephani (Pty) Ltd paid Rnil to the lessor and became
the new owner when the market value of the vehicle was R180 000, excluding
VAT. The lease payments were taken into account in the calculation of the
taxable income of R850 300, and the deduction over the two-year lease period
exceeded the market value of R180 000. The write-off period for delivery vehicles
in terms of BGR 7 is four years. The Commissioner has agreed, however, to a
write-off period of two years, because it was previously used by the taxpayer.
(2) On 1 March 2023 the company paid its annual insurance premium for the next
year. The premium amounted to R120 000.
162
Chapter 9
Companies
(3) The company also has a short-term share portfolio in listed companies. The
following information relates to this portfolio, which is treated as trading stock:
Purchase date
Quantity
Total
purchase
price
Selling
date
Quantity
R
Total
selling
price
R
Co A (5/3/2019)
800
4 000
19/10/2022
800
9 200
Co B (1/2/2021)
10 000
20 000
30/3/2023
5 000
15 000
500
2 800
Co C (9/12/2022)
Only the opening stock had been taken into account in the calculation of the
taxable income of R850 300.
The investment income contributes only 5% to the gross income of the company
and does not jeopardise its classification as a “small business corporation”.
YOU ARE REQUIRED TO calculate the normal tax liability of Phephani (Pty) Ltd for the
year of assessment ending 31 March 2023.
Question 9.4
(40 minutes)
Balasi CC operates a manufacturing concern in South Africa. Its draft statement of
comprehensive income for the year ending 31 March 2023 follows (all amounts
exclude VAT, unless stated otherwise):
R
R
Sales (note 1)
21 169 593
Less: Cost of sales (note 2)
(15 372 000)
Gross profit
Other operating income
Rentals received (note 3)
Proceeds from insurance policy (note 4)
5 797 593
16 770
250 000
266 770
6 064 363
Less: Operating expenses
Contributions to a key-man policy (note 4)
Lump sum to dependants (note 4)
Depreciation (note 5)
Repairs (note 6)
Bad debts (note 7)
Other expenses (deductible for tax purposes)
Net income for the year
2 500
150 000
521 000
25 000
12 000
3 394 900
(4 105 400)
1 958 963
163
Tax Workbook
Notes
(1) Sales include trading stock, which was sold on a suspensive sale agreement on
30 April 2022. The suspensive sale agreement was as follows:
R
Selling price
75 000
11 250
Add: VAT @ 15%
86 250
(11 100)
Less: Deposit
(2)
(3)
(4)
(5)
Add: Finance charges
75 150
18 000
Total
93 150
The outstanding amount is repayable in arrears over 24 months in equal monthly
instalments. The debtor made all the required payments on a timely basis. The
accountant credited sales with the deposit and all instalments received and
debited bank. No other entries were made. The cost of the sale of R50 000 was,
however, treated correctly. Interest earned for the 2023 year of assessment on
the suspensive sale agreement, calculated according to s 24J, amounted to
R12 193. At 31 March 2023 the outstanding debtors (excluding finance charges
and VAT) amounted to R38 825.
Balasi CC distributed a dividend in specie to its members on 31 March 2023. The
cost price of the trading stock distributed of R50 000 was deducted as purchases
but was not included in closing stock. Balasi CC’s gross profit margin was 50% on
cost price.
Balasi CC also owns a flat situated outside the Republic. Rentals amounted to
the equivalent of R25 800 after the deduction of operating costs. Non-refundable
foreign tax, the equivalent of R9 030 was paid. No double tax agreement exists
between South Africa and the foreign country in which the flat is situated.
A key-man insurance policy awarded an amount of R250 000 on 31 December
2022 to Balasi CC. The policy was taken out on 31 March 2017 on the life of the
factory manager who died on 15 August 2022. The premiums in respect of the
policy were not deductible in terms of s 11(w) by the CC. Balasi CC paid
R150 000 to the factory manager’s dependants in terms of his employment
contract. Premiums on the policy of R500 a month were not apportioned for
periods shorter than a month.
All assets are already written off in full for tax purposes, except for the following:
Improvements to own factory to
increase industrial capacity
Machinery
Machine E (new)
Machine F (new)
Delivery vehicle (second-hand)
(note 6)
Purchase or
erection date
Brought into use
on
14/11/2004
15/03/2005
2 500 000
15/09/2021
01/11/2022
15/12/2021
15/12/2022
280 000
230 000
01/12/2022
01/12/2022
195 000
164
Cost price
R
Chapter 9
Companies
BGR 7 allows for machinery to be written off over five years and delivery vehicles
over four years, for purposes of s 11(e).
(6) Balasi CC established that it needed to strengthen the body of the delivery
vehicle and incurred these costs (classified as repairs for accounting purposes)
after it has been purchased, but before it could be used to make deliveries.
(7) The following amounts are regarded as bad debts:
• A loan of R10 000 to an employee on 1 April 2022 to assist him in buying a car.
This employee died unexpectedly on 1 June 2022.
• Trading stock sold at cost price of R2 000 to the above-mentioned employee.
In terms of the policy of Balasi CC, all employees are entitled to purchase
trading stock at cost (but subject to a maximum of R2 500 a year).
The corporation was unsuccessful in its attempts to collect any amount from the
deceased estate.
YOU ARE REQUIRED TO calculate the normal tax liability of Balasi CC for its year of
assessment ending 31 March 2023 (start your calculation with net income of
R1 958 963).
Question 9.5
(50 minutes)
Vele Beads (Pty) Ltd (Vele Beads) has qualified as a “small business corporation”
since its incorporation. The company manufactures and sells different kinds of beads
and jewellery. The company is a registered VAT vendor which makes taxable
supplies only. The company’s financial year ends on 30 April.
The accounting profit before tax for the 2023 year of assessment amounted to
R7 180 424. All amounts exclude VAT, unless stated otherwise. Vele Beads has
obtained tax invoices or other necessary documentation for all the transactions
mentioned below.
Assume that Vele Beads would like to minimise its normal tax liability for the 2023
year of assessment, will make any available elections in order to achieve this, and
will also duly notify the Commissioner in writing of its election where applicable.
The following information relates to the calculation of the accounting profit before
tax:
1. Depreciation of R207 950 was provided for during the 2023 financial year. The
following table provides further information regarding the company’s PPE
(property, plant and equipment). All assets were brought into use on date of
acquisition:
Note
Cost price
(R)
Administrative building
1.1
3 990 000
1 February 2023
‘New’ factory building
1.2
2 500 000
15 March 2023
Kiln
1.3
1 300 000
1 May 2004
Mixers
1.4
165 000
17 March 2023
Computer equipment
1.5
171 000
1 September 2021
Audi A4
1.6
320 000
1 April 2023
Description
165
Purchase date
Tax Workbook
SARS allows the following write-off periods for purposes of s 11(e), according to
BGR 7:
Kilns
6 years
Mixers
6 years
Computer equipment (similar to that in note 1.5)
3 years
Audi A4
5 years
1.1. After renting a newly constructed administrative building for 12 months, Vele
Beads made an offer to purchase the building. The offer was accepted, and
Vele Beads acquired the building on 1 February 2023. The rental payments
were taken into account in the accounting profit, and no adjustment is
necessary for these rental payments.
1.2 The ‘old’ factory building was erected at a total cost of R1 150 000 and was
written off in full during the 2022 year of assessment. It became too small and
was sold during March 2023 for R1 500 000. (The profit on sale was not taken
into account in calculating the accounting profit.) On 15 March 2023 Vele
Beads acquired a brand-new factory building from a developer (a vendor)
for R2 500 000. Based on the surface area of the ‘new’ building, Vele Beads
could prove to SARS’ satisfaction that 15% of the building will be used as
offices, change rooms and a staff cafeteria, 20% as storage space, and the
remaining 65% for the manufacturing process.
1.3 The kiln (in which the beads are baked and which had already been written
off in full for income tax purposes) was moved from the old factory to the
new factory during the last week of February 2023 at a total cost of R85 000.
The moving cost was not taken into account in calculating the accounting
profit.
1.4 During March 2023 Vele Beads ordered five specially designed mixers (that is,
machinery used to mix the raw materials in order to make clay) for R33 000
each.
1.5 The new administrative building was broken into and all the computer
equipment was stolen on 22 February 2023. Vele Beads was under-insured
and the insurance company deposited an amount of R28 750 as full and
final settlement of the claim into the company’s bank account on 25 March
2023. The company paid output tax of R3 750 relating to this insurance
payout to SARS, in terms of s 8(8) of the VAT Act. After this theft, the
company entered into operating lease contracts for all its computer
equipment. Apart from depreciation on the equipment (up until the date of
the theft) and the lease payments for the remainder of the year, no other
accounting entries were made in respect of the stolen computer equipment.
1.6 On 1 April 2023 Vele Beads purchased an Audi A4 in terms of an instalment
credit agreement (ISA). The cash cost of the vehicle (including VAT)
amounted to R320 000. Vele Beads paid R25 000 as a deposit. Finance
charges over the four-year period of this ISA amounted to R102 680. (The
yield to maturity is 15,5% per annum Vele Beads paid the first monthly
instalment of R8 285 on 30 April 2023. Apart from depreciation, the
accountant has not yet made any accounting entries regarding the Audi.
166
Chapter 9
Companies
2. The following information relates to trading stock (cost of sales):
2.1 The company donated beads with a cost price of R15 000 and a market
value of R30 000 to the Thubelisha Children’s Home (a public benefit
organisation), and a s 18A receipt was obtained. No accounting entry was
made in respect of this donation.
2.2 On 25 April 2022 jewellery with a cost price of R155 000 was directly exported
at a selling price of €40 666, to a foreign company that is not related to Vele
Beads. The selling price was market-related, but it was agreed that the
outstanding debt was only due on 30 June 2022. No interest was charged on
the outstanding amount, and the company repaid the loan as agreed.
The accountant recorded the transaction correctly for accounting purposes,
but he did not record any foreign exchange differences.
2.3 Raw materials for the manufacturing of some of the beads are imported from
Italy. An order for a total cost of €62 500 was placed on 1 December 2022,
and the material was shipped on 15 December 2022 (transaction date). The
material was cleared for home consumption in terms of the Customs and
Excise Act on 29 January 2023. The customs duty value on entering the
country was R620 000. Import duty of R18 000 as well as the applicable VAT
was paid in cash on 29 January 2023.
A forward exchange contract (FEC) for a four-month period (ending 30 April
2023) at a forward rate of R18,88 was entered into on 2 January 2023 in
respect of the debt. The debt was settled on 30 April 2023.
The accountant recorded the transaction correctly for accounting purposes,
but he did not record any foreign exchange differences.
The following exchange rates are applicable:
Date
Spot rate (€1 = R)
25 April 2022
€1 = R17,53
30 April 2022
€1 = R17,60
30 June 2022
€1 = R17,50
1 December 2022
€1 = R17,98
15 December 2022
€1 = R17,92
2 January 2023
€1 = R18,04
29 January 2023
€1 = R18,61
30 April 2023
€1 = R18,78
The average exchange rate for the 2023 year of assessment was €1 = R18,07.
YOU ARE REQUIRED TO calculate the taxable income of Vele Beads for its 2023 year
of assessment, starting with the accounting net profit before tax of R7 180 424.
167
Chapter 10
Company distributions
L Introduction
In this chapter, the principles relating to company distributions under the Income Tax
Act 58 of 1962 as amended are illustrated and tested. These principles relate to:
• Dividends:
– The definition of “dividend” provides that any amount transferred or applied by
a resident company for the benefit or on behalf of any person in respect of any
share is a dividend.
– The following transfers are excluded from this definition of a dividend: transfers
that result in the reduction of the company’s contributed tax capital, transfers
that constitute shares in the company, transfers of amounts by a listed
company in connection with the acquisition of its own shares, transfers that
constitute a redemption of a participatory interest in a foreign collective
investment scheme and foreign dividends.
– A separate definition of a foreign dividend has been included in the Income
Tax Act.
– With effect from 1 April 2012, any dividend paid by a company is subject to
dividends tax. The rate has increased from 15% to 20% as from 22 February
2018. Even though the liability for dividends tax rests with the beneficial owner
of the dividend, the company is obliged to withhold the dividends tax. In the
case of dividends in specie, the liability for dividends tax remains with the
company paying the dividend. One of the most important exemptions from
dividends tax is when a dividend is paid to a resident company as the
beneficial owner of the dividend, provided that the necessary declarations
and undertakings have been submitted to the company paying the dividend.
– Any amount received by or accrued to a person by way of a dividend or a
foreign dividend is gross income (refer to paragraph (k) of the definition). The
dividend could be exempt from normal tax in terms of s 10(1)(k). Foreign
dividends are either fully exempt or partially exempt in terms of s 10B.
• Returns of capital
“Contributed tax capital” is defined in s 1. It can be summarised as the
company’s “pure” share capital at 1 January 2011 plus any amounts received for
the issue of the company’s shares after this date. This amount will be reduced by
amounts that the directors of a company indicate are paid from contributed tax
capital after 1 January 2011. The concept “contributed tax capital” means in
short the benefit that the company received for the issue of the shares. It is also
referred to as “pure” share capital.
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Tax Workbook
• Summary
The beneficial owner of the dividend (income) has the right to the income (the
dividend).
The holder of the share owns the share (capital).
Any reference to shareholder in this chapter means that the person is both the
beneficial owner of the dividend and the holder of the share.
L Contents
The table gives an indication of the time that is needed to complete the example or
question. The relevant sectionss (or paragraphs) that need to be known before
attempting the example or question are provided and the level of the example or
question is an indication of its difficulty.
)
Example/Question
and time allocation
Topic and/or relevant sections
Section 1 – definition of “dividend”
Section 22(8)
Eighth Schedule para 75
Section 64E – dividends tax
Level
Example 10.1
(15 minutes)
•
•
•
•
Basic
Example 10.2
(15 minutes)
• Section 1 – definition of “dividend”
(as defined before 1 January 2011)
• Section 1 – definition of “dividend”
(as defined with effect from 1 January
2011)
• Definition of “contributed tax capital”
(as defined with effect from 1 January
2011)
Advanced
Example 10.3
(10 minutes)
• Definition of “dividend”
• Section 64E – deemed dividends
Basic
Example 10.4
(20 minutes)
• Sections 64E, 64F and 64J – dividends
tax
Intermediate
Question 10.1
(30 minutes)
• Dividends tax – ss 64E, 64F and 64G
Basic
Question 10.2
(30 minutes)
• Definition of a dividend
• Dividend in specie
• Dividends tax – ss 64E, 64F and 64G
Intermediate
L Examples
Example 10.1
(15 minutes)
Ahmedi (Pty) Ltd, a resident company that was formed in 2004, has a 31 March
financial year-end. The company distributed the following amounts/assets to its sole
shareholder, Mr Ahmed, on 1 July 2022:
• a cash distribution of R1 000 000;
• an in specie distribution of trading stock with a market value of R500 000 (the
trading stock was acquired on 10 April 2021 at a cost price of R300 000); and
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Chapter 10
Company distributions
• an in specie distribution of a building with a market value of R1 500 000 (the
building was acquired on 12 July 2010 for R1 200 000; the building did not qualify
for any capital allowances).
YOU ARE REQUIRED TO:
(1) Calculate the normal tax consequences arising from the above distributions for
Ahmedi (Pty) Ltd’s 2023 year of assessment.
(2) Calculate the amount of dividends tax that Ahmedi (Pty) Ltd is obliged to pay
over to SARS.
Solution 10.1
(1) Ahmedi (Pty) Ltd’s normal tax liability arising from the distributions is:
Distribution of cash – no normal tax consequences
Distribution of trading stock
Recoupment at market value in terms of s 22(8)
Less: Opening stock
Distribution of the building
Proceeds at market value (paragraph 75 of the
Eighth Schedule)
Less: Base cost
Capital gain
Taxable capital gain (R300 000 × 80%)
Taxable income
R
–
500 000
(300 000)
1 500 000
(1 200 000)
300 000
240 000
440 000
(2) As Mr Ahmed is a natural person, the dividends paid to him do not qualify for
the exemption provided in s 64F(1)(a). The amount of dividends tax to be paid
to SARS by Ahmedi (Pty) Ltd in respect of the distributions that took place on
1 July 2022, is:
R
Dividends paid
Cash distribution (which will result in a dividends tax liability of
1 000 000
Mr Ahmed’s to be withheld by Ahmedi (Pty) Ltd)
Distribution of trading stock (note) (which will result in a
dividends tax liability of Ahmedi (Pty) Ltd)
500 000
Distribution of a building (note) (which will result in a dividends
1 500 000
tax liability of Ahmedi (Pty) Ltd)
Dividends paid on 1 July 2022
3 000 000
Dividends tax (R3 000 000 × 20%)
600 000
Note
The definition of “dividend” provides that any amount transferred or applied by a
resident company for the benefit or on behalf of any person in respect of any share
is a dividend. “Amount” is not defined in the Act. Our courts have held that within
the context of gross income, “amount” means not only money but the value of
every form of property, whether corporeal or incorporeal, which has a money value
(Lategan v CIR 1926 CPD (2 SATC 16); CIR v Butcher Bros (Pty) Ltd 1945 AD (13 SATC 21)).
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Tax Workbook
It is submitted that the amount on these in specie distributions is the market value of
the respective assets.
Dividends tax is payable by the end of the month following the month in which the
dividend was paid.
Example 10.2
(15 minutes)
Protea Construction (Pty) Ltd (Protea Construction) has a last day of February
financial year-end. On 28 February 2008, Protea Construction issued two
capitalisation shares for every five ordinary shares (equity shares) held. The
capitalisation shares were ordinary shares. Before the capitalisation issue, Protea
Construction’s issued share capital consisted of 100 000 ordinary shares of R1 each.
In paying up the capitalisation shares, the company applied R40 000 of its profit. The
contributed tax capital on 1 January 2011 was R100 000.
On 15 July 2022, Protea Construction bought back 15% of its issued share capital in
terms of s 48 of the Companies Act 71 of 2008. For each share bought back, Protea
Construction paid its shareholder R5 cash and distributed two shares in Brick a Pave
(Pty) Ltd. Protea Construction had purchased the shares in Brick a Pave (Pty) Ltd on
1 April 2005 for R1,80 a share. On 15 July 2022, the market value of a share in Brick a
Pave (Pty) Ltd was R3. Protea Construction’s directors indicated that R1 per share
was paid from share capital that arose when the company was incorporated
(contributed tax capital) and R1 per share was paid from profits capitalised during
the capitalisation issue that took place on 28 February 2008 (dividend) and R3 from
retained earnings (dividend).
YOU ARE REQUIRED TO determine the dividend, as defined, that was distributed by
Protea Construction (Pty) Ltd in terms of its share buy-back.
Solution 10.2
After the capitalisation issue, Protea Construction’s share capital consists of:
• “pure” share capital of R100 000; and
• capitalised revenue profits of R40 000 (“tainted” share capital). Remember that
the company did not receive any benefit for the issue of the shares. It is therefore
not contributed tax capital. The reserves/profits of the company were utilised to
issue the shares.
When the tainted share capital is distributed, it constitutes a dividend.
On 1 January 2011, Protea Construction’s contributed tax capital is calculated as
follows:
R
Stated share capital on 1 January 2011
(R100 000 (“pure” share capital) + R40 000 (“tainted” share capital))
140 000
Less: Amounts included in stated share capital that would have
constituted a dividend if distributed immediately prior to 1 January
2011(“tainted” share capital)
(40 000)
Contributed tax capital on 1 January 2011
100 000
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Chapter 10
Company distributions
The dividend distributed by Protea Construction (Pty) Ltd is calculated as follows:
R
R
Total amount distributed to holders of shares
231 000
Cash distributed
(R5 per share × 21 000 shares bought back)
Non-cash amounts distributed
(21 000 shares bought back × 2 Brick shares at R3 each)
Less: Amounts that result in a reduction in contributed
tax capital
Amounts paid from “pure” share capital reduce
contributed tax capital (R1 × 21 000)
Amounts paid from “tainted” share capital do not
reduce contributed tax capital
Dividend paid by Protea Construction (Pty) Ltd
Example 10.3
105 000
126 000
(21 000)
(21 000)
–
210 000
(10 minutes)
Leoatle CC made the following loans and distributions on 1 April 2022:
(a) an interest-free loan to the brother of a member. Both are residents;
(b) a loan to a member (who is a resident) on which interest calculated at 8% per
annum is payable;
(c) an interest-free loan of R2 500 to Sediba (a resident), a full-time employee as
well as a member of the CC. It is the policy of the CC to lend to all its
employees, an amount to a maximum of R3 000, interest-free; and
(d) a computer with a market value of R1 000 was sold to Sediba (a resident) for R1.
All the CC’s computer equipment is leased. At the end of the three-year lease
term, the employee has the option to buy the computer at the residual value.
YOU ARE REQUIRED TO indicate whether any of the loans or distributions would have
dividends tax implications. Give reasons for your answer. Assume a repurchase rate
of 5% for purposes of this question.
Solution 10.3
In terms of s 64E(4) a deemed dividend arises for purposes of dividends tax if an
amount is owing to a company in respect of a loan or advance to:
(a) a connected person in relation to the company, that is a resident but not a
company; or
(b) a connected person in relation to the above connected person, that is a
resident but not a company
if the loan or advance arises by virtue of any share in the company. This deemed
dividend is based on the difference between the interest that would have been
charged on the loan at the official rate and the actual interest charged on the loan.
For the purposes of s 64E, the official rate is equal to the repurchase rate (5% –
given) plus 100 basis points (1%) – refer definition of ‘official rate’ in paragraph 1 of
the Seventh Schedule. The official rate is therefore 6%.
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It should be noted that for purposes of income tax, a close corporation is treated as
a company (see par (f) of the definition of ‘company’ in s 1).
(a) Deemed dividend. The member is a connected person in relation to the CC, is a
resident and not a company. The member’s brother is a connected person in
relation to the member, a resident and not a company. The difference between
the interest charged on the loan (0%) and the interest that would have been
charged at the official rate (6%) will result in a deemed dividend.
(b) Deemed dividend of Rnil. The member is connected in relation to the CC, is a
resident and not a company, therefore a deemed dividend may arise. The loan,
however, bears interest at a higher interest rate than the official interest rate;
therefore, in terms of s 64E(4)(b) the deemed dividend will be Rnil.
(c) This could constitute a deemed dividend. If the loan was advanced by virtue of
Sediba’s share (member in CC), the loan could result in a deemed dividend as
Sediba is a resident and not a company (s 64E(4)). If, however, the loan was
advanced by virtue of his employment with the CC, it will not result in a deemed
dividend. As the loans are advanced to all employees, it would appear as if the
loan was advanced by virtue of employment, rather than by virtue of a share in
the CC. In this case, no value will be placed on the loan under paragraph 11 of
the Seventh Schedule either, as it is a casual loan that does not exceed R3 000.
(d) If the computer was sold to Sediba as a result of or by virtue of his employment,
the value of the benefit will be taxed in terms of paragraph (i) of the definition of
“gross income” and the Seventh Schedule. If this is the case, no dividend will
arise as no amount was transferred to a person by virtue of a share in the CC. If
the computer was, however, sold to Sediba as a result of or by virtue of the fact
that he is a member of the CC, there will be a dividend. The deciding factor will
therefore be the reason why he was allowed to purchase the computer at less
than its market value from the CC.
Example 10.4
(30 minutes)
Lethabo Ltd, a company that trades solely in the Republic, has a year of assessment
which ends on the last day of February each year. Its policy is to declare an interim
dividend on 31 August each year and a final dividend on the last day of February
each year.
During the 2023 year of assessment, Lethabo Ltd made the following distributions to
its holders of shares:
(1) On 31 August 2022 it paid a special dividend of R200 000 to Nxesi (Pty) Ltd, a
resident company that owns 71% of the issued shares of Lethabo Ltd. Nxesi (Pty)
Ltd did not submit any declarations or undertakings in respect of dividends tax to
Lethabo Ltd.
(2) On 28 February 2023 it made the following distributions to its holders of shares:
• No amount was distributed to Nxesi (Pty) Ltd, as it already received the
special dividend.
• R10 000 paid to Mr Xing, a 4% holder of shares, who is a resident in China. The
double tax agreement between South Africa and China states that South
Africa may tax dividends paid to Chinese residents at a rate of 5%. Mr Xing
submitted a declaration to Lethabo Ltd stating that it qualifies for this reduced
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Chapter 10
Company distributions
withholding rate and an undertaking to inform Lethabo Ltd should it cease to
be the beneficial owner of the dividends.
• R30 000 paid to Max Fana Ltd, a South African resident company that holds
19% of the shares of Lethabo Ltd. Max Fana Ltd submitted the required
declarations and undertakings in respect of dividends tax to Lethabo Ltd.
• 1 000 capitalisation shares issued to Mr Zonke, who holds the remaining shares
in Lethabo Ltd.
YOU ARE REQUIRED TO determine the amount of dividends tax in respect of each of
Lethabo Ltd’s distributions during the 2023 year of assessment. You are furthermore
required to indicate the date when Lethabo must pay the dividends tax to SARS.
Solution 10.4
Dividends tax to be withheld/paid by Lethabo Ltd is:
No.
(1)
(2)
Description
Special dividend paid
to Nxesi (Pty) Ltd
R
Dividends
tax
Calculations/
reference to legislation
As Nxesi (Pty) Ltd is a resident company but
also a company forming part of the same
group of companies as Lethabo Ltd, the
dividend qualifies for the exemption in
s 64F(1)(a). In terms of s 64G(2)(b) no declaration or undertaking is required in the case
where the beneficial owner of the dividend is
part of the same group of companies as the
company paying the dividend.
–
Dividend paid to
Mr Xing
As Lethabo Ltd has received a declaration of
the reduced rate that applies to the dividends
paid to Mr Xing and undertaking from him to
inform Lethabo if it is no longer the shareholder,
dividends tax should be withheld at a rate of
5%, thus R10 000 x 5%.
500
Dividend paid to Max
Fana Ltd
As Max Fana Ltd is a resident company and
has submitted the required declarations and
undertakings, the dividend is exempt from dividends tax in terms of s 64F(1)(a).
–
In terms of the definition of a dividend, the
issuing of shares in the company does not constitute a dividend. As this does not result in a
dividend, it will not be subject to dividends tax.
–
Capitalisation shares
issued to Mr Zonke
This dividends tax must be paid over to SARS by no later than 31 March 2023.
L Question
Question 10.1
(30 minutes)
Rorisang Ltd is a resident company that is listed on the JSE Limited. It manufactures
sports equipment that is sold both locally in South Africa and exported to various
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Tax Workbook
other international countries. The company was established in 1992 and has a
31 December year end. The following holders of shares have an interest in Rorisang
Ltd:
• Phumlani (Pty) Ltd is a resident company that purchased a 35% share in Rorisang
Ltd on 1 June 2000.
• Ethembeni Foundation is a Public Benefit Organisation that is registered as such in
terms of s 30 of the Income Tax Act since its inception in 2004. It holds a 10% share
in Rorisang Ltd. The investment allows Ethembeni Foundation to collect dividends
that are used to fund the activities of the foundation such as taking children to
various sporting events. The foundation has not submitted the required
declarations and undertakings to inform Rorisang Ltd that it is exempt from
dividends tax in terms of s 64F(1)(c).
• Sevens Pty (Ltd) is a non-resident company from Fiji that purchased 20% of the
shares in Rorisang Ltd in 2008.
• OlympicsSA is a portfolio of a collective investment scheme in securities in the
Republic that holds 15% of the shares in Rorisang Ltd.
• Individuals: 20% of the shares in Rorisang Ltd is owned by various number of
unrelated individuals of which not more than 5% is owned by one individual. Of
these individuals 15% are residents of the United Kingdom and the rest are
residents of the Republic.
Rorisang Ltd has 1 500 000 issued shares. The company declared a dividend of R1,50
per share to its holders of shares on 15 November 2022. The dividend was paid to the
holders of shares on 1 December 2022.
After becoming aware of the declaration of the dividend, the Ethembeni
Foundation requested the board of Rorisang Ltd to consider distributing sporting
equipment with a manufacturing cost equal to amount of the dividend that the
foundation is entitled to, rather than a cash dividend, as equipment was urgently
required for an upcoming event. The board of Rorisang Ltd decided to approve the
request.
You may accept that Rorisang Ltd normally sells goods to the public at a profit
margin of 20% on manufacturing cost.
Other relevant information
• South Africa has a double tax agreement with the United Kingdom which states
that dividends received by UK resident individuals from South African companies
may only be taxed at a rate of 10% in South Africa.
• No double tax agreement has been concluded between South Africa and Fiji.
• Phumlani (Pty) Ltd submitted the declarations and undertakings to as required by
s 64G to Rorisang Ltd indicating that it qualified for exemption from dividends tax
as contemplated in s 64F(1)(a).
• Only 40% of UK resident holders of shares have submitted the declarations and
undertakings required in terms of s 64G to Rorisang Ltd indicating that the
reduced dividends tax rate in terms of the double tax agreement applies to
them. Rorisang Ltd, however, is aware from the entries in the share register that
the other 60% of these individuals are UK citizens.
YOU ARE REQUIRED TO calculate the amount of dividends tax on the dividends paid
on 1 December 2022 as well as indicate which party is liable for the dividends tax.
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Company distributions
Question 10.2
(30 minutes)
This question should only be attempted after PART XI of the Eighth Schedule has
been studied.
During Mahufe Ltd’s 2023 financial year that ended on 31 March 2023, the following
amounts accrued to it:
From Moleketla (Pty) Ltd
Moleketla (Pty) Ltd’s financial year ends on the last day of February. On 31 August
2022 it distributed R300 000 cash as a dividend to its sole holder of shares, Mahufe
Ltd. On 15 January 2023 the company distributed trading stock with a market value
of R50 000 to Mahufe Ltd. Moleketla (Pty) Ltd had acquired the trading stock on
15 January 2022 at a cost of R30 000. Mahufe Ltd did not submit any declaration or
undertaking to Moleketla (Pty) Ltd. By 31 March 2023, Mahufe Ltd had sold 60% of
this trading stock for R48 000.
From Likhweti (Pty) Ltd
Mahufe Ltd holds 25% of the issued share capital (equity share capital) of Likhweti
(Pty) Ltd. Mahufe Ltd’s interest in Likhweti (Pty) Ltd was acquired on 10 June 2007 for
R45 000. Mahufe Ltd and Likhweti (Pty) Ltd do not form part of the same group of
companies.
On 18 November 2022 Likhweti (Pty) Ltd reduced the value of its issued share capital
by 15%. It paid its holders of shares R40 000 in total to compensate for the reduction.
The directors of Likhweti (Pty) Ltd indicated that R30 000 of this amount was paid
from contributed tax capital. On this date the market value of Mahufe Ltd’s interest
in Likhweti (Pty) Ltd was R66 667.
On 30 March 2022 Mahufe Ltd sold its 25% interest in Likhweti (Pty) Ltd for R85 000.
On 1 April 2022 Mahufe Ltd submitted a declaration stating that it qualified for the
exemption from dividends tax as contemplated in s 64F(1)(a) as well as an
undertaking to inform Likhweti (Pty) Ltd if it ceases to be the beneficial owner of the
dividend to Likhweti (Pty) Ltd.
From Moloto Ltd
Mahufe Ltd holds 10 000 of the issued share capital in Moloto Ltd (1% of its issued
share capital). Mahufe Ltd’s interest in Moloto Ltd was acquired on 15 April 2010 for
R20 000. Moloto Ltd is listed on the JSE Limited (JSE).
On 30 January 2023, Moloto Ltd acquired 7% of its own equity shares by way of a
general repurchase of securities. The repurchase complied with the applicable
requirements prescribed by the JSE Limited Listings Requirements. Moloto Ltd paid its
holders of shares R5 per share.
Mahufe Ltd is not a share-dealer.
YOU ARE REQUIRED TO discuss and calculate the effect of the above transactions
on Mahufe Ltd’s:
(1) taxable income for its 2023 year of assessment; and
(2) dividends tax that would have been withheld by the companies in which
Mahufe Ltd invested in respect of the dividends paid to Mahufe Ltd.
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Chapter 11
Partners and Partnerships
L Introduction
This chapter contains examples and questions covering the normal tax
consequences of partners when trading in a partnership.
The partnership is not a separate legal entity and the normal rules for individuals
apply to the partners.
Assume all amounts exclude VAT, unless stated otherwise.
In order to answer the examples and questions relating to partnerships, keep the
basic framework of the calculation of taxable income in mind.
Framework:
Calculating taxable trade income of a partnership
Calculate the partner’s share:
“Gross income” as defined:
Less: Exempt income
Gives: “Income” as defined
Less: “Allowable” deductions
Gives: Taxable trade income of all the partners
• Calculate each partner’s personal share of taxable trade income of the
partnership by multiplying the profit-sharing ratio by the taxable trade income of
all the partners.
• Include taxable income in gross income of the partner in order to calculate the
partner’s taxable income.
L Contents
The table gives an indication of the time that you will need to complete the
example or question. The relevant sections or paragraphs that you need to know
before attempting the example or question are provided and the level of the
example or question gives an indication of the difficulty of the question.
)
Example/Question
and time allocation
Topic and/or relevant sections
Level
Example 11.1
(10 minutes)
• Section 24H – limited partnerships
Intermediate
Example 11.2
(10 minutes)
• Section 11(i) – irrecoverable debts
• Section 8(4)(a) – irrecoverable debts
recovered
Basic
continued
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Tax Workbook
)
Example/Question
and time allocation
Topic and/or relevant sections
Level
Example 11.3
(10 minutes)
• Section 1 – definition of “gross
income”
• Section 10(1)(i) – interest exemption
• Section 10(1)(k) – dividends
• Section 10B – foreign dividend
exemption
Intermediate
Example 11.4
(45 minutes)
• Section 1 – definition of “gross
income”
• Section 10(1)(i) – interest exemption
• Section 10(1)(k) – dividends
• Section 11(a) – general deduction
formula
• Section 11(e) – wear-and-tear
• Section 11(i) – irrecoverable debts
• Section 11F – retirement annuity fund
contributions
• Section 18A – donations
Advanced
Question 11.1
(40 minutes)
Combined
Intermediate
Question 11.2
(45 minutes)
Combined
Advanced
L Examples
Example 11.1
(10 minutes)
Annie, Hillary and Britney carry on business in partnership as traders. They share
profits and losses equally. Britney is a limited partner and her total contribution
amounted to R8 000. No income was received by/accrued to Britney from the
partnership before the 2023 year of assessment. Before the wear-and-tear
allowance of R45 000 for the new delivery vehicle is taken into account, the taxable
income of the partnership for the year of assessment ended 28 February 2023 is
R9 000.
YOU ARE REQUIRED TO calculate Britney’s taxable income for the 2023 year of
assessment.
Solution 11.1
Calculation of the taxable business income of the partnership
Taxable income before wear-and-tear allowance
Less: Wear-and-tear allowance
R
9 000
(45 000)
Partnership loss
(36 000)
Britney’s share of the partnership loss (1 / 3)
(12 000)
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Chapter 11
Partners and Partnerships
In terms of the provisions of s 24H, her share of the wear-and-tear allowance is
limited to:
8 000
Contributions to the partnership
3 000
Share in taxable income (R9 000 / 3)
11 000
Britney’s taxable income
Share of taxable income before wear-and-tear allowance (R9 000 / 3)
Less: Wear-and-tear allowance (R45 000 / 3 = R15 000)
But limited to R11 000 (s 24H)
Assessed loss allowed for 2023 year of assessment
3 000
(11 000)
(8 000)
R4 000 (R15 000 – R11 000) of the wear-and-tear allowance will be carried forward to
the 2023 year of assessment.
Example 11.2
(10 minutes)
Fhulu and Fhelo are partners that share profits in a 40:60 ratio. At the end of their
previous financial year, they had debtors in their financial statements of R60 000. On
31 May 2022, Fhuwani joined the partnership, and the agreement was amended so
that profits will be shared equally between the three partners. The agreement also
provided that Fhuwani’s existing debtors would not form part of the partnership. On
31 August 2022, one of the debtors, whose debt amounted to R20 000, was
declared insolvent. The R20 000 was included in the partnership’s R60 000 debtors at
the end of the previous financial year. Irrecoverable debts of R8 000 in respect of a
debtor of Fhuwani when she carried on business as a sole trader were recouped on
20 January 2023. Debt of R3 000 written off by the partnership in the previous year of
assessment was recovered in February 2023.
YOU ARE REQUIRED TO calculate how much each partner can deduct in terms of
s 11(i) and recoup in terms of s 8(4)(a) for the 2023 year of assessment.
Solution 11.2
Irrecoverable debts
Fhulu: 1 / 3 × R20 000 = R6 667
Fhelo: 1 / 3 × R20 000 = R6 667
Fhuwani: Rnil
(Previously included in income = R20 000 × 40% =
R8 000)
(Previously included in income = R20 000 × 60% =
R12 000)
(the sale was never included in her income)
Irrecoverable debts recovered (R8 000)
Fhulu: Rnil
Fhelo: Rnil
Fhuwani: R8 000
(debtors not part of partnership)
(debtors not part of partnership)
(irrecoverable debts deduction previously
allowed and full amount included, as
agreement states that debtors do not form part
of the partnership)
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Tax Workbook
Irrecoverable debts recovered (R3 000)
Fhulu: 1 / 3 × R3 000 = R1 000
Fhelo: 1 / 3 × R3 000 = R1 000
Fhuwani: Rnil
(s 8(4)(a) recoupment is limited to the amount
previously claimed = R3 000 × 40% = R1 200, thus
amount recouped is R1 000)
(s 8(4)(a) recoupment is limited to the amount
previously claimed = R3 000 × 60% = R1 800, thus
amount recouped is R1 000)
(Fhuwani did not claim a s 11(i) deduction;
therefore no amount can be recouped)
Example 11.3
(10 minutes)
Dr Rex Shabile (25 years old) is a pathologist. He operates a pathology laboratory in
partnership with two other doctors. Profits and losses are shared equally between
the three partners; in other words, each partner has a one-third interest in the
partnership. Details regarding Rex’s receipts and accruals for the 2023 year of
assessment were as follows:
Partnership
R
One-third share of partnership profits after paying salaries
of partners and interest on the partners’ capital accounts
Monthly salary from the partnership
Interest from the partnership on his capital account
1 125 000
13 250
19 250
Other receipts and accruals
Rental income
10 000
Dividends
• Republic shares in companies
15 800
• United Kingdom private companies (rand equivalent)
3 900
All these shares were inherited from an uncle who was not ordinarily
resident in the Republic at the time of his death. The dividends from
the United Kingdom are not exempt from tax in terms of s 10B(2)
and were received on 30 September 2022.
Foreign interest (rand equivalent)
5 000
YOU ARE REQUIRED TO calculate Rex’s taxable income for the 2023 year of
assessment.
Solution 11.3
R
Partnership profits (one third)
Monthly salary (R13 250 × 12 months)
Interest on capital account
Less: Interest exemption s 10(1)(i) (limited to R23 800)
19 250
(19 250)
R
1 125 000
159 000
–
continued
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Chapter 11
Partners and Partnerships
Rental income
Dividends received – Republic companies
Less: Exemption s 10(1)(k)
Foreign dividends
Less: Dividend exemption (note)
Foreign interest
R
15 800
(15 800)
3 900
(2 167)
Taxable income
R
10 000
–
1 733
5 000
1 300 733
Note
In terms of s 10B(3) a portion of the foreign dividend is exempt, calculated as follows:
A=B×C
A = 25/45 × R3 900 = R2 167
Example 11.4
(45 minutes)
Gary Golf and Ernie Ball conduct business in partnership. Their bookkeeper has
prepared the following income statement in respect of the partnership’s 2023 year
of assessment:
R
R
Income
Gross profit
487 000
Bad debt recovered (note 1)
3 750
Dividends received (note 2)
4 500
Interest (from a local bank)
6 360
Settlement discount
19 390
521 000
Less: Expenditure
Annuities (note 3)
Bad debts (note 1)
Depreciation:
– Shop fittings at 10% (note 4)
– Cash register at 10% (note 4)
Delivery van purchased (note 4)
Donations (note 5)
Goodwill (note 6)
Insurance (note 7)
Licences: Trade and delivery van
Delivery van running expenses
Rental paid
Retirement annuity fund contributions:
– Gary
– Ernie
Staff salaries and wages
Shares purchased (note 2)
Stationery and printing
12 000
6 000
4 500
2 250
39 600
18 750
60 000
13 500
1 080
5 500
21 600
3 000
4 500
90 000
75 000
1 080
continued
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Tax Workbook
R
17 900
6 600
Sundry deductible expenses
Drawings Gary (note 8)
Salaries paid:
– Gary
– Ernie
36 000
45 000
Net profit
Net profit:
– Gary
– Ernie
R
(463 860)
57 140
39 998
17 142
57 140
The profit-sharing ratio is as follows:
Gary Golf
70%
Ernie Ball
30%
Notes
(1) The bad debt of R3 750 was recovered from a former debtor of Gary when he
had been trading on his own, two years before. Gary sold his debtors to the
partnership. R2 000 of the bad debts relates to debts that the partners took over
when they purchased the business. The balance of the bad debts is wholly in
respect of present customers who have failed to pay their accounts.
(2) During the 2023 year of assessment, the partners decided to invest their surplus
cash funds and they purchased 25 000 shares in Clubs (Pty) Ltd, a company
registered in the Republic, at R3 a share. The company paid a dividend of
R4 500 to the partnership on 31 December 2022.
(3) The following annuities were paid during the year to dependants of two
deceased former employees:
R
Olivia Perch and her two children
8 400
Mavis Ndoyini
3 600
12 000
It is not the policy of the partners to make payments of this nature to
dependants of former employees. Yet these particular payments were made in
order to assist the recipients who were all in poor financial circumstances after
their husbands or fathers passed away.
(4) The depreciation claimed in the income statement has been calculated on the
straight-line method in respect of the shop fittings and the cash register. These
items were purchased on 1 March 2022. No depreciation has been provided for in
the income statement in respect of the delivery van which was purchased on
1 May 2022 for R39 600 (excluding VAT).
The approved write-off periods are:
Shop fittings:
Six years
Cash register:
Five years
Delivery vehicles:
Four years
184
Chapter 11
Partners and Partnerships
(5) During the 2023 year of assessment, the partners made two donations:
To a non-public benefit organisation
To a public benefit organisation
R
3 750
15 000
18 750
Official receipts were obtained.
Gary also donated R20 000 in his own name to a qualifying public benefit
organisation and obtained the required receipt.
(6) Goodwill of R60 000 paid refers to the final instalment due in respect of the
purchase consideration paid to take over the business.
(7) Insurance premiums paid during the year were in respect of the following policies:
R
Loss of profits policy
8 625
Fire policy
4 875
13 500
(8) Other partnership information (not taken into account in arriving at the net profit
of R57 140):
Gary
Ernie
R
R
Interest on capital
20 000
–
Drawings (including the R6 600 deducted in the income
statement)
108 000
90 000
(9) Both partners are under the age of 65 years. All amounts paid to or on behalf of
the partners are in accordance with the partnership agreement.
YOU ARE REQUIRED TO calculate the 2023 taxable income of each partner.
Solution 11.4
Calculation of taxable income from partnership
Gross profit
Bad debts recovered (note 1)
Dividends received
Dividends (exempt s 10(1)(k))
Interest received (note 2)
Settlement discount received
R
R
487 000
–
4 500
(4 500)
–
19 390
506 390
Less: Expenditure
Annuities paid (note 3)
Bad debts (note 4)
Donations made (note 5)
Delivery van purchased
Wear-and-tear allowances (note 6)
Goodwill (of a capital nature)
Insurance
12 000
4 000
–
–
20 250
–
13 500
continued
185
Tax Workbook
Licences paid – trade and delivery van
Delivery van running expenses
Rent paid
Retirement annuity fund contributions (note 7)
Staff salaries and wages
Shares purchased (of a capital nature)
Stationery and printing
Sundry deductible expenses
Salaries paid (note 8)
Interest paid (note 8)
Drawings (capital in nature)
R
1 080
5 500
21 600
7 500
90 000
–
1 080
17 900
81 000
20 000
–
Preliminary taxable income
R
(295 410)
210 980
Calculation starting with net profit (alternative method)
Net profit
Gross profit (no adjustment)
Bad debts recovered (note 1)
Dividends (exempt s 10(1)(k))
Interest (note 2)
Settlement discount (no adjustment)
Annuities paid (no adjustment) (note 3)
Bad debts (note 4)
Delivery van (of a capital nature)
Donations made (note 5)
Depreciation (R4 500 + R2 250)
Wear-and-tear allowance (note 6)
Goodwill (of a capital nature)
Insurance (deductible, no adjustment)
Licences: Trade and delivery van
(deductible, no adjustment)
Delivery van expenses (deductible, no adjustment)
Rentals (deductible, no adjustment)
Retirement annuity fund contributions (note 7)
Salaries and wages (deductible, no adjustment)
Shares purchased (of a capital nature)
Stationery and printing (deductible, no adjustment)
Sundry deductible expenses (deductible, no adjustment)
Drawings Gary (capital in nature)
Salaries – partners (note 8)
Interest paid not deducted from net profit (note 8)
Deduct
R
(3 750)
(4 500)
(6 360)
(20 250)
(20 000)
(54 860)
Add back
R
57 140
–
–
–
2 000
39 600
18 750
6 750
60 000
–
–
–
–
–
–
75 000
–
–
6 600
–
265 840
Preliminary taxable income
210 980
Gary 70% × R210 980
Ernie 30% × R210 980
147 686
63 294
continued
186
Chapter 11
Partners and Partnerships
Calculation of partners’ taxable income
Deduct
R
Gary
70%
R
147 686
36 000
4 452
20 000
2 625
3 000
Add back
R
Ernie
30%
R
63 294
45 000
1 908
–
–
4 500
Gross profit
Less: Interest exemption s 10(1)(i);
maximum of R23 800 for the 2023 year of assessment
(Gary: R4 452 + R20 000 = R24 452 limited to R23 800)
213 763
114 702
(23 800)
(1 908)
Income
Less: Retirement annuity fund contributions (note 7)
189 963
(3 000)
112 794
(4 500)
Less: Donations (note 5)
186 963
(18 696)
108 294
(4 500)
Taxable income
168 270
103 794
Preliminary taxable income
Salary (note 8)
Interest (note 2)
Interest from partnership
Bad debts recovered (note 1)
Retirement annuity fund contributions (note 7)
Notes
(1) The maximum amount recovered that a taxpayer may be taxed on is the
amount previously deducted. Gary claimed a bad debt deduction of R3 750
two years ago. He is now entitled to 70% of the bad debt recovered, namely
R2 625. He sold his debtors to the partnership and will therefore not be entitled to
100%. Ernie is entitled to the difference, namely R1 125. Ernie’s receipt of R1 125 is
of a capital nature as it was not deducted in the past; whereas Gary’s receipt of
R2 625 is a recoupment (he previously deducted R3 750 (see above)).
(2) Gary is entitled to R4 452 (70% × R6 360) and Ernie to R1 908 (30% × R6 360) of the
interest earned.
(3) Annuities payable to former employees are deductible in terms of s 11(m).
(4) Bad debts in terms of s 11(i) can only be written off if the amount was included in
the taxpayer’s income. The amount of R2 000 was never included in either of the
partners’ income, and therefore no deduction will be allowed.
(5) Section 18A allows individuals to deduct donations to public benefit
organisations, but this is limited to 10% of their taxable income. The donation of
R3 750 will thus not be allowed.
The donation of R15 000 is deemed to be made by the partners in the profit and
loss ratio.
Gary is deemed to make a donation of R10 500 and Ernie a donation of R4 500.
Gary also made a donation of R20 000 in his own name. His qualifying donations
amount to R30 500 but are limited to R18 696 (10% × R186 963). Any amount of a
qualifying donation not allowed can be rolled over and will be allowed as a
187
Tax Workbook
deduction in the following year of assessment but subject to the 10% limitation.
Gary will be able to roll over R11 804 (R30 500 – R18 696).
The limitation on the deduction of the s 18A for Ernie amounts to R10 829 (10% ×
R108 294) (but limited to the actual donation of R4 500).
(6) The wear-and-tear allowance according to s 11(e) is calculated as follows:
Shop fittings
: R4 500 / 10% = R45 000 cost price
R
R45 000 / 6 years
=
7 500
Cash register
: R2 250 / 10% = R22 500 cost price
R22 500 / 5 years
=
4 500
=
8 250
Delivery van
: R39 600 / 4 years × 10/12
VAT – input claimed on delivery van
20 250
(7) Retirement annuity fund contributions paid by the partnership are a fringe
benefit for the partners. These amounts must be included in the individual
partners’ income, and then the s 11F deduction can be claimed.
The deduction is limited to the lesser of R350 000
or
27,5% of the taxable income after the inclusion of a taxable capital gain but
before the s 18A deduction
or
The taxable income of Gary before allowing any deduction under s 11F and
before the inclusion of any taxable capital gain.
Deduction for Gary:
The lesser of
• R350 000 or
• 27,5% of R189 963 = R52 240
• R189 963
Limited to actual contributions of R3 000.
Deduction for Ernie:
The deduction is limited to the lesser of R350 000
or
27,5% of the taxable income after the inclusion of a taxable capital gain but
before the s 18A deduction
or
The taxable income of Ernie before allowing any deduction under s 11F and
before the inclusion of any taxable capital gain.
Deduction for Ernie:
The lesser of
• R350 000 or
• 27,5% of R112 796 = R31 019
• R112 794
Limited to actual contributions of R3 000.
188
Chapter 11
Partners and Partnerships
(8) Salaries paid to partners are expenses for the partnership and income for the
partners. The interest paid to Gary is also an expense for the partnership and
income for Gary.
(9) Whatever amounts the partners may have drawn during the year of assessment
in anticipation of their salaries and share of the profits, have no effect on the
calculation of the taxable income of the partnership or of the individual
partners, as drawings are not expenses incurred in the production of income,
but are drawn out of income that has already been earned.
L Questions
Question 11.1
(40 minutes)
Michael Rgoke and Carl Abrahams were partners in a business. The profit-sharing
ratio was established at 50% each at the beginning of the partnership.
Michael and Carl decided to change the profit-sharing ratio with effect from the
beginning of the current year of assessment, and to allow a new partner Vera Jacobs
to enter the partnership.
The new profit-sharing ratio will be as follows:
Michael Rgoke
10%
Carl Abrahams
60%
Vera Jacobs
30%
Vera paid Michael R100 000 for the 30% share, which was largely ascribed to goodwill.
The bookkeeper prepared the following income statement for the year of
assessment ended 28 February 2023:
Income
Note
R
R
Gross income
1 105 100
Bad debts written off in the previous year
recovered from debtors
4 900
Interest received (from a local bank)
10 000
Total income
Less: Expenses
Annuities paid
Irrecoverable debts written off
Donation to a non-public benefit organisation
Rental paid
Salaries and wages
Pension fund contributions
Depreciation
Legal costs – for setting up the new partnership
agreement
Trading stock written off
Drawings
Michael
(10%)
Carl
(60%)
Vera
(30%)
Net profit
1 120 000
1
2
3
4
4
5
6
18 000
22 900
10 000
230 000
442 000
36 600
13 851
10 470
19 200
30 000
180 000
90 000
(1 103 021)
16 979
189
Tax Workbook
Notes
(1)
The following annuities were paid:
To Mr Lloyd, a retired employee
To Mrs Moodley and her daughter. The amount of R300 a month
was paid to each of them. Mrs Moodley’s husband was killed
the previous year of assessment in an accident.
R
10 800
7 200
18 000
(2)
During the year the following amounts were written off:
2022 – trade debtors
2023 – trade debtors
Sundry loans to employees who were paid off during the prior year
R
4 100
12 800
6 000
22 900
(3) On 1 March 2022, the partnership occupied new business premises. The rental
agreement makes provision for a lease period of five years, with the option of
renewing the lease for a further five years. The Commissioner considers the
renewal period to be its probable duration. Rent is payable at R15 000 per
month and the lease agreement makes provision for a lease premium of R50 000
which is payable immediately.
(4) Salaries and wages included a salary of R90 000 which was paid to Vera.
(5) The partnership writes depreciation off on furniture and fittings at 10%, using the
reducing balance method. The furniture was purchased for R162 000 and taken
into use on 31 August 2019. A write-off period of six years on furniture and fittings
is allowed in terms of Binding General Ruling No. 7.
(6) Included in trading stock written off is the recoupment of stock with a cost price
of R5 000 and a market value of R6 200, which Vera took for private use.
(7) The partners had no other income or expenses. All three partners are younger
than 65 years.
YOU ARE REQUIRED TO calculate the taxable income of the respective partners for
the 2023 year of assessment. Ignore capital gains tax.
Question 11.2
(45 minutes)
Tshembo Kona, aged 65 years, and his wife, Rhandza, aged 60 years, are equal
partners in a business called Discount Liquors. They are married out of community of
property. Their business consists of three bottle-stores, situated in Johannesburg. They
have provided the following information for Discount Liquors for its year ending
28 February 2023:
Its taxable income before making any adjustments for the items listed below was
R106 800.
• Cash shortages of R1 200 resulting from the theft of certain cash sales by a
cashier. The cashier disappeared from employment the day that the cash
shortages were discovered.
• Three new cash registers were purchased on 30 June 2022 for R14 400 (in total)
under a cash transaction. The Commissioner allows wear-and-tear over a fiveyear period on the straight-line basis.
190
Chapter 11
Partners and Partnerships
• On 1 September 2021, Discount Liquors entered into a ten-year lease agreement
with Checker Properties (Pty) Limited for the lease of shop premises to be used as
one of the Discount Liquors retail outlets. In terms of this agreement, Discount
Liquors was obliged to spend R190 000 to convert the premises into a bottle store.
These improvements were completed on 1 March 2022 at a cost of R240 000. The
extra cost of R50 000 was incurred in making certain structural improvements that
were not required in the lease agreement.
• A debt of R1 380 due from Troy Shiraz, a former manager of one of the bottle
stores, is considered to be bad. This debt of R1 380 comprises R580 for liquor
purchased from the bottle store in May 2021, R700 for moneys borrowed on
1 August 2022 and R100 interest on the R700 loan (to 28 February 2023). Troy Shiraz
has disappeared and left no forwarding address.
• The provision for doubtful debts (calculated correctly and accepted by the
Commissioner) at 28 February 2022 was R1 000 and at 28 February 2023 it was
R1 200.
• During March 2022, Discount Liquors purchased a new house for R200 000. The
house was sold to the manager of its three stores on 1 April 2022 on an
interest-free loan account for R200 000. The loan account is repayable monthly in
arrears over ten years. All the monthly payments were paid promptly.
• The partnership donated liquor costing R1 000 (with a selling price of R1 500) for a
local wine festival. Acknowledgement was given to Discount Liquors in the
programme that was distributed at the wine festival.
• As Rhandza Kona has to do a lot of travelling in the course of running Discount
Liquors, the partnership has insured her life. Premiums paid during the year were
R1 200 and are regarded as part of Rhandza’s “salary package”.
