Introduction to taxation
and calculation of net tax
payable
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All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law.
1
Gross
income
–
Exempt
income
–
Deductions
=
Taxable
income
Tax per table
–
Rebate
=
Normal
tax liability
–
Prepaid
taxes
Tax liability
=
Net tax due/
(refundable)
Page
1.1
Introduction .........................................................................................................
2
1.2
Taxation in perspective ......................................................................................
1.2.1 Types of taxation ....................................................................................
1.2.2 Classification of taxes ............................................................................
1.2.3 Criteria of a good tax system................................................................
2
2
2
3
1.3
The budget process .............................................................................................
1.3.1 Medium-term expenditure framework ..............................................
1.3.2 The national budget...............................................................................
1.3.3 The Income Tax Act 58 of 1962 (the Act) ............................................
4
4
4
6
1.4
Calculation of taxable income (section 5).........................................................
7
1.5
Calculation of final normal tax liability ...........................................................
1.5.1 Year or period of assessment (section 1) .............................................
1.5.2 Normal tax (section 5) ...........................................................................
1.5.3 Normal tax rebates for natural persons (section 6) ...........................
1.5.4 Medical scheme fees tax credit (MTC) (section 6A) ..........................
1.5.5 Additional medical expenses tax credit (AMTC) (section 6B) .........
1.5.6 Rebate in respect of foreign taxes on income (section 6quat) ...........
1.5.7 Prepaid taxes ..........................................................................................
12
13
14
15
17
19
23
23
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A Student’s Approach to Income Tax/Natural Persons
1.6
1.7
1.8
1.9
1.1–1.2
Tax returns, assessments and objections ..........................................................
Tax practitioners ..................................................................................................
Summary ..............................................................................................................
Examination preparation ...................................................................................
Page
24
25
26
27
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1.1 Introduction
Most people who enter the workplace are amazed to see how much tax is deducted
from their monthly salary. Most people’s first reaction is: ‘There must be a mistake; I
am paying too much tax.’ After consultation with the salary department, it is usually
confirmed that the correct amount was deducted. The reality of tax is something that
most people have to face whether they are employed or operating their own business.
Critical questions
When dealing with taxation a person is normally confronted with the following questions:
• What determines the tax rate?
• Do the taxation rules change every year?
• Which types of taxes are levied in the Republic?
• What does the government do with the tax levied?
• How is a person’s taxable income for the year calculated?
• How does a person know how much tax they should pay?
• How does the government collect the tax that is due?
1.2 Taxation in perspective
Taxes are levied to enable the government to provide services to the people. Another
view is that taxes are contributions to the State for the ultimate benefit of all who
enjoy the privileges and protection offered by the State.
1.2.1 Types of taxation
In South Africa we pay a variety of taxes of which the main types are income tax,
(which includes capital gains tax), value-added tax (VAT), excise and customs duties
and a whole range of other taxes such as transfer duty and local authority taxes.
South Africans also pay donations tax and estate duty (which tax the transfer of
wealth), securities transfer tax on shares and local property rates.
1.2.2 Classification of taxes
There are a number of ways to classify taxes ranging from the tax calculation method
used, to identifying the person who is ultimately responsible for paying the tax.
Taxes are classified according to a number of different factors.
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1.2
Chapter 1: Introduction to taxation and calculation of net tax payable
Based on what the various taxes are levied on
• Income Tax on income earned, for example normal tax levied on taxable income.
• Consumption Taxes on the sale or use of goods or services, for example VAT,
excise duty on domestic consumption, and customs duty and import tariffs on foreign trade. These taxes take the form of price increases and affect the consumers.
• Wealth Taxes on the ownership of assets or capital gains made on the sale of
property, for example capital gains tax, estate duty, donations tax and local authority taxes.
• Other Taxes that are levied on specific business transactions, for example stamp
duty, transfer duty and securities transfer tax.
The method used to calculate the tax
• Proportional tax Tax is levied at a fixed rate on the amount of income earned,
for example income tax on companies is levied at a fixed rate of 28% of taxable
income.
• Progressive tax The rate that is used to calculate the amount of tax is determined
by the person’s income. The higher a person’s income, the higher the tax rate that
is used to calculate the tax, for example income tax levied on natural persons.
• Regressive tax The tax rate decreases with the increase of a person’s income. No
such form of tax exists in South Africa.
The person who has the responsibility of paying the tax
• Direct tax The impact and incidence of tax falls on the same person (the person on
whom the tax is levied bears the impact, while the person who ultimately pays the
tax, bears the incidence). Income tax and capital gains tax are therefore direct taxes.
• Indirect tax The seller bears the impact of the tax, while the consumer ultimately
pays the tax. VAT is an example of an indirect tax.
1.2.3 Criteria of a good tax system
As early as 1776, Adam Smith, in his Wealth of Nations, recognised that the levying of
taxation should comply with certain basic criteria or norms and proposed the following four canons (or principles) of taxation:
• Equity The subjects of every state ought to contribute, almost in proportion to
their abilities, towards the support of the government, that is to say in proportion
to the benefits which they enjoy under the protection of the state.
• Certainty The tax that every individual is bound to pay should be certain and not
arbitrary. This means that the time and manner of payment, and the amount to be
paid should be clear and plain to the contributor and to every other person.
• Convenience Every tax should be levied at the time or in the manner most convenient for the contributor to pay it.
• Economy Every tax should be such that the contributor pays the minimal additional cost for administration and in submission costs beyond its actual tax, but it
must still be sufficient to provide the treasury of the State with the amount it
requires.
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1.2
Chapter 1: Introduction to taxation and calculation of net tax payable
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Based on what the various taxes are levied on
• Income Tax on income earned, for example normal tax levied on taxable income.
• Consumption Taxes on the sale or use of goods or services, for example VAT,
excise duty on domestic consumption, and customs duty and import tariffs on foreign trade. These taxes take the form of price increases and affect the consumers.
• Wealth Taxes on the ownership of assets or capital gains made on the sale of
property, for example capital gains tax, estate duty, donations tax and local authority taxes.
• Other Taxes that are levied on specific business transactions, for example stamp
duty, transfer duty and securities transfer tax.
The method used to calculate the tax
• Proportional tax Tax is levied at a fixed rate on the amount of income earned,
for example income tax on companies is levied at a fixed rate of 28% of taxable
income.
• Progressive tax The rate that is used to calculate the amount of tax is determined
by the person’s income. The higher a person’s income, the higher the tax rate that
is used to calculate the tax, for example income tax levied on natural persons.
• Regressive tax The tax rate decreases with the increase of a person’s income. No
such form of tax exists in South Africa.
The person who has the responsibility of paying the tax
• Direct tax The impact and incidence of tax falls on the same person (the person on
whom the tax is levied bears the impact, while the person who ultimately pays the
tax, bears the incidence). Income tax and capital gains tax are therefore direct taxes.
• Indirect tax The seller bears the impact of the tax, while the consumer ultimately
pays the tax. VAT is an example of an indirect tax.
1.2.3 Criteria of a good tax system
As early as 1776, Adam Smith, in his Wealth of Nations, recognised that the levying of
taxation should comply with certain basic criteria or norms and proposed the following four canons (or principles) of taxation:
• Equity The subjects of every state ought to contribute, almost in proportion to
their abilities, towards the support of the government, that is to say in proportion
to the benefits which they enjoy under the protection of the state.
• Certainty The tax that every individual is bound to pay should be certain and not
arbitrary. This means that the time and manner of payment, and the amount to be
paid should be clear and plain to the contributor and to every other person.
• Convenience Every tax should be levied at the time or in the manner most convenient for the contributor to pay it.
• Economy Every tax should be such that the contributor pays the minimal additional cost for administration and in submission costs beyond its actual tax, but it
must still be sufficient to provide the treasury of the State with the amount it
requires.
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1.2–1.3
In the modern context, these principles must also include the broader principles of
social justice.
1.3 The budget process
The tax rate to be used for a specific year of assessment is determined after the budget
process has been completed and the government knows how much revenue they
require.
1.3.1 Medium-term expenditure framework
The government’s budgeting process starts with the preparation of the medium-term
expenditure framework document. This document sets out the expected expenditure of
the different government departments and the expected revenue for the next three years.
The document is prepared to assist in the government’s main objectives, as set in the
National Development Plan. The expenditure framework also seeks to implement
certain broad economic policy objectives.
These macro-economic policies include –
• the maintenance of full-time employment;
• the achievement of a high rate of economic growth;
• the maintenance of price stability (that is to say the prevention of inflation); and
• the maintenance of external equilibrium (that is to say the maintenance of a
favourable balance of payments and a stable exchange rate).
The three-year framework and the budget process form part of the fiscal policy that
can be used to achieve the macro-economic goals. Fiscal policy influences the total
demand in the household’s economy. An increase in government expenditure or a
decrease in taxes will increase disposable income and therefore demand. This will lead
to increased supply (goods being made) and therefore an increase in employment (or a
decrease in unemployment). Fiscal policy is controlled by the National Treasury.
The second measure that can be used to achieve the macro-economic goals is monetary policy. Monetary policy is the action by the monetary authority (South African
Reserve Bank) aimed at influencing the use of money and credit; this is done through
changes in interest rates. The Reserve Bank controls the interest rates and therefore
the monetary policy. It is important to note that taxation measures do not form part
of the monetary policy but of the fiscal policy.
1.3.2 The national budget
Each year during February, the Minister of Finance presents his budget proposals in
the form of a ‘budget speech’ to Parliament. It has become customary for the budget
speech to start with a short review of the economic, political, social and other circumstances that have had an effect on the budget proposals.
In the second part of his speech, the Minister discusses the most important items of
estimated state expenditure, the reasons for these items of expenditure and the policy
objectives the State wishes to achieve. He also discusses the sources of the revenue to
be used in defraying this expenditure and, as taxes form the major proportion of this
revenue, the details of proposed tax changes.
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1.3
Chapter 1: Introduction to taxation and calculation of net tax payable
The third part of the speech refers to the budget documents tabled at the session.
These documents include –
• the estimate of expenditure to be defrayed from the National Revenue Fund;
• the estimate of income to be received;
• the statistical/economic survey;
• the tax proposals;
• comparative figures of income; and
• any other relevant documents.
These documents give an indication of how the income received during the year will
be spent by the government. Table 1.1 summarises budgeted government expenditure for the 2021/2022 fiscal year.
Table 1.1: Budgeted government expenditure (source: Budget 2021)
Percentage
of expenditure as
budgeted
Type of expenditure
Social Development
20,1%
Learning and culture
18,87%
Health
12,0%
Debt-service costs
11,4%
Peace and Security
10,7%
Community Development
10,3%
Economic Development
9,3%
General public services
3,1%
Payments for financial assets
4,3%
The documents provided to Parliament also indicate how the income will be gathered.
Table 1.2 provides a summary of government’s planned income for the 2021/2022
fiscal year before the effects of lockdown and Covid-19 were taken into account.
Table 1.2: Sources of government income (source: 2021 Budget Highlights)
Amount received
R‘billion
Type of tax
Percentage
of income
Personal income tax
516.0
37,8%
VAT
370.2
27,1%
Corporate income tax
213.1
15,6%
83.1
6,1%
Fuel levies
Customs and excise duties
100.5
7,4%
Other
82.2
6,0%
Total
1 365.1
100,0%
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1.3
From the table above it is clear that the government receives most of its income from
income tax levied on individuals and companies, and VAT. Once a year the National
Treasury and SARS publish tax statistics, giving information about how and where
taxes were collected.
Tax statistics
According to the 2020 tax statistics South Africa had 20 million registered individual
taxpayers. Some interesting facts are
• 40,9% of assessed taxpayers were registered in Gauteng.
• 27,0% of assessed taxpayers were 35 to 44 years old.
• 45,8% of assessed taxpayers were female.
• Travel allowances were the largest allowance for individuals: 26,3% of total allowances
assessed.
• Retirement fund contributions paid on behalf of employees was the largest fringe
benefit (50,8% of the total fringe benefits assessed).
• Contributions to retirement funding was the largest deduction (83,4% of all deductions
granted).
1.3.3 The Income Tax Act 58 of 1962 (the Act)
After debate by Parliament and referral to the Standing Committee on Finance (and
possibly to other committees), the draft taxation bills are presented to the State President for signature and are finally promulgated as an Act of Parliament by publication
in the Government Gazette. The result of this is that these Acts now become part of the
main Income Tax Act and this results in a change to the Act.
When calculating your tax liability or when advising a client about their tax affairs, it
is critical to ensure that you are referring to the correct version of the Act. If you use a
previous or later version of the Act, the calculation or advice that you give might be
incorrect or out of date, resulting in negative tax and financial implications for your
client and even for yourself.
Interpretation rules If the language of the Act provided for absolute certainty, there
would be no necessity for interpretation. Unfortunately this is not the case and the
many court decisions on tax matters are testimony to the need for interpretation. The
circumstances and situations giving rise to income and expenses are also often very
complex, making the application of the provisions of the Act difficult and uncertain.
Where a dispute relating to the application of the Act to a particular case arises
between the revenue authorities and a taxpayer, the parties frequently have to rely on
the courts to give a decision.
The interpretation of law is a very complex field of study and for the purposes of this
book, it is sufficient to take note of a few of the more important rules of interpretation. The need for interpretation will arise only where a provision in the Act is not
clear.
• Hardship is no criterion Even if a certain provision in the Act leads to hardship
for the taxpayer, provided the language of the section is clear, the fact that it gives
rise to hardship cannot be taken into consideration.
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1.3–1.4
Chapter 1: Introduction to taxation and calculation of net tax payable
• The literal meaning must be applied If the literal meaning is clear, it must be
applied even if it may give rise to apparently unfair results.
• The intention of the legislature The intention of the legislator must be applied. A
governing rule in interpretation is, in general, to try to ascertain the intention of the
legislature from a study of the provision in question.
• The contra fiscum rule The benefit of the doubt must be given to the person
sought to be charged, except in cases where a provision in the Act is designed to
prevent tax avoidance. In these cases it should be interpreted in such a way that it
will prevent the mischief against which the section is directed. The rule can be
summarised as follows: the benefit of the doubt would therefore be given to the
taxpayer, except where tax avoidance is involved.
A distinction must be drawn between interpretation by the courts and a practice
adopted by the South African Revenue Service (SARS). Where the wording in the Act
isn’t clear, the courts cannot take note of the SARS practice or base their interpretation on the practice. Instead, the court must apply the rules of interpretation. Apart
from interpretation, the practice of SARS plays an important role in the administration of the Act. ‘Interpretation Notes’ are issued from time to time to inform taxpayers about some practices that apply.
1.4 Calculation of taxable income (section 5)
Section 5(1) of the Act makes provision for the payment of income tax (which is
referred to as normal tax) on the taxable income received by or accrued to or in
favour of a person during the year of assessment.
In order to determine how much tax a person should pay, that person’s taxable
income must first be established. The Act has a number of definitions that must be
used to determine a person’s taxable income. Section 1 of the Act provides the following definition of taxable income:
[T]he aggregate of –
(a) the amount remaining after deducting from the income of any person all the
amounts allowed under Part I of Chapter II to be deducted from or set off against
such income; and
(b) all amounts to be included or deemed to be included in the taxable income of any
person in terms of this Act.
It is clear from the above that in order to calculate a person’s taxable income, the
income for the year and the expenditure allowed for the year need to be determined.
The expenditure is set out in Part I of Chapter II of the Act. The amount of the
expenditure that is allowed as a deduction will depend on the kind of expenditure
and the date of the expenditure. These rules are dealt with in later chapters. The term
‘income’ is also defined in section 1 of the Act, which reads as follows:
[T]he amount remaining of the gross income of any person . . . after deducting therefrom any amounts exempt from normal tax . . .
A list of income that is exempt from tax is provided in section 10 of the Act and is
discussed in chapter 3.
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1.4
Examples of exempt income are dividends and interest received. For example, local
dividends received are exempt from income tax but only a portion of foreign dividends are exempt from tax. Interest received by a natural person will also be exempt
but limited to a maximum of R23 800 for persons under 65 years of age and R34 500
for persons 65 years of age or older on the last day of the year of assessment. All
income (for example interest, dividends and capital gains) received on a tax free
investment is exempt from income tax. Only accounts that meet specific criteria are
classified as tax free investments, these investments must be identified as such in the
name of the investment.
REMEMBER
• Exempt income is deducted from gross income; therefore, an amount can only be exempt
income if it is already included in gross income.
The next step is to determine which amounts are included in gross income. The Act
provides a definition of ‘gross income’ in section 1:
Gross income in relation to a year or period of assessment –
(i) in the case of a resident, the total amount, in cash or otherwise, received by or
accrued to or in favour of such resident; or
(ii) in the case of a person other than a resident the total amount, in cash or otherwise, received by or accrued to or in favour of such person from a source within
the Republic,
during such year or period of assessment, excluding receipts or accruals of a capital
nature, but including . . . amounts . . . as described hereunder . . .
The gross income definition can be divided into three components:
• the general rule for residents of South Africa;
• the general rule for non-residents of South Africa; and
• amounts specifically included in a person’s gross income.
A salary received is an example of an amount to be included in gross income in terms
of the general rule as it complies with all the requirements of the definition. These
requirements are discussed in chapter 2.
Remember that it is not required that a person must receive an amount before it is
included in gross income, that is to say where an amount accrues to the taxpayer, it
will also be taxable even though they have not physically received it. For example, if
a person invests in a unit trust (also known as a collective investment scheme) and
elects to reinvest the annual interest and dividend earned, they will never receive
these amounts in cash. The income is however reinvested for their benefit and is
therefore included in their gross income as it accrues to them.
As from 1 October 2001 all capital gains are also subject to normal tax. The taxable
portion of the capital gain must be added to the taxable income from the revenue
activities to calculate the total taxable income for the year. The calculation of the
taxable capital gain is discussed in chapter 13.
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Chapter 1: Introduction to taxation and calculation of net tax payable
1.4
Framework for the calculation of taxable income
The definitions discussed above provide a fixed structure that should be used to calculate taxable income. This sequence may be set out as in the following framework:
R
Gross income (as defined in section 1)
Less:
Exempt income (sections 10, 10A and 12T)
Income (as defined in section 1)
Deductions (section 11 – but see below; subject to section 23(m) and
assessed loss (sections 20 and 20A))
Taxable portion of allowances (section 8 – such as travel and subsistence
allowances)
Less:
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Add:
xxx
(xxx)
xxx
(xxx)
xxx
Add:
Taxable income before taxable capital gain
Taxable capital gain (section 26A)
Less:
Taxable income before retirement fund deduction
Retirement fund deduction (section 11F)
xxx
(xxx)
Less:
Taxable income before donations
Donations deduction (section 18A)
xxx
(xxx)
Taxable income (as defined in section 1)
xxx
xxx
xxx
Calculating taxable income
Step 1:
Identify amounts that comply with the ‘gross income’ definition (chapter 2).
Step 2:
Identify amounts included in gross income that are exempt in terms of
the Act (chapter 3).
Step 3:
Identify amounts that can be deducted for tax purposes (chapters 4
and 5).
Step 4:
Calculate the taxable income (before taxable capital gain and donations) by deducting the exempt income (Step 2) and the deductions
(Step 3) from the gross income (Step 1).
Step 5:
Calculate the taxable capital gain (chapter 13).
Step 6:
Calculate the total taxable income by adding the taxable income (before
taxable capital gain and donations) (Step 4) to the taxable capital
gain (Step 5) and, thereafter, deducting the allowable deductions for
donations.
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A Student’s Approach to Income Tax/Natural Persons
1.4
REMEMBER
• Exempt income can only be exempted if it has been included in gross income.
• Taxable income may be a negative amount which is called ‘an assessed loss’.
• A person is anybody who receives ‘income’. Therefore even a minor (person younger
than 18) who receives income is a taxpayer and pays tax in their own name. In some
cases the parent of a minor can be taxed on the income of the child, but then specific
requirements must be met.
Example 1.1
Robert Roberts is a 40-year-old resident of South Africa. During the current year of
assessment he received a salary of R300 000. He owns shares in Sam Ltd (a South African
company) and received a dividend of R4 000 during the current year. Robert contributed
R6 000 to his employer’s pension fund (the total amount is deductible for income tax purposes). Robert made a taxable capital gain of R1 000.
You are required to calculate Robert’s taxable income for the current year of assessment.
Solution 1.1
R
Gross income
Salary received
Dividends received
300 000
4 000
304 000
Less: Exempt income
Dividends received
(4 000)
300 000
1 000
301 000
Income
Add: Taxable capital gains
Less: Deductions
Retirement fund contributions
(6 000)
295 000
Taxable income
1.
Why are the dividends received included in gross income if they are
an exempt income?
2.
Must taxable capital gains be included last or can it be added to
gross income?
Married in community of property
Income received or accrued from carrying on a trade (excluding the letting of fixed
property) is taxed in the hands of the spouse who is carrying on the trade, for
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Chapter 1: Introduction to taxation and calculation of net tax payable
1.4
example if the wife earns a salary or profit from business activities, she will be taxed
on the amount earned. On the other hand, if a couple is married in community of
property and either of them earns any passive income (that is to say income other
than trade income, for example dividend or interest income), it is deemed to have
accrued equally to each spouse. Where a spouse’s income is deemed to be the income
of the other spouse, the deduction or allowance relating to that income is allowed in
the same proportion as that in which the income is taxed.
REMEMBER
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• Income derived from a trade will only be taxed in the hands of the spouse who is carrying on the trade.
• Income that will be split where spouses are married in community of property therefore
includes –
– local and foreign interest;
– local and foreign dividends;
– income from letting of fixed property.
• Income that will NOT be split where spouses are married in community of property
therefore include –
– a benefit paid by a pension, provident or retirement annuity fund;
– income specifically excluded from the joint estate; and
– a purchased annuity.
Calculating taxable income – married in community of property
Step 1:
Add both spouses’ passive income together to get a total passive
income, for example total interest received.
Step 2:
Divide the total passive income equally between the two spouses.
Include in each spouse’s calculation half of the total passive income,
and add it to the individual’s gross income.
Example 1.2
John (59 years old) and Jane (66 years old) Naidoo are married in community of property.
John received a salary of R150 000 during the current year of assessment. John also
received R60 000 interest on his savings account. Jane did not receive any income during
the current year of assessment.
You are required to calculate John and Jane’s taxable income for the current year of
assessment.
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A Student’s Approach to Income Tax/Natural Persons
1.4–1.5
Solution 1.2
John
Gross income
Salary received
Interest received (Note)
R
150 000
30 000
Less: Interest exemption – R23 800 maximum
180 000
(23 800)
Taxable income
156 200
Jane
Gross income
Interest received (Note)
Less Interest exemption – R34 500 maximum but limited to amount received
30 000
(30 000)
Taxable income
nil
Note
As John and Jane are married in community of property, it is deemed that the interest was
received in equal shares by each spouse. Therefore they each include R60 000 / 2 = R30 000
in their gross income.
1.
Why is R30 000 interest exempt for Jane and only R23 800 for John?
2.
As Jane is over 65 years old, why did she not get an interest exemption of R34 500?
REMEMBER
• Where persons are married in community of property, each spouse qualifies for their
full interest exemption on half of the gross interest received. An exemption can never
exceed the amount received.
1.5 Calculation of final normal tax liability
After a person’s taxable income has been determined this amount is used to calculate
their normal tax liability for a year or period of assessment.
Normal tax calculated based on the tax tables
Less:
Annual rebates (section 6)
Less:
Medical tax credits (sections 6A and 6B)
Less:
Add:
Normal tax liability for the year
PAYE and provisional tax (prepaid taxes)
Normal tax due by or to the taxpayer
Withholding taxes
Final tax liability of natural person
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R
xxx
(xxx)
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Chapter 1: Introduction to taxation and calculation of net tax payable
1.5
Calculating final normal tax liability
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Steps 1–6:
Calculate the total taxable income for the year of assessment as discussed previously.
Step 7:
Calculate normal tax by using the tax table (paragraph 1.5.2).
Step 8:
Determine the age of the taxpayer on 28/29 February of the current
year of assessment. Determine whether the taxpayer qualifies for the
full rebate for the current year of assessment, if not pro rata the
rebate (paragraph 1.5.3).
Step 9:
Calculate the medical scheme fees tax credit and the additional
medical expenses tax credit (paragraphs 1.5.4 and 1.5.5).
Step 10:
Calculate tax credits for specific transactions (if any) (paragraph 1.5.6).
Step 11:
Calculate normal tax liability: normal tax for the year (Step 7)
minus
• rebates (Step 8);
• medical credits (Step 9);
• tax credits for specific transactions (Step 10).
Step 12:
Calculate prepaid taxes (PAYE and provisional tax) (paragraph 1.5.7).
Step 13:
Calculate final tax liability
= Normal tax liability (Step 11) minus prepaid taxes (Step 12).
1.5.1 Year or period of assessment (section 1)
The following guidelines can be used to determine the year or period of assessment:
• In the case of a person other than a company, the year of assessment ends on 28 or
29 February.
• When a taxpayer dies, the period of assessment will run from 1 March up to and
including the date of death.
• When a baby is born and they are entitled to income, their year of assessment is
from the date of birth (including this day) until the end of February.
• A taxpayer who is declared insolvent will have a period of assessment from
1 March up to and including the date of insolvency.
• A taxpayer who emigrates will have a year of assessment from 1 March up to the
day preceding the day that they ceased to be a resident.
• A taxpayer who earns income for the first time, however, will have a period of
assessment of 12 months irrespective of the date of employment or of commencing
to earn income.
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• A company’s year of assessment is the financial year of the company ending during the calendar year in question.
REMEMBER
• Where the period of assessment is less than a full year, rebates will be apportioned by
the total number of days of the period as part of the full year of assessment.
Current year of assessment
The current year of assessment for natural persons starts on 1 March 2021 and ends
on 28 February 2022. For the purposes of this book and examples, if a transaction
takes place on 31 August in the current year of assessment, it means that the transaction took place on 31 August 2021.
The ‘current year of assessment’ in terms of this book will be the 2022 year of assessment, which ends on 28 February 2022. If an amount is carried over to the next year of
assessment, that is to say the 2023 year of assessment, it is carried over to 1 March
2022 (the beginning of the following year of assessment). The same principle applies
to amounts carried forward from the previous year of assessment (2021 year of assessment). These amounts are available for deduction on 1 March 2021.
1.5.2 Normal tax (section 5)
In terms of section 5(2) of the Act, the applicable rates of tax are determined annually
by Parliament. Each year, a Revenue Laws Amendment Act, which contains the
normal tax tables that must be used during that particular year of assessment, is
approved by Parliament.
The tax tables applicable to the current year of assessment are given in Appendix A
(at the back of this book) and are used to illustrate the calculation of normal tax on
taxable income.
Example 1.3
Gershane Yosh has a taxable income of R543 000 for the current year of assessment.
Vershi Yosh has a taxable income of R350 000 for the current year of assessment.
You are required to calculate Gershane and Vershi’s normal tax for the current year of
assessment.
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1.5
Chapter 1: Introduction to taxation and calculation of net tax payable
Solution 1.3
R
Gershane (taxable income = R543 000)
On R467 500 (per the tax tables)
Add: 36% of R75 500
(the amount in excess of R445 100 thus R543 000 – R467 500)
Normal tax
27 180
137 919
Vershi (taxable income = R350 000)
On R337 800 (per the tax tables)
Add: 31% of R12 200
(the amount in excess of R337 800 thus R350 000 – R337 800)
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110 739
Normal tax
70 532
3 782
74 314
Why is there a difference in the tax percentage used in the two calculations?
The example given here illustrates the calculation of normal tax on taxable income,
but can also be used to explain the two concepts often referred to in tax literature,
namely the marginal and the average rate of tax.
• Marginal rate of tax This rate of tax applies to an additional R1 of taxable income
earned. Referring to Example 1.3, the marginal rate of income tax is 36% because if
Gershane earned R1 more of taxable income, she would have to pay 36% tax on
this R1.
• Average rate of tax This is the rate of tax applying to the total taxable income.
Gershane’s average rate of tax is
R137 919
× 100, therefore the average rate is 25,4%.
R543 000
The marginal rate of tax is high but the average rate of tax is much lower. For natural
persons, the maximum marginal tax rate of 45% comes into operation on taxable
income in excess of R1 656 600.
REMEMBER
• When you evaluate the tax implications of a specific transaction, you always refer to the
marginal tax rate.
1.5.3 Normal tax rebates for natural persons (section 6)
Section 6 of the Act prescribes certain normal tax rebates to be deducted from the normal
tax payable by natural persons. Natural persons qualify for the following three rebates:
• primary rebate (all natural persons)
–
R15 714;
• secondary rebate (natural persons over 65 years of age)
–
R8 613; and
• tertiary rebate (natural persons over 75 years of age)
–
R2 871.
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The total rebates can be summarised as follows:
Age of the taxpayer
Total rebates
Under 65 years of age
R15 714
65 years but less than 75 years of age
R24 327 (R15 714 + R8 613)
75 years and older
R27 198 (R15 714 + R8 613 + R2 871)
Normal tax rebate rules
• To qualify for the secondary rebate (over 65 rebate), the taxpayer must be 65 years
of age or older on the last day of the year of assessment (or would have been had
they lived to that day). The same applies to the tertiary rebate.
• When the taxpayer’s year of assessment is less than 12 months (for example where
the taxpayer dies or the date of insolvency is before 28/29 February), all three of
the above-mentioned rebates will be reduced proportionally.
• If the normal tax rebates exceed the normal tax, these rebates only reduce the
normal tax liability to zero and do not create a tax refund.
Calculation of normal tax liability
Step 1–6:
Calculate the total taxable income for the year, as explained earlier.
Step 7:
Calculate the normal tax by using the tax table.
Step 8:
Determine the age of the taxpayer at 28/29 February of the current year
of assessment. Determine if the taxpayer will qualify for the full rebate in
the year of assessment. If not, the rebate should be reduced pro rata.
Step 9:
The normal tax liability will be the normal tax (Step 7) for the year
minus rebates (Step 8).
Example 1.4
Victoria Dlamini was 83 years old when she died on 31 August 2021. She earned a taxable
income of R160 000 from 1 March 2021 to 31 August 2021.
You are required to calculate Victoria’s normal tax liability for the current year of assessment.
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Chapter 1: Introduction to taxation and calculation of net tax payable
1.5
Solution 1.4
R
Taxable income (given)
R
160 000
Normal tax on R160 000 @ 18%
Less: Normal tax rebates: 83 years of age
• Primary rebate (natural person)
• Secondary rebate (over 65)
• Tertiary rebate (over 75)
28 800
15 714
8 613
2 871
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27 198
Reduced pro rata (Note)
184 days / 365 days × R27 198
(13 711)
Normal tax liability
15 089
Note
Due to the fact that the taxpayer died during the year of assessment, the tax period is less
than 12 months; therefore the rebate should be reduced on a pro rata basis using days.
Do the rebates remain the same for every year?
REMEMBER
• If the tax less the rebate results in a negative amount, the answer is limited to nil.
• If a person starts to work during the year, they will still qualify for the full annual
rebate, as their tax year is for a period of 12 months although they only worked for a
couple of months.
• The rebate must be deducted from normal tax and not from taxable income.
1.5.4 Medical scheme fees tax credit (MTC) (section 6A)
Section 6A of the Act allows deduction of a medical scheme fees tax credits. The tax
credit applies to contributions made to registered medical schemes. The medical
scheme fees tax credit is calculated as follows:
• R332 in respect of benefits to the person;
• R664 in respect of benefits to the person and one dependant; or
• R664 in respect of benefits to the person and one dependant, plus R224 in respect
of benefits to each additional dependant, for each month in which those fees are
paid.
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1.5
REMEMBER
For the purposes of the tax credit, a dependant is
• the spouse, partner, dependent children or other members of the taxpayer’s immediate
family. The taxpayer must be responsible for their care and support; or
• any other person who in terms of the rules of the medical scheme to which the taxpayer
belongs, is recognised as a dependant and eligible for benefits.
A ‘child’ is defined as the taxpayer’s child or a child of their spouses.
Children, for the purposes of this section, must have been alive during any portion of the
year of assessment and must be unmarried on the last day of the year of assessment and
must:
(a)
not be (or, had they lived, would not have been) over the age of 18; or
(b) be wholly or partially dependent for their maintenance on the taxpayer and not be
liable for the payment of normal tax in the year of assessment concerned and not be
(or, had they lived, would not have been) over the age of 21; or
(c)
be wholly or partially dependent for their maintenance on the taxpayer and not be
liable for the payment of normal tax in the year of assessment concerned, and, to the
Commissioner’s satisfaction, be a full-time student at an educational institution of a
public character, and not be (or, had they lived, would not have been) over the age of
26; or
(d) due to physical or mental infirmity, be unable to maintain themselves and be wholly
or partially dependent for their maintenance on the taxpayer and not be liable for the
payment of normal tax.
Where more than one person pays fees to a medical scheme, the medical tax credits
listed above must be apportioned between the people paying in the same proportion
as their payment is to the total payment.
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Chapter 1: Introduction to taxation and calculation of net tax payable
1.5
Example 1.5
Joseph Roos is 35 years old and married to Refilwe (34 years old). They have one child,
Susan (seven years old). None of them have any disabilities. Joseph’s taxable income for
the current year of assessment is R250 000. Joseph is the main member of the medical
fund.
You are required to
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(a)
calculate Joseph’s normal tax liability for the current year of assessment assuming
that Joseph makes the full medical aid payment in respect of himself, his wife and
child;
(b) calculate the amount that Refilwe can claim as a medical tax credit if the full medical
aid payment that Joseph is required to make is R3 000 per month and she pays
R1 000 of the payment.
Solution 1.5
(a)
Joseph’s normal tax liability
Calculate the medical scheme fees tax credits:
(R664 (Joseph + Refilwe) + R224 (Susan)) × 12 months = R10 656
Calculation of normal tax liability:
R
Taxable income
250 000
Normal tax (R38 916 + (26% × (R250 000 – R216 200)))
Less: Primary rebate
Less: Medical scheme fees tax credit ((R664 + R224) × 12 months)
47 704
(15 714)
(10 656)
Normal tax liability
21 334
(b) Refilwe’s medical scheme fees tax credit
MTC calculated as above – R10 656
Apportioned for Refilwe’s payment – R10 656 × R12 000 / R36 000
3 552
Note
In this case Joseph’s MTC would also be apportioned and he would be able to deduct a
tax credit of R7 104.
1.5.5 Additional medical expenses tax credit (AMTC) (section 6B)
There will be an additional medical expenses tax credit (additional medical tax credit)
for medical expenses. The Act provides for the following qualifying medical expenses
to be considered for an additional medical tax credit:
(1) Amounts (that have not been recovered from the medical scheme) that were paid
by the taxpayer during the year of assessment to
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(a) a medical practitioner, dentist, optometrist, homeopath, naturopath, osteopath, herbalist, physiotherapist, chiropractor or orthopaedist for professional
services rendered or medicines supplied to the taxpayer or their spouse or
child, or a dependant of the taxpayer if the taxpayer was a member of a
scheme or fund and the dependant was, at the time the amounts were paid,
admitted as a dependant of the taxpayer in terms of the fund;
(b) a nursing home or hospital or a nurse, midwife or nursing assistant or to a
nursing agency for the services of such a nurse, midwife or nursing assistant
because of the illness or confinement of the taxpayer or their spouse or child
or a dependant as contemplated in item (a); or
(c) a pharmacist for medicines supplied on the prescription of a person mentioned in item (a) above for the taxpayer or their spouse or child.
(2) Amounts (that have not been recovered from the medical scheme) that were paid or
contributed by the taxpayer during the year of assessment for expenditure incurred
outside the Republic on services rendered or medicines supplied to the taxpayer
or their spouse or child that are substantially similar to the services and medicines for which a deduction may be made under item (a), (b) or (c) above.
(3) Expenditure (that has not been recovered from the medical scheme) necessarily
incurred and paid by the taxpayer in consequence of a disability suffered by the
taxpayer or their spouse or child or a dependant as contemplated in item 2(a).
REMEMBER
• The medical scheme and all practitioners and nurses referred to above have to be registered with their respective controlling bodies and in terms of certain Acts.
Taxpayers 65 and over
All contributions and expenses will be converted into medical tax credits. A taxpayer 65 and
over the age of 65 will be entitled to the following credits:
• the standard monthly medical scheme fees tax credit in respect of any contributions paid to a medical scheme – same as all other taxpayers (section 6A);
• a 33,3% credit for any contributions paid that exceed three times the medical tax
credit (as calculated in the first bullet above); and
• a 33,3% additional medical tax credit based on all qualifying medical expenses not
refunded by medical scheme (excluding contributions).
Example 1.6
David Hess is 66 years old. For the year of assessment commencing 1 March 2021, he
made contributions of R3 000 per month to a medical scheme on behalf of himself and his
wife. He paid R23 500 qualifying medical expenses for the year. David earned a salary of
R340 000.
You are required to calculate David’s medical tax credits for the 2022 year of assessment.
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1.5
Chapter 1: Introduction to taxation and calculation of net tax payable
Solution 1.6
Medical scheme fees tax credit (R664 × 12 months)
Excess medical scheme fees credit
(R36 000 (monthly contributions) ï (3 × R7 968)) × 33,3%
Additional medical expenses tax credit (R23 500 × 33,3%)
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Total medical tax credits that will reduce his normal tax
R
(7 968)
(4 028)
(7 826)
(19 822)
Taxpayers with a disability
Where the taxpayer is not yet 65 years old and the taxpayer, spouse and/or child is a
person with a disability, they will be entitled to the following credits against normal
tax:
• the standard monthly medical tax credit in respect of any contributions paid to a
medical scheme – same as all other taxpayers;
• a 33,3% credit for any contributions paid that exceed three times the tax credit (as
calculated in the first bullet above); and
• a 33,3% additional medical tax credit based on all qualifying medical expenses not
refunded by medical scheme (excluding contributions).
Example 1.7
Lisa Sharpe is 35 years old. For the year of assessment commencing 1 March 2021, she
made contributions of R2 000 per month to a medical scheme on behalf of herself and her
two children. She paid R23 500 qualifying medical expenses for the year. Her employer
contributed R15 000 to the medical scheme during the year. Lisa earned a salary of
R275 000. Lisa’s son has a disability.
You are required to calculate Lisa’s medical tax credits for the 2022 year of assessment.
Solution 1.7
R
Medical scheme fees tax credit (R664 + R224) × 12 months
(10 656)
Excess medical scheme fees credit (R24 000 (own contributions) + R15 000
(fringe benefit employer contributions) – (3 × R10 656)) × 33,3%
(2 342)
Additional medical tax credit (R23 500 × 33,3%)
(7 826)
Total tax credits
(20 824)
Taxpayers not yet 65 years old
These taxpayers will be entitled to the following credits that will reduce normal tax:
• the standard monthly medical tax credit in respect of any contributions paid to a
medical scheme – same as all other taxpayers;
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1.5
• an additional medical tax credit equal to 25% of the sum of:
– any contributions paid that exceed four times the tax credit (as calculated in the
first bullet above); and
– qualifying medical expenses
that exceed 7,5% of the taxpayer’s taxable income.
Example 1.8
Joe Blunt is 35 years old. For the year of assessment commencing 1 March 2021, he made
contributions of R6 000 per month to a medical scheme on behalf of himself, his wife and
a child. He paid R50 000 qualifying medical expenses for the year. His employer contributed R40 000 to the medical scheme during the year. Joe earned a salary of R500 000.
You are required to calculate Joe’s medical tax credits for the 2022 year of assessment.
Solution 1.8
Medical scheme fees tax credit (R664 + R224) × 12 months
Additional medical expenses tax credit: 25% of:
Excess contributions (R6 000 × 12 + R40 000) – (4 × R10 656)
Add: Qualifying expenses
Less: 7,5% × taxable income (R540 000) (Note)
R
(10 656)
R69 376
R50 000
(R40 500)
R78 876
Therefore: R78 876 × 25%
(19 719)
Note
Calculation of taxable income
Salary
Medical fringe benefit (employer’s contributions)
500 000
40 000
540 000
REMEMBER
For the purposes of the tax credit a dependant is
• the spouse, partner, dependent children or other members of the taxpayer’s immediate
family. The taxpayer must be responsible for their care and support; or
• any other person who in terms of the rules of the medical scheme to which the taxpayer
belongs, is recognised as a dependant and eligible for benefits.
A ‘child’ is defined as the taxpayer’s child or a child of their spouses.
continued
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Chapter 1: Introduction to taxation and calculation of net tax payable
1.5
Children, for the purposes of this section,
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must have been alive during any portion of the year of assessment and must be unmarried on the last day of the year of assessment and:
(a)
not (or, had they lived, would not have been) over the age of 18; or
(b)
wholly or partially dependent for their maintenance upon the taxpayer and not
liable for the payment of normal tax in the year of assessment concerned and not
(or, had they lived, would not have been) over the age of 21; or
(c)
wholly or partially dependent for their maintenance on the taxpayer and not liable
for the payment of normal tax in the year of assessment concerned, and, to the
Commissioner’s satisfaction, a full-time student at an educational institution of a
public character, and not (or, had they lived, would not have been) over the age of 26;
or
(d)
due to physical or mental infirmity, was unable to maintain themselves and was
wholly or partially dependent for their maintenance on the taxpayer and was not
liable for the payment of normal tax.
1.5.6 Rebate in respect of foreign taxes on income (section 6quat)
If a resident includes foreign income in their taxable income on which they also paid
tax in another country, they can qualify for a rebate for the tax they paid (section
6quat, refer to chapter 5).
1.5.7 Prepaid taxes
The final step in calculating a person’s final tax liability is to reduce normal tax liability by any prepayments of tax made during the year of assessment. Prepayments of
tax would normally consist of one or more of the following payments:
• employees’ tax deducted by the employer during the year of assessment from a
wage, salary or similar earnings (also known as Pay as You Earn (PAYE)) (chapter 11);
• provisional tax paid by the taxpayer during the year of assessment (chapter 11).
Where a taxpayer owes an amount of tax and has not paid the amount by the due
date (second date), interest is added to the normal tax liability . If a taxpayer has
overpaid an amount of tax owing, (under certain circumstances) interest is credited.
These interest rates are determined by SARS from time to time (refer to Annexure F).
If a taxpayer still owes an amount of normal tax at the end of the year, it is referred to
as a net debit. If, however, the taxpayer paid more than the tax due, they have a net
credit, which will be refunded to them.
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A Student’s Approach to Income Tax/Natural Persons
1.5–1.6
Example 1.9
Mpho Zuma is 44 years old and her normal tax payable (after rebates and credits) for the
current year of assessment amounts to R25 250. Her employer deducted R20 000 employees’ tax from her monthly salary. She is also registered as a provisional taxpayer and paid
R8 500 provisional tax during the current year of assessment.
You are required to calculate how much Mpho still owes SARS or how much she will be
refunded for the current year of assessment.
Solution 1.9
R
25 250
Normal tax liability
Less: Prepaid taxes:
Employees’ tax
Provisional tax
(20 000)
(8 500)
Net credit (amount due to Mpho)
(3 250)
REMEMBER
• If the net amount due is negative (net credit), taxpayers are entitled to a refund of the
amount they overpaid during the year of assessment.
• If a refund is due, SARS will first refund the provisional tax paid and then the PAYE.
1.6 Tax returns, assessments and objections
Persons earning a monthly salary receive a salary slip (or a salary advice) at the end
of each month indicating how much they have earned, what deductions were made
and how much tax has been deducted by the employer. Shortly after the end of the
year of assessment the employer must prepare an IRP5 for each employee.
The IRP5 shows the total remuneration paid during the year, certain deductions
made by the employer, such as retirement fund and medical aid fund contributions,
and the total employees’ tax deducted during the year, as well as other information.
The employer submits the IRP5 information to SARS. SARS then includes all this
information in a taxpayer’s prepopulated tax return (ITR12) on the efiling system.
If a person earns income from sources other than employment, they prepay their tax
on such other income by means of provisional tax. The taxpayer must complete an
IRP6 form to calculate the amount of provisional tax due.
SARS has introduced a fully electronic filing system (e-filing) for the submission of
income tax returns. Where a taxpayer is required to submit an annual tax return, they
need to request the return to be issued on SARS e-filing. In the case of individuals, the
form is an ITR12 (which includes the information discussed above) and an ITR14 in
the case of companies. After the taxpayer has completed the tax return on the e-filing
system and submits it electronically to SARS, SARS uses the information to calculate
the normal tax liability for the year of assessment.
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1.6–1.7
Chapter 1: Introduction to taxation and calculation of net tax payable
An ITR12 is prepopulated and the taxpayer must provide details of other income and
expenditure in order to calculate the normal tax payable. Persons who derive income
from business are also required to prepare a statement of assets and liabilities. This
section assists SARS in identifying undeclared income and possible tax evasion
practices.
After receiving the tax return, SARS processes the return and issues a tax assessment
(recorded on an ITA34) to each taxpayer. The ITA34 shows:
• the total taxable income for the year of assessment;
• the normal tax on this taxable income;
• a sub-total after the deduction of rebates (in this book referred to as normal tax
liability)
• the provisional tax paid for the year;
• employees’ tax in respect of the year;
• the net debit or credit;
• any balance of tax or interest owing from a previous year of assessment; and
• the final net debit or credit for the year of assessment.
The assessment has a date, a due date and a second date (the final date for payment
of the amount owing). The date is the date on which the assessment was processed.
The payment of any outstanding taxes may be made in cash, by cheque or electronically.
Sometimes, the assessment issued by SARS does not agree with the taxpayer’s own
calculation. In these situations, the Act allows the taxpayer to object to their assessment. The objection has to be in writing (on the prescribed form (ADR1) via e-filing),
setting out the reasons for the objection, and must be submitted electronically to SARS
within the prescribed period (usually 21 business days).
SARS will consider the taxpayer’s objection and either issue a revised assessment or
confirm the assessment issued. If the taxpayer is not satisfied with the reasons given
for the assessment or partially changed assessment, they have the right to appeal
against the assessment in a court of law.
1.7 Tax practitioners
SARS requires all natural persons who provide tax advice or complete or help to
complete tax returns to register as tax practitioners. A person must register with
SARS as well as with a recognised professional body within 21 business days from
the date they start delivering these services.
The following persons are not required to register:
• if the advice or service is provided for no consideration;
• if the services are provided in anticipation of actions against SARS;
• if the services are incidental to or a subordinate part of a person’s business;
• if the person is a full-time employee and renders service to their employer; or
• if the person is under the direct supervision of a person that is registered.
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If a person does not register within the required period, they are guilty of an offence
and liable for a fine or imprisonment (not exceeding 24 months).
1.8 Summary
In this chapter the basic steps for calculating taxable income were discussed. This was
followed by a discussion of the steps used to calculate a taxpayer’s tax liability for the
year of assessment. You should now be able to answer the critical questions asked at
the beginning of the chapter.
In the following chapters, the details of the framework below are discussed. It is
therefore very important that you understand the content of this chapter as it forms
the basis for all the chapters that follow.
Gross income (as defined in section 1)
Less:
Exempt income (sections 10, 10A and 12T)
Less:
Add:
Add:
Less:
Less:
Income (as defined in section 1)
Deductions (section 11 – but see below; subject to section 23(m) and
assessed loss (sections 20 and 20A)
Taxable portion of allowances
(section 8 – such as travel and subsistence allowances)
(xxx)
Taxable income before taxable capital gain
Taxable capital gain (section 26A)
Taxable income before retirement fund deduction
Retirement fund deduction (section 11F)
Taxable income before donations deduction
Donations deduction (section 18A)
xxx
xxx
xxx
(xxx)
xxx
(xxx)
Taxable income (as defined in section 1)
Normal tax calculated based on the tax tables
Less:
Annual rebates (section 6)
Less:
Medical tax credits (sections 6A and 6B)
Less:
Add:
R
xxx
(xxx)
Normal tax liability for the year
PAYE and provisional tax (pre-paid taxes)
Withholding taxes
Final tax liability of natural person
xxx
xxx
xxx
xxx
(xxx)
(xxx)
xxx
(xxx)
xxx
xxx
xxx
The next section contains questions that allow you to test your knowledge on the calculation of tax payable.
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1.9
Chapter 1: Introduction to taxation and calculation of net tax payable
1.9 Examination preparation
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Question 1.1
Sipho and Andele Baloi are married in community of property.
Andele (55 years of age) received the following income during the year of assessment:
• a salary of R225 000;
• interest of R170 000 on an investment account with a South African bank (not a tax free
investment).
Sipho (66 years of age) received the following income during the year of assessment:
• a salary of R400 000;
• interest of R18 000 on his savings account at a local bank.
Sipho paid retirement annuity fund contributions amounting to R60 000 (all tax deductible) during the current year of assessment. During the current year he also paid municipal
costs of R80 000 which relate to his private house.
You are required to:
Calculate Sipho and Andele’s taxable income for the current year of assessment.
Answer 1.1
Calculation of Andele’s taxable income:
Gross income
• Salary
• Interest received (Note 1)
R
225 000
94 000
319 000
Less: Exempt income
• Interest received (Note 2)
(23 800)
Income
Less: Deductions
295 200
nil
Taxable income
295 200
Calculation of Sipho’s taxable income:
Gross income
• Salary
• Interest received (Note 1)
400 000
94 000
494 000
Less: Exempt income
• Interest received (Note 2)
(34 500)
Income
Less: Deductions
• Private home cost (Note 3)
• Retirement fund contributions
459 500
Taxable income
399 500
nil
(60 000)
continued
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1.9
Notes
1. As Andele and Sipho are married in community of property, the interest received must
be divided equally between both spouses. Therefore Andele and Sipho must include
R94 000 ((R170 000 + R18 000) / 2 = R94 000) interest in their gross income.
2. Each taxpayer qualifies for an interest exemption on his or her portion of the interest.
As Sipho is over 65 years of age he qualifies for an exemption of R34 500. Andele qualifies for an exemption of R23 800 on interest received.
3. A taxpayer is not allowed to claim any private costs for income tax purposes.
Additional questions for this chapter are available electronically at
www.myacademic.co.za/books
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2
Gross
income
General
definition
–
Gross income
Exempt
income
Specific
inclusions
–
Deductions
=
Taxable
income
Tax
payable
Fringe
benefits
Page
2.1
Introduction .........................................................................................................
30
2.2
Definition of ‘gross income’ (section 1) ............................................................
31
2.3
Resident of the Republic.....................................................................................
2.3.1 Ordinarily resident ................................................................................
2.3.2 ‘Physical presence’ test..........................................................................
32
33
35
2.4
Total amount in cash or otherwise....................................................................
38
2.5
Received by or accrued to or in favour of ........................................................
40
2.6
Year or period of assessment .............................................................................
52
2.7
Receipts or accruals of a capital nature ............................................................
2.7.1 Subjective tests .......................................................................................
2.7.2 Objective factors .....................................................................................
2.7.3 Specific types of transactions ...............................................................
52
54
63
68
2.8
Special inclusions (section 1 ‘gross income’ definition) .................................
2.8.1 Annuities (paragraph (a)) .....................................................................
2.8.2 Alimony, allowances or maintenance (paragraph (b)) .....................
2.8.3 Amounts received in respect of services rendered, employment,
or holding an office (paragraphs (c), (cA), (cB), (d ), (f ) and (i))........
2.8.4 Retirement fund lump sum benefits or retirement fund
lump sum withdrawal benefits (paragraphs (e) and (eA)) ...............
74
74
76
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77
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2.1
Page
2.8.5
2.8.6
2.8.7
‘Know-how’ payments (paragraph (gA)) ...........................................
Dividends (paragraph (k)) ....................................................................
Other amounts included in gross income
(paragraphs (g), (h), (l), (m) and (n)) .....................................................
78
78
78
2.9
Amounts that are deemed to be of a capital nature (section 9C) ..................
80
2.10
Summary ..............................................................................................................
80
2.11
Examination preparation ...................................................................................
81
2.1 Introduction
Gross income is one of the main building blocks of taxation. If you are given a pile of
documents relating to a taxpayer’s income, you will have to understand the concept
of ‘gross income’ to be able to decide which of the amounts constitute gross income
and are therefore subject to tax. An amount must be included in gross income before
it can be subject to tax. The determination of gross income is the starting point of the
taxpayer’s tax calculation.
An amount can be included in gross income either by complying with the general
definition thereof in the Act or by being included in gross income by means of one of
the specific inclusions listed at the end of the definition.
This chapter discusses the different components of the gross income definition as well
as the special inclusions listed as part of the gross income definition.
Critical questions
When a person deals with the concept gross income, the following questions arise:
• What is meant by gross income?
• Does the definition of gross income apply to all persons whether they reside in South
Africa or not?
• When is an amount included in gross income?
• Can the taxpayer decide when such an amount may be included?
• What if an amount does not fall within the definition of gross income?
• Which amounts are specifically included in gross income?
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Chapter 2: Gross income
2.2
2.2 Definition of ‘gross income’ (section 1)
‘Gross income’ is defined in section 1 of the Act as follows:
Legislation:
Section 1: Interpretation
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‘Gross income’, in relation to any year or period of assessment means –
(i)
in the case of any resident, the total amount, in cash or otherwise, received by or
accrued to or in favour of such resident; or
(ii)
in the case of any person other than a resident, the total amount, in cash or otherwise, received by or accrued to or in favour of such person from a source within the
Republic, or
during such year or period of assessment, excluding receipts or accruals of a capital
nature, . . .;
The definition is divided into two sections, namely one applicable to residents and
the other to non-residents (refer to 7.2).
The components of the definition are as follows:
• resident (refer to 2.3);
• total amount (refer to 2.4);
• received by or accrued to or in favour of (refer to 2.5);
• year or period of assessment (refer to 2.6); and
• receipts or accruals of a capital nature (refer to 2.7).
Section 1 of the Act defines certain terms used in the gross income definition (see
bullets above), but not all the terms are defined and therefore the courts have been
called on to provide clarity on the meaning of some of these terms. In the paragraphs
that follow reference is made to court cases. In this book, reference is made in the
following way:
Natal Estates LTD v SIR 37 SATC 193. The name of the case is ‘Natal Estates LTD v SIR’.
The reference to ‘SATC’ depicts a publication of all the reported tax cases namely
‘South African Tax Cases’. In this example, the ‘37’ refers to the volume and the’193’ to
the page at which the court’s decision commences.
References are also made to income tax cases and these are indicated as follows:
ITC 1545 45 SATC 464. The ‘ITC’ means ‘Income Tax Case’.
When considering different tax case law it is important to know the hierarchy of the
different courts. The higher up in the hierarchy a court is, the more important its
decision is.
• Constitutional Court (the highest court)
• Supreme Court of Appeal
• Provincial High Courts
• Provincial Tax Courts (the lowest court)
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A lower court must follow the rules set by the higher court. However, the decisions of
the tax courts are not binding on other courts. All tax courts and High Courts are
bound by the Supreme Court of Appeal. The Constitutional Court will only be
involved in tax matters if the Constitution as such is involved in the case.
Before the different components of the gross income definition are discussed, it is
important to determine whether a person is a resident of the Republic or not.
REMEMBER
• All the components of gross income must be present for an amount to constitute gross
income.
2.3 Resident of the Republic
From the definition it is clear that residents are taxed on receipts and accruals from
anywhere in the world and non-residents (refer to 7.2) are taxed only on receipts and
accruals derived from sources within or deemed to be within the Republic. It is therefore important to determine whether or not a person is a resident as that will determine which set of rules applies to their income.
The definition of a ‘resident’ in section 1 of the Act refers to natural persons and
persons other than natural persons. The definition of ‘person’ in section 1 of the Act
includes ‘an insolvent estate, the estate of a deceased person and any trust and a
portfolio of collective investment schemes but excluding foreign partnerships’. This
chapter deals only with the part of the definition of a resident pertaining to a natural
person.
Determination of whether a natural person is a resident of the Republic
Step 1:
Yes:
No:
Step 2:
Yes:
No:
Step 3:
Yes:
No:
Determine whether the person is exclusively a resident of another
country as a result of a double-tax agreement.
He is not a resident.
Go to Step 2.
Determine whether the person is ordinarily resident in the Republic
(refer to 2.3.1).
He is a resident.
Go to Step 3.
Determine whether the person complies with the ‘physical presence’
test as described in the Act (refer to 2.3.2).
He is a resident.
He is not a resident of the Republic (refer to 7.2).
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Chapter 2: Gross income
2.3
2.3.1 Ordinarily resident
The term is not defined and has no special or technical meaning. The question whether
you are ordinarily resident in a country is one of fact. There are two important cases
dealing with ‘ordinarily resident’, namely the Cohen and Kuttel cases. These cases
should be used to determine where a person is ordinarily resident.
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CASE:
Cohen v Commissioner for Inland Revenue
13 SATC 362
Facts: The taxpayer, who was domiciled in
the Union of South Africa (now the Republic), was one of two directors of a company carrying on business in South Africa.
He was requested by his company to go
overseas to act as the company’s buyer in
view of the difficulty of obtaining merchandise, caused by war conditions. He left South
Africa in June 1940, accompanied by his
family. The permit authorising his departure contained the words ‘duration 9
months’. In October 1940, he arrived in the
USA and he and his family lived in an
apartment in New York, from where he
carried on the business operations which
were the purpose of his visit. In 1941, the
taxpayer was granted an extension of
12 months in respect of his permit to
remain in the USA. From that date and up
to 30 June 1942, neither the taxpayer nor
his family had returned to South Africa. In
1939, the taxpayer had leased a flat in
Johannesburg for a period of five years
and had furnished it. This flat had been
sub-let, with the furniture, during the
period he was in the USA. During the year
ended 30 June 1942, the taxpayer had
derived taxable South African dividends.
He claimed to be exempt from supertax as
the Act exempted individuals ‘not ordinarily resident nor carrying on business in
the Union’ from the tax.
Judgment: The question whether an individual was in any one year of assessment
ordinarily resident in South Africa or elsewhere was not to be determined solely by
his actions during that year of assessment;
his conditions of ordinary residence during
that year could be determined by evidence
as to his mode of life outside the year of
assessment. Mere physical absence during
the whole of the year of assessment was
not decisive of the question of ‘ordinarily
resident’. On the facts, the taxpayer was
found to be still ‘ordinarily resident’ in
South Africa. The judge stated that a person’s ordinary residence was the country
to which he would naturally and as a matter of course return from his wanderings,
his usual or principal residence and could
be described as his real home.
Principle: ‘Ordinarily resident’ refers to
the place where a person will return to
after his ‘wanderings’.
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2.3
CASE:
Commissioner for Inland Revenue v Kuttel
54 SATC 298
wife were the sole shareholders. At no
time was it let and consequently it was
available whenever the taxpayer wanted to
live in it. During 1985 he effected substantial renovations and extensions to the
house. He did so, according to his unchallenged testimony, because he wished portion of his South African capital to be
invested in fixed property as a hedge
against the falling value of the rand in relation to the United States dollar. The taxpayer also stated that had he not been
prohibited by the South African exchange
control regulations from taking all his
assets out of the country, he would certainly have done so.
Judgment: A person is ordinarily resident
where his ordinary or main residence is,
i.e. what can be described as his real home.
By applying this test, the taxpayer was not
ordinarily resident in the Republic during
the period under consideration. His normal
or main residence, his real home, was in
the USA. The fact that the taxpayer retained his home in Cape Town, was not at all
contrary to his usual home in the USA. The
Commissioner agreed that the taxpayer
was not trading in South Africa because he
was only earning dividends and interest
income.
Facts: The taxpayer was taxed on interest
and dividends he earned from a source in
the Republic in the 1984, 1985 and 1986
years of assessments. He contended that he
was not ordinarily resident in South Africa
as required by the Act. In 1983, he and his
wife emigrated to the USA where he had
obtained a permanent resident’s permit to
open a business on behalf of a South African company in which he held shares. He
sold a large number of his South African
assets and invested the proceeds in Eskom
stock in order to secure the maximum personal income transmissible to him in the
USA. He decided to buy a home in Florida,
USA. He established church membership,
opened banking accounts, acquired an
office, bought a car and registered with
social security. He also obtained a settlingin allowance from the South African exchange control authorities.
Since then, apart from visits to South Africa
and other countries, the taxpayer had lived
and worked in the USA. During the period
September 1983 to November 1985 the taxpayer made nine visits to South Africa, staying for up to two months at a time. The
visits were to attend to the continuing liquidation of his interests, to participate in
yachting and personal boat-building activities and to attend to family matters. Of the
31-month period under review, the taxpayer spent, on average, just over one third
of the time in South Africa, the duration of
his visits becoming shorter towards the
end of the period. During his visits to Cape
Town the taxpayer lived in a house owned
by the company in which he and his
Principle: A person was ordinarily resident
where he had his usual or principal residence, that which may be described as his
real home. A person may also have a second home in, for example, South Africa
but the South African home must not be
seen to be the home to which he will return
to after his wanderings.
The principles developed over time by the courts to establish whether a person is an
ordinary resident in the Republic can be summarised as follows:
• If it is part of a person’s ordinary regular course of life to live in a particular place
with a degree of permanence, the person must be regarded as being ordinarily resident (Levene v IRC1928 AC).
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2.3
• A person is ordinarily resident in the country to which they would naturally and
as a matter of course return from their wanderings and would, in contrast to other
countries, call home (Cohen v CIR 13 SATC 362).
• A person can be ordinarily resident even if they are physically absent throughout
the year of assessment in question. In determining residence, the person’s mode of
life outside that year of assessment must be considered (Cohen v CIR 13 SATC 362).
• The place of residence must be settled and certain, not temporary and casual
(Soldier v COT 1943 SR).
• A person is ordinarily resident where their permanent place of abode is situated,
where their belongings are stored which they left behind during temporary
absences and to which they regularly return after these absences (H v COT 1960
SR).
• The term ordinarily resident is narrower than the term resident. A person is ordinarily resident where they normally reside, apart from temporary and occasional
absences (CIR v Kuttel 1992 AR).
The taxpayer will be resident in the Republic from the date they became ordinarily
resident, therefore not necessarily for the full year of assessment. Before this event
occurs, they will be treated as a non-resident.
If during a year of assessment a taxpayer stops being ordinarily resident in the
Republic, they will be non-residents from the following day. The ‘physical presence’
test cannot be applied if a person was ordinarily resident in the Republic at any time
during the year of assessment.
2.3.2 ‘Physical presence’ test
A natural person who is not ordinarily resident in the Republic may be resident if
they are physically present in the Republic for certain periods.
The physical presence test is also known as the ‘day test’ or ‘time rule’ and is based
on the number of days during which a natural person is physically present in the
Republic during a year or years of assessment. The purpose or nature of the visit is
irrelevant.
The definition of resident includes a natural person who is not ordinarily resident in
the Republic but who was physically present in the Republic:
• for a period or periods exceeding 91 days in aggregate during the relevant year of
assessment; and
• for a period or periods exceeding 91 days in aggregate during each of the five years
of assessment preceding the current year of assessment (a person will be deemed
resident in the sixth year of assessment); and
• for a period or periods exceeding 915 days in aggregate during such five preceding years of assessment preceding the current year of assessment.
In order to determine the number of days during which a person is physically
present, a part of a day is included as a full day. This, however, excludes the days
that a person is in transit between two places outside the Republic and that person
has not yet formally entered the Republic through a port of entry or at any other
place authorised by the Minister of Home Affairs as defined by the Immigration Act
13 of 2002.
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2.3
Where a person who is resident in terms of these rules is physically absent from the
Republic for a continuous period of at least 330 full days immediately after the day
the person ceases to be physically present in the Republic, the person is deemed not
to have been resident from the day the person ceased to be physically present in the
Republic.
A person who becomes resident by virtue of the physical presence test will become a
resident from the first day of the year of assessment during which all the requirements of the test are met and will be taxed on their worldwide income for the full
year of assessment.
REMEMBER
• The determination of residency is important, as different rules regarding the inclusion
of amounts in gross income apply to residents and non-residents.
• A natural person is a resident either by being ordinarily resident or physically present
in the Republic.
• If a natural person is ordinarily resident in the Republic during the year of assessment
under review, the physical presence test is not applicable to that natural person during
that year of assessment.
• If a person was physically present and then leaves the Republic and is away – that is to
say not physically present any more – for 330 days immediately after he left, the person
is deemed not to have been resident from the day he left the Republic
The burden of proof in terms of section 102 of the Tax Administration Act, 2011 lies
with the taxpayer; therefore it is important that a person who could become resident
as a result of the physical presence test keep a detailed record of days present in and
outside of the Republic (as they will have to prove that they are not residents).
Example 2.1
Mr Sam Ntembo is a South African citizen who lives in the Republic. Sam was on holiday
in Spain for the last 92 days of the year of assessment.
You are required to determine whether Sam is a resident of the Republic.
Solution 2.1
Firstly determine whether the person is exclusively a resident of another country as a
result of a double-tax agreement: No.
Now determine whether the person is ordinarily resident in the Republic: Yes, Sam was
on holiday and his intention was to return to the Republic. Therefore he is a resident of
the Republic and ordinarily resident.
Why did we not count the days that he was in the Republic?
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Chapter 2: Gross income
2.3
Example 2.2
Jay Kolapen is not a resident of the Republic. His employer in England sent him over to
South Africa to work here and gain experience in his field. The days he spent in South
Africa during the years of assessment were as follows:
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2016: He spent 95 days in South Africa
2017: He spent 100 days in South Africa
2018: He spent 200 days in South Africa
2019: He spent 200 days in South Africa
2020: He spent 321 days in South Africa
2021: He spent 300 days in South Africa
2022: He spent 100 days in South Africa
He returned to England during 2022 and did not return to South Africa again. Ignore any
effect of a double-tax agreement between the two countries.
You are required to determine whether Jay will be classified as a resident for South African income tax purposes for each of the years of assessment.
Solution 2.2
Firstly determine whether the person is exclusively a resident of another country as a
result of a double-tax agreement: No.
Next determine whether the person is ordinarily resident in the Republic: He is not ordinarily resident.
Now consider the physical presence rules:
2016:
Jay is present for more than 91 days in this year, but not in each of the five
prior years of assessment. He is not a resident.
2017:
Jay is present for more than 91 days in this year, and for the 2016 year, but
not for the four prior years. He is not a resident.
2018:
Jay is present for more than 91 days in this year as well as for 2016 and
2017 years, but not for the three years prior to that (2013, 2014 and 2015).
He is not a resident.
2019:
Jay is present for more than 91 days in this year, and for the 2016, 2017 and
2018 years, but not for the two prior years (2014 and 2015). He is not a resident.
2020:
Jay is present for more than 91 days in this year, and for the 2016, 2017,
2018 and 2019 years, but not for the prior year (2015). He is not a resident.
2021:
Jay is present for more than 91 days in this current year as well as for each
of the five preceding years, and in aggregate, he is present for more than
915 (321 + 200 + 200 + 100 + 95 = 916) days in the five prior years. He is a
resident of South Africa from 1 March 2020.
2022:
As in 2021 (he meets the requirements).
Note:
In this question all the years of assessment were considered but in an exam or test when
the question requires physical presence for that specific year of assessment, you only first
consider the current year of assessment
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2.4
2.4 Total amount in cash or otherwise
There must be an actual amount received or accrued before there can be any question
of gross income. The case of CIR v Butcher Bros (Pty) Ltd 13 SATC 21 established the
principle of how the value is determined.
CASE:
Commissioner for Inland Revenue v Butcher Bros (Pty) Ltd
13 SATC 21
Facts: The taxpayer owned land that was
leased to a cinema company for a period of
50 years with a further option for another
period of 49 years. In terms of the contract,
the lessee was obliged to erect a cinema
building at its own expense. At the end of
the contract the building would become
the property of the lessors at no cost.
the year of assessment in which the building was completed. (It should be noted
that paragraph (h) of the definition of ‘gross
income’ now includes the value of improvements to leasehold properties in gross
income.)
Principle: The onus is firstly on the Commissioner to establish a method to be used
to value an asset received other than in
cash. It is only after the Commissioner has
established the amount that the burden
shifts onto the taxpayer, in terms of section 102 of the Tax Administration Act,
2011, to show that the amount is incorrect.
Judgment: The rights that accrued to the
lessor could not be regarded as constituting an amount accrued to the lessor in
the year the building was completed, as it
did not have an ascertainable money value
that the Commissioner could include in
The inclusion of ‘amounts received in cash or otherwise’ means that the value of
assets received in lieu of cash must also be included in gross income. A car dealer
may accept a trade-in of a customer’s old car as part of the selling price of a new car.
Both the cash received and the value of the car traded in will be included in the
dealer’s gross income.
In Lategan v CIR 2 SATC 16 the court held that the term ‘amount’ included not only
money, but also the value of every form of property the taxpayer earned.
When an asset other than money is received, it will have to be valued. The principle
has been established in several court decisions, for example ITC 932 24 SATC 341 and
Lace Proprietary Mines Ltd v CIR 9 SATC 349, that this value will normally be the
market value of the asset on the date the asset was received. A farmer may exchange
produce they have grown on their farms for an implement such as a plough at their
local co-operative. The value of the plough will be included in their gross income and
this value will be the selling price (market value) of the plough on the date they
received the plough. The value of the new item (exchanged item, in this case the
plough) and not the value of the ‘old’ item (in this case the produce) will be the
amount received.
In CIR v People’s Stores (Walvis Bay) (Pty) Ltd 52 SATC 9, Judge Hefer accepted as
correct the statement of Judge Watermeyer in Lategan v CIR 2 SATC 16 that the word
‘amount’ should be given a wider meaning and ‘include not only money, but the
value of every form of property earned by the taxpayer, whether corporeal or incorporeal, which has a money value’.
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Chapter 2: Gross income
2.4
One of the problems associated with the valuation of receipts in a form other than
cash is the question whether the value so ascribed should be a subjective or objective
value (see Ochberg v CIR 5 SATC 93 and the Butcher Bros case).
Example 2.3
In return for services rendered, Mr Jayce Naidoo is granted the right to occupy his client’s
holiday flat in Cape Town free of charge for two weeks. The holiday flat is normally let to
the public at a rate of R5 000 a week. Jayce cannot make use of the benefit at the time it is
made available and does not have the right to grant the benefit to a third party in return
for cash.
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You are required to determine the amount in terms of the gross income definition.
Solution 2.3
The objective valuation of this non-cash receipt would be R10 000.
The subjective value of this benefit to Jayce would be Rnil.
Burden of proof (in terms of section 102 of the Tax Administration Act, 2011) of the taxpayer will be important in this instance regarding the value placed on the benefit.
The effect of the ‘cash or otherwise’ element of gross income is also that notional
amounts are not included in gross income. For example, if a person could have
earned R1 000 in interest on funds they had at their disposal had they invested these
funds, this ‘notional’ interest cannot be included in their gross income if they did not
in fact so invest it. However, in Brummeria, the court found that where something is
received that is connected to a transaction, this ‘notional amount’ can be included in
gross income.
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2.4–2.5
CASE:
Commissioner for South African Revenue Services v
Brummeria Renaissance
69 SATC 205
Facts: The taxpayers (developers) obtained
interest-free loans from future occupants to
finance the construction units in a retirement village. Interest-free loans were made
by occupants of the retirement villages.
The lenders (occupiers of units) made the
interest-free loans and were granted a
lifelong right to occupy a unit (called ‘life
rights’). The developers retained ownership of the units. When the lender died or
the agreement was cancelled, the developer had to repay the loan. The developer
received the use of the interest-free loan in
exchange for life rights.
Judgment: The actual receipt of the loan
did not result in a receipt for purposes of
the definition of ‘gross income’. The right
to obtain the loan capital without paying
interest is linked to the taxpayer providing
the lender with a ‘life right’. Therefore a
monetary value can be determined for this
right that accrued to the taxpayer. As these
rights are of a non-capital nature and can
be valued in money they are included in
gross income.
Principle: The court stated that where an
interest-free loan is given to a person in
return for something (a quid pro quo), in
this instance ‘life rights’, then the notional
interest on interest-free loans represents
the total amount in cash or otherwise.
The general rule for establishing an amount in relation to assets received in a form
other than cash is set out above. Specific types of assets such as shares or insurance
policies have special rules relating to their valuation, and certain sections of the Act
provide for the valuation methods to be used in certain circumstances.
REMEMBER
• There must be an actual amount received or accrued before there can be any question of
gross income.
• Amount has a wide meaning which includes the value of any form of property earned
by the taxpayer and which has monetary value.
2.5 Received by or accrued to or in favour of
In many instances, the receipt and accrual of an amount will coincide but it is also
possible to receive an amount before it accrues or vice versa. This does not mean that
the taxpayer can be taxed on an amount when it is received and again when it
accrues, as this would be double taxation. This principle was established by the court
in CIR v Delfos 6 SATC 92. The case of SIR v Silverglen Investments (Pty) Ltd 30 SATC
199 established that the Secretary for Inland Revenue (now the Commissioner) does
not have the choice to include an amount either when it is received or when it
accrues. Whichever event occurs first will determine the date of inclusion of the
amount. In Kotze v KBI 54 SATC 149 it was held that if the taxpayer omitted to disclose an amount when it accrued, the Commissioner had the right to tax the amount
when it was received.
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Chapter 2: Gross income
2.5
In financial statements prepared according to generally accepted accounting practice,
an amount is recognised as income only when it accrues, irrespective of when it is
received, giving rise to a timing difference between income recognition for accounting and tax purposes. An income statement (or profit and loss account) drawn up for
accounting purposes would usually have to be adjusted for the purposes of determining taxable income (or an assessed loss for tax purposes).
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Receipts
The question of when an amount is deemed to have been received by a taxpayer was
determined in Geldenhuys v CIR.
CASE:
Geldenhuys v CIR
14 SATC 419
Facts: The taxpayer enjoyed a usufructuary
interest in a flock of sheep (that is to say she
had the right to enjoy the fruits and income
of the asset (sheep)). Her children were the
owners of the bare dominium (actual sheep).
The taxpayer and her children decided
to give up farming and sell the sheep. The
proceeds were deposited in the taxpayer’s
banking account. The question is: how
should she be taxed on the amount
received?
Judgment: As the number of sheep on date
of the sale was smaller than the number
when the usufruct commenced, there was
no surplus to which she was entitled; therefore the amount belonged to the children.
Principle: The mere receipt of an amount
does not result in an inclusion in gross income. Although a taxpayer might receive
an amount, it will only be included in
gross income if it is received on his or her
own behalf and for his or her own benefit.
Example 2.4
Jakes Attorney received R250 000 rental per month on behalf of his client Billy Rental.
Billy owns two warehouses that he leases to businesses. Jakes receives these rentals on a
monthly basis and pays it over to Billy.
You are required to determine in whose hands the R250 000 will be taxable.
Solution 2.4
The R250 000 rent received will form part of Billy’s gross income, since Jakes Attorney
had not received it on his own behalf and for his own benefit.
If a taxpayer receives an amount as an agent of someone else, the amount does not accrue
to the agent (C: SARS v Cape Consumers (Pty) Ltd 61 SATC 91).
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CASE:
A Company v Commissioner for the South African
Revenue Service
IT 24510
Facts: The taxpayer sold gift cards and
deposited monies received for it in a separate bank account until the card is redeemed or expired. They started with this
practice after the Consumer Protection Act
was introduced. They subsequently did
not include any receipts from the gift card
in their gross income until the cards were
redeemed or they expired. SARS assessed
the taxpayer on the full amount of the
separate bank account’s receipts for the
2013 year of assessment.
Judgment: As the cards are considered the
property of the holder/beneficiary until
they are presented to be redeemed, it can
not form part of the issuer of the cards (the
taxpayer’s) gross income and cannot be
taxed then. They have not yet received the
monies for their own benefit.
Principle: The mere receipt of an amount
does not result in an inclusion in gross income. Although a taxpayer might receive
an amount, it will only be included in
gross income if it is received on his or her
own behalf and for his or her own benefit.
The question is: Are the receipts received
in terms of the gross income definition or
can they be considered to be in a type of
trust for protection of the gift card holders?
