Silke: South African Income Tax
2021
Silke: South African Income Tax
2021
Professor Madeleine Stiglingh (volume editor)
DCom (UP) CA (SA)
Professor Alta Koekemoer
PhD (UP) CA (SA)
Professor Linda van Heerden
MCom (Taxation) (UP) CA (SA) LLB (Unisa)
Professor Jolani S Wilcocks
MCom (Taxation) (UP) CA (SA)
Professor Pieter van der Zwan
MCom (Taxation) (UP) CA (SA)
Assisted by:
Associate Professor David Warneke (BDO)
Karen Stark
Wessel Smit
Rudi Oosthuizen
Annelize Oosthuizen
Onkarabetse Mothelesi
Nompumelelo Monageng
Herman van Dyk
Maryke Wiesener
Marese Lombard
Ilinza Maree
Ettienne Retief
Craig Miller
Angela Jacobs
Doria Cucciolillo (BDO)
Herman Viviers
Evádne Bronkhorst
Piet Nel
Mphagahlele Ndlovu
Liza Coetzee
Alicia Heyns
Neo Molefi-Kau
Andrea Herron
Lizelle Bruwer
Juanita Dos Santos-Venter
Nadia Bauer
Leanie Groenewald
Keith Engel
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© 2020
ISBN 978-0-6390-0937-7
E-book ISBN 978-0-6390-0938-4
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Editor: Mandy Jonck
Technical Editor: Maggie Talanda/Crystal Naidoo
Preface
The objective of the authors and publishers of Silke: SA Income Tax is to provide a book that simplifies the understanding and application of tax legislation in a South African context for both students and general practitioners.
This is the 23rd edition of the book. This edition is up to date with the amendments that were issued
in Bill format or that were promulgated during 2020. As far as income tax is concerned, most of the
amendments apply to the 2021 year of assessment, that is, years of assessment ending on
28 February 2021 for persons other than companies, and financial years ending during the period of
12 months ending on 31 March 2021 for companies. Nevertheless, some amendments may have
other effective dates.
In this edition we again attempt to assist the students preparing for the qualifying examination of
chartered accountants. All the discussions in the book that fall outside the 2022 syllabus of the Initial
Test of Competence (ITC) are shaded in the headings of the relevant paragraphs. Students preparing for the Tax Professional qualification should, however, still include the shaded sections in their
preparation.
This edition is, again, a collaborative effort by several authors and co-workers. The task of producing
a book of this nature so early is made so much more difficult by the fact that the amending legislation
is, regrettably, not only becoming increasingly complex, but is promulgated so late in the year.
We appreciate any suggestions that you may offer for improvement, since we continue to strive
to produce a work that will be useful to general practitioners and students without sacrificing accuracy or quality.
Madeleine Stiglingh
Alta Koekemoer
Linda van Heerden
Jolani Wilcocks
Pieter van der Zwan
January 2021
v
Contents
Preface .........................................................................................................................................
Page
v
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
General principles of taxation ............................................................................................
Taxation in South Africa .....................................................................................................
Gross income .....................................................................................................................
Specific inclusions in gross income...................................................................................
Exempt income ..................................................................................................................
General deductions............................................................................................................
Natural persons ..................................................................................................................
Employment benefits..........................................................................................................
Retirement benefits ............................................................................................................
Employees’ tax ...................................................................................................................
Provisional tax ....................................................................................................................
Special deductions and assessed losses .........................................................................
Capital allowances and recoupments ...............................................................................
Trading stock .....................................................................................................................
Foreign exchange ..............................................................................................................
Investment and funding instruments..................................................................................
Capital gains tax (CGT) .....................................................................................................
Partnerships .......................................................................................................................
Companies and dividends tax ...........................................................................................
Companies: Changes in ownership and reorganisations..................................................
Cross-border transactions .................................................................................................
Farming operations ............................................................................................................
Turnover tax system ..........................................................................................................
Trusts ..................................................................................................................................
Insolvent natural persons ...................................................................................................
Donations tax .....................................................................................................................
The deceased and deceased estate .................................................................................
Transfer duty ......................................................................................................................
Securities transfer tax.........................................................................................................
Customs and excise duty ..................................................................................................
Value-added tax (VAT) .......................................................................................................
Tax avoidance ....................................................................................................................
Tax administration ..............................................................................................................
COVID-19 tax relief measures ...........................................................................................
1
11
27
61
77
123
147
193
245
277
311
329
371
485
507
541
591
687
705
749
809
887
921
929
957
965
987
1029
1037
1043
1049
1135
1155
1209
Appendix A: Tax monetary thresholds .........................................................................................
1219
Appendix B: Rates of tax and other information ..........................................................................
1225
Appendix C: Travel allowance .....................................................................................................
1229
Appendix D: Expectation of life and present value tables...........................................................
1231
Appendix E: Write-off periods acceptable to SARS ....................................................................
1235
Table of cases ..............................................................................................................................
1237
Special court cases ......................................................................................................................
1241
Table of provisions .......................................................................................................................
1243
Subject index ................................................................................................................................
1251
vii
1
General principles of taxation
Evádne Bronkhorst and Madeleine Stiglingh
Outcomes of this chapter
After studying this chapter, you should be able to:
l define and understand the concept of taxation
l describe the components of taxation
l evaluate tax policy by applying the principles of a good tax system.
Contents
1.1
1.2
1.3
1.4
1.5
Overview ............................................................................................................................
Tax base .............................................................................................................................
Tax rate structure and incidence .......................................................................................
Principles of taxation ..........................................................................................................
1.4.1 The Equity Principle ..............................................................................................
1.4.2 The Certainty Principle ..........................................................................................
1.4.3 The Convenience Principle ...................................................................................
1.4.4 The Economic Efficiency Principle ........................................................................
1.4.5 The Administrative Efficiency Principle .................................................................
1.4.6 The Flexibility Principle ..........................................................................................
1.4.7 The Simplicity Principle .........................................................................................
Conclusion ...........................................................................................................................
Page
1
2
2
5
5
7
7
7
8
8
8
10
1.1 Overview
There is a relationship between a government and its citizens that is referred to as the social compact.
In this social compact, a citizen has the responsibility to pay taxes, and a government has the
responsibility to deliver certain goods and services in return.
Taxes can be defined as compulsory payments that are imposed on citizens to raise revenue in order
to fund general expenditure, such as education, health and housing, for the benefit of society as a
whole.1
In deciding on the appropriate level of taxation to be imposed, the government of a country formulates a tax policy. Policies are those courses of action taken by governments to ensure that their
objectives are achieved.2
To formulate an appropriate tax policy, governments have to make decisions about the tax base
(see 1.2), the tax rate structure and the incidence of the tax liability (see 1.3). All of the aforementioned should be guided by the general principles of taxation (see 1.4). The following figure illustrate
these components of tax policy.
_________
1
2
Steyn T, Franzsen R and Stiglingh M ‘Conceptual framework for classifying government imposts relating to the tax burden
of individual taxpayers in South Africa’ International Business & Economics Research Journal (2013) vol 12(2) 242
accessed 2013-11-18 available from http://repository.up.ac.za/bitstream/handle/2263/21199/Steyn_Conceptual(2013).pdf?
sequence=1.
Merriam-Webster Policy (2013) accessed 2013-11-18 available from http://www.merriam-webster.com/dictionary/policy.
1
Silke: South African Income Tax
1.1–1.3
×
=
Tax base
(par. 1.2)
Tax structure
(par. 1.3)
Tax incidence
(par. 1.3)
Definition
Rate structure
Tax liability
Tax principles
(par. 1.4)
1.2 Tax base
The tax base is the amount on which tax is imposed. This amount is usually determined by legislative
provisions that provide guidance on what should be included and excluded from the tax base. The
amounts included in the tax base do not necessarily correlate with our normal understanding of
economic income. For example, when you receive interest income of R30 000, your bank balance
and your economic income increase by R30 000. If tax legislation provides that R20 000 of your
annual interest income is tax free, then only R10 000 (R30 000 – R20 000) of the interest income will
be included in the tax base that is subject to tax. Evidently, economic income will not always be
equal to the amount subjected to tax.
While a specific tax base will be defined within each piece of legislation, a tax base is broadly based
on income, wealth or consumption:
l An income tax base includes income earned or profits generated by taxpayers during a year of
assessment.
l A wealth tax base consists of the value of assets or property of a taxpayer.
l A consumption tax base encompasses the amount spent by taxpayers on goods and services.
After determining the tax base, a percentage or unit is applied to this amount to determine the tax
liability.
1.3 Tax rate structure and incidence
The tax rate is sometimes expressed as a percentage, for example where tax is imposed at 15% on
the value of a transaction. Other times it can be expressed as an amount per unit, for example where
excise taxes are imposed on each packet of cigarettes consumed in a country.
The following terminology is important in understanding tax rates:
l Marginal tax rate: This is the tax rate that will apply if the tax base increases by one rand.
l Statutory tax rate: This is the tax rate that is imposed on the tax base as determined in accordance with relevant legislation.
l Average tax rate: The average tax rate represents the rate at which tax is paid with reference to
the total tax base of a relevant taxpayer. This is determined by dividing the total tax liability by the
total tax base (i.e. Total tax liability / Total tax base). The tax liability and the total tax base are
determined having regard to relevant legislative provisions.
l Effective tax rate: The effective tax rate can be determined by dividing the tax liability by the total
profit or income. The effective tax rate is often used as a measure to compare the effective tax
liabilities of different taxpayers.
2
1.3
Chapter 1: General principles of taxation
Example 1.1. The average tax rate vs. the effective tax rate
Melody earned interest income of R28 500 and net rental income of R28 500. Suppose the
applicable tax rate is 39%.
Interest income
The average tax rate = Total tax liability / Total tax base
If we assume that R23 800 of the interest income will not be taxable, the tax base will be R4 700
(R28 500 – R23 800).
Melody’s tax liability would then be R1 833 (R4 700 × 39%).
The average tax rate for Melody’s interest income is 39% (R1 833/R4 700).
The effective tax rate = Total tax liability/Total profit or income
The tax liability will still be R1 833. The total interest income is R28 500. The effective tax rate is
therefore 6,4% (R1 833/R28 500).
Net rental income
The average tax rate = Total tax liability / Total tax base
Assuming the net rental income is fully taxable, the total tax base will be R28 500.
Melody’s tax liability would then be R11 115 (R28 500 × 39%).
The average tax rate for Melody’s net rental income is 39% (R11 115/R28 500).
The effective tax rate = Total tax liability/Total profit or income
The tax liability will still be R11 115. The total profit equals R28 500. The effective tax rate is
therefore 39% (R11 115/R28 500).
The above can be summarised as follows:
Description
Interest income
Net rental income
Income before tax
R28 500
R28 500
Less: Tax
(R1 833)
(R11 115)
Income after tax
R26 667
R17 385
Average tax rate
39%
39%
Effective tax rate
6,4%
39%
An analysis of the average tax rate (39%) incorrectly creates the impression that the relative after
tax income for both investments should be similar. However, in reality the after tax income of the
interest-bearing investment exceeds the after tax income of the property investment. This conclusion is reflected in the effective tax rate, i.e. the effective tax rate of the interest income (6,4%) is
significantly lower than the effective tax rate of the net rental income (39%).
Tax rates are usually determined with reference to one or more of the following structures:
l Progressive tax rate structure: The tax rate increases as the tax base increases.
l Proportional tax rate structure: The tax rate does not change in line with the tax base (a flat rate
tax).
l Regressive tax rate structure: The tax rate increases as the tax base decreases.
The type of tax structure elected by policymakers would depend on a number of aspects, one of
which is the policy objectives to be achieved. Governments that aim to achieve wealth redistribution,
usually prefer progressive tax rates.
3
Silke: South African Income Tax
1.3
Example 1.2. Tax rate structure analysis
Miss Clules generated a total profit before tax of R720 730. Her tax practitioner determined that
the amount that should be subjected to tax is R700 730 (i.e. the taxable income).
Assume that the following tax rate table applies:
Taxable amount
Rate of tax
Tax Bracket
Exceeding R445 100 but not
exceeding R584 200
R105 429 plus 36% of the amount by which
taxable amount exceeds R445 100
Tax Bracket 1
Exceeding R584 200 but not
exceeding R744 800
R155 505 plus 39% of the amount by which
taxable amount exceeds R584 200
Tax Bracket 2
Exceeding R744 800 but not
exceeding R1 577 300
R218 139 plus 41% of the amount by which
taxable amount exceeds R744 800
Tax Bracket 3
Exceeding R1 577 300
R559 464 plus 45% of amount by which
taxable income exceeds R1 577 300
Tax Bracket 4
Using this information, determine the following:
l the tax base
l the tax liability
l the marginal tax rate
l the statutory tax rate
l the average tax rate
l the effective tax rate, and
l if the tax rate structure is progressive, proportional or regressive.
SOLUTION
l
The tax base
The tax base is the amount that should be subjected to tax. In this case it is the taxable
income of R700 730.
l
The tax liability
Based on the tax tables provided, Miss Clules will be liable for tax of R200 951,70 [R155 505
+ {39% × (R700 730 – R584 200)}].
l
The marginal tax rate
The marginal tax rate will be the tax rate that will be imposed on one additional rand.
Miss Clules’ taxable income is R700 730. Currently, her taxable income falls within Tax
Bracket 2. If her taxable income increased by R1 (to R700 731), her taxable income would
still fall within Tax Bracket 2 and she would continue to be taxed at 39%. Therefore, the
marginal tax rate is 39%.
l
The statutory tax rate
The statutory tax rate is the legislated rate. It differs from the marginal tax rate in that it is not
the rate that will be imposed on the next rand, but rather the rate that will be imposed on the
current taxable income. As Miss Clules’ current taxable income of R700 730 falls within Tax
Bracket 2, the statutory tax rate is 39%.
l
The average tax rate
The average tax rate can be stated as: Total tax liability / total tax base. In this case the tax
base is represented by the taxable income of R700 730. Therefore the average tax rate is
28,7% (R200 951,70 / R700 730).
l
The effective tax rate
The effective tax rate can be stated as: Tax liability / total profit. Miss Clules’ profit before tax
is R720 730. Her tax liability will still be R200 951,70. Therefore the effective tax rate is 27,9%
(R200 951,70 / R720 730).
l
The tax rate structure
The tax rate structure applied to Miss Clules’ taxable amount is progressive, because, as her
taxable income increases, the tax rate also increases.
There is a common misconception that the person liable for tax is the person required to pay the tax.
This is not always the case. Sometimes the person actually paying the tax, does so on behalf of the
person liable to pay the tax. For example, in many countries, employers withhold and pay employment/payroll taxes to the revenue authorities. It is actually the employee who is liable to pay these
4
1.3–1.4
Chapter 1: General principles of taxation
taxes. However, the actual payment is made by the employer on behalf of the employee. In this
example, the tax burden is borne by the employee, even though it is paid by the employer. This is
known as the incidence of taxation, i.e. who bears the true burden of a tax.
In designing tax policy, it is important for policymakers to determine on whom the burden of the tax
will fall. For example, say a specific country wants to focus on the upliftment of lower-income
households by ensuring that these households pay less tax than higher-income households. If the
government decides to increase fuel levies resulting in increased fuel prices, transporters of fruit and
vegetables may then be compelled to increase their prices in order to cover the higher fuel prices.
This will result in an increase in the prices of fruit and vegetables. This will negatively affect all
consumers, including lower-income households. Therefore, the increase in the fuel levy also had the
unintended consequence of shifting the tax burden to lower-income households.
Another element that policymakers should consider when designing tax policy, is the principles of
taxation.
1.4 Principles of taxation
While there is no perfect tax policy, tax policy can be benchmarked against the commonly accepted
principles of a good tax system.
The principles of a good tax system are generally referred to as:
l The Equity Principle: Tax should be imposed according to one’s taxable ability or capacity.
l The Certainty Principle: The timing, amount and manner of tax payments should be certain.
l The Convenience Principle: Taxes should be imposed in a manner or at a time that is convenient
for taxpayers.
l The Economic Efficiency Principle: Tax should be designed in a manner not unduly influencing
economic decision-making.
l The Administrative Efficiency Principle: The tax system should be designed in such a manner as
to not impose an unreasonable administrative burden on the taxpayer and the revenue
authorities.
l The Flexibility Principle3: A good tax system should be designed in such a manner that it
accounts for changing economic circumstances.
l The Simplicity Principle4: A tax should be designed in a manner that is easy to understand and
apply.
The priority of application of these principles would depend on the policy objective to be achieved.
For instance, the redistribution of wealth would require a focus on the Equity Principle to ensure that
the tax policy facilitates redistribution of wealth to lower-income households.
Whatever the order of application, these principles function like a ‘tax ecosystem’. Therefore, there
cannot be an isolated focus on only one principle as this may result in policy failure. For instance,
where a tax deduction is granted to lower-income taxpayers based on the Equity Principle, the
purpose may be defeated if a high administrative burden is imposed on taxpayers desiring to claim
such deduction. Insufficient focus on the Administrative Efficiency Principle has, therefore, negatively
impacted the ability to apply the Equity Principle.
The following sections will analyse the principles of taxation in more detail.
1.4.1 The Equity Principle
According to the Equity Principle, tax should be imposed according to one’s taxable ability or
capacity. The Equity Principle is based on the concept of fairness. A tax should be fair and should
also be perceived to be fair. If a tax is perceived to be unfair, it could negatively impact taxpayers’
willingness to comply.
What is considered to be fair, may be different for each person. Therefore, while the Equity Principle
is an important tax policy principle, its implementation may prove to be challenging. A person’s
_________
3
4
While the Flexibility Principle is not part of the principles established by Adam Smith, this principle is recognised internationally as an important modern tax policy design principle.
While the Simplicity Principle is not part of the principles established by Adam Smith, this principle is recognised internationally as an important modern tax policy design principle.
5
Silke: South African Income Tax
1.4
economic capacity is at times influenced by personal choices. The decision to smoke, for example,
could result in the payment of more taxes (internationally, cigarettes are generally subjected to taxes
such as value-added tax and excise tax). Should a person be penalised just because such person
exercises his or her free will to satisfy certain desires? How should one then determine what is
regarded as fair and what is not?
Equity is underpinned by the ‘ability-to-pay principle’ and the ‘benefit principle’.5 In terms of the
ability-to-pay principle, the tax liability imposed on a taxpayer should take into account the economic
capacity of the taxpayer (that is, how much can a taxpayer afford to pay?). The ‘benefit principle’
indicates that equity is established where a taxpayer pays tax in proportion to the benefit received
from a government (via tax revenue spending).
The Equity Principle can further be subdivided into vertical and horizontal equity:6
l Vertical equity is achieved where a taxpayer with a greater economic capacity (or ability to pay)
bears a greater burden of tax than a taxpayer with a lesser ability. For example, where Thabelo
earns taxable income of R500 000 per annum and Dumisane earns R250 000, Thabelo should
pay a greater amount of tax relative to Dumisane in order to establish vertical equity.
l Horizontal equity is achieved where taxpayers with equal economic capacity bear an equal tax
burden. For example, let us assume Thabelo is paid R5 000 in cash for services rendered and
Dumisane receives a laptop with a market value of R5 000 for services rendered. To establish
horizontal equity, both should be subjected to tax on the R5 000 (that is, the value of consideration for services rendered).
Example 1.3. The Equity Principle
Zinkandla Republic has decided that citizens should pay toll fees for the privilege to use certain
public roads. These fees will then be used to maintain the roads. Toll fees will be based on
kilometres travelled between certain points on certain public roads. No special rates are available to any specific class of road user. Zinkandla Republic has three provinces: Zum-Zum
Province, Beki Province and Dela-Dela Province. Zum-Zum Province is by far the key economic
contributor and its roads carry the most traffic. The wealthier citizens also tend to reside in ZumZum Province.
Would it be equitable if Zinkandla Republic introduces toll fees only in Zum-Zum Province?
SOLUTION
l
l
Vertical equity
Based on the ability-to-pay principle, the proposed system will not achieve vertical equity.
Toll fees will not be based on a road user’s ability to pay/economic capacity but on the
kilometres travelled on certain public roads. In other words, a road user that has an annual
economic income of R1 500 000 and that travels 240 kilometres weekly, will pay exactly the
same toll fees as a road user earning R100 000 per annum, travelling the same number of
kilometres.
The proposed system is more closely aligned with the benefit principle, because the road
users that receive the greatest benefit pay the most toll fees. For example, if Sandile uses the
relevant road each day, she will pay more toll fees than Khanyi who only uses the road once
a month. Evidently, the benefit principle does not consider a specific road user’s ability to pay.
Horizontal equity
Based on the ability-to-pay principle, horizontal equity will not be achieved. Toll fees will not
be levied according to a road user’s ability to pay, but on the number of kilometres travelled
on designated public roads. Taxpayers with the same ability to pay might be required to
travel different distances on designated public roads and would therefore not have to pay
the same amount of toll fees.
Based on the benefit principle, horizontal equity will be achieved as far as Zum-Zum
Province is concerned. The toll fees liability increases in line with the increase in the benefit
from using certain public roads. Therefore, if two different citizens both use specific public
roads five times a week, they will both be required to pay the same amount of toll fees
because they both received the same benefit.
However, horizontal equity is not achieved on a national level, because road users in Beki
Province and Dela-Dela Province are able to use public roads free of charge.
_________
5
6
Smith A The wealth of nations vol 2 (1947) JM Dent & Sons Ltd: London at 307–308.
Black P, Calitz E and Steenekamp T Public Economics, (5th ed 2011) Oxford: Oxford University Press ch 10.
6
1.4
Chapter 1: General principles of taxation
1.4.2 The Certainty Principle
According to the Certainty Principle, the timing, amount and manner of tax payments should be
certain. Uncertainty about aspects such as how to apply the relevant legislative principles, or how
and by when the legislator will introduce new legislation or amend existing legislation, may have a
profound impact on the economy of a country.
Taxpayers cannot act on promises alone, only on what is embodied in law. Therefore, it is imperative
that tax policy be finalised and certain long before its implementation and that it is managed in a
transparent manner to facilitate the creation of certainty. Furthermore, legislative provisions and
procedures should be transparent and applied in a consistent manner.7
1.4.3 The Convenience Principle
According to the Convenience Principle, taxes should be imposed in a manner or at a time that is
convenient for taxpayers. The Convenience Principle is all about making it easy for taxpayers to
comply with tax legislation and to pay their tax liabilities.8
For example, requiring taxpayers to physically visit the offices of the revenue authorities weekly to
complete their tax returns and to submit all the supporting documentation would contradict the
Convenience Principle. Allowing taxpayers to comply with their tax obligations via the Internet in the
comfort of their own homes would support the Convenience Principle and could possibly increase
taxpayer compliance. Another example of the application of the Convenience Principle is the
inclusion of value-added tax in the retail selling prices of goods and services. Just imagine buying
groceries at a retail store and then having to queue at an in-store revenue authority office to declare
and pay the required taxes!
1.4.4 The Economic Efficiency Principle
According to the Economic Efficiency Principle, a tax is regarded as economically efficient if it does
not unduly influence a person’s economic decision-making.9 Economic efficiency plays an important
role in preserving the tax base. Where a tax is inefficient, taxpayers would be motivated to change
their behaviour in an effort to avoid paying the tax. For example, where interest income is more
heavily taxed than dividend income, some taxpayers might elect to rather invest in dividend-bearing
investments in order to reduce their tax burden. Consequently, there would be a decrease in tax
revenue collected and governments would have to seek alternative avenues to satisfy their revenue
needs.
A tax that is not economically efficient is not always negative from a policy perspective, especially
when it encourages desired behaviour. For example, should taxes levied on alcohol increase, it could
encourage reduced alcohol consumption, and also generate indirect social benefits, such as less
domestic violence and road accidents.
Example 1.4. Economic efficiency
The Democratic Republic of Green is proud of the rich biodiversity its country has to offer. It is a
destination of choice for international travellers and therefore environmental conservation is one
of its top priorities. As part of the country’s conservation efforts, the Green Revenue Authority has
introduced a tax on liquids in plastic bottles. Liquids in glass bottles will remain tax free.
Dr Teddi is very upset. She has two small children and never buys cold drinks in glass bottles in
fear of one of them breaking a glass bottle and accidentally cutting themselves with the broken
glass. To avoid paying tax, she no longer buys cold drink in plastic bottles. She now buys cold
drink in glass bottles and pours it into re-usable plastic cups.
Is this tax economically efficient?
_________
7
8
9
Davis Tax Committee, First Interim Report on Macro Analysis – Full Report (2014), ch 5, accessed 2018-11-10, available
from: https://bit.ly/2SWpMG2.
Smith A The wealth of nations vol 2 (1947) JM Dent & Sons Ltd: London at 307–308.
Black P, Calitz E and Steenekamp T Public Economics, (5th ed 2011) Oxford: Oxford University Press ch 11.
7
Silke: South African Income Tax
1.4
SOLUTION
The imposition of a tax on liquids in plastic bottles has caused Dr Teddi to change her behaviour,
i.e. she now buys cold drink in glass bottles where she previously only bought cold drink in
plastic bottles. Therefore, the tax system is not economically efficient because it has caused
behavioural change.
However, in this specific example, the intended policy outcome called for a tax system that is not
economically efficient, as the Democratic Republic of Green wanted to encourage behavioural
change.
It should be noted that even though the intention was to institute behavioural change, in reality
this may not always happen. Some consumers may continue with the undesired behaviour
because of their specific preferences.
1.4.5 The Administrative Efficiency Principle
According to the Administrative Efficiency Principle, the tax system should be designed in such a
manner as to not impose an unreasonable administrative burden on the taxpayer and the revenue
authorities. A tax system should therefore cost much less to implement and maintain than the tax
revenue it is able to generate.
From a revenue authority’s perspective, administrative efficiency relates to aspects such as the
number of internal controls required to be in place to audit taxpayers’ information, the design of the
organisational structure and the number of personnel required to ensure that the provisions of the
different tax Acts are complied with.
From a taxpayer’s perspective, administrative efficiency can relate to anything from keeping
supporting documents in the prescribed format, the frequency with which tax and other returns have
to be submitted to the revenue authority and the hiring of a tax practitioner to assist with the
completion of tax returns.
1.4.6 The Flexibility Principle
According to the Flexibility Principle, a good tax system should be designed in such a manner that it
accounts for changing economic circumstances. The Flexibility Principle is also referred to as tax
buoyancy, which is a measure of the responsiveness of tax revenue to changes in economic
growth.10 The global economy brings with it rapid changes. A tax system can quickly become outdated or even obsolete if it does not remain aligned with the dynamic economic and trade
environment. For example, the introduction of electronic commerce has resulted in an increase in the
cross-border sale of goods via the Internet. This has required governments to give more thought to
aspects such as which country has the right to tax the revenue generated from goods sold over the
Internet.
1.4.7 The Simplicity Principle
According to the Simplicity Principle, a tax should be designed in a manner that is easy to understand and apply. Tax legislation and its application should be simple enough so that a relatively
knowledgeable taxpayer would be able to understand and apply it.11
It is therefore important that governments consider the Simplicity Principle in determining how many
taxes should be implemented, what items should be excluded from a specific tax base and how
many supplementary materials should be issued in addition to primary legislation.
_________
10 Davis Tax Committee, First Interim Report on Macro Analysis – Full Report (2014), ch 5, accessed 2018-11-10, available
from: https://bit.ly/2SWpMG2.
11 BusinessDictionary.com Taxation principles (2013), accessed 2013-11-21, available from: http://www.businessdictionary.
com/definition/taxation-principles.html.
8
1.4
Chapter 1: General principles of taxation
Example 1.5. Comprehensive example
Mr Politik has been tasked with designing a tax on food products that have been classified as
unhealthy by the World Health Organization. His preliminary research indicated that unhealthy food
products in Group A are mostly consumed by low-income households, unhealthy food products in
Group B by mid-income households and unhealthy food products in Group C by high-income
households. The intended ‘unhealthy food tax’ has been communicated to the media. However,
because the different options had not been analysed in detail yet, the media statement was very
brief and did not include much detail. This caused the media to speculate on the design and
impact of the proposed tax. This caused a lot of unrest among South African consumers.
Mr Politik appointed you as a consultant to assist with the policy design required to implement
the ‘unhealthy food tax’. He has drafted the following options and requested that you comment
on whether or not his proposals are in line with the principles of a good tax system:
Option 1
All relevant unhealthy food products will be subjected to a consumption tax of 10% of the sales
price. Consumers will be required to keep records of their consumption and file tax returns
annually that account for their consumption of these food products.
Option 2
All relevant unhealthy food products will be subjected to a consumption tax of 10%. Suppliers will
be required to add the tax to the sales prices of the unhealthy food products and to file a monthly
tax return. The tax return should separately indicate the total tax attributable to the unhealthy
food products in the relevant categories.
Option 3
Unhealthy food products in Group A, Group B and Group C will be subjected to a consumption
tax of 2%, 5% and 12% respectively. Suppliers will be required to add the tax to the sales prices
of the food products and to file a monthly tax return. The tax return should separately indicate the
total tax attributable to the unhealthy food products in the relevant categories.
SOLUTION
Equity
l Options 1 and 2
A consumption tax of 10% on food products in Categories A, B and C represents a regressive tax rate structure. This is because the tax amount would constitute a greater portion of a
low-income consumer’s total income than of a high-income consumer’s income.
This would be equitable from a horizontal perspective as the tax liability increases in line with
the benefit obtained, i.e. the more food consumed, the greater the tax liability. However, this
tax rate structure does not consider the consumer’s ability to pay. Low-income households
will be expected to pay exactly the same amount of tax as high-income households. Therefore, the proposed tax rate structures do not achieve vertical equity.
l Option 3
Different rates are imposed on different food product categories based on the income-earning
capacity of the consumers. Therefore, consumers with a greater ability to pay would be
expected to bear a higher tax burden than those having a lesser ability. Because the tax liability
increases as the income earned increases, vertical equity is achieved.
Horizontal equity is achieved within a specific category, i.e. if Thuli purchases an unhealthy
food product included in Category A, for example full-cream milk, and Tlale purchases an
unhealthy food product included in Category A, for example potato chips, both will be
subjected to the same tax rate. However, horizontal equity is not achieved for purchases in
different categories. Suppose Tlale purchases cheddar cheese that is included in Category C. The cheddar cheese has the same fat content as the full-cream milk purchased by
Thuli that is included in Category A. Despite the aforementioned, the cheddar cheese is
subjected to a higher tax rate than the full-cream milk even though they both have the same
fat content. Horizontal equity would have been achieved if both the cheddar cheese and the
full-cream milk were subjected to the same tax rate.
It is important to note that the implications of this proposal would depend greatly on the
accuracy of the assumptions on which the categorisation of the food products was based.
The tax rate structure may also become regressive where a low-income taxpayer decides to
purchase food products included in Category C. The general expectation would be that this
would be the exception to the rule, as the preliminary research proved that low-income
consumers prefer food products in Category A.
continued
9
Silke: South African Income Tax
1.4–1.5
Certainty
The Certainty Principle has not been sufficiently adhered to. The media statements were made
before a detailed analysis of the impact of the proposed options was performed. This has
caused speculation among consumers, resulting in uncertainty.
Convenience
Options 2 and 3 will be more convenient than Option 1. The consumers are effectively those who
bear the economic burden of the tax. By including the proposed tax in the retail sales price of the
unhealthy food products, no administrative burden will be imposed on the taxpayers. Under
Option 1, the consumers would be required to account for all purchases of unhealthy food
products to determine the tax payable. Not only would this result in an increase in the number of
taxpayers that the Revenue Authority would have to administer, it would also be inconvenient for
consumers. Arguably, most businesses already have systems in place to track the sales of food
products. Existing systems could be amended to cater for the new tax. Should Option 1 be
implemented, consumers would most likely have to keep record of purchases manually, which
would be onerous and prone to errors.
Economic efficiency
The proposed tax is not economically efficient. Consumers might be motivated to consume food
products that do not fall within Categories A, B and C in an attempt to avoid paying tax. While
inefficient, it could be argued that this inefficiency is positive as it could motivate the consumers
to avoid food products classified as unhealthy. A healthier lifestyle might improve the health of
consumers, thereby indirectly reducing the pressure placed on the public health system.
Option 3 would result in the greatest economic inefficiency between the different categories of
unhealthy food products. The reduction in consumption of unhealthy food products included in
Category C could be relatively more when compared to those included in Categories A and B, as
a result of the higher tax rate. Similarly, the reduction in the consumption of unhealthy food
products included in Category B could be relatively more than those included in Category A, for
the same reason.
Administrative efficiency
The systems proposed under Options 2 and 3 appear to be more administratively efficient than
the one proposed under Option 1. It would be reasonable to assume that there are far more
consumers than there are suppliers of unhealthy food products. Therefore, the Option 1 system
would take up much more of the Revenue Authority’s capacity as far as the processing and audit
of returns are concerned. Consumers would also most likely not have sophisticated recordkeeping systems in place, while most suppliers would probably already have record-keeping
systems in place for accounting purposes. It would, therefore, also be less burdensome for the
taxpayers if Option 2 or 3 is implemented.
Flexibility
For all of the options, the proposed tax appears to be flexible. Because the tax is expressed as a
percentage of the sales prices of the relevant unhealthy food products, the tax will automatically
increase in line with the sales prices. Therefore, where inflationary pressures result in an increase
in sales prices, the tax will automatically be adjusted in line with inflation.
Simplicity
Generally, the proposed tax could be perceived as being relatively simple. However, if
considered in the context of other taxes already being imposed on certain foods (such as the
imposition of value-added tax on certain food products at 0% and on others at 15%), the
introduction of another tax on unhealthy food products introduces complexity. Should Option 3 be
implemented, the proposed tax would introduce even more complexity because the different
categories of unhealthy food products will be subjected to different tax rates (i.e. 2%, 5% and
12%).
1.5 Conclusion
Evidently, tax policy design is by no means a simple process as there is no ‘one-size-fits-all’ solution.
While the principles of taxation may provide useful guidance in designing tax policy, in practice their
application is much more challenging. Tax policy cannot be customised in accordance with
individuals’ wants and needs. It has to take into account different income groups, international trade
relations, other laws and regulations, the current and anticipated economic environment, and many
other factors.
10
2
Taxation in South Africa
Alta Koekemoer
Outcomes of this chapter
After studying this chapter, you should be able to:
l explain the legislative process in South Africa
l identify the national taxes levied in South Africa
l describe how the tax Acts are administered
l explain how tax law is interpreted
l illustrate how tax legislation is interpreted by performing a normal tax calculation.
Contents
2.1
2.2
2.3
2.4
2.5
2.6
Overview .............................................................................................................................
Taxation in South Africa......................................................................................................
2.2.1 Brief history of taxation in South Africa .................................................................
2.2.2 The legislative process .........................................................................................
2.2.3 Current tax legislation ...........................................................................................
2.2.3.1 Normal tax ..............................................................................................
2.2.3.2 Withholding Tax (Fourth Schedule, ss 9(2)(b), 10(1)(h), 10(1)(i),
10(1)(l), 10(1)(lA), 35A, 47A–47K, 49A–49H, 50A–50H, 64D
and 64E) ................................................................................................
2.2.3.3 Turnover tax (ss 48–48C) ......................................................................
2.2.3.4 Dividends tax (ss 64D–64N) .................................................................
2.2.3.5 Donations tax (s 54) ..............................................................................
2.2.3.6 Value-added tax ....................................................................................
2.2.3.7 Transfer duty ..........................................................................................
2.2.3.8 Estate duty .............................................................................................
2.2.3.9 Securities transfer tax ............................................................................
2.2.3.10 Customs and excise duties and levies ..................................................
2.2.3.11 Unemployment insurance contributions ................................................
2.2.3.12 Skills development levies.......................................................................
Administration of tax legislation..........................................................................................
Interpretation of tax law ......................................................................................................
2.4.1 Tax legislation........................................................................................................
2.4.2 Judicial decisions ..................................................................................................
2.4.3 Rules of interpretation ..........................................................................................
Illustrating the components of normal tax and the interpretation of tax law in South Africa
2.5.1 The incidence of normal tax ..................................................................................
2.5.2 The rate structure of normal tax ............................................................................
2.5.3 The tax base of normal tax for natural persons and companies ..........................
Comprehensive example ...................................................................................................
Page
11
12
12
12
13
14
14
15
15
16
16
16
16
16
16
17
17
17
17
18
19
20
21
21
21
22
24
2.1 Overview
This chapter provides an overview of the national taxes imposed in South Africa. While the focus of
this book is predominantly on the Income Tax Act 58 of 1962, the taxes imposed by the Income Tax
Act 58 of 1962 are, however, not the only taxes levied in South Africa. In South Africa, different types
of taxes are levied based on income, wealth and consumption (see discussion on tax base in chapter 1 (par 1.2)).
The chapter starts with a background to taxation in South Africa in general (see 2.2). In this chapter,
we also look at how tax law is administered in South Africa (see 2.3) and how it is interpreted (see 2.4).
Lastly, normal tax will be used as an example to analyse the tax components (set out in chapter 1) and
to illustrate the interpretation of tax law and the calculation of normal tax in South Africa (2.5 and 2.6).
11
Silke: South African Income Tax
2.2
2.2 Taxation in South Africa
2.2.1 Brief history of taxation in South Africa
Taxation has been around in South Africa since the 1600s, when transfer duty was imposed on
property transferred by sale and customs taxes were imposed on goods imported into the Cape
Colony. Often the taxes were imposed on a colonial level based on the colonies existing at the time,
namely the Cape Colony, the Orange Free State, Natal and the Transvaal. South Africa inherited most
of its earlier tax practices from the Netherlands and Britain. This resulted in a proliferation of
requirements. Most of these taxes were subsequently nationalised in an attempt to simplify these
requirements.1
While income tax has been levied since the 1800s, it was only when amendments were made in the
early 1900s that income tax was transformed into the format we know today.2 Important contributors
to the transformation of South Africa’s tax system were:3
l The Commission of Enquiry into Fiscal and Monetary Policy in South Africa (‘the Franzsen
Commission’) – issued two reports in 1968 and 1970 respectively;
l The Commission of Inquiry into the Tax Structure of the Republic of South Africa (‘the Margo
Commission’) – issued one report in 1986;
l The Commission of Inquiry into Certain Aspects of the Tax Structure of South Africa (‘the Katz
Commission’) – issued nine interim reports during 1994–1999; and
l The Davis Tax Committee inquiring into the role of the tax system in promoting ‘inclusive growth,
employment, development and fiscal sustainability’ in order to make recommendations to the
Minister of Finance – issued 25 reports from 17 July 2013 to 27 March 2018.4
Since the reviews conducted by these commissions and committee, there have been significant
changes in the South African tax system.
2.2.2 The legislative process
South Africa’s tax policy has come a long way since the 1600s. The Constitution of South Africa,
1996, ensures that a thorough and transparent process is followed to introduce new legislation and to
amend existing legislation. The legislative process generally commences with the issuing of a Green
Paper, followed by the White Paper, the Draft Money Bill and, finally the Act of Parliament. A Green
Paper is a policy document intended for public discussion and it sets out a Government
Department’s general view of the matter under consideration. In South Africa, National Treasury is the
Government Department that deals with tax laws. The public is allowed to comment on the Green
Paper. TheNational Treasury then considers any public comments received and may elect to adjust
the Green Paper for these comments. The adjusted Green Paper is then issued in the form of a White
Paper. A White Paper represents a more refined version of the Green Paper. A White Paper may also
be subjected to further discussions and commentary prior to it being transformed into a draft set of
legislation known as a Draft Money Bill.5
A Draft Money Bill should be prepared and submitted by the National Treasury to the Minister of
Finance. Once Cabinet approval has been obtained, the Draft Money Bill must be reviewed by the
State Law Advisers to ensure that it does not contradict the Constitution and other existing laws, and
that there are no technical errors. Upon obtaining the approval of the State Law Advisers, the Draft
Money Bill is then introduced by the Minister of Finance in Parliament to the National Assembly and
the National Council of Provinces.6 The Draft Money Bill is then published in the Government Gazette
for public comment. A consultative process is applied, and amendments are made where required.
Only after the Draft Money Bill has successfully passed through Parliament, will it be submitted for
assent by the President. Once assented by the President, the Draft Money Bill becomes an Act of
Parliament and becomes binding on one of the following dates:
l the date the Act is published in the Government Gazette
___________
1
2
3
4
5
6
De Kock MH Economic History of South Africa Juta & Co. Ltd (1924) at 300.
Ibid at 422–425.
‘Polity Fifth interim report of the Commission of Inquiry into Certain Aspects of the Tax Structure of South Africa – basing
the South African income tax system on the source or residence principle – options and recommendations’ (1997)
<http://www.polity. org.za/polity/govdocs/commissions/katz-5.html.> (accessed 2013-06-12).
Tax Review Committee The Davis Tax Committee (2018) <http://www.taxcom.org.za/> (accessed 2018-11-20).
Parliament of the Republic of South Africa How a law is made (2013) < http://www.parliament.gov.za/live/content.php?
Item_ID=1843> (accessed 2013-11-18).
The National Assembly and the National Council of Provinces are collectively referred to as the Houses of Parliament.
12
2.2
Chapter 2: Taxation in South Africa
l the date determined in accordance with the Act, or
l the date as indicated in the Government Gazette.7
The legislative process is depicted in Figure 2.1.
Figure 2.1: The legislative process in South Africa
Act of
Parliament
Draft Money Bill
White Paper
Green Paper
2.2.3 Current tax legislation
Table 2.1 provides an overview of the current national taxes levied in South Africa, categorised
according to the tax base (see 1.2). It also refers to the specific paragraph in this chapter where a
brief summary is provided as well as the chapter in this book where the particular tax is dealt with in
detail.
Table 2.1: National taxes in South Africa
Tax Base
Category
Legislation
Tax Type
Tax Base
Income Tax Act 58 of
1962
Normal tax (2.2.3.1)
Taxable income
Withholding tax
(2.2.3.2)
Gross amount payable to
non-resident / beneficial
owner
Turnover tax (2.2.3.3)
Taxable turnover
Chapter 23
Dividends tax (2.2.3.4)
Gross amount of dividend
Chapter 19
Donations tax (2.2.3.5)
Value of property
disposed of under a
donation or deemed
donation
Value-Added Tax Act
89 of 1991
Value-added tax*
(2.2.3.6)
Taxable supplies of goods
and services
Silke Chapter
Main focus of
the book
Income
Chapter 21
Wealth
Chapter 26
Consumption
Chapter 31
continued
___________
7
The Department of Justice and Constitutional Development (South Africa) The legislative process (2004) <http://www.
justice.gov.za/legislation/legprocess.htm> (accessed 2014-11-15).
13
Silke: South African Income Tax
2.2
Legislation
Tax Type
Tax Base
Transfer Duty Act
40 of 1949
Transfer duty* (2.2.3.7)
Value of property acquired
or property value
enhancement via
renunciation of rights
Estate Duty Act 45 of
1955
Estate duty (2.2.3.8)
Dutiable amount of estate
Securities Transfer
Tax Act 25 of 2007
Securities transfer tax*
(2.2.3.9)
Taxable amount of
transferred security
Customs and Excise
Act 91 of 1964
Customs duties*
(2.2.3.10)
Imported goods
Excise duties and
levies*
(2.2.3.10)
Specified goods
manufactured and/or
consumed in South Africa
Unemployment
Insurance
Contributions Act 4 of
2002
Unemployment
insurance
contributions
(2.2.3.11)
Remuneration
Skills Development
Levies Act 9 of 1999
Skills development
levy (2.2.3.12)
Remuneration
Tax Base
Category
Silke Chapter
Chapter 28
Wealth
Chapter 27
Chapter 29
Consumption
Chapter 30
Chapter 10
Income
Chapter 10
*These taxes are also classified as indirect taxes and are levied on transactions as opposed to direct taxes
(without the *) that are levied on a person.
Please note!
All references in this book to the ‘Act’ are references to the Income Tax Act 58
of 1962 (referred to as the Act), and all references to sections and Schedules
are references to sections and Schedules to the Act, unless otherwise specified.
2.2.3.1 Normal tax
Normal tax is imposed by the Act and is commonly referred to as income tax.
2.2.3.2 Withholding tax (Fourth Schedule, ss 9(2)(b), 10(1)(h), 10(1)(i), 10(1)(l), 10(1)(lA), 35A,
47A–47K, 49A–49H, 50A–50H, 64D and 64E)
Withholding tax is also a tax imposed by the Act. It is a tax that is withheld at source. Withholding tax,
therefore, places a responsibility on a person that owes an amount of money to another person, to
withhold an amount of tax from the amount owed to that other person. Only the net amount is then
paid to that other person (normally a non-resident). The tax withheld by the payer of the amount must
be paid over to the South African Revenue Service (SARS) on behalf of the recipient. The final liability
for the amount of tax rests on the person receiving the amount. The withholding tax can be the full or
partial tax liability in respect of the specific amount. Several taxes on income are required to be
withheld on payment in South Africa in order to ensure the convenience of the collection of these
taxes.
(a) Taxes withheld on payments of remuneration by employers to employees
The duty of an employer (as defined) to withhold employees’ tax from any remuneration (as defined)
paid to an employee (as defined) and to pay it over to SARS, is considered a withholding tax.
Employees’ tax is not a final tax but rather a prepayment of normal tax and is deducted from normal
tax payable in the calculation of the final normal tax due by or to the natural person on assessment.
The calculation of employees’ tax is contained in the Fourth Schedule. Employees’ tax is discussed in
chapter 10. The amount to be paid over is subject to relief in terms of the Employment Tax Incentive
Act 26 of 2013 that will cease on 28 February 2029. The Employment Tax Incentive Act provides relief
to all ‘eligible employers’ in respect of ‘qualifying employees’ to encourage employers to hire young
and less experienced work seekers in an effort to reduce unemployment in South Africa.
(b) Taxes withheld on payments of dividends by companies to beneficial owners
Dividends tax is also a withholding tax and is payable on the amount of any dividend paid by a
resident company or non-resident company that is listed on a recognised stock exchange in South
Africa, such as the JSE, to a beneficial owner (as defined – s 64D). It is payable in respect of cash
dividends and dividends in specie (s 64E). Dividends tax is a final tax. It applies in respect of
payments to both resident and non-resident beneficial owners. Dividends tax is discussed in detail in
chapter 19.
14
2.2
Chapter 2: Taxation in South Africa
(c) Taxes withheld on payments to non-residents
Withholding tax is often used by countries to collect income tax in respect of amounts derived by
non-residents from a local source due to the ease of collection. The withholding taxes are withheld by
a resident paying an amount to a non-resident and are paid over to SARS by the resident on behalf of
the non-resident. The resident is, therefore, merely a middleman; the tax liability is that of the nonresident. Take note that a reduced rate for withholding taxes may apply depending on the relevant
applicable double taxation agreement between South Africa and the other country. The Act provides
for four types of payments made by a resident to a non-resident which are subject to a withholding
tax. There is no withholding tax on service fees paid to a non-resident.
l Withholding tax on payments to non-resident sellers of immovable property: s 35A (see chapter 21)
A non-resident who sells immovable property in South Africa will be liable for withholding tax of
7,5%, 10% or 15% on the selling price received or accrued by the non-resident who is a natural
person, company and trust, respectively. This withholding tax is different from the other three
withholding taxes applicable to amounts payable to non-residents. The reason is that it is not a
final withholding tax, but it reduces the normal tax payable by the non-resident taxpayer in the
calculation of the final normal tax due by or to that taxpayer.
l Withholding tax on royalties: ss 49A–49H (see chapter 21)
A non-resident who receives a royalty from a resident or to whom a royalty accrues from a source
in South Africa will be liable to 15% withholding tax on the gross royalty received (ss 49A–49H).
Royalties or similar amounts that have been subject to withholding tax are exempt from normal
tax (s 10(1)(l)). The effect of this exemption is that the withholding tax is a final tax in South Africa
on such royalty income for qualifying non-residents. The possiblility exists that a lower rate may
apply due to the application of a double taxation agreement between South Africa and the other
country.
l Withholding tax on interest: ss 50A–50H (see chapter 21)
Withholding tax is payable at a fixed rate of 15% of the amount of any interest received by or
accrued to any non-resident person from a source in South Africa (s 9(2)(b)). The interest which
is subject to a withholding tax may be exempt from normal tax (ss 10(1)(h) and 10(1)(i)). This
withholding tax is also a final tax.
l Withholding tax on payments to foreign entertainers and sportspersons: ss 47A–47K (see
chapter 21)
Withholding tax is payable at a fixed rate of 15%. Amounts received by or accrued to any foreign
entertainer or sportsperson that have been subject to withholding tax are exempt from normal tax
(s 10(1)(lA)). This withholding tax is also a final tax.
2.2.3.3 Turnover tax (ss 48–48C)
Turnover tax is incorporated in the Sixth Schedule to the Act. Sections 48 to 48C has been included
in the Income Tax Act and links the Sixth Schedule with the Act. It provides for an elective turnover
tax for micro-businesses with an annual turnover of R1 million or less. Turnover tax is a tax calculated
on the taxable turnover of a registered micro business, and not on its taxable income. This method
eliminates the need for keeping detailed records of expenditure. An important feature of the turnover
tax regime is that the tax liability that is imposed is aligned with the tax liability under the current
income tax regime, but on a simplified base, with reduced compliance requirements.
2.2.3.4 Dividends tax (ss 64D–64N)
Dividends tax is also a tax imposed by the Act. Because of the method of collection, dividends tax
can also be considered a withholding tax (see 2.2.3.2). Dividends tax is payable at a fixed rate of
20% on the amount of any dividend paid by a resident company or a non-resident company that is
listed on a recognised stock exchange in South Africa, with certain exceptions like headquarter
companies, oil and gas companies and international shipping companies.. Take note that a reduced
rate for withholding taxes may apply depending on the relevant applicable double taxation agreement between the countries. The ‘beneficial owner’ (as defined in s 64D) remains liable for the dividends tax although it is the company that deducts the 20% withholding tax on any dividend paid.
Where a dividend in specie is declared, it is the resident company that is liable for the dividends tax.
This withholding tax is a final tax in South Africa on such dividends. This means that there will be no
need to submit an annual return of income if such dividends are the only income received by the
taxpayer (see chapter 19).
15
Silke: South African Income Tax
2.2
2.2.3.5 Donations tax (s 54)
Donations tax is another tax imposed by the Act. In order to prevent the avoidance of estate duty
through the gratuitous distribution of property while the resident is still alive, donations tax is imposed
by s 54 of the Act. Donations tax is a tax on the gratuitous transfer of wealth (property) and not a tax
on income. Donations tax is levied on the value of all donations, other than those specifically exempt,
made by a donor who is a resident.
Donations tax is calculated at a fixed rate of 20% on the cumulative value of donations not exceeding
R30 million, and at a fixed rate of 25% on the cumulative value of donations exceeding R30 million..
An annual exemption of up to R100 000 of the value of all donations made during the tax year is
available to a taxpayer that is a natural person and, in the case of a company, an exemption of up to
R10 000 in respect of the value of all casual gifts. Although donations tax is not a tax on income, it
has been incorporated into the Income Tax Act for administrative convenience.
2.2.3.6 Value-added tax
Value-added tax (VAT) is imposed by the Value-Added Tax Act 89 of 1991. Output tax is levied at
15% (since 1 April 2018) on the supply of goods or services by a registered VAT vendor in South
Africa. Prior to 1 April 2018, the rate was set at 14%. In terms of s 65 of the VAT Act, all quoted and
advertised prices are deemed to include VAT. In certain instances, an enterprise registered as a VAT
vendor may claim the VAT it has paid, back from SARS in the form of input tax. VAT is an indirect tax
with the total direct cost being borne by the final consumer, as the consumer cannot claim the
amount back from SARS. VAT is also levied on certain goods and services imported into South
Africa.
2.2.3.7 Transfer duty
Transfer duty is levied in terms of the Transfer Duty Act 40 of 1949 on the cost price of fixed property
using a sliding scale (0%, 3%, 6%%, 8%, 11% and 13%). It is a wealth tax payable by the purchaser
on the acquisition of property as defined in section 1(1) of the Transfer Duty Act (generally, fixed
property situated in South Africa).
2.2.3.8 Estate duty
A tax called ‘estate duty’ is levied in terms of the Estate Duty Act 45 of 1955. It is levied on the
dutiable value of the estate of a deceased person at a fixed rate of 20% of the dutiable value that
does not exceed R30 million and 25% of the amount that exceeds R30 million. An abatement of
R3,5 million is available against the net value of the estate, while a deceased spouse’s unused
abatement may be carried forward to a surviving spouse. The purpose of estate duty is to tax the
transfer of wealth from the deceased estate to the beneficiaries. It is usually the estate that is liable
for the estate duty. In some cases, however, the beneficiaries could be held liable for the estate duty
on the property they received.
2.2.3.9 Securities transfer tax
Securities transfer tax is imposed by the Securities Transfer Tax Act 25 of 2007 at the rate of 0,25% of
the the taxable amount the transferred security (generally, the value of any shares purchased). It is
payable by the purchaser on the transfer of both listed and unlisted shares in companies
incorporated in South Africa, as well as on the transfer of shares of foreign companies listed on any
recognised stock exchange in South Africa. It is also payable on the transfer of members’ interests in
a close corporation. No securities transfer tax is payable on the issue of shares.
2.2.3.10 Customs and excise duties and levies
Two taxes are imposed in terms of the Customs and Excise Act 91 of 1964:
l Customs duties are imposed on the importation of goods into South Africa with the aim of
protecting the local market.
l Excise duties and levies are imposed on certain luxury or non-essential goods manufactured
and/or consumed in South Africa.
Please note!
Certain parts of the Customs and Excise Act 91 of 1964 will be replaced by the
Customs Duty Act 30 of 2014, the Customs Control Act 31 of 2014 and the
Customs and Excise Amendment Act 32 of 2014. The effective dates of said
Acts were not known at the time of writing.
16
2.2–2.4
Chapter 2: Taxation in South Africa
2.2.3.11 Unemployment insurance contributions
Unemployment insurance contributions are determined with reference to remuneration of specified
employees as per the Unemployment Insurance Contributions Act 4 of 2002. The purpose is to
provide relief to employees during short periods of unemployment. The amount contributed by the
employee is deducted from the employee’s gross remuneration. Contributions are made by both the
employer and employee in equal parts (1% of gross remuneration is paid by each). The calculation
thereof is discussed in detail in chapter 10.
2.2.3.12 Skills development levies
Skills development levies are determined with reference to the remuneration of specified employees
as per the Skills Development Levy Act 9 of 1999. Contributions are made by employers only. The
calculation thereof is discussed in detail in chapter 10.
2.3 Administration of tax legislation
SARS is the government department dealing with South African tax administration. SARS was founded
in terms of the South African Revenue Service Act 34 of 1997, as a sovereign organisation, in charge of
managing the South African tax system and customs service. The Commissioner of SARS is
responsible for carrying out the function of collecting taxes and ensuring compliance with tax laws
(s 2(1)). Administrative requirements and procedures for purposes of the performance of any duty,
power or obligation, or the exercise of any right in terms of the tax laws are regulated by the Tax
Administration Act 28 of 2011 (see chapter 33). In essence, SARS is responsible for administering the
relevant tax Acts drafted and legislated by the National Treasury.
The Constitution of the Republic of South Africa of 1996 requires national legislation to be enacted to
give effect to the taxpayer’s right to ‘administrative action’ that is lawful, reasonable and procedurally
fair. The legislation must also provide for the review of ‘administrative action’, to impose a duty on the
state to give effect to these rights and to promote efficient administration (s 33(3) of the Constitution).
In order to give effect to this, the Promotion of Administrative Justice Act 3 of 2000 (PAJA) was
promulgated. In terms of PAJA, ‘administrative action’ is any decision made by SARS or any failure of
SARS to make a decision that adversely affects the rights of any person and that has a direct external
effect. Examples of the decisions made by the Commissioner of SARS that constitute administrative
action include the issuing of an assessment, the disallowance of an objection, a denial of a refund
under the VAT Act, etc. In such instances, SARS is subject to the provisions of PAJA that requires the
administrative action to be procedurally fair. In determining the fairness of the administrative action,
the following should be taken into account (s 3 of PAJA):
l Was adequate notice provided?
l Was there a reasonable opportunity to make representation?
l Did SARS provide a clear statement of the administrative action?
l Was adequate notice given of the right of review?
l Was adequate notice given of the right to request reasons?
Where a taxpayer believes that he has not been dealt with fairly, he can commence with procedures
as specified in PAJA. In the end, PAJA provides taxpayers with the means to fair administrative
action.
2.4 Interpretation of tax law
In carrying out its function of collecting taxes and ensuring compliance with tax laws, the tax laws of
South Africa need to be interpreted by SARS. Furthermore, in terms of s 102 of the Tax Administration
Act, the burden of proof lies with the taxpayer to claim an exemption, non-liability, deduction,
abatement, set-off or exclusion. The interpretation of tax law is therefore important for both SARS and
the taxpayer. The Constitution of the Republic of South Africa, 1996, is the supreme law of South
Africa. Any law (including an Act) that is inconsistent with it is invalid. No provision in any tax Act can
therefore contravene the provisions of the Constitution or the Bill of Rights contained in Chapter 2 of
the Constitution. All interpretations of tax legislation must, in terms of s 39(2) of the Constitution,
promote the spirit, purport and objects of the Bill of Rights. Constitutional matters are heard in the
Constitutional Court, and its judgments are binding on all other courts.
The two most important sources of tax law are tax legislation and judicial decisions. These two
sources of tax law are interpreted according to certain rules of interpretation (see 2.4.3).
17
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2.4
2.4.1 Tax legislation
When interpreting tax legislation, the taxing statutes (briefly discussed in 2.2.3), as well as the regulations promulgated in terms of these acts, double taxation agreements, the definitions in the Tax
Administration Act and the Interpretation Act, are essential. Interpretation Notes and Binding General
Rulings are also useful in providing guidance regarding the interpretation of tax legislation by the
Commissioner of SARS.
Regulations
Section 107(1) of the Act enables the Minister of Finance to make regulations regarding certain
matters, namely
l the duties of all persons engaged in the administration of the Act
l the limits of areas within which such persons are to act
l the nature and contents of the accounts to be rendered by a taxpayer in support of returns
rendered under the Act and the manner in which such accounts must be authenticated
l the method of valuation of annuities or of fiduciary, usufructuary or other limited interests in
property.
These regulations are published in the Government Gazette and have the same power as legislation.
An example is the motor vehicle rate per kilometre (s 8(1)(b)(ii) and (iii)).
Double taxation agreements
Agreements to avoid the imposition of double taxation when residents of a country transact in another
country may be entered into by the governments of the respective countries. Once published in the
Government Gazette, following its approval by Parliament, a double taxation agreement (DTA) has
the effect of law (s 108(2)). This means that where any provision of the Act, as discussed in the rest of
this book, is applied to a transaction to which the double taxation agreement also applies, the double
taxation agreement must be considered as if it forms part of that provision. Where there is a conflict
between the Act and the double taxation agreement, the double taxation agreement takes preference
over the Act.
Definitions
When interpreting the words of tax legislation, it is important to note that the main source of definitions
is contained in the first section of a tax Act, i.e. s 1. At times, a specific section or subsection can also
contain definitions that apply within a particular context.
All sections in the Act are subject to their provisos unless the context indicates otherwise. Similarly,
the definitions set out in s 1(1) are all subject to their provisos. With regard to the meaning of certain
terms in tax legislation, the following also needs to be considered:
l If there is a definition in the Tax Administration Act but not in the Act, then the definition in the Tax
Administration Act will also apply for the purposes of the Act unless the context indicates
otherwise (s 1(2) of the Act). This also applies to other tax acts, for example, the VAT Act.
l If there is a definition in the Act but not in the Tax Administration Act, then the definition in the Act
also applies for purposes of the Tax Administration Act unless the context indicates otherwise
(preamble to s 1 of the Tax Administration Act).
l If there are inconsistencies between the Tax Administration Act and the Act, the Act prevails
(s 4(3) of the Tax Administration Act).
The Interpretation Act
If a term used in the Income Tax Act is not defined in another tax act, it is necessary to look at the
Interpretation Act 33 of 1957 for guidance. If a term is clearly defined in the Income Tax Act and there
are no ambiguities, the provisions of the Income Tax Act apply. The provisions of the Interpretation
Act, therefore, only apply if the Income Tax Act does not define a term or ambiguities exist in the
Income Tax Act. Certain terms, for example ‘person’, are defined in both the Income Tax Act and the
Interpretation Act. If a definition is given in the Income Tax Act that differs from the definition given in
the Interpretation Act, the definition in the Income Tax Act takes precedence, unless the context
indicates otherwise.
If a term is not defined within primary legislation or the Interpretation Act, the normal dictionary
meaning of the word may indicate its meaning. If the meaning is still uncertain or incomplete relevant
case law is examined in order to understand the meaning of the term used (see 2.4.2).
18
2.4
Chapter 2: Taxation in South Africa
Interpretation Notes and Binding General Rulings
In addition to the regulations, SARS publishes Interpretation Notes (previously Practice Notes of
which some still apply) that set out its interpretation of various provisions of the Act. These Interpretation Notes do not form part of tax legislation. For example, Interpretation Note No. 3 deals with
the interpretation of the term ‘ordinarily resident’ used in the definition of a resident (if a natural
person) in s 1(1) of the Act. These Interpretation Notes are simply SARS’s interpretation regarding the
relevant provisions and do not have the force of law, unless if they are binding private or class
rulings. Interpretation Notes serve only as guidelines. If challenged in courts of law, they may be
overthrown. A taxpayer may therefore challenge the practice of SARS as set out in a particular Interpretation Note. It appears that an Interpretation Note does not bind the Commissioner, unless it contains a statement that it is a Binding General Ruling in which instance the Commissioner is bound to
its interpretation. An example of an Interpretation Note that states it is a Binding General Ruling is
Interpretation Note No. 47 (see discussion below). Although not necessarily binding, Interpretation
Notes are relevant when considering the application of tax legislation.
The Advance Tax Ruling system provides for the issuing of Binding General Rulings (BGRs). BGRs
are issued on matters of general interest or importance in order to promote clarity, consistency and
certainty regarding the Commissioner's application or interpretation of the tax law relating to these
matters. For example, in BGR7, dealing with s 11(e) of the Act, SARS makes it clear that SARS interprets 'value' for purposes of the s 11(e) allowance to be the actual cash cost incurred. According to
BGR7, 'value' is not the market value unless the asset is acquired by way of a donation, inheritance,
as a distribution in specie or from a connected person. Although BGR7 (and Interpretation Note
No. 47) suggest that a taxpayer will have to use ‘cost price’ in the context of a s 11(e) allowance a
BGR is not binding on the taxpayer. The taxpayer may, therefore, still decide to use market value as
‘value’ where the market value exceeds the actual cost incurred. In such an instance, the taxpayer
may, however, have to defend his decision in court at a later stage.
2.4.2 Judicial decisions
In South Africa, judgments of the courts are an important source of tax law.
When will a tax case be heard in a court of law?
Where a taxpayer is aggrieved with his assessment, he may appeal if his objection has been disallowed. The Tax Administration Act provides for the following appeal route:
Tax Board Ö Tax Court Ö Provincial Divisions of the High Court Ö Supreme Court of Appeal.
The Tax Board deals with appeals where the amount of tax in dispute does not exceed R1 000 000.
The party against whom was decided in the Tax Board hearing can appeal to the Tax Court. The Tax
Court is not a court of law. It has no inherent jurisdiction as is possessed by the Supreme Court of
Appeal. It is bound by a decision of the Provincial Divisions of the High Court and the Supreme Court
of Appeal, although it is not bound by its own decisions. A decision by the Tax Court is only binding on
the parties to the specific case. Although the Commissioner is bound by earlier decisions of the
Supreme Court of Appeal, he is not bound by a decision by the Tax Court given in an earlier case,
since, although the Tax Court is a competent court to decide on an issue between the parties, it is not
a court of law.
Provincial Divisions of the High Court are generally bound by their own decisions; however, they are
not bound by decisions of other provincial divisions. The Tax Court is bound by decisions of the
Provincial Divisions of the High Court in terms of the principle of legal precedence (see the
discussion of the meaning of this term below).
The Supreme Court of Appeal is not bound by the decision of any Provincial Division. It is bound by
its own decisions and will generally follow any previous decision it has given. All subordinate courts
are bound by the decisions of the Supreme Court of Appeal in terms of the principle of legal
precedence. Prior to February 1997, the High Court was called the Supreme Court and the Highest
Court of Appeal was called the Appellate Division of the Supreme Court. In this book, the courts are
referred to by the name by which they were known at the time of the hearing of the relevant case.
The legal precedence principle
The English stare decisis rule is accepted in South Africa. This rule entails the principle of legal
precedence, meaning that the rule of law established in a previous judgment is binding upon a lower
court and that courts of equal rankings must follow their own previous decisions. This implies that
19
Silke: South African Income Tax
2.4
there is a hierarchy of courts that can be summarised as follows: a decision of the Provincial Divisions
of the High Court binds the Tax Court and a decision of the Supreme Court of Appeal binds the
Provincial Divisions of the High Court and the Tax Court.
What part of the decision creates legal precedence?
The part of the decision that creates precedent is the ratio decidendi. The ratio decidendi of a case is
the reason or ground for the decision of a court. This becomes a principle of law that may have to be
applied in future cases where the facts are similar, depending on the authority of the court that gave
the decision. However, in passing judgment, the court may make certain observations that do not
affect the reason for the decision. These obiter dicta are not binding on any court even if these
passing remarks originate in the Supreme Court of Appeal. It may, however, in the future have
persuasive authority on another court.
Can income tax decisions of foreign countries create legal precedence?
The courts have frequently pointed out that the income tax decisions of other countries must be
cautiously approached, owing to differences in the basis of taxation applicable in foreign countries.
In referring to such decisions, therefore, one must always bear in mind that they may be based upon
a differently worded statute from the statute under consideration. They may, however, be valuable
and may influence South African courts, particularly when they deal with a point of law that also
occurs in the South African Act.
2.4.3 Rules of interpretation
The strict literal approach
The strict literal or textual approach originated from the English law and is also known as the ‘golden
rule of interpretation’. In terms of this rule, the interpreter primarily concentrates on the literal meaning
of the words of the provision that must be interpreted to determine the purpose of the legislator.
When the statute is expressed in clear, precise and unambiguous words, the court is not entitled to
do otherwise than interpret those words in their ordinary and natural sense. It, therefore, makes sense
to equate the grammatical meaning of the words to the intention of the legislator. A literal approach is
thus, always the starting point. If the text is, however, ambiguous or unclear, or if a strict literal
meaning will be absurd, the literal meaning may be departed from. In such a case the purposive
approach may be more appropriate to use. Case law that supports the strict legal approach includes
Partington v The Attorney General (1869 House of Lords) and Cape Brandy Syndicate v IRC (1921
King’s Bench).
The purposive approach
The purposive or contextual approach determines the purpose of the legislation by taking into
account all surrounding circumstances and resources. The Constitution of South Africa, 1996, has
supreme authority and, through ss 39(1) and (2), indicates that the purpose underlying the statute
must be sought.8 This means not merely seeking the ‘intention of Parliament’ but also considering the
history of the provision, its broad objectives, the constitutional values underlying it and its interrelationship with other provisions.9 Case law that supports the purposive approach includes Glen Anil
Development Corporation Ltd v SIR (1975 A) and CSARS v Airworld and Another (70 SATC 48).
An objective approach
In a more recent decision (Natal Joint Municipal Pension Fund v Endumeni Municipality 2012 (4) SA
593 (SCA)) the judge (Wallis JA) warned against the use of an expression such as “the intention of
the legislature” if the sole purpose is an enquiry into the mind of the legislature. The meaning that the
members of Parliament or other legislative body attributed to a particular legislative provision should
not carry more weight than the language of the provision. When interpreting legislation, the emphasis
should be on considering both the context and the words of the provision with neither dominating the
other. One should furthermore not impose one’s own views as to what would have been sensible for
others to intend. The process of interpretation should be an objective process.
___________
8
9
Goldswain, GK ‘Hanged by a comma, groping in the dark and holy cows – fingerprinting the judicial aids used in the
interpretation of fiscal statutes’ Meditari 16(3) (2012), at 31.
Goldswain, GK ‘Hanged by a comma, groping in the dark and holy cows – fingerprinting the judicial aids used in the
interpretation of fiscal statutes’ Meditari 16(3) (2012), at 52.
20
2.4–2.5
Chapter 2: Taxation in South Africa
The contra fiscum rule
The contra fiscum rule is also in agreement with the spirit and purport of the Bill of Rights. This rule
means that where a provision of the Act is open to more than one interpretation, the court must follow
the interpretation that favours the taxpayer. The practical application of this rule is illustrated with
regard to s 6A(3A) in par 7.2.2 (see discussion before the “Remember” block).
The substance over form rule
If problems of interpretation arise in relation to the true meaning of an agreement or a transaction, the
courts will be concerned with the substance rather than the form of the agreement or transaction.
2.5 Illustrating the components of normal tax and the interpretation of tax law in
South Africa
In chapter 1 it became clear that, in applying its tax policies, Government will decide on a tax base
(see 1.2), a tax rate structure (see 1.3) and the incidence of the tax liability, which are all guided by
the general principles of taxation (see 1.4). The different taxes and levies implemented in South
Africa are set out in chapter 2 (see 2.2). These taxes and levies are interpreted using tax legislation
and judicial decisions (see 2.4).
The Act currently calls for the annual payment of an income tax, which is referred to as ‘normal tax’
(s 5(1)). Normal tax will now be used as an example to analyse the tax components (as set out in
chapter 1) and to illustrate the interpretation of tax law in South Africa (described in chapter 2).
2.5.1 The incidence of normal tax
The incidence of tax refers to the liability of tax. Normal tax is imposed upon any ‘person’ (s 5(1)).
According to the definition of ‘person’ in s 1(1), a ‘person’ specifically includes trusts, estates of
deceased persons, insolvent estates, and a portfolio of a collective investment scheme. It does,
however, specifically exclude a foreign partnership. Although not specifically included, a natural
person is considered a ‘person’ (in terms of the broad understanding of a person per dictionary
definition). The definition of ‘person’ in the Interpretation Act also includes any ‘body of persons,
whether incorporated or unincorporated’. This means that irrespective of whether specifically referred
to in the definition of person in s 1(1) of the Act, all companies, close corporations and even partnerships are considered persons for income tax purposes. Clearly, a partnership can be regarded as
a person for normal tax purposes (an unincorporated body of persons). The Act, however, deems the
income of the partnership to be received by the partners individually (s 24H). For income tax
purposes, the partnership is, therefore, not taxed as the individual partners are the taxpayers. For
VAT purposes, however, a partnership is considered a person and liable for registration as a VAT
vendor.
The collection of normal tax is facilitated through a system of employees’ tax, provisional tax and
withholding tax payments. While an employer is obliged to withhold the employees’ tax, the
employee, as a ‘person’, carries the burden of the tax. Payments of employees’ tax and provisional
tax are deducted from the normal tax payable in the calculation of the final normal tax due by or to
the person. Withholding tax paid by non-residents in respect of the sale of immovable property in
South Africa is similarly taken into account for non-resident persons.
2.5.2 The rate structure of normal tax
The tax rate structure for normal tax varies in accordance with the different persons subject to normal
tax.
The same progressive rate structure is used to calculate the normal tax of natural persons, deceased
estates, insolvent estates and special trusts. This progressive rate structure ranges from 18% to 45%.
It is applied to taxable income and increases as the taxable income increases. Taxable income
excludes the taxable income from lump sum benefits and severance benefits of natural persons
(separate tax tables and a cumulative tax system are used to tax such amounts – see chapter 9).
Special trusts include:
l trusts created solely for the benefit of persons with disabilities as defined in s 6B(1), and
l testamentary trusts created for relatives of the deceased person of whom the youngest, at the
end of any year of assessment of the trust, is under 18 years of age (for more detail see 24.3.2).
A fixed rate structure is prescribed for trusts other than special trusts (currently 45%) and for
companies (currently 28%). The current company tax rate of 28% (with the exception of ‘small
21
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2.5
business corporations’ as defined in s 12E) applies in respect of years of assessment ending during
the 12-month period ending on 31 March 2020. The tax rate of 28% has been applicable to companies since years of assessment ending on or after 1 April 2008. Prior to this, the rate was set at
29%. For normal tax purposes, close corporations are included in the definition of ‘company’ and are
taxed in the same way as companies (s 1(1)). References in this book to companies include close
corporations, unless otherwise specified.
The tax rates are determined annually. The Minister of Finance announces the rate of tax chargeable
in respect of taxable income in the annual national budget. This announcement includes an indication
of the date or dates from which the changes take effect (s 5(2)(a)). This change in tax rates comes
into effect on the dates announced and applies for a period of 12 months from that date. The change
in tax rates is, however, subject to Parliament passing legislation giving effect to the announcement
within that 12-month period (s 5(2)(b)). This legislation is normally in the form of Acts amending the
rates and monetary amounts.
Rebates
All natural persons are entitled to deduct a primary rebate (a saving of normal tax) from the normal
tax per the tax table calculated on taxable income. Natural persons who are or would have been
65 years of age or older on the last day of the year of assessment are further entitled to deduct a
secondary rebate from their normal tax payable. Natural persons who are or would have been
75 years of age or older on the last day of the year of assessment are further entitled to deduct both a
secondary and a tertiary rebate (s 6(2)). If the individual is a resident whose taxable income includes
amounts from countries other than South Africa, the s 6quat rebate for foreign taxes must also be
deducted in determining the normal tax payable (see chapter 21).
Tax relief
In order to promote investment, growth and job creation in South Africa, certain companies could
qualify for normal tax relief in the form of lower tax rates. In line with South Africa’s tax objectives,
relief measures were introduced to stimulate the economic development of selected regions (s 12R),
to promote the development of ‘small business corporations’ (as defined in s 12E) and to stimulate
certain activities, for example, s 11D allowances to encourage research and development activities in
South Africa.
2.5.3 The tax base of normal tax for natural persons and companies
The tax base is the amount on which tax is imposed. With normal tax, the tax base is the ‘taxable
income’ of a person for a ‘year of assessment’.
Year of assessment
The year of assessment always ends on the last day of February, except in the case of companies,
when it ends on the last day of the financial year of the company. The financial year of a company
can end on the last day of any of the 12 months in a calendar year. The 2021 year of assessment of a
company with a financial year ending on 30 June will generally, for example, begin on 1 July 2020
and end on 30 June 2021 (the date of the end of the financial year, therefore, indicates which year of
assessment it is). The year of assessment is commonly referred to as the ‘tax year’. A broken period
of assessment arises when a taxpayer is born, dies or is declared insolvent during a year of
assessment.
Taxable income of a natural person
The calculation of the taxable income and normal tax liability of a natural person is shown in the
framework below. In light of the different tax tables applicable to natural persons, chapter 7 suggests
a subtotal method in a comprehensive framework using three different columns in order to determine
the normal tax payable by natural persons. Columns 1 and 2 in that framework contain all the lump
sum benefits and severance benefits and column 3 contain all other income of a natural person. The
framework in Table 2.2 provides a broad overview of the determination of the taxable income of
column 3 of that comprehensive framework and the normal tax payable (on the taxable income in
column 3) by a natural person. Refer to chapter 7 for a complete and detailed framework which
incorporates all taxes payable by a natural person.
22
2.5
Chapter 2: Taxation in South Africa
Table 2.2: Framework for calculating ‘taxable income’ and ‘normal tax payable’
Gross income (definition in s 1(1)) (Note 1) ......................................................................
Less: Exempt income (ss 10, 10A-10C and certain sections in s 12) ...........................
Rxxx
(xxx)
Income (definition in s 1(1)) ..............................................................................................
Less: Deductions and allowances (ss 11–19, ss 21–24P, excluding s 11F and s 18A)
Less: Assessed loss (ss 20–20B)..................................................................................
Rxxx
(xxx)
(xxx)
Add: Other amounts included in taxable income (for example s 8(1)(a)) .....................
Rxxx
xxx
Add: Taxable capital gain (s 26A).................................................................................
Rxxx
xxx
Less: Deductions in terms of s 11F (retirement fund contributions) ..............................
Rxxx
(xxx)
Less: Deductions in terms of s 18A (donations to PBO) ...............................................
Rxxx
(xxx)
Taxable income (definition in s 1(1)) (Note 2) ..................................................................
Rxxx
Normal tax determined per the progressive tax table on taxable income in column 3
(see chapter 7) .................................................................................................................
Less: Tax rebates and tax credits ....................................................................................
Rxxx
(xxx)
Normal tax payable ..........................................................................................................
Rxxx
Note 1: Gross income
The determination of ‘gross income’ is the first step in the calculation of a taxpayer’s taxable income.
The term ‘gross income’, is defined in s 1(1) of the Act. For a resident, ‘gross income’, in relation to a
year or period of assessment, means the total amount, in cash or otherwise, received by or accrued
to or in his favour, excluding receipts and accruals of a capital nature. For a non-resident, gross
income, in relation to a year or period of assessment, means the total amount, in cash or otherwise,
received by or accrued to or in his favour from a source within South Africa, excluding receipts and
accruals of a capital nature. Residents are therefore subject to normal tax on their worldwide income,
whereas non-residents are subject to normal tax in South Africa only on their income from sources
within South Africa. The residence of a taxpayer is thus crucial in determining his liability for South
African normal tax. (Remember also to consider double taxation agreements when dealing with
cross-border transactions.) Some of the terms used in the definition of ‘gross income’, such as
‘amount’, ‘received or accrued’ and ‘of a capital nature’, are not clearly defined for normal tax
purposes in the Act, dictionaries, the Tax Administration Act or in the Interpretation Act. In order to
obtain a clear understanding of these terms, one has to resort to judicial decisions (see chapter 3 for
a discussion of case law on these terms).
Note 2: Taxable income
The term ‘taxable income’ is also defined in s 1(1) of the Act. ‘Taxable income’ is the aggregate of the
following amounts:
l The amount remaining after deducting all the amounts allowed to be deducted or set off from
‘income’ (‘income’ is defined as the ‘gross income’ remaining after deducting all ss 10 and 10A–C
exemptions). Most of the deductions and set-offs are to be found in s 11, which should be read
with s 23.
l All amounts to be included or deemed to be included in taxable income in terms of the Act. The
unexpended portions of s 8(1)(a) allowances are also included in taxable income. The taxable
capital gain, as determined in terms of the Eighth Schedule for a year of assessment, is required
to be included in taxable income in that year of assessment (s 26A).
Please note!
There is no separate Capital Gains Tax (CGT) system in South Africa. Although
the term CGT is used in the spoken language, it is not a separate type of tax and
no amount is subject to capital gains tax. The taxable capital gain is included in
taxable income and is subject to normal tax.
Taxable income of a company
The above framework is not used in the calculation of the taxable income of companies. The financial
statements submitted to SARS by a company together with the annual return (ITR14) are used as a
basis for the calculation of the taxable income of the company. The calculation starts with the
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Silke: South African Income Tax
2.5–2.6
accounting profit or loss before tax per the Statement of Profit or Loss and Other Comprehensive
Income (SPLOCI), and this figure is adjusted with the differences between the accounting and tax
treatment of all the incomes and expenditures (item for item) in order to calculate the taxable income.
There is no specific sequence in which the items need to be considered, except that the s 18A
deduction for donations to public benefit organisations will always be the last deduction for a
company due to the limitation placed on the deductible amount by the section.
The tax treatment of an income item is determined by ascertaining whether the item meets all the
requirements of the definition of ‘gross income’ and whether any s 10 exemption is applicable to it.
The tax treatment of an expense item is determined by ascertaining whether the item meets all the
requirements of one of the sections in the Act allowing an amount as a deduction. It is very important
to determine whether the adjustment (the difference between the accounting and tax treatment of an
item) must increase or reduce the profit before tax. The following process is suggested:
Firstly, determine the effect of the accounting treatment of the item on the profit before tax; in other
words, did the item increase or reduce the profit before tax? Then apply the adjustments as follows:
Debit adjustments:
(1) If the accounting treatment increased the profit before tax, and a smaller amount or no amount
must be included in gross income in terms of the tax treatment, deduct the adjustment from the
profit before tax.
(2) If the accounting treatment reduced the profit before tax, and a greater amount is allowable as
deduction in terms of the tax treatment, deduct the adjustment from the profit before tax.
Credit adjustments:
(3) If the accounting treatment reduced the profit before tax, and a smaller amount or no amount is
allowable as a deduction in terms of the tax treatment, add the adjustment to the profit before
tax.
(4) If the accounting treatment increased the profit before tax, and a greater amount must be
included in gross income in terms of the tax treatment, add the adjustment to the profit before
tax.
No adjustment:
(5) If the accounting treatment and the tax treatment are the same, no adjustment needs to be
made (it may, however, be required to be shown by students when answering assessments).
(See Example 19.1 in chapter 19 (par 19.2.2) for a suggested framework to calculate the taxable
income of a company and an example of a basic company tax computation.)
2.6 Comprehensive example
The following example illustrates how the framework suggested for the calculation of a natural
person’s normal tax liability (see Table 2.2 in 2.5.5) should be applied. Please ignore the implications
of the double taxation agreement in this example.
Example 2.1. Calculating taxable income and normal tax liability of a natural person
Using the following information, calculate the taxable income, normal tax liability and total tax
liability of a 58-year-old taxpayer who is resident in South Africa in respect of the 2021 year of
assessment:
Income:
Commission received in South Africa (gross income) .................................................
R140 000
Legacy from the estate of a deceased uncle (receipt of a capital nature) ..................
20 000
Rent from a property in South Africa (gross income) ...................................................
50 000
Receipts from business in Zimbabwe (gross income) .................................................
30 000
Dividends received from South African public company (gross income) ...................
600
Interest received from bank in South Africa (gross income) ........................................
1 300
Taxable capital gain on the sale of the taxpayer’s investment property in
South Africa ..............................................................................................................
50 000
Expenditure:
Rates and taxes .............................................
Insurance .......................................................
Alterations to property ...................................
Water charges ...............................................
Repairs ..........................................................
Wages ............................................................
24
South African
property
R1 700
150
7 000
650
430
–
Zimbabwean
business
–
R750
–
350
2 800
6 500
2.6
Chapter 2: Taxation in South Africa
SOLUTION
Gross income .....................................................................................
Commission ....................................................................................
Legacy (receipt of a capital nature) (note 3) ..................................
Rent ................................................................................................
Business in Zimbabwe (note 1) ......................................................
Dividends ........................................................................................
Interest ............................................................................................
Less: Exempt income:
Dividends (note 2)...................................................................
Interest (note 4) .......................................................................
Income ..................................................................................................
Less: Allowable deductions:
South African property expenditure (note 5)
Rates and taxes ......................................................................
Insurance ................................................................................
Water charges ........................................................................
Repairs....................................................................................
R221 900
R140 000
–
50 000
30 000
600
1 300
(R600)
(1 300)
(1 900)
R220 000
(R1 700)
(150)
(650)
(430)
(R2 930)
Zimbabwean business expenditure (note 6)
Insurance .............................................................................
Water charges .....................................................................
Repairs.................................................................................
Wages ..................................................................................
(R750)
(350)
(2 800)
(6 500)
(13 330)
Add: Taxable capital gain (s 26A) (note 7) ........................................
R206 670
50 000
Taxable income ..................................................................................
R256 670
Normal tax determined per tax table (37 062 + (R50 770 × 26%)) ....
Less: Rebates (s 6(2)) ........................................................................
R50 262
(14 958)
Normal tax payable ............................................................................
Add: Withholding tax on dividends (20% × R600) (note 2) ................
R35 304
120
Total tax payable by the taxpayer ......................................................
R35 424
Notes
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Although it is specifically stated that the double taxation agreement should be ignored in this
example, one must always consider the double taxation agreement where a resident transacts
in another country. Had the double taxation agreement between South Africa and Zimbabwe
been considered in this example, the business income from Zimbabwe would have probably
been taxed exclusively in Zimbabwe. The business income from Zimbabwe cannot then be
taxed in South Africa as well, as the provisions of the double taxation agreement prevail in
such an instance.
Dividends from a South African company (whether public or private) are included in gross
income (par (k) of the definition of ‘gross income’) but most dividends are exempt
(s 10(1)(k)(i)). The company must withhold 20% withholding tax on dividends. This is a final
tax, and it remains the liability of the beneficial owner.
A legacy is a receipt of a capital nature excluded from gross income and also not taxed as a
capital gain.
The s 10(1)(i) exemption covers the first R23 800 of RSA interest received by a natural
person younger than 65 years.
Expenditure of R430 incurred on the repairs of property from which income is receivable is
deductible (s 11(d)). The other South African property expenditure of R2 500 is deductible,
since it was incurred in the production of the R50 000 rent. Alterations to property are
expenditure of a capital nature and not deductible for normal tax purposes (s 11(a)). The
expenditure will, however, be added to the base cost of the property if the improvements
are still reflected in its state or nature of the asset when it is eventually disposed of
(par 20(1)(e) of the Eighth Schedule).
The Zimbabwean business expenditure is deductible, since the receipts in respect of which
it was incurred are included in income and the receipts exceed the expenditure. If the
expenditure exceeded the income, s 20 would have prohibited the set-off of the foreign loss
against South African income. (The double taxation agreement can also affect the deductibility of the Zimbabwean business expenditure. If the Zimbabwean business income is not
taxed in South Africa, the expenditure will not be tax deductible as it would not have been
incurred in the production of income – see note 1.)
The term ‘taxable capital gain’ means that the annual exclusion has been deducted and that
the 40% inclusion rate has been applied (only applicable to natural persons and special
trusts).
25
3
Gross income
Jolani Wilcocks
Assisted by Alicia Heyns
Outcomes of this chapter
After studying this chapter, you should be able to:
l demonstrate an in-depth knowledge of each requirement of the definition of ‘gross
income’
l determine whether a natural person or a person other than a natural person is a
resident for income tax purposes
l apply the principles of relevant case law in order to illustrate the meaning of the
terms used in the definition of ‘gross income’
l demonstrate an in-depth knowledge of the criteria to be applied in order to distinguish
between capital and income for purposes of the definition of ‘gross income’.
Contents
Page
3.1
3.2
3.3
3.4
3.5
3.6
Overview (the definition of ‘gross income’ (s 1)) ................................................................
Resident and non-resident .................................................................................................
3.2.1 Residence of natural persons (par (a) of the definition of ‘resident’ in s 1) ..........
3.2.2 Residence of persons other than natural persons (par (b) of the definition
of ‘resident’ in s 1) .................................................................................................
3.2.3 Change of residence, ceasing to be a controlled foreign company or
becoming a headquarter company (s 9H) ..........................................................
Amount in cash or otherwise ..............................................................................................
Received by or accrued to.................................................................................................
3.4.1 Meaning of ‘received by’.......................................................................................
3.4.2 Meaning of ‘accrued to’ ........................................................................................
3.4.3 Valuation of receipt or accrual ..............................................................................
3.4.4 Unquantified amounts (s 24M)..............................................................................
3.4.5 Accrual rules with the disposal of certain equity shares (s 24N) .........................
3.4.6 Blocked foreign funds (s 9A) ................................................................................
3.4.7 Disposal of income after receipt or accrual (without prior cession) versus
disposal of a right to future income (prior cession) ..............................................
3.4.8 Time of accrual of interest payable by SARS (s 7E) .............................................
Year or period of assessment (ss 1(1), 5, 66(13A)–(13C)) ...............................................
Receipts and accruals of a capital nature .........................................................................
3.6.1 Nature of an asset.................................................................................................
3.6.2 Intention of a company .........................................................................................
3.6.3 Business conducted with a profit making purpose ..............................................
3.6.4 Selling an asset to best advantage ......................................................................
3.6.5 Realisation of a capital asset ................................................................................
3.6.6 Change of intention...............................................................................................
3.6.7 Mixed purpose ......................................................................................................
3.6.8 Secondary purpose ..............................................................................................
3.6.9 Realisation company ............................................................................................
3.6.10 Damages and compensation ...............................................................................
3.6.11 Isolated transactions.............................................................................................
3.6.12 Closure of a business and goodwill .....................................................................
3.6.13 Copyrights, inventions, patents, trademarks, formulae and secret processes ...
3.6.14 Debts and loans ....................................................................................................
3.6.15 Gambling ..............................................................................................................
3.6.16 Horse-racing .........................................................................................................
3.6.17 Gifts, donations and inheritances .........................................................................
27
28
29
29
33
35
39
40
40
42
44
44
44
45
45
47
47
48
49
50
50
51
51
52
53
53
54
55
56
56
56
56
57
57
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Silke: South African Income Tax
3.6.18
3.6.19
3.6.20
3.6.21
3.1
Interest ...............................................................................................................
Restraint of trade ...............................................................................................
Share transactions .............................................................................................
Subsidies ...........................................................................................................
Page
57
57
58
59
3.1 Overview (the definition of ‘gross income’ (s 1))
The basic framework for calculating a person’s taxable income is:
Gross income
Less: Exempt income
Rx
(x)
Income
Less: Deductions and allowances
Rx
(x)
Taxable income
Rx
The starting point for calculating a person’s taxable income, is to determine the person’s ‘gross
income’. This term is defined as follows in s 1:
“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,
during such year or period of assessment, excluding receipts or accruals of a capital nature…
The definition continues to include specific amounts in ‘gross income’. These amounts are referred to
as specific inclusions and are discussed in chapter 4.
All the requirements of the definition of ‘gross income’ must be complied with for an amount to qualify
as gross income. In summary, these requirements are
l in the case of a resident:
– there must be an amount, in cash or otherwise
– that is received by or accrued to or in favour of such resident
– during a year or period of assessment
– excluding receipts or accruals that are of a capital nature.
l in the case of a non-resident:
– there must be an amount, in cash or otherwise
– that is received by or accrued to or in favour of such resident
– during a year or period of assessment
– from a source within South-Africa
– excluding receipts or accruals that are of a capital nature.
The worldwide receipts and accruals derived by a ‘resident’ as defined in s 1 are included in his or
her gross income. Residents are therefore taxed on a residence-based system of tax. For non-residents
(persons who are not ‘residents’, as defined) only receipts and accruals derived from sources within
the Republic are subject to tax in South Africa, with certain exceptions. Non-residents are therefore
taxed on a source-based system of tax. Liability for South African normal tax is therefore dependent
either upon the place of residence of a person (in the case of a resident) or, in the case of a nonresident, upon the source of the income. The principles that should be applied when determining the
source of a non-resident’s income are discussed in chapter 21.
Although capital receipts and accruals are excluded from a person’s gross income under the above
general definition, certain receipts and accruals will be included as specific inclusions (listed in paragraphs (a) to (n) of the gross income definition in s 1(1) even though they may be of a capital nature
(see chapter 4). If capital receipts and accruals are not included in gross income, a portion of these
amounts may still be subject to income tax by the inclusion of taxable capital gains in taxable
income. This is referred to as capital gains tax and is discussed in chapter 17.
Some of the terms in the definition of ‘gross income’ are defined in the Act. However, the meaning of
most of these terms have been the subject of a number of court cases. These terms and their interpretations from the most relevant court cases are discussed below.
28
3.2
Chapter 3: Gross income
3.2 Resident and non-resident
The concept of ‘residence’ is fundamental to the residence-based system of taxation. The residence
of a person is determined in terms of the definition of ‘resident’ in s 1. The definition of ‘resident’
distinguishes between natural persons and persons other than natural persons.
The definition of ‘resident’ specifically provides that a person is not a resident if that person is
deemed to be exclusively a resident of another country in terms of a double tax agreement (DTA).
This means that if a DTA between South African and another country is in place, one should first
consider whether the taxpayer is deemed to be exclusively a resident of the other country under the
DTA, before considering whether the person is a resident under the definition of ‘resident’.
3.2.1 Residence of natural persons (par (a) of the definition of ‘resident’ in s 1)
A natural person is a ‘resident’ if he or she is either ordinarily resident in the Republic or meets the
requirements of the physical presence test.
Ordinarily resident
The term ‘ordinarily resident’ is not defined in the Act and the interpretation given by the courts must
be followed.
In the case Cohen v CIR (13 SATC 362) (1946 AD 174), the taxpayer, who was a South African
resident at the time, was requested by his employer to work in the USA. The taxpayer and his family
lived in New York for a period of 20 months. During this period neither the taxpayer nor his family
returned to South Africa. The court had to consider whether the taxpayer ordinarily resided in South
Africa during this time. In ruling that the taxpayer ordinarily resided in South Africa at the time, the
court established three important principles:
l The first is that a person’s ordinary residence would be the country to which he would naturally
and as a matter of course return from his wanderings. When compared to other countries in
which a person may live, a person’s ordinary residence is the person’s usual or principal residence, or the person’s real home.
l The second is that one should not only consider the person’s actions during the year of assessment to determine whether he is ordinarily resident in a particular country. The person’s mode of
life outside the year of assessment under consideration should also be considered.
l The third is that physical absence during the full year of assessment is not decisive. A person
could be absent from a country for the entire year and still qualify as ordinarily resident in that
country.
In CIR v Kuttel (54 SATC 298) (1992 (3) SA 242 (A)), the taxpayer held a majority interest in a South
African company. The taxpayer agreed with his fellow shareholders to move to New York to open an
office for the company from where he could oversee the company’s American business. After being
granted a permanent residence permit in the USA, the taxpayer emigrated from South Africa to the
USA with his family. The taxpayer rented a house in the USA, established church membership,
opened banking accounts, acquired an office, bought a car and registered with social security.
Following his move, apart from visits to South Africa and other countries, the taxpayer lived and
worked in the USA. During the 31-month period under consideration, the taxpayer made nine visits to
South Africa, staying for up to two months at a time. The visits were to attend to his business interests
and family matters. The taxpayer on average spent just over one-third of the time in South Africa.
During his visits to South Africa, the taxpayer stayed in a house owned by a company in which he
and his wife were the sole shareholders. The house was not let and was available whenever the
taxpayer wanted to live in it. In applying the principle formulated in Cohen v CIR, that a person is
ordinarily resident where he has his usual or principle residence, that is what may be described as
his real home, the court held that the taxpayer was not ordinarily resident in South Africa. The court
held that there was no evidence which indicated that the taxpayer did not set up his usual or
principle residence in the USA. The court also held that the fact that the taxpayer kept his house in
South Africa was in no way inconsistent with his usual or principal residence or home having been in
the USA. He could not take all his assets to the USA because of exchange control regulations and,
by investing in a house, the taxpayer made the most advantageous arrangement in the circumstances for the substantial assets he retained in South Africa. This, however, did not mean that the
taxpayer ordinarily resided in South Africa.
29
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3.2
SARS published Interpretation Note No. 3 (Issue 2) (June 2018) in which the concept of ‘ordinarily
resident’ as referred to in relation to a natural person in the definition of ‘resident’ is discussed.
According to SARS, the question of whether a natural person is ordinarily resident in a country is one
of fact and each case must be decided on its own merits, taking into consideration principles
established by case law. It is not possible to lay down any clearly defined rule or period to determine
ordinary residence. The circumstances of the natural person must be examined as a whole, taking
into account the year of assessment concerned and that person’s mode of life before and after the
period in question. The purpose, nature and intention of a taxpayer’s absence must be established
and considered as part of all the facts to determine whether the taxpayer is ordinarily resident.
According to SARS, the following factors, although not exhaustive, will be considered as a guideline:
l an intention to be ordinarily resident in the Republic
l most fixed and settled place of residence
l habitual abode, meaning place where the person stays most often, and his present habits and
mode of life
l place of business and personal interests of the person and his family
l employment and economic factors
l status of individual in the Republic and in other countries, meaning whether he or she is an immigrant, work permit periods and conditions, etc.
l location of personal belongings
l nationality
l family and social relations (schools, places of worship, sports or social clubs, etc.)
l political, cultural or other activities
l application for permanent residence or citizenship
l period abroad, purpose and nature of visits, and
l frequency of and reasons for visits.
Beginning and ending of being ‘ordinarily resident’
A natural person who became ordinarily resident will be a resident from a specific date. A taxpayer
immigrating to the Republic will therefore be treated as being ‘ordinarily resident’ in the Republic from
the day on which he becomes ordinarily resident in the Republic and not for the full year of assessment in which he becomes ordinarily resident. For the period from the beginning of the year until the
day before he becomes ordinarily resident, he will be seen as a non-resident for tax purposes.
Interpretation Note No. 3 determines that a natural person who emigrates from the Republic to
another country will cease to be a resident from the date that he emigrates. This means that the day
on which the natural person flies to the other country (leaves the Republic) is the first day that he will
be regarded as a non-resident.
The first proviso to the definition of ‘resident’ confirms this principle by determining that where any
person that is a resident ceases to be a resident during a year of assessment, that person must be
regarded as not being a resident from the day on which that person ceases to be a resident. A taxpayer emigrating from the Republic will therefore, for example, be taxed as a resident in the Republic
from the beginning of the year until the day before he ceases to be ordinarily resident in the Republic
(emigrates), and will be taxed as a non-resident from the day he ceases to be ordinarily resident in
the Republic (emigrates) till the end of the year of assessment. A person therefore ceases to be
ordinarily resident on the day he or she emigrates, meaning on the day he or she boards the aircraft.
In terms of s 9H(2)(b), the year of assessment of a resident who ceases to be a resident is deemed to
have ended on the date immediately before the day on which he or she ceases to be a resident, and
in terms of s 9H(2)(c), the next succeeding year of assessment is deemed to have started on the day
on which the resident ceases to be a resident. This means, for example, that if a natural person
emigrates on 1 October 2020, his 2021 year of assessment as resident will be from 1 March 2020 to
30 September 2020, and his 2021 year of assessment as non-resident will be from 1 October 2020 to
28 February 2021.
Physical presence
A natural person who is not at any time during the relevant year of assessment ‘ordinarily resident’ will
be a ‘resident’ if he is physically present in the Republic for certain periods, that is, if he meets the
requirements of the so-called ‘physical presence’ test. This test therefore only applies to a person
who is not ordinarily resident in the Republic at any time during the year of assessment (referred to
30
3.2
Chapter 3: Gross income
here as ‘the current year of assessment’) but is physically present in the Republic for a period or
periods
l exceeding 91 days in aggregate during the current year of assessment, and
l exceeding 91 days in aggregate during each of the five years of assessment preceding the
current year of assessment, and
l exceeding 915 days in aggregate during the five years of assessment preceding the current year
of assessment (par (a)(ii) of the definition of ‘resident’ in s 1).
The effect of the definition of a ‘resident’ is that a natural person who is not ordinarily resident in the
Republic can, in terms of the physical presence test, only become a resident for tax purposes in the
year after a period of five consecutive years of assessment during which the person is physically
present in the Republic for a qualifying period or periods.
The following rules apply to the ‘physical presence test’:
l for the purposes of determining the number of days during which a person is physically present
in the Republic, a part of a day is included as a day
l a day spent in transit through the Republic is not included as a day, provided that the person
does not formally enter the Republic through a port of entry
l the more than 91 days and more than 915 days’ periods of physical presence in the Republic
need not be continuous. If a person is present for several periods which in aggregate exceed 91
or 915 days, the requirement will be met.
Please note!
A person who is deemed to be exclusively a resident of another country for the
purposes of a double taxation agreement between the governments of the
Republic and that other country will not be a resident of the Republic, even
though he meets the qualifying requirements of being a resident (par (a) of the
definition of ‘resident’). This rule will, in many cases, render the physical presence test irrelevant since the rules in double taxation agreements are more
similar to the ordinary resident test.
Beginning and ending of being a resident in terms of the physical presence test
A person will be a resident with effect from the first day of the relevant year of assessment (that is, the
sixth year) during which all the requirements of the physical presence test are met.
A person who is a resident in terms of the physical presence test will cease to be a resident from the
day that he or she ceases to be physically present in South Africa if the person remains physically
outside South Africa for a continuous period of 330 full days from this date.
The period of at least 330 full days required to terminate a person’s residence must be continuous
and meeting this proviso will therefore stretch over two years of assessment. The at-least-330-days
exception only applies if a person is already a resident in terms of the physical presence test, which
means he must have been physically present in the Republic for more than 91 days in the year that
he ceases to be physically present. The at-least-330-continuous days of absence will commence only
on the day after the period of more than 91 days has been met, and he then ceases to be physically
present.
Paragraph 4.4 of Interpretation Note No. 4 (Issue 5) (August 2018) confirms that a natural person,
who is a resident by virtue of the physical presence test, ceases to be a resident from the day when
the person leaves the Republic. The 330 days of absence therefore starts on the day after the person
leaves the Republic.
Please note!
If a person, who is ordinarily resident in the Republic, is physically absent for a
continuous period of at least 330 days, for example in order to study in a foreign
country, he will not cease to be a resident, as the physical presence test does
not apply to a person who is ordinarily resident in the Republic.
31
Silke: South African Income Tax
3.2
Example 3.1. Temporary secondment to the Republic
Craig, a civil engineer and ordinarily resident outside the Republic, was temporarily seconded to
the Republic by his employer on 1 November 2014 to oversee a major contract that was
expected to last for two years. Due to unforeseen problems on the contract, Craig eventually left
the Republic and returned home only on 30 November 2020. He was physically present in the
Republic throughout the seven-year period except for returning home for his annual leave
(35 days) each calendar year from 2016 to 2020.
Is Craig resident in the Republic during the years of assessment ending 28 February 2015 to
28 February 2021?
SOLUTION
As Craig was not ordinarily resident in the Republic at any time during his secondment, he will
be resident only if he meets the requirements of the physical presence test.
Year of
assessment
2015
2016
2017
2018
2019
2020
2021
Period physically present
1 November 2014 to 28 February 2015 (no annual leave taken) ....
Entire year of assessment except for 35 days annual leave...........
Entire year of assessment except for 35 days annual leave...........
Entire year of assessment except for 35 days annual leave...........
Entire year of assessment except for 35 days annual leave...........
Entire year of assessment except for 35 days annual leave...........
1 March to 30 November 2020 .......................................................
Number
of days
121
331
330
330
330
331
275
2015 year of assessment
Craig is present in the Republic for more than 91 days in this year of assessment but not in each
of the five prior years of assessment. He is therefore not resident in terms of the physical presence test.
2016 year of assessment
Craig is present in the Republic for more than 91 days in this year of assessment and in the prior
year but not in each of the four years prior to that. He is therefore not resident in terms of the
physical presence test.
2017 year of assessment
Craig is present in the Republic for more than 91 days in this year of assessment and in the two
immediately prior years, but not in the three years prior to that. He is therefore not resident in
terms of the physical presence test.
2018 year of assessment
Craig is present in the Republic for more than 91 days in this year of assessment, for more than
91 days in each of the three prior years, but not in the two years prior to that. He is therefore not
resident in terms of the physical presence test.
2019 year of assessment
Craig is present in the Republic for more than 91 days in this year of assessment and in the four
immediately prior years, but not in the year prior to that. He is therefore not resident in terms of
the physical presence test.
2020 year of assessment
Craig is present in the Republic for more than 91 days in this year of assessment, for more than
91 days in each of the five prior years and in aggregate for more than 915 days in the five prior
years. He is therefore resident in terms of the physical presence test from 1 March 2019, the first
day of the year of assessment.
2021 year of assessment
Craig also met the requirements of the physical presence test during the 2021 year of assessment. He will remain a resident for South African tax purposes until he is no longer physically
present in the Republic for more than 330 consecutive days that commence immediately after
30 November 2020. Since Craig leaves the Republic on 30 November, he will, in terms of Interpretation Note No. 4, cease to be a resident from the day that he leaves the Republic. He therefore ceases to be a resident on 30 November 2020. His 2021 year of assessment as a resident
will therefore, in terms of s 9H(2)(b), end on 29 November 2020 and he will be taxed in the
Republic as a resident for the period 1 March 2020 to 29 November 2020 and as a non-resident
from 30 November 2020 to 28 February 2021.
