TAXATION

298
 Disclaimer
General

The content of these notes has been compiled by combining class slides, class
examples, information from the textbooks & personal class notes.

Please note that though these summaries are very thorough they should only be
used as a study aid in conjunction with your class examples, slides, textbooks &
attending class. They should by no means be used as a substitute for any of the
above.

These notes were compiled for our own studying purposes to the best of our abilities
so we apologize should you find any errors.

We hope they will benefit and assist you in your academic journey this year and we
wish you everything of the best for your studies.

Taxation 298

It’s very important that you stay up to date in class as all the chapters eventually link
up. Please note that rates and the prescribed work may change and that it is crucial
that you note these changes to ensure you do not study the wrong information.
These notes have been made using the slides and SILKE however they should be
used to complement your own notes made during class.

Highlighting the tax act can be a little overwhelming, however, the robot system
works well and prevents your book from looking like a rainbow:

• Red: all amounts excluded

• Green: all amounts included
• Blue: to cross-reference any sections (please look into the rules regarding
cross-references)
• Yellow: important definitions and amounts

It’s very important that you know your theory well so that you do not need to rely on
your legislation for every question in the test - it is merely there to assist you.

HEBREWS 11:1
 Table of Contents
Chapter
1. General principles of taxation
2. Taxation in South Africa
3. Gross income
4. Special inclusions
5. Exempt income
21. Sources and non-residents
6. General deductions
7. Natural Persons
17. Capital gains tax
8. Employment benefits
10. Employees tax
 CHAPTER 1 GENERAL PRINCIPLES OF TAXATION

1. Types of taxes

Direct taxes are imposed on: Indirect taxes are levied on:
• Individuals • Transactions that are collected by
• Companies intermediaries
• Other taxpayers • On behalf of SARS.
The burden of tax is not shifted. Intention or expectation that the tax burden
will be shifted.

Example

Classify the taxes as direct or indirect taxes:

Relevant Description Direct or Relevant Reasoning
legislation indirect tax sections
Income Tax Normal tax Direct tax Section Pursuant to section 5(1), normal taxes
Act No. 58 5(1) are levied annually on the taxable
of 1962 incomes of any person (other than a
(Part I) company) and any company. Therefore,
levied on a person as opposed to a
transaction.

Income Tax Withholding Direct tax Section Pursuant to section 50B(1)(a),

Act No. 58 tax on 50B(1) read withholding tax on interest is calculated
of 1962 interest together with reference to the amount of interest
(Part IVB) with and that is paid by any person to or for the
50C(1) and benefit of any foreign person to the
50C(2). extent that the amount is received or
accrued from a source within the
Republic as determined in accordance
with S9(2)(b). Pursuant to section 50C(1)
the foreign person is liable for the
withholding tax on interest. Under
section 50C(2) the withholding tax on
interest is regarded as an amount paid in
respect of the foreign person’s liability.
Therefore, even though the tax is
collected by an intermediary (the
person paying the interest to the foreign
 person) the tax liability rests on the
foreign person, it is not a tax that is
expected or intended to be passed onto
another person (e.g. as is the case with
VAT).

Taxes may be described as “direct” taxes “…notwithstanding that the actual payment may be
enforced against some intermediary, so that the income tax on employment income is not less
direct because the employer must deduct the tax” (Loutzenhiser, 2016:19-20).

This same principle can be extended to withholding taxes on interest. Notwithstanding that the
actual payment is enforced against an intermediary (the person paying the RSA-source interest),
the withholding tax on interest is not less direct because the intermediary is required to deduct
(withhold) the tax and pay it over to the SARS.

Value- Value- Indirect tax Section Pursuant to section 7(1), VAT is levied:
Added Tax Added Tax 7(1) (a) on the supply by any vendor of goods
Act No. 89 (VAT) and services supplied by him in the
of 1991 course or furtherance of any enterprise
carried on by him; and
(b) on the importation of goods into SA
by any person; and
(c) on the supply of any imported
services by any person. Therefore, VAT
is levied on transactions/ actions as
opposed to on a person.

Note that because vendors are entitled to claim input tax, the tax burden is intended and expected
to fall on the ultimate consumer of the goods and services. You were not expected to include
this in your answer as VAT will only be covered in term 3.

2. Tax policy

What is it?
• The formulation of a tax policy is concerned with the design of a tax system
that is capable of financing the necessary level of public spending (by the
government) in the most efficient and equitable manner.

Tax policy components Economic income is not necessarily the amount subject to tax.

D. Tax principles

A. Tax base X B. Tax structure = C. Tax incidence

Definition Rate structure Tax incidence

A. Tax base
• Amount on which tax is imposed and requires a determination of what is
taxable (e.g. income, wealth or consumption).
• After the tax base, a percentage or unit is applied to this amount to
determine the tax liability.

• Income tax base = income earned, or profits generated by tax payers during the year of
assessment.
• Wealth tax base = the value of your assets or property of the tax payer.
• Consumption tax base = amount spent by tax payers on goods and services.
 Example – Average tax rate vs the effective tax rate

Melody earned interest income of R28 500 and net rental income of R28 500. Suppose
the applicable interest rate is 39%.

Interest income
𝑇𝑜𝑡𝑎𝑙 𝑡𝑎𝑥 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦
• 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑎𝑥 𝑟𝑎𝑡𝑒 =
𝑇𝑜𝑡𝑎𝑙 𝑡𝑎𝑥 𝑏𝑎𝑠𝑒

If we assume that R23 800 of the interest income will not be taxable, the tax base will be
R4 700 (R28 500 – R23 800).
Melody’s tax liability is thus R1 833 (R4 700 x 39%).

𝑇𝑜𝑡𝑎𝑙 𝑡𝑎𝑥 𝑙𝑖𝑎𝑏𝑖𝑙𝑡𝑦

• 𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑡𝑎𝑥 𝑟𝑎𝑡𝑒 =
𝑇𝑜𝑡𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡 𝑜𝑟 𝑖𝑛𝑐𝑜𝑚𝑒

The total interest income is R28 500. The effective tax rate is therefore 6.4%
(R1 833/R28 500).

Net rental income

Assuming that the rental income is fully taxable, the total tax base is R28 500.
Melody’s tax liability would be then R11 115 (R28 500 x 39%).
The effective tax rate is therefore 39% (R11 115/R28 500).

Description Interest income Net rental income

Income before tax R28 500 R28 500
Less: Tax (R1 833) (R11 115)
Income after tax R26 667 R17 385
Average tax rate 39% 39%
Effective tax rate 6.4% 39%

B. Tax rate structure

Marginal tax rate Tax rate that will apply if the tax base increases by R1.

Statutory tax rate Tax rate imposed on tax base (as determined by legislation).

Average tax rate Rate at which tax is paid with reference to the total tax base
of a relevant taxpayer.
𝑇𝑜𝑡𝑎𝑙 𝑡𝑎𝑥 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦
ATR = 𝑇𝑜𝑡𝑎𝑙 𝑡𝑎𝑥 𝑏𝑎𝑠𝑒

Effective tax rate The effective tax rate is often used as a measure to facilitate
comparability between tax systems of different countries and
tax liabilities of different taxpayers. The effective tax rate
allows comparisons to be conducted having regard to the tax
emanating from all activities of a taxpayer.

𝑇𝑎𝑥 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦
ETR = 𝑇𝑜𝑡𝑎𝑙 𝑒𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝑝𝑟𝑜𝑓𝑖𝑡/𝑖𝑛𝑐𝑜𝑚𝑒

Can be expressed as: Fixed percentage, amount per unit, sliding scale (variable percentage).
Three types of tax rate structures

The type of structure is elected by policy makers and is in line with the policy objectives wanting
to be achieved. E.g. Governments that aim to achieve wealth redistribution, usually prefer
progressive tax rates.

This can be asked by means of a discussion question where you will be required to discuss how
taxpayers should be levied, with a reason/explanation and example.

a. Progressive
• The effective tax rate increases as the tax base increases.
• I.e. tax burden on high-income groups is larger.
• Often cited as a method to reduce economic inequalities in societies.
• Used by most economies.

b. Proportional
• The effective tax rate doesn’t change in line with the tax base (a flat tax rate).
• Applies to all income levels or for any size tax base.
 c. Regressive
• The effective tax rate increases as the tax base decreases.
• The tax burden on low-income groups is larger.

Economists argue that VAT is regressive (ETR), however it can also be proportional (ATR).

3. Principles of taxation

• Tax design: benchmarked against the commonly accepted principles of a

good tax system.
• Priority of application: depends on the policy objectives set out by the
government.
• Systems must be integrated to ensure effectiveness.

Principle Description
Equity • Tax should be imposed according to one’s ability to pay.
• Based on the concept of fairness.
• A person’s economic capacity or ability to pay may be influenced by
personal choices.
Certainty • The timing, amount and manner of tax payments should be certain.
• Legislative provisions and procedures must be transparent long
before implementation.
Convenience • Taxes should be imposed in a manner or at a time convenient for
taxpayers.
• Paying taxes should be made easy.
• By allowing taxpayers to do their returns via the internet.
• The inclusion of VAT in retail selling prices.
Economic • Taxes should be designed in a manner not unduly influencing
Efficiency economic decision-making.
 Administration • The tax system should be designed in such a manner as to not impose
Efficiency an unreasonable administrative burden on the taxpayer and the
revenue authorities
• Cost vs. benefit = a tax system should cost less to implement and
maintain than the tax revenue it generates for the government.
Flexibility • A good tax system should be designed in such a manner that it can
easily adjust in response to changing economic circumstances.
• Referred to as tax buoyancy which measures the responsiveness of
tax revenue changes to changes in economic growth.
Simplicity • Taxes should be designed in a manner that is easy to understand and
apply.
• Used to determine how many taxes should be implemented, which
items should be excluded from the tax base, how many
supplementary materials should be issued in addition to primary
legislation.

Principles in focus

a. Equity principle
• Based on the concept of fairness (in terms of reality and an individual’s
unique perception because fairness is subjective).
• If taxpayers are perceived to be unfair it erodes taxpayer confidence and
negatively impacts compliance behaviour. E.g. Gauteng e-tolls, where many
SA citizens simply refused to comply with the new legislation.
• A taxpayer’s economic capacity to pay is influenced by personal choices.
E.g. the decision to smoke.

Two underlying principles

Ability-to-pay Benefit principle
• Tax liability should take into account the • Equity is established when a taxpayer
economic capacity of the taxpayer. pays tax in proportion to the benefit
received from the government (via tax
*These two principles are not necessarily revenue spending).
complementing one another.

Two subcategories
Vertical equity Horizontal equity
• Taxpayer with the greater economic • Taxpayers with equal economic
capacity/ability to pay bears the capacity bear an equal tax burden.
greater burden of tax. • E.g. A receives R5 000 cash and B
• E.g. A earns a taxable income of R500 receives a laptop with a market value of
000 and B earns a taxable income of R5 000. Both receive it for services
R250 000. A should pay a greater rendered. They should both be
amount of tax relative to B. subjected to tax on the R5 000 (this is
the value of consideration for services
rendered).
b. Economic Efficiency Principle
• To be economically efficient, it cannot influence a person’s economic decision
making.
• It places an important role in preserving the tax base.
• Where a tax is inefficient, taxpayers would be motivated to change their
behavior to avoid paying the tax.
• E.g. if interest income is more heavily taxed than dividend income, investors
might elect to invest in dividend-bearing investments in order to reduce tax.
This ultimately leads to a decrease in tax revenue collected by the
government.
• A tax that is not economically efficient is not necessarily negative as it
encourages the desired behavior. E.g. an increase in tax levied on alcohol
could lead to a decrease in alcohol consumption and generate indirect social
benefits.
 CHAPTER 2 TAXATION IN SOUTH AFRICA

1.1. Brief history of taxation in SA Just read through

1.2. The legislative process Be able to explain process in own words

• The Constitution of the Republic of South Africa: is the supreme law in South Africa.
• The Constitution dictates, amongst other things, how the legislatures should conduct their legislative
processes.
• Parliament: has the power to pass new laws and to repeal or amend existing laws.

Parliament
- Bill must be passed by parliament before it is submitted to the president to sign into law.

Draft money bill

- White paper is transformed into a draft money bill.
- Prepared by the National Treasury and sent to the Minister of
Finance for approval.

White paper
- Adjusted for comments.
- A more refined version of green paper.

Green paper
- Proposal: discussion of policy options.
- Published for comments and ideas.
- Usually has submission date for Civil Society.
- Forms the basis of a draft bill.

1.3. Current tax legislation Just know what the rest are

1. Normal tax
- commonly referred to as income tax.

2. Withholding tax
- a tax deducted at source
- places responsibility on a person that owes an
amount of money to another to withhold an
amount of tax from the amount owed.
- only pay net amount to the other person.
- e.g. PAYE, dividend tax, payments to non-
residents.

3. Turnover tax (not in SAICA syllabus)

4. Dividends tax
- payable at a fixed rate of 20% on the amount of any dividend paid by a company except a
headquarter company.

5. Donations tax
- prevent the avoidance of estate duty.
- a tax on the gratuitous transfer of wealth (property).
- levied on the value of donations, other than those specifically exempted.
- calculated at a fixed rate: 20% (first R30m) and 25% (>R30m).

6. Value-added tax (VAT)

- levied at 15% on the supply of goods or services by a vendor in SA.
- indirect tax and direct cost to the final consumer.
 7. Transfer duty
- levied on the cost price of fixed property using a sliding scale (0%, 5%, 11% and 13%).
- wealth tax payable by the purchaser on the acquisition of property in SA.

8. Estate duty
- levied on the dutiable value of the estate of a deceased person.
- calculated at a fixed rate: 20% (first R30m) and 25% (>R30m).
- the purpose is to tax the transfer of wealth from the deceased estate to the beneficiaries.

9. Securities transfer tax (SET)

- at a rate of 0,25% of the value of any shares purchased.
- payable by: purchaser of both listed and unlisted shares in SA and the transfer of shares of
foreign companies listed on the JSE.
- not payable on the issue of shares.

10. Customs and excise tax (not in SAICA syllabus)

11. Unemployment insurance contributions (not in SAICA syllabus)
12. Skills development levies (not in SAICA syllabus)

2. Administration of tax legislation Just read through

• The Commissioner of SARS (CSARS) – responsible for carrying out the function of collecting
taxes and ensuring compliance with the tax laws.
• The Tax Administration Act – regulates the administrative requirements and procedures for
purposes of the performance of any duty, power of obligation, or the exercise of any right in
terms of the tax laws.
• SARS – responsible for administering the relevant tax Acts drafted and legislated by National
Treasury.
• PAJA – Promotion of Administrative Justice Act

3. Interpretation of tax law Just read through

• The tax laws of SA need to be interpreted by SARS.

• The burden of proof is on the taxpayer to claim an exemption, non-liability, deduction,
abatement, set-off or exclusion.
• The Constitution of the Republic of South Africa is the supreme law of SA, thus any law that is
inconsistent with it is invalid.

3.1. Tax legislation Just read through – which is binding?

• Regulations
- Enables the Minister of Finance to make regulations
regarding certain matters.
- Namely: the duties of all persons engaged in the
administration of the Act, limits of areas within which such
persons are to act, etc.
- These regulations are published in the Government Gazette and
have the same power as legislation.

• Double tax agreements

- Agreements to avoid the imposition of double tax when residents of a
country transact in another country may be entered into by the
governments of the respective countries.
- Once published in the Government Gazette following its approval by Parliament double tax
agreement (DTA) has the effect of law.
- Double tax agreement enjoys preference over the Act.
 • Definitions
- For the interpretation of the words in tax legislation.
- The main source of definitions is contained in the first section of the tax Act.
- All definitions are subject to their provisos.
- The following must be considered:
▪ If the definition in the Tax Administration Act but not in the Act – the definition in the Tax
Administration Act will also apply for the Act. (Vice versa)
▪ If there are inconsistencies between Acts, the Act is applicable.

• The Interpretation Act

- If a term used in the Income Tax Act is not defined in another tax act, necessary to look to
the Interpretation Act for guidance.
- Provisions apply only if there is nothing in the language or context of the Income Tax Act
contradictory to those provisions.
- If not defined within the primary legislation or the Interpretation Act, the normal dictionary
meaning of the word may indicate its meaning.
- If still unclear, use case law.

• Interpretation notes
- In addition to the regulations, SARS publishes Interpretation Notes that set out its
interpretation of various provisions.
- The notes do not form part of tax legislation.
- It appears that not even the Commissioner is bound by an Interpretation Note unless it
contains a statement that it is a Binding General Ruling.

• Binding General Rulings

- If an Interpretation note contains a Binding General Ruling the Commissioner is bound to its
interpretation.
- The Advance Tax Ruling system provides for the issuing of BGRs.
- BGRs are issued on matters of general interest or importance.
- They promote clarity, consistency and certainty regarding the Commissioner’s application or
interpretation of the tax law relating to these matters.

3.2. Judicial decisions

When will a tax case be heard in a court of law?
- Where a taxpayer is dissatisfied with his assessment, he may appeal if his
objection has been disallowed. The Tax Administration Act provides for the
following appeal route:
 • Tax board
- Deals with appeals where the amount of tax in dispute does not exceed R1m.
- The party against whom was decided can appeal to the Tax Court.

• Tax Court
- Not a court of law.
- It has no inherent jurisdiction as is possessed by the Supreme Court of Appeal.
- Bound by a decision of the Provincial Division of High Court and the Supreme
Court of Appeal, although not bound by its own decisions.
- A decision in of the Tax Court is only binding on the parties of the specific case.
- Commissioner not bound by a decision in the Tax Court.

• High Court
- Provincial Divisions of the High Court are generally bound by their own decisions;
however, they are not bound by decisions of other provincial divisions.
- The Tax Court is bound in terms of the principle of legal precedence.

• Supreme Court of Appeal

- Not bound by the decision of any Provincial Division.
- It is bound by its own decisions.
- All subordinate courts are bound by the decisions of the SCA.
The legal precedence principal
- The English stare decisis rule is accepted in SA.
- Entails the principle of legal precedence.
- Meaning: a rule of law established in a previous judgement is binding upon a lower
court, and that courts of equal rankings must follow their own previous decisions.
- The hierarchy of courts apply.
What part of the decision creates legal precedence?
- The ratio decidendi of a case = the reason or ground for the decision of a court.
- This becomes a principle of law that may have to be applied in future cases where
the facts are similar, depending on the court that gave the decision.
Can income tax decisions of foreign countries create legal precedence?
- Must be cautiously approached.
- Due to the difference in the basis of taxation applicable in foreign countries.
- When referring to such decision: bear in mind that they may be based upon a
differently worded statue from the statute under consideration.
- May, however, be valuable and may influence SA courts.
3.3. Rules of interpretation Just read through

• Strict and literal (‘golden rule of interpretation’)

- The interpreter primarily concentrates on the literal meaning of words of the
provision that must be interpreted to determine the purpose of the legislator.
- Equate the grammatical meaning of words to the intention of the legislature.
- Always the starting point.
- If text is ambiguous or unclear or if a strict literal meaning will be absurd, the literal
meaning may be departed from.
 - Case law that supports the strict legal approach: Not examinable

‘It simply means that one has to look at what is clearly said. There is no room for any intendment.
There is no equity about tax. There is no presumption as to a tax. Nothing is to be read in, nothing
is to be implied. One can only look fairly at the language used’. (Cape Brandy Syndicate v IRC)

• The purposive approach (contextual approach)

- Required by Constitution.
- Courts applying this approach strive to give effect to the purpose with which the
legislature enacted a particular provision.
- Also considers the history of the provision of a taxing act, its broad objectives, the
constitutional values underlying it and its interrelationship with other provisions.

• Substance over form rule

- Courts are concerned with the substance rather than the form of a transaction.

• Contra fiscum rule

- Provides that where more than one meaning is possible, the court must give effect
to the meaning which favours the taxpayer (i.e. against the fiscus)

4.1. The incidence of normal tax

• Incidence of tax refers to the liability of tax.

• Normal tax is levied on any ‘person’ – s5(1)
• Definition of a ‘person’ – s1(1)
- Including trusts, deceased and insolvent estates, portfolio of a collective
investment scheme (CIS), natural persons, but excludes foreign partnerships.
- The Interpretation Act also includes: ‘body of persons whether incorporated or
unincorporated’.
- This means all companies, close corporations and even partnerships are
considered as persons for Income Tax purposes.

For income tax purposes the partnership in not taxed – partners are taxed in their own names.
However, for VAT purposes a partnership is considered as a person.

• Collection of normal tax is facilitated through:

- PAYE (employees’ tax)
- Withholding tax
- Provisional tax

• Payments of employee’s tax, provisional tax and withholding tax are deducted from
the normal tax payable in the calculation of the final normal tax due.
• Withholding tax paid by non-residents in respect of the sale of immovable
property in SA is similarly taken into account for non-residents persons.
4.2. Rate structure of normal tax – s5

Progressive rate structure Fixed rate structure 28% Fixed rate structure 45%
• Natural persons • Companies and CC’s • Trusts (other than
(individuals) special trusts)
• Deceased estates
• Insolvent estates
• Special trusts

• Tax rates are determined annually by the Minister of Finance in the annual national
budget.
• The change is however subject to Parliament passing legislation.
Progressive rate structure
• Progressive rate structure ranges from 18% to 45%.
• Applied to taxable income.
• Increases as taxable income increases.
• Taxable income excludes:
- Taxable income from lump slump benefits and severance benefits of natural
persons.
• The current sliding scale used for the progressive rate structure:

Tax threshold - the level of income or money earned above which people must pay tax.
Can be calculated using tax rebates:
𝑅𝑒𝑏𝑎𝑡𝑒𝑠 (𝑒𝑛𝑡𝑖𝑡𝑙𝑒𝑑)
𝑇ℎ𝑟𝑒𝑠ℎ𝑜𝑙𝑑 =
𝐿𝑜𝑤𝑒𝑠𝑡 𝑡𝑎𝑥 𝑟𝑎𝑡𝑒

Leap year: effect on apportionments – use 366 and not 365 days.
E.g. when apportioning the s6 rebates in broken years of assessment.

Rebates – s6
• Natural persons only (not for juristic persons) are entitled to deduct a rebate.
• Primary, secondary and tertiary – depending on the age of the taxpayer.
Broken years of assessment
• “Was or would have been”
- Applicable in the following three instances:
1. Taxpayer is born
2. Taxpayer dies
3. Taxpayer is declared insolvent

• Effect of a broken YoA?

- s6: rebates must be apportioned (SARS uses days).

• Example:

𝐴𝑐𝑡𝑖𝑣𝑒 𝑑𝑎𝑦𝑠
• Calculation: 𝑅𝑒𝑏𝑎𝑡𝑒𝑠 𝑒𝑛𝑡𝑖𝑡𝑙𝑒𝑑 𝑡𝑜 × 𝐷𝑎𝑦𝑠 𝑜𝑓 𝑌𝑜𝐴

Example of apportionment in a broken YoA:

Natural person dies at the age of 74 on 1 December 2019. The taxpayer would have been 75
years old on 1 January 2020.
Effect on the s6 rebates for the 2020 year of assessment:
1. How old would the taxpayer have been on the last day of the year of assessment (29
February 2020)? – 75 years old
2. Therefore he/she is entitled to the following s6 rebates:
- Primary rebate of R14 220
- Secondary rebate of R7 794
- Tertiary rebate of R2 601
3. Apportion:
276 𝑑𝑎𝑦𝑠
S6 rebate allowed = (R14 220 + 7 794 + 2601) × 366 𝑑𝑎𝑦𝑠
= R18 562

4.3. Tax base of normal tax

• The tax base is the amount on which tax is imposed.

• With normal tax, the tax base is the taxable income of a person for the year of
assessment.

a. Year of assessment – s1 under ‘YoA’

• Normal tax levied annually in respect of a YoA.
• Natural persons: YoA ends on the last day of February.
- 2019 YoA: 1 March 2018 – 28 February 2019
- 2020 YoA: 1 March 2019 – 29 February 2020

• Companies: YoA corresponds to their financial year. (Can end on the last day of any
12 months in a calendar year.)
- E.g. Company financial year commences on 1 July and ends on 30 June each
year.
- 2019 YoA: 1 July 2018 – 30 June 2019
 - 2020 YoA: 1 July 2019 – 30 June 2020
b. Taxable income of a natural person
• The calculation of a natural person’s taxable income, normal tax due on assessment
and total tax payable is performed in accordance with the subtotal method.

Framework for calculating ‘taxable income’ and ‘normal tax payable’

 CHAPTER 3 GROSS INCOME

1. Definition for gross income

Gross income – in relation to any year or period of assessment means that

1) In the case of any resident, the total amount in cash or otherwise, received by or accrued to or in
favour of such resident; or
2) In the case of any person other than a resident; the total amount in cash or otherwise, received by
or accrued to or in favour of such a person from a source within the Republic,

during such year or period of assessment, excluding receipts or accruals of a capital nature.

Requirements
• All the requirements (also referred to as special inclusions) below must be
met for an amount to qualify as gross income.
• Residents are taxed on their worldwide income through a residence-based
system of tax.
• Non-residents are taxed only on SA source income through a source-based
system of tax.
• Note: The requirements differ for resident and non-resident.
RESIDENT (4) NON-RESIDENT (5)
- There must be an amount in cash - There must be an amount in cash
or otherwise or otherwise
- That is received by, accrued to; or - That is received by, accrued to; or
in favour of the resident in favour of the non-resident
- During a YoA - During a YoA
- Excluding amounts of a capital - From a source within/deemed to
nature be within RSA
- Excluding amounts of a capital
nature but can be included i.t.o.
specific inclusions*
*If these amounts are not included it does not imply that they are free of tax. A portion of capital gain (i.e. capital
gains tax) is realised on the disposal of an asset which is included in taxable income (Discussed later).

2. Resident and non-resident

• The definition of resident in s1 distinguishes between
natural persons and persons other than natural persons.
• A person cannot be a resident if they are deemed to be
exclusively a resident of another country.
• Thus; in the case of a DTA between two
countries, one should first consider whether the
taxpayer is a resident under the DTA and then
only under the definition in s1.
• A natural person is a ‘resident’ if he or she is either
ordinarily resident or meets the requirements of the
physical presence test.
Tests to determine residency
i. Ordinarily resident
• The term “ordinarily resident” is not defined in the act and therefore the
interpretations of the court are used. (Case law)
Two cases to be considered with regards to ordinarily resident
Case Principle
Cohen vs. CIR • A person’s ordinary residence is the
Facts: country to which he would naturally
• The TP was a South African resident return to. It is the country in which
• Was requested by his employer to work in
the person’s usual or principal
the USA for 20 months
• His family went with him and during the 20 residence is i.e. their real home.
months, none of them returned to SA. • The person’s mode of life or
• The court ruled the TP to be an ordinary
resident in SA during the time.
actions outside the YoA must be
considered and not only those during
the YoA.
• Physical absence during the full
YoA is not decisive. The person
could be absent for the full year and
still qualify as an ordinary resident of
that country.

CIR vs. Kuttel • Place where a person normally

Facts:
resides apart from occasional/
• The TP had a majority interest in a SA temporary absences (‘real home’).
company.
• Agreed to move to NY to open an office
there.
• He was granted permanent residency and
his family emigrated to NY.
• Whilst being there he acquired a house, car,
bank accounts and offices.
• During a 31-month period, he visited SA 9
nights, staying up to 2 months per visit.
• During the visits, he stayed in a house
owned by a company where he and his wife
are the sole shareholders. The house was
never rented out.
• The court applied to principles of CIR vs
Cohen and concluded that the TP is not
ordinarily resident in SA.
• Application of principles:
- There was no proof that the tax payer’s
place of principal residence was not set up
in the USA. (He bought a car, house, etc.)
- The fact that he kept his house in SA is
not enough evidence to identify it as his
‘real home.’ He only visited SA with no
intent shown of staying there.
 - He could not take all his assets with him
due to the exchange control regulations
and by vesting his money in a house
based in SA he merely used the most
advantageous means of retaining his
assets in the country.

A guideline of factors considered by SARS to determine ordinarily residency

(Interpretation note 3 issue 2)

• An intention to be ordinarily resident in the Republic.

• Most fixed and settled place of residency.
• Habitual mode (present habits and mode of life)
• Place of business and personal interests of the person and family.
• Employment and economic factors.
• Status of the individual (immigrant, work permits).
• Location of personal belongings.
• Nationality
• Family and social relations (schools, churches, sports clubs).
• Political, cultural and other activities.
• Application for permanent residence or citizenship.
• Period abroad, purpose and nature of visits.
• Frequency and reasons for visits abroad.

When does a taxpayer stop being ordinarily resident?

ii. Physical presence test

• This applies to a natural person who is not at any time during the year of
assessment ‘ordinarily resident.’
• The person will be deemed a ‘resident’ if he is physically present in the
Republic for a certain period and meets all three the requirements.
Three requirements – in legislation under s1
• Exceeding 91 days in aggregate during the current YoA, AND
• Exceeding 91 days in aggregate during each of the 5 YoA preceding the
current YoA, AND
• Exceeding 915 days in aggregate during the 5 YoA preceding the current
YoA.
Rules to apply to the ‘physical presence test’
• Part of a day counts as a full day for the physical presence test.
• A day spent in transit through the Republic is not included as a day, provided
that the person does not formally enter the Republic through a port entry.
- E.g. a plane lands in SA for a stopover flight and the person doesn’t enter through an
official point of entry, they are considered to be “out of the country.”
• The more than 91 days and more than 915 days’ periods of physical presence
in the Republic need not be continuous.
• The reason for being in the country during the required number of days is
irrelevant. Unless the ‘part of a day’ is in transit.
• Cannot apply both tests (ordinary and physical) in the same YoA.
• NB! If a person is exclusively resident in another country i.t.o a DTA between
the republic and another country, he will not be a resident in the Republic
even if he meets all the requirements of being a resident.
• A person will be a resident from the first day of the relevant YoA (that is the
sixth year) during which all the requirements of the test are met.
When does residency terminate under the physical presence test?
2.1. Residence of persons other than natural persons [par(b) of the definition
of ‘resident’ in s1]
• A person other than a natural person (e.g. companies, close corporations or
trusts) is defined as being ‘resident’ if:
- Is incorporated, established or formed in the RSA, or
- Has its place of effective management in the RSA.

What does a place of effective management mean?

• Not defined in the Act.
• IN 6 (issue 2) provides more guidance for the purposes of establishing the place of effective
management – in short, SARS regards it as ‘the place where key management and
commercial decisions that are necessary for the conduct of its business as a whole are in
substance made’.
• May have more than one place of management but only ONE place of EFFECTIVE
management.
• DTA’s have priority.

3. Elements of the ‘gross income’ definition in s 1(1)

Meaning of ‘amount in cash or otherwise’

• Not only the receipt or accrual of an amount of cash should be included in a

person’s gross income.
• The value of non-cash items should also be included.
Cases to be considered
Case Principle
Lategan • ‘Amount’ includes not only money
Facts: but also every form of property
• TP = wine farmer who sold wine that he earned by the taxpayer which has
made during the YoA for a specific amount. money value, even the right to
Part of the amount was paid cash before the receive future payment.
end of the YoA.
• The balance was paid in instalments during
the following year.
• Court had to decide whether the full amount
qualified as ‘total amount’ for the purposes
of ‘gross income' or only the part that he
received in cash.
• The court ruled that where a taxpayer
acquired a right during a YoA to receive
instalments of an amount during subsequent
years, the present value of that right at the
end of that year should be included in
‘gross income’.
Butcher Bros • The onus is on CSARS to establish
Facts: the amount if it cannot be
• TP leased a building for a period of 50 years, established it does not form part of
which can be renewed for a further period of ‘gross income’.
49 years. • Amounts accruing must have an
• In terms of the lease agreement, the tenant ascertainable monetary value.
was required to demolish the existing
buildings and build a new theatre which was
worth substantially more than the original
buildings.
• Upon termination of the lease, the building
and improvements would revert to the TP
without compensating the tenant for costs
incurred relating the building and
improvements.
• Court had to decide whether the
improvements qualified as an ‘amount’. NOTE: The Act was amended after this case.
• The court held that no amount was (par h) The specific inclusion in gross income
received by or accrued to the TP by the end now provides that improvements to leasehold
of the YoA – improvements did not have an property should be included in the gross income
ascertainable money value at the time. of a lessor.

Brummeria Renaissance • The right to an interest-free loan is

Facts:
an amount and this right has value
• Investors in a retirement village did not in money.
compensate the TP (developer) in cash for
the construction. There is an amount if what is received or
• Instead, investors granted interest-free loans accrued is capable of being valued in money
to the TP as consideration for the acquisition terms. (Irrelevant if it can be converted into
of units. money)
• The court held that the right to use the loan
interest-free was a right that had an Interpretation note (No 58) confirms that the
ascertainable monetary value. principle only applies where interest-free loans
are granted in exchange (quid pro quo) for
• To determine: use an objective test.
goods supplied, services rendered, or any other
benefit granted.

Calculating the monetary value of the right of use of the interest-free loan to be included in the
borrower’s gross income: (Once off calculation, incl. in the YoA the borrower becomes entitled to
the right to use the loan.)

(𝐿𝑜𝑎𝑛 𝑎𝑚𝑜𝑢𝑛𝑡 × 𝑃𝑉 𝑜𝑓 𝑅1 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑙𝑖𝑓𝑒𝑡𝑖𝑚𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑙𝑖𝑓𝑒 𝑟𝑖𝑔ℎ𝑡 ℎ𝑜𝑙𝑑𝑒𝑟
× 𝑤𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑝𝑟𝑖𝑚𝑒 𝑜𝑣𝑒𝑟𝑑𝑟𝑎𝑓𝑡 𝑟𝑎𝑡𝑒 𝑑𝑒𝑡𝑒𝑟𝑚𝑖𝑛𝑒𝑑 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑌𝑜𝐴)
− 93,1%

Meaning of ‘received by’

• E.g. the value of an asset increased over time does not mean that the value
should be included in its owner’s gross income. Although it has an
ascertainable monetary value, until the asset is sold, the increased value is
not received by the owner.
Cases to be considered
Case Principle
Geldenhuys • An amount is only received by the
Facts: taxpayer if it is received on his own
• TP and her husband (farmers) executed a behalf and for his own benefit.
will under which the surviving spouse was to
enjoy the fruits and income of the joint estate
for his or her lifetime and their children to be
the heirs of the estate.
• After the husband’s death, the TP, with her
children’s consent, decided to sell a flock of
sheep.
• She invested the proceeds in a bond in her
favour.
• The court held that the TP only had the right
of use of the flock. Since the number of
sheep at the date of sale was smaller, there
was no surplus offspring she was entitled to.
• The proceeds from the sale belonged to the
heirs.
• Although the TP received the proceeds,
she did not become entitled to the money,
therefore, not included in gross income.

