TAX1501/103/3/2021

Tutorial Letter 103/3/2021

TAXATION OF SALARIED PERSONS

TAX1501
Department of Taxation

Bar code
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© 2021 University of South Africa

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University of South Africa
Muckleneuk, Pretoria

TAX1501/103/3/2021

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IMPORTANT INFORMATION:

Please register on myUnisa, activate your myLife e-mail address, and ensure that you
have regular access to the TAX1501-21-S1 module site on myUnisa.

Remember that we only have ONE Semester for 2021.

Note: This is an online module; therefore, your module is available on myUnisa.

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1. GENERAL

Please use this document to guide you through the contents of this module. This TL contains LU’s 5, 6
and 7

We wish you every success with your studies in taxation. Make the most of your opportunity to learn about
this dynamic and practical subject. If you work through the module diligently and practice the examples
on your own, then you will be well on your way to successfully completing this module.

Regards

TAX1501
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LEARNING UNIT 5
51
INTRODUCTION

STUDY PROGRAMME

LEARNING OUTCOMES

PRESCRIBED STUDY MATERIAL FOR THIS LEARNING

UNIT

CONTENTS

5.1 Background
5.2 Right of use of motor vehicle
5.3 Meals, refreshments and vouchers
5.4 Residential accommodation Gross
5.5 Low-interest loans
5.6 Contributions to medical and retirement funds income
5.7 Travel allowance

and
Introdu
POINT TO PONDER ction
exempt
WRAP-UP
Fringe
e-TIVITY incometo
benefits
SELF-ASSESSMENT QUESTIONS taxatio
ASSESSMENT CRITERIA
n
 5 TAX1501/103

INTRODUCTION

In this learning unit, we will consider the different fringe benefits and allowances and how they are taxed.
A fringe benefit arises between an employer and employee and it is a form of payment for work done by
the employee for the employer.

STUDY PROGRAMME

You should complete this learning unit in week 5, 6 and 7 of the programme.

Refer to Tutorial Letter 102 for the study programme.

LEARNING OUTCOMES

After you have completed this learning unit, you should be able to

• describe the meaning of the term “fringe benefit”

• calculate the cash equivalent of the following fringe benefits:

o right of use of a motor vehicle

o meals and refreshments or vouchers
o residential accommodation
o low-interest loans
o Contributions paid by the employer on behalf of the taxpayer
o Use of laptop

• calculate the taxable value of the following allowances:

o travelling allowance
o subsistence allowance

PRESCRIBED STUDY MATERIAL FOR THIS LEARNING UNIT

This study guide is sufficient to enable you to meet the learning outcomes. You can visit the SARS website
to obtain more information regarding a certain topic on www.sars.gov.za.
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CONTENTS

5.1 Background

In this learning unit, we will look at how the different fringe benefits and allowances are taxed. A person
can receive fringe benefits as well as cash, which together make up his or her salary received from the
employer. Fringe benefits are one of the specific inclusions of gross income.

Refer to the framework in previous learning units.

For purposes of this module, we will only deal with the following fringe benefits and
allowances:

• right of use of a motor vehicle

• meals, refreshments, and meal and refreshment vouchers
• residential accommodation (including holiday accommodation)
• low-interest loans
• contributions to funds
• travel allowance
• subsistence allowance
• use of laptop

The definition of gross income contains two specific inclusions:

paragraph (c) ... any amount, including any voluntary award, received or accrued in respect of
services rendered or to be rendered or any amount received or accrued in respect of any employ-
ment or the holding of any office

paragraph (i) ... 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
and any amount required to be included in the taxpayer’s income

From the above two definition we can see that all amounts received by an employee from an em-
ployer needs to be included in the employees’ taxable income. You should also note that there
needs to be an employer-employee relationship for a fringe benefit to exist.

Fringe benefits refer to non-cash benefits granted to employees by employers in addition to their
normal wages and salaries, but do not constitute cash payments made. These fringe benefits must
be converted into a cash equivalent amount and the taxable benefit should be included in the
employee’s taxable income calculation. Allowances, however, are cash payments to an employee.

The Seventh Schedule of the Income Tax Act provides specific rules of how the cash equivalent of
a taxable benefit must be determined that should be included in ‘gross income’. At this point, it is
important to realise that where an employee makes use of any asset for business purposes, there
is no tax consequences as far as SARS is concerned. It is only where private or domestic use of
an asset is more than incidental that there will be tax consequences.

We will now look at specific fringe benefit and allowance and how the cash equivalent needs to be
calculated according to the Seventh Schedule.
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5.2 Right of use of motor vehicle

A taxable benefit shall be deemed to be granted where employee is granted the right of use of any motor
vehicle for private or domestic purposes.

The cash equivalent of the value of the taxable benefit shall be the value of the private use of such
vehicle as exceeds any consideration given by employee to employer for the use of the vehicle during
the year of assessment/period of use, excluding cost relating to licence, insurance, maintenance or
fuel in respect of the vehicle.

You should have noted that the value of the fringe benefit cannot be reduced where the employee pays
for the full cost of the licence, insurance, maintenance or private fuel for that vehicle. The value of the
fringe benefit can however be reduced by any consideration paid by an employee for the use of the vehicle.

A claim for the full fuel cost actually incurred by an employee for private purposes will be calculated on
assessment by applying the prescribed rate per kilometre to the kilometres travelled for private purposes.

The value of the taxable benefit shall be calculated on a monthly basis or each part of a month during
which the employee was entitled to the use of the vehicle for private purposes (including travelling between
employees’ place of residence and his or her place of employment or any other travelling done for his or
her private or domestic purposes)

There are two rates at which the right of use of a company vehicle can be taxed:

• 3,5% per month of the “determined value” of the motor vehicle, or

• 3,25% per month of the “determined value” of the motor vehicle if it is subject to a maintenance
plan
(A maintenance plan is a contractual obligation between the buyer and seller of a vehicle. The seller
will cover the maintenance of the vehicle for a certain period (three years) or to a kilometre limit for
instance 60 000km have been travelled by the vehicle. The maintenance usually covers the service of
the vehicle that needs to be done each year and certain components that needs replacing on the
vehicle.)

Where two or more employer-owned vehicles are used at the same time and the Commissioner agrees
that each vehicle is primarily used for business purposes:

• the value for private use of all the vehicles will be determined using the value of the vehicle having
the highest “determined value”

What is the determined value of the motor vehicle?

Determined value for a company car is the cash cost of the vehicle including VAT (but excluding
finance charges and interest). In some instances, the determined value may exclude VAT. Where
applicable, the determined value may be reduced by 15% p.a.
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Type of business New or demo motor vehicles Pre-owned motor vehicle

(Determined value) (Determined value)
The cost to the employer (excluding
finance charge and interest) and in-
cluding VAT. OR
Manufacturers or importers Dealer billing price (including Where the employer acquired the
VAT) motor at no cost, the market value (in-
cluding VAT) plus any cost of repairs
incurred
The cost to the employer (excluding
finance charge and interest) and in-
cluding VAT. OR
Dealer or rental companies Dealer billing price (including Where the employer acquired the
VAT) motor at no cost, the market value (in-
cluding VAT) plus any cost of repairs
incurred
Other The price of acquisition paid by The price of acquisition paid by re-
respective employer (including spective employer (including VAT)
VAT)

No value is placed on the private use of a company owned vehicle if:

• it is available and used by all employees (private use is incidental, and the vehicle is not normally
kept near the employee’s residence or used outside normal business hours – the vehicle is
effectively a pool car), or
• the employee’s duties require regular use of the vehicle for the performance of duties outside
normal hours of work and private use is infrequent or incidental to business use.

Example 5.1

Nevonia received the right to use of a company owned vehicle on 1 March 2020 and
use the vehicle for the whole year of assessment. (Employer is not a manufacturer/
importer/dealer or rental company)

Nevonia’s employer purchased the motor vehicle new on 1 March for R337 500 inclu-
ding VAT.

No maintenance plan was included in the purchase cost of the vehicle. The employer
is responsible for the maintenance of the motor vehicle (the employer is therefore re-
sponsible for the services of the motor vehicle and any other wear and tear cost.

Required:

Calculate the taxable benefit from the private use of the motor vehicle that needs to be
included in Nevonia’s gross income for the 2021 year of assessment.

Try to complete it on your own without referring to the solution.

Solution Example 5.1

R337 500 x 3.5% x 12 months = R164 682

The employer falls into the other category and therefore the cost to the employer inclu-
ding VAT is used as the determine value of the motor vehicle. The employer is also
responsible for the maintenance of the motor vehicle and therefore 3.5% rate is used.
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Example 5.2

Refilwe received the right to use of a company owned vehicle on 1 September 2020 and
use the vehicle for the rest of the year of assessment. (Employer is a retail shop)

Refilwe’s employer purchased the motor vehicle on 1 September 2020 for R280 000
including VAT.

A maintenance plan of 3 years or 60 000km is included in the purchase cost of the

vehicle. The employer is responsible for the maintenance of the motor vehicle.

Required:

Calculate the taxable benefit from the private use of the motor vehicle that needs to be
included in Refilwe’s gross income for the 2021 year of assessment.

Try to complete it on your own without referring to the solution.

Solution Example 5.2

R280 000 x 3.25% x 6 months = R54 600

The percentage used is 3.25% because the cost price of the vehicle includes a mainte-
nance plan. The taxable benefit was only calculated for 6 months because the employee
used the vehicle only for half of the year of assessment.

Example 5.3

Ben received the right to use of a company owned vehicle on 1 April 2020 and use the
vehicle for the rest of the year of assessment. (Employer is a motor vehicle rental com-
pany)

Ben’s has the free use of the motor vehicle that cost his employer R402 500, retail
market value.

A maintenance plan of 3 years or 60 000km is included in the purchase cost of the

vehicle. The employer is responsible for the maintenance of the motor vehicle.

Required:

Calculate the taxable benefit from the private use of the motor vehicle that needs to be
included in Ben’s gross income for the 2021 year of assessment.

Try to complete it on your own without referring to the solution.

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Solution Example 5.3

R402 500 x 3.25% x 11 months = R202 768

The percentage used is 3.25% because the cost price of the vehicle includes a mainte-
nance plan. The taxable benefit was only calculated for 11 months because the em-
ployee used the vehicle only for 11 months of the year of assessment.

If the employer acquired a vehicle or the right of use of the motor vehicle 12 months or more before the
date on which the employee is granted the right of use of the motor vehicle, a depreciation allowance must
be deducted from the value of the motor vehicle as determined.

The allowance is calculated according to the reducing balance method at the rate of 15% for each com-
pleted period of 12 months, calculated from the date on which the employer first obtained such vehicle or
the right of use thereof to the date on which the employee was first granted the use of the vehicle.

Example 5.4

A retail company acquired a new motor vehicle for R320 000 on 1 March 2018 (including
a maintenance plan for 3 years or 60 000km).

The employer granted the right of use of this motor vehicle to Vuyi on 1 March 2020.
The vehicle was used by another employee before Vuyi.

Required:

Calculate the taxable benefit from the private use of the motor vehicle that needs to be
included in Vuyi’s gross income for the 2021 year of assessment.

Try to complete it on your own without referring to the solution.

Solution Example 5.4

R
Cost 320 000
Less: Wear and tear: R320 000 x 15% (1 March 2018 to 28 February 2019) (48 000)
272 000
Less: Wear and tear: R272 000 x 15% (1 March 2019 to 29 February 2020) (40 800)
Determined value on 1 March 2020 231 200
Taxable benefit:

R231 200 x 3.25% x 12 months = R125 268

You should notice that the determined value is reduced by 15% for each
completed period of 12 months. In this example there were two completed
12 months period before the employee received the right to use the motor
vehicle.
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Example 5.5

A motor vehicle dealer acquired a new motor vehicle for R275 000 (dealer billing price
including VAT) on 1 January 2018 (including a maintenance plan for 3 years or 60 000
km).

Employee A uses the vehicle for 30 months from 1 January 2018 to 30 June 2020 where
after the right of use was granted to employee B.

Required:

Calculate the taxable benefit from the private use of the motor vehicle that needs to be
included in Employee A’s gross income and Employee B’s gross income for the 2021
year of assessment.

Try to complete it on your own without referring to the solution.

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Solution Example 5.5

Employee A

The determine value of the vehicle will be the cost at which the employer
acquired the motor vehicle – R275 000

Taxable benefit:

R275 000 x 3.25% x 6 months = R53 625

Employee A only used the motor vehicle for 6 months in the 2021 year of
assessment.

Employee B

Employee B received the right to use the motor vehicle 30 months after
employee A used the motor vehicle. Therefore, the determined value needs
to be reduced by two 12-month completed periods.

Determined vale:
R
Cost 275 000
Less: Wear and tear: R275 000 x 15% (1 January 2018 to
31 December 2018) (49 294)
225 706
Less: Wear and tear: R225 706 x 15% (1 January 2019 to
31 December 2019) (33 856)
Determined value on 1 July 2020 191 850

Taxable benefit:

R191 850 x 3.25% x 6 months = R37 411

• You should notice that the determined value is reduced by 15% for each
completed period of 12 months. In this example there were two com-
pleted 12 months period before employee A received the right to use the
motor vehicle.
• Employee A also only used the motor vehicle for 6 months in the 2021
year of assessment.

The above calculation of the cash equivalent assumes that the vehicle is not used
at all for business purposes and that the employer pays for all operating expenses
of the vehicle. In this module, this will always be the assumption.

5.3 Meals, refreshments and vouchers

A taxable benefit shall be deemed to have been granted where the employee has been provided with any
meal or refreshment or a voucher entitling the employee of any meal or refreshment, either free of charge
or for a consideration which is less than the value of such meal, refreshment or voucher.
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The cash equivalent is the cost of the meal to the employer, less any amount paid by the employee.

Example 5.6

Kate’s employer pays R120 a meal for his employees at a dining place close to where their
offices are situated. Kate’s employer provides each employee with 20 coupons per month
for which the employee must pay R1 200 for. One meal can be enjoyed at the dining place
for each coupon.

Required:

Calculate the taxable benefit that should be included in Kate’s gross income.

Try to complete it on your own without referring to the solution.

Solution Example 5.6 R

Cost to the employer (R120 x 20) 2 400

Less: cost to the employee (1 200)
Taxable benefit to be included in Kate’s gross income 1 200

If these meals were provided in the employer’s canteen, they would not be a
fringe benefit.

There is no taxable benefit in the following scenarios:

➢ Any meal or refreshment supplied by an employer to the employees in any canteen, cafeteria or
dining room operated by or on behalf of the employer.
➢ Any meal or refreshment supplied by an employer to any employee during business hours or ex-
tended working hours or on special occasions.
➢ Any meal or refreshment enjoyed by an employee in the course of providing a meal or refreshment
to any person whom the employee is required to entertain on behalf of the employer.
➢ Board and meals provided with accommodation. They are dealt with as part of the accommodation
benefit. Refer to section 5.4 below.

5.4 Residential accommodation

A taxable benefit shall be deemed to have been granted where the employer has provided the employee
with residential accommodation either free of charge or for a rental consideration which is less than the
value of the accommodation.

The employer owns the residential accommodation

Where the employer owns the residential accommodation then the cash equivalent will be determined as
per the formula.

Formula: (A-B) x C/100 x D/12

A = the remuneration proxy, which is the employee’s remuneration and received in relation to the pre-
vious year of assessment (excluding residential accommodation and use of a motor vehicle)
 14

*B = R83 100 in most circumstances or Rnil if the employer is a private company and the employee
controls the company or the employee has the option to become the owner of the accommodation

C = 17, or
C = 18 (at least four rooms, and furnishings or electricity supplied), or
C = 19 (at least four rooms, and furnishings and electricity supplied)

D = the number of months the accommodation is used in the current year of assessment

* Remember the B is a fixed cost given by the legislations as per the Income Tax Act and therefore the
amount needs to be remembered and learned.

Example 5.7

Busi’s employer owns accommodation and supplies Busi with the unfurnished accom-
modation that consists of at least four rooms. Busi uses the accommodation for the full
year of assessment and pays R2 500 rent per month. All other expenses in respect of
the accommodation are covered by the employer.

Busi’s remuneration proxy for the previous year of assessment was R284 000.

Required:

Calculate the taxable benefit from the residential accommodation that needs to be in-
cluded in Busi’s gross income for the current year of assessment.

Try to complete it on your own without referring to the solution.

Solution Example 5.7
Formula: (A-B) x C/100 x D/12
(R284 000 - R83 100) x 18/100 x 12/12 = R36 162
Less: rental paid by Busi (R2 500 x 12) = (R30 000)
Taxable benefit R 6 162

Therefore R6 162 will be included in Busi’s gross income for the year of assessment.

18 was used in the formula as the accommodation consist of at least 4 rooms and elec-
tricity was paid by the employer.

Example 5.8

Fezile’s employer owns accommodation and supplies Fezile with the unfurnished ac-
commodation that consists of at least four rooms, free of charge. Fezile only needs to
pay for the electricity used by him during his use of the accommodation. Fezile uses
the accommodation for 6 months during the current year of assessment.

Fezile’s remuneration proxy for the previous year of assessment was R190 000.
 15 TAX1501/103

Required:

Calculate the taxable benefit from the residential accommodation that needs to be
included in Fezile’s gross income for the current year of assessment.

