TAXATION
298
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General
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Please note that though these summaries are very thorough they should only be
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Taxation 298
It’s very important that you stay up to date in class as all the chapters eventually link
up. Please note that rates and the prescribed work may change and that it is crucial
that you note these changes to ensure you do not study the wrong information.
These notes have been made using the slides and SILKE however they should be
used to complement your own notes made during class.
Highlighting the tax act can be a little overwhelming, however, the robot system
works well and prevents your book from looking like a rainbow:
•
•
•
•
Red: all amounts excluded
Green: all amounts included
Blue: to cross-reference any sections (please look into the rules regarding
cross-references)
Yellow: important definitions and amounts
It’s very important that you know your theory well so that you do not need to rely on
your legislation for every question in the test - it is merely there to assist you.
HEBREWS 11:1
Table of Contents
Chapter
1.
General principles of taxation
2.
Taxation in South Africa
3.
Gross income
4.
Special inclusions
5.
Exempt income
21.
Sources and non-residents
6.
General deductions
7.
Natural Persons
17.
Capital gains tax
8.
Employment benefits
10.
Employees tax
CHAPTER 1 GENERAL PRINCIPLES OF TAXATION
1. Types of taxes
Direct taxes are imposed on:
•
•
•
Indirect taxes are levied on:
•
Individuals
Companies
Other taxpayers
•
The burden of tax is not shifted.
Transactions that are collected by
intermediaries
On behalf of SARS.
Intention or expectation that the tax burden
will be shifted.
Example
Classify the taxes as direct or indirect taxes:
Relevant
legislation
Income Tax
Act No. 58
of 1962
(Part I)
Description
Income Tax
Act No. 58
of 1962
(Part IVB)
Withholding
tax on
interest
Normal tax
Direct or
indirect tax
Direct tax
Relevant
sections
Section
5(1)
Direct tax
Section
50B(1) read
together
with and
50C(1) and
50C(2).
Reasoning
Pursuant to section 5(1), normal taxes
are levied annually on the taxable
incomes of any person (other than a
company) and any company. Therefore,
levied on a person as opposed to a
transaction.
Pursuant to section 50B(1)(a),
withholding tax on interest is calculated
with reference to the amount of interest
that is paid by any person to or for the
benefit of any foreign person to the
extent that the amount is received or
accrued from a source within the
Republic as determined in accordance
with S9(2)(b). Pursuant to section 50C(1)
the foreign person is liable for the
withholding tax on interest. Under
section 50C(2) the withholding tax on
interest is regarded as an amount paid in
respect of the foreign person’s liability.
Therefore, even though the tax is
collected by an intermediary (the
person paying the interest to the foreign
person) the tax liability rests on the
foreign person, it is not a tax that is
expected or intended to be passed onto
another person (e.g. as is the case with
VAT).
Taxes may be described as “direct” taxes “…notwithstanding that the actual payment may be
enforced against some intermediary, so that the income tax on employment income is not less
direct because the employer must deduct the tax” (Loutzenhiser, 2016:19-20).
This same principle can be extended to withholding taxes on interest. Notwithstanding that the
actual payment is enforced against an intermediary (the person paying the RSA-source interest),
the withholding tax on interest is not less direct because the intermediary is required to deduct
(withhold) the tax and pay it over to the SARS.
ValueAdded Tax
Act No. 89
of 1991
ValueAdded Tax
(VAT)
Indirect tax
Section
7(1)
Pursuant to section 7(1), VAT is levied:
(a) on the supply by any vendor of goods
and services supplied by him in the
course or furtherance of any enterprise
carried on by him; and
(b) on the importation of goods into SA
by any person; and
(c) on the supply of any imported
services by any person. Therefore, VAT
is levied on transactions/ actions as
opposed to on a person.
Note that because vendors are entitled to claim input tax, the tax burden is intended and expected
to fall on the ultimate consumer of the goods and services. You were not expected to include
this in your answer as VAT will only be covered in term 3.
2. Tax policy
What is it?
• The formulation of a tax policy is concerned with the design of a tax system
that is capable of financing the necessary level of public spending (by the
government) in the most efficient and equitable manner.
Tax policy components
Economic income is not necessarily the amount subject to tax.
D. Tax principles
A. Tax base
Definition
X
B. Tax structure
Rate structure
=
C. Tax incidence
Tax incidence
A. Tax base
•
Amount on which tax is imposed and requires a determination of what is
taxable (e.g. income, wealth or consumption).
After the tax base, a percentage or unit is applied to this amount to
determine the tax liability.
•
•
•
•
Income tax base = income earned, or profits generated by tax payers during the year of
assessment.
Wealth tax base = the value of your assets or property of the tax payer.
Consumption tax base = amount spent by tax payers on goods and services.
Example – 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 interest rate is 39%.
Interest income
•
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 is thus R1 833 (R4 700 x 39%).
•
𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑡𝑎𝑥 𝑟𝑎𝑡𝑒 =
𝑇𝑜𝑡𝑎𝑙 𝑡𝑎𝑥 𝑙𝑖𝑎𝑏𝑖𝑙𝑡𝑦
𝑇𝑜𝑡𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡 𝑜𝑟 𝑖𝑛𝑐𝑜𝑚𝑒
The total interest income is R28 500. The effective tax rate is therefore 6.4%
(R1 833/R28 500).
Net rental income
Assuming that the rental income is fully taxable, the total tax base is R28 500.
Melody’s tax liability would be then R11 115 (R28 500 x 39%).
The effective tax rate is therefore 39% (R11 115/R28 500).
Description
Income before tax
Less: Tax
Income after tax
Average tax rate
Effective tax rate
Interest income
R28 500
(R1 833)
R26 667
39%
6.4%
Net rental income
R28 500
(R11 115)
R17 385
39%
39%
B. Tax rate structure
Marginal tax rate
Tax rate that will apply if the tax base increases by R1.
Statutory tax rate
Tax rate imposed on tax base (as determined by legislation).
Average tax rate
Rate at which tax is paid with reference to the total tax base
of a relevant taxpayer.
ATR =
Effective tax rate
𝑇𝑜𝑡𝑎𝑙 𝑡𝑎𝑥 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦
𝑇𝑜𝑡𝑎𝑙 𝑡𝑎𝑥 𝑏𝑎𝑠𝑒
The effective tax rate is often used as a measure to facilitate
comparability between tax systems of different countries and
tax liabilities of different taxpayers. The effective tax rate
allows comparisons to be conducted having regard to the tax
emanating from all activities of a taxpayer.
𝑇𝑎𝑥 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦
ETR = 𝑇𝑜𝑡𝑎𝑙 𝑒𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝑝𝑟𝑜𝑓𝑖𝑡/𝑖𝑛𝑐𝑜𝑚𝑒
Can be expressed as: Fixed percentage, amount per unit, sliding scale (variable percentage).
Three types of tax rate structures
The type of structure is elected by policy makers and is in line with the policy objectives wanting
to be achieved. E.g. Governments that aim to achieve wealth redistribution, usually prefer
progressive tax rates.
This can be asked by means of a discussion question where you will be required to discuss how
taxpayers should be levied, with a reason/explanation and example.
a. Progressive
• The effective tax rate increases as the tax base increases.
• I.e. tax burden on high-income groups is larger.
• Often cited as a method to reduce economic inequalities in societies.
• Used by most economies.
b. Proportional
• The effective tax rate doesn’t change in line with the tax base (a flat tax rate).
• Applies to all income levels or for any size tax base.
c. Regressive
• The effective tax rate increases as the tax base decreases.
• The tax burden on low-income groups is larger.
Economists argue that VAT is regressive (ETR), however it can also be proportional (ATR).
3. Principles of taxation
•
•
•
Tax design: benchmarked against the commonly accepted principles of a
good tax system.
Priority of application: depends on the policy objectives set out by the
government.
Systems must be integrated to ensure effectiveness.
Principle
Equity
Certainty
Convenience
Economic
Efficiency
Description
• Tax should be imposed according to one’s ability to pay.
• Based on the concept of fairness.
• A person’s economic capacity or ability to pay may be influenced by
personal choices.
• The timing, amount and manner of tax payments should be certain.
• Legislative provisions and procedures must be transparent long
before implementation.
• Taxes should be imposed in a manner or at a time convenient for
taxpayers.
• Paying taxes should be made easy.
• By allowing taxpayers to do their returns via the internet.
• The inclusion of VAT in retail selling prices.
• Taxes should be designed in a manner not unduly influencing
economic decision-making.
Administration
Efficiency
•
•
Flexibility
•
•
Simplicity
•
•
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
Cost vs. benefit = a tax system should cost less to implement and
maintain than the tax revenue it generates for the government.
A good tax system should be designed in such a manner that it can
easily adjust in response to changing economic circumstances.
Referred to as tax buoyancy which measures the responsiveness of
tax revenue changes to changes in economic growth.
Taxes should be designed in a manner that is easy to understand and
apply.
Used to determine how many taxes should be implemented, which
items should be excluded from the tax base, how many
supplementary materials should be issued in addition to primary
legislation.
Principles in focus
a. Equity principle
•
•
•
Based on the concept of fairness (in terms of reality and an individual’s
unique perception because fairness is subjective).
If taxpayers are perceived to be unfair it erodes taxpayer confidence and
negatively impacts compliance behaviour. E.g. Gauteng e-tolls, where many
SA citizens simply refused to comply with the new legislation.
A taxpayer’s economic capacity to pay is influenced by personal choices.
E.g. the decision to smoke.
Two underlying principles
Ability-to-pay
Benefit principle
• Tax liability should take into account the • Equity is established when a taxpayer
economic capacity of the taxpayer.
pays tax in proportion to the benefit
received from the government (via tax
revenue spending).
*These two principles are not necessarily
complementing one another.
Two subcategories
•
•
Vertical equity
Taxpayer with the greater economic
capacity/ability to pay bears the
greater burden of tax.
E.g. A earns a taxable income of R500
000 and B earns a taxable income of
R250 000. A should pay a greater
amount of tax relative to B.
•
•
Horizontal equity
Taxpayers with equal economic
capacity bear an equal tax burden.
E.g. A receives R5 000 cash and B
receives a laptop with a market value of
R5 000. Both receive it for services
rendered. They should both be
subjected to tax on the R5 000 (this is
the value of consideration for services
rendered).
b. Economic Efficiency Principle
•
•
•
•
•
To be economically efficient, it cannot influence a person’s economic decision
making.
It places an important role in preserving the tax base.
Where a tax is inefficient, taxpayers would be motivated to change their
behavior to avoid paying the tax.
E.g. if interest income is more heavily taxed than dividend income, investors
might elect to invest in dividend-bearing investments in order to reduce tax.
This ultimately leads to a decrease in tax revenue collected by the
government.
A tax that is not economically efficient is not necessarily negative as it
encourages the desired behavior. E.g. an increase in tax levied on alcohol
could lead to a decrease in alcohol consumption and generate indirect social
benefits.
CHAPTER 2 TAXATION IN SOUTH AFRICA
1.1. Brief history of taxation in SA
1.2. The legislative process
•
•
•
Just read through
Be able to explain process in own words
The Constitution of the Republic of South Africa: is the supreme law in South Africa.
The Constitution dictates, amongst other things, how the legislatures should conduct their legislative
processes.
Parliament: has the power to pass new laws and to repeal or amend existing laws.
Parliament
Bill must be passed by parliament before it is submitted to the president to sign into law.
Draft money bill
White paper is transformed into a draft money bill.
Prepared by the National Treasury and sent to the Minister of
Finance for approval.
White paper
Adjusted for comments.
A more refined version of green paper.
Green paper
Proposal: discussion of policy options.
Published for comments and ideas.
Usually has submission date for Civil Society.
Forms the basis of a draft bill.
1.3. Current tax legislation
Just know what the rest are
1. Normal tax
commonly referred to as income tax.
2. Withholding tax
a tax deducted at source
places responsibility on a person that owes an
amount of money to another to withhold an
amount of tax from the amount owed.
only pay net amount to the other person.
e.g. PAYE, dividend tax, payments to nonresidents.
3. Turnover tax (not in SAICA syllabus)
4. Dividends tax
payable at a fixed rate of 20% on the amount of any dividend paid by a company except a
headquarter company.
5. Donations tax
prevent the avoidance of estate duty.
a tax on the gratuitous transfer of wealth (property).
levied on the value of donations, other than those specifically exempted.
calculated at a fixed rate: 20% (first R30m) and 25% (>R30m).
6. Value-added tax (VAT)
levied at 15% on the supply of goods or services by a vendor in SA.
indirect tax and direct cost to the final consumer.
7. Transfer duty
levied on the cost price of fixed property using a sliding scale (0%, 5%, 11% and 13%).
wealth tax payable by the purchaser on the acquisition of property in SA.
8. Estate duty
levied on the dutiable value of the estate of a deceased person.
calculated at a fixed rate: 20% (first R30m) and 25% (>R30m).
the purpose is to tax the transfer of wealth from the deceased estate to the beneficiaries.
9. Securities transfer tax (SET)
at a rate of 0,25% of the value of any shares purchased.
payable by: purchaser of both listed and unlisted shares in SA and the transfer of shares of
foreign companies listed on the JSE.
not payable on the issue of shares.
10. Customs and excise tax (not in SAICA syllabus)
11. Unemployment insurance contributions (not in SAICA syllabus)
12. Skills development levies (not in SAICA syllabus)
2. Administration of tax legislation
•
Just read through
The Commissioner of SARS (CSARS) – responsible for carrying out the function of collecting
taxes and ensuring compliance with the tax laws.
The Tax Administration Act – regulates the administrative requirements and procedures for
purposes of the performance of any duty, power of obligation, or the exercise of any right in
terms of the tax laws.
SARS – responsible for administering the relevant tax Acts drafted and legislated by National
Treasury.
PAJA – Promotion of Administrative Justice Act
•
•
•
3. Interpretation of tax law
•
•
Just read through
The tax laws of SA need to be interpreted by SARS.
The burden of proof is on the taxpayer to claim an exemption, non-liability, deduction,
abatement, set-off or exclusion.
The Constitution of the Republic of South Africa is the supreme law of SA, thus any law that is
inconsistent with it is invalid.
•
3.1. Tax legislation
•
Just read through – which is binding?
Regulations
-
•
Enables the Minister of Finance to make regulations
regarding certain matters.
Namely: the duties of all persons engaged in the
administration of the Act, limits of areas within which such
persons are to act, etc.
These regulations are published in the Government Gazette and
have the same power as legislation.
Double tax agreements
-
-
Agreements to avoid the imposition of double tax 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 double tax
agreement (DTA) has the effect of law.
Double tax agreement enjoys preference over the Act.
•
Definitions
-
•
For the interpretation of the words in tax legislation.
The main source of definitions is contained in the first section of the tax Act.
All definitions are subject to their provisos.
The following must be considered:
▪ If the definition in the Tax Administration Act but not in the Act – the definition in the Tax
Administration Act will also apply for the Act. (Vice versa)
▪ If there are inconsistencies between Acts, the Act is applicable.
The Interpretation Act
•
If a term used in the Income Tax Act is not defined in another tax act, necessary to look to
the Interpretation Act for guidance.
Provisions apply only if there is nothing in the language or context of the Income Tax Act
contradictory to those provisions.
If not defined within the primary legislation or the Interpretation Act, the normal dictionary
meaning of the word may indicate its meaning.
If still unclear, use case law.
Interpretation notes
•
In addition to the regulations, SARS publishes Interpretation Notes that set out its
interpretation of various provisions.
The notes do not form part of tax legislation.
It appears that not even the Commissioner is bound by an Interpretation Note unless it
contains a statement that it is a Binding General Ruling.
Binding General Rulings
-
-
If an Interpretation note contains a Binding General Ruling the Commissioner is bound to its
interpretation.
The Advance Tax Ruling system provides for the issuing of BGRs.
BGRs are issued on matters of general interest or importance.
They promote clarity, consistency and certainty regarding the Commissioner’s application or
interpretation of the tax law relating to these matters.
3.2. Judicial decisions
When will a tax case be heard in a court of law?
-
Where a taxpayer is dissatisfied with his assessment, he may appeal if his
objection has been disallowed. The Tax Administration Act provides for the
following appeal route:
•
Tax board
-
•
Deals with appeals where the amount of tax in dispute does not exceed R1m.
The party against whom was decided can appeal to the Tax Court.
Tax Court
•
Not a court of law.
It has no inherent jurisdiction as is possessed by the Supreme Court of Appeal.
Bound by a decision of the Provincial Division of High Court and the Supreme
Court of Appeal, although not bound by its own decisions.
A decision in of the Tax Court is only binding on the parties of the specific case.
Commissioner not bound by a decision in the Tax Court.
High Court
•
-
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 in terms of the principle of legal precedence.
Supreme Court of Appeal
Not bound by the decision of any Provincial Division.
It is bound by its own decisions.
All subordinate courts are bound by the decisions of the SCA.
The legal precedence principal
-
The English stare decisis rule is accepted in SA.
Entails the principle of legal precedence.
Meaning: a rule of law established in a previous judgement is binding upon a lower
court, and that courts of equal rankings must follow their own previous decisions.
The hierarchy of courts apply.
What part of the decision creates legal precedence?
-
The ratio decidendi of a case = 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 court that gave the decision.
Can income tax decisions of foreign countries create legal precedence?
-
Must be cautiously approached.
Due to the difference in the basis of taxation applicable in foreign countries.
When referring to such decision: bear in mind that they may be based upon a
differently worded statue from the statute under consideration.
May, however, be valuable and may influence SA courts.
3.3. Rules of interpretation
•
Just read through
Strict and literal (‘golden rule of interpretation’)
-
The interpreter primarily concentrates on the literal meaning of words of the
provision that must be interpreted to determine the purpose of the legislator.
Equate the grammatical meaning of words to the intention of the legislature.
Always the starting point.
If text is ambiguous or unclear or if a strict literal meaning will be absurd, the literal
meaning may be departed from.
-
Case law that supports the strict legal approach:
Not examinable
‘It simply means that one has to look at what is clearly said. There is no room for any intendment.
There is no equity about tax. There is no presumption as to a tax. Nothing is to be read in, nothing
is to be implied. One can only look fairly at the language used’. (Cape Brandy Syndicate v IRC)
•
The purposive approach (contextual approach)
-
•
Required by Constitution.
Courts applying this approach strive to give effect to the purpose with which the
legislature enacted a particular provision.
Also considers the history of the provision of a taxing act, its broad objectives, the
constitutional values underlying it and its interrelationship with other provisions.
Substance over form rule
•
Courts are concerned with the substance rather than the form of a transaction.
Contra fiscum rule
-
Provides that where more than one meaning is possible, the court must give effect
to the meaning which favours the taxpayer (i.e. against the fiscus)
4.1. The incidence of normal tax
•
•
•
Incidence of tax refers to the liability of tax.
Normal tax is levied on any ‘person’ – s5(1)
Definition of a ‘person’ – s1(1)
- Including trusts, deceased and insolvent estates, portfolio of a collective
investment scheme (CIS), natural persons, but excludes foreign partnerships.
- The Interpretation Act also includes: ‘body of persons whether incorporated or
unincorporated’.
- This means all companies, close corporations and even partnerships are
considered as persons for Income Tax purposes.
For income tax purposes the partnership in not taxed – partners are taxed in their own names.
However, for VAT purposes a partnership is considered as a person.
•
Collection of normal tax is facilitated through:
- PAYE (employees’ tax)
- Withholding tax
- Provisional tax
•
Payments of employee’s tax, provisional tax and withholding tax are deducted from
the normal tax payable in the calculation of the final normal tax due.
•
Withholding tax paid by non-residents in respect of the sale of immovable
property in SA is similarly taken into account for non-residents persons.
4.2. Rate structure of normal tax – s5
Progressive rate structure
• Natural persons
(individuals)
• Deceased estates
• Insolvent estates
• Special trusts
•
•
Fixed rate structure 28%
• Companies and CC’s
Fixed rate structure 45%
• Trusts (other than
special trusts)
Tax rates are determined annually by the Minister of Finance in the annual national
budget.
The change is however subject to Parliament passing legislation.
Progressive rate structure
•
•
•
•
Progressive rate structure ranges from 18% to 45%.
Applied to taxable income.
Increases as taxable income increases.
Taxable income excludes:
- Taxable income from lump slump benefits and severance benefits of natural
persons.
• The current sliding scale used for the progressive rate structure:
Tax threshold - the level of income or money earned above which people must pay tax.
Can be calculated using tax rebates:
𝑅𝑒𝑏𝑎𝑡𝑒𝑠 (𝑒𝑛𝑡𝑖𝑡𝑙𝑒𝑑)
𝑇ℎ𝑟𝑒𝑠ℎ𝑜𝑙𝑑 =
𝐿𝑜𝑤𝑒𝑠𝑡 𝑡𝑎𝑥 𝑟𝑎𝑡𝑒
Leap year: effect on apportionments – use 366 and not 365 days.
E.g. when apportioning the s6 rebates in broken years of assessment.
Rebates – s6
•
•
Natural persons only (not for juristic persons) are entitled to deduct a rebate.
Primary, secondary and tertiary – depending on the age of the taxpayer.
Broken years of assessment
•
-
•
“Was or would have been”
Applicable in the following three instances:
1. Taxpayer is born
2. Taxpayer dies
3. Taxpayer is declared insolvent
Effect of a broken YoA?
- s6: rebates must be apportioned (SARS uses days).
•
Example:
•
Calculation: 𝑅𝑒𝑏𝑎𝑡𝑒𝑠 𝑒𝑛𝑡𝑖𝑡𝑙𝑒𝑑 𝑡𝑜 × 𝐷𝑎𝑦𝑠 𝑜𝑓 𝑌𝑜𝐴
𝐴𝑐𝑡𝑖𝑣𝑒 𝑑𝑎𝑦𝑠
Example of apportionment in a broken YoA:
Natural person dies at the age of 74 on 1 December 2019. The taxpayer would have been 75
years old on 1 January 2020.
Effect on the s6 rebates for the 2020 year of assessment:
1. How old would the taxpayer have been on the last day of the year of assessment (29
February 2020)? – 75 years old
2. Therefore he/she is entitled to the following s6 rebates:
- Primary rebate of R14 220
- Secondary rebate of R7 794
- Tertiary rebate of R2 601
3. Apportion:
276 𝑑𝑎𝑦𝑠
S6 rebate allowed = (R14 220 + 7 794 + 2601) × 366 𝑑𝑎𝑦𝑠 = R18 562
4.3. Tax base of normal tax
•
•
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 the year of
assessment.
a. Year of assessment – s1 under ‘YoA’
•
Normal tax levied annually in respect of a YoA.
•
•
Natural persons: YoA ends on the last day of February.
2019 YoA: 1 March 2018 – 28 February 2019
2020 YoA: 1 March 2019 – 29 February 2020
Companies: YoA corresponds to their financial year. (Can end on the last day of any
12 months in a calendar year.)
- E.g. Company financial year commences on 1 July and ends on 30 June each
year.
- 2019 YoA: 1 July 2018 – 30 June 2019
- 2020 YoA: 1 July 2019 – 30 June 2020
b. Taxable income of a natural person
•
The calculation of a natural person’s taxable income, normal tax due on assessment
and total tax payable is performed in accordance with the subtotal method.
Framework for calculating ‘taxable income’ and ‘normal tax payable’
CHAPTER 3 GROSS INCOME
1. Definition for gross income
Gross income – in relation to any year or period of assessment means that
1)
2)
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
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 a person from a source within the Republic,
during such year or period of assessment, excluding receipts or accruals of a capital nature.
Requirements
•
•
•
•
-
All the requirements (also referred to as special inclusions) below must be
met for an amount to qualify as gross income.
Residents are taxed on their worldwide income through a residence-based
system of tax.
Non-residents are taxed only on SA source income through a source-based
system of tax.
Note: The requirements differ for resident and non-resident.
RESIDENT (4)
There must be an amount in cash
or otherwise
That is received by, accrued to; or
in favour of the resident
During a YoA
Excluding amounts of a capital
nature
-
NON-RESIDENT (5)
There must be an amount in cash
or otherwise
That is received by, accrued to; or
in favour of the non-resident
During a YoA
From a source within/deemed to
be within RSA
Excluding amounts of a capital
nature but can be included i.t.o.
specific inclusions*
*If these amounts are not included it does not imply that they are free of tax. A portion of capital gain (i.e. capital
gains tax) is realised on the disposal of an asset which is included in taxable income (Discussed later).
2. Resident and non-resident
•
•
•
•
The definition of resident in s1 distinguishes between
natural persons and persons other than natural persons.
A person cannot be a resident if they are deemed to be
exclusively a resident of another country.
Thus; in the case of a DTA between two
countries, one should first consider whether the
taxpayer is a resident under the DTA and then
only under the definition in s1.
A natural person is a ‘resident’ if he or she is either
ordinarily resident or meets the requirements of the
physical presence test.
Tests to determine residency
i. Ordinarily resident
•
The term “ordinarily resident” is not defined in the act and therefore the
interpretations of the court are used. (Case law)
Two cases to be considered with regards to ordinarily resident
Case
Cohen vs. CIR
Facts:
• The TP was a South African resident
• Was requested by his employer to work in
the USA for 20 months
• His family went with him and during the 20
months, none of them returned to SA.
• The court ruled the TP to be an ordinary
resident in SA during the time.
•
•
•
CIR vs. Kuttel
Facts:
• The TP had a majority interest in a SA
company.
• Agreed to move to NY to open an office
there.
• He was granted permanent residency and
his family emigrated to NY.
• Whilst being there he acquired a house, car,
bank accounts and offices.
• During a 31-month period, he visited SA 9
nights, staying up to 2 months per visit.
• During the visits, he stayed in a house
owned by a company where he and his wife
are the sole shareholders. The house was
never rented out.
• The court applied to principles of CIR vs
Cohen and concluded that the TP is not
ordinarily resident in SA.
• Application of principles:
There was no proof that the tax payer’s
place of principal residence was not set up
in the USA. (He bought a car, house, etc.)
The fact that he kept his house in SA is
not enough evidence to identify it as his
‘real home.’ He only visited SA with no
intent shown of staying there.
•
Principle
A person’s ordinary residence is the
country to which he would naturally
return to. It is the country in which
the person’s usual or principal
residence is i.e. their real home.
The person’s mode of life or
actions outside the YoA must be
considered and not only those during
the YoA.
Physical absence during the full
YoA is not decisive. The person
could be absent for the full year and
still qualify as an ordinary resident of
that country.
Place where a person normally
resides apart from occasional/
temporary absences (‘real home’).
He could not take all his assets with him
due to the exchange control regulations
and by vesting his money in a house
based in SA he merely used the most
advantageous means of retaining his
assets in the country.
-
A guideline of factors considered by SARS to determine ordinarily residency
(Interpretation note 3 issue 2)
•
•
•
•
•
•
•
•
•
•
•
•
•
An intention to be ordinarily resident in the Republic.
Most fixed and settled place of residency.
Habitual mode (present habits and mode of life)
Place of business and personal interests of the person and family.
Employment and economic factors.
Status of the individual (immigrant, work permits).
Location of personal belongings.
Nationality
Family and social relations (schools, churches, sports clubs).
Political, cultural and other activities.
Application for permanent residence or citizenship.
Period abroad, purpose and nature of visits.
Frequency and reasons for visits abroad.
When does a taxpayer stop being ordinarily resident?
ii. Physical presence test
•
•
This applies to a natural person who is not at any time during the year of
assessment ‘ordinarily resident.’
The person will be deemed a ‘resident’ if he is physically present in the
Republic for a certain period and meets all three the requirements.
Three requirements – in legislation under s1
•
•
Exceeding 91 days in aggregate during the current YoA, AND
Exceeding 91 days in aggregate during each of the 5 YoA preceding the
current YoA, AND
Exceeding 915 days in aggregate during the 5 YoA preceding the current
YoA.
•
Rules to apply to the ‘physical presence test’
•
•
Part of a day counts as a full day for the physical presence test.
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 entry.
-
•
•
•
•
•
E.g. a plane lands in SA for a stopover flight and the person doesn’t enter through an
official point of entry, they are considered to be “out of the country.”
The more than 91 days and more than 915 days’ periods of physical presence
in the Republic need not be continuous.
The reason for being in the country during the required number of days is
irrelevant. Unless the ‘part of a day’ is in transit.
Cannot apply both tests (ordinary and physical) in the same YoA.
NB! If a person is exclusively resident in another country i.t.o a DTA between
the republic and another country, he will not be a resident in the Republic
even if he meets all the requirements of being a resident.
A person will be a resident from the first day of the relevant YoA (that is the
sixth year) during which all the requirements of the test are met.
When does residency terminate under the physical presence test?
2.1.
Residence of persons other than natural persons [par(b) of the definition
of ‘resident’ in s1]
•
A person other than a natural person (e.g. companies, close corporations or
trusts) is defined as being ‘resident’ if:
- Is incorporated, established or formed in the RSA, or
- Has its place of effective management in the RSA.
What does a place of effective management mean?
• Not defined in the Act.
• IN 6 (issue 2) provides more guidance for the purposes of establishing the place of effective
management – in short, SARS regards it 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’.
• May have more than one place of management but only ONE place of EFFECTIVE
management.
• DTA’s have priority.
3. Elements of the ‘gross income’ definition in s 1(1)
Meaning of ‘amount in cash or otherwise’
•
•
Not only the receipt or accrual of an amount of cash should be included in a
person’s gross income.
The value of non-cash items should also be included.
Cases to be considered
Case
Lategan
Facts:
• TP = wine farmer who sold wine that he
made during the YoA for a specific amount.
Part of the amount was paid cash before the
end of the YoA.
• The balance was paid in instalments during
the following year.
• Court had to decide whether the full amount
qualified as ‘total amount’ for the purposes
of ‘gross income' or only the part that he
received in cash.
• The court ruled that where a taxpayer
acquired a right during a YoA 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
‘gross income’.
•
Principle
‘Amount’ includes not only money
but also every form of property
earned by the taxpayer which has
money value, even the right to
receive future payment.
Butcher Bros
Facts:
• TP leased a building for a period of 50 years,
which can be renewed 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 building
and improvements would revert to the TP
without compensating the tenant for costs
incurred relating the building and
improvements.
• Court had to decide whether the
improvements qualified as an ‘amount’.
• The court held that no amount was
received by or accrued to the TP by the end
of the YoA – improvements did not have an
ascertainable money value at the time.
Brummeria Renaissance
Facts:
• Investors in a retirement village did not
compensate the TP (developer) in cash for
the construction.
• Instead, investors granted interest-free loans
to the TP as consideration for the acquisition
of units.
• The court held that the right to use the loan
interest-free was a right that had an
ascertainable monetary value.
• To determine: use an objective test.
•
•
The onus is on CSARS to establish
the amount if it cannot be
established it does not form part of
‘gross income’.
Amounts accruing must have an
ascertainable monetary value.
NOTE: The Act was amended after this case.
(par h) The specific inclusion in gross income
now provides that improvements to leasehold
property should be included in the gross income
of a lessor.
•
The right to an interest-free loan is
an amount and this right has value
in money.
There is an amount if what is received or
accrued is capable of being valued in money
terms. (Irrelevant if it can be converted into
money)
Interpretation note (No 58) confirms that the
principle only applies where interest-free loans
are granted in exchange (quid pro quo) for
goods supplied, services rendered, or any other
benefit granted.
Calculating the monetary value of the right of use of the interest-free loan to be included in the
borrower’s gross income: (Once off calculation, incl. in the YoA the borrower becomes entitled to
the right to use the loan.)
(𝐿𝑜𝑎𝑛 𝑎𝑚𝑜𝑢𝑛𝑡 × 𝑃𝑉 𝑜𝑓 𝑅1 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑙𝑖𝑓𝑒𝑡𝑖𝑚𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑙𝑖𝑓𝑒 𝑟𝑖𝑔ℎ𝑡 ℎ𝑜𝑙𝑑𝑒𝑟
× 𝑤𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑝𝑟𝑖𝑚𝑒 𝑜𝑣𝑒𝑟𝑑𝑟𝑎𝑓𝑡 𝑟𝑎𝑡𝑒 𝑑𝑒𝑡𝑒𝑟𝑚𝑖𝑛𝑒𝑑 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑌𝑜𝐴)
− 93,1%
Meaning of ‘received by’
•
E.g. the value of an asset increased over time does not mean that the value
should be included in its owner’s gross income. Although it has an
ascertainable monetary value, until the asset is sold, the increased value is
not received by the owner.
Cases to be considered
Case
Geldenhuys
Facts:
• TP and her husband (farmers) executed a
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.
• After the husband’s death, the TP, with her
children’s consent, decided to sell a flock of
sheep.
• She invested the proceeds in a bond in her
favour.
• The court held that the TP only had the right
of use of the flock. Since the number of
sheep at the date of sale was smaller, there
was no surplus offspring she was entitled to.
• The proceeds from the sale belonged to the
heirs.
• Although the TP received the proceeds,
she did not become entitled to the money,
therefore, not included in gross income.
Pyott
Principle
• An amount is only received by the
taxpayer if it is received on his own
behalf and for his own benefit.
•
Deposits are amounts received and
should be included in gross income
unless they are deposited into a
separate trust account specifically
for deposits received.
•
Illegal receipts may also constitute
gross income – the legality of income
is irrelevant to the question of the
liability of that income for tax
purposes.
Facts:
• TP = biscuit manufacturer.
• Biscuits were sold in tin containers for which
the TP charged a fee.
• The fee was refunded if the container was
returned in good condition.
• At the end of the year, the TP deducted an
amount from gross income as a provision for
containers still to be returned.
• The court ruled that the amount that the TP
received for the sale of containers should be
included in gross income at its face value.
• The court also made the observation that
the TP correctly conceded that the proceeds
were not in any way ‘trust monies.’
• If this was the case it would not form part of
the TP’s income.
Delagoa Bay Cigarette
Facts:
• TP operated an illegal lottery.
• TP sold cigarettes at an amount much
higher than the normal selling price and the
difference was distributed to the holder of a
lucky coupon.
• The court found that whether the business
is legal or not is not material for
determining whether the income should be
subject to tax.
MP Finance Group
•
Facts:
• TP operated an illegal investment pyramid
scheme.
• It promised significant returns on investors’
money.
• The operators of the scheme used some of
the money for their own benefit.
• Throughout the tax years under question,
the operators knew they were insolvent.
• The TP’s argued that they never received
the funds within the definition of ‘gross
income’ because it was legally obliged to
refund the deposits to investors.
• Interpretation note: the issue is not
whether the victim intended to part with the
money, but rather whether the thief intended
to benefit from it.
Illegal receipts may also constitute
gross income – if the taxpayer
intended to receive the amount for
his or her own benefit.