32
3.2
Chapter 3: Gross income
Example 3.2. Emigration
Thabiso was born in the Republic. He emigrated to Argentina on 1 July 2018. The periods that he
was inside and outside of the Republic were as follows:
In the Republic Outside the Republic
2015 year of assessment .................................................
2016 year of assessment .................................................
2017 year of assessment .................................................
2018 year of assessment .................................................
2019 year of assessment .................................................
2020 year of assessment .................................................
2021 year of assessment .................................................
280
246
258
243
101
98
122
85
120
107
122
264
268
243
Calculate and explain whether Thabiso is a resident or a non-resident for each of the 2019, 2020
and 2021 years of assessment, respectively.
SOLUTION
2019
Only the ordinarily resident test can apply in the year that Thabiso emigrates. Because Thabiso
is ordinarily resident for a part of the year of assessment, the physical presence test cannot be
applied.
Thabiso is ordinarily resident in the Republic until 30 June 2018. He is therefore a resident from
1 March 2018 to 30 June 2018 and his 2019 year of assessment as resident ends on 30 June
2018 (in terms of s 9H(2)(b)). Thabiso is a non-resident for the period 1 July 2018 to 28 February
2019.
2020
The requirements of the physical presence test must be met:
1 Thabiso is in the Republic for >91 days in the 2020 year of assessment.
2 Thabiso is in the Republic for >91 days in the 2019, 2018, 2017, 2016 and 2015 years of
assessment.
3 Thabiso is in the Republic for > 915 days in total during the 2015 to 2019 years of assessment.
Therefore, Thabiso is a resident from 1 March 2019.
2021
The requirements of the physical presence test must be met:
1 Thabiso is in the Republic for >91 days in the 2021 year of assessment.
2 Thabiso is in the Republic for >91 days in each of the 2020, 2019, 2018, 2017 and 2016
years of assessment.
3 Thabiso is in the Republic for >915 days in total during the 2016 to 2020 years of assessment.
Therefore, Thabiso is a resident from 1 March 2020.
Please note!
Interpretation Note No. 25 (Issue 3) (issued on 12 March 2014) clarifies, with the
use of examples, the application of the physical presence test in the year of
assessment that a natural person, who is not ordinarily resident on the Republic,
dies or becomes insolvent.
3.2.2 Residence of persons other than natural persons (par (b) of the definition of ‘resident’
in s 1)
A person other than a natural person (for example a company, close corporation or trust) is defined
as being ‘resident’ if it
l is incorporated, established or formed in the Republic, or
l has its place of effective management in the Republic (par (b) of the definition of ‘resident’ in s 1).
Where a company is incorporated, established or formed
There is no definition in the Act of the terms ‘incorporated’, ‘established’ or ‘formed’. A company that
is formed and incorporated in South Africa in terms of s 13 of the Companies Act 71 of 2008 is clearly
a resident because of its formation and incorporation in the Republic, irrespective of where it is managed or where it carries out its business. As a result of being a resident, the company is liable for tax
in South Africa on its worldwide receipts.
33
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3.2
Remember
A person who is deemed to be exclusively a resident of another country for the purposes of a
double taxation agreement between the governments of the Republic and that other country will
not be a resident of the Republic, even though he meets the qualifying requirements of being a
resident (par (b) of the definition of ‘resident’). This rule will, in many cases, render the place of
incorporation irrelevant since the rules in double taxation agreements usually refer to the place
of effective management.
Where a company is effectively managed
The Act does not define the expression ‘place of effective management’. According to Interpretation
Note No. 6 (Issue 2) (issued on 3 November 2015), SARS regards the place of effective management
as the place where key management and commercial decisions that are necessary for the conduct of
its business as a whole are in substance made. This approach is consistent with the OECD’s commentary on Article 4 of the Model Tax Convention regarding the term ‘place of effective management’.
All relevant facts and circumstances must be examined to determine the place of effective management. A company may have more than one place of management, but it can only have one place of
effective management at any one time. If a company’s key management and commercial decisions
affecting its business as a whole are made at a single location, that location will be its place of
effective management. However, if those decisions are made at more than one location, the company’s place of effective management will be the location where those decisions are primarily or predominantly made.
Please note!
Certain activities of foreign investment entities should be disregarded when
determining whether their place of effective management is in South Africa (2nd
proviso to the definition of ‘resident’). Certain foreign investment funds make
use of local fund managers when investing in South African assets or in other
African assets. The South African fund manager is usually given an investment
fund mandate (or a sub-mandate for a certain portion of the fund). The foreign
investment fund typically pays the South African fund manager a management
fee. The purpose of disregarding certain activities of a foreign investment entity
when determining whether its place of effective management is in South Africa,
is to ensure that the activities of the local fund manager do not cause the entire
entity to be subject to income tax in South Africa. The management fees and
performance fees earned by the local fund manager will remain subject to tax in
South Africa.
A foreign investment entity is a person other than a natural person that complies
with all of the following requirements (definition of ‘foreign investment entity’ in
s 1):
l it should not be incorporated, established or formed in South Africa
l its assets should consist solely of a portfolio of one or more of the following
that are held for investment purposes:
– amounts in cash or that constitute cash equivalents
– financial instruments that are issued by a listed company or by the South
African Government
– if the financial instruments are not issued by a listed company or by the
South African Government, they must be traded by members of the
general public and a market for that trade exists
– financial instruments which values are determined with reference to the
financial instruments mentioned above
– rights to receive any of the above assets
l 10% or less of the entity’s shares, units or other form of participatory interest
are directly or indirectly held by persons that are residents; and
l the entity should have no employees, directors or trustees that are engaged
in managing the entity on a full-time basis.
The activities of a foreign investment entity that should be disregarded when
determining whether its place of effective management is in South Africa, are
the following activities carried on by a financial service provider as defined in
s 1 of the Financial Advisory and Intermediary Services Act in terms of a licence
issued to that financial service provider under s 8 of that Act:
l a financial service as defined in s 1 of the Financial Advisory and Intermediary Services Act, or
l any service that is incidental to a financial service contemplated above
where the incidental service is in respect of a financial product that is
exempted from the provisions of the Financial Advisory and Intermediary
Services Act as contemplated in s 1(2) of that Act.
34
3.2
Chapter 3: Gross income
Residence of estates, trusts, clubs and associations
Estates, trusts and other entities are resident in the Republic if they are incorporated, established or
formed or have their place of effective management in South Africa. The place of incorporation,
establishment or formation is a matter of fact, and each case must be decided on its own merits. If
the executors, administrators or trustees are resident in South Africa or if the entity is administered
from South Africa, the entity is resident in South Africa. For example, if the trustees of a trust meet to
attend to the affairs of the trust in South Africa, the trust is resident in South Africa. The place where
the assets of the entity are effectively managed is crucial.
3.2.3 Change of residence, ceasing to be a controlled foreign company or becoming a
headquarter company (s 9H)
Section 9H triggers an exit charge through either a capital gain or an income gain when a person
(other than a company) who is a resident ceases to be a resident during any year of assessment. A
deemed disposal at market value of all the assets that this section provides for, arises.
Please note!
Market value means the price which could be obtained upon a sale of that asset
between a willing buyer and a willing seller dealing at arm’s length in an open
market (s 9H(1)).
For purposes of this section, the market value of any asset must be determined
in the currency of the expenditure incurred to acquire the asset (s 9H(7))
In the case of a company that is a resident that ceases to be resident, or becomes a headquarter
company during any year of assessment, or if a controlled foreign company (CFC) ceases to be a
CFC in relation to any resident during any foreign tax year of the CFC (see chapter 21 where the
provisions of s 9H that relate to CFCs will be discussed), similar capital or income gains will arise due
to the deemed disposal at market value of all the assets and shares this section provides for. A
dividend in specie for the purposes of dividends tax (s 64EA(b)) is also deemed to have been
declared in the case of a company that is a resident that ceases to be resident or becomes a headquarter company.
Please note!
An asset for the purposes of this section means an asset as defined in par 1 of
the Eighth Schedule (s 9H(1)). The definition of ‘asset’ in the Eighth Schedule is
very wide and also includes rights in assets. The wide definition of ‘asset’ has
the consequence that s 9H is applicable to both capital assets and income
assets. Certain assets are excluded from the deeming provisions of s 9H
(s 9H(4)), namely:
l immovable property situated in the Republic that is held by the person
l any assets which will, after the person ceases to be a resident or a CFC,
be attributable to a permanent establishment of that person in the Republic
l any s 8B qualifying equity shares that were granted to that person less
than five years before the date on which that person ceased to be a resident
l any s 8C equity instruments which had not yet vested at the time that the
person ceased to be a resident, or
l any right of that person to acquire any marketable security contemplated in
s 8A.
There is no deemed disposal of these assets under s 9H.
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3.2
Event
Persons other than companies cease to
be resident
Company ceases to be resident or becomes
a headquarter company (otherwise than by
way of becoming a resident)
Deemed
disposal
l All assets except those in s 9H(4)
l At market value
l To a person who is a resident on
the date immediately before the
day on which he or she ceases to
be a resident (s 9H(2)(a)(i))
l All assets except those in s 9H(4)
l At market value
l To a person who is a resident on the
date immediately before the day on
which the company ceases to be a resident or becomes a headquarter company (s 9H(3)(a)(i))
Deemed
reacquisition
l Reacquisition of all assets except
those in s 9H(4)
l At market value
l On the day on which he or
she ceases to be a resident
(s 9H(2)(a)(ii))
l Reacquisition of all assets except those
in s 9H(4)
l At market value
l On the day on which the company
ceases to be a resident or becomes a
headquarter company (s 9H(3)(a)(ii))
End of year of
assessment
On the date immediately before the
day on which he or she ceases to be a
resident (s 9H(2)(b)).
On the date immediately before the day on
which the company ceases to be a resident
or becomes a headquarter company
(s 9H(3)(c)(i))
Commencement of
next succeeding
year of assessment
On the day he or she ceases to be a
resident (s 9H(2)(c))
On the day on which the company ceases
to be a resident or becomes a headquarter
company (s 9H(3)(c)(ii))
For the purposes of
s 64EA(b) a
dividend is deemed
to have been
declared to the
persons holding
shares in the
company in
accordance with
their effective interest in the shares
(s 9H(3)(c)(iii))
Companies that cease to be resident or
become headquarter companies are deemed to have declared and paid a dividend
that consists solely of a distribution of an
asset in specie of the difference between
l the market value of all the shares in that
company on the day immediately before
the day on which the company ceases to
be a resident or becomes a headquarter
company, and
l the sum of the contributed tax capital of
all the classes of shares in the company
on the same date
Capital gain disregarded in terms
of par 64B of the
Eighth Schedule in
respect of the
disposal of equity
shares
If a capital gain on the disposal of equity
shares was disregarded in terms of par 64B
of the Eighth Schedule (see chapter 17)
within three years before a company ceases
to be a resident, that capital gain is deemed
to be a net capital gain derived by the
company from that capital gain during the
year of assessment that the company
ceases to be a resident (s 9H(3)(e))
Foreign dividend
exempt in terms of
s 10B(2)(a)
If any foreign dividend was exempt in terms
of s 10B(2)(a) from normal tax within three
years before a company ceases to be a
resident, that foreign dividend is deemed to
be received or accrued by the company
during the year of assessment that the
company ceases to be a resident and such
foreign dividend is not exempt in terms of
s 10B(2) (s 9H(3)(f))
continued
36
3.2
Chapter 3: Gross income
Event
Persons other than companies cease to
be resident
Deemed dividend
in specie in terms
of s 9H(3)(c)(iii) that
is exempt in terms
of s 64FA
(Effective from
1 January 2021)
Company ceases to be resident or becomes
a headquarter company (otherwise than by
way of becoming a resident)
If a person holds at least 10% of the equity
shares and voting rights in a company that
l ceases to be a resident, and
l the dividend in specie, deemed to have
been declared by the company in
s 9H(3)(c)(iii), is exempt from dividends
tax (in terms of s 64FA),
that person must be deemed to have
l disposed of those shares to a resident
at their market value on the day before
the company ceases to be a resident
and
l reacquired the shares at market value
on the day that the company ceases to
be a resident (s 9H(3A))
This deemed disposal aims to ensure that
the person (shareholder) does not subsequently enjoy the participation exemption
(s 10B(2)(a) – see chapter 5) in respect of
value that accumulated while the company
was a resident
The effect of s 9H(2)(b) and (c) (if it is a natural person) and s 9H(3)(c)(i) and (ii) (if it is a company) is
that a taxpayer will submit two income tax returns in the year a natural person emigrates or a company ceases to be a resident or becomes a headquarter company (one as a resident and one as a
non-resident or as a headquarter company, in the case of a company that becomes a headquarter
company). This is done for practical reasons because a natural person must obtain a clearance
certificate before he can emigrate and the two returns make this possible. The operational
procedures that need to be followed with regard to the two years of assessment in s 9H(2)(b) and (c)
(and s 9H(3)(c)(i) and (ii) in the case of a company) are, however, unclear because SARS’ system
does not allow two tax returns to be submitted for one year of assessment. It is suggested that if a
natural person emigrates (or a company with a February year-end ceases to be a resident or
becomes a headquarter company) on 1 October 2020, the 2021 year of assessment as resident will
be from 1 March 2020 to 30 September 2020 and the 2021 year of assessment as non-resident will
be from 1 October 2020 to 28 February 2021. It is further suggested that the rebates be apportioned
accordingly in the case of natural persons.
Example 3.3. Section 9H
Mrs Juanita Loots (66 years old) is a retired widow and a ‘resident’ of the Republic. Her husband
passed away recently. All of her children reside in Australia and they suggested that she also
relocate to Australia in order for them to take care of her. Mrs Loots therefore decided to
emigrate to Sydney, Australia, on 1 June 2020. She has however been informed that she requires
a tax clearance certificate in order for her emigration request to be approved. She contacted you
for advice to ensure that all her tax affairs in South Africa are in order and informed you that she
has an assessed capital loss of R250 000 relating to the previous year of assessment. Mrs Loots
owned the following assets on 31 May 2020:
Asset description
Market value on 31 May 2020
Note
R500 000
R800 000
R1 000 000
R300 000
1
2
3
4
Fixed deposit
Listed shares
Unlisted shares
Krugerrands
continued
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3.2
Notes
1. Mrs Loots invested in a fixed deposit from ABC Bank for an amount of R500 000 on the birth
of her first grandchild in 2011. She would like to contribute to the future tuition fees of her
grandchildren and invested in the fixed deposit for this reason. The interest earned on the
fixed deposit is paid to Mrs Loots monthly and is therefore not reinvested. Section 24J is also
not applicable to the fixed deposit.
2. Mrs Loots is an avid investor and enjoys reading up on the local stock exchange in her spare
time. Her investment philosophy entails investing in high-quality companies over the long
term. She is not a follower of speculation and is therefore not considered to be a share
dealer.
The following information pertains to the listed shares:
Purchase date
Purchase price
Valuation date value:
1 October 2001
Market value:
31 May 2020
5 January 2001
R150 000
R180 000
R800 000
Mrs Loots did not incur any further cost relating to the listed shares since the acquisition
date.
3. The investment in listed shares consists of an investment in Holdco Limited (‘Holdco’).
Mrs Loots owns a 10% interest in the equity shares of Holdco. She acquired this interest for a
total cost of R800 000 during 2017. On her recommendation, Mrs Loots’ son also acquired a
10% interest in the equity shares of Holdco during 2017. Holdco is a holding company and a
‘resident’ of South Africa. Holdco owns the following assets on 31 May 2020:
l Current bank account in the amount of R1,2 million
l 80% equity interest in Propco Ltd, a property company of which the only asset is commercial fixed property situated in South Africa. The commercial fixed property had a
market value of R10 million on 31 May 2020.
4. Mrs Loots is a collector of old coins. To add to her collection, she obtained Krugerrands for
an amount of R200 000 during 2007. She is not a trader in old coins.
Advise Mrs Loots on the capital gains tax consequences in the RSA that her emigration to
Australia might have.
You can assume that Mrs Loots did not make any other capital disposals for the 2021 year of
assessment.
SOLUTION
Deemed disposal
In terms of s 9H(2)(a), Mrs Loots is deemed to have disposed of all her assets (except s 9H(4)
assets) at market value on the day immediately before she emigrates (31 May 2020), and to have
reacquired all of those assets (except s 9H(4) assets) on the date of emigration (1 June 2020) at
market value.
The deemed disposal provision will therefore result in the following capital gains for Mrs Loots:
Fixed deposit:
A fixed deposit does not represent currency and is therefore an ‘asset’ as defined in the Eighth
Schedule. Mrs Loots is therefore deemed to have disposed of the fixed deposit on 31 May 2020.
The deemed disposal resulted in the following capital gain:
Proceeds (market value on 31 May 2020) ................................................................... R500 000
Less: Base cost............................................................................................................
(500 000)
Capital gain ..................................................................................................................
Rnil
Listed shares:
The listed shares were purchased on 5 January 2001 and are therefore a ‘pre-valuation date’
asset [1]. Hence only capital growth realised after 1 October 2001 is subject to capital gains tax.
The base cost of the listed shares is the valuation date value of R180 000 on 1 October 2001.
The deemed disposal of the listed shares on 31 May 2020 resulted in the following
capital gains:
Proceeds (market value on 31 May 2020) ................................................................... R800 000
Base cost (value on 1 Oct 2001)..................................................................................
(180 000)
Capital gain ..................................................................................................................
R620 000
continued
38
3.2–3.3
Chapter 3: Gross income
Unlisted shares:
The deemed disposal of the unlisted shares resulted in the following capital gain:
Proceeds (market value on 31 May 2020) ................................................................... R1 000 000
Less: Base cost............................................................................................................
(800 000)
Capital gain ..................................................................................................................
R200 000
Krugerrands:
Krugerrands represent coins of gold and platinum and are therefore an ‘asset’ for purposes of
the Eighth Schedule. As a result there is a disposal of the Krugerrands on 31 May 2020 in terms
of s 9H.
The deemed disposal resulted in the following capital gain:
Proceeds (market value on 31 May 2020) ................................................................... R300 000
Less: Base cost............................................................................................................
(200 000)
Capital gain ..................................................................................................................
R100 000
Taxable capital gain:
Mrs Loots’ emigration resulted in the following taxable capital gain for the 2021 year of assessment:
Sum of capital gains (R620 000 + R200 000 + R100 000) .......................................... R920 000
Less: Annual exclusion ................................................................................................
(40 000)
Total capital gain..........................................................................................................
Less: Assessed capital loss .........................................................................................
R880 000
(250 000)
Net capital gain ............................................................................................................
R630 000
Taxable capital gain (R630 000 × 40%) ......................................................................
R252 000
Mrs Loots’ emigration to Australia will result in a taxable capital gain of R252 000 to be included in
her taxable income for her 2021 year of assessment as a resident ending on 31 May 2020 in
terms of s 26A.
3.3 Amount in cash or otherwise
It is not only the receipt or accrual of an amount of cash that should be included in a person’s gross
income. The value of non-cash items should also be included.
In Lategan v CIR (2 SATC 16) (1926 CPD 2013) the taxpayer, a wine farmer, sold wine that he made
during the year of assessment for a specific amount. Part of this amount was paid in cash to him
before the end of the year of assessment and the balance was paid in instalments during the following year. The court had to decide whether the full amount qualified as the ‘total amount’ for purposes
of the definition of gross income, or only the part that he received in cash. The court held that the
word ‘amount’ should be given a wider meaning than merely referring to money, and must include the
value of every form of property earned by the taxpayer, whether corporeal or incorporeal, which has
a money value.
Remember
In the Lategan case the court ruled that where a taxpayer acquired a right during a year of
assessment to receive instalments of an amount during subsequent years, the present value of
that right at the end of that year should be included in the taxpayer’s gross income. However, a
proviso was added to the definition of ‘gross income’ in s 1, which provides that where a person
becomes entitled to any amount during a year of assessment, which is payable on a date falling
after the last day of such year, the amount is deemed to have accrued to the person during the
year. This means that the face value of the amount is included in the person’s gross income and
not the present value as what was decided in the Lategan case.
In CIR v Butcher Bros (Pty) Ltd (13 SATC 21) (1945 AD 301) the taxpayer owned a building that was
leased to a tenant for a period of 50 years, which the tenant could renew for a further period of
49 years. In terms of the lease agreement the tenant was required to demolish the existing buildings
and build a new theatre which was worth substantially more than the original buildings. Upon termination of the lease, the buildings and improvements would revert back to the taxpayer without compensating the tenant for the costs incurred relating to the buildings and improvements. The court was
asked to rule on whether the improvements to the land qualified as an ‘amount’ received by or that
accrued to the taxpayer for purpose of the definition of ‘gross income’. The court held that no amount
39
Silke: South African Income Tax
3.3–3.4
was received by or accrued to the taxpayer by the end of the year of assessment, because the
improvements did not have an ascertainable money value at the time.
Remember
The Act was amended after the Butcher Bros case by including par (h) in the definition of ‘gross
income’. This specific inclusion in gross income now provides that improvements to leasehold
property should be included in the gross income of a lessor. This paragraph also specifies how
the amount should be determined – see chapter 4.
In CSARS v Brummeria Renaissance (Pty) Ltd (2007 SCA) the investors in a retirement village did not
compensate the taxpayer (the developer) in cash for the construction and supply of the residential
units. Instead, the investors granted interest-free loans to the taxpayer as consideration for the acquisition of the life-interests in the units. The court held that the right to use the loan capital interest-free
was a right that had an ascertainable monetary value. Even though this right could not be transferred
or actually turned into money, the court held that this does not mean that the right does not have a
monetary value. The test that should be applied to determine whether a right has a monetary value is
therefore an objective test and not a subjective test.
*
Remember
l
l
l
Interpretation Note No. 58 (Issue 2) explains the principles that the court applied in the
Brummeria Renaissance case.
The Interpretation Note confirms that the principles applied in this case would only apply in
instances where an interest-free loan is granted in exchange (quid pro quo) for goods supplied, services rendered or any other benefit granted.
The court in the Brummeria Renaissance case did not decide on how the right to an interestfree loan should be valued. SARS applied the weighted-average prime overdraft rate of
banks to the average amount of interest-free loans in possession of the taxpayer in the
relevant year of assessment. Since the valuation of the right was not in dispute, the court
neither accepted nor rejected this approach.
l Binding General Ruling 8 (Issue 2) sets out the formula for calculating the monetary value of
the right of use of the interest-free loan to be included in the borrower’s gross income. The
monetary value of the right to use the interest-free loan in the year in which it is granted and
paid is determined by multiplying the loan amount by the present value of R1 per year for the
lifetime of the life-right holder and the weighted-average prime overdraft rate determined for
the relevant year of assessment. The amount so calculated is then reduced by 93,1%. This is
a once-off calculation of the amount to be included in the gross income of the borrower in the
year of assessment in which the borrower becomes entitled to the right to use the loan.
3.4 Received by or accrued to
An amount must either be received by or it must accrue to a taxpayer during a year of assessment to
be included in the taxpayer’s gross income for that year. If a taxpayer did not receive an amount or if
an amount did not accrue to the taxpayer, the amount is not gross income and therefore not subject
to income tax.
The fact that the value of an asset increased over time does not mean that the value should be
included in its owner’s gross income. The increased value might have an ascertainable monetary
value, but until the asset is sold, the increased value is not received by and has not accrued to the
owner.
Similarly, the interest that a person would have received had he invested an amount of money in an
interest-bearing account instead of keeping it in a safe, cannot be included in the person’s gross
income because the person did not receive the interest and neither did it accrue to him.
The terms ‘received by’ and ‘accrued to’ are not defined in the Act. The most relevant court cases
wherein the meaning of these terms were considered are discussed below.
3.4.1 Meaning of ‘received by’
In Geldenhuys v CIR (14 SATC 419) (1947(3)SA 256(C)) the taxpayer and her husband, who carried
on business as farmers, executed a mutual will under which the surviving spouse was to enjoy the
fruits and income of the joint estate for his or her lifetime and their children to be the heirs of the
estate. A number of years after her husband’s death, the taxpayer, with her children’s consent,
decided to sell a flock of sheep which was included in her and her late husband’s joint estate. The
40
3.4
Chapter 3: Gross income
number of sheep sold was less than the number of sheep at the time of her husband’s death. She
invested the proceeds from the sale in a bond in her favour. The court was required to rule on
whether the amount received from the sale of the flock should be included in her gross income. The
court held that the taxpayer only had the right of use of the flock (that is, she was the usufructuary of
the flock), and since the number of sheep at the date of sale was smaller than at the date when her
usufruct commenced, there was no surplus offspring to which she was entitled. The whole of the
proceeds realised belonged to the heirs. Although the taxpayer received the proceeds from the sale
of the flock, she did not become entitled to the money, and it should therefore not be included in her
“gross income”.
An amount received by a taxpayer on behalf of another person is therefore not gross income for the
taxpayer.
Deposits
The taxpayer in Pyott Ltd v CIR (13 SATC 121) (1945 AD 128) was a biscuit manufacturer. Their
biscuits were sold in tin containers for which the taxpayer charged a fee. The fee was refunded to a
customer if the tin container was returned in good condition. At the end of the relevant year of
assessment, the taxpayer deducted an amount from its gross income as a provision for containers
still to be returned. The court was asked to rule on whether the amount that the taxpayer deducted
should have been included in its gross income. The court ruled that the amount that the taxpayer
received for the sale of the containers should be included in its gross income at its face value
because it was an amount of cash received by the taxpayer. The taxpayer was not entitled to exclude
the amount it was still going to refund customers from its gross income. The court also made an
important observation that the taxpayer, according to the court, correctly conceded that the
proceeds from the sale of the tin containers were not in any way ‘trust moneys’. The court noted that if
it was, it would not form part of the taxpayer's income. See similar decisions in Brooks Lemos Ltd v
CIR (1947 AD) and Greases (SA) Ltd v CIR (1951 AD) (the so-called ‘deposit cases’).
The principle from the Pyott case is that even a deposit received could qualify as gross income if the
taxpayer receives the amount on its own behalf and for its own benefit. If an amount is received as
trust money and the taxpayer is not the beneficial owner, but merely the trustee, the amount does not
qualify as gross income because the taxpayer does not receive it on its own behalf and for its own
benefit.
Example 3.4. Advance payments
1. A man lets his house and in terms of the contract of lease receives the rent in advance for two
years.
2. A hotelier receives a non-refundable deposit in terms of a contract to reserve accommodation
for a later date.
Indicate when these amounts will be taxable.
SOLUTION
1. The total amount of rent (for the two years) constitutes gross income for the year in which it is
received.
2. The deposit is taxable in the year of receipt.
Gift cards
In ITC 1918 (2019) (IT 24510) the taxpayer, a high street retailer of clothes and other merchandise,
offered gift cards to customers. The court had to decide when the revenue from the ‘sale’ (issuing) of
the gift cards constituted gross income: upon receipt or only when the gift card is redeemed, or if not
redeemed, upon expiry of the gift card. Prior to the 2013 year of assessment, the taxpayer included
the amounts received for the issuing of gift cards as gross income and claimed an allowance for
future expenditure against the income (s 24C allowance (see chapter 14). Amounts received for gift
cards were also kept in a separate account.
After the promulgation of the Consumer Protection Act (68 of 2008), the taxpayer changed its tax
treatment for amounts received from the issuing of gift cards. The taxpayer now excluded the
amounts received in respect of the issuing of gift cards from gross income. The taxpayer’s primary
argument was that the amounts were not received for its own benefit, but for the benefit of the gift
card holder who would redeem the card in the future. The taxpayer’s second argument was that,
under the Consumer Protection Act, the consideration paid for a gift card was the property of the
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Silke: South African Income Tax
3.4
bearer until the supplier redeemed the card in exchange for goods or services or the card expired
(which would be after three years unless the card reflected a longer period).
The court rejected the first level of the taxpayer’s argument and held that keeping the receipts for
unredeemed gift cards in a separate identifiable bank account did not mean that the retailer
(taxpayer) did not hold the money on its own behalf and for its own benefit. However, the position
changed as a result of the introduction of the Consumer Protection Act. This Act provided the
‘cognisable legal context’ that requires the taxpayer to take and hold the receipts for the card bearers
and to refrain from applying the receipts as if they were its own property. Accordingly, the gift card
receipts were ‘received’ by the taxpayer, not for its own benefit, but to be held for the card bearer.
The receipts should not be included in the taxpayer’s gross income until the gift card is redeemed or,
if not redeemed, when the gift card expires.
Illegal income
In CIR v Delagoa Bay Cigarette Co, Ltd (32 SATC 47) (1918 TPD 391) the taxpayer operated an
illegal lottery. The taxpayer sold cigarettes at an amount much higher than the normal selling price of
the cigarettes and the difference was distributed to the holder of a lucky coupon. The relevance of
this case is that the court found that whether the business carried on by the taxpayer was legal or
illegal is not material for the purpose of determining whether its income should be subject to tax. The
receipts and accruals from illegal activities will therefore still be included in the taxpayer’s gross
income.
In MP Finance Group CC (in liquidation) v CSARS (69 SATC 141) (2007 SCA) the taxpayer operated
an illegal investment pyramid scheme. It promised significant returns on investors' money. Some
investors received repayment of their investments plus returns, but the majority received less or
nothing and the operators of the scheme used some of the money for their own benefit. Throughout
the tax years in question, the operators of the scheme knew that it was insolvent, that it was
fraudulent and that it would be impossible to pay all investors what they had been promised.
The court had to rule on whether the amounts invested in the scheme qualified as gross income for
the taxpayer. The taxpayer argued that it never received the funds within the meaning of the definition
of ‘gross income’ because it was legally obliged to refund the deposits to the investors.
In ruling that the deposits qualified as gross income for the taxpayer, the court made the following
important findings:
l An illegal contract is not without all legal consequences; it can, indeed, have fiscal consequences.
l Notwithstanding the fact that the taxpayer was legally obliged to refund the deposits to the investors, and therefore not entitled to retain the amounts, the taxpayer ‘received’ the deposits within
the meaning of the definition of ‘gross income’ because the deposits were accepted with the
intention of retaining them for the taxpayer's own benefit.
Please note!
Interpretation Note No. 80 confirms the application of the principles of the
MP Finance case to the receipt of money stolen through robbery, burglary or
other criminal means. The issue is not whether the victim intended to part with
the money, but rather whether the thief intended to benefit from it.
3.4.2 Meaning of ‘accrued to’
It is not only amounts ‘received’ by a taxpayer that are included in gross income, but also amounts
that accrue to a taxpayer. ‘Accrued to’ means that the taxpayer became entitled to an amount. In
other words, at the time that a taxpayer obtains a vested right to a future payment, the amount
accrues to the taxpayer.
In CIR v People's Stores (Walvis Bay) (Pty) Ltd (52 SATC 9) (1990 (2) SA 353(A)) the taxpayer was a
retailer that sold goods to its customers for cash and on credit. The credit sales were made under the
taxpayer's six-months-to-pay revolving credit scheme. The court had to decide whether the
instalments not yet payable and outstanding at the end of a particular year of assessment, accrued to
the taxpayer and should be included in its gross income.
The court, in applying the principles that were established in the Lategan case (see 3.3), held that an
amount does not have to be due and payable to the taxpayer for it to accrue to the taxpayer. The taxpayer acquired a right during the year of assessment to claim payment of an amount in the future.
Since the right vested in the taxpayer in the year of assessment, it accrued to the taxpayer in that
year. And since the right can be turned into money (that is, it has an ascertainable monetary value),
the right qualifies as an ‘amount’ and should be included in ‘gross income’
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3.4
Chapter 3: Gross income
Remember
Similarly to the Lategan case, the court in the People’s Stores case said that since it is the right to
receive payment in the future that accrued to the taxpayer (and not the amount itself), it is that
right that has to be valued. The court said that the right to receive future payments does not
necessarily have the same value as the cash amount, since it is affected by its lack of immediate
enforceability. The court held that the right should be valued at its present value. However, a
proviso was added to the definition of ‘gross income’ in s 1, which provides that where a person
becomes entitled to any amount during a year of assessment, which is payable on a date falling
after the last day of such year, the amount is deemed to have accrued to the person during the
year. This means that the face value of the amount should now be included in a person’s gross
income despite the decisions in the Lategan and People’s Stores cases.
The taxpayer in CIR v Witwatersrand Association of Racing Clubs (23 SATC 380) (1960 (3) SA 291(A))
was an association formed by a number of horse racing clubs. The taxpayer decided to hold a horse
racing event for the benefit of two charities. The court had to consider whether the proceeds from the
race should be included in the taxpayer's gross income.
The taxpayer argued that in organising the event, it entered into a number of contracts on behalf of
the charities. However, the court found, based on the facts presented, that it was the taxpayer, and
no one else, that was liable to pay the expenses incurred in holding the event; and that the race was
conducted by the taxpayer itself as principal, and not as an agent for the clubs or for the charities.
The court held that the proceeds from the race were gross income for the taxpayer because it was
the taxpayer, and no one else, who became entitled to the proceeds of the race. The court also said
that although the taxpayer was not going to keep the proceeds from the race for itself, but pay it to
the two charities, the taxpayer was not thereby relieved from liability for tax. A moral obligation to
hand over the proceeds to the charities did not destroy the beneficial character of the receipt of those
proceeds by the taxpayer.
Please note!
The court in the Witwatersrand Association of Racing Clubs case found that the
taxpayer did not act as agent on behalf of the charities. If the taxpayer had, in
fact, acted as agent on behalf of the charities, the proceeds from the event
would have accrued to the charities, because the association would not have
been entitled to the amounts.
In Mooi v SIR (35 SATC 1) (1972 (1) SA 674 (A)) the taxpayer's employer granted him an option to
acquire shares in the company at a specific price. The option was, however, subject to certain conditions, including that the construction of the company's mine should be completed and that the
taxpayer should still be an employee at the time the option is exercised. The taxpayer accepted the
option during a specific year and exercised the option more than three years later. When the option
was exercised, the value of the shares was more than the option price. The court was required to
consider whether the difference between the price of the shares when the option was exercised and
the option price should be included in the taxpayer's gross income. The court made the following
important findings:
l In applying the principle established in the Lategan case (see 3.3), the court said that to determine the ‘amount’ in the case of a right, one has to establish the value of the right.
l The taxpayer argued that the right accrued to him when the option was granted and the value of
the right at that time should be included in his gross income. However, the court found that the
right granted to the taxpayer was a contingent right, as it was subject to the conditions mentioned
above. The right only accrued to the taxpayer when the conditions were fulfilled and the right
became exercisable.
l Since the taxpayer was not a share-dealer, the amount was of a capital nature. However, par (c)
of the definition of ‘gross income’ specifically included ‘any amount, including any voluntary
award, received or accrued in respect of services rendered or to be rendered’ in the taxpayer’s
gross income, despite being of a capital nature.
Please note!
An amount accrues to a taxpayer when the taxpayer becomes entitled to the
amount (Lategan and People’s Stores cases), but only when that entitlement is
unconditional (Mooi case).
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3.4
3.4.3 Valuation of receipt or accrual
Valuing an amount received presents little difficulty, since the value of the receipt is the amount that
has been received during the year of assessment. The difficulty lies with the valuation of amounts that
have accrued to a taxpayer in a year of assessment, but which are still outstanding at the end of the
year of assessment.
In CIR v People Stores (Walvis Bay) (Pty) Ltd (1990 A), the court had to decide how the outstanding
amounts should be valued at year-end. The court was asked to consider whether the amounts should
be included at their face value (as they appeared in the records), or whether the amounts had to be
discounted by the inclusion of their present value (remember that the value of money decreases over
time). The court held that the present (discounted) value of the outstanding amounts had to be
included. However, the legal position was changed shortly after this decision by virtue of an amendment to the Act, which introduced a proviso to the definition of ‘gross income’ in s 1.
The proviso provides that when
l a person has become entitled to an amount during the year of assessment, and
l that amount is payable on a date or dates falling after the last day of that year,
the face value (and not the present value) of that amount shall be deemed to have accrued to the
person during such year.
Example 3.5. Value of accrual
A taxpayer sold and delivered goods on 26 February 2021 for R30 000. Payment is only due two
years later. Assume that the present value of the R30 000 receivable at the end of the year of
assessment during which the taxpayer sold the goods (28 February 2021) is R18 000 after two
years. Calculate the amount to be included in gross income in the 2021 year of assessment.
SOLUTION
An amount of R30 000 (and not the discounted present value of R18 000) will be included in the
gross income of the taxpayer in the year of assessment in which the sale was concluded (2021
year of assessment), as he became entitled to the amount of R30 000, even though the physical
receipt thereof will only occur later.
3.4.4 Unquantified amounts (s 24M)
If an asset is disposed of for a consideration that consist of or includes an amount that cannot be
quantified in that year of assessment, the unquantified amount is deemed not to have accrued to that
person in that year of assessment. The unquantified amount accrues to that person in the year when
it becomes quantifiable (s 24M(1)).
Example 3.6. Unquantified amount
A farmer sells his mealie crop to a co-operative for R2 000 per ton on 15 February 2021 (in terms
of a contract with no suspensive conditions). Assume that the farmer delivers the crop to the cooperative on 27 February 2021, but that the actual quantity thereof is only established on
3 March 2021. Indicate when the selling price will be included in gross income.
SOLUTION
In view of the fact that the amount, which has already accrued to the farmer according to the
general principles, is an unquantified amount at year-end (28 February 2021), it will be deemed
not to have accrued to the farmer in the 2021 year of assessment. The amount of the mealie crop
will only be included in the farmer’s gross income in the 2022 year of assessment when it is
quantified.
3.4.5 Accrual rules with the disposal of certain equity shares (s 24N)
A special accrual rule applies to profit participation sales of equity shares. This applies where the
consideration for the shares is determined with reference to the future profits of the company. The
accrual of the consideration in the seller’s hands is deferred to the extent and until the amounts
become due and payable (s 24N(1)). This rule essentially allows profit participation sales of equity
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3.4
Chapter 3: Gross income
shares to be subject to normal tax only to the extent that the consideration becomes due and
payable. Similar rules apply to the purchaser (s 24N(2)).
These rules apply when all of the following features are present (s 24N(2)):
l More than 25% of the amount payable for the shares in a company becomes due and payable
after the end of the seller’s year of assessment.
l The amount payable for the shares must be based on the future profits of that company (the socalled ‘profit participation requirement’).
l The value of the equity shares, that have in aggregate been disposed of during the year to which
s 24N applies, exceeds 25% of the total value of equity shares in the company.
l The purchaser and seller are not connected persons after the disposal.
l The purchaser is obliged to return the equity shares to the seller in the event of his failure to pay
any amount when due.
l The amount is not payable by the purchaser to the seller in terms of a financial instrument (see
chapter 16) that is payable on demand and is readily tradable in the open market.
3.4.6 Blocked foreign funds (s 9A)
A special rule applies where a person’s income includes an amount that accrued to him from a
foreign country, where that country imposes currency or other restrictions which prevent the amounts
from being remitted to South Africa during the year of assessment. These amounts are referred to as
blocked foreign funds. These amounts must be deducted from that person’s income in that year of
assessment (s 9A(1)), and are deemed to be amounts received by or accrued to the person in the
following year of assessment (s 9A(2)). See also Interpretation Note No. 63 (Issue 2)). The effect of
this section is that the taxation of blocked foreign funds is delayed to the year of assessment in which
the restrictions are lifted.
3.4.7 Disposal of income after receipt or accrual (without prior cession) versus disposal
of a right to future income (prior cession)
Once income has been received by a person for his own benefit or it has accrued to him in terms of
the definition of ‘gross income’ in s 1, the ultimate disposal of the income by that person would not
affect his liability for taxation in respect of such receipt or accrual.
If, for example, a dishonest employee embezzles the day’s takings, his act can in no way destroy the
accrual in favour of the employer. The amount forms part of the employer’s gross income the moment
that it has been received. The subsequent loss thereof does not mean that it is no longer gross
income in the employer’s hands.
The same principle applied in the Witwatersrand Association of Racing Clubs case (see 3.4.2). The
taxpayer undertook to hand over the net proceeds of a race meeting to two charitable organisations,
but had to pay tax in respect of the profits that were received. The horse-racing association donated
the proceeds only after they were received by it for its own benefit. The accrual of the income and the
resulting tax liability (in the hands of the association) would have been avoided if the race meeting
had been arranged in terms of a contract which stated that all of the proceeds would be for the
account of the charitable organisations and that the association would only act as an agent of the
charitable organisations. The amounts would then have been received in favour of and on behalf of
the charitable organisations.
The question of the disposal of profits frequently arises when a business is sold during a year of
assessment, and where a seller disposes of all the benefits of the profits earned for the current year
of assessment to the purchaser. The sale to the purchaser cannot alter the seller’s liability for tax on
amounts that have already accrued to him.
Example 3.7. Disposal of income after accrual
The owner of a business disposes of his business on 29 December 2021 (together with the right
to the profits as from 1 March 2021). Indicate whether the original owner (seller) will be liable for
tax on the profits for the period 1 March 2021 to 29 December 2021.
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3.4
SOLUTION
The profits for the period 1 March 2021 to 29 December 2021 will still accrue to the original
owner. The disposal of the profits after the accrual thereof does not influence the original owner’s
tax liability in respect thereof. The new owner will, however, be liable for tax in respect of the
profits from 30 December 2021.
There is, however, a significant difference between the disposal of income after it has accrued to a
person, and the disposal and cession by him of a right under which income will accrue only in the
future. When income is disposed of after it has already accrued to the party who is disposing of it, it
still remains taxable in his hands. Alternatively, when a right to future income is disposed of, the
income will in future accrue to the recipient of the right, provided that the right to such income has
been properly ceded to such recipient (Van der Merwe v SBI (1977 A)). Cession simply means that
one person (the transferor, or cedent) transfers his rights to another person (the cessionary). Delivery of
rights occurs through cession. It should, however, operate in such a way that the transferor divests
himself totally of any right to claim the income when that income accrues in the future (ITC 265 (1932)).
The cession of income in respect of an asset of which the cedent retains ownership will in terms of
the definition of gross income accrue to the cessionary, although the ownership has been reserved
(ITC 1378 (1983)). For example, the rental income of a property may be ceded without transferring
the ownership of the property. Section 7(7) of the Act is, however, specifically designed to deem the
income received by the cessionary in such cases to be included in the gross income of the cedent
(owner of the property).
Confusion is sometimes created if a cedent, after he has properly ceded his right to future income to
a cessionary, still physically received the income, where after he duly paid it over to the cessionary. It
is important to note that the cedent, in such a case, actually received the income on behalf and for
the benefit of the cessionary. The mere fact that the cedent received the money physically does not
mean that he received it for his own benefit or that the amount had accrued to him (SIR v Smant
(1973 A), CSARS v Cape Consumers (1999 C)).
Example 3.8. Disposal of income before accrual
Lesedi wrote a book. He sold the book, including all the potential future rights to royalties, to
Faith. The rights were properly ceded to Faith. Indicate the tax implications of the receipt of the
royalties for Faith.
SOLUTION
Faith will be subject to tax on all future royalties (given that the amount in the hands of Faith
complies with all the other requirements of gross income).
If the publishers paid the royalties to Lesedi (subsequent to the valid cession), whereafter Lesedi
paid them over to Faith, the royalties would still be taxable in Faith’s hands. Lesedi merely
received it on behalf of Faith (the new ‘owner’ of the rights).
It is, however, possible to cede a right to future income in an attempt to avoid a potential tax liability.
There are certain anti-avoidance provisions in the Act which are specifically designed to counteract
such avoidance. For example, par (c) of the definition of ‘gross income’ provides that the consideration that a person receives for services rendered by such person will be included in his gross
income, although it may have been received by or accrued to another person. The person who performs services can therefore not evade his tax liability by ceding his right to future income in respect
of such services to another person. Section 7 also contains specific provisions that direct that income
disposed of to a spouse or minor child would still be taxable in the hands of the disposing spouse or
parent (see chapter 7 for further discussion). Furthermore, the application of the general antiavoidance measures could result in the cession being ignored for tax purposes (see chapter 32). A
cession of income in order to achieve a tax advantage will therefore not always be successful.
Securities sold cum or ex income rights
Securities, such as shares, debentures or government stocks, are often sold together with a right to a
dividend or interest: the purchaser would then be entitled to receive any forthcoming dividend or interest. The general principles, as discussed above, would be applicable to assess which party
should be liable for the taxation in respect of such dividends or interest.
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3.4–3.5
Chapter 3: Gross income
If the income has already accrued to the seller prior to the sale, it is taxable in his hands. The mere
fact that the purchaser will receive the income is irrelevant. If the income accrues only after the sale,
when the buyer is already the owner of the security, it is taxable in the buyer’s hands. There can be
no question of apportioning the income relating to the period up to the date of sale to the seller and
the income relating to the period after the date of the sale to the buyer. The full income is taxable in
the hands of either the seller or buyer, whichever one of them is entitled to it. This general principle
may, however, be regulated by specific anti-avoidance provisions within the Act, for example, s 24J
may deem interest to accrue on a day-to-day basis, irrespective of the fact that the actual interest is
received in other specified periods (see chapter 16). In such a case the interest should be apportioned between the seller and the buyer.
Example 3.9. Cum and ex income rights
Assume that on 10 June 2020 Lethabo sold shares to Amahle on which a dividend had been
declared on 15 May 2020, payable on 9 June 2020 to holders of shares registered on 1 June
2020. Accept that Lethabo had not yet received the dividend. Discuss whether the dividend
received will be gross income in the hands of Lethabo.
SOLUTION
It is submitted that the dividend is gross income in the hands of Lethabo, since it accrued to him
on 1 June. Even if the shares were sold cum dividend (in other words inclusive of the dividend),
that is, it was agreed on in the contract that Amahle was to receive the dividend, Lethabo is the
party to whose gross income the dividend would be added. He merely disposed of the dividend
after it had accrued to him.
The position would have been different if Lethabo sold the shares prior to the date of accrual of
the dividend and if it was agreed between the parties that Amahle would be entitled to the forthcoming dividend. The dividend would then have to be included in the gross income of Amahle.
3.4.8 Time of accrual of interest payable by SARS (s 7E)
Where a person becomes entitled to an amount of interest that is payable by SARS in terms of any
tax Act, the amount is deemed to accrue to the person on the date on which the amount is paid
(s 7E). This rule, which applies from 1 March 2018, overrides the general rule that an amount is
included in a person’s gross income at the earlier of receipt or accrual. The effect of this rule is that
interest payable by SARS is only included in the recipient’s gross income when the amount is actually
paid and not when the person becomes entitled to it. The circumstances under which a person
becomes entitled to interest payable by SARS are discussed in chapter 33.
Please note!
If, at the time when this section became effective (from 1 March 2018), interest
payable by SARS was previously, in whole or part, included in the taxpayer’s
gross income on the accrual basis, only that portion not previously taxed will be
taxable under s 7E. The taxpayer bears the onus of proving that the interest, or a
portion thereof, has previously been included in gross income (Binding General
Ruling No. 53 (issued on 22 June 2020)).
Interest that was previously received from SARS (under s 7E) and that is later repaid to SARS by the
taxpayer will, to the extent that it was previously included in his taxable income, be deductible from
the taxpayer’s income in the year of assessment that it is repaid by the taxpayer (s 7F – see chapter 6).
Please note!
The accrual of other amounts of interest is provided for in s 24J (see chapter 16).
3.5 Year or period of assessment (ss 1(1), 5, 66(13A)–(13C))
A ‘year of assessment’ is defined in s 1 as a year or other period in respect of which any tax or duty
leviable under the Act is chargeable. An amount is only income and subject to taxation in a relevant
year if it has been received by or accrued to a taxpayer during that year of assessment. Each year of
assessment stands on its own. When rates of tax or special provisions change from one year to the
next it becomes important from the point of view of both the taxpayer and SARS to ensure that all
amounts received or accrued during a particular year of assessment are included in the assessment
for that year.
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3.5–3.6
Remember
For income tax purposes, a year of assessment of a person differs from a calendar year.
The 2021 year of assessment of a natural person and a trust generally extends from
1 March 2020 until 28 February 2021. The 2021 year of assessment of a company is its financial
year ending during the 2021 calendar year.
The ‘year of assessment’ of all natural persons and trusts generally runs from 1 March of one year to
the last day of February of the following year (s 5(1)(c)). The Commissioner may accept accounts to a
date other than the last day of February, if satisfied that the whole or some portion of the natural
person or trust’s income cannot be conveniently returned for any year of assessment (s 66(13A)).
Interpretation Note No. 19 (Issue 5) (issued 18 November 2020) provides guidance on the Commissioner’s discretionary powers granted under s 66(13A). The discretionary powers granted to the
Commissioner are not subject to objection and appeal (s 66(13A) read together with s 3(4)(b)).
A company’s year of assessment is its financial year (s 1(1)). If a company does not close its financial
accounts on the last day of its financial year, the Commissioner may accept financial accounts for a
period ending on a day other than the last day of the company’s financial year (s 66(13C)). Interpretation Note No. 90 (Issue 2 (issued 18 November 2020)) provides guidance on the Commissioner’s discretionary powers granted under s 66(13C).
3.6 Receipts and accruals of a capital nature
The general definition of ‘gross income’ in s 1(1) excludes receipts and accruals of a capital nature.
This, however, does not mean that receipts and accruals of a capital nature are entirely free from
income tax. Certain receipts and accruals are included in the specific inclusions (listed in paras (a) to
(n)) of the gross income definition in s 1(1) even though they may be of a capital nature (see chapter 4). If capital receipts and accruals are not included in gross income, a portion of these amounts
may still be subject to income tax by the inclusion of taxable capital gains in taxable income. This is
referred to as capital gains tax and is discussed in chapter 17.
The Act contains no definition of the term ‘capital’ and as was mentioned in WJ Fourie Beleggings v
C:SARS (2009 SCA) ‘[w]hether a receipt or an accrual should be regarded as capital or revenue is
probably the most common issue which arises in income tax litigation’. The courts have laid down a
number of guidelines that should be considered when determining whether an amount is of a capital
nature or not. But, as the court said in the WJ Fourie Beleggings case, ‘it has not been possible to
devise a definite or all-embracing test to determine whether a receipt or accrual is of a capital nature,
despite the regularity with which the issue has arisen. At the same time, and although common sense
has been described as “that most blunt of intellectual instruments”, it remains the most useful tool to
use in deciding the issue’. Although a decisive test does not exist, the following important principles
have been established over the years:
l The burden of proof that an amount is of a capital nature is on the taxpayer (s 102 of the Tax
Administration Act). The taxpayer must, for example, prove that an asset was acquired for the
purpose of investment and not for the purpose of resale at a profit, if the proceeds are to be
regarded as being capital in nature.
l The inquiry as to whether an amount is of an income or a capital nature is a question of fact, which
has to be decided on the merits of each case. Although the court will consider the guidelines
which have been laid down in earlier decisions, it will have regard to the totality of all the relevant
facts and circumstances of each case.
l The most important test used by the courts in deciding whether a receipt in respect of the disposal
of an asset is income or capital in nature is the intention of the taxpayer. Generally, the proceeds
will be income in nature if the asset was acquired with the purpose of selling it at a profit.
However, if the asset itself was acquired and held, not for the purpose of resale at a profit, but to
produce income from that asset such as rent, interest or dividends, then the proceeds on the
disposal of the asset will be capital in nature. Another person could acquire the same asset, but
with the intention to sell it at a profit. The proceeds on sale of the asset by such person will then
be income in nature (CIR v Visser (1937 TPD)).
l The taxpayer’s own evidence (the ipse dixit of the taxpayer) about his intention and his credibility
will be considered by a court. Due to subjectivity, self-interest, the uncertainties of recollection
and the possibility of mere reconstruction, the evidence given by the taxpayer will not be
decisive. The court will test that evidence against the surrounding facts and circumstances (in
other words, objective factors) in order to establish a taxpayer’s true intention (CIR v Nussbaum
(1996 (A)).
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Chapter 3: Gross income
l All receipts and accruals must be categorised as being either of a capital or of an income nature.
An amount cannot be both ‘non-capital’ and ‘non-income’ (Pyott Ltd v CIR (1945 AD)), but a
single receipt may be apportioned between its capital and income elements (Tuck v CIR
(1988 A)).
l The intention of a company’s shareholders could be attributed to the company itself (Elandsheuwel
Farming (Edms) Bpk v SIB (1978 (A)).
l Amounts received will be revenue if they qualify as receipts made by an operation of business in
carrying out a scheme for profit-making. For a receipt to be of a revenue nature, it is not sufficient
for the taxpayer to be carrying on a business. The business should be conducted with a profitmaking purpose as well (CIR v Pick 'n Pay Employee Share Purchase Trust (1992 (A)).
l A person is entitled to realise an asset to the best advantage and to accommodate the asset to
the exigencies of the market in which he was selling. The fact that he did so could not alter what
was an investment of capital into a trade or business for earning profits (CIR v Stott (1928 AD)).
l The mere decision to sell an asset originally held as an investment is not necessarily to be
regarded as a transformation of the profits from a capital nature into a revenue nature. Something
more than the mere disposal is required for the proceeds to be of a revenue nature (CIR v Nel
(1997 (T)); CIR v Richmond Estates (Pty) Ltd (1956 (A)); John Bell & Co (Pty) Ltd v SIR (1976 A);
Natal Estates Ltd v CIR (1975 (A)).
l From the totality of the facts, one should enquire whether it can be said that the taxpayer had
crossed the Rubicon and gone over to the business of, or embarked upon a scheme for profit,
using the asset as his stock-in-trade (Natal Estates Ltd v CIR (1975 (A)).
l Where the purposes of a taxpayer regarding an asset are mixed, one should seek and give effect
to the dominant factor that induced the taxpayer to acquire the asset (COT v Levy (1952 (A)).
l Where a taxpayer who intends to invest in an asset, has a secondary, profit-making purpose when
the asset is purchased and sold, the proceeds will be of an income nature (CIR v Nussbaum
(1996 (A)).
l Where a taxpayer received an amount as compensation for the cancellation of a contract, the
court held that one should distinguish between a contract, which is a means of producing
income, and a contract directed by its performance towards making a profit. Compensation for
cancelling the first would be of a capital nature and the latter of a revenue nature (WJ Fourie
Beleggings v C:SARS (2009 SCA)).
The above principles and court cases are discussed in more detail below.
3.6.1 Nature of an asset
In CIR v George Forest Timber Company Limited (1 SATC 20) (1934 AD 516) the taxpayer was a
company that acquired land with a natural forest for business purposes. The taxpayer felled a
quantity of trees each year which were sawn up in its mill and sold as stock-in-trade. The court had
to consider whether the receipts from the sale of the timber were of a revenue or capital nature. The
court found that in selling the timber the company did not realise a capital asset, but created and
sold a new product. The court said that, as a general rule, capital, as opposed to income might be
said to be wealth used for the purpose of producing fresh wealth. The court distinguished between
fixed and floating capital, with the substantial difference being that floating capital was consumed and
disappeared in the very process of production, while fixed capital did not. Fixed capital produced
fresh wealth but remained intact. The receipts from selling the timber were found to be from the sale
of floating capital and not of a capital nature.
In CIR v Visser (1937 TPD) the taxpayer acquired mining options on certain farm properties. The
options, however, lapsed before the taxpayer could start searching for mineral deposits on the farms.
Although the options lapsed, the taxpayer had persuasive influence over the farmers in the area and
was convinced that he could acquire the options again if he wished to do so. The taxpayer then
entered into an agreement with another person whereby the taxpayer agreed to assist the other person in obtaining the mining options in exchange for shares in the other person's company. The court
had to decide whether the shares that the taxpayer received were of a capital nature and therefore
excluded from his gross income. The court came to the following conclusions:
l The nature of the transaction and the taxpayer's intention when he entered into this transaction
should be considered.
l The taxpayer's intention in regard to any particular transaction, although not necessarily conclusive, is always of the utmost importance in deciding whether the profit made on the sale of an
asset is income or merely the enhanced value of a capital asset.
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l The taxpayer's intention is not necessarily determined by what he says his intention was, but by
the inference as to the intention to be drawn from the facts of the case.
l If we consider the economic meaning of ‘capital’ and ‘income’, the one excludes the other.
‘Income’ is what ‘capital’ produces, or is something in the nature of interest or fruit as opposed to
principal or tree. This economic distinction is a useful guide, but its application is often difficult, for
what is principal or tree in one person's hands may be interest or fruit in the hands of another.
l ‘Income’ may also be described as the product of a person's wits and energy. The consideration
received by the taxpayer was a product of his wits and energy and therefore of an income nature.
3.6.2 Intention of a company
In Elandsheuwel Farming (Edms) Bpk v SIB (1978 (A)) the taxpayer was a company that acquired a
property that was used for farming purposes. One of its shareholders carried on farming activities on
the property for about four years. The farm was then leased to other tenants who used the property
for farming purposes. About six years after the company acquired the property, its shareholders sold
their shares in the company. The price of the company's shares was based on the value of the
property as agricultural land. The new shareholders were property developers. At that time another
developer was purchasing land in the area at a price significantly more than what the new shareholders paid for their shares in the company. A year later, the company sold the property to a local
municipality at a significant profit. The court had to rule on whether the proceeds on the sale of the
property were of a capital nature and therefore excluded from the company’s gross income. The
court came to the following conclusions:
l The new shareholders derived a scheme to make a substantial profit by acquiring the shares in
the company at a price based on the agricultural value of the land and then to sell the land to the
municipality for township development.
l The shareholders’ intentions should be attributed to the company itself.
l After the new shareholders acquired control of the company, the company's purpose with
regards to the land changed to that of trading stock.
l The profit realised on sale of the land was of a revenue nature and should be included in the
company's gross income.
3.6.3 Business conducted with a profit making purpose
In CIR v Pick 'n Pay Employee Share Purchase Trust (1992 (A)) the taxpayer was a trust established
by the Pick ’n Pay group of companies to administer a share purchase scheme for the benefit of
employees of the group. The trust was created and maintained to enable employees to purchase
shares in Pick ’n Pay, their employer company. It purchased shares in order to make them available
to employees entitled to them. In terms of its constitution, it was compelled to repurchase shares from
employees who were required to forfeit their holdings. The court had to consider whether the
proceeds on the sale of shares were of a capital nature for the trust. The court held that:
l Although there are a variety of tests the courts have laid down for determining whether or not a
receipt is of a revenue or capital nature, they are guidelines only. There is no single infallible test
of invariable application.
l The amounts received by the trust will be revenue if they qualify as receipts made by an
operation of business in carrying out a scheme for profit-making.
l For a receipt to be of a revenue nature, it is not sufficient for the taxpayer to be carrying on a
business. The business should be conducted with a profit-making purpose as well.
l Transactions involving shares are no different from any other transaction and the capital or
revenue nature of a receipt should be determined in the same way as other assets.
l While the trustees might have contemplated the possibility of profits, it was not the purpose of
either the company in founding the trust, or of the trustees, to carry on a profit-making scheme.
l Any receipts accruing to the trust were not intended or worked for but purely fortuitous in the
sense of being an incidental by-product.
l The receipts were of a capital nature.
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3.6.4 Selling an asset to best advantage
In CIR v Stott (1928 AD) the taxpayer was a surveyor and architect. On a number of occasions, he
purchased land when he had funds to invest. During a particular year he derived profit from the sale
of plots of land which were subdivided from two properties. The taxpayer acquired the first property
as a seaside residence. The property was larger than what he required, but was only for sale as a
whole. After building a cottage on the land, the taxpayer subdivided half the property into small plots
and sold it. The second property was a small fruit farm which was subject to a long term lease when
acquired. After the tenant defaulted, the taxpayer subdivided the property into plots and sold it.
According to SARS, the taxpayer embarked on a scheme of profit-making when he subdivided the
land into plots and sold it. In considering whether the receipts from the sale of land were of a revenue
or capital nature, the court held that:
l The intention with which a taxpayer acquired an article is an important factor to consider and
unless some other factor intervened to show that when the article was sold it was sold in
pursuance of a scheme of profit-making, it was conclusive in determining whether the receipts
were capital or gross income.
l The taxpayer acquired each of the properties as an ordinary investment using surplus funds.
There was no evidence to show that the taxpayer, at any time after purchasing the properties,
considered dealing with them as a part of a business of buying and selling land.
l The mere fact that the land was subdivided into plots rather than sold as a whole could not by
itself alter the character of the proceeds derived from the land from capital to revenue.
l The fact that the taxpayer, as a surveyor, knew somewhat more than the ordinary public about the
value of land made no difference.
l Every person who invested his surplus funds in land or stock or any other asset was entitled to
realise such asset to the best advantage and to accommodate the asset to the exigencies of the
market in which he was selling. The fact that he did so could not alter what was an investment of
capital into a trade or business for earning profits.
l The receipts were of a capital nature.
3.6.5 Realisation of a capital asset
Proceeds from the sale of capital assets should be subjected to the same tests applicable to other
assets when being classified as of either an income or a capital nature.
In CIR v Nel (1997 (T)) the taxpayer had purchased Krugerrands with the intention of holding them as
a long-term investment as a hedge against inflation. Although the Krugerrands steadily escalated in
value over the years and, despite the fact that he had many opportunities to sell them, he never did
so. Urgently and unexpectedly needing to purchase a motor car for his wife, he reluctantly realised
one third of the coins to pay for the vehicle. The taxpayer made a gain on the disposal of the Krugerrands, which he considered as being of a capital nature. The court held that
l The mere decision to sell an asset originally held as an investment is not necessarily to be
regarded as a transformation of the profits from a capital nature into a revenue nature. Something
more than the mere disposal is required for the proceeds to be of a revenue nature.
l The evidence showed clearly that the taxpayer’s purpose in selling the Krugerrands was not to
make a profit, but to realise a capital asset.
The court therefore accepted the capital nature of the proceeds on the basis that the Krugerrands
were purchased, as it were, for ‘keeps’ and that the disposal of some of them was due to some
unusual or special circumstances.
In CIR v Richmond Estates (Pty) Ltd (1956 (A)) the taxpayer was a company that was formed to
control the investments and savings of its sole shareholder and director. The company's memorandum of association empowered it to trade with and invest in land. For some time, the company made
profits from trading in land and from receiving rent from properties that were let. Due to legislative
changes, it became difficult for the company to purchase land in the particular area in which it traded
in land, and the shareholder decided that the company would cease trading in land and develop the
properties to receive rental income. This decision was not recorded in a formal resolution of the company. Two years later the shareholder became aware of further legislative changes that, according to
the shareholder, would have had a negative impact on the value of the properties. Due to this, the
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company sold the properties and realised a substantial profit. In considering whether the profit
realised from the sale of the properties was of a capital or income nature, the court concluded as
follows:
l The company’s intention with the properties changed from trading stock to capital assets when it
decided to develop the properties to receive rental income.
l The fact that the change of intention from trading stock to capital was not recorded as a formal
resolution of the company’s directorate, but evidenced only by the sole shareholder's statements,
was no reason for concluding that the taxpayer's intention did not change.
l The capital assets were sold due to the pending legislative changes that would negatively impact
the value of the properties. The mere decision to sell a capital asset at a profit does not per se
mean that the profit is of an income nature.
l The proceeds from the sale of the properties were of a capital nature.
3.6.6 Change of intention
In John Bell & Co (Pty) Ltd v SIR (1976 A) the taxpayer, a company, operated a textile business from
premises that it owned. After the business relocated to other premises, the directors of the company
decided in principle to sell the original premises. In view of the fact that the property market was not
performing well at that point in time, the directors decided to wait until the market had improved. In
the meantime, the property was rented out (for a period of 11 years) and thereafter, once the market
had improved, the property was realised at a profit. The court emphasised the principle that a taxpayer is entitled to realise his property to his best advantage, and therefore decided that there was
no factual evidence that indicated that the taxpayer had had a change of intention to use the
property as trading stock. The court held that something more than merely selling the asset is
required in order to metamorphose the character of the asset and so render its proceeds gross
income. The taxpayer must embark on some scheme for selling such assets for profit and use the
assets as his stock-in-trade.
In Natal Estates Ltd v CIR (1975 (A)) the taxpayer, a company, owned a large piece of land north of
Durban. It carried on business as a grower and miller of sugar cane and a manufacturer of sugar.
Throughout the years the directors of the company were aware of the possibility that the local authorities could expropriate the property for public development. The directors of the company appointed
town planners and surveyors to investigate possible residential development on the land. It was
decided to wait until the market was better developed and the project was temporarily suspended. A
newly elected board of directors decided to proceed with the project. Consulting engineers and
architects, as well as financial advisors and marketers, were appointed to the project. The taxpayer
proceeded with the development bit by bit and started to sell developed land directly to the public
and to investors. SARS assessed the taxpayer’s receipts from the sale of land as being revenue in
nature. The court held that:
l Although, the original intention with which a taxpayer acquired an asset is an important factor, it is
not necessarily decisive because a taxpayer’s intention can change.
l The mere decision to sell an asset at a profit is not an indication that a taxpayer that acquired an
asset with an investment purpose changed its intention. Something more is required.
l From the totality of the facts, one should enquire whether it can be said that the taxpayer had
crossed the Rubicon and gone over to the business of using the land as his stock-in-trade or
embarked upon a scheme of selling the land for profit.
l A change of intention implies something more than the mere decision to sell an asset of a capital
nature.
l The court considered the fact that the taxpayer had gone over to the business of township
development on a grand scale and held that the company changed its intention to sell the land at
a profit. Consequently, the proceeds of the sales formed part of the company’s gross income and
were subject to normal tax.
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Chapter 3: Gross income
The following paragraph from C:SARS v Founders Hill (Pty) Ltd (2011 SCA)
explains the concept of ‘crossing the Rubicon’ referred to in the Natal Estates
case:
‘In 49 BC when Julius Caesar crossed the Rubicon – a small river dividing Cisalpine Gaul (a province of Rome) from Italy – committing an act of treason in so
doing (for no Roman general was allowed to enter Italy with his army without the
consent of the Roman Senate), he intended to defy the Senate and in effect to
declare civil war in Rome. Little did he foresee (I suspect) that his act would
come to be a symbol of passing a point of no return in the general sense, and
that it has, in South Africa, become a tax mantra in cases that attempt to discern
the distinction between capital gains and taxable income upon a disposal of
property.’
3.6.7 Mixed purpose
In COT v Levy (1952 (A)) the taxpayer argued that the proceeds realised on the sale of shares in a
company were of a capital nature. The taxpayer acquired 25% of the shares in the company and was
also one of its four directors. The company was formed to acquire and develop land in an area that
was thought likely to develop. The taxpayer had an open mind when he bought the shares as to what
would be the best thing to do with the property. Although he hoped that the property and therefore
the shares would appreciate in value, he was really interested in obtaining a good revenue from the
property and agreed with the other shareholders to develop the property to obtain a better return
from it. Three years after the taxpayer acquired the shares another person purchased all the shares
from the four shareholders. The taxpayer made a substantial profit from the sale. The court had to
consider whether the taxpayer correctly treated the proceeds from the sale of the shares as being of
a capital nature. The court found that:
l Where the purposes of a taxpayer regarding an asset are mixed, one should seek and give effect
to the dominant factor that induced the taxpayer to acquire the asset.
l Based on the evidence before the court, the court found that the taxpayer’s dominant intention in
acquiring the shares was to hold the shares as an income-earning investment. The taxpayer
never at any time attempted to sell the shares and only sold the shares when someone made him
an offer. The taxpayer accepted the offer with a view to realise his investment.
l The proceeds from the disposal of the shares were of a capital nature.
3.6.8 Secondary purpose
In CIR v Nussbaum (58 SATC 283) (1996 (4) SA 1156 (A)), a case considered by the Appellate
Division of the High Court, the taxpayer inherited listed shares. With active and careful investment, he
built a substantial portfolio of listed shares over a number of years. For the three years of assessment
under consideration, SARS assessed the taxpayer's profits from the sale of shares as being of a
revenue nature. The taxpayer testified that over the years he used surplus income to consistently add
shares to the portfolio he inherited. When he purchased shares, he did so with an intention to
produce dividend income and to protect his capital from inflation. He never purchased shares for a
profitable resale. He would only sell a share if a better dividend yield could be achieved with other
shares, or where his shares in a specific company distorted the balance he aimed to achieve in his
portfolio.
For the three years under consideration, the taxpayer testified that his approach was decidedly
different. He turned 60 and decided to build up readily available cash resources to meet expected
future medical expenses and to buy a house. Over this period, he sold shares ‘bit by bit’ in order to
invest the proceeds in fixed interest investments. His criteria for deciding which shares to sell were
the same as in prior years. He only sold shares with a poor dividend yield, regardless of whether he
would realise a profit or loss on the sale.
SARS argued that, for the years under consideration, the taxpayer changed his intention towards his
shares and had gone over to holding them, if not also buying them, with a dual purpose. Although his
main aim was still investment, his secondary purpose was to use his portfolio as stock-in-trade and to
sell shares for profit whenever he felt it appropriate to do so.
In considering whether the receipts from the disposal of shares were revenue or capital in nature, the
court held that:
l It had to consider whether the sale of shares amounted to the realisation of capital assets or the
disposal of trading stock in the course of carrying on a business.
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3.6
l Although the scale and frequency of the taxpayer's share transactions are not conclusive, they
are of major importance. In this case, the taxpayer entered into a significant number of share
transactions, which were almost, without exception, profitable. His annual profits from selling
shares substantially exceeded his annual dividend income.
l The taxpayer ‘farmed’ his portfolio diligently as evidenced by the number, frequency and profitability of sales, especially of short-term shares.
l Although the taxpayer testified that his intention with buying and selling shares was to invest in
shares, the court held that if one looks beyond the taxpayer's version of his intention to all the
facts, it is clear that the profits in question were not merely incidental to the taxpayer's investment
activities. The taxpayer had a secondary, profit-making purpose when he purchased and sold the
shares.
l Since the taxpayer purchased shares for investment purposes, but contemplated dealing with the
shares for the purpose of making a profit, it cannot be argued that the profit from the sale of
shares is merely incidental. Since the taxpayer had no absolving dominant purpose, the profit
gained from his secondary purpose was of a revenue nature.
3.6.9 Realisation company
The taxpayer in Berea West Estates (Pty) Ltd v SIR (38 SATC 43) (1976 (2) SA 614(A)) was a company that was formed for the purpose of selling land. At the time of forming the company, the land
was held by a deceased estate and a trust. The administration of the deceased estate had been
running for 22 years and due to a number of reasons the estate could not be wound up. The
executors were pressed to finalise the estate and for this reason the deceased estate and the trust
transferred the land to a company so that the company could sell the land. The beneficiaries of the
deceased estate and the trust became the shareholders of the company and the proceeds from
selling the land were to be distributed to them. Prior to transferring the land to the company, the
executors of the deceased estate obtained approval to establish townships on the land. The
townships were only proclaimed after transferring the land to the company, but were subject to
building roads and a water supply before the individual plots could be sold. At the time the company
was formed, there were no obvious buyers for the land as a whole and the company decided to
develop the land so that it could be sold as individual plots. Over a period of 20 years the company
developed a part of the land, sold the plots, and then used the money to develop a further area. The
court had to consider whether the receipts from selling the plots were of a capital nature. The court
held that:
l Where a company is formed with the purpose to sell an asset (that is, a realisation company) and
does so at best advantage, it does not mean that the company traded for profit.
l In deciding whether a company was merely acting as a realisation company or was carrying on
the business of trading for profit, one is entitled to look at the facts leading up to the company’s
incorporation, and to its memorandum and articles, and to its subsequent conduct.
l The court had to consider whether, on all the evidence, the taxpayer deviated from its original
intention and went over to trading for profit, and in that sense whether a change of intention had
taken place.
l The fact that the taxpayer incurred a considerable amount of expenses in developing the
property over a period of 20 years was undoubtedly a factor to be taken into account, but should
not be considered in isolation. The taxpayer had to sell a very large piece of undeveloped land
and could only do so by subdividing the land and developing the property, which involved
spending a lot of money. But this does not in itself mean that the taxpayer was trading for profit.
l The facts of this case should be distinguished from the Natal Estates case where the taxpayer,
with its elaborate and sustained scheme and expertise, did much more than merely realising a
capital asset to the best advantage. In the Natal Estates case, the taxpayer carried on a business
of selling land for profit on a grand scale, using the land as its stock-in-trade, which was not the
same in this case.
l The taxpayer, a realisation company, merely sold the land at best advantage and did not change
its original intention to that of trading for profit. The receipts from selling the plots were of a capital
nature.
In CSARS v Founders Hill (Pty) Ltd (2011 SCA) the taxpayer was formed to acquire and realise surplus land owned by AECI Ltd, which it held as a capital asset. The purpose of the taxpayer, as was
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Chapter 3: Gross income
evident from its memorandum of association, was to realise the land at best advantage. The court
had to consider whether the receipts from the sale of land were of a capital nature and held that:
l It is an established principle in South African law that a taxpayer is entitled to realise an asset to
best advantage, and, in doing so, its receipts will be capital in nature. However, this principle
only applies to capital assets and the mere fact that a taxpayer refers to an asset as a capital
asset does not make it one.
l The taxpayer was formed solely for the purpose of acquiring the property as stock-in-trade and
then conducted business in trading in the property.
l Calling a company a ‘realisation company’ (and limiting its objects and restricting its selling
activities in respect of the assets transferred to it) is not itself a magical act that inevitably makes
the profits derived from the sale of the assets of a capital nature. The court distinguished this
case from the Berea West case where it said that there was a real justification for the formation of
the realisation company (in addition to the purpose of realising the assets) without which the realisation of the asset would have been difficult, if not impossible. Where a company was formed
solely for the purpose of facilitating the realisation of property that could not otherwise be dealt
with satisfactorily, the profit achieved on sale would be of a capital nature and would not be
taxable.
l The taxpayer's profits were gains made by an operation of business in carrying out a scheme for
profit-making and was therefore revenue derived from capital productively employed and must
be taxable income.
3.6.10 Damages and compensation
In WJ Fourie Beleggings v C:SARS (2009 SCA) the taxpayer conducted business as a hotelier. The
taxpayer concluded an agreement whereby it would accommodate a substantial number of persons
over an extended period of time. For a number of reasons, this contract was cancelled and the taxpayer received an amount of money in settlement of all claims it might have arising from the early
termination of the contract. The court had to consider whether the settlement amount received was of
a revenue or capital nature. The taxpayer argued that the contract itself amounted to an asset that
formed part of its income-producing structure and that the settlement amount had been paid for the
loss or ‘sterilisation’ of this income-earning asset and should be regarded as capital. The court held
that:
l There is a fundamental distinction between a contract that is a means of producing income and a
contract directed by its performance towards making a profit.
l Although the taxpayer stood to earn a great deal from the contract that was to form the major
source of its income during the period it lasted, this did not transform the contract into part of the
taxpayer's income-producing structure.
l The taxpayer's income-producing structure was made up of its lease of the hotel and the use to
which the hotel was put. The contract under consideration was concluded as part of its business
of providing accommodation. It was therefore a product of the taxpayer's income-earning
activities, not the means by which it earned income.
l The contract under consideration could not be construed as being an asset of a capital nature
forming part of the taxpayer's income-producing structure. That being so, the amount paid to the
taxpayer on termination of the contract was not capital in nature.
In Stellenbosch Farmers' Winery Ltd v CIR (2012 SCA) the taxpayer received compensation for the
premature termination of a distribution agreement. In terms of the distribution agreement, the
taxpayer had the exclusive right to distribute certain whiskeys in South Africa for a period of 10 years.
The sale of these products made a significant contribution to the taxpayer’s profit during this time.
Due to a corporate structural changes of the company that granted the distribution right, the taxpayer
agreed to receive a lump sum payment on early termination of the exclusive distribution agreement.
The court had to consider whether the amount received was of a capital nature. The court held that:
l The exclusive distribution rights that the taxpayer had in terms of the distribution agreement were
a capital asset. As a result of the termination, the taxpayer therefore lost a capital asset.
l Since the taxpayer did not carry on the business of the purchase and sale of rights to purchase
and sell liquor products, it did not embark on a scheme of profit-making. The compensation that
the taxpayer received for the impairment of the taxpayer's business by the loss of its exclusive
distribution right was a receipt of a capital nature.
l The nature of a receipt for income tax purposes is not determined by the accounting treatment
thereof.
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3.6.11 Isolated transactions
As mentioned above, the frequency of a particular transaction may provide a useful guide in distinguishing between income and capital. If the same type of transaction were concluded continuously, it would be obvious that there was a scheme of profit-making and the proceeds would then be
income in nature and therefore subject to normal tax. Yet an isolated or once-off transaction is not
necessarily of a capital nature. The real test depends upon the intention behind the transaction and
on whether or not a scheme of profit-making is involved. A speculation in futures was held to be
subject to normal tax even though it was an isolated transaction. The court found that, although this
transaction was different from the taxpayer’s normal transactions, it was within the scope of his
business (ITC 43 (1925)).
3.6.12 Closure of a business and goodwill
The proceeds derived from trading stock realised in the course of winding up a business are of an
income nature and will be included in the taxpayer’s gross income. It does not matter that the business has been sold ‘lock, stock and barrel’, and no enquiry needs to be made as to whether the
proceeds were derived in the ordinary course of trade. Whatever amount is derived by the taxpayer
as a result of the disposal of the stock is in the nature of income and forms part of his gross income.
An amount received for the sale of the goodwill of a business is a receipt of a capital nature. This
will be the case if the seller originally bought the business in order to derive income from the carrying
on of that business, rather than for the purpose of reselling it at a profit. As long as the goodwill is a
fixed amount, it is capital in nature. It does not matter whether it is payable in one sum or in periodic
instalments.
The consideration for the sale of goodwill may, however, take the form of an annuity. In this instance
the annual payment is taxable in terms of par (a) of the definition of ‘gross income’ in s 1.
The sales agreement should therefore contain a clear distinction in respect of the amount of the
purchase price representing the trading stock (income), the amount of the purchase price
representing the business assets (capital), and the amount of the purchase price representing the
goodwill (capital, unless paid in the form of an annuity).
3.6.13 Copyrights, inventions, patents, trademarks, formulae and secret processes
The same tests as are applied to any other asset should be applied to determine whether a copyright, invention, patent, trade mark, formula or secret process is of an income or a capital nature. The
outcome will depend upon the facts of each case.
Amounts received for the disposal of copyrights, patents, trademarks and similar assets by a person,
who originally acquired and has held such assets as an income-producing investment, are of a
capital nature. However, if the assets were acquired for the purposes of a profitable resale in a profitmaking scheme, their proceeds would be of an income nature.
3.6.14 Debts and loans
If debts are bought with the intention of collecting them at a profit, the receipt thereof is income in
nature. Some finance houses buy debts at a discount and then proceed to collect the outstanding
amount at a profit. This represents a profit-making scheme and the profit made on the collection of
the debts is therefore income in nature.
It may, however, happen that a profit made on the collection of debts is capital in nature. What often
occurs in practice is that a person buys a business as a going concern and, in terms of the
agreement, is required to buy the debts owing to the seller. If a greater amount is collected than what
was paid for the debts, the profit is capital in nature. Here the debts are not acquired with the
intention of deriving a profit therefrom. They are part and parcel of the business bought – the intention
is to generate a profit with the business, not to generate a profit from the collection of the debts.
When a taxpayer sells his business, inclusive of his debtors book, the amount received for the sale of
the debtors would generally be of a capital nature, notwithstanding the fact that a profit was derived
from the sale (of the debts).
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Chapter 3: Gross income
3.6.15 Gambling
If gambling activities are systematically undertaken, to the extent that they become a business or
scheme of profit-making, the proceeds are income in nature and therefore part of gross income
(Morrison v CIR (1950 A)).
If, however, the gambling activities are undertaken as a means of entertainment or hobby, the proceeds are capital in nature.
Remember
The intention of the gambler will again determine the capital or income nature of the proceeds.
Was his intention to entertain himself by gambling? If so, the proceeds will be capital in nature
and not part of his gross income. The gambler will, however, have to convince SARS that this
was indeed his true intention.
Amounts derived by racehorse owners and trainers are subject to normal tax where betting is a
regular practice.
It would be difficult for a professional punter and racehorse owner to distinguish his jackpot winnings
from his other betting activities. His winnings are subject to normal tax, because these activities are
so closely related to his business (ITC 214 (1931)).
In practice, SARS includes the results of betting transactions systematically carried on in gross
income. It is not the practice to tax ordinary punters on the proceeds of betting when they engage in
betting as a means of entertainment, but persons closely connected with racing and possessing
special knowledge, for example owners, trainers and jockeys, will usually be subject to normal tax on
the results of regular betting.
In terms of the practice of SARS, a bookmaker is liable to normal tax on his gambling activities if they
may be regarded as forming part and parcel of his business. His winnings from sweepstakes, lotteries and racing jackpots would be included in his income.
3.6.16 Horse-racing
Racing stakes (prizes for the winners of the horse races) won by racehorse owners are subject to
normal tax in practice, if the activities carried on are undertaken for gain or in pursuance of a scheme
of profit-making, rather than a hobby.
3.6.17 Gifts, donations and inheritances
A lump sum or an asset received by way of a gift, donation or inheritance is capital in nature.
If the inherited asset is sold, that receipt is also capital in nature, unless the asset is sold in pursuance of a profit-making scheme or as part of a business carried on.
Remember
Intention may change – the recipient of an inherited asset may decide not to consider that asset
as part of his capital structure. He may decide to dispose of the asset in pursuance of a scheme
of profit-making.
3.6.18 Interest
Interest derived from a loan or investment of money is income in nature.
Remember
The capital investment is the ‘tree’ and the interest is the ‘fruit’ thereof.
3.6.19 Restraint of trade
Payments received in respect of a restraint of trade are capital in nature.
In this instance, a person usually undertakes not to exercise a trade, profession or occupation in a
specified area for a defined period of time in return for some compensation. What he is selling is his
ability to generate further income; in other words, his capital structure. This represents the sterilisation
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3.6
of a capital asset and is capital in nature (Taeuber and Corssen (Pty) Ltd v SIR (1975 A)). These payments are, however, expressly included in the gross income of certain taxpayers in certain circumstances in terms of par (cA) or par (cB) of the definition of ‘gross income’ in s 1 (see chapter 4).
It has been held that a consideration received by a garage proprietor from an oil company for undertaking to become a one-brand petrol station, that is, to sell only the products of the oil company, is a
capital receipt. The court came to the conclusion that the garage owner in this case sold his right to
also trade in other products or brands. This represented a capital asset (ITC 772 (1953)).
3.6.20 Share transactions
Profits on share transactions are not only subject to normal tax if the frequency and volume of the
number of transactions are so great as to constitute the carrying on of a business. The intention with
regard to which shares are held will determine whether the proceeds on the sale thereof would be
classified as capital or income in nature. Like any other assets, shares may be trading stock. Profits
and losses resulting from share transactions are of an income nature if the shares were acquired for
the purpose of resale at a profit (Anglovaal Mining Limited v CSARS (2009 SCA)).
Conversely, shares may be held for a long period with the intention to derive dividend income. If
these shares were then disposed of, the proceeds would be capital in nature. Even where the
taxpayer initially acquired the shares for purposes of investment, but with the ‘secondary purpose’ to
dispose of the shares at a profit if the dividend yield was unsatisfactory, the judiciary has taken the
view that the proceeds would be classified as income in nature (CIR v Nussbaum (1996 A)).
In the case, CSARS v Capstone 556 (Pty) Ltd (2016 SCA), the taxpayer disposed of shares in a
company that was acquired to rescue a major business in the retail sector. The court had to consider
whether the proceeds of the sale of shares were of a capital or revenue nature. The taxpayer’s
intention at the time of acquisition of the shares was to make a strategic investment in a leading
company in the furniture industry as part of a large-scale ‘rescue operation’ (and this was overwhelmingly supported by the objective evidence). It was clear from the evidence that the taxpayer’s
decision to sell the shares was not foreseen (even though the shares were sold less than five months
after the acquisition date), as the circumstances that prevailed at the time of sale were materially
different from the circumstances prevailing when the obligation was incurred. The court held that it
was clear from the evidence that the first and primary purpose of the acquisition of the shares was to
rescue a major business in the retail furniture industry by a long-term investment of capital. The court
held that this involved commitment of capital for an indeterminate period involving considerable risk
and only a very uncertain prospect of a return and that this was consistent with an investment of a
capital nature that was realised sooner than initially expected because of skilled management and
favourable economic circumstances. It was not a purchase of shares as trading stock for resale at a
profit and the proceeds were therefore held to be of a capital nature.
For certain shares that are held by the taxpayer for more than three years, the receipt on the disposal
of the shares is deemed to be capital in nature (s 9C – see chapter 14).
At times, it is difficult to establish the intention underlying certain share transactions, as illustrated by
the following discussion of specific cases:
Employees’ share trusts
A controversial line of cases deals with the position of trusts created by employers as vehicles for
share purchase schemes designed to benefit their employees.
In CIR v Pick ’n Pay Employee Share Purchase Trust (1992 A), the court held that the trust had no
intention of carrying on a business in shares, but operated ‘primarily as a conduit for the acquisition
of shares by employees entitled to them in terms of the scheme’s rules’. It had no profit motive and
did not act as a normal trader in shares would. Even if in a broad sense it was carrying on a business, it was not a business carried on as part of a scheme of profit-making. While the trustees might
have contemplated the possibility of profits, it was neither their purpose to seek out profits, nor were
profits inevitable. The trust’s receipts were therefore not intended or worked for, but purely fortuitous,
a by-product of the trust’s activities. Consequently, the proceeds were therefore capital in nature.
Portfolio in a collective investment scheme
There is no reason in principle why units held by a taxpayer in a portfolio of a collective investment
scheme should not be investigated for their income or capital characteristics in the same way as
shares. Therefore, if they are acquired and held for the purposes of a profitable resale in a scheme of
profit-making, any profits realised or losses suffered upon their disposal will be of an income nature.
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3.6
Chapter 3: Gross income
3.6.21 Subsidies
If a subsidy takes the form of a contribution towards the producer’s cost of production of a certain
commodity, it is submitted that it is of an income nature. The subsidy becomes part of the floating
capital of the producer.
If the subsidy is paid as a contribution towards the cost of fixed capital assets, it is capital in nature.
For example, the Government may contribute towards the cost of a new factory or plant and
machinery. This is a capital receipt that is not subject to normal tax, unless specifically stated otherwise by the Act.
Certain Government grants are exempt from normal tax (see chapter 5).
59
4
Specific inclusions in gross income
Linda van Heerden
Outcomes of this chapter
After studying this chapter, you should be able to:
l identify or explain which amounts should specifically be included in ‘gross income’,
even though they may be of a capital nature, and support your opinion with the relevant authority
l demonstrate your knowledge in a practical case study (both in a calculation question
and a theoretical advice question).
Contents
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
4.14
4.15
4.16
4.17
4.18
4.19
4.20
Overview .............................................................................................................................
Annuities (paras (a) and (d)(ii) of the definition of ‘gross income’, ss 10(1)(gA), 10A
and par 2(4) of the Fourth Schedule) .................................................................................
Alimony payments (par (b) of the definition of ‘gross income’, ss 7(11) and 10(1)(u)) .....
Services (paras (c) and (n) of the definition of ‘gross income’, ss 8B, 8C, 10(1)(gC),
(nA) to (nE), (o) and (q)) .....................................................................................................
Restraint of trade (paras (cA) and (cB) of the definition of ‘gross income’) ......................
Services: Compensation for termination of employment (par (d) of the definition of
‘gross income’ and s 10(1)(gG)) ........................................................................................
Fund benefits (paras (e) and (eA) of the definition of ‘gross income’) ..............................
Services: Commutation of amounts due (par (f) of the definition of ‘gross income’) ........
Lease premiums (par (g) of the definition of ‘gross income’, s 11(f) and (h)) ...................
Compensation for imparting knowledge and information (par (gA) of the definition of
‘gross income’, s 9(2)(e) and (f))........................................................................................
Leasehold improvements (par (h) of the definition of ‘gross income’, s 11(h)) .................
Taxable (fringe) benefits (paras (c) and (i) of the definition of ‘gross income’) ................
Proceeds from the disposal of certain assets (par (jA) of the definition of ‘gross
income’, ss 8(4)(a), 22(8) and 26A) ...................................................................................
Dividends (par (k) of the definition of ‘gross income’, ss 10(1)(k) and 10B) .....................
Subsidies and grants (par (l) of the definition of ‘gross income’ and par 12(1) of the
First Schedule) ...................................................................................................................
Amounts received by or accrued to s 11E sporting bodies (par (lA) of the definition of
‘gross income’) ...................................................................................................................
Government grants (par (lC) of the definition of ‘gross income’ and s 12P) .....................
Key-man insurance policy proceeds (par (m) of the definition of ‘gross income’) ...........
Amounts deemed to be receipts or accruals and s 8(4) recoupments (par (n) of the
definition of ‘gross income’, ss 7, 8C and 24I) ...................................................................
Amounts received in terms of certain short-term insurance policies (s 23L(2)) ................
Page
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4.1 Overview
Receipts and accruals can be included in gross income in terms of the general definition of ‘gross
income’ (see chapter 3), or in terms of the specific inclusions listed in paragraphs (a) to (n) of the
definition of ‘gross income’ in s 1(1) of the Act. Contrary to the exclusion of receipts or accruals of a
capital nature from the general definition of ‘gross income’, these specific inclusions are included in
gross income even though they may be of a capital nature. The other elements of the general definition also apply to the specific inclusions, except where otherwise stated. It is specifically provided
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4.1–4.2
that the specific inclusions as listed do not limit the scope of the general definition of ‘gross income’.
Any amounts not included in terms of par (a) to (n) can therefore still be included in gross income in
terms of the general definition. It is submitted that the specific inclusion provisions do enjoy priority
over the general definition, even though the Act does not contain a similar provision in this regard,
like s 23B(3), that deals with the precedence of the specific provisions for deductions over s 11(a). All
other amounts that must be included in a taxpayer’s income in terms of any other provision of the Act,
for example ss 7(3) or 8C, are effectively included in the taxpayers’ gross income through par (n).
All references to paragraphs in this chapter are references to paragraphs of the ‘gross income’
definition (s 1(1)).
Please note!
The authority for the inclusion of an amount in gross income is either a reference
to the specific paragraph of the definition of gross income (in the case of a specific inclusion), or the general definition of gross income. Although the use of
the subtotal method in chapter 7 facilitates the calculation of taxable income
and the total tax liability, reference to the column in which an amount must be
included is not authority for the inclusion of an amount in gross income.
The specific inclusions in gross income are now discussed separately.
4.2 Annuities (paras (a) and (d)(ii) of the definition of ‘gross income’, ss 10(1)(gA),
10A, and par 2(4) of the Fourth Schedule)
Paragraph (a) specifically includes in gross income any amount received or accrued by way of
l an annuity
l a ‘living annuity’
l an ’annuity amount’ as defined in s 10A(1).
Paragraph (a) specifically excludes an amount received or accrued from the proceeds of a policy of
insurance where the person is or was an employee or director of the policy holder (par (d)(ii) –
see 4.6). This exclusion aims to eliminate a possible double inclusion in gross income in respect of
compulsory insurance annuities for the benefit of employees and their dependents. Such annuities
are therefore dealt with solely in terms of par (d)(ii). This exclusion under par (a) is to the benefit of
the taxpayer. This is because the inclusion under par (d)(ii) means that the compulsory insurance
annuity income may be exempt (in terms of s 10(1)(gG)) due to the wording ‘any amount received by
or accrued’.
Annuities (except s 10A annuity amounts) are not divided into capital and income, and are taxable in
full under par (a), whether or not they are receipts or accruals of a capital nature. Paragraph (a),
however, does not override the source rules. In order to establish the source of annuities, the place
where the contract was concluded must be determined (as held in Boyd v CIR (1951 AD), the fons et
origo is the formal act giving rise to the annuity).
Annuities
There is no definition of the term ‘annuity’ in the Act, but the meaning of the term has been discussed
in case law. The main characteristics of an annuity, listed in ITC 761 (1952) and confirmed in KBI en
’n ander v Hogan (1993 AD), are
(1) It is an annual payment (this would probably not be defeated if it were divided into instalments).
(2) It is repetitive: payable from year to year for, at any rate, a certain period.
(3) It is chargeable against some person.
An annuity may arise in a variety of ways:
l It may be bought from an insurance company.
l It may be granted by way of a donation or bequest, through a trust or otherwise.
l It may be received as consideration for the sale of a business, or an asset, or for the surrender of
a right.
The following are examples of amounts that do, or do not, constitute annuities:
l The annual payment of instalments due, in terms of a transaction of a capital nature with a definite
ascertainable price, is not an annuity and falls outside the scope of par (a).
l Annual voluntary amounts payable in terms of a discretion are not annuities, but rather individual
gifts and capital in nature.
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4.2
Chapter 4: Specific inclusions in gross income
l A pension paid by an employer to the widow of a deceased employee, terminable at the will of
the employer, cannot be regarded as an annuity. However, a life pension payable to the widow
by an employer who has bound himself to pay the pension for life would constitute an annuity.
l A contractual obligation or an obligation in terms of a trust deed to make regular monthly or
annual payments for life or for a fixed period would constitute an annuity.
l Fixed annual amounts payable out of the residue of an estate in terms of a will constitute an
annuity. These amounts would constitute annuities, whether they were payable for a specified
number of years or for the lifetime of the recipient. Even if there were variations in the amounts of
the annual payments because of certain contingencies, they would still constitute annuities. It is
immaterial whether the annuity is payable out of the income or the capital assets of the estate.
In KBI en ’n ander v Hogan (1993 AD) the taxpayer, a fireman, instituted an action for a lump sum
compensation from the Motor Vehicle Assurance Fund after being seriously injured in a collision. The
Fund undertook to pay his claim for loss of future earning capacity by way of monthly instalments.
The issues were whether these payments constituted an annuity and, if so, whether the Fund should
deduct employees’ tax from them. The Fund’s undertaking made no mention of a lump sum as payment for the taxpayer’s loss of future earning capacity; moreover, the payment of each instalment
was conditional on proof that he was still alive. The Fund’s delictual obligation to compensate him
was replaced by a contractual obligation to pay the instalments while he lived, without creating a
liquid or determinable debt capable of being reduced by those instalments. The payments met all the
characteristics of an annuity and, for that reason, it also followed that employees’ tax had to be deducted, no matter what the contractual arrangements provided.
The definition of the term ‘remuneration’ in par 1 of the Fourth Schedule includes amounts referred to
in par (a) of the definition of the term ‘gross income’. Any person paying any annuity to another person is therefore an employer paying ‘remuneration’ and must withhold employees’ tax thereon in
terms of par 2(4) of the Fourth Schedule.
Annuities from funds
When a member retires from a pension fund, pension preservation fund or retirement annuity fund,
the member is only allowed to take one-third of the member’s retirement interest as a lump sum
benefit. The other two-thirds are reinvested to ensure a future income and is paid out in the form of
annuities (see chapter 9). With effect from 1 March 2021, this one-third rule will also apply to provident funds and provident preservation funds.
A member can either invest the two-thirds in a guaranteed life annuity or a living annuity. The main
differences between life annuities and living annuities are as follows:
Life annuities
l Life annuities can offer the assurance that you will not outlive your capital.
l Life annuities provide an income for life, with annual increases.
l Not all types of life annuities will guarantee that the increases in income will keep up with inflation.
l Life annuities will not leave capital for your dependants to inherit once you die – you only receive
it as long as you live.
Living annuities
l Living annuities are market-linked and will fluctuate depending on the performance of its underlying investment portfolio.
l You can choose how much you want to draw as income annually. (Pensioners are obliged by law
to take an income from between 2,5% and 17,5% per year.)
l If the drawdown rate remains below the growth rate of the investment portfolios, you will likely
have capital remaining to leave as an inheritance once you die.
The term ‘living annuity’ is defined in s 1(1) and means the right of a member or former member of
any retirement fund (see chapter 9), or his or her dependant or nominee, to an annuity purchased or
provided on or after the retirement date of that member. These annuities can be purchased from
another person (for example another fund), or can be provided by the fund to which the member
belongs. The value of the annuity is determined solely by reference to the value of the assets specified in the annuity agreement and held for paying the annuities (par (a) of the definition of ‘living
annuity’). The amount of the annuity is determined according to a method or formula prescribed by
the Minister of Finance and it is not guaranteed by the person from which it is purchased or the fund
that provides it (paras (b) and (d) of the definition of ‘living annuity’). That formula provides for payments on a monthly or other agreed basis, at a rate of between 2,5% and 17,5% per annum calculated on the reducing balance of capital. The practical working of such annuity agreement is
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4.2–4.4
like an investment account and the possibility therefore exists that the funds (the value of the assets)
are depleted before the person receiving the annuities dies.
The full remaining value of the assets specified in the annuity agreement may be paid as a lump sum
when the value of those assets become less than an amount prescribed by the Minister of Finance
(par (c) of the definition of ‘living annuity’). The current prescribed amount is R125 000 (Government
Notice No. 619 dated 1 June 2020). On the death of the member or former member, the value of the
assets may be paid as an annuity and/or lump sum to a nominee or the deceased’s estate (par (e) of
the definition of ‘living annuity’).
A new par (eA) to the definition of ‘living annuity’ (with effect from 1 March 2021) provides that, in
anticipation of the termination of a trust, the value of the assets must be paid to the trust as a lump
sum pursuant to that termination. This is to accommodate the fact that a trust cannot ‘die’ like a
natural person (in par (e)). Before the amendment, if a trust that was initially nominated as the owner
of a living annuity upon the death of the original annuitant is subsequently terminated, such trust was
unable to make payments to its nominees. The new par (eA) rectifies this problem.
Please see chapter 9 for a discussion of the s 10C exemption in respect of qualifying annuities.
Annuity amounts
An ‘annuity amount’ is defined as an amount payable by way of an annuity under an ‘annuity contract’
(as defined) and in consequence of the commutation or termination of an annuity contract (s 10A).
These annuity amounts are bought from insurers in return for a lump sum cash consideration (purchased annuity).
In terms of the annuity contract, the insurer guarantees to pay an annuity until the death of the
annuitant or the expiry of a specified term.
An annuity amount under s 10A is divided into capital and income. The total annuity amount is included in gross income in terms of par (a) and the capital part, determined by a formula (s 10A(3)), is
exempt from tax (s 10A(2)).
4.3 Alimony payments (par (b) of the definition of ‘gross income’, ss 7(11) and
10(1)(u))
On separation or divorce, judicial orders or maintenance orders instruct the paying spouse to make
alimony or maintenance payments to the receiving spouse. Such payments are made in respect of the
receiving spouse’s or a child’s maintenance. Alimony payments are normally paid monthly from the
after-taxed income of the paying spouse.
If the paying spouse, for example, refrains from paying, the receiving spouse can request the court to
grant a maintenance order instructing the paying spouse’s retirement fund to pay the total maintenance due out of the minimum individual reserve of the paying spouse’s retirement fund. The minimum individual reserve of a member of a retirement fund is the balance of all the member’s contributions plus growth over his or her whole period of membership. Such an order and payment is, however, a once-off event and not a monthly payment. Amounts paid in terms of such maintenance
orders must be included in the income of the paying spouse (s 7(11) applies). The receiving spouse
must still include such an amount in gross income in terms of par (b), but has no ‘income’ because of
the exemption in s 10(1)(u).
The tax consequences of all alimony or maintenance payments are as follows:
For whom
Divorce on or before 21 March 1962
Divorce after 21 March 1962
Paying spouse
Section 21 deduction
No deduction
Section 7(11) inclusion in income if the
minimum individual reserve was reduced
once-off in terms of a maintenance order
Receiving spouse
Paragraph (b) inclusion in gross income
Paragraph (b) inclusion in gross income
and s 10(1)(u) exemption (for both
monthly amounts and s 7(11) amounts
received)
4.4 Services (paras (c) and (n) of the definition of ‘gross income’, ss 8B, 8C,
10(1)(gC), (nA) to (nE), (o) and (q))
Amounts received or accrued in respect of services rendered or to be rendered, or any employment
or the holding of an office, for example salaries paid to employees, are included in gross income
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4.4
Chapter 4: Special inclusions
(par (c)). Not all amounts paid ‘in respect of’ services rendered are included in gross income in terms
of par (c). Amounts included in terms of s 8(1), 8B and 8C are specifically excluded from the ambit of
par (c).
Awards for services rendered are taxable in the year of their receipt or accrual, irrespective of the
period to which the services relate. ‘Services rendered’ does not mean services rendered during the
year of assessment but refers to the total period, long or short, of the services of the taxpayer. The
reference to ‘services rendered or to be rendered’ means that the recipient is liable for tax on the full
amount received by or accrued to him, even though the services were rendered in a previous year of
assessment or will be rendered only in a later year of assessment. The full amount of a salary paid in
advance is included in gross income even though the services are rendered in a later year. If an
amount is paid to an employee for entering into a contract of service, it is paid as a consideration for
the rendering of future services and falls within gross income.
There must be a causal relationship between the amount received and the services rendered or to be
rendered. The words ‘in respect of’ therefore mean that the income was only received because the
services were rendered (CIR v Crown Mines Ltd (1923 AD)). The causal relationship need not be a
direct relationship (ITC 1439 (1987)). The causal relationship does not only exist in an employeeemployer relationship. If a person is, for example, paid for information relating to stolen diamonds
given to the police, the payment is made ‘in respect of’ services rendered and the amount will be
included in gross income in terms of par (c) (CSARS v Kotze (2002 (C)).
Voluntary awards in respect of services rendered, for example annual bonuses made ex gratia, are
specifically included. The question of whether or not there is any contractual obligation is irrelevant in
this case. As long as the amount is awarded to an employee in respect of services rendered, it is
included in gross income, whether or not it is payable under a contract of service.
In Stevens v CSARS (2006 SCA) an ex gratia payment was made by a company to a taxpayer to
compensate the taxpayer for the loss of a share option when the company went into voluntary liquidation. It was held that the payment was directly linked to the taxpayer’s services and employment,
and such receipt therefore fell within par (c).
All amounts paid or granted by a principal (for example an employer) to a recipient (the person
receiving the amount, for example an employee) as an allowance or advance must be included in
taxable income to the extent that it is not exempt from normal tax under section 10. Please see chapter 8 for a detailed discussion of allowances and advances.
All gains made by a person in terms of s 8B (broad-based employee share plan) or s 8C (equity instruments) are included in the income of the person in terms of those sections. All amounts referred to in
s 8(1) and all gains referred to in ss 8B and 8C are consequently not included in gross income terms
of par (c). Please remember that any amounts included in ‘income’ in terms of any other provision of the
Act are effectively included in gross income in terms of par (n).
Benefits or advantages that are included in gross income in terms of par (i), that is, any taxable
(fringe) benefit in terms of the Seventh Schedule, are also excluded from par (c) (proviso (i) to
par (c)). Receipts in terms of par (c) are subject to par (i) (proviso (i) to par (c)). This means that if a
‘taxable benefit’ in terms of the Seventh Schedule is received, par (c) will not apply since par (i)
already applies. It is therefore important to determine whether a benefit is a ‘taxable benefit’, and also
whether the Seventh Schedule excludes a specific type of benefit as a taxable benefit, or merely
states that no value must be placed on it.
