Tutorial Letter 104

TAX4861
&
TAX4862

Define Tomorrow.
 Agenda

• Gross Income (Part I)

• Special inclusions
• Non-residents and double tax agreements (Part II)
• Source
• Withholding tax
• DTA’s
• Exempt income (Part III)
• Assessed Losses (Part IV)
• Capital gains tax (Part V)

2019/02/27 2
TL104 - Part I
Gross Income

Define Tomorrow.
Image courtesy of MS Office clip art
 Framework for the calculation of taxable income
Gross income (including lump sums, but in a different column )
XXX
Add: Specific inclusions in income
Less: Exempt income (XXX)
= INCOME XX
Less: Deductions and allowances
Trade and special deductions Limitations imposed by s 23(m) (XXX)
ASSESSED LOSSES
Subtotal XX
Add: Specific inclusions in taxable income XXX
Add: Unexpended portion of allowances XXX
Subtotal XX
Add: Taxable capital gain (s 26A) XXX
Less: Retirment Fund Contributions (s 11F) (XXX)
Subtotal XX
Less: Donations (s 18A) (XXX)
TAXABLE INCOME XX

Remember – Check the required part of the question, so see if it requires you to start your
calculation with net profit / income. If it does, IT IS IMPERATIVE THAT YOU DO SO.

2019/02/27 4
Gross income definition
• Total amount
• Cash or otherwise
• Received by or accrued to or in favour of
• Resident – world wide
• Non-resident – RSA source
• (refer to TL104 summary pg. 17 – 19 - 5.5)
• During a year or period of assessment
• Excluding receipts or accruals of a capital nature

Special inclusions regardless of its nature

(SILKE chapter 4)

2019/02/27 5
Gross income discussion points
• Exam technique for discussion questions:
• Apply scenario to all elements of the definition
(briefly), but

• Identify & focus the discussion on the main issue(s)

• Revenue vs. Capital
• Received by or Accrued to
• Resident vs. Non-resident

• Refer to case law (TL102)

• Describe principle in the case law
• Apply to scenario

• Conclude

2019/02/27 6
Gross income – special inclusions
• Included even though capital in nature

• Annuities (par (a))

• Alimony (par (b))
• Restraint of trade (par (cA))
• Lease premiums (par (g))
• Leasehold improvements (par (h))
• Fringe benefits (par (i))
• Proceeds on disposal of certain assets (par (jA))
• Dividends (par (k))
• Amounts deemed to be receipts or accruals & s 8(4)
recoupments (par (n))
• Etc…

2019/02/27 7
TL104 - Part II
Non-residents & Double Tax Agreements (DTA)

Define Tomorrow.
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Non-residents
• Residents: defined and taxed on world wide income
• Non-residents: not defined – logic → RSA has control over
certain income (including CGT)
• Deemed source rules (section 9 – if section 9 does not
apply then apply Common Law principles (case law))
• Physical presence / ordinary resident test  deemed to
be a resident
• Source = what caused the income (fruit) and then where is
the cause situated (“Common Law”)
• If a final withholding tax is applicable then it will be
exempt for normal tax
• S35A(8) – (13), S47A - 47K, 49A - 49H, 50D(c) & (d) and
50G - 50H are excluded from the 2019 Syllabus
• BUT WHT is subject to DTA
• Refer to summary in TL104 section 5.5
2019/02/27 16
Non-residents

• Resident becomes a Non-resident – s 9H

• Deemed to have
• Disposed of all assets at market value on the day
before ceasing to be a resident, and
• Reacquired at expenditure equal to market value on
same date
• S9H(7) states that the market value of such assets
reacquired will be in the same currency in which the
assets were originally acquired.
• S 9H(4) excludes certain assets from this deemed
disposal for example Immovable property in SA

2019/02/27 17
Non-residents – withholding tax

5.6.3 Summary in TL104

• Final WHT on interest earned @ 15%

• Section 50A – 50F
(excluding: see TL104 pg 23)
• Exemptions: if interest is earned from a SA
financial institution, government, etc (s 50D)

2019/02/27 18
Non-residents – Withholding tax

• WHT iro disposal of immovable property (not subject

to section 9H) in SA (Seller is non-resident)
• Section 35A
• Purchaser must withhold tax depending on nature of seller,
from purchase price (if purchase price> R2m);

• 7.5% Natural persons

• 10% Company
• 15% Trust

• Not a final WHT

• WHT on dividends
• Section 64D – 64N (TL106)
WHT is always subject to any DTA
2019/02/27 19
Double tax agreements (DTA’s) /
Tax treaties

• Double tax – the taxpayer is subject to tax on the

same income in two countries.
• The resident country always has the taxing rights,
unless otherwise agreed and the other country
obtains the rights in terms of the DTA.
• Where a DTA exists between two countries, a
taxpayer will not be taxed more than once on the
same source of income (i.e. overcomes overlapping
taxation rights), as the resident country will grant tax
relief.
• An approved DTA has the force of law and therefore
takes precedence over the Republic’s tax rules.