Pyott • Deposits are amounts received and

Facts: should be included in gross income
• TP = biscuit manufacturer. unless they are deposited into a
• Biscuits were sold in tin containers for which separate trust account specifically
the TP charged a fee. for deposits received.
• The fee was refunded if the container was
returned in good condition.
• At the end of the year, the TP deducted an
amount from gross income as a provision for
containers still to be returned.
• The court ruled that the amount that the TP
received for the sale of containers should be
included in gross income at its face value.
• The court also made the observation that
the TP correctly conceded that the proceeds
were not in any way ‘trust monies.’
• If this was the case it would not form part of
the TP’s income.

Delagoa Bay Cigarette • Illegal receipts may also constitute

Facts: gross income – the legality of income
• TP operated an illegal lottery. is irrelevant to the question of the
• TP sold cigarettes at an amount much liability of that income for tax
higher than the normal selling price and the purposes.
difference was distributed to the holder of a
lucky coupon.
• The court found that whether the business
is legal or not is not material for
determining whether the income should be
subject to tax.
MP Finance Group • Illegal receipts may also constitute
Facts: gross income – if the taxpayer
• TP operated an illegal investment pyramid intended to receive the amount for
scheme. his or her own benefit.
• It promised significant returns on investors’
money.
• The operators of the scheme used some of
the money for their own benefit.
• Throughout the tax years under question,
the operators knew they were insolvent.
• The TP’s argued that they never received
the funds within the definition of ‘gross
income’ because it was legally obliged to
refund the deposits to investors.
• Interpretation note: the issue is not
whether the victim intended to part with the
money, but rather whether the thief intended
to benefit from it.

Meaning of ‘accrued to’

• Accrued to means that a taxpayer became entitled to an amount.

• I.e. at the time a taxpayer obtains a vested right to a future payment, the
amount accrues to a taxpayer.
Cases to be considered
Case Principle
People’s Stores • ‘Accrued’ means ’entitled to’
payment; not ’due and payable’.
Facts:
• The TP = retailer that sold goods to An amount accrues in the tax year the TP
customers for cash/credit. becomes entitled to the amount.
• Credit sales were made under the
taxpayer’s six-months-to-pay revolving
Provisio was added to the definition of ‘gross
credit scheme.
income’, which provides that the face value of
• Court had to decide whether the instalment the amount should be included in a person’s
not yet payable and outstanding at the gross income.
end of YoA, accrued to the TP.
• Court applied principles established in the
Lategan case.
• Held that the amount does not have to be
due and payable to TP for it to accrue to the
TP.
• The TP acquired a right during the YoA to
claim payment of an amount in the future.
(Vested right)
• And since the right has an ascertainable
monetary value in should be included in
‘gross income’.
Witwatersrand Association of Racing • Disposal of income after receipt
Clubs or accrual does not affect gross
Facts: income: where amounts have been
• TP = an association formed by a number of received in favour of and on behalf
horse racing clubs. of a person, that person must be
• TP held a horse racing event for the benefit taxed even though he may have an
of two charities. obligation to pay it over to some
• TP argued that in organising the event, it other person.
entered into a contract on behalf of the
charities.
• The court found, that it was the TP that was
liable to pay the expenses incurred in
holding the event. He was thus not an
agent on behalf of the charities.
• The court held that the proceeds from the
race were gross income for the TP because
it was the TP who became entitled to the
proceeds of the race.
• A moral obligation to hand over the
proceeds to the charities did not destroy
the beneficial character of the receipt of
those proceeds by the TP.
Mooi • Meaning of ‘accrued’ is extended to
Facts: ‘unconditionally entitled to’
• TP’s employer granted him an option to payment.
acquire shares in the company at a specific
price.
• The option was, however, subject to certain
conditions.
• The TP accepted the option during a
specific year and exercised the option more
than three years later.
• When it was exercised, the value of the
shares was more than the option price.
• The court had to consider at which price it
should be included in the TP’s gross
income.
• The court made the following findings:
- In applying the principle established in the
Lategan case, the court said that to
determine the ‘amount’ in the case of a
right, one must establish the value.
- TP argued the right accrued when the
option was granted. But the court found
that a contingent right was granted, as it
was subject to certain conditions.
- The right only accrued to the TP when
the conditions were fulfilled, and the
right became exercisable.
- Since the TP was not a share-dealer, the
amount was of capital nature. However,
par (c) of the definition of ‘gross income’
specifically included ‘any amount, incl. any
voluntary award received or accrued in
respect of services rendered or to be
rendered’ in the TP’s gross income,
despite being of capital nature.
 Inclusion in gross income: earliest of receipt or accrual (which ever takes place 1st).
May be on the same date or on different dates. This rule applies to all other payments, excluding
amounts payable by SARS.

Self-study section

i. Valuation of receipt or accrual

• Relevant to amounts that have been accrued but not yet received
(outstanding amounts), e.g. instalments.
• The value of the receipt is the amount that has been received during the YoA.

ii. Face value vs. present value Silke example 3.5

• When a person has become entitled to an amount during the YoA, AND
• That amount is payable on a date or dates falling after the last day of that
year, THEN
• The face value of that amount shall be deemed to have accrued to the
person during such year.
• Note: Previously the present value or discounted was used until the CIR vs.
People Stores case.

iii. Unquantified amounts Silke example 3.6

• If an asset is disposed of for a consideration that includes or consists of an

amount that cannot be quantified in that YoA, the unquantified amount is
deemed not to have accrued to the person in that specific YoA.
• It will only accrue in the year when it becomes quantifiable.

Cession or disposal of income

Disposal of income after receipt or accrual Disposal of income before receipt or accrual

• When income is received by a person for his • When a right to future income is disposed of,
own benefit or has accrued to him i.t.o. the the income will in future accrue to the recipient
definition of gross income the disposal of the of the right, provided that the right has been
income by that person will not affect his liability properly ceded.
for taxation.

Examples: Examples:
Theft Rental income
• An employee steals money – this act can in no • The income of a property may be ceded without
way destroy the accrual in favour of the transferring the right of ownership.
employer. • Income received by the cessionary is included
• The stolen amount will still form part of the in the gross income of the cedent (owner of the
employer’s gross income. property).
Silke example 3.8
Donations Royalties
• Witwatersrand Association of Racing Clubs • Sometimes the cedent after properly ceding his
• The TP undertook to pay the proceeds of the right to future income receives the money and
race over to a charitable organisation but had to then pays it over to cessionary.
pay tax in respect of the profits.
• The TP made the donations only after they • In this case, the cedent merely acts as an agent
were received. and for the benefit of the cessionary.
• Therefore, the income was never accrued for
Sale of a business the cedent’s own benefit and he has no tax
• If a business is sold during YoA he cannot liability.
dispose of the benefits or profits for that year on
the buyer. Services rendered
• The original owner will be liable for the tax until • Any considerations a person receives for
the following tax year. services rendered by him will be included in his
gross income (anti-avoidance provisions)

Spouse or minor
• Income disposed to a spouse or minor would
be taxable in the person disposing thereof.

Special case
Securities sold cum or ex income rights Silke example 3.9

• Shares, debentures and government stocks are sold together with the right to dividends and interest.
• If the income has already accrued to the seller prior to the sale = taxable in the seller’s hands.
• If the income accrues after the sale = taxable in the buyer’s hands.
• The full income is taxable by either the buyer or seller whoever is entitled to it.
• Anti-avoidance provisions: These deem that interest may accrue on a day-to-day basis, although
the actual interest is received in other periods. In this case, tax may be apportioned between the
buyer and seller.

iv. Time of accrual and interest payable by SARS

• When a person becomes entitled to interest payable by SARS, the amount is
deemed to accrue to the person on the date on which the amount is paid.
As from 1 March 2018, the above-mentioned rule overrides the previous rule that the amount is
included in a person’s gross income at the earlier of receipt or accrual.

• Interest payable by SARS is included in the recipient’s gross income when the
amount is actually paid and not when they become entitled to it.
• Interest previously received from SARS and is later repaid to SARS by TP will
be deductible from the TP’s taxable income in the YoA in which it is repaid.

v. Year or period of assessment

• A year or other period in which any tax or duty levied under the Act is
chargeable.
• An amount is considered income and subject to tax in the year it is received or
accrued by the TP
• If rates of tax or special provisions change it is important to ensure that all
amounts are included for each separate YoA.
• YoA for natural persons and trusts = 1 Mar 2018 to 29 Feb 2019
• YoA for companies = according to its financial year-end.
Receipts and accruals of a capital nature

• Definition of ‘gross income’ excludes receipts or accruals of a capital nature

(exception of special inclusions, see chapter 4).
What does capital in nature mean?

• Not defined in the Act – therefore rely on principles laid down by case law.
• However:
- Each case to be considered on its own merits.
- Body of case law: used as guidelines.
- No single or all-embracing test exists.
- S102 of the Tax Administration Act (burden of proof = TP)
- All receipts or accruals must be classified as either income (revenue) or
capital in nature (there is no half-way house, however, lump sums may be
divided into their respective components).
- Intention is the most important test in deciding whether an amount is income
or capital.
- Difficult: what is capital in the hands of one TP may be revenue in the hands
of another.
Cases to be considered
The nature of the asset
Case Principle
Visser • Nature of transaction must be
Facts:
considered.
• The TP acquired mining options on certain • The TP’s intention is the focus.
farms. • Economic distinction must be made
• The options lapsed before he could search between ‘the fruits’ = income and is
for mineral deposits.
produced by the capital;
• He had persuasive influence over the other
farms • And ‘the trees’ = capital and is the
• He, therefore, gained the mining options income-producing asset.
again in exchange for shares in someone’s • Income can be the product of a
company. person’s wits and energy.

George Forest Timber • The sale of fixed capital assets is

capital in nature.
Facts:
• The sale of floating assets is
• The TP was a company that acquired land
income in nature. E.g. trading stock.
with a natural forest for business purposes.
• The trees were sawn and sold for trade-in-
stock.
• Selling the timber did not realize a capital
asset but created and sold a new asset.
• Floating capital disappears within the
production process.
• Fixed capital produces wealth but remains
intact.

Intention
Case Principle
Elandsheuwel Farming – Intention a • Consider the intention of the
company taxpayer at the time of:
Facts: - Acquisition
• TP = a company that acquired a property - Holding period
used for farming purposes. - Disposal
• One of its shareholders carried on farming
activities on the property for four years.
• If the intention is…
• Six years after the company acquired the
property, its shareholders sold their shares - Investment (income-producing
in the company. structure) = of a capital nature.
• The price of the company’s shares was - Speculation/scheme of profit-
based on the value of the property as making = not of a capital nature.
agricultural land.
• The new shareholders were property
developers.
• A year later, the company sold the property
to a local municipality at a significant profit.
• The court came up with the following
conclusions:
- The new shareholders derived a scheme
to make a profit by buying at a price based
on agricultural value.
- The shareholder’s intention should be
attributed to the company itself.
- After the new shareholders acquired
control of the company, the purpose of
the land changed to trading stock.
- The profit realised was of a revenue
nature and should be included in a
company’s gross income.

Levy – Mixed purpose • Where a taxpayer has mixed

Facts:
intentions, the main or dominant
• The TP acquired 25% of the shares in the intention will apply.
company and was also one of its four • If there is no dominant intention,
directors. speculation is considered the
• The company was formed to acquire and dominant intention and the amount
develop land in an area that was thought to
will be revenue in nature.
likely to develop.
• TP had an open mind as to what to do with
the property.
• He was interested in making good revenue
from the shares.
• Agreed with the shareholders to develop the
property.
• Three years later the property was sold, and
the TP made a substantial profit.
• TP argued the sale of shares was capital of
nature.
• The court found that:
 - The TP’s dominant intention in acquiring
the shares was to hold the shares an
income-earning investment.
- The TP never attempted to sell the
shares and only did when someone made
him an offer.
- The proceeds from the disposal of shares
were of a capital nature.

Richmond Estates – Realisation of a • A taxpayer can change his intention,

capital asset but the mere fact that a taxpayer
Facts: sells his capital asset at a profit
• TP = a company that was formed to control cannot per se make the profit
the investments and savings of its sole subject to tax.
shareholder and director.
• The company was empowered to trade with
and invest inland.
• Due to legislative changes, it became
difficult to purchase land in the area.
• The company decided to cease trading and
develop the properties to receive rental
income.
• The decision was not recorded in a formal
resolution of the company.
• Due to further legislative changes the
company sold properties and realised a
substantial profit.
• The court concluded the following:
- The company’s intention with the
properties changed from trading stock to
capital assets when it decided to develop
the properties to receive rental income.
- The fact that this intention was not
recorded formally was nor reason for
concluding that their intentions did not
change.
- The proceeds from the sale were of
capital nature.

Scheme of profit-making
Case Principle
Pick ‘n Pay Employee share • If the TP participates in a scheme of
purchase trust profit-making, the proceeds =
revenue in nature.
Facts:
• The TP was a trust established by the PnP
group to create a share purchase scheme
for the benefit of the employees.
• The trust purchased shares in the employer
company and made it available to
employees who were entitled to shares.
• If employees had to forfeit their holdings,
the trust was compelled to repurchase the
shares.
• The court concluded:
- A TP must conduct business with the
purpose of making a profit for it to be
revenue in nature.
- The receipts accruing to the trust were not
worked for. It was merely a by-product.
- There was no intention of making profits,
thus = capital in nature.

Change in intention
Case Principle
Stott – mixed purposes • The intention of the TP on the date
Facts:
of acquisition is decisive.
• TP was a surveyor and architect. • Unless the intention changed prior to
• He purchased land as investments. sale and factors indicate that it was
• The 1st property was acquired as a seaside sold in a scheme of profit-making.
residence.
• TP’s are entitled to realise such an
• On the one half, he built a cottage and the
asset to his best advantage without
other was split into small plots which were
sold. it being a change intention.
• The 2nd property was a fruit farm which was
subject to a long-term lease when acquired.
• Once the tenant defaulted, the TP divided it
into subplots and sold it.
• The court concluded:
- The TP used surplus funds and merely
made an investment.
- The fact that the land was sub-divided is
not enough to assume his intention was
profit-making.
- His occupation as a surveyor had no
impact on the court’s decision.
- The receipts were capital in nature.

Nel – Realisation of a capital asset • An asset acquired with the intention

Facts:
to own it as an investment will
• TP = bought Krugerrands as a long-term remain capital in nature when the
investment and hedge against inflation. disposal of it occurs due to unusual
• His intention was for his children to inherit or special circumstances.
them.
• The value increased steadily over the years,
but he never sold them.
• Due to circumstances his wife urgently
required a new car.
• He exchanged some of the rands to pay for
this and subsequently made a gain on the
disposal.
• The courts concluded:
- To sell an asset initially purchased as an
investment does not qualify a
transformation to it being revenue in
nature.
- The TP’s intention was to realise a capital
asset.

Nussbaum – Secondary purpose • If the individual has original

Facts:
intention = capital in nature; and
• Considered by High Court second intention = revenue in
• TP = inherited shares nature; and
• Created a substantial portfolio of • The two intentions are pursued
investments in listed shares. simultaneously then the secondary
• For 3 YoA SARS deemed the profits from
intention would affect the primary
the sale of shares to be income in nature.
• TP stated he used the revenue generated to
intention and results in profits being
buy more shares for his portfolio. taxed as income in nature.
• Intention = produce dividend income and
protect the capital from inflation.
• Only sales made were if other shares had a
higher dividend yield.
• When he was 60, he sold the shares in
small bits to invest in medical expenses and
a house.
• The court concluded:
- Though his main intention was
investment his secondary intention was
to sell shares and use the profits where
appropriate.
- The profits received were higher than his
dividend income.
- He had carefully planned to use the profits
for later investments and profits were not
incidental.
- Proceeds = revenue in nature.

Natal Estates – Change in intention • Confirmed the Scott case.

Facts: • TP = entitled to realise an asset to
• TP = company who owned a large piece of the best of their advantage.
land in KZN. • Unless the TP embarks on an
• Business = manufacture sugar. elaborate scheme to dispose of an
• TP was aware that authorities could asset then:
expropriate the land.
- Considered scheme of profit-
• The company appointed professionals to
asses the land for possible residential making.
development. - TP has ‘crossed the Rubicon’
• The market was weak, and the project was - Proceeds = revenue in nature.
placed on hold.
• New shareholders took over and decided to
continue with the project. Again, consulting
professionals, they started developing and
selling the land.
• The court concluded:
- The original intention is not necessarily the
deciding factor.
- From the totality of facts, it should be
assessed whether the Rubicon was
crossed.
- Buying an asset as an investment and then
selling it at a profit, doesn’t indicate a
change in intention.
- TP = gone over into the business of
township development on a grand scale
and thus intention has been changed.
- Proceeds = revenue in nature.

Berea West – Realisation company • The mere use of a realisation

Facts:
company to realise a capital asset
• TP = company with the purpose of selling does not indicate a change in
land. intention to engage in a scheme of
• At formation, the land was held by a profit-making.
deceased land and trust.
• The executors were pressed to finalise the
estate and thus transferred the land to the
company to sell it.
• The trust beneficiaries became
shareholders of the company and the
proceeds from the sale were distributed to
them.
• Prior to the transfer, executors gave
approval for townships to be built on the
land but were subject to building roads and
water supply before individual plots could be
sold.
• Over 20 years the company sold these plots
and used the profits to develop a further
area.
• The courts concluded:
- The company was formed to sell an asset
to the best of its advantage (i.e. a
realisation company).
- TP incurred a lot of expenses to make the
sale, this is not a deciding factor, however.
- Distinguish the facts from the Natal
Estates case. Here the TP carried on a
business for selling land to generate profit.
- Receipts = capital in nature. The TP only
acted as a realisation company and didn’t
change the original intention.
Founders Hill – Realisation Company • Where there is no justification for
Facts:
forming a realisation company the
• TP = formed to acquire and realise surplus intention of the original entity cannot
land owned by AECI Ltd. which was held as be rolled over the realisation
a capital asset. company.
• Purpose of TP in accordance with the MOA
= realise the land to the best advantage.
• The courts concluded:
- The principle of realising the best
advantage of an asset only applies to
capital assets.
- The TP claiming it is a capital asset does
not make it one.
- TP was formed solely to trade in the
property.
- Compared to the Berea West case where
the formation of the realisation company is
justified as it would be impossible to realise
the asset without it.
- Was deemed a scheme for profit-making;
thus proceeds = revenue derived from
capital properly employed.

John Bell – Change in intention • The mere decision to dispose of an

Facts:
asset held as capital does not per se
• TP = company that operates a textile subject the resultant profit to tax.
business from premises they own. • Something more is required to
• Company changed locations and the metamorphose the character of the
shareholders sold the original premises. asset and so render its proceeds as
• The property market was low; thus, the
gross income.
property was rented out for 11 months and
sold for a profit once the market improved.
• Proceeds = capital in nature.

Elandsheuwel Farming • The test to determine whether a

taxpayer has gone over from
See above. realising an asset to his best
advantage to a profit‐making
scheme is one of degree.

Intention of a company
Case Principle
Richmond Estates • The intentions of a company are
evidenced by the formal acts of
See above. directors, e.g. in the form of
resolutions.
 • And the informal acts of the
company (especially in the case of a
one-man company, where the only
director is also the sole beneficial
owner of the shares).

Elandsheuwel Farming • A change in shareholding may

bring about a change in the
See above. intentions of a company, as the court
may pierce the “corporate veil”.
• Meaning they can look to the profile
of the new shareholders to establish
whether there has been a change in
intention regarding the capital asset
of the company.

Damages and compensation

Case Principle
WJ Fourie Beleggings A distinction must be drawn between
Facts: two types of agreements:
• TP conducted business as a hotelier. • a contract directed by its
• TP concluded an agreement whereby it
would accommodate a substantial number
performance towards making a
of persons over an extended period. profit – for example a normal lease
• The contract was cancelled, and the TP agreement (income of nature) and
received an amount for early termination of • a contract which establishes an
the contract. income-producing asset – for
• The court had to decide whether the amount
example, a franchise agreement
received was income/capital of nature.
• The court held that: (capital of nature)
- Although the contract would’ve formed a
major source of its income, this did not
transform the contract into part of the TP’s
income-producing structure.
- The income-producing structure was
made up of its lease of the hotel and its
use.
- The contract was part of its business to
provide accommodation. Thus, a product
of the TP’s income-earing activities, not
the means by which it earned income.
- The amount, therefore, being income of
nature.

Stellenbosch Farmers’ Winery • Compensation received by the

Facts: taxpayer for premature termination
• TP had a distribution agreement, which of an agreement was for the
gave the TP the exclusive right to distribute impairment of the taxpayer’s
certain whiskeys in SA for a period of 10 business by the loss of exclusive
years. distribution rights – capital.
• These sales made a significant contribution
to the TP’s profits.
• Due to corporate structural changes in the
company that granted the distribution right,
the TP agreed to receive a lump sum
payment on early termination of the
agreement.
• The court had to decide whether the amount
received was income/capital of nature.
• The court held that:
- The exclusive distribution rights were a
capital asset.
- The TP, therefore, lost a capital asset.
- Since the TP did not carry on the business
of the purchase and sale of rights to
purchase and sell liquor, it did not embark
on a scheme of profit-making.
- The payment was, therefore, capital of
nature.
- The nature of a receipt for income tax
purposes is not determined by the
accounting treatment thereof.

Tests that must be applied for damages:

• Takes on the character of the loss.
• For loss of income – compensation also income (‘hole in profit’)
• For loss of capital structure – compensation also capital (‘hole in capital asset’)

THINGS TO LOOK OUT FOR: capital vs revenue in nature - Inferences from cases.
• Nature of asset:
- Shares with low dividend yield – unlikely to be capital.
- Reason for purchase – resale at profit.
- Undeveloped land – cannot earn income, unless there’s a strong inference that proceeds =
revenue in nature. (Exception: Nel case)
- Perishable goods - normally trading stock = revenue in nature.
• Nature of taxpayer:
- Is followed by the nature of the asset (E.g. Land jobbers).
- Personal factors: knowledge, expertise or lack thereof, age, health can be taken into account.
• Holding period:
- Long period – inference: capital in nature – unless indication of change in intention.
- Short period – inference: income in nature (trading stock) – unless convincing reason for
sale.
• Financing method:
- Larger amount borrowed- inference: capital in nature.
• Activities prior to realisation:
- Significant activity – inference – scheme of profitmaking.
- Refusal of offers – capital in nature but in certain circumstances can indicate scheme of
profitmaking.
• Reason for realisation:
- Asset no longer useful to trade.
- Adverse changes (unusual circumstances – Nel case)
• Frequency of similar transactions:
- High = more likely to be trading in asset.
- Low = more likely to be capital asset, but where profit-making intent is clear a lack of
frequency will not be of any assistance to TP.
 Specific Transactions Income or capital?
Isolated transactions • The frequency of a particular transaction
may provide a useful guide to distinguish
between income and capital.
• Yet an isolated or once-off transaction is not
necessarily of a capital nature.
• Real test: intention behind the transaction.

Closure of business and goodwill • Proceeds from trading stock in the course of
winding up a business – always of an
income nature.
• Amount for sale of goodwill – capital nature
if:
- purpose is to carry on business,
- the goodwill is a fixed amount, and
- it is not paid in the form of an annuity.

Copyright, patents, trademarks • Use the same test as for any other asset.

Debts and loans • If debts are bought with the intention of

collecting them at a profit = income in
nature.
- E.g. finance houses that buy debts at a
discount and collect the outstanding
amount as profit.
• Can be capital of nature.
- E.g. a person buys a business as a going
concern, debts are thus part of the
business bought – the intention is to
generate profit with the business.

Gambling • If gambling activities are systematically

undertaken, to the extent they become a
business or scheme of profit-making –
proceeds are income of nature. E.g.
professional gambler.
• If the gambling activities are undertaken as
a means of entertainment or hobby –
proceeds are capital in nature.

Horse-racing • Amounts by racehorse owners and trainers

are subject to normal tax where betting is
a regular practice – possess special
knowledge.

Gifts, donations and inheritance • Capital in nature.

• If sold, also capital nature, unless the asset
is sold in pursuance of a profit-making
scheme or as part of a business carried on.

Interest • Interest from a loan or investment of money

is income in nature.

Krugerrands • Subject to the same tests applicable to

other assets. (Nel case)
Restraints of trade • Payments received in respect of a restraint
of trade is capital in nature.
• What he is selling is his ability to generate
further income – his capital structure.

Share transactions • The intention regarding which shares are

held will determine the nature of the
proceeds.

Subsidies • If a subsidy takes the form of a contribution

towards the producer’s cost of production =
income in nature. (Becomes part of the
floating capital of the producer.)
• If the subsidy is paid as a contribution
towards the cost of fixed capital assets =
capital in nature. E.g. contribution to the
cost of a new factory.
• Note: certain government grants are
exempt from normal tax.
 CHAPTER 4 SPECIAL INCLUSIONS

1. Special inclusions fundamentals

• Par (a) – (n) of the definition of ‘gross income’, section 1(1) of the ITA
includes certain amounts in gross income, even though they may be of a
capital nature.
• These receipts or accruals are referred to as special inclusions to the
definition of ‘gross income’.
• The special inclusions do not limit the scope of the gross income definition
and therefore items not specifically included under par (a)-(n) can still be
included in gross income by virtue of the ‘general definition’.
• Special inclusions, however, enjoy priority over the general definition.
Overview of the special inclusions:
PARAGRAPH DEALS WITH NOTES
Par (a) Annuities
Par (b) Alimony or maintenance payments
Par (c) Payments for services rendered
Par (cA) & (cB) Restraint of trade payments
Par (d) Lump sum benefits arising from variation of
office + lump sums from employer-owned
insurance policies
Par (e) Pension, provident and retirement annuity fund Ignore - HONS
nd
benefits in terms of the 2 schedule, excluding
state pension fund transfers
Par (eA) State pension fund transfers Ignore - HONS
Par (f) Commutation of amounts due under contract of
service
Par (g) Lease premiums
Par (gA) Know-how payments
Par (h) Leasehold improvements
Par (i) Fringe benefits
Par (j) Recoupments in respect of mining operations Ignore – not in
SAICA
Par (jA) Disposal of assets similar to trading stock
Par (k) Dividends or foreign dividends
Par (I) Farming subsidies Ignore – not in
SAICA
Par (lA) Amounts received by sporting bodies Ignore – not in
SAICA
Par(lC) Government grants Ignore – not in
SAICA
Par(m) Key-man insurance policies – amounts
received by employer policyholders
Par(n) Recoupments and other inclusions
2. Annuities
living annuity - a financial
• Par (a) of the definition of ‘gross income’, section 1(1) product that pays you a
regular income, e.g.
of the ITA includes in gross any amount received or
retirement fund.
accrued by way of:
annuity amount - an
- An annuity amount payable by way of
- A ‘living annuity’ an annuity under an
annuity contract.
- An ‘annuity amount’ as contemplated in s10A(1)

• Excludes par d(ii) amounts which are proceeds of a policy of insurance

where the person is or was an employee or director of the policyholder. This is
to avoid a double tax inclusion in gross income.
• Annuities with the exception of s10A are not divided into capital and income
and are taxable in full.
• In order to determine the source of annuities, the place (country) where the
contract was concluded must be established (Boyd v CIR).

• The term ‘annuity’ is not defined in the Act and principles are drawn from case
law. The Hogan case set out the following characteristics of an annuity:
- An annual or periodical payment that would not be defeated if it were divided
into instalments;
- It is repetitive (more than one such payment); and
- It is chargeable against some person. (i.e. there is an obligation to pay)

KBI vs Hogan

• TP = fireman who instituted an action for a lumpsum compensation from an insurance fund
after being seriously injured in a collision.
• The fund paid for his claim for the loss of future earnings by monthly installments.
• The question was whether it constituted a lumpsum, or whether one must deduct
employees’ tax from them.
• There was no mention of a lumpsum payment, and the payments were on condition that he
was alive.
• The funds delictual obligation to compensate was replaced by a contractual obligation to
pay installments.
• Court found that: all characteristics of an annuity were met and that employee’s tax also
had to be conducted.
• This was due to definition of remuneration which includes amounts referred to in the
definition of ‘gross income’.
• Any person paying an annuity to another person is therefore an employer paying
remuneration and must withhold employee’s tax.

• It is an annuity irrespective of whether:

- Payable for a specified number of years or lifetime.
- The amounts are fixed or variable.
 • Examples of how an annuity may arise:
- Purchased from an insurance company
- Granted by way of gift, donation or legacy
- Received as consideration for the sale of an asset (such as a business) or
surrendering of a right.
• NB! Inheritance, donation, sale of goodwill is capital in nature, but are
included in gross income if it takes the form of an annuity.
• Settlement of debt in instalments is not an annuity.

• When is an amount considered an annuity?

Does not constitutes an annuity Constitutes an annuity

The annual payment of instalments, Contractual obligation to make
in terms of a transaction of a capital regular either monthly or annual
nature with an ascertainable price. payments for life or fixed period.

If a pension paid by an employer to If it is a life pension, then constitutes

the widow of the employee and it is an annuity as the employer has
terminable it is not an annuity. bound himself.

Voluntary amounts payable in terms Fixed annual amounts payable out

of discretion are gifts. of the residue of an estate i.t.o. a
will. Regardless of whether it was
payable for a specific number of
years or for the lifetime

‘‘A man may sell his property for a sum which is to be paid in instalments, and when you see that
that is the case, that is not income or any part of it. . . A man may sell his property for what is an
annuity, that is to say, he causes the principal to disappear and an annuity to take its place. If you
can see that that is what it is, then the Income Tax Act taxes it’ (Jones v CIR)

3. Alimony payments

• Par (b) of the definition of ‘gross income’, section 1(1) of the ITA includes the
following amounts:
- Payable to TP by a spouse or former spouse of TP.
- Alimony or allowance or maintenance of TP by a judicial order or written
agreement of separation or order of divorce; or
- Amounts in respect of the maintenance of the child i.t.o. maintenance order.

• Alimony payments are normally paid monthly from the after-taxed income of
the paying spouse.
 • There is an ‘unconditional entitlement’ to the payment, therefore the inclusion
in gross income is not dependent on whether the spouse pays or not.

• Tax consequences of all alimony or maintenance payments are as follows:

For whom Divorce on or before 21 Divorced after 21 March

March 1962 1962
Paying spouse Section 21 deduction No deduction S7(11)
inclusion in income if the
minimum individual
reserve was reduced in
terms of a maintenance
order.

Receiving spouse Par (b) inclusion in gross Par (b) inclusion in gross
income income and s10(1)(u)
exemption (for both
monthly amounts and
s7(11) amounts received).

4. Services

• Par (c) of the definition of ‘gross income’, section 1(1) of the ITA includes:
• Amounts received or accrued in respect of:
- Services rendered or to be rendered (including voluntary reward); or
- Employment or the holding of an office (but not ss 8(1), 8B or 8C
amounts). Such amounts are included in taxable income (s8(1)) and
income ss 8B and 8C). These are then later included in gross income by
par(n).
- but not: par (i) fringe benefits, excluded due to (proviso (i) par (c)).

• When is it taxable? Amounts received for services rendered are taxable in

the year in which the amount is received or accrued irrespective of the period
to which the services relate.
• ‘Services rendered or to be rendered’: taxpayers are taxed on the full
amount, regardless of when the services were rendered. E.g. the full amount
of salary paid in advanced will be included, even if services are only rendered
later.

• Consideration paid for entering into a contract is also included.

• There must be a causal relationship between the amount received and
services rendered.
• Additional awards such as bonuses are included regardless of whether or not
there is a contractual obligation.
 • Proviso (ii): The amount received by a person for services rendered by
another person is specifically included in gross income of the person who
rendered the services.
• Leave is a condition of service and is included in gross income and is taxed
(not part of a severance benefit).

• In the Stevens vs CSARS case:

• An ex gratia payment was made (by moral obligation, there was no legal requirement to do
so) by the company to the taxpayer, to compensate the taxpayer for the loss of a share
option when the company was voluntarily liquidated.
• It was held that the payment was linked directly to the tax payer’s services and
employment and therefore the receipt will fall within par(c).

• See example 4.1 (p. 63)

- Always look at causal relationship between services rendered and amounts received =
included.
- E.g. ‘tips’ received, although voluntary amounts, it will be included by virtue of par(c)
because of the causal relationship. (Voluntary award specifically included.)

5. Restraint of trade

• Par (cA) of the definition of ‘gross income’, section 1(1) of the ITA includes in
gross income any restraint of trade payments received by a person who:
- Is a ‘labour broker’ without a certificate of exemption, or
- Is a ‘personal service provider’, or
- Is a ‘personal service company’ or a ‘personal service trust’.

• The right to trade freely is a capital asset, therefore, the right to trade freely is
an incorporeal asset and the compensation paid for the loss of such a right
is a receipt of a capital in nature.

Amounts received from these persons, will therefore be included in gross income irrespective of
whether it is capital in nature or not.

Restraint of trade payments of a capital nature received by companies or trusts, that are not
personal service providers will not form part of gross income.

• Par (cB) also includes restraint of trade payments received by or accrued to

any natural person with regards to:
- Any past, present or future employment or
- The holding of an office.

• A restraint of trade payment received by a natural person that does not

relate to employment, will not be included in gross income.
- E.g. if a natural person sells his business as a sole proprietor and the buyer
places a restraint of trade, it will not be included as it is capital in nature.
 • The payer of a restraint of trade will be allowed to claim a reduction under
s11(cA) provided that the recipient is taxed under par(cA).
- The receipt is taxed immediately and in full in the hands of the receiver, but
the deduction in the hands of the payer must be spread over a certain
period.
• A restraint of trade payment is not a payment for services rendered, but a
payment for an undertaking not to render services (in competition with the
payer).

6. Services: Compensation for termination or variation of employment

• Par (d) of the definition of ‘gross income’, section 1(1) of the ITA includes
amounts in respect of the termination or variation of any office or employment.

• Par (d)(i): In the case of the relinquishment, termination, loss, repudiation,

cancellation or variation in office or employment by the employer or
associated institution:
- it must be determined whether it also meets the requirements of a
severance benefit.
- This will determine in which column of the subtotal method the amount is
included and in terms of which tax table the normal tax thereon must be
calculated.

If an amount is received under par(d)(i) it must be determined whether it meets the requirements of
a severance benefit.