If the definition of ‘taxable benefit’ in the Seventh Schedule specifically excludes a benefit granted to
an employee as a taxable benefit, it means that the Seventh Schedule does not apply to the benefit
and that it cannot be included in gross income in terms of par (i). It can, however, still be included in
gross income in terms of par (c), being an amount received in respect of services rendered. Any
benefit, the amount or value of which is exempt from tax in terms of s 10 (see s 10(1)(gC), (nA) to
(nE), (o) and (q) in chapter 5), is, for example, specifically excluded from the definition of ‘taxable
benefit’ in the Seventh Schedule. Such benefits or amounts can therefore not be included in gross
income in terms of par (i). As mentioned earlier, it can be included in gross income in terms of par (c)
but will be exempt in terms of s 10 again.
If the Seventh Schedule states that no value must be placed on a benefit (for example if the employer
continues to pay the employee’s contributions to the medical scheme after retirement in
par 12A(5)(a)), it means that there is still a taxable benefit (as defined) and that it must be included in
gross income in terms of par (i), even though the cash equivalent of the taxable benefit is Rnil.
Paragraph (c) can consequently not apply to such a no-value taxable benefit.
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4.4
If a person (A) receives an amount in respect of services rendered by another person (B), the amount
is expressly included in the gross income of the person who renders services (B) (proviso (ii) par (c)).
This anti-avoidance provision prevents the employee or office-holder from trying to avoid tax by
diverting his salary or rewards for services to other taxpayers, such as family members. The effect of
the proviso is that no matter who might actually receive the remuneration, the person who rendered
those services remains liable for normal tax thereon.
Example 4.1. Amounts received or accrued in respect of services rendered
Discuss whether the following amounts are included in gross income by virtue of par (c) of the
definition:
l a pension or retirement allowance received by an ex-employee from an employer, whether
payable in terms of a service contract or awarded voluntarily by an employer
l an amount received on retirement in lieu of accumulated leave
l a salary received in lieu of the notice required to be given by the employer in terms of the
service agreement
l a prize won by an employee for excellent services rendered
l a climatic allowance received by a public servant or employee
l an allowance paid by an employer to an employee for the upkeep of the garden of a house
belonging to the employer but occupied by the employee
l amounts received by way of ‘tips’, however small the service might be.
SOLUTION
The pension will be included by virtue of par (c) since the causal relationship to services rendered exists and voluntary awards are specifically included.
The amount in respect of accumulated leave will be included by virtue of par (c) since leave is a
benefit that accrues in respect of services rendered.
The salary in lieu of the notice required will be included by virtue of par (c) since it is payable
under a service contract.
The prize won will be included by virtue of par (c) because of the causal link to excellent services
rendered. Although it might be seen as an amount of a capital nature, the specific inclusions are
included in gross income even though they may be of a capital nature.
The climatic allowance will not be included by virtue of par (c), but will be included in taxable
income in terms of s 8(1) being an allowance.
The allowance for the upkeep of the garden will not be included by virtue of par (c), but will be
included in taxable income in terms of s 8(1) being an allowance.
Amounts by way of tips are voluntary amounts, but will be included by virtue of par (c) because
the causal relationship to services rendered exists and voluntary awards are specifically included.
Please note!
Leave is a condition of service and accrues to the employee as the services are
rendered. Accumulated leave is paid out because a benefit has accumulated in
respect of services rendered. In terms of the Guide for Employers in respect of
Employees Tax 2021 (PAYE-GEN-01-G15), leave pay (including accumulated
leave payments) does not form part of a severance benefit (see 4.6). It is a
payment in respect of services rendered and must be included in gross income
in terms of par (c) of gross income. The employees’ tax on such leave payments
must be calculated in the same manner as employees’ tax on a bonus (and it is
also seen as variable remuneration in terms of s 7B). See chapters 10 and 12
for detail on s 7B.
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4.4–4.6
Chapter 4: Specific inclusions
The employee is liable for tax on the full amount paid to him, even when the Commissioner has disallowed a portion of the payment made to the employee as a deduction to the employer (for
example because the requirements of s 11(a) are not met). The taxability in the hands of the receiver
and the deductibility in the hands of the payer are therefore independent of each other.
Please note!
Most receipts or accruals in respect of services will fall under both the general
‘gross income’ definition and par (c), but the amount cannot be included in
terms of both provisions. It can only be taxed once. Specific provisions override
general provisions.
4.5 Restraint of trade (paras (cA) and (cB) of the definition of ‘gross income’)
A company’s or a person’s right to trade freely is an incorporeal asset (ITC 1338 (43 SATC 171)) and
compensation paid for the restriction or loss of such right is a receipt of a capital nature. Restraint of
trade payments received by a person who
l is or was a ‘labour broker’ without a certificate of exemption, or
l is or was a ‘personal service provider’, or
l is or was a ‘personal service company’ or ‘personal service trust’
are specifically included in gross income (par (cA)).
Restraint of trade payments received by the above-mentioned persons will therefore be included in
gross income irrespective of whether it is of a capital nature or not. Restraint of trade payments of a
capital nature received by companies and trusts that are not personal service providers will not form
part of gross income (Interpretation Note No. 7).
Restraint of trade payments received by any natural person, which are related to any past, present or
future employment or the holding of an office, are specifically included in gross income (par (cB)).
Even though such payments may relate to employment, it is received for the acceptance of a restraint
of trade and not in respect of the termination or variation of any office or employment. It consequently
does not fall within par (d).
A restraint of trade payment received by a natural person that does not relate to employment, for
example if a natural person sells his business as sole proprietor and the buyer places a restraint of
trade on him, will not be included in gross income since it is capital in nature.
Please note!
The payer of the restraint of trade payment will be allowed to claim a deduction
under s 11(cA) provided that the recipient is taxed under par (cA) or (cB). The
receipt is taxed immediately and in full in the hands of the receiver, but the deduction in the hands of the payer must be spread over a certain period – see
chapter 12.
4.6 Services: Compensation for termination of employment (par (d) of the definition
of ‘gross income’ and s 10(1)(gG))
Paragraph (d) includes any amount received or accrued in respect of the termination or variation of
any office or employment (this also includes death as a reason for the termination) (par (d)(i)). It also
includes amounts received as a result of employer-owned policies of insurance that pay out or are
ceded as provided for (par (d)(ii) and (d)(iii)). Since paragraph (d) specifically excludes annuities
contemplated in par (a), the words ‘any amount’ effectively refers to lump sum amounts (except for
compulsory insurance annuities contemplated in par (d)(ii) – please see below). Voluntary amounts
are also specifically included and a voluntary amount therefore does not need to be paid in terms of a
contract. The words ‘any amount . . . received or accrued’ indicate that the gross amount of such a
lump sum received or accrued is included in gross income. Students often incorrectly claim the deductions claimable against lump sum benefits in terms of the Second Schedule against lump sums in
terms of par (d). No allowable deduction is claimable against lump sums in terms of par (d). Amounts
received from employer-owned policies of insurance (par (d)(ii) amounts) are, in turn, specifically
excluded from par (a). This means that all amounts (annuities and lump sums) from such policies of
insurance will be included in gross income in terms of par (d).
If an employee receives a lump sum in respect of the loss or variation of any office or employment
(par (d)(i)) from an employer that is not a retirement fund (since any lump sum awards from a retirement
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4.6
fund are excluded in terms of proviso (aa) and are specifically included in gross income in terms of
par (e)), it must be determined whether the amount also meets the requirements of the definition of
‘severance benefit’. This classification is important since it will determine in which column of the
subtotal method the amount must be included (see chapter 7), and in terms of which tax table the
normal tax thereon must be calculated.
The courts have not exhaustively defined the word ‘employment’ in the context of par (d). The dominant criterion in a determination of whether any situation constitutes employment for this purpose is that
of control of the employee (‘servant’) by the employer (‘master’). In other words, the employer must
have control of the conduct of the work in which the employee is employed, and a duty must rest on
the employee to carry out that work in accordance with the instructions of the employer as given from
time to time (SIR v Somers Vine, 29 SATC 179). Similar to par (c) (see 4.4), the words ‘in respect of’
require a causal or direct relationship between the amount received and the employment or office. It
must be clear that the amount is received in consequence of the service or office.
The word ‘office’ has been interpreted to mean a position that
l generally carries with it some remuneration
l has an existence independent of the person who fills it, and
l will, usually, be filled by successive holders.
A director of a company therefore clearly holds an office. A firm of attorneys that receives a monthly
retainer fee will typically not hold an ‘office’ (SIR v Somers Vine, 29 SATC 179).
Lump sums from employer-owned policies of insurance consist of amounts paid out (par (d)(ii)
amounts) or ceded (par (d)(iii) amounts) to the employee or director and any of their dependants or
nominees. All such amounts are deemed to be received by or accrued to the employee or director
and not by the dependant or nominee (proviso (cc)). The effect is that the employee or director must
include all such amounts in his or her gross income, even though a dependant or a nominee receives
such amount or such policy is ceded to him or her. All such amounts are exempt in terms of
s 10(1)(gG) if the requirements of that section are met.
Any par (d) amount that becomes payable in consequence of a person’s death is deemed to accrue
to the deceased immediately prior to his or her death (proviso (bb)). Such amount is included in the
deceased’s gross income for the period ending on the date of his or her death. This has the effect of
extinguishing any normal tax consequences for the actual recipient of that benefit.
The following amounts fall within the terms of par (d)(i):
l an amount determined with reference to the unexpired portion of his contract received by an
employee from his employer for breach of his contract of employment
l a payment made by a company to its managing director in consideration of his resignation from
the company
l a payment made by a company to its managing director in consideration of his agreeing to
accept a smaller salary in the future or to surrender his future rights to a pension
l compensation paid to a prospective employee because of the failure of his prospective employer
to enter into a contract of employment
l an amount received by a director for surrendering his right to a permanent directorship
l an amount of compensation paid in respect of the death of any person arising out of and in the
course of his employment and to which the s 10(1)(gB) exemption will apply
l an asset given to an employee at retirement as a final benefit from his employer.
Please note!
Insurance payouts received by employers are included in gross income under
the provisions of par (m) – see 4.18. Paragraph (d)(ii) and (iii) are aimed at insurance payouts received by or ceded to employees or directors.
Severance benefits
The concept ‘severance benefit’ includes both lump sums received from an employer and an associated institution in relation to that employer. It specifically excludes a retirement fund lump sum
benefit, a retirement fund lump sum withdrawal benefit as well as the two policies of insurance in
terms of par (d)(ii) and (iii). Therefore, only lump sums in respect of the termination or variation of any
office or employment (par (d)(i) amounts) and lump sums received in commutation of amounts due
under a contract of employment or service (par (f) amounts – see 4.8 below) can be severance
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Chapter 4: Specific inclusions in gross income
benefits. To be a severance benefit, the amount must be received by way of a lump sum (in terms of
par (d)(i) or (f)) and one of the following three requirements must be met:
(a) the person is 55 years of age, or
(b) the person has become permanently incapable of holding his or her office or employment due to
sickness, accident, injury or incapacity through infirmity of mind or body, or
(c) the person’s employer has ceased to trade or made a general or specific reduction in personnel*.
* If the person’s employer is a company and he or she at any time held more than five per cent of the
issued share capital of or members’ interest in the company, any amount received due to the employer ceasing to trade or a personnel reduction will not be a severance benefit. Such an amount will
still be included in gross income in terms of par (d)(i), but taxed in terms of the progressive tax table
for natural persons (and will be included in column 3 (and not column 1) of the subtotal method in
chapter 7).
Any severance benefit paid after the death of a person is deemed to have accrued to such person
immediately prior to his or her death (proviso to the definition of severance benefit). The severance
benefit is therefore included in the deceased’s gross income for the period ending on the date of his
or her death.
The taxability of the two types of par (d)(i) amounts can be summarised as follows:
Type
Taxability
Paragraph (d)(i) amounts that do not meet the
requirements of the definition of severance benefit
Include in gross income in column 3 (see chapter 7)
and tax in terms of the progressive tax table applicable
to the taxable income of natural persons
Paragraph (d)(i) amounts that meet the requirements of the definition of severance benefit
Include in gross income in column 1 (see chapter 7)
and tax in terms of the separate tax table applicable to
severance benefits (see 9.2.1)
Students are advised to keep severance benefits in a separate column (together with retirement fund
lump sum benefits) in the calculation of the taxable income of a natural person. This will facilitate
remembering that the normal tax payable on such amounts is calculated separately in terms of the
specific tax tables applicable to such amounts. It will also facilitate the calculations of some deductions as explained in chapter 7. See chapters 7 and 9 for complete details regarding the three columns of the subtotal method.
4.7 Fund benefits (paras (e) and (eA) of the definition of ‘gross income’)
Both a ‘retirement fund lump sum benefit’ and a ‘retirement fund lump sum withdrawal benefit’ are
included in gross income (par (e)). The taxable amounts to be included in gross income are calculated in terms of par 2(1) of the Second Schedule (as indicated by the definitions of these two terms
in s 1(1)). See chapter 9 for a detailed discussion on these retirement fund benefits.
Please note!
The taxable portion of lump sum benefits from funds is included in gross income
and not the gross lump sum benefit received. The taxable portion means the
balance remaining after the deduction of the allowable deductions in terms of
paras 5 and 6 of the Second Schedule from the gross amount of the lump sum
benefit. The ‘net amount’ of lump sum benefits from funds are therefore included in gross income. The amount included in gross income is also ‘remuneration’
for employees’ tax purposes (see chapter 10).
Amounts included in terms of par (eA) are excluded from par (e). Lump sums from State or Local
Authority pension funds are taxed on a favourable basis (see chapter 9). Until 28 February 2021, a
member of a provident fund can take his total retirement interest as a lump sum instead of only onethird, like in the case of a pension fund. Paragraph (eA) aims to discourage members of State or
Local Authority pension funds to transfer their benefits to a provident fund of the same employer in
order to increase the lump sum benefit.
If fund benefits are transferred from such a pension fund to such a provident fund, two-thirds of the
amount transferred are included in the gross income of members who remain in the service of the
same employer (par (eA)). Two-thirds of the amounts payable from the fund to a member or used to
redeem a debt are also included. These provisions also apply to State or Local Authority provident
funds with effect from 1 March 2018. This inclusion is also applicable in the case of a conversion from
a pension fund to a provident fund. It further also applies if a court granted an order during the divorce proceedings of a member in terms of which any part of his benefits should be paid to his
former spouse (proviso to par (eA)(bb)).
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4.8–4.9
4.8 Services: Commutation of amounts due (par (f) of the definition of ‘gross
income’)
Amounts received or accrued in commutation of amounts due under a contract of employment or
service are included in gross income (par (f)). ‘Commutation’ means ‘substitution’ and simply means
that the person substituted his right to receive a certain benefit under a contract of employment with
a right to receive another benefit. For example, an employee may substitute his right in terms of his
contract of employment to be given notice before the termination of his services for a cash payment.
Such amount will be included in his gross income in terms of par (f). Aforementioned commuted
amounts can also be severance benefits if the requirements of that definition (see 4.6) are met.
In view of the wide scope of par (d), it seems that there is little need for par (f) (which was enacted
many years prior to the enactment of par (d)). Paragraph (d), however, refers to ‘any office or employment’, while par (f) refers to ‘any contract of employment or service’.
The taxability of par (f) amounts is exactly the same as lump sum amounts received on the termination of employment (par (d)(i)) discussed in 4.6.
4.9 Lease premiums (par (g) of the definition of ‘gross income’, s 11(f) and (h))
Amounts paid for the use of assets are normally called ‘rent’ and are included in terms of the general
definition of gross income. The words ‘premium or consideration in the nature of a premium’ are not
defined in the Act. Case law has confirmed that lease premiums are amounts paid by the lessee to
the lessor, whether in cash or otherwise, for the use (or right of use) of certain assets distinct from and
in addition to, or instead of, rent (CIR v Butcher Bros (Pty) Ltd (1945 AD)). Lease premiums must have
an ascertainable monetary value. Such amounts paid in respect of the wide variety of tangible and
intangible assets listed are gross income (par (g)).
A lease premium must be distinguished from a rental deposit and an upfront rental receipt by the
lessor (Interpretation Note No. 109). A lease premium is usually, but not necessarily, received as a
cash lump sum at the commencement of the lease and is not refundable. A rental deposit is generally
also received up front, but its purpose is to cover potential damages that may occur during the lease
period. It is normally refundable to the lessee at the end of the lease period if not required to cover
damages or related costs specified in the lease agreement. An upfront rental receipt, also called a
bullet rental, is for the use or right of use, and remains rent in nature. A rental deposit or upfront rental
with these features is not a lease premium or consideration in the nature of a premium. No hard and
fast rule can be formulated to determine whether the receipt of an amount constitutes a lease premium, a rental deposit or an upfront rental. All the facts and circumstances of a particular case must be
considered in making that determination.
The whole amount of the premium is included in gross income in the year in which it is received by or
accrues to the lessor. The Commissioner may make an allowance to the lessor in special circumstances (s 11(h) – see chapter 13). In practice, however, s 11(h) is rarely applied in respect of lease
premiums received because the lease premium is received in cash. This is in contrast to leasehold
improvements received, where the lessor will only benefit from the improvements after the lease contract has expired – see 4.11.
If a lessee sublets land to a sub-lessee for a lump sum payment of R120 000 plus a monthly rental of
R25 000, it is submitted that the R120 000 is a lease premium, since it is a consideration passing
from the sub-lessee to the sub-lessor (the principal lessee) in addition to the rent. Paragraph (g)
therefore applies to a premium passing from a sub-lessee to a sub-lessor.
If the lessee cedes or sells his rights under the lease to a third person for a payment of R120 000, this
amount is not a lease premium, since it is a consideration (purchase price for the right of use) passing from a new lessee to a former lessee and not from a lessee to a lessor. For an amount to qualify
as a lease premium, it must meet the requirement that it is a payment passing from a lessee to a
lessor. The R120 000 will therefore not form part of the gross income of the original lessee, being a
receipt or an accrual of a capital nature, but may be subject to ‘capital gains tax’ if it meets all the
requirements.
The same amount that is deductible by the lessee paying the lease premium (in terms of s 11(f)), is
the amount that will be taxable in the hands of the lessor (in terms of par (g)). The deduction may,
however, only be claimed by the lessee if the amount is taxable in the hands of the lessor in terms of
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Chapter 4: Specific inclusions
par (g) and not, for example, if the lessor is exempt from tax as taxpayer. The deduction for the
lessee is spread over the period of the lease (s 11(f) – see chapter 13), while the amount received by
the lessor is included in one year.
Lessor:
Gross income par (g)
Include full amount in one year
Lessee:
Section 11(f ) deduction
Spread the deduction over greater of
lease period or 25 years
4.10 Compensation for imparting knowledge and information (par (gA) of the
definition of ‘gross income’, s 9(2)(e) and (f))
Any amount received by a person for imparting (disclosing or communicating) any scientific, technical, industrial or commercial knowledge or information is included in gross income (par (gA)).
Rendering any assistance or service in connection with the application or utilisation of such knowledge or information is also included in terms of par (gA).
Such an amount paid for ‘know-how’ is included in full in the year of receipt or accrual, whether paid
as a ‘premium or like consideration’ or not. Know-how payments received by non-residents are
deemed to be derived from a source within the Republic if they are paid by a resident or paid for the
use of the knowledge or information in the Republic (s 9(2)(e) and (f)).
4.11 Leasehold improvements (par (h) of the definition of ‘gross income’, s 11(h))
The lessor (owner) must include the value of the improvements effected on his land or to his buildings
by the lessee in his gross income (par (h)). The inclusion only applies if the lessor has a right to have
the improvements effected to his property. This means that the lessee has a legal and enforceable
obligation in terms of an agreement to effect improvements on the land or to the buildings of the
lessor.
A strict interpretation of the wording in the Act leads to an inclusion in the tax year in which the improvements (or the right to have them effected) accrue to the lessor. The right to have improvements
effected generally accrues when the lessor acquires the right to have the improvements effected
(Interpretation Note No. 110). The date of accrual is normally the date on which all the parties to the
lease agreement sign the lease agreement. Therefore, if the amount of the improvement is stipulated
in the lease agreement, the amount is generally included in the lessor’s gross income in the year of
assessment when all the parties sign the lease agreement. However, if the amount of the improvements is not stipulated in the lease agreement, the date of completion of the improvement is generally regarded as the date of accrual because the amount can only be determined then (Interpretation
Note No. 110).
The amount to be included in gross income of the lessor is
l the amount stipulated in the agreement as the value of the improvements, or
l the amount stipulated in the agreement as the amount to be expended on the improvements, or
l if no amount is stipulated, an amount representing the fair and reasonable value of the improvements.
If the lessee voluntarily pays an additional amount, such amount will not be included in the lessor’s
gross income. For example, if a lessee has agreed under a lease of land to erect buildings up to the
value of R500 000 but actually spends R600 000 on the improvements, only R500 000 is included in
the lessor’s gross income. If the lessee spends less than the amount stipulated in the agreement, the
stipulated amount must still be included in the lessor's gross income under paragraph (h). When the
contract does not stipulate any amount, the ‘fair and reasonable value’ of the improvements must be
objectively determined having regard to all the relevant facts and circumstances of the case. The fair
and reasonable value can correspond to the cost incurred by the lessee in certain cases.
A lease may obligate a lessee to erect certain specified buildings, such as a hotel or a parking garage, or a building that must meet certain specifications with a certain stated minimum value. The
amount to be included in the lessor’s gross income in such a case is the fair and reasonable value of
the improvements and not merely the minimum amount stated. This is because the lessor does not
merely require the erection of buildings – he requires the erection of a particular building, and the
lessee must meet his requirements even if the cost is in excess of the stated minimum value in the
lease.
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4.11–4.13
If the stipulated amount is contractually varied later, the increased sum will be included in the gross
income of the lessor provided the improvements are still in the course of construction at the date of
the variation of the lease (COT v Ridgeway Hotel Pty Ltd (1961)).
The lessor must include the full amount in the year in which the right accrued. The Commissioner
may, however, allow the deduction of a special allowance (s 11(h) – see chapter 13), having regard
to, amongst other things, the fact that the lessor will become entitled to the benefit of the improvements only upon the expiry of the lease.
4.12 Taxable (fringe) benefits (paras (c) and (i) of the definition of ‘gross income’)
Benefits and advantages received by an employee from an employer and which normally do not
consist of cash or cannot be turned into money are referred to as taxable (fringe) benefits. The ‘cash
equivalent’, as determined under the Seventh Schedule to the Act, of taxable benefits is included in
gross income (par (i)), and not the ‘amount’ as in the case of other amounts in respect of services
rendered (par (c)).
Paragraph (i) overrides par (c) and a benefit or an advantage to which par (i) applies can therefore
not be taken into account for par (c) (proviso (i) to par (c)). Paragraph (i), different to par (c), does not
refer to voluntary amounts.
In KBI v Kotze (1992 (T)) it was held that where a new employer releases an employee from an obligation the employee had towards a previous employer, it constitutes a fringe benefit in terms of
par (i). See chapter 8.4.13 and par 13(3) of the Seventh Schedule for a no value rule in respect of
such a fringe benefit.
Gains in respect of the right to acquire marketable securities that are taxable in terms of s 8A (rights
obtained on or before 26 October 2004) are also specifically included in gross income in terms of
par (i).
For a detailed discussion on the taxability of taxable (fringe) benefits from employment, see chapter 8.
4.13 Proceeds from the disposal of certain assets (par (jA) of the definition of ‘gross
income’, ss 8(4)(a), 22(8) and 26A)
The proceeds from the disposal by a taxpayer of fixed capital assets are capital in nature and the
capital gain on the disposal may form part of the taxable capital gain that must be included in the
taxable income of the taxpayer in terms of s 26A.
If a company that manufactures vehicles uses certain vehicles that it manufactures as fixed capital
assets within its business operations, the proceeds from the subsequent disposal of these vehicles
are capital in nature. However, if the assets are manufactured, produced, constructed or assembled
by the taxpayer and the assets are similar to any trading stock used for the purposes of manufacture,
sale or exchange by the taxpayer, such proceeds must be included in gross income (par (jA)). The
disposal of such fixed assets does not give rise to a taxable capital gain, but to a gross income
inclusion.
For example: A manufacturer, Alfa Ltd, uses one vehicle manufactured by it (at a cost price of
R250 000 in the 2020 year of assessment) in its business operation as a demonstration model, and
gave the right of use of another similar vehicle to an employee as a fringe benefit (in the 2020 year of
assessment). Alfa Ltd disposes of both the vehicles during the 2021 year of assessment for an
amount of R280 000 per vehicle. This will have the following consequences:
l the assets will be included in closing stock at the end of the 2020 year of assessment and in
opening stock at the beginning of the 2021 year of assessment at the cost price of R250 000 per
vehicle
l the full proceeds from the disposals (R280 000 per vehicle) are included in gross income in the
2021 year of assessment in terms of par (jA) (similar to when trading stock is sold), even though
the vehicles were used as fixed capital assets
l no wear-and-tear allowances are claimed on these vehicles in the 2020 year of assessment and
no capital gains are calculated on the disposal of the vehicles in the 2021 year of assessment
l no inclusion takes place under s 22(8) in the 2020 year of assessment, and
l no recoupment is included in terms of s 8(4)(a) in the 2021 year of assessment.
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Chapter 4: Specific inclusions in gross income
4.14 Dividends (par (k) of the definition of ‘gross income’, ss 10(1)(k) and 10B)
All dividends and foreign dividends are included in gross income (par (k)). However, s 10(1)(k) and
s 10B provide exemptions from normal tax for certain dividends (see chapter 5). The withholding tax
on dividends (see chapter 19) might be applicable to such exempt dividends.
4.15 Subsidies and grants (par (l) of the definition of ‘gross income’ and
par 12(1) of the First Schedule)
Any grants, subsidies in respect of any soil erosion works and certain capital development expenditure in terms of par 12(1) of the First Schedule are included in the gross income of farmers (par (l )).
4.16 Amounts received by or accrued to s 11E sporting bodies (par (lA) of the
definition of ‘gross income’)
Amounts received by or accrued to non-profit sporting bodies must be included in gross income if
another sporting body that is allowed a deduction in terms of s 11E paid the amount.
4.17 Government grants (par (lC) of the definition of ‘gross income’ and s 12P)
Any amount received by or accrued to a person by way of a government grant as contemplated in
s 12P must be included in gross income (par (lC)). The list of such government grants exempted in
terms of s 12P is contained in the Eleventh Schedule and is discussed in chapter 5.
4.18 Key-man insurance policy proceeds (par (m) of the definition of
‘gross income’)
Employers often hedge themselves against risks that relate to the death, disablement or illness of an
employee or director by taking out policies of insurance. Paragraph (m) includes the proceeds of
such policies of insurance paid out to the employer, including by way of a debt, in its gross income.
The final amount paid out must be reduced by the amount of any debt that is or has previously been
included in the employer’s gross income (proviso to par (m)).
4.19 Amounts deemed to be receipts or accruals and s 8(4) recoupments
(par (n) of the definition of ‘gross income’, ss 7, 8C and 24I)
All amounts that are specifically included in a taxpayer’s ‘income’ through other provisions of the Act
are included in gross income in terms of par (n). Examples of such amounts are the anti-avoidance
provisions of s 7 where certain donations are made, s 8C gains on the vesting of equity instruments
and s 24I foreign exchange gains. Furthermore, it is deemed that these amounts are received by or
accrued to the taxpayer (even if no actual amounts were received, for example, since s 24I taxes an
unrealised foreign exchange profit that results in no physical receipt by the taxpayer, it is deemed
that he received that amount).
See chapter 13 for a detailed discussion of the various s 8(4) recoupments and chapter 15 for a
discussion of s 24I.
4.20 Amounts received in terms of certain short-term insurance policies
(s 23L(2))
For the purposes of s 23L a ‘policy’ means a policy of insurance or reinsurance other than a longterm policy as defined in the Long-term Insurance Act (s 23L(1)).
No deduction is allowed in respect of premiums paid that are not taken into account as an expense
for ‘IFRS’ (s 23L(2)).
The non-deductibility of any such premiums during the current or any previous year of assessment
(see chapter 6) causes a reduced amount to be included in gross income when the policy is paid out
(s 23L(3).
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4.20
Example 4.2. Gross income
John (33 years old and unmarried) is an RSA resident. He designs websites and is in the full-time
employment of Webdezine CC, an RSA close corporation. Webdezine often sends him to provide training to its United States of America (USA) clients. John’s receipts and accruals during
the 2021 year of assessment were as follows:
Note
R
Salary .......................................................................................................
1
192 000
Lump sum from employer ........................................................................
2
32 000
Rent received ...........................................................................................
3
91 300
Leasehold improvements.........................................................................
3
?
Lease premium received .........................................................................
3
?
Interest received ......................................................................................
4
16 600
Dividends received ..................................................................................
5
49 000
Annuity .....................................................................................................
6
?
Leave conditions amended .....................................................................
7
4 000
Private work .............................................................................................
8
28 000
Gambling .................................................................................................
9
12 000
Royalties ..................................................................................................
10
130 000
Notes
(1) John’s salary was divided between the periods that he worked in the RSA and the USA (he
was, however, at all times an RSA resident):
South Africa
R128 000 (8 months)
USA
R64 000 (4 months)
Total
R192 000
(2) In recognition of all his years of faithful service, Webdezine voluntarily paid an amount equal
to two months’ salary to John on 28 February 2021.
(3) John owns a house in Stellenbosch, which he let to the Khumalo couple for the whole year.
The lease contract was concluded on 1 August 2019 and specified the following:
l The Khumalos must pay a monthly rent of R8 300 from 1 August 2019. The Khumalos
only paid the February 2021 rental on 15 March 2021.
l The Khumalos are obligated to effect improvements to the house to the value of
R40 000. Due to cash flow problems, the Khumalos only completed the improvements
during April 2020 at an amount of R35 000.
l The lease term expired on 31 July 2020. However, the Khumalos had a preference right
to lease the house again and paid a once-off amount of R6 000 as a lease premium (the
right to occupy the house) on 1 August 2020. The monthly rent remained unchanged at
R8 300.
(4) John has fixed deposits at various banks and received the following interest:
From South Africa
R9 100
From Switzerland
R7 500
Total
R16 600
(5) John owns shares in both RSA and Australian companies and received the following dividends:
From South Africa
R32 000
From Australia
R17 000
Total
R49 000
(6) John purchased an annuity from Old Mutual Life Insurers at R420 000 on 1 December 2020.
He receives a monthly annuity of R5 000 since 1 December 2020. The capital portion that is
calculated in terms of section 10A amounts to R1 100 per monthly annuity.
(7) Due to the recession, Webdezine amended the leave conditions of all its employees. From
1 June 2020 John is no longer entitled to paid study leave. To compensate him for this,
Webdezine paid a once-off amount of R4 000 to John on 1 June 2020.
(8) John updates the websites of his private clients over weekends. His total fees for the 2021
year of assessment amounted to R28 000.
(9) On his birthday (14 March 2020), John and a few of his friends gambled at the Grandwest
Casino for fun. John won R12 000 that evening.
(10) John wrote a manual on web design that was published during November 2020. The manual
is distributed across the world and he received the following gross royalties:
From South Africa
R86 000
From overseas
R44 000
Total
R130 000
continued
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4.20
Chapter 4: Specific inclusions
Calculate John’s gross income for the 2021 year of assessment.
l Indicate for each item whether it complies with the general definition of gross income or a
specific inclusion of the s 1 gross income definition.
l If it is a specific inclusion, provide the paragraph number, e.g. par (c). You do not have to
provide a reason for your answer.
l If an item is not included in gross income, provide a short reason by identifying the element
that is not met.
l You do not have to refer to case law (court cases).
SOLUTION
NB: John must include worldwide amounts, as he is an RSA resident.
Item
Amount
(R)
Reason
Salary
128 000
64 000
l
Par (c) services rendered
192 000
Lump sum
32 000
l
l
Par (c) services rendered
Not par (d) as employment conditions were not amended,
nor was the employment terminated.
Rental
99 600
l
l
l
l
General definition
Total = R8 300 × 12 = R99 600
February’s rental has already accrued
Practice: earlier of receipt or accrual
0
l
l
Par (h) leasehold improvement included at lessor
Act: in the year contract was concluded (i.e. 2020 year of
assessment)
The amount is specified and John was taxed on R40 000
(irrespective of amount incurred by lessee) in 2020
Leasehold
improvement
l
Lease premium
6 000
l
Par (g) lease premium included at Lessor
Interest received
9 100
7 500
l
General definition
l
Par (k) dividend and foreign dividends
15 000
l
l
l
Par (a) annuity
= R5 000 × 3 = R15 000
The capital portion (R1 100 × 3) is later exempt in terms of
s10A
4 000
l
l
Par (d) lump sum from employer OR
Par (f) also applies (because in terms of employment
contract). It is not a severance benefit.
28 000
l
Par (c) services rendered
–
l
Capital of nature does not meet the general definition of
gross income
86 000
44 000
l
General definition
16 600
Dividends
32 000
17 000
49 000
Annuity
Leave conditions
Private work
Gambling
Royalties
130 000
Gross income
572 200
75
5
Exempt income
Alta Koekemoer
Outcomes of this chapter
After studying this chapter you should be able to:
l identify amounts (that were included in gross income) that are exempt from normal
tax
l apply the qualifying criteria to determine whether certain amounts are exempt from
normal tax
l explain why certain amounts are exempt from normal tax.
Contents
5.1
5.2
5.3
5.4
5.5
5.6
Introduction ........................................................................................................................
Exemptions incentivising investments ...............................................................................
5.2.1 Interest received by natural persons (s 10(1)(i)) ..................................................
5.2.2 Interest received by non-residents (ss 10(1)(h) and 50A to 50H) ........................
5.2.3 Amounts received from tax-free investments (s 12T) ...........................................
5.2.4 Purchased annuities (s 10A) .................................................................................
5.2.5 Exemption of non-deductible element of qualifying annuities (s 10C) .................
5.2.6 Collective investment schemes (ss 10(1)(iB) and 25BA) .....................................
5.2.7 Proceeds from insurance policies (s 10(1)(gG), (gH) and (gI)) ...........................
5.2.8 Approved funds and associations (ss 10(1)(d) and 30B) ....................................
Exemptions relating to dividends .......................................................................................
5.3.1 Dividends from resident companies (s 10(1)(k)) ..................................................
5.3.2 REIT distributions (par (aa) of the proviso to s 10(1)( k)(i)) ..................................
5.3.3 Dividends in respect of employee-based share schemes (paras (dd), (ii), (jj)
and (kk) of the proviso to s 10(1)(k)(i))..................................................................
5.3.4 Dividends received by a company in consequence of a cession (par (ee) of
the proviso to s 10(1)(k)(i)) ....................................................................................
5.3.5 Dividends received by a company in consequence of the exercise of a
discretionary power by a trustee (par (ee) of the proviso to s 10(1)(k)(i))............
5.3.6 Dividends received in respect of borrowed shares (paras (ff) and (gg) of the
proviso to s 10(1)(k)(i)) ..........................................................................................
5.3.7 Dividends applied against deductible financial payments (par (hh) of the
proviso to s 10(1)(k)(i)) ..........................................................................................
5.3.8 Foreign dividends and dividends paid by headquarter companies (s 10B)........
Exemptions relating to employment...................................................................................
5.4.1 Foreign pensions (s 10(1)(gC)) ............................................................................
5.4.2 Unemployment insurance benefits (s 10(1)(mB)) .................................................
5.4.3 Uniforms and uniform allowances (s 10(1)(nA)) ...................................................
5.4.4 Relocation benefits (s 10(1)(nB)) ..........................................................................
5.4.5 Broad-based employee share plan (s 10(1)(nC)).................................................
5.4.6 ‘Stop-loss’ provision for share-incentive schemes (s 10(1)(nE)) ..........................
5.4.7 Equity instruments awarded to employees or directors (s 10(1)(nD))..................
5.4.8 Salaries paid to an officer or crew member of a ship (s 10(1)(o)(i) and (iA)) .......
5.4.9 Employment: Outside South Africa (s 10(1)(o)(ii)) ................................................
Exemptions that incentives education ...............................................................................
5.5.1 Bursaries and scholarships (s 10(1)(q) and (qA)) ................................................
Exemptions relating to government, government officials and governmental institutions
5.6.1 Government and local authorities (s 10(1)(a) and 10(1)(bA)) ..............................
5.6.2 Foreign government officials (s 10(1)(c)) ..............................................................
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5.1
Non-residents employed by the South African government (s 10(1)(p)) .............
Pension payable to former State President or Vice President (s 10(1)(c)(ii)) .......
Foreign central banks (s 10(1)(j))..........................................................................
Semi-public companies and boards, governmental and other multinational
institutions (s 10(1)(bB), (t) and (zE)) ....................................................................
5.7 Exemptions for organisations involved in non-commercial activities ................................
5.7.1 Bodies corporate, share block companies and other associations (s 10(1)(e))
5.7.2 Public benefit organisations (ss 10(1)(cN) and 30) ..............................................
5.7.3 Recreational clubs (ss 10(1)(cO) and 30A) ..........................................................
5.7.4 Political parties (s 10(1)(cE)) .................................................................................
5.8 Exemptions relating to economic development ................................................................
5.8.1 Micro businesses (s 10(1)(zJ))..............................................................................
5.8.2 Small business funding entity (ss 10(1)(cQ), 10(1)(zK), 30C and par 63B of
the Eighth Schedule) .............................................................................................
5.8.3 Amounts received in respect of government grants (ss 10(1)(y) and 12P) .........
5.8.4 Film owners (s 12O) ..............................................................................................
5.8.5 International shipping income (s 12Q) ..................................................................
5.8.6 Owners or charterers of a ship or aircraft (s 10(1)(cG)) .......................................
5.9 Exemptions incentivising environmental protection ..........................................................
5.9.1 Certified emission reductions (s 12K) ...................................................................
5.9.2 Closure rehabilitation company (s 10(1)(cP)) .......................................................
5.10 Exemptions aimed at amounts that are subject to withholding tax ...................................
5.10.1 Royalties paid to non-residents (s 10(1)( l)) ..........................................................
5.10.2 Amounts paid to a foreign entertainer or sportsperson (s 10(1)( lA)) ...................
5.10.3 Interest paid to non-residents (s 10(1)(h)) ............................................................
5.11 Other exemptions ...............................................................................................................
5.11.1 Alimony and maintenance (s 10(1)(u))..................................................................
5.11.2 Promotion of research (s 10(1)(cA))......................................................................
5.11.3 Interest received by the holder of a debt (s 10(1)(hA)) ........................................
5.11.4 War pensions and awards for diseases and injuries (s 10(1)(g), (gA) and
(gB)) ......................................................................................................................
5.11.5 Beneficiary funds (s 10(1)(gE)) .............................................................................
5.6.3
5.6.4
5.6.5
5.6.6
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5.1 Introduction
The ‘income’ of a taxpayer, as defined in s 1, is the amount of his gross income remaining after the
exclusion of any amounts exempt from normal tax for any year of assessment.
Income is thus calculated as follows:
Gross income
Less: Exempt income (s 10 and certain sections in s 12)
Rxxx
(xxx)
Income
Rxxx
Exempt income refers to amounts received or accrued that are not subject to normal tax. Governments often use tax exemptions to incentivise investments, to provide relief to the poor and underprivileged or to ensure that the income of organisations that are not directly involved in commercial
activities, such as religious organisations, amateur sports organisations and charities are not subject
to tax. In some cases, tax exemptions are provided to ensure that the same amount of income is not
subject to double taxation. The exemptions from normal tax provided for in the Act are grouped and
discussed in this chapter based on the purpose of the exemption as mentioned earlier.
Please note!
If an amount does not form part of income, no deduction in respect of expenses
relating to the amount may be claimed in terms of ss 11(a) and 23(f). For example,
dividends are included in gross income, but certain qualifying dividends are
excluded from income as they are exempt, with the result that no expenses
incurred in the production of these dividends may be claimed under s 11(a).
78
5.2
Chapter 5: Exempt income
5.2 Exemptions incentivising investments
The following types of investment income are exempt from normal tax:
5.2.1 Interest received by natural persons (s 10(1)(i))
Where a natural person receives interest from a source in South Africa, the following amounts qualify
for an exemption:
l where the person has not reached the age of 65, the first R23 800 interest that the person received during the year, or
l where the person is 65 years or older (or would have been 65 years old on the last day of the
year of assessment had he lived), the first R34 500 interest that the person received during the
year.
This exemption does not apply to interest received in respect of a tax-free investment (as defined in
s 12T – see 5.2.3). The exemption is also not available to non-natural persons (companies and
trusts).
5.2.2 Interest received by non-residents (ss 10(1)(h) and 50A to 50H)
Only interest that is received from a South African source will be included in a non-resident’s gross
income. The source of interest is in South Africa if the interest is paid by a resident (unless the interest is attributable to a permanent establishment of the non-resident situated outside South Africa),
or is received or accrued regarding any funds used or applied by any person in South Africa
(s 9(2)(b); see chapter 3).
Interest received by a non-resident is exempt from normal tax, subject to the exceptions mentioned
below (s 10(1)(h)). Interest received by a non-resident is, however, not tax-free, since it may be subject to the 15% withholding tax on interest (ss 50A–50H; see chapter 21). The rate of the withholding
tax on interest may be reduced by a double tax agreement between South Africa and the other
country (s 50E(3)).
The normal tax exemption does not apply in the case of a
l a natural person
– who was physically present in South Africa for a period exceeding 183 days in aggregate
during the twelve-month period preceding the date on which the interest is received by or accrues to that person, or
– if the debt from which the interest arises is effectively connected to a permanent establishment
of that person in South Africa, and
l any other person
– if the debt from which the interest arises is effectively connected to a permanent establishment
of that person in South Africa.
Where in the above cases the normal tax exemption does not apply, the foreign person will be exempt
from withholding tax on interest (s 50D(3)).
Example 5.1. Interest received by a non-resident
Oliver Capital Ltd is a company resident in Australia. It has a wholly-owned subsidiary in South
Africa, Sandile Investments (Pty Ltd, and carries on business in South Africa through a branch
that qualifies as a permanent establishment. Oliver Capital Ltd granted an interest-bearing loan to
Sandile Investments (Pty) Ltd (assume that the loan is on market-related terms) and received
R100 000 interest from Sandile Investments (Pty) Ltd on 31 December 2021. Oliver Capital Ltd
further received interest of R80 000 from a South African bank on a current account in its
branch’s name.
What effect does the above have on Oliver Capital Ltd’s South African taxable income for its year
of assessment ending on 31 December 2021?
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5.2
SOLUTION
Interest received from a South African source (R100 000 + R80 000) ......................
Interest exemption (s 10(1)(h)) (The loan in respect of which Oliver Capital Ltd
received the R100 000 interest is not effectively connected to Oliver Capital Ltd’s
permanent establishment in South Africa (see note) and therefore qualifies for the
exemption under s 10(1)(h). The R80 000 interest received on the branch’s current account is effectively connected to a permanent establishment and does not
qualify for the exemption) ..........................................................................................
R180 000
Taxable income .........................................................................................................
R80 000
(100 000)
Note: The subsidiary in South Africa (Sandile Investments (Pty) Ltd) is a company in its own
right and is therefore not a permanent establishment of Oliver Capital Ltd.
5.2.3 Amounts received from tax-free investments (s 12T)
As an incentive to encourage household savings, all amounts received from a ‘tax-free investment’ by
a natural person (or a deceased or insolvent estate of such person) is exempt from normal tax. The
capital gain or loss from the disposal of a ‘tax-free investment’ is also disregarded for CGT purposes
(see chapter 17). A dividend paid to a natural person in respect of a ‘tax-free investment’ is also
exempt from dividends tax (s 64F) (see chapter 19).
Tax-free investment (definition of ‘tax-free investment’, s 12T(1))
A ‘tax-free investment’ is a financial instrument or a policy owned by natural person and administered
by a person designated by the Minister of Finance. A financial instrument or policy in respect of a taxfree investment may only be issued by
l a bank (as defined in s 1 of the Banks Act, 1990)
l a long-term insurer (as defined in s 1 of the Long-term Insurance Act, 1998),
l a manager as defined in s 1 of the Collective Investment Scheme Control Act, 2002
l a manager as defined in s 1 of the Collective Investment Scheme Control Act, 2002 of a collective
investment scheme in participation bonds that complies with the requirements determined by the
Registrar
l the Government of the Republic of South Africa in the national sphere
l a mutual bank (as defined in s 1 of the Mutual Banks Act, 1993), or
l a co-operative bank (as defined in s 1 of the Co-Operative Banks Act, 2007).
(Regulation 172 (25 February 2015))
Investment contribution limit (s 12T(4)–(7))
An investment contribution of up to R36 000 per natural person is allowed during a year of assessment and a lifetime contribution limitation of R500 000 will apply. Individuals may open multiple taxfree savings accounts that may each invest in different ‘tax-free investments’; however, the annual
and lifetime limits apply in respect of the total of all tax-free investments held by a person. A product
provider may not accept an amount regarding a tax-free investment from an investor that exceeds
these limits (Regulation 172).
The annual or lifetime limit will not be affected by the following:
l Amounts received from a ‘tax-free investment’ and that are re-invested are not taken into account
when determining whether a person has exceeded the annual or lifetime contribution limits.
l Any transfers of amounts between tax free investments of a person shall not be taken into account when determining whether a person has exceeded the annual or lifetime contribution limits.
Any transfer of tax free investments from one individual (or his estate) to another individual will be
deemed to be a contribution and subject to the annual and lifetime contribution limits of the recipient.
Where a person’s contribution amounts are in excess of the above limitations, the person will be
penalised by having 40% of the excess contribution being deemed to be normal tax payable. Therefore, if, during a year of assessment, contributions in excess of the R36 000 annual contribution limit
were made for the benefit of a person, an amount equal to 40% of the excess amount is deemed to
be normal tax payable by the person in respect of that year of assessment. Where the aggregate of a
person’s investment exceeds R500 000, 40% of the excess is deemed to be normal tax payable. In
both instances all proceeds received from the tax-free investment will be exempt from tax despite the
fact that the contributions are in excess of the limits.
80
5.2
Chapter 5: Exempt income
Death or insolvency (definition of ‘tax free investment’, s 12T(1))
The deceased or insolvent estate of a natural person may also hold ‘tax free investments’. If a person
dies, the person’s ‘tax-free investments’ will be added to his or her estate as property for the purposes of levying estate duty, but while the investments are held by the estate, the returns from these
investments will continue to be exempt from income and dividends tax.
Example 5.2. Amounts received from tax free investments
During the 2021 year of assessment, Kagiso contributed R2 500 per month to a fund that qualifies as a ‘tax-free investment’ as defined in s 12T(1). Kagiso also contributed R3 000 per month
to the same fund on behalf of his major son. Kagiso received R1 500 interest and R800 dividends
during this year from his own investment. He capitalised the interest and dividends that accrued
during the year to the investment.
Determine whether Kagiso exceeded the annual contribution limitation to the tax-free investment
funds and discuss the normal income tax implications for Kagiso relating to the interest and dividends received.
SOLUTION
Total contribution made to the tax free investment
(R2 500 × 12 + R1 500 interest + R800 dividends) .......................................................
Less: Amounts received from a tax free investment that is exempt from normal tax
under s 12T(2) (R1 500 interest + R800 dividends) .......................................................
R32 300
(R2 300)
Contribution subject to limitation of R36 000 per person ...............................................
The contribution made to the fund on behalf of his major son is not added to his contributions as the contribution limit of R36 000 is calculated per person and his major
son is a different person. Since Kagiso’s total contributions made during this year of
assessment did not exceed R36 000, Kagiso did not exceed the annual contribution
limit.
The effect of the amounts received from his tax-free investment on Kagiso’ taxable
income for his 2021 year of assessment will be:
Interest received from tax-free investment.....................................................................
Dividends received from tax-free investments ...............................................................
Less: Amounts received from tax-free investment exemption – the exemption applies
in respect of both interest and dividends (s 12T(2)) ......................................................
R30 000
Taxable income .............................................................................................................
Rnil
R1 500
800
(2 300)
Notes
(1) The R800 dividend that Kagiso received from his tax-free investment will be exempt from
dividends tax in terms of s 64F(1)(o).
(2) The amount of dividends and interest that are exempt in terms of s 12T(2) do not affect the
dividend exemption under s 10(1)(k) (see 5.3.1) or the interest exemption under s 10(1)(i)
(see 5.1.1). Kagiso would still be entitled to the total interest exemption of R23 800 if he is not
yet 65 years old, or R34 500 if he is 65 or older (or would have been 65 years old had he
lived) in respect of other South African source interest that he receives during the year of
assessment.
5.2.4 Purchased annuities (s 10A)
The general rule is that amounts received as an annuity are included in a person’s gross income
(par (a) of the gross income definition). However, the capital portion of certain annuities are in some
cases exempt from normal tax (s 10A(2)). This exemption ensures that the capital payment made by
an investor when purchasing a life annuity product is not subject to normal tax when the amount is
paid back to the investor as part of the annuity. A company purchasing an annuity would not qualify
and the provisions are only applicable to natural persons.
The exemption applies to the capital portion of an ‘annuity amount’ payable to a ‘purchaser’, his
spouse or surviving spouse as per the definition of an ‘annuity contract’ (s 10A(2)). These terms are
defined as follows (s 10A(1)):
‘Purchaser’ is
l any natural person or his deceased or insolvent estate, or
l a curator bonis of, or a trust created solely for the benefit of, any natural person. The High Court
should have declared the person to be of unsound mind and incapable of managing his own
affairs and ordered the appointment of a curator or creation of a trust.
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5.2
An ‘annuity amount’ is an amount payable by way of annuity under an annuity contract and any amount
payable in consequence of the commutation or termination of an annuity contract.
An ‘annuity contract’ is an agreement concluded between an insurer in the course of his insurance
business and a ‘purchaser’, which meets all the following requirements:
l The insurer agrees to pay to the purchaser or the purchaser’s spouse or surviving spouse an
annuity or annuities until the death of the annuitant or the expiry of a specified term. Payments
may be made either to one of these annuitants or to each of them.
l The purchaser agrees to pay to the insurer a lump sum cash consideration for the annuity or
annuities.
l No amounts are or will be payable by the insurer to the purchaser or any other person other than
amounts payable by way of the envisaged annuity or annuities.
An agreement for the payment by an insurer of an annuity that, under the rules of a pension fund,
pension preservation fund, a provident fund, a provident preservation fund or a retirement annuity
fund is payable to a member of the fund or to any other person is excluded from the definition of an
annuity contract.
Therefore, only annuities that are bought from an insurer for a lump sum cash consideration give rise
to an annuity amount qualifying for division into capital and non-capital elements and for the exemption
of the capital element. Annuities payable under pension, pension preservation, provident, provident
preservation or retirement annuity funds were not acquired from an insurer and therefore do not
qualify for exemption. Similarly, inherited or donated annuities, annuities for services rendered, annuities granted as a consideration for the disposal of a business, asset or right would also not qualify.
Annuities: Calculation of capital element
The capital element of an annuity amount (which is the portion exempt from normal tax) is calculated
by means of the following formula:
Y=
A
×C
B
In this formula:
Y is the capital amount (i.e. the exempt amount) to be determined
A is the amount of the total cash consideration paid by the purchaser of the annuity
B represents the total ‘expected return’ of all the annuities provided for in the annuity contract
C is the annuity amount received of which the exempt capital portion must be calculated (s 10A(3)(a)).
The expected return is the sum of all the annuity amounts that are expected to become payable by
way of the annuity from the commencement of the annuity contract (s 10A(1)).
The calculation of the capital portion of all the annuity amounts to be paid under an annuity contract
must be done by the insurer before the payment of the first annuity amount (s 10A(4)). When a determination has to be made of the life expectancy of a person for the purpose of the calculation of the
expected return of an annuity or the probable number of years during which annuity amounts will be
paid under an annuity contract, the mortality tables must be used (s 10A(5)). The tables are reproduced in Appendix D. Furthermore, the age of the person concerned must for the purposes of the
determination be taken to be his age on his birthday immediately preceding the commencement of
the annuity contract (s 10A(5)).
Where an annuity contract is varied to the effect that it no longer qualifies as an “annuity contract” as
defined, the exemption in respect of the capital element will no longer apply to amounts which become due and payable thereafter (s 10A(6)(a)). Where the annuity amount is varied, the capital
element of the annuity must be recalculated (s 10A(6)(b)).
The insurer must give each annuitant under an annuity contract two copies of the calculation (as per
s 10A(4)) or re-calculation (as per s 10A(6)(b)) of the capital amount. This must be done within one
month after the calculation or recalculation, or further period as the Commissioner may allow
(s 10A(7)(a)). The annuitant must submit one copy to the Commissioner (s 10A(7)(b)).
The calculation done under s 10A(4) or recalculation under s 10A(6)(b) shall apply in respect of all
annuity amounts which become due and payable to any person under the annuity contract. It will also
apply to any subsequent year of assessment (s 10A(7)(c)).
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5.2
Chapter 5: Exempt income
Example 5.3. Annuities: Capital element
A man (aged 38) purchases a life annuity for R50 000. The annuity is R3 600 a year. His life expectancy is 30,41 years (based on his age on his birthday preceding the commencement of the
annuity contract). The expected return is therefore R109 476 (R3 600 × 30,41).
The capital element of the annuity that qualifies for the exemption is determined as follows:
A
×C
B
R50 000
× R3 600
=
R109 476
Y =
= R1 644
or 45,67% of each annuity amount
The percentage calculated, 45,67%, will be applied to all the future annuity amounts to determine
the exempt capital element (s 10A(4) and (10)).
If the cash consideration is paid by the purchaser in a foreign currency, the capital amount must,
after being calculated in the foreign currency, be translated into rand by applying the provisions of
s 25D (natural persons can convert using either spot rate or average rate – see chapter 15) to the
annuity amount payable during that year of assessment (a 10A(11)).
Annuities: Calculation of capital element on commutation (amendment) or termination
The capital element of an annuity amount payable in consequence of the commutation or termination
of the annuity contract is calculated by means of the following formula:
X=A–D
In this formula:
X is the amount to be determined (i.e. the exempt amount)
A is the amount of the total cash consideration paid by the purchaser of the annuity contract
D is the sum of the previously exempt capital element of an annuity received prior to the commutation or termination (s 10A(3)(c)).
Example 5.4. Annuities: Payable on commutation or termination of contract
An annuitant is paid an amount of R33 120 on the commutation of an annuity contract for which
he had initially paid a cash consideration of R60 000. The capital amounts payable under the
contract from its commencement up to the date of commutation totalled R49 680.
The capital element of the annuity amount payable on the commutation of the contract is determined as follows:
X = A–D
= R60 000 – R49 680
= R10 320
Therefore, of the amount of R33 120 received on the commutation of the contract, R10 320 is the
capital element and is exempt.
5.2.5 Exemption of non-deductible element of qualifying annuities (s 10C)
The rules of a pension fund, pension preservation fund and retirement annuity fund provide that not
more than one-third of the total value of the retirement interest may be commuted for a single payment (i.e. a lump sum payment). The remainder of the retirement interest must be paid in the form of
an annuity (including a living annuity). From years of assessment commencing on or after 1 March
2021, these rules will also apply in respect of a provident fund and a provident preservation fund.
To the extent that a retirement fund member elects to receive a portion of his or her retirement fund
interest in the form of a lump sum upon retirement, that lump sum is subject to tax as per the retirement lump sum tax table. In calculating the tax due on the lump sum, the former member is afforded
a deduction in terms of the Second Schedule to the extent the member has previously made nondeductible contributions to retirement funds. These non-deductible contributions constitute the total
contributions made to a pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund that did not qualify for a deduction against the person’s income in
terms of s 11F (or the repealed s 11(k)) (see chapter 7). All non-deductible contributions are therefore
first deducted from the lump sum in terms of the Second Schedule.
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5.2
The remaining balance of non-deductible contributions is then applied as an exemption against any
‘qualifying annuity’ received by the taxpayer. For purposes of s 10C, a ‘qualifying annuity’ includes
any retirement interest paid in relation to a pension fund, pension preservation fund, provident fund,
provident preservation fund or retirement annuity fund in the form of annuities. This exemption is
calculated in respect of the aggregate (i.e. total) qualifying annuities payable to a natural person. If,
after applying the s 10C exemption, a balance of non-deductible contributions remains, this balance
can be considered actual retirement fund contributions which can be claimed as a s 11F deduction.
Thereafter, any remaining balance is carried forward to the following year where the balance can be
applied in the same order (first as deduction against a lump sum, then as s 10C exemption and then
as s 11F deduction). Refer to chapter 9 for a detailed discussion in this regard.
Example 5.5. Exemption of non-deductible element of qualifying annuities (s 10C)
Sandile retires from the ABC pension fund on 1 March 2020. He received a lump sum of
R1 000 000 plus an annuity of R10 000 per month. Previous contributions of R1 100 000 he had
made to the pension fund over the years were not deductible for income tax purposes.
What will the normal tax consequences of the above be for Sandile’s 2021 year of assessment?
SOLUTION
First, the non-deductible contributions are deducted from the lump sum:
Retirement lump sum from ABC pension fund ......................................................
Reduced by non-deductible contributions ............................................................
Retirement lump sum included in terms of the gross income definition par (e).....
Next, the remaining balance of non-deductible contributions of R100 000
(R1 100 000 less R1 000 000) is used to exempt any ‘qualifying annuities’
received by the taxpayer.
Annuities in terms of par (a) of the definition of ‘gross income’ .............................
Less: Section 10C exemption. ...............................................................................
R1 000 000
(1 000 000)
Rnil
R120 000
(100 000)
R20 000
The balance of non-deductible contributions is Rnil (R1 100 000 less R1 000 000 (Second
Schedule deduction) less R100 000 (s 10C exemption)). If there had been a remaining balance, it
would have been added to current contributions in the s 11F deduction.
5.2.6 Collective investment schemes (ss 10(1)(iB) and 25BA)
A collective investment scheme is a scheme in terms of which two or more investors contribute money and hold a participatory interest in a portfolio of the scheme through shares, units or any other
form of participatory interest. The investors share the risk and the benefit of the investment in proportion to their participatory interest in a portfolio of a scheme.
Any amount distributed by a portfolio of a collective investment scheme to a holder of a participatory
interest in the portfolio within 12 months of the date of receipt by the portfolio, is deemed to accrue
directly to the holder on the date of distribution. This does not apply to capital amounts distributed or
to a portfolio of a collective investment scheme in property (s 25BA(1)(a)).
If an amount is not distributed by the portfolio within 12 months after its accrual to the portfolio, the
amount is deemed to accrue to the portfolio on the last day of the 12-month period (s 25BA(1)(b)).
The effect of this rule is that since the amount is deemed to accrue to the holder, it will be subject to
normal tax in the holder’s hands. The holder will be entitled to any relevant normal tax exemption,
depending on the nature of the amount. If the amount is not distributed by the portfolio within 12
months after its accrual to the portfolio, the amount is subject to normal tax in the portfolio’s hands.
The portfolio would then be entitled to any relevant normal tax exemption, depending on the nature of
the amount. Where the amount retained by the collective investment scheme is attributable to a
dividend received by or accrued to the portfolio, the amount is deemed to be income of the portfolio.
The effect of this is that the collective investment scheme would be entitled to deduct expenses
against the dividend income, which would otherwise not be the case (a 25BA(1)(b)).
Where an amount that is deemed to have accrued to the portfolio (because it was not distributed to a
holder within 12 months after its accrual to the portfolio) is subsequently distributed to a holder, the
amount is exempt in the holder’s hands in terms of s 10(1)(iB). This exemption only applies if the
amount was subject to normal tax in the portfolio’s hands.
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5.2
Chapter 5: Exempt income
Section 25BA is not applicable to a portfolio of a collective investment scheme in property. In fact,
such portfolio is excluded from the definition of ‘person’ in s 1 and since only a ‘person’ could be
liable for normal tax in terms of s 5, a portfolio of a collective investment scheme in property is not
liable for normal tax. Section 25BB provides for the taxation of Real Estate Investment Trusts (REITs).
A portfolio of a collective investment scheme in property would typically qualify as a REIT. The taxation of REITs is discussed in chapter 19.
The normal tax consequences of amounts received by a portfolio of a collective investment scheme
(other than a portfolio of a collective investment scheme in property and REITs) and distributed to the
holders of participatory interests in such portfolio are summarised in the following table:
Types of
income received
by the portfolio:
Normal tax consequences for the portfolio:
Normal tax consequences for the
holders of participatory interests in the
portfolio on amounts distributed:
Local and foreign interest
If distributed within 12 months from the date of
its accrual: Deemed to accrue directly to the
holder (s 25BA) (i.e. not included in the portfolio’s gross income).
If the holder is a resident, the amounts
are included in gross income. The
local interest may be exempt in terms
of s 10(1)(i) if the holder is a natural
person.
If the holder is a non-resident, only
local interest is included in gross income (foreign interest is not from a
source in South Africa). The local
interest may be exempt in terms of
s 10(1)(h) or 10(1)(i)).
If not distributed within the 12-month period: The
amounts accrue to the portfolio (s 25BA) (i.e.
included in the portfolio’s gross income).
If these amounts are subsequently
distributed to a holder, the amount is
exempt in the holder’s hands
(s 10(1)(iB)).
If distributed within 12 months from the date of
its accrual: Deemed to accrue directly to the
holder (s 25BA) (i.e. not included in the portfolio’s gross income).
The amount is included in gross income and may qualify for the
s 10(1)(k)(i) exemption.
If not distributed within the 12-month period: The
amounts accrue to the portfolio (s 25BA) (i.e.
included in the portfolio’s gross income). The
amounts could be exempt under s 10(1)(k)(i).
If these amounts are subsequently
distributed to a holder, the amount is
exempt in the holder’s hands
(s 10(1)(iB)).
If distributed within 12 months from the date of
its accrual: Deemed to accrue directly to the
holder (s 25BA) (i.e. not included in the portfolio’s gross income).
The amount is included in gross income and may qualify for the s 10B
exemption.
If not distributed within the 12-month period: The
amounts accrue to the portfolio (s 25BA) (i.e.
included in the portfolio’s gross income). The
amounts could be exempt under s 10B.
If these amounts are subsequently
distributed to a holder, the amount is
exempt in the holder’s hands
(s 10(1)(iB)).
Local dividends
Foreign
dividends
5.2.7 Proceeds from insurance policies (s 10(1)(gG), (gH) and (gI))
The proceeds from an insurance policy that pays out in the event of the death, disablement or illness
of a person could be exempt from normal tax depending on a number of factors. A distinction is
drawn between
l policies where the proceeds are intended to solely benefit a taxpayer on the death, disablement
or illness of an employee or director of the taxpayer (so called key-person policies); and
l policies where the proceeds are intended to directly or indirectly benefit a person or the person’s
beneficiaries on the death, disablement or illness of that person (for example, life insurance policies, group life insurance policies, disability insurance policies and income protection policies).
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5.2
Remember
Where an insurance policy is intended to solely benefit a taxpayer on the death, disablement or
illness of an employee or director, the taxpayer has to be the sole policyholder as well as the
sole beneficiary under the policy.
Where the intention is to benefit a person or the person’s beneficiaries on the death, disablement or serious illness of that person, the person could be the policyholder and beneficiary of
the policy. The person’s employer could also be the policyholder and the person (or the person’s beneficiaries) the beneficiary under the policy, or the person’s employer could be the
policyholder and beneficiary where there is a contractual obligation on the employer to pay the
proceeds received under the policy to the person (or the person’s beneficiaries).
Exemption
Inclusion in gross income
The normal tax consequences of proceeds received from these policies are explained by means of
the following table:
Policies that are intended to solely benefit
an employer (or company in the case of a
director) (that is, the employer is both the
policyholder and the beneficiary)
Policies in respect of
which an employee (or
director) or his/her
beneficiaries directly or
indirectly receive a benefit
Policies where a person
other than an employer (or
company in the case of a
director) is the
policyholder
The proceeds from an insurance policy
relating to the death, disablement or illness
of an employee/director are included in the
employer’s gross income (par (m) of ‘gross
income’) (see note 1).
Proceeds are included in
the
employee/director’s
gross income (par (d)(ii) of
‘gross
income’)
(see
note 4).
The proceeds from some
of these policies are of a
capital nature and therefore not included in gross
income. However, in the
case of an income protection policy and annuities
paid in terms of the policy,
the proceeds would be
included in gross income.
(The deduction of the
premiums on these income protection policies is
prohibited in terms of
s 23(r).)
If the premiums did not qualify for a deduction, the proceeds are exempt in the employer’s hands (s 10(1)(gH)) (see note 2).
If the premiums qualified for a deduction,
the proceeds are taxable in the employer’s
hands and are not exempt in terms of s
10(1)(gH) (see note 2).
Exempt under s 10(1)(gG).
The proceeds from an
insurance policy relating
to the death, disablement,
illness or unemployment of
any person who is insured
in terms of the policy are
exempt (s (10(1)(gI)) (see
note 3).
Notes:
(1) Paragraph (m) of ‘gross income’ also applies where the policy relates to the death, disablement
or illness of a former employee or director. Paragraph (m) is discussed in detail in chapter 4.
(2) The deductibility of insurance premiums is discussed in chapter 12.
(3) The exemption under s 10(1)(gI) also applies in respect of a policy of insurance relating to the
death, disablement, illness or unemployment of a person who is an employee of the policyholder.
The exemption under s 10(1)(gI) does not apply to a policy of which the benefits are payable by
a retirement fund.
(4) Paragraph (d)(ii) of ‘gross income’ provides that an amount received or accrued by or to a
person, or dependant or nominee of the person, directly or indirectly in respect of proceeds
from a policy of insurance where the person is or was an employee or director of the policyholder, is included in the person’s gross income. The paragraph specifically provides that any
amount received by or accrued to a dependant or nominee of a person shall be deemed to be
received by or to accrue to that person. This paragraph therefore applies where
l an employer is the policyholder and the employee or dependant or nominee of the employee is the beneficiary under the policy, or
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5.2–5.3
Chapter 5: Exempt income
l a company is the policyholder and a director of the company or its dependent or nominee
is the beneficiary under the policy, or
l an employer (or company in the case of a director) is the policyholder and beneficiary
under the policy, but is contractually obliged to pay the proceeds under the policy to the
employee or director, or his or her dependents or nominees.
Since a lump sum award from any pension fund, pension preservation fund, provident fund,
provident preservation fund or retirement annuity fund is not included in the person’s gross
income in terms of par (d)(ii) of the definition of ‘gross income’ (it is included in gross income in
terms of par (e) of the definition of ‘gross income’), it does not qualify for the exemption under
s 10(1)(gG).
5.2.8 Approved funds and associations (ss 10(1)(d) and 30B)
The receipts and accruals of the following funds and associations are exempt from normal tax:
l any pension fund, pension preservation fund, provident fund, provident preservation fund or
retirement annuity fund (these funds are defined in s 1), or a beneficiary fund defined in s 1 of the
Pension Funds Act (s 10(1)(d)(i))
l a benefit fund, which is defined in s 1 as any friendly society registered under the Friendly
Societies Act of 1956 or any medical scheme registered under the provisions of the Medical
Schemes Act (s 10(1)(d)(ii))
l a mutual loan association, fidelity or indemnity fund, trade union, chamber of commerce or industries (or an association of such chambers) or local publicity association approved by the Commissioner in terms of s 30B (s 10(1)(d)(iii))
l a company, society or other association of persons established to promote the common interests
of persons (being members of such company, society or association of persons) carrying on any
particular kind of business, profession or occupation, approved by the Commissioner in terms of
s 30B (s 10(1)(d)(iv)).
5.3 Exemptions relating to dividends
Dividends received from a South African resident company are generally exempt from normal tax.
Companies are subject to 28% normal tax on their taxable income. Dividends are in essence the
distribution of a company’s after-tax income. Dividends declared by a company are subject to 20%
dividends tax in respect of dividends paid on or after 22 February 2017 (previously 15%), which is
withheld by the company from the dividend and paid to SARS (see chapter 19) on behalf of the
beneficial owner (the shareholder). Since a company’s profit distributed to a shareholder is subject to
28% normal tax paid by the company and 20% dividends tax paid by the shareholder (withheld by
the company from the dividends declared), dividends are not also subject to normal tax in the shareholder’s hands.
Dividends are, as a general rule, exempt from normal tax. However, a number of exceptions apply,
mainly where the underlying company profit was not subject to normal tax, or to prevent tax avoidance. In the following cases dividends are not exempt from normal tax:
l dividends that form part of an amount that is paid as an annuity (s 10(2)(b))
l amounts distributed by a Real Estate Investment Trust (‘REIT’) or a controlled company in respect
of a REIT (par (aa) of the proviso to s 10(1)(k)(i); see 5.3.2)
l dividends in respect of employee-based share schemes (paras (dd), (ii) and (jj) of the proviso to
s 10(1)(k)(i); see 5.3.3)
l dividends received by a company in consequence of a cession (par (ee)(A) of the proviso to
s 10(1)(k)(i); see 5.3.4)
l dividends received by a company in consequence of the exercise of a discretionary power of
trustee of a trust (par (ee)(B) of the proviso to s 10(1)(k)(i); see 5.3.5)
l dividends received by a company in respect of shares borrowed by the company (paras (ff) and
(gg) of the proviso to s 10(1)(k)(i); see 5.3.6)
l dividends applied against deductible financial payments (par (hh) of the proviso to s 10(1)(k)(i);
see 5.3.7)
l dividends received as part of a dividend-stripping transaction (s 22B; see chapter 20).
Dividends declared by headquarter companies and foreign dividends may qualify for specific
exemptions (s 10B; see 5.3.8).
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5.3
5.3.1 Dividends from resident companies (s 10(1)(k))
Dividends declared by South African resident companies are exempt from normal tax (s 10(1)(k)(i)).
This exemption applies irrespective of whether the recipient is a natural person or a corporate entity
and also irrespective of whether the recipient is a resident or not.
Please note!
l Note that s 10(1)(k)(i) does not state that the exemption applies only to
dividends declared by South African resident companies. The limitation
comes from the definition of ‘dividend’ in s 1 that defines a ‘dividend’ as an
amount distributed by a resident company (see chapter 19).
l Dividends declared by a resident company are regarded as being from a
source within South Africa (s 9(2)(a); see chapter 3). If a non-resident receives such dividend, it will be included in the non-resident’s gross income
and will then be exempt in terms of s 10(1)(k)(i).
l Although these dividends may be exempt from normal tax, they may be
subject to dividends tax (see chapter 19).
5.3.2 REIT distributions (par (aa) of the proviso to s 10(1)(k)(i))
Amounts distributed by a Real Estate Investment Trust (‘REIT’) are fully taxable in the recipient’s
hands. The requirements of REITs and the taxation thereof are dealt with under s 25BB and are
discussed in detail in chapter 19. Where such distribution is in the form of a dividend, the dividend is
not exempt in the recipient’s hands (s 10(1)(k)(i)(aa)). This exclusion from the dividend exemption
also applies regarding dividends distributed by a subsidiary of a REIT, a so-called ‘controlled company’ (see chapter 19).
The dividend exemption will, however, apply where the REIT or a controlled company
l distributes a dividend to a non-resident, or
l distributes an amount to a holder of a share as consideration for the acquisition of shares in
the REIT or controlled company (that is, a dividend referred to in par (b) of the definition of
‘dividend’).
5.3.3 Dividends in respect of employee-based share schemes (paras (dd), (ii) (jj) and (kk) of
the proviso to s 10(1)(k)(i))
Employee-based share schemes are schemes whereby employees of a company are allowed to
subscribe for shares in the company. As a general rule, where a person receives an amount in cash
or in kind in respect of or by virtue of services or employment, the amount will be taxed as ordinary
revenue. A number of anti-avoidance measures are put in place to ensure that amounts received that
relate to services or employment are
l not subject to capital gains tax (the normal tax consequences for an employee from acquiring
shares in a company are dealt with in s 8B and 8C (see chapter 8), and
l not exempt from normal tax and only subject to dividends tax.
Dividends in respect of services rendered (par (ii) to the proviso to s 10(1)(k)(i))
Dividends received or accrued as result of services rendered or to be rendered would not be exempt
(therefore taxable as similar to remuneration), unless
l the dividend is received in respect of a restricted equity instrument as defined in s 8C (in such a
case, the taxability of the dividend will be determined under par (dd) of the proviso to s 10(1)(k)(i))
(see below), or
l the share is held by the employee.
(Paragraph (ii) to the proviso to s 10(1)(k)(i).)
Some share schemes hold pure equity shares where the sole intent of the scheme is to generate
dividends for employees as compensation for past or future services rendered to the employer,
without the employees ever obtaining ownership of the shares. The dividend yield in these instances
effectively operates as disguised salary for employees even though these dividends arise from equity
shares. These dividends will not be exempt, unless they fall under one of the above exceptions.
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5.3
Chapter 5: Exempt income
Dividends in respect of restricted equity instruments (par (dd) of the proviso to s 10(1)(k)(i))
A restricted equity instrument is an instrument with a number of restrictions imposed on it. The retention or acquisition by a scheme beneficiary of the benefits flowing from the scheme, for example
dividends, is subject to suspensive or resolutive terms or conditions. These benefits are dependent,
in essence, on continued employment or the rendering of services for a specified period.
Section 8C provides for the normal tax consequences of the vesting of restricted equity instruments
acquired by a person by virtue of his employment or office of director of a company or from a person
by arrangement with such employer (this section is discussed in detail in chapter 8).
Dividends from restricted equity instruments forming part of employee share schemes are taxable as
ordinary revenue unless the dividend falls into one of the following three exceptions:
l the restricted equity instrument is an equity share (other than an equity share that would have
been a hybrid equity instrument as defined in s 8E but for the three-year period requirement in
s 8E (see chapter 16)), or
l the dividend is an equity instrument as defined in s 8C, or
l the restricted equity instrument is an interest in a trust. Where the trust holds shares, all those
shares must be equity shares (other than an equity share that would have been hybrid equity instruments as defined in s 8E but for the three-year period requirement in s 8E (see chapter 16)).
(Paragraph (dd) of the proviso to s 10(1)(k)(i).)
In effect, the exemption from normal tax of dividends from restricted equity instruments forming part
of share incentive schemes will be respected if the underlying shares have pure equity features (for
example, stem from ordinary shares as opposed to preference shares).
Example 5.6. Dividends received in respect of a restricted equity instrument.
AMC Holdings (Pty) Ltd (‘AMC Holdings’) has given some of its employees and directors the
option to buy equity shares in the company at a value less than its market value on condition that
the shares may not be disposed of within three years of acquisition (the shares are therefore
restricted equity instruments as defined in s 8C during this three-year period).
Ajit Koosal, one of AMC Holdings’ directors, exercised this option and acquired 5 000 equity
shares in AMC Holdings on 1 March 2019. Ajit received a dividend of R100 000 on 28 February
2021 in respect of these shares.
What will the normal tax consequences of the above be for Ajit’s 2021 year of assessment?
SOLUTION
The dividend is included in Ajit’s gross income in terms of par (k) of the
definition of ‘gross income’ ....................................................................................
The dividend is exempt in terms of section 10(1)(k)(i)(dd). Although the
dividend is paid in respect of a restricted equity instrument as defined in s 8C,
the restricted equity instrument is an equity share (and not a hybrid equity
instrument as defined in s 8E). The dividend is therefore exempt. ........................
R100 000
(100 000)
Rnil
Dividends liquidating the underlying value of shares (paras (jj) and (kk) of the proviso to s 10(1)(k)(i))
Dividends in respect of restricted equity instruments acquired by virtue of a person’s employment or
office of director of a company will not be exempt if the value of the underlying shares is liquidated in
full or in part by means of a distribution before the restrictions on the shares fall away. As an antiavoidance measure, the dividend exemption will not apply where the dividend constitutes
l an amount transferred or applied by a company as consideration for the acquisition or redemption of any share in that company
l an amount received or accrued in anticipation of, or in the course of the winding up, liquidation,
deregistration or final termination of a company, or
l an equity instrument that does not qualify as a restricted equity instrument as defined in s 8C at
the time of receipt or accrual of the dividend (s 10(1)(k)(i)(jj))
Dividends received in respect of such restricted equity instruments will also not be exempt if the
dividend is derived directly or indirectly from
l an amount transferred or applied by a company as consideration for the acquisition or redemption of any share in that company, or
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5.3
l an amount received or accrued in anticipation of, or in the course of the winding up, liquidation,
deregistration or final termination of a company (s 10(1)(k)(i)(kk)).
Subparagraphs (jj) and (kk) override the provisions of par (dd) and (ii) of the proviso to s 10(1)(k)(i).
5.3.4 Dividends received by a company in consequence of a cession (par (ee) of the
proviso to s 10(1)( k)(i))
A person may cede his right to dividends to another person before or after the declaration of dividends. In terms of such cession, the cedent transfers his right to dividends to the cessionary. The
cessionary would typically pay an amount to the cedent for this right. Where a company receives a
dividend in consequence of a cession (i.e. the company is the cessionary), the dividend is not exempt. This paragraph aims to deny the dividend exemption where the recipient of the dividend is a
company but does not hold the underlying share.
The dividend will, however, be exempt where the dividend is received in consequence of a cession
where the result of the cession is that the company holds all the rights attaching to a share. The only
case where the exemption will not apply is where the company receives dividends in consequence of
a cession without acquiring the underlying share.
5.3.5 Dividends received by a company in consequence of the exercise of a discretionary
power by a trustee (par (ee) of the proviso to s 10(1)(k)(i))
Paragraph (ee) of the proviso to s 10(1)(k)(i) provides that a dividend received by a company in
consequence of the cession of a right to that dividend or in consequence of the exercise of a discretionary power by a trustee of a trust, will not qualify for the dividend exemption. This paragraph aims
to deny the dividend exemption where the recipient of the dividend is a company but does not hold
the underlying share.
The dividend will, however, be exempt where the dividend is received in consequence of the exercise of a discretionary power resulting in the company holding all the rights attaching to a share.
5.3.6 Dividends received in respect of borrowed shares (paras (ff) and (gg) of the proviso
to s 10(1)( k)(i))
Securities lending refers to the practice by which securities (i.e. shares) are transferred temporarily
from one party (the lender) to another (the borrower) with the borrower obliged to return them (or
equivalent securities) either on demand or at the end of any agreed term. The terms of such loan will
be governed by a securities lending agreement. As payment for the loan, the parties negotiate a fee
(a securities lending fee), generally quoted as an annualised percentage of the value of the borrowed
shares.
When a share is borrowed, the title of the share transfers to the borrower. The borrower therefore
becomes the full legal and beneficial owner of the share. An amount equal to the dividends declared
in respect of the borrowed shares is normally paid by the borrower to the lender. This amount is
referred to as a manufactured dividend and will be deductible under s 11(a) since it is an amount
incurred by the borrower in generating taxable income.
Remember
The most common reason for borrowing a security is to cover a short position. Short selling is the
practice of selling shares or other financial instruments, with the intention of subsequently repurchasing them at a lower price. In the event of an interim price decline, the short seller will profit,
since the cost of repurchase will be less than the proceeds received upon the initial sale. The short
seller is obliged to deliver the shares upon the initial sale and for this reason borrows the shares.
When the shares are repurchased, the borrower returns the equivalent shares to the lender.
Where a company receives a dividend in respect of a borrowed share held by the company, the
dividend does not qualify for the dividend exemption (s 10(1)(k)(i)(ff)).
Where a company receives dividends in respect of shares that are identical to the shares borrowed
by the company, an amount equal to the manufactured dividend does not qualify for the dividend
exemption (s 10(1)(k)(i)(gg)), except if a dividend in respect of a borrowed share accrued to the
company and was not exempt under s 10(1)(k)(i)(ff). An identical share is a share of the same class
in the same company as the share, or a share that is substituted for a listed share in terms of an
arrangement that is announced and released as a corporate action, as contemplated in the JSE
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5.3
Chapter 5: Exempt income
Limited Listings Requirements in the SENS (Stock Exchange News Service). Included is any corporate action as contemplated in the listings requirements of any other exchange, licenced under the
Financial Markets Act, that are substantially the same as the requirements prescribed by the JSE
Limited Listings Requirements, where that corporate action complies with the applicable requirements of that exchange. (Definition of ‘identical share’ in s 1).
Where the company loaned any other share that is identical to the borrowed shares, the aggregate
amount incurred as compensation for any distributions in respect of the borrowed shares must be
reduced by the aggregate amount accrued to the company as compensation for any distributions in
respect of the loaned shares (s 10(1)(k)(i)(gg)).
5.3.7 Dividends applied against deductible payments (par (hh) of the proviso to s 10(1)(k)(i))
Where a company incurs an obligation to pay deductible expenditure that is determined directly or
indirectly with reference to dividends in respect of an identical share to the share from which the
company received or accrued a dividend, the amount of the dividend will be taxable to the extent of
the deductible expenditure. This means that dividends received will not be exempt if used as an
offset against a deductible expense. For example, financial intermediary companies sometimes
receive dividends that are applied to offset deductible payments in respect of share derivatives (such
as stock futures, contracts-for-difference and total return swaps). In these cases, a mismatch arises if
the dividend received is exempt and the payment made in respect of the derivative or identical share
is deductible. The proviso to this subparagraph ensures that the subparagraph only denies an exemption to the extent of the expenditure. This anti-avoidance provision is similar to s 10B(6A) that applies
in respect of foreign dividends – see 5.3.8. The definition of an identical share is discussed in 5.3.6.
5.3.8 Foreign dividends and dividends paid by headquarter companies (s 10B)
Foreign dividends and dividends declared by headquarter companies are exempt from normal tax
under certain circumstances.
Foreign dividend
A foreign dividend is an amount paid by a foreign company in respect of a share in that foreign
company. A foreign company is any company that is not a resident. In order for the amount to qualify
as a foreign dividend, the amount must be treated as a dividend or similar payment for purposes of
the laws relating to tax on income on companies of the country in which the foreign company has its
place of effective management (if that country does not have any applicable laws relating to tax on
income, the amount must be treated as a dividend for purposes of the laws relating to companies in
that country). An amount does not qualify as a foreign dividend if it constitutes a redemption of a
participatory interest in a foreign collective investment scheme, or if it constitutes a share in the
foreign company (definition of ‘foreign dividend’ in s 1).
*
Remember
l
l
l
l
As foreign dividends are not received from sources in South Africa, they are not included in
a non-resident’s gross income. Foreign dividends are therefore only included in a resident’s
gross income.
It is important to note that it is the gross amount of a foreign dividend, before any withholding
taxes are deducted, that is included in a person’s gross income. Withholding taxes paid by a
South African resident on foreign dividends that are included in the resident’s gross income
may be allowed as a rebate against the resident’s South African normal tax payable. The
rebate is limited to the resident’s South African normal tax payable on the foreign dividend
included in gross income (s 6quat; see chapter 21).
If a foreign dividend is exempt from normal tax, the taxpayer is not entitled to deduct the
foreign withholding taxes paid in respect of the foreign dividend from its South African normal tax payable (s 6quat(1B); see chapter 21).
Foreign dividends should be converted into rand by applying the spot rate on the date on
which the dividend is received or accrued. Individuals and non-trading trusts are allowed to
elect to convert the amount into rand by applying the average rate of exchange for the year
of assessment (s 25D; see chapter 15).
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5.3
Dividend declared by headquarter company
A headquarter company is a resident company that complies with the following requirements:
l each of the shareholders of the company must hold at least 10% of the equity shares of the
company
l more than 80% of the company’s assets must be attributable to an interest in the equity shares of
a foreign company (or debt owed to, or intellectual property licensed to a foreign company
l the company must hold at least 10% of the equity shares of such foreign companies, and
l where the gross income of the company exceeds R5 million, more than 50% of its gross income
must consist of rental, dividend, interest, royalties or service fees paid by such foreign company
(or from the proceeds of the disposal of equity shares in a foreign company, or intellectual property licensed to a foreign company).
A headquarter company is in actual fact a local company, however, its dividends are treated as
dividends from a non-resident company in the recipient’s hands.
*
Remember
Although a dividend declared by a headquarter company is effectively a dividend from a local
company, it is excluded from the exemption under s 10(1)(k)(i), but may be exempt
under s 10B.
Complete and partial exemption in respect of foreign dividends
In some cases, foreign dividends and dividends declared by headquarter companies may qualify for
a complete exemption, whereas in other cases the dividends are only partially exempt, as set out in
the following diagram:
Foreign dividend
Partial exemption
Complete exemption
Participation
exemption
Dividend
declared on
JSE listed
shares
Dividend from
a controlled
foreign
company
Ratio
exemption
92
Dividend
=/>10% equity
share interest
Foreign country
Participation exemption (s 10B(2)(a))
If the person receiving the foreign dividend holds at least 10% of
Foreign
the total equity shares and voting rights in the company declaring
Company
the foreign dividend, the total foreign dividend will be exempt. If the
recipient of the foreign dividend is a company, the interest that any
other company forming part of the same group of companies as the
recipient has in the company declaring the dividend is added to
the recipient’s interest when determining whether the 10% threshold is exceeded.
The participation exemption will not apply
Shareholder
l if the amount of the foreign dividend arises from an amount
paid by one person to another, which is deductible from the
income of the person paying the amount, but not subject to normal tax in the hands of the
person receiving the amount (or net income as contemplated in s 9D(2A) in the case of a
controlled foreign company). The same applies if the amount of the dividend is determined
directly or indirectly with reference to such amount paid. This exclusion does not apply if
the amount is paid as consideration for the purchase of trading stock by the person paying
the amount (s 10B(4)(a))
South Africa
1
Country-tocountry
exemption
5.3
Chapter 5: Exempt income
l if the amount is paid by a foreign collective investment scheme (s 10B(4)(b))
l to the extent that the foreign dividend is deductible by the foreign company in determining
any tax on income of companies of the country in which the foreign company has its place
of effective management (proviso to s 10B(2))
l if the foreign dividend is received in respect of a share other than an equity share, for
example, preference shares (second proviso to s 10B(2)), or
l to any portion of an annuity or payment out of a foreign dividend received by or accrued to
any person (s 10B(5)).
Example 5.7. Participation exemption (s 10B(2)(a))
Multo Ltd, a South African resident, holds 15% of the equity shares and voting interest in BTX
Plc, a foreign company (not a controlled foreign company under s 9D). On 10 June 2021 Multo
Ltd received a foreign dividend of R3 million (converted to rand) from BTX Plc.
Calculate Multo Ltd’s taxable income for its year of assessment ending on 31 December 2021.
SOLUTION
Gross income – foreign dividend received (par (k) of the gross income definition)
Less: s 10B(2)(a) exemption (> 10% holding) .......................................................
Taxable income .....................................................................................................
R3 000 000
(R3 000 000)
Rnil
Notes
l If the foreign dividend payable to Multo Ltd arose from or was determined with reference to
an amount of interest that BTX Plc received from another South African company. The foreign
dividend will as a result not be exempt in Multo Ltd’s hands. This will be the case if the interest was deductible in the hands of the company paying the interest to BTX Plc and not subject to normal tax in BTX Plc’s hands.
l If the foreign dividend was received in respect of a non-equity share (i.e. a preference
shares), the participation exemption under s 10B(2)(a) will not apply.
l If the foreign dividend does not qualify for the participation exemption under s 10B(2)(a), it
may still qualify for the ratio exemption under s 10B(3) (see below).
93
Dividend
Country-to-country exemption (s 10B(2)(b))
If the foreign dividend is received by a foreign company,
which is a resident in the same country as the person paying
Foreign
the dividend, the dividend is exempt. This exemption applies
Company A
irrespective of the interest that the recipient company has in
the equity shares and voting interest in the company declaring the foreign dividend. Since foreign dividends received by
foreign companies are normally not included in such a foreign
company’s gross income for South African normal tax purForeign
poses (since such dividend will not be from a South African
Company B
source), the country-to-country exemption will only have practical application where the recipient foreign entity is a controlled foreign company. The foreign dividend received by a controlled foreign company will, if
it is not exempt in terms of s 10B(2)(b), be included in the controlled foreign company’s net income in terms of s 9D(2A) and consequently in the resident shareholder’s income in terms of
s 9D(2).
This exemption will, however, not apply
l if the amount of the foreign dividend arises from an amount paid by one person to another,
which is deductible from the income of the person paying the amount, but not subject to
normal tax in the hands of the person receiving the amount (or net income as contemplated
in s 9D(2A) in the case of a controlled foreign company). The same applies if the amount of
the dividend is determined directly or indirectly with reference to such amount paid. This
exclusion does not apply if the amount is paid as consideration for the purchase of trading
stock by the person paying the amount (s 10B(4)(a));
l where the amount is paid by a foreign collective investment scheme (s 10B(4)(b))
Residents in same
foreign country
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5.3
l to the extent that the foreign dividend is deductible by the foreign company in determining
any tax on income on companies of the country in which the foreign company has it place
of effective management (proviso to s 10B(2)), or
l to any portion of an annuity or payment out of a foreign dividend (s 10B(5)).
Controlled foreign company exemption (s 10B(2)(c))
If a resident receives a foreign dividend, it will be exempt to the
extent that the income of the foreign company declaring the diviForeign
Company
dend was included in the resident’s income in terms of s 9D.
Section 9D(2) includes a proportionate amount of a controlled
foreign company’s (CFC’s) net income in the income of a resident
shareholder. The exemption of this foreign dividend prevents the
double taxation of the same profits, both in terms of s 9D and
again when the profits are distributed as a dividend (section 9D
Resident
is discussed in detail in chapter 21).
The controlled foreign company exemption is limited to the following calculation:
Dividend
CFC
1
The aggregate of the net income of the CFC that is included in the resident’s income in
terms of s 9D (without having regard to the ratio exemption under s 10B(3)) ....................
Rx
Add: The aggregate of the net income of any other company which has been
included in the resident’s income in terms of s 9D by virtue of the resident’s
participation rights in the other company held indirectly through the company declaring the dividend (without having regard to the ratio exemption
under s 10B(3)) ..................................................................................................
Rx
Less: The aggregate amount of foreign tax paid in respect of amounts so included
in the resident’s income .....................................................................................
(Rx)
Less: The aggregate amount of foreign dividends that the resident received from
the above two companies that were exempt in terms of s 10B(2)(a),
10B(2)(d) or (2)(e) ..............................................................................................
(Rx)
Less: The aggregate amount of foreign dividends that the resident received from
the above two companies that were not included in the resident’s income
because of a prior inclusion in terms of s 9D (in other words, a dividend that
previously qualified for a s 10(1)(k)(ii)(cc) or a s 10B(2)(c) exemption)............
Dividend exemption in terms of s 10B(2)(c)..................................................................
(Rx)
Rx
This exemption will not apply to any portion of an annuity or payment out of a foreign dividend
(s 10B(5)).
Example 5.8. Controlled foreign company exemption (s 10B(2)(c))
Thebogo Baroka (a resident) holds 8% of the equity shares of French Cuisine Ltd (‘French Cuisine’) (a controlled foreign company).
During French Cuisine’s year of assessment ending on 28 February 2021, its net income (as
contemplated in s 9D) was R10 million; it paid foreign tax of R2,5 million; and distributed dividends of R2 million to its shareholders.
During French Cuisine’s year of assessment ending on 28 February 2022, its net income (as
contemplated in s 9D) was R2 million; it paid foreign tax of R500 000; and distributed dividends
of R5 million to its shareholders.
What is the effect of the above on Thebogo Baroka’s taxable income for his 2021 and 2022 years
of assessment?
94
5.3
Chapter 5: Exempt income
SOLUTION
Thebogo Baroka’s 2021 year of assessment:
Net income imputed in terms of s 9D(2) (R10 000 000 × 8%) ..................................
Foreign dividend (R2 000 000 × 8%) ........................................................................
Less: s 10B(2)(c) exemption: R160 000 foreign dividend limited to:
Aggregate net income imputed in terms of s 9D(2) ...............
R800 000
Less: Aggregate foreign tax paid (R2 500 000 × 8%) ............
(200 000)
R800 000
160 000
R600 000
The s 10B(2)(c) exemption is limited to R600 000. Since the foreign dividend was only R160 000, the entire amount is exempt ...................................
Taxable income ........................................................................................................
Thebogo Baroka’s 2022 year of assessment:
Net income imputed in terms of s 9D(2) (R2 000 000 × 8%) ....................................
Foreign dividend (R5 000 000 × 8%) ........................................................................
Less: s 10B(2)(c) exemption: R400 000 foreign dividend limited to:
Aggregate net income imputed in terms of s 9D(2)
(R800 000 in respect of 2021 + R160 000 in respect of 2022)
R960 000
Less: Aggregate foreign tax paid (R200 000 in respect of
2021 + R40 000 (R500 000 × 8%) in respect of 2022)...........
(240 000)
Less: Aggregate amount of foreign dividends previously not
(160 000)
included in income by reason of a prior inclusion under s 9D
(160 000)
R800 000
R160 000
400 000
R560 000
The s 10B(2)(c) exemption is limited to R560 000. Since the foreign dividend was only R400 000, the entire amount is exempt. ..............................
Taxable income ........................................................................................................
1
(400 000)
R160 000
Dividends declared in respect of JSE-listed shares (ss 10B(2)(d) and 10B(2)(e))
If the company declaring the foreign dividend is listed on the JSE, the dividend will be exempt
from normal tax. The exemption applies only if the dividend does not consist of a distribution of
an asset in specie. However, if a foreign dividend in the form of an in specie distribution is received in respect of a JSE listed share by a resident company, the foreign dividend will be exempt (s 10B(2)(e)).
This exemption will not apply to any payment out of a foreign dividend received by or accrued
to any person (s 10B(5)).
Remember
Because dividends declared in respect of listed shares are subject to dividends tax, they are
exempt from normal tax.
1
Ratio exemption (s 10B(3))
A foreign dividend may qualify for the ratio exemption to the extent that it does not qualify for
the above exemptions (meaning the participation exemption, country-to-country exemption,
controlled foreign company exemption or JSE-listed share exemption). This exemption is calculated in terms of the formula
A=B×C
‘A’ represents the amount to be exempted for a specific year of assessment.
‘B’ represents
l the ratio of 25/45 if the person receiving the dividend is a natural person, deceased or
insolvent estate or a trust
l the ratio of 8/28 where the person receiving the dividend is a person other than a natural
person, deceased or insolvent estate or a trust (thus also companies), or is an insurer in respect of its company policyholder fund, corporate fund or risk policy fund, or
l the ratio of 10/30 where the person receiving the dividend is an insurer in respect of its
individual policyholder fund.
‘C’ represents the aggregate of all foreign dividends that the person received during the year of
assessment that did not qualify for the above exemptions.
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5.3
This exemption will not apply to any portion of an annuity or any payment out of a foreign dividend (s 10B(5)).
Example 5.9. Ratio exemption (s 10B(3))
FinCon Holdings (Pty) Ltd (‘FinCon’), a South African resident, received the following dividends
paid by non-resident companies during its 2021 year of assessment ending on 31 December
2021:
l A dividend of R200 000 from XLN Plc, a company resident in the UK. FinCon holds 5% of
XLN’s total equity shares and voting interest. XLN Plc is not a controlled foreign company.
l A dividend of R280 000 from ABL Ltd, a company resident in Ireland. FinCon holds 6% of
ABL Ltd’s total equity shares and voting interest. ABProp (Pty) Ltd, a company forming part of
the same group of companies as FinCon holds 5% of ABL’s total equity shares and voting interest. ABL Ltd is not a controlled foreign company.
l A dividend of R650 000 from DMA Ltd, a company resident in the Netherlands. FinCon holds
15% of DMA Ltd’s total equity shares and voting interest. The dividend declared by DMA Ltd
was allowed as a deduction when calculating DMA Ltd’s income tax liability in the Netherlands. DMA Ltd is not a controlled foreign company.
l A dividend of R800 000 from BDS Ltd, a company resident in China. FinCon holds 5% of BDS
Ltd’s total equity shares and voting interest. BDS Ltd is a controlled foreign company and
R300 000 of the dividend qualifies for an exemption under s 10B(2)(c).
Calculate FinCon’s taxable income for its 2021 year of assessment.
SOLUTION
Gross income
The dividends received qualify as foreign dividends since they are paid by non-resident companies; the foreign dividends are included in gross income in terms of par (k) of the definition of
‘gross income’:
l Foreign dividend received from XLN Plc..............................................................
R200 000
l Foreign dividend received from ABL Ltd
280 000
l Foreign dividend received from DMA Ltd ............................................................
650 000
l Foreign dividend received from BDS Ltd .............................................................
800 000
Exemptions
l Foreign dividend received from XLN Plc – the foreign dividend is not exempt
under s 10B(2) since FinCon holds less than 10% of XLN Plc total equity
shares and voting interest. ...................................................................................
nil
l Foreign dividend received from ABL Ltd – the foreign dividend is exempt under
s 10B(2)(a), since FinCon together with a company forming part of the same
group of companies holds more than 10% of ABL Ltd’ total equity shares and
voting interest. ......................................................................................................
(280 000)
l A foreign dividend received from DMA Ltd – since a deduction was allowed
when calculating DMA Ltd’s income tax liability in the Netherlands, it does not
qualify for a participation exemption (s 10B(2)(a)). ..............................................
nil
l Foreign dividend received from BDS Ltd – an amount of R300 000 qualifies for
an exemption under s 10B(2)(c) ..........................................................................
(300 000)
Ratio exemption:
Foreign dividends not exempt:
Foreign dividend from XLN Plc ................................................................ R200 000
Amount received from DMA Ltd ..............................................................
650 000
Foreign dividend received from BDS Ltd (R800 000 – R300 000) ...........
500 000
R1 350 000
Ratio exemption (8/28 × R1 350 000) .......................................................................
Taxable income ...........................................................................................................
(385 714)
R964 286
Anti-avoidance provisions relating to share schemes (s 10B(6))
Certain measures are put in place to prevent taxpayers from converting a taxable salary into exempt
(or low taxed) dividends. Many share schemes hold pure equity shares where the sole intent of the
scheme is to generate dividends for employees as compensation for past or future services rendered
to the employer, without the employees ever obtaining ownership of the shares. The dividend yield in
these instances effectively operates as disguised salary for employees even though these dividends
arise from equity shares.
96
5.3–5.4
Chapter 5: Exempt income
Where a foreign dividend is received or accrued in respect of services rendered or to be rendered or
in respect of or by virtue of employment or the holding of any office, the above exemptions under
s 10B(2) and 10B(3) will not apply, unless
l the share is held by the employee, or
l the foreign dividend is received in respect of a restricted equity instrument as defined in s 8C
held by the employee. A foreign dividend received in respect of a restricted equity instrument will
not be exempt if the shares were acquired in the circumstances contemplated in s 8C and the
dividend is derived directly or indirectly from, or constitutes:
– an amount transferred or applied by a company as consideration for the acquisition or redemption of any share in that company
– an amount received or accrued in anticipation or in the course of the winding up, liquidation,
deregistration or final termination of a company, or
– an equity instrument that does not qualify, at the time of receipt or accrual of the foreign dividend, as a restricted equity instrument as defined in s 8C.
Dividends applied against deductible payments (s 10B(6A))
Where a company incurs an obligation to pay deductible expenditure that is determined directly or
indirectly with reference to foreign dividends in respect of an identical foreign share from which the
company received or accrued a dividend, the amount of the foreign dividend will be taxable to the
extent of the deductible expenditure. This means that foreign dividends received will not be exempt
in terms of s 10B(2) or (3) if used as an offset against a deductible expense. For example, financial
intermediary companies sometimes receive foreign dividends that are applied to offset deductible
payments. In these cases, a mismatch arises if the foreign dividend received is exempt in terms of
s 10B(2) or (3) and the payment made is deductible. The proviso to this subparagraph ensures that
the subparagraph only denies an exemption in terms of s 10B(2) or (3) to the extent of the expenditure. Section 10B(6A) comes into operation on 1 January 2021 and applies in respect of foreign
dividends received or accrued on or after that date. This anti-avoidance provision is similar to
par (hh) of the proviso to s 10(1)(k)(i) that applies in respect of local dividends – see 5.3.7. The definition of an identical share is discussed in 5.3.6.
5.4 Exemptions relating to employment
Employers often grant benefits or allowances to their employees to enable them to perform their
duties as employees. Where a non-cash benefit is granted to an employee, the taxable benefit should
be determined in terms of the Seventh Schedule and included in the employee’s gross income in
terms of par (i). However, it appears that par 1 of the Seventh Schedule (definition of ‘taxable benefit’)
excludes all exempt amounts. This creates an anomaly as it is normally only if an amount is included
in gross income that can be exempt in terms of s 10. In this regard, consider uniform benefits
(s 10(1)(nA)), relocation benefits s 10(1)(nB) and scholarships and bursaries (s 10(1)(q)/(qA)). It is
submitted that the exemption can still apply in these situations because the benefits can still be
included in gross income in terms of par (c) of the gross income definition and not in terms of par (i)
thereof.
The same applies where employers pay allowances or advances to employees. All cash allowances
and advances are included in the taxable income (and not in the gross income) of the recipient in
terms of s 8(1). Any portion of an allowance, to the extent that it is exempt from normal tax in terms of
s 10, must be excluded from the amount to be included in taxable income (s 8(1)). An example of an
allowance that is exempt in terms of s 10 is a uniform allowance meeting all the requirements of
s 10(1)(nA). Such an exempt uniform allowance remains an amount received in respect of services
rendered and, even though such an amount is specifically excluded from the s 8(1) amount, it can
still be included in gross income in terms of par (c) of the gross income definition. The amount can
therefore be exempt in terms of s 10(1)(nA).
5.4.1 Foreign pensions (s 10(1)(gC))
Any foreign pension, annuity or lump sum will be included in the gross income of a resident. These
foreign pensions, annuities and lump sums are, however, exempt from normal tax in the hands of the
resident, if received or accrued
l from the social security system of any foreign country (s 10(1)(gC)(i)), or
l from a source outside South Africa as compensation for past employment outside South Africa
from a pension fund, pension preservation fund, provident fund, provident preservation fund or
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5.4
retirement annuity fund as defined in s 1 of the Act (s 10(1)(gC)(ii)). These definitions of retirement funds refer to South African funds approved by SARS. This implies that the exemption from
normal tax only applies to amounts received from foreign retirement funds. Amounts received
from any South African pension fund, pension preservation fund, provident fund, provident
preservation fund or retirement annuity fund do not qualify for the exemption. Amounts received
from a South African long-term insurer will also not qualify for this exemption. Amounts transferred
to a South African fund or long-term insurer from a source outside South Africa in respect of a
specific member, will, however, qualify for the exemption.
It is clear that it is lump sum payments, pensions or annuities from a source outside South Africa
received or accrued by a resident that may be exempt. Any pension, annuity, or lump sum is deemed
to be received from a source within South Africa if the services in respect of which the amount relates
were rendered within South Africa (s 9(2)(i); see chapter 3). Where such amount relates to services
that were rendered partly in South Africa and partly outside South Africa, the full amount is included
in gross income and the portion of the amount that is exempt, is calculated in terms of the following
formula:
Amount exempt
=
Total amount
received / accrued
×
The period during which the services
were rendered outside South Africa
The total period during which
the services were rendered
Example 5.10. Foreign pensions
Lerato is a South African resident. From 1 March 2020 she received R7 000 per month from a
foreign pension fund with regard to services rendered to a foreign company from 1 March 1981
until her retirement in February 2020.
She rendered services at the following times in the following places:
1 March 1982 – 28 February 1990 in Amsterdam (8 years)
1 March 1990 – 28 February 1993 in Bloemfontein (3 years)
1 March 1993 – 28 February 2001 in Amsterdam (8 years)
1 March 2001 – 28 February 2009 in Bloemfontein (8 years)
1 March 2009 – 28 February 2016 in Amsterdam (7 years)
1 March 2016 – 28 February 2020 in Bloemfontein (3 years)
Explain the South African normal tax implications of Lerato’s pension in respect of her 2021 year
of assessment.