• Remember: A DTA cannot levy more tax on a

taxpayer than domestic tax law.

2019/02/27 23
Double tax agreements (DTA’s) /
Tax treaties

• Relief from double tax can either be in the form

of:
• Unilateral relief (credit method), where one of the countries
grants tax credit relief for taxation already paid on the income
in the other country (i.e. s 6quat rebate)
• Bilateral relief (exemption method), where two countries enter
into a DTA to provide relief from double taxation either by
exempting that income or granting a deduction.

• Note that there is a difference between a rebate and

an exemption

2019/02/27 24
Double tax agreements (DTA’s) /
Tax treaties

Answering questions of DTA’s: (exam technique)

• We will either state the rules of the DTA (include an
extract from the DTA in question) or tell you to ignore any
possible existence of a DTA.
• DTA’s between countries differ, therefore read the
provisions of the relevant DTA carefully.
• Residence is the key determining factor when reading a
DTA as this determines the final taxing rights.
• Article 4 of the DTA’s with both Mauritius and the United
Kingdom deals with how to determine the residence of
the taxpayer.
Only the DTA’s with Mauritius and 
the UK is examinable

2019/02/27 25
Double tax agreements (DTA’s) /
Tax treaties

• When reading a DTA always replace the references to

“contracting state” and “other state/ other
contracting state” with South Africa and the other
country that is part of the DTA. This will be from the
resident’s perspective that you will replace the
contracting state with the resident country.
• For example:
“Income derived by a resident company of a contracting
state from immovable property situated in the other
contracting state may be taxed in that other state.”
Will become:
Income derived by a resident company of South Africa
from immovable property situated in Mauritius may be
taxed in Mauritius.

2019/02/27 26
DTA Example: Silke Example 21.12 (extract)

Question:
Propco UK Plc owns a commercial building
in Cape Town. It disposes of the building to
SA Property (Pty) Ltd, a South African
resident company.

Required:
Discuss whether Propco UK Plc will be
subject to tax in South Africa.

2019/02/27 27
DTA Example: Silke Example 21.12 (extract)
The seller is a resident of the UK and therefore a covered person for the
purposes of the tax treaty concluded between South Africa and the UK (Art 1
of the treaty). Capital gains tax forms part of normal tax (included in taxable
income and subject to normal tax in in terms of section 26A. The treaty state
that it applies in respect of normal tax in South Africa (Art 2(3)(a)(i) of the
treaty).

Article 13(1) of the treaty allocates the following taxing rights in respect of
capital gains arising on the disposal of immovable property:
“Gains derived by a resident of a Contracting State from the alienation of
immovable property referred to in Article 6 of this Convention and situated in
the other Contracting State may be taxed in that other State.”

To simplify this Article, it can be adjusted as previously mentioned to:

Gains derived by a resident of the UK from the alienation of immovable
property referred to in Article 6 of this Convention and situated in South
Africa may be taxed in South Africa.

2019/02/27 28
DTA Example: Silke Example 21.12 (extract)

Conclusion:

A non-resident, in this case Propco UK Plc, is subject to capital gains

tax in respect of the disposal of immovable property situated in
South Africa (par 2(1)(b)(i) of the Eighth Schedule).
As the immovable property being disposed of is situated in South
Africa, South Africa may tax the capital gains arising on the disposal
of the property (Art 13(1) of the treaty).

The tax is administered through amounts withheld by the purchaser

from the payments made to the seller for the property (i.e.
withholding tax, as previously discussed).

Refer to Silke examples 21.4, 21.5, 21.6, 21.7, 21.9,

21.10 and 21.12

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DTA Example:
Wetlands (Pty) Ltd (Wetlands), a South African Resident Company, was awarded
a contract with a client in Mauritius to assist the client with water savings
initiatives and solutions. Wetlands sent one of its employees, Faith (a South
African resident), to the client’s premises in Mauritius to perform the services in
terms of the contract.