• Par (d) also includes amounts received as a result of employer-owned

policies of insurance that are paid out or ceded. As provided in:
- Par (d)(ii): Proceeds of the policies of insurance directly or indirectly paid to
an employee, dependent or nominee.
- Par (d)(iii): Policy of insurance ceded to an employee, dependent or
nominee (except where the policy is a risk policy with no cash value or
surrender value).
 • Proviso (bb): amounts that become payable as a consequence of a person’s
death is deemed to be an amount that accrued to him immediately prior to his
death and is therefore included in gross income for the period ending on the
death date.

• Proviso (cc): Amounts paid or ceded to a dependent or nominee are deemed

to be received by or accrued to the employee. This results in the employee
including the amount in their gross income, even if the dependent or nominee
receives the money.

• Amounts that fall within the terms of par(d):

- The unexpired portion of a contract received by an employee from the
employer for the breach of a contract.
- Payment made by a company for the resignation of a managing director.
- Payment made by a company to the managing director for the acceptance
of a smaller salary in future or to surrender future rights for a pension.
- The amount received by a director for surrendering his right to a permanent
directorship.
- Compensation paid for the death of any person due to activities related to
the employment activities.
- An asset given to an employee upon retirement.

• Par (d) specifically excludes par (a) annuities which therefore in effect
applies to lump sums except i.t.o par(d)(ii).
• Remember: insurance pay-outs received by employers are included in gross
income under par(m). Whereas par(d)(ii) and par(d)(iii) are aimed at insurance
pay-outs received by or ceded to employees. Tax scale for severance
benefits: see pg. 373
under point (c)
Severance benefits: par (d)(i) lump sum if one of the following
requirements are met: NB! Accumulated leave
pay-outs are par (c) and
not par (d) inclusions.
-The person is 55 years of age, or
-The person has become permanently incapable of holding his or her office
or employment due to sickness, accident, injury or incapacity through
infirmity of mind or body, or
- The person’s employer:
▪ Has ceased to carry on or intending to cease carrying on the trade-in
respect of which he or she was employed or appointed, or
▪ Made a general reduction in personnel or a reduction in personnel of a
particular class and he or she has become redundant in consequence
thereof.
• Although severance benefits are included in gross income, they are subject
a different tax scale.
• It will be included in column 1, except if the employee held more than 5% of
the issued share capital in the company then it is included in column 3.
 • The taxability of the two types of par (d)(i) amounts can be summarised as
follow:
TYPE TAXABILITY
Par (d)(i) amounts that don’t meet Include in gross income in column 3
requirements of the definition of Tax in terms of the progressive tax
severance benefit table applicable to the taxable income
of a natural person.
Par (d)(i) amounts that meet Include in gross income in column 1
requirements of the definition of Tax in terms of the separate table
severance benefit applicable to severance benefits.

Students are advised to keep SB in a separate column, together with retirement fund lumpsum
benefits) when calculating the taxable income of a natural person. This is because the normal tax
payable on such amounts are calculated separately in terms of the same tax table applicable to
both amounts.

Par(d) = any “office or employment.”

7. Services: Communication of amounts due Par(f) = “any contract of employment
or service.”

• Par (f) of the definition of ‘gross income’, section 1(1) of the ITA includes:
- any amount received or accrued in commutation (substitution) of amounts
due under a contract of employment or service in gross income.
• Commutation: when a person substitutes his right to receive a certain benefit
with a right to receive another benefit.

• Example: An employee may substitute his right in terms of his service

agreement to be given notice before the termination of his services for a cash
payment.
• The above mentioned can also be a severance benefit if it meets all the
requirements.

8. Lease premiums

• Par (g) of the definition of ‘gross income’, section 1(1) of the ITA states that:
- If an amount is considered a lease premium, then the whole amount is
included in the gross income of the lessor in the YOA it is received or
accrues to.

Irrespective of whether the amount is capital or revenue in nature.

• Lease premiums are amounts paid by the lessee to the lessor. (NB! not vice
versa)
• Lease premiums must have an ascertainable monetary value.
• Par (g) does not make provision for spreading the lease premium amount.
(However, s11(h) may provide relief in certain circumstances – covered in
Tax 398).
• The same amount that is deductible by the lessee paying the lease premium
(s 11(f)), is the amount that will be taxable in the hands of the lessor (i.t.o.
par(g))

• What are lease premiums?

- Amounts paid by the lessee to the lessor (NB! not vice versa), whether in
cash or otherwise, for the use, or right of use of certain assets distinct from
and in addition to, or instead of, rent (Butcher Bros).
- Must have an ascertainable monetary value.
- Lease premium: normally (but not necessarily) takes the form of a cash
lump sum payment at the commencement of the lease and is not
refundable at the end of the lease period.
- Also applies to a premium passing from a sub-lessee to a sub-lessor (the
principle lessee). This is when the lessee sublets an asset to a sub-lessee.

• What are not lease premiums?

- Rental deposits (purpose generally to cover potential damages – not for use
or occupation or right to use or occupy and is usually refundable at the end
of the lease period).
- Up-front rental payments (‘Bullet-rental’ – is generally for the use or
occupation or right of use or occupation but is not in addition to or in lieu of
rent – remains rent in nature).
- If a lessee cedes his right to a 3rd party, the amount is not a lease premium.
This does not meet the requirement of a lease premium that payment must
pass from a lessee to a lessor and won’t be included in the gross income of
the original lessee due to it being a capital nature.

• Amount deductible by the lessee paying the premium:

LESSOR LESSEE
Gross income par(g) S 11(f) deduction
Include the full amount in one Spread the deduction over the
year. lease period.

• Example:
9. Compensation for imparting knowledge and information

• Par (gA) of the definition of ‘gross income’, section 1(1) of the ITA defines it
as:
- An amount received or accrued to
- From another person as consideration, for the imparting of, or the
undertaking to impart, knowledge or information, or
- For the rendering of, or the undertaking to render, any assistance or service
in connection with the application or utilisation of such knowledge or
information.
• ‘Know-how’ payments for imparting any scientific, industrial or commercial
knowledge or information, e.g. technical advisory.
• Such an amount is taxable in full in the year of accrual or receipt.
• Imparting = disclosing or communicating.
• The imparting of information must be distinguished from the sale of
copyrighted written material. The latter is not the ‘imparting’ of information
unless the written material is provided as part of a training course.

10. Leasehold improvements

• Par (h) of the definition of ‘gross income’, section 1(1) of the ITA:
- ‘Improvement’ = an addition or alteration which increases the quality or
value of something.
- The value of improvements effected on the land or to the buildings of
the lessor (owner) is included in the lessor’s gross income.

• Requirements:
- Lessor must have a right to have the improvements effected to his property.
- An agreement must exist where the lessee is obliged to effect the
improvements.

• When?
- The right to have the improvements effected accrues when the lessor
acquires the right. The lessor acquires the right on the date when the lease
agreement is signed.
- If the amount is stipulated in the lease agreement, the amount is included in
the lessor’s gross income in the YoA when the parties sign.
- If the amount is not specified in the lease agreement, the date of
completion of the improvement is the date of accrual because the amount
can only be determined at this point in time.
• Amounts included in the gross income of the lessor are:
- The amount stipulated in the agreement as the value of the improvements,
or
- The amount stipulated in the agreement as the amount to be expended on
the improvements, or
- If no amount is stipulated, an amount representing the fair and reasonable
value of the improvements.

• Always use the agreed-upon amount, and not the actual. Even if the lessee
spends less, still include the full amount agreed upon.
• Fair and reasonable value: depends on the facts and circumstances of the
case, however, in several cases, the fair and reasonable value may be equal
to the cost of the improvements.
• What happens if lessee spends more than the stipulated amount?
- Only the amount stipulated in the agreement is included in gross income of
lessor.
- The lessee can spend more than the stipulated amount, but the excess is
voluntary expenditure which is not part of the right to have improvements
affected that accrued to the lessor under par(h).

• What happens if the lessee spends less than the stipulated amount?
- Only the amount stipulated in the agreement must still be included in the
lessor’s gross income.

• What if the agreement has a stipulated minimum amount?

Stipulated minimum amount and Stipulated minimum amount and

no more specific improvement

If there is no obligation on the lessee If there is an obligation on the lessee

to effect improvements in excess of to incur a stipulated minimum
the stipulated minimum amount: amount (e.g. not less than R1 000
000) to effect specific
- Treat ‘stipulated minimum amount’
improvements (e.g. to construct a
as a ‘stipulated amount’ for the
specific type of building such as a
purposes of par(h).
hotel):
- Therefore: Specified minimum - Treat ‘stipulated minimum
value included in gross income. amount’ as if no amount has
been stipulated for purposes of
par(h).

- Therefore: Fair and reasonable

value included in gross income.
 Fringe benefits will be covered in Chapter 8, until then, the
value of the cash equivalent will be stated in assessments.
11. Fringe benefits

• Par (i) of the definition of ‘gross income’, section 1(1) of the ITA.
- Only applies to employee or officeholders.
- Par(i) overrides par(c) and any benefit or advantage to which par(i) applies
can thus not be considered for par(c) – proviso (i).
- Par(i) doesn’t take voluntary amounts into account unlike par(c).
• If an employer releases an employee from an obligation it constitutes a fringe
benefit.
• Benefits and advantages received by the employee from the employer that
normally do not consist of cash.
• Cash equivalent is included in gross income. The calculation of cash
equivalents is governed by the 7th schedule.
• Example: Employee is awarded the right to use an employer’s motor vehicle.
This is where the benefit cannot be turned into money value.

12. Proceeds from the disposal of certain assets

• Par (jA) of the definition of ‘gross income’, section 1(1) of the ITA refers to:
- The disposal of any asset manufactured, produced, constructed or
assembled. Cannot be purchased.
- And is similar to any trading stock used for the purposes of manufacture,
sale or exchange.

• If for example a company manufactures motor vehicles and uses some as

demo models (fixed capital assets and not trading stock), the sale will be
capital in nature.
• But if these assets are similar to the trading stock of the company it will be
included in gross income.

Additional example:
• A manufacturer uses one vehicle in the business as a demonstration model (with a CP of
R250 000 in 2018) and gave the right of use of a similar vehicle to an employee as a fringe
benefit (during 2018 YoA).
• The assets are both disposed of during 2019 for R280 000 per vehicle.
• The following will occur:
- The assets will be included in the 2018 C/B and 2019 O/B at a cost of R250 000 per
vehicle.
- The full proceeds from the vehicles (R280 000) are included in gross income par(jA) due to
it being similar to the company’s trading stock.
13. Dividends

• Par (k) of the definition of ‘gross income’, section 1(1) of the ITA.
• Distinguish between local and foreign dividends (in section 1(1) of the ITA).
Refer to previous chapters on sources.
• Also extends to dividend species. E.g. distributing stock instead of cash as
dividends. It is still the fruits of the shares and therefore is income in nature.

14. Key-man insurance policy proceeds Par(d) = employee is the beneficiary

Par(m) = business/employer is the beneficiary

• Par (m) of the definition of ‘gross income’, section 1(1) of the ITA.
• Employers hedge themselves against risks (such as a decline in profits) that
relate to the death, disablement or illness of an employee or a director.
• Amounts received by or accrued to the policyholder (employer) in respect of
key-man insurance policy are included in gross income, including amounts
received by way of any loan or advance.

• The final amount paid out must be reduced by the amount of any loan or
advance that is or has previously been included in the employer’s gross
income (proviso to par (m)).
• If the employee dies, the policy proceeds are paid to the employer and he
must include this amount in his gross income.

15. Amounts included in the taxpayer’s income

• Par (n) of the definition of ‘gross income’, section 1(1) of the ITA.
- Include all amounts in gross income that are specifically included in a
taxpayer’s ‘income’ through other provisions of the ITA.
- These amounts are further deemed to have been received by or accrued
to the taxpayer.

• Examples:
- ss 7(2) and 7(3) – Chapter 7
- s8C – Chapter 8
- s8(4) – Tax 399 (further deemed to be from source in RSA)

- Do not need to know these sections in detail.

- They cause an amount to be included in income but not in gross income.
- And then if it is included income, it will be included in gross income due to par(n).

Guidance on section referencing

Example when referencing:

Special inclusion
• Par(d) of the definition of gross income in section 1(1) of the ITA.

General definition
• General definition of gross income in section 1(1) of the ITA.
 CHAPTER 5 EXEMPT INCOME

1. Exemption fundamentals Know differences: income vs. gross income vs. taxable income

Section 1(1) of the Income Tax Act: definition of ‘income’:

Gross income less exempt income equals income

• Include an amount in gross income even if the full amount or a portion

thereof will qualify for an exemption.

• Include the amount in gross income and then exempt the amount (if
applicable). Do not include a net amount in gross income i.e. amount
received or accrued less exemption.

• Majority of exemption provisions are contained in s10 of the ITA.

• Exempt income refers to amounts ‘received’ or ‘accrued to’ that are not
subject to normal tax.

• However, not all amounts that qualify for an exemption are exempt from all
taxes, the amounts referred to under s10 of the ITA are only exempt from
normal taxes.

• Normal tax: taxes imposed under ss5 to s37H of the ITA.

• Section 23(f): No deductions i.r.o exempted amounts (revise with chapter 6).

If you correctly include an amount in gross income but proceed to incorrectly exempt it, you forfeit
the marks awarded for the gross income inclusion (see appendix A of module framework).

TEST
2. Exemptions incentivising investments
A. Interest received by natural B. Interest received by non-
persons s10(1)(i) residents s10(1)(h)
Available to Resident and non-resident natural Non-residents (any person), i.e.
persons. natural and juristic persons.
Not for juristic persons such as
companies or trusts.

For what Interest received or accrued from an Interest received or accrued from an
RSA source (s9(2)(b)(i) & (ii)). RSA source (see s9(2)(b)(i) & (ii)).
Not for foreign interest.

Amount Depends on TP age: No limit. All interest is exempt.

• 65 or older = R34 500
• Other: R23 800
(see below)

Not applicable To interest received in respect of a • s10(2)(b): Does not apply if

to tax-free investment as defined in interest takes form of an annuity.
s12T.
 • s10(1)(h)(i): Physical presence
• s10(1)(h)(ii): Permanent est. of
non-resident in RSA.
(see below)

• s10(1)(i) provides an exemption for interest as long as it does not exceed:

(i) R34 500 (for someone who is 65 years of age); or
(ii) R23 800 (for any other case)

• The normal tax exemption for interest received by non-residents (s10(1)(h))

does not apply in the case of a:
natural person
- who was physically present in SA for a period exceeding 183 days in
aggregate during the twelve-month period preceding the date on which the
interest is received by or accrues to that person (s10(1)(h)(i)); or
- if the debt from which interest arises is effectively connected to a permanent
establishment of that person in SA (s10(1)(h)(ii))
any other person
- if the debt from which interest arises is effectively connected to a permanent
establishment of that person in SA.

Integration with WHT

- Interest received by a non-resident is not tax-free since it may be subject to 15% WHT on
interest.
- In the case of a non-resident, if none of the above normal tax exemptions apply, the foreign
person will be exempt due to WHT on interest (s50D(3)).
C. Amounts received from tax-free investments
Section 12T
Applicable to Natural persons (or a deceased or insolvent estate of
such a person).

Death or insolvency S12T(1) If someone dies, the person’s TF investments

will be added to their estate but the returns will be
exempt from income and dividend tax.

Exemption S12T(2) Exempts from normal tax any amounts received

i.r.o the tax-free investment (dividends, interest, profit
Note: Unlike s10(1)(i), s12T(2) does arising from the disposal of the underlying investments).
not place a limit on the interest amount
that can be exempted. S12T(3) excludes any capital gain or capital loss i.r.o
the disposal of the tax-free investment, i.e. capital gain or
loss is disregarded for CGT purposes.

Investment limit under s12T(4) R33 000 per year; and

R500 000 per lifetime

The TP may have more than one tax-free (TF)

investment, but then the limit applies in respect of the
total of all TF investments.

Annual and lifetime limit not affected by reinvestments of

interest received or transfers between TF investments
(s12T(5))

If investment limit is exceeded Penalty: 40% of the excess contribution will be deemed
under 12T(7)(a) and (b) to be normal tax payable.

Excess x 40% = normal tax payable

In both cases, all proceeds received from TF investments

will be exempt from tax despite exceeding the limits.

Service providers may no longer accept contributions

over and above the limitations.

The scenario will state whether or not the investment is a tax-free investment as defined in s12T.

Section 64F - HONS

Dividends in respect of a 12T investment also exempt from dividends tax.
 If the question doesn’t state a capital
portion, then this section cannot apply.
D. Purchased annuities s10A

• S10A: Exempts capital portion of an annuity amount that has been included
in gross income under par (a) of the definition of gross income in section 1(1)
of the Act.
• The capital element is calculated in accordance with a formula, however, this
amount will be provided for assessment purposes
• Purchased annuities are annuities that are bought from an insurer for a
lump-sum cash consideration.

• Excluded from S10A:

- Annuities from pension
- Provident and retirement annuity funds
- Inherited or donated annuities
- Annuities originating from the sale of a business or asset
- Annuities from services rendered

• S10A(1) deals with the purchaser:

- A natural person or his deceased or insolvent estate or,
- A curator bonis of, or a trust created solely for the benefit of any natural
person.

• S10A(2) deals with the requirements of an annuity contract:

- The insurer agrees to pay the purchaser or purchaser’s spouse until the
expiry of the term.
- Purchaser agrees to pay a lump sum cash consideration
- No other amount can be payable to the insurer, besides that of the annuity.

E. Proceeds from insurance policies

The Explanatory Memorandum on the Taxation Laws Amendment Bill, 2011, provides the following
background to the insertion of para 12C in the Seventh Schedule:
 • As per the Explanatory Memorandum: the proceeds from the employer-
owned insurance policy (employee is intended to directly or indirectly
benefit) can be structured in one of two ways:
i. The employee = direct beneficiary, resulting in the proceeds being paid
directly by the insurer to the employee; or

ii. The employer = beneficiary under the policy and the proceeds are paid
out by the insurer. There is a corresponding obligation on the employer to
pay over the proceeds to the employee. This structure effectively leaves
the employer in a neutral position with the benefit being received by the
employee.

• s10(1)(gG) and s10(1)(gI) determine when the proceeds received in respect

of certain insurance policies can be exempted.

PAY-OUT ON DEATH, DISABLEMENT, ILLNESS

Employer = both Person other than an Employee/his
policyholder and employer = beneficiaries =
PROCEEDS RECEIVED OR ACCRUED
TAX CONSEQUENCES RELATING TO

beneficiary policyholder directly or indirectly

receive a benefit
Proceeds from an Proceeds from an If proceeds accrue to
insurance policy relating insurance policy the employee, they are
to the death, relating to the death, included in the
disablement, illness or disablement, illness or employee/director’s
unemployment of any unemployment of any gross income
person who is insured person who is insured par(d)(ii) of ‘gross
i.t.o the policy, including i.t.o the policy, income’ but are then
an employee of the including an employee exempt under
policyholder, are exempt of the policyholder, are s10(1)(gG). Note 4
(s(10(1)(gl)). Note 3 exempt (s(10(1)(gl)).
Note 3

10(1)(gl) 10(1)(gG)
Key-man insurance policies: Par d(ii) and (iii) of the GI
Links with par(m) of the gross definition in sec1(1).
income definition in sec 1(1).

Note 3 Note 4
• Some of these policies are capital in Par(d)(ii) of gross income applies when:
nature and therefore not taxed, however - An employer = the policyholder and the
in the case of an income protection employee or dependent or nominee of the
policy and annuities paid i.t.o a policy, employee is the beneficiary under the
the proceeds would be included in policy;
gross income. - A company = policyholder and a director of
• Proceeds from life and disability policies the company or its dependent or nominee is
are treated the same. the beneficiary under the policy;
• S10(1)(gl) applies to a policy of - An employer (or company in case of a
insurance relating to the death, director) is the policyholder and beneficiary
disablement, illness or unemployment of under the policy but is contractually obliged
a person who is an employee of the to pay proceeds under the policy to the
policyholder. employee or director, or his or her
• But it does not apply if the benefits are dependents or nominee.
payable to a retirement fund.
3. Exemptions relating to dividends
• Different exemptions for RSA source and foreign dividends. Dividends as a
general rule are generally exempt from normal tax.

• Dividends = distribution of a company’s after-tax profits.

A. Dividends from resident companies s10(1)(k)(i) – “local dividends”

Normally exempt, but not if:

S10(1)(k)(i) Dividend received by a resident from a Real Estate Investment Trust (REIT) = fully
proviso taxable but not exempt in the hands of the recipient.
(aa) Dividend from REIT deemed, in essence, to be rental income therefore not exempt.

(dd)-(ii) Not in syllabus (ignore Silke 5.3.3 – 5.3.7)

(jj)-(kk) Honours
- If dividend constitutes a portion of an annuity refer s10(2)(b)

• The nature of the taxpayer is irrelevant – s10(1)(k)(i) available for natural and juristic persons.
• S10(1)(k)(i) available for residents and non-residents.
• Dividends declared by a resident company are regarded as being from a source within RSA
s9(2)(a). If a non-resident then receives dividend it is included in their gross income, but then
exempt under s10(1)(k)(i).

B. Foreign dividends

• Section 10B contains full and partial exemptions - Ignore headquarter companies.
• See definition of ‘foreign dividend’ in s10B(1) of the ITA.
• Include full foreign dividend, then exempt full foreign dividend if it meets all the requirements,
and if not apply s10B(3).
 THE FOLLOWING FOREIGN DIVIDENDS ARE FULLY EXEMPT
S10B(2)(a) Participation exemption (Ignore exclusion in ss10B(4) and (6))
An amount will be exempt if:
• The person receiving the foreign dividend
holds ≥10% of equity shares and voting rights
• The recipient of the foreign dividend is a
company, any interest held by another
company in the same ‘group of companies’
(s 1) is added to the 10%.

S10B(2)(b) Country-to-country exemption (Ignore)

S10B(2)(c) Controlled foreign company (CFC) exemption (Ignore)

S10B(2)(d) and Dividends declared in respect of JSE-listed shares are exempt from normal
(e) tax if:
a) The shares are listed on JSE and are not distribution of an asset in specie.
b) From 1 March 2014: It is a foreign dividend in the form of an in-specie
distribution received in respect of JSE listed share by resident company
(not apply to a natural person).

Only if a foreign dividend is not fully exempt, then consider the partial exemption in 10B(3):
S10B(3) Ratio exemption
Only applies to the extent that a foreign dividend is not exempt in terms of
10B(2)(a) – (e). Then it is calculated as follows:

• Natural person, deceased, estate or trust (thus not companies):

𝟐𝟓
𝒙 𝒇𝒐𝒓𝒆𝒊𝒈𝒏 𝒅𝒊𝒗𝒊𝒅𝒆𝒏𝒅
𝟒𝟓

• Any person not mentioned in (i) and an insurer of policy funds:

𝟖
𝒙 𝒇𝒐𝒓𝒆𝒊𝒈𝒏 𝒅𝒊𝒗𝒊𝒅𝒆𝒏𝒅
𝟐𝟖

Given in act as above, however calculated as:

𝑴𝒂𝒙 𝒎𝒂𝒓𝒈𝒊𝒏𝒂𝒍 𝒓𝒂𝒕𝒆 − 𝟐𝟎% (𝒅𝒊𝒗𝒊𝒅𝒆𝒏𝒅 𝒕𝒂𝒙)

𝑴𝒂𝒙 𝒎𝒂𝒓𝒈𝒊𝒏𝒂𝒍 𝒓𝒂𝒕𝒆

Examples:
• Natural persons or trusts: (45–20)/45
• Company: (28-20)/28

S10B(5) Exemptions in 10B(2) & (3) do not apply in respect of any portion of an annuity
4. Exemptions relating to employment

A. Foreign pension

• Any foreign pension will be included in the gross income of a resident. Certain
foreign pensions are, however, exempt from normal tax, such as

• s10(1)(gC)(i)
- Exempts any amounts received by or accrued to any resident under the
social security system of a foreign country; or

• s10(1)(gC)(ii)
- Any lump sum, pension or annuity received by or accrued to any resident
from a source outside the RSA, as consideration for employment outside
RSA.
- Source = where services where rendered.
- Only applicable to amounts received from foreign funds.

• An apportionment of the amount must be made if services were rendered

both inside and outside the RSA:
𝑃𝑒𝑟𝑖𝑜𝑑 𝑑𝑢𝑟𝑖𝑛𝑔 𝑤ℎ𝑖𝑐ℎ 𝑠𝑒𝑟𝑣𝑖𝑐𝑒𝑠 𝑤𝑒𝑟𝑒 𝑟𝑒𝑛𝑑𝑒𝑟𝑒𝑑 𝑜𝑢𝑡𝑠𝑖𝑑𝑒 𝑅𝑆𝐴
𝐴𝑚𝑜𝑢𝑛𝑡 𝑓𝑟𝑜𝑚 𝑠𝑜𝑢𝑟𝑐𝑒 𝑜𝑢𝑡𝑠𝑖𝑑𝑒 𝑅𝑆𝐴 = x Total amount received
𝑇𝑜𝑡𝑎𝑙 𝑠𝑒𝑟𝑣𝑖𝑐𝑒 𝑝𝑒𝑟𝑖𝑜𝑑

B. Unemployment insurance benefits

• s10(1)(mB): Exempts unemployment benefits in the hands of the recipient.

The Unemployment Contributions Act stipulates that both the employee and the employer have to
make contributions to the Unemployment Insurance Fund. If the employee subsequently losses
their job the employee can claim unemployment benefits for a prescribed period of time.

C. Uniforms and uniform allowances

• s10(1)(nA): Benefits granted by the employer to the employee are included in

the employee's gross income. Therefore, the cash equivalent of a special
uniform will be included.
• The exemption equally applies to any allowance that the employer pays to the
employee instead of giving the employee a uniform.
• It is however exempt if:
- Clearly distinguishable from ordinary clothing and
- The employee is required to wear a uniform on duty.
D. Relocation benefits

• s10(1)(nB): Where an employer pays for the relocation cost of the employee
when he or she is transferred. The benefit accruing to the employee will be
exempt. (Same for new employee appointed and termination of an
employee’s employment.)
• Expenses that are included:
- Transport costs for transporting the employee, family or possessions.
- Costs of the employee to settle in a new house and sell his previous
residence.
- Hiring residential accommodation for the employee or household
members for a maximum period of 183 days after the transfer took place. It
must however only be temporary.
• Exemption for the reimbursement is given on the following:
- New school uniform
- Replacement of curtains
- Registration of mortgage bond and legal fees
- Telephone, water and electricity
- Transfer duty
- Cancellation of a mortgage bond
- Agent’s fee on the sale of the employee’s previous home
• The employer must have either incurred the expenses himself or
reimbursed the employee. The exemption has no monetary limit, as long as
the expense was actually incurred.
• SARS won’t accept a loss on the sale of the employee’s previous house or
architect’s fees for designing or alterations.
• Only actual expenses are exempt, thus if an allowance is paid according to
the number of months of relocation, the amount will be fully taxable in the
hands of the employee, unless there is an intention for the employer to
reimburse for the actual allocation of expenses.

E. Employment outside RSA

• s10(1)(o)(ii): Exempts any remuneration (i.e. salary, leave pay, wages,

overtime pay, bonuses, commissions, fringe benefits etc.) received or accrued
in respect of services rendered outside RSA, for or on behalf of any
employer if that person was outside RSA for:
- A period or periods exceeding 183 full days in aggregate during any 12-
month period and,
- For a continuous period exceeding 60 full days during such period of 12
months and,
- Services were rendered during the period of absence from RSA and,
 - Services were rendered for or on behalf of an employer who can be located
in or outside RSA.

• Proviso (A): Days in transit through RSA are deemed to be outside RSA.
• Proviso (C): If remuneration is received in respect of services rendered in
more than one YoA, remuneration is deemed to have accrued evenly.

Summary

• S10(1)(o)(ii) – requires the existence of an employer-employee relationship. The services

rendered outside SA must be rendered on behalf of an employer.

• The remuneration received must be for services rendered – amounts payable by an ER to an

EE that do not relate to services rendered do not qualify for the exemption e.g. payments for
relinquishment, termination, loss of office (severance benefits).

• 183-day requirement:
- Full days (24 hours)
- Count calendar days (not only workdays) – includes weekends, public holidays, annual
leave days, sick leave days that are spent outside the RSA.
- Days need not be continuous.
- If you remain in the country after you’ve finished rendering the services, it doesn’t count
towards the 183 days.

• SARS supporting documents (onus of proof = on TP)

- Letters of secondment, employment contracts, copies of passports etc.

• Apportionment must be done in workdays and not in months. (Requirements=calendar days)

• Services inside SA cannot qualify.
• Limitation of R1 000 000 will apply from 1 March 2020 – therefore not relevant to the 2019
YoA.

s10(1)q vs. s10(1)qA: Bursaries for people with

5. Exemptions that incentivise education disabilities vs. those without.

A. Bursaries and scholarships

• Bursaries awarded to non-employees, employees and relatives of employees

are treated differently.
• A reward or reimbursement of study expenses borne by a person, after the
completion of studies = does not qualify as it is not to ‘enable’ or ‘assist’ a
person to study.

BURSARIES AND SCHOLARSHIPS REQUIREMENTS (s10(1)(q))

Non-employees and not Employee Relative of employee
relative of employee

Exempt • Bonafide bursary. • Bonafide bursary. • Bonafide bursary.

when: • Granted to enable or • Granted to enable or • Granted to enable or
assist a person to assist EE to study. assist relative of EE to
study. • At a recognised study.
• At a recognised educational or research • At a recognised
educational or institution and. educational or research
research institution. institution and,
 • The employee agrees • The employee’s
to reimburse the remuneration proxy does
employer if fails to not exceed R600 000.
complete for reasons
other than death, ill
health or injury.

Limit: None None • Grades R-12: R20 000

• NQF 1-4: R20 000
• NQF 5-10: R60 000
(Note: per relative)

‘Remuneration proxy’ – this amount will be provided per SAICA’s examinable pronouncements.

Relative (s1) – “in relation to any person, means the spouse of that person or anybody related to
that person or that person’s spouse within the third degree of consanguinity…”

B. Bursaries and scholarships (s10(1)(qA)

• Definition of disability in section 6B(1) requires that the injury must have
been or will be for longer than a year and is diagnosed by a medical
practitioner.
• Same requirements as s10(1)(q) but a different threshold.
• Threshold:
- Grades R-12: R30 000
- NQF 1-4: R30 000
- NQF 5-10: R90 000
6. Exemptions aimed at amounts that are subject to withholding tax

A. Interest paid to non-residents Refer back to s10(1)(h) in and chapter 21 notes.

• s10(1)(h) Interaction between exemptions and withholding taxes on interest.

- Interest paid to a foreign person is subject to 15% withholding tax on
interest, if:
▪ Interest is from a SA source.
▪ SA source = interest paid by a resident (unless the interest is attributable
to a permanent establishment outside SA). (s50B – chapter 21)
▪ Is received or accrued in respect of any funds used or applied by any
person in SA. (s9(2)(b) – chapter 3)

7. Other exemptions

A. Alimony and maintenance

• s10(1)(u): Exemption for an amount received i.t.o. alimony or allowance granted

or agreement of separation entered into after 21 March 1962.
• The amount will be gross income of the receiver (par (b) of the definition of
‘gross income’, section 1(1)).
• Does not apply when there is a s7(11) deduction.
• The amount can only be claimed if the former spouse paid the alimony from
after-tax income.

B. War pensions and awards for diseases and injuries

SECTION WHAT IS EXEMPT?
10(1)(g) War pension and awards or compensation for
diseases contracted through mining.

10(1)(gA) Disability-pensions

10(1)(gB)(i) Workmen’s compensation

10(1)(gB)(ii) Pensions paid due to occupational-related

injuries or illnesses contracted before 1 March
1994.

10(1)(gB)(iii) Any compensation paid by an employer on the

death of a person (death is caused by
employment) over and above Workmen’s
compensation.
The amount is restricted to a maximum
exemption of R300 000.
10(1)(gB)(iv) The compensation received from the Road
Accident Fund (within South Africa)
 CHAPTER 21 CROSS-BORDER TRANSACTIONS

1. Principles of South African taxation of cross-border transactions

Residence vs. source-based tax system

Cross-border transactions may be subject to tax in the following jurisdictions:

Residence based Source based

Taxes residents on WWI without having Taxes income of residents based on

regard to the source of the income. (E.g. whether its source is in a particular country
South Africa) and the residential status of taxpayer is
irrelevant. (E.g. Kenya)

The definition of gross income in section 1(1) of the Act, distinguishes between persons who are
‘residents’ for South African income tax purposes and those who are not.

- Non-residents: (see chapter 3) are taxed on receipts or accruals from an RSA-source. This
is usually in the form of a withholding tax (WHT) and they may also be subject to capital
gains tax.
- Residents: (see chapter 3) are taxed on WWI.

Mechanisms to avoid double taxations:

• S6quat: South Africa provides relief to its residents for certain foreign taxes.
• Certain cross-border transactions are exempt from tax. This can be afforded by the
source country or the country of residence.
• Tax treaties or double tax agreements (DTA’s). These are imposed by the governments
of the relevant countries and limits the right of one of the countries to implement taxes.

2. Source rules
The source of income can be determined in terms of statutory source rules or common
law established in case law:

First consider the statutory source rules in s9 – only if the source of the income is not specified in
section 9 (i.e. if s9 is silent on the source of a particular receipt or accrual) will the common law
source principles be applied.

Statutory Source Rules

- S 9(2) positive: when is a receipt/ accrual deemed to be from a source within SA.
- S 9(4) negative: when is a receipt/accrual not deemed to be from a source within SA.

Rules to a number of income streams commonly encountered in cross-border transactions:

Category Crux From source in RSA From source outside
RSA
Dividends The source of dividend s 9(2)(a) dividend received s 9(4)(a) Foreign dividends
income depends on the by or accrued to that received by or accrued to
residence of the person. that person.
 company that pays the “Dividend” as defined in s “Foreign dividend” as
dividend. 1(1) = paid by resident defined in s 1(1) = paid by
company. foreign company.

Interest The source of interest 1. s 9(2)(b)(i) interest is s 9(4)(b) – interest that

as defined in s income determined on one attributable to an does not meet the criteria
24J of two bases: amount incurred (paid) in s 9(2)(b)(i) or (ii).
• The residence of the by a person that is a
person paying the resident unless the
interest; or interest is
• The place where the attributable to a Then not from
permanent source in RSA.
funds/ credit
obtained is being establishment (fixed
used or applied. place of business) of
that resident outside
the RSA.
2. s 9(2)(b)(ii) interest is
received or accrues in
respect of the
utilisation or
application in the
Republic by any
person of any funds/
credit obtained in terms
of any form of interest-
bearing arrangement.