Additional information provided by Tshembo and Rhandza Kona is as follows:
The taxable income of R106 800 was determined after deducting salaries for
Tshembo and Rhandza Kona of R90 000 each. If they had employed two “outsiders”
to run the business, a salary of R90 000 each would have been reasonable in
relation to the work required to be done.
Interest of R126 650 on City of Johannesburg Municipal Stock (“Jozi Bonds”) accrued
to Tshembo during the 2023 year of assessment.
Local dividends of R24 000 and interest of R16 500 accrued to Rhandza Kona during
the 2023 year of assessment.
Rhandza Kona suffered a tax-deductible loss of R12 550 for the 2023 year of
assessment, being her share of the loss from an unsuccessful joint venture that she
had entered into with her younger sister. Section 20A is not applicable.
YOU ARE REQUIRED TO calculate the normal tax liabilities of Tshembo and Rhandza
Kona for the 2023 year of assessment. Ignore capital gains tax.
191
Chapter 12
Trusts
L Introduction
In this chapter, the principles relating to the taxation of resident trusts will be
illustrated and tested. The specific sections of the Income Tax Act 58 of 1962 as
amended (the Act) that apply to the taxation of trusts are:
• section 25B, dealing with the income of trust funds and the beneficiaries of trust
funds; and
• section 7(2) to (10), dealing with donations, settlements and other similar
dispositions by taxpayers. If it weren’t for these provisions, taxpayers would divide
income between two or more taxpayers, or move it to a person who pays tax at
a lower tax rate. The donations dealt with in these subsections are frequently
associated with trusts set up by donors.
The paragraphs of the Eighth Schedule to the Act which may also apply to the
taxation of trusts are:
• paragraph 80, dealing with the capital gains tax consequences of trust funds and
the beneficiaries of trust funds;
• paragraphs 68 to 73, dealing with the capital gains tax consequences when
donations, settlements and other similar dispositions are made to trusts.
The normal tax consequences of trusts can be summarised as follows (s 25B):
Is there a donation, settlement or similar disposition?
Yes
No
Is s 7(2) (spouse),
s 7(3) or (4) (parent to minor child),
s 7(5) (no vesting due to condition),
s 7(6) (donor retains revoking right),
s 7(7) (donor may regain ownership), or
s 7(8) (resident donor to non-resident
beneficiary) applicable?
No
1. Tax beneficiary
on amounts
distributed to
him/her.
2. Does any
beneficiary have
a vested right on
retained income?
Yes
Yes
Tax the beneficiary on
the amount entitled to.
Tax the donor.
Tax the trust on the undistributed income of the trust.
193
No
Tax Workbook
With regard to capital gains tax, the gain derived by a trust may only be disregarded
for purposes of calculating the aggregate capital gain or aggregate capital loss of
the trust, if paragraphs 68 to 72 are applicable, or if the beneficiary, who is a
resident of the Republic, obtains a vested right.
For purposes of the application of s 7(3) and (4) and paragraph 69 of the Eighth
Schedule, a minor is an unmarried person who has not attained the age of 18 years.
L Contents
The table gives an indication of the time that you will need to complete the example
or question. The relevant sections or paragraphs that you need to know before
attempting the example or question are provided, and the level of the example or
question gives an indication of the difficulty of the question.
)
Example/Question
and time allocation
Topic and/or relevant sections
Level
Example 12.1
(30 minutes)
• Section 25B(1)
• Section 7(1) – vested rights (without
application of s 7(2) to (8))
• Section 7(3) discussion if interest-free
loan
• Section 10(1)(i) – interest exemption
Intermediary
Example 12.2
(30 minutes)
• Section 7(1), (3) and (5)
• Section 10(1)(i), (k) and(2)(b)
• Section 25B(1)
Advanced
Example 12.3
(20 minutes)
• Paragraphs 68, 69, 72 and 80 (relate to
capital gains tax, do example after
studying/attempting chapter 19)
Intermediary
Example 12.4
(30 minutes)
• Section 7(1), (3), (5), (7) and (8)
• Section 10(1)(h), (i) and (k)
• Section 25B(1)
Advanced
Example 12.5
(40 minutes)
• Section 7(1), (3) and (5)
• Section 10(1)(i), (k) and (2)(b)
• Low interest rate loan
Advanced
Question 12.1
(15 minutes)
• Section 7(1), (3) and (5)
• Section 10(1)(i)
• Section 25B(1)
Basic
Question 12.2
(15 minutes)
• Paragraphs 69, 72 and 80
Intermediary
Question 12.3
(30 minutes)
•
•
•
•
Section 7(1), (3), (5) and (6)
Section 10(1)(i) and (k)
Section 18
Section 25B(1)
Intermediary
Question 12.4
(20 minutes)
•
•
•
•
Section 7(2A), (3), (5) and (7)
Section 10(1)(i), (k) and (2)(b)
Section 25B(1)
Interest-free loan
Advanced
continued
194
Chapter 12
)
Example/Question
and time allocation
Question 12.5
(60 minutes)
Trusts
Topic and/or relevant sections
•
•
•
•
•
•
Definition of “special trust”
Section 7(5) and(8)
Section 10(1)(i) and (k)
Section 10B
Section 25B(1)
Eighth Schedule paragraphs 72
and 80(1)
• Interest-free loan
Level
Advanced
L Examples
Example 12.1
(40 minutes)
Julie Mahlangu created a trust on 1 March 2020 in favour of her three grandchildren
Penny, Fezile, and Ntombi (aged 15, 21 and 24 years respectively on that date).
Their father is Mfaniseni, Julie’s 50-year-old son. Penny celebrated her 18th birthday
on 14 September 2022.
Penny, Fezile and Ntombi each have a vested right to one third of the retained
income of the trust.
Julie donated a farm with a market value of R2 000 000 to the trust. The annual
rentals derived from the farm were R160 000. The trust will be wound up two years
after Julie’s death. The farm will be sold and its proceeds will be distributed equally
among the beneficiaries who are alive at that stage.
Mfaniseni sold a flat at its market value of R900 000 to the trust on 1 May 2020. The
selling price was left owing as a loan account bearing market-related interest at 8%
a year, repayable on the dissolution of the trust.
The trustees have a discretion regarding the amounts to be distributed to the
beneficiaries, provided that each beneficiary receives the same amount.
The following information relates to the 2023 year of assessment:
Receipts and accruals
1 March–
1 September–
31 August
28 February
R
R
Net rentals – farm (after deduction of allowable
expenditure)
77 000
77 000
Net rentals – flat (after deduction of interest and
repairs)
8 900
12 600
Net income – current year
85 900
89 600
An amount of R25 000 was distributed to each of the three beneficiaries on 31 August
2022, consisting of R22 410 from the farm rentals and R2 590 from the flat rentals. A
further R30 000 was distributed to each beneficiary on 28 February 2023, pro rata
from the income that accrued to the trust.
YOU ARE REQUIRED TO
(1) calculate the taxable income for the 2023 year of assessment of each of the
parties referred to in the question; and
195
Tax Workbook
(2) discuss how your answer in (1) would differ if Mfaniseni did not charge any
interest on the loan granted to the trust. Consider in detail if there would be a
“donation, settlement or other disposition” for purposes of s 7.
Solution 12.1
Part 1
Trust
Trust’s net income for the year, before distribution (R85 900 + R89 600)
Less: Amounts distributed (R25 000 + R30 000) × 3
Retained in trust
Less: Vested rights of beneficiaries
Penny (R10 500 × 1 / 3)
Fezile (R10 500 × 1 / 3)
Ntombi (R10 500 × 1 / 3)
R
175 500
(165 000)
10 500
(3 500)
(3 500)
(3 500)
Taxable income
–
Penny (Section 7(3) is not applicable because Julie is Penny’s
grandparent and Mfaniseni (Julie’s father) charged market-related
interest on the loan to the trust)
Distribution – 31 August 2022
Distribution – 28 February 2023
1 / 3 × retained rentals – s 7(1) vested right
25 000
30 000
3 500
Taxable income
58 500
Fezile
Distribution – 31 August 2022
Distribution – 28 February 2023
1 / 3 × retained rentals – s 7(1) vested right
25 000
30 000
3 500
Taxable income
58 500
Ntombi (same as Fezile above)
58 500
Mfaniseni
Interest (8% × R900 000 × 12 / 12)
Less: Interest exemption (s 10(1)(i))
72 000
(23 800)
Taxable income
48 200
Julie Mahlangu
Taxable income
–
Part 2
If Mfaniseni had not charged interest on the outstanding loan account, then it
would have resulted in a “donation, settlement or other disposition” for purposes of
the application of s 7. Even though this phrase is not defined in the Act, the court
has laid down the following principles:
• The term “any donation, settlement or other disposition” excludes any disposal of
property made for due consideration.
• The word “disposition” means any disposal of property made wholly or to an
appreciable extent gratuitously out of the liberality or generosity of the disposer.
196
Chapter 12
Trusts
• Where there is a settlement or other disposition for some consideration but there
is also an appreciable element of gratuity, the resulting income may be
apportioned between these two elements. If no apportionment is possible or if
the taxpayer fails to produce evidence to justify an apportionment, the whole
of the income must be regarded as having been derived by the donor
• In addition, the court has held that the word “disposition” did not include a
transaction made for full value.
Therefore, the purchase consideration that was left owing as an interest-free loan is
a “continuing donation” and s 7 could apply (CIR v Berold 1962 (3) SA 748 (A)),
which principle was confirmed in C:SARS v Woulidge 2002 (2) SA 199 (A)).
The R2 590 from the rentals of the flat distributed to Penny on 31 August 2022 would
have been subject to s 7(3) and taxed in Mfaniseni’s hands. The amount is less than
the market-related interest of 8% on the loan account and no limitation would have
been applicable.
The distribution on 28 February 2023 and the retained portion to which Penny has a
vested right would still not be subject to s 7(3) because Penny turned 18 years old on
14 September 2022 and is not a minor after that date.
Note: Apart from the normal tax consequences discussed above, Mfaniseni may
also have donations tax consequences due to the application of s 7C. In terms of
s 7C, Mfaniseni (a connected person in relation to the trust) is deemed to have
made a donation on 28 February 2023 to the trust for purposes of donation tax
equal to the difference between the interest charged and the official rate of
interest on the loan that was outstanding during the year. Mfaniseni may, however,
utilise his annual R100 000 donation tax exemption against this deemed donation.
Example 12.2
(30 minutes)
During January 2022, Jonathan Durham (51 years old) created a trust in favour of his
three children, Hein, Chris and Carl. Hein is a 29-year-old medical doctor in
Johannesburg, Chris turned 18 on 1 December 2022, and Carl is 15 years old and still
attending school.
The trust assets consist of a flat with a market value of R2 000 000, and a local share
portfolio with a market value of R1 500 000. Both these assets were donated to the
trust by Jonathan. Jonathan’s brother, Will (54 years old), who is a bachelor, donated
R1 000 000 invested in 5% bonds issued by a local bank, to the trust.
The trust deed includes the following provisions, amongst others:
(1) An annuity of R30 000 (R2 500 per month) shall be paid to Hein.
(2) The trustees may make payments to the children for education and/or
maintenance. All payments should be funded pro rata from the current year’s
income and, apart from those mentioned in (4), no payments should be made
out of the accumulated funds.
(3) The trustees, who are independent, must be remunerated at 5% of the trust’s net
income, before any distributions to the beneficiaries.
(4) The trust will be wound up when Carl reaches the age of 25 years. The
accumulated funds as well as the capital in respect of the shares and the flat
will be shared equally between the three children subject to the following
conditions:
197
Tax Workbook
• If Hein decides to leave the Republic in search of greener pastures, his share
will go to the other two brothers in equal shares.
• If Hein or Carl should die before Carl attains the age of 25 years, that child’s
portion will go to the other two brothers in equal shares.
• If Chris should die before Carl attains the age of 25 years, his share of any
accumulated funds as well as the capital in respect of the bonds will be paid
to his estate.
(5) On the winding up of the trust, the accumulated funds as well as the capital in
respect of the bonds will be paid to Chris.
Note: Chris therefore has a vested right in all the accumulated interest as well as in
one-third of the accumulated dividends and rentals. Neither Hein nor Carl has any
vested rights in any accumulated income.
The receipts and accruals accrued evenly throughout the year. The distribution to
Chris took place on 1 September 2022 (while Chris was still a minor), and the
education fees of Chris and Carl were paid on 15 January 2023 (after Chris became
a major).
The following is the statement of receipts and accruals and payments of the trust for
the 2023 year of assessment:
R
350 000
(50 000)
Donor:
Jonathan
Rentals
R
200 000
(50 000)
Donor:
Jonathan
Dividends
R
100 000
Donor:
Will
Interest
R
50 000
300 000
100%
150 000
50%
100 000
33,33%
50 000
16,67%
(15 000)
(30 000)
(7 500)
(15 000)
(5 000)
(10 000)
(2 500)
(5 000)
(25 000)
(75 000)
(65 000)
(12 500)
(37 500)
(32 500)
(8 333)
(25 000)
(21 667)
(4 167)
(12 500)
(10 833)
90 000
45 000
30 000
15 000
Total
Receipts and accruals
Less: Rates, taxes and repairs
Net income
Ratio as a percentage
Less:
Trustee’s remuneration
Annuity to Hein (29 years old)
Distribution to Chris (17 years old)
on 1 September 2022
Education fees of Chris (18)
Education fees of Carl (15)
Retained in trust
YOU ARE REQUIRED TO calculate the taxable income of each of the taxpayers as a
result of the income/accruals of the trust during the 2023 year of assessment. You
may assume that no taxpayer earned any other investment income.
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Solution 12.2
Jonathan Durham (the father)
Retained in trust (s 7(5))
– rentals 2/3 of R45 000
– dividends 2/3 of R30 000 (exempt s 10(1)(k))
Chris – distribution (s 7(3))
– rentals
– dividends of R8 333 (exempt s 10(1)(k))
Carl – education (s 7(3))
– rentals
– dividends of R21 667 (exempt s 10(1)(k))
R
30 000
–
32 500
–
Taxable income from trust
75 000
12 500
–
Hein (a major child)
Annuity
– rentals
– interest
– dividends (no s 10(1)(k) exemption by reason of the provisions
of s 10(2)(b))
Section 10(1)(i) exemption of R23 800, limited to actual interest
R
15 000
5 000
Taxable income from trust
25 000
10 000
(5 000)
Chris (a major child since his 18th birthday on 1 December 2022)
Retained in trust
– interest on bonds – vested right
– rentals 1/3 of R45 000
– dividends 1/3 of R30 000 (exempt s 10(1)(k))
Distribution – interest
(Section 7(3) applies only to amounts by reason of donation by parent
(thus only to rentals and dividends))
Education fees
– rentals
– dividends of R25 000 (exempt s 10(1)(k))
– interest
R
15 000
15 000
–
4 167
37 500
–
12 500
84 167
(23 800)
Less: Interest exemption – s 10(1)(i)
Taxable income from trust
60 367
continued
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Tax Workbook
Carl (a minor child)
Education fees – interest
(Section 7(3) applies only to amounts by reason of donation by parent
(thus only to rental and dividends))
R
10 833
10 833
Less: Interest exemption – s 10(1)(i),
R23 800 limited to actual interest
(10 833)
Taxable income from trust
–
Will
Taxable income from trust
–
Trust
There is no taxable income in respect of the R90 000 retained in the trust. Two thirds
of the retained rentals of R45 000 and the retained dividends of R30 000 are subject
to the provisions of s 7(5), and one third is subject to s 7(1) as Chris has a vested right
to it. The retained interest of R15 000 has accrued to Chris in terms of s 25B(1),
because he has a vested right to it.
The trustee
The trustee will be taxed on the remuneration of R15 000.
Example 12.3
(20 minutes)
Below are seven unrelated scenarios applicable to discretionary trusts. All donors,
beneficiaries and trusts are residents as defined, unless stated otherwise. All
transactions occurred after 1 October 2001 and have led to capital gains or losses
being realised.
YOU ARE REQUIRED TO explain in whose hands the following capital gains or losses
will be taken into account when calculating the aggregate capital gain or loss:
(1) Bheki (40 years old) is one of three beneficiaries of Trust A. The trustees decided
to dispose of an office block, which was held to earn rental income. A capital
gain of R520 000 was realised. The total profit was distributed to Bheki.
(2) Ntswaki (15 years old) is one of two beneficiaries of Trust B created by her father.
The trustees decided to sell the share portfolio, which was originally donated to
the trust by her father, Thato (who is still alive). A capital gain of R30 000 was
realised on the sale of the share portfolio, and the total profit was distributed to
Ntswaki. The trustees also decided to distribute a beach cottage to Ntswaki. The
cottage had been donated by Ntswaki’s aunt to the trust. A gain of R150 000
arose in respect of the vesting of this asset in Ntswaki.
(3) Mzumbe donated a farming operation to Trust C before 1 October 2001. The
beneficiaries are nieces and nephews of Mzumbe. The farming operation was
sold by the trust on 1 March of the current year and a capital gain of R250 000
was realised. The proceeds have been retained in the trust and no part of it has
been distributed at year-end.
(4) Maria sold a business property to trust D. The trust paid the full purchase price in
cash. Norma, a non-resident, is one of the beneficiaries. This business property
200
Chapter 12
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was sold by the trust and a capital gain of R50 000 was realised. The full capital
gain was distributed to Norma during the same year of assessment.
(5) Use the same information as in point 4, but assume that the business property
was donated rather than sold to the trust.
(6) Use the same information as in point 4, but assume that a capital loss of R50 000
was realised when the business property was sold by the trust.
Solution 12.3
The capital gains and losses are attributed as follows (all paragraph references are
to the Eighth Schedule):
(1) In terms of paragraph 80(2), Bheki (a resident) must take the R520 000 into
account in his calculation of his aggregate capital gain or aggregate capital
loss for the year of assessment. Bheki receives a vested interest in the capital
gain, but not in the asset of the trust.
(2) Thato must take the capital gain of R30 000 into account in the calculation of his
aggregate capital gain or aggregate capital loss for the year of assessment,
since Ntswaki is a minor child and Thato, the parent, donated the share portfolio
(paragraph 69).
In terms of paragraph 80(1), Ntswaki will be taxed on the R150 000 capital gain in
respect of the vesting of the beach cottage. Paragraph 69 is not applicable
because Ntswaki’s aunt made the donation, and not her parent.
(3) The capital gain will be allocated to Mzumbe in accordance with paragraph 70.
Due to the fact that Trust C is a discretionary trust, no beneficiary will obtain a
vested right until the trustees exercise their discretion. The retained gain is thus
subject to the condition that the trustees must exercise their discretion, and at
year-end, no part of the gain vested in any beneficiary.
(4) In terms of paragraph 80, the capital gain will be included in the calculation of
the aggregate capital gain or aggregate capital loss of the trust, as a gain may
only be disregarded in the trust, if it is distributed or vested in a resident
beneficiary – and Norma is a non-resident. No attribution rule is applicable
because no donation, settlement or other disposition occurred.
(5) In terms of paragraph 72, Maria will have to include the R50 000 in the
calculation of her aggregate capital gain or aggregate capital loss for the year
of assessment. Maria is a resident and also the donor. The beneficiary who has a
vested right to the asset is not a resident.
(6) The capital loss will only be available to the trust. Paragraph 80 only deals with
the attribution of gains to donors or beneficiaries, and no capital loss may thus
be utilised by a donor or beneficiary.
Example 12.4
(30 minutes)
On 1 February 2022 Vujo Sithole (58 years old) created a trust for the benefit of his
three children (Joyce, Thava and Rico):
• Joyce is 16 years old and unmarried;
• Thava is 20 years old and married; and
• Rico is 23 years old and not a resident of the Republic since January 2020. He only
visits the Republic once a year for a few weeks.
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Tax Workbook
Vujo donated an office block to the trust on 28 February 2022. The trust earns rentals
from this building.
Sam (66 years old), Vujo’s older brother, ceded the income from his block of flats to
the trust until the trust dissolves. Sam also donated the following assets to the trust on
28 February 2022:
• an investment portfolio consisting of shares in listed companies earning “local”
dividends; and
• a fixed deposit at a local bank earning interest.
The trust deed stipulates the following:
(1) Thava has a vested right to all the retained office rentals.
(2) The trust is to remain in existence until Joyce attains the age of 25 years. When
this occurs, the income from the block of flats will revert back to Sam, all other
assets will be sold, and the proceeds split equally among the beneficiaries who
are still alive.
(3) Any distributions by the trustees are to be made pro rata from all sources of
income.
Income and expenditure of the trust for its 2023 year of assessment:
Donor:
Donor:
Donor:
Vujo
Sam
Total
Sam
Rent
Rent
Interest
(offices)
(flats)
R
R
R
R
Receipts and accruals
600 000
336 000
186 000 42 000
Ratio as percentage
100%
56%
31%
7%
Less: Distributions
– Joyce (minor)
(60 000) (33 600)
(18 600) (4 200)
– Thava
(30 000) (16 800)
(9 300) (2 100)
– Rico (non-resident)
(15 000)
(8 400)
(4 650) (1 600)
Retained receipt and accruals
495 000
277 200
153 450
34 650
Donor:
Sam
Dividends
R
36 000
6%
(3 600)
(1 800)
(900)
29 700
YOU ARE REQUIRED TO calculate the taxable income of Thava, Rico, Vujo and Sam
as a result of the income/accruals of the trust during the 2023 year of assessment.
You may assume that no taxpayer earned any other investment income.
Solution 12.4
Thava (20 years old, thus not a minor)
Distribution
– Rent (offices)
– Rent (flats) (s 7(7) – taxed in Sam’s hands)
– Interest
– Dividends of R1 800 – exempt (s 10(1)(k))
Retained income – rentals
Less: Interest exemption (s 10(1)(i)), R23 800 limited to actual interest
R
16 800
–
2 100
–
277 200
(2 100)
Taxable income
294 000
continued
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Rico (non-resident)
R
Distribution
– Rent (offices (s 7(8) – taxed in Vujo’s hands
–
– Rent (flats) (s 7(7) – taxed in Sam’s hands)
–
– Interest
1 600
– Dividends
900
(Neither the interest nor the dividends would have constituted income had
Rico been a resident, therefore s 7(8) is not applicable)
Less: Interest exemption (s 10(1)(h))
(1 600)
Less: Dividend exemption (s 10(1)(k))
(900)
Taxable income
–
Vujo
Distributions
– Rent (offices) – Joyce (s 7(3))
– Rent (offices) – Rico (s 7(8))
33 600
8 400
Taxable income
42 000
Sam
Distributions – Rent (flats) (s 7(7)) (R18 600 + R9 300 + R4 650)
– Dividends – Rico (s 7(8) not applicable)
Retained amounts – Rent (flats) – (s 7(5) or (7))
– Interest (s 7(5))
– Dividends (s 7(5)) – R29 700 exempt
– (s 10(1)(k))
Less: Interest exemption (s 10(1)(i)) over 65 years R34 500
Taxable income
32 550
–
153 450
34 650
–
(34 500)
186 150
Example 12.5
(40 minutes)
On 1 March 2022, Hugh Ibis (47 years old) sold his two main business assets to the Ibis
Trust. These assets are his shareholding in his business company and a large factory
building. The purpose of this sale was to ensure that any growth in the value of these
assets would take place in the trust and not in his name. The shares were sold at a
value determined by the auditor of the company and the factory was sold at its
market value. The total value of the sale was R900 000.
The purchase consideration was left owing on loan account. As Hugh was going to
need a regular inflow of income, it was agreed that the trust would pay interest on
this loan account at a rate of 3% per year. The interest would be payable on a
monthly basis. If the trust borrowed funds from an “outside” moneylender the rate of
interest would have been 12% per year. Assume that SARS accepted an
apportionment of the resulting income on the basis of 25% (3%/12%) not being as a
result of a “donation, settlement or other [similar] disposition”, and 75% as being a as
a result of a “donation” (9%/12%) as indicated in the table.
The two beneficiaries of the trust are Hugh’s 22-year-old married daughter, Jill, and
Hugh’s 15-year-old son, Jack, who is still a scholar.
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Tax Workbook
Details of the receipts and accruals, payments and distributions of the trust during
the 2023 year of assessment are as follows:
Receipts and accruals
Ratio as percentage
Less: Interest payment (note)
Less: Distributions
Annuity
– Jill
– Jack
Less: Distributions as lump
sums
– Jill
– Jack
Retained amounts
Donation:
No
Donation:
No
donation:
donation:
Total
25%
25%
75%
75%
dividend dividend net rentals net rentals
R
R
R
R
R
153 000
12 750
38 250
25 500
76 500
100%
8.33%
25%
16.67%
50%
(27 000)
(2 250)
(6 750)
(4 500)
(13 500)
(30 000)
(18 000)
(2 500)
(1 500)
(7 500)
(4 500)
(5 000)
(3 000)
(15 000)
(9 000)
(15 000)
(6 000)
(1 250)
(500)
(3 750)
(1 500)
(2 500)
(1 000)
(7 500)
(3 000)
57 000
4 750
14 250
9 500
28 500
Note
It could also be argued that the interest deduction should only be made pro rata
from the portion of dividends and rental that is not a donation (25%). For purposes of
this example, use the amounts as provided in the table.
The annuity (distributed monthly) from the trust to the beneficiaries are made in
terms of an instruction contained in the trust deed, and will continue for a period of
ten years. The lump sum distributions are made at the discretion of the trustees, who
are independent persons. The beneficiaries do not have a vested right to the
current income, capital or any accumulated receipts and accruals of the trust.
YOU ARE REQUIRED TO:
discuss the inclusions and exemptions of each taxpayer in calculating his or her
taxable income for the 2023 year of assessment.
Solution 12.5
Normal tax implications
Hugh
He will include R27 000 interest in his gross income as interest. If he has not used his
interest exemption he can claim the first R23 800 as exempt interest.
He will include R13 500 (R4 500 (dividends) + R9 000 (rentals)) of the R18 000 annuity
to Jack in terms of s 7(3), that is the extent that there is a “donation” (75%). The
components of the annuity will retain its identity until it reaches the hands of the
parties in whose hands it is taxable (Armstrong v CIR 1938 AD 343 (10 SATC 1)). The
dividend exemption in terms of s 10(1)(k) is, however, prohibited for any portion of
an annuity as a result of s 10(2)(b). The full amount is therefore taxable.
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Chapter 12
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He will include R4 500 (R1 500 (dividends) + R3 000 (rentals)) of the R6 000 distribution
to Jack in terms of s 7(3), that is to the extent that there is a “donation” (75%). The
dividend portion of R1 500 is exempt in terms of s 10(1)(k).
Section 7(5) applies to that portion of the income retained in the trust which
originated from the “donation” by Hugh. He needs therefore to include in his gross
income R14 250 as dividends and R28 500 as rentals. The dividends are exempt from
tax, in terms of s 10(1)(k).
The total amount included in the gross income of Hugh in terms of s 7 is currently:
R
Section 7(3) – R18 000 × 75%
13 500
Section 7(3) – R6 000 × 75%
4 500
Section 7(5) – R57 000 × 75%
42 750
60 750
This amount is limited to the interest forfeited by Hugh of R900 000 × (12% – 3%) =
R81 000. The amount of R60 750 included in Hugh’s gross income is less than R81 000
as calculated, and no limitation is applicable.
Jill
Jill’s gross income includes the annuity of R30 000, consisting of dividends of R10 000
(R2 500 + R7 500) and rentals of R20 000 (R5 000 + R15 000). The dividend exemption
in terms of s 10(1)(k) does not apply as a result of s 10(2)(b), because the R30 000 is
an annuity and therefore the R10 000 dividends are fully taxable.
Jill’s gross income includes the distribution of R15 000, consisting of dividends of
R5 000 (R1 250 + R3 750) and rentals of R10 000 (R2 500 + R7 500). Jill’s dividends of
R5 000 will be exempt from tax in terms of s 10(1)(k).
Jack
Included in Jack’s gross income is R4 500 (R1 500 + R3 000) of the annuity of R18 000;
in other words, the extent that there was no “donation” (25%). The annuity will retain
its identity as the amounts are deemed to accrue to him in terms of s 25B(1) read
with s 25B(2). The dividend exemption in terms of s 10(1)(k) is, however, prohibited as
a result of s 10(2)(b), because the payment is an annuity.
He will include R1 500 (R500 (dividends) + R1 000 (rentals)) of the R6 000 distribution
to him, in other words to the extent that there was no “donation” (25%). The
dividend portion of R500 is exempt in terms of s 10(1)(k).
Trust
The trust will include in its gross income, dividends of R4 750 and rentals of R9 500; in
other words, the retained income to which s 7(5) is not applicable and to which no
beneficiary has a vested right. The dividends are exempt from tax in terms of
s 10(1)(k).
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Tax Workbook
L Questions
Question 12.1
(15 minutes)
In terms of the will of the late Mr Modiba, a discretionary trust was created on
15 November 2020 for the sole benefit of his two grandchildren, Tsholo (currently 16
years old) and Tshepo (currently 22 years old). Mr Modiba bequeathed a substantial
amount of cash to the trust. The trustees of the trust deposited the cash at a local
bank.
During the current year of assessment, Tswarelo (Tsholo and Tshepo’s father)
donated a fixed property to the trust.
During the trust’s 2023 year of assessment (ended on 28 February 2023), interest of
R50 000 was received from the fixed deposit at the local bank and net rental of
R150 000 was earned from the fixed property.
The trustees exercised their discretion and distributed R20 000 to Tsholo and R120 000
to Tshepo (see table below for more detail).
Interest
Total accruals
Rental
Total
50 000
150 000
200 000
Tsholo (16 years old)
(5 000)
(15 000)
(20 000)
Tshepo (22 years old)
(30 000)
(90 000)
(120 000)
15 000
45 000
Distributed to beneficiaries:
Amount retained in the trust:
60 000
The R60 000 retained in the trust was subject to the condition that no beneficiary has
a vested right in it until the trustees exercise their discretion.
YOU ARE REQUIRED TO:
(1) Calculate (supported with reasons and reference to legislation) the taxable
income of Tsholo, Tshepo and Tswarelo for the 2023 year of assessment,
assuming that no other income accrued to them during that year.
(2) Calculate the tax liability of the trust for the 2023 year of assessment.
Question 12.2
(15 minutes)
All persons mentioned are residents of the Republic unless specifically stated
otherwise.
Mickey created the Orlando Trust, a discretionary trust, a few years ago. No
beneficiary has a vested right to the income or capital of the trust until the trustees
exercise their discretion.
One of the assets owned by the trust is a property situated in South Africa.
During the 2022 year of assessment the trust sold the property for R1 200 000 and
realised a capital gain of R400 000 as indicated below.
Proceeds =
R1 200 000
Base cost =
(R 800 000) (refer to two scenarios below on how the trust acquired
the property)
Capital gain = R 400 000
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Chapter 12
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The trustees dealt with the proceeds as follows:
Minnie (Mickey’s 16-year-old daughter) received R50 000 of the capital gain,
Donald (Mickey’s 22-year-old son) received R100 000 of the capital gain,
The remaining capital gain of R250 000 and the balance of the selling price
remained in the trust with no beneficiary obtaining a vested right to it.
None of the persons mentioned in the case study have any other disposals for
capital gains tax (CGT) purposes.
Scenario 1: Mickey donated the property to the trust when the market value was
R800 000.
OR
Scenario 2: The trust bought the property for R800 000 and paid for it in full (no
donation).
YOU ARE REQUIRED TO:
(1) If scenario 1 were applicable, (i.e. the trust obtained the property by way of a
donation from Mickey), briefly discuss who will be taxed on the capital gain (or
portion thereof). Support your discussion with reference to the provisions in the
Eighth Schedule to the Income Tax Act.
(2) If scenario 2 were applicable, (i.e. the trust did not obtain the property by way of
a donation), calculate Minnie’s and the trust’s taxable capital gain.
Question 12.3
(30 minutes)
On 1 May 2021 Menzi Dube (66 years old), created a trust for the benefit of his three
children (Bafana, Velile and Thando).
• Bafana is 15 years old and still at school. He earned R24 000 during the current
year of assessment from the sale of magazines and newspapers.
• Thando is 22 years old and a full-time student who is fully dependent on his father,
Menzi.
• Velile is 25 years old and got married on 1 June 2021. Menzi was unhappy with the
marriage and forced Velile to return to university in order to complete her studies.
Menzi donated a flat to the trust. Menzi’s father-in-law, Paul Serame, 88 years old
and a widower, donated cash to the trust, which was invested in a savings account
at a local bank.
The trust deed contained the following provisions:
(1) The trustees, who are independent, must be remunerated at 5% of the net trust
income, before any distributions to the beneficiaries.
(2) The trust must continue in existence until Bafana attains the age of 25 years. The
trust assets and accumulated income must then be shared equally between the
three children. If any of the children should die before Bafana attains the age of
25 years, that child’s portion will go to the remaining children in equal shares. This
means that none of the beneficiaries have vested rights as to the retained
income.
(3) An annuity of R4 000, funded by the rentals, would be awarded to Velile. The
ratio of any subsequent distribution must be recalculated after taking this
annuity into account.
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Tax Workbook
(4) The trustee may make payments to the children for training and education at his
discretion.
(5) Menzi retains the right to name another beneficiary in Velile’s place at any time
he sees fit, because Menzi dislikes Velile’s husband and does not want him to
obtain a share in the family’s assets.
Menzi received a pension of R25 500 a month and his contributions to a medical
scheme were R69 950 for the 2023 year of assessment. Only Bafana and Thando are
dependants on Menzi’s medical scheme. All medical expenses were covered by
the medical scheme.
Paul received a pension of R24 000 a month as well as dividends amounting to
R15 000 from listed Republic companies.
The following is the statement of receipts, accruals and payments of the trust for the
2023 year of assessment:
Trust account
Donor:
Donor:
Menzi
Paul
Total
Rentals
Interest
R
R
R
Receipts and accruals
157 333
117 333
40 000
Less: Rates and taxes and repairs
(24 000)
(24 000)
–
133 333
Ratios
Less: Trustees’ remuneration at 5%
Annuity to Velile
New ratios
Education fees paid:
93 333
70%
(4 667)
(4 000)
40 000
30%
(2 000)
–
(12 000)
(18 000)
(14 400)
84 666
69.02%
(8 283)
(12 424)
(9 939)
38 000
30.98%
(3 717)
(5 576)
(4 461)
78 266
54 020
24 246
(6 667)
(4 000)
122 666
Bafana (minor)
Velile
Thando
Surplus retained in trust
The education fees were in each case paid in two equal payments, the first on
1 August 2022 and the second on 1 February 2023.
YOU ARE REQUIRED TO:
(1) calculate the normal tax liabilities for the 2023 year of assessment of Menzi, Paul,
Velile, Bafana, Thando and the trust; and
(2) state how your answer would change, if the trust deed contained the following
provision:
The income retained in the trust must be credited to Bafana’s account annually.
Whenever the trust comes to an end, this accumulated trust balance must be
paid out to Bafana, or to his estate if he is deceased.
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Question 12.4
(20 minutes)
Tuku is married in community of property to Nonkwe, and no asset is specifically
excluded from their joint estate. They are both residents of the Republic. Tuku
created an inter vivos South African trust during 2013, when he donated the usufruct
of ten years on a large office building to the trust. At the end of the ten-year period,
Tuku will again regain the full right to ownership of the property. During 2017, Tuku’s
father passed away and he bequeathed shares in South African companies to the
trust.
The beneficiaries of the trust, who are all residents of the Republic, are Tuku’s
children (Malaika and Vusi) and Tuku’s mother, Zinzi. On 1 March 2022 Malaika was
16 years old, Vusi 20 and Zinzi 65.
On 28 February 2022 Zinzi sold a block of flats to the trust at its market value of
R2 000 000, but on an interest-free loan. The Commissioner has accepted that a
market-related interest rate is 10%. The trust has not repaid any capital during the
2023 year of assessment. Zinzi inherited this block of flats, situated in Pretoria, from
her late husband.
The following clauses, amongst others, appear in the trust deed:
(i) An annuity of R8 000 per month is payable to Zinzi until the trust dissolves in ten
years’ time.
(ii) The trustees may exercise their discretion as to how much of the income should
be distributed each year to the beneficiaries. The retained income must be paid
in equal shares to Malaika and Vusi on the date that Malaika turns 30. If one of
the beneficiaries should die before then, his or her share will go to the surviving
beneficiary.
(iii) The trustees’ remuneration amounts to 5% of the net income of the trust. The
trustees are all independent persons.
The trustees compiled the following table of the income, expenditure and payments
of the trust for the year ended 28 February 2023:
Not related Interest-free
Bequeathed Donor:
loan:
to a
Dividends
Tuku
donation
Zinzi
Total
Rentals
Interest
Rentals
(Office)
(Flats)
R
R
R
R
R
Income
600 000
18 000
180 000
62 000
340 000
Ratios
100%
3,0%
30,0%
10,3%
56,7%
Trustees' remuneration
(5%)
(30 000)
(900)
(9 000)
(3 100)
(17 000)
Annuity to Zinzi
Distribution to Vusi
Distribution to Malaika
570 000
(96 000)
(72 000)
(36 000)
17 100
(2 880)
(2 160)
(1 080)
171 000
(28 800)
(21 600)
(10 800)
58 900
(9 920)
(7 440)
(3 720)
323 000
(54 400)
(40 800)
(20 400)
Retained Income
366 000
10 980
109 800
37 820
207 400
209
Tax Workbook
YOU ARE REQUIRED TO calculate the taxable income of Tuku, Zinzi, Malaika and the
trust for the 2023 year of assessment. Assume that no beneficiary has any other
investment income. Support your answer with references to legislation.
Question 12.5
(60 minutes)
Amos Diggory, a South African resident, was a keen businessman and the proud
parent of Roxie and Velma. Amos passed away on 1 April 2022 at the age of 55. In
terms of his will, the Chicago Trust was created in South Africa and a block of flats
(market value of R3 100 000) situated in Hatfield, Pretoria, as well as a cash amount
of R1 750 000, were bequeathed to it. During the 2023 year of assessment, the
Chicago Trust earned rentals from letting the flats, and interest from investing the
cash by way of a fixed deposit at a South African bank.
Further disposals to the Chicago Trust:
• On 1 May 2022 Amos’s brother, Billy (a resident of South Africa), sold foreign listed
shares to the Chicago Trust at their market value of R560 000. The purchase price
was financed by Billy, by means of an interest-free loan (denominated in rand)
granted to the trust. The capital portion is repayable in full on 1 January 2023.
None of these dividends were exempt in terms of s 10B(2). (Assume that SARS
considers a rate of 10% to be a market-related rate for the 2023 year of
assessment.)
• On 1 November 2022, Capone, an old friend of the late Amos, donated 400 of his
shares in Burgundy Limited (a resident company) to the Chicago Trust. The market
value of each share was R18 on that date. Because the value of this donation
was less than R100 000, it was not subject to donations tax. Assume that the
donation resulted in a capital gain of R1 500.
On 28 February 2023, the value of these Burgundy shares increased to R30 per
share, and the trustees exercised their discretion and awarded and transferred
100 shares to each beneficiary.
Stipulations in the trust deed (as determined in terms of Amos’ will):
The beneficiaries of this trust are as follows. No beneficiary has a vested right to any
income or capital of the Chicago Trust and the trustees have full discretionary
powers to make distributions:
• Roxie, aged 19 years (on 1 April 2022), a full-time student and a resident of South
Africa.
• Velma, aged 25 and a resident of the United States of America. She emigrated
four years ago to pursue a career in performing on Broadway, and has lived in
New York City ever since.
• Mary Sunshine, Amos’ favourite aunt, aged 72, whom he felt very sorry for because
she never married and is now all alone in her old age, living in Durban.
• Kelly, Amos’ 30-year-old cousin (related to him in the fourth degree of
consanguinity) who suffers from a mental illness as defined in s 1 of the Mental
Health Care Act that incapacitates her from earning sufficient income for her
maintenance. Kelly is a resident of the Republic.
Distributions made during February 2023 from the income of the trust:
• R10 000 to Roxie to pay for her studies for the year;
210
Chapter 12
Trusts
• R35 000 to Velma to pay for acting classes in New York, which were too expensive
for her to afford on her own;
• R22 000 to Mary Sunshine to help her refurnish her unit in the retirement village
where she lives;
• R38 000 to Kelly for payment of medical costs.
Summary of the Chicago Trust’s income and distributions:
Gross income
Less: tax-deductible
expenses
Distributions to:
Roxie
Velma
Mary
Kelly
Rents from
Flats
R
Interest
R
Foreign
Dividends
R
272 412
139 500
48 438
(5 858)
(20 504)
(12 888)
(22 262)
(3 000)
(10 500)
(6 600)
(11 400)
(1 042)
(3 646)
(2 292)
(3 958)
210 900
108 000
37 500
Local
Dividends
R
4 650
(100)
(350)
(220)
(380)
3 600
Total
R
465 000
(10 000)
(35 000)
(22 000)
(38 000)
360 000
Assume that:
• No natural person mentioned above has yet utilised any portion of the exemption
available in terms of s 10(1)(i), in respect of the 2023 year of assessment.
• No person has any other disposals during the 2023 year of assessment.
• No person has any assessed capital loss brought forward from a previous year of
assessment.
YOU ARE REQUIRED TO:
(1) discuss whether or not the Chicago Trust is a “special trust” for income tax and/or
capital gains tax purposes;
(2) discuss the normal tax consequences for Billy in respect of the income
generated by the Chicago Trust from the foreign shares sold to it;
(3) calculate the taxable capital gain of Capone in respect of his 2023 year of
assessment; and
(4) calculate Roxie’s taxable income for her 2023 year of assessment. She did not
receive any other income from any other source during the year.
211
Chapter 13
Non-residents
L Introduction
Non-residents are taxed on amounts which are received by or that accrue from a
source within or deemed to be within the Republic. Double Tax Agreements (DTAs)
between South Africa and a foreign country may override some of the provision of
the Income Tax Act 58 of 1962 as amended (the Act), for example limit the amount
of withholding tax or grant sole taxing rights to a foreign country. However, for
purposes of this chapter, the possible application of any DTA is ignored. The
following sections of the Act are only applicable to non-residents, namely:
• The definition of gross income determines that amounts received by or that
accrue to non-residents from a source within the Republic may be subject to
income tax in South Africa (s 1).
• The definition of a resident. For the purposes of this chapter, a non-resident is any
person who does not meet the definition of a resident (s 1).
• Source rules are contained in s 9 for certain types of income. If s 9 does not
contain a source rule for the particular type of income, the source of income
must be determined with reference to case law. (Refer to chapter 2.)
• Withholding tax on interest at 15% if interest is paid to a non-resident from a
source in the Republic (s 50A–50H). Exemptions from withholding tax are
contained in s 50D.
• Normal tax exemptions relating to interest earned by non-residents (s 10(1)(h)).
Interest that is not exempt in terms of s 10(1)(h) will not be subject to the
withholding tax on interest.
• Withholding tax on royalties at 15% if the royalty is paid to a non-resident from a
source in the Republic (s 49A–49H).
• Royalties that are subject to the final withholding tax will be exempt from normal
tax in terms of s 10(1)(l).
• Dividends paid to non-residents are generally subject to a final dividends tax
(s 64D–64N). (Refer to chapter 10.)
• The withholding tax relating to the purchase price paid to a non-resident in
respect of a disposal of immovable property situated in the Republic (s 35A). This
withholding tax is not a final tax but a prepayment of normal tax.
• The final withholding tax relating to amounts paid to foreign entertainers and
sportspersons (s 47A–47K). Amounts paid to foreign entertainers and sportspersons
that are subject to the withholding tax, are exempt from normal tax in terms of
s 10(1)(lA).
213
Tax Workbook
Framework:
The taxable income of a non-resident is calculated using the normal tax framework:
Gross income
Less: Exempt income
Gives: Income
Less: Deductible expenditure
Gives: Taxable income
L Contents
The table gives an indication of the time that you will need to complete the
example or question. The relevant sections or paragraphs that you need to know
before attempting the example or question are provided, and the level of the
example or question gives an indication of the difficulty of the question.
)
Example/Question
and time allocation
Topic and/or relevant sections
Level
Example 13.1
(10 minutes)
• Framework for calculating taxable
income
• Withholding tax on royalties and
interest
Basic
Example 13.2
(18 minutes)
• Section 1 – definition of “gross
income”
Intermediary
Example 13.3
(10 minutes)
• Business income of foreign branch
• Dividends tax
Basic
Example 13.4
(15 minutes)
• Investment income
• Withholding tax on foreign
entertainers and sportspersons,
interest and royalties
Basic
Example 13.5
(24 minutes)
• Gross income
• Investment income
• Withholding tax on royalties and
interest
Basic
Question 13.1
(20 minutes)
• Business income
• Investment income
• Withholding tax on dividends,
royalties, interest
Advanced
Question 13.2
(40 minutes)
• Business in the Republic versus
business not in the Republic
• Withholding tax on sale of fixed
property situated in the Republic
(Prepaid withholding tax)
Advanced
Question 13.3
(20 minutes)
• Resident of the Republic versus nonresident of the Republic
• Withholding tax on royalties
Advanced
214
Chapter 13
Non-residents
L Examples
Example 13.1
(10 minutes)
Sewela Mashilo, an unmarried woman, 63 years old, was formerly resident in the
Republic but emigrated from South Africa to Australia six years ago. She is a partner
in a business in South Africa that her brother-in-law started ten years ago. She visits
the Republic regularly to participate in the business activities of the partnership
(which is regarded as a permanent establishment in South Africa). In the current
year of assessment, she spent 28 days in the Republic.
The taxable income of the partnership for the 2023 year of assessment amounted to
R500 000, and Sewela and her brother-in-law shared in this profit equally.
In 2019, she used partnership profits to purchase 2 000 debentures issued by an
unlisted South African company of R100 each. These debentures pay interest at 20%
per annum. The interest is payable quarterly on 31 March, 30 June, 30 September
and 31 December.
Sewela earns a royalty from a company that is a resident in Botswana for tax
purposes for a patent she developed while she was still ordinarily resident in the
Republic. The gross royalty on this patent for the 2023 year of assessment amounted
to R34 000.
In addition, a gross royalty of R150 000 accrued to her on 31 January 2023 as a result
of the use of another patent by a company in the Republic. She developed this
patent during 2010 in Australia. She paid tax amounting to R7 200 (rand equivalent)
in Australia on the gross royalties.
During the current year of assessment, Sewela made a donation of R10 000 to UNISA,
for which an official s 18A receipt was obtained.
YOU ARE REQUIRED TO calculate Sewela’s Republic tax liability for the 2023 year of
assessment in respect of these receipts and accruals.
Solution 13.1
Sewela is not a resident of the Republic as she was not ordinarily resident in South
Africa during the current year of assessment and did not meet the requirements of
the physical presence test. She will therefore be subject to income tax on income
from a source within the Republic.
Sewela’s normal tax liability for the 2023 year of assessment
Taxable income from the partnership – 50% of R500 000
R
250 000
Interest on debentures (note 1) (R100 × 20% × 2 000)
Royalties for the use of her patent developed in the Republic (note 2)
Royalties for use of patent developed in Australia (note 2)
40 000
–
150 000
440 000
(23 800)
(150 000)
Less: Basic interest exemption s 10(1)(i)
Royalty exemption s 10(1)(l)
266 200
continued
215
Tax Workbook
R
Less: Donation (s 18A) – R10 000
Limited to R266 200 × 10% = R26 620, thus actual amount
(10 000)
Taxable income
256 200
Normal tax (R40 680 + (26% x (R256 200 – R226 000))
Less: Primary rebate
Section 6quat rebate (note 3)
48 532
(16 425)
–
Normal tax liability
32 107
Withholding tax on royalties (note 4)
22 500
Notes
(1) Sewela is conducting a partnership business in the Republic (s 24H(2)). Therefore,
s 10(1)(h) does not apply. She will only qualify for the basic interest exemption in
terms of s 10(1)(i). This interest is exempt from the withholding tax on interest in
terms of s 50D(3)(b) because the debt is effectively connected to Sewela’s
permanent establishment in the Republic.
(2) The royalties earned by Sewela will be from a source within the Republic if:
• it is paid or incurred by a resident, unless the royalties are attributable to that
resident’s permanent establishment outside South Africa (s 9(2)(c)); or
• the royalty is received or accrues in respect of the use of the patent in South
Africa (s 9(2)(d)).
The royalties from a South African source will be subject to the 15% withholding
tax in terms of s 49A–49H and exempt from normal tax in terms of s 10(1)(l).
Any other royalties received by non-residents will be from a source outside the
Republic (s 9(4)(c)).
Royalties earned from use of patent by Botswana resident company
The royalties are not paid by a South African resident or in respect of the use of
the patent in South Africa. The income is therefore not from a South African
source, even though the patent was developed in South Africa. The royalties
would therefore not be included in Sewela’s gross income and also not be
subject to the withholding tax.
Royalties earned from use of patent in South Africa
As a result of the fact that the royalty is paid to a non-resident for use in the
Republic, the royalties would be from a source within the Republic. The royalties
would therefore be subject to the withholding tax at a rate of 15% and be
exempt from normal tax in terms of s 10(1)(l).
(3) Sewela is not a resident of the Republic. Therefore no rebate can be claimed in
terms of s 6quat on the foreign tax which she had paid.
(4) The withholding of tax on royalties is not a pre-payment of normal tax, but the
payment of a separate final tax.
No withholding tax is levied on the royalties on the patent developed in the
Republic (see note 2).
The royalties on the patent developed in Australia but used in the Republic by a
company that is resident will be taxed as follows:
R150 000 at 15% = R22 500.
216
Chapter 13
Non-residents
Example 13.2
(18 minutes)
The following retired taxpayers are all non-residents. They earned the following
amounts from sources within the Republic during the 2023 year of assessment.
Abe Abrahams
Abe receives a monthly pension of R25 000 from a South African pension fund. He
worked at the Botswana branch of a resident company for 18 years. Before his
retirement he worked at its head office in Johannesburg for two years. After
retirement he moved back to Botswana. In total he worked 20 years for the resident
company. He was a member of the South African pension fund for the entire period
of 20 years.
Andile Dlamini
Andile emigrated from the Republic six years ago. Before she emigrated, she
purchased a ten-year annuity from an insurance company in the Republic. She paid
R50 000 and receives R700 a month.
Claire Cleveland
Claire Cleveland is a retired professor. Two years ago, the University of Cape Town
signed a service contract with her to supervise doctoral students, via e-mail. This
supervision is regarded by SARS as a service rendered (and not the imparting of
scientific, technical, industrial or commercial knowledge) by an independent
contractor (she is not under the supervision and control of the University of Cape
Town). She will not visit the Republic. She earns R80 000 per completed doctoral
thesis. She is the supervisor of ten doctoral students. Three of these students
completed their theses during January 2023. She invoiced the University of Cape
Town for R240 000 on 15 January 2023 payable by the end of January 2023.
YOU ARE REQUIRED TO discuss whether the amounts earned by the above
nonresidents constitute “income” (as defined) in South Africa for the 2023 year of
assessment.
Solution 13.2
A non-resident is only required to include in his “gross income” in relation to any year
or period of assessment, the total amount, in cash or otherwise, received by or
accrued to or in favour of such person from a source within the Republic, excluding
receipts or accruals of a capital nature. The special inclusions to the gross income
definition include certain amounts in gross income, whether of a capital nature or
not.
Abe Abrahams
Paragraph (a) of the definition of “gross income” includes annuities. The special
inclusion is subject to the source rules contained in s 9(2)(i). Section 9(2)(i) states that
any pension earned by a person who performed services partly within the Republic
and partly outside the Republic is from a source in the Republic to the extent that
the services were rendered in Republic. The pension amounts received by Abe will
therefore be from a source within the Republic in the same ratio as the period
during which he rendered services in the Republic bears to the total period of
services rendered by Abe.
217
Tax Workbook
Abe has to include R13 091 in his gross income, which is calculated as follows:
2 / 20 years × R300 000 (12 months × R25 000) = R30 000.
There is no exemption and R30 000 will thus be his “income”.
Andile Dlamini
The originating cause of the annuity is the formal act that gives rise to it. For a
purchased annuity, the source will be located at the place at which the contract
was entered into (Boyd v CIR 1951 (3) SA 525 (A)). An annuity is regarded as gross
income, regardless of whether it is of a capital nature or not, according to para (a)
of the definition of gross income. Andile has to include R8 400 (R700 × 12 months) in
her gross income.
Section 10A allows for an exemption in respect of the capital portion of the
purchased annuity. The exempt portion is calculated as follows:
R50 000 / (R700 × 12 × 10) × R8 400 = R5 000.
Andile will thus have “income” of R3 400 (R8 400 less R5 000).
Claire Cleveland
The originating cause of the income is located where the services are rendered,
which is outside the Republic. The special inclusion in para (gA) to the “gross
income” definition and source rule in s 9(2)(e) are not applicable (given in the
question). The R240 000 is thus not included in Claire’s gross income (and is therefore
also not “income”).
Example 13.3
(15 minutes)
International Plc (an unlisted company) is incorporated in the United Kingdom and is
managed and controlled in the United Kingdom. It has substantive business
operations in the Republic, which it operates through branches (permanent
establishment in South Africa). The following information relates to International Plc’s
trading in the Republic for its year of assessment ended 31 March 2023.
R
Sales – local (in the Republic)
684 000
Sales – export to United Kingdom
1 800 000
Interest earned (note 1)
476 000
Foreign exchange gain (note 2)
120 000
Rentals earned (note 3)
58 750
Total income
Less: Deductible expenditure
3 138 750
(1 304 835)
Net income (note 4)
1 833 915
Notes
(1) Interest earned is as follows:
• Interest on current accounts at South African resident banks
• Interest on an investment made by International Plc, namely
£200 000 invested in listed South African debt instruments.
The £200 000 invested did not originate from profits made in its
Republic branches.
R
56 000
420 000
476 000
218
Chapter 13
Non-residents
(2) The foreign exchange gain was made on an export transaction.
(3) International Plc subleases some of the offices it leases in the Republic.
(4) International Plc distributed the equivalent of R500 000 of its Republic profits to its
foreign shareholders.
(5) International Plc made provisional tax payments of R250 000.
YOU ARE REQUIRED TO calculate the Republic normal tax due by International Plc.
Solution 13.3
International Plc is not a resident of the Republic as it is neither incorporated in the
Republic nor effectively managed in South Africa. International Plc will therefore be
taxed on its income from sources within the Republic.
Calculation of normal tax liability for its year of assessment ending 31 March 2023
R
Sales – local (note 1)
684 000
Sales – export (note 1)
1 800 000
Interest (note 2)
476 000
Foreign exchange gain (note 3)
120 000
Rentals (note 4)
58 750
Gross income
Less: Exempt income
Section 10(1)(h) (note 5)
3 138 750
Income
Less: Deductible expenditure
2 718 750
(1 304 835)
(420 000)
Taxable income
1 413 915
Normal tax liability at 27% (note 6)
Less: Provisional tax payments made
381 757
(250 000)
Normal tax due
131 757
Notes
(1) The source of the profits made from the Republic branches is the branch
activities, which is the originating cause of the profit. These activities are carried
on in the Republic.