Faith left South Africa on the 15th of September 2018 and commenced working
in Mauritius at the client’s premises on 1 October 2018. Wetlands does not have
a permanent establishment (as defined in the Double Taxation Agreement
between South Africa and Mauritius) in Mauritius. It was agreed between
Wetlands, as her employer, and Faith that she would return to South Africa at the
end of February 2019. Faith’s monthly remuneration amounts to R85 800. She is
concerned about the taxing implications of her remuneration earned whilst
working abroad. She does not know whether she will be subject to South African
income tax or Mauritian income tax or perhaps even double taxation on her
income earned whilst working in Mauritius.

2019/02/27 30
 DTA Example:
The applicable extracts from the relevant articles in the South Africa/Mauritian Double
Taxation Agreement read as follows (please note that the wording below in italics has been
inserted by us):
ARTICLE 3

GENERAL DEFINITIONS

1. In this Agreement, unless the context otherwise requires —

(c) the terms “a Contracting State” and “the other Contracting State” mean Mauritius or South Africa as the context requires;

ARTICLE 14

INCOME FROM EMPLOYMENT

1. Subject to the provisions of Articles 15, 17, 18 and 20 (none of these articles are relevant in this scenario), salaries, wages and other
similar remuneration derived by a resident of a Contracting State in respect of an employment, shall be taxable only in that State
unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived
therefrom may be taxed in that other State.

2. Notwithstanding the provisions of paragraph 1 of this Article, remuneration derived by a resident of a Contracting State in respect of an
employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if –

(a) The recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in the calendar year
concerned; and
(b) The remuneration is paid by or on behalf of an employer who is not a resident of the other State; and
(c) The remuneration is not borne by a permanent establishment which the employer has in the other State.

3. … (not relevant)

2019/02/27 31
DTA Example Required:
Explain to Faith the tax implications in respect of her remuneration earned
whilst working for her South African employer in Mauritius. Do not perform any
tax calculations, but confine your answer to a discussion on whether her
remuneration earned between the period October 2018 to February 2019 will
be subject to South African income tax and/or Mauritian income tax or neither.

2019/02/27 32
 DTA Example Solution:
As a South African resident, Faith will be taxed on her worldwide income.
However, in light of the fact that Faith’s remuneration in question is earned in Mauritius, in order to determine where Faith will be taxed,
regard must firstly be had to the provisions of the Double Tax Agreement (DTA) between South Africa and Mauritius, as the DTA overrides
the provisions of the South African Income Tax Act (because the DTA has the force of law in terms of section 108(2) of the Income Tax Act).

Now - read the DTA by replacing the contracting state and the other state with South Africa and Mauritius as follows:

ARTICLE 14

INCOME FROM EMPLOYMENT

1. Subject to the provisions of Articles 15, 17, 18 and 20 (none of these articles are relevant in this scenario), salaries, wages and other
similar remuneration derived by a resident of South Africa a Contracting State in respect of an employment, shall be taxable only in
South Africa that State unless the employment is exercised in Mauritius the other Contracting State. If the employment is so
exercised, such remuneration as is derived therefrom may be taxed in Mauritius that other State.

In terms of Article 14(1) of the DTA between South Africa and Mauritius the
remuneration derived by Faith in respect of her employment exercised in Mauritius
may be taxed in Mauritius.

2019/02/27 33
 DTA Example Solution (continues):
2. Notwithstanding the provisions of paragraph 1 of this Article, remuneration derived by a resident of South Africa a Contracting State
in respect of an employment exercised in Mauritius other Contracting State shall be taxable only in South Africa the first-mentioned
State if –

(a) The recipient is present in Mauritius the other State for a period or periods not exceeding in the aggregate 183 days in the
calendar year concerned; and
(b) The remuneration is paid by or on behalf of an employer who is not a resident of Mauritius the other State; and
(c) The remuneration is not borne by a permanent establishment which the employer has in Mauritius the other State.

However, the provisions of Article 14(1) are subject to the provisions of Article 14(2) of the DTA and in terms of Article 14(2), the
remuneration derived by Faith in respect of her employment exercised in Mauritius shall be taxable only in South Africa if the following
three requirements are all met:

(a) The recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in the calendar year
concerned – this requirement is met because Faith will be in Mauritius for only 108 days in 2018 and 59 days in 2019.
(b) The remuneration is paid by or on behalf of an employer who is not a resident of the other State – Wetlands (Pty) Ltd is Faith’s
employer and is a South African resident (and not a Mauritian resident) and this requirement is thus also met.
(c) The remuneration is not borne by a permanent establishment which the employer has in the other State – Wetlands (Pty) Ltd does
not have a permanent establishment in Mauritius. This requirement is also met.