Amounts The source of the amount s 9(2)(j): immovable s 9(4)(d): amounts derived
received from received in respect of the property is situated in from the disposal of s
the disposal of disposal depends on the RSA. 9(2)(j) and s 9(2)(k)-
immovable location of the immovable assets are from a source
property property. See s 9J(1) same rule applies outside RSA if the
if immovable property is amounts do not meet the
Note: this source rule also disposed of as trading stock. criteria as set out in the
applies to the disposal of an abovementioned sections.
interest in or right to
immovable property as
contemplated in par 2 of the
8th Schedule to the Income
Tax Act.

Amounts The source of the amount 1. Resident (s 9(2)(k)(i)): Originating cause not
received from received in respect of the • Asset not effectively located in RSA.
the disposal of disposal is determined connected with
assets other differently for residents permanent
than s 9(2)(j)- and non-residents. establishment of that
assets e.g. resident which is
movable Apply s 9(2)(k)(i) if the situated outside RSA;
property person who disposes of AND
the asset and receives the
• Proceeds on disposal
amount is a resident.
not subject to taxes
 Apply s 9(2)(k)(ii) if the in any country other
person who disposes of than RSA.
the asset and receives the
amount is a non-resident. 2. Non-resident (s
9(2)(k)(ii):
• Asset is attributable
to a permanent
establishment of that
non-resident which is
situated inside RSA.

Amounts Applies to lump sums, s 9(2)(i) Services rendered outside

received from pensions or annuities paid Services rendered in RSA. RSA.
retirement by retirement funds
funds Proviso: apportionment if
Key: where were the services were rendered partly
services rendered? within and partly outside
RSA.
• Portion relating to
services rendered in
RSA = RSA source.
• Portion relating to
services rendered
outside RSA=, not RSA
source.

Common Law Source Rules

Common law source principles

• No statutory source rule for the receipt/ accrual in question?
– Apply case law principles.

• The authority in SA for the determination of the source of an amount is found

in the CIR v Lever Brothers & Unilever case:
i. What is the originating cause of the income (i.e. what gave rise to the
amount – work which the taxpayer does to earn them)?
ii. Where is the originating cause located? (can be the location of the income-
generating asset/ place where services are rendered etc.)

• If an amount has more than one originating cause, the source of the income
will be based on the dominant cause.
• If an amount has more than one dominant cause, apportionment of the
source may be appropriate.
• Courts have pointed out: dangerous to generalise with regard to source.
• Therefore, each case has to be decided on its own facts. (Weigh relevant
facts.)
Guidance to a number of income streams commonly encountered in cross-border
transactions:
Category Crux From source in RSA From source outside
RSA
Rental income s 9 is silent on the source Originating cause located Originating cause not
of rental income – fall back in RSA. located in RSA.
on common law principles.
Ask 2 questions:
1. What is the
originating cause of
the rental income?
2. Where is the
originating cause
located?

However, it follows that it

is too wide of a
proposition.

• If emphasis on the
property let and not
on the business –
where the property is
used.
• If emphasis on the
business and not on
the assets (example
car rentals) – where
the business is
situated.

Amounts s 9 is silent on the source Originating cause located Originating cause not
received in of income from services in RSA. located in RSA.
respect of rendered – fall back on
services common law principles.
rendered Ask 2 questions:
1. What is the originating
cause of the income?
- the services
rendered
2. Where is the originating
cause located?

Note: Directors – services

regarded as being rendered
at the company’s head
office. E.g. a director who is
a non-resident would,
therefore, be liable for SA
normal tax on his fees if the
board of directors meets in
SA.
3. Withholding taxes (WHT)

Crux Who is subject to WHT?

‘Retention’ tax – requirement for a South Africa imposes WHT on the following
purchaser/payer of an item to withhold or income earned from a South African source
deduct from the payment made to the by a non-resident:
seller/receiver a tax and pay it over to
SARS. • proceeds paid to non-resident sellers in
respect of immovable property
disposed of (s 35A)
• interest (s 50A to 50F)

Remember: dividends paid by SA resident company, subject to dividends tax = WHT. (Applies to
dividends paid to both resident and non-resident.) The same is valid for employees’ tax.

Pay WHT Pay net amount

(Proceeds x %) (Proceeds – WHT)

'Agent' 'Principle'
SARS
Purchaser/Payer Non-resident
Resident or Non-resident
Immovable property
Section 35A Immovable Property
Applies if 1. Seller is a non-resident.
2. Asset disposed of is immovable property in SA.
3. Proceeds on disposal >R2 million.
Interest in immovable property (shares) also subjected to s 35A –
refer to s 35A(15) and par 2(2) of Eighth Schedule.

Consequences Buyer withholds from amount payable to seller:

• 7.5% (if seller is NP);
• 10% (if seller is Co.);
• 15% (if seller is Trust); or
• Seller can apply for directive from CSARS.

Of amount payable – “amount payable” = sales price/ proceeds

• If a deposit is paid – only withheld from first payment after-sale is
finalized.

Buyer (‘agent’) • Withholds and pays amount to SARS – WHEN? – identity of

Nothing in framework buyer:
- Resident: 14 days
- Non-resident: 28 days
• Submits return with payment.
• Personal liability – reasonably ‘knew’/’should have known’.

Seller (‘principle’) • Includes gross proceeds in:

Affects framework - Gross income (income in nature), or
- Taxable capital gain (capital in nature)
• WHT = ‘pre-payment’ of tax liability.
Example
Mr X (45 years old and a non-resident for South African Income tax purposes) disposes of
his immovable property in Durban, South Africa for R4 500 000 to Company Y on 1 January
2019. The taxable capital gain on disposal amounts to R1 100 000.

R4 500 000 x 0.075

Interest

Section 50A – 50F Interest

Applies if 1. Interest is = RSA source interest under section 9(2)(b) and,
2. The person receiving the interest = non-resident.

Does not apply if 1. The payer = RSA Government or RSA Bank.

2. Payment made = i.r.o. listed debt.
3. Interest is paid to a natural person and is physically present for
>183 days in a 12-month period prior to date of payment.
4. Interest is on debt connected to PE in RSA and non-resident is a
registered RSA TP.

Consequences • Payer of RSA source interest is to withhold from the amount

payable.
• At a rate of 15% (fixed) of interest.

Payer (‘agent’) • Merely withholds WHT and pays it over to SARS.

Nothing in framework • Return and payment = last day of the month following the month
in which interest was paid.

Receiver (‘principle’) • Gross interest is included in gross income and exempt in terms of
Affects framework section 10(1)(h).
• No 10(1)(h) exemption if:
- Foreign person (NP) is physically present > 183 days in RSA; or
- Debt of the interest is connected to PE of foreign person in RSA
• s 10(1)(i) is only applicable if s 10(1)(h) is not applicable.
• WHT = final tax.
Example
Interest of R200 000 is payable from Company Y (a resident) to Mr X (a non-resident) on 1
September 2018.

Assume Mr X’s normal tax payable for the 2019 year of assessment is R120 000 and that he
is not liable for any other withholding taxes.

200 000 x 0.15

 CHAPTER 6 GENERAL DEDUCTIONS

1. Chapter overview

• Subsequent to determining ‘income’ (gross income – exempt income) the

next step in the calculation of taxable income is to deduct all amounts allowed
as tax deductions under s11(a).
• Unless specifically provided for elsewhere in the Income Tax Act, expenditure
and losses are only deductible if the requirements laid down in the general
deduction formula are met.
• S11(a) contains the positive test (what may be deducted), and s23 contains
the negative test (prohibitions on certain deductions). The prohibitions in s23
must always be considered in conjunction with the general deduction formula.
• The fact that accounting principles (IFRS) or business practice would treat an
amount as deductible is irrelevant.
• Note: specific deductions (not for tax 298) takes preference over general
deductions.

‘[T]he court is not concerned with deductions that may be considered proper from an accountant’s
point of view or from the view of the prudent trader, but is merely concerned with the deductions
which are permissible according to the language of the Act’ [Joffe & Co Ltd v CIR 1946 AD 457 at
165]
2. The general deduction formula
Deduction of expenses:
1. Expenditure and losses (voluntary & involuntary);
2.
3.
Actually incurred (paid or unconditional liability to pay);
During the YoA (s11(a) silent – courts); → not in Act.
‘AND’
4. In the production of income (act that gave rise to expenditure is closely
connected to income-producing activities); → Purpose: income.
5. Not of a capital nature (must be closely related to the income-generating
operations, not the income-producing structure, floating not fixed capital, does
not create enduring benefit); and
6. Laid out for trade purposes (opening words of s11(a) – deduction from the
taxable income derived from the carrying on of a trade).

Positive test – must meet all 6 requirements

A. Expenditure and losses

Expenditure Loss

• Voluntary payment of money (Joffe & • Involuntary deprivation (Joffe & Co)
Co) • Within the context of s11(a) means
• Action of spending funds/ losses of floating capital employed in
disbursement/ consumption (Labat) trade which produces income (PE
• Diminution (even if temporary) or at very Electric Tramway)
least movement of assets of person • E.g. warehouse (capital in nature) burns
who expends (Labat) down – floating stock = loss.

actually incurred  due and payable

B. Actually incurred

• Existence of an absolute and unconditional liability/ obligation to pay

irrespective of the fact that payment will only be made in the future
(Nasionale Pers). (See example 6.2 in SILKE)
• If there is no definite and absolute liability to pay an amount, the expenditure
is not ‘actually incurred’. I.e. if the liability is contingent upon some condition,
only incurred once the condition has been met (Nasionale Pers).
• Expenditure is actually incurred in the tax year in which the liability to pay it
arises and not in the tax year in which it is actually paid (Nasionale Pers).
• A deduction in respect of a disputed claim cannot be claimed if the outcome
of the dispute is undetermined at the end of the tax year (Golden Dumps).

• Actually incurred ≠ necessarily incurred (PE Electric Tramway).

 - E.g. one man my conduct business inefficiently, incurring expenditure that
another man does not incur, but it is incurred and is therefore deductible.

A distinction must be drawn between:

• A case where the existence of the liability itself is conditional and
dependent upon the happening of an event after the tax year in question, in
which event the liability is not actually incurred in the tax year in question;
and
• A case where the existence of the liability is certain (unconditional) and
established in the relevant tax year, but the amount of the liability is
uncertain – in this case, the liability is regarded as having been ‘actually
incurred’. The amount of the liability must be estimated based on available
information and claimed in that tax year (Edgars stores) – BUT s24M.
- The unquantified portion is deemed to be incurred only in the YoA in which it
can be quantified. (s24M(2)(b))

The issuing of shares by a company in exchange for an asset is not expenditure

‘actually incurred’ (Labat). Expenditure actually incurred means either:
• Expenditure for which a liability has been incurred or the action of spending
funds (diminution of assets).
• The issuing of shares in exchange for an asset is neither.

Note: The company itself is not made ‘poorer’ by issuing shares although the issuance of shares
may dilute the value of the shares held by the shareholders.

Note: effect of Labat judgement partially undone by ss 24BA and 40(CA) – covered in Tax 399/
HONS

S24N: ignore not covered in Tax298.

C. During the year of assessment

• Expenditure is only deductible during the YoA in which it was incurred. It

cannot be carried forward to claim in a subsequent year or carried back to
claim in a previous year (Sub-Nigel).
• To be deductible, it is not necessary that expenditure produces income in
the year that it was incurred – the income may only be earned in future
years (Sub-Nigel).
- E.g. buy trading stock: has not yet produced income, but expenditure is
deductible.
• Remember: ‘during YoA’ requirement laid down by the courts and not listed
as a requirement in s11(a) itself. Centlivres CJ in Sub-Nigel Ltd v CIR:

‘[T]he whole scheme of the Act shows that, as the taxpayer is assessed for income tax for a period
of one year, no expenditure incurred in a year previous to the particular tax year can be deducted’.

Note: Ignore Concentra case referred to in Silke – Sub-Nigel is the prescribed case.
 • Exceptions:
- s24M: defer until the amount is quantifiable.
- s23H: prepaid expenses – only receive benefits in the next YoA.

D. In the production of income

Probably the most onerous requirement the general deduction formula.

Fundamentals:
‘Expenditure per se does not produce income. Income is produced by actions, and the
question whether expenditure has been incurred in the production of income must be answered by
examining the act which produces the income and then judging whether the attendant
expenditure can be said to be sufficiently closely linked to that act to be regarded as having been
incurred in the production of income’ (Emslie, Davis & Hutton, 1995:323).

• Two aspects must be considered: (PE Electric Tramway)

- First, the cause of the expenditure (action that gave rise to the
expenditure) must be determined and;
- Secondly, it must be determined if the expenditure (action) is closely
connected with (or a necessary concomitant of) the income-earning
activities of the taxpayer.
• It is not necessary that expenditure produced income in the year that it was
incurred before it is deductible. The income may only be earned in a future
year, as long as the expenditure was incurred for the purpose of earning that
income, it is deductible (Sub-Nigel).
• Amounts paid to incentivize current and future employees are incurred in the
production of current or future income (Provider).
• Expenditure with a dual purpose must be apportioned (Nemojim). I.e. if it is
not possible to appropriate the expenditure to either ‘income’ or ‘exempt
income’, the expenditure must be apportioned.
• Gross income vs Income. A reasonable apportionment method to be used –
must identify a reasonable method for apportionment (MTN Holdings).

An expense brought about by the negligence of the TP or one of its employees would only be
deductible if it could be shown that the risk or chance of such an expense being incurred was
closely connected to (an inevitable concomitant of) the TP’s income earning operations.

In other words, it must be shown that the event (negligence) was a ‘necessary evil’ of the TP’s
trade – an inherent risk that is inseparable from the carrying on of a particular business. E.g. a
driver involved in an accident. (PE Electric Tramway – consider two aspects)
E. Not a capital nature

• Money spent to ‘work’ the source of revenue (income-producing structure) =

‘income in nature’ and money spent to create/ acquire/ improve a source of
future revenue (income-producing structure) = ‘capital in nature’ (Rand
Mines).
- E.g. buy oil for machinery (operational expenses).
• Where no new capital asset for the enduring benefit of the TP has been
created, the expenditure tends to assume more of a revenue character (BP
Southern Africa).
- ‘Subsidiary test’: e.g. advertising billboard (capital) vs. advertisement in a
magazine (income).
- “ST vs. LT”: e.g. when buying a car, if period is long enough – car loses
value.
- Rule of thumb: >3 years = enduring benefit (capital in nature).
• Cost incurred as part of performing income-producing operations = has an
‘income nature’. Cost incurred to establish/ enhance or add to the income-
producing structure = has a ‘capital nature’ (New State Areas).
• Floating capital (being capital that frequently changes its form from money
to good and vice versa) = income in nature. Fixed capital (being capital
employed to acquire and improve property, plant, tools etc. which may qualify
for capital allowance) = capital in nature (New State Areas).

NB! It does not follow that expenditure of a capital nature is never deductible – just not
deductible under s11(a).

When capital expenditure is deductible – capital allowances or special deductions (TAX 399).

3. Carrying on a trade
SECTION 11(a)
‘For the purpose of determining the taxable income derived by a taxpayer from carrying on any
trade, there shall be allowed as deductions from the income of the person so derived…’
SECTION 23(g)

‘No deductions shall, in any case, be made in respect of the following matters, namely -

‘any moneys, claimed as a deduction from income derived from trade, to the extent to which such
moneys were not laid out or expended for the purposes of trade’

- Non-exhaustive and largely circular definition of ‘trade’ in section 1(1).

- ‘To the extent’ = authority for apportionment if expense is partly incurred for trade and partly
for non-trade purposes.
- Trading requirement also manifests itself in 23(a) and 23(b) which deals with the prohibition of
the deduction of domestic and private expenditure
 • Deductions under s11(a) will only be allowed if:
- The taxpayer is carrying on a trade and,
- To the extent that the expense is incurred for the purposes of trade.

• The definition of ‘trade’ should be given a wide interpretation and includes:

- A ‘venture’, being a transaction in which a person risks something with the
object of making a profit (Burgess).
- Any profitable activity even if it was a single activity (Burgess).
- If the TP carries on a trade, his motive is irrelevant (Burgess).

• The act of watching over investments does not constitute the ‘carrying on
of a trade’
- Despite its wide meaning, the term ‘trade’ does not embrace all activities
that might produce income. For example, income in the form of interest,
dividends, pension and annuities are generally considered to be ‘passive
income,’ unless they are a shareholder.
- If a TP accumulates his savings and invests in interest-bearing securities
or in shares held as assets of a capital nature, does not derive income from
carrying on a trade.
- However, in practice, if capital is borrowed for the sole purpose of re-
investing = trade income and the interest earned = deduction.

• Trading involves more than the mere intention to trade (SA Bazaars).
- Trading involves an active step.
- Active step has been held to be ‘more’ than the mere laying out of plans or
watching over investments.
• Continuity and profit motive are not prerequisites for the ‘carrying on of a
trade’ but are strong indications that a trade is being carried on.

A. Section 11A Pre-trade expenditure and losses

• Expenditure incurred before ‘trading’ commences is not deductible under

s11 because:
- The trade requirement has not been satisfied.
- However, s11A allows for a deduction of set-up costs, but only once
trading has commenced.

i. How does it work?

• Pre-trade expenses: Are accumulated until trade commences and then the
total is claimed as a single s11A deduction (if there is enough income
available from that trade).
 If the requirements are met, aggregrate all the pre-trade expenses
and get one deduction in the YoA in which trading commences.

REQUIREMENTS FOR PRE-TRADE EXPENSE DEDUCTION

Pre-trade expenditure qualify for a deduction against the income from the trade to
which it relates if the following all four requirements are satisfied:

1. The trade, in respect of which the pre-trade expenditure was incurred, must have
been commenced (s11A(1)).
2. The pre-trade expenditure must have been actually incurred before the
commencement of and in preparation for carrying on that trade (s11A(1)(a)).
3. Had the pre-trade expenditure been incurred after the commencement of the
relevant trade, it would have been allowed as a deduction under ss11 (Other
than 11(x)), 11D or 24J, section 11A(1)(b).
4. The pre-trade expenditure must not previously have been allowed as a
deduction. (Section 11A(1)(c)).

IF ALL THE REQUIREMENTS ARE MET

• Once all four of the requirements have been met:
- The pre-trade expenses will be allowed as a deduction under s11A(1) in the year of
assessment in which the trade to which it relates commences,
- But is subject to the ring-fencing requirements of s11A(2).

• Ring-fencing
- If pre-trade expenses > income from that particular trade (after deductions
allowable i.t.o. any other provision), then
- The excess may not be set off at other income (trading or otherwise).
- Thus: S11A(1) deduction is limited to the taxable income of the trade to which the
deduction relates and,
- Excess is carried over to the next year of assessment.
 ii. When does trading commence?
• Mere intention to trade is not sufficient = must take active steps to initiate
trade not merely layout plans
• Depends on the facts of the case.
• Absence of some or all of the following could indicate that a taxpayer is
not trading:
- Premises, equipment, trading stock, employees.
- Note that obtaining income is not a pre-requisite for carrying on a trade.
It is possible for a trade to have commenced prior to the actual earning of
income.

Remember: TP can carry on more than one trade simultaneously.

A taxpayer’s taxable income is determined on a trade-by-trade basis with the overall taxable
income being determined by aggregating the results from the separate trades.

E.g. A salaried employee who carries on the trade of ‘employment’ can also be trading in shares.

CLASS EXAMPLE 1: Section 11A Pre-trade expenditure and losses – ring-fencing

4. Prepaid Expenditure (s23H)

s23H does not apply to ‘trading stock’
i. What does it do? s11(c), (d) and (w) – ignore for 298.

• Limits and defers the deduction of expenditure incurred under:

- s11(a), s11(c), s11(d) or s11(w) or s11A where some or all of the economic
benefit which the taxpayer seeks to derive from incurring the expenditure is
only to be received in future years.

• Section 23H will only apply if two conditions are met and none of the
exceptions in the provisos below are applicable:
- Expenditure must be allowable as a deduction under s11(a), s11(c), s11(d)
or s11(w) or s11A and,
- Expenditure is in respect of goods or services but that will not be received
or rendered during the YoA or,
- Any other benefits but the period to which it extends is beyond the YoA.
ii. Provisos and deferral of s23H
S23H DOES NOT APPLY:
• All goods or services supplied within 6 months after the end of YoA in
Proviso (aa) which prepaid expenditure incurred.
- Contra fiscum: apply to each prepaid expense separately.

Proviso (bb) • Aggregate of total prepaid expenditure (otherwise prohibited by

s23H) is ≤ R100 000

• ‘Would otherwise be limited by this section’:

- Exclude amounts taken into account under (aa) and (dd) for the
purposes of applying the R100 000 limit.

Proviso (dd) • Expenditure prepaid due to unconditional liability imposed by

legislation.

ADDITIONAL INFORMATION

• If an amount falls under one of these provisos it means the deduction of the amount
actually incurred will not be limited and the full amount is deductible.
• s23H(2): Alternative apportionment method can be used at the discretion of the
CSARS.
• s23H(3): If the expenditure was actually paid and TP can show the goods or
services on which the expenditure was incurred will never be received, the
deferment ceases and he can claim a deduction.

Steps: (order is very important)

1. Apply proviso (aa): if it meets 6m rule, do not apply s23H.

2. Apply proviso (dd): If it’s an unconditional payment = apply s23H.
3. Apply proviso (bb): If ≤ 100 000 ≠ s23H
If > 100 000 = s23H

SILKE EXAMPLE 6.7: Prepaid Expenditure (s23H) NB!

5. Prohibitions SECTION 23

• S23 = negative test if meets all the requirements in s11 and have no
limitations in 23H.
SECTION 23 PROHIBITED DEDUCTIONS
This section provides that no deduction may be made in respect of the following
expenditure, irrespective of the fact that the general deduction formula might allow for a
deduction:
SECTION PROHIBITS NOTES
23(a) Deduction of costs incurred to: - Such as the cost of feeding and
clothing the taxpayer and his
- Maintain the taxpayer, his
family, providing them with the
family or establishment.
necessities and comforts of life.

- Medical expenditure to maintain

TP or family’s health.

23(b) Deduction of domestic and 23(b) is an extension of 23(a), but:

private expenses
- Does allow for the deduction of
certain expenses incurred in
respect of domestic premises
used for trade purposes (usually
a home office).
- Usually based on floor space.

23(g) Deduction of moneys not laid out 23(g) further confirms that non-trade
or expended for trade purposes expenses i.e. domestic or private
expenses are not deductible.

A. Domestic or private expenditure s23(b)

• Fuel expenses: km between your

house and work = private but,
if they send you to a client or
conference = business.
- Even if you’re a sole prop.
• (a) Must be specifically equipped and
used specifically to trade (100%) if TP
= sole prop.
• (b) If employee and earning
commission must regularly use > 50%
of the home office and must be
equipped.
 S23(b) BREAKDOWN

Taxpayer’s income from Taxpayer’s income from Taxpayer’s income

employment derived employment not mainly not derived from
mainly from commission derived from commission employment

Partial deduction allowed if: Partial deduction allowed if: Partial deduction allowed if:

1) Specific part of domestic premises is specifically equipped for trade purposes

Proviso (a)
2) Specific part is regularly and exclusively used for trade purposes

3) Duties performed mainly 3) Duties performed mainly N/A

otherwise than in an office in that part.
supplied by employer.
Proviso (b)

‘Mainly’ usually means >50% (i.e. more than 50% is commission).

‘Regularly’ means frequently
‘Exclusively’ means excluding or not admitting other things (i.e. the specific part may
not be used for any other purpose).
Effect of this proviso is that the portion of a TPs private expenditure used for the purposes
of trade will be allowed a deduction.

Examples:
- Cost of employment of a household worker to enable a TP spouse to work.
- TPs expenditure incurred in travelling from his residence to place of business.
- Medical expenditure, property rates, interest on a mortgage and loan, security expenditure.

B. Expenditure relating to employment or office (ss23(m) and 23(b))

S23(m) prohibits the deduction of expenditure that relates to:

• Any employment or office held in respect of which remuneration is earned
other than the specific deductions listed in s23(m)(i) to (iv) below.
• Note: this prohibition does not apply to an agent or representative whose
remuneration is derived mainly in the form of commission based on sales or
turnover.

What is allowed?
(i) Retirement fund contributions deductible under:
• s11F – covered in term 3
(ii) Allowances or expenses deductible under:
• s11(c) (legal expenses), 11(e) (wear and tear), 11(i) (bad debts) and 11(j)
(doubtful debts) – not covered in Tax 298
 (iii) Any deduction which is allowable under:
• 11(nA) (service income refunds) or 11(nB) (restraint of trade refunds) – not
covered in Tax 298

(iv) Any deduction which is allowable under:

• s11(a) (general deduction formula) or s11(d) (repairs = not covered in 298) in
respect of any rent of, cost of repairs or expenses in connection with any
dwelling house or domestic premises, to the extent that the deduction is
not prohibited under s23(b).

Cannot use general deductions freely as it is limited to s23m(i)-(iv)

Not apply if you are self-employed and includes any remuneration, salary and bonus.
Then: only deduct expenses in i-iv.

An employee who earns remuneration that does not mainly consist of commission can claim
deductions in respect of part of a private home used as a home office if:

• Specifically equipped for the purpose of trade proviso (a) to 23(b).

• Regularly and exclusively used for trade purposes proviso (a) to 23(b).
• Employees duties are performed mainly in the home office proviso (b)(ii) to 23(b ).

CLASS EXAMPLE 2: s23(b) & 23(m) – employment income = mainly commission

CLASS EXAMPLE 3: s23(b) & 23(m) – employment income not mainly commission

C. Non-trade expenditure s23(g)

• S23(g) = the negative test and must always be read with s11(a).
• Authority for apportioning expenditure into ‘trade’ and ‘non-trade’ portions– as
it only denies the deduction of expenditure to the extent (apportion between
trade and private) that it was not laid out or expended for ‘trade’ purposes.
• Warner Lambert principles: Where social responsibility expenditure is
incurred to ensure the company’s trading success, the expenses are incurred
for the purposes of trade and in the production of income.

Case of Warner Lambert SA (Pty) Ltd vs. SARS

• The TP = a South African subsidiary of a US company and a signatory to the Sullivian Code.
• To comply with the principles of the code, there was certain expenditure incurred namely:
wage improvements and similar expenses.
• TP argued that to prevent the loss of his status of a subsidiary of the US company he needed
to incur the costs to comply with the changes and that it is crucial to the success of his
business.
• The court held that the expenses were incurred in the production of income.

Case law relevant to 23(g): Scribante (not covered in Tax 298) and Warner Lambert.
D. Other s23 prohibitions

ACT PROHIBITION OF
23(c) Deduction of expenditure to the extent that:
- It is recoverable under a contract of insurance, guarantee, security or
indemnity.

23(d) Deduction of any tax imposed under the ITA or interest or penalty
imposed under any Act administered by the CSARS.

23(e) Deduction of income carried to a reserve fund or capitalized in any way.

- Accepted accounting practice to create provisions i.r.o. anticipated
expenditure e.g. provisions are not deductible.
- In addition to not meeting the ‘actually incurred’ requirement under
s11(a) = It is also specifically prohibited by s23(e)

23(f) Deduction of expenditure not incurred in the production of ‘income’ (as

defined in s1(1)).
- “Opportunity cost of interest.”

23(h) Deduction of interest which may have been made on any capital
employed in trade.
- “Interest for-gone.”

23(k) Deduction of expenditure other than expenditure specifically mentioned

incurred by a labour broker (who is not in possession of a tax exemption
certificate), a personal service company or trust. (Covered in term 4)

23(l) Deduction of restraint of trade payments except as provided for in

s11(cA).
- I.e. restraint of trade payments can only be deducted in accordance
with s11(cA) and not under any other section such as 11(a).
- NB! This is a special deduction and has preference over general
deductions.

23(o) Deduction of expenditure incurred in respect of unlawful activities. E.g.

‘bribes’ and ‘speeding fines’.

23(q) Deduction of expenditure incurred in respect of the production of non-

exempt foreign dividends. (See definition of foreign dividend in s1(1)).

23(r) Deduction of premiums paid in terms of an insurance policy if that policy

covers that person against:
- Illness, injury, disability, unemployment or death of that person.
- That person = natural person who takes out their own insurance
policy.
E. Prohibitions against double deductions s23B

S23B
(1) The same amount qualifying for more than one deduction or allowance under
more than one provision of the ITA – cannot be deducted more than once.

(2) When two deductions or allowances are clearly contemplated, the second is
only available if the first is available.
- In such circumstances, the prohibition on the duplication in sub-section (1)
does not apply, since the intention is clearly to allow two deductions or
allowances.

(3) Special deductions take preference over 11(a).

- If a specific deduction is available (even if the amount of the deduction is
limited or if only allowed in a different year) then the general deduction
formula (s11(a)) cannot be applied.
- Note: special deductions not covered in Tax 298.

(5) This subsection provides that no deduction is permissible under s 11(a)

(general deduction formula).
- In respect of any expenditure incurred by a person in respect of a
premium paid under a policy of insurance where the policy relates to:
- Death, disablement or illness of an employee or director, or former
employee or director, of the person that is the policyholder (other than a
policy that relates to death, disablement or illness arising solely out of and
in the course of employment of the employee or director).
- The insertion is effective from 1 March 2012 and applies to premiums paid
or incurred on or after this date.
- I.e. Deduct the premium that is paid for the employee and if the policy is
work-related, then deduct under s11A.

Excessive expenditure
• Actually incurred does not mean necessarily incurred.
• Even though an expense is actually incurred – deduction under s11(a) may be
denied if:
- The expense is excessive because it may fall foul of other requirements namely: ‘not
incurred for bona fide trade purposes’ or ‘not incurred in the production of income’.
- E.g. family business, must determine if the motivation is for furthering trade or not.

6. Cost of assets and VAT s23C

• Section 23C deals with the effect of VAT on the cost or market value of an
asset or the amount of expenditure incurred.

• What does it do?

- Prevents VAT from being claimed as input VAT by VAT Vendors and
subsequently also being claimed as a deduction for income tax purposes.
10. Specific transactions
Expenditure and losses Allowable deduction (s11(a))?
Advertising Advertisement expenditure incurred by a
business already in existence (already trading) –
deductible if expenditure meets the
requirements of the general deduction formula.
Look out for: ‘in the production of income’
E.g. a furniture dealer erects a model house for
exhibition = enduring benefit = capital nature =
not deductible.

Copyrights, inventions, patents, trademarks and Cost incurred for the outright acquisition of a
know-how patent or trademark = capital expenditure,
unless it’s acquired for the purpose of
speculation.
Repetitive payment for the use of an asset =
revenue nature = deductible.
Annual royalty payment for the use of a patent
= deductible.

Damages and compensation Payments for damages resulting from

negligence – only deductible if the negligence
constitutes an ‘inevitable concomitant’ of the
trade, i.e. very close connection between trade
and liability that caused damages.

Education and continuing education Expenditure incurred by TP in improving his

knowledge or education = not deductible:
capital in nature or not incurred in the production
of income.
Exceptions: e.g. costs incurred by practising
CAs in its programme of continuing education =
deductible.
Employment and services rendered All amounts payable by employer to an
employee i.t.o. service agreement = deductible
from employer’s income if all requirements met.
E.g. can deduct bursaries awarded by employer,
if holder of bursary binds himself to work for the
employer.

Fines Fines attached to unlawful acts of TP = not

deductible.

Goodwill Acquisition of goodwill= capital nature = not

deductible.

Legal expenditure (Ignore 11(c) – not covered in For legal expenditure to be deductible under s
Tax 298) 11(a) – TP must show that expenditure linked to
an operation undertaken with the object of
producing income and not just to protect an
existing source of income.

Legal expenditure of a capital nature (Ignore Not deductible under s11(a) = capital nature.
11(c) – not covered in Tax298)

Losses: Fire, theft and embezzlement Trading stock – goods lost or destroyed by fire
or theft = deductible.
Fixed assets – capital nature = not deductible.

Losses: Loans, advances and guarantees Amounts advanced to a third party – if

integral part of the business carried on for
securing business, any losses = deductible.
Amounts borrowed from a third party –
determine purpose of borrowing, i.e. capital or
revenue in nature.

Losses: Sale of debts If a person sells his business, ceases trading

and incurs a loss on the sale of debts = not
deductible.
If sell debts to a finance company at a discount,
and in so doing incurs a loss = deductible.
If TP buys debts to sell at a profit and sustains a
loss = deductible.

Provisions for anticipated losses or expenditure Provisions for anticipated losses or expenditure
= not actually incurred = not deductible.
Exemptions: e.g. allowance granted for doubtful
debt = deductible.
EXAMPLES

CLASS EXAMPLE 1: Section 11A Pre-trade expenditure and losses – ring fencing

Cerwin Trell carries on two trades and also receives passive income (non-trading income). None
of the income streams qualify for exemptions.

Calculate Cerwin Trell’s taxable income for year 1 and year 2

Trade 2

Year 1 = 120 000 – 70 000 = 50 000 (available for pre-paid expense)

s11A(1) limited to R50 000: 85 000 > 50 000  Excess = 35 000

Year 2 = 340 000 – 120 000 = 220 000  can deduct full R35 000.
 SILKE EXAMPLE 6.7: Prepaid Expenditure (s23H) NB!

Steps:
1. Is there a general deduction?
2. Does s23H limit the deduction?

Note: not all goods = trading stock, e.g. stationary. (Assume for question all goods = trading stock)

Current

R93 500 – fully deductible in 2019 YoA.

Pre-paid expenses:

Not deductible by s23H – different YoA, but certain provisios:

i. aa: test each expenditure separately

Goods will be supplied within 6 months after year end and provisio (aa) will therefore
be applicable to the expenditure on goods, i.e. can deduct full amount (R16 000 +
R8 000).
ii. dd
iii. bb: test prepaid portions together
52 500 + 80 000 = 132 500 > 100 000 threshold can’t be deductible – defer
R132 500 to 2020 YoA and only deduct current year portions of rent expenditure and
security services.
 CLASS EXAMPLE 2: s23(b) & 23(m) – employment income = mainly commission

TP 1 is an estate agent employed by Pam Golding Properties

• He is obliged to work from home (no work office).

• Maintains a home office which has been specifically set up for the purposes of his
employment duties.

• Home office is used regularly and exclusively for work purposes.

• Duties are performed mainly in the home office.

• The total area (square metres) of the home study is 20 m2 in relation to the total area of
the house of 200 m2.

• Do the restrictions of s23(m) apply?