(2) In terms of s 9(2)(b) interest income (as defined in s 24J) is from a source within
the Republic if:
(a) the amount is incurred by a resident,
(b) the interest is received or accrues in respect of the use or application of
funds or credit in the Republic.
In this case, both interest accruals are therefore from a source within the
Republic. However, both interest accruals are exempt from the withholding
tax on interest since the interest of R56 000 is paid by a bank and the interest of
R420 000 is in respect of a listed debt (see s 50D(1).
219
Tax Workbook
(3) The foreign exchange gain is taxable under the provisions of s 24I as it is
attributable to the business operations in South Africa (s 9(2)(l)).
(4) The source of the rentals is the location of the property, which is in the Republic
(COT v British United Shoe Machinery (SA) (Pty) Ltd 1964 FC).
(5) The exemption under s 10(1)(h) does not apply if the debt from which the
interest arises is effectively connected to a permanent establishment of that
non-resident in the Republic. Only the interest on the company’s current
accounts is thus excluded from this exemption. In addition, International Plc does
not qualify for the interest exemption in s 10(1)(i) as it is not a natural person.
(6) Branches of external companies also pay normal tax at the new rate of 27%. The
dividends that International Plc distributed from the Republic branch profits are
not subject to dividends tax. The reason is that it is not a dividend as defined in
s 64D.
Example 13.4
(15 minutes)
The following four taxpayers are not residents of the Republic for tax purposes. They
received the following amounts during the 2023 year of assessment from sources
within the Republic.
Tsidi Pule (26 years old)
R
Tsidi has never been a resident of the Republic. He visited the Republic
for four months to play in the Sunshine Golf season. The events took
place in various country clubs throughout the country.
Winnings received
420 000
Vuyani Mali (40 years old)
Vuyani has never been a resident of the Republic. He visited the
Republic for eight months and toured the country.
Interest earned on 31 January 2023 from fixed deposit at a South African
bank (not effectively connected to a permanent establishment in the
Republic)
Rental income received on fixed property situated in Durban (not
deemed to be a business carried on through a permanent
establishment in the Republic)
Dividend on 15 February 2023 from collective investment scheme in
securities (70% was paid out of local exempt dividends and 30% out
of taxable interest)
Deneo Modise (66 years old)
Deneo emigrated from the Republic on 1 January 2000. She visited the
Republic for five months during the 2023 year of assessment to look after
her business interests.
Income from businesses carried on in South Africa
Royalties (gross) from a patent she developed abroad which is used by
one of her businesses in South Africa
Rental income from a flat situated in Pretoria
29 000
36 000
6 000
190 000
59 000
24 000
continued
220
Chapter 13
Non-residents
Mulalo Mukhuwevho (52 years old)
Mulalo has never been ordinarily resident in the Republic and did not
visit the Republic during the current year of assessment.
Dividends from listed RSA companies
Distribution from Real Estate Investment Trust (REIT)
Annuity from a trust (80% was financed out of dividends and 20% out of
interest earned on Government bonds)
Royalties (gross) on a patent used in South Africa (10 January 2023)
R
12 900
15 800
40 000
90 000
YOU ARE REQUIRED TO calculate the taxable income from Republic sources of all
the above-mentioned taxpayers for the 2023 year of assessment.
Solution 13.4
Taxable income of Tsidi Pule for the 2023 year of assessment
Winnings received (note 1)
Less: Foreign sportsperson exemption (s 10(1)(lA)) (note 2)
Taxable income
R
420 000
(420 000)
–
Taxable income of Vuyani Mali for the 2023 year of assessment
Interest earned (note 3)
Rental from fixed property
Collective investment scheme in securities
Dividends
Interest (note 3)
Gross Income
Less: Interest exemption (s 10(1)(i) (note 3)
Less: Dividend exemption (s 10(1)(k)(i)) (note 3)
Taxable income
29 000
36 000
4 200
1 800
71 000
(23 800)
(4 200)
43 000
Taxable income of Deneo Modise for the 2023 year of assessment
Business income
Royalties (note 4)
Rentals earned on fixed property
190 000
59 000
24 000
Taxable income
273 000
Taxable income of Mulalo Mukhuwevho for the 2023 year of assessment
Dividends (par (k) of “gross income” definition in s 1)
Distribution from Real Estate Investment Trust (REIT) (note 5)
Royalties (note 4)
Annuity
Dividends (note 6)
Government bonds interest (note 7)
Income
Less: Interest exemption (note 7) (s 10(1)(i))
Less: Dividend exemption (s 10(1)(k)) (R12 900 + R15 800) (note 5)
Less: Section 10(1)(l) exemption
Taxable income
12 900
15 800
90 000
32 000
8 000
158 700
(8 000)
(28 700)
(90 000)
32 000
221
Tax Workbook
Notes
(1) The services are rendered in South Africa; therefore the source of the income is
in the Republic.
(2) Tsidi is a non-resident sportsperson; therefore the income is subject to 15%
taxation on foreign sportsmen, and exempt in terms of s 10(1)(lA). The
withholding tax payable is R420 000 × 15% = R63 000.
(3) Section 10(1)(h) exempts interest received or accrued to a person ordinarily
resident outside the Republic. This exemption does not apply if a person is
physically present in the Republic for at least 183 days during the 12 month
period preceding the date on which the interest is accrued or received. The
s 10(1)(h) exemption will therefore not be available to Vuyani. If a person fails to
qualify for the exemption in s 10(1)(h), the person can still claim the interest
exemption under s 10(1)(i), which is, however, limited to R23 800 for individuals
younger than 65 years and to R34 500 for individuals older than 65 years.
The interest is exempt from withholding tax on interest in terms of s 50D because
it is paid by a bank.
(4) The royalties are from a source within the Republic if:
• it is paid or incurred by a resident, unless the royalties are attributable to that
resident’s permanent establishment outside South Africa (s 9(2)(c)); or
• the royalty is received or accrues in respect of the use of the patents in South
Africa (s 9(2)(d)).
Section 9(4)(c) states that all other royalties received by non-residents will be
from a source outside the Republic.
Deneo’s royalties are included in gross income because it is from a South African
source. It is not exempt in terms of s 10(1)(l) because it was not subject to the
final withholding tax in terms of s 49A–49H. Section 49D determines that a royalty
is exempt from withholding tax if the royalty is effectively connected to a
business carried on in the Republic.
Mulalo’s royalties are also included in gross income because it is from a South
African source. It is exempt in terms of s 10(1)(l) because it was subject to the
final withholding tax in terms of s 49A–49H of R13 500 (R90 000 × 15%).
(5) Section 10(1)(k)(i)(aa) exempts dividends from REITs accruing to persons not
ordinarily resident in the Republic.
(6) Section 10(2)(b) disallows the application of the dividend exemption (s 10(1)(k)),
if the dividends are paid by way of an annuity.
(7) Section 10(2)(b) provides that the exemptions under s 10(1)(h) and (k) do not
apply to an amount derived in the form of an annuity. The exemption in terms of
s 10(1)(i) can still be claimed against interest, as s 10(2)(b) only refers to s 10(1)(h)
and (k). The R23 800 exemption can be claimed but is limited to the actual
amount received.
222
Chapter 13
Non-residents
Example 13.5
(12 minutes)
Katlego Marumo (49 years of age) is not ordinarily resident in the Republic. He has
business interests in the Republic and spent about two months in the Republic
looking after his business affairs. The following information is applicable to the 2023
year of assessment:
R
Gross royalties earned for the use of his patent by a South African
resident. The resident uses it in his permanent establishment in Botswana
100 000
Taxable profits out of Republic business activities
475 200
Net rentals – house in England
31 800
– house in Cape Town
13 500
Income from a Real Estate Investment Trust (REIT)
9 210
Income from a collective investment scheme in securities (R5 213 was
financed out of local exempt dividends, and R2 070 out of interest). This
investment was effectively connected with Katlego’s permanent
establishment in the Republic.
7 283
YOU ARE REQUIRED TO calculate the normal tax liabilities of the above-mentioned
taxpayers for the 2023 year of assessment.
Solution 13.5
Katlego Marumo is not a resident of the Republic for tax purposes as he was not
ordinarily resident in South Africa during the year and does not meet the
requirements of the physical presence test. He will therefore only be taxed on
income from a source within the Republic.
Calculation of the normal tax liability of Katlego Marumo for the year of
assessment ended 28 February 2023
R
Royalties (note 1)
Taxable income from business activities
Rental income (note 2)
Residence in England
Residence in Cape Town
Return from a Real Estate Investment Trust (REIT)
Income from a collective investment scheme in securities
Financed by dividends
Financed by interest
–
475 200
–
13 500
9 210
5 213
2 070
Less: Interest exemption (note 3) (s 10(1)(i))
Dividend exemption (note 4) (R5 213 + R9 120)
505 193
(2 070)
(14 333)
Taxable income
488 790
Schedule tax payable (R115 762 + (36% x (R488 790 – R488 700)
Less: Primary rebate
115 794
(16 425)
Normal tax liability
99 369
223
Tax Workbook
Notes
(1) The royalties are not from a source within the Republic because the royalties are
attributable to a resident’s permanent establishment outside South Africa
(s 9(2)(c)). The royalties are therefore not included in Katlego’s gross income and
will also not be subject to the withholding tax in terms of s 49A–49H.
(2) The source of the rental income is the place where the fixed property is situated.
Only the rental from the South African property is therefore from a source in the
Republic.
(3) A person not ordinarily resident in the Republic and who has been physically
absent from the country for at least 183 days during the 12-month period
preceding the interest accrual is entitled to the s 10(1)(h) exemption on interest
earned from a South African source. But, if the debt is effectively connected to
a permanent establishment of the non-resident in the Republic, then the
exemption is not available. Therefore, Katlego is not entitled to the exemption.
The s 10(1)(i) exemption can be used up to a maximum of R23 800.
The interest is exempt from withholding tax on interest in terms of s 50D because
it is effectively connected with the non-resident’s permanent establishment in
the Republic.
(4) The dividend from the REIT will also be exempt in terms of s 10(1)(k) because the
proviso does not apply to non-residents (s 10(1)(k)(i)(aa)).
L Questions
Question 13.1
(20 minutes)
Siso Nkomo is not a resident of the Republic. He has never been ordinarily resident in
the Republic. He is 50 years old and unmarried. Siso has visited the Republic of South
Africa for eight weeks each year during his vacation for the past four years.
During the year of assessment ended 28 February 2023, he had the following
receipts, accruals and expenses:
R
Salary from his Canadian employer for work done in Canada
Dividends from companies in the Republic
Royalties during February 2023 for the use of a design in the Republic
(the design was developed in Canada)
Rentals from a property situated in the Republic
Director’s fees from a company in the Republic
Consultation fees during February 2023 from an independent company
in the Republic (the consultation relates to scientific work done
in Canada)
500 000
15 000
100 000
36 000
60 000
200 000
Siso also conducts a business operation in Johannesburg as a sole proprietor. He
appoints a person to manage the business while he is not in South Africa.
224
Chapter 13
Non-residents
The following income statement for the year ending 28 February 2023 is available to
the business:
R
Consultation fees
Interest received on South African bank account
Total income
Less: Business expenses
2 370 200
14 000
2 384 200
(1 688 700)
Rentals – Office space
Telephone, faxes and Internet
Salaries
Other deductible expenses
36 000
65 000
1 000 500
587 200
Net profit
695 500
Notes
(1) All amounts are stated in their rand equivalent amount, excluding VAT (where
applicable), but before taking into account any prepaid taxes or withholding
taxes.
(2) The business operation in Johannesburg is registered as a VAT vendor and is an
employer for employees’ tax purposes. This business has its own bank account.
(3) Siso is a registered taxpayer in South Africa and pays his tax on time. He has
already paid provisional tax of R200 000 for the 2023 year of assessment.
YOU ARE REQUIRED TO
(1) calculate Siso’s net tax debit or credit for the year of assessment ending
28 February 2023; and
(2) calculate any other taxes payable.
Question 13.2
(40 minutes)
Kabelo Mahlanga is a 40-year-old unmarried taxpayer. He is not ordinarily resident in
the Republic and has never (except for the current year of assessment) been to the
Republic. He visited the Republic for 90 days during the current year of assessment.
He earned the following from a South African source during the 2023 year of
assessment:
R
Investment income:
Dividend on shares in a South African company
12 000
Interest from a South African bank
37 000
Royalty income:
Royalties for the use of his patent in South Africa (net amount on
15 December 2022 after deduction of the withholding tax)
88 000
continued
225
Tax Workbook
Consulting income:
Fee for assisting the company with advice in relation to the patented
process (thus “royalty” as defined in s 49A) when the company started
manufacturing the product using this process (net amount on 10
January 2023 after deduction of the withholding tax)
Rental income:
Net rental income from fixed property situated in the Republic
(not deemed to be business carried on through a permanent
establishment in the Republic)
R
21 250
145 500
On 25 February 2023, Kabelo sold the fixed property he owned for R2 785 000 to a
South African resident. Kabelo purchased the property in 2004 for R1 320 000. He
had to pay agent’s commission of R175 000 on the sale of the house. He made a
taxable capital gain of R500 000.
YOU ARE REQUIRED TO
(1) calculate Kabelo’s liability for Republic taxes in respect of amounts he earned
from the Republic; and
(2) re-calculate Kabelo’s liability for Republic taxes assuming that Kabelo conducts
a business partnership in South Africa and earned a taxable income of R105 000
from this partnership during the 2023 year of assessment. Assume further that the
interest from the bank is effectively connected to his permanent establishment in
the Republic. He also incurred travelling expenses of R10 000 while attending to
his South African business interests.
Question 13.3
(20 minutes)
You are a registered tax practitioner in Nelspruit. Tebogo Mashilo (currently 62 years
old) came to consult you whilst he was visiting his daughter who works in the Kruger
National Park. Tebogo and his wife are retired and ordinarily resident in Eswatini
(Swaziland), but are considering permanently moving to Nelspruit and becoming
tax residents of South Africa. Tebogo’s biggest concern about the move is the
possible tax implication of the move because they are currently not paying any tax
in Eswatini. To be able to advise Tebogo, you requested him to provide you with
certain documents. A week later you received the following documents:
Royalty income (rand equivalent)
A royalty of R75 000 a year is paid to Tebogo by a Republic manufacturer for the
use of a patented manufacturing process that was devised by Tebogo in 2002
when he had been resident in Eswatini. The accrual will be on the last day of the
year of assessment.
226
Chapter 13
Non-residents
Pension income (rand equivalent)
An annuity of R300 000 payable in monthly instalments of R25 000 each from
Game Viewers Ltd, a company of Eswatini. During the 30 years he was employed
by Game Viewers Ltd, Tebogo rendered services both in the Republic and in
Eswatini. Details of his employment history is:
• 1 January 1992 to 31 December 2001 in Eswatini (10 years);
• 1 January 2002 to 31 December 2011 in the Republic (10 years);
• 1 January 2012 to 31 December 2018 in Eswatini (seven years);
• 1 January 2019 to 31 December 2020 in the Republic (two years); and
• 1 January 2021 to 31 December 2021 in Eswatini (one year).
Investment income (rand equivalent)
Interest on investment with a bank in Eswatini. Interest of R30 500 a year accrues
from this investment.
Medical cost (rand equivalent)
Tebogo and his wife do not belong to a medical scheme. Tebogo paid qualifying
medical expenses of R18 100 during the 2023 year of assessment; all the expenses
were incurred in the Republic.
YOU ARE REQUIRED TO advise Tebogo on his tax liability if he moves to the Republic,
compared to staying in Eswatini. (Assume his earnings and expenses are the same
for future years of assessment. Assume the 2023 tax legislation and rates of tax will be
the same in future years of assessment.)
227
Chapter 14
Trading stock
L Introduction
If a taxpayer disposes of an asset in a scheme of profit making, then the amount
received or accrued will be gross income. The taxpayer speculates with the asset
and treats the asset as trading stock. The cost of trading stock will be deductible
under s 11(a) of the Income Tax Act 58 of 1962 as amended as expenditure actually
incurred in the production of income, not of a capital nature.
Section 22 contains the normal income tax rules relating to trading stock resulting in
an extension of the application of s 11(a) by, for example, determining that trading
stock that was deducted but not yet sold at the end of the year of assessment does
not qualify for a deduction. The cost price of this stock must be added back as
closing stock (s 22(1)). The closing stock that is added back at the end of the year
can be deducted as opening stock in the following year of assessment (s 22(2)).
Framework:
Section 22 of the Income Tax Act contains the legislation that applies to trading
stock. It contains, amongst others, the following provisions:
• Section 22(1): Closing stock valuation
• Section 22(2): Opening stock valuation
• Section 22(3): Cost price of trading stock
• Section 22(4): Trading stock acquired for no consideration
• Section 22(5): LIFO basis is not allowed
• Section 22(8): Recoupments of trading stock
L Contents
The table gives an indication of the time that is needed to complete the example
or question. The relevant sections or paragraphs that need to be known before
attempting the example or question are provided. The level of the example or
question gives an indication of the difficulty of the question.
)
Example/Question
and time allocation
Topic and/or relevant sections
Level
Example 14.1
(15 minutes)
• Section 22(1), (2) and (8)
• Section 11(a)
• Paragraph (jA) of “gross income”
definition
• Section 23F
Intermediate
Example 14.2
(10 minutes)
• Section 22(1)
• Section 11(a)
Basic
continued
229
Tax Workbook
)
Example/Question
and time allocation
Topic and/or relevant sections
Level
Example 14.3
(10 minutes)
• Section 11(a) and (e)
• Section 22(3)
Basic
Example 14.4
(10 minutes)
• Section 22(1) and (4)
Basic
Example 14.5
(25 minutes)
• Section 11(a) – positive test of the
general deduction formula
• Definition of “trading stock”
• Section 18A
• Section 22(8)
Intermediate
Question 14.1
(30 minutes)
• Section 22(1) and (2)
• Section 1 – definition of “gross income”
• Eighth Schedule paras 5, 6, 7, 20, 35
and 40
• Section 25
Advanced
Question 14.2
(20 minutes)
• Section 11(a)
• Section 22(1), (2), (3), (4) and (8)
Basic
Question 14.3
(25 minutes)
•
•
•
•
•
Intermediate
Section 11(a)
Section 22(1), (2), (3) and (4)
Section 23(e)
Section 8(4)(a)
Section 19
L Examples
Example 14.1
(15 minutes)
Part A
Mandlethu Dladla purchased trading stock for R20 000 on 27 February 2023 and
commenced trading on the same date. The trading stock was offered for sale at
R30 000, but no items were sold on 27 or 28 February 2023.
YOU ARE REQUIRED TO calculate Mandlethu Dladla’s taxable income for the 2023
year of assessment from the trade that he commenced on 27 February 2023.
Part B
Lenong Golf Cart (Pty) Ltd manufactures golf carts. During the year of assessment, a
golf cart was transferred to the advertising department to be used for demonstration
purposes. The cost of the golf cart is R20 000 and its market value R35 000. The
expected lifetime of a golf cart is 10 years.
YOU ARE REQUIRED TO briefly discuss the normal tax consequences of the transfer of
the golf cart from trading stock to be used as a capital asset for demonstration
purposes.
Part C
Ntsu Ltd’s year-end is 31 March. Ntsu Ltd ordered and paid for trading stock on
31 March 2023, to be delivered to its premises on 1 April 2023. Ownership will pass to
Ntsu Ltd on 1 April. The goods were not included in closing stock.
YOU ARE REQUIRED TO discuss briefly whether Ntsu Ltd is entitled to deduct the
acquisition cost of the trading stock during its 2023 year of assessment.
230
Chapter 14
Trading stock
Solution 14.1
Part A
Gross income
Closing stock (valued at the lower of cost or market value,
in terms of s 22(1)(a))
Less: Allowances and deductions
Purchases (s 11(a) deduction)
Taxable income
R
20 000
(20 000)
–
Part B
Section 22(8) is not applicable if trading stock consists of assets in respect of which
any amount received or accrued from the disposal thereof is or will be included in
gross income in terms of para (jA). Paragraph (jA) of the gross income definition
refers to assets manufactured, produced, constructed or assembled. Lenong Golf
Cart (Pty) Ltd manufactures golf carts and para (jA) is therefore applicable. The golf
cart is regarded as trading stock regardless the fact that it is used as a capital asset.
If the golf cart had been bought as trading stock, s 22(8) would have applied. This
would have resulted in a recoupment at market value of trading stock and the
acquisition of the same asset at market value for capital gains tax purposes. The
company would be able to claim a wear-and-tear allowance on the market value
of the asset.
Part C
Section 23F is applicable as the trading stock was neither disposed of nor held at the
end of the 2023 year of assessment. The acquisition cost actually incurred, and
allowed as a deduction under s 11(a), is therefore prohibited by s 23F(1). The
deduction will be allowed in Ntsu Ltd’s 2024 year of assessment.
Example 14.2
(10 minutes)
On 1 February 2023 Bakgaga (Pty) Ltd commenced dealing in both shares and in
property. On 2 February 2023, it bought 20 000 shares in Bakone Ltd for R180 000.
On 3 February 2023, it bought a plot of land for R600 000. It did not sell any shares or
property during February 2023.
On 28 February 2023, the market value of the trading stock of the
• 20 000 shares in Bakone Ltd was R166 000; and
• the plot of land was R595 000.
Bakgaga (Pty) Ltd’s financial year ends on the last day of February.
YOU ARE REQUIRED TO calculate Bakgaga (Pty) Ltd’s taxable income from its
share- and property-dealing businesses for its 2023 year of assessment.
231
Tax Workbook
Solution 14.2
Gross income
Closing stock of shares
(valued at cost in terms of s 22(1)(a)) (note)
Closing stock of property (valued at the lower of cost or market
value, in terms of s 22(1)(a))
R
R
180 000
595 000
775 000
Less: Allowances and deductions
Purchase of shares (s 11(a))
Purchase of property (s 11(a))
180 000
600 000
Taxable income
(780 000)
(5 000)
Note
Section 22(1)(a) allows the cost of closing stock to be reduced to its market value
when its market value is less than its cost. There is an exception to this provision,
namely that it does not apply to financial instruments, for example shares, held as
trading stock by a taxpayer. This exception applies to all taxpayers.
Example 14.3
(10 minutes)
Duvha (Pty) Ltd is a resident of the Republic. It retails toys, chocolates and sweets.
During its financial year that ended on 28 February 2023, it moved to new premises.
The total cost of this move was R12 500, made up as follows:
• moving of its shop equipment – R4 500;
• moving of all its trading stock – R8 000.
The directors of Duvha (Pty) Ltd would like to know the normal tax consequences of
the R12 500 expenditure it has incurred.
YOU ARE REQUIRED TO write a report for Duvha (Pty) Ltd, setting out the tax
implications of the R12 500 cost of its move.
Solution 14.3
For normal tax purposes, in certain circumstances, the cost of relocating fixed assets
on which certain capital allowances are granted may be added to their cost.
Shop-equipment
Shop equipment does not qualify for the s 12C capital allowance. The R4 500
incurred on the removal of the shop equipment would therefore qualify for the
wear-and-tear or depreciation allowance at the rates normally allowed on shop
equipment (s 11(e) proviso (v)). The tax value of the shop equipment will therefore
be increased by R4 500 and must be written of over the remaining write-off period.
Trading stock
The cost of removal of the trading stock of R8 000 is expenditure of a non-capital
nature. This cost is sufficiently closely related to the income-producing activities of
Duvha (Pty) Ltd, thus permitting the R8 000 to be tax deductible under the provisions
of s 11(a).
232
Chapter 14
Trading stock
Section 22(3), in defining the method of arriving at the cost price of trading stock,
states that the cost of trading stock includes “any further costs incurred . . . in getting
such trading stock into its then existing condition or location”.
Therefore, it follows that the R8 000 incurred on moving the trading stock should be
apportioned over those items that were moved and added to their cost.
Example 14.4
(10 minutes)
Redvers Burgundy, the managing director and sole holder of shares in Natal Wines
(Pty) Ltd, carried on a business in his own name as an importer and distributor of
French wines. On 1 November 2022 he ceased this business. He donated his stock of
French wines on hand at 1 November 2022 to Natal Wines (Pty) Ltd.
Natal Wines (Pty) Ltd sells, as part of its business, wines that are bottled in KwaZuluNatal. The original cost of the French wines donated by Redvers Burgundy was
R75 000. Their market value on 1 November 2022 was R125 000.
At 28 February 2023, 75% of these French wines had been sold. No entries were put
through the accounting records to record either the acquisition of the French wines
for no cost or the balance on hand at 28 February 2023.
Natal Wines (Pty) Ltd’s financial year ends on the last day of February.
YOU ARE REQUIRED TO write a memorandum to Redvers Burgundy, setting out the
effect of the above transactions on the normal tax calculation of Natal Wines (Pty)
Ltd for its 2023 year of assessment.
Solution 14.4
Your details and address
To: Redvers Burgundy
Public Officer
From: You
Date
Subject: Natal Wines (Pty) Ltd – Trading Stock Valuation
As requested, I have detailed below an issue relating to trading stock that should be
taken into account in the preparation of Natal Wines (Pty) Ltd’s normal tax
calculation for its 2023 year of assessment.
The issue to be taken into account is as follows:
French wines
Section 22(4) deemed deduction (“donated” stock is deemed
to have been acquired at a cost equal to its market value)
Closing stock inclusion in taxable income, in terms of s 22(4):
25% of R125 000 (cost deemed to be market value)
233
R
(125 000)
31 250
Tax Workbook
Example 14.5
(25 minutes)
Hashi Hlophe is a resident of the Republic. He is a sole trader. He retails in books,
newspapers and magazines.
Hashi Hlophe has queried the normal tax implications of the following four
transactions:
• Each Thursday morning is “pensioners’ day” at his shop. Hashi Hlophe supplies, free
of charge, a magazine to his older customers. Hashi does this to encourage
pensioners to visit his shop and purchase his trading stock. Hashi Hlophe has
determined that each magazine costs him R6. He sells this particular magazine for
R16,50.
• At the request of the local old-age home, he donated ten books to it. The
old-age home provided Hashi Hlophe with a s 18A certificate for this donation. A
book normally sells in his shop for R240, representing a 50% mark-up on its cost.
• Hashi Hlophe recently attended the 70th birthday of a friend. As a birthday
present for this friend, Hashi took a book of jokes from his shop. The book of jokes
normally sells in his shop for R300, representing a 150% mark-up on its cost.
• Because of the nature of his trading stock, Hashi Hlophe does a physical stock
take every three months. At the most recent stock take Hashi performed, he
established that four imported books were missing from the shop (due to theft).
The imported books normally sell in his shop for R240 each, representing a 100%
mark-up on its cost.
Hashi Hlophe is not a registered VAT vendor.
YOU ARE REQUIRED TO discuss the normal tax implications that arise as a result of the
four transactions as detailed above.
Solution 14.5
“Pensioners day”
The magazines are part of Hashi Hlophe’s trading stock. Because he has disposed of
trading stock, other than in the ordinary course of his trade, for a consideration less
than its market value, a deemed recoupment arises in terms of s 22(8)(b)(ii)(B). The
deemed recoupment is calculated at market value, being R16,50 for each
magazine.
If the donated magazines have been used by Hashi Hlophe in the carrying on of his
trade (as a marketing exercise) then a deemed deduction is available to him for
each magazine supplied. The deemed deduction is calculated at the same value
as set out above, that is R16,50 for each magazine. The deduction available for
normal tax purposes is the amount recouped, namely R16,50 per magazine. Refer to
proviso (a) of s 22(8).
Donation of books
The books are trading stock. By donating the books to the local old-age home, a
deemed recoupment arises calculated at the amount which was taken into
account for that year of assessment in respect of the value of that trading stock.
This amount would be the cost (or opening stock value) of the books. Hashi Hlophe
must include in his income R1 600 (10 × R240 × 100 / 150).
234
Chapter 14
Trading stock
Because a s 18A certificate has been issued to Hashi for this donation, he may claim
a deduction based on the recoupment of R1 600. The deduction is, however, limited
to 10% of Hashi Hlophe’s taxable income (before this s 18A deduction).
Birthday gift
The book of jokes is trading stock. Hashi Hlophe has applied trading stock to his
personal use or consumption. In terms of s 22(8)(a), a deemed recoupment arises,
calculated at cost. Hashi Hlophe must include in his income R120 (R300 × 100 / 250),
being the cost of the book of jokes. Section 22(8)(a) is only applicable to natural
persons because only natural persons can apply trading stock for private use or
domestic use or consumption.
Stolen imported books
On purchasing the four imported books, Hashi Hlophe is entitled to a s 11(a)
deduction of R480 (R240 × 100 / 200 × 4). No subsequent adjustment is required as a
result of this trading stock being stolen from his shop, because he did not include it in
closing stock or use it for a purpose other than selling it in the ordinary course of his
trade.
L Questions
Question 14.1
(25 minutes)
Philani Zondi, aged 61 years, a resident of the Republic, died on 3 March 2022. He
traded in his own name as a souvenir dealer. He was shot dead as he opened his
trade premises in a shopping centre early in the morning. He died immediately. The
robber (his killer) fled empty-handed when a neighbouring shopkeeper sounded the
alarm.
On 28 February 2022, with the assistance of a trainee accountant from his auditor,
he had counted his trading stock. It had a market value of R880 000 and had cost
him R400 000.
Market
Trading stock
Cost
value
R
R
On hand on 28 February 2022
880 000
400 000
Less: Sales on 1 and 2 March 2022
(66 000)
(30 000)
On hand on 3 March 2022
814 000
370 000
Philani Zondi’s executor closed the shop with immediate effect. The executor then
arranged for the trading stock on hand to be sold by an auctioneer. It was sold by
the auctioneer for R405 000. This amount was then received by the executor from
the auctioneer.
Philani Zondi was a widower. His will provided for the executor to liquidate his assets,
settle his liabilities and to bequeath the residue of his estate to his niece.
YOU ARE REQUIRED TO discuss, supported by calculations, the normal tax, including
capital gains tax, consequences for Philani Zondi and the Estate Late Philani Zondi
that arise out of all the above transactions for the 2023 year of assessment.
235
Tax Workbook
Question 14.2
(20 minutes)
Teboho Mohorosi is a resident of the Republic. He is a dealer in shares. It should be
noted that in determining his closing stock value, he uses the FIFO basis of valuation.
• On 1 April 2022 Teboho Mohorosi’s older brother died and Teboho inherited 5 000
shares in Beaks Ltd from his brother’s estate. Teboho Mohorosi and his late brother
had each purchased (as trading stock) 5 000 shares in Botho-Ubuntu Ltd, for
R15 000 on 1 March 2022. On 1 April 2022 the market value of a Botho-Ubuntu Ltd
share was R3,50. On 1 December 2022 Teboho Mohorosi sold 3 000 shares in Beaks
Ltd for R12 750. On 28 February 2023 Teboho Mohorosi still held 7 000 shares in
Botho-Ubuntu Ltd, and the market value of a Botho-Ubuntu Ltd share was R4,40.
• On 2 January 2022 Teboho Mohorosi purchased 250 shares (trading stock) in
Lesiba Ltd for R15 000. On 28 February 2022 the market value of a Lesiba Ltd share
was R66. On 31 March 2022 Teboho Mohorosi was pleasantly surprised when he
received an unexpected dividend from Lesiba Ltd of R1 485. Another unexpected
dividend from Lesiba Ltd of R1 050 accrued to Teboho Mohorosi on 30 September
2022. As a result of these generous dividend yields, Teboho Mohorosi “transferred”
the 250 shares out of his share-dealing business on 1 October 2022. He now holds
these shares in Lesiba Ltd as a long-term investment. The market value of a Lesiba
Ltd share on 1 October 2022 was R70, and on 28 February 2023 it was R75. Teboho
Mohorosi still held 250 shares in Lesiba Ltd on 28 February 2023.
• On 1 February 2022, Teboho Mohorosi purchased 100 shares in Manzimtoti Ltd
(trading stock) for R6 000. On 28 February 2022, he still held all 100 shares in
Manzimtoti Ltd, at a market value of R50 per share. For most of the 2023 year of
assessment, the market value of a Manzimtoti Ltd share remained about R50 a
share. But as from 1 January 2023, the market value increased. On 28 February
2023, Teboho Mohorosi still held 100 shares in Manzimtoti Ltd, but the market value
of a Manzimtoti Ltd share was now R55.
YOU ARE REQUIRED TO calculate the effect that each of the above transactions will
have on Teboho Mohorosi’s taxable income. The value of those shares that form
part of his trading stock and form part of his taxable income must be given.
Question 14.3
Part A
Optimistic Stoke, a South African resident, opened a boutique in a shopping mall on
15 February 2022. He studied fashion design and believed that he had adequate
knowledge of the fashion world to make a success of this venture. He started his
business with his own capital. His plan was only to stock his own label, namely, Black
and White. This was a great success. He could not keep up with the demand for his
stock and decided to expand the fashion line, by buying designer clothes from
Pessimistic, on credit.
One day, the shop attendant put a notice on the door, stating “Back within 10
minutes”, and went to the storeroom at the back of the shop where the stock was
stored, where she lit a cigarette. The telephone rang and she left the cigarette in an
ashtray. When she came back, the stock was on fire. She ran away, leaving the fire
to spread. The stock loss amounted to R1 600 000. Fortunately, Optimistic was
insured. However, because Optimistic was under-insured, the insurance company
only paid out the amount he was insured for.
236
Chapter 14
Trading stock
After this incident, he needed stock on short notice. Pessimistic had not been paid
for the first delivery of trading stock and did not want to sell stock on credit any
longer. Optimistic misjudged the effect of the fire loss. He soon realised that he was
in financial trouble and could not pay the operational expenses. He hoped for the
best, but the debt only escalated. He could not obtain a loan from the bank as he
was not regarded as credit-worthy and also could not provide security for the loan.
He could not pay Pessimistic. A group of loyal friends decided to donate stock to
Optimistic to at least cover some of his operating costs. However, he was forced to
close shop and sell all the remaining stock on sale in March 2023. The following
information relates to the year of assessment ending 28 February 2023:
R
Opening stock:
Cost of own designed stock (label Black and White) (its market value
at the beginning of the year of assessment was R4 000 000)
3 000 000
Acquisition of trading stock during the year of assessment:
Purchases from Pessimistic
1 800 000
Cost of own designed stock (label Black and White)
1 500 000
Stock donated by his friends to help him to cover some of the
operational costs. The market value of the stock was R450 000
and it cost his friends R290 000 when they originally bought it
–
Indemnity payment under a contract of insurance
Damaged stock for which a payment was received
Cost of damaged stock not paid out by the insurance company
1 180 000
420 000
Closing stock:
Purchases from Pessimistic (Market value R300 000)
Own designed stock (label Black and White) (market value at year end
was R650 000)
Donated stock sold during the year of assessment
250 000
1 000 000
–
YOU ARE REQUIRED TO calculate and discuss, with reference to legislation, the effect
of the information as detailed above on Optimistic’s normal tax for the year of
assessment ending 28 February 2023.
Part B
Pessimistic knew that Optimistic was in financial trouble. After consultation with his
attorney, he was advised to reach a compromise (a debt reduction agreement)
with Optimistic rather than pursuing the matter further. He would at least recover
some of the cost from the income from the sale which would start on 15 March 2023.
237
Tax Workbook
YOU ARE REQUIRED TO calculate the effect of the information as detailed above on
Optimistic’s normal tax for the year of assessment ending 28 February 2023 if you
assume that:
(1) Pessimistic waived 20% of the R1 800 000 debt owed by Optimistic. The cost price
of the waived stock on hand that had not been disposed of on that date was
R500 000.
(2) Pessimistic waived his profit of R800 000 on the R1 800 000 debt owed by
Optimistic in order to recover his cost. The cost price of the waived stock on
hand that had not been disposed of on that date was R500 000.
238
Chapter 15
Farmers
L Introduction
This chapter deals with a taxpayer who carries on bona fide farming operations.
Farming receipts, accruals and expenditure are dealt with in the same way as those
of other taxpayers, with the exception of the matters specifically provided for in the
First Schedule to the Income Tax Act read with s 26. These specific principles are
illustrated and tested in this chapter.
Special provisions provide what amounts a farmer may deduct in the determination
of his taxable income from farming operations for livestock purchased (limited to his
farming income, plus his closing stock, less his opening stock) and his capital
development expenditure. The First Schedule also contains provisions to be used in
the determination of the opening and closing stock values of livestock and
produce. A farmer also qualifies for special tax relief through the rating formula. And
special drought-relief provisions are also available to certain farmers.
Framework:
The following structure is used to determine a farmer’s taxable income:
Gross income
Add: Closing stock of livestock (at standard values) and produce (at a fair and
reasonable value)
Gives: Farming gross income
Less: Farming receipts and accruals exempt from normal tax
Gives: Farming income
Less: Opening stock of livestock (at standard values) and produce (at a fair and
reasonable value)
Livestock purchases (a limited deduction)
Other farming expenses deductible in the determination of farming taxable
income
Less: Capital development expenditure (a limited deduction)
Gives: Taxable farming income
Add: Other non-farming receipts and accruals
Less: Non-farming receipts and accruals exempt from normal tax
Less: Other amounts deductible in the determination of taxable income
Gives: Taxable income – preliminary
Add: Taxable capital gain
Gives: Taxable income
239
Chapter 15
Farmers
L Contents
The following table gives an indication of the time that is needed to complete the
example or question. The relevant sections or paragraphs that must be referred to
before attempting the example or question are provided. The level of the example
or question gives an indication of its difficulty.
)
Example or Question
and time allocation
Topic and relevant sections
Level
Example 15.1
(15 minutes)
• Framework for the determination of
farming income.
Basic
Example 15.2
(20 minutes)
• Paragraphs 2 to 7 and para 9 –
livestock and produce.
Basic
Example 15.3
(30 minutes)
• Paragraph 12 – capital development
expenditure.
• Section 12B – capital assets.
Intermediary
Example 15.4
(30 minutes)
• Taxable income from general farming
activities.
Intermediary
Example 15.5
(30 minutes)
• Taxable income from general farming
activities.
• Paragraphs 14 to 16 and para 20 –
taxable income of plantation farming.
Basic
Example 15.6
(20 minutes)
• Paragraph 19 – average formula.
• Paragraph 15 – average formula.
Intermediary
Example 15.7
(50 minutes)
• First Schedule – farming income.
Advanced
Question 15.1
(45 minutes)
• First Schedule – farming income.
• Paragraph 19 – average formula.
• Eighth Schedule – capital gains.
Advanced
Question 15.2
(40 minutes)
• First Schedule – farming income.
• First Schedule – plantation farming.
• First Schedule – sugar cane farming.
Advanced
Question 15.3
(50 minutes)
• First Schedule – farming income.
• First Schedule – plantation farming.
• First Schedule – sugar cane farming.
Advanced
L Examples
Example 15.1
(15 minutes)
Prakash Moodley is 40 years old. He is a full-time farmer in Mpumalanga. The
following information is relevant to him for the 2023 year of assessment:
R
Sale of livestock
137 600
Sale of produce
395 300
Bonus from a co-operative society
(based on turnover of produce supplied by him to it)
3 000
Opening stock of livestock (standard values)
9 200
continued
240
Chapter 15
Farmers
R
Closing stock of livestock (standard values)
8 100
223 000
Expenses deductible in the determination of farming taxable income
Livestock purchases (deductible in the determination of taxable income)
138 700
Purchase of a new irrigation pump (deductible in the determination
of farming taxable income as capital development expenditure)
20 000
Net rentals from a holiday home
35 000
YOU ARE REQUIRED TO determine Prakash Moodley’s taxable income for the 2023
year of assessment.
Solution 15.1
Sale of livestock
Sale of produce
Bonus from a co-operative society (based on turnover of
produce supplied by him to it, therefore it is a receipt or an
accrual from farming operations)
Closing stock of livestock at standard values
R
R
137 600
395 300
3 000
8 100
Farming income
Less: Opening stock of livestock at standard values
544 000
9 200
Less: Expenditure
Livestock purchased – limited to farming income,
(see above)therefore deductible in full in the
determination of his farming taxable income
Other expenses deductible in the determination
of his farming taxable income
534 800
Less: Capital development expenditure (deduction in the
determination of his farming taxable income limited to
R173 100 (see above))
Purchase of a new irrigation pump
138 700
223 000
361 700
173 100
20 000
Taxable farming income
Add: Other non-farming receipts and accruals
Net rentals
153 100
Taxable income
188 100
Example 15.2
35 000
(20 minutes)
Altus Millet is 50 years old. He is a farmer in the North-West Province. Nine years ago,
he planted fruit trees. This year they have yielded their second crop of fruit.
241
Chapter 15
Farmers
Altus Millet’s receipts, accruals and expenditure for the 2023 year of assessment
follows:
R
Sheep sold
1 197 600
Fruit sold
244 000
Local interest earned on a deposit in the Land and
Agricultural Bank of South Africa
47 800
Sheep purchased
2 710 000
Non-capital expenses incurred – deductible in the determination
of his farming taxable income (including interest incurred on the
loan – the borrowed funds were used for farming purposes)
292 500
Capital development expenditure
104 554
Additional information
(1) Altus Millet had 12 000 sheep on hand at 28 February 2022. He inherited
200 sheep from a late uncle during the 2023 year of assessment. Five sheep
were slaughtered as rations, three were slaughtered for private consumption
and two were donated to a school for a fund-raising activity. On
28 February 2023, 11 400 sheep were on hand.
(2) The sheep on hand had a cost price of R540 each, a market value of R1 040
each and a standard value of R6 each.
(2) Fruit on hand at cost price is as follows:
Harvested
Growing crop
R
R
On 28 February 2022
30 400
–
On 28 February 2023
31 200
9 800
YOU ARE REQUIRED TO determine Altus Millet’s taxable income for the 2023 year of
assessment.
Solution 15.2
R
Sheep sold
Fruit sold
Private consumption: three sheep at R540 each (cost price)
Rations: five sheep at R1 040 each (market value) – but see
the deduction in the determination of his farming taxable
income below)
Donations: two sheep at R1 040 each (market value)
Add:
Closing stock – 11 400 sheep at R6 each (standard value)
Closing stock – fruit – harvested (produce)
Closing stock – growing crop (not produce)
R
1 197 600
244 000
1 620
5 200
2 080
1 450 000
68 400
31 200
–
99 600
1 550 100
continued
242
Chapter 15
Farmers
Less:
Opening stock – fruit – harvested (produce)
Opening stock – 12 000 sheep at R6 each (standard value)
Opening stock – donation received:
200 sheep at R1 040 each (market value)
Less: Purchases of livestock (see the note below)
Rations: five sheep at R1 040 each (market value)
Deductible in the determination of his farming
taxable income (non-capital expenses)
Loss from farming operations
Less: Capital development expenditure
Expenditure for the year of R104 554
(carried forward to the 2024 year of assessment since
it cannot create or increase a loss)
Loss from farming operations
Other non-farming receipts and accruals
Local interest on a deposit in the Land and
Agricultural Bank of South Africa
Less: Basic local interest exemption from normal tax
(s 10(1)(i))
R
R
30 400
72 000
208 000
1 238 900
5 200
292 500
310 400
1 239 700
1 536 600
296 900
–
296 900
47 800
23 800
Trade loss to become an assessed loss
24 000
272 900
Note
Altus Millet’s purchase of livestock of R2 710 000. But the deduction in the determination of his 2023 taxable income from farming operations is limited to the following
amount:
R
Farming income (see above)
1 450 500
Add: Closing stock of livestock at standard values
68 400
1 518 900
Less: Opening and deemed opening stock of livestock at standard
values (R72 000 + R208 000)
280 000
Limit for the deduction in the determination of taxable income of
livestock purchases – limited to
Purchases of livestock for the 2023 year of assessment plus purchases
brought forward from the 2022 year of assessment
2 710 000
Amount deductible for livestock purchases is limited to (see above)
1 238 900
1 238 900
continued
243
Chapter 15
Farmers
R
R
The amount of purchases that is not yet deductible in the determination
of his 2023 farming taxable income and possibly carried forward to the
2024 year of assessment is as follows (but see below):
R2 710 000 – R1 238 900 = R1 471 100
The market value of the closing stock of livestock is (R1 040 × 11 400)
11 856 000
Amount qualifying for additional deduction:
Disallowed (see above)
1 471 100
10 385 000
Add: Opening stock (standard value)
176 000
10 561 000
Less: Closing stock (at market value)
11 856 000
Additional deduction in the determination of his 2023 taxable income
(amount limited to nil since it cannot be negative)
–
The amount of purchases that is not yet deductible in the determination of his 2023
farming taxable income and that is carried forward for possible deduction in the
determination of his farming taxable income in the 2024 year of assessment is
R1 471 100 (see above).
Example 15.3
(30 minutes)
Letsema Polokwe is 40 years old. He is a livestock farmer in the Free State. He is a
vendor. During the 2023 year of assessment, he established a cherry tree orchard on
his farm.
Letsema Polokwe’s receipts and accruals for the 2023 year of assessment follow:
R
2 026 900
Sale of livestock
Rental earned (note 6)
96 000
Irrigation equipment sold (note 1)
9 800
Letsema Polokwe incurred the following expenses during the 2023 year of
assessment:
Lucerne and fodder purchased
Dipping tanks constructed
Planting of cherry trees – expenses incurred
Clearing of land to plant cherry trees – expenses incurred
Interest incurred on a loan – the borrowed funds were used for
farming purposes
Salaries of farm employees
Livestock purchased
Erection of a barn (a farm building)
Eradication of noxious plants
Non-capital expenses deductible in the determination of taxable income
24 500
55 000
32 500
15 000
12 600
696 800
900 000
25 000
12 000
290 500
Additional information
(1) Moveable irrigation equipment was purchased by Letsema Polokwe eight years
ago for R8 000 (excluding value-added tax). It was sold on 1 June 2022 for R9 800
(excluding value-added tax). Its base cost is Rnil.
(2) Letsema Polokwe’s capital development expenditure brought forward from the
2022 year of assessment was R15 000.
244
Chapter 15
Farmers
(3) Letsema Polokwe had purchased a tractor on 1 May 2021 for R130 000
(excluding value-added tax).
(4) Letsema Polokwe had 2 000 cattle on hand at 28 February 2022. On 28 February
2023, 1 400 cattle were on hand. The cattle on hand had a cost price of R6 800
each and a standard value of R40 each.
(5) Letsema Polokwe erected a cottage (a small house) for his farm manager. It
was completed on 31 May 2022. His manager occupied it as from 1 June 2022. It
cost R345 000 to erect. In the 2007 year of assessment he had erected six houses
for his employees.
(6) Letsema Polokwe lets a portion of his farm that is unsuitable for farming. The
lessee uses this land for a dog-kennel boarding business.
YOU ARE REQUIRED TO determine Letsema Polokwe’s normal tax liability for the 2023
year of assessment, assuming he did not exercise the option to be subject to normal
tax under para 19 of the First Schedule.
Solution 15.3
Sale of livestock
Add: Closing stock – 1 400 cattle × R40 each
R
2 082 900
80 000
2 002 900
Less: Opening stock – 2 000 cattle × R40 each
Less the following amounts:
Livestock purchases (limited to his gross farming income,
therefore deductible in the determination of his farming
taxable income in full)
Salaries of farm employees
Lucerne and fodder purchased
Interest incurred on a loan – the borrowed funds
were used for farming purposes
Eradication of noxious plants (unlimited deduction
in the determination of his farming taxable income)
Non-capital expenses deductible in the determination of his
farming taxable income
Capital allowance on tractor – 30% × R130 000 (note 1)
Capital allowance on residential unit – 5% × R345 000
(s 13sex(1))
Capital development expenditure brought forward
Less: Irrigation equipment – recoupment (note 2)
R
2 026 900
56 000
900 000
696 800
24 500
12 600
12 000
290 500
39 000
17 250
15 000
(8 000)
1 992 650
10 250
7 000
continued
245
Tax Workbook
– Dipping tanks constructed
– Erection of a barn (a farm building)
– Planting of cherry trees – expenditure incurred
– Clearing of land – expenditure incurred
Less: Deduction in the determination of his farming taxable
income limited to farming taxable income
Capital development expenditure carried forward
to the 2024 year of assessment
R
55 000
25 000
32 500
15 000
R
134 500
10 250
10 250
124 250
Taxable income from farming
Other receipts and accruals
– Rentals earned (not farming income)
Taxable capital gain (note 2)
–
96 000
–
Taxable income
96 000
Normal tax payable on R96 000 (at 18%)
Less: Rebate (primary only)
17 280
16 425
Normal tax liability
855
Notes
(1) Letsema Polokwe’s tractor is written off over three years under s 12B: 50% was
deductible in the determination of his taxable income in the 2022 year of
assessment, 30% is deductible in the determination of his taxable income in the
2023 year of assessment and 20% will be deductible in the determination of his
taxable income in the 2024 year of assessment.
(2) Letsema Polokwe’s moveable irrigation equipment was written off in full (under
para 12(1) of the First Schedule) eight years ago. Under para 12(3B) of the First
Schedule, its recoupment must first be set off against the balance of capital
development expenses brought forward from the 2022 year of assessment. Since
it was sold for more than its original cost, a capital gain also arises. It is
determined as follows:
R
Proceeds R9 800 – R8 000 (recoupment)
1 800
Less: Base cost (R8 000 – R8 000)
–
Net capital gain
Less: Annual exclusion (R40 000 but limited to)
Aggregate capital gain
1 800
(1 800)
–
(3) Since Letsema Polokwe owns at least five residential units within South Africa that
are used by him for the purposes of a trade carried on by him (farming), he
enjoys the s 13sex(1) capital allowance on the R345 000 he incurred on the cost
of his manager’s cottage (a residential unit). It is determined at a rate of 5%. His
other six residential units were erected in the 2007 year of assessment. Since they
were erected before 21 October 2008, the s 13sex capital allowance is
unavailable on their cost of erection.
246
Chapter 15
Example 15.4
Farmers
(30 minutes)
Tshidi Sebola is 50 years old, a widow, and a person with a “disability” (as defined in
s 6B(1)). She farms livestock and maize.
Tshidi Sebola’s receipts, accruals and expenditure for the 2023 year of assessment
were as follows:
R
852 000
Sales – livestock
Sales – maize
1 966 000
Subsidy received from the Government to build a dam for maize farming
20 000
Rentals for letting a portion of her farm land to a neighbour
120 000
Bonus from a co-operative society for maize supplied to it
40 000
Grazing fees earned
50 000
60 000
Closing stock – livestock – standard value
– market value
22 500 000
36 000
Opening stock – livestock – standard value
– market value
13 500 000
Livestock purchased
540 000
Salaries – farm employees
1 450 000
Eradication of noxious plants in her maize fields
40 000
Purchase of irrigation pipes – maize farming
30 000
Purchase of new tractor on 1 May 2022 – maize farming
180 000
Cost of the erection of eight houses for farm employees at R72 000 each
(note 1)
576 000
Cost to build a dam
216 000
Notes
(1) One of Tshidi Sebola’s houses is occupied by the manager of her maize farm
and his wife, who is also a farm employee. The other seven houses are occupied
by other farm employees.
(2) Tshidi Sebola slaughtered three cows for her domestic consumption and four
cows as rations for her employees. She donated two cows to the local church
for its fête. The standard value of a cow is R40, its cost price is R9 000 and its
market value is R15 000.
Tshidi Sebola inherited livestock from a late uncle during May 2022. The market
value of this inherited livestock was R600 000. Its standard value is R1 600.
(3) Tshidi Sebola’s capital development expenditure brought forward from the 2022
year of assessment is R86 000.
(4) Tshidi Sebola is not a member of a medical scheme. "Qualifying medical
expenses" paid by her in the 2023 year of assessment amounted to R12 500.
YOU ARE REQUIRED TO determine Tshidi Sebola’s taxable income for the 2023 year
of assessment.
247
Tax Workbook
Solution 15.4
Farming income
Sales: Livestock
Sales: Maize
Subsidy received for building a dam
Bonus from a co-operative society (for maize supplied)
Grazing fees
Livestock slaughtered – three cows for private use
at cost (R9 000 each × 3)
– four cows as rations
(R15 000 each × 4 – but see
the deduction below)
Livestock donated – two cows at market value
(R15 000 each × 2)
Closing stock livestock (standard value)
Less: Opening stock livestock (standard value)
Livestock inherited at market value
Less:
Livestock purchased (less than the limited amount)
Eradication of noxious plants (capital development
expenditure that is deducted in the determination
of her taxable income in full)
Purchase of new tractor – s 12B capital
allowance: 50% × R180 000
Rations – livestock slaughtered (see above)
Salaries
Capital allowance on low-cost residential units –
s 13sex(2): 10% × R576 000
Farming income
Less: Capital development expenditure – balance
brought forward – 1 March 2022
Irrigation pipes purchased
Dam
R
R
852 000
1 966 000
20 000
40 000
50 000
27 000
60 000
30 000
60 000
36 000
600 000
3 105 000
636 000
2 469 000
540 000
40 000
90 000
60 000
1 450 000
57 600
2 237 600
231 400
86 000
30 000
216 000
332 000
Less: Deduction in the determination of her farming
taxable income limited to farming income (see
above)
(Carried forward to the 2024 year of assessment:
R100 600 (R332 000 – R231 400))
Farming taxable income
Other income – rentals from her neighbour
Less: “Qualifying medical expense paid” (not
deductible in the determination of taxable
income being domestic or private expenses.
But the R12 500 paid qualifies for her additional
medical expenses tax credit rebate)
Taxable income
231 400
–
120 000
120 000
–
120 000
248
Chapter 15
Example 15.5
Farmers
(30 minutes)
Thuso Apane is 66 years old. He is a livestock and maize farmer. He inherited his farm
from his late grandfather 25 years ago. He is a vendor.
In October 2020, Thuso Apane purchased a plantation farm for R980 000 (R380 000
of the R980 000 was allocated to the cost of the land).
Thuso Apane’s gross income from the sale of timber for the 2021 and 2022 years of
assessment was as follows:
R
2021 year of assessment: sale of timber
150 000
2022 year of assessment: sale of timber
340 000
Thuso Apane’s receipts, accruals and expenditure relating to his maize and livestock
farming for the 2023 year of assessment follows:
Sales – maize to a co-operative society
1 066 000
Sale of a second-hand tractor purchased on 1 December 2021 for
R30 000. (It was sold on 1 March 2022 (he did not use it on 1 March 2022)
76 500
Local interest earned from a co-operative society on an investment (see
note 5 below)
35 625
Rentals earned for letting surplus farm land to a neighbour. The
neighbour used this land to graze his livestock
72 000
Salaries – livestock and maize employees
575 000
120 000
Purchase of a new planter – 1 July 2022 (excluding value-added tax)
Prevention of soil erosion
55 000
Eradication of noxious plants
20 000
Purchase of irrigation pipes
15 000
Cost of the erection of two houses for his farm employees at R90 000 each
(see note 2 below)
180 000
Cost to build a dam
40 000
Thuso Apane’s receipts, accruals and expenditure relating to his plantation farming
for the 2023 year of assessment follow:
R
Sales – timber
623 000
Subsidy received from Government for interest on a loan, the
borrowed funds were used to build roads in the plantations (see
below)
15 000
Interest incurred on the above loan
27 000
Salaries – plantation employees
260 000
Maintenance of the plantation
32 000
Establishment of new plantations
42 000
Stumping and preparing of ground for the replanting of trees
33 000
Construction of roads in the plantation
29 000
Notes
(1) Thuso Apane inherited farming equipment from his late father. This equipment
was purchased by his father on 1 April 2022 for R100 000. Its tax value to his father
on 31 July 2022 (the date of his father’s death) was R50 000. Its market value on
31 July 2022 was R60 000.
249
Tax Workbook
(2) Thuso Apane has now erected a total of six houses for his employees. His four
previous houses were erected before 21 October 2008.
