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© 2023
First edition 2021
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A Student’s Approach to Taxation in South Africa was written for undergraduate stu-
dents with the specific purpose of combining in one volume the provisions of the
Income Tax Act 58 of 1962, as it applies to individuals and businesses for the year of
assessment ending 28 February 2023. Simple language is used and the relevant sec-
tions of the Act are provided and explained in simple terms.
A further characteristic of this book is the steps used to explain certain topics. This is
especially handy for students who are making use of distance education. At the end
of each chapter are exam preparation questions, with solutions, that can be used to
revise the various principles of the chapter.
This work is directed at undergraduate students. It is not written specifically for tax
practitioners but may in fact be used by general accountants for addressing basic tax
problems.
The book contains various examples and practical case studies. All examples and case
studies relate to the year of assessment from 1 March 2022 to 28 February 2023 (the
2023 year of assessment). Unless otherwise indicated, all dates will fall within the
2023 year of assessment. A date of 3 August will thus refer to the August of this year
of assessment, 3 August 2022, and 2 February will refer to 2 February 2023.
A Student’s Approach to Taxation in South Africa integrates some basic technology into
taxation students’ studies. Some examples have so-called e-mails inserted. You can
electronically download the responses to these e-mails either on your computer or on
your smartphone. The e-mail questions are based on errors students traditionally
make in exams or on aspects students are sometimes uncertain about. The responses
to these e-mails do not provide any new content but seek to embed concepts. Stu-
dents who don’t have access to the electronic answers are not disadvantaged, as these
answers do not contain any new information. Each chapter also contains one or more
additional questions that are available electronically.
This work is updated to include all relevant legislative amendments to the end of
November 2022.
We would like to thank all the people who offered us their invaluable advice.
Although extreme care was taken to update, review and edit the content of this book,
some errors or anomalies may still occur. To help us and your fellow students, please
send any errors or anomalies you find to [email protected].
AUTHORS
v
Assumptions and
abbreviations
Unless expressly stated to the contrary, the following assumptions must be made
when interpreting the examples and examination preparation questions in this vol-
ume:
• References to ‘the Act’ bear reference to the Income Tax Act 58 of 1962 (as amended).
• The use of the concept ‘South Africa’ or ‘Republic’ refers to the Republic of South
Africa and vice versa.
• All individuals are residents of the Republic.
• No double tax agreements between South Africa and overseas countries are in
force.
• Enterprises are registered as vendors for value-added tax (VAT).
• The cost price of all purchases made by vendors registered for VAT purposes is net
after any input tax credit to which they are entitled.
• All married persons are married out of community of property.
• Taxpayers, their spouses and their children are not persons with a disability as
defined.
• Medical costs fulfil the requirements of section 18 of the Act.
• The ages given are the ages of the persons on the last day of the year of assessment.
• In the case of an individual, the current year of assessment ends on 28 Febru-
ary 2023.
• All calculations are in Rands only.
vii
A Student’s Approach to Taxation in South Africa
viii
Contents
Page
Preface ......................................................................................................... v
Assumptions and abbreviations ........................................................................... vii
Chapter 1 Introduction ............................................................................................. 1
Lizelle Bruwer
Chapter 2 Value-added Tax (VAT) ......................................................................... 19
Lizelle Bruwer
Chapter 3 Gross income ........................................................................................... 159
Karina Coetzee
Chapter 4 Special inclusions .................................................................................... 207
Annelize Oosthuizen
Chapter 5 The taxation of non-residents ................................................................ 219
Karina Coetzee
Chapter 6 Income exempt from tax ........................................................................ 241
Kerry de Hart
Chapter 7 General deduction formula ................................................................... 267
Annelize Oosthuizen
Chapter 8 Specific deductions and allowances ..................................................... 305
Carien Cass
Chapter 9 Expenditure and allowances relating to capital assets ...................... 359
Carien Cass
Chapter 10 Capital gains tax...................................................................................... 399
Alta Koekemoer
Chapter 11 Taxation of companies and company distributions ........................... 473
Doria Cucciolillo
Chapter 12 Prepaid taxes ........................................................................................... 511
Annelize Oosthuizen
Chapter 13 Individuals ............................................................................................... 549
Kerry de Hart
ix
A Student’s Approach to Taxation in South Africa
Page
Chapter 14 Fringe benefits ......................................................................................... 601
Karina Coetzee
Chapter 15 Retirement benefits ................................................................................. 661
Kerry de Hart
Chapter 16 Taxation of trusts .................................................................................... 683
Doria Cucciolillo
Chapter 17 Donations tax........................................................................................... 737
Karina Coetzee
Chapter 18 Estate duty ............................................................................................... 759
Cinzia Stedall
Chapter 19 Administrative procedures.................................................................... 799
Cinzia Stedall
Appendices ...................................................................................................................... 839
Index ................................................................................................................................. 853
x
1 Introduction
Page
1.1 Introduction ......................................................................................................... 1
1.2 Taxation in perspective ...................................................................................... 2
1.2.1 Types of taxation .................................................................................... 2
1.2.2 Classification of taxes ............................................................................ 2
1.2.3 Criteria of a good tax system................................................................ 3
1.3 The budget process ............................................................................................. 4
1.3.1 Medium-term expenditure framework .............................................. 4
1.3.2 The national budget............................................................................... 4
1.3.3 The Income Tax Act 58 of 1962 (the Act) ............................................ 6
1.4 Calculation of taxable income (section 5)......................................................... 8
1.4.1 General principles when calculating taxable income ....................... 8
1.4.2 Calculating the taxable income of a company or close corporation 10
1.5 Selecting an enterprise type ................................................................................. 13
1.6 Tax implications of the different enterprise types ............................................ 14
1.7 Summary................................................................................................................. 16
1.1 Introduction
Taxes are levied to enable the government to provide services to the people. Another
view is that taxes are contributions to the State for the ultimate benefit of all who
enjoy the privileges and protection offered by the State.
1
A Student’s Approach to Taxation in South Africa 1.1–1.2
There are many role-players in the South African tax landscape and each role-player
has an important role to play. Some of the role-players, and their responsibilities,
include:
Role-player Responsibility
Minister of Finance The minister is mandated with the task of overseeing a number of
financial functions within the South African government, includ-
ing responsibility for National Treasury, the South African Rev-
enue Services (SARS), the Financial Intelligence Centre (FIC) etc.
National Treasury The governmental department responsible for the fiscal policy
that can be used to achieve the macro-economic goals of South
Africa.
South African Rev- Tax collection agency of South Africa. Responsible for
enue Service • the collection of tax revenue as mandated by the South African
(SARS) Revenue Services Act of 1997;
• ensuring compliance by taxpayers; and
• facilitating legitimate trade by protecting South Africa’s bor-
ders from illegal trade.
The Commissioner The person responsible for the management of SARS and who
of SARS reports directly to the Minister of Finance.
Legislation Specific laws, other than tax laws that also impact the tax land-
scape in South Africa such as:
• the South African Constitution, including the Bill of Rights;
• the Promotion of Administrative Justice Act (PAJA); and
• the Protection of Personal Information Act (POPIA).
Other • Taxpayers (companies, natural persons, trusts, farming, bank-
ing etc.)
• Professional accountancy bodies (SAICA, SAIPA, SAIT etc.)
• International organisations (Organisation for Economic Coop-
eration and Development (OECD), the World Bank etc.).
2
1.2 Chapter 1: Introduction
Based on what the various taxes are levied on (also known as the tax base)
• Income Tax on income earned, for example normal tax levied on taxable income.
• Consumption Taxes on the sale or use of goods or services, for example VAT,
excise duty on domestic consumption, and customs duty and import tariffs on for-
eign trade. These taxes take the form of price increases and affect the consumers.
• Wealth Taxes on the ownership of assets or capital gains made on the sale of
property, for example capital gains tax, estate duty, donations tax and local author-
ity taxes.
• Other Taxes that are levied on specific business transactions, for example stamp
duty, transfer duty and securities transfer tax.
The method used to calculate the tax (also known as the tax rate structure)
• Proportional tax Tax is levied at a fixed rate on the amount of income earned,
for example income tax on companies is levied at a fixed rate of 27% of taxable
income.
• Progressive tax The rate that is used to calculate the amount of tax is determined
by the person’s income. The higher a person’s income, the higher the tax rate that
is used to calculate the tax, for example income tax levied on natural persons.
• Regressive tax The tax rate decreases with the increase of a person’s income. No
such form of tax exists in South Africa, although there are arguments that VAT is
an example of a regressive tax.
3
A Student’s Approach to Taxation in South Africa 1.2–1.3
• Convenience Every tax should be levied at the time or in the manner most con-
venient for the contributor to pay it.
• Economy Every tax should be such that the contributor pays the minimal add-
itional cost for administration and in submission costs beyond its actual tax, but it
must still be sufficient to provide the treasury of the State with the amount it
requires.
In the modern context, these principles must also include the broader principles of
social justice, which include the elimination of inequality, the recognition and respect
of diversity, and the provision of supportive environments to all members of society.
4
1.3 Chapter 1: Introduction
speech to start with a short review of the economic, political, social and other circum-
stances that have had an effect on the budget proposals.
In the second part of his speech, the Minister discusses the most important items of
estimated state expenditure, the reasons for these items of expenditure and the policy
objectives the State wishes to achieve. He also discusses the sources of the revenue to
be used in defraying this expenditure and, as taxes form the major proportion of this
revenue, the details of proposed tax changes.
The third part of the speech refers to the budget documents tabled at the session.
These documents include –
• the estimate of expenditure to be defrayed from the National Revenue Fund;
• the estimate of income to be received;
• the statistical/economic survey;
• the tax proposals;
• comparative figures of income; and
• any other relevant documents.
These documents give an indication of how the income received during the year will
be spent by the government. Table 1.1 summarises budgeted government expendi-
ture for the 2022/2023 fiscal year.
5
A Student’s Approach to Taxation in South Africa 1.3
The documents provided to Parliament also indicate how the income will be collected.
Table 1.2 provides a summary of government’s planned income for the 2022/2023
fiscal year:
Table 1.2: Sources of government income (source: 2022 Budget Highlights)
Amount received Percentage
Type of tax
R‘billion of income
Personal income tax 587.9 37%
VAT 439.7 27%
Corporate income tax 269.9 17%
Fuel levies 89.1 6%
Customs and excise duties 117.4 7%
Other 94.5 6%
Total 1 598.5 100,0%
From the table above it is clear that the government receives most of its income from
income tax levied on individuals and companies, and VAT. Once a year National
Treasury and SARS publish tax statistics, giving information about how and where
taxes were collected.
Tax statistics
According to the 2021 tax statistics South Africa had 20 million registered individual
taxpayers. Some interesting facts are
• There were 22.9 million registered taxpayers .
• 37,2% of taxpayers are registered in Gauteng.
• 26,2% of assessed taxpayers were 35 to 44 years old.
• 46.4% of assessed taxpayers were female.
• Travel allowances were the largest allowance for individuals: 23,1% of total allowances
assessed.
• Retirement fund contributions paid on behalf of employees was the largest fringe
benefit (59,2% of the total fringe benefits assessed).
• Contributions to retirement funding was the largest deduction (85,5% of all deductions
granted).
6
1.3 Chapter 1: Introduction
incorrect or out of date, resulting in negative tax and financial implications for your
client and even for yourself.
Interpretation rules If the language of the Act provided for absolute certainty, there
would be no necessity for interpretation. Unfortunately, this is not the case and the
many court decisions on tax matters are testimony to the need for interpretation. The
circumstances and situations giving rise to income and expenses are also often very
complex, making the application of the provisions of the Act difficult and uncertain.
Where a dispute relating to the application of the Act to a particular case arises be-
tween the revenue authorities and a taxpayer, the parties frequently must rely on the
courts to give a decision.
The principle of legal precedence, known in Latin as the stare decisis rule, means that
the decision taken in a court case (the ratio decidendi, that is to say the reason or
grounds for a decision of the court) is binding on all lower courts. The hierarchy of
the different courts in South Africa is important in the context of the interpretation of
tax legislation and it can be illustrated as follows:
Tax Court
• Not an official court of law.
• Deals with tax disputes where amounts exceed R1
million or if a party wants to appeal the decision of
the Tax Board.
• Bound by High Court decisions and decisions from
the Supreme Court of Appeal (SCA)
Tax Board
• Not an official court of law.
• Deals with tax disputes where amounts are less than
R1 million.
• Decisions by the Tax Board are only binding on the
parties involved, but do not create any legal prece-
dence.
7
A Student’s Approach to Taxation in South Africa 1.3–1.4
The interpretation of law is a very complex field of study and for the purposes of this
book, it is sufficient to take note of a few of the more important rules of interpre-
tation. The need for interpretation will arise only where a provision in the Act is not
clear.
• Hardship is no criterion Even if a certain provision in the Act leads to hardship
for the taxpayer, provided the language of the section is clear, the fact that it gives
rise to hardship cannot be taken into consideration.
• The literal meaning must be applied If the literal meaning is clear, it must be
applied even if it may give rise to apparently unfair results.
• The intention of the legislature The intention of the legislator must be applied. A
governing rule in interpretation is, in general, to try to ascertain the intention of the
legislature from a study of the provision in question.
• The contra fiscum rule The benefit of the doubt must be given to the person
sought to be charged, except in cases where a provision in the Act is designed to
prevent tax avoidance. In these cases it should be interpreted in such a way that it
will prevent the mischief against which the section is directed. The rule can be
summarised as follows: the benefit of the doubt would therefore be given to the
taxpayer, except where tax avoidance is involved.
A distinction must be drawn between interpretation by the courts and a practice
adopted by the South African Revenue Service (SARS). Where the wording in the Act
isn’t clear, the courts cannot take note of the SARS practice or base their interpreta-
tion on the practice. Instead, the court must apply the rules of interpretation. Apart
from interpretation, the practice of SARS plays an important role in the administra-
tion of the Act. ‘Interpretation Notes’ are issued from time to time to inform tax-
payers about some practices that apply.
8
1.4 Chapter 1: Introduction
components build on one another and certain deductions are limited to specific
taxable income amounts. The basic framework is as follows:
R
Gross income (as defined in section 1) xxx
Less: Exempt income (section 10) (xxx)
INCOME (as defined in section 1) xxx
Less: Deductions (section 11 and other capital allowances) (xxx)
Add: Taxable capital gain (section 26A) xxx
Less: Retirement fund contributions (section 11F (for a natural person))
Less: Donations deduction (section 18A) (xxx)
TAXABLE INCOME (as defined in section 1) xxx
Normal tax calculated (less primary, secondary, tertiary rebates and medical tax
credits for a natural person) xxx
Less: Provisional tax (xxx)
Less: Employee’s tax (for a natural person and certain companies) (xxx)
NORMAL TAX DUE xxx
Add: Withholding tax on dividends xxx
TOTAL TAX LIABILITY xxx
The framework commences with gross income. Gross income is defined in the Act
and is divided into two parts. Firstly, there are the general requirements that have to
be met for an amount to be considered gross income, and secondly, there are specific
inclusions that are subject to tax although they do not meet the general requirements.
The second component in the calculation of taxable income is exempt income. Once
gross income is determined there are some amounts that would have been included
in gross income but the Act makes provision that they are not subject to income tax.
These amounts that have been included in gross income can then be excluded from
the calculation of income in terms of the provisions of the Act.
The last component in calculating taxable income is allowable deductions. The deduc-
tions can be divided into three main groups, namely:
• expenses that are deductible in terms of the general deduction formula;
• amounts that are deductible in terms of specific rules in the Act; and
• expenses that relate to capital assets which have specific rules that regulate the
allowances that can be claimed.
After deductions have been taken into account, the amount is referred to as taxable
income. The next step is to calculate the normal tax payable by the taxpayer based on
the taxable income.
The normal tax of a natural person is calculated by using a progressive tax table.
Once the tax has been calculated according to the table, natural persons (depending
on their age) are entitled to rebates as well as medical tax credits. Trusts are taxed at a
flat rate of 45% on their taxable income and companies and close corporations are
taxed at a flat rate of 27% (unless a company is a small business corporation as de-
fined for tax purposes (see chapter 11)).
9
A Student’s Approach to Taxation in South Africa 1.4
REMEMBER
• The tax rate of companies and close corporations was reduced from 28% to 27% for
years of assessment ending on or after 31 March 2023 (that is to say where the year of
assessment of the company or close corporation commences on or after 1 April 2022).
The rate of 27% is used for purposes of this book, unless the year of assessment in an
example or question indicates otherwise.
If you now have to calculate the taxable income starting with net profit, it implies that
certain income is already included and certain expenses have already been deducted
to calculate the net profit. In order to process the correct adjustments, you need to
consider income and expenses separately.
Income
The income for accounting purposes can differ from the income for income tax pur-
poses.
REMEMBER
• Income for income tax purposes is gross income less exempt income.
You therefore have to consider the gross income and exempt income provisions of the
Income Tax Act.
10
1.4 Chapter 1: Introduction
When working through the income as reported for accounting purposes, you may
come across the following situations:
Situation Example Net profit/Accounting profit
adjustment
The amount received is Cash sales No adjustment needs to be made to the
included in accounting accounting profit.
income and is the same as
the amount that should be
included in income for
income tax purposes.
The amount received is Compensation An adjustment is needed.
included in accounting for defama- As the amount is included in accounting
income but is excluded tion (capital in income, it is included in net profit.
from gross income. nature) As it is not subject to income tax,
because it is capital in nature, the
amount must be deducted from the
profit to effectively exclude it from
taxable income.
The amount received is Local divi- An adjustment is needed.
included in accounting dends As the amount is included in accounting
income but is exempt for income, it is included in net profit.
income tax purposes. As it is exempt for income tax, the
exempt amount must be deducted from
the net profit to effectively exclude it
from taxable income.
The amount received is Rental An adjustment is needed.
not included in account- received in As no amount has been included in net
ing income but should be advance profit, the amount must be added to the
included in gross income accounting net profit to calculate taxable
income.
The amount received that A capital gain An adjustment is needed.
is included in accounting on the sale of The amount is included in the account-
profit differs from the an asset. ing income and therefore in net profit.
amount that should be Only a portion of the amount is subject
included in income for to income tax (taxable capital gain).
income tax purposes. To calculate the correct taxable income,
the amount included in the accounting
income must be deducted to eliminate
the accounting gain that was included
and then the correct amount for income
tax purposes must be added.
Expenses
Expenses for accounting purposes can differ from the expenses for income tax pur-
poses. Remember that expenses for income tax purposes consist of deductions in
terms of the general deduction formula, specific deductions and capital allowances.
11
A Student’s Approach to Taxation in South Africa 1.4
When working through the expenses, you can have the following situations:
Situation Example Net profit/Accounting profit adjust-
ment
The amount (expense) Cash pur- No adjustment needs to be made to the
deducted in the expenses chases of trad- accounting profit.
for accounting purposes is ing stock
the same as the amount
that must be deducted for
income tax purposes.
The amount (expense) Compensation An adjustment is needed.
deducted for accounting paid due to As the amount is deducted as an ac-
purposes is not deductible negligence counting expense, it has reduced the net
for income tax purposes. profit, but because it is not deductible
for income tax (as it is capital in nature),
the amount must be added back to the
net profit to effectively eliminate the
effect of the accounting deduction.
The amount (expense) is Rental ex- An adjustment is needed.
not deducted when calcu- pense paid in As the amount is not deducted as an
lating the accounting advance accounting expense, the whole amount
profit but is deductible for has to be deducted from the net profit to
income tax purposes. calculate taxable income.
The amount (expense) Depreciation An adjustment is needed.
deducted for accounting (accounting The amount is deducted in the account-
purposes differs from the expense) in ing expenses as depreciation, and has
amount that should be contrast to a therefore reduced the net profit.
deducted for income tax wear-and-tear A wear-and-tear allowance for income
purposes. allowance on tax purposes can differ from deprecia-
an asset (in- tion.
come tax)
To calculate the correct taxable income,
the amount deducted in the accounting
expenses must be added back to the net
profit to effectively eliminate the reduc-
tion and then the correct amount as per
the Income Tax Act must be deducted to
calculate the taxable income.
This book refers to the tax calculation of all persons (taxpayers) and not only compa-
nies. A person is defined in the Act and includes individuals (natural persons) and
business entities such as companies and trusts. As some tax implications differ for
different persons, it is important to also have a broad understanding of the different
enterprise types and the impact that the type has on the calculation of taxable income.
Some provisions of the Act are applicable only to certain persons while other provi-
sions are applicable to all persons. Each chapter will make it clear to which person the
provisions being discussed is applicable.
12
1.5 Chapter 1: Introduction
13
A Student’s Approach to Taxation in South Africa 1.5–1.6
After these factors have been considered, the most appropriate business type must be
selected for the specific situation. The most important income tax implications of the
different enterprise types are discussed in the next section.
14
1.6 Chapter 1: Introduction
• The taxable income of a partner is calculated by adding their portion of the profit
from the partnership to their income from other sources, and then the tax is calcu-
lated, if the partner is a natural person, by using the tax tables and thereafter the
rebates are deducted.
Company
• There is a separate legal entity and therefore there is a separate taxpayer. The profit
of the company is not added to the shareholder’s income from other sources to cal-
culate the shareholder’s taxable income. The dividend is added to gross income but
is then exempt. The profit or loss from the business is not taken into
account when calculating the shareholders’ limits for retirement contributions and
donations.
• The interest earned on the business’s bank account does not qualify for any exemp-
tion.
• Dividends to shareholders are subject to dividends tax. Any distributions received
by the members are added to their gross income but then exempted as distribut-
ions constitute a dividend.
• If the company realises a loss at the end of the year, the loss cannot be set off
against the shareholders’ income from other sources.
15
A Student’s Approach to Taxation in South Africa 1.6–1.7
• The company’s normal income tax payable is calculated at a flat rate of 27%. Dis-
tributions to shareholders are subject to a withholding tax on shareholders of 20%
(dividends tax). The company can qualify as a small business corporation (refer to
chapter 11) or a micro business and is then taxed on the applicable sliding scale tax
rate.
Trusts
• There is a separate legal entity and therefore there is a separate taxpayer. The profit
of the business in the trust that is not distributed to the beneficiaries must not be
added to the beneficiaries’ income from other sources to calculate their taxable in-
come. The business income distributed to the beneficiaries or to which they have a
vested right must be added to their income from other sources when calculating
their taxable income.
• Income that is distributed by the trust retains its character. Because interest retains
its character, any interest earned on the trust’s bank account that is distributed to a
beneficiary together with other interest received by the taxpayer (beneficiary) qual-
ify for the R23 800 annual interest exemption (persons over the age of 65 qualify for
R34 500). The trust itself does not qualify for any interest exemptions.
• If the trust realises a loss at the end of the year, the loss cannot be set off against the
beneficiaries’ income from other sources.
• The taxable income of the beneficiary includes the distributed income from the trust
and tax is calculated according to the tax tables and thereafter rebates are deducted.
Undistributed income is retained in the trust and is subject to income tax at a flat rate
of 45%.
• The trust cannot qualify as a small business corporation.
The framework as explained in 1.4 used to calculate taxable income is the same for all
the different enterprise types and is discussed in more detail, in the next section.
1.7 Summary
In this chapter a brief overview of the main types of taxes, as well as the fundamental
principles underlying a good tax system and aspects to consider when interpreting
tax legislation, were discussed. A taxpayer that decides to conduct a trade, must
consider the tax consequences of such a decision. Prior to trading, a taxpayer usually
needs to decide on a business structure. Business types include sole traders, partner-
ships, close corporations, companies and trusts. Once the business structure has been
selected and trading has commenced, the taxable income of the business has to be
calculated.
The first step in calculating a person’s taxable income is to determine the gross in-
come received. Certain amounts included in gross income are, however, specifically
exempt from income tax. The net amount after deducting the exempt income from
gross income is called ‘income’. Expenses that are incurred in the production of
income can be deducted in terms of the general deduction formula or as specific
deductions. After deducting the allowable deductions and allowances from the
income, the remaining amount is the taxable income from operations. After adding
the taxable capital gain, the total taxable income for the year is obtained. This amount
16
1.7 Chapter 1: Introduction
is used to calculate the tax due for the year. For individuals two further deductions
are allowed after the capital gain is included, namely retirement fund contributions
and donations.
Although the basic framework for calculating taxable income for the different tax-
payers is the same, there are a couple of minor differences between the different types
of taxpayers. It is therefore important to ascertain which type of taxpayer you are
calculating income tax for.
17
Value-added Tax (VAT)
2
Page
2.1 Introduction............................................................................................................ 23
2.2 VAT in perspective ................................................................................................ 25
2.3 Calculation of VAT ................................................................................................ 26
2.3.1 The accounting basis (section 15) ........................................................... 27
2.3.1.1 Invoice basis .............................................................................. 27
2.3.1.2 Payments basis.......................................................................... 28
2.3.2 Tax periods (section 27) ........................................................................... 31
2.3.3 Tax returns and payments (sections 28 and 25 of the
Tax Administration Act) ......................................................................... 33
2.3.4 Penalties and interest (section 39 and Chapter 15
of the Tax Administration Act) .............................................................. 34
2.3.5 Refunds (section 44 and Chapter 13 of the Tax
Administration Act) ................................................................................. 34
2.4 The basics of output VAT ..................................................................................... 36
2.5 The levying of output VAT (section 7(1)) ........................................................... 38
2.6 Output VAT: Supply of goods or services (section 7(1)(a)) ............................. 39
2.6.1 Supply ........................................................................................................ 39
2.6.2 Goods or services ..................................................................................... 39
2.6.2.1 Goods ......................................................................................... 39
2.6.2.2 Services ...................................................................................... 40
2.6.3 Vendor (sections 23, 50, 50A and 51(2) and sections 22
and 23 of the Tax Administration Act).................................................. 41
2.6.3.1 Registration as a vendor: Compulsory registration
(sections 23(1), (2), (3) and (6), 50 and 50A) .......................... 42
19
A Student’s Approach to Taxation in South Africa
Page
2.6.3.2 Registration as a vendor: Voluntary registration
(section 23(3))........................................................................ 44
2.7 Output VAT: In the course or furtherance of an enterprise
(section 7(1)(a)) ....................................................................................................... 45
2.7.1 Enterprise or activity carried on continuously or regularly ............ 46
2.7.2 Goods or services are supplied for a consideration .......................... 47
2.7.3 Specifically included in the definition of an ‘enterprise’ .................. 47
2.7.4 Specifically excluded from the definition of an ‘enterprise’ ............ 47
2.8 VAT levied: Importation of goods (sections 7(1)(b) and 13) .......................... 48
2.8.1 Importation of goods from BLNS countries ....................................... 49
2.8.1.1 Time of importation (section 13(1)(iii)) ............................. 49
2.8.1.2 Calculation of VAT on importation (section 13(2)(b))..... 49
2.8.2 Importation of goods from other countries ........................................ 49
2.8.2.1 Time of importation (section 13(1)(i)) ............................... 49
2.8.2.2 Calculation of VAT on importation (section 13(2)(a))..... 50
2.9 VAT levied: Imported services (sections 7(1)(c) and 14) ................................ 52
2.9.1 Imported services: Meaning of ‘supply’ ............................................. 52
2.9.2 Imported services: Time of supply (section 14(2)) ............................ 56
2.9.3 Imported services: Value of the supply (section 14(3))..................... 56
2.10 Output VAT: Zero-rated supplies (section 11) ................................................ 56
2.10.1 Zero-rated supply: Exported goods (section 11(1)(a)(i) and (ii)) .......... 56
2.10.1.1 Direct exports (goods consigned or
delivered to an export country
(definition of ‘exported’ – paragraph (a))) ........................ 57
2.10.1.2 Indirect exports (goods delivered in South Africa
to non-residents under the Export Regulations
(definition of ‘exported’ – paragraph (d)))........................ 59
2.10.1.3 Goods delivered by a vendor to a foreign-going
ship or aircraft (‘exported’ – paragraphs (b) and (c)) ...... 61
2.10.1.4 Goods supplied under a rental agreement
(section 11(1)(c) and (d)) ...................................................... 62
2.10.2 Zero-rated supply: Exported services (section 11(2)) ........................ 62
2.10.2.1 Exported services: Transportation (section 11(2)(a),
(b) and (d)) ............................................................................. 62
2.10.2.2 Exported services: Ancillary services to exported
goods (section 11(2)(e)) ........................................................ 62
2.10.2.3 Exported services: Services rendered outside
South Africa (section 11(2)(k)) ............................................ 63
2.10.2.4 Exported services: Services to non-residents
(section 11(2)(l)) .................................................................... 63
2.10.3 Zero-rated supply: The sale of a going concern
(sections 11(1)(e) and 18A) .................................................................... 66
2.10.3.1 General .................................................................................. 66
2.10.3.2 Specific examples relating to going-concern sales .......... 66
2.10.3.3 Calculations relating to going-concern sales.................... 68
2.10.4 Zero-rated supplies: Other ................................................................... 69
20
Chapter 2: Value-added Tax (VAT)
Page
2.11 Output VAT: Exempt supplies (section 12) ..................................................... 72
2.11.1 Exempt supply: Financial services (sections 2 and 12(a)) ................. 72
2.11.2 Exempt supply: Donated goods and services (section 12(b))........... 75
2.11.3 Exempt supply: Accommodation (section 12(c)) ............................... 75
2.11.3.1 Exempt supply: Residential accommodation
(section 12(c)) ........................................................................ 75
2.11.3.2 Taxable supply: Commercial accommodation ................ 76
2.11.4 Exempt supplies: Other......................................................................... 80
2.12 Output VAT: Deemed supplies (sections 8, 8A and 18(3)) ............................ 81
2.12.1 Deemed supply: Ceasing to be a vendor ............................................ 82
2.12.1.1 Meaning of ‘supply’: Ceasing to be a vendor
(section 8(2)) ......................................................................... 82
2.12.1.2 Value of the supply: Ceasing to be a vendor
(section 10(5))........................................................................ 82
2.12.1.3 Time of supply: Ceasing to be a vendor
(sections 8(2) and 9(5)) ........................................................ 85
2.12.2 Deemed supply: Indemnity payments ............................................... 85
2.12.2.1 Meaning of ‘supply’: Indemnity payments
(section 8(8)) ......................................................................... 85
2.12.2.2 Value of the supply: Indemnity payments
(section 8(8)) ......................................................................... 86
2.12.2.3 Time of supply: Indemnity payments (section 8(8)) ....... 86
2.12.3 Deemed supply: Supplies to independent branches......................... 88
2.12.3.1 Meaning of ‘supply’: Supplies to independent branches
(paragraph (ii) of the proviso to the definition
of ‘enterprise’, sections 8(9), 11(1)(i) and 11(2)(o)) ........... 88
2.12.3.2 Value of the supply: Supplies to independent
branches (section 10(5)) ....................................................... 89
2.12.3.3 Time of supply: Supplies to independent branches
(section 9(2)(e)) ..................................................................... 90
2.12.4 Deemed supply: Fringe benefits .......................................................... 90
2.12.4.1 Meaning of ‘supply’: Fringe benefits (section 18(3)) ......... 90
2.12.4.2 Value of the supply: Fringe benefits (section 10(13)) ........ 91
2.12.4.3 Time of supply: Fringe benefits (section 9(7)) .................. 96
2.12.5 Deemed supply: Payments exceeding consideration ....................... 97
2.12.5.1 Meaning of supply: Payments exceeding
consideration (sections 8(27) and 16(3)(m)) ...................... 97
2.12.5.2 Value of supply: Payments exceeding consideration
(section 10(26))...................................................................... 97
2.12.5.3 Time of supply: Payments exceeding consideration
(section 8(27))......................................................................... 97
2.12.6 Deemed supplies: Other
(section 8(3), (7), (13), (15), (25) and (29)) ............................................ 98
2.13 Output VAT: Non-supplies (section 8(14)) ...................................................... 101
2.14 Output VAT: No apportionment (section 8(16)) ............................................. 102
21
A Student’s Approach to Taxation in South Africa
Page
2.15 Time of supply (section 9) .................................................................................. 102
2.15.1 Time of supply: General rule (section 9(1)) ........................................ 102
2.15.2 Time of supply: Connected persons (section 9(2)(a)) ........................ 103
2.15.3 Time of supply: Rental agreements (section 9(3)(a)) ......................... 103
2.16 Value of the supply (section 10) ........................................................................ 104
2.16.1 Value of the supply: General rule (section 10(3)) .............................. 104
2.16.2 Value of the supply: Connected persons (section 10(4))................... 105
2.16.3 Value of the supply: Entertainment (section 10(21)) ......................... 106
2.16.4 Value of the supply: Dual supplies (section 10(22)) .......................... 107
2.16.5 Value of the supply: Supply for no consideration (section 10(23)) .... 107
2.17 Basics of input VAT ............................................................................................ 107
2.18 Tax invoices (sections 16(2) and 20) .................................................................. 110
2.19 Debit notes and credit notes (section 21).......................................................... 112
2.19.1 Debit notes .............................................................................................. 112
2.19.2 Credit notes............................................................................................. 112
2.20 The determination of input VAT (section 17) .................................................. 114
2.20.1 Turnover-based method ....................................................................... 117
2.20.2 Special apportionment method............................................................ 119
2.21 Input VAT: Denial of input VAT (section 17(2)) ............................................. 119
2.21.1 Denial of input VAT: Entertainment ................................................... 119
2.21.2 Denial of input VAT: Club membership fees and subscriptions .... 120
2.21.3 Denial of input VAT: Motor car ........................................................... 120
2.22 Input VAT: Deemed input tax on second-hand goods
(sections 1, 18(8) and 20(8)) ................................................................................ 122
2.22.1 Zero rating of movable second-hand goods exported
(proviso sections 11(1) and 10(12)) ...................................................... 124
2.23 Special rules: Instalment credit agreements .................................................... 126
2.23.1 Meaning of ‘supply’: Instalment credit agreements ......................... 126
2.23.2 Value of the supply: Instalment credit agreements (section 10(6))....... 127
2.23.3 Time of supply: Instalment credit agreements (section 9(3)(c)) ...... 127
2.24 Special rules: Fixed property ............................................................................. 129
2.24.1 Meaning of ‘supply’: Fixed property .................................................. 129
2.24.2 Value of the supply: Fixed property ................................................... 129
2.24.3 Time of supply: Fixed property ........................................................... 130
2.24.3.1 Time of supply: Fixed property supplied in
the course or furtherance of an enterprise........................ 130
2.24.3.2 Time of supply: Fixed property not supplied
in the course or furtherance of an enterprise .................... 131
22
2.1 Chapter 2: Value-added Tax (VAT)
Page
2.25 Special rules: Foreign supplies of electronic services
(sections 1 (definition of ‘enterprise’), 23 and 20) ........................................... 133
2.26 Adjustments: 100% non-taxable use
(sections 18(1), 9(6), 16(3)(h), 10(7), 18D, 9(13), 10(29) and 16(3)(o)) ............. 134
2.27 Adjustments: Subsequent taxable use (section 18(4)) ..................................... 138
2.28 Adjustments: Increase and decrease of taxable use
(sections 18(2), (5) and (6) and 10(9)) ................................................................ 140
2.29 Adjustments: Game-viewing vehicles and hearses
(sections 8(14)(b) and (14A), 9(10), 10(24) and 18(9)) ...................................... 143
2.30 Adjustments: Supplies of going concerns (section 18A) ................................ 144
2.30.1 100% taxable usage ................................................................................ 144
2.30.2 More than 50% taxable usage for the purposes of the going
concern .................................................................................................... 145
2.30.3 Less than 50% of the selling price relates to the going
concern .................................................................................................... 147
2.31 Adjustments: Leasehold improvements
(sections 8(29), 9(12), 10(28) and 18C) ............................................................... 148
2.32 Adjustments: Irrecoverable and recoverable debts (section 22) ................... 150
2.33 Tax rulings............................................................................................................ 153
2.33.1 Chapter 7 of the Tax Administration Act: Advance Rulings ........... 153
2.33.2 Section 41B of the VAT Act: VAT rulings and VAT class
rulings...................................................................................................... 153
2.33.3 Section 72 of the VAT Act: Arrangements and decisions to
overcome difficulties ............................................................................. 154
2.34 Tax avoidance (section 73 of the VAT Act and section 102 of the Tax
Administration Act) ............................................................................................ 154
2.35 Unprofessional conduct (Chapter 18 of the Tax Administration Act) ......... 154
2.36 The influence of VAT on income tax calculations .......................................... 155
2.37 Summary .............................................................................................................. 155
2.38 Examination preparation .................................................................................. 156
2.1 Introduction
Almost every time a consumer purchases goods or services from a vendor in South
Africa, he has to pay a price that includes value-added tax (VAT). VAT is a type of
indirect tax and a direct cost to the final consumer, as he cannot claim the amount
back from the South African Revenue Service (SARS).
However, in certain instances an enterprise registered as a vendor may claim the
VAT it has paid back from SARS. It is therefore critical to understand the mechanisms
of VAT in an enterprise, as it has a direct cash-flow effect on the enterprise.
23
A Student’s Approach to Taxation in South Africa 2.1
VAT
Adjustments
(refer to 2.26–2.32)
Time of Value
supply of supply
(refer to 2.15) (refer to 2.16)
Critical questions
When dealing with VAT, a person is normally confronted with the following questions:
• How does the VAT system work?
• When and at what rate is VAT levied?
• When does a person need to register as a vendor?
• How long is a VAT period?
• What are the requirements for the documents that are the driving force of the VAT
system?
• How does zero rating of supplies work?
• When is a supply an exempt supply?
continued
24
2.1–2.2 Chapter 2: Value-added Tax (VAT)
Tax statistics
According to the 2021 tax statistics there were 880 553 registered VAT vendors in South
Africa. SARS received the following VAT payments per sector:
Financial intermediation, insurance,
R167,8bn
real-estate and business services
Manufacturing R53,8bn
Wholesale and retail trade, catering
R59,5bn
and accommodation
Construction R19,3bn
Transport, storage and communication R21,4bn
Community, social and personal services R22,2bn
Mining and quarrying R21,5bn
All other sectors R28,8bn
25
A Student’s Approach to Taxation in South Africa 2.3
Step 3: Determine whether there are any VAT adjustments that must be con-
sidered (refer to 2.26 to 2.32).
Step 4: If the input tax claimable exceeds the output tax payable, the credit is
refundable to the vendor. If the output tax payable exceeds the input
tax claimable, the debit is payable by the vendor to SARS.
Tax statistics
According to the 2021 tax statistics the following output tax was paid and input tax
claimed during the fiscal year:
R million
OUTPUT TAX
Standard rate (excl. capital goods and services
and accommodation) 1 479 180
Standard rate (only capital goods and/or services) 32 496
Supply of accommodation 1 520
Adjustments 16 956
Total output tax 1 530 151
INPUT TAX
Claimed on capital goods and/or services 96 657
Claimed on capital goods imported 5 130
Claimed on other goods and/or services 1 108 902
Claimed on other goods imported 138 656
Claimed on adjustments 14 787
Total input tax 1 364 131
26
2.3 Chapter 2: Value-added Tax (VAT)
REMEMBER
• Output VAT and output tax has the same meaning and refers to the VAT that a vendor
must levy on a supply and pay over to SARS.
• Similarly, input VAT and input tax has the same meaning and refers to the VAT that a
vendor can claim on goods or services supplied to the vendor that will be used for the
making of taxable supplies.
Example 2.1
A vendor registered on the invoice basis supplied the following goods:
(a) On 2 February goods were delivered at a client’s premises and the invoice for the
goods was issued on the same date. The payment for the goods was received on
31 March.
(b) On 29 April a client paid R100 000 for goods delivered on the same date. The invoice
was issued on 14 May.
You are required to determine the time of the above supplies for VAT purposes.
27
A Student’s Approach to Taxation in South Africa 2.3
Solution 2.1
(a) As the invoice for the goods was issued before payment was made, the time of the
supply is the date the invoice was issued, which is 2 February. The date of payment
(31 March) is irrelevant.
(b) As the payment for the goods was made before the issue of the invoice, the time of
supply is 29 April, when payment was made. The date of delivery of the goods is
irrelevant.
When a vendor changes from the invoice basis to the payment’s basis, he should
calculate the amount payable or refundable, which is the amount of input tax payable
on his creditors’ balances less the amount of output tax receivable on his debtors’
balances (refer to 2.15 for the other time-of-supply rules).
Example 2.2
A vendor registered on the payments basis supplied the following goods:
(a) On 2 February goods are delivered at a client’s premises and the invoice for R15 000
for the goods was issued on the same date. The payment for the goods was received
on 31 March.
(b) On 29 April a client paid R50 000 for goods delivered on the same date. The invoice
for the goods was issued on 14 May.
(c) On 19 July trading stock is delivered at a client’s premises and the invoice for
R180 000 was issued on the same date. Payment for the goods was only received on
31 August.
You are required to determine the time of the above supplies for VAT purposes.
28
2.3 Chapter 2: Value-added Tax (VAT)
Solution 2.2
(a) The consideration of the supply is lower than R100 000 and the time of supply is the
date the payment is received – 31 March.
(b) The consideration of the supply is lower than R100 000 and the time of supply is the
date the payment is received – 29 April.
(c) As the consideration of the supply exceeds R100 000, the time of supply is deter-
mined by applying the time-of-supply rules for the invoice basis and that is the ear-
lier of payment or the date the invoice is issued. The invoice is issued before
payment is made and the time of supply is therefore on the date the invoice is issued
– that is to say 19 July.
A vendor may account for VAT on the payments basis only if the vendor applied to
the Commissioner in writing and the vendor is one of the following persons (that is to
say registration on the payments basis is not automatic):
• a public authority;
• a municipality;
• a municipal entity that supplies electricity, gas, water, drainage, or services relat-
ing to the removal or disposal of garbage or sewage;
• an association not for gain;
• a water board or any other institution which has similar powers to a water board;
• a regional electricity distributor, for example City Power in Johannesburg;
• a foreign supplier or intermediary of electronic services (refer to 2.25 for further
information regarding foreign suppliers of electronic services);
• the South African Broadcasting Corporation; or
• a natural person or an unincorporated body of persons of which all the members
are natural persons (a partnership of which all the partners are natural persons),
and the total value of the taxable supplies in a 12-month period has not exceeded
R2,5 million (excluding VAT).
Example 2.3
Which of the following persons qualify to register on the payments basis for VAT pur-
poses? Support your answer with a reason.
(a) A sole proprietor whose turnover (taxable supplies) in a 12-month period amount to
R2,8 million.
(b) A South African resident company.
(c) The regional electricity distributor in the Western Cape, REDI.
29
A Student’s Approach to Taxation in South Africa 2.3
Solution 2.3
Person Does the person qualify to register on the pay-
ments basis for VAT purposes?
(a) A sole proprietor whose No. While a sole proprietor is a natural person, the
turnover (taxable supplies) total value of taxable supplies in a 12-month
in a 12-month period period exceeds the R2,5 million threshold.
amounts to R2,8 million.
(b) A South African resident No, companies are not on the list of persons who
company. can apply for registration on the payments basis in
terms of section 15(2) of the Act.
(c) The regional electricity Yes, regional electricity distributors are on the list
distributor in the Western of persons who can apply for registration on the
Cape, REDI. payments basis in terms of section 15(2) of the Act.
Any vendor that is voluntarily registered for VAT purposes with the value of its
taxable supplies not exceeding R50 000, must register on the payments basis (refer to
2.6.3.2). Such vendor should continue to be registered on the payments basis until the
value of its taxable supplies exceeds R50 000. Unless such a vendor otherwise quali-
fies for the payments basis as listed above, such vendor must convert to the invoice
basis from the commencement of the tax period immediately following the tax period
when the total value of taxable supplies has exceeded R50 000.
When the taxable supplies of a vendor (individual and unincorporated body of
persons) who accounts for VAT on the payments basis exceed R2,5 million, he must
inform the Commissioner in writing, as he will now have to account for VAT on the
invoice basis. The reverse situation also applies but is not compulsory.
The following can be disregarded when determining whether a vendor’s taxable
supplies exceed R2,5 million:
• the ending of or a substantial and permanent reduction in the size or scale of an
enterprise carried on by the vendor;
• the replacement of a plant or other capital asset used in an enterprise carried on by
the vendor (for example selling old plant and machinery to replace them with new
plant and machinery); or
• abnormal circumstances of a temporary nature.
If a vendor’s tax basis changes, he must provide particulars to the Commissioner on
the prescribed form. This allows for the calculation of the tax payable or refundable
as a result of the change in the tax basis.
If the vendor changes from the payments basis to the invoice basis, he should prepare
a list of his enterprise’s debtors and creditors, showing the amounts owing at the end
of the tax period immediately preceding the change-over period. The amount payable
or refundable will be the output tax due on his outstanding debtors’ balances less the
input tax receivable on his creditors’ balances.
30
2.3 Chapter 2: Value-added Tax (VAT)
REMEMBER
• The payment basis is not available to vendors that are not natural persons (except for
those entities listed above).
Example 2.4
Paul is a natural person carrying on a sole proprietorship and is currently registered for
VAT on the payments basis. As a result of his flourishing business, his taxable supplies
(excluding VAT) for the previous 12 months have increased to R2,5 million. He now must
make the required adjustment in respect of debtors and creditors and will change over to
the invoice basis as from 1 August of the current year of assessment. On 31 July of the cur-
rent year of assessment, Paul’s records reflected debtors (including VAT) of R350 000
(Note 1) and creditors (including VAT) of R315 000 (Note 2).
Notes
1. Included in his debtors is an amount of R10 000 for zero-rated sales made to export
debtors. Also included in debtors is an amount of R12 000 for interest on long out-
standing debtors’ balances. Interest is an exempt financial service and no VAT should be
levied on this.
2. Included in creditors is an amount of R80 000 for the purchase of a motor car in respect
of which the input tax is denied.
Calculate the VAT adjustment which Paul needs to make as a result of the change from
the payments to the invoice basis.
Solution 2.4
Output tax not yet paid in respect of debtors:
R
Export debtors: Zero-rated nil
Interest: Financial service, thus exempt nil
Other debtors: (R350 000 – R10 000 – R12 000) × 15 / 115 42 783
Less: Input tax not yet claimed in respect of creditors:
On motor vehicle: Input denied nil
Other creditors: (R315 000 – R80 000) × 15 / 115 (30 652)
Net output tax adjustment 12 131
31
A Student’s Approach to Taxation in South Africa 2.3
Section 27 of the VAT Act provides for different categories of vendors and their
various tax periods.
Category A: Periods of two months ending on the last day of January, March, May
etc. (odd-numbered calendar months).
This is applicable to vendors with taxable supplies that do not exceed
R30 million in a 12-month period, or farmers with taxable supplies
that exceed R1,5 million in any given 12-month period.
Category B: Periods of two months ending on the last day of February, April,
June etc. (even-numbered calendar months).
This is applicable to vendors with taxable supplies that do not exceed
R30 million in a 12-month period, or farmers with taxable supplies
that exceed R1,5 million in any given 12-month period.
Category C: Periods of one month ending on the last day of each month.
The following vendors fall into this category:
• those whose taxable supplies during a period of 12 months exceed,
or are likely to exceed, the value of R30 million;
• those who have applied in writing to be placed in this category;
• those who have repeatedly been in default in terms of the VAT
Act.
Category D: Periods of six months ending on the last day of February and August
respectively. Vendors who only carry on farming activities with
taxable supplies of less than R1,5 million in value over 12 months fall
into this category. A vendor that is a registered micro business (refer
to chapter 8) who has made written application in this regard, could
also qualify as a Category D vendor.
Category E: Periods of 12 months ending on the last day of their year of assessment
for normal tax purposes. Vendors falling into this category include:
• companies and trust funds whose activities consist solely of:
– the letting of fixed property or movable goods to; or
– the administration or management of;
companies that are connected persons in relation to the vendor;
• those connected persons are all registered vendors and are entitled
to deduct the full amount of input tax.
• tax invoices are issued, and payments are only made once a year,
at the end of the year of assessment.
In determining the value of taxable supplies for a 12-month period, the following
must be excluded:
• supplies arising from the ending of an enterprise or a substantial and permanent
reduction in the size or scale of an enterprise;
• supplies resulting from the replacement of capital assets (for example selling an
old manufacturing building and acquiring a new factory building); and
• supplies resulting from temporary abnormal circumstances.
32
2.3 Chapter 2: Value-added Tax (VAT)
The Commissioner may permit a vendor’s tax period to end within ten days either
before or after the last day of the month during which the period was originally
supposed to end. The future tax period, as approved by the Commissioner, must be
used by the vendor for a minimum period of 12 months commencing from the tax
period during which the change is made (section 27(6)(ii)). A binding general ruling
(Interpretation Note No. 52) stipulates that a vendor could use the ten-day rule if the
cut-off date is:
• a fixed of the week;
• a fixed date in a calendar month; or
• a fixed day in accordance with ‘commercial accounting periods’ applied by the
vendor. (The vendor should supply the necessary proof for this option (for exam-
ple minutes of a board meeting).)
33
A Student’s Approach to Taxation in South Africa 2.3
REMEMBER
The Commissioner may alter the normal rules as presented above and prescribe the
following:
• the form and manner (including any specifications relating to any means of electronic
communication) in which returns must be submitted and payments be made;
• the date for the submission of returns and the making of payments (section 28(4)).
REMEMBER
• The Commissioner has the right to fix the specific time of the day on which any VAT
payment must be made.
• Any payment received after such time, is treated as a late payment for VAT purposes.
34
2.3 Chapter 2: Value-added Tax (VAT)
return was due. If the return is submitted after five years from the date on which it
was due, the vendor loses the refund and the refund amount reverts to SARS (sec-
tion 44 of the VAT Act).
The Commissioner may only refund an amount of VAT mistakenly paid by a vendor
(for example, the vendor’s VAT liability is R10 000, but the vendor mistakenly paid
R11 000 over to SARS), if the claim for such refund is received within five years from
the date on which the incorrect payment was made. In addition, if the vendor does
not provide SARS with its banking details, in writing, within 90 days from the sub-
mission of the claim for the refund, it will be deemed that SARS did not receive the
claim from the vendor, that is to say no refund will be made.
An amount is not refundable if the amount is less than R100, but the amount must be
carried forward in the vendor’s account (section 191 of the Tax Administration Act).
If the Commissioner does not refund the VAT within 21 business days after receipt of
the vendor’s VAT return, interest is payable in accordance with Chapter 12 of the Tax
Administration Act. The 21-day interest-free period only commences from the date
the vendor submits relevant material, requested by SARS for purposes of verification,
inspection or audit of a refund in accordance with Chapter 5 of the Tax Administra-
tion Act or prescribed banking particulars are supplied to the Commissioner (that is to
say only when the Commissioner does not already have the prescribed banking
particulars). Interest is paid in accordance with Chapter 12 of the Tax Administration
Act if the Commissioner fails to pay in time (section 45).
A vendor that carries on separate enterprises, for example through different branches
or divisions, can register each enterprise separately for VAT purposes if certain
requirements are met (refer to 2.6.3.1). A refund that is owed to a vendor that carries
on these separately registered enterprises may be set-off against an outstanding tax
debt of the vendor, or the tax debt of any of the separately registered enterprises,
whatever the case may be.
If the refund and interest is due to a vendor who has an outstanding tax debt, the
refund must be treated as a payment by the taxpayer that is recorded in the tax-
payer’s account (section 191 of the Tax Administration Act).
Example 2.5
A vendor carries on an enterprise and supplied goods and services for R1 150 000 (includ-
ing VAT of R150 000) during a tax period.
You are required to calculate the VAT payable by or refundable to the vendor if he paid
the following amount of input tax on goods and services supplied to him during the tax
period:
(a) R60 000
(b) R160 000.
35
A Student’s Approach to Taxation in South Africa 2.3–2.4
Solution 2.5
R
(a) Output tax 150 000
Less: Input tax (60 000)
VAT payable 90 000
(b) Output tax 150 000
Less: Input tax (160 000)
VAT refundable (10 000)
REMEMBER
The VAT calculation is therefore the amount of output tax less the amount of input tax.
Section 17(2) of the VAT Act provides that input tax may not be claimed in respect of cer-
tain goods or services. The input tax is denied although VAT was charged to the vendor
when the goods or services were acquired and even though it is going to use the goods or
services wholly for the making of taxable supplies. The input tax is denied to the extent
that such goods or services are acquired for the purposes of entertainment or relate to the
supply of a motor car (refer to 2.21).
36
2.4 Chapter 2: Value-added Tax (VAT)
No VAT
@ 15% @ 0%
applicable
Supplies charged at the zero rate are taxable supplies charged with VAT at 0%.
Exempt supplies are supplies that are not charged with VAT at all.
Supplies or transactions are all taxable at the rate of 15% unless they are taxed at 0%
or are specifically exempt. It is thus important to know exactly which supplies are
taxed at 0% (refer to 2.10) and which are exempt (refer to 2.11), as all the other sup-
plies are taxable at the standard rate of 15%.
In order to be able to calculate the VAT component of taxable supplies at the standard
rate, it is necessary to apply the tax fraction to the consideration of such supplies.
The tax fraction is the fraction calculated in terms of the formula:
r where:
100 + r
r is the rate of tax, thus 15%.
15
100 + 15
15
=
115
In the case of a zero-rated supply, ‘r’ in the formula will be 0.
Example 2.6
Vendor Ltd’s sales (all standard-rated taxable supplies) for a specific tax period amounted
to R46 000 (including VAT).
You are required to calculate output tax in respect of the supplies.
37
A Student’s Approach to Taxation in South Africa 2.4–2.5
Solution 2.6
R
Tax fraction × taxable supplies
= (15 / 115) × R46 000 6 000
This output tax must be paid over to SARS.
If the zero rate was applied to Vendor Ltd’s supplies, the output tax would be:
Tax fraction × taxable supplies
= (0 / 100) × R46 000 nil
Rnil output tax has been levied, and Rnil is payable to SARS.
38
2.6 Chapter 2: Value-added Tax (VAT)
2.6.1 Supply
The first requirement for a transaction in South Africa to attract VAT is that the
transaction should constitute a supply for VAT purposes. According to the English
Usage Dictionary, ‘to supply’ means to provide or to make available.
According to the definition of ‘supply’ in section 1 of the VAT Act, the term ‘supply’
includes a sale, rental agreement, an instalment credit agreement, as well as all other
forms of supply, whether voluntary, compulsory or by operation of law, irrespective
of where the supply is affected.
It is clear from the definition of ‘supply’ that a supply also includes supplies under
barter exchange transactions and expropriation of property. A barter exchange trans-
action occurs when goods are supplied for a consideration that is not money, for
example, when John supplies his farm to Janet in exchange for Janet’s holiday home
in Knysna. Expropriation occurs when someone’s possession is taken in order to use
it for a public purpose.
However, for a supply to occur, it appears that there must be at least two persons
involved, namely the supplier and the recipient of the goods or services. The recipi-
ent is the person to whom the supply is made.
In order to avoid any confusion about whether a transaction is a supply or not, and
whether certain transactions are deemed to be either a supply of goods or a supply of
services or not, deemed provisions are contained in sections 8 and 18(3) of the VAT
Act. Section 8 also deems certain transactions to be a supply for VAT purposes, alt-
hough they do not meet the requirements of the applicable definitions (refer to 2.12).
2.6.2.1 Goods
‘Goods’ are defined as:
• corporeal movable things;
• fixed property;
• any real right in such thing or fixed property; and
• electricity.
39
A Student’s Approach to Taxation in South Africa 2.6
‘Corporeal things’ are items that can be physically touched (in other words, tangible
assets).
‘Fixed property’ includes land, improvements to the land, sectional title units, shares
in a share block company, time-share interests and a real right to such land, unit,
share or time-sharing interest. SARS believes transactions involving fractional owner-
ship interests in fixed property would mostly constitute the supply of fixed property
and not the supply of shares.
‘Real rights’ include rights such as servitudes or usufructs.
The supply of ‘electricity’ is specifically included as part of the definition of goods to
clarify that electricity falls within the ambit of goods and not services. VAT is calcu-
lated on the final price of the electricity supplied, including the amount of the envi-
ronmental levy.
The following are not included in the definition of ‘goods’:
• Money: As money is not ‘goods’ as defined, the supply of cash, for example,
through the granting of a loan by a bank, does not attract VAT. Money includes
bills of exchange, postal orders, promissory notes etc. Money excludes coins made
from a precious metal (other than silver). Precious metals are gold, platinum and
iridium. Money is excluded when used as currency and not as a collector’s piece or
investment article. This implies that a person who collects coins must pay VAT
when they are acquired. Kruger Rands are made from gold coins. They are there-
fore goods and not money. If they are supplied they could attract VAT, but their
sale is zero rated.
• Revenue stamps: These are not included in the definition of ‘goods’, except when
acquired by stamp collectors. It is important to note that this does not include
normal postage stamps but refers to a stamp issued by the State as proof of pay-
ment of any tax (revenue stamp). Normal postage stamps attract VAT under the
normal rules, since they constitute proof of payment for services rendered by the
postal company. Stamps disposed of or imported as collectors’ items also attract
VAT.
• Certain rights: These are rights arising from a mortgage bond or pledge of goods
and are excluded from the definition of ‘goods’.
2.6.2.2 Services
The term ‘services’ is also defined very widely and includes the granting, cession or
surrender of any right or the making available of any facility or advantage.
If a supply is not a supply of goods and not specifically excluded in the definition of
‘’goods’ or the definition of service’, the supply constitutes a service.
For example: A buys a business from B. He pays R100 000 for the fixed assets and
R50 000 for the goodwill in the business. The fixed assets are clearly property and are
therefore ‘goods’. The goodwill is not included in the definition of ‘goods’ and it is
not specifically excluded from the definition of ‘goods’ or the definition of ‘services’.
Goodwill therefore constitutes the supply of services. The supply of services includes,
for example, trademarks, goodwill, patents and know-how payments.
Advancements and developments in technology over the past couple of years have
introduced certain concepts that require clarification in terms of the tax treatment
40
2.6 Chapter 2: Value-added Tax (VAT)
2.6.3 Vendor (sections 23, 50, 50A and 51(2) and sections 22 and 23
of the Tax Administration Act)
The third requirement for a transaction in South Africa to attract VAT is that the
transaction should constitute a supply of goods or services by a vendor.
If a person is a vendor, he has to levy VAT on his taxable supplies (selling price), and
input tax credits may be claimed on certain purchases and expenses. If, on the other
hand, a person is not a vendor, VAT is not levied on his supplies (the selling price of
goods and services does not include VAT) and no input tax credit can be claimed on
the purchases or expenses.
A ‘vendor’ is a person who is, or is required to be, registered under the VAT Act.
The definition of a ‘person’ includes a public authority, a municipality, a company, a
close corporation, a body of persons (whether vested with a legal persona or not, for
example, a partnership or a joint venture), a deceased or insolvent estate, and a trust
fund.
Although a partnership is not a separate person for income tax purposes, it is a sepa-
rate person for VAT purposes, and the partnership, not the individual partners,
should register as a VAT vendor. When a partnership is dissolved as the result of a
member leaving or dying, or a new partner joining, and a new partnership is formed,
the old and new partnerships are regarded as one and the same vendor (section
51(2)).
While it is the partnership (or joint venture, provided that it is not incorporated) that
is registered as the vendor for VAT purposes, every member of that partnership is
liable (jointly and severally with the other members of the partnership) to perform
the duties of the partnership. In addition, each member is also liable for paying any
amount of VAT on supplies made by the partnership while that person was a mem-
ber of the partnership.
For VAT purposes, SARS regards spouses married in community of property as an
unincorporated body of persons just like a partnership.
It is clear from the above that not only registered persons are vendors, but also every
person that should be registered. It is thus important to know the registration
requirements. A person is either obliged to register as a VAT vendor (compulsory
registration) or can choose to register voluntarily.
41
A Student’s Approach to Taxation in South Africa 2.6
42
2.6 Chapter 2: Value-added Tax (VAT)
Example 2.7
Zulu (Pty) Ltd has three branches enterprises that only make taxable supplies. None of
the three branches are independent branches.
R
Branch 1: Turnover of 360 000 for 12 months (excluding VAT)
Branch 2: Turnover of 320 000 for 12 months (excluding VAT)
Branch 3: Turnover of 340 000 for 12 months (excluding VAT)
1 020 000
You are required to determine whether Zulu (Pty) Ltd is obliged to register for VAT pur-
poses if the above information applies to the 12 months ending 31 December of the cur-
rent year.
Solution 2.7
Zulu (Pty) Ltd must register as a vendor since the three branches together make taxable
supplies of R1 020 000, which is above the R1 million threshold. It is the person, Zulu
(Pty) Ltd, that must register, and therefore all of its taxable supplies must be taken into
account to determine whether the company meets the registration threshold.
However, where business activities are split between two different persons to avoid
the registration threshold of R1 million, the Commissioner may make a decision in
terms of which such separate persons (for example, a natural person and a legal
entity of which he is a member) are deemed to be a single person carrying on one
enterprise. The Commissioner will issue such decisions only if he is satisfied that
there is a split of an activity into more than one entity to avoid the registration
requirements of VAT. If such a decision is issued, the single person is required to
register (section 50A).
Example 2.8
Sibusiso is a plumber and carries on business as a sole trader. His turnover (excluding
VAT) for the past 12 months ending 31 December amounted to R550 000. He is also the
sole shareholder of a private company called ‘Sibusiso’s Plumbing Services’ with a turn-
over (excluding VAT) of R580 000 for the past 12 months.
You are required to determine whether Sibusiso is obliged to register for VAT purposes.
Solution 2.8
No, Sibusiso is not obliged to register as he and the private company are separate persons
for VAT purposes. However, if the Commissioner makes a decision in this regard,
Sibusiso might have to register as a vendor under section 50A, since the combined value
of taxable supplies for the two persons is R1 130 000, which exceeds R1 million.
43
A Student’s Approach to Taxation in South Africa 2.6
44
2.6–2.7 Chapter 2: Value-added Tax (VAT)
• the total value of taxable supplies of that person has not yet exceeded R50 000 but
can reasonably be expected to exceed R50 000 within 12 months from the date of
registration as a vendor (that is to say we consider future supplies).
Note that where the value of the taxable supplies has not yet exceeded R50 000,
such vendor will be registered on the payments basis (refer to 2.3.1.2) until the val-
ue of its taxable supplies exceeds R50 000. Regulation 447 contains a number of ob-
jective tests that can be used to determine whether a person can with ‘reasonable
certainty expect’ to make taxable supplies of more than R50 000, for example where
the previous two months’ income was at least R4 200 per month or there are writ-
ten contracts for more than R50 000.
The third instance where a person can voluntarily register for VAT is where that
person is continuously and regularly carrying on an activity listed in a regulation
made by the Minister. The nature of these activities is that it is likely to make taxable
supplies only after a period of time. Regulation 446 provides a list of what can be seen
as ‘ongoing and regular activities’ in the sectors of agriculture, farming, forestry and
fisheries, mining, ship and aircraft building, manufacturing or assembly, property
development, infrastructure development and beneficiation.
The fourth instance where a person can voluntarily register for VAT is in the case of a
qualifying welfare organisation, foreign donor funded project, share-block com-
pany or municipality that may register voluntarily, without any minimum taxable
supply or the conducting of an enterprise requirement.
Persons supplying commercial accommodation with a value not exceeding R120 000
in any 12-month period are not carrying on enterprises (refer to 2.7.4). Therefore, such
persons are eligible for voluntary registration only once the taxable supplies exceed
R120 000 for a 12-month period.
The Commissioner may cancel a vendor’s registration if the Commissioner is satisfied
that the vendor no longer meets the registration requirements as set out above
(section 24(5)). If the vendor does not meet the administrative or recordkeeping
requirements (under section 23(7)) the Commissioner can also cancel the vendor’s
registration (section 24(6)). The Commissioner must inform the vendor in writing of
such deregistration and the date from when the deregistration will be applicable
(section 24(7)).
45
A Student’s Approach to Taxation in South Africa 2.7
REMEMBER
• For VAT purposes, it is required that the vendor supplies goods and services in the
course or furtherance of an enterprise. Enterprise is specifically defined in section 1 of
the VAT Act.
• For normal tax purposes, a person must be conducting a trade before deductions and
allowances can be claimed. Trade is specifically defined in section 1 of the Income Tax
Act.
• While these two definitions are similar, they are not the same and students must take
care to use the correct definition in the correct context.
REMEMBER
• Where a municipality imposes a fine or penalty, such as a traffic fine, in respect of an
unlawful activity, that charge will not have VAT-consequences as it is not in respect of
any supply of goods or services by the municipality. Fines are generally levied in terms
of the national or provincial laws of the country.
• The collection of licence fees in terms of the Road Traffic Act will not be in the course or
furtherance of the municipality’s enterprise, as the actual levying of licence fees is in
respect of the supply of goods or services made in terms of the authority of the province
(public authority). However, where the municipality is paid a certain percentage of the
licence fees collected, the municipality is liable to account for VAT at the standard rate
on that amount as it is in respect of the collection service rendered to the province.
46
2.7 Chapter 2: Value-added Tax (VAT)
A donation to an association not for gain is specifically excluded from the definition
of consideration.
47
A Student’s Approach to Taxation in South Africa 2.7–2.8
48
2.8 Chapter 2: Value-added Tax (VAT)
a ‘cost’ for a person to the extent that those goods are imported by a person who is
not a VAT vendor or by a VAT vendor to the extent that those goods are not going to
be used in the course or furtherance of an enterprise.
Smaller items are often imported through the mail. The Commissioner may then
require the postal company to collect the VAT and provide him with the necessary
information with regard to such imported goods.
Provision is made, however, for certain imported goods to be exempt from VAT upon
importation. These goods are defined in Schedule 1 to the VAT Act (section 13(3)).
These goods not subject to VAT on importation include goods abandoned, destroyed
or damaged before entered for home consumption.
The rules applied to imports from customs union member countries are slightly different
to those applied to other countries. The customs union member countries are
Botswana, Lesotho, Namibia and eSwatini (formerly known as Swaziland) (BLNS
countries).
49
A Student’s Approach to Taxation in South Africa 2.8
REMEMBER
• While the levying of VAT on the importation of goods is determined in terms of sec-
tion 7 of the VAT Act, the importer of the goods is not the one that levies the output
VAT.
• A Customs and Excise SARS official levies and collects the amount of output VAT on
behalf of SARS at the border post.
• Where vendors paid VAT on goods imported, they are permitted to claim the VAT paid
at the border, as input tax, subject to the normal conditions pertaining to input tax
deductions (refer to 2.17 and 2.20 to 2.22).
Example 2.9
Gert Smit Construction (Pty) Ltd imported marble, that has a cost price and customs
value of R120 000, from Zimbabwe. Import surcharges of R5 600 were levied.
You are required to determine the amount of the VAT levied on importation.
Solution 2.9
R
Customs duty value 120 000
Add: 10% of customs duty value 12 000
Add: Importation surcharges 5 600
137 600
× 15%
VAT levied on importation (R137 600 × 15%) (Note) 20 640
continued
50
2.8 Chapter 2: Value-added Tax (VAT)
Note
The output VAT of R20 640 is levied by a SARS Customs and Excise official at the border
when the goods enter the Republic. This output VAT is an additional charge to the
importer. The treatment of this additional charge after acquisition depends on whether
the importer is a registered VAT vendor that will be utilising the imported goods for the
purposes of making taxable supplies. To distinguish between the subsequent use of the
imported item to make taxable or non-taxable supplies, consider the following:
(a) Gert Smit imported the marble for use in his own home. This is not a taxable supply,
so he cannot claim the R20 640 VAT, levied by the Customs and Excise official, and
paid at the border post as an input tax deduction.
The journal entries for the purchase of the marble are as follows:
Transaction 1 Dr Cr
R R
Improvement to home 120 000
Bank 120 000
Marble purchased to affect improvements to private residence
Transaction 2
Improvements to home 20 640
Bank 20 640
Input tax paid on the importation of marble
The non-refundable VAT paid on the importation of marble to improve private
residence
(b) Gert Smit imported the marble to use it in one of his client’s homes in the course of
making taxable supplies. He charges the client R230 000 for the rendering of his ser-
vices. Gert is now entitled to claim the tax of R20 640 levied by the Customs and
Excise official and paid at the border post as an input tax deduction and needs to
charge output tax of R30 000 (R230 000 × 15 / 115) on the supply made to his client.
The journal entries for the purchase of the marble are then as follows:
Transaction 1 Dr Cr
R R
Trading stock 120 000
Bank 120 000
Marble purchased as trading stock
Transaction 2
According to the proviso to section 13(2), the Minister of Finance may in certain
circumstances lay down a value for the goods by regulation.
51
A Student’s Approach to Taxation in South Africa 2.8–2.9
REMEMBER
• VAT is usually levied on the supply of goods and services of an enterprise (thus the
turnover) and is usually received by the vendor on behalf of SARS. The VAT relating to
the importation of goods is a calculated amount of additional VAT that was not
received on behalf of SARS, but that is paid in addition to the purchase price, in terms
of the VAT Act.
• A Customs and Excise SARS official collects the amount of VAT on behalf of SARS at
the border post.
• Where vendors paid VAT on goods imported, they are permitted to claim the VAT paid
as input tax, subject to the normal conditions pertaining to input tax deductions (refer
to 2.17 and 2.20 to 2.22).
52
2.9 Chapter 2: Value-added Tax (VAT)
CASE:
CSARS v De Beers Consolidated Mines LTD
74 SATC 330
Facts: The taxpayer was in the business of otherwise than for the making of taxable
mining for and the international sale of supplies. In order to determine if the ser-
diamonds. The taxpayer was approached vices rendered by the English advisory
by a consortium of companies that pro- company were utilised or consumed by the
posed a complex transaction, the result of taxpayer for the purposes of making taxable
which would be the formation of a new supplies, the court looked at whether these
company and this new company becoming services were utilised to make taxable sup-
the holding company of the taxpayer. This plies in the course or furtherance of the
arrangement was done in terms of the taxpayer’s enterprise of buying and selling
provisions of section 311 of the old Com- diamonds. The court held that the foreign
panies Act. The taxpayer appointed an advisory services were not related to the
English advisory services company (this taxpayer’s primary activities, which was the
advisory company was based in London in mining and sale of diamonds, but that it
the UK) to assist the taxpayer with regards rather related to the interest of the tax-
to the finalisation of the proposed transac- payer’s shareholders. The services rendered
tion. This advisory company then invoiced by the English advisory company therefore
the taxpayer nearly R161 million for the constituted ‘imported services’ as they were
services that it rendered. The taxpayer did not utilised for the making of taxable sup-
not levy output VAT on this R161 million plies. The output VAT raised by SARS on
invoice. On assessment, the Commissioner the invoice of R161 million was thus pay-
able by the taxpayer in terms of sec-
of SARS determined that the English advi-
tion 7(1)(c) of the VAT Act.
sory company’s services constituted ‘im-
ported services’ as defined. Consequently, Principle: In order to determine whether
SARS assessed the taxpayer on an amount services constitute ‘imported services’, one
of output VAT on these imported services needs consider the purpose for which the
in terms of section 7(1)(c) of the VAT Act. services were acquired. If the purpose (that
The taxpayer lodged an objection to is to say the purpose of the acquirer of the
SARS’s decision. service) of the services was not to utilise or
consume it in South Africa for the purpose
Judgment: For a service to be classified as of making taxable supplies (which relates
an ‘imported service’, it is the supply of to a taxpayer’s core enterprise/activities),
services by a non-resident to a South Afri- then those services will constitute ‘im-
can resident to the extent that such services ported services’ as defined, and output
are utilised or consumed in South Africa VAT will be payable thereon.
If the recipient of the imported services is not a vendor, the recipient is required to
pay the VAT within 30 days from the time of supply (section 14(1)). The non-vendor
is required to also obtain, complete and retain a VAT 215 form.
If the recipient of the imported services is a vendor, the vendor is required to include
the VAT in the VAT 201 return corresponding to the tax period in which the supply
was made (proviso to section 14(1)).
53
A Student’s Approach to Taxation in South Africa 2.9
REMEMBER
• VAT is usually levied on the supply of goods and services (thus the turnover) of an
enterprise and is usually received by the vendor on behalf of SARS. The reversed
charge VAT relating to the imported services is an amount of VAT that was not
received on behalf of SARS, but an amount that is paid in addition to the charge for the
service. Although thus referred to as VAT, this is a reversed charge VAT that is paid by
the vendor to SARS, although he never received this amount as an agent on behalf of
SARS.
• Where vendors have paid VAT on imported services, such vendors are NOT permitted
to claim the VAT paid as input tax, as it relates to only non-taxable supplies.
• The VAT paid on imported services is a non-refundable cost for the South African
taxpayer and could be deducted for income tax purposes if the expense it relates to is
deductible for income tax purposes.
Example 2.10
A bank in South Africa received professional advice relating to their total business from a
company outside South Africa. The bank’s business entails the making of both taxable
and exempt supplies in a ratio of 80:20. The non-resident company charges the bank
R60 000 for such services.
You are required to determine the amount of the VAT that should be levied.
Solution 2.10
Since the bank acquired the services partly for the purposes of making exempt supplies
(20%), the bank will be required to account for VAT on 20% of the value of the services
(that is to say R60 000 × 20% × 15% = R1 800).
The journal entries for the transaction would be as follows:
Journal entry 1 Dr Cr
R R
Professional services 60 000
Bank 60 000
Professional services paid that is rendered to the Bank.
Journal entry 2
Professional services 1 800
Bank 1 800
continued
54
2.9 Chapter 2: Value-added Tax (VAT)
The reversed charge VAT on the professional services that constitute imported ser-
vices, to the extent that the service is not applied in the course of making taxable sup-
plies – in this case: exempt supplies (R60 000 × 20% × 15% = R1 800).
However, a private individual who does not make taxable supplies and who seeks pro-
fessional advice overseas to be utilised in South Africa will have to account for VAT on
the total value of that advice, since it will not be used in South Africa for the purpose of
making taxable supplies.
The journal entries for the transaction would be as follows
Journal entry 1 Dr Cr
R R
Professional services 60 000
Bank 60 000
Payment for professional services rendered to the
private individual.
Journal entry 2
Professional services 9 000
Bank 9 000
The reversed charge VAT on the professional services that constitute imported ser-
vices, to the extent that the service is not applied in the course of making taxable sup-
plies – in this case: private purposes (R60 000 × 100% × 15% = R9 000).
The individual is then legally obliged to pay the reversed charge VAT to SARS, but this is
not very practical and very difficult for SARS to administer.
The rationale behind the levying of VAT on imported services is to prevent unfair
competition. Private individuals or businesses making exempt supplies might be
tempted, if imported services are not subject to VAT, to acquire them from non-
resident suppliers rather than buy them locally and pay irrecoverable VAT on the
purchase price. The levying of VAT on the imported services would thus partly
prevent such persons from paying a lower price to non-residents.
VAT is also payable on imported services, even if the same person renders the ser-
vices. Where a person carries on activities outside South Africa (for example, a head
office) that does not form part of the activities of an enterprise (for example, a branch)
carried on by him in South Africa, the supply of services from such head office to the
branch also constitutes imported services (section 14(4)). This appears to be aimed at
preventing non-vendors from setting up an operation across the border (for example,
a branch, thus the same person) and then rendering services to themselves free of
VAT.
The following imported services do not attract VAT (section 14(5)):
• A supply of services that was already subject to VAT at 15%.
• A supply that, if made in South Africa, would be subject to VAT at 0% (refer to
2.10) or would have been an exempt supply (refer to 2.11).
• The supply of educational services rendered by foreign educational institutions to
South African students.
55
A Student’s Approach to Taxation in South Africa 2.9–2.10
56
2.10 Chapter 2: Value-added Tax (VAT)
The word ‘exported’ is defined in the VAT Act as the supply of movable goods under
either an instalment credit agreement or a sale (a transaction whereby ownership
passes or is to pass from one person to another) where such movable goods are
supplied in any one of the following ways:
• direct exports (paragraph (a) of the definition of exported); or
• indirect exports (paragraph (d) of the definition of exported); or
• goods delivered by the vendor to a foreign-going ship or aircraft for use in such
ship or aircraft (paragraphs (b) and (c) of the definition of exported); or
• goods supplied under rental agreements for use in an export country or customs-
controlled area (section 11(1)(c) and (d)).
The items listed above are discussed in more detail in the paragraphs that follow.
57
A Student’s Approach to Taxation in South Africa 2.10
of the transaction and the transportation of the movable goods, example, a tax
invoice, airway bill, bill of lading, recipient’s order or contract.
The supplying vendor must obtain the required documentary proof within 90 days
calculated from the date that the movable goods are required to be exported, gener-
ally 90 days from the earlier of:
• the time an invoice is issued; or
• the time payment is received.
When the supplying vendor does not obtain the required documentation within 90
days calculated from the date the movable goods are required to be exported, the
supply may, subject to the exceptions provided in Interpretation Note No. 30, be
deemed to be at the standard rate in the tax period within which the period of 90
days ends. Should the documentation be obtained at a later stage (within five years
from the end of the tax period that the invoice was or should have been issued),
an output tax adjustment may be deducted, provided that the necessary proof is
provided to the Commissioner (refer to Interpretation Note No. 30).
The zero rate also applies:
• if the customer is a South African resident who requests delivery to himself at
another address in an export country;
• where the movable goods are situated, temporarily or permanently, outside of
South Africa;
• where the movable goods are subject to a process of repair, improvement, manu-
facture, assembly or alteration by a third party in South Africa, where after the
goods are delivered to the vendor by the third party who then consigns and deliv-
ers the goods at an address in an export country; or
• in certain instances where movable goods are supplied to a vendor and delivered
to that vendor’s costumer at an address in an export country (an indirect supply).
Example 2.11
A foreign company (recipient in the export country) places an order with BT (Pty) Ltd
(a supplier in South Africa). BT (Pty) Ltd does not have the goods in stock and places
orders with CAZ (Pty) Ltd (another supplier in South Africa) with the instruction that the
goods are to be exported by CAZ (Pty) Ltd to the foreign company.
The above constitutes an indirect supply and the effect will be as follows:
CAZ (Pty) Ltd invoices BT (Pty) Ltd at the zero rate. CAZ (Pty) Ltd exports the movable
goods to the foreign company. BT (Pty) Ltd invoices the foreign company at the zero rate.
It should be noted that the zero rate is not applicable to supplies of second-hand
goods (that is to say previously owned and used goods) where a notional input tax
deduction was claimed by the South African vendor or any other person who is a
connected person in relation to the vendor when the goods were originally acquired.
In such circumstances, VAT is chargeable to the recipient equal to the notional input
tax deduction claimed by the South African vendor (proviso to sections 11(1) and
10(2)) (refer to 2.22.1).
As already pointed out, only movable goods can be exported. The supply of vouchers
entitling the purchaser to a service, for example, a phone recharge voucher, a prepaid
58
2.10 Chapter 2: Value-added Tax (VAT)
59
A Student’s Approach to Taxation in South Africa 2.10
Example 2.12
Mr Strempel is a non-resident on vacation in South Africa. While touring the Kruger
National Park, he decided to purchase a wooden giraffe figure. The curio shop charged
him R3 450 for the novelty item, including VAT at the standard rate of 15%. Mr Strempel
and his giraffe figure continued to tour the country for another two weeks before his
leave entitlement ran out and he needed to return to his home country, Germany by
means of a flight from O.R. Tambo International Airport. Mr Strempel took the giraffe
figure along when he left South Africa and was able to provide all the necessary
documentation to the VAT Refund Administration upon leaving the country.
You are required to explain the VAT consequences for Mr Strempel, the curio shop, and
the position of SARS.
Solution 2.12
Mr Strempel initially paid VAT of R450 (R3 450 × 15 / 115) when he purchased the giraffe
figure from the curio shop. The curio shop, being a VAT vendor, needs to charge the out-
put VAT of R450 and pay it over to SARS.
Upon leaving the country with the wooden giraffe, Mr Strempel can have the VAT of
R450 refunded to him. The VAT Refund Administration needs to refund this amount on
Mr Strempel’s departure with the item purchased in South Africa, as it is regarded as
being an indirect export in terms of the Export Regulations.
Part 2 of the Export Regulations provides for an exception to the rules in part 1 of the
Export Regulations This part applies in respect of exports of movable goods in which
case the supplier (that is to say the South African vendor) may at his own discretion
and risk decide to apply the zero rate. The supplying vendor may elect to supply the
movable goods at the zero rate where the vendor ensures that the movable goods are
initially delivered to a harbour or an airport or are supplied by means of a pipeline or
electrical transmission line in South Africa before being exported). This election by
the supplying vendor can also be made where the movable goods are consigned and
delivered to an agent (which may be a cartage contractor) of the qualifying purchaser
to be exported by road or rail. The zero rating is in both cases subject to the fulfilment
of several responsibilities and documentary requirements by the supplying vendor,
the qualifying purchaser and the agent of the qualifying purchaser.
Once again, the zero rate is not applicable to supplies of second-hand goods (goods
previously owned and used) where a notional input tax deduction was claimed by
the South African vendor or any other person who is a connected person in relation
60
2.10 Chapter 2: Value-added Tax (VAT)
to the vendor when the goods were originally acquired. Where the South African
vendor applied the standard rate in respect of second-hand goods to be exported, the
recipient of the goods is entitled to a VAT refund representing the difference between
the notional input tax claimed in respect of the acquisition of the second-hand goods
and the output tax charged by the South African vendor on the supply thereof (refer
to 2.22.1).
The following diagram summarises the differences between direct and indirect ex-
ports:
No
61
A Student’s Approach to Taxation in South Africa 2.10
2.10.1.4 Goods supplied under a rental agreement (section 11(1)(c) and (d))
The zero rate could be applied to movable goods supplied to a lessee or other person
under a rental agreement:
• if the goods were used exclusively in an export country or by a customs-controlled
area enterprise; or
• if the goods were used exclusively in a business conducted in an export country
(section 11(1)(d)).
Interpretation Note No. 31 (Table A) also stipulates the documentary proof required
in these circumstances.
62
2.10 Chapter 2: Value-added Tax (VAT)
63
A Student’s Approach to Taxation in South Africa 2.10
Example 2.13
ABC (Pty) Ltd (a South African vendor) is instructed to replace the screen of a laptop
computer belonging to a visiting tourist. The supply by ABC (Pty) Ltd may not be zero
rated because the laptop is within the borders of South Africa. If, however, the laptop is
again exported directly after the supply, the zero rating may be applied.
Example 2.14
A local newspaper, run by a VAT vendor, inserts an advertisement for a foreign advertis-
er. This will be zero rated even though local readers of the newspaper may also inci-
dentally benefit from the advertisement.
Three important court cases have dealt with the issue relating to the zero rating of
supplies made to non-residents: Master Currency (Pty) Ltd v CSARS, Stellenbosch
Farmers’ Winery Ltd v CSARS and XO Africa Safaris CC v CSARS.
CASE:
Master Currency (Pty) Ltd v CSARS
[2013] 3 All SA 135 (SCA)
Facts: The taxpayer operated foreign ruling was a special arrangement which
exchange services (bureaux de change) in intended to relieve a non-resident of the
the duty-free area of a South African air- burden of having to apply for a refund of
port. These foreign exchange services were the VAT which would otherwise have
rendered to non-resident passengers. The been paid on goods purchased in the duty-
taxpayer sought to rely on a ruling issued free area and subsequently refunded by
by the Commissioner of SARS (under sec- the VAT Refund Administrator. The non-
tion 72) which indicates that supplies of resident would be able to qualify for the
goods in duty free areas were subject to refund as the goods are to be exported. The
VAT at the zero rate and subsequently non-resident does not qualify for any
levied output VAT at zero per cent on the refund in relation to the services and the
commission and transaction fee that it ruling would thus not apply to services.
charged departing passengers in respect of
the foreign exchange services. SARS, how- Principle: Foreign exchange services sup-
ever, raised an assessment where VAT was plied in the duty-free area of an interna-
charged at the standard rate on the com- tional airport are subject to VAT at the
mission and transaction fees charged by standard rate. The duty-free area of an
the taxpayer. international airport is therefore not
regarded to be outside the Republic. This
Judgment: The court concluded that Mas- judgment confirms a basic VAT principle
ter Currency could not rely on the ruling that goods or services consumed within
because the ruling was limited in its appli- the borders of the Republic are subject to
cation to goods supplied by duty free VAT at the standard rate unless the VAT
shops in duty free areas and therefore did Act specifically provides for an exemption
not apply to services. In addition, the or zero rating.
64
2.10 Chapter 2: Value-added Tax (VAT)
CASE:
Stellenbosch Farmers’ Winery Ltd v CSARS
74 SATC 235
Facts: The taxpayer was a producer and Judgment: The taxpayer, in terms of the
importer of liquor products. It had entered termination agreement, surrendered the
into a distribution agreement with a com- remaining portion of its right to the exclu-
pany in the UK, whereby the taxpayer sive distribution right and this surrender
acquired the exclusive right to distribute constituted the supply of services in the
Bells whiskey in South Africa. The period course of an enterprise. The exclusive dis-
of the distribution agreement was ten tribution right did not constitute movable
years. The UK company terminated the property as envisaged in section 11(2)(l).
distribution agreement with the taxpayer The supply was subject to VAT at the rate
three years earlier than agreed upon. of zero per cent.
As compensation for the early termination, Principle: Distribution rights constitute an
the taxpayer received an amount of incorporeal right (not goods as defined)
R67 million. SARS contended that the and the incorporeal right is situated in the
compensation amount of R67 million relat- place where the debtor resides. If the debt-
ed to the supply of ‘services’ as defined in or is a non-resident, the incorporeal right
section 1 of the VAT Act, but that the sup- will be located in the non-resident’s coun-
ply should not be zero rated and assessed try of residence.
VAT thereon at the standard rate.
CASE:
XO Africa Safaris CC v CSARS
[2016] 3 ZASCA 160 (SCA)
Facts: The taxpayer supplied South African applicable: (1) What services were supplied?
tour packages, including accommodation, (2) To whom were the services supplied? (3)
travel, and entertainment activities, to Were the services supplied to South African
foreign travel operators. The taxpayer residents OR persons who were present in
viewed these supplies as zero-rated in South Africa when the services were sup-
terms of section 11(2)(l) as the taxpayer did plied? If the answer to question (3) above is
not have a direct relationship with the Yes, the zero-rating of the services will not
foreign clients who made use of these tour be applicable. In the case of XO Africa Safa-
packages. The local services (accom- ris, since the services were supplied to
modation, travel and entertainment ac- non-residents (the foreign tour operators),
tivities) were supplied by other local sup- but the services were enjoyed in South
pliers and not directly by the taxpayer. Africa, VAT had to be levied at the standard
SARS, however, was of the view that the rate.
taxpayer contracted with local suppliers to
Principle: The supply of services to foreign
render these services to the CC, and then
parties are not subject to VAT at the zero
supplied these services to the foreign trav-
rate, if the services are rendered to persons
el operators and their foreign clients.
who are present in South Africa at the time
Therefore, the supplies should be subject
that the services are rendered. The benefit
to VAT at the standard rate.
of the services rendered is enjoyed and
Judgment: The court asked three questions consumed in South Africa and the zero-
to determine whether section 11(2)(1) is rating in section 11(2)(l) is not applicable.
65
A Student’s Approach to Taxation in South Africa 2.10
Farming activities
The mere sale of a farm property constitutes the supply of the capital asset structure
of a business and not the farming enterprise. In order to supply a farming enterprise
66
2.10 Chapter 2: Value-added Tax (VAT)
as a going concern, the seller and the purchaser must agree that an operative income-
earning activity in the form of the farm, its equipment, grazing, cropping etc., will be
transferred.
Leasing activities
Where the seller of fixed property conducts a leasing activity, the contract must
provide for the leasing activity to be disposed of together with the fixed property in
order to constitute an income-earning activity. If the agreement does not provide for a
tenanted property to be transferred, an asset is merely sold.
67
A Student’s Approach to Taxation in South Africa 2.10
More than 50% taxable usage for the purposes of the going concern
If the assets of the going concern were applied by the seller mainly for taxable sup-
plies in the going concern (that is to say more than 50%), but also partly for other
purposes, all the assets are deemed to form part of the going concern disposed of and
the full selling price is zero rated (refer to 2.30 for adjustments by both the seller and
purchaser).
Less than 50% of the selling price relates to the going concern
If the goods or services of the enterprise were applied by the seller partially for pur-
poses of the going concern, but not mainly (thus less than 50%), only the portion of
the selling price that relates to the going concern may be zero rated. Section 8(15)
determines that the seller must make an apportionment:
• The seller must charge VAT at the standard rate in respect of the non-going-
concern portion.
• The seller must charge VAT at the zero rate in respect of the going-concern por-
tion that was applied for taxable purposes.
(Refer to 2.30 for adjustments by both the seller and purchaser.)
Example 2.15
A vendor sells tenanted fixed property for R1 700 000. The building is partly let as resi-
dential flats (exempt supplies) and partly as commercial offices (taxable supplies).
Assume that all requirements are met and that the sale qualifies as the sale of a going
concern.
You are required to determine how much of the selling price will be subject to the zero
rating, if the building is used:
(a) 4% for residential flats and 96% for commercial offices.
(b) 60% for residential flats and 40% for commercial offices.
(c) 40% for residential flats and 60% for commercial offices.
68
2.10 Chapter 2: Value-added Tax (VAT)
Solution 2.15
(a) Residential flats 4% versus commercial offices 96%: As at least 95% of the assets of the
enterprise were used for the making of taxable supplies, the de minimis rule applies
and the entire (100%) R1 700 000 will be subject to VAT at 0%.
(b) Residential flats 60% versus commercial offices 40%: Only R680 000 (R1,7m × 40%) will
be subject to the zero rating.
R1 020 000 (R1,7m × 60%) will be subject to VAT at 15%.
(c) Residential flats 40% versus commercial offices 60%: The full selling price of R1,7m
will be zero rated as the assets are mainly (more than 50%) applied for taxable
supplies.
69
A Student’s Approach to Taxation in South Africa 2.10
– used by the recipient wholly for the purposes of making taxable supplies (sec-
tion 11(1)(q)).
Example 2.16
A foreign company, ABC Plc, is contracted to supply goods to Recipient Ltd, a client in
South Africa. ABC Plc in turn contracts with Supplier Ltd, a local supplier, to supply cer-
tain goods that are to be delivered to Recipient Ltd in South Africa. Recipient Ltd is going
to use the goods wholly for taxable supplies.
You are required to discuss the VAT implications of the above.
Solution 2.16
The supply of the goods from Supplier Ltd (South African vendor) to ABC Plc is a zero-
rated supply. The supply of the goods from ABC Plc (non-resident and non-vendor) to
Recipient Ltd (South African vendor) does not carry any VAT, as ABC Plc is not a vendor.
The goods are also not imported goods. Recipient Ltd will not be entitled to input VAT, as
no VAT has been paid on this transaction.
Since the goods were supplied by Supplier Ltd, they will have to obtain a declaration
from Recipient Ltd that states that the goods will be used wholly for the purposes of mak-
ing taxable supplies. Only then can Supplier Ltd make the supply at the zero rate. If at a
later stage it is discovered that a false declaration was made by Recipient Ltd, the VAT
that should have been charged at the standard rate on the supply by Supplier Ltd on
behalf of ABC Plc will be recovered from Recipient Ltd in terms of section 61 of the VAT
Act.
70
2.10 Chapter 2: Value-added Tax (VAT)
The zero rating of municipal rates is, however, not applicable where such rate is:
– a flat rate charged to the owner of the rateable property for rates and other
goods and services (such as supplies of electricity, gas, water, drainage, disposal
of sewage and rubbish); or
– a flat rate charged to a person exclusively for the supply of the other goods and
services as mentioned above,
and such flat rate is taxed at the standard VAT rate of 15%.
• International roaming services (that is to say the ability of a cellular customer to
make use of the internet and calling services of another service provider when
travelling across different geographical areas). These international roaming ser-
vices are only zero-rated if they are provided by South African telecommunication
providers (for example Vodacom and MTN) to international telecommunication
providers in terms of an agreement known as the Dubai ITR (section 11(2)(y)).
REMEMBER
Following the principle of the British Airways case (refer to 2.12.8), when zero-rated
municipal rates are charged by the owner of the property to a tenant using the property
for commercial purposes, the owner (if VAT registered) should levy VAT at the standard
rate on the recovery of the rates and taxes. The owner incurs the municipal rates as princi-
pal and not as the tenant’s agent. The municipal rates charged to the tenant as a disburse-
ment is just a method to calculate the total rental consideration which is subject to VAT.
The vendor has to obtain and retain the documentary proof listed in Interpretation Note
No. 31 in order to substantiate a zero-rate (section 11(3)).
REMEMBER
A zero-rated supply is a taxable supply and a vendor could claim back all input VAT
(levied at 15%) in connection with such supply.
Example 2.17
Mpho Motshoane (a VAT vendor) carries on the business of a dairy, and for the VAT
period under review he received R300 000 (VAT inclusive) for the sale of milk. During the
same period he incurred the following expenses (all amounts are VAT inclusive, where
applicable):
R
Purchase of cows from vendors – standard-rated supply 115 000
Fuel from vendors – zero-rated supply 18 000
Purchase of packing materials from vendors – standard-rated supply 57 500
You are required to calculate the VAT payable or refundable for the applicable VAT period.
71
A Student’s Approach to Taxation in South Africa 2.10–2.11
Solution 2.17
R
Output VAT
Sale of milk (zero rated) nil
Less: Input VAT
Purchase of cows (R115 000 × 15 / 115) (15 000)
Fuel (zero rated) nil
Purchase of packing materials (R57 500 × 15 / 115) (7 500)
Amount refundable by SARS (Rnil – R22 500) (22 500)
Can Mpho claim back VAT if he doesn’t have to pay any VAT?
72
2.11 Chapter 2: Value-added Tax (VAT)
of the definition of a ‘financial service’ and could be taxed at either the standard or
zero rate if supplied by a vendor.
• The provision of credit and paying of interest (section 2(1)(f)). This implies that not
only the principal loan but also the interest thereon will be a financial service and
are therefore exempt from VAT.
• The provision or transfer of ownership of a life insurance policy, or reinsurance in
respect of a life insurance policy (section 2(1)(i)). This will include, for example, life
policies, endowment policies or funeral policies. The premiums and proceeds on
such policies are therefore exempt from VAT.
• The provision or transfer of ownership in a superannuation scheme (sec-
tion 2(1)(j)). This includes a pension, pension preservation, provident, provident
preservation, retirement annuity or medical aid fund. The contributions as well as
the proceeds from these funds are therefore exempt from VAT.
• The buying or selling of any derivative or the granting of any option (section 2(1)(k)).
A ‘derivative’ is a derivative as defined for purposes of the International Account-
ing Standard 39. The supply of the underlying goods and services is deemed to be
a separate supply at its market value and is not deemed to be a financial service.
The premium paid on an option contract does thus also not attract any VAT.
• The issue, acquisition, collection, buying, selling or transfer of ownership of any
cryptocurrency, such as bitcoin. While cryptocurrency is an internet-based digital
currency, it is not recognised as an official South African currency by SARS. They are
assets of an intangible nature. As the supply of cryptocurrencies is considered to be
financial services, it is exempt for VAT purposes (refer to 2.6.2.2).
In South Africa, banks and insurance companies are the biggest financial services
providers.
Financial services do not include:
• Fee-based financial services. The financial service is still be exempt, but the fee,
commission or similar charge attract VAT. Similarly, where any fee is charged for
the giving of advice on any of the services, this fee is taxable. For example: The
bank charges, on the overdraft account, attracts VAT at the standard rate, whereas
the interest, that is to say the consideration for providing the overdraft facility, is
exempt.
• Underwriting of the issue of a share or member’s interest.
• A consideration payable for renewal or variation of financial arrangements relating to
a debt security. This is a fee or commission and therefore it attracts VAT.
• Rental agreement payments. Rental agreement payments to a vendor usually do
not constitute an exempt supply for VAT purposes. If, for example, Vendor X rents
a building to Tenant Y, the rental payments paid by Tenant Y to Vendor X do not
constitute consideration for a supply that constitutes a financial service. The trans-
fer of a right to receive money (that is to say a debt security) in terms of a rental
agreement however constitutes the supply of a financial service and therefore be
exempt from VAT. If Vendor X in the above example decides to transfer his rights
in terms of the rental agreement for a consideration to Bank B, the transaction be-
tween Vendor X and Bank B constitutes an exempt financial service.
73
A Student’s Approach to Taxation in South Africa 2.11
• A merchant’s discount (being the charge made to merchants for accepting a credit
or debit card as payment). Although merchant’s discounts are taxable for VAT
purposes, discounting costs form part of financial services and are exempt supply.
• The supply of a cheque book.
REMEMBER
• Dividends paid by a company to a shareholder are not exempt for VAT purposes be-
cause it does not fall within the definition of ‘financial services’ in section 2. Dividends
paid in cash constitute the supply of money, that is to say currency and is therefore ex-
cluded from the definition of goods and services and will therefore not attract any
VAT. In the case of dividends in specie, there could be output VAT consequences in
terms of the adjustment provisions contained in section 18(1) (refer to 2.26).
• Although the provision of financial services is an exempt supply, it will be zero rated if
physically rendered outside South Africa.
• The zero rating of a supply will always take preference over either being an exempt
supply or a standard-rated supply. The zero rating of financial services therefore takes
precedence over exemption. It is important for vendors to determine whether the fi-
nancial services they supply are zero rated or not, as their input tax claim could in-
crease substantially when compared with the input tax credit if the supply of the
services was an exempt supply (refer to 2.20).
• Other services supplied to a non-resident (even if physically rendered in South Africa)
may be zero rated only if the services are supplied directly to that non-resident or any
other person, and both the non-resident and the other person are not in South Africa at
the time the services are supplied. For example: B Bank (a resident of South Africa)
provides a loan to a non-resident UK company and charges the UK company 6% inter-
est. The provision of the loan will be a zero-rated supply in terms of section 11(2)(l) of
the VAT Act, and the interest will be regarded as the consideration for such supply.
Example 2.18
The following items appeared on Ragdoll Boutique’s bank statements for September:
R
Internet banking fee 73,92
Service fee (bank charges) 162,35
Transaction costs 83,90
Administration costs 14,00
Interest charged on overdraft 116,40
Interest received on positive bank balance 83,20
You are required to indicate which of the above amounts include VAT and, if any, how
much VAT is included.
74
2.11 Chapter 2: Value-added Tax (VAT)
Solution 2.18
R
Internet banking fee (R73,92 × 15 / 115) – fee-based financial service 9,64
Service fee (bank charges) (R162,35 × 15 / 115) – fee-based financial service 21,18
Transaction costs (R83,90 × 15 / 115) – fee-based financial service 10,94
Administration costs (R15,00 × 15 / 115) – fee-based financial service 1,96
Interest charged on overdraft – exempt financial service nil
Interest received on positive bank balance – exempt financial service nil
Example 2.19
The Needy Association, an association not for gain, received second-hand clothes and
glasses as donations from members of the public. The Needy Association sells the clothes
to the public for R10 a piece and engraved the Association’s name on the glasses prior to
selling them to the public for R5 a glass.
You are required to determine the output VAT consequences of the above.
Solution 2.19
The supply of the clothes as well as the glasses will be exempt from VAT, since at least
80% of the value of these goods consisted of donated goods.
75
A Student’s Approach to Taxation in South Africa 2.11
qualify for the residential accommodation exemption, as they supply taxable com-
mercial accommodation. The exemption, however, also applies where lodging or
board and lodging are supplied by an employer to his employee where:
• the employee is entitled to occupy the accommodation as a benefit of employment;
or
• the employer operates a hostel or boarding establishment mainly for its employees
rather than for a profit (section 12(c)(ii)).
The above exemption is applicable only to the supply of a dwelling under an agree-
ment for the letting and hiring thereof, and not applicable to the supply by means of a
sale. The normal rules apply in respect of the sale of a dwelling. If a non-vendor sells
a dwelling, no VAT is levied. If a vendor sells a dwelling, it does not attract VAT if it
was previously used to earn exempt rental income. This is so because any activity
involving the making of exempt supplies is specifically excluded from the definition
of an ‘enterprise’ and, therefore, the dwelling was not used in the course of an enter-
prise.
It is, however, different for a property developer – if he only temporarily rents out a
property before the sale thereof, he should still levy VAT on the sale, subject to the
requirements of section 18D (refer to 2.26).
REMEMBER
• There could never be both transfer duty and VAT on a single transaction. If a sale of
property attracts VAT, no transfer duty will be payable. If it does not attract VAT, trans-
fer duty will be payable.
• In all cases, the VAT provisions take precedence. One must first identify whether or
not the sale is subject to VAT (at either standard or zero rate); if so, transfer duty is not
payable.
76
2.11 Chapter 2: Value-added Tax (VAT)
REMEMBER
• The VAT Act is not clear whether student accommodation in student houses will be
exempt from VAT or subject to VAT at the standard rate. It is submitted that that the
letting of residential accommodation to students in student houses fall within the ambit
of ‘residential accommodation’ and will therefore be exempt for VAT purposes.
77
A Student’s Approach to Taxation in South Africa 2.11
REMEMBER
• Despite the fact that an occupant may be taxed only on a portion of the value of the
accommodation provided to him, the enterprise itself may deduct input tax as if the
occupant is taxed on the full value.
• The enterprise still bills the occupant for the full 100% of the value of the accommoda-
tion and not for only 60%. If the supply of commercial accommodation is for a period
exceeding 28 days, it is only the VAT that is calculated on 60% of the value.
The CSARS v Respublica court case clarified when the supply of the use of a building
by one vendor to another vendor constitutes commercial accommodation, as defined.
CASE:
CSARS v Respublica (Pty) Ltd
(1025/2017) [2018] ZASCA 109
Facts: The taxpayer concluded a lease HEI and its students and holiday visitors.
agreement with a higher education institu- There was no contractual relationship be-
tion (HEI) for the lease of a building. The tween the taxpayer and the students and
lease agreement provided that the HEI holiday visitors. The taxpayer did not pro-
could sub-lease the property to students as vide ‘board and lodging’ in terms of its
well as use the building to provide accom- lease agreement with the HEI.
modation to holiday groups during vaca- Principle: The supply of the use of a build-
tions. The taxpayer contended that the ing by one vendor to another vendor can-
lease of the building constituted the supply not constitute commercial accommodation
of commercial accommodation as defined (or ‘dwelling’) if the lessee is a juristic per-
and that, in terms of section 10(10) of the son, who by nature is unable to live in the
VAT Act, it was only obliged to levy VAT accommodation. A juristic person, like a
on 60% of the total consideration received HEI, cannot be the recipient of ‘board and
from the HEI in terms of the lease agree- lodging’. One hundred per cent (100%) of
ment. the value of the supply of the building is
Judgment: Two separate agreements were therefore subject to VAT at the standard
in place: The first between the taxpayer rate.
and the HEI and the second between the
Example 2.20
Hein is the owner of Rest-a-While, a bed-and-breakfast establishment situated in the
Natal Midlands. His total annual receipts from the bed-and-breakfast business amount to
R175 000. Most of the guests do not stay longer than three nights at a time. It does some-
times happen that a guest stays a month at a time. Hein charges R920 per night (exclud-
ing VAT) for bed and breakfast.
You are required to explain to Hein the VAT consequences of running his bed-and-
breakfast business.
78
2.11 Chapter 2: Value-added Tax (VAT)
Solution 2.20
The bed-and-breakfast business constitutes the provision of commercial accommodation. As
the annual receipts of the business exceed R120 000, Hein can register voluntarily for VAT
(still below the mandatory registration threshold of R1 million).
Should Hein decide to register, he must levy output tax on the supply of the domestic
goods and services (being a taxable supply) as follows:
• guests staying 28 days and less: 100% of the charge is subject to VAT at 15% (for exam-
ple, three nights at R920 × 100% × 15% = R414 output tax); and
• guests staying more than 28 days at a time: Only 60% of the charge is subject to VAT at
15% (for example, 30 nights at R920 × 60% × 15% = R2 484 output tax).
Hein will be entitled to an input tax deduction for VAT paid on the acquisition of goods
and services for the purposes of the bed-and-breakfast business because he is making
taxable supplies.
Should Hein decide not to register for VAT purposes, he does not have to account for
output tax, but then he will not be entitled to any input tax deductions.
Example 2.21
Jo Ndlovu is a property magnate and a vendor. During the current tax period Jo earned
the following amounts:
R
• letting of townhouses (purely for residential purposes) 242 000
• short-term stay (less than 28 days) in bed and breakfast hotels
(including VAT) 150 000
• board and lodging in boarding houses (all periods longer than
28 days – excluding VAT) 30 000
You are required to calculate the output tax in respect of the income earned.
Solution 2.21
R
Letting of townhouse, hiring of a dwelling, which is an exempt residential
supply nil
Bed and breakfast, commercial accommodation
• R150 000 × 15 / 115 = 19 565
Board and lodging, long-term commercial accommodation
• (R30 000 × 15% × 60%) 2 700
Where separate prices are charged for accommodation in a room and any other ser-
vices (for example meals, cleaning services, maintenance etc.) and the occupant stays
for an unbroken period exceeding 28 days, the charge must be apportioned between
the room (accommodation) provided and the other services. (VAT is levied at 100%
on the other services and only at 60% on the fee for the room). The only exception is
where the services are supplied together with the room (accommodation) at an all-
inclusive price.
79
A Student’s Approach to Taxation in South Africa 2.11
Example 2.22
Assume the all-inclusive daily rate at a hotel is R2 500 per day (excluding VAT). Included
in the R2 500 daily rate is the use of a post-box.
You are required to calculate the VAT if:
(a) the person stays in the hotel for four days; and
(b) the person stays in the hotel for 35 days.