Meaning of ‘accrued to’
•
•
Accrued to means that a taxpayer became entitled to an amount.
I.e. at the time a taxpayer obtains a vested right to a future payment, the
amount accrues to a taxpayer.
Cases to be considered
Case
People’s Stores
Facts:
• The TP = retailer that sold goods to
customers for cash/credit.
• Credit sales were made under the
taxpayer’s six-months-to-pay revolving
credit scheme.
• Court had to decide whether the instalment
not yet payable and outstanding at the
end of YoA, accrued to the TP.
• Court applied principles established in the
Lategan case.
• Held that the amount does not have to be
due and payable to TP for it to accrue to the
TP.
• The TP acquired a right during the YoA to
claim payment of an amount in the future.
(Vested right)
• And since the right has an ascertainable
monetary value in should be included in
‘gross income’.
•
Principle
‘Accrued’ means ’entitled to’
payment; not ’due and payable’.
An amount accrues in the tax year the TP
becomes entitled to the amount.
Provisio was added to the definition of ‘gross
income’, which provides that the face value of
the amount should be included in a person’s
gross income.
Witwatersrand Association of Racing
Clubs
•
Disposal of income after receipt
or accrual does not affect gross
income: where amounts have been
received in favour of and on behalf
of a person, that person must be
taxed even though he may have an
obligation to pay it over to some
other person.
•
Meaning of ‘accrued’ is extended to
‘unconditionally entitled to’
payment.
Facts:
• TP = an association formed by a number of
horse racing clubs.
• TP held a horse racing event for the benefit
of two charities.
• TP argued that in organising the event, it
entered into a contract on behalf of the
charities.
• The court found, that it was the TP that was
liable to pay the expenses incurred in
holding the event. He was thus not an
agent on behalf of the charities.
• The court held that the proceeds from the
race were gross income for the TP because
it was the TP who became entitled to the
proceeds of the race.
• 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 TP.
Mooi
Facts:
• TP’s employer granted him an option to
acquire shares in the company at a specific
price.
• The option was, however, subject to certain
conditions.
• The TP accepted the option during a
specific year and exercised the option more
than three years later.
• When it was exercised, the value of the
shares was more than the option price.
• The court had to consider at which price it
should be included in the TP’s gross
income.
• The court made the following findings:
- In applying the principle established in the
Lategan case, the court said that to
determine the ‘amount’ in the case of a
right, one must establish the value.
- TP argued the right accrued when the
option was granted. But the court found
that a contingent right was granted, as it
was subject to certain conditions.
- The right only accrued to the TP when
the conditions were fulfilled, and the
right became exercisable.
- Since the TP was not a share-dealer, the
amount was of capital nature. However,
par (c) of the definition of ‘gross income’
specifically included ‘any amount, incl. any
voluntary award received or accrued in
respect of services rendered or to be
rendered’ in the TP’s gross income,
despite being of capital nature.
Inclusion in gross income: earliest of receipt or accrual (which ever takes place 1st).
May be on the same date or on different dates. This rule applies to all other payments, excluding
amounts payable by SARS.
Self-study section
i. Valuation of receipt or accrual
•
•
Relevant to amounts that have been accrued but not yet received
(outstanding amounts), e.g. instalments.
The value of the receipt is the amount that has been received during the YoA.
ii. Face value vs. present value
•
•
•
•
When a person has become entitled to an amount during the YoA, AND
That amount is payable on a date or dates falling after the last day of that
year, THEN
The face value of that amount shall be deemed to have accrued to the
person during such year.
Note: Previously the present value or discounted was used until the CIR vs.
People Stores case.
iii. Unquantified amounts
•
•
Silke example 3.5
Silke example 3.6
If an asset is disposed of for a consideration that includes or consists of an
amount that cannot be quantified in that YoA, the unquantified amount is
deemed not to have accrued to the person in that specific YoA.
It will only accrue in the year when it becomes quantifiable.
Cession or disposal of income
Disposal of income after receipt or accrual
•
When income is received by a person for his
own benefit or has accrued to him i.t.o. the
definition of gross income the disposal of the
income by that person will not affect his liability
for taxation.
Disposal of income before receipt or accrual
•
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 has been
properly ceded.
Examples:
Theft
• An employee steals money – this act can in no
way destroy the accrual in favour of the
employer.
• The stolen amount will still form part of the
employer’s gross income.
Examples:
Rental income
• The income of a property may be ceded without
transferring the right of ownership.
• Income received by the cessionary is included
in the gross income of the cedent (owner of the
property).
Donations
• Witwatersrand Association of Racing Clubs
• The TP undertook to pay the proceeds of the
race over to a charitable organisation but had to
pay tax in respect of the profits.
Royalties
• Sometimes the cedent after properly ceding his
right to future income receives the money and
then pays it over to cessionary.
Silke example 3.8
•
•
The TP made the donations only after they
were received.
•
Sale of a business
• If a business is sold during YoA he cannot
dispose of the benefits or profits for that year on
the buyer.
• The original owner will be liable for the tax until
the following tax year.
In this case, the cedent merely acts as an agent
and for the benefit of the cessionary.
Therefore, the income was never accrued for
the cedent’s own benefit and he has no tax
liability.
Services rendered
• Any considerations a person receives for
services rendered by him will be included in his
gross income (anti-avoidance provisions)
Spouse or minor
• Income disposed to a spouse or minor would
be taxable in the person disposing thereof.
Special case
Securities sold cum or ex income rights
•
•
•
•
Silke example 3.9
Shares, debentures and government stocks are sold together with the right to dividends and interest.
If the income has already accrued to the seller prior to the sale = taxable in the seller’s hands.
If the income accrues after the sale = taxable in the buyer’s hands.
The full income is taxable by either the buyer or seller whoever is entitled to it.
Anti-avoidance provisions: These deem that interest may accrue on a day-to-day basis, although
the actual interest is received in other periods. In this case, tax may be apportioned between the
buyer and seller.
•
iv. Time of accrual and interest payable by SARS
•
When a person becomes entitled to interest payable by SARS, the amount is
deemed to accrue to the person on the date on which the amount is paid.
As from 1 March 2018, the above-mentioned rule overrides the previous rule that the amount is
included in a person’s gross income at the earlier of receipt or accrual.
•
•
Interest payable by SARS is included in the recipient’s gross income when the
amount is actually paid and not when they become entitled to it.
Interest previously received from SARS and is later repaid to SARS by TP will
be deductible from the TP’s taxable income in the YoA in which it is repaid.
v. Year or period of assessment
•
•
•
•
•
A year or other period in which any tax or duty levied under the Act is
chargeable.
An amount is considered income and subject to tax in the year it is received or
accrued by the TP
If rates of tax or special provisions change it is important to ensure that all
amounts are included for each separate YoA.
YoA for natural persons and trusts = 1 Mar 2018 to 29 Feb 2019
YoA for companies = according to its financial year-end.
Receipts and accruals of a capital nature
•
Definition of ‘gross income’ excludes receipts or accruals of a capital nature
(exception of special inclusions, see chapter 4).
What does capital in nature mean?
•
•
-
-
Not defined in the Act – therefore rely on principles laid down by case law.
However:
Each case to be considered on its own merits.
Body of case law: used as guidelines.
No single or all-embracing test exists.
S102 of the Tax Administration Act (burden of proof = TP)
All receipts or accruals must be classified as either income (revenue) or
capital in nature (there is no half-way house, however, lump sums may be
divided into their respective components).
Intention is the most important test in deciding whether an amount is income
or capital.
Difficult: what is capital in the hands of one TP may be revenue in the hands
of another.
Cases to be considered
The nature of the asset
Case
Visser
Facts:
• The TP acquired mining options on certain
farms.
• The options lapsed before he could search
for mineral deposits.
• He had persuasive influence over the other
farms
• He, therefore, gained the mining options
again in exchange for shares in someone’s
company.
•
•
•
•
•
George Forest Timber
•
Facts:
• The TP was a company that acquired land
with a natural forest for business purposes.
• The trees were sawn and sold for trade-instock.
• Selling the timber did not realize a capital
asset but created and sold a new asset.
• Floating capital disappears within the
production process.
•
Principle
Nature of transaction must be
considered.
The TP’s intention is the focus.
Economic distinction must be made
between ‘the fruits’ = income and is
produced by the capital;
And ‘the trees’ = capital and is the
income-producing asset.
Income can be the product of a
person’s wits and energy.
The sale of fixed capital assets is
capital in nature.
The sale of floating assets is
income in nature. E.g. trading stock.
•
Fixed capital produces wealth but remains
intact.
Intention
Case
Elandsheuwel Farming – Intention a
•
company
Facts:
• TP = a company that acquired a property
used for farming purposes.
• One of its shareholders carried on farming
activities on the property for four years.
• 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.
• A year later, the company sold the property
to a local municipality at a significant profit.
• The court came up with the following
conclusions:
- The new shareholders derived a scheme
to make a profit by buying at a price based
on agricultural value.
- The shareholder’s intention should be
attributed to the company itself.
- After the new shareholders acquired
control of the company, the purpose of
the land changed to trading stock.
- The profit realised was of a revenue
nature and should be included in a
company’s gross income.
Levy – Mixed purpose
Facts:
• The TP 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 to
likely to develop.
• TP had an open mind as to what to do with
the property.
• He was interested in making good revenue
from the shares.
• Agreed with the shareholders to develop the
property.
• Three years later the property was sold, and
the TP made a substantial profit.
• TP argued the sale of shares was capital of
nature.
• The court found that:
•
Principle
Consider the intention of the
taxpayer at the time of:
- Acquisition
- Holding period
- Disposal
If the intention is…
Investment (income-producing
structure) = of a capital nature.
- Speculation/scheme of profitmaking = not of a capital nature.
-
•
•
Where a taxpayer has mixed
intentions, the main or dominant
intention will apply.
If there is no dominant intention,
speculation is considered the
dominant intention and the amount
will be revenue in nature.
-
-
-
The TP’s dominant intention in acquiring
the shares was to hold the shares an
income-earning investment.
The TP never attempted to sell the
shares and only did when someone made
him an offer.
The proceeds from the disposal of shares
were of a capital nature.
Richmond Estates – Realisation of a
•
capital asset
Facts:
• TP = a company that was formed to control
the investments and savings of its sole
shareholder and director.
• The company was empowered to trade with
and invest inland.
• Due to legislative changes, it became
difficult to purchase land in the area.
• The company decided to cease trading and
develop the properties to receive rental
income.
• The decision was not recorded in a formal
resolution of the company.
• Due to further legislative changes the
company sold properties and realised a
substantial profit.
• The court concluded the following:
- 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.
- The fact that this intention was not
recorded formally was nor reason for
concluding that their intentions did not
change.
- The proceeds from the sale were of
capital nature.
Scheme of profit-making
Case
Pick ‘n Pay Employee share
purchase trust
Facts:
• The TP was a trust established by the PnP
group to create a share purchase scheme
for the benefit of the employees.
• The trust purchased shares in the employer
company and made it available to
employees who were entitled to shares.
• If employees had to forfeit their holdings,
the trust was compelled to repurchase the
shares.
•
A taxpayer can change his intention,
but the mere fact that a taxpayer
sells his capital asset at a profit
cannot per se make the profit
subject to tax.
Principle
If the TP participates in a scheme of
profit-making, the proceeds =
revenue in nature.
•
The court concluded:
A TP must conduct business with the
purpose of making a profit for it to be
revenue in nature.
- The receipts accruing to the trust were not
worked for. It was merely a by-product.
- There was no intention of making profits,
thus = capital in nature.
-
Change in intention
Case
Stott – mixed purposes
Facts:
• TP was a surveyor and architect.
• He purchased land as investments.
• The 1st property was acquired as a seaside
residence.
• On the one half, he built a cottage and the
other was split into small plots which were
sold.
• The 2nd property was a fruit farm which was
subject to a long-term lease when acquired.
• Once the tenant defaulted, the TP divided it
into subplots and sold it.
• The court concluded:
- The TP used surplus funds and merely
made an investment.
- The fact that the land was sub-divided is
not enough to assume his intention was
profit-making.
- His occupation as a surveyor had no
impact on the court’s decision.
- The receipts were capital in nature.
Nel – Realisation of a capital asset
Facts:
• TP = bought Krugerrands as a long-term
investment and hedge against inflation.
• His intention was for his children to inherit
them.
• The value increased steadily over the years,
but he never sold them.
• Due to circumstances his wife urgently
required a new car.
• He exchanged some of the rands to pay for
this and subsequently made a gain on the
disposal.
•
•
•
•
Principle
The intention of the TP on the date
of acquisition is decisive.
Unless the intention changed prior to
sale and factors indicate that it was
sold in a scheme of profit-making.
TP’s are entitled to realise such an
asset to his best advantage without
it being a change intention.
An asset acquired with the intention
to own it as an investment will
remain capital in nature when the
disposal of it occurs due to unusual
or special circumstances.
•
The courts concluded:
To sell an asset initially purchased as an
investment does not qualify a
transformation to it being revenue in
nature.
- The TP’s intention was to realise a capital
asset.
-
Nussbaum – Secondary purpose
Facts:
• Considered by High Court
• TP = inherited shares
• Created a substantial portfolio of
investments in listed shares.
• For 3 YoA SARS deemed the profits from
the sale of shares to be income in nature.
• TP stated he used the revenue generated to
buy more shares for his portfolio.
• Intention = produce dividend income and
protect the capital from inflation.
• Only sales made were if other shares had a
higher dividend yield.
• When he was 60, he sold the shares in
small bits to invest in medical expenses and
a house.
• The court concluded:
- Though his main intention was
investment his secondary intention was
to sell shares and use the profits where
appropriate.
- The profits received were higher than his
dividend income.
- He had carefully planned to use the profits
for later investments and profits were not
incidental.
- Proceeds = revenue in nature.
Natal Estates – Change in intention
Facts:
• TP = company who owned a large piece of
land in KZN.
• Business = manufacture sugar.
• TP was aware that authorities could
expropriate the land.
• The company appointed professionals to
asses the land for possible residential
development.
• The market was weak, and the project was
placed on hold.
•
•
•
•
If the individual has original
intention = capital in nature; and
second intention = revenue in
nature; and
The two intentions are pursued
simultaneously then the secondary
intention would affect the primary
intention and results in profits being
taxed as income in nature.
Confirmed the Scott case.
TP = entitled to realise an asset to
the best of their advantage.
• Unless the TP embarks on an
elaborate scheme to dispose of an
asset then:
- Considered scheme of profitmaking.
- TP has ‘crossed the Rubicon’
- Proceeds = revenue in nature.
•
•
-
-
-
-
New shareholders took over and decided to
continue with the project. Again, consulting
professionals, they started developing and
selling the land.
The court concluded:
The original intention is not necessarily the
deciding factor.
From the totality of facts, it should be
assessed whether the Rubicon was
crossed.
Buying an asset as an investment and then
selling it at a profit, doesn’t indicate a
change in intention.
TP = gone over into the business of
township development on a grand scale
and thus intention has been changed.
Proceeds = revenue in nature.
Berea West – Realisation company
Facts:
• TP = company with the purpose of selling
land.
• At formation, the land was held by a
deceased land and trust.
• The executors were pressed to finalise the
estate and thus transferred the land to the
company to sell it.
• The trust beneficiaries became
shareholders of the company and the
proceeds from the sale were distributed to
them.
• Prior to the transfer, executors gave
approval for townships to be built on the
land but were subject to building roads and
water supply before individual plots could be
sold.
• Over 20 years the company sold these plots
and used the profits to develop a further
area.
• The courts concluded:
- The company was formed to sell an asset
to the best of its advantage (i.e. a
realisation company).
- TP incurred a lot of expenses to make the
sale, this is not a deciding factor, however.
- Distinguish the facts from the Natal
Estates case. Here the TP carried on a
business for selling land to generate profit.
- Receipts = capital in nature. The TP only
acted as a realisation company and didn’t
change the original intention.
•
The mere use of a realisation
company to realise a capital asset
does not indicate a change in
intention to engage in a scheme of
profit-making.
Founders Hill – Realisation Company
•
Where there is no justification for
forming a realisation company the
intention of the original entity cannot
be rolled over the realisation
company.
•
The mere decision to dispose of an
asset held as capital does not per se
subject the resultant profit to tax.
Something more is required to
metamorphose the character of the
asset and so render its proceeds as
gross income.
Facts:
• TP = formed to acquire and realise surplus
land owned by AECI Ltd. which was held as
a capital asset.
• Purpose of TP in accordance with the MOA
= realise the land to the best advantage.
• The courts concluded:
- The principle of realising the best
advantage of an asset only applies to
capital assets.
- The TP claiming it is a capital asset does
not make it one.
- TP was formed solely to trade in the
property.
- Compared to the Berea West case where
the formation of the realisation company is
justified as it would be impossible to realise
the asset without it.
- Was deemed a scheme for profit-making;
thus proceeds = revenue derived from
capital properly employed.
John Bell – Change in intention
Facts:
• TP = company that operates a textile
business from premises they own.
•
Company changed locations and the
shareholders sold the original premises.
• The property market was low; thus, the
property was rented out for 11 months and
sold for a profit once the market improved.
• Proceeds = capital in nature.
Elandsheuwel Farming
•
•
See above.
Intention of a company
Case
Richmond Estates
See above.
•
The test to determine whether a
taxpayer has gone over from
realising an asset to his best
advantage to a profit‐making
scheme is one of degree.
Principle
The intentions of a company are
evidenced by the formal acts of
directors, e.g. in the form of
resolutions.
Elandsheuwel Farming
•
And the informal acts of the
company (especially in the case of a
one-man company, where the only
director is also the sole beneficial
owner of the shares).
•
A change in shareholding may
bring about a change in the
intentions of a company, as the court
may pierce the “corporate veil”.
Meaning they can look to the profile
of the new shareholders to establish
whether there has been a change in
intention regarding the capital asset
of the company.
See above.
•
Damages and compensation
Case
WJ Fourie Beleggings
Facts:
• TP conducted business as a hotelier.
• TP concluded an agreement whereby it
would accommodate a substantial number
of persons over an extended period.
• The contract was cancelled, and the TP
received an amount for early termination of
the contract.
• The court had to decide whether the amount
received was income/capital of nature.
• The court held that:
Although the contract would’ve formed a
major source of its income, this did not
transform the contract into part of the TP’s
income-producing structure.
The income-producing structure was
made up of its lease of the hotel and its
use.
The contract was part of its business to
provide accommodation. Thus, a product
of the TP’s income-earing activities, not
the means by which it earned income.
The amount, therefore, being income of
nature.
Stellenbosch Farmers’ Winery
Facts:
• TP had a distribution agreement, which
gave the TP the exclusive right to distribute
certain whiskeys in SA for a period of 10
years.
• These sales made a significant contribution
to the TP’s profits.
Principle
A distinction must be drawn between
two types of agreements:
•
•
•
a contract directed by its
performance towards making a
profit – for example a normal lease
agreement (income of nature) and
a contract which establishes an
income-producing asset – for
example, a franchise agreement
(capital of nature)
Compensation received by the
taxpayer for premature termination
of an agreement was for the
impairment of the taxpayer’s
business by the loss of exclusive
distribution rights – capital.
•
•
•
-
-
-
Due to corporate structural changes in the
company that granted the distribution right,
the TP agreed to receive a lump sum
payment on early termination of the
agreement.
The court had to decide whether the amount
received was income/capital of nature.
The court held that:
The exclusive distribution rights were a
capital asset.
The TP, therefore, lost a capital asset.
Since the TP did not carry on the business
of the purchase and sale of rights to
purchase and sell liquor, it did not embark
on a scheme of profit-making.
The payment was, therefore, capital of
nature.
The nature of a receipt for income tax
purposes is not determined by the
accounting treatment thereof.
Tests that must be applied for damages:
•
•
•
Takes on the character of the loss.
For loss of income – compensation also income (‘hole in profit’)
For loss of capital structure – compensation also capital (‘hole in capital asset’)
THINGS TO LOOK OUT FOR: capital vs revenue in nature - Inferences from cases.
•
Nature of asset:
Shares with low dividend yield – unlikely to be capital.
Reason for purchase – resale at profit.
Undeveloped land – cannot earn income, unless there’s a strong inference that proceeds =
revenue in nature. (Exception: Nel case)
Perishable goods - normally trading stock = revenue in nature.
-
•
Nature of taxpayer:
Is followed by the nature of the asset (E.g. Land jobbers).
Personal factors: knowledge, expertise or lack thereof, age, health can be taken into account.
•
•
Financing method:
Larger amount borrowed- inference: capital in nature.
•
•
Holding period:
Long period – inference: capital in nature – unless indication of change in intention.
Short period – inference: income in nature (trading stock) – unless convincing reason for
sale.
Activities prior to realisation:
Significant activity – inference – scheme of profitmaking.
Refusal of offers – capital in nature but in certain circumstances can indicate scheme of
profitmaking.
Reason for realisation:
Asset no longer useful to trade.
Adverse changes (unusual circumstances – Nel case)
•
-
Frequency of similar transactions:
High = more likely to be trading in asset.
Low = more likely to be capital asset, but where profit-making intent is clear a lack of
frequency will not be of any assistance to TP.
Specific Transactions
Isolated transactions
Income or capital?
•
•
•
Closure of business and goodwill
•
Copyright, patents, trademarks
•
Debts and loans
•
Gambling
•
The frequency of a particular transaction
may provide a useful guide to distinguish
between income and capital.
Yet an isolated or once-off transaction is not
necessarily of a capital nature.
Real test: intention behind the transaction.
Proceeds from trading stock in the course of
winding up a business – always of an
income nature.
• Amount for sale of goodwill – capital nature
if:
purpose is to carry on business,
the goodwill is a fixed amount, and
it is not paid in the form of an annuity.
Use the same test as for any other asset.
If debts are bought with the intention of
collecting them at a profit = income in
nature.
E.g. finance houses that buy debts at a
discount and collect the outstanding
amount as profit.
• Can be capital of nature.
- E.g. a person buys a business as a going
concern, debts are thus part of the
business bought – the intention is to
generate profit with the business.
•
If gambling activities are systematically
undertaken, to the extent they become a
business or scheme of profit-making –
proceeds are income of nature. E.g.
professional gambler.
If the gambling activities are undertaken as
a means of entertainment or hobby –
proceeds are capital in nature.
Horse-racing
•
Amounts by racehorse owners and trainers
are subject to normal tax where betting is
a regular practice – possess special
knowledge.
Gifts, donations and inheritance
•
•
Capital in nature.
If sold, also capital nature, unless the asset
is sold in pursuance of a profit-making
scheme or as part of a business carried on.
Interest
•
Interest from a loan or investment of money
is income in nature.
Krugerrands
•
Subject to the same tests applicable to
other assets. (Nel case)
Restraints of trade
•
•
Payments received in respect of a restraint
of trade is capital in nature.
What he is selling is his ability to generate
further income – his capital structure.
Share transactions
•
The intention regarding which shares are
held will determine the nature of the
proceeds.
Subsidies
•
If a subsidy takes the form of a contribution
towards the producer’s cost of production =
income in nature. (Becomes part of the
floating capital of the producer.)
If the subsidy is paid as a contribution
towards the cost of fixed capital assets =
capital in nature. E.g. contribution to the
cost of a new factory.
Note: certain government grants are
exempt from normal tax.
•
•
CHAPTER 4 SPECIAL INCLUSIONS
1. Special inclusions fundamentals
•
Par (a) – (n) of the definition of ‘gross income’, section 1(1) of the ITA
includes certain amounts in gross income, even though they may be of a
capital nature.
•
These receipts or accruals are referred to as special inclusions to the
definition of ‘gross income’.
•
The special inclusions do not limit the scope of the gross income definition
and therefore items not specifically included under par (a)-(n) can still be
included in gross income by virtue of the ‘general definition’.
•
Special inclusions, however, enjoy priority over the general definition.
Overview of the special inclusions:
PARAGRAPH
Par (a)
Par (b)
Par (c)
Par (cA) & (cB)
Par (d)
DEALS WITH
Par (g)
Par (gA)
Par (h)
Par (i)
Par (j)
Annuities
Alimony or maintenance payments
Payments for services rendered
Restraint of trade payments
Lump sum benefits arising from variation of
office + lump sums from employer-owned
insurance policies
Pension, provident and retirement annuity fund
nd
benefits in terms of the 2 schedule, excluding
state pension fund transfers
State pension fund transfers
Commutation of amounts due under contract of
service
Lease premiums
Know-how payments
Leasehold improvements
Fringe benefits
Recoupments in respect of mining operations
Par (jA)
Par (k)
Par (I)
Disposal of assets similar to trading stock
Dividends or foreign dividends
Farming subsidies
Par (lA)
Amounts received by sporting bodies
Par(lC)
Government grants
Par(m)
Key-man insurance policies – amounts
received by employer policyholders
Recoupments and other inclusions
Par (e)
Par (eA)
Par (f)
Par(n)
NOTES
Ignore - HONS
Ignore - HONS
Ignore – not in
SAICA
Ignore – not in
SAICA
Ignore – not in
SAICA
Ignore – not in
SAICA
2. Annuities
•
Par (a) of the definition of ‘gross income’, section 1(1)
of the ITA includes in gross any amount received or
accrued by way of:
- An annuity
- A ‘living annuity’
- An ‘annuity amount’ as contemplated in s10A(1)
•
living annuity - a financial
product that pays you a
regular income, e.g.
retirement fund.
annuity amount - an
amount payable by way of
an annuity under an
annuity contract.
Excludes par d(ii) amounts which are proceeds of a policy of insurance
where the person is or was an employee or director of the policyholder. This is
to avoid a double tax inclusion in gross income.
Annuities with the exception of s10A are not divided into capital and income
and are taxable in full.
In order to determine the source of annuities, the place (country) where the
contract was concluded must be established (Boyd v CIR).
•
•
•
The term ‘annuity’ is not defined in the Act and principles are drawn from case
law. The Hogan case set out the following characteristics of an annuity:
-
An annual or periodical payment that would not be defeated if it were divided
into instalments;
It is repetitive (more than one such payment); and
It is chargeable against some person. (i.e. there is an obligation to pay)
KBI vs Hogan
•
•
•
•
•
•
•
•
•
TP = fireman who instituted an action for a lumpsum compensation from an insurance fund
after being seriously injured in a collision.
The fund paid for his claim for the loss of future earnings by monthly installments.
The question was whether it constituted a lumpsum, or whether one must deduct
employees’ tax from them.
There was no mention of a lumpsum payment, and the payments were on condition that he
was alive.
The funds delictual obligation to compensate was replaced by a contractual obligation to
pay installments.
Court found that: all characteristics of an annuity were met and that employee’s tax also
had to be conducted.
This was due to definition of remuneration which includes amounts referred to in the
definition of ‘gross income’.
Any person paying an annuity to another person is therefore an employer paying
remuneration and must withhold employee’s tax.
It is an annuity irrespective of whether:
- Payable for a specified number of years or lifetime.
- The amounts are fixed or variable.
•
Examples of how an annuity may arise:
-
•
Purchased from an insurance company
Granted by way of gift, donation or legacy
Received as consideration for the sale of an asset (such as a business) or
surrendering of a right.
•
NB! Inheritance, donation, sale of goodwill is capital in nature, but are
included in gross income if it takes the form of an annuity.
Settlement of debt in instalments is not an annuity.
•
When is an amount considered an annuity?
Does not constitutes an annuity
The annual payment of instalments,
in terms of a transaction of a capital
nature with an ascertainable price.
Constitutes an annuity
Contractual obligation to make
regular either monthly or annual
payments for life or fixed period.
If a pension paid by an employer to
the widow of the employee and it is
terminable it is not an annuity.
If it is a life pension, then constitutes
an annuity as the employer has
bound himself.
Voluntary amounts payable in terms
of discretion are gifts.
Fixed annual amounts payable out
of the residue of an estate i.t.o. a
will. Regardless of whether it was
payable for a specific number of
years or for the lifetime
‘‘A man may sell his property for a sum which is to be paid in instalments, and when you see that
that is the case, that is not income or any part of it. . . A man may sell his property for what is an
annuity, that is to say, he causes the principal to disappear and an annuity to take its place. If you
can see that that is what it is, then the Income Tax Act taxes it’ (Jones v CIR)
3. Alimony payments
•
Par (b) of the definition of ‘gross income’, section 1(1) of the ITA includes the
following amounts:
- Payable to TP by a spouse or former spouse of TP.
- Alimony or allowance or maintenance of TP by a judicial order or written
agreement of separation or order of divorce; or
- Amounts in respect of the maintenance of the child i.t.o. maintenance order.
•
Alimony payments are normally paid monthly from the after-taxed income of
the paying spouse.
•
There is an ‘unconditional entitlement’ to the payment, therefore the inclusion
in gross income is not dependent on whether the spouse pays or not.
•
Tax consequences of all alimony or maintenance payments are as follows:
For whom
Paying spouse
Receiving spouse
Divorce on or before 21
March 1962
Section 21 deduction
Divorced after 21 March
1962
No deduction S7(11)
inclusion in income if the
minimum individual
reserve was reduced in
terms of a maintenance
order.
Par (b) inclusion in gross
income
Par (b) inclusion in gross
income and s10(1)(u)
exemption (for both
monthly amounts and
s7(11) amounts received).
4. Services
•
Par (c) of the definition of ‘gross income’, section 1(1) of the ITA includes:
•
Amounts received or accrued in respect of:
-
-
Services rendered or to be rendered (including voluntary reward); or
Employment or the holding of an office (but not ss 8(1), 8B or 8C
amounts). Such amounts are included in taxable income (s8(1)) and
income ss 8B and 8C). These are then later included in gross income by
par(n).
but not: par (i) fringe benefits, excluded due to (proviso (i) par (c)).
•
When is it taxable? Amounts received for services rendered are taxable in
the year in which the amount is received or accrued irrespective of the period
to which the services relate.
•
‘Services rendered or to be rendered’: taxpayers are taxed on the full
amount, regardless of when the services were rendered. E.g. the full amount
of salary paid in advanced will be included, even if services are only rendered
later.
•
•
Consideration paid for entering into a contract is also included.
There must be a causal relationship between the amount received and
services rendered.
Additional awards such as bonuses are included regardless of whether or not
there is a contractual obligation.
•
•
Proviso (ii): The amount received by a person for services rendered by
another person is specifically included in gross income of the person who
rendered the services.
Leave is a condition of service and is included in gross income and is taxed
(not part of a severance benefit).
•
•
In the Stevens vs CSARS case:
•
•
•
An ex gratia payment was made (by moral obligation, there was no legal requirement to do
so) by the company to the taxpayer, to compensate the taxpayer for the loss of a share
option when the company was voluntarily liquidated.
It was held that the payment was linked directly to the tax payer’s services and
employment and therefore the receipt will fall within par(c).
See example 4.1 (p. 63)
- Always look at causal relationship between services rendered and amounts received =
included.
- E.g. ‘tips’ received, although voluntary amounts, it will be included by virtue of par(c)
because of the causal relationship. (Voluntary award specifically included.)
5. Restraint of trade
•
Par (cA) of the definition of ‘gross income’, section 1(1) of the ITA includes in
gross income any restraint of trade payments received by a person who:
-
•
Is a ‘labour broker’ without a certificate of exemption, or
Is a ‘personal service provider’, or
Is a ‘personal service company’ or a ‘personal service trust’.
The right to trade freely is a capital asset, therefore, the right to trade freely is
an incorporeal asset and the compensation paid for the loss of such a right
is a receipt of a capital in nature.
Amounts received from these persons, will therefore be included in gross income irrespective of
whether it is capital in nature or not.
Restraint of trade payments of a capital nature received by companies or trusts, that are not
personal service providers will not form part of gross income.
•
Par (cB) also includes restraint of trade payments received by or accrued to
any natural person with regards to:
-
•
Any past, present or future employment or
The holding of an office.
A restraint of trade payment received by a natural person that does not
relate to employment, will not be included in gross income.
- E.g. if a natural person sells his business as a sole proprietor and the buyer
places a restraint of trade, it will not be included as it is capital in nature.
•
The payer of a restraint of trade will be allowed to claim a reduction under
s11(cA) provided that the recipient is taxed under par(cA).
- 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.
•
A restraint of trade payment is not a payment for services rendered, but a
payment for an undertaking not to render services (in competition with the
payer).
6. Services: Compensation for termination or variation of employment
•
Par (d) of the definition of ‘gross income’, section 1(1) of the ITA includes
amounts in respect of the termination or variation of any office or employment.
•
Par (d)(i): In the case of the relinquishment, termination, loss, repudiation,
cancellation or variation in office or employment by the employer or
associated institution:
-
it must be determined whether it also meets the requirements of a
severance benefit.
This will determine in which column of the subtotal method the amount is
included and in terms of which tax table the normal tax thereon must be
calculated.
If an amount is received under par(d)(i) it must be determined whether it meets the requirements of
a severance benefit.
•
Par (d) also includes amounts received as a result of employer-owned
policies of insurance that are paid out or ceded. As provided in:
-
Par (d)(ii): Proceeds of the policies of insurance directly or indirectly paid to
an employee, dependent or nominee.
Par (d)(iii): Policy of insurance ceded to an employee, dependent or
nominee (except where the policy is a risk policy with no cash value or
surrender value).
•
Proviso (bb): amounts that become payable as a consequence of a person’s
death is deemed to be an amount that accrued to him immediately prior to his
death and is therefore included in gross income for the period ending on the
death date.
•
Proviso (cc): Amounts paid or ceded to a dependent or nominee are deemed
to be received by or accrued to the employee. This results in the employee
including the amount in their gross income, even if the dependent or nominee
receives the money.
•
Amounts that fall within the terms of par(d):
- The unexpired portion of a contract received by an employee from the
employer for the breach of a contract.
- Payment made by a company for the resignation of a managing director.
- Payment made by a company to the managing director for the acceptance
of a smaller salary in future or to surrender future rights for a pension.
- The amount received by a director for surrendering his right to a permanent
directorship.
- Compensation paid for the death of any person due to activities related to
the employment activities.
- An asset given to an employee upon retirement.
•
Par (d) specifically excludes par (a) annuities which therefore in effect
applies to lump sums except i.t.o par(d)(ii).
•
Remember: insurance pay-outs received by employers are included in gross
income under par(m). Whereas par(d)(ii) and par(d)(iii) are aimed at insurance
pay-outs received by or ceded to employees.
Tax scale for severance
Severance benefits: par (d)(i) lump sum if one of the following
requirements are met:
-
benefits: see pg. 373
under point (c)
NB! Accumulated leave
pay-outs are par (c) and
not par (d) inclusions.