(3) On 1 December 2020, Thuso Apane purchased a new tractor for R300 000
(excluding value-added tax) solely for use in his plantation. On 1 May 2022, he
purchased a second-hand truck for R90 000 (excluding value-added tax). It is
used solely for transporting employees for his maize and livestock farming
purposes. The Commissioner has agreed to a five-year write-off period for his
trucks.
(4) Thuso Apane’s capital development expenditure in relation to his maize and
livestock farming carried forward from the 2022 year of assessment is R25 000.
(5) Thuso Apane’s investment in the co-operative is not a “tax free investment” as
defined in s 12T(1).
YOU ARE REQUIRED TO determine Thuso Apane’s taxable income for the 2023 year
of assessment.
Solution 15.5
R
Maize and livestock farming
Sales – maize
R
1 066 000
Add: Recoupment for the tractor: R30 000 – R15 000 (note 1)
15 000
1 081 000
Less: Amounts deductible in the determination of his
farmingtaxable income
Purchase of new planter on 1 July 2022 – s 12B capital
allowance at 50% of R120 000
Truck (R90 000 / 5 × 10 / 12) (s 11(e) capital allowance)
Section 12B capital allowance on inherited equipment
at 50% of R60 000 (determined on its market value)
Salaries
Eradication of noxious plants (capital development
expenditure that is deductible in the determination
of his farming taxable income in full)
Prevention of soil erosion (capital development
expenditure that is deductible in the determination
of his farming taxable income in full)
Capital allowance on low-cost residential units –
10% × R180 000 (under s 13sex(2))
Less: Capital development expenditure brought forward
Irrigation pipes purchased
Dam
Farming taxable income
60 000
15 000
30 000
575 000
20 000
55 000
18 000
25 000
15 000
40 000
773 000
308 000
80 000
228 000
continued
250
Chapter 15
Farmers
R
Plantation farming
Sale of timber
Subsidy on interest incurred on loan used for farming purposes
Less: Tractor – s 12B capital allowance: R300 000 × 20%
Purchase of land (note 2)
Interest incurred on loan
Salaries
Establishment of new plantations
Maintenance
Stumping and preparing of ground for the replanting
of trees
R
623 000
15 000
60 000
110 000
27 000
260 000
42 000
32 000
33 000
Less: Capital development expenditure
Roads in the plantation
638 000
564 000
74 000
29 000
45 000
Plantation farming taxable income
Maize and livestock farming taxable income (see above)
Plantation farming taxable income (see above)
Farming taxable income
Other non-farming receipts and accruals
– Rentals
– Local interest
Less: Local interest exemption from normal tax:
s 10(1)(i) – over 65 years
228 000
45 000
273 000
35 625
34 500
72 000
1 125
Add: Taxable capital gain (note 1)
346 125
2 600
Taxable income
348 725
Notes
(1) Thuso Apane’s tractor qualifies for a capital allowance under s 12B. During the
2022 year of assessment, R15 000 (50% of R30 000) was written off. Its tax value on
1 March 2022 is then R15 000 (R30 000 – R15 000). He does not enjoy the s 12B
capital allowance for it for the 2023 year of assessment, since he did not use it
during that year of assessment. The difference between its selling price of
R76 500 and its cost price of R30 000 is a capital profit. A capital gain also arises
(see below). The normal tax recoupment is limited to the capital allowances
deducted in the determination of his taxable income.
R
Proceeds: R76 500 – R15 000 (recoupment)
61 500
Less: Base cost: R30 000 – R15 000
(amounts deductible in the determination of his taxable
income) (s 12B capital allowance)
15 000
Capital gain
Less: Annual exclusion
46 500
40 000
Aggregate capital gain
6 500
Taxable capital gain (R6 500 × 40%)
2 600
251
Tax Workbook
(2) Thuso Apane’s purchase price of his plantation is R600 000 (R980 000 – R380 000
(cost of land)). In the 2021 and 2022 years of assessment, R490 000
(R150 000 + R340 000) of its purchase price of R600 000 was deducted in the
determination of his plantation farming taxable income. The balance of
R110 000 (R600 000 – R490 000) is therefore deductible in the determination of his
plantation farming taxable income in the 2023 year of assessment.
Example 15.6
(20 minutes)
Franco Mtobi is 52 years old. He is a livestock farmer.
Three years ago, Franco Mtobi purchased a plantation farm for R5 800 000 (R1 800 000
was allocated to the cost of the land). He is now a plantation farmer, in addition to
being a livestock farmer.
Franco Mtobi provides the following determination of his taxable income for the
2023 year of assessment (it is correct):
R
R
Livestock farming
Sales – livestock
987 000
Add closing stock of livestock (at standard values)
18 000
1 005 000
124 000
Less: Opening stock of livestock (at standard values)
Less: Livestock purchased (less than the relevant limit,
therefore, deductible in the determination of his
taxable income in full)
Eradication of noxious plants (fully deductible
in the determination of his taxable income)
Expenses deductible in the determination
of his farming taxable income
881 000
250 000
25 000
300 000
575 000
Less: Capital development expenditure
306 000
95 000
Livestock farming taxable income
211 000
Plantation farming
Sale of timber
Less: Deductible expenses in the determination of his
plantation farming taxable income
Less: Capital development expenditure deductible
in the determination of his taxable income
Plantation farming taxable income
340 000
268 000
72 000
42 000
30 000
Livestock farming taxable income (see above)
Plantation farming taxable income (see above)
Farming taxable income
211 000
30 000
241 000
continued
252
Chapter 15
Farmers
R
Farming taxable income
Other non-farming receipts and accruals
– Rentals from letting of farm land
– Local interest
Less: Exempt from normal tax local interest (s 10(1)(i))
26 550
23 800
R
241 000
42 500
2 750
Add: Taxable capital gain (R3 125 at 40%)
286 250
1 250
Taxable income
287 500
Notes
(1) Franco Mtobi’s farming taxable income or deductible loss (livestock farming and
plantation farming) for the previous five years of assessment was as follows:
R
2018
25 000
2019
80 000
2020 – loss
(55 000)
2021
50 000
2022 – loss
(12 000)
(2) Franco Mtobi’s plantation farming taxable income or deductible loss for the
previous three years of assessment was as follows:
R
2020
–
2021
–
2022
21 000
YOU ARE REQUIRED TO determine
(1) Franco Mtobi’s normal tax liability for the 2023 year of assessment, assuming that
he has not yet exercised the option to be subjected to normal tax under para 19
of the First Schedule, and
(2) his normal tax liability for the 2023 year of assessment, assuming that he has exercised the option to be subjected to normal tax under para 19 of the First
Schedule.
Solution 15.6
Part 1
Since Franco Mtobi had not yet elected to be subjected to normal tax under
para 19 of the First Schedule, para 15 applies to his plantation farming taxable
income.
Section 5(10) – rating formula: Y = A / (B + D – C) × B
B
= R287 500
C = R30 000 – ((Rnil + Rnil + R21 000) ÷ 3) (being the average from his previous
three years of assessment from his plantation farming activities)
= R30 000 – R7 000
= R23 000
D = Rnil
B + D – C = R287 500 – R23 000 = R264 500
A is the normal tax payable on B + D – C = normal tax payable on R264 500
253
Tax Workbook
R
–
–
On R226 000
On R38 500 at 26%
40 680
10 010
50 690
Y = R50 690 ÷ R264 500 × R287 500 =
Less: Primary rebate
55 097,83
16 425,00
Normal tax liability
38 672,83
Part 2
If Franco Mtobi had elected to be subject to normal tax under para 19 of the First
Schedule, his plantation farming taxable income then forms part of his total farming
taxable income.
Section 5(10) rating formula:
Y = A / (B + D – C) × B
B = R287 500
C = R241 000 – R60 8000(average farming income, see below) = R180 200
Average farming income (being the average of his current and the four previous
years of assessment from all his farming activities):
(R80 000 – R55 000 + R50 000 – R12 000 + R241 000) / 5 = R60 800
D = Rnil
B + D – C = R287 500 – R180 200 = R107 300
A is the normal tax payable on B + D – C = normal tax payable on R107 300
On R107 300 at 18% = R19 314
R
Y = R19 314 ÷ R107 300 × R287 500 =
Less: Primary rebate
51 750
16 425
Normal tax liability
35 325
Example 15.7
(50 minutes)
On 28 February 2022, Koos Koekemoer resigned from his employment and became
a full-time dairy and wheat farmer. He had been a part-time farmer for 10 years.
A lump sum of R944 000 accrued to Koos Koekemoer on 31 March 2022 from the
pension fund that he had been a member of. During his membership of it, all his
contributions to it were deductible in the determination of his taxable income. This is
the first occasion that a lump-sum benefit from a recognised retirement fund has
accrued to him. He used the entire R944 000 lump sum to help finance his farming
activities.
254
Chapter 15
Farmers
The following information relates to Koos Koekemoer for the 2023 year of assessment:
R
Receipts and accruals
Sales of
• livestock
128 800
• milk
2 028 600
• wheat
581 800
• forest produce (note 5)
11 000
Subsidy received from the Government towards interest incurred on
funds borrowed by him from the Land and Agricultural Bank of South
Africa (note 4)
15 000
Bonus from local co-operative society based on his purchases from it
130 000
Rentals (note 6)
95 000
Expenses
Livestock purchased (note 2)
Salaries – farm employees
Veterinary expenses (note 9)
Interest incurred (note 4)
Rentals of tractor (note 1)
Prevention of soil erosion
Livestock feed purchased
Dipping tank constructed
Plantation maintenance costs
Planting of trees in the plantation
Donation to a “qualifying” university (receipt obtained from it)
"Qualify medical expenses" paid (not recovered from the medical
scheme)
Medical scheme contributions (note 7)
9 900 000
476 500
22 000
17 708
6 000
4 800
44 842
48 300
9 800
31 200
60 000
41 438
56 976
Notes
(1) On 1 May 2020, Koos Koekemoer had purchased a second-hand tractor for
R120 000 (excluding value-added tax). In October 2022, he ordered a new
tractor. While awaiting delivery of his new tractor, he hired his neighbour’s
tractor for the three-month period from 1 December 2022 to 28 February 2023
at a market-related rental of R2 000 a month.
(2) Details of Koos Koekemoer’s livestock are as follows:
Bulls
Cows
Calves
R
R
R
Standard value
50
40
4
Market value
15 000
12 000
5 000
Cost price
12 000
9 000
4 000
Opening stock (number)
50
505
100
Closing stock (number)
40
1 600
835
The above numbers were determined after the following events, amongst
others, were taken into account:
• 1 100 cows were purchased for R9 900 000 (R9 000 each). Of these 1 100 cows
purchased, 900 cows were purchased to replace cows he had sold three
255
Tax Workbook
years earlier because of a prevailing drought. He elected that the provisions of
para 13(1)(a) of the First Schedule be applied to him. The remaining
200 cows were purchased in the ordinary course of his farming operations,
and
• two cows were slaughtered for his family and himself.
(3) Koos Koekemoer’s opening and closing stock values of wheat (at cost) were as
follows:
Harvested
Standing crops
R
R
On 28 February 2022
15 630
21 000
On 28 February 2023
11 340
17 000
(4) On 1 October 2022, Koos Koekemoer borrowed R500 000 from the Land and
Agricultural Bank of South Africa at an interest rate of 8,5% a year to help
finance his purchase of the cows.
(5) On 1 May 2022, Koos Koekemoer inherited a plantation from a late uncle. It
had been purchased two years earlier by his late uncle for R5 640 000 (R900 000
was for the land). His late uncle had already enjoyed R4 500 000 of its cost as a
deduction in the determination of his plantation farming taxable income.
(6) Fourteen years ago, Koos Koekemoer erected a house for an employee at a
cost of R180 000. This resulted in him being granted an allowance of R6 000
under the provisions of para 12(1)( f ) of the First Schedule in the 2008 year of
assessment. The employee resigned on 1 April 2022. He then let this house as
from 1 May 2022 at a market-related rental of R9 500 a month. The employee
had occupied the house for 12 years and eight months.
(7) Koos Koekemoer is 45 years old, married and has two children, both of whom
are at primary school. His wife, their two children and himself are members of
his medical scheme.
(8) Koos Koekemoer’s balance of capital development expenditure brought
forward from the 2022 year of assessment is R2 000.
(9) Koos Koekemoer’s veterinary expenses include R2 000 for an operation on his
pet dog. The balance of the veterinary expenditure he incurred was for his
cows.
(10) Koos Koekemoer’s taxable income from farming for the past five years of
assessment (after the adjustment was made for the 900 cows purchased) was
as follows:
R
2022 – loss
(52 990)
2021
382 140
2020
176 200
2019
124 650
2018
93 200
(11) During the 2018 year of assessment, Koos Koekemoer exercised his option to be
subject to normal tax under para 19 of the First Schedule.
(12) Koos Koekemoer is a vendor. All amounts exclude value-added tax (when
applicable), unless stated otherwise.
YOU ARE REQUIRED TO determine Koos Koekemoer’s normal tax liability for the 2023
year of assessment.
256
Chapter 15
Farmers
Solution 15.7
R
Sales – livestock
– milk
– wheat
Subsidy from the Government towards interest incurred
Bonus from co-operative society
Recoupment – house for employee (note 2)
Domestic consumption of livestock (note 3)
Add: Closing stock
– livestock (note 9)
– wheat
R
2 902 200
69 340
11 340
Less: Amounts deductible in the determination of
his farming taxable income
Opening stock – livestock (note 9)
23 100
– wheat
15 630
Livestock purchased (note 4)
Salaries – farm labourers
Veterinary expenses (R22 000 – R2 000 (non-deductible in
the determination of his taxable income since it is a
domestic expense))
Interest incurred
Rentals of tractor (hiring of farm equipment)
Livestock feed purchased
Tractor purchased in the 2021 year of assessment
– s 12B capital allowance: 20% × R120 000 (note 1)
R
128 800
2 028 600
581 800
15 000
130 000
–
18 000
80 680
2 982 880
38 730
1 800 000
476 500
20 000
17 708
6 000
44 842
24 000
2 427 780
555 100
4 800
Less: Prevention of soil erosion
550 300
Less: Capital development expenditure
– Brought forward
– Dipping tanks constructed
2 000
48 300
Taxable income from livestock and produce farming
Plantation farming (note 6)
Sales of forest produce
Less: Purchase of plantation (note 6)
Maintenance costs
Planting of trees
500 000
–
9 800
31 200
Loss from plantation farming
Other non-farming receipts and accruals
– Rentals
– Lump sum from pension fund (note 5)
50 300
11 000
41 000
30 000
95 000
944 000
1 039 000
continued
257
Tax Workbook
R
– Livestock and produce profit
– Less plantation loss
R
500 000
30 000
Farming taxable income
Add: Other non-farming taxable income
470 000
1 039 000
1 509 000
Less: Retirement fund lump-sum withdrawal benefit
(subject to normal tax on its own tax table
(see below))
944 000
Less: Donation to qualifying university (note 7)
565 000
56 500
Less: "Qualifying medical expenses” paid (note 8)
508 500
–
Taxable income
508 500
Normal tax liability
The option Koos Koekemoer’s exercised in the 2020 year of assessment is binding for
all future years of assessment:
Rating formula in s 5(10):
Y=
A
×B
B+D–C
R
Average farming income for the current and previous four years
= (R470 000 – R52 990 + R382 140 + R176 200 + R124 650) / 5
B
C = (R470 000 – R220 000)
D = Rnil
B + D – C = R508 500 – R250 000
A = Schedule tax on R258 500
On R226 000
On R32 500 at 26%
=
=
=
220 000
508 500
250 000
=
258 500
40 680
8 450
49 130
Y
=
R49 130
R258 500 × R508 500
96 644,51
Less: Primary rebate
Medical scheme fees tax credit rebate
(12 × (R694 + ( R234 × 2)))
Additional medical expenses tax credit rebate
(note 8)
16 425
13 944
1 125
30 894,00
65 750,51
continued
258
Chapter 15
Farmers
Add the normal tax payable on his retirement fund
lump-sum withdrawal benefit taxable income of
R944 000
– On R660 000
– On R284 000 at 26%
R
R
114 300
73 840
188 140,00
253 890,51
Notes
(1) Tractor
Koos Koekemoer’s tractor qualifies for the s 12B capital allowance (the so-called
50 / 30 / 20 capital allowance). Therefore, in the third year of assessment of its
use the relevant capital allowance is 20% of its cost.
(2) Recoupment of housing allowance
R
Allowance granted in the 2008 year of assessment
6 000
Less: 1 / 10 × R6 000 × 13 years (but limited to 10 years)
6 000
Recoupment under para 12(6)
(3)
(4)
(5)
(6)
–
Since the house was built by Koos Koekemoer before 1 March 2009, he qualified
for a R6 000 deduction for it. The recoupment must then be based on this R6 000.
Paragraph 12(3B) of the First Schedule is inapplicable, since the house is not a
movable asset.
Domestic consumption
The cost price of livestock used for Koos Koekemoer’s domestic consumption is
included in gross income, therefore R18 000 (2 × R9 000 each) is included in his
farming gross income.
Deduction in the determination of taxable income for livestock purchased
Since Koos Koekemoer elected to have para 13(1)(a) of the First Schedule
apply, the purchase price for 900 cows was deductible in the determination of
his taxable income in the year of assessment when he sold them. Only the
purchase price of the remaining 200 cows (200 cows at R9 000 each =
R1 800 000) is deductible in the determination of his 2023 farming taxable
income.
Lump sum from pension fund
The R944 000 lump sum that was awarded to Koos Koekemoer on his resignation
from the pension fund that he was a member of is subject to normal tax as a
retirement fund lump-sum withdrawal benefit. Since all his contributions had been
deductible in the determination of his taxable income and because no portion
of it was re-invested in another qualifying retirement fund, the entire R944 000 is
subject to normal tax.
Plantation farming
Since Koos Koekemoer inherited the plantation from his late uncle, neither the
part of the cost price incurred by his late uncle nor that portion that had not yet
been deducted in the determination of his late uncle’s taxable income is
deductible in the determination of Koos Koekemoer’s farming taxable income.
This is since Koos Koekemoer did not incur an expense in purchasing the
plantation.
259
Tax Workbook
(7) Donation to the qualifying university of R60 000
R60 000 was donated by Koos Koekemoer. But the amount deductible in the
determination of his taxable income is limited to R56 500 (10% of R565 000).
(8) Additional medical expenses tax credit rebate
R
Medical scheme contributions
56 976
Less: Four times the medical scheme fees tax credit
(12 × (R694 + ( R234 × 2)))
55 776
Add: Actual medical expenses paid
1 200
41 438
Less: 7,5% × R508 500
42 638
38 138
4 500
× 25%
Additional medical expenses tax credit rebate (s 6B)
1 125
(9) Livestock
Koos Koekemoer’s opening livestock standard value
– 50 bulls at R50 each
– 505 cows at R40 each
– 100 calves at R4 each
2 500
20 200
400
23 100
Koos Koekemoer’s closing livestock standard value
– 40 bulls at R50 each
– 1 600 cows at R40 each
– 835 calves at R4 each
2 000
64 000
3 340
69 340
L Questions
Question 15.1
(45 minutes)
Matsilele Marima, 62 years of age, has been farming livestock for the past 30 years.
He also has vineyards.
The following information relates to Matsilele Marima’s receipts, accruals and
expenses for the 2023 year of assessment:
R
Grapes sold at his farm stall
80 000
Grapes sold to a wine co-operative society
972 000
Sale of wine that had been bottled on his farm
370 000
Livestock sold – 50 cows
600 000
– 60 sheep
90 000
Bonus from the wine co-operative society based on his grapes sold to it
15 800
Subsidy received from Government for the prevention of soil erosion
8 700
continued
260
Chapter 15
Farmers
Subsidy received from Government for interest on a loan – the
borrowed funds were used by him for the planting of new vineyards
Local interest earned from the wine co-operative society on his credit
account (note 1)
Grazing fees earned
Rentals earned from letting his adjoining farm to a neighbour for six
months (note 2)
Sale of his adjoining farm to a neighbour (note 2)
Purchases of livestock
Salaries paid to his farm employees
Clearing of land for the planting of new vineyards
Vines purchased to be planted in the new vineyards
Interest incurred on a loan – the borrowed funds were used
for the planting of new vineyards
Erection cost of a small house for his farm manager (note 4)
Purchase of tractor (on 1 May 2022)
Costs of producing and bottling wine
New dipping tanks
Fodder purchased
Prevention of soil erosion
Amount received from the sale of a tractor purchased for R130 000
on 1 March 2021. It was sold on 31 January 2023.
Veterinary expenses
Repairs to fences
R
9 500
25 800
35 000
48 000
500 000
549 200
605 000
75 000
189 200
12 500
180 000
140 000
150 000
68 800
15 000
22 000
50 000
5 600
25 000
Notes
(1) Matsilele Marima’s investment in the wine co-operative society is not a “tax free
investment” as defined in s 12T.
(2) On 30 September 2022, Matsilele Marima sold his adjoining farm (solely land and
a dam), that he had let to his neighbour in the past, for R500 000. There are no
buildings on this farm. Of this amount, R100 000 was paid for the dam. The base
cost of the dam was R62 700, and the base cost of the land was R217 300.
(3) Matsilele Marima’s livestock and produce
Market
Standard
Cost
price
value
value
R
R
R
Livestock on hand:
28 February 2022
580 000
1 780 000
280 000
28 February 2023
660 000
2 450 000
392 400
Grapes:
28 February 2022
– Harvested
170 000
310 000
– Unharvested
–
–
28 February 2023
– Harvested
180 000
360 000
– Unharvested
220 000
444 500
Matsilele Marima donated two cows and one sheep to the local school for a
fund-raising event.
261
Tax Workbook
Matsilele Marima slaughtered three cows and five sheep as rations for his farm
employees.
Matsilele Marima slaughtered one cow and six sheep for his domestic
consumption:
• Each cow had a cost price of R12 000, a market value of R15 000 and a
standard value of R40.
• Each sheep had a cost price of R1 000, a market value of R1 500 and a
standard value of R6.
Matsilele Marima inherited 220 sheep during the 2023 year of assessment. Each
sheep had a market value of R1 500 and a standard value of R6. The value of
these sheep is included in the value of livestock on hand at 28 February 2023.
(4) Matsilele Marima’s farm manager moved into the small house on 1 January 2023.
He has now erected six houses for his employees. The other five houses were
erected before 21 October 2008.
(5) Matsilele Marima’s balance of capital development expenditure brought
forward from the 2022 year of assessment is R24 600.
(6) Matsilele Marima elected to be subject to normal tax under para 19 of the First
Schedule. During the previous five years of assessment, his taxable income (or
deductible loss in the determination of his taxable income) from farming was as
follows:
Year of assessment
Taxable farming income or (loss)
R
2022
(20 000)
2021
45 000
2020
(40 500)
2019
(34 500)
2018
7 000
YOU ARE REQUIRED TO determine Matsilele Marima’s normal tax liability for the 2023
year of assessment.
Question 15.2
(40 minutes)
Mthunzi Mkulu Sondeza is a 50-year-old farmer with two farms,
• a plantation farm that he purchased on 1 September 2019 for R2 500 000
(R1 500 000 was allocated to the cost of the land), and
• a farm that he inherited on which he carries on mixed farming activities.
The following information relates to Mthunzi Mkulu Sondeza for the 2023 year of
assessment:
Plantation farming
R
Sale of timber
490 000
Maintenance of the plantation
17 000
Fencing the new plantation area
15 000
Construction of roads in the plantation
49 000
On 1 September 2021 he purchased a second-hand tractor for R80 000 to
be used solely for his plantation farming.
continued
262
Chapter 15
Farmers
Mixed farming
R
Sale of livestock (as detailed below)
Sale of produce
On 1 October 2022 an irrigation pump that originally cost R30 000 on
1 October 2017 and that had now become unsuitable was sold for
R40 000. (Prior to it being sold, it was detached from the irrigation
system. It had therefore become a moveable asset.)
Salaries
Expenses deductible in the determination of his farming taxable income
Purchases of livestock (as detailed below)
Purchase of a new irrigation pump
Prevention of soil erosion expenditure
Erection of five cottages (small houses) to be occupied by five of his
employees and their families. (All five employees work in his mixedfarming activities.)
307 600
682 300
390 000
23 000
320 000
80 000
12 086
250 000
Livestock
Opening stock
Purchases
4 bulls
27 cows
30 heifers
10 calves
Sales
1 bull
20 cows
2 bulls (out of his 2021 stock)
2 cows (out of his 2021 stock)
8 calves
25 heifers (out of his 2021 stock)
20 calves
Births
Deaths
3 cows (out of the 20 cows he purchased)
3 calves (that were born during the year)
Other information
• Four heifers were slaughtered by Mthunzi Mkulu Sondeza for his domestic purposes
(cost R7 500 each).
• One heifer was donated by Mthunzi Mkulu Sondeza to a local church.
• Two of his calves (out of his 2022 livestock) have now matured into heifers.
Values
Bulls
Cows
Heifers
Calves
Produce
28 February 2022
28 February 2023
263
Standard
R
50
40
14
4
Market
R
20 000
15 000
9 000
3 000
Harvested
R
20 000
26 000
Growing crops
R
37 000
33 000
Chapter 15
Farmers
During the previous five years of assessment, Mthunzi Mkulu Sondeza had the
following results from his farming operations:
Plantation farming
2020:
2021:
2022:
Sale of timber
Sale of timber
Sale of timber
Establishment of further plantation areas
Stumping and preparing the ground for the replanting of trees
Maintenance of the plantation
Purchase of a tractor solely for his plantation
Mixed farming
2018:
Taxable income
2019:
Taxable income
2020:
Taxable income
2021:
Taxable income
2022:
Trade loss
R
210 000
380 000
750 000
15 000
22 000
12 000
80 000
53 000
74 000
79 000
37 000
(41 000)
YOU ARE REQUIRED TO determine Mthunzi Mkulu Sondeza’s normal tax liability for
the 2023 year of assessment on the assumption that he has
(1) not exercised the option of being subject to normal tax under para 19 of the First
Schedule, and
(2) exercised the option of being subject to normal tax under para 19.
Question 15.3
(50 minutes)
Mthunzi Jele is 60 years old. He farms in Mpumalanga. He owns the following three
farms:
• Intaba Encane: He lives on this farm and farms livestock on it.
• Intaba Ephakathi: He farms sugar cane on it.
• Intaba Enkulu: He has an established pine plantation on it.
The following information relates to Mthunzi Jele’s farming operations for the 2023
year of assessment:
Intaba Encane
Sale of livestock (see below)
Purchase of livestock
Fodder purchased
Expenditure deductible in the determination of his farming taxable income
Salaries
Market value of livestock used as rations
Cost of livestock used for domestic purposes (market value is R15 000)
Market value of natural increases in livestock
New fences erected
R
743 000
845 000
65 838
1 900 000
310 000
125 000
12 500
58 000
8 000
continued
264
Chapter 15
Farmers
R
Purchase on 1 September 2022 of a second-hand truck used solely for the
transport of his livestock
195 000
Sale of old truck on 30 September 2022 (purchased on 1 October 1998
for R45 000). The full amount was deducted as capital development
expenditure in the year it was purchased, under legislation applicable at
that stage. Its market value on 1 October 2001 was R35 000. It was sold for
132 500
Balance of capital development expenditure brought forward from the
2022 year of assessment (relates to livestock farming only, all incurred
after 1 October 2001)
1 517 000
Local interest earned from an investment in the Land and Agricultural Bank
of South Africa (see below)
31 000
Further information
Mthunzi Jele earned R200 000 from the forced sale of livestock as a result of a
prevailing drought. This amount is not included in the R743 000 sale of livestock
amount (see above). He invested the R200 000 in the Land and Agricultural Bank of
South Africa on 1 June 2022 (the day he received it). He withdrew R60 000 on
31 August 2022 to pay his first provisional tax payment for the 2023 year of
assessment. The investment in the Land and Agricultural Bank of South Africa is not a
“tax free investment” as defined in s 12T.
Livestock
The following information relates to Mthunzi Jele’s livestock:
Sold on
Closing
28 February
stock
2023
Bulls
4
56
–
Cows
154
187
–
Tollies and heifers (two to three years)
23
36
–
Tollies and heifers (one to two years)
32
18
–
Calves
41
68
–
See under “Personal Information” below as to why Mthunzi Jele had no closing stock
of livestock on 28 February 2023.
The standard values applicable to livestock are as follows:
R
Bulls
50
Cows
40
Tollies and heifers – two to three years
30
Tollies and heifers – one to three years
14
Calves
4
Opening
stock
Description
265
Tax Workbook
Intaba Ephakathi
Sale of sugar cane (see below)
Fertiliser
Salaries
Irrigation pipes installed
Transport expenses
Cost to erect five cottages (small houses) for five employees, who work
solely on his sugar cane farm. (Each cottage was erected at a cost of
R38 000.)
Interest incurred on a mortgage bond registered over his sugar cane
farm. The borrowed funds from this loan were used to finance his sugar
farming activities.
R
375 000
38 000
154 000
23 000
67 000
190 000
31 000
Further information
Mthunzi Jele’s sales of sugar cane of R375 000 include R124 000 of sugar cane that
was damaged by fire. This sugar cane would not have been sold in the 2024 year of
assessment had it not been burnt. The net profit derived from this “forced” sale of
sugar cane is R118 000.
Intaba Enkulu
Sale of timber and bark (see below)
Further establishment costs of his existing plantation
Fertiliser
Salaries
Prevention of soil erosion
Other expenses deductible in the determination of his farming taxable
income
Insurance
Purchase of additional plantation farm (see below)
R
3 050 000
430 000
243 000
420 000
60 000
180 000
29 000
4 800 000
Further information
The purchase and sale agreement between the seller and Mthunzi Jele for his
purchase of his additional plantation farm stipulates a purchase price of
• R2 700 000 for the plantation, and
• R2 100 000 for the land.
Mthunzi Jele’s gross income derived from this additional plantation is R150 000 and is
included in the sale of the timber and bark amount of R3 050 000 (see above). Its
net income after the deduction of the running expenses is R15 000. (These running
expenses are included in the details of his plantation farming operations.)
Mthunzi Jele commenced plantation farming in the 2023 year of assessment.
Personal information
Mthunzi Jele’s taxable income for the 2022 year of assessment was Rnil.
On 20 February 2023, Mthunzi Jele was involved in a car accident and, as a result,
he sold Intaba Encane to a neighbour and then moved into town. The farm was
266
Chapter 15
Farmers
sold by him on 28 February 2023. Details of the purchase and sale agreement
included the following:
R
Description
Residential home (base cost of R975 000)
Truck (that was purchased on 1 September 2022 (see above))
Farming equipment (below its cost price)
Farm (valuation date value of R875 000)
Livestock
3 087 000
97 500
50 000
3 150 000
3 615 500
YOU ARE REQUIRED TO determine Mthunzi Jele’s normal tax liability for the 2023 year
of assessment. He has not elected to be subjected to normal tax under para 19(5).
267
Chapter 16
Retirement benefits
L Introduction
This chapter deals with the various financial benefits which an employee may receive
on retirement or resignation, or which may accrue to his estate in consequence of his
death while in employment, and the tax concessions relating to these benefits.
The sections of the Income Tax Act 58 of 1962 as amended (the Act) that will be
illustrated and tested include:
• retirement fund lump-sum benefits from pension, pension preservation, provident,
provident preservation and retirement annuity funds –para (e) of the definition of
“gross income”, s 9(1)(i) and the Second Schedule;
• Severance benefits from employer – the Second Schedule;
• purchased annuities – s 10A;
• the taxation of a retirement fund lump-sum benefit, or retirement fund lump-sum
withdrawal benefit;
• the pensions and annuities received or accrued – para (a) of “gross income”.
Framework:
The following structure can be used to calculate the taxable income of a person
who received a lump sum amount:
Gross income
• Taxable portion of lump-sum benefits (from retirement funds and from employer)
• Taxable portion of retirement fund lump-sum withdrawal benefit
• Pension and annuities received/accrued
• Purchased annuities
Less: Exempt income
Less: Allowable deductions (excluding s 11F deduction)
Gives: Taxable income – sub-total
Add: Taxable capital gain
Less: Contributions to retirement benefits (s 11F deduction)
Gives: Taxable income
Separate calculation for calculating the:
Tax payable on taxable lump-sum benefits
Tax payable on taxable retirement fund lump-sum withdrawal benefit
Tax payable on other taxable income (rebates may only be deducted in this
calculation)
The tax liability of the taxpayer can be calculated in different ways. For a taxpayer
who retires from a retirement fund or who dies whilst being a member of a
retirement fund, the tax on the retirement fund lump-sum benefit (including
269
Tax Workbook
severance benefits received from employer) is calculated separately from other
income, using the retirement fund lump-sum benefit table and severance benefit
table. Lump sum benefits from funds due to retrenchments are dealt with in a similar
way as retirement or death. The tax liability for taxpayers who resign from a
retirement fund is calculated separately from other income, using the retirement
fund lump-sum withdrawal benefit table.
From 1 March 2016 the contributions to all retirement funds are treated the same,
and subject to limitations provided for in s 11F.
L Contents
The table gives an indication of the time that you will need to complete the
example or question. The relevant sections or paragraphs that you need to know
before attempting the example or question are provided, and the level of the
example or question gives an indication of the difficulty of the question.
)
Example/Question
and time allocation
Topic and/or relevant sections
Level
Example 16.1
(12 minutes)
• Calculating tax payable when retiring
from a fund
Basic
Example 16.2
(15 minutes)
• Calculating tax payable on a
retirement fund benefit with a
previous fund benefit
Basic
Example 16.3
(15 minutes)
• Calculating tax payable when
withdrawing from a fund with a
previous fund benefit
Basic
Example 16.4
(14 minutes)
• Paragraph (d) – lump sum employer
(gross income definition)
• Section 10A – purchased annuity
• Second Schedule – resignation lump
sum provident fund
Basic
Example 16.5
(15 minutes)
• Second Schedule – lump sum state
pension fund
Intermediary
Example 16.6
(30 minutes)
• Combined question
Advanced
Question 16.1
(30 minutes)
• Lump sum payment in case of
retirement and death
Advanced
Question 16.2
(45 minutes)
• Combined question
Advanced
Question 16.3
(45 minutes)
• Combined question
Advanced
270
Chapter 16
Retirement benefits
L Examples
Example 16.1
(12 minutes)
Bongani Ndamase retired on 31 December 2022 at the age of 65. He received the
following information regarding the lump sum that his pension fund will pay him on
date of retirement:
• A lump sum amount of R1 845 000 (before tax) will be payable to him.
• During the 30 years that he was a member of the fund, R45 000 of his own
contributions were not allowed as deductions in terms of s 11F of the Act.
• Bongani’s taxable income excluding the lump sum amount for the current year of
assessment is R750 000. He did not previously receive any lump sum payments.
YOU ARE REQUIRED TO calculate the tax that Bongani will pay on the lump sum
received from the pension fund.
Solution 16.1
Taxable portion of the pension fund lump sum:
The taxable portion of the pension fund lump sum will be calculated in terms of para
2(1)(a), which allows for deductions in terms of para 5 of the Second Schedule to
the Act.
R
Amount received from the fund
1 845 000
Less: deductions in terms of para 5
(45 000)
– contributions not previously allowed
Taxable retirement fund lump-sum benefit
1 800 000
Bongani’s tax liability on the lump-sum benefits must be calculated on the tax scale
for retirement fund lump-sum benefits.
As the taxable amount exceeds R1 050 000, the tax must be calculated on the
following scale:
= R130 500 plus 36% of the taxable amount exceeding R1 050 000
= R130 500 + (36% × (R1 800 000 – R1 050 000))
= R130 500 + R270 000
= R400 500
Bongani will therefore have to pay R400 500 tax on the lump sum of R1 845 000 that
he receives from the fund. He will therefore receive R1 444 500 in cash.
Example 16.2
(15 minutes)
Sibosiso Zuma retired on 31 December 2022 the age of 66. On that day, his employer
paid him a lump sum amount of R50 000. On 31 December 2022, he also received a
lump sum amount of R920 000 from his provident fund. During the period that he was
a member of the provident fund, contributions of R304 000 were not deductible for
income tax purposes. On 31 December 2016, when he received a lump sum amount
of R600 000 from a retirement annuity fund that he was a member of, he reached
retirement age.
YOU ARE REQUIRED TO calculate the tax payable on the lump sums received on
31 December 2022.
271
Tax Workbook
Solution 16.2
The taxable portion of the provident fund lump sum:
As Sibosiso is retired, para 2(1)(a)(i), which allows for deductions in terms of para 5 of
the Second Schedule is applicable.
R
Amount received from the fund
920 000
Less: Deductions in terms of para 5
– The taxpayer’s contributions to the fund, not allowed as a
deduction (in the case of a provident fund, contributions have
only become deductible from 1 March 2016 under s 11F and
subject to the same limitations as for other fund contributions)
(304 000)
Taxable retirement fund lump-sum benefit
R616 000
Firstly the tax liability must be calculated on all the retirement fund lump-sum
benefits, retirement fund lump-sum withdrawal benefits received and severance
benefits in the current and previous years of assessment.
Retirement fund lump-sum benefit received this year
(provident fund)
R616 000
Severance benefit received this year (employer)
R50 000
Add: Retirement fund lump-sum benefit previously received
R600 000
Total retirement fund lump-sum benefits
R1 266 000
As the total retirement fund lump-sum benefits and severance benefits received
exceeds R1 050 000, the tax must be calculated on the following scale:
= R130 500 plus 36% of the taxable amount exceeding R1 050 000
= R130 500 + 36% × (R1 266 000 – R1 050 000)
= R130 500 + R77 760
= R208 260
Next the tax liability must be calculated on all the retirement fund lump-sum benefits
and retirement fund lump-sum withdrawal benefits received previously.
Retirement fund lump-sum benefit previously received
R600 000
Total retirement fund lump-sum benefits
R600 000
As the total retirement fund lump-sum benefits previously received exceeds R500 000,
the tax must be calculated on the following scale:
= R0 plus 18% of the taxable amount exceeding R500 000
= R0 + 18% × (R600 000 – R500 000)
= R0 + R18 000
= R18 000
The tax payable on the current lump sums (provident fund and severance benefit) is
the difference between tax calculated on the cumulative balance of lump sums
(including these amounts) and the tax calculated on the cumulative balance of
lump sums (excluding these amounts).
The tax payable = R208 260 – R18 000 = R190 260.
272
Chapter 16
Retirement benefits
Example 16.3
(15 minutes)
Neren Ramavu, together with all the other employees, was transferred by his
employer when a manufacturing plant in Polokwane was closed down, due to
adverse economic circumstances. Employees could either accept a position in
Cape Town or had to resign. As Neren’s family is in Polokwane he elected to resign.
Neren attained the age of 40 on 30 November 2022.
On 31 December 2022 a lump sum amount of R652 000 accrued to him from the
provident fund that he belonged to while employed. R50 000 of this amount was
transferred for his benefit to an approved provident preservation fund. During the
period that he was a member of the provident fund, contributions of R124 000 were
not previously deductible.
On 31 March 2013 he also received a taxable withdrawal lump sum amount of
R400 000 from a retirement annuity fund.
YOU ARE REQUIRED TO calculate the tax payable on the lump sum accrued from
the provident fund.
Solution 16.3
Taxable portion of the provident fund lump sum:
As Neren had resigned from the fund due to loss of employment, the lump sum he
received will be taxed in terms of para 2(1)(a)(ii), which allows for deductions in
terms of para 6 of the Second Schedule. This means that the amount is treated
similar to retirement lump-sum benefits received at retirement as opposed to
retirement fund lump-sum withdrawal benefits.
R
Amount accrued from the fund
652 000
Less: Deductions in terms of para 6
– The taxpayer’s contributions to the fund, not allowed as a
deduction (in the case of a provident fund, contributions have
only become deductible from 1 March 2016 under s 11F)
(124 000)
– The amount transferred to an approved fund, including
a provident preservation
(50 000)
Taxable retirement fund lump-sum withdrawal benefit
478 000
Firstly the tax liability must be calculated on all the retirement fund lump-sum
benefits and retirement fund lump-sum withdrawal benefits received in the current
and previous years of assessment.
Retirement fund lump-sum withdrawal benefit received this year
R478 000
Add: Retirement fund lump-sum withdrawal benefit previously received
R400 000
Total retirement fund lump-sum benefits
R878 000
As the total retirement fund lump-sum benefits received exceeds R660 000, the tax
must be calculated on the following scale:
= R114 300 plus 27% of the taxable amount exceeding R660 000
= R114 300 + 27% × (R878 000 – R660 000)
= R114 300 + R58 860
= R173 160
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Tax Workbook
Next the tax liability must be calculated on all the retirement fund lump-sum benefits
and retirement fund lump-sum withdrawal benefits received previously.
Retirement fund lump-sum withdrawal benefit previously received
R400 000
Total retirement fund lump-sum benefits
R400 000
As the total retirement fund lump-sum benefits received exceeds R25 000, the tax
must be calculated on the following scale:
= R0 plus 18% of the taxable amount exceeding R25 000
= R0 + 18% × (R400 000 – R25 000)
= R0 + R67 500
= R67 500
The tax payable on the current provident fund lump-sum benefit is the difference
between the tax calculated on the cumulative balance of lump sums (including the
relevant amounts) and the tax calculated on the cumulative balance of lump sums
(excluding the relevant amounts).
The tax payable is = R173 160 – R67 500 = R105 660.
Example 16.4
(14 minutes)
Lungisa Majeke resigned on 31 August 2022 at the age of 50 years, in order to go
and farm on a full-time basis. He had the following receipts and accruals during the
2023 year of assessment:
Lump sum amount from his employer consisting of:
R
Gratuity
20 000
Accumulated leave pay (paid out in cash)
40 000
Lump sum amount from provident fund:
R552 000 accrued to Lungisa from the provident fund. The retirement date in terms
of the fund is 55 years of age. During the period that he was a member of the
provident fund, contributions of R200 000 were not deductible for income tax.
He did not receive any lump sum amounts during previous years of assessment.
His monthly salary for the six months to the date he resigned amounted to R54 000.
Using R50 000 of the amounts he received, Lungisa purchased an annuity of R6 000
(payable at a rate of R500 a month) for life, payable from 1 September 2022. His life
expectancy at that stage was 21,47 years.
YOU ARE REQUIRED TO
(1) Calculate the taxable portion of the lump sum amounts received from his
employer.
(2) Calculate the taxable portion of the purchased annuity.
(3) Calculate the taxable portion of the lump sum received from the provident fund.
274
Chapter 16
Retirement benefits
Solution 16.4
(1) Taxable portion of the lump sums from his employer.
R
Gross income (para (d)):
Gratuity
Accumulated leave pay (paid out in cash)
20 000
40 000
Less: Section 10 exemptions
60 000
(nil)
Taxable portion
60 000
The lump sums that Lungisa received from his employer do not qualify as
severance benefits as Lungisa is not 55 years of age and has not retired due to ill
health, superannuation or an infirmity, nor did his employer cease to carry on
trading or have a personnel retrenchment.
(2) Calculate the taxable portion of the purchased annuity.
The capital element of a purchased annuity is exempt from income tax in terms of
s 10A. The capital element of a purchased annuity in terms of s 10A is determined
as follows:
Y =
Y =
A =
B =
C =
=
Y
A
× C, where
B
The capital element to be determined
The total cash consideration given – that is, R50 000
The total expected returns of all the annuities provided for in the annuity
contract, which is R500 a month for the rest of his life. This expected return is
the annuity multiplied by his life expectancy, based on his age on his
preceding birthday, that is, 50 years.
R500 × 12 × 21,47 = R128 820
The annuity amount, which is R500 per month.
R50 000
× R500
=
R194
R128 820
The taxable portion of each payment will be
R500 – R194
=
R306
For the period 1 September 2022 to 28 February 2023
Lungisa will receive six monthly payments which will be included in his taxable
income as follows:
R306 × 6 months
=
275
R1 836
Tax Workbook
(3) Taxable portion of the lump sums received from the provident fund.
As Lungisa resigned, the amount received from the fund is seen as a withdrawal
benefit and will be taxed in terms of para 2(1)(b), which allows for deductions in
terms of para 6 of the Second Schedule to the Act.
R
Amount received from the fund
552 000
Less: Deductions in terms of para 6
The taxpayer’s contributions to the fund, not allowed as a
deduction (in the case of a provident fund, contributions
have only become deductible from 1 March 2016 under
s 11F and subject to the same limitations as for the
(200 000)
other fund contributions).
Taxable portion of retirement fund lump-sum benefit
352 000
Example 16.5
(15 minutes)
Thomson Gumbi retired on 31 January 2023, when he was 66 years old. He provides
you with the following information regarding his retirement from the State pension
fund:
• Member of fund:
30 years and 2 months
• Average salary during membership:
R159 250 per annum
• Average salary during last five years: R300 000 per annum
• Contribution rate:
7,5% of salary
The fund informed him that he would receive a lump sum of R2 596 500. Thomson
did not previously receive any lump sum amounts.
YOU ARE REQUIRED TO calculate the tax payable on the lump sum received.
Solution 16.5
In terms of para 2A the amount received from the State pension fund lump sum will
be calculated by applying the following formula:
B
A=
×D
C
B = 24 (completed years from 1 March 1998)
D = R2 596 500 (lump sum received)
C = 30 (total completed service years)
A = (24 / 30 × R2 596 500)
= R2 077 200
Taxable portion of the pension fund lump sum:
The taxable portion of the pension fund lump sum will be calculated in terms of
para 2(1)(a), which allows for deductions in terms of para 5 of the Second Schedule
to the Act.
R
Amount received/accrued from the fund
2 077 200
Less: Deductions in terms of para 5
(nil)
Taxable retirement fund lump-sum benefit
276
2 077 200
Chapter 16
Retirement benefits
The tax liability on the lump sum amount must be calculated on the tax scale for
retirement fund lump-sum benefits.
As the taxable amount exceeds R1 050 000, the tax must be calculated on the
following scale:
= R130 500 plus 36% of the taxable amount exceeding R1 050 000
= R130 500 + (36% × (R2 077 200 – R1 050 000))
= R130 500 + R369 792
= R500 292
Example 16.6
(30 minutes)
Jack and Jill Rhyme are both 65 years of age and are married in community of
property. No property or income is excluded from the joint estate, unless specifically
stated otherwise.
Jill retired in April 2017 and is currently earning a monthly pension of R10 000 from the
pension fund that she had been a member of. During her 2023 year of assessment
she also earned interest of R96 200 on a bank savings account, dividends of R26 000
from a public company in the Republic and rental of R32 000 on a farm that she
inherited from her late father.
Jack retired on 30 October 2022 (on his 65th birthday), after having been employed
for 40 years and two months by the same employer. Jack did not receive any lump
sum amounts during previous years of assessment.
The following information relates to Jack for the 2023 year of assessment:
Income and accruals:
R
Pension
112 000
Salary
280 000
Pension fund contributions (by company for Jack’s benefit)
14 000
Gratuity from employer
65 000
Farewell gift from colleagues
14 500
Taxable portion of lump sum from pension fund (note)
1 966 000
Taxable portion of lump sum from retirement annuity fund (RAF) (note)
550 000
Interest on a savings account at a local bank – Jack inherited the
investment from his uncle in terms of a will, which specified that the
income should not form part of their joint estate
4 125
Distribution from a close corporation (CC) – Jack is a member of the CC
30 000
Expenditure:
Pension fund contributions (own)
28 000
RAF contributions – R1 000 a month (until 31 October) and a lump sum
contribution of R60 000 during October 2022
68 000
Qualifying medical expenses paid by Jack (Jack is not member of a
medical scheme)
44 000
Note
During Jack’s previous years of assessment, all his contributions to the pension and
RAF had been allowed as deductions.
YOU ARE REQUIRED TO calculate the normal tax liability of Jack for the 2023 year of
assessment.
277
Tax Workbook
Solution 16.6
Jack
Normal tax on taxable income (without lump sum benefits)
R
112 000
280 000
14 000
Pension
Salary
Pension fund contributions by employer – fringe benefit
Farewell gift (from his colleagues and not from employer)
Interest excluded from joint estate
Interest – Jill 50% × R96 200
Less: Interest exemption (s 10(1)(i)) – over 65
4 125
48 100
52 225
(34 500)
Dividends and distribution from CC (50% × (R26 000 +
R30 000)) – exempt in terms of s 10(1)(k)
Rental – Jill 50% × R32 000
406 000
–
17 725
–
16 000
Income
Less: Pension fund and RAF contributions – R110 000
(R14 000 (deemed contribution by employee +
R28 000 + R68 000)
Limited to the lesser of R350 000 or 27,5% of the
higher of his “remuneration” (without lump sums) of
R406 000 or “taxable income” (without lump sums)
of R439 725, being 27,5% of R439 725 = R120 924 or
the taxable income before the 11F deduction and
before any taxable capital gain being R 439 725
439 725
(110 000)
Taxable income (without lump sums)
329 725
Taxed in terms of normal tax table
Tax on R226 000
40 680
Tax on R103 725 × 26%
26 969
67 649
Less: Normal tax rebates – primary
– over 65
16 425
9 000
Additional medical expenses tax credit:
s 6B (33,3% × R44 000)
14 652
(40 077)
Normal tax liability on normal taxable income
Tax liability on taxable lump-sum benefits (note)
(R130 500 + ((R2 581 000 – R1 050 000) × 36%))
681 660
Total normal tax liability
709 232
278
27 572
Chapter 16
Retirement benefits
Note: Taxable lump sum benefits
Gratuity (severance benefit)
Taxable portion of lump sum from pension fund (given)
Taxable portion of lump sum from RAF (given)
65 000
1 966 000
550 000
2 581 000
L Questions
Question 16.1
(30 minutes)
On 31 March 2022, Abraham Fuzile (57 years of age) resigned from Alfa Ltd. The next
day, he started working at Beta Ltd. On 31 December 2022, Abraham died in a
mountaineering accident.
Abraham's income for the 2023 year of assessment was as follows:
From Alfa Ltd
R
Salary
40 000
Lump sum from pension fund (note 1)
1 850 000
From Beta Ltd
Salary
Pension fund contributions (note 2)
Gratuity from employer due to death
Lump sum from pension fund (note 2)
650 000
65 000
55 000
2 075 000
Notes
(1) All contributions made by Abraham in the past were allowed as an income tax
deduction. He did not previously receive any lump sum amounts. Abraham
transferred the full amount received from the pension fund to his new employer’s
pension fund.
(2) Beta Ltd was the sole contributor to the pension fund and Abraham did not pay
for any contributions. Abraham's accident happened five years before he was
due to retire. He was a member of a pension fund for a total of 32 years. After his
death the lump sum award was paid to Abraham’s estate. The number of years
that he would have been employed had he reached retirement age was taken
into account in arriving at the lump sum award.
YOU ARE REQUIRED TO calculate Abraham’s normal tax liability for the 2023 year of
assessment.
Question 16.2
(45 minutes)
Alexander Smit is a South African resident who retired on 31 January 2023 at the age
of 61. Alexander worked for Green House Ltd for 40 years of which 24 years were in
South Africa and 16 years were in the Scottish Highlands. He was a member of the
company’s pension fund from the day that he started working. Whilst he was
working in Scotland, he contributed R300 000 to the fund which was not deductible
for South African income tax purposes but will be accounted for under para 5(1)(a)
of the Second Schedule when calculating the taxable lump sum.
279
Tax Workbook
During the 2023 year of assessment, Alexander earned the following:
• A monthly salary of R36 000 (up to the date of his retirement).
• In December 2022, he received an annual bonus, equivalent to twice his monthly
salary.
• On 31 January 2023, Alexander received a golden handshake gratuity of R245 000
(assume that no portion is regarded as consideration for past employment
outside South Africa).
• The company’s pension fund paid him a lump sum payment of R1 870 000 on
31 January 2023. Alexander did not previously receive any lump sum amounts.
• His monthly pension of R22 000 was paid to him from the end of February 2023.
Green House Ltd has always matched Alexander’s pension fund contributions of 5%
of his monthly salary.
The following returns from investments accrued to Alexander for the 2023 year of
assessment:
• R48 850 interest on a fixed deposit with a South African bank;
• Dividends from a South African listed company: R24 000;
• Net rental from a summer house on a Greek island (rand equivalent): R86 700.
For the 2023 year of assessment, employees’ tax of R101 163 was withheld on
Alexander’s salary and bonus to the date of his retirement but no tax was withheld
on the golden handshake. The pension fund withheld R101 340 employees’ tax on
the lump sum and R1 067 employees’ tax on the pension paid.
YOU ARE REQUIRED TO calculate the amount due to or from the Commissioner in
respect of the normal tax liability of Alexander for the 2023 year of assessment.
Ignore, for the purposes of your answer, the provisions of any Double Tax Agreement.
Question 16.3
(45 minutes)
Assume today is 15 June 2022.
Sizwe Dyanti will turn 55 years of age on 15 December 2022. He is a member of his
employer’s pension fund. In terms of the rules of the pension fund, he can only retire
after he reaches the age of 55. After his retirement, Sizwe wants to go and live at the
coast. During a visit to the coast in May 2022, he saw the dream house he wanted.
On 14 June 2022 the seller accepted his offer of R2,4 million. Sizwe has to pay the
purchase price on 1 July 2022. Sizwe is unsure what to do and requires your advice.
Sizwe made an appointment with you to discuss his situation. You made the
following notes during the meeting with Sizwe:
• Sizwe is currently earning R40 000 per month; the only deductions against his salary
are his pension fund contributions. In terms of the pension fund rules, he and his
employer each contribute 7% of his salary to the pension fund.
• If Sizwe retires with effect from 31 December 2022, in terms of the fund’s rules, a
lump sum of R3,2 million from the pension fund and a monthly pension of R38 000
will accrue to him.
• If he resigns effective 30 June 2022, he will receive a lump sum of R3 million from
the pension fund and a monthly pension of R37 800.
280
Chapter 16
Retirement benefits
• When Sizwe moves to the coast, he will have to sell his house in Johannesburg. He
should be able to sell his house within the next month for R3 270 000. Sizwe bought
the house two years ago for R3 350 000. The monthly running cost of the house
amounts to R7 500.
• If Sizwe does some repairs and paints the house before it is sold, he should be
able to sell the house in December 2022 for R3 500 000. He will do the repairs and
painting himself at negligible cost.