Illegal receipts
In ITC 1624 59 SATC 373 the judge ruled that where an amount is received due to an
overcharge to a customer, it constitutes an amount received. This is due to the fact
that the amount is received and it is received by virtue of a contract between the two
parties.
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Chapter 2: Gross income
2.5
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In ITC 1545 54 SATC 464, the taxpayer was a dealer in stolen diamonds, knowing
them to be stolen. The court, without arguing the matter, stated that it was common
cause that the proceeds of the sales of the diamonds amounted to a ‘receipt or accrual’
for the purposes of the definition of gross income. The taxpayer receives an amount
on their own behalf and for their own benefit irrespective of the fact that the person is
engaged in illegal activities.
As can be seen in ITC 1545 and ITC 1624, the South African Court taxed the theft of
money as income. This principle was confirmed and extended in two other cases: CIR
v Delagoa Bay Cigarette Company and MP Finance Group CC (in liquidation) v C: SARS.
CASE:
Commissioner for Inland Revenue v
Delagoa Bay Cigarette Co, Ltd
32 SATC 47
Facts: The taxpayer company had advertised a scheme under which it sold packets
of cigarettes at a discount, each such packet
containing a numbered coupon. The then
company undertook to set aside two thirds
of the amount received from such sales as
a prize fund from which a monthly distribution would be made to such purchasers
of the packets ‘as the directors of the company should in their discretion determine’.
Two monthly distributions to winners
were made. However, before the third distribution took place, the scheme was stopped as it was considered to be a lottery and
therefore illegal. The taxpayer argued that
the prizes paid were incurred in the production of the income, and that if the
scheme was illegal the Commissioner could
not tax the profits.
Judgment: The prizes were paid in terms
of a contract of purchase and sale and the
cost had been incurred in earning the
income. Accordingly it had not been a
distribution of profit. The court ruled that
the legality or otherwise of the business
was irrelevant and that income earned was
taxable.
Principle: To decide if an amount is
‘income’ or not, no account must be taken
of the fact that the activity involved was
illegal, immoral or ultra vires. Expenditure
incurred in producing such income may
qualify as a deductible expense, except
where the expenses are prohibited by section 23(o), which prohibits the deduction of
bribes, fines and penalties.
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CASE:
MP Finance Group CC (In Liquidation) v Commissioner for
South African Revenue Service
69 SATC 141
Facts: During the 2000, 2001 and 2002
years of assessment, Prinsloo operated a
pyramid scheme (an illegal and fraudulent
investment enterprise). In terms of the
scheme agents solicited and transmitted
investors’ deposits in return for commission. Prinsloo controlled several entities
which printed a range of convincinglooking documentation issued to investors
when they made deposits. In schemes of
this nature, investors are promised irresistible (but unsustainable) returns on their
investments and the scheme paid such
returns before finally collapsing, owing
many millions to investors. During the
years of assessment under review the operators of the scheme knew that it was insolvent, fraudulent and would not be able to
pay investors. The taxpayer contended that
because the scheme was in law liable to
immediately refund the deposits, there
was no basis on which it could be said that
the deposits were ‘received’ and that they
were therefore not subject to tax.
Judgment: The relationship between
investor and scheme and the relationship
between scheme and fiscus (the Commissioner), was different. An illegal contract
can have some legal and fiscal (taxation)
consequences. For tax purposes the only
question is if the amounts paid to the
scheme complied with the requirements of
the Income Tax Act and unquestionably it
did. The amounts paid to the scheme were
accepted by the operators of the scheme
with the intention of using it for their own
benefit and notwithstanding that in law
they were immediately repayable, they
constituted receipts and were taxable.
Principle: There is a distinction to be drawn
in the relationship between contracting
parties (commercial relationship) and the
relationship that a taxpayer has with the
fiscus. The tax consequences flow from the
relationship with the fiscus rather than from
the commercial relationship. Therefore illegal
receipts and ill-gotten gains are taxable.
Example 2.5
Jack Smith uses street vendors to sell pirated versions of well-known DVDs to the general
public. His income from these activities amounted to R150 000 for the current year of
assessment.
You are required to determine whether Jack Smith will be taxable on the income
received.
Solution 2.5
Jack will include the R150 000 in his gross income as this amount was received by him on
his own behalf and for his own benefit, irrespective of the fact that the sale of pirated
DVDs constitutes illegal activities. SARS does not distinguish between income from legal
activities and income from illegal activities.
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Chapter 2: Gross income
2.5
Accrued to
In terms of the definition of gross income, amounts which accrue to a taxpayer which
they have not yet received will be included in their gross income. The first case dealing with the meaning of the term ‘accrue’, namely Lategan v CIR, was heard in 1926.
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CASE:
WH Lategan v Commissioner for Inland Revenue
2 SATC 16
Facts: The taxpayer, a wine farmer, entered
into an agreement to sell his wine to a cooperative company. A portion of the selling
price was paid prior to the end of his year of
assessment and the balance was to be paid
after the end of the year of assessment.
the year of assessment in respect of the
wine produced during the year of assessment formed part of the ‘gross income’ for
that year. The court also held that the
future payments must be included at their
discounted future value.
Judgment: ‘Accrued to’ means ‘become
entitled to’ thus the instalments payable after
Principle: ‘Accrued to’ is the amount to
which the taxpayer has become entitled.
The Lategan decision was followed by CIR v Delfos 6 SATC 92, where two of the
judges interpreted accrue to mean ‘due and payable’. This interpretation may result
in income being taxed in different years of assessment. An amount may be ‘due’ to a
taxpayer during the year of assessment, but only ‘payable’ during the following year
of assessment. In 1990 the appeal court gave its first ruling on the term accrual in CIR v
People’s Stores (Walvis Bay) (Pty) Ltd, thus effectively overruling the previous
decisions.
CASE:
Commissioner for Inland Revenue v People’s Stores
(Walvis Bay) (Pty) Ltd
52 SATC 9
Facts: The taxpayer was a retailer of clothing, footwear etc., for cash and on credit.
Most of the credit sales were made under
its so-called ‘6-months-to-pay’ revolving
credit scheme. In terms of this scheme
customers’ accounts were payable in six
equal monthly instalments. The instalment
reflected on the statement had to be paid
before the next statement date. The
Commissioner taxed the full amount of
the sale of the goods in the year of
assessment in which they were sold, but
allowed a section 11(j) deduction (provision for bad debt).
during the year of assessment and to
which a monetary value can be attached,
forms part of the ‘gross income’, irrespective of whether it is immediately payable
(due and enforceable) or not. The value of
the instalments not yet payable had to be
their market value.
After this decision an amendment was
enacted that subsequently included the
‘present value’ of any unpaid amounts.
Principle: The court confirmed the meaning of ‘accrued to’ as applied in Lategan,
has become ‘entitled’. Please note that
granting credit is not a condition. A condition in a contract normally delays the
transfer of ownership until the occurrence
of a specific event.
Judgment: An amount accrues to a taxpayer
when he becomes entitled to the ‘amount’.
Therefore any right that a taxpayer acquired
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2.5
SARS immediately counteracted this decision by introducing the provisos to the
definition of gross income in section 1 of the Act:
Provided that where during any year of assessment the taxpayer has become entitled
to any amount which is payable on a date or dates falling after the last day of such
year, there shall be deemed to have accrued to him during such year such amount.
The provisos:
• confirm the interpretation of the Lategan case that accrue means ‘become entitled
to’; and
• confirm that if the taxpayer becomes entitled to any amount during the year of
assessment, the full amount is included in that year and no present value can be used.
Example 2.6
Ms Norah Eyssel rendered services to Invest (Pty) Ltd on 15 January. Invest (Pty) Ltd
agrees to pay her R5 000 for the services rendered but the amount is only payable in five
years’ time. Assume that the present value of R5 000 in five years’ time is R1 500.
You are required to determine the amount that will be included in Norah’s gross
income.
Solution 2.6
The total value of the accrual is R5 000 and she will include the R5 000 in her gross
income for the current year of assessment.
Will she be taxed on the amount when she receives it after five years?
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Chapter 2: Gross income
2.5
In Mooi v SIR 34 SATC 1 the accrual principle was further extended.
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CASE:
Mooi v Secretary For Inland Revenue
34 SATC 1
Facts: The taxpayer received an option to
subscribe for (buy) shares in the company
he was employed by but subject to the
following conditions: he must still be
employed by the company at the time the
mine (at which he worked) came into
operation. Three years later the mine came
into operation and he exercised the option.
The option price paid was far below the
market price of the shares. The Commissioner included the difference between the
option price paid and the market value of
the shares at the time of exercising the
option, in the taxpayer’s gross income. The
inclusion was made on the basis that the
amount had accrued to him in respect of
services rendered. The taxpayer argued
that the only amount, if any, which
accrued to him in respect of services, was
the right he had acquired three years earlier
(namely the right to exercise an option in
future when certain conditions had been
met). Therefore the amount accrued when
the options were exercised was as a result
of the amount paid by the taxpayer for the
shares and not in respect of services rendered.
Judgment: The true and real benefit contemplated in the option offer was the right,
upon the due fulfilment of all the conditions, to obtain the shares at a set price.
The relevant accrual of that benefit occurred
when the option became exercisable upon
those conditions being fulfilled some three
years later; until the taxpayer had performed those services he did not become
‘entitled to’ any right of option, nor was
anything ‘due and payable’ to him. Therefore there was no accrual to the taxpayer
until the conditions were fulfilled. The
court also found that when the taxpayer
was in the service of the company, there
existed the necessary causal relationship
between the benefit acquired by the taxpayer and his services to the company.
(Note that section 8C now allows for these
amounts to be taxed.)
Principle: An amount can only accrue if
the person has ‘become unconditionally
entitled to’ it. Conditional entitlement
would therefore not constitute an accrual
until the condition had been satisfied.
In practice, the date of accrual will depend on the terms of the contract giving rise to the
income. A rental agreement may provide for monthly, quarterly or annual rent payments. The amount accrues on the date it is due.
Example 2.7
A taxpayer carries on business as a furniture dealer. He sells an item of furniture for cash
during the year of assessment. He also sells and delivers furniture on 25 February 2022
but only receives payment on 25 March 2022.
You are required to determine the date of accrual.
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Solution 2.7
The selling price of the item sold for cash which he has received during the current year
of assessment is included in his gross income on the date of sale.
The selling price of the second sale accrues to him on 25 February 2022, even though payment is only received after the current year of assessment and will be included in his
gross income for the current year of assessment.
Blocked foreign funds (section 9A)
Where an amount is included in a person’s income but that person cannot bring the
money to South Africa, they will qualify for a section 9A special deduction equal to
the amount that cannot be remitted to South Africa.
Section 9A states that the deduction allowed in one year must be added back in the
next year and a new allowance must be calculated. The allowance can be claimed
every year there is a limitation on the amount that can be transferred to South Africa.
Example 2.8
Frederikus has an investment in a foreign country. During the current year of assessment,
interest amounting to R32 300 was credited to the account. According to the laws of the
foreign country, the interest earned on these types of accounts may only be remitted to
foreign residents after two years.
You are required to show the effect of the R32 300 interest earned on Frederikus’ taxable
income for the current and next two years, assuming that he earned no other investment
income.
Solution 2.8
Current year of assessment
R
Gross income – Foreign interest earned
Section 9A deduction
32 300
(32 300)
Effect on taxable income
nil
2023 year of assessment
Gross income – section 9A inclusion
Section 9A deduction
32 300
(32 300)
Effect on taxable income
nil
As the amount has been included in income and once again it has not been
remitted to the Republic, it can be deducted in terms of section 9A.
2024 year of assessment
Gross income – section 9A inclusion
32 300
As the amount can now be remitted to the Republic in terms of the rules of the
foreign country, there will be no section 9A deduction.
continued
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Chapter 2: Gross income
2.5
If you don’t take the money that you have earned out of a country
within that same year, and in the next year the country imposes a limitation on the removal of the money, will you still be able to qualify for
this deduction?
REMEMBER
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• The section 9A deduction is only allowed where, as a result of currency or other
restrictions or limitations imposed in terms of the laws of the foreign country where the
amount arose, the amount (or part of the amount) may not be remitted to the Republic.
• If the currency restrictions apply to a controlled foreign company, a section 9A deduction can be claimed for each foreign year of assessment in which the restrictions are in
place.
• As soon as the restrictions no longer apply, no deduction will be allowed in terms of
section 9A.
Deposits received
Advance payments received for work still to be performed, such as advance payments on building contracts, will be included in the taxpayer’s gross income although
the payment accrues to them only when the work has been performed. The principle
relating to deposits was set out in Pyott Ltd v CIR.
CASE:
Pyott Ltd v Commissioner for Inland Revenue
13 SATC 121
Facts: The taxpayer (Pyott) manufactured
biscuits. The biscuits were packaged and
sold in tin containers. A refundable deposit
was charged for the tin container which
was repaid when the tin was returned in
good condition. Before the Second World
War between 25% and 30% of the tins were
so returned to the company. Due to a
shortage of tinplate in the war years, the
deposit on the tins was tripled in an attempt
to have more tins returned. This resulted
in 90% of the tins being returned for a
refund. The company provided for an
allowance on tin containers returnable, an
amount representing their liability for refunds, effectively resulting in the deposits
received not being taxed. The Commissioner refused to allow the provision for
refunds.
Judgment: The amount received for the
containers was cash (not subject to any
reduction or discounting) and must be
included in the gross income of the taxpayer at its full value. The provision made
to meet future claims for refunds is a reserve for a contingent liability, which was
expressly forbidden (section 23(e)). The
court stated that if the moneys received as
deposits had been banked in a separate
trust account set up specifically for the
deposits received, then such amounts
deposited would not constitute ‘gross
income’.
Principle: Deposited moneys are included
in ‘gross income’ unless they are deposited
into a separate trust account set up specifically for the deposits received.
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There have also been several other decisions relating to deposits received by a taxpayer (Brookes-Lemos Ltd v CIR 14 SATC 295 and Greases SA Ltd v CIR 17 SATC 358)
that have indicated that once a taxpayer has received an amount as their own during
a year of assessment to be dealt with as they wish, it is included in their gross income
despite the fact that in terms of the contract they may have to repay the amount later
in certain circumstances.
Example 2.9
Grace Nkomo operates a bed and breakfast establishment in Soweto. She received a deposit of R10 000 on 1 April 2021 to reserve accommodation for a group of German tourists
who will visit Soweto during April 2022.
You are required to determine whether Grace will include the R10 000 in her gross income for the current year of assessment.
Solution 2.9
Grace will include the deposit of R10 000 in the year of receipt (2022 year of assessment).
Even though the services will only be rendered in the 2023 year of assessment, she has
received the amount for her own benefit. It will not be included in her gross income again
in the 2023 year of assessment.
Or in favour of
The words ‘or in favour of’, which are included in the definition, mean that income
received by another person on behalf of the taxpayer will be included in the taxpayer’s gross income. A letting agent may collect rent from the tenants in a block of
flats on behalf of the owner. The owner, not the agent, will include this rental income
in their gross income, because it was received or accrued in their favour.
An amount will be included in their gross income irrespective of how the taxpayer
applies it after it has accrued. Section 7(1) of the Act provides:
Income shall be deemed to have accrued to a person notwithstanding that such
income has been invested, accumulated or otherwise capitalised by him or that such
income has not been actually paid over to him but remains due and payable to him or
has been credited in account or reinvested or accumulated or capitalised or otherwise
dealt with in his name or on his behalf, and a complete statement of all such income
shall be included by any person in the returns rendered by him under this Act.
For example, where interest has been credited to the taxpayer’s savings account, it
will have accrued, even though it has not been paid out to them. The leading case
dealing with in favour of is CIR v Witwatersrand Association of Racing Clubs.
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CASE:
Commissioner for Inland Revenue v Witwatersrand
Association of Racing Clubs
23 SATC 380
Facts: The taxpayer (a non-registered association of racing clubs) organised a race
meeting on the Johannesburg Turf Club’s
race course, the proceeds of which were to
be divided between two non-profit charities. The proceeds of the meeting were
divided between the two charitable bodies
for whose benefit the meeting was stated to
be held. The Commissioner included the
amount received in the taxpayer’s ‘gross
income’.
it to distribute the proceeds to the charities
in accordance with its declared intention.
The Association acted as the principal in
holding the race meeting rather than as an
agent.
Principle: Once an amount has been beneficially received by or accrued to a taxpayer,
he is taxed on such amount even though
he may have an obligation to pay it over to
some other person. If there is a principal
agent relationship, the amount would be
taxed in the principal’s name. In this case
the two non-profit charities could have
acted as principals in which event they
would have been taxed.
Judgment: The Association had, in holding
the race meeting, embarked upon a scheme
of profit-making and was liable for tax
upon the proceeds of the meeting, notwithstanding the moral obligation upon
Example 2.10
Sarah Msimang signs a stop order authorising the deduction of her car payment of R5 000
directly from her salary. She earns a gross salary of R18 000 a month.
You are required to determine the amount that will be included in gross income.
Solution 2.10
She will include her full salary of R18 000 in her gross income, irrespective of the fact that
she has not received the full amount.
A taxpayer may, however, divest themselves of the right to income which may accrue
to them in the future, prior to its accrual. The question whether taxpayers have
divested themselves from receiving income prior to its accrual is a difficult one. In
Cactus Investments (Pty) Ltd v CIR 1999 (1) SA 315 (SCA), it was ruled that interest on
investments that had been ceded in exchange for dividend income had accrued when
the investments were made and that this accrual was not affected by subsequent
cessions.
When a right to future income is disposed of, the future income will be taxable in the
hands of the recipient of that right. However, it must be noted that there are also
certain provisions in the Act, for example section 7, which prevent certain donations
of income and the right to income in order to limit the ability of taxpayers to divest
themselves of the right to future income.
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Example 2.11
Dave Right has legally ceded the income from a rent-producing property that he owns to
a friend for this year and the next four years. Dave’s friend lost his job and has no income.
During the current year of assessment, R50 000 rent was received on the property.
You are required to determine whether Dave or his friend will include the R50 000 in
their gross income.
Solution 2.11
As Dave disposed of his right to future income, he will not include the income in his
gross income. Dave’s friend, who is the recipient of the rent, will have to include the
R50 000 in his gross income. Note, however, that section 7(7) of the Act (an anti-avoidance
section) states that if an amount is transferred to another person for a specific period of
time with a donation, settlement or other disposition, the donor (Dave) (and not the person receiving it) will be taxed on the income. So even though this was ceded Dave will
still be taxed on the rental.
REMEMBER
• ‘Received’ means that a taxpayer receives the amount for their own benefit and for
themselves.
• ‘Accrued’ means that the taxpayer has become unconditionally entitled to the amount.
• The time value of money is ignored.
• Income received by another person on behalf of a taxpayer will be included in the
taxpayer’s gross income.
• An amount is included in gross income either on the date of receipt or accrual, whichever event occurred first. You cannot be taxed twice on an amount received.
• Sections 7A and 7B have specific accrual times in respect of antedated and variable
remuneration, while sections 7C to 7E deal with accrual of certain interest and loans or
credits advanced to a trust by a connected person.
2.6 Year or period of assessment
Only an amount received or accrued in a particular year of assessment will be included
in gross income for that year of assessment. A natural person’s year of assessment
always ends on 28 or 29 February and a company’s year of assessment is the same as
its financial year.
2.7 Receipts or accruals of a capital nature
The Act does not define ‘receipts or accruals of a capital nature’. Capital income in
the hands of one taxpayer may be non-capital income to another. For example, a man
may sell their private car, and the proceeds would be capital. To a car dealer whose
business is selling cars, this income would be non-capital because it constitutes
trading stock.
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Example 2.12
Sam Olivier sold his personal house, which he owned for 12 years, for R700 000 due to
personal circumstances.
You are required to determine whether Sam will include the R700 000 in his gross income
for the current year of assessment.
Solution 2.12
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Sam will not include the R700 000 in gross income, as this transaction constitutes a sale of
an asset which is capital in nature.
It does not normally happen that one amount is partly capital and partly revenue.
However, in Tuck v CIR 50 SATC 98 it was held that the amount was received for two
reasons and therefore the amount was apportioned between capital and revenue
income. It is also impossible to have an amount which is neither capital nor revenue.
The basic test to determine whether an amount is of a capital or a revenue nature,
was set out in CIR v Visser.
CASE:
Commissioner for Inland Revenue v Visser
8 SATC 271
Facts: The taxpayer (an influential businessman) acquired mining options for a period
of two years over certain properties which
were not renewed and had expired. Later,
a third party negotiated with and offered
the taxpayer an interest in a company to
be formed if he would refrain from taking
up options in competition with him and
assist him to acquire the previously lapsed
options. The taxpayer agreed to the proposal. The arrangement was confirmed in
a letter which stated that the taxpayer had
been promised shares ‘in consideration of
the services you have already rendered
and will be rendering to me and my associates in the venture that we are undertaking’.
Judgment: The amount in dispute had
accrued to the taxpayer as the product of his
wits, energy and influence and as such was
not a receipt of a capital nature, but income
in nature. The court used the tree and fruit
analogy as a useful guide but cautioned
that what is the principal or tree in the
hands of one man may be interest or fruit
in the hands of another. For example, law
books in the hands of a lawyer are a capital
asset, while for a bookshop it is stock-intrade (revenue). Adopting a profession is
likened to a tree while the earnings from
the profession is likened to the fruit of the
tree.
Principle: The ‘tree and fruit’ principle,
namely that the tree is capital in nature
and the fruit is revenue in nature.
Not all capital or revenue decisions are as clear as in the above. Over the years the
courts have identified a number of factors that can be used to determine if a receipt is
of a capital or revenue nature. The most important factors that can be considered will
be dealt with briefly.
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The test the courts developed to determine the difference between capital and revenue receipts is the intention test. The test determines what the taxpayer’s intention
was. If the intention was to receive a capital amount, it will not be taxable. This test,
however, is a subjective test and courts look at various objective factors to determine
whether the subjective test gives the correct answer.
2.7.1 Subjective tests
Although income derived from ‘an operation of business in carrying out a scheme of
profit-making’ will be characterised as revenue, it will usually be necessary to consider the intention of the taxpayer to determine whether they are carrying on a
scheme of profit-making. The intention of a taxpayer is a subjective matter and the
courts have dealt with the problems relating to the subjective tests as follows.
Intention of the taxpayer
Whether a taxpayer has embarked on a profit-making scheme depends on their intention. One man may buy a block of flats with the intention of holding it as an investment to earn rental income. Should circumstances force them to sell the property later
the proceeds will be of a capital nature. Another man may buy the block of flats with
a speculative motive, intending to apply for sectional title rights and sell the flats
immediately at a profit. The proceeds of these sales will be revenue because they had
the intention of embarking on a scheme of profit-making.
In SIR v Trust Bank of Africa Ltd 37 SATC 87, it was held that the intention at the time
of acquisition is important, and in particular circumstances may be fundamental and
decisive. The question is what happens if a person acquires something (for example
shares) with the intention to keep it as a capital asset, and then decides to speculate
with it.
Change of intention
The intention at the time of acquisition of the property is not conclusive because an
intention to hold as an investment may change during the time the property is held
into an intention to engage in a profit-making scheme – refer to CIR v Richmond
Estates (Pty) Ltd.
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CASE:
Commissioner for Inland Revenue v
Richmond Estates (Pty) Ltd
20 SATC 355
Facts: The taxpayer company was formed
for the purpose of controlling the investments and savings of the sole beneficial
owner of the shares issued (who was also
the director). The memorandum of association of the company empowered it to purchase land, deal in land, turn land to
account, develop land and lay out and
prepare land for building purposes. The
company carried on business as a land
speculator and received rent from properties it let. A large part of the business of
the company consisted of buying and selling plots in a black township but after 1945
it was no longer possible except with approval of the appropriate Minister. In 1948,
the shareholder decided that the company
should cease selling its plots in the township and for the future develop its holding
of eighteen plots in the township as rentproducing properties. No formal resolution recording this decision appeared in the
company’s records. By 1950, the Group Areas Act had been passed and the intention
of the government was to remove the
black inhabitants from the township in
which the company had its holding. As this
would make it impossible for the company
to dispose of its plots to blacks, the shareholder decided that it would be better for
the company to dispose of all its holdings,
both improved and unimproved, in the
township. The company thereafter disposed of 15 of its 18 plots in the township
at a substantial profit.
Judgment: The company had a change in
its intention as regards the properties sold,
in that it was converted to a capital asset.
The sale at a profit as the result of a change
in conditions outside the company’s control did not per se make the resulting profit
subject to tax. The fact that the change of
intention had taken place was not recorded
in a formal resolution of the company’s
only director (who was also the sole beneficial shareholder) but was evidenced from
the statements of the sole director and was
regarded as sufficient evidence for the
amount not to be taxed.
Principle: The intention of a company is
derived from both its formal acts (resolutions
of directors) and its informal acts.
It should be noted that the mere fact that the taxpayer decides to realise an asset is not
proof of a change of intention, nor the fact that they do so in such a way that they
realise it to the best advantage (refer to CIR v Stott).
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CASE:
Commissioner for Inland Revenue v Stott
3 SATC 253
Facts: Over the thirty years prior to the sale
of the properties in question, the taxpayer
(an architect and surveyor) had purchased
various properties, some of which he held
for a period of time to let or for private
purposes (seaside cottage) and later sold
them, sometimes having subdivided the
property before selling. One of the properties in question was a property which
the taxpayer purchased for residential purposes. This property acquired was larger
than the taxpayer required for residential
purposes, but the property was only for
sale in one block. The taxpayer built a cottage on the site and thereafter cut up about
half the property (property which he regarded as excess to his needs) into small
lots, which he proceeded to sell and from
which he derived substantial profits. A
further property was purchased for the purpose of assisting tenants who were living
there and who feared that they would be
ejected. His father had been a missionary
and he felt it his duty to assist these people.
Part of the farm, after the purchase, was
subdivided and sold to the tenants at a
small profit. The third property in question
was a small fruit farm which he purchased
subject to a long lease. The tenant failed to
pay his rent and the subsequent tenant
caused trouble. The farm was then put up
for sale and was sold at a profit.
Judgment: Although the taxpayer’s profession was one of a surveyor and architect, this aspect, on the facts, did not affect
him adversely. The fact that he had dealt in
property previously was not taken into
account because the court regarded them
as having taken place too long ago and too
lacking in information. However, the
motives in relation to the properties in
question were looked at closely to establish
whether there was a scheme of profitmaking or not. The court found that there
was no scheme of profit-making in regard
to the property purchased to protect the
rights of the tenants and later sold to them.
His father had been a missionary and the
purchase of the property was for philanthropic purposes, which by its very nature
excluded a scheme of profit-making. The
amounts realised constituted accruals of a
capital nature.
Principle: A person may realise his capital
asset to best advantage and the mere subdivision of land does not constitute a trade.
The decision also lays down the principle
that the taxpayer’s intention at the time the
asset is purchased is decisive unless there
is a subsequent change in intention and the
taxpayer ‘crosses the Rubicon’ by being
involved in a scheme of profit-making.
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Chapter 2: Gross income
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In Natal Estates Ltd v SIR and similarly in Berea West Estates (Pty) Ltd v SIR the courts
gave guidance as to when an asset is deemed to have been realised to its best
advantage as opposed to when it was being disposed of in a business venture.
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CASE:
Natal Estates Ltd v Secretary for Inland Revenue
37 SATC 193
Facts: The taxpayer company (formed in
1920) acquired as a going concern the
whole of the assets of a company which
had for some 25 years been carrying on
business in Natal as a grower and miller of
sugar. The assets acquired were mainly
planted sugar cane and included areas
north of Durban (now known as La Lucia
and Umhlanga Rocks). The taxpayer continued the sugar cane business uninterrupted until the years 1965–70, when the
taxpayer sold substantial areas of its land
at considerable profit but still retained
large portions of land. The Durban City
Council pressurised the taxpayer to sell the
land as Durban was expanding towards La
Lucia and Umhlanga Rocks. If the land
was not sold voluntarily, it was likely to be
expropriated. In 1963, consulting engineers
and architects were appointed for the development. After the taxpayer became a
wholly owned subsidiary of a parent company (Huletts Corporation Ltd), the process of selling the land picked up speed. By
April 1964, about 188 lots of the 2 350
comprising the La Lucia township layout
had been sold. In 1965 the taxpayer formed
a company, La Lucia Homes (Pty) Ltd, for
the purpose of constructing houses in La
Lucia. During 1968 a company, known
as La Lucia Property Investment Ltd,
was formed in which 45% of the equity
was held by Huletts Investments Ltd and
55% by the Anglo American Corporation
Ltd. This company purchased from the
taxpayer the La Lucia beachfront and
Umhlanga Lagoon areas en bloc for
R1,4 million. Although the taxpayer continued for some time to effect sales directly
to members of the public, by the latter half
of 1968 this had largely given way to bulk
sales. These bulk sales were all to companies associated with the taxpayer, one a
subsidiary of the taxpayer and three others
wherein the taxpayer’s parent company
held a 45% interest.
Judgment: The original intention of the
taxpayer to hold an asset as an investment
is always an important factor but such
intention is not necessarily decisive. There
was a change of intention considering the
manner or method of realisation which
indicates that a scheme for profit-making
was taking place and therefore the profits
derived from the sale of the asset were
subject to tax. The court also ruled that the
change of intention in regard to land in
Umhlanga Rocks and La Lucia also included the areas sold in bulk as these transactions also benefited (and were intended
to benefit) from the intensive business
activities primarily associated with the
preparation for, and promotion of the sale
of lots in township development, and all
the transactions formed part of the same
scheme of profitable dealing in land.
continued
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owner’s statements of intention; the nature
and extent of his marketing operations and
the like; and the incidence of the burden
imposed by section 102 of the Tax Administration Act, 2011.
To determine whether a taxpayer is realising a capital asset at best or is carrying on
a business scheme of selling land for profit,
the facts of the case must be considered in
their relation to the ordinary commercial
concept of carrying on a business scheme
for profit. In any such enquiry important
considerations will include, inter alia, the
intention of the owner both when acquiring and selling the land; the objects of the
owner, if a company; the owner’s activities
in relation to the land prior to his decision
to sell, and the light thereby thrown upon the
Principle: The court looked at the intention
of the taxpayer and whether it had
changed its intention from holding onto
the land as a capital asset or to embark on
a scheme of profit-making. The court ruled
that if a person ‘had crossed the Rubicon’
and started a ‘scheme of profit-making’ the
profits were of a revenue nature.
CASE:
Berea West Estates (Pty) Ltd v Secretary for
Inland Revenue
38 SATC 43 (A)
Facts: Mr K donated an undivided halfshare in a property to his 13 children. The
other half was bequeathed to them in his
will. After his death the property was sold
piecemeal to cover costs in the estate. As a
result of the financial and administration
problems, it was agreed to create a company that would acquire the remainder of
the property. The company will then sell
the property to the best advantage and any
balance left paying creditors, would be
distributed to the beneficiaries according
to Mr K’s will and the company wound
up. The shares in the company were allocated to the heirs and beneficiaries in proportion to their entitlement. The property
was subsequently proclaimed as a township provided that the company arranged
for the infrastructure (roads, water supplies,
and surveys) to be installed. Except for
periodic investment of temporarily surplus
funds, the taxpayer did not enter into any
trading activities that were not related to the
sale of the property. The taxpayer’s activities related to the development of one
area, selling the plots in that area, and then
to use the money to develop a further area.
Some 40 years after the death of Mr K all
the land had been sold and the proceeds
distributed.
Judgment: The taxpayer (company) was
the method used to realise the beneficiaries’ interests in the property. The totality of the facts showed the taxpayer was a
realisation company and that they had not
deviated from this purpose. The proceeds
on the sales were therefore of a capital
nature.
Principle: The use of a realisation company does not relax the rules related to a
taxpayer ‘crossing the Rubicon’. The formation of a realisation company can assist
a taxpayer to discharge the burden of proof
that an amount is capital in nature.
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In 2011 the Supreme Court of Appeal expanded the principles related to realisation
companies in the Founders Hill (Pty) Ltd case. The court found that the principles can
only be applied in limited cases.
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CASE:
CSARS v Founders Hill (Pty) Ltd
(509/10) [2011] ZASCA 66
Facts: AECI Ltd erected an explosives factory in 1896, which was extended in 1937.
Much of the land on which the factory was
built was required as a buffer between the
factory and urban areas. AECI owned land
in Modderfontein, Johannesburg, for many
decades. However as technology improved,
the extent of the buffer was reduced.
Economic and social developments in
Johannesburg led to more land being
required for housing and industry. AECI
took steps to subdivide and applied for it
to be rezoned. AECI wanted to develop the
land for the purpose of selling it as land for
residential, business and light industrial
purposes.
had ‘crossed the Rubicon’ to change the
property into stock-in-trade.
Judgment: The court found that Founders
Hill was not merely AECI’s alter ego; it
was established with the sole aim of
acquiring the property, developing it and
then selling it at a profit. The property was
therefore stock-in-trade. The judge pointed
out that the taxpayer’s intention in acquiring the property was different from that
which AECI had had, namely surplus land
held as a capital investment. Founders
Hill’s profits were gains ‘made by an
operation of business in carrying out a
scheme for profit-making’ and therefore
taxable.
Acting on legal advice, in 1993 AECI
formed Founders Hill as a ‘realisation
company’ with the express purpose of
realising the land which AECI sold to it to
‘best advantage’. It commenced doing so
and engaged the services of another AECI
subsidiary, Heartland Properties, to further develop and market the land. Both the
Commissioner and Founders Hill agreed
that the taxpayer acquired a capital asset
from AECI. The question was if the company
Principle: Once a taxpayer acquires assets
for the purpose of selling them, it is trading in those assets. There are exceptional
cases where a realisation company or trust
is required in order to facilitate the sale of
assets (for example, where different people
owned them, but to sell to best advantage
the interposition of another entity is
required).
It has been held that the onus of establishing a change in intention from revenue to
capital is a heavy burden (Yates Investments v CIR 20 SATC 355). The mere fact that the
taxpayer decides to wait before selling a capital asset does not represent a change in
intention; something more is required (John Bell & Co (Pty) Ltd v Secretary for Inland
Revenue 38 SATC 87).
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CASE:
John Bell & Co (Pty) Ltd v Secretary for Inland Revenue
38 SATC 87
The taxpayer had at no time offered the property for sale í it was approached to sell it.
Facts: In 1916 the taxpayer purchased, as a
going concern, the businesses of fruit merchants, exporters, importers and distributors. The businesses were established in
Johannesburg and Cape Town. In 1924, it
purchased the property in which it conducted
its business. In 1956, the taxpayer’s controlling shares were passed to new shareholders. The purpose of the new shareholders was to secure the property as premises
for a new business they proposed to establish, but one of the shareholders appreciated
the possibility of being able to sell the property at a price well in excess of its book
value at some point in the future. In 1957
and 1959, both the old and the new businesses were discontinued. The property,
which, at that point, was admittedly held by
the taxpayer as a capital asset, was no longer
required for its original purposes and from
1957 the taxpayer intended to retain the
property for the purpose of selling it at a
good profit when the market for property in
the area had risen sufficiently. To this end,
the property was leased to a third party for
a period of ten years and thereafter sold.
Judgment: That a mere decision to sell the
asset (previously kept as a capital asset)
rather than keep it does not per se make the
profit from the subsequent sale income in
nature. Something more is required in order to metamorphose the character of the
asset and so render its proceeds gross income. The court said it could not reasonably be found that the taxpayer had in 1957
embarked upon a new trade or profitmaking business of dealing in land. That
the taxpayer’s decision in 1957 to wait for a
period of time with the object of selling the
property at a high profit when the market
for property in the area had risen sufficiently,
by itself did not affect its character as a
capital asset.
Principle: Once a decision is made to sell a
capital asset, it does not matter that the
taxpayer waits for a period of time until the
value of the asset rises before he sells it.
However, this is subject to the provision
that he does not in the interim embark on a
scheme of profit-making.
Mixed intentions
A taxpayer may even acquire an asset with mixed motives. In COT v Levy 18 SATC
127 the court ruled that the main purpose must be found and given effect to.
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CASE:
Commissioner of Taxes Southern Rhodesia v Levy
18 SATC 127
the property should not affect the issue, if
the dominant purpose of the acquisition
was clearly established.
Principle: Where there are two possible
motives at the time an asset is purchased,
the dominant motive (if there is one) prevails especially where an individual taxpayer is involved. If there is no dominant
motive the revenue motive normally prevails.
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Facts: The taxpayer disposed of his shares
in a property-holding company at a profit.
He had two purposes for originally purchasing the shares, namely to acquire the
shares as an income-earning investment
while at the same time not excluding the
possibility of a profitable resale of the shares.
Judgment: The fact that the taxpayer at the
time of purchasing the shares had in mind
possible alternative methods of dealing with
Where neither purpose can be said to dominate, the court held in COT v Glass
24 SATC 499 that there had been a dual purpose. This case concerned a company, but
there is no reason why it should not apply to individuals as well. The taxpayer
bought a property, planned to let it while it was more profitable, and sell it when
circumstances changed making it even more profitable. The taxpayer will be taxed on
the proceeds of the sale since they acquired the property with a dual purpose of
profit-making. In Commissioner for Inland Revenue v Nussbaum the court looked at the
dual intention of a natural person.
CASE:
Commissioner for Inland Revenue v Nussbaum
58 SATC 283
Facts: The taxpayer (a retired schoolteacher) inherited certain shares quoted on
the Johannesburg Stock Exchange some
35 years previously and, on that foundation, with active and careful investment,
had built up a substantial portfolio of
quoted shares over the ensuing years. He
said in evidence that his investment decisions were always based on a ‘pattern of
expectations’ that a share would pay ‘adequate’ dividends in the short term or ‘more
than adequate’ dividends later on and when
he bought shares he did so with the intention to produce a sound and increasing
dividend income and to protect the capital
thus invested from erosion by inflation.
He also said that he had never bought a
share merely for profitable resale. After his
retirement, he began changing his share
portfolio. Many of the shares sold had
been held for much longer than five years
and therefore profits were ‘inevitable’ but
some of the shares had been held for five
years or less. He added that in the prevailing inflationary economic climate it was
‘almost impossible to make losses’. For the
three years in question, he made over
R1 million in profits and the Commissioner sought to tax him on these profits as being a scheme of profit-making.
The Commissioner accepted that prior
to this three-year period, the holding of the
continued
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had been wholly consistent with his investment motive not to sell certain holdings
entirely and that 82% of the shares held at
the beginning of the three-year period
were still held at the end of that period,
this share retention factor detracted in no
measure from the force of all those circumstances that point to a subsidiary profit-making purpose. Although an investor
buys shares ‘for keeps’ and generally adds
to his portfolio by employing surplus existing income, the taxpayer’s share transactions enlarged the value of his portfolio
and, at the same time, generated very considerable, annually increasing, funds, over
and above his existing income. The
employment of his capital in this way constituted an additional method of earning
income. The court found that the taxpayer
had a secondary, profit-making purpose
resulting in the income being taxable.
shares by the taxpayer was on capital
account but contended that he thereafter
changed his intention or at the very least
had a dual or secondary intention.
Judgment: The frequency of the taxpayer’s
share transactions, viewed in isolation,
provided evidence of continuity required
for the carrying on of a business. The taxpayer’s sales were almost without exception profitable – the taxpayer’s annual
profits substantially exceeded his annual
dividend income and the profits increased
every year, which, in turn, resulted in a
decrease in dividend yield. Given the close
watch that the taxpayer kept on his portfolio and on every shareholding within it,
and bearing in mind his meticulous attention to detail, it was most likely that he
was aware of the profit implications in
selling when the dividend yield had fallen.
In the present case not only was a profit
inherent in the sale of shares of which the
dividend yield had dropped, but the taxpayer manifestly worked for it; he ‘farmed’
his portfolio assiduously and the number,
frequency and profitability of sales, especially of short-term shares, bear clear
enough testimony to that. Although the
taxpayer was primarily an investor and it
Principle: The court extended the principle, previously only applied to companies, that if an individual has a dominant purpose, which is capital in nature,
and a secondary purpose, which is revenue in nature, the secondary purpose
could result in profits being treated as
revenue in nature because the two purposes are pursued simultaneously.
Establishing a person’s true intention
It is not an easy task to establish a person’s true intention. The court will in the first
instance give due consideration to the taxpayer’s evidence concerning their motives
and will not lightly disregard their ipse dixit, that is to say what they state their intention to be (Malan v KBI 45 SATC 59). In evaluating the evidence, the court will place a
considerable value on the taxpayer’s credibility as a witness, but will also weigh up
his subjective evidence against the facts of the case (objective tests) which may either
support his testimony or refute it.
If the taxpayer states that their intention is of a revenue nature, it is not necessary to
consider the objective tests (refer to 2.7.2) as the amount will be taxable. If the taxpayer
states they have a capital intention the objective tests (refer to 2.7.2) must be considered.
The objective tests normally give an indication of the taxpayer’s true intention.
Note that in terms of section 102 of the Tax Administration Act, 2011, the burden of
proof that an amount is exempt from or not liable to tax, or is subject to deduction,
abatement or setoff, rests upon the person claiming such exemption, non-liability,
deduction, abatement or setoff. This burden of proof must be discharged on a balance
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of probabilities. When considering the objective factors (refer to 2.7.2) some factors
might indicate that the person’s intentions are capital in nature and other objective
factors might indicate that their intentions are revenue in nature. The balance of probability means that when the taxpayer looks at all the objective facts and factors, the
majority of the factors indicate that their intention is capital or revenue in nature.
2.7.2 Objective factors
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As previously stated, the court will weigh up a taxpayer’s evidence regarding their
intention by having regard to certain objective factors. Some of the objective factors
that have been considered by the courts include:
The manner of acquisition
When a taxpayer uses their own funds to buy property, it is more likely that this is an
investment transaction than if they had borrowed money that would have to be
repaid over a short period, especially when the property is unlikely to yield enough
revenue to enable them to repay the loan (Strathmore Holdings (Pty) Ltd v CIR 22 SATC
203). If a taxpayer inherits a property, this factor will support their contention that
their motive was investment.
The manner of disposal
The way in which the taxpayer disposes of an asset will also be taken into consideration. A fortuitous offer to purchase, or a sale due to expropriation would support an
intention to invest (thus capital in nature). In ITC 1547 55 SATC 19, the fact that the
property was expropriated was not sufficient to prove that the original intention to
hold the property as trading stock had changed to an intention to hold it as a capital
asset. Repeated offers to sell the property, especially if accompanied by an extensive
advertising campaign, would indicate an operation of business (Natal Estates Ltd v
SIR).
The period for which the asset is held
When an asset is sold after being held for a very short period, it may be indicative of
a speculative motive, and vice versa. However, this will not necessarily be conclusive.
In ITC 862 22 SATC 301, the property had been held for more than 50 years but,
taking all the other circumstances into account, the proceeds of the sale were held to
be taxable (thus income in nature).
Continuity
The number of similar transactions undertaken by a taxpayer will be a factor to be
taken into account (CIR v Stott 3 SATC 253). A taxpayer who repeatedly buys and
sells homes, making a profit on each transaction, runs the risk of being taxed on the
proceeds of the sales because their actions indicate a business intention. This does not
mean that an isolated transaction will never be taxed. In Stephan v CIR 1919 WLD 1, it
was held that the profits from an isolated transaction of salvaging a wreck were of a
revenue nature because there was an intention to make a profit.
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Occupation of the taxpayer
An estate agent selling property would normally be carrying on a business, while a
salaried taxpayer who sells their house would in all likelihood merely be realising
their investment.
No change in ownership of the asset
Where the income derives from capital productively employed, without a change in
the ownership of the asset itself, the receipt will be of an income nature (CIR v
Booysens Estate Ltd 32 SATC 10). In Modderfontein B Gold Mining Co Ltd v CIR 32 SATC
202, the court held that the receipts were not of a capital nature due to their annual
nature and their closeness in character to rental payments, and in ITC 740 18 SATC
219, the use of water did not give rise to receipts for a capital asset but were periodical payments for a renewable resource of the farm (the fructus of the farm).
Nature of the asset disposed of
CASE:
Commissioner for Inland Revenue v George Forest Timber
Company Limited
1 SATC 20
Facts: The taxpayer company carried on a
business as timber merchants and sawyers.
It acquired about 600 morgen of natural
forest for the purposes of its business. The
nature of the trees in the forest was such
that they did not renew themselves, and
for practical purposes the value of the land
without the timber was negligible. In the
course of its business the company felled a
quantity of timber each year, which was
sawn up in the mill and sold as part of its
stock-in-trade. The balance of stock was
acquired by purchase from other sources.
Judgment: The total amount received for
the sale of the stock-in-trade was in the
course of the company’s business and
formed part of gross income.
Principle: The sale of fixed capital assets is
of a capital nature and the sale of floating
capital is of a revenue nature. However,
income from wasting assets is taxable.
Reason for the receipt
An example of this is amounts received for services rendered. Such amounts are
considered to be income even when disguised in the form of an inheritance, gift or
donation.
Legal nature of the transaction
Amounts received for granting the use of an asset to another person, for example
interest, rent, royalties etc., will be of an income nature (Vaculug (Pvt) Ltd v COT
25 SATC 201).
An operation of business in carrying out a scheme for profit-making
This test, which was referred to in Californian Copper Syndicate v IR (1904) 6F (Ct of
Session) 894; 41 Sc LR 691; 5 TC 159, has been adopted in many court decisions
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including Overseas Trust Corporation Limited v CIR 2 SATC 71, where Judge Innes
stated:
When an asset is realised as a mere change of investment, there is no difference in
character between the amount of the enhancement and the balance of the proceeds.
But where the profit is ‘a gain made by an operation of business in carrying out a
scheme for profit-making’, then it becomes revenue derived from capital productively
employed, and must be income.
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In CIR v Pick ’n Pay Employee Share Purchase Trust, the court considered ‘an operation
of business in carrying out a scheme of profit-making’.
CASE:
Commissioner for Inland Revenue v Pick ’n Pay Employee
Share Purchase Trust
54 SATC 271
Facts: The taxpayer was the Pick ’n Pay
Employee Share Purchase Trust that had
been established to administer a share purchase scheme for the benefit of employees
of the group. The Trust contended that it
was created and maintained to enable
employees to purchase shares in Pick ’n
Pay, their employer company. It did not
acquire shares with the intention of reselling them in a scheme of profit-making. It
purchased shares in order to make them
available to employees entitled to them in
terms of its rules and in terms of its constitution was compelled to repurchase shares
from employees who were required to
forfeit their holdings. Whether a profit or
loss resulted, was completely immaterial.
Moreover, the Trust had no control over
the time at which it may have to repurchase a share, particularly when such
shares are forfeited. It also had no control
over the market price of the share at that
time.
stock in the hope that the price would rise
in order to make a profit.
Any profit or loss was, therefore, purely
fortuitous. This was evidenced by the
profits and losses made on the purchase of
forfeited and other shares. The Trust had
never ‘stocked up’, that is to say buying
when the price was low or had bought
Principle: There must be a scheme of profitmaking before the proceeds become taxable. The fact that the Memorandum of the
company permits it to trade does not automatically mean that the sale of an asset
constitutes trading.
Judgment: Whether the taxpayer was carrying on a business by trading in shares
must be determined by applying ordinary
common sense and business standards.
The court ruled that there was no intention
to conduct a business in shares; it was to
operate as a conduit for the acquisition of
shares by employees entitled to them in
terms of the scheme’s rules. While a profit
motive is not essential for the carrying on
of a business, it may well indicate whether
a business is being conducted.
The constraints placed upon the trustees in
dealing with the shares in question were
foreign to commercial business, therefore
on a common sense approach, the trust
was not carrying on a business by trading
in shares. It was not the intention (purpose) that the trust should carry on business by trading in shares for profit.
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Other factors
• The age of the taxpayer: The age of the taxpayer may be indicative of their intention (Goodrick v CIR 23 SATC 1).
• The nature of the asset: A long lease period, entered into by the taxpayer, may be
indicative of the taxpayer’s intention (CIR v Stott). The fact that land may be ‘excess’
to a taxpayer’s needs or the fact that the land may be useless for the taxpayer’s purposes may also give an indication of their intention (ITC 379 9 SATC 339).
• The taxpayer’s activities: The taxpayer’s activities prior to the acquisition of an
asset may be indicative of their intention (ITC 595 14 SATC 252). However, their
activities after disposing of the asset in question may also provide further evidence
of their intention. For example: Did they frequently transact similar deals after the
deal in question (ITC 1436 50 SATC 122)? How were the proceeds of the realisation
dealt with? Were the proceeds reinvested in a capital asset?
• Accounting treatment of the transaction: The way the transaction is disclosed for
accounting purposes may also provide some evidence of intention (T v COT 40
SATC 179).
• The purpose of a legal person: The courts will usually consider documents, such
as minutes of directors’ meetings and financial statements, to determine the intention of a company. The company as independent taxpayer’s intention should be
established separately from that of its shareholders. The courts view the action of
the directors as an indication of the intention of the company because they are in
control of the company's assets. In some cases, the courts will however also look at
the intention of the shareholders to determine the company’s true intention
(Elandsheuwel Farming (Edms) Bpk v Sekretaris van Binnelandse Inkomste 39 SATC
163).
CASE:
Elandsheuwel Farming (Edms) Bpk v Sekretaris van
Binnelandse Inkomste
39 SATC 163
Facts: The control of the company (the taxpayer) was acquired by a group of individual land speculators who also became
directors of the taxpayer. The taxpayer owned
farm land for several years which it leased
out for farming purposes. After the change
in shareholding, it was decided by the new
shareholders that the land be sold to a municipality at a profit.
Judgment: The taxpayer did originally
acquire the land as a capital asset and continued to hold and use it as such while the
original shareholders were in control of the
company The new shareholders were either
land speculators or prospective land speculators who appreciated the potentialities of
the land for township development. The
new shareholders devised a scheme to derive a substantial profit from that potential.
The scheme consisted of buying the taxpayer’s shares at a price based upon the
land’s value as agricultural land, and selling the land to the municipality for township development. The new shareholders
had the intention to use the property as
trading stock, therefore the income is taxable.
Principle: If a transaction might be considered to be part of a scheme of tax evasion
and avoidance, then the courts can pierce
the ‘corporate veil’ to determine the true
intention of the taxpayer.
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Example 2.13
Miss Angie Baker is a very dynamic estate agent. She makes her living by selling 20 or
more houses per month. Angie has also owned her own beach cottage for over 20 years.
She decided to sell the cottage after hearing from a client that he was looking for a similar
cottage in the same area where her beach cottage was located. The sales agreement was
concluded on 30 January 2021 and the contract price of R570 000 was paid into Angie’s
bank account on 15 March 2021.
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You are required to determine whether the R570 000 accrued is revenue or capital in
nature.
Solution 2.13
It must be determined whether the receipt is of a capital or revenue nature. The following
factors will be taken into account when considering the subjective tests:
• intention of the taxpayer;
• change of intention; and
• mixed intentions.
Angie’s intention would have to be determined. It should be determined what Angie’s
intentions were when she purchased the cottage. Did she decide to sell the cottage because she did not need it any more or because she could make a large profit on the sale?
Did she embark on a profit-making scheme? From the above information it appears that
Angie had no intention of selling the cottage prior to meeting this specific client and it
does not appear that she embarked on a scheme of profit-making. There may be mixed
intentions at the time of sale. Angie may have recognised the possibility of a good selling
price and profit even though she had not intended to sell the cottage. A taxpayer is
allowed to try to obtain the best price without undertaking a scheme of profit-making. A
scheme of profit-making may have occurred if Angie had auctioned the property or made
major improvements and then advertised the cottage in several newspapers and on the
Internet.
As Angie stated that her intention was capital in nature, the objective factors must be considered.
When considering the objective factors to determine whether the sale of the beach cottage is of a capital or revenue nature, the following factors are considered:
• the manner of acquisition or disposal;
• the period for which the asset is held;
• continuity;
• occupation of the taxpayer;
• no change in ownership of the asset;
• nature of the asset disposed of;
• reason for the receipt;
• legal nature of the transaction; and
• an operation of business in carrying out a scheme of profit-making.
continued
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Angie’s occupation is selling houses. This would lead one to believe that the sale of the
cottage is of a revenue nature. She held this cottage for 20 years and if this was her first
personal sale, this would indicate that the cottage was an investment and therefore of a
capital nature.
On the balance of probabilities, the receipt would probably be of a capital nature and the
amount of R570 000 will not be included in Angie’s gross income.
It must be noted that if SARS decides that the amount is of a revenue nature, the onus of
proof will lie with Angie to prove otherwise.
1. When I advise a client should I only discuss the factors that indicate
that the amount will be capital in nature?
2. If an amount received is capital in nature would you pay tax on that
amount?
REMEMBER
• The nature of the receipt is determined by objective considerations, in other words the
taxpayer’s state of mind is not taken into consideration. The facts surrounding the
receipts are taken into account (refer to 2.7.2).
• The nature of the receipt is determined by subjective considerations, in other words the
intention of the taxpayer is taken into account (refer to 2.7.1).
• If a receipt is capital in nature, it is subject to capital gains tax.
2.7.3 Specific types of transactions
Finally, a few specific types of transactions and the norms for determining their
revenue or capital nature are referred to.
• Compensation or damages Whether income of this nature is taxable was first
considered in Burmah Steam Ship Co Ltd v IRC in 1930. The court decided that the
test to determine whether damages or compensation received is capital or revenue
in nature, is to test ‘which hole’ the compensation is intended to fill, and if revenue,
it is taxable.
If the compensation is paid to reimburse the taxpayer for trading profits lost, the
compensation will be taxable; if it was paid to replace a capital asset lost, it will
assume the nature of the asset lost and will therefore be of a capital nature. The
receipt of compensation from an insurance company in respect of a claim will be a
capital receipt if paid for a fixed asset that was destroyed and will be a revenue
receipt if paid for trading stock that was stolen or destroyed. This test was applied
in ITC 1547 55 SATC 19 where the following question was asked: Was the compensation received from the sale of the property intended to fill a hole in the recipient’s pocket or was it aimed at filling a hole in the recipient’s assets? Refer to
WJ Fourie Beleggings v Commissioner for South African Revenue Service (71 SATC 125)
and Stellenbosch Farmers’ Winery Ltd v Commissioner for South African Revenue Service
(74 SATC 235).
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CASE:
WJ Fourie Beleggings v Commissioner for
South African Revenue Service
71 SATC 125
Judgment: Unlike previous cases where the
contract enabled the taxpayer to do business, the taxpayer could operate the hotel
without the contract. Therefore it was not
part of the income producing structure of
the business. The contract was part of the
taxpayer’s business of providing accommodation i.e. its income-earning activities. The
compensation received was thus for the
loss of income and must be included in
gross income.
Facts: The taxpayer (an hotelier) entered
into a long-term contract to provide accommodation and meals for overseas
guests. Immediately after the 9/11 attacks
the guests left the hotel without any notice.
This resulted in a breach of the accommodation agreement. The taxpayer lost a
major source of income for the remainder
of the contract period and the state of the
rooms was so bad that considerable repairs
had to be effected to return the rooms to a
condition in which they could be hired out
again. The taxpayer and the company
managed to settle the matter out of court
with the taxpayer receiving R1 292 760 in
full and final settlement of all claims it
might have. The taxpayer claimed that the
compensation so received was capital in
nature.
Principle: The compensation received was
to fill a hole in the taxpayer’s income and
not to compensate for the loss of a capital
asset. The taxpayer’s capital asset was the
hotel and the contract was to provide
rooms in the hotel and was thus the fruits
of the tree.
CASE:
Stellenbosch Farmers’ Winery Ltd v Commissioner for
South African Revenue Service
74 SATC 235
Facts: The taxpayer is a producer and importer of liquor products, as well as a wholesaler of a range of spirits, wine and other
liquor products, mainly to retailers. It entered
into a distribution agreement with an entity
in the United Kingdom. In terms of the agreement the taxpayer acquired the exclusive
right to distribute Bells’ whisky throughout
South Africa for a period of 10 years. Hereafter the agreement can be terminated with
12 months’ notice (thus effectively a minimum period of 11 years).
As a result of corporate takeovers in Europe,
the UK entity sought to terminate the distribution agreement three years prematurely.
A termination agreement was concluded
and the taxpayer received the sum of
R67 million as compensation for the early
termination of the exclusive distribution
agreement.
Judgment: Although the value of the asset
for accounting purposes was determined by
considering the future inflow from the contract, accounting treatment is not the determining factor. The termination agreement
referred to payment of full compensation for
the closure of the taxpayer’s business relating
to the exercising of its exclusive distribution
rights (the asset). As the taxpayer is not in
the business of buying and selling rights
to purchase and sell liquor products, the
continued
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contract is not part of a scheme of profitmaking, therefore the receipt is capital in
nature
2.7
the exclusive distribution right) or whether
it was paid as compensation for a loss of
profits in the sales of the products (in this
case the sale of the Bells’). If the compensation is to fill a hole in the taxpayer’s
assets, it is of a capital nature.
Principle: When compensation is paid, it
is important to determine if it is paid
for the loss of a capital asset (in this case
• ‘Sterilisation’ of assets (prohibiting an asset to produce income): The English
case of The Glenboig Union Fireclay Co Ltd v IRC (1922) 12 TC 427 (HL) established
the principle that compensation paid for ‘sterilising’ an asset from which profit
might otherwise have been obtained, is of a capital nature. The capital asset need
not be corporeal property, but it may be a right. Payments made in restraint of
trade are therefore of a capital nature. An actor, who was paid an amount of money
for undertaking not to perform in a film for any other person, had received a
‘restraint of trade’ payment which was held to be of a capital nature (Higgs v
Olivier 1952). Refer to 2.8.3 where certain sterilisation payments received by taxpayers are taxable.
• Gambling transactions, lotteries and prizes: Where a person makes a livelihood
from gambling, their gambling income may be of a revenue nature (Morrison v CIR
1950 (2) SA 449 (A); 16 SATC 377). The Commissioner will not tax an ordinary
punter on their winnings, but will tax owners and trainers who regularly place bets
(ITC 712 17 SATC 335) and bookmakers whose trade is that of betting. In the same
way, a lottery or prize that depends on an element of luck and is not a business
operation will be of a capital nature. However, a journalist or writer who wins a
prize in a literary competition will be taxed on the receipt (ITC 976 24 SATC 812),
as there is a close connection with their income-earning operations.
• Gifts and inheritances: Gifts and inheritances are fortuitous receipts unconnected
with business activities and are therefore of a capital nature. This does not mean
that, if the donee or heir sells the property, the proceeds are of a capital nature. The
ordinary tests will be applied.
• Kruger Rands: Conflicting decisions have been handed down in relation to the
proceeds of the sale of Kruger Rands (ITC 1355 44 SATC 132, ITC 1379 45 SATC
236, ITC 1525 54 SATC 209 and ITC 1526 54 SATC 216). The intrinsic problem is
that they do not produce income, are usually acquired with the intention to sell at a
higher price and are often held as a hedge against inflation. Because of this, it
could hardly be said that Kruger Rands are acquired as an investment. In ITC 1543
54 SATC 447, the court introduced a new factor into the question of the capital or
revenue nature of the proceeds of the sale of Kruger Rands, namely that of the
degree of permanence with which the coins were held. Therefore, if a taxpayer
acquires Kruger Rands with the intention of holding the coins for a long period,
this would indicate an investment intention and the coins would become part of
their fixed capital. The High Court decision in CIR v Nel provided binding principles on how the sale of Kruger Rands should be taxed.
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CASE:
Commissioner for Inland Revenue v NEL
59 SATC 349
Facts: The taxpayer, over a period of three
years, purchased 250 Kruger Rands with
surplus cash that he had available from
time to time, at an average price of R280
per coin. His intention, when he purchased
the coins, was to hold them as a long-term
investment as a hedge against inflation. He
did not plan to sell the Kruger Rands and
thought that they would be inherited by
his children. He did not purchase any further Kruger Rands thereafter. The Kruger
Rands steadily escalated in value over the
years and although he had many opportunities to sell them, he never did so and it
never entered his mind to do so. However,
11 years later he urgently needed to buy a
car for his wife and he was advised by his
auditor to exchange 80 of his Kruger Rands
for a car since he had no cash available to
do so. The 80 Kruger Rands were then sold
for cash, the taxpayer making a profit of
R67 000. The Commissioner, in assessing
the profit to tax, contended that the nature
of Kruger Rands was unique in the sense
that they are not income-producing assets
other than that they can be worked into
jewellery. They do not have any economic
utility save for being sold when cash is
required. He also submitted that when a
taxpayer invests in Kruger Rands, he must
inevitably envisage a sale of this asset in
due course and his failure to realise the
investment over many years was due to the
fact that he did not require the additional
funds at that time.
Judgment: The taxpayer was unwilling to
sell his Kruger Rands but was obliged to
do so because he had no other available
means and a motor car was urgently and
unexpectedly required by his wife and
therefore the evidence showed clearly that
the taxpayer’s purpose in selling the Kruger
Rands was not to make a profit but to realise
a capital asset in order to acquire another
capital asset. In the transaction under review
the Kruger Rands were purchased for
‘‘keeps’’ and the disposal of some of them
was due to ‘some unusual, unexpected, or
special circumstances’ which supervened.
It is not correct to say that an investor
could only invest in Kruger Rands with a
view to reselling them at a profit and in
several cases the taxpayers had sold Kruger
Rands that had been bought originally as an
investment in order to pay for a pressing
and unexpected debt which had arisen
and in each case the court had held that
the proceeds of the sale were of a capital
nature. Thus, the disposal of the Kruger
Rands constituted the realisation of a capital
asset.
Principle: For investments in Kruger
Rands and the selling thereof, the same
principles and guidelines must be applied
as with other assets when they are sold.
• Goodwill: In ITC 1542 54 SATC 417, the proceeds of the sale were considered to be
of goodwill and the court held that the sale of goodwill and payment for ‘knowhow’ are two different things. The former gives rise to a receipt or accrual of a capital nature and the latter, due to the passing of knowledge, skill or ingenuity
requires effort on the part of the seller, as it is of a revenue nature. It is important
that the contract provides for the sale of goodwill and not for the share of future
profits. In Deary v Deputy Commissioner of Inland Revenue 32 SATC 92, the contract
provided for a payment of goodwill to be partly settled as an annuity out of future
profits. The amounts so received were held to be of a revenue nature.
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2.7
Example 2.14
Jim Jacobs is a resident of the Republic who earns his income as a consulting geologist.
The following revenue transactions relate to his current year of assessment:
• He earned consultation fees of R800 000 for surveys carried out in the Republic during
the year of assessment.
• He was instructed by the chairman of a mining company in Johannesburg to carry out
a survey in Botswana at the site of a new coal mine. He carried out all the work in
Botswana, returning to Johannesburg to type his final report. He was paid a fee of
R80 000.
• While he was in Botswana, he was approached by a farmer to carry out a survey of a new
borehole for water. In lieu of a fee, Jim, who also restores antique furniture as a parttime occupation, accepted an antique yellow-wood suite which the farmer transported to Jim’s home in Johannesburg. Jim had the suite valued by a dealer in
Johannesburg, who set its value at R320 000.
• Jim also purchased debentures issued by a Namibian company. He telephoned his
bank manager in Johannesburg, instructing him to make the funds available to the
company at a bank in Windhoek in Namibia. He purchased 100 debentures of R100
each, paying interest quarterly at 18%. He received interest on 31 October and
31 January of the current year of assessment (R900 each quarter).
• Jim operates from a small factory in the garden of his home just outside Johannesburg.
The following sales of antique furniture were made by Jim during the year:
Sales to clients in the Republic
R500 000
Sales to clients in Zimbabwe
(At the end of the current year of assessment, he had not yet
received this amount)
R250 000
He received a deposit from a client in Pretoria for restoration work
to be done in May of the next year of assessment
R50 000
He sold certain furniture that he had acquired many years ago and
used in his home as part of his personal assets
R300 000
• He sold a house in Johannesburg, which he had originally acquired
with the intention of letting
R1 980 000
Assume that no double-tax agreements are in force with Botswana or Namibia.
You are required to calculate Jim’s gross income.
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Chapter 2: Gross income
2.7
Solution 2.14
R
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Consultation fees earned in the Republic
Consultation fees earned in Botswana (Note 1)
Consultation fees earned from the Botswana farmer (Note 1)
Interest on the debentures in the Namibian company (Note 2)
Sales of antique furniture (Note 3)
• Clients in the Republic
• Clients in Zimbabwe
• Deposit from a client in Pretoria
• Furniture forming part of his personal assets
Sale of a house (Note 4)
Gross income
800 000
80 000
320 000
1 800
500 000
250 000
50 000
nil
nil
2 001 800
Notes
1. The amount of the fee to be included in Jim’s gross income will be determined by the
cash payment received, as well as the market value (R320 000) of the asset received in
lieu of the fee. This is as a result of the definition of gross income that includes the
total amount ‘in cash or otherwise’. Residents are taxed on their worldwide income.
2. The interest on the debentures issued by the Namibian company will be included in
Jim’s gross income, as he is taxed on his worldwide income, both active and passive.
In terms of section 24J, which provides detailed rules relating to the accrual (and
incurring) of interest, the calculation of the actual amount accruing to Jim could differ
from the interest received. This calculation has been ignored for the purposes of this
example.
3. Although the clients in Zimbabwe had not yet paid the amounts owing, they had
accrued during the year of assessment and are therefore included in his gross income.
In the case of the deposit received from his client in Pretoria, this amount had clearly
not yet accrued because the work would only start in May of the next year of assessment. However, the amount was actually received during the year of assessment and
would be included in his gross income, which includes amounts received or accrued.
The sale of his personal furniture will give rise to a receipt of a capital nature because Jim
did not purchase the asset with the intention of selling it. His intention may have
changed, however, in which case his intention at the time of sale would determine the
capital or revenue nature of the proceeds. If, for example, he only sold this furniture
because he was replacing it with furniture that was more suitable or that he liked
more, the proceeds would be of a capital nature. The fact that he owned the furniture
for many years would support the contention that this was a receipt of a capital
nature, but the fact that he carries on the trade of restoring and selling antique furniture, would go against this contention. On the balance of probabilities, the receipt
would probably be of a capital nature.
4. The sale of property purchased with the intention of holding it as a revenue producing asset would give rise to a receipt of a capital nature, unless Jim had changed
his intention. If the asset was held for many years, it would support the capital nature of
the receipt and the fact that he does not carry on business as a property dealer would
also support it. However, if he had carried out several such transactions in the
past (the continuity test), SARS may consider the receipt to be of a revenue nature.
continued
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The mere fact that the taxpayer has decided to realise an asset and to realise it at the
best possible price would not be enough to categorise the proceeds as revenue. The
way in which the taxpayer goes about selling their property may also have a bearing
on the matter. Repeated attempts to sell, together with an extensive advertising campaign, may support an intention of selling at a profit, whereas selling as a result of a
fortuitous offer would not. The sale of the house may have capital gains tax implications.
Will the same amounts be taxable if he is not a resident of the Republic?
2.8 Special inclusions (section 1 ‘gross income’ definition)
Paragraphs (a) to (n) of the definition of gross income include certain types of
income that would not necessarily be included if the general principles applying to
gross income were to be applied. The reason for the non-inclusion of these types of
income may be that they possess the characteristics of capital income. The general
rules for capital versus revenue do not always apply to these specific types of income.
2.8.1 Annuities (paragraph (a))
This paragraph includes in the gross income:
• an amount received or accrued by way of an annuity; including
• a living annuity (as defined in section 1 of the Act); or
• an amount (revenue portion) payable by way of an annuity under an annuity
contract in terms of section 10A, and an amount payable in consequence of the
commutation or termination of such an annuity contract (excluding key man policy
payments).
The Act does not define an annuity, but in ITC 761 19 SATC 103, the Special Income
Tax Court stated that the main characteristics are that:
• it provides for a (fixed) annual payment even if it is divided into instalments;
• it is repetitive, that is to say payable from year to year for a certain period; and
• it is chargeable against some person.
The originating cause of the annuity is immaterial to its revenue nature. It may be
payable in terms of:
• the will of a deceased person;
• a contract;
• a deed of donation;
• a pension or retirement annuity fund; or
• the sale of the goodwill of a business.
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Chapter 2: Gross income
2.8
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Note that:
• A guaranteed annuity is an insurance product that the person can purchase from a
life insurance company. The life insurance company guarantees to pay the person a
monthly pension for the rest of their life.
• A living annuity is essentially an investment. With a living annuity the two thirds
of the lump sum is invested in a variety of investments. A living annuity is only
permitted to accept contributions from a retirement fund or another living annuity.
Although an inheritance, donation or the sale of the goodwill of a business as such
may constitute a capital receipt (when expressed as an annuity) payable for a certain
period or for life, the receipt of this annuity constitutes gross income. This principle
was established in Kommissaris van Binnelandse Inkomste en ’n Ander v Hogan.
CASE:
Kommissaris van Binnelandse Inkomste en ’n Ander v Hogan
55 SATC 329
Facts: The taxpayer had been seriously
injured in a motor vehicle collision and
after settling with the Motor Vehicle Assurance Fund, had been compensated for loss
of future earnings, to be paid in monthly
instalments. The taxpayer contended that
the payments were capital in nature and
not an annuity.
obligation to compensate the taxpayer for
his future loss of earnings was extinguished and replaced by a contractual undertaking to pay the monthly instalments
while the taxpayer was alive, without creating a liquid or determinable debt capable
of being reduced by such instalments. In
the light of the above, read with the essential characteristics of an annuity, the
monthly instalments could be regarded as
annuities and were not capital in nature.
Judgment: Paragraph (a) of the definition
of ‘gross income’ includes ‘any amount
received or accrued by way of annuity’. It
does not matter whether the annuity is of a
capital nature or not. That although ‘annuity’
is not defined in the Act, it appeared that an
annuity had two essential characteristics
(which are, however, in no way exhaustive); it was an annual (or periodical) payment and the beneficiary had the right
to receive more than one such payment. It
was significant that the payments expired
on the death of the taxpayer and that the
Principle: If a person gives up a right to be
paid a capital amount that would not
under normal circumstances be subject to
ordinary tax in return for the payment of
an annuity, the capital status of the amount
payable will be lost and the annuity will
become revenue in nature in terms of paragraph (a) of the definition of ‘gross
income’.
Note that the payment of a capital debt in instalments, however, is not an annuity. It
is often difficult to distinguish between the two but it has been said that periodic
payments in liquidation of a debt, even if the instalments may vary depending on the
circumstances, do not constitute an annuity. For example, an incoming partner in a
partnership may purchase goodwill from a retiring partner, the instalments being
dependent on the profits of the partnership. Provided the amount payable for goodwill is a fixed amount, these payments do not constitute an annuity. If the consideration payable for the goodwill is expressed as an annuity for a certain period, or for
life, it is included in the gross income of the recipient.
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2.8
2.8.2 Alimony, allowances or maintenance (paragraph (b))
An amount payable to a taxpayer by a spouse or former spouse of that taxpayer
under a judicial order or written agreement of separation, or divorce order, by way of
alimony, allowance or maintenance of the taxpayer is included in the gross income of
the taxpayer. Where an amount is payable to a taxpayer in terms of a maintenance
order for the maintenance of a child, this amount is included in the gross income of
the taxpayer.
2.8.3 Amounts received in respect of services rendered,
employment or holding an office (paragraphs (c), (cA),
(cB), (d ), (f) and (i))
These paragraphs ensure that amounts received or accrued in respect of services
rendered, employment or holding an office are included in the gross income, irrespective of the nature of the payment. These subsections ensure that gratuities that
would normally be capital receipts are included in gross income (see Stevens v Commissioner for SARS). Allowances, ‘fringe’ benefits and many other kinds of payments
from the employer are also included in gross income.
CASE:
Stevens v Commissioner for South African Revenue Service
32 SATC 54
Facts: The taxpayer, as part of his company’s share incentive scheme had
acquired an option to buy its shares but
before the option could be exercised, the
company announced that it would be voluntarily liquidated rendering such options
valueless. The company resolved to pay
the taxpayer, as option holder, 75 cents per
share ex gratia. The purpose of the incentive
scheme had been to promote the retention of
employees of ability and expertise who
were primarily responsible for the profitability and continued growth of the company. The taxpayer contended that such ex
gratia payment was not aimed at compensating the option holders as employees or
ex-employees, but because their option
price was below the market value when the
special dividend was declared and it was
they who were deprived of a contemplated
profit.
Judgment: The recipients of the ex gratia
payments were employees or ex-employees
who had enjoyed a benefit directly linked
to their employment, and who had lost
that benefit but were deserving in the particular circumstances of a substitute ex gratia
payment. Accordingly, the receipt fell within the terms of paragraph (c) of the definition of ‘gross income’.
Principle: The ex gratia (voluntary)
payment was received as a direct result of
the incentive scheme entered into (paragraph (c) includes within its ambit voluntary
payments). The share incentive scheme was
only offered to employees. It therefore
follows that the ex gratia payment was
received ‘by virtue of services rendered or
by virtue of any employment or the holding of any office’ as required by paragraph (c) of the definition of ‘gross
income’.
The words ‘in respect of’ used in these paragraphs require a causal connection between the amount received and the employment or office (De Villiers v CIR
4 SATC 86). Payments by an employer such as charitable donations, which are not
connected with services, do not necessarily fall within the ambit of these paragraphs.
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Chapter 2: Gross income
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Payments made to one person in respect of services rendered by another are also, in
terms of paragraph (c), included in the taxable income of the person rendering the
services. Amounts deducted from an employee’s salary and paid over to the third
person are therefore included in the employee’s gross income. In other words, the
employee’s gross salary is included in their gross income.
In C: SARS v Kotze 64 SATC 447, the respondent received a police reward for providing
information regarding the illegal purchase of diamonds. The issue was whether the
amount had been received for services rendered. The court held that he was rewarded
for having provided information that led to the arrest and conviction of persons. If he
had not provided the information, he would not have received the reward. The court
held the amount was received in respect of services rendered.
Example 2.15
Ms Jane Nell renders a service to Crax CC and in recognition of the services she rendered
to the CC, her brother receives R5 000 from Crax CC.
You are required to determine whether Jane will be taxed on this amount.
Solution 2.15
In terms of paragraph (c) (ii) Jane will be taxed on the R5 000 as she was the person who
rendered the services.
Restraint-of-trade payments made to employees terminating their services with the
employer making the payment would normally be of a capital nature. These payments limit the use by the recipient of their skills, knowledge or business contracts to
earn income for a specified number of years. Paragraph (cA) of the definition of gross
income includes in the gross income, amounts received or accrued to a company (for
example a personal service company or personal service trust) as consideration for
restraints of trade imposed on them. Paragraph (cB) also includes in the gross income
of a natural person restraints of trade amounts received or accrued to them in relation
to current, previous or future employment.
Paragraph (d) includes an amount received due to loss of employment, proceeds from
a policy or the benefits from a policy being ceded to you, a dependent or your retirement fund. The amount received from the policy can be paid to you directly or indirectly via the company.
Paragraph (f) includes an amount received in commutation of amounts due under a
contract of employment or service.
2.8.4 Retirement fund lump sum benefits or retirement fund lump
sum withdrawal benefits (paragraphs (e) and (eA))
The Second Schedule to the Act makes provision for the calculation of the taxable
portion of retirement fund lump sum benefits. Paragraphs (e) and (eA) of the
definition of gross income include the taxable amounts received or accrued in respect
of approved retirement funds including a retirement fund lump sum benefit in gross
income. These benefits are dealt with in detail in chapter 9.
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2.8
2.8.5 ‘Know-how’ payments (paragraph (gA))
This paragraph includes an amount received or accrued as consideration for imparting or undertaking to impart a scientific, technical, industrial or commercial knowledge or information, or for rendering or undertaking to render assistance or service in
connection with the application or utilisation of such knowledge or information
in gross income. These know-how payments may, like lease premiums and improvements, be in the nature of capital income, but are included in gross income in full in
terms of this paragraph.