Solution 2.22
R
(a) Full supply at standard rate (R2 500 × 4 × 15%) – output VAT 1 500
(b) Supply of the post box that is included in the all-inclusive
daily rate – output tax nil
Supply of commercial accommodation together with domestic goods and
services (R2 500 × 35 × 60% × 15%) – output tax 7 875
80
2.11–2.12 Chapter 2: Value-added Tax (VAT)
REMEMBER
• The supply of qualifying educational services by the State, a school, a public higher
education institution or certain institutions that meet the definition of a public
benefit organisation in section 30(1) of the Income Tax Act is an exempt supply
(section 12(h)(i)). This includes also private higher education institutions, provided
they are registered as such under the Higher Education Act. The exemption is not
applicable to technical training provided by an employer to his employees or em-
ployees of an employer who are connected persons in relation to that employer.
• The supply by a school, university, technikon or college, solely or mainly for the
benefit of its learners, of goods or services (including domestic goods or services)
for a consideration in the form of school fees, tuition fees or payment for lodging or
board and lodging, is exempt (section 12(h)(ii)).
• Membership contributions to employee organisations, such as trade unions, are
exempt (section 12(i)).
• The supply of childcare services by a crèche or an after-school care centre are also
exempt (section 12(j)).
• All supplies of goods or services as by a bargaining council to any of its members
(section 12(l)).
• All supplies of goods or services by a political party to any of its members to the
extent that the consideration for such supply consists of membership contributions
(section 12(m)).
REMEMBER
• The zero rating of financial services and transport services takes precedence over
exempt supplies. You will thus always first determine whether these supplies qualify as
zero-rated supplies. This may, for example, be the case if it relates to transport services.
Only if it is not zero rated will it qualify as an exempt supply.
81
A Student’s Approach to Taxation in South Africa 2.12
REMEMBER
• The goods and rights could only trigger output tax to the extent that they were paid for
(provisos (v) and (vi) to section 8(2)).
82
2.12 Chapter 2: Value-added Tax (VAT)
REMEMBER
• The outstanding balances owing to suppliers could only trigger output tax to the
extent that input VAT was actually claimed on the supply that gave rise to the out-
standing balance (section 22(3)(a)).
Example 2.23
Mr Phillip de Vos trades as a sole proprietor under the name DeVos Golf. Phillip is regis-
tered on the invoice basis for VAT purposes and makes 100% taxable supplies. Phillip is a
category B VAT vendor. Phillip decided that he will deregister as a VAT vendor with
effect from 1 May of the current year because his taxable supplies permanently dropped
below the compulsory registration threshold of R1 000 000. You may assume that SARS
deregistered Phillip on 1 May of the current year.
On 1 May of the current year, Phillip provided you with the following list of assets and
liabilities of DeVos Golf:
Cost Open
Assets (Including market
VAT) value
R R
Delivery vehicle (Note 1) 180 000 110 000
Toyota Corolla – solely used for business purposes (Note 1) 320 000 270 000
Furniture – solely used for business purposes 115 000 135 000
Debtors (Note 2) 70 000 n/a
Trading stock 30 000 45 000
Liabilities
Creditors (Note 3) 40 000 n/a
Notes
1. The delivery vehicle not a ‘motor car’ as defined. The Toyota Corolla is a ‘motor car’
as defined.
2. The following is the debtors age analysis on the local credit sales of trading stock:
30 days 60 days 90 days Total
Amount (R) 20 000 27 000 23 000 70 000
Phillip is of the opinion that the 90 days outstanding debtors’ amount of R23 000 will
not be recoverable and consequently wrote it off on 1 May of the current year. Phillip
does not charge any interest on outstanding accounts.
continued
83
A Student’s Approach to Taxation in South Africa 2.12
Solution 2.23
Output tax R
Delivery vehicle: (R110 000 – R3 000) × 15 / 115 (Note 1) 13 957
Motor car (Note 2) nil
Furniture: R115 000 × 15 / 115 15 000
Debtors: (Note 3) nil
Trading stock: (R30 000 – R4 000) × 15 / 115 (Note 1) 3 391
Creditors: – Older than 12 months: R25 000 × 15 / 115
(Note 4) 3
261
– Balance of creditors: R15 000 × 15 / 115
(Note 4) 1 957
Input tax
Irrecoverable debts: 23 000 × 15 / 115 (Note 5) (3 000)
VAT payable to SARS 34 566
Notes
1. A deemed disposal for VAT purposes arises when a person ceases to be a VAT ven-
dor (section 8(2)). Output VAT is calculated by multiplying the lesser of the cost
(including VAT) and the open market value by the tax fraction. However, sec-
tion 8(2)(v) provides that this shall not apply to assets where output tax has already
been accounted for in terms of section 22(3). As output tax has already been account-
ed for on an amount of R3 000 (the amount outstanding in respect of the delivery
vehicle) and R4 000 (the amount outstanding in respect of the trading stock on hand)
in terms of section 22(3), no deemed supply arises on these amounts.
continued
84
2.12 Chapter 2: Value-added Tax (VAT)
2. Input tax was denied with the initial purchase of the motor car (section 17(2)). No
deemed supply consequently arises with deregistration.
3. The general time of supply is the earliest of the issue of the invoice in respect of that
supply or the time a payment of consideration is received by the supplier (sec-
tion 9(1)). The output tax was therefore already accounted for by Phillip when the
invoice for the supply of the goods was issued.
4. Consideration for the supply was not paid within 12 months from the supply. A
deemed output tax therefore needs to be levied on creditors older than 12 months in
terms of section 22(3). The remaining creditor’s balance is subject to the deemed out-
put provisions in section 22(3) proviso (ii)(dd) as the vendor ceased to be a vendor
within 12 months after the supply.
5. Deemed input tax available in terms of section 22 where a vendor has made a taxable
supply for consideration, the output of which has been properly accounted for and
the consideration subsequently becomes irrecoverable.
Where a vendor deregisters solely because the total value of taxable supplies in the
preceding 12 months did not exceed the voluntary registration threshold of R50 000
or the compulsory registration threshold of R1 000 000. The Minister determined by
regulation that the output VAT payable in respect of the deregistration should be
paid within six months (section 8(2E)).
85
A Student’s Approach to Taxation in South Africa 2.12
long-term insurance contract, for example, death benefits received. Just as premiums
for long-term insurance policies do not attract VAT (exempt supply of financial
service), any claim received under a long-term insurance contract does thus also not
give rise to any output VAT.
The insured must also be a vendor, as this deemed supply is not applicable to non-
vendors. There are also no deemed supplies where the payments are:
• not related to taxable supplies made by the vendor; or
• the payments relate to the total reinstatement of goods for which an input tax
deduction was denied (section 17(2)) to the vendor and such goods are stolen or
damaged beyond economic repair, which includes, for example, motor cars or
goods used for entertainment (refer to 2.21).
REMEMBER
• If the insurer replaces the damaged or stolen goods, there can be no output VAT conse-
quences for the vendor, as there was no indemnity payment.
• If the payment is made to a third party to indemnify the vendor, the vendor also has to
pay output tax, although the vendor himself did not receive any money.
Example 2.24
Manufacturers Ltd recently suffered a robbery at its premises. Their insurance company
reimbursed them in cash, as follows:
R
• for delivery vehicle stolen 132 000
• for passenger vehicle stolen (input tax was denied with purchase) 300 000
• for microwave oven in canteen stolen (input tax was denied with purchase) 2 500
You are required to calculate the output tax in respect of the insurance payment received.
86
2.12 Chapter 2: Value-added Tax (VAT)
Solution 2.24
R
Delivery vehicle, not motor car as defined, could claim input tax in the past
R132 000 × 15 / 115 = 17 217
Passenger vehicle, motor car as defined, total reinstatement of goods where input tax was
originally denied – thus no output tax liability.
Microwave oven, entertainment, total reinstatement of goods where input tax was origi-
nally denied – thus no output tax liability.
Example 2.25
Ohno (Pty) Ltd recently experienced flooding of the ground floor at the premises rented
from Agnee (Pty) Ltd. Ohno’s insurance company replaced the following items:
• computers R48 000
• desks and chairs R80 000
• cupboards R12 500
Their insurance company also reimbursed Ohno in cash for other losses suffered as fol-
lows:
• fittings R93 600
The insurance company also paid Agnee for damages suffered amounting to R36 000.
You are required to calculate the output tax in respect of the insurance payments and
replacements.
Solution 2.25
Ohno is not required to account for output tax on the replacements by the insurance
company, since these replacements are not payments in money.
Regarding the fittings on which input tax could be claimed in the past, output VAT of
R12 209 (R93 600 × 15 / 115) must be accounted for.
Ohno is indemnified by the payment of an amount of money to a third party and must
account for output VAT of R4 696 (R36 000 × 15 / 115).
REMEMBER
• Output tax is usually not apportioned, but levied on the value of the full supply, even if
the supply was previously used only partially for taxable purposes. There are two
exceptions to the above rule, namely, fringe benefits and indemnity payments. For both
these types of supply, the amount of output tax is payable only to the extent that it
relates to taxable supplies made in the course of the enterprise.
87
A Student’s Approach to Taxation in South Africa 2.12
Example 2.26
BB Bank acquired insurance cover for a computer of which 40% was used for taxable
purposes and 60% for exempt supplies. The computer was stolen, and the bank received
an indemnity payment of R14 230 from its insurer.
You are required to calculate BB Bank’s output tax liability.
Solution 2.26
R14 230 × 15 / 115 × 40% = R742 output tax payable to SARS.
BB Bank’s output tax liability is apportioned according to 40% taxable supplies made.
With the initial purchase of the computer as well as with the monthly insurance premi-
ums paid, BB Bank was only entitled to 40% of the input VAT.
88
2.12 Chapter 2: Value-added Tax (VAT)
• the services are supplied directly in connection with land, or improvements thereto,
situated in South Africa; or
• the services are supplied directly in connection with movable property situated
inside South Africa at the time the services are rendered,
– except when the movable property is consigned or delivered to the non-resident
at an address in an export country subsequent to the supply of such service; or
– forms part of a supply that the non-resident makes to a registered vendor.
REMEMBER
• The value of a supply that occurs in terms of section 8(9) is usually determined with
reference to the lesser of the cost of acquisition (including VAT) or the open market
value of the goods or services supplied.
• However, where the supplying vendor initially acquired the goods or services, which
will be supplied in terms of section 8(9), from a connected person (a vendor) and the
open market value on the date of acquisition of such goods or services is higher than
the cost of acquisition, the actual cost of acquisition must be ignored and the open-
market value on the date of acquisition is effectively taken to be the deemed cost of
acquisition.
• The open market value for a supply is inclusive of VAT.
89
A Student’s Approach to Taxation in South Africa 2.12
Example 2.27
Africa (Pty) Ltd has its head office in Johannesburg and is a vendor for VAT purposes.
Africa (Pty) Ltd also has a branch in America, which is separately identifiable and has a
separate accounting system. Africa (Pty) Ltd purchased goods for R115 000 (VAT inclu-
sive) and then sold them to the branch in America. The branch then sold the goods to a
third party in America.
You are required to calculate the VAT consequences of the above transactions.
Solution 2.27
Africa (Pty) Ltd will be entitled to claim the input tax deduction of R15 000 (R115 000 ×
15 / 115) as the goods were purchased for the purpose of making taxable supplies. The
sale to the branch in America is a taxable supply at the rate of 0%. The sale by the branch
of the goods to a third party in America will not attract any VAT, as the supplies made by
the branch in America will not form part of the enterprise that Africa (Pty) Ltd carries on
in South Africa.
90
2.12 Chapter 2: Value-added Tax (VAT)
91
A Student’s Approach to Taxation in South Africa 2.12
REMEMBER
• The calculation of output tax on the fringe benefit does not apply to the supply of any
such benefit to the extent that it is granted by the vendor in the course of making non-
taxable supplies. This means that the output tax on the fringe benefit should be appor-
tioned to the extent that it relates to the making of taxable supplies. For example: Where a
bank making 20% taxable and 80% exempt supplies provides a fringe benefit to an
employee, the bank will apportion the output VAT (account for output tax on 20% of the
cash equivalent of the fringe benefit).
• Although the employee is the recipient of the fringe benefit, the payment of the output
tax is the obligation of the employer and not the employee.
• The output tax paid by the employer forms part of the employer’s salary costs.
Example 2.28
An employer purchases a watch at a cost of R1 150 (including VAT) to give to an employ-
ee as a fringe benefit. The value (cash equivalent) of the fringe benefit is the cost to the
employer exclusive of VAT, being R1 000.
You are required to calculate output tax in respect of the fringe benefit.
Solution 2.28
R
Output tax:
The tax fraction × the cash equivalent: 15 / 115 × R1 000 = 130
Where an employee is granted the right of use of a motor vehicle, the consideration is
calculated differently. It is calculated monthly as follows:
• 0,3% of the determined value (as calculated according to Regulation 2835), in the
case of a motor car as defined; and
• 0,6% of the determined value in the case of any other vehicle.
REMEMBER
• The determined value of the vehicle excludes VAT. The determined value for income
tax purposes is the retail market value inclusive of VAT. The determined value for VAT
purposes, however, still excludes VAT (Government Notice (GN) 2835 defines
‘determined value’ as exclusive of VAT).
• The rate of 0,3% is used if the employer was not entitled to claim an input tax credit in
respect of a motor car as defined.
• The rate of 0,6% is used in all other cases.
• The rates of 0,3% and 0,6% are per month. Therefore, if a vendor has a two-month VAT
period, the amount calculated should be multiplied by two.
continued
92
2.12 Chapter 2: Value-added Tax (VAT)
• When the employee pays anything for the right of use, a portion of this amount could be
deducted in the calculation of the consideration for the right of use of a motor vehicle.
Split this amount paid by the employee to determine the different items it relates to.
• In the case where the employee bears the full cost of maintaining the motor vehicle, a
deduction of R85 per month is allowed to establish the consideration. (This is not appli-
cable to fuel.)
• Where there is a reduction in the determined value, the depreciation allowance is
calculated according to the reducing-balance method at the rate of 15% for each
completed period of 12 months from the date on which the vendor first obtained such
vehicle, to the date when the relevant employee was first granted the right of use
thereof.
Step 1: Determine the value of the motor vehicle (excluding VAT and finance
charges). Take any reductions in the determined value into account.
Step 2: Determine the consideration for the use of the motor vehicle (value
determined in step 1 × 0,3% or 0,6%). If the input tax was denied, use
0,3% and if not, use 0,6%.
or
• if the input tax on the motor car was denied, all amounts paid by
the employee to the employer, excluding finance charges, fuel and
the portion of the amount that relates to the fixed cost of the motor
car. (The portion of the consideration that relates to the fixed cost of
the motor vehicle does not include any VAT as no input tax was
claimed when the vehicle was purchased (section 8(14)).)
•R85 if the employee bears the full cost of repairs and maintenance.
93
A Student’s Approach to Taxation in South Africa 2.12
Example 2.29
An employer grants an employee the right of use of a motor car. The employer was
unable to claim the input VAT when the vehicle was purchased for R161 000 (including
VAT). The employee bears the full cost of maintaining the vehicle.
You are required to calculate output tax for one month in respect of the fringe benefit.
Solution 2.29
Output tax:
Value of the motor vehicle: R161 000 × 100 / 115 = R140 000
Consideration for the use of the motor vehicle: R140 000 × 0,3% = R420
Less deductions: R420 – R85 = R335
Multiply by the tax fraction: R335 × 15 / 115 = R44
Multiply by the percentage of taxable usage: R44 × 100% = R44 output tax payable
If the vehicle had not been a motor car but a delivery vehicle, the employer would have
been able to claim the VAT paid on the vehicle as an input tax credit (R161 000 × 15 / 115
= R21 000), and output tax would have been calculated as follows:
Value of the motor vehicle: R161 000 × 100 / 115 = R140 000
Consideration for the use of the motor vehicle: R140 000 × 0,6% = R840
Less deductions: R840 – R85 = R755
Multiply by the tax fraction: R755 × 15 / 115 = R98
Multiply by the percentage of taxable usage: R98 × 100% = R98 output tax payable.
Example 2.30
An employee is granted the use of a company-owned motor car (input tax denied) with a
determined value of R320 000, that is fully used for taxable purposes. The employee pays
R1 200 per month, allocated as follows:
R
Fuel 224
Insurance 300
Repairs 140
Interest 326
Fixed costs of car 200
Total 1 200
You are required to calculate the VAT consequences of the above.
94
2.12 Chapter 2: Value-added Tax (VAT)
Solution 2.30
Output tax:
Value of the motor vehicle: R320 000 (determined value already excludes VAT)
Consideration for the use of the motor vehicle: R320 000 × 0,3% = R960
Less deductions: R960 – R300 (insurance) – R140 (repairs) = R520
The fuel (zero rated), interest (exempt), and fixed cost (input tax denied) are not
deductible.
Multiply by the tax fraction: R520 × 15 / 115 = R68
Multiply by the percentage of taxable usage: R68 × 100% = R68 output VAT per month
payable by the employer on the fringe benefit
Additional output VAT on consideration received:
The employer must also account for output VAT on the consideration paid by the
employee to the employer in respect of the insurance and maintenance. (The employer
probably claimed the VAT on these expenses paid by him.)
R300 + R140 = R440 × 15 / 115 = R57 output tax
Example 2.31
The use of a delivery truck, with a determined value of R350 000, of which 60% was used
for taxable supplies and 40% for non-taxable supplies, is granted to an employee. The
employee pays R800 for fuel to the employer.
You are required to calculate the VAT consequences of the above.
Solution 2.31
Value of the motor vehicle: R350 000 (determined value already excludes VAT)
Consideration for the use of the motor vehicle: R350 000 × 0,6% = R2 100
Less deductions: R2 100 – Rnil = R2 100
No deduction for fuel – zero rated (Note)
Multiply by the tax fraction: R2 100 × 15 / 115 = R274
Multiply by the percentage of taxable usage: R274 × 60% = R164
Note
The fact that the employee also pays for the fuel does not give rise to another output tax,
because it is a zero-rated supply.
95
A Student’s Approach to Taxation in South Africa 2.12
Example 2.32
A vendor who makes both taxable (70%) and exempt (30%) supplies provides certain
fringe benefits to its managing director. The monthly cash equivalent of each benefit for
employees’ tax purposes is as follows:
Fringe benefit Cash
equivalent
R
Interest-free loan 135
Residential accommodation 3 900
Free use of a company-owned motor car that cost the employer R230 000
(including VAT) 5 000
In addition to the above benefits, the managing director was given a computer during the
tax period. The cash equivalent of this benefit is R7 000.
You are required to:
(a) calculate the VAT payable by the vendor in respect of the fringe benefits granted to
the managing director for the two-month tax period;
(b) provide the journal entry that should be passed in the accounting records of the
employer.
Solution 2.32
Consideration
(a) Fringe benefit R
Interest-free loan – exempt supply nil
Residential accommodation – exempt supply nil
Free use of the company car
(R230 000 × 100 / 115 × 0,3% × 2 months) 1 200
Asset acquired for no consideration 7 000
Total 8 200
Extent used to make taxable supplies (R8 200 × 70%) 5 740
Total output VAT payable: R5 740 × 15 / 115 779
96
2.12 Chapter 2: Value-added Tax (VAT)
Example 2.33
STP (Pty) Ltd issues a tax invoice to George Thompson for R115 (invoice no. 1025 dated
1 March of the current year of assessment). Three weeks later, STP sends him a statement
reflecting the purchase made as an outstanding amount due. Upon receiving the statement
on 28 April of the current year of assessment, George’s wife decides to pay STP R115. She
does this as she is unaware that George already paid the amount two days earlier.
STP (Pty) Ltd has a two-monthly VAT period ending on the last day of January, March,
May etc.
You are required to explain the VAT treatment of the payment:
(a) assuming STP (Pty) Ltd retains both payments and does not refund the overpayment
received from George’s wife;
(b) assuming STP (Pty) Ltd refunds the overpayment received by George’s wife on
25 October of the current year of assessment.
97
A Student’s Approach to Taxation in South Africa 2.12
Solution 2.33
(a) The excess payment of R115 received by STP (Pty) Ltd will be treated as a deemed
supply and output tax will be payable. STP will be liable to account for output tax
amounting to R15 (R115 × 15 / 115). The time of supply is 30 September of the cur-
rent year of assessment, which is the last day of the VAT period ending four months
after the excess amount was received.
(b) Upon refunding the amount of R115 to George’s wife, STP (Pty) Ltd will become
entitled to claim input tax amounting to R15 (R115 × 15 / 115). As the company
failed to refund the amount within four months of receipt, they previously needed to
account for output tax on the deemed supply. In terms of section 16(3)(m) they are
now entitled to claim an additional amount of input tax in the VAT period ending
30 November of the current year.
2.12.6 Deemed supplies: Other (section 8(3), (7), (13), (15), (25) and
(29))
Section 8 also provides for the following deeming provisions (this list is not exhaust-
ive and therefore other deeming provisions exist):
• When a supply is made under a credit agreement and the buyer has exercised his
right to rescind that agreement within a certain period of time (‘cooling-off’ period
of five days (section 9(2)(b))), that supply is deemed not to be a supply of goods or
services (section 8(3)).
• The sale of an enterprise as a going concern or part thereof, which is capable of
separate operation, is deemed to be a taxable supply of goods (that is to say the
whole business including any services (for example, goodwill) is deemed to be
goods (section 8(7)).
• Where a person bets an amount on the outcome of a race or any other event or
occurrence (for example, at a casino), the person with whom the bet is placed (for
example, the casino) is deemed to supply a service to the first-mentioned person
(for example, the punter) (section 8(13) and section 8(13A)). In the event that the
person with whom the bet is placed (for example, a casino) pays any prize or win-
nings, such person, if a registered vendor, is entitled to claim an input tax deduc-
tion. This input tax deduction is however limited to the input tax on the initial cost
of acquiring goods or services for this purpose (section 16(3)(d)) (refer to Interpre-
tation Note No. 41 that deals with the application of VAT to the gambling indus-
try).
• Where a single supply of goods or services would, if separate considerations had
been payable, have been charged partly at the standard rate and partly at the zero
rate, each part of the supply is deemed to be a separate supply (section 8(15)). This
principle was expanded upon in the CSARS v British Airways court case.
98
2.12 Chapter 2: Value-added Tax (VAT)
CASE:
CSARS v British Airways
67 SATC 167
Facts: The fare charged by the taxpayer in Judgment: The court agreed with the tax-
respect of its international flights included a payer that the total fare for the ticket
number of elements which were separately should be zero rated and held that a single
disclosed on the passenger ticket. One such supply of service is only capable of notion-
charge was the fees levied by the Airport al separation into its component parts, as
Company Limited (a separate independent contemplated by section 8(15), when the
vendor) to the taxpayer. This charge is lev- same vendor supplies more than one
ied to the taxpayer for the general airport service, each of which, had it been sup-
services (baggage handling facilities, wait- plied separately, would have attracted a
ing lounges etc.) that are made available different tax rate. The passenger service
to its passengers at the airport and was charge that the Airport Company Limited
referred to as the passenger service charge. charges to taxpayer is no more than a cost
The taxpayer separately reflects this charge that the taxpayer has to bear in order to
on the passenger ticket in order to recover it operate its carrier service. This is similar to
from its passengers. As the fare related to the cost it pays to land and park its aircraft.
international travel, the taxpayer zero rated The passenger service charge therefore
the total fare charged for the ticket. SARS relates to a service that was supplied by
relied on section 8(15), arguing that the another vendor (not the taxpayer) and
British Airways fare was a composite fare simply formed part of the cost of the
given for a single supply of a number of taxpayer’s supply of international trans-
services and wanted to apply the standard portation.
rate to the passenger service charge of the
fare as this service is provided in South Principle: The recovery of costs is not a
Africa. supply for VAT purposes.
Example 2.34
Mr Du Toit is an attorney practising in Johannesburg. Mr Du Toit provided legal services
to a client in Pretoria and is uncertain about the VAT consequences of this supply.
The breakdown of the charge to the client is as follows:
R
Legal advice fee (standard-rated supply) 80 000
Fuel costs incurred (zero-rated supply) 500
Gautrain tickets cost incurred (exempt supply) 1 200
Value of supply (excluding VAT) 81 700
Discuss the VAT consequences of the above supply.
99
A Student’s Approach to Taxation in South Africa 2.12
Solution 2.34
VAT will be levied at the standard rate on the total value of the supply (R81 700 × 15% =
R12 255). The provision of sections 8(15) and 10(22) (refer to 2.16.4) will not be applicable
in respect of the fuel and Gautrain ticket costs incurred as these will form part of the
expenses incurred by Mr Du Toit to perform the legal service, rather than a service sup-
plied by Mr Du Toit to the client.
• The supplying vendor (registered vendor) and recipient (registered vendor) are in
certain cases deemed to be one and the same persons in respect of certain company
re-organisation transactions that occurred in terms of section 42, 44, 45 or 47 of the
Income Tax Act (section 8(25)). The transactions to which this is applicable are
transactions whereby:
– A person disposes of an asset to a company in exchange for the company’s
equity shares (asset-for-share transaction; section 42 of the Income Tax Act).
– A company’s existence is terminated after it disposes of all its assets to another
company (amalgamation transaction; section 44 of the Income Tax Act).
– One company disposes of an asset to another company that forms part of the same
group of companies (intra-group transactions; section 45 of the Income Tax Act).
– A company distributes all its assets to another company that forms part of the
same group of companies in anticipation of its liquidation, winding up or dereg-
istration (transactions relating to liquidation and deregistration; section 47 of the
Income Tax Act).
– A person supplies fixed property to a company (either as part of an asset-for-
share transaction in terms of section 42 of the Income Tax Act, or as part of an
intra-group transaction in terms of section 45 of the Income Tax Act) and the
person and the company agree in writing that immediately after the supply, the
company will lease the fixed property from the person that supplied it.
– The effect of section 8(25) is that a re-organisation for VAT purposes is deemed
to be a non-event (no VAT is charged on the supply and no adjustments in terms
of sections 16(3)(h) and 18A are applicable). The VAT re-organisation provisions
only apply to a supply contemplated in section 42 or 45 if that supply is a going
concern. If a single transfer of trading stock or a capital asset occurs under a sec-
tion 42 or 45 transaction, the normal VAT rules apply.
However, parties in a section 42 or 45 transaction can agree in writing that the
provisions of section 8(25) must not apply (that is to say the transaction is not
treated as a non-VAT event), but that the going concern provision in sec-
tion 11(1)(e) should apply to the corporate transaction.
• Where a lessee (the supplying vendor) effects leasehold improvements to the
property of a lessor, the lessee is deemed to have made a taxable supply of goods
to the lessor to the extent that these leasehold improvements are made for no con-
sideration. There is no deemed supply if the lessee uses the leasehold improve-
ments wholly (100%) for the making of exempt supplies (section 8(29)). Refer also
to 2.31 for further VAT effects regarding leasehold improvements.
100
2.13 Chapter 2: Value-added Tax (VAT)
Example 2.35
Speedy purchased a motor car, a coffee machine for the canteen and a printer. He paid the
following for these items:
Motor car: R343 000 (including VAT – input VAT denied)
Coffee machine: R6 457 (including VAT – input VAT denied)
Printer: R6 900 (including VAT)
He then sells all three items.
You are required to explain the VAT consequences relating to the purchase and sale of the
motor car, coffee machine and the printer.
Solution 2.35
Provided Speedy acquired the printer for the purposes of making taxable supplies, he will
be able to claim an input tax deduction on the acquisition of the printer amounting to
R900 (R6 900 × 15 / 115). No input tax will be claimable on the acquisition of the motor
car and coffee machine, as input tax deductions are specifically denied on the acquisition
thereof, even if the goods will be utilised for the making of taxable supplies.
Speedy will be required to levy output tax on the sale of the printer only, since the said
supply will be made in the course or the furtherance of his enterprise. Speedy will not be
required to account for any output tax on the sale of the coffee machine and motor car,
since Speedy was denied input tax deductions on the acquisition of these items.
Where goods or services were acquired by a vendor wholly (that is to say 100%) to
make exempt supplies, the subsequent sale thereof is not subject to VAT, as the
supply is not made in the course or furtherance of the vendor’s enterprise.
REMEMBER
Where the initial input VAT was denied on a motor vehicle, but the vehicle was subsequent-
ly converted into a game-viewing vehicle or a hearse on which input tax is allowed (sec-
tion 18(9)), the ultimate sale of the vehicle will be deemed to be a supply in the course of the
enterprise, and VAT should thus be levied on this transaction (section 8(14)(b)) (refer to 2.28).
101
A Student’s Approach to Taxation in South Africa 2.14–2.15
Example 2.36
BBC Bank sells a computer to CNN Bank for R12 000. This computer was used 80% for
the making of taxable supplies and 20% for the making of exempt supplies.
You are required to advise BBC Bank on the VAT consequences of the transaction.
Solution 2.36
BBC Bank will be required to account for VAT at the standard rate on the full selling price
of R12 000 (R1 565 (R12 000 × 15 / 115)). However, BBC will be entitled to make an input
tax adjustment for the 20% exempt portion in terms of section 16(3)(h) (refer to 2.25).
102
2.15 Chapter 2: Value-added Tax (VAT)
103
A Student’s Approach to Taxation in South Africa 2.15–2.16
When goods are supplied in terms of a rental agreement, the time of supply is the
earlier of the date on which payment is due, or the date on which payment is received.
If goods are delivered periodically, the time of supply is the earliest of payment
received or invoice issued.
REMEMBER
Example 2.37
A vendor sells goods for R115 000 (including VAT). You are required to calculate the VAT
that is included in the consideration.
Solution 2.37
VAT is determined as: R115 000 × 15 / 115 = R15 000
104
2.16 Chapter 2: Value-added Tax (VAT)
REMEMBER
• The value is usually determined with reference to the consideration, but for qualifying
transactions between connected persons, the actual consideration must be ignored, and
the open-market value of the supply is taken to be the deemed consideration.
• This special rule relating to connected persons is not applicable to the supply of fringe
benefits.
• Instances where a person is not able to claim a full input tax credit includes where
the person is a non-vendor for VAT purposes or where the person does not make 100%
taxable supplies.
Example 2.38
Arnold and Bob are connected persons. Arnold, a registered vendor, sells trading stock
valued at R10 000 to Bob, who only paid an amount of R4 000 for this trading stock. B is
also a registered vendor, but he is not entitled to a full input tax deduction (only 60%).
You are required to explain the VAT consequences of the above.
Solution 2.38
Arnold must account for VAT on the open-market value of the supply: R10 000 × 15 / 115
= R1 304. (The actual consideration received from Bob is ignored for VAT purposes.)
Bob will only be able to claim an input tax on the actual consideration of R4 000: R4 000 ×
15 / 115 × 60% = R313.
Bob has a VAT invoice showing the total consideration as only R4 000 and could therefore
not claim input tax on R10 000. The definition of ‘input tax’ further specifically states that
it is the tax charged and payable. Unless the parties decide to adjust their purchase price
to R10 000, Bob will always be able to claim only the input tax on the actual consideration.
Example 2.39
A vendor sells goods for R115 000 (including VAT) to its wholly owned subsidiary, which
is not registered as a vendor for VAT purposes. The open-market value of the goods on
the date of sale is R172 500 (including VAT).
You are required to calculate the VAT that is payable by the vendor.
105
A Student’s Approach to Taxation in South Africa 2.16
Solution 2.39
The open-market value of R171 000 must be used, since the recipient is a connected person
to the vendor, is not entitled to an input tax credit and the supply was for a consideration
less than market value.
VAT is determined as: R172 500 × 15 / 115 = R22 500
Note
It is therefore clear from the above that section 10(4) will be applicable when the connect-
ed person could either claim only a portion of the input tax or when the connected person
could not claim any portion of the input tax.
What would the effect be, had the wholly owned subsidiary in this
example been a registered vendor?
The reason for this special rule is that connected persons could try to limit the VAT
cost and therefore manipulate the prices so that the VAT cost is decreased. If the
recipient is a vendor and allowed to claim the input tax in full, no manipulation can
take place. The VAT paid by the one vendor is claimed back by the other vendor. No
special value of supply rules is therefore required.
Example 2.40
Abraham bought coffee powder in bulk for his employees to consume at work. Abraham sold
half of the coffee powder to Beryl (a connected person) at a discount of 30%. Beryl also
obtained the coffee powder to provide it to her employees to consume while at work.
You are required to explain the VAT consequences of the above.
Solution 2.40
Abraham cannot claim the input VAT on the purchase of the coffee powder as this trans-
action is in respect of the acquisition of goods for the purposes of entertainment. The
value of the supply between Abraham and Beryl is Rnil: (section 10(21)), even though
Beryl and Abraham are connected parties. Beryl will therefore also not be entitled to claim
any input VAT on the purchase of the coffee powder from Abraham.
106
2.16–2.17 Chapter 2: Value-added Tax (VAT)
Example 2.41
Teboho, a registered vendor, sells his private house (worth R790 000) as well as his
computer from his enterprise (worth R10 000) to Bernadette. Bernadette pays an amount
of R800 000 for both items.
What are the VAT consequences of the above transaction?
Solution 2.41
The payment of R800 000 should be allocated to the different items to determine the VAT
consequences, since the selling of the private house (R790 000) will not attract VAT,
whereas the selling of the computer (R10 000) will be subject to standard rate VAT of 15%.
The above should not be confused with the situation where a single supply was
previously partially used for taxable purposes (refer to 2.14). That supply is a taxable
supply without an apportionment. The above example refers to a situation where a
single consideration (not supply) is received for more than one supply.
107
A Student’s Approach to Taxation in South Africa 2.17
Example 2.42
Purchaser Ltd, a vendor who only makes taxable supplies, acquired the following goods
from vendors during the tax period:
• computer: R13 800 (including VAT); and
• stationery: R4 600 (including VAT).
You are required to calculate input tax in respect of the goods acquired.
Solution 2.42
Tax fraction × goods acquired R
Computer = 15 / 115 × R13 800 1 800
Stationery = 15 / 115 × R4 600 600
The total amount of input tax for the period 2 400
Section 17(1) of the VAT Act provides that where goods or services are used partially
for the purpose of making taxable supplies, only the portion of the input tax attribut-
able to taxable supplies may be claimed as an input tax credit. However, if 95% or
more of the purchased goods or services will be used in the making of taxable sup-
plies, the full input tax credit may be claimed, and no apportionment is necessary (the
so-called de minimis rule) (first proviso to section 17(1)). De minimus is a Latin phrase
that means ‘something that’s too small or insignificant to be of importance’.
Only registered VAT vendors can claim input VAT. In addition, the claiming of an
input tax deduction is not automatic as there are four aspects that need to be consid-
ered:
• all documentary requirements must be met (refer to 2.18 and 2.19); and
• the goods or services must be acquired wholly or partly for the making of taxable
supplies (refer to 2.20) ; and
• VAT at the rate of 15% must actually have been paid by the vendor who wants to
claim the input tax deduction. If goods or services are purchased from a person
who is not a registered vendor, no input tax can be claimed, as no VAT has been
paid on the goods or services. The same principle applies if zero-rated goods or
services are purchased, for example petrol and diesel. Since output VAT was lev-
ied at a rate of 0%, there is no input VAT that can be claimed. The only exception is
the purchase of second-hand goods from non-vendors (refer to 2.22); and
• the claiming of an input tax deduction must not specifically be prohibited in terms
of section 17(2) (refer to 2.21).
As mentioned above, input tax may be claimed only if the vendor is in possession of
documentary proof that substantiates the vendor’s entitlement to the input tax. Such
documentary proof include:
• a tax invoice;
• a debit note or a credit note;
108
2.17 Chapter 2: Value-added Tax (VAT)
CASE:
South Atlantic Jazz Festival (Pty) Ltd v CSARS
Facts: The taxpayer organised an on. The taxpayer had requested tax invoices
international jazz festival (which it had from the sponsors but had not been
done for a number of years). It entered into provided with the tax invoices as requested.
sponsorship agreements with various large
businesses. In exchange for their Judgment: The court determined that this
sponsorship (cash, goods or services to an specific transaction was a barter transaction
agreed value), the businesses were given between persons dealing at arm’s length. In
preferential advertising and marketing the absence of any contrary indication, the
rights. SARS regarded the granting of these value that the parties attributed to the
rights by the taxpayer to the large goods or services that were exchanged, was
businesses as a taxable service. SARS a reliable indicator of their market value.
consequently raised output VAT on the The value of these goods and services were
value of the goods and services that were determinable from the sponsorship agree-
supplied by the businesses, as specified in ments. As SARS had used these sponsor-
the applicable sponsorship agreements. The ship agreements to determine the value of
taxpayer agreed with the levying of the the output VAT in respect of these goods
output VAT but contended that as it had and services, the sponsorship agreements
purchased goods and services from the were acceptable documentary proof for the
sponsors to an agreed value, SARS should claiming of input tax.
allow the taxpayer an input tax deduction
Principle: Where a vendor is entitled to an
in respect of the VAT on those supplies.
input tax deduction but is not in possession
SARS denied the taxpayer’s input VAT
of a valid tax invoice, the vendor may use
claim by a deduction in respect of input tax
any other document that has sufficient
that may not be claimed unless the vendor
information to substantiate his claim. The
is in possession of a valid tax invoice from
document must, however, be acceptable to
the supplier. The taxpayer only had the
the Commissioner.
sponsorship agreements to base its claim
Input tax should usually be deducted in the VAT return in the period during which
the time of supply occurs or, for imported goods, the period during which the VAT
on importation is paid. The vendor must, however, be in possession of the relevant
documentary proof to qualify for the deduction. In some cases, the vendor may claim
109
A Student’s Approach to Taxation in South Africa 2.17–2.18
an input tax without the relevant documentary proof if he has documents that prove
that he is entitled to the deduction but is waiting for the required document. Input tax
may be deducted in a later period if the vendor is unable to deduct input tax in the
aforementioned period (for example, because evidence is not received in time). This
later period may not be more than five years after the tax period during which the
input tax deduction should have been made (first proviso to section 16(3)).
110
2.18 Chapter 2: Value-added Tax (VAT)
• an individual serialised number and the date on which the tax invoice is issued;
• a description of the goods or services supplied (including an indication that the
goods are second-hand, if that is the case);
• either:
– the value of the supply, the amount of VAT levied, and the consideration paid
for the supply; or
– where the amount of VAT charged is calculated by applying the tax fraction to
the consideration, the consideration for the supply and the VAT charged or a
statement that it includes a charge for VAT and the rate at which the VAT was
charged.
REMEMBER
• The abridged tax invoice does not have to include the name, address or VAT regis-
tration number of the recipient or the quantity or volume of the goods or services.
• An abridged tax invoice may not be issued for zero-rated supplies.
• The requirement that the VAT amount should be reflected in South African currency is
not applicable to zero-rated supplies.
• A vendor may reflect the foreign currency of a supply on an invoice as long as the
South African currency is also reflected on it. Vendors should use the applicable daily
exchange rate as published on the South African Reserve Bank website. This rate is the
weighted average of the bank’s daily rates at approximately 10:30 (Binding General
Ruling No. 11). These rates are published on http://www.resbank.co.za.
If a tax invoice contains an error, for example the VAT registration number of the
recipient is incorrect, the supplying vendor can cancel the incorrect tax invoice and
re-issue the tax invoice with the correct information within 21 days from the date of
the request to correct it. The supplying vendor is not guilty of an offence by issuing a
corrected tax invoice but must ensure that there is a proper audit trail between the
initial invoice, the manner and/or reason for the cancellation and the re-issued tax
invoice.
If the Commissioner is satisfied that a vendor’s records are sufficient and that
it would be impractical to require a full tax invoice to be issued, he may direct
that certain particulars may be omitted or that no tax invoice needs to be issued
(section 20(7)). Interpretation note No. 56 grants approval to recipients (not suppliers)
to issue tax invoices, credit and debit notes if the recipient:
• determines the consideration for the supply;
• is in control of determining the quantity or quality of the supply; and
• obtained written authorisation from the Commissioner.
In the case where no formal documentary proof is required, the Commissioner is
granted discretionary powers in order to prescribe acceptable documentary proof
that a vendor must be in possession of before making any input tax deductions (sec-
tion 16(2)(f)) (refer to Interpretation Note No. 49 for guidance on documentary proof
for specific transactions).
There are also special rules regarding documentary proof for second-hand goods
(refer to 2.22) and foreign suppliers of electronic services (refer to 2.25).
111
A Student’s Approach to Taxation in South Africa 2.19
112
2.19 Chapter 2: Value-added Tax (VAT)
amount of the excess (reduced) VAT or a statement that the reduction includes
VAT and the rate of the VAT included;
• a brief explanation of the circumstances giving rise to the credit note; and
• sufficient information to identify the transaction to which the credit note refers.
REMEMBER
• No credit note is required if a customer pays his account and receives a prompt pay-
ment discount, if the terms of the prompt payment discount offer are clearly stated on
the face of the tax invoice (proviso (C) of section 21(3)).
• It is not lawful to issue more than one credit or debit note. A copy credit or debit note
may, however, be provided where the original debit or credit note is lost, but it should
be clearly marked as a ‘copy’ (provisos (A) and (B) of section 21(3)).
Where an enterprise is sold as a going concern (refer to 2.10.3), VAT is levied on the
sale of the assets of the going concern at 0%. A recent amendment to section 21
determines that when the purchaser returns goods that were acquired in terms of the
going concern sale to the seller, the purchaser of the enterprise is allowed to issue a
credit note to the seller.
A Binding General Ruling (BGR No. 6) clarifies the VAT treatment of discounts,
rebates and incentives in the production, distribution and marketing of the packaged
consumer goods industry. The discounts, rebates and incentives can be divided into
two categories, namely variable allowances and fixed allowances. Early settlement
allowances and growth rebates (allowances linked to a volume target where a per-
centage discount is provided when a certain growth percentage has been achieved)
are categorised as variable allowances. The binding general ruling determines that
variable allowances are regarded as a reduction in the original purchase prices and a
credit note should be issued unless otherwise directed. If Vendor X supplies goods to
Vendor Z, Vendor X should issue a credit note to Vendor Z to facilitate the reduction
of the consideration payable by Vendor Z.
New store allowance (an allowance for the promotion of products with the opening
of a new store) and major refurbishment allowances (a payment to revamp a retailer’s
store to meet the required standard) are some of the fixed allowances as per the
binding general ruling. The binding general ruling determines that fixed allowances
are regarded as consideration for the supply of a service and a tax invoice must be
issued. If Vendor X supplies goods to Vendor Z, Vendor Z should issue a tax invoice
to Vendor X for the supply of the fixed allowance.
Example 2.43
OCS Wholesalers purchases trading stock from Kleentex (Pty) Ltd for R115 000. As OCS
Wholesalers exceeded the R75 000 purchase target for the month, they are entitled to a
growth rebate (variable allowance) of R20 000 and only paid the difference of R95 000
(R115 000 less R20 000).
Discuss the VAT implications of the growth rebate.
113
A Student’s Approach to Taxation in South Africa 2.19–2.20
Solution 2.43
With the original purchase transaction, Kleentex (Pty) Ltd issued a tax invoice to OCT
Wholesalers stating a consideration due of R115 000 (R100 000 plus R15 000 VAT). Kleen-
tex (Pty) Ltd must now also issue a credit note for the R20 000 growth rebate.
The credit note should indicate the reduction in the consideration of the supply of R20 000
(R17 391 plus VAT of R2 609). As Kleentex (Pty) Ltd has previously accounted for an
excess amount of output tax, they must either increase their input tax by R2 609 or reduce
their output tax attributable to the tax period by R2 609 (section 21(2)(b)). As OCS Whole-
salers has previously deducted input tax in relation to a supply and receives a credit note,
they must make the necessary adjustment in their VAT return (section 21(6)). The excess
tax (R2 609) must be accounted for by OCS Wholesalers by either increasing their output
tax or reducing their input tax for the tax period in which the credit note is issued.
Example 2.44
Assume that OCS Wholesalers again purchases trading stock from Kleentex (Pty) Ltd for
R115 000. As OCS Wholesalers just opened their store, they are entitled to a promotion of
new products allowance (fixed allowance) of R20 000. OCS Wholesalers again only paid
the net amount of R95 000 (R115 000 less R20 000).
Discuss the VAT implications of the promotion of new products allowance.
Solution 2.44
With the original purchase transaction, Kleentex (Pty) Ltd will again issue a tax invoice to
OCT Wholesalers with a consideration due of R115 000 (R100 000 plus R15 000 VAT). For
fixed allowances OCS Wholesalers is regarded to supply a service to Kleentex (Pty) Ltd
(in this case an advertising service of the product of Kleentex (Pty) Ltd with the opening
of their store). To correctly account for the fixed allowance, OCS Wholesalers must now
issue a tax invoice to Kleentex (Pty) Ltd for R20 000 (R17 391 plus VAT of R2 609). This
deemed supply for which the tax invoice is issued by OCS Wholesalers will result in them
having an additional output tax liability of R2 609 with Kleentex (Pty) Ltd having a corre-
sponding increase in their input tax deduction of R2 609.
114
2.20 Chapter 2: Value-added Tax (VAT)
115
A Student’s Approach to Taxation in South Africa 2.20
CASE:
Consol Glass (Pty) Ltd v CSARS
(1010/2019) [2020] ZASCA 175
Facts: The taxpayer, as part of a reorgani- The acquisition of companies in a reorgani-
sation transaction, acquired the shares in sation transaction is a financial service (as
two subsidiary companies through debt defined) and therefore constitutes an ex-
funding. After the acquisition, the taxpayer empt supply.
continued with the trading that was con-
ducted in the subsidiary companies. Be- Principle: The refinancing of debt does not
cause the servicing of the foreign debt form the making of taxable supplies by an
turned out to be too expensive, the taxpay- enterprise if the original debt was used in
er refinanced the reorganisation transaction respect of reorganisation transactions.
in South Africa. The services of both foreign Because there is no causal link between the
and local service providers were obtained to debt and the making of taxable supplies,
advise on the reorganisation arrangement no input VAT on the service fees relating
and to assist with the drafting of agree- to the debt paid can be claimed. In the
ments to put in place (among others) the same vein, since the imported services
refinancing agreement. The taxpayer would be used for the making of non-
claimed input VAT on the payments made taxable (exempt) supplies, a taxpayer
to the local suppliers and did not declare would have to pay output VAT on the im-
VAT on imported services for the payments ported services in terms of section 7(1)(c).
made to the foreign service providers.
If, however, the debt was used to acquire
Judgment: The court had to decide whether assets directly (and not as part of a reor-
there was a causal link between the original ganisation transaction), the input tax
financing transaction, the subsequent refi- would have been incurred in the making
nancing thereof in South Africa and the of taxable supplies and the claiming there-
making of taxable supplies by the taxpayer. of would have been permitted.
If a vendor uses the goods or services wholly in the course of making taxable sup-
plies, the vendor would be entitled to claim the full input tax.
If a vendor uses the goods or services only partially in the course of making taxable
supplies, either of the following input tax deductions may be made:
• the full input tax deduction (so-called de minimis rule) if the taxable use is not less
than 95% of the total intended use; or
• the portion that relates to the taxable supplies if the taxable use is less than 95%
(the input tax being apportioned by the vendor).
REMEMBER
Apportionment of input tax is thus compulsory where goods and services are acquired for
both taxable and exempt supplies, but output tax is never apportioned (except for fringe
benefits and indemnity payments).
The methods used to calculate the apportionment rate of input tax are discussed
below.
116
2.20 Chapter 2: Value-added Tax (VAT)
Example 2.45
At the beginning of their current financial year, Kagiso (Pty) Ltd registered as a VAT
vendor. They did so as they realised that their taxable supplies in the coming year would
exceed the registration threshold.
The company owns several residential properties which it hires out to tenants. Addition-
ally, they manufacture and promote, ‘Flangals’, a new type of square potato chip. During
the last year, the company earned R175 000 (excluding VAT) from its letting activities and
R200 000 (excluding VAT) from manufacturing and promoting Flangals.
Immediately after registering for VAT purposes, the managing director authorised the
purchase of the following assets:
• A new computer, costing R23 000 (including VAT), to be used for administering the
residential letting activities and the chip manufacturing process.
continued
117
A Student’s Approach to Taxation in South Africa 2.20
• A new mixer, costing R16 100 (including VAT), to be used solely in the chip manufac-
turing process.
The managing director now wishes to determine what input tax the company can claim,
as they are registered for VAT purposes.
You are required to calculate the apportionment ratio of input tax using the turnover-
based method and apply this ratio to determine the amount of input tax that Kagiso (Pty)
Ltd can claim in its first VAT period.
Solution 2.45
The computer is going to be used in making both taxable supplies (the selling of potato
chips) and non-taxable supplies (the hiring out of residential accommodation). Therefore,
the input tax deduction that can be claimed must be apportioned.
The turnover-based method entails the total taxable supplies expressed as a percentage of
total supplies and is an acceptable means of determining an input tax ratio. The following
formula is applied: B × C / D, where:
C = the value of taxable supplies (R200 000), and
D = the value of all supplies (R375 000 = R200 000 (manufacturing income) + R175 000
(income from letting activities)).
Thus:
The input tax ratio for Kagiso (Pty) Ltd is calculated as R200 000 / R375 000 = 53,33%.
Input tax deduction on the computer:
As the computer is used for the making of both taxable supplies and exempt supplies, the
input tax deduction is determined using the input tax ratio of 53,33%. Kagiso (Pty) Ltd is
entitled to claim R1 600 (rounded) as an input tax deduction on the computer, calculated as
follows: R23 000 x 15 / 115 = R3 000 x 53,33%
Input tax deduction on the mixer:
The company is entitled to claim the full input tax deduction on the mixer as this machine
is used wholly for the making of taxable supplies.
Kagiso (Pty) Ltd will therefore be entitled to claim a further R2 100 (R16 100 × 15 / 115) as
an input tax deduction.
REMEMBER
The standard method of apportionment might not be relevant for all vendors. Even if a ven-
dor generally makes 100% taxable supplies, each expense must be evaluated on an indi-
vidual basis to determine whether a 100% or an apportioned input VAT deduction can be
claimed. Should an expense not fully relate to a taxable supply, for example bank charges
relating to investment income which constitute a minor portion of the vendor’s total turn-
over, individual apportionment based on the specific transaction could be necessary.
118
2.20–2.21 Chapter 2: Value-added Tax (VAT)
119
A Student’s Approach to Taxation in South Africa 2.21
enterprise required to be away from his usual place of residence and usual place of
business for at least one night.
A self-employed person is a person who is not an employee of the vendor but
who invoices the vendor for services rendered. A vendor may only claim the input
tax on the personal subsistence of a self-employed natural person where the self-
employed natural person is:
– by reason of his contractual obligations with the vendor;
– obliged to spend any night away from his usual place of business.
Vendors who receive bets in respect of the outcome of a race or any other event
• Input VAT can be claimed on entertainment where the entertainment is continu-
ously or regularly supplied as a prize to its clients or customers (section 8(13)).
120
2.21 Chapter 2: Value-added Tax (VAT)
normally used on public roads, that has three or more wheels and is constructed or
converted wholly or mainly for the carriage of passengers, excluding:
• vehicles capable of transporting only one person or suitable for carrying more than
16 persons;
• vehicles with an unladen mass of 3 500 kg or more;
• caravans;
• ambulances;
• vehicles constructed for a purpose other than the transport of persons which do
not have the ability to transport passengers;
• game-viewing vehicles constructed or permanently converted for the carriage of
seven or more passengers for game-viewing. The game-viewing vehicle should be
used in national parks, game reserves, sanctuaries or safari areas and exclusively
for the purpose of game-viewing, other than use that is merely incidental and sub-
ordinate to that use (refer to Interpretation Note No. 42 which also deals with the
VAT implications pertaining to the supply of game-viewing services in South Africa);
and
• vehicles constructed as, or permanently converted into hearses for the transport of
deceased persons and used exclusively for that purpose.
The denial of input tax does not apply in the case of a vendor who:
• is a car-dealer;
• runs a car-hire business at an economic rental;
• acquired the motor car for awarding that motor car as a prize in consequence of a
betting transaction-supply in terms of section 8(13); or
• regularly or continuously supplies motor cars as prizes to clients or customers
(other than employees, office-holders or a connected person in relation to that
employee, office-holder or vendor).
The denial of input tax also does not apply in respect of the related expenses that are
incurred as part of vehicle ownership, for example insurance premiums, maintenance
and repair costs etc.
Example 2.46
Mr Silindile is a vendor that bought a new motor car valued at R230 000 from Van Oordt
& Hills Motors Inc. in terms of a credit sale with monthly payments of R4 500. As an addi-
tional option Mr Silindile took out a maintenance plan and insurance on the motor car
resulting in an additional monthly payment of R500 and R400 respectively. All amounts
are inclusive of VAT. The motor car is used 100% for the making of taxable supplies.
You are required to determine the input tax deduction claimable (if any) by Mr Silindile.
121
A Student’s Approach to Taxation in South Africa 2.21–2.22
Solution 2.46
Mr Silindile cannot claim an input tax deduction on the cost of the motor car, because it
relates to the acquisition of a motor car and this deduction is denied in terms of sec-
tion 17(2). Mr Silindile can, however, claim an input tax deduction in respect of the
maintenance plan and insurance on the motor car as section 17(2) does not deny the input
tax deduction on these services supplied.
Note that if the maintenance plan and insurance payment were not separately indicated
on the VAT invoice but formed part of the supply of the motor car, the input tax deduc-
tion on these expenses would have been denied in terms of section 17(2) as it would have
related to the acquisition of a motor car as defined.
122
2.22 Chapter 2: Value-added Tax (VAT)
to any notional input VAT. At the time of publication, the date on which this pro-
posal will take effect was not known yet.
The deemed input tax is calculated by the application of the tax fraction (15/115) to the
lesser of:
• the purchase price; or
• open-market value,
even though no VAT has actually been paid.
‘Open-market value’ is the consideration in money that the supply of goods and
services will fetch if freely offered and made between persons who are not connected.
Open-market value includes VAT, where applicable, in respect of taxable supplies.
This deemed VAT may be claimed as input tax to the extent that payment has been
made for the second-hand goods. If only a portion of the purchase price for the
second-hand goods has been paid, only the same relative portion of the deemed input
tax may be claimed.
REMEMBER
• This deemed input tax rule relates only to goods previously owned and used. The pur-
chase of trading stock from a non-vendor (except for antiques) would usually not quali-
fy as second-hand goods, as the trading stock was not previously used.
• The rule that the lesser of purchase price or open market value should be used in calcu-
lating the deemed input VAT does not apply to the motor industry on the trade in of
second-hand vehicles. It is not the intention of the VAT Act to deny an input tax credit
on an arm’s-length transaction between parties that are not connected persons. A bind-
ing general ruling (BGR No. 12) allows motor dealers to deduct the deemed input tax
on the full consideration (including any over-allowance amount) paid or credited to the
supplier for a second-hand vehicle traded-in under a non-taxable supply.
Example 2.47
Simunye (Pty) Ltd, a vendor for VAT purposes, acquired a second-hand machine from a
non-vendor for use in its business. The purchase price of the machine was R6 300 and the
market value was R7 800. The purchase price was paid in full.
You are required to determine whether any input tax may be claimed in respect of the
purchase.
Solution 2.47
Because the vendor has purchased a second-hand machine from a person not registered
for VAT purposes, a deemed input tax credit can be claimed on the second-hand machine.
The deemed input tax credit is based on the lower of the consideration paid (R6 300) or
open-market value (R7 800).
The deemed input tax is calculated as follows:
Tax fraction × consideration paid (15 / 115 × R6 300) = R822.
123
A Student’s Approach to Taxation in South Africa 2.22
If, after a deduction of input tax on second-hand goods, the sale is cancelled, the
consideration is reduced, or the second-hand goods are returned, and the input tax
actually deducted exceeds the input tax properly deductible, the difference should be
accounted for as an output tax (section 18(8)).
The recipient of second-hand goods must obtain and maintain a declaration by the
supplier stating whether the supply is a taxable supply or not, and must further
maintain sufficient records to enable the following particulars to be ascertained
(section 20(8)):
• The name of the supplier; and
– where the supplier is a natural person, his identity number;
– where the supplier is not a natural person, the name of the supplier and the
name and identity number of the natural person representing the supplier in
respect of the supply, and any legally allocated registration number.
* The recipient should verify the name and identity number of natural person
with reference to the person’s identity card and, the recipient should also
retain a photocopy of such identity card.
* The recipient should verify the name and registration number of any suppli-
er, other than a natural person, with reference to its business letterhead and
should retain a photocopy of such name and registration number appearing
on such letterhead.
• The date upon which such second-hand goods were acquired.
• A description of the goods.
• The quantity or volume of the goods.
• The consideration for the supply.
• Proof and date of payment.
No documentary proof is required if the total consideration for the supply of the
second-hand goods is in money and does not exceed R50.
124
2.22 Chapter 2: Value-added Tax (VAT)
Example 2.48
Aron (Pty) Ltd buys scrap metal from a non-vendor for R6 000 and claims a deemed input
tax deduction of R783 (R6 000 × 15 / 115).
You are required to explain the VAT consequences if:
(a) Aron (Pty) Ltd exports the goods for R7 000, and
(b) Aron (Pty) Ltd exports the goods for R4 000.
Solution 2.48
(a) Aron (Pty) Ltd will be required to account for output tax equal to the notional input
tax claimed (R783). The output VAT is based on the purchase price, irrespective of
the selling price. However, where Aron (Pty) Ltd accounted for VAT at the standard
rate of 15% in respect of the total amount charged, the purchaser, if a qualifying pur-
chaser, may claim the difference between the VAT paid and the notional input tax
deduction from the VAT Refund Administrator.
(b) Aron (Pty) Ltd will again be required to account for output tax equal to R783,
although the selling price of the goods is less than the purchase price. The output
VAT is based on the original purchase price, irrespective of the selling price.
Example 2.49
Adam buys second-hand goods for R2 000 and claims a notional input tax deduction of
R261, then sells them to Bart, a connected person, for R1 800. Bart claims an input tax
deduction of R235 based on the tax invoice provided by Adam. Bart exports the goods for
R1 980.
You are required to explain the VAT consequences in respect of the export.
Solution 2.49
Bart will be required to account for output tax of R261 (R2 000 × 15 / 115) which is based
on the greater of the price paid by the connected person (Adam) – R2 000; or the price
paid by (Bart) – R1 800.
125
A Student’s Approach to Taxation in South Africa 2.23
It should be noted that all the requirements listed above should be met for a supply to
be in terms of a suspensive sale or in terms of a finance lease.
126
2.23 Chapter 2: Value-added Tax (VAT)
Although the definitions summarised above are similar to a large extent, it seems that
the major difference between a suspensive sale and finance lease lies in the person
carrying the risk of ownership of the goods supplied. In terms of a suspensive sale
the risk of ownership passes to the purchaser on the date that the suspensive sale
condition is complied with, where in terms of a finance lease the risk of ownership
passes to the lessee and the date that the lease agreement is concluded.
Example 2.50
A bank enters a finance lease on 15 May of the current tax year for the lease of a motor car
to a clothing manufacturer, as follows:
R
Cost of motor car 292 174
VAT 43 826
336 000
Finance charges 117 600
453 600
The agreement states that 36 monthly instalments of R12 600 (including VAT) are payable
starting on 30 June of the current year. The motor car was delivered on 1 June. The motor
car is a motor car (refer to 2.21) as defined for VAT purposes.
You are required to discuss the VAT implications of the above transaction if both parties
have a one-month tax period.
127
A Student’s Approach to Taxation in South Africa 2.23
Solution 2.50
The bank must account for output tax of R43 826 (R336 000 × 15 / 115) on 1 June on the
cash value of the motor car. The bank does not have to account for output VAT on the
finance charges as they constitute an exempt supply.
The clothing manufacturer is not able to claim any input tax deduction since the vehicle is
a ‘motor car’ as defined (refer to 2.21).
Should the clothing manufacturer purchase the car at the end of the lease, VAT is also
payable on any consideration paid for the vehicle at that stage. Again the manufacturer
would not be able to claim any input tax deduction, as it relates to the acquisition of a
motor car as defined.
Example 2.51
Assume the same information as in the above example, except that it is now a delivery
vehicle acquired in terms of a suspensive sale agreement, which provides for a deposit of
R42 000 payable on 15 May of the current tax year.
The monthly instalments are R11 025, and finance charges totalling R102 900 will be paid
over the 36-month period.
You are required to discuss the VAT implications of the above transaction.
Solution 2.51
The only difference is that the bank now must account for output tax of R43 826 (R336 000
× 15 / 115) on 15 May. This is also the date on which the manufacturer can claim the input
tax of R43 826, assuming that the delivery vehicle will be used exclusively to make taxable
supplies. Regarding a suspensive sale agreement, when a deposit is paid, it is immediate-
ly applied in reducing the total consideration due. Neither the bank nor the manufacturer
needs to account for VAT on the finance charges as it constitutes an exempt supply.
REMEMBER
continued
128
2.23–2.24 Chapter 2: Value-added Tax (VAT)
129
A Student’s Approach to Taxation in South Africa 2.24
REMEMBER
• Transfer duty is a separate tax levied by SARS on the value of any property acquired by
any person. Property includes land, fixtures and rights to land, rights to minerals,
shares or interest in residential property companies and shares in share-block compa-
nies.
• Fixed property transactions in South Africa are either subject to VAT or to transfer
duty.
If a supply of fixed property does not attract VAT at any rate, the supply is subject to
transfer duty. Transfer duty is levied at a sliding scale for all persons. No distinction
is made between natural persons and legal persons. The current transfer duty rates
are:
130
2.24 Chapter 2: Value-added Tax (VAT)
applied), the above time of supply rule does not necessarily correlate with the actual
entitlement to claim an input tax or the liability to pay output tax. The input tax may
then only be claimed in proportion to the amount paid, irrespective of the date of
transfer. The output VAT is also only accounted for to the extent that payment is
received (sections 16(3)(a)(iiA) and (4)(a)(ii)). For these transactions, the special time
of supply rule is ignored, and we only have to focus on the payments as this would
trigger an output tax obligation or an input tax entitlement.
It does also not matter whether the applicable vendor is registered on the invoice
basis or payments basis as all input tax and output tax cash-flows arise only to the
extent payment has been made or has been received (section 16(3)(a)(iiA) and
(4)(a)(ii)).
REMEMBER
• The payment of transfer duty is not payment for a consideration, but payment of an
additional tax on the transaction.
• The payment of a deposit is not regarded as a payment until the deposit is applied as
part-payment or forfeited.
• Payment does not include seller financing or promissory notes.
There are, however, different rules pertaining to fixed property that is not supplied in
the course or furtherance of an enterprise (refer to 2.24.3.2).
131
A Student’s Approach to Taxation in South Africa 2.24
the fixed property is registered in the name of the vendor. After registration in the
name of the vendor, the deemed input tax can further only be claimed to the extent
that payment was made for the supply.
Example 2.52
Venter and Naidoo (Pty) Ltd purchased a house from a non-vendor South African resi-
dent for a consideration equal to R800 000. The open-market value of the house is
R750 000. Venter and Naidoo (Pty) Ltd will use the house for the purposes of making
taxable supplies. As the value of the fixed property is below R900 000, no transfer duty is
payable on the transfer of the fixed property. The registration of the property in the name
of Venter and Naidoo (Pty) Ltd occurred on 15 April of the current year. Venter and
Naidoo (Pty) Ltd borrowed money from ABC Bank and paid the full R800 000 to the non-
vendor on 20 March of the current year.
You are required to determine when and to what extent input tax may be claimed in
respect of the purchase of the house. The company is registered on the invoice basis (refer
to 2.3.1.1).
Solution 2.52
Because the vendor has purchased second-hand fixed property from a South African
resident, deemed input tax may be claimed for the house.
The deemed input tax credit is calculated as follows:
Tax fraction × (lesser of) consideration paid (R800 000) or open market value (R750 000)
= 15 / 115 × R750 000 = R97 826
Although the full consideration for the supply was paid on 20 March, the actual
registration of the house in the name of Venter and Naidoo (Pty) Ltd only occurred on
15 April of the current year. The full deemed input tax may be claimed only after
registration − in the tax period covering April of the current year – as the company is
registered on the invoice basis.
If it is assumed that only 80% of the house will be used by Venter and Naidoo (Pty) Ltd
for taxable purposes, the calculation for the allowable input VAT would have been as
follows:
R750 000 × 15 / 115 × 80% = R78 261
Whether Venter and Naidoo (Pty) Ltd paid cash or used third party financing to effect
payment makes no difference as to the timing of the deemed input VAT. If Venter and
Naidoo (Pty) Ltd, however, used financing that it obtained from the seller, the deemed
input tax is claimable to the extent that Venter and Naidoo (Pty) Ltd settles their debt to
the seller (that is to say to the extent that payment is made).
If the house was purchased by a natural person who is registered on the payments basis,
the input VAT will be claimable to the extent that payment has been made for the consid-
eration. Let us assume that the natural person is going to use 80% of the house for taxable
purposes, and that only R300 000 of the consideration has been paid on 20 March of the
current year. The input tax will then be as follows:
15 / 115 × R750 000 × 80% × R300 000 / R800 000 = R29 348
Thus, R29 348 may be claimed as a notional input tax deduction (refer to Note).
continued
132
2.24–2.25 Chapter 2: Value-added Tax (VAT)
Note
The deemed input tax could be claimed to the extent payment was made and to the extent
the property will be used for taxable purposes. This deemed input tax could be claimed in
the tax period covering March of the current year – to the extent of payment and we do
not need to wait for registration if the vendor is registered on the payments basis.
133
A Student’s Approach to Taxation in South Africa 2.25–2.26
In terms of section 23(1), a foreign supplier of electronic services must register (com-
pulsory registration) as a VAT vendor at the end of the month where the total value
of the taxable supplies made by foreign supplier has exceeded R1 000 000 in any
consecutive 12-month period. Foreign suppliers of electronic services are, however,
not required to register where the value of their taxable supplies exceed R1 000 000
only because of temporary, abnormal circumstances.
Foreign suppliers of electronic services (and their intermediaries) are allowed to
account for VAT on the payments basis, provided that the foreign supplier (and/or
the intermediary) applied to the Commissioner in writing to do so.
The supplies made by foreign suppliers of electronic services are subject to VAT at
the standard rate of 15% and do not qualify for zero rating in terms of section 11(2).
A foreign supplier of electronic services is required to issue a tax invoice that contains
particulars prescribed by SARS in Binding General Ruling No. 28. Additional infor-
mation on the tax invoices of foreign suppliers of electronic services include, for
example, the exchange rate used.
The output tax is equal to the tax fraction multiplied by the open-market value (sec-
tion 10(7)), as determined in the following formula:
A×B
where:
A = the tax fraction, and
B = the open-market value.
The time of supply is the date on which the goods are applied for non-taxable pur-
poses (section 9(6)).
Where a vendor has made an adjustment to output tax as contemplated in sec-
tion 18(1) in circumstances where partial input tax was originally claimed, an addi-
tional input tax adjustment is provided for. The purpose of this adjustment is to allow
a deduction of the unclaimed portion of the input tax. The adjustment is required to
be made on the date on which the goods are supplied. For this purpose, the following
formula is to be used (section 16(3)(h)):
A×B×C
where:
A = the tax fraction;
B = the lesser of:
– adjusted cost (including VAT) of the goods or services (an exception
being that the cost for connected persons is the open-market value on the
date of the original transaction),
134
2.26 Chapter 2: Value-added Tax (VAT)
REMEMBER
• The adjusted cost of an asset differs from the cost price of the asset. The ‘adjusted cost
of an asset’ refers to that part of the cost price of the asset where VAT has been charged
or would have been charged if VAT was applicable when the goods or services were
supplied to the vendor.
• Wages and finance charges are sometimes included in the cost price of an asset. These
costs would, however, not be included in the adjusted cost of the asset as no VAT is lev-
ied on either the wages or the finance charges.
Example 2.53
Dube Mahlangu purchased ten lawnmowers to be sold in his nursery. Each lawnmower
cost him R10 000 (including VAT). At the time of purchase, he intended to sell the
lawnmowers in the course of his business and claimed input tax of R1 304 (R10 000 × 15 /
115) per lawnmower. Dube decided to take one of the lawnmowers for his own private
use in his garden at home. Dube usually sells the lawnmowers for R18 000 each (includ-
ing VAT).
You are required to calculate the output tax.
Solution 2.53
R
Output tax adjustment is equal to the tax fraction multiplied by
open-market value = 15 / 115 × R18 000 2 348
If Dube originally acquired the lawnmower for making only 55% taxable
supplies, the VAT consequences would have been as follows:
Output tax
= 15 / 115 × R18 000 (section 18(1)) 2 348
Input tax
= 15 / 115 × R10 000 × 45% (non-taxable use) (section 16(3)(h)) 587
135
A Student’s Approach to Taxation in South Africa 2.26
• where adequate data has not been maintained, the amount prescribed by the
Minister in the Government Gazette (section 10(8)).
REMEMBER
• Section 18(1) is not applicable if the input has been denied in terms of the VAT Act (for
example, motor vehicles or entertainment assets) (refer to 2.21).
• The open-market value is used in cases where the use for taxable purposes decreases to
0%, but if the goods are still used in the course of making taxable supplies and the
extent merely decreases, section 18(2) will be applicable (refer to 2.28).
• A section 18(1) adjustment is made on the date of the change of use.
REMEMBER
• The relief provided for by section 18D lies in the fact that instead of having to account
for output VAT on the open market value of the fixed property when it is temporarily
rented out, output VAT is accounted for on the costs that the vendor had incurred when
constructing the fixed property.
• When a developer rents out fixed property as residental accommodation for 12 months
or less, section 18D(2) triggers a deemed taxable supply, which is why output VAT has
to be accounted for.
136
2.26 Chapter 2: Value-added Tax (VAT)
The time of supply for this change in use adjustment is the earlier of the date within
the tax period when the agreement for the rental of the fixed property as residential
accommodation comes into effect or the date when the dwelling is occupied by the
lessee (section 9(13)). The value of the supply, as stated above, is the adjusted cost of
the fixed property (section 10(29)).
Should a developer manage to sell the fixed property within the 12-month ‘temporar-
ily applied period’, such sale will be regarded as a taxable supply on which output
VAT has to be levied. In other words, irrespective of the fact that the fixed property
was temporarily used as residential accommodation (which is an exempt supply),
output VAT has to be levied on the sale thereof, if it is sold within the 12-month
rental period (section 18D(3)). In this case, the output VAT will be levied on the actual
consideration that the developer receives for the sale of the fixed property.
To compensate for the fact that a developer in this case would have had two output
VAT events (the first being the output VAT adjustment on the cost of the fixed prop-
erty in terms of section 18D(2) and the second the output VAT on the actual consider-
ation received for the sale of the fixed property), section 18D also makes provision for
an input VAT adjustment.
An input VAT adjustment is allowed in the following circumstances (section 18D(5)):
• if the developer managed to sell the fixed property within the 12-month temporari-
ly applied period and has to levy output VAT on the actual sale of the fixed prop-
erty in terms of section 18D(3); or
• if the fixed property was temporarily applied as residential accommodation (and
the developer had to account for an output VAT adjustment on the cost of the fixed
property), but is no longer rented out after the lapse of the 12-month temporarily
applied period; or
• if the fixed property was never temporarily applied for 12 months or less but was
initially rented out as residential accommodation for longer than 12 months and
the developer had to account for an output VAT adjustment in terms of sec-
tion 18(1) on the open market value of the fixed property.
The input VAT adjustment is based on the adjusted cost of the fixed property (sec-
tion 16(3)(o)).
The provisions of section 18D are only applicable to developers as defined. A devel-
oper means a vendor that continuously or regularly constructs, extends or substan-
tially improves residential fixed property with the purpose of selling that fixed
property (section 18D(1) – definition of developer). A person merely buying and
selling residential fixed property would not qualify as a developer and any temporary
renting by such a person would immediately result in a change of use adjustment
(section 18(1)).
137
A Student’s Approach to Taxation in South Africa 2.26–2.27
Example 2.54
Mr Chill is a residential property developer. Mr Chill recently completed a development
in Mooikloof, Tswhane. Due to the current market conditions Mr Chill is unable to sell
the residential units.
Discuss the VAT consequences of the following scenarios:
(a) Mr Chill decides to temporarily rent out the property as residential accommodation
for 12 months, with the intention to still sell the property. After 8 months, a buyer is
found, and the property is sold.
(b) Mr Chill decides to temporarily rent out the property as residential accommodation
for 18 months, with the intention to still sell the property. After 18 months Mr Chill
is still unable to sell the property.
(c) Mr Chill decides to temporarily rent out the property as residential accommodation
for 12 months, with the intention to still sell the property. After 12 months the rental
agreement came to an end and Mr Chill puts the property back on the market.
Solution 2.54
(a) An output VAT adjustment in terms of section 18D(2), calculated as the tax fraction
multiplied by the adjusted cost of the property, has to be made in the tax period
when the agreement for the renting of the property comes into effect. When the
property is sold within the 12-month temporarily applied period, Mr Chill has to ac-
count for further output VAT on the actual consideration received in respect of the
sale. An input VAT adjustment, based on the adjusted cost of the property, will be
allowed in the tax period that the property is sold.
(b) An output VAT adjustment in terms of section 18(1), calculated as the tax fraction
multiplied by the open market value of the property, has to be made in the tax peri-
od when the agreement for the renting of the property comes into effect, since the
rental agreement is for a fixed period exceeding 12 months. An input VAT adjust-
ment, based on the adjusted cost of the property, will be allowed in terms of sec-
tion 18D(5).
(c) An output VAT adjustment in terms of section 18D(2), calculated as the tax fraction
multiplied by the adjusted cost of the property, has to be made in the tax period
when the agreement for the renting of the property comes into effect. When the
property is put back on the market after 12 months, an input VAT adjustment, again
based on the adjusted cost of the property, will be allowed.
138
2.27 Chapter 2: Value-added Tax (VAT)
REMEMBER
• Section 18(4) is not applicable if the input has been denied in terms of the VAT Act (for
example, motor vehicles or entertainment assets) (refer to 2.21). For example: A vendor
took a fridge from the flat he rented for residential purposes to the kitchen of his
enterprise. Although the fridge is now utilised for taxable purposes, it relates to the
supply of entertainment, and no input tax deduction could be made in terms of this
section.
• Section 18(4) is also applicable (for example, if a motor car or entertainment asset was
acquired and, on purchase date, the input tax was denied, but subsequently the use of
the asset changed). For example, a warehouse purchased a fridge for the canteen.
Originally input tax was denied. Then the fridge was moved to the warehouse to be
used for taxable purposes and not the supply of entertainment. A section 18(4) adjust-
ment is permitted.
• The section 18(4) adjustment is applicable if there is an increase of taxable use, but only
if the taxable use before the increase was 0%. (For other increases of taxable use, refer to
2.28.)
Example 2.55
Mr Knowhow, a VAT vendor on the invoice basis, did the following in March of the cur-
rent tax period:
• He started to use his personal motor vehicle 100% for business purposes. His business
entails only taxable supplies, and he is not a car dealer. The motor vehicle cost him
R66 000 (VAT inclusive) and on the date on which he started to use it for business pur-
poses, it had a market value of R37 500.
• He started to use his private computer 100% for business purposes. The computer cost
him R11 355 (VAT inclusive) and had a market value of R7 300 when he started to use
it for business purposes.
• He started to use his private printer 97% for business purposes. The printer was
bought from a non-vendor for R2 500 and had a market value of R1 500 on the date on
which he started to use it for business purposes. The full purchase price had been paid.
continued
139
A Student’s Approach to Taxation in South Africa 2.27–2.28
• He converted 80% of his private residence into offices. He bought his residence for
R500 000. He bought the residence on credit from the seller and has paid only R300 000
up to date. At the date on which he started to use 80% of the residence as offices, it had
a market value of R750 000.
Calculate the VAT consequences of the above.
Solution 2.55
Motor vehicle
• Cannot claim input tax in terms of section 18(4), as input tax is denied in terms of
section 17(2) as it is a motor car as defined.
Computer
A×B×C
15 / 115 × R7 300 × 100% = R952 input VAT can be claimed in terms of section 18(4) in
the applicable tax period when he started to use it for the making of taxable supplies.
Printer
A×B×C×D
15 / 115 × R1 500 × 100% (Note 1) × 100% = R196 input VAT can be claimed
Offices
A×B×C×D
15 / 115 × R500 000 (Note 2) × 80% × R300 000 / R500 000 = R31 304 input tax can be
claimed
Notes
1. Taxable use of 97% is deemed to be 100% (as it is more than 95% – the de minimus
rule).
2. The lesser of the original cost R500 000 and the market value on the date of the change
of use – R750 000 – should be used.
3. The section 18(4) output VAT adjustment is made in the tax period when Mr
Knowhow starts using the goods for taxable purposes, that is to say March of the cur-
rent tax period.
140
2.28 Chapter 2: Value-added Tax (VAT)
Section 18(2)
≤ 100% taxable use lower % of taxable use (but not 0%)
Section 18(5)
< 100% taxable use higher % of taxable use
141
A Student’s Approach to Taxation in South Africa 2.28
Example 2.56
Jo Soap purchased a computer for his business for R48 000 (including VAT). 60% of the
business relates to taxable supplies. Input tax claimed was therefore R48 000 × 15 / 115 ×
60% = R3 757. At the end of Jo’s Year 1, Jo determined that 45% of his business would
now relate to taxable supplies. The market value of the computer on that date was
R45 000. At the end of Year 2, Jo determined that 80% of the business would now relate to
taxable supplies and the market value of the computer on that date amounted to R49 500.
Calculate the VAT consequences of the above.
Solution 2.56
R
Year 1 – reduction in the percentage taxable use
(section 18(2) output VAT adjustment)
15 / 115 × R45 000 × 15% (60% – 45%) 880
= Output tax payable by Jo
In terms of section 18(6), any output VAT adjustment in terms of section 18(2) is
deemed to take place at the end of the vendor’s year of assessment.
Year 2 – increase in the percentage taxable use
(section 18(5) input VAT adjustment)
15 / 115 × R45 000 (Note) × 35% (80% – 45%) 2 054
= Input tax claimable by Jo
In terms of section 18(6), any input VAT adjustment in terms of section 18(5) is
deemed to take place at the end of the vendor’s year of assessment.
Note
Although the market value was R49 500, the lower of the cost, current market value or the
value of the previous adjustment should be used.
REMEMBER
• Decrease in taxable use to 0%: Section 18(1) and an additional input tax credit in terms
of section 16(3)(h) (refer to 2.26).
• Increase in taxable use from 0%: Section 18(4) (refer to 2.27).
• Any other increases or decreases: Section 18(2) (decrease) and 18(5) (increase). Only for
capital goods or services.
• These section 18(2) and section 18(5) adjustments are only made at year end. The
market value at year end (and not at any other date) is relevant as the B value in the
formula.
142
2.28–2.29 Chapter 2: Value-added Tax (VAT)
Example 2.57
A vendor acquires capital goods or services partially (65%) for the purposes of making tax-
able supplies for R86 700 (including VAT). The vendor claimed R7 351 as input tax (R86 700
× 15 / 115 × 65%). The open-market value in all cases is R102 600.
Year 1: The taxable percentage increases to 80%;
Year 2: The taxable percentage reduces to 58%; and
Year 3: The taxable percentage is 0%.
You are required to calculate the adjustments to be made by the vendor.
Solution 2.57
Year 1: A×B×C
= 15 / 115 × 86 700 × 15% (80% – 65%)
= R1 696 (input tax adjustment)
Year 2: A×B×C
= 15 / 115 × 86 700 × 22% (80% – 58%)
= R2 488 (output tax adjustment)
Year 3: A×B
= 15 / 115 × R102 600 (market value for section 18(1))
= R13 383 (output tax adjustment)
Section 16(3)(h) – additional input
= A×B×C
= 15 / 115 × 86 700 × 42% (100% – 58%)
= R4 750 (input tax adjustment)
REMEMBER
When an input tax deduction has been denied in terms of section 17(2) in respect of
the acquisition of a motor vehicle, section 18(9) could subsequently grant the input
tax deduction if the motor vehicle were converted into a game-viewing vehicle or
hearse.
This converted game-viewing vehicle or hearse is deemed to be supplied to that
vendor in that tax period. The vendor can claim an input tax equal to the tax fraction
of the lesser of:
• the adjusted cost; or
143
A Student’s Approach to Taxation in South Africa 2.29–2.30
Example 2.58
A station-wagon is purchased for R115 000 (VAT included). An input tax deduction is
denied in terms of section 17(2)(c), as the station-wagon falls within the ambit of the defi-
nition of ‘motor car’. The station-wagon is subsequently converted into a hearse for
R23 000 (VAT included). The market value on the date of the conversion was R116 000.
Calculate the input tax claimable as a result of the conversion of the motor vehicle.
Solution 2.58
Input tax of R3 000 (R23 000 × 15 / 115) is allowed on the conversion costs. An adjustment
will be allowed in terms of section 18(9), which will result in an input tax claim of R15 000
(R115 000 × 15 / 115) in relation to the acquisition of the station-wagon. The input tax
adjustment is based on the lower of adjusted cost (R115 000) and the open market value at
the date of the conversion (R116 000).
Where the hearse is subsequently sold to another undertaker, the supply will be subject to
VAT at the standard rate in terms of section 8(14)(b). Alternatively, where the hearse is
converted back into a station-wagon or it is no longer used to transport deceased persons,
a supply of the hearse is deemed to be made in terms of section 8(14A) and output VAT
will be payable by the vendor.
144
2.30 Chapter 2: Value-added Tax (VAT)
that will also use all (or at least 95%) of the assets for taxable purposes, the effect is
that:
• the seller levies output tax at the rate of 0% on the full transaction; and
• the purchaser pays Rnil input tax and may not claim any input tax on the transaction.
145
A Student’s Approach to Taxation in South Africa 2.30
both items is denied. Output tax should thus be raised on R79 000 ((R500 000 –
R90 000 – R15 000) × 20%). The adjustment according to section 18A then amounts
to R11 850 (R79 000 × 15%). This calculation can be summarised as follows:
Step 2: Reduce such value by the value of assets that specifically relate to
100% taxable supplies.
Step 3: Reduce the value by all items for which input tax would have been
denied.
Example 2.59
Financinki (Pty) Ltd, a vendor, acquires a business as a going concern from Itsover (Pty)
Ltd at the zero rate for R500 000. Financinki determines that three office desks, six chairs
and two laptops will be used 100% to make taxable supplies. The value of these assets
amounts to R70 000. Included in the R500 000 purchase price is a motor car to the value of
R95 000 and a coffee machine to the value of R10 000. Except for the assets specifically
mentioned, Financinki estimates that for the rest of the assets 65% will be used for the
making of taxable supplies.
Itsover (Pty) Ltd used the chairs, desks and laptops 70% for the purposes of making non-
taxable supplies. The value of the above-mentioned items constitutes R70 000 of the
R500 000 purchase price. The original cost of these items for Itsover (Pty) Ltd amounted to
R114 000 (VAT inclusive). All the other items relating to the acquired concern were used
100% by Itsover (Pty) Ltd for the purposes of making taxable supplies.
Calculate all the VAT implications of the above transaction for both parties.
Solution 2.59
Itsover (Pty) Ltd R
Output VAT
Selling of the enterprise as a going concern:
((R500 000 – R95 000 – R10 000) × 0%) nil
Additional input VAT
Section 16(3)(h) relief
A×B×C
15 / 115 × R70 000 (lesser of cost or market value) × 70% (non-taxable use)
= R6 391 input VAT
continued
146
2.30 Chapter 2: Value-added Tax (VAT)
2.30.3 Less than 50% of the selling price relates to the going
concern
If the goods or services of the enterprise were applied by the seller partially for the
purposes of the going concern, but not mainly (thus less than 50%), only the portion
of the selling price that relates to the going concern may be zero rated.
• The seller should charge VAT at the zero rate on the going concern portion of the
supply.
• The seller must charge VAT at the standard rate in respect of the non-going-
concern portion.
• The seller can claim an input tax adjustment in respect of the assets used for non-
taxable purposes (section 16(3)(h) of the VAT Act).
• The purchaser may claim input tax credits where the assets acquired at the stand-
ard rate is applied for purposes of making taxable supplies. However, the purchas-
er cannot claim an input tax deduction in connection with the portion he is going
to utilise for non-taxable purposes.
• The purchaser is required to make a section 18A adjustment where he does not
apply the going-concern portion only for taxable purposes.
147
A Student’s Approach to Taxation in South Africa 2.30–2.31
Example 2.60
Barry sells a farm, together with crops and assets, that was used for taxable purposes
(farming), exempt purposes (provision of accommodation to labourers) and private pur-
poses (the farmhouse and game farm) is sold as a going concern to Zander for
R2 million (excluding VAT). Only 40% of the selling price relates to the taxable supply of
farming (going concern). The R2 million does not include any assets in respect of which
an input has been denied. Zander estimates that he will also use only 40% of the farm for
taxable purposes (going concern). The cost price of the concern for Barry amounted to
R900 000 when he originally bought it from a vendor.
Explain and calculate the VAT consequences of the above.
Solution 2.60
VAT consequences for Barry (seller) R
Output VAT
Two supplies are deemed to occur for VAT purposes. The supply relating to the going
concern is zero rated and the second supply is a supply at the standard rate.
Zero-rated portion: R2 000 000 × 40% = R800 000
R800 000 × 0% = nil
Standard-rated portion: R2 000 000 × 60% × 15% = 180 000
Input VAT
Section 16(3)(h) relief
A×B×C
15 / 115 × R900 000 (lesser of cost or market value) × 60% = 70 435
VAT consequences for Zander (purchaser)
Input VAT
Although he paid input VAT of R180 000, he cannot claim it as a deduction, as it is not
incurred for the making of taxable supplies.
No input VAT can be claimed on the portion relating to the going concern as 0% VAT
was levied by Barry.
Output VAT
The full supply of the going concern (40%) will be utilised for taxable purposes, thus, no
additional section 18A adjustment is required.
148
2.31 Chapter 2: Value-added Tax (VAT)
149
A Student’s Approach to Taxation in South Africa 2.31–2.32
Example 2.61
Jane Brand enters into a lease agreement with Khaya Dube for a vacant piece of land on
1 April. The lease agreement stipulates that Jane must erect a building on the piece of
land for R3 000 000. The ground floor of the building (60%) will be used by Jane for
making taxable supplies, while the top floor (40%) will be let to residential tenants (ex-
empt supply). The erection of the building was completed on 1 August. Khaya did not
pay any consideration to Jane for the erection of the building. Both Jane and Khaya are
VAT vendors.
Determine the VAT implications of the above for both Jane Brand and Khaya Dube.
Solution 2.61
VAT implications for Jane Brand (lessee)
Jane Brand will be deemed to have supplied the building (the leasehold improvements)
on 1 August (date of completion of the improvements) for Rnil. As she will be using the
building for the making of both taxable supplies as well as exempt supplies, she will need
to apportion her input VAT deduction in respect of the costs that she incurs.
VAT implications for Khaya Dube (lessor)
Khaya needs to make an output VAT adjustment in terms of section 18C as the building
(the leasehold improvements) will not be used solely for the making of taxable supplies
(40% of the building will be used for residential purposes, that is to say an exempt
supply).
The output VAT that Khaya needs to account for on 1 August (the date of completion of
the leasehold improvements) is calculated using the formula A × B × C:
15 / 115 × R3 000 000 (amount stipulated in agreement) × 40% (% non-taxable use)
= R156 522.
150
2.32 Chapter 2: Value-added Tax (VAT)
Example 2.62
For accounting purposes, Talita (Pty) Ltd wrote off R4 658 as bad debts. This amount com-
prises an amount of R2 875 owed by a local debtor and an amount of R1 783 owed by an
export sale debtor.
Provide the journal entry for the above in the books of Talita (Pty) Ltd.
Solution 2.62
R R
Dr Bad debts (SCI) 4 283 (R4 658 – R375)
Dr VAT Control Account: Input tax (SFP)
(Note) 375 (R2 875 × 15 / 115)
Cr Local debtor (SFP) 2 875
Cr Export debtor (SFP) 1 783
(Bad debts written off and corresponding VAT adjustment.)
Notes
1. The sale to the export debtor was a zero-rated supply. No adjustment to the VAT is
therefore allowed when the debt is subsequently written off.
2. One of the requirements to be able to deduct a bad debt for income tax purposes is
that the amount of the debt must have been included in the taxpayer’s income in ei-
ther the current or a previous year of assessment. As the output tax was never in-
cluded in Talita (Pty) Ltd’s income, only R4 658 (therefore excluding VAT) would
quality as a bad debt deduction (section 11(i) – refer to chapter 4).
If the debt is wholly or partially recovered, the tax attributable to the amount recov-
ered by the vendor is deemed to be tax charged by him in relation to a taxable supply
made during the tax period in which the debt is recovered and must be accounted for
as output tax (section 22(2)).
Creditors: claw-back of input tax deduction
When a debt is irrecoverable, the vendor (seller) is entitled to an amount of input
VAT. However, if a vendor does not pay his creditors, he is obliged to account for an
additional amount of output VAT. This is so because he claimed the input VAT initially,
when he incurred the expense. This additional output VAT arises when a vendor on
the invoice basis has:
• deducted input tax in respect of a taxable supply of goods or services made to him;
and
• not paid the full consideration for the supply within 12 months from the end of the
tax period in which the deduction was claimed.
The tax fraction (as determined at the time of deduction) of the unpaid portion of the
consideration must be accounted for as output tax (section 22(3)).
If a written agreement provides for payment to be made after the tax period in which
the deduction of the input tax was made, the period of 12 months is determined from
151
A Student’s Approach to Taxation in South Africa 2.32
the end of the month in which the consideration is payable (proviso (i) to sec-
tion 22(3)). For example, A and B may agree in writing that A will pay B only three
months after the date of the supply. If this is the case, the adjustment of the output tax
will arise only if A pays B after a period of 15 months (the original three months as
per the contract plus the additional period of 12 months).
This payment of additional output VAT is also applicable to a vendor who:
• has either voluntarily or compulsorily been sequestrated;
• has been declared insolvent;
• has entered into an arrangement;
• has entered a compromise with creditors (proviso (ii) to section 22(3)); or
• has ceased to be a vendor as contemplated in section 8(2) (refer to 2.12.1) (pro-
viso (ii) to section 22(3)).
The input tax may again be deducted if the vendor subsequently pays the considera-
tion in respect of the supply (section 22(4)).
REMEMBER
Intra-group debt
Group companies often do not have written agreements with one another for each
VAT transaction processed via loan account. Group companies also often operate
internal loan accounts for commercial reasons without clearing these accounts for
many years. Therefore, the 12-month unpaid creditor adjustment is unrealistic in a
group context. Debts between inter-group companies would not be subject to the 12-
month unpaid creditor adjustment (section 22(3A)). The creditor providing the sup-
ply to the indebted group company can also not claim an input deduction for a bad
debt written of (section 22(6)(a)). For applying this relief a group of company is
defined as in section 1 with the exception that the 70% shareholding should be
replaced with a 100% shareholding (section 22(6)(b)).
152
2.32–2.33 Chapter 2: Value-added Tax (VAT)
Example 2.63
Slow-Mo (Pty) Ltd owns 100% of the shares in Retro (Pty) Ltd. Retro (Pty) Ltd supplied
goods to the value of R750 000 to Slow-Mo (Pty) on a loan account. After 15 months the
amount in respect of the loan is still unpaid.
Discuss the VAT consequences of the following scenarios:
(a) Because Slow-Mo (Pty) Ltd had cash flow problems, Retro (Pty) Ltd decided to
write-off the debt owed as bad debt.
(b) 14 months after the date of the initial transaction Slow-Mo (Pty) Ltd sold 40% of its
shares in Retro (Pty) Ltd to an unconnected third party.
Solution 2.63
(a) As Slow-Mo (Pty) Ltd and Retro (Pty) Ltd are a group of companies for the purposes
of section 22(6) the 12-month unpaid creditor adjustment will not apply to Slow-Mo
(Pty) Ltd. Consequently Retro (Pty) Ltd will not be entitled to an input tax deduction
on the bad debt write-off.
(b) As the two companies are no longer a group of companies for the purposes of sec-
tion 22(6) the 12-month unpaid creditor adjustment will apply and Slow-Mo (Pty)
Ltd would have to account for output VAT for the supply of goods made to them. If
Retro (Pty) Ltd were to write-off the loan as bad debt, Retro (Pty) Ltd would be enti-
tled to an input tax deduction as the provisions of section 22(6) will no longer apply.
2.33.2 Section 41B of the VAT Act: VAT rulings and VAT class
rulings
Section 41B of the VAT Act provides for the Commissioner to continue to issue bind-
ing VAT rulings in addition to rulings under the Advance Ruling system. VAT rul-
ings are issued under the provisions of ‘binding private rulings’ whereas ‘VAT class
153
A Student’s Approach to Taxation in South Africa 2.33–2.35
rulings are issued under the provisions of ‘binding class rulings’. It should also be
noted that some of the information required for tax rulings are not applicable to VAT
rulings and VAT class ruling (section 79(4)(f) and (k) of the Tax Administration Act.
The VAT rulings and VAT class rulings are also not subject to the application fees but
are still subject to the cost recovery fees (sections 79(6) and 81 of the Tax Administra-
tion Act).
The Commissioner has also published a list of aspects that would result in an applica-
tion for these types of rulings to be automatically rejected (GG 36119 read together
with section 80(2) of the Tax Administration Act.)
2.34 Tax avoidance (section 73 of the VAT Act and section 102
of the Tax Administration Act)
The Commissioner may determine a VAT liability in respect of certain schemes. This
is the case if a scheme has been entered or carried out and has resulted in a tax benefit
being granted to a person, and the scheme was entered into or carried out in a manner
that would not normally be employed for bona fide business purposes.
A scheme includes any transaction, operation, scheme or understanding, including all
steps and transactions by which it is carried into effect.
A tax benefit includes:
• any reduction of tax;
• an increase in an entitlement of a vendor;
• a reduction in the consideration payable by a person in respect of any supply of
goods or services; or
• any other avoidance or postponement of liability for the payment of any tax, duty
or levy imposed by the VAT Act or by any other law administered by the Commis-
sioner.
154
2.35–2.37 Chapter 2: Value-added Tax (VAT)
2.37 Summary
VAT is levied by vendors on all taxable supplies. Vendors who pay input tax may
claim the input tax against output tax on taxable supplies. The scope of the rules in
the VAT Act is, however, much more complicated. The VAT Act is indeed a compli-
cated rule-based document with many exceptions.
In respect of supplies made, great care must be taken to distinguish between stand-
ard-rated supplies, zero-rated supplies and exempt supplies.
In respect of input tax, VAT may only be claimed if VAT was levied on the supply,
except in the case of second-hand goods acquired from non-vendors.
In addition to these basic principles, cognisance must be taken of special rules in
respect of the change of use, exports, accommodation, financial services, sale of going
concerns, fringe benefits, indemnity payments, instalment credit agreements etc.
The next section contains several questions that may be completed in order to evalu-
ate your knowledge on VAT.
155
A Student’s Approach to Taxation in South Africa 2.38
Question 2.1
Invoices (Pty) Ltd, a vendor registered for VAT purposes on the invoice basis, provides the
following information for the period May and June (all amounts include VAT at 15%
where applicable, and tax invoices have been issued for all supplies and, where applicable,
received from all suppliers):
Extracts from the cashbook:
R
Cash receipts
Cash sales in the Republic 68 400
Sales in Lesotho (delivery was made outside the Republic) 89 000
Sales in Namibia (delivery was made outside the Republic) 56 200
Receipts from debtors – South Africa (Note 1) 22 800
– Lesotho (Note 1) 14 000
– Namibia (Note 1) 20 520
Cash payments
Bank charges 2 280
Interest on bank overdraft 2 300
Fuel 5 400
Entertainment expenses 1 140
Stock purchases (Note 1) 28 500
Payments to creditors for stock purchases 31 920
Rent paid 9 120
Motor vehicle purchased (Note 2) 57 000
Delivery vehicle purchased (Note 3) 115 000
Short-term insurance premiums – fire and theft of stock 1 710
Notes
1. Debtors, creditors and stock
1 May 30 June
R R
Debtors – South Africa 45 600 74 100
– Lesotho 34 200 39 900
– Namibia 28 500 36 480
Creditors – purchase of stock 57 000 62 700
Stock on hand at cost (excluding VAT) 35 000 45 000
2. A motor car for use in the business was purchased from a vendor, and a second-hand
delivery vehicle was purchased from a person not registered for VAT, for use in the
business. The person confirmed in writing that the sale of the vehicle was not a taxable
supply. Invoices (Pty) Ltd is not a car dealer.
3. A new delivery vehicle was purchased and delivered on 1 June in terms of an instal-
ment credit agreement. The purchase price was R91 200 (including VAT at 15%). The
first instalment of R9 800 was payable on 1 July and includes interest amounting to
R500.
156
2.38 Chapter 2: Value-added Tax (VAT)
Answer 2.1
Calculation of VAT payable or refundable R R
Output tax
Republic cash sales 68 400
Republic credit sales 51 300
Debtor receipts 22 800
Debtors outstanding 30 June 74 100
96 900
Less: Debtors outstanding 1 May (45 600)
Total Republic sales 119 700
Output VAT (R119 700 × 15 / 115) 15 613
Exports – zero rated (Note 1) nil
15 613
Less: Input tax
Bank charges (R2 280 × 15 / 115) 297
Interest on bank overdraft – exempt supply, financial service nil
Fuel – zero-rated supply (section 11(1)(h)) nil
Entertainment – not deductible (section 17(2)(a)) nil
Stock purchases R
Cash purchases 28 500
Credit purchases 37 620
Creditors – 30 June 62 700
Payments to creditors 31 920
94 620
Less: Creditors – 1 May (57 000)
Total stock purchases 66 120
Input VAT (R66 120 × 15 / 115) 8 624
Rent paid (R9 120 × 15 / 115) 1 190
Motor car – input tax denied (section 17(2)(c)) (Note 2) nil
Short-term insurance premiums (R1 710 × 15 / 115) 223
Delivery vehicle –
(R115 000 × 15 / 115) (Note 3) 15 000
Interest on credit agreement – exempt supply, financial services nil (25 334)
VAT refundable by the Commissioner (Note 4) (9 721)
Notes
1. The sales to Lesotho and Namibia are zero rated.
2. Even though the motor car is a second-hand vehicle and it was purchased from a non-
vendor, no notional (deemed) input tax credit may be claimed as it is a motor car (as
defined).
3. The delivery vehicle is not a motor car as defined and the input tax can be claimed
upfront as it was purchased in terms of an instalment credit agreement.
4. As the input tax exceeds the output tax, the difference represents the VAT refundable
by the Commissioner.
157
3 Gross income
Page
3.1 Introduction ......................................................................................................... 160
3.2 Definition of ‘gross income’ (section 1) ............................................................ 160
3.3 Resident of the Republic ..................................................................................... 161
3.3.1 Ordinarily resident ................................................................................ 162
3.3.2 ‘Physical presence’ test.......................................................................... 165
3.4 Total amount in cash or otherwise.................................................................... 168
3.5 Received by or accrued to or in favour of ........................................................ 170
3.6 Year or period of assessment ............................................................................. 182
3.7 Receipts or accruals of a capital nature ............................................................ 182
3.7.1 Subjective tests ....................................................................................... 184
3.7.2 Objective factors ..................................................................................... 193
3.7.3 Specific types of transactions ............................................................... 198
3.8 Summary .............................................................................................................. 204
3.9 Examination preparation ................................................................................... 204
159
A Student’s Approach to Taxation in South Africa 3.1–3.2
3.1 Introduction
Gross income is one of the main building blocks of taxation. If you are given a pile of
documents relating to a taxpayer’s income, you will have to understand the concept
of ‘gross income’ to be able to decide which of the amounts constitute gross income
and are therefore subject to tax. An amount must be included in gross income before
it can be subject to tax. The determination of gross income is the starting point of the
taxpayer’s tax calculation.
An amount can be included in gross income either by complying with the general
definition thereof in the Act or by being included in gross income by means of one of
the special inclusions listed at the end of the definition.
This chapter discusses the different components of the gross income definition as well
as the special inclusions listed as part of the gross income definition.
Critical questions
When a person deals with the concept gross income, the following questions arise:
• What is meant by gross income?
• Does the definition of gross income apply to all persons whether they reside in South
Africa or not?
• When is an amount included in gross income?
• Can the taxpayer decide when such an amount may be included?
• What if an amount does not fall within the definition of gross income?
Legislation:
Section 1: Interpretation
‘Gross income’, in relation to any year or period of assessment means –
(i) 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
(ii) in the case of any person other than a resident, the total amount, in cash or other-
wise, received by or accrued to or in favour of such person from a source within the
Republic, or
during such year or period of assessment, excluding receipts or accruals of a capital
nature, . . .;
The definition is divided into two sections, namely one applicable to residents and
the other to non-residents (refer to 7.2).
The components of the definition are as follows:
• resident (refer to 3.3);
• total amount (refer to 3.4);
160
3.2–3.3 Chapter 3: Gross income
REMEMBER
• All the components of gross income must be present for an amount to constitute gross
income.
161
A Student’s Approach to Taxation in South Africa 3.3
Step 3: Determine whether the person complies with the ‘physical presence’
test as described in the Act (refer to 3.3.2).
Yes: He/she is a resident.
No: He/she is not a resident of the Republic (refer to 7.2).
162
3.3 Chapter 3: Gross income
CASE:
Cohen v Commissioner for Inland Revenue
13 SATC 362
Facts: The taxpayer, who was domiciled in derived taxable South African dividends.
the Union of South Africa (now the Re- He claimed to be exempt from supertax as
public), was one of two directors of a com- the Act exempted individuals ‘not ordin-
pany carrying on business in South Africa. arily resident nor carrying on business in
He was requested by his company to go the Union’ from the tax.
overseas to act as the company’s buyer in Judgment: The question whether an indi-
view of the difficulty of obtaining merchan- vidual was in any one year of assessment
dise, caused by war conditions. He left South ordinarily resident in South Africa or else-
Africa in June 1940, accompanied by his where was not to be determined solely by
family. The permit authorising his depart- his actions during that year of assessment;
ure contained the words ‘duration 9 his conditions of ordinary residence during
months’. In October 1940, he arrived in the that year could be determined by evidence
USA and he and his family lived in an as to his mode of life outside the year of
apartment in New York, from where he assessment. Mere physical absence during
carried on the business operations which the whole of the year of assessment was
were the purpose of his visit. In 1941, the not decisive of the question of ‘ordinarily
taxpayer was granted an extension of resident’. On the facts, the taxpayer was
12 months in respect of his permit to re- found to be still ‘ordinarily resident’ in
main in the USA. From that date and up to South Africa. The judge stated that a per-
30 June 1942, neither the taxpayer nor his son’s ordinary residence was the country
family had returned to South Africa. In to which he would naturally and as a mat-
1939, the taxpayer had leased a flat in Jo- ter of course return from his wanderings,
hannesburg for a period of five years and his usual or principal residence and could
had furnished it. This flat had been sub-let, be described as his real home.
with the furniture, during the period he Principle: ‘Ordinarily resident’ refers to
was in the USA. During the year ended 30 the place where a person will return to
June 1942, the taxpayer had after his ‘wanderings’.
163
A Student’s Approach to Taxation in South Africa 3.3
CASE:
Commissioner for Inland Revenue v Kuttel
54 SATC 298
Facts: The taxpayer was taxed on interest wife were the sole shareholders. At no
and dividends he earned from a source in time was it let and consequently it was
the Republic in the 1984, 1985 and 1986 available whenever the taxpayer wanted to
years of assessments. He contended that he live in it. During 1985 he effected substan-
was not ordinarily resident in South Africa tial renovations and extensions to the
as required by the Act. In 1983, he and his house. He did so, according to his unchal-
wife emigrated to the USA where he had lenged testimony, because he wished por-
obtained a permanent resident’s permit to tion of his South African capital to be
open a business on behalf of a South Afri- invested in fixed property as a hedge
can company in which he held shares. He against the falling value of the rand in rela-
sold a large number of his South African tion to the United States dollar. The tax-
assets and invested the proceeds in Eskom payer also stated that had he not been
stock in order to secure the maximum per- prohibited by the South African exchange
sonal income transmissible to him in the control regulations from taking all his
USA. He decided to buy a home in Florida, assets out of the country, he would certain-
USA. He established church membership, ly have done so.
opened banking accounts, acquired an Judgment: A person is ordinarily resident
office, bought a car and registered with where his ordinary or main residence is,
social security. He also obtained a settling- i.e. what can be described as his real home.
in allowance from the South African ex- By applying this test, the taxpayer was not
change control authorities. ordinarily resident in the Republic during
the period under consideration. His normal
Since then, apart from visits to South Africa
or main residence, his real home, was in
and other countries, the taxpayer had lived
the USA. The fact that the taxpayer retain-
and worked in the USA. During the period
ed his home in Cape Town, was not at all
September 1983 to November 1985 the tax-
contrary to his usual home in the USA. The
payer made nine visits to South Africa, stay-
Commissioner agreed that the taxpayer
ing for up to two months at a time. The
was not trading in South Africa because he
visits were to attend to the continuing liquid-
was only earning dividends and interest
ation of his interests, to participate in
income.
yachting and personal boat-building activi-
ties and to attend to family matters. Of the Principle: A person is ordinarily resident
31-month period under review, the tax- where he has his usual or principal resi-
payer spent, on average, just over one third dence, that which may be described as his
of the time in South Africa, the duration of real home. A person may also have a sec-
his visits becoming shorter towards the ond home in, for example, South Africa
end of the period. During his visits to Cape but the South African home must not be
Town the taxpayer lived in a house owned seen to be the home to which he will return
by the company in which he and his to after his wanderings.