SOLUTION
Gross income
Pension received (R7 000 × 12) (since Lerato is a resident, her worldwide income is
included in her gross income .......................................................................................
Less: Pension exempt in terms of s 10(1)(gC) (R4 351 × 12) (note 1)..........................
84 000
(52 212)
Income ..........................................................................................................................
31 788
Note 1
The portion of Lerato’s pension that is received from a source outside South Africa, is exempt in
terms of s 10(1)(gC). Since the services to which the pension relates were rendered partly in
South Africa and partly outside South Africa, a portion of Lerato’s pension will be regarded as
being from a source outside South Africa and exempt in terms of s 10(1)(gC). This portion is
calculated as follows:
The total period during which the services were rendered...........................................
37 years
The period during which the services were rendered in South Africa ..........................
14 years
Portion of monthly pension regarded from a source within South Africa
(R7 000 × 14/37) ...........................................................................................................
R2 649
Portion of monthly pension exempt in terms of s 10(1)(gC) (R7 000 × 23/37) ..............
R4 351
Note 2
If, instead of receiving a pension from a foreign pension fund, Lerato invested in a living annuity
from a South African resident life insurance company (that is a long-term insurer), the capital
portion of the annuity that she received during the months of March 2020 to February 2021 would
be exempt under s 10A (see 5.2.4) and the deemed foreign-sourced portion of the non-capital
portion of the annuity will no longer be exempt under s 10(1)(gC)(ii) since the long-term insurer is
a South African resident life insurance company.
98
5.4
Chapter 5: Exempt income
5.4.2 Unemployment insurance benefits (s 10(1)(mB))
Any benefit or allowance payable in terms of the Unemployment Insurance Act 63 of 2001 is exempt
from normal tax.
5.4.3 Uniforms and uniform allowances (s 10(1)(nA))
Benefits granted and allowances paid by an employer to an employee in respect of a uniform are
both taxable in the employee’s hands. The cash equivalent of a uniform benefit, as well as the
amount of a uniform allowance paid by the employer can be included in the employee’s gross income in terms of par (c) of the definition of gross income (refer to discussion in par 5.4). Certain
uniforms are, however, exempt from normal tax (s 10(1)(nA)). For the exemption to apply, the uniform
should be clearly distinguishable from ordinary clothing, and the employee should be required to
wear the uniform while on duty.
5.4.4 Relocation benefits (s 10(1)(nB))
Where an employer pays the relocation cost of an employee who is either transferred from one place
of employment to another place of employment or appointed/terminated as an employee, the benefit
of the relocation cost can be included in the employee’s gross income in terms of par (c) of the gross
income definition (refer to discussion in par 5.4). An exemption from normal tax in terms of
s 10(1)(nB) applies to the following expenses borne by the employer:
l the expense of transporting the employee, members of his household and their personal goods
and possessions from his previous place of residence to his new place of residence
l those costs that have been incurred by the employee in respect of the sale of his previous residence and in settling-in at his new permanent place of residence
l the expense of hiring residential accommodation in a hotel or elsewhere for the employee or
members of his household for a maximum period of 183 days after his transfer took effect or after
he took up his appointment. The rented accommodation must be temporary while the employee
is in search of permanent residential accommodation.
The employer must have borne these expenses, that is, he must either have incurred them himself or
have reimbursed his employee.
In practice, SARS allows the exemption for the reimbursement of the expenditure incurred by the
employee on the following:
l new school uniforms
l the replacement of curtains
l the registration of a mortgage bond and legal fees
l transfer duty
l motor-vehicle registration fees
l telephone, water and electricity connection
l the cancellation of a mortgage bond, and
l an agent’s fee on the sale of the employee’s previous residence.
It will not accept a loss incurred by the employee on the sale of his previous residence or an architect’s
fees for the design or alteration of a residence.
Please note!
l Only actual expenses incurred by the employer, or reimbursed by the employer, qualify for the exemption. Where an employer pays an allowance to
an employee, such as a relocation allowance equal to a number of months’
salary, the allowance will be fully taxable in the employee’s hands if the purpose is not to reimburse the employee for actual relocation expenses incurred.
l The exemption is not subject to a monetary limitation. As long as the expense
is actually incurred (either by the employer, or the employee who is then reimbursed by the employer for the expense), the benefit that accrues to the
employee is exempt from normal tax.
l The 183 days limit is only applied in respect of the cost of temporary accommodation. If the cost relating to temporary accommodation exceeds 183 days,
the portion of the cost relating to accommodation in excess of 183 days will
not be exempt.
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5.4
5.4.5 Broad-based employee share plan (s 10(1)(nC))
Employee share incentive schemes are ordinarily implemented by employer companies in order to
incentivise and retain employees, and for such employees to receive indirect benefits from the appreciation in the growth of such company. Where an employer company gives an employee shares in
the company, a tax implication will generally arise for the employee. However, shares received in
terms of a broad-based employee share plan are exempt from normal tax until the employee disposes of such shares (s 10(1)(nC)). The exemption is effectively limited to shares received with a market
value of R50 000 over a five-year period. The normal tax consequences for employees receiving
shares in terms of a broad-based employee share plan are provided for in s 8B (see chapter 7).
See also Interpretation Note No. 62 (30 March 2011) that deals with the taxation of broad-based
employee share plans.
5.4.6 ‘Stop-loss’ provision for share-incentive schemes (s 10(1)(nE))
As mentioned above, employee share-incentive schemes are designed to incentivise and retain
employees. It may, however, happen that the value of the employer company shares decline, which
could result in a loss for the employee. Amounts received by a person under these circumstances
may be exempt from normal tax (s 10(1)(nE)). This exemption is referred to as a stop-loss provision,
and applies in the following circumstances:
l where a person receives an amount when the transaction in terms of which the person acquired
the shares is cancelled, or
l where the shares are repurchased from the employee at a price not exceeding the original purchase price.
The above exemption only applies if the taxpayer has not received or become entitled to any consideration or compensation other than the repayment of the original purchase price.
The exemption does not apply in respect of equity instruments in respect of which s 8C applies (see
chapter 7).
5.4.7 Equity instruments awarded to employees or directors (s 10(1)(nD))
An employer could also issue equity instruments, which are not in terms of a broad-based employee
share plan, to employees (see 5.4.5), for example when shares are only awarded to certain employees and not to at least 80% of permanent employees. An employer could award shares to an employee subject to a condition that the share only vests in the employee after a period of time, or after
certain conditions are met. An employer would normally do this to incentivise retention of key employees, or to award employees for specific performance. Where an employer gives shares to an
employee, which do not vest in the employee at the time of acquisition, the amount accruing to the
employee will be exempt from normal tax in the employee’s hands (s 10(1)(nD)(i)).
This exemption will apply regarding equity shares that the person receives by virtue of his employment, or because the person is a director of the company, or in respect of equity shares received
from any other person by arrangement with the person's employer.
Where the person disposes of such shares before they vest in his or her hands, the amount received
will similarly be exempt from normal tax (s 10(1)(nD)(ii)).
Although the benefit that accrues to a person when he or she receives the above shares is exempt
from normal tax, the shares may have tax implications for the person at the time when the shares vest
in the person (that is when the restrictions imposed on the share are lifted). Section 8C determines
the amount that should be included in or deducted from the person’s income at the time when the
shares vest in the person’s hands (see chapter 7).
Also see Interpretation Note No. 55 (30 March 2011) that deals with the taxation of directors and
employees on the vesting of equity instruments.
5.4.8 Salaries paid to an officer or crew member of a ship (ss 10(1)(o)(i) and (iA))
The remuneration of a person earned as an officer or crew member of a ship is exempt from normal
tax if the person was outside South Africa for a period or periods exceeding 183 full days in aggregate during the year of assessment. The remuneration referred to here is remuneration as defined in
par 1 of the Fourth Schedule. This exemption only applies if
l the ship is engaged in the international transport of passengers or goods, or
l the ship is engaged in prospecting, exploration or mining for, or production of, any minerals
(including natural oils) from the seabed outside South Africa, or
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5.4
Chapter 5: Exempt income
l the ship is a South African ship engaged in international shipping (as defined in s 12Q), or in
fishing outside South Africa.
In the case of a South African ship engaged in international shipping or in fishing outside South
Africa, the requirement that the person should be outside South Africa for a period or periods exceeding 183 days in aggregate, does not apply. The remuneration received by an officer or crew
member on such ship is exempt from normal tax regardless of the period that the person was outside
South Africa.
5.4.9 Employment: Outside South Africa (s 10(1)(o)(ii))
An exemption in terms of s 10(1)(o)(ii) applies
(a) in respect of employees who are South African residents
(b) earning remuneration (see list under (b) below) in respect of services rendered
(c) by way of employment outside South Africa
(d) for or on behalf of an employer, who can be situated in or outside South Africa,
(e) during a qualifying period of employment outside South Africa (183-days requirement* and 60continuous-days requirement must both be met)
(f) provided that the remuneration is not specifically excluded from the exemption.
*As a COVID-19 relief measure, the 183-day requirement will be met where the period of employment
outside South Africa exceeds more than 117 full days during any period of 12 months ending on or
after 29 February 2020 but on or before 28 February 2021. The reason for reducing the required
183 days in a 12-month period to 117 days, is to provide relief in respect of the lockdown period
when residents were not allowed to travel outside South Africa.
With effect from 1 March 2020 and in respect of years of assessment commencing after 1 March
2020, the s 10(1)(o)(ii) exemption will only apply to the first R1,25 million of a person’s qualifying
foreign remuneration.
Interpretation Note No. 16, issue 3 (31 January 2020) provides more clarity regarding the requirements of s 10(1)(o)(ii):
(a) Employees must be South African residents
A person is a resident of South Africa if he or she is ordinarily resident or becomes a resident by way
of physical presence. Citizenship or financial emigration are merely factors to consider and do not
determine residency. Refer to chapter 3 for the different tests to determine if a person is a resident of
South Africa.
Please note!
If a person ceases to be a resident of South Africa for tax purposes, a deemed
disposal of his or her worldwide assets, excluding immovable property situated in
South Africa and assets attributable to a permanent establishment in South
Africa, is triggered. See chapter 3 for a detailed discussion of s 9H.
(b) Remuneration in respect of services rendered
The exemption applies to any salary, taxable benefits (as determined in terms of the Seventh Schedule), leave pay, wage, overtime pay, bonus, gratuity, commission, fee, emolument, allowance and
amounts vested in terms of share schemes (s 8B (broad-based employee share plans) and 8C
(restricted equity shares)). The exemption does not apply to payments for the termination, loss,
cancellation or variation of any office or employment as these payments are not in respect of services
rendered.
(c) Employment outside the Republic of South Africa
The services must be rendered outside the Republic of South Africa. The ‘Republic’ is defined in
s 1(1) and includes the landmass of South Africa as well as its territorial waters, which is a belt of sea
adjacent to the landmass not exceeding 12 nautical miles (approximately 22,2 km). The definition
also specifically includes exclusive areas beyond the territorial waters where South Africa has sovereign rights in respect of the exploration of natural resources which extends to the outer edge of the
continental margin, or 200 nautical miles (approximately 370,6 km), whichever is the greater. This
means that any remuneration for exploration services rendered beyond South Africa’s territorial seas
but within the exclusive economic zone will not qualify for exemption under this section.
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5.4
(d) Services for or on behalf of an employer situated in or outside South Africa
The services that are rendered for or on behalf of the employer must be rendered in terms of an
employment contract. The term ‘any employer’ means that services rendered to resident or nonresident employers could qualify for exemption. The term ‘employee’ excludes an independent contractor or self-employed person (sole proprietors or partners in a partnership) because they are not
considered to be employees. Directors in their capacity as directors are holders of an office, not
employees, and to the extent that they earn director’s fees, such fees do not qualify for the exemption.
(e) Outside South Africa for a qualifying period
The period of employment outside South Africa must be for more than 183 full days during any
12-month period (or, in terms of the transitional measure, for more than 117 full days during any
12-month period ending between 29 February 2020 to 28 February 2021). This period of 183 days (or
117 days) must include a continuous period of absence of more than 60 full days during that period
of 12 months. Full days are required for purposes of both the 183-day (or 117-day) and 60-continuous-day requirements. A ‘full day’ means 24 hours, i.e. from 0:00 to 24:00. In calculating the
number of days during which a person is outside South Africa, weekends, public holidays, vacation
leave and sick leave spent outside South Africa are considered to be days during which services are
rendered. These should therefore be included in the calculation of the 183-day (or 117-day) and
60-day periods of absence. Where a person is in transit through South Africa between two places
outside South Africa and does not formally enter South Africa through a designated port of entry, the
person is deemed to be outside of South Africa for purposes of this exemption (proviso (A) to
s 10(1)(o)(ii)).
Please note!
The rules, to calculate whether the 183-day (or 117-day) or 60-continous day
tests have been met, are different from the rules to determine the qualifying days
for the apportionment of income (see the discussion of apportionment under (g)
below).
The 12-month period need not correspond with a financial or tax year – in other words, any 12-month
period may be used to establish whether the person was outside South Africa for more than 183 days
(117 days during any 12-month period ending between 29 February 2020 to 28 February 2021). The
services that generated the exempt income should, however, have been rendered during that period.
In identifying a period of 12 months that may be used, the period during which the services were
rendered to the employer should first be identified. It is suggested that one should start by looking
from the first day of the month in which remuneration from foreign services was received or accrued,
and then work forward 12 months to determine whether the 183-day (or 117-day) and 60-continuousday tests were met. Alternatively, if the days tests are not met using this first test, one can look backwards 12 months from the last day of the month in which foreign remuneration was earned to determine whether the 183-day (or 117-day) and 60-continuous-day tests were met. Please note that a
person is entitled to look both forwards and backwards over any period of 12 months. The use of any
specified period in more than one tax year is therefore permitted due to the wording of the section
that permits the test to be conducted over ‘any’ period of 12 months.
The onus is on the employee to prove his or her periods of absences from South African and that the
absences were in terms of an employment contract. Examples of proof include letters of secondment,
employment contracts for foreign services, travel schedules and copies of passports.
(f)
Exclusions from s 10(1)(o)(ii) exemption
This exemption is also not applicable to the following types of remuneration:
l remuneration derived from the holding of any public office to which the person was appointed in
terms of an Act of Parliament (refer to s 9(2)(g), or
l remuneration received in respect of services rendered or work or labour performed of an employer
– in the national, provincial or local sphere of government of South Africa
– that is a constitutional institution listed in Schedule 1 of the Public Finance Management Act,
1 of 1999
– that is a public entity listed in Schedule 2 of the Public Finance Management Act, 1 of 1999,
or
– that is a municipal entity as defined in s 1 of the Local Government: Municipal Systems Act,
32 of 2000 (refer to s 9(2)(h).
(Proviso (B) to s 10(1)(o)(ii))
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5.4
Chapter 5: Exempt income
Example 5.11. Foreign employment income
Karabo is a resident who conducts a business as a sole proprietor.
l During the 2021 year of assessment he was awarded a contract to construct a building in
Nigeria. The construction of the building will take nine months to complete. Karabo will not be
returning to South Africa any time during these nine months (not even over weekends).
l 15 of his employees are going to render services on the site in Nigeria. These employees are
all South African residents.
– Eight have agreed not to return to South Africa during the nine-month period.
– Seven have agreed only to work on the contract if they can return to South Africa during
the last weekend of every month in order to visit their families.
Explain the tax implications for the 2021 year of assessment for:
(a) Karabo
(b) The eight employees that do not return to South Africa
(c) The seven employees that return to South Africa once a month.
Assume for purpose of this example that there is no double tax agreement between South
Africa and Nigeria.
SOLUTION
(a) Because Karabo is a resident, he will be taxed on his worldwide receipts and accruals. As
he is not an employee, he will be taxed on the profit of the contract. The s 10(1)(o)(ii) exemption is not available to him.
(b) Because the eight employees comply with the requirements of s 10(1)(o)(ii), they qualify for
the exemption. The first R1,25 million of each employee’s remuneration that relates to the
period worked in Nigeria will not be taxed in South Africa due to the fact that it will be
exempt.
(c) The seven employees who return to South Africa once a month do not qualify for the
s 10(1)(o)(ii) exemption. They do not comply with the requirements to be outside of South
Africa for more than 183 full days, of which 60 days must be continuous during the period
of 12 months. They will be taxed in South Africa on the salary that they earn while working in
Nigeria.
(g) Apportionment of remuneration
It is clear that the exemption applies to remuneration received or accrued for services rendered outside South Africa during a qualifying period. There should be a link between the remuneration and
the foreign services rendered. Where remuneration is received or accrued during a qualifying period
but it relates to services rendered within South Africa, it cannot qualify for the exemption. However,
any remuneration earned during a qualifying period in respect of services that were rendered both
inside and outside South Africa must be apportioned so that only the income relating to foreign
services rendered during that specific tax year is exempt (proviso (C) to s 10(1)(o)(ii)). This is relevant, for example, where an employee becomes entitled to benefits under share incentive schemes.
The inclusion of the gain in terms of s 8C takes place when the vesting of the equity instrument occurs. The vesting of the equity instrument is, however, not the originating source of the gain. The
originating source is the service period that the equity benefit relates to (also referred to as the
source period).
SARS accepts the following as the correct method to apportion the remuneration:
Work days outside the Republic during qualifying period (relating to source period)
Total work days in respect of the source period
× Remuneration
= Exempt portion of remuneration limited to R1,25 million
For purposes of the apportionment, ‘work days’ means days of actual services rendered and not
weekends, public holidays or leave days.
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5.4
Example 5.12. Foreign employment income
Martin is a resident who works for a South African company. On 1 March 2015, Martin acquired
shares in the company by virtue of his employment. Under the agreement, Martin was not permitted to dispose of the shares until 1 March 2020. The shares were granted solely to retain Martin’s
services during the period from 1 March 2015 to 1 March 2020, i.e. for 1 826 calendar days and
1 152 actual working days (excluding leave days) and it was not awarded to any other employees.
The shares vested on 1 March 2020 and the s 8C gain to be included in his gross income on this
date was correctly calculated as R320 000. Martin is currently 28 years old. All of Martin’s services to his employer were physically rendered in South Africa, except for the following:
l From 1 March 2016 until 31 July 2018, Martin was seconded by his employer to render his
services physically in Mauritius. During this 17-month period (517 calendar days) in Mauritius,
Martin’s actual working days were 342 days (excluding leaves days) and he only returned to
South Africa once during this period, for a holiday of two weeks.
Explain the tax implications of the above for Martin’s 2021 year of assessment.
For purpose of this example, you can ignore the double tax agreement between South Africa and
Mauritius.
SOLUTION
l
l
l
The period from 1 March 2016 to 31 July 2018 is a qualifying period because Martin met the
183-day requirement (517 days in Mauritius) and the 60-continuous-day requirement (only
returned for 14 days in 517 days). The remuneration earned for services rendered outside
the Republic during this 17-month period in Mauritius, therefore, qualifies for exemption
under s 10(1)(o)(ii), subject to the R1,25 million limit.
According to proviso C of s 10(1)(o)(ii), Martin’s s 8C gain is deemed to be spread evenly
over the period relating to the s 8C remuneration. The shares were granted solely to retain
Martin's services for the period from 1 March 2015 to 1 March 2020. Thus, the total 1 152
actual work days relates to the s 8C remuneration. Of these 1 152 days, 342 working days
fall in a qualifying period in respect of services rendered outside South Africa.
The s 8C gain of R320 000 can thus be apportioned to determine the exempt portion by
multiplying the amount with 342 days / 1 152 days. The exemption equals R95 000. This
amount is limited to R1,25 million. The balance of the section 8C gain of R225 000
(R320 000 less R95 000) remains taxable in South Africa, i.e. must be included in Martin’s
taxable income and taxed per normal tax tables.
Limitation of R1,25 million
With effect from 1 March 2020 and in respect of years of assessment commencing after 1 March
2020, the s 10(1)(o)(ii) exemption will only apply to the first R1,25 million of a person’s qualifying
foreign remuneration. Any excess above R1,25 million will be included in the person’s taxable income
and will be subject to normal tax in South Africa. The R1,25 million exemption is available in respect
of each year of assessment and will apply even if the person rendered services outside South Africa
for only a part of the year of assessment, provided that the ‘days’ requirements are met in respect of
the foreign salary income. Taxable benefits received while rendering services outside South Africa
are valued using the provisions of the Seventh Schedule and these benefits should be included in
calculating the person’s remuneration amount (see chapter 8) (SARS Guide – FAQs: Foreign Employment Income Exemption).
Please note!
The provisions of a double tax agreement should be considered in respect of
remuneration that exceeds R1,25 million. In general, double tax agreements
provide that both countries enjoy taxing rights where an employee renders
services in a foreign country for a period or periods exceeding 183 full days.
Double tax relief in the form of a foreign tax credit is available in South Africa
where tax was paid in both countries on the same remuneration. Refer to chapter 21 for a detailed discussion of double tax agreements and foreign tax credits.
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5.5
Chapter 5: Exempt income
5.5 Exemptions that incentives education
5.5.1 Bursaries and scholarships (s 10(1)(q) and (qA))
Any bona fide scholarship or bursary granted to enable or assist any person to study at a recognised
educational or research institution is exempt from normal tax (s 10(1)(q)). The following requirements
must be met for a bursary or scholarship to qualify for this exemption:
l The scholarship or bursary must be a bona fide scholarship or bursary.
l It must be granted to enable or assist a person to study.
l The person must study at a recognised educational or research institution.
l Where a bursary is awarded to an employee or a relative of an employee, further requirements
apply, which are discussed below.
Section 10(1)(qA) exempts bona fide scholarships or bursaries granted to enable or assist any person who is a person with a disability to study at a recognised educational or research institution. The
requirements for this exemption are the same as under s 10(1)(q) discussed above. ‘Disability’ is
defined in s 6B and is discussed in chapter 7. The only difference brought about by s 10(1)(qA) is
that bursaries granted to a relative who is a person with a disability are subject to a higher threshold
(see below).
Scholarships or bursaries to non-employees
These scholarships or bursaries are exempt from normal tax. They refer to scholarships or bursaries
that are competed for by, or are awarded on merit (academic or otherwise) to, anyone applying for
them and are not, to any extent, confined to the employees or relatives of employees of a particular
employer, organisation or other institution.
Scholarships or bursaries granted by an employer to an employee
A bursary or scholarship granted by an employer to an employee is exempt from normal tax as long
as the employee agrees to reimburse the employer if he or she fails to complete his or her studies
(except if failure to complete occurs as a result of death, ill-health or injury) (s 10(1)(q) and in respect
of an employee who is a person with a disability, s 10(1)(qA)).
Scholarships or bursaries granted by an employer to relatives of an employee
Where a scholarship or bursary is granted by an employer to enable a relative of an employee to
study at a recognised educational or research institution, the amount can be included in gross income (see discussion in par 5.4) and it will be exempt from normal tax if the following conditions are
met:
l The remuneration proxy (see below) of the employee in relation to a year of assessment may not
exceed R600 000.
l The remuneration proxy must not be subject to an element of salary sacrifice. A salary sacrifice
normally occurs where an employee agrees to a reduction in his or her cash salary, usually in
return for a non-cash benefit. If the remuneration (or future remuneration) of the employee is
reduced or forfeited because of the granting of a scholarship or bursary, then the exemption will
not be allowed. This requirement applies in respect of years of assessment commencing after
1 March 2021, i.e. for the 2022 year of assessment.
l The amount of any scholarship or bursary awarded to a relative during the year of assessment
that is exempt, is limited to the following:
– R20 000 in respect of grades R to 12,
– R20 000 in respect of a qualification to which an NQF level from 1 up to and including 4 has
been allocated in accordance with Chapter 2 of the National Qualifications Framework Act,
2008, and
– R60 000 in respect of a qualification to which an NQF level from 5 up to and including 10 has
been allocated in accordance with Chapter 2 of the above Act.
Please note!
The amounts mentioned above apply in respect of the 2018 and later years of
assessment for a natural person.
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5.5
Where an employer grants a bursary to a person with a disability who is a member of the family of an
employee in respect of whom the employee is liable for family care and support, the amount will be
exempt from normal tax if the following conditions are met:
l The remuneration proxy (see below) of the employee in relation to a year of assessment may not
exceed R600 000.
l Again, the remuneration proxy must not be subject to an element of salary sacrifice. If the remuneration (or future remuneration) of the employee is reduced or forfeited because of the granting
of a scholarship or bursary, then the exemption will not be allowed. This requirement applies in
respect of years of assessment commencing after 1 March 2021, i.e. for the 2022 year of assessment.
l The amount of any scholarship or bursary awarded to a relative during the year of assessment
that is exempt, is limited to the following:
– R30 000 in respect of grades R to 12
– R30 000 in respect of a qualification to which an NQF level from 1 up to and including 4 has
been allocated in accordance with Chapter 2 of the National Qualifications Framework Act,
2008, and
– R90 000 in respect of a qualification to which an NQF level from 5 up to and including 10 has
been allocated in accordance with Chapter 2 of the above Act.
‘Remuneration proxy’ is the remuneration that the employee received from the employer during the
immediately preceding year of assessment (definition of remuneration proxy in s 1). If the employee
was only employed by a specific employer (or associated institution to the employer) for a portion of
the preceding year, the remuneration proxy must be determined with reference to the number of days
in that year that the employee was employed. If the employee was not employed by the employer
during the immediately preceding year, the employee’s remuneration proxy is determined with reference to the number of days in the first month of the employee’s employment.
Please note!
An employee’s remuneration excludes the cash value of employer-provided
accommodation (as contemplated in par 9(3) of the Seventh Schedule) when
determining the employee’s remuneration proxy.
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5.5
Chapter 5: Exempt income
The requirements that must be complied with in order for a bursary or scholarship to be exempt from
normal tax are summarised in the following diagram:
Is the bursary or
scholarship a bona fide
bursary or scholarship?
NO
The bursary or
scholarship is not exempt
YES
NO
Was the bursary granted
to enable a person to
study at a recognised
educational or research
institution?
NO
Bursary or
scholarship granted to
an employee
Did the employee agree to
reimburse the employer if he
failed to complete his studies for
reasons other than death, ill health
or injury?
YES
The bursary or
scholarship is exempt in
terms of s 10(1)(q)
YES
Was the bursary granted by
an employer (or associated
institution) to an employee
or relative of an employee?
NO
The bursary or
scholarship is exempt in
terms of s 10(1)(q)
YES
Bursary or
scholarship granted to
a relative of an employee
YES
The bursary or
scholarship is
not exempt
NO
Did the employee’s remuneration
proxy for the year of assessment
exceed R600 000 or was remuneration sacrificed to obtain the
scholarship/bursary?
NO
NO
If the bursary
is awarded
in respect
of grades R
to 12
If the bursary is
awarded in
respect of an
NQF 1 to 4
qualification,
then
If the bursary is
awarded in
respect of an
NQF 5 to 10
qualification,
then
the first R20 000
(R30 000 if
disabled)
of the bursary
awarded to
such relative is
exempt
the first R20 000
(R30 000 if
disabled)
of the bursary
awarded to
such relative is
exempt
the first R60 000
(R90 000 if
disabled)
of the bursary
awarded to
such relative is
exempt
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5.5
Example 5.13. Bursaries and scholarships
Pretend (Pty) Ltd awarded various bursaries during the 2021 year of assessment ending on
28 February 2021. The following employees were involved:
l Nomatema: An employee who was awarded a bursary of R20 000 to study at a prestige university for an NQF level 5 qualification. The bursary was granted on condition that she would
reimburse Pretend if she fails to complete her studies for reasons other than death, ill-health
or injury. On her way to the exam venue she was in a fatal accident and was pronounced
deceased at the scene.
l Sibiwe: An employee who successfully completed a qualification at a university of technology
for an NQF level 4 qualification was reimbursed for his study expenses of R15 000. Pretend
was unaware that Sibiwe was studying, until he brought his new qualification to the Human
Resources Department of Pretend to record in his personnel file.
l Joe: Joe is an employee whose child, Nelson, was awarded a bursary of R70 000 to study an
NQF level 6 qualification at a university. Joe has been in Pretend (Pty) Ltd’s employment
since 1 September 2019. During the period from 1 September 2019 to 29 February 2020,
Joe’s remuneration was R90 000. During the period 1 March 2020 to 28 February 2021, Joe’s
remuneration was R216 000. Joe’s remuneration was not sacrificed to obtain the bursary.
l Julia: Julia is an employee. Her daughter, Kate, received a scholarship of R18 000 for her
primary school fees. Kate is in grade 5. Julia has been employed at Pretend (Pty) Ltd since
1 June 2020. Her remuneration was R50 000 per month during the period 1 June 2020 to
28 February 2021. Julia’s remuneration was not sacrificed to obtain the bursary.
l Simon: Simon is an employee. Simon’s remuneration proxy is R580 000 for a full year. His
disabled daughter, Amy, was awarded a bursary of R90 000 to study an NQF level 8 qualification at a university. Simon has been employed at Pretend (Pty) Ltd since 2001. He had to
forfeit remuneration of R90 000 during the period 1 March 2020 to 31 December 2020 to
obtain the bursary.
Calculate all the tax implications for the employees (and their dependents where applicable) in
respect of the bursaries granted.
SOLUTION
Nomatema: Exempt from normal tax under s 10(1)(q). Failure to complete her studies
due to death does not disqualify her from the exemption. ................................................
Sibiwe: Reimbursement of expenses after completion of studies is not exempt, but a
taxable benefit under par 2(h) of the Seventh Schedule in Sibiwe’s hands ......................
Joe: Joe’s remuneration proxy is R181 492 (R90 000/181 days × 365 days). Since
this is less than R600 000 and since the NQF level of the qualification that his child
will study towards is higher than level 4, R60 000 of the bursary awarded to his child
will be exempt in his hands and he will only be taxed on R10 000 (R70 000 –
R60 000)) ..........................................................................................................................
The bursary awarded to Nelson is taxed in the hands of Joe (par 16 of the Seventh
Schedule) and will not be taxable in Nelson’s hands.
Julia: Julia’s remuneration proxy is R608 333 (R50 000/30 days × 365 days). Since
this is more than R600 000, the scholarship is not exempt in Julia’s hands .....................
The bursary awarded to Kate is taxed in the hands of Julia (par 16 of the Seventh
Schedule) and will not be taxable in Kate’s hands.
Simon: Simon’s remuneration proxy is R580 000 for a full year (365 days). Since this
is less than R600 000 and since the NQF level of the qualification that his disabled
child will study towards is higher than level 4, R90 000 of the bursary awarded to
Amy will be exempt in his hands (R90 000 – R90 000) .....................................................
The fact that Simon’s remuneration was sacrificed does not influence the exemption
for the 2021 year of assessment. However, the exemption will no longer be available
from the 2022 year of assessment. From years of assessment commencing after
1 March 2021, the bursary will no longer be exempt in Simon’s hands because he
sacrificed cash remuneration in order to obtain Amy’s bursary.
The bursary awarded to Amy will be taxed in the hands of Simon (par 16 of the
Seventh Schedule) and will not be taxable in Amy’s hands.
108
Rnil
R15 000
R10 000
R18 000
Rnil
5.5
Chapter 5: Exempt income
Interpretation Note No. 66 (1 March 2012)
Interpretation Note No. 66, which deals with the taxation of scholarships and bursaries provides the
following guidelines:
l The phrase ‘bona fide scholarship or bursary granted’ refers to financial or similar assistance
granted to enable a person to study at a recognised educational or research institution. A bona
fide scholarship or bursary could include the cost of the following:
– tuition fees
– registration fees
– examination fees
– books
– equipment (required in that particular field of study, for example, financial or scientific calculators)
– accommodation (other than the person’s home)
– meals or meal voucher/card
– transport (from residence to campus and vice versa).
l A direct payment of fees, for example, to a university for the purpose of an employee’s studies, is
regarded as falling within the ambit of a bona fide scholarship or bursary.
l A recognised educational or research institution is a ‘college’ or ‘university’ as defined in s 18A of
the Act, or a school or any other educational or research institution, wherever situated, which is of
a permanent nature, open to the public generally and offering a range of practical and academic
courses.
l The payment received by a person who undertakes research for the benefit of another person will
be subject to normal tax in his or her hands and he or she will not qualify for the exemption in
terms of s 10(1)(q).
l A loan does not constitute income for tax purposes and is therefore not taxable. Personal study
loans obtained from a financial institution or from any other source unrelated to employment are
not taken into consideration for purposes of s 10(1)(q), nor are study expenses (including the
interest payable) incurred by the holder of the loan deductible from the income of the borrower.
Such privately funded loans are therefore neither taxable nor tax deductible. In terms of
par 11(4)(b) of the Seventh Schedule to the Act, no value is placed on a taxable benefit derived
by an employee in consequence of the grant of a loan by any employer for the purpose of enabling that employee to further his own studies.
l Any scholarship or bursary which is granted subject to repayment due to non-fulfilment of conditions stipulated in a written agreement will be treated as a bona fide scholarship or bursary until
such time as the non-compliance provisions of the agreement are invoked. In the year of assessment in which these provisions are invoked, the amount or amounts of the scholarship or bursary
will be regarded as a loan and, if relevant, any benefit which an employee may have received by
way of an interest-free or low-interest loan will constitute a taxable benefit in terms of par 2(f ) of
the Seventh Schedule and will not qualify for the exemption contained in par 11(4)(b) of the Seventh Schedule, as such loan was not granted to enable the employee to study.
l Where an employee who had obtained a loan from his employer to enable him to study is absolved
from repaying the loan, he will have received a taxable benefit in terms of par 2(h) of the Seventh
Schedule.
l A reward, or reimbursement of study expenses borne by a person, after completion of his studies
does not constitute a scholarship or bursary, as the grant must have been made to enable or
assist the person to study. Where an employer rewards an employee for a qualification or for
having successfully completed a course of studies or reimburses him for study expenses borne
by him, the reward or reimbursement of study expenses will represent, in the case of the reward,
taxable remuneration, and in the case of the reimbursement of expenses, a taxable benefit in
terms of par 2(h) of the Seventh Schedule to the Act.
l A scholarship or bursary granted to a visiting academic for the purpose of lecturing students
does not satisfy the study requirement as the object of the grant will be to impart knowledge, not
to gain it.
l Expenditure in connection with in-house or on-the-job training or courses presented by other undertakings for or on behalf of employers does not represent a taxable benefit in the hands of the
employees of the employer if the training is job-related and ultimately for the employer’s benefit.
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l It is common practice for certain educational institutions, notably universities, to allow their employees and such employees’ close relatives to study free of charge or at greatly reduced fees at
these institutions. While the marginal cost of the education of such employees and their relatives
represents a taxable benefit under the Seventh Schedule, the exemption under s 10(1)(q) will
apply, subject to the limitations provided for.
5.6 Exemptions relating to government, government officials and governmental
institutions
5.6.1 Government and local authorities (s 10(1)(a) and 10(1)(bA))
The receipts and accruals of the Government of the Republic is exempt from normal tax (s 10(1)(a)).
This exemption applies to the national, provincial and local governments. The receipts and accruals
of any sphere of government of any country other than South Africa are also exempt from tax
(s 10(1)(bA)(i)).
5.6.2 Foreign government officials (s 10(1)(c))
The salaries (and amounts for services rendered, referred to as emoluments) payable to certain
foreign government officials are exempt from normal tax in the following cases:
l If the person holds office in South Africa as an official of a foreign government. The person must
be stationed in South Africa and may not be ordinarily resident in South Africa (s 10(1)(c)(iii)).
Diplomats, consuls and ambassadors representing foreign countries in South Africa qualify for
this exemption.
l The person is a domestic or personal servant of the above foreign government official. The person may not be a South African citizen or ordinarily resident in South Africa (s 10(1)(c)(iv)).
l The person is a subject of a foreign state and is temporarily employed in South Africa. The exemption must be authorised by an agreement entered into by the governments of the foreign
state and South Africa (s 10(1)(c)(v)).
l The person is a subject of a foreign state and not a resident in South Africa, and the salary is
paid by a government agency or multinational organisation providing foreign donor funding
(s 10(1)(c)(vi)).
5.6.3 Non-residents employed by the South African government (s 10(1)(p))
Any amount that a non-resident receives for services rendered or work done outside South Africa will
be exempt from normal tax if the services are rendered or work is done for or on behalf of any employer in the national or provincial sphere of Government (s 10(1)(p)). The exemption will also apply if
the work is done for or on behalf of any South African municipality or any national or provincial public
entity if at least 80% of the expenditure of such entity is defrayed directly or indirectly from funds
voted by Parliament.
This exemption will only apply if the amount received or accrued is subject to normal tax in the country in which the person is ordinarily resident. The normal tax must also be borne by the person himself
and not paid on his behalf by the government, municipality or public entity.
5.6.4 Pension payable to former State President or Vice President (s 10(1)(c)(ii))
A pension that is payable to any former State President or Vice State President or his or her surviving
spouse is exempt from normal tax (s 10(1)(c)(ii)).
5.6.5 Foreign central banks (s 10(1)(j))
The receipts and accruals of any bank are exempt from tax if all the following requirements are fulfilled:
l the bank is not resident in South Africa, and
l the bank is the central bank of another country (that is, the bank is entrusted by the government
of a territory outside South Africa with the custody of the principal foreign-exchange reserves of
that territory).
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5.6.6 Semi-public companies and boards, governmental and other multinational institutions
(s 10(1)(bB), (t) and (zE))
The receipts and accruals of the following semi-public companies and boards are exempt from
normal tax:
l the Council for Scientific and Industrial Research (s 10(1)(t)(i))
l the South African Inventions Development Agency (s 10(1)(t)(ii))
l the South African National Roads Agency (s 10(1)(t)(iii))
l any traditional council or traditional community (established or recognised in terms of the Traditional Leadership and Governance Framework Act 41 of 2003) or any tribe as defined in s 1 of
that Act (s 10(1)(t)(vii))
l the Armaments Corporation of South Africa Limited contemplated in s 2(1) of the Armaments
Corporation of South Africa, Limited Act, 2003 (s 10(1)(t)(v))
l the compensation fund or reserve fund established in terms of s 15 of the Compensation for
Occupational Injuries and Diseases Act 130 of 1993 (COIDA). This Act regulates the compensation relating to the death or personal injury suffered by an employee in the course of employment.
A mutual association licensed in terms of COIDA may also be exempt from normal tax. Such
mutual association should be licensed in terms of COIDA to carry on the business of insurance of
employers against their liabilities to employees. The mutual association will only qualify for the
exemption to the extent that the compensation paid by the mutual association is identical to compensation that would have been payable in circumstances in terms of COIDA (s 10(1)(t)(xvi)
l any water service provider (s 10(1)(t)(ix))
l the Development Bank of Southern Africa (s 10(1)(t)(x))
l the National Housing Finance Corporation established in 1996 by the National Department of
Human Settlements (s 10(1)(t)(xvii)) (this exemption applies regarding amounts received or accrued
on or after 1 April 2016)
l amounts received by or accrued to the Small Business Development Corporation Limited by way
of any subsidy or assistance payable by the state (s 10(1)(zE))
l institutions established by a foreign government that perform their functions in terms of an official
development assistance agreement which provides that the receipts and accruals of such organisation is exempt. The agreement must be binding in terms of s 231(3) of the Constitution of the
Republic of South Africa (1996) (s 10(1)(bA)(ii))
l multinational organisations providing foreign donor funding in terms of an official development
assistance agreement that is binding in terms of s 231(3) of the Constitution of the Republic of
South Africa (1996) (s 10(1)(bA)(iii))
l the following multilateral development financial institutions (s 10(1)(bB)):
– African Development Bank, established on 10 September 1964
– World Bank, established on 27 December 1945 including the International Bank for Reconstruction and Development and International Development Association
– International Monetary Fund, established on 27 December 1945
– African Import and Export Bank, established on 8 May 1993
– European Investment Bank, established on 1 January 1958 under the Treaty of Rome, and
– New Development Bank, established on 15 July 2014.
5.7 Exemptions for organisations involved in non-commercial activities
5.7.1 Bodies corporate, share block companies and other associations (s 10(1)(e))
Certain amounts received by body corporates, share block companies and other associations are
exempt from normal tax (s 10(1)(e)). The amounts that qualify for the exemption are
l levies received by these entities from its members (or from holders of shares in the case of a
share block company), and
l any amount received other than levies to the extent that it does not exceed R50 000.
The exemption applies only to
l bodies corporate established in terms of the Sectional Titles Act 95 of 1986
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l share block companies as defined in the Share Blocks Control Act 59 of 1980
l any other association of persons that was formed solely for purposes of managing the common
collective interest of its members. To qualify, the association may not be permitted to distribute
any of its funds to any person other than a similar association of persons. Such association of
persons may not be a company as defined in the Companies Act, any co-operative, close corporation or trust. The association may, however, be a non-profit company as defined in s 1 of the
Companies Act.
This exemption is nullified if the body, share block company or association knowingly becomes a
party to any tax avoidance scheme.
(Refer to 5.7.3 with regard to the exemption available to recreational clubs.)
Example 5.14. Bodies corporate, share block companies and other associations
The statement of comprehensive income of the ABC Association for the 2021 year of assessment
is as follows. The association qualifies for exemption in terms of s 10(1)(e).
Statement of profit or loss
Administrative expenses –
member transactions .......................
Net surplus .......................................
R8 000
60 000
Income from members:
Levies .............................................
Interest on investments ...................
R68 000
10 000
58 000
R68 000
SOLUTION
Levies from members – exempt (s 10(1)(e)) ..................................................................
Interest on investment (R58 000 – R50 000 (s 10(1)(e) exemption)) .............................
Less: Administrative expenses (not allowed as it relates to exempt income received
(s 23(f)) ..........................................................................................................................
Taxable income .............................................................................................................
–
R8 000
–
R8 000
5.7.2 Public benefit organisations (ss 10(1)(cN) and 30)
The receipts and accruals resulting from any ‘public benefit activity’ (non-trading activities) of any
approved ‘public benefit organisation’, as defined in s 30(1) are exempt from normal tax
(s 10(1)(cN)). Public benefit activities are listed in Part I of the Ninth Schedule to the Act or are determined by the Minister of Finance and published in the Gazette. Examples of public benefit activities
according to the different categories are (subject to certain criteria) the following:
l Welfare and Humanitarian. The provision of services to homeless children, elderly people,
abused persons or people in distress, and the development of poor and needy communities.
l Health care. The provision of health care services to poor and needy persons, education on
family planning and services in connection with HIV/Aids.
l Land and Housing. The development of stands and housing units for low income groups, residential care for certain elderly people and the building of certain buildings used by the community.
l Education and Development. The provision of education on all levels and training to the unemployed, disabled persons or government officials.
l Religion, belief or philosophy. The promotion or practice of a belief or philosophical activities or
any religion that involves acts of worship, witness, teaching and community service.
l Cultural. The promotion and protection of the arts, cultures, customs, libraries and buildings of
historical and cultural interest. The development of youth leadership is included under this category.
l Conservation, environment and animal welfare. The protection of the environment and the
care and rehabilitation of animals, as well as environmental awareness programmes and cleanup projects.
l Research and consumer rights. Research in certain fields and the protection of consumer rights
and improvement of products or services.
l Sport. The managing of amateur sport or recreation.
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l Providing of funds, assets or other resources. If assets, resources or money are donated or sold
at cost to a public benefit organisation, government department or person conducting one or
more public benefit activities.
l General. Supporting or promoting public benefit organisations, as well as the bid to host or the hosting of any international event where foreign countries will participate and that will have an economic impact on the country.
The provision of funds to foreign public benefit organisations, which are exempt from tax in the foreign country, with the sole or principal object of the carrying on of one or more PBO activity listed in
Part 1 of the Ninth Schedule to the Income Tax Act has also been classified as a public benefit activity.
What is a public benefit organisation?
A public benefit organisation is defined in s 30(1) as any organisation
l that is a non-profit company as defined in s 1 of the Companies Act, or a trust or association of
persons that has been incorporated, formed or established in South Africa, or
l a South African agency or branch of a non-resident company, association or a trust, that is exempt from tax in its country of residence.
The sole or principle objective of the organisation must be the carrying on of one or more public
benefit activities. These activities must be carried on in a non-profit manner and with an altruistic or
philanthropic intent. The activities may not be intended to directly or indirectly promote the selfinterest of any fiduciary or employee of the organisation other than by way of reasonable remuneration. The activities of the organisation must be carried on for the benefit of, or must be widely accessible to, the general public at large, including any sector thereof.
All of the above requirements must be met. In addition, the Minister must approve the public benefit
organisation before the exemption will apply.
Exempt from normal tax
The following receipts and accruals of a public benefit organisation are exempt from normal tax
(s 10(1)(cN)):
l the receipts and accruals derived otherwise than from any business undertaking or trading activity, or
l the receipts and accruals derived from any business undertaking or trading activity, if
– the undertaking or activity is integral and directly related to the sole or principle object of the
organisation (the basis on which the activity is carried out must substantially be directed at
the recovery of costs and may not result in unfair competition in relation to taxable entities),
– the undertaking or activity is of an occasional nature and undertaken substantially with assistance on a voluntary basis without compensation, or
– the undertaking or activity is approved by the Minister by notice in the Gazette, or
l where the receipts and accruals are derived from any business undertaking or trading activity
other than the above, the receipts and accruals will be exempt from normal tax to the extent that it
does not exceed the greater of 5% of the total receipts and accruals of the organisation during
the relevant year of assessment and R200 000.
See Interpretation Note No. 24 (Issue 4) (12 February 2018) for the practical application and provisions of s 10(1)(cN) regarding the trading rules of Public Benefit Organisations. Also refer to Interpretation note 98 (7 February 2018) that provides guidance on a conduit public benefit organisation
carrying on public benefit activities contemplated in par 10(iii) of Part I of the Ninth Schedule and the
meaning of “association of persons”.
COVID-19 note
A COVID-19 disaster relief organisation that is approved by the Commissioner as a
PBO under s 30(3) of the Act qualifies for various tax concessions. Refer to chapter 34 for a discussion of these relief measures.
5.7.3 Recreational clubs (ss 10(1)(cO) and 30A)
Certain receipts and accruals of a recreational club approved by the Commissioner will be exempt from
normal tax. (The club exemption is not automatic. Clubs have to apply for the exemption.) A recreational club is defined in s 30A as any non-profit company as defined in s 1 of the Companies Act, society
or other association of which the sole or principal object is to provide social and recreational amenities or facilities for the members of that company, society or other association.
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These receipts and accruals must be derived in the form of
l membership fees or subscriptions paid by members
l from any business undertaking or trading activity that
– is integral and directly related to the provision of social and recreational amenities (or facilities)
to its members
– substantially carried out only to recover cost, and
– does not create unfair competition for taxable entities
l occasional fundraising undertaken substantially with voluntary assistance without compensation,
and
l any other source, if the receipts and accruals in respect of ‘other sources’ are not in total more
than the greater of
– 5% of the total membership fees and subscriptions due and payable by its members during
the relevant year of assessment, or
– R120 000.
Section 30A provides the conditions to which a club must adhere to qualify for the exemption:
l The club will have at least three unconnected persons who accept fiduciary responsibility for the
club. One person may never directly or indirectly control the decision-making of the club.
l The club will carry on its activities solely in a non-profit manner.
l The club will not distribute any surplus funds.
l All assets and funds will be transferred to another club that qualifies for the exemption on club
dissolution or a public benefit organisation approved under s 30(3). The funds may also be transferred to an institution that is exempt from tax under s 10(1)(cA)(i) (an institution, board or body
which has as its sole or principle object the carrying on of any public benefit activity) or the government of South Africa in the national, provincial or local sphere.
l The club will not pay excessive remuneration.
l All members must be entitled to annual or seasonal membership.
l Members cannot sell their membership rights.
l A copy of any amendment to the constitution must be submitted to the Commissioner.
l The club may not be part of a tax avoidance scheme (s 30A(2)).
5.7.4 Political parties (s 10(1)(cE))
The receipts and accruals of any political party registered in terms of the Electoral Commission Act
51 of 1996 are exempt from normal tax.
5.8 Exemptions relating to economic development
5.8.1 Micro businesses (s 10(1)(zJ))
Any amount received by or accrued to or in favour of a registered micro business (as defined in the
Sixth Schedule; see chapter 23) from a business carried on in South Africa, will be exempt from
normal tax. The exemption does not include any amount received by or accrued to a natural person if
it constitutes
l investment income as defined in par 1 of the Sixth Schedule (see chapter 23), or
l remuneration as defined in the Fourth Schedule.
Although the receipts and accruals of micro businesses are exempt from normal tax, these businesses are not completely exempt from tax since they will be subject to turnover tax (see chapter 23).
5.8.2 Small business funding entity (ss 10(1)(cQ), 10(1)(zK), 30C and par 63B of the Eighth
Schedule)
The receipts and accruals of any small business funding entity are exempt from normal tax under
certain circumstances (s 10(1)(cQ)). A small business funding entity is an entity approved by the
Commissioner under s 30C. An entity will qualify as a small business funding entity if it complies with
the following requirements (s 30C(1)):
l It must either be a trust, an association of persons or a non-profit company as defined in s 1 of
the Companies Act incorporated, formed or established in the South Africa.
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l The sole or principal object of the entity must be to provide funding for small, medium and microsized enterprises. A small, medium and micro-sized enterprise is a person that qualifies either as
a micro business as defined in par 1 of the Sixth Schedule (see chapter 23) or as a small business corporation as defined in s 12E(4) (see chapter 19) (definition of small, medium and microsized enterprises in s 1).
l The entity must provide funding for the benefit of, or must be widely accessible to small, medium
and micro-sized enterprises.
l The funding must be provided on a non-profit basis and with an altruistic or philanthropic intent.
l The funding should not be intended to directly or indirectly promote the self-interest of any fiduciary or employee of the entity, other than reasonable remuneration.
l The entity’s constitution or written instrument under which it was established must be submitted to
the Commissioner and must comply with specific requirements set out in s 30C(1)(d).
Exempt from normal tax
Section 10(1)(cQ) exempts the following receipts and accruals of a small business funding entity
from normal tax:
l the receipts and accruals derived otherwise than from any business undertaking or trading activity, or
l the receipts and accruals derived from any business undertaking or trading activity, if
– the undertaking or activity is integral and directly related to the sole or principle object of the
organisation (the basis on which the activity is carried out must substantially be directed at
the recovery of costs and may not result in unfair competition in relation to taxable entities),
– the undertaking or activity is of an occasional nature and undertaken substantially with assistance on a voluntary basis without compensation, or
– the undertaking or activity is approved by the Minister by notice in the Gazette, or
l where the receipts and accruals are derived from any business undertaking or trading activity
other than the above, the receipts and accruals will be exempt from normal tax to the extent that it
does not exceed the greater of
– 5% of the total receipts and accruals of the organisation during the relevant year of assessment, or
– R200 000.
Amounts received from a small business funding entity
Any amount received by or accrued to a small, medium or micro-sized enterprise from a small business funding entity is exempt from normal tax (s 10(1)(zK)).
CGT exemption
A small business funding entity must disregard any capital gain or loss determined in respect of the
disposal of
l an asset that the small business funding entity did not use in carrying on any business undertaking or trading activity, or
l an asset where substantially the whole of the use of the asset was directed at a purpose other
than carrying on any business undertaking or trading activity or a business undertaking or trading
activity in respect of which the receipts and accruals qualified for an normal tax exemption under
s 10(1)(cQ).
What are the consequences if an approved small business funding entity fails to comply with the s 30C
requirements?
The Commissioner may withdraw its approval of a small business funding entity if it fails to comply
with the s 30C requirements (s 30C(3)). Such entity must within six months after the withdrawal transfer the remainder of its assets to another small business funding entity, a public benefit organisation,
an institution, body or board exempt from tax under s 10(1)(cA)(i) or the government of South Africa
(s 30C(4)). This also applies in the case where a small business funding entity is wound up or liquidated (s 30C(5)). If it fails to transfer its assets as required, an amount equal to
l the market value of its remaining assets
l less an amount equal to the bona fide liabilities of the entity
is deemed to be an amount of taxable income that accrued to the entity in the year of assessment in
which the approval is withdrawn or the winding up or liquidation took place (s 30C(6)).
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Any person who is in a fiduciary capacity responsible for the management of a small business funding entity and who intentionally fails to comply with the above requirements or with the provisions of
the small business funding entity’s constitution, is guilty of an offence and liable on conviction to a
fine or imprisonment for a period not exceeding 24 months (s 30C(7)).
5.8.3 Amounts received in respect of government grants (ss 10(1)(y) and 12P)
The following government grants are exempt from normal tax (s 12P):
l a grant in aid, subsidy or contribution by the Government in the national, provincial or local
sphere that
– is listed in the Eleventh Schedule, or
– is identified by the Minister of Finance in the Gazette (s 12P(2)), and
l an amount received from the Government in the national, provincial or local sphere for the performance of that person’s obligations pursuant to a Public Private Partnership. This amount is
exempt if the person is required to spend at least an equal amount on improvements on land or to
buildings owned by any sphere of the Government, or over which any sphere of the Government
holds a servitude (s12P(2A)).
A person can receive the government grant funding or a government grant in kind. Where the person
receives a government grant in kind, which is exempt from normal tax in terms of s 12P(2), the base
cost of the asset received will be zero. Other than this, the grant in kind will have no further normal tax
consequences.
Special rules apply where a person receives government grant funding that is exempt in terms of
s 12P(2) or s 12P(2A). The purpose of these rules is to avoid a further tax benefit from applying the
government grant funding. Where a government grant (other than a grant in kind) is received for the
purpose of acquisition, creation or improvement or as a reimbursement for expenditure incurred in
respect of the acquisition, creation or improvement of
l trading stock – any expenditure allowed as a deduction in terms of s 11(a) (or the amount taken
into account for purpose of opening stock in terms of s 22(1) or (2)) must be reduced to the extent that the government grant is so applied (s 12P(3)(a)). If the government grant exceeds the
expenditure incurred in respect of acquiring the trading stock, the excess amount is deemed to
be an amount recovered or recouped by the taxpayer for purpose of s 8(4)(a) (s 8(4)(o)). The excess amount will therefore be included in the taxpayer’s income.
l an allowance asset – the base cost of the allowance asset must be reduced to the extent that the
government grant is so applied (s 12P(3)(b)). Furthermore, the aggregate of any deductions or
allowances allowable in respect of the allowance asset may not exceed an amount equal to
(s 12P(4)):
The aggregate
amount incurred in
respect of the
allowance asset
LESS
The amount of
the government
grant
PLUS
The aggregate amount
of all deductions and
allowances previously allowed in
respect of that allowance asset
If the government grant exceeds the expenditure incurred in respect of acquiring the allowance
asset, the excess amount is deemed to be an amount recovered or recouped by the taxpayer for
purpose of s 8(4)(a) (s 8(4)(p)). The excess amount will therefore be included in the taxpayer’s
income.
l any other asset (i.e. other than trading stock or an allowance asset) – the base cost of the asset
must be reduced to the extent that the government grant is so applied (s 12P(5)).
Where a person received a government grant (other than a grant in kind) during the year of assessment otherwise that for the purpose of acquiring, creating or improving any of the assets above (or as
a reimbursement for such acquisition, creation or improvement) any allowable deductions in terms of
s 11 for that year of assessment must be reduced by the amount of the government grant. Where the
government grant exceeds the allowable deductions in terms of s 11 for that year of assessment, the
excess must be carried forward to the following year of assessment and deemed to be a government
grant received during that year (s 12P(6)).
Grants or scrapping allowances received in terms of approved programs
Any government grant or government scrapping payment received or accrued in terms of any programme or scheme which has been approved in terms of the national annual budget process and
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has been identified by the Minister by notice in the Gazette (after taking prescribed factors into
account) qualifies for an exemption under s 10(1)(y). Grants and scrapping allowances that qualify
for an exemption under s 10(1)(y) are not subject to the anti-double-dipping-rules of s 12P.
Example 5.15. Government grants
On 1 August 2020, Pumbela Enterprises received a R4 million government grant from the
Department of Trade and Industry as part of the Small, Medium Enterprise Development Programme. The grant was paid in order to reimburse Pumbela Enterprises for capital equipment
that it acquired during December 2019 for R5 million. During its 2021 year of assessment that
ended on 28 February 2021, Pumbela Enterprises claimed a capital allowance of R2 million for
the assets acquired.
On 1 October 2021, JayJay Clothing (Pty) Ltd (‘JayJay Clothing’) received a R500 000 government grant from the Department of Trade and Industry as part of the Clothing and Textiles Competitiveness Programme. JayJay Clothing had to use the government grant to purchase clothing
material from South African suppliers. During its 2021 year of assessment that ended on
31 December 2021, JayJay Clothing expended R450 000 of the government grant on purchasing
clothing material.
On 1 November 2020, Food4Africa (Pty) Ltd (‘Food4Africa’) received a R1 million Food Fortification Grant from the Department of Health. Food4Africa was not required to purchase any specific
assets with the grant. During its 2021 year of assessment that ended on 30 June 2021, Food4Africa
incurred expenses of R5 million that qualify for a deduction in terms of s 11 of the Act.
What effect does the above have on the respective taxpayers’ taxable income for the relevant
years of assessment? Assume that the grants were not approved for purpose of s 10(1)(y).
SOLUTION
Pumbela Enterprises
Government grant. ....................................................................................................
Government grant exempt from normal tax in terms of s 12P(2), since the Small,
Medium Enterprise Development Programme is listed in the Eleventh Schedule ....
Capital allowance in respect of the capital asset (see note 1)..................................
Effect on Pumbela Enterprises’ taxable income in respect of its 2021 year of
assessment. ..............................................................................................................
JayJay Clothing
Government grant .....................................................................................................
Government grant exempt from normal tax in terms of s 12P(2), since the Clothing and Textiles Competitiveness Programme is listed in the Eleventh Schedule ....
Trading stock acquired (s 11(a)) (R450 000 less R500 000) ....................................
R4 000 000
(4 000 000)
(nil)
Rnil
R500 000
(500 000)
Rnil
Closing stock (s 22) (R450 000 less R500 000) ........................................................
Rnil
Recoupment in terms of s 8(4)(a) (see note 2) .........................................................
50 000
Effect on JayJay Clothing taxable income in respect of its 2021 year of
assessment. ..............................................................................................................
R50 000
Food4Africa
Government grant .....................................................................................................
Government grant exempt from normal tax in terms of s 12P(2), since a Food
Fortification Grant is listed in the Eleventh Schedule ................................................
Section 11 deductions (R5 000 000 less R1 000 000) (see note 3) ..........................
Effect on Food4Africa’s taxable income in respect of its 2021 year of
assessment ...............................................................................................................
R1 000 000
(1 000 000)
(4 000 000)
(R4 000 000)
continued
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Notes
(1) The aggregate of any allowance or deduction in respect of an allowance
asset may not exceed:
The aggregate amount incurred in respect of the allowance asset ..................
Less: The amount of the government grant (R4 000 000) plus the aggregate
amount of all deductions and allowances previously allowed in respect of
that allowance asset (R2 000 000). ...................................................................
Since this amount is less than Rnil, Pumbela Enterprises may not claim any
further capital allowances in respect of the asset. ............................................
R5 000 000
(6 000 000)
(R1 000 000)
The base cost of this asset is reduced by R4 000 000. Since the base cost
was R3 000 000 (R5 000 000 cost price less R2 000 000 capital allowance in
respect of the 2020 year of assessment) at the time of receiving the grant,
the base cost is reduced to Rnil.
(2) Since the government grant exceeds the expenditure incurred in respect of acquiring the
trading stock by R50 000, this amount is deemed to be an amount recovered or recouped
by the taxpayer for purpose of s 8(4)(a) and therefore included in JayJay Clothing’s income
(s 8(4)(p)).
(3) Since Food4Africa received a government grant during its 2021 year of assessment for the
purpose of acquiring, creating or improving any of the assets above (or as a reimbursement
for such acquisition, creation or improvement), any allowable deductions in terms of s 11 for
that year of assessment must be reduced by the amount of the government grant.
5.8.4 Film owners (s 12O)
Section 12O(2) provides for the exemption of all income derived from the exploitation rights of a film.
Exploitation rights are defined in s 12O(1) as the right to any receipts or accruals in respect of the
use of, right of use of, or the grant of permission to use any film to the extent that those receipts and
accruals are wholly dependent on profits and losses in respect of the film. Film is defined for purpose
of s 12O as a feature film, a documentary or documentary series, or an animation, conforming to the
requirements stipulated by the Department of Trade and Industry in the Programme Guidelines for
the South African Film and Television Production and Co-production Incentive.
The following requirements have to be complied with in order to qualify for the exemption:
l The National Film and Video Foundation must approve the film as a local production or co-production whereby the film is produced in terms of an international co-production agreement between the Government of South Africa and the government of another country.
l If income is derived from the exploitation rights of the film by a person who acquired the exploitation rights in respect of that film:
– prior to the date that the principal photography of the film commenced, or
– after the principal photography of the film commenced, but before the completion date of the
film if no consideration was directly or indirectly paid to the person who acquired the exploitation rights of the film prior to the date that the principal photography of the film commenced).
l The income must be received by or must have accrued to the person within 10 years of the
completion date.
Completion date is defined for purpose of s 12O as the date on which the film is in a form for the first
time in which it can be regarded as ready for copies of it to be made and distributed for presentation
to the general public.
The exemption in terms of s 12O is not allowed to a person who is a broadcaster as defined in s 1 of
the Broadcasting Act, No. 4 of 1999.
Section 12O(5) provides that a taxpayer may claim a deduction in respect of any expenditure incurred to acquire exploitation rights in respect of a film. This deduction is allowed despite the provisions
of s 23(f), which provides that expenses incurred in respect of exempt income are not deductible.
Such deduction is equal to the amount of any expenditure incurred to acquire exploitation rights in
respect of a film less any amount received or accrued during any year of assessment in respect of
the film. The deduction may not be made to the extent that the expenditure was funded from a loan,
credit or similar funding. Furthermore, the deduction may only be made in any year of assessment
commencing at least two years after the completion date of the film to the extent that the expenditure
incurred exceeds the total amount received or accrued in respect of the exploitation rights. The
exemption under s 12O(2) ceases to apply to any income derived from a film in any year of assessment subsequent to the date that a deduction is made in terms of s 12O(5).
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5.8–5.10
Chapter 5: Exempt income
5.8.5 International shipping income (s 12Q)
International shipping income received by an international shipping company is exempt from normal
tax. The purpose of this exemption is for the industry to remain competitive internationally. The international trend has been to reduce the taxation of international shipping transport due to the highly
mobile nature of this activity.
In order to qualify for this exemption, the international shipping company must be a South African
resident that operates one or more South African ships that are used in international shipping. International shipping (defined in s 12Q(1)) is the conveyance for compensation of passengers or goods
by means of the operation of a South African ship mainly engaged in international traffic. A South
African ship is a ship which is registered in South Africa in accordance with Part 1 of Chapter 4 of the
Ship Registration Act, 1998. If a non-South African ship is temporarily used to replace a qualifying
South African ship whilst the South African ship is undergoing repairs or maintenance, the replacement ship will also qualify as a South African ship for purposes of s 12Q and the exemption in terms
of this regime for gross income from that ship will still apply.
Tax regime for qualifying international shipping companies includes exemptions from normal tax,
capital gains tax (see chapter 17), dividends tax (see chapter 19) as well as cross-border withholding
tax on interest (see chapter 21).
5.8.6 Owners or charterers of a ship or aircraft (s 10(1)(cG))
The receipts and accruals of a non-resident that carries on business as the owner or charterer of a
ship or aircraft are exempt from normal tax. The exemption, however, only applies if a similar or
equivalent exemption is granted for South African residents carrying on the same type of business in
the country where the non-resident resides.
5.9 Exemptions incentivising environmental protection
5.9.1 Certified emission reductions (s 12K)
Section 12K was repealed with effect from 1 June 2019, the date on which carbon tax was implemented. The Carbon Tax Act 15 of 2019 deals with several relief measures that make this income tax
exemption redundant.
5.9.2 Closure rehabilitation company (s 10(1)(cP))
The receipts and accruals of a closure rehabilitation company or trust (as contemplated in s 37A) are
exempt from normal tax. The sole object of such company or trust must be the rehabilitation of land
following the closure and decommissioning of a mine. The constitution of the company or the instrument that established the trust must incorporate the provisions of s 37A.
5.10 Exemptions aimed at amounts that are subject to withholding tax
Certain amounts paid to non-residents are subject to withholding tax. Withholding tax is imposed on
the recipient of an amount, but the payer of the amount is required to deduct the tax from the payment and pay the tax to the government. The amount subject to withholding tax should not be subject
to normal tax as well. For this reason, exemption from normal tax is provided for.
5.10.1 Royalties paid to non-residents (s 10(1)(l))
A royalty paid to a foreign person is subject to 15% withholding tax on royalties to the extent that the
royalty is regarded as being from a South African source (s 49B; see chapter 21). If a double taxation
agreement applies in the specific circumstances, the withholding tax rate might be reduced by the
double tax agreement.
The source of royalty income is in South Africa if the royalty is paid by a resident (unless the royalty is
attributable to a permanent establishment situated outside South Africa), or is received in respect of
the use of any intellectual property in South Africa (s 9(1)(d) and (c); see chapter 3).
A royalty paid to a non-resident is exempt from normal tax, unless
l the person is a natural person who was physically present in South Africa for longer than 183 days
in aggregate during the 12-month period before the royalty is received or accrued, or
l the intellectual property or the knowledge or information in respect of which it is paid is effectively
connected with the permanent establishment of the person in South Africa (s 10(1)(l)).
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5.10–5.11
For purpose of this exemption, royalty means any amount that is received for the use or right of use of
or permission to use any intellectual property, or the imparting of or the undertaking to impart any
scientific, technical, industrial or commercial knowledge or information, or the rendering of or the
undertaking to render any assistance or service in connection with the application or use of such
knowledge or information (definition of royalty in s 49A).
Example 5.16. Royalty or similar payments to non-residents (s 10(1)(l))
Mr Collins, who is not a resident of South Africa, received a gross royalty payment of R300 000
for the use of a trademark in South Africa by ABC Limited on 10 May 2020.
What is the effect of this on Mr Collins’ taxable income in respect of his 2021 year of assessment?
SOLUTION
The ‘income’, as defined, of Mr Collins will be calculated as follows:
Gross Income:
Royalty ............................................................................................................................
Less: Exempt income:
Royalty – exempt in terms of s 10(1)(l)............................................................................
Income ............................................................................................................................
300 000
(300 000)
–
Note
Unless the relevant double tax agreement prescribes a reduced rate, ABC Limited must withhold
15% of the gross royalty (R45 000) as a withholding tax (s 49B) and pay it over to SARS. ABC
Limited will pay the net amount of R255 000 to Mr Collins. However, the gross amount of
R300 000 is included in Mr Collins’ gross income.
5.10.2 Amounts paid to a foreign entertainer or sportsperson (s 10(1)( lA))
Amounts paid to foreign entertainers and sport persons in respect of specified activities are subject
to 15% tax on foreign entertainers and sport persons (s 47A to 47K; see chapter 21). To the extent
that such amount is subject to tax on foreign entertainers and sport persons, the amount is exempt
from normal tax (s 10(1)(lA)).
5.10.3 Interest paid to non-residents (ss 10(1)(h))
Interest paid to a foreign person is subject to 15% withholding tax on interest to the extent that the
interest is regarded as being from a South African source (s 50B - see chapter 21). If a double taxation agreement applies in the specific circumstances, the withholding tax rate might be reduced by
the double tax agreement. The source of interest is in South Africa if the interest is paid by a resident
(unless the interest is attributable to a permanent establishment situated outside South Africa), or is
received or accrued in respect of any funds used or applied by any person in South Africa (s 9(2)(b)
– see chapter 3). Interest received by a non-resident is exempt from normal tax, subject to certain
exceptions (s 10(1)(h) - see 5.2.2).
5.11 Other exemptions
5.11.1 Alimony and maintenance (s 10(1)(u))
An amount received by or accrued to a person from or on behalf of his or her spouse or former
spouse by way of an alimony or allowance granted in consequence of proceedings instituted after
21 March 1962, or under an agreement of separation entered into after that date, is exempt from
normal tax. This exemption is not applicable when s 7(11) deems the reduction of a person’s minimum individual reserve in terms of a maintenance order in favour of another person (the person’s
former spouse) to be income received by the person. The s 10(1)(u) exemption, in effect, can only be
claimed by a person if his or her former spouse paid the alimony or maintenance from after-taxed
income.
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5.11
Chapter 5: Exempt income
5.11.2 Promotion of research (s 10(1)(cA))
The receipts and accruals of any institution, board or body established under any law will be exempt
from normal tax if its sole or principal object is to
l conduct scientific, technical or industrial research, or
l provide necessary or useful commodities, resources or services to the State or members of the
general public, or
l carry on activities (including the rendering of financial assistance by way of loans or otherwise)
designed to promote commerce, industry or agriculture.
Companies (as defined in the Companies Act), co-operatives, close corporations, trusts and water
service providers are specifically excluded from this exemption. The receipts and accruals of any
association, corporation or company will qualify for the exemption if all its shares are held by an
institution, board or body mentioned above and only if the operations of such association, corporation
or company are ancillary or complimentary to the object of the institution, board or body.
The institution, board or body has to be approved by the Commissioner. Also, by law or under its
constitution, it may not be permitted to distribute any amount to any person other than, in the case of
a company, to the holders of shares in the company. It is also required to use its funds solely for
investment or the objects for which it has been established.
5.11.3 Interest received by the holder of a debt (s 10(1)(hA))
This exemption is aimed at avoiding double taxation. Where a company acquires an asset in terms of
a reorganisation transaction and funds the acquisition with debt, the amount of interest that the company may claim as a deduction is limited under certain circumstances (s 23K; see chapter 20). A
reorganisation transaction for this purpose refers to an intragroup transaction, or a liquidation distribution (as defined in ss 45(1) and 47(1) respectively; see chapter 20).
Interest will be exempt from normal tax in the recipient’s hands if the person receiving the interest
and the person paying the interest forms part of the same group of companies and the interest
deduction was limited in terms of s 23K (s 10(1)(hA).
5.11.4 War pensions and awards for diseases and injuries (s 10(1)(g), (gA) and (gB))
The following are exempt from normal tax:
l amounts received as a war pension or as an award or benefit relating to compensation in respect
of diseases contracted by persons employed in mining operations (s 10(1)(g))
l disability pensions paid under s 2 of the Social Assistance Act 59 of 1992 (s 10(1)(gA))
l compensation paid in terms of the Workmen’s Compensation Act 30 of 1941 or the Compensation
for Occupational Injuries and Diseases Act 130 of 1996 (s 10(1)(gB)(i))
l pensions paid in respect of occupational injuries or disease sustained by an employee before
1 March 1994 if the employee would have qualified for compensation under the Compensation for
Occupational Injuries and Diseases Act, 1993, had the injury or disease been sustained or contracted on or after 1 March 1994 (s 10(1)(gB)(ii))
l any compensation paid by an employer in respect of the death of an employee. The employee’s
death must arise out of and in the course of his or her employment. The compensation must be
paid in addition to the compensation that is paid in terms of the Workmen’s Compensation Act
30 of 1941 or the Compensation for Occupational Injuries and Diseases Act 130 of 1996. This
exemption only applies to the extent that the compensation paid does not exceed R300 000
(s 10(1)(gB)(iii))
l any compensation paid in terms of s 17 of the Road Accident Fund Act 56 of 1996 (s 10(1)(gB)(iv)).
Section 17 of the Road Accident Fund Act 56 of 1996 provides that the Road Accident Fund
(RAF) has to compensate any person for any loss or damage which the person has suffered as a
result of any bodily injury to himself or the death of or any bodily injury to any other person, caused
by or arising from the driving of a motor vehicle by any person at any place within South Africa.
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5.11
5.11.5 Beneficiary funds (s 10(1)(gE))
Any amount awarded to a person by a beneficiary fund is exempt from normal tax. A beneficiary fund
is defined in the Pension Fund Act as a fund established with the object of receiving, administering
and investing death benefits on behalf of beneficiaries. These funds are set up as a last resort to
safeguard benefits that were paid from employer funds for the benefit of a minor on the death of an
employer-fund member, where no other suitable guardian, trust or other mechanism exists. All remaining funds will be paid to the minor when he or she reaches majority.
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6
General deductions
Linda van Heerden
Outcomes of this chapter
After studying this chapter you should be able to:
l demonstrate an in-depth knowledge of the general deduction formula in practical
case studies and theoretical advice questions (supporting your opinion by relevant
authority)
l apply the criteria that disallow an item to qualify for a tax deduction to both practical
case studies and theoretical advice questions.
Contents
6.1
6.2
6.3
6.4
6.5
6.6
6.7
6.8
6.9
Overview ...........................................................................................................................
The meaning of ‘carrying on a trade’ (ss 1(1), 11A and 20A) ..........................................
6.2.1 Pre-trade expenditure and losses (ss 11A, 11(a) to (x), 11D and 24J) ..............
General deduction formula (ss 11(a) and 23(g)) ..............................................................
6.3.1 ‘Expenditure and losses’ .....................................................................................
6.3.2 ‘Actually incurred’ (ss 11(a), 22(2)(b), 22(3)(a)(ii), 23(e), 23H and
par 12(2)(c) of the Eighth Schedule)...................................................................
6.3.2.1 Unquantified amounts: Acquisition of assets (s 24M) .........................
6.3.2.2 Disposal or acquisition of equity shares (s 24N) .................................
6.3.3 ‘During the year of assessment’ (ss 23H and 24M(2)(b)) ..................................
6.3.4 ‘In the production of the income’ (ss 1(1) and 23(f)) ..........................................
6.3.5 ‘Not of a capital nature’ .......................................................................................
Prepaid expenditure (s 23H).............................................................................................
Section 23 prohibited deductions .....................................................................................
6.5.1 Private maintenance expenditure (s 23(a)) ........................................................
6.5.2 Domestic or private expenditure (s 23(b) and (m)) ............................................
6.5.3 Recoverable expenditure (s 23(c)) ....................................................................
6.5.4 Interest, penalties and taxes (ss 23(d), 7E and 7F) ...........................................
6.5.5 Provisions and reserves (ss 23(e) and 11(j)) .....................................................
6.5.6 Expenditure incurred to produce exempt income (s 23(f))................................
6.5.7 Non-trade expenditure (s 23(g)) ........................................................................
6.5.8 Notional interest (s 23(h)) ...................................................................................
6.5.9 Deductions claimed against any retirement fund lump sum benefits
and retirement fund lump sum withdrawal benefits (s 23(i) and paras 5 and 6
of the Second Schedule) .....................................................................................
6.5.10 Expenditure incurred by labour brokers and personal service providers
(s 23(k)) ....................................................................................................................
6.5.11 Restraint of trade (ss 23(l ) and 11(cA)) .............................................................
6.5.12 Expenditure relating to employment or an office held (ss 23(m) and 23(b)) ...
6.5.13 Government grants (s 23(n)) ..............................................................................
6.5.14 Unlawful activities (s 23(o)) ................................................................................
6.5.15 The cession of policies by an employer (s 23(p) and par 4(2)bis of the
Second Schedule) ...............................................................................................
6.5.16 Expenditure incurred in the production of foreign dividends (s 23(q))...........
6.5.17 Premiums in respect of insurance policies against illness, injury, disability,
unemployment or death of that person (ss 23(r) and 10(1)(gl)) .........................
Prohibition against double deductions (s 23B) ................................................................
Limitation of deductions in respect of certain short-term insurance policies (s 23L) ......
Excessive expenditure ( s 23(g)) .....................................................................................
Cost of assets and VAT (s 23C) ........................................................................................
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Page
6.10 Specific transactions .........................................................................................................
6.10.1 Advertising .........................................................................................................
6.10.2 Copyrights, inventions, patents, trademarks and know-how ............................
6.10.3 Damages and compensation ............................................................................
6.10.4 Education and continuing education ................................................................
6.10.5 Employment and services rendered .................................................................
6.10.6 Goodwill .............................................................................................................
6.10.7 Legal expenditure (s 11(a) and (c)) ..................................................................
6.10.8 Legal expenditure: Of a capital nature (s 11(a) and (c)) ..................................
6.10.9 Losses: Fire, theft and embezzlement (s 23(c)) ...............................................
6.10.10 Losses: Loans, advances and guarantees .......................................................
6.10.11 Losses: Sale of debts ........................................................................................
6.10.12 Provisions for anticipated losses or expenditure ..............................................
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6.1 Overview
‘Taxable income’ is the amount remaining after deducting all allowable deductions and allowances
from the ‘income’ as determined. The main sections of the Act dealing with deductions are ss 11 to
18A and 22 to 24.
Most deductions are allowed by virtue of the so-called general deduction formula in s 11(a) read with
s 23(g). Unless specifically provided for elsewhere in the Act, expenditure and losses incurred in the
carrying on of a trade may only be deductible if the requirements (positive terms) laid down in s 11(a)
are complied with. Compliance with the positive terms in s 11(a) to determine whether an amount is
deductible is, however, not sufficient. The provisions of s 23 must also be complied with. Section 23
contains the so-called prohibited deductions (negative terms) stating what is not deductible (CIR v
Nemojim (Pty) Ltd (45 SATC 241). Due to the opening words of s 11, the first step in the enquiry as to
whether an expenditure or loss is deductible in terms of s 11(a), is to establish whether the taxpayer
was carrying on a trade. No deductions may be claimed in terms of the general deduction formula
(and s 11 as a whole) if the taxpayer is not carrying on a trade. The trading requirement also
manifests in s 23(a) and (b) (being domestic or private expenditure not incurred for the purposes of
trade) and s 23(g) prohibiting the deduction of amounts not expended for the purposes of trade.
Prerequisite: Trade
l
l
Definition
Pre-trade expenditure
General deduction
formula
Negative terms
Section 23(b) and (g)
Positive terms
Section 11(a)
Always consider
l section 23(a)–(r)
l section 23B
l section 23C
l section 23H
Five requirements
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6.2
Chapter 6: General deductions
6.2 7KHPHDQLQJRIµFDUU\LQJRQDWUDGH¶ (ss 1(1), 11A and 20A)
The opening words of s 11 permit deductions from the income of a person only if the person is carrying on a trade. The implications are that
l expenditure incurred prior to the commencement of that trade is not deductible in terms of s 11
(certain pre-trade expenditure is allowed as deductions (s 11A – see 6.2.1)), and
l expenditure not incurred in carrying on a trade is not deductible in terms of s 11, and
l expenditure can only be deducted from the income derived from the carrying on of a trade. This
is strengthened by s 23(g). However, if a section specifies that a deduction can be claimed despite s 23(g), for example s 11F, a deduction can be claimed against non-trade income.
The term ‘trade’ is given a very wide meaning in s 1(1) and includes
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 as defined in the Patents Act, or any
design as defined in the Designs Act, or any trademark as defined in the Trade Marks Act, or any copyright
as defined in the Copyright Act, or any other property which is of a similar nature.
In Burgess v CIR (1993 A) the principle that this definition should be given a wide interpretation was
described as being well established. It was further held that the taxpayer, who laid out money to
obtain a bank guarantee, which he risked in the hope of making a profit, was engaged in a ‘venture’,
‘a speculative enterprise par excellence’. Grosskopf JA said that a taxpayer carrying on what, standing on its own, amounts to the carrying on of a trade does not cease to carry on a trade simply because one of his purposes or even his main purpose is to enjoy a tax advantage. He stated:
‘If he carries on a trade, his motive for doing so is irrelevant.’
It was also pointed out that the definition is not necessarily exhaustive and that the term ‘trade’ was
intended to embrace every profitable activity.
It is very important to note that, although the term ‘trade’ is defined, the Act requires the carrying on of
a trade before a s 11 deduction can be claimed. While the views of SARS contained in Interpretation
Note No 33 (Issue 5) provide direction in interpreting this requirement, it states that SARS will consider each case on its own and that much will depend upon the nature and extent of the taxpayer’s
activities. The ‘carrying on of a trade’ might imply that there must be a continuity of activities, but in
the case of Stephan v CIR (32 SATC 54) a single venture was held to be the ‘carrying on of a business’ (which term is included in the definition of ‘trade’).
Depending on the circumstances of the case, the principle of continuity may result in the denial of
deductions against rental income earned from a single residential property. Although the letting of
property is included in the definition of ‘trade’, it does not necessarily constitute the carrying on of a
trade. In practice, the Commissioner may allow deductions, but limit them to the income, so that it
does not result in an assessed loss. If a natural person has an assessed loss from rental activities, it
may be ring-fenced if s 20A is applicable – in other words, such assessed loss may not be offset
against taxable income derived from another trade (see chapter 7).
Continuity and the profit motive are not prerequisites, however, for the carrying on of a trade. The
activities concerned should be examined as a whole in order to establish whether the taxpayer is in
fact carrying on a trade (Estate G v COT (1964 SR)). It is submitted that in appropriate circumstances
a taxpayer will be carrying on a trade even if he has no objective to make a profit, or even if he deliberately sets out to make a loss. In De Beers Holdings (Pty) Ltd v CIR (1985 AD) it was stated that a
taxpayer may elect to trade for some other commercial advantage for his business or that he may be
compelled to sell at a loss. This principle was established in the earlier case of Modderfontein Deep
Levels Ltd v Feinstein (1920 TPD).
In spite of its wide meaning, the term ‘trade’ does not include all activities that might produce income,
for example income in the form of interest, dividends, annuities or pensions (the so-called ‘passive’
earning of income). Interpretation Note No. 33 (Issue 5), in par 4.1.6, explains this as the ‘active step’
requirement and states that it means something more than watching over existing investments that
are not income producing and are not intended or expected to be so.
A person who accumulates his savings and invests them in interest-bearing securities or shares held
as assets of a capital nature does not derive the income from carrying on any trade (ITC 1275
(1978)). In practice, SARS accepts that if capital is borrowed specifically to reinvest, such a transaction results in trade income and the expenditure is, therefore, allowable. On this basis, it will allow
interest incurred in order to earn interest income as a deduction. The Commissioner’s practice is set
out in Practice Note No 31, the relevant portion of which reads:
While it is evident that a person (not being a moneylender) earning interest on capital or surplus funds invested does not carry on a trade and that any expenditure incurred in the production of such interest cannot be allowed as a deduction, it is nevertheless the practice of Inland Revenue to allow expenditure incurred in the production of interest to the extent that it does not exceed such income. This practice will also
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6.2
be applied in cases where funds are borrowed at a certain rate of interest and invested at a lower rate.
Although, strictly in terms of the law, there is no justification for the deduction, this practice has developed
over the years and will be followed by Inland Revenue.
In Robin Consolidated Industries Ltd v CIR (1997 A, 59 SATC 199) one of the issues that had to be
considered by the court was whether the taxpayer had ‘carried on a trade’ during a particular year of
assessment.
The taxpayer was a manufacturer, wholesaler and retailer of stationery and associated products,
operating throughout the country via subsidiary companies. The taxpayer became insolvent and was
placed in provisional liquidation. The liquidators sold the taxpayer’s business ‘lock, stock and barrel’,
with the exclusion of goods and stock in bond. Whilst in liquidation, two sale transactions, i.e. the sale
of goods in bond and stock in bond respectively, were undertaken by the liquidators. The court held
that transactions concluded by the liquidators involving the realisation of the taxpayer’s stock during
liquidation do not constitute the carrying on of a trade by the taxpayer himself.
6.2.1 Pre-trade expenditure and losses (ss 11A, 11(a) to (x), 11D and 24J)
Expenditure and losses are generally only deductible if incurred after the commencement of a trade.
In the process of commencing a trade and setting up an income-producing structure, a taxpayer
incurs various expenditure in preparation for the carrying on of that trade before trading starts. Such
pre-trade expenditure normally includes assets bought and salaries or rent paid and is regarded as
capital expenditure because they relate to the setting up of an income-producing structure (the
business or trade). Section 11A allows certain qualifying expenditure and losses, incurred before the
commencement of that trade and not previously claimed or allowed as a deduction, as a deduction
once that specific trade is carried on (but subject to the limitation provisions of s 23H – see 6.4). Only
expenditure qualifying for a specific deduction in terms of s 11 (other than s 11(x), which means that
this refers to s 11(a) to (w)), s 11D (research and development expenditure) or s 24J (interest incurred)
can be deducted as pre-trade expenditure.
Section 11(x) brings within the scope of s 11 all amounts allowed to be deducted in terms of other
provisions of Part I of the Act, which deal with normal tax. If such amounts (amounts in ss 11D and
24J excluded), however, were incurred before the commencement of the carrying on of the taxpayer’s trade, it will not qualify for deduction in terms of s 11A being specifically excluded.
If the pre-trade expenditure and losses qualifying for this deduction exceed the taxable income from
that trade, such excess may not be set off against income from another trade, notwithstanding
s 20(1)(b) (s 11A(2)). This implies that the pre-trade expenditure in respect of a specific trade is ringfenced. Such excess may be carried forward to the following year of assessment and may then be
set off against taxable income from that same trade (s 11A(1)(c)).
Interpretation Note No 51 (Issue 5) describes SARS’s interpretation of s 11A in more detail.
Example 6.1. Pre-trade expenditure
Assume that the following events took place within the year of assessment ending on 31 December
2021.
A vacant administration building was purchased on 25 January 2021. Transfer costs amounted
to R30 000. The building was renovated at a cost of R250 000. The renovations were completed
on 1 July 2021, the same date on which the occupants moved in and became liable for rent to
the property owner. The property owner therefore commenced with the carrying on of this rental
trade on 1 July 2021. Rental income of R50 000 and royalty income (not related to the rental
trade) of R10 000 accrued to the property owner during the year of assessment.
Rates and taxes in respect of the building amounted to the following:
l for the period 25 January 2021 to 30 June 2021 – R60 000
l in respect of the remainder of the year of assessment – R33 000.
What amounts will qualify for a deduction in terms of s 11A?
SOLUTION
Transfer costs as well as renovation expenditure are not deductible, because these are expenditures of a capital nature. Both ss 11(a) and 11A do not allow for a deduction of expenditure of
a capital nature.
The expenditure of R60 000 in respect of rates and taxes was incurred before the rental trade
was carried on. It is for this reason that this expenditure will not qualify as a deduction in terms of
any provision other than s 11A.
continued
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Chapter 6: General deductions
The calculation of taxable income is as follows:
Taxable income from the rental trade:
Gross income – rental received ......................................................................................
Less: Deductions
Expenditure incurred whilst carrying on the trade (s 11(a))...........................................
Pre-trade expenditure (s 11A) (R60 000 limited to R17 000 (R50 000 – R33 000)) .....
R50 000
Taxable income ..............................................................................................................
Rnil
(33 000)
(17 000)
The R43 000 (R60 000 – R17 000) excess of pre-trade expenditure may be carried forward to
the next year, when it will qualify for a deduction against his rental trade taxable income
(s 11A(1)(c)).
Taxable income from non-rental trade:
Gross income – royalty income ...................................................................................... R10 000
The property owner will be subject to tax on the royalty income. He may not set off the excess
pre-trade expenditure of R43 000 against this income in terms of s 11A(2).
6.3 General deduction formula (ss 11(a) and 23(g))
The courts have laid down a general deduction formula by holding that ss 11(a) and 23(g) must be
read together when one considers whether an amount may be deducted (Port Elizabeth Electric
Tramway Co Ltd v CIR (1936 CPD)).
The general deduction formula can be broken down into the following elements:
l expenditure and losses
l actually incurred
l during the year of assessment (from case law – see 6.3.3)
l in the production of the income
l not of a capital nature
l to the extent that it is laid out or expended for the purposes of trade (s 23(g)).
The above elements, all of which must be satisfied before an amount can be deducted in terms of the
general deduction formula, are discussed in the following paragraphs.
6.3.1 ‘Expenditure and losses’
In CSARS v Labat (2011 SCA) the Supreme Court of Appeal held that the terms ‘obligation’ or ‘liability’ and ‘expenditure’ are not synonyms. The ordinary meaning of ‘expenditure’ refers to the action of
spending funds; disbursement or consumption; and hence the amount of money spent. In the context
of the Act, it would also include the disbursement of other assets with a monetary value. Expenditure,
accordingly, requires a diminution (even if only temporary) or, at the very least, movement of assets
of the person who expends.
The courts have not defined the word ‘losses’. In Joffe & Co (Pty) Ltd v CIR (1946 AD) the court
considered that the word had several meanings; that, in the context of a provision almost identical to
s 11(a), its meaning was ‘somewhat obscure’; and that it was not clear whether it meant anything
different from ‘expenditure’. Watermeyer CJ, who delivered the judgment of the Appellate Division of
the Supreme Court, said (at 360) that:
in relation to trading operations the 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.
In Port Elizabeth Electric Tramway Co Ltd v CIR (1936 CPD) the court considered that, in the context,
the word appeared ‘to mean losses of floating capital employed in the trade which produces the
income’.
6.3.2 ‘Actually incurred’ (ss 11(a), 22(2)(b), 22(3)(a)(ii), 23(e), 23H and par 12(2)(c) of the
Eighth Schedule)
The use of the words ‘actually incurred’ rather than the words ‘necessarily incurred’ widens the field of
deductible expenditure. For instance, one man may conduct his business inefficiently or extravagantly, incurring expenditure that another man does not incur; such expenditure is therefore not
‘necessary’, but it is actually incurred and is therefore deductible (Port Elizabeth Electric Tramway Co
Ltd v CIR (1936 CPD)). Excessive expenditure may be disqualified from deduction for other reasons –
see 6.8.
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6.3
In Caltex Oil (SA) Ltd v SIR (1975 A) it was held that ‘expenditure actually incurred’ does not mean
expenditure actually paid during the year of assessment. It was said to mean ‘all expenditure for
which a liability has been incurred during the year, whether the liability has been discharged during
that year or not’. Actual payment is therefore not essential for the deduction of expenditure.
The meaning of ‘incurred’ was addressed by Corbett JA, in delivering the judgment of the majority of
the Appellate Division in Edgars Stores Ltd v CIR (1988 A), it was stated (at 90):
[I]t is clear that only expenditure (otherwise qualifying for deduction) in respect of which the taxpayer has
incurred an unconditional legal obligation during the year of assessment in question may be deducted in
terms of s 11(a) from income returned for that year . . . if the obligation is initially incurred as a conditional
one during a particular year of assessment and the condition is fulfilled only in the following year of assessment, it is deductible only in the latter year of assessment (the other requirements of deductibility being
satisfied). (Own emphasis.)
There must therefore be an unconditional legal liability to pay an amount before an amount is ‘actually
incurred’. If there is no definite and absolute liability during the year of assessment to pay an amount,
expenditure has not been ‘actually incurred’ (Nasionale Pers Bpk v KBI (1986 A)). A limitation is
placed on the amount of certain prepaid expenditure that may be claimed as deductions for tax
purposes even though the expenditure was ‘actually incurred’ in the year of assessment (s 23H –
see 6.4)).
The words ‘actually incurred’ rule out the deduction of
l provisions for expenditure or losses that are uncertain, or
l expenditure or losses that may arise in the future, or
l expenditure or losses that are no more than impending or expected.
Therefore, estimates of contingent (uncertain) liabilities are not expenditure actually incurred. If an
expenditure was incurred (an unconditional legal liability) but cannot be quantified, the amount must
be estimated based on available information and claimed in that tax year (CIR v Edgars Stores Ltd
(1986 TPD)). Moreover, a deduction of income carried to any reserve fund or capitalised in any way
is prohibited (s 23(e)).
Example 6.2. Actually incurred
ABC Ltd has a June financial year end. Due to an expected price increase, trading stock
amounting to R500 000 was bought on 25 June 2020. The invoice was issued on 26 June 2020
but delivery only occurred on 3 July 2020.
Discuss in which year of assessment the amount is actually incurred and deductible.
SOLUTION
ABC Ltd did not actually incur the R500 000 in terms of s 11(a) in the 2020 year of assessment
since an unconditional legal obligation to pay was not incurred. The expenditure is only actually
incurred when the trading stock is delivered in the 2021 year of assessment and will only be
deductible in that year of assessment.
When a taxpayer has originally acquired any asset with the purpose of holding it as an asset of a
capital nature, such expenditure will not be deductible in terms of s 11(a). If the taxpayer subsequently changes his intention and starts using the asset as trading stock, the expenditure may qualify
for the s 11(a) deduction. No expenditure is incurred at the time that the taxpayer’s intention changes,
and accordingly no deduction is available at this time. The original cost of the trading stock is normally
brought into account, and effectively deducted as opening stock, in terms of s 22(2)(b). If, however, a
capital asset becomes trading stock due to a taxpayer changing its intention, the cost price of the
trading stock is deemed to be the market value of the capital asset on the conversion date (in terms
of par 12(2)(c) of the Eighth Schedule) (s 22(3)(a)(ii)).
If a taxpayer disputes the validity of a claim against him, the disputed expenditure is not actually
incurred since no unconditional legal obligation has been incurred. To permit the deduction of disputed expenditure would encourage abuse. This situation went on appeal in CIR v Golden Dumps
(Pty) Ltd (1993 A), where Nicholas AJA, who delivered the judgment of the Appellate Division, dealt
with the issue (at 206) in the following manner:
Where at the end of the tax year in which a deduction is claimed, the outcome of the dispute is undetermined, it cannot be said that a liability has been actually incurred. The taxpayer could not properly claim
the deduction in that tax year, and the Receiver of Revenue could not, in the light of the onus provision of
s 82 of the Act, properly allow it. (Section 82 has since been repealed and replaced by s 102 of the Tax
Administration Act, 2011.)
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Chapter 6: General deductions
The following cases have debated the issue of shares in exchange for something:
l It has been held that the issue of shares by a company does not mean that the company incurred
an expenditure (ITC 1783 (66 SATC 373)). The implication is that if, for example, a company issues a share in exchange for a service, no cost was incurred in respect of the service and no deduction may be claimed.
l A later judgment in ITC 1801 stated that ‘. . . the decision in ITC 1783 was clearly wrong and not a
reflection of the law . . .’. It was held that expenditure is actually incurred if a company issues
shares in order to discharge a liability that arose when it was obtained. An example of this is
where an asset is given in exchange for those shares (ITC 1801 (68 SATC 57)).
l This viewpoint was confirmed by the High Court in CSARS v Labat Africa Ltd (72 SATC 75) when
shares were issued for the acquisition of a trademark.
l The SCA, however, disagreed with the High Court in CSARS v Labat (2011 SCA) and held that an
allotment or issuing of shares does not involve a shift of assets of the company even though it
might, but not necessarily, dilute or reduce the value of the shares in the hands of the existing
shareholders. The allotment or issuing of shares in exchange for the acquisition of an asset was
therefore not allowed as an expenditure.
Currently, the tax implications of transactions where assets are acquired in exchange for shares
issued, are contained in ss 24BA and 40CA of the Act (see chapter 20).
6.3.2.1 Unquantified amounts: Acquisition of assets (s 24M)
If a person acquires an asset for a consideration that cannot be quantified in that year of assessment,
the part of the consideration that cannot be quantified is deemed not to be incurred by that person in
that year of assessment. The unquantified portion is deemed to be incurred only in the year of assessment in which it can be quantified (s 24M(2)(b)).
6.3.2.2 Disposal or acquisition of equity shares (s 24N)
Section 24N applies when a person sells equity shares to another person during the year of assessment at a quantified or quantifiable amount but the amount is not yet payable by the purchaser to the
seller. The amount is deemed to accrue and to be incurred to the extent to which it becomes due and
payable (s 24N(1)) if all of the following requirements are met:
l More than 25% of the amount payable for the shares becomes due and payable after the end of
the seller’s year of assessment and is based on the future profits of that company. It is important
to note that, even though the future profits have to be determined before the amount payable can
be quantified, the date on which such amount becomes due and payable triggers taxability and
deductibility.
l The value of all the equity shares sold during the year to which s 24N applies, exceeds 25% of
the total value of equity shares in the company.
l The purchaser and seller are not connected persons after the disposal.
l The purchaser is obliged to return the equity shares to the seller in the event of his failure to pay
any amount when due.
l The amount is not payable by the purchaser to the seller in terms of a financial instrument that is
payable on demand and is readily tradeable in the open market (s 24N(2)).
6.3.3 ‘During the year of assessment’ (ss 23H and 24M(2)(b))
Although s 11(a) does not specifically require it, the courts have held that expenditure is only deductible in the year of assessment in which it is incurred (Concentra (Pty) Ltd v CIR (1942 CPD)). Expenditure cannot be carried forward to a subsequent year of assessment or carried back to a previous year
of assessment. This is so even though it may properly relate to the income of those particular years.
However, this rule is subject to exceptions. One example is the provisions of s 23H (see 6.4), which
may in certain instances allow a deduction of expenditure which was actually incurred in a previous
year of assessment, but could not be claimed due to the restrictions placed on the amounts deductible in that year during which the expenditure was actually incurred.
Remember
If an amount is not claimed as a deduction in the correct year of assessment, the deduction may
not be claimed in a later year.
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6.3
Example 6.3. Incurred during the year of assessment
The payment of directors’ fees were authorised but not paid during a specific year of assessment
(Year 1). The company only claimed a s 11(a) deduction in respect of this expenditure in the
following year of assessment, during which the directors’ fees were paid (Year 2).
Discuss whether the deduction will be allowed in Year 2.
SOLUTION
As the expenditure was actually incurred in Year 1 after being authorised, the s 11(a) deduction
should have been claimed in Year 1. The deduction will not be allowed in Year 2.
Expenditure incurred during the year of assessment must be quantified and brought into account at
the end of that year. If an asset is acquired for an unquantifiable amount, such expenditure is deemed to be incurred only in the year of assessment that the amount can be quantified (s 24M(2)(b)).
6.3.4 ‘In the production of the income’ (ss 1(1) and 23(f))
The ‘income’ referred to in the phrase ‘in the production of the income’ is income as defined in s 1(1),
namely the gross income less the exempt income. This was confirmed in CIR v Nemojim Pty Ltd (45
SATC 241). Section 23(f), which prohibits a deduction of expenditure incurred in respect of any
amounts received or accrued that are not included in the term ‘income’ as defined in s 1(1), strengthens this viewpoint.
Remember
No deduction can be claimed if it does not relate to the production of income as defined.
Example 6.4. In the production of the income
ABC Ltd incurred R3 000 of expenditure in order to receive local dividends of R5 000.
Discuss the deductibility of the R3 000.
SOLUTION
Since dividends are exempt income in terms of s 10(1)(k)(i), it does not form part of ‘income’ as
defined. The expenditure of R3 000 cannot be claimed as a deduction in terms of s 11(a).
The meaning of the expression ‘in the production of the income’ was considered in Port Elizabeth
Electric Tramway Co Ltd v CIR (1936 CPD). The taxpayer concerned was a transport company. The
driver of one of its vehicles was involved in an accident and, as a result, the driver suffered injuries
and eventually died. The company was compelled to pay compensation to the deceased’s dependants.
To determine whether the expenditure was in the production of income, the court asked two questions:
(1) What action gave rise to the expenditure and what is the purpose of the action?
In this case, the action of the employment of an employee as a driver gave rise to the expenditure. This action is performed for the purpose of earning income by transporting passengers.
(2) Is this action so closely connected with (or a necessary concomitant of) the income-earning
business activities from which the expenditure arose as to form part of the cost of performing it?
The income-earning business activity of the taxpayer is the transporting of passengers. The
action that gave rise to the expenditure is the employment of drivers. There is an inherent potential risk of an accident and a consequential potential liability to pay compensation when driving any vehicle. The two elements (the action and the income-earning business activities) are
closely connected with each other.
The expenditure was considered to be closely connected with and a necessary concomitant of the
income-earning business activities and was therefore allowed as a deduction.
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Chapter 6: General deductions
Example 6.5. Incurred in the production of income
XYZ (Pty) Ltd (XYZ) is a construction company carrying on business as engineers in reinforced
concrete. XYZ had to pay damages to the dependants of deceased employees who were killed
when the roof of a building under construction collapsed. The accident was caused by the negligence of the company in carrying out one of its contracts. Discuss whether the damages will be
allowed as a s 11(a) deduction.
SOLUTION
l Question 1: What action gave rise to the expenditure and what is the purpose of the action?
The action is the erection of a roof by employees who are employed as builders by a construction company. This action is performed for the purpose of earning income by completing
contracts.
l Question 2: Is this action closely connected with the income-earning business activities?
Even though erecting roofs are part of the business activities of a construction company,
erecting defective roofs due to negligence is not a necessary concomitant of the trading operations of a reinforced concrete engineer but rather an avoidable expenditure. The actions
are therefore not closely connected to the income-earning business activities of any construction business. (See Joffe & Co (Pty) Ltd v CIR (1946 AD) (6.10.3) for a similar finding.) The
damages will therefore not be deductible in terms of s 11(a).
It is not necessary that expenditure produces income in the year that it was incurred before it is
deductible (Sub-Nigel Ltd v CIR (1948 A)). The income may be earned only in a future year, but as
long as the expenditure was incurred for the purpose of earning that income, it is deductible. In light
of this principle, it was held in the aforementioned case that premiums paid on insurance policies
against loss of income and losses due to fire are incurred in the production of income.
Amounts paid to former employees on retirement, in recognition of prior services rendered, will not
qualify as a deduction. This expenditure is not in the production of any current or future income
(Johnstone & Co Ltd v CIR (1951 A)). If, however, as in the case of Provider v COT (1950 SR), the
expenditure is incurred to induce current and future employees to enter and remain in the service of
the taxpayer, the expenditure may qualify as a deduction since the purpose is to produce current or
future income. Amounts paid in terms of a service agreement will be deductible (see 6.10.5).
In CSARS v Mobile Telephone Networks Holdings (Pty) Ltd (2014 SCA) the Commissioner only allowed a portion of the audit fees as a deduction. Mobile Telephone Networks Holdings lent money to its
subsidiaries and earned dividends from investments made. The full bench of the South Gauteng High
Court referred to ITC 1589 57 SATC 153 (Z) where it was held that expenses relating to the portion of
the accountancy work relating to dividend income should be disallowed (being exempt income) and
the remainder of the accountancy work relating to income producing activities should be allowed.
The Supreme Court of Appeal (SCA) held that the apportionment must be fair and reasonable. The
SCA held that the value of the taxpayer’s equity and dividend activities were much bigger than the
more limited income-generating activities, and, with this as yardstick, only 10% of the audit fees was
allowed as a deduction in terms of s 11(a). (This is in contrast with the decision of the High Court to
use the amount of work done during the audit as the yardstick and in terms thereof allowing 94% of
the audit fees as a deduction. This was held based on the basis that only 6% of the time was spent
on the audit of the dividend section.)
The apportionment of expenditure incurred with a dual purpose, namely to produce moneys on resale
(income) and dividends (exempt income), was considered in CIR v Nemojim Pty (Ltd) (45 SATC 241).
The court held that the expenditure had to be apportioned since the purpose could not accurately be
appropriated either to income or to exempt income.
6.3.5 ‘Not of a capital nature’
It is often difficult to distinguish whether expenditure is of a capital or non-capital (or ‘revenue’) nature. Although there is a mass of judicial decisions on the topic, it is impossible to extract a universal
test that can be applied in all situations. One has to look at the facts of each case and the purpose of
the expenditure concerned in order to ascertain whether the expenditure is of a capital or revenue
nature. Despite the principle that there is no half-way house between capital and revenue, apportionment between expenditure incurred with a dual purpose has been allowed by the courts in, for
example, SIR v Guardian Assurance Holdings (SA) Ltd (38 SATC 111).