Examples of such payments may include the sale of information, technical advisory
fees and the sale of operating manuals.
2.8.6 Dividends (paragraph (k))
This paragraph includes dividends or foreign dividends received or accrued in gross
income.
2.8.7 Other amounts included in gross income
(paragraphs (g), (h), (l), (m) and (n))
Paragraph (g) includes a premium amount received from another person for the use
of land, buildings, plant, machinery or any other assets in gross income.
Paragraph (h) includes in the gross income of the lessor an amount spent by a lessee
on improvements of leased property.
Paragraph (l ) includes grants or subsidies received or accrued in respect of soil erosion works on farming property that is leased by the taxpayer, or for farm development expenditure incurred by a farmer on their property in gross income.
Paragraph (m) includes amounts received from an insurance policy on the life of an
employee or director, including loans or advances, and policies for disability or illness in gross income. This paragraph is not applicable if the amount has already been
taxed.
Paragraph (n) includes an amount that is specifically required to be included in a
taxpayer’s income in terms of any other provision of the Act in gross income.
Example 2.16
Arthur McArthur is a resident of South Africa. He only worked for one private sector
employer throughout his entire working life of 40 years. The following information
relates to his receipts and accruals for the current year of assessment:
• Arthur received a lump sum of R800 000 from his employer’s pension fund when he
retired on 30 June. This amount relates to all his years of service. The business’s
accountant has ascertained from SARS that, in terms of the Second Schedule of the Act,
the tax-free portion of this lump sum amounts to R300 000.
• When he retired, his employer paid him a gratuity, amounting to R100 000, in gratitude for his years of loyal service.
continued
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Chapter 2: Gross income
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• At his retirement party, Arthur’s fellow workers presented him with a Persian carpet,
which cost R6 000.
• For many years Arthur has been a part-time partner in a small hardware business. He
sold his share in the goodwill of the partnership on 31 August. In return, he will
receive a monthly amount for the next ten years, amounting to the greater of R10 000
or 1% of the monthly turnover of the business. His actual income amounted to R10 000
a month during the current year of assessment.
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You are required to determine which amounts will be included in Arthur’s gross income
for the current year of assessment.
Solution 2.16
• The taxable portion of a pension fund lump sum amounting to R500 000 (R800 000 –
R300 000) would be included in Arthur’s gross income in terms of paragraph (e) of the
definition.
• The gratuity, being a voluntary award received in respect of the termination of his
employment, is included in Arthur’s gross income in terms of paragraph (d) of the definition.
• The value of the Persian carpet presented to Arthur by his fellow workers on his
retirement will not be included in his gross income. It was not received in respect of
services rendered from the employer but from fellow employees and represents a gratuitous capital receipt.
• The monthly amount of R10 000 (R60 000 for the current year of assessment) is
included in Arthur’s gross income in terms of paragraph (a) of the definition. An
amount received for the sale of goodwill (a capital asset) by a partner in a partnership
would normally be of a capital nature. Due to the payment being expressed as a
monthly amount over a period of ten years, each monthly payment will constitute an
annuity (being a fixed annual payment divided into instalments, repetitive and
chargeable against the purchaser of the goodwill) and it will be included in Arthur’s
gross income in terms of paragraph (a) of the definition.
Do I need to discuss the general gross income definition if the amount is
included as one of the special inclusions?
REMEMBER
• The special inclusions listed in the definition of gross income are included in gross
income, even though they are of a capital nature.
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2.9–2.10
2.9 Amounts that are deemed to be of a capital nature
(section 9C)
Apart from certain amounts being deemed to be gross income even though they do
not comply with the definition of gross income, the Act also deems certain amounts
to be of a capital nature and therefore not gross income but rather subject to capital
gains tax (this is dealt with in depth in chapter 13).
Section 9C deems an amount (excluding dividends and foreign dividends) received
by or accrued to a taxpayer as a result of the disposal by that taxpayer of an equity
share to be of a capital nature. In order for a share to be an equity share, the taxpayer
must have owned the share (including a portfolio of collective investment schemes in
securities and a portfolio of hedge fund collective investment schemes) for a continuous period of at least three years prior to its disposal.
The following cannot be qualifying shares:
• a share in a share block company;
• a share in a company that was not a resident (except if the company was at that
time a listed company, as defined); or
• a hybrid equity instrument as defined.
This deeming provision will not apply to a qualifying share if at the time of disposal
the taxpayer was a connected person in relation to the company that issued that share
and
• more than 50% of the market value of the equity shares of that company was
attributable to immovable property (excluding immovable property held indirectly
by a person who is not a connected person to the taxpayer and immovable property
held for a period of more than three years prior to that disposal); or
• that company acquired an asset during the period of three years prior to that
disposal and amounts were paid or payable by a person during that period to any
person other than that company for the use of that asset during the three years.
Where shares are lent by a lender to a borrower or where a borrower returns another
share of the same kind to a lender in terms of a collateral arrangement, no disposal is
deemed to have taken place.
Where this provision deems the disposal of the equity shares to be of a capital nature,
expenditures or losses that have been allowed as a deduction from the income of the
taxpayer in terms of section 11(a) (after applying the debt reduction rules in section 19), must be included in the taxpayer’s income.
2.10 Summary
The first building block of taxation is discussed in this chapter and this forms the
basis of the tax calculation. Before the different components of the definition are
applied, the residency of a person must be determined. A natural person can be a
resident of the Republic either by being ordinarily resident or by means of the physical presence test.
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Chapter 2: Gross income
2.10–2.11
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All the components of the gross income definition must be present before an amount
forms part of the gross income. As seen in this chapter, many of these concepts are
not defined in the Act and the principles and guidelines from court cases are used to
understand the components of the definition of gross income and to apply them to
the amount in question.
The gross income definition also lists items that are specifically included in the taxpayer’s gross income, even though they would not have formed part of gross income
due to their capital nature.
In the questions to follow, the different components of the gross income definition
will be applied to real-life situations to determine whether amounts comply with the
requirements of the gross income definition and form part of the gross income of the
taxpayer.
2.11 Examination preparation
Question
Felix sells computer equipment and is objecting to an assessment received from SARS.
During the current year of assessment (28 February 2022), Felix donated second-hand
office equipment to a local radio station. In return, the radio station agreed to broadcast ‘specials’ that Felix had on certain computer products for the week.
SARS taxed the value of the office equipment donated to the radio station and stated that
the donation fell within the definition of gross income. Felix believes otherwise.
You are required to:
Discuss all the gross income requirements that Felix should bear in mind when preparing the objection of the assessment. (Assume that Felix is a resident of the Republic.)
Answer
Discussion of the gross income requirements
• An amount: A value must be placed on the free airtime. The value would be the
normal advertising fees charged by the radio station to its clients at the time of the
donation. Barter transactions would give rise to gross income as long as the ‘asset’
received (in this case the free airtime) is capable of being valued in monetary terms.
• In cash or otherwise: Felix did not receive cash since it was a donation to the radio
station but he did receive free airtime, which is an intangible consideration received. If
Felix did not receive something in return, this requirement would not be met, but it would
have to be proved that nothing was received in return, not even increased goodwill.
• Received by or accrued to: Felix became entitled to the airtime when the agreement
was made. The agreement need not have been in writing. Felix must include the
amount received at time of receipt or accrual, whichever occurs first. This would
depend on how the agreement was worded between the two represented parties. If
the agreement stated that from a specific date the radio station would start broadcasting
the specials, then that specific date would be the date of accrual. If the agreement did
not give a specific time, then the date that the broadcast actually occurred would be the
date of receipt.
continued
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• Year or period of assessment: Felix will be taxed in the year that the amount was
received or accrued to him, whichever occurs first. It must be noted that if the accrual
and receipt fall into different years of assessment, then it will only be included in one of
the years of assessment and not both. In this case it will be included in the current year
of assessment.
• Receipts of a capital or revenue nature: Felix’s intention will have to be considered.
Why did he donate the second-hand office equipment? Did he intend to enter into an
agreement for ‘free airtime’, or was it just a gesture of goodwill? Did he change his
intentions when the offer of free airtime was given to him? Felix most probably knew
how the broadcasting business worked. If you donate products, prizes or assets which
the radio station can use, normally some type of ‘free advertising’ is then made available to you. This free advertising would be part of a ‘scheme of profit-making’, since the
advertising would most definitely help profits increase in general.
• Note that Felix most probably purchased the office equipment to be used in the business. The intention of the business appears to have been met as long as the equipment
was used for a period of time. If the equipment was donated because it was no longer of
use to the business, then the original intention would not have changed.
• Felix will find it very difficult to convince SARS that the equipment was not of a revenue nature due to the intentions discussed above. Also, the time that the equipment
was held, the frequency of disposing of this type of equipment and how the equipment
was financed will also have to be considered.
• All the elements of the gross income definition appear to be met and therefore the value
of the free airtime received in lieu of the donation of the second-hand equipment will be
included in Felix’s gross income.
Additional questions for this chapter are available electronically at
www.myacademic.co.za/books
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3
Gross income
Income exempt from tax
–
Exempt
income
–
Deductions =
Taxable
income
Tax
payable
Page
3.1
3.2
3.3
3.4
3.5
3.6
Introduction............................................................................................................
Exemptions resulting from the status of the taxpayer (section 10) .................
Exemptions available to non-residents (section 10) ..........................................
3.3.1 South African dividends ........................................................................
3.3.2 South African interest .............................................................................
3.3.3 Royalties ....................................................................................................
3.3.4 Foreign entertainers and sportspersons ................................................
3.3.5 Employment of non-residents outside the Republic
by the South African Government .........................................................
3.3.6 Owners or charters of a ship or aircraft ................................................
Exemptions based on the nature of the income (section 10) ............................
3.4.1 Pensions .....................................................................................................
3.4.2 Benefits ......................................................................................................
3.4.3 Amounts relating to employment .........................................................
3.4.4 Investment income ...................................................................................
3.4.5 Other exemptions .....................................................................................
Summary.................................................................................................................
Examination preparation ......................................................................................
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84
87
88
88
88
88
89
89
89
89
91
91
98
104
106
106
3.1 Introduction
If an amount complies with the definition of ‘gross income’, it is included in the
taxpayer’s gross income. In certain cases the Income Tax Act 58 of 1962 (the Act)
makes provision for certain types of income to be exempt (not subject to tax). In other
words, this income is free from normal tax. This income, which was included in gross
income, then has to be subtracted from a taxpayer’s gross income. Section 10 provides
for the list of the exempt income while section 10A provides for an exempt portion of
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3.1–3.2
purchased annuities, section 10B for foreign dividends and headquarter companies
and section 12T for an exemption of interest earned on tax free investments. When
calculating taxable income, you have to be sure that you subtract the exempt income
from the gross income to determine the income. Allowable deductions are then also
subtracted from the income to determine the taxable income.
Critical questions
While dealing with income, a person could be confronted with the following questions:
• What income is exempt from tax?
• Does the type of income determine whether it is exempt?
• Are some taxpayers exempt from paying tax?
• What is the difference between an exemption and a deduction?
Taxable income framework
Gross income (as defined in section 1)
Less:
Exempt income (sections 10, 10A and 12T)
Less:
Add:
Add:
Less:
Less:
Income (as defined in section 1)
Deductions section 11 – but see below; subject to section 23(m) and
assessed loss (section 20)
Taxable portion of allowances (section 8 – such as travel and subsistence
allowances)
Taxable income before taxable capital gain
Taxable capital gain (section 26A)
Taxable income before retirement fund deduction
Retirement fund deduction (section 11F)
Taxable income before donation deduction
Donations deduction (section 18A)
Taxable income (as defined in section 1)
R
xxx
(xxx)
xxx
(xxx)
xxx
xxx
xxx
xxx
(xxx)
xxx
(xxx)
xxx
3.2 Exemptions resulting from the status of the taxpayer
(section 10)
Certain taxpayers’ income is exempt from tax. In some instances, all receipts and
accruals are exempt, and in other cases only particular receipts and accruals are
exempt. The status or characteristics of the taxpayer is of importance. Section 10 of
the Act provides a list of tax exempt bodies and persons. These bodies or persons do
not pay normal tax on any of their receipts or accruals where applicable. Exempt
bodies or persons include
• the Government of the Republic – this includes national, provincial or local government (section 10(1)(a));
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3.2
• foreign governments – this includes any sphere of a foreign government as well as
an institution or body established by a foreign government that is involved with
official development assistance, and a multinational organisation providing foreign donor funding in terms of an official development assistance agreement (section 10(1)(bA));
• the receipts and accruals of certain international banks and monetary funds, namely:
– the African Development Bank;
– the World Bank (including the International Bank for Reconstruction and
Development and International Development Agency);
– the International Monetary Fund;
– the African Import and Export Bank;
– the European Investment Bank;
– the New Development Bank (section 10(1)(bB));
• an official of another government (for example foreign diplomats and ambassadors) who is not a resident of the Republic, including servants of that official (section 10(1)(c)(iii) and (iv));
• a salary and emoluments payable to a person of a foreign state who is temporarily employed in the Republic. This exemption must be authorised by an
agreement between the government of the foreign state and the Republic. The
agreement must provide that the receipts and accruals of the institution or body
are exempt. This exemption is also applicable to an institution, body or multinational organisation established by a foreign government (section 10(1)(c)(v));
• an institution, board or body (other than a company), a cooperative, close corporation, trust or water services provider, and a black tribal authority, community
authority, black regional authority or black territorial authority established under
any law and which, as its sole or principal object,
– conducts scientific, technical or industrial research;
– provides necessary or useful commodities, amenities or services to the State
(including any provincial administration) or the general public; or
– carries on activities, including the rendering of financial assistance designed
to promote commerce, industry or agriculture or a branch thereof (section 10(1)(cA));
• registered political parties (section 10(1)(cE));
• the owner or charterer of a ship or aircraft who is not a resident of the Republic if a
similar exemption is granted by the country (of which the person is a resident) to a
South African resident in similar circumstances (section 10(1)(cG));
• public benefit organisations (PBOs) (as defined in section 30). The PBO will, however, pay normal tax on business undertakings or trading activities which are not
approved public benefit activities. Certain non-trading activities and limited
trading activities are exempt. Public benefit organisations include: homes for
abandoned, abused or orphaned children, pre-primary schools offering approved
educare programmes, HIV organisations etc. (section 10(1)(cN));
• a recreational club approved by SARS in terms of section 30A and subject to certain
limitations (section 10(1)(cO));
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• taxpayers whose principal object it is to rehabilitate the environment surrounding
mines, quarries etc. (section 10(1)(cP));
• the receipts and accruals of a small business funding entity (SBFE) are exempt from
tax to the extent that it is received from:
– a business undertaking or trading activity that is integral and directly related to
the sole object of the SBFE and is carried out on a basis directed towards the
recovery of cost; or
– occasional fundraising activities of the SBFE, undertaken on a voluntary basis
without compensation; or
– another undertaking or activity and the receipts and accruals do not exceed the
greater of:
* 5% of the total receipts and accruals of the SBFE for the relevant year of
assessment; or
* R200 000
(section 10(1)(cQ));
• pension funds, pension preservation funds, retirement annuity funds, provident
funds, provident preservation funds, benefit funds, trade unions, chambers of
commerce or industries, local publicity associations, mutual loan associations or a
fidelity or indemnity fund (section 10(1)(d));
• associations (as defined in section 30B). A company, society or association of persons providing social and recreational amenities or facilities for its members or
promoting the common interests of members carrying on a particular kind of business, profession or occupation (section 10(1)(d)(iv));
• levies received by a body corporate established in terms of the Sectional Titles Act,
as well as the first R50 000 of other income received (section 10(1)(e)(i)(aa));
• levies received by share block companies, as defined in the Share Blocks Control
Act, as well as the first R50 000 of other income received (section 10(1)(e)(i)(bb));
• levies received by another association of persons (other than a company,
co-operative, close corporation and trust), including a non-profit company as
defined. Certain conditions must be met to the satisfaction of the Commissioner.
As with the previous two exemptions, the first R50 000 of other income received is
also exempt (section 10(1)(e)(i)(cc));
• foreign central banks that are not residents of the Republic (section 10(1)(j));
• the Council for Scientific and Industrial Research (section 10(1)(t)(i));
• the South African Inventions Development Corporation (section 10(1)(t)(ii));
• the South African National Roads Agency Limited (section 10(1)(t)(iii));
• the Armaments Corporation of South Africa Limited (Armscor) (section 10(1)(t)(v)) or
the income and accruals of a company during the period during which all the
issued shares are held by Armscor (section 10(1)(t)(vi));
• a traditional council or traditional community established or recognised in terms of
the Traditional Leadership and Governance Framework Act 2003 or a tribe as
defined in section 1 of the Act (section 10(1)(t)(vii));
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3.2–3.3
• a water service provider (section 10(1)(t)(ix));
• the Development Bank of Southern Africa (section 10(1)(t)(x));
• the compensation fund established by the Compensation for Occupational Injuries
and Diseases Act (section 10(1)(t)(xvi)(aa));
• the reserve fund established by the Compensation for Occupational Injuries and
Diseases Act (section 10(1)(t)(xvi)(bb));
• a mutual association licensed in terms of the Compensation for Occupational
Injuries and Diseases Act, to carry on the business of insurance of employers
against their liabilities to employees (section 10(1)(t)(xvi)(cc));
• the National Housing Finance Corporation with effect from 1 April 2016 (section 10(1)(t)(xvii));
• a subsidy or assistance payable by the State to the Small Business Development
Corporation Limited (section 10(1)(zE));
• an amount received by or accrued to in favour of a registered microbusiness (as
defined in the Sixth Schedule) from the carrying on of a business in the Republic,
but excluding investment income (as defined in paragraph 1 of the Sixth Schedule)
and remuneration (as defined in the Fourth Schedule) received by a natural person
(section 10(1)(zJ)); and
• an amount received by or accrued to in favour of a small, medium or micro-sized
enterprise from a small business funding entity (section 10(1)(zK).
An organisation is not exempt from tax merely because it is a non-profit organisation.
It must satisfy the provisions of section 10.
REMEMBER
• The listed organisations are exempt from normal tax in terms of section 10 and not
because they might be non-profit organisations.
• Some of the organisations or bodies only enjoy a partial exemption relating only to
certain income received.
• The provisions of section 10(1) only apply to normal tax.
3.3 Exemptions available to non-residents (section 10)
South African persons making payments to offshore investors (non-resident) must
deduct withholding taxes on amounts that involve dividends, interest and royalties.
Some of these non-residents might be subject to a double-tax agreement depending
on in which country they are considered residents. Double-tax agreements override
the enactment of the Income Tax Act and could reduce or eliminate withholding
taxes.
Where amounts have been subject to specific withholding taxes, the foreign person is
not subject to normal tax. The exemption of amounts of non-residents from normal
tax is discussed below.
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3.3.1 South African dividends
South African dividends as well as those distributed by a real estate investment trust
(REIT) received by non-residents are subject to dividend tax in terms of section 64D
and are exempt from normal tax in terms of section 10(1)(k). Dividends paid or declared by a headquarter company are not exempt for non-residents.
3.3.2 South African interest
Section 10(1)(h) provides that interest received by or accrued to a person who is not a
resident is exempt from normal tax (it is subject to withholding tax – refer to 7.4.1).
The exemption does not apply where:
• the non-resident is a natural person and was physically present in the Republic for
a period of more than 183 days (in total) during the 12 months prior to the date on
which the interest was received or accrued; or
• the debt from which the interest arises is effectively connected to a permanent
establishment of that person in the Republic.
When the above exclusions exist the non-resident will be exempt from withholding
tax. The normal tax exemption does not apply to interest received by a non-resident
in the form of an annuity.
3.3.3 Royalties
Royalties received are subject to withholding tax in terms of section 49A to 49G (refer
to 7.4). If the royalty is subject to withholding tax, it is exempt from normal tax (section 10(1)(l)).
A royalty is defined as the amount received or accrued in respect of:
• the use or right of use of or permission to use intellectual property (as defined in
section 23I);
• the imparting of or the undertaking to impart scientific, technical, industrial or
commercial knowledge or information, or the rendering of assistance in this
regard.
Royalties received on or after 1 January 2015 are exempt in terms of section 10(1)(l) if
they were subject to withholding tax in terms of section 49A.
The exemption does not apply where:
• the non-resident is a natural person and was physically present in the Republic for
a period of more than 183 days (in total) during the 12 months prior to the date on
which the amount was received or accrued;
• the intellectual property or the knowledge or the information in respect of which
that royalty is paid is effectively connected to a permanent establishment of that
person in the Republic.
3.3.4 Foreign entertainers and sportspersons
In terms of section 10(1)(lA), foreign entertainers and sportspersons who are nonresidents are exempt from normal tax if the amount that they receive is subject to tax
on foreign entertainers and sportspersons (sections 47A to 47K – refer to 7.4).
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3.3–3.4
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3.3.5 Employment of non-residents outside the Republic
by the South African Government
Section 10(1)(p) provides that an amount received by or accrued to:
• a person who is not a resident;
• for services rendered or work or labour done by them outside the Republic;
• for or on behalf of an employer in the national or provincial sphere of government,
or a municipality in the Republic, or a national or provincial public entity; and
• if not less than 80% of the expenditure of the entity is defrayed directly or
indirectly from funds voted by Parliament,
is exempt from taxation, provided that the amount is subject to income tax in their
country of residence. This exemption does not apply if this income tax is payable on
their behalf by the government or the other institutions referred to.
3.3.6 Owners or charters of a ship or aircraft
Section 10(1)(cG) provides that an amount received by or accrued to a non-resident
who owns or charters a ship or aircraft, is exempt from normal tax. The requirement
for the exemption is that a similar or equivalent exemption must be granted by the
country where the non-resident resides, for South African residents carrying on the
same type of business in that country.
3.4 Exemptions based on the nature of the income (section 10)
Certain types of income or portions of income are exempt from taxation as a result of
the nature of the income. The nature of the income, not the status of the taxpayer,
therefore determines whether this income is exempt from tax.
REMEMBER
• There is a difference between a deduction and an exemption. An exemption refers to
income that has been included in gross income in terms of the definition, but is not subject to tax because a specific paragraph of section 10 exempts it from being taxed. A
deduction is an amount that reduces taxable income. An exemption is limited to the
income received.
• A particular exemption can only be claimed by a taxpayer who actually earned that
particular type of income.
3.4.1 Pensions
Payable to State President, Vice State President or their widow or widower
In terms of section 10(1)(c)(ii), a pension payable to a person as State President, Vice
State President or their widows is exempt from tax. This exemption only applies to
presidents etc. who were not elected in terms of section 77 of the Constitution, that is
to say the previous regime.
War pensions and awards for diseases
In section 10(1)(g) provision is made for the exemption of an amount received as:
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• a war pension; or
• compensation in respect of diseases contracted in mining operations.
Disability pensions and compensation
In terms of section 10(1)(gA) and (gB), the following are exempt from tax:
• a disability pension paid in terms of section 2 of the Social Assistance Act;
• a compensation paid in terms of the Workmen’s Compensation Act or the Compensation for Occupational Injuries and Diseases Act;
• a pension paid with regard to the death or disability caused by any occupational
injury or disease contracted by an employee before 1 March 1994;
• compensation paid by an employer (over and above workmen’s compensation) in
respect of the death of an employee in the course of their employment. The exemption is limited to R300 000 (refer to 9.4.2); and
• compensation paid in terms of the Road Accident Fund.
Foreign pensions, lump sums and annuities
Pensions, lump sums and annuities from any source are included in gross income.
Section 10(1)(gC) exempts amounts received by or accrued to a resident:
• under the social security system of another country; or
• being a lump sum, pension or annuity received by or accrued to a resident from a
source outside the Republic in consideration for past employment outside the
Republic.
Amount taxed in
South Africa
= Lump sum received ×
No of years worked in
South Africa
Total period worked
REMEMBER
• This exemption only applies if the amount is received from a foreign retirement fund.
• The apportionment of annuities (section 9(2)(i)) will not apply to retirement annuity
funds as their payment is not linked to employment.
Section 9 of the Act includes rules on the source of certain types of income. The definition of gross income includes any amounts from a South African source. In terms
of foreign pensions and lump sums, section 9(2) provides that part of the amount
received is deemed to be from a South African source. The section states that where
services were rendered partly in South Africa and partly outside South Africa, the
portion of the pension that has a South African source is calculated according to the
following formula:
Amount received from a
South African source
=
Total amount ×
Total period of services rendered in
South Africa
Total period of services rendered
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Chapter 3: Income exempt from tax
3.4
3.4.2 Benefits
Funeral benefits
Section 10(1)(gD) exempts amounts received by or accrued to a resident who receives
a funeral benefit in terms of the Special Pensions Act 69 of 1996.
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Beneficiary fund awards
Section 10(1)(gE) exempts amounts awarded to a person by a beneficiary fund as
defined in the Pension Funds Act. These are funds for the benefit of a minor beneficiary without nominated suitable guardians.
Unemployment insurance benefit funds
A benefit or allowance payable in terms of the Unemployment Insurance Act is
exempt in terms of section 10(1)(mB).
Insurance policies
An amount received or accrued in respect of an insurance policy that covers the
policyholder or an employee of the policyholder for:
• death;
• disability;
• illness; or
• unemployment,
is exempt in terms of section 10(1)(gI) so long as the benefits are not paid or payable
by a retirement fund.
3.4.3 Amounts relating to employment
Employer-owned insurance policies
All amounts received from employer-owned insurance policies are included in gross
income (refer to 2.8.7). In terms of section 10(gG) and (gH), the amount received may
be exempt from income tax, depending on the type of policy. The proceeds might also
be subject to capital gains tax (refer to chapter 13).
Amounts received by the employee
Where an employee receives an amount from an employer-owned policy, either directly
or indirectly (via the employer), the amount is included in gross income (refer to
chapter 6). However, the amount is exempt in terms of section 10(1)(gG) provided the
premiums paid by the employer was considered a taxable fringe benefit.
Pure risk policies
The amount received is exempt if the premiums have been paid by the employer and
have been included in the taxable income of the employee as a fringe benefit. The
amount received is not exempt if the premiums were deductible from tax in terms of
section 11(a).
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Other policies
The amount received is exempt where an amount equal to all premiums paid has
been included in the income of the person receiving the amount as a fringe benefit
since the date that the policy was entered into.
REMEMBER
• If a dependant or nominee of an employee received the proceeds of an employer-owned
policy, the employee will be taxed on the amount.
• A risk policy is one that has no cash or surrender value.
Amounts received by the employer
Section 10(1)(gH) exempts an amount received by a policyholder in respect of a policy
that relates to:
• death;
• disablement; or
• illness,
of an employee, former employee, director or former director of the policyholder.
REMEMBER
• No exemption is available for the employer where the proceeds are received by the
employer but were intended for the benefit of the employee. In this situation the
employer can claim a deduction when paying the amount to the employee, provided
there is an obligation to pay the amount over.
• If the proceeds of a policy are part of an ‘approved’ group life plan associated with
pension or provident fund membership, they will be taxed under the retirement tax as a
lump sum or as an annuity and not in terms of the employer-owned policy rules.
Compensation plans
All premiums paid in respect of employer-owned investment policies (not pure risk)
for the benefit of employees must be included in the income of employees as a fringe
benefit. The result is that a cession or pay-out of the policy is exempt in the hands of
the employee, as long as ALL the premiums paid by the employer have been subjected
to tax as a fringe benefit in the hands of the employee.
Uniforms and uniform allowances
Section 10(1)(nA) provides that where an employee, as a condition of their employment,
• is required to wear a special uniform while on duty;
• which is clearly distinguishable from ordinary clothing,
the value of the uniform provided by the employer is exempt from taxation.
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Examples of uniforms provided by the employer that qualify for this exemption are
those of security guards, nurses and police officers.
An allowance made by the employer to the employee in lieu of the uniform is also
exempt, provided the amount is reasonable (refer to 6.6.1).
Example 3.1
Rose Turpin is employed by Blooming Gorgeous, a florist. Rose receives a uniform allowance of R1 000 per month because she is only allowed to wear pink clothes to work.
During the year Rose spent R8 900 on pink clothes. She has all her receipts.
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You are required to explain the income tax implications of the uniform allowance that
Rose received.
Solution 3.1
The uniform allowance of R12 000 (R1 000 × 12 months) will form part of Rose’s gross
income. It will not be exempt.
If uniforms and uniform allowances are exempt, why is Rose’s uniform
allowance subject to tax?
Relocation benefits
Section 10(1)(nB) determines that the benefit an employee receives, where their
employer paid the cost to relocate an employee from one place to another on the
appointment or termination of the employee’s employment, may be exempt from
tax. The following expenditure qualifies for the exemption:
• transporting the employee, their household and their personal possessions from
their previous place of residence to their new place of residence;
• the costs incurred by the employee in respect of the sale of their previous residence
and in settling in permanent residential accommodation at their new place of residence; or
• hiring residential accommodation in an hotel or elsewhere for the employee or
members of their household for a period ending 183 days after the transfer took
effect or after they took up appointment (if it was occupied temporarily).
The cost of these expenses must have been incurred by the employer or the employer
must have reimbursed the employee for them.
SARS allows the exemption of the following expenses in practice:
• bond registration and legal fees;
• transfer duty;
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• new school uniforms;
• replacement of curtains;
• motor vehicle registration fees; and
• telephone, water and electricity connections.
SARS will not allow for the deduction of a loss incurred by an employee on the sale of
their residence or architect’s fees relating to any alteration of a residence.
Example 3.2
XYZ Ltd transferred Anike Moody from Durban to Pretoria. Her basic salary is R8 700 per
month. XYZ Ltd paid for the transfer of her personal goods and made arrangements
for Anike and her family to stay in a hotel on their account for two months (61 days) during which Anike had to wait for the previous owners to move out of the house that she
purchased.
Anike puts in a claim for the following expenses to XYZ Ltd:
Description
Amount
R
1 New school uniforms purchased for her two children
2 Curtains made for her new house
2 180
12 800
3 Motor vehicle registration fees
480
4 Telephone, water and electricity connections
1 500
5 Loss on sale of previous residence
20 000
6 Agent’s fee on sale of previous residence
28 895
7 Transfer duty on new residence
30 000
95 855
You are required to indicate which portion of Anike’s claim will be exempt from tax.
Solution 3.2
The benefit Anike receives due to the fact that her employer paid for the transfer of her
personal goods as well as the hotel accommodation (in respect of herself and her family)
for two months qualifies for the exemption in terms of section 10(1)(nB).
Items 1 to 4 are considered to be settling-in costs and the amount that Anike is reimbursed will be exempt from normal tax. Item 5 is a taxable benefit and if XYZ Ltd pays
this amount to Anike, it is taxable in full. Items 6 and 7 qualify again for the exemption in
respect of relocation.
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Chapter 3: Income exempt from tax
3.4
REMEMBER
• Only actual expenses that were either incurred by the employer or reimbursed by the
employer to the employee will qualify for an exemption. Any allowance paid in respect
of relocation is fully taxable.
Fringe benefits
The provisions of section 10(1)(nC) (broad-based employee share plan), (nD) (equity
instruments), and (nE) (share incentive scheme), dealing with taxable fringe benefits,
are discussed in chapter 6.
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Employment outside the Republic
Officer or crew of a ship
Section 10(1)(o)(i) exempts any remuneration derived by a person as an officer or
crew member of a ship engaged in:
• the international transportation for reward of passengers or goods; or
• prospecting, exploration or mining.
The remuneration is only exempt if the officer or crew member is employed solely for
the purpose of the passage of such ship and was outside the Republic for a period or
periods exceeding 183 full days in aggregate during the year of assessment.
Officer or crew of a South African ship
With effect from 1 April 2014, section 10(1)(o)(iA) exempts any remuneration derived
by a person as an officer or crew member of a South African ship (as defined in
section 12Q) that is mainly engaged in:
• international shipping as defined in section 12Q; or
• fishing outside the Republic.
Foreign services
Section 10(1)(o)(ii) provides for the exemption of up to R1 250 000 in respect of:
• salary, leave pay, wages, overtime pay, bonuses, gratuities, commissions, fees,
emoluments or allowances;
• including any fringe benefit as per the Seventh Schedule; and
• including any subsistence allowance, travel allowance, holder of public office
allowance;
• as well as any taxable amounts derived from broad-based employee share plans
(section 8B) and a taxable amount arising on the vesting of equity instruments (section 8C),
derived by an employee in respect of services rendered outside the Republic for or on
behalf of an employer, if the employee was outside the Republic
– for a period or periods exceeding 183 (117 in the 2021 year of assessment) full
days in aggregate during any 12-month period commencing or ending during a
year of assessment; and
– for a continuous period exceeding 60 full days during such period of 12 months.
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TEMPORARY
CHANGE
A Student’s Approach to Income Tax/Natural persons
3.4
• For the 2021 year of assessment this exemption was applicabhle if the
taxpayer was outside the Republic for a period or periods exceeding 117
full days in aggregate.
This exemption does not apply to remuneration derived in respect of the holding of a
public office or from services rendered or work or labour performed for or on behalf
of an employer in government (national, provincial or local); or a constitutional
institution as listed in the Public Finance Management Act (Schedule 1); or a public
entity listed in Schedule 2 or 3 of the above Act; or a municipal entity as defined in
the Local Government: Municipal Systems Act.
A proviso to this section provides that, for the purposes of this section, where remuneration is received by or accrues to an employee during a year of assessment for
services that were rendered by them in more than one year of assessment, the remuneration is deemed to have accrued evenly over the period in which those services
were rendered.
A person in transit between two places outside the Republic who has not entered the
Republic through a port of entry as defined in the Immigrations Act 13 of 2002 is
deemed to be outside of the Republic.
Scholarships and bursaries
A bona fide scholarship or bursary granted to enable or assist a person to study at a
recognised educational or research institution is exempt from normal tax in terms of
section 10(1)(q). Section 10(1)(qA) exempts the same but for persons with a disability.
‘To study’ refers to the formal process whereby the person to whom the scholarship
or bursary has been granted gains or enhances their knowledge, intellect or expertise.
It is not a requirement that a degree, diploma or certificate be awarded on completion
of the course. Scholarships and bursaries awarded solely on merit are always exempted (and not only for employees).
Interpretation Note No. 66, which deals with the taxation of scholarships and bursaries, provides the following guidelines:
• Financial assistance provided in terms of a bona fide scholarship or bursary could
include the cost of:
– tuition fees;
– registration fees;
– examination fees;
– books;
– equipment relating to the studies;
– accommodation (other than at home);
– meals or vouchers; and
– transport.
• A direct payment of fees to an institution that is included in the value of the bursary, which must be granted to study at a recognised educational or research institution, including a foreign research institution, if the qualification obtained is
recognised in South Africa.
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3.4
Personal study loans obtained from financial institutions or employers are not
included in this exemption as they are not gross income.
REMEMBER
• Scholarships and bursaries granted to a relative of an employee who retired are subject
to the same conditions as bursaries granted to a relative of a current employee.
• Research is not considered to be studying and will not qualify for an exemption in
terms of this section.
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• A scholarship or bursary that is granted subject to repayment if all the conditions
stipulated are not met will be treated as a bona fide bursary until non-compliance
occurs. In the year the non-compliance occurs, a taxable fringe benefit will arise.
• A reward or reimbursement to an employee for a qualification or for having successfully
completed a course or to assist in covering private study expenses is taxable remuneration.
Scholarships or bursaries paid to non-employees
These scholarships and bursaries are awarded based on merit and are not subject to
normal tax. These bursaries are not confined to employees or relatives of employees.
Employers to employees
In terms of section 10(1)(q) and (qA), where the scholarship or bursary is granted by
an employer (or associated institution) to an employee, it will only be exempt where
the employee agrees to reimburse the employer if they fail to complete their studies
for reasons other than death, ill-health or injury.
Employers to relatives of employees
Persons without disabilities
Bursaries or scholarships granted to relatives of an employee are exempt up to an
amount of:
• R20 000 in respect of grade R to grade 12 (in terms of the South African Schools
Act) or a qualification to which an NQF level 1í4 has been allocated;
• R60 000 in respect of a qualification to which an NQF level 5 up to and including
10 has been allocated.
Persons with disabilities (from 1 March 2018)
Where the bursary or scholarship is granted to a person with a disability who is a
member of the family of the employee (in respect of whom the employee is liable for
family care and support), the bursary is exempt up to an amount of
• R30 000 in respect of grade R to grade 12 (in terms of the South African Schools
Act) or a qualification to which an NQF level 1í4 has been allocated;
• R90 000 in respect of a qualification to which an NQF level 5 up to and including
10 has been allocated.
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‘Disability’ is defined in section 6B and
means a moderate to severe limitation of any person’s ability to function or perform
daily activities as a result of a physical, sensory, communication, intellectual or mental
impairment, if the limitation—
(a) has lasted or has a prognosis of lasting more than a year; and
(b) is diagnosed by a duly registered medical practitioner in accordance with criteria
prescribed by the Commissioner.
Where the employee has a remuneration proxy of more than R600 000, the full scholarship or bursary will be taxed.
‘Remuneration proxy’ is defined as the remuneration derived by the employee in the
previous year of assessment (excluding the cash equivalent of residential accommodation).
If the employee was not employed for a full year in the previous year, the remuneration proxy will have to be determined in the ratio that 365/366 days bears to the
period of employment.
With effect from the 2022 year of assessment, where the remuneration proxy is subject to any salary sacrifice, the scholarship/bursary will be taxed.
A salary sacrifice occurs when an employee’s cash salary is reduced in exchange for a
non-cash benefit. Where remuneration is reduced because the employer grants the
scholarship/ bursary, the receipt of the scholarship/bursary will not be exempt.
3.4.4 Investment income
South African interest
In terms of section 10(1)(i ), a taxpayer (only natural persons) under the age of 65 is
entitled to an exemption of up to R23 800 and a taxpayer over the age of 65 is entitled
to an exemption of up to R34 500 against interest accrued from a source in the Republic (excluding interest from tax free investments).
Interest and dividends received from tax free investments (section 12T)
Interest received or accrued from a tax free investment (as defined in section 12T) is
exempt from income tax.
A tax free investment must meet the following four requirements:
• It must be issued by:
– a bank;
– a long-term insurer;
– a portfolio of a collective investment scheme in property;
– a portfolio of a collective investment scheme in securities; or
– the government of the Republic (national sphere).
• It must be administered by:
– an authorised user; or
– an administrative FSP (financial service provider).
• It must be held by:
– a natural person;
– the deceased estate; or
– the insolvent estate of a person.
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• It must meet the requirements of a tax free investment in accordance with either:
– the Policyholder Protection Rules under the Long-term Insurance Act; or
– the regulations contemplated in the Collective Investment Schemes Control Act.
An amount received or accrued from a tax free investment by a natural person is
exempt from normal tax. The disposal of a tax free investment will also not be subject
to capital gains tax.
The amount contributed to these investments (in total) is limited to R36 000 per year
of assessment and R500 000 in total (excluding reinvestment of interest). Where a
person exceeds these limits, a penalty of 40% on the excess contribution will be levied
as deemed normal tax payable.
Example 3.2
In each of the following case studies you are required to calculate the taxpayer’s ‘income’.
Taxpayer
A
B
C
D
Age
48
35
76
68
–
R2 900
R3 000
R600
R15 000
R24000
R27 000
R39 500
–
–
1 900
–
Foreign interest earned
South African interest earned (not from
a tax free investment)
Interest received – tax free investment
Solution 3.2
Gross income
Foreign interest
South African interest
Interest received – tax free investment
Less: Exempt income
Tax free investment interest
South African interest
Income
A
B
C
D
R
R
R
R
–
15 000
–
2 900
24 000
–
3 000
27 000
1 900
600
39 500
–
15 000
26 900
31 900
40 100
(15 000)
(23 800)
(1 900)
(27 000)
(34 500)
nil
3 100
3 000
5 600
Taxpayer A in the above question would like to know the following:
1. Why is their South African interest included in the gross income if it is
exempt?
2. A taxpayer is entitled to R23 800 exemption in respect of interest, why
did they only receive an exemption of R15 000?
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Distribution from a portfolio of collective investment scheme
A distribution, received by or accrued to a holder of a participatory interest in a
portfolio of a collective investment scheme in securities is exempt from tax if the
amount was subject to normal tax in terms of section 25BA in the hands of the portfolio.
Dividends (other than foreign dividends and headquarter company dividends)
In terms of section 10(1)(k), dividends (other than dividends paid or declared by a
headquarter company) received by or accrued to a taxpayer are exempt from normal
tax. Some dividends, however, are not exempt (remain taxable) according to this
section. The following dividends are not exempt:
• dividends that are part of an amount that is paid in the form of an annuity;
• a dividend (other than dividends paid to a non-resident or as consideration for the
acquisition of a share) declared by a real estate investment trust (REIT) or a controlled company in respect of the REIT. A REIT is a resident company if its shares
are listed on the JSE. A controlled property company is a subsidiary of a REIT.
From 1 January 2019 a REIT could also be listed on one of the four new South African stock exchanges if they meet certain requirements;
• a dividend from a restricted equity instrument (as defined in section 8C). Where
the restricted equity instrument constitutes an equity share or an equity instrument
(as defined) or an interest in a trust, the dividend is exempt. Excluded from this
provision are dividends that are derived from or constitute:
– an amount that the company used as consideration for a share in that company;
– an amount received or accrued in the course (or anticipation of) winding up,
liquidation, deregistration or final termination of a company; or
– an equity instrument that is not a restricted equity instrument (as defined in
section 8C) but will on vesting, become subject to section 8C;
• certain dividends received by companies.
Foreign dividends and headquarter company dividends (sections 1 and 10B(1))
A foreign dividend is an amount paid by a company that is not a resident, in respect
of a share in that company. In terms of section 10B foreign dividends and dividends
paid or declared by head-quarter companies are subject to certain exemptions. A
reference to a foreign dividend includes a headquarter company dividend, as a headquarter company is treated as a foreign company for normal tax purposes.
A headquarter company is a resident company where:
• each of the shareholders holds at least 10% of the equity shares of the company;
• 80% or more of the assets of the company are attributable to an interest in the
equity shares of a foreign company;
• the company holds at least 10% of the equity shares of a foreign company; and
• more than 50% of the gross income must consist of rental, dividend interest, royalties or service fees paid by a foreign company if the gross income of the company
exceeds R5 million.
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Full exemptions (section 10B(2))
All foreign dividends are included in full in gross income. However, the following
dividends are exempt:
• Participation exemption (section 10B(2)(a)) – the foreign dividend is exempt if
received by a person who holds at least 10% of the equity share and voting rights
in the company declaring the foreign dividend. This exemption only applies when
the dividend is paid in respect of an equity share.
• Country-to-country participation exemption (section 10B(2)(b)) – a foreign company
is allowed to claim an exemption on a foreign dividend paid by another foreign
company which is in the same country. This exemption is only applicable to companies.
The participation exemption and the country-to-country participation exemption
do not apply to the foreign dividend to the extent that it is deductible by the foreign company in the determination of their taxable income in the country where
they have their place of effective management.
• Previously taxed exemption (section 10B(2)(c)) – foreign dividends that are
received by a resident from profits that have already been taxed in terms of section 9D, are exempt.
• JSE-listed shares (section 10B(2)(d)) – foreign dividends (not dividends in specie)
paid by companies that are listed on the JSE are taxed in terms of dividends tax
and are therefore not subject to normal tax.
REMEMBER
• An equity share is a share in a company, excluding a share that does not have the right
to participate beyond a specified amount in a distribution (of dividends or of capital).
This means that, in order to be an equity share, there must be an unlimited right to participate in company distributions.
Partial exemption (section 10B(3))
If the foreign dividends received exceed the exemptions above or the exemptions
listed above do not apply, there is a partial exemption that is applied to the remaining
‘taxable dividends’. The exemption for individuals and trusts is calculated as the
foreign dividends received multiplied by 25 / 45.
REMEMBER
• The foreign dividend exemptions (discussed above) do not apply to an annuity or to
any amounts paid out of previously exempt dividends.
Example 3.3
Simon Tshabalala earned foreign dividends of R2 400. They are not subject to any of the
specific exemptions.
You are required to calculate the taxable portion of the foreign dividends.
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A Student’s Approach to Income Tax/Natural Persons
3.4
Solution 3.3
Gross income: Foreign dividends received
Less: Section 10B(3) exemption (R2 400 × 25 / 45)
R
2 400
(1 333)
1 067
Taxable portion
In terms of section 23(q), deductions in respect of expenditure incurred in the production
of income from foreign dividends are not allowed. Residents are also entitled to a rebate
or credit for direct foreign taxes paid in respect of foreign dividends (refer to chapter 5).
Capital element of purchased annuity
The definition of gross income specifically includes the annuity amount calculated in
terms of section 10A(1) in the gross income of the purchaser.
This exemption ensures that the capital portion (that was already subject to tax) of a
purchased annuity is exempt from tax.
The capital portion is calculated in terms of the following formula:
A
Y =
×C
B
where:
Y is the capital element to be calculated;
A is the total cash price payable by the purchaser to the insurance company in
terms of the annuity contract;
B is the sum of all the expected returns over the term of the contract; and
C is the total receipt during the current year of assessment.
Once the capital portion has been calculated, it is deducted from the amount received
in terms of the annuity and the balance (or return on the amount that was invested) is
taxable.
Example 3.4
On 1 August 2019, when Chris Gray was 56 years old, he purchased an annuity from an
insurer. He paid R250 000 for the annuity and receives a monthly annuity of R2 000 from
1 September 2019 for the rest of his life. His life expectancy, according to the tables in
Appendix C, is 17,18 years (based on his age when the annuity contract was concluded).
You are required to calculate the taxable amount of the annuity received for the current
year of assessment.
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Solution 3.4
The total expected returns from the purchased annuity amount to
R2 000 × 12 months × 17,18 years = R412 320.
In the formula
A
Y=
×C
B
A = R250 000 (total cost price)
B = R412 320 (expected returns)
C = R2 000 × 12 months = R24 000 (receipts in current year)
R250 000
Y=
× R24 000
R412 320
Y = R14 551,80
The taxable portion of the annuity is therefore:
Total amount received for the year – capital portion (as calculated)
= R24 000 – R14 551,80
= R9 448,20
Where the capital portion of the annuity is indicated in terms of section 10A(4) as a percentage, the percentage is
R250 000
× 100 = 60,63%
R412 320
Alternatively, the tax-free portion can be calculated as follows:
60,63% of R24 000 = R14 551,20
The portion of the annuity that will be included in Chris’ gross income for the current year
of assessment is R9 448,80 (R24 000 – R14 551,20).
Note
You may find small differences due to rounding.
Why is the current year of assessment’s taxable amount for the annuity not
reduced pro rata?
REMEMBER
Calculating the expected returns of an annuity:
• If the annuity is purchased for a fixed term, that is to say ten years, you must use ten
years when calculating the expected return.
• If the annuity is purchased for the rest of the purchaser’s life, you must use the purchaser’s life expectancy according to the tables in Appendix C, based on his age when
the annuity contract was concluded.
• If the annuity is purchased in a foreign currency and the annuity is payable in a foreign
currency, the exempt capital portion of the annuity must first be determined in the foreign currency. The exempt portion must then be converted to rand using the average
exchange rate.
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A Student’s Approach to Income Tax/Natural Persons
3.4.5
3.4
Other exemptions
Gratuity received from public funds
Section 10(1)(r) exempts a gratuity (other than a leave gratuity) received by or
accrued to a person from public funds on their retirement from an office or employment under the government, the Railway Administration, a provincial administration, or from the funds of the Land and Agricultural Bank of South Africa upon
retirement as a member of the board of that bank, which the Treasury declares to be
free of tax.
Alimony received
Section 10(1)(u) provides that an amount received by or accrued to a person from
their spouse or former spouse by way of alimony, allowance or maintenance for
themselves in terms of an order of judicial separation or divorce is exempt from
taxation if the proceedings were instituted after 21 March 1962 or in terms of an
agreement of separation entered into after that date.
In ITC 1584 56 SATC 63, it was held that the provisions of section 10(1)(u) also apply
to exempt amounts paid by the estate of a deceased former spouse in pursuance of an
obligation to pay maintenance.
Government grants
In terms of section 12P, an amount received as a government grant, where the grant
scheme is listed in the Eleventh Schedule (updated from time to time), is deemed not
to be received or accrued to the taxpayer, effectively exempting it from income tax. If
the grant refunds the taxpayer for costs incurred to acquire:
• trading stock, the deductible amount (section 11(a)) must be reduced by the
amount of exempt grant received;
• a depreciable asset, the cost used to calculate the depreciation on must be reduced
by the exempt amount;
• a capital asset, the base cost of the asset must be reduced by the exempt amount.
The rules do not apply if the government incurred the expenses. If the grant received
is more than the deduction that can be claimed in the current year of assessment, the
balance is carried forward to the following year of assessment as if it were received in
that year.
Amounts received by or accrued to a person from the government, is exempt:
• where the amount was for performance of that person in terms of a Public Private
Partnership; and
• to the extent that the person is required in terms of the Public Private Partnership
to spend that amount on improvements on land or to buildings owned by any
sphere of government.
In terms of section 10(1)(y) the Minister of Finance will identify government grants to
be tax exempt in the Government Gazette. The list is provided in the Eleventh Schedule.
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Chapter 3: Income exempt from tax
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Example 3.5
Ms Nkele Matuang (40 years of age), who is resident in the Republic, received the following amounts during the year of assessment:
R
Compensation in terms of the Workmen’s Compensation Act for an injury suffered while on duty
30 000
Unemployment Insurance Fund compensation for the period 1 July to
31 December while she was unemployed
13 900
Salary for the period 1 January to 28 February, as a trainee game ranger
25 600
Uniform allowance for the period 1 January to 28 February in respect of a distinctive uniform she was required to wear while on duty
1 600
During this period she received a scholarship from her employer to study for a
game ranger’s certificate on a part-time basis at the local University of Technology (she has to pay the scholarship back if she does not pass the course)
15 000
When she was first employed, her employer paid the cost of transferring her
personal belongings to her place of employment, as well as the cost of her hotel
for the first month. The value of these amounted to
26 000
Taxable foreign dividends
3 800
Interest on a South African investment (not a tax free investment)
20 000
Nkele’s gross income amounts to
135 900
You are required to calculate Nkele’s income for the current year of assessment.
Solution 3.5
The following amounts are exempt from normal tax:
R
Compensation in terms of the Workmen’s Compensation Act –
section 10(1)(gB)
Benefit in terms of the Unemployment Insurance Act 63 of 2001 –
section 10(1)(mB)
Uniform allowance for a special uniform to be worn while on duty –
section 10(1)(nA)
Bona fide scholarship to study at a recognised educational institution –
section 10(1)(q)
Cost of transfer paid by her employer, as well as the cost of temporary
accommodation (up to 183 days permitted) – section 10(1)(nB)
Foreign dividends (R3 800 × 25 / 45) – section 10B(3)
Interest – she is entitled to an exemption of up to R23 800 as she is
under 65 years of age – however, she only received R20 000, therefore the full
amount is exempt – section 10(1)(i)
30 000
13 900
1 600
15 000
26 000
2 111
20 000
108 611
Nkele’s income in terms of the definition in section 1 of the Act is
therefore determined as follows:
Gross income
135 900
(108 611)
Less: Exempt income
27 289
Income
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3.4–3.6
REMEMBER
• Amounts that have been included in gross income can be exempt from normal tax
either in terms of the nature of the taxpayer or the type of income that is received.
• In order to exempt an amount, it must have been included in gross income.
• You can never exempt more than the taxpayer has included in their gross income.
• There is a difference between an exemption and a deduction in the sense that to be able
to claim an exemption you have to earn the particular type of income. By contrast, a deduction depends on the nature of the expense.
3.5 Summary
Although an amount is included in gross income in terms of the definition, in certain
cases, owing to its nature, it is exempt from taxation in terms of the specific provisions discussed in this chapter. This chapter focuses mainly on the exemptions based
on the nature of the income, for example interest, dividends, bursaries, gratuities etc.
In terms of the Act, a taxpayer’s income is their gross income less exempt income. The
concept of income is important as the deduction of certain expenses depends on the
amount of the taxpayer’s income.
In the questions that follow, the principles as discussed in the chapter are highlighted.
3.6 Examination preparation
Question 3.1
The following taxpayers are uncertain whether or not the amounts listed below constitute
exempt income:
1.
Simon Shabalala is a retired miner. During the current year of assessment he received
the following amounts:
R
Pension received for past services rendered
Pension received for a disease contracted during employment at the mine
120 000
60 000
The R60 000 is payable under law relating to the payment of compensation for diseases
contracted by persons employed in the mining industry.
2.
Major Peter Sinclair received a war pension of R12 000 for the current year of assessment.
3.
Kirsh Naidoo (40 years old) received R24 800 interest from a bank investment
account and reinvested the full interest amount during the current year of assessment.
She also received interest of R800 from a tax free investment during the current year
of assessment.
continued
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Chapter 3: Income exempt from tax
3.6
4.
During 2000, Pieter and Sandra Pietersen separated and divorced. Pieter pays alimony
to Sandra to finance her living costs. Pieter passed away on 31 July 2021. Prior to his
death, he had created a trust to ensure that Sandra would still receive alimony after
his death.
During the current year of assessment, she received the following amounts:
R
Alimony received from Pieter for the period before his death
Alimony received from the trust
40 000
56 000
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You are required to:
Discuss whether the above amounts are exempt from normal tax.
Answer 3.1
Discussion of whether the amounts are exempt from tax.
1. Simon Shabalala will be taxed on the pension received for past services rendered as it
is related to services rendered. The pension in respect of a disease contracted in
mining operations will be exempt in terms of section 10(1)(g).
2. In terms of section 10(1)(g), Major Peter Sinclair will not be taxed on the war pension
received, as this type of income is exempt from tax.
3. Kirsh Naidoo will be taxed on the interest received. In terms of section 10(1)(i), a
taxpayer under the age of 65 is entitled to an exemption of R23 800, thus Kirsh will be
taxed on R1 000 (R24 800 – R23 800) for the current year of assessment.
She will not be taxed on the interest from the tax free investment.
4. In terms of section 10(1)(u), the alimony received by Sandra Pietersen from her former
spouse and the trust (after his death) will be exempt from tax.
Additional questions for this chapter are available electronically at
www.myacademic.co.za/books
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General deduction
formula
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4
Gross
income
General
deduction
formula
–
Exempt
income
Specific
deductions
–
Deductions
=
Capital
allowances
Taxable
income
Tax
payable
Deductions
for
individuals
Page
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
Introduction .........................................................................................................
Carrying on a trade (section 1) ..........................................................................
4.2.1 General ....................................................................................................
4.2.2 Pre-trade expenses .................................................................................
4.2.3 Expenses after trading has stopped ....................................................
The general deduction formula (sections 11(a) and 23) .................................
Expenditure and losses .......................................................................................
Actually incurred ................................................................................................
Year of assessment ..............................................................................................
In the production of income ..............................................................................
Not of a capital nature ........................................................................................
Laid out or expended for the purposes of trade (section 23(g)) ....................
Prohibited deductions (section 23)....................................................................
Specific transactions ............................................................................................
Summary ..............................................................................................................
Examination preparation ...................................................................................
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110
110
113
113
113
114
115
120
121
130
136
136
140
144
145
A Student’s Approach to Income Tax/Natural Persons
4.1–4.2
4.1 Introduction
In the process of determining the taxable income, certain expenses incurred are
deducted from the income (refer to chapter 1.4 for the framework for calculating
taxable income). If you are in the process of calculating a taxpayer’s taxable income,
you will have to know which amounts of the expenditure may be deducted, as a
taxpayer would like to be able to deduct as much of their expenses as possible.
Section 11 of the Act makes provision for the deduction of expenses from a taxpayer’s
taxable income. Section 11(a) contains the requirements for deductions of a general
nature, while section 11(c) to (x) makes provision for specific deductions. Before any
of the provisions contained in section 11 can be applied, the Act specifies that the
taxpayer must be carrying on a trade.
Critical questions
When a person deals with allowable deductions, the following questions arise:
• When is an expense deductible for tax purposes?
• May the taxpayer decide when such an amount can be deducted?
• In which circumstances is an expense of a capital nature?
• What happens if the amount is not deductible in terms of the general deduction
formula?
• Are there expenses that may never be deducted for tax purposes?
4.2 Carrying on a trade (section 1)
4.2.1 General
As stated above, for an amount to be deductible in terms of section 11 of the Act, the
taxpayer must be carrying on a trade.
Legislation:
Section 11: Preamble
for the purpose of determining the taxable income derived by any person from carrying on
any trade, there shall be allowed as deductions from the income of such person so derived
...
The deductions provided for in section 11 are restricted to expenditure incurred in
carrying on a trade. ‘Trade’ is defined in section 1 of the Act.
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Chapter 4: General deduction formula
4.2
Legislation:
Section 1: Interpretation
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‘Trade’ every profession, trade, business, employment, calling, occupation or venture,
including the letting of any 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.
Although this definition is very wide, it does not include all forms of incomeproducing activities. Passive investment activities are not considered to be trading
activities. For example, activities producing interest, dividends, annuities and pensions are not included in the definition of trade. The extent of the activities might,
however, indicate that you are carrying on a trade. When a taxpayer speculates in
securities or shares, for instance, this constitutes carrying on a trade and even if the
scale of investment in securities or shares is not very extensive, it may amount to
carrying on a trade (ITC 770 (1953) 19 SATC 216).
The earning of interest by a taxpayer other than a moneylender does not constitute
‘carrying on a trade’. In theory, no deduction will be allowed for an expense incurred
in earning the interest income. In Practice Note No. 31, however, the Commissioner
indicated that they will allow the deduction of interest expenditure incurred in
earning the interest income, but limited to the amount of the interest income. The
interest expenditure cannot create a loss.
A taxpayer may also carry on several trades during the year of assessment, but, in
order to determine ‘taxable income’, the income or losses from each trade must be
aggregated. The insertion of section 20A limits the setting-off of losses of different
trades in certain circumstances of a natural person. This limitation only applies to
natural persons. This aspect is discussed in detail in chapter 5.
The definition of trade includes a ‘venture’, which has been held to be a transaction in
which a person risks something with the object of making a profit, for example
financial or commercial speculation (ITC 368 9 SATC 211).
There is some confusion concerning the question of whether a profit motive is necessary before it can be said that a taxpayer is carrying on a trade. In ITC 1292 41 SATC
163, Judge Myburgh said that the test for deductibility of expenditure is ‘the real hope
to make a profit. Such hope must not be based on fanciful expectations but on
reasonable possibility’. In CIR v De Beers Holdings (Pty) Ltd 46 SATC 47, it was held
that ‘the absence of a profit does not necessarily exclude a transaction from being part
of a taxpayer’s trade’ and in ITC 1274 40 SATC 185, the court held that there is no
requirement in our Income Tax Act that the taxpayer concerned should be aiming at a
net profit in their trading operations. A trader may deliberately sell articles at a loss
‘for business purposes’.
In carrying on a trade, therefore, there should preferably be a profit or an expectation
of profit. If a transaction is entered into with the purpose of not making a profit or
in fact registering a loss, it must then be shown to have been so connected with the
pursuit of the taxpayer’s trade so as to justify the conclusion that, despite the lack
of profit motive, the moneys paid out under the transaction were wholly and
exclusively expended for the purposes of trade (CIR v De Beers Holdings). The court
will look at all the facts and circumstances in deciding the issue.
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A Student’s Approach to Income Tax/Natural Persons
4.2
In Burgess v Commissioner for Inland Revenue 55 SATC 185 the court provided some
guidelines for determining whether a person is busy with trading activities.
CASE:
Burgess v Commissioner for Inland Revenue
55 SATC 185
ruled that if the actions of a taxpayer,
when viewed in isolation, constitute the
carrying on of a trade, he would not cease
carrying on that trade merely because one
of his purposes, or even his main purpose,
was to obtain some tax advantage. If he
carries on a trade, his motive for doing so
is irrelevant. The definition of ‘trade’
should be given a wide interpretation and
includes a ‘venture’, being a transaction in
which a person risks something to make a
profit. The taxpayer clearly undertook a
venture in that he laid out the money
required to obtain a bank guarantee and
risked the amount of the guarantee in the
hope of making a profit – it was a speculative enterprise par excellence. The investment in the insurance policy did not constitute a capital asset – the scheme was a
short-term speculation with borrowed
money and the intention was to surrender
the policy after a year or two so as to
realise the appreciation of its underlying
assets.
Facts: The taxpayer operated a scheme
where it borrowed money from a bank and
invested in an insurance company for a
short period in a single-premium pure
endowment policy. The stock market
crashed and the value of the fund plummeted, resulting in the accounts reflecting
a loss due to interest payable to the bank.
The taxpayer had provided a bank guarantee and the cost thereof was the only
outlay on the part of the individual investor. The policy was a non-standard policy and the proceeds on maturity fell
within the investor’s gross income. One of
the selling points of the scheme was that it
provided certain tax advantages. No part
of the structures could be described as
artificial, as each one was designed for a
commercial purpose. The taxpayer had
testified that the tax savings generated by
the scheme did not play a substantial part
in his decision to participate in the scheme
and that it was the prospect of profit as
contained in the brochure’s profit forecasts
that had attracted him.
Principle: In order to claim an amount
under section 11, it is necessary for a taxpayer to be ‘carrying on a trade’. The fact
that there is no continuity, or there is a lack
of a profit motive or risk, does not necessarily mean that a trade is not being carried on. However, the taxpayer’s burden of
proof increases when one or the other
element is not present.
Judgment: No part of the structures was
artificial as each step was designed for a
commercial purpose. Although there was
an expected benefit by reason of the tax
deferment (namely that interest became
due before any profit was realised), it was
not contrived in an artificial way. The courts
While the ‘facts and circumstances’ test is generally appropriate, special concern
exists when taxpayers disguise private consumption. Private consumption can often
masquerade as a trade (that is to say it is in fact a hobby) so that individuals can set
off these expenditures and losses against other income (usually salary or professional
income) (refer to chapter 5).
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Chapter 4: General deduction formula
4.2–4.3
4.2.2 Pre-trade expenses
Expenses are normally only deductible once the taxpayer has commenced trading.
Section 11A does, however, allow expenses incurred before the trade commenced to
be deducted once the taxpayer starts trading.
Three requirements must be met before these pre-trade expenses can be deducted in
the year that trading commences:
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• The expenditure or loss must have been actually incurred by that person prior to the
commencement of and in preparation for carrying on that trade.
• Had the expenditure or loss been incurred after that person commenced carrying on
that trade, it must be determined if the expenditure or loss would have been allowed as
a deduction in terms of
– section 11 (other than amounts which in terms of another provision are allowed
to be deducted from income (section 11(x)),
– section 11D (deductions in respect of scientific or technological research and
development), or
– section 24J (incurral and accrual of interest).
• The expenditure or losses must not already have been allowed as a deduction in that
year or any previous year of assessment.
If the above requirements are met, the taxpayer will be able to claim all such expenses
that were incurred prior to the commencement of the trading activities, in the year
that trading commences. If those expenses, however, exceed the income from that
trade, the deduction of the expenses will be limited to the income of that trade. The
excess expenditure will be carried forward to the following year.
4.2.3 Expenses after trading has stopped
Where a taxpayer is in the process of being liquidated, the activities surrounding
liquidation are not considered to be the carrying on of a trade. In Robin Consolidated
Industries Ltd v CIR 59 SATC 199, the court found that the sale of trading stock during
liquidation is not the carrying on of a trade.
REMEMBER
• Passive investment activities that produce interest and dividends do not form part of
the carrying on of a trade.
• A profit motive is not a prerequisite for the carrying on of a trade.
• If no trade is carried on, there can be no deduction in terms of section 11.
4.3 The general deduction formula (sections 11(a) and 23)
Deductions of a general nature need to fulfil the requirements set out in section 11(a). This
section, when read with section 23, is referred to as the general deduction formula:
• section 11(a) sets out the requirements for what may be deducted (positive test); and
• section 23 stipulates what may not be deducted (negative test).
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A Student’s Approach to Income Tax/Natural Persons
4.3–4.4
Legislation:
Section 11(a)
[f]or the purpose of determining the taxable income derived by any person from carrying
on any trade, there shall be allowed as deductions from the income of such person so
derived . . . expenditure and losses actually incurred in the production of the income, provided such expenditure and losses are not of a capital nature.
This so-called ‘general deduction formula’ will be broken down into its components,
each of which will be discussed briefly:
• carrying on a trade (refer to 4.2);
• expenditure and losses (refer to 4.4);
• actually incurred (refer to 4.5);
• during the year of assessment (refer to 4.6);
• in the production of income (refer to 4.7);
• not of a capital nature (refer to 4.8); and
• laid out or expended for the purposes of trade (refer to 4.9).
REMEMBER
• All the components of the general deduction formula must be present for an expense to
be deductible.
4.4 Expenditure and losses
Section 11(a) contemplates the deduction of both expenditure and losses. The Act has
not defined the word ‘loss’, but, in Joffe & Co (Pty) Ltd v CIR 13 SATC 354, the court
held that the meaning in the context was ‘somewhat obscure’ and did not appear to
mean anything different from expenditure:
[T]he word is sometimes used to signify a deprivation suffered by the loser, usually an
involuntary deprivation, whereas expenditure usually means a voluntary payment of
money.
Deductible expenditure is not restricted to expenditure in cash, but includes the outlay
of amounts in a form other than cash. The cost to the taxpayer of the asset given instead
of cash is allowed as a deduction, but no value may be placed on the taxpayer’s own
labour where the asset was created by them. A taxpayer may, for example, exchange an
asset they have made for trading stock to be sold in their business operation. The cost of
the trading stock that may be deducted in terms of section 11(a) will be limited to the
cost of the components incorporated in the asset they have made and bartered, and no
deduction may be claimed in respect of their own labour, even though the market
value of the asset they have created may be substantially higher than this cost. Where
the taxpayer has acquired an asset as trading stock, other than by purchase, for
example by inheritance or donation, the value of the asset is allowed as a deduction.
The value is usually the fair market value of the asset on the date of acquisition by the
taxpayer.
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Chapter 4: General deduction formula
4.4–4.5
Example 4.1
Gladys Botha manufactures leather purses. Due to cash flow constraints, she was unable
to pay for the latest consignment of leather, costing R25 000. She offered the supplier a
delivery motorcycle with a market value of R28 000 in settlement of the consignment of
the leather.
You are required to discuss the deductibility of the amounts.
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Solution 4.1
Gladys would be able to deduct the market value of the delivery motorcycle in respect of
the purchase of the leather (R28 000). Expenses and losses do not only include amounts
payable in cash, as long as the consideration has a determinable money value.
REMEMBER
• Expenses need not be in cash only. They can be in a form other than cash, for example a
trade-in of an asset as part of the payment of an expense incurred.
4.5 Actually incurred
Expenditure that may be deducted includes both amounts paid and amounts for
which the taxpayer has incurred a liability (Caltex Oil (SA) Ltd v SIR 37 SATC 1).
Therefore, a taxpayer may deduct expenses actually paid and amounts owing.
Expenditure actually incurred does not mean amounts that are due and payable. The
taxpayer may have incurred a liability, which is payable only after the end of the year
of assessment, and it would still be deductible. There are three specific cases that you
need to take note of when determining if an amount is actually incurred, namely
Nasionale Pers Bpk v Kommissaris van Binnelandse Inkomste 48 SATC 55, Edgars Stores
Ltd v Commissioner for Inland Revenue 50 SATC 81, and Commissioner for Inland Revenue
v Golden Dumps (Pty) Ltd 55 SATC 198.
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A Student’s Approach to Income Tax/Natural Persons
4.5
CASE:
Nasionale Pers Bpk v Kommissaris van Binnelandse
Inkomste
48 SATC 55
Facts: The taxpayer claimed a provision of
one month’s salary for bonuses to be paid
to staff. The financial year end of the taxpayer was 31 March but the bonus would
only be paid on 30 September of that year.
The policy in regard to the bonus reads as
follows: ‘The annual holiday bonus is
equal to a full month’s salary for officials
who have completed a full year’s service
and pro rata less for officials who have
completed less than a full year’s service. A
bonus will only be paid to officials who are
in service on 31 October. The full amount
of the bonus will be recovered from an
official who after payment thereof gives
notice of termination of service and leaves
the service before 31 October.’ The taxpayer accepted that the bonus – pro rata to
length of service – was immediately payable in the case of an employee whose
service terminated through retirement on
attaining retirement age, or by reason of
ill-health or upon re-organisation of the
taxpayer’s activities or, in the case of
female employees, by reason of pregnancy.
In its accounts as at 31 March, the taxpayer’s practice was to include, in the case
of an employee who already had six months’
service, half the amount of the anticipated
bonus payable on 30 September if then still
in the taxpayer’s employ.
Judgment: The future uncertain event
(namely whether the employee would be
in the taxpayer’s employ on 31 October) to
which the legal obligation to pay a holiday
bonus to an employee was made subject,
was an event which fell outside the year of
assessment of the taxpayer. Therefore the
question whether the taxpayer was in law
obliged to pay a holiday bonus to an employee could only be answered on 31 October, and not 31 March. The provision for
the bonus had, accordingly, not been actually incurred until that date.
Principle: If a payment is conditional on the
happening of an event, whether suspensive
(coming into effect immediately, but suspended until the c ondition had been met) or
resolutive (not effective until the condition
has been met), the expense is only actually
incurred once the condition has been met.
Until the condition has been met, it remains a
contingent liability that is not tax deductible.
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Chapter 4: General deduction formula
4.5
This principle was confirmed in Edgars Stores Ltd v Commissioner for Inland Revenue.
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CASE:
Edgars Stores Ltd v Commissioner for Inland Revenue
50 SATC 81
Facts: The taxpayer entered into several
lease agreements for premises on which it
would conduct its businesses. The rental
was determined as a ‘basic rental’ (paid
monthly) and a ‘turnover rental’ (to be
calculated if the annual turnover exceeded
a specific amount). The ‘turnover rental’
could only be ascertained subsequent to
the last day of the taxpayer’s year of
assessment in many instances (where the
financial year end of the taxpayer was different to the end of the lease year). The dispute with the Commissioner only related
to those instances where the lease year
ended after the taxpayer’s year of assessment and the liability to pay turnover
rental could not be determined before the
end of the taxpayer’s tax year. Included in
the rental expenses claimed for tax purposes were two amounts representing
genuine estimates (the accurate figures not
being available yet) of the respective
amounts by which the turnover rentals
exceeded the basic rentals in the years in
question. These estimated rentals were disallowed by the Commissioner.
Judgment: The crucial issue was whether
the conditions relating to the turnover
rental created a contingent obligation which
was incurred, if at all, only at the end of
the annual lease period or whether the
provisions of the lease gave rise to an
unconditional obligation, the quantification of which took place at the end of the
lease year. The court ruled that the obligation to pay turnover rental is contingent
until the turnover for the lease year is
determined; thus the expenditure was not
actually incurred in a year of assessment
that ended prior to the termination of the
lease year and therefore could not be
deducted in that tax year.
Principle: Before an expense can be
deducted in terms of section 11(a), it must
be unconditional; that is to say the expense
must not be contingent; the event must
have taken place. It does not matter that
the condition imposed is resolutive (not
effective until the condition has been met) or
suspensive (coming into effect immediately, but suspended until the condition
had been met).
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A Student’s Approach to Income Tax/Natural Persons
4.5
In Commissioner for Inland Revenue v Golden Dumps (Pty) Ltd, the court ruled on when
a liability becomes unconditional in the event of a dispute.
CASE:
Commissioner for Inland Revenue v
Golden Dumps (Pty) Ltd
[2011] 55 SATC 198
Facts: A dispute arose between the taxpayer and a former employee which resulted in the taxpayer withholding the delivery of shares previously promised to the
employee. The employee instituted legal
proceedings to compel the delivery of the
shares promised. The legal proceedings
were instituted in 1981 but the action was
only heard in 1983. The appeal by the
employee to the Appellate Division was
upheld in 1985. The taxpayer was then
ordered to deliver the shares promised to
the employee. The taxpayer claimed the
cost of the shares awarded as a deduction
in terms of section 11(a). The Commissioner contended that the expenditure on
the shares had been ‘actually incurred’
during the 1981 year of assessment when
the action had been instituted. The taxpayer countered that the expenditure was
‘actually incurred’ only in 1985 when the
dispute was finally resolved.
Only if the claim is admitted, or if it is
finally upheld by the decision of a court or
arbitrator, will a liability arise. If at the end
of a tax year the outcome of the dispute is
undetermined, the liability has not been
actually incurred and cannot be claimed.
At the end of the 1981 year of assessment,
the outcome of the action instituted by the
employee was undetermined. The liability
on the part of the taxpayer was then ‘no
more than impending, threatened, or
expected’. The ultimate outcome was only
known upon the delivery of the Appellate
Division’s judgment, which lay four years
in the future. Accordingly, the expenditure
in question was ‘actually incurred’ in 1985
and not 1981.
Principle: If the outcome of a bona fide
legal dispute is unresolved by the end of
the year of assessment of a taxpayer, any
possible compensation payable is only
incurred when the dispute is settled. If a
dispute goes to court, it is only when the
final court renders its decision that the
expenditure is actually incurred (i.e. the
decision is not taken on appeal).
Judgment: A liability is only contingent in
a case where there is a claim which is
genuinely disputed and not vexatiously or
frivolously made for the purposes of delay.
In Port Elizabeth Electric Tramway Company v CIR 8 SATC 13, Acting Judge
Watermeyer stated the following about the meaning of ‘actually incurred’: ‘But
expenses actually incurred cannot mean ‘actually paid’. So long as the liability to pay
them actually has been incurred they may be deductible.’ In Ackermans Limited v the
Commissioner for the South African Revenue Services [2010] ZASCA 131, the court found
that contingent liabilities transferred to a purchaser were not costs incurred and were,
therefore, not deductible.
Before it may be said that expenditure has actually been incurred, there must be a
clear legal liability to pay at that particular time (ITC 1094 28 SATC 275). Where the
item of expenditure in question is the subject of a bona fide dispute, the court has
held (ITC 1499 53 SATC 266) that it lacks the degree of certainty and finality to render it
actually incurred. In C: SARS v Labat (2011), the Appeal Court considered the
implications of issuing shares.
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Chapter 4: General deduction formula
4.5
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CASE:
Commissioner for South African Revenue Service v
Labat Africa Ltd
[2011] ZASCA 157
Facts: The company purchased a trademark from the seller and instead of paying
cash, the company entered a sale of business agreement, in terms of which it issued
a part of its own authorised share capital.
Judgment: The question was whether the
issue of authorised capital was an ‘expenditure actually incurred’ for the purposes of
section 11(gA) of the Income Tax Act.
Principle: The court found that the issue of
shares was not ‘expenditure actually
incurred’ and that the taxpayer cannot
deduct the cost. The court indicated if two
separate contracts existed, one to buy the
trademark and a second to issue the shares,
the cost would have been deductible.
A distinction must also be made between expenditure that is subject to a contingency,
and expenditure that cannot be quantified but is estimated on the last day of the year of
assessment and quantified in a subsequent year. Expenditure is incurred when the
event giving rise to the liability occurs. The fact that the expenditure that will arise
from the event cannot be quantified with precision does not disqualify it as a deduction. Expenditure subject to contingency will not qualify as a deduction.
Where a person acquires an asset for an unquantifiable amount, section 24M provides
that the unquantifiable portion of the amount will be deemed to be incurred in the
year of assessment in which it can be quantified.
With regard to the date upon which an unconditional legal liability was incurred, the
contract relating to the particular transaction may determine that date. The deductibility of payments made in advance of the date on which the taxpayer has a legal
obligation to pay therefore presents a problem. Section 23H may, however, place a
limitation on the deduction of the amount that may be claimed for tax purposes in
respect of prepaid expenses.