Try to complete it on your own without referring to the solution.

Solution Example 5.8
Formula: (A-B) x C/100 x D/12
(R190 000 - R83 100) x 17/100 x 6/12 = R9 087

Therefore, a taxable benefit of R9 087 will be included in Fezile’s gross income for the
year of assessment.

17 was used in the formula as the accommodation is unfurnished and the electricity is
paid by the employee.

The employer does not own the residential accommodation

Where the employer does not own the residential accommodation, the cash equivalent will be the lower of

➢ the amount determined in terms of the formula and

➢ the rental paid by the employer.

Example 5.9

Katlego is a director and shareholder of a private company (owns 50% of the shares in
the company). Katlego has the free use of an accommodation (rented by the company),
which consist of 10 rooms. The company pays R6 900 per month to rent the accom-
modation. The accommodation is unfurnished and Katlego needs to pay the water and
electricity each month. Katlego used the accommodation for the full current year of
assessment.

Katlego’s remuneration proxy for the previous year of assessment was R670 000.

Required:

Calculate the taxable benefit from the residential accommodation that needs to be
included in Katlego’s gross income for the current year of assessment.

Try to complete it on your own without referring to the solution.

Solution Example 5.9

The taxable benefit will be the lower of the formula or the rental paid by the employer.

Formula: (A-B) x C/100 x D/12

(R670 000 - R0) x 17/100 x 12/12 = R113 900

Paid by employer/company: R6 900 x 12 months = R82 800

The lower of the two is the R82 800 paid by the employer for the accommodation.
 16

Therefore, a taxable benefit of R82 800 will be included in Katlego’s gross income for
the year of assessment.

Due to Katlego being a shareholder of the private company and Katlego will therefore
have an interest in the accommodation provided by the company the ‘B’ in the formula
will be nil.

17 was used in the formula as the accommodation is unfurnished and the electricity is
paid by the employee.

Holiday accommodation

The cash equivalent of a holiday accommodation depends on whether the accommodation is owned or
leased by the employer and will be reduced by the amount of any consideration given by an employee.

The value of the benefit shall be:

➢ Where the accommodation is hired from unconnected person:

- Rental payable and any amounts chargeable in respect of meals, refreshments or any services
relating to such accommodation or
➢ In any other case, the prevailing rate per day that such accommodation is let to any unconnected
person

Example 5.10

Petro’s employer owns a holiday accommodation and supplied Petro with the free use
of the holiday accommodation during the April school holiday for 2 weeks. Petro’s em-
ployer normally rents the place out to unconnected persons for R1 300 per week.

Required:

Calculate the taxable benefit from the holiday accommodation that needs to be included
in Petro’s gross income for the current year of assessment.

Try to complete it on your own without referring to the solution.

Solution Example 5.10

Taxable benefit to be included in Petro’s gross income R1 300 x 2 weeks = R2 600

The holiday accommodation was provided to Petro. Petro did not pay anything for the
use of the accommodation; therefore, no deduction is set off against the cash equivalent
of R2 600.

5.5 Low-interest loans

If an employee borrows money from his or her employer, a fringe benefit arises if the employer charges
less interest than the official interest rate (a rate of interest used by the Commissioner for the purpose of
calculating a deemed fringe benefit on low or interest-free loans).

The value of the fringe benefit is determined by multiplying the amount of the loan granted with the
difference between the actual interest rate applicable to the loan and the official rate of interest.
 17 TAX1501/103

The official interest rate is available on the SARS website. When we ask a ques-
tion, we will provide you with the official interest rate if necessary.

Exclusion; no value shall be placed on the benefit if:

➢ A debt owed by any employee to the employer does not exceed the sum of R3 000 in total at any
time.
➢ Granting of debt to enable employee to further his/her own studies.
➢ A loan granted by the employer to the employee which does not exceed R450 000 if:
o The debt was to acquire residential accommodation (immovable property)
o The market value of the property acquired does not exceed R450 000
o The remuneration proxy of the employee does not exceed R250 000 in the year of assessment
during which the loan is granted; and
o The employee is not a connected person in relation to the employer.

➢ The cash equivalent of the fringe benefit is the difference between the official interest rate and the
actual interest rate (if any) that is paid by the employee.
➢ The rate is for a full year, where the employee has a loan for less than 12 months then the cash
equivalent is reduced pro rata.
➢ The deemed interest can be deducted as an interest expense in terms of section 11(a) provided it
would have been incurred by the taxpayer in the production of income
➢ Casual short-term loans of less than R3 000 are excluded from this fringe benefit.
➢ Loans to further one’s own studies are excluded from this fringe benefit.

Example 5.11

Johannes Manual borrowed R12 000 on 1 March 2020 from his employer at an interest
rate of 5.5%. The official interest rate is 7.1%

Required:

Calculate the taxable benefit that needs to be included in Johannes’ gross income.

Try to complete it on your own without referring to the solution.

Solution Example 5.11

Actual interest on loan R12 000 x 5.5% = R660

Interest at official interest rate R12 000 x 7.1% = R852

Taxable benefit (R852 - R660) = R192

Therefore, R192 will be included in Johannes gross income.

Do you see that the fringe benefit is the difference between the interest rates of 5.5% and
7.1%?
 18

Example 5.12

Rosie borrowed R120 000 from her employer on 1 September 2020 at an

interest rate of 4%. The official interest rate for the current year of assessment R
is 7.1%.

Other information:

Salary 430 000

Rental income 36 000
Rosie used the R120 000 borrowed from her employer to obtain a rental pro-
perty on which she earned rental income for the current year of assessment.

Required:

Calculate Rosie’s taxable income for the current year of assessment.

Try to complete it on your own without referring to the solution.

Solution Example 5.12

R
Salary 430 000
Low interest debt – taxable benefit 1 860
Deemed interest value (R120 000 x 7.1% x 6/12 months) = R4 260
Less: Actual interest paid (R120 000 x 4% x 6/12 months) = (R2 400)
36 000
Rental income 467 860

Less: Allowable deductions (4 260)

Deemed interest paid in the production of income 463 600
Taxable income

If the interest paid is use in the production of income, in this example to pro-
duce rental income, then the deemed interest at the official interest rate can
be deducted as an allowable deduction in terms of section 11(a) of the Income
Tax Act.

Example 5.13

Betty Barbo’s employer granted her a low interest loan on 1 April 2019. The initial loan
was for R100 000 and the loan carries interest at 2,5%. She is required to repay R10 000
every six months. On 1 March 2020, the official interest rate was 8%. On 1 November 2020,
the official interest rate changed to 7%.

Calculate the taxable portion of the fringe benefit for the 2021 year of assessment.
 19 TAX1501/103

Solution Example 5.13

The following timeline represents all of the changes to the outstanding loan balance as well
as changes in the official interest rate. We must calculate the fringe benefit for the 2021
year of assessment and we therefore require the outstanding loan balance on 1 March
2020.
1 April 30 September 1 March 31 March 30 September 1 November 28 February
2019 2019 2020 2020 2020 2020 2021

New year of
Loan assessment. Repaid Repaid Change in End of 2020
Repaid
granted of Outstanding R10 000. R10 000. official year of
R10 000
R100 000 loan balance: Balance Balance interest assess-
R90 000 R80 000 R70 000 rate ment

1 March 2020 – 31 March 2020

R90 000 x (8% - 2,5%) x 1/12 = R413
1 April 2020 – 30 September 2020
R80 000 x (8% - 2,5%) x 6/12 = R2 200
1 October 2020 – 31 October 2020
R70 000 x (8% - 2,5%) x 1/12 = R321
1 November 2020 – 28 February 2021
R70 000 x (7% - 2,5%) x 4/12 = R1 050
Total fringe benefit: R3 984 (R413 + R2 200 + R321 + R1 050)

Remember, with every change in a variable, a new calculation needs to be performed.

5.6 Contributions to funds

The total contributions to pension fund, provident fund or retirement annuity fund paid by the employer on
behalf of the taxpayer constitute a fringe benefit.

When the employee calculates the deduction for retirement annuity contribution, both the employer’s and
employee’s contribution will be deductible. We will look further at the deduction available for a taxpayer
on contributions made to retirement funds in learning unit 6.

Contributions paid by an employer on behalf of a taxpayer to a medical scheme were covered in Learning
unit 3.

Remember, if you are over 65 and not retired, the contributions paid by your
employer for medical aid constitute a fringe benefit.
 20

Example 5.14

July Lin’s employer made the following contributions on behalf of Lin for the current year
of assessment.

Contribution to medical aid scheme - R15 000

Contribution to retirement annuity fund – R12 500

Required:
Calculate the taxable benefit that should be included in Lin’s gross income for the current
year of assessment.
Try to complete it on your own without referring to the solution.
Solution Example 5.14

Fringe benefit included in gross income:

Contribution to medical aid scheme by employer R15 000

Contribution to retirement annuity fund by employer R12 500

Both of the contributions made by the employer on behalf of the employee will be included
in employee’s gross income.

5.7 Travel allowance Textbook: section 6.3 and 6.3.1

Sometimes an employee will receive allowances from his or her employer in order to assist him or her in
paying certain expenses that the employer expects him or her to incur in order to perform a job.

These allowances may take the form of reimbursive allowances, where the employee will be refunded the
amount that he or she spends, once he or she provides the employer with proof that the expenditure has
actually been incurred for business purposes.

Other allowances are provided to employees to cover certain expenses, but the employee has to decide
whether or not he or she will use the allowance for such purpose.

All allowances (except for travelling, subsistence and public office allowances) are included in full in an
employee’s taxable income. The exceptions to the rule, namely travel and subsistence allowances, are
discussed below. (We will not look at public office allowance in this module)

A travel allowance is an amount of money given to an employee to cover business-related travelling

expenses. The taxable portion is determined by using the rules set out in the Act.

Any allowance or advance in respect of travelling expenses not for the purpose of business travelling but
for private travelling (this includes travelling between the employee’s place of residence and his/her place
of employment or other travelling done for his or her private or domestic purposes) shall be deemed not
to have been actually expended on travelling for business purposes.

Travel allowance: A travel allowance given to an employee to finance transport

Reimbursive allowance: A reimbursement given to employee based on actual business travel.

 21 TAX1501/103

Travel allowance:

The full travel allowance received is not included in income. Only the part of the allowance that remains
(if anything), once the cost of travelling for business purposes has been deducted, is included.

Travel allowance received

Less: cost of business travelling

Amount of the remaining Cost exceeds allowance

allowance

(Positive answer) (Negative answer)

Include in taxable income No inclusion

(No deduction of cost that exceeds allowance)

What you are trying to achieve when dealing with a travel allowance is that, so long as the employee has
used the travel allowance to pay for business travelling, there will not be a fringe benefit.

Where employees received an allowance of more than what they spent on business travelling, then the
excess amount of the travel allowance will be taxed. However, how do we calculate the cost of business
travelling?

In order to calculate the cost of business travelling, we need two variables:

1. Actual business kilometres travelled

2. Cost per kilometre travelled

How do we obtain this information?

Step 1: Business kilometres travelled:

In order to ascertain the distance a person travelled for business purposes, we have to refer to

• a logbook

The logbook will give us the actual kilometres travelled during the year of assessment. A logbook is used
every time the employee travels in his car to record how far he travelled and the purpose of the trip.
Travelling can only be for private or business purposes. Therefore, if we supply you with the total kilo-
metres travelled for the year of assessment and we give you the private kilometres travelled for same
year of assessment, then the difference between the two values must be the business kilometres tra-
velled.

Be aware that if an employee does not keep a logbook, he will not be entitled to claim any business travel
expenditure. His entire travel allowance will therefore be fully taxable.
 22

Step 2: Cost per kilometre:

Now that we understand how to calculate the business kilometres, we need to calculate how much it costs
a person to run his vehicle for the year of assessment. We can

• make use of the actual expenses, where the employee has kept proof, or
• we can make use of the tables that are provided in the Income Tax Act

Where an employee keeps proof of all his expenditure on travelling during the year of assessment:

The total actual expenditure will be divided by the total kilometres travelled to give us a
calculated cost per kilometre.

Actual costs cannot be calculated where the employee only knows the cost price of the vehicle.

The Actual cost includes:

o fuel
o licensing and insurance fees
o maintenance costs
o wear and tear. Wear and tear is calculated by dividing the cost price of the vehicle (including VAT)
by seven (7) years. The cost price of the vehicle is limited to R595 000, where the cost price of
the vehicle is more than R595 000, R595 000 will be used as the cost price and not the actual cost
price of the motor vehicle.
o Interest paid where the vehicle is financed (this interest is limited to an amount which would have
been incurred had the original debt been R595 000.
o Lease payments where the taxpayer leases the vehicle.

Where an employee does not keep proof of his actual expenditure on travelling, he can make use of the
tables to calculate the total cost per kilometre (fixed plus variable).

Determined vehicle cost – SARS table:

Where the value of the vehicle Fixed Cost R Fuel Cost Maintenance
c/km Cost c/km

does not exceed R95 000 31 332 105.8 37.4

exceeds R95 000 but does not exceed R190 000 55 894 118.1 46.8

exceeds R190 000 but does not exceed R285 000 80 539 128.3 51.6

exceeds R285 000 but does not exceed R380 000 102 211 138.0 56.4

exceeds R380 000 but does not exceed R475 000 123 955 147.7 66.2

exceeds R475 000 but does not exceed R570 000 146 753 169.4 77.8

exceeds R570 000 but does not exceed R665 000 169 552 175.1 96.6

exceeds R665 000 169 552 175.1 96.6

 23 TAX1501/103

You will be supplied with the “Employee-owned vehicles” table for the purpose of deter-
mining the portion of the travel allowance expended for business purposes. Remem-
ber that the determined value of the vehicle includes VAT, but excludes finance char-
ges or interest payable.

How to calculate the deemed cost per km using the employee-owned vehicle table (as shown
above):

First: Select the correct line on the table to use according to the vehicle cost price (including VAT)

Second: Calculate the fixed cost per kilometre: Fixed cost/ total kilometres travelled = R/km

Third: Convert the R/km to cent: R/km x 100cents = cents/km

Fourth: Add the fixed cost (calculated above) + Fuel cost (per table) + Maintenance cost (per table) =
Total cost cents/km

Fifth: Convert the cents/km amount to Rand/km: Total cost cents/km / 100 = R/km

Step 3: Calculate the total business cost

You now take the R/km amount calculated in step 2 and times that by the business kilometres as calculated
in step 1.

R/km x business km = Business value

Step 4: Calculate the amount that needs to be include in the taxable income calculation

Travel allowance received less business value (calculated in step 3) = Taxable portion (if any)

Where a taxpayer has kept record of the actual expenses, you will calculate both the
actual cost per kilometre as well as the deemed cost per kilometre. The highest of
the two Rand/km will be used in the travel allowance calculation as per step 3 above.

Let’s look at some example:

 24

Example 5.15
Eddie received a travel allowance from his employer for the full year of assessment.

The following information relates to his travel allowance:

Travel allowance received for the year – R65 000
Total kilometres for the year – 38 000 km
Private kilometres for the year – 22 000km
Vehicle cost R250 000 (including VAT)

He kept no records of his vehicle expenses but did keep a logbook of all business travel-
led.

Required:

a) Calculate the business kilometres for the current year of assessment

b) Calculated the deemed cost per kilometre (in rand)
c) Calculate the total business cost
d) Calculate the taxable amount (if any) that needs to be included in Eddie’s taxable
income calculation.

(Hint: Follow the steps provided above to answer the example)

Try to complete it on your own without referring to the solution.

 25 TAX1501/103

Solution Example 5.15

a) Calculate the business kilometres:

Km
Total kilometres travelled 38 000
Private kilometres 22 000
Business kilometres 16 000

b) Calculated the deemed cost per kilometre:

First: Refer to the determined value table above, the determined value of the vehicle falls
in the line ‘exceeds R190 000 but does not exceeds R285 000’.

The following values will be used:

Fixed Cost – R80 539
Fuel cost – 128.3 cents per kilometre
Maintenance cost – 51.6 cents per kilometre

Second: Fixed Cost Rand/kilometre amount: R80 539/38 000 = R2.11

Third: Fixed Cost converted to cents = R2.11 x 100 cents = 211 cents per kilometre
Fourth: Total cost per kilometre = 211 + 128.3 + 61.6 = 390 .9 cents per kilometre
Fifth: Convert to rand per kilometre = 390.9/ 100 = R3.91/km

c) Calculate the business cost

Business kilometres x deemed/km: R16 000 x R3.91 = R62 560

d) Calculate taxable portion of travel allowance

R
Travel allowance 65 000
Deemed business cost (62 560)

Taxable portion to be included in taxable income 2 440

 26

Example 5.16

Elsa received a travel allowance from her employer for the full year of assessment.

The following information relates to her travel allowance:

Travel allowance received for the year – R43 000
Total kilometres for the year - 28 000 km
Private kilometres for the year – 18 000km
Vehicle cost R320 000 (including VAT)
Actual Vehicle expenses – R26 000 (all allowed)

She kept record of all actual expenses incurred on her vehicle. She also kept a logbook
of all business travelled.

Required:

a) Calculate the business kilometres for the current year of assessment

b) Calculated the actual cost per kilometre as well as the deemed cost per kilometre
(in rand)
c) Calculate the total business cost
d) Calculate the taxable amount (if any) that needs to be included in Elsa’s taxable
income calculation.

