How to Get a SARS Refund
Published by Penguin Books
an imprint of Penguin Random House South Africa (Pty) Ltd
Reg. No. 1953/000441/07
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PO Box 1144, Cape Town, 8000, South Africa
www.penguinrandomhouse.co.za
First published 2021
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Publication © Penguin Random House 2021
Text © Daniel Baines 2021
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All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system or transmitted, in any form or by any means,
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without the prior written permission of the copyright owners.
PUBLISHER: Marlene Fryer
MANAGING EDITOR: Ronel Richter-
Herbert
EDITOR: Dane Wallace
PROOFREADER: Bronwen Maynier
COVER AND TEXT Sean Robertson
DESIGNER:
TYPESETTER: Monique van den
Berg
ISBN 978 1 77609 653 4 (print)
ISBN 978 1 77609 654 1 (ePub)
CONTENTS
Introduction
Chapter 1: The basics of understanding individual tax
1.1 Your annual tax return
1.2 The tax threshold
1.3 Taxable income
1.4 Tax rebates
1.5 Amount of tax payable
1.6 Tax benefits
Chapter 2: Deductions from taxable income
2.1 Deductions from taxable income for salaried employees
2.2 Retirement annuities, pension funds and provident funds
2.3 Business-related motor-vehicle travel
2.4 Donations
2.5 Home-office expenses
2.6 Wear and tear
2.7 Recoupments
Chapter 3: Medical tax credits
3.1 Normal medical scheme fees tax credit
3.2 Additional medical expenses tax credit
Chapter 4: Exempt income
4.1 Interest
4.2 Local dividends
4.3 Bursaries and scholarships
4.4 Tax-free investment accounts
Chapter 5: Capital gains tax
5.1 What is capital gains tax and how is it calculated?
5.2 Primary residence exclusion
5.3 Shares
5.4 Trading stock
5.5 Exemptions from CGT
5.6 Capital loss
Chapter 6: Miscellaneous aspects of individual tax
6.1 Commission earners
6.2 Independent contractors
6.3 Provisional tax payments
6.4 Retired persons and persons over the ages of 65 and 75
6.5 Bonuses
Conclusion
About the author
References
I dedicate this book to my wife, Jocelyn,
for all her support; and to my parents, Gary and Angela,
for providing me with an education. And a special thanks
to my dad for his help in improving the book.
The author has put many months of work into researching and
writing this book. This ebook is NOT free, and should be bought
from an ebook retailer. If you are circulating it for free, you are
breaking the law and can be prosecuted under the Copyright
Act 98 of 1979.
INTRODUCTION
Salaried employees are in the unfortunate position that they are
severely limited in terms of the tax deductions they are allowed to
make. There are, however, numerous ways in which they can reduce
their tax burden.
This book explains the fundamentals of income tax and tax
deductions in South Africa, with a specific focus on salaried
employees. Its aim is to enable taxpayers to gain a thorough
understanding of South Africa’s individual tax laws and to use this
knowledge to their full advantage to reduce their tax liability and
increase the likelihood of receiving a refund from the South African
Revenue Service (SARS). Information is also provided on the
various tax laws pertaining to different types of income, including
income from investments and gains made on the sale of property.
Detailed and easy-to-understand examples illustrate how to
calculate your tax liability and make maximum use of admissible
deductions, as these can greatly reduce your tax liability.
Tax deductions for commission-earning employees and
independent contractors are also discussed. Such persons are able
to access greater tax benefits, as they can deduct business-related
expenditure (including mobile phone, travel and entertainment
expenses) that they incur to produce their income.
An understanding of the topics covered will allow taxpayers to
better evaluate their current circumstances and determine ways to
reduce their tax liability, thus increasing their chances of receiving a
refund from SARS upon filing their annual tax return.
A note of caution: While there are many ways to reduce your tax
burden, there are no guarantees. Whether you receive a refund from
SARS will ultimately depend on your overall tax situation.
The tax figures used in this book are for the 2022 tax year as
announced in the Budget Speech on 24 February 2021. These
figures must still be passed into law.
The remainder of the book is based on the law as it stood when
this book went to print. Please note that tax laws are subject to
frequent change.
DANIEL BAINES
MAY 2021
Chapter 1
THE BASICS OF UNDERSTANDING
INDIVIDUAL TAX
If you derive your income from salaried employment and wish to
utilise the tax laws in South Africa to minimise your tax liability and
maximise your refund from SARS upon filing your annual tax return,
this book is for you. It will also help you navigate your way through
the income tax return for individuals (a form called the ITR12) if you
use SARS’s eFiling option.
1.1 YOUR ANNUAL TAX RETURN
All salaried employees have a tax called PAYE deducted from their
salary on a monthly basis. PAYE is not a special type of tax – it is
merely income tax that is levied on your salary by SARS.
Perhaps you have seen the acronym PAYE on your payslip, or
your employer mentioned it. PAYE stands for ‘pay as you earn’, and
it means that you pay the tax you owe to SARS on a monthly basis
instead of all in one go at the end of each tax year. Essentially, this
method of paying tax means that you avoid having to pay between
18% and 45% of your earnings to SARS in cash as a lump sum once
a year.
Your employer will calculate your PAYE on your behalf and pay
this amount directly to SARS before your salary is paid to you. The
amount of PAYE that is deducted from your salary each month will
depend on several factors. (Later in this chapter, I discuss in more
detail how PAYE is calculated.) Your employer must upload your
IRP5 onto eFiling. Your IRP5 is the document that details your
income and the PAYE your employer paid to SARS for the tax year in
question. When you log on to eFiling to complete your tax return, the
information should already be available.
The tax return that you fill in on eFiling is called an ITR12. This
will contain your IRP5. (If you were employed by more than one
employer during the tax year, or if you had more than one job, then
you will have more than one IRP5 included within your ITR12.) The
ITR12 will also contain other relevant information relating to your tax
status, such as certain prepopulated deductions and fields where
you can insert your other allowable deductions.
Salaried employees’ tax benefits are severely limited.
(Businesses, by contrast, have far greater benefits.) However, a
significant number of benefits are available if you understand how
the South African tax system works. In the following chapters, I will
provide detailed information on these benefits and show you how
you can take advantage of the various provisions in the Income Tax
Act No. 58 of 1962 to help you capitalise on the avenues available to
you for receiving a refund from SARS.
In addition, the following taxes that may apply to salaried
taxpayers are also discussed:
• dividends tax;
• tax on interest earned;
• capital gains tax (CGT); and
• provisional tax.
CGT and the provisions and benefits of it that relate to individuals
are covered in Chapter 5. Tax laws that are relevant to special
salaried employees, such as commission earners and independent
contractors, will then be discussed in Chapter 6.
To begin with, let us unpack the important concepts that
taxpayers need to understand clearly if they want to benefit from
South Africa’s tax laws. The first one is the tax threshold. (Note that
the tax rates used in this book are those specified by SARS for the
2022 tax year. These rates change each year. You can find the latest
tax-rate tables on the SARS website at www.sars.gov.za. Full URLs
are provided in the References section at the back of this book.)
1.2 THE TAX THRESHOLD
The tax threshold is the minimum salary that you must earn before
your employer will deduct PAYE from your income. This means that if
your salary is below a certain amount per annum, your employer
does not need to deduct PAYE. For the 2022 tax year, the threshold
is R87 300 if you are under 65 years of age. This threshold
increases if you are over 65 (the tax implications of being over this
age are discussed in later chapters). If you fall under the tax
threshold and do not pay PAYE, you will not be able to claim a
refund from SARS – you will only be eligible for a refund if you have
overpaid your PAYE amount in income tax.
Remember that the tax year for individuals runs from 1 March
until the last day of February the following year, so the 2022 tax year
runs from 1 March 2021 until 28 February 2022.
1.3 TAXABLE INCOME
Taxable income is an important term that will help you fully
understand how your tax-payment calculations work.