Finally, it may be noted that the words actually incurred do not mean ‘necessarily
incurred’. It is not within the power of SARS to dictate how a taxpayer should
operate their business by determining whether it was necessary for an item of
expenditure to have been incurred. If the actual expenditure complies with all the
requirements of the general deduction formula, it cannot be disallowed on the
grounds that it was not ‘necessarily’ incurred. The meaning of actually incurred is
therefore wider than that of necessarily incurred.
Example 4.2
Jan Els has his own biltong retail outlet. His shop is situated in a shopping centre. He
pays a monthly rental of R10 000 on the 28th of each month. Apart from the R10 000, he
must also pay 2% rental based on his annual turnover for the period 1 April 2021 to
31 March 2022 if the annual turnover exceeds R500 000. His turnover for the period from
1 April 2021 to 31 March 2022 amounted to R580 000.
You are required to discuss the deductibility of the above amounts for the current year of
assessment ended 28 February 2022.
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4.5–4.6
Solution 4.2
The monthly rental of R10 000 is actually incurred and will be deductible. The rental
based on annual turnover exceeding R500 000 depends on a condition and there is no
definite and absolute liability to pay this amount at the end of his year of assessment
(28 February 2022), therefore it has not been actually incurred yet and is not deductible in
the 2022 year of assessment.
REMEMBER
• ‘Incurred’ means an unconditional liability to pay the expense that was incurred.
• The actual payment of the expenditure is not essential for the deduction of the expenditure.
REMEMBER
• Specific sections have been added to the Act, resulting in the issuing of shares to
acquire assets (including stock) being treated as expenditure actually incurred.
4.6 Year of assessment
The accounting concept of ‘matching’ often requires expenditure to be carried
forward to a subsequent year, or back to an earlier year, for the purposes of financial
reporting. For income tax purposes, the courts have held that deductible expenditure
can be deducted only in the year of assessment in which it was incurred. If expenditure is not deducted in the year of assessment in which it was incurred, it can never
be claimed (COT v A Company 41 SATC 66).
For income tax purposes, the expenditure will be incurred and deductible during the
current year of assessment, while for accounting purposes, it might be dealt with as
‘prepaid expenditure’. There is one exception to this rule. This is where the provisions
of section 23H provide that the deduction of a prepaid expense must be spread over
the period to which the expense relates. Section 23H has very specific requirements
relating to the deductibility of prepaid expenditure. Prepaid expenditure is, for
example, where an insurance premium is paid up front for 18 months.
REMEMBER
• The general rule for income tax is that expenditure can be deducted only in the year of
assessment in which it was incurred. If it is not deducted, it cannot be claimed in a
future year of assessment, except where section 23H applies to prepaid expenses (refer
to chapter 14 (14.5)).
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4.7 In the production of income
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In terms of section 11(a), deductible expenditure is restricted to expenses incurred ‘in
the production of income’. Income is arrived at by the deduction of exempt amounts
from gross income, while capital amounts are excluded from the definition of gross
income. Expenditure incurred in the production of exempt income or capital income
is therefore not allowed as a deduction. There has been a line of decisions by our
courts on whether an expense is incurred in the production of income. However, the
very first case to establish the basis of the rules developed over the years is Port
Elizabeth Electric Tramway Co Ltd v CIR 8 SATC 13.
CASE:
Port Elizabeth Electric Tramway Company Ltd v
Commissioner for Inland Revenue
8 SATC 13
Facts: The taxpayer company carried on
business as a tramway transporter. A
driver of one of its tram-cars lost control
while descending a steep gradient. He died
sometime afterwards as a result of the
injuries sustained in the accident. A claim
for damages was lodged against the taxpayer in terms of the Workman’s Compensation Act. The Cape Provincial Division of
the Supreme Court compelled the taxpayer
to pay an amount as compensation to the
driver’s widow. In addition, the taxpayer
also incurred legal costs in resisting the
claim. The taxpayer claimed these two
amounts as a deduction, but these claims
were disallowed by the Commissioner.
of the company and the employment of
drivers carried with it, as a necessary
consequence, a potential liability to pay
compensation if such drivers were injured
in the course of their employment, the payment made by the company by way of compensation was to be regarded as part of the
cost of the company’s operations for the
purpose of earning income and was thus
deductible. The legal costs incurred in resisting the claim for compensation had not
been expended in an operation entered
upon for the purpose of earning income and
were not allowable as a deduction.
Principle: The test (called the ‘inevitable
concomitant’ or ‘closely connected’test)
firstly required that the purpose (task performed) of the expenditure must be established. Next, it should be determined
whether the task was necessary and
whether an expected or foreseeable risk
attached to that task. Thus, it should be
asked whether the expense is so closely
connected with the income earned that it
may be regarded as part of the cost of performing it. Note that the deductibility of
legal costs is determined by section 11(c).
Judgment: Section 11(a) permits the
deduction of all expenses attached to the
performance of a business operation
that is bona fide performed for the purpose
of earning income regardless of whether
such expenses are necessary for its performance or attached to it by chance, provided
they are so closely connected with it that
they may be regarded as part of the cost of
performing it. As the employment of
drivers was necessary for carrying on of the
b
u
s
i
n
e
s
s
Over the years, this basic principle was developed further in Joffe & Co (Pty) Ltd v
Commissioner for Inland Revenue 13 SATC 354, Sub-Nigel Ltd v Commissioner for Inland
Revenue 15 SATC 381, Commissioner for South African Revenue Service v BP South Africa
(Pty) Ltd 68 SATC 229 and Commissioner for Inland Revenue v Drakensberg Garden Hotel
(Pty) Ltd.
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CASE:
Joffe & Co (Pty) Ltd v Commissioner for Inland Revenue
13 SATC 354
Facts: The taxpayer company carried on
business as engineers in reinforced concrete. A concrete hood (tower) for a power
station which they were supervising, collapsed, and a workman employed by the
building contractor was killed by the falling material. In a delictual action, it was
established that the taxpayer company had
been negligent in the performance of its
work and it was required to pay damages
to the relatives of the deceased workman.
The Commissioner disallowed the claim
for compensation as well as the legal costs
incurred in defending the action.
Judgment: The expenditure had not been
incurred for the purpose of earning profits,
nor, as it had not been established that
negligent construction was a necessary
concomitant of the trading operations of a
reinforced concrete engineer, had it been
incurred for the purposes of the taxpayer’s
trade. The legal expenses were also not
deductible.
Principle: Compensation paid is disallowed as a deduction if the negligent
action is not a necessary concomitant of the
trading operations.
CASE:
Sub-Nigel Ltd v Commissioner for Inland Revenue
15 SATC 381
Facts: The taxpayer company carried on
the business of mining for gold. It made a
practice of taking out policies of insurance
against loss incurred by fire in respect of net
profits and standing charges. The insurance
against the loss of net profits was undertaken in order to enable the company to
maintain a steady rate of dividend to its
shareholders, notwithstanding a cessation
of operations in part or in whole by reason
of fire. The insurance in respect of standing
charges was designed to enable the company to carry on its essential services without loss, notwithstanding any such cessation
of mining operations. These insurance premiums were claimed as a deduction by the
taxpayer although no insurance claims
were received during that year.
Judgment: The expenditure upon premiums
was incurred for the purpose of earning
income in the event of certain happenings
and was not of a capital nature. As any
amount received under the policies would
constitute a trading receipt, the expenditure on the premiums had been laid out or
expended for the purposes of the taxpayer’s trade. The premiums of the policies were admissible expenditure.
Principle: Section 11(a) does not require
that claimable expenditure must have produced income in the same year it was
incurred.
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CASE:
Commissioner for Inland Revenue v Drakensberg
Garden Hotel (Pty) Ltd
23 SATC 251 (A) – 1960
shares and the production of the rental
income were sufficiently closely connected
to allow a deduction of the interest paid.
Facts: The taxpayer, a private company,
leased a hotel from another private company (known as the Stiebel company) for
4¼ years. It then sub-let the hotel to a partnership who thereafter ran the hotel. A
farm on which there was a trading store, is
surrounded by the hotel premises. The taxpayer leased the store initially from one of
the Stiebel company’s two shareholders
and then later from the Stiebel company
itself. So at this point in time the taxpayer
held two leases from the Stiebel company.
The taxpayer then acquired all the shares
in the Stiebel company for the purpose of
obtaining absolute control over the hotel
and store premises (thus to secure and
preserve the two leases). Interest was
payable on the outstanding balance of the
purchase price of the shares. The court had
to decide whether the purchase of the
Judgment: The court held that the taxpayer’s purpose in buying the shares was
not to secure dividend income, but to ensure the taxpayer’s control of its revenueproducing asset and thereby securing the
continuance of an increased income from
his trading/business operations. Therefore
the payment of interest and the production
of income were sufficiently close to allow
the deduction.
Principle: Interest paid on a loan to
acquire shares can be deductible, if the taxpayer’s purpose with the acquisition of the
shares is to ensure the continuance of his
business activities. The new section 24)
confirms and extends the principle in this
case.
The principles developed several years ago were recently confirmed in Commissioner
for South African Revenue Service v BP South Africa (Pty) Ltd.
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CASE:
Commissioner for South African Revenue Service v
BP South Africa (Pty) Ltd
68 SATC 229
Facts: The taxpayer company, being a marketer of petroleum products, was wholly
owned by a British parent company. Two
items of expenditure were at stake.
Judgment:
• In regard to the first claim, the loan
was not required to pay the dividend.
Therefore, the purpose of the loan was
to continue its income-producing activities. The interest paid on the loan was
thus an expense incurred in order to
produce income.
• The first claim concerned interest paid
on a loan from its parent company,
which at the same time required that
dividends be declared quarterly. The
company had sufficient funds to pay
the full dividends without any loan
from the parent. However, the loan
was required for the purchase of
capital equipment so that the business
could expand. If the dividends had not
been declared, the taxpayer could have
funded the purchase out of its own
funds. The obtaining of the long-term
loan also enabled the company to make
additional local borrowings (local borrowings were restricted in the case of a
foreign-owned company).
• In regard to the second claim, the lump
sum payments were more closely
related to the taxpayer’s income-earning structure than its income-producing
operations, as they were incurred not
to carry on the business of the taxpayer, but to establish it. The nature of
the advantage obtained, namely to ensure that the taxpayer’s products
would be sold from the leased premises for a substantial period, resulted in
the expenditure being of a capital nature. Accordingly, expenses had to be
deducted in terms of section 11(f) –
deduction of lease premiums.
• The second claim concerned a lump
sum ‘up front’ rental payment in respect of leases which endured for some
20 years. The purpose of the lump sum
payments ‘up front’ was to secure sites
from which the taxpayer’s petrol could
be sold and from which income would
be produced for 20 years.
Principle: The principle established in PE
Electric Tramways (that the purpose of the
expenditure must be looked at to determine whether such expenditure produces
income as defined) is confirmed.
The purpose of the expenditure is an important consideration. If the purpose is to
earn a return that does not fall within the definition of income, or to preserve capital,
for example by preventing the partial or total extinction of the business from which the
taxpayer’s income was derived, the expenditure is not deductible (CIR v African
Greyhound Racing Association (Pty) Ltd 13 SATC 259). It is not necessary that the expense
produces the income in the current year of assessment for it to be deductible.
It is also possible that expenditure is incurred for more than one purpose. In a
number of reported cases, the main purpose was taken into account; in others,
apportionment was applied. The case that determined the principle to be applied
where expenditure is incurred with more than one purpose is Commissioner for Inland
Revenue v Nemojim (Pty) Ltd 45 SATC 241.
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CASE:
Commissioner for Inland Revenue v Nemojim (Pty) Ltd
45 SATC 241
Facts: The taxpayer company was a sharedealing company, making profits from
buying and selling shares in dormant companies holding cash reserves available
for distribution by way of dividends.
In common terms, it carried on dividendstripping operations. When the company
was so ‘stripped’, the taxpayer sold the
shares at a loss (because all the reserves
had by that time been declared as dividends). The dividends received by the
taxpayer were exempt from tax and the
whole loss on the sale of the shares was
claimed as a deduction being offset against
a bag-cleaning business operated by the
company. The Commissioner limited the
loss on the sale of the shares to the
proceeds received for the shares.
Judgment: The taxpayer had a dual purpose, namely the receipt of moneys on
resale of the shares (which would constitute income in its hands) and the receipt of
a dividend after declaration thereof (exempt
income in its hands). The expenditure in
issue thus did not pass the dual test of
sections 11(a) and 23(f) of the Act and
therefore it would be appropriate to apply
the principle of apportionment. Thus, only
a proportion of the expenditure on the
shares would qualify as a deduction.
Principle: Where expenditure is incurred
for two purposes and only one of those
qualified for deduction, the expenditure
can be apportioned. Note that section 23(g)
now allows apportionment where there is
trade and non-trade or private-purpose
expenditure.
Example 4.3
Karin Marais operates a catering business from home. She does catering for office parties
and meetings. During June, she calculated that 80% (R50 000) of her grocery purchases
related to her catering business. During the same month, she paid her domestic worker an
extra R5 000 for her help in the preparation of the food.
You are required to discuss the deductibility of the above amounts for the current year of
assessment.
Solution 4.3
The R50 000 (80%) of her grocery purchases and the R5 000 paid to her domestic worker
are deductible in terms of section 11(a), as these expenses were incurred in the production
of her catering income. The 80% of the grocery purchases as well as the ‘wage’ of R5 000
relate to her trading activities.
With regard to the closeness of the connection, the court held, in CIR v Hickson
23 SATC 243, that expenditure would be regarded as part of the cost of performing
the income-earning operations if ‘it would be proper, natural or reasonable to regard
the expenses as part of the cost of performing the operation’.
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Fines or bribes
Section 23(o) specifically prohibits the deduction of fines, bribes, unlawful kickbacks
or penalties due to unlawful activities.
Theft
In regard to losses resulting from theft or embezzlement, these are losses attached to
the business operations by chance. They will be deductible provided they are so
closely connected to the operation that they may be regarded as part of the cost of
performing it. Theft of trading stock by third parties in a supermarket, for example,
would fall into this category.
In relation to ‘employee theft’, the court held in COT v Rendle 26 SATC 326 that the
expenditure
was sufficiently closely connected with the firm’s business operations as to be
regarded as part of the cost of performing those operations.
In ITC 1221 36 SATC 233, it was confirmed that theft losses by a managing director, a
director or a manager in the position of a proprietor will not be deductible. In
ITC 1242 37 SATC 306, it was held that,
as a prerequisite to deductibility the taxpayer must establish that the risk of the loss
which he seeks to deduct from his income is inseparable from, or a necessary ingredient of, the carrying on of the particular business.
This case also involved junior employees.
In ITC 1383 46 SATC 90, which dealt with defalcations by a senior employee of a
bank, it was held that the risk of theft is inherent in and an inseparable element of
such business and the loss in issue was therefore deductible.
Example 4.4
Marlene Vorster has a takeaway outlet that only operates on a cash basis. During the
current year of assessment it came to her attention that the cashier stole money from the
cash register amounting to R10 000. During the year, Marlene was also robbed of her
takings of the day during an armed robbery. The loss amounted to R7 500. She was not
insured for such losses.
You are required to discuss the deductibility of the above amounts for the current year of
assessment.
Solution 4.4
Marlene will be able to deduct both amounts during the current year of assessment as
they are closely connected to the operation of a cash-based business and the risk of theft
can be regarded as part of the cost of performing such a business.
Social responsibility expenses
In Warner Lambert SA (Pty) Ltd v Commissioner for South African Revenue Service, the
court had to decide if costs incurred that related to social responsibility spending is
deductible for income tax purposes.
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CASE:
Warner Lambert SA (Pty) Ltd v Commissioner for South
African Revenue Service
65 SATC 346
Facts: The taxpayer, an American-owned
South African company operating in South
Africa during the height of the apartheid
regime, had joined an association of local
signatories of the Sullivan Code in 1978.
Subsequently, the USA promulgated the
Comprehensive Anti-Apartheid Act 1986,
which compelled American companies and
their subsidiaries operating in South Africa
to comply with the Sullivan Code principles.
a capital nature since the purpose of the
expenditure was to protect the taxpayer’s
income-earning structure.
Judgment: The money spent by a taxpayer
in order to advance the interests of the
group of companies to which it belonged
was not regarded as expenditure in the production of income. The link between the
expenditure and the production of income
was too tenuous; moneys expended by a
taxpayer from motives of pure liberality
also failed to qualify as expenditure in the
production of income. The evidence on the
appellant’s behalf was to the effect that the
purpose of the Sullivan Code expenditure
was not merely to serve a social responsibility but also to insure against the risk of
losing its treasured subsidiary status. It was
true that the link between the appellant’s
trade and the social responsibility expenditure was not as close and obvious in the
second category (social spending) as in the
first (increased wages), but that did not
mean that the connection was too remote.
If the appellant had lost its subsidiary
status, it might have directly brought
about the loss of all kinds of trade advantages and it was therefore unthinkable that
the appellant would not comply with the
Sullivan Code. The Sullivan Code expenses
were therefore bona fide incurred for the
performance of its income-producing operation and formed part of the cost of performing it, and therefore the social responsibility expenditure was incurred for the
purposes of trade and for no other. The
expenses incurred by the appellant were
not of a capital nature, as no asset was created or improved. The appellant’s incomeearning structure had been erected long
ago and it was now a question of protecting its earnings. The periodic payments
made were to preserve it from harm, or
at least to avert the risk of harm and
therefore these payments were similar to
If they did not comply, fines and even
imprisonment for the directors of the
American holding company could be imposed. The Sullivan Code principles provided for the non-segregation of races in
the workplace, equal and fair employment
for all employees, equal pay, the development of training programmes, increasing the number of disadvantaged
persons in management and supervisory
positions, and improving the quality of
employees’ lives outside the work environment. The social responsibility expenses
incurred in complying with the Sullivan
Code principles, namely the expenses
incurred in ‘Working to Eliminate Laws
and Customs that Impede Social, Economic and Political Justice’, which was
the seventh principle of the Sullivan
Code, were claimed by the taxpayer as
deductions. The taxpayer contended that it
was instructed by its American parent to
incur expenses that went with the performance of its Code obligations and if it failed
to do so, it would almost certainly have
suffered a loss of income. Such expenditure included participation in national
conventions, peace initiatives, providing
information, technology support, adopting
schools and helping small businesses start
up operations. The Commissioner disallowed the social responsibility expenses
claimed on the basis that the expenditure
had not been incurred in the production of
taxpayer’s income and was expenditure of
continued
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insurance premiums and of a revenue
nature. Accordingly, the expenditure in
issue was deductible in terms of section 11(a) read with section 23(g).
4.7
the production of income. However, as the
social responsibility expenditure reduced
the risk that the appellant might lose its
subsidiary privileges and it was linked
closely enough to the company’s trading
activities, the court found that no capital
asset was created or improved by the
expenditure,
which
was
therefore
deductible.
Principle: Money spent by a taxpayer in
order to advance the interests of the group
of companies to which it belongs, and
money expended from motives of pure liberality, are not regarded as expenditure in
Recurrent expenses
There are certain recurrent expenses that are not incurred in the production of
income, such as accounting fees. Practice Note No. 37 provides for the deduction of
fees paid to accountants, bookkeepers and tax consultants for the completion of
income tax returns for taxpayers whose remuneration includes income such as
commission, or for taxpayers who earn income in the form of interest or dividends, as
well as administration fees charged by institutions administering the affairs of
pensioners. In the case of Commissioner for the South African Revenue Service v Mobile
Telephone Networks Holdings (Pty) Ltd the court considered whether these costs should
be apportioned where both taxable and exempt income is earned.
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CASE:
Commissioner for the South African Revenue Service
v Mobile Telephone Networks Holdings (Pty) Ltd
(966/12) [2014] ZASCA 4
Facts: The taxpayer, a holding company,
has five subsidiaries and a number of
indirectly held subsidiaries and joint ventures. The company is a wholly owned
subsidiary of a listed entity and the collective business of this group of companies is
the provision of mobile telecommunication
networks and related services. The taxpayer’s business activities comprised the
earning of dividends from the holding of
shares in its subsidiaries, as well as the
provision of loans. The provision of loans,
in turn, comprised loan funding to its subsidiaries (mainly interest-free) and loan
funding as part of a debenture scheme
arrangement whereby the taxpayer company borrowed funds (through the issue
of debentures) and then loaned the funds
to group companies at a higher interest
rate. The taxpayer thus had two sources of
income, that is to say dividend income
(exempt income) and interest income
(taxable income).
Judgment: The Supreme Court held that in
order to determine whether moneys outlaid by a taxpayer constitute ‘expenditure
incurred in the production of the income’,
it is important to consider the purpose of
the expenditure and its underlying cause.
The court thus had to assess the closeness
of the connection between the expenditure
and the taxpayer’s income-earning operations. It agreed with the Tax Court’s
conclusion that ‘the auditing of financial
records is clearly a function which is
“necessarily attached” to the performance
of the taxpayer company’s income-earning
operations’. In this case the expenditure
was incurred for a dual or mixed purpose,
therefore an apportionment of such
expenditure should take place. The apportionment that should be used is dependent
on the facts of each case, but must be fair
and reasonable. In this case the taxpayer
company’s value lay in its principal business as a holding company. It appears that
the audit time spent specifically on dividend and interest entries made up a relatively small component of the overall audit
time. The audit function involved the
auditing of the taxpayer company’s affairs
as a whole, the major part of which concerned the consolidation of the subsidiaries’ results into the taxpayer company’s
results. Therefore the apportionment must
be heavily weighted in favour of the disallowance of the deduction given the predominant role played by the taxpayer company’s equity and dividend operations as
opposed to its far more limited incomeearning operations.
The taxpayer had claimed the deduction of
the audit fees incurred in respect of the
annual statutory audit of the company’s
financial statements for each of the 2001 to
2004 years of assessment. In addition, the
taxpayer also claimed a professional fee
(training fee) incurred during its 2014 year
of assessment, for the ‘implementation,
adjustment, fine tuning and user operation
of a new accounting computer system’.
The Commissioner for SARS disallowed
the professional fee deduction in full on
the basis that the expense was capital in
nature. The Commissioner apportioned the
deduction of the audit fees incurred for
each year of assessment, on the basis of the
ratio between the interest income and the
dividend income. Since the dividend
income comprised the bulk of the taxpayer’s income each year, the bulk of the
audit fees was disallowed every year,
leaving a small percentage of between 2%
and 6% that was allowed as a deduction in
each of the relevant years of assessment.
The court then ruled that it would be fair
and reasonable that only 10% of the audit
fees be allowed. As the taxpayer gave
inadequate evidence with regards to the
professional fee, the court had to rule that
the professional fee was disallowed in
full.
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Ex gratia payments
A taxpayer who makes voluntary payments related to their trade still qualifies for a
deduction, as was the case in PROVIDER v Commissioner of Taxes, Southern Rhodesia
17 SATC 40.
CASE:
PROVIDER v Commissioner of Taxes, Southern Rhodesia
17 SATC 40
Facts: The taxpayer started two schemes
for the benefit of its employees – a ‘Life
Assurance Scheme’ and a ‘Service Bonus
Scheme’. Both schemes were non-contributory and could be withdrawn from
at will by the company. In terms of
the schemes, the company undertook to
pay, firstly, a bonus on retirement to any
employee who had been in the company’s
service for a certain period, and, secondly,
a benefit to the dependants of men
who died in the company’s service, the
amount of the bonus or benefit, as the
case might be, being graduated for the
service of the employee and calculated
based on the length of employment. The
Commissioner allowed the deduction of
the bonuses but not the benefits paid to
their dependants.
Judgment: There are no clear distinctions
that could be drawn between the two sets
of payments since both were clearly
designed by the taxpayer to induce its
employees to enter and remain in its service. Both payments were validly deducted as constituting expenditure actually
incurred in the production of income.
Principle: To be incurred ‘in the production of income’ does not mean that a taxpayer is legally obliged to incur the expenditure. Ex gratia payments made by an
employer to promote happy and contented staff may also qualify for a deduction
under section 11(a) under certain conditions, namely if there is a contract in
existence with an employee for a deferred
payment on retirement or if there is an
established policy to that effect.
REMEMBER
•
•
•
•
Expenses must be incurred for the purpose of earning income.
Expenses incurred in respect of exempt income, for example dividends, are not deductible.
Expenses need not lead to income in order to be deductible.
Expenses must be a necessary closely-connected risk of the business or trade carried on
in order to be deductible.
4.8 Not of a capital nature
Just as capital receipts are excluded from the definition of gross income, so too is
capital expenditure prohibited by section 11(a). It is very important to understand
that the tests to determine whether an amount from a gross income point of view is of
a capital nature or not (refer to 2.7) are different from those used to determine
whether expenditure is of a capital or revenue nature. As in the case of capital
receipts, the Act does not define or explain what constitutes capital expenditure, and
it was said in Sub-Nigel Ltd v CIR 15 SATC 381 that it is impossible to give a definition
of what is expenditure of a non-capital nature which will act as a touchstone in
deciding all possible cases.
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The courts have, however, established certain tests or norms that are of assistance
when determining the capital or revenue nature of a specific type or class of expenditure. In New State Areas Ltd v CIR 14 SATC 155, Judge Watermeyer describes the first
of the tests that can be used.
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CASE:
New State Areas Ltd v Commissioner for Inland Revenue
14 SATC 155
Facts: The taxpayer company carried on
the business of gold mining. The company
was legally required to install a system
of water-borne sewerage and to link up
with the local authority’s system. The
system installed consisted of sewers and
connections upon the company’s own property and sewers upon land outside the
company’s property linking the system
into the local authority’s main system. The
system was installed at the local authority’s
cost but this was recovered by way of
charges payable by the company over
60 months for the cost of the system on its
own property (which would become its
own property) and over 180 months for the
cost of the system which was not located
on the local authority’s property. When
claimed as a deduction, the Commissioner
disallowed all the monthly amounts
payable to the local authority as being
expenditure of a capital nature.
Judgment: The payments made in respect
of the internal sewers were of a capital
nature, being the payment of instalments
towards the acquisition of an asset owned
by the company. The payments made in
respect of the external connections, which
did not produce any permanent asset, constituted a charge for the use of the local
authority’s system, which remained a
recurrent business charge.
Principle: Expenditure is to be regarded as
part of the cost of performing incomeearning operations, or as part of the cost of
establishing or improving or adding to the
income-earning structure, the so-called
‘operations vs structure’ test. The other
tests used for assistance in deciding the
matter were the ‘fixed vs floating capital’
test; the test to establish whether there was
any enduring benefit or permanent asset
created by the expenditure, and even the
recurrence test, which is not of much use.
Other tests that were established can be summarised as follows:
• The true nature of the transaction The true nature is a matter of fact and the purpose of the expenditure is an important factor – if it is incurred for the purpose of
acquiring a capital asset for the business, it is capital expenditure, even if it is paid
in annual instalments.
• Closeness of the connection to the income-earning operations One of the matters
to be taken into consideration is the closeness of the connection of the expenditure
to the income-producing structure as against the closeness of the connection to the
income-earning operations. This test was amplified in CIR v Genn & Co (Pty) Ltd
20 SATC 113, where it was held that the court has to
assess the closeness of the connection between the expenditure and the incomeearning operations, having regard both to the purpose of the expenditure and to
what it actually effects.
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In CIR v George Forest Timber Co Ltd 1 SATC 20 it was held that
money spent in creating or acquiring an income-producing concern must be capital
expenditure. It is invested to yield future profit; and while the outlay does not recur
the income does. There is a great difference between money spent in creating or
acquiring a source of profit, and money spent in working it. The one is capital
expenditure the other is not . . . in the one case it is spent to enable the concern to
yield profits in the future, in the other it is spent in working the concern for the
present production of profit.
In BPSA (Pty) Ltd v The Commissioner for SARS [2007] SCA 7 (RSA), 69 SATC 79, it
was held that recurrent rent paid for the use of another’s property was expenditure
incurred in the production of income and is of a non-capital nature.
In The Commissioner of South African Revenue Services v BP South Africa (Pty) Ltd
[2006] SCA 60 (RSA), 68 SATC 229, the deductibility of interest was considered and
it was held that where a loan is raised by a taxpayer to continue its incomeproducing activities, the interest paid on the loan is an expense incurred in order to
produce income within the meaning of section 11(a).
• An asset or advantage for enduring benefit Another test the courts have developed is whether the expenditure was incurred in order to bring into existence an
asset or advantage for the enduring benefit of the trade. In COT v Rhodesia Congo
Border Timber Company Limited 24 SATC 602, the court held that the expenditure in
question was recurrent and not incurred for the purpose of bringing into existence
an asset for the enduring benefit of the company’s trade, but in working the source
of profit. It is neither conclusive nor essential that the expenditure should result in
the creation of a new asset or an addition to an existing asset for it to be expenditure of a capital nature. However, it will be a relevant factor to consider if no asset
has been acquired as a result of the payment (Palabora Mining Co Ltd v SIR 35 SATC
159). In British Insulated and Helsby Cables Ltd v Atherton (HM Inspector of Taxes)
(1926) AC 205; 10 TC 155, it was indicated that when an expenditure is incurred
not only once and for all but with a view to bringing into existence an asset or
advantage for the enduring benefit of the trade, that expenditure must, in the
absence of special circumstances leading to an opposite conclusion, be treated as an
expenditure of a capital nature. It was added that ‘enduring’ means ‘enduring in
the way that fixed capital endures’. The term ‘enduring benefit’ inevitably raises
problems concerning the length of time the asset or advantage should endure in
order to constitute a capital asset. In ITC 1063 27 SATC 57, a right was acquired for
three years with a right of renewal for a further two years and was considered to
be of an enduring benefit. The answer to this problem would obviously depend on
the circumstances of each case and each case is decided on its own merits.
In CIR v Manganese Metal Company (Pty) Ltd 58 SATC 1, it was held that
it is not necessary to turn to the ‘enduring benefit’ test where you have a permanent
fixed capital asset. It is only when you are dealing with some other form of property
that you have to enquire whether it is a benefit or advantage which endures in the
way that fixed capital does.
In BP Southern Africa (Pty) Ltd v Commissioner for South African Revenue Services the
court had to decide whether or not payment of royalties for the use of intellectual
property (trade names etc.) provided an enduring benefit and is thus of a capital
nature.
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CASE:
BP Southern Africa (Pty) Ltd v Commissioner For South
African Revenue Services
2007 SATC 7
Facts: The taxpayer, BPSA, was the manufacturer, supplier and marketer of fuel in
South Africa. BPSA obtained the nonexclusive right to use certain licensed
products and marketing material from its
offshore holding company and paid an
annual royalty, based on the quantity of
product supplied for these rights of use.
The special court found that the royalty
expenditure incurred for the use of intellectual property (trademarks and other
marketing material) was not comparable to
rentals paid for business premises, but that
it rather resembled expenditure incurred in
setting up a business (for example franchise
fees). It found that the rights and obligations between BPSA and its holding
company were of an enduring nature,
despite the fact that the parties had enjoyed
a clear contractual right to terminate these
obligations.
Judgment: The annual royalty payments
incurred in consideration for the right to
use intellectual property were not of a
capital nature and were accordingly
deductible. The court also reconfirmed the
principle that regard must principally
be had to their agreement to determine
the true rights and obligations between
parties, unless it was a simulated transaction. As the royalty was paid in consideration for the use of, and not the
ownership, of intellectual property, it is for
all intents and purposes indistinguishable
from recurrent rent paid for the use of
another’s property.
Principle: Royalty payments made in
terms of a licence agreement are revenue in
nature and are therefore deductible in
terms of section 11(a).
• Fixed or floating capital A further test that has been developed is whether the
expenditure relates to fixed or floating capital. This distinction was referred to in
the New State Areas case as follows:
[W]hen the capital employed in a business is frequently changing its form from
money to goods and vice versa (for example, the purchase and sale of stock by a
merchant or the purchase of raw material by a manufacturer for the purpose of
conversion to a manufactured article) and this is done for the purpose of making a
profit, then the capital so employed is floating capital. The expenditure of a capital
nature, the deduction of which is prohibited. . ., is expenditure of a fixed capital
nature, not expenditure of a floating capital nature, because expenditure which
constitutes the use of floating capital for the purpose of earning a profit, such as the
purchase price of stock-in-trade, must necessarily be deducted from the proceeds of
the sale of stock-in-trade in order to arrive at the taxable income derived by the
taxpayer from that trade.
In Stone v SIR 36 SATC 117, the issue considered was whether the loss of moneys
advanced was of a capital or revenue nature. The court used the test of fixed or
floating capital as follows: The capital was not consumed in the very process of
income production; it did not disappear to be replaced by something that, when
received by the taxpayer, forms part of their income.
In a business of banking or money lending, losses incurred as a result of irrecoverable loans made in the course of that business are of a revenue nature and are
deductible.
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• ‘Once and for all’ expenditure Another test referred to by the court was whether
the expenditure was once and for all expenditure. In Vallambrosa Rubber Company v
Farmer 1910 SC 519, the opinion was expressed that ‘in a rough way’ it was ‘not a
bad criterion that capital expenditure is a thing that is going to be spent once and
for all while income expenditure is a thing that is going to recur every year’. This
test can clearly not be of universal application, but should not be dismissed as
useless (British Insulated and Helsby Cables Ltd v Atherton).
• Nature of the business carried on The nature of the business a taxpayer is
engaged in may determine whether an expenditure or loss is deductible. In Rand
Mines (Mining and Services) Ltd v CIR 59 SATC 85, the type of business the taxpayer
carried on had an impact on the decision as to whether the expenditure was of a
capital or revenue nature.
CASE:
Rand Mines (Mining & Services) Ltd v
Commissioner or Inland Revenue
59 SATC 85
purposes, the taxpayer had received, via
management fees, the amount originally
paid for the right to manage the mine.
Facts: The taxpayer was a mine management company and a member of a large
group of mining companies. Its principal
function was the administration and management of 40 mines controlled by the
group. The group’s policy was to require
the taxpayer to manage all its mines as it
would ordinarily not invest in a mine
unless it could be managed by the taxpayer. After a mining company outside the
group began to experience financial difficulties, the group acquired a controlling
interest in the ailing company, on the condition that it cancelled an existing management agreement and concluded a new
agreement with the taxpayer. The taxpayer
had to pay a ‘management termination
agreement’ amount of R30 million to the
previous management company before it
entered into a new management contract
with the mine with a term of not less than
twenty years. When the price of platinum
dropped, the group elected to relinquish its
controlling interests in the newly acquired
company. As a consequence, the taxpayer
was obliged to terminate its management
of that mine. The taxpayer, however, had
already received R30 million in management fees (which had been taxed) by the
time it was obliged to terminate the management agreement. Thus, for all intents and
Judgment: The expenditure in question
was made in order to acquire an asset
which was intended to provide an enduring benefit for the taxpayer, as the
contract was to endure for at least 20
years. Only on one other occasion did the
taxpayer pay to acquire a management
contract. It was not the taxpayer’s stock-intrade. The expenditure in question had
been incurred to acquire an asset which
added to the income-earning structure of
the business and was not expenditure
routinely occurring in the running of the
taxpayer’s business. The contracts per se
generated no income but they did provide
the taxpayer with the opportunity of
generating income by providing the management services for which payment
would be made. The contract was ‘a source
of profit’ and the R30 million was spent to
acquire it. Accordingly, the cost had been
of a capital nature.
Principle: Expenditure that provides an
‘enduring benefit’ is capital in nature.
Expenditure more closely linked to the
income-earning structure than the incomeearning operations of the taxpayer is
capital in nature.
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4.8
A taxpayer, whose business it was to insure farmers, was not granted a deduction in
respect of a loss incurred, as the court held that the taxpayer was not engaged in a
banking or money-lending business. As a result, the loss was of a capital nature
(Sentra-Oes Koöperatief Bpk v KBI 57 SATC 109).
• Halfway house between capital and income It has also been held that there is no
halfway house between capital and income. However, in Tuck v CIR 50 SATC 98,
the court sanctioned the apportionment of income between a capital and a noncapital element. The apportionment of expenditure between capital and revenue
should therefore also be possible, but the matter is, as yet, not tested.
From the norms established by the courts, it is obvious that the purchase (other
than by a trader in these assets) of buildings, plant and machinery, which are fixed
assets, constitutes capital expenditure, while the purchase of trading stock
constitutes non-capital expenditure. The acquisition of the goodwill of a business,
which confers an enduring benefit, is a capital expense, while expenditure on a
continuing advertising campaign is of a revenue nature. The cost of improving or
adding to capital assets is a capital expense, but the cost of effecting necessary
repairs to the property is a revenue expense. Unfortunately, not all capital/revenue
decisions are as clear cut as these and each case will have to be decided on its own
particular facts.
Example 4.5
During the current year of assessment, James Dolby purchased a piece of land adjoining his
business premises to use as parking for his clients. The cost of the land amounted to
R100 000 and was paid for in cash during August 2021.
You are required to discuss whether the above expense is of a capital nature.
Solution 4.5
The amount of R100 000 incurred to purchase the vacant land is an expense of capital
nature as the land forms part of the income-earning structure, is not connected to the
income-earning operations and was also incurred as part of the fixed capital of the
business, rather than the floating capital. The expense will not be deductible during the
current year of assessment.
Can I also use these tests to determine the intention of a taxpayer in
order to include an amount in gross income?
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4.8–4.10
REMEMBER
• The true nature of each transaction must be examined in order to determine whether
the expenditure is of a capital or revenue nature.
• The purpose of the expenditure and whether it is connected to the income-producing
structure (capital nature) or the income-earning operations (revenue nature) is an
important norm.
• Generally, expenditure resulting in the creation of a new asset will be of a capital
nature.
• The relation of the expenditure to the fixed capital (fixed asset) or the floating capital
(trading stock) will determine whether the expenditure is of a capital or revenue nature.
• Generally, capital expenditure is spent once and for all and revenue expenditure is
recurrent in nature.
4.9 Laid out or expended for the purposes of trade
(section 23(g))
Section 23(g), the negative part of the general deduction formula, must be read with
section 11(a) to determine whether a particular amount may be deducted from the
income.
Section 23(g) reads as follows, prohibiting the deduction of
any moneys, claimed as a deduction from income derived from trade, to the extent to
which such moneys were not laid out or expended for the purposes of trade.
Apportionment has therefore officially been sanctioned by the Act. In other words, if
a portion of the amount is not for purposes of trade, that portion may not be
deducted for tax purposes. In CIR v Nemojim (Pty) Ltd, Judge Corbett said that
in making such an apportionment the court considers what would be fair and
reasonable in all circumstances of the case.
Apportionment may be made in various ways, for example on a time basis, a piecework basis, on the basis of the capital employed etc., as long as it is fair.
4.10 Prohibited deductions (section 23)
In terms of section 23, the following deductions are prohibited despite them sometimes
complying with section 11(a):
• the cost incurred in maintaining the taxpayer, their family or their establishment
(such as food and clothes of the taxpayer or his family and cost of keeping up the
taxpayer’s establishment) (subsection (a));
• domestic or private expenses, including the rent of, or cost of repairs of, or expenses
in connection with premises not occupied for the purposes of trade, or of a
dwelling house or domestic premises, except in respect of that part which is
occupied for the purposes of trade (subsection (b)).
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4.10
Three scenarios are distinguished depending on the taxpayer’s trade:
1 Occupied for purposes of the taxpayer’s trade (a trade other than employment)
A part of domestic property expenses will be deemed to have been incurred
for the purpose of the taxpayer’s trade only if that part of the property is
specifically equipped for purposes of the taxpayer’s trade and is regularly and
exclusively used for such purposes. If this is the case, then the expenses are
deductible.
2 Occupied for purposes of the taxpayer’s employment trade where the taxpayer earns
remuneration mainly in the form of commission
If the taxpayer’s income from employment is derived mainly from commission
or other variable payments based on their work performance, the taxpayer
will be able to claim the domestic expenses if:
– it (the home study or other domestic area) is specifically equipped for
purposes of the taxpayer’s trade and is regularly and exclusively used for
such purposes; and
– their duties are mainly performed (more than 50%) otherwise than in an
office provided to them by their employer.
3 Occupied for purposes of the taxpayer’s employment trade where the taxpayer does not
earn remuneration mainly in the form of commission
If the taxpayer’s trade relates to employment and the taxpayer does not
mainly derive income in the form of commission, the taxpayer will only be
able to claim a deduction for such domestic expenses if:
– it (the home study or other domestic area) is specifically equipped for
purposes of the taxpayer’s trade and is regularly and exclusively used for
such purposes; and
– their duties are mainly performed (more than 50%) in that part of the
domestic property.
For example, where a doctor has his consulting rooms at their home, or another
professional person or businessman conducts their business from their home, they
may, in terms of this subsection, be entitled to deduct a certain proportion of their
private expenses on their homes, usually in proportion to the floor space used for
business purposes. A proportion of expenses such as interest on a mortgage bond,
assessment rates, electricity, cleaning and maintenance may be deducted. A person
who has a normal place of business (employment) but also uses part of their home,
for example a study, will have to show that they have used the room to produce
income and do so regularly and exclusively for that purpose. The room has to be
specifically set aside and equipped for this purpose; a desk in the corner of a living
room will not suffice;
• a loss or expense, the deduction of which would otherwise be allowable to the
extent to which it is recoverable under a contract of insurance, guarantee, security
or indemnity (paragraph (c)). For example: Where something is stolen from a
business, this loss is deductible in terms of section 11(a). However, if the stolen
goods are covered by an insurance policy and the taxpayer receives an amount
from the insurance, then the full loss cannot be deducted. Only the amount of the
loss that is not covered by the insurance is deductible;
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• a tax, duty, levy, interest or penalty imposed under this Act, an additional tax
imposed in terms of the Value-added Tax Act, and an interest or penalty payable
in consequence of the late payment of a tax, duty or levy payable under an Act
administered by the Commissioner, the Skills Development Levies Act, and the
Unemployment Insurance Contributions Act (paragraph (d ));
• income carried over to a reserve fund or capitalised in any way (paragraph (e));
• expenses incurred in respect of exempt income, for example interest on a loan to
finance purchases of shares to produce dividends (paragraph (f ));
• the ‘negative test’ of the general deduction formula that is read with section 11(a) to
determine whether an expense may be deducted from income (paragraph (g));
• interest that might have been made on a capital employed in trade (that is to say
notional interest) (paragraph (h));
• an expenditure, loss or allowance, to the extent of which it is claimed as a
deduction from a retirement fund lump sum benefit or retirement fund lump sum
withdrawal benefit (refer to chapter 9) (paragraph (i));
• an expense incurred by a labour broker (other than a labour broker to whom a certificate of exemption has been issued) or a personal service provider. The only deductions that a labour broker and personal service provider can deduct are:
– any amounts paid or payable to any employees of the labour broker or personal
service provider for services rendered by the employees, which is, or will be,
taken into account in determining the employee’s taxable income;
– legal expenses (section 11(c)), bad debts (section 11(i)), contributions to funds on
behalf of employees (section 11(l)), an amount paid to an employee on which
he/she is taxed (section 11(nA)), and a refund of expenses paid by persons (section 11(nB)); and
– operating expenses for business premises, including repairs, finance charges,
fuel, maintenance and insurance of assets if such premises and assets are used
wholly and exclusively for purposes of trade (paragraph (k));
• an expense incurred in respect of the payment made for a restraint of trade, except
as provided for in section 11(cA) (paragraph (l ));
• an expense, loss or allowance that relates to employment of or an office held by a
person that derives remuneration (as defined in the Fourth Schedule). In terms of
paragraph (m) only the following expenses for salaried persons can be deducted:
– contributions to pension, provident or retirement annuity funds in terms of
section 11F;
– legal expenses (section 11(c)), wear-and-tear allowances (section 11(e)), bad
debts (section 11(i)), doubtful debt allowances (section 11( j )), an amount paid
back by an employee on which they were taxed (section 11(nA), and restraint of
trade payments in terms of paragraph (cA) of the gross income definition paid
back to the employer (section 11(nB)); and
– rent, repairs or expenses in connection with a dwelling house or domestic
premises. These expenses must qualify in terms of section 11(a) or (d) (repairs)
to the extent that the deduction is not prohibited under section 23(b) (private
and domestic expenses) (section 23(m));
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4.10
• no deduction or allowance may be made for an asset to the extent that a government grant, which is exempt from tax, was given. This paragraph does not apply if
the grant or payment is in respect of programmes or schemes that the Minister has
identified by way of notice in the Gazette (paragraph (n));
• no deduction of fines, bribes, unlawful kickbacks or penalties due to unlawful
activities (paragraph (o));
• no deduction is allowed for the value of an insurance policy ceded to an employee,
director, their family or a retirement fund of which they are members (paragraph (p));
• no deduction for expenditure incurred in the production of income in the form of
foreign dividends (paragraph (q)); and
• no deduction for any premium paid by a person in terms of an insurance policy if
that policy covers that person against illness, injury, disability, unemployment or
death of that person (the so-called income protection policies) (paragraph (r)).
REMEMBER
• The expenditure listed in section 23 are prohibited deductions for tax purposes, despite
them sometimes complying with section 11(a).
Example 4.6
Mr Rex Mtulu would like to deduct the cost of the clothes that he goes to work in from his
taxable income. He feels that he would not have purchased these clothes if he did not go
to work. Rex is a professional businessman who purchased five suits at a cost of R15 000
each on one of his clothing store accounts. The account has not been settled at the end of
the current year of assessment.
You are required to determine, according to the general deduction formula, whether Rex
will be able to deduct the cost of his working clothes from his taxable income, during the
current year of assessment.
Solution 4.6
Rex is carrying on a trade. He is a professional businessman and this falls under the
definition of ‘trade’.
An expense of R75 000 (R15 000 × 5) was incurred. Rex purchased the suits on credit to the
value of R75 000. The R75 000 expenditure was actually incurred. Rex did not pay cash for
the suits but by buying the suits on credit, the expense is also seen as actually incurred. It is a
fact that the purchase was made and therefore no contingency exists. The expense does not
have to be ‘actually paid’ for it to be ‘actually incurred’.
The purchase occurred in the year of assessment. Even though Rex will only pay the
clothing store account in the following year of assessment, the debt was incurred in the
current year of assessment, and can therefore be deducted in this year, if all the other
requirements of the general deduction formula are met.
continued
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4.10–4.11
In the production of income. The suits were purchased due to Rex’s profession. A
businessman normally wears suits. The questions to be answered, however, are: ‘How
closely connected is the purchase of the suits to the production of the income?’ and ‘Was
the expense a necessary concomitant of the business operation?’ Rex can argue that without
his suits, he would not look like a professional and would probably not produce the
income, since none of his clients would take him seriously and therefore the suits are
necessary to his income-earning operations.
Of a capital nature or not. What was the true nature of the transaction? It was to
purchase clothing, which will be worn when performing income-producing business
operations. Do the suits create an enduring benefit? The suits will create a benefit until
they become worn out and the next set of suits has to be purchased. Due to there being no
prescribed period for the term ‘enduring’, the period is very subjective and some may say
that the suits create an enduring benefit and others will differ.
Are the suits considered to be once and for all expenditure? No, due to the nature of
clothing, suits will be purchased every two to three years.
From the above discussion it seems that the expenditure is of a capital nature.
Laid out or expended for the purposes of trade. Were the suits only purchased due to
Rex’s trade? A suit is a type of clothing that can be worn on many different occasions. It is
not only limited to business hours. Suits are not like overalls or nurses’ outfits that
normally indicate what profession the wearer is a member of. Rex could have a dual
purpose for the suits, both business and private purposes. The expense can be apportioned, but the apportionment will be difficult to determine.
There is also no specific deduction that covers this type of expense. Section 23(m)
prohibits deductions, except for certain listed deductions relating to a salaried person.
Section 23(a) also prohibits expenditure relating to the maintenance of the taxpayer.
The expense does not comply with all the requirements of the general deduction formula
(it could be seen to be of a capital nature). Even if one argued that the suits are not of a
capital nature and all the requirements of the general deduction formula are met, in terms
of section 23(m) and (a) the cost of the suits will not be deductible and the deduction of
the costs will not be allowed against his income.
4.11 Specific transactions
By way of example, a few types of expenditure that do not qualify for a specific
deduction will be examined according to the general rules.
• Advertising Advertising expenditure incurred by an existing business will be
non-capital expenditure incurred in the production of income and allowable as a
deduction, but in certain circumstances an extensive advertising campaign may
create an asset of a permanent nature for the business or an enduring benefit and is
therefore expenditure of a capital nature.
• Damages and compensation Expenditure of this nature may hardly be said to
have been incurred in the production of income and will be allowed only if the
connection between the business carried on and the cause of the liability for
damages is very close, that is to say it is an inevitable concomitant of the trade.
• Donations Donations are gratuitous payments not made in the production of
income but rather as an appropriation of income that has already been earned.
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4.11
• Education/Training Normally, expenditure incurred by a taxpayer in obtaining a
qualification or in improving their qualifications is of a capital nature and is not
deductible. Expenditure incurred in maintaining a level of knowledge or expertise
is of a non-capital nature and is therefore deductible.
• Entertainment An agent or representative (who earns more than 50% of their
remuneration (income from employer) in the form of commissions from sales) may
deduct all entertainment expenditure incurred in the production of income and not
of a capital nature, in terms of the general deduction formula (section 11(a)).
Deductions for entertainment expenditure incurred by an employee (or the holder
of an office) for which the employee derives ‘remuneration’ (as defined in the
Fourth Schedule), are prohibited in terms of section 23(m), unless they are agents
or representatives earning mainly commission based on their sales or the turnover
attributable to them.
Example 4.7
Samuel Gxagxa, a salesman, earned the following income during the current year of
assessment:
R
Salary
270 000
Commission on sales
125 000
Entertainment allowance
12 000
397 000
During the current year, Samuel incurred business-related entertainment expenditure
amounting to R15 000 for meals of clients.
You are required to calculate the amount that Samuel may claim as a deduction in respect
of entertainment expenditure.
Solution 4.7
As Samuel does not earn remuneration mainly (more than 50%) (R125 000 / R397 000 =
31%) by way of commission on sales, he may not claim a deduction in terms of section 11(a) even though it was incurred for trade purposes.
If more than 50% of his remuneration had consisted of commission earnings, he would
have been able to claim the full amount of his entertainment expenditure in terms of
section 11(a) since it was incurred in the production of his income and was not of a capital
nature.
• Goodwill An amount payable for the goodwill of a business is capital expenditure
unless the taxpayer buys and sells businesses for profit, as goodwill gives rise to an
enduring benefit.
• Insurance SARS grants a deduction for all insurance premiums incurred in the course
of a taxpayer’s trade, although insurance expenses incurred in the protection of
capital assets may not necessarily qualify for deduction.
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4.11
• Interest Interest incurred on loans used for business purposes is deductible.
Interest on a loan used to purchase assets that produce exempt income, interest on
a loan used to pay dividends (excluding taxable foreign dividends), or interest on a
loan used to pay taxes (which are not deductible expenses) is not deductible.
If SARS pays interest to a person, the person is taxed on that interest in terms of
section 7E. If that interest has to be repaid to SARS, the person can claim it as a
deduction in terms of section 7F. The amount of the deduction is, however, limited
to the amount of interest that was previously included in the taxable income of that
person.
• Salaries and wages Expenditure on salaries and wages is incurred in the production of income and is therefore deductible. Christmas and other incentive
bonuses are incurred not only to reward employees for past services, but also to
provide incentives for future services. Certain gratuities paid to employees on
retirement cannot, however, be said to be incurred in the production of income as the
employees concerned will no longer be producing income. Where the retirement
gratuities are paid in terms of employment contracts, they will be allowed as a
deduction, being part of the cost of obtaining the services of the employees. Where
the retirement gratuities are paid in terms of an established policy for maintaining a
happy and contented staff, the expenditure will also be allowed as a deduction.
• Security expenses Expenditure incurred in securing business premises is normally
deductible if it is closely connected with the business operations since it is then
incurred in the production of income. However, some expenditure creates an
enduring benefit and is of a capital nature. Such costs are not deductible under
section 11(a) and create an asset for capital gains tax purposes. Examples of such
costs are the cost of installing an alarm system, putting up an electric fence and
acquisition of a guard dog (refer to Interpretation Note No. 45).
• Theft losses Losses suffered by a business as a result of theft of stock or money by
employees and the public are not normally deductible unless they may be regarded
as an inevitable concomitant of the trade carried on. Theft losses in self-service
stores and the theft of cash by junior employees entrusted with cash funds fall into
this category and are deductible.
• Vacant or unproductive property Non-capital expenditure on vacant or unproductive property is not deductible because the expenditure is not incurred in the
production of income.
• Wasting assets Assets such as mines, quarries and forests are exhausted in the
course of their use. Nevertheless, expenditure incurred in the acquisition of these
assets is of a capital nature.
Example 4.8
Max Roper is a retired army officer. Since retirement he has been operating a security
business supplying guards and guard dogs. He seeks advice on whether the following
expenses and losses are deductible in terms of the general deduction formula:
1. One of Max’s guards was badly bitten by one of the guard dogs while on duty. The court
granted the guard compensation amounting to R25 000. Max paid the amount during
March 2022 after the court decision on 20 February 2022.
continued
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Chapter 4: General deduction formula
4.11
2. One of Max’s trucks, with a tax value of R50 000 on the date, was hijacked when the
driver was returning with the truck after having transported a team of guards to a
client’s premises. The truck was not insured.
3. Max erected a billboard on the pavement outside his business premises, advertising his
security business. The billboard cost R30 000. Max also paid R80 000 for advertisements
that appear in the local newspaper every Saturday, in which his security services are
advertised. The local municipality fined Max R10 000 for obstruction to pedestrians
caused by his billboard. Max also paid R2 000 to have the billboard moved inside the
boundary of his property.
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4. Four of Max’s team leaders attended a two-day training seminar on the latest security
techniques, at a cost of R18 000 per person.
5. Max borrowed R100 000 on 1 March 2021 and paid interest on this loan amounting to
R12 000 for the current year of assessment. He used R50 000 to buy shares in his
brother’s private company, R30 000 to buy ammunition to be issued to his security
guards and R20 000 to pay the account for veterinary services that had been unpaid
since July 2020 when four of his guard dogs were injured in a dog fight.
You are required to determine whether the expenses and losses above are deductible in
terms of the general deduction formula.
Solution 4.8
1. The question of whether Max will be able to deduct the amount of R25 000 in terms of
section 11(a) will depend on whether it is a non-capital expense actually incurred
during the year of assessment in the production of Max’s income. The expense is not of
a capital nature because it was not incurred to purchase or improve a capital asset or to
give rise to an enduring benefit. Although the payment was only made after the end of
the year of assessment, Max incurred an unconditional liability on 20 February 2022 to
pay the amount so that, if it is deductible, it will have to be deducted during the current year of assessment. The essential problem to be addressed, however, is whether
this amount was incurred in the production of Max’s income. In Port Elizabeth Electric
Tramway Co Ltd v CIR 8 SATC 13, it was held that expenses are deductible provided
they are so closely connected to a business operation that they may be regarded as part
of the cost of performing it. In the case of fortuitous or chance expenditure arising from
an accidental injury, one must therefore examine the closeness of the connection. Was
the act leading to the expense ‘a necessary concomitant’ of the business operation (Joffe
& Co (Pty) Ltd v CIR 13 SATC 354)? It would appear that the type of business Max is
engaged in carries the risk of employees or the public being bitten by one of his guard
dogs. The expense of R25 000 should therefore be deductible in terms of section 11(a).
2. The loss of the truck is a loss of a capital nature as the truck formed part of the fixed
capital structure of Max’s business (CIR v George Forest Timber Co Ltd 1 SATC 20). The
loss of R50 000 is therefore not deductible in terms of the general deduction formula.
continued
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4.11–4.12
3. The cost of the billboard (R10 000) is an expense of a capital nature as it was
expended to create an enduring benefit for Max’s business and is also not an expense
that is closely connected to his income-producing operations (New State Areas Ltd v
CIR 14 SATC 155). The ongoing advertisements in the newspaper at a cost of R80 000
constitute recurring expenses of a non-capital nature. No single advertisement could
be said to create an enduring benefit. The fine of R10 000 is not an expense incurred in
the production of Max’s income, but a punishment for the contravention of a law. Section 23(o) prohibits the deduction of fines. The expense of R2 000 incurred in moving
the billboard is also an expense of a capital nature as it is closely connected to the
income-producing structure, rather than the income-producing operations of his
business.
4. The cost of R72 000 (R18 000 × 4) incurred by Max in training his workers will be
deductible as it is an expense incurred in the production of his income (by training
them to perform their services more effectively). This is not of a capital nature.
5. The interest of R6 000 (R12 000 × R50 000/R100 000) incurred on R50 000 of the loan
will not be deductible in terms of the general deduction provisions as it is not an
expense which produces income as defined (section 23(f)). Dividends earned on the
shares are exempt from tax and therefore do not constitute income. Interest of R3 600
(R12 000 × R30 000 / R100 000) incurred on the purchase of ammunition is deductible
as the expense was closely connected with his income-producing operations. The
ammunition is not part of the capital structure of his business. The interest of R2 400
(R12 000 × R20 000/R100 000) incurred on the R20 000 used to pay the veterinary costs
for his dogs is an expense incurred in the production of Max’s income, as the risk of
dog fights and the attendant injuries are closely connected to his type of business. The
interest will therefore be deductible. The actual payment of R20 000 would not be deductible in the current year of assessment as this expense was actually incurred in the
previous year of assessment. If Max did not claim it as a deduction in that year of
assessment, he may not deduct it in this year. His only recourse would be to object to
the 2020 assessment issued by SARS.
1.
Interest is payable on a capital loan and is therefore not of a capital
nature. Will interest therefore always be deductible?
2.
Can Max claim the legal cost incurred?
3.
If I claim an expense and don’t have to pay it, do I have a tax saving?
4.12 Summary
In this chapter, the different components that make up the so-called ‘general deduction formula’ were discussed. All these components or requirements must be present
for an expense to be deductible.
The key requirements of the general deduction formula are that the taxpayer must be
carrying on a trade and that the expense must be in the production of income, not of a
capital nature and expended for the purpose of trade. These requirements are not all
defined in the Act and certain tests were laid down by the court. The deductibility of
an expense will have to be decided on its own facts and circumstances.
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Chapter 4: General deduction formula
4.12–4.13
If the expense does not comply with all the requirements of the general deduction
formula, it will be necessary to determine whether a specific deduction in terms of the
Act might apply. The specific deductions are dealt with in chapter 5.
In the questions that follow, the requirements of the general deduction formula will
be illustrated.
4.13 Examination preparation
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Question 4.1
Kyle is a South African resident, aged 36 years. He owns a bar in Bloemfontein. Due to the
good reputation and popularity of his business, Kyle needed to appoint two bouncers to
ensure the safety of his customers and to minimise fights.
During the 2022 year of assessment one customer had five drinks too many and started a
fight with another customer. One of the bouncers tried to control the issue and stop the
fight; however, he ended up having two of his ribs broken. The fight was eventually
stopped by the other bouncer. Kyle incurred costs amounting to R76 000 to cover the
medical expenditure of the bouncer who got injured.
You are required to:
Discuss whether the medical expenses of R76 000 would be deductible in Kyle’s
taxable income for the 2022 year of assessment. Refer to case law to support your
answer.
Answer 4.1
Discussion of the deduction of medical expenses
For an expense to be deductible it has to comply with all the components of the general
deduction formula. The issue is whether the medical expense incurred by Kyle were
incurred in the production of income.
The medical expense was incurred in the production of income as one of Kyle’s bouncers
was injured during his employement.
Port Elizabeth Electric Tramway Company Ltd v Commissioner for Inland Revenue 8 SATC 13:
‘closely connected’ test
What action gave rise to the expenditure?
The medical expenses were incurred because a bouncer tried to stop a fight between
customers and was consequently injured. This is his job.
Is the action so closely linked to the income earned that it may be regarded as part of the cost of
performing it?
It might be necessary to incur such expense in order to produce income, as stopping fights
between customers are in the ordinary course of his business of operating a bar.
Conclusion: The medical expense incurred qualifies as a deduction as it is closely connected
to the business operation.
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4.13
Income and expenses
of individuals
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5
Gross
income
General
deduction
formula
_
Exempt
income
Specific
deductions
–
Deductions
=
Capital
allowances
Taxable
income
Tax
payable
Deductions
for
individuals
Page
5.1
Introduction............................................................................................................
148
5.2
Specific income ......................................................................................................
5.2.1 Introduction ..............................................................................................
5.2.2 South African income (section 1 – definition of ‘gross income’) .......
5.2.2.1
South African dividends (section 10(1)(k) ............................
5.2.2.2
South African interest exemption (section 10(1)(i)) ............
5.2.2.3
Interest and dividends from tax free investments
(section 12T) .............................................................................
5.2.3 Foreign income .........................................................................................
5.2.3.1 Foreign dividends (paragraph (k) of ‘gross income
and section 10B) and headquarter company dividends......
5.2.3.2 Other foreign income ...............................................................
149
149
150
150
150
5.3
Specific deductions ................................................................................................
5.3.1 Introduction ..............................................................................................
5.3.2 Expenses and allowances deductible by salaried taxpayers
(section 23(m)) ...........................................................................................
5.3.3 Contributions to retirement funds (section 11F) ..................................
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151
151
151
153
155
155
157
160
A Student’s Approach to Income Tax/Natural Persons
5.1
Page
5.3.4
Donations to public benefit organisations
(section 18A and the Ninth Schedule) ...................................................
Calculation of taxable income ................................................................
166
167
5.4
Income of minors (section 7(3)) ...........................................................................
170
5.5
Rebate in respect of foreign taxes on income (section 6quat) ...........................
171
5.6
Limiting losses when calculating taxable income (sections 20 and 20A) .......
5.6.1 Suspect trades ...........................................................................................
5.6.2 The exclusion rule ....................................................................................
176
178
178
5.7
Summary.................................................................................................................
179
5.8
Examination preparation ......................................................................................
180
5.3.5
5.1 Introduction
In this chapter, we look at the earning of investment income as well as the deductions that can be claimed, for income tax purposes, by a person earning a salary.
After a person starts working and earning an income, they can eventually start saving
some of the income that they earn. This income can then be invested in different
assets, for example shares, fixed deposits or even business ventures. The aim of
investment is to generate additional income. Remember that the gross income definition includes all income received by residents of South Africa. South Africans can
also invest their money offshore (in overseas countries). The income earned on these
foreign investments is also subject to tax in South Africa, but there are special rules
that need to be considered when dealing with this type of income.
Apart from earning income over and above their salary, a person earning a salary will
also have expenses that they would like to deduct for tax purposes. In terms of the
general deduction formula (section 11(a)) read with section 23, a taxpayer may not
deduct any private or domestic expenditure (chapter 4). The Income Tax Act 58 of
1962 (the Act) does however contain a number of provisions where the taxpayer is
allowed to deduct certain private or domestic expenses. In terms of section 23(m) a
person earning only a salary may deduct only the expenses listed in the section. The
same section prohibits all other deductions for this ‘type’ of taxpayer.
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Chapter 5: Income and expenses of individuals
5.1–5.2
Critical questions
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A person earning investment income will need to deal with the following questions:
• What portion of investment income must be included in gross income?
• Is all investment income taxable?
• Is there a difference between the taxation of South African investment income and
foreign investment income?
Individuals are entitled to also deduct certain amounts that will reduce their taxable
income and the following questions arise:
• How much of the retirement fund contributions can be claimed for tax purposes?
• Can donations made, be claimed for tax purposes?
• Does it matter in which order the expenses are deducted?
• Can any other private or domestic expenses be claimed?
• How much of a rebate is available against any foreign tax paid?
Taxable income framework
Gross income (as defined in section 1)
Less:
Exempt income (sections 10, 10A and 12T)
Less:
Add:
Add:
Less:
Less:
R
xxx
(xxx)
Income (as defined in section 1)
Deductions section 11 – but see below; subject to section 23(m) and
assessed loss (section 20)
Taxable portion of allowances (section 8 – such as travel and subsistence
allowances)
xxx
(xxx)
Taxable income before taxable capital gain
Taxable capital gain (section 26A)
Taxable income before retirement fund deduction
Retirement fund deduction (section 11F)
Taxable income before donations deduction
Donations deduction (section 18A)
xxx
xxx
xxx
(xxx)
xxx
(xxx)
Taxable income (as defined in section 1)
xxx
xxx
5.2 Specific income
5.2.1 Introduction
Certain types of income are included in a taxpayer’s taxable income in terms of the
general definition of gross income. Income that otherwise would not have been
included by the general definition, is specifically included in gross income in terms of
the specific inclusions listed at the end of the general definition of gross income.
In this chapter, selected specific inclusions (and not the general definition of gross
income) as they relate to the calculation of a resident (individual) taxpayer’s taxable
income are discussed. Some income is exempt from tax, for example, certain dividends and interest as dealt with in chapter 3. The specific deductions available to an
individual are also discussed.
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5.2
5.2.2 South African income (section 1 – definition of ‘gross income’)
A person defined as a ‘resident’ of South Africa will be taxed on all income earned in
South Africa, for example salary, interest received and rental received, subject to the
definition of gross income.
5.2.2.1 South African dividends (section 10(1)(k))
All dividends received from South African companies that are subject to dividends
tax, are exempt from normal tax.
5.2.2.2 South African interest exemption (section 10(1)(i))
Where a taxpayer receives South African interest, the interest is subject to an exemption. The amount that is exempt depends on the age of the taxpayer.
Where the taxpayer is 65 years or older on the last day of the year of assessment, the
first R34 500 of the interest income received is exempt from tax. Where the taxpayer is
younger than 65 years of age on the last day of the year of assessment, the first
R23 800 of interest income received or accrued is exempt from tax.
Example 5.1
Chris Canele (66 years old) and his wife (55 years old), who are married out of community
of property and are both South African residents, earned the following investment income
during the current year of assessment:
Chris
Interest from local investments (not tax free investments)
R
37 000
Wife
Interest from local investments (not tax free investments)
21 500
You are required to calculate Chris and his wife’s taxable income for the current year of
assessment.
Solution 5.1
Chris
Interest from local investments
Less: Interest exemption – R34 500
R
37 000
(34 500)
Taxable income
R
2 500
2 500
Wife
Interest from local investment
Less: Interest exemption – R23 800, therefore the full
amount is exempt
Taxable income
21 500
(21 500)
nil
nil
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Chapter 5: Income and expenses of individuals
5.2
REMEMBER
• The interest exemption available to natural persons will be left unchanged from 2015
onwards. Investments in approved tax free investments will not be subject to income tax.
5.2.2.3 Interest and dividends from tax free investments (section 12T)
Interest and dividends received from tax free investments are fully exempt from
taxation (refer to chapter 3).
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5.2.3 Foreign income
South African residents are also taxed on foreign income. This section discusses the
following types of foreign income that can be earned by a South African taxpayer:
• foreign dividends; and
• other foreign income (earned directly by the taxpayer).
Note that section 9D of the Act contains provisions relating to the taxation of income
from controlled foreign companies, but this falls outside the scope of this book.
In this chapter, we also discuss exemptions and rebates in respect of foreign income.
REMEMBER
• Should a double-tax agreement exist between South Africa and another country, all foreign
income derived by South African residents could be subject to that double-tax agreement. The double-tax agreement overrides the general taxation provisions of the Act. If
a double-tax agreement exists between South Africa and a specific country, one must
first consult the double-tax agreement to see which country has the right to tax the specific type of income in question. The country that has the taxing right will then apply
the provisions of its Income Tax Act. If no double-tax agreement exists, the Act’s provisions must be applied.
A double-tax agreement is entered into by the revenue authorities of two countries that
often trade with each other in order to determine who has taxing rights, that is to say
who may tax certain types of income. As a result, certain types of income are only taxable in one of the two countries. South Africa has comprehensive double-tax agreements
with about 85 countries.
5.2.3.1 Foreign dividends (paragraph (k) of ‘gross income’ and
section 10B) and headquarter company dividends
In terms of paragraph (k), foreign dividends are specifically included in gross income.
This section includes the gross amount of the foreign dividend (before the deduction
of any withholding tax) in gross income. It is important to note that foreign dividends
are not subject to dividends tax, except for dividends that are paid by dual-listed
companies (refer to chapter 3.4.4).
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5.2
Example 5.2
Wiley Wonders earned the following investment income during the current year of
assessment:
R
Taxable foreign dividends
26 200
Interest from foreign investments
900
You are required to calculate how much foreign income will be included in Wiley’s
taxable income for the current year of assessment.
Solution 5.2
Wiley
Foreign dividends (gross income special inclusion)
Less: Exempt (section 10B) (R26 200 × 25 / 45)
Interest from foreign investments (gross income and no exemption)
Included in taxable income
R
R
26 200
(14 556)
11 644
900
12 544
In terms of section 23(q), deductions in respect of expenditure incurred in the production of income from foreign dividends are not allowed. Residents will be entitled to
a rebate or credit for direct foreign taxes paid in respect of foreign dividends. The
rebate is limited to the amount of foreign tax levied on the dividends.
Example 5.3
Joseph Malema, a South African resident, pays income tax at the marginal rate of 41%.
Joseph holds 3% of the total equity share and voting rights in a foreign company. He
receives a foreign dividend of R50 000 on shares, which is subject to a dividend withholding tax of 10%. Joseph incurred interest expenditure of R2 000 on a loan which he used to
purchase the shares in respect of which the dividend was received.
You are required to calculate how much tax is payable by Joseph in relation to the foreign dividends for the current year of assessment.
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Chapter 5: Income and expenses of individuals
5.2
Solution 5.3
R
50 000
Foreign dividends (gross income special inclusion)
Expenditure in the production of income – prohibited in terms
of section 23(q)
Less: Exempt (section 10B(3)) (R50 000 × 25 / 45) (Note)
nil
(27 778)
Included in taxable income
22 222
Additional tax at 41%
Less: Foreign tax rebate [Lesser of (R50 000 × 10%) or (R22 222 × 41%)]
9 111
(5 000)
South African tax payable on foreign dividends
4 111
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Note
None of the full exemptions in terms of section 10B(2) applies to these foreign dividends.
Collective investment schemes – foreign dividends (section 25BA)
Where an amount is distributed by the portfolio within 12 months of the date of
receipt of the portfolio the amount is deemed to have accrued directly to the holder of
the participatory interest (on the date of distribution). Where an amount (that is not
distributed by the portfolio within 12 months of its accrual to the portfolio), is subsequently distributed the amount is exempt in the hands of the holder of the interest (in
terms of s 10(1)(iB), so long at the amount was subject to normal tax in the portfolio’s
hands. So if the amount distributed represents foreign dividends the tax treatment
can be summarised as follows:
Distributed within 12 months
from its accrual
Deemed to accrue directly
to holder
Included in gross income
of holder (could be exempt
in terms of s 10B).
Distributed after 12 months
Accrues to portfolio (could
be exempt under s 10B)
Amount is exempt in
holder’s hands.
5.2.3.2 Other foreign income
A South African resident is taxed on all forms of foreign income (that is to say their
worldwide income). Where foreign income is taxed in the foreign country and is
included in South African taxable income, the amount will have been subject to tax
twice. In this case, the South African resident is entitled to claim a rebate (reduction)
against their South African tax. This foreign tax rebate is contained in section 6quat of
the Act (refer to 5.5). The rules cannot be dealt with yet as this rebate takes into
account the specific deductions that the taxpayer can claim, therefore it is dealt with
later in the chapter.
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5.2
REMEMBER
• All other foreign income, such as royalties, rental, trade income etc., must also be
included in the gross income of a South African resident.
• Only South African residents can claim the foreign tax rebate (section 6quat). This is a
rebate to reduce the South African tax payable; it is not a deduction from taxable income.
Example 5.4
Sam Shoba (66 years old) and his wife (Sindy, 55 years old), who are married out of community of property and are both South African residents, earned the following investment
income during the current year of assessment:
Sam
Taxable foreign dividends
Interest from foreign investments
Interest from local investments (not tax free investments)
R
14 200
11 000
38 500
Sindy
Taxable foreign dividends
400
Interest from foreign investments
1 500
Interest from local investments (not tax free investments)
24 000
You are required to calculate Sam and Sindy’s taxable income for the current year of
assessment.
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5.2–5.3
Chapter 5: Income and expenses of individuals
Solution 5.4
Sam
Foreign dividends
Less: Exemption (R14 200 × 25 / 45)
Interest from foreign investments (fully taxable)
Interest from local investments
Less: Interest exemption – R34 500
R
14 200
(7 889)
38 500
(34 500)
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Taxable income
R
6311
11 000
4 000
21 311
Sindy
Foreign dividends
Less: Exemption (R400 × 25 / 45)
Interest from foreign investments
Interest from local investment
Less: Interest exemption – R23 800
400
(222)
24 000
(23 800)
Taxable income
178
1 500
200
1 878
5.3 Specific deductions
5.3.1 Introduction
The cost incurred by a taxpayer in terms of their maintenance or that of their family
or establishment are prohibited as deductions in terms of section 23(a). Private or
domestic expenses do not qualify for a tax deduction in terms of the general deduction formula (section 11(a)) as they are not incurred in the production of income.
Their deduction is also specifically prohibited by section 23(b).
Furthermore, section 23(m) prohibits deductions in terms of section 11 that relate to
employment by a person who derives remuneration except for the following deductions (provided the expenses are related to employment):
• contributions to pension funds, provident funds or retirement annuity funds (section 11F);
• legal expenses (section 11(c));
• depreciation allowance (wear-and-tear) (section 11(e));
• bad debts allowance (section 11(i));
• provision for bad debts allowance (section 11(j));
• refund of an amount for services rendered or a refund in respect of a restraint of
trade, where either amounts had been included in gross income (section 11(nA)
and (nB)); and
• rent, repairs or expenses (section 11(a) and (d)) to the extent that they are not private and domestic expenses (home study expenses).
Remuneration for the purposes of this section is remuneration as defined in paragraph 1 of the Fourth Schedule. A person who is an agent or representative whose
remuneration is normally derived mainly (more than 50%) in the form of commission
based on sales will not be subject to section 23(m) prohibition and may deduct
expenses in terms of section 11.
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‘Remuneration’ includes income received whether in cash or otherwise and whether
or not in respect of services rendered, including:
• a salary;
• wage;
• bonus;
• commission;
• emolument;
• superannuation allowance;
• stipend;
• voluntary awards in respect of employment;
• payments made in commutation of amounts due under any contract of employment
or service;
• restraint-of-trade payments;
• fringe benefits;
• gain on qualifying equity shares (refer to chapter 6);
• an amount from equity instruments that is required to be included in taxable
income in terms of section 8C (from 1 March 2016);
• transfer of amounts from pension to provident fund;
• leave pay;
• overtime pay;
• gratuity;
• fee;
• pension;
• retiring allowance;
• annuity;
• retirement fund lump sum benefits;
• retirement fund lump sum withdrawal benefits;
• the first 80% of travel allowance (taxable benefit) except where the employer is
satisfied that the motor vehicle will be used at least 80% of the time for business
purposes, then the amount included in remuneration is only 20%;
• any other allowance, except in the case of the holder of a public office (in terms of
section 8) will be 50%;
• the first 80% of the taxable benefit for the right of use of a motor vehicle (except
where the employer is satisfied that the motor vehicle will be used at least 80% of
the time for business purposes during the current year of assessment, then the
amount included in remuneration will only be 20% of the fringe benefit);
• an amount paid that can be linked to services rendered or to be rendered; and
• lump sum payments by employers.
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5.3
Chapter 5: Income and expenses of individuals
Remuneration excludes:
• state pensions paid to old-age pensioners, blind persons, disabled persons and
grants in terms of the Children’s Act;
• payment for services to a person who carries on an independent trade (refer to
10.6.2) other than:
– payments made to a person who receives remuneration; or
– to whom any remuneration accrues by reason of any services rendered by such
person to or on behalf of a labour broker or person (or class or category of person);
– whom the Minister of Finance by notice in the Gazette declares to be an
employee for the purposes of this definition; and
– a personal service trust and personal service company;
• reimbursive payments to employees for business expenses; and
• annuities payable in terms of a divorce order or separation agreement.