(Hint: Follow the steps provided in the study guide to answer the example)

Try to complete it on your own without referring to the solution.

 27 TAX1501/103

Solution Example 5.16

a) Calculate the business kilometres:

km
Total kilometres travelled 28 000
Private kilometres 18 000
Business kilometres 10 000

b) Calculate the actual cost per kilometre:

Total cost:
R
Wear and tear on vehicle (R320 000/7) 45 714
Actual cost 26 000
Total cost 71 714

Actual cost per km = R71 714/28 000* = R2.56/km

*Take note: you need to use the total kilometres and not the business kilometres.

Calculated the deemed cost per kilometre:

First: Refer to the determined value table above, the determined value of the vehicle falls
in the line ‘exceeds R285 000 but does not exceed R380 000’.

The following values will be used:

Fixed Cost – R102 211
Fuel cost – 138 cents per kilometre
Maintenance cost – 56.4 cents per kilometre

Second: Fixed Cost Rand/kilometre amount: R102 211/28 000 = R3.65

Third: Fixed Cost converted to cents = R3.65 x 100 cents = 365 cents per kilometre
Fourth: Total cost per kilometre = 365 + 138 + 56.4 = 559.4 cents per kilometre
Fifth: Convert to rand per kilometre = 559.4/ 100 = R5.59/km

The highest value is the deemed cost per km of R5.59/km and will be used in the calcu-
lation in (c) below.

c) Calculate the business cost

Business kilometres x deemed/km: R10 000 x R5.59 = R55 900

d) Calculate taxable portion of travel allowance

R
Travel allowance 43 000
Deemed business cost (55 900)
Taxable portion to be included in taxable
income (12 900)

The deemed cost will be limited to the travel allowance: R43 000 - R43 000 = Rnil

Therefore, no amount will be included in the taxable income.

 28

Reimbursive allowance:

The definition of variable remuneration was extended to include any amount paid or granted in reimburse-
ment of any expenditure. Therefore, any allowance or advance paid as a variable remuneration in terms
of section 7B of the Income Tax Act must be included in the tax year that the allowance or advance is paid
to the employee and not when it was incurred.

A reimbursive travel allowance is where an allowance or advance is based on the actual distance travelled
for business purposes (this is excluding private use)

The current rate per kilometre is R3.98 per kilometre

No amount included in taxable income:

➢ Where the reimbursive allowance does not exceed the prescribed rate per kilometre and no other
compensation is paid to the employee, the amount is not subject to employees tax but the full
amount is still reflected on the IRP5 certificate
➢ Where the reimbursive allowance does not exceed the prescribed rate per kilometre however other
compensation is paid to the employee the amount is not subject to employees tax but the full
amount is reflected on the IRP5 certificate.

Where the reimbursive allowance exceeds the prescribed rate per kilometre (irrespective of the
kilometres travelled), the full amount above the prescribed rate is subject to employees’ tax.

Example 5.17

Joey received a reimbursive allowance from his employer. Joey travelled 1 000 km for his
work in the current year of assessment, his employer reimburse him at a rate of R4.61 for
all business travel.

Required:

Calculate the taxable portion of the reimbursive allowance received.

Try to complete it on your own without referring to the solution.

Solution Example 5.17

R
Reimbursive allowance (R4.61 x 1 000km) 4 610
Allowable rate (R3.98 x 1 000km) 3 980
Taxable portion 630
 29 TAX1501/103

Be careful of fringe benefits that are not granted for the full year of assessment and
remember to only include the months applicable for the year of assessment that you
are working with.

5.8 Subsistence allowance

A subsistence allowance is any allowance given to an employee for expenses incurred or to be incurred
in respect of personal subsistence and incidental cost (for example drinks)

An employee receives an allowance when the employer requires the employee to be away from home for
at least one night.

It is important to note that compensation or an allowance paid to employees who reside far away from their
normal place of employment or who do not spend the night away from home is not regarded as a
subsistence allowance and is subject to employees’ tax.

Section 8(1)(c) of the Income Tax Act prescribes that the employee shall be deemed to have actually
expended a certain amount (daily expenses in respect of meals and /or incidentals cost) where the
employee is absent from his/her usual place of residence.

Deemed cost:

Where the accommodation to which the allowance or advance relates is in South Africa, an amount
equal to the following is deemed to be expended for each day or part of a day in the period during which
the employee is absent from his/her usual place of residence:

o Only incidental costs – R139

o Meals and incidental costs – R452

Only the portion of the allowance that is not spent for business purposes is included in taxable income.

A taxpayer is allowed to either use the actual expenditure incurred (needs to be able to prove the expen-
ses) or deemed figures, whichever yields the greater deduction.

Remember, you have to know that the deemed cost is R139 per day for incidental
costs and R452 per day for meals and incidental costs (laundry, telephone costs,
etc) if an employee receives a subsistence allowance and is away for business
purposes in South Africa.

Taxable subsistence allowance = Total allowance received less costs

 30

Example 5.18

Thandi Dlongolo travelled for five (5) days away from her home for business purposes.
Her employer paid her a subsistence allowance of R2 750. Thandi can prove that she
spent R2 100 on meals and incidental costs.

Required:

Calculate the taxable portion of the subsistence allowance that needs to be included in
Thandi’s taxable income.

Try to complete it on your own without referring to the solution.

Solution Example 5.18

R
Taxable portion of subsistence allowance:
Travel allowance received 2 750
Less: Greater of actual cost or deemed
Actual cost – R2 100
Deemed cost – R452 x 5 days = R2 260 (higher) (2 260)
Taxable portion of subsistence allowance to be included 490

Note that Thandi is entitled to deduct the greater of the actual cost or deemed
cost, even though her actual cost is less than the deemed cost.

POINT TO PONDER

• Is it fair that a person who receives a fringe benefit should be taxed on such a
benefit?

WRAP-UP

• The cash equivalent of fringe benefits is included in gross income.

• A fringe benefit is only possible between an employer and employee.
• A fringe benefit is part of the remuneration of an employee in a form other than cash.
• Different rules apply to calculating the cash equivalent of the different fringe benefits.
• Rules apply to calculating the taxable portion of cash allowances received by employees.

Now that you have completed this learning unit, please revise the learning outcomes
and make sure that you have attained all of them.

E-TUTOR ACTIVITY

Refer to your specific e-tutor site for an activity on this learning unit.
 31 TAX1501/103

Go to the Course Site and do the online self-assessment questions.

Study the unit on the fringe benefits and allowance and discuss any concepts that you
do not understand – or if you do understand, then answer those students who have
posted questions.

ONLINE SUPPORT

Kindly log onto myUnisa and navigate to the lesson tools. The lesson tool provides
an overview of the learning unit to assist you in working through the learning unit. The
lesson tool also contains an additional example and other aids to help you understand
the study material.

SELF-ASSESSMENT QUESTIONS
Solutions are found at the end of this learning unit.

QUESTION 5.1 (7 marks 8 minutes)

(i) An employer may award a retired employee a fringe benefit.

(a) True
(b) False

(ii) Fringe benefits are not included in gross income.

(a) True
(b) False

(iii) A fringe benefit is cash given to an employee.

(a) True
(b) False

(iv) The taxable portion of a fringe benefit is generally the portion used for private purposes.

(a) True
(b) False

(v) An example of an allowance is a car given to an employee for private use.

(a) True
(b) False

REQUIRED: Marks
a) State whether each of the above statements is true or false. 5

b) Discuss what is a fringe benefit 2

 32

QUESTION 5.2 (27 marks, 32 minutes)

Your cousin Bart Junior (25 years old) sends you an e-mail to ask for your assistance regarding the inclu-
sion of fringe benefits to his salary package. Here is an extract from his e-mail:

I have been employed for two years and I have just received a new salary package because I have
completed my studies. My new salary package includes certain fringe benefits.

First of all, can you explain to me what is meant by the term “fringe benefit”?

I will be receiving the following fringe benefits from 1 March 2020 and I would like you to calculate
the taxable portion of each of these benefits for the year of assessment ended 28 February 2021.
You can assume that I will receive the benefits for 12 months (except for the holiday accom-
modation).
 33 TAX1501/103

QUESTION 5.2 (continued)

Residential accommodation

I will have the free use of a flat that belongs to my employer. The flat consists of five rooms and
it is furnished. I will have to pay the water and electricity. During the 2020 year of assessment,
my remuneration amounted to R180 000. My remuneration for the 2021 year of assessment will
amount to R250 000.

Meals at the canteen

I will be provided with 300 meals a year in the cafeteria situated on the business premises. The
meals are valued at R60 per meal.

Holiday accommodation

During September 2020, I will occupy the beach cottage on the West Coast for five days. The
beach cottage belongs to my employer and in September, it is let to the public at a rate of R1 200
per day. I will pay R250 per day for the use of the cottage.

Medical contributions paid by the employer

The employer will contribute R1 000 per month to my medical aid fund.

Travel allowance

I will receive a monthly travel allowance of R3 800 per month. The cost of my vehicle including VAT
amounts to R172 500. I expect that I will travel 15 400 kilometres for business purposes and a
total of 26 500 kilometres for the 2021 year of assessment.

I expect my actual costs for the 12 months to be as follows:

R
Fuel 12 000
Insurance premiums and licence fees 4 200
Maintenance 3 450

Use of motor vehicle instead of travel allowance

What would the taxable value of the fringe benefit be if my employer gives me the use of a motor
vehicle instead of the travel allowance? My employer purchased the company car on 1 March 2020.
The cost of the car is R195 000. This amount includes VAT and a maintenance plan. My employer
pays for all operating expenses and the vehicle is not used for business purposes.

REQUIRED: Marks

(a) Explain the term “fringe benefit” to your cousin Bart Junior. 2
(b) Calculate the cash equivalent of each of the above fringe benefits and the taxable
portion of any allowances for the 2021 year of assessment. 25
 34

QUESTION 5.3 (32 marks, 38 minutes)

Gerald received the following benefits and allowance from his employer during the 2021 year of assess-
ment:

1. Right of use of employer’s guesthouse (4 marks)

Gerald’s wife and two children were given the right to use a guesthouse, owned by Gerald’s employer, for
five nights. Although he could not go on holiday with his family due to work commitments, his wife and
children spent five nights at the guesthouse. The guesthouse is situated in Cape Town. The company
normally charges guests R950 per person per night. Gerald paid R5 000 in total for the entire period of
use of the guesthouse.

2. Travel allowance (20 marks)

Gerald received a travel allowance of R20 000 per month for the full year of assessment. He travelled a
total of 96 000 km for the full year, 42 000 km of which were private kilometres according to his logbook.
The purchase price of the car was R575 000 (including VAT) on 1 March 2017. He had proof of the fol-
lowing expenses:

Finance charges 41 000

Fuel costs 120 000
Licence fees 2 500
Maintenance 12 000

3. Low-interest loan (5 marks)

On 1 March 2020, Gerald received a loan of R30 000 from his employer. The interest on the loan was 2%
while the official interest rate was 9%. On 31 August 2020, he repaid R15 000 to his employer.

REQUIRED: Marks

(a) Discuss whether the use of the employer’s guesthouse would be included in
3
Gerald’s gross income for the 2021 year of assessment.
(b) Assuming the right of use of the employer’s guesthouse is a taxable fringe benefit,
calculate the taxable portion of all of Gerald’s fringe benefits and of the travel al-
lowance received for the 2021 year of assessment. 29
 35 TAX1501/103

QUESTION 5.4 (26 marks, 31 minutes)

Mkhize Khoza is an employee of Zarro Ltd, an advertising company. He wants to complete his tax return
for the 2021 year of assessment, but he does not understand certain tax issues. He therefore sent you an
e-mail (see below) to assist him with his tax queries.

Marks
Tax queries
MkhizeK [mkhizek@mylife.ac.za]
Sent: May 2020, at 08:00
To: Tax Student

Dear Student

Kindly assist me with the following queries:

1. What is the difference between an allowance and a fringe benefit? 2

2. Subsistence allowance 4

I received a subsistence allowance of R2 500 per month, for the full year, to cover the cost
of meals and incidental costs. I was required to travel to clients and spent 26 days in total
away from home during the year. I incurred, in total, R5 200 for meals and R4 700 for
laundry and room service while I was on my business trips. I kept proof of all these expen-
ses.

What is the taxable portion of the allowance? 4

3. Right of use of residential accommodation

I stayed in a house owned by my employer, for the full year. The house consists of four
bedrooms, bathroom, kitchen and lounge and it is furnished by my employer. I did not pay
anything towards the use of the house but only paid for electricity and water.

My remuneration factor for the current year of assessment is R360 000 and for the previous 4
year of assessment, it was R320 000.

What is the cash equivalent of the benefit?

4. Right of use of motor vehicle

9
I had the right to use a vehicle for the full year. The vehicle was not subject to a mainte-
nance plan at the time of purchase. The company purchased the vehicle on 1 March 2020
for R240 000 (excluding VAT of R33 600 and interest of R80 000)
What is the cash equivalent of the benefit?

5. Travel allowance

Assume that I did not receive the right to use a motor vehicle, but that I used my own car
3
for business purposes and received a travel allowance. My employer is willing to pay me
a travel allowance of R6 000 per month. The cost of my car is R220 000 (including VAT).
I will not keep any records for actual expenses incurred.
I travelled a total of 24 000 km during the current year of assessment, of which 8 000 km
were private kilometres.
What is the taxable portion of the allowance?
 36

Marks

6. Low interest rate loan

On 31 August 2020, I obtained a loan of R15 000 from my employer. The interest rate
charged by my employer was 3% per annum and the official interest rate is 8,5% per
annum. At the end of the year, no portion of this loan was repaid.

What is the cash equivalent of the benefit?

REQUIRED: Marks

Assist Mkhize Khoza with his queries by responding to each of the six queries. 26

ASSESSMENT CRITERIA

We could assess this learning unit in assignments or in the examination by asking you to

• explain the term “fringe benefit”

• calculate the cash equivalent of the following fringe benefits as described in a practical case study:

o right of use of a motor vehicle

o meals and refreshments or vouchers
o residential accommodation
o low-interest loans
o contributions paid by the employer on behalf of the taxpayer
o use of laptop

• calculate the taxable value of the following allowances as described in a practical case study:

o travel allowance
o subsistence allowance
 37 TAX1501/103

Solutions to self-assessment questions in learning unit 5

QUESTION 5.1 (7 marks)

Part (a)

(i) False
(ii) False
(iii) False
(iv) True
(v) False

Part (b)

• Fringe benefits refer to non-cash benefits granted to employees by employers in addition to their
normal wages and salaries, but do not constitute cash payments made.

• These fringe benefits must be converted into a cash equivalent amount and the taxable benefit should
be included in the employee’s taxable income calculation.

QUESTION 5.2 (27 marks)

A fringe benefit is between an employer and employee. It is a salary (remuneration) in a form other
than cash. (2)

Residential accommodation
(A – B) x C/100 x D/12
A = R180 000 (1)
B = R83 100 (1)
C = 18 (1)
D = 12 (1) (remember, must be 12/12)
Cash equivalent: (R180 000 – R83 100) x 18/100 x 12/12 = R17 442

Meals
No taxable benefit: Rnil cash equivalent (1)

Holiday accommodation
R
R1 200 (1) x 5 days (1) 6 000
Amount paid by Bart (R250 x 5 days) (1 250) (1)
Cash equivalent 4 750

Medical contributions
R1 000 x 12 = R12 000 cash equivalent (1)

Travel allowance
Determined value: R172 500 (1)
 38

QUESTION 5.2 (continued)

Deemed cost
Fixed cost: R55 894(1) /26 500 km (1) = R2.10 x 100 210.0c
Fuel 118.1c (1)
Repairs 46.8c (1)
Deemed cost per km 374.9c

R
Actual cost
Depreciation: R172 500 / 7 years (1) 24 643
Fuel 12 000 (1)
Insurance premiums and licence fee 4 200 (1)
Maintenance 3 450 (1)
44 293
Actual cost per km: R44 293/26 500 km (1) 167,1c
The greater of actual costs or deemed cost: Use deemed cost = 374.9c

Travel allowance received (R3 800 x 12 months) (1) 45 600

Less: Business travel (15 400 km (1) x 374.9c (1)/100 (1)) = R57735
but limited to travel allowance received (1) (45 600)
Taxable portion of travelling allowance nil

Use of a motor vehicle

R195 000 (1) x 3,25% (1) x 12 months (1) = R76 050
Max: 27
 39 TAX1501/103

QUESTION 5.3 (32 marks)

(a) Gross income

• Gerald received the benefit by virtue of his employment. (1)

• This is therefore considered a taxable fringe benefit received by Gerald. (1)
• The taxable benefit will be included (1) in Gerald’s calculation of taxable income in the 2021
year of assessment.
Marks: 3
R R
(b)
1. Right of use of company guesthouse
Amount charged by company (R950 (1) x 3 (1) x 5 nights (1)) 14 250
Amount paid (5 000) (1)
Taxable benefit 9 250

Marks: 4

2. Travel allowance R
Travel allowance received R20 000 (1) x 12 months (1) 240 000
Less: Business use 54 000 km (1) x R4,47(1) = R241 380 limit to (240 000) (1)
actual travel allowance received

Determined value (given) 575 000

Business kilometres travelled (96 000 km - 42 000 km) = 54 000 km (1)

Deemed cost
Fixed cost (R169 552(1) / 96 000 (1)) x 100 176.0
Fuel 175.1(1)
Maintenance 96.6(1)
Total 447.70
Deemed cost per km: 447.7/100 = R4.47

Actual costs
Wear and tear (R575 000 (1) / 7(1)) 82 143
Finance charges 41 000
Fuel costs 120 000(1)
Licence fees 2 500(1)
Maintenance 12 000(1)
Total 257 643

Cost per km: R257643 / 96 000 km (1) = R2,684 per km

Deemed cost the highest.