The principles developed over time by the courts to establish whether a person is
ordinarily resident in the Republic can be summarised as follows:
• If it is part of a person’s ordinary regular course of life to live in a particular place
with a degree of permanence, the person must be regarded as being ordinarily resi-
dent (Levene v IRC1928 AC).
164
3.3 Chapter 3: Gross income
• A person is ordinarily resident in the country to which they would naturally and
as a matter of course return from their wanderings and would, in contrast to other
countries, call home (Cohen v CIR 13 SATC 362).
• A person can be ordinarily resident even if they are physically absent throughout
the year of assessment in question. In determining residence, the person’s mode of
life outside that year of assessment must be considered (Cohen v CIR 13 SATC 362).
• The place of residence must be settled and certain, not temporary and casual
(Soldier v COT 1943 SR).
• A person is ordinarily resident where their permanent place of abode is situated,
where their belongings are stored which they left behind during temporary
absences and to which they regularly return after these absences (H v COT 1960
SR).
• The term ordinarily resident is narrower than the term resident. A person is ordi-
narily resident where they normally reside, apart from temporary and occasional
absences (CIR v Kuttel 1992 AR).
The taxpayer will be resident in the Republic from the date they became ordinarily
resident, therefore not necessarily for the full year of assessment. Before this event
occurs, they will be treated as a non-resident.
If during a year of assessment a taxpayer stops being ordinarily resident in the
Republic, they will be non-residents from the following day. The ‘physical presence’
test cannot be applied if a person was ordinarily resident in the Republic at any time
during the year of assessment.
165
A Student’s Approach to Taxation in South Africa 3.3
Where a person who is resident in terms of these rules is physically absent from the
Republic for a continuous period of at least 330 full days immediately after the day
the person ceases to be physically present in the Republic, the person is deemed not
to have been resident from the day the person ceased to be physically present in the
Republic.
A person who becomes resident by virtue of the physical presence test will become a
resident from the first day of the year of assessment during which all the require-
ments of the test are met and will be taxed on their worldwide income for the full
year of assessment.
REMEMBER
The burden of proof in terms of section 102 of the Tax Administration Act, 2011 lies
with the taxpayer; therefore it is important that a person who could become resident
as a result of the physical presence test keep a detailed record of days present in and
outside of the Republic (as they will have to prove that they are not residents).
Example 3.1
Mr Sam Ntembo is a South African citizen who lives in the Republic. Sam was on holiday
in Spain for the last 92 days of the year of assessment.
You are required to determine whether Sam is a resident of the Republic.
Solution 3.1
Firstly determine whether the person is exclusively a resident of another country as a
result of a double-tax agreement: No.
Now determine whether the person is ordinarily resident in the Republic: Yes, Sam was
on holiday and his intention was to return to the Republic. Therefore he is a resident of
the Republic and ordinarily resident.
Why did we not count the days that he was in the Republic?
166
3.3 Chapter 3: Gross income
Example 3.2
Jay Kolapen is not a resident of the Republic. His employer in England sent him over to
South Africa to work here and gain experience in his field. The days he spent in South
Africa during the years of assessment were as follows:
2017: He spent 95 days in South Africa
2018: He spent 100 days in South Africa
2019: He spent 200 days in South Africa
2020: He spent 200 days in South Africa
2021: He spent 321 days in South Africa
2022: He spent 300 days in South Africa
2023: He spent 100 days in South Africa
He returned to England during 2023 and did not return to South Africa again. Ignore any
effect of a double-tax agreement between the two countries.
You are required to determine whether Jay will be classified as a resident for South Afri-
can income tax purposes for each of the years of assessment.
Solution 3.2
Firstly determine whether the person is exclusively a resident of another country as a
result of a double-tax agreement: No.
Next determine whether the person is ordinarily resident in the Republic: He is not ordin-
arily resident.
Now consider the physical presence rules:
2017: Jay is present for more than 91 days in this year, but not in each of the five
prior years of assessment. He is not a resident.
2018: Jay is present for more than 91 days in this year, and for the 2017 year, but
not for the four prior years. He is not a resident.
2019: Jay is present for more than 91 days in this year as well as for 2017 and
2018 years, but not for the three years prior to that (2014, 2015 and 2016).
He is not a resident.
2020: Jay is present for more than 91 days in this year, and for the 2017, 2018 and
2019 years, but not for the two prior years (2015 and 2016). He is not a res-
ident.
2021: Jay is present for more than 91 days in this year, and for the 2017, 2018,
2019 and 2020 years, but not for the prior year (2016). He is not a resident.
2022: Jay is present for more than 91 days in this current year as well as for each
of the five preceding years, and in aggregate, he is present for more than
915 (321 + 200 + 200 + 100 + 95 = 916) days in the five prior years. He is a
resident of South Africa from 1 March 2021.
2023 As in 2022 (he meets the requirements). He ceases to be a resident the
day he leaves South Africa, provided that he remains outside South Afri-
ca for a continuous period of 330 days immediately thereafter.
Note: In an exam or test you have to start with the current year because if they
are resident in Republic for 91 days or less in the current year you do not
need to go any further.
167
A Student’s Approach to Taxation in South Africa 3.4
CASE:
Commissioner for Inland Revenue v Butcher Bros (Pty) Ltd
13 SATC 21
Facts: The taxpayer owned land that was the year of assessment in which the build-
leased to a cinema company for a period of ing was completed. (It should be noted
50 years with a further option for another that paragraph (h) of the definition of ‘gross
period of 49 years. In terms of the contract, income’ now includes the value of improve-
the lessee was obliged to erect a cinema ments to leasehold properties in gross
building at its own expense. At the end of income.)
the contract the building would become
Principle: The onus is firstly on the Com-
the property of the lessors at no cost.
missioner to establish a method to be used
Judgment: The rights that accrued to the to value an asset received other than in
lessor could not be regarded as consti- cash. It is only after the Commissioner has
tuting an amount accrued to the lessor in established the amount that the burden
the year the building was completed, as it shifts onto the taxpayer, in terms of sec-
did not have an ascertainable money value tion 102 of the Tax Administration Act,
that the Commissioner could include in 2011, to show that the amount is incorrect.
The inclusion of ‘amounts received in cash or otherwise’ means that the value of
assets received in lieu of cash must also be included in gross income. A car dealer
may accept a trade-in of a customer’s old car as part of the selling price of a new car.
Both the cash received and the value of the car traded in will be included in the
dealer’s gross income.
In Lategan v CIR 2 SATC 16 the court held that the term ‘amount’ included not only
money, but also the value of every form of property the taxpayer earned.
When an asset other than money is received, it will have to be valued. The principle
has been established in several court decisions, for example ITC 932 24 SATC 341 and
Lace Proprietary Mines Ltd v CIR 9 SATC 349, that this value will normally be the
market value of the asset on the date the asset was received. A farmer may exchange
produce they have grown on their farms for an implement such as a plough at their
local co-operative. The value of the plough will be included in their gross income and
this value will be the selling price (market value) of the plough on the date they
received the plough. The value of the new item (exchanged item, in this case the
plough) and not the value of the ‘old’ item (in this case the produce) will be the
amount received.
In CIR v People’s Stores (Walvis Bay) (Pty) Ltd 52 SATC 9, Judge Hefer accepted as
correct the statement of Judge Watermeyer in Lategan v CIR 2 SATC 16 that the word
‘amount’ should be given a wider meaning and ‘include not only money, but the
value of every form of property earned by the taxpayer, whether corporeal or incor-
poreal, which has a money value’.
168
3.4 Chapter 3: Gross income
One of the problems associated with the valuation of receipts in a form other than
cash is the question whether the value so ascribed should be a subjective or objective
value (see Ochberg v CIR 5 SATC 93 and the Butcher Bros case).
Example 3.3
In return for services rendered, Mr Jayce Naidoo is granted the right to occupy his client’s
holiday flat in Cape Town free of charge for two weeks. The holiday flat is normally let to
the public at a rate of R5 000 a week. Jayce cannot make use of the benefit at the time it is
made available and does not have the right to grant the benefit to a third party in return
for cash.
You are required to determine the amount in terms of the gross income definition.
Solution 3.3
The objective valuation of this non-cash receipt would be R10 000.
The subjective value of this benefit to Jayce would be Rnil.
Burden of proof (in terms of section 102 of the Tax Administration Act, 2011) of the tax-
payer will be important in this instance regarding the value placed on the benefit.
The effect of the ‘cash or otherwise’ element of gross income is also that notional
amounts are not included in gross income. For example, if a person could have
earned R1 000 in interest on funds they had at their disposal had they invested these
funds, this ‘notional’ interest cannot be included in their gross income if they did not
in fact so invest it. However, in Brummeria, the court found that where something is
received that is connected to a transaction, this ‘notional amount’ can be included in
gross income.
169
A Student’s Approach to Taxation in South Africa 3.4–3.5
CASE:
Commissioner for South African Revenue Services v
Brummeria Renaissance
69 SATC 205
Facts: The taxpayers (developers) obtained the definition of ‘gross income’. The right
interest-free loans from future occupants to to obtain the loan capital without paying
finance the construction units in a retire- interest is linked to the taxpayer providing
ment village. Interest-free loans were made the lender with a ‘life right’. Therefore a
by occupants of the retirement villages. monetary value can be determined for this
The lenders (occupiers of units) made the right that accrued to the taxpayer. As these
interest-free loans and were granted a rights are of a non-capital nature and can
lifelong right to occupy a unit (called ‘life be valued in money they are included in
rights’). The developers retained owner- gross income.
ship of the units. When the lender died or
the agreement was cancelled, the deve- Principle: The court stated that where an
loper had to repay the loan. The developer interest-free loan is given to a person in
received the use of the interest-free loan in return for something (a quid pro quo), in
exchange for life rights. this instance ‘life rights’, then the notional
Judgment: The actual receipt of the loan interest on interest-free loans represents
did not result in a receipt for purposes of the total amount in cash or otherwise.
The general rule for establishing an amount in relation to assets received in a form
other than cash is set out above. Specific types of assets such as shares or insurance
policies have special rules relating to their valuation, and certain sections of the Act
provide for the valuation methods to be used in certain circumstances.
REMEMBER
• There must be an actual amount received or accrued before there can be any question of
gross income.
• Amount has a wide meaning which includes the value of any form of property earned
by the taxpayer and which has monetary value.
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3.5 Chapter 3: Gross income
Receipts
The question of when an amount is deemed to have been received by a taxpayer was
determined in Geldenhuys v CIR.
CASE:
Geldenhuys v CIR
14 SATC 419
Facts: The taxpayer enjoyed a usufructuary Judgment: As the number of sheep on date
interest in a flock of sheep (that is to say she of the sale was smaller than the number
had the right to enjoy the fruits and income when the usufruct commenced, there was
of the asset (sheep)). Her children were the no surplus to which she was entitled; there-
owners of the bare dominium (actual sheep). fore the amount belonged to the children.
The taxpayer and her children decided Principle: The mere receipt of an amount
to give up farming and sell the sheep. The does not result in an inclusion in gross in-
proceeds were deposited in the taxpayer’s come. Although a taxpayer might receive
banking account. The question is: how an amount, it will only be included in
should she be taxed on the amount gross income if it is received on his or her
received? own behalf and for his or her own benefit.
Example 3.4
Jakes Attorney received R250 000 rental per month on behalf of his client Billy Rental.
Billy owns two warehouses that he leases to businesses. Jakes receives these rentals on a
monthly basis and pays it over to Billy.
You are required to determine in whose hands the R250 000 will be taxable.
Solution 3.4
The R250 000 rent received will form part of Billy’s gross income, since Jakes Attorney
had not received it on his own behalf and for his own benefit.
If a taxpayer receives an amount as an agent of someone else, the amount does not accrue
to the agent (C: SARS v Cape Consumers (Pty) Ltd 61 SATC 91).
171
A Student’s Approach to Taxation in South Africa 3.5
CASE:
A Company v Commissioner for the South African
Revenue Service
IT 24510
Facts: The taxpayer sold gift cards and Judgment: As the cards are considered
deposited monies received for it in a sepa- the property of the holder/beneficiary
rate bank account until the card is re- until they are presented to be redeemed
deemed or expired. They started with this it can not form part of the issuer of the
practice after the Consumer Protection Act cards (the taxpayer’s) gross income and
was introduced. They subsequently did cannot be taxed then. They have not
not include any receipts from the gift card yet received the monies for their own
in their gross income until the cards were benefit.
redeemed or they expired. SARS assessed Principle: The mere receipt of an amount
the taxpayer on the full amount of the does not result in an inclusion in gross
separate bank account’s receipts for the income. Although a taxpayer might receive
2013 year of assessment. an amount, it will only be included
The question is: Are the receipts received in gross income if it is received on his or
in terms of the gross income definition or her own behalf and for his or her own
can they be considered to be in a type of benefit.
trust for protection of the gift card holders?
Illegal receipts
In ITC 1624 59 SATC 373 the judge ruled that where an amount is received due to an
overcharge to a customer, it constitutes an amount received. This is due to the fact
that the amount is received and it is received by virtue of a contract between the two
parties.
In ITC 1545 54 SATC 464, the taxpayer was a dealer in stolen diamonds, knowing
them to be stolen. The court, without arguing the matter, stated that it was common
cause that the proceeds of the sales of the diamonds amounted to a ‘receipt or accrual’
for the purposes of the definition of gross income. The taxpayer receives an amount
on their own behalf and for their own benefit irrespective of the fact that the person is
engaged in illegal activities.
As can be seen in ITC 1545 and ITC 1624, the South African Court taxed the theft of
money as income. This principle was confirmed and extended in two other cases: CIR
v Delagoa Bay Cigarette Company and MP Finance Group CC (in liquidation) v C: SARS.
172
3.5 Chapter 3: Gross income
CASE:
Commissioner for Inland Revenue v
Delagoa Bay Cigarette Co, Ltd
32 SATC 47
Facts: The taxpayer company had adver- Judgment: The prizes were paid in terms
tised a scheme under which it sold packets of a contract of purchase and sale and the
of cigarettes at a discount, each such packet cost had been incurred in earning the
containing a numbered coupon. The then income. Accordingly it had not been a
company undertook to set aside two thirds distribution of profit. The court ruled that
of the amount received from such sales as the legality or otherwise of the business
a prize fund from which a monthly distri- was irrelevant and that income earned was
bution would be made to such purchasers taxable.
of the packets ‘as the directors of the com-
pany should in their discretion determine’.
Two monthly distributions to winners Principle: To decide if an amount is
were made. However, before the third dis- ‘income’ or not, no account must be taken
tribution took place, the scheme was stop- of the fact that the activity involved was
ped as it was considered to be a lottery and illegal, immoral or ultra vires. Expenditure
therefore illegal. The taxpayer argued that incurred in producing such income may
the prizes paid were incurred in the pro- qualify as a deductible expense, except
duction of the income, and that if the where the expenses are prohibited by sec-
scheme was illegal the Commissioner could tion 23(o), which prohibits the deduction of
not tax the profits. bribes, fines and penalties.
173
A Student’s Approach to Taxation in South Africa 3.5
CASE:
MP Finance Group CC (In Liquidation) v Commissioner for
South African Revenue Service
69 SATC 141
Facts: During the 2000, 2001 and 2002 Judgment: The relationship between
years of assessment, Prinsloo operated a investor and scheme and the relationship
pyramid scheme (an illegal and fraudulent between scheme and fiscus (the Commis-
investment enterprise). In terms of the sioner), was different. An illegal contract
scheme agents solicited and transmitted can have some legal and fiscal (taxation)
investors’ deposits in return for commis- consequences. For tax purposes the only
sion. Prinsloo controlled several entities question is if the amounts paid to the
which printed a range of convincing- scheme complied with the requirements of
looking documentation issued to investors the Income Tax Act and unquestionably it
when they made deposits. In schemes of did. The amounts paid to the scheme were
this nature, investors are promised irresist- accepted by the operators of the scheme
ible (but unsustainable) returns on their with the intention of using it for their own
investments and the scheme paid such benefit and notwithstanding that in law
returns before finally collapsing, owing they were immediately repayable, they
many millions to investors. During the constituted receipts and were taxable.
years of assessment under review the oper- Principle: There is a distinction to be drawn
ators of the scheme knew that it was insolv- in the relationship between contracting
ent, fraudulent and would not be able to parties (commercial relationship) and the
pay investors. The taxpayer contended that relationship that a taxpayer has with the
because the scheme was in law liable to fiscus. The tax consequences flow from the
immediately refund the deposits, there relationship with the fiscus rather than from
was no basis on which it could be said that the commercial relationship. Therefore illegal
the deposits were ‘received’ and that they receipts and ill-gotten gains are taxable.
were therefore not subject to tax.
Example 3.5
Jack Smith uses street vendors to sell pirated versions of well-known DVDs to the general
public. His income from these activities amounted to R150 000 for the current year of
assessment.
You are required to determine whether Jack Smith will be taxable on the income
received.
Solution 3.5
Jack will include the R150 000 in his gross income as this amount was received by him on
his own behalf and for his own benefit, irrespective of the fact that the sale of pirated
DVDs constitutes illegal activities. SARS does not distinguish between income from legal
activities and income from illegal activities.
174
3.5 Chapter 3: Gross income
Accrued to
In terms of the definition of gross income, amounts which accrue to a taxpayer which
they have not yet received will be included in their gross income. The first case deal-
ing with the meaning of the term ‘accrue’, namely Lategan v CIR, was heard in 1926.
CASE:
WH Lategan v Commissioner for Inland Revenue
2 SATC 16
Facts: The taxpayer, a wine farmer, entered the year of assessment in respect of the
into an agreement to sell his wine to a co- wine produced during the year of assess-
operative company. A portion of the selling ment formed part of the ‘gross income’ for
price was paid prior to the end of his year of that year. The court also held that the
assessment and the balance was to be paid future payments must be included at their
after the end of the year of assessment. discounted future value.
Judgment: ‘Accrued to’ means ‘become Principle: ‘Accrued to’ is the amount to
entitled to’ thus the instalments payable after which the taxpayer has become entitled.
The Lategan decision was followed by CIR v Delfos 6 SATC 92, where two of the
judges interpreted accrue to mean ‘due and payable’. This interpretation may result
in income being taxed in different years of assessment. An amount may be ‘due’ to a
taxpayer during the year of assessment, but only ‘payable’ during the following year
of assessment. In 1990 the appeal court gave its first ruling on the term accrual in CIR v
People’s Stores (Walvis Bay) (Pty) Ltd, thus effectively overruling the previous
decisions.
CASE:
Commissioner for Inland Revenue v People’s Stores
(Walvis Bay) (Pty) Ltd
52 SATC 9
Facts: The taxpayer was a retailer of cloth- during the year of assessment and to
ing, footwear etc., for cash and on credit. which a monetary value can be attached,
Most of the credit sales were made under forms part of the ‘gross income’, irrespec-
its so-called ‘6-months-to-pay’ revolving tive of whether it is immediately payable
credit scheme. In terms of this scheme (due and enforceable) or not. The value of
customers’ accounts were payable in six the instalments not yet payable had to be
equal monthly instalments. The instalment their market value.
reflected on the statement had to be paid After this decision an amendment was
before the next statement date. The enacted that subsequently included the
Commissioner taxed the full amount of ‘present value’ of any unpaid amounts.
the sale of the goods in the year of Principle: The court confirmed the mean-
assessment in which they were sold, but ing of ‘accrued to’ as applied in Lategan,
allowed a section 11(j) deduction (pro- has become ‘entitled’. Please note that
vision for bad debt). granting credit is not a condition. A con-
Judgment: An amount accrues to a taxpayer dition in a contract normally delays the
when he becomes entitled to the ‘amount’. transfer of ownership until the occurrence
Therefore any right that a taxpayer acquired of a specific event.
175
A Student’s Approach to Taxation in South Africa 3.5
Example 3.6
Ms Norah Eyssel rendered services to Invest (Pty) Ltd on 15 January. Invest (Pty) Ltd
agrees to pay her R5 000 for the services rendered but the amount is only payable in five
years’ time. Assume that the present value of R5 000 in five years’ time is R1 500.
You are required to determine the amount that will be included in Norah’s gross
income.
Solution 3.6
The total value of the accrual is R5 000 and she will include the R5 000 in her gross
income for the current year of assessment.
Will she be taxed on the amount when she receives it after five years?
176
3.5 Chapter 3: Gross income
CASE:
Mooi v Secretary For Inland Revenue
34 SATC 1
Facts: The taxpayer received an option to Judgment: The true and real benefit con-
subscribe for (buy) shares in the company templated in the option offer was the right,
he was employed by but subject to the upon the due fulfilment of all the con-
following conditions: he must still be ditions, to obtain the shares at a set price.
employed by the company at the time the The relevant accrual of that benefit occurred
mine (at which he worked) came into when the option became exercisable upon
operation. Three years later the mine came those conditions being fulfilled some three
into operation and he exercised the option. years later; until the taxpayer had per-
The option price paid was far below the formed those services he did not become
market price of the shares. The Commis- ‘entitled to’ any right of option, nor was
sioner included the difference between the anything ‘due and payable’ to him. There-
option price paid and the market value of fore there was no accrual to the taxpayer
the shares at the time of exercising the until the conditions were fulfilled. The
option, in the taxpayer’s gross income. The court also found that when the taxpayer
inclusion was made on the basis that the was in the service of the company, there
amount had accrued to him in respect of existed the necessary causal relationship
services rendered. The taxpayer argued between the benefit acquired by the tax-
that the only amount, if any, which payer and his services to the company.
accrued to him in respect of services, was (Note that section 8C now allows for these
the right he had acquired three years earlier amounts to be taxed.)
(namely the right to exercise an option in
future when certain conditions had been Principle: An amount can only accrue if
met). Therefore the amount accrued when the person has ‘become unconditionally
the options were exercised was as a result entitled to’ it. Conditional entitlement
of the amount paid by the taxpayer for the would therefore not constitute an accrual
shares and not in respect of services ren- until the condition had been satisfied.
dered.
In practice, the date of accrual will depend on the terms of the contract giving rise to the
income. A rental agreement may provide for monthly, quarterly or annual rent pay-
ments. The amount accrues on the date it is due.
Example 3.7
A taxpayer carries on business as a furniture dealer. He sells an item of furniture for cash
during the year of assessment. He also sells and delivers furniture on 25 February 2023
but only receives payment on 25 March 2023.
You are required to determine the date of accrual.
177
A Student’s Approach to Taxation in South Africa 3.5
Solution 3.7
The selling price of the item sold for cash which he has received during the current year
of assessment is included in his gross income on the date of sale.
The selling price of the second sale accrues to him on 25 February 2023, even though pay-
ment is only received after the current year of assessment and will be included in his
gross income for the current year of assessment.
Example 3.8
Frederikus has an investment in a foreign country. During the current year of assessment,
interest amounting to R32 300 was credited to the account. According to the laws of the
foreign country, the interest earned on these types of accounts may only be remitted to
foreign residents after two years.
You are required to show the effect of the R32 300 interest earned on Frederikus’ taxable
income for the current and next two years, assuming that he earned no other investment
income.
Solution 3.8
Current year of assessment R
Gross income – Foreign interest earned 32 300
Section 9A deduction (32 300)
Effect on taxable income nil
continued
178
3.5 Chapter 3: Gross income
If you don’t take the money that you have earned out of a country
within that same year, and in the next year the country imposes a limi-
tation on the removal of the money, will you still be able to qualify for
this deduction?
REMEMBER
Deposits received
Advance payments received for work still to be performed, such as advance pay-
ments on building contracts, will be included in the taxpayer’s gross income although
the payment accrues to them only when the work has been performed. The principle
relating to deposits was set out in Pyott Ltd v CIR.
CASE:
Pyott Ltd v Commissioner for Inland Revenue
13 SATC 121
Facts: The taxpayer (Pyott) manufactured Judgment: The amount received for the
biscuits. The biscuits were packaged and containers was cash (not subject to any
sold in tin containers. A refundable deposit reduction or discounting) and must be
was charged for the tin container which included in the gross income of the tax-
was repaid when the tin was returned in payer at its full value. The provision made
good condition. Before the Second World to meet future claims for refunds is a re-
War between 25% and 30% of the tins were serve for a contingent liability, which was
so returned to the company. Due to a expressly forbidden (section 23(e)). The
shortage of tinplate in the war years, the court stated that if the moneys received as
deposit on the tins was tripled in an attempt deposits had been banked in a separate
to have more tins returned. This resulted trust account set up specifically for the
in 90% of the tins being returned for a deposits received, then such amounts
refund. The company provided for an deposited would not constitute ‘gross
allowance on tin containers returnable, an income’.
amount representing their liability for re-
funds, effectively resulting in the deposits Principle: Deposited moneys are included
received not being taxed. The Commis- in ‘gross income’ unless they are deposited
sioner refused to allow the provision for into a separate trust account set up speci-
refunds. fically for the deposits received.
179
A Student’s Approach to Taxation in South Africa 3.5
There have also been several other decisions relating to deposits received by a tax-
payer (Brookes-Lemos Ltd v CIR 14 SATC 295 and Greases SA Ltd v CIR 17 SATC 358)
that have indicated that once a taxpayer has received an amount as their own during
a year of assessment to be dealt with as they wish, it is included in their gross income
despite the fact that in terms of the contract they may have to repay the amount later
in certain circumstances.
Example 3.9
Grace Nkomo operates a bed and breakfast establishment in Soweto. She received a de-
posit of R10 000 on 1 April 2022 to reserve accommodation for a group of German tourists
who will visit Soweto during April 2023.
You are required to determine whether Grace will include the R10 000 in her gross in-
come for the current year of assessment.
Solution 3.9
Grace will include the deposit of R10 000 in the year of receipt (2023 year of assessment).
Even though the services will only be rendered in the 2024 year of assessment, she has
received the amount for her own benefit. It will not be included in her gross income again
in the 2024 year of assessment.
Or in favour of
The words ‘or in favour of’, which are included in the definition, mean that income
received by another person on behalf of the taxpayer will be included in the tax-
payer’s gross income. A letting agent may collect rent from the tenants in a block of
flats on behalf of the owner. The owner, not the agent, will include this rental income
in their gross income, because it was received or accrued in their favour.
An amount will be included in their gross income irrespective of how the taxpayer
applies it after it has accrued. Section 7(1) of the Act provides:
Income shall be deemed to have accrued to a person notwithstanding that such
income has been invested, accumulated or otherwise capitalised by him or that such
income has not been actually paid over to him but remains due and payable to him or
has been credited in account or reinvested or accumulated or capitalised or otherwise
dealt with in his name or on his behalf, and a complete statement of all such income
shall be included by any person in the returns rendered by him under this Act.
For example, where interest has been credited to the taxpayer’s savings account, it
will have accrued, even though it has not been paid out to them. The leading case
dealing with in favour of is CIR v Witwatersrand Association of Racing Clubs.
180
3.5 Chapter 3: Gross income
CASE:
Commissioner for Inland Revenue v Witwatersrand
Association of Racing Clubs
23 SATC 380
Facts: The taxpayer (a non-registered asso- it to distribute the proceeds to the charities
ciation of racing clubs) organised a race in accordance with its declared intention.
meeting on the Johannesburg Turf Club’s The Association acted as the principal in
race course, the proceeds of which were to holding the race meeting rather than as an
be divided between two non-profit char- agent.
ities. The proceeds of the meeting were
divided between the two charitable bodies Principle: Once an amount has been bene-
for whose benefit the meeting was stated to ficially received by or accrued to a taxpayer,
be held. The Commissioner included the he is taxed on such amount even though
amount received in the taxpayer’s ‘gross he may have an obligation to pay it over to
income’. some other person. If there is a principal
Judgment: The Association had, in holding agent relationship, the amount would be
the race meeting, embarked upon a scheme taxed in the principal’s name. In this case
of profit-making and was liable for tax the two non-profit charities could have
upon the proceeds of the meeting, not- acted as principals in which event they
withstanding the moral obligation upon would have been taxed.
Example 3.10
Sarah Msimang signs a stop order authorising the deduction of her car payment of R5 000
directly from her salary. She earns a gross salary of R18 000 a month.
You are required to determine the amount that will be included in gross income.
Solution 3.10
She will include her full salary of R18 000 in her gross income, irrespective of the fact that
she has not received the full amount.
A taxpayer may, however, divest themselves of the right to income which may accrue
to them in the future, prior to its accrual. The question whether taxpayers have
divested themselves from receiving income prior to its accrual is a difficult one. In
Cactus Investments (Pty) Ltd v CIR 1999 (1) SA 315 (SCA), it was ruled that interest on
investments that had been ceded in exchange for dividend income had accrued when
the investments were made and that this accrual was not affected by subsequent
cessions.
When a right to future income is disposed of, the future income will be taxable in the
hands of the recipient of that right. However, it must be noted that there are also
certain provisions in the Act, for example section 7, which prevent certain donations
of income and the right to income in order to limit the ability of taxpayers to divest
themselves of the right to future income.
181
A Student’s Approach to Taxation in South Africa 3.5–3.7
Example 3.11
Dave Right has legally ceded the income from a rent-producing property that he owns to
a friend for this year and the next four years. Dave’s friend lost his job and has no income.
During the current year of assessment, R50 000 rent was received on the property.
You are required to determine whether Dave or his friend will include the R50 000 in
their gross income.
Solution 3.11
As Dave disposed of his right to future income, he will not include the income in his
gross income. Dave’s friend, who is the recipient of the rent, will have to include the
R50 000 in his gross income. Note, however, that section 7(7) of the Act (an anti-avoidance
section) states that if an amount is transferred to another person for a specific period of
time with a donation, settlement or other disposition, the donor (Dave) (and not the per-
son receiving it) will be taxed on the income. So even though this was ceded Dave will
still be taxed on the rental.
REMEMBER
• ‘Received’ means that a taxpayer receives the amount for their own benefit and for
themselves.
• ‘Accrued’ means that the taxpayer has become unconditionally entitled to the amount.
• The time value of money is ignored.
• Income received by another person on behalf of a taxpayer will be included in the
taxpayer’s gross income.
• An amount is included in gross income either on the date of receipt or accrual, which-
ever event occurred first. You cannot be taxed twice on an amount received.
• Sections 7A and 7B have specific accrual times in respect of antedated and variable
remuneration, while sections 7C to 7E deal with accrual of certain interest and loans or
credits advanced to a trust by a connected person.
182
3.7 Chapter 3: Gross income
Example 3.12
Sam Olivier sold his personal house, which he owned for 12 years, for R700 000 due to
personal circumstances.
You are required to determine whether Sam will include the R700 000 in his gross income
for the current year of assessment.
Solution 3.12
Sam will not include the R700 000 in gross income, as this transaction constitutes a sale of
an asset which is capital in nature.
It does not normally happen that one amount is partly capital and partly revenue.
However, in Tuck v CIR 50 SATC 98 it was held that the amount was received for two
reasons and therefore the amount was apportioned between capital and revenue
income. It is also impossible to have an amount which is neither capital nor revenue.
The basic test to determine whether an amount is of a capital or a revenue nature,
was set out in CIR v Visser.
CASE:
Commissioner for Inland Revenue v Visser
8 SATC 271
Facts: The taxpayer (an influential business- wits, energy and influence and as such was
man) acquired mining options for a period not a receipt of a capital nature, but income
of two years over certain properties which in nature. The court used the tree and fruit
were not renewed and had expired. Later,
analogy as a useful guide but cautioned
a third party negotiated with and offered
that what is the principal or tree in the
the taxpayer an interest in a company to
be formed if he would refrain from taking hands of one man may be interest or fruit
up options in competition with him and in the hands of another. For example, law
assist him to acquire the previously lapsed books in the hands of a lawyer are a capital
options. The taxpayer agreed to the pro- asset, while for a bookshop it is stock-in-
posal. The arrangement was confirmed in a trade (revenue). Adopting a profession is
letter which stated that the taxpayer had likened to a tree while the earnings from
been promised shares ‘in consideration of the profession is likened to the fruit of the
the services you have already rendered and tree.
will be rendering to me and my associates
in the venture that we are undertaking’. Principle: The ‘tree and fruit’ principle,
namely that the tree is capital in nature
Judgment: The amount in dispute had
and the fruit is revenue in nature.
accrued to the taxpayer as the product of his
Not all capital or revenue decisions are as clear as in the above. Over the years the
courts have identified a number of factors that can be used to determine if a receipt is
of a capital or revenue nature. The most important factors that can be considered will
be dealt with briefly.
183
A Student’s Approach to Taxation in South Africa 3.7
The test the courts developed to determine the difference between capital and reve-
nue receipts is the intention test. The test determines what the taxpayer's intention
was. If the intention was to receive a capital amount, it will not be taxable. This test,
however, is a subjective test and courts look at various objective factors to determine
whether the subjective test gives the correct answer.
Change of intention
The intention at the time of acquisition of the property is not conclusive because an
intention to hold as an investment may change during the time the property is held
into an intention to engage in a profit-making scheme – refer to CIR v Richmond
Estates (Pty) Ltd.
184
3.7 Chapter 3: Gross income
CASE:
Commissioner for Inland Revenue v
Richmond Estates (Pty) Ltd
20 SATC 355
Facts: The taxpayer company was formed would make it impossible for the company
for the purpose of controlling the invest- to dispose of its plots to blacks, the share-
ments and savings of the sole beneficial holder decided that it would be better for
owner of the shares issued (who was also the company to dispose of all its holdings,
the director). The memorandum of associ- both improved and unimproved, in the
ation of the company empowered it to pur- township. The company thereafter dis-
chase land, deal in land, turn land to posed of 15 of its 18 plots in the township
account, develop land and lay out and at a substantial profit.
prepare land for building purposes. The
company carried on business as a land Judgment: The company had a change in
speculator and received rent from pro- its intention as regards the properties sold,
perties it let. A large part of the business of in that it was converted to a capital asset.
the company consisted of buying and sell- The sale at a profit as the result of a change
ing plots in a black township but after 1945 in conditions outside the company’s con-
it was no longer possible except with ap- trol did not per se make the resulting profit
proval of the appropriate Minister. In 1948, subject to tax. The fact that the change of
the shareholder decided that the company intention had taken place was not recorded
should cease selling its plots in the town- in a formal resolution of the company’s
ship and for the future develop its holding only director (who was also the sole bene-
of eighteen plots in the township as rent- ficial shareholder) but was evidenced from
producing properties. No formal resolu- the statements of the sole director and was
tion recording this decision appeared in the regarded as sufficient evidence for the
company’s records. By 1950, the Group Are- amount not to be taxed.
as Act had been passed and the intention
of the government was to remove the Principle: The intention of a company is
black inhabitants from the township in derived from both its formal acts (resolutions
which the company had its holding. As this of directors) and its informal acts.
It should be noted that the mere fact that the taxpayer decides to realise an asset is not
proof of a change of intention, nor the fact that they do so in such a way that they
realise it to the best advantage (refer to CIR v Stott).
185
A Student’s Approach to Taxation in South Africa 3.7
CASE:
Commissioner for Inland Revenue v Stott
3 SATC 253
Facts: Over the thirty years prior to the sale Judgment: Although the taxpayer’s pro-
of the properties in question, the taxpayer fession was one of a surveyor and archi-
(an architect and surveyor) had purchased tect, this aspect, on the facts, did not affect
various properties, some of which he held him adversely. The fact that he had dealt in
for a period of time to let or for private property previously was not taken into
purposes (seaside cottage) and later sold account because the court regarded them
them, sometimes having subdivided the as having taken place too long ago and too
property before selling. One of the pro- lacking in information. However, the
perties in question was a property which motives in relation to the properties in
the taxpayer purchased for residential pur- question were looked at closely to establish
poses. This property acquired was larger whether there was a scheme of profit-
than the taxpayer required for residential making or not. The court found that there
purposes, but the property was only for was no scheme of profit-making in regard
sale in one block. The taxpayer built a cot- to the property purchased to protect the
tage on the site and thereafter cut up about rights of the tenants and later sold to them.
half the property (property which he re- His father had been a missionary and the
garded as excess to his needs) into small purchase of the property was for philan-
lots, which he proceeded to sell and from thropic purposes, which by its very nature
which he derived substantial profits. A excluded a scheme of profit-making. The
further property was purchased for the pur- amounts realised constituted accruals of a
pose of assisting tenants who were living capital nature.
there and who feared that they would be
ejected. His father had been a missionary Principle: A person may realise his capital
and he felt it his duty to assist these people. asset to best advantage and the mere sub-
Part of the farm, after the purchase, was division of land does not constitute a trade.
subdivided and sold to the tenants at a The decision also lays down the principle
small profit. The third property in question that the taxpayer’s intention at the time the
was a small fruit farm which he purchased asset is purchased is decisive unless there
subject to a long lease. The tenant failed to is a subsequent change in intention and the
pay his rent and the subsequent tenant taxpayer ‘crosses the Rubicon’ by being
caused trouble. The farm was then put up involved in a scheme of profit-making.
for sale and was sold at a profit.
186
3.7 Chapter 3: Gross income
In Natal Estates Ltd v SIR and similarly in Berea West Estates (Pty) Ltd v SIR the courts
gave guidance as to when an asset is deemed to have been realised to its best
advantage as opposed to when it was being disposed of in a business venture.
CASE:
Natal Estates Ltd v Secretary for Inland Revenue
37 SATC 193
Facts: The taxpayer company (formed in 55% by the Anglo American Corporation
1920) acquired as a going concern the Ltd. This company purchased from the
whole of the assets of a company which taxpayer the La Lucia beachfront and
had for some 25 years been carrying on Umhlanga Lagoon areas en bloc for
business in Natal as a grower and miller of R1,4 million. Although the taxpayer con-
sugar. The assets acquired were mainly tinued for some time to effect sales directly
planted sugar cane and included areas to members of the public, by the latter half
north of Durban (now known as La Lucia of 1968 this had largely given way to bulk
and Umhlanga Rocks). The taxpayer con- sales. These bulk sales were all to com-
tinued the sugar cane business uninter- panies associated with the taxpayer, one a
rupted until the years 1965–70, when the subsidiary of the taxpayer and three others
taxpayer sold substantial areas of its land wherein the taxpayer’s parent company
at considerable profit but still retained held a 45% interest.
large portions of land. The Durban City Judgment: The original intention of the
Council pressurised the taxpayer to sell the taxpayer to hold an asset as an investment
land as Durban was expanding towards La is always an important factor but such
Lucia and Umhlanga Rocks. If the land intention is not necessarily decisive. There
was not sold voluntarily, it was likely to be was a change of intention considering the
expropriated. In 1963, consulting engineers manner or method of realisation which
and architects were appointed for the de- indicates that a scheme for profit-making
velopment. After the taxpayer became a was taking place and therefore the profits
wholly owned subsidiary of a parent com- derived from the sale of the asset were
pany (Huletts Corporation Ltd), the pro- subject to tax. The court also ruled that the
cess of selling the land picked up speed. By change of intention in regard to land in
April 1964, about 188 lots of the 2 350 Umhlanga Rocks and La Lucia also includ-
comprising the La Lucia township layout ed the areas sold in bulk as these trans-
had been sold. In 1965 the taxpayer formed actions also benefited (and were intended
a company, La Lucia Homes (Pty) Ltd, for to benefit) from the intensive business
the purpose of constructing houses in La activities primarily associated with the
Lucia. During 1968 a company, known preparation for, and promotion of the sale
as La Lucia Property Investment Ltd, of lots in township development, and all
was formed in which 45% of the equity the transactions formed part of the same
was held by Huletts Investments Ltd and scheme of profitable dealing in land.
continued
187
A Student’s Approach to Taxation in South Africa 3.7
CASE:
Berea West Estates (Pty) Ltd v Secretary for
Inland Revenue
38 SATC 43 (A)
Facts: Mr K donated an undivided half- sale of the property. The taxpayer’s acti-
share in a property to his 13 children. The vities related to the development of one
other half was bequeathed to them in his area, selling the plots in that area, and then
will. After his death the property was sold to use the money to develop a further area.
piecemeal to cover costs in the estate. As a Some 40 years after the death of Mr K all
result of the financial and administration the land had been sold and the proceeds
problems, it was agreed to create a com- distributed.
pany that would acquire the remainder of
the property. The company will then sell Judgment: The taxpayer (company) was
the property to the best advantage and any the method used to realise the benefi-
balance left paying creditors, would be ciaries’ interests in the property. The total-
distributed to the beneficiaries according ity of the facts showed the taxpayer was a
to Mr K’s will and the company wound realisation company and that they had not
up. The shares in the company were allo- deviated from this purpose. The proceeds
cated to the heirs and beneficiaries in pro- on the sales were therefore of a capital
portion to their entitlement. The property nature.
was subsequently proclaimed as a town-
Principle: The use of a realisation com-
ship provided that the company arranged
for the infrastructure (roads, water supplies, pany does not relax the rules related to a
and surveys) to be installed. Except for taxpayer ‘crossing the Rubicon’. The for-
periodic investment of temporarily surplus mation of a realisation company can assist
funds, the taxpayer did not enter into any a taxpayer to discharge the burden of proof
trading activities that were not related to the that an amount is capital in nature.
188
3.7 Chapter 3: Gross income
In 2011 the Supreme Court of Appeal expanded the principles related to realisation
companies in the Founders Hill (Pty) Ltd case. The court found that the principles can
only be applied in limited cases.
CASE:
CSARS v Founders Hill (Pty) Ltd
(509/10) [2011] ZASCA 66
Facts: AECI Ltd erected an explosives fac- had ‘crossed the Rubicon’ to change the
tory in 1896, which was extended in 1937. property into stock-in-trade.
Much of the land on which the factory was
built was required as a buffer between the Judgment: The court found that Founders
factory and urban areas. AECI owned land Hill was not merely AECI’s alter ego; it
in Modderfontein, Johannesburg, for many was established with the sole aim of
decades. However as technology improved, acquiring the property, developing it and
the extent of the buffer was reduced. then selling it at a profit. The property was
Economic and social developments in therefore stock-in-trade. The judge pointed
Johannesburg led to more land being out that the taxpayer’s intention in acquir-
required for housing and industry. AECI ing the property was different from that
took steps to subdivide and applied for it which AECI had had, namely surplus land
to be rezoned. AECI wanted to develop the held as a capital investment. Founders
land for the purpose of selling it as land for Hill’s profits were gains ‘made by an
residential, business and light industrial operation of business in carrying out a
purposes. scheme for profit-making’ and therefore
Acting on legal advice, in 1993 AECI taxable.
formed Founders Hill as a ‘realisation
company’ with the express purpose of Principle: Once a taxpayer acquires assets
realising the land which AECI sold to it to for the purpose of selling them, it is trad-
‘best advantage’. It commenced doing so ing in those assets. There are exceptional
and engaged the services of another AECI cases where a realisation company or trust
subsidiary, Heartland Properties, to fur- is required in order to facilitate the sale of
ther develop and market the land. Both the assets (for example, where different people
Commissioner and Founders Hill agreed owned them, but to sell to best advantage
that the taxpayer acquired a capital asset the interposition of another entity is
from AECI. The question was if the company required).
It has been held that the onus of establishing a change in intention from revenue to
capital is a heavy burden (Yates Investments v CIR 20 SATC 355). The mere fact that the
taxpayer decides to wait before selling a capital asset does not represent a change in
intention; something more is required (John Bell & Co (Pty) Ltd v Secretary for Inland
Revenue 38 SATC 87).
189
A Student’s Approach to Taxation in South Africa 3.7
CASE:
John Bell & Co (Pty) Ltd v Secretary for Inland Revenue
38 SATC 87
Facts: In 1916 the taxpayer purchased, as a The taxpayer had at no time offered the pro-
going concern, the businesses of fruit mer- perty for sale − it was approached to sell it.
chants, exporters, importers and distribut- Judgment: That a mere decision to sell the
ors. The businesses were established in asset (previously kept as a capital asset)
Johannesburg and Cape Town. In 1924, it rather than keep it does not per se make the
purchased the property in which it conducted profit from the subsequent sale income in
its business. In 1956, the taxpayer’s control- nature. Something more is required in or-
ling shares were passed to new share- der to metamorphose the character of the
holders. The purpose of the new sharehold- asset and so render its proceeds gross in-
ers was to secure the property as premises come. The court said it could not reason-
for a new business they proposed to estab- ably be found that the taxpayer had in 1957
lish, but one of the shareholders appreciated embarked upon a new trade or profit-
the possibility of being able to sell the prop- making business of dealing in land. That
erty at a price well in excess of its book the taxpayer’s decision in 1957 to wait for a
value at some point in the future. In 1957 period of time with the object of selling the
and 1959, both the old and the new busi- property at a high profit when the market
nesses were discontinued. The property, for property in the area had risen sufficiently,
which, at that point, was admittedly held by by itself did not affect its character as a
the taxpayer as a capital asset, was no longer capital asset.
required for its original purposes and from Principle: Once a decision is made to sell a
1957 the taxpayer intended to retain the capital asset, it does not matter that the
property for the purpose of selling it at a taxpayer waits for a period of time until the
good profit when the market for property in value of the asset rises before he sells it.
the area had risen sufficiently. To this end, However, this is subject to the provision
the property was leased to a third party for that he does not in the interim embark on a
a period of ten years and thereafter sold. scheme of profit-making.
Mixed intentions
A taxpayer may even acquire an asset with mixed motives. In COT v Levy 18 SATC
127 the court ruled that the main purpose must be found and given effect to.
190
3.7 Chapter 3: Gross income
CASE:
Commissioner of Taxes Southern Rhodesia v Levy
18 SATC 127
Facts: The taxpayer disposed of his shares the property should not affect the issue, if
in a property-holding company at a profit. the dominant purpose of the acquisition
He had two purposes for originally pur- was clearly established.
chasing the shares, namely to acquire the Principle: Where there are two possible
shares as an income-earning investment motives at the time an asset is purchased,
while at the same time not excluding the the dominant motive (if there is one) pre-
possibility of a profitable resale of the shares. vails especially where an individual tax-
Judgment: The fact that the taxpayer at the payer is involved. If there is no dominant
time of purchasing the shares had in mind motive the revenue motive normally pre-
possible alternative methods of dealing with vails.
Where neither purpose can be said to dominate, the court held in COT v Glass
24 SATC 499 that there had been a dual purpose. This case concerned a company, but
there is no reason why it should not apply to individuals as well. The taxpayer
bought a property, planned to let it while it was more profitable, and sell it when
circumstances changed making it even more profitable. The taxpayer will be taxed on
the proceeds of the sale since they acquired the property with a dual purpose of
profit-making. In Commissioner for Inland Revenue v Nussbaum the court looked at the
dual intention of a natural person.
CASE:
Commissioner for Inland Revenue v Nussbaum
58 SATC 283
Facts: The taxpayer (a retired school- He also said that he had never bought a
teacher) inherited certain shares quoted on share merely for profitable resale. After his
the Johannesburg Stock Exchange some retirement, he began changing his share
35 years previously and, on that founda- portfolio. Many of the shares sold had
tion, with active and careful investment, been held for much longer than five years
had built up a substantial portfolio of and therefore profits were ‘inevitable’ but
quoted shares over the ensuing years. He some of the shares had been held for five
said in evidence that his investment deci- years or less. He added that in the prevail-
sions were always based on a ‘pattern of ing inflationary economic climate it was
expectations’ that a share would pay ‘ade- ‘almost impossible to make losses’. For the
quate’ dividends in the short term or ‘more three years in question, he made over
than adequate’ dividends later on and when R1 million in profits and the Com-
he bought shares he did so with the inten- missioner sought to tax him on these pro-
tion to produce a sound and increasing fits as being a scheme of profit-making.
dividend income and to protect the capital The Commissioner accepted that prior
thus invested from erosion by inflation. to this three-year period, the holding of the
continued
191
A Student’s Approach to Taxation in South Africa 3.7
shares by the taxpayer was on capital had been wholly consistent with his invest-
account but contended that he thereafter ment motive not to sell certain holdings
changed his intention or at the very least entirely and that 82%of the shares held at
had a dual or secondary intention. the beginning of the three-year period
were still held at the end of that period,
Judgment: The frequency of the taxpayer’s this share retention factor detracted in no
share transactions, viewed in isolation, measure from the force of all those cir-
provided evidence of continuity required cumstances that point to a subsidiary pro-
for the carrying on of a business. The tax- fit-making purpose. Although an investor
payer’s sales were almost without excep- buys shares ‘for keeps’ and generally adds
tion profitable – the taxpayer’s annual to his portfolio by employing surplus exist-
profits substantially exceeded his annual ing income, the taxpayer’s share trans-
dividend income and the profits increased actions enlarged the value of his portfolio
every year, which, in turn, resulted in a and, at the same time, generated very con-
decrease in dividend yield. Given the close siderable, annually increasing, funds, over
watch that the taxpayer kept on his port- and above his existing income. The
folio and on every shareholding within it, employment of his capital in this way con-
and bearing in mind his meticulous atten- stituted an additional method of earning
tion to detail, it was most likely that he income. The court found that the taxpayer
was aware of the profit implications in had a secondary, profit-making purpose
selling when the dividend yield had fallen. resulting in the income being taxable.
In the present case not only was a profit Principle: The court extended the prin-
inherent in the sale of shares of which the ciple, previously only applied to com-
dividend yield had dropped, but the tax- panies, that if an individual has a domin-
payer manifestly worked for it; he ‘farmed’ ant purpose, which is capital in nature,
his portfolio assiduously and the number, and a secondary purpose, which is reve-
frequency and profitability of sales, espe- nue in nature, the secondary purpose
cially of short-term shares, bear clear could result in profits being treated as
enough testimony to that. Although the revenue in nature because the two pur-
taxpayer was primarily an investor and it poses are pursued simultaneously.
192
3.7 Chapter 3: Gross income
of probabilities. When considering the objective factors (refer to 3.7.2) some factors
might indicate that the person’s intentions are capital in nature and other objective
factors might indicate that their intentions are revenue in nature. The balance of proba-
bility means that when the taxpayer looks at all the objective facts and factors, the
majority of the factors indicate that their intention is capital or revenue in nature.
Continuity
The number of similar transactions undertaken by a taxpayer will be a factor to be
taken into account (CIR v Stott 3 SATC 253). A taxpayer who repeatedly buys and
sells homes, making a profit on each transaction, runs the risk of being taxed on the
proceeds of the sales because their actions indicate a business intention. This does not
mean that an isolated transaction will never be taxed. In Stephan v CIR 1919 WLD 1, it
was held that the profits from an isolated transaction of salvaging a wreck were of a
revenue nature because there was an intention to make a profit.
193
A Student’s Approach to Taxation in South Africa 3.7
CASE:
Commissioner for Inland Revenue v George Forest Timber
Company Limited
1 SATC 20
Facts: The taxpayer company carried on a stock-in-trade. The balance of stock was
business as timber merchants and sawyers. acquired by purchase from other sources.
It acquired about 600 morgen of natural
Judgment: The total amount received for
forest for the purposes of its business. The
the sale of the stock-in-trade was in the
nature of the trees in the forest was such
course of the company’s business and
that they did not renew themselves, and
formed part of gross income.
for practical purposes the value of the land
without the timber was negligible. In the Principle: The sale of fixed capital assets is
course of its business the company felled a of a capital nature and the sale of floating
quantity of timber each year, which was capital is of a revenue nature. However,
sawn up in the mill and sold as part of its income from wasting assets is taxable.
194
3.7 Chapter 3: Gross income
including Overseas Trust Corporation Limited v CIR 2 SATC 71, where Judge Innes
stated:
When an asset is realised as a mere change of investment, there is no difference in
character between the amount of the enhancement and the balance of the proceeds.
But where the profit is ‘a gain made by an operation of business in carrying out a
scheme for profit-making’, then it becomes revenue derived from capital productively
employed, and must be income.
In CIR v Pick ’n Pay Employee Share Purchase Trust, the court considered ‘an operation
of business in carrying out a scheme of profit-making’.
CASE:
Commissioner for Inland Revenue v Pick ’n Pay Employee
Share Purchase Trust
54 SATC 271
Facts: The taxpayer was the Pick ’n Pay stock in the hope that the price would rise
Employee Share Purchase Trust that had in order to make a profit.
been established to administer a share pur- Judgment: Whether the taxpayer was car-
chase scheme for the benefit of employees rying on a business by trading in shares
of the group. The Trust contended that it must be determined by applying ordinary
was created and maintained to enable common sense and business standards.
employees to purchase shares in Pick ’n The court ruled that there was no intention
Pay, their employer company. It did not to conduct a business in shares; it was to
acquire shares with the intention of resel- operate as a conduit for the acquisition of
ling them in a scheme of profit-making. It shares by employees entitled to them in
purchased shares in order to make them terms of the scheme’s rules. While a profit
available to employees entitled to them in motive is not essential for the carrying on
terms of its rules and in terms of its consti- of a business, it may well indicate whether
tution was compelled to repurchase shares a business is being conducted.
from employees who were required to
forfeit their holdings. Whether a profit or The constraints placed upon the trustees in
loss resulted, was completely immaterial. dealing with the shares in question were
Moreover, the Trust had no control over foreign to commercial business, therefore
the time at which it may have to re- on a common sense approach, the trust
purchase a share, particularly when such was not carrying on a business by trading
shares are forfeited. It also had no control in shares. It was not the intention (pur-
over the market price of the share at that pose) that the trust should carry on busi-
time. ness by trading in shares for profit.
Any profit or loss was, therefore, purely Principle: There must be a scheme of profit-
fortuitous. This was evidenced by the making before the proceeds become tax-
profits and losses made on the purchase of able. The fact that the Memorandum of the
forfeited and other shares. The Trust had company permits it to trade does not auto-
never ‘stocked up’, that is to say buying matically mean that the sale of an asset
when the price was low or had bought constitutes trading.
195
A Student’s Approach to Taxation in South Africa 3.7
Other factors
• The age of the taxpayer: The age of the taxpayer may be indicative of their inten-
tion (Goodrick v CIR 23 SATC 1).
• The nature of the asset: A long lease period, entered into by the taxpayer, may be
indicative of the taxpayer’s intention (CIR v Stott). The fact that land may be ‘excess’
to a taxpayer’s needs or the fact that the land may be useless for the taxpayer’s pur-
poses may also give an indication of their intention (ITC 379 9 SATC 339).
• The taxpayer’s activities: The taxpayer’s activities prior to the acquisition of an
asset may be indicative of their intention (ITC 595 14 SATC 252). However, their
activities after disposing of the asset in question may also provide further evidence
of their intention. For example: Did they frequently transact similar deals after the
deal in question (ITC 1436 50 SATC 122)? How were the proceeds of the realisation
dealt with? Were the proceeds reinvested in a capital asset?
• Accounting treatment of the transaction: The way the transaction is disclosed for
accounting purposes may also provide some evidence of intention (T v COT 40
SATC 179).
• The purpose of a legal person: The courts will usually consider documents, such
as minutes of directors’ meetings and financial statements, to determine the inten-
tion of a company. The company as independent taxpayer’s intention should be
established separately from that of its shareholders. The courts view the action of
the directors as an indication of the intention of the company because they are in
control of the company's assets. In some cases, the courts will however also look at
the intention of the shareholders to determine the company’s true intention
(Elandsheuwel Farming (Edms) Bpk v Sekretaris van Binnelandse Inkomste 39 SATC
163).
CASE:
Elandsheuwel Farming (Edms) Bpk v Sekretaris van
Binnelandse Inkomste
39 SATC 163
Facts: The control of the company (the tax- the land for township development. The
payer) was acquired by a group of indi- new shareholders devised a scheme to de-
vidual land speculators who also became rive a substantial profit from that potential.
directors of the taxpayer. The taxpayer owned The scheme consisted of buying the tax-
farm land for several years which it leased payer’s shares at a price based upon the
out for farming purposes. After the change land’s value as agricultural land, and sell-
in shareholding, it was decided by the new ing the land to the municipality for town-
shareholders that the land be sold to a mu- ship development. The new shareholders
nicipality at a profit. had the intention to use the property as
Judgment: The taxpayer did originally trading stock, therefore the income is taxa-
acquire the land as a capital asset and con- ble.
tinued to hold and use it as such while the Principle: If a transaction might be con-
original shareholders were in control of the sidered to be part of a scheme of tax evasion
company The new shareholders were either and avoidance, then the courts can pierce
land speculators or prospective land specu- the ‘corporate veil’ to determine the true
lators who appreciated the potentialities of intention of the taxpayer.
196
3.7 Chapter 3: Gross income
Example 3.13
Miss Angie Baker is a very dynamic estate agent. She makes her living by selling 20 or
more houses per month. Angie has also owned her own beach cottage for over 20 years.
She decided to sell the cottage after hearing from a client that he was looking for a similar
cottage in the same area where her beach cottage was located. The sales agreement was
concluded on 30 January 2022 and the contract price of R570 000 was paid into Angie’s
bank account on 15 March 2022.
You are required to determine whether the R570 000 accrued is revenue or capital in
nature.
Solution 3.13
It must be determined whether the receipt is of a capital or revenue nature. The following
factors will be taken into account when considering the subjective tests:
• intention of the taxpayer;
• change of intention; and
• mixed intentions.
Angie’s intention would have to be determined. It should be determined what Angie’s
intentions were when she purchased the cottage. Did she decide to sell the cottage be-
cause she did not need it any more or because she could make a large profit on the sale?
Did she embark on a profit-making scheme? From the above information it appears that
Angie had no intention of selling the cottage prior to meeting this specific client and it
does not appear that she embarked on a scheme of profit-making. There may be mixed
intentions at the time of sale. Angie may have recognised the possibility of a good selling
price and profit even though she had not intended to sell the cottage. A taxpayer is
allowed to try to obtain the best price without undertaking a scheme of profit-making. A
scheme of profit-making may have occurred if Angie had auctioned the property or made
major improvements and then advertised the cottage in several newspapers and on the
Internet.
As Angie stated that her intention was capital in nature, the objective factors must be con-
sidered.
When considering the objective factors to determine whether the sale of the beach cot-
tage is of a capital or revenue nature, the following factors are considered:
• the manner of acquisition or disposal;
• the period for which the asset is held;
• continuity;
• occupation of the taxpayer;
• no change in ownership of the asset;
• nature of the asset disposed of;
• reason for the receipt;
• legal nature of the transaction; and
• an operation of business in carrying out a scheme of profit-making.
continued
197
A Student’s Approach to Taxation in South Africa 3.7
Angie’s occupation is selling houses. This would lead one to believe that the sale of the
cottage is of a revenue nature. She held this cottage for 20 years and if this was her first
personal sale, this would indicate that the cottage was an investment and therefore of a
capital nature.
On the balance of probabilities, the receipt would probably be of a capital nature and the
amount of R570 000 will not be included in Angie’s gross income.
It must be noted that if SARS decides that the amount is of a revenue nature, the onus of
proof will lie with Angie to prove otherwise.
1. When I advise a client should I only discuss the factors that indicate
that the amount will be capital in nature?
2. If an amount received is capital in nature would you pay tax on that
amount?
REMEMBER
• The nature of the receipt is determined by objective considerations, in other words the
taxpayer’s state of mind is not taken into consideration. The facts surrounding the
receipts are taken into account (refer to 3.7.2).
• The nature of the receipt is determined by subjective considerations, in other words the
intention of the taxpayer is taken into account (refer to 3.7.1).
• If a receipt is capital in nature, it is subject to capital gains tax.
198
3.7 Chapter 3: Gross income
CASE:
WJ Fourie Beleggings v Commissioner for
South African Revenue Service
71 SATC 125
Facts: The taxpayer (an hotelier) entered Judgment: Unlike previous cases where the
into a long-term contract to provide ac- contract enabled the taxpayer to do busi-
commodation and meals for overseas ness, the taxpayer could operate the hotel
guests. Immediately after the 9/11 attacks without the contract. Therefore it was not
the guests left the hotel without any notice. part of the income producing structure of
This resulted in a breach of the accom- the business. The contract was part of the
modation agreement. The taxpayer lost a taxpayer’s business of providing accommo-
major source of income for the remainder dation i.e. its income-earning activities. The
of the contract period and the state of the compensation received was thus for the
rooms was so bad that considerable repairs loss of income and must be included in
had to be effected to return the rooms to a gross income.
condition in which they could be hired out
again. The taxpayer and the company Principle: The compensation received was
managed to settle the matter out of court to fill a hole in the taxpayer’s income and
with the taxpayer receiving R1 292 760 in not to compensate for the loss of a capital
full and final settlement of all claims it asset. The taxpayer’s capital asset was the
might have. The taxpayer claimed that the hotel and the contract was to provide
compensation so received was capital in rooms in the hotel and was thus the fruits
nature. of the tree.
CASE:
Stellenbosch Farmers’ Winery Ltd v Commissioner for
South African Revenue Service
74 SATC 235
Facts: The taxpayer is a producer and im- A termination agreement was concluded
porter of liquor products, as well as a whole- and the taxpayer received the sum of
saler of a range of spirits, wine and other R67 million as compensation for the early
liquor products, mainly to retailers. It entered termination of the exclusive distribution
into a distribution agreement with an entity agreement.
in the United Kingdom. In terms of the agree- Judgment: Although the value of the asset
ment the taxpayer acquired the exclusive for accounting purposes was determined by
right to distribute Bells’ whisky throughout considering the future inflow from the con-
South Africa for a period of 10 years. Here- tract, accounting treatment is not the deter-
after the agreement can be terminated with mining factor. The termination agreement
12 months’ notice (thus effectively a mini- referred to payment of full compensation for
mum period of 11 years). the closure of the taxpayer’s business relating
to the exercising of its exclusive distribution
As a result of corporate takeovers in Europe, rights (the asset). As the taxpayer is not in
the UK entity sought to terminate the distri- the business of buying and selling rights
bution agreement three years prematurely. to purchase and sell liquor products, the
continued
199
A Student’s Approach to Taxation in South Africa 3.7
contract is not part of a scheme of profit- the exclusive distribution right) or whether
making, therefore the receipt is capital in it was paid as compensation for a loss of
nature profits in the sales of the products (in this
Principle: When compensation is paid, it case the sale of the Bells’). If the com-
is important to determine if it is paid pensation is to fill a hole in the taxpayer’s
for the loss of a capital asset (in this case assets, it is of a capital nature.
200
3.7 Chapter 3: Gross income
CASE:
Commissioner for Inland Revenue v NEL
59 SATC 349
Facts: The taxpayer, over a period of three fact that he did not require the additional
years, purchased 250 Kruger Rands with funds at that time.
surplus cash that he had available from Judgment: The taxpayer was unwilling to
time to time, at an average price of R280 sell his Kruger Rands but was obliged to
per coin. His intention, when he purchased do so because he had no other available
the coins, was to hold them as a long-term means and a motor car was urgently and
investment as a hedge against inflation. He unexpectedly required by his wife and
did not plan to sell the Kruger Rands and therefore the evidence showed clearly that
thought that they would be inherited by the taxpayer’s purpose in selling the Kruger
his children. He did not purchase any fur- Rands was not to make a profit but to realise
ther Kruger Rands thereafter. The Kruger a capital asset in order to acquire another
Rands steadily escalated in value over the capital asset. In the transaction under review
years and although he had many oppor- the Kruger Rands were purchased for
tunities to sell them, he never did so and it ‘‘keeps’’ and the disposal of some of them
never entered his mind to do so. However, was due to ‘some unusual, unexpected, or
11 years later he urgently needed to buy a special circumstances’ which supervened.
car for his wife and he was advised by his It is not correct to say that an investor
auditor to exchange 80 of his Kruger Rands could only invest in Kruger Rands with a
for a car since he had no cash available to view to reselling them at a profit and in
do so. The 80 Kruger Rands were then sold several cases the taxpayers had sold Kruger
for cash, the taxpayer making a profit of Rands that had been bought originally as an
R67 000. The Commissioner, in assessing investment in order to pay for a pressing
the profit to tax, contended that the nature and unexpected debt which had arisen
of Kruger Rands was unique in the sense and in each case the court had held that
that they are not income-producing assets the proceeds of the sale were of a capital
other than that they can be worked into nature. Thus, the disposal of the Kruger
jewellery. They do not have any economic Rands constituted the realisation of a capital
utility save for being sold when cash is asset.
required. He also submitted that when a
taxpayer invests in Kruger Rands, he must Principle: For investments in Kruger
inevitably envisage a sale of this asset in Rands and the selling thereof, the same
due course and his failure to realise the principles and guidelines must be applied
investment over many years was due to the as with other assets when they are sold.
• Goodwill: In ITC 1542 54 SATC 417, the proceeds of the sale were considered to be
of goodwill and the court held that the sale of goodwill and payment for ‘know-
how’ are two different things. The former gives rise to a receipt or accrual of a capi-
tal nature and the latter, due to the passing of knowledge, skill or ingenuity
requires effort on the part of the seller, as it is of a revenue nature. It is important
that the contract provides for the sale of goodwill and not for the share of future
profits. In Deary v Deputy Commissioner of Inland Revenue 32 SATC 92, the contract
provided for a payment of goodwill to be partly settled as an annuity out of future
profits. The amounts so received were held to be of a revenue nature.
201
A Student’s Approach to Taxation in South Africa 3.7
Example 3.14
Jim Jacobs is a resident of the Republic who earns his income as a consulting geologist.
The following revenue transactions relate to his current year of assessment:
• He earned consultation fees of R800 000 for surveys carried out in the Republic during
the year of assessment.
• He was instructed by the chairman of a mining company in Johannesburg to carry out
a survey in Botswana at the site of a new coal mine. He carried out all the work in Bo-
tswana, returning to Johannesburg to type his final report. He was paid a fee of
R80 000.
• While he was in Botswana, he was approached by a farmer to carry out a survey of a new
borehole for water. In lieu of a fee, Jim, who also restores antique furniture as a part -
time occupation, accepted an antique yellow-wood suite which the farmer trans-
ported to Jim’s home in Johannesburg. Jim had the suite valued by a dealer in
Johannesburg, who set its value at R320 000.
• Jim also purchased debentures issued by a Namibian company. He telephoned his
bank manager in Johannesburg, instructing him to make the funds available to the
company at a bank in Windhoek in Namibia. He purchased 100 debentures of R100
each, paying interest quarterly at 18%. He received interest on 31 October and
31 January of the current year of assessment (R900 each quarter).
• Jim operates from a small factory in the garden of his home just outside Johannesburg.
The following sales of antique furniture were made by Jim during the year:
Sales to clients in the Republic R500 000
Sales to clients in Zimbabwe
(At the end of the current year of assessment, he had not yet
received this amount) R250 000
He received a deposit from a client in Pretoria for restoration work
to be done in May of the next year of assessment R50 000
He sold certain furniture that he had acquired many years ago and
used in his home as part of his personal assets R300 000
• He sold a house in Johannesburg, which he had originally acquired
with the intention of letting R1 980 000
Assume that no double-tax agreements are in force with Botswana or Namibia.
You are required to calculate Jim’s gross income.
202
3.7 Chapter 3: Gross income
Solution 3.14
R
Consultation fees earned in the Republic 800 000
Consultation fees earned in Botswana (Note 1) 80 000
Consultation fees earned from the Botswana farmer (Note 1) 320 000
Interest on the debentures in the Namibian company (Note 2) 1 800
Sales of antique furniture (Note 3)
• Clients in the Republic 500 000
• Clients in Zimbabwe 250 000
• Deposit from a client in Pretoria 50 000
• Furniture forming part of his personal assets nil
Sale of a house (Note 4) nil
Gross income 2 001 800
Notes
1. The amount of the fee to be included in Jim’s gross income will be determined by the
cash payment received, as well as the market value (R320 000) of the asset received in
lieu of the fee. This is as a result of the definition of gross income that includes the
total amount ‘in cash or otherwise’. Residents are taxed on their worldwide income.
2. The interest on the debentures issued by the Namibian company will be included in
Jim’s gross income, as he is taxed on his worldwide income, both active and passive.
In terms of section 24J, which provides detailed rules relating to the accrual (and
incurring) of interest, the calculation of the actual amount accruing to Jim could differ
from the interest received. This calculation has been ignored for the purposes of this
example.
3. Although the clients in Zimbabwe had not yet paid the amounts owing, they had
accrued during the year of assessment and are therefore included in his gross income.
In the case of the deposit received from his client in Pretoria, this amount had clearly
not yet accrued because the work would only start in May of the next year of assess-
ment. However, the amount was actually received during the year of assessment and
would be included in his gross income, which includes amounts received or accrued.
The sale of his personal furniture will give rise to a receipt of a capital nature because Jim
did not purchase the asset with the intention of selling it. His intention may have
changed, however, in which case his intention at the time of sale would determine the
capital or revenue nature of the proceeds. If, for example, he only sold this furniture
because he was replacing it with furniture that was more suitable or that he liked
more, the proceeds would be of a capital nature. The fact that he owned the furniture
for many years would support the contention that this was a receipt of a capital
nature, but the fact that he carries on the trade of restoring and selling antique furni-
ture, would go against this contention. On the balance of probabilities, the receipt
would probably be of a capital nature.
4. The sale of property purchased with the intention of holding it as a revenue pro-
ducing asset would give rise to a receipt of a capital nature, unless Jim had changed
his intention. If the asset was held for many years, it would support the capital nature of
the receipt and the fact that he does not carry on business as a property dealer would
also support it. However, if he had carried out several such transactions in the past
(the continuity test), SARS may consider the receipt to be of a revenue nature. The
continued
203
A Student’s Approach to Taxation in South Africa 3.7–3.9
mere fact that the taxpayer has decided to realise an asset and to realise it at the best
possible price would not be enough to categorise the proceeds as revenue. The way in
which the taxpayer goes about selling their property may also have a bearing on the
matter. Repeated attempts to sell, together with an extensive advertising campaign,
may support an intention of selling at a profit, whereas selling as a result of a fortuit-
ous offer would not. The sale of the house may have capital gains tax implications.
3.8 Summary
The first building block of taxation is discussed in this chapter and this forms the
basis of the tax calculation. Before the different components of the definition are
applied, the residency of a person must be determined. A natural person can be a
resident of the Republic either by being ordinarily resident or by means of the physi-
cal presence test.
All the components of the gross income definition must be present before an amount
forms part of the gross income. As seen in this chapter, many of these concepts are
not defined in the Act and the principles and guidelines from court cases are used to
understand the components of the definition of gross income and to apply them to
the amount in question.
The gross income definition also lists items that are specifically included in the tax-
payer’s gross income, even though they would not have formed part of gross income
due to their capital nature.
In the questions to follow, the different components of the gross income definition
will be applied to real-life situations to determine whether amounts comply with the
requirements of the gross income definition and form part of the gross income of the
taxpayer.
Question 3.1
Felix sells computer equipment and is objecting to an assessment received from SARS.
During the current year of assessment (28 February 2023), Felix donated second-hand
office equipment to a local radio station. In return, the radio station agreed to broadcast ‘spe-
cials’ that Felix had on certain computer products for the week.
SARS taxed the value of the office equipment donated to the radio station and stated that
the donation fell within the definition of gross income. Felix believes otherwise.
204
3.9 Chapter 3: Gross income
Answer 3.1
Discussion of the gross income requirements
• An amount: A value must be placed on the free airtime. The value would be the
normal advertising fees charged by the radio station to its clients at the time of the
donation. Barter transactions would give rise to gross income as long as the ‘asset’
received (in this case the free airtime) is capable of being valued in monetary terms.
• In cash or otherwise: Felix did not receive cash since it was a donation to the radio
station but he did receive free airtime, which is an intangible consideration received. If
Felix did not receive something in return, this requirement would not be met, but it would
have to be proved that nothing was received in return, not even increased goodwill.
• Received by or accrued to: Felix became entitled to the airtime when the agreement
was made. The agreement need not have been in writing. Felix must include the
amount received at time of receipt or accrual, whichever occurs first. This would
depend on how the agreement was worded between the two represented parties. If
the agreement stated that from a specific date the radio station would start broadcasting
the specials, then that specific date would be the date of accrual. If the agreement did
not give a specific time, then the date that the broadcast actually occurred would be the
date of receipt.
• Year or period of assessment: Felix will be taxed in the year that the amount was
received or accrued to him, whichever occurs first. It must be noted that if the accrual
and receipt fall into different years of assessment, then it will only be included in one of
the years of assessment and not both. In this case it will be included in the current year
of assessment.
• Receipts of a capital or revenue nature: Felix’s intention will have to be considered.
Why did he donate the second-hand office equipment? Did he intend to enter into an
agreement for ‘free airtime’, or was it just a gesture of goodwill? Did he change his
intentions when the offer of free airtime was given to him? Felix most probably knew
how the broadcasting business worked. If you donate products, prizes or assets which
the radio station can use, normally some type of ‘free advertising’ is then made avail-
able to you. This free advertising would be part of a ‘scheme of profit-making’, since the
advertising would most definitely help profits increase in general.
• Note that Felix most probably purchased the office equipment to be used in the busi-
ness. The intention of the business appears to have been met as long as the equipment
was used for a period of time. If the equipment was donated because it was no longer of
use to the business, then the original intention would not have changed.
• Felix will find it very difficult to convince SARS that the equipment was not of a rev-
enue nature due to the intentions discussed above. Also, the time that the equipment
was held, the frequency of disposing of this type of equipment and how the equipment
was financed will also have to be considered.
• All the elements of the gross income definition appear to be met and therefore the value
of the free airtime received in lieu of the donation of the second-hand equipment will be
included in Felix’s gross income.
205
4 Special inclusions
General Specific
definition inclusions
Page
4.1 Introduction............................................................................................................ 208
4.2 Special inclusions (definition of ‘gross income’ (secion 1)) ............................. 208
4.2.1 Annuities (paragraph (a))........................................................................ 208
4.2.2 Alimony, allowances or maintenance (paragraph (b)) ........................ 210
4.2.3 Amounts received in respect of services rendered
(paragraph (c)) .......................................................................................... 210
4.2.4 Restraint of trade payment (paragraphs (cA) and (cB)) ...................... 212
4.2.5 Amounts received from termination of employment
(paragraph (d)).......................................................................................... 212
4.2.6 Retirement fund lump sum benefits or retirement fund
lump sum withdrawal benefits (paragraphs (e) and (eA)) ................. 212
4.2.7 Commutation of amounts due (paragraph (f)) .................................... 213
4.2.8 Lease premiums (paragraph (g)) ............................................................ 213
4.2.9 ‘Know-how’ payments (paragraph (gA)) ............................................. 213
4.2.10 Leasehold improvements (paragraph (h)) ............................................ 214
4.2.11 Fringe benefits (paragraph (i)) ............................................................... 215
4.2.12 Proceeds from the disposal of certain assets (paragraph (jA)) .......... 215
4.2.13 Dividends (paragraph (k)) ...................................................................... 216
4.2.14 Other amounts included in gross income ............................................ 216
4.3 Summary................................................................................................................. 216
4.4 Examination preparation ...................................................................................... 217
207
A Student’s Approach to Taxation in South Africa 4.1–4.2
4.1 Introduction
The definition of gross income was discussed in the previous chapter. However, the
definition of gross income also contains a list of income that is specifically included in
gross income. This chapter discusses the special inclusions listed as part of the gross
income definition.
Legislation:
Section 1: Interpretation
‘Gross income’, in relation to any year or period of assessment means –
(i) 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
(ii) in the case of any person other than a resident, the total amount, in cash or other-
wise, received by or accrued to or in favour of such person from a source within the
Republic, or
during such year or period of assessment, excluding receipts or accruals of a capital
nature, but including, without in any way limiting the scope of this definition, such
amounts (whether of a capital nature or not) so received or accrued as are described
hereunder, namely …)
Paragraphs (a) to (n) of the definition of gross income include certain types of
income that would not necessarily be included if the general principles applying to
gross income were to be applied. The reason for the non-inclusion of these types of
income may be that they possess the characteristics of being capital in nature. Income
listed under paragraphs (a) to (n) should therefore be included in gross income, even if
they are of a capital nature.
REMEMBER
• The special inclusions listed in the definition of gross income are included in gross
income, even though they are of a capital nature.
• If the taxpayer is a non-resident, the special inclusion amounts should be included in
the gross income of that taxpayer only if they are from a South African source.
208
4.2 Chapter 4: Special inclusions
CASE:
Kommissaris van Binnelandse Inkomste en ’n Ander v Hogan
55 SATC 329
Facts: The taxpayer had been seriously obligation to compensate the taxpayer for
injured in a motor vehicle collision and his future loss of earnings was extinguish-
after settling with the Motor Vehicle Assu- ed and replaced by a contractual under-
rance Fund, had been compensated for loss taking to pay the monthly instalments
of future earnings, to be paid in monthly while the taxpayer was alive, without cre-
instalments. The taxpayer contended that ating a liquid or determinable debt capable
the payments were capital in nature and of being reduced by such instalments. In
not an annuity. the light of the above, read with the essen-
tial characteristics of an annuity, the
Judgment: Paragraph (a) of the definition monthly instalments could be regarded as
of ‘gross income’ includes ‘any amount annuities and were not capital in nature.
received or accrued by way of annuity’. It
does not matter whether the annuity is of a Principle: If a person gives up a right to be
capital nature or not. That although ‘annuity’ paid a capital amount that would not
is not defined in the Act, it appeared that an under normal circumstances be subject to
annuity had two essential characteristics ordinary tax in return for the payment of
(which are, however, in no way exhaust- an annuity, the capital status of the amount
ive); it was an annual (or periodical) pay- payable will be lost and the annuity will
ment and the beneficiary had the right become revenue in nature in terms of para-
to receive more than one such payment. It graph (a) of the definition of ‘gross
was significant that the payments expired income’.
on the death of the taxpayer and that the
209
A Student’s Approach to Taxation in South Africa 4.2
Note that the payment of a capital debt in instalments, however, is not an annuity. It
is often difficult to distinguish between the two but it has been said that periodic
payments in liquidation of a debt, even if the instalments may vary depending on the
circumstances, do not constitute an annuity. For example, an incoming partner in a
partnership may purchase goodwill from a retiring partner, the instalments being
dependent on the profits of the partnership. Provided the amount payable for good-
will is a fixed amount, these payments do not constitute an annuity. If the considera-
tion payable for the goodwill is expressed as an annuity for a certain period, or for
life, it is included in the gross income of the recipient.
Example 4.1
Ben Majoli (a resident of South Africa) sold his share in the goodwill of a partnership on
31 August. In return, he will receive a monthly amount for the next ten years, amounting
to the greater of R10 000 or 1% of the monthly turnover of the business. His actual income
amounted to R10 000 a month during the current year of assessment.
You are required to determine which amounts will be included in Ben’s gross income for
the current year of assessment.
Solution 4.1
The monthly amount of R10 000 (R60 000 for the current year of assessment) is included
in Ben’s gross income in terms of paragraph (a) of the definition. An amount received for
the sale of goodwill (a capital asset) by a partner in a partnership would normally be of a
capital nature. Due to the payment being expressed as a monthly amount over a period of
ten years, each monthly payment will constitute an annuity (being a fixed annual
payment divided into instalments, repetitive and chargeable against the purchaser of the
goodwill) and it will be included in Arthur’s gross income in terms of paragraph (a) of the
definition.
210
4.2 Chapter 4: Special inclusions
CASE:
Stevens v Commissioner for South African Revenue Service
32 SATC 54
Facts: The taxpayer, as part of his com- Judgment: The recipients of the ex gratia
pany’s share incentive scheme had payments were employees or ex-employees
acquired an option to buy its shares but who had enjoyed a benefit directly linked
before the option could be exercised, the to their employment, and who had lost
company announced that it would be vol- that benefit but were deserving in the par-
untarily liquidated rendering such options ticular circumstances of a substitute ex gratia
valueless. The company resolved to pay payment. Accordingly, the receipt fell with-
the taxpayer, as option holder, 75 cents per in the terms of paragraph (c) of the defini-
share ex gratia. The purpose of the incentive tion of ‘gross income’.
scheme had been to promote the retention of Principle: The ex gratia (voluntary)
employees of ability and expertise who payment was received as a direct result of
were primarily responsible for the profit- the incentive scheme entered into (para-
ability and continued growth of the com- graph (c) includes within its ambit voluntary
pany. The taxpayer contended that such ex payments). The share incentive scheme was
gratia payment was not aimed at compen- only offered to employees. It therefore
sating the option holders as employees or follows that the ex gratia payment was
ex-employees, but because their option received ‘by virtue of services rendered or
price was below the market value when the by virtue of any employment or the hold-
special dividend was declared and it was ing of any office’ as required by para-
they who were deprived of a contemplated graph (c) of the definition of ‘gross
profit. income’.
The words ‘in respect of’ used in these paragraphs require a causal connection be-
tween the amount received and the employment or office (De Villiers v CIR
4 SATC 86). Payments by an employer such as charitable donations, which are not
connected with services, do not necessarily fall within the ambit of these paragraphs.
Payments made to one person in respect of services rendered by another are also, in
terms of paragraph (c), included in the taxable income of the person rendering the
services. Amounts deducted from an employee’s salary and paid over to the third
person are therefore included in the employee’s gross income. In other words, the
employee’s gross salary is included in their gross income.
In C: SARS v Kotze 64 SATC 447, the respondent received a police reward for pro-
viding information regarding the illegal purchase of diamonds. The issue was wheth-
er the amount had been received for services rendered. The court held that he was
rewarded for having provided information that led to the arrest and conviction of
persons. If he had not provided the information, he would not have received the
reward. The court held the amount was received in respect of services rendered.
Example 4.2
Ms Jane Nell renders a service to Crax CC and in recognition of the services she rendered
to the CC, her brother receives R5 000 from Crax CC.
You are required to determine whether Jane will be taxed on this amount.
211
A Student’s Approach to Taxation in South Africa 4.2
Solution 4.2
In terms of paragraph (c) (ii) Jane will be taxed on the R5 000 as she was the person who
rendered the services.
Example 4.3
Arthur McArthur is a resident of South Africa. He only worked for one private sector
employer throughout his entire working life of 40 years. The following information
relates to his receipts and accruals for the current year of assessment:
• Arthur received a lump sum of R800 000 from his employer’s pension fund when he
retired on 30 June. This amount relates to all his years of service. The business’s
accountant has ascertained from SARS that, in terms of the Second Schedule of the Act,
the tax-free portion of this lump sum amounts to R300 000.
• When he retired, his employer paid him a gratuity, amounting to R100 000, in grati-
tude for his years of loyal service.
• At his retirement party, Arthur’s fellow workers presented him with a Persian carpet,
which cost R6 000.
You are required to determine which amounts will be included in Arthur’s gross income
for the current year of assessment.
212
4.2 Chapter 4: Special inclusions
Solution 4.3
• The taxable portion of a pension fund lump sum amounting to R500 000 (R800 000 –
R300 000) would be included in Arthur’s gross income in terms of paragraph (e) of the
definition.
• The gratuity, being a voluntary award received in respect of the termination of his
employment, is included in Arthur’s gross income in terms of paragraph (d) of the def-
inition.
• The value of the Persian carpet presented to Arthur by his fellow workers on his
retirement will not be included in his gross income. It was not received in respect of
services rendered from the employer but from fellow employees and represents a gra-
tuitous capital receipt.
213
A Student’s Approach to Taxation in South Africa 4.2
in gross income. These know-how payments may, like lease premiums and improve-
ments, be in the nature of capital income, but are included in gross income in full in
terms of this paragraph.
Examples of such payments may include the sale of information, technical advisory
fees and the sale of operating manuals.
214
4.2 Chapter 4: Special inclusions
– if the lessee spends less than the amount stipulated in the agreement, the stipu-
lated amount must still be included in the lessor’s gross income since it is sub-
mitted that the lessor will probably sue the lessee for non-performance under
the agreement.
• If the value of the improvements or the amount to be expended on the improve-
ments is not stipulated in the agreement but the obligation is on the lessee to effect
specific improvements (even if that requires the lessee to incur costs which exceed
the stipulated minimum amount):
– the stipulated minimum amount is not considered to be an amount which has
been stipulated in an agreement and the fair and reasonable value of the spe-
cific improvements to be effected under the agreement must be included in the
lessor’s gross income. The fair and reasonable value is the actual cost incurred.
Leasehold improvements must be included in the lessor’s gross income on the date of
accrual. The right to have improvements effected generally accrues when the lessor
acquires the right to have the improvements effected.
• If the amount of the improvement is stipulated in the lease agreement, the
amount is generally included in the lessor’s gross income in the year of assessment
when the lease agreement is signed by all the parties.
• If the amount of the improvements is not stipulated in the lease agreement, the
date of completion of the improvement is generally regarded as the date of accrual
because the amount can only be determined at this point in time.
When a lessor has to include the value of leasehold improvements in his gross in-
come by virtue of paragraph (h) of the gross income definition, he is taxed on an
amount of which he won't get the benefit until the end of the lease agreement. This is
so because, for the duration of the lease agreement, the lessee and not the lessor has
the right to use the leased assets. In order to provide relief for lessors, section 11(h) of
the Act makes provision for the deduction of an allowance in respect of leasehold
improvements (refer to chapter 6). Such allowance must be an amount which seems
fair and reasonable to the Commissioner, taking into account circumstances such as
the duration of the lease agreement and the nature of the building or improvements
erected on the property. This allowance ensures that a person is not taxed on the value
of leasehold improvements at the date of the agreement which, by the date that the
lease agreement terminates, may have little or no value.
215
A Student’s Approach to Taxation in South Africa 4.2–4.3
Example 4.4
BMY Ltd manufactures vehicles. During the previous year of assessment, one of the manu-
factured vehicles (with a cost of R150 000) was used as a demonstration model. BMY Ltd
disposed of the vehicle in the current year of assessment for an amount of R220 000.
You are required to determine the effect of the above on the gross income of BMY Ltd for
the current year of assessment.
Solution 4.4
In terms of paragraph (jA) of the gross income definition, the vehicle will remain part of
the trading stock of BMY Ltd even though it was used as a capital asset. The full R220 000
will be included in gross income in the current year of assessment (similar to when trad-
ing stock was sold).
REMEMBER
• The special inclusions listed in the definition of gross income are included in gross
income, even though they are of a capital nature.
4.3 Summary
The special inclusions listed in the gross income definition are discussed in this
chapter. Both amount included in gross income in terms of the definition and the
specific inclusions forms the basis of the tax calculation.
Special inclusions are listed in the gross income definition and these are specifically
included in the taxpayer’s gross income, even though they would not have formed
part of gross income due to their capital nature.
216
4.4 Chapter 4: Special inclusions
Question 4.1
Ignore VAT for purposes of this question.
Bantami (Pty) Ltd, a South African resident, has the following income for the 2022 year of
assessment:
R
Gross foreign dividends (foreign tax paid R600) 6 000
Gross foreign interest (foreign tax paid R3 800) 8 000
Local interest 9 000
Other foreign income (foreign tax paid R6 000) 20 000
Bantami (Pty) Ltd entered into a lease agreement with Promac Ltd (a non-connected third
party that is also a South African resident). The following are extracts from the agreement:
Commencement of the lease: 1 March 2022
Lease term 60 months
Asset leased to Promac Office building
Lease premium payable on 1 March 2022 R60 000
Monthly rental payment from 1 March 2022 R40 000
Value of improvements to be incurred by the lessee (Promac Ltd): R190 000
The improvements were completed on 30 June 2022 at a cost of R170 000. The lease premi-
um was paid on 1 March 2022. The building was used from 1 July 2022 by Promac Ltd.
No exemptions have been taken into account and the company paid non-refundable for-
eign tax on all the foreign income that it received.
Answer 4.1
Calculating Bantami (Pty) Ltd’s tax liability for the current year of assessment
R
Foreign dividend 6 000
Foreign interest 8 000
Local interest 9 000
Other foreign income 20 000
217
The taxation of
5 non-residents
Adjustments
Non-
for tax
residents
avoidance
Page
5.1 Introduction............................................................................................................ 220
5.2 Non-residents (section 1) ...................................................................................... 220
5.3 From a source in the Republic ............................................................................. 220
5.3.1 Double-tax agreements ........................................................................... 221
5.3.2 Statutory source rules (section 9) ........................................................... 222
5.3.3 Common-law source principles ............................................................. 229
5.3.3.1 Services rendered .................................................................... 230
5.3.3.2 Sale of trading stock ................................................................ 230
5.3.3.3 Rental ........................................................................................ 230
5.4 Withholding taxes .................................................................................................. 232
5.4.1 Withholding tax on interest (sections 50A to 50H).............................. 232
5.4.2 Withholding tax on royalties (sections 49A to 49G) ............................ 233
5.4.3 Disposal of immovable property by a non-resident person
(section 35A) ............................................................................................. 233
5.4.4 Taxation of foreign entertainers and sports persons
(sections 47A to 47K) ............................................................................... 235
5.5 Summary................................................................................................................. 236
5.6 Examination preparation ...................................................................................... 237
219
A Student’s Approach to Taxation in South Africa 5.1–5.3
5.1 Introduction
Because of globalisation, the world has become a small place and people trade and
invest their money all over the world. Just as South Africans invest offshore, people
from other countries invest in South Africa. In this chapter, the income that is earned
by non-residents in the Republic is discussed. We also look at whether the amount
received by or accrued to the non-resident, is taxable in the Republic.
Where it must be determined whether a receipt or accrual of a non-resident is taxable
or not, it is important to determine if it is from a source within the Republic. The
definition of gross income determines that a non-resident has to include in gross
income receipts and accruals from a source within the Republic. After an amount is
included in gross income, it must then be determined whether or not any exemptions
are applicable.
REMEMBER
220
5.3 Chapter 5: The taxation of non-residents
REMEMBER
• Even though income is from a source in the Republic, it might be specifically exempted
in terms of section 10 of the Act.
• The Act defines the Republic as the Republic of South Africa and when used in a geo-
graphical sense, it includes the territorial seas thereof as well as any area outside the
territorial seas which has been or may be designated, under international law and the
laws of South Africa, as areas within which South Africa may exercise sovereign rights
or jurisdiction in regard to the exploration or exploitation of natural resources.
To determine whether the source of the income is in the Republic or not it must first
be determined if a double-tax agreement exists between the government of the Re-
public and of the other country. If there is no double-tax agreement, or if the double-
tax agreement does not determine the source of the income, section 9 of the Income
Tax Act needs to be considered. If the source is not addressed in section 9, case-law
principles must be applied to determine the source of the income. The following
diagram illustrates the process to follow in order to determine the source of income:
221
A Student’s Approach to Taxation in South Africa 5.3
REMEMBER
222
5.3 Chapter 5: The taxation of non-residents
223
A Student’s Approach to Taxation in South Africa 5.3
224
5.3 Chapter 5: The taxation of non-residents
225
A Student’s Approach to Taxation in South Africa 5.3
226
5.3 Chapter 5: The taxation of non-residents
REMEMBER
• A permanent establishment is defined (in terms of the model tax treaty of the
Organisation for Economic Cooperation and Development (OECD)) as a fixed place of
business, for example a branch of a business or a factory.
• You only have to consider the source rules in section 9 if the double-tax agreement does
not determine the source of the income.
• Where the double-tax agreement does not determine the source of the income and the
source of the income is consequently determined in terms of the provisions of section 9,
you should not move to the third step (the common-law source principles in 5.3.3).
Section 9 overrides (that is to say is stronger than) the case-law source principles.
227
A Student’s Approach to Taxation in South Africa 5.3
Example 5.1
Zach Zachariah is ordinarily resident outside the Republic and does not carry on a trade
in the Republic. Zach received R50 000 royalties from a South African company for the
use of his patent that he developed in Holland.
You are required to calculate Zach’s tax liability in the Republic.
Solution 5.1
R
Taxable income (R50 000 – R50 000 (exempt)) nil
Income tax nil
The South African company must withhold the following tax:
Tax withheld on royalties (R50 000 × 15%) 7 500
If Zack was present in the Republic during the year of assessment, will
the South African company still be required to withhold withholding tax
on the royalty?
Example 5.2
Andries te Groen, a non-resident, earns a pension of R3 500 per month. Andries retired on
31 December 2022 and received a pension from 1 January 2023. He was employed by a
South African employer for 25 years. During this time, he was employed outside the
Republic from time to time for a total of 13 years.
You are required to calculate the taxable portion of Andries’ pension for the 2023 year of
assessment.
Solution 5.2
R
Total pension received for the current year of assessment
R3 500 × 12 months 42 000
Portion deemed to be from a source in the Republic (Note):
12
× R42 000 21 840
25
Note: Of the 25 years of service, only 12 years (25 years less 13 years) relate to years of ser-
vices rendered in the Republic. R21 840 is therefore from a source within the Republic and is
included in Andries’ South African taxable income for the 2023 year of assessment.
228
5.3 Chapter 5: The taxation of non-residents
CASE:
Commissioner for Inland Revenue v Lever Brothers &
Unilever Ltd
14 SATC 1 (1946 AD 441)
Facts: The court had to consider where the quarter whence they come, but the origi-
source and location of interest was for nating cause of their being received as
interest which was payable in respect of income and that this originating cause is
indebtedness assumed by a company the work which the taxpayer does to earn
which was resident in the Union. The court them, the quid pro quo which he gives in
considered whether the source of such return for which he receives them.
interest was the indebtedness or the
The work which he does may be a business
business operations of creditor company.
which he carries on, or an enterprise which
Judgment: ’The word “source” has several he undertakes, or an activity in which he
possible meanings. In this section it is used engages and it may take the form of per-
figuratively, and when so used in relation sonal exertion, mental or physical, or it
to the receipt of money one possible mean- may take the form of employment of cap-
ing is the originating cause of the receipt of ital either by using it to earn income or by
the money, another possible meaning is letting its use to someone else. Often the
the quarter from which it is received. A work is some combination of these’
series of decisions of this Court and of the (pp. 8–9).
Judicial Committee of the Privy Council
upon our Income Tax Acts and upon simi- Principle: To determine the source of
lar Acts elsewhere have dealt with the income, two questions must be answered:
meaning of the word “source” and the
1. What is the originating cause of the
inference, which, I think, should be drawn
income?
from those decisions is that the source of
receipts, received as income, is not the 2. Where is the originating cause located?
While the principles established by the Lever Brothers case will in the majority of
instances provide the correct answer to determine what the source of income is, the
most important other tests laid down by case law include:
• ascertaining source is a practical hard matter of fact;
• the place where the capital is employed determines the source;
• the activities test: The place where the business is carried on (the ‘activities test’)
was the determining factor in locating the source of income;
• the place where the contract is concluded determines the source of the income
arising from the contract, but only where the making of the contract is the essence
of the business carried on.
229
A Student’s Approach to Taxation in South Africa 5.3
The dominant source, the source of incidental income and multiple sources
The question of dominant source arises most often in relation to business activities
involving buying and selling, each activity being carried out at a different location. If
one of the activities can be said to be dominant, the place at which this activity is
carried out is the dominant source. The source of incidental income is located at the
source of the main activity (COT v Shein 22 SATC 12).
Where there are multiple sources of income and none of these sources can be said to
be dominant or incidental, the profits from each source may have to be dealt with
separately.
REMEMBER
• To determine the source of income by using case law, two questions must be answered:
1. What is the originating cause of the income?
2. Where is the originating cause located?
• If the originating cause is located in the Republic, the source of the income is from the
Republic and therefore taxable in the Republic.
230
5.3 Chapter 5: The taxation of non-residents
• Section 10(1)(o)(ii) makes provision for the exemption of the first R1,25 million of
remuneration that was received or accrued for services rendered outside the Re-
public. The exemption applies in respect of remuneration received by an employee
for services rendered outside the Republic on behalf of an employer, where the
employee was outside South Africa:
– for a period(s) exceeding 183 full days in total during a 12-month period that
commences or ends during the year of assessment; and
– for a continuous period exceeding 60 full days during that period of 12 months.
The period of 183 days does not need to be continuous. The 60 days, however,
must be continuous.
This exemption does not apply to remunerations derived in respect of the holding
of an office or from services rendered for or on behalf of the Government.
• Section 10(1)(lA) exempts all income received by visiting entertainers and sports
people if the income is subject to withholding tax (refer to 3.7.4.4).
REMEMBER
• Where the source was determined in section 9, the source rules of section 9 should be
adhered to and not that of the case law. This is for example the case where a person
holding a public office has been appointed in terms of an Act of Parliament or where
services are rendered to an employer in the national, provincial or local sphere of the
government of the Republic (refer to 3.7.2). As section 9(2)(g) and (h) provides the
specific source rules for these types of income, it overrides the case-law principles.
Example 5.3
Michael Mnguni, a South African citizen, is appointed by the government as ambassador
of the Republic in Switzerland and earns R800 000 per annum. Michael and his family live
in Switzerland and only come home for holidays in the Republic.
You are required to determine the source of the income that Michael received.
Solution 5.3
As Michael was appointed in terms of an Act of Parlement, the source of the income is
from the Republic (section 9(2)(g)).
5.3.3.3 Rental
The source of rent received from the renting of immovable property is usually the
place where the property is situated (Rhodesian Metals Ltd v COT 11 SATC 244).
231
A Student’s Approach to Taxation in South Africa 5.3–5.4
Where movable property is rented, the source is where the business of the lessor is
situated or where the movable property is used. The nature of the movable property
and length of the usage form a guideline to determine whether the source is the
location of the business of the lessor or where the property is used (COT v British
United Shoe Machinery (Pty) Ltd 26 SATC 163). If it is the nature of the business that
many movable assets are leased at different places (as in the case of a motor car rental
agent), the business and not the assets determine the source. If only one movable
asset is leased, the use of the asset usually determines the source of the income.
232
5.4 Chapter 5: The taxation of non-residents
Example 5.4
Zippy Zach (Pty) Ltd is effectively managed and carries on their trade in Switzerland and
is therefore not a resident of the Republic. The company received R50 000 royalties from a
South African company for the use of the company’s patent that was developed in Hol-
land.
You are required to calculate Zippy Zach (Pty) Ltd’s tax liability in the Republic.
Solution 5.4
R
Taxable income 50 000
Less: exemption: (50 000)
The royalties are from a source in the Republic as it was paid
by a South African resident
Income tax nil
The South African company must withhold the following tax:
Tax withheld on royalties (R50 000 × 15%) 7 500
233
A Student’s Approach to Taxation in South Africa 5.4
REMEMBER
• If the amount owing is paid in instalments, the withholding tax must be deducted
before each payment to the non-resident.
• The withholding tax is a prepaid tax, not a final tax, and therefore the non-resident
must complete a tax return at the end of the year to calculate the correct amount due.
Normally, the amount paid to the seller is subject to the withholding tax. The seller
may apply for a directive from SARS to change the amount used. The request for a
directive to reduce the withholding tax or not to pay any withholding tax can only be
made in one of the following situations:
• if the seller provides adequate security for the tax due;
• if the seller has other assets in the Republic that can be used to recover outstanding
tax;
• if the seller is not subject to tax due to some other stipulation in the Act, for
example a double-tax agreement; and
• if the actual tax liability is less than the proposed withholding tax.
The withholding tax is not applicable if the total purchase price of the property is less
than R2 million.
If a deposit is paid to secure the transaction, the withholding tax is not deducted from
this deposit. The withholding tax becomes due when the amount is used as partial
payment of an amount due under the contract.
REMEMBER
• If the amount is not paid within the prescribed time, a penalty of 10% is levied and
interest is charged on the outstanding amount.
If the purchaser knows or should reasonably have known that the seller is a non-
resident, the purchaser is personally liable for the tax. If the person makes use of an
estate agent or conveyancer who failed to inform him in writing, before a payment is
made, of the fact that the seller is a non-resident, they are all jointly and separately
liable for the tax due. The estate agent and conveyancer’s liability is, however, limited
to the amount of remuneration or other income received.
The purchaser has a right of recovery for the withholding tax against the seller. Note
that he cannot recover any interest or penalties.
234
5.4 Chapter 5: The taxation of non-residents
REMEMBER
Example 5.5
Jason Donnie is ordinarily resident in the United Kingdom and does not carry on a trade
in the Republic. Jason performed in a music concert at the Sun City Superbowl and will
be paid R100 000 by a South African company for the performance.
You are required to calculate the withholding tax that is to be paid in the Republic.
235
A Student’s Approach to Taxation in South Africa 5.4–5.5
Solution 5.5
R
Total income 100 000
Withholding tax (R100 000 × 15%) 15 000
As Jason is a non-resident, he is subject to the withholding tax on foreign entertainers at a
rate of 15%. When calculating Jason’s taxable income, the full R100 000 will be included in
gross income and will then be exempt from income tax.
Therefore the South African company will pay Jason R85 000 and R15 000 directly to
SARS.
Example 5.6
Golden Boot is ordinarily resident in Italy and does not carry on a trade in the Republic.
Golden Boot is a soccer player who is on tour with his club in South Africa. He received
R200 000 for the matches he played in South Africa.
You are required to calculate the withholding tax that must be paid in the Republic.
Solution 5.6
R
Total income 200 000
Withholding tax (R200 000 × 15%) 30 000
As Golden Boot is a non-resident, he is subject to the withholding tax on foreign sports-
persons at a rate of 15%. When calculating Golden Boot’s taxable income, the full
R100 000 will be included in gross income and will then be exempt from income tax in
terms of section 10(1)(lA).
5.5 Summary
Where the taxability of any receipts or accruals of a non-resident must be determined,
one should first consider if any specific provisions of section 9, which deem the
income to be from a South African source, are applicable. If section 9 does not apply,
the true source of the income should be considered, taking into account decisions that
have been made by the courts (case law). Any exemptions that are applicable must be
carefully considered, as source rules might regard the income as being from a source
in the Republic, but it may be specifically exempted.
Double-tax agreements must also always be consulted as they take precedence over
the provisions contained in the Income Tax Act where trade takes place within the
borders of other countries.
The following question will test your knowledge of non-residents.
236
5.6 Chapter 5: The taxation of non-residents
Question 5.1
Abel Sidinile is a resident of another African country. Abel is employed by the local gov-
ernment in his country. He also earns other income in his country. For a number of years
Abel has been investing money in South African investments, as he was concerned about
the political climate in his country. He has never visited South Africa for longer than a
month a year. He is also not carrying on any business in South Africa. Abel is 45 years old.
He earned the following income during the current year of assessment from a number of
different sources. You can accept that the rand equivalent of all the incomes has been cor-
rectly calculated.
Investment income: R
Dividends from a South African source (ignore dividends tax) 250 000
Dividends from an investment in his home country 125 000
(Assume that Abel does not have an interest of more than 10% in this
company and it is not listed on any stock exchange.)
Interest on fixed deposit from a South African bank 58 000
Interest on fixed deposit from a United Kingdom bank 205 000
Income from services rendered: R
From his home country – his salary as manager in their local government 920 000
Consulting fees from a local government in South Africa while he was on
holiday here (he was officially appointed in terms of an Act of Parliament of
the Republic). 325 000
Other income:
Abel completed his PhD on ‘Local government controls in Africa’ and this was
subsequently published by a South African publisher and sold in South Africa,
Africa and abroad
His royalties from the book accrued as follows during the current year of
assessment:
From sales in South Africa 146 000
From sales in his home country 220 000
From sales in Europe 320 000
Investment income:
He purchased a flat in Clifton, Cape Town, for his annual holiday. While he is
not in South Africa, he rents out the flat. Rental earned from this flat during
the current year of assessment 880 000
His monthly expenses for the flat amount to R56 000, which includes an
amount of R30 000 in respect of interest on his bond
237
A Student’s Approach to Taxation in South Africa 5.6
Answer 5.1
(a) Calculation of the taxes payable by Abel
As Abel is not a resident of South Africa, he will only be taxed on income that has a South
African source.
Gross income: R
Dividends from a South African company 250 000
Dividends from his home country – Not a source in the Republic, therefore
not taxable nil
Interest received on an investment in the Republic 58 000
Interest received from a UK bank – Not a source in the Republic, therefore
not taxable nil
Royalties for his book:
• Sales in South Africa 146 000
• Sales in his country (section 9(2)(c)) – the person paying the royalty is in
South Africa (printed and published here) 220 000
• Sales in Europe (section 9(2)(c)) – the person paying the royalty is in South
Africa (printed and published here) 320 000
Rent received 880 000
Services rendered in his home country – not taxable here as not from a
source in the Republic nil
Consultation work (Note) 325 000
Gross income 2 199 000
Less: Exemptions
Republic dividend exemption – section 10(1)(k) 250 000
Interest exemption – section 10(1)(h) 58 000
Less: Royalty incomes – section 10(1)(lA) 686 000
Income 1 205 000
Less: Deductions
Expenses in respect of rental income (R56 000 × 12) – section 11(a) 672 000
Taxable income 533 000
Calculation of net normal tax
Tax on ((R533 000 – R488 700) × 36%) + R115 762 131 710
Less: Primary rebate (16 425)
Tax payable 115 285
continued
238
5.6 Chapter 5: The taxation of non-residents
continued
239
A Student’s Approach to Taxation in South Africa 5.6
Note
It is assumed that he will not earn a salary in his country anymore, as he presumably
could not work there and be ordinarily resident in the Republic. However, if he should
still work there, he could still qualify for the section 10(1)(o) exemption on that salary.