• Sizwe indicated that he is not willing to sell his house and rent another house until
the end of the year, should he decide to only move at the end of the year.
• If Sizwe only moves at the end of the year, he will be able to let the new house at
R11 000 per month. The monthly running cost of the house is R8 500.
• Sizwe will earn R39 800 interest during the year of assessment if he does not retire
immediately. If Sizwe retires immediately he will earn interest of R52 800 for the
year of assessment.
YOU ARE REQUIRED TO advise Sizwe purely from an after-tax cash-flow perspective if
he should resign in June or retire in December.
281
Chapter 17
Fringe benefits
L Introduction
The examples and questions in this chapter illustrate the taxation of persons whose
receipts and accruals are in the form of remuneration from employment. All the
persons are residents. The aspects covered include:
• salaries, wages, commissions and bonuses;
• cash allowances and fringe benefits;
• exemptions to which employees are often entitled;
• deductions which employees customarily claim, such as pension and retirement
annuity fund contributions, donations to public benefit organisations and other
allowable expenses, but do not include benefits which an employee may receive
on retirement, death or redundancy, which are dealt with in chapter 16.
The sections of the Income Tax Act 58 of 1962 as amended (the Act) which are
tested and which have not been dealt with specifically in earlier chapters, include:
• paragraphs (c) and (i) of the “gross income” definition, dealing with special
inclusions in gross income;
• section 8(1), dealing with cash allowances;
• sections 8B and 8C dealing with the right to acquire shares;
• certain subsections of section 10, containing certain relevant exemptions;
• the Seventh Schedule, dealing with the so-called fringe benefits.
Assume an official interest rate of 8% from 1 March 2022 to 28 February 2023. The
official rate is calculated at the repurchase rate plus 1%.
Assume that all references to a medical aid fund or medical scheme or medical
fund refers to a medical scheme registered under the Medical Schemes Act 131 of
1998.
Assume that all persons referred to are residents in the Republic.
To answer the examples and questions, keep the framework for the calculation of
taxable income and the framework to calculate normal tax due or payable in mind.
283
Tax Workbook
Framework
Calculating taxable income:
“Gross income” as defined (including paras (c) and (i ) of the gross income
definition):
Less:
Gives:
Less:
Add:
Add:
Less:
Less:
Gives:
Exempt income
“Income” as defined
“Allowable” deductions (except for s 11F)
Unutilised portion of allowances not used for business purposes
Taxable capital gain (Eighth Schedule)
Retirement contributions (deductible under s 11F)
Donations to certain public benefit organisations (all taxpayers)
“Taxable income” as defined
Calculation of normal tax payable/(refundable):
Tax tables (natural persons) on taxable income:
Normal tax payable
Less: Rebates (s 6 (only natural persons), s 6quat and s 6quin
(all resident taxpayers))
Less: Medical tax credits (s 6A and 6B)
Gives: Normal tax liability
Less: Prepaid tax
Gives: Amount due to SARS or refundable by SARS
L Contents
The table gives an indication of the time that you will need to complete the example
or question. The relevant sections or paragraphs that you need to know before
attempting the example or question are provided, and the level of the example or
question gives an indication of the difficulty of the question.
)
Example/Question
and time allocation
Topic and/or relevant sections
Level
Example 17.1
(20 minutes)
• Section 10(1)(q)
• Seventh Schedule paras 6, 7, 9, 10, 11
and 13
Basic
Example 17.2
(15 minutes)
• “Gross income” paras (cA) and (i )
• Section 8B
• Seventh Schedule paras 5, 6 and 7
Basic
Example 17.3
(20 minutes)
• Section 8(1)(a)(i)(aa) – travelling
allowance using two motor vehicles
Intermediate
Example 17.4
(30 minutes)
•
•
•
•
Intermediate
Example 17.5
(30 minutes)
• After tax benefit of various options
regarding salary structuring
• Section 8(1)(a)(i)(aa)
• Seventh Schedule paras 7 and 9
Section 8(1)(a)(i)(aa) and (bb)
Section 8B
Section 10(1)(q)
Seventh Schedule paras 6, 8, 9, 10, 10A,
11, and 16
Advanced
continued
284
Chapter 17
)
Example/Question
and time allocation
Fringe benefits
Topic and/or relevant sections
Level
Example 17.6
(20 minutes)
• Section 8(1)(a)(i)(aa)
• Seventh Schedule paras 5, 6, 7, 10 and 16
Intermediate
Question 17.1
(40 minutes)
• Section 8(1)(a)(i)(aa) and (bb)
• Section 10(1)(i), (k) and (q)
• Seventh Schedule paras 6, 7, 8, 9, 10, 12,
12A, 13 and 16
Advanced
Question 17.2
(20 minutes)
• Sections 7B, 7(2A)(b) and 8(1)(a)(ii)
• Seventh Schedule paras 7, 10, 16
Intermediate
L Examples
Example 17.1
(20 minutes)
This question consists of five unrelated case studies. The information relates to the
2023 year of assessment. All taxpayers are under the age of 65 years except where
otherwise stated.
Case study 1
Part (a)
Abel received the use of a company car for the first time from 1 July 2022. The actual
retail market value (in this case the cost) of the car (including VAT) was R400 000.
The employer purchased this car on 1 January 2021. Abel does not contribute to the
use of the company car. The car was not subject to a maintenance plan.
YOU ARE REQUIRED TO CALCULATE the taxable benefit accruing to Abel.
Part (b)
Use the same information as in part (a) except that the company car is subject to a
maintenance plan.
YOU ARE REQUIRED TO CALCULATE the taxable benefit accruing to Abel.
Part (c)
Use the same information as in part (a) except that Abel contributes R250 a month
toward the fuel account for the private use of the car.
YOU ARE REQUIRED TO CALCULATE the taxable benefit accruing to Abel.
Part (d)
Use the same information as in part (a) except that Abel contributes R1 000 a month
for the private use of the car. The contribution does not relate to the cost of the
licence, insurance, maintenance or fuel.
YOU ARE REQUIRED TO CALCULATE the taxable benefit accruing to Abel.
Case study 2
Thembani was allowed to use his employer’s camera free of charge during a
two-week (fourteen-day) December vacation in Europe. He signed an agreement
285
Tax Workbook
to the effect that he would return the camera in good condition. If not, he would be
liable to replace it. His son broke the camera at the OR Tambo International Airport,
on Thembani’s return from the vacation.
The camera was bought by Thembani’s employer on a suspensive sale agreement.
The monthly payment was R300 (excluding VAT). The last payment was due at the
end of December 2022. The cost price of the camera was R5 000 (excluding VAT
and finance charges).
The market value of the camera was R3 000 (excluding VAT) when his employer
gave him the use thereof. Thembani’s employer deducted R1 000 from his salary in
January 2023 as the sole payment of his obligation. Thembani’s employer agreed to
release him from his obligation to replace the camera after he had paid the R1 000.
YOU ARE REQUIRED TO CALCULATE the taxable benefit accruing to Thembani.
Case study 3
Pulane earned R30 000 remuneration a month for the period 1 March 2022 to
28 February 2023. Her employer granted a bursary of R22 000 on 1 March 2022 to her
daughter to complete grade two at a primary school. She borrowed R500 on
1 March 2022 from her employer to pay for her daughter’s textbooks. She repaid it,
in full, on 30 June 2022.
YOU ARE REQUIRED TO CALCULATE the taxable benefit accruing to Pulane.
Case study 4
John Mills is a nuclear scientist and an American resident. He accepted a contract
of 18 months (from 1 January 2022 to 30 June 2022) to supervise the maintenance
programme of a nuclear plant in Cape Town. His employer rented a house
(including furniture, water and electricity) for his use for R30 000 a month. His
remuneration proxy is R1 500 000.
YOU ARE REQUIRED TO CALCULATE the taxable benefit accruing to John.
Case study 5
Jacob Piyose is the senior geologist of a mining company. On 1 April 2022 he was
stationed at Nelspruit for a period of seven months to do exploration work. He lives
with his wife (Florence) and his two daughters (Beauty aged 13 and Patience aged
19) in Johannesburg. During the year of assessment, the employer bought five return
aeroplane tickets for his wife and daughters to visit him in Nelspruit, at a cost of
R1 500 a return ticket to travel the distance of 680 km to Nelspruit and back.
YOU ARE REQUIRED TO CALCULATE the taxable benefit accruing to Jacob.
Solution 17.1
Case study 1
Actual retail market value (including VAT)
Less: Wear-and-tear allowance (at 15% reducing balance method)
R
400 000
(60 000)
Determined value
340 000
286
Chapter 17
Fringe benefits
(a) Taxable benefit: R340 000 × 3,5% × 8 months = R95 200
(b) Taxable benefit: R340 000 × 3,25% × 8 months = R88 400
(c) Taxable benefit: R340 000 × 3,5% × 8 months = R95 200. The contribution to the
fuel costs will be taken into account only on assessment (refer to paras 7(2) and
7(8)).
(d) Taxable benefit amounts to R87 200 calculated as follows: R340 000 × 3,5% × 8
months = R95 200 less consideration of R8 000 paid by employee. This
consideration is not in respect of the cost of licence, insurance, maintenance or
fuel and therefore the employer is allowed to reduce the value of the taxable
benefit.
Case study 2
R
Use of asset: R3 000 × 15% × 14 / 365 days
Release of obligation: R3 000 less R1 000 paid
17
2 000
Taxable benefit
2 017
Case study 3
Pulane’s remuneration of R360 000 (R30 000 × 12) derived during the year of
assessment does not exceed R600 000. The bursary is taxable to the extent that it
exceeds R20 000. The benefit is therefore R2 000. The benefit in respect of interest, on
debts not exceeding R3 000, is deemed to have a nil value in terms of para 11(4)(a).
The debt granted to Pulane is R500 and does not exceed the R3 000 threshold.
Case study 4
In terms of para 9(7A) and 9(7B), John will be taxed on the value of the benefit
exceeding R25 000, multiplied by the number of months. Thus, R60 000 (being (R30 000
– R25 000) × 12 months).
Case study 5
Paragraph 10(2)(d) places no value on the benefit and applies to a travel facility
granted to the spouse or any minor children of the employee if he is stationed
further than 250 km away from his home for a period exceeding 183 days during the
year of assessment. Patience is no longer a minor, and the taxable benefit amounts
to R7 500 (R1 500 × 5).
Example 17.2
(15 minutes)
The following particulars relate to Lwethu Magwaza for the 2023 year of assessment.
He retired from his position as managing director of Piyose Ltd on 28 February 2022,
the day after his 65th birthday. He has been semi-retired since this date. He still acts
as a consultant for his former employer.
His receipts and accruals for the 2023 year of assessment were as follows:
R
Pension
240 000
Consultancy fee from Piyose Ltd
29 000
A company car with a maintenance plan (from Piyose Ltd) with a determined value
of R300 000 was put at Lwethu’s disposal for the entire year. Lwethu was responsible
for all fuel costs for private use. He did not keep any record of distances travelled or
costs incurred.
287
Tax Workbook
A television which was rented by Piyose Ltd at a cost of R1 250 (excluding VAT) a
month was also put at his disposal from 1 June 2022 to 31 December 2022. The lease
agreement expired on 31 December 2022, at which date Piyose Ltd obtained
ownership of the television at no cost. It was donated to Lwethu on the same date.
The market value of the television was R1 700 (excluding VAT) on 31 December
2022.
Before his retirement, he had acquired the option on 2 000 shares to be purchased
by himself at any time for R1 a share, in terms of a broad-based employee share
plan (in terms of s 8B). He had to pay ten cents a share for the option. He had
exercised the option on 2 000 shares when the shares were R4 each on 30 June 2022.
An amount of R4 500 a month was paid to him by Piyose Ltd, since his retirement, as
a restraint of trade agreement for each month Lwethu adheres to the agreement.
The agreement is applicable to a five-year period.
YOU ARE REQUIRED TO determine Lwethu’s taxable income for the 2023 year of
assessment.
Solution 17.2
R
Pension
Consultancy fee
Fringe benefits (note 1)
Value of shares when option exercised: 2 000 × R4
Less: Cost of option: 2 000 × 10c
Cost of shares: 2 000 × R1
200
2 000
R
8 000
(2 200)
5 800
(5 800)
Less: Exempt s 10(1)(nC) (note 2)
Restraint of trade receipt (note 3)
R
240 000
29 000
127 450
–
54 000
Taxable income
450 450
Notes
(1) Retired employees and fringe benefits
Employees who retired are still deemed to be employees for the Seventh
Schedule calculation of fringe benefits.
Company car
R
R300 000 × 3,25% × 12 months
117 000
(No reduction of taxable benefit in terms of para 7(8)
of the Seventh Schedule as no accurate records kept)
Use of employer’s asset (para 6(2))
R1 250 × 7 months
8 750
Acquisition of asset less than market value
The cash equivalent of the television is the market value thereof.
The employer had the use of the asset before purchasing it for the
employee (para 5(2) Seventh Schedule)
1 700
Total fringe benefits
127 450
288
Chapter 17
Fringe benefits
(2) Lwethu did not dispose of the shares. If the shares are disposed of within five years
after they were acquired then the gain will be income in his hands and fully
taxable as determined in s 8B. If he disposes of the shares after five years then
the gain will be treated as a capital gain and subject to the capital gains tax
rules.
(3) Restraint of trade
The amount received by or accrued to Lwethu as a restraint of trade agreement
is of a capital nature. All amounts accruing to or received by a natural person is
fully taxable according to para (cB)(ii) of the gross income definition if it relates
to past or future employment or the holding of an office. Only R4 500 for 12
months accrued to him. He will be taxed on R54 000 (R4 500 × 12 months).
Example 17.3
(20 minutes)
Brandon received a travelling allowance of R72 000 (R6 000 a month) from his
employer. He used two vehicles during the year of assessment. Vehicle 1 was
purchased second-hand (actual retail market value) for R215 000 (including VAT) and
was traded in for vehicle 2. Vehicle 2 (new) cost (actual retail market value)
R310 000 (including VAT). During the year of assessment, he used vehicle 1 for 106
days and vehicle 2 for 259 days. He did not keep accurate records of costs incurred.
He travelled 10 231 km in vehicle 1 during the 2023 year of assessment and 20 880
km in vehicle 2. His logbooks showed that he travelled 4 027 business km in vehicle 1
and 8 085 business km in vehicle 2 during the 2023 year of assessment.
YOU ARE REQUIRED TO calculate the taxable amount of the travel allowance.
Solution 17.3
Vehicle 1
10 231 km
Total kilometres
Fixed costs: On R215 000
Fixed costs: On R310 000
R76 033 ×
10 231 km
R96 197 ×
20 880 km
106 days
365 days
259 days
365 days
Fuel costs:
Maintenance costs:
Business km
4 027
× Total costs
431,8c
Business km
8 085
× Total costs
560,1c
Total costs (Vehicle 1 + 2)
Vehicle 2
20 880 km
215,8c
326,8c
159,7c
56,3c
171,8c
61,5c
431,8c
560,1c
17 389
45 284
62 673
R
72 000
(62 673)
Travelling allowance
Less: Business costs
Taxable portion of travelling allowance
9 327
289
Tax Workbook
Example 17.4
(30 minutes)
Simon Monyuku has approached you for assistance with the completion of his tax
return for the 2023 year of assessment.
Simon worked for the entire year, he earned a basic salary of R610 000 and received
the following fringe benefits:
• share options (note 1);
• housing (note 2);
• computer (note 3);
• bursary (note 4);
• subsistence allowance (note 5);
• meals (note 6).
Notes
(1) On 1 January 2022, Simon was granted the option to take up 1 000 shares in the
company at R1 each, in terms of a broad-based employee share plan (in terms
of s 8B). He exercised the option on 3 October 2022.
The market value of the shares was as follows:
1 January 2022
R8,50 a share
3 October 2022
R5,55 a share
(2) Simon had the option to purchase the two-roomed flat owned by his employer
for R600 000 (its market value). He paid rental of R1 000 a month for the period
1 March 2022 up to 31 October 2022, and he paid R1 500 for November. The flat
was unfurnished and no power or fuel was supplied by the employer. He
purchased the flat on 30 November 2022. The employer financed the purchase
price. Simon must repay R5 000 a month on the capital amount owing, together
with interest. The interest is calculated at an interest rate which is 3% lower than
the official interest rate. His remuneration proxy is R450 000. (He does not qualify
for the nil value placed on the interest on the debt regarding the housing
because his remuneration proxy is more than R250 000, the loan is more than
R450 000 and the market value of the immovable property exceeds R450 000.)
(3) The private use of a computer that was purchased by his employer for R10 000
(net of VAT) was granted to Simon’s daughter from 1 March 2022 until
31 December 2022, to assist with her master’s degree (note 4). The computer
was returned on the first working day in January 2023.
(4) A bursary of R50 000 was granted to his daughter on 1 March 2022 by his
employer, to study for a master’s degree in international tax through a
recognised educational institution (NQF level 9). If she fails, then the bursary must
be repaid. She completed the degree successfully.
(5) Simon was sent to Durban for business purposes for a period of seven days during
the year of assessment. A daily allowance of R500 was paid to him to cover his
costs in respect of meals and incidental costs. Simon did not keep a record of his
business expenses.
(6) Each employee is provided on a monthly basis with a booklet containing 20 meal
vouchers. The vouchers are redeemable at the local supermarket and entitle
the employee to the meal of the day. The supermarket bills the employer on a
monthly basis for the vouchers, discounted at R30 a voucher. The employee has
to hand in the booklet together with vouchers not used, at the end of the month
in order to qualify for a new booklet. Simon discounted 153 vouchers for the 2023
year of assessment.
290
Chapter 17
Fringe benefits
YOU ARE REQUIRED TO calculate the cash equivalent of the fringe benefits and the
taxable portion of any allowances for the 2023 year of assessment.
Solution 17.4
The cash equivalent of each fringe benefit and the taxable portion of the
subsistence allowance are as follows:
R
R
Share option (1 000 × (R5,55 – R1,00)) = R4 550
but exempt in terms of s 10(1)(nC)
–
Housing (R400 000 – 0) × 17 / 100 × 9 / 12 (note 1)
51 000
Less: Paid (R1 000 × 8) + R1 500
(9 500)
41 500
Low interest debt (note 2)
Computer (R10 000 × 15% × 10 / 12)
Bursary (note 3)
Meals (R30 × 153) (note 4)
Taxable portion of subsistence allowance
Allowance (R500 × 7)
Less: Deemed expended for business purposes (R493 × 7)
4 463
1 250
50 000
4 590
3 500
(3 451)
49
Notes
(1) B in the formula is nil because he has the right to buy the property.
(2) Low interest debt
R
1 500
1 488
1 475
R600 000 × (3%) × 1 / 12
R595 000 × (3%) × 1 / 12
R590 000 × (3%) × 1 / 12
4 463
(3) A benefit was given to a family member and para 16 of the Seventh Schedule is
applicable. Simon must include the amount in his gross income. He does not
qualify for the s 10(1)(q) exemption, because his remuneration exceeds R600
000.
(4) The meals were not supplied by the employer in a canteen, cafeteria or dining
room operated by the employer and patronised mainly by his employees. The
meals are also not supplied on the business premises of the employer. It also
seems that the meals are not supplied by the employer to the employee during
working or extended working hours. The employee can for all practical purposes
redeem these vouchers at any time (also after working hours) and can also
redeem the voucher for a meal for somebody else. The benefit does not come
into consideration for the no-value valuation.
Example 17.5
(30 minutes)
Veli Ndlovu, who is 45 years old, commenced working at Jikeleza (Pty) Ltd on
1 December 2021.
On 1 February 2022, Veli was promoted. His promotion allows him to restructure his
remuneration package. The increased remuneration package will be implemented
on 1 March 2022.
291
Tax Workbook
Veli Ndlovu is entitled to a gross annual salary of R250 000 or to a remuneration
package, which is structured as follows:
• A salary of R10 000 a month.
• Free accommodation in a house consisting of six rooms, which is owned by Jikeleza
(Pty) Ltd. Electricity, water and furniture will not be supplied. Veli is at present
paying R3 000 rent a month for the flat in which he lives. (His remuneration proxy is
R153 950.)
• A travelling allowance of R6 000 a month. Veli will lease a vehicle at a monthly
instalment of R3 300. The cash value (retail market value) of the vehicle is R123 120
(including VAT of 15%). This vehicle will be acquired on 1 March 2022.
Veli has confirmed that he will keep records of all his business trips but not of the
costs in respect of the vehicle. He estimates that the operating costs of the vehicle
will amount to R1,20 a kilometre, excluding the lease payments.
Veli has estimated the following for the 2023 year of assessment:
Business kilometres
Private kilometres
14 000
11 000
YOU ARE REQUIRED TO calculate the most favourable after-tax benefit of the two
options for the year of assessment ended 28 February 2023.
Solution 17.5
Option 1
Cash salary
R
R
Salary
250 000
Taxable income
250 000
Schedule tax on R250 000
On R226 000
On R24 000 at 26%
Less: Rebate
40 680
6 240
Normal tax liability
Net cash
Salary (Cash)
Less: Taxation
Housing (R3 000 × 12)
Vehicle (note 1)
46 920
(16 425)
30 495
30 495
36 000
69 600
Net cash
250 000
(136 095)
113 905
292
Chapter 17
Fringe benefits
Option 2
Travelling allowance and housing benefit
R
Salary (R10 000 × 12)
Housing benefit (note 2)
Travelling allowance (R6 000 × 12)
Less: Deemed business cost (note 3)
72 000
(57 358)
R
120 000
10 659
130 659
14 642
Taxable income
145 301
Schedule tax on R145 301 at 18%
Less: Rebate
26 154
(16 425)
Normal tax liability
9 729
Net cash
Salary (cash)
Travelling allowance (cash)
120 000
72 000
Less: Taxation
Vehicle costs (note 1)
9 729
69 600
Net cash
192 000
(79 329)
112 671
Option 1 provides the most favourable after-tax benefit, but the difference between
the two options is minimal and other factors should also be taken into account.
Notes
R
(1) Vehicle costs
Lease payments (R3 300 × 12)
Add: Running costs (R1,20 × 25 000 km)
39 600
30 000
69 600
(2) Housing benefit
(A – B) × C / 100 × D / 12
(R153 950 – R91 250) × 17 / 100 × 12 / 12 =
10 659
(3) Deemed business cost spent on business trips
Value of vehicle: R123 120
Fixed component: R52 889 / 25 000 km
Fuel
Maintenance
211,6c
147,0c
51,1c
Total costs
Business kilometres: 14 000 km
Business costs: 14 000 km × 409,7c =
409,7c
57 358
293
Tax Workbook
Example 17.6
(20 minutes)
Mr Star Fish is the marketing manager of Fish (Pty) Ltd. Mr Star Fish is 50 years old and
a widower. The following information relates to Mr Star Fish’s income and expenditure
for the year of assessment ending 28 February 2023:
(1) Salary
He received a monthly basic cash salary of R50 000 a month for the period
1 March2022 to 28 February 2023.
(2) Company car and travelling allowances
The right of use of a company car was granted to him for the period 1 March
2022 until 30 June 2022 (four months). The determined value of the car was
R450 000, and the car was subject to a maintenance plan. He had to bear the
cost of all fuel used for private purposes, and the cost of insuring the vehicle. He
travelled 20 200 kilometres in total of which 9 400 kilometres related to business
travel. The fuel cost amounted to R18 000 and the insurance amounted to R6 000.
The company provided Mr Star Fish with the option to buy the car at its retail
market value less 10% discount on 1 July 2022. The retail value of the car was
R380 000 on 1 July 2022. Mr Star Fish exercised this right and paid the company
the agreed purchase price of R342 000. This is currently the only car that he owns.
From 1 July 2022, he received a travelling allowance of R17 000 a month for the
remaining eight months (243 days) of the year of assessment. Mr Star Fish does
not keep accurate records of actual costs incurred. He kept a logbook and
travelled 16 540 business kilometres during the period. The odometer reading of
the car was 32 317 km on 1 July 2022, and 54 122 km on 28 February 2023.
(3) His employer provided him with a laptop of R16 000 to be used mainly for
business purposes. He was also provided with an internet facility at a cost of R350
a month to assist him in his duties as marketing manager.
YOU ARE REQUIRED TO calculate the taxable income of Mr Star Fish for the 2023 year
of assessment.
Solution 17.6
Salary (R50 000 × 12)
Company car (note 1)
Acquisition of company car (note 2)
Use of laptop (note 3)
Internet service (note 3)
Add: Taxable travelling allowance not utilised
for business purposes (note 4)
Taxable income
R
600 000
8 219
38 000
–
–
48 834
695 053
294
Chapter 17
Fringe benefits
Notes
(1)
Taxable benefit
Reduced on assessment
Business travel
Private use
Less: incurred for private use
Insurance
Fuel (must use the rate per
kilometre for fuel as fixed by the
Minister in the Gazette)
3,25% × R450 000 × 4 months
R
58 500
Business km / Total km ×
taxable benefit)
(9 400 / 20 200) × R58 500
(27 223)
31 277
Private km / Total km ×
insurance cost
10 800 / 20 200 × R6 000
10 800 ×183,8c
(3 208)
(19 850)
Recalculated taxable benefit
8 219
(2) Paragraph 5 of the Seventh Schedule deals with the acquisition of an asset at
less than actual value. The taxable benefit is the retail market value less the
consideration given by Mr Star Fish which is equal to R38 000 (R380 000 –
R342 000).
(3) In terms of para 6(4)(bA), no value is placed on using the employer’s computer
equipment if it is used mainly for business purposes. No value is placed on any
communication service provided to an employee if the service is used for the
employer’s business (para 10(2)(bA)).
(4) He travelled 21 805 (54 122 – 32 317) kilometres during the eight months. The
calculation of the taxable portion of the travelling allowance follows:
Mr Star Fish was taxed on the market value of the company car less the
consideration paid. The value of the base cost of the asset (company car) is
R380 000 (refer to para 20(1)(h)(ii)(bb) of the Eighth Schedule. The base cost of
the asset is calculated by adding the benefit of R38 000 and the considerations
paid of R342 000 together.
R
Travelling allowance: R17 000 × 8 months
136 000
Fixed cost based on market value of R380 000
R96 197 × 243 / 365 = 64 043
R64 043 / 21 805 km
Fuel
Maintenance
293,7c
171,8c
61,5c
Total deemed cost
527,0c
Less: 527,0 c × 16 540 km
(87 166)
Taxable portion of travelling allowance
295
48 834
Tax Workbook
L
Questions
Question 17.1
(40 minutes)
Kwame Zondo is 50 years old and divorced. He is the chief creative director of
Advertisements Agency RSA (Pty) Ltd. He spends more or less four months of every
year in Cape Town at the branch office, and more or less eight months at the
Gauteng head office during a year. Kwame was in the employment of
Advertisements Agency RSA (Pty) Ltd for the entire year, and his remuneration
package and benefits for the 2023 year of assessment were as follows:
R
Basic salary (note 1)
1 800 000
Performance bonus (note 2)
400 000
Medical scheme contributions (note 1 and 3)
57 000
Subsidies (note 4)
92 000
Travelling allowances and company car (note 5)
270 000
Housing benefits including meals (note 6)
44 000
Subsistence allowance and entertainment advance (note 7)
120 000
Holiday accommodation (note 8)
80 500
Payment of membership fees (note 9)
5 400
Kwame earned the following additional income during the 2023 year of assessment:
• local interest of R201 800 (not from a tax-free investment);
• local dividends of R80 000.
Notes
(1) His salary of R1 800 000 excludes any fringe benefits.
(2) The performance bonus is awarded on an annual basis.
(3) All the employees are members of the same medical scheme and the company
makes a 100% contribution to the scheme. The contribution for Kwame and his
20-year-old daughter amounts to R4 750 a month.
(4) The company subsidises the interest on the purchase of a vehicle for the amount
of R800 000 (note 5). The interest benefit was correctly calculated according to
s 24J.
(5) Kwame purchased a vehicle in a prior year of assessment for R800 000. The
vehicle is financed through a bank and the company subsidised the interest
liability. The bank’s lending rate is higher than the official interest rate for fringe
benefits. Kwame received a travelling allowance of R20 000 a month. Kwame
does not keep accurate records of expenses, but he keeps accurate records of
actual business distances travelled. He travelled 33 800 km in total during the
year with his own vehicle, of which 23 100 km was for business purposes. A
company vehicle is at his disposal when he works in Cape Town. The company
pays all costs relating to the vehicle. The total costs of the vehicle amounted to
R65 000 for the year of assessment. The determined value of the vehicle is
R200 000 and Kwame, when working in Cape Town, mainly uses it. There is no
maintenance plan on the vehicle. If he does not need to use the vehicle, it is
used as a fleet vehicle. The private use of the motor vehicle is incidental and
infrequent.
(6) When Kwame is working in Cape Town, he occupies one of the company’s fully
furnished flats. The flat is serviced, and the company pays the electricity, water
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Chapter 17
Fringe benefits
and levies. The total cost of the housing amounts to R10 000 a month. Kwame
usually has lunch at the branch. An external caterer provides the meals. Kwame
had 80 meals during office hours, and the cost of a meal is R80 a meal. Kwame’s
remuneration proxy is R2 000 000.
(7) Kwame received a subsistence allowance of R300 (for meals and incidental
costs) a day or part of a day for the period that he was away from his home in
Gauteng and worked in Cape Town. He received R36 000 for the 2022 year of
assessment. Kwame also received an entertainment advance of R10 000. If he
entertains clients, he claims it back from the company, supported by the
necessary documentation. He spent R80 000 on entertainment on the instruction
of his employer.
(8) The company paid R80 500 (all inclusive) for a breakaway vacation for 14 days
at a luxury game lodge.
(9) The company paid all the employees’ membership fees to a gym group. The
membership gives the employee entrance to exercise at any one of the
nationwide gyms in the group. Kwame is very lazy and visited the gym only 36
times during the year. The cost of the membership amounts to R5 400 a year.
YOU ARE REQUIRED TO calculate Kwame’s taxable income for the year of
assessment ending 28 February 2023.
Question 17.2
(20 minutes)
Mtutuzeli Mbete is married in community of property. He retired at the age of 60 in
the previous year from his employer (Mechanics Play Blocks (Pty) Ltd). Mechanics
Play Blocks (Pty) Ltd is the sole importer and distributor of play blocks and its biggest
customers are schools and crèches. It distributes from its Johannesburg, Cape Town,
Durban and Bloemfontein branches. Since Mtutuzeli left his previous employer, sales
went down. The customers were not happy with the new representatives.
Mechanics Play Blocks (Pty) Ltd requested a meeting and asked Mtutuzeli to
consider working for the company for another 10 months as an employee. After
discussions with his wife, the two of them decided, depending on the package deal
and his work conditions, that it will be a good idea to go back to work for another
10 months.
The following package deal and work conditions were negotiated and will only be
valid for the 10 months ending 28 February 2023.
• basic salary of R80 000 a month;
• 10% commission on all sales exceeding targets set (note 1);
• entertainment (it is expected from him to entertain clients although he hates it)
(note 2); and
• use of a fleet motor car for traveling in the Johannesburg area (note 3).
The company must pay the following if he needs to visit other branches:
• he hates to fly and therefore he and his wife will only fly business class – she will
accompany him on every visit (note 4);
• accommodation of his choice including breakfast and lunch (note 4); and
• car rental (note 5).
There will be a penalisation clause in the agreement, namely if he does not deliver
as promised in the contract, a certain amount must be paid back to the company.
The amount is based on a ratio used in the industry.
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Tax Workbook
Notes:
(1) The company calculates the commission at the end of the year of assessment
and it will be paid in the following year of assessment. He accepted this
condition. He earned commission of R350 000 for the year of assessment ending
28 February 2023.
(2) Mtutuzeli entertained clients and staff of different branches on the instruction of
his employer. He spent R55 300 on entertainment during the 2023 year of
assessment. He kept evidence to support these expenses. The employer
refunded the amount of R55 300.
(3) The car is not available for private use including the distance travelled between
his home and the office.
(4) He was sent to Cape Town to restructure the office. Building Blocks (Pty) Ltd
estimated that it will take two months to sort out all the trouble at this branch.
The airfare tickets were bought, the company paying R24 000 for the two return
tickets (R12 000 each). Economy class would have cost the company only
R10 000. The accommodation cost R1 000 per person per day and R1 500 a day
for two persons sharing. The company paid R1 500 a day for the accommodation
for 60 days.
(5) The cost of the rental amounted to R18 000 (R300 a day for 60 days). If Mtutuzeli
did not have to use the vehicle then his wife used the vehicle. Fortunately the
accountant also warned Mtutuzeli to keep record of all travel for business
purposes and for private purposes as well as for fuel. They travelled a total of
3 700 km during this period which was 1 500 km for private purposes and 2 200
km for business. He paid for all the fuel and he will be reimbursed by the
company for business cost. The total fuel cost was R6 500.
(6) He earns a monthly pension of R55 000 and R9 000 local interest (not from a
taxfree investment) a month from a fixed deposit. His wife is wealthy and earns
rentals from various properties. The properties were bequeathed to her by her
father. The condition of the bequest is that the property and any income
thereon are excluded from the joint estate. She earned rentals of R100 000 a
month.
YOU ARE REQUIRED TO calculate the taxable income of Mtutuzeli for the year of
assessment ending 28 February 2023.
298
Chapter 18
Employees’ tax and provisional tax
L Introduction
The Fourth Schedule of the Income Tax Act 58 of 1962 as amended (the Act)
contains the provisions relating to
• amounts to be deducted or withheld by employers; and
• provisional tax payments in respect of normal tax.
Assume the following prescribed interest rates for Fourth Schedule late payments
(and overpayments):
1 March 2022 and thereafter – 7% (3%).
In order to answer the examples and questions, please bear the following critical
issues in mind, namely:
Employees’ tax
• There must be an employer-employee relationship.
• “Remuneration” as defined must be paid or must be payable by an employer
to an employee.
• The employer must deduct employees’ tax and pay it over to SARS.
• This is a pre-payment of the employee’s normal tax liability and is only final in
limited situations.
• The calculation of employees’ tax is based on the balance of remuneration
after deducting certain expenditure listed in para 2(4)(a)–(f).
• Paragraph 9(6) provides that the employer, under certain conditions, must
deduct from employees’ tax withheld the amount of the medical scheme fees
tax credit that applies to that employee in terms of s 6A and where the
employee is entitled to a rebate under s 6(2)(b), also s 6B(3)(a)(i).
• The deduction of contributions to retirement funds (pension, provident and
retirement annuity funds) for purposes of calculating the balance of
remuneration is limited to the lesser of R350 000/12 or 27,5% of the remuneration
(as defined).
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Tax Workbook
Provisional tax
• Provisional tax is also a pre-payment of the normal tax liability of a taxpayer.
• The first two payments are based on estimated taxable income and the third
payment on actual taxable income.
• The first payment is due six months before the end of the year of assessment,
the second payment is due on or before the end of the year of assessment and
the third payment is due six months after the year of assessment, except in
the case of February year-end, in which case it will be seven months after
year-end.
L Contents
The table gives an indication of the time that you will need to complete the
example or question, as well as an indication of the difficulty of the question.
)
Example/Question
and time allocation
Topic and/or relevant legislation
Level
Example 18.1
(7 minutes)
• Fourth Schedule – employees’ tax
Basic
Example 18.2
(15 minutes)
• Fourth Schedule – employees’ tax
Intermediate
Example 18.3
(20 minutes)
• Fourth Schedule – provisional tax
Intermediate
Example 18.4
(30 minutes)
• Fourth Schedule – provisional tax
Intermediate
Example 18.5
(30 minutes)
• Fourth Schedule – employees’ tax and
provisional tax
Advanced
Question 18.1
(15 minutes)
• Fourth Schedule – provisional tax
Basic
Question 18.2
(30 minutes)
• Fourth Schedule – employees’ tax and
provisional tax
Advanced
Question 18.3
(30 minutes)
• Fourth Schedule – employees’ tax
Advanced
Question 18.4
(25 minutes)
• Fourth Schedule – employees’ tax
Advanced
L Example
Example 18.1
(7 minutes)
Thapelo Karinge (35 years old) accepted employment on 1 January 2023. His
package was as follows:
• Monthly salary of R19 000.
• A 12-month interest-free loan of R100 000 since 1 February 2023. (Assume an official
interest rate of 4,5%.)
300
Chapter 18
Employees’ tax and provisional tax
• Pension fund contributions of R1 520 a month were deducted from his salary. The
contributions were calculated at 8% of his salary.
YOU ARE REQUIRED TO calculate Thapelo’s employee’s tax liability for February 2023.
Solution 18.1
Thapelo Karinge
Balance of remuneration for the period 1 February 2023 to 28 February 2023 is:
R
19 000
345
Salary
Low-interest loan: R100 000 × 4,5% × 28 / 365 days
Remuneration
Less: Pension fund contributions of R1 520
Actual limited to the lesser of R350 000 / 12 or R5 320
(27,5% × R19 345 (remuneration))
Thus actual contributions of
19 345
(1 520)
Balance of remuneration
17 825
Annual equivalent: (R17 825 × 12)
213 900
Tax per table
(18% × R213 900)
Less: Primary rebate
38 502
(16 425)
Annual tax on annual equivalent
22 077
Employees’ tax for period (per month): R22 077 / 12
Example 18.2
1 839,75
(15 minutes)
Danny Davis (unmarried with no dependents) is 42 years old and has been a fulltime employee of SS Security (SS) since 2010. He earns a basic monthly salary of
R30 000 and a monthly travel allowance of R3 000. Danny contributes R2 100 a month
to a pension fund. He also pays R1 200 a month to his medical aid and has provided
the proof of this payment to SS. SS pays R300 a month in respect of a policy of
insurance against the loss of income for the benefit of Danny. This insurance policy
relates to an event arising solely out of and in the course of employment of Danny.
YOU ARE REQUIRED TO calculate the employee’s tax liability for the month of
January 2023 that SS Security (Pty) Ltd needs to withhold from Danny’s salary.
Solution 18.2
Danny Davis
Balance of remuneration for the period 1 January 2023 to 31 January 2023 is:
Salary
Travel allowance (R3 000 × 80%)
Fringe benefit (para 2(k) of the Seventh Schedule)
Remuneration
R
30 000
2 400
300
32 700
continued
301
Tax Workbook
Less: Pension fund contributions of R2 100
Actual limited to the lesser of:
R350 000 / 12 or R8 992,50 (27,5% × R32 700 (remuneration))
Thus actual contributions of
Less: Premiums in respect of policy of insurance (not allowed)
Balance of remuneration
Annual equivalent: (R30 600 × 12)
R
(2 100)
–
30 600
367 200
Tax per table
On R353 100
On R14 100 (R367 200 less R353 100) at 31%
Less: Primary rebate
Less: Medical scheme fees tax credit (s 6A) (R347 × 12)
Annual tax on annual equivalent
73 726
4 371
78 097
(16 425)
(4 164)
57 508
Employees’ tax for January 2023: R57 508 / 12
Example 18.3
4 792,33
(20 minutes)
Sizwe Matlala is 45 years old and a provisional taxpayer. He is in permanent
employment and also earns income from consulting services conducted after his
normal business hours. He presents you with the following information:
R
Adjusted taxable income reflected on the first provisional tax return
for 2023 (i.e. basic amount)
552 000
Taxable income for 2022 as assessed on 27 August 2022
1 300 000
Sizwe’s estimated taxable income for the 2023 year of assessment
855 000
Sizwe Matlala did not make a first provisional tax payment for the 2023 year of
assessment. Sizwe based his second provisional return for his 2023 year of assessment
on an estimated taxable income of R855 000.
R15 000 per month was deducted from his salary for employees’ tax purposes.
YOU ARE REQUIRED TO
(1) confirm whether or not it was correct not to have made a payment for the first
provisional tax return; and
(2) calculate any further provisional tax payments (second and third payments)
payable by Sizwe for the 2023 year of assessment, if you assume that he used
his estimate of R855 000 for his second payment and his actual taxable income
for the 2023 year of assessment was established on 31 March 2023 as R940 000.
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Chapter 18
Employees’ tax and provisional tax
Solution 18.3
(1) First provisional tax paymentPayable on or before 31 August 2022
Calculated using the basic amount of R552 000
Tax per table payable on R552 000
On R488 700
On R63 300 at 36%
Less:Primary rebate
R
115 762
22 788
R
138 550
(16 425)
122 125
One half thereof
Less: Employees’ tax (6 × R15 000)
61 062,50
(90 000,00)
First provisional tax payment (note 1)
–
Sizwe did not have to make a first provisional payment.
(2) Second provisional tax payment: Payable on or before 28 February 2023
Calculated by using his own estimate of R855 000
Tax per table payable on R855 000
On R817 600
On R37 400 at 41%
Less: Primary rebate
Normal tax liability
Less: Employees’ tax (actual) (12 × R15 000)
First provisional payment (see above)
R
239 452
15 334
R
254 786
(16 425)
238 361
180 000
–
(180 000)
Second provisional tax payment (note 2)
58 361
(3) Third provisional tax payment: Payable on or before 30 September 2023
The actual taxable income of R940 000 must be used
Tax per table payable on R940 000
R
On R817 600
239 452
On R122 400 at 41%
50 184
Less: Primary rebate
Normal tax liability
Less:Credit amount
Employees’ tax
First provisional tax payment
Second provisional tax payment
R
289 636
(16 425)
273 211
180 000
–
58 361
Third provisional tax payment(note 3)
(238 361)
34 850
Notes
(1) Sizwe has to render a return, although no amount is payable.
(2) Sizwe is required to estimate his taxable income for the second payment. Sizwe’s
actual taxable income does not exceed R1 million. If his estimate is lower than
the lesser of R846 000 (90% of R940 000 the actual taxable income for 2023) or the
basic amount (of R1 300 000), he is liable for 20% additional tax on the difference
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Tax Workbook
between the tax payable on his estimate and the tax payable on the lesser of
90% of actual taxable income for the 2023 year of assessment, or the basic
amount. He is not liable for any additional tax, since his estimate of R855 000 was
not less than R846 000 (calculated above).
(3) If he does not pay the R34 850 by 30 September 2023, interest at the prescribed
rate will be calculated on the amount owing from 1 October 2023 until the due
date reflected on the assessment.
Example 18.4
(30 minutes)
Tweba (Pty) Ltd is one of your clients. The financial year of Tweba (Pty) Ltd ends on
31 March. The company is neither a “small business corporation” nor a “personal
service provider” as defined.
Tweba (Pty) Ltd received its 2022 tax assessment on 2 August 2022, which reflected
a taxable income of R200 000 and a credit balance of R20 000. This credit balance
relates to overpayments of provisional tax made in the 2022 year of assessment. The
credit balance was repaid to Tweba (Pty) Ltd on 10 August 2022.
Its financial statements for the 2023 year of assessment were only completed during
October 2023. On 31 October 2023, the group accountant determined that the
company’s taxable income for the year was R300 000, and he immediately
instructed a further provisional tax payment to be made.
YOU ARE REQUIRED TO calculate all the provisional tax payments payable by Tweba
(Pty) Ltd during the period from 30 September 2022 to 31 October 2023, and to
calculate the interest payable by Tweba (Pty) Ltd on the late payment of its third
provisional payment. Assume that Tweba (Pty) Ltd used the basic amount for its first
and second provisional payments.
Solution 18.4
The basic amount should only be increased by 8% a year if the estimate must be
made more than 18 months after the end of the latest preceding year of assessment
in relation to such estimate. No adjustment is to be made to the basic amount for
the first and second provisional tax payment for the 2023 year of assessment as the
2022 assessment is available. (If the 2022 assessment is used as the basic amount for
the second provisional tax payment for 2024, then it needs to be increased by 16%.)
Tweba (Pty) Ltd
2023 first provisional tax payment
R
Due date: Not later than 30 September 2022
“Basic” taxable income 2022 used = R200 000
Normal tax payable on R200 000 × 27%
For six months
54 000
× 50%
Provisional tax payment (first)
27 000
continued
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Chapter 18
Employees’ tax and provisional tax
2023 second provisional tax payment
Due date: Not later than 31 March 2023
“Basic” taxable income 2022 used = R200 000
Normal tax payable on R200 000 × 27%
Less:First provisional payment
Provisional payment (second)
R
54 000
(27 000)
27 000
2023 third provisional tax payment
Due date: Not later than 30 September 2023
Interest in terms of ss 187–189 of the Tax Administration Act 28 of
2011 as amended is levied from 1 October 2023
At 31 October 2023
Normal tax liability on R300 000 × 27%
Provisional tax paid
Provisional payment (third)
Interest thereon at 7% (assumed prescribed interest rate given
at the beginning of chapter 18)
For 31 days (from 1 October 2023 to 31 October 2023)
R27 000 × 7% × 31 / 365
81 000
(54 000)
27 000
160,52
2024 first provisional payment
Due date: Not later than 30 September 2023
“Basic amount” still taxable income of R200 000
Normal tax on R200 000 × 27%
For six months
54 000
× 50%
First provisional tax payment
27 000
Example 18.5
(45 minutes)
Monde Mavuso retired at the age of 55 during the 2020 year of assessment. After
two years of fishing he became bored and started his own consulting business. He
conducts this consultancy through a close corporation, Mavukani CC, of which he is
the sole member. Mavukani CC is a VAT vendor, and its year-end is 31 March.
Furthermore, from 1 March 2022, Monde served on the board of directors of Hlumisa
(Pty) Ltd, one of his former clients. The following information relates to the 2023 year
of assessment:
Private pension fund
A pension of R12 000 a month accrues to him.
Old Mutual retirement annuity fund
An annuity of R8 500 a month accrues to him.
Hlumisa (Pty) Ltd
Monde’s director’s emoluments (“remuneration” as defined) from Hlumisa (Pty) Ltd
for the period 1 March 2022 to 28 February 2023 amounted to R2 000 a month.
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Tax Workbook
Mavukani CC
Mavukani CC secured a major contract with a telecommunication company. Due
to the work involved, the CC could only service this client. Monde had to refer all
the other existing clients of Mavukani CC to one of his friends. The
telecommunication company was billed as follows:
R
May 2022
August 2022
November 2022
February 2023
115 000
115 000
115 000
115 000
Mavukani CC did not incur any salaries or make any distributions during its 2023 year
of assessment.
Other information relating to Monde was as follows:
• He earned net rentals of R133 000.
• Medical expenditure paid was R53 090 for the 2023 year of assessment. The
amount comprises contributions of R3 600 a month to a medical scheme, and
R9 890 medical expenses paid and not reimbursed by the medical scheme. He
and his wife are members of the scheme.
• He made the first and second provisional tax payments for 2023 based on his
basic amount (relating to his 2022 year of assessment). The amounts paid for the
first and second periods were R22 000 each.
YOU ARE REQUIRED TO
(1) calculate the total employees’ tax that the employers had to deduct from the
above remuneration in the 2023 year of assessment; and
(2) calculate the third provisional tax payment that Monde has to make for the 2023
year of assessment to avoid any liability for interest.
Solution 18.5
Part 1
Private pension fund
The pension fund is deemed to be an employer. The annual equivalent of the
remuneration is R144 000 (R12 000 × 12).
R
Normal tax payable (R144 000 × 18%)
25 920
Less: Primary rebate
(16 425)
Total employees’ tax
9 495
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Chapter 18
Employees’ tax and provisional tax
Old Mutual retirement annuity fund
The retirement annuity fund is deemed to be an employer. The annual equivalent is
R102 000 (R8 500 × 12).
R
On R102 000 at 18%
18 360
Less: Primary rebate
(16 425)
Total employees’ tax
1 935
Hlumisa (Pty) Ltd
Directors of private companies are also subject to employees’ tax if they earn
remuneration as defined. The annual equivalent of his remuneration amounted to
R24 000. Tax per table is R4 320 (calculated as 18% of R24 000). The rebate of R16 425
exceeds the tax per table and no employees’ tax will therefore be deductible.
Telecommunication company
Mavukani CC is a personal service provider. 27% employees’ tax must be deducted
from each invoice of R100 000 (100 / 115 × R115 000), which is deemed to be
remuneration. R27 000 must be deducted from each payment. The total
employees’ tax will amount to R108 000 (R27 000 × 4).
Part 2
Calculation of third provisional payment
R
Pension (R12 000 × 12)
Annuity (R7 500 × 12)
Director’s emoluments (R2 000 × 12)
Fees from Mavukani CC
Rentals
144 000
90 000
24 000
–
133 000
Taxable income
391 000
Tax per table on R391 000
Normal tax payable (R73 726 + (R391 000 – 353 100) x 31%)
Less: Primary rebate
Less: Medical scheme fees tax credit (s 6A)
(R694 × 12 months)
R
85 475
(16 425)
(8 328)
continued
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Tax Workbook
Less:
R
Medical expenses tax credit (s 6B)
Medical scheme contributions: (R3 600 × 12 months)
Less: 4 × medical scheme fees tax credit
(s 6A) (R694 × 12 months × 4)
R
43 200
(33 312)
Excess
Add: Other qualifying medical expenditure
9 888
9 890
19 778
(29 325)
Less: 7,5% × R391 000
Thus 25% × Rnil since there is no excess
–
Normal tax liability
Less: Taxes prepaid
Employees’ tax (R9 495 + R1 935)
Provisional tax (R22 000 + R22 000)
60 722
11 430
44 000
(55 430)
Amount due on 30 September 2023
5 292
L Questions
Question 18.1
(15 minutes)
You bought a tax practice from a retired chartered accountant on 15 August 2023.
Fortunately, all the clients’ files are computerised. You realise that the third
provisional tax payments have to be made by the end of September 2023 and you
have to call all your clients. You can ignore any provisional payments which relate
to the 2024 year of assessment. According to the computer printout, you have to
deal with the following clients’ tax matters as a matter of urgency:
Client
Year-end
Latest
assessment
Taxable income
per latest
assessment
R
Provisional tax payments
2023
1st
2nd
Note
3rd
(1)
Sonke CC
28 Feb
2022
(170 000)
–
–
?
(2)
Cala (Pty) Ltd
28 Feb
2022
3 571 429
500 000
500 000
?
(3)
Lihle Qiqa
28 Feb
2023
295 000
13 000
19 000
?
(4)
Fika CC
28 Feb
2022
89 200
–
25 000
?
(5)
Notes
(1) All provisional tax payments made were according to the basic amount and all
payments were made on time for the full amount due. All your clients want to
pay the minimum provisional tax within the limits of legislation. None of the
companies are a “small business corporation” or a “personal service provider”
as defined. All the individuals are younger than 65 years and did not earn any
remuneration.
(2) Sonke CC’s taxable income for the 2023 year of assessment, after taking into
account the assessed loss of R170 000, amounts to R45 000.
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Chapter 18
Employees’ tax and provisional tax
(3) The actual taxable income of Cala (Pty) Ltd for the 2023 year of assessment
amounts to R3 273 000.
(4) Lihle Qiqa was assessed by the SARS on 1 July 2023. He paid the amount due on
30 July 2023.
(5) Fika CC has cash flow problems and will be unable to make a third payment.
They will, however, borrow money for the first payment for 2024. You have to
estimate the interest that will be due as a result of not making a third payment.
The actual taxable income for the 2023 year of assessment amounts to R290 000.
The member estimates that the cash flow problems will be solved by
28 February 2024.
YOU ARE REQUIRED to calculate the third provisional tax liabilities of your clients for
the 2023 year of assessment, as well as any interest on late payments.
Question 18.2
(40 minutes)
Ahlulani Bila is 50 years old. Her husband died during the current year of assessment.
She earned the following amounts during the year of assessment ending
28 February 2023:
(1) Amounts received from pension fund
She received a pension of R18 500 a month for 10 months from her late
husband’s pension fund.
(2) Amounts and benefits received from her employer
She was employed for the entire year and received a monthly salary of R35 000
and a travelling allowance of R7 500 a month. Her monthly pension fund
contribution is R3 000.
(3) Amounts received from Abila CC
She is a member of Abila CC (a “small business corporation”, as defined). She
has a 40% interest and her daughter a 60% interest in Abila CC. The CC operates
a florist’s shop in a large shopping mall. Ahlulani is actively involved in all
operational and management decisions affecting the shop. She also does the
books of the shop over weekends. Her daughter works full-time in the shop.
Ahlulani’s salary is R12 000 a month and her daughter’s salary has been R15 000
a month for the past three years.
Annual bonuses (calculated at 50% of taxable income in excess of R100 000
before provision for normal tax) are paid to the members after the financial
statements are finalised.
The following information related to the taxable income of Abila CC:
Financial
year end
Taxable
Financial statements
Available Daughter’s
finalised and bonuses income before
for bonuses
share
bonus
paid (if any)
R
R
R
Ahlulani’s
share
R
28 February 2021
30 April 2021
70 000
None
None
None
28 February 2022
31 May 2022
510 000
205 000
123 000
82 000
28 February 2023
30 June 2024
320 000
110 000
66 000
44 000
309
Tax Workbook
(4) Provisional tax information relating to Abila CC year of assessment ending
28 February 2023
Basic
amount
Date last
assessed
Taxable income
used as an estimate
First provisional tax
payment due on
31 August 2022
R70 000
2021 tax assessment
received on
15 December 2021
R70 000
Second provisional tax
payment due on
28 February 2023
R305 000
2022 tax assessment
received on
1 December 2022
R105 000
N/A
2023 year of
assessment not yet
assessed
?
Third provisional tax
payment due on
30 September 2023
YOU ARE REQUIRED TO
(1) Calculate the employees’ tax for the year of assessment ending
28 February 2023 that the employers mentioned above had to withhold from
Ahlulani Bila’s remuneration (notes 1–3).
(2) Calculate the first and second provisional tax payments that Abila CC made for
the 2023 year of assessment based on the given estimates as well as the third
provisional tax payment to be made to avoid any interest.
Question 18.3
(30 minutes)
Anti-Smoking Ltd is a pharmaceutical company and a public company for tax
purposes. All the full-time employees are members of the company’s pension fund.
The employees must make a 10% contribution and the company a 5% contribution
of basic salary, according to the rules of the fund. The company does not have a
medical scheme but is willing to deduct the contributions from the employees’
salaries and to pay the fund on behalf of its employees. The company is also willing
to withhold any retirement annuity fund (RAF) contributions and to pay the fund on
behalf of the employees. The company is also willing to take the above-named
contributions into account when calculating the employees’ tax liability.
You are busy with an audit on employees’ tax for SARS. The following two
employees were selected for verification purposes.
Vogue Slim
Vogue Slim is 30 years old and married. She is a full-time employee and a
representative of the company. She spends most of her working time on the road
and visits medical doctors in the Gauteng area. Vogue was in employment of her
employer for the full year, and her remuneration package and benefits for the 2023
year of were as follows:
(1) Her pension fund contributions are calculated on her basic salary of R30 000 a
month.
(2) Commission is awarded on a monthly basis. She earned R100 000 commission in
total for the year.
(3) The company deducted her retirement annuity fund contributions of R1 000 a
month from her salary and paid it over on her behalf.
310
Chapter 18
Employees’ tax and provisional tax
(4) Vogue had the use of the employer’s vehicle for the entire year of assessment.