Taxable income is the amount of income you receive on which
SARS is allowed to tax you. As an example, if you receive a salary of
R20 000 per month and no other income, then your annual taxable
income will be R240 000. Your tax liability is calculated on this
taxable income figure. Certain types of income are exempt from
taxation (these are discussed in Chapter 4).
The term taxable income is important, because taxpayers must
first establish their taxable income before they can determine their
tax liability. Tax legislation in South Africa allows individuals to
reduce their taxable income (and therefore their tax liability) by
deducting certain expenditure that they incurred during that tax year.
To use the same example as above, if your salary is R240 000 per
annum, but you can deduct certain expenses, for example your
retirement annuity, then this expense will reduce your taxable
income. If your annual salary is R240 000 and you have contributed
R20 000 to a retirement annuity over the year, your new taxable
income would be R220 000. The relevant tax rates are then applied
to this lower amount.
1.4 TAX REBATES
Every individual taxpayer is entitled to a rebate. A rebate is merely a
reduction of your tax liability. If, for example, your tax liability is R100
000, the rebate will reduce this amount – a process that is applied
automatically by SARS for all individual taxpayers.
The primary rebate
Every taxpayer is entitled to what is known as a primary rebate. This
rebate is a set amount by which your yearly tax liability is reduced.
For the 2022 tax year, this rebate amount is R15 714. This means
that if your tax liability for the year is R50 000, the primary rebate will
reduce your tax liability by R15 714. This rebate should be
considered by your employer when calculating your PAYE so that
you pay less tax each month.
The secondary rebate
Taxpayers who are 65 years or older on the last day of the tax year
are entitled to an additional rebate. This is called the secondary
rebate, and for 2022 this rebate amount is set at R8 613. Taxpayers
above the age of 65 will therefore have a total rebate of R24 327 per
tax year (the primary rebate and the secondary rebate added
together).
The tertiary rebate
Taxpayers who are 75 years or older on the last day of the tax year
receive a third rebate, called the tertiary rebate. This rebate is to the
amount of R2 871 in 2022. A taxpayer who is 75 years or older will
therefore qualify for a total rebate of R27 198.
1.5 AMOUNT OF TAX PAYABLE
The amount of PAYE that your employer withholds from your salary
to pay to SARS is wholly dependent on your income. SARS
publishes a sliding scale each year, which is then used to determine
the tax amount that any individual will pay. The taxable income figure
that you see in Table 1.1 is your salary (presuming that you have not
earned any additional income). The table shows clearly that income
is taxed on the basis of a sliding scale.
Bear in mind that your employer may also take medical aid scheme
payments and other factors into account when determining your
monthly tax liability. This would change the calculation.
1.6 TAX BENEFITS
The tax benefits that are available to individuals who are in salaried
employment are severely limited. However, certain benefits are
available that can greatly reduce your tax liability. These can be
grouped into different categories:
• deductions from taxable income (see Chapter 2);
• medical tax credits (see Chapter 3); and
• exempt income (see Chapter 4).
Make sure that you have a good grasp of the fundamentals of
individual tax in South Africa as detailed here, as they are essential
to your understanding of the chapters that follow, and they will
determine how successful you are at obtaining a refund from SARS.
But remember that although this book was up to date at the time of
publishing, taxation laws change on a regular basis. You must
always check for the latest information when submitting your annual
tax return or considering your tax affairs.
Chapter 2
DEDUCTIONS FROM TAXABLE INCOME
2.1 DEDUCTIONS FROM TAXABLE INCOME FOR
SALARIED EMPLOYEES
In determining your tax liability, you may deduct certain expenses
from your taxable income. This can decrease your tax liability with
SARS and place you in a better financial position.
If you are an employee earning R500 000 per year as a basic
salary, this will be your taxable income. From this amount of R500
000, you may subtract certain expenditure to reduce your taxable
income and, therefore, your tax liability.
Your employer may take certain deductions into account when
determining your monthly salary. In such an event, your monthly tax
will be reduced, but this could prevent you from receiving a refund
upon filing your tax return – as you already will have received the
reduction in your tax liability on a monthly basis.
When you log on to eFiling and start filling out your ITR12 form,
you will be presented with a page that requests you to fill in certain
information by ticking various boxes. This page is vital, as it
determines what you can deduct from your taxable income – which
determines your ultimate tax liability. In the rest of this chapter, I
discuss the various deductions to which individuals in salaried
employment are entitled. These include the following:
• retirement annuities, pension funds and provident funds;
• business-related motor-vehicle travel;
• donations;
• home-office expenses; and
•
wear and tear.
2.2 RETIREMENT ANNUITIES, PENSION FUNDS
AND PROVIDENT FUNDS
Retirement annuities, pension funds and provident funds are
probably the most common deductions that are utilised by taxpayers
who are salaried employees. Many taxpayers contribute to a
retirement annuity, a pension fund or a provident fund, as these
provide a considerable tax benefit.
Taxpayers are allowed to deduct up to 27.5% of their
remuneration or taxable income (whichever is greater), to a
maximum of R350 000 per tax year, from their taxable income if they
contributed this amount to their retirement annuity, pension fund or
provident fund. For example, if your salary is R360 000 per year and
you pay R24 000 annually into a retirement annuity, you can deduct
the full allowable amount from your taxable income. The effect of this
benefit is remarkable.
This means that an amount of R7 350 (R77 414 – R70 064) will be
paid out as a refund by SARS when you file your annual income tax
return (presuming that your employer has not taken your retirement
annuity contributions into account when determining your monthly
PAYE – you can check this with your employer).
In Example 2.2, you will receive the benefit of the refund from
SARS as well as the benefit of having invested R24 000 into a
retirement annuity. You must keep your retirement annuity, pension
fund and provident fund certificates available for submission to
SARS, as they may be requested.
The same principle applies to pension and provident funds, which
are treated the same for income tax purposes. (Note that certain
lump sums received or donations made to an approved organisation
must not be considered in these retirement annuity, pension fund or
provident fund calculations.)
You will need to tick the option ‘Did you or your employer make
any retirement annuity fund contributions for the benefit of yourself?’
on the first page of your ITR12 to access this benefit. The amount
contributed will then be included under code 4006 for retirement
annuities on your ITR12 form. Taxpayers must also include the policy
number of their retirement annuity, as well as the name of the
insurance company that holds it, on their ITR12. If SARS has already
prepopulated this field, ensure that it is correct and all of your
retirement annuities have been declared.
However, if these contributions were to a pension or provident
fund, they should already be reflected on your IRP5 form, and SARS
should automatically take them into account.
2.3 BUSINESS-RELATED MOTOR-VEHICLE TRAVEL
Many employees will be required to travel for work. This may include
travelling to clients or travelling from one worksite to another. It is
important to note that travel from your home to your place of work
does not count as work-related travel.
If you receive a travel allowance from your employer (code 3701
on your IRP5), your employer will most likely tax you on 80% of your
travel allowance. This tax is worked out by your employer, who
withholds the appropriate amount from your gross salary each month
as part of your PAYE deductions, and then pays this amount over to
SARS on your behalf. This means that you have paid tax on 80% of
your travel allowance (and 20% of the allowance is tax-free).
If you use your car for work for more than 20% of its total usage
(this being the combination of work and personal usage), then you
will be able to get a reduction of your tax liability upon submission of
your return. The general principle here is that you do not pay tax on
your travel allowance to the extent that you travelled for work-related
purposes.
If your employer has taxed you on 80% of your travel allowance,
but you can prove to SARS (by means of a logbook) that you
travelled for work more than 20% of the time, then you will get a
reduction in your tax liability. In this case, it is essential that you keep
a detailed logbook of your travelling; SARS will not allow a reduction
of your tax liability if you fail to do this. Examples of logbooks may be
found on the SARS website. As per the SARS logbook template, you
must include reasons for the trip, as well as contact details of the
person visited, e.g. ‘Delivery of stock to client, Mr Z’ or ‘Meeting with
Mrs A at ABC Suppliers’. It is also recommended that you have your
vehicle-purchase contract available, as SARS may request this.