• If not mainly in the form of commission.

• I.e. 150 000 + 50 000 = 200 000

• Commission = 150 000/ 200 000 = 75%  >50% of renumeration = commission.

• Does the TP comply with the requirements of s23(b)?

- Specifically equipped for purpose of trade

- Regularly and exclusively used for his trade

- Income from employment mainly = commission and his duties are mainly performed
otherwise than in an office which is provided to him by his employer.

• Calculation:

• Area based expenses: 25 000 + 2 500 = R27 500

• Office area: 20/200m2 = 10%

• 27 500 x 10% = R2 750 + R9 000 (Other) = R11 750

 CLASS EXAMPLE 3: s23(b) & 23(m) – employment income not mainly commission

TP 2 is an estate agent employed by Pam Golding Properties

• She is obliged to work from home (no work office).

• Maintains a home office which has been specifically set up for the purposes of her
employment duties.

• Home office is used regularly and exclusively for work purposes.

• Duties are performed mainly in the home office.

• The total area (square metres) of the home study is 20 m2 in relation to the total area of
the house of 200 m2.

• Do the restrictions of s23(m) apply?

• If not mainly in the form of commission.

• 150 000 + 50 000 = 200 000

• Commission = 50 000/ 200 000 = 25%  <50% of renumeration = commission.

• s11(a) does not freely apply.

• Does the TP comply with the requirements of s23(b)?

1. Specifically equipped for purpose of trade

2. regularly and exclusively used for his trade

3. Income from employment mainly = commission and his duties are mainly performed
otherwise than in an office which is provided to him by his employer.

• Calculation:

• Area based expenses: 25 000 + 2 500 = R27 500

• Office area: 20/200m2 = 10%

• 27 500 x 10% = R2 750 + R9 000 (Other) = R2 750

• R9 000 disallowed under s23(m).

 CHAPTER 7 NATURAL PERSONS

1. OVERVIEW AND FRAMEWORK

• The Act follows a specific sequence in the calculation of a natural person’s

taxable income.
• The framework (or subtotal method) is based on the sequence given in the
Act.
• Natural persons can carry on more than one trade and can also receive
non-trade income, e.g. interest.
• Work through Annexure A of the module framework – the incorrect use of the
framework may result in marks being forfeited.

What is the difference between these instructions?

1. Calculate the taxable income of natural person A for the 2020 year of assessment.
2. Calculate the normal tax payable by natural person A for the 2020 year of assessment.
3. Calculate the normal tax due on assessment by natural person A for the 2020 year of
assessment.
4. Calculate the total tax payable by natural person A for the 2020 year of assessment.

A. Assessed losses – s20 and s20A

Assessed loss (AL) Amount by which the deductions admissible under section 11
exceed the income in respect of which they are so admissible –
note that this definition also applies to s 20A.

Balance of assessed Refers to an assessed loss brought forward from the preceding
loss (BAL) year of assessment.

Example – AL & BAL

TP (resident and 44 years old) operates a grocery store as a sole proprietor.

Information pertaining to the 2020 year of assessment:

Trade-related receipts Trade-related expenditure

Sales: R100 000 Rent: R40 000
Electricity: R20 000
Wages paid to store clerks: R50 000
Cost of stock purchased and sold in 2020:
R30 000

Assume that the trade-related expenditure is fully

deductible under s11(a).

Income: R100 000 Deductions: R140 000

Conclusion:
• Income < Deductions
⸫ Assessed loss
 • The taxpayer has no other income – therefore s(he) has no taxable income – only
an assessed loss. The assessed loss is carried forward to the 2021 year of
assessment and becomes a “balance of assessed loss”.

2020 YoA R 2021 YoA R

Gross income 100 000 Gross income 330 000
Exempt income - Exempt income (23 800)
Income 100 000 Income 306 200
S11(a) deductions (140 000) S11(a) deductions (170 000)
Assessed loss 40 000 BAL AL (2020) (40 000)
Taxable income 96 200

Section 20(1) and 20(2A)(a) read together – set-off of assessed losses:

• May generally set off an AL against income derived from ‘non-trading’
activities, i.e. passive income (interest/dividends on investments) and against
trading income.
• When calculating the taxable income of a natural person from a trade or from
non-trade activities, reduce the income by
- Any balance of assessed loss carried forward from the previous YOA.
- Any assessed loss in the same YOA from another trade.
But:
• Proviso (b) to s 20(1): Assessed loss from trade outside RSA is fully ring-
fenced, i.e. foreign assessed losses can only be set-off against foreign
income and not against income derived from a source within RSA.
• Proviso (c) to s 20(1): Cannot set off an assessed loss against a severance
benefit (SB).
• The unused balance of the AL is carried forward to the next year of
assessment until it has been eradicated (i.e. becomes a balance of assessed
loss).
• s 20(2A)(b): concession for natural persons overrides the decision in SA
Bazaars case – may, therefore, transfer a balance of assessed loss even after
a year without income.

• Example:
- Natural person has a balance of assessed loss established in Year 1.
- Natural person derives no income in Year 2.
- Natural person may still carry forward the balance of the assessed loss established in
Year 1 to Year 3.

Example – Foreign losses

RSA Foreign Cannot be set off

Salary 250 000 against RSA
Foreign trade income 25 000 income, only
Foreign trade expenditure (160 000) against other
foreign income.
250 000 (135 000)
B. Ring-fencing of losses – s20A
• s20A applies in respect of trades carried on by a natural person.
• Assessed losses incurred by juristic persons (e.g. companies) are not
subject to the s20A ring-fencing provisions.

What does this section do?

• If the provisions of s20A apply, the natural person will be prohibited from
setting off the assessed loss incurred as a result of the ‘ring-fenced’ trade
against the taxable income derived from any other trade.
• In other words: the AL of the ring-fenced trade can only be set-off against
future income of the self-same trade.

What is the reason behind the introduction of s20A?

- s20A is an anti-avoidance provision.
- Background:
Trade 1: Trade 2: Non-trade Income:
Employment Income Dog breeding Dividends and Interest
R1 490 000 ? R50 000
Taxable income before trade 2: R1 490 000 + R50 000 = R1 540 000

Import costs R90 000

Vet bills R35 000
Food R12 000
Dog show entries R6 000
Total cost R143 000
Sell 2 dogs (income) R20 000
‘Hobby-like’
Assessed loss (trade 2) R20 000 – R143 000 = R123 000
trade – use to
decrease TI.
Taxable income after trade 2: R1 540 000 – R123 000 = R1 417 000

When will section 20A apply?

 Application of s20A in 3 steps:

1. Maximum marginal tax rate requirement: 2. ‘3/5 year rule’

• The sum of the natural person’s taxable income ignoring the • This enquiry focusses on the loss-generating
provisions of s 20A and any assessed loss or balance of activity. These ‘3/5 year rule’ and ‘listed suspect
assessed loss set-off in determining taxable income must equal trade’ are either/or requirements.
or exceed a certain amount – i.e. add back AL/BAL. • Therefore, ring-fencing will potentially apply if
• The amount of taxable income at which the highest marginal tax one of these requirements is satisfied
rate (45%) would become applicable: R1 500 001. • Pursuant to s20A(2)(a) an AL will be subject to
potential ring-fencing if assessed losses have
• If the NP’s taxable income (excluding any AL/BAL) > been incurred in at least 3 out of 5 years
R1 500 000 then the TP will fall into the highest marginal tax (therefore current and previous 4 YoA).
bracket and proceed to Step 2. • NB! Need not be 3 consecutive YoA. Any 3 out
• If the TP does not fall into the highest marginal tax bracket – of the 5 years will trigger potential ring-fencing.
then S20A does not apply and that is the end to the matter.

3. Carrying on a trade 4. S20A(4)

• S20A(4) provides that the ‘facts and circumstances test’ (escape hatch) in
Ring-fencing in s 20A(1) does not apply to S20A(3) is not available where the TP has incurred an AL in at least 6 out
s 20A(2)(a) or (b) suspect trades if: of the last 10 years of assessment (10 years include current YoA) – other
than farming.
• the escape clause in s 20A(3)
applies. • In the YoA where the 6/10-year requirement is met the AL will be
permanently ring-fenced and the escape hatch can no longer be used.
• This means there is a reasonable
prospect of taxable income within • The effect is that the ring-fenced AL can only be set-off against future
reasonable period (refer to 6 income from the same trade. If no such income is available, the AL is
objective factors in s 20A(3)(a) – (f)). carried forward to the next YoA.
• NB! This only applies to listed suspect trades.
UNLESS…

2. CALCULATION OF NORMAL TAX PAYABLE

Framework Column 3 –
Other income
and deductions
Normal tax determined per the progressive tax table on taxable income in
column 3
Less: S6(2) rebate

Add: Additional tax in terms of s12T(7)(a) E.g. penalty -

TFSA

Normal tax payable on the taxable income from SB

Less: Section 6A and 6B credits

Normal tax payable by the natural person

A. The s 6(2) rebates
• Remember proportionate reduction in broken years of assessment.
- Broken year of assessment arises in a YoA in which a natural person is born, dies
or declared insolvent.
- Secondary and tertiary rebates – ‘was or would have been’.
- Non-refundable and cannot be carried forward.

• s 6(2) rebates are only deductible against normal tax payable on the taxable income in,
i.e. cannot be claimed against the normal tax calculated on severance benefits.
• s 6(2) rebates are only available to natural persons – they are unavailable to other
persons such as companies.

B. 6A and 6B medical tax credits

• s 6A – only deals with medical expenditure in the form of fees (contributions) paid to duly
registered medical schemes.
• s 6 B – deals with excess medical scheme fees and other qualifying medical expenses
(e.g. “out of pocket” medical expenditure not recovered from the medical scheme).

• 6A and 6B medical tax credits are deductible against any normal tax payable,
i.e. may reduce the normal tax payable on any severance benefit and it must
be clear from the sequence of the answer.
• Credits are not refundable and cannot be carried forward to a future year of
assessment.
• Only available to natural persons.

6A – MTC (Medical Scheme Fees Tax 6B – AMTC (Additional Medical

Credit) Expenses Credit)
FOR Own: Contributions paid to a registered 1. Excess contributions to a medical
WHAT medical scheme. scheme, and
2. Qualifying medical expenditure as
Employer contributions paid to a set out in s6B.
registered scheme if taxed as fringe - Actually paid
benefit under par(i) of GI definition. - Not recovered by medical aid
S6A(3)(b) – “like the individual paid”. - Not for over the counter medication
- Expenses necessarily incurred and
Note the effect of par 12A(5)(a) of the Seventh
paid i.r.o. any disability or physical
Schedule if employer pays the fees after
impairment.
retirement and ’no value’ fringe benefit applies.

FOR Taxpayers and dependants Taxpayers and dependants

WHO Dependant for s6A – as defined in s6B(1). Dependant defined in s6B(1).

HOW Fixed amount per month determined by Three categories:

MUCH s6A(2)(b) – depending on the number of 1. 6B(3)(a) > 65 years
dependants. 2. 6B(3)(b) disability
3. 6B(3)(c) other – younger than 65 and
no disability
 OTHER Where more than one person pays any
fees in respect of a person or dependant,
the tax credit will be prorated – s6A(3A).

• Rebate against taxed payable and cannot create a refund and excess cannot be carried over to the
following YoA.
• Fees paid by the estate of a deceased person are deemed to have been paid by the deceased on the
day before death.

The following definitions in s6B(1) are relevant:

A ‘dependant of a person is:

• His or her spouse
• His or her child and the child of his or her spouse
• Any other member of his or her family in respect of whom he or she is liable for family care and
support, e.g. the member’s mother who lives with them.
• Any other person who is recognised as a dependant of that person i.t.o. rules of a medical
scheme or fund at the time the qualifying medical expenses were paid.
• A disabled person is always a dependant.

A ‘child’ includes an adopted child but not a stepchild.

• Four categories: (all unmarried)
1. <18 years,
2. <21 years and wholly or partially dependant for maintenance and not liable for normal tax.
3. <26 years and wholly or partially dependant for maintenance and not liable for normal tax and
is a full-time student at an educational institution.
4. child incapacitated by a disability and wholly or partially dependant for maintenance and not
liable for normal tax.
• Child must have been alive for a portion of the year.
• Requirements must be met on the last day of the YoA.
• If child dies: determine whether requirements would have been met had the child lived.
• If the TP dies: age of child on the day of the TP’s death.
• ‘Not over the age of 18’: over 18 on the day of 18th birthday.

Formulas: AMTC – s6B

Three categories
1. 65 year and older – s6B(3)(a) 3. Other – s6B(3)(c) – default for TP younger
2. Disability – s6B(3)(b) – only if the than 65 and no disability
person/spouse/child (therefore not any
dependant) is a person with a ꞌdisability’

MS contributions XX MS contributions XX
(ER & EE – taxed as FB) (ER & EE – taxed as FB)
Less: 3 x 6A credit (XX) Less: 4 x 6A credit (XX)
= Excess MS XXX = Excess MS XXX
contributions contributions
Add: QME XX Add: QME XX
XXX XXX
X33.3% Less: 7.5% of taxable
income
= s6B credit XXX XXX
X25%
= s6B credit XXX
Example: MTC – s6A

TP (aged 47) contributed R1 700 per month to a registered medical scheme in the 2019
YOA.
• He did not incur any other medical expenses.
• His taxable income for the 2019 YOA is R170 000.
• He is the main member of the medical scheme and 3
other dependants are registered on the scheme.

Calculate the normal tax payable by the TP for the 2019 YOA.

6A
620 + 2(209) R1 030 per month (x12)
R12 456
6B
Contribution R20 400
-4(12 456) (R49 824)
Excess contribution –

Taxable income R170 000

Normal tax determined per the progressive tax table on taxable R30 600
income in column 3 @18%
Less: S6(2) rebate (R14 067)

Less: Section 6A and 6B credits (12 456 + 0) (R12 456)

Normal tax payable by the individual R4 077

Example: AMTC – s6B

TP: 67 years old

Salary income: R215 000
The Taxpayer’s spouse is recognised as a dependant in terms of the rules of his medical
scheme and he has no other dependants.

Medical expenses (PAID):

• Medical scheme contributions (own) R3 100 per month
• R6 250 out-of-pocket expenses for prescription medicine
• R2500 for spectacles (that were not covered by medical scheme)
• R280 for a consultation with a general practitioner on 20 February 2019. The amount
was only paid on 31 March 2019. – Can’t add = next YoA

Calculate the ss 6A and 6B medical tax credits that can be claimed by the TP in
respect of the 2019 YOA.
6A
620 R620 per month (x12)
R7 440
6B
R3 100 x 12 R37 200
-3(7 440) (R22 320)
Excess R14 880
Continues on next page…
 Qualifying medical expenditure
Out-of-pocket expenses for prescription medicine R6 250
Spectacles R2500
Consultation with a general practitioner –
X 33,3% R23 630
s6B credit R7 869

Example – s6A credit apportionment (simplistic)

A B C
• Not a member of a duly • Not a member of a duly • Is a member of a duly
registered medical registered medical registered medical
scheme. scheme. scheme.
• Paid 60% of C’s medical • Paid 40% of C’s medical • Paid 0% of his own
scheme fees for the 12- scheme fees for the 12- medical scheme fees for
month period ending 29 month period ending 29 the 2020 year of
February 2020. February 2020. assessment.
• C is A’s father. • C is B’s father. • C is A and B’s father.
• A is liable for the family • A is liable for the family • C is dependent on the
care and support of C. care and support of C. family care and support
of his two children (A and
B).
• C’s monthly medical
scheme fees amount to R5
500.

Did C pay medical No s6A credit

No
scheme fees? for C

Yes, it was for a

dependant of A. s6A(2)(b)(i)(aa):
R310 in respect
Did A pay Was it for A C is a dependant of benefits to a
medical scheme Yes and/or a of A as dependant who
fees? dependant of A? contemplated in is a member of a
par (c) of the def duly registered
of 'dependant' in medical scheme.
s6B(1).

Did A pay 100% Apportionment

of C's medical No s6A(3A) applies
scheme fees? 60%

Apportionment 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛𝑠 𝑝𝑎𝑦𝑎𝑏𝑙𝑒 𝑏𝑦 𝑡ℎ𝑒 𝑝𝑒𝑟𝑠𝑜𝑛

Thought process the × 𝑇𝑜𝑡𝑎𝑙 𝑀𝑇𝐶
same as for A. 40% 𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛𝑠 𝑝𝑎𝑦𝑎𝑏𝑙𝑒

Therefore: R310 x 40% = R124 per month

Total 6A credit for YoA: R124 x 12 (#months paid) = R1 488
Example – s6A credit apportionment (complex)

A B
• Is a member of a duly registered medical • Is a member of a duly registered medical
scheme. scheme.
• The following persons are recognized as • There are no recognised dependants in
dependants in terms of the rules of A’s terms of the rules of B’s medical scheme.
medical scheme: • B paid 100% of the medical scheme fees
- A’s spouse i.r.o. benefits to himself.
- A’s child • B paid 50% of the medical scheme fees i.r.o
- A and B’s father benefits to his father who is recognised as
• A paid 100% of the medical scheme fees a dependant on A’s medical scheme.
i.r.o benefits to himself, his spouse and his
child.
• A paid 50% of the medical scheme fees i.r.o
benefits of his father.

Yes, it was for B

and a dependant s6A(2)(b)(i)(bb):
of B. R620 in respect
B's father is a of benefits to B
Did B pay Was it for B
dependant of B and 1
medical scheme Yes and/or a
as contemplated dependant. I.e.
fees? dependant of B?
in par (c) of the R310 for B, and
def of R310 for B's
'dependant' in father.
s6B(1).

Did B pay 100% No, he paid 100% s6A(3A) applies

of his own and his of his own and to the amount B Apportionment
father's medical 50% of his wants to claim in 50%
scheme fees? father's. respect of his
father's fees.

Therefore: Credit for fees paid in respect of himself (100%) + Credit fees paid in respect of his
father (50%) = Total 6A credit

⸫ R3 720 (R310 x 12m) + R1 860 (R310 x12m x 50%) = R5 580

Yes, it was for A and

multiple dependants of A. s6A(2)(b)(i)(bb): R620 in
A's spouse and child are respect of benefits to A and
dependants of A as 1 dependant. I.e. R310 for A,
Did A pay Was it for A and R310 for one
contemplated in par (b) of
medical and/or a dependant.
Yes the def of 'dependant' in
scheme dependant of
s6B(1). s6A(2)(b)(ii): R209 in respect
fees? A?
A's father is a dependant of of benefits to each additional
B as contemplated in par (c) dependant (i.e. after the first
of the def of 'dependant' in dependant.)
s6B(1).

Did A pay 100% No, he paid

of the fees 100% the fees s6A(3A) applies
payable in i.r.o.: Himself, to the amount A
spouse and child Apportionment
respect of wants to claim in
benefits to: respect of his 50%
But only 50% of
Himself, spouse, the fees i.r.o. his father's fees.
child and father? father.
Problem: What is the total MTC?

In respect of benefits to: Per month

Self 310
First dependant 310
Additional dependant 209

Is A’s father the first dependant? Because then the amount would be R310.
Or is A’s father an additional dependant? Because then the amount would be R209.

This is a grey-area that is not addressed in the Act. At the time these notes were compiled SARS had
not issued any guidance on this matter.

If the contra fiscum rule is applied (Chapter 2) – “…it means that where a provision of the
Act is open to more than one meaning, the court must follow the interpretation that favours
the taxpayer.”

Within this context, s 6(3A) must be applied contra fiscum. Therefore, it must be applied in a
manner that benefits the taxpayer as opposed to the fiscus.

SILKE identifies two possible ways in which s6(3A) can be applied in the circumstances
described above:
• Option 1: Allocate the credits in the same sequence that the dependants are listed in
the definition of “dependant” in s 6B(1); or
• Option 2: Allocate the credits in the sequence in which the dependants were
registered as dependants in terms of the rules of the medical scheme.

Option 1 Option 2
We require more information to be able to use this
option, lets assume the order in which A’s
dependants were registered on the medical scheme
a. a person's spouse was as follows:
R310

b. a person's child or child of his or Father

R209 her spouse R310

c. any other member of a person's

R209 family i.r.o whom s(he) is liable for Spouse
family support R209

d. other person recognised as a

R209 dependant i.t.o. the rules of the MS Child
R209

Therefore: R310 + R209 + R209 + 50%(R310) =

Therefore: R310 + R310 + R209 + 50%(R209) =
R883
R933.50
6A credit R883 x 12 = R10 596
6A credit R933.50 x 12 = R11 202

Conclusion: Option 1 – provides a marginally higher s6A credit for A. Therefore, choose to
apply option 1 as it will lead to the greatest reduction in the normal tax payable by A.
3. RECOVERY OF NORMAL TAX

Framework Column 3 –
Other income
and deductions
Normal tax determined per the progressive tax table
Less: S6(2) rebate

Add: Additional tax in terms of s12T(7)(a) E.g. penalty -

TFSA

Normal tax payable on the taxable income from SB

Less: Section 6A and 6B credits

Normal tax payable by the natural person

Less: PAYE, provisional tax and s35A withholding tax i.r.o. non-
residents

Normal tax due by or to the natural person on assessment

The normal tax payable by an individual is recovered through:

• Employee’s tax in the form of PAYE (Chapter 10)
• Provisional tax payments (Chapter 11)
• Withholdings tax on the sale of immovable property by non-residents (Chapter 21).
• A final settlement on assessment if necessary.
• Both provisional tax paid and employees’ tax are deducted from normal tax payable.

4. DEDUCTIONS Natural Persons

A. If an individual is carrying on a trade – deductions may be allowed under s11(a) (Chapter 6),
the special deductions (Chapter 12) and capital allowances (Chapter 13).
B. “Employment’ is a trade as defined in s 1(1). Nevertheless, deductions may be limited by s
23(m). Under section 23(m) only the following expenditure may be deducted from
remuneration from employment if remuneration is not mainly derived from commissions
based on sales turnover:
- Any contributions to any retirement fund – s 11F;
- Any legal expenditure (s 11(c)) (Chapter 12), wear-and-tear allowance (s 11(e))
(Chapter 13), bad debts (s 11(i)) (Chapter 12) or doubtful debts (s 11(j)) (Chapter 12);
- So much of any amount received in respect of services or as a restraint of trade
payment as is refunded by that person (ss 11(nA) and 11(nB)) (Chapter 12); and
- Qualifying rent, repairs or expenditure (in terms of s 11(a) or (d)), in respect of all
expenses in connection with any private home, to the extent that such a deduction is not
prohibited under s 23(b) (Chapter 6).
C. Contributions to retirement funds
D. Donations to a PBO
A. Trade Expenditure

• Underlying principle of s 11(a) that only expenditure incurred for the purposes
of trade can be deducted is re-enacted in: s 23(a), 23(b) and 23(g).

S23 Prohibitions Notes

(a) Deduction of costs incurred to maintain • Such as the cost of feeding and
the taxpayer, his family or clothing the taxpayer and his
establishment family, providing them with the
necessities and comforts of life.
• Medical expenditure to maintain
TP or family’s health.

(b) Deduction of domestic and private s 23(b) is an extension of s 23(a) but

expenses does allow for the deduction of certain
expenses incurred in respect of
domestic premises used for trade
purposes (usually a home office).

(c) Deduction of moneys not laid out or s 23(g) further confirms that non-trade
expended for trade purposes expenses i.e. domestic/ private
expenses are not deductible.

• Domestic or private expenditure – s 23(b): Breakdown

Taxpayer’s income from Taxpayer’s income from Taxpayer’s income not

employment derived mainly employment not mainly derived from employment
from commission derived from commission

Partial deduction allowed if: Partial deduction allowed if: Partial deduction allowed if
1. Specific part of domestic premises is specifically equipped for trade purposes
2. Specific part is regularly AND exclusively used for trade purposes
3. Duties performed 3. Duties performed N/A
mainly otherwise than mainly in that part.
in an office supplied by
employer.

• ‘Mainly’ usually means more than 50% (>50%)

• ‘Regularly’ means frequently
• ‘Exclusively’ means excluding or not admitting other things (i.e. the specific part may
not be used for any other purpose).

B. Contributions to retirement funds

• Applies notwithstanding s 23(g) – therefore deduction allowed against both

trading and non-trading income
• Excess contributions: any contributions not claimed due to exceeding limit –
carried over to next YOA – s 11F(3).
 • s11F cannot increase or create an assessed loss – 11F(2)(c).

FOR Contributions paid to any pension fund, provident fund or retirement annuity
fund during the YoA.

HOW MUCH S 11F(2) deduction = actual contributions to all three funds, limited to the
lesser of:
• R350 000;
• 27.5% of the higher of:
- Remuneration from all employers (excluding SB) or
- Taxable income (excluding SB) before the s11F and s18A deductions
(therefore in effect subtotal 5); or
• Taxable income before s 11F deduction and before the inclusion of any
taxable capital gain.

Example – s11F contributions to retirement funds

Mr X, aged 40, is a sales representative. For the 2020 year of assessment, he earned a
salary of R400 000 and rental income amounting to R340 000.
His monthly contributions to a pension fund amounted to R10 000 and he contributed an
amount of R14 000 to a retirement annuity fund every month. His employer contributed R5
000 per month to his pension fund on his behalf.
The balance of unclaimed contributions in respect of the 2019-year amount to R6 000. Mr X
realised a taxable capital gain of R50 000 during the 2020 year.
Calculate his taxable income for the 2020 year of assessment.
Contributions made
Pension fund 120 000 (10 000 x12m)
Retirement annuity fund 168 000 (14 000 x12m)
Employer pension fund 60 000 (50 000 x12m)
Unclaimed contribution 6 000
354 000

Gross income (400 000 + 340 000 + 60 000) 800 000

Taxable income before TCG & s11F 800 000
Taxable capital gain 50 000
Taxable income before s11F 850 000
S11F (233 750)
Taxable income 616 250

The R354 000 is limited to the lessor of:

• R350 000
• Higher of 27.5% of:
- R 460 000 x 27.5% = R126 500
- Taxable income before 11F: R850 000 x 27.5% = R233 750
• Taxable income before TCG & s11F: R800 000
C. Donations to a public benefit organization (PBO)

• This is a deduction from taxable income and therefore, a TP with no taxable

income or an assessed loss will not be allowed to claim.
• Last deduction in the calculation of taxable income.

FOR Donations paid in cash or transfer of property in kind to an approved PBO

during a YoA – s18A(1).

HOW MUCH Limited to 10% of the taxable income (excluding SB) before s18A has been
taken into account. (Excess can be carried forward to next YoA).

CRUX Taxpayer must be in possession of a s18A receipt from the PBO (cannot
assume – must be stated before s 18A can be claimed) – s 18A(2).

Donations in kind – s18A(3)

• s18A(3) states that if a deduction is claimed by a TP under s 18A(1) in respect
of a donation of property in kind, other than immovable property of a capital
nature to which s18A(3A) applies the amount of the s 18A(1) deduction is
calculated as follows:
Type of property donated Amount of donation for s18A purposes
A financial instrument (if taxpayer’s The lower of:
trading stock) - fair market value on the date of the
donation, or
- the amount that has been taken into
account for the purposes of s22(8)(C).

Asset used by the taxpayer for the The lower of:

purposes of his trade (not trading stock) - fair market value on the date of the
donation, or
Examples: cash registers, computers, furniture, - cost to the taxpayer of the property
delivery vehicles, etc. less any allowance allowed to be
deducted from his income under the
Act.

Asset not used by the taxpayer for the The lower of:
purposes of his trade (not trading stock) - fair market value on the date of the
donation, or
Examples: personal use assets - cost

For movable property that has

deteriorated in condition, the fair value or
cost must be reduced by a depreciation
allowance using the reducing-balance
depreciation allowance at a rate of 20% a
year.

Purchased, manufactured, erected, The lower of:

assembled, installed or constructed by - fair market value on the date of the
or on behalf of the taxpayer in order to form donation, or
the subject of the donation - cost

Other No deduction is allowed for the donation.

- subject to any fiduciary right, usufruct
or other similar right, or This prohibition applies unless the financial
- that constitutes an intangible asset, or instrument is a share in a listed company or
- financial instrument is issued by a qualifying financial institution
– s18A(3B).

Deductions for donations of immovable property of a capital nature

• If the lower of the market value or municipal value exceeds the cost of the
property (appreciated immovable property) the s 18A deduction is calculated as
follows:
A = B + (C x D)
A Amount of section 18A deduction – still subject to 10% limit.
B Cost of the property
C Amount that would have been a capital gain if the property has been sold for
the lower of MV or municipal value on the day of the donation is made
D • 60% – natural person or special trust
• 20% – all other cases

Example: S18A Donations to public benefit organizations

a) An individual donates R1 900 to a PBO. Her taxable income before any deduction under
s18A is R30 000.
b) An individual donates R16 000 to a PBO. Her taxable income before any deduction under
s18A is R30 000.
c) An individual donates R6 000 to a PBO. She has an assessed loss before any deduction
under s18A of R1 000.
Calculate the amount of the s18A deduction that the individual can claim assuming that she is in
possession of a section 18A receipt for each of the scenarios above.

Solution

a) Limitation: 30 000 x 0.1= R3 000 – Maximum can deduct but deduction limited to actual
donation of R1 900.
b) Limitation: 30 000 x 0.1 = R3 000 – S18A deduction limited to R3 000. (Balance of R13 000
not claimed carried to next YoA, therefore add excess donation to donation of CY and apply
10% again)
c) No s18A deduction – assessed loss position, R6 000 may be carried forward to next YoA.

-
5. MARRIED COUPLES
Spouse: Apart from
A. Married both in and out of community of property marriage i.t.o. law,
includes unions
• Each spouse is taxed separately (whether married in recognized as a
CP or out of CP), unless one of the deemed inclusion marriage i.t.o.
rules of s7(2) or s7(2A) applies. religion as well as
live-together-unions
• This causes the tax liability to fall onto the person who of a permanent
did not actually incur the liability = anti-avoidance nature.
provision.

• Section 7(2)(b) requirements:

- Trade must be connected to the donor spouse, and
- There must be excessive remuneration paid to the recipient spouse.
- Recipient spouse – taxed on reasonable remuneration.
- Donor-spouse – taxed on excessive remuneration.

• Marriage, separation, divorce or death of a spouse during the year have no

effect on the determination of normal tax liability of an individual unless s7(2)
or s7(2A) applies.
• The same concept applies if, for example, the donor is the main shareholder
of a company and the company employs or pays the donor’s spouse.

B. Marriages in community of property – s7(2A) to (2C)

• Default marital regime in SA (if no prenuptial contract is signed).
• The spouses will have a joint estate (50-50 interest) but certain assets or
income can fall outside the joint estate (then only taxed in one spouse’s
hands).

Trade income (excluding rental from fixed property)

• Only the spouse carrying on of the trade is taxed.
• Though trade income is included in the s1 definition of trade, it is excluded
from s7(2A).
• Income for letting movable assets will be deemed part of carrying on a trade.
• s7(2C) deals with active income which is certain incomes that are deemed to
be income derived by a spouse from a trade carried on by him or her. E.g.
lumpsum payments and annuities.
• If spouses carry on a trade jointly, the income is deemed to accrue in
proportion to the spouse’s agreement or otherwise reasonable entitlement.

Rental from fixed property and non-trade income

• Deemed to have accrued in equal shares to both spouses, e.g. interest and
dividends.
• Capital and/or income which does not fall into the joint estate is deemed to
have accrued to the spouse who is entitled to it.
Example – Married in vs out of community of property

Sunny and Veil are engaged to be married and have approached a lawyer to draft their
marital contract. They are uncertain what the tax implications would be if they married in or
out of community of property. Assume that both spouses are residents for South African
Income Tax purposes.
Sunny
• Earns a monthly salary of R60 000 from his employer (Active rule = only apply to
spouse that earns the income)
• Owns an investment property which is rented out at R5 500 per month (not apply to
active rule);
• Owns an interest-bearing investment of R1 500 000 with a yield of 8% per annum.

Veil
• Earns a monthly salary of R12 000 from her employer;
• Owns JSE-listed shares of R50 000 with a dividend yield of 6% per annum.

Required
Assuming that none of their assets or any income thereon will be excluded from the joint
estate, determine whether it would be more tax beneficial for the couple to marry in or out
of community of property.

In community of property Out of community of property

Sunny Veil Sunny Veil
Salary (Sunny) 720 000 - 720 000 -
Salary (Veil) - 144 000 - 144 000
Interest (Sunny) 60 000 60 000 120 000 -
Rental income (Sunny) 33 000 33 000 66 000 -
Dividend income (Veil) 1 500 1 500 - 3 000
GROSS INCOME 814 500 238 500 906 000 147 000

EXEMPT INCOME
Interest s10(1)(i) (23 800) (23 800) (23 800) -
Local dividend s10(1)(k) (1 500) (1 500) - (3 000)

TAXABLE INCOME 789 200 213 200 882 200 144 000
Normal tax per progressive 240 613 39 764 278 743 25 920
tax table
240 613 + 39 764 = 280 377 278 743 + 25 920 = 304 663

Conclusion – most beneficial to marry in community of property, pay R24 286 less tax.

6. SEPARATION, DIVORCE AND MAINTENANCE ORDERS

Alimony/child maintenance:

Paying spouse No deduction

Receiving spouse Par (b) inclusion in gross income and s10(1)(u) exemption.

Note: paying spouse pays from after-tax profits, i.e. exemption

prevents double taxation.
7. MINOR CHILDREN

• Income is subject to tax in the hands of the minor child unless s7(3) or s7(4)
applies – ignore s7(4).
• Also applies to a minor stepchild.
• As soon as the minor child reaches majority, section 7(3) no longer applies.
• s7(3) – Parent makes a donation, settlement or other disposition (DSOD) and
his minor child or stepchild receives income, then the is parent taxed.
• Where a person advances an interest-free or low-interest bearing loan to
another person, the courts have held that this constitutes a continuous
donation or other disposition for the purposes of s7. (CIR v Berold and CSARS v
Woulidge – will be covered in detail in HONS)
• The donation doesn’t need to be made directly to the child, there must
however be a causal link between the donation and the income being
received.

Example – Minor children

In the following instances, determine in whose hands the income will be assessed.

1. A father transferred a sum of money into a savings account for the benefit of and in the
name of his child M, aged 17, and a further sum of in the name of his stepchild N, aged
16. In this manner, the child M received R4 500 interest, while the stepchild N received
R6 000 interest.
M - minor child (17 y/o)
R4 500 interest
Parent Savings account
N - minor stepchild (16 y/o)
R6 000 interest

Solution: s7(3) interest income is deemed to have accrued to the parent, i.e. R4 500 +
R6 000. Note that any exemptions or deductions will follow income.