The person is 55 years of age, or
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
- The person’s employer:
▪ Has ceased to carry on or intending to cease carrying on the trade-in
respect of which he or she was employed or appointed, or
▪ Made a general reduction in personnel or a reduction in personnel of a
particular class and he or she has become redundant in consequence
thereof.
• Although severance benefits are included in gross income, they are subject
a different tax scale.
• It will be included in column 1, except if the employee held more than 5% of
the issued share capital in the company then it is included in column 3.
•
The taxability of the two types of par (d)(i) amounts can be summarised as
follow:
TYPE
Par (d)(i) amounts that don’t meet
requirements of the definition of
severance benefit
Par (d)(i) amounts that meet
requirements of the definition of
severance benefit
TAXABILITY
Include in gross income in column 3
Tax in terms of the progressive tax
table applicable to the taxable income
of a natural person.
Include in gross income in column 1
Tax in terms of the separate table
applicable to severance benefits.
Students are advised to keep SB in a separate column, together with retirement fund lumpsum
benefits) when calculating the taxable income of a natural person. This is because the normal tax
payable on such amounts are calculated separately in terms of the same tax table applicable to
both amounts.
7. Services: Communication of amounts due
Par(d) = any “office or employment.”
Par(f) = “any contract of employment
or service.”
• Par (f) of the definition of ‘gross income’, section 1(1) of the ITA includes:
- any amount received or accrued in commutation (substitution) of amounts
due under a contract of employment or service in gross income.
• Commutation: when a person substitutes his right to receive a certain benefit
with a right to receive another benefit.
• Example: An employee may substitute his right in terms of his service
agreement to be given notice before the termination of his services for a cash
payment.
• The above mentioned can also be a severance benefit if it meets all the
requirements.
8. Lease premiums
• Par (g) of the definition of ‘gross income’, section 1(1) of the ITA states that:
- If an amount is considered a lease premium, then the whole amount is
included in the gross income of the lessor in the YOA it is received or
accrues to.
Irrespective of whether the amount is capital or revenue in nature.
• Lease premiums are amounts paid by the lessee to the lessor. (NB! not vice
versa)
• Lease premiums must have an ascertainable monetary value.
• Par (g) does not make provision for spreading the lease premium amount.
(However, s11(h) may provide relief in certain circumstances – covered in
Tax 398).
• The same amount that is deductible by the lessee paying the lease premium
(s 11(f)), is the amount that will be taxable in the hands of the lessor (i.t.o.
par(g))
• What are lease premiums?
-
-
-
Amounts paid by the lessee to the lessor (NB! not vice versa), 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 (Butcher Bros).
Must have an ascertainable monetary value.
Lease premium: normally (but not necessarily) takes the form of a cash
lump sum payment at the commencement of the lease and is not
refundable at the end of the lease period.
Also applies to a premium passing from a sub-lessee to a sub-lessor (the
principle lessee). This is when the lessee sublets an asset to a sub-lessee.
• What are not lease premiums?
-
Rental deposits (purpose generally to cover potential damages – not for use
or occupation or right to use or occupy and is usually refundable at the end
of the lease period).
-
Up-front rental payments (‘Bullet-rental’ – is generally for the use or
occupation or right of use or occupation but is not in addition to or in lieu of
rent – remains rent in nature).
-
If a lessee cedes his right to a 3rd party, the amount is not a lease premium.
This does not meet the requirement of a lease premium that payment must
pass from a lessee to a lessor and won’t be included in the gross income of
the original lessee due to it being a capital nature.
• Amount deductible by the lessee paying the premium:
LESSOR
Gross income par(g)
Include the full amount in one
year.
• Example:
LESSEE
S 11(f) deduction
Spread the deduction over the
lease period.
9. Compensation for imparting knowledge and information
•
Par (gA) of the definition of ‘gross income’, section 1(1) of the ITA defines it
as:
- An amount received or accrued to
- From another person as consideration, for the imparting of, or the
undertaking to impart, knowledge or information, or
- For the rendering of, or the undertaking to render, any assistance or service
in connection with the application or utilisation of such knowledge or
information.
• ‘Know-how’ payments for imparting any scientific, industrial or commercial
knowledge or information, e.g. technical advisory.
• Such an amount is taxable in full in the year of accrual or receipt.
• Imparting = disclosing or communicating.
• The imparting of information must be distinguished from the sale of
copyrighted written material. The latter is not the ‘imparting’ of information
unless the written material is provided as part of a training course.
10. Leasehold improvements
• Par (h) of the definition of ‘gross income’, section 1(1) of the ITA:
- ‘Improvement’ = an addition or alteration which increases the quality or
value of something.
- The value of improvements effected on the land or to the buildings of
the lessor (owner) is included in the lessor’s gross income.
• Requirements:
-
Lessor must have a right to have the improvements effected to his property.
An agreement must exist where the lessee is obliged to effect the
improvements.
• When?
-
-
The right to have the improvements effected accrues when the lessor
acquires the right. The lessor acquires the right on the date when the lease
agreement is signed.
If the amount is stipulated in the lease agreement, the amount is included in
the lessor’s gross income in the YoA when the parties sign.
If the amount is not specified in the lease agreement, the date of
completion of the improvement is the date of accrual because the amount
can only be determined at this point in time.
•
Amounts included in the gross income of the lessor are:
-
•
The amount stipulated in the agreement as the value of the improvements,
or
The amount stipulated in the agreement as the amount to be expended on
the improvements, or
If no amount is stipulated, an amount representing the fair and reasonable
value of the improvements.
•
Always use the agreed-upon amount, and not the actual. Even if the lessee
spends less, still include the full amount agreed upon.
Fair and reasonable value: depends on the facts and circumstances of the
case, however, in several cases, the fair and reasonable value may be equal
to the cost of the improvements.
•
What happens if lessee spends more than the stipulated amount?
-
•
Only the amount stipulated in the agreement is included in gross income of
lessor.
The lessee can spend more than the stipulated amount, but the excess is
voluntary expenditure which is not part of the right to have improvements
affected that accrued to the lessor under par(h).
What happens if the lessee spends less than the stipulated amount?
-
Only the amount stipulated in the agreement must still be included in the
lessor’s gross income.
• What if the agreement has a stipulated minimum amount?
Stipulated minimum amount and
no more
Stipulated minimum amount and
specific improvement
If there is no obligation on the lessee If there is an obligation on the lessee
to effect improvements in excess of
to incur a stipulated minimum
the stipulated minimum amount:
amount (e.g. not less than R1 000
000) to effect specific
- Treat ‘stipulated minimum amount’
improvements (e.g. to construct a
as a ‘stipulated amount’ for the
specific type of building such as a
purposes of par(h).
hotel):
- Therefore: Specified minimum
value included in gross income.
- Treat ‘stipulated minimum
amount’ as if no amount has
been stipulated for purposes of
par(h).
- Therefore: Fair and reasonable
value included in gross income.
Fringe benefits will be covered in Chapter 8, until then, the
value of the cash equivalent will be stated in assessments.
11. Fringe benefits
•
Par (i) of the definition of ‘gross income’, section 1(1) of the ITA.
- Only applies to employee or officeholders.
- Par(i) overrides par(c) and any benefit or advantage to which par(i) applies
can thus not be considered for par(c) – proviso (i).
- Par(i) doesn’t take voluntary amounts into account unlike par(c).
•
If an employer releases an employee from an obligation it constitutes a fringe
benefit.
• Benefits and advantages received by the employee from the employer that
normally do not consist of cash.
• Cash equivalent is included in gross income. The calculation of cash
equivalents is governed by the 7th schedule.
• Example: Employee is awarded the right to use an employer’s motor vehicle.
This is where the benefit cannot be turned into money value.
12. Proceeds from the disposal of certain assets
•
Par (jA) of the definition of ‘gross income’, section 1(1) of the ITA refers to:
- The disposal of any asset manufactured, produced, constructed or
assembled. Cannot be purchased.
- And is similar to any trading stock used for the purposes of manufacture,
sale or exchange.
•
If for example a company manufactures motor vehicles and uses some as
demo models (fixed capital assets and not trading stock), the sale will be
capital in nature.
But if these assets are similar to the trading stock of the company it will be
included in gross income.
•
Additional example:
• A manufacturer uses one vehicle in the business as a demonstration model (with a CP of
R250 000 in 2018) and gave the right of use of a similar vehicle to an employee as a fringe
benefit (during 2018 YoA).
• The assets are both disposed of during 2019 for R280 000 per vehicle.
• The following will occur:
The assets will be included in the 2018 C/B and 2019 O/B at a cost of R250 000 per
vehicle.
The full proceeds from the vehicles (R280 000) are included in gross income par(jA) due to
it being similar to the company’s trading stock.
13. Dividends
•
•
•
Par (k) of the definition of ‘gross income’, section 1(1) of the ITA.
Distinguish between local and foreign dividends (in section 1(1) of the ITA).
Refer to previous chapters on sources.
Also extends to dividend species. E.g. distributing stock instead of cash as
dividends. It is still the fruits of the shares and therefore is income in nature.
14. Key-man insurance policy proceeds
Par(d) = employee is the beneficiary
Par(m) = business/employer is the beneficiary
•
•
Par (m) of the definition of ‘gross income’, section 1(1) of the ITA.
Employers hedge themselves against risks (such as a decline in profits) that
relate to the death, disablement or illness of an employee or a director.
•
Amounts received by or accrued to the policyholder (employer) in respect of
key-man insurance policy are included in gross income, including amounts
received by way of any loan or advance.
•
The final amount paid out must be reduced by the amount of any loan or
advance that is or has previously been included in the employer’s gross
income (proviso to par (m)).
If the employee dies, the policy proceeds are paid to the employer and he
must include this amount in his gross income.
•
15. Amounts included in the taxpayer’s income
-
•
Par (n) of the definition of ‘gross income’, section 1(1) of the ITA.
- Include all amounts in gross income that are specifically included in a
taxpayer’s ‘income’ through other provisions of the ITA.
- These amounts are further deemed to have been received by or accrued
to the taxpayer.
•
Examples:
- ss 7(2) and 7(3) – Chapter 7
- s8C – Chapter 8
- s8(4) – Tax 399 (further deemed to be from source in RSA)
Do not need to know these sections in detail.
They cause an amount to be included in income but not in gross income.
And then if it is included income, it will be included in gross income due to par(n).
Guidance on section referencing
Example when referencing:
Special inclusion
• Par(d) of the definition of gross income in section 1(1) of the ITA.
General definition
• General definition of gross income in section 1(1) of the ITA.
CHAPTER 5 EXEMPT INCOME
1. Exemption fundamentals
Know differences: income vs. gross income vs. taxable income
Section 1(1) of the Income Tax Act: definition of ‘income’:
Gross income less exempt income equals income
•
Include an amount in gross income even if the full amount or a portion
thereof will qualify for an exemption.
•
Include the amount in gross income and then exempt the amount (if
applicable). Do not include a net amount in gross income i.e. amount
received or accrued less exemption.
•
Majority of exemption provisions are contained in s10 of the ITA.
•
Exempt income refers to amounts ‘received’ or ‘accrued to’ that are not
subject to normal tax.
•
However, not all amounts that qualify for an exemption are exempt from all
taxes, the amounts referred to under s10 of the ITA are only exempt from
normal taxes.
•
Normal tax: taxes imposed under ss5 to s37H of the ITA.
•
Section 23(f): No deductions i.r.o exempted amounts (revise with chapter 6).
If you correctly include an amount in gross income but proceed to incorrectly exempt it, you forfeit
the marks awarded for the gross income inclusion (see appendix A of module framework).
TEST
2. Exemptions incentivising investments
A. Interest received by natural
persons s10(1)(i)
Resident and non-resident natural
persons.
Not for juristic persons such as
companies or trusts.
B. Interest received by nonresidents s10(1)(h)
Non-residents (any person), i.e.
natural and juristic persons.
For what
Interest received or accrued from an
RSA source (s9(2)(b)(i) & (ii)).
Not for foreign interest.
Interest received or accrued from an
RSA source (see s9(2)(b)(i) & (ii)).
Amount
Depends on TP age:
• 65 or older = R34 500
• Other: R23 800
(see below)
No limit. All interest is exempt.
Not applicable
to
To interest received in respect of a
tax-free investment as defined in
s12T.
•
Available to
s10(2)(b): Does not apply if
interest takes form of an annuity.
•
•
s10(1)(h)(i): Physical presence
s10(1)(h)(ii): Permanent est. of
non-resident in RSA.
(see below)
•
s10(1)(i) provides an exemption for interest as long as it does not exceed:
(i) R34 500 (for someone who is 65 years of age); or
(ii) R23 800 (for any other case)
•
The normal tax exemption for interest received by non-residents (s10(1)(h))
does not apply in the case of a:
natural person
- who was physically present in SA 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 (s10(1)(h)(i)); or
- if the debt from which interest arises is effectively connected to a permanent
establishment of that person in SA (s10(1)(h)(ii))
any other person
- if the debt from which interest arises is effectively connected to a permanent
establishment of that person in SA.
Integration with WHT
- Interest received by a non-resident is not tax-free since it may be subject to 15% WHT on
interest.
- In the case of a non-resident, if none of the above normal tax exemptions apply, the foreign
person will be exempt due to WHT on interest (s50D(3)).
C. Amounts received from tax-free investments
Applicable to
Section 12T
Natural persons (or a deceased or insolvent estate of
such a person).
Death or insolvency
S12T(1) If someone dies, the person’s TF investments
will be added to their estate but the returns will be
exempt from income and dividend tax.
Exemption
S12T(2) Exempts from normal tax any amounts received
i.r.o the tax-free investment (dividends, interest, profit
arising from the disposal of the underlying investments).
Note: Unlike s10(1)(i), s12T(2) does
not place a limit on the interest amount
that can be exempted.
Investment limit under s12T(4)
S12T(3) excludes any capital gain or capital loss i.r.o
the disposal of the tax-free investment, i.e. capital gain or
loss is disregarded for CGT purposes.
R33 000 per year; and
R500 000 per lifetime
The TP may have more than one tax-free (TF)
investment, but then the limit applies in respect of the
total of all TF investments.
Annual and lifetime limit not affected by reinvestments of
interest received or transfers between TF investments
(s12T(5))
If investment limit is exceeded
under 12T(7)(a) and (b)
Penalty: 40% of the excess contribution will be deemed
to be normal tax payable.
Excess x 40% = normal tax payable
In both cases, all proceeds received from TF investments
will be exempt from tax despite exceeding the limits.
Service providers may no longer accept contributions
over and above the limitations.
The scenario will state whether or not the investment is a tax-free investment as defined in s12T.
Section 64F - HONS
Dividends in respect of a 12T investment also exempt from dividends tax.
D. Purchased annuities s10A
•
S10A: Exempts capital portion of an annuity amount that has been included
in gross income under par (a) of the definition of gross income in section 1(1)
of the Act.
The capital element is calculated in accordance with a formula, however, this
amount will be provided for assessment purposes
Purchased annuities are annuities that are bought from an insurer for a
lump-sum cash consideration.
•
•
•
Excluded from S10A:
- Annuities from pension
- Provident and retirement annuity funds
- Inherited or donated annuities
- Annuities originating from the sale of a business or asset
- Annuities from services rendered
•
•
If the question doesn’t state a capital
portion, then this section cannot apply.
S10A(1) deals with the purchaser:
A natural person or his deceased or insolvent estate or,
A curator bonis of, or a trust created solely for the benefit of any natural
person.
S10A(2) deals with the requirements of an annuity contract:
- The insurer agrees to pay the purchaser or purchaser’s spouse until the
expiry of the term.
- Purchaser agrees to pay a lump sum cash consideration
- No other amount can be payable to the insurer, besides that of the annuity.
E. Proceeds from insurance policies
The Explanatory Memorandum on the Taxation Laws Amendment Bill, 2011, provides the following
background to the insertion of para 12C in the Seventh Schedule:
•
•
As per the Explanatory Memorandum: the proceeds from the employerowned insurance policy (employee is intended to directly or indirectly
benefit) can be structured in one of two ways:
i.
The employee = direct beneficiary, resulting in the proceeds being paid
directly by the insurer to the employee; or
ii.
The employer = beneficiary under the policy and the proceeds are paid
out by the insurer. There is a corresponding obligation on the employer to
pay over the proceeds to the employee. This structure effectively leaves
the employer in a neutral position with the benefit being received by the
employee.
s10(1)(gG) and s10(1)(gI) determine when the proceeds received in respect
of certain insurance policies can be exempted.
TAX CONSEQUENCES RELATING TO
PROCEEDS RECEIVED OR ACCRUED
PAY-OUT ON DEATH, DISABLEMENT, ILLNESS
Employer = both
policyholder and
beneficiary
Person other than an
employer =
policyholder
Proceeds from an
insurance policy relating
to the death,
disablement, illness or
unemployment of any
person who is insured
i.t.o the policy, including
an employee of the
policyholder, are exempt
(s(10(1)(gl)). Note 3
Proceeds from an
insurance policy
relating to the death,
disablement, illness or
unemployment of any
person who is insured
i.t.o the policy,
including an employee
of the policyholder, are
exempt (s(10(1)(gl)).
Note 3
10(1)(gl)
Key-man insurance policies:
Links with par(m) of the gross
income definition in sec 1(1).
Note 3
• Some of these policies are capital in
nature and therefore not taxed, however
in the case of an income protection
policy and annuities paid i.t.o a policy,
the proceeds would be included in
gross income.
• Proceeds from life and disability policies
are treated the same.
• S10(1)(gl) applies to a policy of
insurance relating to the death,
disablement, illness or unemployment of
a person who is an employee of the
policyholder.
• But it does not apply if the benefits are
payable to a retirement fund.
Employee/his
beneficiaries =
directly or indirectly
receive a benefit
If proceeds accrue to
the employee, they are
included in the
employee/director’s
gross income
par(d)(ii) of ‘gross
income’ but are then
exempt under
s10(1)(gG). Note 4
10(1)(gG)
Par d(ii) and (iii) of the GI
definition in sec1(1).
Note 4
Par(d)(ii) of gross income applies when:
- An employer = the policyholder and the
employee or dependent or nominee of the
employee is the beneficiary under the
policy;
- A company = policyholder and a director of
the company or its dependent or nominee is
the beneficiary under the policy;
- An employer (or company in case of a
director) is the policyholder and beneficiary
under the policy but is contractually obliged
to pay proceeds under the policy to the
employee or director, or his or her
dependents or nominee.
3. Exemptions relating to dividends
•
Different exemptions for RSA source and foreign dividends. Dividends as a
general rule are generally exempt from normal tax.
•
Dividends = distribution of a company’s after-tax profits.
A. Dividends from resident companies s10(1)(k)(i) – “local dividends”
Normally exempt, but not if:
S10(1)(k)(i)
proviso
(aa)
•
•
•
Dividend received by a resident from a Real Estate Investment Trust (REIT) = fully
taxable but not exempt in the hands of the recipient.
Dividend from REIT deemed, in essence, to be rental income therefore not exempt.
(dd)-(ii)
Not in syllabus (ignore Silke 5.3.3 – 5.3.7)
(jj)-(kk)
-
Honours
If dividend constitutes a portion of an annuity refer s10(2)(b)
The nature of the taxpayer is irrelevant – s10(1)(k)(i) available for natural and juristic persons.
S10(1)(k)(i) available for residents and non-residents.
Dividends declared by a resident company are regarded as being from a source within RSA
s9(2)(a). If a non-resident then receives dividend it is included in their gross income, but then
exempt under s10(1)(k)(i).
B. Foreign dividends
•
•
•
Section 10B contains full and partial exemptions - Ignore headquarter companies.
See definition of ‘foreign dividend’ in s10B(1) of the ITA.
Include full foreign dividend, then exempt full foreign dividend if it meets all the requirements,
and if not apply s10B(3).
THE FOLLOWING FOREIGN DIVIDENDS ARE FULLY EXEMPT
S10B(2)(a)
Participation exemption (Ignore exclusion in ss10B(4) and (6))
An amount will be exempt if:
•
The person receiving the foreign dividend
holds ≥10% of equity shares and voting rights
The recipient of the foreign dividend is a
company, any interest held by another
company in the same ‘group of companies’
(s 1) is added to the 10%.
•
S10B(2)(b)
Country-to-country exemption (Ignore)
S10B(2)(c)
Controlled foreign company (CFC) exemption (Ignore)
S10B(2)(d) and
(e)
Dividends declared in respect of JSE-listed shares are exempt from normal
tax if:
a) The shares are listed on JSE and are not distribution of an asset in specie.
b) From 1 March 2014: It is a foreign dividend in the form of an in-specie
distribution received in respect of JSE listed share by resident company
(not apply to a natural person).
Only if a foreign dividend is not fully exempt, then consider the partial exemption in 10B(3):
S10B(3)
Ratio exemption
Only applies to the extent that a foreign dividend is not exempt in terms of
10B(2)(a) – (e). Then it is calculated as follows:
•
Natural person, deceased, estate or trust (thus not companies):
𝟐𝟓
𝒙 𝒇𝒐𝒓𝒆𝒊𝒈𝒏 𝒅𝒊𝒗𝒊𝒅𝒆𝒏𝒅
𝟒𝟓
•
Any person not mentioned in (i) and an insurer of policy funds:
𝟖
𝒙 𝒇𝒐𝒓𝒆𝒊𝒈𝒏 𝒅𝒊𝒗𝒊𝒅𝒆𝒏𝒅
𝟐𝟖
Given in act as above, however calculated as:
𝑴𝒂𝒙 𝒎𝒂𝒓𝒈𝒊𝒏𝒂𝒍 𝒓𝒂𝒕𝒆 − 𝟐𝟎% (𝒅𝒊𝒗𝒊𝒅𝒆𝒏𝒅 𝒕𝒂𝒙)
𝑴𝒂𝒙 𝒎𝒂𝒓𝒈𝒊𝒏𝒂𝒍 𝒓𝒂𝒕𝒆
Examples:
• Natural persons or trusts: (45–20)/45
• Company: (28-20)/28
S10B(5)
Exemptions in 10B(2) & (3) do not apply in respect of any portion of an annuity
4. Exemptions relating to employment
A. Foreign pension
•
Any foreign pension will be included in the gross income of a resident. Certain
foreign pensions are, however, exempt from normal tax, such as
•
s10(1)(gC)(i)
- Exempts any amounts received by or accrued to any resident under the
social security system of a foreign country; or
•
s10(1)(gC)(ii)
- Any lump sum, pension or annuity received by or accrued to any resident
from a source outside the RSA, as consideration for employment outside
RSA.
- Source = where services where rendered.
- Only applicable to amounts received from foreign funds.
•
An apportionment of the amount must be made if services were rendered
both inside and outside the RSA:
𝐴𝑚𝑜𝑢𝑛𝑡 𝑓𝑟𝑜𝑚 𝑠𝑜𝑢𝑟𝑐𝑒 𝑜𝑢𝑡𝑠𝑖𝑑𝑒 𝑅𝑆𝐴 =
𝑃𝑒𝑟𝑖𝑜𝑑 𝑑𝑢𝑟𝑖𝑛𝑔 𝑤ℎ𝑖𝑐ℎ 𝑠𝑒𝑟𝑣𝑖𝑐𝑒𝑠 𝑤𝑒𝑟𝑒 𝑟𝑒𝑛𝑑𝑒𝑟𝑒𝑑 𝑜𝑢𝑡𝑠𝑖𝑑𝑒 𝑅𝑆𝐴
𝑇𝑜𝑡𝑎𝑙 𝑠𝑒𝑟𝑣𝑖𝑐𝑒 𝑝𝑒𝑟𝑖𝑜𝑑
x Total amount received
B. Unemployment insurance benefits
•
s10(1)(mB): Exempts unemployment benefits in the hands of the recipient.
The Unemployment Contributions Act stipulates that both the employee and the employer have to
make contributions to the Unemployment Insurance Fund. If the employee subsequently losses
their job the employee can claim unemployment benefits for a prescribed period of time.
C. Uniforms and uniform allowances
•
s10(1)(nA): Benefits granted by the employer to the employee are included in
the employee's gross income. Therefore, the cash equivalent of a special
uniform will be included.
• The exemption equally applies to any allowance that the employer pays to the
employee instead of giving the employee a uniform.
• It is however exempt if:
- Clearly distinguishable from ordinary clothing and
- The employee is required to wear a uniform on duty.
D. Relocation benefits
•
s10(1)(nB): Where an employer pays for the relocation cost of the employee
when he or she is transferred. The benefit accruing to the employee will be
exempt. (Same for new employee appointed and termination of an
employee’s employment.)
•
Expenses that are included:
-
•
Transport costs for transporting the employee, family or possessions.
Costs of the employee to settle in a new house and sell his previous
residence.
Hiring residential accommodation for the employee or household
members for a maximum period of 183 days after the transfer took place. It
must however only be temporary.
Exemption for the reimbursement is given on the following:
•
New school uniform
Replacement of curtains
Registration of mortgage bond and legal fees
Telephone, water and electricity
Transfer duty
Cancellation of a mortgage bond
Agent’s fee on the sale of the employee’s previous home
The employer must have either incurred the expenses himself or
reimbursed the employee. The exemption has no monetary limit, as long as
the expense was actually incurred.
SARS won’t accept a loss on the sale of the employee’s previous house or
architect’s fees for designing or alterations.
Only actual expenses are exempt, thus if an allowance is paid according to
the number of months of relocation, the amount will be fully taxable in the
hands of the employee, unless there is an intention for the employer to
reimburse for the actual allocation of expenses.
•
•
E. Employment outside RSA
•
s10(1)(o)(ii): Exempts any remuneration (i.e. salary, leave pay, wages,
overtime pay, bonuses, commissions, fringe benefits etc.) received or accrued
in respect of services rendered outside RSA, for or on behalf of any
employer if that person was outside RSA for:
-
A period or periods exceeding 183 full days in aggregate during any 12month period and,
For a continuous period exceeding 60 full days during such period of 12
months and,
Services were rendered during the period of absence from RSA and,
•
•
Services were rendered for or on behalf of an employer who can be located
in or outside RSA.
Proviso (A): Days in transit through RSA are deemed to be outside RSA.
Proviso (C): If remuneration is received in respect of services rendered in
more than one YoA, remuneration is deemed to have accrued evenly.
Summary
•
S10(1)(o)(ii) – requires the existence of an employer-employee relationship. The services
rendered outside SA must be rendered on behalf of an employer.
•
The remuneration received must be for services rendered – amounts payable by an ER to an
EE that do not relate to services rendered do not qualify for the exemption e.g. payments for
relinquishment, termination, loss of office (severance benefits).
•
183-day requirement:
Full days (24 hours)
Count calendar days (not only workdays) – includes weekends, public holidays, annual
leave days, sick leave days that are spent outside the RSA.
- Days need not be continuous.
- If you remain in the country after you’ve finished rendering the services, it doesn’t count
towards the 183 days.
-
•
•
•
•
SARS supporting documents (onus of proof = on TP)
Letters of secondment, employment contracts, copies of passports etc.
Apportionment must be done in workdays and not in months. (Requirements=calendar days)
Services inside SA cannot qualify.
Limitation of R1 000 000 will apply from 1 March 2020 – therefore not relevant to the 2019
YoA.
5. Exemptions that incentivise education
s10(1)q vs. s10(1)qA: Bursaries for people with
disabilities vs. those without.
A. Bursaries and scholarships
•
•
Bursaries awarded to non-employees, employees and relatives of employees
are treated differently.
A reward or reimbursement of study expenses borne by a person, after the
completion of studies = does not qualify as it is not to ‘enable’ or ‘assist’ a
person to study.
BURSARIES AND SCHOLARSHIPS REQUIREMENTS (s10(1)(q))
Non-employees and not
Employee
Relative of employee
relative of employee
Exempt
when:
• Bonafide bursary.
• Granted to enable or
assist a person to
study.
• At a recognised
educational or
research institution.
• Bonafide bursary.
• Granted to enable or
assist EE to study.
• At a recognised
educational or research
institution and.
• Bonafide bursary.
• Granted to enable or
assist relative of EE to
study.
• At a recognised
educational or research
institution and,
Limit:
None
• The employee agrees
to reimburse the
employer if fails to
complete for reasons
other than death, ill
health or injury.
• The employee’s
remuneration proxy does
not exceed R600 000.
None
•
•
•
Grades R-12: R20 000
NQF 1-4: R20 000
NQF 5-10: R60 000
(Note: per relative)
‘Remuneration proxy’ – this amount will be provided per SAICA’s examinable pronouncements.
Relative (s1) – “in relation to any person, means the spouse of that person or anybody related to
that person or that person’s spouse within the third degree of consanguinity…”
B. Bursaries and scholarships (s10(1)(qA)
•
Definition of disability in section 6B(1) requires that the injury must have
been or will be for longer than a year and is diagnosed by a medical
practitioner.
• Same requirements as s10(1)(q) but a different threshold.
• Threshold:
- Grades R-12: R30 000
- NQF 1-4: R30 000
- NQF 5-10: R90 000
6. Exemptions aimed at amounts that are subject to withholding tax
A. Interest paid to non-residents
•
Refer back to s10(1)(h) in and chapter 21 notes.
s10(1)(h) Interaction between exemptions and withholding taxes on interest.
- Interest paid to a foreign person is subject to 15% withholding tax on
interest, if:
▪ Interest is from a SA source.
▪ SA source = interest paid by a resident (unless the interest is attributable
to a permanent establishment outside SA). (s50B – chapter 21)
▪ Is received or accrued in respect of any funds used or applied by any
person in SA. (s9(2)(b) – chapter 3)
7. Other exemptions
A. Alimony and maintenance
•
•
•
•
s10(1)(u): Exemption for an amount received i.t.o. alimony or allowance granted
or agreement of separation entered into after 21 March 1962.
The amount will be gross income of the receiver (par (b) of the definition of
‘gross income’, section 1(1)).
Does not apply when there is a s7(11) deduction.
The amount can only be claimed if the former spouse paid the alimony from
after-tax income.
B. War pensions and awards for diseases and injuries
10(1)(g)
SECTION
WHAT IS EXEMPT?
War pension and awards or compensation for
diseases contracted through mining.
10(1)(gA)
Disability-pensions
10(1)(gB)(i)
Workmen’s compensation
10(1)(gB)(ii)
Pensions paid due to occupational-related
injuries or illnesses contracted before 1 March
1994.
10(1)(gB)(iii)
Any compensation paid by an employer on the
death of a person (death is caused by
employment) over and above Workmen’s
compensation.
The amount is restricted to a maximum
exemption of R300 000.
The compensation received from the Road
Accident Fund (within South Africa)
10(1)(gB)(iv)
CHAPTER 21 CROSS-BORDER TRANSACTIONS
1. Principles of South African taxation of cross-border transactions
Residence vs. source-based tax system
Cross-border transactions may be subject to tax in the following jurisdictions:
Residence based
Source based
Taxes residents on WWI without having
regard to the source of the income. (E.g.
South Africa)
Taxes income of residents based on
whether its source is in a particular country
and the residential status of taxpayer is
irrelevant. (E.g. Kenya)
The definition of gross income in section 1(1) of the Act, distinguishes between persons who are
‘residents’ for South African income tax purposes and those who are not.
-
Non-residents: (see chapter 3) are taxed on receipts or accruals from an RSA-source. This
is usually in the form of a withholding tax (WHT) and they may also be subject to capital
gains tax.
Residents: (see chapter 3) are taxed on WWI.
-
Mechanisms to avoid double taxations:
•
•
•
S6quat: South Africa provides relief to its residents for certain foreign taxes.
Certain cross-border transactions are exempt from tax. This can be afforded by the
source country or the country of residence.
Tax treaties or double tax agreements (DTA’s). These are imposed by the governments
of the relevant countries and limits the right of one of the countries to implement taxes.
2. Source rules
The source of income can be determined in terms of statutory source rules or common
law established in case law:
First consider the statutory source rules in s9 – only if the source of the income is not specified in
section 9 (i.e. if s9 is silent on the source of a particular receipt or accrual) will the common law
source principles be applied.
Statutory Source Rules
-
S 9(2) positive: when is a receipt/ accrual deemed to be from a source within SA.
S 9(4) negative: when is a receipt/accrual not deemed to be from a source within SA.
Rules to a number of income streams commonly encountered in cross-border transactions:
Category
Crux
From source in RSA
Dividends
The source of dividend
income depends on the
residence of the
s 9(2)(a) dividend received
by or accrued to that
person.
From source outside
RSA
s 9(4)(a) Foreign dividends
received by or accrued to
that person.
Interest
as defined in s
24J
Amounts
received from
the disposal of
immovable
property
company that pays the
dividend.
“Dividend” as defined in s
1(1) = paid by resident
company.
“Foreign dividend” as
defined in s 1(1) = paid by
foreign company.
The source of interest
income determined on one
of two bases:
• The residence of the
person paying the
interest; or
• The place where the
funds/ credit
obtained is being
used or applied.
1. s 9(2)(b)(i) interest is
attributable to an
amount incurred (paid)
by a person that is a
resident unless the
interest is
attributable to a
permanent
establishment (fixed
place of business) of
that resident outside
the RSA.
2. s 9(2)(b)(ii) interest is
received or accrues in
respect of the
utilisation or
application in the
Republic by any
person of any funds/
credit obtained in terms
of any form of interestbearing arrangement.
s 9(4)(b) – interest that
does not meet the criteria
in s 9(2)(b)(i) or (ii).
The source of the amount
received in respect of the
disposal depends on the
location of the immovable
property.
s 9(2)(j): immovable
property is situated in
RSA.
s 9(4)(d): amounts derived
from the disposal of s
9(2)(j) and s 9(2)(k)assets are from a source
outside RSA if the
amounts do not meet the
criteria as set out in the
abovementioned sections.
Note: this source rule also
applies to the disposal of an
interest in or right to
immovable property as
contemplated in par 2 of the
8th Schedule to the Income
Tax Act.
Amounts
received from
the disposal of
assets other
than s 9(2)(j)assets e.g.
movable
property
The source of the amount
received in respect of the
disposal is determined
differently for residents
and non-residents.
Apply s 9(2)(k)(i) if the
person who disposes of
the asset and receives the
amount is a resident.
See s 9J(1) same rule applies
if immovable property is
disposed of as trading stock.
1. Resident (s 9(2)(k)(i)):
•
•
Asset not effectively
connected with
permanent
establishment of that
resident which is
situated outside RSA;
AND
Proceeds on disposal
not subject to taxes
Then not from
source in RSA.
Originating cause not
located in RSA.
Apply s 9(2)(k)(ii) if the
person who disposes of
the asset and receives the
amount is a non-resident.
Amounts
received from
retirement
funds
Applies to lump sums,
pensions or annuities paid
by retirement funds
Key: where were the
services rendered?
in any country other
than RSA.