2019/02/27 34
DTA Example Solution (continues):

It follows that the remuneration derived by Faith in Mauritius will be taxable only in
South Africa. The remuneration will be included in Faith’s gross income in terms of
section 1, paragraph (c), of the Income Tax Act.

However, one has to further consider the exemption provisions of section

10(1)(o)(ii) of the Income Tax Act to determine if such remuneration is exempt
from normal tax.
In the circumstances in question, however, section 10(1)(o)(ii) will not apply to
exempt the remuneration from South African income tax, because Faith was not
outside the Republic for a period in excess of 183 days during a 12-month period.
It follows that Faith will be subject to South African tax on the remuneration that
she earns in Mauritius.
There is no section 6quat rebate or deduction to take into account, because in
terms of the provisions of the DTA, no foreign tax (in Mauritius) is levied on the
remuneration.

2019/02/27 35
 TL104 - Part III
Exempt income

Define Tomorrow.
Image: http://www.texaswildlifeguy.com/Blog/Wildlife-Blog/Wildlife-Blog/Difference-in-Ag-and-Wildlife-Exemptionsart
Framework for the calculation of taxable income

Gross income (including lump sums, but in a different column )

XXX
Add: Specific inclusions in income
Less: Exempt income (XXX)
= INCOME XX
Less: Deductions and allowances
Trade and special deductions Limitations imposed by s 23(m) (XXX)
ASSESSED LOSSES
Subtotal XX
Add: Specific inclusions in taxable income XXX
Add: Unexpended portion of allowances XXX
Subtotal XX
Add: Taxable capital gain (s 26A) XXX
Less: Retirment Fund Contributions (s 11F) (XXX)
Subtotal XX
Less: Donations (s 18A) (XXX)
TAXABLE INCOME XX

2019/02/27 37
Exempt income (section 10) - Partial

• Dividends - s 10(1)(k)
• Foreign dividends - s 10B
• Participation exemption (s10B(2)(a)) – ≥10% total
equity & voting rights
• JSE listed shares (s10B(2)(d) & (e)) - dual listed
• Ratio exemption ((s10B(3))
• Natural person, trusts, estates: 25/45 x foreign dividend
• Company: 8/28 x foreign dividend

Ratio changes 
effective from 1 
March 2017 

2019/02/27 38
Exempt income (section 10) - Partial
• Ratio exemption (s10B(3)) continued…

• How is it derived?
• Use the maximum marginal tax rate – dividend tax
rate:
• Natural persons, trusts, estates: 25/45
Calculated as follows: 45% - 20% = 25%, hence 25/45
• Companies: 8/28
Calculated as follows: 28% - 20% = 8%, hence 8/28

Now you’ll never forget the ratios!!

2019/02/27 39
Ratio Exemption s10B(3)
Silke example 5.8 - adapted
FinCon (Pty) Ltd, a South African resident, received the
following dividends paid by non-resident companies during
the 2019 year of assessment ending on 31 December 2019:
• A dividend of R200 000 from XLN Plc, a company resident in the
UK. FinCon holds 5% of XLN’s total equity shares and voting
interest. XLN is not a controlled foreign company.
• A dividend of R650 000 from DMA Ltd, a company resident in the
Netherlands. FinCon holds 15% of DMA’s total equity shares and
voting interests. The dividend declared by DMA was allowed as a
deduction when calculating DMA’s income tax liability in the
Netherlands. DMA is not a controlled foreign company.
• A dividend of R800 000 from BSD Ltd, a company resident in
China. FinCon holds 5% of BSD’s total equity and voting interests.
BSD is a controlled foreign company and R300 000 of the
dividend qualifies for an exemption under s10B(2)(c)
Calculate FinCon’s taxable income for its 2019 year of assessment

2019/02/27 40
Solution – Ratio Exemption s10B(3)

Gross income:
The dividends received qualify as foreign dividends since they are
paid by non-resident companies; the foreign dividends are included
in gross income in terms of par (k) of the definition of gross income.
Foreign dividend – Received from XLN Plc R200 000
Foreign dividend – Received from DMA Ltd R650 000
Foreign dividend – Received from BSD Ltd R800 000
Foreign dividend received from BSD – an amount of  (R300 000)
R300 000 qualifies for an exemption under s10B(2)(c)

2019/02/27 41
Solution – Ratio Exemption s10B(3)