Taxable portion 0

Marks: 20
3. Low interest rate loan
R
R30 000 (1) x (9% – 2%) (1) x 6/12 (1) 1 050
(R30 000 - R15 000) = R15 000 (1) x (9% - 2%) x 6/12 (1) 525
Taxable portion 1 575

Marks: 5
 40

QUESTION 5.4 (26 marks)

An allowance is the amount of cash given to you by your employer to use for business purposes. A fringe
benefit is a benefit given to you by your employer in a form other than in cash. (2)

Subsistence allowance R R
Subsistence allowance received (R2 500 x 12) 30 000 (1)
Less: Business expenses
The greater of (11 752) (1)
– deemed cost (R452 x 26) 11 752 (1)
– actual costs (R5 200 + R4 700) 9 900 (1)
Taxable portion of the benefit 18 248

Right of use of residential accommodation

(A – B) x C/100 x D/12
A = R320 000
B = R83 100
C = 18
D = 12
Taxable portion of the benefit (R320 000 (1) –
R83 100 (1)) x 18/100 (1) x 12/12 (1)) 42 642

1. Right of use motor vehicle

Determined value (R240 000 (1) + R36 000 (1)) = R276 000

Fringe benefit (R276 000 x 3,5% (1) x 12 months (1)) 115 920
Travel allowance
Travel allowance received (R6 000 x 12 months) 72 000 (1)
Determined value of the car 220 000 (1)
Deemed cost:
Fixed cost R80 539 (1) / 24 000 km (1) x100 335 c
Fuel cost 128.3 c (1)
Maintenance cost 51.6 c (1)
514.9 c
Less: Business travel (24 000 km – 8 000 km (1)
(or 16 000 km)) x (514.9c(1) / 100) = R82 384 limit (72 000)
to travel allowance (1)
Taxable portion of the benefit Nil

Low interest rate loan

Taxable portion of the benefit ((R15 000 (1) x
(8,5% - 3% (1))) x 6/12 months (1) 413
26
 41 TAX1501/103

NOTES
 42

LEARNING UNIT 6

6
INTRODUCTION
STUDY PROGRAMME
LEARNING OUTCOMES
PRESCRIBED STUDY MATERIAL FOR THIS
LEARNING UNIT

CONTENTS
6.1 Background
6.2 Taxable income framework
6.3 Deductions
6.4 Pension fund, retirement annuity fund and provident
fund contributions
6.5 Donations to public benefit organisations

POINT TO PONDER
WRAP-UP
e-TIVITY
SELF-ASSESSMENT QUESTIONS
ASSESSMENT CRITERIA

Calculation
of taxable
income
 43 TAX1501/103

INTRODUCTION

In learning unit 2, we referred to the frameworks for calculating the taxable income and the final tax liability
of a salaried person. The emphasis in learning unit 2 was on calculating the final tax liability. In this
learning unit, you will learn how to calculate the taxable income, which you need to do before you can
calculate the normal tax and therefore, the final tax liability.

STUDY PROGRAMME

You should complete this learning unit in week 6 to week 12 of the programme.

LEARNING OUTCOMES

After you have completed this learning unit, you should be able to

• reproduce the framework for calculating the taxable income and apply it in a practical scenario
• know the order in which deductions must be deducted and apply it in a practical scenario
• calculate and apply the limitations for income tax purposes in respect of
o contributions to retirement funds
o donations to public benefit organisations
• calculate the taxable income of a person receiving a salary

PRESCRIBED STUDY MATERIAL FOR THIS LEARNING UNIT

This study guide is sufficient to enable you to meet the learning outcomes. You can visit the SARS website
to obtain more information regarding a certain topic on www.sars.gov.za.

CONTENTS

6.1 Background

This learning unit describes how SARS uses the information declared by a taxpayer in the income tax
return (IT12) to calculate taxable income. It is important to know how taxable income is calculated so that
you can check whether SARS has done the calculation correctly.

Refer to the income tax framework below, in this learning unit we will look at the calculation of taxable
income (highlighted in orange below):
 44

INCOME TAX FRAMEWORK

R
Gross income
- including special inclusions, fringe
benefits and lump sums (lump sums are taxed
separately) xxxxx

less: Exempt income (xxxxx) (learningunit3)

gives: Income xxxxxx

less: Allowable deductions

- General deductions (xxxx) (learning unit 4)
- “Other” allowable expenses (xxxx) (learning unit 4)

add: Taxable capital gain xxxx (learning unit 7)

xxxxx

less: Retirement fund contributions (xxx)

xxxxx

less: Donations (xxxx)

(learning unit 2
gives: Taxable income xxxxx & 6)

Normal tax (per the tax tables) xxxxx (learning unit 2)

less: Rebates and credits
- Primary (xxxx) (learning unit 2)
- Age > 65 (xxxx) (learning unit 2)
- Age > 75 (xxxx) (learning unit 2)
- Medical scheme fees tax credits
(section 6A) (xxxx) (learning unit 2)
- Additional qualifying medical expense tax
credits (section 6B) (xxxx) (learning unit 2)
- Foreign tax (section 6quat) (xxxx)
gives: Net normal tax payable xxxxx (learning unit 2)

less: Prepaid tax (learning unit 2)

- Employees’ tax (xxx)
- Provisional tax (xxx)

gives: Tax liability xxxxx (learning unit 2)

 45 TAX1501/103

6.2 Taxable income framework

The first step in calculating taxable income is establishing gross income.

Individuals can receive different types of income that may be classified as “gross income”, such as salary,
commission, bonus and investment income (rental income, interest and dividends). All income that meets
the requirements of the definition of gross income is included in gross income. Gross income was discus-
sed in detail in learning unit 3.

In learning unit 3 we identified five requirements that must be present for an amount to be included in gross
income, they are as follows:

● resident
● total amount in cash or otherwise
● year or period of assessment
● received by/accrued to
● excluding receipts or accruals of a capital nature

If all of the above is present the amount will be included in gross income in your taxable income calculation.

Fringe benefits are also included in gross income and were discussed in learning unit 5.

Remember:
Fringe benefits refer to non-cash benefits granted to employees by employers in
addition to their normal wages and salaries, but do not constitute cash payments
made. These fringe benefits must be converted into a cash equivalent amount and
the taxable benefit should be included in the employee’s taxable income calculation.

The next step is to exclude any gross income for which the Act provides as exempt.

Exempt income was also discussed in learning unit 3.

Remember:
Income can only be exempt if it was included in gross income. In your tax calculation
you first need to include the income in gross income and then include the exemption
under exempt income.

In learning unit 3 we discussed the following exempt income:

➢ South African interest paid to South African residents

➢ Dividends
➢ Foreign dividends

Refer to learning unit 3 for detail discussion on what the exempt amount should be or how the exempt
amount should be calculated.

The next step is to make general deductions in terms of the general deduction formula, which were dis-
cussed in learning unit 4.

In learning unit 4 we identified the following requirements of the general deduction formula:

Requirements:
1. carrying on a trade
2. expenditure and losses
3. actually incurred
 46

4. in the production of income

5. not of a capital nature
6. partially or fully expended for the purposes of trade

Remember:
All of the above requirements must be present before an amount can be
deducted.

In this learning unit, we will focus on the specific deductions that a salaried person may deduct for income
tax purposes.

Remember to refer back to the income tax framework given in section 6.1. This will
form the basis for all tax calculations; you will use it throughout your studies in
taxation.

6.3 Deductions

Salaried taxpayers qualify for certain deductions of expenses that they have to pay. These deductions
reduce taxable income. It is important to note, however, that these amounts must be deducted in a specific
order.

This order of deductions implies that all other general deductible expenses have
been deducted and these are the last items that must be deducted from income for
the calculation of taxable income.

Some of the deductions also have specific limits that must be applied. To be able to calculate the limits
you have to remember to calculate a subtotal after each deduction, as the limits are often based on the
subtotal at that point of the calculation.

A golden rule in tax is that you can never deduct more than what you paid. The Income Tax Act is very
clear about the deductions that a salaried taxpayer may claim. These expenses are listed in section 23(m)
of the Income Tax Act. A salaried taxpayer may claim very few deductions.

In the following section we will look at the following two deductions:

➢ Pension fund, retirement annuity fund and provident fund contributions
➢ Donations to public benefit organisations

6.4 Pension fund, retirement annuity fund and provident fund contributions

Contributions to retirement funds are deductible for income tax purposes, but the deduction is limited. Any
contributions paid by an employer are taxed as a fringe benefit and will be included as part of the total
contributions made to funds.

Retirement funds include: pension funds, retirement annuity funds and provident funds.

Section 11F of the Income Tax Act states:

 47 TAX1501/103

Notwithstanding section 23(g), for the purpose of determining the taxable income of a natural person in
respect of any year of assessment there must be allowed as a deduction from the income of that person
any amount contributed during a year of assessment to any pension fund, provident fund or retirement
annuity fund in terms of the rules of that fund by a person that is a member of that fund.

The S11F retirement fund annual allowable deductions is:

A taxpayer is entitled to a deduction, under section 11F, of contributions to any pension fund, provident
fund or retirement annuity fund. The contributions that may be claimed as a deduction in the current year
of assessment are:

Limited to the lesser of:

(i) R350 000;

(ii) 27,5% of the higher of –
• remuneration; or
• taxable income; or
(iii) taxable income of that person before –
• including any taxable capital gain.

RETIREMENT
FUND
CONTRIBUTION

Pension,
provident
and
retirement
annuity

Step 1: Calculate the percentage limit

27.5% of the greater of remuneration or
taxable income

Step 2: Total contributions are deductible

but limited to the lesser of:
- The percentage limit (Step 1) or
- R350 000
- Taxable income (excluding CGT)

The remuneration referred to is remuneration for employees’ tax purposes but excluding retirement lump
sums and severance benefits.

Remuneration is defined in the Fourth Schedule of the Income Tax Act. Remuneration includes a salary,
fee, bonus, gratuity, pension, leave pay-outs, voluntary award, commission, and overtime payments recei-
ved from the employer and specifically include the following:
 48

- 80% of the travel allowanced received from the taxpayer’s employer.

- 80% of the taxable value of the right of use of a motor vehicle received from the taxpayer’s
employer.
- Fringe benefits (medical fringe benefits etc.) received from the taxpayer’s employer.

The taxable income referred to excludes retirement lump sums and severance benefits and is the taxable
income before the deduction of qualifying retirement fund contributions, qualifying foreign tax credits [sec-
tion 6quat(1C)] and bona fide donations (section 18A).

Contributions made in prior years that were not allowed as a deduction in those years will be carried
forward to the current year of assessment unless they had been deducted from a retirement fund lump
sum or withdrawal benefit or set off against a compulsory annuity. Arrear contributions simply get added
to the current year’s contributions and treated in the same manner.

The limits apply to the sum of all contributions made to pension funds, provident funds and retirement
annuity funds.

The remuneration will always be GIVEN in an exam.

Example 6.1

Claudy Dlamini earns a salary of R450 000, she received a bonus of R32 000 in the current
year of assessment. She contributes R2 000 per month to a retirement annuity fund for
the full year of assessment.

Claudy's remuneration amounts to R482 000 and her taxable income before the remunera-
tion deduction is R410 000.

Required:

Calculate the retirement fund contribution deduction which Claudy will be allowed to deduct
from her taxable income for the current year of assessment.

Try to do it on your own without looking at the solution.

Solution Example 6.1

R R
Total contributions (R2 000 x 12) 24 000
Retirement deduction calculation:
Step 1: Percentage limit - greater of:
27.5% of remuneration or (R482 000 x 27.5%) 132 550
27.5% of taxable income (R410 000 x 27.5%) 112 750
Therefore, the greater is the remuneration of R112 750
Step 2: deduction limited to the lesser of
- percentage limit - R112 750
- R350 000
- Taxable income R410 000
Therefore, the lesser is R112 750 but limit to the actual
contributions (24 000)
 49 TAX1501/103

Example 6.2

Kagiso Moloto total remuneration for the current year of assessment is R980 000, his tax-
able was correctly calculated as R760 000 before the remuneration deduction.
He contributed to R120 000 to a pension fund and R89 000 to a retirement annuity fund in
the current year of assessment.

Required:

Calculate the retirement fund contribution deduction which Kagiso will be allowed to deduct
from his taxable income for the current year of assessment.

Try to do it on your own without looking at the solution.

Solution Example 6.2

R R
Total retirement contributions (R120 000 + R89 000) 209 000
Retirement deduction calculation:
Step 1: Percentage limit - greater of:
27.5% of remuneration or (R980 000 x 27.5%) 269 500
27.5% of taxable income (R760 000 x 27.5%) 209 000
Therefore, the greater is the remuneration of R269 500
Step 2: deduction limited to the lesser of
- percentage limit calculated above - R269 500
- R350 000
- Taxable income R760 000
Therefore, the lesser is R269 500 but limit to the actual
contributions (209 000)

Remember, after calculating the limitation, to compare it with the contributions – you can
never deduct more than what was paid.

Example 6.3

Casey is 35 years old and unmarried. She received a salary of R390 000 for the current
year of assessment. She also received a bonus of R35 000. Other income (not received
from her employer) for the current year of assessment amounted to R65 000. She made
the following contributions:
R
• Retirement annuity fund contributions 17 000
• Pension fund contributions 27 300

Required:

Calculate Casey’s taxable income for the current year of assessment if you assume that she
had no other income or deductions.

Cover the answer below and first see if you can do the calculation on your own!
 50

Solution Example 6.3

Calculation of Casey’s taxable income for the current year of assessment

R
Salary 390 000
Bonus 35 000
Other income 65 000
Taxable income before retirement fund contributions 490 000

Less: retirement fund contributions

Actual contributions: R17 000 + R27 300 = R44 300
Step 1: Calculate the percentage limit:
27.5 % of the greater of remuneration or
taxable income before this deduction
- Remuneration: R390 000 + R35 000 = R425 000
- Taxable income before this deduction: R490 000
The greater of the two amounts is the taxable income
Thus 27.5% x R490 000 = R134 750 is the first limit

Step 2: Limited to the lesser of:

1) R134 750 or
2) R350 000
3) R490 000
The lesser of the three amounts is R134 750 and would be the
limitation.
The contributions were however less than the limit and all of
the contributions can therefore be deducted (44 300)

Taxable income 445 700

6.5 Donations to public benefit organisations

If a person makes a donation to a public benefit organisation (PBO) that is registered with SARS (to qualify
for section 18A), the person making the donation will qualify for a deduction. However, before the deduc-
tion may be claimed, an official section 18A receipt must be obtained.

In a question, we will specify whether the donation was made to a PBO or not. How-
ever, if a section 18A receipt was obtained, it will be a PBO, because an entity cannot
give a section 18A receipt if it is not a PBO.

The deduction for donation is limit to 10% of taxable income before donations, BUT limit to actual donations
made.
 51 TAX1501/103

Example 6.4

Sammy has a taxable income of R650 000 after all allowable deduction have been taken
into account except the allowable deduction for donations. He made the following dona-
tions during the current year of assessment:

- Childhelp (registered PBO) R4 500

- Elsie (Sammy's sister) R1 000
- DogSave (registered PBO) R3 900

Sammy received all the necessary certificates.

Required:

Calculate the allowable deduction which Sammy will be able to deduct from his taxable
income for the donations he made during the current year of assessment?

Try to do it on your own without looking at the solution.

Solution Example 6.4

R R
Taxable income before donations deduction 650 000
Donations made:
Childhelp - registered PBO 4 500
Elsie - not a PBO -
DogSave - registered PBO 3 900
Total allowable deduction 8 400

Donation deduction - limit to 10% of taxable income

(R650 000 x 10%= R65 000 BUT limit to actual donations)
(8 400)

Taxable income 641 600

Example 6.5

Larry has a taxable income of R12 000 after all allowable deduction have been taken into
account except the allowable deduction for donations. He made the following donations
during the current year of assessment:

- TAXeducation (18A receipt received) R6 500

- Home for cats (No 18 A receipt received) R2 000
- Home for all (18A receipt received R1 900

Required:

Calculate the allowable deduction which Larry will be able to deduct from his taxable in-
come for the donations he made during the current year of assessment?

Try to do it on your own without looking at the solution.

 52

Solution Example 6.5

R R
Taxable income before donations deduction 12 000
Donations made:
TAXeduction 6 500
Home for cats - no 18A receipt received -
Home for all 1 900
Total allowable deduction 8 400

Donation deduction - limit to 10% of taxable income

(R12 000 x 10% = R1 200) (1 200)

Taxable income 10 800

POINT TO PONDER

• Why is there a limit on the deductions with which we dealt in this learning unit?

WRAP-UP

• There is a framework to calculate the taxable income of a salaried person.