2. Non-resident (s
9(2)(k)(ii):
• Asset is attributable
to a permanent
establishment of that
non-resident which is
situated inside RSA.
s 9(2)(i)
Services rendered in RSA.
Services rendered outside
RSA.
Proviso: apportionment if
services were rendered partly
within and partly outside
RSA.
•
Portion relating to
services rendered in
RSA = RSA source.
•
Portion relating to
services rendered
outside RSA=, not RSA
source.
Common Law Source Rules
Common law source principles
•
No statutory source rule for the receipt/ accrual in question?
– Apply case law principles.
•
The authority in SA for the determination of the source of an amount is found
in the CIR v Lever Brothers & Unilever case:
i. What is the originating cause of the income (i.e. what gave rise to the
amount – work which the taxpayer does to earn them)?
ii. Where is the originating cause located? (can be the location of the incomegenerating asset/ place where services are rendered etc.)
•
•
•
•
If an amount has more than one originating cause, the source of the income
will be based on the dominant cause.
If an amount has more than one dominant cause, apportionment of the
source may be appropriate.
Courts have pointed out: dangerous to generalise with regard to source.
Therefore, each case has to be decided on its own facts. (Weigh relevant
facts.)
Guidance to a number of income streams commonly encountered in cross-border
transactions:
Category
Crux
From source in RSA
Rental income
s 9 is silent on the source
of rental income – fall back
on common law principles.
Ask 2 questions:
1. What is the
originating cause of
the rental income?
2. Where is the
originating cause
located?
Originating cause located
in RSA.
From source outside
RSA
Originating cause not
located in RSA.
Originating cause located
in RSA.
Originating cause not
located in RSA.
However, it follows that it
is too wide of a
proposition.
•
•
Amounts
received in
respect of
services
rendered
If emphasis on the
property let and not
on the business –
where the property is
used.
If emphasis on the
business and not on
the assets (example
car rentals) – where
the business is
situated.
s 9 is silent on the source
of income from services
rendered – fall back on
common law principles.
Ask 2 questions:
1. What is the originating
cause of the income?
- the services
rendered
2. Where is the originating
cause located?
Note: Directors – services
regarded as being rendered
at the company’s head
office. E.g. a director who is
a non-resident would,
therefore, be liable for SA
normal tax on his fees if the
board of directors meets in
SA.
3. Withholding taxes (WHT)
Crux
‘Retention’ tax – requirement for a
purchaser/payer of an item to withhold or
deduct from the payment made to the
seller/receiver a tax and pay it over to
SARS.
Who is subject to WHT?
South Africa imposes WHT on the following
income earned from a South African source
by a non-resident:
•
•
proceeds paid to non-resident sellers in
respect of immovable property
disposed of (s 35A)
interest (s 50A to 50F)
Remember: dividends paid by SA resident company, subject to dividends tax = WHT. (Applies to
dividends paid to both resident and non-resident.) The same is valid for employees’ tax.
Pay WHT
(Proceeds x %)
Pay net amount
(Proceeds – WHT)
'Agent'
Purchaser/Payer
SARS
'Principle'
Non-resident
Resident or Non-resident
Immovable property
Section 35A Immovable Property
Applies if
1. Seller is a non-resident.
2. Asset disposed of is immovable property in SA.
3. Proceeds on disposal >R2 million.
Interest in immovable property (shares) also subjected to s 35A –
refer to s 35A(15) and par 2(2) of Eighth Schedule.
Consequences
Buyer withholds from amount payable to seller:
• 7.5% (if seller is NP);
• 10% (if seller is Co.);
• 15% (if seller is Trust); or
• Seller can apply for directive from CSARS.
Of amount payable – “amount payable” = sales price/ proceeds
•
Buyer (‘agent’)
Nothing in framework
•
Seller (‘principle’)
Affects framework
•
If a deposit is paid – only withheld from first payment after-sale is
finalized.
Withholds and pays amount to SARS – WHEN? – identity of
buyer:
- Resident: 14 days
- Non-resident: 28 days
• Submits return with payment.
• Personal liability – reasonably ‘knew’/’should have known’.
•
Includes gross proceeds in:
Gross income (income in nature), or
Taxable capital gain (capital in nature)
WHT = ‘pre-payment’ of tax liability.
Example
Mr X (45 years old and a non-resident for South African Income tax purposes) disposes of
his immovable property in Durban, South Africa for R4 500 000 to Company Y on 1 January
2019. The taxable capital gain on disposal amounts to R1 100 000.
R4 500 000 x 0.075
Interest
Section 50A – 50F Interest
Applies if
1. Interest is = RSA source interest under section 9(2)(b) and,
2. The person receiving the interest = non-resident.
Does not apply if
1. The payer = RSA Government or RSA Bank.
2. Payment made = i.r.o. listed debt.
3. Interest is paid to a natural person and is physically present for
>183 days in a 12-month period prior to date of payment.
4. Interest is on debt connected to PE in RSA and non-resident is a
registered RSA TP.
Consequences
•
•
Payer (‘agent’)
Nothing in framework
•
•
Receiver (‘principle’)
Affects framework
•
Payer of RSA source interest is to withhold from the amount
payable.
At a rate of 15% (fixed) of interest.
Merely withholds WHT and pays it over to SARS.
Return and payment = last day of the month following the month
in which interest was paid.
Gross interest is included in gross income and exempt in terms of
section 10(1)(h).
• No 10(1)(h) exemption if:
- Foreign person (NP) is physically present > 183 days in RSA; or
- Debt of the interest is connected to PE of foreign person in RSA
• s 10(1)(i) is only applicable if s 10(1)(h) is not applicable.
• WHT = final tax.
Example
Interest of R200 000 is payable from Company Y (a resident) to Mr X (a non-resident) on 1
September 2018.
Assume Mr X’s normal tax payable for the 2019 year of assessment is R120 000 and that he
is not liable for any other withholding taxes.
200 000 x 0.15
CHAPTER 6 GENERAL DEDUCTIONS
1. Chapter overview
•
•
•
•
•
Subsequent to determining ‘income’ (gross income – exempt income) the
next step in the calculation of taxable income is to deduct all amounts allowed
as tax deductions under s11(a).
Unless specifically provided for elsewhere in the Income Tax Act, expenditure
and losses are only deductible if the requirements laid down in the general
deduction formula are met.
S11(a) contains the positive test (what may be deducted), and s23 contains
the negative test (prohibitions on certain deductions). The prohibitions in s23
must always be considered in conjunction with the general deduction formula.
The fact that accounting principles (IFRS) or business practice would treat an
amount as deductible is irrelevant.
Note: specific deductions (not for tax 298) takes preference over general
deductions.
‘[T]he court is not concerned with deductions that may be considered proper from an accountant’s
point of view or from the view of the prudent trader, but is merely concerned with the deductions
which are permissible according to the language of the Act’ [Joffe & Co Ltd v CIR 1946 AD 457 at
165]
2. The general deduction formula
Deduction of expenses:
1. Expenditure and losses (voluntary & involuntary);
2. Actually incurred (paid or unconditional liability to pay);
3. During the YoA (s11(a) silent – courts); → not in Act.
4. In the production of income (act that gave rise to expenditure is closely
connected to income-producing activities); → Purpose: income.
5. Not of a capital nature (must be closely related to the income-generating
operations, not the income-producing structure, floating not fixed capital, does
not create enduring benefit); and
6. Laid out for trade purposes (opening words of s11(a) – deduction from the
taxable income derived from the carrying on of a trade).
‘AND’
Positive test – must meet all 6 requirements
A. Expenditure and losses
Expenditure
•
Voluntary payment of money (Joffe &
Co)
Action of spending funds/
disbursement/ consumption (Labat)
Diminution (even if temporary) or at very
least movement of assets of person
who expends (Labat)
•
•
B. Actually incurred
Loss
•
•
•
Involuntary deprivation (Joffe & Co)
Within the context of s11(a) means
losses of floating capital employed in
trade which produces income (PE
Electric Tramway)
E.g. warehouse (capital in nature) burns
down – floating stock = loss.
actually incurred  due and payable
•
Existence of an absolute and unconditional liability/ obligation to pay
irrespective of the fact that payment will only be made in the future
(Nasionale Pers). (See example 6.2 in SILKE)
•
If there is no definite and absolute liability to pay an amount, the expenditure
is not ‘actually incurred’. I.e. if the liability is contingent upon some condition,
only incurred once the condition has been met (Nasionale Pers).
•
Expenditure is actually incurred in the tax year in which the liability to pay it
arises and not in the tax year in which it is actually paid (Nasionale Pers).
•
A deduction in respect of a disputed claim cannot be claimed if the outcome
of the dispute is undetermined at the end of the tax year (Golden Dumps).
•
Actually incurred ≠ necessarily incurred (PE Electric Tramway).
-
E.g. one man my conduct business inefficiently, incurring expenditure that
another man does not incur, but it is incurred and is therefore deductible.
A distinction must be drawn between:
•
A case where the existence of the liability itself is conditional and
dependent upon the happening of an event after the tax year in question, in
which event the liability is not actually incurred in the tax year in question;
and
• A case where the existence of the liability is certain (unconditional) and
established in the relevant tax year, but the amount of the liability is
uncertain – in this case, the liability is regarded as having been ‘actually
incurred’. The amount of the liability must be estimated based on available
information and claimed in that tax year (Edgars stores) – BUT s24M.
- The unquantified portion is deemed to be incurred only in the YoA in which it
can be quantified. (s24M(2)(b))
The issuing of shares by a company in exchange for an asset is not expenditure
‘actually incurred’ (Labat). Expenditure actually incurred means either:
•
•
Expenditure for which a liability has been incurred or the action of spending
funds (diminution of assets).
The issuing of shares in exchange for an asset is neither.
Note: The company itself is not made ‘poorer’ by issuing shares although the issuance of shares
may dilute the value of the shares held by the shareholders.
Note: effect of Labat judgement partially undone by ss 24BA and 40(CA) – covered in Tax 399/
HONS
S24N: ignore not covered in Tax298.
C. During the year of assessment
•
Expenditure is only deductible during the YoA in which it was incurred. It
cannot be carried forward to claim in a subsequent year or carried back to
claim in a previous year (Sub-Nigel).
• To be deductible, it is not necessary that expenditure produces income in
the year that it was incurred – the income may only be earned in future
years (Sub-Nigel).
- E.g. buy trading stock: has not yet produced income, but expenditure is
deductible.
• Remember: ‘during YoA’ requirement laid down by the courts and not listed
as a requirement in s11(a) itself. Centlivres CJ in Sub-Nigel Ltd v CIR:
‘[T]he whole scheme of the Act shows that, as the taxpayer is assessed for income tax for a period
of one year, no expenditure incurred in a year previous to the particular tax year can be deducted’.
Note: Ignore Concentra case referred to in Silke – Sub-Nigel is the prescribed case.
•
-
Exceptions:
s24M: defer until the amount is quantifiable.
s23H: prepaid expenses – only receive benefits in the next YoA.
D. In the production of income
Probably the most onerous requirement the general deduction formula.
Fundamentals:
‘Expenditure per se does not produce income. Income is produced by actions, and the
question whether expenditure has been incurred in the production of income must be answered by
examining the act which produces the income and then judging whether the attendant
expenditure can be said to be sufficiently closely linked to that act to be regarded as having been
incurred in the production of income’ (Emslie, Davis & Hutton, 1995:323).
•
Two aspects must be considered: (PE Electric Tramway)
-
First, the cause of the expenditure (action that gave rise to the
expenditure) must be determined and;
Secondly, it must be determined if the expenditure (action) is closely
connected with (or a necessary concomitant of) the income-earning
activities of the taxpayer.
•
It is not necessary that expenditure produced income in the year that it was
incurred before it is deductible. The income may only be earned in a future
year, as long as the expenditure was incurred for the purpose of earning that
income, it is deductible (Sub-Nigel).
•
Amounts paid to incentivize current and future employees are incurred in the
production of current or future income (Provider).
•
Expenditure with a dual purpose must be apportioned (Nemojim). I.e. if it is
not possible to appropriate the expenditure to either ‘income’ or ‘exempt
income’, the expenditure must be apportioned.
•
Gross income vs Income. A reasonable apportionment method to be used –
must identify a reasonable method for apportionment (MTN Holdings).
An expense brought about by the negligence of the TP or one of its employees would only be
deductible if it could be shown that the risk or chance of such an expense being incurred was
closely connected to (an inevitable concomitant of) the TP’s income earning operations.
In other words, it must be shown that the event (negligence) was a ‘necessary evil’ of the TP’s
trade – an inherent risk that is inseparable from the carrying on of a particular business. E.g. a
driver involved in an accident. (PE Electric Tramway – consider two aspects)
E. Not a capital nature
•
Money spent to ‘work’ the source of revenue (income-producing structure) =
‘income in nature’ and money spent to create/ acquire/ improve a source of
future revenue (income-producing structure) = ‘capital in nature’ (Rand
Mines).
- E.g. buy oil for machinery (operational expenses).
•
Where no new capital asset for the enduring benefit of the TP has been
created, the expenditure tends to assume more of a revenue character (BP
Southern Africa).
- ‘Subsidiary test’: e.g. advertising billboard (capital) vs. advertisement in a
magazine (income).
- “ST vs. LT”: e.g. when buying a car, if period is long enough – car loses
value.
- Rule of thumb: >3 years = enduring benefit (capital in nature).
•
Cost incurred as part of performing income-producing operations = has an
‘income nature’. Cost incurred to establish/ enhance or add to the incomeproducing structure = has a ‘capital nature’ (New State Areas).
•
Floating capital (being capital that frequently changes its form from money
to good and vice versa) = income in nature. Fixed capital (being capital
employed to acquire and improve property, plant, tools etc. which may qualify
for capital allowance) = capital in nature (New State Areas).
NB! It does not follow that expenditure of a capital nature is never deductible – just not
deductible under s11(a).
When capital expenditure is deductible – capital allowances or special deductions (TAX 399).
3. Carrying on a trade
SECTION 11(a)
‘For the purpose of determining the taxable income derived by a taxpayer from carrying on any
trade, there shall be allowed as deductions from the income of the person so derived…’
SECTION 23(g)
‘No deductions shall, in any case, be made in respect of the following matters, namely ‘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’
-
Non-exhaustive and largely circular definition of ‘trade’ in section 1(1).
‘To the extent’ = authority for apportionment if expense is partly incurred for trade and partly
for non-trade purposes.
Trading requirement also manifests itself in 23(a) and 23(b) which deals with the prohibition of
the deduction of domestic and private expenditure
•
Deductions under s11(a) will only be allowed if:
-
•
The definition of ‘trade’ should be given a wide interpretation and includes:
-
•
A ‘venture’, being a transaction in which a person risks something with the
object of making a profit (Burgess).
Any profitable activity even if it was a single activity (Burgess).
If the TP carries on a trade, his motive is irrelevant (Burgess).
The act of watching over investments does not constitute the ‘carrying on
of a trade’
-
-
•
Despite its wide meaning, the term ‘trade’ does not embrace all activities
that might produce income. For example, income in the form of interest,
dividends, pension and annuities are generally considered to be ‘passive
income,’ unless they are a shareholder.
If a TP accumulates his savings and invests in interest-bearing securities
or in shares held as assets of a capital nature, does not derive income from
carrying on a trade.
However, in practice, if capital is borrowed for the sole purpose of reinvesting = trade income and the interest earned = deduction.
Trading involves more than the mere intention to trade (SA Bazaars).
•
The taxpayer is carrying on a trade and,
To the extent that the expense is incurred for the purposes of trade.
Trading involves an active step.
Active step has been held to be ‘more’ than the mere laying out of plans or
watching over investments.
Continuity and profit motive are not prerequisites for the ‘carrying on of a
trade’ but are strong indications that a trade is being carried on.
A. Section 11A Pre-trade expenditure and losses
•
i.
Expenditure incurred before ‘trading’ commences is not deductible under
s11 because:
- The trade requirement has not been satisfied.
- However, s11A allows for a deduction of set-up costs, but only once
trading has commenced.
How does it work?
•
Pre-trade expenses: Are accumulated until trade commences and then the
total is claimed as a single s11A deduction (if there is enough income
available from that trade).
If the requirements are met, aggregrate all the pre-trade expenses
and get one deduction in the YoA in which trading commences.
REQUIREMENTS FOR PRE-TRADE EXPENSE DEDUCTION
Pre-trade expenditure qualify for a deduction against the income from the trade to
which it relates if the following all four requirements are satisfied:
1. The trade, in respect of which the pre-trade expenditure was incurred, must have
been commenced (s11A(1)).
2. The pre-trade expenditure must have been actually incurred before the
commencement of and in preparation for carrying on that trade (s11A(1)(a)).
3. Had the pre-trade expenditure been incurred after the commencement of the
relevant trade, it would have been allowed as a deduction under ss11 (Other
than 11(x)), 11D or 24J, section 11A(1)(b).
4. The pre-trade expenditure must not previously have been allowed as a
deduction. (Section 11A(1)(c)).
IF ALL THE REQUIREMENTS ARE MET
•
-
The pre-trade expenses will be allowed as a deduction under s11A(1) in the year of
assessment in which the trade to which it relates commences,
But is subject to the ring-fencing requirements of s11A(2).
•
-
Once all four of the requirements have been met:
Ring-fencing
If pre-trade expenses > income from that particular trade (after deductions
allowable i.t.o. any other provision), then
The excess may not be set off at other income (trading or otherwise).
Thus: S11A(1) deduction is limited to the taxable income of the trade to which the
deduction relates and,
Excess is carried over to the next year of assessment.
ii. When does trading commence?
•
Mere intention to trade is not sufficient = must take active steps to initiate
trade not merely layout plans
•
Depends on the facts of the case.
•
Absence of some or all of the following could indicate that a taxpayer is
not trading:
-
Premises, equipment, trading stock, employees.
Note that obtaining income is not a pre-requisite for carrying on a trade.
It is possible for a trade to have commenced prior to the actual earning of
income.
Remember: TP can carry on more than one trade simultaneously.
A taxpayer’s taxable income is determined on a trade-by-trade basis with the overall taxable
income being determined by aggregating the results from the separate trades.
E.g. A salaried employee who carries on the trade of ‘employment’ can also be trading in shares.
CLASS EXAMPLE 1: Section 11A Pre-trade expenditure and losses – ring-fencing
4. Prepaid Expenditure (s23H)
i. What does it do?
•
s23H does not apply to ‘trading stock’
s11(c), (d) and (w) – ignore for 298.
Limits and defers the deduction of expenditure incurred under:
-
•
s11(a), s11(c), s11(d) or s11(w) or s11A where some or all of the economic
benefit which the taxpayer seeks to derive from incurring the expenditure is
only to be received in future years.
Section 23H will only apply if two conditions are met and none of the
exceptions in the provisos below are applicable:
-
Expenditure must be allowable as a deduction under s11(a), s11(c), s11(d)
or s11(w) or s11A and,
Expenditure is in respect of goods or services but that will not be received
or rendered during the YoA or,
Any other benefits but the period to which it extends is beyond the YoA.
ii.
Provisos and deferral of s23H
•
Proviso (aa)
Proviso (bb)
S23H DOES NOT APPLY:
All goods or services supplied within 6 months after the end of YoA in
which prepaid expenditure incurred.
- Contra fiscum: apply to each prepaid expense separately.
•
Aggregate of total prepaid expenditure (otherwise prohibited by
s23H) is ≤ R100 000
•
-
Proviso (dd)
•
‘Would otherwise be limited by this section’:
Exclude amounts taken into account under (aa) and (dd) for the
purposes of applying the R100 000 limit.
Expenditure prepaid due to unconditional liability imposed by
legislation.
ADDITIONAL INFORMATION
•
•
•
If an amount falls under one of these provisos it means the deduction of the amount
actually incurred will not be limited and the full amount is deductible.
s23H(2): Alternative apportionment method can be used at the discretion of the
CSARS.
s23H(3): If the expenditure was actually paid and TP can show the goods or
services on which the expenditure was incurred will never be received, the
deferment ceases and he can claim a deduction.
Steps: (order is very important)
1. Apply proviso (aa): if it meets 6m rule, do not apply s23H.
2. Apply proviso (dd): If it’s an unconditional payment = apply s23H.
3. Apply proviso (bb): If ≤ 100 000 ≠ s23H
If > 100 000 = s23H
SILKE EXAMPLE 6.7: Prepaid Expenditure (s23H) NB!
5. Prohibitions
•
SECTION 23
S23 = negative test if meets all the requirements in s11 and have no
limitations in 23H.
SECTION 23 PROHIBITED DEDUCTIONS
This section provides that no deduction may be made in respect of the following
expenditure, irrespective of the fact that the general deduction formula might allow for a
deduction:
SECTION
PROHIBITS
NOTES
23(a)
Deduction of costs incurred to:
- Such as the cost of feeding and
clothing the taxpayer and his
- Maintain the taxpayer, his
family, providing them with the
family or establishment.
necessities and comforts of life.
-
23(b)
Deduction of domestic and
private expenses
23(b) is an extension of 23(a), but:
-
23(g)
Medical expenditure to maintain
TP or family’s health.
Deduction of moneys not laid out
or expended for trade purposes
Does allow for the deduction of
certain expenses incurred in
respect of domestic premises
used for trade purposes (usually
a home office).
Usually based on floor space.
23(g) further confirms that non-trade
expenses i.e. domestic or private
expenses are not deductible.
A. Domestic or private expenditure s23(b)
•
Fuel expenses: km between your
house and work = private but,
if they send you to a client or
conference = business.
Even if you’re a sole prop.
• (a) Must be specifically equipped and
used specifically to trade (100%) if TP
= sole prop.
• (b) If employee and earning
commission must regularly use > 50%
of the home office and must be
equipped.
S23(b) BREAKDOWN
Taxpayer’s income from
employment derived
mainly from commission
Taxpayer’s income from
employment not mainly
derived from commission
Taxpayer’s income
not derived from
employment
Partial deduction allowed if:
Partial deduction allowed if:
Partial deduction allowed if:
1) Specific part of domestic premises is specifically equipped for trade purposes
2) Specific part is regularly and exclusively used for trade purposes
3) Duties performed mainly
otherwise than in an office
supplied by employer.
Proviso (a)
3) Duties performed mainly N/A
in that part.
Proviso (b)
‘Mainly’ usually means >50% (i.e. more than 50% is commission).
‘Regularly’ means frequently
‘Exclusively’ means excluding or not admitting other things (i.e. the specific part may
not be used for any other purpose).
Effect of this proviso is that the portion of a TPs private expenditure used for the purposes
of trade will be allowed a deduction.
Examples:
Cost of employment of a household worker to enable a TP spouse to work.
TPs expenditure incurred in travelling from his residence to place of business.
Medical expenditure, property rates, interest on a mortgage and loan, security expenditure.
B. Expenditure relating to employment or office (ss23(m) and 23(b))
S23(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 deductions listed in s23(m)(i) to (iv) below.
•
Note: 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.
What is allowed?
(i) Retirement fund contributions deductible under:
• s11F – covered in term 3
(ii) Allowances or expenses deductible under:
• s11(c) (legal expenses), 11(e) (wear and tear), 11(i) (bad debts) and 11(j)
(doubtful debts) – not covered in Tax 298
(iii) Any deduction which is allowable under:
• 11(nA) (service income refunds) or 11(nB) (restraint of trade refunds) – not
covered in Tax 298
(iv) Any deduction which is allowable under:
• s11(a) (general deduction formula) or s11(d) (repairs = not covered in 298) in
respect of any rent of, cost of repairs or expenses in connection with any
dwelling house or domestic premises, to the extent that the deduction is
not prohibited under s23(b).
Cannot use general deductions freely as it is limited to s23m(i)-(iv)
Not apply if you are self-employed and includes any remuneration, salary and bonus.
Then: only deduct expenses in i-iv.
An employee who earns remuneration that does not mainly consist of commission can claim
deductions in respect of part of a private home used as a home office if:
•
•
•
Specifically equipped for the purpose of trade proviso (a) to 23(b).
Regularly and exclusively used for trade purposes proviso (a) to 23(b).
Employees duties are performed mainly in the home office proviso (b)(ii) to 23(b ).
CLASS EXAMPLE 2: s23(b) & 23(m) – employment income = mainly commission
CLASS EXAMPLE 3: s23(b) & 23(m) – employment income not mainly commission
C. Non-trade expenditure s23(g)
•
S23(g) = the negative test and must always be read with s11(a).
•
Authority for apportioning expenditure into ‘trade’ and ‘non-trade’ portions– as
it only denies the deduction of expenditure to the extent (apportion between
trade and private) that it was not laid out or expended for ‘trade’ purposes.
•
Warner Lambert principles: Where social responsibility expenditure is
incurred to ensure the company’s trading success, the expenses are incurred
for the purposes of trade and in the production of income.
Case of Warner Lambert SA (Pty) Ltd vs. SARS
•
•
•
•
The TP = a South African subsidiary of a US company and a signatory to the Sullivian Code.
To comply with the principles of the code, there was certain expenditure incurred namely:
wage improvements and similar expenses.
TP argued that to prevent the loss of his status of a subsidiary of the US company he needed
to incur the costs to comply with the changes and that it is crucial to the success of his
business.
The court held that the expenses were incurred in the production of income.
Case law relevant to 23(g): Scribante (not covered in Tax 298) and Warner Lambert.
D. Other s23 prohibitions
ACT
23(c)
PROHIBITION OF
Deduction of expenditure to the extent that:
- It is recoverable under a contract of insurance, guarantee, security or
indemnity.
23(d)
Deduction of any tax imposed under the ITA or interest or penalty
imposed under any Act administered by the CSARS.
23(e)
Deduction of income carried to a reserve fund or capitalized in any way.
- Accepted accounting practice to create provisions i.r.o. anticipated
expenditure e.g. provisions are not deductible.
- In addition to not meeting the ‘actually incurred’ requirement under
s11(a) = It is also specifically prohibited by s23(e)
23(f)
Deduction of expenditure not incurred in the production of ‘income’ (as
defined in s1(1)).
- “Opportunity cost of interest.”
23(h)
Deduction of interest which may have been made on any capital
employed in trade.
- “Interest for-gone.”
23(k)
Deduction of expenditure other than expenditure specifically mentioned
incurred by a labour broker (who is not in possession of a tax exemption
certificate), a personal service company or trust. (Covered in term 4)
23(l)
Deduction of restraint of trade payments except as provided for in
s11(cA).
- I.e. restraint of trade payments can only be deducted in accordance
with s11(cA) and not under any other section such as 11(a).
- NB! This is a special deduction and has preference over general
deductions.
23(o)
Deduction of expenditure incurred in respect of unlawful activities. E.g.
‘bribes’ and ‘speeding fines’.
23(q)
Deduction of expenditure incurred in respect of the production of nonexempt foreign dividends. (See definition of foreign dividend in s1(1)).
23(r)
Deduction of premiums paid in terms of an insurance policy if that policy
covers that person against:
- Illness, injury, disability, unemployment or death of that person.
- That person = natural person who takes out their own insurance
policy.
E. Prohibitions against double deductions s23B
S23B
(1)
The same amount qualifying for more than one deduction or allowance under
more than one provision of the ITA – cannot be deducted more than once.
(2)
When two deductions or allowances are clearly contemplated, the second is
only available if the first is available.
- In such circumstances, the prohibition on the duplication in sub-section (1)
does not apply, since the intention is clearly to allow two deductions or
allowances.
(3)
Special deductions take preference over 11(a).
- If a specific deduction is available (even if the amount of the deduction is
limited or if only allowed in a different year) then the general deduction
formula (s11(a)) cannot be applied.
- Note: special deductions not covered in Tax 298.
(5)
This subsection provides that no deduction is permissible under s 11(a)
(general deduction formula).
- In respect of any expenditure incurred by a person in respect of a
premium 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 person that is the policyholder (other than a
policy that relates to death, disablement or illness arising solely out of and
in the course of employment of the employee or director).
- The insertion is effective from 1 March 2012 and applies to premiums paid
or incurred on or after this date.
- I.e. Deduct the premium that is paid for the employee and if the policy is
work-related, then deduct under s11A.
Excessive expenditure
Actually incurred does not mean necessarily incurred.
Even though an expense is actually incurred – deduction under s11(a) may be
denied if:
The expense is excessive because it may fall foul of other requirements namely: ‘not
incurred for bona fide trade purposes’ or ‘not incurred in the production of income’.
E.g. family business, must determine if the motivation is for furthering trade or not.
•
•
-
6. Cost of assets and VAT s23C
•
Section 23C deals with the effect of VAT on the cost or market value of an
asset or the amount of expenditure incurred.
•
What does it do?
-
Prevents VAT from being claimed as input VAT by VAT Vendors and
subsequently also being claimed as a deduction for income tax purposes.
10. Specific transactions
Expenditure and losses
Advertising
Allowable deduction (s11(a))?
Advertisement expenditure incurred by a
business already in existence (already trading) –
deductible if expenditure meets the
requirements of the general deduction formula.
Look out for: ‘in the production of income’
E.g. a furniture dealer erects a model house for
exhibition = enduring benefit = capital nature =
not deductible.
Copyrights, inventions, patents, trademarks and
know-how
Cost incurred for the outright acquisition of a
patent or trademark = capital expenditure,
unless it’s acquired for the purpose of
speculation.
Repetitive payment for the use of an asset =
revenue nature = deductible.
Annual royalty payment for the use of a patent
= deductible.
Damages and compensation
Payments for damages resulting from
negligence – only deductible if the negligence
constitutes an ‘inevitable concomitant’ of the
trade, i.e. very close connection between trade
and liability that caused damages.
Education and continuing education
Expenditure incurred by TP in improving his
knowledge or education = not deductible:
capital in nature or not incurred in the production
of income.
Exceptions: e.g. costs incurred by practising
CAs in its programme of continuing education =
deductible.
Employment and services rendered
All amounts payable by employer to an
employee i.t.o. service agreement = deductible
from employer’s income if all requirements met.
E.g. can deduct bursaries awarded by employer,
if holder of bursary binds himself to work for the
employer.
Fines
Fines attached to unlawful acts of TP = not
deductible.
Goodwill
Acquisition of goodwill= capital nature = not
deductible.
Legal expenditure (Ignore 11(c) – not covered in
Tax 298)
For legal expenditure to be deductible under s
11(a) – TP must show that expenditure linked to
an operation undertaken with the object of
producing income and not just to protect an
existing source of income.
Legal expenditure of a capital nature (Ignore
11(c) – not covered in Tax298)
Not deductible under s11(a) = capital nature.
Losses: Fire, theft and embezzlement
Trading stock – goods lost or destroyed by fire
or theft = deductible.
Fixed assets – capital nature = not deductible.
Losses: Loans, advances and guarantees
Amounts advanced to a third party – if
integral part of the business carried on for
securing business, any losses = deductible.
Amounts borrowed from a third party –
determine purpose of borrowing, i.e. capital or
revenue in nature.
Losses: Sale of debts
If a person sells his business, ceases trading
and incurs a loss on the sale of debts = not
deductible.
If sell debts to a finance company at a discount,
and in so doing incurs a loss = deductible.
If TP buys debts to sell at a profit and sustains a
loss = deductible.
Provisions for anticipated losses or expenditure
Provisions for anticipated losses or expenditure
= not actually incurred = not deductible.
Exemptions: e.g. allowance granted for doubtful
debt = deductible.
EXAMPLES
CLASS EXAMPLE 1: Section 11A Pre-trade expenditure and losses – ring fencing
Cerwin Trell carries on two trades and also receives passive income (non-trading income). None
of the income streams qualify for exemptions.
Calculate Cerwin Trell’s taxable income for year 1 and year 2
Trade 2
Year 1 = 120 000 – 70 000 = 50 000 (available for pre-paid expense)
s11A(1) limited to R50 000: 85 000 > 50 000  Excess = 35 000
Year 2 = 340 000 – 120 000 = 220 000  can deduct full R35 000.
SILKE EXAMPLE 6.7: Prepaid Expenditure (s23H) NB!
Steps:
1. Is there a general deduction?
2. Does s23H limit the deduction?
Note: not all goods = trading stock, e.g. stationary. (Assume for question all goods = trading stock)
Current
R93 500 – fully deductible in 2019 YoA.
Pre-paid expenses:
Not deductible by s23H – different YoA, but certain provisios:
i.
ii.
iii.
aa: test each expenditure separately
Goods will be supplied within 6 months after year end and provisio (aa) will therefore
be applicable to the expenditure on goods, i.e. can deduct full amount (R16 000 +
R8 000).
dd
bb: test prepaid portions together
52 500 + 80 000 = 132 500 > 100 000 threshold can’t be deductible – defer
R132 500 to 2020 YoA and only deduct current year portions of rent expenditure and
security services.
CLASS EXAMPLE 2: s23(b) & 23(m) – employment income = mainly commission
TP 1 is an estate agent employed by Pam Golding Properties
•
He is obliged to work from home (no work office).
•
Maintains a home office which has been specifically set up for the purposes of his
employment duties.
•
Home office is used regularly and exclusively for work purposes.
•
Duties are performed mainly in the home office.
•
The total area (square metres) of the home study is 20 m2 in relation to the total area of
the house of 200 m2.
•
Do the restrictions of s23(m) apply?
•
If not mainly in the form of commission.
•
I.e. 150 000 + 50 000 = 200 000
•
Commission = 150 000/ 200 000 = 75%  >50% of renumeration = commission.
•
Does the TP comply with the requirements of s23(b)?
-
Specifically equipped for purpose of trade
-
Regularly and exclusively used for his trade
-
Income from employment mainly = commission and his duties are mainly performed
otherwise than in an office which is provided to him by his employer.
•
Calculation:
•
Area based expenses: 25 000 + 2 500 = R27 500
•
Office area: 20/200m2 = 10%
•
27 500 x 10% = R2 750 + R9 000 (Other) = R11 750
CLASS EXAMPLE 3: s23(b) & 23(m) – employment income not mainly commission
TP 2 is an estate agent employed by Pam Golding Properties
•
She is obliged to work from home (no work office).
•
Maintains a home office which has been specifically set up for the purposes of her
employment duties.
•
Home office is used regularly and exclusively for work purposes.
•
Duties are performed mainly in the home office.
•
The total area (square metres) of the home study is 20 m2 in relation to the total area of
the house of 200 m2.
•
Do the restrictions of s23(m) apply?
•
If not mainly in the form of commission.
•
150 000 + 50 000 = 200 000
•
Commission = 50 000/ 200 000 = 25%  <50% of renumeration = commission.
•
s11(a) does not freely apply.
•
Does the TP comply with the requirements of s23(b)?