These expenses are now discussed in the order that they are deducted when calculating taxable income.
5.3.2 Expenses and allowances deductible by salaried taxpayers
(section 23(m))
The following expenses may be deducted by a salaried taxpayer, but only to the
extent that they relate to the taxpayer’s employment.
Legal expenses (section 11(c))
Legal expenses include fees for the services of legal practitioners, expenses incurred
in getting evidence or expert advice, court fees, witness fees and expenses, taxing
fees, the fees and expenses of sheriffs or messengers of the court and other expenses
of litigation that are of a similar nature to any of these expenses.
These expenses may only be deducted where the taxpayer actually incurs legal
expenses regarding a claim, dispute or action arising in the course of the ordinary
operations (employment) undertaken by the taxpayer. Legal fees may not be capital
in nature.
Depreciation of an asset (section 11(e))
A wear-and-tear allowance represents the amount by which an asset owned by the
taxpayer has diminished in value. This deduction may only be claimed in respect of
an asset used for the purposes of earning salary income. The Act refers to write-off
periods that are listed for this purpose in a public notice issued by the Commissioner.
Currently the write-off period of assets is supplied by the Commissioner in terms of
Binding General Ruling No. 7.
Bad debts (section 11(i))
Bad debts may only be claimed in respect of a salary that has not been paid, if the
taxpayer can prove that the employer will never pay the amount and that it has
already been included in taxable income in the current or a previous year of assessment.
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5.3
Provision for doubtful debts (section 11(j))
Where an employee can prove that there is a strong likelihood that an employer is not
going to pay a salary that has already been included in the taxpayer’s taxable income,
and it is outstanding for 90 days or more, the taxpayer is entitled to claim a provision
equal to 25% of the debt as a deduction. This provision must however be included in
income in the following year of assessment.
Entertainment expenses (section 11(a))
Entertainment expenses may only be deducted by an agent or representative who
earns more than 50% of their remuneration (income from employment) in the form of
commission from sales. The expenses must be incurred in the production of income
and not of a capital nature, in terms of the general deduction formula (section 11(a)).
Entertainment expenditure is not defined in the Act. It was previously described as
expenditure incurred in the provision of hospitality of any kind, which specifically
included:
• food, drink or accommodation;
• a ticket or voucher entitling a person to admission to a theatre, exhibition or club,
to attend a show, display or performance or to use or enjoy a sporting, recreational
or other facility;
• a gift of goods intended for the personal use or enjoyment of a person;
• travel facility; and
• a voucher entitling the recipient or a holder of the voucher to exchange it for food,
drink or accommodation or for a ticket, voucher, gift, or travel facility as described
above.
Deductions cannot be made in terms of section 11(a) for entertainment expenditure
incurred by an employee (or the holder of an office) for which the employee derives
remuneration (as defined in the Fourth Schedule), unless they are agents or representatives normally earning commissions based on their sales or the turnover
attributable to them.
An agent or representative who earns more than 50% of their remuneration (amount
paid by employer) in the form of commission can claim all the entertainment costs
they incur in the production of income not of a capital nature in terms of the general
deduction formula (section 11(a)).
REMEMBER
• Only a taxpayer who earns commission that is 50% or more of their total remuneration
may deduct entertainment expenses.
• For entertainment expenses to be deductible in these circumstances, they must comply
with all the requirements of section 11(a).
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5.3
Chapter 5: Income and expenses of individuals
Example 5.5
Samuel Gxagxa, a salesman, earned the following income during the year of assessment:
R
Salary
30 000
Commission on sales
25 000
Annual prize for the highest sales for the year
3 000
Entertainment allowance
1 200
59 200
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During the year, Samuel incurred entertainment expenditure amounting to R1 500.
You are required to calculate the amount that Samuel may claim as a deduction in respect
of entertainment expenditure.
Solution 5.5
As Samuel does not earn remuneration mainly (more than 50%, (R25 000/R59 200 = 42%))
in the form of commission on sales, he may not claim a deduction in terms of section 11(a). If more than 50% of his remuneration had consisted of commission earnings,
he would have been able to claim the full amount of his entertainment expenditure in
terms of section 11(a) if it were incurred in the production of his income and not of a capital
nature.
Note that the winning of a prize would, in certain circumstances, constitute a receipt of
a capital nature. In the above circumstances, however, it is earned by virtue of the taxpayer’s trading activities (his employment) and will therefore be taxable.
REMEMBER
• An entertainment allowance is always included, in full, in gross income.
Home office expenses (sections 11(a), (d), 23(b) and 23(m))
A taxpayer who is required by their employer to bear the cost of maintaining a home
office as their central business location may deduct legitimate expenses that comply
with the requirements of section 11(a), or repairs in terms of section 11(d). This deduction will be particularly relevant for those who had to work from home during the
Covid-19 pandemic. The deduction may be for costs such as rental, repairs or expenses relating to the office. Section 23(b) disallows any portion of these expenses if they
are not expended for the purposes of trade.
The office expenses can only be claimed where
• the part of the house used as a home office is specifically equipped for purposes of
the employee’s trade;
• the part is regularly and exclusively used for the employee’s trade; and
• the employee’s duties are mainly performed in that home office.
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5.3
It is important to note that the “exclusivity” requirement means that the part that is
used for trade may not be used for any purpose other than the taxpayer’s trade. If the
trade is employment then section 23(b) imposes further limitations on claiming a
deduction. For employees who do not earn mainly commission, their duties must be
performed mainly (>50%) in the part of the private premises occupied for the purpose of trade.
Calculating the deduction
Permitted expenditure
The expenses are limited in terms of what is permitted by section 23(b), which is rent,
cost of repairs or expenses in connection with premises occupied for the purposes of
trade. Expenses in connection with the premises, could include interest on home
loans, rates and taxes, levies, electricity and cleaning costs. Communication costs, for
example internet or fibre, are not deductible as they are not in connection with the
premises or repairs. Section 23(m) allows an employee to deduct wear and tear. An
employee is also be permitted to deduction of a section 11(e) allowance on office
equipment and furniture.
Apportionment
Any expenses relating to the premises need to be apportioned. SARS allows expenses
relating to the part of the premises occupied for trade to be based on the proportion
of the floor area to the total floor area of all the buildings on the property (including
the home office and out buildings).
Payments related to employment that are refunded (section 11(nA) and (nB))
Where a taxpayer receives an amount, including voluntary awards, for services
rendered or in respect of employment, or a restraint of trade payment, an amount
repaid by the taxpayer may be deducted.
5.3.3 Contributions to retirement funds (section 11F)
Section 11F is applicable to all amounts that have been contributed to any pension,
provident or retirement annuity funds. Before the deduction is discussed, a brief
discussion on pension, provident and retirement annuity funds is included for those
who do not know the difference between them.
Pension and provident funds
Pension and provident funds are linked to employment. Contributions made to a
pension fund or provident fund are a type of forced saving. Every month employers
set aside a prescribed amount of each employee’s income from employment and
contribute it to a pension or provident fund. In most instances, the employer will also
contribute an amount on behalf of each employee. When an employee retires, the
fund will pay out all the contributions made to the fund by the employer and employee, plus interest earned over the years. Therefore, when an employee retires and
is no longer earning a salary, they will receive a monthly pension instead, based on
the amount that was contributed during their working years. In practice, employees
are compelled to join the employer’s pension or provident fund, if the employer has
one.
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Chapter 5: Income and expenses of individuals
5.3
Each month a percentage of the employee’s salary is deducted by the employer and
paid over to the pension or provident fund. The employer also considers these contributions when they determine the amount of employees’ tax to be withheld from
the employee’s salary or wage. In most cases, an employer will also make a monthly
contribution to the fund on behalf of the employee. The contributions to the fund are
made by the employee and the employer.
Retirement annuity fund contributions
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Where taxpayers do not contribute to a pension or provident fund or where they
would like to supplement their retirement earnings, they can contribute to a retirement annuity fund.
Membership of a retirement annuity fund is voluntary and contracts are entered into
independently between a person and the desired fund. This means that, unlike pension
funds or provident funds, retirement annuity funds are not linked to employment.
REMEMBER
• A retirement annuity fund is not the same as retirement funds.
‘Retirement funds’ is used to describe all funds for retirement savings, namely pension
fund, provident fund and retirement annuity fund.
Contributions disallowed in previous years
Contributions made in previous years that were not allowed because they exceeded
the limitation (referred to as ‘unclaimed balance of contributions’) are deemed to be
contributed in the next year. This unclaimed balance of contributions at the end of the
2021 year of assessment is only deemed to be contributed in the 2022 year of assessment for the purposes of section 11F if it was not previously
• allowed as a deduction (in terms of section 11F) in any year of assessment (up to
the end of the 2021 year of assessment);
• taken into account in terms of paragraph 5(1)(a) or 6(1)(b)(i) of the Second Schedule
(up to the end of the 2022 year of assessment); or
• taken into account in determining amounts exempt under section 10C (up to the
end of the 2022 year of assessment).
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5.3
This means that any unclaimed balance of contributions at the end of the 2021 year of
assessment is used in the following sequence in the 2022 year of assessment:
• as a deduction in terms of paragraph 5(1)(a) or 6(1)(b)(i) of the Second Schedule,
when the taxpayer receives a retirement fund lump sum benefit or a retirement
fund withdrawal benefit in the 2022 year of assessment (refer to chapter 9);
• as an exemption in terms of section 10C against any qualifying annuities received
during the 2022 year of assessment; and
• any remaining unclaimed balance will be added to the current contributions made
to a retirement fund during the 2022 year of assessment and will be referred to as
actual contributions.
Current contributions not allowed to be deducted in terms of the section 11F deduction will never form part of the current year’s unclaimed balance of contributions.
Contributions to provident funds were not allowed as deductions before 1 March
2016, therefore the rollover of unclaimed balance of contributions to provident funds
will only be effective from the 2017 year of assessment for amounts disallowed in the
2017 year of assessment. The rollover is not applicable to amounts disallowed before
1 March 2016.
Contributions made by the employer
An amount contributed by an employer is deemed to be a current contribution to the
extent that it has been included in the income of the person as a fringe benefit. A
partner in a partnership is deemed to be an employee for the purposes of this deduction.
Deduction of contributions
With effect from 1 March 2016, all contributions to retirement funds are deductible
under section 11F limited to the provisions of the section. Contributions to provident
funds were not allowable as a deduction before 1 March 2016.
REMEMBER
• A limit means that you cannot deduct more than that amount from taxable income. This
means that if you contributed R10 000 and the limit is R8 000, you are only entitled to
deduct R8 000; however, if you wish to deduct R5 000 and the limit is R8 000, you are
entitled to deduct the full R5 000 as it is less than the limit.
• You can never deduct more than the taxpayer actually paid.
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Chapter 5: Income and expenses of individuals
5.3
Contributions made to pension, provident and retirement annuity funds during a
year of assessment and any unclaimed balance of contributions are added together
and in total are limited to a deduction of:
the lesser of:
• R350 000 (this amount is never apportioned for this deduction); or
• 27,5% of the highest of:
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– ‘remuneration’ as defined in paragraph 1 of the Fourth Schedule (refer to 5.3.1)
(excluding retirement fund lump sum benefits, retirement fund withdrawal
benefits and severance benefits); or
– taxable income (excluding retirement fund lump sum benefits, retirement fund
withdrawal benefits and severance benefits) before this deduction and a section
18A deduction (donations to public benefit organisations – refer to 5.3.4). Taxable income, for the purpose of calculating the 27,5%, includes any capital gains
inclusion for the purposes of this part of calculating the limitation for this deduction; or
• taxable income (excluding retirement fund lump sum benefits, retirement fund
withdrawal benefits and severance benefits) before this deduction and a section
18A deduction and before the inclusion of any taxable capital gain.
The inclusion of the third leg of the limitation, namely taxable income, in effect means
that the deduction of retirement fund contributions can never create a loss.
REMEMBER
• For the purposes of section 11F, retirement fund deduction ‘remuneration’ excludes
– a retirement fund lump sum benefit;
– a retirement fund lump sum withdrawal benefit; and
– a severance benefit.
• Contributions consist of all contributions made by the taxpayer to pension, provident
and retirement annuity funds plus contributions made by the employer on which the
taxpayer has been taxed and any unclaimed balance of contributions.
• Allowable contributions to retirement funds are deducted after the inclusion of a
taxable capital gain but before the deduction for donations to public benefit organisations.
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A Student’s Approach to Income Tax/Natural Persons
5.3
Example 5.6
Harry Hadebe earns a salary of R442 000 and a non-pensionable bonus of R5 000. He is a
member of his employer’s pension fund. He contributes R35 000 per annum in respect of
current contributions and R2 000 per annum in respect of ‘past period’ contributions. His
employer did not contribute to the fund. His remuneration amounts to R447 000 and his
taxable income before this deduction is R600 000.
Hilda Hadebe (his wife) is a teacher employed in a government school. She earns a salary
of R235 000 a year and makes an annual contribution of R15 000 to the government pension fund. Her employer also contributes R15 000 per annum to the fund on her behalf
and this has been included in her taxable income as a fringe benefit. Her remuneration
amounts to R250 000 and her taxable income before this deduction is also R250 000.
You are required to calculate the amount that Harry and Hilda will be able to deduct in
respect of pension fund contributions.
Solution 5.6
Harry
Contributions to retirement fund (R35 000 + R2 000 = R37 000)
Deduction limited to the lesser of
• R350 000; or
• 27,5% × the higher of
remuneration (R447 000) or taxable income (R600 000)
Therefore 27,5% × R600 000 = R165 000; or
• R600 000
R165 000 is less than R350 000 and R600 000 therefore the limit is R165 000
Harry can therefore deduct the full amount of his contributions of R37 000 as they are
less than the limit.
Hilda
Contributions to retirement fund (R15 000 (Hilda) + R15 000 (employer) = R30 000)
Deduction limited to the lesser of
• R350 000; or
• 27,5% × the higher of
remuneration (R250 000) or taxable income (R250 000)
Therefore 27,5% × R250 000 = R68 750; or
• R250 000
R68 750 is less than R350 000 and R250 000 therefore limit is R68 750.
Hilda can therefore deduct the full amount of her contributions of R30 000 as it is less
than the limit.
What would happen if Hilda’s contributions were R70 000 in total (assuming
that her remuneration and taxable income was R250 000)?
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Chapter 5: Income and expenses of individuals
5.3
Example 5.7
For the current year of assessment, William Wonfor had a taxable income of R225 000 (he
did not receive any retirement fund lump sum benefits during the year), before deducting
any retirement fund contributions. His taxable income is derived from the profits of a
small hardware shop that he owns. Wanda Wonfor, his wife, earned a salary of R85 000
during the year of assessment. From that amount, current pension fund contributions
were deducted by her employer. During the year, William and Wanda made the following contributions to retirement funds:
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William:
Wanda:
Retirement annuity fund contributions
Pension fund contributions (her employer did not contribute)
Retirement annuity fund contributions
Reinstatement retirement annuity fund contributions
R40 000
R 3 000
R10 500
R2 000
You are required to calculate the amount that William and Wanda will be able to deduct
in respect of retirement annuity fund contributions. Neither of them had any other income
or deductions.
Solution 5.7
William
Contributions to retirement fund – R40 000
Limited to the lesser of
• R350 000; or
• 27,5% of the higher of
remuneration (R0) or taxable income (R225 000)
Therefore 27,5% × R225 000 = R61 875; or
• R225 000
R61 875 is less than R350 000 and R225 000 therefore the limit is R61 875.
William can therefore deduct the amount of his contributions of R40 000 in full as they
are less than the limit.
Wanda
Contributions to retirement funds – R3 000 + R10 500 + R2 000 = R15 500
Limited to the lesser of
• R350 000; or
• 27,5% of remuneration (R85 000) or taxable income (R85 000)
Therefore 27,5% × R85 000 = R23 375; or
• R85 000
R23 375 is less than R350 000 and R85 000 therefore the limit is R23 375.
Hilda can therefore deduct the amount of her contributions of R15 500 in full as they
are less than the limit.
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A Student’s Approach to Income Tax/Natural Persons
5.3
5.3.4 Donations to public benefit organisations
(section 18A and the Ninth Schedule)
Section 18A allows a taxpayer to deduct an amount of bona fide donations by that
taxpayer in cash or property made in kind, that were actually paid or transferred
during the year of assessment. The deductible donations must be made to:
• a public benefit organisation that has been approved by SARS in terms of section 30; or
• an institution, board or body as defined in section 10(1)(cA)(i) that hosts public
benefit activities in South Africa or complies with additional requirements prescribed by the Minister.
Part II of the Ninth Schedule provides that certain public benefit activities may be
classified as approved public benefit activities.
Once it has been established whether or not an amount donated by a taxpayer is an
approved donation for tax purposes, the total of all allowable donations made during
the year of assessment are then subject to a limitation of:
• 10% × taxable income before this deduction (excluding any retirement fund lump
sum benefit, retirement fund lump sum withdrawal benefit and severance benefit).
An amount that exceeds the limit is carried forward to the following year of assessment and can be claimed as a donation made in that year.
Example 5.8
Gift Mabija (45 years old) had a taxable income of R300 000 during the current year of
assessment before donating the following amounts:
R
Donation to Natal University
800
Donation to AIDS crisis centre (public benefit organisation)
600
Donation to Trees for Africa (not a public benefit organisation)
500
You are required to calculate the deduction in terms of donations that Gift will be able to
deduct for income tax purposes. You can assume that where applicable all official receipts
were obtained and that Gift did not receive any retirement fund lump sum benefits during the year.
Solution 5.8
Qualifying donations
Donation to Natal University – allowable
Donation to AIDS crisis centre (public benefit organisation) – allowable
Donation to Trees for Africa (not a public benefit organisation)
R
800
600
nil
1 400
Limited to 10% × R300 000 = R30 000
Gift only donated R1 400 of allowable donations and can therefore deduct R1 400 in full
because it is less than the limit.
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5.3
Chapter 5: Income and expenses of individuals
REMEMBER
• A donation may only be claimed in respect of section 18A where a receipt, as prescribed
by the Act, has been received.
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5.3.5 Calculation of taxable income
It is important to remember when calculating taxable income that certain deductions
must be deducted in a specific order in terms of the Act. The last items of a calculation of taxable income must be in the following order:
• assessed loss brought forward from the previous years of assessment;
• inclusion of taxable capital gain;
• contributions to retirement funds; and
• donations to public benefit organisations.
REMEMBER
• Capital gains tax is discussed in chapter 13. The calculated capital gain must be added
to taxable income before the retirement fund and donations deduction.
Example 5.9
The following information relates to Sam Jacombe (30 years old, unmarried) for the current year of assessment:
R
Salary
270 000
Bonus (non-pensionable)
6 000
South African interest (not tax free investments)
33 800
Medical fund contributions made by Sam (40%)
24 000
His employer pays 60% of the contributions to the fund
Retirement annuity fund contributions – current
Pension fund contributions – current
Sam pays 100% of his contributions to all retirement funds.
Donation to public benefit organisations – official receipt received
Donation to non-public benefit organisations – receipt received
Medical expenses not covered by the fund
4 200
8% of salary
800
300
5 340
You are required to calculate Sam’s taxable income for the current year of assessment.
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5.3
Solution 5.9
Calculation of Sam’s taxable income for the current year of assessment
R
Salary
Bonus
Interest
Less: Exemption
33 800
(23 800)
Medical fringe benefit – employer’s contribution
(R24 000 / 40% × 60%)
R
270 000
6 000
10 000
36 000
Taxable income before retirement fund deduction
Less: Retirement fund contributions
(8% × R270 000 = R21 600 + R4 200 = R25 800)
Limited to the lesser of
• R350 000; or
• 27,5% × the higher of
322 000
Remuneration (R270 000 + R6 000 + R36 000 = R312 000) or
Taxable income (R322 000)
Therefore 27,5% × R322 000 = R88 550; or
• R322 000
R88 550 is less than R350 000 and R322 000 and is
therefore the limit
Therefore allow R25 800 in full
Taxable income before donations deduction
Less: Donations to public benefit organisations
Donations to non-public benefit organisations
(25 800)
296 200
800
nil
800
Limited to 10% × R296 200 = R29 620; thus deduct in full
Taxable income
(800)
295 400
Example 5.10
Joe Mashishi is 54 years old; he is married and has three children, all under 18 years of
age. Joe had the following income and expenses for the current year of assessment:
R
Salary
150 000
Bonus
15 000
Contributions to retirement annuity fund (Note 1)
3 600
Donations (Note 2)
1 600
Contributions to pension fund (Note 3)
12 000
continued
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5.3
Chapter 5: Income and expenses of individuals
Notes
1. Joe contributed R300 per month to a retirement annuity fund.
A total of R1 300 was not deducted at the end of the previous year of assessment.
2. He made the following donations during the year:
Donation to Natal University
500
Donation to AIDS crisis centre (public benefit organisation)
600
Donation to Trees for Africa (not a public benefit organisation)
500
3. Joe contributed 8% of his salary to the pension fund and his employer contributed
R500 a month.
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You are required to calculate Joe’s taxable income for the current year of assessment. You
can assume that, where applicable, all official receipts were obtained.
Solution 5.10
R
Calculation of taxable income
Salary
Bonus
Employer’s contribution to pension fund (R500 × 12 months)
150 000
15 000
6 000
Income
171 000
Less: Contributions to retirement funds
(8% × R150 000 = R12 000 + R6 000 + R3 600 + R1 300 = R22 900)
Limited to the lesser of
• R350 000; or
• 27,5% × the higher of
Remuneration (R171 000); or
Taxable income (R171 000)
Therefore 27,5% × R171 000 = R47 025; or
• R171 000
R47 025 is less than R350 000 and R171 000, therefore limit
is R47 025
Allow contributions in full
(22 900)
Taxable income before donations deduction
148 100
Less: Donations
Donation to Natal University – allowable
Donation to AIDS crisis centre – allowable
Donation to Trees for Africa – not allowable
R
500
600
nil
R
1 100
Limited to 10% × R148 100 = R14 810 therefore can deduct full amount
Taxable income
(1 100)
147 000
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A Student’s Approach to Income Tax/Natural Persons
5.4
5.4 Income of minors (section 7(3))
The definition of gross income includes amounts actually received by a taxpayer and
amounts that have accrued to them. In the past, taxpayers have tried to reduce their
taxable income by taking steps or entering into transactions whereby some other person receives the income from an asset owned by the taxpayer. Parents often donate
income-earning assets to their children so that the income will accrue to a minor. The
parent still has access to the income through this type of transaction, but because the
income does not accrue to the parent, it does not fall into the net of gross income.
Section 7 was introduced into the Act to put an end to these types of transactions and
is in effect called an ‘anti-avoidance section’. Section 7 extends the general accrual
principle to include certain types of income that are deemed to have been received or
to have accrued.
Section 7(3) specifically deems income that arises because of a donation, settlement or
other disposition made by a parent of a minor to that minor to have been received by
the parent.
This means that when income is earned as a result of an asset that has been donated:
• by a parent;
• to a minor child,
the parent will be taxed on that income.
The ‘income earned’ by the child relates to any income that has been:
• received by the child;
• accrued to the child;
• expended for the maintenance, education or benefit of the child; or
• accumulated for the benefit of the child.
A minor is an unmarried person under the age of 18 years. A divorced or widowed
person under the age of 18 does not revert to the status of a minor.
REMEMBER
• For this section to be applicable, there must be a causal connection between the income
received and the donation.
Example 5.11
Jan Pieterse (45 years old, married out of community of property) donated R100 000 to his
daughter Kate (16 years old, unmarried). She invested this money in her savings account.
During the current year of assessment, she earned R6 000 interest on the amount. Jan used
this interest to pay her school fees. Jan also earned other interest from South African
sources amounting to R18 000. None of the interest was earned on tax free investments.
You are required to calculate the amount of interest income that Jan will be taxed on.
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Chapter 5: Income and expenses of individuals
5.4–5.5
Solution 5.11
Interest income from South African sources
Interest from Kate’s savings account (section 7(3))
Less:
R
18 000
6 000
24 000
(23 800)
Investment exemption
Taxable interest income
200
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5.5 Rebate in respect of foreign taxes on income (section 6quat)
Where foreign income is included in a resident’s taxable income, it has often been
subject to tax in the foreign country and subsequently is subject to double tax (where
there is no double-tax agreement with South Africa and that country) as it is included
in gross income for South African income tax purposes.
In such case, the Act makes provision for a rebate in respect of foreign taxes paid. A
resident who earns South African sourced income, from a trade that attracts foreign
tax, might qualify for a deduction (rather than a rebate) in terms of section
6quat(1C)(a). This deduction is similar to the rebate and is beyond the scope of this
chapter.
This rebate is deducted from South African normal tax. The section 6quat rebate only
applies to residents who have the following included in their taxable income:
• an income received from a source outside the Republic;
• an income included in taxable income because of the provisions of section 9D
(controlled foreign entities);
• a taxable capital gain in respect of an asset situated outside South Africa;
• an amount (received from a source outside South Africa or the proportional
amount in terms of section 9D) which is deemed to accrue to a resident in terms of
section 7;
• a capital gain that is attributed to a resident in terms of the special attribution rules
in the Eighth Schedule; or
• an amount that represents the capital of a trust in respect of which a resident
acquires a vested right.
Other countries sometimes tax income received by South African residents from a
South African source as if the income fell under their jurisdiction, for example if a
capital asset that is situated in another country, is sold.
Calculation of the rebate
The rebate is in respect of foreign taxes paid. For instance, where a South African resident has paid foreign tax with no right of recovery (that is to say the South African
resident will not be refunded any amount of tax paid) to a foreign government, and
the income on which the tax was paid has also been included in their South African
taxable income, the taxpayer will become entitled to a rebate on the foreign tax paid.
However, the rebate cannot exceed the South African normal tax that has been levied
on that foreign income.
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A Student’s Approach to Income Tax/Natural Persons
5.5
The rebate is thus the lesser of:
• the sum of all (total) foreign taxes paid in respect of the above-mentioned income;
or
• the portion of South African normal tax that relates to foreign income.
The portion of South African normal tax that relates to foreign income is calculated as
follows:
Taxable portion of foreign income
(after deductions and exemptions)
× SA normal tax
Sum of all (total) taxable income
REMEMBER
• When calculating South African normal tax related to foreign income, tax before the
deduction of rebates must be used.
Where the sum of the foreign taxes is more than the rebate/deduction that is allowed
(that is to say the rebate is limited to the South African normal tax), the excess
amount of foreign taxes is then carried forward to the following year of assessment
and is added to the foreign taxes paid in that year. The excess foreign taxes carried
forward will exclude any foreign tax that has been paid in respect of exempt income.
Example 5.12
Joe Jackson (55 years old) received the following income for the current year of assessment:
R
Gross foreign interest (foreign tax paid R 2 800)
12 000
Local interest (not tax free investments)
24 700
Other gross foreign income (foreign tax paid R6 000)
15 000
South African income
145 500
No exemptions have been taken into account. He paid non-refundable foreign tax on all the
foreign income he received.
You are required to calculate Joe’s tax liability for the current year of assessment.
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Chapter 5: Income and expenses of individuals
5.5
Solution 5.12
R
Foreign interest
12 000
Local interest
Less: Investment exemption
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R
24 700
(23 800)
900
Other foreign income
South African income
15 000
145 500
Taxable income
173 400
Normal tax payable
Less: Primary rebate
31 212
(15 714)
Less: Section 6quat rebate (Note)
15 498
(4 860)
Net normal tax payable
10 638
Note
Total taxable income from foreign sources:
Foreign interest
Other foreign income
12 000
15 000
27 000
Calculation of foreign taxes payable in respect of taxable
foreign income that qualifies for the rebate:
Foreign taxes paid in respect of all foreign income (R2 800 + R6 000)
Calculation of section 6quat rebate:
Amount of foreign taxes that qualifies for the rebate
Limited to
Taxable income derived from all foreign sources
× Normal tax payable
=
Total taxable income derived from all sources
=
R27 000
R173 400
= R4 860
R
8 800
8 800
× R31 212
(And it is less than the R8 800 paid overseas.)
R8 800 – R4 860 = R3 940 will be carried forward to the following year of assessment to
be added to any foreign taxes paid during that year.
Foreign tax carried forward exception
Where the foreign tax paid is in respect of:
• a taxable capital gain from an asset situated outside South Africa that is not attributable to a permanent establishment; or
• income that is included in the resident’s taxable income in terms of section 9D(2),
the Act provides that an amount of foreign tax paid that is more than the South
African normal tax on that gain or income will not be carried forward.
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A Student’s Approach to Income Tax/Natural Persons
5.5
Example and Solution 5.13
Erin Dart sold a house situated in Zimbabwe. An equivalent of R1 000 in foreign tax was
paid. If the South African normal tax in respect of the sale of this house is calculated at
R900, then Erin will be able to reduce her South African normal tax by R900. The R100
(R1 000 – R900) will be forfeited.
Where the person claiming the section 6quat rebate has contributed to retirement
funds or has donated to public benefit organisations (refer to 5.3.4) that have been
deducted from their taxable income, these deductions must then be apportioned between South African-sourced income and foreign income. This is best explained with
an example.
Example 5.14
During the current year of assessment, Martha Mhlanga (30 years old) earned a pensionable salary of R100 000 from a South African source, from which an amount of R4 920 was
withheld in respect of employees’ tax.
In addition, she received the following gross investment income:
R
South African source
Dividends (not tax free investments)
Interest (not tax free investments)
Foreign source
Interest (including R3 600 withholding tax)
50 000
28 500
45 000
In terms of her conditions of employment, she is obliged to contribute 8% of her monthly
salary to a pension fund. She made a qualifying donation of R6 000. She does not belong
to a medical aid fund.
You are required to calculate Martha’s tax liability for the current year of assessment.
Solution 5.14
R
Salary income
Dividend income – exempt
Foreign interest
South African interest income
(R28 500 – R23 800)
100 000
Nil
45 000
Income
Less:
Retirement fund contributions – R8 000
149 700
4 700
continued
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Chapter 5: Income and expenses of individuals
5.5
R
Limited to the lesser of
• R350 000; or
• 27,5% × the higher of
– R100 000 or
– R149 700
Therefore R149 700 × 27,5% = R41 168; or
• R149 700
The limitation is therefore R41 168 – contributions will be allowed in full
(8 000)
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141 700
Less:
Donation – R6 000
Limited to 10% × R141 700 = R14 170, therefore allow full donation
(6 000)
Taxable income
135 700
Calculation of normal tax payable before rebates
Normal tax payable
24 426
Calculation of foreign taxes payable in respect of taxable
foreign income
Foreign taxes payable in respect of foreign income
3 600
Calculation of the section 6quat rebate
Amount of foreign taxes that qualifies for the rebate limited to
3 600
=
=
Taxable income derived from all foreign sources
Total taxable income derived from all sources
R40 791 (Note)
R135 700
× Normal tax payable
× R24 426 = R7 342
Note
R
R40 791 is calculated as follows:
Salary income
Dividend income
Foreign interest income
Gross income and income
Less: Retirement fund contributions –
R8 000 x R45 000 / R149 700
R
Nil
Nil
45 000
45 000
(2 405)
42 595
Less: Donation (as calculated)
Apportionment of R6 000: (R42 595 / R141 700 × R6 000)
Foreign taxable income
(6 000)
(1 804)
40 791
continued
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A Student’s Approach to Income Tax/Natural Persons
5.5–5.6
Calculation of the normal tax payable after taking rebates into account
Normal tax payable before rebates
Less: Primary rebate
Less: Medical tax credit (none as she did not contribute to a medical scheme)
Less: Section 6quat rebate R3 600 is less than R7 342
Less: Employees’ tax
Amount payable or (refundable)
R
24 426
(15 714)
(nil)
(3 600)
(4 920)
192
No foreign taxes will be carried forward, as the taxpayer was able to deduct the full
amount of foreign tax paid as a rebate.
5.6 Limiting losses when calculating taxable income
(sections 20 and 20A)
An assessed loss is created when the deductions in terms of section 11 (but limited by
section 23) exceed the income of a taxpayer. This means that the taxable income of a
taxpayer is negative for a year of assessment. A natural person can set off an assessed
loss from the previous year of assessment in the current year of assessment.
There are a number of limitations with respect to an assessed loss:
• Foreign assessed losses These are ‘ring-fenced’ and cannot be set off against any
taxable income from a South African source. This limit only disallows foreign assessed losses from being set off against South African income. South African assessed losses can therefore be set off against foreign income.
• Retirement fund lump sum benefit, retirement fund withdrawal benefit and
severance benefit These amounts (although gross income is kept separate from
other taxable income) and an assessed loss cannot be set off against this income.
• Suspect trades If a natural person suffers a loss from operating a trade (for example the letting of property), they may not claim this loss against income from
another trade (for example salary received) under certain circumstances. Some
trades are what is referred to as suspect trades such as hobby activities, where the
taxpayer might enter into the activities in order to reduce taxable income.
There are certain requirements that must be met before the limitations will be applied
to suspect trades. If these requirements are met, the taxpayer is prohibited from
setting off the assessed loss from that specific trade against income derived during
the same year of assessment from another trade or a non-trading activity:
• the taxpayer must be paying tax at the maximum rate;
• the trade in question meets the requirements of the suspect trade list.
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Chapter 5: Income and expenses of individuals
5.6
Determine whether the loss from the operating of a trade is limited when
calculating the taxable income for a year of assessment
Step 1:
Yes:
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No:
Step 2:
Yes:
No:
Step 3:
Yes:
No:
Step 4:
Yes:
No:
Would the person have paid tax at the maximum marginal rate (taxable income (including an assessed loss and balance of assessed loss
brought forward) of R1 656 000 for the 2022 year of assessment) if they
did not have this loss?
Step 2
The loss can be used when calculating the taxable income for the
current year of assessment – section 20A is not applicable.
Is the trade classified as a suspect trade by SARS (refer to 5.6.1) or did
the person make a loss from this trade in any three of the last five years
(including the current year)?
Step 3
The loss can be used when calculating the taxable income for the
current year of assessment.
Does the trade qualify for the exclusion rule (refer to 5.6.2)?
Step 4
The loss cannot be used in the calculation of the taxable income
for the current year of assessment and must be carried forward to
the next year of assessment where it can be set off against income
from the same trade.
Did the trade (excluding farming activities) have a loss for six of the
last ten years?
The exclusion cannot be used, therefore the loss cannot be used in
the current year’s calculation. The loss must be carried forward to
the next year of assessment where it can be set off against income
from the same trade.
The exclusion can be used and the loss can be set off against
income from other trades in the current year of assessment.
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A Student’s Approach to Income Tax/Natural Persons
5.6
REMEMBER
• To determine whether a loss is incurred from the trade in a specific year of assessment,
the loss carried forward from the previous year is not included.
• The income from the trade includes recoupments in terms of section 8(4) and capital
gains on disposal of assets used in the trade.
• The income from different farming activities (for example livestock and plantation
farming) is added together for the purposes of these rules in order to determine farming
income.
• If a person is subject to the limitation rules or might be subject to the rules, they must
provide full details of the trade in their tax return.
• These rules are only applicable to individuals.
5.6.1 Suspect trades
SARS considers the following trades to be suspect trades, and losses can therefore
not be included in the calculation of taxable income unless the exclusion rule is
applicable:
• a sport practised by the person or a relative;
• dealing in collectibles by the person or relative;
• rental of residential accommodation, unless at least 80% is used by persons who
are not relatives and they lease the property for at least half of the year;
• the rental of vehicles, aircraft or boats, unless at least 80% of the asset is used by
persons who are not relatives and they lease it for at least half of the year;
• animal showing by that person or a relative;
• farming or animal breeding, unless that person carries on farming, animal breeding or activities of a similar nature on a full-time basis;
• a form of performing or creative arts practised by that person or a relative;
• a form of gambling or betting practised by that person or a relative; or
• the acquisition or disposal of a cryptocurrency (with effect from 17 January 2019).
5.6.2 The exclusion rule
If a person carries on a trade that is a business in respect of which there is, within a
reasonable period of time, a reasonable prospect of deriving taxable income (other
than taxable capital gain), the limitation will not be applied. The person will therefore
be able to deduct the loss from the trade against other income.
The following factors must be considered to determine whether the business qualifies
for the exclusion:
• the proportion of the gross income to the amount of the allowable deductions;
• the amount spent on or the activities related to advertising and promotions;
• the commercial manner in which the trade is carried on, taking into account:
– the number of full-time employees (other than persons employed to provide
services of a domestic or private nature);
– the commercial setting of the premises;
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5.6–5.7
Chapter 5: Income and expenses of individuals
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– the extent of the equipment used exclusively for purposes of carrying on that
trade; and
– the time that the person spends on the premises;
• the number of years of assessment during which losses occurred in relation to the
period from the date the person commenced with the trade and taking into account:
– an unexpected event giving rise to any of those losses; and
– the nature of the business involved;
• the business plans and any changes thereto to ensure that taxable income is
derived in the future; and
• the extent to which a trade asset is used, or is available for use for recreational
purposes or personal consumption.
5.7 Summary
Order of taxable income including deductions and limitations
Gross income
Less: Exempt income
Equals: Income
Less: Assessed loss from a previous year
Add: Other amounts included in taxable income
Add: Taxable capital gains
Less: Retirement fund contributions
Contributions to retirement fund (current year + amounts not deducted in previous years)
Deduction limited to the lesser of
• R350 000; or
• 27,5% × the higher of
– remuneration; or
– taxable income (excluding lumpsum benefits but including taxable capital gain); or
• taxable income before this deduction (excluding taxable capital gain).
Less: Donations to public benefit organisations
Limited to 10% × taxable income before this deduction (excluding any retirement fund
lump sum benefit and retirement fund lump sum withdrawal benefit)
Questions that test your knowledge on specific income and deductions for individuals
follow.
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A Student’s Approach to Income Tax/Natural Persons
5.8
5.8 Examination preparation
Question 5.1
Johann Pieterse (34 years old) had the following income and expenses for the current year
of assessment:
R
Income
Salary
Earnings from selling stamps (part-time business)
A cash inheritance
Expenses
Provident fund contributions – current year – 70% paid by Johann
Current year retirement annuity fund contributions actually paid by Johann
(he used some of his inheritance to boost his retirement savings)
Medical aid fund contributions (paid 100% by Johann)
Qualifying medical expenses not recovered from medical aid fund
Donation to his children’s primary school
(he is in possession of the necessary section 18A receipt)
356 000
159 000
600 000
77 000
320 000
48 000
3 200
1 200
Additional information
Johann’s employer contributes 30% of the contributions to a provident fund
on Johann’s behalf.
Johann sold a second property during the year and his accountant correctly
calculated a taxable capital gain of R100 000 of which 40% must be included
in taxable income.
You are required to:
Calculate Johann’s taxable income for the current year of assessment. Johann is married
and has two children, aged ten and nine. They are all members of the medical fund.
Answer 5.1
Johann’s taxable income for the current year of assessment:
Salary
Earnings from selling stamps
Cash inheritance – of a capital nature
Employer’s contribution to provident fund (R77 000 / 70% × 30%)
Add:
Taxable capital gain (R100 000 × 40%)
R
356 000
159 000
nil
33 000
548 000
40 000
588 000
continued
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Chapter 5: Income and expenses of individuals
5.8
Less: Retirement fund contributions (R77 000 + R33 000 + R320 000)
= R430 000
Limited to the lesser of
• R350 000; or
• 27,5% × higher of
Remuneration (R356 000+ R33 000) (Note) = R389 000; or
Taxable income including taxable capital gains
(R548 000 + R40 000) – R588 000
Therefore 27,5% × R588 000 = R161 700; or
• R548 000 before taxable capital gain (R588 000 – R40 000)
R161 700 is the limit, therefore contributions are limited to
(161 700)
426 300
Copyright 2022. LexisNexis SA.
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Less:
Donations to public benefit organisations – R1 200
Limited to 10% × R426 300 = R42 630, allow actual
Taxable income
(1 200)
425 100
Note: Only salary and employers contribution to the provident fund are remuneration as
defined.
Additional questions for this chapter are available electronically at
www.myacademic.co.za/books
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6
Gross
income
General
definition
–
Fringe benefits
Exempt
income
Specific
inclusions
–
Deductions
=
Fringe
benefits
Taxable
income
Tax
payable
Taxable
capital gain
Taxable
allowances
Page
6.1
Introduction .........................................................................................................
184
6.2
Classification of employment benefits .............................................................
186
6.3
Fringe benefits in terms of the Seventh Schedule ...........................................
6.3.1 General ....................................................................................................
6.3.2 Acquisition of an asset at less than the actual value
(paragraph 5) ..........................................................................................
6.3.3 Right of use of an asset (excluding a motor vehicle
and accommodation) (paragraph 6) ....................................................
6.3.4 Right of use of a motor vehicle (paragraph 7) ...................................
6.3.5 Meals, refreshments, and meal and refreshment vouchers
(paragraph 8) ..........................................................................................
6.3.6 Accommodation (paragraph 9) ............................................................
6.3.6.1 Residential accommodation .................................................
6.3.6.2 Holiday accommodation .......................................................
6.3.7 Free or cheap services (paragraph 10).................................................
6.3.8 Benefits in respect of interest on debt (paragraph 11) ......................
6.3.9 Subsidies in respect of loans (paragraph 12) ......................................
6.3.10 Medical fund contributions paid on behalf of an employee
(paragraph 12A) .....................................................................................
6.3.11 Costs incurred for medical services (paragraph 12B) .......................
187
187
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189
192
194
205
205
205
208
210
212
215
217
219
A Student’s Approach to Income Tax/Natural Persons
6.1
Page
6.3.12 Benefit in respect of employer-owned insurance policies
(paragraph 12C) .....................................................................................
6.3.13 Payment of contribution on behalf of employee to a pension,
provident or retirement annuity fund (paragraph 12D) ..................
6.3.14 A contribution to a bargaining council (paragraph 12E)..................
6.3.15 Payment of employee’s debt or the release of the employee
from the obligation to pay a debt (paragraph 13) .............................
221
222
223
223
6.4
Allowances and advances ..................................................................................
6.4.1 Travel allowance (section 8(1)(b)) ........................................................
6.4.2 Subsistence allowance (section 8(1)(c)) ...............................................
6.4.3 Public officer allowance (section 8(1)(d)) ............................................
6.4.4 Other allowances ...................................................................................
6.4.5 Employees’ tax implications regarding the receipt of allowances ....
225
226
231
234
234
235
6.5
Taxation of amounts derived from broad-based employee share plans
(section 8B) ...........................................................................................................
235
Taxation of directors and employees on vesting of equity instruments
(section 8C) ...........................................................................................................
241
6.6
6.7
Exemptions from tax in an employer/employee relationship
(section 10)............................................................................................................
6.7.1 Special uniforms (section 10(1)(nA)) ...................................................
6.7.2 Transfer costs (section 10(1)(nB)) .........................................................
6.7.3 Qualifying equity shares in terms of a broad-based employee
share plan (section 10(1)(nC))...............................................................
6.7.4 Equity instruments in terms of section 8C (section 10(1)(nD)) ........
6.7.5 Equity instruments in terms of section 8C – ‘stop loss’ provision
(section 10(1)(nE)) ..................................................................................
6.7.6 Scholarships and bursaries (section 10(1)(q) and (qB)) .....................
252
252
252
252
252
252
254
6.8
Administrative provisions .................................................................................
255
6.9
Summary ..............................................................................................................
255
6.10
Examination preparation ...................................................................................
255
6.1 Introduction
James has just started working at Botha and King (Pty) Ltd. It is his first job. In addition to his salary every month, he is entitled to use one of the company’s vehicles. He
can take the vehicle home and use it over weekends for his own private purposes. On
resigning from the company, he will have to return the vehicle to the company.
On his salary slip, at the end of each month, he saw that over and above the cash
salary he receives there is an additional entry: ‘Fringe benefit – company vehicle’. He
is, therefore, taxed not only on his cash salary, but also on the value of the benefit he
receives from his employer.
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Chapter 6: Fringe benefits
6.2–6.3
• all the administrative provisions relating to fringe benefits that apply to all
employers (paragraphs 16–18 in the Fourth Schedule) (refer to 6.8).
6.3 Fringe benefits in terms of the Seventh Schedule
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6.3.1 General
There is an obligation on each employer to determine the cash equivalent of the value
of a taxable benefit granted to an employee if in a form other than cash. The South
African Revenue Service (SARS) may, on assessment for normal tax, re-determine the
cash equivalent of the taxable benefit if it is considered that the determination is
incorrect.
An ‘employer’ is a person who pays another person an amount by way of remuneration, and includes a company, close corporation and the government.
An ‘employee’ is a person who receives remuneration or to whom remuneration
accrues. Included in this definition are a personal service provider and a labour
broker, as well as a director of a company. Previous directors and previous employees of a company are also included in the definition of an employee, if the previous
director or previous employee is or was the sole shareholder or one of the controlling
shareholders in such company. The definition excludes persons who retired before
1 March 1992. Consequently, persons who retired on or after 1 March 1992 are subject
to tax in full in respect of a benefit that they continue to receive, or which is granted
after retirement. A partner in a partnership is also included as an employee of the
partnership for the purposes of calculating fringe benefits.
Note that a non-executive director who receives a taxable benefit is also considered to
be an employee for the purposes of the Seventh Schedule.
A taxable benefit also arises when an associated institution of the employer provides an employee with the benefit. The employer must include the cash equivalent
of the taxable benefit given by the associated institution in the employee’s tax calculation.
An ‘associated institution’ in relation to an employer includes and means:
• if the employer is a company, another company that is managed or controlled
directly or indirectly by substantially the same persons;
• if the employer is not a company,
– a company managed or controlled directly or indirectly by the employer or any
partnership of which the employer is a member; and
– a fund established mainly for providing benefits for employees or former
employees of the employer or an associated institution (excluding funds established by trade unions and industrial councils, and funds established for postgraduate research not financed by the employer).
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A Student’s Approach to Income Tax/Natural Persons
6.3
REMEMBER
A taxable benefit excludes:
• a benefit that is specifically exempt in terms of section 10 (refer to 6.7);
• a benefit provided by a benefit fund in respect of medical, dental and similar services,
hospital and nursing services, and medicines;
• a benefit or privilege received by or accrued to a person stationed outside the Republic,
which is attributable to that person’s services rendered outside the Republic, if the services rendered by such a person are:
– in the national or provincial sphere of government; or
– in a municipality in the Republic; or
– in a national or provincial public entity if not less than 80% of the expenditure of
such entity is defrayed directly or indirectly from funds voted by Parliament; or
– due to the holding of a public office to which such a person has been appointed in
terms of an Act of Parliament;
• a qualifying equity share acquired by the employee as contemplated in section 8B (refer
to 6.5);
• an equity instrument contemplated in section 8C (refer to 6.6);
• an interest benefit in terms of paragraph 11 (refer to 6.3.8) on loans granted to subsidise
the purchase of shares by an employee in terms of a share-based employee share plan;
and
• a severance benefit (refer to chapter 9).
The Seventh Schedule lists the following taxable benefits:
• acquisition of an asset at less than the actual value (paragraph 5 – refer to 6.3.2);
• right of use of an asset, other than a motor vehicle (paragraph 6 – refer to 6.3.3);
• right of use of a motor vehicle (paragraph 7 – refer to 6.3.4);
• meals, refreshments or vouchers that entitle an employee to a meal or refreshment
(paragraph 8 – refer to 6.3.5);
• free or cheap accommodation (paragraph 9 – refer to 6.3.6);
• free or cheap services (paragraph 10 – refer to 6.3.7);
• in respect of interest on debt (low-interest or interest-free loans) (paragraph 11 –
refer to 6.3.8);
• subsidies in respect of loans (paragraph 12 – refer to 6.3.9);
• medical aid fund contributions paid on behalf of an employee (paragraph 12A –
refer to 6.3.10);
• costs incurred for medical services (paragraph 12B – refer to 6.3.11);
• payment to an insurer under an insurance policy directly or indirectly for the benefit of the employee (paragraph 12C – refer to 6.3.12);
• payment for the benefit or on behalf of an employee to a pension fund, provident
fund or retirement annuity fund (paragraph 12D – refer to 6.3.13);
• payment for the benefit or on behalf of an employee to a bargaining council (paragraph 12E – refer to 6.3.14)
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Chapter 6: Fringe benefits
6.3
• payment of an employee’s debt or the release of the employee from the obligation
to pay a debt (paragraph 13 – refer to 6.3.14).
Each of the above-mentioned taxable benefits is discussed individually. Firstly, the
meaning of the benefit is explained; then the calculation of the cash equivalent of the
benefit (including the exceptions and exclusions in respect of the specific benefit, if
applicable) is discussed. Finally, a number of examples are supplied.
REMEMBER
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• The general rule of the Seventh Schedule is that the amount to be included in gross
income is the cash equivalent of a fringe benefit. This is the value of the benefit in terms
of the Seventh Schedule less any amount paid by the employee.
6.3.2 Acquisition of an asset at less than the actual value
(paragraph 5)
Meaning of the benefit
Any asset consisting of any goods, commodities, financial instruments or property of
any nature (other than money) acquired by an employee from the employer, for no
consideration or for a consideration less than the value of the asset, is a taxable benefit in the hands of the employee.
Cash equivalent of the benefit
The cash equivalent of the taxable benefit is the difference between the market value
of the asset at the time the employee acquired the asset and the consideration given
(if any) by the employee.
Exceptions
There are two exceptions to the general valuation rule, namely where:
• the asset concerned is movable property (other than marketable securities or an
asset which the employer had the use of prior to acquiring ownership thereof)
acquired by the employer with the purpose of disposing of it to the employee – the
asset is valued at the cost to the employer; and
• the asset concerned is trading stock of the employer – the value to be placed on the
asset is the lesser of the cost to the employer or the market value.
Exclusions
• Where assets are presented to the employee as an award for bravery or for long
service, the value determined is reduced by the lesser of the cost to the employer of
all such assets so awarded to the relevant employee during the year of assessment,
or R5 000.
• In respect of properties bought on or after 1 March 2014, no value is placed on
immovable property for residential purposes acquired by an employee from an
employer or related institution if the remuneration proxy of that employee (not a
connected person) is R250 000 or less for that year of assessment and the market
value of the immovable property is R450 000 or less and the employee is not a connected person in relation to the employer.
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A Student’s Approach to Income Tax/Natural Persons
6.3
REMEMBER
• Long service means an initial unbroken period of service of not less than 15 years, or
any subsequent unbroken period of service of not less than 10 years.
• Awards granted for outstanding performance or for any reason other than long service
or bravery do not qualify for the R5 000 reductions in value.
• If an employee receives the first long service award after, for example, 20 years (not 15)
the following available reduction in value would only be after another 10 years – that is
to say after 30 years’ service.
• ‘Unbroken period of service’ is interpreted to mean a continuous employment with a
single employer without a lawful termination of the contract.
• Gift vouchers are seen as a form of property and therefore regarded as an asset – but a
voucher for a meal, for example, would be excluded and therefore taxable.
• Remuneration proxy is the remuneration earned by the employee in the previous year
of assessment
Example 6.1
Alida Groenewald is employed by Pharma Pills Ltd (a manufacturer of pharmaceutical
products). During the current year of assessment, she purchased pharmaceutical products
from her employer for R800. The cost price of these products was R1 700 and the market
value was R2 100.
You are required to calculate the cash equivalent of the benefit for inclusion in Alida’s
current year of assessment.
Solution 6.1
R
Value of the benefit – cost price of the asset
Less: Consideration paid by Alida
1 700
(800)
Cash equivalent of the benefit
900
Because the products constitute trading stock of the employer, the cash equivalent is calculated using the lesser of the cost price or market value of the asset.
Example 6.2
Manie du Plessis received an asset with a market value of R5 600 on 31 December of the
current year of assessment, after rendering 20 years’ service to ABC Ltd. The asset cost
the employer R5 200. The initial intention was not to acquire the asset to dispose of it to
the employee.
You are required to calculate the cash equivalent of the benefit for the current year of
assessment.
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Chapter 6: Fringe benefits
6.3
Solution 6.2
R
Value of the benefit – market value of the asset at the time the employee
acquired the asset
Less: Exemption in terms of a long-service award
Less: Consideration paid by Manie
Cash equivalent of the benefit
5 600
(5 000)
(nil)
600
The long-service award exemption of up to R5 000 is available in respect of an initial
unbroken period of service of not less than 15 years or any subsequent unbroken period of
service of not less than ten years.
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Notes
1. If the asset cost the employer R4 500, the cash equivalent of the benefit would have
been R1 100 (R5 600 – R4 500). The amount to be excluded could never exceed the cost
for the employer. For long-service awards, the amount to be excluded is therefore
always the lower of the cost for the employer or R5 000.
2. If Manie received the R5 600 in cash, the full amount must be included in his taxable
income as the exemption applies only to an asset and not to a cash award.
Example 6.3
Sarie Smit received a number of gift vouchers in recognition of 15 years’ continuous
service with her employer:
1. A voucher for dinner for two at the local gourmet restaurant to a maximum of R1 000.
Sarie’s employer is a regular visitor to the restaurant and gets 10% discount on his
meals there – he therefore only paid R900 for the voucher.
2. A gift voucher for a full-day treatment at Feather Hill Spa that cost the employer
R1 500.
3. A gift voucher for the local book and media store to the value of R2 000 (cost to the
employer as well).
Sarie had to pay R150 for each voucher.
You are required to calculate the cash equivalent of the benefit for the current year of
assessment.
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A Student’s Approach to Income Tax/Natural Persons
6.3
Solution 6.3
Value of the benefit
The voucher for the restaurant is a voucher for a meal and is specifically excluded from
paragraph 2(a) (long-service awards) and taxable in terms of paragraph 2(c) (meals or
refreshment).
R
Cost to the employer
Less: Paid by Sarie
900
(150)
Cash equivalent of the taxable benefit
750
The spa voucher and the book store voucher fall within the scope of paragraph 2(a) as
Sarie acquires them at less than actual value.
R
Cost to employer of the vouchers
Less: Long-service award reduction (cost of the assets is less than R5 000)
Value of the taxable benefit
Less: Consideration paid (R150 for each voucher)
Cash equivalent – cannot be less than zero
3 500
(3 500)
nil
(300)
nil
Therefore Sarie must include a total of R750 in gross income.
2023
Amendment
From 1 March 2022, the par 5 exemption in respect of long service
or bravery awards is extended to par 6(4) use of an asset granted
and par 10(2) free or cheap services granted and the R5 000 limit is
applied to all these paragraphs in total.
6.3.3 Right of use of an asset (excluding a motor vehicle and
accommodation) (paragraph 6)
Meaning of the benefit
Where an employee has been granted the right to use an asset for private or domestic
purposes, either for free or for a consideration less than the actual value of such asset,
a taxable benefit will arise. (The right of use of residential accommodation, household
goods that go with it and motor vehicles is calculated in terms of other paragraphs –
refer to 6.3.6 and 6.3.4).
Cash equivalent of the benefit
The cash equivalent of the taxable benefit is the difference between the value of the
private use of the asset and the consideration given by the employee (if any) or the
amount spent by the employee to maintain or repair the asset. The cash equivalent of
the taxable benefit must be apportioned and is deemed to have accrued on a monthly
or weekly basis.
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Chapter 6: Fringe benefits
6.3
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The value of private use of the asset is as follows:
Where
Value of taxable benefit
the asset is leased by the employer,
rental payable by the employer for the
period that the employee has the use of the
asset.
the asset is owned by the employer,
15% per annum × the lesser of the cost of
the asset or the market value on the date
the use was granted.
the sole right of use of the asset is given to
the employee,
the cost of the asset to the employer on the
date that the right of use was granted and
included in gross income on that date.
Exclusions
No value will be placed on the taxable benefit if:
• the private use is incidental to the use of the asset for the employer’s business (as
of 1 March 2018 this excludes the right of use of clothing);
• the asset is provided as an amenity to be enjoyed by the employee at their place of
work or for recreational purposes at that place or a place for recreation provided
by the employer for the use of their employees in general, for example gym facilities (as of 1 March 2018 this excludes the right of use of clothing);
• the asset is any equipment or machine which the employer allows their employees in
general to use from time to time for short periods and the value of the private use
does not exceed an amount as set out in a public notice issued by the Commissioner;
• the asset consists of telephone or computer equipment which the employee uses
mainly for the purposes of the employer’s business. This includes modems on
fixed lines of all kinds, removable storage of all kinds (that is to say memory
sticks), printers, office-related software (MSOffice, operating systems, development
and management tools) and telephone line rentals and subscriptions for internet
access; or
• the asset is a book, literature, recording or a work of art.
Example 6.4
Daniel Mamabola has had the use of his employer’s cell phone for the past two years. He
must constantly be available for business purposes and the private use of the cell phone is
only incidental. The cost of the cell phone was R3 000. The market value on the date when
he acquired the use of the cell phone was R1 200.
You are required to calculate the cash equivalent of the benefit to be included in Daniel’s
taxable income.
Solution 6.4
No value is placed on this benefit, as the cell phone is used mainly for the employer’s
business.
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A Student’s Approach to Income Tax/Natural Persons
6.3
Example 6.5
Ernst Gray’s employer granted him the right of use of a computer for private purposes for
five months from 1 October of the current year of assessment. On that date, the market
value of the computer was R12 000. His employer purchased the computer two years
earlier for R15 000.
You are required to calculate the cash equivalent of the benefit for the current year of
assessment.
Solution 6.5
As this computer is not used for the employer’s business, the exemption does
not apply.
15% of R12 000 (market value is lower than cost of the asset) × 5 / 12
Less: Consideration given for the right of use
Cash equivalent of the benefit
R
750
(nil)
750
REMEMBER
• The value of the taxable benefit must be apportioned and is deemed to have accrued on
a monthly or weekly basis.
6.3.4 Right of use of a motor vehicle (paragraph 7)
Meaning of the benefit
The value of the private use by an employee of a motor vehicle allocated to them by
the employer is a taxable benefit. The private use of the vehicle includes travelling
between the employee’s place of employment and place of residence and any other
travelling done for their private or domestic purposes.
REMEMBER
• The employer is also deemed to have granted their employee the right to use a motor
vehicle if they have hired the motor vehicle under a lease and have transferred their
rights and obligations under the lease to the employee. The employee’s deemed right of
use then extends to the remainder of the lease. The rentals payable by the employee
under the lease will in time be deemed a consideration to be paid by them for the right
of use of the motor vehicle, and the ‘determined value’ of the vehicle is the retail market
value at the time when the employer first obtained the right of use of the vehicle, or the
cash value (excluding finance charges) where the lease is a financial lease.
• Where the lease is an operating lease concluded by parties who are not connected
persons and are transacting at arm’s length, the cash value is the actual cost to the
employer incurred under the operating lease as well as the cost of fuel for that vehicle if
the employer pays the fuel.
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Chapter 6: Fringe benefits
6.3
Cash equivalent of the benefit
The cash equivalent of the taxable benefit is the difference between the value of the
private use of the motor vehicle and the consideration given by the employee (if any
– excluding a consideration given for the cost of licences, insurance, maintenance or
fuel).
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Cash equivalent =
value of private use less amount paid by employee
It is assumed that all travel is private travel and that the employer bears all costs
relating to the vehicle and the travel with it.
The value of the private use is calculated as follows:
• For each month during which the employee is entitled to use the vehicle for private purposes, the value of the taxable benefit is 3,5% per month of the determined
value of the motor vehicle.
• Where the vehicle (at acquisition by the employer) is the subject of a maintenance
plan, the value of the taxable benefit is 3,25% per month of the determined value of
the motor vehicle.
Value of private use = determined value × 3,5% (3,25%) per month
• Where the employer holds the vehicle under an operating lease, the value of the
taxable benefit is the actual cost of the lease and the cost of fuel for the vehicle.
Value of private use (operating lease) = (monthly lease payments × number of months
used during the year of assessment) plus cost of fuel for the year
• When the employee uses the vehicle for a period shorter than a full month, the
value is reduced according to the ratio of the number of days in the period to the
number of days in the month. The purpose of the reduction is to provide for the
right of use of the motor vehicle commencing in the middle of a month. No reduction in the value determined must be made by reason of the fact that the vehicle
in question was during any period (for any reason) temporarily not used by the
employee for private purposes. For example: If an employee receives the vehicle on
10 May, the calculation for May is:
Value of private use = determined value × 3,5% × 21 / 31 days
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A Student’s Approach to Income Tax/Natural Persons
6.3
REMEMBER
• A ‘maintenance plan’ is defined as a contractual obligation undertaken by a provider in
the ordinary course of trade with the general public to underwrite the costs of all
maintenance of that motor vehicle, other than the costs related to top-up fluids, tyres or
abuse of the motor vehicle, for at least a period of not less than three years and a distance travelled by the motor vehicle of not less than 60 000 km from the date that the provider undertakes the contractual obligation: Provided that the contractual obligation may
terminate at the earlier of the end of the period of three years; or the date on which the
distance of 60 000 km is travelled by that motor vehicle.
• The maintenance plan must commence at the same time that the motor vehicle is
acquired by the employer.
• A top-up or add-on plan taken out after acquisition of the motor vehicle does not
qualify for the 3,25% rate.
• This percentage (3,25%) will still be applicable for calculating the value of the vehicle
even after the period the motor plan is active, has expired.
• These percentages (3,5% or 3,25%) are applicable to each motor vehicle that the
employee has the use of from their employer.
The determined value of a motor vehicle is the retail market value as determined by
Regulation R.362 excluding finance charges and interest payable (paragraph 7).
Note that the rules are different depending on when the vehicle was acquired.
The following table summarises retail market value and the respective dates which in
turn show the determined value:
Type of employer
Dates
Retail market value
Manufacturer or motor vehicle importers
1 March 2015–
29 February 2016
The dealer billing price
excluding VAT less 10%
1 March 2016–
28 February 2017
The dealer billing price
excluding VAT less 5%
1 March 2017–
28 February 2018
The dealer billing price
excluding VAT
From 1 March 2018
The dealer billing price plus
VAT
Before 1 March 2018
Cost to employer no VAT etc.
New or demo vehicles
Manufacturer or motor vehicle
importer
Pre-owned vehicles
If vehicle obtained for no cost
then market value plus cost of
repairs
After 1 March 2018
Cost plus VAT
continued
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Chapter 6: Fringe benefits
6.3
Type of employer
Dates
Retail market value
Dealers and rental companies
1 March 2015–
28 February 2018
Dealer billing price no VAT
After 1 March 2018
Dealer billing price plus VAT
Before 1 March 2018
Cost to the employer excluding VAT
New or demonstration vehicles
Dealers and rental companies
Pre-owned vehicles
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If vehicle acquired at no cost:
Market value plus cost of
repairs incurred
From 1 March 2018
Cost to employer plus VAT
If vehicle obtained at no cost:
Market value plus repairs
In cases other than vehicle
manufacturers, importers,
dealers or rental companies
The price paid by the employer
on acquisition plus VAT
REMEMBER
• The dealer billing price is the selling price determined by a manufacturer or importer
thereof in the Republic in respect of selling a vehicle to dealers and rental companies.
• Both the retail market value and the dealer billing price should be supplied to you in
questions and the examinations.
• The examples in this book refer to cost price of a vehicle including or excluding VAT.
You should use these values unless reference is specifically made to manufacturers,
exporters, dealers or rental companies.
Example 6.6
The employer purchased a motor vehicle for R200 000 plus R30 000 VAT plus R35 000
finance charges. The determined value will differ depending on how the vehicle is
acquired:
• If the employer purchases the vehicle, the determined value is R230 000.
• If the employer is a motor vehicle manufacturer, the determined value is the market
value of R200 000 (VAT excluded, if VAT input was claimed) or the average cost of all
their stock which is available to employees, for example R150 000.
• If the vehicle is obtained in terms of an instalment credit agreement, the determined
value is the cash value of R200 000 (add VAT if it cannot be claimed).
• If the employer leases the vehicle and obtained it at the end of the lease, the retail
market value when the employer obtained the right of use of the vehicle is the market
value, that is to say R200 000 (add VAT if it cannot be claimed).
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6.3
REMEMBER
• Where the employer has granted an employee the right of use of a motor vehicle and a
limit was placed on the value of such vehicle by the employer, and the employee makes
a contribution towards the purchase price of a more expensive vehicle, the contribution
made by the employee must be deducted from the cost price (or cost to the employer) of
the more expensive vehicle. (For example: The employer gave a R230 000 (VAT included)
motor vehicle to Mr Ryk to use. Mr Ryk, however, wants a more expensive vehicle and
he pays R57 500 to obtain a R287 500 (VAT included) vehicle. The determined value is
R287 500 – R57 500 = R230 000.)
• The cost includes add-on items such as tow bars, smash-and-grab window tinting, air
conditioning etc., but not the cost of insurance products such as monthly vehicle tracking service fees.
• The value must include VAT even if it was acquired before 1 March 2011 when VAT
was specifically excluded from the determined value of the vehicle. If, however, the
employer was entitled to a deduction of VAT input tax, for example if the employer is a
car dealer, the VAT must be excluded.
• Where more than one employee has the right to a specific vehicle, they would all be
taxable in terms of this paragraph on the same vehicle.
• Where an employee obtains the use of an employer vehicle and then moves to an
associated institution and the institution provides them with the same vehicle, the
determined value is the original value to the first employer.
The ‘determined value’ of a motor vehicle must be reduced if:
• the employee was granted the right of use of the vehicle 12 months or more after
the employer acquired the vehicle. In this case, a depreciation allowance must be
deducted from the determined value as determined above before the monthly percentage is used. The depreciation allowance is calculated at 15% on the reducing
balance method for each completed period of 12 months, calculated from the date
on which the employer first obtained such vehicle or the right of use thereof to the
date on which the employee was first granted the use of the vehicle. For example,
if an employee obtains the use of a vehicle (market value on date of purchase
18 months before was R230 000 – VAT included) on 1 March of the current year of
assessment, then the determined value = R230 000 × 85% × 3,5% × 12 months.
The value of the monthly taxable benefit must be reduced if:
• the employee pays an amount to the employer for the use of that vehicle. The taxable benefit is not reduced where the payment is in respect of the cost of the
licence, insurance, maintenance or fuel for that vehicle, made by the employee.
The value of the taxable benefit (value of private use) is reduced on assessment
where
• the employee proves that accurate records of distances travelled for business purposes in such vehicle are kept. The benefit is then reduced pro rata with the ratio of
kilometres driven for business purposes to the total number of kilometres driven;
and
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Chapter 6: Fringe benefits
6.3
• the employee proves that accurate records for the distances travelled for private
purposes are kept and that the employee pays the full amount for fuel for private
purposes. This reduction is also calculated on assessment and is calculated on the
number of kilometres travelled for private purposes and the rate per kilometre as
announced for the use of the travel allowance (paragraph 7(8)(b)).
Example 6.7
If an employee does not receive a travel allowance but has the private use of a company
vehicle with a purchase price of R287 500 (including VAT), and the employee:
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• is responsible for bearing all the costs of maintenance (R45 000) with regard to the
vehicle (the company bears all fuel expenses);
• has accurate records of distances travelled for private purposes and she travelled
25 000 km of her total 40 000 km for private purposes.
You are required to calculate the cash equivalent of the benefit for the current year of
assessment.
Solution 6.7
R
The private travel is taxed
The fringe benefit for the year is calculated as follows
(adjusted on assessment for private kilometres):
R287 500 × 3,5% × (25 000 km/40 000 km) × 12 months
Less: cost paid for private use (R45 000 × (25 000 km/40 000 km))
Taxable value
75 469
(28 125)
47 344
Note
Only private travel is taxed.
The full amount will be taxed monthly. No adjustment for private travel is made on a
monthly basis. The deductions and adjustment will only be made by SARS on assessment as the total kilometres travelled would only be available then.
Exclusions
There is no taxable benefit
• where the vehicle is available to and is used by employees in general, the private use
of the vehicle by the employee is infrequent or merely incidental to the business use,
and the vehicle is not normally kept at or near the residence of the employee
concerned when not in use outside of business hours (for example pool vehicles); or
• when the nature of the employee’s duties are such that they are regularly required
to use the vehicle for the performance of these duties outside their normal hours of
work, the private use of the vehicle by the employee is infrequent or merely
incidental to the business use and they are not permitted to use the vehicle for private purposes other than travelling between their places of residence and their
places of work (for example police vehicles).
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6.3
The calculation of the taxable benefit in respect of the right of use of a motor vehicle
can be summarised as follows:
Right of use of a motor vehicle – paragraph 7
How to calculate the taxable benefit
Determined value
(retail market value = cost
including VAT but
excluding finance
charges)
Value of private use
3,5% or 3,25%
per month of the
determined
value
On assessment
Deduction for
business use if a record is
kept of kilometres
travelled for private use
and business use
Bears all the maintenance costs
pro rata reduction for
business use
Bears all the fuel cost pro rata
deduction for business use
(Kilometres x fuel rate per table)
Receives a travel allowance for same vehicle?
Yes
No
Deduct consideration paid by employee
Taxable benefit
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Chapter 6: Fringe benefits
6.3
Right of use of more than one motor vehicle
Where an employee receives the right to use more than one motor vehicle at the
same time and the Commissioner agrees that each vehicle is used during the year of
assessment primarily for business purposes, the value of the private use of all the
vehicles will be determined using the value of the vehicle having the highest determined value (unless the Commissioner directs otherwise).
REMEMBER
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• ‘Primarily for business use’ means that more than 50% of kilometres travelled must be
for business purposes.
Where the employee has the right of use of more than one vehicle, no further
reductions on assessment is available. This means that there will be no apportionment of value and no claim in respect of actual expenses incurred in respect of the
licence, insurance, fuel or maintenance. The SARS EMP 10 Guide ‘Guidelines for
employers’ states that, in all cases, the fact that more than one vehicle is made available to an employee at the same time must be reported to SARS and only in those cases
where the Commissioner so directs after application by the taxpayer, may the determined value of only one vehicle be used. Full details of the reasons why it is necessary to make more than one vehicle available to the employee must be submitted
when application for such concession is made.
Special dispensation for judges
If the employee receiving the right to use a motor vehicle is a judge or a Constitutional Court judge and they keep accurate records for distances travelled, the kilometres travelled between the judge’s place of residence and the court over which they
preside is deemed to be kilometres travelled for business purposes and not for private purposes.
Example 6.8
Ronel de Witt was granted the use of a company vehicle from 1 March of the current year
of assessment. In addition, the company (her employer) bears the full cost of fuel used for
both business and private travelling, as well as the full cost of maintaining the vehicle.
The vehicle, which was purchased by the company on 30 June two years ago, cost
R278 280. The cost price included VAT amounting to R28 280 and finance charges of
R48 000. Ronel pays R200 a month to the company for the use of the vehicle.
You are required to calculate the cash equivalent of the benefit for the current year of
assessment.
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A Student’s Approach to Income Tax/Natural Persons
6.3
Solution 6.8
R
Determined value of the vehicle
Cost price (R278 280 excluding finance charges (R48 000))
Less: Depreciation for one period (15% on R230 280)
230 280
(34 542)
Determined value (R230 380 x 85%)
195 738
Taxable benefit:
3,5% per month of R195 738 (value of private use)
Less: Amount paid by Ronel
6 851
(200)
6 651
Cash equivalent of benefit for the current year of assessment
(R6 651 × 12 months)
79 812
Why is the determined value only reduced by 15% if the vehicle has been
used by someone else for longer than a year?
Example 6.9
Assume the same facts as in Example 6.8 above, except that Ronel de Witt kept accurate
records (to the satisfaction of the Commissioner) of private kilometres travelled during
the current year of assessment. She travelled 8 000 of the total 20 000 km during the year
of assessment for private purposes.
You are required to calculate the cash equivalent of the benefit for the current year of
assessment.
Solution 6.9
R
Value for private use
Taxable benefit as calculated above
3,5% per month of R195 738
6 851
R6 851 per month × 12 months
On assessment: Reduction as a result of business use
(20 000 – 8 000)
km × R82 212
20 000
82 212
(49 327)
Less: Consideration given (R200 × 12 months)
32 885
(2 400)
Cash equivalent of the benefit
30 485
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Chapter 6: Fringe benefits
6.3
Example 6.10
Jan has the use of a company car from 1 March of the current year of assessment. His
employer purchased the vehicle on 1 March (that same day) for R345 000 (VAT included)
and he pays R200 per month for the use of the vehicle.
You are required to calculate the cash equivalent of the benefit of the company car which
has to be included in Jan’s taxable income for the year of assessment if:
1.
2.
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3.
4.
Jan did not keep records and did not pay any costs of the vehicle himself. Also indicate the amount subject to PAYE.
Jan did not keep records and did not pay any of the vehicle costs, what is the annual
amount on assessment?
Jan kept record of his business travel. 10 000 km of the total 40 000 km was for business travel.
Jan records his business kilometres as in 3. above and he paid the following costs
himself:
R
Licence of the vehicle
Insurance
Maintenance
Fuel
5.
200
12 000
25 000
26 000
The vehicle was purchased with a three-year/60 000 km maintenance plan; it cost
R399 000 (VAT included) and he did not keep any records or pay any expenses of the
vehicle.
REMEMBER
Unless it is proven otherwise with the use of an employer-owned motor vehicle, it is
deemed that:
• all travel is private travel;
• all costs are paid by the employer;
• adjustments for deductions are only done on assessment; and
• VAT is included in the determined value.
Solution 6.10
1. Monthly value is 3,5% × R345 000 = R12 075 less his payment of R200 = R11 875
Monthly inclusion (remuneration) for PAYE is 80% × R11 875 = R9 500
2. Annual amount on assessment is 3,5% × R345 000 × 12 months = R144 900 less
(R200 × 12 months) = R142 500
continued
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3. Taxable amount
R
R
Annual amount 3,5% × R345 000 × 12 months =
Less: Portion travelled for business purposes
R144 900× 10 000km/40 000km =
144 900
Annual amount
Less: Paid by Jan – R200 × 12 months
108 675
(2 400)
Cash equivalent of the benefit
106 275
4. Annual amount (as per 3 above)
Less: Private costs
Licence
Insurance
Maintenance
(36 225)
108 675
200
12 000
25 000
37 200
× 30 000km/40 000km (calculation of private travel portion)
Fuel – per table
30 000km × 135.8 cents
(27 900)
(40 740)
Annual amount
Less: Paid by Jan – R200 × 12 months
40 035
(2 400)
Cash equivalent of the benefit
37 635
5. 3,25% × R399 000 × 12 months = R155 610 less consideration paid R2 400 = R153 210
6.3.5 Meals, refreshments, and meal and refreshment vouchers
(paragraph 8)
Meaning of the benefit
Meals, refreshments and vouchers provided by the employer that entitle the employee
to meals and refreshments free of charge or for an insufficient consideration are
regarded as a taxable benefit.
Cash equivalent of the benefit
The cash equivalent of the taxable benefit is the cost of the meal, refreshment or
voucher to the employer, less any consideration paid by the employee.
Exclusions
No value is placed on:
• a meal or refreshment supplied by an employer to their employees in a canteen,
cafeteria or dining room operated by or on behalf of the employer and used wholly
or mainly by their employees;
• a meal or refreshment supplied by an employer to their employees on the employer’s business premises;
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Chapter 6: Fringe benefits
6.3
• a meal or refreshment supplied by an employer to any employee during business
hours or extended working hours or special occasions;
• a meal or refreshment enjoyed by an employee while entertaining someone (for
example a client) on behalf of the employer; and
• meals provided with accommodation (these meals are not taxed separately as they
are dealt with as part of the accommodation benefit).
Example 6.11
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The partners and managers of Top Auditing Firm all eat together, free of charge, in the
auditorium every afternoon. The cost per person amounts to R35 per day for the employer.
You are required to calculate the cash equivalent of the benefit for the current year of
assessment.
Solution 6.11
No value is placed on the benefit as a meal or refreshment supplied by an employer to
their employees in a canteen, cafeteria or dining room operated by or on behalf of the
employer and used wholly or mainly by their employees is excluded.