2. A minor child received R5 000 interest during a year in a donation of R100 000 made
to him by his father. The R5 000 was used to purchase shares in a company, and the
child received a dividend of R2 000 from the company.

Solution: The R5 000 is deemed to be the income of the father s7(3). Specific facts will
need to be considered to determine whether the dividend applies to s7(3) – it must first
be proved that the dividends were received as a result of the donation from the father.

3. A minor child works in her father’s business and received a salary of R30 000 for the
year. She received a cash legacy during the year from a deceased uncle and received
R1 000 interest on the sum of this money.

Solution: The salary of R30 000 received from the father is assessed in the hands of
the minor child since it has not been received by a gift or donation from the father. The
 R1 000 interest received on the investment is taxed in the hands of the child. S7(3) is
thus not applicable.

4. Parent 1 and 2 are married in community of property, i.e. owns assets and income in
equal shares. Parent 2 donates shares to their minor child and the minor child earns
dividends of R50 000 on these shares.

Solution: Dividend income must be imputed to the parents under s7(3) because the
income resulted from a disposition made by the parent, but as they are married in
community of property the amount must be split between the parents.
 CHAPTER 17 CAPITAL GAINS TAX (CGT)

1. Chapter overview and scope

• CGT came into effect on 1

October 2001.
NB: Valuation date – use to calculate
base cost of assets.

• Before CGT: only taxed on

income gains.
• After CGT: also taxed on capital
Separate FW gains.
s26A • Income Tax Act → s26A → 8th
Schedule (no separate CGT Act)
Also subject
to normal tax. s26A (charging provision) is the link
between the 8th Schedule and the
main act – provides for the inclusion
of ‘taxable capital gain’ in taxable
What is CGT? income. (Framework)

• Definition of gross income (s1):

- Amount
- Cash or otherwise
- Received or accrued
- During current YoA
- Not of a capital nature
NB: Amount is included once: either
in gross income in the framework or
in proceeds in CGT.

Separate CGT Framework – treat each asset separate

Par 3
Par 4

Fixed
Par 5 monetary
amount –
Par 6/7 not carried
over.
Par 9
Par 8

Portion of gains included in Framework:

Par 10
• Net capital loss = carry over to following YoA
• Net capital gain x 80% = Taxable capital gain for companies
• Net capital gain x 40% = Taxable capital gain for natural persons
2. Withholding tax applicable to disposal of immovable property in RSA by non-resident

• Withholding tax (s35A):

- If non-resident sells immovable property (or interest) in RSA.
- Purchaser withholds amount on behalf on non-resident and pays over to
SARS.
- Only if the sales price exceeds R2 million.

How is withholding tax calculated?

Non-final tax
• 7.5% if seller is natural person
• 10% if seller is company
• 15% if seller is trust

3. Person liable for CGT – par 2

• All persons are subject to CGT (whether registered for normal tax or not).

Residents Non-residents

Worldwide income – therefore liable for Only on the disposal of the following assets
CGT on the disposal of assets situated situated in RSA:
anywhere in the world. - Immovable property and any interest
in immovable property in RSA.
- Assets connected to a permanent
establishment through which the NR
SILKE: Example 17.2 and 17.3 carries on business in RSA.

Note: ‘Interest’
- Permanent establishment: any fixed 1. At least 20% interest in company
place of business. And
- Market value: for MV analysis, always 2. At least 80% of market value of shares
use gross MV and not CA. is attributable to immovable property in
RSA.
 Class example (par 2)

Non-resident (Mr A) sells immovable property in RSA @ R5 000 000 to a resident (Mr B) (Base
cost = R2 000 000)

Assume the resident withheld the WHT and no other transactions occurred. Calculate the normal
tax due on assessment.

4. Basic rules of CGT

Four requirements – ‘Building blocks of CGT’

• Asset
• Disposal during the YoA – actual and deemed disposals.
• Base cost calculated
• Proceeds calculated
Base cost includes:
• Acquisition cost;
• Improvement cost and
• Direct cost i.r.o. the acquisition
Only after all requirements are met, can CGT be calculated. and disposal of the asset.

Disposal – triggers calculation.

Calculation (par 3-10)

• Capital gain = Proceeds – Base cost Calculate separately for every disposal

• Capital loss = Proceeds < Base cost

• Hereafter calculate the sum of all capital gains or losses:
- Calculate capital gain/ loss first.
- Aggregate the gains and losses.
- If positive, then reduce it by the amount.
- Asses the prior year’s capital loss.
- If it’s positive apply either the 40% or 80% inclusion rate.
 Class example (par 3 to par 10)

Assume that the prior year assessed capital loss was R20 000.

IF <0: carried over to next YoA.

Four building blocks of CGT

Definition of an asset – par 1

Specifically excluded: currency

 • If you don’t have an asset as defined, then no CGT can be calculated.
• Mainly = more than 50%
• Trading stock is considered an asset but there are no tax consequences.
• Physical cash is not an asset because it can be stolen.
• Deposit in the bank is an asset and can calculate CGT but will always be 0.

Is Bitcoin a currency?
- Cryptocurrencies are neither official
South African tender nor widely used
and accepted in South Africa as a
medium of payment or exchange.
- As such, cryptocurrencies are not
regarded by SARS as a currency for
income tax purposes or Capital Gains
Tax (CGT).
- Investment seen as revenue in nature
(volatility).
- Therefore, included in GI and can get a
s11a deduction.

Disposals

i. Disposal events – par11(1) NB! par(2) overrides par(1)

• Any event, act or operation of law which leads to

• Creation, variation, transfer, extinction of asset
• Examples: sale, donation, exchange, destruction of asset
• Distribution of asset by a company to a shareholder.

Barter transactions example:

Jacob purchased a piece of land in 2010 for R200 000. In 2018 he entered into an exchange
transaction with Zanele. The terms were as follows:

- Jacob will give Zanele land valued at R300 000.

- Zanele in exchange will give Jacob a house valued at R320 000.
- In 2019 Jacob sold the house for R340 000.

Calculate the CGT effects of the transaction.

Remember:

Proceeds = MV of the asset received or given up.

Base cost = Purchase price
New base cost = MV of the asset given up.

2018 2019
Proceeds = R320 000 Proceeds = R340 000
Base cost = (R200 000) Base cost = (R300 000)
Capital gain = R120 000 Capital gain = R40 000
ii. Non-disposals – par11(2)
• Event deemed to not be a disposal, and thus there’s no CGT effect.
• Examples:
- Assets that are transferred as security for debt.
- Issuing of a bond.
- Company issues or cancels shares
- If you default on a loan, the ownership remains with you.

Disposals:
• Par11(1) = actual disposals (no longer have ownership.
• Par11(2) = Events are not seen as a disposal and therefore no CGT consequences.
• Par12 and s9H = Deemed disposal (not fully given up). Generally, occurs when there is a
change in the use of an asset.
• Par13 = Timing of the disposal. When to account for CGT to ensure it is in the correct YoA.

iii. Deemed disposals – par12 and s9H

• Although it is not an actual disposal, it is deemed to be one.
• Purpose of par 12 is to:
- Calculate the capital gain or loss or,
- To determine a new base cost.

a. Non-resident to resident b. Resident to non-resident

par12(2)(a)(i) s9H(2) and s9H(3)(a)

c. Asset of non-resident becomes asset of PE in SA (par 12(2)(b)(i))

- Base cost = Market value
d. Asset ceases to be asset of PE in SA (par 12(2)(b)(ii))
- Proceeds = Market value and calculate capital gains and capital losses.

• Counts as an exit charge for removing assets from the CGT net.
• The only par2(b) asset to which the exit charge does apply is an ‘interest in immovable
property’ as defined.
• Also includes trading stock and not only assets of a capital nature.

Referencing in test: par 12(2)(a)(i) of the 8th Schedule to ITA

iv. Time of disposal – par 13
• The time of disposal is important, because it may affect:
- The rate at which a capital gain is taxed or
- Whether a capital loss may be set off against a capital gain.

• Paragraph 13(1) provides the time of disposal of an asset in 2 situations:

When a specific event occurs If there is not a specific event
- When that stipulated event - When ownership of an asset
takes place. changes.
- I.e. disposal on the day the - For tax: on the day the contract is
suspensive condition is signed and not the day ownership
satisfied, e.g. obtain bond from is transferred.
Bank XYZ by June 2019.
- Contract linked to a future event.

• Examples: (Self-study)
Specific event, act, forbearance or operation Time of disposal
of law
An agreement for the disposal of the asset Date on which the suspensive condition is
subject to a suspensive condition. satisfied.
An agreement not subject to a suspensive Date of conclusion of agreement (usually the
condition. date when the offer is accepted by the seller).
Distribution of an asset on which the beneficiary The date on which the interest vests.
holds a vested interest.
Donation of an asset. Date of compliance with all the legal
requirements for a valid donation, which
includes, for example, acceptance of the
donation by the recipient.
Expropriation of an asset Date on which the taxpayer receives the full
compensation for the expropriation that is
agreed to or finally determined.
Conversion of an asset Date on which the asset is converted.
Granting, renewal or extension of an option. Date on which the option is granted, renewed or
extended.
Exercise of an option. Date on which the option is exercised.
Termination of an option to acquire a share, Date on which the option terminates.
participatory interest or debenture of the
company.

Note: the person who acquires the asset is deemed to have acquired it at the time of disposal.

v. Spouse married in community of property – par 14 Class example 1

• Asset in common estate = equal parts by each spouse.

• Some assets may be excluded.
• Only applicable when married in community of property.
• Each spouse is entitled to the R40 000 annual exclusion. (Per taxpayer)
Base cost – par 20

• Asset acquired before 1 Oct 2001: (Pre-valuation date assets)

- Base cost = Valuation Date Value (VDV) + allowable expenses since 1 Oct
2001
• Asset acquired on/after 1 Oct 2001:
- Base cost = allowable expenses incurred in acquiring the asset.

TP must prove base cost, otherwise = R0.

i. Allowable expenditure – par 20(1)

Allowable – despite s23(b) and (f)

• Actual expenses in acquisition/creation – the purchase price.
• Valuation costs – only if valued for CGT purposes.
• Direct expenses (e.g. transfer duty, installation, advertising costs, sales
commission)
- Transfer duty: tax when buying a house (sliding scale) and Securities
Transfer Tax (STT).
• Defence of legal title (even if unsuccessful)
- E.g. government enforces land expropriation – expense for the legal team.
• Improvements (enhancements)
- Note: a repair is a general deduction.
- Not all improvements are allowable expenditure.
- Includes improvements to a property by a tenant.
• Option (acquired before 1 Oct 2001) exercised after 1 Oct 2001 (read)
• Financing cost of listed shares or interest in CIS
- Only ⅓ of interest on loan/refinancing.
- Irrespective of whether for business assets or private use.
• Inheritance received by a resident from non-resident (read)
- Base cost = MV on death + allowable expenses incurred by executor
(valuation, etc.)
- N/A if the asset was already in the CGT net.
• Non-resident donates assets to a resident (CP) → MV.

NB: Expense is only deductible ONCE:

• Normal deduction (e.g. s 11(a)) OR
• Part of base cost

• Amount included in ‘gross income’ to be included in the base cost:

- Marketable securities or equity instruments (s 8C, BC = MV (Cost + profit)
- Lease assets + lease improvements (par(h) GI – s 11(h)) (at the end of the
lease term for lessor)
- Fringe benefit assets (BC = 7th Schedule value)
ii. Qualifying costs excluded from base cost – par 20(2) and s23C

Not Allowable Class example 2

• Financing cost (except listed shares – par 20(1)(g))

• Expenses already deducted under normal tax
- Capital allowances (e.g. s 12C wear-and-tear) Tax 399
- Holding costs (repairs, protection, etc.), i.e. operational cost.
• Any amount already reduced/recovered/paid by another person (price).
- E.g. when an expense incurred is reimbursed by another person.
• VAT (if VAT vendor could claim an input) [s 23C]
- If VAT vendor: can claim VAT and therefore excluded from base cost.
- Not a VAT vendor: can’t claim VAT and is therefore included in base cost.

iii. Cancellation of contracts – par 20(4) A1S2

• Contract entered into and cancelled in the same year of assessment – no

disposal (par 11(2)(o)).
- No CG/CL and BC stays the same.

• Contract entered into and cancelled in the subsequent year of assessment.

- Deemed to acquire at BC before contract was cancelled and improvements.
- Deemed CG realised: Where seller realised CL in previous y.o.a. (same
amount) – par 3(c).
- Deemed CL realised: Where seller realised CG in previous y.o.a. (same
amount) – par 4(c).

• What if buyer makes improvements before cancellation of contract? Discussion

- The seller assumes the original base cost and adds improvements, but only
if improvements are reimbursed.

iv. Limitation of expenditure – par 21

• Prohibits double deduction.
v. Donations tax paid by donor – par 22
• Portion of donations tax paid included in base cost of asset in the hands of the
donor.

𝐌−𝐀
𝐘= ×𝐃
𝐌
• Y = portion included;
• M = market value of asset;
• A = base cost of asset;
• D = donations tax (amount will be given)

• Donations tax = 20% (flat-rate) and exempt R100 000 per year and when
donated to a charity organisation.
• Tax liability on the donor, however, if the donor cannot pay, the donee can
be held jointly liable.
• Read par 22 with par 20(1)(vii) – allows a portion of the tax to be added to the
base cost.
Par 20(1)(vii): ‘so much of the donations tax which bears to the full amount of the donations tax so
payable the same ratio as the capital gain of the donor determined in respect of the donation,
bears to the market value of that asset on the date of donation.’
Capital gain of donor
Amount added to BC = Donations tax ×
MV
𝑃−𝐵𝐶
= Donations tax ×
MV

Example 17.20

vi. Pre-valuation date assets – par 25

• Residents who purchased assets before 1 Oct 2001 and
• Non-residents who immigrated before 1 Oct 2001.
• Asset acquired before 1 Oct 2001: Valuation Date Value (VDV) + allowable
expenses since 1 Oct 2001
• Asset acquired on/after 1 Oct 2001: allowable expenses
Mindmap: Pre-valuation date assets

vii. Kink test (loss-limitation rules)

• VDV = Valuation date value
• P = Proceeds
• B = Cost before 1 Oct 2001
• A = Cost after 1 Oct 2001
• MV = Market value (will be given)
• TAB = Time apportionment BC (will be given)

VDV in a historic gain situation – par 26

• Proceeds > Qualifying expenditure incurred before, on and after the
valuation date:
• The taxpayer must choose one of the following amounts as the valuation date
value of the asset: Higher of
- The market value of the asset on valuation date.
- 20% of (proceeds of the disposal less allowable expenditure incurred on or
after valuation date)
- The TAB of the asset will be given.

NB: If a person elects a valuation date value (VDV) in the year of disposing of the pre-valuation
date asset, and adopts the market value (MV) as the valuation date value, and the proceeds from
the disposal of the asset do not exceed that market value, the valuation-date value must be
substituted in terms of par 26(3)).

Example 17.22
 • Remember, if the taxpayer / SARS cannot determine the expenditure on a
pre-valuation date asset incurred before valuation date, then the taxpayer
may adopt only one of the following 2 amounts as the VDV of the asset:
- The market value of the asset on valuation date; or
- 20% of the proceeds less allowable expenditure incurred on or after the
valuation date.
Example 17.23

VDV in historic loss/break-even situation – par 27

• Proceeds < Qualifying par 20 expenditure
• If market value on valuation date determined, two situations may occur:
Par 20 expenditure before valuation date ≥ Par 20 expenditure before valuation date <
Proceeds AND Par 20 expenditure before Proceeds OR Par 20 expenditure before
valuation date ≥ Market value valuation date ≤ Market value

VDV higher of: VDV lower of:

- Market value or - Market value or
- Proceeds less base cost expenditure - The TAB cost of the asset.
incurred on/after valuation date.

Example 17.24 Example 17.25

• If the taxpayer did not determine market value on valuation date, nor was it
published by the Commissioner:
- The taxpayer must adopt the TAB cost of the asset as its valuation date
value.

viii. Time-apportionment base cost (TAB) – par 30

• Integration with other paragraphs stays important.
• When do we use TAB?
- Disposal of a pre-valuation date asset.
- Only capital gain after valuation date (1 Oct 2001) is subject to CGT –
determine VDV.
• VDV can be determined in 3 ways (par 26(1)):
- MV on 1 Oct 2001; or
- 20% x (Proceeds – par 20 allowable expenditure after 1 Oct 2001); or
- TAB

ix. Market value of assets (par 31) – MV will be given

Proceeds – par 35 - 43

• An amount is anything with monetary value and is not limited to cash only
(Lategan).
• Received by (Geldenhuys) or accrued (Mooi) to in respect of that disposal.
Term Meaning
Amount Lategan: ‘Amount’ includes not only money but also every form of property
earned by the taxpayer which has money value, even the right to receive
future payment.

Received by Geldenhuys: An amount is only received by the taxpayer if it is received on his

own behalf and for his own benefit.

Accrued to Mooi: Meaning of ‘accrued’ is extended to ‘unconditionally entitled to’

payment.

Specific - Amount by which any debt owed has been reduced or discharged;
inclusions - Amount received by or accrued to a lessee from lessor with regards to
improvements to leased property.

No discounting: always use face value (not present value) – par 35(4).

Par 35(1)(a) – debt Par 35(1)(b) – improvements

Disposal of debt Leasehold improvements

Proceeds = R100 (discharged debt) + R50 (cash back) Proceeds = Reimbursement

CG or CL = Proceeds – BC

• Composite disposals
- E.g. sell the whole business for a lump sum.
How to calculate capital gain/loss?
- Allocate with MV and
- Calculate with BC.

Example – Lumpsum payment of R 1 500 000

Market value Allocation Proceeds
100 000
A. 100 000 𝑥 1 500 000 R150 000
1 000 000
200 000
B. 200 000 𝑥 1 500 000 R300 000
1 000 000
700 000
C. 700 000 𝑥 1 500 000 R1 050 000
1 000 000
R1 000 000 R1 500 000
i. Amounts excluded from the definition of ‘proceeds’ – par 35(3)

Paragraph Amounts excluded

a) Amounts are taken into account when determining a person’s taxable income for
normal tax purposes. E.g. recoupment of capital allowances, interest received from
bank.
b) Any amount that has been repaid or becomes repayable to the person who
purchased or acquired the asset.
c) If the price of the disposed asset is reduced by:
- A termination, cancellation or variation
- Release from an obligation
- Prescription or waiver
- Any other event, e.g. a discount due to damages on the asset.

VAT vendors act as agents for SARS and therefore any output tax levied on the
disposal of an asset needs to be paid over to SARS and is not included in proceeds.

ii. Unquantified amounts – s24M

• Consideration not quantifiable on date of acquisition or disposal.
• Incurral or accrual is deferred until amount becomes quantifiable.
• Nature of amount (income vs. capital) is not determined by s24M.

iii. Proceeds deemed at market value – par 38 Par 22

• Person donates asset (can be to anyone) or

• Person disposes of asset at consideration not measurable in money or
• Person disposes (sells or donates) to a connected person not at arm’s
length
Connected person – s1 Relative – s1
“In relation to a natural person – any relative.” “Means the spouse of that person or anybody
related to that person or that person’s spouse
within the third degree of consanguinity.”

What does arm’s length mean?

It connotates that each party is independent of

the other and, in so dealing will strive to get the
utmost possible advantage out of the
transaction for himself.

Consideration which is not at arm’s length

could be greater than or less than the market
value of the asset.

Arm’s length price = does not always mean

market value but for Tax 298 we consider it to
be market value.
 • Then:
- Seller’s proceeds = MV
- Purchaser’s base cost = MV

• Par 38 is not applicable if transfers between spouses (s9HB)

- Note: in the 2019 Act it says s67, however, this section has been deleted from the act.
Therefore, read it as if it says s9HB.

Par 38 establishes proceeds for the seller and BC for buyer – see example 17.9

5. Exclusions, rollovers and attributes

The four building blocks of CGT are necessary to determine the capital gain or loss in
respect of each asset. The next step is to calculate the capital gain or loss:
Proceeds > Base Cost Proceeds < Base Cost
- Proceeds – Base Cost = Capital gain - Proceeds – Base Cost = (Capital loss)

However, the following must be noted: However, the following must be noted:
- Certain capital gains must be disregarded - Certain capital losses must be disregarded
or ignored or rolled forward. or ignored or limited.
- Certain capital gains which result from a
donation will be attributed to the donor.
(Inter vivos trust – HONS)

i. Assets disposed of to a connected person – par 39 Class example 3

• If the disposal of an asset is to a connected person

- Who was connected immediately before disposal or,
- Immediately after disposal.
• Capital loss is clogged and is not permanently disregarded.
- Clogged is like ring-fencing.
- Can only offset capital loss against the capital gain from the same
connected person.
- I.e. carry over to next year of assessment until another disposal with the
same connected person occurs.

• Ignore CL in ‘aggregate CG or CL calculation’.

• NB! Connected person definition in par 39(3) is different to par 38.
- Par 39 is more restrictive.
- Par 38 has a broader scope and is defined in s1 of the Act.

Connected person – s1 Connected person – par 39

“In relation to a natural person – any relative.” “A natural person does not include a relative of
that person other than a parent, child,
stepchild, brother, sister, grandchild or
grandparent of that person.”
ii. Primary residence exclusion – par 44 - 50

• Primary residence Definitions par 44

- A residence in which a natural person holds interest and which that person
or a spouse of that person –
i. Ordinarily resides or resided in as his or her main residence and,
ii. Uses or used mainly (>50%) for domestic purposes (personal use only).

If for example someone has a building that is used as a home and as a business (e.g. a shop) then
compare the size of the shop vs. the size of the living space. It must be the greater of for it to be
classified as being a living space.

• Residence
- Any structure, including a boat, caravan or mobile home,
- Which is used as a place of residence by a natural person, together with
any appurtenance (e.g. swimming pool) belonging thereto or enjoyed
therewith.
• This can only apply to South African residents.
• Cannot apply to a person’s holiday home as it isn’t a primary residence.

Gross exclusion – R2m proceeds rule Gain exclusion – R2m gain rule
par 45(1)(b) par 45(1)(a)
Natural person or special trust disposes of • Consider ‘gain rule’ when R2m ‘gross rule’
primary residence. does not apply.
i. Disregard full capital gain provided that • Disregard CG or CL to the extent that it
proceeds ≤ R2m does not exceed R2m.
ii. Exclusion is not applicable (par45(4)),
when:
- Not ordinarily resident in residence for
the whole of the period during which
interest is held (period commences on or
after 1 Oct 2001), or
- Residence (or part thereof) is used for
purposes of trade. E.g. if there was a
home office cannot apply.

Must meet all three requirements:

• Proceeds ≤ R2m
• Been a resident the entire time.
• Only used for domestic purposes.

A taxpayer cannot choose between par 45(1)(a) and par 45(1)(b):

• In other words, if proceeds ≤ R2m, and leads to CG then, entire CG is ignored (par 45(1)(b)).
• If proceeds ≤ R2m and leads to CL then, CL is subject to R2m exclusion in terms of par
45(1)(a).
• If proceeds > R2m then, both CG or CL is subject to R2m exclusion in terms of par 45(1)(a).
• Par 45(1)(b) is therefore not applicable to CL.
Primary residence exclusion principles

• Entitled to exclusion on every disposal of primary resident.

• However only one primary resident at any given time – par 45(3).
- E.g. if you own a flat in CPT and in JHB, cannot apply the exclusion to both.
• Immovable property specifically excluded from par 53, hence primary
residence cannot be a personal use asset.
• Exclusion is ‘per residence’ and not ‘per person’ – par 45(2).
- Hence, where more than one natural person holds an interest in a primary
residence an apportionment needs to take place. E.g. spouses married in
community of property (COP).

Spouses married in COP More than one interest holder

- Exclusions operate on a ‘per primary - More than one person holds interest in the
residence basis. residence, and
- Not on a ‘per person holding on interest - It is not the primary residence of all those
basis.’ persons

A husband and wife are married in COP. The Two sisters own a share of 50% each in a
property was the primary residence of both house
parties - Sister one occupies the house as her PR
- Sister two lives in another house
Proceeds = R4 000 000
BC = R1 000 000 Proceeds = R4 000 000
BC = R1 000 000

*Did not
use as
primary
residence.
Gross exclusion = whole capital gain is disregarded
Gain exclusion = only disregard gain up to 2m
Three limitations

Apportionment of capital gain or loss (par46-par50)

a. The apportionment is limited to a land size of two hectares – par 46

• When a person disposes of a primary residence together with the land the
exclusion will only apply to so much of the land, as does not exceed 2
hectares.
• The land must be mainly used for domestic or private purposes.
• The land must be disposed of at the same time and to the same person who
buys the residence.

b. Apportionment for periods not ordinarily resident – par 47

• The exclusion will only apply for the time the person was ordinarily resident
in his primary residence.
• They do not need to be living in the residence at the time of the sale to qualify.
• It only needs to be used as a primary residence for a part of the time he or
she owned it.
• In such cases, the CG or CL must be disregarded and must be determined
with reference to the period during which the person was in fact ordinarily
resident.
• However, par 48 provides exceptions.

c. Apportionment for periods of absence deemed to be ordinarily resident –

par 48
• Person is deemed ordinarily resident for up to two years if:
- PR was vacated due to the acquisition of a new PR; or
- PR was erected on land that was acquired for the purpose of building a PR,
or
- PR was accidentally rendered uninhabitable, or
- The taxpayer died
• If the period of absence exceeds two years, the person is treated as though
he was only resident for two years.
• If period ≤ 2 years, then deemed to
have been OR for the period.
Therefore, the person is OR for the
whole period and no apportionment
will be made.
• If period > 2 years, then deemed to
have been OR for a maximum of two
years.
Therefore, OR = actual + maximum 2
years for the apportionment of CG or
CL.
d. Apportionment for non-residential use of the primary residence – par 49
• The exclusion will only apply to the residential use of the property.
• An adjustment must be made with reference to the period during which part of
the residence was used for carrying on trade.
• However, par 50 provides exceptions.

e. Periods of non-residential use deemed to be residential use – par 50

• Will be deemed to be residential use for up to 5 years if:
- Trade is for temporary letting of the PR, and
- The person resided in the PR for a continuous period of at least one year
prior to and after the letting, and
- The person had no other PR during the period of letting, and
- The person is temporarily absent from RSA, or
- They were employed or engaged in carrying on business in RSA at a
location further than 250km from PR.
• If the period of absence exceeds 5 years, then it is deemed to be for trading
use
• If period of letting (absence) ≤ 5
years + lived in PR 1 year before and 1
year after lease period + no other PR
during this time + was absent from RSA
or employed or trading > 250km from
PR
= deem trade period to be domestic
use.
Then: Whole period is considered
domestic use and there’s no
apportionment.
• If period of letting (absence) > 5 years
= apportionment of CG or CL
Then: No par 50 relief (all or nothing
concession) and no deeming.
f. R2 million capital gain or loss rule
Class example 6
iii. Other exclusions

a. Personal use assets – par 53

• Only applies to natural persons.
• PUA = assets that are mainly used for non-trade purposes.
• Assets for which an allowance is received such as a business car or
cellphone will be treated as a PUA.
• Any capital loss must be disregarded i.t.o. par 15 (to extent that it is used for
non-trade purposes), but a capital gain must be taken into account.

• Specifically excluded from PUA – par 53(3)

- An aircraft with an empty mass exceeding 450kg
- A boat exceeding 10m in length
- Coins of gold or platinum
- Fixed property (primary residence)
- Financial instruments e.g. shares
- A right or interest in any of the above assets

Capital gain or loss (disregarded) = Proceeds – Base cost

b. Limitation of losses – par 15

Start with par 53:
• Ignore capital losses with disposal of the following Requirements:
assets to the extent that they are used for non- 1. Natural person
2. Mainly used for non-trade
trade purposes:
purposes
- An aircraft with an empty mass > 450kg 3. Specifically excluded
- A boat exceeding 10m in length
Par 15:
- Any fiduciary or other like interest of which the Requirements:
value decreases over time 1. Capital loss
- A right or interest of whatever nature in the 2. To the extent that they are used
for non-trade purposes.
above assets

• Any capital loss on the disposal of a boat > 10m used for non-trade purposes
only and any capital gain should be included.
• If a par 15 asset is used for both private and trade purposes = apportionment
is made. Only the portion of the capital loss relating to private use will be
disallowed i.t.o par 15.

c. Lumpsum retirement benefits – par 54

• A person must disregard capital gains and losses determined in respect of a
disposal that resulted in him receiving:
- A lump sum benefit that is from a pension, provident or retirement annuity
fund.
- A lumpsum benefit from a fund, arrangement or instrument situated outside
South Africa.
d. Disposal of small business assets – par 57 Class example 9

• Requirements for exclusion:

- Must be a natural person
- Must dispose of active business assets
- Be substantially involved in the small business
- Have attained the age of 55 years or older
- Have realized all their capital gains within a period of 24 months,
commencing from the date of the first qualifying disposal

• If all these requirements are met, a maximum amount of R1.8 million of CG

can be disregarded over a lifetime.
• In a small business, the market value of all the assets does not exceed R10
million as on the disposal date.

• Where a person owns more than one small business:

- All small businesses qualify for exclusion if the total MV of all the small
businesses assets are ≤ R10m.

e. Compensation for personal injury, illness or defamation – par 59

• A person can disregard a CG or CL determined in respect of compensation
for compensation, personal injury or defamation.
• Only applies to personal injury for natural persons and special trusts.

f. Gambling, games and competitions – par 60

• A natural person may disregard a CG or CL determined on a disposal relating
to any form of gambling, games and competitions if,
• The form or game or gambling is authorised by SA laws
• Exceptions that will be subject to CGT:
a. Foreign winnings by natural persons
b. Illegal gambling games and competitions in SA
c. Capital gains by companies, trusts and other non-natural persons

g. Collective investment scheme in securities – par 61

• Only determine CG or CL when the holder of that particular investment
disposes of the interest.
• The CG or CL = proceeds with disposal less the base cost of interest.
• Hence any CG or CL is disregarded.

h. Donations to public benefit organizations – par 62

• Person disregards the CG or CL determined in respect of the donation or
bequest of an asset by that person to:
a. The government
 b. A public benefit organization
c. A person approved by the Commissioner
d. A political party, body corporate or share block company
e. A recreational club

i. Recreational club – par 63

• A person, body or institute that is exempt from tax i.t.o. s10 must disregard
the CG or CL of any disposal.
• The only applies if to persons who are fully exempt from tax with regard to all
gross income i.t.o. s10.
• Excluded: Public benefit organizations and recreational clubs = partially
exempt.

Class example 10
iv. Roll-over relief

• s9HB is applicable on all types of disposals, including donations, sale and

transfer of assets between spouses.
• Effect of s9HB
a. Disregard any CG or CL resulting from a transfer; and
b. Transferee inherits the history of the asset transferred.
• Hence, transferee deemed to:
- Have acquired asset on the same date
- Have acquired asset at same cost (base cost prior to disposal)
- Have incurred cost on the same date and in the same currency
- Have used the asset in the same manner
- Treat proceeds on future disposal in the same manner

• Relief is not available if: The receiving spouse is a non-resident unless the
asset falls within the CGT-net.

6. Final step and changes to capital gain or capital loss

• Par3(b) and par4(b) both deal with the capital gain or capital loss in the
previous year of assessment.

FOUR SITUATIONS
Par 3(b)(i) • Additional proceeds are received or accrued CG
Par 4(b)(i) • Proceeds reduced in the following years CL
Par 3(b)(ii) • Part of the base cost is recovered or recouped CG
- E.g. A discount after disposal
- From 1 January 2013 onwards, the cancellation of debt is
excluded
Par 4(b)(ii) • If the BC increases in the following years CL
- E.g. Unforeseen additional costs incurred after the disposal
 CHAPTER 8 EMPLOYMENT BENEFITS

The following abbreviations are used in these notes:

Abbreviation Meaning
CE Cash equivalent
CP Cost price
MV Market value
EE Employee (as defined in paragraph 1 of the 7th schedule to the ITA)
ER Employer (as defined in paragraph 1 of the 7th schedule to the ITA)
MRV Meals, refreshments and refreshment voucher
ROU Right of use
ET Employees’ tax
ITA Income Tax Act
GI Gross income
CP Connected person
L/I/M License, insurance and maintenance cost
These abbreviations may be used for the purposes of answering assessment questions IF a legend
is provided in the answer script.
Per SAICA’s examinable pronouncements, the following amounts will be provided in
assessments:
- Repurchase rate
- Relevant retail market value
- Par 12D value
- Remuneration proxy

1. OVERVIEW
Differences and similarities regarding the above employment benefits:
Legislation Deals with Include in
Paragraph (c) of the Amounts received i.r.o. services Gross income – the applicable
GI definition rendered but not allowances, 8C value of benefits excluded from the
instruments or taxable fringe definition of ‘taxable benefit’ – if par
benefits. (c) of the GI definition applies.

Paragraph (i) of the Fringe benefits (i.e. non-cash Gross income – CE of any taxable
GI def read together employment benefits). benefit in terms of the 7th schedule
with the 7th schedule (including taxable benefits with a nil
value).

Section 8(1) All allowances and has special Taxable income –

rules for travel and subsistence • net amount of any allowance or
allowances. advance (after deducting any
portion thereof expended for
specified business purposes) in
the case of travel and
subsistence allowances.
• gross amount of any other
allowance or advance.

Section 8C read Equity instruments Income – gain on the vesting of an

together with equity instrument obtained by virtue
paragraph (n) of the of employment.
GI def

2. ALLOWANCES – s8(1)

s 8(1)(a)(i) all amounts paid or granted by a principal to a recipient as an allowance or advance

must be included in the taxable income of the recipient to the extent that the allowance or
advance or portion of the allowance or advance:
• Is not exempt from normal tax under s 10; or
• Has not actually been expended for the specific purposes stated
in s 8(1)(a)(i)(aa) – (cc) in the case of travelling on business and subsistence.

Refer to SARS Interpretation note 14 (issue 3)

‘recipient’ for the purposes of s8(1)(a) means:

• The person who has been paid or granted an allowance, advance or reimbursement by a
principal.
• I.e. employee or holder of an office.