1. Specifically equipped for purpose of trade
2. regularly and exclusively used for his trade
3. Income from employment mainly = commission and his duties are mainly performed
otherwise than in an office which is provided to him by his employer.
•
Calculation:
•
Area based expenses: 25 000 + 2 500 = R27 500
•
Office area: 20/200m2 = 10%
•
27 500 x 10% = R2 750 + R9 000 (Other) = R2 750
•
R9 000 disallowed under s23(m).
CHAPTER 7 NATURAL PERSONS
1. OVERVIEW AND FRAMEWORK
•
•
•
•
The Act follows a specific sequence in the calculation of a natural person’s
taxable income.
The framework (or subtotal method) is based on the sequence given in the
Act.
Natural persons can carry on more than one trade and can also receive
non-trade income, e.g. interest.
Work through Annexure A of the module framework – the incorrect use of the
framework may result in marks being forfeited.
What is the difference between these instructions?
1. Calculate the taxable income of natural person A for the 2020 year of assessment.
2. Calculate the normal tax payable by natural person A for the 2020 year of assessment.
3. Calculate the normal tax due on assessment by natural person A for the 2020 year of
assessment.
4. Calculate the total tax payable by natural person A for the 2020 year of assessment.
A. Assessed losses – s20 and s20A
Assessed loss (AL)
Amount by which the deductions admissible under section 11
exceed the income in respect of which they are so admissible –
note that this definition also applies to s 20A.
Balance of assessed
loss (BAL)
Refers to an assessed loss brought forward from the preceding
year of assessment.
Example – AL & BAL
TP (resident and 44 years old) operates a grocery store as a sole proprietor.
Information pertaining to the 2020 year of assessment:
Trade-related receipts
Sales: R100 000
Trade-related expenditure
Rent: R40 000
Electricity: R20 000
Wages paid to store clerks: R50 000
Cost of stock purchased and sold in 2020:
R30 000
Assume that the trade-related expenditure is fully
deductible under s11(a).
Income: R100 000
Conclusion:
• Income < Deductions
⸫ Assessed loss
Deductions: R140 000
•
The taxpayer has no other income – therefore s(he) has no taxable income – only
an assessed loss. The assessed loss is carried forward to the 2021 year of
assessment and becomes a “balance of assessed loss”.
2020 YoA
Gross income
Exempt income
Income
S11(a) deductions
Assessed loss
R
100 000
100 000
(140 000)
40 000
2021 YoA
Gross income
Exempt income
Income
S11(a) deductions
BAL AL (2020)
Taxable income
R
330 000
(23 800)
306 200
(170 000)
(40 000)
96 200
Section 20(1) and 20(2A)(a) read together – set-off of assessed losses:
•
May generally set off an AL against income derived from ‘non-trading’
activities, i.e. passive income (interest/dividends on investments) and against
trading income.
• When calculating the taxable income of a natural person from a trade or from
non-trade activities, reduce the income by
- Any balance of assessed loss carried forward from the previous YOA.
- Any assessed loss in the same YOA from another trade.
But:
• Proviso (b) to s 20(1): Assessed loss from trade outside RSA is fully ringfenced, i.e. foreign assessed losses can only be set-off against foreign
income and not against income derived from a source within RSA.
• Proviso (c) to s 20(1): Cannot set off an assessed loss against a severance
benefit (SB).
• The unused balance of the AL is carried forward to the next year of
assessment until it has been eradicated (i.e. becomes a balance of assessed
loss).
• s 20(2A)(b): concession for natural persons overrides the decision in SA
Bazaars case – may, therefore, transfer a balance of assessed loss even after
a year without income.
•
Example:
- Natural person has a balance of assessed loss established in Year 1.
- Natural person derives no income in Year 2.
- Natural person may still carry forward the balance of the assessed loss established in
Year 1 to Year 3.
Example – Foreign losses
Salary
Foreign trade income
Foreign trade expenditure
RSA
250 000
250 000
Foreign
25 000
(160 000)
(135 000)
Cannot be set off
against RSA
income, only
against other
foreign income.
B. Ring-fencing of losses – s20A
•
•
s20A applies in respect of trades carried on by a natural person.
Assessed losses incurred by juristic persons (e.g. companies) are not
subject to the s20A ring-fencing provisions.
What does this section do?
•
•
If the provisions of s20A apply, the natural person will be prohibited from
setting off the assessed loss incurred as a result of the ‘ring-fenced’ trade
against the taxable income derived from any other trade.
In other words: the AL of the ring-fenced trade can only be set-off against
future income of the self-same trade.
What is the reason behind the introduction of s20A?
-
s20A is an anti-avoidance provision.
Background:
Trade 1:
Employment Income
R1 490 000
Trade 2:
Dog breeding
?
Non-trade Income:
Dividends and Interest
R50 000
Taxable income before trade 2: R1 490 000 + R50 000 = R1 540 000
Import costs
Vet bills
Food
Dog show entries
Total cost
Sell 2 dogs (income)
Assessed loss (trade 2)
R90 000
R35 000
R12 000
R6 000
R143 000
R20 000
R20 000 – R143 000 = R123 000
Taxable income after trade 2: R1 540 000 – R123 000 = R1 417 000
When will section 20A apply?
‘Hobby-like’
trade – use to
decrease TI.
Application of s20A in 3 steps:
1.
•
•
•
•
3.
Maximum marginal tax rate requirement:
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 taxable income must equal
or exceed a certain amount – i.e. add back AL/BAL.
The amount of taxable income at which the highest marginal tax
rate (45%) would become applicable: R1 500 001.
If the NP’s taxable income (excluding any AL/BAL) >
R1 500 000 then the TP will fall into the highest marginal tax
bracket and proceed to Step 2.
If the TP does not fall into the highest marginal tax bracket –
then S20A does not apply and that is the end to the matter.
4.
Carrying on a trade
Ring-fencing in s 20A(1) does not apply to
s 20A(2)(a) or (b) suspect trades if:
•
•
2.
the escape clause in s 20A(3)
applies.
This means there is a reasonable
prospect of taxable income within
reasonable period (refer to 6
objective factors in s 20A(3)(a) – (f)).
UNLESS…
•
•
•
•
•
•
•
•
‘3/5 year rule’
This enquiry focusses on the loss-generating
activity. These ‘3/5 year rule’ and ‘listed suspect
trade’ are either/or requirements.
Therefore, ring-fencing will potentially apply if
one of these requirements is satisfied
Pursuant to s20A(2)(a) an AL will be subject to
potential ring-fencing if assessed losses have
been incurred in at least 3 out of 5 years
(therefore current and previous 4 YoA).
NB! Need not be 3 consecutive YoA. Any 3 out
of the 5 years will trigger potential ring-fencing.
S20A(4)
S20A(4) provides that the ‘facts and circumstances test’ (escape hatch) in
S20A(3) is not available where the TP has incurred an AL in at least 6 out
of the last 10 years of assessment (10 years include current YoA) – other
than farming.
In the YoA where the 6/10-year requirement is met the AL will be
permanently ring-fenced and the escape hatch can no longer be used.
The effect is that the ring-fenced AL can only be set-off against future
income from the same trade. If no such income is available, the AL is
carried forward to the next YoA.
NB! This only applies to listed suspect trades.
2. CALCULATION OF NORMAL TAX PAYABLE
Framework
Column 3 –
Other income
and deductions
Normal tax determined per the progressive tax table on taxable income in
column 3
Less: S6(2) rebate
Add: Additional tax in terms of s12T(7)(a)
Normal tax payable on the taxable income from SB
Less: Section 6A and 6B credits
Normal tax payable by the natural person
E.g. penalty TFSA
A. The s 6(2) rebates
•
Remember proportionate reduction in broken years of assessment.
•
•
Broken year of assessment arises in a YoA in which a natural person is born, dies
or declared insolvent.
Secondary and tertiary rebates – ‘was or would have been’.
Non-refundable and cannot be carried forward.
s 6(2) rebates are only deductible against normal tax payable on the taxable income in,
i.e. cannot be claimed against the normal tax calculated on severance benefits.
s 6(2) rebates are only available to natural persons – they are unavailable to other
persons such as companies.
B. 6A and 6B medical tax credits
•
•
•
•
•
FOR
WHAT
s 6A – only deals with medical expenditure in the form of fees (contributions) paid to duly
registered medical schemes.
s 6 B – deals with excess medical scheme fees and other qualifying medical expenses
(e.g. “out of pocket” medical expenditure not recovered from the medical scheme).
6A and 6B medical tax credits are deductible against any normal tax payable,
i.e. may reduce the normal tax payable on any severance benefit and it must
be clear from the sequence of the answer.
Credits are not refundable and cannot be carried forward to a future year of
assessment.
Only available to natural persons.
6A – MTC (Medical Scheme Fees Tax
Credit)
Own: Contributions paid to a registered
medical scheme.
1.
2.
Employer contributions paid to a
registered scheme if taxed as fringe
benefit under par(i) of GI definition.
S6A(3)(b) – “like the individual paid”.
Note the effect of par 12A(5)(a) of the Seventh
Schedule if employer pays the fees after
retirement and ’no value’ fringe benefit applies.
-
6B – AMTC (Additional Medical
Expenses Credit)
Excess contributions to a medical
scheme, and
Qualifying medical expenditure as
set out in s6B.
Actually paid
Not recovered by medical aid
Not for over the counter medication
Expenses necessarily incurred and
paid i.r.o. any disability or physical
impairment.
FOR
WHO
Taxpayers and dependants
Taxpayers and dependants
Dependant for s6A – as defined in s6B(1).
Dependant defined in s6B(1).
HOW
MUCH
Fixed amount per month determined by
s6A(2)(b) – depending on the number of
dependants.
Three categories:
1. 6B(3)(a) > 65 years
2. 6B(3)(b) disability
3. 6B(3)(c) other – younger than 65 and
no disability
OTHER
•
•
Where more than one person pays any
fees in respect of a person or dependant,
the tax credit will be prorated – s6A(3A).
Rebate against taxed payable and cannot create a refund and excess cannot be carried over to the
following YoA.
Fees paid by the estate of a deceased person are deemed to have been paid by the deceased on the
day before death.
The following definitions in s6B(1) are relevant:
A ‘dependant of a person is:
• His or her spouse
• His or her child and the child of his or her spouse
• Any other member of his or her family in respect of whom he or she is liable for family care and
support, e.g. the member’s mother who lives with them.
• Any other person who is recognised as a dependant of that person i.t.o. rules of a medical
scheme or fund at the time the qualifying medical expenses were paid.
• A disabled person is always a dependant.
A ‘child’ includes an adopted child but not a stepchild.
• Four categories: (all unmarried)
1. <18 years,
2. <21 years and wholly or partially dependant for maintenance and not liable for normal tax.
3. <26 years and wholly or partially dependant for maintenance and not liable for normal tax and
is a full-time student at an educational institution.
4. child incapacitated by a disability and wholly or partially dependant for maintenance and not
liable for normal tax.
• Child must have been alive for a portion of the year.
• Requirements must be met on the last day of the YoA.
• If child dies: determine whether requirements would have been met had the child lived.
• If the TP dies: age of child on the day of the TP’s death.
• ‘Not over the age of 18’: over 18 on the day of 18th birthday.
Formulas: AMTC – s6B
1. 65 year and older – s6B(3)(a)
2. Disability – s6B(3)(b) – only if the
Three categories
3. Other – s6B(3)(c) – default for TP younger
than 65 and no disability
person/spouse/child (therefore not any
dependant) is a person with a ꞌdisability’
MS contributions
XX
(ER & EE – taxed as FB)
Less: 3 x 6A credit
= Excess MS
contributions
Add: QME
XX
(ER & EE – taxed as FB)
(XX)
XXX
XX
XXX
X33.3%
= s6B credit
MS contributions
Less: 4 x 6A credit
= Excess MS
contributions
Add: QME
(XX)
XXX
XX
XXX
Less: 7.5% of taxable
income
XXX
XXX
X25%
= s6B credit
XXX
Example: MTC – s6A
TP (aged 47) contributed R1 700 per month to a registered medical scheme in the 2019
YOA.
• He did not incur any other medical expenses.
• His taxable income for the 2019 YOA is R170 000.
• He is the main member of the medical scheme and 3
other dependants are registered on the scheme.
Calculate the normal tax payable by the TP for the 2019 YOA.
6A
620 + 2(209)
R1 030 per month (x12)
R12 456
6B
Contribution
-4(12 456)
Excess contribution
R20 400
(R49 824)
–
Taxable income
R170 000
Normal tax determined per the progressive tax table on taxable
income in column 3 @18%
Less: S6(2) rebate
R30 600
(R14 067)
Less: Section 6A and 6B credits (12 456 + 0)
(R12 456)
Normal tax payable by the individual
R4 077
Example: AMTC – s6B
TP: 67 years old
Salary income: R215 000
The Taxpayer’s spouse is recognised as a dependant in terms of the rules of his medical
scheme and he has no other dependants.
Medical expenses (PAID):
• Medical scheme contributions (own) R3 100 per month
• R6 250 out-of-pocket expenses for prescription medicine
• R2500 for spectacles (that were not covered by medical scheme)
• R280 for a consultation with a general practitioner on 20 February 2019. The amount
was only paid on 31 March 2019. – Can’t add = next YoA
Calculate the ss 6A and 6B medical tax credits that can be claimed by the TP in
respect of the 2019 YOA.
6A
620
6B
R3 100 x 12
-3(7 440)
Excess
R620 per month (x12)
R7 440
R37 200
(R22 320)
R14 880
Continues on next page…
Qualifying medical expenditure
Out-of-pocket expenses for prescription medicine
Spectacles
Consultation with a general practitioner
X 33,3%
s6B credit
R6 250
R2500
–
R23 630
R7 869
Example – s6A credit apportionment (simplistic)
A
•
•
•
•
B
Not a member of a duly
registered medical
scheme.
Paid 60% of C’s medical
scheme fees for the 12month period ending 29
February 2020.
C is A’s father.
A is liable for the family
care and support of C.
•
•
•
•
C
Not a member of a duly
registered medical
scheme.
Paid 40% of C’s medical
scheme fees for the 12month period ending 29
February 2020.
C is B’s father.
A is liable for the family
care and support of C.
•
Is a member of a duly
registered medical
scheme.
Paid 0% of his own
medical scheme fees for
the 2020 year of
assessment.
C is A and B’s father.
C is dependent on the
family care and support
of his two children (A and
B).
C’s monthly medical
scheme fees amount to R5
500.
•
•
•
•
Did C pay medical
scheme fees?
Did A pay
medical scheme
fees?
No s6A credit
for C
No
Was it for A
and/or a
dependant of A?
Yes
Did A pay 100%
of C's medical
scheme fees?
Thought process the
same as for A.
No
Yes, it was for a
dependant of A.
C is a dependant
of A as
contemplated in
par (c) of the def
of 'dependant' in
s6B(1).
s6A(3A) applies
Apportionment
40%
s6A(2)(b)(i)(aa):
R310 in respect
of benefits to a
dependant who
is a member of a
duly registered
medical scheme.
Apportionment
60%
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛𝑠 𝑝𝑎𝑦𝑎𝑏𝑙𝑒 𝑏𝑦 𝑡ℎ𝑒 𝑝𝑒𝑟𝑠𝑜𝑛
× 𝑇𝑜𝑡𝑎𝑙 𝑀𝑇𝐶
𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛𝑠 𝑝𝑎𝑦𝑎𝑏𝑙𝑒
Therefore: R310 x 40% = R124 per month
Total 6A credit for YoA: R124 x 12 (#months paid) = R1 488
Example – s6A credit apportionment (complex)
A
B
•
Is a member of a duly registered medical
scheme.
• The following persons are recognized as
dependants in terms of the rules of A’s
medical scheme:
- A’s spouse
- A’s child
- A and B’s father
• A paid 100% of the medical scheme fees
i.r.o benefits to himself, his spouse and his
child.
• A paid 50% of the medical scheme fees i.r.o
benefits of his father.
Did B pay
medical scheme
fees?
Yes
Did B pay 100%
of his own and his
father's medical
scheme fees?
•
•
•
•
Is a member of a duly registered medical
scheme.
There are no recognised dependants in
terms of the rules of B’s medical scheme.
B paid 100% of the medical scheme fees
i.r.o. benefits to himself.
B paid 50% of the medical scheme fees i.r.o
benefits to his father who is recognised as
a dependant on A’s medical scheme.
Was it for B
and/or a
dependant of B?
No, he paid 100%
of his own and
50% of his
father's.
Yes, it was for B
and a dependant
of B.
B's father is a
dependant of B
as contemplated
in par (c) of the
def of
'dependant' in
s6B(1).
s6A(3A) applies
to the amount B
wants to claim in
respect of his
father's fees.
s6A(2)(b)(i)(bb):
R620 in respect
of benefits to B
and 1
dependant. I.e.
R310 for B, and
R310 for B's
father.
Apportionment
50%
Therefore: Credit for fees paid in respect of himself (100%) + Credit fees paid in respect of his
father (50%) = Total 6A credit
⸫ R3 720 (R310 x 12m) + R1 860 (R310 x12m x 50%) = R5 580
Did A pay
medical
scheme
fees?
Did A pay 100%
of the fees
payable in
respect of
benefits to:
Himself, spouse,
child and father?
Yes
Was it for A
and/or a
dependant of
A?
No, he paid
100% the fees
i.r.o.: Himself,
spouse and child
But only 50% of
the fees i.r.o. his
father.
Yes, it was for A and
multiple dependants of A.
A's spouse and child are
dependants of A as
contemplated in par (b) of
the def of 'dependant' in
s6B(1).
A's father is a dependant of
B as contemplated in par (c)
of the def of 'dependant' in
s6B(1).
s6A(3A) applies
to the amount A
wants to claim in
respect of his
father's fees.
s6A(2)(b)(i)(bb): R620 in
respect of benefits to A and
1 dependant. I.e. R310 for A,
and R310 for one
dependant.
s6A(2)(b)(ii): R209 in respect
of benefits to each additional
dependant (i.e. after the first
dependant.)
Apportionment
50%
Problem: What is the total MTC?
In respect of benefits to:
Self
First dependant
Additional dependant
Per month
310
310
209
Is A’s father the first dependant? Because then the amount would be R310.
Or is A’s father an additional dependant? Because then the amount would be R209.
This is a grey-area that is not addressed in the Act. At the time these notes were compiled SARS had
not issued any guidance on this matter.
If the contra fiscum rule is applied (Chapter 2) – “…it means that where a provision of the
Act is open to more than one meaning, the court must follow the interpretation that favours
the taxpayer.”
Within this context, s 6(3A) must be applied contra fiscum. Therefore, it must be applied in a
manner that benefits the taxpayer as opposed to the fiscus.
SILKE identifies two possible ways in which s6(3A) can be applied in the circumstances
described above:
• Option 1: Allocate the credits in the same sequence that the dependants are listed in
the definition of “dependant” in s 6B(1); or
• Option 2: Allocate the credits in the sequence in which the dependants were
registered as dependants in terms of the rules of the medical scheme.
Option 1
R310
a. a person's spouse
Option 2
We require more information to be able to use this
option, lets assume the order in which A’s
dependants were registered on the medical scheme
was as follows:
R209
b. a person's child or child of his or
her spouse
R310
Father
R209
c. any other member of a person's
family i.r.o whom s(he) is liable for
family support
R209
Spouse
R209
d. other person recognised as a
dependant i.t.o. the rules of the MS
Therefore: R310 + R310 + R209 + 50%(R209) =
R933.50
6A credit R933.50 x 12 = R11 202
R209
Child
Therefore: R310 + R209 + R209 + 50%(R310) =
R883
6A credit R883 x 12 = R10 596
Conclusion: Option 1 – provides a marginally higher s6A credit for A. Therefore, choose to
apply option 1 as it will lead to the greatest reduction in the normal tax payable by A.
3. RECOVERY OF NORMAL TAX
Framework
Column 3 –
Other income
and deductions
Normal tax determined per the progressive tax table
Less: S6(2) rebate
Add: Additional tax in terms of s12T(7)(a)
E.g. penalty TFSA
Normal tax payable on the taxable income from SB
Less: Section 6A and 6B credits
Normal tax payable by the natural person
Less: PAYE, provisional tax and s35A withholding tax i.r.o. nonresidents
Normal tax due by or to the natural person on assessment
The normal tax payable by an individual is recovered through:
• Employee’s tax in the form of PAYE (Chapter 10)
• Provisional tax payments (Chapter 11)
• Withholdings tax on the sale of immovable property by non-residents (Chapter 21).
• A final settlement on assessment if necessary.
• Both provisional tax paid and employees’ tax are deducted from normal tax payable.
4. DEDUCTIONS
Natural Persons
A. If an individual is carrying on a trade – deductions may be allowed under s11(a) (Chapter 6),
the special deductions (Chapter 12) and capital allowances (Chapter 13).
B. “Employment’ is a trade as defined in s 1(1). Nevertheless, deductions may be limited by s
23(m). Under section 23(m) only the following expenditure may be deducted from
remuneration from employment if remuneration is not mainly derived from commissions
based on sales turnover:
- Any contributions to any retirement fund – s 11F;
- Any legal expenditure (s 11(c)) (Chapter 12), wear-and-tear allowance (s 11(e))
(Chapter 13), bad debts (s 11(i)) (Chapter 12) or doubtful debts (s 11(j)) (Chapter 12);
- So much of any amount received in respect of services or as a restraint of trade
payment as is refunded by that person (ss 11(nA) and 11(nB)) (Chapter 12); and
- Qualifying rent, repairs or expenditure (in terms of s 11(a) or (d)), in respect of all
expenses in connection with any private home, to the extent that such a deduction is not
prohibited under s 23(b) (Chapter 6).
C. Contributions to retirement funds
D. Donations to a PBO
A. Trade Expenditure
•
Underlying principle of s 11(a) that only expenditure incurred for the purposes
of trade can be deducted is re-enacted in: s 23(a), 23(b) and 23(g).
S23
(a)
Prohibitions
Deduction of costs incurred to maintain
the taxpayer, his family or
establishment
Notes
• Such as the cost of feeding and
clothing the taxpayer and his
family, providing them with the
necessities and comforts of life.
• Medical expenditure to maintain
TP or family’s health.
(b)
Deduction of domestic and private
expenses
s 23(b) is an extension of s 23(a) but
does allow for the deduction of certain
expenses incurred in respect of
domestic premises used for trade
purposes (usually a home office).
(c)
Deduction of moneys not laid out or
expended for trade purposes
s 23(g) further confirms that non-trade
expenses i.e. domestic/ private
expenses are not deductible.
•
Domestic or private expenditure – s 23(b): Breakdown
Taxpayer’s income from
employment derived mainly
from commission
Taxpayer’s income from
employment not mainly
derived from commission
Taxpayer’s income not
derived from employment
Partial deduction allowed if:
Partial deduction allowed if:
Partial deduction allowed if
1. Specific part of domestic premises is specifically equipped for trade purposes
2. Specific part is regularly AND exclusively used for trade purposes
3. Duties performed
mainly otherwise than
in an office supplied by
employer.
•
•
•
3. Duties performed
mainly in that part.
N/A
‘Mainly’ usually means more than 50% (>50%)
‘Regularly’ means frequently
‘Exclusively’ means excluding or not admitting other things (i.e. the specific part may
not be used for any other purpose).
B. Contributions to retirement funds
•
•
Applies notwithstanding s 23(g) – therefore deduction allowed against both
trading and non-trading income
Excess contributions: any contributions not claimed due to exceeding limit –
carried over to next YOA – s 11F(3).
•
s11F cannot increase or create an assessed loss – 11F(2)(c).
FOR
Contributions paid to any pension fund, provident fund or retirement annuity
fund during the YoA.
HOW MUCH
S 11F(2) deduction = actual contributions to all three funds, limited to the
lesser of:
• R350 000;
• 27.5% of the higher of:
- Remuneration from all employers (excluding SB) or
- Taxable income (excluding SB) before the s11F and s18A deductions
(therefore in effect subtotal 5); or
• Taxable income before s 11F deduction and before the inclusion of any
taxable capital gain.
Example – s11F contributions to retirement funds
Mr X, aged 40, is a sales representative. For the 2020 year of assessment, he earned a
salary of R400 000 and rental income amounting to R340 000.
His monthly contributions to a pension fund amounted to R10 000 and he contributed an
amount of R14 000 to a retirement annuity fund every month. His employer contributed R5
000 per month to his pension fund on his behalf.
The balance of unclaimed contributions in respect of the 2019-year amount to R6 000. Mr X
realised a taxable capital gain of R50 000 during the 2020 year.
Calculate his taxable income for the 2020 year of assessment.
Contributions made
Pension fund
Retirement annuity fund
Employer pension fund
Unclaimed contribution
Gross income (400 000 + 340 000 + 60 000)
Taxable income before TCG & s11F
Taxable capital gain
Taxable income before s11F
S11F
Taxable income
120 000 (10 000 x12m)
168 000 (14 000 x12m)
60 000 (50 000 x12m)
6 000
354 000
800 000
800 000
50 000
850 000
(233 750)
616 250
The R354 000 is limited to the lessor of:
• R350 000
• Higher of 27.5% of:
- R 460 000 x 27.5% = R126 500
- Taxable income before 11F: R850 000 x 27.5% = R233 750
• Taxable income before TCG & s11F: R800 000
C. Donations to a public benefit organization (PBO)
•
This is a deduction from taxable income and therefore, a TP with no taxable
income or an assessed loss will not be allowed to claim.
Last deduction in the calculation of taxable income.
•
FOR
Donations paid in cash or transfer of property in kind to an approved PBO
during a YoA – s18A(1).
HOW MUCH
Limited to 10% of the taxable income (excluding SB) before s18A has been
taken into account. (Excess can be carried forward to next YoA).
CRUX
Taxpayer must be in possession of a s18A receipt from the PBO (cannot
assume – must be stated before s 18A can be claimed) – s 18A(2).
Donations in kind – s18A(3)
•
s18A(3) states that if a deduction is claimed by a TP under s 18A(1) in respect
of a donation of property in kind, other than immovable property of a capital
nature to which s18A(3A) applies the amount of the s 18A(1) deduction is
calculated as follows:
Type of property donated
A financial instrument (if taxpayer’s
trading stock)
Amount of donation for s18A purposes
The lower of:
- fair market value on the date of the
donation, or
- the amount that has been taken into
account for the purposes of s22(8)(C).
Asset used by the taxpayer for the
purposes of his trade (not trading stock)
The lower of:
- fair market value on the date of the
donation, or
- cost to the taxpayer of the property
less any allowance allowed to be
deducted from his income under the
Act.
Examples: cash registers, computers, furniture,
delivery vehicles, etc.
Asset not used by the taxpayer for the
purposes of his trade (not trading stock)
The lower of:
- fair market value on the date of the
donation, or
Examples: personal use assets
-
cost
For movable property that has
deteriorated in condition, the fair value or
cost must be reduced by a depreciation
allowance using the reducing-balance
depreciation allowance at a 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:
- fair market value on the date of the
donation, or
- cost
Other
- subject to any fiduciary right, usufruct
or other similar right, or
- that constitutes an intangible asset, or
- 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
– s18A(3B).
Deductions for donations of immovable property of a capital nature
•
If the lower of the market value or municipal value exceeds the cost of the
property (appreciated immovable property) the s 18A deduction is calculated as
follows:
A = B + (C x D)
A
B
C
D
Amount of section 18A deduction – still subject to 10% limit.
Cost of the property
Amount that would have been a capital gain if the property has been sold for
the lower of MV or municipal value on the day of the donation is made
• 60% – natural person or special trust
• 20% – all other cases
Example: S18A Donations to public benefit organizations
a) An individual donates R1 900 to a PBO. Her taxable income before any deduction under
s18A is R30 000.
b) An individual donates R16 000 to a PBO. Her taxable income before any deduction under
s18A is R30 000.
c) An individual donates R6 000 to a PBO. She has an assessed loss before any deduction
under s18A of R1 000.
Calculate the amount of the s18A deduction that the individual can claim assuming that she is in
possession of a section 18A receipt for each of the scenarios above.
Solution
a) Limitation: 30 000 x 0.1= R3 000 – Maximum can deduct but deduction limited to actual
donation of R1 900.
b) Limitation: 30 000 x 0.1 = R3 000 – S18A deduction limited to R3 000. (Balance of R13 000
not claimed carried to next YoA, therefore add excess donation to donation of CY and apply
10% again)
c) No s18A deduction – assessed loss position, R6 000 may be carried forward to next YoA.
-
5. MARRIED COUPLES
A. Married both in and out of community of property
•
•
•
•
•
Each spouse is taxed separately (whether married in
CP or out of CP), unless one of the deemed inclusion
rules of s7(2) or s7(2A) applies.
This causes the tax liability to fall onto the person who
did not actually incur the liability = anti-avoidance
provision.
Spouse: Apart from
marriage i.t.o. law,
includes unions
recognized as a
marriage i.t.o.
religion as well as
live-together-unions
of a permanent
nature.
Section 7(2)(b) requirements:
- Trade must be connected to the donor spouse, and
- There must be excessive remuneration paid to the recipient spouse.
- Recipient spouse – taxed on reasonable remuneration.
- Donor-spouse – taxed on excessive remuneration.
Marriage, separation, divorce or death of a spouse during the year have no
effect on the determination of normal tax liability of an individual unless s7(2)
or s7(2A) applies.
The same concept applies if, for example, the donor is the main shareholder
of a company and the company employs or pays the donor’s spouse.
B. Marriages in community of property – s7(2A) to (2C)
•
•
Default marital regime in SA (if no prenuptial contract is signed).
The spouses will have a joint estate (50-50 interest) but certain assets or
income can fall outside the joint estate (then only taxed in one spouse’s
hands).
Trade income (excluding rental from fixed property)
•
•
•
•
•
Only the spouse carrying on of the trade is taxed.
Though trade income is included in the s1 definition of trade, it is excluded
from s7(2A).
Income for letting movable assets will be deemed part of carrying on a trade.
s7(2C) deals with active income which is certain incomes that are deemed to
be income derived by a spouse from a trade carried on by him or her. E.g.
lumpsum payments and annuities.
If spouses carry on a trade jointly, the income is deemed to accrue in
proportion to the spouse’s agreement or otherwise reasonable entitlement.
Rental from fixed property and non-trade income
•
•
Deemed to have accrued in equal shares to both spouses, e.g. interest and
dividends.
Capital and/or income which does not fall into the joint estate is deemed to
have accrued to the spouse who is entitled to it.
Example – Married in vs out of community of property
Sunny and Veil are engaged to be married and have approached a lawyer to draft their
marital contract. They are uncertain what the tax implications would be if they married in or
out of community of property. Assume that both spouses are residents for South African
Income Tax purposes.
Sunny
•
•
•
Earns a monthly salary of R60 000 from his employer (Active rule = only apply to
spouse that earns the income)
Owns an investment property which is rented out at R5 500 per month (not apply to
active rule);
Owns an interest-bearing investment of R1 500 000 with a yield of 8% per annum.
Veil
• Earns a monthly salary of R12 000 from her employer;
• Owns JSE-listed shares of R50 000 with a dividend yield of 6% per annum.
Required
Assuming that none of their assets or any income thereon will be excluded from the joint
estate, determine whether it would be more tax beneficial for the couple to marry in or out
of community of property.
Salary (Sunny)
Salary (Veil)
Interest (Sunny)
Rental income (Sunny)
Dividend income (Veil)
GROSS INCOME
In community of property
Sunny
Veil
720 000
144 000
60 000
60 000
33 000
33 000
1 500
1 500
814 500
238 500
EXEMPT INCOME
Interest s10(1)(i)
Local dividend s10(1)(k)
(23 800)
(1 500)
(23 800)
(1 500)
(23 800)
-
(3 000)
789 200
240 613
213 200
39 764
882 200
278 743
144 000
25 920
TAXABLE INCOME
Normal tax per progressive
tax table
240 613 + 39 764 = 280 377
Out of community of property
Sunny
Veil
720 000
144 000
120 000
66 000
3 000
906 000
147 000
278 743 + 25 920 = 304 663
Conclusion – most beneficial to marry in community of property, pay R24 286 less tax.
6. SEPARATION, DIVORCE AND MAINTENANCE ORDERS
Alimony/child maintenance:
Paying spouse
Receiving spouse
No deduction
Par (b) inclusion in gross income and s10(1)(u) exemption.
Note: paying spouse pays from after-tax profits, i.e. exemption
prevents double taxation.
7. MINOR CHILDREN
•
•
•
•
•
Income is subject to tax in the hands of the minor child unless s7(3) or s7(4)
applies – ignore s7(4).
Also applies to a minor stepchild.
As soon as the minor child reaches majority, section 7(3) no longer applies.
s7(3) – Parent makes a donation, settlement or other disposition (DSOD) and
his minor child or stepchild receives income, then the is parent taxed.
Where a person advances an interest-free or low-interest bearing loan to
another person, the courts have held that this constitutes a continuous
donation or other disposition for the purposes of s7. (CIR v Berold and CSARS v
Woulidge – will be covered in detail in HONS)
•
The donation doesn’t need to be made directly to the child, there must
however be a causal link between the donation and the income being
received.
Example – Minor children
In the following instances, determine in whose hands the income will be assessed.
1. A father 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 of 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.
M - minor child (17 y/o)
R4 500 interest
Parent
Savings account
N - minor stepchild (16 y/o)
R6 000 interest
Solution: s7(3) interest income is deemed to have accrued to the parent, i.e. R4 500 +
R6 000. Note that any exemptions or deductions will follow income.
2. A minor child received R5 000 interest during a year in 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 is deemed to be the income of the father s7(3). Specific facts will
need to be considered to determine whether the dividend applies to s7(3) – it must first
be proved that the dividends were received as a result of the donation from the father.
3. 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 sum of this money.
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 a gift or donation from the father. The
R1 000 interest received on the investment is taxed in the hands of the child. S7(3) is
thus not applicable.
4. Parent 1 and 2 are married in community of property, i.e. owns assets and income in
equal shares. Parent 2 donates shares to their minor child and the minor child earns
dividends of R50 000 on these shares.
Solution: Dividend income must be imputed to the parents under s7(3) because the
income resulted from a disposition made by the parent, but as they are married in
community of property the amount must be split between the parents.
CHAPTER 17 CAPITAL GAINS TAX (CGT)
1. Chapter overview and scope
• CGT came into effect on 1
October 2001.
NB: Valuation date – use to calculate
base cost of assets.
• Before CGT: only taxed on
Separate FW
s26A
Also subject
to normal tax.
What is CGT?
income gains.
• After CGT: also taxed on capital
gains.