240
6 Income exempt from tax
Page
6.1 Introduction............................................................................................................ 241
6.2 Exemptions resulting from the status of the taxpayer (section 10) ................. 242
6.3 Exemptions based on the nature of the income (section 10) ............................ 245
6.3.1 Pensions ..................................................................................................... 245
6.3.2 Benefits ...................................................................................................... 246
6.3.3 Amounts relating to employment ......................................................... 246
6.3.4 Investment income ................................................................................... 253
6.3.5 Other exemptions ..................................................................................... 263
6.4 Summary................................................................................................................. 264
6.5 Examination preparation ...................................................................................... 265
6.1 Introduction
If an amount complies with the definition of ‘gross income’, it is included in the
taxpayer’s gross income. In certain cases the Income Tax Act 58 of 1962 (the Act)
makes provision for certain types of income to be exempt (not subject to tax). In other
words, this income is free from normal tax. This income, which was included in gross
income, then has to be subtracted from a taxpayer’s gross income. Section 10 provides
for the list of the exempt income while section 10A provides for an exempt portion of
purchased annuities, section 10B for foreign dividends and headquarter companies
and section 12T for an exemption of interest earned on tax free investments. When
calculating taxable income, you have to be sure that you subtract the exempt income
from the gross income to determine the income. Allowable deductions are then also
subtracted from the income to determine the taxable income.
241
A Student’s Approach to Taxation in South Africa 6.1–6.2
R
Gross income (as defined in section 1) xxx
Less: Exempt income (sections 10, 10A, 10B and 12T) (xxx)
Income (as defined in section 1) xxx
242
6.2 Chapter 6: Income exempt from tax
243
A Student’s Approach to Taxation in South Africa 6.2
• levies received by a body corporate established in terms of the Sectional Titles Act,
as well as the first R50 000 of other income received (section 10(1)(e)(i)(aa));
• levies received by share block companies, as defined in the Share Blocks Control
Act, as well as the first R50 000 of other income received (section 10(1)(e)(i)(bb));
• levies received by another association of persons (other than a company,
co-operative, close corporation and trust), including a non-profit company as
defined. Certain conditions must be met to the satisfaction of the Commissioner.
As with the previous two exemptions, the first R50 000 of other income received is
also exempt (section 10(1)(e)(i)(cc));
• foreign central banks that are not residents of the Republic (section 10(1)(j));
• the Council for Scientific and Industrial Research (section 10(1)(t)(i));
• the South African Inventions Development Corporation (section 10(1)(t)(ii));
• the South African National Roads Agency Limited (section 10(1)(t)(iii));
• the Armaments Corporation of South Africa Limited (Armscor) (section 10(1)(t)(v)) or
the income and accruals of a company during the period during which all the
issued shares are held by Armscor (section 10(1)(t)(vi));
• a traditional council or traditional community established or recognised in terms of
the Traditional Leadership and Governance Framework Act 2003 or a tribe as
defined in section 1 of the Act (section 10(1)(t)(vii));
• a water service provider (section 10(1)(t)(ix));
• the Development Bank of Southern Africa (section 10(1)(t)(x));
• the compensation fund established by the Compensation for Occupational Injuries
and Diseases Act (section 10(1)(t)(xvi)(aa));
• the reserve fund established by the Compensation for Occupational Injuries and
Diseases Act (section 10(1)(t)(xvi)(bb));
• a mutual association licensed in terms of the Compensation for Occupational
Injuries and Diseases Act, to carry on the business of insurance of employers
against their liabilities to employees (section 10(1)(t)(xvi)(cc));
• the National Housing Finance Corporation with effect from 1 April 2016 (sec-
tion 10(1)(t)(xvii));
• a subsidy or assistance payable by the State to the Small Business Development
Corporation Limited (section 10(1)(zE));
• an amount received by or accrued to in favour of a registered microbusiness (as
defined in the Sixth Schedule) from the carrying on of a business in the Republic,
but excluding investment income (as defined in paragraph 1 of the Sixth Schedule)
and remuneration (as defined in the Fourth Schedule) received by a natural person
(section 10(1)(zJ)); and
• an amount received by or accrued to in favour of a small, medium or micro-sized
enterprise from a small business funding entity (section 10(1)(zK).
An organisation is not exempt from tax merely because it is a non-profit organisation.
It must satisfy the provisions of section 10.
244
6.2–6.3 Chapter 6: Income exempt from tax
REMEMBER
• The listed organisations are exempt from normal tax in terms of section 10 and not
because they might be non-profit organisations.
• Some of the organisations or bodies only enjoy a partial exemption relating only to
certain income received.
• The provisions of section 10(1) only apply to normal tax.
REMEMBER
6.3.1 Pensions
War pensions and awards for diseases
In section 10(1)(g) provision is made for the exemption of an amount received as:
• a war pension; or
• compensation in respect of diseases contracted in mining operations.
245
A Student’s Approach to Taxation in South Africa 6.3
6.3.2 Benefits
Funeral benefits
Section 10(1)(gD) exempts amounts received by or accrued to a resident who receives
a funeral benefit in terms of the Special Pensions Act 69 of 1996.
Insurance policies
An amount received or accrued in respect of an insurance policy that covers the
policyholder or an employee of the policyholder for:
• death;
• disability;
• illness; or
• unemployment,
is exempt in terms of section 10(1)(gI) so long as the benefits are not paid or payable
by a retirement fund.
REMEMBER
• The apportionment of annuities (section 9(2)(i)) does not apply to retirement annuity
funds as their payment is not linked to employment.
246
6.3 Chapter 6: Income exempt from tax
Other policies
The amount received is exempt where an amount equal to all premiums paid has
been included in the income of the person receiving the amount as a fringe benefit
since the date that the policy was entered into.
REMEMBER
Compensation plans
All premiums paid in respect of employer-owned investment policies (not pure risk)
for the benefit of employees must be included in the income of employees as a fringe
benefit. The result is that a cession or pay-out of the policy is exempt in the hands of
the employee, as long as ALL the premiums paid by the employer have been subjected
to tax as a fringe benefit in the hands of the employee.
247
A Student’s Approach to Taxation in South Africa 6.3
Example 6.1
Rose Turpin is employed by Blooming Gorgeous, a florist. Rose receives a uniform allow-
ance of R1 000 per month because she is only allowed to wear pink clothes to work.
During the year Rose spent R8 900 on pink clothes. She has all her receipts.
You are required to explain the income tax implications of the uniform allowance that
Rose received.
Solution 6.1
The uniform allowance of R12 000 (R1 000 × 12 months) will form part of Rose’s gross
income. It will not be exempt.
Relocation benefits
Section 10(1)(nB) determines that the benefit an employee receives, where their
employer paid the cost to relocate an employee from one place to another on the
appointment or termination of the employee’s employment, may be exempt from
tax. The following expenditure may qualify for the exemption:
• transporting the employee, their household and their personal possessions from
their previous place of residence to their new place of residence;
• the costs incurred by the employee in respect of the sale of their previous residence
and in settling in permanent residential accommodation at their new place of resi-
dence; or
• hiring residential accommodation in an hotel or elsewhere for the employee or
members of their household for a period ending 183 days after the transfer took
effect or after they took up appointment (if it was occupied temporarily).
The cost of these expenses must have been incurred by the employer or the employer
must have reimbursed the employee for them.
SARS allows the exemption of the following expenses in practice:
• cancellation of bond;
• agent’s commission on sale of previous residence.
Examples of settling in costs (as mentioned above) that qualify for the exemption are
• bond registration and legal fees;
• transfer duty;
• new school uniforms;
• replacement of curtains;
• motor vehicle registration fees; and
• telephone, water and electricity connections.
248
6.3 Chapter 6: Income exempt from tax
SARS will not allow for the deduction of a loss incurred by an employee on the sale of
their residence or architect’s fees relating to any alteration of a residence.
Example 6.2
XYZ Ltd transferred Anike Moody from Durban to Pretoria. Her basic salary is R8 700 per
month. XYZ Ltd paid for the transfer of her personal goods and made arrangements
for Anike and her family to stay in a hotel on their account for two months (61 days) dur-
ing which Anike had to wait for the previous owners to move out of the house that she
purchased.
Anike puts in a claim for the following expenses to XYZ Ltd:
Amount
Description R
1 New school uniforms purchased for her two children 2 180
2 Curtains made for her new house 12 800
3 Motor vehicle registration fees 480
4 Telephone, water and electricity connections 1 500
5 Loss on sale of previous residence 20 000
6 Agent’s fee on sale of previous residence 28 895
7 Transfer duty on new residence 30 000
95 855
You are required to indicate which portion of Anike’s claim will be exempt from tax.
Solution 6.2
The benefit Anike receives due to the fact that her employer paid for the transfer of her
personal goods as well as the hotel accommodation (in respect of herself and her family)
for two months qualifies for the exemption in terms of section 10(1)(nB).
Items 1 to 4 are considered to be settling-in costs and the amount that Anike is reim-
bursed is exempt from normal tax. Item 5 is a taxable benefit and if XYZ Ltd pays this
amount to Anike, it is taxable in full. Items 6 and 7 qualify again for the exemption in
respect of relocation.
REMEMBER
• Only actual expenses that were either incurred by the employer or reimbursed by the
employer to the employee will qualify for an exemption. Any allowance paid in respect
of relocation is fully taxable.
Fringe benefits
The provisions of section 10(1)(nC) (broad-based employee share plan), (nD) (equity
instruments), and (nE) (share incentive scheme), dealing with taxable fringe benefits,
are discussed in chapter 14.
249
A Student’s Approach to Taxation in South Africa 6.3
Foreign services
Section 10(1)(o)(ii) provides for the exemption of up to R1 250 000 in respect of
• salary, leave pay, wages, overtime pay, bonuses, gratuities, commissions, fees,
emoluments or allowances;
• including any fringe benefit as per the Seventh Schedule; and
• including any subsistence allowance, travel allowance, holder of public office
allowance;
• as well as any taxable amounts derived from broad-based employee share plans
(section 8B) and a taxable amount arising on the vesting of equity instruments (sec-
tion 8C),
derived by an employee in respect of services rendered outside the Republic for or on
behalf of an employer, if the employee was outside the Republic
• for a period or periods exceeding 183 full days in aggregate during any
12-month period commencing or ending during a year of assessment; and
• for a continuous period exceeding 60 full days during such period of 12 months.
This exemption does not apply to remuneration derived in respect of the holding of a
public office or from services rendered or work or labour performed for or on behalf
of an employer in government (national, provincial or local); or a constitutional
institution as listed in the Public Finance Management Act (Schedule 1); or a public
entity listed in Schedule 2 or 3 of the above Act; or a municipal entity as defined in
the Local Government: Municipal Systems Act.
A proviso to this section provides that, for the purposes of this section, where remu-
neration is received by or accrues to an employee during a year of assessment for
services that were rendered by them in more than one year of assessment, the remu-
neration is deemed to have accrued evenly over the period in which those services
were rendered.
250
6.3 Chapter 6: Income exempt from tax
A person in transit between two places outside the Republic who has not entered the
Republic through a port of entry as defined in the Immigrations Act 13 of 2002 is
deemed to be outside of the Republic.
Scholarships and bursaries
A bona fide scholarship or bursary granted to enable or assist a person to study at a
recognised educational or research institution is exempt from normal tax in terms of
section 10(1)(q). Section 10(1)(qA) exempts the same but for persons with a disability.
‘To study’ refers to the formal process whereby the person to whom the scholarship
or bursary has been granted gains or enhances their knowledge, intellect or expertise.
It is not a requirement that a degree, diploma or certificate be awarded on completion
of the course. Scholarships and bursaries awarded solely on merit are always ex-
empted (and not only for employees).
Interpretation Note No. 66, which deals with the taxation of scholarships and bursa-
ries, provides the following guidelines:
• Financial assistance provided in terms of a bona fide scholarship or bursary could
include the cost of:
– tuition fees;
– registration fees;
– examination fees;
– books;
– equipment relating to the studies;
– accommodation (other than at home);
– meals or vouchers; and
– transport.
• A direct payment of fees to an institution that is included in the value of the bur-
sary, which must be granted to study at a recognised educational or research insti-
tution, including a foreign research institution, if the qualification obtained is
recognised in South Africa.
Personal study loans obtained from financial institutions or employers are not
included in this exemption as they are not gross income.
REMEMBER
• Scholarships and bursaries granted to a relative of an employee who retired are subject
to the same conditions as bursaries granted to a relative of a current employee.
• Research is not considered to be studying and will not qualify for an exemption in
terms of this section.
• A scholarship or bursary that is granted subject to repayment if all the conditions
stipulated are not met will be treated as a bona fide bursary until non-compliance
occurs. In the year the non-compliance occurs, a taxable fringe benefit will arise.
• A reward or reimbursement to an employee for a qualification or for having successfully
completed a course or to assist in covering private study expenses is taxable remuneration.
251
A Student’s Approach to Taxation in South Africa 6.3
Employers to employees
In terms of section 10(1)(q) and (qA), where the scholarship or bursary is granted by
an employer (or associated institution) to an employee, it will only be exempt where
the employee agrees to reimburse the employer if they fail to complete their studies
for reasons other than death, ill-health or injury.
252
6.3 Chapter 6: Income exempt from tax
Interest and dividends received from tax free investments (section 12T)
Interest received or accrued from a tax free investment (as defined in section 12T) is
exempt from income tax.
A tax free investment must meet the following four requirements:
• It must be issued by:
– a bank;
– a long-term insurer;
– a portfolio of a collective investment scheme in property;
– a portfolio of a collective investment scheme in securities; or
– the government of the Republic (national sphere).
• It must be administered by:
– an authorised user; or
– an administrative FSP (financial service provider).
• It must be held by:
– a natural person;
– the deceased estate; or
– the insolvent estate of a person.
• It must meet the requirements of a tax free investment in accordance with either:
– the Policyholder Protection Rules under the Long-term Insurance Act; or
– the regulations contemplated in the Collective Investment Schemes Control Act.
An amount received or accrued from a tax free investment by a natural person is
exempt from normal tax. The disposal of a tax free investment will also not be subject
to capital gains tax.
The amount contributed to these investments (in total) is limited to R36 000 per year of assess-
ment and R500 000 in total (excluding reinvestment of interest). Where a person exceeds these
limits, a penalty of 40% on the excess contribution will be levied as deemed normal tax paya-
ble.
253
A Student’s Approach to Taxation in South Africa 6.3
Example 6.3
In each of the following case studies you are required to calculate the taxpayer’s ‘income’.
Taxpayer A B C D
Age 48 35 76 68
Foreign interest earned – R2 900 R3 000 R600
South African interest earned (not from
a tax free investment) R15 000 R24000 R27 000 R39 500
Interest received – tax free investment – – 1 900 –
Solution 6.3
A B C D
R R R R
Gross income
Foreign interest – 2 900 3 000 600
South African interest 15 000 24 000 27 000 39 500
Interest received – tax free investment – – 1 900 –
15 000 26 900 31 900 40 100
Less: Exempt income
Tax free investment interest (1 900)
South African interest (15 000) (23 800) (27 000) (34 500)
Income nil 3 100 3 000 5 600
2024 amendment
From 1 March 2022, where a person has a year of assessment of less than 12 months the
interest exemption will be applied pro rata.
254
6.3 Chapter 6: Income exempt from tax
REMEMBER
• To qualify as a REIT, the resident company’s equity shares must be listed on a South
African exchange. The mere listing of non-equity shares, for example preference shares,
will not be sufficient for that company to qualify as a REIT.
255
A Student’s Approach to Taxation in South Africa 6.3
Example 6.4
Company A is a REIT as defined. For the current year of assessment, the company received
taxable rental income of R100 000. The full R100 000 was distributed to Company B, a resi-
dent, as a dividend.
You are required to explain the tax implications of the above in respect of the current year
of assessment.
256
6.3 Chapter 6: Income exempt from tax
Solution 6.4
R
Company A – REIT
Taxable rental income 100 000
Less: Distribution to shareholders (section 11(a) deduction) (100 000)
Taxable income nil
Company B
Taxable section 25BB dividend received 100 000
No exemption for the dividend in terms of section 10(1)(k)(i)(aa) as Company B
is not a non-resident. The dividend will therefore be subject to normal tax in the
hands of Company B. The dividend will be exempt from dividends tax under
section 64F(l) as the dividend constitutes income of the beneficial owner, Com-
pany B..
Example 6.5
Suppose Company B in the previous example is a portfolio of a collective investment
scheme in securities and also received other South African dividends amounting to
R50 000 and taxable interest amounting to R30 000 during the current year of assessment.
During the current year of assessment, Company B distributes 40% of its current year’s
income to Mr Tjombe, who is 67 years old.
You are required to explain the income tax implications of the above for the current year of
assessment.
257
A Student’s Approach to Taxation in South Africa 6.3
Solution 6.5
R
Company B
Taxable section 25BB dividends received from Company A 100 000
South African dividends received 50 000
Interest income received 30 000
Less: Amount distributed to Mr Tjombe (distributed within 12 months after
received or accrued to the portfolio, therefore deemed to accrue directly
to the holder). (72 000)
- From taxable section 25BB dividend (R100 000 × 40% = R40 000)
- South African dividend (R50 000 × 40%= R20 000)
- Interest income (R30 000 × 40% = R12 000)
Undistributed income 108 000
Undistributed income 108 000
Less: Exempt local dividends – section 10(1)(k) (R50 000 – R20 000) (30 000)
Taxable income 78 000
Mr Tjombe’s taxable income:
Taxable section 25BB portion of distribution 40 000
South African dividend portion of distribution 20 000
Local dividend exemption – section 10(1)(k) (20 000)
Interest portion of distribution 12 000
Interest exemption – section 10((1)(i) (R34 500 limited to amount actually
accrued) (12 000)
Taxable income 40 000
258
6.3 Chapter 6: Income exempt from tax
• notwithstanding the provisions of paragraphs (dd) and (ii), specific types of divi-
dends relating to a restricted equity instrument as defined in section 8C that was
acquired in the circumstances contemplated in section 8C (section 10(1)(k)(i)(jj) and
(kk)).
Foreign dividends and headquarter company dividends (sections 1 and 10B(1))
A foreign dividend is an amount paid by a company that is not a resident, in respect
of a share in that company. In terms of section 10B foreign dividends and dividends
paid or declared by head-quarter companies are subject to certain exemptions. A
reference to a foreign dividend includes a headquarter company dividend, as a head-
quarter company is treated as a foreign company for normal tax purposes.
A headquarter company is a resident company where:
• each of the shareholders holds at least 10% of the equity shares of the company;
• 80% or more of the assets of the company are attributable to an interest in the
equity shares of a foreign company;
• the company holds at least 10% of the equity shares of a foreign company; and
• more than 50% of the gross income must consist of rental, dividend interest, royal-
ties or service fees paid by a foreign company if the gross income of the company
exceeds R5 million.
Full exemptions (section 10B(2))
All foreign dividends are included in full in gross income. However, the following
dividends are exempt:
• Participation exemption (section 10B(2)(a)) – the foreign dividend is exempt if
received by a person who holds at least 10% of the equity share and voting rights
in the company declaring the foreign dividend. This exemption only applies when
the dividend is paid in respect of an equity share.
• Country-to-country participation exemption (section 10B(2)(b)) – a foreign company
is allowed to claim an exemption on a foreign dividend paid by another foreign
company which is in the same country. This exemption is only applicable to compa-
nies.
The participation exemption and the country-to-country participation exemption
do not apply to the foreign dividend to the extent that it is deductible by the for-
eign company in the determination of their taxable income in the country where
they have their place of effective management.
• Previously taxed exemption (section 10B(2)(c)) – foreign dividends that are
received by a resident from profits that have already been taxed in terms of sec-
tion 9D, are exempt.
• JSE-listed shares (section 10B(2)(d)) – foreign dividends (not dividends in specie)
paid by companies that are listed on the JSE are taxed in terms of dividends tax
and are therefore not subject to normal tax.
259
A Student’s Approach to Taxation in South Africa 6.3
REMEMBER
• An equity share is a share in a company, excluding a share that does not have the right
to participate beyond a specified amount in a distribution (of dividends or of capital).
This means that, in order to be an equity share, there must be an unlimited right to par-
ticipate in company distributions.
REMEMBER
Example 6.6
Simon Tshabalala earned foreign dividends of R2 400. They are not subject to any of the
specific exemptions.
You are required to calculate the taxable portion of the foreign dividends.
260
6.3 Chapter 6: Income exempt from tax
Solution 6.6
R
Gross income: Foreign dividends received 2 400
Less: Section 10B(3) exemption (R2 400 × 25 / 45) (1 333)
Taxable portion 1 067
Example 6.7
On 1 August 2021, when Chris Gray was 56 years old, he purchased an annuity from an
insurer. He paid R250 000 for the annuity and receives a monthly annuity of R2 000 from
1 September 2021 for the rest of his life. His life expectancy, according to the tables in
Appendix C, is 17,18 years (based on his age when the annuity contract was concluded).
You are required to calculate the taxable amount of the annuity received for the current
year of assessment.
261
A Student’s Approach to Taxation in South Africa 6.3
Solution 6.7
The total expected returns from the purchased annuity amount to
R2 000 × 12 months × 17,18 years = R412 320.
In the formula
A
Y= ×C
B
A = R250 000 (total cost price)
B = R412 320 (expected returns)
C = R2 000 × 12 months = R24 000 (receipts in current year)
R250 000
Y= × R24 000
R412 320
Y= R14 551,80
The taxable portion of the annuity is therefore:
Total amount received for the year – capital portion (as calculated)
= R24 000 – R14 551,80
= R9 448,20
Where the capital portion of the annuity is indicated in terms of section 10A(4) as a per-
centage, the percentage is
R250 000
× 100 = 60,63%
R412 320
Alternatively, the tax-free portion can be calculated as follows:
60,63% of R24 000 = R14 551,20
The portion of the annuity that will be included in Chris’ gross income for the current year
of assessment is R9 448,80 (R24 000 – R14 551,20).
Note
You may find small differences due to rounding.
Why is the current year of assessment’s taxable amount for the annuity not
reduced pro rata?
262
6.3 Chapter 6: Income exempt from tax
REMEMBER
Example 6.8
Ms Nkele Matuang (40 years of age), who is resident in the Republic, received the follow-
ing amounts during the year of assessment:
R
Compensation in terms of the Workmen’s Compensation Act for an injury suf-
fered while on duty 30 000
Unemployment Insurance Fund compensation for the period 1 July to
31 December while she was unemployed 13 900
Salary for the period 1 January to 28 February, as a trainee game ranger 25 600
Uniform allowance for the period 1 January to 28 February in respect of a dis-
tinctive uniform she was required to wear while on duty 1 600
During this period she received a scholarship from her employer to study for a
game ranger’s certificate on a part-time basis at the local University of Technol-
ogy (she has to pay the scholarship back if she does not pass the course) 15 000
When she was first employed, her employer paid the cost of transferring her
personal belongings to her place of employment, as well as the cost of her hotel
for the first month. The value of these amounted to 26 000
Taxable foreign dividends 3 800
Interest on a South African investment (not a tax free investment) 20 000
Nkele’s gross income amounts to 135 900
You are required to calculate Nkele’s income for the current year of assessment.
263
A Student’s Approach to Taxation in South Africa 6.3–6.4
Solution 6.8
The following amounts are exempt from normal tax:
R
Compensation in terms of the Workmen’s Compensation Act –
section 10(1)(gB) 30 000
Benefit in terms of the Unemployment Insurance Act 63 of 2001 –
section 10(1)(mB) 13 900
Uniform allowance for a special uniform to be worn while on duty –
section 10(1)(nA) 1 600
Bona fide scholarship to study at a recognised educational institution –
section 10(1)(q) 15 000
Cost of transfer paid by her employer, as well as the cost of temporary
accommodation (up to 183 days permitted) – section 10(1)(nB) 26 000
Foreign dividends (R3 800 × 25 / 45) – section 10B(3) 2 111
Interest – she is entitled to an exemption of up to R23 800 as she is
under 65 years of age – however, she only received R20 000, therefore the full
amount is exempt – section 10(1)(i) 20 000
108 611
Nkele’s income in terms of the definition in section 1 of the Act is
therefore determined as follows:
Gross income 135 900
Less: Exempt income (108 611)
Income 27 289
REMEMBER
• The list contains gross income that is exempt from taxation due to the nature or type of
income.
• In order to exempt an amount, it must have been included in gross income.
• You can never exempt more than taxpayers have included in their gross income.
• There is a difference between an exemption and a deduction in the sense that to be able
to claim an exemption you have to earn the particular type of income (as listed). By con-
trast, a deduction depends on the nature of the expense.
6.4 Summary
Although an amount is included in gross income in terms of the definition, in certain
cases, owing to its nature, it is exempt from taxation in terms of the specific provi-
sions discussed in this chapter. This chapter focuses mainly on the exemptions based
on the nature of the income, for example interest, dividends, bursaries, gratuities etc.
In terms of the Act, a taxpayer’s income is their gross income less exempt income. The
concept of income is important as the deduction of certain expenses depends on the
amount of the taxpayer’s income.
In the questions that follow, the principles as discussed in the chapter are highlighted.
264
6.5 Chapter 6: Income exempt from tax
Question 6.1
The following taxpayers are uncertain whether or not the amounts listed below constitute
exempt income:
1. Simon Shabalala is a retired miner. During the current year of assessment he received
the following amounts:
R
Pension received for past services rendered 120 000
Pension received for a disease contracted during employment at the mine 60 000
The R60 000 is payable under law relating to the payment of compensation for diseases
contracted by persons employed in the mining industry.
2. Major Peter Sinclair received a war pension of R12 000 for the current year of assess-
ment.
3. Kirsh Naidoo (40 years old) received R24 800 interest from a bank investment
account and reinvested the full interest amount during the current year of assessment.
She also received interest of R800 from a tax free investment during the current year
of assessment.
4. During 2000, Pieter and Sandra Pietersen separated and divorced. Pieter pays alimony
to Sandra to finance her living costs. Pieter passed away on 31 July 2021. Prior to his
death, he had created a trust to ensure that Sandra would still receive alimony after
his death.
During the current year of assessment, she received the following amounts:
R
Alimony received from Pieter for the period before his death 40 000
Alimony received from the trust 56 000
265
A Student’s Approach to Taxation in South Africa 6.5
Answer 6.1
Discussion of whether the amounts are exempt from tax.
1. Simon Shabalala will be taxed on the pension received for past services rendered as it
is related to services rendered. The pension in respect of a disease contracted in
mining operations will be exempt in terms of section 10(1)(g).
2. In terms of section 10(1)(g), Major Peter Sinclair will not be taxed on the war pension
received, as this type of income is exempt from tax.
3. Kirsh Naidoo will be taxed on the interest received. In terms of section 10(1)(i), a
taxpayer under the age of 65 is entitled to an exemption of R23 800, thus Kirsh will be
taxed on R1 000 (R24 800 – R23 800) for the current year of assessment.
She will not be taxed on the interest from the tax free investment.
4. In terms of section 10(1)(u), the alimony received by Sandra Pietersen from her former
spouse and the trust (after his death) will be exempt from tax.
266
General deduction
7 formula
General Deductions
Specific Capital
deduction for
deductions allowances
formula individuals
Page
7.1 Introduction............................................................................................................ 268
7.2 Carrying on a trade (section 1) ............................................................................ 268
7.2.1 General ...................................................................................................... 268
7.3 The general deduction formula (sections 11(a) and s 23(g)) ............................ 271
7.3.1 Expenditure and losses ........................................................................... 272
7.3.2 Actually incurred ..................................................................................... 273
7.3.3 Year of assessment ................................................................................... 277
7.3.4 In the production of income ................................................................... 278
7.3.5 Not of a capital nature ............................................................................. 287
7.3.6 Laid out or expended for the purposes of trade (section 23(g))......... 293
7.4 Prohibited deductions (section 23) ...................................................................... 293
7.4.1 Private maintenance expenditure (section 23(a)) ................................. 293
7.4.2 Domestic or private expenditure (section 23(b)) .................................. 293
7.4.3 Recoverable expenditure (section 23(c)) ............................................... 295
7.4.4 Interest, penalties and taxes (section 23(d)) .......................................... 295
7.4.5 Provisions and reserves (section 23(e)).................................................. 295
7.4.6 Expenditure incurred to produce exempt income (section 23(f)) ...... 295
7.4.7 Non-trade expenditure (section 23(g)) .................................................. 295
7.4.8 Notional interest (section 23(h)) ............................................................. 295
7.4.9 Deductions against fund lump sums (section 23(i)) ............................ 295
267
A Student’s Approach to Taxation in South Africa 7.1–7.2
Page
7.4.10 Expenditure incurred by labour brokers and personal
service providers (section 23(k)) ............................................................. 296
7.4.11 Restraint of trade (section 23(l)) ............................................................. 296
7.4.12 Expenditure relating to employment or holding of an office
(section 23(m)) ........................................................................................... 296
7.4.13 Unlawful activities (section 23(o)) .......................................................... 298
7.4.14 Cessation of policies of insurance (section 23(p)) ................................ 298
7.4.15 Expenditure incurred in the production of foreign dividends
(section 23(q)) ............................................................................................ 298
7.4.16 Premiums in respect of insurance policies (section 23(r)) .................. 298
7.5 Specific transactions .............................................................................................. 299
7.6 Summary................................................................................................................. 303
7.7 Examination preparation ...................................................................................... 303
7.1 Introduction
In the process of determining the taxable income, certain expenses incurred are
deducted from the income. If you are in the process of calculating a taxpayer’s taxable
income, you will have to know which amounts of the expenditure may be deducted,
as a taxpayer would like to be able to deduct as much of their expenses as possible.
Section 11 of the Act makes provision for the deduction of expenses from a taxpayer’s
taxable income. Section 11(a) contains the requirements for deductions of a general
nature, while section 11(c) to (x) makes provision for specific deductions. Before any
of the provisions contained in section 11 can be applied, the Act specifies that the
taxpayer must be carrying on a trade.
7.2.1 General
As stated above, for an amount to be deductible in terms of section 11 of the Act, the
taxpayer must be carrying on a trade.
Legislation:
Section 11: Preamble
for the purpose of determining the taxable income derived by any person from carrying on
any trade, there shall be allowed as deductions from the income of such person so derived
...
268
7.2 Chapter 7: General deduction formula
Legislation:
Section 1: Interpretation
‘Trade’ every profession, trade, business, employment, calling, occupation or venture,
including the letting of any property and the use of or the grant of permission to use any
patent . . . or any design . . . or any trade mark . . . or any copyright . . . or any other
property which is of a similar nature.
Although this definition is very wide, it does not include all forms of income-
producing activities. Passive investment activities are not considered to be trading
activities. For example, activities producing interest, dividends, annuities and pen-
sions are not included in the definition of trade. The extent of the activities might,
however, indicate that you are carrying on a trade. When a taxpayer speculates in
securities or shares, for instance, this constitutes carrying on a trade and even if the
scale of investment in securities or shares is not very extensive, it may amount to
carrying on a trade (ITC 770 (1953) 19 SATC 216).
The earning of interest by a taxpayer other than a moneylender does not constitute
‘carrying on a trade’. In theory, no deduction will be allowed for an expense incurred
in earning the interest income. In Practice Note No. 31, however, the Commissioner
indicated that they will allow the deduction of interest expenditure incurred in
earning the interest income, but limited to the amount of the interest income. The
interest expenditure cannot create a loss.
A taxpayer may also carry on several trades during the year of assessment, but, in
order to determine ‘taxable income’, the income or losses from each trade must be
aggregated. The insertion of section 20A limits the setting-off of losses of different
trades in certain circumstances of a natural person. This limitation only applies to
natural persons. This aspect is discussed in detail in chapter 12.
The definition of trade includes a ‘venture’, which has been held to be a transaction in
which a person risks something with the object of making a profit, for example
financial or commercial speculation (ITC 368 9 SATC 211).
There is some confusion concerning the question of whether a profit motive is neces-
sary before it can be said that a taxpayer is carrying on a trade. In ITC 1292 41 SATC
163, Judge Myburgh said that the test for deductibility of expenditure is ‘the real hope
to make a profit. Such hope must not be based on fanciful expectations but on
reasonable possibility’. In CIR v De Beers Holdings (Pty) Ltd 46 SATC 47, it was held
that ‘the absence of a profit does not necessarily exclude a transaction from being part
of a taxpayer’s trade’ and in ITC 1274 40 SATC 185, the court held that there is no
requirement in our Income Tax Act that the taxpayer concerned should be aiming at a
net profit in their trading operations. A trader may deliberately sell articles at a loss
‘for business purposes’.
In carrying on a trade, therefore, there should preferably be a profit or an expectation
of profit. If a transaction is entered into with the purpose of not making a profit or
in fact registering a loss, it must then be shown to have been so connected with the
pursuit of the taxpayer’s trade so as to justify the conclusion that, despite the lack
of profit motive, the moneys paid out under the transaction were wholly and
exclusively expended for the purposes of trade (CIR v De Beers Holdings). The court
will look at all the facts and circumstances in deciding the issue.
269
A Student’s Approach to Taxation in South Africa 7.2
In Burgess v Commissioner for Inland Revenue 55 SATC 185 the court provided some
guidelines for determining whether a person is busy with trading activities.
CASE:
Burgess v Commissioner for Inland Revenue
55 SATC 185
Facts: The taxpayer operated a scheme ruled that if the actions of a taxpayer,
where it borrowed money from a bank and when viewed in isolation, constitute the
invested in an insurance company for a carrying on of a trade, he would not cease
short period in a single-premium pure carrying on that trade merely because one
endowment policy. The stock market of his purposes, or even his main purpose,
crashed and the value of the fund plum- was to obtain some tax advantage. If he
meted, resulting in the accounts reflecting carries on a trade, his motive for doing so
a loss due to interest payable to the bank. is irrelevant. The definition of ‘trade’
The taxpayer had provided a bank guaran- should be given a wide interpretation and
tee and the cost thereof was the only includes a ‘venture’, being a transaction in
which a person risks something to make a
outlay on the part of the individual in-
profit. The taxpayer clearly undertook a
vestor. The policy was a non-standard pol-
venture in that he laid out the money
icy and the proceeds on maturity fell
required to obtain a bank guarantee and
within the investor’s gross income. One of
risked the amount of the guarantee in the
the selling points of the scheme was that it hope of making a profit – it was a specu-
provided certain tax advantages. No part lative enterprise par excellence. The invest-
of the structures could be described as ment in the insurance policy did not con-
artificial, as each one was designed for a stitute a capital asset – the scheme was a
commercial purpose. The taxpayer had short-term speculation with borrowed
testified that the tax savings generated by money and the intention was to surrender
the scheme did not play a substantial part the policy after a year or two so as to
in his decision to participate in the scheme realise the appreciation of its underlying
and that it was the prospect of profit as assets.
contained in the brochure’s profit forecasts
Principle: In order to claim an amount
that had attracted him.
under section 11, it is necessary for a tax-
Judgment: No part of the structures was payer to be ‘carrying on a trade’. The fact
artificial as each step was designed for a that there is no continuity, or there is a lack
commercial purpose. Although there was of a profit motive or risk, does not neces-
an expected benefit by reason of the tax sarily mean that a trade is not being
deferment (namely that interest became carried on. However, the taxpayer’s bur-
due before any profit was realised), it was den of proof increases when one or the
not contrived in an artificial way. The courts other element is not present.
While the ‘facts and circumstances’ test is generally appropriate, special concern
exists when taxpayers disguise private consumption. Private consumption can often
masquerade as a trade (that is to say it is in fact a hobby) so that individuals can set
off these expenditures and losses against other income (usually salary or professional
income) (refer to chapter 13).
270
7.2–7.3 Chapter 7: General deduction formula
REMEMBER
• Passive investment activities that produce interest and dividends do not form part of
carrying on of a trade. Interest and dividend income are, however, still included in
gross income since there is no ‘trade’ requirement for an amount to be included in gross
income.
• A profit motive is not a prerequisite for the carrying on of a trade.
• If no trade is carried on, there can be no deduction in terms of section 11.
Legislation:
Section 11(a)
[f]or the purpose of determining the taxable income derived by any person from carrying
on any trade, there shall be allowed as deductions from the income of such person so
derived . . . expenditure and losses actually incurred in the production of the income, pro-
vided such expenditure and losses are not of a capital nature.
This so-called ‘general deduction formula’ will be broken down into its components,
each of which will be discussed briefly:
• carrying on a trade (refer to 7.2 and 7.3.6);
• expenditure and losses (refer to 7.3.1);
• actually incurred (refer to 7.3.2);
• during the year of assessment (refer to 7.3.3);
• in the production of income (refer to 7.3.4);
• not of a capital nature (refer to 7.3.5); and
• laid out or expended for the purposes of trade (refer to 7.3.6).
REMEMBER
• All the components of the general deduction formula must be present for an expense to
be deductible.
271
A Student’s Approach to Taxation in South Africa 7.3
Example 7.1
Grande Leather (Pty) Ltd manufactures leather purses. Due to cash flow constraints, the
company was unable to pay for the latest consignment of leather, costing R25 000. Grande
Leather (Pty) Ltd offered the supplier a delivery motorcycle with a market value of
R28 000 in settlement of the consignment of the leather.
You are required to discuss the deductibility of the amounts.
Solution 7.1
Grande Leather (Pty) would be able to deduct the market value of the delivery
motorcycle in respect of the purchase of the leather (R28 000). Expenses and losses do not
only include amounts payable in cash, as long as the consideration has a determinable
money value.
REMEMBER
• Expenses need not be in cash only. They can be in a form other than cash, for example a
trade-in of an asset as part of the payment of an expense incurred.
272
7.3 Chapter 7: General deduction formula
CASE:
Nasionale Pers Bpk v
Kommissaris van Binnelandse Inkomste
48 SATC 55
Facts: The taxpayer claimed a provision of service, half the amount of the anticipated
one month’s salary for bonuses to be paid bonus payable on 30 September if then still
to staff. The financial year end of the tax- in the taxpayer’s employ.
payer was 31 March but the bonus would
only be paid on 30 September of that year. Judgment: The future uncertain event
The policy in regard to the bonus reads as (namely whether the employee would be
follows: ‘The annual holiday bonus is in the taxpayer’s employ on 31 October) to
equal to a full month’s salary for officials which the legal obligation to pay a holiday
who have completed a full year’s service bonus to an employee was made subject,
and pro rata less for officials who have was an event which fell outside the year of
completed less than a full year’s service. A assessment of the taxpayer. Therefore the
bonus will only be paid to officials who are question whether the taxpayer was in law
in service on 31 October. The full amount
obliged to pay a holiday bonus to an em-
of the bonus will be recovered from an
ployee could only be answered on 31 Octo-
official who after payment thereof gives
notice of termination of service and leaves ber, and not 31 March. The provision for
the service before 31 October.’ The tax- the bonus had, accordingly, not been actu-
payer accepted that the bonus – pro rata to ally incurred until that date.
length of service – was immediately pay- Principle: If a payment is conditional on the
able in the case of an employee whose happening of an event, whether suspensive
service terminated through retirement on (coming into effect immediately, but sus-
attaining retirement age, or by reason of
pended until the c ondition had been met) or
ill-health or upon re-organisation of the
taxpayer’s activities or, in the case of resolutive (not effective until the condition
female employees, by reason of pregnancy. has been met), the expense is only actually
In its accounts as at 31 March, the tax- incurred once the condition has been met.
payer’s practice was to include, in the case Until the condition has been met, it remains a
of an employee who already had six months’ contingent liability that is not tax deductible.
273
A Student’s Approach to Taxation in South Africa 7.3
This principle was confirmed in Edgars Stores Ltd v Commissioner for Inland Revenue.
CASE:
Edgars Stores Ltd v Commissioner for Inland Revenue
50 SATC 81
Facts: The taxpayer entered into several Judgment: The crucial issue was whether
lease agreements for premises on which it the conditions relating to the turnover
would conduct its businesses. The rental rental created a contingent obligation which
was determined as a ‘basic rental’ (paid was incurred, if at all, only at the end of
monthly) and a ‘turnover rental’ (to be the annual lease period or whether the
calculated if the annual turnover exceeded provisions of the lease gave rise to an
a specific amount). The ‘turnover rental’ unconditional obligation, the quantifica-
could only be ascertained subsequent to tion of which took place at the end of the
the last day of the taxpayer’s year of lease year. The court ruled that the obli-
assessment in many instances (where the gation to pay turnover rental is contingent
financial year end of the taxpayer was dif- until the turnover for the lease year is
ferent to the end of the lease year). The dis- determined; thus the expenditure was not
pute with the Commissioner only related actually incurred in a year of assessment
to those instances where the lease year that ended prior to the termination of the
ended after the taxpayer’s year of assess- lease year and therefore could not be
ment and the liability to pay turnover deducted in that tax year.
rental could not be determined before the Principle: Before an expense can be
end of the taxpayer’s tax year. Included in deducted in terms of section 11(a), it must
the rental expenses claimed for tax pur- be unconditional; that is to say the expense
poses were two amounts representing must not be contingent; the event must
genuine estimates (the accurate figures not have taken place. It does not matter that
being available yet) of the respective the condition imposed is resolutive (not
amounts by which the turnover rentals effective until the condition has been met) or
exceeded the basic rentals in the years in suspensive (coming into effect imme-
question. These estimated rentals were dis- diately, but suspended until the condition
allowed by the Commissioner. had been met).
274
7.3 Chapter 7: General deduction formula
In Commissioner for Inland Revenue v Golden Dumps (Pty) Ltd, the court ruled on when
a liability becomes unconditional in the event of a dispute.
CASE:
Commissioner for Inland Revenue v
Golden Dumps (Pty) Ltd
[2011] 55 SATC 198
Facts: A dispute arose between the tax- Only if the claim is admitted, or if it is
payer and a former employee which result- finally upheld by the decision of a court or
ed in the taxpayer withholding the deliv- arbitrator, will a liability arise. If at the end
ery of shares previously promised to the of a tax year the outcome of the dispute is
employee. The employee instituted legal undetermined, the liability has not been
proceedings to compel the delivery of the actually incurred and cannot be claimed.
shares promised. The legal proceedings At the end of the 1981 year of assessment,
were instituted in 1981 but the action was the outcome of the action instituted by the
only heard in 1983. The appeal by the employee was undetermined. The liability
employee to the Appellate Division was on the part of the taxpayer was then ‘no
upheld in 1985. The taxpayer was then more than impending, threatened, or
ordered to deliver the shares promised to expected’. The ultimate outcome was only
the employee. The taxpayer claimed the known upon the delivery of the Appellate
cost of the shares awarded as a deduction Division’s judgment, which lay four years
in terms of section 11(a). The Commis- in the future. Accordingly, the expenditure
sioner contended that the expenditure on in question was ‘actually incurred’ in 1985
the shares had been ‘actually incurred’ and not 1981.
during the 1981 year of assessment when
Principle: If the outcome of a bona fide
the action had been instituted. The tax-
legal dispute is unresolved by the end of
payer countered that the expenditure was
the year of assessment of a taxpayer, any
‘actually incurred’ only in 1985 when the
possible compensation payable is only
dispute was finally resolved.
incurred when the dispute is settled. If a
Judgment: A liability is only contingent in dispute goes to court, it is only when the
a case where there is a claim which is final court renders its decision that the
genuinely disputed and not vexatiously or expenditure is actually incurred (that is, the
frivolously made for the purposes of delay. decision is not taken on appeal).
In Port Elizabeth Electric Tramway Company v CIR 8 SATC 13, Acting Judge
Watermeyer stated the following about the meaning of ‘actually incurred’: ‘But
expenses actually incurred cannot mean ‘actually paid’. So long as the liability to pay
them actually has been incurred they may be deductible.’ In Ackermans Limited v the
Commissioner for the South African Revenue Services [2010] ZASCA 131, the court found
that contingent liabilities transferred to a purchaser were not costs incurred and were,
therefore, not deductible.
Before it may be said that expenditure has actually been incurred, there must be a
clear legal liability to pay at that particular time (ITC 1094 28 SATC 275). Where the
item of expenditure in question is the subject of a bona fide dispute, the court has
held (ITC 1499 53 SATC 266) that it lacks the degree of certainty and finality to render it
actually incurred. In C: SARS v Labat (2011), the Appeal Court considered the
implications of issuing shares.
275
A Student’s Approach to Taxation in South Africa 7.3
CASE:
Commissioner for South African Revenue Service v
Labat Africa Ltd
[2011] ZASCA 157
Facts: The company purchased a trade- Principle: The court found that the issue
mark from the seller and instead of paying of shares was not ‘expenditure actually
cash, the company entered a sale of busi- incurred’ and that the taxpayer cannot
ness agreement, in terms of which it issued deduct the cost. The court indicated if
a part of its own authorised share capital. two separate contracts existed, one to buy
Judgment: The question was whether the the trademark and a second to issue the
issue of authorised capital was an ‘expend- shares, the cost would have been
iture actually incurred’ for the purposes of deductible.
section 11(gA) of the Income Tax Act.
Example 7.2
Jan Els has his own biltong retail outlet. His shop is situated in a shopping centre. He
pays a monthly rental of R10 000 on the 28th of each month. Apart from the R10 000, he
must also pay 2% rental based on his annual turnover for the period 1 April 2022 to
31 March 2023 if the annual turnover exceeds R500 000. His turnover for the period from
1 April 2022 to 31 March 2023 amounted to R580 000.
You are required to discuss the deductibility of the above amounts for the current year of
assessment ended 28 February 2023.
276
7.3 Chapter 7: General deduction formula
Solution 7.2
The monthly rental of R10 000 is actually incurred and will be deductible. The rental
based on annual turnover exceeding R500 000 depends on a condition and there is no
definite and absolute liability to pay this amount at the end of his year of assessment
(28 February 2023), therefore it has not been actually incurred yet and is not deductible in
the 2023 year of assessment.
REMEMBER
• ‘Incurred’ means an unconditional liability to pay the expense that was incurred.
• The actual payment of the expenditure is not essential for the deduction of the expend-
iture.
REMEMBER
• Specific sections have been added to the Act, resulting in the issuing of shares to
acquire assets (including stock) being seen as expenditure actually incurred.
REMEMBER
• The general rule for income tax is that expenditure can be deducted only in the year of
assessment in which it was incurred. If it is not deducted, it cannot be claimed in a
future year of assessment, except where section 23H applies to prepaid expenses (refer
to chapter 8).
277
A Student’s Approach to Taxation in South Africa 7.3
CASE:
Port Elizabeth Electric Tramway Company Ltd v
Commissioner for Inland Revenue
8 SATC 13
Facts: The taxpayer company carried on the business of the company and the
business as a tramway transporter. A employment of drivers carried with it, as a
driver of one of its tram-cars lost control necessary consequence, a potential liability
while descending a steep gradient. He died to pay compensation if such drivers were
sometime afterwards as a result of the injured in the course of their employment,
injuries sustained in the accident. A claim the payment made by the company by way
for damages was lodged against the tax- of compensation was to be regarded as part
payer in terms of the Workman’s Compen- of the cost of the company’s operations for
sation Act. The Cape Provincial Division of the purpose of earning income and was
the Supreme Court compelled the taxpayer thus deductible. The legal costs incurred in
to pay an amount as compensation to the resisting the claim for compensation had
driver’s widow. In addition, the taxpayer not been expended in an operation entered
also incurred legal costs in resisting the upon for the purpose of earning income and
claim. The taxpayer claimed these two were not allowable as a deduction.
amounts as a deduction, but these claims Principle: The test (called the ‘inevitable
were disallowed by the Commissioner. concomitant’ or ‘closely connected’test)
Judgment: Section 11(a) permits the firstly required that the purpose (task per-
deduction of all expenses attached to the formed) of the expenditure must be estab-
performance of a business operation lished. Next, it should be determined
that is bona fide performed for the purpose whether the task was necessary and
of earning income regardless of whether whether an expected or foreseeable risk
such expenses are necessary for its perform- attached to that task. Thus, it should be
ance or attached to it by chance, provided asked whether the expense is so closely
they are so closely connected with it that connected with the income earned that it
they may be regarded as part of the cost of may be regarded as part of the cost of per-
performing it. As the employment of forming it. Note that the deductibility of
drivers was necessary for carrying on of legal costs is determined by section 11(c).
Over the years, this basic principle was developed further in Joffe & Co (Pty) Ltd v
Commissioner for Inland Revenue 13 SATC 354, Sub-Nigel Ltd v Commissioner for Inland
Revenue 15 SATC 381, Commissioner for South African Revenue Service v BP South Africa
(Pty) Ltd 68 SATC 229 and Commissioner for Inland Revenue v Drakensberg Garden Hotel
(Pty) Ltd.
278
7.3 Chapter 7: General deduction formula
CASE:
Joffe & Co (Pty) Ltd v Commissioner for Inland Revenue
13 SATC 354
Facts: The taxpayer company carried on Judgment: The expenditure had not been
business as engineers in reinforced con- incurred for the purpose of earning profits,
crete. A concrete hood (tower) for a power nor, as it had not been established that
station which they were supervising, col- negligent construction was a necessary
lapsed, and a workman employed by the concomitant of the trading operations of a
building contractor was killed by the fall- reinforced concrete engineer, had it been
ing material. In a delictual action, it was incurred for the purposes of the taxpayer’s
established that the taxpayer company had trade. The legal expenses were also not
been negligent in the performance of its deductible.
work and it was required to pay damages Principle: Compensation paid is dis-
to the relatives of the deceased workman. allowed as a deduction if the negligent
The Commissioner disallowed the claim action is not a necessary concomitant of the
for compensation as well as the legal costs trading operations.
incurred in defending the action.
CASE:
Sub-Nigel Ltd v Commissioner for Inland Revenue
15 SATC 381
Facts: The taxpayer company carried on Judgment: The expenditure upon premiums
the business of mining for gold. It made a was incurred for the purpose of earning
practice of taking out policies of insurance income in the event of certain happenings
against loss incurred by fire in respect of net and was not of a capital nature. As any
profits and standing charges. The insurance amount received under the policies would
against the loss of net profits was under- constitute a trading receipt, the expend-
taken in order to enable the company to iture on the premiums had been laid out or
maintain a steady rate of dividend to its expended for the purposes of the tax-
shareholders, notwithstanding a cessation payer’s trade. The premiums of the poli-
of operations in part or in whole by reason cies were admissible expenditure.
of fire. The insurance in respect of standing
Principle: Section 11(a) does not require
charges was designed to enable the com-
that claimable expenditure must have pro-
pany to carry on its essential services with-
duced income in the same year it was
out loss, notwithstanding any such cessation
incurred.
of mining operations. These insurance pre-
miums were claimed as a deduction by the
taxpayer although no insurance claims
were received during that year.
279
A Student’s Approach to Taxation in South Africa 7.3
CASE:
Commissioner for Inland Revenue v Drakensberg
Garden Hotel (Pty) Ltd
23 SATC 251 (A) – 1960
Facts: The taxpayer, a private company, shares and the production of the rental
leased a hotel from another private com- income were sufficiently closely connected
pany (known as the Stiebel company) for to allow a deduction of the interest paid.
4¼ years. It then sub-let the hotel to a part- Judgment: The court held that the tax-
nership who thereafter ran the hotel. A payer’s purpose in buying the shares was
farm on which there was a trading store, is not to secure dividend income, but to en-
surrounded by the hotel premises. The tax- sure the taxpayer’s control of its revenue-
payer leased the store initially from one of producing asset and thereby securing the
the Stiebel company’s two shareholders continuance of an increased income from
and then later from the Stiebel company his trading/business operations. Therefore
itself. So at this point in time the taxpayer the payment of interest and the production
held two leases from the Stiebel company. of income were sufficiently close to allow
The taxpayer then acquired all the shares the deduction.
in the Stiebel company for the purpose of Principle: Interest paid on a loan to
obtaining absolute control over the hotel acquire shares can be deductible, if the tax-
and store premises (thus to secure and payer’s purpose with the acquisition of the
preserve the two leases). Interest was shares is to ensure the continuance of his
payable on the outstanding balance of the business activities. The new section 24)
purchase price of the shares. The court had confirms and extends the principle in this
to decide whether the purchase of the case.
The principles developed several years ago were recently confirmed in Commissioner
for South African Revenue Service v BP South Africa (Pty) Ltd.
280
7.3 Chapter 7: General deduction formula
CASE:
Commissioner for South African Revenue Service v
BP South Africa (Pty) Ltd
68 SATC 229
Facts: The taxpayer company, being a mar- Judgment:
keter of petroleum products, was wholly
• In regard to the first claim, the loan
owned by a British parent company. Two
was not required to pay the dividend.
items of expenditure were at stake.
Therefore, the purpose of the loan was
• The first claim concerned interest paid to continue its income-producing activ-
on a loan from its parent company, ities. The interest paid on the loan was
which at the same time required that thus an expense incurred in order to
dividends be declared quarterly. The produce income.
company had sufficient funds to pay
the full dividends without any loan • In regard to the second claim, the lump
from the parent. However, the loan sum payments were more closely
was required for the purchase of related to the taxpayer’s income-earn-
capital equipment so that the business ing structure than its income-producing
could expand. If the dividends had not operations, as they were incurred not
been declared, the taxpayer could have to carry on the business of the tax-
funded the purchase out of its own payer, but to establish it. The nature of
funds. The obtaining of the long-term the advantage obtained, namely to en-
loan also enabled the company to make sure that the taxpayer’s products
additional local borrowings (local bor- would be sold from the leased prem-
rowings were restricted in the case of a ises for a substantial period, resulted in
foreign-owned company). the expenditure being of a capital na-
ture. Accordingly, expenses had to be
• The second claim concerned a lump
deducted in terms of section 11(f) –
sum ‘up front’ rental payment in re-
deduction of lease premiums.
spect of leases which endured for some
20 years. The purpose of the lump sum Principle: The principle established in PE
payments ‘up front’ was to secure sites Electric Tramways (that the purpose of the
from which the taxpayer’s petrol could expenditure must be looked at to deter-
be sold and from which income would mine whether such expenditure produces
be produced for 20 years. income as defined) is confirmed.
281
A Student’s Approach to Taxation in South Africa 7.3
CASE:
Commissioner for Inland Revenue v Nemojim (Pty) Ltd
45 SATC 241
Facts: The taxpayer company was a share- Judgment: The taxpayer had a dual pur-
dealing company, making profits from pose, namely the receipt of moneys on
buying and selling shares in dormant com- resale of the shares (which would consti-
panies holding cash reserves available tute income in its hands) and the receipt of
for distribution by way of dividends. a dividend after declaration thereof (exempt
In common terms, it carried on dividend- income in its hands). The expenditure in
stripping operations. When the company issue thus did not pass the dual test of
was so ‘stripped’, the taxpayer sold the sections 11(a) and 23(f) of the Act and
shares at a loss (because all the reserves therefore it would be appropriate to apply
had by that time been declared as divi- the principle of apportionment. Thus, only
dends). The dividends received by the a proportion of the expenditure on the
taxpayer were exempt from tax and the shares would qualify as a deduction.
whole loss on the sale of the shares was
Principle: Where expenditure is incurred
claimed as a deduction being offset against
for two purposes and only one of those
a bag-cleaning business operated by the
qualified for deduction, the expenditure
company. The Commissioner limited the
can be apportioned. Note that section 23(g)
loss on the sale of the shares to the
now allows apportionment where there is
proceeds received for the shares.
trade and non-trade or private-purpose
expenditure.
Example 7.3
Karin Marais operates a catering business from home. She does catering for office parties
and meetings. During June, she calculated that 80% (R50 000) of her grocery purchases
related to her catering business. During the same month, she paid her domestic worker an
extra R5 000 for her help in the preparation of the food.
You are required to discuss the deductibility of the above amounts for the current year of
assessment.
Solution 7.3
The R50 000 (80%) of her grocery purchases and the R5 000 paid to her domestic worker
are deductible in terms of section 11(a), as these expenses were incurred in the production
of her catering income. The 80% of the grocery purchases as well as the ‘wage’ of R5 000
relate to her trading activities.
With regard to the closeness of the connection, the court held, in CIR v Hickson
23 SATC 243, that expenditure would be regarded as part of the cost of performing
the income-earning operations if ‘it would be proper, natural or reasonable to regard
the expenses as part of the cost of performing the operation’.
282
7.3 Chapter 7: General deduction formula
Theft
In regard to losses resulting from theft or embezzlement, these are losses attached to
the business operations by chance. They will be deductible provided they are so
closely connected to the operation that they may be regarded as part of the cost of
performing it. Theft of trading stock by third parties in a supermarket, for example,
would fall into this category.
In relation to ‘employee theft’, the court held in COT v Rendle 26 SATC 326 that the
expenditure
was sufficiently closely connected with the firm’s business operations as to be
regarded as part of the cost of performing those operations.
In ITC 1221 36 SATC 233, it was confirmed that theft losses by a managing director, a
director or a manager in the position of a proprietor will not be deductible. In
ITC 1242 37 SATC 306, it was held that,
as a prerequisite to deductibility the taxpayer must establish that the risk of the loss
which he seeks to deduct from his income is inseparable from, or a necessary ingre-
dient of, the carrying on of the particular business.
This case also involved junior employees.
In ITC 1383 46 SATC 90, which dealt with defalcations by a senior employee of a
bank, it was held that the risk of theft is inherent in and an inseparable element of
such business and the loss in issue was therefore deductible.
Example 7.4
Fastway (Pty) Ltd has a takeaway outlet that only operates on a cash basis. During the
current year of assessment it came to their attention that the cashier stole money from the
cash register amounting to R10 000. During the year, the company was also robbed of
takings of the day during an armed robbery. The loss amounted to R7 500. Fastway (Pty)
Ltd was not insured for such losses.
You are required to discuss the deductibility of the above amounts for the current year of
assessment.
Solution 7.4
Fastway (Pty) Ltd will be able to deduct both amounts during the current year of
assessment as they are closely connected to the operation of a cash-based business and
the risk of theft can be regarded as part of the cost of performing such a business.
283
A Student’s Approach to Taxation in South Africa 7.3
CASE:
Warner Lambert SA (Pty) Ltd v Commissioner for South
African Revenue Service
65 SATC 346
Facts: The taxpayer, an American-owned a capital nature since the purpose of the
South African company operating in South expenditure was to protect the taxpayer’s
Africa during the height of the apartheid income-earning structure.
regime, had joined an association of local Judgment: The money spent by a taxpayer
signatories of the Sullivan Code in 1978. in order to advance the interests of the
Subsequently, the USA promulgated the group of companies to which it belonged
Comprehensive Anti-Apartheid Act 1986, was not regarded as expenditure in the pro-
which compelled American companies and duction of income. The link between the
their subsidiaries operating in South Africa expenditure and the production of income
to comply with the Sullivan Code principles. was too tenuous; moneys expended by a
If they did not comply, fines and even taxpayer from motives of pure liberality
imprisonment for the directors of the also failed to qualify as expenditure in the
American holding company could be im- production of income. The evidence on the
posed. The Sullivan Code principles pro- appellant’s behalf was to the effect that the
vided for the non-segregation of races in purpose of the Sullivan Code expenditure
the workplace, equal and fair employment was not merely to serve a social responsi-
for all employees, equal pay, the devel- bility but also to insure against the risk of
opment of training programmes, in- losing its treasured subsidiary status. It was
creasing the number of disadvantaged true that the link between the appellant’s
persons in management and supervisory trade and the social responsibility expend-
positions, and improving the quality of iture was not as close and obvious in the
employees’ lives outside the work environ- second category (social spending) as in the
ment. The social responsibility expenses first (increased wages), but that did not
incurred in complying with the Sullivan mean that the connection was too remote.
Code principles, namely the expenses If the appellant had lost its subsidiary
incurred in ‘Working to Eliminate Laws status, it might have directly brought
and Customs that Impede Social, Eco- about the loss of all kinds of trade advan-
nomic and Political Justice’, which was tages and it was therefore unthinkable that
the seventh principle of the Sullivan the appellant would not comply with the
Code, were claimed by the taxpayer as Sullivan Code. The Sullivan Code expenses
deductions. The taxpayer contended that it were therefore bona fide incurred for the
was instructed by its American parent to performance of its income-producing opera-
incur expenses that went with the perform- tion and formed part of the cost of per-
ance of its Code obligations and if it failed forming it, and therefore the social respon-
to do so, it would almost certainly have sibility expenditure was incurred for the
suffered a loss of income. Such expen- purposes of trade and for no other. The
diture included participation in national expenses incurred by the appellant were
conventions, peace initiatives, providing not of a capital nature, as no asset was cre-
information, technology support, adopting ated or improved. The appellant’s income-
schools and helping small businesses start earning structure had been erected long
up operations. The Commissioner dis- ago and it was now a question of protect-
allowed the social responsibility expenses ing its earnings. The periodic payments
claimed on the basis that the expenditure made were to preserve it from harm, or at
had not been incurred in the production of least to avert the risk of harm and therefore
taxpayer’s income and was expenditure of these payments were similar to
continued
284
7.3 Chapter 7: General deduction formula
Recurrent expenses
There are certain recurrent expenses that are not incurred in the production of
income, such as accounting fees. Practice Note No. 37 provides for the deduction of
fees paid to accountants, bookkeepers and tax consultants for the completion of
income tax returns for taxpayers whose remuneration includes income such as
commission, or for taxpayers who earn income in the form of interest or dividends, as
well as administration fees charged by institutions administering the affairs of
pensioners. In the case of Commissioner for the South African Revenue Service v Mobile
Telephone Networks Holdings (Pty) Ltd the court considered whether these costs should
be apportioned where both taxable and exempt income is earned.
285
A Student’s Approach to Taxation in South Africa 7.3
CASE:
Commissioner for the South African Revenue Service
v Mobile Telephone Networks Holdings (Pty) Ltd
(966/12) [2014] ZASCA 4
Facts: The taxpayer, a holding company, Judgment: The Supreme Court held that in
has five subsidiaries and a number of order to determine whether moneys out-
indirectly held subsidiaries and joint ven- laid by a taxpayer constitute ‘expenditure
tures. The company is a wholly owned incurred in the production of the income’,
subsidiary of a listed entity and the collect- it is important to consider the purpose of
ive business of this group of companies is the expenditure and its underlying cause.
the provision of mobile telecommunication The court thus had to assess the closeness
networks and related services. The tax-
of the connection between the expenditure
payer’s business activities comprised the
and the taxpayer’s income-earning oper-
earning of dividends from the holding of
ations. It agreed with the Tax Court’s
shares in its subsidiaries, as well as the
provision of loans. The provision of loans, conclusion that ‘the auditing of financial
in turn, comprised loan funding to its sub- records is clearly a function which is
sidiaries (mainly interest-free) and loan “necessarily attached” to the performance
funding as part of a debenture scheme of the taxpayer company’s income-earning
arrangement whereby the taxpayer com- operations’. In this case the expenditure
pany borrowed funds (through the issue was incurred for a dual or mixed purpose,
of debentures) and then loaned the funds therefore an apportionment of such
to group companies at a higher interest expenditure should take place. The appor-
rate. The taxpayer thus had two sources of tionment that should be used is dependent
income, that is to say dividend income on the facts of each case, but must be fair
(exempt income) and interest income and reasonable. In this case the taxpayer
(taxable income). company’s value lay in its principal busi-
The taxpayer had claimed the deduction of ness as a holding company. It appears that
the audit fees incurred in respect of the the audit time spent specifically on divi-
annual statutory audit of the company’s dend and interest entries made up a rela-
financial statements for each of the 2001 to tively small component of the overall audit
2004 years of assessment. In addition, the time. The audit function involved the
taxpayer also claimed a professional fee auditing of the taxpayer company’s affairs
(training fee) incurred during its 2014 year as a whole, the major part of which con-
of assessment, for the ‘implementation, cerned the consolidation of the subsid-
adjustment, fine tuning and user operation iaries’ results into the taxpayer company’s
of a new accounting computer system’. results. Therefore the apportionment must
The Commissioner for SARS disallowed be heavily weighted in favour of the dis-
the professional fee deduction in full on allowance of the deduction given the pre-
the basis that the expense was capital in dominant role played by the taxpayer com-
nature. The Commissioner apportioned the pany’s equity and dividend operations as
deduction of the audit fees incurred for opposed to its far more limited income-
each year of assessment, on the basis of the earning operations.
ratio between the interest income and the
dividend income. Since the dividend The court then ruled that it would be fair
income comprised the bulk of the tax- and reasonable that only 10% of the audit
payer’s income each year, the bulk of the fees be allowed. As the taxpayer gave
audit fees was disallowed every year, inadequate evidence with regards to the
leaving a small percentage of between 2% professional fee, the court had to rule that
and 6% that was allowed as a deduction in the professional fee was disallowed in
each of the relevant years of assessment. full.
286
7.3 Chapter 7: General deduction formula
Ex gratia payments
A taxpayer who makes voluntary payments related to their trade still qualifies for a
deduction, as was the case in PROVIDER v Commissioner of Taxes, Southern Rhodesia
17 SATC 40.
CASE:
PROVIDER v Commissioner of Taxes, Southern Rhodesia
17 SATC 40
Facts: The taxpayer started two schemes Judgment: There are no clear distinctions
for the benefit of its employees – a ‘Life that could be drawn between the two sets
Assurance Scheme’ and a ‘Service Bonus of payments since both were clearly
Scheme’. Both schemes were non-con- designed by the taxpayer to induce its
tributory and could be withdrawn from employees to enter and remain in its ser-
at will by the company. In terms of vice. Both payments were validly deduct-
the schemes, the company undertook to ed as constituting expenditure actually
pay, firstly, a bonus on retirement to any incurred in the production of income.
employee who had been in the company’s
service for a certain period, and, secondly, Principle: To be incurred ‘in the produc-
a benefit to the dependants of men tion of income’ does not mean that a tax-
who died in the company’s service, the payer is legally obliged to incur the expen-
amount of the bonus or benefit, as the diture. Ex gratia payments made by an
case might be, being graduated for the employer to promote happy and content-
service of the employee and calculated ed staff may also qualify for a deduction
based on the length of employment. The under section 11(a) under certain con-
Commissioner allowed the deduction of ditions, namely if there is a contract in
the bonuses but not the benefits paid to existence with an employee for a deferred
their dependants. payment on retirement or if there is an
established policy to that effect.
REMEMBER
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A Student’s Approach to Taxation in South Africa 7.3
The courts have, however, established certain tests or norms that are of assistance
when determining the capital or revenue nature of a specific type or class of expend-
iture. In New State Areas Ltd v CIR 14 SATC 155, Judge Watermeyer describes the first
of the tests that can be used.
CASE:
New State Areas Ltd v Commissioner for Inland Revenue
14 SATC 155
Facts: The taxpayer company carried on Judgment: The payments made in respect
the business of gold mining. The company of the internal sewers were of a capital
was legally required to install a system nature, being the payment of instalments
of water-borne sewerage and to link up towards the acquisition of an asset owned
with the local authority’s system. The by the company. The payments made in
system installed consisted of sewers and respect of the external connections, which
connections upon the company’s own pro- did not produce any permanent asset, con-
perty and sewers upon land outside the stituted a charge for the use of the local
company’s property linking the system authority’s system, which remained a
into the local authority’s main system. The recurrent business charge.
system was installed at the local authority’s Principle: Expenditure is to be regarded as
cost but this was recovered by way of part of the cost of performing income-
charges payable by the company over earning operations, or as part of the cost of
60 months for the cost of the system on its establishing or improving or adding to the
own property (which would become its income-earning structure, the so-called
own property) and over 180 months for the ‘operations vs structure’ test. The other
cost of the system which was not located tests used for assistance in deciding the
on the local authority’s property. When matter were the ‘fixed vs floating capital’
claimed as a deduction, the Commissioner test; the test to establish whether there was
disallowed all the monthly amounts any enduring benefit or permanent asset
payable to the local authority as being created by the expenditure, and even the
expenditure of a capital nature. recurrence test, which is not of much use.
288
7.3 Chapter 7: General deduction formula
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A Student’s Approach to Taxation in South Africa 7.3
CASE:
BP Southern Africa (Pty) Ltd v Commissioner For South
African Revenue Services
2007 SATC 7
Facts: The taxpayer, BPSA, was the manu- Judgment: The annual royalty payments
facturer, supplier and marketer of fuel in incurred in consideration for the right to
South Africa. BPSA obtained the non- use intellectual property were not of a
exclusive right to use certain licensed capital nature and were accordingly
products and marketing material from its deductible. The court also reconfirmed the
offshore holding company and paid an principle that regard must principally
annual royalty, based on the quantity of be had to their agreement to determine
product supplied for these rights of use. the true rights and obligations between
The special court found that the royalty parties, unless it was a simulated trans-
expenditure incurred for the use of intel- action. As the royalty was paid in con-
lectual property (trademarks and other sideration for the use of, and not the
marketing material) was not comparable to ownership, of intellectual property, it is for
rentals paid for business premises, but that all intents and purposes indistinguishable
it rather resembled expenditure incurred in from recurrent rent paid for the use of
setting up a business (for example franchise another’s property.
fees). It found that the rights and obli-
gations between BPSA and its holding Principle: Royalty payments made in
company were of an enduring nature, terms of a licence agreement are revenue in
despite the fact that the parties had enjoyed nature and are therefore deductible in
a clear contractual right to terminate these terms of section 11(a).
obligations.
• Fixed or floating capital A further test that has been developed is whether the
expenditure relates to fixed or floating capital. This distinction was referred to in
the New State Areas case as follows:
[W]hen the capital employed in a business is frequently changing its form from
money to goods and vice versa (for example, the purchase and sale of stock by a
merchant or the purchase of raw material by a manufacturer for the purpose of
conversion to a manufactured article) and this is done for the purpose of making a
profit, then the capital so employed is floating capital. The expenditure of a capital
nature, the deduction of which is prohibited. . ., is expenditure of a fixed capital
nature, not expenditure of a floating capital nature, because expenditure which
constitutes the use of floating capital for the purpose of earning a profit, such as the
purchase price of stock-in-trade, must necessarily be deducted from the proceeds of
the sale of stock-in-trade in order to arrive at the taxable income derived by the
taxpayer from that trade.
In Stone v SIR 36 SATC 117, the issue considered was whether the loss of moneys
advanced was of a capital or revenue nature. The court used the test of fixed or
floating capital as follows: The capital was not consumed in the very process of
income production; it did not disappear to be replaced by something that, when
received by the taxpayer, forms part of their income.
In a business of banking or money lending, losses incurred as a result of irrecover-
able loans made in the course of that business are of a revenue nature and are
deductible.
290
7.3 Chapter 7: General deduction formula
• ‘Once and for all’ expenditure Another test referred to by the court was whether
the expenditure was once and for all expenditure. In Vallambrosa Rubber Company v
Farmer 1910 SC 519, the opinion was expressed that ‘in a rough way’ it was ‘not a
bad criterion that capital expenditure is a thing that is going to be spent once and
for all while income expenditure is a thing that is going to recur every year’. This
test can clearly not be of universal application, but should not be dismissed as
useless (British Insulated and Helsby Cables Ltd v Atherton).
• Nature of the business carried on The nature of the business a taxpayer is
engaged in may determine whether an expenditure or loss is deductible. In Rand
Mines (Mining and Services) Ltd v CIR 59 SATC 85, the type of business the taxpayer
carried on had an impact on the decision as to whether the expenditure was of a
capital or revenue nature.
CASE:
Rand Mines (Mining & Services) Ltd v
Commissioner or Inland Revenue
59 SATC 85
Facts: The taxpayer was a mine manage- purposes, the taxpayer had received, via
ment company and a member of a large management fees, the amount originally
group of mining companies. Its principal paid for the right to manage the mine.
function was the administration and man-
agement of 40 mines controlled by the Judgment: The expenditure in question
was made in order to acquire an asset
group. The group’s policy was to require
which was intended to provide an endur-
the taxpayer to manage all its mines as it
ing benefit for the taxpayer, as the
would ordinarily not invest in a mine contract was to endure for at least 20
unless it could be managed by the tax- years. Only on one other occasion did the
payer. After a mining company outside the taxpayer pay to acquire a management
group began to experience financial diffi- contract. It was not the taxpayer’s stock-in-
culties, the group acquired a controlling trade. The expenditure in question had
interest in the ailing company, on the con- been incurred to acquire an asset which
dition that it cancelled an existing manage- added to the income-earning structure of
ment agreement and concluded a new the business and was not expenditure
agreement with the taxpayer. The taxpayer routinely occurring in the running of the
had to pay a ‘management termination taxpayer’s business. The contracts per se
agreement’ amount of R30 million to the generated no income but they did provide
previous management company before it the taxpayer with the opportunity of
entered into a new management contract generating income by providing the man-
agement services for which payment
with the mine with a term of not less than
would be made. The contract was ‘a source
twenty years. When the price of platinum
of profit’ and the R30 million was spent to
dropped, the group elected to relinquish its
acquire it. Accordingly, the cost had been
controlling interests in the newly acquired of a capital nature.
company. As a consequence, the taxpayer
was obliged to terminate its management Principle: Expenditure that provides an
of that mine. The taxpayer, however, had ‘enduring benefit’ is capital in nature.
already received R30 million in manage- Expenditure more closely linked to the
ment fees (which had been taxed) by the income-earning structure than the income-
time it was obliged to terminate the manage- earning operations of the taxpayer is
ment agreement. Thus, for all intents and capital in nature.
291
A Student’s Approach to Taxation in South Africa 7.3
A taxpayer, whose business it was to insure farmers, was not granted a deduction in
respect of a loss incurred, as the court held that the taxpayer was not engaged in a
banking or money-lending business. As a result, the loss was of a capital nature
(Sentra-Oes Koöperatief Bpk v KBI 57 SATC 109).
• Halfway house between capital and income It has also been held that there is no
halfway house between capital and income. However, in Tuck v CIR 50 SATC 98,
the court sanctioned the apportionment of income between a capital and a non-
capital element. The apportionment of expenditure between capital and revenue
should therefore also be possible, but the matter is, as yet, not tested.
From the norms established by the courts, it is obvious that the purchase (other
than by a trader in these assets) of buildings, plant and machinery, which are fixed
assets, constitutes capital expenditure, while the purchase of trading stock
constitutes non-capital expenditure. The acquisition of the goodwill of a business,
which confers an enduring benefit, is a capital expense, while expenditure on a
continuing advertising campaign is of a revenue nature. The cost of improving or
adding to capital assets is a capital expense, but the cost of effecting necessary
repairs to the property is a revenue expense. Unfortunately, not all cap-
ital/revenue decisions are as clear cut as these and each case will have to be
decided on its own particular facts.
Example 7.5
During the current year of assessment, JJ Ltd purchased a piece of land adjoining his
business premises to use as parking for its clients. The cost of the land amounted to
R100 000 and was paid for in cash during August 2022.
You are required to discuss whether the above expense is of a capital nature.
Solution 7.5
The amount of R100 000 incurred to purchase the vacant land is an expense of capital
nature as the land forms part of the income-earning structure, is not connected to the
income-earning operations and was also incurred as part of the fixed capital of the
business, rather than the floating capital. The expense will not be deductible during the
current year of assessment.
292
7.3–7.4 Chapter 7: General deduction formula
REMEMBER
• The true nature of each transaction must be examined in order to determine whether
the expenditure is of a capital or revenue nature.
• The purpose of the expenditure and whether it is connected to the income-producing
structure (capital nature) or the income-earning operations (revenue nature) is an
important norm.
• Generally, expenditure resulting in the creation of a new asset will be of a capital
nature.
• The relation of the expenditure to the fixed capital (fixed asset) or the floating capital
(trading stock) will determine whether the expenditure is of a capital or revenue nature.
• Generally, capital expenditure is spent once and for all and revenue expenditure is
recurrent in nature.
7.3.6 Laid out or expended for the purposes of trade (section 23(g))
Section 23(g), the negative part of the general deduction formula, must be read with
section 11(a) to determine whether a particular amount may be deducted from the
income.
Section 23(g) reads as follows, prohibiting the deduction of
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.
Apportionment has therefore officially been sanctioned by the Act. In other words, if
a portion of the amount is not for purposes of trade, that portion may not be
deducted for tax purposes. In CIR v Nemojim (Pty) Ltd, Judge Corbett said that
in making such an apportionment the court considers what would be fair and
reasonable in all circumstances of the case.
Apportionment may be made in various ways, for example on a time basis, a piece-
work basis, on the basis of the capital employed etc., as long as it is fair.
293
A Student’s Approach to Taxation in South Africa 7.4
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7.4 Chapter 7: General deduction formula
295
A Student’s Approach to Taxation in South Africa 7.4
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7.4 Chapter 7: General deduction formula
Example 7.6
Mr Rex Mtulu would like to deduct the cost of the clothes that he wears to work from his
taxable income. He feels that he would not have purchased these clothes if he did not go
to work. Rex is a professional businessman who purchased five suits at a cost of R15 000
each on one of his clothing store accounts. The account has not been settled at the end of
the current year of assessment.
You are required to determine, according to the general deduction formula, whether Rex
will be able to deduct the cost of his working clothes from his taxable income during the
current year of assessment.
Solution 7.6
Rex is carrying on a trade. He is a professional businessman and this falls under the
definition of ‘trade’.
An expense of R75 000 (R15 000 × 5) was incurred. Rex purchased the suits on credit to the
value of R75 000. The R75 000 expenditure was actually incurred. Rex did not pay cash for
the suits but by buying the suits on credit, the expense is also seen as actually incurred. It is a
fact that the purchase was made and therefore no contingency exists. The expense does not
have to be ‘actually paid’ for it to be ‘actually incurred’.
The purchase occurred in the year of assessment. Even though Rex will only pay the
clothing store account in the following year of assessment, the debt was incurred in the
current year of assessment, and can therefore be deducted in this year, if all the other
requirements of the general deduction formula are met.
In the production of income. The suits were purchased due to Rex’s profession. A
businessman normally wears suits. The questions to be answered, however, are: ‘How
closely connected is the purchase of the suits to the production of the income?’ and ‘Was
the expense a necessary concomitant of the business operation?’ Rex can argue that without
his suits, he would not look like a professional and would probably not produce the
income, since none of his clients would take him seriously and therefore the suits are
necessary to his income-earning operations.
Of a capital nature or not. What was the true nature of the transaction? It was to
purchase clothing, which will be worn when performing income-producing business
operations. Do the suits create an enduring benefit? The suits will create a benefit until
they become worn out and the next set of suits has to be purchased. Due to there being no
prescribed period for the term ‘enduring’, the period is very subjective and some may say
that the suits create an enduring benefit and others will differ.
Are the suits considered to be once and for all expenditure? No, due to the nature of
clothing, suits will be purchased every two to three years.
From the above discussion it seems that the expenditure is of a capital nature.
continued
297
A Student’s Approach to Taxation in South Africa 7.4
Laid out or expended for the purposes of trade. Were the suits only purchased due to
Rex’s trade? A suit is a type of clothing that can be worn on many different occasions. It is
not only limited to business hours. Suits are not like overalls or nurses’ outfits that
normally indicate what profession the wearer is a member of. Rex could have a dual
purpose for the suits, both business and private purposes. The expense can be appor-
tioned, but the apportionment will be difficult to determine.
There is also no specific deduction that covers this type of expense. Section 23(m)
prohibits deductions, except for certain listed deductions relating to a salaried person.
Section 23(a) also prohibits expenditure relating to the maintenance of the taxpayer.
The expense does not comply with all the requirements of the general deduction formula
(it could be seen to be of a capital nature). Even if one argued that the suits are not of a
capital nature and all the requirements of the general deduction formula are met, in terms
of section 23(m) and (a) the cost of the suits will not be deductible and the deduction of
the costs will not be allowed against his income.
REMEMBER
• The expenditure listed in section 23 are prohibited deductions for tax purposes, despite
them sometimes complying with section 11(a).
298
7.5 Chapter 7: General deduction formula
Example 7.7
Samuel Gxagxa, a salesman, earned the following income during the year of assessment:
R
Salary 270 000
Commission on sales 125 000
Entertainment allowance 12 000
397 000
During the curent year, Samuel incurred business-related entertainment expenditure
amounting to R15 000 for meals of clients.
You are required to calculate the amount that Samuel may claim as a deduction in respect
of entertainment expenditure.
299
A Student’s Approach to Taxation in South Africa 7.5
Solution 7.7
As Samuel does not earn remuneration mainly (more than 50%) (R125 000 / R397 000 =
31%) by way of commission on sales, he may not claim a deduction in terms of sec-
tion 11(a) even though it was incurred for trade purposes.
If more than 50% of his remuneration had consisted of commission earnings, he would
have been able to claim the full amount of his entertainment expenditure in terms of
section 11(a) since it was incurred in the production of his income and was not of a capital
nature.
300
7.5 Chapter 7: General deduction formula
• Wasting assets Assets such as mines, quarries and forests are exhausted in the
course of their use. Nevertheless, expenditure incurred in the acquisition of these
assets is of a capital nature.
Example 7.8
Max Roper is a retired army officer. Since retirement he has been operating a security
business supplying guards and guard dogs. He seeks advice on whether the following
expenses and losses are deductible in terms of the general deduction formula:
1. One of Max’s guards was badly bitten by one of the guard dogs while on duty. The court
granted the guard compensation amounting to R25 000. Max paid the amount during
March 2023 after the court decision on 20 February 2023.
2. One of Max’s trucks, with a tax value of R50 000 on the date, was hijacked when the
driver was returning with the truck after having transported a team of guards to a
client’s premises. The truck was not insured.
3. Max erected a billboard on the pavement outside his business premises, advertising his
security business. The billboard cost R30 000. Max also paid R80 000 for advertisements
that appear in the local newspaper every Saturday, in which his security services are
advertised. The local municipality fined Max R10 000 for obstruction to pedestrians
caused by his billboard. Max also paid R2 000 to have the billboard moved inside the
boundary of his property.
4. Four of Max’s team leaders attended a two-day training seminar on the latest security
techniques, at a cost of R18 000 per person.
5. Max borrowed R100 000 on 1 March 2022 and paid interest on this loan amounting to
R12 000 for the current year of assessment. He used R50 000 to buy shares in his
brother’s private company, R30 000 to buy ammunition to be issued to his security
guards and R20 000 to pay the account for veterinary services that had been unpaid
since July 2020 when four of his guard dogs were injured in a dog fight.
You are required to determine whether the expenses and losses above are deductible in
terms of the general deduction formula.
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A Student’s Approach to Taxation in South Africa 7.5
Solution 7.8
1. The question of whether Max will be able to deduct the amount of R25 000 in terms of
section 11(a) will depend on whether it is a non-capital expense actually incurred
during the year of assessment in the production of Max’s income. The expense is not of
a capital nature because it was not incurred to purchase or improve a capital asset or to
give rise to an enduring benefit. Although the payment was only made after the end of
the year of assessment, Max incurred an unconditional liability on 20 February 2020 to
pay the amount so that, if it is deductible, it will have to be deducted during the cur-
rent year of assessment. The essential problem to be addressed, however, is whether
this amount was incurred in the production of Max’s income. In Port Elizabeth Electric
Tramway Co Ltd v CIR 8 SATC 13, it was held that expenses are deductible provided
they are so closely connected to a business operation that they may be regarded as part
of the cost of performing it. In the case of fortuitous or chance expenditure arising from
an accidental injury, one must therefore examine the closeness of the connection. Was
the act leading to the expense ‘a necessary concomitant’ of the business operation (Joffe
& Co (Pty) Ltd v CIR 13 SATC 354)? It would appear that the type of business Max is
engaged in carries the risk of employees or the public being bitten by one of his guard
dogs. The expense of R25 000 should therefore be deductible in terms of section 11(a).
2. The loss of the truck is a loss of a capital nature as the truck formed part of the fixed
capital structure of Max’s business (CIR v George Forest Timber Co Ltd 1 SATC 20). The
loss of R50 000 is therefore not deductible in terms of the general deduction formula.
3. The cost of the billboard (R10 000) is an expense of a capital nature as it was
expended to create an enduring benefit for Max’s business and is also not an expense
that is closely connected to his income-producing operations (New State Areas Ltd v
CIR 14 SATC 155). The ongoing advertisements in the newspaper at a cost of R80 000
constitute recurring expenses of a non-capital nature. No single advertisement could
be said to create an enduring benefit. The fine of R10 000 is not an expense incurred in
the production of Max’s income, but a punishment for the contravention of a law. Sec-
tion 23(o) prohibits the deduction of fines. The expense of R2 000 incurred in moving
the billboard is also an expense of a capital nature as it is closely connected to the
income-producing structure, rather than the income-producing operations of his
business.
4. The cost of R72 000 (R18 000 × 4) incurred by Max in training his workers will be
deductible as it is an expense incurred in the production of his income (by training
them to perform their services more effectively). This is not of a capital nature.
5. The interest of R6 000 (R12 000 × R50 000/R100 000) incurred on R50 000 of the loan
will not be deductible in terms of the general deduction provisions as it is not an
expense which produces income as defined (section 23(f)). Dividends earned on the
shares are exempt from tax and therefore do not constitute income. Interest of R3 600
(R12 000 × R30 000 / R100 000) incurred on the purchase of ammunition is deductible
as the expense was closely connected with his income-producing operations. The
ammunition is not part of the capital structure of his business. The interest of R2 400
(R12 000 × R20 000/R100 000) incurred on the R20 000 used to pay the veterinary costs
for his dogs is an expense incurred in the production of Max’s income, as the risk of
dog fights and the attendant injuries are closely connected to his type of business. The
interest will therefore be deductible. The actual payment of R20 000 would not be de-
ductible in the current year of assessment as this expense was actually incurred in the
previous year of assessment. If Max did not claim it as a deduction in that year of
assessment, he may not deduct it in this year. His only recourse would be to object to
the 2021 assessment issued by SARS.
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7.5–7.7 Chapter 7: General deduction formula
7.6 Summary
In this chapter, the different components that make up the so-called ‘general deduc-
tion formula’ were discussed. All these components or requirements must be present
for an expense to be deductible.
The key requirements of the general deduction formula are that the taxpayer must be
carrying on a trade and that the expense must be in the production of income, not of a
capital nature and expended for the purpose of trade. These requirements are not all
defined in the Act and certain tests were laid down by the court. The deductibility of
an expense will have to be decided on its own facts and circumstances.
If the expense does not comply with all the requirements of the general deduction
formula, it will be necessary to determine whether a specific deduction in terms of the
Act might apply. The specific deductions are dealt with in chapter 8.
In the questions that follow, the requirements of the general deduction formula will
be illustrated.
Question 7.1
Kyle is a South African resident, aged 36 years. He owns a bar in Bloemfontein. Due to the
good reputation and popularity of his business, Kyle needed to appoint two bouncers to
ensure the safety of his customers and to minimise fights.
During the 2023 year of assessment one customer had five drinks too many and started a
fight with another customer. One of the bouncers tried to control the issue and stop the
fight; however, he ended up having two of his ribs broken. The fight was eventually
stopped by the other bouncer. Kyle incurred costs amounting to R76 000 to cover the
medical expenditure of the bouncer who got injured.
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A Student’s Approach to Taxation in South Africa 7.7
Answer 7.1
Discussion of the deduction of medical expenses
For an expense to be deductible it has to comply with all the components of the general
deduction formula. The issue is whether the medical expense incurred by Kyle were
incurred in the production of income.
The medical expense was incurred in the production of income as one of Kyle’s bouncers
was injured during his employement.
Port Elizabeth Electric Tramway Company Ltd v Commissioner for Inland Revenue 8 SATC 13:
‘closely connected’ test
What action gave rise to the expenditure?
The medical expenses were incurred because a bouncer tried to stop a fight between
customers and was consequently injured. This is his job.
Is the action so closely linked to the income earned that it may be regarded as part of the cost of
performing it?
It might be necessary to incur such expense in order to produce income, as stopping fights
between customers are in the ordinary course of his business of operating a bar.
Conclusion: The medical expense incurred qualifies as a deduction as it is closely connected
to the business operation.
304
Specific deductions and
8 allowances
General
Specific Capital Deductions for
deduction
deductions allowances individuals
formula
Page
8.1 Introduction............................................................................................................ 306
8.2 Foreign exchange transactions (sections 1, 24I and 25D) ................................. 307
8.3 Trading stock (section 1) ....................................................................................... 315
8.3.1 Trading stock: Introduction (section 22) ............................................... 316
8.3.2 Closing stock (section 22(1)) ................................................................... 316
8.3.3 Opening stock (section 22(2)) ................................................................. 317
8.3.4 Deduction of stock purchased during the year (section 11(a)) .......... 318
8.3.5 Cost price of stock (section 22(3) and (5)) ............................................. 319
8.3.6 Trading stock acquired for no consideration (section 22(4)) .............. 321
8.3.7 Consumable stores ................................................................................... 322
8.3.8 Disposal of stock other than normal trading (section 22(8)) .............. 322
8.3.9 Trading stock: Year of assessment (section 22(6)) ............................... 324
8.3.10 Acquisition or disposal of trading stock (section 23F) ........................ 324
8.3.11 Debt reduction: Trading stock (section 19) ........................................... 325
8.3.12 Trading stock: Share dealers (sections 22 and 9C)............................... 326
8.4 Employee-related expenses .................................................................................. 329
8.4.1 Contributions to funds (section 11(l) and (a)) ...................................... 329
8.4.2 Annuities in respect of former employees (section 11(m)) ................. 330
8.4.3 Restraint of trade payments (section 11(cA)) ....................................... 330
8.4.4 Learnership agreements (section 12H) .................................................. 332
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A Student’s Approach to Taxation in South Africa 8.1
Page
8.5 Deductions relating to trade debtors and similar matters ............................... 334
8.5.1 Bad debts (section 11(i)) .......................................................................... 334
8.5.2 Doubtful debts (section 11(j)) ................................................................. 335
8.5.3 Allowances on credit sales (debtors’ allowance) (section 24) ............ 338
8.6 Other expenses and deductions........................................................................... 340
8.6.1 Legal expenses (section 11(c)) ................................................................. 340
8.6.2 Donations (section 18A) .......................................................................... 341
8.6.3 Future expenditure on contracts (section 24C) .................................... 343
8.6.4 The accrual and incurral of interest (section 24J) ................................. 345
8.7 Double deductions (section 23B) ......................................................................... 345
8.8 Value-added tax (VAT) (section 23C) ................................................................. 346
8.9 Prepaid expenses (section 23H) ........................................................................... 347
8.10 Pre-trade expenditure (section 11A) ................................................................... 349
8.11 Assessed losses (section 20).................................................................................. 351
8.12 Calculating taxable income of a company ......................................................... 353
8.13 Summary................................................................................................................. 356
8.14 Examination preparation ...................................................................................... 356
8.1 Introduction
A taxpayer who carries on a business incurs expenses in respect of his business. Some
of the expenses are allowed under the general deduction formula in section 11(a),
while others are not allowed because they are of a capital nature or because they
cannot satisfy the restrictive test that the expenditure be incurred in the production of
income. These deductions are either permitted in terms of the special deductions
contained in the Income Tax Act 58 of 1962 (the Act) or they are not deductible
for income tax purposes. Section 11(x) also provides for the deduction of
amounts allowed to be deducted in terms of any provisions other than section 11;
these would include, for example, losses on foreign exchange transactions permitted
by section 24I.
REMEMBER
• The tax rate was reduced from 28% to 27% for a company or close corporation with a
year of assessment ending on or after 31 March 2023 (that is to say. where the year of
assessment of the company or close corporation commences on or after 1 April 2022).
The rate of 27% is used for purposes of this book, unless the year of assessment in an
example or question indicates otherwise.
306
8.2 Chapter 8: Specific deductions and allowances
Is section 24I
applicable?
YES NO
Section 25D
The translation of the purchase sum must be made at the spot rate, since section 25D
determines that expenditure incurred in a foreign currency must be translated by
applying the spot rate on the transaction date. For purposes of section 25D the
transaction date is the date on which the expenditure or loss is actually incurred, in
other words, the date on which there is an unconditional liability to pay the
outstanding amount. In the case where goods are acquired in a foreign currency, the
date on which the expense is actually incurred is usually the date on which the risks
and rewards of ownership are transferred from the seller to the purchaser (that is to
say the taxpayer). A common accounting term used to indicate when the risks and
rewards of ownership are transferred, is ‘free-on-board’ (FOB). When goods are
delivered free-on-board at the port of departure, the risks and rewards associated
307
A Student’s Approach to Taxation in South Africa 8.2
with ownership are transferred to the purchaser on the delivery of the goods to the
port of departure.
A natural person or a trust (other than a trading trust) may elect that all transactions
be translated by applying the average exchange rate for the relevant year of
assessment.
The other category of taxpayers who can still use the average rate is taxpayers with
foreign permanent establishments. In that case, the taxable income must be
determined in the currency used by that permanent establishment for purposes of
financial reporting and the result must be translated into Rands using the average
rate. However, if that currency is not the currency used for financial reporting
purposes by the permanent establishment and that country has an official rate of
inflation of 100% or more throughout the year of assessment, the taxable income of
the permanent establishment is ignored, providing relief in the case of hyper-
inflationary currencies.
The calculation of the average exchange rate can be a very complex issue and can
vary greatly from taxpayer to taxpayer depending on the chosen method of
calculation. Fortunately, the average exchange rate is available on SARS’s website
and need not be calculated by the taxpayer himself.
It is important to note that section 25D does not determine the deductibility of an
amount actually incurred. This section sets out the rules to use to translate the foreign
currency amount to our local currency (Rands). The deductibility of expenditure is
determined in terms of the general deduction formula (refer to chapter 7) or, in the
case of capital assets, the provisions of the capital allowance sections, for example
section 12C (refer to chapter 9).
REMEMBER
• A company and trading trust will always translate underlying assets and expenses
acquired in foreign currency to rand by using the spot rate on the transaction date.
• Natural persons and non-trading trusts can elect to either use the spot rate on the
transaction date or the average exchange rate for the relevant year of assessment when
translating underlying assets and expenses acquired in foreign currency to rand.
Whichever option is chosen must be consistently used for that specific year of
assessment.
• The foreign permanent establishment (a fixed place of business) of a South African
resident must translate its taxable income using the average exchange rate for the
relevant year of assessment.
Section 24I
Section 24I requires that all gains and losses on foreign exchange transactions,
irrespective of whether realised or not and irrespective of whether of a capital nature
or not, be included in the determination of taxable income.
308
8.2 Chapter 8: Specific deductions and allowances
Definitions
‘Spot rate’ is the appropriate quoted exchange rate, at a specific time, by an
authorised dealer in foreign exchange for the delivery of currency.
‘Average exchange rate’ in relation to a year of assessment means the average,
determined by using the closing spot rate, at the end of the daily or monthly intervals
during the year of assessment, consistently applied.
‘Foreign exchange transactions’ are transactions involving foreign currencies, for
example:
• the sale of goods to a customer in a foreign country with payment in the currency
of that country; and
• the purchase of goods from a supplier in a foreign country to be paid for in the
currency of that country.
An ‘exchange difference’ is:
• the foreign exchange gain or loss;
• in respect of an exchange item;
• arising during a year of assessment; and
• determined by multiplying the exchange item by the difference between:
– the ruling rate at the payment date and the ruling rate at the transaction date if
the transaction arises and is settled in the same tax year;
– the ruling rate on the translation date (year-end) and the ruling rate at the
transaction date if the transaction arises in the current year and is settled in a
later year;
– the ruling rate at the previous translation date and the ruling rate at the current
translation date if the debt is not settled during the current year; and
– the ruling rate at realisation date and the ruling rate at the previous translation
date if the debt is settled in the current year of assessment but arose in a
previous year of assessment.
An ‘exchange item’ is the amount in a foreign currency:
• which constitutes a unit of currency acquired and not disposed of by that person;
• owing to a person in respect of a loan, advance or debt payable to the person by
another person;
• owing by or to a person in respect of a forward exchange contract; and
• in respect of which the person has the right or contingent obligation to buy or sell
in terms of a foreign currency option contract.
‘Foreign currency’ is a currency that is not a legal tender in the Republic.
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A Student’s Approach to Taxation in South Africa 8.2
310
8.2 Chapter 8: Specific deductions and allowances
• acquired in an earlier year of assessment but not realised during the current year of
assessment.
Acquisition of assets
Section 24I(7) provides that an exchange difference that relates to the acquisition of
certain assets must be deferred and included in taxable income in the year of
assessment during which the asset is brought into use for trade purposes.
The provisions of section 24I(7) apply to:
• an exchange difference arising from a loan, advance or debt;
• that has been used in the acquisition, installation, erection or construction;
• of any machinery, plant, implement, utensil, building or improvements to a
building; or
• the devising, developing, creation, production, acquisition or restoration of an
invention, patent, design, trademark, copyright or other similar property or
knowledge.
An exchange difference that arises before the asset is brought into use is deferred to
the tax year in which it is brought into use and a carry-back to the year in which it
was incurred is not allowed.
Proviso
If the Commissioner is satisfied that during a subsequent year of assessment:
• the loan, advance or debt to be obtained or incurred will no longer be obtained or
incurred;
• the loan, advance or debt has not been used as contemplated above; or
311
A Student’s Approach to Taxation in South Africa 8.2
• the asset, property or knowledge will no longer be brought into use for trade pur-
poses,
the exchange difference may no longer be carried forward but must be included in
the taxable income in that year of assessment.
Example 8.1
Avoca Ltd’s year of assessment ends on the last day of February. On 1 November 2022 the
company purchased a second-hand machine from a supplier in another country for a
foreign currency (FC) amount of FC100 000 (The machine was also shipped free on board
on 1 November 2022). The machine is delivered at the company’s premises on 15
February 2023 and is brought into use on 1 April 2023.
Avoca Ltd incurs the following costs in addition to the purchase price:
R
Freight and insurance 10 000
Import duty 45 000
VAT 57 120
The purchase consideration is settled in full on 31 May 2022.
Assume that the spot rates on the relevant dates are as follows:
1 November 2022 FC1 = R7,60
28 February 2023 FC1 = R7,74
31 May 2023 FC1 = R8,00
Assume that the average exchange rate for the 2023 year of assessment is as follows:
FC1 = R7,80.
You are required to calculate the exchange differences of Avoca Ltd for the 2023 and 2024
years of assessment. No forward exchange contract was entered into.
Solution 8.1
R
2023 year of assessment
Cost of machine
Purchase price (FC100 000 × R7,60) (section 25D) 760 000
Freight and insurance 10 000
Import duty 45 000
VAT – not included in cost of machine as claimed as input tax deduction nil
815 000
Exchange loss in respect of 2023 tax year
FC100 000 × (R7,74 – R7,60) (14 000)
Limited to (Note) nil
2024 year of assessment
Exchange loss in respect of 2024 tax year
FC100 000 × (R8,00 – R7,74) (26 000)
Total deduction in 2024 year of assessment (R26 000 + R14 000) (40 000)
continued
312
8.2 Chapter 8: Specific deductions and allowances
Note
Since the machine is only brought into use on 1 April 2023, the exchange loss is not
deductible in the 2023 year of assessment. The deduction is therefore deferred to the year
during which the machine is brought into use, namely, the 2024 year of assessment
(section 24I(7)).
Example 8.2
On 30 November 2022, Motsepe (Pty) Ltd purchased trading stock for US$100 000 from a
supplier in America. It also entered into a contract for manufacturing machinery costing
US$500 000 with the same supplier in America. The trading stock was sent by air (FOB on
30 November 2022) and was received by the taxpayer on 5 December 2022. Air freight
and customs and clearing expenses amounted to R10 000. The manufacturing machinery
was dispatched by ship (FOB on 30 November 2022) and was received and brought into
use by the taxpayer on 15 February 2023. At 28 February 2023, 80% of the trading stock
was still on hand and the cost of the trading stock and of the manufacturing machinery
was still unpaid. The total debt of US$600 000 was paid on 30 June 2023.
The spot rates were as follows:
30 November 2022 $1 = R6,90
5 December 2022 $1 = R6,96
15 February 2023 $1 = R6,98
28 February 2023 $1 = R7,03
30 June 2023 $1 = R6,82
The average exchange rate for the 2023 year of assessment was $1 = R6,95
You are required to calculate the tax consequences of these transactions for the 2023 and
2024 years of assessment (ending 29/28 February)
Solution 8.2
R
2023 year of assessment
Deduction in respect of the cost of trading stock (Note 1)
$100 000 at a spot rate of $1 = R6,90 (section 25D) (Note 2) (690 000)
Add: Cost of getting the stock into its present place and condition – air
freight, customs and clearing cost (10 000)
Section 11(a) deduction (700 000)
Section 24I: Deduction of unrealised foreign exchange loss
$600 000 × (R6,90 – R7,03) (exchange rate at 28 February 2023) (78 000)
Cost price of manufacturing machinery for tax allowances $500 000 × R6,90 =
R3 450 000 (section 25D)
Section 12C: Wear-and-tear: R3 450 000 × 40% (1 380 000)
Section 22: Closing stock on hand to be included in taxable income 80% of 560 000
R700 000
continued
313
A Student’s Approach to Taxation in South Africa 8.2
Notes
1. Section 22(3) provides for the valuation of trading stock, this value being:
• the cost incurred in acquiring the stock; plus
• any further costs incurred in getting the trading stock into its existing condition and
location but excluding foreign exchange differences.
2. The cost price of the manufacturing machinery and trading stock has been calculated
by applying the spot rate in terms of section 25D.
3. Section 24I applies because assets were acquired in foreign currency on credit (there is
debt that constitutes an exchange item as defined) and therefore all realised and
unrealised gains and losses, irrespective of whether it is of a capital nature or not, are
included in the determination of taxable income.
REMEMBER
• The foreign exchange differences on trading stock and other movable assets financed by
a loan, advance or debt in a foreign currency are included in the taxpayer’s taxable
income in terms of section 24I.
• If the amount of any foreign exchange gain relating to debt becomes bad and it was
included in taxable income in the current or a previous year of assessment, it must be
deducted from income. If the amount of a foreign exchange loss relating to debt
becomes bad and it was deducted from income in the current or a previous year of
assessment, it must be included in income.
• Section 24I only addresses the foreign exchange differences on the exchange items (the
underlying debt) and not the underlying asset. The conversion of the underlying asset
or expense is dealt with in terms of section 25D (converted into the local monetary unit
by using the spot rate on the transaction date). In certain cases, the average exchange
rate is used. The deductibility of the underlying asset or expense is determined in terms
of section 11(a) or the allowances relating to capital assets (refer to chapter 9).
• If a headquarter company received or paid an amount in a currency other than its
functional currency or the Rand, that amount must be determined in its functional
currency and must then be translated to Rand by applying the average exchange rate
for that year of assessment.
314
8.3 Chapter 8: Specific deductions and allowances
Legislation:
Section 1: Definitions: Trading stock
(a) includes:
(i) anything produced, manufactured, constructed, assembled, purchased or in any
other manner acquired by a taxpayer for the purposes of manufacture, sale or
exchange by the taxpayer or on behalf of the taxpayer;
(ii) anything the proceeds from the disposal of which forms or will form part of the
taxpayer’s gross income; but
(iii) any consumable stores and spare parts acquired by the taxpayer to be used or
consumed in the course of the taxpayer‘s trade; but
(b) does not include:
(i) a foreign currency option contract; or
(ii) a forward exchange contract, as defined in section 24I(1).
REMEMBER
In Ernst Bester Trust v Commissioner for South African Revenue Service the court had to
decide if sand on a farm can be trading stock.
CASE:
Ernst Bester Trust v Commissioner for South African
Revenue Service 70 SATC 151 (SCA)
Facts: A contractor obtained a mining Judgment: The income received from the
licence to mine sand on a farm from the sales of sand was made in the operation of
taxpayer. The taxpayer played no part in an on-going scheme of profit-making over
the extraction or disposal of the sand. The many years and is income in nature. The
taxpayer merely required due payment per agreement was similar to a mineral lease
cubic meter of sand removed as and when and that the rental or royalties were ‘the
it suited the contractor to exercise its product of capital productively employed’
rights. The taxpayer contended that the and therefore constituted income.
proceeds derived from the sales of sand Section 22 was not applicable to unsepa-
were capital in its hands or in the rated in situ (still in the ground) deposits of
alternative, if it is revenue in nature then sand. Accordingly, that the sand deposit
he can claim an opening stock deduction in could not fairly be described as trading
respect of the sand still in the ground at stock held by the taxpayer for the purposes
the beginning of each of the years of of section 22.
assessment valued at its market value.
315
A Student’s Approach to Taxation in South Africa 8.3
REMEMBER
316
8.3 Chapter 8: Specific deductions and allowances
In the Commissioner for South African Revenue Service v Volkswagen SA (Pty) Ltd the
court had to decide if the Commissioner could grant the taxpayer a reasonable
allowance for the diminished value of closing stock.
CASE:
Commissioner for South African Revenue Service v
Volkswagen South Africa (Pty) Ltd
Facts: The taxpayer holds a number of diminished value of the training stock at
unsold vehicles at the end of each tax year. the end of the year and also refused the
Some of them are manufactured while deduction claimed by the taxpayer. The
others are imported. The taxpayer calcul- court held that the difference between the
ated the value of its trading stock at year cost price and the NRV was not justifiable
end using its ‘net realisable value’ (NRV) to claim a deduction and the taxpayer had
in terms of IAS2. This yielded an amount to pay the additional tax levied. The value
less than the cost price of the trading stock of trading stock can only be reduced below
and the taxpayer claimed a deduction from cost price if the trading stock is worth less
the cost price that was represented by the due to damage, deterioration, change in
difference between the cost price and the fashion, decrease in market value or any
NRV. other reason accepted by the Commis-
Judgment: The Commissioner rejected the sioner in terms of section 22(1)(a) (but this
contention that the NRV represented the does not include future expenditure.
317
A Student’s Approach to Taxation in South Africa 8.3
Example 8.3
Bailey (Pty) Ltd provides the following information in connection with stock on hand
and stock purchased:
Cost Market
price value
1 March 2022 R R
Completed products 200 000 800 000
Raw materials (purchased on 1 March 2022) 30 000 24 000
Packing material 54 000 14 000
Machinery spares 6 600 13 200
28 February 2023
Completed products 160 000 620 000
Raw materials 40 000 32 000
Packing material 3 000 1 000
Machinery spares 7 800 14 800
Note
The Commissioner accepts these market values as reasonable values.
You are required to calculate the value of the opening and closing stock of Bailey (Pty)
Ltd for the current year of assessment (ending 28/29 Feburary).