You will need to fill in the following information about your vehicle
on your ITR12 to claim this tax benefit:
• make, model and year of manufacture;
• cost price;
• opening kilometres;
• closing kilometres;
• business kilometres; and
• licence number.
The SARS eFiling system will automatically calculate your travel
deduction. Because of the many variables and the complexity of the
travel-allowance calculations, I do not provide a detailed example
here. However, note that it is worthwhile keeping a proper logbook,
as this tool will greatly reduce your tax liability. If, for example, your
employer pays you an amount of R60 000 for the tax year as a travel
allowance, and your business-related travel expenditure amounts to
R60 000 (calculated in terms of the applicable SARS rates and your
logbook), then you will not pay tax on this travel allowance. The
amount of PAYE that you have been paying to SARS monthly in
terms of the travel allowance will be refunded to you upon
submission of your return. SARS may, however, require verification
or an audit, during which you will be requested to supply your
logbook and, possibly, some further documentation (such as your
vehicle-purchase contract).
If your employer provides you with a vehicle to use for work (this
will either be under code 3802, 3852, 3816 or 3866 on your IRP5),
you must also keep a logbook that you can submit to SARS when
filing your tax return. Your tax liability can also be greatly reduced
with this logbook (provided that it complies with SARS’s
requirements).
However, the possible reduction of your tax liability will depend
on a variety of factors, which include the number of business
kilometres travelled in relation to personal kilometres, and the cost
price of the vehicle.
You have to tick the option ‘Do you want to claim a deduction
against a travel allowance?’ or ‘Do you want to claim a deduction
against an employer-provided vehicle?’ on the first page of your
ITR12 to access this benefit. A block will then open on your ITR12 in
which you can fill in the requisite information.
2.4 DONATIONS
Donations that are made by individuals to certain public benefit
organisations are deductible from taxable income. For a taxpayer to
claim a deduction for a donation they made, the public benefit
organisation must be able to issue Section 18A certificates. A list of
all the organisations that fall within this category is available on the
SARS website.
A taxpayer may not deduct donations in excess of 10% of their
taxable income (excluding certain retirement lump sums, withdrawals
and severance benefits). So, if your taxable income is R200 000, you
cannot claim a deduction of more than R20 000 for that tax year. You
may only claim a deduction if the institution to which you donated
money provides you with a Section 18A certificate. Check this with
the organisation of your choice before making the donation to ensure
that they can provide you with such a certificate. An example of one
institution that issues Section 18A certificates is the National Sea
Rescue Institute of South Africa. Here are two examples that show
the tax benefit of a donation.
As this shows, SARS will refund you an amount of R8 910 (R77 414
– R68 504) when you file your annual income tax return. You will
therefore have the benefit of contributing to a charity and receiving a
refund from SARS.
You will have to tick the option ‘Do you want to claim donations
made to an approved organisation in terms of s18A?’ on the first
page of your ITR12 to access this benefit. The amount donated can
then be included under code 4011 on your ITR12, along with details
relating to the public benefit organisation.
2.5 HOME-OFFICE EXPENSES
Certain expenses that a taxpayer incurs as a result of having a home
office are deductible, but only under very specific conditions. These
are as follows:
• the taxpayer must have a room that is used only for their work
and is equipped as such; and
• the taxpayer must do more than 50% of their work at home in this
office.
The requirements for this deduction are slightly different for
commission-earning employees. If an employee earns more than
50% of their salary from commission, that taxpayer will be entitled to
a home-office expense deduction if most of the work (i.e. more than
50%) is not done in an office provided by their employer (see
Chapter 6 for a more detailed discussion of tax deductions that apply
to commission-earning employees).
Taxpayers who are entitled to a home-office deduction can
deduct various expenses, including:
• their rental payment OR bond interest;
• rates and taxes; and
• repairs and maintenance.
It is important to note that actual bond repayments are not deductible
– only the interest on the bond is. Neither can improvements to the
property be deducted. And obviously a taxpayer can only deduct
either bond-interest expenses or rental-payment expenses. The list
contains only a few examples and is by no means exhaustive.
Depending on the nature of the taxpayer’s work, more deductions
are possible.
It is also important to note that the taxpayer needs to provide
SARS with a calculation of the total area of their property in relation
to the area of their home office. Calculations for home-office
expenses are based on the percentage of the area of the home
office compared to the total area of the premises.
If, for example, the taxpayer’s premises are 100 square metres in
size (this includes the built property only, not the garden) and the
home office is 10 square metres in size, the office represents 10% of
the premises. So the taxpayer will be allowed to deduct 10% of their
expenses for the property.
Taxpayers who wish to deduct expenses for a home office are
required by SARS to submit a letter from their employer stating that
they are required to work from home more than 50% of the time.
Table 2.1 and the examples below it show some of the benefits
that can be obtained by utilising home-office deductions.
While the amounts in these examples do not represent a huge tax
saving, home-office deductions will reduce your tax liability by R1
085. The greater your home-office expenses, the greater the
allowable deductions.
You will need to click the option ‘Did you receive any other
income?’ on the first page of your ITR12 to access this deduction.
This will direct you to a series of questions. Ensure that you then tick
the option ‘Did you incur any expenditure that you wish to claim as a
deduction that was not addressed by the previous questions?’ This
amount to be deducted can then be inserted under code 4028 on
your ITR12.
Note that there may be issues on the ITR12: when claiming this
expense, the relevant input block for code 4028 may be greyed out
unless more than 50% of your remuneration is from commission
income. It is recommended that if this is the case, you attempt to put
these expenses into one of the blocks that are not greyed out and
include a letter to SARS stating that the relevant block had been
greyed out.
If you are a commission earner, you may also deduct other work
expenses that are incurred in a home office, such as internet fees,
stationery purchases and telephone bills. If these expenses were
incurred solely for work use, they may be deducted in full. For
example, if you purchased R4 000 worth of stationery to use in the
office, the full amount of R4 000 may be added to your home-office
expenses and deducted.
Accurate records (including invoices) of all expenses incurred
must be kept. Also note that if you use a portion of the house you
own as your office and deduct home-office expenses, your primary
residence exclusion (which is dealt with in Chapter 5) will be reduced
in accordance with the size of the office in relation to your house and
the amount of time you utilised your office.
2.6 WEAR AND TEAR
Salaried employees are entitled to wear-and-tear deductions for
goods they have purchased with their own money but have used for
work purposes. However, they must have been under obligation to
use the item regularly for work purposes to get the deduction.
Common examples of such items are books and laptops. The cost
price of the asset is written off over a set period, as stipulated by
SARS.
Computers, laptops and books may be written off over a period of
three years. If an item cost R7 000 or less, it may be written off in full
in the year it was acquired and brought into use.
Table 2.2 and the examples below show the benefit that can be
obtained through utilising a deduction for wear and tear for a laptop
computer.
Once again, you must be able to prove to SARS that the laptop was
used regularly for work-related purposes and that you were obliged
to use it accordingly (usually, a letter from your employer to this
effect will suffice); in other words, you cannot submit a deduction for
a laptop that you purchased for personal use.
Assets that cost less than R7 000 per item and that function in
their own right and do not form part of a set may be deducted in full
in the year in which they were purchased. If the laptop you
purchased cost R6 000, your wear-and-tear calculation will be as
follows:
Tick the option ‘Did you receive any other income?’ on the first page
of your ITR12. This will direct you to a series of further questions.
Ensure that you then tick the option ‘Did you incur any expenditure
that you wish to claim as a deduction that was not addressed by the
previous questions?’ to access this benefit. The wear-and-tear
amount can be inserted under code 4027 on your ITR12.