• Income Tax Act → s26A → 8th
Schedule (no separate CGT Act)
s26A (charging provision) is the link
between the 8th Schedule and the
main act – provides for the inclusion
of ‘taxable capital gain’ in taxable
income. (Framework)
• Definition of gross income (s1):
- Amount
- Cash or otherwise
- Received or accrued
- During current YoA
- Not of a capital nature
NB: Amount is included once: either
in gross income in the framework or
in proceeds in CGT.
Separate CGT Framework – treat each asset separate
Par 3
Par 4
Fixed
monetary
amount –
not carried
over.
Par 5
Par 6/7
Par 9
Par 8
Portion of gains included in Framework:
Par 10
• Net capital loss = carry over to following YoA
• Net capital gain x 80% = Taxable capital gain for companies
• Net capital gain x 40% = Taxable capital gain for natural persons
2. Withholding tax applicable to disposal of immovable property in RSA by non-resident
•
Withholding tax (s35A):
- If non-resident sells immovable property (or interest) in RSA.
- Purchaser withholds amount on behalf on non-resident and pays over to
SARS.
- Only if the sales price exceeds R2 million.
How is withholding tax calculated?
• 7.5% if seller is natural person
• 10% if seller is company
• 15% if seller is trust
Non-final tax
3. Person liable for CGT – par 2
•
All persons are subject to CGT (whether registered for normal tax or not).
Residents
Worldwide income – therefore liable for
CGT on the disposal of assets situated
anywhere in the world.
SILKE: Example 17.2 and 17.3
Note:
- Permanent establishment: any fixed
place of business.
- Market value: for MV analysis, always
use gross MV and not CA.
Non-residents
Only on the disposal of the following assets
situated in RSA:
- Immovable property and any interest
in immovable property in RSA.
- Assets connected to a permanent
establishment through which the NR
carries on business in RSA.
‘Interest’
1. At least 20% interest in company
And
2. At least 80% of market value of shares
is attributable to immovable property in
RSA.
Class example (par 2)
Non-resident (Mr A) sells immovable property in RSA @ R5 000 000 to a resident (Mr B) (Base
cost = R2 000 000)
Assume the resident withheld the WHT and no other transactions occurred. Calculate the normal
tax due on assessment.
4. Basic rules of CGT
Four requirements – ‘Building blocks of CGT’
•
•
•
•
Asset
Disposal during the YoA – actual and deemed disposals.
Base cost calculated
Proceeds calculated
Only after all requirements are met, can CGT be calculated.
Base cost includes:
•
Acquisition cost;
•
Improvement cost and
•
Direct cost i.r.o. the acquisition
and disposal of the asset.
Disposal – triggers calculation.
Calculation (par 3-10)
•
•
Capital gain = Proceeds – Base cost
Capital loss = Proceeds < Base cost
•
Hereafter calculate the sum of all capital gains or losses:
- Calculate capital gain/ loss first.
- Aggregate the gains and losses.
- If positive, then reduce it by the amount.
- Asses the prior year’s capital loss.
- If it’s positive apply either the 40% or 80% inclusion rate.
Calculate separately for every disposal
Class example (par 3 to par 10)
Assume that the prior year assessed capital loss was R20 000.
IF <0: carried over to next YoA.
Four building blocks of CGT
Definition of an asset – par 1
Specifically excluded: currency
•
•
•
•
•
If you don’t have an asset as defined, then no CGT can be calculated.
Mainly = more than 50%
Trading stock is considered an asset but there are no tax consequences.
Physical cash is not an asset because it can be stolen.
Deposit in the bank is an asset and can calculate CGT but will always be 0.
Is Bitcoin a currency?
Cryptocurrencies are neither official
South African tender nor widely used
and accepted in South Africa as a
medium of payment or exchange.
As such, cryptocurrencies are not
regarded by SARS as a currency for
income tax purposes or Capital Gains
Tax (CGT).
Investment seen as revenue in nature
(volatility).
Therefore, included in GI and can get a
s11a deduction.
Disposals
i.
Disposal events – par11(1)
•
•
•
•
NB! par(2) overrides par(1)
Any event, act or operation of law which leads to
Creation, variation, transfer, extinction of asset
Examples: sale, donation, exchange, destruction of asset
Distribution of asset by a company to a shareholder.
Barter transactions example:
Jacob purchased a piece of land in 2010 for R200 000. In 2018 he entered into an exchange
transaction with Zanele. The terms were as follows:
-
Jacob will give Zanele land valued at R300 000.
Zanele in exchange will give Jacob a house valued at R320 000.
In 2019 Jacob sold the house for R340 000.
Calculate the CGT effects of the transaction.
Remember:
Proceeds = MV of the asset received or given up.
Base cost = Purchase price
New base cost = MV of the asset given up.
2018
Proceeds = R320 000
Base cost = (R200 000)
Capital gain = R120 000
2019
Proceeds = R340 000
Base cost = (R300 000)
Capital gain = R40 000
ii. Non-disposals – par11(2)
•
•
Event deemed to not be a disposal, and thus there’s no CGT effect.
Examples:
- Assets that are transferred as security for debt.
- Issuing of a bond.
- Company issues or cancels shares
- If you default on a loan, the ownership remains with you.
Disposals:
• Par11(1) = actual disposals (no longer have ownership.
• Par11(2) = Events are not seen as a disposal and therefore no CGT consequences.
• Par12 and s9H = Deemed disposal (not fully given up). Generally, occurs when there is a
change in the use of an asset.
• Par13 = Timing of the disposal. When to account for CGT to ensure it is in the correct YoA.
iii. Deemed disposals – par12 and s9H
•
•
Although it is not an actual disposal, it is deemed to be one.
Purpose of par 12 is to:
- Calculate the capital gain or loss or,
- To determine a new base cost.
a. Non-resident to resident
par12(2)(a)(i)
b. Resident to non-resident
s9H(2) and s9H(3)(a)
c. Asset of non-resident becomes asset of PE in SA (par 12(2)(b)(i))
-
Base cost = Market value
d. Asset ceases to be asset of PE in SA (par 12(2)(b)(ii))
•
•
•
Proceeds = Market value and calculate capital gains and capital losses.
Counts as an exit charge for removing assets from the CGT net.
The only par2(b) asset to which the exit charge does apply is an ‘interest in immovable
property’ as defined.
Also includes trading stock and not only assets of a capital nature.
Referencing in test: par 12(2)(a)(i) of the 8th Schedule to ITA
iv. Time of disposal – par 13
•
•
The time of disposal is important, because it may affect:
The rate at which a capital gain is taxed or
Whether a capital loss may be set off against a capital gain.
Paragraph 13(1) provides the time of disposal of an asset in 2 situations:
-
When a specific event occurs
When that stipulated event
takes place.
I.e. disposal on the day the
suspensive condition is
satisfied, e.g. obtain bond from
Bank XYZ by June 2019.
Contract linked to a future event.
•
Examples: (Self-study)
-
Specific event, act, forbearance or operation
of law
An agreement for the disposal of the asset
subject to a suspensive condition.
An agreement not subject to a suspensive
condition.
Distribution of an asset on which the beneficiary
holds a vested interest.
Donation of an asset.
Expropriation of an asset
Conversion of an asset
Granting, renewal or extension of an option.
Exercise of an option.
Termination of an option to acquire a share,
participatory interest or debenture of the
company.
-
If there is not a specific event
When ownership of an asset
changes.
For tax: on the day the contract is
signed and not the day ownership
is transferred.
Time of disposal
Date on which the suspensive condition is
satisfied.
Date of conclusion of agreement (usually the
date when the offer is accepted by the seller).
The date on which the interest vests.
Date of compliance with all the legal
requirements for a valid donation, which
includes, for example, acceptance of the
donation by the recipient.
Date on which the taxpayer receives the full
compensation for the expropriation that is
agreed to or finally determined.
Date on which the asset is converted.
Date on which the option is granted, renewed or
extended.
Date on which the option is exercised.
Date on which the option terminates.
Note: the person who acquires the asset is deemed to have acquired it at the time of disposal.
v. Spouse married in community of property – par 14
•
•
•
•
Class example 1
Asset in common estate = equal parts by each spouse.
Some assets may be excluded.
Only applicable when married in community of property.
Each spouse is entitled to the R40 000 annual exclusion. (Per taxpayer)
Base cost – par 20
•
Asset acquired before 1 Oct 2001: (Pre-valuation date assets)
- Base cost = Valuation Date Value (VDV) + allowable expenses since 1 Oct
2001
• Asset acquired on/after 1 Oct 2001:
- Base cost = allowable expenses incurred in acquiring the asset.
TP must prove base cost, otherwise = R0.
i. Allowable expenditure – par 20(1)
Allowable – despite s23(b) and (f)
•
•
•
Actual expenses in acquisition/creation – the purchase price.
Valuation costs – only if valued for CGT purposes.
Direct expenses (e.g. transfer duty, installation, advertising costs, sales
commission)
- Transfer duty: tax when buying a house (sliding scale) and Securities
Transfer Tax (STT).
• Defence of legal title (even if unsuccessful)
- E.g. government enforces land expropriation – expense for the legal team.
• Improvements (enhancements)
- Note: a repair is a general deduction.
- Not all improvements are allowable expenditure.
- Includes improvements to a property by a tenant.
• Option (acquired before 1 Oct 2001) exercised after 1 Oct 2001 (read)
• Financing cost of listed shares or interest in CIS
- Only ⅓ of interest on loan/refinancing.
- Irrespective of whether for business assets or private use.
• Inheritance received by a resident from non-resident (read)
- Base cost = MV on death + allowable expenses incurred by executor
(valuation, etc.)
- N/A if the asset was already in the CGT net.
• Non-resident donates assets to a resident (CP) → MV.
NB: Expense is only deductible ONCE:
Normal deduction (e.g. s 11(a)) OR
Part of base cost
•
•
•
Amount included in ‘gross income’ to be included in the base cost:
- Marketable securities or equity instruments (s 8C, BC = MV (Cost + profit)
- Lease assets + lease improvements (par(h) GI – s 11(h)) (at the end of the
lease term for lessor)
- Fringe benefit assets (BC = 7th Schedule value)
ii. Qualifying costs excluded from base cost – par 20(2) and s23C
Not Allowable
Class example 2
•
•
Financing cost (except listed shares – par 20(1)(g))
Expenses already deducted under normal tax
- Capital allowances (e.g. s 12C wear-and-tear) Tax 399
- Holding costs (repairs, protection, etc.), i.e. operational cost.
• Any amount already reduced/recovered/paid by another person (price).
- E.g. when an expense incurred is reimbursed by another person.
• VAT (if VAT vendor could claim an input) [s 23C]
- If VAT vendor: can claim VAT and therefore excluded from base cost.
- Not a VAT vendor: can’t claim VAT and is therefore included in base cost.
iii. Cancellation of contracts – par 20(4)
•
•
A1S2
Contract entered into and cancelled in the same year of assessment – no
disposal (par 11(2)(o)).
- No CG/CL and BC stays the same.
Contract entered into and cancelled in the subsequent year of assessment.
Deemed to acquire at BC before contract was cancelled and improvements.
- Deemed CG realised: Where seller realised CL in previous y.o.a. (same
amount) – par 3(c).
- Deemed CL realised: Where seller realised CG in previous y.o.a. (same
amount) – par 4(c).
-
•
What if buyer makes improvements before cancellation of contract? Discussion
- The seller assumes the original base cost and adds improvements, but only
if improvements are reimbursed.
iv. Limitation of expenditure – par 21
•
Prohibits double deduction.
v. Donations tax paid by donor – par 22
•
Portion of donations tax paid included in base cost of asset in the hands of the
donor.
𝐘=
•
•
•
•
𝐌−𝐀
×𝐃
𝐌
Y = portion included;
M = market value of asset;
A = base cost of asset;
D = donations tax (amount will be given)
•
•
•
Donations tax = 20% (flat-rate) and exempt R100 000 per year and when
donated to a charity organisation.
Tax liability on the donor, however, if the donor cannot pay, the donee can
be held jointly liable.
Read par 22 with par 20(1)(vii) – allows a portion of the tax to be added to the
base cost.
Par 20(1)(vii): ‘so much of the donations tax which bears to the full amount of the donations tax so
payable the same ratio as the capital gain of the donor determined in respect of the donation,
bears to the market value of that asset on the date of donation.’
Amount added to BC = Donations tax ×
= Donations tax ×
Capital gain of donor
MV
𝑃−𝐵𝐶
MV
Example 17.20
vi. Pre-valuation date assets – par 25
•
•
•
•
Residents who purchased assets before 1 Oct 2001 and
Non-residents who immigrated before 1 Oct 2001.
Asset acquired before 1 Oct 2001: Valuation Date Value (VDV) + allowable
expenses since 1 Oct 2001
Asset acquired on/after 1 Oct 2001: allowable expenses
Mindmap: Pre-valuation date assets
vii. Kink test (loss-limitation rules)
•
•
•
•
•
•
VDV = Valuation date value
P = Proceeds
B = Cost before 1 Oct 2001
A = Cost after 1 Oct 2001
MV = Market value (will be given)
TAB = Time apportionment BC (will be given)
VDV in a historic gain situation – par 26
•
Proceeds > Qualifying expenditure incurred before, on and after the
valuation date:
The taxpayer must choose one of the following amounts as the valuation date
value of the asset: Higher of
•
-
The market value of the asset on valuation date.
20% of (proceeds of the disposal less allowable expenditure incurred on or
after valuation date)
The TAB of the asset will be given.
NB: If a person elects a valuation date value (VDV) in the year of disposing of the pre-valuation
date asset, and adopts the market value (MV) as the valuation date value, and the proceeds from
the disposal of the asset do not exceed that market value, the valuation-date value must be
substituted in terms of par 26(3)).
Example 17.22
•
Remember, if the taxpayer / SARS cannot determine the expenditure on a
pre-valuation date asset incurred before valuation date, then the taxpayer
may adopt only one of the following 2 amounts as the VDV of the asset:
-
The market value of the asset on valuation date; or
20% of the proceeds less allowable expenditure incurred on or after the
valuation date.
Example 17.23
VDV in historic loss/break-even situation – par 27
•
•
Proceeds < Qualifying par 20 expenditure
If market value on valuation date determined, two situations may occur:
Par 20 expenditure before valuation date ≥
Proceeds AND Par 20 expenditure before
valuation date ≥ Market value
Par 20 expenditure before valuation date <
Proceeds OR Par 20 expenditure before
valuation date ≤ Market value
VDV higher of:
- Market value or
- Proceeds less base cost expenditure
incurred on/after valuation date.
VDV lower of:
- Market value or
- The TAB cost of the asset.
Example 17.24
•
Example 17.25
If the taxpayer did not determine market value on valuation date, nor was it
published by the Commissioner:
- The taxpayer must adopt the TAB cost of the asset as its valuation date
value.
viii. Time-apportionment base cost (TAB) – par 30
•
•
Integration with other paragraphs stays important.
When do we use TAB?
- Disposal of a pre-valuation date asset.
- Only capital gain after valuation date (1 Oct 2001) is subject to CGT –
determine VDV.
•
VDV can be determined in 3 ways (par 26(1)):
- MV on 1 Oct 2001; or
- 20% x (Proceeds – par 20 allowable expenditure after 1 Oct 2001); or
- TAB
ix. Market value of assets (par 31) – MV will be given
Proceeds – par 35 - 43
•
•
An amount is anything with monetary value and is not limited to cash only
(Lategan).
Received by (Geldenhuys) or accrued (Mooi) to in respect of that disposal.
Term
Amount
Meaning
Lategan: ‘Amount’ includes not only money but also every form of property
earned by the taxpayer which has money value, even the right to receive
future payment.
Received by
Geldenhuys: An amount is only received by the taxpayer if it is received on his
own behalf and for his own benefit.
Accrued to
Mooi: Meaning of ‘accrued’ is extended to ‘unconditionally entitled to’
payment.
Specific
inclusions
-
Amount by which any debt owed has been reduced or discharged;
Amount received by or accrued to a lessee from lessor with regards to
improvements to leased property.
No discounting: always use face value (not present value) – par 35(4).
Par 35(1)(a) – debt
Disposal of debt
Par 35(1)(b) – improvements
Leasehold improvements
Proceeds = R100 (discharged debt) + R50 (cash back)
•
-
Proceeds = Reimbursement
CG or CL = Proceeds – BC
Composite disposals
E.g. sell the whole business for a lump sum.
How to calculate capital gain/loss?
-
Allocate with MV and
Calculate with BC.
Example – Lumpsum payment of R 1 500 000
Market value
Allocation
100 000
𝑥 1 500 000
A. 100 000
1 000 000
200 000
𝑥 1 500 000
B. 200 000
1 000 000
700 000
𝑥 1 500 000
C. 700 000
1 000 000
R1 000 000
Proceeds
R150 000
R300 000
R1 050 000
R1 500 000
i. Amounts excluded from the definition of ‘proceeds’ – par 35(3)
Paragraph
a)
b)
c)
Amounts excluded
Amounts are taken into account when determining a person’s taxable income for
normal tax purposes. E.g. recoupment of capital allowances, interest received from
bank.
Any amount that has been repaid or becomes repayable to the person who
purchased or acquired the asset.
If the price of the disposed asset is reduced by:
- A termination, cancellation or variation
- Release from an obligation
- Prescription or waiver
- Any other event, e.g. a discount due to damages on the asset.
VAT vendors act as agents for SARS and therefore any output tax levied on the
disposal of an asset needs to be paid over to SARS and is not included in proceeds.
ii. Unquantified amounts – s24M
•
•
•
Consideration not quantifiable on date of acquisition or disposal.
Incurral or accrual is deferred until amount becomes quantifiable.
Nature of amount (income vs. capital) is not determined by s24M.
iii. Proceeds deemed at market value – par 38
•
•
•
Par 22
Person donates asset (can be to anyone) or
Person disposes of asset at consideration not measurable in money or
Person disposes (sells or donates) to a connected person not at arm’s
length
Connected person – s1
“In relation to a natural person – any relative.”
What does arm’s length mean?
It connotates that each party is independent of
the other and, in so dealing will strive to get the
utmost possible advantage out of the
transaction for himself.
Consideration which is not at arm’s length
could be greater than or less than the market
value of the asset.
Arm’s length price = does not always mean
market value but for Tax 298 we consider it to
be market value.
Relative – s1
“Means the spouse of that person or anybody
related to that person or that person’s spouse
within the third degree of consanguinity.”
•
•
Then:
Seller’s proceeds = MV
Purchaser’s base cost = MV
Par 38 is not applicable if transfers between spouses (s9HB)
-
Note: in the 2019 Act it says s67, however, this section has been deleted from the act.
Therefore, read it as if it says s9HB.
Par 38 establishes proceeds for the seller and BC for buyer – see example 17.9
5. Exclusions, rollovers and attributes
The four building blocks of CGT are necessary to determine the capital gain or loss in
respect of each asset. The next step is to calculate the capital gain or loss:
Proceeds > Base Cost
Proceeds – Base Cost = Capital gain
-
However, the following must be noted:
- Certain capital gains must be disregarded
or ignored or rolled forward.
- Certain capital gains which result from a
donation will be attributed to the donor.
(Inter vivos trust – HONS)
-
Proceeds < Base Cost
Proceeds – Base Cost = (Capital loss)
However, the following must be noted:
- Certain capital losses must be disregarded
or ignored or limited.
i. Assets disposed of to a connected person – par 39
•
•
If the disposal of an asset is to a connected person
Who was connected immediately before disposal or,
Immediately after disposal.
Capital loss is clogged and is not permanently disregarded.
•
•
Class example 3
Clogged is like ring-fencing.
Can only offset capital loss against the capital gain from the same
connected person.
I.e. carry over to next year of assessment until another disposal with the
same connected person occurs.
Ignore CL in ‘aggregate CG or CL calculation’.
NB! Connected person definition in par 39(3) is different to par 38.
- Par 39 is more restrictive.
- Par 38 has a broader scope and is defined in s1 of the Act.
Connected person – s1
“In relation to a natural person – any relative.”
Connected person – par 39
“A natural person does not include a relative of
that person other than a parent, child,
stepchild, brother, sister, grandchild or
grandparent of that person.”
ii. Primary residence exclusion – par 44 - 50
•
Definitions par 44
Primary residence
- A residence in which a natural person holds interest and which that person
or a spouse of that person –
i. Ordinarily resides or resided in as his or her main residence and,
ii. Uses or used mainly (>50%) for domestic purposes (personal use only).
If for example someone has a building that is used as a home and as a business (e.g. a shop) then
compare the size of the shop vs. the size of the living space. It must be the greater of for it to be
classified as being a living space.
•
Residence
- Any structure, including a boat, caravan or mobile home,
- Which is used as a place of residence by a natural person, together with
any appurtenance (e.g. swimming pool) belonging thereto or enjoyed
therewith.
•
•
This can only apply to South African residents.
Cannot apply to a person’s holiday home as it isn’t a primary residence.
Gross exclusion – R2m proceeds rule
par 45(1)(b)
Natural person or special trust disposes of
primary residence.
i. Disregard full capital gain provided that
proceeds ≤ R2m
ii. Exclusion is not applicable (par45(4)),
when:
- Not ordinarily resident in residence for
the whole of the period during which
interest is held (period commences on or
after 1 Oct 2001), or
- Residence (or part thereof) is used for
purposes of trade. E.g. if there was a
home office cannot apply.
Gain exclusion – R2m gain rule
par 45(1)(a)
•
•
Consider ‘gain rule’ when R2m ‘gross rule’
does not apply.
Disregard CG or CL to the extent that it
does not exceed R2m.
Must meet all three requirements:
•
•
•
Proceeds ≤ R2m
Been a resident the entire time.
Only used for domestic purposes.
A taxpayer cannot choose between par 45(1)(a) and par 45(1)(b):
•
•
•
•
In other words, if proceeds ≤ R2m, and leads to CG then, entire CG is ignored (par 45(1)(b)).
If proceeds ≤ R2m and leads to CL then, CL is subject to R2m exclusion in terms of par
45(1)(a).
If proceeds > R2m then, both CG or CL is subject to R2m exclusion in terms of par 45(1)(a).
Par 45(1)(b) is therefore not applicable to CL.
Primary residence exclusion principles
•
•
Entitled to exclusion on every disposal of primary resident.
However only one primary resident at any given time – par 45(3).
- E.g. if you own a flat in CPT and in JHB, cannot apply the exclusion to both.
• Immovable property specifically excluded from par 53, hence primary
residence cannot be a personal use asset.
• Exclusion is ‘per residence’ and not ‘per person’ – par 45(2).
- Hence, where more than one natural person holds an interest in a primary
residence an apportionment needs to take place. E.g. spouses married in
community of property (COP).
-
Spouses married in COP
Exclusions operate on a ‘per primary
residence basis.
Not on a ‘per person holding on interest
basis.’
A husband and wife are married in COP. The
property was the primary residence of both
parties
Proceeds = R4 000 000
BC = R1 000 000
-
More than one interest holder
More than one person holds interest in the
residence, and
It is not the primary residence of all those
persons
Two sisters own a share of 50% each in a
house
- Sister one occupies the house as her PR
- Sister two lives in another house
Proceeds = R4 000 000
BC = R1 000 000
*Did not
use as
primary
residence.
Gross exclusion = whole capital gain is disregarded
Gain exclusion = only disregard gain up to 2m
Three limitations
Apportionment of capital gain or loss (par46-par50)
a. The apportionment is limited to a land size of two hectares – par 46
•
•
•
When a person disposes of a primary residence together with the land the
exclusion will only apply to so much of the land, as does not exceed 2
hectares.
The land must be mainly used for domestic or private purposes.
The land must be disposed of at the same time and to the same person who
buys the residence.
b. Apportionment for periods not ordinarily resident – par 47
•
•
•
•
•
The exclusion will only apply for the time the person was ordinarily resident
in his primary residence.
They do not need to be living in the residence at the time of the sale to qualify.
It only needs to be used as a primary residence for a part of the time he or
she owned it.
In such cases, the CG or CL must be disregarded and must be determined
with reference to the period during which the person was in fact ordinarily
resident.
However, par 48 provides exceptions.
c. Apportionment for periods of absence deemed to be ordinarily resident –
par 48
•
Person is deemed ordinarily resident for up to two years if:
- PR was vacated due to the acquisition of a new PR; or
- PR was erected on land that was acquired for the purpose of building a PR,
or
- PR was accidentally rendered uninhabitable, or
- The taxpayer died
• If the period of absence exceeds two years, the person is treated as though
he was only resident for two years.
•
•
If period ≤ 2 years, then deemed to
have been OR for the period.
Therefore, the person is OR for the
whole period and no apportionment
will be made.
If period > 2 years, then deemed to
have been OR for a maximum of two
years.
Therefore, OR = actual + maximum 2
years for the apportionment of CG or
CL.
d. Apportionment for non-residential use of the primary residence – par 49
•
•
The exclusion will only apply to the residential use of the property.
An adjustment must be made with reference to the period during which part of
the residence was used for carrying on trade.
However, par 50 provides exceptions.
•
e. Periods of non-residential use deemed to be residential use – par 50
•
Will be deemed to be residential use for up to 5 years if:
-
•
Trade is for temporary letting of the PR, and
The person resided in the PR for a continuous period of at least one year
prior to and after the letting, and
The person had no other PR during the period of letting, and
The person is temporarily absent from RSA, or
They were employed or engaged in carrying on business in RSA at a
location further than 250km from PR.
If the period of absence exceeds 5 years, then it is deemed to be for trading
use
•
•
If period of letting (absence) ≤ 5
years + lived in PR 1 year before and 1
year after lease period + no other PR
during this time + was absent from RSA
or employed or trading > 250km from
PR
= deem trade period to be domestic
use.
Then: Whole period is considered
domestic use and there’s no
apportionment.
If period of letting (absence) > 5 years
= apportionment of CG or CL
Then: No par 50 relief (all or nothing
concession) and no deeming.
f. R2 million capital gain or loss rule
Class example 6
iii. Other exclusions
a. Personal use assets – par 53
•
•
•
•
•
Only applies to natural persons.
PUA = assets that are mainly used for non-trade purposes.
Assets for which an allowance is received such as a business car or
cellphone will be treated as a PUA.
Any capital loss must be disregarded i.t.o. par 15 (to extent that it is used for
non-trade purposes), but a capital gain must be taken into account.
Specifically excluded from PUA – par 53(3)
- An aircraft with an empty mass exceeding 450kg
- A boat exceeding 10m in length
- Coins of gold or platinum
- Fixed property (primary residence)
- Financial instruments e.g. shares
- A right or interest in any of the above assets
Capital gain or loss (disregarded) = Proceeds – Base cost
b. Limitation of losses – par 15
•
•
•
Ignore capital losses with disposal of the following
assets to the extent that they are used for nontrade purposes:
- An aircraft with an empty mass > 450kg
- A boat exceeding 10m in length
- Any fiduciary or other like interest of which the
value decreases over time
- A right or interest of whatever nature in the
above assets
Start with par 53:
Requirements:
1. Natural person
2. Mainly used for non-trade
purposes
3. Specifically excluded
Par 15:
Requirements:
1. Capital loss
2. To the extent that they are used
for non-trade purposes.
Any capital loss on the disposal of a boat > 10m used for non-trade purposes
only and any capital gain should be included.
If a par 15 asset is used for both private and trade purposes = apportionment
is made. Only the portion of the capital loss relating to private use will be
disallowed i.t.o par 15.
c. Lumpsum retirement benefits – par 54
•
A person must disregard capital gains and losses determined in respect of a
disposal that resulted in him receiving:
- A lump sum benefit that is from a pension, provident or retirement annuity
fund.
- A lumpsum benefit from a fund, arrangement or instrument situated outside
South Africa.
d. Disposal of small business assets – par 57
•
•
•
•
Class example 9
Requirements for exclusion:
- Must be a natural person
- Must dispose of active business assets
- Be substantially involved in the small business
- Have attained the age of 55 years or older
- Have realized all their capital gains within a period of 24 months,
commencing from the date of the first qualifying disposal
If all these requirements are met, a maximum amount of R1.8 million of CG
can be disregarded over a lifetime.
In a small business, the market value of all the assets does not exceed R10
million as on the disposal date.
Where a person owns more than one small business:
- All small businesses qualify for exclusion if the total MV of all the small
businesses assets are ≤ R10m.
e. Compensation for personal injury, illness or defamation – par 59
•
•
A person can disregard a CG or CL determined in respect of compensation
for compensation, personal injury or defamation.
Only applies to personal injury for natural persons and special trusts.
f. Gambling, games and competitions – par 60
•
A natural person may disregard a CG or CL determined on a disposal relating
to any form of gambling, games and competitions if,
• The form or game or gambling is authorised by SA laws
• Exceptions that will be subject to CGT:
a. Foreign winnings by natural persons
b. Illegal gambling games and competitions in SA
c. Capital gains by companies, trusts and other non-natural persons
g. Collective investment scheme in securities – par 61
•
•
•
Only determine CG or CL when the holder of that particular investment
disposes of the interest.
The CG or CL = proceeds with disposal less the base cost of interest.
Hence any CG or CL is disregarded.
h. Donations to public benefit organizations – par 62
•
Person disregards the CG or CL determined in respect of the donation or
bequest of an asset by that person to:
a. The government
b. A public benefit organization
c. A person approved by the Commissioner
d. A political party, body corporate or share block company
e. A recreational club
i. Recreational club – par 63
•
•
•
A person, body or institute that is exempt from tax i.t.o. s10 must disregard
the CG or CL of any disposal.
The only applies if to persons who are fully exempt from tax with regard to all
gross income i.t.o. s10.
Excluded: Public benefit organizations and recreational clubs = partially
exempt.
iv. Roll-over relief
Class example 10
•
s9HB is applicable on all types of disposals, including donations, sale and
transfer of assets between spouses.
• Effect of s9HB
a. Disregard any CG or CL resulting from a transfer; and
b. Transferee inherits the history of the asset transferred.
•
•
Hence, transferee deemed to:
- Have acquired asset on the same date
- Have acquired asset at same cost (base cost prior to disposal)
- Have incurred cost on the same date and in the same currency
- Have used the asset in the same manner
- Treat proceeds on future disposal in the same manner
Relief is not available if: The receiving spouse is a non-resident unless the
asset falls within the CGT-net.
6. Final step and changes to capital gain or capital loss
•
Par3(b) and par4(b) both deal with the capital gain or capital loss in the
previous year of assessment.
Par 3(b)(i)
Par 4(b)(i)
Par 3(b)(ii)
•
•
•
Par 4(b)(ii)
•
FOUR SITUATIONS
Additional proceeds are received or accrued
Proceeds reduced in the following years
Part of the base cost is recovered or recouped
- E.g. A discount after disposal
- From 1 January 2013 onwards, the cancellation of debt is
excluded
If the BC increases in the following years
- E.g. Unforeseen additional costs incurred after the disposal
CG
CL
CG
CL
CHAPTER 8 EMPLOYMENT BENEFITS
The following abbreviations are used in these notes:
Abbreviation
CE
CP
MV
EE
ER
MRV
ROU
ET
ITA
GI
CP
L/I/M
Meaning
Cash equivalent
Cost price
Market value
Employee (as defined in paragraph 1 of the 7th schedule to the ITA)
Employer (as defined in paragraph 1 of the 7th schedule to the ITA)
Meals, refreshments and refreshment voucher
Right of use
Employees’ tax
Income Tax Act
Gross income
Connected person
License, insurance and maintenance cost
These abbreviations may be used for the purposes of answering assessment questions IF a legend
is provided in the answer script.
Per SAICA’s examinable pronouncements, the following amounts will be provided in
assessments:
- Repurchase rate
- Relevant retail market value
- Par 12D value
- Remuneration proxy
1. OVERVIEW
Differences and similarities regarding the above employment benefits:
Legislation
Paragraph (c) of the
GI definition
Deals with
Amounts received i.r.o. services
rendered but not allowances, 8C
instruments or taxable fringe
benefits.
Include in
Gross income – the applicable
value of benefits excluded from the
definition of ‘taxable benefit’ – if par
(c) of the GI definition applies.
Paragraph (i) of the
GI def read together
with the 7th schedule
Fringe benefits (i.e. non-cash
employment benefits).
Gross income – CE of any taxable
benefit in terms of the 7th schedule
(including taxable benefits with a nil
value).
Section 8(1)
All allowances and has special
rules for travel and subsistence •
allowances.
Taxable income –
net amount of any allowance or
advance (after deducting any
portion thereof expended for
specified business purposes) in
the case of travel and
subsistence allowances.
gross amount of any other
allowance or advance.
•
Section 8C read
together with
paragraph (n) of the
GI def
Equity instruments
Income – gain on the vesting of an
equity instrument obtained by virtue
of employment.
2. ALLOWANCES – s8(1)
s 8(1)(a)(i) all amounts paid or granted by a principal to a recipient as an allowance or advance
must be included in the taxable income of the recipient to the extent that the allowance or
advance or portion of the allowance or advance:
• Is not exempt from normal tax under s 10; or
• 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 and subsistence.
Refer to SARS Interpretation note 14 (issue 3)
‘recipient’ for the purposes of s8(1)(a) means:
• The person who has been paid or granted an allowance, advance or reimbursement by a
principal.
• I.e. employee or holder of an office.
‘principal’ for the purposes of s8(1)(a) include:
• the employer of the recipient of an allowance; or
• the authority, company, body or other organisation in relation to which any office is held; or
• any “associated institution” as defined in the Seventh Schedule in relation to that employer,
authority, company, body or organisation.
Allowances, Advances and Reimbursements – what is the difference?
-
Different tax consequences
Allowance
Advance
Reimbursement
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 of the employee to
prove or account for the
business-related expenditure to
the employer. The amount of the
allowance is based on anticipated
business-related expenditure.
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 businessrelated expenditure to the
employer. The amount of the
advance is based on anticipated
business-related expenditure. The
employer covers the difference
from the employee if the actual
expenses incurred are less than
the advance granted and vice
versa.
A reimbursement of businessrelated expenditure occurs where
the employee has incurred and
paid for business-related
expenses on behalf of an
employer without having had the
benefit of an allowance or
advance and is subsequently
reimbursed for the exact
expenditure by the employer after
having proved and accounted
for the expenditure to the
employer.
• Anticipated business expense
(future-looking)
• Don’t need any proof.
• ER/ EE covers difference
between actual business
expenditure and amount paid
in advance.
•
•
Nothing received before
incurring expense.
Claim exact business
expense (slip & logbook)
•
s 8(1)(a)(ii): provides that in limited circumstances a reimbursement or advance must
not be included in taxable income as otherwise required by s8(1)(a)(i).