The courts have nevertheless laid down the following very useful tests for distinguishing between capital and revenue expenditure:
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6.3
New State Areas Ltd v CIR (1946 AD) (at 163):
The fixed v floating capital test laid down in an earlier case was used for assistance, but the main test
used in this decision was, the ‘operations v structure’ test.
Fixed v floating capital test
l Floating capital (being capital that frequently changes its form from money to goods and vice
versa, for example the purchase cost of stock) is income in nature.
l Fixed capital (being capital employed to acquire or improve property, plant, tools, etc., which
may qualify for capital allowances) is capital in nature.
Operations v structure test
l Expenditure incurred to perform the income-earning operations is income in nature.
l Expenditure incurred to establish, improve or add to the income-earning structure is capital in
nature.
SIR v Cadac Engineering Works (Pty) Ltd (1965 A):
This case also applied the ‘operations v structure’ test. It was held that there must be a sufficiently
close link between the expenditure and the taxpayer’s income-earning operations in order to warrant
the conclusion that it formed part of the cost of performing the taxSD\HU¶VLQFRPH-earning operations,
rather than the cost of expanding his income-producing structure. If the expenditure is more closely
related to the taxpayer’s income-earning structure than to his income-earning operations, it is capital
expenditure.
Rand Mines (Mining & Services) Ltd v CIR (1997 A):
The facts of this case revealed that millions of rands were spent in acquiring a contract to manage a
mine. This expenditure was held to be capital in nature because it was a cost expended to acquire
that income-earning right or structure. The acquisition was intended to provide an enduring benefit.
BP Southern Africa (Pty) Ltd v CSARS (69 SATC 79):
It was held that where no new capital asset for the enduring benefit of the taxpayer has been created
(enduring in the way that fixed capital endures), the expenditure naturally tends to assume more of a
revenue character.
The question arises: how long must the asset or advantage endure in order to constitute a capital
asset? The fact that an asset will endure for a very short period will support a view that a payment for
that asset or right is of a revenue nature and may therefore qualify for a deduction in terms of the
general deduction formula. On the other hand, when a right is acquired for a substantial period,
it constitutes an enduring benefit. This was the position in ITC 1036 (1964), in which a right was
granted for three years, with a right of renewal for a further two years. This type of expenditure will
therefore not qualify for deduction in terms of the general deduction formula. The degree of longevity
of the right or asset is a question of fact, and each case must be considered on its own merits.
Based on the facts of particular cases, the following expenditure has been found to be of a capital
nature and is thus not deductible:
l Money spent in the acquisition of fixed capital assets for use in a business (for example factory
premises and plant and machinery). Included here would be all expenditure connected with or
attached to the acquisition of capital assets (for example transfer duty on factory premises acquired, rail age paid on plant acquired for use in a business, and installation costs).
l Money spent in order to create a source of income, for example, the purchase price of the goodwill of a business.
l Expenditure incurred by a company in obtaining share capital (for example by way of underwriting
commissions, advertising and legal costs in connection with an offer of shares to the public).
l Transfer fees paid on the transfer of a liquor licence from one set of premises to another.
l The cost of erecting a model house on a hired site for the exhibition of the goods of a furniture
dealer. Although the purpose of the erection is to advertise the dealer’s products, the advertising
is of a permanent nature and results in the creation of a capital asset.
l Amounts paid to extinguish competition in order to expand the goodwill of a business.
l Losses incurred by a freelance journalist in building up a part-time business in journalism.
Losses of a capital nature are also prohibited as a deduction in terms of the general deduction formula.
The following are examples of losses of a capital nature that are not deductible under the general
deduction formula:
l the loss of money lent, except where the money is lost by moneylenders, financiers or others
whose business it is to make loans
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6.3±6.4
Chapter 6: General deductions
l losses on fixed capital assets (for example as a result of the destruction of plant or premises by
fire or the theft of machinery, furniture or other capital assets)
l the loss incurred by a tenant on the termination of his lease in connection with improvements
effected by him to the hired premises
l losses on the realisation of shares, except when it is the business of the taxpayer to deal in shares.
Although expenditure may be deductible in terms of the positive test of the general deduction formula, the expenditure must still pass the negative test contained therein. Section 23 contains a list of
items that may not be claimed as a deduction (see 6.5).
6.4 Prepaid expenditure (s 23H)
Section 23H provides exceptions to the normal rule that expenditure is only deductible in the year of
assessment in which it is actually incurred (see 6.3.3). It limits the allowable deductions for certain
prepaid expenditure to the extent that only the expenditure relating to the goods supplied, the services rendered or the benefits enjoyed during the specific year of assessment will be deductible in
that year of assessment.
Section 23H(1) can only apply if the two conditions in s 23H(a) and (b) are met, and none of the four
exceptions listed in the provisos is applicable. The two conditions that must be met are
l the expenditure must be allowable as a deduction in terms of the provisions of s 11(a) (general
deduction formula (other than expenditure incurred in respect of the acquisition of trading stock)),
s 11(c) (legal expenditure), s 11(d) (repairs), s 11(w) (premiums in respect of key-man policies)
or s 11A (qualifying pre-trade expenditure and losses), and
l the expenditure must be in respect of
– goods or services, but all the goods or services will not be supplied or rendered during the
year of assessment, or
– any other benefits, but the period to which the expenditure relates extends beyond the year of
assessment.
Unless any of the exceptions in the four provisos below are applicable, the allowable deduction in the
year in which the expenditure is incurred and subsequent years of assessment will be limited as
follows:
l Expenditure incurred in respect of goods to be supplied: only expenditure in respect of goods
actually supplied in a particular year will be deductible in that specific year of assessment.
l Expenditure incurred in respect of services to be rendered: the amount to be deducted in any
year will be determined as follows:
Months in the year during which the services are rendered
× Total expenditure on the service
Total number of months during which services are to be rendered
l Expenditure incurred in respect of any other benefit that the person will enjoy: the amount to be
deducted in any year will be determined as follows:
Months in the year during which the person will enjoy the relevant benefit
Total number of months during which he will enjoy the benefit
× Total expenditure on the benefit
The deductibility of the prepaid portion in respect of which the benefits will only be received or enjoyed in a future year is postponed to that future year (s 23H(1)). If the above-mentioned apportionment does not reasonably represent a fair apportionment in respect of the goods, services or
benefits to which it relates, the apportionment must be made in such manner as is fair and reasonable (s 23H(2)).
Section 23H does not apply in the following situations (meaning that the deduction of the amount
actually incurred will therefore not be limited and the full amount will be deductible in the year that it
was actually incurred):
l If all the goods or services are to be supplied or rendered or enjoyed within six months after the
end of the year of assessment during which the expenditure was incurred, unless the expenditure
is allowable under s 11D(2)) (research and development expenditure) (proviso (aa)). The Act is
unclear about whether the six-month rule must be applied to each individual prepaid expenditure,
or to all prepaid expenditure in total. The contra fiscum rule should be followed and therefore
every prepaid expenditure should be measured separately.
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6.4
l If the aggregate of all the amounts of expenditure incurred by the person, which may otherwise
have been limited by s 23H, does not exceed R100 000 (proviso (bb)). The total of all the prepaid portions of all the expenditure to which s 23H could have been applied (meaning amounts
which are not subject to another exception in proviso (aa), (cc) or (dd)) must be measured
against the R100 000.
l Any expenditure to which the provisions of s 24K (interest-rate agreements) or 24L (option contracts) apply (proviso (cc)).
l Any expenditure actually paid in respect of any unconditional liability to pay an amount imposed
by legislation. For example, if municipal law requires a person to pay property tax upfront, this
expenditure will not be subject to the limitations of s 23H (proviso (dd)).
Remember
The exceptions in provisos (aa), (cc) or (dd) must first be considered. Only amounts not subject
to any of them will then be taken into account for the purposes of the R100 000 exception in
proviso (bb).
If a person can show during any year of assessment that the goods or services will never be received
by or rendered to him, or that he will never enjoy the benefit, the expenditure can be claimed as a
deduction during that year to the extent that it has actually been paid by the person (s 23H(3)).
Example 6.6. Prepaid expenditure
An individual signed a contract on 1 January of the current year of assessment ending on
28 February 2021. The contract entitles him to the use of a machine for a period of five years. The
lease expenditure qualifies for a deduction in terms of s 11(a). The contract provides for a once-off
lease payment of R600 000, which becomes due and payable on the date of signature of the contract.
Section 23H could apply because the two conditions are met. Since none of the exceptions are
applicable, s 23H will limit the amount that may be deducted in terms of s 11(a) in each of the
years of assessment as follows:
2021 year of assessment:
1 January to 28 February
2
u
12
2022–2025 years of assessment:
12
10
12
........................................
R20 000
........................................
R120 000
........................................
R100 000
5
u
12
2026 year of assessment:
600 000
600 000
5
u
600 000
5
Example 6.7. Prepaid expenditure
X Ltd incurred the following expenditure during the year of assessment ending on 30 June 2021:
On 1 February 2021 Annual rent of the office premises ............................................
R90 000
On 1 March 2021
Annual fee for security services ................................................
120 000
On 1 May 2021
Goods (3 months’ supply – R8 000 worth of goods will be
received on each of 31 May 2021, 30 June 2021 and
31 July 2021) ...................................................................
24 000
TOTAL ...........................................................................................................................
What amount will be deductible during the 2021 year of assessment?
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Chapter 6: General deductions
SOLUTION
All the expenditures are deductible in terms of s 11(a). Not all of the goods will be supplied
during the year and the period to which benefits (from renting the office and the rendering of
security services) relate extends beyond the year of assessment. Section 23H therefore applies.
The current year portion and prepaid portion of the expenditures are calculated as follows:
Current
Prepaid
year
Rent
R90 000 × 5/12 .......................................................... R37 500
Rent
R90 000 × 7/12 ..........................................................
R52 500
Security services
R120 000 × 4/12 ........................................................
40 000
Security services
R120 000 × 8/12 ........................................................
80 000
Goods
R24 000 × 2/3 ............................................................
16 000
Goods
R24 000 × 1/3 ............................................................
8 000
Total ............................................................................................................
R93 500
R140 500
Test whether one of the provisos would render s 23H inapplicable.
Proviso (aa) (test each expenditure separately)
All the goods will be supplied within six months after year end and proviso (aa) will therefore be
applicable to that expenditure and the total amount of R24 000 can be deducted.
All the benefits from the rent of the office and the security services will not be enjoyed within six
months after year end. Proviso (aa) will therefore not apply to those expenditures and the s 23H
limitation might be applicable. Test for proviso (bb) in respect of the rent expenditure and the
security services.
Proviso (bb) (test prepaid portions together)
The total expenditure actually incurred that may otherwise have been limited by s 23H (meaning
amounts not subject to another exception) relates to the prepaid portion, and amounts to R132 500
(R80 000 + R52 500). Since this amount does exceed the R100 000 threshold, s 23H will apply
and only the current year portions of the rent expenditure (R37 500) and the security services
(R40 000) will be deductible.
6.5 Section 23 prohibited deductions
Section 23 provides that no deduction may be made in respect of the following expenditure, therefore
irrespective of the fact that s 11(a) might allow for a deduction:
6.5.1 Private maintenance expenditure (s 23(a))
The costs incurred in the maintenance of any taxpayer, his family or establishment (his private home)
are not allowed as a deduction.
The core word in this section is ‘maintenance’ and the meaning of the aforementioned words was
discussed in CIR v Hickson (1960 A) and Beyers JA, who delivered the judgment of the Appellate
Division of the Supreme Court, said (at 249):
I take ‘maintenance of the taxpayer, his family or establishment’ to mean feeding and clothing himself and
his family, providing them with the necessities of life, and comforts, and, as it were, maintaining a certain
standard of living, and keeping up his establishment.
6.5.2 Domestic or private expenditure (s 23(b) and (m))
Domestic or private expenditure, including the rent of, cost of repairs, or expenditure in connection
with any premises not occupied for the purposes of trade, any dwelling house or domestic premises
(private home), is not allowed as a deduction except for any part (usually based on floor area) occupied for the purposes of trade. Read together with the trade requirement in s 11(a), expenditure
linked to the part of a private home occupied for trade purposes should consequently be deductible.
In CIR v Hickson (1960 A) Beyers JA said (at 249):
‘Domestic and private expenditure’ are, I should say, without attempting an exhaustive definition, expenditure pertaining to the household, and to the taxpayer’s private life as opposed to his life as a trader.
The cost of employment of a household servant to enable a taxpayer’s spouse to take up a job, a
taxpayer’s expenditure incurred in travelling from his residence to his place of business and medical
expenditure incurred are all examples of domestic or private expenditure prohibited by s 23(b).
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6.5
A part of any private home only qualifies as being occupied for the purposes of trade if it is
l specifically equipped for the purposes of the taxpayer’s trade, and
l regularly and exclusively used for trade purposes
(proviso (a)).
If the trade for which such part of a private home is occupied does not constitute any employment or
office, the taxpayer must only meet the aforementioned two requirements in order to claim a deduction of the allowable expenditure relevant to such part occupied for the purposes of trade.
In addition to the aforementioned two requirements, if the trade does constitute any employment or
office, the taxpayer must also comply with one of the following two conditions before a deduction in
respect of the allowable expenditure is allowed:
l in the case where the income from that employment or office is derived mainly (‘mainly’ means
more than 50%) from commission or other variable payments based on his work performance: the
taxpayer’s duties must be mainly performed otherwise than in an office provided to him by his or
her employer, or
l in the case where the income from employment is not derived mainly from commission: the taxpayer’s duties must be performed mainly in the qualifying part of the private home
(proviso (b)).
The effect of the two provisos is that a portion of the taxpayer’s relevant domestic or private expenditure, which would normally be prohibited deductions, but which was incurred in respect of that part
of his or her private home used for the purpose of trade as explained, will be allowed as a deduction
if all the aforementioned requirements are met. Examples of such allowable expenditure are property
rates, interest on a mortgage loan and security expenditure, such as burglar alarms, electric fences
and armed-response services (see Interpretation Note No 45 (Issue 3) in this regard). Section 23(b)
must be read together with s 23(m), which lists the specific limited deductions allowable in respect of
expenditure which relates to employment (see 6.5.12).
6.5.3 Recoverable expenditure (s 23(c))
Any loss or expenditure that is recoverable under any contract of insurance, guarantee, security or
indemnity is not allowed as a deduction. The meaning of the word ‘recoverable’ is unsure. The opinion (without giving a definite decision) that the word means ‘capable of being sued for’ was given in
Oosthuizen v Standard Credit Corporation (1993 A) (on 350).
Since the general recoupment provision (s 8(4)(a)) will in any event bring any recovery or recoupment of a previously deducted amount back into income, this prohibition seems to be superfluous.
Section 23(c) is amended, with effect from 1 January 2021, in order to clarify the interaction between
s 23(c) and s 23L – see 6.7 below.
6.5.4 Interest, penalties and taxes (ss 23(d), 7E and 7F)
The deduction of any tax imposed under the Act or any interest or penalty imposed under any other
Act administered by the Commissioner (for example the VAT Act) is disallowed.
Please note that interest paid by SARS to a person under a tax Act is deemed to accrue to that person in terms of s 7E on the date of payment. If such interest has to be repaid by that person to SARS,
it must be deducted in the year of assessment that the interest is repaid to SARS (s 7F). This deduction is only available to the extent that the interest is or was included in the person’s taxable income.
6.5.5 Provisions and reserves (ss 23(e) and 11(j))
Income carried to any reserve fund or capitalised in any way (for example a provision made out of income to provide for a contingent liability) is denied as a deduction.
This provision underlines the ‘actually incurred’ requirement in terms of the general deduction formula. The creation of a provision definitely does not represent the ‘incurrence’ of expenditure. Section 23(e) will not apply where the Act specifically allows for the creation of a reserve-type of
allowance, for example the provision for doubtful debt (in s 11(j)). Section 11(j) makes provision for a
doubtful debt allowance to be claimed in one year of assessment and added back to income in the
next year of assessment.
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6.5.6 Expenditure incurred to produce exempt income (s 23(f ))
Expenditure incurred in respect of any amounts that are not included in the term ‘income’ as defined
in s 1(1) will not qualify as a deduction. ‘Income’ is defined as gross income less exempt income.
The purpose of this prohibition is to prevent the deduction of expenditure incurred in the production
of gross income that is exempt in terms of s 10 or amounts excluded from the definition of ‘gross
income’, because such amounts are consequently excluded from the definition of ‘income’.
A typical example is expenditure incurred to produce dividends that are exempt from tax (see 6.3.4).
It is submitted that expenditure of a general character that cannot accurately be appropriated either
to income or to non-taxable amounts should be apportioned.
Corbett JA suggested a method for the application of this prohibition in delivering the judgment of
the Appellate Division in CIR v Nemojim (Pty) Ltd (1983 A) (at 256):
It seems to me . . . that when considering whether moneys outlaid by the taxpayer constitute expenditure
incurred in respect of amounts received or accrued which do not constitute ‘income’ as defined (for the
sake of brevity I shall call this ’exempt income‘), the court must assess the closeness of the connection between the expenditure incurred and the exempt income received or accrued, having regard to the purpose
of the expenditure and what the expending thereof actually effects. (Own emphasis.)
In CIR v Standard Bank of SA Ltd (1985 A) it was stated that the same general test applies to this
prohibition as to the general deduction formula. This general test entails that the purpose of expenditure and the closeness of the connection between the expenditure and the income-earning operations must be established.
6.5.7 Non-trade expenditure (s 23(g))
Expenditure can be incurred with mixed motives. Expenditure may be incurred partly for the purpose
of trade and partly for private purposes. Section 23(g) prohibits 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’. The words ‘to the extent’ indicate that it is possible to
apportion any expenditure and claim the trade portion of the expenditure as a deduction. Section 23(g) must always be read together with the trade and other requirements of s 11(a) when the
deductibility of an amount is being ascertained in terms of the general deduction formula.
In Warner Lambert SA (Pty) Ltd v C: SARS (2003 SCA) the taxpayer, a South African subsidiary of an
American company and a signatory to the Sullivan Code, involved its senior management in ‘social
responsibility projects’. When the principles of this Code became enshrined in legislation, the Comprehensive Anti-Apartheid Act, it compelled the parent company to ensure that its South African
subsidiary complied with the principles, or fines or imprisonment for the directors could be imposed.
These costs fell into two broad categories: wage improvements and similar expenses, which were
clearly incurred in the production of income; and social responsibility expenditure incurred outside
the workplace.
The taxpayer argued that the reason for incurring the social responsibility expenditure was to prevent
the loss of its status as a subsidiary of the US parent, with all the concomitant privileges, which was
crucial to its trading success. The court held that it was unthinkable that the taxpayer should not
comply with the Sullivan Code and concluded that the expenses were incurred for the performance
of the taxpayer’s income-producing operations and formed part of the cost of performing it. This
meant that the expenditure had been ‘incurred for the purposes of trade and for no other’, and was
therefore incurred in the production of income.
In C: SARS v Scribante Construction (62 SATC 443) the taxpayer company had sufficient funds
available to pay the dividend without borrowing, but for good business reasons elected to pay only a
portion as dividend and to credit a portion of the dividend to interest-bearing loan accounts of the
shareholders. The Supreme Court of Appeal found that the ‘borrowing’ was to enable the company to
earn income and that the loans of the shareholders were used for the purposes of trade and in fact
produced income directly and indirectly. The distinguishing feature in this case was that the funds,
which were available to pay the dividend, were surplus to the taxpayer’s business requirements and
hence the only reason for their retention was to enable the company to earn interest. The interest
paid on the loans was therefore deductible.
6.5.8 Notional interest (s 23(h))
A taxpayer cannot claim a deduction for interest which might have been made but is forfeited due to
the taxpayer employing his capital in his trade rather than investing it in a bank.
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6.5.9 Deductions claimed against any retirement fund lump sum benefits and retirement
fund lump sum withdrawal benefits (s 23(i) and paras 5 and 6 of the Second Schedule)
Paragraphs 5 and 6 of the Second Schedule allow certain unclaimed contributions made by the taxpayer to a retirement fund as deductions in the calculation of the taxable amounts of lump sum
benefits. Section 23(i) prohibits a deduction in terms of s 11 of the same unclaimed contributions
allowed in terms of the aforementioned paragraphs. This merely confirms that the balance of
unclaimed contributions can only be allowed once, as will be explained in detail in chapters 7 and 9.
6.5.10 Expenditure incurred by labour brokers and personal service providers (s 23(k))
In the past, a popular tax-saving method for employees was to offer their services to their employers
through the medium of private companies or close corporations. This effectively enabled them
l to avoid the monthly payment of employees’ tax
l to be taxed at the company rate of taxation as opposed to the higher marginal tax rates applicable to individuals, and
l to avoid the limitations placed on the deduction of expenditure incurred by employees.
Section 23(k) places a limitation on allowable deductions in order to discourage the use of a corporate entity in an attempt to avoid being classified as an employee. It limits the deductions allowable
for expenditure incurred by
l labour brokers (as defined in the Fourth Schedule) who do not possess an employees’ tax exemption certificate, and
l personal service providers (as defined in the Fourth Schedule).
Labour brokers are natural persons, and personal service providers can be either companies or
trusts. In the case of labour brokers, the remuneration paid or payable to an employee for services
rendered is the only expenditure that can be deducted. In the case of a personal service provider,
such remuneration paid and the following expenditure incurred is not prohibited as deductions:
l legal expenditure (s 11(c)), bad debt (s 11(i)), qualifying pension, provident or retirement annuity
fund contributions (s 11(l)), the refund of amounts received in respect of services or any employment or the holding of any office (s 11(nA)) and the refund of any restraint of trade payment
(s 11(nB))
l expenditure in respect of premises, finance charges, insurance, repairs, fuel and maintenance in
respect of assets if such premises or assets are wholly and exclusively used for trade purposes.
Example 6.8. Expenditure incurred by personal service providers
John rendered services to his employer, Delta Ltd, for 15 years. He resigned during the 2021
year of assessment and established a company. The company now renders the service that
John used to render. John is the only holder of shares and employee of the company. The
company incurred the following expenditure:
l rental of office space (used wholly and exclusively for trade purposes)
l lease expenditure in respect of motor vehicle used by John. The vehicle is used for trade
and private purposes
l salary paid to John (the only employee and holder of shares of the company).
Which deductions can the company claim in respect of the expenditure incurred?
SOLUTION
The company is a personal service provider (see chapter 10) and may claim deductions in respect of the office rental expenditure as well as the salary paid to John (not prohibited in terms of
s 23(k)).
Since the asset is not used wholly and exclusively for trade purposes as required by s 23(k), the
motor vehicle lease expenditure may not be claimed. John cannot claim any of the expenditure
because he did not incur it.
Note that Delta Ltd is obliged to withhold employees’ tax at a flat rate of 28% from the payments
made to the company because a personal service provider is an ‘employee’ as defined.
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6.5.11 Restraint of trade (ss 23(l) and 11(cA))
Section 23(l) prohibits the deduction of restraint of trade payments, except those allowable in terms
of s 11(cA), being payments to natural persons, labour brokers (without employees’ tax exemption
certificates) and personal service providers allowed over the lesser of the term of the contract and
three years (see chapter 12).
6.5.12 Expenditure relating to employment or an office held (s 23(m) and (b))
Section 23(m) prohibits the deduction of expenditure that relates to any employment or office held in
respect of which remuneration is earned other than the specific amounts listed below. This prohibition
does not apply to an agent or representative whose remuneration is derived mainly in the form of
commission based on sales or turnover (mainly means more than 50%).
Only the following s 11 expenditure relating to employment or an office held may be claimed as a
deduction against remuneration earned by an employee whose remuneration does not mainly consist
of commission:
l any contributions to any retirement fund (s 11F)
l any legal expenditure (s 11(c)), wear-and-tear allowance (s 11(e)), bad debt (s 11(i)) or provision for doubtful debt (s 11( j))
l refund of amounts received in respect of services or any employment or the holding of any office
(s 11(nA)) or refunds of amounts received as a restraint of trade payment (s 11(nB))
l qualifying rent, repairs or expenditure (in terms of s 11(a) or (d)) in connection with any private
home to the extent that the deduction is not prohibited in terms of s 23(b) as being domestic or
private expenditure* (see 6.5.2).
* An employee who earns remuneration that does not mainly consist of commission, can consequently claim deductions in respect of that part of a private home used as a home office (therefore for the
purposes of trade) if
l that part is specifically equipped for purposes of his trade (proviso (a) to s 23(b)), and
l that part is regularly and exclusively used for his trade (proviso (a) to s 23(b)), and
l the employee’s duties are mainly performed in that home office (proviso (b)(ii) to s 23(b))
(ss 11(a), 11(d), 23(m) and 23(b) read together).
Section 23(m) is subject to the limitation placed on the expenditure incurred by labour brokers and
personal service providers (s 23(k) – see 6.5.10). In terms of Interpretation Note No. 13 (Issue 3) it
means that the aforementioned limitations imposed upon labour brokers (without an exemption certificate) and personal service providers (‘employees’ as defined), will apply despite the provisions of
s 23(m).
6.5.13 Government grants (s 23(n))
Government grants received or accrued in respect of goods or services provided to beneficiaries in
terms of an official development assistance agreement are exempt (s 10(1)(yA)). If such exempt
grant is used to fund the acquisition of any asset or expenditure, no deduction or allowance can be
claimed (s 23(n)).
6.5.14 Unlawful activities (s 23(o))
The deduction of expenditure incurred in respect of unlawful activities (for example the payment of a
bribe or a fine) is prohibited.
Unlawful activities include activities referred to in the Prevention and Combating of Corrupt Activities
Act. Fines and penalties imposed as a result of unlawful activities, even if carried out in any other
country, may also not be claimed as deductions (s 23(o)(ii). The deduction of any expenditure incurred constituting fruitless and wasteful expenditure, as defined in and determined in accordance
with the Public Finance Management Act, is also prohibited (s 23(o)(iii)). This means that the deduction of any expenditure that was made in vain and that would have been avoided if reasonable care
had been exercised by the public entity, is prohibited (s 23(o)(iii)).
The exemption in s 10(1)(zL) (see chapter 5) provides that any amount of fruitless and wasteful
expenditure that was not allowed as a deduction (or that was prohibited as a deduction in terms of
s 23(o)(iii)) and is subsequently recovered by the public entity, is deemed to be exempt during the
year of assessment in which it is received or accrued.
Interpretation Note No. 54 (Issue 2) describes SARS’s interpretation of s 23(o) in more detail.
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6.5±6.7
6.5.15 The cession of policies by an employer (s 23(p) and par 4(2)bis of the Second
Schedule)
An employer who cedes a policy of insurance to an employee (or former employee), a director (or
former director), or a dependant or nominee of such employee or director, or to any retirement fund for
the benefit of any of the aforementioned persons, may not deduct the value in respect of such cession. In the case of a cession to a retirement fund, the member of such fund will only be taxed when
the fund cedes such policy to the member (par 4(2)bis of the Second Schedule).
6.5.16 Expenditure incurred in the production of foreign dividends (s 23(q))
The deduction of any expenditure incurred in the production of income in the form of foreign
dividends is prohibited (s 23(q)).
6.5.17 Premiums in respect of insurance policies against illness, injury, disability,
unemployment or death of that person (ss 23(r) and 10(1)(gI))
The deduction of premiums paid by a person in terms of a policy of insurance, which covers a person
against illness, injury, disability, unemployment or death of that person, is prohibited. The proceeds
of such policies are also exempt from tax (s 10(1)(gI)).
6.6 Prohibition against double deductions (s 23B)
Even though an amount may qualify for a deduction under more than one provision of the Act, no
amount may reduce the taxable income of a taxpayer more than once (s 23B(1)).
If a particular section expressly allows a deduction on the condition that the amount is also deductible under any other section, such a specific double deduction is allowed (s 23B(2)). The Act contains no such specific provisions. The intention of this exception is clear, but since a double deduction is prohibited by the rule in s 23B(1), it is unclear how such exception will work.
Sometimes it might seem that a taxpayer obtains a ‘double deduction’, for example in the case of the
additional deduction in respect of learnership agreements (s 12H). The salaries paid to the learners
are allowed as deductions in terms of s 11(a) and additional fixed amounts are allowed as deductions in respect of the same learners if certain conditions are met. These type of incentives are not
double deductions of the same amounts but merely additional incentives for a specific purpose.
Specific deductions take precedence over the general deduction formula. If a specific deduction is
allowed, no deduction in terms of s 11(a) is available, even if there is a limitation on the amount of the
specific deduction or allowance, or if it is available in a different year of assessment (s 23B(3)). The
general deduction formula can therefore not be used to claim the balance of any expenditure for
which there is a specific deduction, but which is limited to a certain amount, as a deduction.
An employer (as policyholder) can claim no deduction in terms of the general deduction formula for
premiums paid under a policy of insurance where the policy relates to death, disablement or illness
of an employee or director, or former employee or director of the employer (s 23B(5)). If the policy
relates to death, disablement or illness arising solely from and in the course of employment of the
employee or director, the employer may however deduct such premiums paid (exclusion in s 23B(5)).
Last-mentioned policies are taken out to safeguard an employer in the case of events happening in
the course of employment, for example travel insurance and general work-related disability insurance
for all employees collectively.
6.7 Limitation of deductions in respect of certain short-term insurance policies
(s 23L)
An insurance contract is viewed as an investment contract if the short-term insurer fails to accept
significant risk from the policyholder in the case of a specified uncertain event. An insurance contract
is a ‘policy’ for income tax purposes if it is a policy of insurance or reinsurance. The policyholder must
therefore have an insurable interest.
No deduction is allowed in respect of any insurance premiums incurred in respect of a policy if such
premiums are not taken into account as an expense in terms of IFRS in either the current year of
assessment or a future year of assessment (s 23L(2)).
Policy benefits received must be included in gross income but any premiums not allowed as a deduction in the current or any previous year of assessment reduce the taxable amount of any benefits
received from such policies (s 23L(3)).
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Chapter 6: General deductions
This leads to insurance benefits being fully taxed for policyholders of short-term insurance ‘investment contracts’ and on the other hand any related expenditure that is recovered being disallowed as
a deduction under s 23(c) of the Act. An amendment to s 23(c), effective from 1 January 2021, makes
it clear that the rules of s 23L override the limitation provision of s 23(c).
6.8 Excessive expenditure (s 23(g))
Expenditure can be excessive if it is not actually incurred in the production of the income, as required
by s 11(a) , or if it is not laid out or expended for the purposes of trade, as is required by s 23(g), but
is inspired by some other motive.
If the Commissioner disallows the excessive portion of expenditure, the recipient is nevertheless
subject to tax on the full amount (ITC 792 (1954)). It does not follow that, because any particular
amount is not allowed as a deduction from the income of the payer, it is not taxable in the hands of
the recipient (W F Johnstone & Co Ltd v CIR (1951 A)).
There are a number of reported cases in which the Special Court has had to decide whether remuneration alleged to be excessive was or was not paid in the production of income. In these cases, the
court took into account various factors, for example
l the open market value and the nature of the services rendered
l the nature of the business
l the relationship between the employer and the employee
l the amount of the remuneration in relation to the net profit earned by the employer
l the dependence of the remuneration paid on the profits earned, and
l the presence of motives other than ordinary commercial ones (for example the avoidance of tax
or the expression of family feelings) (ITC 1518 (1989)).
Employers must take care that travel allowances paid to an employee are not out of all proportion to
the amount that the employee would be likely to use for business purposes. It then indicates that the
employer, in arranging, was inspired by some ulterior motive, such as a desire to evade tax. In such
a situation, the Commissioner is entitled to challenge the deduction of the whole or portion of the
travel allowance as not being expenditure incurred in the production of income (ITC 575 (1944)).
Salaries and bonuses paid to members of firms practising in corporate form, such as lawyers, public
accountants, consulting engineers, architects and stockbrokers, were allowed in full as a deduction
to the companies concerned (withdrawn Practice Note No. 29). It is submitted that such companies
will now have to provide proof that salaries are market related and meet the requirements of ‘in the
production of the income’.
6.9 Cost of assets and VAT (s 23C)
The introductory words ‘notwithstanding the Seventh Schedule’ to s 23C refer to the Regulation
determining the ‘determined value’ of company cars in par 7(1) of the Seventh Schedule. The ‘determined value’ used to calculate the fringe benefit arising in the employee’s hands includes VAT (see
chapter 8).
The VAT portion of the cost of an asset or an expenditure incurred has the following impact:
l If the taxpayer is a ‘vendor’ and an input tax deduction is claimed, the amount of the actual input
tax must be excluded from the cost (or the market value) of the asset or the amount of the expenditure (s 23C(1)).
l If the taxpayer is a non-vendor and no input deduction is claimed, the VAT portion must be included in the cost (or the market value) of the asset or the amount of the expenditure.
Section 23C also applies to the notional input tax claimable as a deduction by a vendor when he
acquires ‘second-hand goods’ (as defined in s 1(1) of the VAT Act) in qualifying circumstances
(s 23C read with s 16(3)(a)(ii) of the VAT Act). Where a VAT vendor leases an asset under an ‘instalment credit agreement’, a portion of the input tax paid must reduce each lease rental payment. The
portion is calculated as the amount of the rental divided by the total rental and multiplied by the
amount of the input tax (proviso to s 23C(1)).
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6.9±6.10
Example 6.9. Cost of assets and VAT
XYZ Ltd leased a delivery vehicle in terms of an instalment credit agreement for R30 600 per
month (VAT inclusive) for a period of 36 months. The cash price of the delivery vehicle is
R513 000 (including VAT). Discuss the VAT and normal tax implications of the transaction.
SOLUTION
VAT implication of the transaction:
Total input tax claimable R66 913 (R513 000 × 15/115)
The input tax credit of R66 913 is claimable in full on the earliest of date of payment of any consideration or the date of delivery of the vehicle.
Normal tax implication of the transaction:
The monthly lease payment (exclusive of VAT) is claimable in terms of s 11(a) and s 23C. This
amounts to R28 741 per month, calculated as:
[Instalment inclusive of VAT – (input tax × (instalment this period/total instalments))]
[R30 600 – (R66 913 × (R30 600/(R30 600 × 36)))].
The VAT portion of R1 859 (R30 600 – R28 741) cannot be claimed for normal tax purposes.
6.10 Specific transactions
The remainder of this chapter is devoted to the distinction between expenditure and losses that are
allowable in terms of the general deduction formula, and those that are not, taking the decisions of
case law into account. It is important to note that each case is decided upon by the courts, based on
the specific circumstances of that case.
6.10.1 Advertising
Advertising expenditure incurred by a business already in existence (therefore already trading) will
be allowed if the expenditure qualifies as a deduction in terms of the general deduction formula (the
most important requirements in this regard are the ‘in the production of the income’ and ‘not of a
capital nature’ requirements).
When advertising costs result in the acquisition of an asset of a permanent nature (a direct enduring
benefit), they are of a capital nature. For example, in ITC 469 (1940) the taxpayer, a furniture dealer,
erected a model house on a hired site in order to exhibit his goods. This advertising expenditure was
held to be of a permanent nature and to have created a capital asset, and was not allowed as a
deduction.
A celebrated case involving large donations was CIR v Pick ’n Pay Wholesalers (1987 A). The principle
that arose was that if a donation is made for moral reasons (to support a good cause) without any
business purpose whatsoever, no deduction will be allowed. The reason is that the expenditure will
not be in the production of income.
Interpretation Note No. 45 (Issue 3) explains that sponsorship generally involves the support or
promotion of an activity such as a sporting event in return for advertising of the sponsor’s products or
services. In terms of security expenditure, a company that, for example, provides an armed response
service or installs security gates may offer to secure a certain premises in return for extensive advertising of such company’s logo at the premises or at a high-profile event. The sponsorship may also
take the form of the provision of products related to the advancement of crime-initiative projects.
From an income tax perspective, the question has been raised whether contributions to anti-crime
initiatives are deductible under s 11(a) read with s 23(g). In terms of the aforementioned Interpretation Note, the deduction will be limited to so much of the contributions as the taxpayer can prove
produced commercial value for the business through exposure of its name or products.
6.10.2 Copyrights, inventions, patents, trademarks and know-how
The cost of taking out a patent is capital expenditure unless a dealer in patent rights incurs it. Similarly, a trader or manufacturer’s costs of registering a trademark or trade name constitute capital
expenditure.
The cost incurred for the outright acquisition of a patent or trademark is capital expenditure unless it
is acquired for the purpose of speculation. It does not matter, it is submitted, that the purchase price
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Chapter 6: General deductions
is paid by annual instalments, whether fixed or variable (ITC 1365 (1982)). In these circumstances, the
taxpayer expends an amount to obtain an enduring right to use (and own) an asset. Although the
deduction of the aforementioned costs of a capital nature will not be deductible in terms of the general deduction formula, other specific deductions are allowed in respect of these costs (ss 11(gB),
11(gC) and 11D – see chapter 13).
An outright acquisition must be distinguished from the situation where the taxpayer makes a repetitive payment for the use of an asset. Payments for the use of an asset are of a revenue nature and will
be deductible in terms of the general deduction formula. Examples are lease payments or rent expenditure for the use of an asset, as opposed to capital expenditure for the outright acquisition of the
asset.
Annual royalty payments for the use of a patent or trademark are clearly deductible, whether they are
paid in fixed or variable amounts, depending, for example, upon the number of articles sold. Once
again, the expenditure relates to the right of use and not to the obtaining of enduring ownership. This
principle was confirmed in BP Southern Africa (Pty) Ltd v CSARS (69 SATC 79).
6.10.3 Damages and compensation
Payments for damages or compensation resulting from negligence will only be deductible if the negligence constitutes a ‘necessary concomitant’ of the trading operations. A close connection between the
trading operations or income-earning business activities and the action that causes the liability for
damages must exist.
In Joffe & Co (Pty) Ltd v CIR (1946 AD) the taxpayer carried on business as engineers in reinforced
concrete. The death of a worker was caused by the negligence of the company in carrying out one of
its contracts, and it was required to pay damages and costs. The company claimed a deduction of
the amount paid. The claim was disallowed, because the construction of a building does not necessarily
lead to its collapse during that construction process. Watermeyer CJ, who delivered the judgment of
the Appellate Division of the Supreme Court, said (at 360):
There is nothing . . . to show that the appellant’s method of conducting his business necessarily leads to
accidents, and it would be somewhat surprising if there were.
This case did not decide that losses occasioned by a taxpayer’s negligence are not deductible. It
merely decided that there was no evidence that losses arising from the negligence of the particular
taxpayer concerned were necessary concomitants of the specific trade carried on by him.
If a taxpayer sells petrol lamps (under a guarantee) as his principal business, there is an inherent risk
of injuries if one of the lamps explodes. Payments for consequential damages and compensation are
incurred in the production of income due to the risk being an ‘inevitable concomitant’ of the trade.
6.10.4 Education and continuing education
The deduction of expenditure incurred by a taxpayer in improving his knowledge or education has
been disallowed on the grounds that either the expenditure is of a capital nature or it is not incurred
in the production of income, or both.
It is nevertheless suggested that circumstances could arise in which expenditure of this nature would
be incurred in the production of income and would not be of a capital nature (ITC 1433 (1984)). It
was held in Smith v SIR (1968 A) by Steyn CJ (who delivered the judgment of the majority of the
Appellate Division of the Supreme Court) that all expenditure incurred by a taxpayer in the acquisition
of knowledge or education cannot be of a capital nature.
In practice, SARS has ruled that the fees paid by practising attorneys for attending courses conducted as part of the continuing legal education programme of the Association of Law Societies of South
Africa will be allowed under s 11(a) (De Rebus 332 (1975)). SARS has also ruled that the costs
incurred by practising chartered accountants in attending courses conducted by the South African
Institute of Chartered Accountants in its programme of continuing education will be allowed on the
same basis under s 11(a) (Accountancy SA (August 1987)).
SARS considers ‘on their merits’ submissions by other taxpayers claiming expenditure of a similar
nature, but insists that it be shown that the expenditure is so closely linked with the earning of their
income that it warrants a deduction in terms of s 11(a).
6.10.5 Employment and services rendered
All amounts payable by an employer to an employee in terms of a service agreement are deductible
from the employer’s income, if all the requirements of the general deduction formula are met. If the
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amount payable is excessive in relation to the services performed by the employee, SARS is entitled
to disallow such portion as being incurred for some other purpose than ‘in the production of income’
or for purposes other than ‘trade’.
It is the practice of SARS to allow the deduction of bursaries awarded by an employer if the holder of
the bursary binds himself to work for the employer for a certain period after completing his studies,
provided that it is not ‘unduly generous’. SARS cannot give an employer an assurance that a deduction will be allowed when he operates a bursary scheme that is only open to dependents of employees, retired employees or the children of deceased employees. SARS considers it advisable to
review all schemes of this nature annually, having regard, amongst other things, to the position held
by the parent of a student when a bursary is granted to a child of an employee, the nature of the course
being followed, the educational institution attended and the amount of the bursary. Based on this information, it will decide whether or not to challenge the deduction claimed by the employer.
The deductibility of voluntary awards (not provided for in a service contract) made by an employer to
an employee will depend on the circumstances surrounding the payment. For example, reasonable
annual bonuses paid to staff are allowed in practice, since their purpose is usually to secure a happy
and contented staff and so spur them on to greater efforts in future; future income will thus be generated. In a case in which a bonus payable to employees bore a relation to the services they rendered
over a number of prior years, its deduction was refused (ITC 618 (1946)).
A problem also arises when the employer has taken out policies of insurance on the lives of employees to compensate their heirs or dependants upon their death. Unless the employer can show that it
is his established practice to provide such benefits for the heirs or dependants of the employees in
order to promote a settled and contented staff, he will not be entitled to a deduction of the amount he
pays out. This is the case even if the proceeds of the policies will be taxable in the employer’s hands
in terms of par (m) of the definition of ‘gross income’ in s 1(1). The provisions of s 11(m), however,
allow a deduction in respect of annuities paid to retired employees and dependants of retired employees (see chapter 12).
6.10.6 Goodwill
An amount paid for the acquisition of the goodwill of a business is expenditure of a capital nature and
is not deductible from income. This is the case if the business is purchased in order to derive an
income and not for the purpose of resale at a profit (ITC 1073 (1965)). If the purpose is a profitable
resale of the business, the cost of acquisition is properly deductible from the proceeds derived from
a resale of the goodwill.
If the purpose of the acquisition is to derive an income, the fact that the purchase price is payable in
monthly or annual instalments does not affect the position. The amount laid out is for the acquisition
of a capital asset and is therefore of a capital nature. The terms of the agreement can stipulate that
the annual payments are not made for the outright purchase of the goodwill but merely for the right of
use of the goodwill for a certain period and that, on the expiry of the period, the goodwill is to revert
to its owner. In such a situation, the payments would be in the nature of rent and would be deductible
from income (ITC 140 (1929)).
6.10.7 Legal expenditure (s 11(a) and (c))
It was held in Port Elizabeth Electric Tramway Co Ltd v CIR (1936 CPD) that, for legal expenditure to
be deductible under s 11(a), the taxpayer must show that the legal expenditure is linked to an operation undertaken with the object of producing income and not to operations that merely serve to protect an existing source of income.
In African Greyhound Racing Association (Pty) Ltd v CIR (1945 TPD) legal expenditure incurred in
connection with the taxpayer’s representation before a commission into whether dog-racing should
be abolished or curtailed was disallowed by SARS as a deduction from its income. It was held that
the expenditure incurred in making its representation was not incurred for the production of income
but for preventing the total or partial extinction of the business from which the taxpayer’s income was
derived; therefore, it was not deductible. Similarly, legal costs incurred in the defence of a taxpayer’s
good name to protect the existence of his business are also not deductible under s 11(a), being not
incurred in the production of income.
If legal expenditure is not deductible under s 11(a), it may nevertheless still be deductible under
s 11(c). For example, legal costs incurred in the protection of income, to prevent a diminution of
income, to prevent an increase in deductible expenditure or to avoid a loss or resist a claim for compensation may be deductible under s 11(c).
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Chapter 6: General deductions
6.10.8 Legal expenditure: Of a capital nature (s 11(a) and (c))
Both s 11(a) and (c) require that the legal expenditure should not be of a capital nature. If the purpose of legal costs is to protect trademarks, designs or similar assets and to eliminate competition,
the legal costs are of a capital nature and do not qualify for deduction, even though the overall object
is to increase profits. In SIR v Cadac Engineering Works (Pty) Ltd (1965 A) the court held that legal
costs incurred in order to protect a design and eliminate competition constituted expenditure of a
capital nature and were not deductible under either s 11(a) or (c).
Legal expenditure incurred in the acquisition of a capital asset is not deductible. All such expenditure
bears a distinct relationship to the capital asset and is consequently expenditure of a capital nature,
specifically prohibited as a deduction by s 11(a).
For example, legal costs paid for the cost of transfer of an income-producing property into the name
of a taxpayer is a capital expenditure. If the property is trading stock for the taxpayer, however, the
legal costs paid for the transfer are deductible.
Legal expenditure laid out to secure an enduring benefit for a trade is of a capital nature. A distinction must be drawn between
l legal expenditure incurred in the creation of a right to receive income (capital in nature), and
l legal expenditure incurred in the actual earning of the income itself (income in nature).
6.10.9
Losses: Fire, theft and embezzlement (s 23(c))
Trading stock
Opening and closing stock are taken into account in the determination of taxable income. Goods lost
or destroyed by fire or theft are not on hand at the end of the year of assessment and the taxpayer
therefore automatically enjoys a deduction of goods lost in these ways.
SARS will allow a loss arising from the theft or destruction of stock by fire only to the extent to which it
exceeds the amount recoverable under any insurance policy or indemnity. This is because no deduction may be made for any loss that would otherwise be allowable to the extent to which it is recoverable under a contract of insurance, guarantee, security or indemnity (s 23(c)).
Fixed assets
Losses owing to theft or destruction of fixed assets such as plant, machinery or vehicles by fire
clearly do not rank for deduction under the general deduction formula, since they are of a capital
nature.
Cash
The principle regarding embezzlements and theft of cash is the following:
l If the loss is due to defalcations by the managing director or owner of the business, it will not be
allowed as a deduction (Lockie Bros Ltd v CIR (1922 TPD)).
l Losses suffered due to defalcations by subordinate employees will be allowed as a deduction,
since the risk of theft by such employees can be regarded as being a necessary concomitant of
the business activities. These losses generally arise from a risk that is always present when subordinate employees are engaged in performing the duties entrusted to them.
6.10.10 Losses: Loans, advances and guarantees
Amounts advanced to a third party (invested amounts)
If it is the custom of a trade or business to make loans or advances to customers as an integral part
of the business carried on for securing business, any losses of moneys lent to someone will be deductible. In Stone v CIR (1974 A) the inquiry to be answered was whether the capital lost was fixed or
floating (circulating) capital. Corbett AJA, said at (129):
If it was fixed capital, then the loss was of a capital nature; if floating (or circulating) capital, then it was a
non-capital loss. These conclusions would be in conformity with the dicta of Watermeyer CJ [in Port Elizabeth
Electric Tramway Co Ltd v CIR (1936 CPD)] in which the concept of a ‘loss’ is identified with a loss of floating capital.
The question of whether a taxpayer carries on a business of moneylending is a question of fact, to be
decided from the surrounding circumstances and transactions pertaining to the taxpayer. Factors
that have a bearing on the inquiry are, for example, whether there is any degree of continuity of the
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6.10
transactions, the frequency of the turnover stipulated for by the lender and the rate of interest on the
loans.
A loss sustained by an employer on a loan or an advance made to an employee that proves to be
irrecoverable is one of a capital nature and not deductible (ITC 249 (1932)). It is submitted that, when
it is the custom of an employer to make advances to employees to meet expenditure necessarily incurred by them in the course of carrying out their duties, any consequential irrecoverable losses are
deductible in terms of the general deduction formula.
Losses sustained by lending or advancing money may be refused a deduction when the moneys are
recoverable from some other person under a guarantee or arrangement of suretyship. A loss that
would otherwise be allowable as a deduction, to the extent to which it is recoverable under a contract
of insurance, guarantee, security or indemnity is prohibited (s 23(c)).
Amounts borrowed from a third party
Where losses arise on amounts borrowed from a third party, the purpose of the borrowing must be
taken into account (CIR v General Motors SA (Pty) Ltd (1982 T)). The purpose could be one of the
following:
l To hold the amounts on revenue account. If the amounts are held on revenue account, as working
capital employed for purposes of being turned over at a profit, any loss is deductible. The General Motors case dealt with foreign exchange losses incurred, amongst other things, to purchase
trading stock. A deduction was allowed because of the connection between the purchase of trading stock and the production of income.
l To hold the amounts as fixed capital. If the amounts are raised for capital purposes only, and
losses arise on the loan, no deduction will be allowed (Plate Glass and Shatterprufe Industries Finance Co (Pty) Ltd v SIR (1979 T)).
6.10.11 Losses: Sale of debts
When a person sells his business, ceases trading and incurs a loss on the sale of the debts due to
him, the loss is not deductible from his income, as this loss is not incurred in the production of income but after the income has been earned.
It often happens that a trader who requires cash sells the debts due to him to a finance company at a
discount, and in so doing incurs a loss. In practice, SARS will permit the deduction of such a loss as
being a loss incurred in the production of income in terms of s 11(a).
A loss sustained by a taxpayer who buys debts to sell them at a profit or in order to make a profit on
their collection would be allowable as a deduction, while any profits made would be taxable.
6.10.12 Provisions for anticipated losses or expenditure
Provisions made for anticipated losses or expenditure are not deductible, since no loss or expenditure has been actually incurred as is required by the general deduction formula. Moreover, such a
provision is expressly prohibited by s 23(e). There are, however, provisions that do provide for certain allowances under specified circumstances. Examples are the allowance granted for doubtful
debt (s 11(j) (see chapter 12) and the deduction of future expenditure on contracts, which is permitted by s 24C (see chapter 12).
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7
Natural persons
Linda van Heerden and Maryke Wiesener
/
Outcomes of this chapter
After studying this chapter you should be able to:
l calculate the normal tax payable by a natural person using the framework for the
calculation of taxable income
l explain and practically apply the assessed loss provisions of ss 20 and 20A
l calculate the deductions in respect of expenditure of a private nature that can be
claimed by natural persons in respect of contributions to retirement funds and donations to Public Benefit Organisations
l apply the anti-avoidance provisions of the Act in s 7(2), (2A), (2B), (3) and (4) in
respect of married persons and minor children
l apply the provisions of the Act in respect of antedated salaries
l demonstrate your knowledge by means of an integrated case study or theoretical
advice questions.
Contents
7.1
7.2
7.3
7.4
7.5
7.6
7.7
7.8
Overview ...........................................................................................................................
7.1.1 Assessed losses (ss 20 and 20A) ........................................................................
Calculation of normal tax payable (ss 6, 6A, 6B and 12T) ...............................................
7.2.1 The s 6(2) rebates ................................................................................................
7.2.2 The ss 6A and 6B medical tax credits .................................................................
Recovery of normal tax payable .......................................................................................
Deductions (ss 23(b), 23(m), 11F and 18A) .....................................................................
7.4.1 Contributions by members to retirement funds (ss 10C, 11F and 23(g),
par 5(1)(a) or 6(1)(b)(i) of the Second Schedule) ................................................
7.4.2 Donations to public benefit organisations and other qualifying
beneficiaries (s 18A) ............................................................................................
Taxation of married couples (ss 7(2), (2A)–(2C) and 25A)...............................................
7.5.1 Deemed inclusion (s 7(2)) ....................................................................................
7.5.2 Marriages in community of property (ss 7(2A), (2C) and 25A) ...........................
7.5.3 ‘Income’ for the purpose of the deeming provisions in s 7..................................
7.5.4 Expenditure and allowances (s 7(2B)).................................................................
Separation, divorce and maintenance orders (ss 21, 10(1)(u) and 7(11)).......................
Minor children (s 7(3) and (4)) ..........................................................................................
Antedated salaries and pensions (s 7A)...........................................................................
Page
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159
160
169
169
171
175
180
181
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185
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7.1 Overview
The determination of taxable income for a year of assessment is the first step in the calculation of the
normal tax payable by a taxpayer. The year of assessment for a natural person always runs from the
first day of March in a year to the last day of February of the following year. The year of the February
date indicates the year of assessment; for example, the 2021 year of assessment is from 1 March
2020 to 28 February 2021.
The Act follows a specific sequence in the calculation of a natural person’s taxable income and the
terms ‘gross income’, ‘income’ and ‘taxable income’ lead the way. Regarding inclusions, the definition
of ‘gross income’ discussed in chapters 3 and 4 is the clear starting point. The Act further contains
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7.1
provisions on deemed inclusions in ‘income’ (for example gains on the vesting of equity instruments in
s 8C), which is in effect also included in gross income through par (n) of the definition of ‘gross income’. The Act lastly contains provisions on deemed inclusions in ‘taxable income’ (for example
taxable capital gains in s 26A) and on deemed accruals (for example variable remuneration in s 7B).
There are a few specific deductions relating only to natural persons. Some of these deductions are
calculated as a percentage of a specific amount or subtotal that needs to be calculated first. The
sequence of the deductions therefore affects the taxable income after each deduction, which, in turn,
affects the value of the next deduction. The use of the following comprehensive framework (the socalled subtotal method) can facilitate the calculation of the taxable income and the normal tax payable by natural persons. Note that three separate columns are used. The subtotals in column 3 can
then be used as is, or with minor adjustments, to calculate some of the percentage-based allowable
deductions. A natural person can also qualify for deductions in terms of s 11(a), but the fact that
specific deductions take precedence over the general deduction formula (s 23B(3) – see chapter 6)
must always be remembered.
Natural persons can carry on more than one trade and can also receive non-trade income, for
example interest. In light of the provisons regarding the set-off of assessed losses (s 20) and the ringfencing of losses from certain trades (s 20A), it is advisable to first calculate the taxable income from
the various trades separately in order to determine the impact of ss 20 and 20A. Also note that
s 23(m) limits the allowable deductions if the trade of the taxpayer is employment (except for agents
and representatives – see 7.4).
Three different tax tables are applicable to the taxable income of natural persons:
l the ‘R500 000’ tax table applies to the taxable income in column 1, namely severance benefits
and retirement fund lump sum benefits
l the ‘R25 000’ tax table applies to the taxable income in column 2, namely retirement fund lump
sum withdrawal benefits, and
l the progressive tax table for natural persons, deceased estates, insolvent estates and special
trusts applies to the taxable income in column 3. This is the remainder of taxable income.
Remember
Although the use of the subtotal method facilitates the calculation of taxable income and the total
normal tax payable, reference to the column in which an amount must be included is not authority for the inclusion of an amount in gross income. This method was merely created to facilitate
the understanding and application of the provisions applicable to natural persons. The correct
authority for any inclusion is the specific paragraph of the definition of gross income.
Apart from normal tax, natural persons can also be liable for certain withholding taxes (for example the
withholding tax on interest in s 50A–H). Please see chapters 19 and 21 for more details in this regard.
Please note!
The following abbreviations are used in the comprehensive framework of the
subtotal method:
SB = Severance benefit
RFLB = Retirement fund lump sum benefit
RFLWB = Retirement fund lump sum withdrawal benefit
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Chapter 7: Natural persons
Subtotal method: Comprehensive framework for the 2021 year of assessment
Gross income – general and specific inclusions s 1(1)
including the deemed inclusions in ‘income’, for example
ss 7 and 8(4)(a) (note 1) .............................................
Less: Exempt income ss 10 and 10A – 10C ............
Column 1
RFLB
and
SB
Column 2
RFLWB
Rxxx
Rxxx
Column 3
Other
income and
deductions
Rxxx
(xxx)
Income – Subtotal 1 ....................................................
Less: Deductions (all the s 11 and other deductions
except ss 11F and 18A) ..........................................
Rxxx
Subtotal 2 ....................................................................
Less: Assessed loss from a previous year of assessment – s 20 ..............................................................
Rxxx
Subtotal 3 ....................................................................
Add: Other amounts included in ‘taxable income’,
for example the net travel allowance in terms of
s 8(1)(a) ...................................................................
Rxxx
Subtotal 4 ....................................................................
Add: Taxable capital gain in terms of s 26A (note 2)
Subtotal 5 ....................................................................
Less: Section 11F contributions to any retirement
fund ........................................................................
Subtotal 6 ....................................................................
Rxxx
xxx
Rxxx
(xxx)
(xxx)
xxx
(xxx)
Rxxx
(xxx)
Less: Section 18A – donations to PBO ...................
Taxable income per column ....................................
Rxxx
Rxxx
Rxxx
Total taxable income (sum of columns 1, 2 and 3) ............................................................
Rxxx
Normal tax determined per the progressive tax table on taxable income in column 3 .....
Less: Section 6(2) and 6quat rebates ...............................................................................
Add: Additional tax in terms of s 12T(7)(a) – see chapter 5 .............................................
Add: Normal tax payable on the taxable income in columns 1 and 2 ..............................
Less: Section 6A and 6B tax credits .................................................................................
Rxxx
(xxx)
xxx
xxx
(xxx)
Normal tax payable by the natural person (A) ..................................................................
Less: PAYE, provisional tax and the s 35A (non-final) withholding tax in respect of nonresidents ..................................................................................................................
Rxxx
Normal tax due by or to the natural person on assessment ..............................................
Rxxx
Withholding taxes (final) (in terms of ss 47A–47K, 49A–49H and 50A–50H) in respect of
non-residents ....................................................................................................................
Add: Withholding tax on dividends (final) (s 64EA(a)) in respect of ‘beneficial owners’ ...
Rxxx
xxx
Total withholding tax payable by the natural person (B) ..................................................
Rxxx
Donations tax payable by resident natural persons (as donors) (ss 54 and 64) (C).........
Rxxx
Total tax payable by the natural person (A + B + C) .........................................................
Rxxx
(xxx)
Note 1
It is proposed that the taxable amounts of severance benefits, retirement fund lump sum benefits
and retirement fund lump sum withdrawal benefits must be kept in separate columns (columns 1
and 2) when the taxable income of a natural person is calculated. One reason for this is that
such amounts are specifically excluded when the deductions in respect of ss 11F and 18A are
calculated. Another reason is that an assessed loss cannot be set off against these lump sum
amounts (proviso (c) to s 20(1)). A last reason is that the normal tax payable on these lump sum
amounts is calculated separately per amount and in terms of separate tax tables applying the
cumulative principle (see 7.2 and chapter 9). The amounts included in gross income in columns 1 and 2 are therefore also the final taxable income for these columns and no subtotals are
necessary for columns 1 and 2.
Application of this proposal will mean that the subtotals in column 3 can be used in the calculation of the deductions in respect of contributions to retirement funds (s 11F) and donations
(s 18A). This is because the subtotals already exclude all these lump sum amounts. The total
taxable income of the natural person will be the sum of the final amounts in the three columns.
continued
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7.1
Note 2
The taxable capital gain of a natural person is determined as follows in accordance with the provisions of the Eighth Schedule:
Sum of a natural person’s capital gains for the year of assessment .................................... Rxxx
Less: Sum of his capital losses for the year of assessment .............................................
(xxx)
Less: Annual exclusion of R40 000 (or R300 000 in the year of death) ............................
(xxx)
Less: Any assessed capital loss brought forward from the previous year .......................
(xxx)
Net capital gain for the year.................................................................................................
Rxxx
Taxable capital gain: 40% × net capital gain ...................................................................... Rxxx
(See chapter 17.)
It is very important to remember that many words used in the Act have specific meanings. Note,
for example, that the net capital gain is the amount after the deduction of the annual exclusion
and assessed capital loss. The 40% must be applied to this net capital gain in order to calculate
the taxable capital gain. Students frequently incorrectly swop the sequence of the annual exclusion and the 40%.
Covid-19 Note
The negative impact of the COVID-19 pandemic on the South African economy is
legion. The South African Government has introduced the concept of COVID-19
disaster relief organisations and laid down the requirements that must be met in
order to be deemed to be a Public Benefit Organisation (PBO). In order to encourage donations to such organisations and to the Solidarity Fund (an approved
PBO), the rules for the calculation of a taxpayer’s deduction in terms of s 18A was
amended. Refer to chapter 34 for a discussion of these terms and tax relief
measures.
7.1.1 Assessed losses (ss 20 and 20A)
Assessed losses (s 20)
An ‘assessed loss’ is defined as an amount by which the deductions admissible under s 11 (read in
conjunction with s 23) exceeds the income from which they are so admissible (s 20(2)). The fact that
s 11(x) brings all other allowable deductions in terms of Part I of the Act (normal tax) into the scope of
s 11, means that all such deductions must also be taken into account when the assessed loss is
determined. An assessed loss therefore arises when the ‘taxable income’ of a taxpayer for a specific
year of assessment is a negative amount (and an assessment was issued to this effect).
The term ‘balance of assessed loss’ is not defined. It is submitted that, for a natural person, it means
the excess of any assessed losses incurred in the carrying on of any trade in a specific year of assessment over the taxable income derived from the carrying on of any other trade plus any other nontrade taxable income in the same year of assessment, which is carried forward to the next year of
assessment.
The provisions of ss 20(1) and 20(2A)(a) read together make it clear that, when the taxable income of
a natural person is calculated, the following amounts can be set off against the income derived by
him from any trade or the taxable income from non-trade activities:
l a balance of assessed loss incurred by him in any previous year that has been carried forward
from the preceding year of assessment (ss 20(1)(a) and 20(2A)(a)), and
l an assessed loss incurred by him during the same year of assessment in carrying on any other
trade, either alone or in partnership with others (ss 20(1)(b) and 20(2A)(a)). An assessed loss incurred as a member of a company whose capital is divided into shares may not be deducted.
The effect of this is that a natural person holding shares in a company may not claim an assessed
loss incurred by the company as a deduction in the determination of his taxable income.
Please note!
Since a close corporation is a ‘company’ as defined in s 1, a member of a close
corporation also may not claim an assessed loss incurred by the close corporation as a deduction in the determination of his taxable income.
In Conshu (Pty) Ltd v CIR (1994(4) SA 603 (A), 57 SATC 1) Harms JA indicated that the word ‘income’ in the context of the set-off of assessed losses is not used in its defined sense (in s 1(1), that
is, gross income less exempt income). It should be read as ‘income taxable but for the set-off of
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Chapter 7: Natural persons
assessed losses’. He further stated that this all simply means that a set-off in terms of s 20 can only
arise if there would otherwise have been taxable income i.e. pre-tax profit.
The provisions of s 20(1) and (2) also apply to non-trade income and a person whose non-trade
expenditure in a particular year of assessment exceeds his non-trade income for that year can therefore establish a ‘non-trade’ assessed loss (s 20(2A)(a)). Subject to s 20(1), a natural person will not
be prevented from carrying forward any balance of assessed loss merely because he has not derived any income during a particular year of assessment (s 20(2A)(b)).
Consequently, even though a natural person derives no income in Year 2, he or she may still carry
forward the balance of the assessed loss established in Year 1 to Year 3. He or she need not be
carrying on a trade in a particular year in order to carry forward to that year any balance of assessed
loss established in the previous year. This concession for natural persons therefore overrides the
decision in SA Bazaars (Pty) Ltd v CIR (1952 AD), which, however, still applies to companies.
Example 7.1. Balance of assessed loss
In Year 1 Mr Nobuntu has an assessed loss from trading of R50 000, in Year 2 a taxable income
of R30 000 from non-trade sources and in Year 3 an assessed loss from trading of R60 000.
Calculate the balance of assessed loss for each year of assessment.
SOLUTION
In Year 1, the balance of assessed loss is R50 000, and in Year 2, R20 000 (R50 000 less R30 000).
In Year 3, the balance of assessed loss is R80 000 (R20 000 + R60 000).
Example 7.2. Set-off of assessed loss against income from another trade
In the current year of assessment, Mr Zoleka has derived a taxable income of R450 000 from the
carrying on of a profession, but he is an equal partner in another business that has an assessed
loss of R420 000 for the same year.
What is his taxable income for the current year of assessment?
SOLUTION
Mr Zoleka is entitled to set off his half-share of the partnership loss, namely R210 000, against
the taxable income of R450 000 derived from his profession. His final taxable income is therefore
R240 000.
Limitations regarding the set-off of assessed losses
An assessed loss incurred prior to the date of sequestration of a natural person (the insolvent) can be
set off against the income of the insolvent estate from the carrying on of any trade in South Africa
(proviso to s 20(1)(a)). This is because, in terms of s 25C, the insolvent prior to sequestration and the
insolvent estate are deemed the same person for the purposes of determining any deduction or setoff to which the insolvent estate may be entitled.
An assessed loss of the insolvent incurred prior to sequestration cannot be carried forward to the
insolvent as a natural person for the period subsequent to sequestration, unless the order of sequestration has been set aside. If this happens, the amount to be carried forward will be reduced by the
amount that was allowed to be set off against the income of the insolvent estate from the carrying on
of a trade (proviso to s 20(1)(a)). For example, if Mr Alfonso had an assessed loss of R120 000 on
sequestration, and R40 000 thereof was set off against the income of the insolvent estate carrying on
a trade, R80 000 will be carried forward to Mr Alfonso provided that the sequestration order has been
set aside.
Foreign assessed losses are fully ring-fenced. Assessed losses and any balance of assessed loss
incurred in carrying on any trade outside South Africa cannot be offset against any taxable income
(whether from trade or passive income (for example rentals)) from a South African source (proviso (b)
to s 20(1) read with s 20(2A)(a)). The Explanatory Memorandum on the Revenue Laws Amendment
Bill, 2000 explained that was proposed in order to protect the existing tax base as there is no information available relating to the magnitude of foreign losses and to what extent this may erode the
current South African tax base. This restriction only prevents foreign assessed losses being set off
against South African taxable income, not South African assessed losses being set off against foreign
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7.1
taxable income. It also does not prevent assessed losses incurred in one foreign country being set
off against taxable income from another foreign country.
An assessed loss or any balance of assessed loss cannot be offset against any amount (included in
taxable income) received by or accrued to a person as a retirement fund lump sum benefit, a retirement fund lump sum withdrawal benefit or a severance benefit (proviso (c) to s 20(1)). Such amounts
are kept in separate columns in the subtotal method and are taxed separately in terms of the specific
tax tables without taking any assessed losses into account.
Assessed losses: Ring-fencing of assessed losses from certain trades (s 20A)
The aforementioned set-off provisions are subject to the ring-fencing provisions in s 20A in respect of
assessed losses from certain trades (ss 20(1), 20(2A) and 20A(1) read together).
Not every activity is a trade and taxpayers often disguise private consumption as a trade so that
expenses and losses can be set off against other income, for example salary income. According to
the Explanatory Memorandum on the Revenue Laws Amendment Bill, 2003, s 20A was introduced to
prevent expenditure and losses associated with what was called ‘suspect trades’, such as ‘hobby
activities’, from being deducted as a means to reduce taxable income.
Ring-fencing means that an assessed loss from a specific trade can only be deducted against income from that same trade. Offsetting assessed losses from suspect trades against other taxable
income (from both trade and non-trade activities) is therefore restricted by ring-fencing the losses
from suspect trades.
The ring-fencing of an assessed loss from a certain trade applies only to certain natural persons (not
to companies or trusts). The SARS Guide on the Ring-Fencing of Assessed Losses Arising From
Certain Trades Conducted by Individuals (second issue dated 8 October 2010) highlights the fact
that natural persons who trade in a partnership are, however, included in the provisions of s 20A. This
Guide further explains that there are four steps contained in s 20A, which will determine if an assessed loss can be ring-fenced if all four these requirements are met, namely:
l the maximum marginal rate of tax requirement (s 20A(2))
l the ‘three-out-of-five-years’ requirement or alternatively, the ‘listed suspect trade’ requirement
(s 20A(2)(a) and (b)
l the ‘facts and circumstances’ test, i.e. the escape clause (s 20A(3), and
l the ‘six-out-of-ten-years’ requirement, i.e. the ‘catch all’ provision (s 20A(4)).
Before ring-fencing can apply, the sum of the natural person’s taxable income (ignoring the provisions of s 20A) and any assessed loss or balance of assessed loss set-off in determining the taxable
income must, firstly, be equal to or exceed the amount at which the maximum marginal tax rate
applicable to natural persons (currently 45%) becomes applicable. The effect of the aforementioned
is that the taxable income, before taking any assessed loss or balance of assessed loss into account
must, for the 2021 year of assessment, be equal to or exceed R1 577 301. Secondly, the natural
person must also meet one of the requirements as contained in s 20A(2)).
The heart of the ring-fencing doctrine lies in s 20A(1), which provides that
l when the requirements in s 20A(2) apply to a trade (see below)
l a natural person is prohibited
l from setting off an assessed loss incurred by him in that trade
l against the income derived by him during the same year of assessment from another trade or a
non-trading activity (s 20A(1)).
Ring-fenced losses are ring-fenced forever and may only be set off against income from that same
suspect trade (s 20A(5)). Natural persons may not use ring-fenced losses against income from other
trades or against non-trade income either during the current tax year during which the ring-fenced
losses occur or in a subsequent year (in the form of a carry-forward). This rule applies ‘notwithstanding s 20(1)(a)’, confirming that s 20A overrides s 20(1)(a).
Example 7.3. Permanent ring-fencing
An accountant maintains a guesthouse that qualifies as a listed suspect trade. In 2021, he generates R1 750 000 taxable income as an accountant and R12 000 as an assessed loss from the
guesthouse. He is unable to demonstrate a reasonable prospect of generating taxable income.
Explain the effect of the aforementioned to the accountant.
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Chapter 7: Natural persons
SOLUTION
The accountant’s taxable income exceeds the amount at which the maximum marginal rate
becomes applicable.
Rental from residential accommodation is a suspect trade and no reasonable prospect of generating taxable income can be demonstrated.
The assessed loss of R12 000 from the guesthouse activities is therefore ring-fenced in 2021.
This means that the accountant will not be able to set off the assessed loss against any other
income derived from another trade. This treatment of the R12 000 assessed loss will continue
for all subsequent years after 2021 (s 20A(5)).
The following diagram illustrates the working of s 20A:
Does the maximum marginal rate of tax (45%)
apply to the natural person?
YES
NO
Is this trade specifically listed as a suspect trade? (s 20A(2)(b))
YES
NO
Did the natural person incur losses in this trade for at least three out
of five years? (s 20A(2)(a))
YES
NO
Escape clause:
Is there a reasonable prospect of taxable
income within a reasonable period?
NO
The escape clause is not available if the natural
person incurred losses in his suspect trade (as
listed in s 20A(2)(b)) for at least six out of ten
years, except for farmers.
YES
S 20A IS APPLICABLE
S 20A IS NOT APPLICABLE
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The s 20A(2) requirements
The s 20A(2) requirements involves an enquiry into two matters:
l The first enquiry focuses on the taxpayer’s level of taxable income. The taxable income of the
natural person for the year of assessment, before setting-off any current or preceding years’
assessed losses from any trade, is looked at. It must equal or exceed the amount at which the
maximum marginal rate of tax becomes applicable per the progressive tax table. For the year of
assessment ending on 28 February 2021, the maximum marginal rate of tax of 45% becomes
payable when the taxable income of a natural person exceeds R1 577 300. It is consequently
only necessary to proceed to the second enquiry if a natural person’s taxable income is equal to
or exceeds R1 577 301.
Please note!
If the taxable income for the 2021 year of assessment is below R1 577 301, there
is no need to proceed to the second enquiry and the ring-fencing of assessed
losses from certain trades will not be applicable (s 20A).
l The second enquiry focuses on the loss-generating activity. A taxpayer will be subject to potential
ring-fencing if either
– he has incurred losses in at least ‘three-out-of-five-years’ in that specific trade (see
s 20A(2)(a) – the ‘three-out-of-five years’ requirement), or
– that specific trade has been explicitly listed as a suspect trade in s 20A(2)(b) (the ‘suspect
trade’ requirement).
Ring-fencing will apply if any one of the ‘either/or’ tests is applicable (after meeting the required level
of taxable income).
‘Three-out-of-five-year’ trade loss
A loss-generating activity is treated as a suspect trade if assessed losses arise during any three
years out of the past five year period ending on the last day of that year of assessment. The current
year of assessment is therefore included in the five years. Assessed losses in three consecutive
years will therefore, for example, render a trade a suspect trade at the end of year three. The
assessed losses are determined without regard to any balance of assessed loss carried forward
(s 20A(2)(a)). The SARS Guide explains that it is not necessary to wait for five years before the ringfencing provisions can be applied. A profit made in any year of assessment can, however, delay the
potential ring-fencing.
The Explanatory Memorandum on the Revenue Laws Amendment Bill, 2003 states that ‘sustained
losses of this kind are frequently an indicator of a suspect trade because natural persons would
rarely continue with a trade generating losses on a long-term scale, as it does not make sense from
an economic perspective unless tax motives are present’.
Example 7.4. Three-out-of-five-year trade loss
Explain the effect of the following assessed losses to Mr Mabena:
(a) Mr Mabena carries on a trade during the 2017 to 2021 tax years, generating assessed losses of R12 000, R15 000, R20 000, R6 000 and R3 000 respectively in each of the years in
question.
(b) Mr Mabena’s trade results in an assessed loss of R12 000 in 2017, R4 000 taxable income in
2018, R2 000 taxable income in 2019, and assessed losses of R20 000 and R3 000 in 2020
and 2021 respectively.
SOLUTION
(a) The trade is a suspect trade from year 2019 onwards as Mr Mabena has incurred assessed
losses for three years during a five year period.
(b) In this instance, his trade becomes a suspect trade in 2021. The taxable income arising in
2018 and 2019 counts in his favour, thereby delaying the ‘suspect trade’ treatment. The
R12 000 assessed loss in 2017 is ignored in determining whether 2018 and 2019 will qualify
as years in which an assessed loss is incurred.
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7.1
Chapter 7: Natural persons
Specific suspect trade list
As an alternative to the ‘three-out-of-five-years’ requirement, ring-fencing will apply if the trade in
respect of which the assessed loss was incurred constitutes any one of the following list of nine
specified activities (s 20A(2)(b)). The word ‘relative’ is used in seven of these activities and is specifically defined for the purposes of s 20A. It means ‘a spouse, parent, child, stepchild, brother, sister,
grandchild or grandparent of that person’ (s 20A(10)). The definition in s 1(1) does therefore not
apply. The specified activities are:
l Sport practised by the taxpayer or any relative. The fact that the sport must be practised suggests a hobby element, in contrast to a mere passive investment in which the taxpayer has no
active operational involvement. This will include, for example, any form of sport, hunting, yachting
or boat racing, water-skiing and scuba diving.
l Dealing in collectibles by the taxpayer or any relative. This will include, for example, cars,
stamps, coins, antiques, militaria, art and wine.
l The rental of residential accommodation unless
– at least 80% of such residential accommodation is used by persons who are not relatives of
the taxpayer for at least half of the year of assessment.
This will include the rental of holiday homes, bed-and-breakfast establishments, guesthouses
and dwelling houses.
l The rental of vehicles, aircraft or boats as defined in the Eighth Schedule, unless
– at least 80% of the vehicles, aircraft or boats are used by persons who are not relatives of the
taxpayer for at least half of the year of assessment.
l The showing of animals in competitions by the taxpayer or his relative. This will include, for example, the showing of horses, dogs and cats.
l Farming or animal breeding, unless the taxpayer carries on farming, animal breeding or activities
of a similar nature on a full-time basis. In other words, farming or animal breeding by the taxpayer
other than on a full-time basis, such as weekend or casual farming, is a suspect trade. One notable activity within this suspect class would be game farming.
l Performing or creative arts practised by the taxpayer or his relative. This will include, for example,
acting, singing, film-making, photography, writing, pottery and carpentry. Since the art must be
practised, mere passive investment in these activities is not a suspect trade.
l Gambling or betting practised by the taxpayer or any relative. This will include trying one’s luck at
a casino regularly, card playing, lottery purchases and sports betting. It does not include the
owning of racehorses, but owners of racehorses are still subject to the three-out-of-five-year rule.
l The acquisition or disposal of any crypto asset.
All farming activities carried on by a person are deemed to constitute a single trade carried on by him
or her (s 20A(7)). The Explanatory Memorandum on the Revenue Laws Amendment Bill, 2003 pointed
out that assessed losses from a single trade can be set off only against income from the same trade.
Whether one or more related activities constitute the same trade or multiple trades is a question of
fact. However, since multiple farming activities are deemed to constitute a single trade for the purposes of s 20A, this unified treatment (or concession) is appropriate, since farming typically entails
multiple diverse activities.
The s 20A(3) ‘Facts and circumstances’ escape clause
Despite meeting the requirements of the ‘either/or’ test as set out in s 20A(2)(a) or (b), there is an
escape clause if the taxpayer can prove that the activity at issue is a legitimate trade despite its
classification. The facts and circumstances escape clause applies to any trade contemplated in
s 20A(2)(a) or (b) that constitutes a business in respect of which there is a reasonable prospect of
deriving taxable income (other than a taxable capital gain) within a reasonable period (s 20A(3)).
The use of vague expressions such as a ‘business’, ‘reasonable prospect’ and ‘reasonable period’
creates uncertainty. Determinations in this regard must take the surrounding facts and circumstances
listed in the six objective factors (s 20A(3)(a)–(f)), into account. The burden of proof rests upon the
taxpayer in terms of s 102 of the Tax Administration Act 28 of 2011. What is clear is that, for an activity to escape the ‘suspect taint’, it must constitute a business in contradistinction to a mere hobby or
isolated venture.
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7.1
The six objective factors are:
l The proportion of the gross income derived from that trade in relation to the amount of the allowable deductions incurred in carrying on that trade during a year of assessment (s 20A(3)(a)). If a
taxpayer derives relatively small amounts of gross income and incurs large deductions, this disproportionate result highlights a risk to the fiscus (and vice versa).
l The level of activities carried on or the amount of expenses incurred on advertising, promoting or
selling while carrying on the trade (s 20A(3)(b)). Trading requires regular selling and marketing
initiatives in terms of time and expense. More often than not, hobby activities tend to involve large
amounts of expenses or losses, while the level of selling activity is minimal. The taxpayer must
demonstrate selling or advertising efforts in terms of activities performed or expenses incurred.
l Whether the trade is carried on in a commercial manner, taking into account the following:
– the number of full-time employees appointed for purposes of his trade; employees providing
services of a domestic or private nature, such as domestic servants and residential gardeners,
are excluded for this purpose, regardless of whether or not they are also involved in the trade
– the commercial setting of the premises where the trade is carried on; for example, whether the
business is located in a commercial district and the business-like nature of its appearance
– the extent of the equipment used exclusively for the trade: mixed-use property, for example a
yacht, is excluded from qualifying as a favourable factor, and
– the time that the taxpayer concerned spends at the premises conducting the business
(s 20A(3)(c)).
l The number of years of assessment during which assessed losses have been incurred by the
person while carrying on the relevant trade in relation to the total period of carrying on that trade
taking into account:
– any unexpected or unforeseen events that may give rise to losses, such as heavy rains or
droughts that would provide grounds for mitigating sustained losses for farmers, and
– the nature of the business, for example whether the business typically has a long start-up
period, such as olive farming (s 20A(3)(d)).
l The business plans of the person concerned, together with changes thereto, to ensure that future
income is derived from carrying on the trade. Favourable consideration will be given to the business plans and steps put in place by the taxpayer concerned to prevent or limit further losses.
Consideration will also be given to whether the taxpayer intervened strategically to ensure that
the activity will ultimately be profitable (s 20A(3)(e)).
l The extent to which any asset attributable to the trade is used, or is available for use, by the person concerned, or any relative, for recreational purposes or personal consumption (s 20A(3)(f)).
The Explanatory Memorandum on the Revenue Laws Amendment Bill, 2003, points out that this
factor goes to the heart of the matter, but is often the most difficult to prove or disprove. The onus
rests upon the taxpayer to prove that the asset was generally unavailable or not actually used by
the taxpayer or his relative for recreational use or personal enjoyment. For example, in the case of
a holiday home at the coast, the taxpayer will have to prove that the property was not readily
available for personal use. He will also be required to provide details of periods when persons
other than the taxpayer or his relatives occupied the home during the year of assessment.
Limitation on the facts and circumstances escape clause: the ‘six-out-of-ten-year’ trade loss prohibition
The facts and circumstances escape clause is not altogether absolute. It does not apply to any trade
on the specific suspect trade list (in s 20A(2)(b)) (other than farming) if the individual has incurred an
assessed loss in at least six of the last ten years, including the current year of assessment. Any
balance of assessed loss carried forward is ignored in the calculation of these assessed losses.
Meeting the six-out-of-ten-year prohibition means that the facts and circumstances escape clause is
not applicable and the ring-fencing provisions of s 20A(1) will apply.
This automatic ring-fencing from year six onwards assumes that, from an economic perspective, a
person cannot afford a legitimate trade indefinitely if continuous losses are sustained. Such trading
will indicate that motives other than profit were present. Farming is excluded from the ‘six-out-of-tenyear’ prohibition (s 20A(4)) since many forms of legitimate farming entail long-term losses before the
expectation of profit can be realised.
Only assessed losses for tax years commencing on or after 1 March 2004 are taken into account for
both the ‘three-out-of-five-years’ requirement and the ‘six-out-of-ten-year’ prohibition (s 20A(9)).
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7.1
Chapter 7: Natural persons
Miscellaneous provisions
Set-off against recoupment
Generally, as noted above, ring-fenced losses can be freely used against income from that specific
trade. The income derived from any suspect trade includes the recoupment under s 8 of allowances
from the disposal of assets used in carrying on that trade. These disposals can occur while still
trading or after cessation of that trade (s 20A(6)). This provision ensures that, for example, losses of a
suspect trade can similarly be used against income from recoupments under s 8(4)(a) associated
with that trade, even if the disposal took place after cessation of the trade.
This use of ring-fenced losses against recoupment income stems from the assumption that any recoupment most likely originates from depreciation or other losses that were ring-fenced.
In contrast, ring-fenced losses cannot be offset against capital gains associated with the same trade,
since capital gains represent investment profits as opposed to trading profits.
Reporting requirement
Natural persons with a suspect trade to which s 20A applies must indicate the nature of the business
in his annual return as referred to in s 66 (s 20A(8)). Under this rule, a taxpayer is obliged to report a
suspect trade under the ‘three-out-of-five-year’ test or the ‘suspect activity’ list in his annual return.
Example 7.5. Ring-fencing of assessed losses
Rara, the manager/owner of a flower shop, is also an enthusiastic tennis player and a partner in a
biltong shop (all of which are South African trades). Her share of the taxable income (or assessed
loss) stemming from each of these businesses for the 2019 until the 2021 years of assessment, is
as follows:
Taxable income or (assessed loss)
Salary from
Tennis
Biltong shop
flower shop
for the year of assessment:
R
R
R
2019
1 690 000
*(25 000)
30 000
2020
1 525 000
*(15 000)
*(5 000)
2021
1 600 000
2 000
*(20 000)
* Assume Rara will be unable to prove to SARS a reasonable prospect of earning taxable income within a
reasonable period during that specific year of assessment.
Calculate Rara’s taxable income for the 2019 until the 2021 years of assessment. The maximum
marginal tax rate of 45% for the 2019 and 2020 years of assessment applies to a taxable income
above R1 500 000 per annum. The maximum marginal tax rate of 45% for the 2021 year of assessment applies to a taxable income above R1 577 300 per annum.
SOLUTION
2019
Ring-fenced assessed loss in terms of s 20A(1):
Section 20A(1) will be applicable and the assessed loss of R25 000 from tennis will be permanently ring-fenced, because:
l the taxpayer is a natural person carrying on a trade with an assessed loss, and
l the taxpayer is taxed at the maximum marginal rate (taxable income before any assessed loss
of (R1 690 000 (flower shop) less R25 000 (tennis) plus R30 000 (biltong shop) plus R25 000
(tennis) (in terms of s 20A(2)) = R1 720 000 versus R1 500 001 (the amount at which the maximum tax bracket starts to apply in the 2019 tax table), and
l although the three-out-of-five-year rule does not apply, it is a listed suspect trade (s 20A(2)(b))
as it relates to a sport practised by the taxpayer, and
l the trade does not constitute a business in respect of which there is a reasonable prospect to
derive taxable income (not a taxable capital gain) within a reasonable period (s 20A(3)) (given
in the scenario).
The R25 000 assessed loss from the tennis can only be used against future taxable income from
tennis. Rara’s taxable income will be R1 690 000 + R30 000 = R1 720 000.
continued
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7.1±7.2
2020
Section 20A(1) will not apply to the assessed loss of R5 000 from the biltong shop. The taxpayer
is a natural person, carrying on a trade with an assessed loss and the taxpayer is taxed at the
maximum marginal rate (taxable income, before any assessed loss and ignoring the tennis loss
because it has been ring-fenced since 2019, of R1 525 000 (flower shop) less R5 000 (biltong
shop) plus R5 000 (biltong shop) (in terms of s 20A(2)) = R1 525 000 versus R1 500 001). The
three-out-of-five-year rule does, however, not apply to the biltong shop (s 20A(2)(a)) (first year in
which an assessed loss is made) and it is also not a listed suspect trade (s 20A(2)(b)).
The general rule contained in s 20(1)(b) will therefore apply, that is, the set-off of an assessed
loss of R5 000 incurred in the same year of assessment from one trade (biltong shop) of a taxpayer against the taxable income of R1 525 000 from another trade (flower shop) will be allowed.
Rara’s taxable income will be R1 525 000 - R5 000 = R1 520 000.
Ring-fenced assessed loss in terms of s 20A(1):
Ring-fenced losses are ring-fenced forever and may only be set off against income from that
same suspect trade (s 20A(5)). The R25 000 (2019) + R15 000 (2020) = R40 000 assessed loss
from tennis can only be used in future against taxable income from tennis.
2021
l The R40 000 balance of assessed loss from tennis will be limited to the taxable income of
R2 000 from the tennis, as it was ring-fenced in terms of s 20A(1) in a previous year of assessment (s 20A(5)) The new balance of assessed loss of R38 000 (R40 000 – R2 000) will be carried forward to the 2022 year of assessment.
l Section 20A(1) will not apply to the assessed loss of R20 000 from the biltong shop. The taxpayer is a natural person, carrying on a trade with an assessed loss and the taxpayer is taxed
at the maximum marginal rate (taxable income before any assessed loss of R1 600 000 (flower shop) less R20 000 (biltong shop) plus R20 000 (biltong shop) (in terms of s 20A(2)) =
R1 600 000 versus R1577 301). The three-out-of-five-year rule does, however, not apply
(s 20A(2)(a)) (second year in which an assessed loss is made) and it is also not a listed suspect trade (s 20A(2)(b)).
The general rule contained in s 20(1)(b) will therefore apply, that is, the set-off of an assessed
loss incurred in the same year of assessment from one trade (biltong shop) of a taxpayer against
the taxable income from another trade (flower shop) will be allowed.
Rara’s taxable income will be R1 600 000 + R0 (R2 000 – R2 000) – R20 000 = R1 580 000.
7.2 Calculation of normal tax payable (ss 6, 6A, 6B and 12T)
Different tax tables are used to calculate the normal tax payable on the taxable incomes of an individual as calculated per columns 1 to 3 of the subtotal method. In light of the wordings of ss 6, 6A
and 6B read together, it is advised that the normal tax payable on the taxable income in column 3 be
calculated first. Please take note that the words ‘normal tax payable’ mean the normal tax that the
natural person must pay and does therefore take all rebates and medical tax credits into account, but
does not take any normal tax already paid (like employee’s tax and provisional tax) into account (also
see the comprehensive framework of the subtotal method in 7.1).
The first step is to determine the normal tax payable on the taxable income in column 3 per the progressive tax table applicable to natural persons, deceased estates, insolvent estates and special
trusts. The primary, secondary and tertiary rebates in s 6(2) only reduce normal tax payable on the
taxable income in column 3 and not the normal tax payable on lump sum benefits and severance
benefits (s 6(1)). Students’ answers must clearly indicate that the rebates cannot reduce the normal
tax payable on lump sum benefits in columns 1 and 2. If the individual is a resident whose taxable
income includes amounts from countries other than South Africa, the s 6quat rebate for foreign taxes
must also be deducted in determining the normal tax payable on the taxable income in column 3 (see
chapter 21). The amount remaining after the deduction of all such s 6(2) and s 6quat rebates is the
normal tax payable on the taxable income in column 3.
Any additional tax in terms of s 12T(7)(a) and (b) (see chapter 5) is deemed to be normal tax
payable, and must also be added to the normal tax payable on the taxable income in column 3.
The next step is to calculate the normal tax payable on the taxable income from any lump sum benefits (as defined) and severance benefits in columns 1 and 2. This is calculated separately and in
terms of separate tax tables (see chapter 9) applying the cumulative principle. The normal tax payable on all the aforementioned lump sums must consequently be added to the normal tax payable on
the taxable income in column 3 and the additional tax in terms of s 12T(7)(a) and (b).
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7.2
Chapter 7: Natural persons
A natural person can deduct the medical tax credits (s 6A and 6B) in determining the ‘normal tax
payable by a natural person’. This means that the medical tax credits can reduce any amount of
normal tax payable as discussed above.
The normal tax payable by a natural person is therefore the net result of all the aforementioned. The
specific sequence as indicated in the comprehensive framework of the subtotal method in 7.1 is an
application of all the aforementioned provisions read together.
7.2.1 The s 6(2) rebates
The s 6(2) rebates are non-refundable (they cannot be used as the basis for a refund) and cannot be
carried forward to the next year of assessment. The s 6(2) rebates are as follows:
Primary rebate .....................................................
Secondary rebate (65 years or older) .................
Tertiary rebate (75 years or older) ......................
2020
2021
R14 220
R7 794
R2 601
R14 958
R8 199
R2 736
The primary rebate is available to any taxpayer who is a natural person. The primary rebate divided
by the lowest tax rate for natural persons (18%) is the tax threshold (‘tax threshold’ as defined in par 1
of the Fourth Schedule). This means that a natural person will only become liable for normal tax in the
2021 year of assessment if his or her taxable income exceeds R83 100 (R14 958 divided by 18%).
In addition, if a taxpayer was or would have been, had he lived, 65 years or older on the last day of
the year of assessment, he is also entitled to the secondary rebate. If a taxpayer was or would have
been, had he lived, 75 years or older on the last day of the year of assessment, he is entitled to the
primary, secondary and tertiary rebates.
Broken periods of assessment (that is, periods shorter than 12 months) only arise in a year of assessment in which a natural person is born, dies or is declared insolvent. The primary, secondary and
tertiary rebates must be proportionately reduced in such cases according to the same ratio as the
period assessed bears to 12 months (s 6(4)). (Take note that it is the practice of SARS to use the
number of days in the period of assessment relative to the total number of days in the relevant year of
assessment.)
When a natural person emigrates, s 66(13)(a)(iii) allows for the practice of submitting only one return
for that specific year of assessment, albeit with two separate spreadsheets. One spreadsheet will be
for the period pre ceasing to be a resident and the residence-based system of tax (meaning being
taxed on worldwide income) must be applied, and one will be for the period post ceasing to be a
resident and the source-based system of tax must be applied. This practise seems to apply the
provisions of s 9H(2)(b) and (c) which state that the natural person’s year of assessment (as a resident) ends on the date immediately before the date on which he or she ceases to be a resident, and
that the natural person’s next year of assessment (as a non-resident) starts on the day he or she
ceases to be a resident. As explained in Interpretation Note No. 3 (Issue 2) and chapter 3, a person
ceases to be ordinarily resident on the day he or she emigrates, meaning the day he or she boards
the aircraft. It is submitted that a natural person who emigrates will qualify for the full allowable s 6
rebates for the year of assessment during which he or she emigrates, and that it will not be apportioned between the period pre ceasing to be a resident and the period post ceasing to be a resident.
The Minister annually announces the amendments to the s 6(2) rebates in the annual budget. These
amendments come into effect on the date determined in the announcement and apply for a period of
12 months from that date, subject to legislation passed by Parliament in this regard.
*
Remember
(1) When answering questions, students must use the correct sequence (see the comprehensive framework) to clearly indicate that the s 6(2) rebates are only deductible against the
normal tax payable on the taxable income in column 3. The s 6A and 6B medical tax credits
are deductible against any normal tax payable.
(2) The s 6(2) rebates and the s 6A and 6B medical tax credits reduce normal tax payable, and
not taxable income (like deductions in terms of the Act).
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7.2
Example 7.6. Proportionate reduction of rebates
Mr Y died on 30 April 2020 at the age of 57 years. Calculate Mr Y’s rebates for his 2021 year of
assessment.
SOLUTION
Primary rebate ...........................................................................................................
Since Mr Y was a taxpayer from 1 March to 30 April (61 days), the rebate
61
must be reduced to
× R14 958 .....................................................................
365
R14 958,00
R2 500
Example 7.7. Computing tax liability: Natural person
Marie, who is a resident aged 67, received and paid the following amounts during the year of
assessment ended 28 February 2021:
Salary .............................................................................................................................. R150 000
Interest (from a source within South Africa) ....................................................................
38 000
Dividends accrued (from South African companies) .....................................................
12 000
Deductible expenditure ..................................................................................................
3 000
Taxable capital gain (40% of net capital gain of R12 500) .............................................
5 000
Calculate Marie’s total tax payable for the year of assessment ended 28 February 2021.
SOLUTION
Salary .............................................................................................................................
Interest ...........................................................................................................................
R150 000
38 000
Dividends .......................................................................................................................
12 000
Gross income .................................................................................................................
Less: Exempt income
Interest (s 10(1)(i)(ii)) ..........................................................................................
Dividends (s 10(1)(k)(i)) ......................................................................................
R200 000
Income ...........................................................................................................................
Less: Deductible expenditure ......................................................................................
R153 500
(3 000)
Add: Taxable capital gain ...........................................................................................
R150 500
5 000
Taxable income ..............................................................................................................
R155 500
Normal tax determined per the tax table:
On R155 500 @ 18% ......................................................................................................
R27 990
(34 500)
(12 000)
Less: Primary rebate ....................................................................................................
Secondary rebate ...............................................................................................
(14 958)
(8 199)
Normal tax payable ..........................................................................................
Add: Withholding tax on dividends (20% × R12 000) (already paid over to SARS
by the South African companies) ........................................................................
R4 833
Total tax payable ..........................................................................................................
R7 233
2 400
7.2.2 The s 6A and 6B medical tax credits
Since the medical tax credits (ss 6A and 6B) are credits and not deductions, they cannot be used as
the basis for a refund of tax, cannot exceed the amount of normal tax payable and cannot be carried
forward to the next year of assessment. The Minister annually announces the amendments to the s 6A
and 6B credits in the annual budget. These amendments come into effect on the date determined in
the announcement and apply for a period of 12 months from that date, subject to legislation passed
by Parliament in this regard.
The medical scheme fees tax credit – s 6A
When the normal tax payable by a natural person is determined, the s 6A medical scheme fees tax
credit (s 6A credit) allowed to that natural person must be deducted (s 6A(1)). This allowable s 6A
credit is the sum of the amounts allowed to that natural person in terms of s 6A(2), which is subject to
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s 6A(3A). In order to qualify for such a credit in terms of s 6A(2), a natural person must pay fees to a
registered South African medical scheme or a (similarly registered) foreign medical fund (s 6A(2)(a)).
The fees paid must relate to benefits from that fund in respect of ‘that person’ (the person paying the
fees) or of any person that is a dependant of that person (s 6A(2)(a)). For the purposes of the s 6A
credit, the word ‘dependant’ means a dependant as defined in s 6B(1), which means
(a) a person’s spouse (as defined in s 1(1))
(b) a person’s child and the child of his or her spouse (the reference here to ‘child’ refers to a child
as defined in s 6B(1) and read with the definition of ‘child’ in s 1(1))
(c) any other member of a person’s family (therefore not persons falling in paras (a) and (b) above) in
respect of whom he or she is liable for family care and support (for example the person is liable
for family care and support in respect of his mother)), or
(d) any other person (therefore not persons falling in par (a) to (c) above) who is recognised as a
dependant of that person in terms of the rules of a medical scheme or fund
at the time the fees or the ‘qualifying medical expenses’ were paid or the expenditure in respect of
the physical impairment or disability was necessarily incurred and paid.
In terms of the Guide on the Determination of Medical Tax Credits (Issue 11), the phrase ‘any other
member of a person’s family’ includes relations by blood, adoption, marriage, etc.
A natural person can only be a member of, or be registered as a dependant on, one medical
scheme. A specific natural person can, however, pay fees to more than one medical scheme. It is not
a requirement that the person paying the fees and his or her dependants must all be on the same
medical scheme in order for that person to qualify for the s 6A credit. Such a person will still qualify
for the credits in s 6A(2)(b), as long as the fees paid relate to benefits granted by that fund to that
specific person or any dependant of that specific person. The ‘key’ to determine the specific amounts
in s 6A(2)(b), that will be allowed as credits to the person paying the fees, is the total number of
persons in respect of whom benefits are received from the various funds to which fees were paid by
that specific person.
Medical scheme fees can be payable in advance or in arrears. If medical scheme fees are payable in
arrears, it can happen that the executor of the estate of a deceased person must pay the fees after
the date of death of a person, but the fees paid relate to benefits received for the month during which
the person died. Such fees are deemed to have been paid by the deceased on the day before his or
her death (s 6A(3)(a)) and the deceased will therefore qualify for the s 6A credit for that month. The
Guide on the Determination of Medical Tax Credits (Issue 11) states that contributions paid by a
person other than the natural person, will not be taken into account to determine the s 6A credit,
except for contributions paid by the estate of a deceased taxpayer ‘for the period up to the date of
the taxpayer’s death’.
Fees paid by the employer of a natural person are included in gross income (par (i) read with
par 12A of the Seventh Schedule) and are consequently deemed to have been paid by that natural
person (s 6A(3)(b)). The practical implication is that the total of all fees paid by the natural person, his
estate and his employer (to the extent that the amount paid by the employer has been included in the
income of the person as a taxable benefit in terms of the Seventh Schedule) are regarded as fees
paid by the natural person for the purposes of the s 6A credit.
To determine the sum of the amounts allowed as credits to a specific person in terms of s 6A(2),
l the total number of persons in respect of whom benefits are received from the various funds to
which fees were paid by that person, and
l the number of months in respect of which such fees were paid
must first be determined.
The amounts allowed as s 6A credits for each month are then determined based on the total number
of qualifying persons for that month. The amounts are stated in s 6A(2)(b)(i) and (b)(ii) as:
(b)(i)(aa)
R319, in respect of benefits to ‘the person’ (the person paying the fees), or if ‘the
person’ is not a member of a medical scheme or fund, in respect of benefits to a dependant who is a member of a medical scheme or fund or a dependant of a member
of a medical scheme or fund;
(b)(i)(bb)
R638, in respect of benefits to the person and one dependant; or
(b)(i)(cc)
R638, in respect of benefits to two dependants; and
(b)(ii)
R215 in respect of benefits to each additional dependant.
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7.2
It is clear that if only one qualifying person receives benefits from a medical scheme, the maximum
s 6A credit allowed to the person paying the fees is R319. If two qualifying persons receive benefits,
the maximum s 6A credit allowed to the person paying the fees is R638. For each additional qualifying person receiving benefits, an additional amount of R215 per person is allowed to the person
paying the fees.
Examples of the words ‘a dependant who is a member of a medical scheme or fund or a dependant
of a member of a medical scheme or fund’ are:
l Albert, who is not a member of a medical scheme, paid the fees in respect of his mother for
whom he is liable for family care and support (his dependant), and who is a member of a medical
scheme.
l Albert is not a member of a medical scheme, but his mother, for whom he is liable for family care
and support (his dependant), is a member of medical scheme B. Albert pays the fees in respect
of his brother, who is a dependant on his mother’s medical scheme (therefore a dependant on
the medical scheme of Albert’s dependant).
Section 6A(3A) was enacted in order to address the anomaly that previously allowed each of the
persons who share the responsibility to pay the medical scheme fees in respect of a single individual
who is a dependant of both of the persons paying the fees (for example the mother of two persons for
whom both are liable for family care and support) to independently claim the full s 6A credit for each
of the shared dependants. Where more than one person pays any fees in respect of benefits to a
specific person or dependant, the amount allowed to be deducted as a s 6A credit in respect of
those fees must be apportioned (s 6A(3A)). The burden of proving that an amount was paid by more
than one person, and that a pro rata s 6A credit may be claimed by each person, will rest on the
persons (‘taxpayer’ in s 102 of the Tax Administration Act). The Guide on the Determination of
Medical Tax Credits (Issue 10) explains that where contributions or fees in respect of a dependant
have been made to a different medical aid to the one to which the person paying the fees belongs,
SARS will accept a sworn affidavit in which the person indicates that the contributions or fees claimed
for the dependant have actually been paid by the person (either directly or indirectly).
The ‘total amount in respect of that person or dependant’ is proportionally allocated between the
persons who paid the fees (s 6A(3A)). The apportionment must be done in the same ratio that the
fees paid by each person bear to the total amount of the fees payable (s 6A(3A)). It is unclear how
the ‘the total amount in respect of that person or dependant’ must be determined.
The Guide on the Determination of Medical Tax Credits (Issue 11) contains the following formula that
can be used to determine the medical tax credit that may be claimed by each person:
Contributions payable by the person
Total contributions payable
×
Total medical tax credit
The example in this Guide is in respect of the 2020 year of assessment, is simplistic and entails two
children (let’s say A and B), who are both liable for family care and support of their mother. Each
pays half of the total medical scheme fees for their mother who is a member of her own medical
scheme. In the example neither A nor B are members of a medical scheme. The mother is a ‘dependant’ of both A and B in terms of par (c) of the definition of ‘dependant’ in s 6B(1). The Guide
explains that the total amount of the s 6A credit in respect of the one dependant will be R310. Both A
and B paying half of the medical scheme fees in respect of this dependant will therefore qualify for a
s 6A credit of R155 (R310 divided by 2) per month in respect of their mother. A and B will therefore
each claim a maximum s 6A credit of R1 860 (12 × R155) in respect of this dependant.
The practical application of s 6A(3A) becomes a very grey area where the persons paying the dependant’s fees (A and B) are members of their own medical schemes, and the mother is registered
as a dependant on one of either A or B’s medical scheme, or is a member of her own medical
scheme. It is uncertain how the amount of the s 6A credit claimable by A and B respectively, in
respect of their mother as dependant, will then be determined. The total amount allowable as s 6A
credit is determined separately for each of A and B, who pays fees in respect of qualifying persons.
The total number of persons to whom benefits are paid by all the medical schemes to which A and B
respectively paid fees must be determined.
It is submitted that the actual application of s 6A(3A) in determining the normal tax payable by a
natural person, on assessment by SARS, remains uncertain even in the updated Issue 11 of the
Guide. The sequence in which all the dependants of A and B are taken into account by SARS, on
assessment, is not clear from the wording in s 6A. The deduction of the s 6A credit is not a ‘field’ that
is completed by the natural person when completing the ITR12, but it is a determination that is made
by SARS and is reflected on the assessment as a credit. This raises the question whether SARS will
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7.2
Chapter 7: Natural persons
apply the contra fiscum rule (meaning SARS must apply the interpretation which is in favour of the
specific taxpayer) in respect of s 6A(3A). The following further questions arise regarding the
sequence in which all the dependants of a specific person are taken into account on assessment:
l will the sequence of the dependants as listed in the definition in s 6B(1) be used by SARS in
order to determine the ‘total medical tax credit’ in respect of a dependant, or
l will the date sequence in which all dependants were registered as dependants on the scheme be
used (provided that all funds must provide this information on the tax certificates)?