Note that there are currently issues with claiming this expense on
the ITR12, as the relevant input block for code 4027 may be greyed
out unless more than 50% of your remuneration is from commission
income. If this is the case, it is recommended that you attempt to put
these expenses into one of the blocks that are not greyed out and
include a letter to SARS stating that the relevant block had been
greyed out.
Accurate records (including invoices) of all expenses incurred
must be kept. Please note that certain apportionments may apply to
a wear-and-tear deduction; for example, if you bought an asset worth
more than R7 000 in the middle of the tax year, you must apportion
the yearly wear-and-tear allowance in the year the asset was
purchased and brought into use. Another example would be if the
asset has been used partly for work and partly for personal use.
2.7 RECOUPMENTS
If you write off the value of your laptop or any other asset (through
wear and tear as explained in the previous section) and then sell it,
you must include the amount that you wrote off in your taxable
income.
Let us consider Example 2.10 again: you claimed wear and tear
on the full value of your laptop in the year you bought it. This means
that your laptop has a ‘carrying value’ of nil. If you then sell your
laptop for R4 000 the following year, the amount of R4 000 will need
to be included in your taxable income and taxed accordingly. This
recoupment provision applies to all goods that have been subject to
wear and tear, regardless of the period over which the asset was
written off.
Salaried taxpayers can utilise all the deductions discussed in this
chapter to reduce their tax liability and increase the likelihood of
receiving a refund from SARS on submission of their annual tax
return. Be aware, though, that SARS might request you to submit all
supporting documentation related to these deductions. If you fail to
provide the requisite documentation, the deductions will be
disallowed and SARS may impose various penalties. If SARS
incorrectly disallows a deduction you claimed, you will need to object
to the assessment issued by SARS. (The assessment from SARS is
the ITA34 document that is issued when you submit your return on
eFiling.)
Chapter 3
MEDICAL TAX CREDITS
3.1 NORMAL MEDICAL SCHEME FEES TAX CREDIT
Every taxpayer who contributes to a registered medical aid scheme
in South Africa is entitled to a medical scheme fees tax credit (similar
to the rebates discussed in Chapter 1). This credit is not dependent
on the amount of the contributions paid to the medical aid scheme:
regardless of whether you pay R1 000 or R4 000 per month for your
medical aid, the medical credit that you are entitled to will be the
same. Individuals are entitled to the following medical tax credit:
• a taxpayer who is a sole member of the scheme: R332 per
month;
• a taxpayer plus one dependant on the scheme: R664 per month;
and
• a taxpayer plus additional dependants: R664 plus R224 per
additional dependant.
If you contribute to a medical scheme for yourself, your partner and
your two children, then your monthly credit would be as follows:
• R664 (taxpayer plus one dependant); plus
• R448 (two additional dependants).
This monthly medical credit of R1 112 (or R13 344 per year) can
reduce your tax liability. Let’s see how by comparing the two
examples below:
If your employer pays your medical aid on your behalf, it is likely that
this credit will be taken into account in your monthly PAYE
calculations (i.e. your PAYE will be reduced each month by an
amount that matches this reduction in liability). The contributions
your employer makes on your behalf are deemed to be contributions
made by you, and for the purposes of this credit it doesn’t matter
whether your employer paid the medical aid contributions to the
medical aid or if you paid them to the medical aid scheme directly:
you will receive the same credit. If your employer paid a portion of
your medical aid contributions (and you paid the other portion), then
the combined contributions will be considered when calculating the
credit. From the 2017 tax year (and presumably for the foreseeable
future), the full amount contributed (i.e. your employer’s contribution
and your own contribution) must be reflected under code 4005.
In terms of the above examples, if you paid your medical aid
yourself, you will receive the amount of R13 344 as a refund upon
submission of your tax return. If your employer contributed to your
medical aid, then it is likely that you will receive a smaller refund (as
you would probably have received the reduction in tax on a monthly
basis already). If your employer paid all your medical aid
contributions, you will probably not receive a refund, as your monthly
tax liability should then have been reduced by your employer (i.e.
you received the tax benefit of contributing to a medical aid on a
monthly basis).
3.2 ADDITIONAL MEDICAL EXPENSES TAX CREDIT
In addition to the medical credit discussed in the previous section,
you may benefit from an additional medical expenses tax credit. I
discuss this tax credit separately for persons under the age of 65
and persons 65 years of age or older (on the last day of the tax year)
or with a disability.
Persons over 65 and persons with disabilities
Persons over the age of 65 and persons with disabilities are treated
differently from other taxpayers in terms of the additional medical tax
credit. If you fall into one of these categories, you are entitled to a
significant additional credit, which may result in a substantial
decrease of your tax liability.
To qualify as a taxpayer with a disability, your condition (or the
condition of one of your dependants on your medical aid) will need to
fall within the definition of disability as contained in the Income Tax
Act. It is defined as follows:
‘Disability’ means a moderate to severe limitation of any person’s
ability to function or perform daily activities as a result of a
physical, sensory, communication, intellectual or mental
impairment, if the limitation
a) has lasted or has a prognosis of lasting more than a year; and
b) is diagnosed by a duly registered medical practitioner in
accordance with criteria prescribed by the Commissioner (of
SARS).
Source: Section 6B of the Income Tax Act No. 58 of 1962
If you or one of your dependants on your medical aid scheme falls
into this category, you need to consult your doctor and request them
to fill in a ‘Confirmation of Diagnosis of Disability’ (ITR-DD) form,
which is available from the SARS website. You must have this form
on file in case SARS requests it when you submit your tax return.
The SARS website states that the ITR-DD form must be renewed
once every five years.
For a full list of expenditure that may be claimed in terms of
disability regulations, refer to the guide ‘List of Qualifying Physical
Impairment or Disability Expenditure’, which is available on the
SARS website.
Table 3.1 provides an example of the tax benefit that may be
derived from an additional medical credit if you (or your dependant)
fall into one of these categories.
Table 3.1 clearly shows that the amount the taxpayer contributes to
the medical scheme becomes very important (whereas the amount
contributed was not important in calculating the normal medical
credit).
The taxpayer made a contribution of R18 000 to their medical
scheme over the tax year. The taxpayer then incurred additional
medical expenses to the total of R10 000. As a result of this, the
taxpayer is entitled to an additional medical expenses tax credit of
R5 343. This means that their tax liability will be reduced by this
amount for the year (and depending on the circumstances, will
probably result in a refund to the taxpayer).
Only certain medical expenses may be claimed over and above
the medical aid contributions. These are known as ‘qualifying
medical expenses’ and are amounts that cannot have been paid by
your medical aid. Common examples of these include the following:
• medical practitioner fees;
• dental fees;
• optometrist fees;
• physiotherapist fees;
• nursing-home fees;
• hospital fees; and
• medication from a pharmacy.
This example will be the same for people with disabilities and people
over the age of 65 – the law is the same. SARS does not require you
to perform this calculation yourself – the Receiver of Revenue will do
so automatically upon submission of your tax return. However, it is
important to understand what expenses may be included and that
you fill in the correct codes on your tax return.
These qualifying medical expenses will fall under code 4020,
4023 or 4034 on your tax return, depending on your circumstances.
Ensure that you tick the option ‘Did you pay any medical expenditure
(including medical scheme contributions made by you or your
employer towards a medical scheme where you are the
principal/main member)?’ on the first page of your tax return to be
able to fill in the relevant data to access this credit.
Other taxpayers
For taxpayers who do not have a disability and are not over the age
of 65, the additional medical expenses credit only becomes available
under very specific circumstances: the taxpayer must have spent a
large amount on medical costs themselves before becoming eligible
for this credit.
This calculation entails deducting four times the normal medical
tax credit from the taxpayer’s medical aid contributions for the year.
The qualifying medical expenses are then calculated and added to
the above; if this amount exceeds 7.5% of the taxpayer’s taxable
income for the tax year, then 25% of this amount is the additional
medical credit.