•
Reimbursements or advances need not be included in taxable income IF:
-
Reimbursement or advance was or must be expended by the recipient on
instruction of the principal in the furtherance of the principal’s trade; and
The recipient must produce proof to the principal that the amounts were wholly
and actually expended for this purpose; and
The recipient must account to the principle for the expenditure; and
If the expenditure was or will be incurred to acquire an asset, ownership in that
asset must vest in the principal.
Per IN 14 paragraph 5.2: ‘travel reimbursements’ are an exception to this rule. I.e. s8(1)(a)(ii)
does not apply to travel reimbursements. The provisions of s 8(1)(a)(i) and 8(1)(b) must still be
applied to ‘travel reimbursements’.
A. Travel allowances – s8(1)(b)
•
•
Generally granted by principal (usually ER) to recipient (usually EE) for the
use of a private motor vehicle for the principal’s business purposes.
The travel allowance must be included in the recipient’s taxable income to
the extent that it is not expended for business travels.
Amount included in taxable income (Net amount) = gross allowance less portion expended for
business travels*
*No expenditure can be claimed unless an accurate logbook is kept.
(In assessments the scenario will state whether the taxpayer kept an accurate logbook).
Effect: employee is taxed on the portion of the allowance expended for private travel purposes.
Exception:
•
•
If a fixed travel allowance (fixed or reimbursive) is received i.r.o. a par 7
company car and the taxpayer also has right of use of the same vehicle:
The full gross travel allowance is included in taxable income, no deduction is
allowed against the travel allowance, the company car is taxed i.t.o. par 7,
and the par 7(7) and 7(8) – reductions will be allowed.
Two types of travel allowances:
Fixed travel allowance
• Fixed amount per month regardless of
business km's travelled in any motor
vehicle (therefore receive the amount
irrespective of whether travelled for
business at all).
• Business expenditure calculated in 1 of
2 ways:
a. Actual cost method
b. Deemed cost method
S8(1)(b)(ii) transport expenditure and s 8(1)(b)(ii)
expenditure i.r.o. motor vehicle used – variable
remuneration s 7B.
TP can choose
most beneficial
Reimbursive travel allowance S8(1)(b)(iii) method.
• Based on actual kilometres travelled
for business in any motor vehicle
(therefore only receive the amount if
has already travelled for business).
• Business expenditure calculated in 1
of 3 ways:
a. Actual cost method
b. Deemed cost method
c. Simplified method
s 8(1)(b)(iii) – variable remuneration s 7B (after 1
March 2020)
Note: New provisio from 1 March 2020
•
•
•
The definition of “variable remuneration” in s 7B(1) has been expanded to include “an
allowance or advance paid in respect of transport expenses as contemplated in section
8(1)(b)(ii) or (iii).”
The effect is that these transport allowances and advances are deemed to accrue in the
YoA in which they are PAID.
This, business km deemed to be travelled in the same YOA that allowance accrues (when
paid due to being variable remuneration) – i.e. business kilometers travelled is aligned with the
accrual of the allowance.
‘Value’ of the vehicle
Bonafide agreement of sale or exchange
Original cost (for EE), including VAT, but
excluding finance charges.
NB! IN 14: If the cost price at acquisition
includes a maintenance plan and deemed
costs are claimed, the maintenance cost
component cannot be claimed
Instalment credit agreement (par b) or
financial lease
In any other case
Cash value
Market value
“Business travel” vs “private travel”
•
S8(1)(b)(i): travel between the recipient’s place of residence and place of
employment = is considered to be private travel – even if the travel takes place
after normal work hours/ during extended working hours (IN 14, issue 4).
•
•
•
Examples of private travel
Home to office
Friend or relatives house to office.
If your ER has stores in various
parts of the province, and TP is
required to work a portion of the
week at a different store.
•
•
•
•
Examples of business travel
Office in JHB and have to attend a
conference in Ruimsig.
Consultant stops at a client en route
to his office – distance between his
home and the client and the
distance from the client to office.
Salesperson usually works at V&A
travels from her usually shop to PTA
store to do a stock count – travel
between home, CPT and PTA.
Home office – travel to a client’s
house to assist.
Methods to calculate business portion
a. Actual cost method
Available
ONLY IF accurate records of costs were kept. (I.e. the
taxpayer must be able to prove the amount of actual costs
incurred).
Portion expended for
business purposes
Business Km x Actual rate per Km
Calculation of actual rate per KM
•
•
Amount (R)
If vehicle is leased: lease payments – total lease payments for the year
may not be > fixed cost per table based on the vehicle’s cash cost.
If vehicle is owned: wear and tear – calculate over a 7-year period, cost
is limited to R595 000.
Finance charges incurred to finance acquisition of the vehicle – limited to an
amount which would have been incurred had the original debt not exceeded
R595 000.
Fuel costs / maintenance costs/ insurance costs/ licensing fees/ etc.
Total actual cost incurred
Actual rate =
𝐓𝐨𝐭𝐚𝐥 𝐚𝐜𝐭𝐮𝐚𝐥 𝐜𝐨𝐬𝐭 𝐢𝐧𝐜𝐮𝐫𝐫𝐞𝐝
𝐓𝐨𝐭𝐚𝐥 𝐤𝐦 𝐭𝐫𝐚𝐯𝐞𝐥𝐥𝐞𝐝
x
x
x
xx
b. Deemed cost method
Available
In all cases, irrespective of whether the taxpayer kept
accurate records of costs incurred.
Portion expended for
business purposes
Business Km x Deemed rate per Km
Calculation of deemed rate per KM
•
Amount (R)
Fixed cost per table/ total km travelled during the year (this includes km
travelled for both private and business purposes).
If the vehicle is used for business purposes during a period which is less
than a full year, the fixed cost must be reduced proportionately then:
•
𝐃𝐚𝐲𝐬 𝐮𝐬𝐞𝐝 𝐟𝐨𝐫 𝐛𝐮𝐬𝐢𝐧𝐞𝐬𝐬 𝐩𝐮𝐫𝐩𝐨𝐬𝐞𝐬 ÷ 𝟑𝟔𝟓 (𝐨𝐫 𝟑𝟔𝟔)
-
Fixed cost per table ×
-
Fixed cost amount in quoted in RAND.
x
𝐓𝐨𝐭𝐚𝐥 𝐤𝐦 𝐭𝐫𝐚𝐯𝐞𝐥𝐥𝐞𝐝 𝐝𝐮𝐫𝐢𝐧𝐠 𝐭𝐡𝐞 𝐲𝐞𝐚𝐫
Fuel cost per KM as per table where the recipient has borne the full cost –
quoted in cent per km – must, therefore, convert to RAND.
Maintenance cost per KM as per table where the recipient has borne the full
cost* – quoted in cent per km – must, therefore, convert to RAND.
x
x
*Cannot be claimed if a maintenance plan is part of the cost price at acquisition.
Deemed rate per km
xx
c. Simplified method
Available
Allowance must be based on actual km travelled; and
no other travel allowance or reimbursement (other than for
parking or toll fees) is payable by the principal to the
recipient.
Portion expended for
business purposes
Business Km x Simplified rate per Km
Simplified rate = fixed amount of 361c per km (ITA)
•
•
Cannot apply if the person receives a fixed allowance per month.
Applies when for example, the person is sent to a client and the company reimburses
them per km.
Anti-avoidance rule – s8(1)(b)(iv)
•
Employee (or spouse or child) lets their own vehicle to the employer (ER) or
associated institution and is then awarded the right of use of the same vehicle:
Travel allowances and employees’ tax – chapter 10
Reimbursive travel allowance
100% of excess* = remuneration
* Excess = (rate paid by ER less rate of simplified
method R3.61) x business km travelled
Fixed travel allowance
If the ER convinced that:
• Vehicle < 80% for business:
80% x gross travel allowance = remuneration
• Vehicle ≥ 80% for business:
20% x gross travel allowance = remuneration
B. Subsistence allowances – s8(1)(a)(i)(bb) & s8(1)(c)
•
•
•
s 8(1)(a)(i)(bb) requirement: EE must spend at least one
night away from his usual place of residence in SA for
business purposes – i.e. EE must be a resident.
Claim deemed costs per day/part of a day – s 8(1)(c)(ii) –
i.e. one night away = can claim 2 days’ deemed costs.
Net subsistence allowance is included in taxable income.
“Night” means one full
period from sunset of
one day to sunrise of the
next.
Methods to calculate business portion
a. Actual cost method
Available
•
Amount the recipient actually
expends for business
purposes is
•
Excluding
•
Limited to
•
•
The amount TP proves to CSARS was actually
incurred.
Therefore, the recipient will need to obtain and retain
supporting documentation (invoices, receipts, etc.)
For accommodation, meals and other incidentals.
Any amount of expenditure borne by the ER (otherwise
than by way of the allowance or advance).
• The ER bears the expense if:
- The ER pays it directly or,
- If the EE pays the expense but is subsequently
reimbursed by the ER.
The amount of allowance or advance granted to meet
the expenses.
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 charge for bed and breakfast, the cost of the
breakfast may be regarded as part of the cost of accommodation.
b. Deemed cost method
Available
•
Amount the recipient actually
expends is deemed to be
equal to…
•
•
Excluding
•
•
Limited to
•
For meals and other incidental costs, or incidental costs
only.
For each day or part of a day in the period during which
the recipient is absent from his or her usual place of
residence.
An amount determined by the CSARS as published in
the Government Gazette.
Any amount of expenditure borne by the ER (otherwise
than by way of the allowance or advance) for which the
allowance or advance was paid.
Any amount proved by the recipient to SARS as the
actual expenditure and claimed as a deduction for
meals or incidental costs equal to the actual costs for
that day or part of that day.
The amount of the allowance or advance granted to
meet these expenses.
Amount determined by the CSARS
TRAVEL WITHIN RSA
R138 per day for incidental costs paid.
R435 per day for meals and incidental
costs.
TRAVEL OUTSIDE RSA
See amounts per regulation on pages 300304 of the ITA.
Counties are listed in alphabetical order.
s 25D translation rules: spot rate or average
rate for NPs – s 25D(3).
Subsistence allowances and employees’ tax – chapter 10
•
•
Not remuneration – definition of ‘remuneration’ par (bA)(ii) of the 4th
Schedule to the ITA.
BUT (proviso to subpar (ii) of par (bA) of the definition of ‘remuneration’ in par
1 of the Fourth Schedule):
If the employee has not by the last day of the month following the payment of the
allowance either…
i. Spent a night away from his/her usual place of residence; or
ii. Paid the allowance back to ER, the amount is
▪ deemed to be paid for services rendered (‘gross income’ par (c)), and
▪ ET must then be deducted.
C. Other allowances or advances or reimbursements
•
s8(1)(a)(i) is meant to deal with all allowances, advances and
reimbursements not only those related to travel and subsistence.
Travel/ subsistence allowance
Net amount included in taxable income – s 8
specifically allows the gross allowance/ advance
to be reduced with the “business” expenditure
incurred.
Any other allowance – that is NOT
travel or subsistence
E.g.
Gross amount included in taxable income – s 8
does not allow for the gross allowance/ advance
to be reduced with the “business expenditure
incurred”.
•
Cell phone allowances/ advances/
reimbursements
Housing allowances
Entertainment allowances/
advances/ reimbursements
•
•
3. SEVENTH SCHEDULE BENEFITS
‘valuation rules’ for non-cash benefits
Paragraph (i) of the gross income definition in section 1(1).
“The cash equivalent, as determined under the provisions of the Seventh Schedule, of the value
during the year of assessment of any benefit or advantage granted in respect of employment or to
the holder of any office, being a taxable benefit as defined in the said Schedule…”
Fringe benefit
• Defined as: Benefits granted to EE in a form other than cash – for services
rendered.
-
•
E.g. the employee may have the right to use a company car in lieu of a portion of
his or her cash salary.
Can be beneficial to EE, as the amount that the EE must include in his or her
gross income pursuant to par (i) of the definition of gross income, may be
lower than the amount of cash salary sacrificed to obtain the benefit.
Par (i) of the gross income definition includes the ‘value’ of fringe benefits
received by employees or directors in their gross income.
•
-
•
This ‘value’ is called the ‘cash equivalent’ of the fringe benefit and it is determined
under the provisions of the 7th Schedule. (Cash equivalent = value of non-cash
benefit.)
Obligation on ER to determine the cash equivalent of a taxable benefit.
-
ER completes an IRP5 form.
•
•
If not a taxable benefit: fall back to par (c) of the definition of gross income.
The Act contains ‘no value’ provisions in respect of each type of taxable benefit – par (i)
benefit but means that the CE is nil. (Cannot include i.t.o. par (c).)
•
Exclusions to the definition of ‘taxable benefit’ in par 1.
-
benefits that are exempt i.t.o. s 10
medical services and other benefits provided by a benefit fund
lump sum benefits from a retirement fund or a benefit fund
benefits received by government employees stationed outside the Republic in
respect of services rendered outside the republic, and
severance benefits (lump sum cash amount)
-
•
“benefit or advantage granted in respect of employment”, i.e. an ER-EE
relationship must exist.
Associated institutions
Anti-avoidance
• Defined in par 1 = Deemed that the ER granted the
benefit (in terms of par 4).
• TPs claimed that as an EE-ER relationship did not
exist, it was not a FB as defined.
• Three categories of employers:
- ER is a company: another company managed or
controlled by the same person.
- ER is not a company: another company
managed or controlled by ER/partnership of
which ER is a member.
- ER is a fund: established to provide benefits to
EEs.
Benefits granted to relatives of EE
and others
• As a result of the EE’s employment or services
rendered.
• Par 16 → taxed in the hands of the EE.
Consideration paid by EE
• When calculating the CE → deduct any
consideration paid by the EE.
• CE = Value – consideration
• Services rendered ≠ consideration
• E.g. receive a company vehicle, but must pay
R2000 p.m.
ER’s duties
• ER who granted the TB has the responsibility to
determine the CE.
Types of taxable benefits – par 2
Par of the Seventh Schedule
2
5-13
Paragraph 2
(a)
(b)
(b)
(c)
(d)
(e)
(f)
(g)
(gA)
(h)
(i)
(j)
(k)
Details
Defines the types of taxable benefits (fringe benefits)
Determines the cash equivalents (CE) of the taxable benefits.
Employment Benefit
Acquisition of an asset for no consideration or at less than actual
value – e.g. laptop (R10 000) pay R6 000.
Right of use of an asset (but not residential accommodation or
motor vehicles – own paragraphs)
Right of use of a motor vehicle
Meals & refreshments & vouchers – but not if provided with
residential accommodation
Residential accommodation
Free or cheap services – e.g. SU gives discount to kids of lecturer
Low-interest loans
Subsidies on loans
Housing subsidy scheme
Payment of employee debts or release of an employee of an
obligation to pay a debt
Benefit funds – e.g. medical aid contributions
Medical expenses paid by ER – other than contributions
Long-term insurance paid by ER
Valuation
5
6
7
8
9 and 10A
10
11
12
12
13
12A
12B
12C
a. Assets acquired at less than the actual value
Definition
Par 2(a) and 5
•
•
Asset acquired for no consideration; or
Asset acquired for less than actual value (see exclusions)
Cash equivalent
•
Value of the asset less consideration paid by EE
Value
•
•
MV on date of acquisition by EE.
Special rules in par 5(2):
- Movable property acquired to provide to EE = CP
- Marketable securities and assets previously used by ER =
MV
- Trading stock of ER = lesser of CP/MV
- Asset for bravery/long service = ҅ Value’ less the lesser of
CP or R5 000
•
‘Long service’ – initial unbroken period of service of not less
than 15 years or any subsequent period of service of not less
than 10 years.
•
•
Fuel and lubricants i.r.o. company car if private use brought
into account as taxable benefit – i.e. taxed in different par.
Immovable property acquired by EE – see exceptions
below
Acquisition of accommodation – requirements in s10A(2)
Employees Tax
•
CE = remuneration
Additional
•
Zero value items = TB, then Rnil is included in gross income
in terms of par (i).
If an item is not a TB – not within the 7th schedule and must
fall back to par (c) of the definition of gross income.
Base cost for CGT purposes = value in the 7th Schedule.
CP or MV used =
excluding VAT
NB! Memorise list for
exam, cannot rely on
the Act.
No Values
•
•
•
Immovable property acquired by EE – When is it not a zero-value item?
•
•
No value provision – par5(3A)
Must meet all three requirements for it to be a zero-value item.
b. Use of sundry assets
Definition
Par 2(b) and 6
•
•
Free private (or domestic) use of various assets; or
Private use of various assets for a consideration less than the
value of private use.
Cash equivalent
•
Value of the asset less consideration paid by EE
Value
•
•
ER rents asset: Rent paid by ER
ER owns asset: 15% (for a full year) x lesser of CP or MV of
asset x (period used/365 or 366 days)
EE has sole right of use of asset over useful life or major
portion thereof: CP for ER
of private use
•
MV – on the date of the commencement of the period of use.
I.e. taxable benefit is deemed to have accrued to the EE on the day on
which he was first granted right of use of the asset (assets that age
quickly e.g. a laptop).
Major – not defined in the Act and must, therefore, be given its ordinary
meaning.
I.e. if the employee is granted the right to use the asset for more than
50% of its useful life, it will constitute the right to use the asset for a
major portion of its useful life.
No Values
•
•
The private use of the asset is incidental to the use thereof
for ER business (does not apply to clothing).
Provided as amenity to be enjoyed at work or for recreational
purposes.
Asset is telephone or computer used >50% for business
purposes.
Asset is books, literature, works of art etc.
•
CE = remuneration (calculated monthly)
•
•
Employees Tax
c. Right of use of motor vehicles
Definition
Par 2(b) and 7
•
•
Free private use (can be a portion) of motor vehicle, or
Use of a motor vehicle for consideration less than value of
private use.
Cash Equivalent
•
Value of private use less consideration paid by the EE
Value of private
use
Par 7(4)
1. ER owns the motor vehicle – i.e. not acquired under
operating lease:
Value of private use per month = determined value x
3.5% or 3.25% x number of months
•
•
•
•
Determined value = Retail MV (will be given) excluding finance
cost x 85% for each 12-month period from when the ER acquired
vehicle until EE was first granted right of use.
3.25% – If maintenance plan was included in cost price of motor
vehicle when acquired by ER.
Number of months – If vehicle is used for a part of month
(remember to apportion based on days).
If the motor plan expires = still use 3.25%, if there’s an option to topup = use 3.5%.
2. Vehicles acquired under operating lease:
• Value of private use = ER’s actual cost i.t.o. operating lease +
cost of fuel
Par 7(6)
ER grants ROU of >1 vehicle to EE then:
• Each vehicle = separate taxable benefit.
• However: if SARS is satisfied that the EE used each vehicle
primarily for business purposes
- Value of private use on all vehicles is = to only that of the
one with the highest value of private use.
• Exception: Par7(6) does not apply if par7(7) or par7(8) is
applicable (reductions on assessment).
No values
•
•
If the vehicle is available for use in general, and the private
use is incidental or infrequent and the vehicle is not
normally kept at the employee's residence.
If the nature of the employee's duties regular requires him to
use the vehicle for his duties outside his normal hours of work
and his private use is thus limited to the travelling between
his place of residence and his place of work, or it is merely
incidental or infrequent to its business use.
Reduction of value
of private use
Value of private use
Less: consideration paid by EE
Cash equivalent
Less: par 7(7) adjustment
Less: par 7(8) adjustment
Amount included in gross income
Adjustment on
assessment
Par 7(7)
•
•
xxx
(xxx)
xxx
(xxx)
(xxx)
xxx
Business km must be proved (logbook)
Adjustment = Value of private use x business km/total km
Purpose: 3.5% or 3.25% – assumes employee only uses the employerprovided vehicle for private or domestic purposes ⸫ par 7(7) reduction allows
the employee to reduce the “value of private use” placed on the vehicle on
assessment if the employee can prove that the vehicle was also used for the
purposes of the employer’s business.
Adjustment on
assessment
Par 7(8)
Reduction only allowed if
EE bears the full cost –
if vehicle is subject to a
maintenance plan ≠
bearing full cost.
Employees Tax
•
•
•
Private km must be proved, full cost must be paid by EE.
Adjustment for cost of L/I/M = cost x private km/total km
Adjustment for cost of fuel for private use = private km x
deemed cost per km for fuel (table)
Purpose: 3.5% or 3.25% – based on the presumption that the employer carries
all the vehicle’s operating expenses ⸫ par 7(8) reduction allows the employee to
reduce the value of the fringe benefit on assessment if the employee can prove
that the employee and not the employer bore certain costs relating to the
employee’s private use.
•
•
Remuneration = Cash equivalent x either 80% or 20%
The cash equivalent is the value before the paragraph 7(7)
and 7(8) adjustments have been made.
If any travel allowance is received i.r.o. a par 7 company car and the taxpayer also has
right of use of the same vehicle:
• The full gross travel allowance is included in taxable income.
• No deduction is allowed against the travel allowance.
• The company car is taxed i.t.o. par 7, and the par 7(7) and 7(8)-reductions will be
allowed.
•
•
Travel allowance
Amount of money (i.e. a cash amount) that is
given by a principal (e.g. an employer) to a
recipient (e.g. an employee) to incur businessrelated travel expenses on behalf of the
employer.
S8
•
•
Right to use a motor vehicle
Not a cash benefit, the employee receives the
right to use a motor vehicle (an asset) provided
by the employer.
The right of use of a motor vehicle provided by
an employer to an employee for private or
domestic purposes is regarded as a taxable
benefit in the hands of the employee, the value
of which is determined in accordance with the
7th Schedule.
X
d. Meals, refreshments and meal and refreshment vouchers
Definition
Par 2(c) and 8
•
•
Free meals, refreshments and refreshment voucher (M, R, V);
or
Meals for consideration less than value of M, R or V
Cash equivalent
•
Value of M, R, V less consideration paid by EE
Value
•
Value = cost of M, R, V for ER
No Values
•
Meal provided in canteen/cafeteria/dining room wholly or
mainly used by EEs.
Employees Tax
•
•
•
•
Meal provided on business premises.
Meal during business hours (or extended working hours).
Meals on special occasions.
Meals when EE is required to entertain on behalf of ER.
•
CE = remuneration
e. Residential accommodation
Definition
Par 2(d) and 9
•
•
Free residential accommodation; or
Residential accommodation for rental consideration less than
rental value.
Cash equivalent
•
Rental value less rental consideration paid by EE.
Rental Value
1. If owned by ER, rental value = formula value
• Formula: (A – B) x C/100 x D/12
- A = remuneration proxy (will be given);
- B = R79 000 (Can be Rnil in two cases – see below)
- C = 17, 18, 19 (Choose based on number of rooms)
- D = number of months
Apply one of two rules
2. If rented by ER, rental value = lower of formula value or
expenditure paid by ER.
• The expenditure must relate to ROU (e.g. if the electricity is
paid or fully furnished house).
No Values
•
Resident EE: Away from usual place of residence in RSA for
work purposes (E.g. temporary accommodation for work –
then do not apply formula) – par9(7)
• Non-resident EE: Away from usual place of residence
outside RSA – par 9(7A):
- For period of ≤ 2 years (two exceptions to this par
9(7B)(i) and (ii))
▪ ≤ 2 years = no TB value
▪ > 2 years = formula for TB or
- For period < 90 days in YOA
Two exceptions: ‘No value’ is not applicable and person is therefore taxed
1. >90 days in SA during previous YOA
2. the excess CE over R25 000 pm
Employees Tax
•
CE = remuneration
When must B be
reduced to 0?
Two cases:
1. Case 1
- ER = private company, and
- EE or spouse controls the company or is one of the
persons who control the company (directly or indirectly)
OR
2. Case 2
- EE/ Spouse/ Minor child has the right of option or preemption granted by ER/ associated institution/ other
person in arrangement with ER whereby,
- EE/Spouse/Minor child may become the owner of the
residential accommodation whether directly or indirectly by
virtue of a controlling interest in the company or otherwise.
Chosen “C” value
•
•
•
17 = Default – if a house has 3 rooms
18 = at least 4 rooms – only bedrooms do not include
bathroom + fuel
Or at least 4 rooms + furnished
19 = 4 rooms + fuel + furnished
Deemed housing loan – par 10A
•
•
Purpose: to counter schemes whereby an EE has the right to acquire residential
accommodation at a future date in accordance with an agreement with the ER.
Do not apply formula. EE deemed to have received a loan equal to future
purchase price and any rental amounts paid= deemed to be interest.
f. Holiday accommodation
Definition
Par 2(d) and 9(4)
•
•
Free holiday accommodation; OR
Holiday accommodation for consideration less than rental
value
CE
•
Rental value
Rental Value
•
Rental value if ER rents holiday accommodation from person
other than associated institution = cost of rental, meals,
refreshments and other services OR
•
In all other cases: prevailing rate per day (leased to person
who is not an employee).
No Values
•
None
Employees Tax
•
CE = remuneration
g. Free or cheap services
Definition
Par 2(e) and 10
•
Free or cheap services (used by EE for private or domestic
purposes)
-
CE
•
No values
•
ER provides you with a service e.g. lecturers studying for free or
supplies it to you via an outside party such as paying your phone
bill.
ER in business of conveying passengers by sea or air
outside RSA:
- Lowest fare less consideration paid by EE or relative.
• All other cases:
- Cost for ER less consideration paid by EE
•
•
•
•
Employees Tax
•
Travel to destination in RSA; travel overland to destination
outside RSA, or travel by flight or voyage to destination
outside RSA, but no firm advance reservation of seat.
Transport service to and from work.
Communication service provided to EE if mainly used for ER
business. E.g. ER buys airtime or data and uses it for
business > 50% then: remaining will not be taxed.
Services provided by ER at place of work (requirements)
Travel facility to spouse or minor child if EE works > 250 km
from usual place of residence and must work there for > 183
days.
CE = remuneration
Free or cheap services – BMW South Africa (Pty) Ltd v CSARS [2019] ZASCA 107
Principles:
•
•
•
An ancillary benefit (“peripheral advantage”) derived by an employer from the provision of
private or domestic services to an employee will not preclude such services from
constituting taxable fringe benefits in the hands of the employees.
There will be instances in which benefits have some residual or marginal advantage for an
employer.
The primary question is 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.
h. Low-interest debts
Definition
Par 2(f), 10A and 11
•
•
•
Debt owed by EE to ER at no interest; or
At rate lower than the official rate of interest
I.e. either pay a low-interest rate or not enough interest per
the official interest rate.
CE
•
Interest at official rate of interest less actual interest paid
by EE
In the test, can be
given the repo rate
and must then adjust.
-
Official rate of interest = RSA repurchase rate + 1% point
Accrual of CE – Cash equivalent deemed interest actually
incurred for the purposes of s11(a), if in production of income.
Changes in official rate of interest: If there is a change in the
repo rate, it applies from the first date of the following month.
Deemed loan
•
Residential accommodation taxed as a low-interest loan –
see requirements in par10A(1).
No values
•
Total debt ≤ R3 000 (this is short term debt granted on an
irregular basis, not merely all debts ≤ R3 000).
Debt incurred to further EE’s studies.
Debt in consequence of a loan <R450 000 to acquire
immovable property if all the other requirements are met.
•
•
Employees Tax
•
•
CE = remuneration
CE accrues when interest is payable or when remuneration is
payable – par 11(2)(a).
i. Subsidiaries in respect of debts
•
Subsidies paid by ER in respect of interest or repayment of
capital payable by EE in respect of debt of the EE to a third
party.
CE
•
Amount of the subsidy paid by the ER
Employees Tax
•
CE = remuneration
Definition
Par 2(g), 2(gA) and 12
Low interest rate loans vs. subsidies
Consider the rates that the EE and ER are paying for the loan if:
Subsidy
Sum of ER and EE rates > official interest rate
Low-interest rate loan
Sum of ER and EE rates < official interest rate
CE = calculate with reference to rate paid by
ER
CE = calculate with reference to rate paid by
EE
Consider the following example:
•
•
EE borrows R50 000 from Nedbank.
Interest rate: prime rate – of which the EE pays a fixed rate of 6% and the ER pays the
difference between prime and 6%.
•
The relevant interest rates for the YoA under consideration were as follows:
First 6 months of YoA
14%
15%
Prime
Official interest rate
Last 6 months of YoA – Subsidy
•
CE: R50 000 x 10% x 6/12 = R 2
500
Last 6 months of YoA
16%
15%
First 6 months of YoA – Low-interest rate
loan
• Interest paid by EE: R50 000 x 6% x
6/12 = R1 500
• Interest @ official rate: R50 000 x
15% x 6/12 = R3 750
• CE = R3 750 - R1 500 = R2 250
j. Discharge or payment of obligation
Definition
par 2(h) and 13
•
•
Discharge of obligation to pay debt owing by EE to ER; OR
Direct or indirect payment of debt owing by EE to third party
(NB! This will include ER contributions to RAF – compare with ER
contributions to pension and provident funds).
CE
•
•
Amount released or paid by ER (debt being written off)
The amount of the deemed release on the prescription of a
debt
No values
•
Payment of subscription to professional bodies if
membership is requirement of EE’s employment (e.g. ER
pays SAICA membership fees as it is a requirement of
employment = TB but has 0 value).
Payment of insurance premiums indemnifying an EE
against claims arising from negligent acts or omissions of EE
in the course of his or her employment.
The value of a benefit paid by a ‘former member of a nonstatutory force or service’ to the ‘Government Employees’
Pension Fund’
ER pays EE’s debt to his/her first ER i.r.o a study
loan/bursary on behalf of EE – requirements in par 13(3).
•
•
•
Note: A scholarship, which is subject to repayment if certain written conditions are
not met, is treated as a bona fide scholarship or bursary until the conditions are
not fulfilled. In the tax year in which such conditions are not fulfilled, the amount of
the scholarship will be regarded as a debt and any benefit that the employee may
have received will constitute a taxable benefit.
Employees Tax
•
CE = remuneration
k. Contributions to benefit funds
Interaction with s6A
Definition
Par 2(i) and 12A
•
Direct or indirect contributions to benefit funds by ER for
benefit of EE or dependants
- Including contributions to medical schemes, based on
definition of benefit fund – s 1(1))
- Applies only to medical schemes and must be either
registered in RSA or in another country.
CE
•
•
Amount of contributions paid by ER or
If contributions cannot be specifically attributed, then it is
𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛𝑠
deemed that contribution = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠
No values
•
Employees Tax
•
•
Person retired from employment due to age, ill-health or
other infirmities – remember impact on s6A credit.
• Dependants of deceased EE
• Dependants of deceased retired EE
- Dependents = child, spouse, family members taking care
of.
CE = remuneration
ER takes s6A credit into account when calculating ET
- Deemed to have been paid for the purpose of calculating
medical credits.
Example – par 12A(2)
Salazar (Pty) Limited has 100 employees. Salazar pays a premium of R550 000 per month in
respect of a group medical scheme it has with Pomfrey Health. No particular part of the premium is
attributable to any one employee. All employees and their dependents are entitled to the
healthcare benefits that the group medical scheme provides. In addition to the 100 employees, the
scheme also provides healthcare benefits to 85 dependents.
What is the cash equivalent of the taxable benefit provided to Salazar’s employees?
-
Don’t consider the number of dependents or whose dependents they are, only divide by
the number of employees.
-
CE =
𝑅 550 000 𝑥 12𝑚
100
= 𝑅66 000 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 𝑝𝑒𝑟 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒
l. Costs relating to medical expenses
Interaction with s6B
•
Costs in respect of various medical services to EE, spouse,
child, relative or dependant paid by ER.
CE
•
Amount incurred by ER.
No values
•
•
Medical treatments listed by Minister
Services rendered/medicine supplied to comply with RSA law
(i.e. HIV/AIDS medicine)
Definition
Par 2(j) and 12B
If there is legislation
that obligates the ER
to pay it for the EE,
then there is no value.
•
•
•
•
•
Person retired due to age, ill-health or other infirmities
Dependants of deceased EE
Dependants of deceased retired EE
Person entitled to over 65 rebate
Services at workplace to EEs in general (better performance
of duties)
Employees Tax
•
CE = remuneration
m. Benefits i.r.o. insurance policies
Definition
•
Payment of premiums to insurer under insurance policy
directly/indirectly for benefit of EE, spouse, child,
dependent or nominee.
Par 2(k) and 12C
•
Exclusion in proviso to par 2(k) – i.e. not a taxable benefit:
-
Insurance policy relates to an event arising solely out of and in
the course of employment of the EE.
For example, a policy that pays out if the EE is injured at work. In
other words, no taxable benefit arises in the hands of the EE.
Work-related policy = no TB
After work policy = TB
CE
•
Amount of premiums paid
No values
•
None
Employees Tax
•
CE = remuneration
Pension and provident funds
What is the difference between defined contribution and defined benefit funds?
Defined contribution fund
Defined benefit fund
The contributions made by the member and
the employer are defined as a percentage
of the member’s current salary. When the
employee’s salary increases, the
contributions to the fund also increase.
The pension to which the member is
entitled after retirement is not based on the
contributions plus growth. The retirement
benefit is based on the member’s final
salary and is calculated by using a formula
which is incorporated in the rules of the
fund – seldom tested.
• If the question does not state, then can
assume it is a defined contribution fund
• If it is a defined contribution fund, then
it falls on the EE.
When the employee retires his retirement
benefit will be a value equal to:
• The contributions paid by the member
and the employer on his behalf;
• Less such expenses as the board
determined should be deducted from
the contributions paid;
• Plus growth on such contributions.
Benefit = contributions – expenses +
growth
The benefit amount is used to finance the
pension.
n. Contributions by ER to pension and provident funds – defined contribution
fund
Interaction with s11F
Definition
•
•
Contributions by ER to pension and provident funds for
benefit of EE.
Defined contribution fund: contributions and benefits at
retirement correlate.
CE
•
Par 12D(2) = Total contributions made by ER
No Values
•
Benefits derived from contributions made:
Par 2(l) and 12D
-
For the benefit of a member who retired from the fund; OR
For the benefit of dependants/nominees of deceased member.
Transfers
Provisio to par 2(l)
•
Transfers of actuarial surpluses between or within retirement
funds of the same ER are not a fringe benefit.
Employees Tax
•
CE = remuneration
o. Contributions to pension and provident funds – defined benefit fund
Definition
Par 2(l) and 12D
•
•
Contributions by ER to pension and provident funds for
benefit of EE.
Defined benefit fund: Contributions based on retirement
funding employment (RFE) income and benefits calculated
per fund member category i.t.o. a formula.
CE
•
Par 12D(3) = amount according to formula:
X = (A x B) – C
Note: value of X will
be given.