The determined value of the vehicle is R250 000 (including VAT), and the
employer carries all costs relating to the vehicle. The vehicle is not subject to a
maintenance plan.
(5) The employer awarded a bursary of R20 000 to her to enrol for a diploma in
marketing at UNISA. If she does not complete the course, she has to repay the
amount.
Camel Filter
Camel Filter is 76 years old. He was the chief executive officer of Anti-Smoking Ltd.
He retired on 30 November 2022. Camel’s remuneration package and benefits for
the 2023 year of assessment were as follows:
(1) His pension fund contributions were calculated on his basic salary of R120 000 a
month.
(2) The company deducted R8 500 from his salary and paid it over to the medical
scheme on behalf of Camel. He and his spouse are members of the medical
scheme.
(3) Camel received a travel allowance of R22 050 a month until retirement.
(4) He contributed R2 000 a month to a public benefit organisation registered in
terms of s 30 and received a s 18A receipt. The company deducted the
contributions from his salary and paid it over on his behalf. The company agreed
to take the contributions into account when calculating the employees’ tax
liability.
YOU ARE REQUIRED TO calculate the employees’ tax for each of the two employees
that the employer had to withhold in total for the year of assessment ending
28 February 2023.
Question 18.4
(25 minutes)
One of your friends, Thula Phindi (28), is of the opinion that her employer, Fashion
House Limited, has deducted too much employees’ tax from her December 2022
remuneration. Sarah obtained a detailed calculation and asked you to point out
any errors in the calculation of the employees’ tax.
Employees’ tax calculation for the month ended 31 December 2022:
Note
Calculation
R
Salary
1
45 000
Travel allowance
2
R15 000 × 50%
7 500
Bonus
3
45 000
Entertainment allowance
4
2 500
Pension fund contribution
5
Retirement annuity fund contribution
6
R45 000 × 8%
100 000
(3 600)
96 400
(3 500)
Taxable income
92 900
Annualised
R92 900 × 12
1 114 800
continued
311
Tax Workbook
Note
Tax according to table
Primary rebate
Calculation
(R1 114 800 – R817 600)
× 41% + 239 452
R
361 304
(15 714)
345 590
Annual tax
Employees’ tax
R345 590 / 12
28 799
Notes:
(1) Thula’s basic monthly salary is R45 000 per month.
(2) Fashion House Limited pays Thula a monthly travel allowance of R15 000 per
month. On average, 50% of Thula’s vehicle usage is for business purposes.
(3) Thula is entitled to an annual bonus equal to one month’s salary in December of
each year.
(4) On 15 December 2022, Thula took some of the clients of Fashion House Limited
for lunch on the instruction of the company. Thula kept the slip and claimed an
amount of R2 500 back from the company. This amount was paid to her with her
December salary.
(5) Thula and Fashion House Limited each contribute R3 600 per month to the
pension fund. The pension fund contributions are based on her basic salary.
(6) Fashion House Limited makes a monthly contribution of R3 500 for the benefit of
Thula to a retirement annuity fund. Thula does not contribute to the fund.
(7) Thula and Fashion House each contribute R3 500 per month to a medical
scheme of which Thula and her husband are dependents.
YOU ARE REQUIRED TO discuss, with reasons, all the errors contained in the
December 2022 employees’ tax calculation of Thula Phindi. For each error you
should discuss the correct treatment. A recalculation of the total employees’ tax
liability for December 2022 is not required, but you should reflect the amounts that
you have calculated in your discussion in respect of each of the errors identified.
Ignore rounding differences.
312
Chapter 19
Capital gains tax
L Introduction
The first step when calculating a person’s total taxable capital gain or assessed
capital loss, is determining the capital gain or capital loss per asset disposed of
during such year of assessment. In doing this, the Eighth Schedule of the Income Tax
Act 58 of 1962 as amended (the Act)) provides four key definitions which form the
basic building blocks in determining a capital gain or a capital loss on each asset
disposed of. These four definitions are the definitions of an “asset”, a “disposal”, the
“proceeds” and the “base cost”.
The occurrence that triggers any capital gains tax (CGT) event is the disposal or
deemed disposal of an asset. If no disposal occurs, no gain or loss arises.
• An asset is defined as widely as possible, and CGT applies to all assets disposed of
on or after valuation date, whether or not the asset was acquired by the person
before, on, or after that date.
• The concept of disposal covers any event, act, forbearance or operation of law
which results in a creation, variation, transfer or extinction of an asset. It also
includes certain events treated as disposals, for example, emigration, immigration
and the change in the use of an asset.
• When an asset is disposed of it gives rise to proceeds. The amount which is
received by or which accrues to the seller of the asset, constitutes the proceeds
from the disposal, excluding amounts already taxed as part of normal income tax
calculation.
• The fourth important building block in the calculation of a capital gain or a
capital loss is the base cost of an asset. The base cost of an asset, in essence,
consists of three broad components, namely, costs directly incurred in respect of
the:
– acquisition of an asset;
– improvement of an asset; and
– direct costs in respect of the acquisition and disposal of an asset.
If the amount was already claimed as a deduction for income tax purposes, it
cannot be claimed again.
The base cost of an asset is calculated as the sum of the valuation date value (base
cost value on 1 October 2001) and the cost incurred after 1 October 2001. The
valuation date value on 1 October 2001 is calculated in terms of para 26 or 27 of
the Eighth Schedule. If the proceeds exceed the cost, then para 26 is applicable,
and the highest of either the market value on 1 October 2001 or “proceeds” minus
costs incurred after 1 October 2001, multiplied by 20% or the time-apportionment
313
Tax Workbook
base cost may normally be used as the valuation date value. The exception arises
when the market value on 1 October exceeds the proceeds. The base cost of assets
purchased after 1 October 2001 is considered as being the cost incurred on that
asset.
These four definitions are illustrated as follows:
An investor buys 100 shares as an investment (not as trading stock) on 1 October
2004, at a base cost of R100 000. He sells them on 1 October 2022 for R300 000.
The asset is the 100 shares.
The disposal event is the sale of the shares.
The proceeds are the R300 000 (sale price).
The base cost is the R100 000 (purchase price).
The capital gain that results is therefore R200 000 (R300 000 – R100 000).
The same principles apply in calculating a capital loss, in which instance the base
cost exceeds the proceeds.
Various capital gains or capital losses must be disregarded or are limited for
purposes of determining a capital gain or a capital loss, and certain capital gains
resulting from a donation, settlement or other similar disposition can be attributed to
the “donor”.
The Eighth Schedule also provides for the roll-over of certain capital gains. In these
circumstances, the recognition of these gains is delayed for CGT purposes and
deferred until the happening of a future event.
Steps:
The Eighth Schedule provides the following steps for calculating taxable capital gain:
Calculate the capital gain or capital loss on each disposal or deemed disposal, by
deducting the base cost from the proceeds. Add all the capital gains and losses
together after taking exclusions, limitations and roll-overs into account.
Reduce the above calculated total with the annual exclusion (only available for
natural persons and special trusts).
The result is the total capital gain or total capital loss for the year of assessment.
From this amount, any assessed capital loss brought forward from the previous year
can be deducted.
The result gives the net capital gain or capital loss.
If there is a net capital gain it must be included in taxable income after applying the
inclusion rate.
If there is an assessed capital loss it must be carried over to the following year of
assessment.
L Contents
The table gives an indication of the time that you will need to complete the
example or question. The relevant sections or paragraphs that you need to know
before attempting the example or question are provided, and the grading of the
example or question gives an indication of the difficulty of the question.
314
Chapter 19
)
Example/Question
and time allocation
Capital gains tax
Topic and/or relevant sections
Level
Example 19.1
(10 minutes)
• Framework (paragraphs 3 to 10)
Basic
Example 19.2
(20 minutes)
• Paragraph 15 – limitation of losses
• Paragraph 22 – donation’s tax and base
cost
• Paragraphs 25 and 26 – Pre-valuation
date asset
• Paragraph 30 – time-apportionment base
cost
• Paragraph 38 – disposal by way of
donation
• Paragraph 45 – basic primary residence
exclusion
• Paragraph 53 – personal-use assets
exclusion
Intermediate
Example 19.3
(12 minutes)
• Section 19 – reduction of debt (debtor)
• Paragraphs 38 and 39 – connected
persons
• Paragraph 56 – write-off of debt
(creditor)
Intermediate
Example 19.4
(12 minutes)
• Paragraph 13 – time of disposal
Intermediate
Example 19.5
(20 minutes)
• Sale of office building and delivery
vehicle
• Paragraphs 9, 20(2) and 20(3)
• Section 11(e) and (o)
Advanced
Example 19.6
(20 minutes)
• Depreciable assets – pre-valuation date
Advanced
Question 19.1
(20 minutes)
• Company selling assets
Intermediate
Question 19.2
(20 minutes)
• Sale of assets versus shares
Intermediate
Question 19.3
(20 minutes)
• Primary residence exclusion and
marriage in community of property
Advanced
Question 19.4
(20 minutes)
• Write-off of debt
Advanced
• Paragraph 20 – calculation of base cost
• Paragraphs 45, 48 and 49– primary
residence exclusion
L Examples
Example 19.1
(10 minutes)
John Roller retired on 28 February 2022 at the age of 62 years. A monthly pension of
R35 000 accrued to him from the pension fund he was a member of. Employees’ tax
of R78 040 was deducted from this pension during the 2023 year of assessment. On
31 July 2022 he sold his shares in Birding Ltd (an unlisted company).
315
Tax Workbook
John provides the following information regarding his shareholding in Birding Ltd:
• He bought 10 000 shares in Birding Ltd on 2 January 2012 at R15 each for
investment purposes (not for speculation).
• He sold his shares to Sarah Sunbird on 31 July 2022 for R400 000.
YOU ARE REQUIRED TO calculate the normal tax owing by John Roller for his 2023
year of assessment.
Solution 19.1
Calculation of taxable capital gain:
31 July 2022:
Asset: 10 000 shares in Birding Ltd
Disposal event: Sale of the shares
Proceeds: R400 000 (sale price)
Base cost = R150 000 (acquisition price)
Capital gain
R
400 000
(150 000)
Proceeds
Less: Base cost
Gives: Gain
Less: Specific exclusions
250 000
–
Less: Annual exclusion
250 000
(40 000)
Total capital gain
Multiply: Inclusion rate
210 000
40%
Taxable capital gain (note)
84 000
Calculating taxable income for the year of assessment
ended 28 February 2023:
Pension (35 000 × 12)
420 000
Taxable income before capital gain
Taxable capital gain
420 000
84 000
Taxable income
504 000
Normal tax payable (R115 762 + 36% × (R504 000 – R488 700))
Less: Rebate
121 270
(16 425)
Normal tax liability
Less: Employees’ tax paid
104 845
(78 040)
Normal tax owing
26 805
316
Chapter 19
Capital gains tax
Note
Taxable capital gain
In terms of para 5, the aggregate capital gain must be reduced by the annual
exclusion of R40 000 for a natural person. Only a portion of the aggregate capital
gain is subject to tax, and the taxable capital gain is calculated with reference to
the inclusion rate. The inclusion rate for a natural person is 40% (para 10(a)).
Example 19.2
(20 minutes)
James Mabena, 59 years old, has lived in Cape Town for the past 20 years. After
accepting a promotion, he was transferred to Pretoria. He took up his new position
on 1 October 2022. James sold or donated the following assets on 29 September
2022, before moving to Pretoria:
Primary residence in Cape Town
James bought a house in Cape Town on 1 October 1980 for R80 000. He and his wife
(to whom he is married out of community of property) lived in the house from the
day that they bought it until the day of sale. In 1996 they made certain
improvements to the house at a cost of R375 000. The house was valued at
R2 500 000 on 1 October 2001 and was sold for R3 600 000. The time-apportionment
base cost of the asset amounts to R1 989 146.
House in Plettenberg Bay
James bought a house in Plettenberg Bay on 1 March 2005 for R1 550 000. He
and his family used this house as a holiday house and let it out to holidaymakers
from time to time. It was sold for R1 927 700.
Yachts
James owned two yachts, which he bought during 2008. Both yachts were used
mainly for recreational purposes, but 25% of the time the yachts were used for trade
purposes. The 8-metre yacht was sold at a capital loss of R24 000, and the 12-metre
yacht was sold at a capital loss of R74 800.
Listed shares in company A
James donated shares in listed company A to his nephew. James bought the shares
on 15 October 2005 for R90 000. The market value of the shares on the date of the
donation was R150 000. This was the first donation that James made during the year
of assessment, and he paid the donations tax within the prescribed period.
YOU ARE REQUIRED TO calculate James’s taxable capital gain or loss for the 2023
year of assessment. James is not registered for VAT and all the amounts are inclusive
of Value-Added Tax (where applicable).
317
Tax Workbook
Solution 19.2
Taxable capital gain/loss for the year of assessment
Asset
House (primary residence) in Cape Town (note 1)
House (holiday home) in Plettenberg Bay (note 2)
Yachts (note 3)
Shares (note 4)
–
377 700
(18 700)
56 000
Aggregate capital gain (para 6)
Less: Annual exclusion (para 5)
415 000
(40 000)
Capital gain
Multiply: Inclusion rate (para 10)
375 000
× 40%
Taxable capital gain
150 000
R
Notes
(1) House in Cape Town
The original cost price and cost incurred on effecting improvements must be
included in the base cost of this asset, in terms of para 20.
If an asset was owned for a period before and after the valuation date and then
sold after the valuation date, para 30 provides a formula to be used in
determining the time-apportionment base cost of an asset. The formula is as
follows:
Y = B + (P – B) × (N / (T + N))
The meaning of all these symbols must then be given.
B = R80 000 + R375 000 = R455 000
P = R3 600 000
N = 20 years (21 years, but limited to 20 years because expenditure was
incurred in more than one year prior to 1 October 2001)
T = 21 years
Y = R455 000 + ((R3 600 000 – R455 000) × (20 / (21 + 20)))
Y = R1 989 146
The valuation date value is the highest of
• market value of R2 500 000;
• 20% rule = 20% × R3 600 000 = R720 000; or
• time-apportionment base cost = R1 989 146,
therefore the valuation date value is R2 500 000.
The base cost is the valuation date value plus the cost incurred after 1 October
2001, thus R2 500 000 + Rnil = R2 500 000.
Capital gain
Proceeds
Less: Base cost (see above)
R
3 600 000
(2 500 000)
Capital gain
Less: Primary residence exclusion (R2 000 000, limited to)
1 100 000
(1 100 000)
Capital gain
–
318
Chapter 19
Capital gains tax
Paragraph 45(1)(a) disregards the first R2 000 000 of a capital gain (or capital
loss) made on the disposal of a primary residence. The amount is limited to the
actual gain.
(2) House in Plettenberg Bay
Capital gain
R
1 927 700
(1 550 000)
Proceeds
Less: Base cost
Capital gain
377 700
The home will not qualify as a primary residence, as the house in Cape Town was
James Mabena’s primary residence.
(3) Yachts
The eight-metre yacht is a personal-use asset as contemplated in para 53,
because it is less than ten metres in length and is mainly used for purposes other
than the carrying on of a trade. A gain or a loss must therefore be disregarded in
respect of this yacht.
The 12-metre yacht is specifically excluded from being a personal use asset for
purposes of the application of para 53 (because it exceeds ten metres in
length). Paragraph 15 disregards the loss on this yacht to the extent that it is used
for purposes other than the carrying on of a trade. 75% of the loss of R74 800
must therefore be disregarded, while 25% of the loss, being R18 700, may be
taken into account in the calculation of the sum of his capital gains and losses.
(4) Shares in listed Company A
Paragraph 38 determines that, where an asset is donated, it is deemed to have
been disposed of at market value. A portion of the donation’s tax of R10 000
(that is 20% × (R150 000 – R100 000 exemption) may, however, be added to
James’s base cost in terms of para 22. The portion is R4 000 in this scenario,
calculated as R10 000 × (M – A) / M, where M represents the market value of the
asset donated of R150 000, and A represents the para 20 expenditure incurred of
R90 000.
Capital gain
Proceeds
Less: Base cost (R90 000 + R4 000; see above)
Capital gain
R
150 000
(94 000)
56 000
Example 19.3
(12 minutes)
Ndaba Ltd is a resident of the Republic. It owns shares in a number of subsidiary and
associate companies. It also owns several immovable properties.
319
Tax Workbook
On 1 February 2023 it entered into the following transactions with some subsidiaries:
Ntsele (Pty) Ltd (a wholly-owned subsidiary)
An immovable property with a base cost of R1 000 000 was sold by Ndaba Ltd to
Ntsele (Pty) Ltd for R2 500 000. Ntsele (Pty) Ltd used the property as a storeroom
where it kept goods for the local market.
Ntsele (Pty) Ltd could have sold the asset for R3 000 000 to an independent third
party.
Mawa (Pty) Ltd (a wholly-owned subsidiary)
Ndaba Ltd sold an undeveloped immovable property with a base cost of R500 000
to Mawa (Pty) Ltd for R400 000. The property was valued at R400 000 on date of sale.
Khuzwayo (Pty) Ltd (a 60% subsidiary – not part of “group of companies”)
Ndaba Ltd lent R50 000 interest-free to Khuzwayo (Pty) Ltd during December 2020.
Khuzwayo (Pty) Ltd used the full R50 000 loan to purchase trading stock from one of
its suppliers. Due to financial difficulties, Khuzwayo (Pty) Ltd was relieved of its
obligation to repay the loan during January 2023. None of the trading stock
purchased with the loan was, however, still on hand when the loan was written off.
YOU ARE REQUIRED TO discuss the implications of the above three transactions on
the taxable income of Ndaba Ltd for its year of assessment, which ended on 30 June
2023.
Solution 19.3
Sale to Ntsele (Pty) Ltd
The price agreed to between Ndaba Ltd and Ntsele (Pty) Ltd was lower than the
price an independent person dealing at arm’s length would have been willing to
pay for the property. Paragraph 38 results in the market value (that is R3 000 000) of
the property being deemed to be the consideration for purposes of this disposal. This
will also be the base cost to Ntsele (Pty) Ltd.
The capital gain/(loss) is calculated as follows:
R
Proceeds
3 000 000
Less: Base cost
(1 000 000)
Capital gain
2 000 000
The gain will be added to Ndaba Ltd’s sum of capital gains and losses for the year
of assessment.
Sale to Mawa (Pty) Ltd
The price agreed to between Ndaba Ltd and Mawa (Pty) Ltd is the market value,
and no adjustment need therefore be made in terms of para 38.
The capital gain/(loss) is calculated as follows:
R
Proceeds
400 000
Less: Base cost
(500 000)
Capital loss
(100 000)
320
Chapter 19
Capital gains tax
Paragraph 39 determines that a taxpayer’s capital loss determined in respect of the
disposal of an asset to a connected person be treated as a “clogged” loss. The loss
will in effect be ring-fenced so that it can only be deducted from capital gains
determined in respect of other disposals during that or any subsequent year to the
same connected person. The person to whom the subsequent disposals are made
would, moreover, still have to qualify as a connected person at the time of those
disposals. A “ring-fenced” loss may thus not be brought into account in determining
that person’s aggregate capital gain or aggregate capital loss for the tax year in
which that disposal takes place.
The loss of R100 000 is therefore carried over to the next year of assessment, and no
loss is brought into the calculation for the current year of assessment.
Write-off of loan owed by Khuzwayo (Pty) Ltd
The application of s 19(5) will result in Khuzwayo (Pty) Ltd having to account for a
recoupment of R50 000. Ndaba Ltd disposes of a claim owed by a connected
person at a loss of R50 000. The loss is calculated as proceeds of Rnil less base cost of
R50 000. This loss is not disregarded or ring-fenced, due to the fact that the R50 000
must be included in Khuzwayo (Pty) Ltd’s gross income as a recoupment
(para 56(2)(c)).
Taxable capital gain
Assuming that these were Ndaba Ltd’s only disposals during its 2023 year of
assessment, its aggregate capital gain is R1 950 000 (R2 000 000 (gain) – Rnil
(ring-fenced loss) – R50 000 (loss)). The inclusion in its taxable income is thus
R1 560 000 (80% of R1 950 000). No annual exclusion is available to a company.
Example 19.4
(12 minutes)
Mr and Mrs Musho are married out of community of property. They are both
residents of the Republic. Mr Musho is an insurance consultant. On 1 November
2004, he purchased a piece of land for R200 000. Their intention was to erect their
primary residence on this piece of land. He commenced building the house on the
property on 1 April 2005. The house was, however, only completed on 1 September
2006, at a cost of R880 000, on which date they moved into the house. An additional
living room was added to the house at a cost of R260 000. Work on the addition
commenced on 3 January 2009 and was completed on 18 February 2009. While the
builders were busy on the premises, they fixed the leaking roof at an additional cost
of R25 000.
From 1 April 2007 Mr Musho used some of the rooms in the house as an office from
where he operated his insurance consulting business. Throughout the period, he
used approximately 10% of the floor space of the house for business purposes. Every
year Mr Musho claimed 10% of the costs of the house as an income tax deduction.
On 10 January 2023 the residence was sold for R2 500 000. The registration of the
transfer of ownership took place on 10 March 2023.
YOU ARE REQUIRED TO calculate the taxable capital gain for the 2023 year of
assessment. Round your calculations to the nearest rand.
321
Tax Workbook
Solution 19.4
Paragraph 13 determines the date of the disposal of an asset. As there is a contract
of sale between the parties that is not subject to any condition (for example the
obtaining of a mortgage bond or the purchasers being able to sell their house), the
date of the sale is the date on which the contract is concluded, in this instance
10 January 2023.
The base cost of the house is R1 340 000 (R200 000 + R880 000 + R260 000) since the
repair may not be included in the base cost.
As the house was used as a primary residence, the taxpayer qualifies for a primary
residence exclusion of R2 000 000 in terms of para 45. Where a residence was not
used as a primary residence for the whole period on or after 1 October 2001, an
apportionment must be made to determine the capital gain (or loss) that qualifies
for the exclusion.
The second proviso to para 48 provides that, where land has been purchased with
the intention of erecting a primary residence thereon, and there is no structure,
there is no primary residence. The taxpayer is then allowed two years to complete
the erection of a residence to be used as a primary residence, before the
apportionment clause will come into operation. This paragraph is not applicable in
this example, however, since the residence was completed (and occupied) in less
than
2 years (namely 22 months) after the acquisition of the land.
The purpose of para 49 is to reduce the capital gain to be disregarded in terms of
the primary residence exclusion, where a part of the primary residence was used for
the purposes of carrying on a trade. The primary residence exclusion cannot be
claimed on the 10% of the house that was used for business purposes.
The capital gain or loss is calculated as follows:
R
Proceeds
2 500 000
Less: Base cost (see above)
(1 340 000)
Capital gain
Less: Gain attributable to primary residence (note)
Capital gain on asset
Less: Annual exclusion
1 160 000
(1 044 000)
116 000
(40 000)
Capital gain for the year of assessment
Multiply: Inclusion rate
76 000
× 40%
Taxable capital gain
30 400
Note
Residential exclusion
The capital gain on the disposal of a residential property qualifies for an exclusion of
up to R2 000 000, limited to the gain. The gain attributable to the primary residence
is R1 044 000 (R1 160 000× 90%), because 10% of the house was used for trade
purposes. The gain attributable to the primary residence is thus fully exempt as it is
less than the primary residence exclusion of R2 000 000. If the proceeds from the sale
of a primary residence do not exceed R2 000 000, then the full gain may be
322
Chapter 19
Capital gains tax
excluded on the condition that no portion of the residence was used for trade
purposes, which is not applicable in this scenario.
Example 19.5
(20 minutes)
Musina Ltd, a registered vendor that only makes taxable supplies, entered into the
following transactions during the year of assessment ended 31 March 2023. The
company brought forward an assessed capital loss of R150 000 from the previous
year of assessment. All transactions were concluded between unconnected persons
who are VAT vendors.
Existing office building
An office building was purchased on 10 December 2007 for R3 200 000 (excluding
VAT). Transfer cost paid to the lawyer was R72 000. The building did not qualify for
s 13quin since it was not new and unused. The office building was sold on 20 January
2023 for R4 500 000 (excluding VAT).
The following costs were incurred while the company owned the asset (all costs
exclude VAT):
R
Improvements
740 000
Interest paid on mortgage bond (deducted for normal tax purposes)
890 000
Property tax (deducted for normal tax purposes)
350 000
1 980 000
Delivery vehicle
A delivery vehicle, purchased on 1 July 2021 for R414 000 (including VAT), was sold
on 30 November 2022 for R230 000 (including VAT). The company qualified for the
s 11(e) wear-and-tear allowance (over four years) and will elect the application of
s 11(o) if possible.
YOU ARE REQUIRED TO calculate the company’s taxable capital gain for the year of
assessment ended 31 March 2023.
Solution 19.5
Calculation of Musina Ltd’s taxable capital gain for the year of assessment ended
31 March 2023:
Existing office building
Calculation of base cost
Cost 10 December 2007
Plus: Improvements
Plus: Transfer cost
Interest and property tax may not be added to base cost
(para 20(2)(a) and (b)).
Base cost
R
3 200 000
740 000
72 000
4 012 000
continued
323
Tax Workbook
Calculation of capital gain
R
4 500 000
(4 012 000)
Proceeds (selling price)
Less: Base cost
Capital gain
488 000
Delivery vehicle
Income tax calculation
Tax value of delivery vehicle on 30 November 2022
Cost 1 July 2021 (R414 000 × 100/115)
Less: Wear-and-tear (s 11(e))
31 March 2022 R360 000 / 4 × 9/12
30 November 2022 R360 000 / 4 × 8/12
R
360 000
(67 500)
(60 000)
Tax value on 30 November 2022
232 500
Calculation of s 11(o) allowance on delivery vehicle
Selling price 30 November 2022 (R230 000 ×
Less: Tax value on 30 November 2022
100/
115)
Section 11(o) allowance
R
200 000
(232 500)
(32 500)
Capital gains tax calculation
R
Calculation of proceeds
Selling price (R230 000 × 100/115)
Less: Adjustments (no adjustments, as there is no recoupment)
Proceeds
Calculation of base cost
Cost (R414 000 × 100/115)
Less: Wear-and-tear (as above)
Less: Section 11(o) allowance
200 000
–
200 000
360 000
(127 500)
(32 500)
Base cost
200 000
Calculation of capital gain
Proceeds
Less: Base cost
200 000
(200 000)
Capital gain
–
Taxable capital gain
Capital gain on office building
488 000
Capital gain on delivery vehicle
Total capital gain
Less: Assessed capital loss (brought forward)
–
488 000
(150 000)
Net capital gain
338 000
Taxable capital gain (R338 000 × 80%)
270 400
324
Chapter 19
Capital gains tax
Example 19.6
(20 minutes)
Buang Ltd, a resident of the Republic, purchased a plot of land on 1 April 2000 for
R500 000. It erected a factory on the land at a cost of R2 000 000 (evenly incurred
over the period 1 May 2000 until 31 August 2001. The erection of the factory was
completed on 1 September 2001 and the factory was immediately brought into use.
It extended its factory which increased the manufacturing capacity of the factory
by 25%. The extension to the factory was completed at a cost of R1 250 000 and
brought into use on 1 December 2013.
On 25 September 2022 Buang Ltd received an offer for the purchase of the factory
from an independent third party and agreed to sell the factory for R6 000 000.
Buang Ltd has a taxable income from trading activities of R10 000 000 for the current
year of assessment. This amount includes all allowances and recoupments.
Where applicable, all amounts exclude Value-Added Tax correctly accounted for.
Buang Ltd elected the time-apportionment valuation date value of R630 435 to
determine the capital gain.
YOU ARE REQUIRED TO calculate the normal tax liability of Buang Ltd for its year of
assessment ended 31 December 2022. Round amounts to the nearest rand.
Solution 19.6
Normal tax liability of Buang Ltd
Income from trade activities (including recoupments)
Taxable capital gain (note 3)
R
10 000 000
1 690 909
Total taxable income for the year of assessment
11 690 909
Tax at 28%
3 273 455
Notes
1. Income tax recoupment
Tax value of asset on date of disposal
Land
Acquisition cost equals tax value
500 000
Factory
Erection costs incurred
Less: Capital allowance (s 13) (5% × R2 000 000 × 20 years)
Tax value on date of disposal
2 000 000
(2 000 000)
nil
Improvements
Extension costs incurred
Less: Capital allowance (s 13) (5% × R1 250 000 × 10 years)
Tax value on date of disposal
1 250 000
(625 000)
625 000
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Tax Workbook
R
Recoupment on disposal
Selling price (R6 000 000, limited to cost price:
R500 000 + R2 000 000 + R1 250 000)
Less: Tax value (R500 000 + Rnil + R625 000)
3 750 000
(1 125 000)
Section 8(4)(a) recoupment
2 625 000
Alternative calculation of recoupment on disposal:
Selling price
Less: Tax value (R500 000 + Rnil + R625 000)
6 000 000
(1 125 000)
4 875 000
But a s 8(4)(a) recoupment is limited to allowances
previously claimed of R2 000 000 + R625 000
2 625 000
2. Time-apportioned base cost
As it was stated that Buang elected the time-apportionment base cost, it will not
be compared to the other options available in terms of para 26. As the total
amount of expenditure allowable in terms of para 20 was incurred before and
after valuation date, and the asset is a depreciable asset, the proceeds to be
used in determining the TAB cost must be determined in accordance with the
formula contained in para 30(4).
This formula is as follows:
R1 × B1
P1 =
(A1 + B1)
R1 = R6 000 000
B1 = R500 000 + R2 000 000 = R2 500 000
A1 = R1 250 000
R6 000 000 × R2 500 000
(R1 250 000 + R2 500 000)
= R4 000 000
Y
= B + [(P1 – B1) × (N / (T + N))]
B
= R500 000 + Rnil = R500 000
P1 = R4 000 000
B1 = R2 500 000
N
= 2 years (1 April 2000 to 1 October 2001)
T
= 21 years
Y
= R500 000 + [(R4 000 000 – R2 500 000) × (2 / (20 + 2)]
= R630 435
The base cost is calculated as follows:
P1
=
R
Time-apportionment valuation date value (see above)
Add: Paragraph 20 expenditure incurred after valuation
date
Extension costs incurred
Less: Capital allowance
Base cost
1 250 000
(625 000)
R
630 435
625 000
1 261 364
326
Chapter 19
Capital gains tax
3. Taxable capital gain
Proceeds from disposal (R6 000 000 – R2 625 000)
Less: Time-apportioned base cost (note 2)
R
3 375 000
(1 261 364)
Capital gain on disposal of asset
Less: Annual exclusion (not a natural person)
2 113 636
–
Capital gain for the year of assessment
Multiply: Inclusion rate
2 113 636
80%
Taxable capital gain
1 690 909
L Questions
Question 19.1
(20 minutes)
Sejtaba CC, resident of the Republic, manufactures radios for the local and export
markets. Sejtaba CC is a registered vendor that only makes taxable supplies. The
close corporation wants to pay as little tax as possible. On 31 March 2023 burglars
broke into its premises, causing extensive damage. The following assets (all used in
the process of manufacture) were damaged beyond repair:
Machine A
Machine A (a second-hand machine) was purchased on 1 July 2022 for R400 000
(excluding VAT) and was immediately brought into use. The machine was insured,
and Sejtaba CC received R450 000 (excluding VAT) on 10 April 2023 from its insurer.
The tax value of Machine A on 31 March 2023 was R320 000. The award from the
insurer was used in full to purchase a brand-new machine to replace the damaged
one. The new machine was delivered on 15 June 2023 and brought into use on that
date.
Machine B
Machine B (a second-hand machine) was purchased on 1 November 2022 for
R100 000 (excluding VAT) and was immediately brought into use. Sejtaba CC had to
construct a special foundation for it at a cost of R12 400. Machine B was insured.
Sejtaba CC received R160 000 (excluding VAT) from its insurer. The remains of
Machine B were sold to a scrap-metal dealer for R12 000 (excluding VAT). The
award from the insurer was used by Sejtaba CC to repay its bank overdraft.
Sejtaba CC did not dispose of any other assets during the current year of
assessment.
YOU ARE REQUIRED TO calculate the taxable capital gain or assessed capital loss for
the year of assessment ended 30 June 2023.
Question 19.2
(20 minutes)
On 1 December 2005, Joseph Baloi (then 46 years of age) inherited R599 000 from
his uncle. He used this money to buy all the shares in Beach House 136 (Pty) Ltd.
Beach House 136 (Pty) Ltd is a dormant company and its only property is House 136,
Beach Road, Margate. The company has a 30 April year end. Joseph and his family
have been using this property as a holiday home since acquiring the shares.
327
Tax Workbook
The company was formed in June 1997 and bought the house in December 1997.
The company paid R260 000 cash for the property. The company does not have any
other assets or liabilities. The company will elect the time-apportionment valuation
date value of R506 400 to determine the capital gain. The market value of the
property on 1 October 2001 was not obtained.
Joseph recently moved to Cape Town for work purposes. He wants to sell the house
in Margate and use the money to buy another holiday home closer to Cape Town.
On 1 September 2022 he received the following two offers to buy the house:
Offer 1: Jimmy Patterson will buy all the shares in the company for R1 800 000.
Offer 2: Fatima Naidoo wants to buy the house from the company for R1 800 000.
Joseph will not buy or sell any other assets during the current year of assessment.
Joseph pays tax at the maximum marginal tax rate. Neither the property nor the
shares were valued on 1 October 2001.
YOU ARE REQUIRED TO calculate which offer will provide Joseph with the most aftertax cash to buy the new house, assuming that Joseph is already paying normal tax
at the maximum marginal rate.
Question 19.3
(20 minutes)
Fakaza is married in community of property to Mbali. They sold their primary
residence, situated on a 10-hectare property on 31 August 2022. The residence
was sold fully furnished for R5 000 000 of which R1 000 000 was attributable to the
10-hectare piece of land, R3 200 000 to the actual buildings on the property, and
R800 000 to furniture, paintings and other personal use items of Fakaza and Mbali
that were sold with the house. These personal items were sold at a loss of R200 000.
The property was acquired on 31 August 2016 at a cost of R1 400 000 (of which
R350 000 was attributable to the land and R1 050 000 to the buildings on the
property). The property was, however, let until 31 August 2017, whereafter Fakaza
and Mbali moved into it to use it as their primary residence. From that date until the
date of disposal, they used 15% of the house for business purposes. The land was
used mainly for private purposes during this period.
YOU ARE REQUIRED TO calculate the taxable capital gain or assessed capital loss for
Fakaza for the 2023 year of assessment. Provide detailed calculations and support
each inclusion, exclusion or limitation with reasons.
328
Chapter 19
Capital gains tax
Question 19.4
(20 minutes)
Tulum (Pty) Ltd (‘Tulum’), not a VAT vendor, experienced serious financial difficulties
during its 2023 year of assessment (ended 31 March 2023) that resulted in debt
totalling R335 000 being written off by some of its creditors, namely:
Debt
Further information
1
Land acquired
for R3 000 000
The land was acquired as a capital asset but due to
financial constraints already disposed of for R2 800 000
during the 2022 year of assessment.
2
Second-hand
machine (used in
a process of
manufacture)
The machinery was bought at a cost of R500 000.
Capital allowances were claimed for 2 years (being
2022 and 2023 years of assessment).
Furniture
Original cost was R100 000. It was fully written off in
terms of s 11(e) prior to the debt reduction.
3
Amount
written off
(incl. VAT)
R250 000
R60 000
R25 000
R335 000
Tulum has an assessed capital loss of R270 000 brought forward from the 2022 year
of assessment and did not have disposals during its 2023 year of assessment.
Subsequent to the debt reduction, the machine (refer point 2 in above table) will be
used for one more year and then sold to an independent person at its market value
of R520 000. (The reason this machine’s market value would be so high is due to its
scarcity.)
Tulum will elect any available option to minimize its tax liability.
YOU ARE REQUIRED TO
(1) Briefly state the normal tax consequences for Tulum (Pty) Ltd of each amount
being written off.
(2) Calculate the inclusion in or deductions from the taxable income of Tulum (Pty)
Ltd that will arise in the year of assessment in which the machine is disposed of.
This would be the only disposal in that year, and you may assume that current
legislation remains the same.
329
Chapter 20
Donations tax
L Introduction
The examples and questions in this chapter deal with donations tax. Donations tax is
levied in terms of ss 54–64 of the Income Tax Act 58 of 1962 as amended.
Donations tax is a tax paid on the value of property that is donated by a donor to a
donee. The donations tax is in the first instance payable by the donor.
The donations that are subject to this tax are those donations that are made during
the donor’s lifetime.
Each natural person is entitled to make donations of up to R100 000 in value each
year of assessment, free from donations tax. Other specified donations are also
exempt from donations tax.
Donations tax is levied at a rate of 20% if the aggregate of the value does not
exceed R30 million. A rate of 25% applies to donations exceeding R30 million with
effect from 1 March 2018. It has been described as an advance death duty. For
purposes of the examples, assume that the aggregate of donations does not
exceed R30 million unless specifically stated otherwise.
L Contents
The table gives an indication of the time needed to complete the example or
question. The relevant sections or paragraphs that need to be known before
attempting the example or question are provided. The level of the example or
question gives an indication of its difficulty.
)
Example/Question
and time allocation
Topic and/or relevant sections
Level
Example 20.1
(10 minutes)
• Section 56(1)(a) and (b)
• Section 56(2)(b) and (c)
Basic
Example 20.2
(10 minutes)
• Section 56(1)(a) and (b)
• Section 56(2)(b) and (c)
Basic
Example 20.3
(45 minutes)
•
•
•
•
Intermediate
Example 20.4
(20 minutes)
• Section 56(1)(b) and (k)
• Section 56 (2)(c)
Definition of “gross income”
Section 10(1)(cE) and (e)
Section 54
Section 56(1)(h), (k) and (q)
Intermediate
continued
331
Tax Workbook
)
Example/Question
and time allocation
Topic and/or relevant sections
Level
Example 20.5
(15 minutes)
• Section 56(1)(b)
• Section 62
Intermediate
Example 20.6
(30 minutes)
• Section 56(1)(b), (h) and (k)
• Section 62
Intermediate
Question 20.1
(20 minutes)
Combined question
Intermediate
Question 20.2
(30 minutes)
Combined question
Intermediate
Question 20.3
(25 minutes)
Combined question
Intermediate
L Examples
Example 20.1
(10 minutes)
Dominique Abrahams is the sole breadwinner of his family. His wife, Ramasela, is a
housewife. They have two children, a son and a daughter. Dominique and Ramasela
are married out of community of property (with an ante nuptial contract).
On the first of each month Ramasela receives R30 000 for housekeeping expenses.
Dominique has calculated that it cost him, excluding donations and gifts, R126 000
during the year of assessment to maintain Ramasela, R72 000 to maintain his son,
and R58 500 to maintain his daughter.
On 20 January 2023 Dominique gave his son a second-hand car for his 19th
birthday. Dominique bought the car for R140 000 four years ago. His son sold the car
for R95 000 the following day.
During February 2023, Dominique made gifts and donations to various members of
his family amounting to R120 000 in total, including gifts and donations to his wife of
R30 000.
YOU ARE REQUIRED TO determine the amount of donations tax payable by
Dominique during the 2023 year of assessment.
Solution 20.1
Donations made by Dominique
“Housekeeping” money (exempt – s 56(1)(b) or s 56(2)(c))
Maintenance of wife (exempt – s 56(2)(c))
Maintenance of son (exempt – s 56(2)(c))
Maintenance of daughter (exempt – s 56(2)(c))
Donations to wife (exempt s 56(1)(a) and (b))
19th birthday gift (value on date of donation; because it was sold the day
after the donation, it is considered to be the value of the donation)
Less: Annual exemption (s 56(2)(b) maximum R100 000)
Amount subject to donations tax
R
–
–
–
–
–
95 000
95 000
(95 000)
–
332
Chapter 20
Donations tax
Donations made by Dominique in February
Less: Donations to his wife (exempt – s 56(2)(c))
120 000
(30 000)
Less: Annual exemption (s 56(2)(b): Limited to R100 000 – R95 000)
90 000
(5 000)
Amount subject to donations tax
Rate of donations tax
85 000
× 20%
Donations tax payable by Dominique
17 000
Example 20.2
(10 minutes)
Peter and Petru Baardman are married in community of property.
From March 2022 until December 2022 Peter made gifts and donations to various
members of his family of R12 000 in total, including gifts and donations to his wife,
Petru, of R3 000. During this period Petru also made gifts and donations to various
members of her family of R20 000 in total, including gifts and donations to her
husband of R200.
Their only daughter turned 18 years of age on 15 January 2023.
Peter gave her a coin collection as a birthday gift. The collection was valued at
R170 000.
Petru gave her an apartment as a birthday gift. Petru inherited this apartment from
her mother's estate. In accordance with the provisions of the will the apartment was
to be excluded from their joint estate. The apartment's value was R430 000, when
Petru inherited it and R750 000 when she donated it to her daughter.
YOU ARE REQUIRED TO determine the amount of donations tax payable by Peter
and Petru during the 2023 year of assessment.
333
Tax Workbook
Solution 20.2
Donations between husband and wife are exempt from donations tax (s 56(1)(a)
and (b)).
As they are married in community of property, they each own an equal share of all
the assets unless this was specifically excluded from their joint estate.
Peter
Petru
R
R
R
March–December:
Donations made by Peter
12 000
Less: Donations to spouse (exempt)
(3 000)
Each spouse owns 50% of the assets being donated
Donations made by Petru
Less: Donations to spouse (exempt)
9 000
4 500
4 500
9 900
9 900
14 400
(14 400)
14 400
(14 400)
20 000
(200)
Each spouse owns 50% of the assets being donated
Less: Annual exemption (s 56(2)(b))
Amount subject to donations tax
15 January:
Coin collection (each spouse 50%)
Apartment (the apartment is excluded from the joint
estate, therefore only Petru made the donation)
Less: Annual exemption (s 56(2)(b):
R100 000 – R14 400, limited to actual donation)
19 800
–
–
85 000
85 000
750 000
85 000
835 000
(85 000)
(85 600)
Amount subject to donations tax
Rate of donations tax
–
749 400
× 20%
Donations tax payable by Petru
–
149 880
Example 20.3
(45 minutes)
Warona Seete recently retired as Chief Financial Officer of a medium-sized mining
company and received a substantial lump sum. He also owns and manages two
businesses that manufacture goods for the mining industry. Warona wants your
advice on the donation tax implications of the following donations. Warona has
always been a resident of the Republic.
Donation 1:
Warona’s aunt (not a resident of the Republic) owns the property in Rustenburg on
which one of the factories is situated. She wants to donate the property to one of
Warona’s companies (a resident of the Republic).
Donation 2:
Warona owns a cottage in Scotland which he wants to donate to his cousin living in
the United Kingdom (not a resident of the Republic).
334
Chapter 20
Donations tax
Donation 3:
Warona wants to give some money to his former university but is not sure if he should
give it as (a) a library of books to the Department of Taxation at a “qualifying”
university, or (b) a cash donation made to a “qualifying” university’s “Charity Rag
Fund”.
Donation 4:
After attending a motivational speech by a former President, he wants to give a
cash donation to a political party. He is considering either making the donation to
the political party who is registered under the provisions of s 36 of the Electoral Act
or in the alternative he can make it to the Friends of the Political Youth Organisation.
Although the Friends of the Political Youth Organisation is “active” in politics, it is not
a political party registered under the provisions of s 36 of the Electoral Act. It is also
not a public benefit organisation.
Donation 5:
Warona is the Chairperson of the local soccer club. The club is a recreational club
and approved by the SARS Commissioner in terms of s 30A. Warona donated
R200 000 to the club to host a soccer tournament for local schools.
Donation 6:
Warona gives his housekeeper a bonus (voluntary award) of R25 000. The bonus was
not paid to the employee in accordance with her service contract. It was paid on
25 December.
Donation 7:
Warona’s business donated 50% of the prize money for an inter-mine dart
tournament. In exchange for this donation, the business’s name will appear in the
official programme and will be frequently referred to by the media.
Donation 8:
Warona gives his secretary a birthday present (new motor vehicle) valued at
R475 000. It should be noted that the secretary is also Warona’s “friend”.
YOU ARE REQUIRED TO state with reasons whether the above donations may be
exempt from, or not liable for, donations tax.
Solution 20.3
Donation 1:
Donations tax is levied on all donations made by a resident of the Republic. Donations
tax is therefore not levied according to where the property is situated, or the place
where the donation is made, but is levied on a donor who is a resident of the
Republic.
As the donor is not a resident of the Republic, no South African donations tax is
payable.
Donation 2:
Donations tax is payable by a resident who makes a donation (unless a specific
exemption applies) even if the donation is made to a non-resident. Donations tax is
335
Tax Workbook
levied on all donations made by a person if he is a resident of the Republic. (In other
words, donations tax is not levied according to where the property is situated, or the
place where the donation is made, but is levied on a donor who is a resident of the
Republic.) But then s 56(1)(g) grants an exemption if the donated property “consists
of a right in property situated outside the Republic and was acquired by the donor”:
• before he became a resident of the Republic; or
• by inheritance from a person who at the date of his death was not ordinarily
resident in the Republic, or by donation if at the time of the donation he was a
person (other than a company) not ordinarily resident in the Republic; or
• out of funds derived by him from the disposal of a property referred to above, or if
he disposed of the property referred to above and replaced it successively with
other “foreign” properties financed by the sale of the first properties, or out of
funds derived from the revenues from these “foreign” properties.
Not enough information is provided to come to a final conclusion.
Donation 3:
(a) The donation of library books to the Department of Taxation at a “qualifying”
university will be exempt from donations tax in terms of s 56(1)(h). This
provision provides an exemption from donations tax if the donation is made to
an approved public benefit organisation (PBO). A “qualifying” university is an
approved PBO, with the result that this donation is exempt from donations tax.
(b) Both donations to universities and donations to charities may be exempt from
donations tax. Yet before the exemption can apply, the institution must be an
approved PBO. It would seem that the “qualifying” university’s “Charity Rag
Fund” will be recognised as an approved PBO (s 56(1)(h)).
Donation 4:
As the political party is registered under the provisions of s 36 of the Electoral Act, its
receipts and accruals are exempt from normal tax in terms of s 10(1)(cE). A direct
result of this exemption from normal tax is that donations made to it (or by it) are
also exempt from donations tax (s 56(1)(h)).
Although Friends of the Political Youth Organisation is “active” in politics, it is not a
political party registered under the provisions of s 36 of the Electoral Act. Therefore,
neither the provisions of s 10(1)(cE) nor 56(1)(h) will apply to it, with the result that
donations tax is payable.
Donation 5:
The donation is exempt in terms of s 56(1)(h) as the recipient body is a recreational
club (approved by the SARS Commissioner in terms of s 30A and exempt under
s 10(1)(cO)).
Donation 6:
The employee who receives the R25 000 voluntary award from his employer will be
required to include it in his gross income. This is in terms of para (c) of the definition
of “gross income” because of the causal relationship between the award and his
services rendered or to be rendered. When a donee is required to include the value
of a donation in his gross income “in terms of para (c), (d) or (i) of the definition of
336
Chapter 20
Donations tax
‘gross income’ in s 1”, then the value of the donation is exempt from donations tax
in terms of s 56(1)(k).
Donation 7:
Based on the information provided, it would seem that the donation of 50% of the
prize money by the business to the tournament is in substance trade advertising, as
there is a direct relationship between the donor’s gift of the prize money and the
business of the donor. The amount “donated” would therefore not be a “gratuitous
disposal of property”, with the result that no donation has taken place and therefore
no liability for donations tax arises.
Donation 8:
The cause of this donation by Warona to his secretary is her birthday, coupled with
their friendship. The donation was not caused by services rendered or to be
rendered by the secretary, with the result that the secretary will not be required to
include the value of this gift, R475 000, in her gross income. A gift is a donation, and
it would seem that none of the exemptions from donations tax apply, apart from the
donor’s basic annual exemption. Donations tax is thus payable on this R475 000 but
only after taking his R100 000 basic annual exemption (or remaining portion for the
year of assessment) into account.
Example 20.4
(20 minutes)
During the 2023 year of assessment Neville Owl, a resident of the Republic who is
married with ante nuptial contract, carried out the following transactions:
Date
Donee and property donated
1 March
He gave his wife (Paula) the lifelong use of the family residence, which
had cost him (Neville) R110 000 in 1981 and which was now valued at
R1 320 000. (The value of this lifelong use determined under the
provisions of s 62 is R1 162 870.)
10 March He gave his son, Ross, the family residence, subject to its lifelong use to
Paula.
15 March He gave his housekeeper, Nesta, who was then aged 60 years, an
annuity of R14 400 for the duration of her life, in recognition of many years
of loyal and efficient service. (Under the provisions of s 62, the value of
this annuity is R90 262.)
23 March He gave his daughter, Shirley, an annuity of R12 000 for ten years. (Under
the provisions of s 62, the value of this annuity is R67 802.)
1 April
He gave his son, Timothy, half the profits of his (Neville’s) manufacturing
business for the remainder of Timothy’s life, and to Timothy’s son, Walter
(his grandson), he gave a half share in his business, subject to Timothy’s
entitlement to its profits. The average annual net income of the
business, before tax, over the past three years was R160 000. The
business was recently valued by a competent authority at R480 000.
(Under the provisions of s 62, the value of this gift to Timothy is R176 771,
and the value of this gift to Walter is R3 398.)
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Tax Workbook
1 May
He gave R40 000 to a clay pigeon shooting club, a recreational club
(approved by the Commissioner in terms of s 30A). He is a member of
the club.
1 June
He gave R50 000 to a university (approved public benefit organisation).
1 July
He waived a debt owed to him by his son, Timothy, to whom he had lent
R16 000 on 1 July 2021, at an interest rate of 9% a year. The capital and
interest payable to him were waived on 1 July 2022.
All members of the Owl family are residents of the Republic. Dates of birth of the Owl
family are as follows:
• Neville:
24 March 1958
• Paula:
21 April 1962
• Ross:
1 October 1988
• Shirley:
7 December 1989
• Timothy:
11 February 1992
• Walter:
7 July 2016
YOU ARE REQUIRED TO calculate the donations tax payable on each of the above
transactions.
Solution 20.4
Date
Donee
Amount
Exempt
portion
R
1 March
Paula
10 March
Taxable
portion
R
Donations
tax at 20%
R
Person
liable
R
1 162 870
(note 1)
1 162 870
(note 2)
–
–
–
Ross
157 130
(note 3)
100 000
(note 4)
57 130
11 426
Donor
15 March
Nesta
90 262
(note 5)
90 262
(note 6)
–
–
–
23 March
Shirley
67 802
(note 7)
–
(note 8)
67 802
13 560,40
Donor
1 April
Timothy
176 771
(note 9)
–
176 771
35 354,20
Donor
1 April
Walter
3 398
(note 10)
–
3 398
679,60
Donor
1 May
An amateur
sporting club
40 000
40 000
(note 11)
–
–
–
1 June
A “qualifying”
university
50 000
50 000
(note 12)
–
–
–
1 July
Timothy
–
17 440
3 488,00
Donor
17 440
(note 13)
Notes
(1) The R1 162 870 value was determined as follows:
R1 320 000 × 12% × 7,34135 (female aged 60 years next birthday) = R1 162 870.
338
Chapter 20
Donations tax
(2) Donations “to or for the benefit of the spouse of the donor who is not
separated from him” are exempt from donations tax under the provisions of
s 56(1)(b).
R
(3) Market value of the family residence
1 320 000
Less: The market value of its lifelong use to Paula:
R1 320 000 × 12% × 7,34135 (female aged 60 years next birthday)
(1 162 870)
157 130
(4) Annual exemption of R100 000 (s 56(2)(b)).
(5) The R90 262 value was determined as follows:
Life expectancy of the donor is 12,31 years (64 years old on his next birthday).
Life expectancy of the donee is 18,04 years (61 years old on next birthday). The
lesser period is the life expectancy of the donor. And the factor is 6,26822.
Value of the donation is therefore R90 262 (R14 400 × 6,26822).
(6) The donation to Nesta is exempt in terms of s 56(1)(k). It provides an exception
from donations tax for donations that are included in the donee’s gross
income, in terms of para (c), (d) or (i) of the definition of “gross income”.
(7) The R67 802 value was determined as follows:
The life expectancy of donor is 12,31 years (64 years old on next birthday). The
period of the donation is ten years. The lesser period is the ten-year period. And
the factor is 5,6502. Value of the donation is therefore R67 802 (R12 000 ×
5,6502).
(8) The R100 000 exemption has already been fully enjoyed (see note 4).
(9) The R176 771 value has been determined as follows:
The life expectancy of the donor is 11,77 years (now 65 years old on his next
birthday), and the factor is 6,13789. Value of donation to Timothy is R176 771
(R480 000 × 50% × 12% × 6,13789).
(10) The R3 398 value has been determined as follows:
The life expectancy of Timothy is 37,57 years (31 years old on his next birthday),
and the factor is 8,21538.
R
Value of donation to Walter is as follows:
Half share of business: 50% of R480 000 =
240 000
Less: Value of profits to Timothy: R480 000 × 50% × 12% × 8,21538
236 602
3 398
(11) The donation to the amateur sporting club is exempt in terms of s 56(1)(h). It
provides an exception from donations tax for donations made to certain
“qualifying” exempt entities.
(12) The donation to the “qualifying” university is exempt in terms of s 56(1)(h). It
provides an exception from donations tax for donations made to certain
“qualifying” exempt entities.
R
(13) Capital sum owing
16 000
Add: Interest due: R16 000 × 9% × 12 months
1 440
Value of donation to Timothy
17 440
339
Tax Workbook
Example 20.5
(15 minutes)
Three separate case studies follow:
• Mr Stimela (70 years old) donated a property valued at R1 000 000 to his
40-year-old son.
• Mr Mvelo (70 years old) donated a property valued at R1 000 000 to his
10-year-old grandson.
• Mr Loliwe (70 years old) donated the usufruct in a property valued at R1 000 000
to his 40-year-old son and donated the bare dominium in the same property to his
10-year-old grandson. In terms of s 62, the value of the usufruct is R636 930, and
the value of the bare dominium is R38 720.
The above donors and donees are residents of the Republic.
YOU ARE REQUIRED TO calculate the donations tax payable on the above donations.
Solution 20.5
The ages of the donors and donees are:
• 70 years old,
• 40 years old, and
• 10 years old.
The life expectancy and present value tables based on their next birthdays are as
follows:
• 71 years: 8,94 years and present value of 5,30775,
• 41 years: 28,69 years and present value of 8,01067, and
• 11 years: 55,86 years and present value of 8,31849.