• There is a specific order to the deductions.
• There are specific limits for each of these deductions.
• A taxpayer cannot deduct more than the amount that was paid.

Now that you have completed this learning unit, please revise the learning outcomes
and make sure that you have attained all of them.

E-TUTOR ACTIVITY

Refer to your specific e-tutor site for an activity on this learning unit.

Go to the Course Site and do the online self-assessment questions.

Study the unit on Calculation of Taxable income and discuss any concepts that you
do not understand – or if you do understand, then answer those students who have
posted questions.

This is an intense Learning Unit so please spend extra time.

 53 TAX1501/103

ONLINE SUPPORT

Kindly log onto myUnisa and navigate to the lesson tools. The lesson tool pro-
vides an overview of the learning unit to assist you in working through the learn-
ing unit. The lesson tool also contains an additional example and other aids to
help you understand the study material.
 54

SELF-ASSESSMENT QUESTIONS
Solutions can be found at the end of this tutorial letter.

QUESTION 6.1 (4 marks, 5 minutes)

(i) Salary forms part of …

(a) exempt income.

(b) gross income.
(c) specific deductions.
(d) general deductions.

(ii) South African dividends are …

(a) deductible.
(b) not deductible.
(c) exempt.
(d) not part of gross income.

(iii) A salaried person is allowed to deduct …

(a) personal expenses.

(b) more than he or she has paid.
(c) all medical expenses
(d) pension fund contributions.

(iv) The amounts donated to public benefit organisations (PBOs) are …

(a) not allowed as a deduction.

(b) exempt from tax.
(c) allowed as a deduction but limited to a percentage of taxable income before provident fund
contributions.
(d) allowed as a deduction but limited to a percentage of taxable income before donations to
PBOs.

QUESTION 6.2 (12 marks, 15 minutes)

Penny Razzle is 35 years old and is unmarried.

Penny received the following gross income during the year of assessment:
R
Salary 360 000
Bonus 25 000
Penny paid the following expenses during the year of assessment:
Retirement annuity fund contributions 3 500
Donations to a PBO (received a section 18A receipt) 2 500
Pension fund contributions 28 800

REQUIRED Marks

Calculate Penny’s taxable income for the current year of assessment. 12

 55 TAX1501/103

QUESTION 6.3 (20 marks, 24 minutes)

Jennifer Green is 38 years old. She is married out of community of property and has two children, five
and eight years old. She had the following income and expenses for the current year of assessment:

R
Income
Salary ................................................................................................................ 250 000
Bonus ............................................................................................................... 10 000

Expenses
Contributions made to a retirement annuity fund (note 1)................................... ?
Contributions made to a medical aid fund (note 2) ............................................. ?
Donation made (note 3) ..................................................................................... 15 000
Contributions made to a pension fund (note 4) ................................................. 20 800

Notes:

1. Jennifer contributed R300 per month to a retirement annuity fund for the full tax year.
2. Jennifer contributed R2 500 per month to a medical aid fund for the full tax year. Her employer did
not make any contribution for the full tax year. She had qualifying medical expenses of R10 200 for
the current year of assessment. Her husband and two children are dependants on her medical aid.
Neither Jennifer nor any of her dependants are persons with disabilities as defined.
3. Jennifer donated R15 000 to the University of Cape Town and received a section 18A receipt.
4. Jennifer contributes 8% of her salary and bonus to the pension fund each month and contributed for
the entire year.

REQUIRED Marks

Calculate Jennifer Green’s tax payable for the current year of assessment. 20

QUESTION 6.4 (30 marks, 36 minutes)

Peter Rashopola is 67 years old. He is married out of community of property. His remuneration was
correctly calculated as R944 600. He had the following income and expenses for the current year of
assessment:

R
Income
Salary ................................................................................................................ 760 000
Bonus ............................................................................................................... 120 000

Dividend income - South African ......................................................................... 33 000

Foreign interest ................................................................................................... 42 000

 56

QUESTION 6.4 (continued)

R
Expenses
Contributions made to a retirement annuity fund (note 1)................................... ?
Contributions made to a medical aid fund (note 2) ............................................. ?
Donation made (note 3) ..................................................................................... 110 000

Notes:

1. Peter contributed R60 000 to a retirement annuity fund for the full tax year. His employer contributed
a further R25 000 for the full tax year.
2. A total contribution of R132 000 was made to a medical aid fund for the full tax year. Peter's
employer contributed 30% of the total medical aid contribution for the full tax year. He had qualifying
medical expenses of R27 000 not paid by the medical aid for the current year of assessment. Neither
Peter nor his wife are persons with disabilities as defined.
3. Peter donated R110 000 to the Hope Organisation and received a section 18A receipt.

REQUIRED Marks

Calculate Peter Rashopola’s tax liability for the current year of assessment. 30

QUESTION 6.5 (24 marks, 29 minutes)

Refiliwe Mani is 42 years old. She is married out of community of property and has one child age five.
Her remuneration was correctly calculated as R559 000. She had the following income and expenses for
the current year of assessment:

R
Income
Salary ................................................................................................................ 550 000
Foreign Dividend - partial exempt........................................................................ 8 700
Local interest received ........................................................................................ 21 000
Bonus ............................................................................................................... 9 000

Expenses
Contributions made to a retirement annuity fund ............................................... 98 000
Past retirement annuity fund contributions carried forward................................. 12 000
Donation to Childrens fund (no section 18A receipt) .......................................... 4 000
Donation to Aid4You (section 18A receipt received) .......................................... 17 000
Groceries for the month (use home office mainly for work) ................................ 18 000
Computer mainly use for work (wear and tear over 3 years)............................... 16 000

REQUIRED Marks

Calculate Refiliwe Mani's tax income for the current year of assessment. 24
 57 TAX1501/103

ASSESSMENT CRITERIA

We could assess this learning unit in assignments or in the examination by asking you to

• reproduce and apply the framework for calculating taxable income of a salaried person
• calculate deductions for pension fund, retirement annuity fund and provident fund contributions,
using the applicable limitations
• calculate deductions for donations to PBOs, applying the applicable limitation

Remember to show all calculations of the limits involved in each deduction,

as marks are allocated for these calculations.

Solutions to self-assessment questions in learning unit 6

QUESTION 6.1 (4 marks)

(i) b (1)
(ii) c (1)
(iii) d (1)
(iv) d (1)

QUESTION 6.2 (12 marks)

R
Salary 360 000 (1)
Bonus 25 000 (1)
385 000
Less: Contributions to retirement funds
STEP 1: Calculate the percentage limit
27.5% of the greater of remuneration or taxable income before this deduction
Remuneration and taxable income is the same: R385 000
27.5% x R385 000 = R105 875
(2)
STEP 2: Actual contributions: R3 500 + R30 800 = R32 300
Limited to the lesser of: (2)
- R350 000 (1)
- R105 875 (1)
Thus, the limit is R105 875
But the deduction is limited to the contributions
(32 300) (1)
352 700
Less: Donations – R2 500
Limited to 10% x R352 700 = R35 270: The donation is less than the (2)
limit; therefore, the R2 500 donation is deducted. (2 500) (1)

Taxable income 350 200

12
 58

QUESTION 6.3 (20 marks)

R
Salary 250 000 (1)
Bonus 10 000 (1)
260 000
Less: Deductions

Contributions to retirement funds

STEP 1: Percentage limit (2)

27.5% x R260 000 (remuneration and taxable income the same)
= R71 500 (24 400)

STEP 2:
Actual contributions: (R300 x 12) + R20 800 = R24 400 (3)
Limited to the lesser of (1)
- R350 000 (1)
- R71 500

Donations – R15 000 235 600

(2)
Limited to 10% x R235 600 = R23 560. The donation is less than the
limit; therefore, the R15 000 donation is deducted. (15 000)
220 600 (1)
Taxable income

Normal tax (R37 062 + ((R220 600 - R205 900) x 26%) 40 884 (2)
Less: Primary rebate (14 958) (1)
Less: Medical tax credit
- Medical scheme fees tax credit
(R319 x 12 x 2) + (R215 x 2 x 12) (12 816) (2)
- Additional medical expenses tax credit
Excess (R30 000 - (4 x R12 816)) 0 (1)
Other expenses 10 200 (1)
10 200
Threshold: 7,5% x R220 600 16 545 (2)
Does not exceed 7,5%; therefore, no additional tax credit (1)
Net normal tax payable 13 110

Available marks: 22
Maximum: 20
 59 TAX1501/103

QUESTION 6.4 (30 marks)

R
Salary 760 000 (1)
Bonus 120 000 (1)
Dividend income 33 000 (1)
Foreign interest 42 000 (1)
Fringe benefit: Employer contribution to retirement fund 25 000 (1)
Fringe benefit: Employer contribution to medical aid scheme 39 600 (1)
Gross Income 1 019 600 (1)
Less: Exempt Income
Dividend income (fully exempt) (33 000) (1)
Total Income 986 600

Less: Deductions

Contributions to retirement funds

STEP 1: Percentage limit, greater of: (1)

Remuneration: 27.5% x R944 600 = R259 765 (1)
Taxable income: 27.5% x R986 600 = R271 315 (1)
Taxable income is the greater

STEP 2:
Actual contributions: R60 000 + R25 000 = R85 000 (2)
Limited to the lesser of (1)
- R350 000 (1)
- R271 315 (1)
- R986 600 (1)
Limit to actual contributions (85 000) (1)

Taxable income before donations 901 600 (2)

Donations: R110 000
Limited to 10% x R901 600 = R90 160 (90160) (2)
Taxable income 811 440

Normal tax (R218 139 + ((R811 440 - R744 800) x 41%) 66 640 (2)
Less: Primary rebate (14 958) (1)
Secondary rebate (8 199) (1)
Less: Medical tax credit
- Medical scheme fees tax credit
(R319 x 12 x 2) (7 656) (2)
- Additional medical expenses tax credit
Excess (R132 000 - (3 x R7 656)) 109 032 (1)
Other expenses 27 000 (1)
136 032
Threshold: 33% x R136 032 (44 891) (2)
Tax refundable (9 064)

Available marks: 32
Maximum: 30
 60

QUESTION 6.5 (24 marks)

R
Salary 550 000 (1)
Bonus 9 000 (1)
Foreign dividends 8 700 (1)
Local interest received 21 000 (1)

Gross income 588 700 (1)

Less: exempt income
Foreign dividends - partial exempt (R8 700 x 25/45) (4 833) (2)
Local interest exemption - limit to R23 800 BUT limit to actual interest (21 000) (2)
Less: Deductions

Groceries for the month - not deductible domestic expenses - (1)

Computer - wear and tear (R16 000/3 = R5 333) (5 333) (1)
Taxable income before retirement contribution 557 534

Contributions to retirement funds (2)

STEP 1: Percentage limit, greater of (1)

Remuneration:27.5% x R559 000 = R153 725 - greater (1)
Taxable income: 27.5% x R557 534 = R153 322

STEP 2:
Actual contributions: R98 000 + R12 000 = R110 000 (includes past contributions
carried forward) (2)
Limited to the lesser of
- R350 000 (1)
- R153 725 (1)
- R583 367 (1)
Therefore R153 725 but limit to actual contributions
(110 000) (1)

Donations 447 534

Childrens fund - no 18A receipt received no deduction
Aid4You - R17 000 (1)
Limited to 10% x R473 367 = R47 337. The donation is less than the (1)
Limit; therefore, the R17 000 donation is deducted. (17 000)
430 534
Taxable income (1)

Marks: 24
 61 TAX1501/103

LEARNING UNIT 7
7
INTRODUCTION

STUDY PROGRAMME

LEARNING OUTCOMES

PRESCRIBED STUDY MATERIAL FOR THIS LEARNING

UNIT

CONTENTS

7.1 Background
7.2 Calculation of a capital gain or loss on an asset
7.3 Taxable capital gain or loss
7.4 Proceeds
7.5 Base cost
7.6 Exclusions
7.7 Limitation of capital losses

POINT TO PONDER

WRAP-UP

e-TIVITY
Capital
SELF-ASSESSMENT QUESTIONS
Gain Tax
ASSESSMENT CRITERIA
 62

INTRODUCTION

On 1 October 2001, the government implemented capital gains tax (CGT). This means that if an asset is
sold, such as a house, the transaction could be subject to capital gains tax. Prior to its implementation,
the disposal of a capital asset was not taxed, as it did not meet the requirements of the gross income
definition.

However, from 1 October 2001, a capital gain is taxed in terms of section 26A of the Income Tax Act, with
the exception of certain exclusions and roll-overs. It is also possible that a capital loss can be incurred.

Capital gains tax is not a separate tax but rather a way of taxing capital gains when a person sells or
disposes of an asset. The Income Tax Act contains rules in the Eighth Schedule, regarding how to cal-
culate the gain and how to include it in the calculation of taxable income. The income tax framework in
section 7.1 illustrates where the taxable capital gain should be included.

Bear in mind that certain gains and losses are excluded or partly excluded from capital gains tax. In this
learning unit, we will learn how to calculate capital gains tax payable by an individual.

STUDY PROGRAMME

You should complete this learning unit in week 12 to 16 of the programme.

Refer to Tutorial Letter 102 for the study programme.

LEARNING OUTCOMES

After you have completed this learning unit, you should be able to

• calculate the capital gain or loss for each asset sold by applying the rules regarding the determination
of proceeds and base cost for each asset
• apply the exclusions regarding the different types of assets
• calculate the aggregate capital gain or loss
• calculate the taxable capital gain or loss

PRESCRIBED STUDY MATERIAL FOR THIS LEARNING UNIT

This study guide is sufficient to enable you to meet the learning outcomes. You can visit the SARS website
to obtain more information regarding a certain topic on www.sars.gov.za.
 63 TAX1501/103

CONTENTS

7.1 Background

In learning unit 3, we identified certain tests that can be used to determine which amounts should be
included in gross income. One of the requirements we considered was whether the amount was a capital
amount. As a general rule, if an amount is a capital amount for gross income purposes, the amount could
relate to an asset and therefore, it is subject to capital gains tax.

Look at the framework and see where the taxable capital gain is added to taxable
income.

Remember that a capital loss cannot reduce taxable income. It is carried forward
to the next year to reduce the capital gains of the next year.
 64

INCOME TAX FRAMEWORK

R
Gross income
- including special inclusions, fringe
benefits and lump sums (lump sums are taxed (learning units
separately) xxxxx 3& 5)

less: Exempt income (xxxxx) (learning unit3)

gives: Income xxxxx

less: Allowable deductions

- General deductions (xxxx) (learning unit 4)
- “Other” allowable expenses (xxxx) (learning unit 3)

add: Taxable capital gain xxxx (learning unit 7)

xxxxx

less: Retirement fund contributions (xxx)

xxxxx

less: Donations (xxxx)

(learning units2
gives: Taxable income xxxxx & 6)

Normal tax (per the tax tables) xxxxx (learning unit 2)

less: Rebates and credits
- Primary (xxxx) (learning unit 2)
- Age > 65 (xxxx) (learning unit 2)
- Age > 75 (xxxx) (learning unit 2)
- Medical scheme fees tax credits
(section 6A) (xxxx) (learning unit 2)
- Additional qualifying medical expense tax
credits (section 6B) (xxxx) (learning unit 2)
- Foreign tax (section 6quat) (xxxx)
gives: Net normal tax payable xxxxx (learning unit 2)

less: Prepaid tax (learning unit 2)

- Employees’ tax (xxx)
- Provisional tax (xxx)

gives: Tax liability xxxxx (learning unit 2)

 65 TAX1501/103

Taxable capital gain is included before the retirement fund deduction and the dona-
tion deductions. For purposes of this module, capital gains tax will always remain
as a separate section and will not be integrated at this level.

The first step in calculating a person’s taxable capital gain or assessed capital loss is to determine the
person’s capital gain or loss. In order to determine a capital gain or loss, the Eighth Schedule provides for
four key definitions that form the basic building blocks in determining that capital gain or loss. These four
blocks are ‘asset’, ‘disposal’, ‘proceeds’ and ‘base cost’

In this learning unit we will discuss each of these building blocks.

Capital gains and losses are generally triggered by a disposal or an event treated as a disposal. Unless
such a disposal or event occurs, no capital gain or loss arises.

7.2 Asset, Disposal and Calculation of a capital gain or loss on an asset

Before capital gains tax can be applied, an asset must have been disposed of.

Asset

The Act defines an asset as including—

(a) property of whatever nature, whether movable or immovable, corporeal or incorporeal, excluding any
currency, but including any coin made mainly from gold or platinum; and

(b) a right or interest of whatever nature to or in such property;

The definition of an ‘asset’ is of importance, as CGT is, with few exceptions, not triggered until an asset is
disposed of. A wide definition has been ascribed to the term, which includes all forms of property and all
rights or interests in such property.

A few examples of assets are listed below:

• Land and buildings, for example, a factory building, a person’s home, or holiday home;
• Shares;
• Collectables, for example, jewellery or an artwork;
• Personal-use assets, for example, a boat;

Disposal

CGT will be triggered when a disposal or deemed disposal (as described below) takes place. As a general
rule, an asset is acquired or disposed of whenever there is a change in the ownership of the asset.

Disposal can occur when an asset is:

➢ Sold,
➢ Donated,
➢ Scrapped,
➢ Exchanged, for example, a share swap,
➢ Lost for example due to theft
➢ Destroyed for example due to fire
➢ When it is redeemed or cancelled.