‘principal’ for the purposes of s8(1)(a) include:

• the employer of the recipient of an allowance; or
• the authority, company, body or other organisation in relation to which any office is held; or
• any “associated institution” as defined in the Seventh Schedule in relation to that employer,
authority, company, body or organisation.
 Allowances, Advances and Reimbursements – what is the difference?
- Different tax consequences

Allowance Advance Reimbursement

An allowance is an amount of An advance is an amount of A reimbursement of business-
money granted by an employer to money granted by an employer to related expenditure occurs where
an employee to incur business- an employee to incur business- the employee has incurred and
related expenditure on behalf of related expenses on behalf of the paid for business-related
the employer, without an employer, with an obligation on expenses on behalf of an
obligation of the employee to the employee to prove or employer without having had the
prove or account for the account for the business- benefit of an allowance or
business-related expenditure to related expenditure to the advance and is subsequently
the employer. The amount of the employer. The amount of the reimbursed for the exact
allowance is based on anticipated advance is based on anticipated expenditure by the employer after
business-related expenditure. business-related expenditure. The having proved and accounted
employer covers the difference for the expenditure to the
from the employee if the actual employer.
expenses incurred are less than
the advance granted and vice
versa.

• Anticipated business expense • ER/ EE covers difference • Nothing received before

(future-looking) between actual business incurring expense.
• Don’t need any proof. expenditure and amount paid • Claim exact business
in advance. expense (slip & logbook)

• s 8(1)(a)(ii): provides that in limited circumstances a reimbursement or advance must

not be included in taxable income as otherwise required by s8(1)(a)(i).

• Reimbursements or advances need not be included in taxable income IF:

- Reimbursement or advance was or must be expended by the recipient on
instruction of the principal in the furtherance of the principal’s trade; and
- The recipient must produce proof to the principal that the amounts were wholly
and actually expended for this purpose; and
- The recipient must account to the principle for the expenditure; and
- If the expenditure was or will be incurred to acquire an asset, ownership in that
asset must vest in the principal.

Per IN 14 paragraph 5.2: ‘travel reimbursements’ are an exception to this rule. I.e. s8(1)(a)(ii)
does not apply to travel reimbursements. The provisions of s 8(1)(a)(i) and 8(1)(b) must still be
applied to ‘travel reimbursements’.

A. Travel allowances – s8(1)(b)

• Generally granted by principal (usually ER) to recipient (usually EE) for the
use of a private motor vehicle for the principal’s business purposes.
• The travel allowance must be included in the recipient’s taxable income to
the extent that it is not expended for business travels.

Amount included in taxable income (Net amount) = gross allowance less portion expended for
business travels*
*No expenditure can be claimed unless an accurate logbook is kept.
(In assessments the scenario will state whether the taxpayer kept an accurate logbook).

Effect: employee is taxed on the portion of the allowance expended for private travel purposes.
 Exception:
• If a fixed travel allowance (fixed or reimbursive) is received i.r.o. a par 7
company car and the taxpayer also has right of use of the same vehicle:
• The full gross travel allowance is included in taxable income, no deduction is
allowed against the travel allowance, the company car is taxed i.t.o. par 7,
and the par 7(7) and 7(8) – reductions will be allowed.

Two types of travel allowances: TP can choose

most beneficial
Fixed travel allowance Reimbursive travel allowance S8(1)(b)(iii) method.

• Fixed amount per month regardless of • Based on actual kilometres travelled

business km's travelled in any motor for business in any motor vehicle
vehicle (therefore receive the amount (therefore only receive the amount if
irrespective of whether travelled for has already travelled for business).
business at all).
• Business expenditure calculated in 1
• Business expenditure calculated in 1 of of 3 ways:
2 ways: a. Actual cost method
a. Actual cost method b. Deemed cost method
b. Deemed cost method c. Simplified method

S8(1)(b)(ii) transport expenditure and s 8(1)(b)(ii) s 8(1)(b)(iii) – variable remuneration s 7B (after 1

March 2020)
expenditure i.r.o. motor vehicle used – variable
remuneration s 7B.

Note: New provisio from 1 March 2020

• The definition of “variable remuneration” in s 7B(1) has been expanded to include “an
allowance or advance paid in respect of transport expenses as contemplated in section
8(1)(b)(ii) or (iii).”
• The effect is that these transport allowances and advances are deemed to accrue in the
YoA in which they are PAID.
• This, business km deemed to be travelled in the same YOA that allowance accrues (when
paid due to being variable remuneration) – i.e. business kilometers travelled is aligned with the
accrual of the allowance.

‘Value’ of the vehicle

Bonafide agreement of sale or exchange Original cost (for EE), including VAT, but
excluding finance charges.

NB! IN 14: If the cost price at acquisition

includes a maintenance plan and deemed
costs are claimed, the maintenance cost
component cannot be claimed

Instalment credit agreement (par b) or Cash value

financial lease
In any other case Market value
 “Business travel” vs “private travel”
• S8(1)(b)(i): travel between the recipient’s place of residence and place of
employment = is considered to be private travel – even if the travel takes place
after normal work hours/ during extended working hours (IN 14, issue 4).

Examples of private travel Examples of business travel

• Home to office • Office in JHB and have to attend a
• Friend or relatives house to office. conference in Ruimsig.
• If your ER has stores in various • Consultant stops at a client en route
parts of the province, and TP is to his office – distance between his
required to work a portion of the home and the client and the
week at a different store. distance from the client to office.
• Salesperson usually works at V&A
travels from her usually shop to PTA
store to do a stock count – travel
between home, CPT and PTA.
• Home office – travel to a client’s
house to assist.

Methods to calculate business portion

a. Actual cost method

Available ONLY IF accurate records of costs were kept. (I.e. the

taxpayer must be able to prove the amount of actual costs
incurred).

Portion expended for Business Km x Actual rate per Km

business purposes

Calculation of actual rate per KM Amount (R)

• If vehicle is leased: lease payments – total lease payments for the year
may not be > fixed cost per table based on the vehicle’s cash cost.
x
• If vehicle is owned: wear and tear – calculate over a 7-year period, cost
is limited to R595 000.

Finance charges incurred to finance acquisition of the vehicle – limited to an

amount which would have been incurred had the original debt not exceeded x
R595 000.
Fuel costs / maintenance costs/ insurance costs/ licensing fees/ etc. x
Total actual cost incurred xx

𝐓𝐨𝐭𝐚𝐥 𝐚𝐜𝐭𝐮𝐚𝐥 𝐜𝐨𝐬𝐭 𝐢𝐧𝐜𝐮𝐫𝐫𝐞𝐝

Actual rate =
𝐓𝐨𝐭𝐚𝐥 𝐤𝐦 𝐭𝐫𝐚𝐯𝐞𝐥𝐥𝐞𝐝
b. Deemed cost method

Available In all cases, irrespective of whether the taxpayer kept

accurate records of costs incurred.

Portion expended for Business Km x Deemed rate per Km

business purposes

Calculation of deemed rate per KM Amount (R)

• Fixed cost per table/ total km travelled during the year (this includes km
travelled for both private and business purposes).
• If the vehicle is used for business purposes during a period which is less
than a full year, the fixed cost must be reduced proportionately then:
x
𝐃𝐚𝐲𝐬 𝐮𝐬𝐞𝐝 𝐟𝐨𝐫 𝐛𝐮𝐬𝐢𝐧𝐞𝐬𝐬 𝐩𝐮𝐫𝐩𝐨𝐬𝐞𝐬 ÷ 𝟑𝟔𝟓 (𝐨𝐫 𝟑𝟔𝟔)
- Fixed cost per table × 𝐓𝐨𝐭𝐚𝐥 𝐤𝐦 𝐭𝐫𝐚𝐯𝐞𝐥𝐥𝐞𝐝 𝐝𝐮𝐫𝐢𝐧𝐠 𝐭𝐡𝐞 𝐲𝐞𝐚𝐫
- Fixed cost amount in quoted in RAND.

Fuel cost per KM as per table where the recipient has borne the full cost –
quoted in cent per km – must, therefore, convert to RAND. x

Maintenance cost per KM as per table where the recipient has borne the full
cost* – quoted in cent per km – must, therefore, convert to RAND.
x
*Cannot be claimed if a maintenance plan is part of the cost price at acquisition.
Deemed rate per km xx

c. Simplified method

Available Allowance must be based on actual km travelled; and

no other travel allowance or reimbursement (other than for
parking or toll fees) is payable by the principal to the
recipient.

Portion expended for Business Km x Simplified rate per Km

business purposes

Simplified rate = fixed amount of 361c per km (ITA)

• Cannot apply if the person receives a fixed allowance per month.

• Applies when for example, the person is sent to a client and the company reimburses
them per km.

Anti-avoidance rule – s8(1)(b)(iv)

• Employee (or spouse or child) lets their own vehicle to the employer (ER) or
associated institution and is then awarded the right of use of the same vehicle:
 Travel allowances and employees’ tax – chapter 10
Reimbursive travel allowance 100% of excess* = remuneration
* Excess = (rate paid by ER less rate of simplified
method R3.61) x business km travelled

Fixed travel allowance If the ER convinced that:

• Vehicle < 80% for business:
80% x gross travel allowance = remuneration
• Vehicle ≥ 80% for business:
20% x gross travel allowance = remuneration

B. Subsistence allowances – s8(1)(a)(i)(bb) & s8(1)(c)

• s 8(1)(a)(i)(bb) requirement: EE must spend at least one “Night” means one full
night away from his usual place of residence in SA for period from sunset of
one day to sunrise of the
business purposes – i.e. EE must be a resident. next.
• Claim deemed costs per day/part of a day – s 8(1)(c)(ii) –
i.e. one night away = can claim 2 days’ deemed costs.
• Net subsistence allowance is included in taxable income.

Methods to calculate business portion

a. Actual cost method

Available • The amount TP proves to CSARS was actually
incurred.
Amount the recipient actually • Therefore, the recipient will need to obtain and retain
expends for business
purposes is
supporting documentation (invoices, receipts, etc.)
• For accommodation, meals and other incidentals.

Excluding • Any amount of expenditure borne by the ER (otherwise

than by way of the allowance or advance).
• The ER bears the expense if:
- The ER pays it directly or,
- If the EE pays the expense but is subsequently
reimbursed by the ER.

Limited to • The amount of allowance or advance granted to meet

the expenses.

Please note that:

• Only actual proven costs and not deemed costs can be claimed in respect of
accommodation.
• If the service provider levies a single charge for bed and breakfast, the cost of the
breakfast may be regarded as part of the cost of accommodation.
 b. Deemed cost method

Available • For meals and other incidental costs, or incidental costs

Amount the recipient actually only.
expends is deemed to be • For each day or part of a day in the period during which
equal to… the recipient is absent from his or her usual place of
residence.
• An amount determined by the CSARS as published in
the Government Gazette.

Excluding • Any amount of expenditure borne by the ER (otherwise

than by way of the allowance or advance) for which the
allowance or advance was paid.
• Any amount proved by the recipient to SARS as the
actual expenditure and claimed as a deduction for
meals or incidental costs equal to the actual costs for
that day or part of that day.

Limited to • The amount of the allowance or advance granted to

meet these expenses.

Amount determined by the CSARS

TRAVEL WITHIN RSA TRAVEL OUTSIDE RSA
R138 per day for incidental costs paid. See amounts per regulation on pages 300-
R435 per day for meals and incidental 304 of the ITA.
costs. Counties are listed in alphabetical order.

s 25D translation rules: spot rate or average

rate for NPs – s 25D(3).

Subsistence allowances and employees’ tax – chapter 10

• Not remuneration – definition of ‘remuneration’ par (bA)(ii) of the 4th
Schedule to the ITA.
• BUT (proviso to subpar (ii) of par (bA) of the definition of ‘remuneration’ in par
1 of the Fourth Schedule):

If the employee has not by the last day of the month following the payment of the
allowance either…
i. Spent a night away from his/her usual place of residence; or
ii. Paid the allowance back to ER, the amount is
▪ deemed to be paid for services rendered (‘gross income’ par (c)), and
▪ ET must then be deducted.

C. Other allowances or advances or reimbursements

• s8(1)(a)(i) is meant to deal with all allowances, advances and

reimbursements not only those related to travel and subsistence.
Travel/ subsistence allowance Net amount included in taxable income – s 8
specifically allows the gross allowance/ advance
to be reduced with the “business” expenditure
incurred.

Any other allowance – that is NOT Gross amount included in taxable income – s 8
travel or subsistence does not allow for the gross allowance/ advance
E.g. to be reduced with the “business expenditure
• Cell phone allowances/ advances/ incurred”.
reimbursements
• Housing allowances
• Entertainment allowances/
advances/ reimbursements

3. SEVENTH SCHEDULE BENEFITS ‘valuation rules’ for non-cash benefits

Paragraph (i) of the gross income definition in section 1(1).

“The cash equivalent, as determined under the provisions of the Seventh Schedule, of the value
during the year of assessment of any benefit or advantage granted in respect of employment or to
the holder of any office, being a taxable benefit as defined in the said Schedule…”

Fringe benefit
• Defined as: Benefits granted to EE in a form other than cash – for services
rendered.
- E.g. the employee may have the right to use a company car in lieu of a portion of
his or her cash salary.
• Can be beneficial to EE, as the amount that the EE must include in his or her
gross income pursuant to par (i) of the definition of gross income, may be
lower than the amount of cash salary sacrificed to obtain the benefit.
• Par (i) of the gross income definition includes the ‘value’ of fringe benefits
received by employees or directors in their gross income.
- This ‘value’ is called the ‘cash equivalent’ of the fringe benefit and it is determined
under the provisions of the 7th Schedule. (Cash equivalent = value of non-cash
benefit.)
• Obligation on ER to determine the cash equivalent of a taxable benefit.
- ER completes an IRP5 form.

• If not a taxable benefit: fall back to par (c) of the definition of gross income.
• The Act contains ‘no value’ provisions in respect of each type of taxable benefit – par (i)
benefit but means that the CE is nil. (Cannot include i.t.o. par (c).)

• Exclusions to the definition of ‘taxable benefit’ in par 1.

- benefits that are exempt i.t.o. s 10
- medical services and other benefits provided by a benefit fund
- lump sum benefits from a retirement fund or a benefit fund
- benefits received by government employees stationed outside the Republic in
respect of services rendered outside the republic, and
- severance benefits (lump sum cash amount)
 • “benefit or advantage granted in respect of employment”, i.e. an ER-EE
relationship must exist.

Associated institutions • Defined in par 1 = Deemed that the ER granted the

Anti-avoidance benefit (in terms of par 4).
• TPs claimed that as an EE-ER relationship did not
exist, it was not a FB as defined.
• Three categories of employers:
- ER is a company: another company managed or
controlled by the same person.
- ER is not a company: another company
managed or controlled by ER/partnership of
which ER is a member.
- ER is a fund: established to provide benefits to
EEs.

Benefits granted to relatives of EE • As a result of the EE’s employment or services

and others rendered.
• Par 16 → taxed in the hands of the EE.

Consideration paid by EE • When calculating the CE → deduct any

consideration paid by the EE.
• CE = Value – consideration
• Services rendered ≠ consideration
• E.g. receive a company vehicle, but must pay
R2000 p.m.

ER’s duties • ER who granted the TB has the responsibility to

determine the CE.

Types of taxable benefits – par 2

Par of the Seventh Schedule Details
2 Defines the types of taxable benefits (fringe benefits)
5-13 Determines the cash equivalents (CE) of the taxable benefits.

Paragraph 2 Employment Benefit Valuation

(a) Acquisition of an asset for no consideration or at less than actual 5
value – e.g. laptop (R10 000) pay R6 000.
(b) Right of use of an asset (but not residential accommodation or 6
motor vehicles – own paragraphs)
(b) Right of use of a motor vehicle 7
(c) Meals & refreshments & vouchers – but not if provided with 8
residential accommodation
(d) Residential accommodation 9 and 10A
(e) Free or cheap services – e.g. SU gives discount to kids of lecturer 10
(f) Low-interest loans 11
(g) Subsidies on loans 12
(gA) Housing subsidy scheme 12
(h) Payment of employee debts or release of an employee of an 13
obligation to pay a debt
(i) Benefit funds – e.g. medical aid contributions 12A
(j) Medical expenses paid by ER – other than contributions 12B
(k) Long-term insurance paid by ER 12C
a. Assets acquired at less than the actual value

Definition • Asset acquired for no consideration; or

Par 2(a) and 5 • Asset acquired for less than actual value (see exclusions)

Cash equivalent • Value of the asset less consideration paid by EE

Value • MV on date of acquisition by EE.

• Special rules in par 5(2):
CP or MV used = - Movable property acquired to provide to EE = CP
excluding VAT - Marketable securities and assets previously used by ER =
MV
NB! Memorise list for
- Trading stock of ER = lesser of CP/MV
exam, cannot rely on
- Asset for bravery/long service = ҅ Value’ less the lesser of
the Act.
CP or R5 000
• ‘Long service’ – initial unbroken period of service of not less
than 15 years or any subsequent period of service of not less
than 10 years.

No Values • Fuel and lubricants i.r.o. company car if private use brought
into account as taxable benefit – i.e. taxed in different par.
• Immovable property acquired by EE – see exceptions
below
• Acquisition of accommodation – requirements in s10A(2)

Employees Tax • CE = remuneration

Additional • Zero value items = TB, then Rnil is included in gross income
in terms of par (i).
• If an item is not a TB – not within the 7th schedule and must
fall back to par (c) of the definition of gross income.
• Base cost for CGT purposes = value in the 7th Schedule.

Immovable property acquired by EE – When is it not a zero-value item?

• No value provision – par5(3A)
• Must meet all three requirements for it to be a zero-value item.
b. Use of sundry assets

Definition • Free private (or domestic) use of various assets; or

Par 2(b) and 6 • Private use of various assets for a consideration less than the
value of private use.

Cash equivalent • Value of the asset less consideration paid by EE

Value • ER rents asset: Rent paid by ER

of private use • ER owns asset: 15% (for a full year) x lesser of CP or MV of
asset x (period used/365 or 366 days)
• EE has sole right of use of asset over useful life or major
portion thereof: CP for ER

MV – on the date of the commencement of the period of use.

I.e. taxable benefit is deemed to have accrued to the EE on the day on
which he was first granted right of use of the asset (assets that age
quickly e.g. a laptop).

Major – not defined in the Act and must, therefore, be given its ordinary
meaning.
I.e. if the employee is granted the right to use the asset for more than
50% of its useful life, it will constitute the right to use the asset for a
major portion of its useful life.

No Values • The private use of the asset is incidental to the use thereof
for ER business (does not apply to clothing).
• Provided as amenity to be enjoyed at work or for recreational
purposes.
• Asset is telephone or computer used >50% for business
purposes.
• Asset is books, literature, works of art etc.

Employees Tax • CE = remuneration (calculated monthly)

c. Right of use of motor vehicles

Definition • Free private use (can be a portion) of motor vehicle, or

Par 2(b) and 7 • Use of a motor vehicle for consideration less than value of
private use.

Cash Equivalent • Value of private use less consideration paid by the EE

Value of private 1. ER owns the motor vehicle – i.e. not acquired under
use operating lease:
Par 7(4) Value of private use per month = determined value x
3.5% or 3.25% x number of months
• Determined value = Retail MV (will be given) excluding finance
cost x 85% for each 12-month period from when the ER acquired
vehicle until EE was first granted right of use.
• 3.25% – If maintenance plan was included in cost price of motor
vehicle when acquired by ER.
• Number of months – If vehicle is used for a part of month
(remember to apportion based on days).
• If the motor plan expires = still use 3.25%, if there’s an option to top-
up = use 3.5%.

2. Vehicles acquired under operating lease:

• Value of private use = ER’s actual cost i.t.o. operating lease +
cost of fuel

Par 7(6) ER grants ROU of >1 vehicle to EE then:

• Each vehicle = separate taxable benefit.
• However: if SARS is satisfied that the EE used each vehicle
primarily for business purposes
- Value of private use on all vehicles is = to only that of the
one with the highest value of private use.
• Exception: Par7(6) does not apply if par7(7) or par7(8) is
applicable (reductions on assessment).

No values • If the vehicle is available for use in general, and the private
use is incidental or infrequent and the vehicle is not
normally kept at the employee's residence.
• If the nature of the employee's duties regular requires him to
use the vehicle for his duties outside his normal hours of work
and his private use is thus limited to the travelling between
his place of residence and his place of work, or it is merely
incidental or infrequent to its business use.

Reduction of value Value of private use xxx

of private use Less: consideration paid by EE (xxx)
Cash equivalent xxx
Less: par 7(7) adjustment (xxx)
Less: par 7(8) adjustment (xxx)
Amount included in gross income xxx
Adjustment on • Business km must be proved (logbook)
assessment • Adjustment = Value of private use x business km/total km
Par 7(7)
Purpose: 3.5% or 3.25% – assumes employee only uses the employer-
provided vehicle for private or domestic purposes ⸫ par 7(7) reduction allows
 the employee to reduce the “value of private use” placed on the vehicle on
assessment if the employee can prove that the vehicle was also used for the
purposes of the employer’s business.

Adjustment on • Private km must be proved, full cost must be paid by EE.

assessment • Adjustment for cost of L/I/M = cost x private km/total km
Par 7(8) • Adjustment for cost of fuel for private use = private km x
deemed cost per km for fuel (table)
Reduction only allowed if
EE bears the full cost – Purpose: 3.5% or 3.25% – based on the presumption that the employer carries
if vehicle is subject to a all the vehicle’s operating expenses ⸫ par 7(8) reduction allows the employee to
maintenance plan ≠ reduce the value of the fringe benefit on assessment if the employee can prove
bearing full cost. that the employee and not the employer bore certain costs relating to the
employee’s private use.

Employees Tax • Remuneration = Cash equivalent x either 80% or 20%

• The cash equivalent is the value before the paragraph 7(7)
and 7(8) adjustments have been made.

If any travel allowance is received i.r.o. a par 7 company car and the taxpayer also has
right of use of the same vehicle:
• The full gross travel allowance is included in taxable income.
• No deduction is allowed against the travel allowance.
• The company car is taxed i.t.o. par 7, and the par 7(7) and 7(8)-reductions will be
allowed.

Travel allowance Right to use a motor vehicle

• Amount of money (i.e. a cash amount) that is • Not a cash benefit, the employee receives the
given by a principal (e.g. an employer) to a right to use a motor vehicle (an asset) provided
recipient (e.g. an employee) to incur business- by the employer.
related travel expenses on behalf of the • The right of use of a motor vehicle provided by
employer. an employer to an employee for private or
• S8 domestic purposes is regarded as a taxable
benefit in the hands of the employee, the value
of which is determined in accordance with the
7th Schedule.
X

d. Meals, refreshments and meal and refreshment vouchers

Definition • Free meals, refreshments and refreshment voucher (M, R, V);

Par 2(c) and 8 or
• Meals for consideration less than value of M, R or V

Cash equivalent • Value of M, R, V less consideration paid by EE

Value • Value = cost of M, R, V for ER

No Values • Meal provided in canteen/cafeteria/dining room wholly or

mainly used by EEs.
 • Meal provided on business premises.
• Meal during business hours (or extended working hours).
• Meals on special occasions.
• Meals when EE is required to entertain on behalf of ER.

Employees Tax • CE = remuneration

e. Residential accommodation

Definition • Free residential accommodation; or

Par 2(d) and 9 • Residential accommodation for rental consideration less than
rental value.

Cash equivalent • Rental value less rental consideration paid by EE.

Rental Value 1. If owned by ER, rental value = formula value

Apply one of two rules • Formula: (A – B) x C/100 x D/12
- A = remuneration proxy (will be given);
- B = R79 000 (Can be Rnil in two cases – see below)
- C = 17, 18, 19 (Choose based on number of rooms)
- D = number of months

2. If rented by ER, rental value = lower of formula value or

expenditure paid by ER.
• The expenditure must relate to ROU (e.g. if the electricity is
paid or fully furnished house).

No Values • Resident EE: Away from usual place of residence in RSA for
work purposes (E.g. temporary accommodation for work –
then do not apply formula) – par9(7)
• Non-resident EE: Away from usual place of residence
outside RSA – par 9(7A):
- For period of ≤ 2 years (two exceptions to this par
9(7B)(i) and (ii))
▪ ≤ 2 years = no TB value
▪ > 2 years = formula for TB or
- For period < 90 days in YOA

Two exceptions: ‘No value’ is not applicable and person is therefore taxed
1. >90 days in SA during previous YOA
2. the excess CE over R25 000 pm

Employees Tax • CE = remuneration

When must B be Two cases:
reduced to 0? 1. Case 1
- ER = private company, and
- EE or spouse controls the company or is one of the
persons who control the company (directly or indirectly)
OR
2. Case 2
- EE/ Spouse/ Minor child has the right of option or pre-
emption granted by ER/ associated institution/ other
person in arrangement with ER whereby,
- EE/Spouse/Minor child may become the owner of the
residential accommodation whether directly or indirectly by
virtue of a controlling interest in the company or otherwise.

Chosen “C” value • 17 = Default – if a house has 3 rooms

• 18 = at least 4 rooms – only bedrooms do not include
bathroom + fuel
Or at least 4 rooms + furnished
• 19 = 4 rooms + fuel + furnished

Deemed housing loan – par 10A

• Purpose: to counter schemes whereby an EE has the right to acquire residential

accommodation at a future date in accordance with an agreement with the ER.
• Do not apply formula. EE deemed to have received a loan equal to future
purchase price and any rental amounts paid= deemed to be interest.

f. Holiday accommodation

Definition • Free holiday accommodation; OR

Par 2(d) and 9(4) • Holiday accommodation for consideration less than rental
value

CE • Rental value

Rental Value • Rental value if ER rents holiday accommodation from person

other than associated institution = cost of rental, meals,
refreshments and other services OR
 • In all other cases: prevailing rate per day (leased to person
who is not an employee).

No Values • None

Employees Tax • CE = remuneration

g. Free or cheap services

Definition • Free or cheap services (used by EE for private or domestic

Par 2(e) and 10 purposes)
- ER provides you with a service e.g. lecturers studying for free or
supplies it to you via an outside party such as paying your phone
bill.

CE • ER in business of conveying passengers by sea or air

outside RSA:
- Lowest fare less consideration paid by EE or relative.
• All other cases:
- Cost for ER less consideration paid by EE

No values • Travel to destination in RSA; travel overland to destination

outside RSA, or travel by flight or voyage to destination
outside RSA, but no firm advance reservation of seat.
• Transport service to and from work.
• Communication service provided to EE if mainly used for ER
business. E.g. ER buys airtime or data and uses it for
business > 50% then: remaining will not be taxed.
• Services provided by ER at place of work (requirements)
• Travel facility to spouse or minor child if EE works > 250 km
from usual place of residence and must work there for > 183
days.

Employees Tax • CE = remuneration

Free or cheap services – BMW South Africa (Pty) Ltd v CSARS [2019] ZASCA 107

Principles:

• An ancillary benefit (“peripheral advantage”) derived by an employer from the provision of

private or domestic services to an employee will not preclude such services from
constituting taxable fringe benefits in the hands of the employees.
• There will be instances in which benefits have some residual or marginal advantage for an
employer.
• The primary question is whether an advantage or benefit was granted by an employer to an
employee and whether it was for the latter’s private or domestic purposes.
h. Low-interest debts

Definition • Debt owed by EE to ER at no interest; or

Par 2(f), 10A and 11 • At rate lower than the official rate of interest
• I.e. either pay a low-interest rate or not enough interest per
the official interest rate.

CE • Interest at official rate of interest less actual interest paid

by EE
In the test, can be - Official rate of interest = RSA repurchase rate + 1% point
given the repo rate - Accrual of CE – Cash equivalent deemed interest actually
and must then adjust.
incurred for the purposes of s11(a), if in production of income.
- Changes in official rate of interest: If there is a change in the
repo rate, it applies from the first date of the following month.

Deemed loan • Residential accommodation taxed as a low-interest loan –

see requirements in par10A(1).

No values • Total debt ≤ R3 000 (this is short term debt granted on an

irregular basis, not merely all debts ≤ R3 000).
• Debt incurred to further EE’s studies.
• Debt in consequence of a loan <R450 000 to acquire
immovable property if all the other requirements are met.

Employees Tax • CE = remuneration

• CE accrues when interest is payable or when remuneration is
payable – par 11(2)(a).

i. Subsidiaries in respect of debts

Definition • Subsidies paid by ER in respect of interest or repayment of

Par 2(g), 2(gA) and 12 capital payable by EE in respect of debt of the EE to a third
party.

CE • Amount of the subsidy paid by the ER

Employees Tax • CE = remuneration

Low interest rate loans vs. subsidies

Consider the rates that the EE and ER are paying for the loan if:

Subsidy Low-interest rate loan

Sum of ER and EE rates > official interest rate Sum of ER and EE rates < official interest rate

CE = calculate with reference to rate paid by CE = calculate with reference to rate paid by
ER EE

Consider the following example:

• EE borrows R50 000 from Nedbank.
• Interest rate: prime rate – of which the EE pays a fixed rate of 6% and the ER pays the
difference between prime and 6%.
 • The relevant interest rates for the YoA under consideration were as follows:

First 6 months of YoA Last 6 months of YoA

Prime 14% 16%
Official interest rate 15% 15%

Last 6 months of YoA – Subsidy First 6 months of YoA – Low-interest rate

loan
• CE: R50 000 x 10% x 6/12 = R 2 • Interest paid by EE: R50 000 x 6% x
500 6/12 = R1 500
• Interest @ official rate: R50 000 x
15% x 6/12 = R3 750
• CE = R3 750 - R1 500 = R2 250

j. Discharge or payment of obligation

Definition • Discharge of obligation to pay debt owing by EE to ER; OR

par 2(h) and 13 • Direct or indirect payment of debt owing by EE to third party
(NB! This will include ER contributions to RAF – compare with ER
contributions to pension and provident funds).

CE • Amount released or paid by ER (debt being written off)

• The amount of the deemed release on the prescription of a
debt

No values • Payment of subscription to professional bodies if

membership is requirement of EE’s employment (e.g. ER
pays SAICA membership fees as it is a requirement of
employment = TB but has 0 value).
• Payment of insurance premiums indemnifying an EE
against claims arising from negligent acts or omissions of EE
in the course of his or her employment.
• The value of a benefit paid by a ‘former member of a non-
statutory force or service’ to the ‘Government Employees’
Pension Fund’
• ER pays EE’s debt to his/her first ER i.r.o a study
loan/bursary on behalf of EE – requirements in par 13(3).

Note: A scholarship, which is subject to repayment if certain written conditions are

not met, is treated as a bona fide scholarship or bursary until the conditions are
not fulfilled. In the tax year in which such conditions are not fulfilled, the amount of
the scholarship will be regarded as a debt and any benefit that the employee may
have received will constitute a taxable benefit.

Employees Tax • CE = remuneration

k. Contributions to benefit funds Interaction with s6A

Definition • Direct or indirect contributions to benefit funds by ER for

Par 2(i) and 12A benefit of EE or dependants
- Including contributions to medical schemes, based on
definition of benefit fund – s 1(1))
- Applies only to medical schemes and must be either
registered in RSA or in another country.

CE • Amount of contributions paid by ER or

• If contributions cannot be specifically attributed, then it is
𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛𝑠
deemed that contribution = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠

No values • Person retired from employment due to age, ill-health or

other infirmities – remember impact on s6A credit.
• Dependants of deceased EE
• Dependants of deceased retired EE
- Dependents = child, spouse, family members taking care
of.

Employees Tax • CE = remuneration

• ER takes s6A credit into account when calculating ET
- Deemed to have been paid for the purpose of calculating
medical credits.

Example – par 12A(2)

Salazar (Pty) Limited has 100 employees. Salazar pays a premium of R550 000 per month in
respect of a group medical scheme it has with Pomfrey Health. No particular part of the premium is
attributable to any one employee. All employees and their dependents are entitled to the
healthcare benefits that the group medical scheme provides. In addition to the 100 employees, the
scheme also provides healthcare benefits to 85 dependents.

What is the cash equivalent of the taxable benefit provided to Salazar’s employees?

- Don’t consider the number of dependents or whose dependents they are, only divide by
the number of employees.

𝑅 550 000 𝑥 12𝑚

- CE = = 𝑅66 000 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 𝑝𝑒𝑟 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒
100

l. Costs relating to medical expenses Interaction with s6B

Definition • Costs in respect of various medical services to EE, spouse,

Par 2(j) and 12B child, relative or dependant paid by ER.

CE • Amount incurred by ER.

No values • Medical treatments listed by Minister

• Services rendered/medicine supplied to comply with RSA law
(i.e. HIV/AIDS medicine)
 If there is legislation • Person retired due to age, ill-health or other infirmities
that obligates the ER • Dependants of deceased EE
to pay it for the EE,
• Dependants of deceased retired EE
then there is no value.
• Person entitled to over 65 rebate
• Services at workplace to EEs in general (better performance
of duties)

Employees Tax • CE = remuneration

m. Benefits i.r.o. insurance policies

Definition • Payment of premiums to insurer under insurance policy

Par 2(k) and 12C directly/indirectly for benefit of EE, spouse, child,
dependent or nominee.
• Exclusion in proviso to par 2(k) – i.e. not a taxable benefit:
- Insurance policy relates to an event arising solely out of and in
the course of employment of the EE.
- For example, a policy that pays out if the EE is injured at work. In
other words, no taxable benefit arises in the hands of the EE.
- Work-related policy = no TB
- After work policy = TB

CE • Amount of premiums paid

No values • None

Employees Tax • CE = remuneration

Pension and provident funds

What is the difference between defined contribution and defined benefit funds?

Defined contribution fund Defined benefit fund

The contributions made by the member and The pension to which the member is
the employer are defined as a percentage entitled after retirement is not based on the
of the member’s current salary. When the contributions plus growth. The retirement
employee’s salary increases, the benefit is based on the member’s final
contributions to the fund also increase. salary and is calculated by using a formula
which is incorporated in the rules of the
• If the question does not state, then can
fund – seldom tested.
assume it is a defined contribution fund
• If it is a defined contribution fund, then
it falls on the EE.
When the employee retires his retirement
benefit will be a value equal to:
• The contributions paid by the member
and the employer on his behalf;
 • Less such expenses as the board
determined should be deducted from
the contributions paid;
• Plus growth on such contributions.
Benefit = contributions – expenses +
growth
The benefit amount is used to finance the
pension.

n. Contributions by ER to pension and provident funds – defined contribution

fund Interaction with s11F

Definition • Contributions by ER to pension and provident funds for

Par 2(l) and 12D benefit of EE.
• Defined contribution fund: contributions and benefits at
retirement correlate.

CE • Par 12D(2) = Total contributions made by ER

No Values • Benefits derived from contributions made:

- For the benefit of a member who retired from the fund; OR
- For the benefit of dependants/nominees of deceased member.