To illustrate:
Assume that A and B are siblings and are both liable for family care and support of their mother, C. A
is a member of medical scheme ABC and his spouse, his child and C are registered as dependants
on his medical scheme. A pays the full contributions in respect of himself, his spouse and his child,
and 50% of the contributions in respect of C.
B belongs to her own medical scheme and is the only member of that medical scheme. B pays her
own contributions and 50% of the contributions in respect of C.
In order to determine the sum of the amounts allowed to A and B respectively in terms of s 6A(2), the
following possibilities arise:
Regarding A:
l If we assume the sequence of the dependants as listed in the definition in s 6B(1) will be used by
SARS, the monthly s 6A credit for A will be R960,50. This is R319 in respect of A, R319 in respect
of his spouse, R215 in respect of his child and R107,50 (R215 × 50%) in respect of his mother.
l If we assume that the sequence of registration as dependants will be used by SARS and that C
was a dependant on A’s medical scheme even before A was married, the monthly s 6A credit for
A will be R908,50. This is R319 in respect of A, R159,50 (R319 × 50%) in respect of his mother,
and R215 in respect of each of his spouse and his child.
Regarding B:
l The monthly s 6A credit for B will be R478,50, being R319 in respect of B and R159,50 (R319 ×
50%) in respect of C.
The wording in s 6A(3A) therefore potentially leads to the total monthly s 6A credit in respect of C as
a dependant being different amounts for A, namely either R107,50 or R159,50 depending on the
sequence in which the dependants are taken into account. It also potentially leads to different total
monthly s 6A credits for A of either R960,50 or R908,50. It is doubtful that this could be the Legislator’s intention with s 6A(3A).
It also potentially leads to A and B claiming different monthly s 6A credit amounts, namely R107,50
and R159,50 respectively, in respect of the same dependant (C). It is submitted that the practical
assessment issues with s 6A(3A) are legion and that it could not be a true reflection of the Legislator’s intention with s 6A(3A) that the s 6A credit in respect of one specific person could be various
amounts depending on the circumstances of the case.
The details regarding medical schemes requested by SARS on the ITR12 are requested per medical
scheme, in order to tie the tax certificates issued by the funds up to the number of persons in respect
of whom benefits are granted by that fund. Until SARS clarifies the practical application of s 6A(3A), it
is suggested that the section be applied contra fiscum.
1.
2.
Please note!
The s 6A credit is not limited to the actual fees paid by the person. In rare
circumstances, the s 6A medical tax credit might therefore exceed the fees
paid by the person.
If an employer continues to pay fees to a medical scheme after an employee has retired, it is still a ‘taxable benefit’ (as defined in par 2 of the Seventh
Schedule) even though it has no value as fringe benefit (par 12A(5)(a) of
the Seventh Schedule). If the employer pays the total fees of such an exemployee after retirement, the taxable benefit will have no value. The retired
employee is deemed to have paid any amount paid by his employer to the
extent that the amount has been included in the income as a taxable benefit
(in terms of s 6A(3)(b)). The retired employee is consequently deemed to
have paid Rnil (no value) for those months. The s 6A credit applies in respect of fees paid by a person and since Rnil is included in income and
Rnil is deemed to be paid by the retired employee, such retired employee
cannot claim any s 6A(2)(b) credit for the months after retirement.
continued
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Please note!
7.2
If the retired employee, however, has paid any portion of the fees during the
months after retirement, he will be able to claim the full s 6A(2)(b) credit for
those months. Even though Rnil is included in the person’s income in respect of any portion paid by the employer in respect of the months after retirement, it is still deemed that the person has paid that amount of Rnil plus
the portion of the fees contributed by him or her. The total contributions are
consequently deemed to be paid by the same person and the apportionment in terms of s 6A(3A) is not applicable in such a case.
The additional medical expenses tax credit – s 6B
Taxpayers are grouped into three categories for the s 6B tax credit, namely (i) persons who are
65 years or older, (ii) persons with a disability factor, and (iii) all remaining taxpayers. The s 6B medical tax credit is calculated in the same manner for the first two categories, but differently for the last
category – see the summary in the table after the discussion of the relevant theory.
Two amounts are taken into account for the tax credit in terms of s 6B:
l excess medical scheme fees (calculated in terms of s 6B(3)), and
l ‘qualifying medical expenses’ paid by a person (or his or her estate or employer – see s 6B(4)) in
respect of the person or a dependant.
In order to know which persons are ‘dependants’, who is regarded as the ‘child’ of a person, and
what the words ‘qualifying medical expenses’ and ‘disability’ mean, the following definitions in s 6B(1)
are relevant:
A ‘dependant’ of a person is:
(a) his or her spouse (as defined in s 1(1))
(b) his or her child (as defined in s 6B(1) and read with the definition of ‘child’ in s 1(1)) and the child
of his or her spouse
(c) any other member of his or her family(therefore not persons falling in paras (a) and (b) above) in
respect of whom he or she is liable for family care and support (for example the member’s mother who lives with her as she is reliant on her daughter for family care and support), or
(d) any other person (therefore not persons falling in par (a) to (c) above) who is recognised as his or
her dependant in terms of the rules of a medical scheme or fund
at the time the fees or the ‘qualifying medical expenses’ were paid or the expenditure in respect of
the disability was necessarily incurred and paid.
In terms of the Guide on the Determination of Medical Tax Credits (Issue 11), the phrase ‘any other
member of a person’s family’ (in category (c)) includes relations by blood, adoption, marriage, etc.
It is submitted that the words ‘who is recognised as his or her dependant in terms of the rules of a
medical scheme or fund’ (in category (d)) refers to dependants of a person who are eligible for
benefits under the rules of the medical scheme, which implies that they are registered as dependants
of the member and that contributions are paid in respect of them.
The category (b) dependant refers to the word ‘child’, which is defined in both s 1(1) and s 6B(1).
l The definition in s 1(1) includes an adopted child. If the child is adopted under the law of any
other country, the adoptive parent must have been ordinarily resident in such other country at the
time of adoption. In practice, SARS accepts that the deduction may also be claimed for illegitimate children, if the taxpayer can prove that an illegitimate child is his child. The effect of this definition on the s 6B credit is that the qualifying medical expenses incurred in respect of adopted
children will also be taken into account if the child meets the requirements in s 6B(1).
l The definition in s 6B(1) refers to both the person’s child and the child of his or her spouse. It
further distinguishes between four categories with different requirements. The requirements must
be met on the last day of the year of assessment before a taxpayer can take any qualifying medical expenses incurred in respect of such a child into account. The child must be alive for a portion of the year and if the child dies during the year of assessment, it must be determined whether
the requirements would have been met had the child lived. If the taxpayer dies during the year of
assessment, the age of any child must be determined on the date of death of the taxpayer since
that is the last day of the taxpayer’s year of assessment.
The definition uses, for example, the words ‘not over the age of 18’. A person who turns 18 is over
the age of 18 on the day of his 18th birthday.
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Chapter 7: Natural persons
The following table summarises the requirements and categories of children:
Definition of ‘child’ in s 6B(1)
Par (a)(i)
Par (a) (ii)
Par (a) (iii)
Par (b)
<18
< 21
< 26
Any
Unmarried
Unmarried
Unmarried
Any
Dependent for maintenance (wholly or partially)
N/a
Yes
Yes
Yes
Liable for normal tax
N/a
No
No
No
Full-time student at an educational institution of a
public nature
N/a
Yes/No
Yes
Yes/No
Disability
No
No
No
Yes
Age
Status
A person’s 27-year-old child (without a disability) does therefore not meet the requirements of the
definition of a ‘child’ in s 6B(1), and is consequently not a ‘dependant’ in terms of category (b). If
such child is recognised by the medical scheme as a dependant (meaning the person pays
contributions in respect of the child), the taxpayer can still take the qualifying medical expenses of
that child into account. This is because the child is a dependant in terms of category (d) of the
definition of ‘dependant’, even though he or she is not a dependant in terms of category (b) of that
definition.
The person who paid the qualifying medical expenses can claim the s 6B medical tax credit. ‘Qualifying medical expenses’ are:
l all amounts paid by the person in respect of the person or any dependant of the person during
the year of assessment to various doctors, hospitals and pharmacies (for prescribed medicine).
These amounts include expenditure incurred both inside and outside South Africa, but exclude
recoverable amounts (paras (a) and (b) of the definition of ‘qualifying medical expenses’).
l expenditure, as prescribed by the Commissioner (recoverable amounts excluded), necessarily
incurred and paid by the person in consequence of any physical impairment or disability in respect of the person or any dependant of the person (par (c) of the definition of ‘qualifying medical
expenses’). ‘Prescribed by the Commissioner’ refers to a list of qualifying physical impairment
or disability expenditure that is available on the SARS website. The revised prescribed list of
expenditure is effective from 1 March 2020.
The terms ‘necessarily incurred’ and ‘in consequence of’ are not defined in the Act. They retain
their ordinary dictionary meaning. This means that a prescribed expense does not automatically
qualify as a deduction by mere reason of its inclusion in the aforementioned list. The expense
must also be necessary for the alleviation of the restrictions on a person’s ability to perform daily
functions.
A ‘disability’ is defined is s 6B(1) and means a moderate to severe limitation of a person’s ability to
function or perform daily activities as a result of a physical, sensory, communication, intellectual or
mental impairment, if the limitation
l has lasted longer or has a prognosis of lasting more than a year, and
l is diagnosed by a duly registered medical practitioner in accordance with criteria prescribed by
the Commissioner.
Form ITR-DD must be completed by the medical practitioner and is valid for five years if the disability
is of a more permanent nature. In the case of a temporary (shorter than five years) disability, the form
is valid only for one year (Guide on the Determination of Medical Tax Credits (Issue 11)).
If the impairment, after maximum correction through the use of therapy, medication and the use of
devices is less than a moderate to severe limitation, it is a physical impairment as meant in par (c) of
the definition of ‘qualifying medical expenses’ (Guide on the Determination of Medical Tax Credits
(Issue 11)).
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7.2
The combined effect of the ss 6A and 6B medical tax credits for the 2021 year of assessment can be
summarised as follows:
Section 6A(2)(b) medical tax credit
Section 6B medical tax credit
The person is 65 years or older
(s 6B(3)(a))
OR
The person, his or her spouse or
his or her child is a person with a
disability
(s 6B(3)(b))
R319 (in respect of benefits to
only the person or, if the person is
not member of a medical scheme
or fund, to a dependant who is a
member of a medical scheme or
fund or to a dependant of a member of a medical scheme or fund),
or
R638 (in respect of benefits to the
person plus one dependant), or
R638 (in respect of benefits to two
dependants), and
R215 per further dependant for
each month in respect of which
fees are paid by the person
(remember, only the pro rata portion of a specific person’s medical
tax credit can be claimed if the
fees for such a person are paid by
more than one person)
33,3% of the excess of [(the
s 6A(2)(a) contributions paid by
the person) less (3 × the
s 6A(2)(b) credit to which that
person is entitled)]
plus
33,3% of the sum of all the
amounts in paras (a), (b) and (c)
of the definition of ‘qualifying
medical expenses’ paid by the
person (the out-of-pocket qualifying medical expenses)
All other cases
(s 6B(3)(c))
R319 (in respect of benefits to
only the person or, if the person is
not member of a medical scheme
or fund, to a dependant who is a
member of a medical scheme or
fund or to a dependant of a
member of a medical scheme or
fund), or
R638 (in respect of benefits to the
person plus one dependant), or
R638 (in respect of benefits to two
dependants), and
R215 per further dependant
for each month in respect of which
fees are paid by the person
(remember, only the pro rata portion of a specific person’s medical
tax credit can be claimed if the
fees for such a person are paid by
more than one person)
25% of
[the excess of {(the s 6A(2)(a)
contributions paid by the person)
less (4 × the s 6A(2)(b) credit to
which that person is entitled)}
plus
all the amounts in paras (a), (b)
and (c) of the definition of ‘qualifying medical expenses’ paid by the
person (the out-of-pocket qualifying medical expenses)
less
7,5% of the taxpayer’s taxable
income* (excluding any RFLB,
RFLWB or SB)]
* The ‘taxable income’ in this calculation is therefore the taxable
income in Column 3 of the subtotal method.
Category
1.
Please note!
2.
3.
4.
Even though the definition of ‘qualifying medical expenses’ includes a
physical impairment or disability in respect of any dependant, only a
disability as defined (and not a physical impairment which is a less
than a moderate to severe limitation and therefore not a disability as
defined) in respect of the person, his or her spouse and his or her child
(therefore only the persons in par (a) and (b) of the definition of
‘dependant’) will cause the person to qualify for the increased 33,3%
in s 6B(3)(b). If a par (c) or (d)-type dependant is the person with the
disability, the 25% in terms of the s 6B(3)(c) credit applies.
Medical expenses in respect of a disability or a physical impairment
must be both necessarily incurred and paid to qualify for deduction.
Married couples under the age of 65 with no disability factor will obtain
the biggest tax advantage in terms of s 6B if the spouse with the
lowest taxable income pays the qualifying medical expenses.
The s 6A medical tax credit must be deducted from the employees’
tax to be withheld (par 9(6)(a) of the Fourth Schedule). If the taxpayer
is 65 years or older, the s 6B medical tax credit (as calculated in terms
of s 6B(3)(a)(i)) must also be deducted from the employees’ tax to be
withheld (par 9(6)(b) of the Fourth Schedule).This means that only
33,3% × (the total contributions paid less (3 × the s 6A(2)(b) credit))
must be deducted by the employer.
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Chapter 7: Natural persons
Remember
The fact that only the ¶excess¶ medical scheme fees are taken into account for the s 6B(3)(a)(i),
(3)(b)(i) and (3)(c)(i) medical tax credit means that the amount of the difference between the
s 6A contributions paid and three or four times the s 6A medical tax credit may not be negative
and it is therefore limited to Rnil. It can therefore not reduce the part of the s 6B medical tax
credit relating to the qualifying medical expenses (see s 6B(3)(a)(ii), (3)(b)(ii) and (3)(c)(iii)).
Example 7.8. Medical tax credits
Gary is a 44-year-old employee. He is married out of community of property and has no children.
His only source of income is his salary, which amounted to R136 000 for the current year of assessment. During the year he paid qualifying medical expenses of R11 000 and fees of R21 760
to a medical scheme. His wife is a dependant on his medical scheme. His employer contributed
R9 240 to the medical scheme on his behalf during the 2021 year of assessment. Gary has also
paid 60% of the fees of his mother’s medical scheme fees of R6 000 during the 2021 year of
assessment. His mother depends on him for family care and support.
Calculate the taxable income of and normal tax payable by Gary for the 2021 year of assessment.
SOLUTION
Salary ..........................................................................................................................
Add: Fringe benefit – par 12A Seventh Schedule ......................................................
R136 000
9 240
Taxable income .................................................................................................
R145 240
Normal tax determined per table
R145 240 × 18% ..........................................................................
Less: Primary rebate .................................................................
Section 6A credit R767 (R638 + R129 (60% × R215*))
× 12 = ..............................................................................
Section 6B credit (note 1) ................................................
R26 143
(14 958)
Normal tax payable .....................................................................
R1 954
(9 204)
(27)
* If we assume that s 6A(3A) is applied contra fiscum.
Note 1
Fees paid to a medical scheme = R31 000 (R21 760 by Gary plus
R9 240 by employer) plus R3 600 (60% × R6 000) in respect of his
mother ......................................................................................................
Less: 4 × s 6A medical tax credit
= 4 × R9 204 (R7 656 (R638 × 12) + R1 548 (R129 × 12)) ............
R34 600
Subtotal (R2 216) limited to Rnil ...............................................................
Plus: Qualifying medical expenses ..........................................................
Rnil
11 000
Less: 7,5% × R145 240 ............................................................................
R11 000
(10 893)
(36 816)
R107
Section 6B medical tax credit (25% × R107) ..........................................
R27
Example 7.9. Medical tax credits and s 11F
Nobuntu (40 years old) is divorced, with a child aged 10. Her child is a dependant on her medical scheme. During the year of assessment, she received a salary of R150 000, paid fees of
R18 000 to a medical scheme and paid qualifying medical expenses of R10 000. She is a member of a provident fund, to which she contributed R12 000 during the year of assessment. Her
employer made no contributions to the provident fund.
Calculate the taxable income of and normal tax payable by Nobuntu for the 2021 year of assessment.
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SOLUTION
Salary ..........................................................................................................................
Less: Provident fund contributions (s 11F): Actual R12 000, limited to the lesser of
l R350 000 (s 11F(2)(a))
l 27,5% × R150 000 = R41 250 (s 11F(2)(b)(i) and (ii))
l R150 000 (s 11F(2)(c))
Therefore limited to actual .................................................................................
R150 000
Taxable income .................................................................................................
R138 000
Normal tax determined per table
R138 000 × 18% ..........................................................................
Less: Primary rebate ..................................................................
Section 6A medical tax credit (R638 × 12) ......................
Section 6B medical tax credit (note 1) ............................
R24 840
(14 958)
(7 656)
(Rnil)
Normal tax payable..................................................................
R2 226
Fees paid to a medical scheme
Less: 4 × s 6A medical tax credit = 4 × R7 656 (R638 × 12)................
R18 000
(30 624)
Subtotal (R11760) limited to ..................................................................
Add: Qualifying medical expenses .......................................................
Rnil
10 000
Less: 7,5% × R138 000 .........................................................................
R10 000
(10 350)
(12 000)
Note 1
Total is negative therefore it is limited to ...............................................
Rnil
There will therefore be no s 6B medical tax credit.
Example 7.10. Medical tax credits and retirement
Edgar is a 65-year-old employee. He is married out of community of property and has no children. His spouse is a dependant on his medical scheme. He paid qualifying medical expenses
of R76 800 during the year of assessment. His employer paid 50% of his total monthly fees of
R6 500 to the medical scheme and he paid 50%. Edgar retired on 31 May 2020. He remained a
member of the medical scheme and his employer continued to pay the previously mentioned
fees.
Calculate Edgar’s s 6A and 6B medical tax credits for the 2021 year of assessment.
SOLUTION
The s 6A medical tax credit is granted for the number of months in respect of which the person
pays fees. Edgar has paid 50% of the fees for 12 months and is deemed to have paid all the
contributions paid by his employer to the extent that it was included in income (R9 750 in total).
Since he has paid fees on a monthly basis, he will qualify for the full s 6A medical tax credit of
R7 656 (12 × R638).
The s 6B medical tax credit is calculated as follows:
Fees paid to medical scheme
l paid by Edgar (12 × R3 250)...............................................................................
R 39 000
l paid by employer and taxed as fringe benefit (3 × R3 250)................................
9 750
l paid by employer but no value in terms of par 12A(5)(a) of the Seventh
Rnil
Schedule (9 × R0) ...............................................................................................
Subtotal .....................................................................................................................
Less: 3 × s 6A medical tax credit (3 × R7 656)
R48 750
(22 968)
Subtotal .....................................................................................................................
Add: Qualifying medical expenses ...........................................................................
R25 782
76 800
Total ..........................................................................................................................
R102 582
Section 6B medical tax credit = 33,3% × R102 582 = R34 160
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7.3±7.4
Chapter 7: Natural persons
7.3 Recovery of normal tax payable
The normal tax payable by a natural person is recovered by SARS through
l employees’ tax in the form of PAYE (see chapter 10)
l provisional tax payments (see chapter 11)
l withholding tax on the sale of immovable property in South Africa if the individual is a nonresident (see chapter 21), and
l a final settlement on assessment, if necessary.
The final amount is either due to the taxpayer by SARS or due by the taxpayer to SARS.
Example 7.11. Final assessment of normal tax payable
During the year of assessment ended 28 February 2021 Zoleka, aged 30 and a resident, received a salary of R200 000 and rental from a source within South Africa of R84 300. Employees’
tax amounting to R23 460 was withheld from her salary during the year of assessment, and she
made provisional tax payments of R23 000.
Calculate the outstanding amount of tax that will be payable or refundable once her final assessment is issued for the 2021 year of assessment.
SOLUTION
Tax payable by Zoleka
Salary .......................................................................................................
Rental .......................................................................................................
R200 000
84 300
Taxable income ..........................................................................
Normal tax determined per the tax table on R284 300:
On R205 900 ............................................................................................
On R78 400 (26% of R78 400) .................................................................
R284 300
R37 062
20 384
R57 446
(14 958)
Less: Primary rebate ...............................................................................
Normal tax payable ....................................................................
Less: Provisional tax paid .......................................................................
Employees’ tax paid.......................................................................
Balance refundable on assessment (due to Zoleka) ..................
R42 488
R23 000
23 460
(46 460)
(R3 972)
7.4 Deductions (ss 23(b), 23(m), 11F and 18A)
Natural persons can carry on various trades during the same year of assessment and may therefore
claim all the deductions discussed in chapters 6 and 12 to 16 if applicable to any specific trade.
Deductions claimable against remuneration from employment
Employment is included in the definition of ‘trade’ in s 1. Section 23(m) places a limitation on the
deduction of any expenditure, loss or allowance, contemplated in s 11, which relates to any employment of, or office held by, any person in respect of which he or she derives remuneration. This limitation does not apply to agents or representatives who normally earn remuneration mainly (more than
50%) in the form of commission based on their sales or the turnover attributable to them. Such agents
and representatives may deduct all expenditure incurred under any relevant provision of the Act, if
the specific requirements of that provision have been met.
Only the following expenditure may be deducted against remuneration derived from any employment
of, or any office held by, any person:
l any contributions to any retirement fund (s 11F) (see 7.4.1)
l any legal expenses (s 11(c)) (see chapter 12), wear-and-tear allowance (s 11(e)) (see chapter 13),
bad debts (s 11(i)) (see chapter 12) or doubtful debts (s 11(j)) (see chapter 12)
l so much of any amount received in respect of services rendered or received as a restraint of
trade payment as is refunded by that person (ss 11(nA) and 11(nB)) (see chapter 12), and
l qualifying rent, cost of repairs or expenses (in terms of s 11(a) or (d)) in respect of all expenses in
connection with any dwelling house or domestic premises, to the extent that such a deduction is
not prohibited under s 23(b) as being domestic or private expenses.
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7.4
Regarding the last item, ss 11(a), 11(d), 23(m)(iv) and 23(b) read together entail that an employee
who earns remuneration that does not consist mainly of commission, can claim a deduction in respect of the listed types of expenditure claimable in terms of s 11(a) or (d) to the extent that it relates
to the part of a dwelling house or domestic premises used as a home office for the purposes of his
trade if
l that part is specifically equipped for purposes of the employee’s trade (proviso (a) to s 23(b)),
and
l that part is regularly and exclusively used for the employee’s trade (proviso (a) to s 23(b)), and
l the employee’s duties are mainly performed in that home office (proviso (b)(ii) to s 23(b)).
In the case of an employee who earns remuneration that mainly consists of commission, the first two
requirements above must also be met. A third requirement for such an employee is that the employee’s duties must mainly be performed otherwise than in an office provided to him by his employer
(proviso (b)(i) to s 23(b)).
Interpretation Notes No. 13 and 28 provides more clarity regarding this deduction. If a deduction for
a home office was claimed in respect of a primary residence, the provision, which allows a capital
gain to be disregarded completely if the proceeds do not exceed R2 million, is not applicable when
the primary residence is disposed of (par 45(4)(b) of the Eighth Schedule).
Example 7.12. Home office use in respect of property sold for equal or less than R2 million
Mr Hadeeb lived in a house that he bought on 1 July 2002 for R650 000. The house was his primary residence for 20 years before he sold it. For the entire period of 20 years, prior to selling it,
he used approximately 20% of the area of the house as a home office in which he conducted his
trade. He disposed of the house for R1 850 000.
Calculate the taxable capital gain that should be included in the taxable income of Mr Hadeeb.
SOLUTION
Mr Hadeeb’s taxable capital gain is determined as follows:
Capital gain (Note 1) .........................................................
The primary residence exclusion in terms of par 45(2)(a)
(R2 million limited to R960 000) .........................................
Total
Trade use
R
1 200 000
R
240 000
(960 000)
Balance subject to CGT ....................................................
Annual exclusion ...............................................................
240 000
(40 000)
Aggregate capital gain ......................................................
200 000
Taxable capital gain (R200 000 × 40%) ............................
80 000
(0)
240 000
Residential use
R
960 000
(960 000)
0
Note 1:
Of the capital gain of R1 200 000 (R1 850 000 – R650 000) made on the disposal of the house,
R240 000 (R1 200 000 × 20% (part)) will be taxable as a capital gain, since it is attributable to
non-residential or trade use. The balance of the capital gain, that is, R960 000 (R1 200 000 –
R240 000) will qualify for the primary residence exclusion of up to R2 million and R240 000 would
be included in aggregate capital gain or aggregate capital loss.
Please note: If a deduction for a home office was claimed in respect of a primary residence, the
provision, which allows a capital gain to be disregarded completely if the proceeds do not exceed R2 million (par 45(1)(b)), is not applicable when the primary residence is disposed of
(par 45(4)(b) of the Eighth Schedule). The R2 million exclusion rule (par 45(1)(a)) can still be
applied.
The prohibition in s 23(m) applies to the specific s 11 deductions only and does not affect deductions
for donations to PBOs (s 18A).
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7.4
Chapter 7: Natural persons
7.4.1 Contributions by members to retirement funds (ss 10C, 11F, and 23( g), par 5(1)(a) or
6(1)(b)(i) of the Second Schedule)
Before 1 March 2016, contributions made to a provident fund were not allowable as a deduction.
Only contributions to pension funds and retirement annuity funds were, subject to certain limits,
allowed as deductions (s 11(k) and (n)). This has an impact on the ‘balance of unclaimed contributions’ for the purposes of s 11F, and will be explained below.
As part of the wider retirement reform objectives, the tax deductibility of contributions to all retirement
funds were harmonised and the total amount of the deduction allowed is now determined in terms of
s 11F(2). Section 11F applies ‘notwithstanding s 23(g)’, which confirms that the s 11F deduction can
be claimed against both trade and non-trade income.
The s 11F deduction applies to all amounts contributed to any pension fund, provident fund and
retirement annuity fund during a specific year of assessment (s 11F(1). Section 11F(3) must be read
with s 11F(1), and the deemed contributions in terms of s 11F(3) therefore influence the determination
of the total amount contributed during a year of assessment.
Any amount contributed to any fund during any previous year of assessment and which has been disallowed solely because the amount contributed exceeded the amount of the allowable deduction (this
can be called the ‘balance of unclaimed contributions’), is deemed to be contributed in the next year
of assessment, subject to certain rules (s 11F(3)).
The balance of unclaimed contributions
The first important point to remember is that the ‘balance of unclaimed contributions’ can be applied
in three different ways.
The ‘balance of unclaimed contributions’ can be
l applied as a deduction in terms of par 5(1)(a) or 6(1)(b)(i) of the Second Schedule in order to
calculate the taxable amount of any lump sum benefit to be included in gross income in terms of
par (e) of the gross income definition, or
l claimed as an exemption against any qualifying annuities received from any retirement fund in
terms of s 10C, or
l claimed as a s 11F deduction.
Section 23(i) prohibits a deduction in terms of s 11 of the same unclaimed contributions allowed in
terms of par 5 or 6 of the Second Schedule. This merely confirms that the balance of unclaimed contributions can only be applied once, but also confirms the sequence. It is submitted that a taxpayer
will derive the greatest benefit if the balance of unclaimed contributions is used as soon as possible,
meaning at the first allowable opportunity. It is further submitted that the normal reduction process in
the calculation of taxable income (gross income less exemptions less deductions as explained in the
subtotal method) must be followed.
The second important point to remember is that the determination of the amount of the ‘balance of
unclaimed contributions’ for the purposes of s 11F differs from the other two instances due to the
wording of the applicable sections and paragraphs.
Determination of the balance of unclaimed contributions for the purposes of s 11F
Since the contributions made to a provident fund until 29 February 2016 have never been allowed as
deductions, it was not disallowed solely because the contributions exceed the amount of the allowable deduction (as required by the wording in s 11F(3). Consequently, such contributions cannot be
taken into account as part of the balance of unclaimed contributions deemed to be contributed in the
next year of assessment. The contributions made to a provident fund until 29 February 2016 will consequently never be taken into account in the determination of the total amount contributed during a
year of assessment for the s 11F deduction.
Please note that any amounts contributed during the current year of assessment, but not allowed as a
s 11F deduction due to the limitations on the allowable deduction, will never form part of the current
year’s ‘balance of unclaimed contributions’. This is because s 11F(3) specifically refers to amounts
contributed during any previous year of assessment.
For the purposes of s 11F(3), the ‘balance of unclaimed contributions’ at the end of the 2020 year of
assessment is deemed to be contributed in the 2021 year of assessment except to the extent that it
has been
l allowed as a deduction (in terms of s 11F) in any year of assessment (this means any year of
assessment up to the end of the 2020 year of assessment since a s11F deduction is only allowed
once a year on assessment by SARS)
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7.4
l taken into account in terms of par 5(1)(a) or 6(1)(b)(i) of the Second Schedule (this will include
lump sum benefits received during the 2021 year of assessment), or
l taken into account in determining amounts exempt under s 10C (this will include qualifying annuities received during the 2021 year of assessment) (s 11F(3)).
Determination of the balance of unclaimed contributions for the purposes of par 5(1)(a) or 6(1)(b)(i) of
the Second Schedule and s 10C
Any unclaimed pre-1 March 2016 provident fund contributions can be deducted in terms of
par 5(1)(a) or 6(1)(b)(i) of the Second Schedule and it can also qualify for an exemption in terms of
s 10C. This is due to the same wording in par 5(1)(a) or 6(1)(b)(i) of the Second Schedule and in
s 10C, which is different from the wording contained in s 11F(3). The wording in the aforementioned
paragraphs and in s 10C is ‘that did not rank for a deduction against the person’s income in terms of
s 11F’. It is clear that the only requirement is that the contributions were not allowable as a deduction
in terms of s 11F. Due to this wording, all the unclaimed pre-1 March 2016 provident fund contributions, that have never been allowed as a deduction, can qualify for either deduction in terms of
par 5(1)(a) or 6(1)(b)(i) of the Second Schedule or for exemption in terms of s 10C if the requirements
thereof are met.
In summary:
For the purposes of s 11F, the ‘balance of unclaimed contributions’ will consist of the sum of any
unclaimed contributions in respect of a pension fund or a retirement annuity fund and only the unclaimed contributions to a provident fund made on or after 1 March 2016.
For the purposes of both par 5(1)(a) or 6(1)(b)(i) of the Second Schedule and s 10C, the ‘balance of
unclaimed contributions’ will consist of the sum of any unclaimed contributions in respect of a pension fund or a retirement annuity fund and any unclaimed contributions to a provident fund whether
made before or after 1 March 2016. Please note that in respect of the contributions made before 1
March 2016, the total amount of the contributions will be unclaimed, but this is not necessarily the
case in respect of contributions on or after 1 March 2016.
Following the normal reduction process in the calculation of taxable income (gross income less
exemptions less deductions as explained in the subtotal method), any ‘balance of unclaimed contributions’ at the end of the 2020 year of assessment is applied in the following sequence during the
2021 year of assessment:
l firstly, to claim a deduction in terms of par 5(1)(a) or 6(1)(b)(i) of the Second Schedule when the
par (e) gross income amount in respect of any qualifying retirement fund lump sum benefit or retirement fund lump sum withdrawal benefit received during the 2021 year of assessment is calculated,
l secondly, to claim an exemption in terms of s 10C against any ‘qualifying annuities’ received
during the 2021 year of assessment, and
l lastly, to add any remaining balance of unclaimed contributions to the contributions made to any
retirement fund during the 2021 year of assessment. This total amount of contributions is called
the ‘actual contributions’ in the explanation that follows, and is used as the starting point in the
calculation of the allowable deduction in terms of s 11F(2).
The s 11F(2) deduction
The total deduction allowed in terms of s 11F(2) is the actual contributions, limited to the lesser of
(a) R350 000 (this limit is never apportioned for the s 11F(2) calculation, although it is apportioned for
the monthly calculation of employees’ tax – please see chapter 10) (s 11F(2)(a)); or
(b) 27,5% of the higher of the person’s
– ‘remuneration’ (excluding any retirement fund lump sum benefits, retirement fund lump sum
withdrawal benefits and severance benefits) as defined in the Fourth Schedule (this means all
the amounts included in the definition of ‘remuneration’ from all employers that are included in
column 3 of the comprehensive framework in 7.1) (s 11F(2)(b)(i)), or
– ‘taxable income’ (excluding any retirement fund lump sum benefits, retirement fund lump sum
withdrawal benefits and severance benefits) determined before allowing deductions for contributions to retirement funds (s 11F(2)), for donations to PBOs (s 18A) and for non-recoverable
foreign taxes paid by a resident in terms of s 6quat(1C) (this means the taxable income after
the taxable capital gain in subtotal 5 of the comprehensive framework in 7.1) (s 11F(2)(b)(ii));
or
(c) the ‘taxable income’ (excluding any retirement fund lump sum benefits, retirement fund lump
sum withdrawal benefits and severance benefits) of that person before allowing the ss 11F(2),
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7.4
Chapter 7: Natural persons
6quat(1C) and 18A deductions and before including any taxable capital gain (this means the
taxable income in subtotal 4 of the comprehensive framework in 7.1) (s 11F(2)(c)).
The effect of the wording of s 11F(2)(c) is that the creation or increase of an assessed loss through
the s 11F deduction is prevented (see Examples 7.13(b) and 7.13(c)).
In terms of s 11(l), employers can claim deductions in respect of all amounts paid or contributions
made to any retirement fund on behalf of or for the benefit of any employee, former employee and the
dependent of any deceased employee. The cash equivalent of such contributions is included as a
fringe benefit in the hands of the employees in terms of
l paras 2(l) and 12D of the Seventh Schedule in the case of contributions to pension and provident
funds (because employers must make the contributions to these ‘employer funds’ in terms of the
rules of the funds), and
l paras 2(h) and 13 of the Seventh Schedule if the fund is a retirement annuity fund (because it is
an ‘independent fund’ and it is the employee’s responsibility to pay the contributions and the employer paying it amounts to the payment of a debt on behalf of an employee).
Due to these inclusions in the employee’s gross income, the cash equivalents of such contributions
are deemed to have been contributed by the employee (s 11F(4)).
A partner in a partnership is deemed an employee of the partnership, and a partnership is deemed
an employer of a partner for the purposes of s 11F (s 11F(5)), s 11(l) and par 12D of the Seventh
Schedule. This means that
l a partner’s contributions to retirement funds will be allowed as deductions in terms of s 11F
l a partnership’s contributions on behalf of partners will be included as a fringe benefit in terms of
par 12D of the Seventh Schedule, and
l the partnership can claim a deduction in terms of s 11(l) in respect of such contributions made.
Please refer to chapter 18 for a more detailed discussion and examples regarding partnerships.
Example 7.13(a). Deductions in terms of s 11F(2))
During the year of assessment ended 28 February 2021 Zurelda, aged 30 and a resident,
received a salary of R300 000 and rental income from a source within South Africa of R264 300.
Her monthly contributions to the pension fund amounted to R4 500 and she contributed R10 000
to a retirement annuity fund monthly. Her employer made no contributions to any fund. She
realised a taxable capital gain of R58 000. The balance of unclaimed contributions to all her
retirement funds on 28 February 2020 amounted to R8 000.
Calculate Zurelda ’s taxable income for the 2021 year of assessment.
SOLUTION
Salary ..........................................................................................................................
Rental income .............................................................................................................
R300 000
264 300
Subtotal 1 ...................................................................................................................
Add: Taxable capital gain ...........................................................................................
R564 300
58 000
Subtotal 2 ....................................................................................................................
Less: Section 11F(2) deduction:
Actual contributions (in terms of s 11F(3)) = R54 000 (R4 500 × 12) + R120 000
(R10 000 × 12) + R8 000 = R182 000
Limited to the lesser of
l R350 000, or
l 27,5% × the higher of
– R300 000 (remuneration) or
– R622 300 (taxable income after the taxable capital gain)
Therefore 27,5% × R622 300
= R171 133, or
R622 300
l R564 300 (taxable income before the taxable capital gain)
The deduction is therefore limited to ...........................................................................
(The excess of R10 867 (R182 000 – R171 133) is carried forward to the 2022 year
of assessment (s 11F(3).)
Taxable income.................................................................................................
173
(171 133)
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7.4
Example 7.13(b). Deductions in terms of s 11F(2)
During the year of assessment ended 28 February 2021 Zurelda, aged 30 and a resident, received rental income from a source within South Africa of R400 000. Her monthly contributions to
the retirement annuity fund amounted to R14 500. Her assessed loss from the 2020 year of
assessment amounted to R550 000. She realised a taxable capital gain of R200 000 during the
2021 year of assessment. The balance of unclaimed contributions to all her retirement funds on
28 February 2020 amounted to R8 000.
Calculate Zurelda ’s taxable income for the 2021 year of assessment.
SOLUTION
Rental income .............................................................................................................
Less: Assessed loss brought forward .........................................................................
R400 000
(550 000)
Subtotal 1 ....................................................................................................................
Add: Taxable capital gain ...........................................................................................
(R150 000)
200 000
Subtotal 2 ....................................................................................................................
Less: Section 11F(2) deduction:
Actual contributions (in terms of s 11F(3)) = R174 000 (R14 500 × 12) + R8 000 =
R182 000
Limited to the lesser of
l R350 000, or
l 27,5% × the higher of
– R0 (remuneration), or
– R50 000 (taxable income after the taxable capital gain)
Therefore 27,5% × R50 000
= R13 750, or
l (Rnil) (because subtotal 1 (before the taxable capital gain) is a loss and
s 11F(2)(c) only refers to taxable income). The effect of this limitation is that
the increase of the assessed loss through the s 11F deduction is prevented.
The deduction is therefore limited to Rnil ...................................................................
(The total contribution of R182 000 is carried forward to the 2022 year of
assessment (s 11F(3).)
R50 000
Taxable income ...................................................................................................
R50 000
(nil)
Example 7.13(c). Deductions in terms of s 11F(2)
During the year of assessment ended 28 February 2021, Zurelda, aged 30 and a resident,
received rental income from a source within South Africa of R400 000. Her monthly contributions
to the retirement annuity fund amounted to R14 500. Her assessed loss from the 2020 year of
assessment amounted to R380 000. She realised a taxable capital gain of R200 000 during the
2021 year of assessment. The balance of unclaimed contributions to all her retirement funds on
29 February 2020 amounted to R8 000. Zurelda made a R50 000 donation to a PBO and
received the required certificate.
Calculate Zurelda ’s taxable income for the 2021 year of assessment.
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7.4
Chapter 7: Natural persons
SOLUTION
Rental income .............................................................................................................
Less: Assessed loss brought forward .........................................................................
R400 000
(380 000)
Subtotal 1 ....................................................................................................................
R20 000
Add: Taxable capital gain ...........................................................................................
200 000
Subtotal 2 ...................................................................................................................
Less: Section 11F(2) deduction:
Actual contributions = R174 000 (R14 500 × 12)) + R8 000 = R182 000
Limited to the lesser of
l R350 000, or
l 27,5% × the higher of
– R0 (remuneration), or
– R220 000 (taxable income after the taxable capital gain)
Therefore 27,5% × R220 000
= R60 500, or
l R20 000 (taxable income before the taxable capital gain). The effect of this limitation is that the creation of an assessed loss through the s 11F deduction is
prevented.
The deduction is therefore limited to ...........................................................................
(The excess of R162 000 (R182 000 – R20 000) is carried forward to the 2022 year
of assessment (s 11F(3).)
R220 000
Subtotal 3 ....................................................................................................................
R200 000
Less: Section 18A deduction: R50 000 limited to 10% x R200 000 = R20 000...........
(The excess of R30 000 (R50 000 – R20 000) can be carried forward to the 2022
year of assessment (proviso to s 18A(1)(B).)
Taxable income.................................................................................................
(20 000)
(20 000)
R180 000
7.4.2 Donations to public benefit organisations and other qualifying beneficiaries (s 18A)
Section 18A(1) permits a deduction for bona fide donations, in cash or property in kind, actually paid
or transferred by any taxpayer to specified beneficiaries during the year of assessment. The words
‘actually paid or transferred’ include payments by electronic fund transfer, credit card, postal order or
debit card, but they do not include promissory notes, pledges, payments to be made in future instalments or post-dated cheques.
It is submitted that a donation is made when the legal formalities for a valid donation have been completed, and not when the subject matter is delivered to the donee. No deduction can be claimed
unless a receipt meeting certain specifications is issued by the public benefit organisation, institution,
board, body or agency, programme, fund, High Commissioner, office, entity or organisation or the
department concerned to the taxpayer (s 18A(2)). A public benefit organisation, institution, board,
body or department may only issue the aforementioned receipts to the extent that the donation will be
used solely to provide funds or assets to a public benefit organisation, institution, board or body contemplated in s 18A(1)(a), which will use those funds or assets solely in carrying on activities contemplated in Parts I and/or II of the Ninth Schedule (s 18A(2A)).
The following payments or transfers are more examples from the Basic Guide to Section 18A
Approval (Issue 3) of amounts that do not qualify for a deduction under section 18A:
l amounts paid to attend a fundraising event such as a dinner or charity golf day
l memorabilia and other assets donated to be auctioned to raise funds
l amounts paid for raffle or lottery tickets
l prizes and sponsorships donated for a fundraising event such as a charity golf day
l tithes and offerings to churches or other faith-based organisations in support of their religious
activities
l membership fees.
No deduction shall be allowed for the donation of
l any property in kind that consists of, or is subject to any fiduciary right, usufruct, or other similar
right, or
l which consists of an intangible asset, or
l a financial instrument, unless that financial instrument is a share in a listed company, or is issued
by an eligible financial institution as defined in the Financial Sector Regulation Act (s 18A(3B)).
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7.4
Specified beneficiaries
The specified beneficiaries to whom a donation may be made are
l approved public benefit organisations (PBO)
l an institution, board or body (contemplated in s 10(1)(cA)(i) – see below) that carries on certain
activities and has been approved by the Commissioner (see below)
l approved PBOs that provide for funds or assets to any PBO, institution, board, body or any department in the government of the Republic in all spheres (a conduit PBO) and has been approved by
the Commissioner
l any specialised agency (of the United Nations) that carries on certain activities (see below) and
that has furnished SARS with a written undertaking that the agency will comply with the s 18A requirements, waives diplomatic immunity and has been approved by the Commissioner, or
l any department or government of the Republic on the national, provincial or local sphere contemplated in s 10(1)(a) which has been approved by the Commissioner to be used for the purposes of
certain activities (see below) (s 18A(1)).
Each of these beneficiaries must comply with the requirements set in its constitution or founding document and any additional requirements prescribed by the Minister (in terms of s 18A(1A)).
The activities referred to above are
l public benefit activities contemplated in Part II of the Ninth Schedule under the headings:
– welfare and humanitarian
– health care
– education and development
– conservation, environment and animal welfare
– land and housing, or
l any other activity determined by the Minister of Finance by notice in the Gazette.
An approved institution, board or body established under s 10(1)(cA)(i) is
l one established by law
l that, in the furtherance of its sole or principal object
– conducts scientific, technical or industrial research, or
– provides necessary or useful commodities, amenities or services to the State or members of
the general public, or
– carries on activities (including financial assistance) to promote commerce, industry or agriculture.
The Minister may by regulation prescribe additional requirements with which a PBO or other qualifying entity must comply before donations to it will be allowed as a deduction (s 18A(1A)).
The s 18A deduction
The deduction of all qualifying donations actually paid or transferred by the taxpayer during the year
of assessment is limited to
l 10% of the taxable income (excluding any retirement fund lump sum benefit, any retirement fund
lump sum withdrawal benefit or any severance benefit) of the taxpayer
l as calculated before allowing any deduction under s 18A (donation) or s 6quat(1C) (non-recoverable tax paid by a resident to the government of another country).
Please note!
This deduction is a deduction from ‘taxable income’ and therefore a taxpayer with no
taxable income or an assessed loss will not be allowed to claim the deduction (10%
× Rnil = Rnil). The excess unclaimed donation under s 18A can be carried forward to
the next year of assessment (proviso to s 18A(1)(B)).
The s 18A deduction available to a portfolio of a collective investment scheme is calculated using a
special formula (s 18A(1)(A)). All other taxpayers will continue to calculate the s 18A deduction by
using the 10% limitation discussed above.
176
7.4
Chapter 7: Natural persons
Example 7.14. Donations made during the year of assessment
During the current year of assessment, Mr Gratuity promises to pay R5 000 to a PBO in 10 equal
annual instalments of R500. The PBO accepts the donation during the 2021 year of assessment
and all the other legal formalities are completed in the same year.
Determine the amount of the donation made by Mr Gratuity during the 2021 year of assessment.
SOLUTION
It is considered that the donation of R5 000 has been made during the 2021 year of assessment
since all the legal formalities were met and that it cannot be contended that a separate donation
is being made in each of the subsequent years as each instalment is paid. The deductibility of
the donation in terms of s 18A is, however, influenced by the words ‘actually paid or transferred’
and therefore only R500 will qualify for a deduction in the 2021 year of assessment. The balance
of donations of R4 500 (R5 000 – R500) can be carried forward to the 2022 year of assessment.
This situation must be distinguished from that in which Mr Gratuity promises to pay R500 a year
for 10 years but retains the right to revoke the payment of any instalment. In such a situation, it is
considered that a donation is made only as Mr Gratuity pays each year’s instalments.
Any balance of donations can be carried forward and will be allowed as a deductible donation in the
following year (subject to the limits set out above). The excess can be carried forward from year to
year until it is fully deductible (proviso to s 18A(1)(B)).
Example 7.15. Excess deductible donations
Emily donated R100 000 to an approved public benefit organisation (a PBO) on 1 June 2019.
She donated another R50 000 to the same PBO on 1 April 2020.
She had taxable income of R850 000 for the 2020 year of assessment and R950 000 for the 2021
year of assessment before any s 18A deduction was taken into account.
Calculate the s 18A deduction available to Emily for the 2020 and 2021 years of assessment. You
can assume that she was in possession of the relevant s 18A certificates.
SOLUTION
Year ended 29 February 2020
Donation of R100 000, but maximum s 18A deduction limited to 10% × R850 000 =
R85 000 (excess deductible donation of R15 000 rolled over to the 2021 year of
assessment (proviso to s 18A(1))) .................................................................................. (R85 000)
Year ended 28 February 2021
Total deductible donations of R50 000 (2021) plus R15 000 (excess deductible
donation rolled over from 2020) = R65 000. The maximum deduction will be limited
to 10% of taxable income of R950 000 = R95 000, but limited to total deductible
donations of R65 000 ...................................................................................................... (R65 000)
The s 18A deduction is the last deduction when calculating taxable income according to the subtotal
method for natural persons (s 18A(1)(B)). This implies that a taxable capital gain will increase
the deduction that a taxpayer can claim for donations, since it will be included before the s 18A
deduction.
Donations in kind
Section 18A(3) deals with the valuation of donations in kind. It states that if a deduction is claimed by
a taxpayer under s 18A(1) in respect of a donation of property in kind, other than immovable property
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7.4
of a capital nature where the lower of market value or municipal value exceeds cost (s 18A(3A) – see
below), the amount of the deduction must be determined as follows:
Type of property donated
Amount of donation for s 18A purposes
A financial instrument (if taxpayer’s trading stock)
The lower of
l fair market value on the date of the donation, or
l the amount that has been taken into account for
the purposes of s 22(8)(C)
Trading stock (including livestock or produce of a
farmer)
The amount that has been taken into account for
the purposes of
l s 22(8)(C), or
l par 11 (for livestock or produce)
Asset used by the taxpayer for the purposes of his
trade (not trading stock)
The lower of
l fair market value on the date of the donation, or
l cost to the taxpayer of the property less any
allowance allowed to be deducted from his income under the Act
Asset not used by the taxpayer for the purposes of
his trade (not trading stock)
The lower of
l fair market value on the date of the donation, or
l cost
For movable property that has deteriorated in condition, the fair market value or cost must be
reduced by a depreciation allowance calculated
using the reducing-balance depreciation allowance
at the rate of 20% a year
Purchased, manufactured, erected, assembled, installed or constructed by or on behalf of the taxpayer
in order to form the subject of the donation
The lower of
l fair market value of the property on the date of
the donation, or
l cost
Other
l subject to any fiduciary right, usufruct or other
similar right, or
l that constitutes an intangible asset, or
l financial instrument
No deduction is allowed for the donation.
This prohibition applies unless the financial instrument is a share in a listed company or is issued by a
qualifying financial institution (s 18A(3B))
Deduction for qualifying donations of immovable property of a capital nature where the lesser of market
value or municipal value exceeds cost (appreciated immovable property)
The s 18A(1) deduction available for any donation of immovable property of a capital nature that has
increased in value is calculated using a special formula. The deduction is limited to
A = B + (C × D)
Where:
l A is the amount deductible in respect of s 18A(1).
l B is the cost of the immovable property being donated.
l C is the amount of a capital gain (if any) that would have been determined in terms of the Eighth
Schedule had the immovable property been disposed of for an amount equal to the lower of the
market value or the municipal value (to prevent excessive deductions as a result of artificial valuations) on the day the donation is made.
l D is 60% in the case of a natural person or special trust or 20% in all other instances (s 18A(3A)).
Thus, the deductible donations will be limited to the cost of the immovable property plus the portion
of the capital gain (which would have realised had the property been sold at the lesser of market
value or the municipal value) left after deducting the taxable portion of the capital gain.
Often landowners own land for long periods before they decide to donate it (many consider making a
99-year private endorsement for the promotion of a national park or nature reserve). The tax deduction for the donation was limited to the lesser of cost or fair market value, with fair market value in
most instances far in excess of the cost. Thus, most of the tax benefit of the donation for environmental
conservation was therefore eliminated. This provision tries to rectify this situation and enhances the
incentive to donate land for environmental conservation purposes (Explanatory Memorandum on the
Taxation Laws Amendment Bill, 2013).
178
7.4
Chapter 7: Natural persons
Binding General Ruling No. 24 (issue 2) (issued 15 February 2016) gives an
exception to the rule that no deduction will be allowed if a s 18A certificate (required under s 18A(2)) has not been issued.
If an amount qualifies under s 37C(3) or (5) (expenditure actually incurred to conserve or maintain land, which is deemed to be a donation for s 18A – see chapter 13), a deduction will be allowed irrespective of whether a certificate was issued.
Please note!
Example 7.16. Donation of appreciated immovable property
Jessica Wilbert owns a farm with a cost (and base cost) of R350 000. Jessica undertakes a
99-year endorsement of the farmland in terms of the Department of Environmental Affairs’ biodiversity stewardship programme. At the time of the donation, the farm had a market value of
R4 500 000 and a municipal value of R4 000 000. Jessica has taxable income of R2 500 000 for
the year of assessment during which the endorsement was undertaken.
Calculate the s 18A deduction available to Jessica for the 2021 year of assessment.
SOLUTION
Deductible donation (A) = B + (C × D)
A = R350 000 + ((R4 000 000 – R350 000) × 60%)
A = R350 000 + R2 190000 = R2 540 000 (s 18A(3A)), but maximum s 18A
deduction limited to 10% × R2 500 000 = R250 000 (excess deductible donation
of R2 290 000 (R2 540 000 – R250 000) carried forward to the 2022 year of assessment (proviso to s 18A(1))) ............................................................................................. (R250 000)
Section 22(8) requires that the market value of the property must be included in
the income of the taxpayer who donated trading stock. If the donation qualifies for
a s 18A deduction, the cost price is included (s 22(8)(C)).
Please note!
Example 7.17. Donations to public benefit organisations and other qualifying beneficiaries
Albert donates (a) R400, (b) R1 200, and (c) R3 300 to a PBO. His taxable income or assessed
loss before any deduction under s 18A for donations is (i) taxable income of R100, (ii) taxable
income of R30 000, (iii) assessed loss of R1 000.
What is his final taxable income or assessed loss in each instance?
SOLUTION
(a) Actual donation R400
Taxable income or assessed loss before deduction .............................
The deduction is limited to 10% of taxable income.
In this instance the limit will therefore be ................................
(i)
R100
(ii)
R30 000
(R10)
(R400)
Final taxable income or assessed loss ...................................
R90
R29 600
(R1 000)
R100
R30 000
(R1 000)
(b) Actual donation R1 200
Taxable income or assessed loss before deduction .............................
The deduction is limited to 10% of taxable income.
In instance (ii) 10% of taxable income is R3 000 and
the limit will therefore be the amount donated ........................
Final taxable income or assessed loss ...................................
(c) Actual donation R3 300
Taxable income or assessed loss before deduction .....................
The deduction is limited to 10% of taxable income.
In instance (ii) 10% of taxable income is R3 000 ....................
Final taxable income or assessed loss ..........................................
179
(iii)
(R1 000)
Rnil
(R10)
(R1 200)
Rnil
R90
R28 800
(R1 000)
R100
R30 000
(R1 000)
(R10)
(R3 000)
Rnil
R90
R27 000
(R1 000)
Silke: South African Income Tax
7.4±7.5
Documentation
A claim for a deduction under s 18A for a donation will not be allowed unless supported by a receipt
issued by the PBO or other qualifying entity concerned. The receipt must contain:
l the reference number of the PBO, institution, board, body or agency, programme, fund, High
Commissioner, office, entity or organisation or the department concerned
l the date of the receipt of the donation
l the name and address of the PBO or other qualifying entity that received the donation
l the name and address of the donor
l the amount of the donation or the nature of the donation (if not made in cash)
l a certificate to the effect that the receipt is issued for the purposes of s 18A and that the donation
has been or will be used exclusively for the object of the PBO or other qualifying entity concerned
(s 18A(2)(a)).
An employee can make a donation to a qualifying entity by way of a deduction from his salaries or
wages. The employer then makes the donation on behalf of the employee. The employee will be able
to rely on the employer tax certificate (IRP 5) to substantiate the deductible donation for purposes of
his annual tax return (the original receipt will be in possession of his employer) (s 18A(2)(b)). The
employer will take such a donation into account in the calculation of the employees’ tax so as to
provide the employee with a cash flow benefit (par 2(4)(f) of the Fourth Schedule – see chapter 10).
The amount taken into account for employees’ tax purposes is based on 5% of the balance of remuneration and is therefore not calculated in the same way as the s 18A deduction.
Legal obligations, offences and punishment
The details regarding this are not discussed and can be found in s 18A(2A)–(2D) and 18A(5)–(7).
7.5 Taxation of married couples (ss 7(2), (2A)±(2C) and 25A)
Each spouse in a marriage is taxed separately on his or her own taxable income for a particular year
of assessment, unless one of the deemed inclusion rules of s 7(2) or 7(2A) applies. Marriage, separation, divorce or the death of a spouse during the year of assessment will therefore have no effect on
the determination of the normal tax payable by a natural person unless s 7(2) or 7(2A) applies.
The word ‘spouse’ is defined in s 1 of the Act and, apart from a marriage in terms of the Laws of the
Republic, it includes unions recognised as a marriage in terms of religion as well as live-together unions
of a permanent nature. In the absence of proof to the contrary, a marriage in terms of religion and livetogether unions of a permanent nature are deemed to be out of community of property (proviso to the
definition). A marriage in terms of the Laws of the Republic is by default in community of property. The
taxable incomes of spouses married in community of property, but separated in circumstances which
indicate that the separation is of a permanent nature, are calculated as if the marriage was out of
community of property (s 25A)).
If an antenuptial contract exists, the marriage will be out of community of property. Couples married
out of community of property can also elect that the accrual principle applies to them (see chapter 27
for detail).
Example 7.18. Husband and wife
Mervin’s salary for the 2021 year of assessment is R164 600 and his interest income from a
source in the Republic is R35 000. He is 68 years old. His wife, Wanda, aged 53, derives income
from a business of R115 500 for the year of assessment, while her interest income from a source
in the Republic is R5 500. They are married out of community of property.
Calculate the normal tax payable by Mervin and Wanda for the 2021 year of assessment.
180
7.5
Chapter 7: Natural persons
SOLUTION
Mervin:
Salary .....................................................................................................................
Interest ............................................................................................... R35 000
Less: Interest exemption (s 10(1)(i)(i) ...............................................
(34 500)
R164 600
500
Taxable income .....................................................................................
Normal tax determined per the tax table on R165 100:
On R165 100 @ 18% ..............................................................................................
Less: Primary rebate .............................................................................................
Secondary rebate .......................................................................................
R165 100
Normal tax payable ...............................................................................
R6 561
Wanda:
Business income ....................................................................................................
Interest ...............................................................................................
R5 500
Less: Interest exemption (s 10(1)(i)(ii)..............................................
(5 500)
Taxable income .....................................................................................
Normal tax determined per the tax table on R115 500:
On R115 500 @ 18% ..............................................................................................
Less: Primary rebate .............................................................................................
Normal tax payable ...............................................................................
R29 718
(14 958)
(8 199)
R115 500
–
R115 500
R20 790
(14 958)
R5 832
7.5.1 Deemed inclusion (s 7(2))
Section 7(2) is an anti-avoidance provision aimed at preventing married couples (irrespective of
whether they are married in or out of community of property) from reducing their liabilities for normal
tax by arranging for taxable income to be split between the spouses.
If a spouse (the recipient spouse) receives income in consequence of a donation, made by his or her
spouse (the donor spouse) with the sole (100%) or main (>50%) purpose to reduce, postpone or
avoid tax, the donor spouse will be taxed on that income of the recipient spouse received in consequence of the donation (s 7(2)(a)).
Example 7.19. Deemed inclusion: S 7(2)(a)
Alfred (aged 53 years) donated money to his wife Betty (aged 50 years) that enabled her to earn
interest. His sole purpose was to reduce his own normal tax liability. They are married out of
community of property.
Salary: Alfred .................................................................................................................... R82 000
Business profits: Betty ......................................................................................................
40 000
Interest received from a source in the Republic: Alfred ...................................................
8 500
Betty.....................................................
19 000
Director’s fees: Alfred .......................................................................................................
4 800
Calculate the normal tax payable by Alfred and Betty for the 2021 year of assessment.
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7.5
SOLUTION
Alfred:
Salary ..............................................................................................................................
Director’s fees .................................................................................................................
Interest: Own ..............................................................................................
R8 500
Betty’s (deemed to accrue to Alfred in terms of s 7(2)(a)) ...........
19 000
R82 000
4 800
R27 500
(23 800)
3 700
Taxable income .................................................................................................
R90 500
Less: Interest exemption s 10(1)(i)(ii) ........................................................
Normal tax determined per the tax table on R90 500 @ 18% .........................................
Less: Primary rebate .......................................................................................................
R16 290
(14 958)
Normal tax payable ...........................................................................................
R1 332
Betty:
Business profits...............................................................................................................
R40 000
Taxable income .................................................................................................
R40 000
Normal tax determined per the tax table on R40 000 @ 18% .........................................
Less: Primary rebate .......................................................................................................
Normal tax payable ...........................................................................................
R7 200
(14 958)
Rnil
If the recipient spouse receives income exceeding ‘reasonable income’ from
l a trade connected to that of the donor spouse, or
l a trade that the recipient spouse carries on in partnership or association with the donor spouse,
or
l the donor spouse or a partnership of which the donor spouse was a member, or
l a private company of which the donor spouse was the sole or main holder of shares or one of the
principal holder of shares
the donor spouse will be taxed on any ‘excessive income’ and the recipient spouse on the ‘reasonable income’ (s 7(2)(b)). This ‘reasonable income’ must be established in the light of the nature of the
relevant trade, the extent of the recipient’s participation in that trade, the services rendered by the
recipient or any other relevant factor.
For example: Mrs A works as a secretary for her husband’s business as sole trader and earns
R400 000 annually but the reasonable income for such services amounts to R180 000. Mrs A will be
taxed on the R180 000 and Mr A on the excessive R220 000 (R400 000 – R180 000). Unless a deduction is disallowed due to being excessive and not in the production of income, Mrs A’s husband
will be allowed a deduction of R400 000. If the excessive portion is disallowed, the deduction will be
R180 000 (R400 000 – R220 000), which equals the amount included in Mrs A’s hands.
Section 7(2)(b) ensures that married couples who genuinely work together in a trade are treated in
the same way as other couples engaged in separate trades. Section 7(2)(b) is therefore an effective
anti-avoidance rule directed against the diversion of income and is in place to discourage the erosion
of the tax base.
7.5.2 Marriages in community of property (ss 7(2A), (2C) and 25A)
The assets and liabilities of both spouses married in community of property, acquired or incurred by
either spouse before or during the marriage, constitute their joint estate. Each spouse has a 50%
share therein. Assets (and income earned therefrom) can, however, be specifically excluded from the
joint estate. This can, for example, happen if the will or act of grant through which the spouse obtains
the asset stipulates that the spouse is granted an independent title to the asset and that the asset
may not form part of any joint estate. Similar stipulations can also be made regarding the income
from such asset, or regarding both the asset and the income therefrom. If the will or act of grant does
not stipulate anything regarding the asset or the income, such asset and income falls in the joint
estate.
182
7.5
Chapter 7: Natural persons
The tax implications of four types of provisions in wills and acts of grant in respect of assets and
income bequeathed or donated to a person married in community of property can be summarised as
follows:
Provision in will
or act of grant:
Only the asset is
excluded from
the joint estate
Provision in will
or act of grant:
Only the income
from the asset is
excluded from the
joint estate
Provision in will or
act of grant: Both
the asset and the
income from the
asset are excluded
from the joint
estate
No provision
in will or act of
grant regarding any
exclusion
from the joint
estate
Effect on the capital
gain when assets so
obtained are
subsequently
disposed of
Capital gain on
disposal is
excluded from
the joint estate
and only the
spouse making
the disposal is
taxed thereon
(par 14(b) of the
Eighth Schedule)
Deemed to be a
disposal made in
equal shares by
each spouse.
Capital gain on
disposal is part of
the joint estate
and each spouse
is taxed on 50%
thereof (par 14(a)
of the Eighth
Schedule)
Capital gain on
disposal is
excluded from the
joint estate and
only the spouse
making the disposal is taxed
thereon (par 14(b)
of the Eighth
Schedule)
Deemed to be
a disposal
made in equal
shares by
each spouse.
Capital gain
on disposal is
part of the
joint estate
and each
spouse is
taxed on 50%
thereof
(par 14(a) of
the Eighth
Schedule)
Effect on the income
received from the
assets so obtained
Income from the
asset is part of
the joint estate
and each spouse
is taxed on 50%
thereof (s
7(2A)(b))
Income from the
asset is excluded
from the joint
estate and only
the spouse
receiving the
income is taxed
thereon
(s 7(2A)(b))
Income from the
asset is excluded
from the joint
estate and only the
spouse receiving
the income is
taxed thereon
(s 7(2A)(b))
Income from
the asset is
part of the
joint estate
and each
spouse is
taxed on 50%
thereof
(s 7(2A)(b))
According to common law principles, income accrues equally to each spouse married in community
of property, except in certain circumstances. To avoid confusion, s 7(2A) and (2C) set out specific
rules that determine in whose hands the income of couples married in community of property will be
taxed. A distinction is made between trade and non-trade income received by the spouses.
Trade income (s 7(2A)(a))
Income derived from the carrying on of a trade by only one spouse is deemed to accrue only to the
spouse who carried on the trade (s 7(2A(a)(i)). Although the letting of any type of property is included
in the definition of ‘trade’ in s 1(1), rental income from letting fixed property is, for the purposes of
s 7(2A), specifically excluded from the rules regarding income from the carrying on of a trade
(s 7(2A)(a)). Any rental income from letting fixed property is specifically included in the ‘equal share
rule’ regarding non-trade (or passive) income (s 7(2A)(b) – see below). In other words, rental income
from fixed property is shared equally between spouses married in community of property unless one
of the spouses enjoys independent title to the income, due to the income being specifically excluded
from the joint estate (see table above). Rental income from letting movable property will, for the purposes of s 7(2A), still be income from the carrying on of a trade and will consequently only be taxed
in the hands of the person/s carrying on the trade.
Where both spouses carry on the trade jointly, the income is deemed to have accrued to both spouses in the proportions determined by the agreement. In the absence of an agreement the income is
deemed to have accrued in the proportions to which each spouse would reasonably be entitled,
taking into account the nature of the trade, the extent of each spouse’s participation, the services
rendered by each spouse or any other relevant factor (s 7(2A)(a)(ii)). The provisions regarding the
joint trade of spouses are specifically made subject to s 7(2)(b), which means that trading income will
be split between spouses married in community of property to the extent only that the split is substantiated by their agreement or bona fide separate efforts.
Certain types of income are deemed to be income derived by a spouse from a trade carried on by
him or her (s 7(2C)). These incomes are any benefits from retirement funds or preservation funds
183
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7.5
(meaning both lump sum benefits and annuities received from retirement funds), s 10A annuities and
income from patents, designs, trademarks, copyrights and property of a similar nature.
Rental from fixed property and non-trade income (s 7(2A)(b))
Rental income derived from the letting of fixed property and any income derived other than from the
carrying on of a trade (also called passive income) are deemed to have accrued in equal shares to
both spouses (s 7(2A)(b)). Examples of non-trade (or passive) income are interest, dividends and
annuities, other than s 10A annuities and annuities from retirement funds, since those two types of
annuities are deemed to be derived from a trade carried on by the specific spouse (s 7(2C)(a) and
(b)).
If the spouses divorce during the year of assessment, only non-trade income received or accrued up
to the day before the date of divorce is split 50-50, since from the day of the divorce they are no
longer married in community of property. The same principle will apply if one of the spouses dies
during the year of assessment.
Rental income from fixed property and other non-trade income which does not fall into the joint estate
due to the income being specifically excluded from the joint estate in a will or act of grant, as discussed in the table above, is deemed to have accrued only to the spouse who is entitled to it (proviso
to s 7(2A)(b)).
Capital gains
The tax implications of the capital gains on the disposal of assets by spouses married in community
of property are discussed in par 14 of the Eighth Schedule (see chapter 17) and the donations tax
implications of assets donated by spouses married in community of property are discussed in s 57A
(see chapter 26).
Example 7.20. Marriage in community of property
Calculate the taxable income of Patricia and Quincy, who are married in community of property
and are both 40 years old. Their receipts for the 2021 year of assessment were as follows:
Salary: Patricia .............................................................................................................
R60 000
Profit from trade carried on only by Quincy .................................................................
14 000
Interest received by Patricia from a source in the Republic ........................................
45 600
Rental received by Quincy (from a fixed property in the joint estate) .........................
6 000
Rental received by Patricia (from a fixed property – both the asset and the income
therefrom are specifically excluded from the joint estate) ...........................................
10 000
Rental received by Patricia (from movable property – the trade is only carried on by
her) ..............................................................................................................................
25 000
Proceeds from the sale of their primary residence, the base cost of which is
R300 000 .....................................................................................................................
3 000 000
SOLUTION
Patricia
Salary ......................................................................................................
Interest received (R45 600 × 50%) .......................................................
Less: Interest exemption (s 10(1)(i)(ii))(limited to interest received) .....
R60 000
R22 800
(22 800)
nil
Rental received from fixed property in the joint estate (R6 000 × 50%)
Rental received from fixed property excluded from the joint estate .....
Rental received from movable property ................................................
Taxable capital gain (note 2) ................................................................
3 000
10 000
25 000
124 000
Taxable income .........................................................................
R222 000
Quincy
Profit from trade ....................................................................................
Interest received (R45 600 × 50%) .......................................................
Less: Interest exemption (s 10(1)(i)(ii))(limited to interest received) .....
Rental received fixed property in the joint estate (R6 000 × 50%) ........
Taxable capital gain (note 2) ................................................................
Taxable income .........................................................................
R14 000
R22 800
(22 800)
nil
3 000
124 000
R141 000
continued
184
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Chapter 7: Natural persons
Notes
(1) Both spouses are entitled to a s 10(1)(i) exemption.
(2) The taxable capital gain is determined as follows:
Proceeds .................................................................
Less: Base cost .......................................................
Patricia
Quincy
Total
R1 500 000 R1 500 000 R3 000 000
(150 000)
(150 000)
(300 000)
R1 350 000
R1 350 000
R2 700 000
Less: Primary residence exclusion (par 45(2) of
the Eighth Schedule) ...............................................
(1 000 000)
(1 000 000)
(2 000 000)
Capital gain .............................................................
Less: Annual exclusion ...........................................
R350 000
(40 000)
R 350 000
(40 000)
R700 000
Net capital gain .......................................................
R310 000
R310 000
Taxable capital gain (40%) .....................................
R124 000
R124 000
7.5.3 ‘Income’ for the purpose of the deeming provisions in s 7
The court held that the term ‘income’ in s 7(2), (2A) and (2C) must be given its ordinary meaning, that
is, profits or gains or to use the language of the present Act, ‘income’ less all permissible expenditure
incurred in the production of income, and not its meaning as defined in s 1 (gross income less exempt income) (CIR v Simpson (1949 AD)). For example, if the excessive income earned by a wife
from a trade connected to that of her donor husband is to be included in the husband’s income in
terms of s 7(2)(b), it is submitted that it is the net income or gain derived from the business that must
be deemed to accrue to him.
7.5.4 Expenditure and allowances (s 7(2B))
Section 7(2B) ensures that any expenditure or allowance which relates to a portion of income in s 7(2)
and (2A) which is taxed in the donor spouse’s hands is matched with such income. In other words,
when income of the recipient spouse is deemed the income of the donor spouse, the expenditure or
allowances relating to that income will also be deemed available for the benefit of the donor spouse.
If the amount of income has to be split between the spouses, the expenditure or allowances will be
split accordingly.
The normal rules will, however, continue to apply in respect of expenditure that is deductible for tax
purposes but does not specifically relate to any particular income. In the case of medical expenses,
for instance, the expenditure will still be deductible in the hands of the spouse who paid the medical
expenses, notwithstanding the fact that the expenditure was discharged from funds belonging to the
joint estate.
In the case of contributions to a retirement fund, the contributions are deductible in the hands of the
member of the fund.
7.6 Separation, divorce and maintenance orders (ss 21, 10(1)(u) and 7(11))
A change in marital status during a year of assessment does not affect the tax situation of a natural
person, unless there is an application of s 7(2) or (2A).
Alimony payments are normally paid monthly from the after-taxed income of the paying spouse. It
therefore makes sense that the receiving spouse should not again be taxed on such amounts.
If the paying spouse refrains from paying, the receiving spouse can request the court to grant a
maintenance order instructing the paying spouse’s retirement fund to pay the total maintenance due
out of the minimum individual reserve of the paying spouse’s retirement fund. Such a maintenance
order and consequential payment is, however, a once-off event and the tax implications are set out in
s 7(11).
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7.6
The tax consequences of all alimony or maintenance payments are as follows:
Divorce on or before 21 March 1962
Divorce after 21 March 1962
Paying spouse
Section 21 deduction
No s 21 deduction
Section 7(11) inclusion in the income of
the paying spouse if his/her minimum
individual reserve was reduced in terms
of a maintenance order – this is a onceoff event
Receiving spouse
Paragraph (b) inclusion in gross income
Paragraph (b) inclusion in gross income
and s 10(1)(u) exemption
Example 7.21. Separation and divorce after 21 March 1962
Altus and Berta were divorced on 10 September 2016. There were three children out of the marriage, all of them under 18 years of age. Two of the children lived with Altus, their father, and
were maintained by him. The other child lived with Berta, the mother, and was partly maintained
by her. Altus derived a salary of R190 000 and dividend income (from a South African company)
of R3 000, and Berta derived a salary of R46 500 and interest from a source in the Republic of
R1 500 for the year of assessment. Altus paid alimony of R26 000 to Berta during the year, in
terms of the divorce order.
Calculate the normal tax payable by Altus and Berta for the 2021 year of assessment. Both are
under 65 years of age.
SOLUTION
Altus
Salary ......................................................................................................................
Dividends ................................................................................................................
Gross income ..........................................................................................................
Less: Dividend exemption (s 10(1)(k)(i)) ................................................................
Taxable income ......................................................................................
R190 000
3 000
R193 000
(3 000)
R190 000
(Altus cannot deduct the R26 000 maintenance paid.)
Normal tax determined per the tax table on R190 000 @ 18% ................................
Less: Primary rebate ................................................................................................
R34 200
(14 958)
Normal tax payable .................................................................................
R19 242
The company paying the dividend to Altus must withhold an amount of R600
(20% dividend tax) in terms of s 64E.
Berta
Salary .......................................................................................................................
Alimony.....................................................................................................................
Interest .....................................................................................................................
R46 500
26 000
1 500
Gross income ...........................................................................................................
Less: Alimony exemption (s 10(1)(u)) ......................................................................
Interest exemption (s 10(1)(i)(ii)) ....................................................................
Taxable income .......................................................................................
Normal tax determined per the tax table on R46 500 @ 18% ..................................
Less: Primary rebate ................................................................................................
Normal tax payable .................................................................................
R74 000
(26 000)
(1 500)
R46 500
R8 370
(14 958)
Rnil
In the case of non-residents who receive alimony, allowance or maintenance payments, the same
rules apply, if the source of the alimony is in South Africa. The source of the alimony or maintenance
is determined in terms of the originating cause principle (see chapter 5 and the Lever Bros case). It is
in South Africa if the order of divorce or judicial separation was granted in South Africa or the written
agreement of separation was entered into in South Africa.
The minimum individual reserve of a paying spouse’s retirement fund can be reduced by both a
maintenance order and a divorce order. Section 7(11) only affects a once-off deduction from a member’s
minimum individual reserve in terms of a maintenance order (and not in terms of a divorce order).
186
7.6±7.7
Chapter 7: Natural persons
Such a reduction means that the paying spouse will not be taxed on that amount when he or she
retires or withdraw from the retirement fund, and consequently s 7(11) provides that the tax
implications of such reduction will be in the hands of the member whose minimum individual reserve
is reduced. The member of the fund (being the paying spouse, and not the receiving spouse) must
include the sum of the following amounts deducted from his or her minimum individual reserve in his
or her income:
l the amount by which the minimum individual reserve of the member was reduced in terms of the
maintenance order, and
l the employees’ tax withheld by the fund in respect of the aforementioned amount.
There is also a par (b) inclusion in the gross income of the non-member spouse receiving the
amount, but the same amount is exempt in terms of s 10(1)(u).
The full amount included in the member’s income in terms of s 7(11) (the aforementioned sum) is
‘remuneration’ as defined (par (f) of the definition of ‘remuneration’ in the Fourth Schedule) and the
fund is therefore an employer. The fact that the employees’ tax deducted from the minimum individual
reserve also constitutes ‘remuneration’ creates a ‘tax-on-tax’ effect. The fund must therefore deduct
employees’ tax in respect of s 7(11) amounts by following the special steps laid out in Interpretation
Note No. 89 (see chapter 10).
A reduction from a member’s minimum individual reserve in terms of a divorce order is, however, not
taxed in the hands of the paying spouse. It is taxed as a retirement fund lump sum withdrawal benefit
in the hands of the receiving spouse (par 2(1)(b)(iA) of the Second Schedule) (see chapter 9).
7.7 Minor children (s 7(3) and (4))
When a minor child or stepchild receives taxable income in his own right, the income is subject to tax
in his own hands, unless s 7(3) or (4) applies. Aforementioned sections only apply if the income is
received by the minor child or stepchild by reason of any ‘donation, settlement or other disposition’
by a parent. Paragraph 69 of the Eighth Schedule contains an attribution rule similar to s 7(3) and (4)
in respect of any capital gain as a result of a donation, settlement or other disposition to a minor child
(please note that no reference is made to a minor stepchild in par 69).
In terms of the Children’s Act, children become majors at the age of 18 years. In terms of the Marriage Act, a person must be 18 years of age to enter into a legal marriage. Permission to marry may
however be granted to persons younger than 18 in certain specific circumstances. If a person enters
into a legal marriage, that person becomes a major. To determine whether a child is a minor for the
purposes of s 7(3) and (4), it has to be established whether the child has reached the age of 18 years
on the date of receipt or accrual of the income (and not on the date of the donation).
The courts concluded that the expression ‘donation, settlement or other disposition’ should be read
as ‘donation, settlement or other similar disposition’. The word ‘disposition’ was interpreted to mean
any disposal of property made wholly or to an appreciable extent gratuitously out of the liberality or
generosity of the disposer. The s 7 anti-avoidance rules do not apply to dispositions made at full
value or settlements made for full consideration.
For details regarding ss 7(5)–(10) and s 7C also dealing with donations and interest-free or lowinterest loans made to trusts, please refer to chapter 24. Any donations tax implications because of a
donation, settlement or other disposition of property can still apply – see chapter 26.
Section 7(3) – minor child or stepchild
Section 7(3) provides that income received by or accrued to a minor child or stepchild, or which has
been expended for the maintenance, education or benefit of the child, by reason of any donation,
settlement or other disposition made by the parent of such child, is deemed to be received by or
accrued to the parent of that child.
The words ‘by reason of’ indicate that the donation need not be made directly to the minor child or
stepchild. The causal link between the donation made by the parent and the income-benefit to the
minor child or stepchild is what must be established. Therefore, if a father donates an interestbearing investment to a trust of which his minor child is a beneficiary, any interest earned on such
investment and distributed to the minor child will be deemed the income of the father in terms of
s 7(3) and the interest is therefore taxed in the parent’s hands.
By contrast, income from a donation made by a parent to a major child is taxable in the child’s hands,
unless some other anti-avoidance provision is brought into effect, such as s 80A.
Case law confirms that the question of whether such income is received by reason of such a donation,
settlement or other disposition has to be determined from the facts in each particular instance. There
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7.7
are, however, contradictory decisions regarding the tax consequences of reinvested income (or
‘income upon income’). In one case it was held that s 7 did not apply to income received by the
minor from the use or reinvestment of the original income that had been derived. In another case it
was held that such income upon income was received by reason of the original donation and that s 7
applies.
Section 7(4) – cross donations involving a minor child
Section 7(4) is intended to prevent a parent from attempting to escape liability for tax in terms of
s 7(3) through the intervention of a third party via a cross donation. Section 7(4) deems the income
received by a minor child or stepchild from a donation, settlement or other disposition made by a
third party to be received by the child’s parent, if the child’s parent or his or her spouse has made a
cross-donation, settlement or other disposition to the third party or his or her family.
For example, A donates R10 000 to the minor child or stepchild of B and B, or his spouse, reciprocates by donating R10 000 to A or his family. Any income received by the minor child or stepchild of
B is deemed to be received by B. The tax implications of any income accruing to A or his family
because of the donation made by B is determined by the status of the person who receives the
income. If A’s major child, for example, receives income because of the donation by B, the major
child will be taxed thereon.
In the following instances, determine in whose hands the income will be assessed:
Example 7.22(a). Minor children
A father gratuitously transferred a sum of money into a savings account for the benefit of and in
the name of his child M, aged 17, and a further sum in the name of his stepchild N, aged 16. In
this manner, the child M received R4 500 interest, while the stepchild N received R6 000 interest.
SOLUTION
Both M’s interest of R4 500 and N’s interest of R6 000 are deemed to be the income of the father
(s 7(3)).
Example 7.22(b). Minor children ± continued
A minor child received R5 000 interest during a year on a donation of R100 000 made to him by
his father. The R5 000 was used to purchase shares in a company, and the child received a
dividend of R2 000 from the company.
SOLUTION
The R5 000 interest received by the minor child is deemed to be the income of the father (s 7(3)).
Whether s 7(3) also applies to the dividend will depend on the specific facts. It must be proved
that the income on the reinvested money was received ‘as a result of’ the donation of the father.
Case law has given different judgments regarding the notion of ‘income upon income’.
Example 7.22(c). Minor children ± continued
A man who is married out of community of property donated R100 000 to a trust. In terms of the
trust deed, his minor child has a vested right to the income, but the income was to be accumulated for the benefit of his minor child and the income will only be paid out only when he reached
the age of 25. His wife would succeed to the capital of the trust. During the year the trustees
received R6 000 interest, which was accumulated as stipulated.
188
7.7±7.8
Chapter 7: Natural persons
SOLUTION
The R6 000 interest received by the trustees is deemed to be the income of the father. Section 7(3) can apply, since the income is received ‘in favour of’ and being accumulated for the
benefit of the minor child who has a vested right thereto. The fact that the capital is not donated
to the child is irrelevant.
In practice, SARS applies s 7(5) whenever there is a withholding of income in terms of the trust
deed, no matter whether the beneficiaries have a vested right to the income or merely a contingent right or whether their right to income depends upon the exercise of the trustee’s discretion. It is therefore submitted that s 7(5) can alternatively apply to the R6 000, with the same
outcome, namely that the amount is deemed to be the income of the father.
Example 7.22(d). Minor children ± continued
A minor child works in her father’s business and received a salary of R30 000 for the year. She
received a cash legacy during the year from a deceased uncle and received R1 000
interest on the investment of this sum.
SOLUTION
The salary of R30 000 received from the father is assessed in the hands of the minor child, since
it has not been received by reason of any gift or donation made by the father. Section 7(3) is not
applicable. The R1 000 interest received on the investment of the cash legacy is taxed in the
hands of the child. Section 7(3) is not applicable since the amount has not been received by
reason of a donation, settlement or other disposition, but a legacy.
Example 7.22(e). Minor children ± continued
X (aged 17) and Y (aged 23) received donations from K. The interest from these donations was
R7 500 for X, and R6 000 for Y during a tax year. Z, the father of X and Y, reciprocated and donated a sum of money to K’s child M, aged 16. M received interest amounting to R4 500 for the
year of assessment on the investment of this sum.
SOLUTION
X’s interest of R7 500 is deemed the income of Z (s 7(4)). Y’s interest of R6 000 is assessed in his
own hands. Section 7(4) does not apply, since Y is a major child. M’s interest of R4 500 is
deemed the income of K (s 7(4)).
7.8 Antedated salaries and pensions (s 7A)
Section 7A provides for the spread, in arrears, of an ‘antedated salary or pension’.
An ‘antedated salary or pension’ is a salary (excluding any bonus) or pension payable with retrospective effect in respect of a period ending on or before the date of the grant (s 7A(1)).
If the accrual period dates back to before 1 March of the current year of assessment, the taxpayer
can elect as follows to spread the taxability of the payment:
l Accrual period commences not more than two years before 1 March of the current year of
assessment: apportion the total accrual period on the basis of the number of months in each year
of assessment (s 7A(2)(a)).
l Accrual period commences more than two years before 1 March of the current year of assessment: the antedated salary or pension will be deemed to have been received or accrued in three
equal annual instalments. One-third will be taxed in each of the current and previous two years of
assessment (s 7A(2)(b)). The previous two years’ assessments will be reopened and reassessed.
The employer who pays a s 7A amount must obtain a directive from SARS regarding the amount of
employees’ tax that must be withheld and paid over to SARS in respect of the s 7A amount. If the
employee makes no election, the full amount will be taxed in the year of receipt. A taxpayer will make
the election if his average tax rate in the previous years of assessment is lower than the current year
of assessment.
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7.8
Example 7.23. Antedated salaries and pensions
Mrs A, the widow of the late Mr A, is awarded a permanent grant, made with retrospective effect,
of an increase in the pension she receives from the employer of the late Mr A. The increase in
pension, which amounts to R4 500, becomes effective and is paid to Mrs A on 28 February 2021.
The retrospective increase relates
(a) to the period 1 September 2019 to 28 February 2021, and
(b) to the period 1 September 2017 to 28 February 2021.
What amount is deemed to accrue to Mrs A in terms of s 7A for the years of assessment ending
on the last day of February 2018, 2019, 2020 and 2021 if she elects to enjoy the application of
the section?
SOLUTION
‘Antedated pension’ = R4 500
‘Accrual period’
Under (a): 1 September 2019 to 28 February 2021 (18 months).
Commences not more than two years before 1 March 2020 (commencement of
year of assessment during which actual receipt takes place).
Under (b): 1 September 2017 to 28 February 2021 (42 months).
Commences more than two years before 1 March 2020.
The antedated pension is deemed to have accrued as follows:
Years of assessment
2018
2019
2020
2021
(year of actual accrual)
Under (a) .........................
–
–
R1 500 (6/18)
R3 000 (12/18)
Under (b).........................
–
R1 500 (1/3)
R1 500 (1/3)
R1 500 (1/3)
Example 7.24. The tax calculation of a natural person
ABC Ltd employs Kelvin, aged 32 and unmarried, as a sales manager. He also carries on a small
business as a sole trader. His income and expenditure for the year of assessment that ended
28 February 2021 were as follows:
Income:
Salary from ABC Ltd ......................................................................................
R150 000
Non-pensionable commission from ABC Ltd .................................................
50 000
Interest received
From a source outside the Republic........................................................... R4 800
From a source in the Republic ..................................................................
4 000
8 800
Income from trade .........................................................................................
29 400
Expenses:
Deductible expenses related to trade ...........................................................
R24 550
Pension fund contributions made by Kelvin...................................................
18 000
Retirement annuity fund contributions made by Kelvin .................................
9 000
Donations to an approved public benefit organisation (the required re7 000
ceipt was obtained) .......................................................................................
Qualifying medical expenses (not a member of a medical scheme) .............
24 400
Other:
Aggregated capital gains ..............................................................................
51 000
Assessed loss ................................................................................................
10 000
Calculate the normal tax payable by Kelvin for the year of assessment ended 28 February 2021.
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7.8
Chapter 7: Natural persons
SOLUTION
Salary .......................................................................................................
Commission .............................................................................................
Interest received ......................................................................................
Income from trade ....................................................................................
R150 000
50 000
8 800
29 400
Gross income ...........................................................................................
Less: Exempt income
Interest exemption (s 10(1)(i)(ii))
– interest from a source in the Republic .......................................
R238 200
R4 000
(4 000)
Income (Subtotal 1) ..................................................................................
Less: Deductions
Deductible expenses related to trade ............................................
R234 200
Subtotal 2 .................................................................................................
Less: Assessed loss (s 20) ......................................................................
R209 650
(10 000)
Subtotal 3 .................................................................................................
Add: Taxable capital gain (s 26A) R11 000 (R51 000 – R40 000) ×
40% ................................................................................................
R199 650
Subtotal 4 .................................................................................................
Less: Actual contributions to retirement funds (s 11F)
= R27 000 (R18 000 + R9 000)
Limited to the lesser of
l R350 000 (s 11F(2)(a)), or
l 27,5% × the higher of
– Remuneration of R200 000 (R150 000 + R50 000)
– Taxable income of R204 050 (subtotal 4 after the taxable
capital gain)
Therefore 27,5% × R204 050 = R56 114 (s 11F(2)(b)), or
l R199 650 (s 11F(2)(c)) (subtotal 3 taxable income before the
taxable capital gain)
Therefore R56 114, but deduction is limited to actual contributions ........
R204 050
Subtotal 5 .................................................................................................
Less: Donation to public benefit organisations (s 18A)
Actual donation (R7 000) limited to
l 10% × R177 050 = R17 705 (limited to actual donation) ..........
R177 050
Taxable income ................................................................................
R170 050
Normal tax determined per the tax table on R170 050 @ 18% ................
Less:
Primary rebate ......................................................................
Section 6B credit (note 3) ....................................................
Normal tax payable ..........................................................................
(24 550)
4 400
(27 000)
(7 000)
R30 609
(14 958)
(2 912)
R12 739
Notes
(1) It is submitted that taxable capital gains are taken into account in determining the taxable
income for the 27,5% limit – see 7.4.1.
(2) The limitation in s 18A refers to taxable income, which therefore also includes taxable capital
gains.
(3) There is no s 6A medical tax credit (not a member of a medical scheme) and the s 6B medical tax credit is calculated as follows: (R24 400 – R12 754 (7,5% × R170 050)) = R11 646 ×
25% = R2 912.
191
8
Employment benefits
Linda van Heerden and Maryke Wiesener
Outcomes of this chapter
After studying this chapter you should be able to:
l apply the provisions of the Act, the Seventh Schedule and the VAT Act in respect of
employment benefits in both practical calculation questions and theoretical advice
questions
l demonstrate your knowledge with regard to employment benefits by means of an
integrated case study.
Contents
8.1
8.2
8.3
8.4
8.5
8.6
8.7
8.8
Overview ..........................................................................................................................
Allowances (s 8(1)) ..........................................................................................................
Specific allowances .........................................................................................................
8.3.1 Travel allowances (ss 8(1)(a)(i)(aa) and 8(1)(b)) ................................................
8.3.2 Subsistence allowances (ss 8(1)(a)(i)(bb) and 8(1)(c))......................................
8.3.3 Allowances to public officers (ss 8(1)(a)(i)(cc) and 8(1)(d)–(g)) ........................
Seventh Schedule taxable benefits .................................................................................
8.4.1 Benefits granted to relatives of employees and others ......................................
8.4.2 Consideration paid by employee ........................................................................
8.4.3 Employer’s duties ................................................................................................
8.4.4 Assets acquired at less than actual value (paras 2(a) and 5) ............................
8.4.5 Use of sundry assets (paras 2(b) and 6) ............................................................
8.4.6 Right of use of motor vehicles (paras 2(b) and 7) ..............................................
8.4.7 Meals, refreshments and meal and refreshment vouchers (paras 2(c) and 8) ..
8.4.8 Residential accommodation (paras 2(d) and 9) .................................................
8.4.9 Holiday accommodation (paras 2(d) and 9) .......................................................
8.4.10 Free or cheap services (paras 2(e) and 10) .......................................................
8.4.11 Low-interest debts (paras 2(f), 10A and 11) .......................................................
8.4.12 Subsidies in respect of debts (paras 2(g), (gA) and 12) ....................................
8.4.13 Release from or payment of an employee’s debt (paras 2(h) and 13) ...............
8.4.14 Contributions to medical schemes (benefit funds) (paras 2(i) and 12A) ...........
8.4.15 Costs relating to medical services (paras 2(j) and 12B) ....................................
8.4.16 Benefits in respect of insurance policies (paras 2(k) and 12C) .........................
8.4.17 Contributions by an employer to pension and provident funds
(paras 2(l) and 12D) ............................................................................................
8.4.18 Contributions by an employer to bargaining councils (paras 2(m) and 12E) ....
Right to acquire marketable securities (s 8A) .................................................................
Broad-based employee share plans (s 8B) .....................................................................
Taxation of directors and employees at the vesting of equity instruments (s 8C) ..........
8.7.1 Restricted versus unrestricted instruments ........................................................
8.7.2 Vesting as the tax event ......................................................................................
8.7.3 Calculation of gain or loss upon vesting .............................................................
8.7.4 Impact of s 8C on capital gains tax ....................................................................
Mauritius and United Kingdom Double Tax Agreements (DTAs): Income from
employment (Article 14) ...................................................................................................
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8.1 Overview
Employment benefits can consist of a combination of a cash salary, taxable (fringe) benefits, allowances and advances. Amounts (other than allowances and advances in terms of s 8(1) and gains in
terms of ss 8B and 8C) paid in respect of services rendered or employment in the form of cash (like a
salary), are included in gross income in terms of par (c) of the definition of gross income.
Benefits or advantages given by employers to employees by virtue of employment or as a reward for
services rendered or to be rendered, in a form other than cash, are defined as ‘taxable benefits’ in
par 1 of the Seventh Schedule (see 8.4 for detail), and are generally referred to as fringe benefits.
The taxable value of fringe benefits (referred to as the ‘cash equivalent’) is included in gross income
through the application of par (i) of the definition of ‘gross income’.
Receipts in respect of services rendered (par (c) of the definition of gross income – see chapter 4)
are subject to par (i) (proviso (i) to par (c)). This means that if a ‘taxable benefit’ as defined is
received, par (c) will not apply since par (i) already applies. It is therefore important to determine
whether a benefit is a ‘taxable benefit’, and also whether the Seventh Schedule specifically excludes
a specific type of benefit as a taxable benefit, or merely states that no value must be placed on it.
If the definition of ‘taxable benefit’ in the Seventh Schedule specifically excludes a benefit granted to
an employee as a taxable benefit, it means that the Seventh Schedule does not apply to the benefit
and that it cannot be included in gross income in terms of par (i). It can, however, still be included in
gross income in terms of par (c), being an amount received in respect of services rendered. Any
benefit, the amount or value of which is exempt from tax in terms of s 10 (see ss 10(1)(nA) to (nE), (o)
and (q) in chapter 5), is, for example, specifically excluded from the definition of ‘taxable benefit’ in
the Seventh Schedule. Such benefits or amounts can therefore not be included in gross income in
terms of par (i). As mentioned earlier, it can be included in gross income in terms of par (c) (see
discussion in chapter 4) but will be exempt in terms of s 10.
If the Seventh Schedule states that no value must be placed on a benefit (for example if the employer
continues to pay the employee’s contributions to the medical scheme after retirement in
par 12A(5)(a)), it means that there is still a taxable benefit (as defined) and that it must be included in
gross income in terms of par (i), even though the cash equivalent of the taxable benefit is Rnil. Par (c)
can consequently not apply to such a no value taxable benefit.
Employers can also pay cash allowances or advances to employees. All cash allowances and
advances are included in taxable income (and not in gross income – please refer to the comprehensive framework in chapter 7) of the recipient (s 8(1)). Any portion of an allowance, to the extent
that it is either exempt from normal tax under s 10(1), or that it is actually expended for one of the
three specific purposes as listed below, is excluded from the amount to be included (s 8(1)). An
example of an allowance that is exempt in terms of s 10(1) is a uniform allowance meeting all the
requirements of s 10(1)(nA). Such an exempt uniform allowance remains an amount received in
respect of services rendered and even though such an amount is specifically excluded from the
amount to be included in taxable income in terms of s 8(1), it must still be included in gross income in
terms of par (c) of the gross income definition. The amount will be exempt in terms of s 10(1)(nA).
This implies that no employees’ tax needs to be withheld from such amounts since it is not ‘income’,
which is a requirement of the definition of ‘remuneration’ in the Fourth Schedule.
The three specific purposes listed in s 8(1), in respect of which amounts expended are excluded
from the amount to be included in taxable income, all relate to business expenditure and are
l travelling on business
l accommodation, meals and incidental costs incurred when spending a night away from one’s
usual place of residence for work purposes, and
l expenses incurred by the holders of a public office.
The effect of the exclusion of the aforementioned amounts specifically expended for business purposes is that the net amounts (meaning the gross allowance or advance received less any portion
spent for business purposes) of travel allowances, subsistence allowances and allowances for holding a public office are included in the taxable income of that person (s 8(1)(a)(i)(aa)–(cc)) (see 8.3).
Since no portion of any allowances, other than the aforementioned three specific types of allowances,
is excluded in terms of s 8(1), the gross amounts of all other allowances, for example child care
allowances, must be included in taxable income. All these allowances are therefore taken into
account in the calculation of ‘taxable income’ for the purposes of the deduction for contributions to
retirement funds in s 11F – see the comprehensive framework and the subtotal method in chapter 7.
Employees also obtain equity instruments as remuneration in certain instances. Section 8B (which
replaced s 8A) and s 8C contain the rules regarding the tax implications of the acquisition of such
equity instruments by employees.
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The following table summarises the differences and similarities regarding the aforementioned employment benefits:
Include in gross income
Include in income
Include in taxable income
Cash equivalent of any taxable
benefit in terms of the Seventh
Schedule (including taxable benefits with no value) (par (i) of the
definition of gross income)
The applicable value of benefits
excluded from the definition of
‘taxable benefit’ (if par (c) of the
definition of gross income applies)
Section 8B(1): gain on disposal of
a qualifying equity share (except
specific exclusions)
The net amount of any allowance
or advance (after deducting any
portion thereof expended for specified business purposes) in the
case of
l travel allowances
l subsistence allowances
l allowances for holding a public
office
(s 8(1)(a)(i))
Section 8A gain (only valid in respect of rights acquired before
26 October 2004) (par (i) of the
definition of gross income)
Section 8C(1): gain on the vesting
of an equity instrument obtained
by virtue of employment or office
as a director
The gross amount of any other
allowance or advance not listed
above (s 8(1)(a)(i))
Except where otherwise stated, for the purposes of this chapter, the employer is a registered VAT
vendor and references to paragraphs in this chapter are references to paragraphs of the Seventh
Schedule. The cash equivalents of taxable benefits and the amount that respresents ‘remuneration’
are not always the same. The rules contained in the Fourth Schedule that must be applied by
employers in order to calculate the ‘remuneration’ amount (the amount on which employees’ tax must
be withheld) are also briefly discussed at each taxable benefit (see chapter 10 for detail).
8.2 Allowances (s 8(1))
A principal (as defined) can grant an allowance or advance to an employee to incur business-related
expenditure, or can merely reimburse an employee for such expenditure. A ‘principal’, as defined,
includes an employer, as well as the authority, company, body or other organisation in relation to
which an office is held, or any associated institution in relation to the aforementioned (s 8(1)(a)(iii))
(see 8.3.1).
Interpretation Note No. 14 (Issue 4) dated 18 March 2019 explains the difference between the terms
‘allowance’, ‘advance’ and ‘reimbursement’:
l An allowance is an amount of money granted by an employer to an employee to incur businessrelated expenditure on behalf of the employer, without an obligation on the employee to prove or
account for the business-related expenditure to the employer. The amount of the allowance is
based on the anticipated business-related expenditure.
l An advance is an amount of money granted by an employer to an employee to incur businessrelated expenses on behalf of the employer, with an obligation on the employee to prove or
account for the business-related expenditure to the employer. The amount of the advance is
based on the anticipated business-related expenditure. The employer recovers the difference
from the employee if the actual expenses incurred are less than the advance granted and vice
versa.
l A reimbursement of business-related expenditure occurs when an employee has incurred and
paid for business-related expenditure on behalf of an employer without having had the benefit of
an allowance or an advance, and is subsequently reimbursed for the exact expenditure by the
employer after having proved and accounted for the expenditure to the employer.
Interpretation Note No. 14 (Issue 4) further states that the nature of allowances, advances and reimbursements is frequently misunderstood, as are the reasons for granting recipients such amounts. In
this regard, it states that:
l Any allowance, advance or reimbursement is a reflection of business-related expenditure or
anticipated business-related expenditure of the employer. A payment to an employee under the
disguise of an allowance, but actually for services rendered or to be rendered, is subject to tax
under the normal provisions of ‘gross income’ and is not treated as an allowance under s 8(1)(a).
The label of a payment does not necessarily correctly reflect the true nature of the payment.
l The judgment in ITC 15231 confirmed that when the word ‘allowance’ is used in an employeeemployer relationship, it means a grant of something additional to ordinary wages. The taxpayer,
in that case, had received a salary and sought to claim a deemed subsistence expenditure
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deduction against his salary. The court held that he had not received an allowance as he had not
received anything extra and was not automatically entitled to the deduction provided for in s 8(1).
l A typical misconception is that the quantum of an allowance or advance does not have to reflect
the anticipated business expense. This misconception is sometimes caused by the incorrect
understanding that an allowance can, without reference to the actual expenditure anticipated, be
based on the amounts of expenditure that are deemed to have been incurred by the Act under
specified circumstances and that the employee will automatically be entitled to a tax deduction
against that “allowance”. The misconception means that employees sometimes receive
allowances that are much greater than the true anticipated business expense.
All amounts paid or granted by a principal to a recipient (the person receiving the amount, for
example the employee) as an allowance or advance must be included in taxable income excluding
any portion thereof that
l is exempt from normal tax under s 10, or
l has not actually been expended for the specific purposes stated (in s 8(1)(a)(i)(aa)–(cc)) in the
case of travelling on business, subsistence and the holding of a public office.
Including an amount in taxable income implies that the amount so included is the final taxable
amount. As previously stated, either the net or the gross amount of allowances and advances is
included in taxable income.
The Act specifically allows deductions for business-related expenditure only in respect of allowances
or advances received in respect of travelling on business, subsistence and the holding of a public
office (s 8(1)(a)(i)(aa)–(cc)). This implies that a net amount is included in taxable income only in these
instances.
Since the gross amounts in respect of all other allowances or advances are included in taxable
income (as the final taxable amount), no expenditure can reduce the amount of such allowances or
advances to be included in taxable income. The full gross amounts of all other allowances, for
example clothing allowances, child-care allowances, allowances for the use of a cell phone or
entertainment allowances, are consequently included in taxable income as the final taxable amount.
It is clear from the explanations of the terms ‘advance’ and ‘reimbursement’ that the amount of the
business-related expenditure incurred by the employee and proven to the employer will, in the end,
be equal to the amount of the advance or reimbursement. It consequently seems fair that the
definition of ‘remuneration’ excludes ‘any amount paid or payable to an employee wholly in reimbursement of expenditure actually incurred by such employee in the course of his employment’ (specific
exclusion (vi) to the definition of ‘remuneration’ in the Fourth Schedule).
Until 28 February 2021, an amount paid by a principal as reimbursement or advance is not included in
the recipient’s taxable income if it is or will be used for expenditure incurred or to be incurred by him
l on the instruction of his principal in the furtherance of the principal’s trade(s 8(1)(a)(ii)(aa)); and
l where the recipient must account to his principal for the expenditure incurred and must provide
proof that the expenditure was wholly so incurred (s 8(1)(a)(ii)(bb)).
Where such expenditure is incurred to acquire an asset, the ownership of the asset must vest in the
principal (proviso to s 8(1)(a)(ii)).
Where an employee is therefore obliged to be away from the office on a day trip, and such employee
purchases meals and incurs incidental costs (for example purchases lunch, uses an Uber or the
Gautrain, uses airport parking) in the furtherance of the employer’s trade, but the employee has not
been explicitly instructed by the employer to purchase meals and incur incidental costs as required
by s 8(1)(a)(ii)(aa), the reimbursement is subject to tax in the employee’s hands.
The aforementioned strict requirement regarding the specific instruction of the employer in
s 8(1)(a)(ii)(aa) is amended with effect from 1 March 2021. Either
l such instruction, or
l being allowed by the employer to incur expenditure on meals and other incidental costs while
obliged to spend a day or part of a day away from the employee’s usual place of work or employment, not exceeding the amount determined by notice in the Gazette,
will from that date cause the reimbursement of expenditure incurred in the furtherance of the
employer’s trade not to be included in the employee’s taxable income.
The definition of ‘variable remuneration’ in s 7B includes any such reimbursement of expenditure in
terms of 8(1)(a)(ii). This means that such amount accrues to the employee and is deductible by the
employer on the date on which the employer pays the reimbursement or advance to the employee.
This might seem to indicate that such reimbursements and advances will be taxable, but since
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s 8(1)(a)(ii) makes it clear that reimbursements and advances meeting the requirements of that section are not included in taxable income, it is suggested that the inclusion of reimbursement of expenditure in the variable remuneration definition of s 7B merely governs the timing of the employer’s
deduction of the reimbursement.
Interpretation Note 14 (Issue 4) makes it clear that
l the aforementioned non-inclusion of reimbursements in the specific circumstances does not
apply to what is called ‘travel reimbursements’ made by an employer to an employee. The
meaning of ‘travel reimbursements’ is explained as ‘reimbursements for the actual business kilometres travelled at an employer-agreed rate per kilometre’, and
l the provisions of ss 8(1)(a)(i) and 8(1)(b) must still be applied to ‘travel reimbursements’ when
determining the amount, if any, which must be included in the recipient’s taxable income.
In the context of travel, an allowance or advance therefore includes both a fixed travel allowance and
a travel reimbursement (a reimbursive travel allowance – see 8.3.1). A recipient who receives a travel
allowance and a travel reimbursement must add the amount of the travel reimbursement to the
amount of the travel allowance and then deduct the calculated allowable deduction based on the
business kilometres travelled in order to determine the net amount to be included in taxable income.