Solution 8.3
R
Completed products at cost price 200 000
Raw materials at cost price
(did not form part of closing stock from the previous year of assessment) 30 000
Packing material at market value 14 000
Machinery spares at cost price 6 600
Opening stock 250 600
Completed products at cost price 160 000
Raw materials at market value 32 000
Packing material at market value 1 000
Machinery spares at cost price 7 800
Closing stock 200 800
REMEMBER
318
8.3 Chapter 8: Specific deductions and allowances
Example 8.4
Gala (Pty) Ltd provided you with an extract from its Statement of profit or loss and other
comprehensive income for the current year of assessment:
R R
Sales 1 000 000
Less: Cost of sales (375 000)
Opening stock 150 000
Add: Purchases 350 000
500 000
Less: Closing stock (125 000)
Gross profit 625 000
You are required to calculate the effect of the cost of sales on Gala (Pty) Ltd’s taxable
income.
Solution 8.4
R R
Sales 1 000 000
Add: Closing stock (section 22(1)) 125 000
Gross income 1 125 000
Less: Expenditure
Opening stock (section 22(2)) 150 000
Purchases (section 11(a)) 350 000 (500 000)
Taxable income 625 000
319
A Student’s Approach to Taxation in South Africa 8.3
Example 8.5
Gumbo (Pty) Ltd purchased stock for R50 000 (VAT excluded). The company also
incurred handling fees of R2 500 (VAT excluded) and paid a transporter R5 000 (VAT
excluded) to deliver the stock.
You are required to calculate the cost price of the stock for tax purposes for the current
year of assessment..
Solution 8.5
R
Purchase price 50 000
Add: Handling fees 2 500
Transport 5 000
Cost price 57 500
320
8.3 Chapter 8: Specific deductions and allowances
Will the answer differ if the company is not a registered VAT vendor?
Example 8.6
Blue Hills (Pty) Ltd, a South African resident, acquired trading stock by way of an
inheritance on 1 March. The market value on the date of inheritance was R760 000 (VAT
excluded). The stock was not sold at year-end and the market value at year-end was
R780 000. Purchases of trading stock of R2 500 000 were acquired during the current year
of assessment and the opening stock and closing stock was R580 000 and R620 000,
excluding the trading stock acquired by inheritance above, respectively.
You are required to calculate the effect of the above transaction on the taxable income of
Blue Hills (Pty) Ltd, for the current year of assessment ended 28/29 February2.
Solution 8.6
R
Opening stock – section 22(2) (R580 000 + R760 000 SARS practice) (1 340 000)
Purchases – section 11(a) (2 500 000)
Closing stock – section 22(1) (R620 000 + R760 000) 1 380 000
321
A Student’s Approach to Taxation in South Africa 8.3
CASE:
Everyready (Pty) Ltd v Commissioner for South African
Revenue Service 74 SATC 185 (SCA)
Facts: A taxpayer company acquired a agreed between the parties. It was apparent
business as a going concern. The company from the subject matter of the sale that in
claimed a deduction for trading stock terms of the agreement the business as a
acquired for no consideration, at market whole was the subject of the sale, which
value according to section 22(4). The included payment for the purchase of
Commissioner disallowed the deduction in trading stock.
full, but only allowed a partial deduction
Section 22(4) was not applicable, and the
and levied section 89quat interest on the
trading stock was not acquired for no consi-
‘unpaid’ tax. The court had to decide if the
deration. The taxpayer therefore could not
amount could be claimed by the company.
deduct the market value of the trading stock
in terms of SARS practice, but had to allo-
Judgment: Whether the stock was acquired cate a reasonable portion of the actual
for no consideration depended on what was purchase consideration to trading stock.
322
8.3 Chapter 8: Specific deductions and allowances
REMEMBER
• Only a natural person can apply assets such as trading stock for private use or domestic
consumption.
• If a director of a company takes stock for private or domestic use or consumption, he or
she is effectively not the taxpayer and only an employee of the taxpayer (which is the
company) and therefore the stock will be recouped at market value.
• Non-natural persons, such as trusts and companies, cannot apply assets for private or
domestic purposes.
Where the taxpayer has applied the trading stock in any other manner as set out
above or has ceased to hold it as trading stock, he is deemed to have recouped the
market value of the stock (less any reduction in terms of section 22(1) as a result of a
decrease in value) and this amount is included in his taxable income in the year of
assessment in which the stock is so applied, or no longer held as trading stock.
Where the taxpayer has applied the trading stock for the purpose of making a
donation in respect of which the provisions of section 18A apply, he is deemed to
have recouped an amount equal to the amount that was taken into account for that
year of assessment in respect of the value of that trading stock (usually the cost price)
(refer to 8.7.2).
Where the asset was applied by the taxpayer for the purposes of his trade (for
example, withdrawn as trading stock but applied in the production process), the
amount recovered or recouped as above is deemed to be the expenditure incurred in
acquiring the asset for use in carrying on his trade. For example: A motor dealer who
withdraws a motor vehicle from stock to be used by one of his salesman for business
purposes, is deemed to have recouped an amount equal to the market value and is then
also deemed to have incurred expenditure equal to the market value of the vehicle and
will base his wear-and-tear allowance in terms of section 11(e) on the deemed price of
acquisition (refer to chapter 9).
Example 8.7
Trading stock, which cost the taxpayer (a natural person) R6 000, is removed by him for
private use. The market value of the trading stock on the date it was used was R8 000.
You are required to calculate the effect of the above transaction on taxable income.
Solution 8.7
R
Recoupment included in taxable income at cost price (section 22(8)(A)) 6 000
323
A Student’s Approach to Taxation in South Africa 8.3
Example 8.8
Refer to the information as set out in example 8.7. However, the taxpayer distributed the
trading stock as a dividend.
You are required to calculate the effect of the above transaction on taxable income.
Solution 8.8
R
Recoupment included in taxable income at market value (section 22(8)(B)) 8 000
Example 8.9
Refer to the information as set out in example 8.7. However, the taxpayer donated the
trading stock and the donation qualifies for the section 18A deduction.
Solution 8.9
R
Recoupment included in taxable income at cost price (section 22(8)(C)) 6 000
Note
If the donation did not qualify for the section 18A deduction, the recoupment would have
been included at the market value.
324
8.3 Chapter 8: Specific deductions and allowances
A deduction which may be granted in terms of section 11(a) in respect of the ex-
penditure incurred is not granted in the year of assessment it was actually incurred,
but is deemed to have been incurred in the subsequent year of assessment in which:
• the trading stock is disposed of;
• the value of the trading stock is included in the closing stock on hand (in terms of
section 22(1)); or
• it is shown that, by reason of the loss or destruction of the trading stock or the
termination of the agreement in terms of which the stock was acquired or for any
other reason, the trading stock is neither disposed of nor included in the closing
stock,
to the extent that the expenditure has actually been paid.
REMEMBER
• Trading stock includes consumables and spare parts used in the course of trade.
• Closing stock is added to gross income.
• Opening stock is deducted from income.
• The cost price of trading stock includes the cost incurred in acquiring the stock plus any
further costs incurred in getting the stock into its existing condition and location.
• Trading stock purchases during the year are deductible in terms of section 11(a).
• Trading stock acquired for no consideration is deemed to be acquired at the market value.
• The amount included in the taxpayer’s income as a result of the disposal of trading
stock other than normal trading is reduced by the amount of consideration received by
or accrued for the disposal of the trading stock.
• Trading stock used or consumed for private use by the taxpayer (a natural person) is
deemed to have been recouped equal to the cost price of the trading stock by the
taxpayer.
• Where trading stock is donated in terms of section 18A, an amount equal to the section
11(a) deduction (cost price) of the trading stock is deemed to have been recouped by the
taxpayer making the donation.
• VAT incurred on the acquisition of trading stock is excluded from the cost price of the
stock if an input tax deduction was claimed.
• The purchase of trading inventory that qualifies as a deduction is limited to the amount
received or accrued as a result of that inventory during that year of assessment. This is
an anti-avoidance measure.
325
A Student’s Approach to Taxation in South Africa 8.3
If the amount of the reduction is greater than the amount claimed, the amount is a
recoupment in terms of section 8(4)(a) and must be added to the taxpayer’s gross
income.
Section 19 does not apply if the debt benefit in respect of a debt owed by a person:
• constitutes ‘property’ (as defined for estate duty purposes) in a deceased estate and
the debt is reduced in favour of an heir or legatee by virtue of a bequest from the
deceased (refer to chapter 18);
• qualifies as a donation in respect of which donations tax is payable (refer chapter
17); or
• stems from an employer-employee relationship and is regarded as a fringe benefit
(refer to chapter 14).
326
8.3 Chapter 8: Specific deductions and allowances
Example 8.10
Monate (Pty) Ltd is a share dealer and a South African resident. The company bought
18 000 shares in another company, A Ltd, in the previous year of assessment at a total cost
of R10 000. Monate (Pty) Ltd sold 12 000 of these shares for R1 each.
You are required to calculate Monate (Pty) Ltd’s taxable income for the current year of
assessment on the disposal of the shares in company A Limited.
Solution 8.10
R
Gross income: Cash proceeds (12 000 x R1) 12 000
Less:Opening stock – 18 000 A Ltd shares (10 000)
Add:Closing stock – 6 000 A Ltd shares
6 000
× R10 000 3 333
18 000
Taxable income 5 333
Note
Capital gains tax is not applicable as the shares are disposed of by a share dealer as part of
his business activities and the shares were not held for more than three years. The profit is
therefore taxed as part of his normal business income.
327
A Student’s Approach to Taxation in South Africa 8.3
328
8.3–8.4 Chapter 8: Specific deductions and allowances
REMEMBER
• Where the profit on the sale of shares by a share dealer is taxable, it is not subject to
capital gains tax as the proceeds would already have been included in gross income and
the cost of the shares claimed as a deducton in terms of the general deduction formula.
• Section 9C makes provision for circumstances in which the disposal of listed shares is
deemed to be a transaction of a capital nature that may give rise to capital gains tax.
• If an investor sells shares that has been held for a period of less than three years, it will
not automatically be seen as capital in nature and the intention of the taxpayer must be
investigated (refer to the gross income definition in chapter 3).
329
A Student’s Approach to Taxation in South Africa 8.4
Example 8.11
During the current year of assessment, Matsaung (Pty) Ltd paid the following annuities to
former employees and their dependants:
R
Mrs Sarah Ntuli, the wife of an employee who died during the year 60 000
Jeffrey and Martha, the children of a retired employee, to each 20 000
Mr Thomas Mbeki, a retired employee on the grounds of old age 10 000
You are required to calculate the amounts that Matsaung (Pty) Ltd can claim as a
deduction in determining its taxable income for the current year of assessment.
Solution 8.11
R
Sarah 60 000
Jeffrey and Martha (R20 000 × 2) 40 000
Thomas 10 000
Deduction that can be claimed 110 000
330
8.4 Chapter 8: Specific deductions and allowances
• is a natural person;
• is or was a labour broker as defined in the Fourth Schedule to the Act; or
• is a personal service provider as defined in the Fourth Schedule; and
if it constitutes income in the hands of the recipient.
The amount to be deducted may not exceed, for a year of assessment, the lesser of:
• so much of the amount incurred as is equal to the amount divided by the number
of years or part thereof during which the restraint of trade applies; or
• one-third of the amount incurred.
In terms of section 23(l), an expense incurred in respect of the payment of a restraint
of trade is prohibited except as provided for in section 11(cA), to the extent that such
payment constitutes income of the person to whom it is paid. This prevents a
deduction in terms of section 11(a).
Example 8.12
Mickey Ltd made a restraint of trade payment of R160 000 to a retiring executive, Mr
Gavin Donald, on 1 March. Gavin was restrained from competing with the company for
four years from the date of the payment. Mickey Ltd’s financial year ends on the last day
of February. Gavin will be taxed on this amount.
You are required to calculate the amount that will be deductible for the current year of
assessment.
Solution 8.12
R
Amount paid 160 000
Current year of assessment
Deduction allowed
(the lesser of (R160 000 / 4) or (1 / 3 × R160 000)) 40 000
Note
The payment is deductible in equal instalments over the period to which it relates, four
years. Gavin is taxed on the full amount at date of receipt or accrual.
REMEMBER
• The deduction is only allowed to the extent that the amount incurred constitutes or will
constitute the income of the recipient.
• The minimum period for writing the payment off is three years.
• The deduction must not be apportioned for a part of the year, and the full deduction
calculated must be claimed by the taxpayer.
331
A Student’s Approach to Taxation in South Africa 8.4
Available deduction
In addition to any deductions allowable in terms of the Income Tax Act (for example
salaries), if a learner is a party to a registered learnership agreement with an
employer during the year of assessment, the employer will be able to claim an annual
as well as a completion allowance for the provisions as set out below.
The learnership agreement is deemed to be registered throughout the period of the
agreement as long as the learnership agreement is registered within six months after
the employer’s year of assessment.
332
8.4 Chapter 8: Specific deductions and allowances
Example 8.13
On 1 February 2022 BCN (Pty) Ltd enters into a learnership agreement with an employee
with a NQF level 5 qualification for a 12-month period. The company’s year of assessment
ends on 31 January 2023. At the end of July 2022, the employee leaves the employment of
BCN (Pty) Ltd and on 1 August 2022 takes up employment with another employer,
MJ Productions (Pty) Ltd, where he continues with the original learnership agreement.
The employee successfully completes the learnership agreement six months later. The
employee does not have a disability as defined.
You are required to calculate allowances that will be claimed on the learnership
agreement for the 2023 year of assessment.
Solution 8.13
BCN (Pty) Ltd – 2023 year of assessment R
Annual allowance of R40 000 × 6 / 12 20 000
MJ Productions (Pty) Ltd – 2023 year of assessment
Annual allowance of R40 000 × 6 / 12 20 000
Completion allowance of R40 000 (full amount) 40 000
Note
BCN (Pty) Ltd is only entitled to the equivalent of six months of the annual allowance, as
the employee was only party to the agreement with BCN (Pty) Ltd for six months.
MJ Productions (Pty) Ltd is entitled to the annual allowance only for six months, as well
as the full completion allowance.
333
A Student’s Approach to Taxation in South Africa 8.4–8.5
Example 8.14
Apple Airlines (Pty) Ltd concludes a three-year learnership agreement with an employee
with a NQF level 8 qualification at the beginning of 1 January 2022. The employee
completes the learnership with Apple Airlines (Pty) Ltd on 31 December 2024. The
employee does not have a disability as defined.
You are required to calculate the learnership allowances that will be deductible by Apple
Airlines (Pty) Ltd who has a December year-end.
Solution 8.14
Apple Airlines (Pty) Ltd R
December 2022
Annual allowance 20 000
December 2023
Annual allowance of R20 000 20 000
1 April 2024
Annual allowance of R20 000 20 000
Completion allowance of R20 000 × 3 60 000
Note
The completion allowance of R20 000 is claimed in the year of completion for each
consecutive 12 months that are completed, R20 000 × 3 years (36 months) = R60 000.
REMEMBER
• The annual allowance is claimed in every year for the duration of the agreement,
whereas the completion allowance is claimed in the year that the agreement is
completed.
• An employer is not entitled to the allowances under the provisions of section 12H if a
learnership agreement is entered into and the employee was previously party to
another similarly registered learnership agreement with the same employer or associated
institution, but which they failed to complete.
334
8.5 Chapter 8: Specific deductions and allowances
Example 8.15
Furnish Ltd sells second-hand furniture on credit. The following information relates to
the current year of assessment:
R
Bad debts
• Trade debtors 20 400
• Loan owing by an employee 3 000
These amounts have proved to be irrecoverable.
You are required to calculate the amount that can be claimed as bad debts for the 2022
year of assessment.
Solution 8.15
R
Bad debts
• Trade debts 20 400
• Employee loan nil
Why can the R3 000 with regards to the employee loan not be claimed as
a bad debt deduction?
REMEMBER
• The debts must be trade debts which at some stage formed part of the taxpayer’s income;
irrecoverable staff loans would therefore not qualify unless the staff member borrowed
the money to buy trading stock from his employer.
• The debts also must be proved to be bad and the mere possibility that a debt may in the
future prove to be irrecoverable, does not suffice.
• If amounts allowed as irrecoverable are subsequently recovered, the amounts (excluding
VAT) form part of the gross income in the year of receipt in terms of paragraph (n) of the
gross income definition and section 8(4)(a).
335
A Student’s Approach to Taxation in South Africa 8.5
National Treasury appears to be trying to align the tax treatment of doubtful debts to
the accounting treatment when financial assets such as debtors (receivables) are
impaired for credit losses. Section 11(j) refers to IFRS 9, which is the International
Financial Reporting Standard that deals with financial instruments. It is still a
requirement that, for the allowance to be claimed, the debt must be deductible in
terms of the provisions of section 11(i) if it becomes bad. This means that the taxpayer
must be the owner of the debt and it must have been included in the income of the
taxpayer. Section 11(j) – Allowances for doubtful debt – provides for two scenarios:
Debt to which IFRS 9 is applied for financial reporting purposes (excluding lease
receivables):
REMEMBER
• This allowance must be added to the income of the taxpayer in the following year,
when the new allowance is granted and deducted against the taxable income of the
taxpayer.
336
8.5 Chapter 8: Specific deductions and allowances
Example 8.16
Caz (Pty) Ltd owns a business that sells second-hand furniture. The company sells goods
for cash and on credit. The following information relates to the current and previous year
of assessment and the company does not apply IFRS 9:
Previous Current
year year
R R
List of doubtful debts (older than 60 days, but none older 30 000 60 000
than 120 days)
You are required to calculate the effect of the above amounts on the taxable income for
the current year of assessment.
Solution 8.16
The doubtful-debt allowance for the previous year must be added to taxable income:
25% × R30 000 = R7 500
The doubtful-debt allowance for the current year must be deducted from taxable
income:
25% × R60 000 = R15 000
Example 8.17
Blue Craze (Pty) Ltd owns a business that sells swimming pool equipment. The following
information relates to the current and previous year of assessment (the company does not
apply IFRS 9):
The debtors clerk indicated that the list of doubtful debts amounted to R2 500 000. 70% of
the list of doubtful debts as at year end are in arrears for more than 90 days, but less than
120 days. The doubtful debt allowance (correctly calculated) claimed in the previous year
of assessment amounted to R760 000.
You are required to calculate the effect of the above amounts on the taxable income for
the current year of assessment.
Solution 8.17
The doubtful-debt allowance for the previous year must be added to taxable income:
R760 000.
The doubtful-debt allowance for the current year must be deducted from taxable income:
R2 500 000 × 70% x 25% = R437 500.
337
A Student’s Approach to Taxation in South Africa 8.5
Example 8.18
Red Dot (Pty) Ltd owns a business that sells computer equipment. The company has a
July year end and applies IFRS 9 for financial reporting purposes.
At the end of the year, the company’s IFRS 9 loss allowance relating to impairment (equal
to its lifetime expected credit loss) was R45 000. Lease receivables were excluded from the
debt figures used in calculating the loss allowance.
You are required to calculate the effect of the above amounts on the taxable income for
the current year of assessment.
Solution 8.18
The doubtful-debt allowance for the current year must be deducted from taxable
income:
R45 000 × 40% = R18 000
338
8.5 Chapter 8: Specific deductions and allowances
Example 8.19
Molopi Ltd imports stationery that it sells for cash to wholesalers and to retailers in terms
of instalment credit agreements. These instalment credit agreements provide for the
payment of a deposit of 25% and the balance (including the finance charges) over a period of
18 months. The company applies IFRS 9 and the total doubtful debts amount relates to the
lifetime expected credit loss.
The following information relates to Molopi Ltd’s debtors in respect of instalment credit
agreements:
Current Previous
year year
R R
Debtors’ balances at 28/29 February – sales
(excluding finance charges) 320 000 360 000
Doubtful debts (included in the above amounts)
• debtors (excluding finance charges) 80 000 40 000
• finance charges accrued in terms of section 24J 64 000 32 000
Gross profit percentage 40% 40%
Molopi Ltd’s taxable income for the previous year of assessment amounted to R124 000
and to R318 000 for the current year of assessment, before taking any adjustments in
respect of debtors into account.
You are required to calculate Molopi Ltd’s taxable income for the previous and current
years of assessment.
Solution 8.19
R R
Previous year of assessment
Net profit (taxable income before debtor adjustments) 124 000
Less: Doubtful-debt allowance (Note 2)
(section 11(j) – 40% × (R40 000 + R32 000)) (28 800)
95 200
Less: Section 24 allowance
40% × (R360 000 – (40% × R40 000)) (137 600)
Limited to taxable income (Note 1) (95 200)
Taxable income nil
Current year of assessment
Taxable income before debtor adjustments 318 000
Add: Debtors’ allowances claimed in the previous year
to be added back in the current year of assessment
(R40 000 + R32000) x 40% 28 800
346 800
Less: Doubtful-debt allowance
(section 11(j)) – 40% × (R80 000 + R64 000)) (57 600)
289 200
Less: Section 24 allowance
40% × (R320 000 – (40% × R80 000)) (115 200)
Taxable income 174 000
continued
339
A Student’s Approach to Taxation in South Africa 8.5–8.6
Notes
1. The allowance granted in terms of section 24 is limited to the available income. In the
previous year of assessment, only R95 200 of the R137 600 (as calculated) could be
claimed. The balance is lost. In the current year of assessment, only the amount
claimed as a deduction, namely R95 200, is added to the taxable income before
debtors’ adjustments.
2. The doubtful-debt allowance would also be available in respect of any finance charges
that have accrued (in the present or any previous year of assessment) in terms of
section 24J and are included in the balances owing by debtors who are judged to be
doubtful.
3. The doubtful-debt allowance can create a loss but is calculated and deducted before
the section 24 allowances (the order of the sections in the Act).
REMEMBER
• This allowance cannot create or increase an assessed loss and must be added to the
income of the taxpayer in the following year, when a new allowance is granted.
340
8.6 Chapter 8: Specific deductions and allowances
Examples
• Legal expenses in connection with the collection of trade debtors that are long
outstanding are allowed.
• Legal expenses incurred in drawing up a deed of lease by a lessor of property are
non-capital and are deductible as the taxpayer carries on business as a lessor of
property. To the lessee, this is a capital expense incurred in obtaining the use of an
asset and is therefore not deductible.
• Legal expenses incurred in an appeal against the imposition of tax would not have
been incurred in the production of income from trade and would therefore not be
deductible.
Each circumstance resulting in legal expenses would have to be decided on the facts
to determine the capital or revenue nature of the expense or its connection with the
taxpayer’s trade.
REMEMBER
341
A Student’s Approach to Taxation in South Africa 8.6
• when the property constitutes another trading stock of the taxpayer, the amount is
the amount that has been considered for the purposes of section 22(8). This value is
the market value of the property, but section 22(8) brings this amount into account
only if the cost price of the trading stock has been considered in the determination
of the taxpayer’s taxable income for a year of assessment;
• when the property (but excluding trading stock) constitutes an asset used by the
taxpayer for trade purposes, the lower of its fair market value on the date of that
donation or its cost to the taxpayer less an allowance allowed to be deducted from
the taxpayer’s income;
• when the property does not constitute the taxpayer’s trading stock, or an asset
used by him for trade purposes, the lower of its fair market value on the date of
that donation or its cost to the taxpayer less, for moveable property that has de-
teriorated in condition by reason of use or other causes, a reducing-balance
depreciation allowance at the rate of 20% a year; or
• when the property is purchased, manufactured, erected, assembled, installed or
constructed by, or on behalf of, the taxpayer so as to form the subject of the donation,
the lower of its fair market value on the date of the donation or its cost to the taxpayer.
Section 18A(3A) provides that if immovable property of a capital nature, is donated
and the lower of market value or municipal value exceeds cost, the following formula
must be used:
A = B + (C × D) where:
A is the amount deductible;
B is the cost of the immovable property being donated;
C is the amount of a capital gain (if any); and
D is 60% in the case of a natural person or special trust or 20% in any other case.
The formula effectively takes the capital gains tax into account for donated property.
Section 18A(3B) provides that no deduction must be allowed for the donation of any
property in kind that constitutes, or is subject to a fiduciary right, usufruct or other
similar right, or that constitutes an intangible asset or financial instrument, unless
that financial instrument is:
• a share in a listed company; or
• issued by an eligible financial institution.
Example 8.20
Smile (Pty) Ltd made the following donations to a qualifying public-benefit organisation
and received the appropriate receipt for the 2023 year of assessment.
(a) The donation amounted to R1 600 and the taxable income before the donation
amounted to R50 000.
(b) The donation amounted to R600 and the taxable income before the donation
amounted to R5 000.
You are required to calculate the section 18A deduction allowed to Smile (Pty) Ltd in
each case.
342
8.6 Chapter 8: Specific deductions and allowances
Solution 8.20
(a) The section 18A deduction is limited to 10% of R50 000, R5 000. Therefore, the total
actual donation of R1 600 can be claimed as a section 18A deduction.
(b) The section 18A deduction is limited to 10% of R5 000, R500. Therefore, only R500 of
the actual donation of R600 can be claimed as a section 18A deduction; however, the
R100 that cannot be claimed as a deduction in the current year is carried forward to
the following year of assessment.
Example 8.21
Frown Ltd owns land with a base cost of R250 000. In 2020 Frown Ltd donated the land
with a municipal value of R3 million and a market value of R3.4 million. Frown Ltd has a
taxable income of R1 million for the current year of assessment.
You are required to calculate the section 18A deduction allowed to Frown Ltd. You can
assume that the municipal value can be used in calculating the capital gains tax.
Solution 8.21
The immovable property is donated and the lower of market value or municipal value
exceeds cost, therefore the following formula must be applied:
A = B + (C × D)
B = R250 000 base cost of land
C = Capital gain R2 750 000 (Municipal value of R3 000 000 – Base cost of R250 000)
D = 20%
A = R250 000 + (R2 750 000 x 20%) = R800 000.
The total potential deduction accordingly equals R800 000 (R250 000 + R550 000). This
amount is limited to R100 000 during the current year due to the 10% deductible donation
ceiling. The excess of R700 000 can be carried forward to future years.
REMEMBER
• The deduction is limited to 10% of the taxable income of the taxpayer, however the
amount that exceeds the 10% allowable deduction, can be carried forward to the next
year of assessment.
• A claim for a deduction is not allowed unless supported by a receipt issued by the
relevant body to which the donation was made.
• Special rules apply when a deduction is claimed of a donation of property in kind.
343
A Student’s Approach to Taxation in South Africa 8.6
to enable him to finance the acquisition of materials, equipment and other expenses
relating to the contract. Such a prepayment is included in the taxpayer’s gross
income.
Section 24C provides a deduction for the future expenditure that is incurred by the
taxpayer against the advance payment received, to alleviate the cash-flow problems
he may experience due to tax being paid on the prepayment, whereas the expenses
related to this prepayment will only be deductible for tax purposes in later years. The
section 24C allowance is available if:
• the taxpayer’s income in that year of assessment includes or consists of an amount
received by or accrued to him in terms of a contract; and
• the amount is used wholly or in part to finance future expenditure that will be
incurred by him in the performance of his obligations under the contract.
The future expenditure referred to must be such that it will be deductible from the
income in a subsequent year or for the acquisition of an asset for which any deduction
is allowed, for example, plant or machinery on which allowances are granted in terms
of section 11(e) or (o), 12B or 12C (refer to chapter 9).
Example 8.22
Easy Move (Pty) Ltd has a building contractor business. During the current year of
assessment, the company started on a large contract, the details of which are as follows:
R
Budgeted total income on the contract 2 000 000
Budgeted total expenditure 1 200 000
Budgeted total profit 800 000
During the year of assessment:
Income received 700 000
Actual expenditure (all tax deductible) 20 000
You are required to calculate Easy Move (Pty) Ltd’s taxable income for this contract
(assuming that this is his only contract during the current year) for the current year of
assessment.
Solution 8.22
R R R
Income received 700 000
Less: Actual expenditure (20 000)
Section 24C allowance:
Gross profit budgeted
R800 000 / R2 000 000 × 100 = 40%
Therefore, expenses are budgeted at 60% of income
Allowance:
60% of R700 000 420 000
Less:Actual expenditure (20 000) (400 000) (420 000)
Taxable income 280 000
344
8.6–8.7 Chapter 8: Specific deductions and allowances
REMEMBER
• The allowance must be added to income in the following year of assessment.
• The allowance may be deducted only to the extent necessary to reduce taxable income
to nil, any unclaimed balance of the allowance being lost.
• Actual expenditure incurred must be deducted from the section 24C allowance as calcu-
lated.
REMEMBER
345
A Student’s Approach to Taxation in South Africa 8.7–8.8
REMEMBER
• Where a taxpayer pays for repairs to his delivery vehicle amounting to R863 (including
VAT of 15%), the expense which is deductible for normal tax purposes amounts to R750
(R863 less VAT amounting to R113). Where a taxpayer purchases trading stock for
R11 500 (including VAT amounting to R1 500), the cost of the trading stock for normal
tax purposes amounts to R10 000 (R11 500 less VAT amounting to R1 500).
346
8.9 Chapter 8: Specific deductions and allowances
347
A Student’s Approach to Taxation in South Africa 8.9
Example 8.23
Tackle Ltd, a South African resident, paid an amount of R56 000 on 1 January 2023 to the
local municipality for municipal services (water and electricity). The services are to be
supplied within the period ending 31 July 2023. The expense qualifies for a deduction in
terms of section 11(a). Tackle Ltd has a February year-end.
You are required to calculate the amount which may be deducted in terms of section 23H
in the current year of assessment ended 28 February 2023.
Solution 8.23
The full amount may be deducted in the current year of assessment, as section 23H
determines that there is no limit on the deduction if the services are to be supplied within
six months after the end of the year during which the expenditure was incurred.
Example 8.24
PeeteeWhy (Pty) Ltd incurred the following expenditure during the 2023 year of
assessment:
R
1 December 2022 – Electricity for the period 1 December 2022
to 30 November 2023 52 000
1 December 2022 – Insurance premium for the period 1 December 2022
to 30 November 2023 58 000
1 February 2023 – Telephone expenses for the period 1 February 2023
to 31 January 2024. 22 000
You are required to calculate the amount that may be deducted in terms of section 23H in
the current year of assessment ended 28 February 2023.
348
8.9–8.10 Chapter 8: Specific deductions and allowances
Solution 8.24
Electricity
Current portion = R52 000 x 3 / 12 = R13 000
Prepaid portion = R52 000 x 9 / 12 = R39 000
Insurance premium
Current portion = R58 000 x 3 / 12 = R14 500
Prepaid portion = RR58 000 x 9 / 12 = R43 500
Telephone expenses
Current portion = R22 000 1 / 12 = R1 833
Prepaid portion = R22 000 x 11 / 12 = R20 167
Total amount current portion = R29 333
Total amount prepaid portion = R102 667
Section 23H does not apply to the current portion of each expense as it relates to the
current year of assessment. Consideration must be given to section 23H for the prepaid
portion of each expense.
None of the expenditure above is imposed by legislation and the prepaid portions need to
be tested against the next possible exclusion from section 23H.
For each expenditure, consider whether the services in relation to it will be rendered
within six months from year-end. All the services from the above-stated expenditure will
not be rendered within six months from year-end (each prepaid portion extends beyond
31 August 2023) and is not excluded from the provisions of section 23H.
Finally, if the aggregate of all the prepaid expenses does not exceed R100 000, section 23H
does not apply and the prepaid portions as well the current portions are deductible in the
current year of assessment. The total amount of the prepaid portions of R102 667 exceeds
the R100 000 threshold and therefore section 23H applies. Only the current year’s portions
amounting to R29 333 are deductible. The prepaid portions of R102 667 will only be
deductible in the 2024 year of assessment.
REMEMBER
• Prepaid expenses are fully deductible:
– if the obligation to pay an amount in advance is imposed by legislation; OR
– if the goods or services are supplied within six months after the end of the year of
assessment; OR
– the total amount of prepaid expenses incurred during the year of assessment does
not exceed R100 000.
349
A Student’s Approach to Taxation in South Africa 8.10
Example 8.25
Asmal (Pty) Ltd commenced with trade on 1 July 2022 and incurred the following
expenses before trade commenced:
R
Purchase of small storage area 50 000
Rates and taxes – 1 April 2022 – 30 June 2022 2 400
– 1 July 2023 – 28 February 2023 7 200
Other trading expenses (deductible for tax purposes) 40 000
You are required to calculate the taxable income for Asmal (Pty) Ltd for the current year
of assessment (ended 28 February 2023) if the trading income amounted to R75 000
during the trading period.
Solution 8.25
R R
Trading income 75 000
Less: Other trading expenses 40 000
Purchase of small storage area (Note) nil
Rates and taxes (R2 400 + R7 200) (Note) 9 600 (49 600)
Taxable income 25 400
Note
The purchase of the small storage area is not deductible because it is of a capital nature.
Section 11A does not allow for the deduction of capital expenses. The rates and taxes of
R2 400 were incurred before a trade was carried on and would have been deductible in
terms of section 11(a) and therefore the expense qualifies as a deduction in terms of
section 11A.
REMEMBER
• Only expenditure that would have been deductible if it was incurred after trade had
commenced is deductible in terms of section 11A.
• An assessed loss can never be created in terms of section 11A. However, if an assessed
loss arises it may be carried forward to the following year of assessment and may only
be set off against income from the same trade.
350
8.11 Chapter 8: Specific deductions and allowances
351
A Student’s Approach to Taxation in South Africa 8.11
• In the case of companies, income tax will now always be levied on 20% of the
taxable income for the year where the taxable income in the current year exceeds
R1 million, irrespective of the amounts of assessed loss balances brought forward.
• Companies will not forfeit the balance of the assessed loss not used in a year due to
the off-setting restrictions as mentioned above. The balance can be carried forward
to the next tax year and can be utilised in that year of assessment, provided that the
company earns trade income in the following year.
• A natural person taxpayer may carry forward his assessed loss even though he has
not carried on a trade during a year, while in the case of a company this may not be
done.
Section 20A deals with the ring-fencing of assessed losses from certain trades (refer to
chapter 13).
Example 8.26
Modise Ltd had a gross income of R2 200 000 and expenses of R4 100 000 for the year
ended 31 March 2022. For the 2023 year of assessment the company had gross income
of R2 240 000 and expenses of R1 200 000 and, in the 2024 year, gross income of
R3 380 000 and expenses of R2 240 000.
You are required to calculate the company’s taxable income or assessed loss for the 2022,
2023 and 2024 years of assessment.
Solution 8.26
2022 2023 2024
R R R
Gross income 2 200 000 2 240 000 3 380 000
Deductions (4 100 000) (1 200 000) (2 240 000)
Taxable income / Assessed loss (1 900 000) 1 040 000 1 140 000
Assessed loss brough forward nil (1 900 000) (900 000)
Utilisation of assessed loss b/f (1 000 000) (900 000)
(Higher of R1 million; or [(1 000 000) [(1 000 000)
80% of taxable income) (832 000)] (912 000)]
Taxable income (1 900 000) 40 000 240 000
Assessed loss carried forward (1 900 000) (900 000) nil
352
8.11–8.12 Chapter 8: Specific deductions and allowances
REMEMBER
• If a company engages in more than one trade, the assessed losses of the different trades
can be set off against the different trade income.
• Ring-fencing (limitation of the setting off, section 20A) of assessed losses only applies to
natural persons.
• An assessed loss (with the limitation) may not be carried forward if a company has not
carried on trade during a year.
• Assessed losses from foreign trades cannot be set off against the taxable income of
South African trades.
• The value of a compromise benefit made with creditors reduces the assessed loss of the
year in which the compromise took place. It does not reduce the previous year’s
assessed loss.
353
A Student’s Approach to Taxation in South Africa 8.12
Example 8.27
Mr Ben Baker is the sole shareholder of Betterbake (Pty) Ltd (Betterbake), a company that
sells bread.
Betterbake’s Statement of profit or loss and other comprehensive income for the current
year of assessment, ended on the last day of February, is as follows:
R
Income
Sales 750 000
Recoupment of bad debts (Note 1) 10 000
Doubtful-debt allowance – 2022 (Note 4) 2 000
Interest received on current account 3 000
Closing stock – 28 February 2023 140 000
905 000
Less: Expenses 609 500
Purchases 300 000
Opening stock – 1 March 2022 80 000
Sundry expenses – deductible for tax purposes 95 000
Rent paid (Note 2) 39 000
Employer contributions (Note 3) 7 500
Doubtful-debt allowance – 2023 (Note 4) 3 000
Restraint of trade payment (Note 5) 60 000
Net profit 270 500
Notes
1. The recoupment of bad debts is in respect of a debt written off in 2020.
2. A lease agreement was entered into on 1 January 2022 for the lease of shop premises
for five years at a monthly rental of R3 000. The rental for March 2023 was paid in
February 2023. The full amount was included as a deduction in the Statement of profit
or loss and other comprehensive income.
3. Betterbake contributes to a provident fund on behalf of its employees. Its annual
contribution to the provident fund amounts to R7 500.
4. Included in Betterbake’s outstanding debtors are doubtful debts of R30 000. The company
does not apply IFRS 9 and 50% of the list of doubtful debts as at 28 February 2023 have
been in arrears for more than 90 days, but less than 120 days. The other 50% of debtors
have been in arrears for less than 60 days. The previous year’s doubtful debts allowance
that was allowed as a deduction in terms of section 11(j) was 25% of R20 000, = R5 000.
Betterbake allows 10% of the doubtful debts as an allowance for accounting purposes.
5. On 1 July 2022 Betterbake paid an amount of R60 000 as compensation to one of its
former employees, as a restraint of trade payment. The restraining agreement is
effective for five years. Only R30 000 of the amount paid to the former employee was
taxable in his hands.
You are required to calculate the taxable income of Betterbake (Pty) Ltd for the current
year of assessment, starting with the net profit as per the Statement of profit or loss and
other comprehensive income.
354
8.12 Chapter 8: Specific deductions and allowances
Solution 8.27
R
Net profit as per Statement of profit or loss and other comprehensive
income 295 500
Sales (taxable – gross income) nil
Recoupment of bad debts (section 8(4)(a)) nil
Interest received on current account nil
Closing stock nil
Purchases nil
Opening stock nil
Sundry expenses nil
Rent paid (Note 1) nil
Employer contributions nil
Doubtful-debt allowance – 2022 (Note 2) 3 000
–2023 (Note 2) (750)
Restraint of trade payment (Note 3) 54 000
Taxable income 351 750
Notes
1. The rent for March 2023, which was paid in February 2023, is also claimed as a
deduction as it was actually incurred for tax purposes at the time of payment.
2. The doubtful-debt allowance for taxation purposes is calculated as follows:
2022: 25% × R20 000 = R5 000
2023: 25% × (50% x R30 000) = R3 750.
Therefore, as R2 000 has already been added back for accounting purposes, an
additional R3 000 must be added back in the current year of assessment. As R3 000 has
already been claimed as a doubtful debt allowance for accounting purposes, an
additional R750 should be accounted for to claim the total of R3 750 in terms of section
11(j) for the current year of assessment.
3. The allowance that can be claimed in respect of the restraint of trade payment is the
amount that was taxable in the former employee’s hands, but limited to the lesser of:
R30 000 / 5 years = R6 000; or
1 / 3 × R30 000 = R10 000.
R60 000 must be added back to income as R6 000 can only be claimed for tax purposes.
355
A Student’s Approach to Taxation in South Africa 8.13–8.14
8.13 Summary
In this chapter, certain business deductions are discussed for which special pro-
vision has been made in the Act. These expenses are those which would not qualify
for deduction in terms of section 11(a) because they are of a capital nature (such as
patent development expenditure and fixed assets used for scientific research) or have
not actually been incurred (such as provisions for doubtful debts and future
expenditure on contracts).
Section 11(x) provides for the deduction of ‘any amounts which in terms of any other
provision in this Part, are allowed to be deducted from the income of the taxpayer’.
It should be noted that the deductions provided for in section 11 of the Act are
restricted to the income from trade; the deductions in the other sections have no such
general restriction, but certain sections do specifically impose this restriction.
The next section contains questions to test your knowledge on specific deductions
and allowances.
Question 8.1
Walk for Life (Pty) Ltd is a South African resident. It is a manufacturing business that
manufactures shoes. The different types of shoes manufactured include running and
walking shoes, as well as high heels and flip-flops. The company’s financial year ends on
31 March. Walk for Life (Pty) Ltd is a registered VAT vendor and the company does not
apply IFRS 9 for financial reporting purposes.
The following information is available to calculate the normal tax liability of Walk for Life
(Pty) Ltd for the year of assessment ended on 31 March 2023 (all amounts exclude VAT
unless otherwise stated):
continued
356
8.14 Chapter 8: Specific deductions and allowances
Notes
1. A dividend of R28 000 accrued to Walk for Life (Pty) Ltd on 15 August 2022 from a
wholly owned South African subsidiary company.
2. The cost price of the opening stock was R310 000 and the market value was R285 000 as
on 1 April 2022. The cost price of the closing stock was R365 000 and the market value
was R425 000 on 31 March 2023.
3. The list of doubtful debts as at 31 March 2023 amounted to R69 000 and 72% of the total
amount has been in arrears for more than 120 days. The rest of the debtors have not
been in arrears for more than 60 days. The doubtful debt allowance allowed by the
Commissioner for the 2022 year of assessment, amounted to R18 750.
4. Salaries paid during the current year of assessment amounted to R750 000 and the
company also contributed R56 000 towards the provident fund on behalf of the
company’s employees.
5. Legal costs of R157 000 were incurred for the following: Drafting of all the lease
contracts for the company, R40 000. The collection of outstanding trade debtors,
R65 000 and court cases in respect of employee remuneration claims, R52 000.
6. An amount of R25 000 was incurred on painting the entire exterior of the
manufacturing building. The building was badly damaged due to excessive rainwater
filtering through the cracks.
7. The company paid an amount of R36 500 in respect of electricity for the period
1 March 2023 to 30 October 2023.
8. R160 000 was paid to the former financial manager on 1 March 2022 for agreeing not to
start a similar business in the Republic within a period of five years. Only R120 000
constituted income in the former employee’s hands.
9. The company brought forward an assessed loss of R1 250 000 from the previous year of
assessment.
Answer 8.1
Calculation of Walk for Life (Pty) Ltd’s income tax liability for the current year of
assessment ended on 31 March 2023.
R R
Sales 3 500 000
Add:
Dividend income (Note 1) nil
Closing stock (Note 2) 365 000
Doubtful debt allowance – 2022 (Note 3) 18 750
Income 3 883 750
continued
357
A Student’s Approach to Taxation in South Africa 8.14
Less:Expenses
Purchases of raw material (R985 000 × 100 / 115) (Note 3) (856 522)
Opening stock (Note 2) (285 000)
Bad debts (46 200)
2022 Doubtful-debt allowance (Note 4) (19 872)
Salaries and wages (750 000)
Contribution to provident fund (56 000)
Legal costs (Note 5) (117 000)
Painting of building (Note 6) (25 000)
Prepaid electricity – Current portion (4 563)
– Prepaid portion (Note 7) (31 937)
Restraint of trade (Note 8) (24 000) 2 216 094
Taxable income 1 667 656
Utilisation of assessed loss b/f (restricted to the higher of (1 250 000)
R1 million or 80% of taxable income (R1 334 125)
Taxable income 417 656
Income tax liability (R417 656 x 27%) 112 767
Notes
1. Dividends are exempt from tax as per section (section 10(1)(k)) and therefore they will
not be included in income.
2. Opening and closing stock are always stated at the lower of cost price or market value.
Opening stock is deducted from income and closing stock is added back to income.
3. VAT must be removed from the purchase price.
4. The full doubtful debt allowance of the 2022 year of assessment must be added back to
taxable income. 40% of 72% of the list of doubtful debts for the current year of
assessment must be deducted from income as they have been in arrears for more than
120 days (R69 000 × 72% x 40%).
5. The drafting of lease contracts is capital in nature and therefore not deductible in terms
of section 11(c). The legal costs relating to the collection of outstanding trade debtors
and court cases are deductible in terms of section 11(c) as they are not of a capital
nature.
6. The painting of the building constitutes a repair and is deductible as per section 11(d)
(refer to chapter 9).
7. The current portion of the prepaid electricity is R36 500 × 1 / 8, as only the first month
of the prepayment falls within the current year of assessment. The rest of the
prepayment amount relates to the following year of assessment and because it is more
than six months after year-end (seven months), but less than R100 000 in aggregate, the
prepaid portion will still be deductible within the current year of assessment.
8. The deductible portion is the portion that is regarded as income in the hands of the
former employee (R120 000). The deduction is limited to the lesser of R120 000 / 3 years
= R40 000; or R120 000 / 5 = R24 000; therefore, R24 000 is deductible.
358
Expenditure and
9 allowances relating to
capital assets
Gross Exempt
– – Deductions = Taxable income Tax payable
income income
General
Specific Capital Deductions for
deduction
deductions allowances individuals
formula
Page
9.1 Introduction............................................................................................................ 360
9.2 Connected persons (section 1) ............................................................................. 363
9.3 Repairs and improvements (section 11(d))......................................................... 364
9.4 Process of manufacture ......................................................................................... 366
9.5 Cost of an asset ...................................................................................................... 367
9.6 Deduction in respect of improvements to assets not owned by the
taxpayer (section 12N) .......................................................................................... 369
9.7 Assets used by a small business corporation (section 12E) ............................. 370
9.7.1 Manufacturing plant and machinery .................................................... 370
9.7.2 Other assets ............................................................................................... 370
9.8 Assets used in a process of manufacture (section 12C) .................................... 372
9.8.1 Accelerated allowance for new and unused assets ............................. 373
9.8.2 Allowance for used assets ....................................................................... 374
359
A Student’s Approach to Taxation in South Africa 9.1
Page
9.9 Wear-and-tear allowances (section 11(e)) ........................................................... 376
9.10 Immovable assets................................................................................................... 378
9.10.1 Manufacturing building allowances (section 13)................................. 378
9.10.2 Commercial buildings (section 13quin) ................................................. 380
9.10.3 Residential units (section 13sex) ............................................................. 382
9.11 Disposal of assets ................................................................................................... 384
9.11.1 Allowance on the disposal of assets at a loss (section 11(o)) .............. 384
9.11.2 Recoupment on the sale of assets (section 8(4)(a)) ............................... 385
9.11.3 Replacement asset: Recoupment (section 8(4)(e)) ................................ 386
9.11.4 Donations and dividends: Recoupment (section 8(4)(k)).................... 389
9.12 Leased assets .......................................................................................................... 389
9.12.1 Rental paid (section 11(a)) ....................................................................... 389
9.12.2 Lease premiums (section 11(f )) .............................................................. 390
9.12.3 Leasehold improvements (section 11(g) and (h)) ................................. 391
9.13 Expenditure and allowances relating to intangible assets ............................... 393
9.13.1 Capital expenditure on patents, designs, trademarks
and copyright (section 11(gB) and (gC)) ............................................... 393
9.13.2 Prohibition of deduction of intellectual properties
(sections 11(gC)) ....................................................................................... 396
9.14 Summary................................................................................................................. 396
9.15 Examination preparation ...................................................................................... 397
9.1 Introduction
In terms of the general deduction formula (section 11(a)) which is dealt with in chap-
ter 7, expenditure of a capital nature is not deductible. In other words, if a person
buys an asset such as a computer, delivery vehicle or machinery for use in the per-
son’s business, the person is not allowed to deduct the cost of such an asset for tax
purposes. However, special allowances in the Income Tax Act 58 of 1962 (the Act)
provide that the costs of fixed assets can be deducted over a period of time. These
special allowances make provision for the fact that the value of an asset depreciates
over time.
In this chapter, certain general concepts relating to capital allowances are discussed.
The remainder of the chapter deals with the different allowances that can be claimed
on specific assets.
For tax purposes the costs that can be incurred relating to assets can be divided into
two main groups. Firstly, those costs incurred for assets that are owned and secondly
the costs incurred for assets that are leased by the taxpayer. The costs incurred relat-
ing to assets being leased have specific rules, depending on the type of cost incurred,
for example lease premiums and leasehold improvements.
360
9.1 Chapter 9: Expenditure and allowances relating to capital assets
The tax implications for the first group of assets are more complicated. The allowances
that can be claimed are not only dependent on the type of asset used, but also on the
status of the taxpayer that owns it. Remember these rules are mutually exclusive, and
it is important to ensure that you understand how to decide which rules to use before
studying the individual rules. The following structure will assist you in deciding
which allowances may be claimed (on assets other than intellectual property).
REMEMBER
• The tax rate was reduced from 28% to 27% for a company or close corporation with a
year of assessment ending on or after 31 March 2023 (that is to say, where the year of
assessment of the company or close corporation commences on or after 1 April 2022).
The rate of 27% is used for purposes of this book unless the year of assessment in an
example or question indicates otherwise.
361
A Student’s Approach to Taxation in South Africa 9.1
REMEMBER
• A person for tax purposes refers to natural persons, companies, trusts and estates
(insolvent or deceased estates).
Immovable assets
(e.g. buildings)
Movable assets
(e.g. machinery)
REMEMBER
• In terms of section 11(e) the Commissioner must publish a list of the period over which
an asset must be written off. This list was published in Interpretation Note 47.
362
9.2 Chapter 9: Expenditure and allowances relating to capital assets
363
A Student’s Approach to Taxation in South Africa 9.2–9.3
REMEMBER
• Special rules apply, for example, the determination of the cost of an asset, when transac-
tions between connected persons take place.
• A relative, in relation to a person, refers to the spouse or anybody related to him to the
third degree, including the spouse of such a person.
• An adoptive child is considered to be related to the adoptive parents in the first degree.
Legislation:
Section 11(d)
For the purpose of determining the taxable income derived by any person from carrying
on any trade, there shall be allowed as deductions from the income of such person so de-
rived—
(d) expenditure actually incurred during the year of assessment on repairs of property
occupied for the purpose of trade or in respect of which income is receivable, includ-
ing any expenditure so incurred on the treatment against attack by beetles of any
timber forming part of such property and sums expended for the repair of machinery,
implements, utensils and other articles employed by the taxpayer for the purposes of
his trade;
An analysis of the section indicates that repair expenses may be claimed if:
• the expense is actually incurred;
• it is incurred during the year of assessment;
• it relates to property used for the purposes of trade or income is derived from it; and
• it relates to other assets, for example, machinery, implements etc., used for the
purposes of trade.
REMEMBER
Many court cases have dealt with the issue regarding the differentiation between a
‘repair’ and an ‘improvement’. The two most important cases dealing with this aspect
was Flemming v Kommissaris van Binnelandse Inkomste and Commissioner for Inland
Revenue v African Products Manufacturing Co Ltd.
364
9.3 Chapter 9: Expenditure and allowances relating to capital assets
CASE:
Flemming v Kommissaris van Binnelandse Inkomste
57 SATC 73 (A)
Facts: Judgment:
Water was vital for farming activities of There was no evidence that anything
the taxpayer. Due to the fact that the went wrong with the borehole itself
existing borehole on the farm yielded less requiring its replacement. Expenditure
and less water to feed the existing dam, was therefore not incurred on the repair
the taxpayer drilled a new borehole, of the borehole as a subordinate and
erected a windmill for the borehole and inseparable part of the farm. The avail-
installed piping to feed water from the abiity of water from the original borehole
borehole to a newly constructed dam. The had decreased merely as a result of the
taxpayer contended that all these expenses fact that there was less water available
were repairs of property occupied for the underground at that place and on that
purpose of trade or in respect of which ground the new borehole could not be
income is receivable and claimed a sec- regarded as a repair by virtue of its
tion 11(d) deduction. The basis of his claim replacement of the original. It was simply
was that the borehole and windmill had to improving the water supply which had
be regarded as a subordinate part of the nothing to do with ‘repairs of property’.
farm and that repairs of property as used
in the section also included the replace-
ment of a subordinate portion of property.
CASE:
Commissioner for Inland Revenue v African Products
Manufacturing Co Ltd 13 SATC 164
Facts: Judgment:
The original roof of a factory was in a bad The taxpayer had restored the roof to its
state of repair. The timber roof trusses original condition and the use of material
had been damaged and could not be other than that originally used was not
replaced with the same timber as such for the purpose of improvement but in
timber was unprocurable owing to the order to restore the roof to its original
war. The local wood was unsuitable. A condition. The expenditure thus fell with-
new roof, made of reinforced concrete, in the term ‘repairs’.
was installed in its place.
365
A Student’s Approach to Taxation in South Africa 9.3–9.4
Example 9.1
Marajash (Pty) Ltd incurred the following expenses during the current year of assessment
ended on 28 February.
R
Repairs to the shop’s roof which was leaking 6 000
Replacement of worn carpets in the shop, with tiles (the replacement of the
carpets would have cost R8 000) 12 000
Paving the area in front of the shop to prevent excess dust 22 000
Painting the shop interior, which was damaged due to the leaking roof 10 000
You are required to determine which expenses can be deducted as repairs.
Solution 9.1
R
Repairs to the roof (Note 1) 6 000
Replacement of carpets (Note 2) 12 000
Paving of the area (Note 3) nil
Painting the shop (Note 4) 10 000
Total expenses 28 000
Notes
1. The repair to the roof is the restoration of a part of the shop.
2. Although the cost of tiling exceeds the amount that would have been spent on replac-
ing the carpets, it is not necessary that the materials used be identical to the materials
replaced.
3. The cost of the paving is not deductible as it was an improvement to the asset.
4. The cost of painting is deductible as it is the restoration of a part of the shop to its
original condition.
366
9.4–9.5 Chapter 9: Expenditure and allowances relating to capital assets
• The process need not produce the end-product as long as it contributes towards it
(COT v Processing Enterprises (Pvt) Ltd 3 SATC 109).
• A standardised product must be produced on a large scale by a continuous process
using human effort and specialised equipment in an organised manner (SIR v Saf-
ranmark (Pty) Ltd 43 SATC 235).
The South African Revenue Service (SARS) has issued Practice Note 42 which con-
tains lists of processes which have been accepted as being processes similar to a
process of manufacture and ‘direct’ manufacturing processes which are not exhaus-
tive as these processes do not require specific approval as well as a list of processes
considered not to be a direct process of manufacture or a similar process.
REMEMBER
Legislation:
Section 1: Interpretation
‘depreciable asset’ means an asset as defined in paragraph 1 of the Eighth Schedule (other
than any trading stock and any debt), in respect of which a deduction or allowance deter-
mined wholly or partly with reference to the cost or value of that asset is allowable in terms
of this Act for purposes other than the determination of any capital gain or capital loss;
367
A Student’s Approach to Taxation in South Africa 9.5
If a taxpayer acquires an asset without paying for it (only applicable to section 11(e)),
a reasonable value must be placed on the asset. For all other sections, the ‘cost’ must
be used. Certain sections (such as sections 12C, 12E, 13quin and 13sex), however,
provide that the cost of an asset is the lower of the actual cost or the market value of
the asset on the date of acquisition.
Example 9.2
Kompane (Pty) Ltd (a registered VAT vendor) purchased a second-hand machine in the
current year of assessment. The machine was brought into use in a process of manufac-
ture. The purchase price was made up as follows:
R
Cost price 125 400
Finance charges (R1 500 per month for 30 months) 45 000
Foundations (including VAT) 11 500
181 900
The machine was purchased from a person who is not registered as a vendor for VAT
purposes. However, the cost of the foundation was incurred from a person registered for
VAT purposes.
You are required to calculate the cost of the machine.
Solution 9.2
R
Cost price 125 400
Less: VAT (R125 400 × 15 /115) (Note 1) (16 357)
109 043
Add: Foundations excluding VAT (R11 500 × 100 /115) (Note 2) 10 000
Cost price of machine (Note 4) 119 043
Notes
1. The second-hand machine was purchased from a non-vendor and a deemed input tax
can be claimed. The alternative method of working out the cost price without the VAT
is R125 400 x 100/115 = R109 043.
2. The VAT payable on the foundation may be claimed as an input tax; therefore, it must
be excluded from the cost of the asset.
3. The finance charges may be claimed in terms of section 24J and therefore cannot be
included in the cost of the asset. Finance charges are an exempt supply for VAT pur-
poses and therefore have no VAT consequences.
4. The allowance is claimed in terms of section 12C since it is a machine used in a pro-
cess of manufacture. The cost for purposes of section 12C is the lower of the actual
cost incurred (R109 043) or the market value of the asset on the date of acquisition (not
provided in the question). The R10 000 foundation costs are added to either the cost or
the market value, depending on which is the lowest.
continued
368
9.5–9.6 Chapter 9: Expenditure and allowances relating to capital assets
REMEMBER
• The determination of the cost of an asset for tax purposes differs from the cost of an
asset for accounting purposes.
• Certain sections (such as sections 12C, 12E, 13quin and 13sex) provide that the cost of an
asset is the lower of the actual cost or the market value of the asset on the date of acquisition.
• Shipping and delivery charges are included in the installation and erection cost and
form part of the cost of an asset.
• Foreign travel expenses incurred in order to buy the asset do not form part of the cost of
the asset.
369
A Student’s Approach to Taxation in South Africa 9.6–9.7
370
9.7 Chapter 9: Expenditure and allowances relating to capital assets
• 30% in the second year and 20% in the third year of assessment respectively.
The cost of the asset is the lesser of:
• the actual cost of the asset; or
• the cost of the asset under a cash transaction concluded at arm’s length.
The costs incurred by the taxpayer in moving the assets from one location to another
also form part of the cost of the asset. The removal costs are written off over the
remaining useful life of the asset if they are incurred after the asset was brought into
use.
REMEMBER
• This allowance is calculated for the full year (in other words, it will not be apportioned),
irrespective of the period it was in use during that year of assessment.
• The section 12E allowance does not apply to buildings.
• The allowance can be claimed on new and used assets as long as it is the first time that
that particular asset is brought into use by that particular taxpayer.
Example 9.3
Shoe Lace Ltd, a small business corporation as defined in the Income Tax Act 58 of 1962
and a VAT vendor, manufactures school shoes. On 6 April 2021, the corporation
purchased a new manufacturing machine to the value of R150 000 (excluding VAT) and it
was brought into use on the same date. Due to the expansion of the business, the
corporation purchased four new computers during September 2022 for use by the
administrative staff. The total cost of the four computers amounted to R65 000 (excluding
VAT). The computers were brought into use on 1 October 2022.
You are required to calculate the most advantageous capital allowance for the taxpayer to
claim in the current year of assessment ended on 28 February 2023.
Solution 9.3
R
Manufacturing machine
Cost (excluding VAT) 150 000
Allowance (100% × R150 000) 150 000
Four computers
Cost (excluding VAT) 65 000
Allowance (50% × R65 000) 32 500
continued
371
A Student’s Approach to Taxation in South Africa 9.7–9.8
Note
The taxpayer elected the 50:30:20 write-off, because that would be more advantageous than
the three-year write-off for personal computers allowed according to section 11(e) and
Interpretation Note No. 47 (refer to 9.9). The taxpayer will be able to deduct a greater
amount in the first year when he elects the 50:30:20 write off, which will reduce his tax-
able income.
For the purposes of section 12C, the cost of the asset is the lesser of:
• the actual cost of the asset; or
• the cost of the asset under a cash transaction at the time of acquisition concluded at
arm’s length (therefore the market value on the date of acquisition).
The costs incurred by the taxpayer in moving the assets from one location to another
also form part of the cost of the asset. The removal costs are written off over the
remaining useful life of the asset if they are incurred after the asset was brought into
use. Finance charges are not included in the cost of the asset and can be claimed as a
deduction in terms of section 24J.
Section 12C also provides that:
• where an allowance can be claimed in respect of machinery or plant; and
• the machinery or plant was used by the taxpayer in a previous year of assessment
for the purposes of a trade of which the receipts and accruals were not included in
the income of the taxpayer;
372
9.8 Chapter 9: Expenditure and allowances relating to capital assets
– a deduction which could have been allowed during the previous year of assess-
ment;
– is deemed to have been allowed during the year of assessment concerned, as if
the receipts and accruals had been included in the taxpayer’s income.
REMEMBER
• The accelerated allowance is calculated for the full year (in other words, it will not be
apportioned), irrespective of the period it was in use during that year of assessment.
• The accelerated allowance only applies to new or unused machinery and plant used in
a process of manufacture.
• This allowance may not be claimed on a used or second-hand machine or plant (the
20% allowance is then applicable).
• The taxpayer cannot use this allowance unless he has brought the asset into use for the
first time.
• If the asset is not used by the taxpayer (the owner) himself in a process of manufacture
but is leased to a lessee who uses it in a process of manufacture, the taxpayer cannot
claim this accelerated allowance. The taxpayer can, however, claim the allowance over a
five-year period (20% per annum as discussed below).
Example 9.4
Mahlare (Pty) Ltd (a registered VAT vendor) purchased a new machine on 1 August 2022
for a cash amount of R1 092 500 (VAT inclusive). The machine was brought into use on
the same date in a manufacturing process by Mahlare (Pty) Ltd.
You are required to calculate the capital allowance that can be claimed for the 2023 year
of assessment ended on 28 February 2023.
373
A Student’s Approach to Taxation in South Africa 9.8
Solution 9.4
R
Cost (R1 092 500 – (15 / 115 × R1 092 500)) or (R1 092 500 x 100 / 115) 950 000
Allowance (R950 000 × 40%) 380 000
Note
The allowance of 40% may be claimed as the asset is new and unused and is used by the
owner of the asset in a process of manufacture. If the asset was used by another person in
a process of manufacture (not by Mahlare (Pty) Ltd), the company can still claim an al-
lowance but at a rate of 20% per annum.
Should the allowance not be claimed only for the seven months it was
used? (Therefore R950 000 × 40% × 7 / 12?)
Example 9.5
Machine XT was used by Modisa (Pty) Ltd (a registered vendor) for the first time during the
current year of assessment to manufacture candles. It was previously used in manu-
facturing activities overseas of which the income did not form part of the company’s gross
income. The machine was purchased on 1 January 2021 for R150 000 (excluding VAT).
You are required to calculate the capital allowance that can be claimed for machine XT
for the 2023 year of assessment ended on 28 February 2023.
Solution 9.5
R
Cost 150 000
Allowance (20% × R150 000) 30 000
Note
The 40% and 20% allowances for the 2021 and 2022 years of assessment are deemed to have
been allowed in those two years of assessment and are not deductible in the current year
of assessment; only the current year’s allowance is deductible.
374
9.8 Chapter 9: Expenditure and allowances relating to capital assets
• If the taxpayer (owner of the asset) does not use the plant and machinery (which is
either new and unused or used) himself but leases it to a lessee who uses it in a
process of manufacture.
• For hotelkeepers, if the hotel is not new and unused and is used by the taxpayer in
the process of his/her trade.
• For aircrafts/ships used by the taxpayer in his/her trade, regardless of whether the
aircrafts/ships are new and unused or used.
In the case where the asset is used by the lessee, the taxpayer (lessor) can claim the
allowance, if:
• he/she carries on a trade;
• derives income from the use of the machinery or plant; aircrafts or ships (or de-
rives income from the taxpayer’s trade as a hotelkeeper) in his business; and
• the machinery or plant is used by the lessee directly in a process of manufacture
carried on by the lessee.
Example 9.6
On 1 January 2022, Nasmeen Manufacturers (Pty) Ltd (a registered VAT vendor) pur-
chased a second-hand machine for a cash amount of R230 000 (VAT inclusive). The
machine was brought into use on the same date in a process of manufacture. The
company moved the machine to another site on 1 February 2023 at a cost of R12 000.
You are required to calculate the capital allowance that can be claimed for the current
year of assessment ended on 28 / 29 February 2023.
Solution 9.6
R
Cost (R230 000 x 100 / 115 × R230 000) 200 000
Allowance
Allowance (20% x R200 000) 40 000
Allowance on removal costs (R12 000 / 4) 3 000
Total allowance 43 000
Note
The removal costs are deductible in equal instalments over the remaining years (in this
case four years since the first 20% allowance on the machine has been claimed in the 2023
year of assessment) over which the allowance on the machine can be claimed.
REMEMBER
• The allowance of 20% (section 12C) is calculated for the full year (in other word, it will
not be apportioned), irrespective of the period it was in use during the year of
assessment.
375
A Student’s Approach to Taxation in South Africa 9.9
Legislation:
Section 11(e)
Legislation:
Interpretation Note 47
The wear-and-tear allowances may be used for assets which did not qualify for allow-
ances in any of the other capital allowance sections. The allowance will be granted as
long as the asset is used for purposes of the taxpayer’s trade. The wear-and-tear
allowance is applicable neither to buildings or structures of a permanent nature, nor
on assets received by a taxpayer with or as a government grant. The latter is only
applicable to companies or close corporations with the year of assessment ending on
or after 29 July 2022.
The allowance is claimed on the value of the asset and not on the cost of the asset, as
is the case with the other capital allowance sections discussed above. The implication
is that an allowance can be claimed on a qualifying asset even if the taxpayer did not
incur any expense in respect of the acquisition of the asset (for example if the asset
was inherited, donated or received as a dividend in specie). The taxpayer must be the
owner of the asset in order to claim this capital allowance.
If cost was actually incurred by the taxpayer in order to acquire the asset, the allowance
must, however, be claimed on the actual cost incurred in respect of the acquisition of
the asset and not on the value of asset. However, if cost was incurred but the asset
376
9.9 Chapter 9: Expenditure and allowances relating to capital assets
was purchased from a connected person, the value of the asset on the date of acquisi-
tion should always be used regardless of whether the value is more or less than the
actual cost incurred (Interpretation Note No. 47).
The costs incurred by the taxpayer in moving an asset from one location to another
also form part of the cost of the asset. The removal costs are written off over the
remaining useful life of the asset if they are incurred after the asset was brought into
use.
Interpretation Note No. 47 (Issue 3) ‘Wear-and-Tear or Depreciation Allowance’ was
published as a Binding General Ruling under section 89 of the Tax Administration
Act No. 28 of 2011. Portions of it were also reproduced in Binding General Ruling No.
7. These documents contain the period for which wear-and-tear allowances can be
claimed.
The wear-and-tear allowance can be calculated on the straight-line basis over the
specified write-off periods. The straight-line basis rather than the reducing-balance
method may be used if the taxpayer complies with the following requirements:
• the straight-line basis must apply to all assets of the same class;
• assets written off in full must be indicated at a residual value of R1;
• adequate records regarding cost, tax value, disposals, acquisitions, proceeds etc.,
must be kept; and
• the first year’s allowance must be reduced proportionately when it is brought into
use during the year of assessment.
The depreciation used for accounting purposes differs from the wear-and-tear allow-
ance because, for accounting purposes, assets are normally written off over their
useful life, which can lead to a different rate.
A taxpayer may apply to SARS to use a different write-off period from those provid-
ed in Interpretation Note No. 47. Interpretation Note No. 47 makes allowance for
small items costing less than R7 000 to be written off in full during the year of pur-
chase. The asset should, however, be used by the taxpayer and should not be used by
the lessee to qualify. A small item is regarded as an item that can function normally in
its own right and does not form part of a set.
Section 11(e) also provides that:
• where an allowance can be claimed in respect of an asset, and
377
A Student’s Approach to Taxation in South Africa 9.9–9.10
• the asset was used by the taxpayer in a previous year of assessment for the pur-
poses of a trade of which the receipts and accruals were not included in the income
of the taxpayer,
• a deduction which could have been allowed during the previous year of assess-
ment,
• is deemed to have been allowed during the year of assessment concerned, as if the
receipts and accruals had been included in the taxpayer’s income.
REMEMBER
• The allowance is calculated pro rata for the period the asset was in use during the year
of assessment.
• The asset must be owned or purchased in terms of an instalment credit agreement and
used by a taxpayer for the purposes of his trade.
Example 9.7
On 1 September 2022, JAY Manufacturers (Pty) Ltd purchased a delivery cycle for
R14 950 (including VAT) and brought it into use on the same date. In terms of
Interpretation Note No. 47, the write-off period for delivery vehicles is four years.
You are required to calculate the wear-and-tear allowance for the current year of assess-
ment ended on 28/29 February.
Solution 9.7
R
Cost (R14 950 x 100 / 115) 13 000
Wear-and-tear allowance (R13 000 / 4 years × 6 / 12) 1 625
What period should I use if the asset that I purchased is not on the
Interpretation Note No. 47 list?
378
9.10 Chapter 9: Expenditure and allowances relating to capital assets
allowance as long as the building (or the improvement) is being used in a process of
manufacture.
This section provides for the following deductions that are relevant to the current year
of assessment:
• erection or improvements commenced after 1 October 1999:
– building annual allowance 5%
• erection or improvements commenced between 1 July 1996 and
30 September 1999, provided that the buildings or improvements
were brought into use by 31 March 2000, qualifies for a 10% allowance.
These buildings therefore have a tax value of Rnil.
• erection or improvements commenced between 1 January 1989 and
30 June 1996.
– building annual allowance 5%
• erection or improvements commenced on or before 31 December 1988:
– building initial allowance 17,5%
– building annual allowance 2%
provided the building was brought into use or the improvements com-
pleted on or before 31 December 1989 (including building erected in terms
of a lease agreement, resulting in the lessee qualifying for the allowance).
The building annual allowance may be claimed in respect of buildings:
• purchased by the taxpayer, provided the person from whom it was purchased was
entitled to the allowance;
• erected by the taxpayer;
• purchased by the taxpayer from another person, where the building was never
used prior to its purchase,
and is:
• used wholly or mainly by the taxpayer (tenant or sub-tenant if the building is let)
for the purposes of carrying on a manufacturing or similar process;
• in the course of his trade.
The initial and annual allowances may be claimed in the year in which the building is
first used, or the improvements are completed, and are limited in total to their cost.
Cost of erection or improvements
The allowances are calculated on the cost of erection of the building or the cost of
improvements to the building. ‘Improvements’ are defined in the section as:
any extension, addition or improvements (other than repairs) to a building which is or
are effected for increasing or improving the industrial capacity of the building.
The cost of a building excludes the cost of preparatory work, such as the cost of
levelling the land. When a building is purchased, an apportionment has to be made
between the cost of the land and of the building. The erection of a building starts
when the foundations are laid, and improvements commence when the work is
started.
The cost must also be reduced, if applicable, by the initial allowance previously available.
379
A Student’s Approach to Taxation in South Africa 9.10
380
9.10 Chapter 9: Expenditure and allowances relating to capital assets
Example 9.8
On 30 June 2020 Mountainview Properties Ltd concluded a contract with a developer to
build a new office park, to be used for the purposes of trade. The work commenced on
15 July 2020 and was completed and on 31 May 2022 at a cost of R3 000 000. On the same
day, the building was brought into use. Mountainview Properties Ltd has a December
year-end.
You are required to calculate the amount allowed as a deduction from income for the
2022 year of assessment.
Solution 9.8
2022 year of assessment ended 31 December 2022 R
Section 13quin allowance (R3 000 000 × 5%) 150 000
Note
The full allowance must be claimed, without any apportionment, even though the build-
ing was not used for the full year. The R3 000 000 is not multiplied with 55% since the
R3 000 000 consist only of the cost of the building and does not include the cost of the
land.
Example 9.9
On 30 June 2022 Lavender Properties Ltd purchased part of a new office block from a
developer at a cost of R1 million, to be used for the purposes of trade. The offices were
brought into use on 1 August 2022. Lavender Properties Ltd has a December year-end.
You are required to calculate the amount allowed as a deduction from income for the
2022 year of assessment.
Solution 9.9
Year of assessment ended 31 December 2022 R
Deemed cost R1 000 000 × 55% = R550 000
Section 13quin allowance R550 000 × 5% 27 500
Note
A part of a building was acquired after 21 October 2008, therefore the deemed cost of the
asset is 55% of the cost. Even if the entire building was aqcuired, the cost of the building
will still be multiplied by 55% of the total cost, since the total cost include the cost of the
land on which no allowance can be claimed.
The full allowance must be claimed, without any apportionment, even though the
building was not used for the full year.
381
A Student’s Approach to Taxation in South Africa 9.10
REMEMBER
• The building must be new, and unused by the taxpayer to qualify for the deduction.
• If the building was used by a previous owner, the allowance cannot be claimed.
• The allowance is only available to the owner of the building.
Legislation:
Section 1: Interpretation
‘residential unit’ means a building or self-contained apartment mainly used for residential
accommodation, unless the building or apartment is used by a person in carrying on a
trade as a hotel keeper;
‘low-cost residential unit’ means—
(a) an apartment qualifying as a residential unit in a building located within the Repub-
lic, where—
(i) the cost of the apartment does not exceed R350 000; and
(ii) the owner of the apartment does not charge a monthly rental in respect of that
apartment that exceeds one per cent of the cost; or
(b) a building qualifying as a residential unit located within the Republic, where—
(i) the cost of the building does not exceed R300 000; and
(ii) the owner of the building does not charge a monthly rental in respect of that
building that exceeds one per cent of the cost contemplated in subparagraph (i)
plus a proportionate share of the cost of the land and the bulk infrastructure:
Provided that for the purposes of paragraphs (a)(ii) and (b)(ii), the cost is deemed to be
increased by 10% in each year succeeding the year in which the apartment or building is
first brought into use;
382
9.10 Chapter 9: Expenditure and allowances relating to capital assets
REMEMBER
• The cost is deemed to be increased by 10% in each year succeeding the year in which
the apartment or building is first purchased.
• This section applies where the units were acquired, or the erection commenced on or
after 21 October 2008. Before 21 October 2008 section 13ter must be used.
Example 9.10
On 1 February 2022 Contructo (Pty) Ltd bought seven new apartments in a residential
building situated in the center of Johannesburg at a cost of R750 000 each. All the apart-
ments were rented from 1 March 2022.
You are required to calculate the allowance on the apartments for the year of assessment
ended 31 December 2022.
Solution 9.10
Section 13sex allowance:
R750 000 × 7 × 55% = R2 887 500 × 5% = R144 375
Note
Section 13sex is applicable because the taxpayer owns at least five apartments, which are
used for purposes of trade (renting out) and are situated in South Africa.
The cost of the apartments is deemed to be 55% of the acquisition price because only a
part of a building was acquired and the acquisition cost of that part includes the cost of
the land on which no allowances can be claimed
383
A Student’s Approach to Taxation in South Africa 9.10–9.11
REMEMBER
• The section 13sex allowance is only available to the owner of the asset (therefore lessees
do not qualify for the deduction, except for section 12N assets).
• A residential unit purchased from a seller who previously used the building does not
qualify for this allowance, since the residential unit is not new or unused.
• The taxpayer must own at least five residential units in South Africa, and they must be
solely used for the purposes of carrying on a trade.
• The full allowance is deductible, even if the residential unit is brought into use for only
part of the year of assessment.
384
9.11 Chapter 9: Expenditure and allowances relating to capital assets
Example 9.11
KZQ Limited (a registered VAT vendor) purchased a second-hand manufacturing
machine for R115 000 on 1 January 2021 (including VAT). The machine was sold on
30 November 2022 for an amount of R25 000 (VAT excluded) because it was outdated.
You are required to calculate the allowance on the sale of the machine for the 2023 year of
assessment ended on 28 February 2023. (KZQ Limited elected the deduction of this allow-
ance.)
Solution 9.11
R
Selling price 25 000
Capital allowances allowed up to date of sale
[(R100 000 x 100 / 115) × 20% × 3 years (2021, 2022 and 2023))] 60 000
Sum of the proceeds and capital allowances (R25 000 + R60 000) 85 000
Allowance (R100 000 – R85 000) 15 000
Note
The allowance can also be calculated as the difference between the selling price
(R25 000) and the tax value (R40 000). The tax value is the cost (R100 000) less the capital
allowances granted (R60 000).
REMEMBER
• The taxpayer must elect to have this allowance deducted from his income.
• This allowance can be claimed on the sale of depreciable assets with a useful life which
does not exceed ten years.
• When capital gains tax comes into the equation and a company elects to utilise the
section 11(o) allowance, and this allowance is claimed, the allowance must be deducted
from the base cost. If the allowance is not claimed, it will result in a capital loss
385
A Student’s Approach to Taxation in South Africa 9.11
Example 9.12
Excon Limited (a registered VAT vendor) purchased machine P on 1 May 2019 for
R172 500 (including VAT). The machine was used from that date in a process not
regarded as a manufacturing process. This machine was sold on 31 January 2023 for
R161 000 (including VAT).
SARS granted a wear-and-tear allowance that is calculated according to the straight-line
method of 20% a year on this machinery and these allowances amounted to R120 000 up to
date of sale.
You are required to calculate the recoupment Excon Limited will have to add to income.
Solution 9.12
R
Cost R172 500 x 100/115 150 000
Less: Wear-and-tear allowances (given) (120 000)
Tax value 30 000
Selling price R161 000 x 100 / 115 140 000
Less: Tax value (30 000)
Recoupment 110 000
Note
The recoupment can never be more than the actual amounts claimed as deductions. In
this case, R120 000 was claimed and the full amount of R20 000 is therefore recouped.
REMEMBER
• The amount recouped for tax purposes may not exceed the amounts allowed as deduc-
tions in the previous years.
• The recoupment is added to the taxpayer’s income.
• The capital profit (the amount of the proceeds exceeding the original cost of the asset) is
subject to the rules of capital gains tax.
386
9.11 Chapter 9: Expenditure and allowances relating to capital assets
Example 9.13
Wilcars Limited purchased a secondhand manufacturing machine on 1 August 2019 for
R150 000 (excluding VAT). This machine (Machine X) was used in a manufacturing
process from 1 September 2019. Machine X was replaced on 31 May 2022. The capital
allowances up to this date amounted to R120 000. Machine X was sold for R110 000
(excluding VAT). Machine S was purchased brand new on 31 August 2022 to replace
Machine X, and was brought into use on the same date. The cost of Machine S amounted
to R182 400 (excluding VAT). Wilcars Limited elects that the provisions of paragraph 66
of the Eighth Schedule apply.
You are required to calculate the allowances and recoupments for the 2023 year of assess-
ment.
387
A Student’s Approach to Taxation in South Africa 9.11
Solution 9.13
R
Cost 150 000
Less: Capital allowances (given) (120 000)
Tax value 30 000
Selling price 110 000
Recoupment (R110 000 – R30 000) 80 000
Recoupment must be deferred
Add to income portion of deferred recoupment
R80 000 × 40% 32 000
Capital allowance for Machine S - section 12C (R182 400 × 40%) (72 960)
REMEMBER
Example 9.14
Cars (Pty) Ltd needed more space to manufacture motor vehicle parts which the company
sold to different motor vehichle dealers. The company disposed of their main factory
(Factory A) on 1 September 2022 for R6 440 000 (including VAT). The company purchased
a new factory (Factory B) to replace Factory A on 1 December 2022 for
R8 500 000 (excluding VAT). The factory was brought into use on the same date.
Factory A was purchased new on 1 February 2013 for R3 200 000 (excluding VAT). The
company has a March year end.
You are required to calculate the allowances and recoupments for the current year of
assessment ended 31 March 2023.
388
9.11–9.12 Chapter 9: Expenditure and allowances relating to capital assets
Solution 9.14
R
Cost of Factory A 3 200 000
Less: Capital allowances (R3 200 000 x 5% x 10) (1 600 000)
Tax value 1 600 000
Selling price (R6 440 000 x 100/115) 5 600 000
Less: Tax value (1 600 000)
Recoupment 4 000 000
Limited to allowances 1 600 000
Recoupment not included in income (Note)
Factory B – R8 500 000 – R1 600 000 = R6 900 000
Factory B - section 13 allowance (R6 900 000 x 5%) (345 000)
Note
The recoupment will not be deferred in terms of section 8(4)(e) as it does not meet the
requirements of paragraph 65 of the Eight Schedule as it is not an involuntary disposal.
Paragraph 66 of the Eight Schedule is also not applicable, as this relates to immovable
property, and therefore paragraph 13(3) will apply.
389
A Student’s Approach to Taxation in South Africa 9.12
Example 9.15
Thebe Manufacturers Ltd entered into a lease agreement with Kaqala Properties Ltd on
1 May 2022 to lease an administration building for 15 years from that date. In terms of the
lease agreement, Thebe must pay a lease premium of R60 000 before 31 May 2022 and a
monthly rental of R6 000 from that date.
You are required to calculate what amounts Thebe Manufacturers Ltd can claim for the
current year of assessment ended on the last day of February 2023.
Solution 9.15
R
Lease premium: R60 000 / 15 × 10 / 12 3 333
Rental: 10 × R6 000 60 000
Total deductions 63 333
Note
The lease premium is written off over the period of the lease agreement, that is to say 15
years. The deduction is reduced pro rata as the building is only let for ten months in the
current year of assessment. In the next 14 years of assessment, R4 000 is written off each
year and, in the last year of assessment, R4 000 × 2 / 12 = R667 is written off.
390
9.12 Chapter 9: Expenditure and allowances relating to capital assets
Example 9.16
On 1 May 2021 Mowbray Manufacturers entered into an agreement with Steven Moti for
the lease of land owned by him. The lease agreement provided the following:
• the term of the lease agreement was 20 years from 1 May 2021; and
• the lessees would erect a factory on the land at a cost of R1 000 000.
Building commenced on 1 October 2021 and the factory was completed and brought into
use on 1 October 2022 at a cost of R1 200 000.
You are required to calculate the amount Mowbray Manufacturers may claim in respect
of the leasehold improvements for the 2023 year of assessment ended on the last day of
February.
391
A Student’s Approach to Taxation in South Africa 9.12
Solution 9.16
R
Leasehold improvements R1 000 000 / 18 years 7 months × 5 / 12 (Note 1) 22 422
Annual building allowance 5% × (R1 200 000 – R1 000 000) (Note 2) 10 000
Total deduction that can be claimed 32 422
Notes
1. Mowbray Manufacturers must write the leasehold improvements off over the period
during which the building is in use, that is to say 20 years, less the 17 months it took
to complete the building from the date of agreement = 18 years and 7 months. It was
only in use for 5 months (1 October 2022 to 28 February 2023) in the current year of as-
sessment.
2. The contract value is written off over the useful life of the building and the annual
allowance is calculated on the difference between the actual cost (R1 200 000) and the
contract value (R1 000 000).
Example 9.17
On 1 September 2020, Moti (Pty) Ltd purchased a piece of land for R400 000. On
1 May 2021, the company entered into an agreement with Mowbray Manufacturers for
the lease of the land. The lease agreement provided the following:
• the terms of the lease agreement were 20 years from 1 May 2021; and
• the lessees would erect a factory on the land at a cost of R1 000 000.
Building commenced on 1 October 2021 and the factory was completed and brought into
use on 1 October 2022 at a cost of R1 200 000.
You are required to calculate what amounts Moti (Pty) Ltd must include in his income for
the 2023 year of assessment ended on the last day of February. (The discounting rate is
0,312.)
392
9.12–9.13 Chapter 9: Expenditure and allowances relating to capital assets
Solution 9.17
Gross income R
Value of leasehold improvements (Note) 1 000 000
Moti (Pty) Ltd can claim the following deduction: 688 000
Value of improvements included in income 1 000 000
Less: R1 000 000 discounted at 6% a year over the remaining period
of the lease, that is to say 18 years and seven months
(R1 000 000 × 0,312) (Note) (312 000)
Note
The value of the leasehold improvements included in the contract is included in Moti
(Pty) Ltd’s gross income in terms of paragraph (h)(i) of the definition of ‘gross income’,
thus, the amount of R1 000 000 and not the actual cost of R1 200 000. Although the
amount accrues on the date of the agreement, in practice it is included in gross income in
the year in which the improvements are completed.
REMEMBER
• The lease premium is claimed from the date the lessee has the right of use of the leased
asset and the asset is actually used in the production of income.
• The leasehold improvements are claimed from the date that the improvements are
brought into use.
• The allowance for both the lease premium and leasehold improvements is calculated
pro rata for the period the asset was in use during the year of assessment.
• A lessee is allowed to fully write off any remaining costs of buildings and improvements
on leased property if those costs have not been fully taken into account by the lease termi-
nation date (and would have otherwise been deductible had the lease continued).
393
A Student’s Approach to Taxation in South Africa 9.13
expense and the date the expense was incurred. The following is a summary of the
deductions:
394
9.13 Chapter 9: Expenditure and allowances relating to capital assets
Example 9.18
Aqua (Pty) Ltd owns a shop that sells water sport equipment. The company also designs
and manufactures surfboards.
The company incurred the following expenses in connection with patents and designs on
surfboards (all patents and designs having been developed in South Africa):
R
Expenses incurred in acquiring design E for a surfboard for children. 18 000
The design was registered on 31 July 2022.
Expenses incurred in acquiring patent F for a new type of shoe used by surfers. 4 500
The patent was registered on 31 October 2022.
You are required to calculate the allowances that Aqua (Pty) Ltd can claim
during the current year of assessment (ending 31 March 2023).
Solution 9.18
R
Current year of assessment
Design E: R18 000 × 10% 1 800
Patent F: (Note 1) 4 500
Allowances that Aqua (Pty) Ltd can claim 6 300
Note
The expenditure incurred in acquiring patent F is deductible in full in terms of sec-
tion 11(gC) as it does not exceed R5 000.
395
A Student’s Approach to Taxation in South Africa 9.13–9.14
REMEMBER
• Only acquisition costs can be claimed in terms of section 11(gC). The costs that relate to
the developing, devising or creating are claimed in terms of section 11D.
• Different rates apply depending on whether it is an invention, patent, copyright or a
design:
– 5% in the case of an invention, patent or copyright; or
– 10% in the case of a design.
• If the acquisition costs do not exceed R5 000, it can be claimed in full as a deduction.
• No allowance may be deducted if a trade mark is acquired from another person.
• These assets must be used in the production of income or income must be derived from
them.
REMEMBER
• Section 23I disallows the deduction of expenditure incurred in respect of affected intel-
lectual property to the extent that the expenditure is not income for another party, unless
the expenditure is incurred for the acquisition of intellectual property (section 11(gC)).
9.14 Summary
In this chapter, the allowances that a taxpayer may claim in connection with capital
assets used in the production of income or from which income is derived, are dis-
cussed in detail. The distinction between repairs and improvements are discussed.
Repairs can be claimed immediately in the year the expense was incurred.
The concepts of the ‘cost of the asset’ and a ‘process of manufacture’ are dealt with
separately as these apply to most assets. In the case of plant and machinery used in a
process of manufacture, the different rates depend on the date the plant or machinery
396
9.14–9.15 Chapter 9: Expenditure and allowances relating to capital assets
is brought into use. The allowance is claimed in full even if the asset was not brought
into use for the full year of assessment.
Assets not used in a process of manufacture (for example, computers, delivery vehi-
cles etc.) are written off over periods prescribed by SARS. These wear-and-tear allow-
ances may only be claimed for the period the assets were in use during that year of
assessment.
Buildings used in a process of manufacture are written off at specific rates, depending
on the date the erection or improvements commenced and the date they were
brought into use. In certain cases, buildings purchased by the taxpayer can also be
written off at a certain rate. The cost of land cannot be claimed as it constitutes a cost
of a capital nature and the Act makes no special provision for it.
This chapter also deals with the disposal of assets and the allowances relating thereto.
The loss on the sale of an asset can be claimed as a deduction or in the case of a re-
coupment, the amount is added to the taxpayer’s income except where it relates to a
replacement asset. In the case of a replacement asset, the recoupment is deferred, and
a portion of the recoupment is added to income every year.
In the questions that follow, the principles as discussed in the chapter are high-
lighted.
Question 9.1
Paint Pot (Pty) Ltd is a manufacturing business that manufactures arts and crafts. The
company is not a small business corporation as defined in the Income Tax Act 58 of 1962
and its financial year ends on 31 March. Paint Pot (Pty) Ltd is a registered VAT vendor and
all amounts exclude VAT, unless stated otherwise.
1. Paint Pot (Pty) Ltd donated four office computers with a cost price of R12 000 each to a
local school (not a public benefit organisation) on 1 January 2023 for no consideration.
The market value of the office computers was R16 500 each on 1 January 2023. The
computers were originally purchased and brought into use on 1 August 2021. Binding
General Ruling No. 7 allows for a three-year write off period for computers.
2. The company purchased two machines on 16 September 2022 that were used in the
manufacturing process from that date. Machine X was purchased new at a cost of
R87 000 (including VAT) and machine Z was purchased second-hand from a
competitor for R56 000 (excluding VAT).
3. Paint Pot (Pty) Ltd decided to extend the manufacturing building to improve the
industrial capacity of the building. The extension commenced on 15 July 2022 and was
completed and brought into use on 1 October 2022. The cost of the improvement was
R1 100 000, including the architect’s fees of R125 000. The original manufacturing
building is fully written-off for income tax purposes.
continued
397
A Student’s Approach to Taxation in South Africa 9.15
4. In spite of the fact that the company extended the manufacturing building, it still
required extra space for manufacturing its best seller, the paint brush that lights up
when you paint. The company approached Steelworks (Pty) Ltd for additional
manufacturing space and signed a lease agreement to lease the building with effect
from 1 May 2022 for a period of six years, with the option to extend the lease for
another four years. A monthly rental amount of R12 500 was payable to Steelworks
(Pty) Ltd from 1 May 2022. A lease premium of R120 000 was payable on 1 May 2022.
Answer 9.1
Paint Pot (Pty) Ltd can claim the following allowances for the year ending 31 March 2022:
Office computers R R
Cost (R12 000 x 4) 48 000
Less: Section 11(e) allowance 2022 (R48 000 / 3 x 8 / 12) (10 667)
Less: Section 11(e) allowance 2023 (R48 000 / 3 x 9 / 12) (12 000) (12 000)
Tax value 25 333
Donation at market value (R16 500 x 4) (Deemed selling price) 66 000
(Note 1)
Recoupment (section 8(4)(k)) 40 667
Limited to previous allowances (R10 667 + R12 000) (Note 1) 22 667
Machine X – (R87 000 x 100 / 115 x 40%) – section 12C (30 261)
Machine Z – (R56 000 x 20%) – section 12C (11 200)
Extension to building (section 13) – (R1 100 000 - R125 000) x 5% (48 750)
Rental (R12 500 x 11) – section 11(a) (137 500)
Lease premium (R120 000 / (10 years x 12 months) x 11months) –
section 11(f) (Note 2) (11 000)
Notes
1. Remember that the recoupment can never exceed the previous allowances claimed. To
ensure that the recoupment does not exceed the allowances claimed, the proceeds can
also be limited to the cost price in the calculation, which is R48 000. The tax value is
deducted from the proceeds (R25 333) and this gives you the recoupment amount of
R22 667.
2. The calculation can also be done in years, R120 000 / 10 years x 11 / 12 months.
398
10 Capital gains tax
Taxable
capital
gain
Page
10.1 Introduction ......................................................................................................... 401
10.2 Application of capital gains tax (paragraphs 2 to 10) ..................................... 401
10.3 Determine whether capital gains tax is applicable (Step 1)
(paragraph 1 and section 1)................................................................................ 405
10.3.1 Definition of an asset (Step 1.1) ......................................................... 405
10.3.2 Nature of an asset (Step 1.2) ............................................................... 406
10.3.3 Disposals for capital gains tax purposes (Step 1.3)
(paragraphs 11 and 12) ....................................................................... 406
10.3.4 Timing of disposals (Step 1.4) (paragraph 13) ................................. 408
10.4 Capital gain or loss on the disposal of an asset (Step 2)
(paragraphs 3 and 4) ........................................................................................... 409
10.4.1 Capital gain on the disposal of an asset (paragraph 3) .................. 410
10.4.2 Capital loss on the disposal of an asset (paragraph 4) ................... 411
10.5 Proceeds from the disposal of an asset (Step 2.1) ........................................... 412
10.5.1 Proceeds (paragraph 35) ..................................................................... 412
10.5.2 Donations and transactions between related parties
(paragraph 38) ...................................................................................... 414
10.5.3 Disposals for proceeds not yet accrued (paragraph 39A) .............. 415
10.6 Base cost of an asset (Step 2.2) ........................................................................... 415
10.6.1 Cost included in the base cost of an asset (paragraph 20) ............. 416
399
A Student’s Approach to Taxation in South Africa
Page
10.6.2 Cost not included in the base cost of an asset (paragraph 20(2)
and (3)) and the limitation of expenditure (paragraph 21) ............ 418
10.6.3 Base cost calculation of a pre-valuation date asset ......................... 419
10.7 Market value of assets (paragraphs 29 and 31) ............................................... 420
10.8 Time-apportionment base cost (TAB) (paragraph 30).................................... 423
10.8.1 TAB: Cost only incurred before the valuation date ........................ 423
10.8.2 TAB: Cost incurred before and after the valuation date ................ 427
10.8.3 TAB: Depreciable assets...................................................................... 429
10.9 The 20% rule......................................................................................................... 433
10.10 Selecting the valuation date value (paragraphs 26 and 27) ........................... 434
10.11 Exclusions (Step 2.4) ........................................................................................... 439
10.11.1 Exclusion: Primary residence (paragraphs 44 to 51) ....................... 440
10.11.2 Exclusion: Personal-use assets (paragraph 53) ................................ 446
10.11.3 Exclusion: Disposal of small business assets (paragraph 57) ........ 447
10.11.4 Exclusions: Other ................................................................................. 449
10.11.4.1 Retirement benefits (paragraph 54)................................. 449
10.11.4.2 Long-term insurance (paragraph 55) .............................. 450
10.11.4.3 Compensation for personal injury, illness or
defamation (paragraph 59) ............................................... 451
10.11.4.4 Gambling, games and competitions (paragraph 60)..... 451
10.11.4.5 Exempt persons (paragraph 63)....................................... 452
10.11.4.6 Assets that produce exempt income (paragraph 64) .... 452
10.11.4.7 Donations and bequests to public benefit
organisations (paragraph 62) ........................................... 452
10.11.4.8 Public benefit organisations (paragraph 63A) ............... 452
10.11.5 Annual exclusion (paragraph 5) ........................................................ 453
10.12 Limitation of losses (paragraphs 15 to 19, 39, 56 and 83) ............................... 453
10.12.1 Non-personal use assets (paragraph 15) .......................................... 454
10.12.2 Intangible assets (paragraph 16) ........................................................ 454
10.12.3 Forfeited deposits (paragraph 17) ..................................................... 454
10.12.4 Options (paragraph 18) ....................................................................... 454
10.12.5 Shares disposed of at a loss following an extraordinary
dividend (paragraph 19) ..................................................................... 454
10.12.6 Assets disposed of to a connected person at a loss
(paragraph 39) ...................................................................................... 455
10.12.7 Waiving or cancelling of debt by a creditor (paragraph 56) .......... 456
10.13 Assessed capital loss carried forward (paragraphs 6 and 7) ......................... 456
10.14 Roll-overs ............................................................................................................. 457
10.14.1 Involuntary disposal of assets (paragraph 65)................................. 457
10.14.2 Reinvestment in replacement assets (paragraph 69) ...................... 459
10.14.3 Disposals to a spouse (section 9HB).................................................. 462
10.15 Inclusion rate (paragraphs 9 and 10) ................................................................ 464
10.16 Summary .............................................................................................................. 464
10.17 Examination preparation ................................................................................... 465
400
10.1–10.2 Chapter 10: Capital gains tax
10.1 Introduction
A gain or loss that is realised on the disposal of an asset can be of either a revenue
nature or a capital nature. In determining whether the disposal of a particular asset
will result in a capital gain, and therefore be subject to capital gains tax, it is first nec-
essary to determine whether the profit or loss is revenue in nature by applying the
basic principles of income tax. If it is determined that the disposal is revenue in na-
ture, the gain or loss will then be subject to normal income tax, not capital gains tax. If
it is determined that the disposal is not revenue in nature, the gain or loss will be sub-
ject to capital gains tax in terms of the Eighth Schedule of the Act. The Eighth Sched-
ule excludes capital gains on certain assets. Therefore, it is important to note which
assets are not subject to capital gains tax and which are only partly subject to capital
gains tax. References to paragraphs in this chapter are references to the paragraphs of
the Eighth Schedule.
401
A Student’s Approach to Taxation in South Africa 10.2
Calculate the normal tax payable on the taxable capital gain or the assessed
capital loss to be carried forward to the following year of assessment
Step 1: Determine whether the transaction is subject to capital gains tax (refer
to 10.3).
Step 2: Calculate the capital gain or loss on the disposal of each asset (refer to
10.4).
Step 3: Calculate the sum (total) of all capital gains and losses for the year of
assessment by adding up the capital gains and losses on the different
assets disposed of.
Step 5: Determine whether there is any assessed capital loss brought for-
ward from the previous year of assessment.
Step 6: Calculate the net capital gain or assessed capital loss for the year of
assessment by:
• reducing the aggregate capital gain (Step 4) by the assessed capital
loss (Step 5); or
• adding the aggregate capital loss (Step 4) to the assessed capital
loss (Step 5).
continued
402
10.2 Chapter 10: Capital gains tax
Step 8: Determine the inclusion rate applicable to the taxpayer, that is 80% for
persons other than natural persons and 40% for natural persons (refer
to 10.16).
Step 9: Calculate the taxable capital gain by multiplying the net capital gain
(Step 9) by the inclusion rate (Step 8).
Step 10: The taxable capital gain is added to other taxable income for the year
of assessment to calculate the total taxable income for the year. This
total taxable income is then used to calculate the tax liability.
REMEMBER
• If an assessed capital loss arises, the amount is carried forward to the next year of
assessment.
• An assessed capital loss cannot be set off against other taxable income (refer to 10.15).
Example 10.1
Quintal (Pty) Ltd has a net income from operations (before the sale of capital assets) of
R100 000 for the current year of assessment. Quintal CC sold two assets during the year.
The sale of the first asset realised a capital gain of R90 000. The sale of the second asset
resulted in a capital loss of R20 000. In the previous year of assessment, Quintal CC had
an assessed capital loss of R10 000.
You are required to
(a) calculate Quintal (Pty) Ltd’s taxable income for the current year of assessment;
(b) calculate Mr P Quintal’s taxable income for the current year of assessment if you
assume that Quintal (Pty) Ltd is a natural person, Mr P Quintal.
403
A Student’s Approach to Taxation in South Africa 10.2
Solution 10.1
As assets were sold during the year, capital gains tax is applicable.
(a) Quintal (Pty) Ltd: R
Capital gain on the sale of asset 1 90 000
Capital loss on the sale of asset 2 (20 000)
Sum of all capital gains and losses (R90 000 – R20 000) 70 000
Less: Annual exclusion (not a natural person) nil
Aggregate capital gain (R70 000 – Rnil) 70 000
Less: Assessed capital loss – previous year (10 000)
Net capital gain (R70 000 – R10 000) 60 000
Multiply: Inclusion rate – 80% (not a natural person) 80%
Taxable capital gain (R60 000 × 80%) 48 000
Total taxable income:
Other taxable income (net income from operations) 100 000
Taxable capital gain 48 000
Total taxable income (R100 000 + R48 000) 148 000
(b) P Quintal: R
Capital gain on the sale of asset 1 90 000
Capital loss on the sale of asset 2 (20 000)
Sum of all capital gains and losses (R90 000 – R20 000) 70 000
Less: Annual exclusion (40 000)
Aggregate capital gain (R70 000 – R40 000) 30 000
Less: Assessed capital loss – previous year (10 000)
Net capital gain (R30 000 – R10 000) 20 000
Multiply: Inclusion rate – 40% 40%
Taxable capital gain (R20 000 × 40%) 8 000
Total taxable income:
Other taxable income (net income from operations) 100 000
Taxable capital gain 8 000
Total taxable income (R100 000 + R8 000) 108 000
404
10.2–10.3 Chapter 10: Capital gains tax
REMEMBER
• If the result of Step 6 (net capital gain or assessed capital loss) represents an assessed
capital loss, the amount will be carried forward to the following year of assessment and
will not be deducted from the other taxable income.
• The taxable capital gain for individuals must be included in the calculation of taxable
income before the allowable deductions for retirement contributions and section 18A
donations.
• Only natural persons and paragraph (a) special trusts qualify for the annual exclusion
of R40 000.
Step 1.2: Determine the nature of the asset and whether the asset was subject to
income tax (refer to 10.3.2).
405
A Student’s Approach to Taxation in South Africa 10.3
406
10.3 Chapter 10: Capital gains tax
407
A Student’s Approach to Taxation in South Africa 10.3
Change of ownership
The time of the disposal of an asset by means of a change of ownership is, in the case of:
• an agreement subject to a suspensive condition:
– the date on which the condition is satisfied;
• agreement without a suspensive condition:
– the date of conclusion of the agreement;
• the distribution of an asset of a trust by a trustee to a beneficiary to the extent that
the beneficiary has a vested interest in the asset:
– the date on which the interest vests;
• where a section 8C equity instrument is granted to a beneficiary by a trust:
– the date that the equity instrument vests in that beneficiary in terms of section 8C;
• a donation of an asset:
– the date of compliance with all legal requirements for a valid donation;
• the expropriation of an asset:
– the date on which the person receives the full compensation agreed on or finally
determined by a competent tribunal or court;
• the conversion of an asset:
– the date on which the asset is converted;
• the granting, renewal or extension of an option:
– the date on which the option is granted, renewed or extended;
• the exercise of an option:
– the date on which the option is exercised;
408
10.3–10.4 Chapter 10: Capital gains tax
REMEMBER
• The person acquiring the asset is deemed to have acquired the asset on the date of the
disposal.
409
A Student’s Approach to Taxation in South Africa 10.4
determine the capital gain or capital loss on the disposal of an asset, the following
work method is recommended:
Step 2.1: Calculate the proceeds on the disposal of the asset (refer to 10.5).
Step 2.2: Calculate the base cost of the asset (refer to 10.6).
Step 2.3: Calculate the capital gain (refer to 10.4.1) or capital loss (refer to
10.4.2) on the disposal of the asset by deducting the base cost from
the proceeds.
Step 2.4: Determine whether any portion of the capital gain or loss is excluded
from capital gains tax in terms of the Act (refer to 10.11).
Step 2.5: Determine whether any part of the capital loss is limited by the Act
(refer to 10.12) or whether any roll-over relief exists (refer to 10.13).
410
10.4 Chapter 10: Capital gains tax
REMEMBER
• In certain situations, the capital gain or capital loss on the disposal of the asset must be
recalculated. For example, where further proceeds accrue in a subsequent year, follow-
ing the year of disposal, the additional proceeds are recognised as a capital gain in the
subsequent year.
Example 10.2
Zonke (Pty) Ltd sells the shares in its investment portfolio. The company acquired the
shares for a cost price of R850 000. The gross selling price was R500 000 and the commis-
sion amounted to R50 000, on the sale of the shares. In terms of a loss limitation rule,
R100 000 of the capital loss is limited. The company also earned other taxable income of
R200 000 during the same year of assessment. In the previous year of assessment, he had
an assessed capital loss of R40 000.
You are required to calculate the capital gain or loss to be included in taxable income for
the current year of assessment.
411
A Student’s Approach to Taxation in South Africa 10.4–10.5
Solution 10.2
As shares (an asset) was sold (a disposal) during the year of assessment, capital gains tax
is applicable.
Calculate the capital gain or capital loss on the disposal of the asset: R
Proceeds (selling price) 500 000
Less: Base cost (R850 000 + R50 000) (900 000)
Capital loss on the disposal of an asset (400 000)
Less: Capital loss limited in terms of a loss limitation rule 100 000
Capital loss on disposal of an asset (R400 000 – R100 000) (300 000)
Less: Assessed capital loss – previous year (40 000)
Assessed capital loss carried forward to following year of assessment (340 000)
Note
The assessed capital loss of R340 000 is not multiplied with the inclusion rate and it
cannot be set off against the other taxable income of R200 000. Instead, the assessed cap-
ital loss is carried forward and it can be set off against any future capital gain on the
disposal of an asset.
412
10.5 Chapter 10: Capital gains tax
REMEMBER
• Where an amount was included in a person’s gross income, it cannot be included in the
proceeds. A person can therefore not be taxed twice on the same amount.
• The amount of wear-and-tear that is recouped for income tax purposes must be
excluded from the proceeds of the asset.
• Where a proceeds amount changes in a subsequent year of assessment, the Act provides
for the capital gain or loss to be recalculated in that subsequent year of assessment.
Example 10.3
Umar CC sold its holiday home in Cape Town during the current year of assessment. The
contract states that R500 000 will be paid on the signing of the contract. Another R400 000
will be payable 12 months after the signing of the contract. During the current year of
assessment, after the sale of the house, it was found that a part of the plumbing had to be
replaced. The contract made provision for the repayment of part of the initial payment if
any hidden faults were found. The cost of repairing the plumbing amounts to R75 000,
and Umar CC will repay the amount in the next year of assessment. Umar CC does not
speculate in houses.
You are required to calculate the proceeds on the sale of the asset.
Solution 10.3
R
Selling price received or accrued (Note 1) 500 000
Add: Amount payable after year end (Note 2) 400 000
Less: Amount repayable (Note 3) (75 000)
Proceeds 825 000
Notes
1. Any amount received by or accrued to the taxpayer that has not been included in
gross income must be included in the proceeds. As Umar CC is not a speculator in
houses, the house will be an asset of a capital nature.
2. Paragraph 35 states that the amount payable in future must be included in the pro-
ceeds if the seller is entitled to the payment of the amount.
3. If an amount will have to be repaid, the proceeds can be reduced by the amount of the
repayment.
What will the capital gains tax implications be if the fault in the plumb-
ing was only found in the next year of assessment?
413
A Student’s Approach to Taxation in South Africa 10.5
Example 10.4
Joy Mogale is a resident of the Republic and 41 years old. She is unmarried and therefore
feels that she has a lot to give. During the 2023 year of assessment, she decided to donate
shares to her sister. The shares had a market value of R230 000 on the date of donation.