In this example, the taxpayer will not be eligible for an additional
medical tax credit, as the total (R12 064) is less than 7.5% of the
taxable income (R15 000).
In this example, the taxpayer is entitled to receive an additional
medical tax credit of R4 266; the taxpayer thus effectively recovered
R4 266 of the R30 000 out-of-pocket expenses that were incurred.
This amount is in addition to the normal medical credit of R3 984.
Therefore, the total medical credit will be R8 250 (and their tax
liability will be reduced by this amount).
It is evident that contributing to a qualifying medical aid can
greatly reduce a taxpayer’s tax liability, particularly if they are over
the age of 65 or are disabled. It is important that taxpayers keep a
copy of the medical aid certificate from their medical aid provider as
well as invoices of additional expenses in case SARS requests these
documents during an audit or verification. If the documentation is not
available, these expenses will be disallowed.
If you are unsure whether you are entitled to an additional
medical expenses credit, it is always advisable to include these
medical expenses on your ITR12. SARS will do the necessary
calculations automatically upon submission of your return.
Chapter 4
EXEMPT INCOME
Exempt income is income that is not subject to taxation. While it still
needs to be declared to SARS, it is not taxable. There are four
common categories of exempt income that apply to individuals:
• interest;
• local dividends;
• bursaries and scholarships; and
• tax-free investment accounts.
4.1 INTEREST
Individual taxpayers not older than 65 are entitled to a yearly interest
exemption of R23 800. The exemption for taxpayers aged 65 or
older is R34 500. For most taxpayers, the interest they earn will be
from a bank. Your bank must, upon request, provide you with a
certificate detailing the amount of interest you earned throughout the
tax year. This interest does not have to have been paid over to you;
if it is owed to you by the bank, it needs to be declared to SARS. So,
even if the interest was reinvested, this interest still needs to be
declared to SARS.
For interest received by a taxpayer to exceed R23 800 per year,
the taxpayer would need to have a fairly large amount of capital in
the bank that earns interest.
4.2 LOCAL DIVIDENDS
A dividend is an amount that can be paid out by a company to its
shareholder when it has earned a profit in a particular tax year (or in
the previous tax year, if it kept the profits in the company). Taxpayers
who own shares that are listed on the Johannesburg Stock
Exchange (JSE) may receive dividends periodically, as might
taxpayers who are shareholders in private companies. Such
dividends are all treated the same for tax purposes. Local dividends
are dividends that have been declared by South African companies.
Local dividends are subject to a withholding tax. This means that
the company that is paying the dividend must first pay over a tax of
20% to SARS before the dividend is paid out to the shareholders. As
the tax has already been paid by the time the taxpayer receives their
money, it is exempt in the taxpayer’s hands. The dividends must be
declared to SARS, but they will not be taxed.
4.3 BURSARIES AND SCHOLARSHIPS
Please note that from 1 March 2021 there has been a change in how
bursaries and scholarships are taxed. In previous editions of this
book, it was explained how a taxpayer who is currently studying or
who has a relative at school or university can structure their salary
with their employer so as to reduce their tax liability. This type of
structuring may no longer be done. However, the following explains
how an employee can still benefit from receiving a bursary or
scholarship from their employer.
Bursary and scholarship money received by a salaried employee
from their employer for studying may be completely exempt from
normal tax under the following conditions:
• the bursary is for study at a recognised educational institution;
• it is a term of the bursary that the employee agrees to pay back
the employer if they fail to complete their studies for reasons
other than death, ill health or injury; and
• the bursary is in addition to normal remuneration (i.e. there is no
salary sacrifice).
Here are some examples of expenses that may be covered by a
bursary:
• tuition fees;
• accommodation;
• books;
• meals; and
• transport.
The employer is required to list this income under code 3815 for
basic education or 3821 for higher education for the income to be
exempt.
Bursaries to relatives of employees
If your employer provides you with a bursary or scholarship for your
relative to study at a recognised educational institution, the income
will be exempt in your hands, provided the following applies:
• your remuneration from your employer does not exceed R600
000 per year; and
• the bursary or scholarship does not exceed R20 000 per year for
schoolchildren (from Grade R to Grade 12); or
• the bursary or scholarship does not exceed R60 000 per year for
students in a university or college (NQF levels 5 to 10 of the
South African National Qualifications Framework); and
• the bursary is in addition to normal remuneration (i.e. there is no
salary sacrifice).
Provided that these requirements are met, bursary income that is
received from an employer will be exempt from taxation. If you earn
more than R600 000 remuneration from your employer, you are
disqualified from receiving an exempt bursary from your employer for
a relative. If the bursary or scholarship amount exceeds the R20 000
or R60 000 limits, the excess will be taxed as normal income.
It is also important to note that a ‘relative’ is defined in the Income
Tax Act as the spouse, child, parent, sibling, grandchild, niece or
nephew, uncle or aunt, or grandparent of the employee.
If a taxpayer receives a bursary or scholarship from a third-party
institution (i.e. an institution that is not their employer), none of the
restrictions mentioned above will apply: in such a case, there are no
contract requirements or maximum-amount restrictions. However,
only bursaries or scholarships for relatives that are received from
employers may be exempted from taxation. This means that a thirdparty institution that is not the taxpayer’s employer may not provide
that taxpayer with a tax-free bursary for one of their relatives.
4.4 TAX-FREE INVESTMENT ACCOUNTS
Another form of exempt income worth mentioning here is income
received from a tax-free investment account. These accounts are
offered by various financial institutions. Any income received by an
individual as a result of an investment in one of these accounts is
exempt from taxation. This includes interest, dividends, real-estate
investment trust (REIT) payments and capital gains.
This type of exemption is calculated in addition to the interest
exemptions that were mentioned earlier (see section 4.1).
If an individual receives R23 800 in interest from a fixed-deposit
account at a bank, and then an additional R2 000 in interest from
their tax-free investment account, both amounts will be fully exempt.
Dividends paid to individuals from this account are not subject to
dividends withholding tax. This means that an individual investor will
receive the full dividend and not be subject to a deduction of 20%.
There are also no capital gains implications on the sale of shares
within these accounts.
However, it is important to note that the maximum investment that
can be made is R36 000 per tax year and R500 000 per individual
over their lifetime. If more than this amount is invested, the amount
above R36 000 and/or R500 000 becomes taxable. Taxpayers must
include details of these investments on their ITR12 form.
Individuals can use all the information in this chapter to their
advantage and arrange their financial affairs in such a manner that it
will enable them to receive tax-free income.
Chapter 5
CAPITAL GAINS TAX
5.1 WHAT IS CAPITAL GAINS TAX AND HOW IS IT
CALCULATED?
Capital gains tax is the tax that is paid when a taxpayer purchases
an asset to be held as an investment (and not for selling at a profit)
and then sells it at a later date for a higher amount. In the case of
individual employees, common examples of this are investment
properties and shares. The difference between the purchase price
(with some additional costs that will be discussed below) and the
selling price is the capital gain.
It is apparent that CGT is relatively small for individuals when
compared to normal income tax rates. In this example, the taxpayer
sold an asset for R200 000 more than it was bought for and only
paid a capital gains tax of R23 040.
The details of any capital gain earned must be included in your
annual tax return. This means including the full proceeds of the sale
and the base cost in the appropriate boxes. SARS will automatically
take into account the R40 000 annual exclusion for individuals and
calculate the taxable portion accordingly. If there is a tax liability in
terms of a capital gain, it will be payable upon submission of your
annual tax return. (These regulations differ for provisional taxpayers
– see Chapter 6.)
5.2 PRIMARY RESIDENCE EXCLUSION
A very important exclusion from CGT is the primary residence
exclusion. Your primary residence is the property that you ordinarily
reside in as your main residence and that you use mainly for
domestic purposes. If a portion of the property is used for trade
purposes, the exclusion will be apportioned accordingly (more than
50% of the property must be used for domestic purposes, failing
which the exclusion will fall away completely).