A deemed disposal will occur in the following situations:

➢ Where a natural person (an individual) or a legal person (an entity) ceases to be resident in the
Republic. (emigration)
 66

➢ Death of an individual
➢ Reduction of debt
➢ Where ownership of an asset does not change but for all intents and purposes disposal does occur.
For example, certain derivative and value shifting transactions.

The following events are not considered to be a disposal:

➢ where a person transfers an asset as security for a debt; and
➢ where a person/institution returns that asset to the owner, after settling the debt.

DISPOSAL

INCOME ASSET CAPITAL ASSET

GROSS INCOME CAPITAL GAIN TAX

100% INCLUDED IN 40% NET GAIN

TAXABLE INCOME INCLUDED IN TAXABLE
INCOME

A disposal of an income asset, the amount received will be fully included in gross
income. When a capital asset is disposed of, 40% of the net capital gain will be
included in the taxable income.

The net capital gain is the aggregate capital gain or capital loss of all assets sold
during the year of assessment added together.

Example 7.1

Jane had the following events that took place during the current year of assessment.
1) Jane sold her house
2) Jane's jewellery was stolen
3) Jane donated her holiday home to her mother
4) Jane applied for a loan and ceded her motor vehicle as security to secure the
loan. The bank will cancel the cession of the motor vehicle when Jane repay the
loan.

Required:

Which of the above events will be considered to be a disposal for capital gains tax pur-
poses?
 67 TAX1501/103

Solution Example 7.1

1) Disposal - the selling of her house will be a disposal

2) Disposal - the jewellery that are stolen will be a deemed disposal
3) Disposal - the donation of the holiday home will be a deemed disposal
4) Non-disposal - even though the bank will become temporary owner of the motor
vehicle, SARS will not treat this as a disposal for capital gain tax purposes. The
same will be applicable for the bank when the bank give the motor vehicle back
when the loan is repaid.
Note that transactions, which are not classified as a disposal, do not result in any capital
gain or loss. The term “disposal” includes more than just the sale of an asset.

Calculation of a capital gain or loss on an asset

In order to calculate the capital gain or loss for each asset, very specific rules need to be followed. When
a taxpayer disposes of an asset (as discussed above) a capital gain or loss needs to be calculated. For
each disposal of an asset a separate capital gain or loss needs to be calculated.

Below is the framework to calculate the capital gain or loss for each asset. and as you study your way
through this learning unit, we will refer you back to this framework so that you can add to the framework
what you have learnt.

Below is the above-mentioned framework for calculating the capital gain on each individual asset:

Calculating capital gain on disposal of an asset

R
Proceeds XXXX
Less: base cost (XXXX)
XXXX
Less: any specific exclusion/roll-over (XXXX)
Capital gain for the asset XXXX

o a capital gain will arise if the proceeds are more than the base cost and
o a capital loss will arise where the proceeds are less than the base cost

7.3 Taxable capital gain or loss

The capital gains or losses from individual assets sold are added together to determine the aggregate
capital gain or loss. The calculation of the aggregate capital gain or loss may be calculated as follows:
 68

Asset 1 Asset 2 Asset 3

Proceeds – base cost Proceeds – base cost Proceeds – base cost
= capital gain/loss = capital gain/loss = capital gain/loss

Add the above together to get the aggregate capital gain/loss.

If there is an aggregate capital loss, the loss is reduced by R40 000 (i.e. R40 000 is added to the loss).
The balance, if any, is carried forward to the following year of assessment. It does not reduce taxable
income.

If there is an aggregate capital gain, the taxable capital gain (which is added to taxable income) is cal-
culated as follows:

Aggregate capital gain

Less: Annual exclusion (natural person: R40 000)
Less: Assessed capital loss – previous year

= Net capital gain

Multiply: Inclusion rate – 40% (natural person)

= Taxable capital gain

INCLUDED IN TAXABLE INCOME

Example 7.2

Samuel sold two assets during the current year of assessment. He had an aggregate
capital loss of R65 000.

Required

Calculate the capital loss which Samuel will be able to carry forward to the following year
of assessment.

Solution Example 7.2

R
Aggregate capital loss 65 000
Less: Annual exclusion (40 000)
Loss carried forward to the following year 25 000

The loss is reduced by the annual exclusion of R40 000.

Example 7.3

Refilwe sold four assets during the current year of assessment. She had an aggregate
capital gain of R87 000. She has a carried forward assessed capital loss R10 000.
 69 TAX1501/103

Required

Calculate Refilwe's capital gain/loss for the current year of assessment.

Solution Example 7.3

R
Aggregate capital gain 87 000
Less: Annual exclusion (40 000)
47 000
Less: Loss carried forward from the previous year (10 000)
Capital gain 37 000
Inclusion rate - 40% (R37 000 x40%) 14 800

The R14 800 will be included in the taxable income calculation.

Refer to the notes on the capital gains tax framework under Additional Resources on
myUnisa.

7.4 Proceeds

The proceeds from the disposal of an asset by a person are equal to

➢ the amount
➢ received by, or accrued to, that person
➢ in respect of that disposal.

Meaning the proceeds are the amounts received by or accrued to the seller who disposed of the asset.

No allowable adjustments to proceeds exist in terms of any cost. Only the following amounts can be used
to reduce the proceeds for an individual taxpayer:

➢ any amount that must be or has been included in gross income for example recoupments
➢ any amount that is repayable to the person who purchased the assets

Example 7.4

The taxpayers below sold assets during the year of assessment:

a) Minnie sold her holiday home for R1 200 000, she agreed to repay R100 000 once the
transaction is complete. The transaction was completed before the year of assess-
ment.

b) Danny sold his house for R2 300 000, included in the amount is estate agent com-
mission of R40 000 paid to the estate agents.

Try to complete it on your own without referring to the solution.

 70

Solution Example 7.4

a) The proceeds will be R1 200 000 - R100 000 = R1 100 000.

The R100 000 will be repaid and therefore will not be included in the proceeds received.

b) The proceeds will be R2 300 000.

The estate agents commission will not reduce the proceeds received. The commission
amount may be added to the base cost of the house sold (refer to section 7.5 Base cost
below).

For purposes of this module, these adjustments are the only ones you have to know that
can reduce the proceeds.

Remember the general rule that no adjustments are made to the proceeds.

7.5 Base cost

The base cost of an asset in essence consists of three broad components, namely, costs directly incurred
in respect of the:

➢ acquisition of an asset,
➢ improvement of an asset, and
➢ direct costs in respect of the acquisition and disposal of an asset.

The base cost of the asset depends on when the asset was purchased. If the asset was purchased before
1 October 2001 – the date at which CGT was introduced for the first time – then we have to calculate a
valuation date value before we can calculate a capital gain or loss.
 71 TAX1501/103

BASE
COST

Asset purchased Asset purchased

on or after before 1 October 2001
1 October 2001

Base cost = Base cost = value on

paragraph 20 1 October 2001
costs incurred (valuation date value)
plus
any paragraph 20 costs
incurred on/after
1 October 2001

Paragraph 20 of the Eighth Schedule provides the following list of costs that may form part of the base
cost:

o purchase cost of an asset

o cost incurred in respect of valuation of an asset
o transfer cost
o advertising cost to find a seller or buyer
o moving cost of an asset
o installation cost of an asset
o accounting and legal cost incurred in the sale of the asset

The following costs are excluded for the base cost of an asset:

o borrowing cost, including interest, bond registration cost or bond cancellation cost
o repairs and maintenance
o protection and insurance cost
o rates and taxes
o any cost or expenditure that have been deducted for income tax purposes (even if listed above as
being allowable)

When was the asset purchased?

➢ On or after 1 October 2001

If the answer to your question is on or after 1 October 2001, then the base cost is the total of all qualifying
expenditure on the asset.

(Paragraphs 26 and 27 of the Eighth Schedule, as discussed below, do not apply.)

Expenditure refers only to capital expenditure on the asset and not revenue costs.
 72

Example 7.5

Ziyaad Abrahams sold his holiday flat in the current year of assessment. He rented the
holiday flat out and did not use it personally.

He incurred the following cost in respect with the holiday flat:

R
Purchase cost 450 000
Repairs to the roof due to water leakage 15 000
Interest on bond 88 000
Transfer cost 22 500
Improvement of kitchen 65 000

Ziyaad sold the holiday flat for R650 000, including estate agent commission of R32 500.

Required:

Calculate the base cost of the holiday flat.

Try to complete it on your own without referring to the solution.

Solution Example 7.5

The following cost is included in the base cost of the holiday flat: R
Purchase cost 450 000
Repairs to roof - not allowed as deductible against rental income in taxable
income calculation nil
Interest on bond - not allowed as deductible against rental income in tax-
able income calculation nil
Transfer cost 22 500
Improvement of kitchen 65 000
Base cost 537 500

This example deals with a situation where the assets were purchased on or after
1 October 2001.

In an exam question, you will need to be able to distinguish between the costs
that can be added to the base cost and those that cannot. Also remember that
CGT can be tested in the form of MCQ’s so you have to understand the rules
well to be able to answer a CGT question, in any form.

➢ Before 1 October 2001

If the answer to your question is before 1 October 2001, then the base cost is equal to the valuation date
value PLUS any expenditure on/after 1 October 2001.

The base cost formula for assets acquired before 1 October 2001 is as follows:

Valuation date value XXX

Plus: allowable costs incurred on or after 1 October 2001 XXX

Base cost XXX

 73 TAX1501/103

The valuation date value is the value of the asset on 1 October 2001. This takes into account all the costs
of the asset plus the increase in the value of the asset up to 30 September 2001. The valuation date
value is “deemed” to be the cost price of the asset, as if you had acquired it on 1 October 2001.

The valuation date value is determined by paragraph 26 or paragraph 27 of the Eighth Schedule of the
Act.

Paragraph 26 is applicable when the adjusted proceeds are more than the adjusted cost of an asset (in
other words a profit).

Paragraph 26: Proceeds >adjusted cost

Paragraph 27 is applicable when the adjusted proceeds are less than the adjusted cost of an asset (in
other words a loss).

Paragraph 27: Proceeds ≤ adjusted cost

These paragraphs contain provisions that serve as anti-avoidance measures, because a taxpayer can
manipulate the market value of the asset to ensure that a capital loss is realised on the disposal of the
asset.

An extract of paragraph 26 in the Eighth Schedule of the Income Tax Act will NOT be provided
to you in the exam. We strongly urge you to rather learn the rules of paragraph 26, in order
to save time in the exam by not having to refer to your Study Guides or any other schedules
that have been provided in your course work.

You need to follow the following steps to calculate the valuation date value of an asset:

STEP 1: Divide all allowable costs between pre (before) 1/10/2001 and post (on/after) 1/10/2001.

STEP 2: Identify the following three values:

1. Market value
In order to make use of the market value of the asset, the owner had to have the asset valued by
a valuator. The general rule for determining the market value is that it should be calculated as the
price that would have been agreed upon by a willing seller and a willing buyer on 1 October 2001.

The market value will be provided to you in a question.

2. 20% rule. You need to calculate this value as follows: 20% x (proceeds less allowable costs incur-
red on or after 1 October 2001).
This option will normally be used by taxpayers who cannot prove the cost of the asset.

3. Time-apportionment base cost (TAB cost)

The time-apportionment method spreads the growth in the value of the asset over the period for
which the person owned the asset. The time-apportionment base cost is the sum of the expen-
diture incurred before 1 October 2001, plus the growth (percentage of profit) of the asset before
1 October 2001.

For the purposes of this module, we will not expect you to be able to calculate the time-apportion-
ment base cost. The value will be supplied in a question and you just need to know where to use
it.
 74

Where the asset was purchased before 1 October 2001 and you have to calculate a valuation date value,
the greatest of the three options can be used (subject to paragraphs 26 or 27)

We will determine how each of these is calculated, below.

STEP 3: The final step in determining the valuation date value is to apply the rules of paragraph 26 or
paragraph 27 and select the valuation date value (to be used in the base cost calculation).

Where the proceeds > all expenditure (paragraph 26 of the Eighth Schedule)

The valuation date value will be the greatest of:

➢ Market value on 1 October 2001 (will be given in the question)

➢ The time-apportionment base (TAB) cost (will be given in the question)
➢ 20% of the proceeds

BUT: if the proceeds are ≤ the market value

The taxpayer will not be allowed to use the market value if it is the greatest as the valuation date
value. The valuation date value will be the proceeds less expenditure incurred on or after 1 October
2001. (anti-avoidance measure)

Self-study Study the above rules pf paragraph 26 thoroughly.

Example 7.6

Sonnyboy Mhlanga provides you with the following information relating to assets that he sold
during the current year of assessment.

Cost after Market value

Cost Selling
Asset Date purchased 01/10/2001 on 1 October TAB cost
before price
2001
01/10/2001
A 1 August 2000 R80 000 R20 000 R70 000 R95 000 R195 000

B 2 July 1980 R150 000 Nil R230 000 R170 000 R160 000

Required:

Calculate the base cost of Asset A and B.

Try to complete it on your own without referring to the solution.

 75 TAX1501/103

Solution Example 7.6

Asset A:

Step 1: Divide the cost:

R
Cost before 1/10/2001 80 000
Cost after 1/10/2001 20 000
Total cost 100 000

Step 2:
Identify:
Market value 70 000
TAB 95 000
20% x (proceeds less cost after 1/10/2001) 20% x
(R195 000 - 20 000) 35 000

Step 3:
Valuation date value: Proceeds (R195 000) > All expenditure (R100 000) therefore paragraph
26 applies.

The valuation date value will be the greater

Market value - R70 000
TAB - R95 000
20% of Proceeds - R35 000

The valuation date value will therefore be R70 000

Base cost:
R
Valuation date value 70 000
Cost after 1/10/2001 20 000
Base cost 90 000

This example illustrates the calculation of the valuation date value when proceeds exceed
total expenses.
 76

Asset B:

Step 1: Divide the cost:

R
Cost before 1/10/2001 150 000
Cost after 1/10/2001 -
Total cost 150 000

Step 2:
Identify:
Market value 230 000
TAB 175 000
20% x (proceeds less cost after 1/10/2001) 20% x (R165 000 - 0) 33 000

Step 3:
Valuation date value: Proceeds (R165 000) > All expenditure (R150 000) therefore paragraph
26 applies.

The valuation date value will be the greater

Market value - R230 000
TAB - R175 000
20% of Proceeds - R33 000

The market value is the greater BUT the proceeds (R165 000) ≤ market value (R230 000)

Therefore: The valuation date value will be the proceeds less expenditure incurred on or after
1 October 2001.

The valuation date value will therefore be R165 000 - R0 = R165 000

Base cost:
R
Valuation date value 165 000
Cost after 1/10/2001 0
Base cost 165 000

Where expenditure cannot be determined (paragraph 26 of the Eighth Schedule)

Where the taxpayer did not keep accurate records of the expenditure or the cost of the asset, the
valuation date value of the asset will be the greater of the following:

➢ market value on 1 October 2001

➢ 20% of the proceeds less cost incurred after 1 October 2001

There is no limitation in this situation and the taxpayer may use the market value even if it creates
a loss.

Where the proceeds ≤ all expenditure (paragraph 27 of the Eighth Schedule)

If the market value is known:

Answer the following two questions:

1) Is the expenditure before 1 October 2001 ≥ the proceeds?

2) Is the expenditure before 1 October 2001 > the market value on 1 October 2001?
 77 TAX1501/103

If the answer to BOTH questions is 'yes', the valuation date value will be the greater of:

➢ the market value on 1 October 2001; or

➢ the proceeds less any expenditure incurred after 1 October 2001

If the answer to one or both questions is 'no', the valuation date value will be the lower of:

➢ the market value on 1 October 2001; or

➢ the time-apportionment base cost

If the market value is unknown:

The valuation date value will be the TAB cost

Example 7.7

MihlaSabela provides you with the following information relating to assets that she sold during
the current year of assessment.
Cost after Market value
Cost Selling
Asset Date purchased 01/10/2001 on 1 October TAB cost
before price
2001
01/10/2001
A 1 September 2000 R130 000 R60 000 R105 000 R115 000 R90 000

B 15 April 1985 R150 000 Nil nil R160 000 R100 000

C 20October 1998 R90 000 R15 000 R125 000 R115 000 R80 000

Required:

Calculate the valuation date value of Asset A, B and C.

Try to complete it on your own without referring to the solution.