Stimela family
R
1 000 000
(100 000)
Property – value
Less: Exemption in terms of s 56(2)(b)
Taxable value
900 000
Donations tax payable at 20%
180 000
Mvelo family
R
1 000 000
(100 000)
Property – value
Less: Exemption in terms of s 56(2)(b)
Taxable value
900 000
Donations tax payable at 20%
180 000
340
Chapter 20
Donations tax
Loliwe family
Value of usufruct donation
The R636 930 value of the usufruct has been determined as follows:
Full value of property
1 000 000
Annual value at 12%
Age next birthday of the donor results in a present value factor of
R120 000
× 5,30775
Value of donation of the usufruct
R
636 930
Value of bare dominium donation
The R38 720 value of the bare dominium has been determined as follows:
Full value of property
1 000 000
Less: Value of usufruct calculated in terms of s 62(c)(i)
Annual value at (R1 000 000 × 12%)
Age next birthday of the usufruct holder results in a present
value factor of
Value of donation of bare dominium (R1 000 000 – R961 280)
Donations tax payable
Donation of usufruct – value (see above)
Donation of bare dominium – value (see above)
R120 000
× 8,01067
(961 280)
38 720
636 930
38 720
675 650
(100 000)
Less: Exemption in terms of s 56(2)(b)
Taxable value
575 650
Donations tax payable at 20%
115 130
Note
A simultaneous donation of a bare dominium interest and a life usufructuary interest
in the same property results in less donations tax being payable, if the donor is older
than the donee for the usufruct interest, than if the donation was made of the full
property.
Example 20.6
(30 minutes)
Richard Kone, a resident of the Republic, died on 31 January 2023. He would have
attained the age of 40 years on 1 February 2023. His wife died in 2007, two years after
they were married. They did not have any children.
His parents, brothers and sisters are alive. He has a number of nephews and nieces.
He remembered all their birthdays and spoilt them each year with birthday and
Christmas gifts.
During the period 2 March 2022 to 31 January 2023 (the date of his death), Richard
spent R500 every month except December on gifts for his family and friends. In
December 2022, Richard spent R2 500 on gifts.
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Tax Workbook
In addition to the above gifts, Richard made the following donations during his 2023
period of assessment:
(1) On 1 March 2022, he donated a car to his father. On this date the car had a
book value of R38 400, a tax value of R78 640 (since it was used partly for
business purposes), and a market value of R82 000. It had originally cost Richard
R192 000 four years ago.
(2) On 1 May 2022, he waived a debt owed to him by his nephew, a full-time
university student, to whom he had on 1 February 2021 lent R15 000 at an interest
rate of 6% a year. The capital together with the interest due on it was repayable
to Richard on 1 May 2022.
(3) On 1 July 2022, he gave his cook, Noxolo (who had attained the age of 60 years
on 30 June 2022), an annuity (a pension) of R12 000 a year for the rest of her life.
This donation was made to Noxolo in recognition of 15 years of loyal and
efficient service to him. Noxolo had retired from the position of his cook on her
60th birthday, being the day before the donation was made. In terms of s 62, the
value of this annuity is R87 054.
(4) On 1 October 2022, he gave to Papi, a younger brother, (who was then 25 years
old) one-third of the profits of his (Richard’s) business for the remainder of Papi’s
life. On the same day he donated to Natalie, a niece (who was then 15 years
old), the one-third share in the business, subject to Papi’s entitlement to the
profits from it. The average annual profits of the business, before tax, over the
past three years were R150 000. The business was valued by an independent
third party on 1 October 2022 at R500 000. In terms of s 62, the value of the gift to
Papi is R160 806, and the value of the gift to Natalie is R1 412.
(5) On 1 November 2022, he donated R150 000 to a university (approved public
benefit organisation). It used the proceeds of this donation to subsidise the salary
it was paying to one of its professors in its School of Ornithology.
(6) On 1 January 2023, he donated R40 000 to a bowling club that he was a
member of. The proceeds of this donation were used by it to help finance the
cost of building a new green. This bowling club is an “approved” recreational
club.
YOU ARE REQUIRED TO calculate the donations tax payable by Richard on each of
the donations he made during the period 1 March 2022 to 31 January 2023.
Solution 20.6
Value
1 March 2022: Car to his father
March: Gifts
(Exemption s 56(2)(b))
April: Gifts
(Exemption s 56(2)(b))
1 May 2022: Loan capital
Interest due: R15 000 × (6% p.a. /
12 months) × 15 months
Exempt
Taxable
R
82 000
500
R
82 000
500
R
500
82 500
500
15 000
1 125
(Exemption s 56(2)(b))
Donations
Tax at 20%
R
–
–
–
–
–
–
–
–
83 000
16 125
99 125
continued
342
Chapter 20
Donations tax
Value
Exempt
R
R
May: Gifts
Section 56(2)(b) exemption
June: Gifts
R
Donations
Tax at 20%
R
500
500
–
–
500
99 625
375
125
25
Section 56(2)(b)) exemption
100 000
1 July 2022: Annuity to Noxolo
R12 000 × 7,25457 (61 years)
(s 56(1)(k) included in her gross income in
terms of para (c) of the definition of “gross
income” for services rendered)
July: Gifts
August: Gifts
September month: Gifts
1 October 2022: Profits of business to Papi
1 October 2022: Business to Natalie
October: Gifts
1 November 2022: Donation to a
“qualifying” university (exempt in terms of
s 56(1)(h))
November: Gifts
Taxable
87 054
500
500
87 054
–
–
–
500
500
–
100
100
500
160 806
1 412
500
–
–
–
–
500
160 806
1 412
500
100
32 161,20
282,40
100
150 000
500
150 000
–
–
500
–
100
2 500
–
2 500
500
40 000
500
40 000
–
–
500
–
100
December: Gifts
1 January 2023: Donations to bowls club
(s 56(1)(h))
January: Gifts
L Questions
Question 20.1
(20 minutes)
Patrick Gamede and his family are residents of the Republic. Patrick will be 50 years
old on his next birthday.
He made the following donations during the 2023 year of assessment:
Date
5 April
8 April
13 May
16 July
19 July
Donee and property donated
R10 000 to a local school (a public benefit organisation).
R6 000 a year for six years to a nephew. In terms of s 62, the value of
this donation is R24 668.
A lifetime usufructuary interest in a flat valued at R1 200 000 to his
sister, who will be 55 years old next birthday. In terms of s 62, the
value of this donation is R1 094 690.
R50 000 to each of his three sons. They will be between 10 and 15 years
old on their next birthdays.
R16 000 to his son’s au pair who is leaving to work in the United
Kingdom.
343
Tax Workbook
22 July
25 August
R30 000 to a registered political party.
He sold a farm (used for bona fide farming purposes) to a niece for
R1 180 000. He also received an offer of R1 800 000 from a third party.
Sept to Feb
Sundry casual gifts of small amounts totalling R61 000.
YOU ARE REQUIRED TO calculate the donations tax payable for each of the above
donations, or transactions, and indicate by whom the tax is payable.
Question 20.2
(30 minutes)
Kitwe Mashaba, a resident of the Republic, owns two farms having market values
(being the arm’s-length price between a willing buyer and a willing seller) of
R2 400 000 and R1 800 000 respectively. Both farms are used for bona fide farming
purposes.
• Kitwe donated the usufruct of the farm with a market value of R2 400 000 to his
wife, while the bare dominium in this farm was donated to his eldest son. In terms
of s 62, the value of the usufruct donation is R1 359 199, and the value of the bare
dominium donation is R168 147.
• The right of occupation of the farm with a market value of R1 800 000 was donated
to his youngest son.
Kitwe’s age on his next birthday is 60 years, his wife’s is 58 years old, his eldest son
attained the age of 35 years one month after the donation was made, and the
youngest son was 28 years old when he received his donation.
YOU ARE REQUIRED TO calculate the donations tax payable by Kitwe Mashaba.
Question 20.3
(25 minutes)
Xiporo Thidiela, a widow, attained the age of 66 years on 1 August 2022. She has
one child, namely Gama, and two grandchildren. Xiporo, Gama and the two
grandchildren are all residents of the Republic.
On 1 May 2022, Xiporo inherited R250 000 cash from an aunt. Xiporo then made the
following donations:
• R8 000 to the university she had graduated from (an approved public benefit
organisation (PBO)).
• R6 000 to the church that she is a member of (an approved PBO).
• R10 000 to her only sister, who is not a resident of the Republic.
• R120 000 to her son, Gama.
On 1 July 2022, she gave her sister a house situated outside South Africa that she
had inherited from her father in 2007. The house was valued at the equivalent of
R1 800 000. Her father was ordinarily resident outside South Africa at the date of his
death.
On 2 July 2022, she gave her sister 1 000 shares in Petrel Plc (a foreign company). The
shares were acquired by Xiporo in 2001, with funds transferred from South Africa, for
the equivalent of R1,50 each, and were valued at the equivalent of R4,00 each on
2 July 2022.
On 1 October 2022, she donated R3 000 to each of her two grandchildren.
344
Chapter 20
Donations tax
On 1 November 2022, she retired from farming and gave Gama a lifetime
usufructuary interest in her farm (used for bona fide farming purposes). Xiporo had
owned and run the “North Coast Bird Farm” for over 30 years. Gama had attained
the age of 45 years on 19 December 2021. On 1 November 2022 the farm had a
market value of R3 500 000 (being the arm’s-length price between a willing buyer
and a willing seller). In terms of s 62, the value of the donation of the usufruct is
R1 940 085. Together with the farm, she gave Gama the stock of birds with a market
value of R59 915 and a standard value, for normal tax purposes, of R600.
YOU ARE REQUIRED TO show, for the above donations, the amount subject to
donations tax, indicating the reason for an exempt portion, and to calculate the
donations tax payable on each of the above donations.
345
Chapter 21
Estate duty
L Introduction
The examples and questions in this chapter illustrate the implications of estate duty.
It is levied in terms of the Estate Duty Act 45 of 1955. Estate duty is levied on the
transfer of wealth from one person to another in the event of the death of a person.
Liabilities due by the estate are usually deductible in the calculation of the dutiable
amount of the estate. The final normal tax liability (including capital gains tax
consequences) needs to be calculated and then deducted in the estate duty
calculation.
Framework
When answering the examples and questions, use the following
framework for the calculation of the estate duty liability:
Property of the estate (s 3(2))
Property deemed to be property of the estate (s 3(3))
R
xxx
xxx
Gross value of the estate (s 3(1))
Less: Allowable deductions (s 4)
xxx
(xxx)
Net value of the estate (s 4)
Less: Abatement (s 4A)
xxx
(xxx)
Dutiable amount (s 4A)
xxx
Estate duty calculated at 20% of the dutiable amount up to R30 million
(and 25% of the amount that exceeds R30 million)
Less: Applicable tax rebates, for example, quick succession rebate
(s 16 and First Schedule)
Less: Amount of estate duty to be recovered from beneficiaries
(if applicable) (s 13)
xxx
Estate duty payable by the estate
(xxx)
(xxx)
xxx
In order to calculate the value of limited rights (for example fiduciary, usufructuary
and other rights in property including the right to certain annuities) that the
deceased enjoyed during either his/her lifetime or over a fixed period refer to
Annexure D (expectation of life and present value table).
L Contents
The table gives an indication of the time that is needed to complete the example or
question. The relevant provisions of the Estate Duty Act that must be known before
attempting the example or question are provided. The level of the example or
question gives an indication of its difficulty.
347
Tax Workbook
)
Example/Question
and time allocation
Topic and/or relevant sections
Level
Example 21.1
(10 minutes)
• Section 3(3)(a) – domestic
insurance policies on the life of
the deceased (deemed
property)
Basic
Example 21.2
(15 minutes)
• Section 3(2) – limited interest in
property included as property
• Section 4(h) – bequest to a PBO
• Section 4(q) – property accruing
to a surviving spouse
• Section 4A – abatement
• Section 5(1)(b) – valuation of
limited interest (usufruct)
Intermediate
Example 21.3
(15 minutes)
• Section 3(3)(a) – domestic
insurance policies on the life of
the deceased (deemed
property)
• Section 4 – deductible expenses
• Section 4(q) – property accruing
to a surviving spouse
• Section 4A – abatement
• Section 5(1) – valuation of
property
• Section 5(1)(b) – valuation of
limited interest (usufruct)
• Section 5(1)(c) – valuation of
annuity (that ceases) charged
against property
Intermediate
Example 21.4
(20 minutes)
• Section 5(1) – valuation of
property
• Section 5(1)(c) – valuation of an
annuity (that is transferred)
charged against property
• Section 5(1)( f )bis – valuation of
shares in unlisted companies
• Section 4(q) – property accruing
to a surviving spouse
• Section 4A – abatement
Intermediate
Example 21.5
(45 minutes)
•
•
•
•
•
Section 3(3), (3)(a) and (a)bis
Section 4(h) and (q)
Section 4A
Section 5(1)(b) and (d)
First Schedule
Advanced
Question 21.1
(25 minutes)
•
•
•
•
Section 3(3)(a)
Sections 4, 4(i), (h), (q) and 4A
Section 5(1)(b) and (f)bis
First Schedule
Advanced
Question 21.2
(45 minutes)
•
•
•
•
•
Section 3(3)(a), (a)bis and (cA)
Section 4(q)
Section 4A
Section 5(1)(b), (c) and (f)bis
First Schedule
Advanced
Question 21.3
(40 minutes)
•
•
•
•
•
Section 3(3)(a)bis and (a)
Section 4(e), (i), (lA) and (q)
Section 4A
Section 5(1)(b), (d) and (f)bis
First Schedule
Advanced
348
Chapter 21
Estate duty
L Examples
Example 21.1
(10 minutes)
Thabo Masilela, a resident of the Republic, died on 10 November 2022. The following
information relates to insurance policies that existed or were paid out at the time of
his death:
(1) A policy on his life taken out by his wife, Lindiwe, to whom he was married out of
community of property. Their pre-nuptial contract did not include this policy.
Lindiwe was the sole beneficiary in the policy and had paid all the premiums.
The policy paid out R2 million. The premiums paid by Lindiwe (plus interest at 6%)
were R720 000.
(2) A homeowner’s insurance policy on his house. In the event of the house being
destroyed, the policy would pay out its replacement cost, estimated to be
R2 million.
(3) A policy on his life taken out by his partners in a business venture. His partners,
excluding Thabo, paid all the premiums. The premiums plus interest were
R550 000. The sole beneficiaries are Thabo’s partners. The proceeds are to be
used at their discretion. The policy paid out R1 500 000. His partners are not
related to him.
(4) A policy on his life to cover the outstanding balance of the mortgage bond over
his house. The premiums paid by him (plus interest at 6%) amounted to R100 000.
The policy paid out R420 000.
YOU ARE REQUIRED TO calculate the value of deemed property that should be
included in the net value of Thabo Masilela’s estate. Show your calculations for
each item and give reasons for items to be excluded.
Solution 21.1
Insurance policy taken out by Lindiwe (note 1)
Insurance policy on house (note 2)
Insurance policy taken out by his partners (note 3)
Insurance policy to cover his mortgage bond (note 4)
R
1 280 000
−
−
420 000
Deemed property to be included in the net value of Thabo’s estate
1 700 000
Notes
(1) Amount due and recoverable under “domestic policy”
Less: Premiums (plus interest) paid by Lindiwe
R
2 000 000
(720 000)
1 280 000
The policy is not excluded, as it was not in terms of an ante- or post-nuptial
contract. The s 4(q) deduction is, however, available.
(2) This policy is not included in property, as it is not an insurance policy on his life (see
the definition of a “domestic policy”). There is also no indication that the house
was destroyed. This means that the policy did not actually pay out anything.
When the policy pays an amount, it will increase the cash in the estate, and this
cash will constitute property.
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Tax Workbook
(3) As it was not stipulated that the proceeds from the policy would be used by the
partners to purchase his share of the business, the proceeds are not excluded in
terms of s 3(3)(a)(iA). It may, however, qualify for the s 3(3)(a)(ii) exclusion.
(4) No relief for premiums paid as they were not paid by the beneficiary.
Example 21.2
(15 minutes)
Bertha Kitt, a resident of the Republic, died on 3 December 2022 at the age of 49
years. She is survived by her son, Matthew, aged 23 years. Her husband, Manley,
died two years ago and left his entire estate to Bertha.
At the time of her death, she had the following assets:
(1) The use of a holiday home awarded to her 11 years earlier upon the death of
her brother, Jack, then aged 45 years. The bare dominium at the date of Jack’s
death was given to Bertha’s son Matthew, now aged 23 years. The value of the
property has since deteriorated. Eleven years ago, it was valued at R900 000, but
on 3 December 2022 it was valued at only R750 000.
(2) Cash in a bank account of R8 400 000.
In terms of Bertha’s will, the following bequests were made:
• R990 000 to her nephew, Manley.
• R110 000 to an approved public benefit organisation (PBO).
• The balance of the cash to her son, Matthew.
YOU ARE REQUIRED TO calculate the estate duty payable by the estate of the late
Bertha Kitt.
Solution 21.2
Usufruct (note 1)
Cash in bank account
R
735 455
8 400 000
Less: Bequest to the PBO (s 4(h))
9 135 455
(110 000)
Net value of the estate
Less: Section 4A abatement (note 2)
9 025 455
(7 000 000)
Dutiable amount of the estate
2 025 455
Estate duty payable at 20%
405 091
Notes
(1) The market value of the property is R750 000. Its annual value is: 12% × R750 000 =
R90 000. On Matthew’s next birthday he will be 24 years old, thus the value of
the usufruct before the second proviso is applied, is determined as follows:
R90 000 × 8,27564 = R744 808 (A).
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Chapter 21
Estate duty
Apply the second proviso:
R
Current market value
Less: Value of bare dominium 11 years ago
Original market value
Less: Usufruct R900 000 × 12% × 8,19866
(Factor for Bertha at age 39 years. This represents
her age next birthday on the date the usufruct was
awarded to her 11 years ago.)
R
750 000
900 000
(885 455)
(14 545)
(B) 735 455
Limit in terms of the second proviso is the lesser of
• R744 808 (A), and
• R735 455 (B).
(2) Because Manley's entire estate was bequeathed to his wife, the gross value of
the estate qualified for s 4(q) deduction. Therefore, there was no s 4A rebate
use. Bertha's estate qualifies for the following rebate:
(2 × R3 500 000) – R0 = R7 000 000.
Example 21.3
(15 minutes)
Andile Dludlu, a resident of the Republic, died unexpectedly on 3 March 2022. His
estate consisted of the following assets:
(1) A residence in Johannesburg valued at R1 250 000.
(2) Furniture and household items valued at R500 000.
(3) A motor car valued at R280 000.
(4) 300 000 shares in Cavile Ltd. The listed market value at the date of his death of a
Cavile Ltd share was R15,32 per share. His executor sold the shares on 15 April
2022 for R4 490 000.
(5) A life insurance policy awarded R1 450 000. It was paid to his wife, Gege, in terms
of their ante-nuptial contract.
(6) During his life, Andile enjoyed an annuity of R15 000 from his sister, Mabona. It was
payable out of the net rentals from their deceased father’s block of flats that was
bequeathed to her in 1980. This annuity ceased upon his death.
Liabilities and expenses (including executor’s remuneration, Master’s fees and his
final normal tax liability) amounted to R167 500.
Gege also instituted an accrual claim of R200 000 against the estate.
Andile’s will provided for the following:
(1) His furniture and household items and the usufruct over his residence were
bequeathed to Gege.
(2) His motor car and the bare dominium of his residence were awarded to his sister,
Mabona.
(3) The remainder of his estate was bequeathed to his son, Merlin.
351
Tax Workbook
At the date of Andile’s death, the ages of the relevant persons were as follows:
Andile:
63 years 1 month.
Gege:
58 years 7 months.
Merlin:
25 years 2 months.
Mabona:
55 years 10 months.
YOU ARE REQUIRED TO calculate the estate duty payable by the estate of Andile
Dludlu.
Solution 21.3
R
Residence
Furniture and household items
Motor car
Shares − selling price
Life insurance policy − not property or deemed property
Annuity (note 1)
Gross value of estate
Less: Liabilities and expenses
Accrual claim
Bequests to his wife (s 4(q))
– Usufruct (note 2)
– Furniture and household items
Net value of estate
Less: Section 4A abatement
R
1 250 000
500 000
280 000
4 490 000
−
114 504
6 634 504
167 500
200 000
1 113 482
500 000
(1 980 982)
4 653 522
(3 500 000)
Dutiable amount of estate
1 153 522
Estate duty payable at 20% of R1 153 522
230 704
Notes
(1) Annual value is R15 000 (it is an annuity). On Mabona’s next birthday she will be
56 years old, thus R15 000 × 7,63363 = R114 504. The value of the annuity is
included in his estate as his sister will in future receive the full benefit of the rental
income. This income is no longer subject to the limitation of having to pay an
annuity.
(2) Market value is R1 250 000. Annual value is R150 000 (R1 250 000 × 12%). On
Gege’s next birthday she will be 59 years old, thus R150 000 × 7,42321 = R1 113 482.
Example 21.4
(20 minutes)
Boland Scheepers, a resident of the Republic, died on 31 October 2022 at the age
of 87 years. On the date of his death, Boland Scheepers owned the following assets.
(1) A farm in the Free State Province, on which bona fide farming activities were
conducted. At the time of his death, the farm was valued at R4 400 000. The
farm was bequeathed to his wife (Kate, to whom he was married out of
community of property).
352
Chapter 21
Estate duty
(2) Farming property in Limpopo with a market value of R6 200 000. The executor
sold it for R6 304 026.
(3) A flat in America with a market value the rand equivalent of R850 000. This house
was bequeathed to his daughter, Laetitia (57 years old), who is at present
working in America.
(4) Shares in:
• Bango Ltd, a South African company. These shares had a market value of
R300 000. Half of these shares were bequeathed to Kate. The remaining shares
were bequeathed to his son, Jacques (55 years old).
• Wernoc (Pty) Ltd, a South African company. Its directors valued his shares at
R250 000. Their fair market value was R280 000. His executor sold them for
R310 000.
• Goldeam Ltd, an American company. They had a market value the rand
equivalent of R450 000. They were bequeathed to Jacques.
(5) The usufruct of a farm in the Karoo. Its bare dominium had been sold to his son,
Jacques, on 31 October 2019 for R950 000. Its “fair market value” at the date of
his death was R1 600 000. (Assume the second proviso of the valuation rules for
estate duty purposes does not apply.)
(6) Boland Scheepers enjoyed an annuity of R42 000 (being paid to him at a rate of
R3 500 a month). It was derived from the net rentals of a property that was held
in a trust. After his death the annuity was awarded to his grandson, Anton, for
the rest of his life. Anton is 27 years old.
(7) Before Boland met Kate, he was married to Karin. Karin passed away in 1997.
Except for R50 000 she bequeathed to her sister the remainder of her estate was
left to Boland. Boland and Karin were married out of community of property.
YOU ARE REQUIRED TO calculate the estate duty payable by Boland Scheepers’
estate.
Solution 21.4
Farm – bequeathed to his wife (R4 400 000 less 30%)
Less: Section 4(q) deduction
Farming property in Limpopo sold – selling price
Flat in America
Bango Ltd – half bequeathed to his wife (R300 000 / 2)
Less: Section 4(q) deduction
Bango Ltd – half bequeathed to Jacques (R300 000 / 2)
Wernoc (Pty) Ltd
Goldeam Ltd
Usufruct of farm in Karoo (note 1)
Annuity out of trust (note 2)
Net value of estate
Less: Section 4A abatement (note 3)
R
3 080 000
(3 080 000)
150 000
(150 000)
R
–
6 304 026
850 000
–
150 000
280 000
450 000
240 210
346 364
8 620 600
(6 950 000)
Dutiable value of estate
1 670 600
Estate duty payable at 20%
334 120
353
Tax Workbook
Notes
(1) The “fair market value” in relation to immovable property on which a bona fide
farming undertaking is being carried on, is the arm’s-length price less 30%.
The fair market value of the farm in the Karoo was given as R1 600 000. Its annual
value is R1 600 000 × 12% = R192 000. On Jacques’ next birthday he will be 56 years
old, thus R192 000 × 7,14414 = R1 371 675.
Apply the first proviso:
R
Amount calculated before applying the first proviso
1 371 675
Less: Amount paid plus interest at 6% for three years
– R950 000 × 1,06ñ
(1 131 465)
240 210
(2) The annuity is R42 000. Anton’s next birthday will be his 28th, thus R42 000 ×
8,24677 = R346 364.
(3) Because Boland and Kate were married, and he inherited the entire estate
except the R50 000, the gross value of the estate (except the R50 000) qualified
for a s 4(q) deduction. Therefore, the s 4A rebate used in Karin’s estate was only
R50 000. Boland's estate qualifies for the following rebate:
(2 × R3 500 000) – R50 000 = R6 950 000.
Example 21.5
(45 minutes)
You are a clerk at a firm of lawyers. Your partner has recently been appointed as
the executor of an estate. In terms of s 7(1) of the Estate Duty Act, each executor
must submit an estate duty return to the Commissioner. Your partner has requested
your assistance with the calculation of the estate duty. He has supplied you with the
following information:
• Name of deceased: Hein Preller.
• Date of death: 23 August 2022 (at the age of 57).
• Date of birth: 15 September 1964.
• Usual place of residence: Roodepoort, South Africa.
• Marital status: married out of community of property to Isabel Preller.
Assets, rights and liabilities
• A residence in Roodepoort valued at R1 200 000. This residence is bequeathed to
Hein’s son, John. During 2012, with the written approval of Hein, John effected
improvements to the residence at a cost of R40 000. These improvements
increased the value of the residence by R100 000 on the death of Hein.
• Furniture and private property valued at R850 000.
• A motor vehicle valued at R235 000.
• Twenty-five years ago, Hein obtained the usufruct of a holiday flat from his father.
When his father died six years ago, he bequeathed the bare dominium of this
holiday flat to Hein’s son, John, on the condition that John had to pay R15 000 in
total to his sister. John was 24 years old on the date of Hein’s death. The value of
the holiday flat on Hein’s death was R570 000.
354
Chapter 21
Estate duty
• The farm “Witklip” in the district of Brits with a market value of R1 514 286 (on
which bona fide farming operations are carried on).
• A R100 000 fixed deposit in a bank. Accumulated interest on this fixed deposit to
his date of death was R5 000. After his death, a further R3 000 accrued.
• The return on policy A was R525 000. It was paid to his estate. Premiums and
interest at 6% on policy A (paid by Hein) amounted to R25 000.
• The return on policy B was R750 000. It was paid to his surviving spouse. Premiums
and interest at 6% on policy B (paid by Isabel) amounted to R25 000.
• The return on policy C was R175 000. It was paid to John Dann, a joint shareholder
with the deceased in JD (Pty) Ltd. Premiums and interest at 6% on policy C (paid
by John Dann) amounted to R75 000. John Dann took out the policy on Hein’s life,
so as to make cash available to obtain Hein’s shares in JD (Pty) Ltd. Half the share
capital of JD (Pty) Ltd was owned by Hein. No premiums on this policy were paid
by Hein.
• The return on policy D on the life of Hein was R200 000. It was paid to JD (Pty) Ltd.
Premiums and interest at 6% on policy D (paid by JD (Pty) Ltd) amounted to
R50 000.
• An auditor’s valuation of the 50% interest in JD (Pty) Ltd was R150 000 (excluding
the policy referred to above). The Hein’s shares in JD (Pty) Ltd were, however, sold
for R120 000 to John Dann in terms of an agreement between the deceased and
John.
• A lump-sum benefit of R90 000 was paid to Isabel by the ABC Pension Fund.
• A monthly pension of R1 500 was payable by the ABC Pension Fund to Isabel for
the rest of her life. She was 59 years old at the time of his death.
• Shares in a foreign company were sold for the rand equivalent of R250 000. This
foreign company is listed on a stock exchange in New York. Six years ago, Hein
inherited these shares from the estate of his father, who was ordinarily resident in
South Africa. In his father’s estate, the estate duty payable on these shares was
R25 000. The shares were valued at R100 000 on the date of his father’s death.
Hein paid the R25 000 estate duty. No part of the liabilities or expenses of the
estate relates to these shares.
• A house (immovable property) in London, United Kingdom, was sold for the rand
equivalent of R5 050 000. It was donated to Hein in 2003 by his grandmother, who
was ordinarily resident in London.
• The mortgage loan on the property in London (see above) at the rand equivalent
of R850 000 was repaid by the executor.
• An accrual claim of R343 682 in favour of Isabel.
• His bank overdraft balance was R45 000.
• Hein enjoyed an annuity of R180 000 that was charged against property. When
he died, this annuity ceased. When Hein died, the owner of the property, Albert
Stander, was 56 years old. Albert Stander did not donate the annuity to Hein.
The only other bequest to Isabel was R250 000 in cash.
YOU ARE REQUIRED TO calculate the estate duty liability of the estate of the late
Hein Preller.
355
Tax Workbook
Solution 21.5
R
Residence in Roodepoort (note 1)
Furniture and private property − market value
Motor vehicle − market value
Usufruct (note 2)
Farm “Witklip” − market value reduced by 30% (thus R1 514 286 less 30%)
Fixed deposit in bank − capital
− accumulated interest to date of death
− after date of death
Return on policy A
– no deduction
Return on policy B
– R750 000 less premiums and interest of R25 000
Return on policy C
− paid to the other shareholder in JD (Pty) Ltd
Return on policy D
– R200 000 less premiums and interest of R50 000
Shares in JD (Pty) Ltd − auditor’s valuation
Lump-sum benefit (not property nor deemed property)
Monthly pension
Shares in a foreign company – value
House in London (R5 050 000 – R850 000)
Annuity (note 3)
1 100 000
850 000
235 000
544 362
1 060 000
100 000
5 000
−
525 000
725 000
−
150 000
150 000
−
−
250 000
4 200 000
1 269 320
Gross value of estate
Less: Deduction and bequests
Accrual claim
Bank overdraft
Fixed property in London – donated by non-resident
(s 4(e)(ii)(aa) deduction)
Bequests to spouse – s 4(q) deduction
– Policy B
– Cash to spouse
11 163 682
Net value of estate
Less: Section 4A abatement
5 600 000
(3 500 000)
Dutiable amount of estate
(343 682)
(45 000)
(4 200 000)
(725 000)
(250 000)
2 100 000
Estate duty payable at 20%
Less: Quick succession rebate (note 4)
420 000
(3 000)
Estate duty liability
417 000
Notes
(1) The market value of R1 200 000 should be reduced by the value of the
improvements of R100 000.
(2) The market value is R570 000. The annual value is R68 400 (R570 000 × 12%). The
age next birthday of John was 25 years, thus R68 400 × 8,26959 = R565 640.
Apply the first proviso.
R
Amount calculated before applying the first proviso
565 640
(21 278)
Less: Amount paid plus interest at 6% for six years – R15 000 × 1,066
Limit of the first proviso
544 362
356
Chapter 21
Estate duty
The second proviso is inapplicable because the current bare dominium holder
did not acquire the bare dominium when the usufruct was originally created.
(3) Annual value is R180 000 (R15 000 × 12). Age next birthday of Albert Stander is 57
years, thus R180 000 × 7,05178 = R1 269 320.
R
(4) Amount of estate duty calculated was
420 000
Lesser of:
Net value in previous estate
100 000
Net value in Hein’s estate
250 000
Thus R100 000.
Proportional amount estate duty – R100 000 / R5 600 000 × R420 000
7 500
Reduction from tables: R7 500 × 40%
3 000
Limited to amount of duty in previous estate of
25 000
Lesser of R3 000 and R25 000.
L Questions
Question 21.1
(30 minutes)
On 30 September 2022, Bulelwa Boqwana (a resident of the Republic) died at the
age of 61. She was survived by her husband Vusi (56 years of age on date of her
death), and their two children James and Andrea. Vusi and Bulelwa were married
out of community of property. In terms of the accrual system Vusi has an accrual
claim of R750 000 against Bulelwa’s estate.
The executor of the estate identified the following assets and liabilities in the estate:
(1) A luxury car with a market value of R1 183 000. It was bequeathed to her daughter
Andrea (28 years old).
(2) Shares in “local” companies:
• Boqwana (Pty) Ltd (a private company): The Commissioner approved the
directors’ valuation of R24 200 000. They were sold by the executor for
R24 000 000.
• V&B Boqwana Ltd (a listed company): The executor sold the shares for
R6 000 000 in the course of winding up the estate. There had been a decline
in the market since the date of his death when the market value was
R9 000 000.
(3) A private residence in Cape Town valued at R6 500 000. It was bequeathed to
James (aged 35 at date of Bulelwa’s death), subject to a usufruct in favour of
Vusi until his death. In 2016, James extended the house by building an additional
room (with the approval of Bulelwa), in anticipating that they would live together
in the house. The improvements cost R600 000 and represent 5% of the total value
of the house of R6 500 000.
(4) Bulelwa had a business, valued at R9 000 000 at the time of her death. This
business was bequeathed to her son, James, on the condition that the net profit
from this business for the next five years would accrue to Vusi, after which it will
accrue to James. The average annual net profit for the previous three years was
R1 140 000.
(5) Cash in her bank account on the date of death was R700.
357
Tax Workbook
(6) An insurance policy yielded R891 000, which was received by the executor but
was payable to Vusi in accordance with a duly registered antenuptial contract.
Bulelwa paid all the premiums, which amounted to R20 000. Up to the date of
her death, interest on these premiums amounted to R4 000.
(7) The estate had the following liabilities:
R
• Liabilities including the Master’s fees
276 890
• Debt to financial institutions
1 220 500
• Administration expenses
95 000
• Funeral and deathbed expenses
43 500
(8) Bulelwa bequeathed R500 000 to an old-age home (an approved public benefit
organisation). The surplus in the estate must be divided equally between her two
children.
YOU ARE REQUIRED TO calculate the estate duty payable by Bulelwa Boqwana’s
estate.
Question 21.2
(45 minutes)
On 30 June 2022, Ben Masters died in a motor-car accident. Ben was always a
resident of the Republic. At the time of his death, he was 55 years old and married
to Wilma (43 years old). They had two children, Susan (22 years old), and Jason (24
years old).
At the time of his death, Ben Masters had the following assets:
(1) A life insurance policy of R500 000. Ben Masters took out this policy on 30 June
2015. He paid annual premiums of R5 000. The R500 000 from this policy was paid
to his wife, Wilma.
(2) Shares in a listed company valued at R800 000. He obtained these shares five
years ago from his mother’s estate. At the time of his mother’s death, the net
value of these shares was R700 000, constituting one-third of her net estate. The
total estate duty paid on his mother’s estate was R75 000. Ben paid the estate
duty that related to these shares.
(3) Bank deposits of R16 000.
(4) His damaged motor car valued at R20 000.
(5) A flat that he purchased on 1 March 2019 for R750 000. Its market value at the
time of his death was R880 000. A lifetime usufruct of the flat is bequeathed to his
wife, Wilma, and its bare dominium to his daughter, Susan.
(6) As a result of his death, the pension fund, of which he had been a member of for
30 years, awarded Wilma a lump sum of R2 000 000 and an annuity of R150 000
(payable to her at the rate of R12 500 a month).
(7) For the past seven years, Ben Masters was also a partner in a farming enterprise.
There were three partners in this partnership, namely, Ben, his son Jason, and a
non-related third partner. The non-related third partner had taken out a life
insurance policy on Ben Masters’ life and had paid all the premiums. The policy
yielded R400 000. It was awarded to the non-related third partner. He used it to
partly pay for the acquisition of Ben’s interest in the partnership. Ben’s capital
and loan accounts in the partnership were valued at R450 000 at the time of his
death.
358
Chapter 21
Estate duty
(8) Three years ago, Ben donated the bare dominium of a farm to his son, Jason.
He had kept the usufruct for himself. Bona fide farming activities were
conducted on the farm. The fair market value of the farm (that is after reducing
the market value by 30%) was then R560 000. Jason lived on the farm and, one
year ago, with Ben’s permission, he effected improvements to the value of
R175 000 to it. The improvements increased the farm’s fair market value by
R210 000. At the time of Ben’s death, the fair market value of the farm was
R840 000.
(9) Ben Masters had an accrual claim against Wilma’s estate of R95 000.
(10) A house in Switzerland. Ben bought this house 17 years ago for the equivalent
of R1 050 000. Its current value is the equivalent of R12 040 000.
(11) Unlisted company shares valued at R100 000. They were sold to the remaining
shareholders of the company for R300 000.
(12) Ben’s father, Benjamin, owns a holiday house in the Drakensberg. Five years
ago the usufruct of the house was donated to Ben. His father retained the bare
dominium. Ben’s father was 87 years old at the time of Ben’s death. The market
value of the holiday house was R750 000.
(13) Ben’s father, Benjamin, also owns a block of flats in Cape Town. In terms of a
donation, Ben received an annual amount of R22 800 out of the net rentals
from this property for his life. In the event of Ben’s death, the annuity would be
payable to Wilma for a period of five years. In the event of Wilma dying before
the lapse of the five-year period, the annuity would cease.
The executor made the following payments:
R
(1) Ben’s liabilities
58 347
(2) Miscellaneous expenses (all deductible for estate duty purposes)
12 706
(3) Executor and Master’s fees (10% of this amount relates to shares
17 625
inherited from his mother’s estate)
(4) Tombstone and funeral costs
22 900
Ben Masters’ last will contained the following clause:
“The rest of my estate is bequeathed to my granddaughter and is to be
administered by her mother.”
YOU ARE REQUIRED TO calculate the amount of estate duty payable by the estate
of Ben Masters.
Question 21.3
(40 minutes)
Anzani Mudau (68 years old) married Azwindini (49 years old) 15 years ago. They
were married out of community of property. They have both always been residents
of South Africa.
Anzani belonged to a flying club. He was a pilot of one of the Red Dragons
airplanes (Spitfires). The formations they performed were most daring.
On 5 March 2022, Anzani performed in an air show in Hawaii. Immediately before
the show, he donated his rights in the holiday home in George, South Africa, to his
friend, Rolivhuwa Moringa (also a pilot) if he (Anzani) should die during the event.
359
Tax Workbook
During his performance, Anzani’s plane touched Rolivhuwa’s plane in the air. Anzani’s
plane crashed. Anzani was killed instantly, but Rolivhuwa managed to land safely.
At the time of his death his assets were as follows:
(1) A chalet in the Swiss Alps. Its market value was the equivalent of R1 890 000
(note 1).
(2) A house in Hermanus, South Africa. Its market value was R1 640 000.
(3) A holiday home in George, South Africa. Its market value was R1 430 000
(note 2).
(4) Household contents. Their market value was R410 000.
(5) A Volvo motor vehicle. Its market value was R380 000.
(6) A Mercedes motor vehicle. Its market value was R220 000.
(7) A Land Rover motor vehicle. Its market value was R165 000.
(8) Shares in Red Dragons Flying Club (Pty) Ltd. Its directors valued them at R980 000.
Its auditor valued them at R850 000.
(9) The airplane (Spitfire). After the accident its market value R25 000.
(10) An annuity of R60 000 (payable at the rate of R5 000 a month) (note 3).
(11) A wine farm, with a market value of R3 600 000 (which is being used for bona
fide farming purposes).
(12) Usufruct of flat (note 4).
The following claims in favour of the estate were collected:
(1) Life insurance policy A on Anzani’s life. It was taken out by Anzani and was
payable to his estate in the amount of R1 500 000.
(2) Rolivhuwa took out a policy (policy B) on Anzani’s life. Anzani paid premiums
amounting to R64 000 (including interest at 6%) in this policy. The policy paid
R1 500 000 to Rolivhuwa.
(3) Anzani took out a policy (policy C) on Rolivhuwa’s life and paid the premiums
amounting to R66 000. The value of the policy in the event of Rolivhuwa’s
death was estimated at R1 850 000. Its surrender value (and market value) at
the date of Anzani’s death was R62 000.
Claims against the estate (including his final normal tax liability) amounted to
R535 522. Administration costs amounted to R45 000.
His will contained the following bequests:
(1) The house in Hermanus, the three vehicles, the household contents and
R1 500 000 in cash to his surviving spouse.
(2) The shares in Red Dragons Flying Club (Pty) Ltd, airplane (Spitfire) and R500 000
cash to their son Dovhani (34 years old).
(3) The wine farm, which is being used for bona fide farming purposes, to their
youngest son, Funi (24 years old).
(4) The usufruct of the chalet in the Swiss Alps to his niece, Gundo (31 years old),
and the bare dominium to another niece, Wanda (22 years old).
(5) The remainder of the estate in equal shares to his four grandchildren.
360
Chapter 21
Estate duty
Notes
(1) The chalet in the Swiss Alps belonged to his late father, who died seven years
ago. Anzani inherited the chalet. He paid the estate duty for the chalet in his
father’s estate. It amounted to R55 000. The value of the chalet in his father’s
estate was R620 000. Due to the double tax agreement between South Africa
and Switzerland, no death duties were paid in Switzerland on the chalet.
(2) During his lifetime, Anzani was the holder of the bare dominium in the holiday
home in George. The usufruct was left to his sister (now 61 years old) in terms of
their late mother’s will. Their mother died 12 years ago. At the time of their
mother’s death, the value of the house was R630 000. Anzani’s sister still uses the
holiday home (at least three times each year).
(3) Anzani was the recipient of an annuity (in terms of a contract) of R60 000
(payable at the rate of R5 000 a month). The annuity is transferred to Rolivhuwa
Moringa (60 years old) for the next twenty years.
(4) Anzani was also the holder of a usufruct that was left to him by an aunt who had
died 15 years earlier. She was 91 years old. The usufruct was for a flat. The value
of the flat 15 years ago was R95 000, and at the date Anzani’s death it was
valued at R710 000. The bare dominium belongs to a trust that was established
by his aunt.
YOU ARE REQUIRED TO calculate the estate duty payable in the estate of Anzani
Mudau.
361
Chapter 22
Value-added tax
L Introduction
The examples and questions in this chapter illustrate value-added tax. It is levied
under the Value-Added Tax Act 89 of 1991. Value-added tax is payable by a vendor.
A vendor is required to raise output tax on the supply of goods and services that he
makes. The output tax is raised at either
• the standard rate (at present 15%), or
• the zero rate (0%).
And then certain supplies of goods and services made by a vendor are also exempt
from value-added tax.
A vendor enjoys an input tax deduction on certain supplies of goods and services
made to him. He is, however, denied an input tax deduction on certain goods and
services that he receives.
Zero-rated or exempt supplies and services may also be supplied to a vendor.
For most vendors, the tax period to account for value-added tax to the fiscus is two
months. He deducts his qualifying input tax deductions from the output tax that he
has raised. If
• the output tax that he has raised exceeds his qualifying input tax deductions, he
must pay the difference to the fiscus, or
• his qualifying input tax deductions exceed the output tax he has raised, the fiscus
will refund to him the “overpaid” amount.
L Contents
The following table gives an indication of the time needed to complete the
example or question. The relevant sections or paragraphs that need to be referred
to before attempting the example or question are provided. The level of the
example or question gives an indication of its difficulty.
References to definitions, sections and paragraphs in this chapter are to those in the
Value-Added Tax Act unless stated otherwise.
363
Tax Workbook
)
Example or Question
and time allocation
Topic and relevant sections
Level
Example 22.1
(30 minutes)
• Definitions of “input tax” and
“second-hand goods” in s 1(1).
• Section 2.
• Section 7.
• Section 8.
Basic
Example 22.1
(30 minutes)
•
•
•
•
•
Basic
Example 22.2
(30 minutes)
• Definitions of an “enterprise” and
a “vendor” in s 1(1).
• Section 2.
• Section 10.
• Section 15.
• Section 17.
• Section 23.
• Section 27.
• Section 28.
• Section 45.
Basic
Example 22.3
(30 minutes)
• Definitions of “input tax” and
“second-hand goods” in s 1(1).
• Section 2.
• Section 7.
• Section 8.
• Section 12.
• Section 16.
• Section 17.
• Section 18.
Intermediate
Example 22.4
(30 minutes)
•
•
•
•
•
•
•
Section 2.
Section 7.
Section 8.
Section 12.
Section 16.
Section 17.
Section 22.
Intermediate
Example 22.5
(30 minutes)
•
•
•
•
•
•
•
•
•
Section 2.
Section 7.
Section 8.
Section 9.
Section 10.
Section 11.
Section 12.
Section 16.
Section 17.
Intermediate
Example 22.6
(20 minutes)
• Definitions of a “vendor”, an
“enterprise”, a “taxable supply”,
“output tax”, and “input tax” in s 1(1).
• Section 15.
• Section 23.
Section 11.
Section 12.
Section 16.
Section 17.
Section 22.
Intermediate
continued
364
Chapter 22
)
Example or Question
and time allocation
Value-added tax
Topic and relevant sections
Level
Example 22.7
(15 minutes)
• Definitions of “input tax” and
“second-hand goods” in s 1(1).
• Section 2.
• Section 8.
• Section 11.
• Section 12.
• Section 16.
• Section 17.
• Section 18.
• Section 22.
Basic
Question 22.1
(20 minutes)
Income Tax Act:
• Section 11(a) and s 11(e).
• Section 23C.
• Seventh Schedule.
• Interpretation Note 47.
Value-Added Tax Act:
• Definition of an “enterprise” in s 1(1).
• Section 17.
• Section 18.
Intermediate
Question 22.2
(20 minutes)
•
•
•
•
Definition of “entertainment” in s 1(1).
Section 11.
Section 12.
Section 18.
Advanced
Question 22.3
(30 minutes)
• Definitions of “entertainment” and an
“enterprise” in s 1(1).
• Section 8.
• Section 17.
• Section 18.
Advanced
L Examples
Example 22.1
(30 minutes)
Juba Breweries (Pty) Ltd manufactures “African” beer. It is a vendor. During its
two-month value-added tax period that ended on 30 September 2022, it
completed, amongst others, the following transactions:
(1) Juba Breweries (Pty) Ltd purchased a new delivery van on credit for R460 000
(R400 000 plus R60 000 value-added tax).
(2) Juba Breweries (Pty) Ltd purchased a new motor car for R345 000 (R300 000 plus
R45 000 value-added tax). It paid cash for this motor car. Its use was given to
employee Xoseni Velema as from 1 August 2022. He is required to use it when he
visits Juba Breweries (Pty) Ltd’s customers. He also has the use of it, free of charge,
for his domestic purposes.
(3) Juba Breweries (Pty) Ltd sold 50 crates of beer on credit to Bechuanaland Beers
(Pty) Ltd, a local customer. The selling price of a crate of beer is R180 (exclusive
of value-added tax).
(4) Juba Breweries (Pty) Ltd sold (and exported) 100 crates of beer on credit to
Bulawayo Beverages Ltd, a foreign customer. The selling price of a crate of beer
is R180 (exclusive of value-added tax).
365
Tax Workbook
(5) On 1 August 2022 Juba Breweries (Pty) Ltd paid R5 750 for the lease of a
one-bedroomed flat. On 1 September 2022, it again paid R5 750 for the lease
of this one-bedroomed flat. The use of the flat is given, free of charge, to its
employee, Hope uMakulu, its managing director’s secretary. Her remuneration
proxy is R101 250.
(6) On 1 August 2022 and again on 1 September 2022 Juba Breweries (Pty) Ltd
paid R8 625 (R7 500 plus R1 125 value-added tax) for the lease of a shop in a
shopping centre. This shop is used by it to retail bar accessories to the public.
(7) On 31 August 2022 Juba Breweries (Pty) Ltd paid R6 900 to “buy back” empty
second-hand crates from one of its customers (a vendor). On 30 September
2022 it paid R345 to “buy back” empty second-hand crates from another one
of its customers (who is not a vendor).
(8) On 31 August 2022, Juba Breweries (Pty) Ltd paid a local service station R25 530
for fuel purchased during the month. The fuel was consumed by its delivery
vehicles. On 30 September 2022, it again paid a local service station, this time,
R30 636 for fuel purchased during the month. The fuel was consumed by its
delivery vehicles.
(9) On 30 September 2022, Juba Breweries (Pty) Ltd bank account was credited
with R69, being interest earned on its favourable balance for the month of
September 2022.
(10) Gomboza CC supplies Juba Breweries (Pty) Ltd with some of its raw materials. If
Gomboza CC’s account is settled within 30 days, Juba Breweries (Pty) Ltd is
granted a 5% discount by Gomboza CC. Juba Breweries (Pty) Ltd account
from Gomboza CC was for R10 350. It received this account on 1 September
2022. To enjoy the 5% discount, it settled Gomboza CC’s account within the
30-day time limit, and paid R9 832 to Gomboza CC on 29 September 2022.
(11) Thembisa Tavern CC was one of Juba Breweries (Pty) Ltd’s local customers.
Thembisa Tavern CC owed it R11 500. Thembisa Tavern CC paid it only R3 450.
For six months it unsuccessfully attempted to recover the R8 050 balance owing
to it by Thembisa Tavern CC. On 30 September 2022 it wrote off the R8 050
balance owing by Thembisa Tavern CC as a bad debt.
YOU ARE REQUIRED TO prepare the necessary entries to record the above transactions in Juba Breweries (Pty) Ltd’s journal. The narration to each journal entry must
indicate the value-added tax consequences that arise out of the transaction.
Solution 22.1
Journal of Juba Breweries (Pty) Ltd
Delivery van
Value-added tax input account
To Supplier (motor-car dealer)
Being a new delivery van (not a “motor car”) purchased.
Dr
Dr
R
400 000
60 000
R
460 000
Motor car
Dr
345 000
To Bank
345 000
Being a new motor car purchased
An input tax deduction is unavailable on a “motor car” (s 17(2)(c)).
continued
366
Chapter 22
Value-added tax
R
R
Salaries
Dr
235
To Value-added tax output account
Being the deemed supply on the fringe benefit granted
to employee Xoseni Velema.
This amount has been determined as follows:
R300 000 (excludes value-added tax) × 0,3% × 15 / 115 × 2 months
Bechuanaland Beers (Pty) Ltd (R180 × 50 × 115%)
Dr 10 350
To Sales (R180 × 50)
To Value-added tax output account (R180 × 50 × 15%)
Being the sale of trading stock to a local customer.
Bulawayo Beverages Ltd (R180 × 100)
To Sales
To Value-added tax output account (R180 × 100 × 0%)
Being the sale of trading stock to a “foreign” customer
Export sales are zero rated.
Dr 18 000
235
9 000
1 350
18 000
–
Rentals
Dr 5 750
To Cash
5 750
Being the lease of residential accommodation for August 2022.
The supply of residential accommodation is an exempt supply for value-added tax
purposes.
Rentals
Dr 5 750
To Cash
5 750
Being the lease of residential accommodation for September 2022.
The supply of residential accommodation is an exempt supply for value-added tax
purposes.
Since the supply of residential accommodation is an exempt supply, it does not give
rise to a deemed supply for value-added tax purposes.
Rentals (R8 625 × 100 / 115)
Value-added tax input account (R8 550 × 15 / 115)
To Cash
Being the lease of a commercial property for August 2022.
Dr
Dr
7 500
1 125
Rentals
Value-added tax input account
To Cash
Being the lease of a commercial property for September 2022.
Dr
Dr
7 500
1 125
Purchases (crates) (R6 900 × 100 / 115)
Value-added tax input account (R5 700 × 15 / 115)
To Cash
Being the purchase of second-hand crates from a vendor.
Dr
Dr
6 000
900
8 625
8 625
6 900
continued
367
Tax Workbook
Purchases (crates) (R345 × 100 / 115)
Dr
Dr
Value-added tax input account (R342 × 15 / 115)
To Cash
Being the purchase of second-hand crates from a non-vendor.
A notional (or deemed) input tax deduction is available since
the crates have been paid for in cash.
Fuel
Value-added tax input account (R25 530 × 0%)
To Cash
Being the purchase of fuel (a zero-rated supply for valueadded tax purposes).
Fuel
Value-added tax input account (R30 636 × 0%)
To Cash
Being the purchase of fuel
(a zero-rated supply for value-added tax purposes).
Bank
To Interest
Being interest earned (an exempt supply being a financial
service).
Purchases (R10 350 × 100 / 115)
Value-added tax input account (R10 350 × 15 / 115)
To Gomboza CC
Being purchases of raw materials on credit.
Gomboza CC
To Cash
To Discount (5% settlement discount received)
(R10 350 × 5% × 100 / 115)
To Value-added tax input account (R10 350 × 5% × 15 / 115)
Being the settlement of Gomboza CC’s account within
30 days to qualify for a 5% settlement discount. This will
lead to the issue of a credit note, unless clearly stated on
the face of the tax invoice.
Bad debt (R8 050 × 100 / 115)
Value-added tax input account (R8 050 × 15 / 115)
To Thembisa Tavern CC
Being the amount owing by Thembisa Tavern CC
(a local customer) written off as a bad debt.
Example 22.2
Dr
Dr
R
300
45
25 530
–
30 636
–
Dr
69
Dr
Dr
9 000
1 350
Dr
10 350
R
345
25 530
30 636
69
10 350
9 832
450
68
Dr
Dr
7 000
1 050
8 050
(30 minutes)
Abrie Malmok, a resident of the Republic, converted his hobby, the restoration of
antique furniture, into a fully-fledged business. A feasibility study revealed that there
was a demand for a business of this nature. In the past, he restored furniture for friends,
charging an amount to cover only the cost of the materials that he had used.
On 31 August 2022, Abrie Malmok owned three lounge suites and four dining-room
suites that he had restored.
368
Chapter 22
Value-added tax
Abrie Malmok resigned from his employment on 31 August 2022. He started his
business the following day. He is 50 years old.
The following information relates to Abrie Malmok’s business for the 2023 year of
assessment:
R
Cash sales (note 1 and note 2)
707 250
Purchases of furniture from vendors (note 3)
144 900
Purchases of furniture from non-vendors (during his first three months
of trading) and paid for in cash
113 850
Purchases of wood, leather and other materials
56 925
Bank charges
1 380
Legal expenses for advice concerning his business structure
3 105
Lathe purchased on 1 September 2022
37 950
Other tools purchased on 1 October 2022
46 575
Fuel expenses
59 340
Rental of business premises
7 245
Repairs to motor vehicle (1 October 2022) (note 4)
10 350
Interest paid
4 485
Salary paid
37 260
Entertainment
2 760
Trade licence (1 September 2022)
414
39 100
Closing stock – finished goods
Other information
(1) Abrie Malmok inherited a lounge suite from a late aunt during January 2023.
According to her estate account, its value was R7 590. It was in excellent
condition. He sold it for R12 075 a week after its receipt. This R12 075 is included in
the R707 250 total for sales (see above).
(2) Abrie Malmok sold all the lounge suites and dining-room suites that he owned
before he started the business, except for one. The lounge suite that was still on
hand on 28 February 2023 had an estimated value of R15 180. His lounge and
dining-room suites that he owned when he was restoring furniture as a hobby,
each had an estimated value of R12 650 on 1 September 2022. He estimates
that he spent, on average, 17 hours of his own time on each suite. He charges
his labour at R500 an hour.
(3) Abrie Malmok’s purchases from his suppliers, who are vendors, are paid by him
within 30 days after the statement date. All other purchases and expenses are
paid by him in cash.
(4) Abrie Malmok’s private motor car that he uses to the extent of 60% for business
purposes had to be repaired.