There is a common misconception that no CGT is payable on the
sale of your primary residence. This is not quite true. While the vast
majority of taxpayers will not need to pay CGT upon selling their
main residence, under certain circumstances CGT could become
payable. Allow me to explain this more fully.
For tax purposes, the price you paid for the property is called the
‘base cost’. This becomes important when you file your tax return, as
you need to provide a figure for the base cost of the property. Other
expenses may be added to increase your base cost and thus reduce
your capital gain. These will be discussed later in this chapter.
There is currently a R2 000 000 primary residence exclusion.
This means that the gain that you make on the sale of a property will
need to exceed R2 000 000 for the possibility of CGT to arise. (Note
that whenever you sell your primary residence, you must declare this
on your tax return for the year in which the property was sold – even
if the capital gain was less than R2 000 000. Thereby you will avoid
SARS querying the sale years later.)
If a taxpayer purchased a property as a primary residence in
2015 for R100 000 and then sold the property in 2020 for R400 000,
there would not have been any CGT implications, as the capital gain
that the taxpayer made was R300 000 (which is well below R2 000
000). However, if a taxpayer purchased a property in 2015 for R1
000 000 and sold it in 2017 for R3 500 000, there might be capital
gains implications. Note that the length of time for which the primary
residence was held is not relevant. I include it here to properly
illustrate the example. The capital gain on the sale of this property
will then be R2 500 000.
There is a possibility that CGT will be payable on the R500 000 profit
made. At this point, the concept of the ‘base cost’ of an asset
becomes important. As mentioned earlier, the base cost of an asset
is its purchase price. There are, however, other costs that may be
added to the purchase price to increase the base cost, and thus
potentially reduce the taxpayer’s liability. The following expenses
relevant to property may be added to the purchase price to increase
the base cost:
• transfer fees, including transfer duty;
• estate-agent commission;
• electrical compliance certificate;
•
•
•
borer-beetle certificate;
improvements made to the property; and
advertising costs to find a buyer.
The distinction between improvements and repairs is pivotal here:
only the costs of improvements to a property can be included in the
base cost – and not the cost of repairs. If the taxpayer builds a
brand-new garage on the property, this is an improvement, whereas
if the taxpayer fixes a leaking roof, this is a repair and cannot be
included in the base cost. The improvement must still be in place
and usable at the time of the sale.
Note that bond registration and cancellation fees cannot be
added to the base cost.
In Example 5.3, the taxpayer made improvements to the property
by building a brand-new swimming pool that cost R200 000. The
taxpayer also paid R350 000 in estate-agent commission for the sale
of the property. The capital gain calculation will now look very
different.
As the taxpayer made additions to the purchase price that increased
the base cost, they earned no capital gain and thus no CGT is
payable. In this example, the taxpayer’s annual exclusion of R40 000
was not considered, as there was no capital gain. If there had been a
capital gain, the R40 000 exclusion would have been considered in
addition to the primary residence exclusion.
It is important to note, too, that the year in which the
improvements were made is not significant. Improvements do not
need to have been made in the year the property was sold. It is,
however, important that taxpayers keep a record of all the
improvements they make to their property (from the date of purchase
to the date of sale).
The annual exclusion of R40 000 applies to all capital gains the
taxpayer makes during a particular tax year. Thus, if the taxpayer
sells shares on which they earn a capital gain of R50 000 (and use
the R40 000 annual exclusion to reduce this capital gain), the annual
exclusion will not be available to the taxpayer if they sell a property
as well, since the exclusion will have already been used that year.
Additions to the base cost of the primary residence are also
applicable if the taxpayer sells an investment property or holiday
home: the base cost of these assets may be increased to include
improvements and the estate-agent commission to reduce the
capital gain the taxpayer made.
If you purchased a property prior to 1 October 2001 (when CGT
came into force for the first time), you should have had your property
valued in 2001. This value will be your base cost (excluding other
expenses such as improvements). If you purchased your property
prior to 2001 and did not have your property valued in 2001, a set
calculation can be used to calculate your base cost as at 1 October
2001. (This is a complicated calculation that is beyond the scope of
this book. If this applies to you, seek tax advice on this matter, as the
calculation could potentially lead to a great reduction in capital gain.)
You may, under certain circumstances, also compare the valuation
as at 1 October 2001 with the base cost that is determined using the
complicated calculation and then choose the one that is more
beneficial to you – namely, the higher of the two.
5.3 SHARES
The sale of shares in a company is generally considered to be a sale
of a capital asset. This means that the taxpayer’s income from the
sale may be subject to CGT. The base cost of the shares may be
increased (in a similar way as the cost for immovable property) by
adding the following costs:
• brokers’ fees (for buying or selling the shares);
• securities transfer tax; and
• the cost of acquiring the shares.
Note that the R40 000 exclusion can be used to reduce capital gain
from the sale of shares too.
5.4 TRADING STOCK
Taxpayers who are considered ‘share dealers’ (that is, people who
buy and sell shares for a living or on a regular basis to make a profit)
will not be subject to CGT on the sale of such shares. The profits
they make on their sales are included in their normal taxable income
in the same way as a salary is included in a taxpayer’s taxable
income. The shares are trading stock in the hands of the taxpayer, in
the same way as a shop owner buys a loaf of bread and sells it at a
profit and is taxed on the profit made as normal taxable income.
If a share is held by the taxpayer for a period of three years, then
the profit made on the sale of the share should be considered a
capital gain (based on the Income Tax Act). This means that the
profit made on shares is not taxed as normal taxable income in the
hands of the taxpayer but as a capital gain.
This same concept is applicable to taxpayers who buy property
as trading stock to resell it at a profit. If a taxpayer buys property with
the intention of selling it to make a profit (and not as a long-term
investment), then the profit from the sale will be normal taxable
income in the hands of the taxpayer.
If, however, a taxpayer purchases an investment property as a
long-term investment, then the sale of the property at a later date
should result in a capital gain in the taxpayer’s hands. This is quite a
complicated aspect of South African tax law. A definitive guideline on
this cannot be given for all cases; in each situation, the individual
aspects of the case will be considered.
5.5 EXEMPTIONS FROM CGT
There are certain assets that, when sold, will not attract CGT or any
kind of tax (provided that the assets were not bought with the
intention of selling them at a profit). Below are the most common
exemptions that are applicable to individuals:
• jewellery;
• artwork;
• household furniture and effects;
• motor vehicles;
• boats that are less than 10 metres in length;
• stamps; and
• coins (excluding gold or platinum coins, the value of which
derives mainly from their metal content).
The above items are considered personal-use assets. These must
be used mainly (more than 50%) for personal use to qualify for this
exemption.
5.6 CAPITAL LOSS
A capital loss occurs when an asset is sold for less than its purchase
price. If, for example, a taxpayer purchases an investment property
for R500 000 and sells it four years later for R400 000, the taxpayer
incurred a capital loss of R100 000 on the sale of the property.
This capital loss can be carried forward to the following year and
set off against any capital gain. Note that a capital loss can only be
used to reduce a capital gain in future years; it cannot reduce normal
income tax liability.
If you have incurred a capital loss, details thereof must be
included in your tax return. It is included in the form in the same way
as a capital gain, except that the base cost will exceed the sale
price, thus showing the capital loss. This capital loss can be carried
forward to the following year. SARS will do this automatically if the
capital loss is entered correctly.
Chapter 6
MISCELLANEOUS ASPECTS OF INDIVIDUAL
TAX
6.1 COMMISSION EARNERS
Certain employees (such as estate agents, salespeople and some
financial brokers) earn a commission that is dependent on the
number of sales they make for their employer. SARS will allow such
taxpayers to deduct business-related expenditure from their taxable
income if their remuneration is derived mainly (more than 50%) from
sales or turnover. This is called commission and is listed under code
3606 on an IRP5. Commission-earning taxpayers are not restricted
to the deductions that apply to normal salaried employees (listed in
Chapter 2).