•
•
•
A = fund member category factor of EE
B = RFE income of EE
C = total contributions by EE (excluding voluntary contributions and
buy-back contributions)
No Values
•
•
Benefits derived from contributions for the benefit of a
member who retired from fund; or
To benefit of dependants/nominees of a deceased member
•
CE = remuneration
Employees Tax
4. TAXATION OF DIRECTORS AND EEs AT VESTING OF EQUITY
INSTRUMENTS – s8C
•
•
Director or EE may acquire restricted or unrestricted equity instruments.
Any gain or loss made by a director or an EE as a result of the vesting of an
equity instrument must be included in or deducted from the income of said
person if s8C applies.
• Section 8C applies in respect of:
- Gains or losses made by a director/EE as a result of the vesting of an equity
instrument – as defined in S8C(7), if
- The said instrument was acquired by virtue of the director’s holding of an
office or the employment of the EE, i.e. an ER-EE relationship exists.
Restricted equity instrument
Equity instrument vests at the earliest of 5
events.
Unrestricted equity instrument
Equity instrument vests at acquisition.
S8C(3)(b)
S8C(3)(a)
• When all restrictions cease to exist;
• Immediately after an option terminates
(other than by exercise);
• Immediately after a convertible financial
instrument terminates (other than by
being converted);
• Immediately before a taxpayer dies if all
the restrictions are or may be lifted on
death;
• The time an option to acquire an equity
instrument or financial instrument
convertible into an equity instrument is
released, abandoned or lapses.
This part of the work is no longer in the 7th schedule but is in the main body of the act
a. Upon acquisition of restricted equity instruments
•
•
•
Inclusion in gross income – general definition s 1(1).
Exemption in terms of s 10(1)(nD)
When you acquire these equity instruments s8C will not apply, it is however
still an 8C instrument, it has just not been triggered.
• Therefore use, par(c) of GI definition (cannot use par(i) as it is not a SB)
- Impact on taxable income = 0
b. Upon vesting of equity instrument
•
•
•
Unrestricted equity instrument: vests at acquisition
Restricted equity instrument: vests at earliest of 5 events
s 8C: Gain or loss included in income when equity instrument vests (overrides
s 23(m) and s 9C).
• Inclusion in gross income – par (n) of definition s 1(1)
- Gain or loss = MV at vesting (or amount received) less consideration paid
by director or EE for equity instrument.
•
Once the gain/loss has been subject to normal tax under s 8C on vesting, further normal tax
consequences can arise when the instrument (e.g. shares) is disposed of – i.e. after vesting.
If proceeds = capital → apply provisions of the 8th schedule to the ITA.
For CGT purposes the base cost of the shares = market value that was taken into account to
determine the s 8C gain or loss (refer to par 20(1)(h)(i) of the 8th Schedule).
Very NB that you site the correct authority for the equity instrument.
•
•
•
Examples
i. Restricted equity shares
•
•
•
As part of EE remuneration package for services rendered, EE acquires 500 equity
shares in Company A for R2 000 on 31/12/2016. The shares may not be sold for a
period of 2 years.
EE sells the shares @ MV on 31/12/2019.
Historical share prices:
Date
31/12/2016
31/12/2017
31/12/2018
31/12/2019
R
R6 per share
R8.50 per share
R11 per share
R15 per share
Calculate the normal tax effect of the above on the 2017, 2018, 2019 and 2020
years of assessment.
Assume that the shares are held as capital assets and that there were no other
transactions in any year of assessment.
2017 YOA
2018 YOA
2019 YOA
VEST
Gross income (R6 x R500) – R2 000
Exempt income – s10(1)(nD)
Income
Gross income
Exempt income
Income
Gross income (R11 x 500) – R2 000
Exempt income
Income
Amount (R)
1 000
(1 000)
Amount (R)
Amount (R)
3 500
3 500
2020 YOA
Amount (R)
-
Gross income
Exempt income
Income
Taxable capital gain
Proceeds: 500 x R15 = R7 500
BC: (500 x R11) = R 5 500
CG: 2 000
Less: Annual exclusion (40 000 ltd. R2 000)
ii. Unrestricted equity shares
•
•
•
As part of her remuneration package for services rendered, EE acquires 500 equity
shares in Co A for R2 000 on 31/12/2016. The shares may not be sold for a period of
2 years. Now assume that the shares are unrestricted.
EE sells the shares @ MV on 31/12/2019.
Historical share prices:
Date
31/12/2016
31/12/2017
31/12/2018
31/12/2019
R
R6 per share
R8.50 per share
R11 per share
R15 per share
Calculate the normal tax effect of the above on the 2017, 2018, 2019 and 2020
years of assessment.
Assume that the shares are held as capital assets and that there were no other
transactions in any year of assessment.
2017 YOA
VEST
2018 YOA
2019 YOA
2020 YOA
Gross income (R6 x R500) – R2 000
Exempt income
Income
Gross income
Exempt income
Income
Gross income (R11 x 500) – R2 000
Exempt income
Income
Gross income
Exempt income
Income
Taxable capital gain
Amount (R)
1 000
1 000
Amount (R)
Amount (R)
Amount (R)
-
c. The interaction between s 8C and s 10(1)(o)(ii)
•
•
s 8C gains qualify for exemption under certain circumstances.
Inclusion of gain = on vesting but ‘vesting’ not the originating cause of the
gain being received as income.
•
•
•
•
Originating cause = services rendered by TP and not the place where the
right to participate in the share scheme was offered or accepted and not the
place where the TP was located at the time that vesting occurred.
Remember: only remuneration (including s 8C gains) that relates to services
rendered outside the RSA can qualify for the exemption.
If the remuneration (including s 8C gains) relate to both services rendered
inside and outside the RSA, it must be apportioned based on workdays.
The gain made is deemed to accrue evenly over the period of services
rendered between grant date and vesting date.
𝑊𝑜𝑟𝑘𝑑𝑎𝑦𝑠 𝑜𝑢𝑡𝑠𝑖𝑑𝑒 𝑡ℎ𝑒 𝑅𝑆𝐴
Exemption portion = 8𝐶 𝑔𝑎𝑖𝑛 (𝑜𝑛 𝑣𝑒𝑠𝑡𝑖𝑛𝑔) 𝑥 𝑇𝑜𝑡𝑎𝑙 𝑤𝑜𝑟𝑘 𝑑𝑎𝑦𝑠 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑
Example
Year 1:
Ronica Vestrit (a resident) acquired 1 000 restricted equity shares in Vivacia Limited at R2
per share. The shares were awarded by virtue of her employment with Vivacia Limited in
year 1. During year 1, Ronica met the requirements of 183-day and 60-day tests, with the
result that her remuneration including any s 8C-gains on her equity shares qualify for the s
10(1)(o)(ii) exemption. The shares had a market value of R8 per share on grant date. Total
workdays = 262 days of which Ronica spent 200 rendering services to Vivacia outside RSA.
Year 2:
The restrictions are lifted and the shares vest on day 1 of year 2. On the vesting date, the
shares had a market value of R10 per share.
Year 1
Gross income (R8 x 1 000) – (R2 x 1 000)
Exempt income – s10(1)(nD)
Income
Year 2
Gross income (R10 x 1 000) – (R2 x 1 000)
Exempt income – s10(1)(o)(ii) R8 000 x 200/262
Income
Amount (R)
6 000
(6 000)
Amount (R)
8 000
(6 107)
1 893
CHAPTER 10 EMPLOYEES’ TAX
The following abbreviations are used in these notes:
Abbreviation
ER
EE
ET
TAA
BOR
ITA
LB
PSP
RAF
ROU
MTC
AMTC
CE
Meaning
Employer
Employee
Employees’ tax
Tax Administration Act
Balance of renumeration
Income Tax Act
Labour broker
Personal Service Provider
Retirement Annuity Fund
Right of use
Medical tax credit
Additional medical tax credit
Cash equivalent
These abbreviations may be used for the purposes of answering assessment questions IF a legend
is provided in the answer script.
1. INTRODUCTION
•
There are two main ways in which normal tax is collected.
Employees’ tax – Chapter 10
Deducted from the remuneration paid to
employees and paid over to the SARS by
employers (i.e. it is a withholding tax on
employment income).
•
Provisional tax – Chapter 11
Covered in chapter 11 and is payable by
registered provisional taxpayers.
Employees’ tax
Is not a tax in itself, it is a payment mechanism through which normal tax is
collected.
- Is, in essence, a withholding tax – tax is deducted at source.
-
•
•
•
Where an employer pays or becomes liable to pay remuneration to an employee, the
employer has an obligation to deduct or withhold employees’ tax from the
remuneration and pay the tax deducted or withheld to the SARS on a monthly
basis.
In most instances, the employer is obliged to issue each employee with an
employees’ tax certificate – IRP5/IT3 (a) – at the end of each tax period which
reflects, amongst other details, the employees’ tax deducted.
ER pays ET withheld to SARS within 7 days after the end of the month it was
withheld.
What if the 7th day falls on a Saturday/Sunday/Public holiday?
• Amount must be paid not later than the last business day before the
Saturday/Sunday/Public holiday – s244(1) of the Tax Administration Act.
•
EE’s normal tax payable is reduced by ET that was deducted from remuneration
during the year.
Section 157 of the Tax Administration Act (TAA) and par 5:
• If the ER does not withhold ET or does withhold it but does not pay it over to the
SARS, the ER becomes personally liable for the payment of the tax.
• The tax that the ER is liable to pay is deemed to be a penalty (par5(5)) – if the ER
does not exercise the right of recovery – therefore the ER cannot claim a section
11(a) of the ITA deduction – prohibited by section 23(d).
The link between the 4th Schedule and the ITA:
• s 89bis(1) provides that the payment of employees’ tax (Ch 10) and provisional tax
(Ch 11) must be made in accordance with the provisions of the 4th Schedule to the
ITA and that said payments are deemed to be made in respect of taxpayer’s liability
for “taxes”.
• The term “taxes” is defined in s 89bis(3) as bearing the same meaning as the term
“tax” as defined in s 1(1) but specifically excludes donations tax. The term “tax” in s
1(1) is defined as “any tax or a penalty imposed in terms of this Act”.
• Therefore, a liability for donations tax is not settled by way of employees’ tax or
provisional tax payments.
The 4th Schedule
Three elements must be present before employees’ tax can be deducted:
•
The 4th Schedule requires the presence of all three elements before employees’ tax
may be deducted – i.e. an employer paying remuneration to an employee.
These definitions are
interdependent
Central definition: ‘remuneration’ –
because it drives the application and
relevance of the other two – i.e.
definition of employee requires that
remuneration is received, and the
definition of employer requires that
remuneration is paid.
2. REMUNERATION – par 1
•
First step of ET calculation: calculate ‘remuneration’ – separate per ER for
each EE.
•
•
•
•
•
•
•
If an amount is ‘renumeration’ as defined, any person paying such amount to any other
person is defined as an employer – withheld ET.
The net amount of a lump sum benefit from a retirement fund is included in gross income.
The gross amount of severance benefits received from an employer who is not a
retirement fund is included in gross income.
These net and gross amounts are also renumeration.
Generally, every amount of remuneration accrued or paid to an EE is subject
to ET on the amount concerned (but subject to certain exceptions or special
rate rules).
If not remuneration as defined? Not subject to ET.
Three parts of definition: general definition, special inclusions and
exclusions.
- Non-residents: ET on remuneration earned from source within RSA.
- Par 2(1) – ER withholds ET when remuneration is paid or becomes liable
to pay amount to EE.
- Par 2(1B) – ET on variable remuneration (s7B) withheld on date on which
amount is paid to EE.
- Variable remuneration deemed to accrue to EE on date on which amount
is paid to EE by ER.
Definition
Amount of income
Exempt income is not remuneration
Paid or payable
To any person
By way of any:
• Salary, leave pay, wages,
overtime, bonus
• Gratuity, commission, fee,
emolument
• Pension, superannuation
allowance
• Retiring allowance or stipend
General part of definition
Whether in cash or otherwise
Whether or not for service rendered
Section 10 provides for the following relevant exemptions:
• Uniforms
• Transfer costs
• Remuneration in specific cases
• Study bursaries
Non-residents will only be subject to ET on renumeration earned from a source within the Republic.
There are also specific inclusions and exclusions discussed below:
Employees’ Tax
Normal Tax
Par (a)
Paragraph of
remuneration definition
in par 1 of the 4th
schedule to the ITA
Par (a)
Par (c)
Par (cA)
Paragraph of gross
income definition in
s1(1) of the ITA
Type of remuneration
Annuities including
s10A-annuity amounts
State pension and
various grants i.t.o.
various acts.
An annuity i.t.o.
divorce order.
Par (a)
Services rendered
(e.g. Salary/ leave
pay/ bonus)
Amounts paid to
independent
contractors.
Par (a)
Restraint of trade
payment received by
LB or PSP
Labour broker who
does not have an
exemption certificate.
Par (cB)
Par (a)
Restraint of trade
payment received by
NP i.r.o. office
/employment
Par (d)
Par (a)
Gross lump sum
received from ER who
is not a retirement
fund (irrespective
whether it is a SB)
Remember: Payout of
accumulated leave =
par (c) of the gross
income definition s 1(1)
Par (e) & (eA)
Amounts specifically
excluded from
remuneration definition
Par (a)
Net taxable amount –
retirement funds
Ignore – HONS
Amounts transferred
Par (f)
Par (a)
Services: commutation
of amounts due
Par (i)
Par (b)
CE of taxable benefit
(fringe benefit)
Employees’ Tax
Normal Tax
Section
S 8(1) of the ITA
Right of use of motor
car (par 7 Seventh
Schedule – see par
(cB) for special rule)
Fringe benefits which
are exempt income
(e.g. uniform
allowances and
transfer costs)
Paragraph of
remuneration definition
in par 1 of the 4th
schedule to the ITA
Par (bA)
Type of remuneration
Amounts specifically
excluded from
remuneration definition
S 8(1)(a)(i) allowances
(e.g. computer
allowances and
Allowances (travel and
subsistence – see
special rules).
S 8(1) of the ITA
Subsistence allowance
not used
Proviso to par (bA)(ii)
and par (a)
entertainment
allowances)
Reimbursive
allowances i.t.o. s
8(1)(a)(ii) – “any
amount paid or
payable to any
employee wholly in
reimbursements of
expenditure actually
incurred by such
employee in the
course of his
employment”.
Subsistence allowance
only if EE has not by
the last day of the
following month
either spent the night
away or refunded the
amount to the ER.
NO ET on subsistence
allowance if works
away from home.
If the proviso applies: amount is not seen as a subsistence allowance.
The inclusion in remuneration is then in terms of par (a) (as it is deemed to be an amount paid for
services rendered – par (c) of gross income definition, s 1(1) of the ITA)
S 8 Fixed travel
allowance
Par (cA)
80% / 20% of a fixed
travel allowance
Par 7 of Seventh
Schedule and par (i) of
the ‘gross income’
definition in s 1(1)
Par (cB)
80% / 20% of CE of
par 7 fringe benefit
S 8 Reimbursive travel
allowance
Par (cC)
S 8C
Par (e)
S 8C gain at vesting
Various provisos to s
10(1)(k)(i)
Par (g)(iii)
Any amount received
or accrued to a person
by way of a dividend
i.r.o. a restricted equity
instrument (see par (jj)
of the proviso to s
10(1)(k)(i))
Fringe benefits
Benefits given by
associated
institutions
Benefits granted to
relatives of EE’s and
others
CE = value of private use
less consideration given
by EE (BEFORE par 7(7)
and 7(8) adjustments)
Reimbursive travel
allowance i.t.o.
s 8(1)(b)(iii).
100% of the excess
Excess = (ER rate –
R3.61) x business km
• Refer to par 4 of the Seventh Schedule
• Taxable benefit given to EE by associated institution in relation to ER
is deemed to be a taxable benefit granted by ER (ER deduct ET).
• Refer to par 16 of the Seventh Schedule
• Taxable benefit granted to EE’s relative under agreement/ transaction/
arrangement with ER is deemed to be granted to the EE.
• CE included in EE’s remuneration – subject to ET.
Directors’ fees
Type of director
Resident executive
directors
Resident nonexecutive directors
Employee?
Directors of public and private companies are
included in the definition of ‘employee’ in terms of par
(a) if they receive ‘remuneration’ as defined.
Employees’ Tax
ET must be
withheld
Directors’ fees are not regarded as remuneration and
are not subject to employees’ tax.
ET must not be
withheld
Why?
Binding General Ruling No 40 accepts that resident
non-executive directors are not common law
employees and that no control or supervision is
exercised over the manner they perform their duties or
their hours of work.
Non-resident nonexecutive directors
Directors’ fees are regarded as remuneration and are
subject to employees’ tax.
ET must be
withheld
Why?
Binding General Ruling No 40 does not apply to them
as it specifically excludes non-resident nonexecutive directors. The rule excluding amounts paid
to independent contractors from remuneration
(exclusion (ii) to the definition of ‘remuneration’)
further does not apply to any amounts paid to nonresidents for services rendered.
Right to acquire shares – Read
• The income tax effect of s 8C is trigger on “vesting”.
• An unrestricted equity instrument vests on acquisition and
• A restricted equity instruments vests at the earliest of 5 dates (refer to CH 8 notes).
• When the equity instrument vests in the taxpayer: the gain made in terms of s 8A, 8B and
8C are deemed to be paid to the employee by the person who granted the right or from
whom the equity instrument or qualifying equity share that gave rise to the gain was
acquired.
• Such gains are included in remuneration and will be subject to the deduction of
employees’ tax.
• Dividends – provisio (kk) to s 10(1)(k)(i) – is also remuneration.
Annuities and royalties – Read
Annuities
• Annuities, including ‘annuity amounts’ contemplated in s 10A(1) and living annuities, are
included in the definition of ‘remuneration’ (par (a)).
• The person paying an annuity is, therefore, an employer as defined in par 1.
Royalties
• Royalties do not fall within the definition of ‘remuneration’ if they are received for the use
or grant of permission to use a patent, design, trademark or copyright.
Exemption from income tax: foreign employment income – Read
• Section 10(1)(o)(ii) threshold comes into effect on 1 March 2020 (i.e. in the 2021 YoA).
• With effect from 1 March 2020, the exemption will only apply to the extent that the
employee’s remuneration for services rendered outside South Africa does not exceed R1
250 000 in respect of a year of assessment.
• I.e. foreign employment income earned that exceeds R1 000 000, is subject to normal tax
in South Africa.
3. EMPLOYEE – par 1
Defined in par 1 as one of the following:
•
•
•
•
•
A person other than a company who receives any renumeration or to whom any
renumeration accrues.
A person who receives renumeration or to whom renumeration accrues by reason of
services rendered by that person to or on behalf of a ‘labour broker’.
A labour broker
A personal service provider
A person or a class or category of persons whom the Minister of Finance declares to be an
employee for the purposes of the definition – ‘declared employee’.
4. EMPLOYER – par 1
Defined in par 1 as:
•
•
•
•
•
•
•
•
•
A person (excluding an agent, i.e. not acting as a principal) who pays or is liable to pay to
any person an amount by way of renumeration.
Included: person acting in a fiduciary capacity, or in his/her capacity as a trustee of an
insolvent estate, an executor or an administrator of any fund.
A person who is responsible for the payment of renumeration to any person under the
provisions of any law or out of public funds voted by Parliament or provincial council.
Must not be interpreted through the lens of common law or in terms of Labour
Law definitions.
Fourth Schedule: extends to any person who pays or is liable to pay
‘remuneration’.
Note: a partner in a partnership is, for the purposes of par 2 of the Seventh
Schedule, deemed an employee of the partnership.
However, this deeming provision cannot be extended to the Fourth Schedule.
Therefore, no employees’ tax must be withheld from fringe benefits granted to
partners. (Include in partner’s gross income.)
‘Liable to pay’: indicates a contractual liability to incur the amount, i.e. the
employee has an enforceable right to the amount of remuneration.
Any person who ‘pays or is liable to pay’
Acting as a conduit (an agent
Acting in a fiduciary capacity
without exercising a fiduciary
capacity)
Receives amount for own
No controlling authority over
Whether someone acts in a
benefit and later pays the
the payment or amount of the
fiduciary capacity is dependent
amount (or a portion thereof) to remuneration. There is only
on the facts of each case but
the worker.
temporary physical custody of
essentially entails a
the remuneration coupled with
relationship of trust.
a distribution role.
Included as ‘employer’
Excluded as ‘employer’
Included as ‘employer’
Acting in a capacity as
principal
5. CALCULATION OF ET
Basic calculation
Isolate ET on annual
payments
1. Calculate ET with
bonus
Monthly
calculation
2. Calculate ET
without bonus
3. Subtract two
amounts = ET on
bonus
Calculation done per month and group similar months together.
a. Retirement fund contributions
•
•
Par 2(4)(a), (b) and (bA) & Section 11F of the ITA.
The ER must deduct contributions made by the EE to any
pension fund or provident fund which the ER is entitled or
required to deduct from the EE’s remuneration – par 2(4)(a).
At option of ER: deduct contributions made by EE to a RAF if
proof of contribution has been furnished to the ER – par
2(4)(b).
ER must deduct contribution by the ER on behalf of the EE to
a RAF – par 2(4)(bA).
ER can only take current contributions into account.
•
•
•
Deduction limited to
the higher of:
1. 27.5% of
remuneration paid
by ER (in that
month); or
2. R350 000/12
b. Donations
•
•
Par 2(4)(f) and Section 18A(2)(a) of the ITA.
ER must deduct so much of any donation made by the ER on
behalf of the EE from the EE’s remuneration provided that:
-
The ER will be issued with a receipt as contemplated in
s18A(2)(a).
Deduction limited to:
1. 5% of remuneration
(after deducting
the retirement fund
contributions)
c. MTC & AMTC
•
•
Par 9(6), Section 6A and Section 6B(3)(a)(i)(ii).
6A: number of dependents for whom the contributions are
made determines the value of the MTC.
6B: AMTC is only taken into account for taxpayers who are
≥65 years as is calculated as follows:
•
-
Amount of MS contributions – 3(6A)= excess
Excess x 33.3%
Note: where the EE
pays the medical
scheme
contributions, the
deduction is at the
ER’s option provided
that the EE furnishes
the ER with proof of
payment.
d. ET on annual payments
•
•
Par 9(1) and 9(2)
Is an amount:
-
•
Of remuneration that is, in accordance with the EE’s conditions of
services or the ER’s practice, paid in a lump sum to the EE; or
That is calculated without reference to a period.
Note: fringe benefits are not annual payments even if only
received once during YoA.
Examples:
• Annual bonus
• Incentive bonus
• Leave payouts
• Merit awards
See treatment of
bonus in SILKE
example 10.1.
The employees’ tax on annual payments is calculated as the difference between the employees’
tax on the annual equivalent of the BoR (excluding the annual amount) and the employees’ tax on
the annual equivalent of the BoR (including the annual amount).
Example
Jan (45 years and unmarried) receives a monthly salary of R20 00 and a bonus of R20 000
each year in February. Jan monthly contributes R1 500 to a pension fund based on his cash
salary. Jan received a monthly taxable fringe benefit of R3 000 form 1 August 2018. He is
not a member of a medical scheme. Jan contributes R500 a month to a retirement fund and
supplied his employer with proof thereof.
Calculate the amount of the employees’ tax that his employer must withhold during the
2019 year of assessment. Round off to the nearest rand.
Problem areas:
• Bonus – annual payment ⸫ calculate differently.
• ET is calculated on the BOR ⸫ a change in remuneration = change in ET
Approach
2. Group similar months together – i.e. determine where there is a ∆ in remuneration.
ET FOR 2019 YEAR
•
•
•
•
ET for March to July: R11 010
ET for Aug to Jan: R15 942
ET for Feb: R7 857
TOTAL FOR YEAR: R34 809
2. Determine how many different calculations are needed
CALCULATION 1: MARCH
•
Based on available information at the time, i.e.
don’t know of taxable benefit and bonus.
CALCULATION 2: AUGUST
•
Receive taxable fringe benefit.
Same for: April, May, June & July
⸫ Total ET: R2 202 x 5m = R11 010
Same for: September, October, November & December
⸫ Total ET: R2 657 x 6m = R15 942
CALCULATION 3: FEBRUARY
WITHOUT BONUS
WITH BONUS
Tax on bonus: R37 085 – R31 885 = R5 200
⸫ Total ET for Feb: R5 200 + R2 667 = R7 857
6. PART-TIME EMPLOYEES OR EMPLOYEES NOT IN STANDARD EMPLOYMENT
Standard employment
Any employment where the EE is
required to render services to
single ER for a period of at
least 22 hours in every full
week, provided that:
• Temporary absence is due
to leave/ exceptional
circumstances; or
• Temporary reduction in
working hours is due to a
reduction in the demand for
a company’s product where
the ER imposes a temporary
working week of less than 22
hours.
Deemed standard employment
EE does not fall within the
definition of standard
employment, the EE is deemed
to be in standard employment if:
• S(he) is required to work for
less than 22 hours a week
and the EE furnishes a
written declaration to the ER
that s(he) does not render
services to any other ER
during the period of
employment and is required
to work for at least 5 hours
per day and is paid
remuneration of less than
R316 per day.
Non-standard employment
Any employment that is not
standard employment or
deemed to be standard
employment. E.g.
Workers who are employed on a
daily basis and are paid daily
such as:
• Fees paid to part-time
lecturers;
• Honoraria paid to office
bearers of organizations/
clubs.
ET deducted at a fixed rate of
25%, i.e. normal tax not
calculated in accordance with the
progressive normal tax table.
Note: the Act contains no definition
of ‘standard employment’.
Examples:
7. INDEPENDENT CONTRACTORS, LABOUR BROKERS AND PERSONAL SERVICE
PROVIDERS
A. Independent contractors
•
•
•
•
•
An independent contractor and client agree on specific outcomes to be achieved.
The client pays the independent contractor but does not withhold employees’ tax.
The independent contractor pays his employees and withholds employees’ tax.
The liability of an employer to deduct employees’ tax is
dependent on whether remuneration (par 1) is paid.
Subject to certain conditions, amounts paid to an
independent contractor for services rendered are
excluded from remuneration as defined, in which case an
employer has no obligation to deduct employees’ tax, i.e. one of the three
elements are not satisfied.
•
When is a person an independent contractor?
Statutory tests
First test: ‘Employee test’
If both elements are met the person receiving
the amount is deemed not to be carrying on a
trade independently.
1. Services or duties performed mainly
(>50%) at the premises of the client.
2. Person rendering the service is subject
to the control or supervision of any
other person as to the manner that
person’s duties are performed.
Common law test
• Also known as dominant impression
test.
• Makes use of several indicators, e.g.
was there an ‘acquisition of productive
capacity’, i.e. labour, capacity to work
or simply effort.
Second test: ‘Independence’
Person is deemed to be carrying on a trade
independently if, during the YoA, if:
• He/she employs 3 or more employees
on a full-time basis.
• Employees must not be connected
persons.
The second test overrides the first test and
common law.
Independence test > Employee test
Flow diagram to follow when a determination is to be made under subpar (ii) of the
definition of ‘remuneration’
Employees = only
relatives or less than
three unconnected
employees
B. Labour broker
•
•
A labour broker provides person who get instructions from the client.
The client pays the labour broker (and withholds ET unless an exemption
certificate was obtained i.t.o. par 2(5).
The labour broker pays the persons employed by him and withholds ET.
•
•
•
Par 1 and 2(5)(a) – 2(5)(c) and section 23(k).
A labour broker is a natural person who, for reward, provides and
remunerates or procures workers for a client.
LB is specifically included in the definition of employee.
The person (client) who pays remuneration to a LB is an employer.
The 4th Schedule does make provision for an exemption certificate (IRP30)
to be issued by the SARS which will absolve employers from having to deduct
ET from any payments made to LB – see requirements in par 2(5)(a).
Section 23(k) – limits deduction of certain expenses incurred by LBs who
do not have exemption certificates (see Act – no impact on ET), i.e. can
only deduct amounts paid to employees (remuneration).
•
•
•
•
LB not in possession of exemption
certificate:
• ET essentially deducted twice and s23(k)
prohibits certain deductions for LB.
LB is in possession of exemption certificate:
• No deduction of ET on remuneration paid
to LB by client.
• No prohibition under section 23(k) i.r.o.
deductions for LB.
C. Personal service provider
Connected person – s 1(d)
Company or trust (not NP); and
The services are rendered to a client personally by a person who is a connected
person in relation to said company or trust; and
• One of the following three requirements are met:
- The person rendering the service to the client would have been regarded as an EE of the
client if the service was rendered directly to the client; or Difficult to prove, i.e. test other provisions first.
- Where the duties of the service must be performed mainly at the premises of the
client, the person or company or trust is subject to the supervision of the client relating to
the manner in which the services are performed; or
- Where more than 80% of the income of the company or trust (during the YoA) from
services rendered consists of or is likely to consist of amounts received from one client.
•
•
Even if all above-mentioned requirements met – have an ‘out’
•
But not a PSP if company or trust has three or more full-time EEs who are not
shareholders or connected persons of the company or trust.
•
•
•
•
•
The definition of ‘employee’ in par 1 includes a personal service provider.
Any company or trust that meets the definition of PSP and is in receipt of
remuneration as defined is subject to ET.
The company or trust might supply the client with an affidavit stating that no
more than 80% of income was received from one client – par 2(1A) – i.e. the
client may bona fide trust the affidavit and not withhold any ET.
Section 23(k) – limits deduction of expenses incurred (no impact on ET) –
can only deduct if assets are “wholly and exclusively for trade purposes”.
ET @ 28% (PSP is a company) or 45% (PSP is a trust).
Example
Seraphina Picquery, a South African resident for income tax purposes, is the executive marketing
director of Apothecary Ltd. (‘Apothecary’), a multinational pharmaceutical company.
Seraphina’s husband Fillius was diagnosed with motor neuron disease on 15 February 2019.
Subsequent to receiving the diagnosis, Seraphina decided to resign as Apothecary’s executive
marketing director with effect from 1 March 2019 in order to care for Fillius. In February 2019,
Seraphina incorporated Bezoar (Pty) Ltd. (‘Bezoar’) of which she is the sole shareholder.
Because Seraphina is highly skilled and has extensive knowledge of Apothecary’s business,
Apothecary agreed to the following terms and conditions in order to retain her services with effect
from 1 March 2019:
•
Apothecary will pay Bezoar a monthly retainer fee (Note 1) of R35 000 on condition that
Seraphina (who will be the sole employee of Bezoar) will provide Apothecary with consulting
services. Apothecary will also pay Bezoar a once-off amount of R1 500 000 to prevent Bezoar
from performing services for any other client.
•
Seraphina will perform work for Apothecary from her home for which it will pay Bezoar R800
per hour. Seraphina will complete a timesheet to account for her working hours and Bezoar
will invoice Apothecary accordingly. Seraphina estimates that she will spend 1 600 hours
performing consulting work for Apothecary during the 2020 year of assessment.
Apothecary’s payroll division is unsure of the employees’ tax consequences of the arrangement
detailed above for the 2020 year of assessment.
Note 1:
A retainer fee is an advance payment for the services provided by a consultant. It ensures the
commitment of the receiver of the retainer fee to provide services in the future.
Required
Discuss, with supporting calculations, the employees’ tax consequences (if
any) of the payments that will be made to Bezoar by Apothecary during the
2020 year of assessment. Assume that there will be no changes to the relevant
legislation from the 2019 year of assessment.
Total
Marks
10
10
Considerations:
•
•
•
Can Bezoar be a LB? No not a natural
person.
Independent contractor? Not if PSP
exclusion does not apply to an EE
contemplated in par (e) – therefore,
check PSP.
If not a PSP – then no ET because
par (a) does not apply to companies.
⸫ Is Bezoar a PSP? If yes, then ET.
Solution
Bezoar will qualify as a personal service provider because:
•
•
It is a company;
The consulting services rendered to its client (Apothecary) on its behalf are rendered
personally by Seraphina who is a connected person in relation to Bezoar:
- As she owns 100% of Bezoar’s equity shares (or more than 20%);
• Seraphina would be regarded as an employee of Apothecary if the consulting
services were provided directly to it and not on behalf of Bezoar because:
- Seraphina would have been in receipt of remuneration (restraint of trade payments,
payments for services rendered and the retainers fee all constitute remuneration as
defined), or
• 100% (or more than 80%) of Bezoar’s income from services rendered is received
from Apothecary as it is Bezoar’s only client (restraint of trade prevents provision of
services to other clients); and
• Bezoar does not employ three or more full-time employees (who are not
shareholders and connected person to such shareholders)
Accordingly, Apothecary will be required to withhold employees’ tax on remuneration paid to
Bezoar.
Therefore, Apothecary must withhold: R35 000 x 12 + R1 500 000 + R800 x 1600 = R3 200
000 x 28% = R896 000
8. DIRECTORS OF PUBLIC COMPANIES
•
Included in the definition of ‘employee’ i.t.o. subpar (a) being a person
receiving remuneration.
Executive directors
Fees are remuneration as defined, i.e.
withhold employees’ tax from the monthly
remuneration.
Non-executive directors
Directors who are not involved in the daily
management or operations of a company –
consider both the ‘Employee’ and
‘Independence’ test.
•
•
Resident: fees, not remuneration,
no ET.
Non-resident: fees are
remuneration, ET.
9. DUTIES OF ER – awareness required
•
•
•
•
A person who is an employer must apply for registration as an employer. Par
15 (1)
Obligation to deduct and pay over tax to Commissioner within seven days
after the end of the month during which deduction is made.
13th cheque or bonus – deduct all at once or over 12 equal monthly
instalments.
Keep record of amounts paid to each employee.
•
An employer who deducts or withholds ET must deliver an EE certificate
(IRP5) to each employee – show amount of remuneration and ET deducted or
withheld.
10. THE EMPLOYMENT TAX INCENTIVE ACT – awareness required
•
•
•
Aims to encourage employers to hire young and less experienced workseeker in an effort to reduce unemployment in SA.
Eligible employers may reduce monthly ET withheld from employees and
payable to SARS, i.e. withholds full amount but has benefit of not paying the
full amount to SARS.
Amount = gross income of employer, but exempt i.t.o. s 10(1)(s).
11. SKILLS DEVELOPMENT LEVY AND UNEMPLOYMENT INSURANCE FUND –
awareness required
SDL
• A compulsory levy scheme for the purpose of funding education and training.
• Payable by employers at a rate of 1% of the leviable amount.
• Leviable amount is equal to the ‘balance of remuneration’.
UIF
• Monthly compulsory contributions to the UIF, made by employers and
employees, are collected by SARS and paid over to the UIF.
• The UIF provides short-term relief for unemployed workers or workers unable
to work because of illness, maternity or adoption leave.
• Both the employer and employee contribute 1% of remuneration paid to a
relevant employee during any month.