Any allowance or advance to government employees who are stationed outside South Africa or
persons rendering services for an employer in the public service are excluded from the provisions of
s 8(1) if they are attributable to services rendered by that person outside South Africa (s 8(1)(a)(iv)).
8.3 Specific allowances
The three specific allowances or advances and the expenditure listed in s 8(1)(b) to (d), deductible
against it in the calculation of the net amounts to be included in taxable income, are explained below.
8.3.1 Travel allowances (ss 8(1)(a)(i)(aa) and 8(1)(b))
An employer (the principal) can pay two types of travel allowances to an employee (the recipient):
l a fixed travel allowance, which means that the employee receives the same amount as an
allowance monthly, irrespective of the actual business kilometres travelled by the employee in
any motor vehicle (it is interesting to note that Interpretation Note No. 14 refers to ‘a private motor
vehicle’ while the Act refers to ‘any motor vehicle’). Both allowances in respect of transport
expenses (s 8(1)(b)(i)) and allowances for defraying expenditure in respect of any motor vehicle
used for business purposes (s 8(1)(b)(ii)) can be paid as monthly fixed travel allowances, or
l a reimbursive travel allowance or advance based on the actual business kilometres travelled by
the employee in any motor vehicle (s 8(1)(b)(iii)). The employee therefore first travels for business
and the employer then pays the reimbursive allowance calculated at an employer-agreed rate
per kilometre based on the actual business kilometres travelled.
By allowing expenditure incurred by the recipient for business travel as a deduction, the effect is that
the employee will only be taxable on the portion of the travel allowance expended in using any motor
vehicle for private travel.
Both travel allowances for defraying expenditure in respect of any motor vehicle used for business
purposes (s 8(1)(b)(ii)) and reimbursive travel allowance (s 8(1)(b)(iii)) are included in the definition of
‘variable remuneration’ (s 7B, par (b) of the definition). This means that the allowances are only
deemed to accrue to the employee, and to be incurred by the employer, when it is paid to the
employee. This allows for the timely matching of the inclusion in the employee’s taxable income, the
deduction by the employer and the responsiblity of the employer to withhold employees’ tax on travel
allowances.
The provisos to both travel allowances for defraying expenditure in respect of any motor vehicle used
for business purposes (s 8(1)(b)(ii)) and reimbursive travel allowances (s 8(1)(b)(iii)) makes it clear
that where such allowance is deemed to accrue in the year of assessment during which it is paid (in
terms of s 7B), the distance travelled for business purposes in respect of that allowance shall also be
deemed to be travelled in such year of assessment. The provisos hereby ensure that the business
kilometres travelled are aligned with the accrual of the allowance received in relation to the said
travel. If an employee has, for example, travelled business kilometres in February 2021, but the reimbursive travel allowance in respect thereof is only paid in March 2021 (in the 2022 year of assessment), the employee can claim the business kilometres travelled in February 2021 in March 2021.
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Interpretation Note No. 14 (Issue 4) gives the following examples of private travel:
l a tax consultant employed by a law firm in Johannesburg travels from home in Pretoria to the law
firm’s office: the travel between home and the office
l an assistant employed to work as a shop assistant at a V&A Waterfront store in Cape Town (the
employer has stores all over South Africa, including other 14 stores in the Cape Town area)
travels from a friend’s house to the V&A Waterfront store: the travel between the friend’s house
and the store, and
l an assistant employed to work as a shop assistant at a V&A Waterfront store in Cape Town for
two days a week and the Canal Walk Store in Cape Town for three days a week (the employer
has stores situated all over South Africa, including other stores in the Cape Town area) travels
from home to a store: the travel between home and either of the stores.
In terms of Interpretation Note No. 14 (Issue 4) examples of business travel include, where
l an employee whose place of employment is in Johannesburg leaves the office at lunch time to
attend a business conference in Krugersdorp: the travel between the office and the conference
venue in Krugersdorp
l a consultant stops to see a client en route to his place of employment: the travel between home
and the client’s premises and the travel after the meeting from the client’s premises to the office
l a sales assistant normally works at an employer’s store in the V&A Waterfront, Cape Town travels
directly from home to the employer’s store in Pretoria to assist with an annual stock count: the
travel between home in Cape Town and Pretoria
l an employee located in Kimberley is required to assist a client in Upington over a five-day period:
the travel from Kimberley to Upington, and
l a computer programmer who is allowed to work from home permanently (that is, the home office
is the place of employment) travels to a client’s premises to discuss system requirements and
functionality: the travel from the home office to the clients’ premises.
It is submitted that, if an employer reimburses an employee for actual expenditure incurred and
proven by the employee on the specific instruction of his employer for business travel, it will not be a
reimbursive travel allowance, but a reimbursement that needs not be included in the employee’s
taxable income (s 8(1)(a)(ii)). An example of this is when the employee, on the specific instruction of
his employer and in the furtherance of the employer’s trade, uses an Uber or a taxi to travel from the
employer’s office to another destination for business purposes and must supply proof of the amount
expended to the employer. As previously indicated, the definition of ‘variable remuneration’ in s 7B
includes any such reimbursement of expenditure. This might seem to indicate that such reimbursements will be taxable, but since s 8(1)(a)(ii) makes it clear that reimbursements meeting the requirements of that section are not included in taxable income, it is suggested that this rule operates, in that
instance, to govern only the timing of the employer’s deduction of the reimbursement.
However, if an employee is reimbursed based on the actual business kilometres travelled by the
employee in any motor vehicle at the employer-agreed rate per kilometre, it will be seen as a
reimbursive travel allowance and will be taken into account in determining the net amount to be
included in taxable income.
Fixed travel allowance
Where a fixed travel allowance or advance is paid monthly, the portion of the travel allowance that is
expended in using any motor vehicle to travel for business purposes is effectively tax-free. Only that
part associated with private travelling will therefore fall into the recipient’s taxable income. Travelling
between the recipient’s place of residence and his or her place of employment is not regarded as
business travel (s 8(1)(b)(i)).
The portion of the allowance expended to travel for business purposes can be calculated based on
actual cost or on deemed cost, but both are linked to the actual business kilometres travelled. In
terms of Interpretation Note 14 (Issue 4), if a taxpayer wants to claim the cost of business travel, he or
she must base the claim on the actual business kilometres travelled and is required to prove the
business kilometres travelled to the satisfaction of the Commissioner. Written records of this
information are often referred to as a logbook. It is not necessary to record details of private travel (for
example, that the recipient went to the movies on ‘x’ date and the distance travelled was ‘y’
kilometres) or daily opening and closing odometer readings. A logbook that taxpayers may use is
available on the SARS website. For both the actual cost and deemed cost method, amounts
expensed for business purposes can only be claimed if the taxpayer keeps an accurate logbook of
the business kilometres travelled.
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The employee can use any motor vehicle for this purpose. The Act does not define the term ‘motor
vehicle’. The normal dictionary meaning (being a road vehicle powered by a motor or engine, which
will include a motor cycle) must be attached to it, and not the meaning given to the word ‘motor car’
in the VAT Act. In terms of Interpretation Note 14 (Issue 4) logbooks must include, at a minimum, the
following information:
l the odometer reading on the first day of the tax year
l the odometer reading on the last day of the tax year
l for all business travel
– the date of the travel
– the kilometres travelled, and
– business travel details (where and reason for trip).
Please note!
If a taxpayer has the right of use of a par 7 company car and also receives a
fixed or a reimbursive travel allowance in respect of the same vehicle from
his employer, the net amount of the travel allowance is not included in
taxable income. In such a case
l the full travel allowance will be included in taxable income
l no deductions are allowed against the travel allowance (see Interpretation Note No. 14 Issue 4), par 5.4.1), and
l the company car is taxed in terms of par 7 and the par 7(7) and 7(8)
reductions will be allowed against the value of private use of that company car (see 8.4.6).
The two ways to calculate the portion of the allowance or advance expended to travel for business
are as follows:
l Actual business kilometres travelled during the year of assessment multiplied by the deemed rate
per kilometre which is determined by reference to the table of rates annually published by the
Minister of Finance.
l Actual business kilometres travelled during the year of assessment multiplied by the actual rate
per kilometre. The actual rate per kilometre is the total actual travel expenditure (as supported by
accurate records kept) divided by the total kilometres travelled.
The table of rates prescribed from 1 March 2020 (Notice 271 of GG 43073, dated 6 March 2020) is
applicable in respect of the 2021 year of assessment and is reproduced in Appendix C.
The deemed rate per kilometre
The deemed rate per kilometre is determined as the sum of the three components in the table of
rates. Please note that the fixed cost component is given in rand, while the fuel and maintenance
components are given in cents per kilometre (with one decimal given in the table). This firstly implies
that the three components cannot merely be added together in order to calculate the deemed rate
per kilometre, since they are not all expressed on the same basis. It is therefore necessary to ensure
that all three cost components are either in cent per kilometre or rand per kilometre before they are
added together. The table of rates uses the ‘value’ of the vehicle to determine the amounts for the
three cost components of the deemed rate per kilometre.
The ‘value’ of the vehicle (see Appendix C) is
l the original cost, including VAT but excluding any finance charges or interest payable in respect of
the acquisition of the motor vehicle, where the vehicle was acquired under a bona fide agreement
of sale or exchange
l the cash value, including VAT paid under the lease, if the vehicle was held by the recipient of the
allowance under a lease under which the rent consists of a stated amount of money, which
includes finance charges, or was held by him under a financial lease, or
l the market value of the vehicle at the time when the recipient first obtained it or the right of use of
it, plus VAT on the market value, in any other case.
The Rate per Kilometre Schedule (an external annexure to the SARS Guide for employers in respect
of allowance for the 2020 tax year) explains that where an employer sells his/her motor vehicle to
his/her employee and pays the employee a travelling allowance, the value of the vehicle, which must
be applied for purposes of s 8(1)(b), is the selling price (i.e. the price paid by the employee for the
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vehicle) and not the original purchase price (value) to the employer. No such external annexure is
available for the 2021 tax year, but it is submitted that the same rule will apply.
Interpretation Note No. 14 (Issue 4) explains that the value of the vehicle includes the cost of a maintenance plan when the vehicle is the subject of a maintenance plan. This is if the maintenance plan
commences at the same time the motor vehicle is acquired by the recipient irrespective of whether
the cost of the plan is separately invoiced or included in the vehicle purchase price. The effect of this
is that the maintenance cost component must not be added in the calculation of the deemed cost per
kilometre if the vehicle was the subject of a maintenance plan when it was acquired by the recipient,
since the value of the vehicle will effectively already include an element for maintenance (see below).
The deemed rate per kilometre is determined as the sum of the following three components:
l The fixed cost component
The fixed cost component represents the rand value of the cost of wear-and-tear, interest, licence
and insurance for both private and business kilometres for a full year of assessment. If the vehicle
is used for business purposes for less than the full year, the rand value must therefore firstly be
apportioned on the days in a full year (365 days, and presumably 366 days in a leap year due to
the words ‘during the year of assessment’ used in par 2(a) of the Regulation in Appendix C) to
calculate the rand value of the fixed cost for the period it was used. Thereafter it is divided by the
total kilometres travelled (for both private and business purposes) during the same period that
the vehicle was so used, in order to calculate the rand value of the fixed cost per kilometre.
Interpretation Note 14 (Issue 4) explains that the word ‘used’ means the period that the vehicle
was put into service or action during which the taxpayer had the ability to use the vehicle, that is,
when it was available for the taxpayer to use. The period of business use will thus commence
from the date that an employee becomes required to use a vehicle for business purposes and
has a vehicle available for such purpose. A vehicle therefore does not need to be actually used
every day during a particular period in order for that day to qualify as a period of ‘use’.
Since the fixed cost component is given in rands per kilometre while the other two components are
given in cents per kilometre, we suggest that this rand value of the fixed cost per kilometre (for
example R3,8736) must be changed to a rate of fixed cost in cent per kilometre by multiplying the
rand value by 100 (to be 387,4c) in order to add it to the other two elements that are given in cent per
kilometre.
l The fuel cost component
This is the fuel cost in cent per kilometre per the table. The recipient of the allowance must have
borne the full cost of the fuel used in the vehicle in order to claim this component. Binding
General Ruling No. 23 states that where employees are provided with a principal-owned petrol or
garage card, the employees are regarded as having borne the full cost of fuel if the amount
expended on the card is included in the employee’s travel allowance.
l The maintenance cost component
This is the maintenance cost in cent per kilometre per the table. The recipient must have borne
the full cost of maintaining the vehicle including the cost of repairs, servicing, lubrication and
tyres in order to claim this component. In terms of Interpretation Note No. 14 (Issue 4) the
recipient will be considered to bear the full cost of maintenance if
– the recipient takes out a maintenance plan, either as a top-up or add-on plan after the acquisition of the vehicle and the recipient is responsible for the cost of that maintenance plan, and
– the recipient is responsible for all the maintenance costs not covered by the maintenance
plan (for example top-up fluids, tyres or maintenance required as a result of abuse of the
motor vehicle).
Please note the difference between a maintenance plan taken out on acquisition as discussed
under the ‘value’ of the vehicle, and a top-up or add-on maintenance plan taken out after acquisition.
The aforementioned sum of the three cost components (for example 601,30c per kilometre) must be
divided by 100 in order to calculate a rand per kilometre rate (R6,013). This rand per kilometre rate is
then multiplied by the actual business kilometres travelled to calculate the amount deductible from
the travel allowance in order to calculate the net amount to be included in taxable income.
The actual rate per kilometre
The actual rate per kilometre is based on the actual travel expenditure incurred and the total actual
kilometres travelled during the period that the travel allowance was received. The taxpayer must be
able to prove the actual travel expenditure and the actual kilometres travelled by keeping accurate
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records of data. To calculate the actual rate per kilometre, the sum of all the actual travel expenditure
is divided by the total actual kilometres travelled (for both private and business purposes). The
deductible amount in respect of the business kilometres travelled is the actual rate per kilometre
multiplied by the business kilometres.
Examples of the type of expenditure that may be included are wear and tear, lease payments, fuel,
oil, repairs and maintenance, car licence, insurance, toll fees and finance charges. The following
specific provisions must be taken into account:
l In the case of a vehicle that is leased (financial lease or operating lease), the total payments
taken into account as actual cost for the year may not exceed the rand amount of the fixed cost in
the table of rates used for the deemed cost per kilometre for the category of vehicle used by the
taxpayer (s 8(1)(b)(iiiA)(aa)).
l In any other case, the wear and tear must be determined over a period of seven years from the
date of acquisition of the vehicle. The cost of the vehicle is currently limited to R665 000 and the
finance charges must be limited to an amount as if the original debt had not exceeded R665 000
(s 8(1)(b)(iiiA)(bb)). Please note that the five-year period of wear and tear in Binding General
Ruling No7 (Issue 2) therefore does not apply when the wear and tear is calculated as part of the
actual travel expenditure.
Remember
(1) The ‘value’ of the vehicle used in calculating the taxable portion of a travel allowance
includes VAT but excludes finance charges or interest.
(2) The total kilometres travelled for both business and private purposes during the year of
assessment in which the travel allowance was received is used to calculate the fixed cost
per kilometre as part of the deemed rate per kilometre.
(3) The recipient of the travel allowance must pay the full fuel costs and/or maintenance cost
before that specific cost component can possibly be taken into account in the calculation of
the deemed rate per kilometre.
Example 8.1. Travel allowance
Xolani owns a motor vehicle that cost him R132 000, inclusive of VAT and R12 000 in respect of
finance charges. No maintenance plan was taken out on acquisition. He received a travel
allowance of R1 600 a month from his employer during the year of assessment. He travelled
22 000 km in the vehicle during the 2021 year of assessment of which 4 000 km was travelled for
business purposes. Xolani kept an accurate logbook. The following actual costs (which include
VAT where applicable) were incurred by Xolani:
l Fuel costs ...........................................................................
R8 000
l Maintenance costs .............................................................
4 000
l Insurance ...........................................................................
2 400
l Finance charges ................................................................
12 000
l Licence cost .......................................................................
400
Calculate the taxable amount of the travel allowance to the greatest benefit of Xolani.
SOLUTION
If deemed costs are claimed:
Allowance received .........................................................................................................
Total kilometres travelled ......................................................................... 22 000 km
Less: Private kilometres ........................................................................... (18 000 km)
Business kilometres .................................................................................
4 000 km
Fixed cost component according to table for a vehicle with a value of
R120 000 (R132 000 – R12 000) ..................................................................
R55 894
R55 894
( 22 000 km ) ..................................................
254,1c
Fuel cost per kilometre (as per table) ......................................................
Maintenance cost per kilometre (as per table) ........................................
118,1c
46,8c
Total cost per kilometre ............................................................................
419,0c
Fixed cost per kilometre
R19 200
continued
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8.3
Deduction for business use (4 000 kilometres × R4,19 per kilometre) ...........................
(16 760)
Taxable amount if deemed costs are claimed ......................................................
If actual costs are claimed:
Allowance received ......................................................................................................
Less: Deduction for business use (4 000 kilometres × R1, 997) ..................................
Actual costs
l Wear and tear R120 000/7..................................................................
R17 143
l Fuel costs ...........................................................................................
8 000
l Maintenance costs .............................................................................
4 000
l Insurance............................................................................................
2 400
l Finance charges.................................................................................
12 000
l Licence cost .......................................................................................
400
R2 440
Total actual costs
R19 200
(7 988)
R43 943
Actual rate per kilometre = R43 943/22 000 km = R1,997
Taxable amount if actual costs are claimed.............................................
R11 212
Xolani must claim deemed costs since the taxable amount of the travel allowance will then be
smaller.
Notes
(1) The fixed-cost component is based on the value of the vehicle, which is the cost including
VAT but excluding finance charges or interest.
(2) Xolani is not obliged to use the table and is entitled instead to furnish an acceptable calculation based upon accurate data. If actual costs are used it will include the following
l wear and tear on the vehicle (take s 8(1)(b)(iiiA)(bb)(A) into account – this means that
the cost of the vehicle for wear-and-tear purposes is limited to R665 000)
l actual fuel costs
l actual maintenance cost
l insurance
l finance charges (take s 8(1)(b)(iiiA)(bb)(B) into account – this means that the finance
cost must be limited to an amount that would have been incurred had the original debt
been R665 000)
l licence cost, and
l toll fees.
The total actual costs are added together and the actual rate per kilometre = total cost/total
kilometres. The deductible amount is the actual rate per kilometre multiplied by the business
kilometres.
Example 8.2. Travel allowance: Vehicle used for less than a full year
Barry owns a motor vehicle that cost him R46 500, inclusive of VAT but exclusive of any finance
charges. He used his motor vehicle for business during the last seven months of the 2021 year of
assessment and received a travel allowance of R30 000 from his employer for the seven months.
He travelled a distance of 24 000 km during the seven months of which his business mileage
amounted to 13 500 km.
Calculate the taxable amount of the travel allowance.
SOLUTION
Allowance received ..................................................................................
Business kilometres .................................................................................
Fixed cost component according to table for vehicle with a value of
R46 500 ....................................................................................................
R31 332
212
Fixed cost per kilometre
×
......................................
24 000 km
365
Fuel cost per kilometre (as per table) ......................................................
Maintenance cost per kilometre (as per table) ........................................
(
)
Total cost per kilometre ............................................................................
Deduction for business use (13 500 kilometres × R2,19 per km) ............
Taxable amount included in taxable income ..............................
202
R30 000
13 500 km
R31 332
75,8c
105,8c
37,4c
219,0c
(29 565)
R435
8.3
Chapter 8: Employment benefits
Reimbursive travel allowance
When an allowance or advance is based upon the actual business kilometres already travelled by the
recipient and it is paid out at the employer-agreed rate per kilometre, it is a reimbursive allowance.
The amount expended on business is, unless the contrary appears, deemed to be the cost per the
table of rates in Appendix C (or Notice 271 of Government Gazette 43073 dated 6 March 2020)
(s 8(1)(b)(iii)). The words ‘unless the contrary appears’ indicate that the taxpayer has a choice
between the deemed cost and the actual costs incurred, supported by accurate records, if the actual
costs incurred exceeds the deemed cost.
If a taxpayer receiving a reimbursive allowance meets the following two requirements, he has a third
choice, namely to use a simplified method to calculate the cost of the business kilometres. This
choice is explained in par 4 of the aforementioned Notice. In terms thereof, a fixed rate per business
kilometre (as determined by the Minister of Finance by notice in the Government Gazette) may be
deducted from the allowance. This rate is currently 398 cents per kilometre. The two requirements
that must be met are:
l The provisions of s 8(1)(b)(iii) must be applicable, which means that the allowance is based on
the actual distance travelled for business or such actual distance is proven to the Commissioner.
l No other travel allowance or reimbursement (other than for parking or toll fees) is payable by the
employer to the employee.
If both a fixed travel allowance and a reimbursive travel allowance are received, both amounts will be
combined on assessment and treated as a travel allowance. In such a case, it will not be possible to
use the simplified method to calculate the cost of the business kilometres since one of the two
requirements is not met.
Example 8.3. Reimbursive travel allowance
Brent owns a motor vehicle that cost him R61 000, inclusive of VAT but exclusive of any finance
charges. He received a travel allowance of R4,10 per kilometre actually travelled on business
from his employer during the 2021 year of assessment. He travelled 16 000 km in the vehicle
during the year, and he maintained an accurate logbook of business travels. Brent paid all the
costs in respect of maintenance and fuel and travelled 9 000 km for business purposes.
Calculate the taxable amount of the travel allowance for the 2021 year of assessment on the
assumption that Brent would elect the most beneficial option available to him.
Explain the employees’ tax consequences of the reimbursive travel allowance to Brent.
SOLUTION
Calculation of the taxable amount
Since the travel allowance is based on actual kilometres travelled for business, it is a reimbursive
travel allowance and he qualifies for the simplified method. No actual costs are given and
therefore the best option between the deemed cost and the simplified method cost must be
used.
The deemed cost per kilometre is R3,39 and is calculated as follows:
Fixed cost based on a vehicle with a value of R61 000 = R31 332
Fixed cost per kilometre is R31 332/16 000 = R1,958 (or 195,8c)
Fuel cost and maintenance cost per kilometre is 105,8c and 37,4c
The total deemed cost per kilometre is 195,8c + 105,7c + 37,4c = 339,0c or R3,39
The rate per kilometre for business travelling in terms of the simplified method is R3,98. The
simplified method is therefore more beneficial.
The amount applicable to business travelling is therefore R35 820 (9 000 km × R3,98), and the
taxable amount is accordingly R1 080 (R36 900 (R4,10 per km × 9 000 km) – R35 820).
Employees’ tax consequences
The excess portion of a reimbursive travel allowance is ‘remuneration’ in terms of par (cC) of the
definition in the Fourth Schedule. The excess portion is the difference between the rate per
kilometre paid by the employer and the rate per kilometre in the simplified method multiplied by
the actual business kilometres travelled, therefore an amount of R1 080 for the 2021 year of
assessment.
The detail was only given for the total year of assessment, but the employer must include the
monthly excess portion in the calculation of ‘remuneration’ and withhold employees’ tax thereon.
Anti-avoidance rule
The anti-avoidance rule in s 8(1)(b)(iv) is aimed at preventing an employee from letting his own motor
vehicle to his employer and then being awarded the right of use of the same vehicle as a fringe
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8.3
benefit. This rule was inserted in 1990, mainly to prevent tax avoidance schemes due to the difference in the rules used to calculate the taxable benefit from travel allowances as opposed to the right
of use of a company car at that stage. These rules have been amended numerous times since then.
Where a motor vehicle owned or leased by an employee, his spouse or his child (the lessor) has
been let to the employer or an associated institution in relation to the employer
l the sum of the rental paid and any expenditure incurred by the employer is deemed to be a travel
allowance paid to the employee,
l the rental paid by the employer will be deemed not to have been received by the employee (and
therefore no costs will be deductible against such ‘rental’), and
l it will be deemed that the employee has not received the right of use of the vehicle (therefore no
par 7 fringe benefit).
Such employee is taxed as if he received a travel allowance, and not as if he was granted the right of
use of a vehicle.
Example 8.4. Travel allowance in respect of a motor vehicle let to employer
Zanele leases a motor vehicle with a cost price of R100 000 (VAT included) for R5 000 per
month. He then lets the motor vehicle to his employer for R5 000 per month and is granted the
right of use of the motor vehicle by his employer. Zanele bears the full fuel cost and cost of
maintenance in respect of the motor vehicle. Zanele travelled 28 000 km during the 2021 year of
assessment of which 10 000 km was travelled for business purposes.
Calculate the tax implications for Zanele in this situation.
SOLUTION
Rental income (rental paid by employer is deemed not to have been
received – s 8(1)(b)(iv)) .................................................................................
Lease rental (expenditure incurred by employee is not deductible –
s 8(1)(b)(iv))...................................................................................................
Use of the motor vehicle (It will be deemed that the employee has not
received a fringe benefit in terms of par 7 of the Seventh Schedule) ......
Travel allowance (R5 000 × 12) (rental paid by employer is deemed to be a
travel allowance – s 8(1)(b)(iv)) ...............................................................
Less: Deduction for business use 10 000 km × R 3,645 per km (see below)
–
–
–
R60 000
(36 450)
Taxable amount .............................................................................................
R23 550
Fixed cost per km R55 894/28 000 km ..........................................................
Fuel per km....................................................................................................
Maintenance per km ......................................................................................
199,6c
118,1c
46,8c
Total cost per km (per table) .........................................................................
Business km: 28 000 km – 18 000 km = 10 000 km
364,5c
Employees’ tax
The employees’ tax implications of fixed travel allowances are as follows:
l 80% of a fixed travel allowance is included in remuneration (par (cA) of the definition of ‘remuneration’ in the Fourth Schedule)
l only 20% of a fixed travel allowance is included in remuneration (par (cA) of the definition of
‘remuneration’ in the Fourth Schedule) if the employer is satisfied that at least 80% (therefore 80%
or more) of the use of the motor vehicle for a year of assessment will be for business purposes. In
terms of the Guide for employers iro Allowances (PAYE-GEN-01-G03), this determination must be
done on a monthly basis. An employee’s accurate logbook can be used to prove his business
use.
The employees’ tax implication of reimbursive travel allowances is that 100% of the excess reimbursive travel allowance is included as remuneration (par (cC) of the definition of ‘remuneration’ in the
Fourth Schedule). The excess is the difference between the rate per kilometre paid by the employer
and the rate per kilometre in the simplified method of R3,98, multiplied by the business kilometres
travelled. This inclusion is therefore irrespective of how much business kilometres were travelled.
Employees’ tax will therefore be deducted monthly in respect of only a portion of a reimbursive travel
allowance, but the full amount of the reimbursive travel allowance must be reflected on the employee’s tax certificate (IRP 5).
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Chapter 8: Employment benefits
The aforementioned Guide for Employers iro Allowances (PAYE-GEN-01-G03) states that:
l Where the reimbursive allowance does not exceed the prescribed rate per kilometre AND no
other compensation is paid to the employee, the amount is not subject to employees’ tax but the
full amount must be reflected on the IRP5 certificate under code 3703.
l Where the reimbursive allowance does not exceed the prescribed rate per kilometre, but other
compensation is paid to the employee (travel allowance code 3701), the amount is not subject to
employees’ tax but the full amount must be reflected on the IRP5 certificate under code 3702.
l Where the reimbursive allowance exceeds the prescribed rate per kilometre (irrespective of the
kilometres travelled), the full amount above the prescribed rate is subject to employees’ tax.
Example: Prescribed rate is R3,98 and employer pays R4,98 and the employee travelled
1 000 km. Therefore – Code 3702 = R3 980 (R3,98 × 1 000 km) (not subject to employees’ tax)
Code 3722 = R1 000 (R1.00 × 1 000 km) (subject to employees’ tax).
l Where the reimbursive allowance exceeds the prescribed rate per kilometre (irrespective of the
kilometres travelled) and other compensation (a travel allowance) was paid, the full amount
above the prescribed rate is subject to employees’ tax. Example: Prescribed rate is R3,98 and
employer pays R4,61 and the employee travelled 1 000 km. Travel allowance of R5 000 was paid.
Therefore – Code 3702 = R3 980 (R3,98 × 1 000 (not subject to employees’ tax)) Code 3722 =
R1 000 (R1,00 × 1 000 (subject to employees’ tax)) Code 3701 = R5 000.
On assessment of the individual’s (employee’s) personal income tax return, SARS will combine the
codes 3701 + 3702 + 3722 and the employee can be entitled to claim expenses incurred for business travel as a deduction on assessment against all values (R3 610 + R1 000 + R5 000 = R9 610).
If both a fixed travel allowance and a reimbursive travel allowance are received, both amounts will be
combined on assessment and treated as a taxable travel allowance. It will then not be possible to use
the simplified method to calculate the cost of the business kilometres since the requirement that no
other travel allowance or reimbursement (other than for parking or toll fees) is payable by the
employer to the employee, is not met. The full travel allowance must be disclosed on the IRP 5.
8.3.2 Subsistence allowances (ss 8(1)(a)(i)(bb) and 8(1)(c))
Most employers grant subsistence allowances to employees who must spend at least one night away
from their usual place of residence in the Republic by reason of the duties of his or her office or
employment (s 8(1)(a)(i)(bb)). The reason that the recipient is away from home must be related to the
recipient’s office or employment, indicating that he or she is away for business purposes.
Interpretation Note No. 14 (Issue 4) explains the words ‘away from his usual place of residence’ by
stating that an employee must spend at least one night away from his or her usual place of residence
in the Republic. The Interpretation note also uses the words ‘away from his home’ as an alternative.
This is the place where one lives permanently and the determination of the usual place of residence
is one of fact. The word ‘night’ refers to one full period from sunset of one day to sunrise of the next.
Subsistence allowances are paid to cover personal subsistence (accommodation and meals) and
incidental costs (for example drinks). Only the portion of the allowance that exceeds the actual costs
or deemed costs is included in the recipient’s taxable income (s 8(1)(a)(i)(bb)). The deduction is
always limited to the amount of the allowance paid.
The expenditure actually incurred in respect of accommodation, meals or other incidental costs can
be claimed if proved to the Commissioner. The supporting documents must be kept for five years
from the date when SARS received the income tax return that included the claim for deduction
(Interpretation Note 14, par 5.3.2).
A deemed amount, based on rates annually published in the Government Gazette, can be claimed in
respect of meals and incidental costs for each day or part of a day that the employee spends away
from his usual place of residence. This applies where the employee has not provided proof of actual
expenditure.
Please note that only actual proven costs, and not deemed costs, can be claimed in respect of
accommodation. If the service provider levies a single rate for bed and breakfast, the cost of the
breakfast may be regarded as part of the cost of accommodation (Interpretation Note 14, par 5.3.3).
The following deemed rates apply for the 2021 year of assessment:
l For travel within South Africa:
– R139 per day or part of a day if the allowance is granted to defray incidental costs only, or
– R452 per day or part of a day if the allowance is granted to defray the cost of meals and incidental costs.
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8.3
l For travel outside South Africa actual costs in respect of accommodation can be claimed. If an
allowance is received to cover the cost of meals and incidental costs, an amount per day
determined in terms of the table in Income Tax Notice 268 of GG 42258 (dated 1 March 2019) for
the country where the accommodation is situated can be claimed (there were no changes to this
table for the 2021 year of assessment).
The amounts laid down in respect of travelling abroad will only apply to employees who are ordinarily
resident in the Republic in respect of continuous periods spent outside the Republic (Guide for
Employers in respect of Allowances). See chapter 15 for a discussion of the s 25D translation rules
for foreign exchange amounts.
Please note!
(1) The amount deemed to be expended without proof of actual expenditure is
given as ‘per day or part of a GD\¶ (s 8(1)(c)(ii)). The absence requirement
(s 8(1)(a)(i)(bb)) is given as ‘per night’ spent away from his usual place of
residence. This is beneficial to the employee. It means that an employee
can, for example, receive R904 (2 × R452) for one night spent away from
his usual place of residence as required in terms of s 8(1)(a)(i)(bb), without
having a taxable inclusion.
(2) Deemed unproven costs can only be claimed in respect of meals and
incidental costs, and not in respect of accommodation.
Any expenditure borne by the employer (other than the granting of the allowance) cannot be seen as
part of the employee’s actual or deemed expenditure (s 8(1)(c)(ii)(aa)).
An employee can only claim expenditure against a subsistence allowance if the allowance is paid on
an ad hoc basis. No deduction is allowed if an employee’s remuneration package is structured to
include a fixed amount for subsistence purposes. In terms of the Guide for employers iro Allowances
(PAYE-GEN-01-G03) a subsistence allowance is intended for abnormal circumstances and therefore
an allowance of this nature cannot form part of the remuneration package of an employee. It is an
amount paid by an employer to the employee in addition to the employee’s normal remuneration.
It is essential that the taxpayer must actually have received a subsistence allowance before any relief
can be claimed under the provisions of s 8(1)(c).
Employees’ tax
No employees’ tax is deducted from a subsistence allowance (subsistence allowances are excluded
from the definition of ‘remuneration’ in the Fourth Schedule (par (bA)(ii)). Any unexpended portion will
be subject to normal tax on assessment. The full allowance (100%) must, however, be reflected on
the IRP 5 (usually as non-taxable), even if it does not exceed the deemed expenditure on subsistence.
If the employee has not by the last day of the month following the payment of a subsistence allowance, either
l spent a night away from his usual place of residence, or
l paid the allowance back to his employer,
that amount is deemed not to be paid as a subsistence allowance in the month that it was paid to the
employee. It will then be deemed that the employee has received a payment for services rendered in
the following month (proviso to subpar (ii) of par (bA) of the definition of ‘remuneration’ in the Fourth
Schedule). Such amount must be included in the employee’s gross income in terms of par (c). The
amount will also be remuneration (in terms of par (a) of the definition) in such following month, and
employees’ tax must be deducted at that stage. The full amount must then be included as part of the
salary on the IRP 5.
Example 8.5. Subsistence allowances
Sipho is obliged to spend one night away from his usual place of residence for business purposes during the 2021 year of assessment. He receives an allowance of R1 580 from his
employer. Calculate the taxable amount of the allowance assuming that:
(a) Sipho travels within South Africa and is able to prove that he incurred actual expenditure of
R1 650 on meals, accommodation and other incidental costs.
(b) The employer pays for Sipho’s accommodation within South Africa and Sipho pays R350 for
meals and other incidental costs, but he does not keep the documentation to prove this
expenditure.
(c) The employer pays for Sipho’s accommodation in Angola and Sipho pays the equivalent of
R700 for meals and other incidental costs, but he does not keep the documentation to prove
this expenditure. Assume the exchange rate is US$1 = R10.
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8.3±8.4
Chapter 8: Employment benefits
SOLUTION
(a) Allowance received ...................................................................................................... R1 580
Less: Actual expenditure incurred by Sipho ................................................................ (1 650)
Taxable amount (limited to Rnil) ...................................................................................
Rnil
(b) Allowance received ...................................................................................................... R1 580
Less: Deemed expenditure by Sipho (2 × R452) .........................................................
(904)
Taxable amount ...........................................................................................................
R676
(c) Allowance received ...................................................................................................... R1 580
Less: Deemed expenditure by Sipho (2 × $303 × R10) = R 6 060
(6 060)
Taxable amount (limited to Rnil) ...................................................................................
Rnil
8.3.3 Allowances to public officers (ss 8(1)(a)(i)(cc) and 8(1)(d)–(g))
The holder of a public office can claim a deduction in his return of certain listed expenditure actually
incurred by him and not recovered (s 8(1)(a)(cc)).
Numerous persons falling under the heading ‘holder of a public office’ over a wide spectrum,
including the national, provincial and local government, as well as non-profit organisations, are listed
(s 8(1)(e)).
A wide range of expenditure relevant to the holding of a public office is listed. Examples are expenditure in respect of secretarial services, stationery and travelling. It is required that this expenditure
must have been actually incurred by the holder of the office for the purposes of the office in order to
be deductible (s 8(1)(d)).
An allowance is deemed to be paid to holders of a public office (as listed in s 8(1)(e)(i)), when they
must incur the listed expenditure out of their salaries (s 8(1)(f)). A certain amount of their salaries is
then automatically deemed to be an allowance against which they can claim qualifying expenditure.
The National Assembly or the President must determine this ‘deemed allowance’. For Premiers, Members of Executive Councils and Members of the Provincial Legislature the allowance is deemed to be
R120 000 (effective from 1 April 2009 as per Proclamation R97 GG 32739). The R120 000 is apportioned if the public office is held for less than a year (s 8(1)(g)).
Employees’ tax
SARS requires the deduction of employees’ tax from 50% of the allowance and the disclosure of the
full allowance (100%) on the IRP 5 (par (c) of the definition of ‘remuneration’ in the Fourth Schedule).
8.4 Seventh Schedule taxable benefits
The cash equivalent of the taxable benefits listed in par 2 are included in gross income. The definition
of ‘taxable benefit’ in par 1 includes all the taxable benefits listed in par 2, whether granted voluntary
or otherwise, but excludes certain benefits, namely
l benefits that are exempt in terms of s 10
l medical services and other benefits provided by a benefit fund
l lump sum benefits from a retirement fund or a benefit fund
l benefits received by government employees stationed outside the Republic in respect of services
rendered outside the Republic, and
l severance benefits.
Paragraph 2 describes the different types of taxable benefits and all the requirements of each subparagraph must be met before it is a taxable benefit and an inclusion in terms of the Seventh Schedule is required. The cash equivalents of the various taxable benefits granted by virtue of employment
are then determined in terms of paras 5 to 13. Taxable benefits in terms of par 2 are generally
referred to as ‘fringe benefits’. The phrase ‘by virtue of such employment’ has the meaning ‘because
of’ or ‘in consequence of’ and it therefore follows that par 2 only comes into operation if there is a
causal connection between the employee’s employment and the granting of the advantage. The taxable benefit must be granted because of this employer-employee relationship, or as a reward for
services rendered. This means that benefits granted on compassionate grounds or grounds
unrelated to employment of services rendered might arguably not be taxable benefits.
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Please note!
8.4
The Seventh Schedule contains ‘no value’ provisions in respect of each type of
taxable benefit. This means that the specific benefit is a par (i) taxable benefit,
but that the cash equivalent thereof is Rnil. Such ‘no value’ benefits cannot be
included in gross income in terms of par (c).
The concepts ‘employer’, ‘employee’ and ‘associated institution’ are all defined in par 1. The concept
‘employer’ is also defined in par 1 of the Fourth Schedule, where the payment of any amount by way
of remuneration renders that person an employer. Both the definitions of ‘employer’ and ‘employee’ in
the Seventh Schedule refer to this definition of ‘employer’ in the Fourth Schedule.
The definition of ‘employee’ in the Seventh Schedule only excludes employees who retired due to
age, ill health or other infirmity before 1 March 1992. If a taxpayer’s previous employer therefore
continues to grant a fringe benefit to him or her after his or her retirement, he or she remains an
‘employee’ receiving a taxable benefit. No normal tax or employees’ tax implication will, however,
arise in respect of the ‘no value’ provisions in the Seventh Schedule.
If the employer is a company, the definition of ‘employee’ in the Seventh Schedule also specifically
includes directors and former employees and directors who are or were the sole, or one of the
controlling holders of shares, of the company. Lastly, the definition of ‘employee’ specifically includes
a person who was released from the obligation to repay a debt due to the employer after retirement.
If an associated institution in relation to the employer grants any taxable benefit to an employee, it is
deemed that the employer has granted the benefit (par 4). This means that the employer, and not the
associated institution, must withhold employees’ tax on such taxable benefits. Associated institutions
include companies managed or controlled by substantially the same persons as the employer, or by
the employer or a partnership of which the employer is a member. It also includes funds established
for the benefit of the employees of the employer or aforementioned companies.
Please note!
There is no employment relationship between a partner and a partnership. A
partner in a partnership is, however, for the purposes of par 2, deemed an
employee of the partnership (par 2A). This means that any par 2 taxable benefit
(fringe benefit) received by a partner from a partnership must be included in the
partner’s gross income in terms of par (i) of the definition of gross income.
The partnership is not specifically deemed to be an employer for the purposes of
par 2 (par 2A) or for purpose of the Fourth Schedule. The definition of ‘remuneration’ does not per se require that an employer must pay the amount to an
employee. This means that, even though a fringe benefit received by a partner is
‘remuneration’ as defined in the hands of the partner, no employees’ tax needs to
be withheld by the partnership from fringe benefits granted to partners.
Note, however, that the wording in ss 11F and 11(l) and par 12D deems a
partnership to be the employer of the partner and a partner to be an employee of
the partnership. It consequently seems that it was the intention of the Legislator to
allow a partner to claim a s 11F deduction based on the ‘remuneration’ paid to the
partner. Please refer to chapter 18 for a more detailed discussion and examples
regarding partnerships.
8.4.1 Benefits granted to relatives of employees and others
Taxable benefits granted to a relative (as defined in s 1(1)) of an employee or any other person by
virtue of the employee’s employment or services rendered or to be rendered to the employer, are
deemed to be granted to the employee. These benefits are not taxed in the hands of the person
receiving the benefits, but in the hands of the employee (par 16).
8.4.2 Consideration paid by employee
When the cash equivalent of taxable benefits is calculated, the value determined in terms of the valuation rules in par 5 to par 13 must be reduced by any consideration paid by the employee. The
definition of ‘consideration’ excludes any consideration in the form of services rendered or to be
rendered by the employee (par 1).
The consideration paid by the employee should be considered by any of the following two situations:
(i) If the asset acquired from the employer is an asset where the input tax was previously denied in
terms of s 17(2) of the VAT Act, then s 8(14)(a) of the VAT Act deems the supply to be otherwise
than in the course or furtherance of his business. If s 8(14)(a) then applies, the consideration is
used as is and no amount of VAT is taken out.
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Chapter 8: Employment benefits
(ii) If the asset acquired by the employee is an asset where the input tax was previously allowed
(thus an asset used for taxable supplies and not denied in terms of s 17(2) of the VAT Act), the
consideration includes VAT at 15%. If the VAT portion must be excluded in order to calculate the
cash equivalent of a taxable benefit, the tax fraction (15/115) must be applied to the amount of
the consideration.
8.4.3 Employer’s duties
The employer who granted the taxable benefit has the responsibility to determine the cash equivalent
(par 3(1)). If no determination is made or if the determination appears to be incorrect, the Commissioner may recalculate the cash equivalent. The Commissioner may then issue the employer with an
assessment in terms of s 96 of the Tax Administration Act for the outstanding employees’ tax that was
required to be deducted or withheld from such recalculated cash equivalent. Alternatively, the Commissioner may recalculate the cash equivalent when the employee’s assessment is issued (par 3(2)).
The employer must prepare and furnish a fringe-benefit certificate to every employee within 30 days
after the end of a year or period of assessment during which the employee has enjoyed a taxable
benefit (par 17(1)). The Commissioner may extend this period. The certificate must show the nature of
the taxable benefit and the full cash equivalent. The employer must also deliver a copy of this fringebenefit certificate to the Commissioner within the same 30-day period or authorised extended period
(par 17(3)). Fringe-benefit certificates need not be prepared if an IRP5 containing the cash equivalents of such remuneration is issued to the employee and employees’ tax was deducted by the
employer. If the cash equivalent was understated in the IRP5, a fringe-benefit certificate must be
issued for the understated amount (par 17(6)).
A penalty of 10% of the cash equivalent of taxable benefits not recorded or understated in a fringebenefit certificate is imposed upon an employer who fails to comply with these requirements
(par 17(4)). The procedure for remittance of administrative non-compliance penalties is dealt with in
Chapter 15 of the Tax Administration Act.
An employer must make a declaration of fringe benefits on the employee’s tax reconciliation called
for by par 14 of the Fourth Schedule. The employer must declare that all taxable benefits enjoyed by
his employees during the period are declared on the IRP5s (par 18(1)). The return submitted by a
company must be certified as being correct by one of its directors (par 18(2)).
The various taxable benefits listed in the Seventh Schedule are discussed below.
8.4.4 Assets acquired at less than actual value (paras 2(a) and 5)
Reference in the Act
Type of taxable benefit
Assets consisting of any goods, commodity,
financial instrument or property of any nature
(other than money) acquired by the employee
for no consideration or for a consideration
given by the employee which is less than the
value of the asset as determined under
par 5(2) (this can be the market value or cost)
Exclusions from taxable
benefit
If the asset is one of the following:
l money
l meals and refreshment benefits and residential accommodation
l marketable securities
l qualifying equity share
l equity instruments
l residential accommodation owned by the
employer and occupied by the employee
at a percentage based rental, if it is
acquired by the employee, his spouse or
minor child in terms of an agreement with
the employer at a price which is not less
than the market value of the accommodation on the date that the agreement
was concluded
Par 2(a)
Par 2(a)
Par 2(a)(i), (c) and (d)
Par 2(a)(ii) and s 8A
Par 2(a)(iii) and s 8B
Par 2(a)(iv) and s 8C
Par 10A(2)
continued
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8.4
Reference in the Act
Definitions
Cash equivalent
± general rule
Cash equivalent
± special rules
No values
Long service: initial unbroken period of
service of not less than 15 years or any subsequent unbroken period of service of not
less than 10 years
Remuneration proxy is:
l the remuneration derived in the preceding
year of assessment, or
l the annual equivalent of
– the previous year’s remuneration (if only
employed for a portion of that year), or
– first month’s remuneration (if not employed in the previous year)
Par 5(4)
Value of the asset* less any consideration
given by employee
*Value of the asset if VAT was claimed back =
market value (VAT excluded) on the date of
acquisition by employee
*Value of the asset if VAT was NOT claimed
back = market value (VAT included) on the date
of acquisition by employee
Par 5(1)
Assets that are movable property (other than
marketable securities or an asset of which the
employer had the use prior to acquiring
ownership thereof) acquired by the employer
in order to dispose of it to the employee: Value
of the asset = cost to employer
Assets that are marketable securities (irrespective of whether they are trading stock)
and assets of which the employer had the use
prior to acquiring ownership thereof (for
example an asset that was leased and the
lease is discontinued): Value of the asset =
market value on the date of acquisition by
employee
Assets held by employer as trading stock:
Value of the asset = lower of cost to employer
or market value
Par 5(2) (first proviso) and
s 23C (see discussion of the
determination of the cost or
market value taking VAT into
account below)
Assets given as an award for bravery or long
service: The value of the asset as previously
determined is reduced by the lesser of the
cost to employer and R5 000
Par 5(2)(a), 5(2)(b) and 5(4)
(a) Fuel or lubricants supplied by an employer to his employee for use in a company car
(b) Immovable property used for residential
purposes acquired by the employee,
either for no consideration or for a consideration given by the employee which is
less than the value of the immovable
property. This no value exception does
NOT apply if the
l remuneration proxy of the employee
exceeds R250 000, or
l the market value of the immovable
property exceeds R450 000, or
l the employee is a connected person
in relation to the employer
Par 5(3)
Section 1
Par 5(2) and s 23C (see discussion of the determination of the
cost or market value below)
Par 5(2) and the first proviso
thereto, and s 23C (see discussion of the determination of the
cost or market value taking VAT
into account below)
Par 5(2) (first and second provisos) and s 23C (see discussion of the determination of the
cost or market value taking VAT
into account below)
Par 5(3A)
Section 1: definition of
remuneration proxy
continued
210
8.4
Chapter 8: Employment benefits
Reference in the Act
The determination of the
‘cost to the employer’ or
the ‘market value’ of
assets, taking VAT into
account
If the employer is a VAT vendor, and has
claimed an input tax deduction in respect of
the aquisition of the asset, VAT is excluded
from both the cost to the employer and the
market value
If the employer is not a VAT vendor, and has
not claimed an input tax deduction in respect
of the aquisition of the asset, VAT stays
included in both the cost to the employer and
the market value
Section 23C
Remuneration for PAYE
Cash equivalent
Par (b) of the definition of ‘remuneration’ in the Fourth Schedule
Amount on IRP 5
Cash equivalent
Example 8.6. Assets acquired at less than actual value
Determine the cash equivalent in respect of the following assets acquired by employees during
the 2021 year of assessment:
(1) An asset was acquired by the employer who is a VAT vendor at a cost of R115 000 VAT and
used in the business for three years. It is sold to an employee for R80 000. The market value
(including VAT) of the asset on the date of sale is R90 000.
(2) A gold watch, which cost the employer R6 270 (including 15% VAT), was bought for an
employee as a long-service award after he had completed 20 years of service. The
employer is a VAT vendor. The market value (including 15% VAT) of the watch on the date of
the presentation is R6 840.
(3) The employees of company A are required to wear special uniforms, clearly distinguishable
from ordinary clothing, when on duty. Uniforms with a market value of R6 900 (including 15%
VAT) were given to a new employee. The employer is a VAT vendor.
SOLUTION
(1) Value of the asset (market value, VAT is excluded because the employer could
have claimed it (s 23C): R90 000 – VAT of R11 739 (R90 000 × 15/115)) ..............
Less: Consideration (Input tax was previously allowed and therefore the
consideration includes VAT which must be excluded: R80 000 – VAT of
R10 435 (R80 000 × 15/115) .........................................................................
Cash equivalent ......................................................................................................
* The deemed output tax in terms of s 18(3) of the VAT Act will be R1 134
(R8 696 × 15/115). This amount is also allowed as a deduction in the hands of
the employer in terms of s 11(a) as it is seen as a salary.
(2) Value of the asset (cost to the employer because the asset was acquired by the
employer in order to dispose of it to the employee, excluding VAT: R6 270 ×
100/115) ..................................................................................................................
Less: Exempt portion ..............................................................................................
Cash equivalent…………………………………………………………………………..
R78 261
(69 565)
R8 696*
R5 452
(5 000)
R452
(3) Since the asset is a special uniform meeting the requirements in terms of s 10(1)(nA), it will
be exempt from normal tax and it is not a taxable benefit as defined. Consequently no cash
equivalent needs to be determined and the Seventh Schedule is not applicable. The R6 000
must be included in the employee’s gross income in terms of par (c) of the gross income
definition, but will be exempt in terms of s 10(1)(nA).
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8.4
8.4.5 Use of sundry assets (paras 2(b) and 6)
Reference in the Act
Type of taxable benefit
Free private (or domestic) use of various
assets (or for a consideration less than the
value of private use as determined in terms of
par 6)
Free private (or domestic) right of use of a
company car (or for a consideration less than
the value of private use as determined in
terms of par 7) (see 8.4.6 for discussion)
Par 2(b)
Exclusions from taxable
benefit
Residential accommodation or household
goods supplied with such accommodation
Par 2(b)
Cash equivalent
± general rule
Value of private (or domestic) use less any
consideration given by the employee or any
amount spent by the employee on the
maintenance or repair of such asset
Par 6(1)
Cash equivalent
± special rules
Asset is leased by the employer: Value of
private (or domestic) use = rent paid by
employer in respect of period used
Asset is owned by employer: Value of private
(or domestic) use = 15% × lesser of the asset’s
cost to employer and market value on first day
of use × (period used / 365 (or 366) days)
Employee has the sole right of use of an asset
for a period extending over the useful life of
the asset or a major portion (meaning more
than 50%) thereof: Value of private (or
domestic) use = cost of asset to employer
(accrual on the day when the right of use was
first granted)
Par 6(2)(a)
(a) Private (or domestic) use of asset is
incidental to the use thereof for the purposes of the employer’s business
Par 6(4)(a): this no-value rule
does not apply in respect of
clothing
(b) Asset is provided as an amenity to be
enjoyed
– at the employee’s place of work, or
– for recreational purposes at the employee’s place of work, or
– at a place of recreation provided by
the employer for the use of his employees in general
(c) Asset is any equipment or machine and
can be used by employees in general for
short periods and the value of the private
use does not exceed an amount determined on a basis as set out in a public
notice issued by the Commissioner
(d) Asset is a telephone or computer equipment which the employee uses mainly
(> 50%) for purposes of the employer’s
business
(e) Asset consists of books, literature,
recordings or works of art
Par 6(4)(a)
Remuneration for PAYE
Cash equivalent (an appropriate portion is calculated monthly)
Par 6(3) and par (b) of the definition of ‘remuneration’ in the
Fourth Schedule
Amount on IRP 5
Cash equivalent
No values
212
Par 2(b)
Par 6(2)(b)
Proviso to par 6(2)(b)
Par 6(4)(b)
Par 6(4)(bA)
Par 6(4)(c)
8.4
Chapter 8: Employment benefits
Example 8.7. Use of sundry assets
(a) Gert has the right of use of a personal computer, which is owned by his employer, for private
purposes. The computer cost the employer R11 500 (including VAT at 15%). Gert does not
pay anything for the use of the computer. The employer is a VAT vendor.
Calculate the taxable amount of the fringe benefit if:
(i) Gert uses the computer continuously for three months.
(ii) Gert uses the computer for its useful life or over a major portion of its useful life.
(iii) Gert uses the computer for one year. The useful life of the computer is 4 years. Gert
used the computer for private purposes 25% of the time.
(b) All employees of company B (a VAT vendor) are required to wear a specific brand of jeans
to work on Fridays. Company B bought the jeans at a cost price of R1 000 (excluding VAT)
per jean. On 1 March 2020, the employees were granted the sole right of use of the jeans
over the useful life thereof, on the condition that it may only be worn to work on Fridays and
that any private use thereof must be incidental. What is the cash equivalent of this taxable
benefit for each employee? Will the answer be different if a printed logo of the company was
sewn onto the jeans?
SOLUTION
(a) (i) Cash equivalent = R10 000 (cost excluding VAT) × 15% × 3/12 = R375 (R125 per
month).
(ii) Cash equivalent = R10 000 (the whole amount is included in remuneration in the first
month of use).
(iii) The cash equivalent is Rnil since the requirements of the nil value rule in par 6(4)(bA)
are met. The asset is a computer and the employee uses the asset mainly for business
purposes.
(b) The no value rule in respect of the incidental private use of assets in terms of par 6(4)(a) is
not applicable since the jeans are normal clothing or a non-special uniform, and is not a
special uniform clearly distinguishable from ordinary clothing. Since the sole right of use
over the useful life of the jeans is granted to the employees, the cost of the asset (R1 000)
accrues to each employee on the day the right was first granted, being 1 March 2020. If a
printed logo of the company was sewn on the jeans, the jeans would be clearly distinguishable from ordinary clothing and would qualify as a special uniform. The R1 000 will
then be included in gross income in terms of par (c) of the gross income definition and will
be exempt in terms of s 10(1)(nA).
8.4.6 Right of use of motor vehicles (paras 2(b) and 7)
The meanings of the core terms used in par 7 are as follows:
Please note!
Value of private use (par 7(4))
(3,5% or 3,25% × determined value) per
month
Cash equivalent (par 7(2))
Value of private use less any consideration
given by employee
Par 7(7) adjustment
Value of private use × business km/total km
Taxable income from a par 7
fringe benefit
Cash equivalent less par 7(7) adjustment
less par 7(8) adjustment
Remuneration
Cash equivalent × 80% or 20% (depending
on the extent of business travels)
213
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8.4
Reference in the Act
Type of taxable benefit
Free private or domestic use of a motor
vehicle (company car) (or for a consideration
less than the value of private use)
Exclusions from
taxable benefit
None
Definitions
Determined value* of motor vehicles owned or
leased RWKHU WKDQ DQ µRSHUDWLQJ OHDVH¶ LQ
terms of s 23A) by the employer = The retail
market value (excluding finance charges) as
determined by the Minister by Regulation. The
retail market value of the motor vehicle at the
time when the employer first acquired the
vehicle, or the right of use thereof, or manufactured the vehicle is used
*The determined value is reduced by 15% per
year (reducing balance method) for every
completed 12-month period between the date
of acquisition by the employer and the date of
granting the right of use to the employee for
the first time
This reduction does not apply if both the
employee and the asset are transferred to an
associated institution
Maintenance plan = contract covering all maintenance costs for a period terminating at the
earlier of the end of three years or the date on
which a distance of 60 000 km is travelled
Please note the following in respect of the
retail market value:
Regulation R.362 in GG 38744, dated
23 April 2015, contains the provisions in
respect of the retail market value applicable
with effect from 1 March 2015
Par 2(b)
Par 7(1)(a), s 23A(1): definition of
operating lease
Par 7(1)(b). In terms of par 7(3)
this value also applies if an employer transfers his rights and
duties in terms of a lease agreement to the employee
Proviso (a) of par 7(1)
Proviso (b) of par 7(1)
Par 7(11). If a question does not
clearly state that the motor vehicle is subject to a maintenance
plan at the time of acquisition by
the employer, the 3,5% must be
applied. One cannot assume that
a maintenance plan was taken
out
Par 7(1)(c)
See Silke 2015 for the rules applicable to motor vehicles acquired
before 1 March 2015
Because the retail market value will be given
to students in terms of the SAICA syllabus, the
regulation is not discussed in detail, but take
note of the following:
l Distinction is made between the different
industries
l Distinction is made between new and
second hand motor vehicles
l It is specified which percentage of the
retail market value must be used as the
determined value and in which year of
assessment it must be used and whether
VAT must be included or excluded
l It is clear that, with effect from 1 March
2018, both the cost to the employer to
acquire the motor vehicle and the market
value (where the employer acquires it at
no cost) include VAT
Cash equivalent ±
general rule
Value of private use (see below) less any
consideration given by the employee (other
than consideration given by an employee in
respect of licence, insurance, maintenance or
fuel)
Par 7(2)
The cash equivalent, which is
calculated by the employer
monthly, is not influenced by the
par 7(7) and 7(8) adjustments
continued
214
8.4
Chapter 8: Employment benefits
Reference in the Act
Value of private use ±
special rules
In all cases other than vehicles acquired under
an operating lease:
Value of private use = 3,5% × determined
value × number of months used during year of
assessment
OR
Value of private use = 3,25% × determined
value × number of months used during year of
assessment
Please note that
1. The private use of a vehicle includes
travels between the employee’s place of
residence and place of employment, as
well as all other private travels
2. If the employee is only entitled to use the
motor vehicle for a part of a month, the
value of the private use is apportioned on a
daily basis. No reduction is made simply
because the vehicle is for any reason
temporarily not used by the employee
3. If an employee uses more than one company car primarily for business purposes,
he will only be taxed on the company car
with the highest value of private use,
unless the Commissioner decides, on
application of the employee, to designate
another vehicle
In the case of vehicles acquired under an
operating lease:
Value of private use = sum of the actual cost
for employer under the operating lease and
the cost of fuel in respect of the motor vehicle
Par 7(4)(a)(i)
Par 7(4)(a)(i): the 3,25% is only
used if the motor vehicle is the
subject of a ‘maintenance plan’ at
the time of acquisition by the
employer
Par 7(4)(a)(i). Please see the
exception to the rule in par 7(8A)
Par 7(4)(b) and 7(5)
Par 7(6). Interpretation Note
No. 72 indicates that ‘primarily
used for business purposes’
means that more than 50% of the
total distance travelled in the
vehicle was for business purposes. The taxpayer must apply
for the application of par 7(6) in
his or her return. The employee
must keep and submit an accurate logbook of business and
private kilometres for this purpose. Please note that par 7(6)
and par 7(7) or 7(8) cannot be
applied simultaneously. The taxpayer should therefore only apply
for par 7(6) if it is the most beneficial option
If the par 7(6) concession is
applied for, SARS requires full
details of the reasons why it was
necessary to make more than
one vehicle available to the
employee
Par 7(4)(a)(ii) and s 23A(1)
The par 7(8) adjustments do not
apply to company cars acquired
in terms of an ‘operating lease’ as
defined in s 23A. The par 7(7)
adjustment can, however, still
apply for such vehicles
continued
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8.4
Reference in the Act
Reduction of the value
of private use on
assessment
The calculation of the par 7 fringe benefit is
based on the employee being entitled to use a
company car for private purposes. The calculation in par 7 is therefore, as a convenient
starting point, based on the implicit assumptions that there have been no business use of
the vehicle and that all operating expenses
are incurred by the employer
It will usually happen that such a company car
is also used for business purposes. The employee is then entitled to a reduction in the
value of the private use on assessment to take
account of actual business use in terms of
par 7(7)
SARS must make the following adjustments in
terms of par 7(7) and 7(8) on assessment:
If the employee keeps an accurate logbook of
the distances travelled for business purposes,
the value of private use must be reduced by
the calculated adjustment in terms of par 7(7)
The par 7(7) adjustment (accurate records of
business kilometres are kept) = Value of private use × (business kilometres/total kilometres)
If the employee bears the full cost of specific
expenses (and not the employer as in the
implicit assumption above) and keeps an
accurate logbook of the distances travelled for
private purposes, the value of private use
must be reduced by the calculated adjustment
in terms of par 7(8) in order to provide for the
fact that the employee paid the costs
Par 7(7) (reduction for business
purposes) and 7(8) (reduction if
employee bears the full cost of
specific expenses). Interpretation
Note No. 72 specifies the same
details regarding the logbook to
be kept by the taxpayer as Interpretation Note No. 14 (Issue 4)
does in respect of travel allowances (see 8.3.1)
Remember: The value of private
use is the amount before any
compensation paid by the employee is deducted
The par 7(8) adjustments (accurate records of
private kilometres are kept) =
Full cost paid by
employee
Reduce the value
of private use with
Cost of licence,
insurance, and
maintenance
Cost × (private
kilometres/total kilometres)
Cost of fuel for
private use
Private kilometres ×
deemed cost fuel
rate per kilometre
as per the deemed
cost table for travel
allowances
Remember that the ‘value’ of the
motor vehicle in the deemed cost
table always includes VAT
Please note that:
1. The par 7(7) and 7(8) adjustments must
be made only when the taxable income is
calculated by a student in a question or by
SARS on assessment. It is not also made
when the cash equivalent or the ‘remuneration’ for PAYE purposes is calculated
by a student in a question or by an
employer
2. The par 7(8) adjustments do not apply to
company cars acquired in terms of an
‘operating lease’ as defined in s 23A. The
par 7(7) adjustment can, however, still
apply for such vehicles
continued
216
8.4
Chapter 8: Employment benefits
Reference in the Act
No values
Remuneration for
PAYE
3.
The par 7(7) adjustment is based on the
value of private use and not on the cash
equivalent
4.
Paragraph 7(8A) makes an exception in
respect of certain private kilometres
travelled by a ‘judge’ or a ‘Constitutional
Court judge’ (as defined in s 1 of the
Judges’ Remuneration and Conditions of
Employment Act 47 of 2001). The kilometres travelled between the judge’s
place of residence and the court over
which the judge presides is deemed to be
kilometres travelled for business purposes
and not for private purposes
(a) If the vehicle is available to and is used
by employees in general, and the private
use of the vehicle by the specific employee is infrequent or is merely incidental
to its business use, and the vehicle is not
normally kept at the employee’s residence
(this is normally referred to as a ‘pool car’)
(b) If the nature of the employee’s duties
regularly requires him to use the vehicle
for his duties outside his normal hours of
work, and his private use thereof is limited
to travelling between his place of residence and his place of work, or is infrequent or merely incidental to its business
use
Par 7(10)(a)
l
Par (cB) of the definition of ‘remuneration’ in the Fourth Schedule.
The words in the Act ‘taxable
benefit calculated in terms of
par 7’ means the cash equivalent
before it is adjusted for par 7(7)
and 7(8) where applicable. This
is because those adjustments
must only be made by SARS on
assessment and the employer
calculates remuneration monthly
It is submitted that the employee
will have to provide an accurate
logbook to the employer in order
to ‘be satisfied’ regarding the
percentage business use. The
determination regarding the percentage used for business purposes is made monthly
l
Amount on IRP 5
Par 7(8A)
80% of the cash equivalent if the employer
is satisfied that the business use will be
less than 80%
20% of the cash equivalent if the employer
is satisfied that the business use will be at
least 80%
Par 7(10)(b)
Cash equivalent
Remember
The 3,5% or 3,25% is in respect of each month. The number of months for which the right of use was
granted in the year of assessment must therefore be used in the calculation of the cash equivalent
(and not the number of months divided by 12).
Example 8.8. Use of a motor vehicle granted more than 12 months after employer
obtained the vehicle
Reaboka was granted the right to use the employer-owned motor vehicle with effect from 1 June
2020. The employer originally acquired the vehicle on 1 March 2019 at a retail market value of
R91 200.
Calculate the cash equivalent of the value of the taxable benefit to Reaboka for the 2021 year of
assessment.
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8.4
SOLUTION
Retail market value ....................................................................................................
Less: R91 200 × 15% (one period of 12 months) ......................................................
R91 200
(13 680)
Adjusted determined value .......................................................................................
R77 520
Cash equivalent = R77 520 × 3,5% = R2 713 per month × 9 months ......................
R24 417
Example 8.9. Use of motor vehicle
Tertius enjoys the right to use a motor vehicle that was acquired by his employer, A Ltd, on
1 March 2019. The retail market value was R114 000. Tertius is transferred to B Ltd, a subsidiary
of A Ltd. B Ltd purchases the motor vehicle of which Tertius has the right of use for R80 000
(excluding VAT).
Calculate the monthly and annual cash equivalent of the value of the taxable benefit if Tertius
retains the right of use of the motor vehicle.
SOLUTION
Cash equivalent = R114 000 × 3,5% = R3 990 per month or R47 880 per year. The determined
value of the motor vehicle remains R114 000 in terms of proviso (b) of par 7(1).
Example 8.10. Use of a motor vehicle for part of a month
With effect from 15 March 2019, Nomsa is granted the right to use a motor vehicle bought by the
employer on 15 March 2019. The retail market value of the vehicle is R100 000. Calculate the
cash equivalent of the taxable benefit for March.
SOLUTION
The cash equivalent of the taxable benefit for March is:
R100 000 × 3,5% = R3 500 × 17/31 = R1 919.
(15 March to 31 March is 17 days)
Example 8.11. Use of two motor vehicles
Mbali is granted the right to use two motor vehicles that were acquired by her employer at a cost
of R114 000 (Vehicle 1) and R171 000 (Vehicle 2). Both amounts include VAT and no maintenance plan was taken out in respect of the vehicles. Mbali bears no costs in respect of the
vehicles.
Calculate the monthly cash equivalent of the value of the taxable benefit, as well as the taxable
amount (on assessment) if Mbali is granted the right of use of both vehicles and if
(a) Mbali uses both vehicles primarily for business purposes and kept an accurate logbook
proving that 12 000 km of the total 23 000 km travelled with each of the vehicles was travelled for business purposes. Mbali did not apply for the application of par 7(6) in her return.
(b) Mbali uses both vehicles primarily for business purposes. She kept an accurate logbook
proving that 12 000 km of the total 23 000 km travelled with each of the vehicles was travelled for business purposes. Mbali did apply for the application of par 7(6) in her return.
218
8.4
Chapter 8: Employment benefits
SOLUTION
(a) Since an accurate logbook was kept and she did not apply for par 7(6), par 7(7) must be
applied. Therefore, the cash equivalent for both vehicles must be calculated. Since Mbali
paid no consideration, the value of the private use equals the cash equivalent.
Cash equivalent each month is the sum of
R171 000 × 3,5% = .................................................................................................
R5 985
R114 000 × 3,5% = .................................................................................................
3 990
(Par 7(4)(a)).............................................................................................................
R9 975
Taxable amount on assessment = R57 248 (R119 700 (R9 975 × 12) – (R119 700 ×
12 000/23 000))
(b) Because Mbali applied for par 7(6) and an accurate logbook was kept, the cash equivalent
for each month is based on the vehicle having the highest value of private use.
Paragraph 7(7) cannot be applied if par 7(6) is applied.
Monthly cash equivalent based on the highest value of private use = R171 000
× 3,5% = R5 985 (par 7(6)))
Taxable amount on assessment = R5 985 × 12 = R71 820
Example 8.12. Paragraph 7(7) and 7(8) adjustments
Jan had the right of use of a luxury employer-owned motor vehicle with a retail market value of
R741 000 up and until his retirement on 30 September 2020. A maintenance plan (as defined) in
respect of the motor vehicle was included in the cost price of the vehicle. Jan travelled 21 000
kilometres with the motor vehicle from the beginning of the year of assessment until his retirement. The accurate logbook proves that 11 000 kilometres thereof was travelled for business purposes. Assume all travels were evenly spread over the year and that Jan provided his logbook to
his employer for PAYE purposes. Jan had to bear the total fuel cost of private use and paid the
full licence cost of R890. The Commissioner accepted the logbook as accurate. Jan monthly
pays R200 as consideration for the right of use of the company car.
Calculate the value of private use, the cash equivalent, the amount that must be included in Jan’s
taxable income as well as the remuneration in respect of the right of use of the company car for
the 2021 year of assessment.
SOLUTION
Value of private use: 3,25% × R741 000 × 7 ............................................................
Cash equivalent = R168 578 less R1 400 (R200 × 7) ..............................................
Paragraph 7(7) adjustment (R168 578 × 11 000/21 000) .........................................
Paragraph 7(8) adjustments (R424 + R17 510) ........................................................
Licence cost: R890 × 10 000/21 000 = R424
Fuel: 10 000 km × R1,751 = R17 510
Taxable income = Cash equivalent of R167 178 less par 7(7) and 7(8) adjustments
= R167 178 – R106 237 (R88 303 + R17 934) = R60 941
Because his business use is only 52% (11 000 km/21 000 km), his remuneration is
cash equivalent of R167 178 = R133 742.
R168 578
R167 178
(R88 303)
(R17 934)
80% × the
Example 8.13. Operating lease
Jabu had the right of use of a luxury motor vehicle with a retail market value of R741 000 since
1 March 2019. This vehicle was leased by his employer, Protea Ltd, at R15 000 per month under
an operating lease. Jabu travelled 21 000 kilometres in total with the motor vehicle and the
accurate logbook proves that 11 000 kilometres thereof was travelled for business purposes.
Protea Ltd also paid the fuel cost amounting to R2 500 per month. The Commissioner accepted
the logbook as accurate. Jabu bears no costs in respect of the vehicle.
Calculate the amount that must be included in Jabu’s taxable income in respect of the right of
use of the company car in the 2021 year of assessment.
219
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8.4
SOLUTION
Taxable income in respect of the right of use of the company car:
Value of private use and also the cash equivalent: 12 × (R15 000 + R2 500) ..........
Less: Paragraph 7(7) adjustment (R210 000 × 11 000/21 000) .............................
R210 000
(110 000)
Taxable income ........................................................................................................
R100 000
Alternative calculation: R210 000 × 10 000/21 000 = R100 000. Please note that this
alternative calculation can only be applied if the employee gave no consideration for
the taxable benefit. This is because the value of private use is then equal to the cash
equivalent.
If the alternative calculation is applied where there is a consideration and the value
of private use is not equal to the cash equivalent, an incorrect taxable value will be
calculated.
8.4.7 Meals, refreshments and meal and refreshment vouchers (paras 2(c) and 8)
Reference in the Act
Type of taxable benefit
Free meals, refreshments and refreshment
vouchers (or for a consideration less than
the value of the meal, refreshment or
voucher)
Par 2(c)
Exclusions from taxable
benefit
Board or meals provided with residential
accommodation in par 2(d)
Par 2(c)
Definitions
None
Cash equivalent
± general rule
Value of meals, refreshments and
refreshment vouchers less consideration
given by employee
Par 8(1)
Cash equivalent
± special rules
Value = cost to the employer of meals,
refreshments and refreshment vouchers
Par 8(2)
No values
A meal or refreshment supplied by an employer to his employee:
l in a canteen, cafeteria or dining room
wholly or mainly used by his employees,
or
l on the business premises of the
employer, or
l during business hours or extended
working hours, or
l on a special occasion
Par 8(3)(a)
Par 8(3)(a)
Par 8(3)(b)
Par 8(3)(b)
A meal or refreshment enjoyed by an employee when he must entertain someone
on behalf of the employer
Par 8(3)(c)
Remuneration for PAYE
Cash equivalent
Par (b) of the definition of ‘remuneration’ in the Fourth Schedule
Amount on IRP 5
Cash equivalent
Example 8.14. Meal vouchers
An employer pays R20 a meal for his employees at a dining place close to where his business is
situated. He provides each employee with 20 coupons per month for which the employee must
pay R160 (R8 per coupon). One meal can be enjoyed at the dining place for each coupon.
Calculate the taxable value of the benefit.
220
8.4
Chapter 8: Employment benefits
SOLUTION
Cost to employer 20 coupons × R20 ........................................................................
Less: Cost to employee (20 coupons × R8)...........................................................
R400
(160)
Taxable value of the benefit ......................................................................................
R240
8.4.8 Residential accommodation (paras 2(d) and 9)
Reference in the Act
Type of taxable benefit
Free residential accommodation (or for a consideration less than the rental value of the
accommodation)
Exclusions from taxable
benefit
None
Cash equivalent
± general rule
Rental value (determined in terms of subpar (3), (3C), (4) or (5)) of the accommodation
less any rental consideration given by the
employee
Par 9(2)
Cash equivalent
± general rule
Accommodation is owned by employer or an
associated institution in relation to the
employer: The rental value = formula value
(subject to the provisions of par 9(3C)
(accommodation obtained from a non-connected person) and 9(4) (holiday accommodation))
The definition of ‘remuneration
proxy’ in s 1 is the remuneration
in terms of the Fourth Schedule
for the prior year of assessment
(where applicable) excluding
the cash equivalent of residential accommodation in terms of
par 9(3)
Formula value = (A –B) × C/100 × D/12
A = the ‘remuneration proxy’
B = R83 100, but Rnil if
l the employee or his spouse directly
or indirectly controls the employer
(who is a private company), or
l the employee, his spouse or minor
child have a right of option or preemption granted by the employer, any
other person by arrangement with the
employer or an associated institution
in relation to the employer, to directly
or indirectly become the owner of the
accommodation by virtue of a controlling interest in a company or otherwise
C = a quantity of 17, or 18 (if the house has
four rooms and is either furnished or power
or fuel is supplied) or 19 (if the house has four
rooms and is furnished and power or fuel is
supplied)
D = the number of months entitled to the
accommodation
Par 9(3)
The Commissioner may determine a lower rental value if he is
satisfied that the rental value is
lower than the cash equivalent
(par 9(5))
Par 2(d)
In terms of par 9(3B), the formula also applies when an
employee has an interest in
accommodation. Par 9(10) determines that such interest includes ownership, an increase
in value and an option to acquire. Par 9(9) determines that
the rent paid by the employer is
deemed not to be received by
the employee in such a case,
and therefore the employee cannot claim any expenses in respect of such accommodation
continued
221
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8.4
Reference in the Act
Cash equivalent
± special rules
Cash equivalent
± special rules
No values
Exception to No values
Full ownership does not vest in the employer
or an associated institution in relation to the
employer, but accommodation is rented by the
employer or associated institution in relation to
the employer LQWHUPVRIDQDUP¶VOHQJWKWUDQVaction from a non-connected person: The
rental value is the lower of
l the formula value
l the expenditure incurred by the employer
or associated institution
Par 9(3C)
The employee is provided with accommodation consisting of two or more residential
units situated at different places: The rental
value = value of the unit with the highest rental
value over the full period of entitlement to
occupy more than one unit
(a) Any accommodation (in or outside the
Republic) supplied while the employee (a
resident) is away from his usual place of
residence in the Republic for work purposes
(b) Any accommodation in the Republic supplied to an employee (a non-resident)
away from his usual place of residence
outside the Republic
l for a period ” two years after date of
arrival in the Republic, or
l for a period <90 days in the year of
assessment
Par 9(6)
The aforementioned ” two years-exception
(par 9(7A)(a)) for non-resident employees is
not applicable
Par 9(7B)
(a) if the employee was present in the
Republic for a period exceeding 90 days
during the year of assessment immediately preceding the date of arrival, or
If 89 days are exceeded, the
accommodation will have a full
taxable value (not only the days
in excess of 89), unless the
par 9(7A)(a) read with par 9(7B)
exception applies
Example: employer pays rent of
R40 000 per month for one year.
Even though the period is less
than two years, R180 000 (12 ×
R15 000 (R40 000 – R25 000))
will be taxable
(b) to the excess of the cash equivalent over
an amount of R25 000 multiplied by the
number of months during which the
accommodation is supplied
Remuneration for PAYE
Cash equivalent
Amount on IRP 5
Cash equivalent
The formula value does not take
into account where the house is
situated. This is addressed by
using the lower of the formula
value and the actual expenditure
Par 9(7). Par 9(7) cannot apply
if the residential accommodation consists of two or more
units
Par 9(7A)
Par 9(7A)(a)
Par 9(7A)(b)
Par (b) of the definition of ‘remuneration’ in the Fourth Schedule
Example 8.15. Residential accommodation
Ayize’s employer provided him with residential accommodation for the entire 2021 year of
assessment at an annual rental of R4 000. Ayize is not a shareholder in the employer company.
The accommodation is unfurnished and is provided without any services. Ayize’s remuneration
from his employer in the previous year of assessment comprised a cash salary of R203 024 only.
Calculate the cash equivalent of the taxable benefit arising from Ayize’s right of occupation of the
accommodation, if
(a) the accommodation is owned by the employer
(b) the employer rents the accommodation from the owner at a cost of R10 000 per year.
222
8.4
Chapter 8: Employment benefits
SOLUTION
Cash equivalent = Rental value less Rent payable
C
D
(a) Rental value = (A – B) ×
×
100
12
A = Remuneration proxy = R203 024 (Ayize’s remuneration for the previous year of
assessment excluding residential accommodation)
B = R83 100
C = 17 (the accommodation is unfurnished and provided without services)
D = 12
17
12
?
Rental value
= (R203 024 – R83 100)
×
×
100
12
= R20 387
?
Cash equivalent = R20 387 – R4 000
= R16 387
(b) Taxable benefit is the lower of
C
D
l the formula value: (A – B) ×
×
(as calculated above) .................
R20 387
100
12
l the total amount paid by the employer .............................................................
R10 000
Taxable benefit = ...................................................................................................
Less: Consideration paid by employee ...................................................................
R10 000
(4 000)
Cash equivalent of the taxable benefit ....................................................................
R6 000
8.4.9 Holiday accommodation (paras 2(d) and 9)
Reference in the Act
Type of taxable benefit
Free holiday accommodation (or for a consideration less than the rental value of the
accommodation)
Exclusions from taxable
benefit
None
Definitions
None
Cash equivalent
± general rule
Rental value of holiday accommodation less
any consideration given by the employee
Par 9(2) and 9(4)
Cash equivalent
± special rules
Rental value if the employer rents the accommodation from a person other than an associated institution in relation to the employer =
costs for employer in respect of rental, meals,
refreshments and other services
Par 9(4)(a)
Rental value in any other case = prevailing
rate per day at which the accommodation
could normally be let to a person who is not
an employee
Par 9(4)(b)
The words ‘any other case’
includes the employer being the
owner of the holiday accommodation or the employer renting
the holiday accommodation
from an associated institution in
relation to the employer
No values
None
Remuneration for PAYE
Cash equivalent
Amount on IRP 5
Cash equivalent
Par 2(d)
Par (b) of the definition of ‘remuneration’ in the Fourth Schedule
Example 8.16. Holiday accommodation
Thabo’s employer provided him, his wife and two children with free holiday accommodation in
the employer’s cottage at the coast for ten days. The employer owns the cottage.
Calculate the cash equivalent of the taxable benefit to Thabo if
(a) the cottage is normally let for R5 000 a day
(b) the cottage is normally let for R800 per person per day.
223
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8.4
SOLUTION
The cash equivalent of the taxable benefit is therefore:
(a) R5 000 × 10 = R50 000
(b) R800 × 10 × 4 = R32 000.
Remember
If the rate is given per person per day, the employee’s family member’s benefit will be taxed in
the employee’s hands in terms of par 16.
8.4.10 Free or cheap services (paras 2(e) and 10)
Reference in the Act
Type of taxable benefit
Any services rendered to the employee at the
expense of the employer and used by the employee for his private or domestic purposes,
and no consideration is given by the employee or a consideration less than the
respective cash equivalents below is given
*BMW South Africa (Pty) Ltd v CSARS 2019
ZASCA 107. The primary questions to be
asked are whether an advantage or benefit was
granted by an employer to an employee and
whether it was for the latter’s private or
domestic purposes
Par 2(e)
An example of services used by
an employee for private purposes is an employer who pays
a tax expert to render assistance to its expatriate employees
to fulfil their obligations to
SARS*
Exclusions from taxable
benefit
Services relating to residential accommodation (par 9(4)(a)), medical services (par 2(j))
and payments to insurers for the benefit of
employees (par 2(k))
Par 2(e)
Definitions
None
Cash equivalent
± general rule
If a travel facility is granted by an employer
engaged in the business of conveying passengers for reward by sea or air, to an
employee or the employee’s relative to travel
to a destination outside the Republic for
private or domestic purposes:
l the lowest fare less any consideration given
by the employee or his relative
In all other cases:
l the cost to the employer less any consideration given by the employee
Cash equivalent
± special rules
None
No values
(a) A travel facility granted to enable an
employee or the employee’s spouse or
minor child to travel to
l any destination in the Republic
l overland to any destination outside the
Republic, or
l any destination outside the Republic if
the travel was undertaken on a normal
flight and no firm advance reservation
of the seat or berth could be made
Par 10(1)(a)
Par 10(1)(b)
(Sometimes it is the marginal
cost for the employer such as in
the case where a lecturer’s child
studies free of charge at a university)
Par 10(2)(a)
continued
224
8.4
Chapter 8: Employment benefits
Reference in the Act
(b) A transport service rendered to employees in general to travel between their
homes and work
(c) Any communication service provided to
an employee which is used mainly for the
purposes of the employer’s business
(d) Services rendered by an employer to his
employees at their place of work
l for the better performance of their duties,
or
l as a benefit to be enjoyed by them at
that place, or
l for recreational purposes at that place
or a place of recreation provided by the
employer for the use of his employees
in general
(e) Any travel facility granted to the spouse
or minor child of an employee to travel
between the employee’s usual place of
residence and the business place where
the employee is stationed if
l the employee is stationed further than
250 km away from his usual place of
residence, and
l the employee is required to work at that
place for more than 183 days during
the year of assessment
Par 10(2)(b)
Remuneration for PAYE
Cash equivalent
Par (b) of the definition of ‘
remuneration’ in the Fourth
Schedule
Amount on IRP 5
Cash equivalent
Par 10(2)(bA)
Par 10(2)(c)
Par 10(2)(d)
8.4.11 Low-interest debts (paras 2(f), 10A and 11)
Reference in the Act
Type of taxable benefit
Debt owed by the employee to the employer
or to any other person by arrangement with
the employer or any associated institution in
relation to the employer at no interest or at a
lower rate than the official interest rate
Par 2(f)
This provision applies if the
debt is granted due to services
rendered. If the debt is granted
due to the holding of shares,
the deemed dividend provisions
in s 64E(4) will apply
Exclusions from taxable
benefit
Debts to enable employees to buy qualifying
equity shares in terms of s 8B or to pay stamp
duty or securities transfer tax thereon
Debts in respect whereof par 2(gA) subsidies
are payable (see 8.4.12)
Par 2(a)
Definitions
Official interest rate: South African repurchase
rate + 1% (debt in rand) and equivalent of
South African repurchase rate + 1% (debt in
other currency)
Section 1:
The South African repurchase
rate is not defined for the purposes of the Act. The South
African Reserve Bank (SARB) in
terms of its monetary policy
fixes this interest rate. It is the
rate levied by the SARB when
lending to other local banks
(see Appendix B)
Where a new repurchase rate or
equivalent repurchase rate is
determined, the new rate applies
from the first day of the month
following the date on which the
amendment came into operation
continued
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8.4
Reference in the Act
Cash equivalent ±
general rule
Interest calculated on the amount owing in
respect of the debt at the official interest rate
less the actual interest incurred during the
year
Par 5(1)
In terms of par 11(3), the Commissioner may, on application
by the taxpayer, approve
another method to calculate the
cash equivalent if such method
achieves substantially the same
result
This taxable benefit is an antiavoidance provision. In terms of
s 7D, where the interest that
would have accrued or have
been incurred in respect of any
loan or debt must be calculated
at a specific rate of interest,
neither the statutory nor the
common law in duplum rule
(see chapter 24) applies in
respect thereof. The general
rule to determine the cash
equivalent using the official
interest rate will therefore apply
despite the limitations of the in
duplum rule. The interest must
be calculated as simple interest
and is calculated daily (s 7D(b))
If the taxpayer has used the debt
in the production of income, the
same amount of the cash equivalent is deemed to be interest
actually incurred and he or she
can claim a s 11(a) deduction
for the amount (par 11(5))
Cash equivalent ±
special rules
A portion of the cash equivalent accrues to
employee
l on each date on which interest is payable
(if interest in respect of the debt is payable
at regular intervals)
l on the last day of each period in respect
of which cash remuneration is payable (if
irregular intervals or no interest)
Par 11(2)(a)
Deemed loan
Residential accommodation is taxed as a low
interest loan* if:
1. the employee lives in an employer-owned
house
2. the employee, his spouse or minor child
is entitled or obliged to acquire the house
from the employer at a future date at a
price stated in an agreement, and
3. the employee is required to pay for his
occupation a rental calculated wholly or
partly as a percentage of the future purchase price stated in the agreement.
Par 10A(1)
*The employer is deemed to have granted the
employee a loan equal to the future purchase
price at an interest rate equal to the percentage in (3)
Cash equivalent = purchase price × (official
interest rate less interest rate in (3))
No values
(a) A debt owed by an employee to his or her
employer if such debt or the aggregate of
such debts does not exceed R3 000 at
any relevant time
Par 11(4)(a)
‘Such debt’ refers to short-term
debt granted to employees on
irregular basis and not to all
debts purely because it is less
than R3 000
continued
226
8.4
Chapter 8: Employment benefits
Reference in the Act
(b) A debt owed by an employee to his or her
employer for the purpose of enabling the
employee to further the employee’s own
studies
Par 11(4)(b)
(c) A debt owed by an employee to his or her
employer in consequence of a loan by the
employer as does not exceed an amount
of R450 000 if
l the debt was assumed to acquire
immovable property used for residential purposes by the employee
l the market value of the immovable
property acquired does not exceed
R450 000
l the remuneration proxy of the employee does not exceed R250 000,
and
l the employee is not a connected person in relation to the employer
Par 11(4)(c)
Remuneration for PAYE
Cash equivalent
Par (b) of the definition of ‘remuneration’ in the Fourth Schedule
Amount on IRP 5
Cash equivalent
Example 8.17. Debts
A company made the following loans to its employees during the year of assessment ending on
28 February 2021:
(1) an interest-free loan of R20 000 to Alfons on 1 September 2020
(2) a loan of R50 000 at an interest rate of 4% to Bert on 1 September 2020 to enable him to
buy a small rent-producing investment
(3) an interest-free loan of R1 500 to Carol on 15 October 2020 in order to help her meet unexpected medical bills, which was repaid in November
(4) an interest-free loan of R6 000 to Don on 7 January 2021 to enable him to pay the university
fees for his studies.
Calculate the cash equivalent of the taxable benefit, if any, from each of these loans, assuming
that all the loans except that made to Carol were still outstanding at the end of the year. The
repurchase rate has been 7,25% since 1 February 2020.
SOLUTION
(1) The cash equivalent of the taxable benefit to Alfons will be:
R20 000 × 8.25% × 181/365 = R 818
(2) The cash equivalent of the taxable benefit to Bert will be:
R50 000 × (8.25% – 4%) × 181/365 = R 1 054
The cash equivalent of the taxable benefit included in Bert’s income is deemed for the purposes of s 11(a) of the Act to be interest actually incurred by him in respect of the loan. If he
had actually incurred this amount as interest, it would have been incurred in the production
of his income. While a taxable benefit of R1 054 will be included in his income, the same
amount will be allowed as a deduction under s 11(a) against rental income earned
(par 11(5)). The 4% paid by him will also be allowed as a deduction under s 11(a).
(3) There will be no taxable benefit to Carol, since the amount is less than R3 000 and therefore
does not give rise to a taxable benefit (par 11(4)(a)).
(4) The loan to Don does not give rise to a taxable benefit, since it was granted to him for the
purpose of enabling him to further his studies (par 11(4)(b)).
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8.4
Example 8.18. Residential accommodation: Employee has an option to acquire
the accommodation
Wandile is granted an option to acquire a house owned by his company at a price of R160 000 at
a time when its market value is R140 000. In the meantime, he is granted the right to occupy the
house on 1 March 2016 at a fixed annual rental of 4% of the option price. The house cost the
company R110 000. Calculate the cash equivalent of the taxable benefit arising from Wandile’s
right of occupation of the house and the taxable benefit, if any, that will arise if he exercises his
option and buys the house for R160 000 when the market value amounted to R230 000. The
repurchase rate has been 7,25% since 1 February 2020.
SOLUTION
Wandile is deemed by par 10A(1) to have been granted a loan of R160 000 and to have paid
interest at the rate of 4% a year on this loan. The cash equivalent of the taxable benefit arising
from the deemed loan will therefore be R6 800 ((8,25% – 4%) × R160 000). This is the difference
between interest calculated at the official rate (repurchase rate of 7,25% plus 100 basis points
(or 1%)) and the deemed interest paid (4%).
There will be no taxable benefit when Wandile exercises his option, since the purchase price of
the house will not be less than its market value at the time of the agreement (R140 000)
(par 10A(2)).
8.4.12 Subsidies in respect of debts (paras 2(g), (gA) and 12)
Reference in the Act
Type of taxable benefit
Subsidies paid by an employer in respect of
interest or a repayment of capital payable by
employee in respect of any debt of the employee
Exclusions from taxable
benefit
None
Definitions
None
Cash equivalent
ದgeneral rule
Pay subsidy to employee: Amount of the subsidy
Pay subsidy to a third party: Amount of the
subsidy
Par 12 and 2(g)
(In terms of par 2(gA) this is only applicable if
the sum of the subsidy and the actual interest
paid by the employee is more than the interest
on the debt at the official interest rate. The tax
consequences if the aforementioned sum is
less are not addressed in the Act or in the
Guide for Employers in respect of fringe benefits)
Par 4.8 of the Guide for Employers in respect of Fringe Benefits explains that a par 2(gA)
fringe benefit occurs if an employer pays a subsidy to a third
party in respect of a low interest
loan or interest free loan
granted by the third party to the
employee
No values
None
Remuneration for PAYE
Cash equivalent
Amount on IRP 5
Cash equivalent
Par 2(g) and (gA)
Par 12 and 2(gA)
Par (b) of the definition of ‘remuneration’ in the Fourth Schedule
228
8.4
Chapter 8: Employment benefits
8.4.13 Release from or payment of an employee’s debt (paras 2(h) and 13)
Reference in the Act
Type of taxable benefit
The employer has
l directly or indirectly paid a debt owing by
the employee to a third person without
requiring reimbursement by the employee,
or
l has released an employee from an obligation to pay a debt owing by the employee
to the employer
Par 2(h).
Indirect payment is when the
employer makes the payment to
the third party via somebody
else (including the employee)
If an employer pays the contributions to a retirement annuity
fund for the benefit of an
employee, it will be a fringe
benefit in terms of this paragraph since it is the payment of
an employee’s debt on his or
her behalf
Exclusions from taxable
benefit
Contributions by an employer to a benefit fund
(medical schemes) (par 2(i)) fringe benefit)
Costs in respect of medical services paid by
employer (par 2(j) fringe benefit)
Par 2(h)
Definitions
The definition of ‘employee’, for the purpose of
par 2(h) and 13, includes a person who retired
prior to 1 March 1992 and is released by his
employer after his retirement from an obligation that arose before his retirement
Par 1 – see definition of ‘employee’ for other exclusions
Cash equivalent
± general rule
The amount released or paid by the employer
Par 13(1)
Cash equivalent
± special rules
Deemed release of debt if the debt is extinguished by prescription
Proviso to par 2(h)
A debt prescribes three years
after the debt became claimable or payable
No values
(a) Employees’ subscriptions paid by an
employer to a professional body if membership of such body is a condition of the
employee’s employment
(b) Insurance premiums paid by the employer indemnifying an employee solely
against claims arising from negligent acts
or omissions of the employee in rendering
services to the employer
(c) The value of a benefit paid by a ‘former
member of a non-statutory force or
service’ to the ‘Government Employees’
Pension Fund’
(d) The payment of an employee’s bursary or
study loan debt by the employee’s current
employer to the employee’s previous
employer
The benefit will have no value if the employee has undertaken to work for the
second employer at least for the unexpired period that he would have been
obliged to work for the first employer
Par 13(2)(b)
Remuneration for PAYE
Cash equivalent
Par (b) of the definition of ‘remuneration’ in the Fourth Schedule
Amount on IRP 5
Cash equivalent
229
There are no CGT consequences in respect of the discharge
of a debt – par 12A(6)(c) of the
Eighth Schedule
Par 13(2)(bA)
Par 13(2)(c)
Par 13(3)
Silke: South African Income Tax
8.4
Example 8.19. Payment or release of obligation
A company paid or waived the following amounts during the 2021 year of assessment:
(1) It paid R5 000 in settlement of debts owing by a director (but not a shareholder), Themba.
(2) It paid Fezile’s subscriptions due to SAICA. Fezile is the financial accountant and it is a condition of his employment that he is registered as a CA(SA).
(3) It waived a debt of R300 owing by Dumisa, a wage clerk, after he resigned and took up
alternative employment.
Calculate the cash equivalent of the taxable benefits, if any, involved in these transactions.
SOLUTION
(1) The cash equivalent of the taxable benefit to Themba will be R5 000 (par 13(1)).
(2) The payment of Fezile’s subscription to SAICA has no taxable value (par 13(2)(b)).
(3) There will be no taxable benefit, because Dumisa was no longer an ‘employee’ (as defined
in par 1) of the company when his debt was waived.
8.4.14 Contributions to medical schemes (benefit funds) (paras 2( i) and 12A)
Reference in the Act
Type of taxable benefit
Direct or indirect contributions to par (b) ‘benefit funds’ as defined by an employer for the
benefit of an employee or his dependants
Exclusions from taxable
benefit
None
Definitions
Benefit fund: Medical schemes are included
in par (b) of this definition
Section 1 and par 2(i)
Cash equivalent
± general rule
The amount of the contributions paid by the
employer
Par 12A
Cash equivalent
± special rules
If the contributions by the employer in respect
of an employee and his dependants cannot
specifically be attributed, it is deemed that the
contribution is equal to the total contributions
by the employer divided by the number of
employees in respect of whom the contributions were made
The Commissioner can, on application by the
taxpayer, allow an alternative fair and reasonable manner of apportionment
Par 12A(2)
No values
Remuneration for PAYE
The benefit is derived by
(a) a person who has retired from employment by reason of age, ill-health or other
infirmity, or
(b) the dependants of a person (who was an
employee at the date of death) after his or
her death, or
(c) the dependants of an employee after his or
her death, if that person retired from
employment by reason of age, ill-health or
other infirmity
Cash equivalent
Par 2(i)
Par 12A(3)
Par 12A(5)(a)*
Par 12A(5)(b)
Par 12A(5)(c)
* Please refer to chapter 7
regarding the link between
par 12A(5)(a) and the s 6A
medical tax credit
Par (b) of the definition of ‘remuneration’ in the Fourth Schedule
Remember that the employer
must take the s 6A medical tax
credit into account when calculating the employees’ tax
(par 9(6)(a) of the Fourth Schedule)
Amount on IRP 5
Cash equivalent
230
8.4
Chapter 8: Employment benefits
Example 8.20. Contributions to medical schemes
FGH Ltd pays R1 500 a month to a medical scheme for the benefit of one of its employees,
Khwezi, who turned 65 during the year of assessment. Khwezi himself does not contribute to the
scheme. He does not have any dependants.
(a) Khwezi worked for the full 2021 year of assessment. Calculate the cash equivalent of the
taxable benefit that must be included in the taxable income of Khwezi for the 2021 year of
assessment. Also explain the employees’ tax consequences of this taxable benefit.
(b) Explain the tax implications if Khwezi retired on 1 July 2020 due to old age and FGH Ltd
paid his full contributions for the full 2021 year of assessment.
SOLUTION
(a) Cash equivalent = Contributions paid by FGH Ltd (R1 500 × 12) .......................
The fringe benefit does not have ‘no value’ because Khwezi has not retired.
Khwezi will qualify for the medical scheme fees tax credit. The remuneration
for employees’ tax purposes is R1 500 per month and the employer must
deduct the medical scheme fees tax credit of R319 monthly in the calculation
of the employees’ tax in terms of par 9(6) of the Fourth Schedule.
(b) Khwezi is an ‘employee’ as defined in the Seventh Schedule for the whole of
the 2020 year of assessment.
The cash equivalent in terms of par 12A will be ((R1 500 × 4) + (R0 × 8)
(par 12A(5)(a)) and is included in gross income in terms of par (i) .....................
Khwezi will be deemed to have paid the R6 000 in terms of s 6A(3)(b) and will
therefore qualify for a medical scheme fees tax credit of R319 for the first four
months of the year of assessment. Khwezi will not qualify for a medical
scheme fees tax credit for the last eight months because Rnil is included as a
fringe benefit for these months and he is therefore deemed to have paid Rnil.
FHG Ltd can consequently only deduct the R319 per month as a medical
scheme fees tax credit in terms of par 9(6) of the Fourth Schedule in the first
four months when calculating the monthly employees’ tax of Khwezi.
R18 000
R6 000
8.4.15 Costs relating to medical services (paras 2 (j) and 12B)
Reference in the Act
Type of taxable benefit
Costs paid by employer in respect of
various medical, dental, hospital or
nursing services or medicines provided to
the employee, his or her spouse, child,
family member or dependant
Exclusions from taxable benefit
None
Definitions
None
Cash equivalent
± general rule
Amount incurred by the employer
Par 12B(1)
Cash equivalent
± special rules
If the payment by the employer in respect
of an employee or his dependants cannot
specifically be attributed, it is deemed that
the payment is equal to the total payments
by the employer divided by the number of
employees in respect of whom the contributions were made
Par 12B(2)
No values
(a) Treatments listed by the Minister of
Health as prescribed minimum benefits provided to an employee, his or
her spouse or children in terms of a
medical scheme run by the employer
as a business
If not run as a business, the aforementioned persons must not be beneficiaries of another medical scheme, or,
if they are, the employer must recover
the total cost of such treatment from
such medical scheme before the no
value will apply
Par 12B(3)(a)
Par 2(j)
continued
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Silke: South African Income Tax
8.4
Reference in the Act
(b) Services rendered or medicines supplied
for the purposes of complying with any
law of the Republic (for example HIV/AIDS
medicine)
(c) Benefits derived by
l a person who retired by reason of
age, ill health or other infirmity, or
l the dependants of an employee
(who was an employee at the date
of death) after his or her death, or
l the dependants of an employee after
his or her death, if that person retired
from employment by reason of age, illhealth or other infirmity
l a person entitled to the over 65 rebate
(d) Services rendered to employees in
general at their place of work for the
better performance of their duties
Par 12B(3)(aA)
Remuneration for PAYE
Cash equivalent
Par (b) of the definition of ‘remuneration’ in the Fourth Schedule
Amount on IRP 5
Cash equivalent
Par 12B(3)(b)(i)
Par 12B(3)(b)(ii)
Par 12B(3)(b)(iii)
Par 12B(3)(b)(iv)
Par 12B(3)(c)
Example 8.21. Medical services
Employer A has a scheme (which does not constitute the business of a medical scheme) in terms
whereof medical services are provided to employees, spouses and dependants. The following
payments are made by employer A:
Employee Barry: Payment of dental services ................................................................... R4 000
(Employee Barry is a member of a medical scheme and employer A
recovered the full R4 000 from employee Barry’s medical scheme.)
Employee Candice: Payment of hospital account for open heart operation ................... R26 000
(Employee Candice is 66 years old).
Employee Driaan: Payment of medicine for epilepsy .......................................................
R3 000
(Employee Driaan was employed by employer A, but died during the year.
The R3 000 was paid on behalf of his wife after employee Driaan’s death.)
Calculate the cash equivalent of the taxable benefits as a result of employer A’s payments on
behalf of the respective employees.
SOLUTION
Employee Barry
The payment of the R4 000 has no taxable value for employee Barry since employer A has
recovered the full R4 000 from employee Barry’s medical scheme (par 13(3)(a)(ii)(bb)).
Employee Candice
The payment of the R26 000 has no taxable value for employee Candice since she is entitled to
the above-65 rebate (par 13(3)(b)(iv)).
Employee Driaan
The payment of the R3 000 on behalf of employee Driaan’s wife has no taxable value since
employee Driaan was employed by employer A at his death and his wife is dependent on
employee Driaan (par 13(3)(b)(ii)).