YOU ARE REQUIRED TO
(1) explain to Abrie Malmok whether he should apply for value-added tax
registration, the tax period that applies to him, and the accounting basis that he
should apply for, and
(2) make full determinations of Abrie Malmok’s value-added tax payable for each
tax period from 1 September 2022 to 28 February 2023, assuming that the last tax
period will end on 28 February 2023. Also, assume that all business receipts and
accruals and expenses, except for the legal expenses that were incurred during
369
Tax Workbook
September 2022, and except when otherwise indicated, occurred evenly
throughout the period. In your answer, you should indicate what methods of
payment he may use and the date on which each type of payment should be
made. Also set out the provisions that may apply should his qualifying input tax
deductions exceed the output tax that he raised. (Assume for the purposes of
this requirement that he is registered for value-added tax as a two-month vendor
and all amounts include value-added tax, when applicable.)
Solution 22.2
Part 1
Abrie Malmok’s turnover for the six months ended 28 February 2023 is R707 250, the
equivalent of an annual turnover of R1 230 000 (R707 250 × 100 / 115 × 2). Since
this exceeds the turnover limit of R1 000 000, he should already have registered for
value-added tax.
Section 23(1)(b) of the Value-Added Tax Act provides that if, at the commencement
of a month when the total value of supplies under a contractual obligation in writing
to be made by a person in the 12-month period reckoned from the
commencement of the said month will exceed R1 000 000, he will have to register as
a vendor.
Since all Abrie Malmok’s receipts, accruals and expenses occurred evenly
throughout the period, it would have been obvious to him at the beginning of the
second tax period, that is on 1 November 2022, that his turnover was likely to
exceed R1 000 000, and he should then have registered on or before 21 November
2022.
In practice, however, the turnover may have built up steadily over the period, and it
may have become apparent to Abrie Malmok only at the beginning of the third tax
period, that is on 1 January 2023, that his turnover was likely to exceed R1 000 000,
and he should then have registered.
Taxable supplies made by Abrie Malmok are less than R30 000 000 and for this
reason he will have a two-month tax period. He will therefore register as either a
Category A or Category B vendor (s 27(2)).
Abrie Malmok should register for value-added tax on the invoice basis since he pays
his creditors 30 days after their statement dates, while his sales are made for cash. If
he registered on the cash basis, he would deduct his qualifying input tax on his
purchases only when he pays his creditors. Yet on the invoice basis, he merely has to
have a valid tax invoice in his possession to be able to deduct his qualifying input
tax. Both the cash basis and the invoice basis require output tax, in this instance, to
be paid on the same date, being the date when his sales are made since they are
all cash sales. (He trades in his own name. If he had conducted his business through
a juristic person, for example, a company, then this business would be compelled to
account for value-added tax on the invoice basis (s 15(2).)
Part 2
Unless a “non-juristic” vendor applies in writing to account for value-added tax on
the cash basis, he will be required to account for value-added tax on the invoice
basis.
370
Chapter 22
Value-added tax
Since Abrie Malmok has not yet registered, it is accepted that he will use the invoice
basis. Not being registered for value-added tax does not absolve him from the
requirements of the Value-Added Tax Act. The definition of a “vendor” in s 1(1)
includes a person who should have registered. The value-added tax determination
has therefore been made for the entire period from 1 September 2022 to
28 February 2023.
1 November
1 September
1 January
to
to
to
Tax period
31 October
31 December
28 February
2022
2022
2023
R
R
R
Sales (R701 100 / 3) (note 1) is
R235 750 for each period
Value-added tax at 15 / 115
30 750
30 750
30 750
Total output tax
30 750
30 750
30 750
8 775
8 775
8 775
9 900
–
–
4 950
–
–
60
405
4 950
6 075
0
315
60
–
–
–
0
315
60
–
–
–
0
315
810
–
–
–
–
–
–
–
–
–
54
–
–
–
–
–
–
–
31 344
14 100
9 150
16 650
21 600
Purchases – all categories except
from non-vendors
((R144 900 + R56 925) × 15 / 115) × 1 / 3
Purchases from non-vendors
(R113 850 × 15 / 115 × 2 / 3)
(R113 850 × 15 / 115 × 1 / 3)
Bank charges –
(R1 380 × 15 / 115 × 1 / 3)
Legal expenses (15 / 115 × R3 105)
Lathe (15 / 115 × R37 950)
Other tools (15 / 115 × R46 575)
Fuel expenses(zero rated)
Rental (15 / 115 × R7 245) × 1 / 3
Repairs to his motor vehicle
(60% × 15 / 115 × R10 350)
Interest paid – financial service
(an exempt supply)
Salaries paid (note 4)
(not an enterprise)
Entertainment – not deductible
(s 17(2)(a)(i))
Trade licence (15 / 115 × R414)
Closing stock (note 3)
Total input tax
Value-added tax payable
Value-added tax refundable
594
Notes
(1) Since no consideration was paid by Abrie Malmok for his “inherited” lounge suite,
no input tax may be deducted, even though output tax must be levied when it
is sold.
(2) Abrie Malmok does not enjoy a s 18(4) adjustment for his labour on the restored
furniture when he registers as a vendor.
371
Tax Workbook
(3) Input tax is deducted when a supply has been made to a vendor (provided he
is in possession of a valid tax invoice). No value-added tax consequences apply
to trading stock held at the beginning or end of a tax period.
(4) When Abrie Malmok pays salaries to his employees it will not constitute his
employees’ carrying on an enterprise. Under proviso (iii)(aa) to the definition of
an “enterprise” in s 1(1), the rendering of services by an employee to his
employer does not constitute the carrying on of an enterprise.
Payment of the amount of value-added tax owing
Under the provisions of s 28, value-added tax returns must be submitted within
25 days after the end of the month in which tax period ends.
Abrie Malmok can pay amounts owing to SARS at its local office where he is
registered. He may also make use of an electronic bank transfer. SARS will initiate the
transfer from his bank only on the last business day of the month concerned. The
return must, however, still be received by its local office no later than the 25th day of
the relevant month.
If the amount owing by SARS for the tax period ended October 2022 is not paid to
Abrie Malmok within 21 days after the receipt of a properly completed return, it will
be liable for interest on the amounts, determined at the prescribed rate (s 45).
Abrie Malmok's December 2022 and February 2023 returns, together with the full
payment, must be received by the local SARS office no later than 25 January 2023
and 25 March 2023 respectively.
Example 22.3
(30 minutes)
Xesha Khetshe, a resident of the Republic, sells and repairs watches from a shop he
leases in a local shopping centre. He is a sole proprietor and is registered for
value-added tax on the invoice basis.
An analysis of Xesha Khetshe’s receipts and accruals and expenditure for his
two-month tax period ended 30 September 2022 is set out below. Unless otherwise
stated, all amounts are inclusive of value-added tax when applicable. He makes
solely taxable supplies.
R
Receipts and accruals
Sales of watches
207 000
Repairs of watches
29 900
Interest
5 175
Indemnity award (note 1)
51 750
Expenditure
Bad debts (note 2)
13 225
Bank charges
920
Depreciation (note 3)
19 145
Insurance premiums (note 4)
5 520
Fuel
14 950
Printing and stationery
1 564
Purchases (note 5)
160 425
Salaries
41 400
Rentals (note 6)
13 294
372
Chapter 22
Value-added tax
Notes
(1) The indemnity award of R51 750 was received by Xesha Khetshe from his insurer
for two expensive watches that were stolen from his shop in June 2022.
(2) Bad debts of R13 225 written off by Xesha Khetshe, comprising the following:
• R10 350 owing by one of his long-standing customers, from a credit sale. This
customer has since emigrated and Xesha Khetshe has been unable to trace her.
• R2 875 was lent by him to an employee, who has since left town without
repaying the loan.
(3) Depreciation (for the two-month tax period) is charged for the following assets
owned by Xesha Khetshe:
R
• Manufacturing equipment that was purchased by him in a previous
tax period for R276 000 (R240 000 plus value-added tax of R36 000)
8 000
• A computer that was purchased by him on 1 August 2022 for R14 375
(R12 500 plus value-added tax of R1 875)
695
• A motor car that was purchased by him on 1 September 2022 for
R632 500 (R550 000 plus value-added tax of R82 500). He has the sole
use of it. (He maintains accurate records of his travelling and can
prove that his business travelling is 40% of his total travelling.)
10 450
19 145
(4) Xesha Khetshe’s insurance premiums of R3 450 were incurred on the following
assets that belong to him:
R
Manufacturing equipment
460
Office computer
230
Motor car
3 105
1 725
Trading stock
5 520
(5) Xesha Khetshe’s purchases of R160 425 are made up as follows:
Purchases of raw materials from vendors
Second-hand watches purchased from vendors
Second-hand watches purchased (and paid for) from non-vendors
R
126 500
17 250
16 675
160 425
Xesha Khetshe purchases second-hand watches from both vendors (for example,
auctioneers) and from non-vendors (for example, private individuals and
deceased estates). He displays and sells second-hand watches in his shop.
(6) Xesha Khetshe’s rentals of R13 294 are for the following items:
R
Shop premises
10 925
Cash register
1 495
Tea urn (located in the shop for his employees and himself to make tea)
874
13 294
YOU ARE REQUIRED TO determine Xesha Khetshe’s value-added tax due to, or from,
SARS for his two-month tax period that ended on 30 September 2022.
373
Tax Workbook
Solution 22.3
R
Output tax
Sales of watches (R207 000 × 15 / 115)
Repairs of watches (R29 900 × 15 / 115)
Interest (an exempt supply being a “financial service” (s 12(a))
Indemnity award (R51 750 × 15 / 115) (note 1)
Use of motor car by Xesha Khetshe (not a deemed supply – note 2)
27 000
3 900
–
6 750
–
Total output tax
37 650
Input tax
Bad debts
– Credit sale (R10 350 × 15 / 115)
– Loan to employee (no output tax was raised on the loan, therefore no
input tax deduction is available)
Bank charges (R920 × 15 / 115)
Depreciation (no value-added tax consequences)
Manufacturing equipment and tools (purchased in a previous tax period)
Computer purchased on 1 August 2022: (R14 375 × 15 / 115)
Motor car purchased on 1 September 2022: (no input tax deduction is
available since it is a “motor car” as defined (s 17(2)(c)))
Insurance premiums
– Manufacturing equipment and tools (R460 × 15 / 115)
– Office computer (R230 × 15 / 115)
– Motor car (R1 035 × 15 / 115 × 40%)
– Trading stock losses (R1 725 × 15 / 115)
Fuel (input tax deduction of nil since fuel is a zero-rated supply)
R14 950 × 0 / 100
Printing and stationery (R1 564 × 15 / 115)
Purchases
– Raw materials (R126 500 × 15 / 115)
– Second-hand watches purchased from vendors (R17 250 × 15 / 115)
– Second-hand watches purchased and paid for from non-vendors
(a notional input tax deduction of R16 675 × 15 / 115)
Salaries (not a taxable supply – an employee does not carry
on an “enterprise”)
Rentals
– Shop premises (R10 925 × 15 / 115)
– Cash register (R1 495 × 15 / 115)
– Tea urn (supply of beverages is “entertainment”, therefore no input tax
deduction is available (s 17(2)(a))
1 350
–
120
–
–
1 875
–
–
60
30
54
225
0
204
16 500
2 250
2 175
–
1 425
195
–
Total input tax
26 463
Net amount of value-added tax due by Xesha Khetshe to SARS
(R37 650 – R26 463)
11 187
374
Chapter 22
Value-added tax
Notes
(1) Since Xesha Khetshe would have enjoyed an input tax deduction on the
purchase of his trading stock, the indemnity award gives rise to a deemed
supply. Output tax must then be accounted for (s 8(8)).
(2) Xesha Khetshe is a sole proprietor. This means that no employer-employee
relationship exists. The provisions of the Seventh Schedule do not apply to him,
and therefore no deemed supply arises for value-added tax purposes, under
s 18(3), when he uses his motor car for his private purposes.
Example 22.4
(30 minutes)
Legae (Pty) Ltd is a resident of the Republic. Its sole asset is a rent-producing
property. The ground floor of this building is let to commercial tenants. The remaining
two floors are let to residential tenants.
Since Legae (Pty) Ltd makes both taxable and exempt supplies for value-added tax
purposes, a turnover-based method of apportionment has been applied to arrive at
an acceptable input tax ratio of 40%, when applicable.
Legae (Pty) Ltd’s receipts and accruals and expenditure for its two-month tax period
ending 31 October 2022 are as set out below. (All amounts are inclusive of
value-added tax when applicable.)
Receipts and accruals
Commercial rentals
Residential rentals
Interest levied on overdue rentals from commercial tenants
Interest levied on overdue rentals from residential tenants
Insurance settlement (note 1)
Expenditure
Bank charges
Audit fees
Salaries
Repairs (note 2)
Maintenance (note 3)
Insurance premiums (note 4)
Interest incurred on mortgage bond
Legal expenses for leases entered into for new
– commercial tenants
– residential tenants
Security maintenance contract expenditure
Bad debts (note 5)
Entertainment expenditure (note 6)
Telephone (note 7)
R
155 250
204 700
6 831
2 944
181 930
2 875
14 375
33 350
224 250
16 675
15 525
43 125
1 725
2 530
4 025
16 330
690
805
Notes
(1) The insurance settlement of R181 930 awarded to Legae (Pty) Ltd was for fire
damage to its building. A fire had occurred at a laundry situated on the ground
floor. The fire damaged the laundry and the flat situated directly above it.
Compensation for the laundry was R115 000, and compensation for the flat was
R66 930.
375
Tax Workbook
(2) It cost Legae (Pty) Ltd R138 000 to repair the “burnt” laundry. It cost Legae (Pty)
Ltd R86 250 to repair the “burnt” flat.
(3) Legae (Pty) Ltd’s incurred maintenance expenses of R16 675 include paint, paint
brushes and other hardware items purchased to carry out necessary repair work
to its building.
(4) Legae (Pty) Ltd’s insurance premiums of R15 525 were incurred for the insurance
of its building.
(5) Legae (Pty)Ltd’s bad debts of R16 330 are made up of debts written off for
commercial rental debtors of R9 890 and for residential rental debtors of R6 440.
(6) The managing director of Legae (Pty) Ltd had lunch with its lawyer during this
two-month period. He takes its lawyer to lunch from time to time to ensure that it
always enjoys preferential treatment from her when it needs her professional
services. Her lunch cost R529, and his lunch cost R161.
(7) Legae (Pty) Ltd pays its caretaker’s home telephone account. He has to make
“business” telephone calls on a regular basis. He has indicated that 70% of his
telephone calls are for it. His telephone account for this two-month period was
R805. He is a part-time employee of it.
(8) In September 2021, Legae (Pty) Ltd bought paint to be used to paint the exterior
of its building for R24 150 (R21 000 plus value-added tax at 15% of R3 150) from a
local supplier. It enjoyed an input tax deduction of R1 260 (40% of R3 150) in its
tax period 1 September 2021 to 31 October 2021. It encountered quality
problems with this paint and paid the supplier only R19 320 (R16 800 plus
value-added tax of R2 520) on 31 October 2021. It refused to settle this account
until the quality problems were resolved. On 1 October 2022, R4 830 (R4 200 plus
value-added tax of R630) was still outstanding, despite numerous letters of
demand having been received by it from its supplier.
YOU ARE REQUIRED TO determine Legae (Pty) Ltd’s value-added tax due to, or from,
SARS for its two-month tax period that ended on 31 October 2022.
Solution 22.4
Output tax
Commercial rentals (R155 250 × 15 / 115)
Residential rentals (exempt supply)
Interest (financial service – exempt supply)
Insurance award: R115 000 × 15 / 115 (note 1)
Deemed supply: Employee’s debt: Home telephone account (note 2)
Reversal of input tax deduction not paid within 12 months: (R630 × 40%)
Total output tax
R
20 250
–
–
15 000
–
252
35 502
continued
376
Chapter 22
Value-added tax
R
Input tax
Bank charges (R2 875 × 15 / 115 × 40%)
Audit fees (R14 375 × 15 / 115 × 40%)
Salaries (not a taxable supply – an employee does not carry on an
“enterprise”)
Repairs to only the commercial portion of the property (R138 000 × 15 / 115)
Maintenance (R16 675 × 15 / 115 × 40%)
Insurance premiums (R15 525 × 15 / 115 × 40%)
Interest paid on mortgage bond (financial service – an exempt supply)
Legal expenses for only the commercial tenants (R1 725 × 15 / 115)
Security maintenance contract expenditure (R4 025 × 15 / 115 × 40%)
Bad debts: (R16 330 – R6 440) × 15 / 115) (note 3))
Entertainment expenditure (note 4)
Telephone account of its caretaker (note 2)
150
750
–
18 000
870
810
–
225
210
1 290
–
–
Total input tax
22 305
Value-added tax due by Legae (Pty) Ltd (R35 502 – R22 305)
13 197
Notes
(1) The portion of Legae (Pty) Ltd’s insurance award relating to the commercial
property is a deemed supply, since it would have enjoyed an input tax
deduction for the commercial portion of the building when it purchased the
building and on the insurance premiums it incurred.
(2) When a vendor receives and pays accounts on behalf of an employee, whether
as a condition of employment or not, the underlying supply is made to the
employee (and not the employer), with the result that no input tax deduction is
available to the employer. It follows, therefore, that this fringe benefit of
employment provided by Legae (Pty) Ltd to its caretaker is not a deemed
taxable supply since the employer has been denied an input tax deduction
when it paid the employee’s telephone account. But if the employee acts as an
agent for his principal (employer), the employer may then deduct the input tax
(s 54).
(3) Legae (Pty) Ltd’s input tax deduction on the bad debts is not apportioned, since
only the bad debts from its rentals charged to its commercial tenants (of R9 890)
were subject to Value-added tax.
(4) An input deduction is unavailable on entertainment expenditure. Although part
of Legae (Pty) Ltd’s entertainment expenditure was incurred for the personal
subsistence of its employee, the entertainment expenditure was not incurred
while its employee was obliged to be away for a night from his usual place of
residence and from his usual workplace, by reason of the duties of his office
(s 17(2)(a) proviso (ii)).
Example 22.5
(30 minutes)
Dichaba-tsa-Lefatshe Ltd is a resident of the Republic. It carries on business as a
retailer from its head office in South Africa. It also operates a depot in Zimbabwe
from where sales are made to customers living in Zimbabwe. Its depot in Zimbabwe
is not regarded as an independent branch. It is a Category A vendor.
377
Tax Workbook
The following amounts relating to Dichaba-tsa-Lefatshe Ltd include value-added
tax, when applicable:
July
August
September
Receipts and accruals
R
R
R
Cash sales of supplies to “local” customers
161 598
198 375
176 065
from its South African head office
Payment received in advance from a “local”
customer for supplies delivered and invoiced
18 400
on only 6 October 2022
Cash sales from its depot in Zimbabwe to
Zimbabwean customers. This trading stock was
forwarded to its depot on 15 July 2022 and was
15 525
16 675
23 575
all sold by 31 October 2022
Indemnity award received on an insurance
claim for trading stock stolen in transit to a
39 215
“local” customer
Interest earned on a loan to a subsidiary
12 075
company in South Africa
Expenditure
Salaries
Rates on its business property
Electricity and water
Telephone
Purchases of trading stock
Cost of entertaining important customers at
various restaurants in Johannesburg
Purchase of a new delivery vehicle
• Cash cost
• Finance charges paid
Purchase of a new motor car. Its use has been
given to the sales manager as a fringe benefit
of his employment from 1 September 2022
(all costs relating to this motor car are paid by
Dichaba-tsa-Lefatshe Ltd).
Petrol for delivery vehicles and the sales
manager’s motor car
Maintenance of delivery vehicles and the sales
manager’s motor car
46 575
529
6 900
391
88 550
42 550
529
7 360
460
82 800
48 070
529
6 440
345
95 450
6 762
414 000
11 040
11 040
483 000
10 304
12 880
14 720
874
1 495
575
YOU ARE REQUIRED TO determine the value-added tax payable by, or refundable
to, Dichaba-tsa-Lefatshe Ltd for its latest tax period.
378
Chapter 22
Value-added tax
Solution 22.5
Category A vendors have a two-month tax period ending on, amongst others,
31 July and 30 September.
Dichaba-tsa-Lefatshe Ltd’s latest tax period therefore ended on 30 September 2022.
R
R
Output tax
Cash sales (South Africa)
• August (15 / 115 × R198 375)
25 875
• September (15 / 115 × R176 065)
22 965
Payment received for supplies to be delivered and invoiced on
6 October 2022 (note 1) 15 / 115 × R18 400
2 500
Cash sales from its Zimbabwean depot (note 2)
0
Interest on loan (note 3)
–
Add: Deemed output tax
– Indemnity payment (15 / 115 × R39 215)
5 115
– Fringe benefit – sales manager’s motor car
(15 / 115 × 0,3% × R483 000 × 100 / 115 × 1 month
since the fringe benefit was granted from only
1 September 2022)
164
Input tax
Salaries
Rates
Electricity and water (15 / 115 × (R7 360 + R6 440))
Telephone (15 / 115 × (R460 + R345))
Purchases (note 4) (15 / 115 × (R82 800 + R95 450))
Entertainment (note 5)
Purchase of delivery vehicle (note 6) (15 / 115 × R414 000)
Purchase of a motor car (note 6)
Petrol for vehicles (note 7)
Vehicle maintenance (15 / 115 × (R1 495 + R575))
Value-added tax to be refunded to Dichaba-tsa-Lefatshe Ltd
(R79 420 – R56 619)
56 619
–
–
1 800
105
23 250
–
54 000
–
0
265
79 420
22 801
Notes
(1) Section 9 deems the time of supply to be the earlier of the date that an invoice
is issued and the date that a consideration is received by the supplier.
(2) Dichaba-tsa-Lefatshe Ltd’s Zimbabwean depot is not an independent branch
(see proviso (ii) to the definition of an “enterprise” in s 1(1)). Supplies to this depot
are therefore not “supplies” for value-added tax purposes. Sales from the
Zimbabwean depot constitute “taxable supplies”, but are zero rated, being
exports. (Definitions of an “export country” and “exported” in s 1(1) and s 11 are
the relevant provisions.)
(3) Interest on a loan constitutes a consideration for a “financial service” (s 2), and
therefore constitutes an exempt supply (s 12). When a vendor makes both
taxable supplies (standard rated and zero rated) and exempt supplies, input tax
may be deducted only in the ratio of the intended use of the goods or services
in making taxable supplies to the total intended use (s 17(1)). When the intended
379
Tax Workbook
(4)
(5)
(6)
(7)
use for making taxable supplies constitutes not less than 95% of the total
intended use, as in Dichaba-tsa-Lefatshe Ltd’s situation, no adjustment of input
tax is required (s 17(1) proviso (i)).
The “matching” principle does not apply to value-added tax. Input tax on a
supply is deductible in full in the tax period the supply is made (provided the
vendor is in possession of a valid tax invoice), irrespective of the fact that the
goods (for example, trading stock) will be sold only in a later period.
No input tax deduction is available for goods or services acquired for the
purpose of entertainment (other than by a vendor who supplies entertainment in
the ordinary course of an enterprise that regularly or continuously supplies
entertainment – s 17(2)(a)).
Input tax may be deducted for vehicles other than a “motor car” as defined
(se 17(2)(c)). When a “motor car” is purchased by a vendor for the purpose of
making a taxable supply of it in the ordinary course of an enterprise that
continuously or regularly supplies motor cars, for example, a motor car dealer,
an input tax deduction is available. Since Dichaba-tsa-Lefatshe Ltd’s delivery
vehicle is not a “motor car”, the input tax paid on its purchase may therefore be
deducted.
The payment of a finance charge is a consideration given for the supply of a
“financial service”. It is an exempt supply and will not give rise to an input tax
deduction.
“Fuel levy” goods, including petrol, are zero rated (s 11(1)(h)).
Dichaba-tsa-Lefatshe Ltd would therefore have paid value-added tax at 0%, and
an input tax deduction of nil would apply.
Example 22.6
(20 minutes)
Atisang Moremi owns a hardware shop in Hatfield, Pretoria. He is a sole trader. Since
1 January 2023, his monthly turnover has increased from R90 000 a month to R110 000
a month. All indications are that his turnover level will not decrease in the future,
except for the three-month period from 1 June to 31 August inclusive when turnover
normally decreases. It is expected to be approximately R90 000 a month in these
three months.
Of Atisang Moremi’s sales, 90% are for cash. His debtors normally pay their accounts
within 45 days of the purchase date.
Atisang Moremi’s purchases are all on credit. He pays his creditors 60 days after
invoice date.
No sales are made by Atisang Moremi to persons outside South Africa.
Atisang Moremi was recently informed that he should have registered as a vendor
and that he will now be liable for substantial penalties. Other legal steps may also
be taken by SARS against him. He always believed that a “small” businessman, like
himself, did not need to register as a vendor. He is now concerned. He knows nothing
about the value-added tax registration requirements and does not know how the
value-added tax system works. He has therefore approached you in this regard.
YOU ARE REQUIRED TO
(1) provide Atisang Moremi with details of the value-added tax registration
requirements as provided for in the Value-Added Tax legislation, and inform him
on what date he became, or will become, liable for registration,
380
Chapter 22
Value-added tax
(2) briefly set out the most important definitions in the Value-Added Tax Act that are
directly relevant to his business, and
(3) inform him about what accounting bases he may use to account for
value-added tax and explain the basis that he should apply for.
Solution 22.6
(1) Registration provisions
The onus is on Atisang Moremi (the businessman) to register as a vendor. He must
register if he is carrying on an enterprise and his total taxable supplies during a
12-month period exceed R1 000 000 or are likely to exceed this amount (s 23(1)).
The term “taxable supplies” is defined in s 1(1). It includes both standard-rate
supplies and zero-rate supplies (see below).
Atisang Moremi may also apply for voluntary registration if his taxable supplies
(see above) do not, or are unlikely to, exceed R1 000 000. He must satisfy the
Commissioner that he will keep satisfactory records and will complete and
submit all tax returns as required by the legislation. He is not allowed to register
on a voluntary basis unless the total value of his taxable supplies exceeds
R50 000 a year (s 23(3)(b)).
Under s 23(1)(a), when a person carrying on an enterprise has reasonable
grounds to believe that his taxable supplies (see above) for the following
12 months will exceed R1 000 000, he must register as a vendor within 21 days
after the beginning of that period. If he has not registered under s 23(1)(a), then,
under s 23(1)(b), he must register as a vendor within 21 days after the end of the
period of 12 months in which his total value of taxable supplies under a
contractual obligation in writing has exceeded R1 000 000.
Before 1 January 2023, it was unlikely that Atisang Moremi’s turnover (taxable
supplies) would have exceeded the compulsory registration limit of R1 000 000.
He was therefore not liable to register as a vendor prior to that date.
From 1 January 2023, it became likely that Atisang Moremi’s taxable supplies
during the following 12 months would exceed R1 000 000 ((R110 000 × 9 + R90 000
× 3 = R1 260 000 ×100 / 115 = R1 095 652). Therefore, he should have registered
for value-added tax no later than 21 January 2023. The other alternative will not
apply to him since he cannot reasonably say that he had no reason to believe
that his taxable supplies for the 12 months from 1 January 2023 would exceed
R1 000 000.
(2) Important definitions
“Vendor”: A “vendor” is a person who is, or is required to be, registered under
the Act.
“Enterprise”: An “enterprise” is an enterprise or activity that is carried on
continuously or regularly by a person in South Africa or partly in South Africa in the
course or furtherance of which goods or services are supplied for a
consideration.
“Taxable supplies”: A “taxable supply” is a supply of goods or services that is not
an exempt supply as defined, and which is chargeable with value-added tax,
whether at the zero rate or the standard rate.
“Output tax”: “Output tax” means the value-added tax that a vendor will charge
on the supply of goods and services that he makes to his customers.
381
Tax Workbook
“Input tax”: “Input tax” is the value-added tax that a vendor will pay his suppliers
for his purchases (of goods and services) from them.
“Consideration”: “Consideration”, in relation to the supply of goods or services to
a person, includes a payment made or to be made (including a deposit (but
see the proviso below) on a returnable container and tax), whether in money or
otherwise, or an act or forbearance, whether or not voluntary, for, in response to,
or for the inducement of, the supply of any goods or services, whether by that
person or by another person. “Consideration”, however, excludes a payment
made by a person as a donation to an association not for gain. The proviso to
the definition of a “consideration” states that a deposit (other than a deposit on
a returnable container), whether refundable or not, given for a supply of goods
or services must not be considered payment made for the supply unless the
supplier applies the deposit as consideration for the supply or the deposit is
forfeited.
(3) Accounting bases
There are two bases for accounting for value-added tax, namely, the
• invoice basis, and
• payments basis.
A vendor must account for value-added tax according to the invoice basis
unless specific application has been made for the payments basis. The
payments basis may be used by only a non-juristic person (for example, a
partnership or a sole proprietor) when the taxable supplies during a 12-month
period do not exceed R2 500 000 (s 15(2)(b)).
The invoice basis requires the declaration by a vendor to SARS of the total output
tax on supplies and deemed supplies made by the enterprise. From this output
tax is deducted the total input tax on valid tax invoices held by him for supplies
of goods and services received from his suppliers, credit notes issued by him,
debit notes received by him and other adjustments under the Act.
• When the output tax exceeds the input tax, the difference must be paid to
SARS.
• But when the input tax exceeds the output tax, the difference will be refunded
to the vendor.
The payments basis differs from the invoice basis in that only the output tax
actually received by the vendor is declared to SARS. Invoices for which payment
has not yet been received are therefore ignored. Only input tax that has
actually been paid to the supplier may be deducted from the output tax
(provided he is in possession of a valid tax invoice for the supply). Input tax on a
supply for which a valid tax invoice has been received, but which has not yet
been paid for, may not be deducted.
The particular basis used will affect the cash flow of the enterprise in different
ways. The most beneficial cash-flow result for the vendor of the two bases should
be investigated.
Since Atisang Moremi trades in his own name, that is, he does not trade as a
juristic person, both bases are available to him. In his situation, the invoice basis
will provide the best result, since the majority of his sales are for cash and his
debtor’s collection period of 45 days is shorter than his creditors’ payment period
of 60 days. Input tax can therefore be deducted before it is paid to his creditors.
382
Chapter 22
Value-added tax
Example 22.7
(15 minutes)
The following information relates to Mukololos Ltd, a vendor, and a resident of the
Republic, for its tax period (a two-month period) ended 31 December 2022:
• Supplies of goods made by Mukololos Ltd subject to value-added tax at the
standard rate amounted to R345 000 (R300 000 plus value-added tax of R45 000).
• Supplies of goods or services made by Mukololos Ltd subject to value-added tax
at the zero-rate amounted to R100 000 (R100 000 plus value-added tax of Rnil).
These goods were exported.
• Supplies of goods or services made by Mukololos Ltd not subject to value-added
tax (exempt) amounted to R30 000 (R30 000 plus value-added tax of Rnil).
• Input tax of R50 000 was incurred by Mukololos Ltd for capital goods purchased
by it.
• Input tax incurred for goods and services supplied to Mukololos Ltd was R25 000.
• Second-hand goods (not of a capital nature) were purchased by Mukololos Ltd
from a non-vendor for R23 000 and paid for in cash.
• A debtor who owed Mukololos Ltd R69 000 (R60 000 plus value-added tax of
R9 000) was liquidated during this period. A first and final liquidation distribution of
20 cents in the rand was awarded to it. The balance owing was written off by it as
a bad debt.
• The cash equivalent of the value of the fringe benefits (excluding the use of motor
vehicles) granted by Mukololos Ltd to its employees (who are working solely with
its standard-rated supplies) during this period was R17 250. (This amount has not
been included in the above amounts for the supply of goods or services made by
it.)
• During this tax period Mukololos Ltd issued two credit notes. The first was to a
“local” customer, for R11 500 (R10 000 plus R1 500 value-added tax), and the
second was to a “foreign” customer, for R6 000 (R6 000 plus Rnil value-added tax).
• One credit note for R9 200 (R8 000 plus R1 200 value-added tax) was received by
Mukololos Ltd during this tax period.
Since the goods and services supplied to Mukololos Ltd are used both in the
course of making taxable supplies and non-taxable supplies, it has agreed with
the Commissioner for an apportionment (when applicable) be made on the
“turnover-based” method. It has been agreed that 85% of its supplies are for taxable
supplies.
YOU ARE REQUIRED TO determine Mukololos Ltd's the value-added tax due to, or
from, SARS for this tax period.
383
Tax Workbook
Solution 22.7
Output tax
R
Output tax at standard rate
– Supply of goods and services
– Fringe benefit deemed supplies
R
345 000
17 250
Output tax at zero rate
Exempt and non-supplies
Add credit note received (85% of R9 200)
362 250
× 15/ 115
47 250
100 000
30 000
7 820
×0
×0
× 15/ 115
0
–
1 020
48 270
Input tax
– Input tax on capital goods
– Other goods or services
– Second-hand goods (paid for) R23 000 × 15 / 115
50 000
25 000
3 000
78 000
Bad debts: 80% (100% – 20%) of R9 000
Credit notes issued – “Local” customer
– “Foreign” customer
× 85%
66 300
7 200
1 500
0
75 000
Total output tax (see above)
Less: Total input tax (see above)
48 270
75 000
Refund due
26 730
L Questions
Question 22.1
(20 minutes)
On 1 March 2022, Nhoveni Ltd, a resident of the Republic, purchased a “motor car”
as defined for R431 250 (R375 000 plus R56 250) cash. On the same day, the
exclusive use of this motor car was given to Thabile Jali, its managing director.
Thabile Jali used this motor car throughout the 2023 year of assessment. Nhoveni Ltd
incurred the following expenses in relation to it:
R
Annual insurance (R27 000 plus R4 050)
31 050
Fuel (R129 600 plus Rnil value-added tax)
129 600
Repairs (R13 500 plus R2 025 value-added
15 525
Licence (R972 plus Rnil value-added tax)
972
Thabile Jali travelled a total distance of 19 500 kilometres during the 2023 year of
assessment in this motor car, of which 7 800 kilometres were for business purposes.
Nhoveni Ltd’s financial year ends on the last day of February.
YOU ARE REQUIRED TO determine all the resulting normal tax and value-added tax
consequences of the above transactions, for both Nhoveni Ltd and Thabile Jali.
384
Chapter 22
Value-added tax
Question 22.2
(20 minutes)
Matunde Ltd is a resident of the Republic. It is a vendor. It makes solely taxable
supplies. You are employed as its accountant.
Matunde Ltd's board of directors decided at its meeting held last week that its
employees could re-negotiate their salary packages with it, and now earn a
package consisting of both cash payments and fringe benefits. (Prior to this decision
being made, employees could earn only cash salaries.)
Matunde Ltd’s board of directors is, however, aware that the awarding of certain
“Seventh Schedule” fringe benefits will result in it having to pay value-added tax on
them. Therefore, it would prefer employees to choose fringe benefits that are not
subject to value-added tax.
YOU ARE REQUIRED TO draft a report for Matunde Ltd setting out those “Seventh
Schedule” fringe benefits that will not give rise to value-added tax having to be
paid by it.
Question 22.3
(30 minutes)
You are a partner in Ntaka, Nkanku & Nseme, an auditing firm. Most tax work that is
not of a general nature is carried out by yourself. A partner of yours is busy finalising
the audit of a major client, namely, Indlwane Ltd. It carries on a diversified business.
It is a vendor. It makes solely taxable supplies. Its current financial year ended on
28 February 2023. You recently received the following inter-office memorandum from
your partner:
Memorandum
To: You
From: Him
Date: 15 March 2023
Re: Tax problems with the “Indlwane Ltd” audit
(1) In January 2023, a motor car (as defined in the Value-Added Tax Act) belonging
to Indlwane Ltd was written off in an accident. The other motor car involved in
this accident was also written off. Indlwane Ltd’s driver was the guilty party in this
accident. It received R207 000 for its written-off motor car from its insurer. This
transaction was recorded in its journal as follows:
R
R
Bank
Dr 207 000
To Motor car
180 000
To Value-added tax output account
27 000
Being an award received from its insurer for its motor car
written off.
Indlwane Ltd’s insurer awarded the other party involved in the accident R136 275
for her claim for her motor car, which was also written off in the accident. She
had claimed R151 800 for her written-off motor car. Indlwane Ltd, wishing to
maintain its good public image, then agreed to pay the difference of R15 525
385
Tax Workbook
(R151 800 – R136 275) to her. It did this by making an electronic transfer out of its
bank account. It recorded this transaction in its journal as follows:
R
R
Motor car expenses
Dr
13 500
Value-added tax input account
Dr
2 025
To Bank
15 525
Being a settlement payment made to the other party
involved in the accident.
Are the above journal entries correct, and if not, what should the correcting
journal entry or entries be?
(2) At Indlwane Ltd’s out-of-town factory, an employees’ canteen was established
by it on 1 March 2022 since there was no place in that area where its employees
could have lunch. The transaction recording the purchase of its canteen
equipment was as follows:
Canteen equipment
To Bank
Being purchase of equipment for an employees’
canteen.
Dr
R
57 500
R
57 500
For a number of reasons Indlwane Ltd’s employees’ canteen has failed. One
reason was that it was operated on a subsidised basis. Its employees’ canteen
was then converted into a fully-fledged profit-making restaurant. This happened
on 2 January 2023. From all reports this move seems to have been successful. The
market value of its canteen equipment on 2 January 2023 was R48 300. Being
the only restaurant in that area it is now used not only by its own employees, but
also by employees from other factories in close proximity. A small amount of
additional restaurant equipment had to be purchased to supplement its
canteen equipment it had already purchased. This transaction was recorded as
follows:
R
R
Restaurant equipment
Dr
10 000
Value-added tax input account
Dr
1 500
11 500
To Bank
Being purchase of equipment for the restaurant.
No adjusting journal entry has been made by Indlwane Ltd for the change of
use of its canteen equipment (into restaurant equipment).
Are the above journal entries correct, and if not, what should the correcting
journal entry or entries be?
(3) Indlwane Ltd sold three fixed assets. They were all sold to employees of it on
28 February 2023: Relevant details are as follows:
• A microwave oven used by Indlwane Ltd’s employees in its administration
office was sold to a creditors’ clerk for R460. It had originally cost Indlwane Ltd
R1 725 (including value-added tax at 15%). It had a carrying amount (book
value) on 28 February 2023 of R575. Its market value on 28 February 2023 was
R644.
386
Chapter 22
Value-added tax
• A personal computer used by Indlwane Ltd’s technical director was sold to his
secretary (for her children’s use) for R897. It had originally cost R5 175 (including
value-added tax at 15%). It had a carrying amount (book value) on
28 February 2023 of R1 500. Its market value on 28 February 2023 was R1 196.
• A motor cycle used by Indlwane Ltd’s messenger was sold to a factory
employee for R2 530. It had originally cost R8 800 (including value-added tax
at 10%). It had a carrying amount (book value) on 28 February 2023 of R1.
Since it is in need of repair, the trade-in valuation received by Indlwane Ltd
was R2 254. The factory employee was prepared to pay R2 530 for it since he
will be able to repair it himself at a nominal cost.
The following journal entry was used by Indlwane Ltd to record the sale of these
three fixed assets:
R
R
Bank (R460 + R897 +R2 530)
Dr
3 887
Accumulated depreciation – furniture and fittings
Dr
1 150
Accumulated depreciation – computer equipment
Dr
3 000
Accumulated depreciation – motor cycle
Dr
7 999
Loss on sale of fixed assets – furniture and fittings (R115) Dt
and computer equipment (R603)
718
To Furniture and fittings
1 725
To Computer equipment
4 500
To Motor cycle
8 000
Profit on sale of fixed asset – motor cycle
2 529
Being the sale of three fixed assets to employees.
Is this journal entry correct, and if not, what should the correcting journal entry or
entries be?
YOU ARE REQUIRED TO provide your partner with correcting journal entries that need
to be made by Indlwane Ltd and explanations in response to his queries.
387
Appendices
L Appendix A
Rates of normal tax
(i)The rate of tax referred to in s 5(2) of the Income Tax Act 58 of 1962 to be levied
on a taxable income (excluding any retirement fund lump-sum benefit or retirement
lump-sum withdrawal benefit) of any natural person, deceased estate, insolvent
estate or special trust (other than a public benefit organisation or recreational club)
for a year of assessment commencing on 1 March 2022, is set out in the table below:
Taxable income
But does
not exceed
Exceeds
R
Rates of schedule tax
R
–
R
226 000
R
18% of each R1
–
226 000
353 100
40 680 + 26% of the excess over
226 000
353 100
488 700
73 726 + 31% of the excess over
353 100
488 700
641 400
115 762 + 36% of the excess over
488 700
641 400
817 600
170 734 + 39% of the excess over
641 400
817 600
1 731 600
239 452 + 41% of the excess over
817 600
1 731 600
–
614 192 + 45% of the excess over
1 731 600
(ii) Trusts (other than special trusts or a public benefit organisation) for a year of
assessment ending on 28 February 2023 – 45% of the taxable income.
(iii) Retirement Fund Lump-Sum Benefits – Retirement or Death from a recognised
retirement fund and Severance Benefits (as defined) from an employer (for the year
of assessment ending 28 February 2023).
Taxable Income from lump-sum
benefits (aggregate)
Rates of tax
Not exceeding R500 000 .............................................
0% of the taxable income,
exceeding R500 000 but not exceeding R700 000 ..
18% of the taxable income exceeding
R500 000,
continued
389
Tax Workbook
Taxable Income from lump sum
benefits (aggregate)
Rates of tax
exceeding R700 000 but not exceeding R1 050 000.
R36 000 plus 27% of taxable income
exceeding R700 000;
exceeding R1 050 000 ...................................................
R130 500 plus 36% of taxable income
exceeding R1 050 000
This determination is done cumulatively, and the amount of tax determined must be
reduced by the hypothetical tax on any previous lump-sum benefits.
(iv) Retirement Fund Lump-Sum Withdrawal Benefits (for the year of assessment
ending 28 February 2023.
Taxable Income from lump sum
benefits (aggregate)
Rates of tax
Not exceeding R25 000 ...............................................
0% of the taxable income;
exceeding R25 000 but not exceeding R660 000 ....
18% of the taxable income exceeding
R25 000;
exceeding R660 000 but not exceeding R990 000 ..
R114 300 plus 27% of taxable income
exceeding R660 000;
exceeding R990 000 ....................................................
R203 400 plus 36% of taxable income
exceeding R990 000
This determination is done cumulatively, and the amount of tax determined must be
reduced by the hypothetical tax on any previous lump-sum withdrawal benefits.
(v) The rate of tax referred to in s 5(2) of the Income Tax Act to be levied on the
taxable income of a company that qualifies as a small business corporation as
defined in s 12E of the Income Tax Act for any year of assessment ending during the
12-months ending on or after 1 April 2022, is set out in the table below:
Taxable Income
Rates of tax
Not exceeding R91 250 ...............................................
0% of the taxable income;
exceeding R91 250 but not exceeding R365 000 ....
7% of taxable income exceeding R91 250,
exceeding R365 000 but not R550 000 ......................
R19 163 plus 21% of taxable income
exceeding R365 000
exceeding R550 000 ....................................................
R58 013 plus 28% taxable income
exceeding R550 000
For any year of assessment ending during the 12-months ending on or after
31 March 2023, the 28% rate is reduced to 27%.
(vi) The rate of tax referred to in s 5(2) of the Income Tax Act to be levied on the
taxable turnover of a person that is a registered micro business as defined in para 1
of the Sixth Schedule to the Income Tax Act for any year of assessment
commencing on or after 1 March 2022, is set out in the table below:
390
Appendices
Taxable turnover
Rates of tax
Not exceeding R335 000 .............................................
0% of the taxable turnover;
exceeding R335 000 but not exceeding R500 000 ..
1% of amount by which the taxable turnover
exceeds R335 000;
exceeding R500 000 but not exceeding R750 000 ..
R1 650 plus 2% of amount by which taxable
turnover exceeds R500 000;
exceeding R750 000 ....................................................
R6 650 plus 3% of amount by which taxable
turnover exceeds R750 000
(vii) Companies and close corporations (other than mining companies, long-term
insurance companies) for the 12-month period ending on or after 1 April 2022:
Normal tax on taxable income
Rate of tax
Companies
28%
Non-resident companies
28%
Public benefit organisations or recreational clubs approved under s 30(3) or
s 30(A)(2) respectively
28%
Personal service provider companies as defined in para 1 of the Fourth Schedule
28%
For the 12-month period ending on or after 31 March 2023 the 28% rate is reduced
to 27%.
391
Tax Workbook
L Appendix B
Scale of values: Travel allowance
Employee-owned vehicles (s 8(1))
Scale of values
From 1 March 2022
Fixed
Cost
Fuel
Cost
Maintenance
Cost
R
c / km
C / km
does not exceed R95 000
29 836
131,7
40,9
exceeds R95 000 but does not exceed R190 000
52 889
147,0
51,1
exceeds R190 000 but does not exceed R285 000
76 033
159,7
56,3
exceeds R285 000 but does not exceed R380 000
96 197
171,8
61,5
exceeds R380 000 but does not exceed R475 000
116 438
183,8
72,3
exceeds R475 000 but does not exceed R570 000
137 735
210,8
84,9
exceeds R570 000 but does not exceed R665 000
159 031
218,0
105,5
exceeds R665 000
159 031
218,0
105,5
When the value of the vehicle
Simplified method
When
(a) the provisions of s 8(1)(b)(iii) are applicable to the recipient of an allowance or
advance, and
(b) no other compensation in the form of a further allowance or reimbursement
(other than for parking or toll fees) is payable by the employer to that recipient,
the rate per kilometre is, at the option of the recipient, equal to 418 cents per
kilometre.
392
Appendices
L Appendix C
Standard values of livestock
For the purposes of para 6 of the First Schedule to the Income Tax Act, the standard
value applicable to any class of livestock shall in the case of every farmer who is
required to account for such value be as set out hereunder:
Standard values
R
Classification
Cattle –
Bulls ..............................................................................................................................
Oxen ...........................................................................................................................
Cows ...........................................................................................................................
Tollies and heifers–
Two to three years .....................................................................................................
One to two years .......................................................................................................
Calves .............................................................................................................................
Sheep–
Wethers ........................................................................................................................
Rams ...........................................................................................................................
Ewes ............................................................................................................................
Weaned lambs ..........................................................................................................
Goats–
Fully grown .................................................................................................................
Weaned kids ..............................................................................................................
Horses–
Stallions, over 4 years ................................................................................................
Mares, over 4 years ...................................................................................................
Geldings, over 3 years ..............................................................................................
Colts and fillies, 3 years .............................................................................................
Colts and fillies, 2 years .............................................................................................
Colts and fillies, 1 year ..............................................................................................
Foals, under 1 year ....................................................................................................
Donkeys–
Jacks, over 3 years ....................................................................................................
Jacks, under 3 years ..................................................................................................
Jennies, over 3 years .................................................................................................
Jennies, under 3 years ..............................................................................................
Mules–
Four years and over ..................................................................................................
Three years .................................................................................................................
Two years ....................................................................................................................
One year ....................................................................................................................
Ostriches, fully grown ....................................................................................................
Pigs–
Over 6 months ...........................................................................................................
Under 6 months (weaned) .......................................................................................
Poultry, over 9 months ...................................................................................................
Chinchillas, all ages .......................................................................................................
393
50
40
40
30
14
4
6
6
6
2
4
2
40
30
30
10
8
6
2
4
2
4
2
30
20
14
6
6
12
6
1
1
Tax Workbook
L Appendix D
Expectation of life and present value tables
Expectation of life
Present value of R1 per annum
for life expectation
Age
Male
Female
Male
Female
Age
0
1
2
3
4
64,74
65,37
64,50
63,57
62,63
72,36
72,74
71,87
70,93
69,97
8,327 91
8,328 28
8,327 76
8,327 14
8,326 44
8,331 05
8,331 14
8,330 91
8,330 64
8,330 33
0
1
2
3
4
5
6
7
8
9
61,69
60,74
59,78
58,81
57,83
69,02
68,06
67,09
66,11
65,14
8,325 67
8,324 80
8,323 81
8,322 71
8,321 46
8,329 99
8,329 61
8,329 18
8,328 69
8,328 15
5
6
7
8
9
10
11
12
13
14
56,85
55,86
54,87
53,90
52,93
64,15
63,16
62,18
61,19
60,21
8,320 07
8,318 49
8,316 73
8,314 80
8,312 65
8,327 53
8,326 84
8,326 08
8,325 22
8,324 27
10
11
12
13
14
15
16
17
18
19
51,98
51,04
50,12
49,21
48,31
59,23
58,26
57,29
56,33
55,37
8,310 29
8,307 70
8,304 89
8,301 80
8,298 41
8,323 20
8,322 03
8,320 71
8,319 26
8,317 64
15
16
17
18
19
20
21
22
23
24
47,42
46,53
45,65
44,77
43,88
54,41
53,45
52,50
51,54
50,58
8,294 71
8,290 61
8,286 13
8,281 17
8,275 64
8,315 84
8,313 83
8,311 61
8,309 12
8,306 33
20
21
22
23
24
25
26
27
28
29
43,00
42,10
41,20
40,30
39,39
49,63
48,67
47,71
46,76
45,81
8,269 59
8,262 74
8,255 16
8,246 77
8,237 37
8,303 26
8,299 81
8,295 95
8,291 71
8,286 97
25
26
27
28
29
30
31
32
33
34
38,48
37,57
36,66
35,75
34,84
44,86
43,91
42,96
42,02
41,07
8,226 94
8,215 38
8,202 57
8,188 36
8,172 62
8,281 70
8,275 83
8,269 30
8,262 10
8,254 00
30
31
32
33
34
35
36
37
38
39
33,94
33,05
32,16
31,28
30,41
40,13
39,19
38,26
37,32
36,40
8,155 36
8,136 47
8,115 58
8,092 74
8,067 81
8,245 09
8,235 17
8,224 26
8,211 99
8,198 66
35
36
37
38
39
40
41
42
43
44
29,54
28,69
27,85
27,02
26,20
35,48
34,57
33,67
32,77
31,89
8,040 30
8,010 67
7,978 44
7,943 44
7,905 47
8,183 86
8,167 62
8,149 83
8,130 12
8 108 81
40
41
42
43
44
continued
394
Appendices
Expectation of life
Age
Present value of R1 per annum
for life expectation
Male
Female
Male
Female
Age
45
46
47
48
49
25,38
24,58
23,79
23,00
22,23
31,01
30,14
29,27
28,41
27,55
7,863 80
7,819 24
7,771 09
7,718 43
7,662 36
8,085 27
8,059 56
8,031 19
8,000 26
7,966 17
45
46
47
48
49
50
51
52
53
54
21,47
20,72
19,98
19,26
18,56
26,71
25,88
25,06
24,25
23,44
7,602 01
7,537 13
7,467 48
7,393 87
7,316 31
7,929 50
7,889 67
7,846 46
7,799 65
7,748 34
50
51
52
53
54
55
56
57
58
59
17,86
17,18
16,52
15,86
15,23
22,65
21,86
21,08
20,31
19,54
7,232 34
7,144 14
7,051 78
6,952 25
6,850 04
7,693 55
7,633 63
7,568 96
7,499 27
7,423 21
55
56
57
58
59
60
61
62
63
64
14,61
14,01
13,42
12,86
12,31
18,78
18,04
17,30
16,58
15,88
6,742 06
6,630 10
6,512 32
6,393 01
6,268 22
7,341 35
7,254 57
7,160 20
7,060 46
6,955 37
60
61
62
63
64
65
66
67
68
69
11,77
11,26
10,76
10,28
9,81
15,18
14,51
13,85
13,20
12,57
6,137 89
6,007 26
5,871 65
5,734 03
5,591 82
6,841 61
6,723 93
6,598 93
6,466 35
6,328 18
65
66
67
68
69
70
71
72
73
74
9,37
8,94
8,54
8,15
7,77
11,96
11,37
10,80
10,24
9,70
5,451 65
5,307 75
5,167 44
5,024 37
4,878 76
6,184 66
6,036 07
5,882 78
5,722 22
5,557 43
70
71
72
73
74
75
76
77
78
79
7,41
7,07
6,73
6,41
6,10
9,18
8,68
8,21
7,75
7,31
4,734 90
4,593 54
4,446 63
4,303 09
4,158 98
5,388 93
5,217 27
5,046 79
4,870 92
4,693 89
75
76
77
78
79
80
81
82
83
84
5,82
5,55
5,31
5,09
4,89
6,89
6,50
6,13
5,78
5,45
4,024 40
3,890 51
3,768 02
3,652 76
3,545 46
4,516 47
4,343 99
4,173 15
4,004 82
3,839 88
80
81
82
83
84
85
86
87
88
89
90
4,72
4,57
4,45
4,36
4,32
4,30
5,14
4,85
4,58
4,33
4,11
3,92
3,452 32
3,368 64
3,300 66
3,249 07
3,225 97
3,214 38
3,679 21
3,523 71
3,374 26
3,231 75
3,102 96
2,989 12
85
86
87
88
89
90
The above tables have been extracted from Government Notice No R1942 dated
23 September 1977.
395
Tax Workbook
Annuity table (Table B)
Present value of R1 per annum capitalised at 12% over fixed periods
Years
Amount
Years
Amount
Years
Amount
1
2
3
4
5
0,892 9
1,690 0
2,401 8
3,037 4
3,604 8
26
27
28
29
30
7,895 7
7,942 6
7,984 4
8,021 8
8,055 2
51
52
53
54
55
8,307 6
8,310 4
8,312 8
8,315 0
8,317 0
76
77
78
79
80
8,331 8
8,332 0
8,332 1
8,332 3
8,332 4
6
7
8
9
10
4,111 4
4,563 8
4,967 6
5,328 2
5,650 2
31
32
33
34
35
8,085 0
8,111 6
8,135 4
8,156 6
8,175 5
56
57
58
59
60
8,318 7
8,320 3
8,321 7
8,322 9
8,324 0
81
82
83
84
85
8,332 5
8,332 6
8,332 6
8,332 7
8,332 8
11
12
13
14
15
5,937 7
6,194 4
6,423 6
6,628 2
6,810 9
36
37
38
39
40
8,192 4
8,207 5
8,221 0
8,233 0
8,243 8
61
62
63
64
65
8,325 0
8,325 9
8,326 7
8,327 4
8,328 1
86
87
88
89
90
8,332 8
8,332 9
8,333 0
8,333 0
8,333 0
16
17
18
19
20
6,974 0
7,119 6
7,249 7
7,365 8
7,469 4
41
42
43
44
45
8,253 4
8,261 9
8,269 6
8,276 4
8,282 5
66
67
68
69
70
8,328 6
8,329 1
8,329 6
8,330 0
8,330 3
91
92
93
94
95
8,333 1
8,333 1
8,333 1
8,333 1
8,333 2
21
22
23
24
25
7,562 0
7,644 6
7,718 4
7,784 3
7,843 1
46
47
48
49
50
8,288 0
8,292 8
8,297 2
8,301 0
8,304 5
71
72
73
74
75
8,330 7
8,331 0
8,331 2
8,331 4
8,331 6
96
97
98
99
100
8,333 2
8,333 2
8,333 2
8,333 2
8,333 2
396
Years
Amount