Commission-earning taxpayers are able to deduct various
additional business-related expenses that they incurred in producing
their commission income. Here are some common examples of
deductions:
• client entertainment expenses;
• work-related mobile-phone expenses;
• internet connection costs;
• travel expenses (flights, train and bus tickets, taxi fares); and
• motor-vehicle expenses.
Motor-vehicle expenses include the following:
• petrol;
• repairs and services;
• insurance;
•
•
•
•
financing costs;
toll fees;
wear and tear of the motor vehicle; and
licensing fees.
If a taxpayer earns, for example, R300 000 in commission income
from an employer (as listed under code 3606 on their IRP5), the
taxpayer may subtract all the deductions available to employees as
listed and discussed in earlier chapters of this book, as well as all
expenses they incurred in the production of their commission
income.
However, the taxpayer will need to be able to prove to SARS that
the expenses deducted are business-related and not personal. This
is why it is essential to keep an accurate record of all expenses,
including invoices for all deductions (including details of clients who
were entertained at the taxpayer’s expense). Here is an example of
the benefits of such deductions.
As a commission-earning taxpayer, therefore, this person would be
able to reduce their tax liability by R18 264 for the tax year. If their
employer did not take this into account when calculating the monthly
PAYE amount, then this reduction should be refundable to the
taxpayer by SARS when the tax return is filed. It is very likely that
SARS will ask for supporting documentation, such as invoices, when
a taxpayer claims deductions like these.
If you are a commission earner, you need to talk to your employer
to determine how much PAYE the company is deducting from your
salary each month. Your employer may be deducting the PAYE
amount that applies to normal salaried employees. In that case, you
should get a refund from SARS when submitting your annual tax
return (as you will have overpaid the PAYE amount during the year).
However, your employer might be calculating your PAYE amount on
the basis of the additional deductions you would be allowed to make,
in which case you may not receive a refund. The submission of your
expenses is equally important in such an instance, as you need to
show SARS that the expenses were incurred to validate the fact that
you paid a smaller PAYE amount each month.
Note that if a commission earner wishes to claim home-office
expenses, they must comply with the following requirements:
•
•
the home study must be specifically equipped as a home office
and regularly and exclusively used for work purposes; and
their duties must be mainly performed away from an office
provided by the employer.
The calculation of home-office expenses is dealt with in Chapter 2.
If you intend to deduct motor-vehicle expenses, it is imperative
that you keep invoices for all expenses, such as fuel slips and
payments for repairs. You are also required to keep a logbook of
private and business travel. SARS will not allow motor-vehicle
expenses to be deducted unless a valid logbook and proof of actual
expenses incurred have been provided.
The cost price of a passenger motor vehicle can be depreciated
over a five-year period in a similar manner to the wear and tear of a
laptop (discussed in Chapter 2). Note that if you depreciate the cost
of the motor vehicle and then sell it at a later stage, the sale amount
may be subject to recoupments (as discussed in Chapter 2). SARS
will apportion your expenses to private or business. This will also
apply to your motor-vehicle expenses. To include these deductions
on your ITR12, you need to click ‘yes’ in response to the ‘Other
deductions’ option on the first page of your tax return. Expenses
incurred must then be included under the various options in the
‘Other deductions’ section of the tax return (for example, you would
put depreciation under code 4027 and internet fees under code
4016).
6.2 INDEPENDENT CONTRACTORS
SARS deals with independent contractors in much the same way as
commission earners: independent contractors are not restricted to
the deductions allowed for normal salaried employees. If you are an
independent contractor, any employer should list your income under
code 3616 on your IRP5.
There is a complex set of tests that needs to be used to
determine whether a person is an employee (whose deductions are
restricted) or an independent contractor (whose deductions are not
restricted).
The general principle is that an independent contractor is
employed to finish a certain task. This task can be completed by the
employees of that person (i.e. the independent contractor can
employ people to assist with the task), whereas an employee may
not employ other people to do their work, and their remuneration is
not dependent on the completion of a certain task. Independent
contractors have far more control over their working conditions than
employees. A full analysis of this concept is available in
Interpretation Note 17, which is available on SARS’s website (see
the References section at the end of this book).
If your income is reflected under code 3616 on your IRP5, you
should be able to deduct certain expenses you incurred in the
production of that independent-contractor income. Common
examples of expenses that independent contractors may deduct are
wages, travel expenses, mobile-phone fees and office-rental fees.
6.3 PROVISIONAL TAX PAYMENTS
Provisional tax is income tax that is paid to SARS on a biannual
basis. Salaried employees pay PAYE on a monthly basis and are
generally not provisional taxpayers. All companies are provisional
taxpayers. This is because they do not pay income tax when they
receive money from their customers; the tax on this income is paid to
SARS on a biannual basis as provisional tax.
Salaried employees (who do not run a separate business as a
sole proprietorship in their personal capacity) will generally only need
to file provisional tax returns if their taxable income from the letting of
property, foreign dividends or interest is more than R30 000.
If you earn total interest to the sum of R50 000 in one tax year,
you first subtract the interest exemption of R23 800 (assuming you
are younger than 65); this will give you a figure of R26 200, which is
your taxable interest income. Since this is below the R30 000
threshold, you would not be required to submit provisional tax
returns. The tax liability on this interest amount received will be
payable when you file your income tax return, as it has not yet been
paid – the interest amount of R26 200 is taxed at your normal tax
rate (as explained in Chapter 4).
However, you have to calculate your combined income streams
to determine whether you have reached the threshold of R30 000 for
taxable income. In cases where you have taxable income from rental
property as well as taxable interest income, the amounts earned
need to be added together to ascertain your taxable income for the
year that is relevant to the payment of provisional tax.
If your taxable income is greater than R30 000, you are required
by law to submit provisional tax returns (in the form of IRP6 forms) to
SARS. Two provisional tax returns need to be submitted per tax
year: one at the end of August and the other at the end of February.
On these tax-return forms, you need to provide a reasonable
estimate of your taxable income for the year, as well as make the
relevant tax payments for that period. You will have to submit these
provisional tax returns in addition to your final tax return each year.
Certain dividends also fall within the bounds of the definition of
taxable income and must be included when you determine whether
your taxable income (for provisional tax purposes) exceeds R30 000.
Remember that not all dividends are exempt: dividends received
from a REIT, for example, are not exempt and need to be included in
your calculations to ascertain whether your taxable income for the
year will exceed R30 000. There are a few other types of dividends
that are not exempt, but since they do not apply to the vast majority
of taxpayers, they are beyond the scope of this discussion.
In summary, if your taxable income from one of the following
sources (or a combination of these) exceeds R30 000, you are
required to submit two provisional tax returns (IPR6 forms) to SARS
each year:
• interest;
• rental income; and
• non-exempt dividends (such as from REITs).
SARS will take into account any tax paid in terms of these
provisional returns when you submit your final tax return. So, if you
have a tax liability when you file your annual return, the amount of
provisional tax already paid will be offset by this amount. If you have
overpaid on provisional tax, SARS will repay this difference when
you file your annual tax return.
6.4 RETIRED PERSONS AND PERSONS OVER THE
AGES OF 65 AND 75
While retired persons are taxed like other taxpayers, there is one
major difference: their tax threshold increases to R135 150 (or to
R151 100 for those over 75) because taxpayers over 65 and over 75
are entitled to additional rebates (see Chapter 1). Retired persons
who earn income through their living annuity (and not lump-sum
payments), but whose total taxable income is below the threshold,
are not liable for income tax.