Joy had originally purchased the shares for R125 000 during the 2018 year of assessment.
Assume that there are no donations tax implications.
You are required to calculate the capital gain or loss for the 2023 year of assessment.
Solution 10.4
Because Joy donated an asset (which is less than market value) to a connected person,
paragraph 38 will apply.
Capital gain or capital loss for the current year of assessment (2023): R
Proceeds (proceeds deemed to be the market value) (note) 230 000
Less: Base cost (125 000)
Capital gain 105 000
Note
Joy’s sister is deemed to have acquired the shares at a base cost of R230 000 despite the
fact that she paid Rnil for the asset.
414
10.5–10.6 Chapter 10: Capital gains tax
Example 10.5
Marc acquired a block of flats in December 2006 at a base cost of R250 000. In March 2021
he sold the block of flats to Jessica for R450 000. The contract determined that the
purchase price was payable in annual instalments over three years, with the first payment
due on 28 February 2023. Each instalment was payable only if the block of flats achieved a
net rental return of at least 10% during the specific year. The block of flats achieved the
net rental return of at least 10% during the first year and Jessica paid the first instalment
of R150 000 as required by the contract, on 28 February 2023.
You are required to calculate the capital gain or loss for the 2023 year of assessment.
Solution 10.5
The entire proceeds from the disposal of the block of flats do not accrue to Mark in the
2022 year of assessment. They accrue at the end of each year of assessment, as the
condition (net rental return of at least 10%) is met. In terms of paragraph 39A any
capital loss that arise in this situation is ring-fenced until sufficient proceeds have
accrued to Marc to absorb the capital loss.
Capital gain or capital loss for the current year of assessment (2023): R
Proceeds (only the amount that accrued unconditionally) (note 1) 150 000
Less: Base cost (250 000)
Capital loss (note 2) (100 000)
Notes
1. Further proceeds of R300 000 (R450 000 less R150 000) will be taxed in future years as
capital gains only when it accrues.
2. The capital loss of R100 000 is ring-fenced in terms of the provisions of par 39A and
cannot be set off against any other capital gains and losses of Marc. It can only be
carried forward and be set off against future proceeds from this transaction, taxed as
capital gains, when it accrues. If it becomes certain in future years that no further
proceeds will accrue, any previously ‘ring-fenced’ capital loss relating to that asset
may be taken into account for CGT purposes
415
A Student’s Approach to Taxation in South Africa 10.6
416
10.6 Chapter 10: Capital gains tax
Example 10.6
Mpho Malatse sold his holiday house on 1 December 2022. He originally bought the
house in January 2005 for R200 000. Mpho improved the house over the years. He in-
stalled a sauna at a cost of R50 000, as well as an alarm system at a cost of R10 000. He also
had to repair the kitchen cupboards at a cost of R20 000 as the cupboards were damaged.
During the 2021 year of assessment the sauna was damaged during a storm and, there-
fore, not used anymore.
You are required to calculate the base cost of the holiday house in the hands of Mpho on
1 December 2022.
Solution 10.6
R
Purchase price 200 000
Add: Improvements (R50 000 (sauna) and R10 000 (alarm system) - see note) 60 000
Base cost 260 000
Note
The repair cost to the kitchen cupboards of R20 000 are not considered improvements
but repairs and maintenance. The amount of R20 000 can therefore not be added to the
base cost. The sauna of R50 000 is an improvement and can be added to the base cost.
The fact that it has been damaged before date of sale does not make a difference.
417
A Student’s Approach to Taxation in South Africa 10.6
REMEMBER
• The cost of selling an asset, for example, the sales commission, is included in the base
cost of the asset.
• Only one-third of interest expenditure can be included in the base cost of listed shares
or an interest in a collective investment scheme (equity unit trust) regardless of whether
these assets were held as an investment or for trading purposes. The interest normally
qualifies as a deduction for income tax purposes when the shares are held for trading
purposes and would therefore not again be included in the base cost of the shares sold.
• Donations tax paid by the donor forms part of the base cost of the asset for the donor. If
the donee pays the donations tax, he is entitled to also include a portion of the
donations tax in his base cost.
418
10.6 Chapter 10: Capital gains tax
Expenditure must be reduced with the foreign exchange gain or premiums received
as calculated in terms of section 24I. Similarly, the expenditure must be increased
with the amount of any foreign exchange loss or premiums paid. These changes to
expenditure can only be made if the taxpayer or another company in the group of
companies did not use these amounts in their income tax calculations.
Example 10.7
Small (Pty) Ltd sold its land and factory building during its 2023 year of assessment. The
company originally acquired the land for R57 000 (including VAT of R7 000) and the new
building for R228 000 (including VAT of R28 000), in the 2007 year of assessment, 15 years
earlier. Small (Pty) Ltd is a VAT vendor making 100% taxable supplies and claimed the
VAT on the original transaction as input tax. The company could not pay the building in
cash and acquired the building using a bond from the bank. Bond registration cost of
R5 000 was incurred. The interest on the bond over the past 15 years was R80 000 in total.
The company claimed a s 13(1) allowance of 5% per annum for 15 years which in total
amounts to R150 000.
You are required to calculate the base cost of the building in the hands of Small (Pty) Ltd.
Solution 10.7
R
Purchase price (R228 000 + R57 000) 285 000
Less: VAT (R28 000 + R7 000) (s 23C) (35 000)
Add: Interest and bond registration cost (note) -
Less: Allowances claimed for income tax purposes (150 000)
Base cost 100 000
Note
Borrowing cost (interest as defined in section 24J) (other than the one-third in terms of
paragraph 20(1)(g)) and bond registration costs cannot be included in base cost.
REMEMBER
• Section 23C of the Income Tax Act provides that VAT is excluded from the base cost of
an asset if it has been allowed as an input deduction.
419
A Student’s Approach to Taxation in South Africa 10.6–10.7
The Eighth Schedule provides three methods that can be used to determine the valua-
tion date value of an asset (on 1 October 2001):
• the market value of the asset on 1 October 2001 (refer to 10.7);
• the time-apportionment base cost of the asset (refer to 10.8); and
• the value according to the 20% rule (refer to 10.9).
Normally the highest value of the three is selected as the valuation date value. The
Act contains a number of special provisions that limit the amount of the valuation
date value (refer to 10.10).
These rules are not applicable to a person becoming a resident on or after 1 Octo-
ber 2001 or to assets that were acquired by South African residents on or after
1 October 2001.
Example 10.8
Tshego Moloi sold his holiday house for R2 100 000 on 1 March 2022. He bought the
house for R200 000 in November 1986. The property was valued on 1 October 2001 for
R1 700 000. The time-apportionment base cost of the asset is R816 667. In January 2006,
Mpho installed a sauna at a cost of R50 000.
You are required to calculate the base cost of the asset.
Solution 10.8
Calculating the base cost of a pre-valuation date asset consists of two components, the
valuation date value and the cost incurred on or after 1 October 2001, upon the introduc-
tion of capital gains tax.
Firstly, calculate the valuation date value of the asset:
• Market value on 1 October 2001 = R1 700 000;
• Time-apportionment base cost = R816 667; or
• 20% of proceeds = R420 000 (R2 100 000 × 20%).
Selected value (highest): R1 700 000
The valuation date value is therefore R1 700 000.
Secondly, add the cost incurred after 1 October 2001 in order to determine base cost.
Cost incurred on or after 1 October 2001: R50 000
Base cost: R1 700 000 + R50 000 = R1 750 000
The base cost of the asset is therefore R1 750 000 (the valuation date value plus the cost
incurred after the valuation date).
420
10.7 Chapter 10: Capital gains tax
421
A Student’s Approach to Taxation in South Africa 10.7
REMEMBER
• Where a person’s valuation date is after 1 October 2001 the above-mentioned rules
cannot be used to determine the valuation date value. The market value must be
determined by using the rules discussed below.
• Where a person’s valuation date is after 1 October 2001 (for example, a tax-exempt body that
loses its exempt status), his assets, excluding listed assets, must be valued within two
years of the valuation date.
422
10.7–10.8 Chapter 10: Capital gains tax
REMEMBER
• When the taxpayer elects to use the market value as the valuation date value of an asset,
the loss limitation rules can limit the amount that can be used as the base cost (refer to
10.10).
• The Act does not indicate how the market value should be obtained. It therefore seems
unnecessary that the valuation should be done by a sworn valuer. It should always be
remembered that the burden of proof is on the taxpayer to prove the correctness of the
value.
• Where an asset is transferred from one spouse to another in terms of the roll-over rules
and the transferor spouse adopted or determined the market value, it is deemed that
the transferee spouse adopted or determined the said market value.
423
A Student’s Approach to Taxation in South Africa 10.8
periods before 1 October 2001 and on or after 1 October 2001. The TAB is the sum of
the expenditure incurred before 1 October 2001 plus the growth (percentage of profit)
of the asset before 1 October 2001.
Example 10.9
Twenty years after the valuation date, an asset with a historical cost of R100, is sold for
R700. This asset was originally acquired ten years before the valuation date. The capital
gain is R600 (R700 – R100). A portion of the gain of R600 refers to the pre-valuation date
period and is not subject to CGT, but a portion of this gain of R600 refers to the post-
valuation date period and is therefore subject to CGT.
You are required to discuss which portion of the R600 is subject to CGT by using the
principles underlying the TAB method.
Solution 10.9
The TAB cost method seeks to achieve a linear spread of the historical gain or loss be-
tween the pre- and post-valuation date periods. If the asset has been sold for a profit
based on historical cost of R600 (R700 – R100), the period before 1 October 2001, is ten
years and the period after 1 October 2001 is 20 years.
It follows that one third of the profit relates to the pre-CGT period, that is R600 × 10/30 =
R200. The valuation date value is determined by adding the gain relating to the pre-CGT
period to the original cost: R100 + (R600 × 1/3) = R300.
The capital gain will then be: R700 less R300 = R400 (that is, two-thirds of the profit relates
to the post-CGT period, that is R600 × 20/30).
The following diagram illustrates how the TAB method achieves a linear spread of
the gain or loss over the period:
This linear spread principle led to the introduction of two sets of formulas under the
TAB method:
(1) two standard TAB formulas (a standard apportionment formula and a standard
proceeds formula); and
(2) two depreciable asset TAB formulas (a depreciable asset apportionment formu-
la and depreciable asset proceeds formula);
In order to determine which formula to use, it must be determined when the expendi-
ture was incurred.
424
10.8 Chapter 10: Capital gains tax
Where the asset qualified for capital allowances, the second set of formulas is used.
The left-hand column provides the three requirements that must be met before the
depreciable asset formulas can be applied. The depreciable asset TAB cost formula
and the depreciable asset proceeds formula must always be used together.
425
A Student’s Approach to Taxation in South Africa 10.8
Calculate the TAB if all expenditure was incurred before 1 October 2001
In order to calculate the TAB of an asset, the following formula needs to be ap-
plied:
Y = B + ((P – B) × (N / (T + N)))
where:
B = the expenditure incurred before the valuation date (1 October 2001) in terms
of paragraph 20;
P = the proceeds on the disposal of an asset less certain selling costs;
N = the number of years (a part of a year is regarded as a full year) from the date
on which the asset was acquired to the day before the valuation date (until
30 September 2001). Where the allowable expenditure was incurred in more
than one year of assessment prior to the valuation date, the number of years
may not exceed 20;
T = the number of years during which the asset was held from the valuation
date (1 October 2001) until the date the asset was disposed of. A part of a
year is regarded as a full year; and
Y = the TAB.
REMEMBER
• Selling costs are all the costs that are directly incurred in order to dispose of the asset.
The selling costs includes also the valuation costs.
• For purposes of the TAB formula, the selling cost incurred on or after the valuation date
must be used to reduce the proceeds on the disposal of an asset. The cost is not to be
included in the post-valuation date costs (‘A’ in the TAB formula).
Example 10.10
Simon Dippenaar CC bought an office building on 1 October 1985 at a cost of R500 000. In
1996 certain improvements were made to the building at a total cost of R400 000. The
building was sold for R3 500 000 on 30 December 2022.
You are required to calculate the valuation date value of the building using the TAB.
426
10.8 Chapter 10: Capital gains tax
Solution 10.10
To calculate the TAB, the time-apportionment formula has to be used. It is not necessary
to use the proceeds formula as all the costs were incurred before 1 October 2001.
Y = B + ((P – B) × (N / (T + N)))
B = R500 000 + R400 000 = R900 000
P = R3 500 000
N = 16 years
T = 21 years
Y = R900 000 + {(R3 500 000 – R900 000) × (16 / (21 + 16))}
= R900 000 + R1 124 324
= R2 024 324
The valuation date value is therefore R2 024 324
10.8.2 TAB: Cost incurred before and after the valuation date
If expenditure was incurred in years of assessment before and on or after
1 October 2001, the TAB formula and the proceeds formula must be used to deter-
mine the TAB. The proceeds formula is used to divide the proceeds into two parts,
the first relating to the part of the asset for which the costs were incurred before
1 October 2001 and the rest to costs incurred on or after 1 October 2001. The portion
of the proceeds that relates to the cost incurred before 1 October 2001 is used in the
time-apportionment formula.
Calculate the TAB of an asset if the expenditure was incurred before and on
or after 1 October 2001
The first formula that needs to be applied is the proceeds formula, which is used
to determine the proceeds relating to the pre-valuation date costs:
P = R × B / (A + B)
where:
R = the total proceeds of the sale of the asset less certain selling costs;
A = the total costs incurred on or after the valuation date (excluding selling costs);
B = the costs incurred before the valuation date; and
P = the proceeds that relate to the cost incurred before 1 October 2001.
427
A Student’s Approach to Taxation in South Africa 10.8
REMEMBER
Example 10.11
Kgogo Ltd bought an office building for R600 000 on 1 October 1995. In 2005 they made
improvements to the building at a total cost of R900 000. The building was sold for
R6 000 000 on 30 November 2022.
You are required to calculate the base cost of the building using the TAB.
428
10.8 Chapter 10: Capital gains tax
Solution 10.11
The costs were incurred before and after 1 October 2001. To calculate the TAB, the pro-
ceeds formula must be applied first.
Proceeds formula:
P = R × B / (A + B)
R = R6 000 000
A = R900 000
B = R600 000
P = R × B / (A + B)
= R6 000 000 × R600 000 / (R900 000 + R600 000)
= R2 400 000
The value of proceeds to be used in the time-apportionment formula is therefore
R2 400 000.
The time-apportionment formula:
Y = B + {(P – B) × (N / (T + N))}
B = R600 000
P = R2 400 000
N = 6 years
T = 22 years
Y = R600 000 + {(R2 400 000 – R600 000) × (6 / (22+ 6))}
= R600 000 + R385 714
= R985 714
The TAB of the building on the valuation date is therefore R985 714.
The total base cost of the building is R1 885 714 (R985 714 + R900 000 (cost after
1 October 2001 + valuation date value)).
REMEMBER
• When a taxpayer sells a depreciable asset, the wear-and-tear and capital allowances
claimed in respect of the asset and any recoupment or section 11(o) deduction must be
taken into account when calculating the proceeds and the base cost.
429
A Student’s Approach to Taxation in South Africa 10.8
The first formula that needs to be applied is the depreciable asset proceeds formu-
la which determines the proceeds relating to the pre-valuation date costs:
P1 = R1 × B1 / (A1 + B1)
The symbols in the formula are defined as follows:
R1 = the proceeds on the sale of the asset
plus any amount that has been recouped and included in gross income
less selling cost;
A1 = the cost incurred (in terms of paragraph 20) on or after the valuation date
(excluding selling cost) plus any wear and tear that has been claimed for in-
come tax purposes;
B1 = the cost (in terms of paragraph 20) incurred before the valuation date plus
any wear and tear that has been claimed for income tax purposes; and
P1 = the proceeds that relate to the cost incurred before 1 October 2001.
The next step is to apply the depreciable asset TAB formula:
Y = B + {(P1 – B1) × (N / (T + N))}
The symbols in the formula are defined as follows:
B = the cost incurred before the valuation date. Remember that the base cost of
the asset has to be reduced by the wear-and-tear claimed for income tax pur-
poses;
P1 = the answer of the depreciable asset proceeds formula;
B1 = the cost (in terms of paragraph 20) incurred before the valuation date plus
any wear-and-tear that has been claimed for income tax purposes;
N = the number of years (a part of a year is regarded to be a full year) from the
date on which the asset was acquired to the day before the valuation date.
Where the allowable expenditure was incurred in more than one year of as-
sessment prior to the valuation date, the number of years may not exceed
20; and
T = the number of years during which the asset was held from the valuation
date until the date the asset was disposed of. A part of a year is regarded as
a full year.
430
10.8 Chapter 10: Capital gains tax
Example 10.12
Siphum Ltd bought a used manufacturing asset on 2 October 2000 for R400 000. The asset
qualified for the section 12C allowance at 20%. On 2 November 2020 it made improve-
ments to the asset at a total cost of R600 000. These improvements qualify for their own
capital allowance of 20% in terms of section 12C. The asset was sold for R2 000 000 on
30 September 2023. The company’s financial year end is 31 December 2023.
You are required to calculate the capital gain on the disposal of the asset. The valuation
date value of the asset must be calculated using the TAB.
Solution 10.12
Tax value of asset on date of sale
Cost before valuation date: R
Cost incurred on 2 October 2000 400 000
Less: Section 12C allowance (2000–2004 years of assessment) (400 000)
Tax value of pre-valuation date cost on date of sale nil
Cost after valuation date:
Cost incurred on 2 November 2020 600 000
Less: Section 12C allowance (R600 000 × 20% × 4) (2020 – 2023) (480 000)
Tax value of post-valuation date cost on date of sale 120 000
Tax value of asset on date of sale:
R120 000 (Rnil + R120 000)
Recoupment for income tax purposes
Selling price of R2 000 000, limited to cost of R1 000 000
(R400 000 + R600 000) 1 000 000
Less: Tax value of asset sold (120 000)
Recoupment 880 000
Proceeds on disposal:
Selling price 2 000 000
Less: Recoupment (880 000)
Proceeds 1 120 000
continued
431
A Student’s Approach to Taxation in South Africa 10.8
REMEMBER
• When calculating the value of B, the wear-and-tear and capital allowances claimed until
the date of sale must be taken into account and not just until the valuation date.
• The recoupment for income tax purposes must be deducted from the proceeds.
432
10.9 Chapter 10: Capital gains tax
How to apply the 20% rule in determining the valuation date value
Step 1: Determine the value to be used: The proceeds from the sale of the
asset less costs incurred on or after 1 October 2001.
Step 2: Multiply the value calculated in Step 1 by 20% to get the valuation
date value.
Example 10.13
Pat Apadile bought a house for R100 000 in 1960. She did not keep any records of the
purchase or the R150 000 for improvements made before the valuation date. In Decem-
ber 2006 she made improvements with a cost of R200 000 and kept records of these
improvements. The house was not valued on 1 October 2001. Pat sold the house on
20 February 2023 for R5 500 000.
You are required to calculate the valuation date value of the house.
Solution 10.13
Calculating the valuation date value:
• The property was not valued on 1 October 2001. Therefore, the market value cannot be
used as the valuation date value.
• As Pat did not keep record of the pre-valuation date costs, she cannot use the TAB cost
as an option to calculate the valuation date value.
• The only option that is available to calculate the valuation date value is the 20% rule.
R
The proceeds from sale 5 500 000
Costs incurred on or after 1 October 2001 200 000
Valuation date value = 20% × (R5 500 000 – R200 000) 1 060 000
The valuation date value of the asset is therefore R1 060 000.
433
A Student’s Approach to Taxation in South Africa 10.9–10.10
REMEMBER
• When calculating the value of the proceeds, amounts already taken into account for
income tax purposes (such as recoupments) must be deducted (refer to 10.5.1).
• When calculating the value of the costs incurred on or after 1 October 2001, amounts
already taken into account for income tax purposes (such as allowances claimed) must
be deducted (refer to 10.6.2).
434
10.10 Chapter 10: Capital gains tax
26. Valuation date value where proceeds exceed expenditure or where expenditure
in respect of an asset cannot be determined.–
No Yes
Yes No
435
A Student’s Approach to Taxation in South Africa 10.10
Yes No
Yes No
436
10.10 Chapter 10: Capital gains tax
Step 1: Determine whether the proceeds (excluding VAT and income tax
amounts) exceed the total expenditure (incurred before and after
valuation date, excluding VAT and income tax amounts).
No: Continue with Step 2 if a historic loss (paragraph 27).
Yes: Continue with Step 4 if a historic gain (paragraph 26).
Step 2: Determine whether the market value on 1 October 2001 was determined.
Yes: Continue with Step 3 (paragraph 27(3)).
No:
The valuation date value is the TAB (paragraph 27(4)).
Step 4: Determine the valuation date value in terms of paragraph 26(1) as the
highest of:
• the TAB; or
• the market value on the valuation date; or
• 20% (of proceeds less costs incurred on or after 1 October
2001).
If the market value is adopted and market value exceeds the proceeds
on 1 October 2001, the valuation date value is:
• the proceeds less expenditure incurred on or after 1 October
2001.
437
A Student’s Approach to Taxation in South Africa 10.10
The application of the rules can best be illustrated by means of a couple of examples.
Example 10.14
Dala CC provides the following information relating to assets sold during the year of as-
sessment. The only cost incurred for these assets is the original purchase price.
Expense Market
Selling
Asset incurred before value on TAB
price
1 October 2001 1 October 2001
R R R R
A 100 85 94 90
B 100 Not determined 87 85
C 100 60 55 50
D 100 110 105 120
E 100 122 108 112
F 100 150 75 45
Assume no expenses were incurred after 1 October 2001.
You are required to calculate the capital gain or loss for each asset.
Solution 10.14
Asset A
Proceeds < Expenditure and Expenditure > Market value
This is a historic loss situation: market value has been determined and is less than ex-
penditure, therefore paragraph 27(3)(a) applies: The valuation date value is the higher of
• market value on 1 October 2001 = R85; or
• proceeds less expenses on or after 1 October 2001 = R90 – Rnil = R90
The valuation date value is therefore R90, resulting in a loss of Rnil (R90 – R90).
Asset B
Proceeds < Expenditure
This is a historic loss situation and as the market value has not been determined on
1 October 2001, paragraph 27(4) applies: The valuation date value is the TAB, that is to
say R87, resulting in a loss of R2 (R85 – R87).
Asset C
Proceeds < Expenditure and Expenditure > Market value
This is a historic loss situation, market value has been determined on 1 October 2001 and
is less than expenditure, therefore paragraph 27(3)(a) applies: The valuation date value is
the higher of
• market value on 1 October 2001 = R60; or
• proceeds less expenses on or after 1 October 2001 = R50 – Rnil = R50
The valuation date value is therefore R60, resulting in a loss of R10 (R50 – R60).
continued
438
10.10–10.11 Chapter 10: Capital gains tax
Asset D
Proceeds > Expenditure
This is a historic gain situation, market value has been determined and is less than pro-
ceeds, therefore paragraph 26(1) applies: The valuation date value is the highest of
• market value on 1 October 2001 = R110;
• time-apportionment base = R105; or
• 20% (proceeds less expenditure on or after 1 October 2001) = 20% × (R120 – Rnil) =
R24.
The market value is the highest but as the proceeds exceed the market value, the market
value can be used.
The valuation date value is therefore R110, resulting in a profit of R10 (R120 – R110).
Asset E
Proceeds > Expenditure
This is a historic gain situation, market value has been determined, but is more than pro-
ceeds, therefore paragraph 26(1) applies: The valuation date value is the highest of
• market value on 1 October 2001 = R122;
• time-apportionment base = R108; or
• 20% (proceeds less expenditure on or after 1 October 2001) = R112 × 20% = R22,40
The market value is therefore the highest and, as the market value is higher than the pro-
ceeds, paragraph 26(3) determines that the valuation date value is proceeds less the cost
on or after the valuation date = R112 – Rnil = R112.
The valuation date value is therefore R112, resulting in a loss of Rnil (R112 – R112).
Asset F
Proceeds < Expenditure and Expenditure > Proceeds but
Expenditure < Market value
This is a historic loss situation, market value has been determined but is more than ex-
penditure, therefore paragraph 27(3)(b) applies: The valuation date value is the lower of
• TAB = R75; or
• market value on valuation date = R150.
The valuation date value is therefore R75 resulting in a loss of R30 (R45 – R75).
439
A Student’s Approach to Taxation in South Africa 10.11
Step 2.4.1: Determine whether the asset qualifies for one of the following
exclusions:
• primary residence (refer to 10.11.1);
• personal-use assets (refer to 10.11.2);
• disposal of small business assets (refer to 10.11.3);
• other exclusions (refer to 10.11.4).
Step 2.4.2: Determine which portion of the capital gain or loss is excluded for
capital gains tax purposes. Note that some exclusions are only
applicable to losses and that others only exclude a portion or
specific amount of the gain or loss.
440
10.11 Chapter 10: Capital gains tax
– If the proceeds do not exceed R2 million on disposal, but that natural person
or a beneficiary of that special trust or a spouse of that person or beneficiary
* was not ordinarily resident in that residence throughout the period on or
after the valuation date (1 October 2001) during which that person or
special trust held that interest; or
* used that residence or a part thereof for the purposes of carrying on a
trade for any portion of the period on or after the valuation date during
which that person or special trust held that interest.
• The R2 million gain or loss exclusion (see below) may, however, still be applied,
but only the portion of the capital gain or loss that is attributable to a period on
or after the valuation date during which that person, beneficiary or spouse was
so ordinarily resident or to that part of the primary residence that was used for
domestic purposes as well as purposes other than the carrying on of a trade by
that person, beneficiary or spouse.
2. The R2 million gain or loss exclusion (paragraph 45(1)(a))
• Where a natural person or a special trust disposes of a primary residence, the
first R2 million of the capital gain or loss should be disregarded in the calculation
of the capital gain.
Example 10.15
Joe Soap sold his primary residence for R6 000 000 during the current year of assessment.
The base cost of the residence is R3 200 000.
You are required to
(a) calculate the capital gain on the disposal of the primary residence after the primary
residence exclusion;
(b) re-calculate the capital gain or loss on the disposal of the primary residence after the
primary residence exclusion if the primary residence is sold for R1 000 000.
Solution 10.15
(a) Where the primary residence is sold for R6 000 000: R
Proceeds 6 000 000
Less: Base cost (3 200 000)
Gain on disposal (R6 000 000 – R3 200 000) 2 800 000
Less: Primary residence exclusion (2 000 000)
Capital gain on the disposal of the asset (R2 800 000 – R2 000 000) 800 000
Since the proceeds on disposal is more than R2 million, the entire capital gain cannot be
disregarded (paragraph 45(1)(b) therefore does not apply). However, the first
R2 million of the gain should still be disregarded in terms of paragraph 45(1)(a).
continued
441
A Student’s Approach to Taxation in South Africa 10.11
If he pays agents commission on the sale of the property, how will it af-
fect the capital gains tax calculation?
The R2 million gain or loss exclusion is a per residence exclusion. Where more than
one natural person owns the property and uses it as their ordinary residence, the
R2 million gain or loss exclusion must be divided between the persons according to
their ownership. Where a person owns more than one residence, only one of the resi-
dences will qualify as a primary residence.
If the property is owned by a combination of natural persons and persons other than
natural persons, only the natural persons can claim their portion of the R2 million
gain or loss exclusion. Therefore, if one natural person and one or more companies
jointly hold the interest in the property, only the natural person will qualify for the
R2 million gain or loss exclusion. However, if two natural persons and one or more
companies hold the interest in the property, the natural persons will only qualify for
a R1 000 000 exclusion each.
Amounts excluded from the primary residence exclusion
The following does not qualify for the exclusion:
• Where a natural person or the beneficiary of a special trust or their spouse was not
ordinarily resident in the residence throughout the period on or after the valuation
date during which the person or special trust held the interest in that residence, the
exclusion cannot be claimed for the period during which they were not ordinarily
resident in that residence.
• Where a primary residence is disposed of together with the land on which it is sit-
uated, the exclusion of R2 million gain or loss exclusion applies to
– a maximum of two hectares of the gain relating to the land;
– land used mainly for domestic purposes together with that residence; and
– land which is disposed of at the same time and to the same person as the resi-
dence.
• The primary residence exclusion does not apply to non-residents.
442
10.11 Chapter 10: Capital gains tax
Example 10.16
Sid Naidoo sold his small holding which he used as a primary residence. The selling price
in the contract is as follows: R500 000 for the house and R3 000 000 for the ten hectares of
land on which the house is situated. The house and land were mainly used for domestic
purposes. The base cost of the house is R300 000 and the base cost of the land is
R1 000 000.
You are required to calculate the taxable capital gain on the sale of the residence.
Solution 10.16
House Land
R R
Proceeds 500 000 3 000 000
Base cost (300 000) (1 000 000)
Gain on disposal 200 000 2 000 000
Less: Amount that does not qualify for the exclusion (Note) nil (1 600 000)
Amount qualifying for the exclusion 200 000 400 000
The total amount qualifying for the exclusion is therefore R200 000 + R400 000 =
R600 000. The maximum amount of the exclusion is R2 000 000, thus the whole R600 000
is excluded.
The taxable portion is therefore: R
Total gain on disposal (R200 000 + R2 000 000) 2 200 000
Less: Primary residence exclusion (R200 000 + R400 000) (600 000)
Capital gain on the disposal of the asset 1 600 000
Note
The amount that does not qualify for the exclusion:
As the property is larger than two hectares, only the first two hectares qualify for the
primary residence exclusion.
The following amount does not qualify for the exclusion:
= R2 000 000 × 8 ha/10 ha
= R1 600 000
443
A Student’s Approach to Taxation in South Africa 10.11
Example 10.17
Thabo Zonke sold his primary residence for R2 200 000 during the current year of assess-
ment. The base cost of the house is R1 200 000. Thabo used a home study and claimed
10% of the running cost as a deduction for income tax purposes every year.
You are required to calculate the taxable capital gain on the sale of the residence.
Solution 10.17
R
Proceeds 2 200 000
Less: Base cost (1 200 000)
Gain on disposal (R2 200 000 – R1 200 000) 1 000 000
Less: Primary residence exclusion (Note) (900 000)
Capital gain on the sale of the residence (R1 000 000 – R900 000) 100 000
Note
The amount that does not qualify for the exclusion:
The portion of the property that is used for business purposes does not qualify for the
primary residence exclusion. Thabo claimed 10% of the running cost of the house as busi-
ness expenditure for income tax purposes; therefore, 10% of the gain on the disposal of
the property does not qualify for the exclusion.
The following amount does not qualify for the exclusion:
= R1 000 000 × 10%
= R100 000
The amount of the exclusion is therefore R1 000 000 – R100 000 = R900 000, which is less
than the maximum of R2 000 000, thus the whole R900 000 qualifies for the exclusion.
444
10.11 Chapter 10: Capital gains tax
REMEMBER
• A person is only allowed to have one primary residence at a time. The reason for the
rules listed above is that there can be an overlap of two years, resulting in a person
having two primary residences at the same time. The person can therefore claim the full
exclusion for both houses.
445
A Student’s Approach to Taxation in South Africa 10.11
REMEMBER
• The gains and losses on the disposal of personal-use assets are disregarded for capital
gains tax purposes.
• If a person receives an allowance in respect of an asset used partly for business pur-
poses (for example a travel allowance or cell phone allowance), the asset must be
treated as being used mainly for purposes other than the carrying on of a trade.
Limiting of losses
If an asset that is excluded from the definition of a personal-use asset is disposed of, a
capital gain or loss should be calculated. Paragraph 15 of the Eighth Schedule states
that the capital loss attributable to that portion of the asset that is not used for carry-
ing on of a trade, cannot be claimed for the following assets:
• an aircraft with an empty mass exceeding 450 kilograms;
• a boat exceeding ten meters in length;
• a fiduciary, usufructuary or similar interest, the value of which decreases over
time;
• a lease of immovable property;
• a time-sharing interest or share in a share-block company with a fixed life of which
the value decreases over time; and
• a right or interest of whatever nature to or in an asset referred to above.
446
10.11 Chapter 10: Capital gains tax
REMEMBER
• If the disposal of one of the above assets results in a gain, the gain will be taxed but the
loss may not be claimed.
Example 10.18
Peter disposes of (none of which was used for purposes of trade)
1. a town house;
2. a motor vehicle for which Peter receives a travel allowance from his employer;
3. a boat 15 metres in length solely used by Peter for recreational purposes; and
4. a portfolio of shares listed on the Johannesburg Securities Exchange.
You are required to indicate which of the above assets will qualify as personal-use assets.
Solution 10.18
1. Town house – not a personal-use asset as immovable property is excluded (could
qualify for primary residence exclusion if Peter used it as his primary residence).
2. Motor vehicle – is a personal-use asset as it is a qualifying asset on which a business
allowance is paid.
3. Boat exceeding ten metres in length – not a personal-use asset as specifically excluded
(in terms of paragraph 15 any capital loss must be disregarded but a capital gain
must be included).
4. Portfolio of listed shares – not a personal-use asset as financial instruments are ex-
cluded.
Note
Because Peter is a natural person, some assets like the motor vehicle will be considered
personal-use assets and a capital gain or loss on the disposal thereof must be disregarded.
This would also be the case if the motor vehicle was sold by a special trust. If, however,
the same motor vehicle was sold by a company, it would not qualify as a personal-use as-
set and the capital gain or loss would not be disregarded.
447
A Student’s Approach to Taxation in South Africa 10.11
A small business is a business of which the market value of all its assets does not ex-
ceed R10 million at the date of disposal. The assets in the business must be active
business assets. An ‘active business asset’ is defined as immovable property, to the
extent that it is used for business purposes and other assets used wholly and exclu-
sively for business purposes. It excludes a financial instrument and an asset held in
the course of carrying on a business mainly to derive income in the form of an annui-
ty, rental income, a foreign exchange gain, royalty or similar income.
The exclusion applies only where the person:
• held the interest for a continuous period of at least five years prior to its disposal;
• was substantially involved in the operations of the business during the five-year
period; and
• has attained the age of 55 years; or
• has disposed of the interest as a consequence of ill-health, other infirmity, super-
annuation or death.
Paragraph 57 also provides that all qualifying capital gains on the disposal of assets
of the small business must be realised within 24 months from the date of the disposal
of the first qualifying asset in order to qualify for the exclusion.
Example 10.19
Labani Kompi, a sole proprietor, is 56 years old and owns a chain of small clothing shops
and a building which he rents out. Labane started the clothing business from scratch and
built it up over a period of 20 years. He decided to sell his chain of clothing shops to an
independent third party on 28 February 2023.
The parties agreed on a selling price of R1 200 000 which consists of:
Trading stock (clothing) (cost price of R980 000) R900 000
Goodwill (clothing business) R300 000
His building is not used in his clothing business and he conducted the clothing shops
only from rented premises. Labane also offered his building for sale but he has not
received any propositions yet. The building which originally cost R1 000 000 has a market
value of R3 400 000.
You are required to calculate the taxable capital gain on the sale of the chain of clothing
shops.
Solution 10.19
R
Proceeds (note 1) 300 000
Less: Base cost (note 2) (nil)
Capital Gain on disposal 300 000
Less: Small business asset exclusion (note 3) (300 000)
Capital gain on the sale of the chain of clothing shops nil
continued
448
10.11 Chapter 10: Capital gains tax
Notes
1. The proceeds of R900 000 relating to trading stock is excluded as it is already taxed in
terms of the gross income definition. Only the proceeds relating to the goodwill is in-
cluded.
2. The cost of R980 000 relating to trading stock is excluded as it is already deducted in
terms of the general deduction formula in section 11(a). The cost that relates to the
goodwill is Rnil as Labane had built the business from scratch. He did not acquire the
business from another person and, therefore, Rnil can be claimed as base cost as
Labane incurred Rnil cost in respect of the goodwill.
3. Labane qualifies for the R1 800 000 relief provided for in par 57 of the 8th Schedule lim-
ited to actual capital gain. The following requirements are met:
The combined market value of all Labane’s assets (active and passive assets) is less
than R10 000 000:
- Building: R3 400 000
- Trading stock: R900 000
- Goodwill: R800 000
- Total: R5 100 000
The disposal of his chain of clothing shops represents business assets of a sole
proprietor which is allowed in terms of par 57.
Labane has held the small business for his own benefit for a continuous period of
at least five years prior to selling it.
Labane has been substantially involved in the operations of the small business
during the period that he held the business.
Labane has attained the age of 55 years
4. If Labane sells the building, he will not be entitled to claim the remainder of the
R1 800 000 exclusion as the building represents a passive asset (earns rental income
from it).
REMEMBER
• This exclusion does not apply if a person owns more than one business as sole proprie-
tor, partner or shareholder (with a direct interest of 10% or more) and the market value
of all the assets of all the businesses together with that person’s passive assets exceeds
R10 million.
449
A Student’s Approach to Taxation in South Africa 10.11
• a lump sum benefit paid for services rendered from a fund, arrangement or instru-
ment situated outside the Republic, which is similar to a pension, pension preser-
vation, provident, provident preservation or retirement annuity fund, is disregard-
ed for capital gains tax purposes.
To determine whether an amount is subject to the Second Schedule to the Act, refer to
chapter 15.
REMEMBER
• If an amount is taxed in terms of the income tax rules, the same amount cannot be sub-
ject to capital gains tax rules. Thus, the tax-free amount of retirement benefits calculated
in terms of the income tax rules cannot be subject to capital gains tax.
REMEMBER
• This exclusion does not apply to the disposal of a long-term insurance policy abroad or
the disposal of a second-hand policy.
• On certain second-hand policies, the capital gains or losses may still be disregarded.
• All risk policies are specifically excluded from the application of capital gains tax. A
specific exemption from capital gains tax applies in respect of employer-owned long-
term insurance policies if the amount to be taxed is included in the gross income of a
person, regardless of whether that amount is subsequently exempted from gross in-
come. Therefore, when policy proceeds from an employer-owned insurance policy are
exempt from gross income, the exemption should not trigger an adverse capital gains
result. In effect, the exemptions should be broad enough to effectively exempt the pol-
icy proceeds from the income tax as well as from the capital gains tax regime.
450
10.11 Chapter 10: Capital gains tax
REMEMBER
• Only gains made in terms of South African laws are excluded; winnings from foreign
sources are subject to capital gains tax.
• All losses, whether from a local or foreign source, are disregarded for capital gains pur-
poses.
• All gains made by persons other than natural persons (for example companies) are
subject to capital gains tax.
Example 10.20
Isabelle Chase retired during the year of assessment and received a lump sum of
R3 200 000 million from her pension fund. She took the money in cash and started gam-
bling at the local casino. In the first three months after her retirement, she lost R3 000 000
on gambling bets. Her husband was so upset by his wife’s behaviour that he had a heart
attack. She rushed to hospital with her husband but due to the negligence of the medical
doctor at the emergency ward he died the following day. After his death, she received
R1 800 000 from his long-term life insurance. Isabelle was convinced that her husband
would still be alive had the medical doctor taken reasonable care. She claimed compensa-
tion from the hospital and was paid R2 000 000 compensation, following a settlement. Af-
ter receiving the money, she felt extremely lucky. Once again, she returned to the casino,
convinced that this time she will win. She won R5 500 000 at the roulette table.
You are required to calculate the aggregate capital gain or loss for Isabelle for the current
year of assessment.
451
A Student’s Approach to Taxation in South Africa 10.11
Solution 10.20
Calculate the aggregate capital gain or loss for the year of assessment: R
Capital gain from retirement benefit (R3 200 000 is excluded) nil
Capital losses from gambling bets (R3 000 000 is excluded) nil
Capital gain from long-term life insurance disposal (R1 800 000 is excluded) nil
Capital gain from compensation claim against hospital (R2 000 000 is excluded) nil
Capital gain from winnings at the casino (R5 500 000 is excluded) nil
Aggregate capital gain or loss for the year of assessment nil
452
10.11–10.12 Chapter 10: Capital gains tax
REMEMBER
• ‘Substantially the whole’ is regarded by SARS as being 90% or more but a percentage of
not less than 85% will also be accepted. The percentage usage is determined using a
method appropriate to the circumstances, which may be based on the time used or area.
• The valuation date of a public benefit organisation in existence on 1 April 2006 will be
the first day of its first year of assessment commencing on or after 1 April 2006.
• The public benefit organisation can determine the base cost of an asset on valuation
date using the same methods available for other assets as per paragraph 26 or 27. If the
market value is adopted, the public benefit organisation must determine the market
value of the asset within two years from the valuation date except for financial instru-
ments (where the market value will equal the ruling price on the last business day
before valuation date) and participatory interest in a local collective investment scheme
in securities of property (the price at which the participatory interest can be sold to the
management of the company of the scheme on valuation date). The weighted average
method is available for identical assets.
453
A Student’s Approach to Taxation in South Africa 10.12
454
10.12 Chapter 10: Capital gains tax
Example 10.21
Ace Ltd., a SA resident company who is not a share-dealer, owns shares in Bongo Ltd (a
JSE-listed SA resident company) which it acquired for R100 000 on 1 March 2006. On
31 May 2021 Bongo Ltd. buys back 10% of its shares from all its shareholders. The direc-
tors advise the shareholders that 75% of the consideration is a dividend while the remain-
ing 25% is a return of capital. Ace Ltd. receives R20 000 as consideration for the buy-back.
You are required to calculate Ace Ltd's capital gain or loss.
Solution 10.21
R
Proceeds (return of capital R20 000 × 25%) 5 000
Less: Base cost (R100 000 × 10%) (10 000)
Capital loss (5 000)
The dividend portion of the consideration of R15 000 (R20 000 × 75%) is an ‘exempt divi-
dend’ in terms of par 19 because it is not subject to normal tax or dividends tax. The capi-
tal loss is disregarded to the extent that any ‘exempt dividend’ is received by or accrues to
Ace Ltd as a result of the share buy-back.
R
Exempt dividend received or accrued as a result of the share buy-back 15 000
Capital loss disregarded (limited to R15 000 exempt dividend) 5 000
Capital loss allowed (R5 000 – R5 000) nil
REMEMBER
The practical effect of par 19 is that it will not apply to a natural person holding shares in a
resident company because these dividends are subject to dividends tax. It will, however,
apply to resident companies receiving dividends from resident companies because such
dividends are exempt from dividends tax under s 64F(a).
455
A Student’s Approach to Taxation in South Africa 10.12–10.13
456
10.13–10.14 Chapter 10: Capital gains tax
Example 10.22
Farah Sansodien realises a capital loss of R60 000 on the sale of her holiday home to her
sister and a capital loss of R10 000 on the sale of shares in her investment portfolio. She
also earned other taxable income of R200 000 during the same year of assessment. In the
previous year of assessment she had an assessed capital loss of R4 000.
You are required to calculate the assessed capital loss to be carried forward to the next
year of assessment.
Solution 10.22
R
Capital loss on the sale of her holiday home (note 1) nil
Capital loss on disposal of shares in her investment portfolio (10 000)
Assessed capital loss – previous year (4 000)
Assessed capital loss for the year (note 2) (14 000)
Notes
1. The capital loss on the holiday home is ring-fenced and cannot be added to the as-
sessed capital loss that is carried forward to the following year. It can only be set off
against future capital gains that arise from transactions with the same connected per-
son.
2. The assessed capital loss of the year of R14 000 is not multiplied with the inclusion
rate and it cannot be set off against the other taxable income of R200 000. Instead, the
assessed capital loss is carried forward and it can be set off against any future capital
gain on the disposal of an asset
10.14 Roll-overs
The Act makes provision for the postponement of the payment of capital gains tax
under certain circumstances, having the effect that the base cost of the asset before the
disposal is rolled over, and when the asset is finally disposed of, capital gains tax is
paid on the difference between the proceeds and the original base cost.
457
A Student’s Approach to Taxation in South Africa 10.14
• that asset is not deemed to have been disposed of and to have been reacquired by
that person;
• an amount at least equal to the receipts from the disposal has been or will be ex-
pended to acquire one or more replacement assets;
• all the replacement assets are from a source in the Republic, including an interest
in immovable property. An interest in immovable property includes a direct or in-
direct interest of at least 20% held by a non-resident (alone or together with con-
nected persons) of the equity share capital of a company or any other entity (where
80% or more of the market value of the net asset value of that company or entity, at
the time of disposal, is attributable to immovable property situated in the Repub-
lic);
• the contracts for the acquisition of the replacement asset or assets have all been or
will be concluded within 12 months after the date of the disposal of that asset; and
• the replacement asset or assets will all be brought into use within three years of the
disposal of the original asset.
REMEMBER
• The Commissioner may extend the period within which the contract must be concluded
or the asset is brought into use by no more than six months if all reasonable steps were
taken to conclude those contracts or bring those assets into use.
• If a taxpayer fails to comply with the periods as laid down:
– the capital gain should be recognised on the date on which the relevant period
ends;
– interest is calculated at the prescribed rate on that capital gain from the date of that
disposal until the date on which the relevant period ends; and
– the interest is deemed to be a capital gain on the date on which the relevant period
ends.
• This rule does not apply to personal-use assets or financial instruments.
• This rule is not applicable when there is a loss.
Where the taxpayer acquires more than one replacement asset, the capital gain must
be apportioned between the different assets. The following formula can be used to
apportion the gain per replacement asset:
Cost of the specific replacement asset
Capital gain per asset = Total gain ×
Total cost of all replacement assets
Where the new asset is a depreciable asset, the capital gain must be realised over the
same time period and in the same ratio that is used to calculate the wear-and-tear
allowances on the replacement asset. Therefore, if an asset qualifies for a 40% deduc-
tion in the first year of assessment it is used, 40% of the gain allocated to the asset
must be recognised as a gain during the first year of assessment. If the taxpayer sells
the replacement asset and there is still an amount of the capital gain allocated to the
original asset that has not been recognised, the full amount is recognised as a gain for
that year of assessment.
458
10.14 Chapter 10: Capital gains tax
Where the new asset is not a depreciable asset, the capital gain must be recognised in
the year of assessment when the taxpayer sells the new asset.
Example 10.23
Arson Ltd purchased a machine on 28 February 2019 at a cost of R100 000.
On 28 February 2020 the machine was destroyed in a fire. The company received
R120 000 from its insurer as compensation. Arson Ltd purchased and started using a
more advanced replacement machine on 30 June 2020 at a cost of R150 000. Arson Ltd.
has a 30 June year-end.
You are required to determine the capital gains for the 2020 to 2023 years of assessment.
Solution 10.23
The capital gain on disposal of the old machine amounts to R20 000. Under par 65 this
must be disregarded and spread over future years of assessment in proportion to the
capital allowances to be claimed on the replacement asset.
The capital allowances on the new machine will be as follows:
2020: R150 000 × 40% = R60 000
2021: R150 000 × 20% = R30 000
2022: R150 000 × 20% = R30 000
2023: R150 000 × 20% = R30 000
The capital gain of R20 000 must be recognised as follows:
2020: R20 000 × R60 000/R150 000 (40%) = R8 000
2021: R20 000 × R30 000/R150 000 (20%) = R4 000
2022: R20 000 × R30 000/R150 000 (20%) = R4 000
2023: R20 000 × R30 000/R150 000 (20%) = R4 000
Note
Had there been a recoupment (section 8(4)), it would have been taxed to the same extent
as the capital gain.
459
A Student’s Approach to Taxation in South Africa 10.14
• an amount at least equal to the proceeds received from the disposal has been or
will be expended to acquire a replacement asset or assets and this asset or assets
will qualify for a capital deduction or allowance in terms of section 11(e), 11D, 12B,
12C, 12DA, 12E or 37B;
• all the replacement assets are from a source in the Republic, including an interest
in immovable property. This includes immovable property held by that person or
interest or right in immovable property of whatever nature of that person. An in-
terest in immovable property includes a direct or indirect interest of at least 20%
held by a non-resident (alone or together with connected persons) of the equity
share capital of a company or any other entity (where 80% or more of the market
value of the net asset value of that company or entity, at the time of disposal, is at-
tributable to immovable property);
• the contracts for the acquisition of the replacement asset or assets have all been or
will be concluded within 12 months after the date of the disposal of that asset; and
• the replacement asset or assets will all be brought into use within three years of the
disposal of the original asset.
Example 10.24
Choice (Pty) Ltd acquired a new machine for R100 000 from a local supplier (not a con-
nected person) on 1 October 2019. The machine was brought into use immediately and
qualified for the s 12C allowance.
Due to the rapid expansion of the operations of Choice (Pty) Ltd, it was decided to re-
place this machine with a technologically more advanced machine. On 1 November 2020
the old machine was sold for R150 000 and a new machine was purchased at a cost of
R450 000. The new machine was brought into use on 15 November 2020 and also qualifies
for the s 12C allowance. The company’s year-end is the last day of December each year.
You are required to calculate the normal tax implications for Choice (Pty) Ltd arising
from the above transactions, assuming that the company elects to apply the provisions of
par 66. (Assume that the company has no other capital gains or losses for the relevant tax
years.)
460
10.14 Chapter 10: Capital gains tax
Solution 10.24
R
Old machine:
Original cost 100 000
Less: Section 12C allowance (2019 tax year) (40% of R100 000) (40 000)
Section 12C allowance (2020 tax year) (20% of R100 000) (20 000)
Income tax value on date of sale 40 000
Recoupment on old machine:
Proceeds of R150 000 (limited to cost price of R100 000) 100 000
Less: Income tax value on date of sale (calculated above) (40 000)
Section 8(4)(a) recoupment 60 000
This recoupment is not fully included in income (for income tax purposes)
if the taxpayer has elected the provisions of par 66 (s 8(4)(e)). Instead,
the inclusion in the taxpayer’s income in the 2020 tax year will be
R60 000 × 40% 24 000
The inclusion in the 2021, 2022 and 2023 tax years will be R60 000 × 20% 12 000
New machine:
Original cost 450 000
Less: Section 12C allowance (2020 tax year) (40% of R450 000) (180 000)
Income tax value at end of year 270 000
Capital gain on disposal of old machine:
Proceeds on disposal 150 000
Less: Section 8(4)(a) recoupment (60 000)
90 000
Less: Base cost (income tax value calculated above) (40 000)
Capital gain 50 000
The capital gain of R50 000 on the old machine must be rolled over. The
company must account only for 40% of the capital gain of R50 000 in the
2020 year of assessment. This means 40% × R50 000 = R20 000 multiplied
with the inclusion rate of 80% should be included in taxable income
16 000
The inclusion in the 2021, 2022 and 2023 tax years will be
R50 000 × 20% × 80% 8 000
Note
If the company disposes of the new machine or ceases to use it for the purposes of its
trade in a year of assessment before the full capital gain has been brought into account,
it must treat the balance of the capital gain that has not yet been brought into account as
a capital gain in that year.
461
A Student’s Approach to Taxation in South Africa 10.14
REMEMBER
• On application by the taxpayer, the Commissioner may decide to extend the period
within which the contract must be concluded or the asset brought into use by no more
than six months if all reasonable steps were taken to conclude those contracts or to
bring those assets into use.
• If a taxpayer fails to comply with the period as laid down:
– the capital gain should be recognised on the date on which the relevant period ends;
– interest is calculated at the prescribed rate on that capital gain from the date of that
disposal until the date on which the relevant period ends; and
– the interest is deemed to be a capital gain on the date on which the relevant period
ends.
Where the taxpayer acquires more than one replacement asset, the capital gain must
be apportioned between the different assets. The following formula can be used to
apportion the gain per replacement asset:
Cost of the specific replacement asset
Capital gain per asset = Total gain ×
Total cost of all replacement assets
The capital gain must be realised over the same time period and in the same ratio as
the amount of any deduction or allowance allowed on the replacement asset in that
year in terms of section 11(e), 11D, 12B, 12C, 12DA, 12E or 37B.
REMEMBER
• If the taxpayer sells the replacement asset or stops using the asset in his trade and there
is still an amount of the capital gain that has not been recognised, the full amount is a
capital gain for that year of assessment.
• This rule is not applicable when there is a loss.
462
10.14 Chapter 10: Capital gains tax
REMEMBER
• This relief is unavailable if the asset is disposed of to a spouse who is not a resident,
unless the asset is an asset that remains in the tax net for non-residents, for example,
immovable property situated in South Africa or assets of a permanent establishment in
South Africa.
A person must also be treated as having disposed of an asset to his or her spouse for
the purposes of this-roll over provision if the asset is transferred to the spouse:
• in settling an accrual claim of the deceased spouse against the surviving spouse
where an asset of the surviving spouse is transferred to the deceased estate; and
• in consequence of a divorce order or an agreement (dividing the assets) made in a
court order.
In settling an accrual claim of the deceased spouse, the surviving spouse is treated as
having disposed of the assets immediately before the death of the deceased spouse.
This means that the surviving spouse is not subject to normal tax on capital gains on
the transfer of the assets to the deceased estate in terms of the accrual claim.
(section 9HB(2)).
Example 10.25
Hans and Gretel Schoeman are both SA residents married out of community of property.
Hans transfers an asset with a market value of R200 000 and a base cost of R160 000 to his
wife during the year of assessment.
You are required to determine the capital gains tax consequences for both Hans and
Gretel.
463
A Student’s Approach to Taxation in South Africa 10.14–10.16
Solution 10.25
Determine the capital gains tax effect for Hans: R
Capital gain or loss for the year of assessment is excluded nil
Determine the capital gains tax effect for Gretel:
Gretel is treated as having acquired the asset on the same date on which it was acquired
by Hans; for an amount equal to the base cost expenditure incurred by the Hans, namely
R160 000; incurred that expenditure on the same date and in the same currency; and
used the asset in the same manner that it was used by Hans. In essence, Gretel steps into
the shoes of Hans with regard to the asset.
REMEMBER
• The roll-over relief is also available where the asset consists of trading stock that in-
cludes a farmer’s livestock.
• Where a spouse dies this relief only applies in respect of the settling of an accrual claim
of the deceased spouse. It does not apply if his or her surviving spouse inherits any
asset. In such an instance, section 9HA determines the roll over consequences for the
deceased spouse.
REMEMBER
• The effective tax rate on a capital gain is therefore a maximum of 18% (40% × 45%)
for individuals and 21,6% (27% × 80%) for companies.
10.16 Summary
When calculating the capital gain on the disposal of an asset, you need to determine
four things, namely the proceeds on the disposal, the base cost of the asset, the
amount excluded from capital gains tax and whether there are any rules limiting the
losses on the disposal of the asset.
464
10.16–10.17 Chapter 10: Capital gains tax
Before starting to calculate the capital gain on the disposal, it first has to be deter-
mined whether any portion of the income is taxed as part of the taxpayer’s income
tax calculation, for example recoupments.
The proceeds on the disposal of the asset are normally the compensation received on
the disposal of the asset. This amount has to be adjusted for amounts included in tax-
able income for income tax purposes, as a person cannot be taxed twice on the same
amount.
The base cost of the asset is the valuation date value (on 1 October 2001) plus the ex-
penditure incurred on or after 1 October 2001. The Eighth Schedule of the Act allows
three methods that can be used to calculate the value of the asset on 1 October 2001,
namely:
• the market value;
• the time-apportionment base cost; and
• the 20% rule.
The capital gain or loss on the disposal of an asset is the proceeds from the disposal
less the base cost. The Act excludes the gains and/or losses on certain assets from the
calculation of the aggregate capital gain or loss for the year of assessment. Remember
that there is no annual exclusion for persons other than natural persons. The net capi-
tal gain for the year is then multiplied by the inclusion rate (80% for persons other
than natural persons) to calculate the taxable capital gain. The taxable capital gain is
not the amount of tax to be paid; it is included in the taxable income and the applica-
ble tax rate is then applied to calculate the tax payable.
The next section contains a number of questions that can be completed to evaluate
your knowledge on capital gains tax.
Question 10.1
Green Finger Ltd is a company manufacturing pot plant holders and it is also a VAT
vendor. Due to the success of the company’s products, it had to acquire a bigger manufac-
turing plant. All amounts include VAT unless stated otherwise. The company’s year of
assessment ends on 31 July.
Old plant
The old plant (previously used) was purchased on 1 November 2020 from another manu-
facturing company (who was a registered VAT vendor) for 2 081 739 (excluding VAT).
Green Finger Ltd sold this plant for R5 244 000 on 1 February 2022.
New plant
A new plant (replacement asset, new and unused) was purchased for R6 100 000 on 1 July
2022. The plant was brought into use on 1 January 2023 after modifications costing
R350 000 were undertaken.
Assume that the only other disposal for the years of assessment ended 31 July 2022 and
31 July 2023 was on 1 November 2022, which created a capital loss of R15 000.
465
A Student’s Approach to Taxation in South Africa 10.17
Answer 10.1
Calculation of the taxable capital gain of Green Finger Ltd for the year of assessment
ended 31 July 2022
R
Proceeds (Note 2) 3 727 304
Less: Base cost (Note 3) (1 249 043)
Capital gain 2 478 261
Less: Roll-over relief (Note 4) (2 478 261)
Taxable capital gain nil
Calculation of the taxable capital gain of Green Finger Ltd for the
year of assessment ended 31 July 2023
R
Capital gain – rolled over (R2 478 261 × 40%) (Note 5) 991 304
Less: Capital loss (given) (15 000)
Net capital gain 976 304
Multiplied by: Inclusion rate 80%
Taxable capital gain 781 043
Notes
1. Income tax calculations
Tax value
Cost 1 November 2020 2 081 739
Less: Section 12C allowance
2021: R2 081 739 × 20% (416 348)
2022: R2 081 739 × 20% (416 348)
Tax value on 1 February 2022 1 249 043
Recoupment
Selling price (R5 244 000 × 100 / 115) limited to cost 2 081 739
Less: Tax value (1 249 043)
Recoupment 832 696
2. Proceeds
Proceeds (R5 244 000 × 100 / 115) 4 560 000
Less: Recoupment (Note 1) (832 696)
Proceeds for capital gains tax purposes 3 727 304
continued
466
10.17 Chapter 10: Capital gains tax
3. Base cost
Original cost price (excluding VAT) 2 081 739
Less: Section 12C allowances claimed (832 696)
Base cost 1 249 043
Question 10.2
Rent-a-lot Ltd (a VAT vendor) owns a fleet of hovercrafts which it rents out. The com-
pany’s year of assessment ends on the last day of February. On 30 November 2022 the
company sold two of its hovercrafts to purchasers who are not connected persons to Rent-
a-lot Ltd.
The following information relates to the sale:
Note
Hovercraft #2 had modifications done to it on 1 April 2005 which cost R59 280 (VAT in-
cluded at 14%).
SARS allows wear-and-tear to be written off over ten years for these hovercrafts.
All amounts include VAT.
467
A Student’s Approach to Taxation in South Africa 10.17
Answer 10.2
Calculation of the taxable capital gain or loss of Rent-a-Lot Ltd
R
Capital loss on disposal of hovercraft #1 (Note 1) nil
Add: Capital gain on disposal of hovercraft #2 (Note 2) 16 418
Aggregate capital gain for the year 16 418
The taxable capital gain is therefore 80% × R16 418 = R13 134
Notes
1. Capital loss on disposal of hovercraft #1
Proceeds 77 322
Less: Base cost (77 322)
Capital loss on disposal of hovercraft #1 nil
There is no capital loss because the whole amount is claimed as an
income tax deduction in terms of section 11(o).
2. Capital gain or loss on disposal of hovercraft #2
Proceeds 20 522
Less: Base cost (4 104)
Capital gain 16 418
Question 10.3
During the 2018 year of assessment, Daisy Ltd purchased ten used manufacturing
machines for R2 250 000. On 2 January 2019, the company sold all its manufacturing
machinery to Donald Ltd, which is not a connected person to Daisy Ltd. In terms of the
sales agreement, the selling price is equal to 10% of Donald Ltd’s profit for the next five
years. Donald Ltd’s profit for the next five years (ended 31 December) is as follows:
2019: R10 000 000
2020: R8 000 000
2021: R15 000 000
2022: R3 500 000 (loss)
2023: R5 000 000
All amounts exclude VAT. The company’s year of assessment ends 31 December.
468
10.17 Chapter 10: Capital gains tax
Answer 10.3
1. 2018 year of assessment:
The company can claim a section 12C allowance:
R2 250 000 × 20% (used asset) = R450 000
2. 2019 year of assessment:
The company can claim a section 12C allowance:
R2 250 000 × 20% (used asset) = R450 000
The company can claim a section 11(o) deduction: R
Selling price (R10 000 000 × 10%) 1 000 000
Less: Tax value (R2 250 000 – R450 000 – R450 000) (1 350 000)
Possible section 11(o) deduction (350 000)
As the full proceeds did not accrue to the company in the first year,
the section 11(o) deduction must be disregarded (section 20B(1)).
Section 11(o) deduction nil
The total proceeds are less than the original cost and therefore
there is no capital gain for the year.
Capital loss for the current year:
Proceeds (R1 000 000 – Rnil (recoupment)) 1 000 000
Less: Base cost (R2 250 000 (cost) – R900 000 (section 12C allowance)) (1 350 000)
Capital loss (350 000)
Capital loss must be disregarded in the 2019 year of assessment (paragraph 39A(1)).
3. 2020 year of assessment:
R
An amount of R800 000 (R8 000 000 × 10%) accrued to the company.
A recoupment must be calculated for income tax purposes:
Total receipts (R1 000 000 + R800 000) 1 800 000
Less: Tax value (R2 250 000 – R450 000 – R450 000) (1 350 000)
Income tax recoupment 450 000
*The section 11(o) allowance of R350 000 that was disregarded in 2019
cannot be deducted in 2020 as the section 11(o) loss now becomes a re-
coupment and is no longer a loss.
Section 11(o) allowance –
Capital gain/loss for the current year:
Further proceeds (further amount accrued to company) 800 000
Further deduction in proceeds (recoupment) (450 000)
Capital gain for 2020 year of assessment 350 000
Capital loss from 2019 year of assessment (paragraph 39A(2)) (350 000)
Net capital gain/loss nil
continued
469
A Student’s Approach to Taxation in South Africa 10.17
Question 10.4
You are a tax consultant at a local firm. During the year you received the query from a cli-
ent:
Hunter Ltd, who is not a share-dealer, purchased a share in Coco (Pty) Ltd on 1 March
2022 for R550 000. On 30 April 2023 Hunter Ltd receives a dividend of R400 000. Hunter
Ltd sells the shares on 1 May 2023 for R100 000.
All amounts exclude VAT. The company’s year of assessment ends 31 July.
Calculate Hunter Ltd’s capital gains or losses for the year of assessment assuming these
were the only transactions with CGT consequences.
470
10.17 Chapter 10: Capital gains tax
Answer 10.4
Query 1:
Calculation of the taxable capital gain or loss of Hunter Ltd for the year of assessment
ended 31 July 2023
R
Proceeds R100 000
Less: Base cost (550 000)
Capital loss (R450 000)
The capital loss is disregarded to the extent that any extraordinary exempt
dividend is received by or accrues to Hunter Ltd within 18 months prior to or
as part of the disposal (refer to 10.12.5).
Extraordinary exempt dividend:
Dividend received or accrued within 18 months before date of disposal R400 000
Less: 15% of proceeds (15% × R100 000) 15 000
Capital loss disregarded R385 000
Capital loss allowed (R450 000 – R385 000) R65 000
471
Taxation of
11 companies and
company distributions
Adjustments
Partnerships Companies Trusts for tax
avoidance
Page
11.1 Introduction ......................................................................................................... 474
11.2 The nature of a company (section 1) ................................................................. 475
11.3 Tax implications for a company ........................................................................ 477
11.4 Small business corporations and personal service providers ....................... 479
11.4.1 Small business corporations (section 12E) .......................................... 479
11.4.2 Personal service providers.................................................................... 482
11.5 Non-resident companies .................................................................................... 484
11.6 Collection of tax due by a company (Fourth Schedule of the Act) ............... 484
11.7 Classification of companies................................................................................ 487
11.8 Tax implications of company distributions ..................................................... 488
473
A Student’s Approach to Taxation in South Africa 11.1
Page
11.9 Dividends tax (sections 1 and 64D to 64N).................................................... 488
11.9.1 Definition of a dividend (sections 1 and 64D) ............................... 488
11.9.2 Definition of contributed tax capital (section 1) ............................ 490
11.9.3 Levying of dividends tax on a dividend paid in cash
(sections 64E and 64EA) ................................................................... 495
11.9.4 Levying of dividends tax on a dividend in specie
(sections 64E and 64EA) ................................................................... 495
11.9.5 Dividends tax for foreign companies (sections 64E and 64EA) ... 497
11.9.6 Exemptions from dividends tax (section 64F) ............................... 497
11.9.7 Exemption from and reduction of dividends tax in respect
of dividends in specie (section 64FA)............................................... 500
11.9.8 Deemed beneficial owner of a dividend (section 64EB)............... 502
11.10 Withholding of dividends tax (section 64G) ................................................. 503
11.11 Refund of dividends tax (sections 64L) .......................................................... 505
11.12 Payment and recovery of dividends tax (section 64K) ................................ 506
11.13 Dividends tax: Summary ................................................................................. 507
11.14 Summary ............................................................................................................ 508
11.15 Examination preparation ................................................................................. 508
11.1 Introduction
Lillian Mtombe decided that she wanted to start her own business. She wants to bake
rusks and sell it to different entities. She knows that she will incur certain expenses
and that she is going to earn income from the sale of the rusks. She is unsure of what
she has to do and heard from a friend that she needs to choose a certain form of
enterprise in which she will operate her business. Lillian decided on a company as
her form of enterprise.
A company is a fictitious separate person or entity that has been clothed with a legal
personality. It is not a building that can be seen. It is just a form or legal entity within
which activities take place and are regulated. For income tax purposes, a company is
also treated as a separate person and a separate tax calculation must be prepared for
the company itself, over and above that of its owners (shareholders) and managers
(directors).
If Lillian Mtombe therefore chooses a company as her form of enterprise, she will
undertake all her trading activities within the company and at the end of the year of
assessment she will summarise the activities and prepare a tax calculation for the
company. She will also have to prepare a tax calculation in her own name, but it will
not include the trading activities of the company; just possibly a salary that she re-
ceived for services rendered to the company, as well as dividends on any shares that
she may hold in the company.
474
11.1–11.2 Chapter 11: Taxation of companies and company distributions
If one has specifically decided upon a company or close corporation (CC) as a form of
enterprise, after studying this chapter one should understand the tax implications of
this form of enterprise.
REMEMBER
• Any reference hereafter to a company refers to the definition in terms of the Act and
includes, among others, a close corporation.
475
A Student’s Approach to Taxation in South Africa 11.2
Example 11.1
50%
A
D 70%
25% B
80%
The diagram sets out the percentages held in the equity shares of Companies B, C and D.
From the diagram it is clear that all the companies form part of the same group of compa-
nies.
Company A is the controlling group company. Since Company A directly holds at least
70% of the equity shares in Company B (controlled group company), Companies A and B
form part of the same group of companies.
Company C also forms part of the group of companies. Although the effective interest of
Company A in the equity shares of Company C is only 56% (70% × 80%), it is not the effect-
ive interest that is relevant. Since Company B (controlled group company) directly holds at
least 70% of the equity shares in Company C (that is 80%) and Company A (controlling
group company) directly holds at least 70% of the equity shares in Company B, Compa-
nies A, B and C form part of the same group of companies.
Company D also forms part of the group of companies. Company A (controlling group
company) directly holds at least 70% of the equity shares in Company B (controlled group
company). Since Company A (controlling group company) and Company B (controlled
group company) directly hold at least 70% of the equity shares in Company D (that is 50%
by Company A plus 25% by Company B), Company D forms part of the same group of
companies.
476
11.2–11.3 Chapter 11: Taxation of companies and company distributions
REMEMBER
• The definition of ‘group of companies’ differs from the definition of ‘connected person’
(refer to chapter 9). A company will be a connected person to another company if, for
example, at least 50% of the equity shares are directly held in that other company, not
70%.
Gross income
Therefore, when a company’s taxable income is calculated, basically the same pro-
cedure is used as applied for natural persons. The normal tax liability of a natural
person is calculated on a sliding scale by means of the tax tables. Companies, howev-
er, pay normal tax at a fixed rate. The normal tax rate for companies has been reduced
from 28% to 27% in respect of years of assessment ending on or after 31 March 2023.
Every year the tax rates for the following year of assessment are announced in the
budget speech. The tax rate announced in the budget of February 2022 for individuals
applies to the year of assessment of 1 March 2022 to 28 February 2023.
For companies, it applies to years of assessment that end on any date during the
South African fiscal year from 1 April 2022 to 31 March 2023. It is therefore possible
that a company with a 30 April 2022 year end will only be informed in February 2022
477
A Student’s Approach to Taxation in South Africa 11.3
during the budget speech that it will have to pay tax at a higher or lower rate for the
2023 year of assessment.
The rate for companies (small business corporations excluded) has been fixed at 27%
of taxable income (taxable income for the current year, less the balance of an assessed
loss incurred in a previous year that has been carried forward from the preceding
year of assessment) (section 20(1)(a)).
A company’s normal tax calculation is done for its year of assessment. This is the
financial year of the company that ends during the relevant fiscal year. It is not neces-
sarily a period of 12 months, but may be changed with the approval of the Com-
missioner. In this manner, a company with a financial year that ends on 31 March
may be incorporated, for example, on 1 October 2022. The first year of assessment
will then be from 1 October 2022 up to and including 31 March 2023. If the company
then changes its financial year end on 15 April 2023 to 31 December, the second year
of assessment will extend from 1 April 2023 to 31 December 2023, subject to the
Commissioner’s approval. The third year of assessment will then extend from
1 January 2024 to 31 December 2024.
Example 11.2
ABC (Pty) Ltd had taxable income of R100 000 for the current year of assessment ended
31 January. The company is not a small business corporation as contemplated in section
12E(4) (refer to 11.4.1).
You are required to calculate the normal tax due by ABC (Pty) Ltd in respect of the year of
assessment ended 31 May 2023.
Solution 11.2
R100 000 × 27% = R27 000 normal tax due.
If a company did not carry on a trade in the Republic during a year of assessment, the
benefit of an assessed loss is not carried forward and it is lost. This principle was
confirmed in SA Bazaars (Pty) Ltd v CIR 18 SATC 240. The expression ‘carrying on of a
trade’ does not include the earning of passive income such as dividends and interest.
Hence, unless a company carries on the business of a moneylender, an assessed loss
cannot be carried forward from a year that the company solely derived interest in-
come and did not carry on any other trade. In order to carry forward an assessed loss,
it is further required that a company must derive income from a trade. However, the
Commissioner does not enforce this principle very strictly and allows for an assessed
loss to be carried forward if the company has carried on a trade, even if no income
was derived from that trade.
A company is also obliged to withhold (or pay) 20% dividends tax (refer to 11.9) in
respect of cash dividends or dividends in specie declared by the company.
The normal tax for gold-mining companies and insurance companies is calculated in
a different manner, but is not discussed in this text as it is considered to be specialist
in nature.
478
11.3–11.4 Chapter 11: Taxation of companies and company distributions
REMEMBER
• The tax rate was reduced from 28% to 27% for a company or close corporation (other
than a small business corporation) with a year of assessment ending on or after
31 March 2023 (that is to say where the year of assessment of the company or close
corporation commences on or after 1 April 2022). The rate of 27% is used for purposes
of this book unless the year of assessment in an example or question indicates
otherwise.
• A company's year of assessment is the same as its financial year.
• A company is not entitled to the primary, secondary and tertiary rebates.
• The basic interest exemption (section 10(1)(i)) is only available to individuals and not to
companies.
• According to section 10(1)(k) both companies and individuals are entitled to the local
dividend exemption.
• According to section 10B both companies and individuals are entitled to the foreign
dividend exemptions.
• The exemption with regards to the capital portion of a purchased annuity (section 10A)
as well as the exemption of amounts received or accrued in respect of tax-free invest-
ments (section 12T) do not apply to companies.
• In terms of section 6quat, a resident company is entitled to a rebate or deduction for
foreign tax paid, provided that the requirements of this section are met.
479
A Student’s Approach to Taxation in South Africa 11.4
480
11.4 Chapter 11: Taxation of companies and company distributions
REMEMBER
• Only close corporations, co-operatives, private companies and personal liability com-
panies may qualify as small business corporations. It is important to note that when it
must be determined for these purposes whether the company is a private or personal li-
ability company, reference is made to the Companies Act only and not to the require-
ments as set out in the Act.
Example 11.3
ABC (Pty) Ltd, a small business corporation in terms of section 12E of the Act, supplies
goods that it manufactures to private institutions. The Commissioner has approved the
company’s manufacturing process as a ‘process of manufacture’. The following repre-
sents a summary of income and expenditure for the current year of assessment ended
31 May:
R
Gross income for goods supplied 4 000 000
Interest income 800 000
Purchase of machine for manufacturing process (brought into use immediately
and for the first time by ABC (Pty) Ltd) 300 000
Office equipment purchased and brought into use immediately 6 000 000
You are required to calculate the normal tax due by ABC (Pty) Ltd in respect of the current
year ended 31 May 2023. The taxpayer prefers the most preferential capital allowance.
481
A Student’s Approach to Taxation in South Africa 11.4
Solution 11.3
R
Gross income for goods supplied 4 000 000
Interest income (Note 1) 800 000
Less: Purchase of machine (section 12E(1) – 100% capital allowance) (300 000)
Office equipment purchased and brought into use (Note 2) (3 000 000)
Taxable income 1 500 000
Notes
1. Although investment income in the form of interest income was earned, it only represents
16,67% (R800 000 / R4 800 000 (R4 000 000 + R800 000)) of the total gross income. The
investment income is therefore less than the 20% limit and ABC (Pty) Ltd still quali-
fies as a small business corporation.
2. In terms of Interpretation Note No. 47, office equipment qualifies to be written off
over five years for purposes of section 11(e). Therefore, it would be more beneficial for
the taxpayer to elect section 12E rates, namely R6 000 000 × 50%.
482
11.4 Chapter 11: Taxation of companies and company distributions
REMEMBER
Example 11.4
XYZ (Pty) Ltd is classified as a personal service provider and for the current year of as-
sessment ended 31 March, the following applies:
R
Gross income for services rendered 6 000 000
Employees’ tax withheld on this (R6 million × 27%) 1 620 000
Remuneration paid to employees 4 030 000
Bad debts 70 000
Other expenses in respect of assets not used wholly and exclusively for trade
purposes. 200 000
You are required to calculate the normal tax due by or to XYZ (Pty) Ltd, in respect of the
current year of assessment.
483
A Student’s Approach to Taxation in South Africa 11.4–11.6
Solution 11.4
R
Gross income for services rendered 6 000 000
Less: Remuneration paid to employees (4 030 000)
Bad debts
(no other expenses are deductible in terms of section 23(k)) (70 000)
Taxable income 1 900 000
Normal tax due on this (R1 900 000 × 27%) 513 000
Less: Employees’ tax paid by XYZ (Pty) Ltd (1 620 000)
Refund owed to XYZ (Pty) Ltd by SARS (1 107 000)
REMEMBER
• When a resident company becomes a non-resident company, all assets (with certain
exceptions) are deemed to have been disposed of by the company at market value on
the day immediately before the company becomes a non-resident.
484
11.6 Chapter 11: Taxation of companies and company distributions
Minimum amount
Taxpayers are divided into two groups when determining the minimum amount:
• taxpayers with taxable income of R1 million or less for the current year of assess-
ment; and
• taxpayers with taxable income of more than R1 million for the current year of
assessment.
485
A Student’s Approach to Taxation in South Africa 11.6
Where the estimate for the second provisional tax payment is less than 90% of the
actual taxable income and also less than the basic amount, SARS will raise an auto-
matic underestimation penalty of 20% on the shortfall in normal tax.
Example 11.5
The year of assessment of Casa Mia CC, a personal service provider as defined, ends on
30 June. The company’s tax assessment in respect of the 2021 year of assessment was
issued on 15 July 2022 and reflects taxable income of R102 593. Included in this taxable
income is a taxable capital gain of R10 000.
The company’s income tax assessment in respect of the 2022 year of assessment, which
indicates a taxable income of R80 000, was issued in the current year of assessment on 20
January 2023.
During the 2023 year of assessment, employees’ tax of R25 000 (R10 000 up to and
including 31 December) was withheld on payments received from other persons.
continued
486
11.6–11.7 Chapter 11: Taxation of companies and company distributions
On 31 July 2023, Casa Mia CC’s financial director prepared the tax calculation for the
2023 year of assessment which indicated a taxable income of R200 000. Included in this
taxable income is a taxable capital gain of R20 000.
You are required to calculate the provisional tax payments made by Casa Mia CC in
respect of the 2023 year of assessment. You may assume that all payments were correct
and were made on time, and that Casa Mia CC paid no interest.
Solution 11.5
R
First provisional tax payment – 31 December 2022
Basic amount (R102 593 – R10 000 (taxable capital gain)) 92 593
Normal tax on this (R92 593 × 27%) (Note 1) 25 000
Half applicable to first provisional tax payment (R25 000 × 50%) 12 500
Less: Employees’ tax paid (up to 31 December) (10 000)
First provisional tax payment 2 500
Second provisional tax payment – 30 June 2023
Basic amount 80 000
Tax on this (R80 000 × 27%) 21 600
Less: First provisional tax payment (2 500)
Less: Total employees’ tax (25 000)
(5 900)
Notes
1. Casa Mia CC is a personal service provider and therefore pays tax at 27%.
2. Although the calculation result in a negative answer, there will not be a refund from
SARS and the second provisional tax payment is taken as Rnil only.
3. If the actual third provisional tax payment only amounted to R20 000, the difference of
R6 500 (R26 500 – R20 000) would have been payable on assessment. If the date of the
assessment was after 31 December 2023, interest on the R6 500 would have been calcu-
lated at the prescribed rate from 1 January 2024 up to the date of the assessment.
487
A Student’s Approach to Taxation in South Africa 11.7–11.9
company, since donations made by a public company are exempt from the payment
of donations tax. Donations made by a private company are subject to the donations
tax provisions.
In terms of section 38, the Commissioner must, upon the request of a company,
inform that company whether it is recognised as a public or private company. In
terms of section 39, the Commissioner may re-determine the classification if circum-
stances change. The re-determination of a company’s status cannot be retroactive, but
must apply from a future date as determined by the Commissioner.
When a close corporation is converted to a company in terms of the Companies Act,
such a company is, for the purposes of the Act, deemed to be and to have been one
and the same company. An assessed loss may therefore be carried over from the close
corporation to the company, assets retain their tax values, tax allowances are carried
over and the year of assessment for tax purposes is the same.
REMEMBER
488
11.9 Chapter 11: Taxation of companies and company distributions
REMEMBER
• The term ‘amount’ includes money as well as the value of every property earned by the
taxpayer, whether corporeal or incorporeal, which has a monetary value (Lategan v
CIR). Therefore a dividend includes money, as well as a dividend in specie, which is a
distribution of assets to a holder of shares.
• A share means, in relation to a company, a unit into which the proprietary interest in
that company is divided.
• A dividend refers to amounts transferrred or applied ‘in respect of’ a share. Therefore, it
does not matter if the amount is paid to a person who is not the owner of the share. A
dividend is an amount transferred or applied because of the particular shareholding.
Dividends do not include an amount transferred or applied for purposes other than in
respect of a share, for example, for services rendered by a shareholder to the company.
• The transfer pricing provisions in section 31 of the Act aim to ensure that resident and
non-resident connected persons transact on an arm’s length basis where the relevant
transaction results in a ‘tax benefit’ (that is to say the reduction, avoidance or post-
ponement of tax) for a party to such a transaction. Failure to transact on an arm’s length
basis firstly triggers a primary adjustment under section 31(2) whereby the taxable in-
come of each party obtaining a tax benefit must be determined as if the transaction had
been entered into at arm’s length terms and conditions. In addition, the secondary ad-
justment under section 31(3)(i) provides that such a primary adjustment to taxable in-
come must be treated as a deemed dividend in specie declared and paid by the resident
if that person is a company. Alternatively, section 31(3)(ii) regards the primary adjust-
ment as a deemed donation for donations tax purposes made by the resident if that per-
son is not a company.
• For purposes of section 1, the concept ‘dividend’ specifically excludes a dividend in
specie resulting from a secondary transfer pricing adjustment in terms of section 31(3)(i).
Nevertheless, such a dividend in specie falls within the ambit of a dividend as defined in
section 64D which therefore attracts dividends tax at a rate of 20%. This exclusion aims
to block any tax treaty relief (such as a reduction in the rate of dividends tax) that
would otherwise have applied in respect of such a dividend in specie.
489
A Student’s Approach to Taxation in South Africa 11.9
Step 1: Add stated capital or share capital and share premium immediately
before 1 January 2011.
Step 2: Subtract the amount included in stated capital or share capital and
share premium that would be classified as a dividend (that is to say
capitalised profits) as per the previous dividend definition (the divi-
dend definition before 1 January 2011).
(Note: For a foreign company that became a resident on or after
1 January 2011 the market value of all the shares in a class
immediately before the date that the company became a resident is the
starting point of your calculation (that is to say Step 1 and Step 2).
Step 3: Add any consideration received by or accrued to the company for the
issue or conversion of shares (including cash, assets, loan reduction or
services received).
Step 4: Subtract any amount transferred from contributed tax capital for the
benefit of shareholders on or after 1 January 2011. The directors of the
company must have determined that the amount was transferred from
contributed tax capital. The transfer of contributed tax capital must be
proportionate in relation to the shares held in that class.
490
11.9 Chapter 11: Taxation of companies and company distributions
PLEASE NOTE
With effect from 1 January 2023, an amount is only allowed as a transfer from contributed
tax capital if all shareholders in the relevant class of shares participate in the transfer in the
same manner and are allocated an amount of contributed tax capital based on their
proportional shareholding in that class of shares. Hence, if a company makes a
distribution to only one of the shareholders in a particular class of shares, that distribution
cannot be funded from contributed tax capital and would therefore constitute a dividend
that may have dividends tax implications.
This requirement is not applicable to the acquisition by a company of its own securities by
way of a general repurchase in terms of the JSE listings requirements or the listings
requirements of any other exchange licenced under the Financial Markets Act that are
substantially similar to the JSE listings requirements.
Example 11.6
On 28 February 2023, Omni Ltd made a cash distribution to all Class A ordinary
shareholders in accordance with their proportionate shareholding in the Class A ordinary
shares of the company. Shareholder A has a 40% interest in the Class A ordinary shares of
Omni Ltd and is paid a distribution of R150 000. The directors of Omni Ltd issued a
resolution stipulating that the distribution to the Class A ordinary shareholders is made
from contributed tax capital. Omni Ltd issued 100 000 Class A ordinary shares at R1 each
on 1 March 2021 and has a Class A share premium of R50 000. No prior distribution has
been made from contributed tax capital.
You are required to determine the amount of the distribution to Shareholder A that
represents a dividend as defined. You can assume that Shareholder A holds the shares in
Omni Ltd as capital assets.
491
A Student’s Approach to Taxation in South Africa 11.9
Solution 11.6
The amount transferred to Shareholder A may be funded proportionally from the
contributed tax capital attributable to the Class A ordinary shares based on Shareholder
A’s interest in the Class A ordinary shares.
The contributed tax capital attributable to the Class A ordinary shares immediately before
the distribution on 28 February 2023 is determined as follows:
R
Consideration received by or accrued to Omni Ltd for issuing the Class A
ordinary shares (100 000 x R1) 100 000
Class A ordinary share premium 50 000
Less: amount transferred from contributed tax capital to Class A ordinary
shareholders on or after 1 January 2011. Rnil
Balance of contributed tax capital attributable to Class A ordinary shares 150 000
An amount transferred from contributed tax capital is excluded from the definition of a
dividend. Any reduction in contributed tax capital is determined pro rata for all
shareholders in the relevant class based on the number of shares held in that class.
R
Distribution paid to Shareholder A 150 000
Less: Shareholder A’s portion of contributed tax capital (R150 000 × 40%) (60 000)
Distribution that represents a dividend for Shareholder A 90 000
Since the shares in Omni Ltd is held as capital assets, the distribution received as
contributed tax capital would reduce the base cost of the Omni Ltd shares in the hands
of Shareholder A in terms of paragrpah 76B of the Eighth Schdule.
Where shares are issued by one company to another company, the provisions of
section 8G can apply. Section 8G seeks to combat schemes whereby South African
subsidiaries artificially increase their contributed tax capital, which is then applied to
fund capital distributions to their foreign shareholders. Targeted transactions typically
involve the issue of shares by a resident company to a non-resident shareholder com-
pany in exchange for consideration consisting of shares in another resident company
(the ‘target company’). This often creates a permanent loss to the fiscus since distribu-
tions from contributed tax capital do not constitute a ‘dividend’ and won’t result in
any dividends tax liability. Moreover, there are no capital gains tax consequences for
the foreign shareholder on the disposal of its shares in the target company if those
shares fall outside the South African CGT net (refer to chapter 10). In order to address
this tax loophole, section 8G limits the contributed tax capital in the hands of the
issuing company in such transactions.
492
11.9 Chapter 11: Taxation of companies and company distributions
REMEMBER
• A distribution of an amount classified as contributed tax capital will not result in
dividends tax.
• Should a company have different classes of shares, the contributed tax capital must be
calculated separately for each class of shares.
• The repurchase by a company of its own shares can result in a dividend to the extent
that it does not represent a reduction of contributed tax capital.
Example 11.7
Adi Ltd made the following distributions
31 May 2022: General repurchase of shares, in compliance with the listings requirements
of the JSE to the amount of R50 000. The repurchase was entirely funded by a share
premium (contributed tax capital) per the directors’ resolutions.
15 June 2022: R2,50 distribution per share. The company has 750 000 shares issued. R1 of
the distribution represent a reduction in contributed tax capital.
20 July 2022: Gratutious distribution to a trust in respect of its shareholding in the
company to the amount of R50 000.
30 September 2022: Distribution of trading stock with a market value of R30 000 to a
shareholder. The cost price of the trading stock was R20 000.
30 November 2022: Payment to Thabo Ndou, a shareholder to the amount of R15 000 for
services rendered to the company.
You are required to determine whether the distributions are a dividend as defined.
Solution 11.7
31 May 2022
The general repurchase of shares in terms of the JSE listings requirements are specifically
excluded from the definition of a dividend. The payment is made from contributed tax
capital which is also excluded from the definition of a dividend.
15 June 2022
A total amount of R1 875 000 (R2,50 × 750 000 shares) was distributed to shareholders
(any person holding a share in Adi Ltd). R750 000 (R1 × 750 000 shares) of the amount
represents contributed tax capital, which is excluded from the definition of a dividend.
The amount distributed to shareholders of R1 125 000 out of profits represents an amount
transferred for the benefit of shareholders of the company in respect of shares they held
in the company. As such it represents a dividend.
continued
493
A Student’s Approach to Taxation in South Africa 11.9
20 July 2022
The distribution to the trust of R50 000 is in respect of the trust’s shareholding in the
company. The amount represents a dividend.
30 September 2022
A dividend is any amount transferred or applied by a company in respect of any share
in that company. An amount can be in cash or otherwise (Lategan). The distribution of
trading stock thus represents an amount distributed to shareholders other than cash,
namely a dividend in specie of R30 000, being the market value of the trading stock.
30 November 2022
The amount paid to Thabo Ndou is for services rendered. Even though he is a share-
holder, it should be noted that the amount was distributed not in respect of any share in
the company. The amount of R15 000 is therefore not a dividend.
Example 11.8
Vuzi (Pty) Ltd is a South African resident company. All of Vuzi (Pty) Ltd’s shareholders
are natural persons. There has not been a movement in the equity of the company since
the effective date. Equity consists of:
R
Ordinary shares 280 000
Share premium 60 000
Retained profits 150 000
490 000
Peter Janse received 500 shares in exchange for services rendered. The value of the ser-
vices rendered amounted to R80 000.
You are required to calculate the value of contributed tax capital after the above-men-
tioned transaction.
Solution 11.8
Calculation of contributed tax capital:
R
Ordinary shares 280 000
Share premium 60 000
Services rendered 80 000
Contributed tax capital 420 000
494
11.9 Chapter 11: Taxation of companies and company distributions
Example 11.9
Encor Ltd, a resident company listed on the JSE declares a cash dividend on 1 June. The
last day to register for the dividend is 15 June when the dividend becomes due and
payable. The date of payment is 1 July.
You are required to state when the dividends are deemed to be paid for dividends tax
purposes (that is to say when the liability for dividends tax will be triggered).
495
A Student’s Approach to Taxation in South Africa 11.9
Solution 11.9
As the company is a listed company, the dividend is deemed to be paid on the date that it
is actually paid, namely 1 July.
Note
If the company had declared a dividend in specie, the dividend would have been deemed
to have been paid on the earlier of when it became due and payable or when it was
actually paid. The dividends tax liability would therefore have been triggered on 15 June.
Example 11.10
A dividend amounting to R250 000, was paid by a resident company to holders of shares
who are not exempt from dividends tax.
You are required to calculate the dividends tax to be paid over to SARS as well as the
amount of dividends that the holders of shares will receive.
Solution 11.10
The dividends tax liability will amount to R50 000 (R250 000 × 20%). The beneficial
owners will receive a dividend of R200 000, and R50 000 dividends tax will be paid over
to SARS by the resident company on behalf of the beneficial owners. For normal tax
purposes, the beneficial owners must include the gross dividend (instead of the amount
net of dividends tax that was actually received) in their gross income.
REMEMBER
• Dividends tax is a separate tax from normal tax and will be charged regardless of
whether or not the individual is in an assessed loss position for normal tax purposes.
• A dividend in specie is a distribution of a dividend other than cash. A resident company
paying a dividend in specie will be liable for dividends tax on the distribution, not the
beneficial owner, as in the case of a cash dividend.
Example 11.11
ZNM Ltd is a resident listed company. The company declared a distribution of shares in
their subsidiary company, NIK Ltd (also a listed company), to its shareholders (all natural
persons). The ruling price of the NIK Ltd shares on the relevant stock exchange at close of
business on the last business day before the day that the distribution was approved by the
directors amounted to R17 per share. The ruling price of the NIK Ltd shares at close of
business on the day that the distribution was approved by the directors, was R15 per
share. A total number of 100 000 shares in NIK Ltd were distributed by ZNM Ltd.
The directors of ZNM Ltd determined that the NIK Ltd shares were to be transferred to
its shareholders on the date that the distribution was approved by the directors. The
actual transfer of the shares only took place after the date that the distribution was
approved when the ruling price of the shares was R20 per share.
You are required to calculate the dividends tax liability of the distribution in specie.
496
11.9 Chapter 11: Taxation of companies and company distributions
Solution 11.11
Since the distribution constitutes a dividend in specie, dividends tax has to be levied at
20% on the earlier of the date that the dividend is paid (that is the date that the shares are
actually transferred) or the date that the dividend becomes due and payable (that is the
date that the distribution was approved by the directors). In the present scenario, the
dividends are therefore deemed to be paid on the date that the distribution was approved
by the directors.
The assets in this case are financial instruments listed on a stock exchange (that is the
listed shares in NIK Ltd). The amount of the dividend is thus R17 per share (this is the
ruling price of the NIK Ltd shares at close of business on the last business day before the
date that the dividend is deemed to be paid) × 100 000 = R1 700 000. The dividends tax
liability will be R340 000 (R1 700 000 × 20%).
Note
Should NIK Ltd have been an unlisted company, the value of the dividend in specie would
have been the market value on the day that the distribution was approved by the
directors (that is to say when it became due and payable).
How will the answer differ if NIK Ltd was an unlisted company?
497
A Student’s Approach to Taxation in South Africa 11.9
• the Council for Scientific and Industrial Research, the South African Inventions
Development Corporation or the South African National Roads Agency Limited
and other qualifying entities as referred to in section 10(1)(t);
• a holder of shares in a registered micro business, to the extent that the aggregate
amount of dividends paid during a year of assessment does not exceed R200 000;
• a person who is not a resident if the dividend is paid by a foreign company in
respect of a South African listed share;
• any person to the extent that the dividend constitutes income of that person (for
example, a dividend or foreign dividend that is not exempt from normal tax in
terms of section 10(1)(k)(i) or 10B);
• any person to the extent that the dividend was subject to secondary tax on com-
panies;
• any fidelity or indemnity fund contemplated in section 10(1)(d)(iii); or
• a small business funding entity.
REMEMBER
A company is not automatically exempt from its obligation to withhold dividends tax if
the provisions of section 64F apply. In order to qualify for these exemptions, the person to
whom the payment is made must provide the company with the prescribed declarations
and written undertakings before the dividend is paid (section 64G). This does not apply if
the beneficial owner forms part of the same group of companies (as defined in section 41)
as the company or if the payment is made to a regulated intermediary.
Step 2: Establish whether the beneficial owner of the dividend is exempt from
dividends tax.
Step 3: Multiply the dividend paid that is not exempt from dividends tax by
20%.
498
11.9 Chapter 11: Taxation of companies and company distributions
Example 11.12
Roderick Ltd, a resident company, declared a dividend as defined in section 64D of
R65 000. The dividend was paid to the following shareholders (that did not form part of
the same group of companies as Roderick Ltd) according to their interest in Roderick Ltd:
• PTS (Pty) Ltd, a resident company with a 25% interest (Note 1);
• DeCo Ltd, a locally listed resident company with a 15% interest (Note 2);
• MacNaught Ltd, an approved PBO with a 20% interest; and
• Mr Joe Rodderick, a resident with a 40% interest.
Notes
1. PTS (Pty) Ltd proceeded to declare the full dividend received from Roderick Ltd to its
shareholders. PTS (Pty) Ltd is a registered micro business, and this is the first dividend
that it has declared for this year of assessment.
2. DeCo Ltd declared the full dividend received from Roderick Ltd to its shareholders,
who are all natural persons.
You are required to calculate the amount of dividends tax that Roderick Ltd, PTS (Pty)
Ltd and DeCo Ltd is required to withhold in respect of each of the dividends paid.
Solution 11.12
Roderick Ltd
• No dividends tax will be withheld on the dividend declared to PTS (Pty) Ltd.
Dividends paid to a resident company are exempt from dividends tax (Note 1).
• No dividends tax will be withheld on the dividends declared to DeCo Ltd. Dividends
paid to a resident company are exempt from dividends tax (Note 1).
• No dividends tax will be withheld on the dividends declared to MacNaught Ltd, as it
is an approved public benefit organisation that is exempt from dividends tax (Note 1).
• Dividends tax of R5 200 (R65 000 × 40% × 20%) will be withheld by Roderick Ltd on
behalf of Mr Joe Roderick.
Note 1
The exemptions from dividends tax in terms of section 64F are not automatic exemptions.
In each of these cases, the person to whom the dividend is paid (for example, resident
companies and approved PBOs) should submit the prescribed declaration and written
undertaking to Roderick Ltd before the dividend is paid. A declaration should be made
by the beneficial owner of the dividend that the dividend is exempt from dividends tax in
terms of section 64F(1). The declaration should be accompanied by a written undertaking
to, going forward, inform Roderick Ltd should the circumstances affecting the exemption
change or should the beneficial owner cease to be the beneficial owner of the dividend.
PTS (Pty) Ltd
The dividend declared to the shareholders of PTS (Pty) Ltd will be exempt from divi-
dends tax, as a holder of a share in a registered micro business is exempt from dividends
tax to the extent that the aggregate dividends paid by that micro business to all holders of
shares do not exceed R200 000 for the year of assessment.
DeCo Ltd
The full dividend paid by DeCo Ltd to its shareholders will be subject to dividends tax of
R1 950 (R65 000 × 15% × 20%).
499
A Student’s Approach to Taxation in South Africa 11.9
REMEMBER
• The beneficial owner is the person who is entitled to the benefit of the dividend attaching
to a share and is not necessarily the registered owner of that share (section 64D).
500
11.9 Chapter 11: Taxation of companies and company distributions
REMEMBER
• If a taxpayer enters into a transaction in a foreign country, they may experience the
problem of being taxed in both their country of residence and the foreign country. A
DTA is a means through which a taxpayer can obtain relief in the case of double taxation.
Step 1: Establish whether the beneficial owner of the dividend is exempt from
dividends tax in terms of section 64F or a DTA and whether the pre-
scribed declaration and written undertaking have been received from
the person to whom the payment is made, if required.
Step 4: Multiply the amount of the dividend (step 3) that is not exempt from
dividends tax by 20%.
Example 11.13
• On 1 June 2022, Roderick Ltd, a resident company, distributed unlisted shares with a
market value of R100 000, which it held as an investment, to some of its shareholders.
These shareholders are all resident companies and do not form part of the same group
of companies as Roderick Ltd.
• On 1 July 2022, Roderick Ltd made a further distribution of 1 000 of its own shares
(which has a market value of R5 each) to all of its registered shareholders who are
natural persons.
• On 1 August 2022, the company distributed a laptop with a market value of R7 000 to a
shareholder who is a natural person.
continued
501
A Student’s Approach to Taxation in South Africa 11.9
Note
You can assume that Roderick Ltd has timeously obtained all the prescribed declarations
and written undertakings from the persons to whom the dividends were paid, where
applicable. All dividends were paid on the date of distribution.
You are required to discuss the dividends tax implications that will result from each of
the aforementioned transactions.
Solution 11.13
• The distribution of shares held as investments constitutes a dividend in specie and
Roderick Ltd will be liable for the dividends tax. However, since the beneficial owners
are resident companies that would have been exempt from dividends tax in terms of
section 64F if the dividends did not consist of a dividend in specie and since Roderick
Ltd has obtained the prescribed declarations and written undertakings from the
persons to whom the dividends were paid, the dividends will be exempt from
dividends tax in terms of section 64FA.
• Roderick Ltd is not liable for dividends tax on the distribution of 1 000 of its own
shares as the latter does not constitute a dividend as defined (refer to paragraph (ii) of
the definition of ‘dividend’ in section 1).
• The distribution of a laptop constitutes a dividend in specie and Roderick Ltd will be
liable for the dividends tax. Since the shareholder is a natural person which does not
qualify for any of the exemptions listed in section 64F, the dividend would not be
exempt from dividends tax. The company is therefore liable for dividends tax of
R1 400 (R7 000 × 20%). Since the dividend was paid on 1 August 2022, the dividends
tax must be paid over by Roderick Ltd to SARS on or before 30 September 2022,
namely the last day of the month following the month during which the dividend was
paid by the company.
The distribution of the laptop will trigger a recoupment for Roderick Ltd under sec-
tion 22(8)(b)(iii) if the laptop was held as trading stock or, if the laptop was held as a
capital asset, it will trigger a recoupment under section 8(4)(k). In terms of para-
graph 75 of the Eighth Schedule, Roderick Ltd will be deemed to have disposed of the
laptop at market value on the date that the distribution becomes due and payable,
which could result in a possible capital gain or loss for the company. The shareholder
would further be deemed to have immediately acquired this asset for the same market
value, which will constitute the base cost of the laptop in the shareholder’s hands.
502
11.9–11.10 Chapter 11: Taxation of companies and company distributions
Example 11.14
Non-Resident Plc, a non-resident company, owns shares in Rota (Pty) Ltd. Non-Resident
Plc ceded the rights to all future dividends in respect of its shares in Rota (Pty) Ltd to a
resident company, Republico Ltd, in exchange for R90 000. After such cession, Rota (Pty)
Ltd declared and paid a dividend of R100 000 to Republico Ltd. Republico Ltd’s rights in
the shares of Rota (Pty) Ltd is limited to the right to receive dividends in respect of such
shares. The applicable DTA between South Africa and Non-Resident Plc’s country
specifies a 5% dividends tax.
Your are required to calculate the dividends tax effect of the dividend declaration.
Solution 11.14
Non-Resident Plc R
Dividend 100 000
Dividends tax at 5% payable by Non-Resident Plc 5 000
Note
Since Republico Ltd, which is exempt from dividends tax in terms of section 64F,
acquired a right to a dividend by way of cession and then received an amount in respect
of such a dividend, the provisions of section 64EB(1) must be applied. Non-Resident Plc
will therefore be deemed to be the beneficial owner of the dividend amounting to R100
000.
503
A Student’s Approach to Taxation in South Africa 11.10
The dividends tax must then be paid to SARS by the last day of the month following
the month during which the dividend was deemed to have been paid (section
64K(1)). In addition, a dividends tax return must be submitted to SARS by the same
date that the payment of the dividends tax is due to SARS.
A company must not withhold any dividends tax from the payment of a dividend if
(section 64G(2)):
• the dividend is exempt from dividends tax in terms of section 64F or a DTA and
the person to whom the dividend is paid has submitted the prescribed declaration
and written undertaking to the company before the date that the dividend is paid
(as determined under section 64E(2)(a));
• the beneficial owner is part of the same group of companies as more narrowly
defined in section 41 (refer to 11.2); or
• the payment is made to a regulated intermediary.
A company must withhold dividends tax at a reduced rate if:
• the dividend is subject to dividends tax at a reduced rate as a result of the applica-
tion of a DTA and the person to whom the dividend is paid submitted the pre-
scribed declaration and written undertaking (section 64G(3)).
Example 11.15
Julie Lily is a non-resident shareholder of Timber Ltd, a resident listed company. A
dividend was declared to shareholders by Timber Ltd and Julie Lily received R20 000. She
submitted the prescribed declaration and written undertaking to Timber Ltd that,
according to the DTA, South Africa is limited to withhold dividends tax at 5% on
dividends declared.
You are required to calculate the dividends tax to be withheld.
Solution 11.15
Timber Ltd will be allowed to withhold R1 000 (R20 000 × 5%) dividends tax from the
dividend paid to Julie Lily.
If a company pays a dividend and withholds dividends tax, the company would be
deemed to have paid the amount so withheld to the person who received the divi-
dend. The gross amount of the dividend (that is to say before reducing it with the
dividends tax withheld) must therefore be included in the gross income of the benefi-
cial owner.
504
11.10–11.11 Chapter 11: Taxation of companies and company distributions
REMEMBER
• For a dividend to be exempt from dividends tax or for dividends tax to be withheld at a
reduced rate, the person to whom the dividend is paid must submit the prescribed dec-
laration by the beneficial owner to the company declaring the dividend. The declaration
must be submitted in the form prescribed by the Commissioner before the dividend is
paid. The person receiving the dividend must also submit a written undertaking in the
form prescribed by the Commissioner to, going forward, inform the company in writ-
ing should the circumstances affecting the exemption change or the beneficial owner
cease to be the beneficial owner.
• A declaration and written undertaking are not required when a dividend is paid within
a group of companies contemplated in section 41 or where the dividend is paid to a
regulated intermediary.
• No declarations or written undertakings are required when a dividend is paid within a
group of companies contemplated in section 41 or where the dividend is paid to a regu-
lated intermediary.
• The prescribed declaration and written undertaking that a company is required to
obtain from a person in order to withhold dividends tax of Rnil or at a reduced rate is
only valid if it is not older than five years.
505
A Student’s Approach to Taxation in South Africa 11.11–11.12
REMEMBER
• A person to whom a dividend was paid is entitled to obtain a refund of dividends tax
withheld should the beneficial owner be exempt from dividends tax or if dividends tax
should have been withheld at a reduced rate and the prescribed declaration and written
undertaking were not timeously submitted. The prescribed declaration and written un-
dertaking must be submitted within three years after the date of paying the dividend in
order to qualify for the refund.
506
11.12–11.13 Chapter 11: Taxation of companies and company distributions
REMEMBER
• The payment of dividends tax to SARS is due on the last day of the month following the
month during which the dividend was deemed to have been paid.
• Should the payment be late, interest is charged at the prescribed rate. No late payment
penalties apply.
How to calculate dividends tax for local dividends (in cash and in specie) as
well as on foreign dividends (cash only) declared by South African listed
companies
Step 2: Examine all the beneficial owners to determine who will be exempt
from dividends tax (refer to 11.9.6 and 11.9.7).
Step 3: Calculate dividends tax on the amount of dividends (after step 2) for
all beneficial owners that are not exempt from dividends tax by multi-
plying the amount of the dividend by 20%.
For a cash dividend only:
The net amount of the dividend remaining after subtracting the divi-
dends tax liability (if applicable) must be paid to the beneficial owner(s),
as the liability for dividends tax falls on the beneficial owner.
Step 4: The company must pay over the dividends tax withheld to SARS by
the last day of the month following the month in which the dividend
is deemed to be paid (refer to 11.10 for the withholding of dividends
tax and 11.12 for payment). The company is responsible to pay the
dividends tax on a dividend in specie, as the liability rests with the
company, on the last day of the month following the month in which
the dividend is deemed to be paid.
Shareholders (who are normally the beneficial owners of the dividends) are also
subject to dividends tax on the dividends paid to them by a company. The company
is responsible for withholding the dividends tax on the dividends paid.
507
A Student’s Approach to Taxation in South Africa 11.13–11.15
Resident natural persons who receive dividend payments will receive an amount net
of dividends tax. The gross amount of the dividend that is received by or accrues to
that person must be included in gross income and declared in the person’s income tax
return (ITR12). Non-resident individuals may qualify for a reduced rate of dividends
tax in terms of the relevant DTA if the requirements are met.
11.14 Summary
In this chapter, the tax principles applicable to companies were examined. It was
found that the calculation of the taxable income for companies does not differ materi-
ally from the calculation of the taxable income for natural persons. Companies
(except small business corporations, personal service providers and foreign branches)
pay tax at a fixed rate and not on a sliding scale.
Companies are liable to withhold a separate tax on the declaration of dividends at a
rate of 20%. Dividends tax is withheld on local cash dividends as well as foreign cash
dividends declared by foreign listed companies. In terms of a dividend in specie
declared by a local company, the company declaring the dividend is responsible to
pay the dividends tax.