6.3.6 Accommodation (paragraph 9)
6.3.6.1 Residential accommodation
Meaning of the benefit
Residential accommodation supplied by an employer to an employee at either a low
or no rental is regarded as a taxable benefit.
Cash equivalent of the benefit
1. Where the employer owns the accommodation or if the employer does not
own the accommodation but it vests in the employer or an associated institution,
the value of the taxable benefit in respect of this residential accommodation is
calculated using the following formula:
(A – B) × C/100 × D/12
In the above formula:
A = remuneration proxy
‘Remuneration proxy’ is defined as the remuneration derived by the
employee in the previous year of assessment (excluding the cash equivalent of
residential accommodation).
If the employee was not employed for a full year in the previous year, the
remuneration proxy must be determined in the ratio that 365/366 days bears
to the period of employment.
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2.
3.
4.
6.3
If the employee was not employed at all by the employer during the previous year of assessment, the remuneration is determined by the remuneration earned in the first month of employment in the current year of assessment in the ratio of 365/366 days to the number of days in the first month
employed.
B = R87 300. This is a reduction that is available to every employee except if the
employee or their spouse has a direct or indirect controlling interest in the
employer (private company) or the employee, their spouse or minor child
may become the owner of the accommodation. If the employee has control
over the employer or right of option to the property, B is Rnil. (This amount
is the tax threshold discussed in chapter 1 – that is to say, the current primary
rebate of R15 714/18% (the first rate of tax for individuals)).
C = a quantity of 17; or
18 where such accommodation consists of a house, flat or apartment consisting of at least four rooms and such accommodation is either furnished or
power or fuel is supplied by the employer; or
19 where the accommodation consists of a house, flat or apartment consisting of at least four rooms, such accommodation is furnished, and the
employer supplies power or fuel.
D = number of months that the employee was entitled to the accommodation
during the current year of assessment.
When an employee has an interest in the accommodation, use the formula.
Where the employer does not own the property and they rent it in an armslength transaction from a person who is not a connected person, the value of the
taxable benefit in respect of the residential accommodation is the lower of:
• an amount determined as calculated using the formula:
(A – B) × C/100 × D/12
as described above; or
• an amount equal to the rental paid by the employer together with any other
expenditure incurred and paid by the employer.
An employee is deemed to have an interest in the accommodation if:
• such accommodation is owned by the employee or a connected person in relation to such an employee;
• an increase in the value of the accommodation accrues directly or indirectly to
the benefit of such employee or a connected person in relation to such
employee; or
• such employee or connected person has a right to acquire the accommodation
from their employer.
Paragraph 9(9) determines that where the employee has an interest in the accommodation and the accommodation has been let to the employer, the value of the
benefit is calculated according to the formula. The rental concerned is deemed
not to be received by or accrued to the employee or a connected person in relation to them. This means that the owner of the accommodation cannot deduct
any expenses, for example interest incurred, municipal rates and electricity
expenses, in terms of section 11(a).
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Chapter 6: Fringe benefits
6.3
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The cash equivalent of the taxable benefit is the difference between the value of
the private use of the accommodation and the consideration given by the
employee (if any).
Under certain circumstances, a benefit granted by an employer under a housing
scheme constitutes a loan and the provision of a low-interest or interest-free loan
applies in terms of paragraph 10A (refer to 6.3.8).
Exclusions
• No value is placed on the accommodation benefit where the employer provides
accommodation to the employee while they are temporarily absent from their
usual place of residence in the Republic in the course of performing their duties of
employment (paragraph 9(7)).
• No value is placed on an accommodation benefit provided by an employer to an
employee away from their usual place of residence outside the Republic for purposes of the employee performing their duties if the employee is physically present
in the Republic for a period of less than 90 days in that year (paragraph 9(7A)(b)).
• No value is placed on an accommodation benefit provided by an employer to an
employee away from their usual place of residence outside the Republic for purposes of the employee performing their duties if the employee is away from their
usual place of residence for a period not exceeding two years from the date of
arrival of that employee in the Republic, but if:
– that employee was present in the Republic for a period exceeding 90 days
during the year of assessment immediately before their arrival in the Republic to
commence their duties; or
– to the extent that the cash equivalent of the value of the taxable benefit derived
from the occupation of the residential accommodation exceeds an amount of
R25 000 multiplied by the number of months during which the benefit is granted
(paragraph 9(7A)(a) and (7B)), a taxable benefit arises.
REMEMBER
• Where residential accommodation is supplied by the employer and the employee, their
spouse or minor child can (according to an agreement) obtain that accommodation in
future at an amount mentioned in the agreement, and the rental paid by the employee is
calculated as a percentage of the purchase price, then the accommodation is taxed as a
loan (refer to deemed loans paragraph 10A, Seventh Schedule and 6.3.8).
• Where more than one residential accommodation which they are entitled to occupy
from time to time while performing their duties have been made available to the
employees, the amount of the value of the unit with the highest rental value over the
full period during which the employee was entitled to occupy more than one unit must
be included in their gross income. (paragraph 9(6)).
• Where the Commissioner is satisfied that the rental value is less than the rental value
determined in accordance with the above-mentioned rules, he/she may reduce the
value to a lower amount which he/she considers fair and reasonable.
continued
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• If an employee has a usual place of residence outside the Republic and they:
(i) are physically present in the Republic for less than 90 days in that year, no value
is to be placed on accommodation given to them; and
(ii) are performing their duties for a period not exceeding two years from date of
arrival in the Republic, no value is to be placed on the accommodation given to
them provided:
–
they did not spend more than 90 days in the Republic in the year of assessment immediately before they arrived here to commence the two-year period;
and
–
the accommodation provided to them does not cost more than R25 000 per
month.
6.3.6.2 Holiday accommodation
Meaning of the benefit
Holiday accommodation supplied by an employer to an employee at either a low or
no rental is regarded as a taxable benefit.
Cash equivalent of the benefit
The value of the taxable benefit in respect of holiday accommodation depends on
whether
• the holiday accommodation is hired by the employer:
The value of the taxable benefit is the sum of the rental payable and amounts
chargeable in respect of meals, refreshments or any other services borne by the
employer.
• the accommodation is owned by the employer or associated institution:
The value of the taxable benefit is an amount calculated at the prevailing rate per
day at which such accommodation could normally be let to a person other than an
employee.
The cash equivalent of the taxable benefit is the difference between the value of the
private use of the accommodation and the consideration given by the employee (if
any).
Exclusions
No exclusions are applicable to the holiday accommodation benefit.
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Chapter 6: Fringe benefits
6.3
Example 6.12
His employer granted Elmo de Bruyn, who earned remuneration of R270 000 (excluding a
housing benefit) during the previous year of assessment, the use of an unfurnished townhouse with more than four rooms, as from 1 March in the current year of assessment. The
employer owns the townhouse. The company pays all the costs of electricity, water,
sewerage and municipal rates. In addition, Elmo was given the use of a beachfront flat on
the South Coast for his 21 days’ annual holiday, at no cost. The company also owns this
block of flats. Elmo, his wife and two children made use of this benefit during December
of the current year of assessment. The company usually rents out the flat at R250 a day
per person to independent third parties.
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You are required to calculate the cash equivalent of the benefit for the current year of
assessment.
Solution 6.12
Townhouse
(A – B)
×
C
100
×
D
12
18
= (R270 000 – R87 300) ×
100
×
12
12
= R32 886
Holiday flat
R250 × 21 days × 4 = R21 000
Total benefit: R32 886 + R21 000 = R53 886
Example 6.13
During the previous year of assessment, Abraham Tayob only worked three months
(December to February) and received remuneration amounting to R100 000 in total
(excluding a housing benefit) from Barlows (Pty) Ltd. R15 200 of this remuneration represents 80% of a travel allowance. Barlows (Pty) Ltd allows Abraham to stay free of charge
in a fully furnished three-bedroom house with a separate kitchen. Barlows (Pty) Ltd owns
the house. Barlows (Pty) Ltd is also responsible for the payment of the water and electricity accounts every month. Abraham received this accommodation benefit for the whole
current year of assessment.
You are required to calculate the cash equivalent of the benefit to be included in
Abraham’s taxable income for the current year of assessment.
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A Student’s Approach to Income Tax/Natural Persons
6.3
Solution 6.13
Remuneration factor – Abraham worked three months during the preceding
year of assessment
Remuneration proxy
Apportion in respect of number of days employed during the previous year
of assessment (R100 000 / 90 (Note) × 365)
From 1 March to 28 February of the current year of assessment
Accommodation benefit
(A – B) × C/100 × D/12
= (R405 556 – R87 300) × 19 (Note)/100 × 12 / 12
Cash equivalent of the benefit for the current year of assessment
R
100 000
405 556
60 469
Note
90 = December (31 days) + January (31 days) + February (28 days)
C = 19 because a three-bedroom house with a separate kitchen represents at least four
rooms and because the employer supplies both furniture and power.
REMEMBER
• Where an employee resides in a house of the employer and they can obtain the house
later according to a contract and the rental is calculated as a percentage of the purchase
value, then it is not a service but a loan, except when the purchase contract was concluded
at market value (refer to paragraph 10A, Seventh Schedule and 6.3.8).
6.3.7 Free or cheap services (paragraph 10)
Meaning of the benefit
A taxable benefit arises when a service has been rendered to the employee (either by
the employer or by some other person) and the employer paid for the service. The
service must have been for private or domestic purposes and no consideration or an
inadequate consideration was paid by the employee to the employer.
Cash equivalent of the benefit
The cash equivalent of the taxable benefit is the cost to the employer of rendering
such service or having such service rendered, less any amount paid by the employee.
Where the employer is in the travel business of transporting passengers for reward by
sea or air and the employee makes use of this to travel outside the Republic for private purposes, the employee is taxed on the value of the lowest fare.
If the employer is an educational institution that provides free or cheap tuition to the
children of personnel, the value of the taxable benefit is the marginal cost involved in
the tuition of one additional person. In practice it is often very difficult to ascertain
this marginal cost and there is no fringe benefit.
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Chapter 6: Fringe benefits
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6.3
Exclusions
There is no taxable benefit on:
• a travel facility granted by an employer who is engaged in the business of transporting passengers for reward, to enable an employee, their spouses or minor children to travel to:
– a destination in the Republic or overland to a destination outside the Republic; or
– a destination outside the Republic if such travel was undertaken on a flight or
voyage in the ordinary course of the employer’s business and such employee,
spouse or minor child was not permitted to make a firm advance booking (for
example trips undertaken by airline staff on a standby basis);
• a transport service rendered to employees in general for the transport of such
employees from their home to the place of their employment and vice versa;
• a communication service provided to an employee if the service is mainly used for
purposes of the employer’s business (for example telephone services);
• a service rendered by an employer to their employees at their place of work for the
better performance of their duties, or as a benefit to be enjoyed by them at that
place of work, or for recreational purposes at that place or a place of recreation
provided by the employer for the use of his employees in general (for example,
provision of parking for motor vehicles at the place of work); and
• a travel facility granted by an employer to the spouse or a minor child of an
employee if:
– that employee is stationed for purposes of the business of that employer at a
specific place in the Republic further than 250 km away from their usual place of
residence in the Republic for the duration of the term of their employment;
– that employee is required to spend more than 183 days during the relevant year
of assessment at that specific place for purposes of the business of that
employer; and
– that facility is granted in respect of travel between that employee’s usual place
of residence in the Republic and that specific place where the employee is so
stationed.
Example 6.14
Every morning, Park Supermarket’s minibus picks up all the employees and drives them
to their place of employment. The cost per capita amounts to R8 per day for the employer.
You are required to calculate the cash equivalent of the benefit to be included in the taxable income for the employees.
Solution 6.14
No value is placed on this benefit, as a transport service rendered to employees in general
for the conveyance of such employees from their home to the place of their employment,
and vice versa, is excluded.
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Example 6.15
Velvet Ltd incurred a cost of R400 000 to erect a gym at the place of employment where
employees can go and exercise during lunch and after work. The cost per capita amounts
to R180 per month for the employer.
You are required to calculate the cash equivalent of the benefit to be included in the taxable income for the employees.
Solution 6.15
No value is placed on this benefit, as a service rendered at the place of work for better
performance of their duties, or as a benefit to be enjoyed by them at the place of work, or
for recreational purposes at work is excluded.
6.3.8 Benefits in respect of interest on debt (paragraph 11)
Meaning of the benefit
A taxable benefit arises when a debt is owed by an employee to their employer and
either no interest is payable or interest is payable by the employee at a rate less than
the official rate.
Cash equivalent of the benefit
The cash equivalent of the taxable benefit is the amount of interest that would have
been paid on the debt during the year of assessment if interest had been paid at the
official rate less the amount of interest (if any) actually paid by the employee during
the year.
If no interest is payable by the employee on the debt, or if interest is payable at irregular intervals, a portion of the cash equivalent is deemed to have accrued to the
employee on the last day of each period in the year of assessment for which a cash
remuneration becomes payable by the employer to them (usually monthly). Therefore, the fringe benefit in respect of the debt is taxed on a regular basis although the
interest on the loan is not raised regularly.
When interest is payable by the employee at regular intervals, a portion of the cash
equivalent is deemed to have accrued to the employee on each date during the year
of assessment on which the interest becomes payable by them for a part of the year
(for example quarterly or half-yearly).
If the taxpayer applies, the Commissioner may approve a different method of calculation of the cash equivalent of the debt.
The official rate is described as
• in the case of a loan in Rands, a rate of interest equal to the South African repurchase rate (REPO rate) plus 100 basis points; or
• in the case of a loan in another currency, the repurchase rate applicable to that
currency plus 100 basis points.
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6.3
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The repurchase rate changed as follows:
From 1 August 2019 to 17 January 2020 .............................................................................6,50%
From 18 January 2020 to 20 March 2020 .............................................................................6.25%
From 21 March 2020 to 15 April 2020..................................................................................5,25%
From 16 April 2020 to 22 May 2020 .....................................................................................4,25%
From 23 May 2020 to 24 July 2020 ...................................................................................... 3,75%
From 25 July 2020 to 1 November 2021 ..............................................................................3,50%
Since 20 November until change in repo rate* ..................................................................3,75%
The official interest rate is then 100 basis points more and is adjusted at the beginning of the
month following the month during which the Reserve Bank changes the repurchase rate:
From 1 August 2019 to 31 January 2020 .............................................................................8,50%
From 1 February 2020 to 31 March 2020 .............................................................................7.25%
From 1 April 2020 to 30 April 2020 ......................................................................................6,25%
From 1 May 2020 to 31 May 2020.........................................................................................5,25%
From 1 June 2020 to 31 July 2020 .........................................................................................4,75%
From 1 August 2020 to 30 November 2021 ........................................................................4,50%
Since 1 December 2021 until change in repo rate* ............................................................4,75%
Note: These rates could still change again for the 2022 year of assessment but at time of
going to print with this book, these were the rates.
The new repurchase rate or equivalent rate must be applied from the first day of the
month following the date on which that new repurchase rate or equivalent rate came
into operation. The repurchase rate can be found on the Reserve Bank website
www.resbank.co.za. You have to check the rates as they can change during the year
of assessment.
Exclusions
There is no taxable benefit on:0.
• casual loans granted by an employer to their employee if the debt or all the debts to
that employee are not more than R3 000 at a time. The loans have to be short-term
loans at irregular intervals. Not all debt will qualify for this exclusion merely because it
is less than R3 000. It is important to note that when a debt amounts to R5 000, it does
not mean that the first R3 000 will qualify for the exclusion. The exclusion will only
apply if the debt does not exceed R3 000 and not to the first R3 000 of a debt; and
• loans granted to employees to enable them to further their studies
• From 1 March 2019 no value is to be placed on interest on a loan that does not
exceed R450 000 for the purchase of immovable property for residential purposes
with a market value of R450 000 or less: Provided the employee’s remuneration
proxy does not exceed R250 000 during the year the loan was granted.
REMEMBER
• Where the employee uses a loan from an employer to produce income (as defined), the
cash equivalent of the taxable benefit is deemed to be interest actually paid by them and
allowed as a possible deduction in terms of section 11(a).
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6.3
Example 6.16
On 1 March of the current year of assessment, Jaco de Swart’s employer granted him a
loan at a rate of 3% per annum (payable monthly), to enable him to buy a new car. The
debt amounted to R200 000 and would be repaid in full at the end of a period of five years
from the date of the agreement.
You are required to calculate the cash equivalent of the benefit to be included in Jaco’s
taxable income in respect of the current year of assessment. Assume that the official rate
of interest is 4,5% from 1 August of the current year of assessment and 4,75% before that.
Solution 6.16
R
Interest at the official rate of interest:
4,75% on R200 000 × 153 / 365 days
4,5% on R200 000 × 212 / 365
3 831
5 227
Less: Interest paid (3% on R200 000 for 12 months)
9 058
(6 000)
Cash equivalent of the benefit
3 058
Taxable benefit for the year
3 058
Deemed loans
Paragraph 10A deems a benefit granted by an employer under a housing scheme to
constitute a loan where:
• an employee has been granted the right to occupy residential accommodation
owned by their employer or by an associated institution in relation to their
employer;
• the employee, their spouse or minor child is entitled or obliged to acquire the
house, either on termination of their service or after the expiration of a fixed period
at a price stated in such an agreement; and
• the employee is granted the right to occupy the house and as a consideration in
respect of their occupation, pays rent to the employer, which is calculated as a given percentage of the price used in the agreement above.
This scheme is identical to the granting by the employer of a low-interest housing
loan and is deemed to be treated as such. These schemes are not taxed as an accommodation/housing benefit (refer to 6.3.6.1).
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6.3
The subsequent acquisition of the property is not treated as an asset acquired at less
than the actual value if the property is acquired at a price that is not lower than the
market value on the date on which the agreement is concluded. This means by implication that when the agreed price in terms of an agreement amounts to R500 000 and
the house is acquired at a later stage (when the market value is R800 000) for the set
amount (R500 000), no taxable benefit in respect of the acquisition of an asset at less
than the actual value will arise.
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Example 6.17
Marlene Mills arranges for her employer to purchase a house in Groenkloof, Pretoria,
where she and her family will live. Marlene and her employer enter into an agreement in
terms of which Marlene will be entitled to acquire the property in five years’ time for
R1 750 000 (its current market value).
In terms of the agreement, Marlene is required to pay a monthly rental 0,5% of the agreed
purchase price. The agreement was entered into on 1 March of the current year of
assessment.
You are required to calculate the cash equivalent of the benefit to be included in
Marlene’s taxable income in respect of the current year of assessment. You can assume
that the official rate of interest is 7,00% for the year.
Solution 6.17
R
Interest at the official rate of interest:
7% on R1 750 000 for 12 months
Less: Rent paid
0,5% × R1 750 000 for 12 months
122 500
(105 000)
Cash equivalent of the benefit
17 500
Taxable benefit for the year
17 500
6.3.9 Subsidies in respect of loans (paragraph 12)
Meaning of the benefit
A taxable benefit arises whenever an employer has paid a subsidy in respect of capital or interest on a loan due by the employee. In addition, the payment of an amount
by the employer to a third party in respect of the granting by that third party of a
low-interest or interest-free loan to an employee of the employer is deemed to be a
subsidy, if the amount paid by the employer together with the interest paid by the
employee exceeds the amount of interest on the loan calculated at the official rate of
interest.
Cash equivalent of the benefit
The full amount of the subsidy is the cash equivalent of the taxable benefit.
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6.3
Example 6.18
James Ndlovu was employed on 1 March of the current year of assessment with a basic
monthly salary of R8 500. He also receives a housing subsidy of R3 500 per month in terms of
his employer’s housing scheme.
You are required to calculate the cash equivalent of the housing benefit received by James
regarding the current year of assessment.
Solution 6.18
R
Taxable portion of the housing subsidy (R3 500 × 12 months)
42 000
Example 6.19
Letta Sepeng obtains a R200 000 loan from Abstec Bank on 1 March of the current year of
assessment and is required to pay interest thereon at 2%. The reason for the low interest
rate is that her employer has arranged to compensate the financial institution for the loss
of interest on the difference between 2% and the normal rate of interest charged of 12%.
Assume that the official rate of interest is 6% for the year.
You are required to calculate the cash equivalent of the subsidy received by Letta in
respect of the current year of assessment.
Solution 6.19
Interest paid by the employee
Payment by the employer
%
2
10
Interest actually received by the financial institution
12
As the interest paid by the employee and the payment made by the employer
exceed the official rate of 6%, the payment is deemed to be a subsidy subject to
tax.
Taxable portion of the housing subsidy (10% (12% – 2%) × R200 000)
R
20 000
continued
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Chapter 6: Fringe benefits
6.3
Note
If the official rate of interest had to change to 13%, the interest paid by the employee (2%)
together with the payment made by the employer (10%) does not exceed the amount of
interest which would have been paid had interest been charged at the official rate of
interest, and the benefit granted is taxed according to the provisions of a low or interestfree loan:
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R
Interest at the official rate (13% × R200 000)
Less: Interest payable (2% × R200 000)
26 000
(4 000)
Cash equivalent of benefit
22 000
Example 6.20
A company has employed Anne Brown for several years. On 1 August of the current year
of assessment the company granted her a loan of R200 000 to enable her to buy the flat she
lives in. The company’s housing scheme provides for housing loans at an interest rate of 2%
per annum, repayment of the capital portion of the loan only becoming due when the
employee leaves the company’s employment for any reason whatsoever. During the current
year of assessment Anne earned a salary of R240 000.
You are required to calculate the cash equivalent of the benefit to be included in Anne’s
taxable income in respect of the current year of assessment. You can assume that the official rate of interest is 7% for the year.
Solution 6.20
R
Interest at official rate:
7% on R200 000 for seven months (7 / 12)
Less: Interest payable (2% on R200 000 for seven months)
Cash equivalent of the benefit
8 167
(2 333)
5 834
No subsidy has been paid by Anne’s employer in respect of the capital or interest on the
loan and therefore it is treated as a low-interest or interest-free loan and not as a housing
subsidy.
6.3.10 Medical fund contributions paid on behalf of an employee
(paragraph 12A)
Meaning of the benefit
A taxable benefit arises where the employer contributes, directly or indirectly, to a
medical scheme on behalf of an employee.
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Cash equivalent of the benefit
The cash equivalent of the benefit is the amount of the employer’s contribution to
such fund or payment to a medical fund (for any period to the advantage of any
employee or dependants of such employee) in relation to such employee or dependants of such employee.
Exceptions
If the contribution or payment to the fund is such that an appropriate portion cannot
be attributed to the employee or their dependants for whose benefit it is made, the
amount of that contribution or payment in relation to a specific employee and their
dependants is deemed to be the total contribution or payment by the employer to the
fund in respect of all employees and their dependants divided by the number of
employees in respect of whom the contribution or payment is made.
If the apportionment of the contribution or payment among all the employees of a
fund as described in the paragraph above does not reasonably represent a fair apportionment of that contribution or payment among the employees, the Commissioner
may decide (after application by the taxpayer) that such apportionment be made in
such other manner as appears fair and reasonable.
Exclusions
The benefit is not regarded as a taxable benefit if the payment by the employer is
made on behalf of:
• a pensioner (persons who have retired from service due to old age, poor health or
other disability);
• the dependants of a person, after such person’s death, if such person was in the
employ of such employer on the date of death;
• the dependants of a pensioner, after such person’s death, if such person retired from
service by reason of age, poor health or other disability.
Example 6.21
Ferramax Ltd has its own medical aid fund registered in terms of the Medical Schemes Act.
For the current year of assessment, Ferramax Ltd made the following contributions to the
fund on behalf of the following employees, none of whom contributed to the fund:
R
Mario Fernando (Note 1)
Other employees and their dependants (Note 2)
Abel Alexander (Note 3)
24 000
3 600 000
33 600
continued
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Chapter 6: Fringe benefits
6.3
Notes
1. Mario Fernando is the managing director. He earns a salary of R680 000 a year. The
contributions were only made for the benefit of Mario as he does not have any
dependants.
2. The company employs 250 other employees. Mary Daneel is one of these other
employees. She has one dependant.
3. Abel Alexander receives a pension from the company’s pension fund, amounting to
R72 000. Abel retired due to old age in 2013.
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You are required to calculate the cash equivalent for the current year of assessment of the
taxable benefits arising from the company’s contributions to the medical aid fund in
respect of all the taxpayers referred to above.
Solution 6.21
R
Mario Fernando
Total contribution by the company = fringe benefit
24 000
Mary Daneel
Mary’s taxable benefit is calculated as follows:
R3 600 000 (the total employer contributions in respect of all employees and
dependants) divided by 250 (being the number of employees)
= R14 400
This R14 400 thus represents the deemed contribution made by the company in
respect of the benefits of Mary and her one dependant
Total contribution by the company = fringe benefit
14 400
Abel Alexander
Taxable benefit (he has retired and receives a pension)
nil
6.3.11 Costs incurred for medical services (paragraph 12B)
Meaning of the benefit
A taxable benefit arises when an employer incurs expenses, whether directly or
indirectly, in respect of a medical, dental or similar service, hospital service, nursing
service or medicine in respect of an employee, their spouse, child or other relative or
dependants.
In order to assist low-income earners and their family members who cannot afford
even the most basic medical scheme package but are entitled to employer-provided
medical care in the form of prescribed minimum benefits, paragraph 12B provides for
programmes or schemes offered by employers where this benefit is not taxed in the
hands of the employee.
Cash equivalent of the benefit
The cash equivalent of the value of the taxable benefit is the amount incurred by the
employer during a month.
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Exceptions
If the payment for the medical services, as described above, is such that an appropriate portion cannot be attributed to the relevant employee and their spouse, children,
relatives and dependants, the amount of the payment in relation to the relevant
employee and their spouse, children, relatives and dependants is deemed to be an
amount equal to the total amount incurred by the employer in respect of the medical
services divided by the number of employees who are entitled to make use of those
services.
Exclusions
The benefit is not regarded as a taxable benefit if the payment by the employer is
made in respect of the following medical services:
• Medical treatment listed in a category of the prescribed minimum benefits determined by the Minister of Health in terms of the Medical Schemes Act 131 of 1998,
which is provided to the employee or their spouse or children in terms of a scheme
or programme of that employer,
– which constitutes the carrying on of the business of a medical scheme, but the
scheme is exempt from the requirement of the Medical Schemes Act; or
– which does not constitute the carrying on of the business of a medical scheme, if
that employee, their spouse and children are not beneficiaries of a registered
medical aid scheme or they are beneficiaries of such a medical aid scheme, and
the total cost of that treatment is recovered from that scheme.
• Medical services rendered or medicines supplied for purposes of complying with
any law of the Republic.
• Medical services received from an employer by:
– a person who retired from the employment of the employer as a result of superannuation, ill-health or other infirmity;
– the dependants of a person after that person’s death, if that person was in the
employ of that employer on the date of death;
– the dependants of a person after that person’s death, if that person retired from
the employ of that employer by reason of superannuation, ill-health or other
infirmity; or
– a person who is entitled to the secondary rebate, that is to say the person will be
65 years or older on the last day of the relevant year of assessment.
• Where the services are rendered by the employer to its employees in general at
their place of work for the better performance of their duties.
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Chapter 6: Fringe benefits
6.3
Example 6.22
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Reubosch Ltd does not have its own medical aid fund registered in terms of the Medical
Schemes Act 131 of 1998. Reubosch Ltd has a policy in respect of which the company
pays for all medical and other related services in respect of employees, their spouses,
children and relatives. For the current year of assessment, Reubosch Ltd made the following payments regarding medical and other related services on behalf of the following
employees, spouses, children and/or relatives. None of the employees paid anything
themselves.
R
• The company received a bill from the local hospital. The costs relate to
immunisations. All employees, their spouses, children and/or relatives could obtain the immunisations. A nurse from the hospital was
available during lunchtime for a week to give the immunisation. Karen
Neveu went for the injections. In total, 800 employees went for the injections.
40 000
• The company pays R500 per month to the local doctor in order for
Avashnee Moola to receive medical services. Avashnee is the widow
of Abdullah Moola, who was in the employ of the company on the
date of his death during the current year of assessment.
6 000
You are required to calculate the cash equivalent of the taxable benefits arising from the
company’s payments in respect of medical and other related services provided to
employees, their spouses, children and/or relatives for all the taxpayers referred to
above.
Solution 6.22
R
Karen Neveu
As the services are rendered by the employer to its employees in general at
their place of work for the better performance of their duties, no taxable benefit
arises.
nil
Avashnee Moola
No value is placed on the amount of R500 per month paid to the local doctor in
order for Avashnee Moola to receive medical services as Avashnee is a dependant of her late husband, who died while in the employ of the company.
nil
6.3.12 Benefit in respect of employer-owned insurance policies
(paragraph 12C)
The cash equivalent of the value of a taxable benefit for insurance policy premiums
paid by the employer is the amount of an expenditure incurred by an employer
during a year of assessment in respect of any premiums payable under a policy of
insurance directly or indirectly for the benefit of an employee or their spouses, child,
dependant or nominee.
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6.3.13 Payment of contribution on behalf of employee to a
pension, provident or retirement annuity fund
(paragraph 12D)
All employer contributions to retirement funds on behalf of employees must be
included in taxable income as a fringe benefit of the employee. These contributions
are however deductible (subject to limitations) in the hands of the employees. This
excludes the transfer of any surplus funds to the retirement fund (from 1 March
2017). From 1 March 2019 this includes the value of a contribution or payment made
by an employer on behalf of an employee to a bargaining council established in terms
of the Labour Relations Act, 1995 (section 27).
Cash equivalent of the benefit
(i) If the contributions are made to a defined contribution fund, the contribution
allocated to the employee are included as a fringe benefit for that employee as at
the cash value of the contribution; or
(ii) If the contributions are made to a defined benefit fund, the value of the fringe
benefit is determined by means of a formula. The value of the amount is determined in accordance with the following formula:
X = (A × B) – C where:
X = amount to be determined;
A = fund member category factor in respect of the fund member category of which the employee is a member;
B = the amount of the retirement funding income of the employee;
C = the sum of the amounts contributed to the fund by the employee
excluding any voluntary contributions made by the employee as
well as buy-back in respect of that year of assessment.
The Minister determines further details by way of regulation.
Exclusions
No value is placed on the taxable fringe benefit obtained:
• from a contribution made by an employer to the benefit of an employee who
retired from service; or
• in respect of the dependants or nominees of a deceased member of the fund.
REMEMBER
• A defined contribution fund means the member eventually gets all contributions made
for their benefit back, plus capital growth, less the costs. A defined benefit fund means
the member would be entitled to a specific pension/retirement benefit determined not
on their contributions but on the benefit they should get. Therefore, an involved formula is required to determine the employer’s specific contribution to one person’s retirement benefits.
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Chapter 6: Fringe benefits
6.3
Example 6.23
Douggies Ltd pays the retirement annuity fund contributions amounting to R20 000 on
behalf of one of its directors, Dewald van Jaarsveld.
You are required to calculate the cash equivalent of the benefit to be included in Dewald’s
taxable income in respect of the current year of assessment.
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Solution 6.23
The value of the taxable benefit in respect of the retirement annuity fund contributions is
R20 000, to be included in Dewald’s taxable income in respect of the current year of
assessment. The amount of R20 000 can qualify as a deduction in terms of section 11F
when calculating Dewald’s taxable income.
6.3.14 Payment of contribution on behalf of employee to a
bargaining council (paragraph 12E)
Meaning of the benefit
The cash equivalent of the value of the taxable benefit paid by the employer on behalf
of an employee directly or indirectly to any bargaining council established under
section 27 of the Labour Relations Act in respect of a scheme or fund other than a
pension or benefit fund.
The cash equivalent of the benefit
The cash equivalent is the amount paid for a specific employee or if that could not be
established the amount paid by the employer divided by the number of employees he
paid it for.
6.3.15 Payment of employee’s debt or the release of the employee
from the obligation to pay a debt (paragraph 13)
Meaning of the benefit
A taxable benefit is deemed to have been granted to an employee if the employer has
paid an amount owing by the employee to a third party without requiring the
employee to make any payment for the amount paid.
In addition, a taxable benefit arises when the employer releases the employee from an
obligation to pay an amount owing by the employee to the employer.
REMEMBER
This benefit does not include amounts paid by the employer as:
• medical fund contributions (paragraph 12A);
• incurral of cost relating to medical services (paragraph 12B); or
• premiums paid on employer-owned insurance policies (paragraph 12C).
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Cash equivalent of the benefit
The cash equivalent of the taxable benefit is the amount paid by the employer or the
amount of the debt from which the employee has been released.
Exclusions
No value is placed on a taxable benefit in terms of this paragraph, if the employer pays:
• subscriptions on behalf of the employee to a professional body if membership of
the body is a condition of the employee’s employment;
• insurance premiums indemnifying an employee solely against claims arising from
negligent acts or omissions on the part of the employee in rendering services to the
employer;
• a portion of the value of a benefit that is payable by a former member of a nonstatutory force or service as defined in the Government Employees Pension Law of
1996 to the Government Employee’s Pension Fund as contemplated in
Rule 10(6)(d) or (e) of the Rules of the Government Employees Pension Fund contained in Schedule 1 to that Proclamation; and
• on behalf of a new employee, an amount to a previous employer in respect of a
study loan or bursary obligation still owing to the previous employer due to the
fact that the previous employer required the employee to work for a fixed period
after obtaining the qualification and the period has not expired. The employee is
consequently liable to work for the new employer for a period not shorter than the
remaining period which they should still have worked for the previous employer.
Example 6.24
Ine-Lize Steyn receives a study loan from her employer on 1 March of the current year of
assessment to enable her to enrol for a certificate programme at a university. At the end of
the calendar year (December), when the results were made available, Ine-Lize was
announced as being the top student of the programme. Her employer waived her debt
and she did not have to repay the loan.
You are required to discuss whether the above-mentioned will result in any cash equivalent of the benefit to be included in Ine-lize’s taxable income in respect of the current year
of assessment.
Solution 6.24
The value of the loan will be included in Ine-Lize’s taxable income, as a taxable benefit
will arise when the employer releases the employee from an obligation to pay an amount
owing by the employee to the employer. If her employer paid her the amount owed as a
bona fide study bursary and made the bursary subject to a condition that Ine-Lize has to
repay the bursary if she abandons her studies or fails to complete them within a certain
period, no taxable benefit will arise as the bursary will qualify as being exempt income in
terms of section 10(1)(q) (refer to 6.7.6).
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Chapter 6: Fringe benefits
6.3–6.4
REMEMBER
• It is important to note that the cash equivalent of all the above-mentioned fringe benefits
will not only be used to calculate the annual taxable income of an employee but also
when the employer calculates employees’ tax on a monthly basis. The right of use of a
motor vehicle, however, is calculated at 80% for employees’ tax purposes, unless the
employer is satisfied that the vehicle is used 80% for business purposes. In that case,
only 20% is included.
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6.4 Allowances and advances
In terms of section 8 of the Act, a person who receives an allowance or advance
paid by a principal must include it in their taxable income. A ‘principal’ is an
employer, authority, company or body in relation to which an office is held and an
associated institution in relation to that employer.
Where the employee is instructed to spend an amount by the principal in the furtherance of the principal’s business and the employee is requested to produce proof that
the amount was spent for that purpose, this allowance is not included in an employee’s taxable income. This allowance is known as a ‘reimbursive’ allowance.
A reimbursive allowance relates to expenses actually incurred on behalf of the
employer, for example when an employee takes a client out to lunch on behalf of
their employer in the furtherance of the employer’s business. The employee keeps the
bill and presents it as proof to substantiate their claim. The company refunds the
employee for the expense and no taxable benefit arises.
In contrast to a reimbursive allowance, an employer can pay the employee an
amount they can use as they wish. For example, an employer pays an employee an
amount they can use to entertain clients. The employees are under no obligation
and can choose whether they actually want to entertain the clients. The employees
also do not need to provide proof to the employer that they actually did use the
allowance to entertain clients. Such an allowance is a taxable allowance.
Taxable allowances include a travel, subsistence, home study, cell phone or any other
allowance.
Certain allowances are exceptions and are not taxable benefits when paid to a person
employed in:
• the national or provincial sphere of government;
• a municipality in the Republic; or
• a national or provincial public entity, if not less than 80% of the expenditure of
such entity is defrayed directly or indirectly from funds voted by Parliament.
The above is applicable where the person is stationed outside the Republic and the
allowance is attributable to that person’s services rendered outside the Republic. This
allowance must not be included in the taxable income of the applicable employee.
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6.4
6.4.1 Travel allowance (section 8(1)(b))
Where an employee receives a travel allowance they must include any amount of this
allowance that is spent on private travelling in respect of the year of assessment in
their taxable income. The portion of the allowance that is expended for business
purposes is effectively tax free.
The portion to be included in taxable income is calculated as follows:
Travel allowance received
Less:
Portion expended for business purposes
Taxable allowance to be included in the taxable income of the employee
(the portion associated with private use)
R
xxx
(xxx)
xxx
The portion of the travel allowance that is used to fund travelling for business purposes needs to be calculated, as this will reduce the travel allowance to be included in
gross income.
In order to calculate the cost of travelling for business purposes, information is
required regarding the kilometres travelled during the year in total and the kilometres travelled relating to business travelling. The cost per kilometre must also be
determined.
Cost of business travel = business kilometres × cost per kilometre
Business kilometres can only be ascertained by keeping accurate records of kilometres travelled in a logbook. Travelling between the taxpayer’s place of residence
and their place of business or employment is considered to be private travelling. The
employee also needs to keep record of the total kilometres travelled during the year.
Cost per kilometre can be determined by either keeping accurate records of expenses
or using the tables or deemed cost provided in the Income Tax Act.
• Actual expenses are determined where the taxpayer keeps accurate records of
expenses incurred in order to substantiate the business use of a travel allowance.
Proof can be kept of the following expenses in order to calculate the actual cost per
kilometre:
– Where the vehicle is owned by the employee, they can claim wear and tear on
the vehicle as part of the actual expenses. This wear and tear must be determined over a period of seven years from the date of the original acquisition by
the recipient and the cost of the vehicle for this purpose must be limited to a
maximum of R665 000.
– Where the vehicle is being leased, the total amount of payments in respect of
that lease may be claimed. The amount claimed may not exceed an amount of
the fixed cost determined by the Minister of Finance in the deemed cost table in
a year of assessment (refer to Appendix B).
– Finance charges in respect of a debt incurred regarding the purchase of that
vehicle can also be claimed but must be limited to an amount that would have
been incurred had the original debt been R665 000.
– All other expenses incurred in the running and maintenance of the vehicle, for
example the cost of licences, insurance, maintenance and tyres, might also be
taken into account.
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Chapter 6: Fringe benefits
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6.4
Once all the actual expenses are added up, these expenses must be divided by the
total number of kilometres travelled by the taxpayer during the year of assessment to
calculate the actual cost per kilometre.
• Deemed cost per kilometre
The deemed cost per kilometre is determined by the Minister of Finance and made
available by notice in the Government Gazette. The employee can use the table if the
taxpayer did not keep an accurate record of expenses (refer to the 2022 table in
Appendix B ).
In order to make use of this table, the employee must use the determined value of the
vehicle in respect of which the travel allowance was granted.
The determined value of a vehicle is:
• If the vehicle was acquired under a bona fide agreement of sale,
– the original cost price of the vehicle (including VAT but excluding finance
charges or interest payable).
• If the vehicle was acquired under a financial lease,
– the cash value of the vehicle (including VAT).
• In any other case,
– the market value of the vehicle at the time when the recipient (employee) first
obtained the vehicle or right of use thereof, plus VAT that would have been
payable on that value on that date.
By using the determined value, the employer is able to read an appropriate fixed cost,
fuel cost and maintenance cost from the table. These amounts are added together in
order to calculate a deemed cost per kilometre.
Fixed cost from the table
In order to obtain a cost per kilometre, the fixed cost must be divided by the total
kilometres travelled during the year of assessment (in respect of both private and
business purposes) to arrive at the fixed cost per kilometre.
REMEMBER
• The fixed cost on the table is given in Rands and the fuel and maintenance rates are given
in cents per kilometre, so they cannot be added together. You must either convert the
fixed cost per kilometre that you calculated to cents per kilometre (by multiplying by 100)
or you must convert the fuel and maintenance rates to rand (by dividing by 100).
• The fixed cost per the table is an annual cost, so where the employee receives a travel
allowance for less than the full year during the current year of assessment, the fixed cost
must be reduced pro rata in the same proportion as the time the allowance was received.
When calculating the portion relating to business travel, an employee may use the
greater of actual expenses per kilometre or deemed cost per kilometre. Where records
have not been kept, the employee must use the deemed cost per kilometre.
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6.4
Note that where a taxpayer receives an allowance based on the actual distance travelled by the recipient using a motor vehicle for business purposes (therefore excluding
private travelling) or the distance is proved to the Commissioner, the amount expended by the recipient on such business travelling is not taxed up to a rate of 382
cents per kilometre (regardless of the value of the vehicle). No employees’ tax is
deducted on such an allowance. For example: If an employee travels 5 000 business
kilometres during the year of assessment, the employer can pay a reimbursive allowance of R19 100 (5 000 business km × 382 cents) as a non-taxable reimbursive allowance if the employee does not receive a fixed travel allowance.
Example 6.25
Yosuf Naidoo receives a travel allowance of R8 000 per month from his employer and uses a
Mercedes Benz and a Hilux bakkie interchangeably for business purposes. During the
current year, he travelled 28 000 km with the Mercedes Benz and 35 000 km with the
Hilux bakkie. Both the Mercedes Benz and the Hilux bakkie are therefore used for business purposes interchangeably for the full 12 months.
You are required to calculate the business cost that can be claimed against Yosuf’s travel
allowance.
Solution 6.25
The taxpayer did not keep accurate records; therefore, all the travelling is deemed to be
private and he will be taxed on R8 000 x 12 for the year of assessment. He cannot deduct
any cost. If, however, he kept accurate records of business kilometres travelled and the
Commissioner is satisfied that he uses both vehicles primarily for business purposes, he
will be taxed on the allowance, but allowed to deduct the business travel.
REMEMBER
• According to the SARS PAYE-GEN-01-G03 ‘Guidelines for employers’, no employees’
tax must be deducted from a reimbursive travel allowance unless the allowance exceeds
3,82 cents per kilometre). Where an employee receives a fixed monthly travel allowance
and additionally is also reimbursed per kilometre for actual business kilometres travelled, employees’ tax must only be deducted from the fixed monthly travel allowance
unless the reimbursive allowance exceeds the 3,82 cents/km.
• The belief that an employee must own the vehicle before the reduction in respect of
business use will apply is wrong. The employee must use the vehicle in respect of
which the allowance is received for business purposes. The total kilometres travelled
with the vehicle is used in the calculation of the above-mentioned reduction against the
travel allowance received by the employee.
• Where an employee is granted the use of a company vehicle in addition to the receipt
of a travel allowance in respect of the same vehicle, the deemed cost per kilometre cannot be used in determining the business portion claimable against the travel allowance.
• Where the employee receives a travel allowance and has the use of a company car as
per paragraph 7 of the Seventh Schedule, no reduction of the travel allowance can be
calculated for business travel in terms of section 8. The full allowance is taxable. The
business travel would be deductible against the value of the company car as calculated.
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Chapter 6: Fringe benefits
6.4
Example 6.26
Mia Swanepoel owns a vehicle with a cost of R145 000 (including VAT) and receives a travel
allowance of R2 200 per month in respect of the whole year of assessment. Mia travelled
29 000 km during the year of assessment and recorded her business travel as being 11 000 km.
You are required to calculate the taxable portion of the travel allowance to be included in
Mia’s taxable income.
Solution 6.26
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R
Travel allowance received: R2 200 × 12 months
Calculate the deemed costs and actual kilometres
Value of the car
Fixed cost determined from the table
R
26 400
145 000
55 894
Fixed cost per kilometre (R52 226 / 29 000km × 100)
Fuel cost per kilometre (from the table)
Maintenance cost per kilometre (from the table)
180.09 cents
116.2 cents
48.3 cents
Total cost per kilometre
344.59 cents
Business kilometres travelled
11 000
Business travels:
(11 000 km × 344.59 cents per kilometre / 100)
Taxable portion of the allowance (limited to Rnil)
(37 905)
nil
Example 6.27
Gordon Heuser uses his private car for business travel on behalf of his employer and for
this he receives a travel allowance of R120 000 per year. On 1 March of the previous year
of assessment, he purchased a new motor vehicle, the cost being as follows:
R
Cost price
VAT
450 000
63 000
513 000
continued
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6.4
Gordon kept accurate records of the expenses incurred in respect of the current year of
assessment:
R
Finance charges
87 210
Fuel cost
28 000
Maintenance cost
12 000
Insurance premiums and licence fees
9 600
Gordon travelled a total of 28 000 km during the current year of assessment, of which
18 000 was for private purposes.
You are required to calculate the taxable portion of the travel allowance to be included in
Gordon’s taxable income.
Solution 6.27
R
Travel allowance received
Compare the deemed and actual costs to select the highest
Deemed cost per kilometre:
Value of the vehicle (R450 000 + R63 000)
513 000
Fixed cost determined from the table
146 753
Fixed cost per kilometre (R135 746 / 28 000 km × 100)
Fuel cost per kilometre (from the table)
Maintenance cost per kilometre (from the table)
484.81 cents
166.7 cents
80.2 cents
Total cost per kilometre
731.71 cents
Actual cost per kilometre:
Depreciation (wear and tear) R513 000 over seven years
in terms of section 8(1) (R513 000 / 7 years)
R
120 000
73 286
87 210
28 000
12 000
9 600
Financing cost
Fuel cost
Maintenance cost
Insurance premiums and licence fees
Total vehicle expenses for the year
210 096
Cost per kilometre (R210 096 / 28 000km × 100)
750,3 cents
continued
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Chapter 6: Fringe benefits
6.4
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The actual cost per kilometre is selected as this is the highest.
Business kilometres travelled:
R
Total kilometres travelled
Less: Private kilometres travelled
28 000
(18 000)
Business kilometres travelled
10 000
R
Cost of business travel:
10 000 km × 750.3 cents per kilometre
(higher of deemed or actual cost per kilometre) / 100
(75 030)
Taxable portion of the allowance
44 970
What would the actual cost per kilometre rate be if Gordon’s vehicle
had a cost of R750 000?
Where an employee, their spouse or child owns or leases a motor vehicle, whether
directly or indirectly, by virtue of an interest in a company or trust or otherwise, and
the vehicle is let to the employer or associated institution in relation to the employer,
• the sum of the rentals paid (plus any expenditure in respect of the vehicle that was
borne by the employer) is deemed to be a travel allowance;
• the rental is deemed not to have been received by or to have accrued to the lessor
of the motor vehicle concerned; and
• the employee is deemed not to have been granted the right to use the motor
vehicle.
The employee is deemed to have received a travel allowance and therefore does not
qualify for any deductions (except for the business portion applicable to a travel
allowance).
6.4.2 Subsistence allowance (section 8(1)(c))
The unexpended portion of an amount received in terms of a subsistence allowance,
where an employee needs to spend at least one night away from their usual place
of residence by reason of their duties, is included in the taxable income of such
employee.
Subsistence allowance received
Less:
Portion expended for business purposes
Taxable allowance to be included in the taxable income of the employee
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R
xxx
(xxx)
xxx
A Student’s Approach to Income Tax/Natural Persons
6.4
For the purposes of determining the taxable portion of the allowance, the employee
has the option to use the following as the portion expended for business purposes:
Actual figures
The amount actually incurred in respect of accommodation, meals and other incidental costs, if proved to the Commissioner.
Deemed figures
Where the employee has not provided proof of actual expenditure, the exclusion for
each day or part of a day that the employee is away from their usual place of residence
is an amount per day in respect of meals and other incidental costs, or incidental
costs only as determined by the Commissioner, for a country or region, by way of
notice in the Government Gazette.
• Where the accommodation to which the allowance or advance relates is in the
Republic, an amount equal to:
– R139 if the allowance or advance is paid or granted to defray the cost of incidental subsistence expenses only; or
– R452 if that allowance or advance is paid or granted to defray the cost of meals
and incidental subsistence expenses.
• Where the accommodation to which the allowance or advance relates is outside the
Republic, an amount per country as determined in a foreign travel subsistence
allowance schedule (refer to Annexure I). For example, in the United States of
America US$146 and in Greece €134 would be granted. The allowance is not
always given in the currency of the specific country, for example, Namibia is given
in South African R950, Kenya is given as United States $138 and for countries not
on the list one must use United States $215.
The amount in respect of travelling abroad applies only in respect of continuous
periods not exceeding six weeks spent outside the Republic.
REMEMBER
• Incidental expenses refer to beverages (including alcoholic beverages), private telephone
calls, gratuities and room service.
• Where an allowance is paid in respect of meals and incidental costs, or incidental costs
only, the amount deemed to have been actually expended by the recipient must be
reduced where a portion of the expenditure is borne by the employer. Where the allowance paid by the employer does not exceed the deemed expense, the deemed expenses must
be reduced by that portion of the actual expenditure borne by the employer, or, where the
allowance paid exceeds the deemed expense, the deemed expenses must be proportionally
reduced.
• Where the accommodation does not have a separate tariff for breakfast, it is the practice
of SARS to regard the breakfast as part of the cost of accommodation.
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Chapter 4: General deduction formula
4.8
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CASE:
BP Southern Africa (Pty) Ltd v Commissioner For South
African Revenue Services
2007 SATC 7
Facts: The taxpayer, BPSA, was the manufacturer, supplier and marketer of fuel in
South Africa. BPSA obtained the nonexclusive right to use certain licensed
products and marketing material from its
offshore holding company and paid an
annual royalty, based on the quantity of
product supplied for these rights of use.
The special court found that the royalty
expenditure incurred for the use of intellectual property (trademarks and other
marketing material) was not comparable to
rentals paid for business premises, but that
it rather resembled expenditure incurred in
setting up a business (for example franchise
fees). It found that the rights and obligations between BPSA and its holding
company were of an enduring nature,
despite the fact that the parties had enjoyed
a clear contractual right to terminate these
obligations.
Judgment: The annual royalty payments
incurred in consideration for the right to
use intellectual property were not of a
capital nature and were accordingly
deductible. The court also reconfirmed the
principle that regard must principally
be had to their agreement to determine
the true rights and obligations between
parties, unless it was a simulated transaction. As the royalty was paid in consideration for the use of, and not the
ownership, of intellectual property, it is for
all intents and purposes indistinguishable
from recurrent rent paid for the use of
another’s property.
Principle: Royalty payments made in
terms of a licence agreement are revenue in
nature and are therefore deductible in
terms of section 11(a).
• Fixed or floating capital A further test that has been developed is whether the
expenditure relates to fixed or floating capital. This distinction was referred to in
the New State Areas case as follows:
[W]hen the capital employed in a business is frequently changing its form from
money to goods and vice versa (for example, the purchase and sale of stock by a
merchant or the purchase of raw material by a manufacturer for the purpose of
conversion to a manufactured article) and this is done for the purpose of making a
profit, then the capital so employed is floating capital. The expenditure of a capital
nature, the deduction of which is prohibited. . ., is expenditure of a fixed capital
nature, not expenditure of a floating capital nature, because expenditure which
constitutes the use of floating capital for the purpose of earning a profit, such as the
purchase price of stock-in-trade, must necessarily be deducted from the proceeds of
the sale of stock-in-trade in order to arrive at the taxable income derived by the
taxpayer from that trade.
In Stone v SIR 36 SATC 117, the issue considered was whether the loss of moneys
advanced was of a capital or revenue nature. The court used the test of fixed or
floating capital as follows: The capital was not consumed in the very process of
income production; it did not disappear to be replaced by something that, when
received by the taxpayer, forms part of their income.
In a business of banking or money lending, losses incurred as a result of irrecoverable loans made in the course of that business are of a revenue nature and are
deductible.
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4.8
• ‘Once and for all’ expenditure Another test referred to by the court was whether
the expenditure was once and for all expenditure. In Vallambrosa Rubber Company v
Farmer 1910 SC 519, the opinion was expressed that ‘in a rough way’ it was ‘not a
bad criterion that capital expenditure is a thing that is going to be spent once and
for all while income expenditure is a thing that is going to recur every year’. This
test can clearly not be of universal application, but should not be dismissed as
useless (British Insulated and Helsby Cables Ltd v Atherton).
• Nature of the business carried on The nature of the business a taxpayer is
engaged in may determine whether an expenditure or loss is deductible. In Rand
Mines (Mining and Services) Ltd v CIR 59 SATC 85, the type of business the taxpayer
carried on had an impact on the decision as to whether the expenditure was of a
capital or revenue nature.
CASE:
Rand Mines (Mining & Services) Ltd v
Commissioner or Inland Revenue
59 SATC 85
purposes, the taxpayer had received, via
management fees, the amount originally
paid for the right to manage the mine.
Facts: The taxpayer was a mine management company and a member of a large
group of mining companies. Its principal
function was the administration and management of 40 mines controlled by the
group. The group’s policy was to require
the taxpayer to manage all its mines as it
would ordinarily not invest in a mine
unless it could be managed by the taxpayer. After a mining company outside the
group began to experience financial difficulties, the group acquired a controlling
interest in the ailing company, on the condition that it cancelled an existing management agreement and concluded a new
agreement with the taxpayer. The taxpayer
had to pay a ‘management termination
agreement’ amount of R30 million to the
previous management company before it
entered into a new management contract
with the mine with a term of not less than
twenty years. When the price of platinum
dropped, the group elected to relinquish its
controlling interests in the newly acquired
company. As a consequence, the taxpayer
was obliged to terminate its management
of that mine. The taxpayer, however, had
already received R30 million in management fees (which had been taxed) by the
time it was obliged to terminate the management agreement. Thus, for all intents and
Judgment: The expenditure in question
was made in order to acquire an asset
which was intended to provide an enduring benefit for the taxpayer, as the
contract was to endure for at least 20
years. Only on one other occasion did the
taxpayer pay to acquire a management
contract. It was not the taxpayer’s stock-intrade. The expenditure in question had
been incurred to acquire an asset which
added to the income-earning structure of
the business and was not expenditure
routinely occurring in the running of the
taxpayer’s business. The contracts per se
generated no income but they did provide
the taxpayer with the opportunity of
generating income by providing the management services for which payment
would be made. The contract was ‘a source
of profit’ and the R30 million was spent to
acquire it. Accordingly, the cost had been
of a capital nature.
Principle: Expenditure that provides an
‘enduring benefit’ is capital in nature.
Expenditure more closely linked to the
income-earning structure than the incomeearning operations of the taxpayer is
capital in nature.
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Chapter 4: General deduction formula
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4.8
A taxpayer, whose business it was to insure farmers, was not granted a deduction in
respect of a loss incurred, as the court held that the taxpayer was not engaged in a
banking or money-lending business. As a result, the loss was of a capital nature
(Sentra-Oes Koöperatief Bpk v KBI 57 SATC 109).
• Halfway house between capital and income It has also been held that there is no
halfway house between capital and income. However, in Tuck v CIR 50 SATC 98,
the court sanctioned the apportionment of income between a capital and a noncapital element. The apportionment of expenditure between capital and revenue
should therefore also be possible, but the matter is, as yet, not tested.
From the norms established by the courts, it is obvious that the purchase (other
than by a trader in these assets) of buildings, plant and machinery, which are fixed
assets, constitutes capital expenditure, while the purchase of trading stock
constitutes non-capital expenditure. The acquisition of the goodwill of a business,
which confers an enduring benefit, is a capital expense, while expenditure on a
continuing advertising campaign is of a revenue nature. The cost of improving or
adding to capital assets is a capital expense, but the cost of effecting necessary
repairs to the property is a revenue expense. Unfortunately, not all capital/revenue
decisions are as clear cut as these and each case will have to be decided on its own
particular facts.
Example 4.5
During the current year of assessment, James Dolby purchased a piece of land adjoining his
business premises to use as parking for his clients. The cost of the land amounted to
R100 000 and was paid for in cash during August 2021.
You are required to discuss whether the above expense is of a capital nature.
Solution 4.5
The amount of R100 000 incurred to purchase the vacant land is an expense of capital
nature as the land forms part of the income-earning structure, is not connected to the
income-earning operations and was also incurred as part of the fixed capital of the
business, rather than the floating capital. The expense will not be deductible during the
current year of assessment.
Can I also use these tests to determine the intention of a taxpayer in
order to include an amount in gross income?
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A Student’s Approach to Income Tax/Natural Persons
4.8–4.10
REMEMBER
• The true nature of each transaction must be examined in order to determine whether
the expenditure is of a capital or revenue nature.
• The purpose of the expenditure and whether it is connected to the income-producing
structure (capital nature) or the income-earning operations (revenue nature) is an
important norm.
• Generally, expenditure resulting in the creation of a new asset will be of a capital
nature.
• The relation of the expenditure to the fixed capital (fixed asset) or the floating capital
(trading stock) will determine whether the expenditure is of a capital or revenue nature.
• Generally, capital expenditure is spent once and for all and revenue expenditure is
recurrent in nature.
4.9 Laid out or expended for the purposes of trade
(section 23(g))
Section 23(g), the negative part of the general deduction formula, must be read with
section 11(a) to determine whether a particular amount may be deducted from the
income.
Section 23(g) reads as follows, prohibiting the deduction of
any moneys, claimed as a deduction from income derived from trade, to the extent to
which such moneys were not laid out or expended for the purposes of trade.
Apportionment has therefore officially been sanctioned by the Act. In other words, if
a portion of the amount is not for purposes of trade, that portion may not be
deducted for tax purposes. In CIR v Nemojim (Pty) Ltd, Judge Corbett said that
in making such an apportionment the court considers what would be fair and
reasonable in all circumstances of the case.
Apportionment may be made in various ways, for example on a time basis, a piecework basis, on the basis of the capital employed etc., as long as it is fair.
4.10 Prohibited deductions (section 23)
In terms of section 23, the following deductions are prohibited despite them sometimes
complying with section 11(a):
• the cost incurred in maintaining the taxpayer, their family or their establishment
(such as food and clothes of the taxpayer or his family and cost of keeping up the
taxpayer’s establishment) (subsection (a));
• domestic or private expenses, including the rent of, or cost of repairs of, or expenses
in connection with premises not occupied for the purposes of trade, or of a
dwelling house or domestic premises, except in respect of that part which is
occupied for the purposes of trade (subsection (b)).
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Chapter 4: General deduction formula
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4.10
Three scenarios are distinguished depending on the taxpayer’s trade:
1 Occupied for purposes of the taxpayer’s trade (a trade other than employment)
A part of domestic property expenses will be deemed to have been incurred
for the purpose of the taxpayer’s trade only if that part of the property is
specifically equipped for purposes of the taxpayer’s trade and is regularly and
exclusively used for such purposes. If this is the case, then the expenses are
deductible.
2 Occupied for purposes of the taxpayer’s employment trade where the taxpayer earns
remuneration mainly in the form of commission
If the taxpayer’s income from employment is derived mainly from commission
or other variable payments based on their work performance, the taxpayer
will be able to claim the domestic expenses if:
– it (the home study or other domestic area) is specifically equipped for
purposes of the taxpayer’s trade and is regularly and exclusively used for
such purposes; and
– their duties are mainly performed (more than 50%) otherwise than in an
office provided to them by their employer.
3 Occupied for purposes of the taxpayer’s employment trade where the taxpayer does not
earn remuneration mainly in the form of commission
If the taxpayer’s trade relates to employment and the taxpayer does not
mainly derive income in the form of commission, the taxpayer will only be
able to claim a deduction for such domestic expenses if:
– it (the home study or other domestic area) is specifically equipped for
purposes of the taxpayer’s trade and is regularly and exclusively used for
such purposes; and
– their duties are mainly performed (more than 50%) in that part of the
domestic property.
For example, where a doctor has his consulting rooms at their home, or another
professional person or businessman conducts their business from their home, they
may, in terms of this subsection, be entitled to deduct a certain proportion of their
private expenses on their homes, usually in proportion to the floor space used for
business purposes. A proportion of expenses such as interest on a mortgage bond,
assessment rates, electricity, cleaning and maintenance may be deducted. A person
who has a normal place of business (employment) but also uses part of their home,
for example a study, will have to show that they have used the room to produce
income and do so regularly and exclusively for that purpose. The room has to be
specifically set aside and equipped for this purpose; a desk in the corner of a living
room will not suffice;
• a loss or expense, the deduction of which would otherwise be allowable to the
extent to which it is recoverable under a contract of insurance, guarantee, security
or indemnity (paragraph (c)). For example: Where something is stolen from a
business, this loss is deductible in terms of section 11(a). However, if the stolen
goods are covered by an insurance policy and the taxpayer receives an amount
from the insurance, then the full loss cannot be deducted. Only the amount of the
loss that is not covered by the insurance is deductible;
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4.10
• a tax, duty, levy, interest or penalty imposed under this Act, an additional tax
imposed in terms of the Value-added Tax Act, and an interest or penalty payable
in consequence of the late payment of a tax, duty or levy payable under an Act
administered by the Commissioner, the Skills Development Levies Act, and the
Unemployment Insurance Contributions Act (paragraph (d ));
• income carried over to a reserve fund or capitalised in any way (paragraph (e));
• expenses incurred in respect of exempt income, for example interest on a loan to
finance purchases of shares to produce dividends (paragraph (f ));
• the ‘negative test’ of the general deduction formula that is read with section 11(a) to
determine whether an expense may be deducted from income (paragraph (g));
• interest that might have been made on a capital employed in trade (that is to say
notional interest) (paragraph (h));
• an expenditure, loss or allowance, to the extent of which it is claimed as a
deduction from a retirement fund lump sum benefit or retirement fund lump sum
withdrawal benefit (refer to chapter 9) (paragraph (i));
• an expense incurred by a labour broker (other than a labour broker to whom a certificate of exemption has been issued) or a personal service provider. The only deductions that a labour broker and personal service provider can deduct are:
– any amounts paid or payable to any employees of the labour broker or personal
service provider for services rendered by the employees, which is, or will be,
taken into account in determining the employee’s taxable income;
– legal expenses (section 11(c)), bad debts (section 11(i)), contributions to funds on
behalf of employees (section 11(l)), an amount paid to an employee on which
he/she is taxed (section 11(nA)), and a refund of expenses paid by persons (section 11(nB)); and
– operating expenses for business premises, including repairs, finance charges,
fuel, maintenance and insurance of assets if such premises and assets are used
wholly and exclusively for purposes of trade (paragraph (k));
• an expense incurred in respect of the payment made for a restraint of trade, except
as provided for in section 11(cA) (paragraph (l ));
• an expense, loss or allowance that relates to employment of or an office held by a
person that derives remuneration (as defined in the Fourth Schedule). In terms of
paragraph (m) only the following expenses for salaried persons can be deducted:
– contributions to pension, provident or retirement annuity funds in terms of
section 11F;
– legal expenses (section 11(c)), wear-and-tear allowances (section 11(e)), bad
debts (section 11(i)), doubtful debt allowances (section 11( j )), an amount paid
back by an employee on which they were taxed (section 11(nA), and restraint of
trade payments in terms of paragraph (cA) of the gross income definition paid
back to the employer (section 11(nB)); and
– rent, repairs or expenses in connection with a dwelling house or domestic
premises. These expenses must qualify in terms of section 11(a) or (d) (repairs)
to the extent that the deduction is not prohibited under section 23(b) (private
and domestic expenses) (section 23(m));
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Chapter 6: Fringe benefits
6.5
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• Total acquisition cost (of the qualifying equity share) multiplied by the consideration received (for the portion disposed of) divided by market value of that qualifying equity share immediately before that disposal.
Employees’ tax implications of a broad-based employee share plan
The person from whom the employee acquired the qualifying equity share is subject
to special employees’ tax and reporting requirements in terms of these qualifying
shares, in order to ensure that both the taxation of ordinary income and capital gains
within five years from date of grant, are fully enforceable. This person must withhold
employees’ tax from the gain, determined on the sale of a qualifying equity share
occurring within five years of date of grant. In the majority of cases, qualifying equity
shares are granted by or acquired by employees from trusts established by employers
to provide these benefits. As these trusts only provide benefits in the form of gains,
these trusts do not pay the employees cash remuneration. As a result, the employees’
tax liability is not paid during the year of assessment when the gain arises. The same
position occurs where the employees are employed by a subsidiary of an international company and the shares are granted or awarded by a body outside the
Republic. In circumstances where a gain arises in the hands of an employee in a year
of assessment and the entity from which the employee acquired the qualifying equity
share is an associated institution, this associated institution and the employer must
withhold an amount from the remuneration payable to the employee equal to the
employees’ tax payable in respect of the gain. The associated institution and the
employer shall be jointly and severally liable for that employees’ tax.
Example 6.30
Aquincum Ltd grants 2 500 of its shares to each and every one of its permanent employees at no consideration for the employees on 5 January of the previous year of assessment.
These shares have a nominal value of R1,00 each. They have a market value of R1,20 each
on the date that the grants are approved. No restrictions apply to these shares, except that
they may not be sold before 5 January five years later, unless an employee is retrenched
or resigns. If an employee leaves the employment of Aquincum Ltd before the specified
date, he must sell his 2 500 shares back to Aquincum Ltd at their market value on the date
of his departure. Aquincum Ltd appoints a trust to administer all the shares that need to
be administered under the plan.
Sarah, an employee of Aquincum Ltd, resigns from employment on 21 December of the
current year of assessment. Under the terms of the plan, she sells her shares back to
Aquincum Ltd (through the trust) on this date at their market value of R3 750 (2 500
shares at R1,50 a share).
You are required to calculate the effect of the transactions on Sarah’s taxable income.
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6.5
Solution 6.30
Although Sarah receives an asset from her employer on 5 January at less than its market
value in terms of section 8B, Sarah will receive the shares free of immediate tax.
The shares issued by the company qualify as a broad-based employee share plan.
However, Sarah has to include R3 750 in her taxable income during the year of assessment in which she resigns from Aquincum Ltd. Aquincum Ltd must withhold the appropriate amount of employees’ tax. The company must also report the sale.
REMEMBER
• If Sarah sells the shares after five years, the amount received in respect of the sale of the
shares will result in a capital gain.
Example 6.31
Praha Ltd has ten executives and 100 rank-and-file employees. Praha Ltd grants 3 000 of
its shares to each of its executives employed on 15 June at no consideration. The shares
have a nominal value of R1,00 each. They have a market value of R1,50 each on the date
that the grants are approved. No restrictions apply to these shares, except that they may
not be sold before 15 June five years later, unless the recipient executive is retrenched or
resigns. If an executive leaves the employment of Praha Ltd before 15 June five years
later, the employee must sell all 3 000 shares back to Praha Ltd for the market value of the
shares on the date of departure. Praha Ltd appoints a trust to administer all the shares
administered under the plan.
Emma, an executive employee of Praha Ltd, receives 3 000 shares from Praha Ltd on
15 June.
You are required to determine if the transaction is in terms of a broad-based employee
share plan.
Solution 6.31
The shares issued by the company do not qualify as a broad-based employee share plan
under section 8B because the non-discrimination requirements are not satisfied. (Only the
ten executives received the shares therefore less than 80% of permanent employees were
offered the shares.) Section 8C is applicable (refer to 6.6 for a discussion in this regard).
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Chapter 6: Fringe benefits
6.5–6.6
REMEMBER
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• Under current law, an employer generally cannot deduct the issue or transfer of a share
to an employee, even if that issue or transfer acts as compensation for salary. In the case
of a broad-based employee share plan, however, the deduction of the share at market
value less any consideration given by that employee for that qualifying equity share
(but not beyond R10 000 per year in respect of all qualifying equity shares granted to a
single employee) is allowed from the taxable income of the employer (section 11(lA)).
• If the employee is responsible for purchasing the shares, no deduction is claimable for
normal income tax purposes (section 8B makes no provision for the deduction of the
purchase price and section 23(m) allows only a limited number of other deductions
available in respect of salaried employees). The cost of the shares, however, forms part
of the base cost of the shares for capital gains tax purposes, being expenditure actually
incurred in respect of the cost of acquisition of that asset (paragraph 20(1)(a)).
• It is important to always consider first whether section 8B might be applicable as this
section is more beneficial than section 8C.
• Section 8B is applicable in the following instances:
– if the share is an ordinary share (not a preference share);
– if it is issued for no consideration or at par value;
– in terms of a broad-based employee share plan;
– where the employer offers the plan to at least 80% of its employees who have been
permanently employed on a full-time basis for at least one year;
– the employees receive full voting rights in the shares offered under the plan;
– only when allowable restrictions are attached to the share; and
– the total shares received under the plan by each employee do not exceed R50 000 in
value during any five-year period.
• If the share does not fall within section 8B, the rules of section 8C apply.
6.6 Taxation of directors and employees on vesting of equity
instruments (section 8C)
Meaning of the benefit
Over the years, a number of equity-based incentives have been developed for top
management (for example directors and executives) that allow top management to
receive various forms of equity with minimal tax cost. These equity-based incentives
include, among others, share options, deferred delivery shares, restricted shares and
convertible debentures. This is done partly to provide an incentive to these employees to strive for the success of the company and partly to keep the employees at a
particular company for longer periods, as these options normally come into effect
after a completed period of service.
Tax implications for the taxpayer’s income
In terms of section 8C, the taxpayer is not taxed when they acquire the equity instrument but only when the instrument vests.
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6.6
In terms of section 8C(1), a taxpayer must include in or deduct from their income for a
year of assessment any gain or loss determined in respect of the vesting of an equity
instrument during that year, if that equity instrument was acquired by that taxpayer:
• by virtue of their employment or office as director of a company;
• from a person by arrangement with the taxpayer’s employer; or
• by virtue of any other restricted equity instrument held by that taxpayer in respect
of which section 8C will apply when that instrument vests; or
• as a limited equity instrument received during their employment from the company or an associated institution or a person employed by or who is a director of
the company or an associated institution.
The term ‘equity instrument’ covers an ordinary share (or part thereof) in the equity
share capital of a company (or a comparable member’s interest in a close corporation). The term also includes share options and another financial instrument that may
be converted into an equity share (such as a convertible debenture) as well as a right
or obligation of which the value is determined directly or indirectly with reference to
the value of the share or member’s interest. Additional equity instruments acquired
by a taxpayer as a result of corporate actions, such as unbundling or issue of capitalisation shares, is also included in the ambit of the provisions of section 8C.
The gain to be included in the income of a taxpayer is:
R
Market value of the equity instrument determined on the date on which it vests in
xxx
the taxpayer
Less:
Sum of any consideration paid in respect of that equity instrument
(xxx)
Taxable allowance to be included in income
xxx
If the answer is negative, it represents a loss which is deductible from the income of a
taxpayer.
For the purposes of section 8C, the following definitions are applicable:
‘market value’, in relation to an equity instrument in terms of sections 8B and 8C
regarding
• a private company contemplated in the Companies Act, means an amount determined as its value in terms of a method of valuation –
– prescribed in the rules relating to the acquisition and disposal of that equity
instrument;
– which is regarded as a proxy for the market value of that equity instrument for
the purposes of those rules; and
– used consistently to determine both the consideration for the acquisition of that
equity instrument and the price of the equity instrument repurchased from the
taxpayer after it has vested in that taxpayer; or
• any other company (another company) means the price which can be obtained on
the sale of that equity instrument between a willing buyer and willing seller dealing freely at arm’s length in an open market and, in the case of a restricted equity
instrument, had the restriction to which that equity instrument is subject, not existed;
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Chapter 6: Fringe benefits
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6.6
‘consideration’ means an amount given or to be given (other than in the form of
services rendered) by the taxpayer in respect of that equity instrument. Consideration
includes an amount paid for a previous equity instrument that was exchanged for the
equity instrument at issue. For example: If an employee pays R10 for a restricted
option that is subsequently converted into a restricted share, the employee treats the
R10 paid for the option as consideration when calculating the gain or loss upon the
vesting of the share. If a restricted equity instrument was acquired by a person other
than the taxpayer by virtue of the taxpayer’s employment (or office as director),
consideration means an amount given or to be given by a person to the extent that the
amount does not exceed the amount the taxpayer would have had to give to acquire
that equity instrument. Consideration (in this case) does not include an amount given
or to be given by that person to the taxpayer to acquire that restricted equity instrument;
‘employer’ refers to an employer as contemplated in paragraph 1 of the Seventh
Schedule.
REMEMBER
• The provisions of section 8C(1) take precedence over the provisions of section 9C.
Section 9C provides that the disposal of shares after holding them for a period of three
years is on capital account. Sections 8B and 8C, however, govern all tax implications
associated with equity instruments acquired by directors or employees by virtue of
employment.
Application of section
This section does not apply in respect of an equity instrument that:
• was acquired by the exercise or conversion of, or in exchange for the disposal of
another equity instrument where section 8C applied in respect of the vesting of
that other equity instrument before that exercise, conversion or exchange; or
• constitutes a qualifying equity share in terms of a broad-based employee share
plan as defined in section 8B (refer to 6.5).
REMEMBER
• The acquisition of equity instruments from the employer falling within section 8C does
not constitute a fringe benefit (paragraph 2(a) of the Seventh Schedule).
As mentioned above, the tax event will be triggered by the vesting of an equity
instrument. It is thus important that the term ‘vest’ be understood.
Vesting of an equity instrument
The date of vesting depends on whether the equity instrument is restricted or unrestricted as specified in section 8C(3).
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An instrument that falls within the ‘restricted’ equity instrument status is an equity
instrument:
• that is subject to a restriction (other than a restriction imposed by legislation
as opposed to contract) that prevents the taxpayer from freely disposing of that
equity instrument at market value (for example if the employee (or director)
cannot sell the instrument until employment terminates, or for several years);
• that is subject to a restriction that could result in the taxpayer forfeiting ownership
or the right to acquire ownership of that equity instrument other than at market
value (for example a restricted equity instrument may arise if an employee/
director must sell the instrument back at cost (or surrender the instrument for
nothing) if employment terminates before a specified date);
• if a person has retained the right to impose a restriction as mentioned in the above
two cases on the disposal of the equity instrument;
• that is an option that can only be converted into a restricted share (hence an option
is restricted if the underlying share is restricted, regardless of whether the option
itself is subject to any restrictions);
• that is convertible into a restricted share (for example, a convertible debenture
qualifies as a restricted equity instrument if that convertible debenture can only be
converted into a restricted share);
• if the employer (associated institution or other person by arrangement with the
employer) at the time of acquisition by the taxpayer of the equity instrument
undertakes to cancel the instrument or repurchase it at a price exceeding market
value on the repurchase date, if the equity instrument declines in value after the
employee/director initially acquired the instrument. This form of one-sided
arrangement ensures that the employee receives only the benefit of appreciation
and they can ignore any potential loss; or
• that is not deliverable to the taxpayer until the happening of an event, whether
fixed or contingent.
Equity instruments free of any of the above restrictions fall within unrestricted status.
In the case of a restricted equity instrument, the date of vesting occurs on the earliest
of the following five events:
• when all restrictions causing the ‘restricted equity instrument’ status are lifted;
• immediately before the employee/director disposes of the restricted equity instrument;
• when an option to acquire such an instrument or a financial instrument that is
convertible to a share or a part of a share (qualifying as a restricted equity instrument) terminates;
• immediately before the employee/director dies, if all the restrictions are lifted or
may be lifted on or after death; and
• the time a disposal occurs.
In the case of an unrestricted equity instrument, the date of vesting occurs when the
employee/director acquires the unrestricted instrument.
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Chapter 6: Fringe benefits
6.6
Example 6.32
Arnold de Beer is employed by Schonbrun Ltd. Arnold acquires a Schonbrun Ltd share
(R1 nominal value) from the company for R100. The market value of the share is R110.
The R10 discount exists by virtue of the employment relationship. The share does not
contain any restrictions.
You are required to calculate the effect of the acquisition of the share on Arnold’s taxable
income.
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Solution 6.32
As the share is an unrestricted share, it is deemed to vest at time of acquisition.
Arnold must include R10 (R110 (market value) – R100 (consideration)) in his taxable
income.