Ratio Exemption
Foreign dividends not exempt:
Foreign dividends from XLN R200 000
Foreign dividends from DMA R650 000
Foreign dividends from BDS  R500 000
(R800 000 – R300 000)
R1 350 000
Ratio exemption (8/28 X R1 350 000) (R385 714)
Taxable income R964 286

2019/02/27 42
Exempt income (section 10) - Partial

• Payments to non-residents:
• Royalties - s10(1)(l) excluded from 2019 syllabus
• foreign entertainers/sportspersons - s10(1)(lA) -
excluded from 2019 syllabus
• service fees - s10(1)(hB)

• subject to final withholding tax  EXEMPT

2019/02/27 43
Exempt income (section 10) - Partial

• Interest (2018/2019)
• Natural persons - s 10 (1)(i)
• R23 800 < 65; R34 500 ≥ 65
• Non-resident - s 10(1)(h)
• Natural persons:
• not physically present >183 days during 12-month period
preceding date received (accrued) OR
• no business in SA (permanent establishment),
• Other persons:
• no business in SA (permanent establishment) during 12-
month period preceding date received (accrued)

2019/02/27 44
 Example – Interest exemption

Mr P (35 years old) emigrated from SA to Japan on

30 April 2018. On 31 August 2018 he received interest from a
SA fixed deposit amounting to R120 000. On 28 February
2019 he received interest relating to a loan to Y Ltd, a SA
resident company, amounting to R100 000.
Assume Mr P never left SA before his emigration and did not
return after his emigration.

1) Calculate all tax implications for Mr P’s 2019 year of

assessment based on the above information.
2) Same as 1) but assume the R100 000 interest was also
from an investment in government bonds.

2019/02/27 45
 Solution – Interest exemption
Mr P’s taxable income for 2019 (non-resident from 30 April 2018):
1.1) Interest received 31 August 2018 is from a source within the
Republic, include in GI
Gross income: Bank interest R120 000
Exemption: 2nd s10(1)(i) applies (R 23 800)
1st does s10(1)(h) apply?
12 mths prior Emigrated Bank Int

1 Sep 17 IN 30 Apr 18 OUT 31 Aug 18

243 days > 183 days 123 days

Therefore s 10(1)(h) is N/A
s50D(3)(a) applies, therefore exempt from WHT
2019/02/27 46
Solution – Interest exemption continued
Mr P’s taxable income for 2019 (non-resident from 30 April 2018):
1.2) Interest received 28 February 2019 is from a source
within the Republic, include in GI
Gross income: interest from Y Ltd R100 000
Exemption: S 10(1)(h) applies (R100 000)
1st does s10(1)(h) apply?
12 mths prior Emigrated Int Y Ltd

IN OUT
1 Mar 18 30 Apr 18 28 Feb 19

61 days < 183 days 304 days
Therefore s 10(1)(h) applies
s50B(1) applies, therefore subject to WHT @ 15%
2019/02/27 47
Solution – Interest exemption continued

2) Answer 1.1 and 1.2 same except in 1.2 Mr P

would also be exempt from withholding tax in
terms of s50D(1)(a)(i)(aa) – interest paid by the
government of the Republic to a foreign person.

2019/02/27 48
TL104 - Part IV
Assessed Losses

Define Tomorrow.
Image: https://www.policyholderpulse.com/category/recoupment/
Framework for the calculation of taxable income
Gross income (including lump sums, but in a different column )
XXX
Add: Specific inclusions in income
Less: Exempt income (XXX)
= INCOME XX
Less: Deductions and allowances
Trade and special deductions Limitations imposed by s 23(m) (XXX)
ASSESSED LOSSES
Subtotal XX
Add: Specific inclusions in taxable income XXX
Add: Unexpended portion of allowances XXX
Subtotal XX
Add: Taxable capital gain (s 26A) XXX
Less: Retirment Fund Contributions (s 11F) (XXX)
Subtotal XX
Less: Donations (s 18A) (XXX)
TAXABLE INCOME XX

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 Assessed losses – Section 20
When allowable deductions and allowances > total income  assessed loss.
This assessed loss is carried forward to the following year.