The following section contains a number of practical questions that the student may
use to test his knowledge of the taxation of companies.
Question 11.1
Transworld Ltd is an unlisted company incorporated in the Republic with a year of assess-
ment that ends on the last day of February of each year. Transworld Ltd only has one class
of shares in issue. A dividend of R500 000 was declared to all shareholders of Transworld
Ltd on 30 June during the current year of assessment. The directors of the company stated
that the distribution represents a reduction in contributed tax capital of R100 000.
Transworld Ltd’s shareholders consists of the following:
• ADM Ltd – a JSE listed resident company (50%) (Note 1)
• Dwayne Barnacle – a South African resident (24%)
• Barnacle Family Trust – (20%). The beneficiaries of the trust have a vested right to
income and consists of Dwayne’s two major children (Mary and John) who share
equally in income accruing to the trust.
EduBooks – (6%), an approved public benefit organisations in terms of section 30 (Note).
Note:
You can assume that all the prescribed declarations and written undertakings are in place.
508
11.15 Chapter 11: Taxation of companies and company distributions
Answer 11.1
Amount subject to dividends tax: R
Dividend declared 500 000
Less: Portion contributed tax capital (100 000)
Share capital 75 000
Share premium 25 000
Amount classified as a dividend 400 000
Shareholders
ADM Ltd (Listed resident company – exempt) 50%
Dwanye (Not exempt) 24%
Edubooks (Approved public benefit organisation – exempt) 6%
Barnacle Family Trust (Not exempt) 20%
100%
Dividend tax liability
ADM Ltd
Dividend accrued: (R400 000 × 50%) 200 000
No dividends tax, ADM Ltd is exempt
Dwayne
Dividend accrued (R400 000 × 24%) 96 000
Dividends tax liability (R96 000 × 20%) 19 200
Edubooks
Dividend accrued (R400 000 × 6%) 24 000
No dividends tax, PBO is exempt
Barnicle Family Trust
• Dividend accrued (R400 000 × 20%) 80 000
• Mary (R80 000 / 2) 40 000
• Dividends tax (R40 000 × 20%) 8 000
• John (R80 000 / 2) 40 000
• Dividends tax (R40 000 × 20%) 8 000
509
12 Prepaid taxes
12
Gross Exempt
– – Deductions = Taxable income Tax payable
income income
Page
12.1 Introduction............................................................................................................ 512
12.2 Employees’ tax (paragraphs 1 to 11A) ................................................................ 512
12.3 Calculation of employees’ tax (paragraphs 1 to 11A) ....................................... 513
12.3.1 Employee................................................................................................... 514
12.3.2 Remuneration ........................................................................................... 514
12.3.3 Balance of remuneration ........................................................................ 516
12.3.4 Employees’ tax.......................................................................................... 517
12.3.5 Annual amounts received (including variable
remuneration) (section 7B)...................................................................... 519
12.4 Identifying the correct employees’ tax rate ........................................................ 523
12.4.1 Process for identifying correct rate to use ............................................ 525
12.4.2 Personal service provider ....................................................................... 526
12.4.3 Independent contractor ........................................................................... 527
12.4.4 Labour broker ........................................................................................... 529
12.4.5 Employees’ tax for directors of private companies and
members of close corporations ............................................................... 530
12.4.6 Employees’ tax for directors of public companies............................... 530
12.4.7 Seasonal workers...................................................................................... 531
12.4.8 Awards by the CCMA and the Labour Court ...................................... 531
12.5 Administration of employees’ tax (paragraphs 13 to 15) ................................. 531
511
A Student’s Approach to Taxation in South Africa 12.1–12.2
Page
12.6 Provisional tax (paragraphs 17 to 27) ................................................................. 531
12.6.1 Persons liable for provisional tax ........................................................... 532
12.6.2 First provisional payment ....................................................................... 534
12.6.3 Second provisional payment .................................................................. 539
12.6.4 Third provisional payment ..................................................................... 541
12.6.5 Penalties and interest ............................................................................... 543
12.7 Summary................................................................................................................. 545
12.8 Examination preparation ...................................................................................... 545
12.1 Introduction
There are three main ways that SARS collects the income tax that is due to them: Pay-
as-you-earn (PAYE), provisional tax and tax due on assessment. Both PAYE and
provisional tax are collected during the year and are referred to as prepaid taxes.
PAYE is the tax withheld by an employer from the remuneration that that employer
paid to their employee. Such tax is referred to as employees’ tax and is paid over to
SARS on behalf of the employee. This tax is not an addition to normal income tax. It is
a prepayment of the employee’s income tax due at the end of the year of assessment.
It is therefore merely a method SARS uses to collect the normal income tax due for
that year.
Where a taxpayer is a company or an individual who earns other income, which is
not from employment, such as interest, royalties, rental or income from a trade other
than employment, SARS uses another method to collect the tax that is due to it from
such non-employment income. This other method of collection is called provisional
tax. It is, however, important to realise that provisional tax is also not a new or addi-
tional tax that is being levied. It, again, is only a method of collecting the normal
income tax that is due to SARS for the year of assessment. Employees’ tax is a method
of collecting the tax on remuneration (such as salaries) monthly whereas provisional
tax is a method of collecting the tax on other income on a six-monthly basis. All
companies, but not all individuals, are provisional taxpayers .
512
12.2–12.3 Chapter 12: Prepaid taxes
dividing the annual tax amount by 12. This monthly amount is withheld by the em-
ployer from the remuneration paid to the employee and is then paid over to SARS on
a monthly basis on behalf of the employee.
The explanation above gives a simplified view of how employees’ tax is calculated.
Depending on how the taxpayer is categorised as an employee, there are different
rules for the calculation of the tax that should be deducted and withheld by the
employer. These rules have been extended to combat specific tax avoidance schemes.
It is therefore important to first identify which category the employee falls into in
order to calculate employees’ tax. Most employees are permanent employees and the
normal tax table would be used.
REMEMBER
• Before employees’ tax can be calculated, there must be an employee/employer relation-
ship. ‘Employee’ and ‘employer’ are defined in the Fourth Schedule.
• Employees’ tax is not different from income tax; it is just a method of collecting the
annual tax that is owed by a taxpayer to SARS.
• The employer withholds employees’ tax on behalf of SARS and acts as an agent for
SARS in this regard.
• Income received on normal investments and other trades, for example interest on a
savings account or rental received, will not be subject to employees’ tax as it is not an
amount received from an employer (that is to say not remuneration).
Step 6: Calculate the tax for the period of employment (answer of Step 5 / 12
months, if for one month).
513
A Student’s Approach to Taxation in South Africa 12.3
Employees earning remuneration must pay employees’ tax on the balance of remu-
neration received from an employer. Before the calculation can be done, the require-
ments as set out in the steps above must be complied with. In order to comply with
the requirements, a number of definitions as set out in the Act must be met.
REMEMBER
• The taxpayer’s age at the end of the year of assessment (28/29 February) should be
used in order to determine the amount of the rebates (primary, secondary and tertiary
rebates as well as the medical tax credits (where applicable)) when calculating the tax
due for the year.
12.3.1 Employee
An ‘employee’ is defined in paragraph 1 of the Fourth Schedule as:
• a person (other than a company) who receives remuneration or to whom remuner-
ation accrues;
• a person who receives remuneration or to whom remuneration accrues by reason of
services rendered by such person to or on behalf of a labour broker;
• a labour broker (refer to 12.4.4);
• a person (or class or category of person) whom the Minister of Finance by
notice in the Government Gazette declares to be an employee for the purposes
of this definition; or
• a personal service provider (refer to 12.4.2).
12.3.2 Remuneration
‘Remuneration’ is defined in paragraph 1 of the Fourth Schedule and includes income
received whether in cash or otherwise and whether or not in respect of services
rendered, including:
• salary;
• leave pay;
• wage;
• overtime pay;
• bonus;
• gratuity;
• commission;
• fee;
• emolument;
• pension;
• superannuation allowance;
• retiring allowance;
• stipend;
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12.3 Chapter 12: Prepaid taxes
• annuity;
• an amount paid that can be linked to services rendered or to be rendered;
• voluntary awards in respect of employment;
• an amount received by or accrued to a labour broker;
• an amount received by or accrued to a personal service provider or personal ser-
vice company or personal service trust;
• restraint of trade payments;
• amount received or accrued in respect of relinquishment, termination, loss, repu-
diation, cancellation or variation of an office or employment or appointment;
• retirement fund lump sum benefits;
• retirement fund lump sum withdrawal benefits;
• lump sum payments from employers;
• payments made in commutation of amounts due under a contract of employment
or service;
• fringe benefits (excluding right of use of motor vehicle);
• the first 80% of gross travel allowance except where the employer is satisfied that
the motor vehicle will be used at least 80% of the time for business purposes, then
the amount included in remuneration is only 20%;
• 50% of the gross allowance paid to a holder of a public office (section 8);
• first 80% of the taxable benefit for the right of use of a motor vehicle (except where
the employer is satisfied that the motor vehicle will be used for business purposes
at least 80% of the time during the current year of assessment, then the amount
included in remuneration will only be 20% of the fringe benefit);
• a reimbursive travel allowance based on actual kilometres travelled, as exceeds the
prescribed rate per kilometre;
• any other allowance;
• any gain on qualifying equity shares of a broad-based employee share plan
referred to in section 8B;
• an amount from equity instruments that is required to be included in taxable
income in terms of section 8C;
• amounts withdrawn by the member from retirements funds in terms of a mainten-
ance order contemplated in section 7(11); and
• certain dividends received after 1 March 2017 relating to section 8C equity shares.
Remuneration excludes:
• payment for services to a person who carries on an independent trade (refer to
12.4.3) other than
– payments made to a person who receives remuneration or to whom remunera-
tion accrues by reason of services rendered by such person to or on behalf of a
labour broker; a labour broker or person (or class or category of person),
515
A Student’s Approach to Taxation in South Africa 12.3
REMEMBER
• The current rate per kilometre fixed by the Minister of Finance (for purposes of the
provisions of a reimbursive travel allowance) is R4.18 per kilometre.
• If a person receives a subsistence allowance because they are required to be away from
home for at least one night for business purposes, the allowance will not form part of
remuneration in the month they receive it. If, by the end of the following month they
have not been away from home on business, this amount is deemed to be paid for
services rendered and included in remuneration for that month.
516
12.3 Chapter 12: Prepaid taxes
REMEMBER
• The employer’s contribution to a retirement fund (pension, provident and retirement
annuity fund) is a taxable fringe benefit and it will be a deemed contribuion in the
hands of the employee. Both the employer and employee contributions should therefore
be taken into account in order to calculate the section 11F deduction.
Example 12.1
Peter Ntho (53 years of age) is employed by Gert Ltd. Peter earns the following from
Gert Ltd: a salary of R9 000 per month, an entertainment allowance of R500 per month
and a travelling allowance of R5 000 per month. He contributes R400 per month to a
retirement annuity fund, which his employer has agreed to take into account when
calculating employees’ tax since he provided proof of payment thereof to his employer.
Peter incurred entertainment expenses amounting to R350 per month during the
current year of assessment. He is not a member of a pension fund.
You are required to calculate the monthly employees’ tax that Gert Ltd must deduct during
the current year of assessment.
517
A Student’s Approach to Taxation in South Africa 12.3
Solution 12.1
Peter is employed by Gert Ltd, therefore he is an employee R
Remuneration:
Salary received 9 000
Entertainment allowance received 500
Travel allowance received (R5 000 × 80%) 4 000
Remuneration 13 500
Less:
Retirement fund contributions (Note) (400)
Entertainment expenses – not deductible (section 23(m)) nil
Balance of remuneration 13 100
Annual equivalent remuneration (R13 100 × 12 months) 157 200
Tax per tax table (R157 200 × 18%) 28 296
Less: Rebate (16 425)
Tax for the year 11 871
Employees’ tax per month (R12 582/ 12 months) 989
Note
The retirement annuity fund contribution is limited to the lesser of
• R350 000 / 12 = R29 167; or
• 27,5% of the higher of remuneration (R13 500) or taxable income (the employer will
not know about other taxable income and therefore the employer will base this deduc-
tion on remuneration only for purposes of calculating employees’ tax) therefore 27,5%
× R13 500 = R3 713; or
• taxable income before this deduction and taxable capital gain (the employer will not
have this information available and therefore this limitation will not be applicable in
calculating employees’ tax).
Therefore, the limitation is R3 713 per month.
The actual contribution is less, therefore the R400 per month can be deducted in full.
518
12.3 Chapter 12: Prepaid taxes
REMEMBER
• The section 11F deduction will be re-calculated on assessment as the ‘taxable income’
limitation can change due to income and deductions being included in the calculation
of taxable income from sources other than employment.
• If the balance of remuneration was calculated for only a month, it must be multiplied by
12 in order to calculate the annual equivalent. If, however, the balance of remuneration
was for a period of, for example, 7 months, the balance of remuneration calculated for
the 7 months must first be divided by 7 to get to a monthly average amount and must
then be multiplied by 12 to get to the annual equivalent.
• If an employee receives a fringe benefit, the value of the benefit must be determined
according to the rules of the Seventh Schedule (chapter 6). The value of the fringe bene-
fit must be included in the remuneration.
• If an employee works for more than one employer during the year of assessment, each
employer will perform their own employees’ tax calculation. The separate amounts
received by the employee are only added together when their tax return is completed at
the end of the year of assessment.
• In the examples, months are used to calculate the tax period. In practice, the annual
equivalent and the PAYE payable are calculated by using the number of days in the tax
period in relation to a total of 365/366 days or the number of weeks in relation to 52
weeks.
519
A Student’s Approach to Taxation in South Africa 12.3
Step 1: Calculate the net normal tax on the annual equivalent of the balance of
remuneration, excluding the annual payment (refer to 12.3.4).
Step 2: Calculate the net normal tax on the total annual equivalent (including
the annual payments) of the balance of remuneration. Total annual
equivalent is calculated by adding the annual remuneration amount(s)
received to the annual equivalent of the balance of remuneration (as
calculated in Step 1).
Step 3: Calculate employees’ tax on the annual amount by deducting the net
normal tax on the annual equivalent of the balance of remuneration
from the net normal tax on the total annual equivalent (Step 2 to Step 1).
REMEMBER
• The taxable portion of a bursary is regarded as an annual payment.
• The bonus is already an annual amount and should not also be multiplied by 12 in
order to calculate the annual equivalent.
2024 amendment
• From the 2024 year of assessment, section 7B will also apply to any amount of ‘re-
muneration’ as defined in paragraph 1 of the Fourth Schedule (other than a bonus)
that is determined based on the employee’s work performance.
• Where an employee dies during the year of assessment, before the date of payment,
the amount subject to section 7B will be included in the income of the taxpayer (and
deducted from the employer’s income) on the day prior to the date of death of the
employee.
Example 12.2
Joe Dlamini (66 years old, unmarried) is employed on a full-time basis at Dirk Ltd. Dur-
ing the current year of assessment, Joe earned a salary of R18 000 per month and a travel
allowance of R3 000 per month. At the end of December, Joe also received the following
amounts from his employer: taxable bursary of R3 000 and a bonus of R15 000. He paid
pension fund contributions of R500 per month and medical aid contributions of R400
per month (his employer did not contribute to these funds, but Joe provide proof of
these payments to his employer). Joe paid R3 000 in qualifying medical costs that were
not refunded by his medical aid but did not supply the proof of this to his employer.
You are required to calculate the employees’ tax that will be withheld on Joe’s bonus
and bursary payment.
520
12.3 Chapter 12: Prepaid taxes
Solution 12.2
R
Salary received 18 000
Travel allowance received (Note 1) 2 400
Remuneration 20 400
Less:
Retirement fund contributions (Note 2)
Limited to the lesser of R350 000 / 12 = R29 167 or (500)
27,5 % × remuneration (R20 400) = R5 610 per month, therefore the limit is
R5 610 so the contributions can be allowed in full
Balance of remuneration excluding annual amounts 19 900
Annual equivalent balance of remuneration excluding annual amounts
(Note 3) 238 800
Tax on R238 800 per tax table
((R238 800 – R226 000) × 26% + R40 680) 44 008
Less: Primary and secondary rebate (R16 425 + R9 000) (25 425)
Less: Medical scheme fees tax credit (R347 × 12 months) (4 164)
Employees’ tax on annual equivalent remuneration
(excluding annual amounts) 14 419
Tax on R256 800 per tax table ((R256 800 – R226 000) × 26% + R40 680) 48 688
Less: Primary and secondary rebate (as above) (25 425)
Less: Medical scheme fees tax credit (as above) (4 164)
Employees’ tax on total remuneration 19 099
Tax payable on bonus and bursary payment
Employees’ tax on total remuneration (including annual amounts) 19 099
Less: Employees’ tax on annual equivalent balance of remuneration
(excluding annual amounts) (14 419)
Employees’ tax on bonus and bursary 4 680
continued
521
A Student’s Approach to Taxation in South Africa 12.3
Notes
1. The definition of remuneration states that 80% of the gross travel allowance
received is included in remuneration.
2. When calculating employees’ tax, the only deductions that are allowed are retirement
fund contributions and donations made by the employer on behalf of the employee.
The retirement fund contributions remain subject to the limitations of section 11F as
set out in chapter 5.
3. The annual equivalent remuneration is calculated as the actual monthly remuneration
received up until that point in time (for example for 10 months) divided by 10 (to get
the average) and then multiplied by 12 months to calculate the annual equivalent.
Since the actual remuneration was the same for each of the first 10 months, the calcu-
lation is therefore: (R19 900 × 10) / 10 × 12 = R238 800.
4. The annual amounts received must comply with the requirements of remuneration
before they can be included in the calculation.
REMEMBER
• The tax rate increases as a taxpayer’s income increases; therefore, the marginal tax rate
at which the bonus is taxed could be higher than the tax on the salary, even if the
amounts are the same.
• The bonus (or any annual payment) is added to the annual equivalent for the month in
which it is paid and not to the monthly remuneration. The bonus is therefore taxed at
the marginal rate of tax. The bonus is only included in the calculation of annual
equivalent in the month in which it is received.
• The steps for calculating tax on an annual amount may be applied in more than one
month if an employee receives an annual payment in more than one month. In such
case, remember that the amounts that were previously used as annual amounts must
also be included in the calculation of the total annual equivalent remuneration for the
month that the new annual payment is then received. For example, if a person receives
a bonus in September and in December, both months will have an annual equivalent
calculation. The December calculation must also include the annual amount received in
September since the annual equivalent must always be calculated by taking the actual
remuneration that was received up to that stage into account.
Example 12.3
Charles Tjale (35 years old) has been employed on a full-time basis by Sarel Ltd since
1 April of the current year of assessment. Charles earned a salary of R122 000 per month.
During December he received a performance bonus of R50 000.
You are required to calculate the total employees’ tax payable by Charles for the year of
assessment.
522
12.3–12.4 Chapter 12: Prepaid taxes
Solution 12.3
Remuneration: R
Salary received 122 000
Balance of remuneration 122 000
Annual equivalent balance of remuneration (R122 000 × 12) 1 464 000
Tax per tax table ((R1 464 000 – R817 600) × 41% + R239 452) 504 476
Less: Rebate (16 425)
Employees’ tax on the monthly balance of remuneration annual equivalent 488 051
Employees’ tax for the period on monthly income (R488 051 / 12 × 11) 447 380
Annual equivalent balance of remuneration 1 464 000
Add: Annual amounts received
Bonus received 50 000
Total annual equivalent remuneration received 1 514 000
Remuneration: R
Tax per tax table ((R1 514 000 – R817 600) × 41% + R239 452) 524 976
Less: Rebate (16 425)
Employees’ tax for the year on total remuneration 508 551
Less: Employees’ tax for the year on annual equivalent remuneration (488 051)
Employees’ tax on bonus (annual amount) 20 500
Total employees’ tax:
Employees’ tax on monthly income (April – February) 447 380
Add: Employees’ tax on bonus 20 500
Total employees’ tax for the period 467 880
523
A Student’s Approach to Taxation in South Africa 12.4
REMEMBER
• The tax directive is valid for only one tax year or for the period stipulated on the certifi-
cate.
• Tax directives issued to electronic clients via the SARS interface are valid directives.
• The tax directive can also be given to an employer who is a private company and who is
experiencing financial difficulty; this directive will determine how the amount due
must be paid.
• If the tax directive is for a fixed percentage, it must be applied to the amount received
before deducting retirement fund contributions.
524
12.4 Chapter 12: Prepaid taxes
Step 4: Determine whether the person is a labour broker (refer to 12.4.4) with
one of the following:
• an exemption certificate (refer to 12.4.4): No employees’ tax is
Yes: deducted.
• a tax directive: Deduct employees’ tax as per the directive.
No: • no exemption certificate or tax directive: Go to Step 5.
continued
525
A Student’s Approach to Taxation in South Africa 12.4
• is required to work at least five hours per day for less than R366 per
day.
Yes: Do not deduct any employees’ tax.
No: Go to Step 6.
Step 6: Determine whether the person falls into one of the following cate-
gories:
No: • Is the person in possession of a valid tax directive?
Calculate the employees’ tax in accordance with the instructions
provided by SARS in the tax directive.
• Does the person do seasonal work?
Calculate the employees’ tax in accordance with the guidelines for
seasonal workers (refer to 12.4.6).
• Is the person in standard employment?
Standard employment is when
– the person works at least 22 hours per complete week; or
– the person is prohibited from working for another employer; or
– the persons have declared that they are not working for an
employer.
The person is in standard employment and therefore the
Yes:
employees’ tax must be calculated in accordance with the
standard rules as set out in 12.2 and 12.3.
No: The person is not in standard employment and therefore the
employees’ tax must be calculated at a rate of 25% for natural
persons or 28% for companies.
REMEMBER
• The tax rate was reduced from 28% to 27% for a company or close corporation with a
year of assessment ending on or after 31 March 2023 (that is to say, where the year of
assessment of the company or close corporation commences on or after 1 April 2022).
526
12.4 Chapter 12: Prepaid taxes
• where more than 80% of the income of the company or trust during the year of
assessment, from services rendered, consists of (or is likely to consist of) amounts
received directly or indirectly from any one client or associated institution in relation
to the client,
except where, throughout the year of assessment, the provider employs three or more
full-time employees on a full-time basis to render such services (other than employees
who are shareholders or members of the company or connected persons in relation to
the shareholders or the trust).
These definitions give a wider meaning to the term employee than is normally under-
stood and were introduced to combat certain schemes to avoid the deduction of
employees’ tax by providing services through a company, close corporation or trust.
Payments for services provided by shareholders or members are subject to the deduc-
tion of employees’ tax.
If a company or a trust earns more than 80% of its income from one employer, that
employer must consider the company or trust to be a personal service provider
(except where the company or trust that renders the service employs three or more
employees on a full-time basis for the full year of assessment). If a person meets the
requirements of a personal service provider, the client paying for the services must
withhold employees’ tax at the higher rate (28%/45%). In cases where the person
provides the employer with an affidavit or solemn declaration, the employer can act
in good faith and need not withhold employees’ tax.
REMEMBER
• Employees’ tax is calculated at 28% on personal service providers that are companies
and 45% on personal service providers that are trusts. The rate of 28% decreased to 27%
for companies for years of assessment ending on or after 31 March 2023.
• Even if all of the other requirements of a ‘personal service provider’ are met, the com-
pany or trust will not be a personal service provider for tax purposes if the company or
trust employed three or more employees (not connected to the company or trust) who
are engaged in the business of such company or trust on a full-time basis.
527
A Student’s Approach to Taxation in South Africa 12.4
528
12.4 Chapter 12: Prepaid taxes
3. Does the contract of employment bind the ‘employed’ to perform specified work
or produce a specified result within a time fixed by the contract or within a rea-
sonable time where no time has been fixed?
Yes: The person is an independent contractor.
No: The person is not an independent contractor.
4. Is the person required to perform the services mainly at the premises of the
person to whom the services are rendered/at the premises of the persons by
whom the amount for the services is paid?
Yes: The person is not an independent contractor.
No: The person is an independent contractor.
REMEMBER
REMEMBER
• Only a natural person can be a labour broker as defined for tax purposes.
• A labour broker provides workers to other businesses and does not provide services to
other business.
• The labour broker will issue an invoice to the other businesses for the workers that were
supplied.
• The labour broker pays the workers; the workers are not paid by the other business
directly.
529
A Student’s Approach to Taxation in South Africa 12.4
REMEMBER
530
12.4–12.5 Chapter 12: Prepaid taxes
531
A Student’s Approach to Taxation in South Africa 12.5–12.6
month. If the amount is not paid over in time, there is a 10% penalty for late payment.
When making the payment, the employer must also submit their EMP201 form. The
EMP201 form provides SARS with the details of the payment. This form is also used
to pay the monthly SDL and UIF. This process is done online via SARS e-Filing.
Within 60 days after the end of the year of assessment (or 14 days after the date the
employee ceases to be an employee), the employer must issue an employee’s tax
certificate (IRP5) to each employee, showing the total remuneration earned by the
employee during the period and the total employee’s tax deducted. Before IRP5s can
be issued to employees, the employer must complete and submit an employee’s tax
reconciliation (EMP501) and only once this has been approved by SARS may the
IRP5s be issued to employees. This process is also done online and IRP5s are sub-
mitted electronically to SARS so that the employees’ tax returns (ITR12s) can be pre-
populated by SARS. Where an employer fails to submit an EMP501, a 10% penalty
based on the total amount of employees’ tax withheld, will be levied.
Employees’ tax reconciliations must be submitted biannually to SARS (1 March to
31 August and 1 September until 28/29 February). These biannual reconciliations
must be submitted by the date announced by the Commissioner.
REMEMBER
If an employee has not received a tax certificate within the specified period, the onus
is on them to apply immediately to the employer for it. They may also be issued with
a duplicate tax certificate if they lose the original.
532
12.6 Chapter 12: Prepaid taxes
of the assessment (that is 28/29 February). The taxpayer has the option of making
a third provisional payment before the end of September after the end of the year of
assessment.
Where the duration of the year of assessment of the taxpayer is not more than six
months (for example because the person ceased to be a resident for tax purposes),
the first payment is not required to be made. Furthermore, no estimate is required
to be made in respect of the period ending on the date of death of that person.
Therefore, no provisional tax return should be submitted and no payment should
be made by the executor of the estate of the deceased person.
533
A Student’s Approach to Taxation in South Africa 12.6
REMEMBER
• Tax threshold depends on the age of the taxpayer and for the 2023 year of assessment
the thresholds were
– below 65 years of age: R91 50 (that is to say the primary rebate of R16 425 divided by
the minimum tax rate of 18%);
– older than 65 and younger than 75 years: R141 250 (that is to say the total of the
primary and secondary rebates (R25 425) divided by the minimum tax rate of 18%);
– older than 75 years of age: R157 900 (that is to say the total of the primary, second-
ary and tertiary rebates (R28 422) divided by the minimum tax rate of 18%).
• Directors of private companies are regarded as employees and are not required to
automatically be registered as provisional taxpayers unless they have other business
income.
534
12.6 Chapter 12: Prepaid taxes
Basic amount
The basic amount is the taxpayer’s taxable income assessed by the Commissioner for
the latest preceding year of assessment less:
• a taxable capital gain;
• the taxable portion of a retirement fund lump sum or withdrawal benefit or sever-
ance benefit; and
• an amount received in terms of paragraph (d) of the gross income definition
(amounts in respect of relinquishment, termination, loss, repudiation, cancellation
or variation of any office or employment or any appointment) that was included in
such assessed taxable income.
The latest preceding year’s assessment must be an assessment that has been issued
more than 14 days prior to the date of the estimate.
The basic amount must be increased by 8% per year if the year of assessment of the
basic amount that is used, is more than 18 months prior to the date of the provisional
tax payment. For example, if the basic amount of the first provisional tax payment of
31 August 2022 needs to be determined and the latest preceding year of assessment is
2021, the basic amount (the taxable income of 2021) will not have to be increased. This
is because from the end of 2021 until 31 August 2022 is exactly 18 months and not
more than 18 months. If the second provisional tax payment had to be determined,
the taxable income of 2021 will have to be adjusted with 16% since there are more
than 18 months between the end of 2021 and 28 February 2023.
The 18-month test can be tricky to apply. It is therefore advisable to draw a timeline
and compare the various dates. The timeline should stretch to the latest preceding
year of assessment. The 18-month test refers to ‘more than’ 18 months after the end of
that year of assessment.
31 August 2022
1st payment - estimate
Compare 31 August 2022 with the end of the latest year assessed. Remember you
need to exclude an assessment if it was received less than 14 days before 31 August
2022.
535
A Student’s Approach to Taxation in South Africa 12.6
Example 12.4
Case A:
The notice of assessment (ITA34) for the 2022 tax year of assessment was issued on
15 August 2022 indicating a taxable income of R180 000.
The notice of assessment (ITA34) for the 2022 tax year of assessment was issued on
1 February 2022 indicating a taxable income of R150 000.
Case B:
The notice of assessment for the 2022 tax year assessment was issued on 19 August 2022
indicating a taxable income of R180 0000.
The notice of assessment for the 2021 tax year of assessment was issued on 1 February
2022 indicating a taxable income of R150 000.
Case C:
The notice of assessment for the 2022 tax year assessment was issued on 25 August 2022
indicating a taxable income of R180 000.
The notice of assessment for the 2021 tax year of assessment has not been issued yet.
The notice of assessment for the 2020 year of assessment was issued on 1 January 2021,
indicating a taxable income amount of R100 000.
You are required to determine whether the basic amount will be increased in respect of
the 18-month rule for the taxpayer’s first provisional tax payment in respect of the 2023
year of assessment for each of the above cases.
Solution 12.4
Case A:
The deadline for submitting the first provisional tax return for 2023 is 31 August 2022.
• The assessment for 2022 was issued 16 days prior to the submission of the provisional
tax estimate. Since this meets the 14-day criterion, the latest assessed preceding year is
the 2022 tax year.
• The estimate is not made more than 18 months after the end of the latest preceding
year.
Compare 31 August 2022 with 28 February 2022.
• Therefore, the basic amount adjustment of 8% will not be taken into account when
determining the basic amount for the first provisional payment for 2023.
Case B:
• The deadline for submitting the first provisional tax return for 2023 is 31 August 2022.
• The 2022 year of assessment was issued 12 days prior to the date on which the provi-
sional tax estimate was submitted. Therefore, as the 2022 assessment does not meet the
14-day criterion, the latest assessed preceding year of assessment is the 2021 tax year of
assessment.
continued
536
12.6 Chapter 12: Prepaid taxes
• The estimate is not made more than 18 months after the end of the latest preceding
year.
Compare 31 August 2022 with 28 February 2021 (exactly 18 months).
• Therefore, the basic amount adjustment of 8% will not be applied.
Case C:
• The deadline for submitting the first provisional tax return for 2023 is 31 August 2022.
• The 2022 year of assessment was issued six days prior to the date on which the provi-
sional tax estimate was submitted. Therefore, the 2022 assessment does not meet the
14-day criterion and the 2022 assessment can’t be used as the basic amount. As the
2021 year of assessment had not been issued yet, the latest assessed preceding year of
assessment is the 2020 tax year of assessment.
• The estimate is made more than 18 months after the end of the latest preceding year.
Compare 31 August 2022 with 28 February 2020.
• Therefore, the basic amount increase of 8% will apply.
• The basic amount is adjusted by 8% for each year from the end of the year of assess-
ment of the latest preceding year up to the end of the year of assessment of the year
for which the estimate is being made.
• The 2020 taxable income will increase by 24% in total (that is to say 8% for each of 2021,
2022 and 2023).
• Basic amount = R100 000 + (R100 000 × 8%) + (R100 000 × 8%) + (R100 000 × 8%) =
R124 000 (alternative calculation is R100 000 × 1.24).
Step 2: Calculate the tax for the full year, that is to say tax according to the tax
table less rebates, medical scheme fees credit and additional medical
expenses tax credit (refer to chapter 12).
Step 3: Calculate the tax for the first provisional payment, that is to say tax for
the full year (Step 2) divided by two.
Step 4: Deduct the employees’ tax actually paid in the first six months of the
current year of assessment.
Step 5: Calculate the amount due for the first provisional tax payment,
namely the tax due for the period (Step 3)
less the employees’ tax paid (Step 4)
less any foreign tax paid (section 6quat).
537
A Student’s Approach to Taxation in South Africa 12.6
Example 12.5
Puledi Black (51 years old) requested his IRP6 from SARS. The return indicated that the
latest year of assessment was 2020. The taxable income indicated on the IRP6 is R220 000
and the basic amount R255 200. Puledi accepts the basic amount. Puledi estimates his
taxable income for the current year of assessment to be R230 000. His employer deducted
employees’ tax amounting to R14 500 from his salary for the first six months of the year.
Puledi did not belong to a medical aid fund.
You are required to calculate the amount Puledi has to pay as his first provisional pay-
ment.
Solution 12.5
R
Basic amount (estimate is lower than basic amount so use basic amount) 255 200
Tax on taxable income ((R255 200 – R226 000) × 26% + R40 680) 48 272
Less: Primary rebate (16 425)
Total tax for the full year 31 847
Tax for the period (R31 847 / 2) 15 924
Less: Prepaid tax (14 500)
Employees’ tax in respect of the first six months 14 500
Foreign tax paid nil
REMEMBER
• The first provisional payment is only for the first half of the year; therefore, only half of
the total tax for the year is payable.
• The first payment for the 2023 year of assessment is due on or before 31 August 2021 for
individuals.
• If the year of assessment of the taxpayer is for a period of not more than six months (for
example because of the death of the person or the person ceased to be a South African
tax resident), the first payment is not required to be made.
• Although the taxable income amount is based on the taxable income of the previous
year, the employees’ tax paid for the current year can be used in the calculation.
• If the employees’ tax paid exceeds the amount due for the first payment, the amount
due is Rnil (no amount is payable to SARS).
• If a person does not make a first provisional payment or pays less than the required
amount or does not hand in their provisional tax return, penalties can be charged (refer
to 12.6.5).
• If the taxpayer does not have a basic amount, an estimation of the income for the year
has to be made.
538
12.6 Chapter 12: Prepaid taxes
Step 1: Determine the estimated taxable income for the year (that is to say the
minimum amount – see below).
Step 2: Calculate the tax for the second provisional payment (that is to say for
the full year of assessment being the tax according to the tax tables
less rebates, medical scheme fees tax credit and additional medical
expenses tax credit).
Step 3: Determine the employees’ tax paid for the current year of assessment.
Step 5: Calculate the amount due for the second provisional tax payment,
namely the tax due for the period (Step 2) less the employees’ tax paid
(Step 3) less the foreign tax paid (section 6quat) less the first
provisional tax payment (Step 4).
Minimum amount
When determining the minimum amount, taxpayers can be classified into one of the
following two groups:
• taxpayers with taxable income of R1 million or less for the current year of assess-
ment; and
• taxpayers with taxable income of more than R1 million for the current year of
assessment.
539
A Student’s Approach to Taxation in South Africa 12.6
the year of assessment, the basic amount is adjusted by 8% per annum for each
year since the assessed year of assessment; or
• 90% of the actual taxable income for the year of assessment.
Where an estimate is used as the basis for calculating the second provisional tax
payment, and it is less than 90% of the actual taxable income and the basic amount,
SARS will impose an automatic penalty of 20% of the shortfall. According to SARS,
the taxpayer may approach them for a full or partial reduction of the penalty if the
taxpayer can prove that the estimate was ‘not deliberately or negligently understated
and was seriously calculated with due regard to the factors having a bearing thereon’.
Example 12.6
Puledi Black (51 years old) requested his IRP6 from SARS for the second provisional
payment. The return indicated that the latest year of assessment was 2021. The taxable
income indicated on the IRP6 and the basic amount is R255 200. Puledi accepts the
amount as his basic amount. Puledi’s estimated taxable income for the current year of
assessment is R260 000. His employer deducted employees’ tax amounting to R30 000
from his salary for the current year of assessment. Puledi paid foreign tax that qualified
for a foreign taxed rebate of R500. Puledi made a first provisional payment of R2 171.
You are required to calculate the amount Puledi has to pay as his second provisional pay-
ment.
Solution 12.6
R
Taxable income amount (Note) 255 200
Tax on taxable income ((R255 200 – R226 000) × 26% + R40 680) 48 272
Less: Primary rebate (16 425)
Total tax for the full year 31 847
Less: Prepaid tax (32 671)
Employees’ tax in respect of this tax year 30 000
Foreign tax paid 500
First provisional payment 2 171
Note
Penalties will not apply provided Puledi bases his payment on the basic amount or 90%
of his taxable income for the year, whichever is the lowest, R234 000 (90% × R260 000).
The question specifically stated that he elected to use the basic amount for his assess-
ment.
540
12.6 Chapter 12: Prepaid taxes
REMEMBER
• The second provisional payment is for the full year of assessment, and a first payment
made must be deducted from the amount due for the year.
• The second payment for the 2023 year of assessment is due on or before 28 Feb-
ruary 2023 for individuals.
• The second payment for the 2023 year of assessment for a company is due on or before
the last day of the company’s financial year end.
• Where the basic amount used is for a year of assessment that closed more than a year
before the provisional tax estimate is due, the basic amount must be increased by 8%
per year.
• Although the estimated taxable income is based on a previous year’s taxable income,
the employees’ tax paid for the current year must be used in the calculation.
• If the taxpayer pays less than the minimum amount or does not file their provisional tax
return, penalties, additional tax and interest can be charged (refer to 12.6.5).
541
A Student’s Approach to Taxation in South Africa 12.6
The amount that is used to calculate the taxable income for the year of assessment
includes the taxable capital gain for the year. For the purpose of the first two pro-
visional tax payments, the taxable capital gain is not taken into consideration if such
payments were determined by using the basic amount as the estimated amount for
those payments. If the taxpayer pays more provisional tax than the tax due for the
year, SARS will pay interest on the amount overpaid from the due date until the date
the amount is repaid. The interest will be paid at the prescribed rate.
Step 1: Determine the taxable income for the year of assessment (remember
that the taxable capital gain must be included in this amount).
Step 2: Calculate the tax for the third provisional payment, that is to say tax
according to the tax table less the rebates and medical tax credits.
Step 3: Determine the employees’ tax paid (the employees’ tax for the current
year of assessment).
Step 6: Calculate the amount due for the third provisional tax payment,
namely the tax due for the period (Step 2) less the employees’ tax paid
(Step 3) less the foreign tax paid (section 6quat) less the first pro-
visional tax payment (Step 4) less the second provisional tax payment
(Step 5).
REMEMBER
• Where the basic amount is used for the first and/or the second payment, such taxable
income (estimate) must exclude taxable capital gains as well as any retirement fund
lump sum benefit, retirement fund lump sum withdrawal benefit and severance benefit.
• Wherever an estimate other than the basic amount is used, such taxable income (esti-
mate) must include taxable capital gains but must still exclude any retirement fund
lump sum benefit, retirement fund lump sum withdrawal benefit and severance benefit.
542
12.6 Chapter 12: Prepaid taxes
Example 12.7
Peter Black’s (48 years old) latest assessed year of assessment for which he was assessed is
the 2022 year of assessment. The taxable income on the IRP6 and the basic amount is
R371 200. Peter calculated his taxable income for the current year of assessment to be
R380 000. His employer deducted employees’ tax amounting to R58 895 from his salary
for the current year of assessment. Peter paid foreign tax amounting to R250. Peter made
a first provisional payment of R4 564 and a second provisional payment of R1 064.
You are required to calculate the amount Peter has to pay as his third provisional pay-
ment if he does not want to pay any interest.
Solution 12.7
R
Taxable income 380 000
Tax on taxable income ((R380 000 – R353 100) × 31% + R73 726) 82 065
Less: Tax rebate (16 425)
Total tax for the full year 65 640
Less: Prepaid taxes (64 773)
Employees’ tax in respect of this tax year 58 895
Foreign tax paid 250
First provisional payment 4 564
Second provisional payment 1 064
543
A Student’s Approach to Taxation in South Africa 12.6
estimation penalty of 20% of the difference between the tax that should have been
paid and the amount of tax that was actually paid by the end of the year of assess-
ment.
The third provisional payment is a voluntary payment and no underestimation
additional tax exists.
If a taxpayer completely fails to submit an estimate of a provisional tax payment and
the estimate is still not yet received by the last day of a period of four months after
the last day of the year of assessment (therefore by 30 June for a natural person), it
will be deemed that an estimate of Rnil taxable income was submitted. The 20%
penalty will then be calculated on the difference between the tax that should have
been paid and the amount of tax that was actually paid by the end of the year of
assessment which is Rnil. If this payment was also made late (and the 10% late pay-
ment penalty has been levied), the amount of the 20% underestimation penalty
should be reduced with the amount of the late payment penalty. The Commissioner
may remit the penalty in certain circumstances (paragraph 20(2) and (2C).
544
12.6–12.8 Chapter 12: Prepaid taxes
The interest is levied where the normal tax exceeds the credit amount and only if the
individual or trust has a taxable income exceeding R50 000 (R20 000 in the case of
companies).
• The normal tax includes the underestimation penalty that was levied in terms of
paragraph 20.
• The ’credit amount’ is the sum of all provisional tax payments made (first, second
and third payments), amounts of employees tax withheld by the employer and the
amount of any foreign taxes paid by the taxpayer in the year of assessment in terms
of section 6quat.
Where the credit amount exceeds the normal tax payable, interest will be payable to
the taxpayer by SARS and the prescribed rate on the difference between the credit
amount and such normal tax from the effective date until the date on which such
difference is refunded to the taxpayer. This is only the case where the difference
between the two amounts (that is to say the excess) is more than R10 000 or where the
taxable income is more than R50 000 for a natural person and R20 000 for a company.
12.7 Summary
In this chapter the different methods used by SARS to collect the tax due to them for a
year of assessment are discussed. If a person receives remuneration, they will pay
employees’ tax on a monthly basis. If a person receives income that is not remuner-
ation, they are required to pay provisional tax on a six-monthly basis. If a person
receives remuneration from their employer, they will pay employees’ tax, but if they
also receive other income, for example interest, they will also pay provisional tax.
The responsibility of calculating, withholding and paying employees’ tax over to
SARS is that of the employer. The responsibility of calculating and paying provisional
tax over to SARS lies with the taxpayers themselves. Employees’ tax and provisional
tax are not additional taxes being levied; they are merely methods used to pay the
income tax that is due to SARS for a year of assessment.
The next section contains questions that allow you to test your knowledge on prepaid
taxes.
Question 12.1
Tinni Kekana is 52 years old. She is married to Toby. Both their children are full-time uni-
versity students. Tinni gives you the available information of what happened and also
supplies the dates when it happened as indicated below:
31 January 2022 Received the assessment for the 2021 year of assessment:
Figures from the ITA34:
• Taxable income: R1 050 732
• PAYE: R307 808,12
• Provisional tax credits: R9 000
continued
545
A Student’s Approach to Taxation in South Africa 12.8
546
12.8 Chapter 12: Prepaid taxes
Answer 12.1
Calculation of Tinni’s provisional tax liabilities for the 2023 year of assessment:
R
First provisional tax payment – 31 August 2022
Estimated taxable income is R1 100 000; however, this payment can be
based on the basic amount (2021 assessed taxable income since it was
assessed more than 14 days before 31 August 2022). No adjustment is nec-
essary since there is not more than 18 months between 28 February 2021
and 31 August 2022. 1 050 732
Normal tax (R1 050 732 – R817 600) × 41% + R239 452) 335 036,12
Less: Primary rebate (16 425,00)
Net normal tax 318 611,12
× 50% for first 6 months 159 305.56
Less: Actual PAYE for the period (125 782,60)
First provisional tax payment for 2022 33 522,96
continued
547
A Student’s Approach to Taxation in South Africa 12.8
R R
Third provisional tax payment – 30 September 2023
Actual taxable income 1 356 553,00
Tax on R1 356 553 (R1 356 553 – R817 600) × 41% + R239 452) 460 422,73
Less: Primary rebate (16 425,00)
Medical scheme fees tax credit (as above) (2 324,00)
Additional medical cost tax credit
Medical aid contributions – (4 × medical scheme fees tax
credit)
= (R21 778) – (4 × R2 324) 12 482
Other qualifying medical expenses nil
12 482
Less: Limitation (7,5% × R1 356 553) (101 742)
nil
Multiply: Deduction rate (25%) (nil)
Net normal tax 441 673,73
Less: Prepaid taxes
• First provisional tax payment (33 522,96)
• Second provisional tax payment (42 846,62)
• Employees’ tax paid for the 2023 year of
assessment (263 659,00)
Top up provisional tax due 101 645,15
548
13 Individuals
General Deductions
Specific Capital
deduction for
deductions allowances
formula individuals
Page
13.1 Introduction ......................................................................................................... 550
13.2 Calculation of taxable income of an individual (section 5) ........................... 551
13.3 Specific income .................................................................................................... 556
13.3.1 South African income (section 1 – definition of ‘gross income’) ..... 557
13.3.1.1 South African dividends (section 10(1)(k)........................... 557
13.3.1.2 South African interest exemption (section 10(1)(i)) ........... 557
13.3.1.3 Interest and dividends from tax free investments
(section 12T) ............................................................................ 558
13.3.2 Foreign income ....................................................................................... 558
13.3.2.1 Foreign dividends (paragraph (k) of ‘gross income’
and section 10B) and headquarter company dividends ... 558
13.3.2.2 Other foreign income ............................................................. 560
13.4 Specific deductions ............................................................................................. 562
13.4.1 Expenses and allowances deductible by salaried taxpayers
(section 23(m)) ........................................................................................ 564
13.4.2 Contributions to retirement funds (section 11F)................................ 567
13.4.3 Donations to public benefit organisations
(section 18A and the Ninth Schedule)................................................. 572
549
A Student’s Approach to Taxation in South Africa 13.1
Page
13.5 Calculation of final normal tax liability (sections 6, 6A, 6B and 6quat) ........ 575
13.5.1 Year or period of assessment (section 1)............................................. 576
13.5.2 Normal tax (section 5) ........................................................................... 577
13.5.3 Normal tax rebates for natural persons (section 6) ........................... 578
13.5.4 Medical scheme fees tax credit (MTC) (section 6A) .......................... 580
13.5.5 Additional medical expenses tax credit (AMTC) (section 6B) ......... 582
13.5.6 Rebate in respect of foreign taxes on income (section 6quat) ........... 586
13.5.7 Prepaid taxes .......................................................................................... 591
13.6 Limiting losses when calculating taxable income (section 20 and 20A) ...... 592
13.6.1 Suspect trades ......................................................................................... 594
13.6.2 The exclusion rule .................................................................................. 594
13.7 Tax returns, assessments and objections .......................................................... 595
13.8 Summary .............................................................................................................. 596
13.9 Examination preparation ................................................................................... 598
13.1 Introduction
In this chapter, we look at the taxation of individuals. This will include discussing
the earning of investment income as well as the deductions that can be claimed, for
income tax purposes, by a person earning a salary. At the end of the chapter the
calculation of normal tax and net normal tax for individuals is discussed.
After a person starts working and earning an income, they can eventually start saving
some of the income that they earn. This income can then be invested in different
assets, for example shares, fixed deposits or even business ventures. The aim of
investment is to generate additional income. Remember that the gross income def-
inition includes all income received by residents of South Africa. South Africans can
also invest their money offshore (in overseas countries). The income earned on these
foreign investments is also subject to tax in South Africa, but there are special rules
that need to be considered when dealing with this type of income.
Apart from earning income over and above their salary, a person earning a salary will
also have expenses that they would like to deduct for tax purposes. In terms of the
general deduction formula (section 11(a)) read with section 23, a taxpayer may not
deduct any private or domestic expenditure (chapter 6). The Income Tax Act 58 of
1962 (the Act) does however contain a number of provisions where the taxpayer is
allowed to deduct certain private or domestic expenses. In terms of section 23(m) a
person earning only a salary may deduct only the expenses listed in the section. The
same section prohibits all other deductions for this ‘type’ of taxpayer.
550
13.1–13.2 Chapter 13: Individuals
Tax statistics
According to the 2021 tax statistics South Africa had 20 million registered individual
taxpayers. Some interesting facts are
• There were 22.9 million registered taxpayers.
• 37,2% of taxpayers are registered in Gauteng.
• 26,2% of assessed taxpayers were 35 to 44 years old.
• 46.4% of assessed taxpayers were female.
• Travel allowances were the largest allowance for individuals: 23,1% of total allowances
assessed.
• Retirement fund contributions paid on behalf of employees was the largest fringe
benefit (59,2% of the total fringe benefits assessed).
• Contributions to retirement funding was the largest deduction (85,5% of all deductions
granted).
551
A Student’s Approach to Taxation in South Africa 13.2
REMEMBER
• Exempt income is deducted from gross income; therefore, an amount can only be exempt
income if it is already included in gross income.
The next step is to determine which amounts are included in gross income (chapters 2
and 3). A salary received is an example of an amount to be included in gross income
in terms of the general rule as it complies with all the requirements of the definition.
Remember that it is not required that a person must receive an amount before it is
included in gross income, that is to say where an amount accrues to the taxpayer, it
will also be taxable even though they have not physically received it. For example, if
a person invests in a unit trust (also known as a collective investment scheme) and
elects to reinvest the annual interest and dividend earned, they will never receive
these amounts in cash. The income is however reinvested for their benefit and is
therefore included in their gross income as it accrues to them.
As from 1 October 2001 all capital gains are also subject to normal tax. The taxable
portion of the capital gain must be added to the taxable income from the revenue
activities to calculate the total taxable income for the year. The calculation of the
taxable capital gain is discussed in chapter 9.
552
13.2 Chapter 13: Individuals
Step 1: Identify amounts that comply with the ‘gross income’ definition (chap-
ters 2 and 3).
Step 2: Identify amounts included in gross income that are exempt in terms of
the Act (chapter 5).
Step 3: Identify amounts that can be deducted for tax purposes (chapters 6
and 12).
Step 4: Calculate the taxable income (before taxable capital gain and dona-
tions) by deducting the exempt income (Step 2) and the deductions
(Step 3) from the gross income (Step 1).
Step 6: Calculate the total taxable income by adding the taxable income (before
taxable capital gain and donations) (Step 4) to the taxable capital
gain (Step 5) and, thereafter, deducting the allowable deductions for
donations.
REMEMBER
• Exempt income can only be exempted if it has been included in gross income.
• Taxable income may be a negative amount which is called ‘an assessed loss’.
• A person is anybody who receives ‘income’. Therefore even a minor (person younger
than 18) who receives income is a taxpayer and pays tax in their own name. In some
cases the parent of a minor can be taxed on the income of the child, but then specific
requirements must be met.
553
A Student’s Approach to Taxation in South Africa 13.2
Example 13.1
Robert Roberts is a 40-year-old resident of South Africa. During the current year of
assessment he received a salary of R300 000. He owns shares in Sam Ltd (a South African
company) and received a dividend of R4 000 during the current year. Robert contributed
R6 000 to his employer’s pension fund (the total amount is deductible for income tax pur-
poses). Robert made a taxable capital gain of R1 000.
You are required to calculate Robert’s taxable income for the current year of assessment.
Solution 13.1
R
Gross income
Salary received 300 000
Dividends received 4 000
304 000
Less: Exempt income
Dividends received (4 000)
Income 300 000
Add: Taxable capital gains 1 000
301 000
Less: Deductions
Retirement fund contributions (6 000)
Taxable income 295 000
1. Why are the dividends received included in gross income if they are
an exempt income?
2. Must taxable capital gains be included last or can it be added to
gross income?
554
13.2 Chapter 13: Individuals
REMEMBER
• Income derived from a trade will only be taxed in the hands of the spouse who is carry-
ing on the trade.
• Income that will be split where spouses are married in community of property therefore
includes –
– local and foreign interest;
– local and foreign dividends;
– income from letting of fixed property.
• Income that will NOT be split where spouses are married in community of property
therefore include –
– a benefit paid by a pension, provident or retirement annuity fund;
– income specifically excluded from the joint estate; and
– a purchased annuity.
Step 1: Add both spouses’ passive income together to get a total passive
income, for example total interest received.
Step 2: Divide the total passive income equally between the two spouses.
Include in each spouse’s calculation half of the total passive income,
and add it to the individual’s gross income.
Example 13.2
John (59 years old) and Jane (66 years old) Naidoo are married in community of property.
John received a salary of R150 000 during the current year of assessment. John also
received R60 000 interest on his savings account. Jane did not receive any income during
the current year of assessment.
You are required to calculate John and Jane’s taxable income for the current year of
assessment.
555
A Student’s Approach to Taxation in South Africa 13.2–13.3
Solution 13.2
John R
Gross income
Salary received 150 000
Interest received (Note) 30 000
180 000
Less: Interest exemption – R23 800 maximum (23 800)
Taxable income 156 200
Jane
Gross income
Interest received (Note) 30 000
Less Interest exemption – R34 500 maximum but limited to amount received (30 000)
Taxable income nil
Note
As John and Jane are married in community of property, it is deemed that the interest was
received in equal shares by each spouse. Therefore they each include R60 000 / 2 = R30 000
in their gross income.
1. Why is R30 000 interest exempt for Jane and only R23 800 for John?
2. As Jane is over 65 years old, why did she not get an interest exemp-
tion of R34 500?
REMEMBER
• Where persons are married in community of property, each spouse qualifies for their
full interest exemption on half of the gross interest received. An exemption can never
exceed the amount received.
556
13.3 Chapter 13: Individuals
Example 13.3
Chris Canele (66 years old) and his wife (55 years old), who are married out of community
of property and are both South African residents, earned the following investment income
during the current year of assessment:
Chris R
Interest from local investments (not tax free investments) 37 000
Wife
Interest from local investments (not tax free investments) 21 500
You are required to calculate Chris and his wife’s taxable income for the current year of
assessment.
Solution 13.3
Chris R R
Interest from local investments 37 000
Less: Interest exemption (34 500) 2 500
Taxable income 2 500
Wife
Interest from local investment 21 500
Less: Interest exemption – R23 800, therefore the full
amount is exempt (21 500) nil
Taxable income nil
557
A Student’s Approach to Taxation in South Africa 13.3
REMEMBER
• The interest exemption available to natural persons will be left unchanged from 2015
onwards. Investments in approved tax free investments will not be subject to income tax.
13.3.1.3 Interest and dividends from tax free investments (section 12T)
Interest and dividends received from tax free investments are fully exempt from
taxation (refer to chapter 5).
REMEMBER
• Should a double-tax agreement exist between South Africa and another country, all foreign
income derived by South African residents could be subject to that double-tax agree-
ment. The double-tax agreement overrides the general taxation provisions of the Act. If
a double-tax agreement exists between South Africa and a specific country, one must
first consult the double-tax agreement to see which country has the right to tax the spe-
cific type of income in question. The country that has the taxing right will then apply
the provisions of its Income Tax Act. If no double-tax agreement exists, the Act’s provi-
sions must be applied.
A double-tax agreement is entered into by the revenue authorities of two countries that
often trade with each other in order to determine who has taxing rights, that is to say
who may tax certain types of income. As a result, certain types of income are only taxa-
ble in one of the two countries. South Africa has comprehensive double-tax agreements
with about 85 countries.
558
13.3 Chapter 13: Individuals
Example 13.4
Wiley Wonders earned the following investment income during the current year of
assessment:
R
Taxable foreign dividends 26 200
Interest from foreign investments 900
You are required to calculate how much foreign income will be included in Wiley’s
taxable income for the current year of assessment.
Solution 13.4
Wiley R R
Foreign dividends (gross income special inclusion) 26 200
Less: Exempt (section 10B) (R26 200 × 25 / 45) (14 556) 11 644
Interest from foreign investments (gross income and no exemption) 900
Included in taxable income 12 544
Example 13.5
Joseph Malema, a South African resident, pays income tax at the marginal rate of 41%.
Joseph holds 3% of the total equity share and voting rights in a foreign company. He
receives a foreign dividend of R50 000 on shares, which is subject to a dividend withhold-
ing tax of 10%. Joseph incurred interest expenditure of R2 000 on a loan which he used to
purchase the shares in respect of which the dividend was received.
You are required to calculate how much tax is payable by Joseph in relation to the for-
eign dividends for the current year of assessment.
559
A Student’s Approach to Taxation in South Africa 13.3
Solution 13.5 R
Foreign dividends (gross income special inclusion) 50 000
Expenditure in the production of income – prohibited in terms
of section 23(q) nil
Less: Exempt (section 10B(3)) (R50 000 × 25 / 45) (Note) (27 778)
Included in taxable income 22 222
Additional tax at 41% 9 111
Less: Foreign tax rebate [Lesser of (R50 000 × 10%) or (R22 222 × 41%)] (5 000)
South African tax payable on foreign dividends 4 111
Note
None of the full exemptions in terms of section 10B(2) applies to these foreign dividends.
560
13.3 Chapter 13: Individuals
REMEMBER
• All other foreign income, such as royalties, rental, trade income etc., must also be
included in the gross income of a South African resident.
• Only South African residents can claim the foreign tax rebate (section 6quat). This is a
rebate to reduce the South African tax payable; it is not a deduction from taxable income.
Example 13.6
Sam Shoba (66 years old) and his wife (Sindy, 55 years old), who are married out of com-
munity of property and are both South African residents, earned the following investment
income during the current year of assessment:
Sam R
Taxable foreign dividends 14 200
Interest from foreign investments 11 000
Interest from local investments (not tax free investments) 38 500
Sindy
Taxable foreign dividends 400
Interest from foreign investments 1 500
Interest from local investments (not tax free investments) 24 000
You are required to calculate Sam and Sindy’s taxable income for the current year of
assessment.
Solution 13.6
Sam R R
Foreign dividends 14 200
Less: Exemption (R14 200 × 25 / 45) (7 889) 6311
Interest from foreign investments (fully taxable) 11 000
Interest from local investments 38 500
Less: Interest exemption – R34 500 (34 500) 4 000
Taxable income 21 311
Sindy
Foreign dividends 400
Less: Exemption (R400 × 25 / 45) (222) 178
Interest from foreign investments 1 500
Interest from local investment 24 000
Less: Interest exemption – R23 800 (23 800) 200
Taxable income 1 878
561
A Student’s Approach to Taxation in South Africa 13.4
562
13.4 Chapter 13: Individuals
563
A Student’s Approach to Taxation in South Africa 13.4
564
13.4 Chapter 13: Individuals
REMEMBER
• Only a taxpayer who earns commission that is more than 50% of their total remunera-
tion may deduct entertainment expenses.
• For entertainment expenses to be deductible in these circumstances, they must comply
with all the requirements of section 11(a).
Example 13.7
Samuel Gxagxa, a salesman, earned the following income during the year of assessment:
R
Salary 30 000
Commission on sales 25 000
Annual prize for the highest sales for the year 3 000
Entertainment allowance 1 200
59 200
565
A Student’s Approach to Taxation in South Africa 13.4
Solution 13.7
As Samuel does not earn remuneration mainly (more than 50%, (R25 000/R59 200 = 42%))
in the form of commission on sales, he may not claim a deduction in terms of sec-
tion 11(a). If more than 50% of his remuneration had consisted of commission earnings,
he would have been able to claim the full amount of his entertainment expenditure in
terms of section 11(a) if it were incurred in the production of his income and not of a capital
nature.
Note that the winning of a prize would, in certain circumstances, constitute a receipt of a
capital nature. In the above circumstances, however, it is earned by virtue of the tax-
payer’s trading activities (his employment) and will therefore be taxable.
REMEMBER
566
13.4 Chapter 13: Individuals
repairs. Section 23(m) further permits an employee to deduct wear and tear. An
employee is also permitted to a deduction or a section 11(e) allowance on office
equipment and furniture.
Apportionment
An expense relating to the premises need to be apportioned. SARS accepts that ex-
penses relating to the part of the premises occupied for trade can be based on the
proportion of the floor area to the total floor area of all the buildings on the property
(including the home office and out buildings).
Payments related to employment that are refunded (section 11(nA) and (nB))
Where a taxpayer receives an amount, including voluntary awards, for services
rendered or in respect of employment, or a restraint of trade payment, an amount
repaid by the taxpayer may be deducted.
567
A Student’s Approach to Taxation in South Africa 13.4
REMEMBER
568
13.4 Chapter 13: Individuals
Deduction of contributions
With effect from 1 March 2016, all contributions to retirement funds are deductible
under section 11F, limited to the provisions of the section. Contributions to provident
funds were not allowable as a deduction before 1 March 2016.
REMEMBER
• A limit means that you cannot deduct more than that amount from taxable income. This
means that if you contributed R10 000 and the limit is R8 000, you are only entitled to
deduct R8 000; however, if you wish to deduct R5 000 and the limit is R8 000, you are
entitled to deduct the full R5 000 as it is less than the limit.
• You can never deduct more than the taxpayer actually paid.
REMEMBER
• For the purposes of section 11F, retirement fund deduction ‘remuneration’ excludes
– a retirement fund lump sum benefit;
– a retirement fund lump sum withdrawal benefit; and
– a severance benefit.
• Contributions consist of all contributions made by the taxpayer to pension, provident
and retirement annuity funds plus contributions made by the employer on which the
taxpayer has been taxed and any unclaimed balance of contributions.
• Allowable contributions to retirement funds are deducted after the inclusion of a
taxable capital gain but before the deduction for donations to public benefit organisa-
tions.
569
A Student’s Approach to Taxation in South Africa 13.4
Example 13.8
Harry Hadebe earns a salary of R442 000 and a non-pensionable bonus of R5 000. He is a
member of his employer’s pension fund. He contributes R35 000 per annum in respect of
current contributions and R2 000 per annum in respect of ‘past period’ contributions. His
employer did not contribute to the fund. His remuneration amounts to R447 000 and his
taxable income before this deduction is R600 000.
Hilda Hadebe (his wife) is a teacher employed in a government school. She earns a salary
of R235 000 a year and makes an annual contribution of R15 000 to the government pen-
sion fund. Her employer also contributes R15 000 per annum to the fund on her behalf
and this has been included in her taxable income as a fringe benefit. Her remuneration
amounts to R250 000 and her taxable income before this deduction is also R250 000.
You are required to calculate the amount that Harry and Hilda will be able to deduct in
respect of pension fund contributions.
Solution 13.8
Harry
Contributions to retirement fund (R35 000 + R2 000 = R37 000)
Deduction limited to the lesser of
• R350 000; or
• 27,5% × the higher of
remuneration (R447 000) or taxable income (R600 000)
Therefore 27,5% × R600 000 = R165 000; or
• R600 000
R165 000 is less than R350 000 and R600 000 therefore the limit is R165 000
Harry can therefore deduct the full amount of his contributions of R37 000 as they are
less than the limit.
Hilda
Contributions to retirement fund (R15 000 (Hilda) + R15 000 (employer) = R30 000)
Deduction limited to the lesser of
• R350 000; or
• 27,5% × the higher of
remuneration (R250 000) or taxable income (R250 000)
Therefore 27,5% × R250 000 = R68 750; or
• R250 000
R68 750 is less than R350 000 and R250 000 therefore limit is R68 750.
Hilda can therefore deduct the full amount of her contributions of R30 000 as it is less
than the limit.
What would happen If Hilda’s contributions were R70 000 in total (assuming
that her remuneration and taxable income was R250 000)?
570
13.4 Chapter 13: Individuals
Example 13.9
For the current year of assessment, William Wonfor had a taxable income of R225 000 (he
did not receive any retirement fund lump sum benefits during the year), before deducting
any retirement fund contributions. His taxable income is derived from the profits of a
small hardware shop that he owns. Wanda Wonfor, his wife, earned a salary of R85 000
during the year of assessment. From that amount, current pension fund contributions
were deducted by her employer. During the year, William and Wanda made the follow-
ing contributions to retirement funds:
William: Retirement annuity fund contributions R40 000
Wanda: Pension fund contributions (her employer did not contribute) R 3 000
Retirement annuity fund contributions R10 500
Reinstatement retirement annuity fund contributions R2 000
You are required to calculate the amount that William and Wanda will be able to deduct
in respect of retirement annuity fund contributions. Neither of them had any other income
or deductions.
Solution 13.9
William
Contributions to retirement fund – R40 000
Limited to the lesser of
• R350 000; or
• 27,5% of the higher of
remuneration (R0) or taxable income (R225 000)
Therefore 27,5% × R225 000 = R61 875; or
• R225 000
R61 875 is less than R350 000 and R225 000 therefore the limit is R61 875.
William can therefore deduct the amount of his contributions of R40 000 in full as they
are less than the limit.
Wanda
Contributions to retirement funds – R3 000 + R10 500 + R2 000 = R15 500
Limited to the lesser of
• R350 000; or
• 27,5% of remuneration (R85 000) or taxable income (R85 000)
Therefore 27,5% × R85 000 = R23 375; or
• R85 000
R23 375 is less than R350 000 and R85 000 therefore the limit is R23 375.
Hilda can therefore deduct the amount of her contributions of R15 500 in full as they
are less than the limit.
571
A Student’s Approach to Taxation in South Africa 13.4
Example 13.10
Gift Mabija (45 years old) had a taxable income of R300 000 during the current year of
assessment before donating the following amounts:
R
Donation to Natal University 800
Donation to AIDS crisis centre (public benefit organisation) 600
Donation to Trees for Africa (not a public benefit organisation) 500
You are required to calculate the deduction in terms of donations that Gift will be able to
deduct for income tax purposes. You can assume that where applicable all official receipts
were obtained and that Gift did not receive any retirement fund lump sum benefits dur-
ing the year.
Solution 13.10
Qualifying donations R
Donation to Natal University – allowable 800
Donation to AIDS crisis centre (public benefit organisation) – allowable 600
Donation to Trees for Africa (not a public benefit organisation) nil
1 400
Limited to 10% × R300 000 = R30 000
Gift only donated R1 400 of allowable donations and can therefore deduct R1 400 in full
because it is less than the limit.
572
13.4 Chapter 13: Individuals
REMEMBER
• A donation may only be claimed in respect of section 18A where a receipt, as prescribed
by the Act, has been received.
Example 13.11
The following information relates to Sam Jacombe (30 years old, unmarried) for the cur-
rent year of assessment:
R
Salary 270 000
Bonus (non-pensionable) 6 000
South African interest (not tax free investments) 33 800
Medical fund contributions made by Sam (40%) 24 000
His employer pays 60% of the contributions to the fund
Retirement annuity fund contributions – current 4 200
Pension fund contributions – current 8% of salary
Sam pays 100% of his contributions to all retirement funds
Donation to public benefit organisations – official receipt received 800
Donation to non-public benefit organisations – receipt received 300
Medical expenses not covered by the fund 5 340
You are required to calculate Sam’s taxable income for the current year of assessment.
Solution 13.11
Calculation of Sam’s taxable income for the current year of assessment
R R
Salary 270 000
Bonus 6 000
Interest 33 800
Less: Exemption (23 800) 10 000
Medical fringe benefit – employer’s contribution
(R24 000 / 40% × 60%) 36 000
Taxable income before retirement fund deduction 322 000
continued
573
A Student’s Approach to Taxation in South Africa 13.4
Example 13.12
Joe Mashishi is 54 years old; he is married and has three children, all under 18 years of
age. Joe had the following income and expenses for the current year of assessment:
R
Salary 150 000
Bonus 15 000
Contributions to retirement annuity fund (Note 1) 3 600
Donations (Note 2) 1 600
Contributions to pension fund (Note 3) 12 000
Notes
1. Joe contributed R300 per month to a retirement annuity fund.
A total of R1 300 was not deducted at the end of the previous year of assessment.
2. He made the following donations during the year:
donation to Natal University 500
donation to AIDS crisis centre (public benefit organisation) 600
donation to Trees for Africa (not a public benefit organisation) 500
3. Joe contributed 8% of his salary to the pension fund and his employer contributed
R500 a month.
You are required to calculate Joe’s taxable income for the current year of assessment. You
can assume that, where applicable, all official receipts were obtained.
574
13.4–13.5 Chapter 13: Individuals
Solution 13.12
R
Calculation of taxable income
Salary 150 000
Bonus 15 000
Employer’s contribution to pension fund (R500 × 12 months) 6 000
Income 171 000
Less: Contributions to retirement funds
(8% × R150 000 = R12 000 + R6 000 + R3 600 + R1 300 = R22 900)
Limited to the lesser of
• R350 000; or
• 27,5% × the higher of
Remuneration (R171 000); or
Taxable income (R171 000)
Therefore 27,5% × R171 000 = R47 025; or
• R171 000
R47 025 is less than R350 000 and R171 000, therefore limit
is R47 025
Allow contributions in full (22 900)
Taxable income before donations deduction 148 100
Less: Donations R R
Donation to Natal University – allowable 500
Donation to AIDS crisis centre – allowable 600
Donation to Trees for Africa – not allowable nil
1 100
Limited to 10% × R148 100 = R14 810 therefore can deduct full amount (1 100)
Taxable income 147 000
R
Normal tax calculated based on the tax tables xxx
Less: Annual rebates (section 6) (xxx)
Less: Medical tax credits (sections 6A and 6B) (xxx)
Normal tax liability for the year xxx
Less: PAYE and provisional tax (prepaid taxes) (xxx)
Normal tax due by or to the taxpayer xxx
Add: Withholding taxes xxx
Final tax liability of natural person xxx
575
A Student’s Approach to Taxation in South Africa 13.5
Steps 1–6: Calculate the total taxable income for the year of assessment as dis-
cussed previously.
Step 7: Calculate normal tax by using the tax table (paragraph 1.5.2).
Step 8: Determine the age of the taxpayer on 28/29 February of the current
year of assessment. Determine whether the taxpayer qualifies for the
full rebate for the current year of assessment, if not pro rata the
rebate (paragraph 1.5.3).
Step 9: Calculate the medical scheme fees tax credit and the additional
medical expenses tax credit (paragraphs 1.5.4 and 1.5.5).
Step 10: Calculate tax credits for specific transactions (if any) (paragraph 1.5.6).
Step 11: Calculate normal tax liability: normal tax for the year (Step 7)
minus
• rebates (Step 8);
• medical credits (Step 9);
• tax credits for specific transactions (Step 10).
Step 12: Calculate prepaid taxes (PAYE and provisional tax) (paragraph 1.5.7).
576
13.5 Chapter 13: Individuals
• A company’s year of assessment is the financial year of the company ending dur-
ing the calendar year in question.
REMEMBER
• Where the period of assessment is less than a full year, rebates will be apportioned by
the total number of days of the period as part of the full year of assessment.
Example 13.13
Gershane Yosh has a taxable income of R543 000 for the current year of assessment.
Vershi Yosh has a taxable income of R350 000 for the current year of assessment.
You are required to calculate Gershane and Vershi’s normal tax for the current year of
assessment.
577
A Student’s Approach to Taxation in South Africa 13.5
Solution 13.13
R
Gershane (taxable income = R543 000)
On R488 700 (per the tax tables) 115 762
Add: 36% of R54 300
(the amount in excess of R488 700 thus R543 000 – R488 700) 19 548
Normal tax 135 310
Vershi (taxable income = R350 000)
On R226 000 (per the tax tables) 40 680
Add: 26% of R124 000
(the amount in excess of R226 000 thus R350 000 – R226 000) 32 240
Normal tax 72 920
Why is there a difference in the tax percentage used in the two calcula-
tions?
The example given here illustrates the calculation of normal tax on taxable income,
but can also be used to explain the two concepts often referred to in tax literature,
namely the marginal and the average rate of tax.
• Marginal rate of tax This rate of tax applies to an additional R1 of taxable income
earned. Referring to Example 13.13, the marginal rate of income tax is 31% because
if Gershane earned R1 more of taxable income, she would have to pay 31% tax on
this R1. Marginal tax rate is before applicable rebates and medical tax credits, it’s
the highest tax rate that can be applied to a portion of your income (not all of it).
• Average rate of tax This is the rate of tax applying to the total taxable income.
Gershane’s average rate of tax is
R137 919
× 100, therefore the average rate is 25,4%.
R543 000
The average tax rate is applied before rebates and tax credits. You will observe that
the marginal rate of tax is high but the average rate of tax is much lower. For natural
persons, the maximum marginal tax rate of 45% comes into operation on taxable
income in excess of R1 731 600.
REMEMBER
• When you evaluate the tax implications of a specific transaction, you always refer to the
marginal tax rate.
578
13.5 Chapter 13: Individuals
Step 1–6: Calculate the total taxable income for the year, as explained earlier.
Step 8: Determine the age of the taxpayer at 28/29 February of the current year
of assessment. Determine if the taxpayer will qualify for the full rebate in
the year of assessment. If not, the rebate should be reduced pro rata.
Step 9: The normal tax liability will be the normal tax (Step 7) for the year
minus rebates (Step 8).
Example 13.14
Victoria Dlamini was 83 years old when she died on 31 August 2022. She earned a taxable
income of R160 000 from 1 March 2022 to 31 August 2022.
You are required to calculate Victoria’s normal tax liability for the current year of assess-
ment.
579
A Student’s Approach to Taxation in South Africa 13.5
Solution 13.14
R R
Taxable income (given) 160 000
Normal tax on R160 000 @ 18% 28 800
Less: Normal tax rebates: 83 years of age
• Primary rebate (natural person) 16 425
• Secondary rebate (over 65) 9 000
• Tertiary rebate (over 75) 2 997
28 422
Reduced pro rata (Note)
184 days / 365 days × R28 422 (14 328)
Normal tax liability 14 472
Note
Due to the fact that the taxpayer died during the year of assessment, the tax period is less
than 12 months; therefore the rebate should be reduced on a pro rata basis.
REMEMBER
• If the tax less the rebate results in a negative amount, the answer is limited to nil.
• If a person starts to work during the year, they will still qualify for the full annual
rebate, as their tax year is for a period of 12 months although they only worked for a
couple of months.
• The rebate must be deducted from normal tax and not from taxable income.
580
13.5 Chapter 13: Individuals
Where more than one person pays fees to a medical scheme, the medical tax credits
listed above must be apportioned between the people paying in the same proportion
as their payment is to the total payment.
REMEMBER
Example 13.15
Joseph Roos is 35 years old and married to Refilwe (34 years old). They have one child,
Susan (seven years old). None of them have any disabilities. Joseph’s taxable income for
the current year of assessment is R250 000. Joseph is the main member of the medical
fund.
You are required to
(a) calculate Joseph’s normal tax liability for the current year of assessment assuming
that Joseph makes the full medical aid payment in respect of himself, his wife and
child;
(b) calculate the amount that Refilwe can claim as a medical tax credit if the full medical
aid payment that Joseph is required to make R3 000 per month and she pays R1 000
of the payment.
581
A Student’s Approach to Taxation in South Africa 13.5
Solution 13.15
(a) Joseph’s normal tax liability
Calculation of normal tax liability: R
Normal tax (R40 680 + (26% × (R250 000 – R226 000))) 46 920
Less:Primary rebate (16 425)
Less: Medical scheme fees tax credit (R694 (Joseph + Refilwe) + R234
(Susan)) × 12 months = R11 136 (11 136)
Normal tax liability 19 359
Normal tax (R40 680 + (26% × (R250 000 – R226 000))) 46 920
(b) Refilwe’s medical tax credit
MTC calculated as above – R10 656
Apportioned for Refilwe’s payment – R11 136 x R12 000 / R36 000 3 712
Note
In this case Joseph’s MTC would also be apportioned and he would be able to deduct a tax
credit of R7 424.
582
13.5 Chapter 13: Individuals
REMEMBER
• The medical scheme and all practitioners and nurses referred to above have to be regis-
tered with their respective controlling bodies and in terms of certain Acts.
Example 13.16
David Hess is 66 years old. For the year of assessment commencing 1 March 2022, he
made contributions of R3 000 per month to a medical scheme on behalf of himself and his
wife. He paid R23 500 qualifying medical expenses for the year. David earned a salary of
R340 000.
You are required to calculate David’s medical tax credits for the 2023 year of assessment.
Solution 13.16
R
Medical scheme fees tax credit (R694 × 12 months) (8 328)
Excess medical scheme fees credit
(R36 000 (monthly contributions) − (3 × R8 328)) × 33,3% (3 668)
Additional medical expenses tax credit (R23 500 × 33,3%) (7 826)
Total medical tax credits that will reduce his normal tax (19 822)
583
A Student’s Approach to Taxation in South Africa 13.5
Example 13.17
Lisa Sharpe is 35 years old. For the year of assessment commencing 1 March 2022, she
made contributions of R2 000 per month to a medical scheme on behalf of herself and her
two children. She paid R23 500 qualifying medical expenses for the year. Her employer
contributed R15 000 to the medical scheme during the year. Lisa earned a salary of
R275 000. Lisa’s son has a disability.
You are required to calculate Lisa’s medical tax credits for the 2023 year of assessment.
Solution 13.17
R
Medical scheme fees tax credit (R694 + R234) × 12 months (11 136)
Excess medical scheme fees credit (R24 000 (own contributions) + R15 000
(fringe benefit employer contributions) – (3 × R11 136)) × 33,3% (1 862)
Additional medical tax credit (R23 500 × 33,3%) (7 826)
Total tax credits (20 824)
Example 13.18
Joe Blunt is 35 years old. For the year of assessment commencing 1 March 2022, he made
contributions of R6 000 per month to a medical scheme on behalf of himself, his wife and
a child. He paid R50 000 qualifying medical expenses for the year. His employer contrib-
uted R40 000 to the medical scheme during the year. Joe earned a salary of R500 000.
You are required to calculate Joe’s medical tax credits for the 2023 year of assessment.
584
13.5 Chapter 13: Individuals
Solution 13.18
R
Medical scheme fees tax credit (R694 + R234) × 12 months (11 136)
Additional medical expenses tax credit: 25% of:
Excess contributions (R6 000 × 12 + R40 000) – (4 × R11 136) R67 456
Add: Qualifying expenses R50 000
Less: 7,5% × taxable income (R540 000) (Note) (R40 500)
R76 956
Therefore: R76 956 × 25% (19 239)
Note
Calculation of taxable income
Salary 500 000
Medical fringe benefit (employer’s contributions) 40 000
540 000
REMEMBER
585
A Student’s Approach to Taxation in South Africa 13.5
586
13.5 Chapter 13: Individuals
The portion of South African normal tax that relates to foreign income is calculated as
follows:
Taxable portion of foreign income
(after deductions and exemptions) × SA normal tax
Sum of all (total) taxable income
REMEMBER
• When calculating South African normal tax related to foreign income, tax before the
deduction of rebates must be used.
Where the sum of the foreign taxes is more than the rebate/deduction that is allowed
(that is to say the rebate is limited to the South African normal tax), the excess
amount of foreign taxes is then carried forward to the following year of assessment
and is added to the foreign taxes paid in that year. The excess foreign taxes carried
forward will exclude any foreign tax that has been paid in respect of exempt income.
Example 13.19
Joe Jackson (55 years old) received the following income for the current year of assessment:
R
Gross foreign interest (foreign tax paid R 2 800) 12 000
Local interest (not tax free investments) 24 700
Other gross foreign income (foreign tax paid R6 000) 15 000
South African income 145 500
No exemptions have been taken into account. He paid non-refundable foreign tax on all the
foreign income he received.
You are required to calculate Joe’s tax liability for the current year of assessment.
587
A Student’s Approach to Taxation in South Africa 13.5
Solution 13.19
R R
Foreign interest 12 000
Local interest 24 700
Less: Investment exemption (23 800) 900
Other foreign income 15 000
South African income 145 500
Taxable income 173 400
Normal tax payable 31 212
Less: Primary rebate (16 425)
14 787
Less: Section 6quat rebate (Note) (4 860)
Net normal tax payable 9 927
Note
Total taxable income from foreign sources:
Foreign interest 12 000
Other foreign income 15 000
27 000
588
13.5 Chapter 13: Individuals
Where the person claiming the section 6quat rebate has contributions to retirement
funds or has donated to public benefit organisations (refer to 13.4.3) that have been
deducted from their taxable income, these deductions must then be apportioned be-
tween South African-sourced income and foreign income. This is best explained with
an example.
Example 13.21
During the current year of assessment, Martha Mhlanga (30 years old) earned a pension-
able salary of R100 000 from a South African source, from which an amount of R4 920 was
withheld in respect of employees’ tax.
In addition, she received the following gross investment income:
R
South African source
Dividends (not tax free investments) 50 000
Interest (not tax free investments) 28 500
Foreign source
Interest (including R3 600 withholding tax) 45 000
In terms of her conditions of employment, she is obliged to contribute 8% of her monthly
salary to a pension fund. She made a qualifying donation of R6 000. She does not belong
to a medical aid fund.
You are required to calculate Martha’s tax liability for the current year of assessment.
Solution 13.21
R
Salary income 100 000
Dividend income – exempt nil
Foreign interest 45 000
South African interest income
(R28 500 – R23 800) 4 700
Income 149 700
Less:
Retirement fund contributions – R8 000
continued
589
A Student’s Approach to Taxation in South Africa 13.5
R
Limited to the lesser of
• R350 000; or
• 27,5% × the higher of
– R100 000 or
– R149 700
Therefore R149 700 × 27,5% = R41 168; or
• R149 700
The limitation is therefore R41 168 – contributions will be allowed in full (8 000)
141 700
Less:
Donation – R6 000
Limited to 10% × R141 700 = R14 170, therefore allow full donation (6 000)
Taxable income 135 700
Calculation of normal tax payable before rebates
Normal tax payable 24 426
Calculation of foreign taxes payable in respect of taxable
foreign income
Foreign taxes payable in respect of foreign income 3 600
Calculation of the section 6quat rebate
Amount of foreign taxes that qualifies for the rebate limited to 3 600
Taxable income derived from all foreign sources
= × Normal tax payable
Total taxable income derived from all sources
R40 791 (Note)
= × R24 426 = R7 342
R135 700
Note
R40 791 is calculated as follows: R R
Salary income nil
Dividend income nil
Foreign interest income 45 000
Gross income and income 45 000
Less: Retirement fund contributions –
R8 000 x R45 000 / R149 700 (2 405)
42 595
Less: Donation (as calculated) (6 000)
Apportionment of R6 000: (R42 595 / R141 700 × R6 000) (1 804)
Foreign taxable income 40 791
continued
590
13.5 Chapter 13: Individuals
Calculation of the normal tax payable after taking rebates into account
R
Normal tax payable before rebates 24 426
Less: Primary rebate (16 425)
Less: Medical tax credit (none as she did not contribute to a medical scheme) (nil)
Less: Section 6quat rebate R3 600 is less than R7 342 (3 600)
Less: Employees’ tax (4 920)
Amount payable or (refundable) (519)
No foreign taxes will be carried forward, as the taxpayer was able to deduct the full
amount of foreign tax paid as a rebate.
Example 13.22
Mpho Zuma is 44 years old and her normal tax payable (after rebates and credits) for the
current year of assessment amounts to R25 250. Her employer deducted R20 000 employ-
ees’ tax from her monthly salary. She is also registered as a provisional taxpayer and paid
R8 500 provisional tax during the current year of assessment.
You are required to calculate how much Mpho still owes SARS or how much she will be
refunded for the current year of assessment.
591
A Student’s Approach to Taxation in South Africa 13.5–13.6
Solution 13.22
R
Normal tax liability 25 250
Less: Prepaid taxes:
Employees’ tax (20 000)
Provisional tax (8 500)
Net credit (amount due to Mpho) (3 250)
REMEMBER
• If the net amount due is negative (net credit), taxpayers are entitled to a refund of the
amount they overpaid during the year of assessment.
• If a refund is due, SARS will first refund the provisional tax paid and then the PAYE.
592
13.6 Chapter 13: Individuals
If these requirements are met, the taxpayer is prohibited from setting off the assessed
loss from that specific trade against income derived during the same year of assess-
ment from another trade or a non-trading activity.
Determine whether the loss from the operating of a trade is limited when
calculating the taxable income for a year of assessment
Step 1: Would the person have paid tax at the maximum marginal rate (tax-
able income (including an assessed loss and balance of assessed loss
brought forward) of R1 731000 for the 2023 year of assessment) if they
did not have this loss?
Yes: Step 2
No: The loss can be used when calculating the taxable income for the
current year of assessment – section 20A is not applicable.
Step 2: Is the trade classified as a suspect trade by SARS (refer to 13.6.1) or did
the person make a loss from this trade in any three of the last five years
(including the current year)?
Yes: Step 3
No: The loss can be used when calculating the taxable income for the
current year of assessment.
Step 3: Does the trade qualify for the exclusion rule (refer to 13.6.2)?
Yes: Step 4
No: The loss cannot be used in the calculation of the taxable income
for the current year of assessment and must be carried forward to
the next year of assessment where it can be set off against income
from the same trade.
Step 4: Did the trade (excluding farming activities) have a loss for six of the
last ten years?
Yes: The exclusion cannot be used, therefore the loss cannot be used in
the current year’s calculation. The loss must be carried forward to
the next year of assessment where it can be set off against income
from the same trade.
No: The exclusion can be used and the loss can be set off against
income from other trades in the current year of assessment.
593
A Student’s Approach to Taxation in South Africa 13.6
REMEMBER
• To determine whether a loss is incurred from the trade in a specific year of assessment,
the loss carried forward from the previous year is not included.
• The income from the trade includes recoupments in terms of section 8(4) and capital
gains on disposal of assets used in the trade.
• The income from different farming activities (for example livestock and plantation
farming) is added together for the purposes of these rules in order to determine farming
income.
• If a person is subject to the limitation rules or might be subject to the rules, they must
provide full details of the trade in their tax return.
• These rules are only applicable to individuals.
594
13.6–13.7 Chapter 13: Individuals
595
A Student’s Approach to Taxation in South Africa 13.7–13.8
13.8 Summary
In this chapter the taxable income framework for individuals was discussed. This was
followed by a discussion how to calculate a taxpayer’s tax liability for the year of
assessment.
R
Gross income (as defined in section 1) xxx
Less: Exempt income (sections 10, 10A and 12T) (xxx)
Income (as defined in section 1) xxx
Less: Deductions (section 11 – but see below; subject to section 23(m) and
assessed loss (sections 20 and 20A) (xxx)
Add: Taxable portion of allowances
(section 8 - such as travel and subsistence allowances) xxx
Taxable income before taxable capital gain xxx
Add: Taxable capital gain (section 26A) xxx
Taxable income before retirement fund deduction xxx
Less: Retirement fund deduction (section 11F) (xxx)
Taxable income before donations deduction xxx
Less: Donations deduction (section 18A) (xxx)
Taxable income (as defined in section 1) xxx
continued
596
13.8 Chapter 13: Individuals
As part of the framework certain deductions are allowed for an individual. These
need to be deducted in a specific order.
Gross income
Less: Exempt income
Equals: Income
Less: Assessed loss from a previous year
Add: Other amounts included in taxable income
Add: Taxable capital gains
Less: Retirement fund contributions
Contributions to retirement fund (current year + amounts not deducted in previous years)
Deduction limited to the lesser of
• R350 000; or
• 27,5% × the higher of
– remuneration; or
– taxable income (excluding lumpsum benefits but including taxable capital gain); or
• taxable income before this deduction
Less: Donations to public benefit organisations
Limited to 10% × taxable income before this deduction (excluding any retirement fund
lump sum benefit and retirement fund lump sum withdrawal benefit)
Questions that test your knowledge on specific income and deductions for individuals
follow.
597
A Student’s Approach to Taxation in South Africa 13.9
Question 13.1
Patricia Lilly is 34 years old and unmarried. She provides you with the following infor-
mation for the current year of assessment:
1. Income and deductions related to employment
She received the following income and incurred the following expenses:
R
Salary 190 000
Bonus (non-pensionable) 13 000
Pension fund contributions 15 200
Retirement annuity fund contributions 1 400
Medical aid fund contributions – this represents 50% of the contribution 12 000
2. Dividends received
Red Limited
This is a South African company and Patricia holds 10% of the shares.
She received dividends amounting to R4 000.
Blue Plc
This is a British company, defined as a ‘small company’. Patricia holds
8% of the shares. She received R46 900 dividends after the deduction of
R4 813 withholding tax.
3. Interest received
French savings account (this amount is before the withholding tax of R800) 8 000
South African savings account (not tax free investments) 900
4. Royalties received
Patricia designed a patent for a manufacturing process. This patent is used
in South Africa as well as in other countries. Her royalty income from the
patent was as follows:
South Africa 40 000
Other countries (before foreign tax of R34 000 was deducted) 170 000
5. Donations
Patricia made the following donations during the year:
Natal University 2 300
Public benefit organisations 500
Non-public benefit organisations 800
Where applicable, the official receipts were obtained.
6. Medical expenses
Patricia had to have cosmetic surgery during the year. The operation cost R90 567. The
medical aid paid R70 000 of this amount. Patricia has a disability as defined.
7. Retirement annuity fund contributions
The unclaimed balance of retirement fund contributions at the end of the previous
year of assessment amounted to R100.
598
13.9 Chapter 13: Individuals
Answer 13.1
Calculation of Patricia’s taxable income for the current year of assessment:
R R
Salary 190 000
Bonus 13 000
Dividends – Red Limited 4 000
Local dividend exemption (4 000) nil
Foreign dividends
Blue Plc (R46 900 + R4 813) 51 713
Less: Exemption (R51 713 × 25/45) (28 729) 22 984
Foreign interest 8 000
South African interest 900
Less: Investment exemption (R23 800), limited to amount
actually received (900) nil
Medical fringe benefit 12 000
Royalties received (R40 000 + R170 000) 210 000
455 984
Less: Retirement fund contributions – R15 200 + R1 400 + R100
= R16 700
Limited to the lesser of
• R350 000 or
• 27,5% x the higher of
(R190 000+R13 000+R12 000) = R215 000 or R455 984
Therefore 27,5% × R455 984 = R125 396
• R455 984
R125 396 is the limit therefore allow contributions in full (16 700)
439 284
Less: Donations to public benefit organisations
Natal University 2 300
Public benefit organisations 500
Non-public benefit organisations nil
2 800
Limited to 10% × R439 284 = R43 928, allow in full (2 800)
Taxable income 436 484
R
Normal tax (R73 726 + (31% × (R436 484 – R353 100)) 99 575
Less: Primary rebate (16 425)
Less: Medical scheme fees tax credit (R347 × 12 months) (4 164)
Less: Excess scheme fees tax credit
(33,3% × (R24 000 – (3 × R4 164)) (3 832)
continued
599
A Student’s Approach to Taxation in South Africa 13.9
R
Less: Medical expenses tax credit (R90 567 – R70 000 = R20 567 (6 849)
× 33,3%)
Less: Section 6quat rebate (calculation) (39 613)
Normal tax liability 30 952
Calculation:
Calculation of the section 6quat rebate
Total foreign taxes (R800 + R4 813 + R34 000) 39 613
Limited to:
Therefore, use lesser of qualifying foreign tax (R39 613) or South African tax on
foreign income (R52 070).
Note
R228 249 foreign income is calculated as follows: R
Salary income – not foreign income nil
Foreign interest 8 000
Royalties received 170 000
Foreign dividend income – section 10B(3) partial inclusion is ignored for
the purposes of section 6quat (R46 900 + R 4 813) 51 713
Gross income 229 713
Less: Donations
(R229 713/R439 284 × R2 800) (1 464)
Foreign taxable income 228 249
Note
Royalties received from South Africa do not qualify for the section 6quat rebate as this is
not from a South African service as a result of section 9.
600
14 Fringe benefits
Page
14.1 Introduction ......................................................................................................... 601
14.2 Classification of employment benefits ............................................................. 604
14.3 Fringe benefits in terms of the Seventh Schedule ........................................... 605
14.3.1 General .................................................................................................... 605
14.3.2 Acquisition of an asset at less than the actual value
(paragraph 5) .......................................................................................... 607
14.3.3 Right of use of an asset (excluding a motor vehicle
and accommodation) (paragraph 6) .................................................... 610
14.3.4 Right of use of a motor vehicle (paragraph 7) ................................... 612
14.3.5 Meals, refreshments, and meal and refreshment vouchers
(paragraph 8) .......................................................................................... 622
14.3.6 Accommodation (paragraph 9) ............................................................ 623
14.3.6.1 Residential accommodation ................................................. 623
14.3.6.2 Holiday accommodation ....................................................... 626
14.3.7 Free or cheap services (paragraph 10) ............................................... 628
14.3.8 Benefits in respect of interest on debt (paragraph 11) ..................... 630
14.3.9 Subsidies in respect of loans (paragraph 12)..................................... 633
14.3.10 Medical fund contributions paid on behalf of an employee
(paragraph 12A) .................................................................................... 635
601
A Student’s Approach to Taxation in South Africa 14.1
Page
14.3.11 Costs incurred for medical services (paragraph 12B) ...................... 637
14.3.12 Benefit in respect of employer-owned insurance policies
(paragraph 12C) .................................................................................... 639
14.3.13 Payment of contribution on behalf of employee to a pension,
provident or retirement annuity fund (paragraph 12D) ................. 640
14.3.14 A contribution to a bargaining council (paragraph 12E) ................ 641
14.3.15 Payment of employee’s debt or the release of the employee
from the obligation to pay a debt (paragraph 13) ............................ 641
14.4 Allowances and advances .................................................................................. 643
14.4.1 Travel allowance (section 8(1)(b)) ........................................................ 644
14.4.2 Subsistence allowance (section 8(1)(c)) ............................................... 649
14.4.3 Other allowances ................................................................................... 652
14.4.4 Employees’ tax implications regarding the receipt of allowances .... 652
14.5 Exemptions from tax in an employer/employee relationship
(section 10)............................................................................................................ 653
14.5.1 Special uniforms (section 10(1)(nA)) ................................................... 653
14.5.2 Transfer costs (section 10(1)(nB)) ......................................................... 653
14.5.3 Scholarships and bursaries (section 10(1)(q) and (qB)) ..................... 654
14.6 Summary .............................................................................................................. 655
14.7 Examination preparation ................................................................................... 655
14.1 Introduction
James has just started working at Botha and King (Pty) Ltd. It is his first job. In add-
ition to his salary every month, he is entitled to use one of the company’s vehicles. He
can take the vehicle home and use it over weekends for his own private purposes. On
resigning from the company, he will have to return the vehicle to the company.
On his salary slip, at the end of each month, he saw that over and above the cash
salary he receives there is an additional entry: ‘Fringe benefit – company vehicle’. He
is, therefore, taxed not only on his cash salary, but also on the value of the benefit he
receives from his employer.
There are, however, certain other benefits which employers can give to their employees
that are not taxable, for example if the employer provides meals in a canteen where
the canteen is situated on the employer’s business premises.
In this chapter, we investigate which benefits are taxable fringe benefits and how the
value of such a benefit is determined.
602
14.1 Chapter 14: Fringe benefits
Critical questions
Tax statistics
According to the latest available tax statistics (Tax Statistics 2021):
The travel expenses claimed against the allowance continue to be the largest for
individuals at 23.13% of all expenses of R29.7 billion. The largest fringe benefit at
R116,2 billion was retirement benefits paid by employers on behalf of employees (59.2%).
603
A Student’s Approach to Taxation in South Africa 14.2
604
14.3 Chapter 14: Fringe benefits
605
A Student’s Approach to Taxation in South Africa 14.3
REMEMBER
606
14.3 Chapter 14: Fringe benefits
REMEMBER
• The general rule of the Seventh Schedule is that the amount to be included in gross
income is the cash equivalent of a fringe benefit. This is the value of the benefit in terms
of the Seventh Schedule less any amount paid by the employee.
607
A Student’s Approach to Taxation in South Africa 14.3
REMEMBER
• Long service means an initial unbroken period of service of not less than 15 years, or
any subsequent unbroken period of service of not less than 10 years.
• Awards granted for outstanding performance or for any reason other than long service
or bravery do not qualify for the R5 000 reductions in value.
• If an employee receives the first long service award after, for example, 20 years (not 15)
the following available reduction in value would only be after another 10 years – that is
to say after 30 years’ service.
• ‘Unbroken period of service’ is interpreted to mean a continuous employment with a
single employer without a lawful termination of the contract.
• Gift vouchers are seen as a form of property and therefore regarded as an asset – but a
voucher for a meal, for example, would be excluded and therefore taxable.
• Remuneration proxy is the remuneration earned by the employee in the previous year
of assessment
Example 14.1
Alida Groenewald is employed by Pharma Pills Ltd (a manufacturer of pharmaceutical
products). During the current year of assessment, she purchased pharmaceutical products
from her employer for R800. The cost price of these products was R1 700 and the market
value was R2 100.
You are required to calculate the cash equivalent of the benefit for inclusion in Alida’s
current year of assessment.
Solution 14.1
R
Value of the benefit – cost price of the asset 1 700
Less: Consideration paid by Alida (800)
Cash equivalent of the benefit 900
Because the products constitute trading stock of the employer, the cash equivalent is cal-
culated using the lesser of the cost price or market value of the asset.
Example 14.2
Manie du Plessis received an asset with a market value of R5 600 on 31 December of the
current year of assessment, after rendering 20 years’ service to ABC Ltd. The asset cost
the employer R5 200. The initial intention was not to acquire the asset to dispose of it to
the employee.
You are required to calculate the cash equivalent of the benefit for the current year of
assessment.
608
14.3 Chapter 14: Fringe benefits
Solution 14.2
R
Value of the benefit – market value of the asset at the time the employee
acquired the asset 5 600
Less: Exemption in terms of a long-service award (5 000)
Less: Consideration paid by Manie (nil)
Cash equivalent of the benefit 600
The long-service award exemption of up to R5 000 is available in respect of an initial
unbroken period of service of not less than 15 years or any subsequent unbroken period of
service of not less than ten years.
Notes
1. If the asset cost the employer R4 500, the cash equivalent of the benefit would have
been R1 100 (R5 600 – R4 500). The amount to be excluded could never exceed the cost
for the employer. For long-service awards, the amount to be excluded is therefore
always the lower of the cost for the employer or R5 000.
2. If Manie received the R5 600 in cash, the full amount must be included in his taxable
income as the exemption applies only to an asset and not to a cash award.
Example 14.3
Sarie Smit received a number of gift vouchers in recognition of 15 years’ continuous
service with her employer:
1. A voucher for dinner for two at the local gourmet restaurant to a maximum of R1 000.
Sarie’s employer is a regular visitor to the restaurant and gets 10% discount on his
meals there – he therefore only paid R900 for the voucher.
2. A gift voucher for a full-day treatment at Feather Hill Spa that cost the employer
R1 500.
3. A gift voucher for the local book and media store to the value of R2 000 (cost to the
employer as well).
Sarie had to pay R150 for each voucher.
You are required to calculate the cash equivalent of the benefit for the current year of
assessment.
609
A Student’s Approach to Taxation in South Africa 14.3
Solution 14.3
Value of the benefit
The voucher for the restaurant is a voucher for a meal and is specifically excluded from
paragraph 2(a) (long-service awards) and taxable in terms of paragraph 2(c) (meals or
refreshment). R
Cost to the employer 900
Less: Paid by Sarie (150)
Cash equivalent of the taxable benefit 750
The spa voucher and the book store voucher fall within the scope of paragraph 2(a) as
Sarie acquires them at less than actual value.
R
Cost to employer of the vouchers 3 500
Less: Long-service award reduction (cost of the assets is less than R5 000) (3 500)
Value of the taxable benefit nil
Less: Consideration paid (R150 for each voucher) (300)
Cash equivalent – cannot be less than zero nil
610
14.3 Chapter 14: Fringe benefits
Exclusions
No value will be placed on the taxable benefit if:
• the private use is incidental to the use of the asset for the employer’s business (as
of 1 March 2018 this excludes the right of use of clothing);
• the asset is provided as an amenity to be enjoyed by the employee at their place of
work or for recreational purposes at that place or a place for recreation provided
by the employer for the use of their employees in general, for example gym facili-
ties (as of 1 March 2018 this excludes the right of use of clothing);
• the asset is any equipment or machine which the employer allows their employees in
general to use from time to time for short periods and the value of the private use
does not exceed an amount as set out in a public notice issued by the Commissioner;
• the asset consists of telephone or computer equipment which the employee uses
mainly for the purposes of the employer’s business. This includes modems on
fixed lines of all kinds, removable storage of all kinds (that is to say memory
sticks), printers, office-related software (MSOffice, operating systems, development
and management tools) and telephone line rentals and subscriptions for internet
access; or
• the asset is a book, literature, recording or a work of art.
Example 14.4
Daniel Mamabola has had the use of his employer’s cell phone for the past two years. He
must constantly be available for business purposes and the private use of the cell phone is
only incidental. The cost of the cell phone was R3 000. The market value on the date when
he acquired the use of the cell phone was R1 200.
You are required to calculate the cash equivalent of the benefit to be included in Daniel’s
taxable income.
Solution 14.4
No value is placed on this benefit, as the cell phone is used mainly for the employer’s
business.
611
A Student’s Approach to Taxation in South Africa 14.3
Example 14.5
Ernst Gray’s employer granted him the right of use of a computer for private purposes for
five months from 1 October of the current year of assessment. On that date, the market
value of the computer was R12 000. His employer purchased the computer two years
earlier for R15 000.
You are required to calculate the cash equivalent of the benefit for the current year of
assessment.
Solution 14.5
As this computer is not used for the employer’s business, the exemption does R
not apply.
15% of R12 000 (market value is lower than cost of the asset) × 5 / 12 750
Less: Consideration given for the right of use (nil)
Cash equivalent of the benefit 750
REMEMBER
• The value of the taxable benefit must be apportioned and is deemed to have accrued on
a monthly or weekly basis.
REMEMBER
• The employer is also deemed to have granted their employee the right to use a motor
vehicle if they have hired the motor vehicle under a lease and have transferred their
rights and obligations under the lease to the employee. The employee’s deemed right of
use then extends to the remainder of the lease. The rentals payable by the employee
under the lease will in time be deemed a consideration to be paid by them for the right
of use of the motor vehicle, and the ‘determined value’ of the vehicle is the retail market
value at the time when the employer first obtained the right of use of the vehicle, or the
cash value (excluding finance charges) where the lease is a financial lease.
• Where the lease is an operating lease concluded by parties who are not connected
persons and are transacting at arm’s length, the cash value is the actual cost to the
employer incurred under the operating lease as well as the cost of fuel for that vehicle if
the employer pays the fuel.
612
14.3 Chapter 14: Fringe benefits
It is assumed that all travel is private travel and that the employer bears all costs
relating to the vehicle and the travel with it.
The value of the private use is calculated as follows:
• For each month during which the employee is entitled to use the vehicle for pri-
vate purposes, the value of the taxable benefit is 3,5% per month of the determined
value of the motor vehicle.
• Where the vehicle (at acquisition by the employer) is the subject of a maintenance
plan, the value of the taxable benefit is 3,25% per month of the determined value of
the motor vehicle.
• Where the employer holds the vehicle under an operating lease, the value of the
taxable benefit is the actual cost of the lease and the cost of fuel for the vehicle.
Value of private use (operating lease) = (monthly lease payments × number of months
used during the year of assessment) plus cost of fuel for the year
• When the employee uses the vehicle for a period shorter than a full month, the
value is reduced according to the ratio of the number of days in the period to the
number of days in the month. The purpose of the reduction is to provide for the
right of use of the motor vehicle commencing in the middle of a month. No reduc-
tion in the value determined must be made by reason of the fact that the vehicle in
question was during any period (for any reason) temporarily not used by the em-
ployee for private purposes. For example: If an employee receives the vehicle on 10
May, the calculation for May is:
613
A Student’s Approach to Taxation in South Africa 14.3
REMEMBER
The determined value of a motor vehicle is the retail market value as determined by
Regulation R.362 excluding finance charges and interest payable (paragraph 7).
Note that the rules are different depending on when the vehicle was acquired.
The following table summarises retail market value and the respective dates which in
turn show the determined value:
614
14.3 Chapter 14: Fringe benefits
REMEMBER
• The dealer billing price is the selling price determined by a manufacturer or importer
thereof in the Republic in respect of selling a vehicle to dealers and rental companies.
• Both the retail market value and the dealer billing price should be supplied to you in
questions and the examinations.
• The examples in this book refer to cost price of a vehicle including or excluding VAT.
You should use these values unless reference is specifically made to manufacturers,
exporters, dealers or rental companies.
Example 14.6
The employer purchased a motor vehicle for R200 000 plus R30 000 VAT plus R35 000
finance charges. The determined value will differ depending on how the vehicle is
acquired:
• If the employer purchases the vehicle, the determined value is R230 000.
• If the employer is a motor vehicle manufacturer, the determined value is the market
value of R200 000 (VAT excluded, if VAT input was claimed) or the average cost of all
their stock which is available to employees, for example R150 000.
• If the vehicle is obtained in terms of an instalment credit agreement, the determined
value is the cash value of R200 000 (add VAT if it cannot be claimed).
• If the employer leases the vehicle and obtained it at the end of the lease, the retail
market value when the employer obtained the right of use of the vehicle is the market
value, that is to say R200 000 (add VAT if it cannot be claimed).
615
A Student’s Approach to Taxation in South Africa 14.3
REMEMBER
• Where the employer has granted an employee the right of use of a motor vehicle and a
limit was placed on the value of such vehicle by the employer, and the employee makes
a contribution towards the purchase price of a more expensive vehicle, the contribution
made by the employee must be deducted from the cost price (or cost to the employer) of
the more expensive vehicle. (For example: The employer gave a R230 000 (VAT included)
motor vehicle to Mr Ryk to use. Mr Ryk, however, wants a more expensive vehicle and
he pays R57 500 to obtain a R287 500 (VAT included) vehicle. The determined value is
R287 500 – R57 500 = R230 000.)
• The cost includes add-on items such as tow bars, smash-and-grab window tinting, air
conditioning etc., but not the cost of insurance products such as monthly vehicle track-
ing service fees.