Note
It is important to always consider whether section 8B might not be applicable. As the
share is not offered to the employees for no or a minimal consideration (par value), section 8B is not applicable. Arnold also does not receive this share in terms of a broad-based
employee share plan.
Example 6.33
Lollie Stofile is employed by Niagara Ltd. Lollie acquires a Niagara Ltd share (R1 nominal value) from Niagara Ltd in exchange for R200 (the market value of the share is R200).
Lollie may not sell the share until she has left the employ of Niagara Ltd. Lollie eventually sells the share to an outside party for R350 when leaving Niagara Ltd.
You are required to calculate the effect of the acquisition of the share on Lollie’s taxable
income.
Solution 6.33
As the share is a restricted share, it only vests when Lollie departs from Niagara Ltd as
this is the date when all restrictions are lifted.
Lollie must include R150 (R350 (market value) – R200 (consideration)) in her taxable
income when she leaves Niagara Ltd.
Note
It is important to always first consider whether section 8B might be applicable. As the
share is not offered to the employees for no or a minimal consideration (par value), section 8B is not applicable. Lollie does not receive this share in terms of a broad-based
employee share plan.
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Example 6.34
Assume the details of the previous example, except for the fact that the share declines in
value to R190 on the date Lollie leaves the employ of Niagara Ltd.
You are required to calculate the effect of the acquisition of the share on Lollie’s taxable
income.
Solution 6.34
The share again vests on the date that employment ceases as this represents the date
when the restriction cease to have an effect.
Lollie will have suffered a loss of R10 (R190 (market value) – R200 (consideration)) which
is deductible from her taxable income.
Example 6.35
Dylan Coetzee is employed by Charleston Ltd. Dylan enters into a forward contract for
the purchase of one Charleston Ltd share in three years’ time. Charleston Ltd shares are
currently worth R300 each. Under the forward contract, Dylan will purchase a share for
R300 in three years’ time. After three years, Dylan purchases the share for R300 when the
shares are worth R480 each.
You are required to calculate the effect of the acquisition of the share on Dylan’s taxable
income.
Solution 6.35
As the equity instrument is restricted, it is deemed to vest when the restriction ceases to
have an effect (in three years’ time).
Dylan must include R180 (R480 (market value) – R300 (consideration)) in his taxable
income in three years’ time.
Employees’ tax implications
The amount of a gain determined in respect of the vesting of an equity instrument is
included in the definition of ‘remuneration’ in the Fourth Schedule and is therefore
subject to employees’ tax.
The person who granted the right to acquire the marketable security or from whom
the employee acquired the equity instrument is deemed to have paid remuneration to
the employee. Paragraph 11A of the Fourth Schedule deems this person to have paid
remuneration equal to the amount of the gain to the employee. In the majority of
cases, the rights to acquire marketable securities or equity instruments are granted by
or acquired by employees from trusts established by employers to provide these
benefits. As these trusts only provide benefits in the form of gains, the trusts do not
pay the employees cash remuneration. As a result, the employees’ tax liability is not
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Chapter 6: Fringe benefits
6.6
paid during the year of assessment when the gain arises. The same position occurs
where the employees are employed by a subsidiary of an international company and
the shares are granted or awarded by a body outside the Republic. In circumstances
where a gain arises in the hands of an employee in a year of assessment and the entity
from which the employee acquired the qualifying equity share is an associated institution, this associated institution and the employer must withhold an amount from
the remuneration payable to the employee equal to the employees’ tax payable in
respect of the gain. The associated institution and the employer shall be jointly and
severally liable for that employees’ tax.
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Subsequent transfers
Equity instrument swaps
Special rules are required when an employee/director enters into a restricted equity
instrument swap in order to ensure that the restrictions remain as before. These swaps
frequently arise when a company restructures. It can also happen due to a change of
employment from one company to another within the same group.
The swap of a restricted equity instrument for a new restricted equity instrument
does not give rise to a taxable event. The new restricted instrument is deemed to have
been acquired by virtue of employment just as the initial restricted equity instrument
was surrendered (section 8C(4)). The new restricted equity instrument will trigger
ordinary income or losses only when it vests.
If, however, the swapping rules contain provisions for situations in which the surrendering party receives a payment in a form other than restricted equity instruments,
the other payment might give rise to immediate taxation. This is due to the fact that
the taxpayer has to be taxed to the extent that a gain is made from the money realised.
The payment received less any consideration attributable to that payment must be
deemed to be a gain or a loss which must be included or deducted from the taxpayer’s income in the year of assessment during which that restricted equity instrument is so disposed of.
Example 6.36
Patty Cloete acquires a restricted equity share while being employed by Lednice Ltd.
Lednice Ltd enters into an amalgamation with Zacker Ltd. Patty surrenders the restricted
Lednice Ltd share in exchange for a restricted Zacker Ltd share as part of the amalgamation.
You are required to calculate the effect of the acquisition of the shares on Patty’s taxable
income.
Solution 6.36
The restricted equity shares swap does not give rise to a tax event.
Patty will be subject to tax on the restricted Zacker Ltd share on a subsequent vesting
date (that is to say when all restrictions are lifted, immediately before certain disposals, or
upon death).
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6.6
Example 6.37
As a result of a corporate restructuring, Luca Nothnagel disposes of a restricted equity
instrument she held to her employer. In return, Luca received another restricted instrument worth R140 and cash of R60. When Luca had exercised her option to acquire the
original equity instrument, she paid a strike price of R100 (that is to say the consideration).
You are required to calculate the effect of the acquisition and disposal of the instrument
on Luca’s taxable income.
Solution 6.37
The new restricted equity instrument is deemed to be acquired by virtue of Luca’s
employment and will be subject to tax when the restrictions on it are lifted.
A gain of R60 is determined as a result of the receipt of the cash. The portion of the consideration attributable to the cash received is allocated as follows:
Portion of consideration: R60 /R200 (R140 + R60) × R100 = R30.
Gain: R60 – R30 = R30 has to be included in Luca’s income.
Transfers to connected persons or at non-arm’s length
A taxpayer may not want to be taxed on the full appreciation of a restricted equity
instrument from the date of acquisition until all the restrictions are lifted. One potential way for triggering an early gain (and not being taxed on the full appreciation) is to
sell the restricted equity instrument at an earlier date in a non-arm’s length transaction,
or to connected persons. Section 8C(5)(a) accordingly remedies this concern by treating
the disposal as not at arm’s length or as a non-event to a connected person. First, the
disposal is not a vesting event. Second, the non-arm’s length or connected person
steps into the shoes of the employee/director so that any vesting event in the hands
of the transferee creates ordinary income for that employee/director.
Example 6.38
Joseph Ray acquires a restricted equity option in Fishtucky Ltd while he is an employee
of Fishtucky Ltd. The option costs R2 (when Fishtucky Ltd’s shares are worth R200 each)
and allows Joseph to convert the option in one restricted Fishtucky Ltd share for R200.
One year later, Joseph sells the option to the Ray Family trust, of which he is a beneficiary. As Joseph is a beneficiary of the Ray Family trust, he and the trust are connected
persons in relation to each other. The Ray Family trust pays R6 for the option (when the
shares of Fishtucky Ltd are worth R204 each). Another year later, the option is converted
into a share when Fishtucky shares are worth R300 each and all restrictions are lifted.
You are required to calculate the effect of the acquisition and disposal of the option and
share on Joseph’s taxable income.
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Chapter 6: Fringe benefits
6.6
Solution 6.38
The transfer of the option to the Ray Family trust is ignored as Joseph and the trust are
connected persons.
When the Ray Family trust converts the option into a share two years after Joseph
acquired the option, a gain of R98 (R300 (market value) – R200 (consideration for the
share) – R2 (consideration for the option)) will be realised.
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This R98 of ordinary income will be included in Joseph’s taxable income.
Comparable rules apply if a person other than the employee/director directly
acquires an equity instrument by virtue of the employee’s/director’s employment
(section 8C(5)(b)). This situation arises when the person (other than the employee/
director) obtains the equity instrument without the employee/director actually being
involved in the transfer. For instance, this situation may arise if a spouse of an
employee directly receives an equity instrument from the employer-company by
virtue of the employee’s employment. Under this circumstance, the vesting of that
instrument to the spouse is treated as a taxable event generating ordinary income or
loss for the employee as if the employee received the instrument directly.
Where an equity instrument is disposed of for less than the market value of the share,
the gain or the loss on the disposal is calculated as the actual consideration received
or accrued less the consideration paid in respect of that equity instrument (section 8C(5)(c)).
Subsequent transfers by connected or non-arm’s length persons
Additional rules apply in terms of section 8C(6) if a connected/non-arm’s length
transferee subsequently disposes of a restricted equity instrument to another person
who is connected to the employee/director (or to another non-arm’s length transferee).
The subsequent transfer is again free of tax and the second transferee is again treated as
having stepped into the shoes of the employee/director.
Example 6.39
Shumani Nkwe acquires a restricted share of Eiffel Ltd while employed by Eiffel Ltd.
Shumani then borrowed R200 from Eiffel Ltd (at a rate higher than the official rate) and
used the proceeds of this loan to pay for his restricted share in Eiffel Ltd. Eiffel Ltd provides Shumani with a unilateral opportunity to cancel the acquisition if the share declines
in value as long as Shumani remains with Eiffel Ltd. One year later, Shumani sells the share
to his spouse, Mary, for R210. Shumani and Mary are married out of community of property. Another year later, Mary transfers the share to the Nkwe CC (of which Shumani and
Mary are members) for R200. As Shumani and Mary are members of the CC, Shumani and
the CC are connected persons in relation to each other. Another year later, Shumani leaves
the employ of Eiffel Ltd, thereby forfeiting the right to unilaterally cancel the acquisition
if the shares decline in value. On this date, the share has a market value of R300.
You are required to calculate the effect of the acquisition and disposal of the share on
Shumani’s taxable income.
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6.6
Solution 6.39
The sale to Shumani’s spouse, Mary, and the subsequent sale by Mary to the Nkwe CC
are ignored because both parties are connected persons to Shumani.
The vesting date for the share arises when the unilateral right is cancelled.
Shumani must include R100 (R300 (market value) – R200 (consideration for the share)) in
his taxable income.
If the loan from Eiffel Ltd to Shumani was granted at no interest or at an interest rate less
than the official rate, paragraph 11 (refer to 6.3.8) would have been applicable. The cash
equivalent of the taxable benefit would have been the amount of interest which would
have been paid on the loan during the year of assessment if interest had been paid at the
official rate, less the amount of interest (if any) actually paid by the employee during the
year.
Where a person disposes of a restricted equity instrument, as defined in section 8C, to a
connected person in relation to the taxpayer, that restricted equity instrument must be
deemed to be donated at the time that it is deemed to vest and have a value equal to the
fair market value of that instrument at that time less an amount equal to the value of any
consideration in respect of that donation (section 58(2)).
The disposal of the share to Shumani’s spouse, Mary, is a donation in terms of section 58(2). Section 56(1), however, stipulates that donations between spouses are exempt from
donations tax.
The transfer of the share by Mary to the Nkwe CC is a donation in terms of section 58(2). The
time of the donation is when the share vests.
The value of the donation for donations tax purposes is
R100 (R300 (fair market value on date of vesting) – R200 (consideration paid by Nkwe CC
in respect of that donation)).
Elimination of duplicated gains
Equity instruments within section 8C do not trigger a disposal event for capital gains
tax purposes before the date of vesting (refer to paragraph 11(2)(j) of the Eighth
Schedule). This non-event treatment follows the same principles as proposed for ordinary income (refer to section 10(1)(nD)). The equity instrument is generally provided
with a base cost equal to the market value on the date that the instrument vests (paragraph 20(1)(h) of the Eighth Schedule).
Example 6.40
Janessa du Preez is employed by Centre Data (Pty) Ltd and is not a share dealer. Janessa
acquires a restricted Centre Data (Pty) Ltd share in exchange for a R100 loan (at a rate
higher than the official rate) when that restricted share has a value of R100. In the next
year, the restrictions of the share are lifted when the share has a R250 value. Janessa eventually sells the share for R400.
You are required to calculate the effect of the acquisition and disposal of the share on
Janessa’s taxable income.
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Chapter 6: Fringe benefits
6.6
Solution 6.40
The share vests in the year when all the restrictions are lifted (one year after acquiring the
share).
Janessa must include R150 (R250 (market value) – R100 (consideration for the share)) in
her taxable income.
The share becomes a capital asset in her hands with a base cost of R250 on the date that it
vests.
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When Janessa eventually sells the share, a capital gain of R150 (R400 (selling price) – R250
(base cost = market value of the share on date of vesting)) is realised.
The interest paid by Janessa on the loan is not deductible from her taxable income as the
share only earns tax-free dividends. The interest can also not be added to the base cost of
the share as Centre Data (Pty) Ltd is not a listed company (paragraph 20(1)(g) and (2)(a)
of the Eighth Schedule).
With effect from 1 March 2017, a taxpayer must include an amount received by or
accrued to them during a year of assessment in respect of a restricted equity instrument in their income for that year of assessment where the amount is not:
• a return of capital or foreign return of capital by way of a distribution of a
restricted equity instrument;
• a dividend or foreign dividend in respect of that restricted equity instrument; or
• an amount that must be taken into account in determining the gain or loss, in terms
of this section, in respect of that restricted equity instrument.
REMEMBER
• It is important to always consider first whether section 8B might not be applicable as
this section is more beneficial to taxpayers than section 8C.
• Section 8B is applicable in the following instances:
– if the share is an ordinary share (not a preference share);
– if it is issued for no consideration or at par value;
– in terms of a ‘broad-based employee share plan’;
– where the employer offers the plan to at least 80% of its employees who have been
permanently employed on a full-time basis for at least one year;
– the employees receive full voting rights in the shares offered under the plan;
– only when allowable restrictions are attached to the share; and
– the total shares received under the plan by the employee do not exceed R50 000 in
value during a five-year period.
• If the share does not fall within section 8B, the rules of section 8C apply.
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6.7
6.7 Exemptions from tax in an employer/employee relationship
(section 10)
In terms of section 10 of the Act, there are a number of exemptions from tax in an
employer/employee relationship namely:
• special uniforms (refer to 6.7.1);
• transfer costs (refer to 6.7.2);
• qualifying equity shares in terms of a broad-based employee share plan (refer to
6.7.3);
• equity instruments in terms of section 8C (refer to 6.7.4);
• equity instruments in terms of section 8C – ‘stop loss’ provision (refer to 6.7.5); and
• scholarships and bursaries (refer to 6.7.6).
6.7.1 Special uniforms (section 10(1)(nA))
Section 10(1)(nA) determines that the value of a uniform or an allowance in respect of
a uniform given to an employee by an employer is exempt from tax. Refer to chapter
3.4.3.
6.7.2 Transfer costs (section 10(1)(nB))
Section 10(1)(nB) determines that the benefit an employee receives, where their
employer paid the cost to relocate an employee from one place to another on the
appointment or termination of the employee’s employment, may be exempt from
tax. Refer to 3.4.3.
Example 6.41
XYZ Ltd transferred Anike Moody from Durban to Pretoria. Her basic salary is R8 700 per
month. XYZ Ltd paid for the transfer of her personal goods and made arrangements
for Anike and her family to stay in a hotel on their account for two months during which
Anike had to wait for the previous owners to move out of the house that she bought.
Anike puts in a claim for the following expenses to XYZ Ltd:
Amount
R
Description
1
2
3
4
5
6
7
New school uniforms purchased for her two children
Curtains made for her new house
Motor vehicle registration fees
Telephone, water and electricity connections
Loss on sale of previous residence
Agent’s fee on sale of previous residence
Transfer duty on new residence
2 180
12 800
480
1 500
20 000
28 895
30 000
95 855
You are required to indicate which portion of Anike’s claim will be exempt from tax.
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Chapter 6: Fringe benefits
6.7
Solution 6.41
The benefit Anike receives due to the fact that her employer paid for the transfer of her
personal goods as well as the hotel accommodation (in respect of herself and her family)
for two months qualifies for the exemption in terms of section 10(1)(nB).
Items 1 to 4 are considered to be settling-in costs and can be paid back to Anike tax free.
Item 5 is a taxable benefit and if XYZ Ltd pays this amount to Anike, it is taxable in full.
Items 6 and 7 qualify again for the exempt relocation allowance.
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REMEMBER
• XYZ Ltd could have paid Anike R8 700 (one month’s basic salary) without withholding
employees’ tax (also not taxable on assessment) in respect of settling-in expenses as per
SARS’s practice. If they chose this option, they could not refund her for items 1 to 4 and
6 and 7 again (as this must be covered from her additional one month’s basic salary).
6.7.3 Qualifying equity shares in terms of a broad-based employee
share plan (section 10(1)(nC))
Section 10(1)(nC) determines that an amount received by or accrued to a person in the
form of a qualifying equity share in section 8B shall be exempt from tax.
REMEMBER
• In order to qualify for the exemption, it has to be a qualifying equity share that is awarded
to the employee. This exemption will not apply if cash is distributed to employees.
• The exemption in section 10(1)(nC) refers only to the acquisition of the equity shares in
terms of a broad-based employee share plan and not to the subsequent transactions
where the share is sold (refer to 6.5).
6.7.4 Equity instruments in terms of section 8C (section 10(1)(nD))
Section 10(1)(nD) determines that an amount received by or accrued to a person in
respect of an equity instrument contemplated in section 8C (refer to 6.6) acquired by
that person, shall be exempt from tax if the share had not vested.
In effect, this non-event treatment ensures that the full appreciated value of the share is
included in the taxpayer’s taxable income on the date that the share vests (refer to 6.6).
6.7.5 Equity instruments in terms of section 8C – ‘stop-loss’
provision (section 10(1)(nE))
Certain amounts received by or accrued to an employee under a share incentive
scheme operated for the benefit of employees are exempt from normal tax. The
exempt amounts are those derived upon:
• the cancellation of a transaction in which the taxpayer bought shares under the
share incentive scheme; or
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6.7
• the repurchase from the taxpayer of shares bought under the share incentive scheme
(only if the repurchase price does not exceed the selling price of the shares).
These exempt amounts are commonly referred to as stop-loss provisions in practice.
REMEMBER
• This exemption is only granted if, in consequence of the cancellation or repurchase, the
taxpayer does not receive or become entitled to receive any compensation or consideration other than the payment of any portion of the purchase price actually paid by them
(refer to 6.6).
6.7.6 Scholarships and bursaries (section 10(1)(q) and (qA))
Section 10(1)(q) and (qA) exempt bona fide scholarships or bursaries granted to enable or assist a person to study at a recognised educational or research institution
(refer to 3.4.3).
Example 6.42
JD Motors Ltd granted a bursary of R18 000 to each of the two high-school children of
Marinella Davids. Marinella earns a salary of R54 000 per annum. JD Motors Ltd does not
operate a bursary scheme open to the general public.
You are required to calculate the effect of the bursaries on Marinella’s taxable income.
Solution 6.42
Marinella received the bursaries in consequence of services rendered by her, and the bursaries are less than the exemption of R20 000 per relative. The bursaries are therefore not
taxable in Marinella’s hands.
Note
If one of Marinella’s children were a person with a disability (as defined in section 6B(1))
then her employer could have given her a bursary of up to R30 000 for this child and it
would have been exempt from tax.
If the child with a disability were at university Marinella could receive a bursary of up to
R90 000 for the child’s studies at university and it would have been exempt from taxation.
REMEMBER
• If Marinella’s remuneration exceeded R600 000 per annum, the bursaries (R18 000 × 2 =
R36 000) are taxable in full (even if the children were persons with disabilities).
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Chapter 6: Fringe benefits
6.8–6.10
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6.8 Administrative provisions
Paragraph 16 (of the Seventh Schedule) ensures that benefits enjoyed by relatives of
an employee and others by virtue of the employee’s employment, are taxed in the
hands of the employee as if the benefits had been granted directly to them.
Paragraph 17 prescribes the duty of employers to provide certificates to employees
showing the nature of the taxable benefits and their cash equivalent, within 30 days
after the end of a year or period of assessment during which an employee has
enjoyed a taxable benefit granted by the employer, and to submit copies of these
certificates to the Commissioner.
Paragraph 18 provides that the employer, on the return referred to in paragraph 14 of
the Fourth Schedule, must declare all taxable benefits enjoyed by their employees
during the period to which the return relates on their tax certificates. Where the
employer is a company, a director of the company must certify the return as correct.
6.9 Summary
When calculating the taxable income of an employee, certain benefits received in any
form other than a cash payment should be valued in terms of the Seventh Schedule
and included in the employee’s taxable income.
In terms of section 8 of the Act, there must be included in the taxable income of a
person any amount which has been paid or granted during that year by their principal (an employer, authority, company or body in relation to which any office is held
and an associated institution in relation to that employer) as an allowance or advance.
These allowances are reduced with the portion used for business purposes.
The next section contains a number of questions that can be completed to evaluate
your knowledge on fringe benefits.
6.10 Examination preparation
Question 6.1
Jan and Martha Williams are married in community of property and are both 45 years old.
They do not have any children and were both employed for the full year of assessment.
Monthly amounts are applicable for a 12-month period unless stated otherwise.
Information relating to Martha
The following amounts accrued to her during the current year of assessment:
Salary
Rental
Interest
R250 000
R12 000
R40 000
She contributed 5% of her salary to a provident fund and R5 000 to a retirement annuity
fund during the current year of assessment.
Information relating to Jan
continued
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Income accrued during the current year of assessment
Monthly basic salary
Annual bonus
Entertainment allowance (Note 1)
Monthly travel allowance until 30 April of the current year of
assessment6.1 (Note 2)
Use of company vehicles (from 1 May of the current year of
assessment) (Note 2)
Briefcase (acquired by the employer with the purpose of giving it to
Jan) received in recognition of 22 years of service – cost to employer
(Note 3)
South African dividends received
Income for the year of assessment from trade activities (Note 4)
6.10
R
28 000
25 200
6 850
13 000
?
6 875
4 000
34 500
Expenses incurred during the current year of assessment
Monthly pension fund contributions (based on basic salary) (Note 5)
Total retirement annuity fund contributions
Tax-deductible expenses relating to trade activities (Note 4)
Monthly medical fund contributions paid by Jan (Jan and Martha are
members of the fund)
Medical expenses not refunded by the medical fund
Donation to a PBO (an approved Public Benefit Organisation –
section 18A receipt was obtained)
2 240
24 000
30 900
5 000
18 500
7 500
Notes
1. Jan is required to entertain clients regularly and incurred entertainment costs of
R3 120 during the year of assessment.
2. Jan used his own vehicle while he received the travel allowance. His car had a cash
cost of R220 000 (excluding VAT at 14%). He kept a logbook and travelled 6 000 km in
total during March and April of the current year of assessment, of which 2 333 km
were for business purposes. He bore the cost of fuel and maintenance for the vehicle
but did not keep record of his expenses.
As from 1 May of the current year of assessment, Jan enjoyed the use of two company
cars:
• Martha used the one vehicle with a determined value of R160 000.
• Jan used the other vehicle. The company purchased this vehicle for R108 300
(including VAT at 14%) on 1 March three years ago. His employer pays all
maintenance and fuel for his private and business travel. He kept a detailed logbook from 1 May of the current year of assessment, which revealed that his private use of this company car until the end of the year of assessment amounted to
5 333 km, and his business use amounted to 6 km. The total distance travelled for
the period was 12 110 km.
3. This is the first time Jan has received any recognition for long service.
4. Jan repairs electronic equipment after hours.
5. On 30 November of the current year of assessment, Jan bought back years of pensionable service for R3 000.
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9
Gross
income
Farming
income
–
Retirement benefits
Exempt
income
Lump sum
benefits
–
Deductions
=
Nonresidents
Taxable
income
Tax
payable
Adjustments for
tax avoidance
Page
9.1
Introduction............................................................................................................
326
9.2
Lump sums .............................................................................................................
327
9.3
Lump sums from employers (paragraphs (d) and (f) definition
of ‘gross income’) ...................................................................................................
329
9.4
9.5
Lump sum benefits from retirement funds (paragraph (e) definition
of ‘gross income’) ...................................................................................................
9.4.1 Retirement fund lump sum benefits (paragraphs 2(1)(a) and 5) .......
9.4.1.1 Deductions (paragraph 5) .......................................................
9.4.1.2 Lump sums received from public sector pension funds
(paragraph 2A) .........................................................................
9.4.1.3 Tax on retirement fund lump sum benefits ..........................
9.4.2 Retirement fund lump sum withdrawal benefits
(paragraphs 2(1)(b) and 6) .......................................................................
9.4.2.1 Deductions ................................................................................
9.4.2.2 Tax on retirement fund lump sum withdrawal benefits.....
330
333
334
335
337
339
339
341
Exemption of qualifying annuities (sections 10C and 11F and
paragraph 5(1)(a) or 6(1)(b)(i)) .............................................................................
343
9.6
Other provisions ....................................................................................................
344
9.7
Summary of lump sums .......................................................................................
344
9.8
Examination preparation ......................................................................................
345
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A Student’s Approach to Income Tax/Natural Persons
9.1
9.1 Introduction
When people become too old to work, they still need money to live on. With this in
mind, they normally contribute to a retirement fund during their working years so
that when they retire they will still receive some form of income.
Most salary packages make provision for employees to contribute to a retirement
fund. There are three basic types of retirement funds in South Africa: Pension funds,
provident funds and retirement annuity funds. For individuals who change employers before they retire, there are preservation funds that hold retirement savings until
the person retires. Pension funds and provident funds are linked to a specific employer, and retirement annuity funds are linked to life insurance companies. The
monthly contributions that an employee makes to one of these retirement funds are
generally allowed as a deduction (subject to limitations – refer to chapter 5) for income tax purposes. This deduction results in the contributions that are deductible not
being subject to income tax.
When persons change employment, lose their jobs (are retrenched) or retire (early or
normal retirement), the pension or provident fund to which a person belonged will
pay a lump sum to the person withdrawing or retiring from the fund. As retirement
annuity funds are not linked to employment, persons will only receive a lump sum
from a retirement annuity fund if they withdraw from the fund or when they reach
retirement age. Retirement funds will also pay out when persons die before they
retire.
A question often asked is ‘Why are senior citizens not exempt from income tax?’ It
must be kept in mind that such a measure would place an extra burden on other
people, especially young people who must finance housing and the education of their
young children. Committees that have specifically examined the taxation systems of
other countries, have determined that the best alternative is to spread the tax burden
as far as possible among all classes of taxpayers and all types of income, rather than
to levy tax at a very high rate on only a few taxpayers.
Bear in mind that interest income earned on investments remains taxable, even after
retirement. This income can be viewed in the same light as pensions. Money is saved,
invested and earns a return. Certain exemptions (such as the interest exemption) and
deductions (such as contributions to pension funds) serve to lighten the tax burden;
however, the proceeds are still subject to tax. When a person receives an amount on
retirement, resignation or withdrawal from a fund or employment, or when a person
dies and these funds pay out a lump sum, the lump sum received will be reduced by
certain allowable deductions and the taxable lump sum will be taxed in accordance
with tax tables specifically designed for lump sum benefits.
In this chapter, the taxation of the benefits received from a pension, pension preservation, provident, provident preservation, or retirement annuity fund when the person
retires or withdraws from a fund, are discussed, as well as the benefits that are
deemed to accrue to persons immediately before their deaths.
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Chapter 9: Retirement benefits
9.1–9.2
Tax statistics
According to the latest tax statistics available (Tax Statistics 2020) contributions to retirement funds were the largest deduction at R181.3 billion. Pension, provident and retirement
annuity paid on behalf of employees was the largest fringe benefit at R102.0 billion.
Critical questions
When the tax implications of lump sums or annuities are studied, the following questions
come to mind:
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• Is a lump sum received from an employer taxable?
• What is meant by ‘periodic payments’ and by ‘lump sum benefits’?
• Is the full amount of a lump sum received from an employer taxable?
• What is the difference between retirement fund lump sum benefits and retirement fund
lump sum withdrawal benefits?
• What portion of a retirement fund benefit may be taken as a lump sum?
• What are the tax implications for a person who has not always been employed in the
Republic?
• Can any deductions be made from a lump sum benefit before it is taxed?
• Is there any difference between a retirement fund lump sum benefit received by a
person employed in the public sector and one employed in the private sector?
9.2 Lump sums
In order to apply the correct taxation principles, it is necessary to briefly differentiate
between the various benefits that are applicable with respect to retirement. Each of
the principles is discussed in more detail later in the chapter. On retirement date (the
date the taxpayer elects to retire) a member has the option to commute a part of their
retirement interest to a single payment or lump sum (of up to one third of the retirement interest) and the balance will be paid as annuities (monthly or annually, often
referred to as pension), therefore, retirement benefits can be divided into two main
categories, namely:
• annuities (for example monthly pension payments); and
• lump sums (a once off payment from the fund or employer).
In this chapter we will examine the taxation of the amount that a taxpayer commutes
to a single payment known as the lump sum benefit.
Lump sums can be received from employers who are not funds or from retirement
funds to which the taxpayer belongs.
Where the lump sum is paid by the employer (that is not a fund) it is included in
gross income in terms of paragraphs (d) and (f). These lump sums might qualify as
severance benefits if specific requirements are met (refer to 9.3).
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9.2
Where the lump sum is from a retirement fund, the provisions of the Second Schedule apply. Lump sums are defined in the Act in section 1 as well as in the Second
Schedule. The definition differentiates between a retirement fund lump sum benefit
and a retirement fund lump sum withdrawal benefit. This results in the lump sum
being defined in terms of the event which led to its receipt. Paragraph (e) of the
definition of ‘gross income’ includes the net amount of both types of lump sums in
gross income (refer to 9.4).
The net amount included in gross income is the lump sum received less the allowable
deductions calculated in terms of paragraphs 5, 6 and 6A of the Second Schedule. The
functioning of the provisions of section 5 results in the lump sum benefit being taxed
according to a table that differs from the taxable income table.
It is therefore suggested that, where lump sums are included in the tax calculation,
the framework is expanded to include a further two columns as shown below to keep
the amounts separate from the other amounts in the taxable income calculation.
Taxable income framework (including lump sums)
1 = Retirement and severance lump sum
2 = Withdrawal lump sum benefit
3 = Other
1
2
3
R
R
R
xxx
Gross income
• as defined in section 1
• specific inclusions (voluntary awards, net amount of
retirement fund lump sum benefit or retirement fund
withdrawal benefit) (paras (d), (e), (eA) and (f))
Less:
Exempt income (section 10C)
Less:
Add:
Add:
Less:
Less:
xxx
xxx
(xxx)
Income (as defined in section 1)
Deductions section 11 – but see below; subject to
section 23(m) and assessed loss
(sections 20 and 20A)
Taxable portion of allowances (such as travel and
subsistence allowances)
xxx
(xxx)
xxx
Taxable income before taxable capital gain
Taxable capital gain (section 26A)
xxx
xxx
Taxable income before retirement fund deduction
Retirement fund contributions deduction (section 11F)
Taxable income before deduction of qualifying
donations
Deduction of qualifying donations (section 18A)
Taxable income (as defined in section 1)
xxx
(xxx)
xxx
(xxx)
xxx
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xxx
xxx
Chapter 9: Retirement benefits
9.2–9.3
There are many reasons why a person may receive a lump sum payment, but ultimately they fall into one of three categories, namely:
• lump sums from employers who are not funds;
• lump sums received prior to retirement (withdrawal benefits); and
• lump sums received on retirement (retirement benefits).
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9.3 Lump sums from employers (paragraphs (d) and (f) of
definition of ‘gross income’)
In terms of paragraphs (d) and (f) of the definition of ‘gross income’, an amount
received by a person in connection with their employment (where there is an
employer-employee relationship) is taxable. An amount paid by an employer to an
employee in respect of services rendered (for whatever reason) is therefore taxable.
There are two types of payment by employers that fall into this category.
Compensation for termination of employment or office (paragraph (d)(i) definition
of ‘gross income’ and section 1(1) definition of ‘severance benefits’)
A lump sum paid by the employer to the employee is included in full in gross income
unless it is a severance benefit.
Commutation of amounts due (paragraph (f) definition of ‘gross income’)
Any amount received or accrued in substitution of amounts due under a contract of
employment or service must be included in gross income. Amounts in terms of this
paragraph could also be severance benefits if the requirements are met.
REMEMBER
• If an associated institution in respect of a person’s employer pays a lump sum to an
employee, it is treated the same as if the person’s employer had paid the amount.
• The provisions of the Second Schedule apply to retirement funds only and can therefore
never apply to severance benefits.
A severance benefit is defined in the Act as
• a lump sum payment (other than originating from an insurance policy);
• received from the person’s employer; and
• as a result of termination of employment,
where
• the person is 55 years or older; or
• the termination of employment was because the employee became incapable of
doing their work due to sickness, accident, injury or incapacity through infirmity
of mind or body; or
• the employee was retrenched or became redundant (refer to ‘Remember’ below).
Where a severance benefit is received, it is taxed according to the same tables as a
retirement fund lump sum benefit (refer to 9.4.1.3).
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9.3–9.4
REMEMBER
• If an associated institution in respect of a person’s employer pays a lump sum to an
employee, it is treated the same as if the person’s employer had paid the amount.
• Accumulated leave pay is a payment in respect of services rendered and does not form
part of a severance benefit.
• Termination of employment includes relinquishment, loss, repudiation, cancellation or
variation of office or employment or of appointment.
• Retrenchment is where the employer has stopped or intend to stop carrying on the
trade for which the person was employed.
• Redundancy is where the person is no longer needed because of a general reduction in
employees or the reduction of employees of a particular type.
• Where a severance benefit is paid to an employee of a company and that person at any
time held more than 5% of the issued share capital or member’s interest in the company, the lump sum is not treated as a severance benefit.
• The provisions of the Second Schedule apply to retirement funds only and can therefore
never apply to severance benefits.
• Amounts paid in terms of paragraphs (d) and (f) are remuneration as defined.
• Section 6(2) rebates are set off against normal tax payable and NOT against the normal
tax on severance benefits and/or lump sums.
9.4 Lump sum benefits from retirement funds (paragraph (e)
definition of ‘gross income’)
Pension, pension preservation, provident, provident preservation and retirement
annuity funds are defined in the Act and must be approved by the Commissioner.
Pension and provident funds are linked to employment. Preservation funds are set
up to cater for the situation where an employee resigns from employment before
retirement age but would like to preserve their contributions to the pension or provident fund. The respective pension or provident fund to which the employee belonged
will then transfer the funds to the preservation fund. In this way, employees do not
diminish their savings towards their retirement and do not attract any tax on the
amount at the time of transfer.
Retirement annuity funds are normally funded by independent individuals and any
person can be a member of these funds. A member of a retirement annuity fund is not
entitled to any benefit before reaching normal retirement age.
Members of pension, provident and retirement annuity funds make contributions to
these funds. As pension and provident funds are linked to employment, the employer normally deducts the contributions from the taxpayer’s salary and pays them over
to the fund. Members of retirement annuity funds normally pay contributions directly to the fund. Taxpayers can claim a section 11F deduction on these contributions
(refer to chapter 5). With the limitation of this deduction, an unclaimed balance of
contributions can arise.
Membership of a pension and provident preservation fund is limited to former members of pension, provident and other pension and provident preservation funds. No
contributions can be made to a preservation fund; only transfers can be made (as
discussed above). A member of a preservation fund only becomes entitled to their
benefit on their retirement date.
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Chapter 9: Retirement benefits
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9.4
By law, a member of a pension fund and/or a retirement annuity fund can only take
up to one-third of their interest/benefits in the form of a lump sum (except where the
total retirement interest in the fund does not exceed R247 500, in which case the full
benefit can be taken in the form of a lump sum). However, a member of a provident
fund could take their full benefit in the form of a lump sum (irrespective of the value
of the full benefit) up to 1 March 2021. From 1 March 2021 new members of provident
funds will be allowed to receive only one-third of their interest/benefit as a lump
sum and the remaining two-thirds will be annuitised. Historic rights from a provident fund will be protected as follows:
• Balances in a provident fund on 1 March 2021 (and subsequent growth) can
still be taken in full as a lump sum at retirement.
• If a provident fund member is 55 years or older on 1 March 2021, he or she will
be allowed to take the full benefit as a lump sum on retirement.
When a person elects to retire, as they can elect to take up to one-third of their pension and/or retirement annuity fund as a lump sum, the balance will be used to
purchase an annuity (with the current fund or with another insurance company). This
monthly amount is referred to as a qualifying annuity. A qualifying annuity is a
periodic payment and is often referred to as a pension. The person can choose to
receive an annuity from the retirement fund or can use their accumulated funds to
purchase an annuity from an insurer. When purchasing an annuity from an insurer,
they can choose between two types of annuities: a guaranteed annuity or a living
annuity (refer to chapter 2 for tax implications of annuities).
REMEMBER
• You will have to be told how much the lump-sum portion of the retirement benefit is, as
the person can elect to take a lump sum up to one-third of their retirement interest.
Example 9.1
Lydia Dlamini was a member of a pension fund and on her retirement the value of her
investment amounted to R1 500 000. Lydia took the maximum lump sum and the balance
was used to purchase a compulsory monthly pension with Aftreewoema Insurance Company. She will receive R5 000 a month from the fund.
You are required to determine the maximum lump sum that Lydia may take and to indicate whether the R5 000 is taxable or not.
Solution 9.1
As the fund is a pension fund, Lydia may take R500 000 (R1 500 000 / 3) in the form of a
lump sum and the balance (R1 000 000) has to be used to purchase a compulsory monthly
pension. Lydia will be taxed on the R5 000 per month as it will be included in her gross
income, along with any other income that she might receive.
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9.4
Example 9.2
Pieter Swanepoel was a member of a provident fund and on his retirement the value of
his investment amounted to R2 750 000.
You are required to determine the maximum lump sum that Pieter may take.
Solution 9.2
As the fund is a provident fund, Pieter may take the full R2 750 000 as a lump sum.
Where a person belongs to a retirement fund and elects to commute part of their
retirement interest/benefit to a single payment on retirement date, a lump sum
payment arises. Retirement funds pay lump sums when one of the following events
happen:
• retirement – this means that in terms of the rules of the fund, the person is entitled
to a lump sum because they have reached the normal retirement age and have
elected to retire (paragraph 2(1)(a)(i));
• death (paragraph 2(1)(a)(i)); or
• termination or loss of employment due to:
– the employer having stopped carrying on or intends to stop the trade in respect
of which the person was employed or appointed; or
– the person becoming redundant because the employer made a general reduction in personnel or a reduction in personnel of a particular class (paragraph
2(1)(a)(ii)); or
• commutation of an annuity for a lump sum benefit (paragraph 2(1)(a)(iii)); or
• transfer on or after normal retirement age but before retirement date (paragraph
2(1)(c)); or
• divorce order (paragraph 2(1)(b)(iA)); or
• direct transfer between funds of the same member (paragraph 2(1)(b)(iB)); or
• certain other events (paragraph 2(1)(b)(ii)).
The provisions of paragraph 2(1) determine how the net amounts due to the different
events are calculated. These provisions are subject to the source rule in section 9(2)(i)
as well as the special formula applicable to Public Sector Pension Funds (paragraph
2A; refer to 9.4.1.2).
Date of accrual of benefit
A lump sum accrues on the earliest of the following dates:
• date on which an election is made to retire;
• date on which any amount is deducted from the fund for the benefit of a member’s
spouse in terms of a divorce order;
• date on which the benefit is transferred to another retirement fund; or
• date of death of the member.
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Chapter 9: Retirement benefits
9.4
Where a person dies while he or she is a member of a pension, provident or retirement annuity fund and a lump sum is paid to the person’s estate as a result of their
death, the lump sum is deemed to have accrued to the person immediately preceding
their death and is treated as a retirement fund lump sum benefit.
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REMEMBER
• Involuntary (forced) retrenchment is treated as retirement from a retirement fund for
taxation purposes.
• Involuntary retrenchment is where employment is terminated because the employer
ceases or intends to cease carrying on a trade, or where a person has become redundant
because the employer has effected a general reduction in personnel or a reduction in
personnel of a particular class, but only if the person was never a director of the company or if they had never held more than 5% of the issued capital of the company.
9.4.1 Retirement fund lump sum benefits (paragraphs 2(1)(a) and 5)
There are four events that qualify as retirement fund lump sum benefits.
Retirement or death (paragraph 2(1)(a)(i))
To understand the concept of retirement fully, three definitions need to be explained:
Retire
Means that the person becomes entitled to the annuity or lump sum benefits contemplated in the definition of ‘retirement date’.
Retirement
date
This is the date on which a member elects to retire and becomes entitled to
an annuity or a lump sum benefit or on or after attaining the normal
retirement age in terms of the rules of the fund.
Normal
retirement
age
This is the date on which a member of a pension or provident fund is entitled to retire.
The normal retirement age of a member of a retirement annuity fund, pension preservation fund or provident preservation fund is 55 years (paragraph (b) of the definition of ‘normal retirement age’.
Normal retirement age is also reached where a person becomes permanently incapable of carrying on their occupation due to sickness, accident,
injury or incapacity through infirmity of mind or body.
This means that a person who receives a retirement benefit upon electing to retire on
or after the normal retirement age, will be taxed on the lump sum benefit as a retirement lump sum benefit.
Loss of office or employment (paragraphs 2(1)(a)(ii))
Where a member receives his or her benefit from a retirement fund due to retrenchment, the lump sum is taxed as a retirement fund lump sum benefit. The deductions
provided in paragraph 6 are allowed to reduce the benefit received.
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A Student’s Approach to Income Tax/Natural Persons
9.4
Commutation of annuity (paragraphs 2(1)(a)(iii))
The one-third limitation on lump sum benefits from pension funds, pension preservation funds and retirement annuity funds is subject to the de minimus rule. This rule
means that where the remaining two-thirds does not exceed R165 000 (or in other
words, the full benefit does not exceed R247 500), this two-thirds can be commuted
for a lump sum benefit. Where this rule applies, the lump sum will be a retirement
fund lump sum benefit. From 1 March 2021, this rule also applies to new members of
provident funds.
Transfer on or after normal retirement age but before retirement date
(paragraph 2(1)(c))
This provision allows for a transfer of the retirement interest on or after the attainment of normal retirement age but before the taxpayer elects to retire. A taxpayer is
not forced to retire on reaching normal retirement age. Individuals are entitled to
elect their retirement date. Individuals who do not elect to retire at normal retirement
age, keep their benefits within such a fund and may continue to contribute to the
fund until they elect to retire. Paragraph 2(1)(c) allows such members to transfer any
amount after normal retirement age but before election to retire and paragraph 6A
allows these transfers as deductions.
REMEMBER
• There are differences in the tax implications when retiring from a fund or withdrawing
from a fund.
• Annuities are specifically included in gross income (refer to chapter 2).
9.4.1.1 Deductions (paragraph 5)
Where a lump sum is received by a person due to retirement, death or termination of
employment, certain deductions are allowed against the lump sum received and the
balance of the lump sum is subject to tax in accordance with the tax table for retirement fund lump sum benefits.
In terms of the Second Schedule, a person may deduct the following from the lump
sum before it is subject to taxation:
• Contributions disallowed The person’s own contributions to a pension fund,
pension preservation fund, provident fund, provident preservation fund or retirement annuity fund that have not been deducted from the person’s income in terms
of section 11F. The contributions disallowed can relate to funds where the person is
or was a member.
• Divorce orders An amount transferred for the benefit of the person to another
fund because of an election made by the non-member spouse in terms of a divorce
order.
• Amounts transferred to an approved fund An amount transferred for the benefit
of a person to a pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund, from a fund of which the person is or was a member and the amount was deemed to have accrued to the person
on the date of the transfer.
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Chapter 9: Retirement benefits
9.4
• Unclaimed benefits An amount paid or transferred to a pension preservation fund
or a provident preservation fund as an unclaimed benefit and that was subject to
tax prior to that transfer or payment.
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• Lump sums from government funds Any other amounts that have been paid into
a pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund for the person’s benefit by a government pension fund, less the amount represented by symbol A in the formula (government
funds are discussed later).
• Transfers on or after normal retirement age but before retirement date An
amount transferred for the benefit of a person from a pension fund into a pension
preservation fund or a retirement annuity fund, or from a provident fund into a
pension preservation fund, a provident preservation fund or a retirement annuity
fund.
The above deductions
• are allowed as long as they have not previously been allowed as a deduction in
terms of the Second Schedule or as an exemption in terms of section 10C in determining the amount of the lump sum that will be subject to taxation; and
• are limited to the amount of the lump sum benefit that was received (they cannot
create a loss situation in respect of a lump sum received).
Example 9.4
Joseph Black is 65 years old. On his retirement, he received a lump sum benefit of R935 000
from the pension fund of which he had been a member for 28½ years. Joseph elected to
retire on 30 November of the current year of assessment. At the end of the previous year of
assessment, he had an unclaimed balance of contributions of R10 000.
You are required to calculate the taxable amount of the retirement fund lump sum benefit.
Solution 9.4
Retirement fund lump sum benefit
Less: Allowable deductions: Contributions disallowed in the past
R
935 000
(10 000)
Taxable income from retirement fund lump sum benefit
925 000
9.4.1.2 Lump sums received from public sector pension funds
(paragraph 2A)
In the past, lump sums from certain public funds were completely tax free. These
were mainly from the previous government’s pension fund. The effect of this was
that when people retired from the civil service, the lump sums received from the
public sector pension fund were tax free. With effect from 1 March 1998, the Act was
amended and currently the portion of a lump sum paid by the public sector fund that
has accumulated since 1 March 1998 is taxable.
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9.4
Where a lump sum is paid from a public sector pension fund (the government fund),
the amount that is included in gross income is calculated using the following formula:
A =
B
×D
C
where
A = the amount to be calculated;
The calculation of B and C depends on the rules of the fund:
• Where the rules of the fund take into account the number of completed years of
employment for the purpose of determining the amount of a benefit payable:
B = the total completed years of employment after 1 March 1998 (excluding certain amounts);
C = the total completed years of employment taken into account in determining
the benefit.
• Where the rules of the fund do not take completed years of employment into
account when determining the amount of the benefit payable:
B = the completed number of years after 1 March 1998 during which the member had been a member of the funds;
C = the number of completed years (up to date of accrual) during which the
member had continuously been a member of a public sector fund;
D = the lump sum benefit that is payable.
Application of public sector pension fund rules
Example 9.5
Charles Ngomani is 65 years old. On his retirement from a government department, he
received a lump sum benefit of R1 232 000 (based on his years of employment) from the
government pension fund of which he had been a member for 28½ years, which was
equivalent to his years of employment. Charles elected to retire on 30 June of the current
year of assessment. He has never previously received a lump sum benefit from a fund.
You are required to calculate how much of Charles’ lump sum will be included in his gross
income.
Solution 9.5
Use the formula (A = B / C × D):
B = 23 (completed years of service after 1 March 1998)
C = 28 (completed years of membership of the fund)
D = R1 232 000
A = 23 / 28 × R1 232 000 = R1 012 000
R968 000 will be included in Charles’ gross income.
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Chapter 9: Retirement benefits
9.4
REMEMBER
• The tax-free nature of public sector pre-1 March 1998 membership is preserved for
people who transferred their public sector benefits to another fund. From 1 March 2018
the tax-free nature of pre-1 March 1998 membership will be preserved for one additional transfer to another fund.
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9.4.1.3 Tax on retirement fund lump sum benefits
Retirement fund lump sum benefits received are taxed separately to other income.
Lump sums received from retirement funds are taxed on an accumulated basis (that
is to say subsequent lump sum benefits are added and taxed at a higher marginal
rate).
Cumulative basis of taxation
Severance benefits, retirement fund lump sum benefits and retirement fund lump
sum withdrawal benefits are taxed on a cumulative basis. This means that previous
lump sums received will influence the tax rate and non-taxable portion of the current
lump sum.
Severance benefits and retirement fund lump sum benefits are taxed according to the
same table. In terms of this table the first R500 000 is taxed at 0%. In order to ensure
that a taxpayer only receives a maximum of R500 000 in respect of all severance
benefits, retirement fund lump sum benefits and retirement fund lump sum withdrawal benefits over their life time, a cumulative taxation principle is applied. The
same principle is applied to retirement fund lump sum withdrawal benefits to ensure
that the R25 000 at 0% tax is also not exceeded.
The cumulative principle therefore takes into account all previous severance benefits
and lump sum benefits from:
• retirement fund lump sum benefits received or accrued on or after 1 October 2007;
• retirement fund lump sum withdrawal benefits received or accrued on or after
1 March 2009; and
• severance benefits received or accrued on or after 1 March 2011.
These previous lump sums (as listed above) are added to the current severance benefit or lump sum benefit.
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A Student’s Approach to Income Tax/Natural Persons
9.4
Calculating tax on a retirement benefit
Step 1:
Calculate the current retirement fund lump sum benefit (or severance
benefit) = amount received less any allowable deductions.
Step 2:
Add together the taxable amounts of
• any previous withdrawal benefits received on or after 1 March 2009
but before the current lump sum benefit; and
• any retirement fund lump sum benefits received on or after 1 October 2007 but before the current lump sum benefit; and
• any severance benefits received on or after 1 March 2011 but before
the current lump sum benefit.
Step 3:
Calculate the tax on all retirement fund lump sum benefits (Step 1 +
Step 2) per the table below.
Step 4:
Calculate the notional tax on the previous retirement fund lump sum
benefit (Step 2) per the table below.
Step 5:
Tax per Step 3 – tax per Step 4 = Tax on current retirement fund lump
sum benefit.
Taxable amount
Rate of tax
R0–R500 000
0% of the taxable amount
R500 001–R700 000
18% of the taxable amount exceeding R500 000
R700 001–R1 050 000
R36 000 plus 27% of the taxable amount exceeding R700 000
R1 050 001 and above
R130 500 plus 36% of the taxable amount exceeding R1 050 000
Example 9.6
Nelia Simons is 68 years old and elected to retire on 31 October of the current year of
assessment. The taxable portion of the lump sum that she received from the pension fund
on retirement amounted to R975 000. Nelia’s taxable income before considering the lump
sum amounted to R225 500.
You are required to calculate the tax payable by Nelia if
(a) she has never received any lump sums in the past;
(b) she received a retirement annuity fund lump sum payment of R550 000 on
1 November 2012.
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Chapter 9: Retirement benefits
9.4
Solution 9.6
R
(a)
Lump sums from retirement funds are taxed separately, therefore we do
not take Nelia’s other income into account.
Taxable portion of lump sum from pension fund
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Tax payable on taxable portion of lump sum
(R36 000 + (27% × (R975 000 – R700 000)))
(b) Taxable portion of all lump sums received (R975 000 + R550 000)
Tax payable on all lump sums received
(R130 500 + (36% × (R1 525 000 – R1 050 000)))
Less: Notional tax payable on previous lump sum
(18% × (R550 000 – R500 000))
Tax on current retirement fund lump sum benefit
975 000
110 250
1 525 000
301 500
(9 000)
292 500
9.4.2 Retirement fund lump sum withdrawal benefits
(paragraphs 2(1)(b) and 6)
Lump sums received by taxpayers from a retirement fund prior to the member attaining normal retirement age because of:
• a divorce order;
• a transfer from a fund elected by the taxpayer;
• withdrawal from a fund;
• termination of employment; or
• the dissolution of a fund;
are withdrawal benefits.
The receipt of a lump sum from a fund before retirement is taxable and the amount is
included in the taxpayer’s gross income. When ascertaining the amount of the withdrawal benefit to be included in gross income, certain deductions are allowed to
reduce the withdrawal benefit before the ‘taxable amount’ is subject to tax.
9.4.2.1 Deductions
Divorce orders and transfers between funds
Where the lump sum received is the result of a divorce order or transfer out of the
fund, the deduction allowed against the lump sum is that portion of the lump sum
that is transferred to another fund.
Amounts transferred from pension funds, pension preservation funds, provident
funds or provident preservation funds can be paid into a pension fund, pension
preservation fund, provident funds, provident preservation or retirement annuity
fund in order to get a deduction. Retirement annuity funds can only be transferred to
other retirement annuity funds to qualify for a deduction.
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9.4
Other circumstances
Where the withdrawal benefit is due to another circumstance, a person is allowed to
deduct the following from the lump sum:
• Previously disallowed contributions The person’s own contributions to a pension
fund, pension preservation fund, provident fund, provident preservation fund or
retirement annuity fund that were not previously deducted in terms of section 11F.
The disallowed contributions must relate to funds where the person is or was a
member.
• Previously taxed divorce award transfers to approved funds An amount transferred for the benefit of the person to a pension fund, pension preservation fund,
provident fund, provident preservation fund or retirement annuity fund as elected
by the person.
• Previously taxed transfers between funds An amount deemed to have accrued to
the person that was previously transferred to a fund.
• Previously taxed unclaimed benefits transferred to preservation funds An
amount that was paid or transferred to a pension preservation fund or a provident
preservation fund as an unclaimed benefit and which had been subject to tax prior
to that transfer or payment.
• Exempt portion of public sector funds (service years before 1 March 1998) The
exempt amount of a public sector fund lump sum which relates to service years
before 1 March 1998 that has been paid into a retirement fund for the person’s benefit (public sector funds are discussed later) or transferred to another fund for the
person’s benefit.
The above deductions
• are allowed so long as they have not previously been allowed as a deduction in
determining the amount of the lump sum that will be subject to taxation or
allowed as an exemption in terms of section 10C; and
• are limited to the amount of the lump sum benefit that was received (they cannot
create a loss situation in respect of a lump sum received).
Example 9.7
Ansie Troulus married Mr Koos Trousku on 9 September of the current year of assessment. She resigned from her employment on 31 August and received a lump sum from
the pension fund. She received all her contributions of R12 000 and interest amounting to
R3 500. On 28 February of the previous year of assessment, contributions up to R10 000
had been allowed as deductions. Ansie used all the money as a deposit on a new house.
You are required to calculate the taxable portion of the lump sum.
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Chapter 9: Retirement benefits
9.4
Solution 9.7
R
Lump sum received from pension fund (R12 000 + R3 500)
Less: Contributions not previously allowed (R12 000 – R10 000)
15 500
(2 000)
Taxable portion
13 500
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9.4.2.2 Tax on retirement fund lump sum withdrawal benefits
Retirement fund lump sum withdrawal benefits received are taxed separately to
other income. Lump sums received from retirement funds are taxed on an accumulated basis (that is to say subsequent lump sum benefits will be added and taxed at a
higher marginal rate). Tax is also calculated on the cumulative basis as discussed
previously in retirement fund lump sum benefits.
Calculating tax on a withdrawal benefit
Where the retirement fund lump sum withdrawal benefit accrues to a person from
1 March 2011, the tax on the amount is calculated as follows:
Step 1:
Calculate the current taxable withdrawal benefit = Current benefit
received less any allowable deductions.
Step 2:
Add together the taxable amounts of
• any previous withdrawal benefits received on or after 1 March 2009
but before the current withdrawal benefit; and
• any retirement fund lump sum benefits received on or after 1 October 2007 but before the current withdrawal benefit; and
• any severance benefits received on or after 1 March 2011 but before
the current withdrawal benefit.
Step 3:
Calculate tax per retirement fund lump sum withdrawal table on the
total benefits (Step 1 + Step 2) per the table below.
Step 4:
Calculate tax per retirement fund lump sum withdrawal table on the
previous benefits (Step 2) per the table below .
Step 5:
Tax per Step 3 – tax per Step 4 = Tax on current lump sum withdrawal
benefit.
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9.4
Retirement fund lump sum withdrawal benefits will only accrue as from
1 March 2009 and will be taxed according to the following table:
Taxable income from
lump sum benefits
Rate of tax
R0–R25 000
0% of the taxable amount
R25 000–R660 000
18% of the taxable amount exceeding R25 000
R660 000–R990 000
R114 300 plus 27% of the taxable amount exceeding R660 000
Exceeding R990 000
R203 400 plus 36% of the taxable amount exceeding R990 000
Example 9.8
Lana Hip is 38 years old and resigned from her employment on 30 June of the current
year of assessment. She received a lump sum from her pension fund of R80 000. She transferred R50 000 into a pension preservation fund and used the balance to pay off her car.
On 28 February of the previous year of assessment, R6 000 of Lana’s contributions to the
fund had not been deducted for tax purposes. Her taxable income for the current year of
assessment before the current lump sum amounted to R134 000.
You are required to
(a)
calculate the tax payable by Lana on the current lump sum that she received if she
received a lump sum withdrawal benefit from her previous pension fund when she
resigned from employment in 2000. The taxable amount of the lump sum amounted
to R15 000;
(b) calculate the tax payable by Lana on the current lump sum that she received if she
received a lump sum withdrawal benefit from her previous pension fund when she
resigned from employment in 2010. The taxable amount of the lump sum amounted
to R15 000.
Solution 9.8
(a)
Retirement fund lump sum withdrawal benefit
Less: Allowable deductions
Contributions not deducted in the past
Amount transferred to pension preservation fund
Taxable portion of lump sum from pension fund
Tax payable on lump sum using the retirement fund withdrawal benefit table
(R24 000 – R25 000) × 18%
R
80 000
(6 000)
(50 000)
24 000
nil
continued
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Chapter 9: Retirement benefits
9.4–9.5
(b)
As the previous lump sum withdrawal benefit was received after 1 March 2009,
we will need to include the amount when calculating tax on the current lump
sum benefit.
Tax payable on lump sum using the retirement fund withdrawal benefit table:
Taxable income from current benefit
Taxable income from previous benefit
R
24 000
15 000
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39 000
Tax per table (R39 000 – R25 000) × 18%
Less: Tax per table on previous lump sums (R15 000)
2 520
(nil)
Tax payable on current lump sum
2 520
1.
2.
3.
In (a) above why is Lana’s other income ignored when the tax is calculated?
In (a) above why is the R15 000 previous lump sum ignored in the
calculation?
In (b) above why was there no tax on the previous lump sum?
9.5 Exemption of qualifying annuities (sections 10C and 11F
and paragraph 5(1)(a) or 6(1)(b)(i))
Section 5.3.3 includes a discussion on the unclaimed balance of contributions. These
are contributions to pension funds, pension preservation funds and retirement annuity funds that have not been deducted in terms of section 11F up to the end of the
previous year of assessment. These unclaimed contributions can be used as an exemption against qualifying annuities.
When a person retires, they will only receive a one-third portion of their fund as a
lump sum. The remaining two-thirds are commuted to qualifying annuities. Section 10C provides an exemption equal to the person’s own contributions to any
pension, provident and retirement annuity fund that have not been deducted in
terms of section 11F or not allowed as a deduction in terms of paragraph 5 or 6 of the
Second Schedule.
When calculating taxable income in the year that a person receives a lump sum, any
unclaimed balance of contributions to retirement funds should first be used to reduce
the lump sum received. If the unclaimed contributions exceed the lump sum, the
balance can be used to exempt any qualifying annuities received during the year of
assessment. Should the unclaimed contributions exceed the compulsory annuities
received, any balance of unclaimed contributions can be added to the current
contributions to retirement funds and be deducted in terms of section 11F (subject to
the limitation) (refer to 5.3.3).
The section 10C exemption is limited to the total amount of qualifying annuities
received in a specific year of assessment.
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A Student’s Approach to Income Tax/Natural Persons
9.6–9.7
9.6 Other provisions
• Paragraph 4(2) of the Second Schedule provides for the situation where an assurance policy is ceded or transferred in another manner by a person when withdrawing or resigning from a fund, or during the liquidation of a fund.
• A lump sum that accrues in terms of such a policy or the selling-off of such a policy
is deemed to be a lump sum benefit to the person on the date of accrual and this
amount is taxable in terms of the Second Schedule. Where the person pays a premium after the cession or transfer of the policy, an amount can be deducted from
the lump sum. The amount deducted from the lump sum bears the same proportion to the lump sum as that which the premium paid bears to the total premiums
that were paid to the policy. Paragraph 4(2)bis further stipulates that where a policy is ceded or transferred, the member of the fund is deemed to have received a
lump sum benefit on that date, equivalent to the value of the policy.
• Where members of a provident fund retire before they are 55 years old due to reasons
other than ill health, the lump sum they received from the fund is taxed in terms of
paragraph 4(3) as if the lump sum was a benefit that accrued to them due to resignation or withdrawal from the fund, unless the Commissioner declares otherwise.
• If a spouse receives an amount from a fund because of a divorce settlement, the
amount is deemed to have accrued to the member of the fund on the date that the
member became entitled to the amount.
9.7 Summary of lump sums
Received
from
Reason
Employer
Any
lump
sum
Retirement fund
Severance award Pre-retirement
• > 55 years
• Ill health
• General
retrenchment
Gross
income
Amount received or accrued
Deductions
None
Tax
Tax
tables
with
other
taxable
income
• Contributions
disallowed
• Amount
transferred to
preservation
fund
Retirement fund Retirement fund
lump sum
lump sum withbenefit table
drawal benefit
table
Retirement or Public sector
death or
fund
termination
• Contribu• Contributions distions disallowed
allowed
• Amount
• Amount
transferred
transferred
to preserv- • Amount A
ation fund
in formula
Retirement
Retirement
fund lump
fund lump
sum benefit
sum benefit
table
table
A question follows where you can test your knowledge on retirement benefits.
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Chapter 9: Retirement benefits
9.8
9.8 Examination preparation
Question 9.1
Dieter Wrogemann (54 years old) resigned from his employment during the current year
of assessment and immediately commenced with new employment.
Employer 1
R
Salary
Pension fund contributions
Lump sum from pension fund on resignation (Note)
400 000
40 000
1 950 000
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Employer 2
Salary
Provident fund contributions
Interest received from a South African bank
Retirement annuity fund contributions
750 000
75 000
9 000
20 000
Note
Lump sum from pension fund
Dieter had never received a withdrawal benefit before. Contributions not deducted on
28 February 2021 amounted to R30 000. He decided to utilise his lump sum in the
following ways:
Transferred into a retirement annuity fund – R300 000
Transferred into his new provident fund – R1 200 000
Deposit on a new car – R100 000
Fixed deposit with bank – R150 000
You are required to:
Calculate the total income tax payable by Dieter for the current year of assessment.
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A Student’s Approach to Income Tax/Natural Persons
9.8
Answer 9.1
Calculation of tax payable by Dieter:
R
Lumpsum
Salary (R400 000 + R750 000)
Lump sum from pension fund
R
Other
1 150 000
1 950 000
Less: Deductions
Transfer to retirement annuity fund
Transfer to provident fund
Deposit on new car – not allowed
Fixed deposit with bank – not allowed
Contributions not deducted before (see the note below)
(300 000)
(1 200 000)
nil
nil
(30 000)
420 000
Interest received (R9 000 up to R23 800 is exempt)
nil
1 150 000
Less: Retirement fund contributions:
R40 000 + R20 000 + R75 000
Limited to lesser of
1. R350 000 or
2. 27,5% × the higher of
Remuneration R1 150 000; or
Taxable income R1 150 000
= 27,5% × R1 150 000 = R316 250; or
3. Taxable income – R1 150 000
Therefore, limit is R316 250, allow contributions in full
135 000
(135 000)
Taxable income – other
Taxable income - lump sum
1 015 000
420 000
Total taxable income
1 435 000
Tax on taxable income ((R1 015 000 – R782 200) × 41% + R229 089)
Less: Primary rebate
324 837
(15 714)
Normal tax
Tax on pension fund withdrawal benefit
Tax on R420 000
(R420 000 – R25 000) × 18%
308 823
Net normal tax payable
379 923
71 100
Note
Where the taxpayer receives a lump sum during the year, the unclaimed amount of deductions is first set off against the lump sum benefit. If there is any excess, it is used to exempt
any compulsory annuities in terms of section 10C. If there is still an excess amount, that
excess is deemed to have been contributed in the current year of assessment and deducted
in terms of section 11F (refer to chapter 5 for the discussion on the order of deductions).
Additional questions for this chapter are available electronically at
www.myacademic.co.za/books
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Capital gains tax for
individuals
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13
Gross
income
–
Exempt
income
–
Deductions
Taxable
income
=
Tax
payable
Taxable
capital gain
Page
13.1
Introduction .......................................................................................................
447
13.2
Application of capital gains tax (paragraphs 2 to 10) ..................................
447
13.3
Determine whether the transaction is subject to capital gains tax
(Step 1) (paragraph 1 and section 1) ...............................................................
450
Capital gain or loss on the disposal of an asset (Step 2)
(paragraphs 3 and 4) .........................................................................................
451
13.5
Proceeds on the disposal of an asset (Step 2.1) (paragraph 35) ..................
452
13.6
Base cost of an asset (Step 2.2) (paragraph 20) ..............................................
455
13.4
13.6.1
Donations tax to be included in the base cost
(paragraphs 20(1)(c)(vii), 20(1)(c)(viii) and 22) ..............................
458
13.7
Market value of assets (paragraphs 29 and 31) .............................................
460
13.8
Time-apportionment base cost (TAB) (paragraph 30) .................................
13.8.1 TAB: Expenditure incurred only before the valuation date ........
13.8.2 TAB: Expenditure incurred before and on or after the
valuation date ....................................................................................
461
461
13.9
The 20% rule ......................................................................................................
465
13.10
Selecting the valuation date value (paragraphs 26 and 27) .........................
466
13.11
Base cost of assets: Special provisions ............................................................
13.11.1 Partial disposals (paragraph 33) ......................................................
13.11.2 Base cost of identical assets (paragraph 32) ...................................
470
470
471
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A Student’s Approach to Income Tax/Natural Persons
Page
13.11.3 Base cost in respect of a person who becomes a resident
on or after the valuation date (paragraph 24)................................
13.11.4 Base cost for a debt-substitution transaction (paragraph 34) ......
13.11.5 Farming capital development cost (paragraph 20A) ....................
13.12
Exclusions (Step 2.4) .........................................................................................
13.12.1 Exclusion: Primary residence (paragraphs 44 to 51) ....................
13.12.2 Exclusion: Personal-use assets (paragraph 53) ..............................
13.12.3 Exclusion: Disposal of small-business assets
(paragraph 57)....................................................................................
13.12.4 Exclusion: Disposal of a registered micro-business’ assets
(paragraph 57A) ................................................................................
13.12.5 Exclusions: Other...............................................................................
13.12.5.1
Retirement benefits (paragraph 54) ...........................
13.12.5.2
Long-term insurance (paragraph 55) ........................
13.12.5.3
Collective investment schemes (paragraph 61) .......
13.12.5.4
Exercising an option (paragraph 58) .........................
13.12.5.5
Compensation for personal injury, illness or
defamation (paragraph 59) .........................................
13.12.5.6
Gambling, games and competitions
(paragraph 60) ..............................................................
13.12.5.7
Exempt persons (paragraph 63) .................................
13.12.5.8
Assets that produce exempt income
(paragraph 64) ..............................................................
13.12.5.9
Award for restitution in terms of the Restitution
of Land Rights Act 22 of 1994 (paragraph 64A
and 64D) ........................................................................
13.12.5.10 Donations and bequests to public benefit
organisations (paragraph 62) .....................................
13.12.5.11 Public benefit organisations (paragraph 63A) .........
13.12.5.12 Disposal of equity shares in a foreign company
(paragraph 64B) ............................................................
13.12.5.13 Disposal by a trust in terms of a share incentive
scheme (paragraph 64E) ..............................................
472
473
473
473
474
479
481
482
482
482
483
483
483
484
484
484
484
484
485
485
485
486
13.13
Limitation of losses (paragraphs 15 to 19) .....................................................
486
13.14
Roll-overs ...........................................................................................................
13.14.1 Involuntary disposal of assets (paragraph 65) ..............................
13.14.2 Reinvestment in replacement assets (paragraph 66) ....................
13.14.3 Transfer of assets between spouses (section 9HB) ........................
13.14.4 Disposal of immovable property in a share-block company
to the members of the company (paragraph 67B) .........................
487
488
488
488
13.15
Assessed capital losses carried forward (paragraphs 6 and 7) ...................
489
13.16
Inclusion rate (paragraphs 9 and 10) ..............................................................
490
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489
Chapter 13: Capital gains tax for individuals
13.1–13.2
Page
13.17
Attribution of capital gains (paragraphs 68 to 73) ........................................
490
13.18
Disposals to and from deceased estates (sections 9HA and 25) .................
490
13.19
Summary ............................................................................................................
491
13.20
Examination preparation .................................................................................
492
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13.1 Introduction
Capital gains tax was only introduced in South Africa on 1 October 2001 and applies
to capital gains and losses that arise after this date. Capital gains tax is a tax payable
on the disposal of an asset. It is important to know what constitutes an ‘asset’ as well
as a ‘disposal’ for capital gains tax purposes. For example, if you were to sell your
house, capital gains tax would be payable. Capital gains tax is not a separate tax that
is payable by a taxpayer, it forms part of the taxable income on which normal income
tax is calculated.
Most capital assets sold are subject to capital gains tax. It is, however, important to
note that there are a number of items that are excluded from capital gains tax. The
aim of this chapter is to discuss the effect of capital gains tax on an individual. These
rules are set out in the Eighth Schedule to the Income Tax Act 58 of 1962 (the Act).
The concepts and examples focus on individual taxpayers. For other aspects of capital
gains tax refer to A Student’s Approach to Income Tax/Business Activities chapter 6.
References to paragraphs in this chapter are to the paragraphs of the Eighth Schedule.
Critical questions
In this chapter the following questions are discussed:
• When is capital gains tax payable?
• How is the capital gain or loss on each asset calculated?
• How is the base cost of an asset calculated?
• How is the taxable capital gain for the year calculated?
• Which assets are not subject to capital gains tax?
• When does the sale of a house qualify for the R2 million exclusion?
• Which assets are classified as personal-use assets?
13.2 Application of capital gains tax (paragraphs 2 to 10)
Capital gains tax is payable by the taxpayer when she/he disposes of a capital asset
that is subject to the capital gains tax rules. Capital gains tax is levied on the disposal
of assets of both residents and non-residents as follows:
• an asset of a resident; or
• the following assets of a non-resident:
– immovable property situated in the Republic that is held by the non-resident or
an interest or right in immovable property situated in the Republic including
mining and resource rights; or
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13.2
– an asset which is effectively connected with a permanent establishment of that
non-resident in the Republic.
An interest in immovable property includes
• any equity shares held in a company;
• ownership or right to ownership in any other entity; or
• a vested interest in an asset of a trust,
if 80% or more of the market value of the above interest, at the time of disposal, is
directly or indirectly attributable to immovable property situated in the Republic or
any interest or right to or in such immovable property. Where the interest is held
through equity shares in a company or ownership or the right to ownership of any
other entity, the non-resident (alone or together with connected persons) must
directly or indirectly hold at least 20% of the equity shares of that company or 20% of
the ownership or right to ownership of that other entity. To determine whether the
disposal of an asset is subject to capital gains tax, a fixed process has to be followed.
Calculating the taxable capital gain for the year of assessment or the
assessed capital loss to be carried forward to the following year of
assessment
Step 1:
Determine whether the transaction is subject to capital gains tax (refer
to 13.3).
Step 2:
Calculate the capital gain or loss on the disposal of each asset (refer to
13.4).
Step 3
Calculate the sum (total) of all capital gains and losses for the year by
adding up the capital gains and losses on the different assets disposed
of. Apply any exclusions (refer to 13.12), roll-overs (refer to 13.14),
attributions (refer to 13.17) and limitations (refer to 13.13) of capital
gains and/or losses in determining this figure.
Step 4:
Determine the aggregate capital gain or loss for the year of assessment
by reducing the sum of all capital gains and losses by the annual
exclusion of R40 000 in the case of a natural person. In the year of
assessment in which a natural person dies, the annual exclusion is
increased to R300 000. It is important to note that both a capital gain
and loss must be reduced with the annual exclusion.
Step 5:
Determine whether an assessed capital loss is brought forward from
the previous year of assessment.
Step 6:
Calculate the net capital gain or assessed capital loss for the year of
assessment by reducing the aggregate capital gain (Step 4) by the
assessed capital loss (Step 5), or by adding the aggregate capital loss
(Step 4) to the assessed capital loss (Step 5).
continued
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Chapter 13: Capital gains tax for individuals
13.2
Step 7:
Determine whether you have a net capital gain or an assessed capital
loss for the year of assessment.
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Gain: Go to Step 8.
Loss: If you have an assessed capital loss, the amount is carried
forward to the next year of assessment. The assessed capital loss
cannot be set off against other taxable income.
Step 8:
Determine the inclusion rate applicable to the taxpayer, for example
40% for natural persons (refer to 13.16).
Step 9:
Calculate the taxable capital gain by multiplying the net capital gain
(Step 6) by the inclusion rate (Step 8).
Step 10:
The taxable capital gain is added to the other taxable income for the year
of assessment in order to calculate the total taxable income for the year.
The normal tax liability of the individual is then calculated by applying
the tax table for individuals to the total taxable income.
REMEMBER
• If you have an assessed capital loss, the amount is carried forward to the next year of
assessment.
• An assessed capital loss cannot be set off against other taxable income.
Example 13.1
Michael Davids earned a salary of R200 000 during the current year of assessment.
Michael sold two assets during the year. On the sale of the first asset he made a capital
gain of R65 000. The sale of the second asset resulted in a capital loss of R11 500. Michael
sold only one asset in the previous year of assessment, which resulted in a capital loss of
R11 000.
You are required to calculate Michael’s taxable income for the current year of assessment.
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A Student’s Approach to Income Tax/Natural Persons
13.2–13.3
Solution 13.1
As assets were sold during the year, capital gains tax is applicable.
Taxable capital gain
R
Capital gain on the sale of asset 1
Capital loss on the sale of asset 2
65 000
(11 500)
Sum of all capital gains and losses (R65 000 – R11 500)
Less: Annual exclusion (natural person)
53 500
(40 000)
Aggregate capital gain (R53 500 – R40 000)
Less: Assessed capital loss – previous year
13 500
(11 000)
Net capital gain (R13 500 – R11 000)
Multiply: Inclusion rate – 40% (natural person)
2 500
40%
Taxable capital gain (R2 500 × 40%)
1 000
Total taxable income:
Other taxable income (salary)
Taxable capital gain
200 000
1 000
Total taxable income
201 000
REMEMBER
• The taxable capital gain is included in the taxpayer’s calculation of taxable income
before the allowable deductions for retirement fund contributions (section 11F) and
section 18A donations.
• If the result of Step 6 is an assessed capital loss, the amount will be carried forward to
the following year of assessment and will not be set off against other taxable income.
• If the taxpayer has a total capital loss for the year (as determined in Step 3), the loss
must also be reduced by the R40 000 annual exclusion. For example, if the sum of all
capital gains and losses represents a capital loss of R50 000, the amount is reduced by
the annual exclusion of R40 000 and only R10 000 will be carried forward to the next
year of assessment.
13.3 Determine whether the transaction is subject to capital
gains tax (Step 1) (paragraph 1 and section 1)
A number of requirements have to be met before capital gains tax can be imposed on
a transaction involving an asset.
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Chapter 13: Capital gains tax for individuals
13.3–13.4
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Determine whether the transaction is subject to capital gains tax
Step 1.1:
Determine whether an asset was involved in the transaction.
Step 1.2:
Determine whether the transaction is a disposal or deemed disposal
in terms of the Act.
In this chapter, it is assumed that all the assets disposed of are assets of a capital
nature and that events qualify as disposals as defined in the Eighth Schedule. For a
discussion on these different aspects and definitions of assets, disposals and deemed
disposals, refer to A Student’s Approach to Income Tax/Business Activities 6.3.
13.4 Capital gain or loss on the disposal of an asset (Step 2)
(paragraphs 3 and 4)
If an asset, subject to capital gains tax, is disposed of, the capital gain or loss on the
disposal of each asset needs to be calculated.
Calculate the capital gain or loss on the disposal of an asset
Step 2.1:
Calculate the proceeds on the disposal of the asset (refer to 13.5).
Step 2.2:
Calculate the base cost of the asset (refer to 13.6 to 13.11).
Step 2.3:
Calculate the capital gain or loss on the disposal of the asset (proceeds
minus base cost).