Silke 12.12 – 12.12.3 and Examples 12.19 and 12.20

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TL104 - Part V
Capital Gains Tax (CGT)

Define Tomorrow.
Image courtesy of MS Office clip art
Framework for the calculation of taxable income
Gross income (including lump sums, but in a different column )
XXX
Add: Specific inclusions in income
Less: Exempt income (XXX)
= INCOME XX
Less: Deductions and allowances
Trade and special deductions Limitations imposed by s 23(m) (XXX)
ASSESSED LOSSES
Subtotal XX
Add: Specific inclusions in taxable income XXX
Add: Unexpended portion of allowances XXX
Subtotal XX
Add: Taxable capital gain (s 26A) XXX
Less: Retirment Fund Contributions (s 11F) (XXX)
Subtotal XX
Less: Donations (s 18A) (XXX)
TAXABLE INCOME XX

2019/02/27 53
 Capital gains tax
• Person (sec 1) - includes an insolvent estate, estate of a deceased
person and any trust
• Four key definitions in 8th Schedule:
• Asset = par 1 (Silke 17.6)
• Disposals & non-disposal = par 11 (Silke 17.7.1 & 17.7.2)
• Deemed disposal = par 12 (Silke 17.7.3)
• Proceeds = par 35 and (Silke 17.9)
• Base cost = pars 20, 25 (Silke 17.8)
• If an asset is disposed of = CGT event
• RSA Residents
• Capital gains made on disposal of assets anywhere in the world
• Non-residents
• Capital gains made on disposal of assets in SA (SA source)
• S 9H (deemed disposal day before ceases to be a resident)

2019/02/27 54
 Capital gains tax

Definitions:
• Asset = par 1
• All assets regardless of nature, revenue or capital (trading stock,
money…)
• Disposal = par 11
• Have an asset, an event occurs, no longer have that asset (sell,
donate, destroyed…)
• Read with par 11(2) – Non-disposals
• Deemed disposal = par 12 & section 9H
• Deemed disposal: Asset has changed, nature, (TS  Capital
asset)
• Change in residency status (section 9H)

2019/02/27 55
 Capital gains tax
Definitions: Base cost
• Qualifying expenditure:
• Post-valuation date (par 20);
• Acquisition/creation costs, valuation, direct disposal costs (sales
com, moving asset, stamp duties…), cost of improvements…
OR
• Pre-valuation date base cost(limited ito par 26 & 27) plus post-
valuation date expenditure;
• Reduced by (par 20(3)):
• Expenditure already allowed as a deduction for income tax
• i.e. sum all capital allowances already deducted
• Amount reduced or recovered by another person
• Increased by:
• Donations tax paid

2019/02/27 56
Capital gains tax

Definitions: Base cost

• par 20 (post-valuation date),
• Direct expenditure (in some cases MV)
• less amounts taken in calculation of taxable income (par 21(1))
Reduced by…. (previous slide)

• par 25 - 27 (pre-valuation date)

• Valuation date value (VDV): 1 Oct 2001
• MV on valuation date; OR
• 20% of proceeds (less allowable expenditure after valuation date); OR
• TABC
• plus post-valuation date expenditure (par 20)
Reduced by…. (previous slide)

2019/02/27 57
 Capital gains tax

Definitions: Base Cost

• Effect of debt reduction  par 12A (before 1 Jan 2019)
Section 19  Par 12A

Allowance assets: Capital assets NOT 
allowance assets:
Tax 
Trading  1st. Reduction amount 
deductible  1st. Reduction amount 
stock applied to reduce BC 
expenses applied to reduce BC      
(par 12A)
(par 12A)
2nd. Excess recouped 
(s19(6) and s8(4)(a)) 2nd. Excess applied to 
reduce assessed capital 
loss (par 12A)

3rd. Excess no effect

2019/02/27 58
 Capital gains tax

Definitions: Base Cost

• Effect of debt reduction  par 12A (on or after 1 Jan 2019)
Section 19  Par 12A

Capital assets NOT 
Tax  Allowance assets:
Trading  allowance assets:
deductible 
stock • Asset still held when 
expenses • Asset still held when 
debt benefit arises
debt benefit arises
• Asset disposed of in 
• Asset disposed of in 
year prior to when 
year prior to when 
debt benefit arises.
debt benefit arises
See Silke page 445
See Silke page 445

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Example: Silke 17.16
• Jeff borrowed R5 million from ABC Bank to acquire two vacant lots.
Vacant Lot 1 was purchased for R3 million and Vacant Lot 2 was
purchased for R2 million. Vacant Lot 2 was sold for R1.2 million,
generating a R800 000 capital loss. Jeff used the R1.2 million of
proceeds from Vacant Lot 1 for urgent running expenses. Due to
circumstances beyond Jeff’s control, Vacant Lot 1 has also significantly
declined in value. In order to alleviate Jeff’s circumstances, ABC Bank
cancels R3 million of the debt. Of this amount, R2 million of the debt
benefit is attributable to formerly held Vacant Lot 2 and R1 million of the
debt benefit is attributable to Vacant Lot 1.
Explain the CGT consequences of the cancellation of the debt on Jeff.