8.4.16 Benefits in respect of insurance policies (paras 2(k) and 12C)
Reference in the Act
Type of taxable benefit
The employer has made any payment to any
insurer under an insurance policy directly or
indirectly for the benefit of the employee or his
or her spouse, child, dependant or nominee
Par 2(k)
Exclusions from taxable
benefit
An insurance policy that relates to an event
arising solely out of and in the course of
employment of the employee
Proviso to par 2(k)
An example of this is a policy
that pays out if the employee is
injured in an accident at work
continued
232
8.4
Chapter 8: Employment benefits
Reference in the Act
Definitions
None
Cash equivalent
± general rule
Amount of premiums paid by the employer
Par 12C(1)
Cash equivalent
± special rules
Where it cannot be determined which premiums paid by an employer relates to a
specific employee, the amount attributed to
that employee is deemed to be an amount
equal to the total expenditure divided by the
number of employees in respect of whom the
expenditure is incurred
Par 12C(3)
No values
None
Remuneration for PAYE
Cash equivalent
Par (b) of the definition of ‘remuneration’ in the Fourth Schedule
Amount on IRP 5
Remuneration for PAYE
Cash equivalent
8.4.17 Contributions by an employer to pension and provident funds (paras 2( l) and 12D)
Reference in the Act
Type of taxable benefit
Contributions by employer to any pension and
provident fund for the benefit of an employee
A defined contribution fund is a fund where
the contributions and the benefits at retirement correlate
A defined benefit fund is a fund where the
contributions are based on the retirement
funding employment income but the benefits
at retirement are calculated per fund member
category in terms of a formula
Exclusions from
taxable benefit
None
Definitions
Benefit: any amount payable to a member, a
dependant or nominee of the member by the
fund
Defined benefit component: a benefit receivable from a retirement fund other than a
defined contribution component or underpin
component
Par 2(l). The proviso to this paragraph ensures that transfers of
actuarial surpluses between or
within retirement funds of the
same employer do not create a
fringe benefit in the employee’s
hands. This is in spite of the fact
that such transfers are deemed
to be contributions made by the
employer (through the fact that
the fund is an associated institution in relation to the employer)
Par 12D(1)
Defined contribution component: a benefit
receivable from a retirement fund based on
the contributions paid by the member and the
employer plus any fund growth and other
credits to the member’s account less expenses determined by the board; or a benefit
that consists of a risk benefit if it is provided
solely by means of a policy of insurance
Fund member category: any group of members where the employers and members
make contributions in the same equal rate and
the value of the benefits are calculated using
the same method
Member: any member or former member, but
not a person who has received all the benefits
that may be due by the fund and thereafter
terminated membership
Retirement-funding income: That part of the
employee’s income taken into account in the
determination of the contributions made. In
the case of a partner in a partnership, it is that
part of the partner’s share of profits taken into
account in the determination of the contributions
continued
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8.4
Reference in the Act
made Risk benefit: a benefit payable in
respect of the death or permanent disablement of a member
Underpin component: a benefit receivable
from a retirement fund the value of which is
the greater of a defined contribution component or a defined benefit component other
than a risk benefit
Cash equivalent
± general rule
Where the benefits payable to a fund member
category of the fund consists solely of defined
contribution components: the total amount
contributed by the employer in respect of the
employee
Where the taxable benefits payable to a fund
member category of the fund consists of
components other than only defined contribution components: an amount determined in
accordance with the following formula:
X = (A × B) – C
Where
A = the fund member category factor of the
employee
B = the retirement funding employment
income of the employee
C = the contributions by the employee
excluding voluntary contributions and buyback contributions
Par 12D(2)
Par 12D(3)
Par 12D(4): the board of a fund
must provide contribution certificates which contain the fund
member category factor to the
employer in respect of this benefit. A corrected contribution
certificate must be issued where
an error occurred in calculating
the fund member category
factor (par 12D(4)(c)). The corrected certificate will have effect
from the first day of the month
following the month in which the
corrected certificate was received. Where the fund category factor has changed during the year of assessment, the
contribution certificate must be
supplied to the employer no
later than one month after the day
on which the changes became
effective (par 12D(4)(d)). Par
12D(5) states that the Minister
may make regulations prescribing
the manner in which funds must
determine the fund member
category factor and the information that the contribution
certificate must contain
Cash equivalent
± special rules
None
No values
The taxable benefit derived from any contribution made by an employer
l for the benefit of a member of a fund that
has retired from that fund, or
l in respect of the dependants or nominees
of a deceased member of that fund
Par 12D(6)
Remuneration for PAYE
Cash equivalent
Par (b) of the definition of ‘remuneration’ in the Fourth Schedule
Amount on IRP 5
Cash equivalent
8.4.18 Contributions by an employer to bargaining councils (paras 2(m) and 12E)
Reference in the Act
Type of taxable benefit
Contributions by employer to any bargaining
council for the benefit of an employee
Exclusions from taxable
benefit
Any payment in respect of a pension fund or
provident fund as contemplated in par 2(l)
Par 2(m)
continued
234
8.4±8.6
Chapter 8: Employment benefits
Reference in the Act
Definitions
None
Cash equivalent
± general rule
Amount of premiums paid
Par 12E(1)
Cash equivalent
± special rules
Par 12E(2)
No values
Where it cannot be determined which premiums paid by an employer relate to a
specific employee, the amount attributed to
that employee is deemed to be an amount
equal to the total expenditure divided by the
number of employees in respect of whom the
expenditure is incurred
None
Remuneration for PAYE
Cash equivalent
Par (b) of the definition of ‘remuneration’ in the Fourth Schedule
Amount on IRP 5
Cash equivalent
8.5 Right to acquire marketable securities (s 8A)
Section 8A read with par (i) of the definition of gross income in s 1 provides that gains made by a
director or employee by virtue of the exercise, cession or release, in whole or in part, of a right to
acquire any marketable security (as defined in s 8A(10)) must be included in gross income. This
inclusion will be applicable if the right was obtained by the taxpayer as a director or former director of
a company or in respect of services rendered or to be rendered by him as an employee to an
employer. Section 8A is only applicable to a right obtained by a taxpayer before 26 October 2004. In
light of the long lapse of time, this section will no longer be discussed in detail. The 2014 version of
Silke can be studied for a full discussion thereof. Section 8A was replaced by s 8C and the taxation
of rights obtained on or after 26 October 2004 is discussed in 8.7.
8.6 Broad-based employee share plans (s 8B)
The acquisition of shares by employees (over standard salary) can motivate productivity because
employees obtain a stake in the future growth of the entity. Section 8B was originally introduced to
lighten the tax burden where shares are transferred to employees on a broad basis. Section 8B
applies to ‘qualifying equity shares’ (as defined) acquired in terms of a broad-based employee share
plan (as defined). In order to prevent an employee, who leaves the services of an employer, from not
being taxed on the gain on disposal, the word ‘employee’ was substituted by the word ‘person’.
A ‘qualifying equity share’ is defined as an equity share acquired in terms of a ‘broad-based
employee share plan’. The total market value of all such shares acquired in the current year and the
four immediately preceding years of assessment, on the date of the grant, does not exceed R50 000.
This limit can be interpreted in different ways. One interpretation is that s 8B will apply to the extent
that the market value of the qualifying shares does not exceed R50 000. Another is that, if a grant will
cause the R50 000 limit to be exceeded, s 8B will not apply in respect of the total of such grant and
that s 8C must then be considered. The value of qualifying equity shares acquired because the person already held other qualifying equity shares (for example through a capitalisation issue or at
unbundling) are not taken into account in calculating the R50 000 limit (s 8B(2A) and the definition of
‘qualifying equity share’ read together).
A ‘broad-based employee share plan’ (as defined in s 8B(3)) must meet the following requirements:
l equity shares in that employer or in any company that is an associated institution as defined in
the Seventh Schedule in relation to the employer, are acquired by the employee (s 8B(3)(a))
l employees who participate in any other equity scheme are not entitled to participate and at least
80% of all other employees employed on a full-time basis for at least one year on the date of
grant are entitled to participate (s 8B(3)(b))
l the employees who acquire the equity shares are entitled to all dividends, foreign dividends and
full voting rights in relation to those equity shares (s 8B(3)(c)), and
l no restrictions have been imposed in respect of those equity shares, other than
– a restriction imposed by legislation
– a right of any person to acquire the shares from the employee or former employee at the lower
of market value on the date of grant and the market value on the date of acquisition by the
person if the employee or former employee is or was guilty of misconduct or poor performance,
or
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8.6
– a right of any person to acquire the equity shares from the employee or former employee at the
market value on the date of the acquisition by that person, or
– a restriction that the employee or former employee is not permitted to dispose of the share for a
period which may not extend beyond five years from the date of grant (s 8B(3)(d)).
The acquisition of the qualifying equity share
Paragraph 2(a)(iii) excludes the acquisition of any qualifying equity share from taxable benefits. The
amount (being the market value of the equity share less any consideration paid by the employee) is
therefore not included in gross income in terms of par (i) of the ‘gross income’ definition. The amount
is also specifically excluded from gross income in terms of par (c) of the ‘gross income’ definition so
as to avoid a possible scenario of double taxation. The amount is, however, exempt from tax in terms
of s 10(1)(nC) – refer to chapter 5. There must be an inclusion in gross income before an amount can
be exempt, and it is therefore submitted that the amount must be included in gross income in terms of
the general definition of gross income. The s 10(1)(o)(ii) apportionment can exempt a part of the
amount if the services were rendered both inside and outside the RSA. A debt incurred by an
employee in favour of the employer or an associated institution in order to pay the consideration for
the s 8B shares, is excluded as a fringe benefit (par 2(f) of the Seventh Schedule).
The gain on the disposal of the qualifying equity share
The gain made by a person from the disposal of any qualifying equity share or any right or interest in
a qualifying equity share within five years from the ‘date of grant’ is included in his or her ‘income’
(s 8B(1)). Please remember that any amounts included in ‘income’ in terms of any other provision of the
Act are effectively included in gross income in terms of par (n). The date of grant is the date on which
the granting of the equity share is approved (s 8B(3)). If the person sells the shares after this five-year
period, s 8B will not apply and the person’s gains will generally be of a capital nature and will
therefore attract CGT in terms of the Eighth Schedule. The intention of the taxpayer will be defining.
Section 8B contains no provision in respect of the tax implication if the disposal of a s 8B share leads
to a loss. It is suggested that such a loss is of a capital nature since deduction thereof will be
prohibited in terms of s 23(m).
The provisions of s 8B are applicable notwithstanding the provisions of s 9C, which deems income
from the sale of equity shares to be of a capital nature if the shares were held for at least three
consecutive years. This means that the provisions of s 8B override those of s 9C and that a disposal
of a qualifying equity share after three years but before five years will still result in a s 8B inclusion in
income and not in CGT. Section 8C does not apply if s 8B is applicable (s 8C(1)(b)(ii)).
The following disposals within five years from the date of grant are excluded from the provisions of
s 8B:
l disposals in exchange for another qualifying equity share as contemplated in s 8B(2) (s 8B(1)(a))
(these disposals are also seen as ‘no disposal’ in terms of par 11(2)(m) of the Eighth Schedule)
l disposals on the death of that person (s 8B(1)(b)), and
l disposals on the insolvency of that person (s 8B(1)(c)).
Section 9HA causes a deemed disposal of s 8B shares in the case of death on or after 1 March 2016.
The provisions of s 25 are not applicable in respect of a disposal on death (s 8B(4)). As a general
rule, if a person ceases to be a resident, the person is deemed to have immediately disposed of all
his assets in terms of s 9H. There is, however, no deemed disposal of s 8B qualifying equity shares
allocated to a person less than five years before the person ceases to be a resident (s 9H(4)(d)). If a
person disposes of qualifying equity shares solely in exchange for any other equity share in the
employer or an associated institution, the new equity shares are deemed to be qualifying equity
shares acquired on the date the first qualifying equity shares were obtained, and for the same consideration (s 8B(2)).
If a person sells his right or interest in qualifying equity shares, the acquisition cost attributable to that
right or interest is calculated as follows:
Acquisition cost multiplied by (the amount received for the disposal divided by the market value of the
qualifying equity shares immediately before the disposal) (s 8B(2B)).
Section 11(lA) provides for a deduction for the employer in respect of the qualifying equity shares
issued. This deduction is limited to R10 000 per employee per year (see chapter 12 for details). Section 56(1)(k)(ii) exempts any gain in terms of s 8A, 8B or 8C from donations tax. Section 8B is discussed in Interpretation Note No. 62.
Employees’ tax
The employer is subject to special PAYE and reporting requirements in terms of qualifying equity
shares (see par 11A of the Fourth Schedule). This is to ensure that the gain on the disposal of
qualifying equity shares within five years from the date of the grant is taxed. The gain on disposal of
236
8.6±8.7
Chapter 8: Employment benefits
qualifying equity shares by an employee within five years from date of grant is ‘remuneration’ (par (d)
of the definition of ‘remuneration’ in the Fourth Schedule). The employer must therefore withhold
PAYE on the gain (see chapter 10 for details) and the gain on disposal must also be shown on the
IRP 5.
Example 8.22. Broad-based employee share plan
XYZ Ltd. grants 2 500 of its shares to each of its permanent employees on 23 February 2020.
The shares are trading at R5,50 each on the date on which the grants are approved. The
employees paid R1 per share, being the nominal value thereof. No restrictions apply to these
shares, except that these shares may not be sold before 23 February 2025 unless the employee
is retrenched or resigns. If an employee leaves the employment of XYZ Ltd. before 23 February 2025, the employee must sell all 2 500 shares back to XYZ Ltd. at the market value of the
shares on the date of departure. XYZ Ltd. appoints a trust to administer all the shares administered under the plan.
Aviwe, an employee of XYZ Ltd., resigns on 15 January 2026 and subsequently disposes of his
shares on the open market for R16 250.
Benno, an employee of XYZ Ltd., resigns on 1 February 2022. The market value of the equity shares
was R5 on 1 February 2021. Mr B sold his shares back to XYZ Ltd. as agreed by the parties.
Discuss the tax consequences of the above transactions. Assume that XYZ has a February year-end.
SOLUTION
All the shares constitute qualifying equity shares under s 8B(2), and there is therefore no taxable
fringe benefit in terms of par 2(a) of the Seventh Schedule on the issue of the shares to the
employees. Any amount received in the form of qualifying equity shares (R4,50 (R5,50 –
R1 paid) per share) is included in gross income in terms of the general definition of gross
income but is also exempt in the hands of the employees in terms of s 10(1)(nC).
XYZ Ltd. can claim a deduction in terms of s 11(lA) in respect of all the shares granted at (R5,50
– R1) = R4,50 per share, therefore 2 500 × R4,50 = R11 250 per employee. The deduction for
the 2020 year of assessment is limited to R10 000 per employee. The excess of R1 250 (R11 250
– R10 000) is transferred to the 2021 year of assessment and is deemed to be the market value
of shares granted in that year to that specific employee. XYZ Ltd. can deduct the R1 250 in the
2021 year of assessment.
Aviwe: The proceeds from the disposal of the shares in 2026 do not constitute income (capital in
nature) since they were not disposed of within five years from the date of the issue of the shares,
and therefore s 8B is not applicable. The disposal will result in a capital gain of R13 750
(R16 250 proceeds less R2 500 nominal value paid) in terms of the Eighth Schedule.
Benno: Section 8B will apply since the shares were sold within five years from the date of grant.
The disposal of the equity shares by Benno on 1 February 2022 results in a profit of R10 000
(2 500 × (R5 – R1)). This profit must be included in Benno’s income and XYZ Ltd. must withhold
employees’ tax on it in terms of par 11A(2) of the Fourth Schedule.
8.7 Taxation of directors and employees at the vesting of equity instruments
(s 8C)
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 and to incentivise retention of key employees. Section 8C regulates the vesting of
equity instruments.
The rules and terms of equity instrument schemes differ, and it is important to note that ‘vesting’ for
the purposes of s 8C is not necessarily the same as vesting in terms of the rules of the scheme. The
rules of a scheme can, for example, determine that the shares are awarded subject to the condition
that the shares only vest after a period of time, or after certain conditions are met. The rules of the
scheme may also first grant a conditional option to acquire equity shares, and then set different dates
for when that option vests, when the option may be exercised, and when all the restrictions falls
away. Interpretation Note No. 55 (Issue 2), issued on 31 March 2011, describes SARS’ interpretation
of s 8C in more detail.
The definition of the term ‘equity instrument’ in s 8C(7) includes the following:
l a share (both equity and non-equity shares – see par 4.2(a)(ii) of Interpretation Note No. 55
(Issue 2)
l a member’s interest in a company
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8.7
l share options or an option to obtain a member’s interest
l any financial instrument that is convertible to a share or member’s interest (for example a convertible debenture), and
l any contractual right or obligation the value of which is determined directly or indirectly with reference to a share or member’s interest (for example a contingent or vested right in a trust that
holds shares).
Section 8C(1) is triggered by the vesting, and not the acquisition, of equity instruments acquired by
directors and employees by virtue of their employment or office, or by virtue of any restricted equity
instrument held (for example as a capitalisation issue or at the unbundling of the company. The
acquisition of equity instruments can be from the employer-company, from any person by arrangement with the employer-company or from an associated institution in relation to the employercompany (s 8C(1)(a)(i)–(iii)).
The acquisition of the equity instrument
Paragraph 2(a)(iv) of the Seventh Schedule specifically excludes the receipt of an asset consisting of
any equity instrument as contemplated in s 8C as a fringe benefit (see 8.4.4 for detail). Any amount
received (that is, the market value of the share on the date of acquisition less any consideration paid
by the employee) by an employee which consists of an equity instrument acquired is therefore not
included in gross income in terms of par (i) of the ‘gross income’ definition. The amount is also
specifically excluded from gross income in terms of par (c) of the ‘gross income’ definition. This
amount is, however, exempt in terms of s 10(1)(nD) as long as vesting has not taken place on the
date of aquisition – see chapter 5. There must, however, be an inclusion in gross income before an
amount can be exempt, and therefore it is submitted that the amount received by way of the aquisition
of an asset consisting of an equity share which has not yet vested must be included in gross income in
terms of the general definition of gross income. Any amount received as consideration for the disposal
of an equity share, which has not yet vested, is similarly included in gross income in terms of the
general definition of gross income and exempt in terms of s 10(1)(nD). A fringe benefit may arise in
relation to a debt granted by an employer in order to buy s 8C shares (in contrast with s 8B shares)
since par 2(f) of the Seventh Schedule only excludes s 8B.
The gain on the vesting of the equity instrument
The gain on the vesting of an equity instrument (as determined in terms of s 8C(2)(a)) is included in
income, and the loss (as determined in terms of s 8C(2)(b)) is deducted from income (s 8C(1)).
Please remember that any amounts included in ‘income’ in terms of any other provision of the Act are
effectively included in gross income in terms of par (n).
The provisions of s 8C(1) are applicable notwithstanding the provisions of ss 9C and 23(m), which
means that the provisions of s 8C override those of the said sections (s 8C(1)(a)). This means that
s 8C will apply even though vesting takes place after three years (s 9C) and that losses are deductible irrespective of the prohibition of s 23(m).
The ‘equity instrument’ is taxed when it ‘vests’ in an employee or director. To establish when an
‘equity instrument’ ‘vests’ in an employee or director, it is important to first establish if it is a ‘restricted
equity instrument’ or an ‘unrestricted equity instrument’, as different rules regarding the vesting of
these instruments apply.
8.7.1 Restricted versus unrestricted instruments
A ‘restricted equity instrument’ is an instrument with any number of restrictions imposed on it. Section 8C(7) lists the following instruments that fall within the restriction status (also see the examples in
par 4.2 of Interpretation Note No. 55):
l Disposal restrictions. This means that the employee or director cannot freely dispose of that
instrument at fair market value at any given time.
l Forfeiture restrictions. This means that the restriction could result in forfeiture of the instrument or
the right to obtain the instrument, or that the taxpayer can be penalised financially in any other
manner. If the employee or director must, for example, sell the instrument back at cost (or
surrender the instrument for nothing) if employment terminates before a specific date, it is a
restricted instrument.
l Right to impose disposal or forfeiture restrictions. This means that any person has a right to
impose a ‘disposal restriction’ or a ‘forfeiture restriction’ on the disposal of that equity instrument.
l Options on restricted equity instruments. An option will be viewed as a restricted instrument if the
equity instrument, which can be acquired in terms of that option, is a restricted instrument.
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l Financial instruments convertible into restricted equity instruments. Financial instruments
(qualifying as equity instruments) that are convertible into a share will be restricted if convertible
only into a restricted share.
l Employee escape clauses. This means that the employer, an associated institution or other
person in arrangement with the employer undertakes to cancel or repurchase the equity instrument at a price exceeding its market value if there is a decline in the value of the equity instrument.
l Event. This means that the equity instrument is not deliverable to the taxpayer until the happening of an event, whether fixed or contingent.
An ‘unrestricted equity instrument’ means an equity instrument that is not a ‘restricted equity
instrument’.
8.7.2 Vesting as the tax event
An ‘unrestricted equity instrument’ will ‘vest’ at the time of acquisition of the instrument (s 8C(3)(a)). A
‘restricted equity instrument’, as per s 8C(3)(b), will ‘vest’ at the earliest of the following five events:
l when all restrictions causing ‘restricted equity instrument’ status are lifted
l immediately before the employee or director disposes of the ‘restricted equity instrument’ (unless
it is exchanged for another equity instrument or sold to a connected person)
l immediately after an option that qualifies as a ‘restricted equity instrument’ or a financial instrument terminates
l immediately before the employee or director dies, if the restrictions relating to that equity instrument are or may be lifted after death, or
l on disposal of a restricted equity instrument for an amount that is less than the market value or if
a disposal by way of release, abandonment or lapse of an option or financial instrument occurs.
8.7.3 Calculation of gain or loss upon vesting
The vesting of an equity instrument will result in an ordinary income gain or loss as if the vested
amount were an adjustment to the salary of the employee or director. The taxable gain or loss will be
calculated as the difference between the market value of the equity instrument at vesting and any
cosideration paid by the taxpayer for the equity instrument (s 8C(2)(a)(ii) and (b)(ii)). A special rule
applies if an option or financial instrument is disposed of by way of release, abandonment or lapse,
namely amount received, less the consideration paid (s 8C(2)(a)(i)(bb) and (b)(i) (bb)).
A return of capital or foreign return of capital in respect of a restricted equity instrument is also,
subject to certain exclusions, included in his or her income (s 8C(1A)). The policy intent underlying
the inclusion of a return of capital or a foreign return of capital is that capital distributions will
generally trigger ordinary revenue, except if the capital distribution consists of another restricted
equity instrument. If this is the case, the capital distribution will be treated as a non-event. A taxpayer
must, include any amount received by or accrued to him or her in respect of a restricted equity instrument if that amount does not constitute:
l a return of capital or foreign return of capital by way of a distribution of a restricted equity
instrument)
l a dividend or foreign dividend in respect of that restricted equity instrument, or
l an amount that must be taken into account in determining the gain or loss in respect of that
restricted equity instrument
(section 8C(1A)).
If, for example, an employee holds restricted equity shares and 90 per cent of the shares are bought
back before the date that the restrictions will end, the amount received as a dividend in respect of
this buyback will not be exempt as it consists of consideration paid in respect of the share buyback.
The s 10(1)(k)(i) dividend exemption does not apply to dividends received in respect of services
rendered other than a dividend received in respect of a restricted equity instrument (proviso (ii) to
s 10(1)(k)(i)). This prevents an employer from paying an employee’s salary as a dividend.
Two specific provisos deal with the situations where restricted instruments held by employees are
liquidated in return for an amount qualifying as dividend. The dividend exemption does not apply to
any dividend in respect of a restricted equity instrument acquired in the circumstances of s 8C(1) if
that dividend constitutes
l an amount transferred or applied by a company as consideration for the acquisition or redemption of any share in that company
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8.7
l an amount received or accrued in anticipation or in the course of the winding up, liquidation,
deregistration or final termination of a company, or
l an equity instrument that does not qualify, at the time of the receipt or accrual of that dividend, as
a restricted equity instrument as defined in s 8C
(proviso (jj) to s 10(1)(k)(i), which applies notwithstanding the provisions of par (dd) and (ii)).
The dividend exception further does not apply in respect of a restricted equity instrument acquired in
the circumstances of s 8C(1) if that dividend constitutes
l an amount transferred or applied by a company as consideration for the acquisition or redemption of any share in that company, or
l an amount received or accrued in anticipation or in the course of the winding up, liquidation,
deregistration or final termination of a company
(proviso (kk) to s 10(1)(k)(i), which applies notwithstanding the provisions of paras (dd) and (ii)).
The terms ‘market value’ and ‘consideration’ are defined in s 8C(7). ‘Market value’, in relation to an
equity instrument, means
l In the case of a private company an amount determined in terms of a method of valuation which
gives a fair value and which is used consistently. This method must be used to determine the
price for both purchases and sales of such equity instruments, or
l In the case of any other company, the price at which an instrument could be obtained between a
willing buyer and a willing seller on the open market at arm’s length.
‘Consideration’ in respect of an equity instrument means any amount given (other than in the form of
services rendered)
l by the taxpayer in respect of the equity instrument
l by the taxpayer in respect of another restricted equity instrument which has been disposed of by
the taxpayer in exchange for that equity instrument
l by any person not dealing at arm’s length or any connected person limited to the amount the
taxpayer would have given to acquire that restricted equity instrument (par (c) of the definition of
‘consideration’ in s 8C(7)).
If an employee exchanges a restricted equity instrument in his employer or an associated institution
for another restricted equity instrument, for example as a result of a corporate restructuring, a rollover relief is provided. The new instrument is deemed to have been acquired as a result of employment, and is therefore taxable (s 8C(4)(a)).
A taxable gain or deductible loss arises where, in addition to the exchange of shares, the employer
pays the employee cash to balance the exchange of instruments (s 8C(4)(b)). A portion of the consideration that the employee paid for the original instrument must be apportioned to the cash
received. The employee will be taxed on the profit from the cash received less the consideration
attributable to the cash received.
No specific deduction is available to employers, and only a s 11(a) deduction can therefore be
claimed if all the requirements are met. Section 56(1)(k)(ii) exempts any gain in terms of s 8A, 8B or
8C from donations tax.
Employees’ tax
The same amount referred to in s 8C which must be included in the income of the employee, is also
included in the definition of ‘remuneration’ in the Fourth Schedule (par (e)). Such amounts will therefore be subject to employees’ tax (see chapter 10 and par 11A of the Fourth Schedule for detail). The
full gain must be shown on the IRP 5. Any dividend received in respect of a restricted equity
instrument is included in ‘remuneration’ in terms of par (g). The employees’ tax implications in respect
of these dividends are contained in par 11A of the Fourth Schedule and applies from 1 March 2018.
Example 8.23. Vesting of equity instruments
CCC Ltd employs Brendon. In the 2016 tax year Brendon acquires a share in CCC Ltd in
exchange for a R100 note when that share had a value of R100. Brendon may not sell the share
until after leaving the employment of CCC Ltd. Brendon eventually leaves the employment of
CCC Ltd in 2021 when the market value of the share is R250, but does not sell the shares.
Discuss the tax consequences of the above transactions.
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Chapter 8: Employment benefits
SOLUTION
The share in CCC Ltd will be a restricted share in terms of s 8C as Brendon is not entitled to sell
the share before he leaves the company. The share therefore only vests in Brendon in 2021 when
he leaves the company as all restrictions are lifted on that date. On the receipt of the share in
2016, no amount will be included in gross income since the market value of the share is equal to
the consideration given by Brendon.
Brendon must include in his 2021 income an amount of R150 (R250 market value of the share
less the R100 consideration paid). The R250 is the base cost for future disposals by Brendon.
Example 8.24. Vesting of equity instruments
Anja, an employee of X Ltd, is granted an option in Year 1 to acquire 1 000 equity shares in X Ltd
for a consideration of R10 per share. The value of the option at the time is R15 per share. The
award is subject to a restriction in that having exercised the option, she may not sell the equity
shares for a period of three years thereafter. The equity shares are therefore treated as restricted
equity instruments and the option qualifies as a restricted equity instrument.
Anja exercises the option in Year 3 when the equity shares have a market value of R27 per share.
In Year 6 when the restriction falls away and she becomes entitled to sell the equity shares, their
value is R48 per share. She holds the equity shares on capital account and sells them in Year 8
for R60 000.
Discuss all the tax consequences for Anja.
SOLUTION
(1) Year 1
On receipt of the option, an amount of R5 000 (1 000 × R15 – R10) accrues to Anja in terms
of the general definition of gross income. The amount is, however, not subjected to tax as
s 10(1)(nD) exempts the receipt of an equity instrument which has not vested from tax.
(2) Year 3
On the exercise of the option, Anja makes a gain of R17 (R27 less R10) which is not taxable
as the instruments have not vested (and s 10(1)(nD) will be applicable). Nor is she taxed on
the exercise of the option as she has disposed of one restricted instrument (the option) for
another restricted instrument (the shares), which does not amount to a vesting (of the
option).
(3) In Year 6 when the restriction falls away, Anja is liable for tax on the gain in terms of s 8C,
calculated as follows:
Market value on vesting date (1 000 × R48) .........................................................
R48 000
Less: Consideration paid (1 000 × R10) ...............................................................
10 000
Inclusion in taxable income ...................................................................................
R38 000
(4) On disposal of the shares which were held on capital account, there is a capital gain or loss
calculated with reference to the difference between the proceeds and the market value of
the shares at vesting date, which must be treated as the base cost in terms of par 20(1)(h)
of the Eighth Schedule. The capital gain therefore amounts to R60 000 less R48 000 (1 000
× R48) = R12 000.
Example 8.25. Swap of restricted equity instruments
As a result of a corporate restructuring an employee disposes of a restricted equity instrument
held by him to his employer and in return receives another restricted equity instrument worth
R140 and cash of R60. When the employee had exercised his option to acquire the original
equity instrument he paid a consideration of R100.
Discuss the tax consequences for the employee.
SOLUTION
The new restricted equity instrument is deemed to be acquired by virtue of the employee’s
employment and will be subject to tax when the restrictions on it are lifted. A gain is determined
because of the receipt of the cash of R60. The portion of the consideration attributable to the
cash received is calculated as follows:
R60/R200 × R100 = R30.
The gain to be included in income is R60 – R30 = R30
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8.7±8.8
The non-arm’s-length disposal of a restricted equity instrument or the disposal to a connected person
will not be regarded as vesting of the equity instrument. It will therefore not attract a taxable gain or
loss (s 8C(5)(a)). The connected person or non-arm’s-length person will therefore step into the shoes
of the employee or director. This means that any vesting event in the hands of the transferee creates
a taxable income or loss for that employee or director (and therefore not for the connected person or
non-arm’s-length person). The aforementioned does not apply where a taxpayer disposes of a
restricted equity instrument (including by way of forfeiture, lapse or cancellation) to his employer for
an amount that is less than the market value (s 8C(5)(c)).
For example, say an employee acquires 1 000 restricted equity instruments from his employer for a
total cost of R2 000 in Year 1. He thereafter disposes of the instruments to his daughter for R3 000
while they remain restricted. The instruments vest in Year 3 when their market value is R5 000. A taxable gain of R3 000 arises in Year 3, calculated as the difference between the market value (at
vesting date) less the consideration (R5 000 less R2 000). Moreover, the employee will be deemed to
have made a donation to his daughter amounting to R2 000 (R5 000 less R3 000) by virtue of s 58(2),
which is subject to donations tax.
The same deeming rule applies where the instrument is acquired by a person other than the taxpayer
by virtue of the taxpayer’s employment or office of director, without a transfer from the taxpayer, for
example, by his spouse. In such a case, the equity instrument is deemed to have been so acquired
by the taxpayer and disposed of to the other person, and the taxpayer will be treated as obtaining the
gain or sustaining the loss at vesting date (s 8C(5)(b)).
What happens if an employee or a director transfers a restricted instrument (by way of a non-event)
to a person (A) and thereafter A transfers the restricted equity instrument to another person (B)? The
second transfer is also treated as a non-event and on vesting of the instrument in B the employee or
director will be taxable on the gain or entitled to deduct a loss (s 8C(6)).
8.7.4 Impact of s 8C on capital gains tax
Paragraph 13(1)(a)(iiB) defers the time of disposal of an equity instrument by a share incentive trust
to the employee beneficiary until the equity instrument is unrestricted and vests in the hands of the
employee beneficiary for the purposes of s 8C. If the equity instrument is disposed of after vesting,
the base cost will be equal to market value on the date that instrument vests (par 20(1)(h)(i) of the
Eighth Schedule).
As a general rule, if a person ceases to be a resident, that person is subject to an immediate deemed
disposal of all qualifying assets in terms of s 9H. However, s 8C equity instruments, which had not yet
vested at the time that the person ceases to be a resident, are exempt from this provision, because
these instruments will only be subject to ordinary gain or loss when vesting takes place (s 9H(4)(e)).
8.8 Mauritius and United Kingdom Double Tax Agreements (DTAs): Income from
employment (Article 14)
Income from employment (salaries, wages and other similar remuneration) paid by a South African
employer to a resident of Mauritius or the United Kingdom respectively
l may only be taxed in the country of residence (Article 14(1) of the Mauritius and UK DTAs),
unless
l the employment is exercised in South Africa (the country of source), in which case it may be
taxed in South Africa (Article 14(1) of the Mauritius and UK DTAs).
Notwithstanding the aforementioned rules, Article 14(2) states that such income shall only be taxable
in the country of residence (either Mauritius or the United Kingdom) if
l the recipient is present in South Africa for a period or periods not exceeding in the aggregate
183 days in the calendar year concerned (in the case of the Mauritius DTA) and in the aggregate
183 days in any twelve-month period commencing or ending in the fiscal year concerned (in the
case of the United Kingdom DTA), and
l the remuneration is paid by or on behalf of an employer who is not a resident of the country of
source (South Africa), and
l the remuneration is not borne by a permanent establishment which the employer has in the
country of source (South Africa).
Regarding the phrase ‘borne by a permanent establishment’, the OECD Model Tax Convention on
Income and on Capital, in par 7 of its commentary to Article 15 (The taxation of Income from
Employment), indicates that this requirement must be read in light of its purpose. The requirements in
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Chapter 8: Employment benefits
paras (b) and (c) are contained in treaties to ensure that the country of source is not required to give
up its taxing right to the remuneration, while it has to allow a deduction for the remuneration against
its tax base in the hands of the payer. If the cost of employment of the employee would have to be
taken into account to determine the profits attributable to the permanent establishment, the permanent establishment bears this cost.
Article 22 (in the case of the Mauritius DTA) and Article 21 (in the case of the UK DTA) contain the
rule regarding allowing deductions or credits to prevent double taxation.
Please note that Article 14(1) of the Mauritius DTA is subject to the provisions of Articles 15, 17, 18
and 20 of that DTA, and that Article 14(1) of the United Kingdom DTA is subject to the provisions of
Articles 15, 17 and 18 of that DTA.
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9
Retirement benefits
Linda van Heerden and Maryke Wiesener
/
Outcomes of this chapter
After studying this chapter you should be able to:
l apply the provisions of the Act in respect of lump sums received from an employer
in both practical calculation questions and theoretical advice questions
l apply the provisions of the Second Schedule in respect of retirement fund lump
sum benefits and retirement fund lump sum withdrawal benefits in both practical
calculation questions and theoretical advice questions
l apply the provisions of the Act in respect of qualifying annuities received in both
practical calculation questions and theoretical advice questions
l demonstrate your knowledge of the topic in a case study.
Contents
9.1
9.2
9.3
9.4
9.5
Overview ...........................................................................................................................
Lump sums from employers that are not retirement funds ...............................................
9.2.1 Compensation for termination of employment or office (par (d)(i) definition of
‘gross income’ and definition of ‘severance benefits’ in s 1(1)) and the cumulative principle .....................................................................................................
9.2.2 Commutation of amounts due (par (f) definition of ‘gross income’) ...................
RSA fund benefits (par (e) definition of ‘gross income’, ss 9(2)(i), 10(1)(gC)(ii) and
the Second Schedule, Article 17 of the Mauritius and United Kingdom Double Tax
Agreements (DTAs)) .........................................................................................................
9.3.1 Retirement fund lump sum benefits (paras 2(1)(a), 2(1)(c), 4(3), 5, 6 and 6A)..
9.3.2 Retirement fund lump sum withdrawal benefits (paras 2(1)(b), 4 and 6) ...........
9.3.3 Public sector pension funds (par (eA) definition of ‘gross income’, par 2A) ......
9.3.3.1 Transfers to provident fund (par (eA) definition of ‘gross income’) ......
9.3.3.2 Lump sum benefits from a public sector pension fund (par 2A) ..........
Exemption of qualifying annuities (ss 10C, 11F and par 5(1)(a) or 6(1)(b)(i)) .................
Rating concession (average rating formula) (s 5(10)) ......................................................
9.5.1 Member of a proto team (s 5(9)) .........................................................................
Page
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248
248
249
250
258
263
270
270
271
272
274
275
9.1 Overview
All paragraph references in this chapter are references to the Second Schedule and sections refer to
the Income Tax Act, except where indicated otherwise. In this chapter, the words ‘retirement funds’
will be used as a collective name to refer to all pension funds, provident funds, retirement annuity
funds and preservation funds registered in the RSA. The Second Schedule is only applicable to lump
sum benefits (as defined) received from RSA funds and this chapter is written from that perspective
when addressing the provisions thereof.
On termination of services and/or membership of retirement funds, various benefits can become
payable by employers that are not funds and/or by funds. The benefits can include annuities, lump
sums, lump sum benefits and lump sum benefits in the form of life policies (see 9.3).
Annuities
Any annuities, living annuities (as defined in s 1(1) and discussed in chapter 4), qualifying annuities
(as defined in s 10C) or ‘annuity amounts’ in s 10A received by a taxpayer are included in gross
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9.1
income by way of par (a) of the definition of ‘gross income’ in s 1(1) (in column 3 of the comprehensive framework in chapter 7). The normal tax payable on the total taxable income in column 3 is
calculated in terms of the progressive tax table applicable to natural persons.
Only qualifying annuities (as defined in s 10C) can be exempt in terms of s 10C if all the requirements
in s 10C(2) are met (see 9.4). Please note that the definition of ‘qualifying annuity’ in s 10C only refers
to annuities received from RSA funds, and that only such annuities can qualify for the s 10C exemption.
Lump sums from an employer that is not a fund
Lump sums paid by an employer that is not a fund are included in the gross income of the employee
in terms of paras (d)(i)–(iii) and (f) of the definition of ‘gross income’ in s 1(1). Only two of these four
lump sums, namely lump sums received in respect of the termination of employment (par (d)(i)) and
in commutation of amounts due under an employment contract (par (f)), can qualify as severance
benefits if the requirements of the definition are met (see chapter 4.6). No deductions are allowed
against severance benefits.
The gross amounts of severance benefits received are included in gross income (in column 1 of the
comprehensive framework in chapter 7). The normal tax payable on a severance benefit is calculated
in terms of the separate tax table applicable to severance benefits, based on the cumulative principle
(see 9.2.1). If a lump sum from an employer that is not a fund does not qualify as a severance benefit,
the gross amount is included in gross income (in column 3 of the comprehensive framework in chapter 7), and it is taxed in terms of the normal progressive tax table applicable to natural persons.
An employer can pay the proceeds of a policy of insurance as a lump sum to an employee, or dependant or nominee of the employee (par (d)(ii)). An employer can also cede a policy of insurance to
an employee, or dependant or nominee of the employee (par (d)(iii)). Both these amounts are specifically excluded in the definition of ‘severance benefit’ and can never be a severance benefit. Please
note that the cession of a policy of insurance (par (d)(iii)) does not necessarily happen on the termination of services.
Lump sum benefits from RSA retirement funds
The Second Schedule only applies to ‘lump sum benefits’ paid by RSA retirement funds. The term
‘lump sum benefit’ is defined in par 1 of the Second Schedule and includes
l any amount in respect of the commutation of an annuity or portion of an annuity, and
l any fixed or ascertainable amount (other than an annuity)
payable by or provided in consequence of membership of any of the five RSA funds.
The term is also defined in s 1(1) of the Act. The definition in s 1(1) merely states that it means the two
types of lump sum benefits from funds, namely a ‘retirement fund lump sum benefit’ and a ‘retirement
fund lump sum withdrawal benefit’ (s 1(1)). Similarly, par (e) of the definition of ‘gross income’ also
merely states that these two types of lump sum benefits must be included in gross income.
The specific definitions for these two types of lump sum benefits in s 1(1) explain how the amount to
be included in terms of par (e) is determined. The amount of the lump sum benefit is the ‘amount
determined’ in terms of par 2(1)(a) or (c) (in the case of a retirement fund lump sum benefit), and in
terms of par 2(1)(b) (in the case of a retirement fund lump sum withdrawal benefit) (s 1(1)). It is
therefore clear that the provisions of the Second Schedule explain the types of lump sum benefits in
detail and also determine how the amount to be included in gross income must be calculated.
The type of lump sum benefit is determined by the event leading to the receipt of the lump sum
benefit. There are four specific events in respect of retirement fund lump sum benefits (par 2(1)(a)(i)–
(iii) and par 2(1)(c)). There are two specific events (par 2(1)(b)(iA) and (iB)) and one general ‘catchall’ event (par 2(1)(b)(ii)) in respect of retirement fund lump sum withdrawal benefits. See the
discussions in 9.3, 9.3.1 and 9.3.2 for more detail in this regard.
The ‘amount determined’ is in effect the net amount, being the amount of the lump sum received from
the RSA retirement fund less the allowable deductions calculated in terms of par 5, 6 or 6A
(par 2(1)). This net amount must be included in gross income (in either column 1 or 2 of the comprehensive framework in chapter 7) in terms of par (e) of the ‘gross income’ definition (s 1(1)). The normal tax payable in respect of all lump sum benefits from RSA retirement funds is calculated in terms
of either the separate tax table applicable to retirement fund lump sum benefits or the separate tax
table applicable to retirement fund lump sum withdrawal benefits, based on the cumulative principle.
Any capital gain or capital loss in respect of a disposal that resulted in a person receiving a lump
sum benefit must be disregarded (par 54 of the Eighth Schedule).
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9.1
Chapter 9: Retirement benefits
The tax implications of all the aforementioned lump sums from an employer that is not a fund and
lump sum benefits from a RSA retirement fund can be summarised as follows:
Receive a severance
benefit (as defined)
from an employer that is
not a fund
Receive a lump sum
which is not a severance
benefit (as defined) from
an employer that is not a
fund
Receive a retirement
fund lump sum benefit
from a RSA retirement
fund
Receive a retirement
fund lump sum withdrawal benefit from a
RSA retirement fund
Include the gross
amount in gross income
in column 1 of the Comprehensive framework in
chapter 7
Paragraph (d)(i) or (f) of
the definition of ‘gross
income’
Include the gross
amount in gross income
in column 3 of the Comprehensive framework in
chapter 7
Paragraph (d)(i)–(iii) or
(f) of the definition of
‘gross income’
Include the net amount
in gross income in column 1 of the Comprehensive framework in
chapter 7
Paragraph (e) of the
definition of ‘gross income’ and par 2(1)(a)(i)–
(iii) and 2(1)(c)
Include the net amount
in gross income in column 2 of the Comprehensive framework in
chapter 7
Paragraph (e) of the definition of ‘gross income’
and par 2(1)(b)(iA),(iB)
and (ii)
The tax table applicable
to severance benefits is
used to calculate the
normal tax payable
The progressive tax
table applicable to natural persons is used to
calculate the normal tax
payable on the taxable
income in column 3
The tax table applicable
to retirement fund lump
sum benefits is used to
calculate the normal tax
payable
The tax table applicable
to retirement fund lump
sum withdrawal benefits
is used to calculate the
normal tax payable
The cumulative principle
applies when calculating
the normal tax payable
The cumulative principle
applies when calculating
the normal tax payable
The cumulative principle
applies when calculating
the normal tax payable
Lump sums, pension or annuities received by residents from foreign funds
The Second Schedule does not apply to lump sums from foreign funds. Industry members have
asked SARS to issue specific guidance in respect of the treatment of foreign retirement funds (in
general). The limited discussion regarding amounts received by residents from foreign funds below
focuses on the impact of the exemption in terms of s 10(1)(gC)(ii).
Lump sums, pensions or annuities received by or accrued to a resident from sources in and outside
the Republic are included in gross income since residents are taxed on a worldwide basis. If a resident receives such an amount from a source outside the Republic in respect of services rendered
outside the Republic, it is exempt from normal tax (s 10(1)(gC)(ii)). The term ‘source outside the
Republic’ refers to the originating cause that gives rise to the pension income, namely where the
services have been rendered (par 3 of Binding General Ruling (Income Tax) 25 (Issue 2)). (Please
note that even though this Ruling only applied until 4 October 2018, no other Ruling has replaced it
and it is submitted that the principle will still apply.) Amounts received from a source outside the
Republic will include amounts received from foreign employers or foreign funds and the causal link to
services rendered outside the Republic must exist. If the resident has rendered services partly within
and partly outside the Republic, it is important to note that only the portion of the amounts relating to
the services rendered outside the Republic is exempt.
The exemption in s 10(1)(gC)(ii) is not applicable to amounts received from RSA retirement funds as
defined in s 1(1), or from a company that is a resident and is registered as a long-term insurer. The
exemption will, however, also apply if the amount is transferred to an RSA fund or resident insurer
from a source outside the Republic in respect of the resident member and is then paid out by the
RSA fund or resident insurer (s 10(1)(gC)(ii)). Since the Second Schedule and s 10C do not apply to
lump sums and annuities received by residents from foreign funds, it must be noted that all such
amounts received by a resident must be included in column 3 of the comprehensive framework in
chapter 7. The lump sum from a foreign fund will therefore not be included in either column 1 or 2 of
the comprehensive framework and the Second Schedule does not apply to it. The exemption in
s 10(1)(gC)(ii) must be considered in respect of all types of benefits (lumps sums, pensions and
annuities) received from foreign funds.
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9.2
9.2 Lump sums from employers that are not retirement funds
Please note!
The provisions of the Second Schedule are only applicable to lump sum benefits received from RSA retirement funds. The Second Schedule is not applicable
to lump sums received from employers that are not retirement funds. The Second Schedule can therefore never apply to severance benefits as defined,
since severance benefits are lump sums received from employers that are not
retirement funds.
9.2.1 Compensation for termination of employment or office (par (d)(i) definition of ‘gross
income’ and definition of ‘severance benefits’ in s 1(1)) and the cumulative principle
The provisions relating to the taxability of lump sums received for the termination of employment or
office in terms of par (d ) was discussed in detail in chapter 4. In respect of the par (d) lump sums,
only a lump sum envisaged in par (d)(i) can be a severance benefit as defined, and it is only such
lump sums that are taxed by applying the cumulative principle and using the special tax table applicable to severance benefits.
The cumulative principle
Severance benefits, retirement fund lump sum benefits (see 9.3.1) and retirement fund lump sum
withdrawal benefits (see 9.3.2) are all taxed on a cumulative basis. This means that the taxable
amounts of previous severance benefits and lump sum benefits received after specific dates, but
before the current severance benefit or lump sum benefit, influence the normal tax payable on the
current severance benefit or lump sum benefit. This causes the current severance benefit or lump
sum benefit to be taxed at a higher marginal rate. The determination of the date sequence in which
all severance benefits and lumps sum benefits are received over the lifetime of a natural person is the
very important first step when calculating the tax on the current severance benefit or lump sum
benefit.
The tax tables used to calculate the normal tax payable on severance benefits and retirement fund
lump sum benefits are exactly the same (the first R500 000 is taxed at 0%). A separate tax table is
used to calculate the normal tax payable on retirement fund lump sum withdrawal benefits (the first
R25 000 is taxed at 0%). The application of the cumulative principle ensures that a maximum of
R500 000 in respect of all severance benefits, retirement fund lump sum benefits and retirement fund
lump sum withdrawal benefits received over a natural person’s entire lifetime can be taxed at 0%.
The following previous severance benefits and lump sum benefits are taken into account in the
application of the cumulative principle and are added to the current severance benefit or lump sum
benefit:
l retirement fund lump sum benefits received or accrued on or after 1 October 2007
l retirement fund lump sum withdrawal benefits received or accrued on or after 1 March 2009, and
l severance benefits received or accrued on or after 1 March 2011.
Application of the cumulative principle to the calculation of normal tax payable on a severance benefit
Place all qualifying severance benefits, retirement fund lump sum benefits and retirement fund lump sum
withdrawal benefits in sequence according to the dates of receipt or accrual.
Calculate the sum of
l the current severance benefit, and
l all previous severance benefits, retirement fund lump sum benefits and retirement fund lump sum
withdrawal benefits received by or accrued to the person on or after the specified dates in the severance
benefit tax table
(Please note: The taxable amounts included in gross income in terms of par (d)(i) or (e) are used.)
Use the tax table applicable to the current severance benefit for both the calculations in step 1 and step 2.
l STEP 1 Calculate the normal tax payable on the sum as determined above.
l STEP 2 Calculate the ‘tax that would be leviable’ (the hypothetical tax) on the sum of all previous severance benefits, retirement fund lump sum benefits and retirement fund lump sum withdrawal benefits
(therefore excluding the current severance benefit).
(Please note: The hypothetical tax will not necessarily be equal to the actual tax paid on these severance
benefits and lump sum benefits.)
Normal tax payable on the current severance benefit = tax in step 1 less tax in step 2.
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Chapter 9: Retirement benefits
The normal tax payable on severance benefits, retirement fund lump sum benefits and retirement
fund lump sum withdrawal benefits received during a year of assessment is calculated in the
sequence of their accrual during that year of assessment. SARS has confirmed that, should a
severance benefit and a retirement fund lump sum benefit be received on the same date, the taxable
amounts of the two lump sums will be added together when calculating the normal tax on these lump
sums using the cumulative principle. This is possible because the same table applies to these two
types of benefits. The total normal tax payable on the sum of two such amounts in one calculation will
be the same as the total normal tax payable if one of the two amounts is deemed to be received
before the other and the normal tax payable is calculated separately applying the cumulative principle. See Example 9.5 for a practical illustration of the aforementioned.
The table applicable to severance benefits and retirement fund lump sum benefits is set out below:
Taxable income
Rate of tax
Not exceeding R500 000
0% of taxable income
Exceeding R500 000 but not exceeding R700 000
R0 plus 18% of taxable income exceeding R500 000
Exceeding R700 000 but not exceeding
R1 050 000
R36 000 plus 27% of taxable income exceeding
R700 000
Exceeding R1 050 000
R130 500 plus 36% of taxable income exceeding
R1 050 000
Examples 9.5 and 9.7 illustrate the calculation of the tax liability on a severance benefit.
Please note!
Amounts included in gross income in terms of par (d) or (e) (see 9.3) are ‘remuneration’. Employers that are not funds paying a severance benefit, as well as all
retirement funds paying a lump sum benefit are ‘employers’ for employees’ tax
purposes. The employer (that is not a fund) paying the severance benefit, or the
RSA retirement fund paying the lump sum benefit, is required to obtain a directive
from the Commissioner regarding the amount of employees’ tax to be withheld
(par 9(3) of the Fourth Schedule). If the directive, for example, specifies a rate of
25%, the employees’ tax to be withheld is 25% of the amount of the remuneration
(being the gross or net amount included in gross income in terms of par (d) or par
(e) respectively).
When calculating normal tax payable, the primary, secondary and tertiary rebates
(s 6(2)) cannot be set off against the normal tax payable on a severance benefit
or any lump sum benefit from an RSA retirement fund (s 6(1)). Students must
clearly indicate that these s 6(2) rebates are only deductible against the normal
tax payable on the taxable income in column 3 of the comprehensive framework
in chapter 7 (and not against normal tax payable on the taxable income in
columns 1 and 2).
Students must also clearly indicate that the s 6A and 6B medical tax credits may
be deducted from the normal tax payable on the taxable income in columns 1, 2
and 3 of the comprehensive framework in chapter 7 (contrast the wording of
ss 6A and 6B with the wording of s 6(1)). The sequence as used in the comprehensive framework in chapter 7, clearly illustrates the correct treatment of the
s 6(2) rebates and the s 6A and 6B credits.
9.2.2 Commutation of amounts due (par (f) definition of ‘gross income’)
Any amount received or accrued in commutation of amounts due under a contract of employment or
service must be included in gross income (par (f) of the definition of that term in s 1). ‘Commutation’
means ‘substitution’. An employee may, for example, commute (or substitute) his right to have a
coffee break into a cash payment that will be included in his gross income in terms of par (f). Paragraph (f) amounts can also be severance benefits if the requirements of the definition thereof are met.
It may therefore happen that an amount falls into both par (d) and par (f). It may, however, be taxed
only once.
The taxability of par (f) amounts is exactly the same as lump sum amounts received on the termination of employment (par (d)(i)) discussed in chapter 4.
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9.3
9.3 RSA fund benefits (par (e) definition of µgross income¶, ss 9(2)(i), 10(1)(gC)(ii)
and the Second Schedule, Article 17 of the Mauritius and the United Kingdom
Double Tax Agreements (DTAs))
A: Types of retirement funds and membership
Retirement funds include pension funds, pension preservation funds, provident funds, provident
preservation funds and retirement annuity funds registered in the RSA. All these funds are established by law and/or registered in terms of the Pension Funds Act which implies that all are RSA
funds. The Commissioner must approve all these funds and all the requirements in terms of the
respective definitions in s 1(1) and in par 1 must be met. The Second Schedule is only applicable to
lump sum benefits from RSA funds. This means that
l only such lump sum benefits can be categorised as either a retirement fund lump sum benefit or
a retirement fund lump sum withdrawal benefit, and
l only such lump sum benefits can be included in either column 1 or 2 of the comprehensive
framework in chapter 7.
The definition of ‘qualifying annuity’ in s 10C also only refers to annuities received from RSA funds,
and therefore only such annuities can qualify for the s 10C exemption.
Pension funds, provident funds and retirement annuity funds
Pension funds and provident funds are employer funds, meaning that only employees of the specific
employer can be members of that specific fund. Pension funds and provident funds can be ‘private
sector’ funds or ‘public sector’ funds depending on the sector in which the employer falls.
Retirement annuity funds, for example funds administered by Allan Gray or Coronation, are normally
funded by independent individuals and any person can be a member of these funds. No member of a
retirement annuity fund shall become entitled to any benefit prior to reaching normal retirement age
(proviso (b)(v) of the definition of ‘retirement annuity fund’ in s 1(1)). If such a member discontinues
contributions prior to his or her retirement date, he or she will only be entitled to make an election
regarding annuities and/or a lump sum benefit on the retirement date (proviso (b)(x)(aa) of the
definition of ‘retirement annuity fund’ in s 1(1)).
Members of these three funds must make annual contributions of a recurrent nature in accordance
with specified scales and the funds keep separate records for each member in respect of these
contributions. The employers of members of pension and provident funds normally deduct the contributions from the salaries of the members and pay it over to the fund, but members of retirement
annuity funds normally pay the contributions directly to the fund. Members can claim a s 11F deduction in respect of these contributions, and a balance of unclaimed contributions can arise (see chapter 7). SARS also keeps a record of all contributions, deductions allowed and any unclaimed balance
of contributions per taxpayer based on the returns and assessments of the taxpayer. This record is
used when SARS must issue a directive in terms of par 9(3) of the Fourth Schedule in respect of the
employees’ tax that must be withheld when the fund pays out a lump sum benefit to a member.
The ‘minimum individual reserve’ of a member of a fund is the balance of all the member’s contributions plus growth over his or her whole period of membership at any given stage of his or her membership. The µUHWLUHPHQW LQWHUHVW¶ of a member is the member’s share in the value of a fund as
determined in terms of the rules of the fund on the date on which he or she elects to retire from that
fund or transfer to a pension preservation fund, provident preservation fund or retirement annuity fund
(definition in s 1(1)). The words ‘the date on which he or she elects to retire’ in the aforementioned
definition refer to the ‘retirement date’ (par (a) of the definition of ‘retirement date’ in s 1(1)). The two
values (minimum individual reserve and retirement interest) of a member will only be equal on the
elected retirement date.
Pension preservation funds and provident preservation funds
Membership of preservation funds is limited. Only
l former members of any other pension funds, provident funds and pension- and provident preservation funds
l persons who have elected to transfer an award in terms of a divorce order from a pension fund,
pension preservation fund, provident fund or provident preservation fund
l former members of a pension fund or a provident fund who have elected to transfer a lump sum
benefit after normal retirement age but before retirement date, and
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l former members of any fund in respect of whom an unclaimed benefit is due by the fund
may be members.
No contributions can be made to a preservation fund. Only certain amounts can be transferred to
preservation funds (those listed in par 2(1)(a)(ii), (b) and (c)). A member of a preservation fund only
becomes entitled to a benefit on his or her retirement date (proviso (d) to the definitions of pensionand provident preservation funds).
Not more than one amount can be paid out to a member during the period of membership of preservation funds (par (c) of the definitions of pension- and provident preservation funds). With effect from
1 March 2019, the single allowable withdrawal from pension- and provident preservation funds does
not apply to a retirement interest that was transferred to the preservation fund after normal retirement
age but before retirement date (in terms of par 2(1)(c)). There is one exception to this, namely to the
extent that it is an amount to which the member is entitled due to emigration from the Republic or
departure from the Republic after a work visa has expired as discussed below.
B: Benefits payable by retirement funds
The Commissioner may not approve any pension fund, provident fund or retirement annuity fund
unless he is satisfied that the fund is a permanent fund, bona fide established for the sole or main
purpose of
l providing annuities or other benefits for employees on retirement date or for the dependants or
nominees of deceased employees (in the case of a pension fund) (proviso (i) to par (c) of the
definition of pension fund)
l providing benefits for employees on retirement date or for the dependants or nominees of
deceased employees (in the case of a provident fund) (proviso (a) of the definition of pension
fund), or
l providing life annuities for the members of the fund or annuities for the dependants or nominees
of deceased members (in the case of a retirement annuity fund) (proviso (a) of the definition of
retirement annuity fund).
A further purpose, contained in both the definitions of pension funds and provident funds, is to provide benefits contemplated in par 2C of the Second Schedule or s 15 or 15E of the Pension Funds
Act.
In line with these sole or main purposes of funds, it is the right to annuities (and not the right to lump
sum benefits) that accrues to members of pension funds and retirement annuity funds on retirement
date (see 9.3.1 for the definition of ‘retirement date’).
The word ‘annuities’ is not defined in the Act. Section 9(1)(i) refers to ‘a lump sum, a pension or an
annuity’ payable by various funds. Where the services in respect of which such amounts are received
were rendered in South Africa, the amounts are regarded as received by or accrued to the person
from a source within South Africa. Article 17 of both the Mauritius DTA and the United Kingdom DTA
also refer to both the words ‘pensions and annuities’. Only the word ‘annuity’ is defined for the purpose of Article 17 of the DTAs. It therefore seems that the two words ‘pension’ and ‘annuity’ can be
regarded as synonyms when used in respect of benefits payable by funds.
Pensions and annuities paid by a South African fund to a resident of Mauritius or the United Kingdom
respectively, in respect of services rendered in the Republic
l may be taxed in South Africa (Article 17(1) of the Mauritius DTA), and
l may only be taxed in the United Kingdom (Article 17(1) of the United Kingdom DTA).
Article 22 (in the case of the Mauritius DTA) and Article 21 (in the case of the United Kingdom DTA)
contain the rule regarding allowing deductions or credits to prevent double taxation on pensions and
annuities.
Please note that Article 17(1) of both the Mauritius DTA and the United Kingdom DTA is subject to
Article 18(2) applicable to Government service.
(i) Members of pension funds, pension preservation funds and retirement annuity funds
Selection of a single payment
Even though the right to annuities accrues to members, the definitions of a pension fund, pension
preservation fund and retirement annuity fund give their members an option to commute a part of the
retirement interest for a single payment (a lump sum benefit) on retirement date. These definitions
provide that ‘not more than one-third of the total value of the retirement interest may be commuted for
a single payment’.
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9.3
The definition of ‘retirement interest’ refers to ‘on the date on which he or she elects to retire’, which in
turn means that the option arises on the ‘retirement date’ (par (a) of the definition of ‘retirement date’).
This limitation of a maximum of one-third of the retirement interest commuted for a lump sum benefit
does therefore not apply if a member dies before the retirement date. This means that the member’s
dependants or nominees can elect that the full retirement interest is paid out as a lump sum benefit
after the death of the member.
A member of these three funds who has reached retirement date must therefore elect to commute a
part of the retirement interest payable by the fund for a single payment (lump sum benefit), before a
‘lump sum benefit’ as defined in par 1 arises. Until the member makes such election, no lump sum
benefit arises or is payable by the fund. The practical effect is that the choice to commute a part of
the retirement interest for a lump sum benefit could have an immediate tax effect for such a member
who reached retirement date. On the selection of a lump sum benefit, it is deemed to be received by
or accrued to the member in terms of par 4(1) and the taxable amount must be included in gross
income in terms of par (e).
The fund must use the remaining two-thirds of the retirement interest (after the deduction of the onethird lump sum benefit) to provide an annuity to such a member or to purchase an annuity (including
a living annuity) from a registered insurer, subject to the de minimis rule. The de minimus rule applies
if the value of the remaining two-thirds of the retirement interest of the member does not exceed
R165 000. In such a case, the total value of the retirement interest of a member may be commuted for
a single lump sum benefit on the retirement date. This is stated in proviso (ii)(dd) of par (c) to the
definition of pension fund, par (e) to the definition of pension preservation fund and par (b)(ii) to the
definition of retirement annuity fund.
The words ‘if two-thirds of the retirement interest does not exceed R165 000’ in effect means if the
total retirement interest does not exceed an amount of R247 500 (R165 000 × 3 ÷ 2). Commuting the
full retirement interest for a lump sum benefit in such a case means that all the future qualifying
annuities are commuted for a lump sum benefit. Such a commuted lump sum benefit due to the
application of the de minimis rule is taxed as a specific type of retirement fund lump sum benefit (in
terms of par 2(1)(a)(iii) – see 9.3.1).
Exceptions to the one-third single payment limitation
For members of pension funds
The limitation that only one-third of the retirement interest can be commuted for a lump sum benefit also
does not apply where the member of a pension fund elects to transfer his or her retirement interest to a
pension preservation fund or a retirement annuity fund after normal retirement age but before retirement
date. Such a transfer is taxed as a specific type of retirement fund lump sum benefit in terms of par
2(1)(c) and could qualify for the specific deductions in terms of par 6A – see 9.3.1.
For members of pension preservation funds and retirement annuity funds
Members of pension preservation funds and retirement annuity funds may withdraw the full retirement
interest as a lump sum benefit prior to the retirement date in the following two circumstances:
l when the member is or was a resident who emigrated from the Republic and the emigration is
recognised by the South African Reserve Bank for purposes of exchange control**, or
l when the member departs from the Republic upon the expiry of a visa obtained to work in or visit
the Republic and the member is not recognised as a resident by the South African Reserve Bank
for purposes of exchange control
(proviso (b)(x)(dd)(A)** and (B) to the definition of ‘retirement annuity fund’ and proviso (ii)(aa)** and
(bb) to par (c) of the definition of ‘pension preservation fund’).
These lump sum benefits will be taxed as a specific type of retirement fund lump sum withdrawal
benefit in terms of par 2(1)(b)(ii) due to being the general event listed in the table under point C
below (also see 9.3.2).
** Proviso (b)(x)(dd)(A) to the definition of ‘retirement annuity fund’ and proviso (ii)(aa) to par (c) to
the definition of ‘pension preservation fund’ will change with effect from 1 March 2021. Such members who emigrated will only be able to withdraw the full retirement interest as a lump sum benefit
prior to the retirement date
l in respect of applications received on or before 28 February 2021 and approved by the South
African Reserve Bank or an authorised dealer in foreign exchange for the delivery of currency on
or before 28 February 2022, or
l if the person is not a resident for an uninterrupted period of three years or longer on or after
1 March 2021.
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Chapter 9: Retirement benefits
The two-thirds balance of the retirement interest
If a member of a pension fund, pension preservation fund or retirement annuity fund has elected a
one-third lump sum benefit on the retirement date, the two-thirds balance of the retirement interest is
payable in the form of qualifying annuities, as defined in s 10C (including a living annuity – see chapter 4.2). All such annuities will only be included in gross income in terms of par (a) of the definition of
‘gross income’ as and when such qualifying annuities are received by or accrue to such member.
The Second Schedule only applies to the lump sum benefit elected by the member. It does not apply
to the qualifying annuities payable out of the two-thirds balance of the retirement interest after the
member has reached retirement date. This will be the case irrespective of whether such balance is
left in the fund of which the person was a member to be taken as in-fund living annuities, or whether it
is transferred by the fund of which the person was a member to another fund (for example Alan Gray)
to buy annuities for the benefit of the member.
(ii) Members of provident funds and provident preservation funds
The definition of provident funds uses the word ‘benefits’ rather than ‘annuities’ in their sole or main
purpose. Members of provident funds and provident preservation funds can still (until 28 February
2021) elect to have the total value of their retirement interest paid out as or commuted for a lump sum
benefit on retirement date. The one-third limitation in respect of the commutation of annuities for a
single payment (lump sum benefit) on retirement date therefore does not apply to members of provident funds and provident preservation funds who reach retirement date.
The date of 28 February 2021 has been amended various times. In order to eliminate the consequential differences in the tax treatment of benefits from the various funds, the definitions of all retirement
funds will be amended with effect from that date. Members of provident funds and provident preservation funds will, with effect from 1 March 2021, also
l not be able to commute more than one-third of their retirement interest for a lump sum benefit on
retirement date, and
l be forced to take qualifying annuities in respect of the remaining two-thirds of the retirement
interest.
The existing retirement interests of members of provident funds and provident preservation funds on
28 February 2021 will be protected. This is done through the provisos to the definitions of all retirement funds. The effect of proviso (A), in respect of such members who have already reached the age
of 55 years on 1 March 2021, is that the one-third limitation is not applicable at all. This means that
such members can always take or commute their full retirement interest (consisting of all contributions, transfers, amounts credited and any fund return) for a lump sum benefit irrespective of when
they reach retirement date.
In any other case (meaning in the case of an existing member to such fund who has not reached the
age of 55 years on 1 March 2021) proviso (B) states that the following must not be taken into account
when calculating the value of the retirement interest (to which the one-third rule will apply):
l any contributions to a provident fund or any transfers to a provident preservation fund before
1 March 2021 (in the case of members of a provident fund who are 55 years or older on
1 March 2021, all contributions to a provident fund of which the person was a member on
1 March 2021 are excluded)
l any other amounts credited to the member’s individual account prior to 1 March 2021, and
l any fund return in respect of the aforementioned contributions and amounts credited
reduced by
l any amounts permitted in terms of the Pension Fund Act to be deducted from the member’s
individual account of the provident fund or provident preservation fund.
As a result of the aforementioned, all the retirement interests in respect of which such members
already obtained a vested right to on 28 February 2021, are protected and can still be taken as or
commuted for a lump sum benefit. The one-third limitation on retirement date is therefore not applicable thereto.
Members of provident funds may
l transfer the withdrawal interest* to a pension fund established by the same employer (subpar (ii)
of par (b) of the proviso to the definition of ‘provident fund’), or
l elect to transfer the retirement interest to a pension preservation fund, provident preservation
fund or a retirement annuity fund (subpar (iii) of par (b) of the proviso to the definition of ‘provident fund’). This election might refer to when the employee of a provident fund elects to transfer
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9.3
the retirement interest to a pension preservation fund, a provident preservation fund or a retirement annuity fund after normal retirement age but before retirement date in terms of par 2(1)(c).
Such a transfer is taxed as a specific type of retirement fund lump sum benefit in terms of
par 2(1)(c) and could qualify for the specific deductions in terms of par 6A – see 9.3.1.
* The term ‘withdrawal interest’ is defined in s 1(1) as the value of a member’s share of any fund, as
determined in terms of the rules of the fund, on the date on which the member elects to withdraw
due to an event other than the member attaining normal retirement age.
Members of provident preservation funds may withdraw the full retirement interest as a lump sum
benefit in the following two circumstances:
l when the member is or was a resident who emigrated from the Republic and the emigration is
recognised by the South African Reserve Bank for purposes of exchange control**, or
l when the member departs from the Republic upon the expiry of a visa obtained to work in or visit
the Republic and the member is not recognised as a resident by the South African Reserve Bank
for purposes of exchange control
(proviso (ii)(aa) and (bb) to par (c) of the definition of ‘provident preservation fund’).
These lump sum benefits will be taxed as a specific type of retirement fund lump sum withdrawal
benefit in terms of par 2(1)(b)(ii) due to being the general event listed in the table under point C
below (also see 9.3.2).
** Proviso (ii)(aa) to par (c) to the definition of ‘provident preservation fund’ will change with effect
from 1 March 2021. Such members who emigrated will only be able to withdraw the full retirement
interest as a lump sum benefit prior to the retirement date
l in respect of applications received on or before 28 February 2021 and approved by the South
African Reserve Bank or an authorised dealer in foreign exchange for the delivery of currency on
or before 28 February 2022, or
l if the person is not a resident for an uninterrupted period of three years or longer on or after
1 March 2021.
C: Types of lump sum benefits received from RSA retirement funds
The types of lump sum benefits received from RSA retirement funds are listed in par 2(1). The type of
event, and not the type of fund, in general, determines the type of lump sum benefit as well as the tax
implications thereof. Public Sector Pension Funds have a separate rule (see 9.3.3). The six specific
events and one general event are summarised in the table below. It is submitted that it must first be
determined whether one of the six specific events is applicable before the general event will apply.
Event
Retirement fund lump sum
benefit in terms of
Retirement fund lump sum
withdrawal benefit in terms of
Specific events
Retirement or death
Par 2(1)(a)(i)
Termination of employment due
to personnel reduction, etc.
Par 2(1)(a)(ii)
Commutation of an annuity for a
lump sum benefit (for example
due to the de minimis rule)
Par 2(1)(a)(iii)
Transfer on or after normal retirement age but before retirement
date
Par 2(1)(c)
Divorce order
Par 2(1)(b)(iA)
Direct transfer between funds of
the same member
Par 2(1)(b)(iB)
General event
All other events
Par 2(1)(b)(ii)
Limitations to par 2(1)
The provisions in par 2(1) determine how the net amounts, to be included in gross income in terms of
par (e) in respect of lump sum benefits, are calculated. The provisions of par 2(1) are subject to the
source rule in s 9(2)(i) (see chapter 3), the special formula applicable to Public Sector Pension Funds
(par 2A) and the rule for surplus allocations (par 2C).
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The source rule in s 9(2)(i)
The source rule states that any lump sum, pension or annuity payable by a pension fund, pension
preservation fund, provident fund or provident preservation fund (as defined, which means that it is
funds registered in the Republic), to a non-resident for services rendered in the Republic, is from a
source in the Republic (s 9(2)(i)). If the non-resident has rendered services partly within and partly
outside the Republic, only a portion of the amount is from a source within the Republic (see chapter 3). The Republic portion is the ratio of the period during which services were rendered in the
Republic to the total period during which services were rendered (s 9(2)(i)). The net amounts must
first be determined in terms of par 2(1), and then be apportioned as aforesaid, in order to calculate
the final amount to be included in gross income in terms of par (e).
Please note!
Section 9(2)(i) does not include a retirement annuity fund since membership to
such a fund is not linked to services rendered. The source of income received by a
non-resident from a retirement annuity fund registered in the Republic will always
be in the Republic.
Remember
The source provisions are relevant only to non-residents, because residents are taxed on a
worldwide basis, and source plays no part in the inclusion of an amount in a resident’s gross
income. Residents may, however, possibly qualify for an exemption in terms of s 10(1)(gC)(ii) in
respect of amounts received from a foreign fund, as explained in 9.1.
Example 9.1. Deemed source provision
Bongani celebrated his 60th birthday on 5 September 2020 and elected to retire from his employment at the end of that month. He is a non-resident. During his 40 years of service he spent
ten years (between 1 January 1998 and 31 December 2007) working in Switzerland and the rest
in the Republic. On his retirement, a lump sum benefit of R500 000 accrued to him from the
South African pension fund. The deductible portion of the lump sum in terms of par 5(1)(a) the
Second Schedule is R200 000.
Calculate the amount to be included in the gross income of Bongani for the year of assessment
ended 28 February 2021.
Also explain the tax effect if you assume that Bongani is a resident.
SOLUTION
Lump sum benefit received (par 2(1)(a)(i)) ..................................................................
Less: Second Schedule deduction (par 5(1)(a)).........................................................
R500 000
(200 000)
R300 000
Gross income = Amount from a source within the Republic (s 9(2)(i)):
R300 000 × 30/40 = .....................................................................................................
R225 000
If Bongani was a resident, the gross income amount would have been R300 000 since he will be
taxable on his worldwide income.
Bongani would only have qualified for a s 10(1)(gC)(ii) exemption of R75 000 (R300 000 × 10/40)
if the pension fund was a foreign fund and not an RSA pension fund.
Special formula applicable to Public Sector Pension Funds (par 2A)
The actual lump sum benefit received from a Public Sector Pension Fund is not taken into account
when calculating the taxable amount of such lump sum benefit. An amount calculated in accordance
with the formula in par 2A is deemed to be the lump sum benefit (see 9.3.3.2). The deemed amount is
further reduced by the par 5, 6 or 6A deductions (see Example 9.8).
Surplus distributions (par 2C)
Any actuarial surplus distributions by any registered, active fund to a member in consequence of an
event prescribed by notice in the Government Gazette, subsequent to the member’s death, retirement or withdrawal, are excluded from gross income, effectively making the payment free of tax
(par 2C). Examples of these extraordinary events include undisclosed secret profits, actuarial surplus
calculations and unclaimed benefits. For example, a surplus may occur when a fund did not pay out
the member’s full minimum individual reserve when the member withdrew from a fund prior to retirement, which caused an actuarial surplus to build up in the fund. To ensure consistent tax treatment in
respect of such extraordinary lump sum payments, a new par 2D ensures that such payments on
behalf of deregistered funds will also qualify for exempt treatment.
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9.3
Lump sum benefits in the form of life policies
It may happen that the lump sum benefit is not a cash payment, but represents a policy of insurance
ceded or made over to the taxpayer by the fund on retirement or cessation of membership. The
surrender value of the policy is deemed to be a lump sum benefit as if it were a cash payment accruing to the member on the date of its cession or making over (par 4(2bis)). These policies must be
distinguished from the policies of insurance under par (d)(ii) and (iii) which are linked to an employer
that is not a fund.
If the policy of insurance is
l ceded or otherwise made over to the person by any retirement fund (fund A), and then
l ceded or otherwise made over by the person to any other such fund (fund B), or
l if the person pays an amount to the other fund in the place of or representative of the surrender
value or a part thereof
the surrender value is deemed to have been paid into the other fund (fund B) by the first fund
(fund A) for the benefit of the person (paras 5(3) and 6(3)). The effect of this deeming provision is that
such a second ceding to or payment into another fund is deemed a direct transfer from the first fund
to the second fund. It is consequently treated as a retirement fund lump sum withdrawal benefit in
terms of par 2(1)(b)(iB) being a direct transfer between funds of the same member.
Example 9.2. Lump sum benefits in the form of life policies
Alfons derives a retirement fund lump sum withdrawal benefit from a pension fund in the form of an
insurance policy with a surrender value of R400 000. R290 000 of his own contributions to the
fund was not deductible initially. Alfons has never received a lump sum benefit or severance
benefit before.
Discuss the nature and tax consequences of the retirement fund lump sum withdrawal benefit.
SOLUTION
The R400 000 falls under ‘other’ retirement fund lump sum withdrawal benefits in par 2(1)(b)(ii)
and the par 6(1)(b)(i) deduction for unclaimed contributions is available. The contributions of
R290 000 not previously allowed as deduction therefore reduces the R400 000 and R110 000
(R400 000 – R290 000) is included in gross income in terms of par (e). The normal tax payable in
terms of the retirement fund lump sum withdrawal benefit tax table and the cumulative principle is
R15 300 (R110 000 – R25 000) × 18%).
Date of accrual of lump sum benefits
Notwithstanding the rules of any RSA retirement fund, and subject to paras 3 and 3A (see below),
any lump sum benefit shall be deemed to have accrued to a person who is a member of such fund
on the earliest of the date
l on which an election is made in respect of which the lump sum benefit becomes recoverable
l on which any amount is deducted from the minimum individual reserve of a member for the
benefit of the member’s spouse in terms of a divorce order
l on which the benefit is transferred to another retirement fund, or
l of death of the member.
Lump sum benefits are taxed in the year of assessment during which such lump sum benefit is
deemed to accrue (par 4(1)).
A lump sum benefit paid after the death of a person is deemed to have accrued to that person immediately prior to the death of that person (par 3). Such a lump sum benefit will therefore be included in
the gross income of the deceased’s last return and assessment, and not in the return of the deceased estate or the heirs of the deceased. Since such a lump sum benefit payable on the death of a
person will often be paid directly to the heirs, the tax payable on the lump sum may be recovered
from the person to whom the lump sum benefit accrues (proviso (i) to par 3). In this way, the ultimate
tax burden is made to fall upon the heir of the benefit. In practice, the executor of the deceased
estate will do this recovery.
If a member of a pension fund, pension preservation fund or retirement annuity fund who has already
elected to retire and to receive a one-third lump sum benefit, and is currently receiving annuities dies,
the person’s heir will inherit the right to annuities or living annuities after the death of the member. If
the heir commutes the annuities for a lump sum benefit after the death of the member, such a lump
sum benefit will also be deemed a lump sum benefit that has become recoverable in consequence of
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Chapter 9: Retirement benefits
or following the death of the member (proviso (ii) to par 3). Such lump sum benefit will therefore be
deemed to accrue to the member immediately before death and the deceased will be taxed thereon
as a retirement fund lump sum benefit in terms of par 2(1)(a)(i).
No lump sum benefit is deemed to accrue to the member on death if
l the dependants or nominees of such a deceased person elected to receive an annuity or living
annuity (proviso (iii) to par 3), or
l where the lump sum benefit is paid into a preservation fund as an unclaimed benefit (proviso (v)
to par 3).
The same rules as in par 3 will apply if the first heir dies and a lump sum benefit becomes recoverable by a second heir. It is deemed to have accrued to the first heir immediately prior to his or her
death (par 3A).
A new paragraph 3B makes provision for any lump sum benefit, recoverable in consequence of the
termination of a trust, to be taxable in the trust immediately prior to the date of termination of the trust.
This will apply for all lump sum benefits from all retirement funds or insurers. This paragraph is a consequential amendment to the proposed amendment to the definition of ‘living annuity’ in s 1(1) to
make provision for the termination of a trust because the word ‘death’ in the definition of ‘living annuity’ is problematic. The reason is that trusts cannot die; they can only be terminated.
Example 9.3. Date of accrual of lump sum benefits
(a) An employee resigns from both his employment and his pension fund and he is entitled to a
withdrawal benefit from the fund, but the rules of the fund stipulate that the benefit is payable to him on the date on which he would normally have retired.
Discuss when the withdrawal benefit will accrue to the employee.
(b) An employee resigns from both his employment and his pension fund. In terms of the rules
of the fund, it is stipulated that, on a member’s resignation, a lump sum benefit is only payable
five years after resignation.
Discuss when the withdrawal benefit will accrue to the employee.
SOLUTION
(a) The benefit will be deemed to accrue to him on the date on which an election is made that
the amount must be paid (he can only elect on the retirement date) (par 4(1)(a)). It will be
regarded as a lump sum benefit derived by him upon his retirement, and the deductions allowable in terms of par 5(1)(a) – (e) will apply.
If the employee dies prior to the retirement date, the withdrawal benefit will be deemed to
have accrued immediately prior to his death. It will be assessed as a retirement fund lump
sum benefit derived by him immediately prior to his death and the deductions allowable in
terms of par 5(1)(a)–(e) will apply (see 9.3.1).
(b) The withdrawal benefit will only accrue on that later date five years after resignation on
which an election can be made that the amount must be paid (par 4(1)(a)). It will be regarded as a retirement fund lump sum withdrawal benefit and the deductions allowable in
terms of par 6(1)(b)(i) – (v) will apply.
If the employee dies prior to the expiry of this five-year period, the retirement fund lump sum
withdrawal benefit will be deemed to have accrued immediately prior to his death, and the
deductions allowable in terms of par 5(1)(a)–(e) will apply. This would remain the outcome
even if the retirement fund lump sum withdrawal benefit were payable to his dependants at
the end of the five-year period only, irrespective of his earlier death.
Please note!
l The amount given to students in a question as a lump sum benefit received
from a pension fund or a retirement annuity fund on retirement date, is the
amount that the taxpayer has elected to commute for a single payment in
terms of the rules of the fund and will never exceed one-third of that member’s retirement interest.
l Even though pension funds and provident funds are linked to a specific
employer, the fund is a separate employer for employees’ tax purposes
when a lump sum benefit or annuity is paid out to a member by the fund
(see the definitions of ‘employer’ and ‘remuneration’ in the Fourth Schedule).
l An annuity received from an ‘annuity contract’ concluded with an insurer
(see s 10A for definition) differs from a compulsory annuity received from an
RSA retirement fund – see chapter 4.
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9.3
9.3.1 Retirement fund lump sum benefits (paras 2(1)(a), (2(1)(c), 4(3), 5, 6 and 6A)
As shown in the table in 9.3, lump sum benefits received after the following four specific events will
qualify as retirement fund lump sum benefits.
Retirement or death
The definitions of ‘retire’, ‘retirement date’ and ‘normal retirement age’ are interlinked and must be
read together in the order below to understand when a person retires.
‘Retire’ means that a person becomes entitled to the annuity or lump sum benefits contemplated in
the definition of ‘UHWLUHPHQWGDWH¶ (par 1).
‘Retirement date’ is the date on which a member elects to retire and becomes entitled to an annuity or
a lump sum benefit contemplated in par 2(1)(a)(i) on or after attaining the ‘normal retirement age’ in
terms of the rules of the fund (definition in s 1). In the case of a nominee of a deceased member, it is
the member’s date of death.
The ‘normal retirement age’ (par (a) of the definition in s 1) of members of a pension fund and a
provident fund is the date on which the member is entitled to retire (in terms of the rules of the fund)
for reasons other than sickness, accident, injury or incapacity through infirmity of mind or body.
Reading the aforementioned three definitions together, it is clear that a member of a fund can only
elect to retire (and thereby reach retirement date) on or after attaining the specific age stated as
‘normal retirement age’ in the rules of that specific fund. The rules of funds can have different normal
retirement ages. Reaching normal retirement age merely means that you are entitled to retire. It does
not automatically mean that a person will elect to retire and, without such an election, retirement date
is not reached.
The ‘normal retirement age’ in the case of members of a retirement annuity fund, pension preservation
fund or provident preservation fund is always the attainment of the age of 55 (par (b) of the definition of
‘normal retirement age’ in s 1(1)).
If a person has elected to retire, the consequential lump sum benefit will be taxed as a retirement
lump sum benefit in terms of par 2(1)(a)(i). However, if a member of a provident fund retires from the
fund before the age of 55 years on grounds other than ill-health, the lump sum benefit received as a
result thereof will be taxed as a retirement fund lump sum withdrawal benefit unless the Commissioner, on application by the fund, directs otherwise (par 4(3)).
‘Normal retirement age’ is also reached, irrespective of age, if a member becomes permanently incapable of carrying on his or her occupation due to sickness, accident, injury or incapacity through
infirmity of mind or body (par (c) of the definition in s 1(1)). This means that any lump sum benefit
received by a person due to reaching normal retirement age in this way, will be taxed as a retirement
fund lump sum benefit in terms of par 2(1)(a)(i) irrespective of the person’s age.
Termination or loss of office or employment
Since the 2008 recession, withdrawal benefits received by members who lost their employment or
whose employment was terminated due to retrenchment are taxed as retirement fund lump sum
benefits (even though it is, in essence, a retirement fund lump sum withdrawal benefit). This was
done to ensure that the members enjoy the bigger benefit of the R500 000 taxed at 0% in terms of the
tax table for retirement fund lump sum benefits, instead of the R25 000 taxed at 0% in terms of the tax
table for retirement fund lump sum withdrawal benefits. This is also the reason why the par 6 deductions (and not the par 5 deductions) reduce the lump sum benefits received on the loss of office or
employment (in terms of par 2(1)(a)(ii)).
If a member receiving such a lump sum benefit on the termination or loss of employment, however, at
any time held more than 5% of the equity shares of the employer-company, the lump sum benefit will
be taxed as a retirement fund lump sum withdrawal benefit (which, in essence, it is) (proviso to
par 2(1)(a)(ii)).
The reference to termination or loss of employment implies that this type of lump sum benefit can only
be paid out by pension funds and provident funds, being employer funds. The one-third limitation on
the amount that can be commuted for a lump sum benefit does not apply, since the member has not
reached retirement date.
Commutation of an annuity (due to the de minimus rule)
As explained in 9.3, the one-third limitation on lump sum benefits from pension funds, pension
preservation funds and retirement annuity funds, and the consequential use of the two-thirds balance
to buy annuities, is subject to the de minimus rule. The de minimus rule applies if the remaining twothirds of the retirement interest in the fund does not exceed R165 000. If this rule applies and the
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9.3
Chapter 9: Retirement benefits
balance of the retirement interest is commuted for a single payment (a lump sum benefit), it will be
taxed as a retirement fund lump sum benefit in terms of par 2(1)(a)(iii).
Transfer on or after normal retirement age but before retirement date
The provision in par 2(1)(c) caters for a transfer of the retirement interest on or after attaining normal
retirement age but before retirement date (meaning before the member elects to retire). Being entitled to retire on reaching ‘normal retirement age’ does not mean that the member must automatically
elect to retire. Individuals are allowed to elect their specific retirement date. The date on which the
lump sum benefit accrues to the individual depends on the date on which the individual elected to
retire and not on reaching the ‘normal retirement age’.
As a result, individuals who postponed the election of the retirement date, were allowed to keep their
benefits within their funds past ‘normal retirement age’. While members retain their benefits within
such a fund, they may no longer contribute to those funds and therefore effectively became inactive
members. This left the employer with the burden of having to keep in touch with an inactive member
and having to deal with additional administration. The employee may also wish to sever ties with the
employer. To address these concerns, par 2(1)(c) allows persons to transfer any amount on or after
normal retirement age but before retirement date, and allows specific transfers to other funds as
deductions in terms of par 6A.
The calculation of the taxable portions of retirement fund lump sum benefits, which must be included
in gross income in terms of par (e), can be illustrated as follows:
Retirement fund lump sum
benefits
Retirement
or death
(par 2(1)(a)(i))
less
Par 5(1)(a)–(e)
Commutation
of an annuity*
(par 2(1)(a)(iii))
Termination or
loss of office or
employment
(par 2(1)(a)(ii))
less
less
Par 6(1)(b)(i)–(v)
Par 5(1)(a)–(e)
Transfer on or
after normal
retirement age
but before
retirement date
(par 2(1)(c))
less
Par 6A
* This is, for example, where two-thirds of the total value of the retirement interest does not exceed R165 000
and the qualifying annuities are therefore commuted for a single payment (a lump sum benefit) after an election by the person entitled to the benefits.
The wordings of the five deductions in par 5(1)(a)–(e) and par 6(1)(b)(i)–(v) respectively are exactly
the same. The deductions can be used in determining the taxable amount of any of the three types of
retirement fund lump sum benefits in terms of par 2(1)(a). Any such deduction can, however, only be
taken into account once
l as a deduction in terms of par 5 or 6 when determining the taxable amount in respect of a lump
sum benefit, or
l as an exemption in terms of s 10C in respect of qualifying annuities received.
It is submitted that it would be most tax beneficial to use an available deduction against the first
applicable retirement fund lump sum benefit received during a year of assessment. The deductions
in terms of par 5 or 6 may not exceed the lump sum benefit (paras 5(2) and 6(2)).
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9.3
The following table summarises the provisions of retirement fund lump sum benefits:
Retirement fund lump sum benefits
Paragraph 2(1)(a)(i)–(iii):
Amount received as retirement fund lump sum benefit less par 5(1)(a)–(e) or 6(1)(i)–(v) deductions = gross
income in terms of par (e)
Paragraph 2(1)(c):
Amount transferred for the benefit of a person less par 6A deduction = gross income in terms of par (e)
Amount received or accrued
Paragraph 2(1)(a)(i): Retirement or
death
Paragraph 2(1)(a)(ii): Termination of employment
because employer ceases to carry on
trade or
person is redundant because of personnel reductions
Paragraph 2(1)(a)(iii): Commutation of
an annuity or portion of an annuity for a
single payment (lump sum benefit)
Paragraph 2(1)(c): Transfer on or after
normal retirement age but before retirement date
Deductions ± so much of the amounts below as was not previously
allowed as a deduction in terms of the Second Schedule or as an
exemption in terms of s 10C:
Paragraph 5(1)(a)±(e) or 6(1)(i)±(v) deductions (the wordings of the
two paragraphs are the same and therefore only the wording of
par 5(1)(a)±(e) are listed):
Paragraph 5(1)(a): Contributions to any fund that did not previously
rank for a deduction in terms of s 11F
Paragraph 5(1)(b): Amounts transferred to a fund for the benefit of
the person because of an election made after a divorce order
allocation in terms of par 2(1)(b)(iA) (this means that the person
previously elected that a transfer must be made from the minimum
individual reserve of the person’s former spouse to a fund of which
the person is a member, and the person was previously taxed on
such transfer due to the fact that a par 6(1)(a)(i) deduction was not
allowed at that stage)
Paragraph 5(1)(c): Amounts deemed to have accrued because an
amount was transferred to a fund for the benefit of the person from
another fund of which that person is or was a member in terms of
par 2(1)(b)(iB) (this means that a transfer was previously made
between two funds of which the same person was a member, and
the member was previously taxed on such transfer due to the fact
that a par 6(1)(a)(ii) deduction was not allowed at that stage)
Paragraph 5(1)(d): Transfers by any fund to any preservation fund
of an already taxed unclaimed benefit**
Paragraph 5(1)(e): The exempt portion of a public sector pension
fund lump sum benefit in respect of service years before 1/3/1998
l paid into any other fund by a public sector pension fund for the
benefit of the person, or
l transferred into any other fund for the person’s benefit directly
from the fund into which the public sector pension fund paid
the amount into.
Paragraph 6A(a): An amount transferred for the benefit of that
person from a pension fund into a pension preservation fund or a
retirement annuity fund (a provident preservation fund is added to
the list with effect from 1 March 2021), or
Paragraph 6A(b): An amount transferred for the benefit of the person from a provident fund into a pension preservation fund, provident preservation fund or retirement annuity fund.
** An unclaimed benefit is a lump sum benefit that a member fails to claim within 24 months after resignation or
termination of services or retirement or death (Interpretation Note 99 (Issue 3)). If a fund transfers such unclaimed benefit to any preservation fund, there is an accrual in terms of par 4(1)(c) and it is a par 2(1)(b)(iB)
retirement fund lump sum withdrawal benefit. The fund from which the transfer is made must obtain a tax
directive from SARS in respect of the employees’ tax to be withheld, making it an already taxed unclaimed
benefit.
If the member later elects to claim this already taxed unclaimed benefit from the preservation fund, there is
another accrual in terms of par 4(1)(a) and it is a par 2(1)(a) retirement fund lump sum benefit or a par 2(1)(b)(ii)
retirement fund lump sum withdrawal benefit. The second accrual will not be taxable due to this deduction in
terms of par 5(1)(d) or 6(1)(b)(iv).
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9.3
Please note!
Chapter 9: Retirement benefits
Students are advised to keep retirement fund lump sum benefits in a separate
column (column 1 together with severance benefits) in the calculation of the taxable income of a natural person, because the same tax table is applicable to
these types of lump sums and lump sum benefits. Please remember that separate calculations of the normal tax payable on all the amounts in column 1 must
be made following the cumulative principle. See chapter 7 for complete details
regarding the subtotal method in the comprehensive framework.
Remember
Although the taxable portion of a retirement fund lump sum benefit must be included in gross
income in terms of par (e) of the gross income definition, it is included in column 1 and not in
column 3. The normal tax payable thereon is calculated separately from the normal tax payable
on the taxable income in column 3 and separately from the normal tax payable on any other
amount in column 1.
A retirement fund lump sum benefit is also not taken into account in the calculation of the allowable deductions in terms of s 11F and 18A (see chapter 7).
Application of the cumulative principle to the calculation of normal tax payable on a retirement fund
lump sum benefit
Place all qualifying severance benefits, retirement fund lump sum benefits and retirement fund lump sum
withdrawal benefits in sequence according to the dates of receipt or accrual.
Calculate the sum of
l the current retirement fund lump sum benefit, and
l all previous severance benefits, retirement fund lump sum benefits and retirement fund lump sum
withdrawal benefits received by or accrued to the person on or after the specified dates in the retirement
fund lump sum tax table.
(Please note: The taxable amounts included in gross income in terms of par (d)(i) or (e) are used.)
Use the tax table applicable to the current retirement fund lump sum benefit for both the calculations in step 1
and step 2.
l STEP 1 Calculate the normal tax payable on the sum as determined above.
l STEP 2 Calculate the ‘tax that would be leviable’ (the hypothetical tax) on the sum of all previous severance benefits, retirement fund lump sum benefits and retirement fund lump sum withdrawal benefits
(therefore excluding the current retirement fund lump sum benefit).
(Please note: The hypothetical tax will not necessarily be equal to the actual tax paid on these severance
benefits and lump sum benefits.)
Normal tax payable on the current retirement fund lump sum benefit = tax in step 1 less tax in step 2.
The retirement fund lump sum benefit table is set out below:
Taxable income from lump sum benefits
Rate of tax
Not exceeding R500 000
0% of taxable income
Exceeding R500 000 but not exceeding
R700 000
R0 plus 18% of taxable income exceeding R500 000
Exceeding R700 000 but not exceeding
R1 050 000
R36 000 plus 27% of taxable income exceeding
R700 000
Exceeding R1 050 000
R130 500 plus 36% of taxable income exceeding
R1 050 000
Example 9.4. Retirement from pension fund
Andile elects to retire from a pension fund on 28 February 2021 after reaching normal retirement
age in terms of the rules of the pension fund. A lump sum benefit of R600 000 accrues to him.
During his 20 years of service, contributions of R18 600 did not previously rank for a deduction in
terms of s 11F. Calculate the amount that must be included in gross income as well as the normal tax payable thereon.
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9.3
SOLUTION
Lump sum benefit (par 2(1)(a)(i)) .............................................................................
Less: Contributions which did not previously rank for deduction (par 5(1)(a)) ........
R600 000
(18 600)
Gross income ............................................................................................................
R581 400
Normal tax payable per table above on (R581 400 – R500 000) @ 18% .....................
R14 652
Example 9.5. Lump sum from an employer and lump sum benefit from a fund combined
Okkie is 60 years old, a resident of the RSA and has worked for Heights Properties Ltd in Cape
Town as a property manager for the past 25 years.
Okkie elected to retire on 31 December 2020 from Heights Properties Ltd after reaching normal
retirement age in terms of the rules of the pension fund. Okkie received the following as a result
of his retirement:
l R120 000 as a lump sum from Heights Properties Ltd
l R800 000 as a lump sum benefit from H Pension Fund (Heights Properties Ltd requires that
all its employees must be members of H Pension Fund)
l R12 000 per month as an annuity from H Pension Fund with effect from 1 January 2021.
Since 1 March 2020, Okkie received a cash salary of R15 000 per month from Heights Properties
Ltd.
Okkie owns an investment property since 2016 and he leased it out during the last two years of
assessment for R8 000 per month.
Except for the items listed above, Okkie did not have any other income or expenditure for the last
two years of assessment. All his contributions to the Pension Fund have been allowed as deductions in the past.
Calculate the total normal tax payable by Okkie for the 2021 year of assessment. You may assume that Okkie has not received a severance benefit or lump sum benefit prior to 31 December
2020.
SOLUTION
(The format in chapter 7 is used)
Retirement
fund lump
sum benefit
and
severance
benefit
(column 1)
Other
(column 3)
Salary .......................................................................................................
Lump sum from employer (severance benefit because older than
55 years) .................................................................................................. R120 000
Rental income ..........................................................................................
Retirement fund lump sum benefit (par 2(1)(a)(i)) ................................... 800 000
Annuities ..................................................................................................
R150 000
Taxable income ....................................................................................... R920 000
R270 000
96 000
24 000*
* No s 10C exemption is available since there is no balance of unclaimed contributions to use.
Normal tax determined in terms of the progressive tax table on other
taxable income (column 3) (calc 1) .........................................................
Less: Primary rebate ................................................................................
Normal tax payable on other taxable income ..........................................
Normal tax payable on retirement fund lump sum benefit and severance
benefit (column 1) in terms of the applicable table (calc 2) ............................
R53 728
(14 958)
R38 770
95 400
Total normal tax payable for the 2021 year of assessment...................... R134 170
Calculation 1 Normal tax on other taxable income
Normal tax on R205 900 .............................................................................................
Normal tax on R64 100(R270 000 – R205 900) @ 26%...............................................
R37 062
16 666
Total normal tax ..........................................................................................................
R53 728
continued
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Chapter 9: Retirement benefits
Calculation 2 Tax on retirement fund lump sum benefit and severance benefit
Since the two amounts are received on the same date and the same table applies
in respect of both, only one calculation is done. There is therefore also no
hypothetical amount of tax. The same answer will be obtained if one amount is
taken as being received ‘first’ and a hypothetical tax is claimed against the
‘second’ amount.
Normal tax determined per the retirement fund lump sum benefit table
On first R700 000 ........................................................................................................
On R220 000 (R920 000 – R700 000) @ 27% .............................................................
R36 000
59 400
Total normal tax payable.............................................................................................
R95 400
To prove that the normal tax payable will be the same amount of R95 400 irrespective of which of
the severance benefit or retirement fund lump sum benefit is deemed to be received first on
31 December 2020:
If the severance benefit is deemed to be received first, and the amounts are not added together
like in the suggested solution, the tax will be Rnil on the severance benefit because it is less than
R500 000 in the severance benefit table and taxed at 0%. The hypothetical tax is also Rnil, as
this is the first time that Okkie has received a severance benefit.
The tax on the retirement fund lump sum benefit will then be calculated in terms of the cumulative principle using the severance benefit table and will be: Tax on R920 000 (R120 000 +
R800 000) = R95 400 less Hypothetical tax (in terms of the severance benefit table on the
R120 000 severance benefit) which is Rnil = R95 400.
If the R800 000 retirement fund lump sum benefit is deemed to be received first, the tax in terms
of the retirement fund lump sum benefit table will be R36 000 + (27% × R100 000) = R63 000.
The hypothetical tax is Rnil, as this is the first time that Okkie has received a lump sum benefit.
The tax on the severance benefit will then be calculated in terms of the cumulative principle using the retirement fund lump sum benefit table and will be: Tax on R920 000 (R120 000 +
R800 000) = R95 400 less Hypothetical tax (in terms of the retirement fund lump sum benefit
table on the R800 000) which is R63 000 = R32 400.
The total tax on both the severance benefit and the retirement fund lump sum benefit will therefore be R63 000 + R32 400 = R95 400.
9.3.2 Retirement fund lump sum withdrawal benefits (paras 2(1)(b), 4 and 6)
As shown in the table in 9.3, certain lump sum benefits received after the following two specific
events and one general event will qualify as retirement fund lump sum withdrawal benefits.
Awards in terms of a divorce order
The ‘clean-break’ principle means that a retirement fund may deduct any amount, awarded to a nonmember in terms of a divorce order or a maintenance order, from a member of that fund’s minimum
individual reserve. The deduction in terms of these orders can be made by the fund from the date on
which the divorce order or maintenance order is granted. The tax implications of reducing a member’s minimum individual reserve in terms of a divorce order are not the same as reducing a member’s minimum individual reserve in terms of a maintenance order. Paragraph 2(1)(b)(iA) only applies
in the case of an award in terms of a divorce order. An award and the consequential deduction from a
member’s minimum individual reserve in terms of a maintenance order is taxed in terms of s 7(11)
and the Second Schedule does not apply to it.
The non-member spouse to whom any such awards accrue, has a choice between having the
amount awarded paid out to him or her, and having it transferred to a fund for his or her benefit. The
non-member spouse must submit the divorce order to the fund that must deduct the money from a
member’s minimum individual reserve. The fund must request the non-member spouse within 45
days from receiving the divorce order to choose between payment and transfer of the amount
awarded. The non-member spouse must choose within 120 days. The fund must effect the payment
or transfer within 60 days after the non-member spouse has notified them of his or her choice. If the
non-member spouse fails to choose or indicate the fund to which a transfer must be made within the
120-day period, the fund must pay the amount directly to the non-member spouse 30 days after the
120-day period has expired.
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9.3
The following summary highlights the differences between reducing the minimum individual reserve
in terms of a maintenance order and reducing the minimum individual reserve in terms of a divorce
order:
Reduce minimum individual
reserve in terms of a maintenance
order
Reduce minimum individual
reserve in terms of a divorce order
Applicable sections
Section 7(11), par (b) definition of
‘gross income’ and s 10(1)(u)
Paragraph (e) definition of ‘gross
income’, par 2(1)(b)(iA) and par
6(1)(a)(i) of the Second Schedule
Taxable in whose hands
The member spouse whose minimum individual reserve is reduced
(this means the spouse against
whom the order was made)
(The amount is also gross income
(par (b)) for the non-member
spouse, but is then also exempt
income (s 10(1)(u)) and therefore
has no impact on the taxable
income of the spouse receiving
the amount)
The non-member spouse who
receives the amount after the
reduction of the minimum individual reserve of the member
spouse
(this means the spouse in favour
of whom the amount was awarded)
What amount is included in income and what amount is ‘remuneration’?
The amount awarded to the
non-member spouse plus employees’ tax thereon (calculated
taking into account the tax-on-tax
principle in chapter 10)
The amount awarded to the nonmember spouse less the applicable par 6 deductions
In which column of the subtotal
method is it included?
Column 3
Column 2 (as a retirement fund
lump sum withdrawal benefit in
terms of par 2(1)(b)(iA))
Employees’ tax consequences
The fund must apply the tax-ontax effect as contained in Interpretation Note No. 89 on Maintenance Orders and the Tax-on-tax
Principle. The normal progressive
tax table of natural persons will be
applicable (see chapter 10)
The fund must obtain a directive
from the Commissioner in terms of
par 9(3) of the Fourth Schedule.
The tax table applicable to a
retirement fund lump sum withdrawal benefit will apply
Direct transfer between funds of the same member
Paragraph 2(1)(b)(iB) refers to ‘any amount that is transferred for the benefit of a person to a fund
from a fund of which that person is or was a member’. Such transfers normally happen when the
member resigns and leaves the employ of the employer before the retirement date, and then elects
that his or her total minimum individual reserve, or a portion thereof, must not be paid to him or her
but must be transferred directly by the employer’s fund to another fund of which he is a member. It is
important to note that the same person must be the member of the two funds between which the
transfer is made and that the transfer must be made directly.
Please remember that ‘transfer between funds’ does not include any transfer of ‘the remainder of a
retirement interest’ as explained in 9.3 to another fund after a member has elected to retire and has
elected to receive a lump sum benefit. The election to retire and to commute a portion of the retirement interest for a lump sum benefit is a retirement fund lump sum benefit in terms of par 2(1)(a)(i).
The transfer of the remainder of the retirement interest of such a retired person in order to purchase
an annuity (including a living annuity) from a registered insurer in effect represents annuities, and the
Second Schedule is not applicable to annuities.
If a person elects a lump sum benefit from fund A on retirement date, but requests that the lump sum
benefit, or a portion thereof, must be transferred directly by fund A to fund B of which that person is a
member instead of paying it out to the person, par 2(1)(a)(i) will not apply. Such a lump sum benefit
will be seen as a retirement fund lump sum withdrawal benefit in terms of par 2(1)(b)(iB) due to the
direct transfer between funds of the same member. The wording of par 2(1)(b)(iB) merely refers to
‘any amount that is transferred for the benefit of that person’ and it is therefore wide enough to include any such direct transfer at any stage of membership.
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9.3
Chapter 9: Retirement benefits
Other cases
Any other amounts received by a person by way of lump sum benefits in consequence of membership of a fund, except those explained in the six specific events listed in the table in 9.3 and already
discussed, fall under the general event in par 2(1)(b)(ii). This is typically when a member withdraws
from a fund or resigns from employment before the retirement date, but does not elect to directly
transfer the minimum individual reserve from that fund to another fund of which he or she is or was a
member, as explained above. An example of this general event is if a member resigns from employment and elects that his or her minimum individual reserve be paid out to him or her.
The calculation of the taxable portions of retirement fund lump sum withdrawal benefits, which must
be included in gross income in terms of par (e), can be illustrated as follows:
Retirement fund lump sum withdrawal benefits
Award in terms of
a divorce order
(par 2(1)(b)(iA))
Direct transfer between
funds of the same member
(par 2(1)(b)(iB))
less
less
Par 6(1)(a)(i)
Par 6(1)(a)(ii)
Other cases (for
example resignation)
(par 2(1)(b)(ii))
less
Par 6(1)(b)(i)–(v)
The following table summarises the provisions of retirement fund lump sum withdrawal benefits:
Retirement fund lump sum withdrawal benefits
Paragraph 2(1)(b)
Amount received or accrued as retirement fund lump sum withdrawal benefit less par 6(1)(a) or (b) deductions = gross income in terms of par (e)
Amount received or accrued
Deduction
Paragraph 2(1)(b)(iA): Amounts
awarded in terms of a divorce
order (to the non-member
spouse) and deducted from
the minimum individual reserve of the member spouse
(The date of accrual is the date
on which the amount became
due and payable by the fund
(par 2(2)(a).)
Paragraph 6(1)(a)(i) and 6(1)(a)(ii) apply in respect of divorce orders (par
2(1)(b)(iA)) and transfers between funds (par 2(1)(b)(iB)):
So much of the lump sum benefit that is paid or transferred to the funds
listed in the table below can be deducted. The words ‘so much of the
benefit’ contemplated in par 2(1)(b)(iA) or 2(1)(b)(iB) means so much of
the specific lump sum benefit that the person elected to be directly transferred. This means that the person’s election regarding the application of
the funds can lead to a par 6(1)(a)(i) or (ii) deduction. The person does
not have to elect to transfer the total lump sum benefit to another fund