Step 2.4:
Identify whether any portion of the capital gain or loss is excluded
from capital gains tax in terms of the Act (refer to 13.12).
Step 2.5:
Determine whether any part of the capital loss is limited in terms of the
Act or whether any roll-over relief exists for the capital gain (refer to
13.13 to 13.14).
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A Student’s Approach to Income Tax/Natural Persons
13.4–13.5
REMEMBER
• If a resident becomes a non-resident, it is deemed that they disposed of all their assets at
market value on the day before they ceased to be a resident.
• Where a spouse, married in community of property, disposes of an asset and that asset
–
is part of the joint estate of the spouses, the disposal is deemed to have been made in
equal shares by each spouse; the capital gain or loss is calculated in the normal
manner, but is then equally divided between the two spouses; or
–
was excluded from the joint estate of the spouses, it is deemed that the disposal of
the relevant asset was made solely by that spouse.
• If the amount of the proceeds or base cost change in a year of assessment after the asset
was disposed of, the capital gain or loss must be recalculated and an additional capital
gain or loss must be recognised for the year.
• If a capital gain or loss from the disposal of an asset occurs in a year of assessment and
the asset is acquired again in a later year of assessment, it is deemed that there is a
capital loss or gain of which the amount is equal (but opposite) to the original amount
in the later years of assessment. For example, if a capital gain was originally realised
and that same asset that was disposed of is acquired again in a later year of assessment,
it is deemed that a capital loss (equal amount to the original capital gain) is realised.
13.5 Proceeds on the disposal of an asset (Step 2.1)
(paragraph 35)
In general terms, the proceeds on the disposal of an asset is the amount that was
received by or accrued to the taxpayer with the disposal (that is to say the selling
price of the asset). The Eighth Schedule to the Act states that the amount that was
received by or had accrued to a person also includes an amount received by or accrued
to a lessee from the lessor of a property for improvements effected to that property.
The proceeds from the disposal of an asset must be reduced by:
• any amount that must be or was included in the gross income of a person or that
must be or was taken into account when determining the taxable income of a
person before the inclusion of any taxable capital gain (for example a recoupment);
• any amount of the proceeds that has been repaid or has become repayable to the
person to whom the asset was disposed of during that year of assessment; or
• any reduction:
– as a result of the cancellation, termination or variation of an agreement;* or
– due to the prescription or waiver of a claim or release from an obligation; or
– due to any other event during that year of accrual, forming part of the proceeds
of the disposal.
* Other than an agreement that results in the asset being reacquired by the seller.
Special rules apply where a taxpayer disposes of:
• a partnership asset;
• the assets of a company or trust;
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Chapter 13: Capital gains tax for individuals
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13.5
• assets as a donation;
• assets as part of a value shifting agreement;
• assets disposed of in the short term;
• identical assets; and
• assets to and from deceased estates.
These rules are discussed in A Student’s Approach to Income Tax/Business Activities 6.5.
If there is a change in the proceeds received by or accrued to a person in subsequent
years of assessment, the Act provides for the capital gain or loss to be adjusted in the
subsequent year.
If a person disposes of an asset and all the proceeds from the disposal do not accrue
to them in that year, the amount that did not accrue should be disregarded. If this
results in a capital loss on the disposal, the loss should also be disregarded for that
year of assessment. The loss can be set off against capital gains determined in a
subsequent year in respect of the disposal of that asset. Once the total proceeds
have accrued and a capital loss that has not been deducted from a subsequent
capital gains as stated above still remains, the loss can be claimed in that year of
assessment in determining that person’s aggregate capital gain or aggregate capital
loss for that year of assessment.
REMEMBER
• Where an amount was included in a person’s gross income, it cannot be included in the
proceeds. A person can therefore not be taxed twice on the same amount.
• The amount of any wear-and-tear or capital allowance that is recouped for income tax
purposes must be excluded from the proceeds of the asset.
• For the purpose of paragraph 30 (the time-apportionment base cost (refer to 13.8)), the
proceeds from the disposal of an asset must be reduced by the selling cost.
• Where a proceeds amount changes in later years of assessment, the amount can
be realised as a capital gain or loss in terms of the ‘capital gain’ and ‘capital loss’
definitions.
Example 13.2
Peet Ferguson sold a block of flats in the previous year of assessment. The base cost of the
flats is R400 000. In terms of the sale agreement he received R500 000 immediately in the
2021 year of assessment and will then receive 10% of the net profit generated in the 2022
year of assessment. On 20 November 2021 he received R20 000 being 10% of the profit for
the 2022 year of assessment.
You are required to calculate the capital gain or loss for the 2021 and 2022 years of
assessment.
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A Student’s Approach to Income Tax/Natural Persons
13.5
Solution 13.2
In order to determine the capital gain or loss for the year, it has to be determined whether
any loss was disregarded in the previous year because not all the proceeds accrued in the
year of the sale.
Capital gain or loss in the previous year of assessment (2021):
Proceeds
Less: Base cost
R
500 000
(400 000)
Capital gain in 2021 year of assessment
100 000
Capital gain or capital loss for the current year of assessment (2022)
Proceeds (proceeds that accrued in the current year)
Less: Base cost (already claimed in the previous year)
20 000
nil
Capital gain
Less: Capital loss that was disregarded in the previous year
20 000
nil
Capital gain in 2022 year of assessment
20 000
If a person disposes of an asset:
• by means of a donation; or
• for a consideration not measurable in money; or
• to a connected person* for a consideration which does not equal open market value
(that is to say either higher or lower than open market value),
it is deemed that the person disposed of the asset for an amount equal to the market
value thereof (paragraph 38).
* Persons can be ‘connected persons’ before or after the transaction.
Example 13.3
Joy Mogale is a resident of the Republic and 41 years old. She is unmarried and therefore
feels that she has a lot to give. During the 2022 year of assessment, she decided to donate
shares to her sister. The shares had a market value of R230 000 on the date of donation.
Joy had originally purchased the shares for R125 000 during the 2017 year of assessment.
Assume that there are no donations tax implications.
You are required to calculate the capital gain or loss for the 2022 year of assessment.
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A Student’s Approach to Income Tax/Natural Persons
13.5
Solution 13.2
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In order to determine the capital gain or loss for the year, it has to be determined whether
any loss was disregarded in the previous year because not all the proceeds accrued in the
year of the sale.
Capital gain or loss in the previous year of assessment (2021):
Proceeds
Less: Base cost
R
500 000
(400 000)
Capital gain in 2021 year of assessment
100 000
Capital gain or capital loss for the current year of assessment (2022)
Proceeds (proceeds that accrued in the current year)
Less: Base cost (already claimed in the previous year)
20 000
nil
Capital gain
Less: Capital loss that was disregarded in the previous year
20 000
nil
Capital gain in 2022 year of assessment
20 000
If a person disposes of an asset:
• by means of a donation; or
• for a consideration not measurable in money; or
• to a connected person* for a consideration which does not equal open market value
(that is to say either higher or lower than open market value),
it is deemed that the person disposed of the asset for an amount equal to the market
value thereof (paragraph 38).
* Persons can be ‘connected persons’ before or after the transaction.
Example 13.3
Joy Mogale is a resident of the Republic and 41 years old. She is unmarried and therefore
feels that she has a lot to give. During the 2022 year of assessment, she decided to donate
shares to her sister. The shares had a market value of R230 000 on the date of donation.
Joy had originally purchased the shares for R125 000 during the 2017 year of assessment.
Assume that there are no donations tax implications.
You are required to calculate the capital gain or loss for the 2022 year of assessment.
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Chapter 13: Capital gains tax for individuals
13.5–13.6
Solution 13.3
Because Joy donated an asset (which is less than market value) to a connected person,
paragraph 38 will apply.
Capital gain or capital loss for the current year of assessment (2022):
Proceeds (proceeds deemed to be the market value) (note)
Less: Base cost
Capital gain
R
230 000
(125 000)
105 000
Note
Joy’s sister is deemed to have acquired the shares at a base cost of R230 000 despite the fact
that she paid Rnil for the asset.
13.6 Base cost of an asset (Step 2.2) (paragraph 20)
The base cost of an asset is determined differently depending on whether the asset
was acquired before 1 October 2001 (valuation date) or on or after 1 October 2001. An
asset purchased before 1 October 2001 is referred to as a pre-valuation date asset
whereas an asset purchased on or after 1 October 2001 is referred to as a postvaluation date asset. An asset purchased before the valuation date must have its base
cost adjusted because a portion of the capital gain relates to the period before capital
gains tax was introduced.
Included in the base cost of a pre-valuation-date asset is the total cost incurred in
respect of the acquisition, maintenance or sale of the asset. Paragraph 20 of the Eighth
Schedule contains a complete list of all costs that can be included.
The following costs may form part of the base cost:
• expenditure actually incurred in order to acquire or create an asset;
• expenditure actually incurred in respect of the valuation of the asset for the purpose of determining the capital gain or loss in respect of the asset;
• the following expenditure actually incurred and directly related to the acquisition
or disposal of an asset:
– the remuneration of a surveyor, valuer, auctioneer, accountant, broker, agent,
consultant or legal advisor, for services rendered;
– transfer costs;
– stamp duty, transfer duty, security transfer tax or similar duty;
– advertising costs to find a seller or a buyer;
– the cost of moving an asset from one location to another;
– the cost of installation of the asset, including the cost of foundations and
supporting structures;
– a part of the donations tax paid (refer to 13.6.1); and
– if the asset is acquired as a result of the exercise of an option, the cost actually
incurred to acquire the option;
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Chapter 13: Capital gains tax for individuals
13.6
Solution 13.4
R
Purchase price
200 000
Add: Improvements (R50 000 (sauna) and R10 000 (alarm system) - see note)
Base cost
60 000
260 000
Note:
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The repair cost to the kitchen cupboards of R20 000 are not considered improvements
but repairs and maintenance. The amount of R20 000 can therefore not be added to the
base cost. The sauna of R50 000 is an improvement and can be added to the base cost.
The fact that it has been damaged before date of sale does not make a difference.
The base cost of a post-valuation date asset consists of two components. The first
component is the value of the asset on 1 October 2001 (valuation date) when capital
gains tax was introduced. The second component is the cost incurred on or after the
valuation date.
The base cost of an asset is therefore the sum of the valuation date value and the cost
incurred on or after the valuation date (1 October 2001).
The valuation date value only needs to be determined if the asset was originally
acquired before the introduction of capital gains tax (that is to say acquired before
1 October 2001). If the asset was acquired after the valuation date, the base cost will
simply be the actual costs incurred.
The first amount that needs to be determined for an asset acquired before the
valuation date, is the valuation date value, that is to say, the value of the asset on
1 October 2001.
The Eighth Schedule provides three methods that can be used to determine the
valuation date value (that is to say the value on 1 October 2001) of an asset:
• the market value of the asset on 1 October 2001 (refer to 13.7);
• the time-apportionment base cost of the asset (refer to 13.8); or
• the value according to the 20% rule (refer to 13.9).
Normally, the highest value of the three is used as the valuation date value. However,
a number of special sections in the Act change the amount that should be used as the
valuation date value (refer to 13.10).
Example 13.5
Thato Mathata sold his holiday house for R2 100 000 on 1 March 2021. He bought the
house for R200 000 in November 1985. The property was valued on 1 October 2001 for
R1 700 000. The time-apportionment base cost of the asset is R1 044 444.
You are required to calculate the valuation date value of the asset.
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A Student’s Approach to Income Tax/Natural Persons
13.6
Solution 13.5
Calculating the valuation date value of an asset:
• Market value on 1 October 2001 = R1 700 000;
• Time-apportionment base cost = R1 044 444; or
• 20% of proceeds = R420 000 (R2 100 000 × 20%).
Selected value (highest): R1 700 000
The valuation date value is therefore R1 700 000.
Example 13.5
Mpho Malatse sold his holiday house on 1 December 2021. Assume the valuation date
value of the house is R1 700 000. In January 2005, Mpho installed a sauna at a cost of
R50 000.
You are required to calculate the base cost of the asset.
Solution 13.5
Calculating the base cost of an asset (Step 2.2):
Valuation date value: R1 700 000
Cost incurred on or after 1 October 2001: R50 000
Base cost: R1 700 000 + R50 000 = R1 750 000
The base cost of the asset is therefore R1 750 000 (the valuation date value plus the cost
incurred after the valuation date).
13.6.1 Donations tax to be included in the base cost
(paragraphs 20(1)(c)(vii), 20(1)(c)(viii) and 22)
Where a donor pays donations tax on the disposal of an asset, a portion of the donations tax can be included in the base cost of the asset. The following formula can be
used to calculate the amount to be added to the base cost:
Y =
(M – A)
M
× D, where:
Y = the donations tax to be included in the base cost;
M = the market value of the asset donated and in respect of which the donations tax
is payable;
A = all amounts allowed to be taken into account in determining the base cost of the
asset (refer to 13.6), other than the donations tax amount to be calculated here;
and
D = the total amount of donations tax payable.
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Chapter 13: Capital gains tax for individuals
13.6
When a donor fails to pay donations tax within the prescribed period, the Act
provides that the donor and donee are jointly and severally liable for the donations
tax (section 59). Where the donee pays the donations tax, paragraph 22 cannot apply.
This is because paragraph 22 is applicable to the donor’s base cost and not the
donee’s base cost. However, the donee is entitled to include a portion of the
donations tax paid in the base cost of the asset acquired in terms of paragraph 20(1)(c)(viii) according to the following ratio:
Capital gain of donor
Y = Market value of asset × Donations tax paid
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REMEMBER
• If the base cost (A) is greater than the market value (M), the amount of donations tax to
be taken into account in calculating the base cost of the asset is Rnil.
• The value of M is determined on the date of the donation.
• If the donor pays the donations tax, the allowable portion of the donations tax
determined under paragraph 22 can be added to the donor’s base cost (paragraph
20(1)(c)(vii).
• If the donee pays the donations tax, the allowable portion of the donations tax, as
determined under paragraph 20(1)(c)(viii), can be added to the donee’s base cost.
Example 13.6
Chris Mabusela bought a house on a piece of land at a cost of R75 000 on 29 October 2001
and sold it to his son, Mark, for R80 000 during the 2022 year of assessment. The market
value of the property on the date of the sale was R200 000. Neither Chris nor Mark made
any other donations during the current year of assessment.
You are required to calculate the capital gain on the disposal of the house if:
(a) Chris paid the donations tax;
(b) Mark paid the donations tax.
Solution 13.6
Donations tax paid:
= 20% × ((R200 000 – R80 000) – R100 000 (annual donations tax exclusion))
= R4 000
(a) Chris paid the donations tax
The amount to be added to the base cost of the asset for the donor is calculated by using
the following formula:
(M – A)
Y =
×D
M
M = R200 000
A = R75 000
D = R4 000
Y = ((R200 000 – R75 000) / R200 000) × R4 000
Y = R2 500
continued
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A Student’s Approach to Income Tax/Natural Persons
13.6–13.7
The capital gain to be taxed in the hands of Chris will be calculated as if he disposed of
the house at proceeds equal to market value since it was disposed of to a connected
person for less than market value (refer to 13.5). The capital gain will thus be as follows:
Proceeds of R200 000 – base cost of R77 500 (R75 000 + R2 500) = capital gain of R122 500.
(b) Mark paid the donations tax
The amount to be added to the base cost of the asset for the donee is calculated by using
the following formula:
Capital gain of donor
× Donations tax paid
Y =
Market value of asset
Y = R125 000 / R200 000) × R4 000
Y = R2 500
The capital gain to be taxed in the hands of Chris, where he did not pay the donations tax,
will be as follows: Proceeds (R200 000) – base cost (R75 000) = capital gain of R125 000.
The base cost of the asset for Mark will increase with the donations tax portion of R2 500,
as calculated above. Since it is deemed that the house was disposed of at market value
(refer to 13.5), it is deemed that Mark acquired the house at a cost equal to the market
value of R200 000. The total base cost for Mark will therefore be R200 000 + R2 500 =
R202 500.
13.7 Market value of assets (paragraphs 29 and 31)
Where a person wants to use the market value of the asset on the valuation date as
one of the options, the property had to be valued within three years of the valuation
date. For most persons, the valuation date was 1 October 2001.
If a person who is exempt from income tax in terms of section 10 ceases to be exempt
after 1 October 2001, the date on which that person ceases to be exempt is their
valuation date. The person’s property must be valued within two years of this date.
SARS does not require the taxpayer to submit the valuation with their tax return in
the year of disposal. The taxpayer is however still required to retain the valuation for
audit purposes.
The Act contains special rules to calculate the market value of specific assets and also
a general rule to calculate the market value of other assets. The general rule is also
used to calculate the proceeds of assets disposed of in certain situations, for example
where a taxpayer donates assets or when a taxpayer dies.
General rule to determine the market value
The general rule that should be used to calculate the market value of an asset is the
price that would have been agreed upon by a willing seller and a willing buyer.
Special rules to determine the market value
Paragraph 31 of the Act provides rules on how to calculate the market value of
certain assets.
Refer to A Student’s Approach to Income Tax/Business Activities 6.7 for a complete
discussion.
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Chapter 13: Capital gains tax for individuals
13.7–13.8
REMEMBER
• When the taxpayer elects to use the market value as the valuation date value of an asset,
the loss limitation rules (refer to 13.10) come into operation that will limit the amount
that can be used as the base cost.
• The Act does not indicate how the market value should be obtained. It does not therefore seem necessary that the valuation should be done by a sworn valuer. It is, however,
important to remember that section 102 of the Act states that the burden of proof to
prove the correctness of the value is on the taxpayer.
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• Where an asset is transferred from one spouse to another in terms of the roll-over rules
(refer to 13.14) and the transferor spouse adopted or determined the market value, it is
deemed that the transferee spouse adopted or determined the said market value.
13.8 Time-apportionment base cost (TAB) (paragraph 30)
13.8.1 TAB: Expenditure incurred only before the valuation date
The time-apportionment base cost method spreads the growth in the value of the
asset over the period the person owned the asset. The growth is divided between the
periods before 1 October 2001 and on or after 1 October 2001. The TAB cost is the sum
of the expenditure incurred before 1 October 2001 plus the growth (as a percentage of
the profit) of the asset that took place before 1 October 2001.
In order to determine how to calculate the valuation date value by using the TAB cost
formula, it must be determined when the expenditure was incurred.
All the expenditure was
Allyears of
incurredAll
in the
assessment before
1 October 2001
Use ONLY the standard
TAB formula
Use the standard
proceeds formula and the
standard TAB formula
Expenditure was incurred in
years of assessment before
and on or after 1 October 2001
2001
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A Student’s Approach to Income Tax/Natural Persons
13.8
The depreciable asset TAB cost formula and the depreciable asset proceeds formula
must always be used together.
• Proceeds (not reduced by
recoupments) on the sale of a
depreciable asset exceeds the
expenditure, and
• The costs were incurred in
the years of assessment
before and on or after
1 October 2001, and
Use the depreciable asset
TAB cost formula AND
the depreciable asset
proceeds formula
• Any of the acquisition,
improvement or disposal
costs qualify for a deduction
for income tax purposes
(such as capital allowances).
The depreciable asset formulas are discussed in A Student’s Approach to Income Tax/
Business Activities 6.8.3.
To determine the expenditure incurred before valuation date, proof of expenditure is
required. If such proof was not retained, the TAB cost formulas cannot be used and
one of the other methods should be used to determine the valuation date value. This
is either the market value of the asset on 1 October 2001 (refer to 13.7) or the value
according to the 20% rule (refer to 13.9).
Calculating the TAB if the expenditure was incurred before
1 October 2001
In order to calculate the TAB cost of an asset, the following formula needs to be
applied:
Y = B + ((P – B) × (N / (T + N)))
The symbols in the formula are defined as follows:
B = the expenditure incurred before the valuation date in terms of paragraph 20;
P = the proceeds on the disposal of the asset less certain selling costs;
N = the number of years (a part of a year is deemed to be a full year) from the date
on which the asset was acquired to the day before the valuation date (that is to
say until 30 September 2001). Where the allowable expenditure was incurred in
more than one year of assessment prior to the valuation date, the number of
years may not exceed 20;
T = the number of years during which the asset was held from the valuation date
(that is to say 1 October 2001) until the date the asset was disposed of. A part of
a year is treated as a full year; and
Y = the TAB.
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Chapter 13: Capital gains tax for individuals
13.8
REMEMBER
• Selling costs are all the costs that are directly incurred in order to dispose of the asset.
The selling cost will include valuation costs on or after 1 October 2001.
• For purposes of the TAB formula, the selling costs incurred on or after the valuation
date must be used to reduce the proceeds on the disposal of an asset when calculating
the TAB. For the purpose of calculating the TAB amount, the selling costs cannot be
included in the post-valuation date costs. It will, however, be added to the valuation
date value when calculating the base cost of the asset.
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• In calculating N and T, a part of a year is deemed to be a full year (this is the case even
if it is only one day in a particular year).
13.8.2 TAB: Expenditure incurred before and on or after the
valuation date
If expenditure was incurred in the years of assessment before and on or after
1 October 2001, the TAB formula and the proceeds formula must be used to
determine the TAB. The proceeds formula is used to divide the proceeds with the
disposal into two parts: the first relates to the part of the asset for which the costs
were incurred before 1 October 2001 and the rest to costs incurred on or after
1 October 2001. The portion of the proceeds that relates to the cost incurred before
1 October 2001 is then used in the time-apportionment formula.
Calculating the TAB of an asset if the expenditure was incurred before and
on or after 1 October 2001
The first formula that needs to be applied is the proceeds formula, which determines
the proceeds relating to the pre-valuation date costs.
P = R × B / (A + B)
The symbols in the formula are defined as follows:
R = the total proceeds of the sale of the asset less certain selling costs;
A = the total cost incurred on or after the valuation date (excluding selling cost)
(refer to 13.6);
B = the costs incurred before the valuation date (refer to 13.6); and
P = the proceeds that relate to the cost incurred before 1 October 2001.
The next step is to apply the TAB cost formula:
Y = B + ((P – B) × (N / (T + N)))
The symbols in the formula are defined as follows:
N = the number of years (a part of a year is deemed to be a full year) from the date
on which the asset was acquired to the day before the valuation date (that is to
say 30 September 2001). Where the allowable expenditure was incurred in more
than one year of assessment, the number of years may not exceed 20;
T = the number of years during which the asset was held from the valuation date
(that is to say 1 October 2001) until the date the asset was disposed of. A part of
a year is treated as a full year;
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13.8
B = the allowable cost incurred before the valuation date in terms of paragraph 20
(refer to 13.6);
P = the answer of the proceeds formula; and
Y = the TAB.
Example 13.7
Niki Nkgo bought a house on 1 October 1972 at a cost of R500 000. In 2005 he made
improvements to the house at a cost of R250 000. The property was sold on 30 November
2021 for R3 000 000.
You are required to calculate the valuation date value using the TAB cost method. You
also need to calculate the base cost of the house.
Solution 13.7
Calculate the TAB cost of the asset if costs were incurred before and on or after 1 October 2001.
To calculate the TAB cost, the proceeds formula must first be applied as the cost was
incurred before and on or after 1 October 2001.
Proceeds formula:
P
R
A
B
P
=
=
=
=
=
=
=
R × B / (A + B)
R3 000 000
R250 000
R500 000
R × B / (A + B)
R3 000 000 × R500 000/(R250 000 + R500 000)
R2 000 000
The proceeds to be used in the TAB cost formula is therefore R2 000 000.
TAB cost formula:
Y
B
P
N
T
Y
=
=
=
=
=
=
=
=
B + {(P – B) × (N / (T + N))}
R500 000
R2 000 000
29 years (not limited to 20 years, expenditure incurred in one year)
20 years
R500 000 + {(R2 000 000 – R500 000) × (29 / (21 + 29))}
R500 000 + R870 000
R1 370 000
The valuation date value of the house is therefore R1 370 000(as the TAB cost formula
was used).
The total base cost of the house is therefore R1 370 000 + R250 000 = R1 620 000.
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Chapter 13: Capital gains tax for individuals
13.8–13.9
REMEMBER
• Where a taxpayer sells a depreciable asset, the wear-and-tear or capital allowances
claimed on the asset and any recoupment or section 11(o) deduction must be taken into
account when calculating the base cost and proceeds. There is also a special formula
that needs to be applied when a depreciable asset is sold (the depreciable asset
formula). Refer to A Student’s Approach to Income Tax/Business Activities 6.8.3 for a discussion thereof.
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13.9 The 20% rule
The third method of calculating the valuation date value is by using the following
formula: 20% × (P – A).
The valuation date value is calculated as 20% of the proceeds from the disposal (P) of
the asset after deducting the costs incurred on or after 1 October 2001 (A).
Calculating the valuation date value under the 20% rule
Step 1:
Determine the value to be used: The proceeds of the sale of the asset
less the costs incurred on or after 1 October 2001.
Step 2:
Multiply the value calculated in Step 1 by 20% to get the valuation
date value.
Example 13.8
Pat Apadile bought a house for R100 000 in 1960. She did not keep any records of the
purchase or the R150 000 for improvements made before the valuation date. In December 2006 she made improvements with a cost of R200 000 and kept records of these
improvements. The house was not valued on 1 October 2001. Pat sold the house on
20 February 2022 for R5 500 000.
You are required to calculate the valuation date value of the house.
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A Student’s Approach to Income Tax/Natural Persons
13.9–13.10
Solution 13.8
Calculating the valuation date value:
• The property was not valued on 1 October 2001. Therefore, the market value cannot be
used as the valuation date value.
• As Pat did not keep record of the pre-valuation date costs, she cannot use the TAB cost
as an option to calculate the valuation date value.
• The only option that is available to calculate the valuation date value is the 20% rule.
The proceeds from sale = R5 500 000
Costs incurred on or after 1 October 2001 = R200 000
Valuation date value = 20% × (R5 500 000 – R200 000) = R1 060 000
The valuation date value of the asset is therefore R1 060 000.
13.10
Selecting the valuation date value
(paragraphs 26 and 27)
Normally a taxpayer will select the option (from the three options discussed above in
calculating the valuation date value) with the highest value as the valuation date
value in order to calculate the base cost. However, the Act contains a number of
provisions that limit the amount that can be used as the valuation date value.
These provisions are applied if the asset is sold for less than the market value on
valuation date or the costs incurred. The effect of these rules is that the loss that can
be claimed is reduced. Paragraphs 26 and 27 of the Eighth Schedule contain the rules
that should be used:
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Chapter 13: Capital gains tax for individuals
13.10
26. Valuation date value where proceeds exceed expenditure or where expenditure
in respect of an asset cannot be determined.–
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20
expenditure
incurred
Proceeds
of disposal exceeds
par 20 on
expenditure
before,
or after incurred
1 October
2001 before, on or after
1 October 2001
Does the market value on
after 1 October
2001or
valuation
date equal
exceed the proceeds on
disposal?
No
Yes
Can the expenditure
incurred before
valuation date in respect
of a pre-valuation date
asset be determined?
Valuation date value is
the proceeds less the
expenditure allowable
in terms of paragraph 20
incurred on or after the
valuation date
No
Yes
Valuation date value is the
higher of:
Valuation date value is the
higher of:
• market value on
1 October 2001; or
• market value on
1 October 2001; or
• (proceeds – after
1 October 2001 costs) ×
20%; or
• (proceeds – after
1 October 2001 costs) ×
20%.
• TAB amount.
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A Student’s Approach to Income Tax/Natural Persons
13.10
27. Valuation date value where proceeds do not exceed expenditure.–
20 Proceeds
expenditure
of disposalincurred
does
NOT on
exceed
paragraph
20
before,
or after
1 October
expenditure incurred before,
2001
on or after 1 October 2001
Has the market value
after
1 October
2001
of the
asset been
determined?
Yes
No
Is the cost incurred
before the valuation
date:
Valuation date
value is the TAB
amount.
• equal to or more
than the proceeds;
and
• more than the
market value?
Yes
No
Valuation date value is the
higher of:
Valuation date value is the
lower of:
• market value; or
• market value; or
• proceeds less the
expenditure allowable in
terms of paragraph 20
incurred on or after the
valuation date.
• TAB amount.
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Chapter 13: Capital gains tax for individuals
13.10
The application of the rules can best be illustrated by means of a couple of examples.
Example 13.9
Evelyn Dala provides the following information relating to the assets sold during the year
of assessment. The only cost incurred for the assets is the original purchase price.
Expenditure
(incurred before
1 October 2001)
Market value on
1 October 2001
TAB cost
Selling
price
R
R
R
R
A
100
80
95
90
B
100
142
118
115
C
100
150
75
45
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Asset
You are required to calculate the valuation date value for each asset.
Solution 13.9
ASSET A
Expenditure > proceeds and market value:
The valuation date value is the higher of
• the market value on 1 October 2001 = R80; or
• the proceeds less expenditure on or after 1 October 2001 = R90 – Rnil = R90.
The valuation date value is therefore R90 resulting in a loss of Rnil (R90 – R90).
ASSET B
Expenditure < proceeds:
The valuation date value is the higher of
• the market value = R142;
• the TAB cost = R118; or
• 20% rule = R23 (R115 × 20%)
The market value is the highest but proceeds < market value, thus the valuation date value
is:
• the proceeds less costs incurred after valuation date = R115 – Rnil = R115.
The valuation date value is therefore R115 resulting in a loss of Rnil (R115 – R115).
ASSET C
Expenditure > proceeds but expenditure < market value:
The valuation date value is the lower of
• the TAB cost = R75; or
• the market value on the valuation date = R150.
The valuation date value is therefore R75 resulting in a loss of R30 (R45 – R75).
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A Student’s Approach to Income Tax/Natural Persons
13.11
13.11
Base cost of assets: Special provisions
13.11.1
Partial disposals (paragraph 33)
Where part of an asset is disposed of, the portion of the base cost that is attributable
to the part that is disposed of must be used in determining the capital gain or loss on
the disposal of that part.
Calculating the base cost of a partly disposed of asset
Step 1:
Determine the base cost of the asset. This will be determined depending
on whether the asset was acquired before or on or after 1 October 2001.
If the asset was purchased before 1 October 2001, determine the valuation date value. If the asset was purchased on or after 1 October 2001,
determine the base cost of the asset using the normal paragraph 20 rules.
Step 2:
Determine whether the expenditure can directly be attributed to the
portion disposed of and whether the asset was acquired on or after
1 October 2001.
The base cost is the amount attributable to the part of the asset
that is disposed of.
Continue to Step 3.
Yes:
No:
Step 3:
For pre-valuation date assets, calculate the portion of the pre-valuation
date expenditure relating to the portion sold as follows:
Qualifying pre-valuation date
expenditure relating to portion
disposed of
×
Market value of portion sold
immediately prior to disposal
Total market value of entire asset
immediately prior to disposal
If the TAB is used to determine the valuation date value, use the value
determined above as ‘B’ in the TAB cost and TAB proceeds formulas.
The result is the valuation date value attributable to the portion
disposed of.
For assets acquired on or after 1 October 2001, calculate the portion of
the base cost relating to the portion sold as follows:
Qualifying expenditure of
entire asset
Step 4:
×
Market value of portion sold
immediately prior to disposal
Total market value of entire asset
immediately prior to disposal
Determine the total base cost of the portion sold by adding the portion
of the valuation date value attributed to the portion sold (as calculated
in Step 3) to qualifying expenditure incurred on or after 1 October 2001
in respect of the part sold. If it cannot be directly identified, calculate the
portion attributable to the portion sold by applying the fraction of the
market value of the portion sold immediately prior to disposal relative
to the market value of the entire asset immediately prior to disposal).
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Chapter 13: Capital gains tax for individuals
13.11
REMEMBER
• There is no partial disposals in the following instances (paragraph 33(3)):
– if an option is granted in respect of an asset;
– the granting, variation or cession of the right to use or occupy an asset where no
proceeds are received or accrued;
– improvements by a lessee of immovable property which is leased; or
– the replacement of a part of an asset while repairing it.
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Example 13.10
James Cane purchased a piece of land (24 hectares) on 2 September 2008 for an amount of
R2 000 000. He decided to sell a part of the land (10 hectares) on 31 October 2021 for
R1 560 000 because he no longer needed so much land. The market value of the whole
piece of land (24 hectares) was R4 200 000 immediately before disposal.
You are required to calculate the capital gain or loss attributable to the partial disposal.
Solution 13.10.
This asset was purchased after 1 October 2001, therefore the base cost according to
paragraph 20 is the original purchase price of R2 000 000 for the whole piece of land.
To determine the base cost of the portion that was sold:
Base cost of portion sold =
Market value of portion sold
Market value of entire property
= R2 000 000 × (R1 560 000 / R4 200 000)
= R742 857
Capital gain = R1 560 000 – R742 857
= R817 143
13.11.2
Base cost of identical assets (paragraph 32)
The base cost of identical assets can be determined by using one of the following
methods:
• specific identification;
• first-in-first-out; or
• weighted average.
The weighted average method of determining the base cost may only be used for
identical assets such as
• financial instruments listed on a recognised exchange (excluding interest-bearing
arrangements);
• assets that constitute the right of unit holders;
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A Student’s Approach to Income Tax/Natural Persons
13.11
• coins made mainly from gold or platinum; or
• instruments as defined in section 24J listed on a stock exchange for which the
prices are published.
In applying the weighted average method, the average cost of identical assets is
calculated after each acquisition by adding the cost of newly acquired assets to the
base cost of assets on hand and dividing the amount by the new total number of
assets.
The valuation date value of these assets must be determined as the total valuation
date value or the market value divided by the number of assets held. The base cost of
the assets is the cost incurred in terms of paragraph 20 divided by the number of
units the taxpayer owns.
The Act defines an ‘identical asset’ as
a group of similar assets which
(a) if any one of them were disposed of, would realise the same amount regardless of
which of them was disposed of; and
(b) are not able to be individually distinguished apart from any identifying numbers
which they may bear.
REMEMBER
• Where one of the three methods has been adopted to calculate the cost of identical
assets, the method must be used until all the identical assets have been disposed of.
• If the weighted average method is used, the TAB cost may not be used to determine the
valuation date value.
13.11.3
Base cost in respect of a person who becomes a resident
on or after the valuation date (paragraph 24)
Special rules apply to a person who becomes a resident, in respect of assets situated
outside the Republic and which had been acquired before a person became a resident.
Where the proceeds from the disposal and the allowable expenditure incurred prior
to becoming a resident are each less than the market value of the asset on the date
they commenced to be a resident, the cost of acquisition of the asset is deemed to be
the higher of:
• the allowable expenditure incurred before the person commenced to be a resident;
or
• the proceeds of the disposal less the allowable expenditure incurred on or after the
date that the person commenced to be a resident.
Where the proceeds from the disposal and the market value at the date of becoming a
resident are less than the allowable expenditure of the asset on the date of its
disposal, the cost of acquisition of the asset is deemed to be the higher of
• that market value; or
• the proceeds of disposal less the allowable expenditure incurred on or after the
date that the person commenced to be a resident.
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Chapter 13: Capital gains tax for individuals
13.11–13.12
REMEMBER
• These rules are only applicable to persons who became residents after the valuation
date.
• To use the market value as the valuation date value, assets must be valued within two
years.
• To determine the base cost of the asset, the cost incurred after becoming a resident must
be added to the cost of acquisition.
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13.11.4
Base cost for a debt-substitution transaction (paragraph 34)
Where a person reduces or discharges a debt, owed by that person to a creditor, by
disposing of an asset to the creditor, that asset must be treated as having been
acquired by the creditor at a cost equal to the market value of that asset at the time of
the disposal. Such cost must therefore be treated as an amount actually incurred and
paid for purposes of determining the base cost of the asset for the creditor.
13.11.5
Farming capital development cost (paragraph 20A)
Where a farmer has unclaimed farming capital development cost and they sold their
immovable property (farm) on which they farmed, they may elect to include the
unclaimed farming capital development cost in the base cost of the farm.
The maximum amount of the farming capital development cost that can be added to
the base cost of the farm is the difference between the proceeds and the base cost
(excluding the unclaimed capital development cost) of the farm. Therefore, the
farming capital development cost cannot create a capital loss on the sale of the farm.
If the market value of the farm is selected as the valuation date value, only the
farming capital development cost incurred on or after 1 October 2001 can be added to
the base cost.
If the total balance of the farming capital development cost is not added to the base
cost of the farm, the balance must be carried forward in terms of the First Schedule.
13.12
Exclusions (Step 2.4)
Certain capital gains and losses are not taken into account in determining the sum of
all capital gains and losses. The Act provides details of the assets and amounts that
can be excluded from the calculation.
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A Student’s Approach to Income Tax/Natural Persons
13.12
Determining the amounts excluded from sum of all capital gains and
capital losses
Step
2.4.1:
Determine whether the asset qualifies for one of the exclusions discussed in 13.12.1 to 13.12.6.
Step
2.4.2:
Determine which portion of the capital gain or loss is excluded for capital gains tax purposes. Note that some exclusions are only applicable
to losses and others only exclude a portion or specific amount.
13.12.1
Exclusion: Primary residence (paragraphs 44 to 51)
A natural person and a special trust must disregard certain capital gains and losses
on the disposal of a primary residence.
A ‘primary residence’ is defined in paragraph 44 and includes a residence:
• in which a natural person or a special trust holds an interest; and
• which that person or a beneficiary of that trust or a spouse of that person or
beneficiary:
– ordinarily resides or resided in as their main residence; and
– uses or used it mainly for domestic purposes.
An interest in a primary residence includes:
• a real or statutory right;
• a share in a share block company or similar foreign entity; or
• a right of use or occupation (for example a 99-year lease), but excluding a right
under a mortgage bond or trust.
A ‘residence’ is defined in paragraph 44 as a structure, including a boat, caravan or
mobile home that is used as a place of residence by a natural person together with
any appurtenance belonging thereto and enjoyed therewith.
The following two exclusions are available:
1.
•
•
The R2 million gross exclusion (paragraph 45(1)(b))
Any capital gain on the disposal of a primary residence by a natural person or
special trust is disregarded if the proceeds from the disposal of that primary
residence do not exceed R2 million.
This rule does not apply in the following scenarios:
– If the primary residence is sold for R2 million or less and a capital loss is
realised. The R2 million gain or loss exclusion (see below) may, however, still
be applied to the loss.
– If the proceeds do not exceed R2 million on disposal, but that natural person
or a beneficiary of that special trust or a spouse of that person or beneficiary
* was not ordinarily resident in that residence throughout the period on or
after the valuation date (1 October 2001) during which that person or
special trust held that interest; or
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Chapter 13: Capital gains tax for individuals
13.12
•
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2.
•
* used that residence or a part thereof for the purposes of carrying on a
trade for any portion of the period on or after the valuation date during
which that person or special trust held that interest.
The R2 million gain or loss exclusion (see below) may, however, still be applied,
but only the portion of the capital gain or loss that is attributable to a period on
or after the valuation date during which that person, beneficiary or spouse was
so ordinarily resident or to that part of the primary residence that was used for
domestic purposes as well as purposes other than the carrying on of a trade by
that person, beneficiary or spouse.
The R2 million gain or loss exclusion (paragraph 45(1)(a))
Where a natural person or a special trust disposes of a primary residence, the
first R2 million of the capital gain or loss should be disregarded in the calculation
of the capital gain.
Example 13.11
Joe Soap sold his primary residence for R6 000 000 during the current year of assessment.
The base cost of the residence is R3 200 000.
You are required to
(a) Calculate the capital gain on the disposal of the primary residence after the primary
residence exclusion.
(b) Re-calculate the capital gain or loss on the disposal of the primary residence after the
primary residence exclusion if the primary residence is sold for R1 000 000.
Solution 13.11
(a) Where the primary residence is sold for R6 000 000:
Proceeds
Less: Base cost
R
6 000 000
(3 200 000)
Gain on disposal (R6 000 000 – R3 200 000)
Less: Primary residence exclusion
2 800 000
(2 000 000)
Capital gain on the disposal of the asset (R2 800 000 – R2 000 000)
800 000
Since the proceeds on disposal is more than R2 million, the entire capital gain cannot be
disregarded (paragraph 45(1)(b) therefore does not apply). However, the first
R2 million of the gain should still be disregarded in terms of paragraph 45(1)(a).
continued
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A Student’s Approach to Income Tax/Natural Persons
(b) Where the primary residence is sold for R1 000 000:
Proceeds
13.12
R
1 000 000
Less: Base cost
(3 200 000)
Loss on disposal (R1 000 000 – R3 200 000)
(2 200 000)
Less: Primary residence exclusion
2 000 000
Capital loss on the disposal of the asset (R2 200 000 – R2 000 000)
(200 000)
Although the proceeds on disposal is less than R2 million, a capital loss is realised
(paragraph 45(1)(b) therefore does not apply). However, the first R2 million of the loss
should still be disregarded in terms of paragraph 45(1)(a).
If he pays agents commission on the sale of the property, how will it
affect the capital gains tax calculation?
The R2 million gain or loss exclusion is a per residence exclusion. Where more than
one natural person owns the property and uses it as their ordinary residence, the
R2 million gain or loss exclusion must be divided between the persons according to
their ownership. Where a person owns more than one residence, only one of the
residences will qualify as a primary residence.
If the property is owned by a combination of natural persons and persons other than
natural persons, only the natural persons can claim their portion of the R2 million
gain or loss exclusion. Therefore, if one natural person and one or more companies
jointly hold the interest in the property, only the natural person will qualify for the
R2 million gain or loss exclusion. However, if two natural persons and one or more
companies hold the interest in the property, the natural persons will only qualify for
a R1 000 000 exclusion each.
Amounts excluded from the primary residence exclusion
The following does not qualify for the exclusion:
• Where a natural person or the beneficiary of a special trust or their spouse was not
ordinarily resident in the residence throughout the period on or after the valuation
date during which the person or special trust held the interest in that residence, the
exclusion cannot be claimed for the period during which they were not ordinarily
resident in that residence.
• Where a primary residence is disposed of together with the land on which it is
situated, the exclusion of R2 million gain or loss exclusion applies to:
– a maximum of two hectares of the gain relating to the land;
– land used mainly for domestic purposes together with that residence; and
– land which is disposed of at the same time and to the same person as the
residence.
• The primary residence exclusion does not apply to non-residents.
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Chapter 13: Capital gains tax for individuals
13.12
Example 13.12
Sid Naidoo sold his small holding which he used as a primary residence. The selling price
in the contract is as follows: R500 000 for the house and R3 000 000 for the ten hectares of
land on which the house is situated. The house and land were mainly used for domestic
purposes. The base cost of the house is R300 000 and the base cost of the land is
R1 000 000.
You are required to calculate the taxable capital gain on the sale of the residence.
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Solution 13.12
Proceeds
Base cost
House
R
500 000
(300 000)
Land
R
3 000 000
(1 000 000)
Gain on disposal
Less: Amount that does not qualify for the exclusion (Note)
200 000
nil
2 000 000
(1 600 000)
Amount qualifying for the exclusion
200 000
400 000
The total amount qualifying for the exclusion is therefore R200 000 + R400 000 =
R600 000. The maximum amount of the exclusion is R2 000 000, thus the whole R600 000
is excluded.
The taxable portion is therefore:
Total gain on disposal (R200 000 + R2 000 000)
Less: Primary residence exclusion (R200 000 + R400 000)
R
2 200 000
(600 000)
Capital gain on the disposal of the asset
1 600 000
Note
The amount that does not qualify for the exclusion:
As the property is larger than two hectares, only the first two hectares qualify for the
primary residence exclusion.
The following amount does not qualify for the exclusion:
= R2 000 000 × 8 ha / 10 ha
= R1 600 000
Apportionment of the primary residence exclusion
Where a natural person or the beneficiary of a special trust (or a spouse of the natural
person or beneficiary) disposes of an interest in a primary residence and that
residence was used for the purposes of carrying on a trade the capital gain or loss
must be apportioned. The portion of the capital gain or loss to be excluded from the
R2 million gain or loss exclusion is determined for that portion of the house during
that period on or after the valuation date during which the residence was used for
trade purposes.
If the natural person, beneficiary or spouse did not stay in the residence for a period,
and when they stayed there, used a percentage for business purposes, the capital gain
or loss in respect of both (absence and trade use) must be excluded from the primary
residence exclusion.
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Example 13.13
Thabo Zonke sold his primary residence for R2 200 000 during the current year of assessment. The base cost of the house is R1 200 000. Thabo used a home study and claimed
10% of the running cost as a deduction for income tax purposes every year.
You are required to calculate the taxable capital gain on the sale of the residence.
Solution 13.13
Proceeds
Less: Base cost
R
2 200 000
(1 200 000)
Gain on disposal (R2 200 000 – R1 200 000)
Less: Primary residence exclusion (Note)
1 000 000
(900 000)
Capital gain on the sale of the residence (R1 000 000 – R900 000)
100 000
Note
The amount that does not qualify for the exclusion:
The portion of the property that is used for business purposes does not qualify for the
primary residence exclusion. Thabo claimed 10% of the running cost of the house as business expenditure for income tax purposes; therefore, 10% of the gain on the disposal of
the property does not qualify for the exclusion.
The following amount does not qualify for the exclusion:
= R1 000 000 × 10%
= R100 000
The amount of the exclusion is therefore R1 000 000 – R100 000 = R900 000, which is less
than the maximum of R2 000 000, thus the whole R900 000 qualifies for the exclusion.
Must Thabo pay normal tax on the full R100 000?
Period when the asset is not used as the primary residence
When a natural person, or the beneficiary of a special trust or their spouses, does not
reside in the primary residence, they only qualify for the R2 million gain or loss
exclusion for the period they resided in the primary residence.
A natural person or a beneficiary of a special trust or their spouses will, however, be
treated as having been ordinarily resident in a residence for a continuous period (not
exceeding two years), if that natural person, or beneficiary of a special trust or their
spouses, were not continuously resident because:
• the residence had been offered for sale and vacated due to the acquisition or
intended acquisition of a new primary residence;
• the residence was being erected on land acquired for that purpose;
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13.12
• the residence had been accidentally rendered uninhabitable; or
• the death of that natural person, beneficiary or spouse had occurred.
Only a maximum of two years will be deemed to have been used as a primary residence if the above applies. For example, if the residence was owned for 20 years
before the date of disposal (of which it has been offered for sale for 5 years) it will be
deemed that the house was used as a primary residence for 17 years (20 – (5 + 2)).
When a person, their spouses, or a special trust lets a residence for a maximum
continuous period of five years and:
• the person, beneficiary of a special trust or spouse resided in that residence as a
primary residence for a continuous period of at least one year prior to and after the
period it was let;
• no other residence was treated as that person’s, beneficiary of a special trust’s or
spouse’s primary residence during this period; and
• the person, beneficiary of a special trust or spouse was:
– temporarily absent from the Republic; or
– employed or engaged in carrying on business in the Republic at a location
further than 250 kilometres from the residence,
the residence is nevertheless deemed to have been a primary residence.
The five-year rule does not apply if the residence has been let for more than five
years.
REMEMBER
• A person is only allowed to have one primary residence at a time. The reason for the
rules listed above is that there can be an overlap of two years, resulting in a person
having two primary residences at the same time. The person can therefore claim the full
exclusion for both houses.
13.12.2
Exclusion: Personal-use assets (paragraph 53)
Where a natural person or a special trust disposes of a personal-use asset, the
resulting capital gain or loss is ignored for the purposes of capital gains tax.
A personal-use asset is an asset of a natural person or a special trust that is used
mainly for purposes other than the carrying on of a trade.
Personal-use assets exclude
• a coin made mainly from gold or platinum of which the market value is mainly
attributable to the material from which it is minted or cast;
• immovable property;
• an aircraft, the empty mass of which exceeds 450 kilograms;
• a boat exceeding ten meters in length;
• a financial instrument;
• a fiduciary, usufructuary or other similar interest, the value of which decreases
over time;
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• a contract in terms of which, in return for payment of a premium, the person is
entitled to policy benefits upon the happening of certain events, excluding a shortterm policy;
• a short-term policy contemplated in the Short-term Insurance Act, to the extent
that it relates to an asset that is not a personal-use asset; and
• a right or interest of whatever nature to or in any of the above assets.
REMEMBER
• The gains and losses on the disposal of personal-use assets are disregarded for capital
gains tax purposes.
• If a person receives an allowance in respect of an asset used partly for business purposes (for example a travel allowance or cell phone allowance), the asset must be
treated as being used mainly for purposes other than the carrying on of a trade.
Limiting of losses
If an asset that is excluded from the definition of a personal-use asset is disposed of, a
capital gain or loss should be calculated. Paragraph 15 of the Eighth Schedule states
that the capital loss attributable to that portion of the asset that is not used for
carrying on of a trade, cannot be claimed for the following assets:
• an aircraft with an empty mass exceeding 450 kilograms;
• a boat exceeding ten meters in length;
• a fiduciary, usufructuary or similar interest, the value of which decreases over
time;
• a lease of immovable property;
• a time-sharing interest or share in a share-block company with a fixed life of which
the value decreases over time; and
• a right or interest of whatever nature to or in an asset referred to above.
REMEMBER
• If the disposal of one of the above assets results in a gain, the gain will be taxed but the
loss may not be claimed.
Example 13.14
Peter disposes of (none of which was used for purposes of trade)
1. a town house;
2. a motor vehicle for which Peter receives a travel allowance from his employer;
3. a boat 15 metres in length solely used by Peter for recreational purposes; and
4. a portfolio of shares listed on the Johannesburg Securities Exchange.
You are required to indicate which of the above assets will qualify as personal-use assets.
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Chapter 13: Capital gains tax for individuals
13.12
Solution 13.14
1.
2.
3.
4.
Town house – not a personal-use asset as immovable property is excluded (could
qualify for primary residence exclusion if Peter used it as his primary residence).
Motor vehicle – is a personal-use asset as it is a qualifying asset on which a business
allowance is paid.
Boat exceeding ten metres in length – not a personal-use asset as specifically excluded
(in terms of paragraph 15 any capital loss must be disregarded but a capital gain
must be included).
Portfolio of listed shares – not a personal-use asset as financial instruments are
excluded.
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Note
Because Peter is a natural person, some assets like the motor vehicle will be considered
personal-use assets and a capital gain or loss on the disposal thereof must be disregarded.
This would also be the case if the motor vehicle was sold by a special trust. If, however,
the same motor vehicle was sold by a company, it would not qualify as a personal-use
asset and the capital gain or loss would not be disregarded.
13.12.3
Exclusion: Disposal of small-business assets (paragraph 57)
If a person disposes of an active business asset of a small business, the capital gains,
to a maximum of R1 800 000 (per lifetime) are disregarded in calculating the aggregate capital gains or losses.
The exclusion is granted to a natural person who disposed of:
• an active business asset of a small business owned by that natural person as a sole
proprietor;
• an interest in each of the active business assets of a small business, owned by a
partnership, to the extent of their interest in that partnership; or
• a direct interest in a company (at least 10% of the equity of the company), to the
extent that the interest relates to active business assets of the small business.
A small business is a business of which the market value of all its assets at the date of
disposal of the business interest does not exceed R10 million. The assets in the small
business must be active business assets:
An ‘active business asset’ is an asset
(a) which constitutes immovable property, to the extent that it is used for business
purposes; or
(b) an asset (excluding immovable property) used or held wholly and exclusively for
business purposes,
but excludes–
• a financial instrument; and
• an asset used in the course of carrying on a business to derive income in the form of
an annuity, rental income, a foreign currency gain, royalty or similar income.
The exclusion only applies where the person
• held the active business asset, interest in a partnership or interest in the company
for a continuous period of at least five years prior to its disposal; and
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13.12
• was substantially involved in the operations of the small business during the fiveyear period; and
• has attained the age of 55 years; or
• has disposed of the interest as a consequence of ill health, other infirmity, superannuation or death.
Paragraph 57 also provides that all capital gains on the disposal of assets of a small
business must be realised within 24 months (from the date of disposal of the first
asset) in order to qualify for the exclusion.
REMEMBER
• If a person operates more than one small business by way of a sole proprietorship, partnership interest or direct interest of at least 10% in the equity of a company,they may
include all these businesses in the lifetime exemption of R1 800 000. However, the
exemption is unavailable if the total market value of all the business assets of all their
small businesses exceeds R10 million.
13.12.4
Exclusion: Disposal of a registered micro-business’ assets
(paragraph 57A)
Paragraph 57A provides that a registered micro-business as defined in terms of the
Sixth Schedule must disregard a capital gain or loss for the disposal by that business
of an asset used mainly for business purposes (not for trade purposes) (‘trade’ as
defined in section 1).
13.12.5
13.12.5.1
Exclusions: Other
Retirement benefits (paragraph 54)
A capital gain or loss determined in respect of a disposal that resulted in a person
receiving
• a lump sum benefit as defined in the Second Schedule (that is to say lump sums
received on retirement, death or withdrawal from a pension, pension preservation,
provident, provident preservation or retirement annuity fund); and
• a lump sum benefit paid for services rendered from a fund, arrangement or instrument situated outside the Republic, which is similar to a pension, pension preservation, provident, provident preservation or retirement annuity fund, is disregarded
for capital gains tax purposes.
To determine whether an amount is subject to the Second Schedule to the Act, refer to
chapter 9.
REMEMBER
• If an amount is taxed in terms of the income tax rules, the same amount cannot be taxed
under the capital gains tax rules. The tax-free amount calculated in terms of the income
tax rules is not subject to capital gains tax.
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13.12
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13.12.5.2
Long-term insurance (paragraph 55)
The capital gain or loss realised on the disposal of a long-term insurance policy (as
defined in section 1 of the Long-term Insurance Act 52 of 1998) is disregarded for the
purpose of capital gains tax if that person:
• is the original beneficial owner of the policy (or one of the original owners);
• is the spouse, nominee, dependant or deceased estate of the original beneficial
owner and no money was received due to the cessation of the policy to that person; or
• is the former spouse of the original beneficial owner and the policy is ceded in
terms of a divorce order.
This provision also applies in respect of a policy taken out on the life of a current or
former employee or director against the death, disability or illness of that person (and
the premiums were deducted in terms of section 11(w)) and a policy taken out on the
life of a current or former partner or co-shareholder. It should, however, be noted that
the person whose life is insured should not pay any premiums on the policy.
Normally the proceeds from a section 11(w) policy is taxed either in the company or
the estate of the employee.
REMEMBER
• This exclusion does not apply to the disposal of a long-term insurance policy abroad or
the disposal of a second-hand policy.
• On certain second-hand policies, the capital gains or losses will still be disregarded.
• All risk policies are specifically excluded from the application of capital gains tax. A
specific exemption from capital gains tax applies in respect of employer-owned longterm insurance policies if the amount to be taxed is included in the gross income of a
person, regardless of whether that amount is subsequently exempt. Therefore, when the
proceeds from an employer-owned insurance policy are exempt, the exemption should
not trigger an adverse capital gains tax result. In effect, the provisions are broad enough
to effectively exempt the keyman-policy proceeds from income tax as well as from
capital gains tax.
13.12.5.3
Collective investment schemes (paragraph 61)
Collective investment schemes that invest in financial instruments other than property companies are not subject to capital gains tax. Holders of participatory interests
in a portfolio of a collective investment scheme are subject to capital gains tax when
they dispose of their participatory interests.
13.12.5.4
Exercising an option (paragraph 58)
The capital gain or loss with the exercise of an option should be disregarded. The cost
associated with the option is included in the base cost of the asset that was acquired
as a result of the exercise of the option (refer to 13.6).
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13.12.5.5
13.12
Compensation for personal injury, illness or defamation
(paragraph 59)
If a natural person or special trust receives compensation as a result of the personal
injury, illness or defamation of the natural person or a beneficiary of the special trust,
a capital gain or loss must be disregarded.
13.12.5.6
Gambling, games and competitions (paragraph 60)
A natural person must disregard any capital gains or losses related to any form of
gambling, game or competition authorised by or conducted in terms of the laws of the
Republic.
REMEMBER
• Only gains made in terms of South African laws are excluded; winnings from foreign
sources are subject to capital gains tax.
• All losses, whether from a local or foreign source, are disregarded for capital gains
purposes.
• All gains made by persons other than natural persons (for example companies) are
subject to capital gains tax.
13.12.5.7
Exempt persons (paragraph 63)
The capital gain or loss that arises from the disposal of an asset is exempt from capital
gains tax if all the receipts and accruals of the person disposing of the asset are
exempt from income tax in terms of section 10.
13.12.5.8
Assets that produce exempt income (paragraph 64)
A capital gain or loss that arises from the disposal of an asset used solely to produce
income, which is exempt from income tax in terms of section 10 or 12K, must be
excluded when calculating the total capital gain. This provision is, however, not
applicable to the following exempt receipts and accruals:
• the annual interest exemption (section 10(1)(i));
• dividends on shares exempt in terms of section 10(1)(k);
• income of a public benefit organisation (section 10(1)(cN)); and
• income of a recreational club (section 10(1)(cO)).
13.12.5.9
Award for restitution in terms of the Restitution of Land Rights
Act 22 of 1994 (paragraphs 64A and 64D)
A gain or loss for a disposal of a right to land by that person claiming a right to land
by virtue of measures as contemplated in Chapter 6 of the National Development
Plan: Vision 2030 (the NDP) of the South African government, must be disregarded.
Any gain or loss in respect of a donation of land by virtue of measures as contemplated in Chapter 6 of the NDP, must also be disregarded.
Chapter 6 focusses on developing rural economic opportunities, without which
services are unlikely to be sustained in the long term (paragraphs 64A(b) and 64D).
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REMEMBER
• Paragraph 64A(b) is from the perspective of the person who has a claim to a piece of
land whereas paragraph 64D is from the perspective of the owner of a piece of land.
13.12.5.10 Donations and bequests to public benefit organisations
(paragraph 62)
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A capital gain or loss realised as a result of a donation or bequest of an asset to the
government, public benefit organisations, recreational clubs or other qualifying
exempt persons must be excluded from the calculation of a person’s aggregate capital
gain or loss for the year.
13.12.5.11 Public benefit organisations (paragraph 63A)
A capital gain or loss realised as a result of a disposal of an asset by an approved
public benefit organisation must be disregarded if
• the asset was not used for business purposes on or after the valuation date; or
• substantially the whole of the asset was used by that public benefit organisation on
and after valuation date for purposes other than the carrying on of a trade or
was used in carrying on a trade that complies with the requirements of section 10(1)(cN).
REMEMBER
• ‘Substantially the whole’ is regarded by SARS as being 90% or more but a percentage of
not less than 85% will also be accepted. The percentage usage is determined using a
method appropriate to the circumstances, which may be based on the time used or area.
• The valuation date of a public benefit organisation in existence on 1 April 2006 will be
the first day of its first year of assessment commencing on or after 1 April 2006.
• The public benefit organisation can determine the base cost of an asset on valuation
date using the same methods available for other assets as per paragraph 26 or 27. If the
market value is adopted, the public benefit organisation must determine the market
value of the asset within two years from the valuation date except for financial instruments (where the market value will equal the ruling price on the last business day
before valuation date) and participatory interest in a local collective investment scheme
in securities of property (the price at which the participatory interest can be sold to the
management of the company of the scheme on valuation date). The weighted average
method is available for identical assets.
13.12.5.12
Disposal of equity shares in a foreign company
(paragraph 64B)
In terms of paragraph 64B a person (other than a headquarter company) must
disregard a capital gain or loss on the disposal of equity shares in a foreign company
or a headquarter company in certain instances.
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A capital gain or loss on the disposal of any equity shares in any foreign company
must be disregarded if
• the person (whether alone or as part of the same group of companies) held at least
10% of the equity shares and voting rights in the foreign company;
• the person held the required equity share percentage of 10% for a period of at least
18 months before the disposal (interim holdings by group members are taken into
account for this purpose);
• the disposal is to a non-resident (other than a controlled foreign company or a
connected person); and
• the person receives full consideration for the foreign equity shares transferred. Full
consideration means
– consideration that is equal to or exceeds the market value of the interest; and
– the consideration will not include the receipt of shares.
REMEMBER
• If the person is a company, their share and the shares of other companies in the same
group of companies must be added to determine whether they own 10% of the equity
shares (and voting rights) in a foreign company.
• If the person is a company and the shares were acquired from another company in the
group, the 18-month period is determined by adding the time both companies owned
the shares.
13.12.5.13 Disposal by a trust in terms of a share incentive scheme
(paragraph 64E)
A capital gain or loss in respect of the disposal of an asset by a trust in terms of a
share incentive scheme, where the trust beneficiary has a vested right to the amount,
must be disregarded. This exclusion applies only if the amount is included in the
income or taken into account in the gain or loss of that trust beneficiary in terms of
section 8C.
13.13
Limitation of losses (paragraphs 15 to 19)
The capital losses that arise from the disposal of the following assets must be disregarded in determining the aggregate capital gain or loss of a person:
• If a creditor disposes of a claim owed to them by a connected person in relation to
them, any capital loss determined in consequence of the disposal must be
disregarded.
This does not apply where
– the base cost of the debtor’s asset was reduced;
– the debtor included the gain in the calculation of their aggregate capital gain or
loss;
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13.13–13.14
– the amount was included in the gross income of the person who acquired the
claim;
– the amount was included in the gross income of the debtor or reduced the
balance of assessed loss of the debtor;
– the amount was taxed as a capital gain which the creditor proves must be or was
included in the capital gain calculation of the acquirer of that debt.
• If an option can be exercised to acquire an asset not intended for use wholly and
exclusively for business purposes or to dispose of an asset not used wholly and
exclusively for business purposes, and the option is abandoned, allowed to expire
or disposed of in any manner other than the exercise of the option.
• When a taxpayer disposes of a share in a company, that taxpayer must disregard
any capital loss resulting from the acquisition of that share by the company as part
of the liquidation, winding-up or deregistration, to the extent that exempt dividends were received by or accrued to the taxpayer.
In all other circumstances, the taxpayer must disregard so much of any capital loss
resulting from the disposal to the extent that extraordinary exempt dividends were
received or accrued 18 months prior to the disposal.
‘Exempt dividend’ means a dividend or foreign dividend not subject to any
dividend tax and exempt from normal tax in terms of section10(1)(k)(i) or 10B(2)(a)
or (b). ‘Extraordinary exempt dividends’ are defined as the amount of the aggregate of any exempt dividends (accruing within 18 months prior to disposal) which
in total exceeds 15% of the proceeds received or accrued from the disposal.
• A capital loss realised as a result of the disposal of an asset to a person who is a
connected person immediately before the transaction or who is a member of the
same group or a trust with a beneficiary in the same group after the transaction can
only be set off against a gain arising as a result of a disposal to that connected
person later in that year of assessment or in later years of assessment provided that
that person is still a connected person. This limitation does not apply where a trust
disposes of marketable securities, equity instruments or any right thereto (as per
section 8A or 8C) to a beneficiary, and these securities instruments or rights vested
due to the employment relationship of the beneficiary and the trust is an associated
institution for purposes of the Seventh Schedule.
• A capital gain or loss realised as a result of a donation or bequest of an asset to the
government, public benefit organisation or other qualifying exempt person.
• No person whose estate has been voluntarily or compulsorily sequestrated may
carry forward an assessed capital loss incurred prior to the date of sequestration.
13.14
Roll-overs
The Act makes provision for the postponement of the payment of capital gains tax
under certain circumstances, having the effect that the base cost of the asset is rolled
over before the disposal and when the asset is finally disposed of, capital gains tax is
paid on the difference between the proceeds and the original base cost.
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13.14.1
13.14
Involuntary disposal of assets (paragraph 65)
If an asset is involuntarily disposed of, for example through the expropriation, loss or
destruction thereof, and the proceeds are used to acquire a replacement asset, the
taxpayer then has an option to roll the gain over. The gain is spread over the period
that allowable capital allowances or other deductions are claimed on the new asset.
Refer to A Student’s Approach to Income Tax/Business Activities 6.15 for the requirements that must be met.
13.14.2
Reinvestment in replacement assets (paragraph 66)
If a person disposes of a depreciable asset which they replace with a similar asset,
they may elect to ignore the capital gain in the calculation of their aggregate capital
gain or loss for the year of assessment. The disregarded capital gain is recognised in
the same proportion per year as allowable capital allowances or other deductions are
claimed on the new asset. Refer to A Student’s Approach to Income Tax/Business
Activities 6.15 for the requirements that must be met.
13.14.3
Transfer of assets between spouses (section 9HB)
The transferor is deemed to have disposed of the asset at its base cost if they dispose
of an asset to their spouse. This results in no capital gain being taxed in the
transferor’s hands. This roll-over relief is only applicable if the transferee spouse is a
South African resident or if the asset is subject to capital gains tax in the Republic. A
capital gain or loss determined in respect of the disposal of an asset due to one of the
spouse’s deaths or in the event of a divorce is also disregarded. A person is deemed
to have disposed of an asset to the other spouse immediately before the death of that
spouse or in consequence of a divorce order.
The relief will have the following capital gains tax effects on the transferee spouse
(person receiving the asset): it is deemed that:
• the person has acquired the asset on the same date as the original spouse did;
• the same costs were incurred as the first person (and the executor of the deceased
estate*) had incurred and the cost was incurred in the same currency;
• the costs were incurred on the same date as the original spouse (and the executor
of the deceased estate*) had incurred such costs;
• the asset was used in the same manner as it was used by the original spouse (and
the executor of the deceased estate*); and
• the transferee spouse received an amount which is equal to an amount that was
received by or had accrued to the transferor spouse in respect of that asset that
would have constituted proceeds on the disposal of that asset had the transferor
disposed of it to a person other than the transferee. An example of this is when a
transferor spouse disposes of an asset in terms of a suspensive sale agreement, and
they receive a part of the proceeds after which the right in terms of the contract is
transferred to the transferee spouse in whose hands the condition will be fulfilled.
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Chapter 13: Capital gains tax for individuals
13.14–13.15
Where an asset is transferred from one spouse to another spouse in terms of the rollover rules and the transferor spouse adopted the market value as the valuation date
value, it is deemed that the transferee spouse adopted the said market value.
Upon the death of a spouse, the deceased spouse is deemed to have disposed of all
their assets on date of death (refer to 13.18 for further detail).
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13.14.4
Disposal of immovable property in a share-block company
to the members of the company (paragraph 67B)
When a company that operates a share block scheme transfers a unit in immovable
property to a person who holds a share in it, the company must disregard a capital
gain or loss determined on the disposal of the unit; and the person (member) must
disregard a capital gain or loss on the disposal of the share.
If a person (member) acquires such a unit, it is deemed that:
• the unit is acquired for an amount equal to the expenditure incurred to acquire that
share;
• the expenditure was incurred on the date that the share was acquired;
• improvements were effected to the unit for an amount equal to the expenditure
incurred in effecting improvements to the immovable property for which that
person has a right of use;
• an amount of expenditure was incurred on the same date that expenditure was
incurred to effect improvements to the immovable property with regard to which
the person has a right of use;
• the person used the unit in the same manner as they used the immovable property
for which they had a right of use;
• the unit was acquired on the same date that the share was acquired; and
• the market value that was adopted as the valuation date value of the unit, is equal
to the valuation date value of the shares.
13.15
Assessed capital losses carried forward
(paragraphs 6 and 7)
The amount of the assessed capital loss that can be carried forward to the next year of
assessment is calculated as follows:
• where a person has an aggregate capital gain for the year, the amount by which
the person’s assessed capital loss brought forward from the previous year of
assessment exceeds the aggregate capital gain for the year;
• where a person has an aggregate capital loss for the year, the sum of the person’s
aggregate capital loss and the assessed capital loss brought forward from the
previous year; or
• where a person has neither an aggregate capital gain nor an aggregate capital
loss for the year, the amount of the assessed capital loss brought forward from the
previous year.
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A Student’s Approach to Income Tax/Natural Persons
13.16
13.16–13.18
Inclusion rate (paragraphs 9 and 10)
A person’s taxable capital gain for the year of assessment is calculated as a percentage
of the net capital gain. The taxable capital gain is then added to the taxable income for
income tax purposes before the deductions for retirement fund contributions and
section 18A donations are claimed.
The percentages to be applied in arriving at the taxable capital gain are as follows:
• 40% for individuals and special trusts as defined; and
• 80% for companies, close corporations and trusts.
REMEMBER
• The effective tax rate on capital gains for individuals is therefore a maximum of 18%
(40% × 45% maximum marginal rate applicable to taxable income in excess of
R1 656 600).
13.17
Attribution of capital gains (paragraphs 68 to 73)
Where capital gains vest in a person during a year of assessment as a result of either
• a donation, settlement or other disposition; or
• a transaction, operation or scheme entered into,
the capital gain will be included in the original owner of the asset’s aggregate capital
gain or loss.
This applies to the transactions:
• with the vesting in a spouse;
• with the vesting in a minor child;
• subject to a conditional vesting;
• subject to a revocable vesting; and
• with the vesting in a non-resident.
These rules are discussed in A Student’s Approach to Income Tax/Business Activities
chapter 11.
13.18
Disposals to and from deceased estates
(sections 9HA and 25)
When a person dies it is deemed that they have disposed of their assets to their estate,
heir or legatee for proceeds equal to the market value of the assets at the date of
death. The estate, heir or legatee is deemed to have acquired the assets at a cost equal
to that same market value (market value at the date of death). This becomes the base
cost of the asset.
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Chapter 13: Capital gains tax for individuals
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13.18–13.19
The rule does not apply to
• assets transferred to the surviving spouse;
• a long-term insurance policy where, if the proceeds of the policy had been received
by or had accrued to the deceased, the capital gain or loss would have been
disregarded; or
• an interest in a pension, pension preservation, provident, provident preservation
or retirement annuity fund in the Republic or a fund or instrument outside the
Republic (which provides benefits similar to a pension, pension preservation,
provident, provident preservation or retirement annuity fund) where the capital
gain or loss would have been disregarded if the proceeds accrued to the deceased.
The market value of the asset is determined in terms of paragraph 31 of the Eighth
Schedule.
If an asset is awarded to a spouse (that is a resident of the Republic), the deceased
person is deemed to have disposed of these assets at their base cost. In effect, no
capital gain or loss is realised.
Where the deceased estate disposes of an asset to an heir or legatee, it is deemed that
• the deceased estate has disposed of the asset for proceeds equal to the base cost of
that asset; and
• the heir or legatee has acquired the asset at a cost equal to the base cost of the asset
for the estate. This cost is considered as expenditure actually incurred and paid.
REMEMBER
• In the case of the death of a person there are three taxpayers to consider for capital gains
tax purposes: the deceased person, the deceased estate and the heir or legatee.
• The exclusion for the taxpayer in the year of assessment that he/she dies is R300 000.
• The deceased estate must be treated as a natural person (but not in respect of the
primary, secondary and tertiary rebate, nor in respect of the medical credits). If the
deceased person was a resident at the time of their death, the estate must also be treated
as a resident. By implication this means that if the deceased person was a non-resident,
only paragraph 2 assets are subject to capital gains tax consequences.
13.19
Summary
When calculating the capital gain on the disposal of an asset, you need to determine
four things, namely the proceeds on the disposal, the base cost of the asset, the
amount excluded from capital gains tax, and whether there is any rule that limits the
capital loss on the disposal of the asset.
Before the capital gain on the disposal of the asset is calculated, first determine
whether any portion of the income must be included in the taxpayer’s taxable income
in terms of normal income tax rules, for example a recoupment.
The proceeds on the disposal of the asset are normally the compensation received on
the disposal of the asset. This amount must be adjusted with an amount included in
the person’s taxable income for income tax purposes since a person cannot be taxed
twice on the same amount.
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A Student’s Approach to Income Tax/Natural Persons
13.19–13.20
The base cost of the asset is the valuation date value (on 1 October 2001) plus the
expenditure incurred on or after 1 October 2001. The Eighth Schedule to the Act
provides three methods that can be used to calculate the valuation date value (on
1 October 2001), namely:
• the market value;
• the time-apportionment base cost; and
• the 20% rule.
The capital gain or loss on the disposal of an asset is the proceeds from the disposal
less the base cost. The Act states that the gains and/or losses on certain assets must be
excluded from the calculation of the aggregate capital gain or loss for the year of
assessment. The most important exclusion applicable to natural persons is the
primary-residence exclusion.
A capital gain on the disposal of a primary residence is disregarded if the proceeds
from the disposal of that primary residence do not exceed R2 000 000. If the proceeds
exceed R2 000 000 or if this exclusion does not apply (refer to 13.12.1), the first R2 million of the gain or loss on the disposal of a primary residence is not subject to capital
gains tax. It should be noted that there are a number of exceptions to the R2 million
gain or loss exclusion.
After determining the aggregate capital gain or loss for the year, the amount must be
reduced with the annual exclusion of R40 000 for natural persons and special trusts.
The net capital gain for the year of assessment is then multiplied with the inclusion
rate (40% for natural persons) to calculate the taxable capital gain for the year. The
taxable capital gain is not the amount of tax to be paid; it must be included in the
taxable income and then the tax table is applied to calculate the tax payable.
The following section contains a number of questions that can be completed to
evaluate your knowledge of capital gains tax.
13.20
Examination preparation
Question 13.1
Marie Licht married Piet Licht in 1997. They are married out of community of property.
Marie owns an apartment which she purchased for R150 000 on 1 October 1970 while she
was still a student. After she and Piet got married, they moved into a new house but she
kept the apartment and rented it out to students. On 1 April 2021 she transferred
ownership of the apartment to Piet. The market value on the date of transfer was R650 000.
The apartment was valued at R440 000 on 1 October 2001.
The following improvements were made to the apartment:
• 1 January 1980: Installed a shower at a cost of R10 000.
• 1 June 2008: A jacuzzi was installed at a cost of R70 000. The jacuzzi leaked and was not
in use anymore at 1 September 2021.
Piet decided to sell the apartment on 1 September 2021. He sold it for R750 000.
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Chapter 13: Capital gains tax for individuals
13.20
You are required to:
Calculate the net capital gain or assessed capital loss for both Marie and Piet due to
the transfer and disposal of the apartment.
Answer 13.1
Calculation of the capital gain or loss
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Marie
As the asset is transferred from one spouse to another spouse, roll-over relief in terms of
paragraph 67 applies. Marie must therefore disregard a capital gain or loss determined in
respect of the disposal of an asset to her spouse (Piet). Piet steps into the shoes of Marie
with regard to this asset. If Piet subsequently disposes of the asset, he will calculate the
capital gain or capital loss in the same way as Marie would have calculated it.
R
Piet
Proceeds
Less: Base cost (Notes 1 to 3)
750 000
(510 000)
Capital gain
Less: Annual exclusion
240 000
(40 000)
Net capital gain
200 000
Notes
1. Time-apportionment base cost
Expenditure
Original cost
Shower
Jacuzzi (allowed although not in use at the time
of disposal)
Before
1 October
2001
R
150 000
10 000
After
1 October
2001
R
nil
nil
Total
R
150 000
10 000
nil
70 000
70 000
160 000
70 000
230 000
Expenditure incurred before and after 1 October 2001
B
(A + B)
R = R750 000
B = R160 000
A = R70 000
P=R×
P = R750 000 ×
R160 000
(R70 000 + R160 000)
P = R521 739
Y = B + {(P – B) × (N / (T + N))}
P = R521 739
B = R160 000
continued
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13.20
N = 31 years limited to 20 years since expenses were incurred in more than one year of
assessment prior to valuation date
T = 20 years
Y = R160 000 + {(R521 739 – R160 000) × (20 / (20 + 20))}
Y = R340 870
2. Valuation date value
The valuation date value is
• market value = R440 000;
• 20% rule = 20% × (R750 000 – R70 000) = R136 000; or
• time-apportionment base cost (Note 1) = R340 870.
Proceeds > expenditure
Therefore: Highest is market value = R440 000
Proceeds > market value
Therefore valuation date value = R440 000
3. Base cost
Base cost = valuation date value (Note 2) + expenditure after 1 October 2001
= R440 000 + R70 000
= R510 000
Additional questions for this chapter are available electronically at
www.myacademic.co.za/books
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