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Solution: Silke 17.16
• Question 1: Is there a debt benefit?
Yes, Jeff’s debt has been reduced with R3 million. The face value of the
claim prior to the arrangement exceeds the market value of the debt with R3
million. R1 million of the debt benefit is attributable to Vacant Lot 1 and R2
million is attributable to Vacant Lot 2. The debt benefit amount is R3 million
in total.
• Question 2: Is the debt benefit specifically excluded from the
provisions of par 12A?
No, none of the exclusions (for example a donation or debt to a deceased
estate apply).
• Question 3: What was the purpose of the debt?
The debt was used to fund the acquisition of capital assets (land is not an
allowance asset as no allowance can be claimed thereon).

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Solution: Silke 17.16 (continued)
• CGT Consequences for Jeff
Vacant Lot 1:
The R1 million amount of debt cancelled that is attributable to Vacant Lot 1
reduces the base cost of that lot from R3 million down to R2 million as the
asset is still held at the date the debt benefit arises.
Vacant Lot 2:
The R2 million cancelled cannot be applied against the base cost of Vacant
Lot 2 because the asset is no longer held during the year of assessment
that the debt benefit arises. The capital gain or loss determined in the prior
year should be recalculated, taking into account the R2 million debt benefit
as though it accrued prior to the disposal of Vacant Lot 2. The capital gain
or loss is thus calculated as R1,2 million (proceeds) less Rnil (base cost of
R2 million reduced to Rnil) = R1,2 million capital gain. The difference
between the original R800 000 capital loss that arose on the disposal of
Lot 2 and the recalculated R1,2 million capital gain, equals R2 million that
gives rise to a capital gain that should be included in the sum of capital
gains or losses in the year that the debt benefit arises.

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Capital gains tax – Inclusion of portion of donations tax
in base cost - Silke example 17.20

Mr Lethiba donates a 12m yacht to his son on 1 April 2018. The

market value of the yacht is R1 250 000 and its base cost,
excluding donations tax, is R750 000. Assuming that this is the
only donation made by Mr Lethiba during the 2019 tax year,
donations tax of R230 000 ((R1 250 000 – R100 000) x 20%) is
payable.

Required:
Calculate Mr Lethiba’s capital gain on the disposal of the yacht
and his son’s base cost if:
• Mr Lethiba (the donor) pays the donations tax, and
• Mr Lethiba’s son (the donee) pays the donations tax.

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Solution: Capital gains tax – Inclusion of portion of
donations tax in base cost - Silke example 17.20
a. If the donor pays donations tax:
Mr Lethiba’s capital gain:
Deemed proceeds on disposal (par38(1)(a)) R1 250 000
Less: Base cost
‐ Base cost excluding donations tax R750 000
‐ Portion of donations tax paid by donor, calculated in      
terms of par 22:
Y = (M – A)/M x D
= (R1 250 000 – R750 000)/R1 250 000 x R230 000 R92 000
(R842 000)
Capital gain R408 000
Base cost to his son (market value on date of donation) R1 250 000

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Solution: Capital gains tax – Inclusion of portion of
donations tax in base cost - Silke example 17.20
b. If the donee pays the donations tax
Mr Lethiba’s capital gain:
Deemed proceeds on disposal (par38(1)(a)) R1 250 000
Less: Base cost (R750 000)
Capital gain R500 000

Base cost to his son: (Market value on date of donation) R1 250 000

Portion of donations tax paid by the donee:
Capital gains of donor / MV of asset on donation date * donations tax paid by the donee

=R500  000 (excluding donations tax) / R1 250 000* R230 000 R92 000

Base cost R1 342 000

Note: The yacht is not a personal use asset, as its length exceeds ten metres; 
Mr Lethiba’s capital gain is therefore not disregarded (see paras 15 and 53)

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Capital gains tax

Definitions: Proceeds (par 35) / Silke 17.9

• Selling price / MV (connected persons)
• Reduced by:
• Amounts accounted for in taxable income (i.e.
recoupments)
• Repayments (i.e. to buyer)

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 Aggregate capital gain or loss and
determination of taxable capital gain