Solution Example 7.7

Asset A:

The proceeds (R90 000) ≤ all expenditure (R190 000) therefore paragraph 27 applies

The market value is known:

Answer the following two questions:

1) Is the expenditure before 1 October 2001(R130 000) ≥ the proceeds (R90 000)? Yes

2) Is the expenditure before 1 October 2001(R130 000)> the market value on 1 October
2001 (R105 000)? Yes

The answer is 'yes' to both questions, the valuation date value will be the greater of:

➢ the market value on 1 October 2001: R105 000

➢ the proceeds less any expenditure incurred after 1 October 2001:
R90 000 - R60 000 = R30 000

Therefore: the valuation date value will be R105 000

 78

Asset B:

The proceeds (R100 000) ≤ all expenditure (R150 000) therefore paragraph 27 applies

The market value is not known:

The valuation date value will be the TAB cost = R160 000

Asset C:

The proceeds (R80 000) ≤ all expenditure (R105 000) therefore paragraph 27 applies

The market value is known:

Answer the following two questions:

1) Is the expenditure before 1 October 2001(R90 000) ≥ the proceeds (R80 000)? Yes

2) Is the expenditure before 1 October 2001(R90 000)> the market value on 1 October 2001
(R125 000)? No

The answer to one of questions is 'no', the valuation date value will be the lower of:

➢ the market value on 1 October 2001 - R125 000

➢ the time-apportionment base cost - R115 000

Therefore: the lower is the TAB cost- R115 000

 79 TAX1501/103

Use the diagram below to decide how to calculate the valuation date value of asset purchase before
1 October 2001

Calculate valuation date value (VDV)

Proceeds > expenditure Expenditure not Proceeds ≤ expenditure

determined

Greatest of Greater of Market value is known:

o market value o market value or 1. Expenditure before 1

o TAB cost or o 20% x (proceeds - October 2001 ≥
o 20% x (proceeds expenditure on/after proceeds?
- expenditure 1 October 2001) 2. Expenditure before
on/after 1 October 2001 >
1 October 2001) market value?

Remember: If market Yes to both:

value is greater and
proceeds are ≤ market VDV will be greater of
value, then VDV will be
proceeds less expendi- o market value or
ture on/after 1 October o proceeds – expen-
2001 diture on/after
1 October 2001

No to one or both

VDV will be the lower of

o market value or
o TAB cost

or

Market value is not

known:

VDV will be the TAB

Remember to add the cost incurred after 1 October 2001 to your valuation date value,
the total will be the base cost of the asset.
 80

Example 7.8
Mindy Dlamini sold the following assets during the current year of assessment:

a) Asset AB
Purchase date: 1 September 1998
Original cost: R65 000
Cost incurred before 1 October 2001: R5 000
Cost incurred after 1 October 2001: R10 000
Market value: R120 000
TAB: R105 000
Selling price: R135 000
b) Asset BC
Purchase date:31 October 2018
Original cost: R430 000
Repair and maintenance: R4 500
Improvements: R2 500
Estate Agent commission: R16 000
Selling price: R335 000

c) Asset CD
Purchase date: 15 April 2000
Original cost: R120 000
Cost incurred before 1 October 2001: Nil
Cost incurred after 1 October 2001: Nil
Market value: R110 000
TAB: R98 000
Selling price: R115 000

d) Asset DE
Purchase date: 25 February 1999
Original cost: R220 000
Cost incurred before 1 October 2001: nil
Cost incurred after 1 October 2001: R23 000
Market value: R245 000
TAB: R225 000
Selling price: R230 000

e) Asset EF
Purchase date: 1 March 1989
Original cost: R580 000
Cost incurred before 1 October 2001: R56 000
Cost incurred after 1 October 2001: R120 000
Market value: R820 000
TAB: R790 000
Selling price: R780 000

f) Asset FG
Purchase date: 30 June 2001
Original cost: R80 000
Cost incurred before 1 October 2001: Nil
Cost incurred after 1 October 2001: R45 000
Market value: not known
TAB: R89 000
Selling price: R110 000
 81 TAX1501/103

Required:

Calculate the base of cost of each asset sold.

Try to complete it on your own without referring to the solution.

Solution Example 7.8

a) Asset AB: Proceeds R135 000 > all expenditure R80 000 (paragraph 26 applies)
The valuation date value will be the greater
Market value - R120 000
TAB - R105 000
20% x (proceeds less cost after 1/10/2001): 20% x (R135 000 - R10 000) = R25 000

The valuation date value will therefore be the market value R120 000
Base cost:
R
Valuation date value 120 000
Cost after 1/10/2001 10 000
Base cost 130 000

You should have notice that the market value is not more than the proceeds and the anti-
avoidance measure is therefore not applicable and the market value can be use.

b) Asset BC: The asset was purchase after 1 October 2001

Base cost:
R
Purchase cost 430 000
Repairs and maintenance (not included - deductible for income tax
purposes) -
Improvements 2 500
Estate Agent commission 16 000
Base cost 448 500
 82

c) Asset CD: Proceeds R115 000 < all expenditure R120 000 (paragraph 27 applies)
The market value is known:

Answer the following two questions:

1) Is the expenditure before 1 October 2001(R120 000) ≥ the proceeds (R115 000)?
Yes

2) Is the expenditure before 1 October 2001(R120 000)> the market value on

1 October 2001 (R110 000)? Yes

The answer is 'yes' to both questions, the valuation date value will be the greater of:

➢ the market value on 1 October 2001 - R110 000

➢ the proceeds less any expenditure incurred after 1 October 2001 -
R115 000 - Rnil = R115 000
Therefore, the valuation date value will be R115 000
Base cost:
R
Valuation date value 115 000
Cost after 1/10/2001 0
Base cost 115 000

d) Asset DE: Proceeds R230 000 < all expenditure (R220 000 + R23 000 = R243 000)
(paragraph 27 applies)
The market value is known:

Answer the following two questions:

1) Is the expenditure before 1 October 2001(R220 000) ≥ the proceeds (R230 000)?
No

2) Is the expenditure before 1 October 2001(R220 000)> the market value on

1 October 2001 (R245 000)? No

The answer is 'no' to both questions, the valuation date value will be the lower of:

➢ the market value on 1 October 2001 - R245 000

➢ the time-apportionment base cost - R225 000
Therefore, the valuation date value will be the TAB cost of R225 000
Base cost:
R
Valuation date value 225 000
Cost after 1/10/2001 23 000
Base cost 248 000
 83 TAX1501/103

e) Asset EF: Proceeds R780 000 > total expenditure (R580 000 + R56 000 + R120 000
= R756 000) - paragraph 26 applies

The valuation date value will be the greater

Market value - R820 000
TAB - R790 000
20% x (proceeds less cost after 1/10/2001): 20% x (R780 000 - R120 000) = R132 000

The market value is the greater amount of R820 000 BUT as the market value is > the
proceeds, the valuation date value will be the proceeds less expenditure incurred on or
after 1 October 2001.

The valuation date value will therefore be the R780 000 - R120 000 = R660 000
Base cost:
R
Valuation date value 660 000
Cost after 1/10/2001 120 000
Base cost 780 000

f) The proceeds (R110 000) ≤ all expenditure (R80 000 + R45 000 = R125 000)
therefore paragraph 27 applies

The market value is not known:

The valuation date value will be the TAB cost = R89 000

Base cost:
R
Valuation date value 89 000
Cost after 1/10/2001 45 000
Base cost 134 000

This example illustrates all the different scenarios to be taken into account to determine
the valuation date value and base cost of an asset.

Remember that when you answer a capital gains tax question, you must carefully
consider whether the asset was purchased prior to 1 October 2001 or on or after
1 October 2001, because that will determine how the base cost must be calculated.

The time apportioned base cost and market value will always be given in a ques-
tion.

7.6 Exclusions

The Act provides that in certain cases, certain capital gains or losses must be excluded before you
calculate the aggregate (total) capital gain or loss for the year of assessment.

Primary residence exclusion

This is the most important provision for individuals because many people own a property in which they
reside. If they sell this residence, the taxable capital gain can be reduced by applying this section.
 84

A residence must meet certain basic requirements before it can qualify as a primary residence:

• It must be a structure, including a boat, caravan or mobile home, which is used as a place of
residence by an individual.
• An individual or special trust must own an interest in the residence.
• The individual with an interest in the residence, beneficiary of the special trust, or spouse of that
person or beneficiary must ordinarily reside in the home and use it mainly for domestic purposes
as his or her ordinary residence.

The primary residence exclusion also applies to the land on which the primary residence is situated,
including unconsolidated adjacent land if the following conditions are met:

• The exclusion applies only to a maximum of two hectares.

• The land must be used mainly for domestic or private purposes together with the residence.
• The residence must be disposed of at the same time and to the same person as the land on which
it is situated.

The individual is also entitled to disregard any capital gain on disposal of the primary residence if the
proceeds do not exceed R2 million. In such event the taxpayer does not need to determine the base cost
of the residence. This rule is not available under certain circumstances, for example, when the taxpayer
has not ordinarily resided in the residence throughout the period since 1 October 2001 or have used part
of it for trade purposes.

Certain limits have been placed on the exclusion:

• The exclusion will not apply to any capital gain or loss in excess of R2 million. To the extent that
the gain exceeds R2 million, the excess must be taken into account as a capital gain. For example,
if the gain is R2,5 million, R2 million must be disregarded while R500 000 will comprise a capital
gain.
• A taxpayer may not claim the primary residence exclusion for more than one residence at a time.
• The exclusion will apply only to a capital gain or loss attributable to a maximum of two hectares of
land used together with the primary residence for domestic or private purposes. For larger pieces
of land or land that is not used for private or domestic purposes the capital gain or loss must be
apportioned. The primary residence exclusion will reduce only the qualifying portion of the capital
gain or loss.
• The exclusion will not apply to any capital gain or loss in respect of a period on or after the valuation
date (1 October 2001) when the person was not ordinarily resident in the primary residence.
• The exclusion will not apply to any capital gain or loss in respect of that part of a primary residence
that has been used for the carrying on of a trade after the valuation date.
• If the property is owned by a combination of natural persons and persons other than natural per-
sons, only the natural persons can claim their portion of the R2 million exclusion.

Generally, a person is not entitled to more than one primary residence at the same time. However, a
taxpayer will be treated as having been ordinarily resident in their primary residence if they were not
ordinarily resident during a period not exceeding two years for any of the following reasons:

• At the time the residence was their primary residence it had been offered for sale and vacated due
to the acquisition or intended acquisition of a new primary residence.
• The residence was being erected on land acquired for that purpose in order to be used as their
primary residence.
• The residence had been accidentally rendered uninhabitable (for example, because of a fire).
• The death of the taxpayer (this enables the deceased estate to claim the primary residence exclu-
sion).
 85 TAX1501/103

A residence is treated as having been used for domestic purposes during any continuous period of
absence while it is being let under the following circumstances:

• The residence must not be let for more than five years.
• The taxpayer, their spouse or a beneficiary of a special trust must have resided in the residence
for a continuous period of at least one year before and one year after the period of absence.
• The taxpayer treated no other residence as a primary residence during their absence.
• They were temporarily absent from the Republic or employed or engaged in carrying on business
in the Republic at a location further than 250km from the residence.

A person is only allowed to have one primary residence at a time. The reason for the
rules listed above is that there may be an overlap of two years, resulting in a person
having two primary residences at the same time. He or she can therefore claim the
full exclusion for both houses.

The disposal of a primary residence that falls within the joint estate of spouses married in community of
property is treated as having been made in equal shares by each spouse and the primary residence
exclusion will be apportioned between them.

If more than 50% of the primary residence is used for trade purposes, the taxpayer will not qualify for any
primary residence exclusion, as the residence is not used mainly for domestic purposes.

While studying the above you should note the following:

✔ The maximum amount of the exclusion is R2 000 000, but if one of the exceptions
exist, that portion does not qualify for the exclusion.
✔ If the running cost of the house is claimed as a business expense for income tax
purposes, that portion of the gain on the disposal of the property does not qualify
for the exclusion.

Example 7.9

Thabang Ramollo sold his primary residence for R2 600 000. He purchased his residence
for R1 600 000 on 1 December 2012. He did not make any improvements to the house
and did not use any portion of the house for trade purposes.

Required:

Calculate the capital gain or loss on the sale of the primary residence.

Try to complete it on your own without referring to the solution.

Solution Example 7.9

R
Proceeds 2 600 000
Less: Base cost (1 600 000)
Capital gain 1 000 000
Less: primary residence exclusion of R2 000 000 limit to
capital gain (1 000 000)
Capital gain 0

This example shows the primary residence exclusion.

 86

Example 7.10

Kagiso Chuma is married in community of property with Sue. They sold their primary resi-
dence for R4 540 000 (excluding estate agent commission). They purchase their residence
for R1 950 000 on 31 October 2017. They did not make any improvements to the house
and did not use any portion of the house for trade purposes. They incurred estate agent
commission on the sale of the house of R28 000.

Required:

Calculate the capital gain or loss on the sale of the primary residence.

Try to complete it on your own without referring to the solution.

Solution Example 7.10

R
Proceeds 4 540 000
Less: Base cost (1 978 000)
Purchase cost 1 950 000
Estate agent commission 28 000
Capital gain 2 562 000
50% will be taxed in Kagiso's hands (R2 562 000 x 50%) 1 281 000
Less: Primary residence exclusion, he only qualifies for
R1 000 000 (R2 000 000 x 50%) (1 000 000)
Capital gain 281 000

You should have notice that due to Kagiso being married in community of property, the
capital gain as well as the primary residence exclusion will be divided equally between
the two spouses. Therefore only 50% is included in Kagiso's capital gain calculation.

Example 7.11

Petros Faku sold his primary residence for R6800 000 in the current year of assessment.
He purchased his residence for R5350 000 on 15 May 2018. He used his primary resi-
dence 15% for trade purposes and claimed 15% of cost for income tax purposes. Due to
this he made improvements to his home of R250 000 and had repair and maintenance cost
of R120 000.

Required:

Calculate the capital gain or loss on the sale of the primary residence.

Try to complete it on your own without referring to the solution.

 87 TAX1501/103

Solution Example 7.11

Calculation Capital
R gain/loss R
Proceeds 6 800 000
Less: Base cost (5 600 000)
Purchase cost 5 350 000
Improvements 250 000
Repair and maintenance - not allowable -
Capital gain 1 200 000
Capital gain attributed to the trade (R1 200 000 x 15%)
180 000
Capital gain attributed to the primary residence
(R1 200 000 - R180 000) 1 020 000
Less: primary residence exclusion of R2 000 000 limit
to capital gain (1 020 000)
Capital gain 0
Total capital gain 180 000

Take note of the limitations on the primary residence exclusion as well as the limita-
tions applicable when the house was used for trade purposes. The split between the
primary residence used for trade purposes is important to understand.

Refer to the additional examples on the E-Tutor site for this split between private use
and business use of a primary residence.

Personal-use asets

The vast majority of personal-use assets are excluded from Capital Gains Tax. In order to qualify as a
personal-use asset, the asset must be used ‘mainly’ for non-trade purposes. The word ‘mainly’ has
been held to mean more than 50%

Examples of personal-use assets are:

o Jewellery
o Artwork
o Household furniture
o Antiques
o Private motor vehicles (not use mainly for business use)
o a microlight aircraft or hang glider with a mass of 450kg or less
o a boat that is 10 metres or less in length
o stamp or coin collections (but excluding gold or platinum coins whose value is mainly derived
from the metal content)

The following assets used for purposes other than the carrying on of a trade will not be classified as
personal-use assets:

o An aircraft with an empty mass exceeding 450kg.

This would exclude for example, a hang glider or microlight aircraft. It is understood that aircraft
with an unladen mass in excess of 450kg have to be licensed as aircraft.

o A boat exceeding 10 metres in length.

The purpose of the 10-metre cut-off is simply to exclude small pleasure craft such as rowing
boats, ski boats, small yachts, rubber dinghies and the like which are unlikely to yield capital
gains on disposal.
 88

o Fiduciary, usufructuary or similar interests whose value decreases over time.

For example, a husband dies and leaves the bare dominium in his holiday home to his son and
the right of use to his wife for the rest of her life.

o A lease of immovable property.

For example, a holiday home acquired under a 99-year lease.

o Time-share and share block interests with a fixed life whose value decreases over time.
o Rights or interests in the above assets
o A coin made mainly from gold or platinum of which the market value is mainly attributable to
the material from which it is minted or cast.

Only the capital gain of these assets will be included in the aggregate capital gain/loss, the losses on
disposal are disregarded.

Retirement benefits

Retirement benefits paid in lump sums are disregarded in determining any capital gain or capital loss.

Disposal of small business assets on retirement

The purpose is to provide relief to small business persons who have invested their resources in their
businesses. The concession applies ‘to the extent’ that immovable property is used for business purpo-
ses. This requirement means that the exclusion will not apply to the part of the immovable property
used for non-business purposes, and an apportionment will be required.

Where a person sells a small business, SARS allows an exclusion of the capital gains on the assets up
to a maximum of R1 800 000 (during a person's lifetime) for capital gains tax purposes when calculating
the aggregate capital gain or loss.

The disregarded amount is therefore cumulative and is not in respect of each business or asset disposed
of.

The amount of R1,8 million is per person. Thus, a couple married in community of property would each
be potentially entitled to the R1,8 million exclusion, provided they individually comply with all the relevant
requirements.

The disregarded amount applies only to capital gains and not to capital losses.

Compensation

A natural person must disregard a capital gain or a capital loss in respect of a disposal of a claim resulting
in that person or trust receiving compensation for personal injury, illness or defamation of that person or
beneficiary.

Gambling, games and competitions

All capital gains and losses arising from gambling, games and competitions will not be subject to CGT.

This includes all manner of activities such as horse racing, the National Lottery, casino winnings and the
like. It is immaterial whether the winnings are in the form of a prize or cash.
 89 TAX1501/103

Donations and bequests to public benefit organisations and exempt persons

Any capital gain or capital loss determined in respect of the donation or bequest to a public benefit
organisations must be disregarded.