Transfers • Transfers of actuarial surpluses between or within retirement

Provisio to par 2(l) funds of the same ER are not a fringe benefit.

Employees Tax • CE = remuneration

o. Contributions to pension and provident funds – defined benefit fund

Definition • Contributions by ER to pension and provident funds for

Par 2(l) and 12D benefit of EE.
• Defined benefit fund: Contributions based on retirement
funding employment (RFE) income and benefits calculated
per fund member category i.t.o. a formula.

CE • Par 12D(3) = amount according to formula:

X = (A x B) – C
Note: value of X will • A = fund member category factor of EE
be given. • B = RFE income of EE
• C = total contributions by EE (excluding voluntary contributions and
buy-back contributions)

No Values • Benefits derived from contributions for the benefit of a

member who retired from fund; or
• To benefit of dependants/nominees of a deceased member

Employees Tax • CE = remuneration

4. TAXATION OF DIRECTORS AND EEs AT VESTING OF EQUITY
INSTRUMENTS – s8C

• Director or EE may acquire restricted or unrestricted equity instruments.

• Any gain or loss made by a director or an EE as a result of the vesting of an
equity instrument must be included in or deducted from the income of said
person if s8C applies.
• Section 8C applies in respect of:
- Gains or losses made by a director/EE as a result of the vesting of an equity
instrument – as defined in S8C(7), if
- The said instrument was acquired by virtue of the director’s holding of an
office or the employment of the EE, i.e. an ER-EE relationship exists.

Restricted equity instrument Unrestricted equity instrument

Equity instrument vests at the earliest of 5 Equity instrument vests at acquisition.
events.
S8C(3)(b)
S8C(3)(a)
• When all restrictions cease to exist;
• Immediately after an option terminates
(other than by exercise);
• Immediately after a convertible financial
instrument terminates (other than by
being converted);
• Immediately before a taxpayer dies if all
the restrictions are or may be lifted on
death;
• The time an option to acquire an equity
instrument or financial instrument
convertible into an equity instrument is
released, abandoned or lapses.

This part of the work is no longer in the 7th schedule but is in the main body of the act

a. Upon acquisition of restricted equity instruments

• Inclusion in gross income – general definition s 1(1).

• Exemption in terms of s 10(1)(nD)
• When you acquire these equity instruments s8C will not apply, it is however
still an 8C instrument, it has just not been triggered.
• Therefore use, par(c) of GI definition (cannot use par(i) as it is not a SB)
- Impact on taxable income = 0
b. Upon vesting of equity instrument

• Unrestricted equity instrument: vests at acquisition

• Restricted equity instrument: vests at earliest of 5 events
• s 8C: Gain or loss included in income when equity instrument vests (overrides
s 23(m) and s 9C).
• Inclusion in gross income – par (n) of definition s 1(1)
- Gain or loss = MV at vesting (or amount received) less consideration paid
by director or EE for equity instrument.

• Once the gain/loss has been subject to normal tax under s 8C on vesting, further normal tax
consequences can arise when the instrument (e.g. shares) is disposed of – i.e. after vesting.
• If proceeds = capital → apply provisions of the 8th schedule to the ITA.
• For CGT purposes the base cost of the shares = market value that was taken into account to
determine the s 8C gain or loss (refer to par 20(1)(h)(i) of the 8th Schedule).
• Very NB that you site the correct authority for the equity instrument.

Examples

i. Restricted equity shares

• As part of EE remuneration package for services rendered, EE acquires 500 equity
shares in Company A for R2 000 on 31/12/2016. The shares may not be sold for a
period of 2 years.
• EE sells the shares @ MV on 31/12/2019.
• Historical share prices:
Date R
31/12/2016 R6 per share
31/12/2017 R8.50 per share
31/12/2018 R11 per share
31/12/2019 R15 per share

Calculate the normal tax effect of the above on the 2017, 2018, 2019 and 2020
years of assessment.
Assume that the shares are held as capital assets and that there were no other
transactions in any year of assessment.
Amount (R)
Gross income (R6 x R500) – R2 000 1 000
2017 YOA
Exempt income – s10(1)(nD) (1 000)
Income -
Amount (R)
Gross income -
2018 YOA
Exempt income -
Income -
Amount (R)
2019 YOA Gross income (R11 x 500) – R2 000 3 500
VEST Exempt income -
Income 3 500
 Amount (R)
Gross income -
Exempt income -
Income -
2020 YOA Taxable capital gain -
Proceeds: 500 x R15 = R7 500
BC: (500 x R11) = R 5 500
CG: 2 000
Less: Annual exclusion (40 000 ltd. R2 000)

ii. Unrestricted equity shares

• As part of her remuneration package for services rendered, EE acquires 500 equity
shares in Co A for R2 000 on 31/12/2016. The shares may not be sold for a period of
2 years. Now assume that the shares are unrestricted.
• EE sells the shares @ MV on 31/12/2019.
• Historical share prices:
Date R
31/12/2016 R6 per share
31/12/2017 R8.50 per share
31/12/2018 R11 per share
31/12/2019 R15 per share

Calculate the normal tax effect of the above on the 2017, 2018, 2019 and 2020
years of assessment.
Assume that the shares are held as capital assets and that there were no other
transactions in any year of assessment.
Amount (R)
2017 YOA Gross income (R6 x R500) – R2 000 1 000
VEST Exempt income -
Income 1 000
Amount (R)
Gross income -
2018 YOA
Exempt income -
Income -
Amount (R)
Gross income (R11 x 500) – R2 000 -
2019 YOA
Exempt income -
Income -
Amount (R)
Gross income -
2020 YOA Exempt income -
Income -
Taxable capital gain -

c. The interaction between s 8C and s 10(1)(o)(ii)

• s 8C gains qualify for exemption under certain circumstances.

• Inclusion of gain = on vesting but ‘vesting’ not the originating cause of the
gain being received as income.
 • Originating cause = services rendered by TP and not the place where the
right to participate in the share scheme was offered or accepted and not the
place where the TP was located at the time that vesting occurred.
• Remember: only remuneration (including s 8C gains) that relates to services
rendered outside the RSA can qualify for the exemption.
• If the remuneration (including s 8C gains) relate to both services rendered
inside and outside the RSA, it must be apportioned based on workdays.
• The gain made is deemed to accrue evenly over the period of services
rendered between grant date and vesting date.
𝑊𝑜𝑟𝑘𝑑𝑎𝑦𝑠 𝑜𝑢𝑡𝑠𝑖𝑑𝑒 𝑡ℎ𝑒 𝑅𝑆𝐴
Exemption portion = 8𝐶 𝑔𝑎𝑖𝑛 (𝑜𝑛 𝑣𝑒𝑠𝑡𝑖𝑛𝑔) 𝑥 𝑇𝑜𝑡𝑎𝑙 𝑤𝑜𝑟𝑘 𝑑𝑎𝑦𝑠 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑

Example

Year 1:
Ronica Vestrit (a resident) acquired 1 000 restricted equity shares in Vivacia Limited at R2
per share. The shares were awarded by virtue of her employment with Vivacia Limited in
year 1. During year 1, Ronica met the requirements of 183-day and 60-day tests, with the
result that her remuneration including any s 8C-gains on her equity shares qualify for the s
10(1)(o)(ii) exemption. The shares had a market value of R8 per share on grant date. Total
workdays = 262 days of which Ronica spent 200 rendering services to Vivacia outside RSA.
Year 2:
The restrictions are lifted and the shares vest on day 1 of year 2. On the vesting date, the
shares had a market value of R10 per share.

Amount (R)
Gross income (R8 x 1 000) – (R2 x 1 000) 6 000
Year 1
Exempt income – s10(1)(nD) (6 000)
Income -
Amount (R)
Gross income (R10 x 1 000) – (R2 x 1 000) 8 000
Year 2 Exempt income – s10(1)(o)(ii) R8 000 x 200/262 (6 107)
Income 1 893
 CHAPTER 10 EMPLOYEES’ TAX

The following abbreviations are used in these notes:

Abbreviation Meaning
ER Employer
EE Employee
ET Employees’ tax
TAA Tax Administration Act
BOR Balance of renumeration
ITA Income Tax Act
LB Labour broker
PSP Personal Service Provider
RAF Retirement Annuity Fund
ROU Right of use
MTC Medical tax credit
AMTC Additional medical tax credit
CE Cash equivalent
These abbreviations may be used for the purposes of answering assessment questions IF a legend
is provided in the answer script.

1. INTRODUCTION
• There are two main ways in which normal tax is collected.
Employees’ tax – Chapter 10 Provisional tax – Chapter 11
Deducted from the remuneration paid to Covered in chapter 11 and is payable by
employees and paid over to the SARS by registered provisional taxpayers.
employers (i.e. it is a withholding tax on
employment income).

• Employees’ tax
- Is not a tax in itself, it is a payment mechanism through which normal tax is
collected.
- Is, in essence, a withholding tax – tax is deducted at source.
• Where an employer pays or becomes liable to pay remuneration to an employee, the
employer has an obligation to deduct or withhold employees’ tax from the
remuneration and pay the tax deducted or withheld to the SARS on a monthly
basis.
• In most instances, the employer is obliged to issue each employee with an
employees’ tax certificate – IRP5/IT3 (a) – at the end of each tax period which
reflects, amongst other details, the employees’ tax deducted.
• ER pays ET withheld to SARS within 7 days after the end of the month it was
withheld.

What if the 7th day falls on a Saturday/Sunday/Public holiday?

• Amount must be paid not later than the last business day before the
Saturday/Sunday/Public holiday – s244(1) of the Tax Administration Act.

• EE’s normal tax payable is reduced by ET that was deducted from remuneration
during the year.
Section 157 of the Tax Administration Act (TAA) and par 5:
• If the ER does not withhold ET or does withhold it but does not pay it over to the
SARS, the ER becomes personally liable for the payment of the tax.
• The tax that the ER is liable to pay is deemed to be a penalty (par5(5)) – if the ER
does not exercise the right of recovery – therefore the ER cannot claim a section
11(a) of the ITA deduction – prohibited by section 23(d).

The link between the 4th Schedule and the ITA:

• s 89bis(1) provides that the payment of employees’ tax (Ch 10) and provisional tax
(Ch 11) must be made in accordance with the provisions of the 4th Schedule to the
ITA and that said payments are deemed to be made in respect of taxpayer’s liability
for “taxes”.
• The term “taxes” is defined in s 89bis(3) as bearing the same meaning as the term
“tax” as defined in s 1(1) but specifically excludes donations tax. The term “tax” in s
1(1) is defined as “any tax or a penalty imposed in terms of this Act”.
• Therefore, a liability for donations tax is not settled by way of employees’ tax or
provisional tax payments.

The 4th Schedule

Three elements must be present before employees’ tax can be deducted:

• The 4th Schedule requires the presence of all three elements before employees’ tax
may be deducted – i.e. an employer paying remuneration to an employee.

These definitions are

interdependent

Central definition: ‘remuneration’ –

because it drives the application and
relevance of the other two – i.e.
definition of employee requires that
remuneration is received, and the
definition of employer requires that
remuneration is paid.
2. REMUNERATION – par 1
• First step of ET calculation: calculate ‘remuneration’ – separate per ER for
each EE.

• If an amount is ‘renumeration’ as defined, any person paying such amount to any other
person is defined as an employer – withheld ET.
• The net amount of a lump sum benefit from a retirement fund is included in gross income.
The gross amount of severance benefits received from an employer who is not a
retirement fund is included in gross income.
• These net and gross amounts are also renumeration.

• Generally, every amount of remuneration accrued or paid to an EE is subject

to ET on the amount concerned (but subject to certain exceptions or special
rate rules).
• If not remuneration as defined? Not subject to ET.

• Three parts of definition: general definition, special inclusions and

exclusions.
- Non-residents: ET on remuneration earned from source within RSA.
- Par 2(1) – ER withholds ET when remuneration is paid or becomes liable
to pay amount to EE.
- Par 2(1B) – ET on variable remuneration (s7B) withheld on date on which
amount is paid to EE.
- Variable remuneration deemed to accrue to EE on date on which amount
is paid to EE by ER.

• Definition
Amount of income Exempt income is not remuneration
Paid or payable
To any person
By way of any:
• Salary, leave pay, wages,
overtime, bonus
• Gratuity, commission, fee, General part of definition
emolument
• Pension, superannuation
allowance
• Retiring allowance or stipend
Whether in cash or otherwise
Whether or not for service rendered

Section 10 provides for the following relevant exemptions:

• Uniforms
• Transfer costs
• Remuneration in specific cases
• Study bursaries

Non-residents will only be subject to ET on renumeration earned from a source within the Republic.
There are also specific inclusions and exclusions discussed below:
Normal Tax Employees’ Tax
Paragraph of
Paragraph of gross Amounts specifically
remuneration definition Type of remuneration
income definition in excluded from
in par 1 of the 4th
s1(1) of the ITA remuneration definition
schedule to the ITA
Par (a) Par (a) Annuities including State pension and
s10A-annuity amounts various grants i.t.o.
various acts.
An annuity i.t.o.
divorce order.

Par (c) Par (a) Services rendered Amounts paid to

(e.g. Salary/ leave independent
pay/ bonus) contractors.

Par (cA) Par (a) Restraint of trade

Labour broker who payment received by
does not have an LB or PSP
exemption certificate.
Par (cB) Par (a) Restraint of trade
payment received by
NP i.r.o. office
/employment

Par (d) Par (a) Gross lump sum

Remember: Payout of received from ER who
accumulated leave = is not a retirement
par (c) of the gross fund (irrespective
income definition s 1(1) whether it is a SB)

Par (e) & (eA) Par (a) Net taxable amount – Ignore – HONS
retirement funds

Amounts transferred

Par (f) Par (a) Services: commutation

of amounts due

Par (i) Par (b) CE of taxable benefit Right of use of motor

(fringe benefit) car (par 7 Seventh
Schedule – see par
(cB) for special rule)
Fringe benefits which
are exempt income
(e.g. uniform
allowances and
transfer costs)

Normal Tax Employees’ Tax

Paragraph of
Amounts specifically
remuneration definition
Section Type of remuneration excluded from
in par 1 of the 4th
remuneration definition
schedule to the ITA
S 8(1) of the ITA Par (bA) S 8(1)(a)(i) allowances Allowances (travel and
(e.g. computer subsistence – see
allowances and special rules).
 entertainment Reimbursive
allowances) allowances i.t.o. s
8(1)(a)(ii) – “any
amount paid or
payable to any
employee wholly in
reimbursements of
expenditure actually
incurred by such
employee in the
course of his
employment”.

S 8(1) of the ITA Proviso to par (bA)(ii) Subsistence allowance NO ET on subsistence

Subsistence allowance and par (a) only if EE has not by allowance if works
not used the last day of the away from home.
following month
either spent the night
away or refunded the
amount to the ER.

If the proviso applies: amount is not seen as a subsistence allowance.

The inclusion in remuneration is then in terms of par (a) (as it is deemed to be an amount paid for
services rendered – par (c) of gross income definition, s 1(1) of the ITA)

S 8 Fixed travel Par (cA) 80% / 20% of a fixed Reimbursive travel

allowance travel allowance allowance i.t.o.
s 8(1)(b)(iii).

Par 7 of Seventh Par (cB) 80% / 20% of CE of

Schedule and par (i) of CE = value of private use par 7 fringe benefit
the ‘gross income’ less consideration given
definition in s 1(1) by EE (BEFORE par 7(7)
and 7(8) adjustments)
S 8 Reimbursive travel Par (cC) 100% of the excess
allowance Excess = (ER rate –
R3.61) x business km

S 8C Par (e) S 8C gain at vesting

Various provisos to s Par (g)(iii) Any amount received

10(1)(k)(i) or accrued to a person
by way of a dividend
i.r.o. a restricted equity
instrument (see par (jj)
of the proviso to s
10(1)(k)(i))

Fringe benefits
Benefits given by • Refer to par 4 of the Seventh Schedule
associated • Taxable benefit given to EE by associated institution in relation to ER
institutions is deemed to be a taxable benefit granted by ER (ER deduct ET).

Benefits granted to • Refer to par 16 of the Seventh Schedule

relatives of EE’s and • Taxable benefit granted to EE’s relative under agreement/ transaction/
others arrangement with ER is deemed to be granted to the EE.
• CE included in EE’s remuneration – subject to ET.
Directors’ fees
Type of director Employee? Employees’ Tax
Resident executive Directors of public and private companies are ET must be
directors included in the definition of ‘employee’ in terms of par withheld
(a) if they receive ‘remuneration’ as defined.

Resident non- Directors’ fees are not regarded as remuneration and ET must not be
executive directors are not subject to employees’ tax. withheld
Why?
Binding General Ruling No 40 accepts that resident
non-executive directors are not common law
employees and that no control or supervision is
exercised over the manner they perform their duties or
their hours of work.

Non-resident non- Directors’ fees are regarded as remuneration and are ET must be
executive directors subject to employees’ tax. withheld
Why?
Binding General Ruling No 40 does not apply to them
as it specifically excludes non-resident non-
executive directors. The rule excluding amounts paid
to independent contractors from remuneration
(exclusion (ii) to the definition of ‘remuneration’)
further does not apply to any amounts paid to non-
residents for services rendered.

Right to acquire shares – Read

• The income tax effect of s 8C is trigger on “vesting”.
• An unrestricted equity instrument vests on acquisition and
• A restricted equity instruments vests at the earliest of 5 dates (refer to CH 8 notes).
• When the equity instrument vests in the taxpayer: the gain made in terms of s 8A, 8B and
8C are deemed to be paid to the employee by the person who granted the right or from
whom the equity instrument or qualifying equity share that gave rise to the gain was
acquired.
• Such gains are included in remuneration and will be subject to the deduction of
employees’ tax.
• Dividends – provisio (kk) to s 10(1)(k)(i) – is also remuneration.

Annuities and royalties – Read

Annuities
• Annuities, including ‘annuity amounts’ contemplated in s 10A(1) and living annuities, are
included in the definition of ‘remuneration’ (par (a)).
• The person paying an annuity is, therefore, an employer as defined in par 1.
Royalties
• Royalties do not fall within the definition of ‘remuneration’ if they are received for the use
or grant of permission to use a patent, design, trademark or copyright.

Exemption from income tax: foreign employment income – Read

• Section 10(1)(o)(ii) threshold comes into effect on 1 March 2020 (i.e. in the 2021 YoA).
• With effect from 1 March 2020, the exemption will only apply to the extent that the
employee’s remuneration for services rendered outside South Africa does not exceed R1
250 000 in respect of a year of assessment.
• I.e. foreign employment income earned that exceeds R1 000 000, is subject to normal tax
in South Africa.
3. EMPLOYEE – par 1

Defined in par 1 as one of the following:

• A person other than a company who receives any renumeration or to whom any
renumeration accrues.
• A person who receives renumeration or to whom renumeration accrues by reason of
services rendered by that person to or on behalf of a ‘labour broker’.
• A labour broker
• A personal service provider
• A person or a class or category of persons whom the Minister of Finance declares to be an
employee for the purposes of the definition – ‘declared employee’.

4. EMPLOYER – par 1

Defined in par 1 as:

• A person (excluding an agent, i.e. not acting as a principal) who pays or is liable to pay to
any person an amount by way of renumeration.
• Included: person acting in a fiduciary capacity, or in his/her capacity as a trustee of an
insolvent estate, an executor or an administrator of any fund.
• A person who is responsible for the payment of renumeration to any person under the
provisions of any law or out of public funds voted by Parliament or provincial council.

• Must not be interpreted through the lens of common law or in terms of Labour
Law definitions.
• Fourth Schedule: extends to any person who pays or is liable to pay
‘remuneration’.
• Note: a partner in a partnership is, for the purposes of par 2 of the Seventh
Schedule, deemed an employee of the partnership.
• However, this deeming provision cannot be extended to the Fourth Schedule.
• Therefore, no employees’ tax must be withheld from fringe benefits granted to
partners. (Include in partner’s gross income.)
• ‘Liable to pay’: indicates a contractual liability to incur the amount, i.e. the
employee has an enforceable right to the amount of remuneration.
Any person who ‘pays or is liable to pay’
Acting in a capacity as Acting as a conduit (an agent Acting in a fiduciary capacity
principal without exercising a fiduciary
capacity)
Receives amount for own No controlling authority over Whether someone acts in a
benefit and later pays the the payment or amount of the fiduciary capacity is dependent
amount (or a portion thereof) to remuneration. There is only on the facts of each case but
the worker. temporary physical custody of essentially entails a
the remuneration coupled with relationship of trust.
a distribution role.
Included as ‘employer’ Excluded as ‘employer’ Included as ‘employer’
 5. CALCULATION OF ET
Basic calculation

Isolate ET on annual
payments

Monthly 1. Calculate ET with

calculation bonus

2. Calculate ET
without bonus

3. Subtract two
amounts = ET on
bonus

Calculation done per month and group similar months together.

a. Retirement fund contributions

• Par 2(4)(a), (b) and (bA) & Section 11F of the ITA.
• The ER must deduct contributions made by the EE to any Deduction limited to
pension fund or provident fund which the ER is entitled or the higher of:

required to deduct from the EE’s remuneration – par 2(4)(a). 1. 27.5% of

• At option of ER: deduct contributions made by EE to a RAF if remuneration paid
by ER (in that
proof of contribution has been furnished to the ER – par month); or
2(4)(b). 2. R350 000/12
• ER must deduct contribution by the ER on behalf of the EE to
a RAF – par 2(4)(bA).
• ER can only take current contributions into account.

b. Donations
Deduction limited to:
• Par 2(4)(f) and Section 18A(2)(a) of the ITA. 1. 5% of remuneration
• ER must deduct so much of any donation made by the ER on (after deducting
behalf of the EE from the EE’s remuneration provided that: the retirement fund
contributions)
- The ER will be issued with a receipt as contemplated in
s18A(2)(a).

c. MTC & AMTC

• Par 9(6), Section 6A and Section 6B(3)(a)(i)(ii). Note: where the EE
pays the medical
• 6A: number of dependents for whom the contributions are scheme
made determines the value of the MTC. contributions, the
• 6B: AMTC is only taken into account for taxpayers who are deduction is at the
ER’s option provided
≥65 years as is calculated as follows: that the EE furnishes
- Amount of MS contributions – 3(6A)= excess the ER with proof of
- Excess x 33.3% payment.
 Examples:
d. ET on annual payments • Annual bonus
• Incentive bonus
• Par 9(1) and 9(2) • Leave payouts
• Is an amount: • Merit awards
- Of remuneration that is, in accordance with the EE’s conditions of
See treatment of
services or the ER’s practice, paid in a lump sum to the EE; or
bonus in SILKE
- That is calculated without reference to a period.
example 10.1.
• Note: fringe benefits are not annual payments even if only
received once during YoA.

The employees’ tax on annual payments is calculated as the difference between the employees’
tax on the annual equivalent of the BoR (excluding the annual amount) and the employees’ tax on
the annual equivalent of the BoR (including the annual amount).

Example
Jan (45 years and unmarried) receives a monthly salary of R20 00 and a bonus of R20 000
each year in February. Jan monthly contributes R1 500 to a pension fund based on his cash
salary. Jan received a monthly taxable fringe benefit of R3 000 form 1 August 2018. He is
not a member of a medical scheme. Jan contributes R500 a month to a retirement fund and
supplied his employer with proof thereof.
Calculate the amount of the employees’ tax that his employer must withhold during the
2019 year of assessment. Round off to the nearest rand.
Problem areas:
• Bonus – annual payment ⸫ calculate differently.
• ET is calculated on the BOR ⸫ a change in remuneration = change in ET
Approach
2. Group similar months together – i.e. determine where there is a ∆ in remuneration.

ET FOR 2019 YEAR

• ET for March to July: R11 010
• ET for Aug to Jan: R15 942
• ET for Feb: R7 857
• TOTAL FOR YEAR: R34 809
2. Determine how many different calculations are needed

CALCULATION 1: MARCH CALCULATION 2: AUGUST

• Based on available information at the time, i.e. • Receive taxable fringe benefit.
don’t know of taxable benefit and bonus.

Same for: April, May, June & July

⸫ Total ET: R2 202 x 5m = R11 010
Same for: September, October, November & December
⸫ Total ET: R2 657 x 6m = R15 942

CALCULATION 3: FEBRUARY
WITHOUT BONUS WITH BONUS

Tax on bonus: R37 085 – R31 885 = R5 200

⸫ Total ET for Feb: R5 200 + R2 667 = R7 857
 6. PART-TIME EMPLOYEES OR EMPLOYEES NOT IN STANDARD EMPLOYMENT

Standard employment Deemed standard employment Non-standard employment

Any employment where the EE is EE does not fall within the Any employment that is not
required to render services to definition of standard standard employment or
single ER for a period of at employment, the EE is deemed deemed to be standard
least 22 hours in every full to be in standard employment if: employment. E.g.
week, provided that: • S(he) is required to work for Workers who are employed on a
• Temporary absence is due less than 22 hours a week daily basis and are paid daily
to leave/ exceptional and the EE furnishes a such as:
circumstances; or written declaration to the ER • Fees paid to part-time
• Temporary reduction in that s(he) does not render lecturers;
working hours is due to a services to any other ER • Honoraria paid to office
reduction in the demand for during the period of bearers of organizations/
a company’s product where employment and is required clubs.
the ER imposes a temporary to work for at least 5 hours
working week of less than 22 per day and is paid ET deducted at a fixed rate of
hours. remuneration of less than 25%, i.e. normal tax not
R316 per day. calculated in accordance with the
progressive normal tax table.
Note: the Act contains no definition
of ‘standard employment’.

Examples:

7. INDEPENDENT CONTRACTORS, LABOUR BROKERS AND PERSONAL SERVICE

PROVIDERS

A. Independent contractors

• An independent contractor and client agree on specific outcomes to be achieved.

• The client pays the independent contractor but does not withhold employees’ tax.
• The independent contractor pays his employees and withholds employees’ tax.

• The liability of an employer to deduct employees’ tax is

dependent on whether remuneration (par 1) is paid.
• Subject to certain conditions, amounts paid to an
independent contractor for services rendered are
excluded from remuneration as defined, in which case an
 employer has no obligation to deduct employees’ tax, i.e. one of the three
elements are not satisfied.

• When is a person an independent contractor?

Statutory tests Common law test
First test: ‘Employee test’ • Also known as dominant impression
If both elements are met the person receiving test.
the amount is deemed not to be carrying on a • Makes use of several indicators, e.g.
trade independently. was there an ‘acquisition of productive
1. Services or duties performed mainly capacity’, i.e. labour, capacity to work
(>50%) at the premises of the client. or simply effort.
2. Person rendering the service is subject
to the control or supervision of any
other person as to the manner that
person’s duties are performed.
Second test: ‘Independence’
Person is deemed to be carrying on a trade
independently if, during the YoA, if:
• He/she employs 3 or more employees
on a full-time basis.
• Employees must not be connected
persons.
The second test overrides the first test and
common law.
Independence test > Employee test

Flow diagram to follow when a determination is to be made under subpar (ii) of the
definition of ‘remuneration’

Employees = only
relatives or less than
three unconnected
employees
B. Labour broker

• A labour broker provides person who get instructions from the client.
• The client pays the labour broker (and withholds ET unless an exemption
certificate was obtained i.t.o. par 2(5).
• The labour broker pays the persons employed by him and withholds ET.

• Par 1 and 2(5)(a) – 2(5)(c) and section 23(k).

• A labour broker is a natural person who, for reward, provides and
remunerates or procures workers for a client.
• LB is specifically included in the definition of employee.
• The person (client) who pays remuneration to a LB is an employer.
• The 4th Schedule does make provision for an exemption certificate (IRP30)
to be issued by the SARS which will absolve employers from having to deduct
ET from any payments made to LB – see requirements in par 2(5)(a).
• Section 23(k) – limits deduction of certain expenses incurred by LBs who
do not have exemption certificates (see Act – no impact on ET), i.e. can
only deduct amounts paid to employees (remuneration).

LB not in possession of exemption LB is in possession of exemption certificate:

certificate: • No deduction of ET on remuneration paid
• ET essentially deducted twice and s23(k) to LB by client.
prohibits certain deductions for LB. • No prohibition under section 23(k) i.r.o.
deductions for LB.

C. Personal service provider

• Company or trust (not NP); and Connected person – s 1(d)

• The services are rendered to a client personally by a person who is a connected
person in relation to said company or trust; and
• One of the following three requirements are met:
- The person rendering the service to the client would have been regarded as an EE of the
client if the service was rendered directly to the client; or Difficult to prove, i.e. test other provisions first.
- Where the duties of the service must be performed mainly at the premises of the
client, the person or company or trust is subject to the supervision of the client relating to
the manner in which the services are performed; or
- Where more than 80% of the income of the company or trust (during the YoA) from
services rendered consists of or is likely to consist of amounts received from one client.
Even if all above-mentioned requirements met – have an ‘out’
• But not a PSP if company or trust has three or more full-time EEs who are not
shareholders or connected persons of the company or trust.
 • The definition of ‘employee’ in par 1 includes a personal service provider.
• Any company or trust that meets the definition of PSP and is in receipt of
remuneration as defined is subject to ET.
• The company or trust might supply the client with an affidavit stating that no
more than 80% of income was received from one client – par 2(1A) – i.e. the
client may bona fide trust the affidavit and not withhold any ET.
• Section 23(k) – limits deduction of expenses incurred (no impact on ET) –
can only deduct if assets are “wholly and exclusively for trade purposes”.
• ET @ 28% (PSP is a company) or 45% (PSP is a trust).

Example
Seraphina Picquery, a South African resident for income tax purposes, is the executive marketing
director of Apothecary Ltd. (‘Apothecary’), a multinational pharmaceutical company.
Seraphina’s husband Fillius was diagnosed with motor neuron disease on 15 February 2019.
Subsequent to receiving the diagnosis, Seraphina decided to resign as Apothecary’s executive
marketing director with effect from 1 March 2019 in order to care for Fillius. In February 2019,
Seraphina incorporated Bezoar (Pty) Ltd. (‘Bezoar’) of which she is the sole shareholder.
Because Seraphina is highly skilled and has extensive knowledge of Apothecary’s business,
Apothecary agreed to the following terms and conditions in order to retain her services with effect
from 1 March 2019:

• Apothecary will pay Bezoar a monthly retainer fee (Note 1) of R35 000 on condition that
Seraphina (who will be the sole employee of Bezoar) will provide Apothecary with consulting
services. Apothecary will also pay Bezoar a once-off amount of R1 500 000 to prevent Bezoar
from performing services for any other client.

• Seraphina will perform work for Apothecary from her home for which it will pay Bezoar R800
per hour. Seraphina will complete a timesheet to account for her working hours and Bezoar
will invoice Apothecary accordingly. Seraphina estimates that she will spend 1 600 hours
performing consulting work for Apothecary during the 2020 year of assessment.

Apothecary’s payroll division is unsure of the employees’ tax consequences of the arrangement
detailed above for the 2020 year of assessment.

Note 1:

A retainer fee is an advance payment for the services provided by a consultant. It ensures the
commitment of the receiver of the retainer fee to provide services in the future.

Required Marks
Discuss, with supporting calculations, the employees’ tax consequences (if
any) of the payments that will be made to Bezoar by Apothecary during the
2020 year of assessment. Assume that there will be no changes to the relevant
legislation from the 2019 year of assessment. 10
Total 10

Considerations:

• Can Bezoar be a LB? No not a natural

person.
• Independent contractor? Not if PSP
exclusion does not apply to an EE
contemplated in par (e) – therefore,
check PSP.
• If not a PSP – then no ET because
par (a) does not apply to companies.

⸫ Is Bezoar a PSP? If yes, then ET.

Solution
Bezoar will qualify as a personal service provider because:

• It is a company;
• The consulting services rendered to its client (Apothecary) on its behalf are rendered
personally by Seraphina who is a connected person in relation to Bezoar:
- As she owns 100% of Bezoar’s equity shares (or more than 20%);
• Seraphina would be regarded as an employee of Apothecary if the consulting
services were provided directly to it and not on behalf of Bezoar because:
- Seraphina would have been in receipt of remuneration (restraint of trade payments,
payments for services rendered and the retainers fee all constitute remuneration as
defined), or
• 100% (or more than 80%) of Bezoar’s income from services rendered is received
from Apothecary as it is Bezoar’s only client (restraint of trade prevents provision of
services to other clients); and
• Bezoar does not employ three or more full-time employees (who are not
shareholders and connected person to such shareholders)
Accordingly, Apothecary will be required to withhold employees’ tax on remuneration paid to
Bezoar.
Therefore, Apothecary must withhold: R35 000 x 12 + R1 500 000 + R800 x 1600 = R3 200
000 x 28% = R896 000

8. DIRECTORS OF PUBLIC COMPANIES

• Included in the definition of ‘employee’ i.t.o. subpar (a) being a person
receiving remuneration.
Executive directors Non-executive directors
Fees are remuneration as defined, i.e. Directors who are not involved in the daily
withhold employees’ tax from the monthly management or operations of a company –
remuneration. consider both the ‘Employee’ and
‘Independence’ test.

• Resident: fees, not remuneration,

no ET.
• Non-resident: fees are
remuneration, ET.

9. DUTIES OF ER – awareness required

• A person who is an employer must apply for registration as an employer. Par
15 (1)
• Obligation to deduct and pay over tax to Commissioner within seven days
after the end of the month during which deduction is made.
• 13th cheque or bonus – deduct all at once or over 12 equal monthly
instalments.
• Keep record of amounts paid to each employee.
 • An employer who deducts or withholds ET must deliver an EE certificate
(IRP5) to each employee – show amount of remuneration and ET deducted or
withheld.

10. THE EMPLOYMENT TAX INCENTIVE ACT – awareness required

• Aims to encourage employers to hire young and less experienced work-
seeker in an effort to reduce unemployment in SA.
• Eligible employers may reduce monthly ET withheld from employees and
payable to SARS, i.e. withholds full amount but has benefit of not paying the
full amount to SARS.
• Amount = gross income of employer, but exempt i.t.o. s 10(1)(s).

11. SKILLS DEVELOPMENT LEVY AND UNEMPLOYMENT INSURANCE FUND –

awareness required
SDL
• A compulsory levy scheme for the purpose of funding education and training.
• Payable by employers at a rate of 1% of the leviable amount.
• Leviable amount is equal to the ‘balance of remuneration’.

UIF
• Monthly compulsory contributions to the UIF, made by employers and
employees, are collected by SARS and paid over to the UIF.
• The UIF provides short-term relief for unemployed workers or workers unable
to work because of illness, maternity or adoption leave.
• Both the employer and employee contribute 1% of remuneration paid to a
relevant employee during any month.