• Capital gain or loss determined separately for each asset

O
• All capital gains and losses aggregated (added together)
• Then reduced by the annual exclusion
• R40 000 p.a. (capital gain and loss) – natural persons & special
R
trusts OR
• R300 000 on death
• Remember! The annual exclusion not only reduces total capital
D
gains but also reduces the total capital loss.
• Deduct previous year(s) assessed capital loss
• = Net capital gain / (assessed loss carried forward)
E
• Apply inclusion rate
• 40% for natural persons & special trusts; or
• 80% for others
R
• = Taxable capital gain (include in taxable income)
Note where included in the tax framework in terms of section 26A
!!
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 Capital gains tax - exclusions

• Primary residence exclusion (par 45) / Silke 17.10.1

• R2 million (per residence)
• Limitations (on gain/loss to which the primary residence
exclusion may be applied)
• Land size ≤ 2 hectares (ha) (par 46)
• Interrupted residence (par 47)
• Except: offered for sale & vacated; rendered uninhabitable; death…
• Non-residential use (par 49)
• Excluding temporary letting of property
• Spouses married in community of property (ICP)

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Example – Interrupted residence
_ Silke 17.44 - Adapted

Mr A bought a house for R350 000. He lived in

it for 15 years (primary residence), where after
he moved into a flat with his family. He then let
the house for five years before disposing of it
for R2 150 000.

Determine the portion of the capital gain that

will qualify for the primary residence
exclusion.

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 Solution – Interrupted residence

Proceeds R2 150 000

BC (R 350 000)
Capital gain R1 800 000

Calculate the capital gain attributable to the period it was a primary

residence (PR):
15/20 x R1 800 000 = R1 350 000
Primary residence exclusion ltd to: (R1 350 000)
R0
CG not attributable to PR (not required – provided for completeness)
(R1 800 000 – R1 350 000) R 450 000
Taxable capital gain R 450 000
(before the annual exclusion)

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 Example – Apportionment/Land
exceeding two hectares

Mr A and Mrs A are married in community of

property. They sold their primary residence,
consisting of a manor house and 3 hectares of land
in Saddlebrook. The sale resulted in a capital gain of
R2 350k for the land and house together. R1m of the
capital gain was attributable to the house and the
remaining R1 350k to the land.

Calculate the taxable capital gain to be included in

Mr and Mrs A’s taxable income.
(assuming no other capital gains or losses for the
y.o.a.)

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 Solution – Apportionment/Land exceeding 2 hectares

Building Land Total

Capital Gain R1 000’ R1 350’ R2 350’
Limitation (par 46)
2ha/3ha x R1 350’ R1 000’ R 900’ R1 900’
Remaining 1ha/3ha R 450’ R 450’

Therefore only R1 900 000 of the capital gain may be

applied against the primary residence exclusion (PRE).

The remaining R450 000 may not be reduced by the

PRE

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Solution – Apportionment/Land exceeding 2 hectares
continued

Mr A Mrs A Total
Capital Gain (ICOP) R1 175’ R1 175’ R2 350’
(R2 350’ ÷ 2)
PRE (par 42(2)) (R950’) (R950’) (R1 900’)
(R2m’ ÷ 2) = R1m ltd to
Remaining CG R225’ R225’ R450’
(R450 ÷ 2)
Annual exclusion (R 40’) (R 40’)
Taxable capital gain R185’ R185’

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 Capital gains tax - Exclusions

• Personal use assets (par 53) and limitation of losses

(par 15)
• Motor car, art, furniture and fittings…
• ≠ PUA → Aircraft >450kg, boat >10m, coins, immovable
property, financial instrument…

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 Capital gains tax – Roll-overs

• Recognition delayed for CGT purposes until a future event 
takes place

Deferment of
capital gains

Involuntary disposal Reinvestment in Transfer of assets

of assets replacement assets to spouse
(par 65) (par 66) (section 9HB)

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 Capital gains tax - Spouses
• Spouses married in community of property (par 14)
• Property in joint estate & one spouse disposes of that property = both
deemed to have disposed of property in equal shares
• Property excluded from joint estate: treated as disposed of by spouse who
owns and has disposed of property
• Roll-over relief to spouses (section 9HB)
• Disregard any capital gain or loss
• Transferee spouse treated as if he/she acquired asset at same date and
amount of expenditure as transferor spouse
• Also if divorced assets are transferred ito a court order
• Not applicable if spouse is not a resident
• Disposal of a deceased &estate assets (s 9HA)
(Covered in TL107)
• Exclude assets transferred to the surviving spouse in terms of section 9HB
• Primary residence exclusion
• Married in community of property: apportioned

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Define Tomorrow.