7.7 Limitation of capital losses

Certain capital losses cannot reduce the aggregate capital gain or increase the aggregate capital loss to
be carried forward, if they were not used for trade purposes. SARS excludes the capital loss on the
disposal of the following assets if the taxpayer did not use the asset for trade purposes:

o aircraft exceeding 450kg and

o boats exceeding 10m

Take note: If there is a gain on the specified aircraft or boat, the gain will be
taken into account. It is only a loss that is ignored.

Transfer of asset between spouses (s 9HB)

Section 9HB provides for a deferral (‘roll-over’) of a capital gain or loss when an asset is trans-
ferred between spouses during their lifetimes. The roll-over is mandatory, and spouses do not
have the option to elect out of it. The spouse receiving the assets will be deemed to have use
the asset for the same use as the spouse who transferred the asset and to have purchase the
asset on the original purchase date for the same original cost.

There is no capital gains tax if assets are transferred between spouses.

You are not required to know anymore regarding Section 9HB except this para-
graph.

POINT TO PONDER

• Why must a taxpayer pay capital gains tax on a capital asset that he or she sells?

WRAP-UP

• Capital gains tax is paid when an asset is sold.

• It is not a separate tax. The taxable gain is included in taxable income.
• A taxable capital loss does not reduce taxable income; it is carried forward to the following year to be
set off against capital gains in that year.
• The capital gain or loss for each asset is calculated separately.
• Rules for the determination of proceeds and base cost apply.
• Certain exclusions apply.
 90

• The capital gains and losses are combined to determine the aggregate capital gain/loss.
• The annual exclusion and assessed capital loss from the previous year are taken into account to deter-
mine the taxable capital gain or loss.

Now that you have completed this learning unit, please revise the learning outcomes
to make sure that you have attained all of them.

E-TUTOR ACTIVITY

Refer to your specific e-tutor site for an activity on this learning unit.

Go to the Course Site on My Unisa and do the online self-assessment questions.

Study the unit on Capital gain tax and discuss any concepts that you do not understand
– or if you do understand, then answer those students who have posted questions.

ONLINE SUPPORT

Kindly log onto myUnisa and navigate to the lesson tools. The lesson tool pro-
vides an overview of the learning unit to assist you in working through the
learning unit. The lesson tool also contains an additional example and other
aids to help you understand the study material.
 91 TAX1501/103

SELF-ASSESSMENT QUESTIONS
Solutions are found at the end of this learning unit.

QUESTION 7.1 (5 marks, 6 minutes)

(i) Capital gains are included in gross income.

(a) True
(b) False

(ii) The annual exclusion for capital gains tax of an individual is R40 000.

(a) True
(b) False

(iii) The primary residence exclusion applies to individuals and deceased estates only.

(a) True
(b) False

(iv) Base cost for assets that are acquired both before 1 October 2001 and on or after this date is cal-
culated in the same way.

(a) True
(b) False

(v) An aggregate capital gain/loss must be calculated for all the assets disposed of.

(a) True
(b) False

REQUIRED: Marks

State whether each of the above statements is true or false. 5

 92

QUESTION 7.2 (8 marks, 10 minutes)

AndileBaloi is 24 years of age and takes part in the National Lottery from time to time. In October 2020,
he was very lucky to be the only one to select the correct numbers. His prize money amounted to R19,8
million. Andile immediately decided to move to St Helena Bay. He wanted to buy a piece of land with a
six-bedroom house and all-round views of the ocean.

After a couple of weeks, he met Patricia Plaatjie, who owned just the property he was looking for. After
some negotiations they agreed that Andile would buy the property from Patricia for R6 250 000.

Patricia is 68 years of age and has never been married. She bought the property in 1995 after she retired
and has been living there ever since. The valuation date value (you can assume that it is correct) of the
property was R2 830 000. During 2010, she built two swimming pools, one on either side of the house,
both of them heated. She built these pools because she wanted to have a view of the sunrise and the
sunset while sitting in a pool. The total cost of building these pools was R261 000. At the same time, she
painted the house at a cost of R453 870. When she sold the house, the outstanding amount on her
mortgage was R368 000.

REQUIRED: Marks

Calculate Patricia’s taxable capital gain/loss for the current year of assessment, assuming
that she did not have any other disposals for the year. 8

QUESTION 7.3 (15 marks, 18 minutes)

Betty Brave is 55 years of age and lives in KwaZulu-Natal. During the current year of assessment, she
sold the following assets:

• Asset: Primary residence, situated in Margate

Date sold: 1 January 2021
Selling price: R5 000 000
Other information: Betty purchased the residence on 1 July 2008 for R2 520 000. The estate
agent’s commission on the sale was R45 000.

• Asset: Holiday home, situated in Umhlanga Rocks

Date sold: 15 February 2021
Selling price: R925 000
Other information: Betty purchased the residence on 1 January 2001 for R250 000. The house
was sold privately. Improvements of R150 000 were made during 2009. The
market value was R350 000 on 1 October 2001, while the time apportion-
ment base cost was R222 222.

• Asset: Motor vehicle

Date sold: 20 November 2020
Selling price: R200 000
Other information: She purchased it on 1 March 2010 for R250 000.

REQUIRED: Marks

Calculate the taxable capital gain/loss for the 2021 year of assessment. 15
 93 TAX1501/103

QUESTION 7.4 (20 marks, 24 minutes)

Roger Road is 59 years old and married out of community of property to Kirsten Road. Roger inherited
R2 500 000 in cash and gold coins to the value of R100 000 from his late father’s estate during May 1996.

Roger purchased a new house in Bedfordview in July 1999 for R2 000 000 and moved into it in the same
month. He sold his previous house, situated in Johannesburg, for R500 000 in August 1999.

Roger decided to retire and sell all his assets, except his motor vehicles and some personal belongings.
He and Kirsten purchased a house on the KwaZulu-Natal north coast forR3 000 000 in February 2021 and
retired there.

Roger supplied you with the following information regarding the Bedfordview house and the other assets
acquired and sold, as well as liabilities settled:

Asset Cost Selling

price

R R
1. Bedfordview house
Sold privately in January 2021 3 200 000
Purchased in July 1999 2 000 000
Improvements made in March 2010 200 000
Outstanding bond settled 250 000
Market value was R2 400 000 on 1 October 2001
Time apportionment base cost was R1 600 000 on 1 October 2001

2. Old furniture
Sold at a capital loss of R120 000

3. Listed shares
Purchased in January 2015 200 000
Sold in January 2021 310 000

REQUIRED: Marks

Calculate Roger’s taxable capital gain/loss for the year of assessment ended
28 February 2021. Provide reasons where amounts are excluded or not taxed. 20
 94

ASSESSMENT CRITERIA

We could assess this learning unit in assignments or in the examination by asking you to

• calculate the capital gain or loss on each asset sold by applying the rules regarding the determination
of proceeds and base cost for each asset
• apply the exclusions regarding the different types of assets
• calculate the aggregate capital gain or loss
• calculate the taxable capital gain or loss

In this module, we will not combine questions on capital gains tax with a tax-
able income question. We will ask about the capital gains tax in a separate
question.

Solutions to self-assessment questions in learning unit 7

QUESTION 7.1 (5 marks)

(i) False
(ii) True
(iii) True
(iv) False
(v) True

QUESTION 7.2 (8 marks)

R

Proceeds 6 250 000 (1)

Less: Base cost
̶ Valuation date value (2 830 000) (1)
̶ Swimming pool (261 000) (1)
̶ Loan nil (1)
̶ Painting nil (1)
Capital gain 3 159 000
Less: Primary residence exclusion (2 000 000) (1)
Gain on sale of house 1 159 000
Less: Annual exclusion (40 000) (1)
Net capital gain 1 119 000
Multiply: Inclusion rate x 40% (1)

Taxable capital gain 447 600 8

 95 TAX1501/103

QUESTION 7.3 (15 marks)

R
Asset: Primary residence
Proceeds 5 000 000 (1)
Less: Base cost (2 565 000)
– Purchase price 2 520 000 (1)
– Agent’s commission 45 000 (1)

Gain 2 435 000

Less: Primary residence exclusion (2 000 000) (1)
Gain on sale of house 435 000

Asset: Motor vehicle 200 000 (1)

Proceeds (250 000) (1)
Less: Base cost
Loss (50 000)

Loss on sale of motor vehicle – personal use asset Nil (1)

Asset: Holiday home

Proceeds 925 000 (1)
Less: Base cost (500 000)
Valuation date value (note 1) 350 000 (1)
Cost after 1/10/2001 150 000 (1)

Gain on sale of holiday home 425 000

Taxable capital gain

Gain on sale of house 435 000
Loss on sale of motor vehicle Nil
Gain on sale of holiday home 425 000
860 000
Less: Annual exclusion (40 000) (1)
820 000
Multiply: Exclusion rate x 40% (1)

Taxable capital gain 328 000

Note 1

The valuation date value is the greatest of (proceeds exceed all expenditure and therefore, par 26 applies).

• market value – R350 000 (1); or

• time apportionment base cost – R222 222 (1); or
• 20% x (R925 000 - R150 000) = R155 000 (1)
 96

QUESTION 7.4 (20 marks)

Inheritance of cash and gold coins in May 1996 – no capital gains tax (1)
Johannesburg house sold in August 1996– no capital gains tax, prior to 1/10/2001 (1)

R R
Bedfordview house 3 200 000 (1)
Proceeds
Less: Base cost
Valuation date value – the greater of
̶ market value – R2 400 000 (1); or
̶ 20% rule – (R3 200 000 (1) - R200 000 (1)) x 20% (1)
= R600 000; or
TAB – R1 600 000(1)
Thus, market value (2 400 000) (1)
Outstanding bond – not part of base cost Nil (1)
Improvements (200 000) (1)
Profit 600 000
Less: Primary residence exclusion of R2 000 000 (1) – limited
to gain (600 000) (1)

Gain on sale of house Nil (1)

Other assets – old furniture (personal use asset) Nil (1)

Listed shares
Proceeds 310 000 (1)
Base cost (200 000) (1)
Capital gain 110 000 110 000 (1)

Aggregate capital gain 110 000 (1)

Less: Annual exclusion (40 000) (1)

Net capital gain 70 000

Taxable capital gain (R70 000 x 40%) (1) 28 000 (1)

22

Max 20
 97 TAX1501/103

NOTES

UNISA
RM/(as)
TAX1501_2021_TL_103_3_E.docx
 98

SCHEDULES

A. 2021 – TAX TABLES

(i) Persons (other than companies and trusts)

Taxable income Rates of tax

Where the taxable income does not exceed R205 900 18% of each R1 of the taxable income;
R37 062 plus 26% of the amount by which the
exceeds R205 900 but does not exceed R321 600 .... taxable income exceeds R205 900;
R67 144 plus 31% of the amount by which the
exceeds R321 600 but does not exceed R445 100 .... taxable income exceeds R321 600;
R105 429 plus 36% of the amount by which the
exceeds R445 100 but does not exceed R584 200 .... taxable income exceeds R445 100;
R155 505 plus 39% of the amount by which the
exceeds R584 200 but does not exceed R744 800 .... taxable income exceeds R584 200;
R218 139 plus 41% of the amount by which the
exceeds R744 800 but does not exceed R1 577 300 . taxable income exceeds R744 800;
R532 041 plus 45% of the amount by which the
exceed R1 577 300 .................................................... taxable income exceeds R1577 300.

(ii) Tax on retirement lump sum benefits (or death)

Taxable income from benefit Rate of Tax

R0 – R500 000.................................................... 0 per cent of taxable income
Exceeding R500 000 but not exceeding R0 plus 18% of taxable income exceeding
R700 000 R500 000
Exceeding R700 000 but not exceeding R36 000 plus 27% of taxable income exceeding
R1 050 000 ......................................................... R700 000
R130 500 plus 36% of taxable income exceeding
Exceeding R1 050 000........................................
R1 050 000

(iii) Tax on retirement lump sum withdrawal benefits (pre-retirement)

Taxable income from benefit Rate of Tax

R0 – R25 000.......................................................... 0 per cent of the taxable income
Exceeding R25 000 but not exceeding R660 000 ... 18% of taxable income exceeding R25 000
Exceeding R660 000 but not exceeding R990 000.. R114 300 plus 27% of taxable income exceeding
R660 000
Exceeding R990 000............................................... R203 400 plus 36% of taxable income exceeding
R990 000
 99 TAX1501/103

B. FRINGE BENEFIT TABLES

(i) Employee–owned vehicles (section 8(1))

SCALE OF VALUES

Fixed Fuel Maintenance

Where the value of the vehicle cost cost cost
R c c

does not exceed R95 000 ............................................. 31 332 105.8 37.4

exceeds R 95 000 but does not exceed R190 000 ....... 55 894 118.1 46.8
exceeds R190 000 but does not exceed R285 000 ...... 80 539 128.3 51.6
exceeds R285 000 but does not exceed R380 000 ...... 102 211 138.0 56.4
exceeds R380 000 but does not exceed R475 000 ...... 123 955 147.7 66.2
exceeds R475 000 but does not exceed R570 000 ...... 146 753 169.4 77.8
exceeds R570 000 but does not exceed R665 000 ...... 169 552 175.1 96.6
exceeds R665 000 169 552 175.1 96.6

(ii) Employer owned vehicles (Paragraph 7(4) of the Seventh Schedule)

Scale of values

Value of private use per month, vehicle not subject to maintenance plan = 3.5% x determined value

Value of private use per month, vehicle subject to maintenance plan = 3.25% x determined value

(iii) Subsistence allowance as per Government Gazette No. 39724

Daily allowance for incidental cost is R139 per day.

Daily allowance for food and incidental cost is R452 per day.

C. REBATES

Persons under 65 ................................................................................................................. R14 958

Persons 65 and under 75 (R14 958 + R8 199) .................................................................... R23 157

Persons 75 and over (R14 958 + R8 199 + R2 736 ) ........................................................... R25 893

D. MEDICAL AID TAX CREDITS

Main member R319

Main member with one dependant (R319 + R319) R638

Main member with two dependants (R319 + R319 + R215) R853

Each additional dependant qualifies for a further rebate or credit of R215.

 100

E. INCOME TAX MONETARY THRESHOLDS SUBJECT TO PERIODIC LEGISLATIVE CHANGE:

Description Reference to Income Tax Monetary

Act, 1962 amount
Exemption for interest and certain dividends:
In respect of persons 65 years or older, exemption for Section 10(1)(i)(i) R34 500
interest from a source within the Republic which are
not otherwise exempt
In respect of persons younger than 65 years, exemp- Section 10(1)(i)(ii) R23 800
tion for interest from a source within the Republic
which are not otherwise exempt
Annual donations tax exemption:
Exemption for donations made by individuals Section 56(2)(b) R100 000
Capital gains exclusions:
Annual exclusion for individuals and special trusts Paragraph 5(1) of Eighth R40 000
schedule
Exclusion on death Paragraph 5(2) of Eighth R300 000
schedule
Paragraph 45(1)(a) of Eighth R2 million
Exclusion for the disposal of a primary residence
Schedule
Exclusion in respect of disposal of primary residence Paragraph 45(1)(b) of Eighth R2 million
(based on amount of proceeds on disposal) Schedule

Maximum market value of all assets allowed within Definition of “small business” in R10 million
the small business definition on disposal when per- paragraph 57(1) of Eighth
son 55 years or older Schedule

Exclusion amount on disposal of small business Paragraph 57(3) of Eighth R1 800 000
when person 55 years or older schedule
Retirement savings thresholds:
Deductible retirement fund contributions:
Members of retirement funds may deduct their contri-
butions subject to certain percentage or monetary
ceilings

Monetary ceiling for total contributions to retirement Proviso to section 11(k)(i) R350 000
funds

Deductible business expenses for individuals:

Car allowance:
Individuals receive an annual vehicle allowance to
defray business travel expenses, including deemed
depreciation on the vehicle.
Ceiling on vehicle cost Section 8(1)(b)(iiiA)(bb)(A) R665 000
Ceiling on debt relating to vehicle cost Section 8(1)(b)(iiiA)(bb)(B) R665 000
 101 TAX1501/103

Description Reference to Income Tax Monetary

Act, 1962 amount

Employment–related fringe benefits

Exempt scholarships and bursaries:
Employers can provide exempt scholarships and bur-
saries to employees and their relatives, subject to
annual monetary ceilings.
Annual ceiling for employees Paragraph (ii)(aa) of the R600 000
proviso to section 10(1)(q)
Annual ceiling for employee relatives Paragraph (ii)(bb) of the R60 000 &
proviso to section 10(1)(q) R20 000
Annual ceiling for employee relatives with a disability R90 000 &
R30 000
Awards for bravery and long service: Paragraphs (a) and (b) of the R5 000
further proviso to paragraph
5(2) of Seventh Schedule
Employee accommodation: Paragraph 9(3)(a)(ii) of R83 100
Seventh Schedule
Exemption for de minimus employee loans: Paragraph 11(4)(a) of Seventh R3 000
Schedule
Administration
Exemptions from provisional tax:
In the case of a natural person not carrying on a Paragraph 18(1)(c)(i) of Fourth Taxable in-
business Schedule come below
threshold
In the case of a natural person not carrying on a Paragraph 18(1)(c)(i) of Fourth Taxable in-
business Schedule come from
interest, fo-
reign divi-
dends and
rental in-
come does
not exceed
R30 000