As discussed in Chapter 4, persons over the age of 65 also have
an increased interest exemption of R34 500. So taxpayers who earn
interest less than or equal to R34 500 will not pay tax on this interest
received. They also have increased tax benefits in terms of the
medical tax credit (as discussed in Chapter 3).
6.5 BONUSES
If you receive a bonus from your employer, this bonus will be
included in your taxable income and taxed accordingly. A taxpayer
who has a salary of R300 000 and receives a bonus of R20 000 from
their employer will thus be taxed on this bonus at 26%, as per the
sliding scale in Chapter 1 (this taxpayer fits into the second band in
Table 1.1, if the additional income does not push them into the next
tax bracket). This taxpayer would therefore pay a tax of R5 200 on
this bonus of R20 000 and receive the amount of R14 800.
CONCLUSION
This book explains the fundamentals of income tax in South Africa
that are relevant to individual salaried employees. It is essential to
have a clear understanding of terms such as ‘taxable income’ and
‘tax liability’ to be able to take full advantage of South African tax
laws, as this will increase the likelihood of reducing your tax liability
and receiving a refund.
Throughout, I have provided easy-to-understand examples to
illustrate how taxpayers who are salaried employees may calculate
their yearly tax liability.
To reiterate, salaried employees are severely limited in the
deductions they are allowed to make from their taxable income.
These include the following:
• contributions to retirement annuities, pension funds and provident
funds;
• business-related motor-vehicle travel expenses;
• donations;
• home-office expenses; and
• wear and tear.
Further examples illustrate the benefits taxpayers stand to gain from
utilising all the deductions available to them. These deductions form
an important part of the tax benefits that are available to salaried
employees, and use of these deductions can greatly reduce their tax
liability.
In addition to these deductions, potential tax benefits are
available for contributions that taxpayers make to medical aid
schemes (for themselves and their dependants). Each month that
taxpayers contribute to a medical aid scheme, they are entitled to a
tax rebate. Taxpayers who are 65 or over, and taxpayers who are
disabled, may qualify for further tax reductions, as they may deduct
specific additional medical expenses.
Many taxpayers can benefit from various types of tax-exempt
income. There are three common tax-exempt income streams in
particular that are relevant to individuals:
• interest (up to R23 800, or R34 500 for persons over 65);
• local dividends; and
• bursaries and scholarships.
Understanding the law pertaining to these types of income can allow
taxpayers to reduce their tax liability. These types of income
therefore form an important aspect of the tax benefits available to
individuals.
Salaried employees often earn income that is subject to CGT
upon the sale of assets that they have held as long-term
investments, such as property or shares. The sale of a primary
residence can, under certain circumstances, result in a capital gain
for the taxpayer. Chapter 5 deals in detail with aspects of CGT
regulations that allow taxpayers to reduce the likelihood of paying
CGT by increasing the base cost of their asset.
Certain personal-use assets held as investments may be sold at
a profit without any negative tax implications, as the profit made on
the sale of these items is not subject to tax. This could potentially be
a useful investment tool.
Commission earners and independent contractors are not subject
to the same restrictions as salaried employees. They can, for
example, deduct business-related expenditure (such as mobilephone and entertainment costs) that they incur to produce income.
This can result in a greatly reduced tax liability.
Most salaried employees are not required to file provisional tax
returns. They need to do so only if they are earning rental income,
interest or non-exempt dividends that exceed a combined taxable
amount of R30 000 per tax year. SARS will take into account any tax
that provisional taxpayers have already paid in terms of provisional
returns when they file their annual tax return.
I end on a note of caution: While there are many ways to reduce
your tax burden, there are no guarantees – whether you will receive
a refund from SARS will ultimately depend on your overall tax
situation. However, a thorough understanding of the information
presented here will enable you to re-evaluate your current
circumstances in order to determine whether you can benefit from
the options discussed. This may allow you to reduce your tax liability
and increase your chances of receiving a refund from SARS upon
filing your annual tax return.
ABOUT THE AUTHOR
Daniel Baines is an admitted attorney with a Bachelor of Arts,
Bachelor of Laws and Master of Commerce (in taxation) from
Rhodes University. He has nearly finished his Doctor of Laws (LLD)
through the University of Pretoria and will be graduating in 2021.
Daniel has more than five years’ experience working in tax and
currently works as a tax professional in South Africa.
He has had 25 of his tax articles published in the Sunday Times,
with contributions to other newspapers and platforms, including the
following:
• ‘Drawing retirement savings early has heavy tax implications’,
Sunday Times, 9 February 2020.
• ‘How to calculate what tax you’ll pay from March 1 2020’,
BusinessLIVE, 27 February 2020.
• ‘Income tax and its effect on your year-end bonus’, Sunday
Times, 17 November 2019.
REFERENCES
Most of the resources mentioned in this book are available from
www.sars.gov.za – the website of the South African Revenue
Service, which is updated regularly.
‘Comprehensive Guide to Capital Gains Tax’ (Issue 9):
https://www.sars.gov.za/wp-content/uploads/Ops/Guides/LAPDCGT-G01-Comprehensive-Guide-to-Capital-Gains-Tax.pdf
‘Comprehensive Guide to the ITR12 Return for Individuals’:
https://www.sars.gov.za/wp-content/uploads/Ops/Guides/IT-AE36-G05-Comprehensive-Guide-to-the-ITR12-Income-TaxReturn-for-Individuals-External-Guide.pdf
‘Guide for Employers in Respect of Employees’ Tax (2021 Tax
Year)’: https://www.sars.gov.za/wpcontent/uploads/Ops/Guides/PAYE-GEN-01-G15-Guide-forEmployers-iro-Employees-Tax-for-2021-External-Guide.pdf
Income Tax Act No. 58 of 1962: available on
http://sars.mylexisnexis.co.za/#
Interpretation Note 1 (Issue 3) – Provisional tax estimates:
https://www.sars.gov.za/wp-content/uploads/Legal/Notes/LAPDIntR-IN-2012-01-Provisional-Tax-Estimates.pdf
Interpretation Note 17 (Issue 5) – Employee’s tax: Independent
contractors: https://www.sars.gov.za/wpcontent/uploads/Legal/Notes/LAPD-IntR-IN-2012-17Employees-Tax-Independent-Contractors.pdf
Interpretation Note 28 (Issue 2) – Deductions of home office
expenses incurred by persons in employment or persons
holding an office: https://www.sars.gov.za/wp-
content/uploads/Legal/Notes/LAPD-IntR-IN-2012-28-HomeOffice-Expenses-Deductions.pdf
Interpretation Note 66 – Scholarships or bursaries:
https://www.sars.gov.za/wp-content/uploads/Legal/Notes/LAPDIntR-IN-2012-66-Scolarships-Bursaries.pdf
Latest tax rates: https://www.sars.gov.za/tax-rates/incometax/rates-of-tax-for-individuals/
‘List of Qualifying Physical Impairment or Disability
Expenditure’: https://www.sars.gov.za/wpcontent/uploads/Ops/Guides/LAPD-IT-G08a-List-of-QualifyingPhysical-Impairment-or-Disability-Expenditure-Effective-1March-2020.pdf
‘Rates and Monetary Amounts and Amendment of Revenue
Laws Bill’, 24 February 2021: http://www.treasury.gov.za/publi
c%20comments/2021%20Rates%20Bill%20and%20Fin%20Ser
vices%20Levies%20Bills%20for%20public%20comments/202
1%20Draft%20Rates%20and%20Monetary%20Amounts%20an
d%20Amendment%20of%20Revenue%20Laws%20%20Bill%20
-%2024%20February%202021.pdf
‘Tax Guide for Share Owners’ (Issue 7):
https://www.sars.gov.za/wp-content/uploads/Ops/Guides/LAPDsIT-G11-Tax-Guide-for-Share-Owners.pdf
‘Travel Logbook 2021/2022’: https://www.sars.gov.za/wpcontent/uploads/Docs/Logbook/2021-22-SARS-eLogbook.pdf
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