• The value must include VAT even if it was acquired before 1 March 2011 when VAT
was specifically excluded from the determined value of the vehicle. If, however, the
employer was entitled to a deduction of VAT input tax, for example if the employer is a
car dealer, the VAT must be excluded.
• Where more than one employee has the right to a specific vehicle, they would all be
taxable in terms of this paragraph on the same vehicle.
• Where an employee obtains the use of an employer vehicle and then moves to an
associated institution and the institution provides them with the same vehicle, the
determined value is the original value to the first employer.
616
14.3 Chapter 14: Fringe benefits
• the employee proves that accurate records for the distances travelled for private
purposes are kept and that the employee pays the full amount for fuel for private
purposes. This reduction is also calculated on assessment and is calculated on the
number of kilometres travelled for private purposes and the rate per kilometre as
announced for the use of the travel allowance (paragraph 7(8)(b)).
Example 14.7
If an employee does not receive a travel allowance but has the private use of a company
vehicle with a purchase price of R287 500 (including VAT), and the employee:
• is responsible for bearing all the costs of maintenance (R45 000) with regard to the
vehicle (the company bears all fuel expenses);
• has accurate records of distances travelled for private purposes and she travelled
25 000 km of her total 40 000 km for private purposes.
You are required to calculate the cash equivalent of the benefit for the current year of
assessment.
Solution 14.7
R
The private travel is taxed
The fringe benefit for the year is calculated as follows
(adjusted on assessment for private kilometres):
R287 500 × 3,5% × (25 000 km/40 000 km) × 12 months 75 469
Less: cost paid for private use (R45 000 × (25 000 km/40 000 km)) (28 125)
Taxable value 47 344
Note
Only private travel is taxed.
The full amount will be taxed monthly. No adjustment for private travel is made on a
monthly basis. The deductions and adjustment will only be made by SARS on assess-
ment as the total kilometres travelled would only be available then.
Exclusions
There is no taxable benefit
• where the vehicle is available to and is used by employees in general, the private use
of the vehicle by the employee is infrequent or merely incidental to the business use,
and the vehicle is not normally kept at or near the residence of the employee
concerned when not in use outside of business hours (for example pool vehicles); or
• when the nature of the employee’s duties are such that they are regularly required
to use the vehicle for the performance of these duties outside their normal hours of
work, the private use of the vehicle by the employee is infrequent or merely
incidental to the business use and they are not permitted to use the vehicle for pri-
vate purposes other than travelling between their places of residence and their
places of work (for example police vehicles).
617
A Student’s Approach to Taxation in South Africa 14.3
The calculation of the taxable benefit in respect of the right of use of a motor vehicle
can be summarised as follows:
Determined value
(retail market value = cost
including VAT but
excluding finance
charges)
3,5% or 3,25%
per month of the
determined
value
On assessment
Deduction for
business use if a record is
kept of kilometres
travelled for private use
and business use
Bears all the fuel cost pro rata Bears all the maintenance costs
deduction for business use pro rata reduction for
(Kilometres x fuel rate per table) business use
Yes No
Taxable benefit
618
14.3 Chapter 14: Fringe benefits
REMEMBER
• ‘Primarily for business use’ means that more than 50% of kilometres travelled must be
for business purposes.
Where the employee has the right of use of more than one vehicle, no further
reductions on assessment is available. This means that there will be no apportion-
ment of value and no claim in respect of actual expenses incurred in respect of the
licence, insurance, fuel or maintenance. The SARS EMP 10 Guide ‘Guidelines for
employers’ states that, in all cases, the fact that more than one vehicle is made availa-
ble to an employee at the same time must be reported to SARS and only in those cases
where the Commissioner so directs after application by the taxpayer, may the deter-
mined value of only one vehicle be used. Full details of the reasons why it is neces-
sary to make more than one vehicle available to the employee must be submitted
when application for such concession is made.
Example 14.8
Ronel de Witt was granted the use of a company vehicle from 1 March of the current year
of assessment. In addition, the company (her employer) bears the full cost of fuel used for
both business and private travelling, as well as the full cost of maintaining the vehicle.
The vehicle, which was purchased by the company on 30 June two years ago, cost
R278 280. The cost price included VAT amounting to R28 280 and finance charges of
R48 000. Ronel pays R200 a month to the company for the use of the vehicle.
You are required to calculate the cash equivalent of the benefit for the current year of
assessment.
619
A Student’s Approach to Taxation in South Africa 14.3
Solution 14.8
R
Determined value of the vehicle
Cost price (R278 280 excluding finance charges (R48 000)) 230 280
Less: Depreciation for one period (15% on R230 280) (34 542)
Determined value (R230 380 x 85%) 195 738
Taxable benefit:
3,5% per month of R195 738 (value of private use) 6 851
Less: Amount paid by Ronel (200)
6 651
Cash equivalent of benefit for the current year of assessment
(R6 651 × 12 months) 79 812
Why is the determined value only reduced by 15% if the vehicle has been
used by someone else for longer than a year?
Example 14.9
Assume the same facts as in Example 14.8 above, except that Ronel de Witt kept accurate
records (to the satisfaction of the Commissioner) of private kilometres travelled during
the current year of assessment. She travelled 8 000 of the total 20 000 km during the year
of assessment for private purposes.
You are required to calculate the cash equivalent of the benefit for the current year of
assessment.
Solution 14.9
R
Value for private use
Taxable benefit as calculated above
3,5% per month of R195 738 6 851
R6 851 per month × 12 months 82 212
On assessment: Reduction as a result of business use
(20 000 – 8 000)
km × R82 212 (49 327)
20 000
32 885
Less: Consideration given (R200 × 12 months) (2 400)
Cash equivalent of the benefit 30 485
620
14.3 Chapter 14: Fringe benefits
Example 14.10
Jan has the use of a company car from 1 March of the current year of assessment. His
employer purchased the vehicle on 1 March (that same day) for R345 000 (VAT included)
and he pays R200 per month for the use of the vehicle.
You are required to calculate the cash equivalent of the benefit of the company car which
has to be included in Jan’s taxable income for the year of assessment if:
1. Jan did not keep records and did not pay any costs of the vehicle himself. Also indi-
cate the amount subject to PAYE.
2. Jan did not keep records and did not pay any of the vehicle costs, what is the annual
amount on assessment?
3. Jan kept record of his business travel. 10 000 km of the total 40 000 km was for busi-
ness travel.
4. Jan records his business kilometres as in 3. above and he paid the following costs
himself:
R
Licence of the vehicle 200
Insurance 12 000
Maintenance 25 000
Fuel 26 000
5. The vehicle was purchased with a three-year/60 000 km maintenance plan; it cost
R399 000 (VAT included) and he did not keep any records or pay any expenses of the
vehicle.
REMEMBER
Solution 14.10
1. Monthly value is 3,5% × R345 000 = R12 075 less his payment of R200 = R11 875
Monthly inclusion (remuneration) for PAYE is 80% × R11 875 = R9 500
2. Annual amount on assessment is 3,5% × R345 000 × 12 months = R144 900 less
(R200 × 12 months) = R142 500
continued
621
A Student’s Approach to Taxation in South Africa 14.3
3. Taxable amount
R R
Annual amount 3,5% × R345 000 × 12 months = 144 900
Less: Portion travelled for business purposes
R144 900× 10 000km /40 000km = (36 225)
Annual amount 108 675
Less: Paid by Jan – R200 × 12 months (2 400)
Cash equivalent of the benefit 106 275
Exclusions
No value is placed on:
• a meal or refreshment supplied by an employer to their employees in a canteen,
cafeteria or dining room operated by or on behalf of the employer and used wholly
or mainly by their employees;
• a meal or refreshment supplied by an employer to their employees on the employ-
er’s business premises;
622
14.3 Chapter 14: Fringe benefits
Example 14.11
The partners and managers of Top Auditing Firm all eat together, free of charge, in the
auditorium every afternoon. The cost per person amounts to R35 per day for the employer.
You are required to calculate the cash equivalent of the benefit for the current year of
assessment.
Solution 14.11
No value is placed on the benefit as a meal or refreshment supplied by an employer to
their employees in a canteen, cafeteria or dining room operated by or on behalf of the
employer and used wholly or mainly by their employees is excluded.
623
A Student’s Approach to Taxation in South Africa 14.3
If the employee was not employed at all by the employer during the
previous year of assessment, the remuneration is determined by the remu-
neration earned in the first month of employment in the current year of as-
sessment in the ratio of 365/366 days to the number of days in the first
month employed.
B = R91 250. This is a reduction that is available to every employee except if the
employee or their spouse has a direct or indirect controlling interest in the
employer (private company) or the employee, their spouse or minor child
may become the owner of the accommodation. If the employee has control
over the employer or right of option to the property, B is Rnil. (This amount
is the tax threshold discussed in chapter 1 – that is to say, the current primary
rebate of R16 425 18% (the first rate of tax for individuals)).
C = a quantity of 17; or
18 where such accommodation consists of a house, flat or apartment consist-
ing of at least four rooms and such accommodation is either furnished or
power or fuel is supplied by the employer; or
19 where the accommodation consists of a house, flat or apartment consist-
ing of at least four rooms, such accommodation is furnished, and the
employer supplies power or fuel.
D = number of months that the employee was entitled to the accommodation
during the current year of assessment.
2. When an employee has an interest in the accommodation, use the formula.
3. Where the employer does not own the property and they rent it in an arms-
length transaction from a person who is not a connected person, the value of the
taxable benefit in respect of the residential accommodation is the lower of:
• an amount determined as calculated using the formula:
(A – B) × C/100 × D/12
as described above; or
• an amount equal to the rental paid by the employer together with any other
expenditure incurred and paid by the employer.
An employee is deemed to have an interest in the accommodation if:
• such accommodation is owned by the employee or a connected person in rela-
tion to such an employee;
• an increase in the value of the accommodation accrues directly or indirectly to
the benefit of such employee or a connected person in relation to such
employee; or
• such employee or connected person has a right to acquire the accommodation
from their employer.
4. Paragraph 9(9) determines that where the employee has an interest in the accom-
modation and the accommodation has been let to the employer, the value of the
benefit is calculated according to the formula. The rental concerned is deemed
not to be received by or accrued to the employee or a connected person in rela-
tion to them. This means that the owner of the accommodation cannot deduct
any expenses, for example interest incurred, municipal rates and electricity
expenses, in terms of section 11(a).
624
14.3 Chapter 14: Fringe benefits
The cash equivalent of the taxable benefit is the difference between the value of
the private use of the accommodation and the consideration given by the
employee (if any).
Under certain circumstances, a benefit granted by an employer under a housing
scheme constitutes a loan and the provision of a low-interest or interest-free loan
applies in terms of paragraph 10A (refer to 14.3.8).
Exclusions
• No value is placed on the accommodation benefit where the employer provides
accommodation to the employee while they are temporarily absent from their
usual place of residence in the Republic in the course of performing their duties of
employment (paragraph 9(7)).
• No value is placed on an accommodation benefit provided by an employer to an
employee away from their usual place of residence outside the Republic for pur-
poses of the employee performing their duties if the employee is physically present
in the Republic for a period of less than 90 days in that year (paragraph 9(7A)(b)).
• No value is placed on an accommodation benefit provided by an employer to an
employee away from their usual place of residence outside the Republic for pur-
poses of the employee performing their duties if the employee is away from their
usual place of residence for a period not exceeding two years from the date of
arrival of that employee in the Republic, but if:
– that employee was present in the Republic for a period exceeding 90 days
during the year of assessment immediately before their arrival in the Republic to
commence their duties; or
– to the extent that the cash equivalent of the value of the taxable benefit derived
from the occupation of the residential accommodation exceeds an amount of
R25 000 multiplied by the number of months during which the benefit is granted
(paragraph 9(7A)(a) and (7B)), a taxable benefit arises.
REMEMBER
• Where residential accommodation is supplied by the employer and the employee, their
spouse or minor child can (according to an agreement) obtain that accommodation in
future at an amount mentioned in the agreement, and the rental paid by the employee is
calculated as a percentage of the purchase price, then the accommodation is taxed as a
loan (refer to deemed loans paragraph 10A, Seventh Schedule and 14.3.8).
• Where more than one residential accommodation which they are entitled to occupy
from time to time while performing their duties have been made available to the
employees, the amount of the value of the unit with the highest rental value over the
full period during which the employee was entitled to occupy more than one unit must
be included in their gross income. (paragraph 9(6)).
• Where the Commissioner is satisfied that the rental value is less than the rental value
determined in accordance with the above-mentioned rules, he/she may reduce the
value to a lower amount which he/she considers fair and reasonable.
continued
625
A Student’s Approach to Taxation in South Africa 14.3
• If an employee has a usual place of residence outside the Republic and they:
(i) are physically present in the Republic for less than 90 days in that year, no value
is to be placed on accommodation given to them; and
(ii) are performing their duties for a period not exceeding two years from date of
arrival in the Republic, no value is to be placed on the accommodation given to
them provided:
– they did not spend more than 90 days in the Republic in the year of assess-
ment immediately before they arrived here to commence the two-year period;
and
– the accommodation provided to them does not cost more than R25 000 per
month.
Exclusions
No exclusions are applicable to the holiday accommodation benefit.
626
14.3 Chapter 14: Fringe benefits
Example 14.12
His employer granted Elmo de Bruyn, who earned remuneration of R270 000 (excluding a
housing benefit) during the previous year of assessment, the use of an unfurnished town-
house with more than four rooms, as from 1 March in the current year of assessment. The
employer owns the townhouse. The company pays all the costs of electricity, water,
sewerage and municipal rates. In addition, Elmo was given the use of a beachfront flat on
the South Coast for his 21 days’ annual holiday, at no cost. The company also owns this
block of flats. Elmo, his wife and two children made use of this benefit during December
of the current year of assessment. The company usually rents out the flat at R250 a day
per person to independent third parties.
You are required to calculate the cash equivalent of the benefit for the current year of
assessment.
Solution 14.12
Townhouse
C D 18 12
(A – B) × × = (R270 000 – R91 250) × × = R32 886
100 12 100 12
Holiday flat
R250 × 21 days × 4 = R21 000
Total benefit: R32 886 + R21 000 = R53 886
Example 14.13
During the previous year of assessment, Abraham Tayob only worked three months
(December to February) and received remuneration amounting to R100 000 in total
(excluding a housing benefit) from Barlows (Pty) Ltd. R15 200 of this remuneration repre-
sents 80% of a travel allowance. Barlows (Pty) Ltd allows Abraham to stay free of charge
in a fully furnished three-bedroom house with a separate kitchen. Barlows (Pty) Ltd owns
the house. Barlows (Pty) Ltd is also responsible for the payment of the water and electrici-
ty accounts every month. Abraham received this accommodation benefit for the whole cur-
rent year of assessment.
You are required to calculate the cash equivalent of the benefit to be included in
Abraham’s taxable income for the current year of assessment.
627
A Student’s Approach to Taxation in South Africa 14.3
Solution 14.13
Remuneration factor – Abraham worked three months during the preceding R
year of assessment
Remuneration proxy 100 000
Apportion in respect of number of days employed during the previous year
of assessment (R100 000 / 90 (Note) × 365) 405 556
From 1 March to 28 February of the current year of assessment
Accommodation benefit
(A – B) × C/100 × D/12
= (R405 556 – R91 250 87 300) × 19 (Note)/100 × 12 / 12
Cash equivalent of the benefit for the current year of assessment 59 718
60 469
Note
90 = December (31 days) + January (31 days) + February (28 days)
C = 19 because a three-bedroom house with a separate kitchen represents at least four
rooms and because the employer supplies both furniture and power.
REMEMBER
• Where an employee resides in a house of the employer and they can obtain the house
later according to a contract and the rental is calculated as a percentage of the purchase
value, then it is not a service but a loan, except when the purchase contract was concluded
at market value (refer to paragraph 10A, Seventh Schedule and 14.3.8).
628
14.3 Chapter 14: Fringe benefits
Exclusions
There is no taxable benefit on:
• a travel facility granted by an employer who is engaged in the business of trans-
porting passengers for reward, to enable an employee, their spouses or minor chil-
dren to travel to:
– a destination in the Republic or overland to a destination outside the Republic; or
– a destination outside the Republic if such travel was undertaken on a flight or
voyage in the ordinary course of the employer’s business and such employee,
spouse or minor child was not permitted to make a firm advance booking (for
example trips undertaken by airline staff on a standby basis);
• a transport service rendered to employees in general for the transport of such
employees from their home to the place of their employment and vice versa;
• a communication service provided to an employee if the service is mainly used for
purposes of the employer’s business (for example telephone services);
• a service rendered by an employer to their employees at their place of work for the
better performance of their duties, or as a benefit to be enjoyed by them at that
place of work, or for recreational purposes at that place or a place of recreation
provided by the employer for the use of his employees in general (for example,
provision of parking for motor vehicles at the place of work); and
• a travel facility granted by an employer to the spouse or a minor child of an
employee if:
– that employee is stationed for purposes of the business of that employer at a
specific place in the Republic further than 250 km away from their usual place of
residence in the Republic for the duration of the term of their employment;
– that employee is required to spend more than 183 days during the relevant year
of assessment at that specific place for purposes of the business of that
employer; and
– that facility is granted in respect of travel between that employee’s usual place
of residence in the Republic and that specific place where the employee is so
stationed.
Example 14.14
Every morning, Park Supermarket’s minibus picks up all the employees and drives them
to their place of employment. The cost per capita amounts to R8 per day for the employer.
You are required to calculate the cash equivalent of the benefit to be included in the tax-
able income for the employees.
Solution 14.14
No value is placed on this benefit, as a transport service rendered to employees in general
for the conveyance of such employees from their home to the place of their employment,
and vice versa, is excluded.
629
A Student’s Approach to Taxation in South Africa 14.3
Example 14.15
Velvet Ltd incurred a cost of R400 000 to erect a gym at the place of employment where
employees can go and exercise during lunch and after work. The cost per capita amounts
to R180 per month for the employer.
You are required to calculate the cash equivalent of the benefit to be included in the tax-
able income for the employees.
Solution 14.15
No value is placed on this benefit, as a service rendered at the place of work for better
performance of their duties, or as a benefit to be enjoyed by them at the place of work, or
for recreational purposes at work is excluded.
630
14.3 Chapter 14: Fringe benefits
The new repurchase rate or equivalent rate must be applied from the first day of the
month following the date on which that new repurchase rate or equivalent rate came
into operation. The repurchase rate can be found on the Reserve Bank website
www.resbank.co.za. You have to check the rates as they can change during the year
of assessment.
Exclusions
There is no taxable benefit on:
• casual loans granted by an employer to their employee if the debt or all the debts to
that employee are not more than R3 000 at a time. The loans have to be short-term
loans at irregular intervals. Not all debt will qualify for this exclusion merely because it
is less than R3 000. It is important to note that when a debt amounts to R5 000, it does
not mean that the first R3 000 will qualify for the exclusion. The exclusion will only
apply if the debt does not exceed R3 000 and not to the first R3 000 of a debt; and
• loans granted to employees to enable them to further their studies
• From 1 March 2019 no value is to be placed on interest on a loan that does not
exceed R450 000 for the purchase of immovable property for residential purposes
with a market value of R450 000 or less: Provided the employee’s remuneration
proxy does not exceed R250 000 during the year the loan was granted.
REMEMBER
• Where the employee uses a loan from an employer to produce income (as defined), the
cash equivalent of the taxable benefit is deemed to be interest actually paid by them and
allowed as a possible deduction in terms of section 11(a).
631
A Student’s Approach to Taxation in South Africa 14.3
Example 14.16
On 1 March of the current year of assessment, Jaco de Swart’s employer granted him a
loan at a rate of 3% per annum (payable monthly), to enable him to buy a new car. The
debt amounted to R200 000 and would be repaid in full at the end of a period of five years
from the date of the agreement.
You are required to calculate the cash equivalent of the benefit to be included in Jaco’s
taxable income in respect of the current year of assessment. Assume that the official rate
of interest is 4,5% from 1 August of the current year of assessment and 4,75% before that.
Solution 14.16
R
Interest at the official rate of interest:
9 058
Less: Interest paid (3% on R200 000 for 12 months) (6 000)
Cash equivalent of the benefit 3 058
Taxable benefit for the year 3 058
Deemed loans
Paragraph 10A deems a benefit granted by an employer under a housing scheme to
constitute a loan where:
• an employee has been granted the right to occupy residential accommodation
owned by their employer or by an associated institution in relation to their
employer;
• the employee, their spouse or minor child is entitled or obliged to acquire the
house, either on termination of their service or after the expiration of a fixed period
at a price stated in such an agreement; and
• the employee is granted the right to occupy the house and as a consideration in
respect of their occupation, pays rent to the employer, which is calculated as a giv-
en percentage of the price used in the agreement above.
This scheme is identical to the granting by the employer of a low-interest housing
loan and is deemed to be treated as such. These schemes are not taxed as an accom-
modation/housing benefit (refer to 14.3.6.1).
The subsequent acquisition of the property is not treated as an asset acquired at less
than the actual value if the property is acquired at a price that is not lower than the
market value on the date on which the agreement is concluded. This means by impli-
cation that when the agreed price in terms of an agreement amounts to R500 000 and
the house is acquired at a later stage (when the market value is R800 000) for the set
amount (R500 000), no taxable benefit in respect of the acquisition of an asset at less
than the actual value will arise.
632
14.3 Chapter 14: Fringe benefits
Example 14.17
Marlene Mills arranges for her employer to purchase a house in Groenkloof, Pretoria,
where she and her family will live. Marlene and her employer enter into an agreement in
terms of which Marlene will be entitled to acquire the property in five years’ time for
R1 750 000 (its current market value).
In terms of the agreement, Marlene is required to pay a monthly rental 0,5% of the agreed
purchase price. The agreement was entered into on 1 June of the current year of
assessment.
You are required to calculate the cash equivalent of the benefit to be included in
Marlene’s taxable income in respect of the current year of assessment. You can assume
that the official rate of interest is as per the table above.
Solution 14.17
R
Interest at the official rate of interest:
From 1 June 2022 to 31 July 2022 at 5.75% on R1 750 000 for 2 months 16 771
From 1 August 2022 to 30 September 2022 at 6.5% for 2 months 18 958
From 1 October 2022 to 28 February 2023 at 7.25% for 5 months 52 865
Less: Rent paid
0,5% × R1 750 000 for 12 months (8 750)
Cash equivalent of the benefit 79 844
Taxable benefit for the year 79 844
633
A Student’s Approach to Taxation in South Africa 14.3
Example 14.18
James Ndlovu was employed on 1 March of the current year of assessment with a basic
monthly salary of R8 500. He also receives a housing subsidy of R3 500 per month in terms of
his employer’s housing scheme.
You are required to calculate the cash equivalent of the housing benefit received by James
regarding the current year of assessment.
Solution 14.18
R
Taxable portion of the housing subsidy (R3 500 × 12 months) 42 000
Example 14.19
Letta Sepeng obtains a R200 000 loan from Abstec Bank on 1 March of the current year of
assessment and is required to pay interest thereon at 2%. The reason for the low interest
rate is that her employer has arranged to compensate the financial institution for the loss
of interest on the difference between 2% and the normal rate of interest charged of 12%.
Assume that the official rate of interest is 6% for the year.
You are required to calculate the cash equivalent of the subsidy received by Letta in
respect of the current year of assessment.
Solution 14.19
%
Interest paid by the employee 2
Payment by the employer 10
Interest actually received by the financial institution 12
As the interest paid by the employee and the payment made by the employer
exceed the official rate of 6%, the payment is deemed to be a subsidy subject to
tax.
R
Taxable portion of the housing subsidy (10% (12% – 2%) × R200 000) 20 000
continued
634
14.3 Chapter 14: Fringe benefits
Note
If the official rate of interest had to change to 13%, the interest paid by the employee (2%)
together with the payment made by the employer (10%) does not exceed the amount of
interest which would have been paid had interest been charged at the official rate of
interest, and the benefit granted is taxed according to the provisions of a low or interest-
free loan:
R
Interest at the official rate (13% × R200 000) 26 000
Less: Interest payable (2% × R200 000) (4 000)
Cash equivalent of benefit 22 000
Example 14.20
A company has employed Anne Brown for several years. On 1 August of the current year
of assessment the company granted her a loan of R200 000 to enable her to buy the flat she
lives in. The company’s housing scheme provides for housing loans at an interest rate of 2%
per annum, repayment of the capital portion of the loan only becoming due when the
employee leaves the company’s employment for any reason whatsoever. During the current
year of assessment Anne earned a salary of R240 000.
You are required to calculate the cash equivalent of the benefit to be included in Anne’s
taxable income in respect of the current year of assessment. You can assume that the offi-
cial rate of interest is 7% for the year.
Solution 14.20
R
Interest at official rate:
7% on R200 000 for seven months (7 / 12) 8 167
Less: Interest payable (2% on R200 000 for seven months) (2 333)
Cash equivalent of the benefit 5 834
No subsidy has been paid by Anne’s employer in respect of the capital or interest on the
loan and therefore it is treated as a low-interest or interest-free loan and not as a housing
subsidy.
635
A Student’s Approach to Taxation in South Africa 14.3
Exceptions
If the contribution or payment to the fund is such that an appropriate portion cannot
be attributed to the employee or their dependants for whose benefit it is made, the
amount of that contribution or payment in relation to a specific employee and their
dependants is deemed to be the total contribution or payment by the employer to the
fund in respect of all employees and their dependants divided by the number of
employees in respect of whom the contribution or payment is made.
If the apportionment of the contribution or payment among all the employees of a
fund as described in the paragraph above does not reasonably represent a fair appor-
tionment of that contribution or payment among the employees, the Commissioner
may decide (after application by the taxpayer) that such apportionment be made in
such other manner as appears fair and reasonable.
Exclusions
The benefit is not regarded as a taxable benefit if the payment by the employer is
made on behalf of:
• a pensioner (persons who have retired from service due to old age, poor health or
other disability);
• the dependants of a person, after such person’s death, if such person was in the
employ of such employer on the date of death;
• the dependants of a pensioner, after such person’s death, if such person retired from
service by reason of age, poor health or other disability.
Example 14.21
Ferramax Ltd has its own medical aid fund registered in terms of the Medical Schemes Act.
For the current year of assessment, Ferramax Ltd made the following contributions to the
fund on behalf of the following employees, none of whom contributed to the fund:
R
Mario Fernando (Note 1) 24 000
Other employees and their dependants (Note 2) 3 600 000
Abel Alexander (Note 3) 33 600
continued
636
14.3 Chapter 14: Fringe benefits
Notes
1. Mario Fernando is the managing director. He earns a salary of R680 000 a year. The
contributions were only made for the benefit of Mario as he does not have any
dependants.
2. The company employs 250 other employees. Mary Daneel is one of these other
employees. She has one dependant.
3. Abel Alexander receives a pension from the company’s pension fund, amounting to
R72 000. Abel retired due to old age in 2013.
You are required to calculate the cash equivalent for the current year of assessment of the
taxable benefits arising from the company’s contributions to the medical aid fund in
respect of all the taxpayers referred to above.
Solution 14.21
R
Mario Fernando
Total contribution by the company = fringe benefit 24 000
Mary Daneel
Mary’s taxable benefit is calculated as follows:
R3 600 000 (the total employer contributions in respect of all employees and
dependants) divided by 250 (being the number of employees)
= R14 400
This R14 400 thus represents the deemed contribution made by the company in
respect of the benefits of Mary and her one dependant
Total contribution by the company = fringe benefit 14 400
Abel Alexander
Taxable benefit (he has retired and receives a pension) nil
637
A Student’s Approach to Taxation in South Africa 14.3
Exceptions
If the payment for the medical services, as described above, is such that an appropri-
ate portion cannot be attributed to the relevant employee and their spouse, children,
relatives and dependants, the amount of the payment in relation to the relevant
employee and their spouse, children, relatives and dependants is deemed to be an
amount equal to the total amount incurred by the employer in respect of the medical
services divided by the number of employees who are entitled to make use of those
services.
Exclusions
The benefit is not regarded as a taxable benefit if the payment by the employer is
made in respect of the following medical services:
• Medical treatment listed in a category of the prescribed minimum benefits deter-
mined by the Minister of Health in terms of the Medical Schemes Act 131 of 1998,
which is provided to the employee or their spouse or children in terms of a scheme
or programme of that employer,
– which constitutes the carrying on of the business of a medical scheme, but the
scheme is exempt from the requirement of the Medical Schemes Act; or
– which does not constitute the carrying on of the business of a medical scheme, if
that employee, their spouse and children are not beneficiaries of a registered
medical aid scheme or they are beneficiaries of such a medical aid scheme, and
the total cost of that treatment is recovered from that scheme.
• Medical services rendered or medicines supplied for purposes of complying with
any law of the Republic.
• Medical services received from an employer by:
– a person who retired from the employment of the employer as a result of super-
annuation, ill-health or other infirmity;
– the dependants of a person after that person’s death, if that person was in the
employ of that employer on the date of death;
– the dependants of a person after that person’s death, if that person retired from
the employ of that employer by reason of superannuation, ill-health or other
infirmity; or
– a person who is entitled to the secondary rebate, that is to say the person will be
65 years or older on the last day of the relevant year of assessment.
• Where the services are rendered by the employer to its employees in general at
their place of work for the better performance of their duties.
638
14.3 Chapter 14: Fringe benefits
Example 14.22
Reubosch Ltd does not have its own medical aid fund registered in terms of the Medical
Schemes Act 131 of 1998. Reubosch Ltd has a policy in respect of which the company
pays for all medical and other related services in respect of employees, their spouses,
children and relatives. For the current year of assessment, Reubosch Ltd made the follow-
ing payments regarding medical and other related services on behalf of the following
employees, spouses, children and/or relatives. None of the employees paid anything
themselves.
R
• The company received a bill from the local hospital. The costs relate to
immunisations. All employees, their spouses, children and/or rela-
tives could obtain the immunisations. A nurse from the hospital was
available during lunchtime for a week to give the immunisation. Karen
Neveu went for the injections. In total, 800 employees went for the in-
jections. 40 000
• The company pays R500 per month to the local doctor in order for
Avashnee Moola to receive medical services. Avashnee is the widow
of Abdullah Moola, who was in the employ of the company on the
date of his death during the current year of assessment. 6 000
You are required to calculate the cash equivalent of the taxable benefits arising from the
company’s payments in respect of medical and other related services provided to
employees, their spouses, children and/or relatives for all the taxpayers referred to
above.
Solution 14.22
R
Karen Neveu
As the services are rendered by the employer to its employees in general at
their place of work for the better performance of their duties, no taxable benefit
arises. nil
Avashnee Moola
No value is placed on the amount of R500 per month paid to the local doctor in
order for Avashnee Moola to receive medical services as Avashnee is a depend-
ant of her late husband, who died while in the employ of the company. nil
639
A Student’s Approach to Taxation in South Africa 14.3
Exclusions
No value is placed on the taxable fringe benefit obtained:
• from a contribution made by an employer to the benefit of an employee who
retired from service; or
• in respect of the dependants or nominees of a deceased member of the fund.
REMEMBER
• A defined contribution fund means the member eventually gets all contributions made
for their benefit back, plus capital growth, less the costs. A defined benefit fund means
the member would be entitled to a specific pension/retirement benefit determined not
on their contributions but on the benefit they should get. Therefore, an involved for-
mula is required to determine the employer’s specific contribution to one person’s
retirement benefits.
640
14.3 Chapter 14: Fringe benefits
Example 14.23
Douggies Ltd pays the retirement annuity fund contributions amounting to R20 000 on
behalf of one of its directors, Dewald van Jaarsveld.
You are required to calculate the cash equivalent of the benefit to be included in
Dewald’s taxable income in respect of the current year of assessment.
Solution 14.23
The value of the taxable benefit in respect of the retirement annuity fund contributions is
R20 000, to be included in Dewald’s taxable income in respect of the current year of
assessment. The amount of R20 000 can qualify as a deduction in terms of section 11F
when calculating Dewald’s taxable income.
REMEMBER
This benefit does not include amounts paid by the employer as:
• medical fund contributions (paragraph 12A);
• incurral of cost relating to medical services (paragraph 12B); or
• premiums paid on employer-owned insurance policies (paragraph 12C).
641
A Student’s Approach to Taxation in South Africa 14.3
Exclusions
No value is placed on a taxable benefit in terms of this paragraph, if the employer pays:
• subscriptions on behalf of the employee to a professional body if membership of
the body is a condition of the employee’s employment;
• insurance premiums indemnifying an employee solely against claims arising from
negligent acts or omissions on the part of the employee in rendering services to the
employer;
• a portion of the value of a benefit that is payable by a former member of a non-
statutory force or service as defined in the Government Employees Pension Law of
1996 to the Government Employee’s Pension Fund as contemplated in
Rule 10(6)(d) or (e) of the Rules of the Government Employees Pension Fund con-
tained in Schedule 1 to that Proclamation; and
• on behalf of a new employee, an amount to a previous employer in respect of a
study loan or bursary obligation still owing to the previous employer due to the
fact that the previous employer required the employee to work for a fixed period
after obtaining the qualification and the period has not expired. The employee is
consequently liable to work for the new employer for a period not shorter than the
remaining period which they should still have worked for the previous employer.
Example 14.24
Ine-Lize Steyn receives a study loan from her employer on 1 March of the current year of
assessment to enable her to enrol for a certificate programme at a university. At the end of
the calendar year (December), when the results were made available, Ine-Lize was
announced as being the top student of the programme. Her employer waived her debt
and she did not have to repay the loan.
You are required to discuss whether the above-mentioned will result in any cash equiva-
lent of the benefit to be included in Ine-lize’s taxable income in respect of the current year
of assessment.
Solution 14.24
The value of the loan will be included in Ine-Lize’s taxable income, as a taxable benefit
will arise when the employer releases the employee from an obligation to pay an amount
owing by the employee to the employer. If her employer paid her the amount owed as a
bona fide study bursary and made the bursary subject to a condition that Ine-Lize has to
repay the bursary if she abandons her studies or fails to complete them within a certain
period, no taxable benefit will arise as the bursary will qualify as being exempt income in
terms of section 10(1)(q) (refer to 14.5.6).
642
14.3–14.4 Chapter 14: Fringe benefits
REMEMBER
• It is important to note that the cash equivalent of all the above-mentioned fringe benefits
will not only be used to calculate the annual taxable income of an employee but also
when the employer calculates employees’ tax on a monthly basis. The right of use of a
motor vehicle, however, is calculated at 80% for employees’ tax purposes, unless the
employer is satisfied that the vehicle is used 80% for business purposes. In that case,
only 20% is included.
643
A Student’s Approach to Taxation in South Africa 14.4
R
Travel allowance received xxx
Less: Portion expended for business purposes (xxx)
Taxable allowance to be included in the taxable income of the employee
(the portion associated with private use) xxx
The portion of the travel allowance that is used to fund travelling for business pur-
poses needs to be calculated, as this will reduce the travel allowance to be included in
gross income.
In order to calculate the cost of travelling for business purposes, information is
required regarding the kilometres travelled during the year in total and the kilome-
tres travelled relating to business travelling. The cost per kilometre must also be
determined.
Cost of business travel = business kilometres × cost per kilometre
Business kilometres can only be ascertained by keeping accurate records of kilo-
metres travelled in a logbook. Travelling between the taxpayer’s place of residence
and their place of business or employment is considered to be private travelling. The
employee also needs to keep record of the total kilometres travelled during the year.
Cost per kilometre can be determined by either keeping accurate records of expenses
or using the tables or deemed cost provided in the Income Tax Act.
• Actual expenses are determined where the taxpayer keeps accurate records of
expenses incurred in order to substantiate the business use of a travel allowance.
Proof can be kept of the following expenses in order to calculate the actual cost per
kilometre:
– Where the vehicle is owned by the employee, they can claim wear and tear on
the vehicle as part of the actual expenses. This wear and tear must be deter-
mined over a period of seven years from the date of the original acquisition by
the recipient and the cost of the vehicle for this purpose must be limited to a
maximum of R665 000.
– Where the vehicle is being leased, the total amount of payments in respect of
that lease may be claimed. The amount claimed may not exceed an amount of
the fixed cost determined by the Minister of Finance in the deemed cost table in
a year of assessment (refer to Appendix B).
– Finance charges in respect of a debt incurred regarding the purchase of that
vehicle can also be claimed but must be limited to an amount that would have
been incurred had the original debt been R665 000.
– All other expenses incurred in the running and maintenance of the vehicle, for
example the cost of licences, insurance, maintenance and tyres, might also be
taken into account.
644
14.4 Chapter 14: Fringe benefits
Once all the actual expenses are added up, these expenses must be divided by the
total number of kilometres travelled by the taxpayer during the year of assessment to
calculate the actual cost per kilometre.
• Deemed cost per kilometre
– The deemed cost per kilometre is determined by the Minister of Finance and
made available by notice in the Government Gazette. The employee can use the
table if the taxpayer did not keep an accurate record of expenses (refer to the
2022 table in Appendix B ).
– In order to make use of this table, the employee must use the determined value
of the vehicle in respect of which the travel allowance was granted.
The determined value of a vehicle is:
• If the vehicle was acquired under a bona fide agreement of sale,
– the original cost price of the vehicle (including VAT but excluding finance
charges or interest payable).
• If the vehicle was acquired under a financial lease,
– the cash value of the vehicle (including VAT).
• In any other case,
– the market value of the vehicle at the time when the recipient (employee) first
obtained the vehicle or right of use thereof, plus VAT that would have been
payable on that value on that date.
By using the determined value, the employer is able to read an appropriate fixed cost,
fuel cost and maintenance cost from the table. These amounts are added together in
order to calculate a deemed cost per kilometre.
REMEMBER
• The fixed cost on the table is given in Rands and the fuel and maintenance rates are given
in cents per kilometre, so they cannot be added together. You must either convert the
fixed cost per kilometre that you calculated to cents per kilometre (by multiplying by 100)
or you must convert the fuel and maintenance rates to rand (by dividing by 100).
• The fixed cost per the table is an annual cost, so where the employee receives a travel
allowance for less than the full year during the current year of assessment, the fixed cost
must be reduced pro rata in the same proportion as the time the allowance was received.
When calculating the portion relating to business travel, an employee may use the
greater of actual expenses per kilometre or deemed cost per kilometre. Where records
have not been kept, the employee must use the deemed cost per kilometre.
645
A Student’s Approach to Taxation in South Africa 14.4
Note that where a taxpayer receives an allowance based on the actual distance trav-
elled by the recipient using a motor vehicle for business purposes (therefore excluding
private travelling) or the distance is proved to the Commissioner, the amount ex-
pended by the recipient on such business travelling is not taxed up to a rate of 382
cents per kilometre (regardless of the value of the vehicle). No employees’ tax is
deducted on such an allowance. For example: If an employee travels 5 000 business
kilometres during the year of assessment, the employer can pay a reimbursive allow-
ance of R19 100 (5 000 business km × 418 cents) as a non-taxable reimbursive allow-
ance if the employee does not receive a fixed travel allowance.
Example 14.25
Yosuf Naidoo receives a travel allowance of R8 000 per month from his employer and uses a
Mercedes Benz and a Hilux bakkie interchangeably for business purposes. During the
current year, he travelled 28 000 km with the Mercedes Benz and 35 000 km with the
Hilux bakkie. Both the Mercedes Benz and the Hilux bakkie are therefore used for busi-
ness purposes interchangeably for the full 12 months.
You are required to calculate the business cost that can be claimed against Yosuf’s travel
allowance.
Solution 14.25
The taxpayer did not keep accurate records; therefore, all the travelling is deemed to be
private and he will be taxed on R8 000 x 12 for the year of assessment. He cannot deduct
any cost. If, however, he kept accurate records of business kilometres travelled and the
Commissioner is satisfied that he uses both vehicles primarily for business purposes, he
will be taxed on the allowance, but allowed to deduct the business travel.
REMEMBER
• According to the SARS PAYE-GEN-01-G03 ‘Guidelines for employers’, no employees’
tax must be deducted from a reimbursive travel allowance unless the allowance exceeds
3,82 cents per kilometre). Where an employee receives a fixed monthly travel allowance
and additionally is also reimbursed per kilometre for actual business kilometres trav-
elled, employees’ tax must only be deducted from the fixed monthly travel allowance
unless the reimbursive allowance exceeds the 418 cents/km.
• The belief that an employee must own the vehicle before the reduction in respect of
business use will apply is wrong. The employee must use the vehicle in respect of
which the allowance is received for business purposes. The total kilometres travelled
with the vehicle is used in the calculation of the above-mentioned reduction against the
travel allowance received by the employee.
• Where an employee is granted the use of a company vehicle in addition to the receipt of
a travel allowance in respect of the same vehicle, the deemed cost per kilometre cannot
be used in determining the business portion claimable against the travel allowance.
• Where the employee receives a travel allowance and has the use of a company car as
per paragraph 7 of the Seventh Schedule, no reduction of the travel allowance can be
calculated for business travel in terms of section 8. The full allowance is taxable. The
business travel would be deductible against the value of the company car as calculated.
646
14.4 Chapter 14: Fringe benefits
Example 14.26
Mia Swanepoel owns a vehicle with a cost of R145 000 (including VAT) and receives a travel
allowance of R4 500 per month in respect of the whole year of assessment. Mia travelled
29 000 km during the year of assessment and recorded her business travel as being 11 000 km.
You are required to calculate the taxable portion of the travel allowance to be included in
Mia’s taxable income.
Solution 14.26
R R
Travel allowance received: R4 500 × 12 months 54 000
Calculate the deemed costs and actual kilometres
Value of the car 145 000
Fixed cost determined from the table 52 889
Fixed cost per kilometre (R52 889/29 000km × 100) 182,38 cents
Fuel cost per kilometre (from the table) 147,00 cents
Maintenance cost per kilometre (from the table) 51,10 cents
Total cost per kilometre 380,48 cents
Example 14.27
Gordon Heuser uses his private car for business travel on behalf of his employer and for
this he receives a travel allowance of R120 000 per year. On 1 March of the previous year
of assessment, he purchased a new motor vehicle, the cost being as follows:
R
Cost price 450 000
VAT 63 000
513 000
continued
647
A Student’s Approach to Taxation in South Africa 14.4
Gordon kept accurate records of the expenses incurred in respect of the current year of
assessment:
R
Finance charges 87 210
Fuel cost 28 000
Maintenance cost 12 000
Insurance premiums and licence fees 9 600
Gordon travelled a total of 28 000 km during the current year of assessment, of which
18 000 was for private purposes.
You are required to calculate the taxable portion of the travel allowance to be included in
Gordon’s taxable income.
Solution 6.27
R R
Travel allowance received 120 000
Compare the deemed and actual costs to select the highest
Deemed cost per kilometre:
Value of the vehicle (R450 000 + R63 000) 513 000
Fixed cost determined from the table 137 735
Fixed cost per kilometre (R137 735 / 28 000 km × 100) 491,91 cents
Fuel cost per kilometre (from the table) 210,8 cents
Maintenance cost per kilometre (from the table) 84,9 cents
Total cost per kilometre 787,61 cents
continued
648
14.4 Chapter 14: Fringe benefits
What would the actual cost per kilometre rate be if Gordon’s vehicle
had a cost of R750 000?
Where an employee, their spouse or child owns or leases a motor vehicle, whether
directly or indirectly, by virtue of an interest in a company or trust or otherwise, and
the vehicle is let to the employer or associated institution in relation to the employer,
• the sum of the rentals paid (plus any expenditure in respect of the vehicle that was
borne by the employer) is deemed to be a travel allowance;
• the rental is deemed not to have been received by or to have accrued to the lessor
of the motor vehicle concerned; and
• the employee is deemed not to have been granted the right to use the motor
vehicle.
The employee is deemed to have received a travel allowance and therefore does not
qualify for any deductions (except for the business portion applicable to a travel
allowance).
R
Subsistence allowance received xxx
Less: Portion expended for business purposes (xxx)
Taxable allowance to be included in the taxable income of the employee xxx
649
A Student’s Approach to Taxation in South Africa 14.4
For the purposes of determining the taxable portion of the allowance, the employee
has the option to use the following as the portion expended for business purposes:
Actual figures
The amount actually incurred in respect of accommodation, meals and other inciden-
tal costs, if proved to the Commissioner.
Deemed figures
Where the employee has not provided proof of actual expenditure, the exclusion for
each day or part of a day that the employee is away from their usual place of residence
is an amount per day in respect of meals and other incidental costs, or incidental
costs only as determined by the Commissioner, for a country or region, by way of
notice in the Government Gazette.
• Where the accommodation to which the allowance or advance relates is in the
Republic, an amount equal to:
– R152 if the allowance or advance is paid or granted to defray the cost of inci-
dental subsistence expenses only; or
– R493 if that allowance or advance is paid or granted to defray the cost of meals
and incidental subsistence expenses.
• Where the accommodation to which the allowance or advance relates is outside the
Republic, an amount per country as determined in a foreign travel subsistence
allowance schedule (refer to Annexure I). For example, in the United States of
America US$146 and in Greece €134 would be granted. The allowance is not
always given in the currency of the specific country, for example, Namibia is given
in South African R950, Kenya is given as United States $138 and for countries not
on the list one must use United States $215.
The amount in respect of travelling abroad applies only in respect of continuous
periods not exceeding six weeks spent outside the Republic.
REMEMBER
650
14.4 Chapter 14: Fringe benefits
An employer must pay a subsistence allowance to an employee over and above the
normal remuneration payable to the employee and cannot amend the cash portion of
an employee’s salary by the amount of the subsistence allowance.
If a subsistence allowance or advance is paid to an employee during a month in
respect of a night away from their usual place of residence and that employee has not
either spent the night away or refunded that amount to the employer by the last day
of the following month, the allowance or advance is deemed to become payable to the
employee in the following month in respect of services rendered.
Example 14.28
Maria Mhlangu is obliged to spend four days away from her usual place of residence in
the Republic for business purposes. She receives an allowance of R2 000 from her
employer. Maria is able to prove that she incurred expenses of R970 on meals and inci-
dental expenditure.
You are required to calculate the taxable portion of the allowance to be included in
Maria’s taxable income.
Solution 14.28
R
Subsistence allowance received 2 000
Less: Deemed amount of R493 per day amounting to R1 808 (R493 × 4 days).
This amount is higher than the actual expenses (R970) incurred. (1 972)
Taxable allowance to be included in the taxable income of the employee 28
Example 14.29
Brian Swart is sent to France by his employer to market a product for the company. He is
absent from his house for a total period of three weeks. The employer pays the actual cost
of Brian’s lodging and furthermore pays the employee an allowance of €210 per day for
meals and incidental costs.
You are required to calculate the taxable portion to be included in Brian’s taxable
income in respect of the allowance received. You can accept that the approved amount
of the subsistence allowance for visits to France is €128 per day.
Solution 14.29
The allowance is taxable as it exceeds €128 per day. For example: If the approved
amount is €217 per day, Brian cannot claim a deduction of €7 (€217 less €210) against
his taxable income, as the deduction is always limited to the allowance received. If Brian
spent seven weeks (longer than six weeks) in France, the full allowance paid by the
employer is included in Brian’s taxable income and Brian can deduct actual costs
incurred.
651
A Student’s Approach to Taxation in South Africa 14.4
REMEMBER
• All the above discussions on allowances (in 14.4) refer to the calculation of the annual
taxable income and not to the monthly employees’ tax implications.
652
14.5 Chapter 14: Fringe benefits
Example 14.30
XYZ Ltd transferred Anike Moody from Durban to Pretoria. Her basic salary is R8 700 per
month. XYZ Ltd paid for the transfer of her personal goods and made arrangements
for Anike and her family to stay in a hotel on their account for two months during which
Anike had to wait for the previous owners to move out of the house that she bought.
Anike puts in a claim for the following expenses to XYZ Ltd:
Amount
Description R
1 New school uniforms purchased for her two children 2 180
2 Curtains made for her new house 12 800
3 Motor vehicle registration fees 480
4 Telephone, water and electricity connections 1 500
5 Loss on sale of previous residence 20 000
6 Agent’s fee on sale of previous residence 28 895
7 Transfer duty on new residence 30 000
95 855
You are required to indicate which portion of Anike’s claim will be exempt from tax.
653
A Student’s Approach to Taxation in South Africa 14.5
Solution 14.30
The benefit Anike receives due to the fact that her employer paid for the transfer of her
personal goods as well as the hotel accommodation (in respect of herself and her family)
for two months qualifies for the exemption in terms of section 10(1)(nB).
Items 1 to 4 are considered to be settling-in costs and can be paid back to Anike tax free.
Item 5 is a taxable benefit and if XYZ Ltd pays this amount to Anike, it is taxable in full.
Items 6 and 7 qualify again for the exempt relocation allowance.
REMEMBER
• XYZ Ltd could have paid Anike R8 700 (one month’s basic salary) without withholding
employees’ tax (also not taxable on assessment) in respect of settling-in expenses as per
SARS’s practice. If they chose this option, they could not refund her for items 1 to 4 and
6 and 7 again (as this must be covered from her additional one month’s basic salary).
Example 14.31
JD Motors Ltd granted a bursary of R18 000 to each of the two high-school children of
Marinella Davids. Marinella earns a salary of R54 000 per annum. JD Motors Ltd does not
operate a bursary scheme open to the general public.
You are required to calculate the effect of the bursaries on Marinella’s taxable income.
Solution 14.31
Marinella received the bursaries in consequence of services rendered by her, and the bursa-
ries are less than the exemption of R20 000 per relative. The bursaries are therefore not
taxable in Marinella’s hands.
Note
If one of Marinella’s children were a person with a disability (as defined in section 6B(1))
then her employer could have given her a bursary of up to R30 000 for this child and it
would have been exempt from tax.
If the child with a disability were at university Marinella could receive a bursary of up to
R90 000 for the child’s studies at university and it would have been exempt from taxation.
REMEMBER
• If Marinella’s remuneration exceeded R600 000 per annum, the bursaries (R18 000 × 2 =
R36 000) are taxable in full (even if the children were persons with disabilities).
654
14.6–14.7 Chapter 14: Fringe benefits
14.6 Summary
When calculating the taxable income of an employee, certain benefits received in any
form other than a cash payment should be valued in terms of the Seventh Schedule
and included in the employee’s taxable income.
In terms of section 8 of the Act, there must be included in the taxable income of a
person any amount which has been paid or granted during that year by their princi-
pal (an employer, authority, company or body in relation to which any office is held
and an associated institution in relation to that employer) as an allowance or advance.
These allowances are reduced with the portion used for business purposes.
The next section contains a question that can be completed to evaluate your
knowledge on fringe benefits.
Question 14.1
Jan and Martha Williams are married in community of property and are both 45 years old.
They do not have any children and were both employed for the full year of assessment.
Monthly amounts are applicable for a 12-month period unless stated otherwise.
Information relating to Martha
The following amounts accrued to her during the current year of assessment:
Salary R250 000
Rental R12 000
Interest R40 000
She contributed 5% of her salary to a provident fund and R5 000 to a retirement annuity
fund during the current year of assessment.
Information relating to Jan
Income accrued during the current year of assessment R
Monthly basic salary 28 000
Annual bonus 25 200
Entertainment allowance (Note 1) 6 850
Monthly travel allowance until 30 April of the current year of
assessment (Note 2) 13 000
Use of company vehicles (from 1 May of the current year of
assessment) (Note 2) ?
Briefcase (acquired by the employer with the purpose of giving it to
Jan) received in recognition of 22 years of service – cost to employer
(Note 3) 6 875
South African dividends received 4 000
Income for the year of assessment from trade activities (Note 4) 34 500
continued
655
A Student’s Approach to Taxation in South Africa 14.7
Notes
1. Jan is required to entertain clients regularly and incurred entertainment costs of
R3 120 during the year of assessment.
2. Jan used his own vehicle while he received the travel allowance. His car had a cash
cost of R220 000 (excluding VAT at 14%). He kept a logbook and travelled 6 000 km in
total during March and April of the current year of assessment, of which 2 333 km
were for business purposes. He bore the cost of fuel and maintenance for the vehicle
but did not keep record of his expenses.
As from 1 May of the current year of assessment, Jan enjoyed the use of two company
cars:
• Martha used the one vehicle with a determined value of R160 000.
• Jan used the other vehicle. The company purchased this vehicle for R108 300
(including VAT at 14%) on 1 March three years ago. His employer pays all
maintenance and fuel for his private and business travel. He kept a detailed log-
book from 1 May of the current year of assessment, which revealed that his pri-
vate use of this company car until the end of the year of assessment amounted to
5 333 km, and his business use amounted to 6 km. The total distance travelled for
the period was 12 110 km.
3. This is the first time Jan has received any recognition for long service.
4. Jan repairs electronic equipment after hours.
5. On 30 November of the current year of assessment, Jan bought back years of pen-
sionable service for R3 000.
656
14.7 Chapter 14: Fringe benefits
Answer 6.1
Normal tax liability of Martha Williams R
Salary 250 000
Rental R12 000 × 50% 6 000
Interest R40 000 × 50% 20 000
Dividends R4 000 × 50% (exempt) Nil
Less: Interest exemption (limited to R23 800 – therefore full amount is
exempt) (20 000)
256 000
Retirement fund contributions R
Provident fund R250 000 × 0,05 12 500
Retirement annuity fund contributions actual 5 000
17 500
Limited to lesser of
R350 000 or
27,5% of higher of
R250 000 or
R256 000
Thus 27,5% of R256 000 = R70 400;
Or R256 000
the limit is R70 400, therefore allow contributions in full (17 500)
Taxable income 238 500
Tax payable (R40 680 + ((R238 500 – R226 000) × 26%)) 43 930
Less: Primary rebate (16 425)
Normal tax liability 27 505
Use of company vehicle R108 300 × 85% × 85% × 85% = R66 510
(Jan) (3,5% × R66 510) × 10 months ×
(5 333 km / 12 110 km) R10 251
(Martha) (3,5% × R160 000 × 10 months) R56 000 66 251
Briefcase R6 875 – R5 000 1 875
continued
657
A Student’s Approach to Taxation in South Africa 14.7
R
Rental (wife) 50% × R12 000 6 000
Interest (wife) 50% × R40 000 20 000
Dividends 50% × R4 000 (exempt) Nil
Less: Interest exemption (20 000)
Net profit from trade (R34 500 – R30 900) 3 600
continued
658
14.7 Chapter 14: Fringe benefits
R
Donations Actual = R7 500
Limited to 10% × R407 916 thus allow in full (7 500)
Taxable income 400 416
Normal tax (R73 726 + ((R400 416 – R353 100) × 31%)) 88 394
Less: Primary rebate (16 425)
Medical scheme fees tax credit
(section 6A credit) (R347 × 2 × 12) (8 328)
Medical cost tax credit (section 6B credit)
Medical scheme fees actually paid (R5 000 × 12 months) 60 000
Less: Medical scheme fees tax credit (R8 328 × 4) (33 312)
Surplus contributions 26 688
Medical cost not refunded 18 500
45 188
Less: 7,5% × R400 416 (29 956)
Total 15 232
@ 25% (3 808)
Normal tax liability 59 833
Note
Remuneration for retirement contribution:
R336 000 (salary) + R25 200 (bonus) + R6 850 (entertainment allowance + [(R26 000 × 80%)
(travel allowance) + (80% × (3,5% × R66 510) × 10 months) + (80% × (3,5% × R160 000 × 10)
(use of company vehicle)] + R1 875 (briefcase) = R454 148.
It is uncertain from legislation whether the company vehicle should be adjusted for private
travel. In this calculation it was assumed not.
659
15 Retirement benefits
Page
15.1 Introduction............................................................................................................ 662
15.2 Lump sums ............................................................................................................. 663
15.3 Lump sums from employers (paragraphs (d) and (f) definition of
‘gross income’) ....................................................................................................... 664
15.4 Lump sum benefits from retirement funds (paragraph (e) definition
of ‘gross income’) ................................................................................................... 666
15.4.1 Retirement fund lump sum benefits
(paragraphs 2(1)(a) and 5) ....................................................................... 669
15.4.1.1 Deductions (paragraph 5) ....................................................... 670
15.4.1.2 Lump sums received from public sector pension funds
(paragraph 2A) ......................................................................... 671
15.4.1.3 Tax on retirement fund lump sum benefits .......................... 672
15.4.2 Retirement fund lump sum withdrawal benefits
(paragraphs 2(1)(b) and 6) ....................................................................... 674
15.4.2.1 Deductions ................................................................................ 675
15.4.2.2 Tax on retirement fund lump sum withdrawal benefits..... 676
15.5 Exemption of qualifying annuities (sections 10C and 11F and
paragraph 5(1)(a) or 6(1)(b)(i)) ............................................................................. 678
15.6 Other provisions .................................................................................................... 679
15.7 Summary of lump sums ....................................................................................... 679
15.8 Examination preparation ...................................................................................... 680
661
A Student’s Approach to Taxation in South Africa 15.1
15.1 Introduction
When people become too old to work, they still need money to live on. With this in
mind, they normally contributes to a retirement fund during their working years so
that when they retire they will still receive some form of income.
Most salary packages make provision for employees to contribute to a retirement
fund. There are three basic types of retirement funds in South Africa: Pension funds,
provident funds and retirement annuity funds. For individuals who change employ-
ers before they retire, there are preservation funds that hold retirement savings until
the person retires. Pension funds and provident funds are linked to a specific
employer, and retirement annuity funds are linked to life insurance companies. The
monthly contributions that an employee makes to one of these retirement funds are
generally allowed as a deduction (subject to limitations – refer to chapter 12) for
income tax purposes. This deduction results in the contributions that are deductible
not being subject to income tax.
When persons change employment, lose their jobs (are retrenched) or retire (early or
normal retirement), the pension or provident fund to which a person belonged will
pay a lump sum to the person withdrawing or retiring from the fund. As retirement
annuity funds are not linked to employment, persons will only receive a lump sum
from a retirement annuity fund if they withdraw from the fund or when they reach
retirement age. Retirement funds will also pay out when persons die before they
retire.
A question often asked is ‘Why are senior citizens not exempt from income tax?’ It
must be kept in mind that such a measure would place an extra burden on other
people, especially young people who must finance housing and the education of their
young children. Committees that have specifically examined the taxation systems of
other countries, have determined that the best alternative is to spread the tax burden
as far as possible among all classes of taxpayers and all types of income, rather than
to levy tax at a very high rate on only a few taxpayers.
Bear in mind that interest income earned on investments remains taxable, even after
retirement. This income can be viewed in the same light as pensions. Money is saved,
invested and earns a return. Certain exemptions (such as the interest exemption) and
deductions (such as contributions to pension funds) serve to lighten the tax burden;
however, the proceeds are still subject to tax. When a person receives an amount on
retirement, resignation or withdrawal from a fund or employment, or when a person
dies and these funds pay out a lump sum, the lump sum received will be reduced by
certain allowable deductions and the taxable lump sum will be taxed in accordance
with tax tables specifically designed for lump sum benefits.
In this chapter, the taxation of the benefits received from a pension, pension preserva-
tion, provident, provident preservation, or retirement annuity fund when the person
retires or withdraws from a fund, are discussed, as well as the benefits that are
deemed to accrue to persons immediately before their deaths.
662
15.1–15.2 Chapter 15: Retirement benefits
Tax statistics
According to the latest tax statistics available (Tax Statistics 2021) contributions to retire-
ment funds were the largest deduction at R181.3 billion. Pension, provident and retirement
annuity paid on behalf of employees was the largest fringe benefit at R204.1 billion.
663
A Student’s Approach to Taxation in South Africa 15.2–15.3
1 2 3
R R R
Gross income xxx
• as defined in section 1
• specific inclusions (voluntary awards, net amount of xxx xxx
retirement fund lump sum benefit or retirement fund
withdrawal benefit) (paragraphs (d), (e), (eA) and (f))
Less: Exempt income (section 10C) (xxx)
Income (as defined in section 1) xxx
Less: Deductions section 11 – but see below; subject to
section 23(m) and assessed loss (xxx)
(sections 20 and 20A)
Add: Taxable portion of allowances (such as travel xxx
and subsistence allowances)
Taxable income before taxable capital gain xxx
Add: Taxable capital gain (section 26A) xxx
Taxable income before retirement fund deduction xxx
Less: Retirement fund contributions (section 11F) (xxx)
Taxable income before deduction of qualifying xxx
donations
Less: Deduction of qualifying donations (section 18A) (xxx)
Taxable income (as defined in section 1) xxx xxx xxx
There are many reasons why a person may receive a lump sum payment, but ulti-
mately lump sum payments fall into one of these three categories:
• lump sums from employers who are not funds;
• lump sums received prior to retirement (withdrawal benefits); and
• lump sums received on retirement (retirement benefits).
664
15.3 Chapter 15: Retirement benefits
REMEMBER
REMEMBER
• If an associated institution in respect of a person’s employer pays a lump sum to an
employee, it will be treated the same as if the person’s employer had paid the amount.
• Accumulated leave pay is a payment in respect of services rendered and does not form
part of a severance benefit.
• Termination of employment includes relinquishment, loss, repudiation, cancellation or
variation of office or employment or of appointment.
• Retrenchment is where the employer has stopped carrying on the trade for which the
person was employed or they intend stopping.
• Redundancy is where the person is no longer needed because of a general reduction in
employees or the reduction of employees of a particular type.
• Where a severance benefit is paid to an employee of a company and that person at any
time held more than 5% of the issued share capital or member’s interest in the com-
pany, the lump sum will not be treated as a severance benefit.
• The provisions of the Second Schedule apply to retirement funds only and therefore can
never apply to severance benefits.
• Amounts paid in terms of paragraphs (d) and (f) are remuneration as defined.
• Section 6(2) rebates are set off against normal tax payable and NOT against the normal
tax on severance benefits and/or lump sums.
665
A Student’s Approach to Taxation in South Africa 15.4
666
15.4 Chapter 15: Retirement benefits
When a person elects to retire, as they can elect to take up to one-third of their pen-
sion and/or retirement annuity fund as a lump sum, the balance will be used to
purchase an annuity (with the current fund or with another insurance company). This
monthly amount is referred to as a qualifying annuity. A qualifying annuity is a
periodic payment and is often referred to as a pension. The person can choose to
receive an annuity from the retirement fund or can use their accumulated funds to
purchase an annuity from an insurer. When purchasing an annuity from an insurer,
one can choose between two types of annuities: a guaranteed annuity or a living
annuity (refer to chapter 2 for tax implications of annuities).
REMEMBER
• You must be told how much the lump sum portion of your retirement benefit is, as one
can elect to take a lump sum up to one-third of their retirement interest/benefit.
Example 15.1
Lydia Dlamini was a member of a pension fund and on her retirement the value of her
investment amounted to R1 500 000. Lydia took the maximum lump sum and the balance
was used to purchase a compulsory monthly pension with Aftreewoema Insurance Com-
pany. She will receive R5 000 a month from the fund.
You are required to determine the maximum lump sum that Lydia may take and to indi-
cate whether the R5 000 is taxable or not.
Solution 15.1
As the fund is a pension fund, Lydia may take R500 000 (R1 500 000 / 3) in the form of a
lump sum and the balance (R1 000 000) has to be used to purchase a compulsory monthly
pension. Lydia will be taxed on the R5 000 per month as it will be included in her gross
income, along with any other income that she might receive.
Example 15.2
Pieter Swanepoel was a member of a provident fund and on his retirement the value of
his investment amounted to R2 750 000.
You are required to determine the maximum lump sum that Pieter may take.
Solution 15.2
As the fund is a provident fund, Pieter may take the full R2 750 000 as a lump sum.
Where a person belongs to a retirement fund and elects to commute part of their
retirement interest/benefit to a single payment on retirement date, a lump-sum
payment arises. Retirement funds will pay lump sums when one of the following
events happens:
667
A Student’s Approach to Taxation in South Africa 15.4
• retirement – this means that in terms of the rules of the fund, the person is entitled
to a lump sum because they have reached the normal retirement age and have
elected to retire (paragraph 2(1)(a)(i));
• death (paragraph 2(1)(a)(i)); or
• termination or loss of employment due to:
– the employer having stopped carrying on the trade in respect of which the
person was employed or appointed (or intending to cease trade); or
– the person becoming redundant because the employer made a general reduc-
tion in personnel or a reduction in personnel of a particular class (para-
graph 2(1)(a)(ii)); or
• commutation of an annuity for a lump sum benefit (paragraph 2(1)(a)(iii)); or
• transfer on or after normal retirement age but before retirement date (para-
graph 2(1)(c)); or
• divorce order (paragraph 2(1)(b)(iA)); or
• direct transfer between funds of the same member (paragraph 2(1)(b)(iB)); or
• certain other events (paragraph 2(1)(b)(ii)).
The provisions of paragraph 2(1) determine how the net amounts due to the different
events are calculated. These provisions are subject to the source rule in section 9(2)(i)
as well as the special formula applicable to Public Sector Pension Funds (para-
graph 2A; refer to 15.4.1.2).
REMEMBER
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15.4 Chapter 15: Retirement benefits
Retirement Is the date on which a member elects to retire and becomes entitled to an
Date annuity or a lump sum benefit or on or after attaining the normal retirement
age in terms of the rules of the fund
Normal Is the date on which a member of a pension or provident fund are entitled to
retirement retire.
age A member of a retirement annuity fund, pension preservation fund or prov-
ident preservation fund is 55 years (para (b) of the definition of ‘normal
retirement age’.
Normal retirement age is also reached where a person becomes permanently
incapable of carrying on their occupation due to sickness, accident, injury or
incapacity through infirmity of mind or body.
This means that any person receiving a retirement benefit on electing to retire on or
after normal retirement age, then the lump sum benefit will be taxed as a retirement
lump sum benefit.
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A Student’s Approach to Taxation in South Africa 15.4
REMEMBER
• There are differences in the tax implications when retiring from a fund or withdrawing
from a fund.
• Annuities are specifically included in gross income (refer to chapter 3).
670
15.4 Chapter 15: Retirement benefits
Example 15.3
Joseph Black is 65 years old. On his retirement, he received a lump sum benefit of R935 000
from the pension fund of which he had been a member for 28½ years. Joseph elected to
retire on 30 November of the current year of assessment. At the end of the previous year of
assessment, he had an unclaimed balance of contributions of R10 000.
You are required to calculate the taxable amount of the retirement fund lump sum benefit.
Solution 15.3
R
Retirement fund lump sum benefit 935 000
Less: Allowable deductions: Contributions disallowed in the past (10 000)
Taxable income from retirement fund lump sum benefit 925 000
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A Student’s Approach to Taxation in South Africa 15.4
• Where the rules of the fund do not take completed years of employment into
account when determining the amount of the benefit payable:
B = the completed number of years after 1 March 1998 during which the mem-
ber had been a member of the funds;
C = the number of completed years (up to date of accrual) during which the
member had continuously been a member of a public sector fund;
D = the lump sum benefit that is payable.
Example 15.4
Charles Ngomani is 65 years old. On his retirement from a government department, he
received a lump sum benefit of R1 232 000 (based on his years of employment) from the
government pension fund of which he had been a member for 28½ years, which was
equivalent to his years of employment. Charles elected to retire on 30 June of the current
year of assessment. He has not previously received a lump sum benefit from a fund.
You are required to calculate how much of Charles’ lump sum will be included in his gross
income.
Solution 15.4
Use the formula (A = B / C × D):
B = 24 (completed years of service after 1 March 1998)
C = 28 (completed years of membership of the fund)
D = R1 232 000
A = 24 / 28 × R1 232 000 = R1 056 000
R1 056 000 will be included in Charles’ gross income.
REMEMBER
• The tax-free nature of public sector pre-1 March 1998 membership is preserved for
people who transferred their public sector benefits to another fund. From 1 March 2018
the tax-free nature of pre-1 March 1998 membership will be preserved for one addi-
tional transfer to another fund.
672
15.4 Chapter 15: Retirement benefits
Step 1: Calculate the current retirement fund lump sum benefit (or severance
benefit) = amount received less any allowable deductions.
Step 3: Calculate the tax on all retirement fund lump sum benefits (Step 1 +
Step 2) per table below.
Step 4: Calculate the notional tax on the previous retirement fund lump sum
benefit (Step 2) per table below.
Step 5: Tax per Step 3 – tax per Step 4 = Tax on current retirement fund lump
sum benefit.
673
A Student’s Approach to Taxation in South Africa 15.4
Example 15.5
Nelia Simons is 68 years old and elected to retire on 31 October of the current year of
assessment. The taxable portion of the lump sum that she received from the pension fund
on retirement amounted to R975 000. Nelia’s taxable income before considering the lump
sum amounted to R225 500.
You are required to calculate the tax payable by Nelia if
(a) she has never received any lump sums in the past;
(b) she received a retirement annuity fund lump sum payment of R550 000 on
1 November 2013.
Solution 15.5
R
(a) Lump sums from retirement funds are taxed separately, therefore we do
not take Nelia’s other income into account.
Taxable portion of lump sum from pension fund 975 000
Tax payable on taxable portion of lump sum
(R36 000 + (27% × (R975 000 – R700 000)) 110 250
(b) Taxable portion of all lump sums received (R975 000 + R550 000) 1 525 000
Tax payable on all lump sums received
(R130 500 + (36% × (R1 525 000 – R1 050 000))) 301 500
Less: Notional tax payable on previous lump sum
(18% × (R550 000 – R500 000)) (9 000)
Tax on current retirement fund lump sum benefit 292 500
674
15.4 Chapter 15: Retirement benefits
The receipt of a lump sum from a fund before retirement is taxable and the amount is
included in the taxpayer’s gross income. When ascertaining the amount of the with-
drawal benefit to be included in gross income, certain deductions are allowed to
reduce the withdrawal benefit before the ‘taxable amount’ is subject to tax.
15.4.2.1 Deductions
Divorce orders and transfers between funds
Where the lump sum received is the result of a divorce order or transfer out of the
fund, the deduction allowed against the lump sum is that portion of the lump sum
that is transferred to another fund.
Amounts transferred from pension funds, pension preservation funds, provident
funds or provident preservation funds can be paid into a pension fund, pension
preservation fund, provident funds, provident preservation or retirement annuity
fund in order to get a deduction. Retirement annuity funds can only be transferred to
other retirement annuity funds to qualify for a deduction.
Other circumstances
Where the withdrawal benefit is due to another circumstance, a person is allowed to
deduct the following from the lump sum:
• Previously disallowed contributions The person’s own contributions to a pension
fund, pension preservation fund, provident fund, provident preservation fund or
retirement annuity fund that were not previously deducted in terms of section 11F.
The disallowed contributions must relate to funds where the person is or was a
member.
• Previously taxed divorce award transfers to approved funds An amount trans-
ferred for the benefit of the person to a pension fund, pension preservation fund,
provident fund, provident preservation fund or retirement annuity fund as elected
by the person.
• Previously taxed transfers between funds An amount deemed to have accrued to
the person that was previously transferred to a fund.
• Previously taxed unclaimed benefits transferred to preservation funds An
amount that was paid or transferred to a pension preservation fund or a provident
preservation fund as an unclaimed benefit and which had been subject to tax prior
to that transfer or payment.
• Exempt portion of public sector funds (service years before 1 March 1998) The
exempt amount of a public sector fund lumpsum which relates to service years be-
fore 1 March 1998 that has been paid into a retirement fund for the person’s benefit
(public sector funds are discussed later) or transferred to another fund for the per-
son’s benefit.
The above deductions
• are allowed so long as they have not previously been allowed as a deduction in
determining the amount of the lump sum that will be subject to taxation or al-
lowed as an exemption in terms of section 10C; and
• are limited to the amount of the lump sum benefit that was received (they cannot
create a loss situation in respect of a lump sum received).
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A Student’s Approach to Taxation in South Africa 15.4
Example 15.6
Ansie Troulus married Mr Koos Trousku on 9 September of the current year of assess-
ment. She resigned from her employment on 31 August and received a lump sum from
the pension fund. She received all her contributions of R12 000 and interest amounting to
R3 500. On 28 February of the previous year of assessment, contributions up to R10 000
had been allowed as deductions. Ansie used all the money as a deposit on a new house.
You are required to calculate the taxable portion of the lump sum.
Solution 15.6
R
Lump sum received from pension fund (R12 000 + R3 500) 15 500
Less: Contributions not previously allowed (R12 000 – R10 000) (2 000)
Taxable portion 13 500
Where the retirement fund lump sum withdrawal benefit accrues to a person from
1 March 2011, the tax on the amount is calculated as follows:
Step 3: Calculate tax per retirement fund lump sum withdrawal table on the
total benefits (Step 1 + Step 2) per the table below.
continued
676
15.4 Chapter 15: Retirement benefits
Step 4: Calculate tax per retirement fund lump sum withdrawal table on the
previous benefits (Step 2) per the table below .
Step 5: Tax per Step 3 – tax per Step 4 = Tax on current lump sum withdrawal
benefit.
Retirement fund lump sum withdrawal benefits will only accrue as from
1 March 2009 and will be taxed according to the following table:
Example 15.7
Lana Hip is 38 years old and resigned from her employment on 30 June of the current
year of assessment. She received a lump sum from her pension fund of R80 000. She trans-
ferred R50 000 into a pension preservation fund and used the balance to pay off her car.
On 28 February of the previous year of assessment, R6 000 of Lana’s contributions to the
fund had not been deducted for tax purposes. Her taxable income for the current year of
assessment before the current lump sum amounted to R134 000.
You are required to
(a) calculate the tax payable by Lana on the current lump sum that she received if she
received a lump sum withdrawal benefit from her previous pension fund when she
resigned from employment in 2000. The taxable amount of the lump sum amounted
to R15 000;
(b) calculate the tax payable by Lana on the current lump sum that she received if she
received a lump sum withdrawal benefit from her previous pension fund when she
resigned from employment in 2010. The taxable amount of the lump sum amounted
to R15 000.
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A Student’s Approach to Taxation in South Africa 15.4–15.5
Solution 15.7
(a) R
Retirement fund lump sum withdrawal benefit 80 000
Less: Allowable deductions
Contributions not deducted in the past (6 000)
Amount transferred to pension preservation fund (50 000)
Taxable portion of lump sum from pension fund 24 000
Tax payable on lump sum using the retirement fund withdrawal benefit table
(R24 000 – R25 000) × 18% nil
(b) R
As the previous lump sum withdrawal benefit was received after 1 March 2009,
we will need to include the amount when calculating tax on the current lump
sum benefit.
Tax payable on lump sum using the retirement fund withdrawal benefit table:
Taxable income from current benefit 24 000
Taxable income from previous benefit 15 000
39 000
Tax per table (R39 000 – R25 000) × 18% 2 520
Less: Tax per table on previous lump sums (R15 000) (nil)
Tax payable on current lump sum 2 520
1. In (a) above why is Lana’s other income ignored when the tax is calcu-
lated?
2. In (a) above why is the R15 000 previous lump sum ignored in the
calculation?
3. In (b) above why was there no tax on the previous lump sum?
678
15.5–15.7 Chapter 15: Retirement benefits
When calculating taxable income in the year that a person receives a lump sum, any
unclaimed balance of contributions to retirement funds should first be used to reduce
the lump sum received. If the unclaimed contributions exceed the lump sum, the
balance can be used to exempt any qualifying annuities received during the year of
assessment. Should the unclaimed contributions exceed the compulsory annuities
received, any balance of unclaimed contributions can be added to the current
contributions to retirement funds and be deducted in terms of section 11F (subject to
the limitation) (refer to 12.3.3).
The section 10C exemption is limited to the total amount of qualifying annuities
received in a specific year of assessment.
Received
Employer Retirement fund
from
679
A Student’s Approach to Taxation in South Africa 15.7–15.8
Received
Employer Retirement fund
from
Gross
Amount received or accrued
income
Deductions None • Contribu- • Contribu- • Contribu-
tions dis- tions dis- tions dis-
allowed allowed allowed
• Amount • Amount • Amount
transferred transferred transferred
to preserv- to preserv- • Amount A in
ation fund ation fund formula
Tax Tax Retirement Retirement Retirement Retirement
tables fund lump fund lump fund lump fund lump
with sum benefit sum with- sum benefit sum benefit
other table drawal benefit table table
taxable table
income
A number of questions follow where you can test your knowledge on retirement benefits.
Question 15.1
Dieter Wrogemann (54 years old) resigned from his employment during the current year
of assessment and immediately commenced with new employment.
Employer 1 R
Salary 400 000
Pension fund contributions 40 000
Lump sum from pension fund on resignation (Note) 1 950 000
Employer 2
Salary 750 000
Provident fund contributions 75 000
Interest received from a South African bank 9 000
Retirement annuity fund contributions 20 000
Note
Lump sum from pension fund
Dieter had never received a withdrawal benefit before. Contributions not deducted on
28 February 2022 amounted to R30 000. He decided to utilise his lump sum in the
following ways:
Transferred into a retirement annuity fund – R300 000
Transferred into his new provident fund – R1 200 000
Deposit on a new car – R100 000
Fixed deposit with bank – R150 000
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15.8 Chapter 15: Retirement benefits
Answer 15.1
Calculation of tax payable by Dieter:
R R
Lumpsum Other
Salary (R400 000 + R750 000) 1 150 000
Lump sum from pension fund 1 950 000
Less: Deductions
Transfer to retirement annuity fund (300 000)
Transfer to provident fund (1 200 000)
Deposit on new car – not allowed nil
Fixed deposit with bank – not allowed nil
Contributions not deducted before (refer to the note) (30 000)
420 000
Interest received (R9 000 up to R23 800 is exempt) nil
1 150 000
Less: Retirement fund contributions:
R40 000 + R20 000 + R75 000 135 000
Limited to lesser of
1. R350 000 or
2. 27,5% × the higher of
Remuneration R1 150 000; or
Taxable income R1 150 000
= 27,5% × R1 150 000 = R316 250; or
3. Taxable income – R1 150 000
Therefore, limit is R316 250, allow contributions in full (135 000)
Taxable income 1 015 000
Add: Taxable income from lump sum 420 000
Total taxable income 1 435 000
Tax on taxable income ((R1 015 000 – R817 600) × 41% + R239 452) 320 386
Less: Primary rebate (16 425)
Normal tax 303 961
Tax on pension fund withdrawal benefit
Tax on R420 000
(R420 000 – R25 000) × 18% 71 100
Net normal tax payable 375 061
Note
Where the taxpayer receives a lump sum during the year, the unclaimed amount of deduc-
tions is first set off against the lump sum benefit. If there is any excess, it is used to exempt
any compulsory annuities in terms of section 10C. If there is still an excess amount, that
excess is deemed to have been contributed in the current year of assessment and deducted
in terms of section 11F (refer to chapter 12 for the discussion on the order of deductions).
681
16 Taxation of trusts
Exempt = Taxable
Gross income – – Deductions Tax payable
income income
Adjustments
Partnerships Companies Trusts for tax
avoidance
Page
16.1 Introduction ......................................................................................................... 684
16.2 The nature of a trust ............................................................................................ 685
16.3 Rate at which a trust is taxed ............................................................................. 686
16.4 Person liable for tax on income of a trust......................................................... 687
16.4.1 Section 25B .............................................................................................. 687
16.4.2 Section 7 .................................................................................................. 688
16.4.3 Meaning of ‘donation, settlement or other disposition’ ................... 689
16.4.4 ‘By reason of’ or ‘in consequence of’ ................................................... 690
16.5 Vested rights to income (sections 7(1) and 25B(1)) ......................................... 691
16.6 Transactions between spouses (section 7(2) to 7(2C)) .................................... 692
16.6.1 Spouses married in or out of community of
property (section 7(2)) ........................................................................... 692
16.6.2 Spouses married in community of property (section 7(2A)) ........... 693
16.6.3 Exclusions (section 7(2C)) ..................................................................... 693
16.7 Transactions between parents and children (section 7(3)) ............................ 695
16.8 Donations linked to a condition (section 7(5))................................................. 697
16.9 Donations between a resident and non-resident (section 7(8)) ..................... 699
16.10 Loans between trusts and connected persons (section 7C) ........................... 701
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A Student’s Approach to Taxation in South Africa 16.1
Page
16.11 Miscellaneous provisions ................................................................................... 710
16.11.1 General remarks about section 7 ....................................................... 710
16.11.2 Limitation of amount deemed to be income .................................... 711
16.11.3 Calculation of interest amount (section 7D) .................................... 713
16.12 The nature of income from a trust .................................................................... 713
16.13 Losses in a trust (section 25B(3) to 25B(6)) ....................................................... 714
16.14 Summary of income tax consequences of trusts ............................................. 717
16.15 Capital gains tax implications of trusts ............................................................ 731
16.15.1 General .................................................................................................. 731
16.15.2 The attribution rules............................................................................ 731
16.15.2.1 Specific rules for ‘donation, settlement or other
disposition’ (paragraphs 68 to 72) .................................. 731
16.15.2.2 General rules (paragraph 80) .......................................... 732
16.16 Summary .............................................................................................................. 734
16.17 Examination preparation ................................................................................... 734
16.1 Introduction
Pierre le Paulle (a French author) made the following comment:
Trusts have now pervaded all fields of social institutions in common law countries.
They are like those extraordinary drugs curing at the same time toothache, sprained
ankles and baldness, sold by peddlers on the Paris boulevards; they solve equally well
family troubles, business difficulties, religious and charitable problems. What amazes
the sceptical civilian is that they really solve them.
Trusts can have several uses especially in the milieu of estate planning. Where
simplicity, flexibility and retention of control are of paramount importance, there is
simply no form of entity that can measure up to the trust. A person may, for instance,
transfer ownership of an asset to a discretionary trust where the trustees can manage
that asset for the benefit of the beneficiaries of that trust while the asset is also
protected against creditor claims that may in future be instituted against that person
or beneficiaries. In a business context, trusts are often used by employer companies in
employee share incentive schemes where the trust functions as a vehicle allowing
employees to share in the profits of the company through the ownership of shares.
Although there are numerous credible motivations for the use of trusts, the use of
discretionary trusts for South African income tax and estate duty savings has become
under intense scrutiny in recent years, which resulted in the introduction of certain
anti-avoidance provisions, such as section 7C (refer to 16.10) to discourage these
practices. In this chapter, we give attention to the taxation of trusts in terms of the
Income Tax Act 58 of 1962 (the Act). The general rules of taxation discussed earlier
also apply to trusts. In this chapter, however, attention is given to the provisions of
the Act that apply to trusts in particular.
684
16.2 Chapter 16: Taxation of trusts
Legislation:
A ‘trust’ is defined in section 1 of the Act as:
any trust fund consisting of cash or other assets which are administered and
controlled by a person acting in a fiduciary capacity, where such person is appointed
under a deed of trust or by agreement or under the will of a deceased person.
There are always at least three parties to a trust, namely the founder, the trustee
and the beneficiary. The founder establishes the trust and hands over any property
(that may also include money) to the trustee. The trustee receives the property and
is obliged to administer these trust assets to the benefit of the beneficiary. The bene-
ficiary is the person for whose benefit the trust assets are administered and applied.
Such a person has a vested or contingent interest in all or a portion of the receipts,
accruals or assets of the trust (refer to the definition of ‘beneficiary’ in section 1).
A trust may be established in one of two ways: testamentary or inter vivos.
Testamentary trust (trust mortis causa): With such a trust, the testator bequeaths
cash or other assets in his or her will to a trust, where a trustee or trustees will
administer the assets for the benefit of the testator’s beneficiaries. Such a trust comes
into existence on the death of the testator. This is particularly popular when the
beneficiaries are minor children. The parent who dies leaves assets to a trust, and a
trustee is appointed to apply and administer these assets on behalf of and for the
benefit of the children. When the children reach a certain age, the trust may be
dissolved and the remaining trust assets may be distributed to the children, or the
trust may continue to exist indefinitely, depending on the testator’s stipulations in the
will.
Inter vivos trust: An ‘inter vivos trust’ is a trust that is established while the founder
is still alive. The assets may be donated or sold to the trust and do not necessarily just
have to be donated or sold by the founder. For example, a father (founder and donor)
may establish a trust for the benefit of his children and donate R100 to the trust. The
children’s grandfather may then donate or sell further assets to the trust. The assets
vest in the trustee, who must administer the trust in accordance with the stipulations
of the trust deed. Inter vivos trusts are particularly popular in estate planning and are
used to peg the value of assets in the estate.
Example 16.1
Jan Jorris owns a block of flats with a current market value of R1,5 million. Jan Jorris’ life
expectancy is another 20 years and it is expected that the value of the block of flats could
increase to R10 million in that period. Jan is considering selling the block of flats to a trust
at the current market value. The sale will be financed by Jan by means of an interest-free
loan to the trust.
You are required to explain to Jan what the effect of the sale will be on his estate.
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A Student’s Approach to Taxation in South Africa 16.2–16.3
Solution 16.1
Before the sale, Jan’s estate consisted of a block of flats with a market value of R1,5 million.
This block of flats is sold to the trust at market value and, after the sales transaction, it will
no longer form part of Jan’s estate. However, Jan is financing the transaction and therefore
the trust still owes him the amount of the outstanding loan account. The loan amounting to
R1,5 million is interest-free. The loan is not paid back and if Jan dies in 20 years’ time, there
will still be an asset of R1,5 million (the loan) in his estate. The block of flats is now the asset
of the trust and the increase in market value from R1,5 million to R10 million takes place in
the trust. If Jan had not sold the block of flats to the trust, his estate would have consisted of
the block of flats with a market value of R10 million.
Note
While Jan is still alive, the provisions of section 7 must be applied to the income produced
by reason or in consequence of the block of flats donated to the trust (refer to 16.4.2).
Consideration must also be given to the provisions of section 7C that deal with loans
between trusts and connected persons (refer to 16.10).
Further to the above two types of trusts, trusts can be classified as either discretionary
trusts or bewind (vested) trusts. With a discretionary trust, no beneficiary has a
vested (unconditional) right to the income or capital of the trust and the trustees have
full discretion with regard to how much is distributed to which beneficiary. With a
bewind trust, the beneficiaries have vested (unconditional) rights to the capital and
income of the trust. In practice, a trust is not necessarily solely one of the above and
could also be a combination of these, with some beneficiaries having vested rights
(refer to 16.5) and other beneficiaries having discretionary rights.
Example 16.2
ABC Trust, a testamentary trust, has a taxable income of R100 000 for the current year of
assessment ending 28 February. Included in the R100 000 is taxable interest income of
R15 000. No beneficiary has a vested right to the income. ABC Trust is not a special trust.
You are required to calculate the normal tax payable by ABC Trust for the current year of
assessment.
Solution 16.2
R100 000 × 45% = R45 000. The normal tax payable by ABC Trust is R45 000 for the
current year of assessment. The basic interest exemption in terms of section 10(1)(i) is not
available to a trust as it is not a natural person.
686
16.3–16.4 Chapter 16: Taxation of trusts
REMEMBER
• A trust is a person, but not a natural person, therefore a trust is not entitled to the
primary, secondary or tertiary rebates for natural persons.
• A trust is not entitled to the local interest exemption under section 10(1)(i).
• A company’s year of assessment ends at its financial year-end but a trust’s year of
assessment always ends on the last day of February.
• Although we calculate the normal tax liability of the trust, the trustee of the trust is its
representative taxpayer who is, among other things, responsible for paying the tax over to
SARS on behalf of the trust. However, the income tax returns are still submitted, and
SARS’ income tax assessments are issued, in the trust’s name.
• A personal service provider, as defined in the Fourth Schedule to the Act, also includes
certain defined trusts which are also taxed at the flat rate of 45% (refer to chapter 11 for
further information regarding personal service providers).
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A Student’s Approach to Taxation in South Africa 16.4
16.4.2 Section 7
Many ways exist for taxpayers to legally spread their income in order to reduce their
normal tax liability. Section 7 deals with these tax avoidance arrangements. Example
16.3 illustrates one of the schemes targeted by section 7 whereby an individual
attempts to reduce his normal tax payable by shifting taxable income to his minor
children.
Example 16.3
Example of a scheme to reduce tax payable
Mr Coleman, aged 50, has two sons who are both unmarried and under the age of 18
years at the end of the current year of assessment. Mr Coleman earned taxable income of
R650 000 for the current year, while his sons did not earn any taxable income for the
current year.
Mr Coleman will pay normal tax before rebates of R174 088 (((R650 000 – R641 400) ×
39%) + R170 734). This is an effective rate of tax of 26,78%.
If Mr Coleman shifts R400 000 of his taxable income to his sons so that they each receive
R200 000, what will the result on the fiscus be?
Mr Coleman
Mr Coleman will be taxed on R250 000 (R650 000 – R400 000).
This will amount to normal tax before rebates for Mr Coleman of
(((R250 000 – R226 000) × 26%) + R40 680) = R46 920.
Each son
Each son will be taxed on R200 000.
Normal tax before rebates for each son: R200 000 × 18% = R36 000
continued
688
16.4 Chapter 16: Taxation of trusts
This amounts to an effective rate of tax of 18,30% ((R46 920 + R36 000 + R36 000) /
R650 000) as opposed to the 26,78% that Mr Coleman would have had to pay if he were
taxed on the full amount.
Further to this, Mr Coleman and each son would receive a primary rebate of R16 425, so
the end result would be that the fiscus would receive R69 645 ((R46 920 – R16 425) +
(R36 000 – R16 425) + (R36 000 – R16 425)) instead of R157 663 (R174 088 – R16 425) if this
arrangement was permitted.
689
A Student’s Approach to Taxation in South Africa 16.4
Example 16.4
John Dann donates R100 000 to his 17-year-old, unmarried son, Jusha. Jusha had recently
completed a course in share transactions and began to speculate with the R100 000 on the
stock exchange. For the current year of assessment he realised profits of R80 000 on the
stock exchange.
You are required to indicate in whose hands the R80 000 will be taxable.
Solution 16.4
The R80 000 is the direct result of the application of Jusha’s knowledge and skills and
therefore not necessarily earned ‘by reason of’ or ‘in consequence of’ the donation (refer
to the Widan case). Therefore, the R80 000 should be taxable in Jusha’s hands and section
7(3) should not be applicable to attribute the income to John.
Example 16.5
John Dann donates R100 000 to his only daughter, Chané, who is 16 years old and
unmarried. Chané invests the full R100 000 in the bank and, for the previous year of
assessment, earned interest amounting to R10 000 on it. She capitalised the interest and
for the current year of assessment, earned interest of R11 000. R10 000 thereof relates to
the original donation and R1 000 relates to the capitalised interest of the previous year.
You are required to determine in whose hands the interest amounting to R11 000, with
regard to the current year of assessment, will be taxable.
690
16.4–16.5 Chapter 16: Taxation of trusts
Solution 16.5
In terms of section 7(3), the R10 000 (R11 000 – R1 000) is definitely taxable in the hands of
John Dann. There may be arguments regarding the taxability of the R1 000 in John’s
hands. However, there is clearly a causal link between the original investment and the R1
000 interest earned, and the fact that it is ‘income upon income’ that was earned does not
necessarily mean that it was not earned ‘by reason of’ the original donation. The minor
child did not really apply any knowledge or skill to earn the income and it still relates
directly to the original donation. The R1 000 interest should therefore, in terms of section
7(3), also be taxable in the hands of John Dann.
691
A Student’s Approach to Taxation in South Africa 16.5–16.6
sometimes it is held in trust to ensure that the person does not deal thriftlessly with
the money and, as such, waste it. This is sometimes the case when a parent dies and
his or her child has never had any experience in managing finances. The legacy is
then bequeathed to the trust, for the benefit of his or her child. In this manner, a
competent person is appointed to administer the assets so that the child will have
sufficient funds available up to the date of his or her death or until the child reaches a
specific age. It is sometimes also necessary to do something similar to protect funds
against future creditor claims. In these cases the beneficiary is taxed on the full
income as it accrued for his or her benefit.
692
16.6 Chapter 16: Taxation of trusts
693
A Student’s Approach to Taxation in South Africa 16.6
REMEMBER
• When one spouse receives an amount, and it is deemed taxable in the hands of the other
spouse, the other spouse is entitled to the proportional share of the permissible deduc-
tions or allowances against such income in terms of section 7(2B).
• It is important to note that the provisions of section 7(2) for a donation, settlement or
other disposition between spouses only apply in circumstances where the sole or main
purpose was the reduction, postponement or avoidance of any tax liability for the
donor spouse.
Example 16.6
Harry Baloy is married out of community of property to Sue Baloy. Sue earns no income
and Harry wants to benefit from the lower normal tax rate that she would pay. On
1 March, Harry donates a block of flats to Sue. During the current year of assessment, Sue
received rental income of R100 000 and she incurred deductible expenses of R20 000.
You are required to explain the income tax consequences with regard to the current year
of assessment.
Solution 16.6
Sue Baloy received the R100 000, but in terms of section 7(2)(a), the amount will be
deemed to accrue to her husband, Harry. The amount is the direct result of a donation
that Sue received from Harry and Harry made the donation with the sole or main
purpose of reducing his normal tax liability.
Harry must therefore include the amount of R100 000 in his taxable income, but in terms
of section 7(2B), he is also entitled to deduct the R20 000 expenses against this. Harry’s
taxable income for the current year will therefore increase by the amount of R80 000
(R100 000 – R20 000).
What will the income tax consequences be if Harry and Sue Baloy
were married in community of property?
694
16.6–16.7 Chapter 16: Taxation of trusts
Section 7(2) may sometimes also apply if the donation, settlement or other disposition
was made to a trust or if a trust was also a party to the transaction, operation or scheme
that the donor carried out with the sole or main purpose of reducing, postponing or
avoiding any tax.
Example 16.7
Harry Baloy is married out of community of property to Sue Baloy. Sue does not earn
any income and Harry wants to benefit from the lower normal tax rate that she can pay.
On 1 March, Harry donates a block of flats to the Baloy Trust. Sue is the only beneficiary
of the trust and she has a vested right to the income of the trust. During the current year
of assessment, the Baloy Trust received rental income of R100 000 and incurred
deductible expenses of R20 000.
You are required to explain the tax consequences of the above income and expenses with
regard to the current year of assessment.
Solution 16.7
The Baloy Trust received the R100 000, but in terms of section 7(1), Sue has a vested right
to it. In terms of section 7(2)(a), the amount will be deemed to accrue to her husband,
Harry. The amount is the direct result of a donation that the Baloy Trust received from
Harry and Harry made the donation with the sole or main purpose of reducing his
normal tax.
Harry must therefore include in his taxable income the amount of R100 000, but in terms
of section 7(2B), he is also entitled to deduct the R20 000 expenses against this. Harry’s
taxable income for the current year will therefore increase by the amount of R80 000
(R100 000 – R20 000).
REMEMBER
• The income tax consequences would have been similar if Harry and Sue Baloy had been
married in community of property. Although section 7(2A)(b) deems income derived
from the letting of fixed property to accrue to both spouses in equal shares, the pro-
visions of section 7(2)(a) will be triggered as Harry made a donation with the sole or
main purpose of reducing his normal tax liability. Consequently, a total amount of
R80 000 (R100 000 income – R20 000 expenditure) will be included in Harry’s taxable
income. The latter represents half of the rental income that accrued to him in terms of
section 7(2A)(b) as well as his wife’s share of the rental income that is deemed to accrue
to him in terms of section 7(2)(a).
695
A Student’s Approach to Taxation in South Africa 16.7
applies to any income from such donation, settlement or disposition spent on the
maintenance, education or benefit of a minor child or income that has accumulated
for the benefit of that child.
For example, if a father donates an amount of money to his minor child and invests it
in a savings account at a bank, the interest that is earned on the investment is taxed in
the hands of the father, even if he uses the interest for the maintenance of the child.
A parent who conducts a business may pay a wage or salary to his or her minor child.
The wage or salary that is received by or accrues to the child would not be attributed
to the father under section 7(3) provided that it is a bona fide payment for the services
rendered by the child to the business and the payment is not excessive. The payment
is permitted as a deduction for business purposes by the father and the child is liable
in his or her own right for the normal tax on such income. Here, there is no issue of a
donation, settlement or other disposition.
Section 68 of the Act stipulates that each parent must include in his or her income tax
return any income received by or accrued to or in favour of his or her minor children,
whether directly or indirectly from that parent or from his or her spouse, together
with any details that the Commissioner may require. Section 68 also applies to any
income which, in terms of section 7(3), is deemed to be the income of the parent.
Please note that a minor child is a child under the age of 18 who has never been
married. A divorced person or a widow/widower under the age of 18 does not
regain the status of a minor. A ‘child’ is defined in section 1 of the Act and includes
an adopted child and a stepchild. SARS accepts that an illegitimate child also falls
within the definition of ‘child’. A stepchild is specifically included in the definition of
a ‘child’ for the purposes of section 7(3).
It is not necessary for the donation to be made directly to the child. Section 7(3) also
applies when the donation is made to a trust and the minor child is a beneficiary of
the trust.
Example 16.8
Harry Baloy wants to benefit from the lower normal tax rate that his unmarried daughter,
Jenny, 16 years old, may pay. On 1 March, Harry donated a block of flats to the Baloy
Trust. Jenny is the only beneficiary of the trust and she has a vested right to the income of
the trust. During the current year of assessment, the Baloy Trust received net rental
income of R100 000.
You are required to explain the income tax consequences pertaining to the net rental
income with regard to the current year of assessment.
Solution 16.8
The Baloy Trust received the R100 000, but in terms of section 7(1), Jenny has a vested
right to it. In terms of section 7(3), the amount will be deemed to accrue to her father,
Harry. The amount is the direct result of a donation that the Baloy Trust received from
Harry. Harry must therefore add the amount of R100 000 to his taxable income.
696
16.7–16.8 Chapter 16: Taxation of trusts
REMEMBER
• Section 7(3) applies to the specific parent who made the donation to the minor child and
not to his or her spouse. If the parent who made the donation dies, the income is not
taxed in the other parent’s hands but will be taxed in the hands of the child.
• Since this subsection only refers to a child of the donor, it does not affect a donation
made by a grandparent to his or her grandchild. Grandparents are therefore able to
donate assets to their minor grandchildren without them being taxed in terms of
section 7(3) on the income derived from the assets. A minor child is subject to normal tax
on the amount that is received or accrues from a trust as a result of a donation made by a
grandparent.
• Unlike section 7(2) that deals with transactions between spouses, none of the other
provisions in section 7 (including section 7(3)) requires that the sole or main purpose of
the transaction must be to reduce, postpone or avoid any tax liability for the donor.
697
A Student’s Approach to Taxation in South Africa 16.8
deed that the income may only be distributed to the children after the occurrence of a
certain event. If a grandparent makes a donation to the trust that is subject to the same
stipulations as imposed by the parent, the donation falls within the ambit of sec-
tion 7(5). The grandparent is then taxed on the undistributed income derived from the
donation. This undistributed income would have accrued to the beneficiaries if it had
not been for the condition in the trust deed.
Example 16.9
A grandfather donates property to a trust with his two minor unmarried grandchildren as
beneficiaries. He stipulates that each year each of them will receive a quarter of the net
rental income from the property and that each year a further quarter of the net rental
income will be accumulated for each child in the trust until the younger of the two children
turns 30 years old. If a child dies before this date, the other child will get the benefit of the
accumulated income, but only when he or she turns 30 years old. The net rental income
from the property in the current year of assessment is R200 000.
You are required to discuss the income tax consequences of the above.
Solution 16.9
Taxable in the hands of each grandchild (R200 000 × ¼) R50 000
Taxable in the hands of the grandfather in terms of section 7(5)
R100 000
(R200 000 net rental income – R100 000 vested in his two grandchildren))
The grandfather (donor) made a donation via a trust to his grandchildren (the bene-
ficiaries) subject to the stipulation that a portion of the income must be withheld from the
beneficiaries until the occurrence of a fixed event. The income that would have accrued to
the beneficiaries by reason of the donation to the trust, had it not been for the condition, is
therefore taxed in the hands of the grandfather (being the donor) until the youngest child
turns 30 or until the grandfather dies, whichever occurs first. The income tax
consequences of the donation for the trust after the occurrence of the event depend on the
other stipulations of the trust deed. The trust deed can stipulate, for example, that the
property and accrued rental income must be transferred to the children after the
occurrence of the stipulated event.
REMEMBER
• It has been found that, in application, section 7(1) holds more weight than (dominates)
section 7(5) – refer to ITC 1328 43 SATC 56. Thus, if the beneficiary has a vested right to
the income retained in the trust, the stipulations of section 7(5) cannot be applicable. In
the above example, there was no vested right, since the income would not accrue to the
estate of the particular child upon his or her death and therefore section 7(1) cannot
apply.
continued
698
16.8–16.9 Chapter 16: Taxation of trusts
• The person making the donation, settlement or other disposition must still be alive for
income to be attributable to that person through the application of section 7(5) (or any
of the other section 7 provisions for that matter). However, if the person who imposed
the condition has died, section 7(5) will continue to apply with regard to any living
donors, who will be taxed proportionally to the extent that such income can be attri-
buted to the donations made by them. Remember, section 7(5) does not attribute the
income to the person who imposed the condition, but to the donor.
• Section 7(5) applies up to and including the date that the condition or stipulation is
fulfilled or the date of death of the donor, whichever occurs first.
• In the case of a discretionary trust, the exercising of the trustees’ discretion is the event
as intended in section 7(5).
699
A Student’s Approach to Taxation in South Africa 16.9
• The non-resident must be a connected person in relation to the resident donor (or
any connected person in relation to such a donor).
Further, to prevent the imposition of double taxation in the hands of the resident
donor, the participation exemption under section 10B(2)(a) must only be disregarded
to the extent that the foreign dividend is not derived from an amount that must be
included as ‘income’ or attributed as a capital gain to the resident donor or any other
resident who is a connected person to the donor.
Example 16.10
Tom Palesky is a resident of the Republic and the father of Sharon Palesky, a major non-
resident who is the sole beneficiary of the Palesky Trust, a non-resident discretionary
trust. On 1 March 2019, Tom donated his entire interest of 60% of the equity shares in
Palesky Fashions Plc, a non-resident company, to the Palesky Trust. During the current
year of assessment, Palesky Fashions Plc declared a dividend of R100 000 to the Palesky
Trust. The dividend declared to the Palesky Trust was not funded by an amount that
constitutes income or a capital gain in the hands of Tom. Tom did not hold any voting
rights in Palesky Fashions Plc during the current year of assessment.
You are required to explain the tax consequences of the above with regard to the current
year of assessment.
Solution 16.10
In terms of section 7(8), the foreign dividend of R100 000 will be deemed to accrue to Tom
as it resulted directly from a donation made by Tom, being a resident donor, to the
Palesky Trust, which is a non-resident.
Section 7(8) provides that the amount attributable to the resident donor must have
constituted ‘income’ in the hands of the non-resident had that person been a resident.
However, in determining such hypothetical income of the non-resident, the foreign
dividend exemption under section 10B(2)(a) of the Act must be disregarded in specific
circumstances.
In the present scenario, the foreign dividend of R100 000 would have been fully exempt
under section 10B(2)(a) in the hands of the Palesky Trust had that trust been a resident as
the trust holds at least 10% of the equity shares in Palesky Fashions Plc. However, for
purposes of section 7(8), this exemption must be disregarded, particularly since the
Palesky Trust holds more than 50% of the participation rights in Palesky Fashions Plc and
the Palesky Trust is a connected person in relation to the resident donor (being Tom)
since he is a relative of a beneficiary of the Palesky Trust.
Tom must therefore include the foreign dividend of R100 000 that accrued to the Palesky
Trust in his gross income for the current year. In terms of section 10B(3), a part of this
dividend (25 / 45) would be exempt from normal tax, provided that the foreign dividend
was not funded by or paid in the form of an annuity (refer to chapter 11). Note that Tom
would not be entitled to a full exemption under section 10B(2) for this foreign dividend.
In particular, the participation exemption under section 10B(2)(a), which requires a
minimum holding of 10% of the equity shares and voting rights in the foreign company
declaring the dividend, would not apply as Tom holds no equity shares or voting rights
in Palesky Fashions Plc.
continued
700
16.9–16.10 Chapter 16: Taxation of trusts
Will the answer above differ if the Palesky Trust only held 40% of the
total participation rights in Palesky Fashions Plc?
Example 16.11
Harry Baloy is a resident of the Republic. On 1 March 2019, Harry donated a block of flats
to the Baloy Trust, a discretionary trust that is tax resident in South Africa. Strauli, a
major non-resident, is the only beneficiary of the trust. During the current year of assess-
ment, the Baloy Trust received rental income amounting to R100 000 that was paid over
to Strauli. The rental income was received from a source outside the Republic.
You are required to explain the tax consequences of the above with regard to the current
year of assessment.
Solution 16.11
The Baloy Trust received R100 000. However, the full amount was paid to Strauli. In
terms of section 7(8), the amount will be deemed to accrue to Harry. The amount is the
direct result of a donation that the Baloy Trust received from Harry and had Strauli been
a South African resident, the R100 000 would have constituted income as defined in his
hands.
Harry must therefore include the amount of R100 000 net rental in his taxable income.
701
A Student’s Approach to Taxation in South Africa 16.10
issues with this type of scenario. Firstly, by disposing of an asset at market value,
donations tax is not triggered as the requirement for a gratuitous disposal is not met.
Secondly, by transferring an asset out of his or her estate, a natural person is able to
peg (freeze) the value of his or her estate for estate duty purposes.
Thirdly, if interest on the outstanding loan is either not charged at all or at a very low
interest rate, this constitutes, according to National Treasury, further tax avoidance
by the natural person. This is because such schemes are lawfully structured with the
sole or main purpose to derive a tax benefit through a reduction of the interest
receipts or accruals that would have otherwise been included in the natural person’s
gross income.
Section 7C applies where:
• a natural person provides a loan (or an advance or credit) to a trust;
• a company provides a loan to a trust at the instance of a natural person who is a
connected person to that company; or
• a natural person or a company, at the instance of a natural person who is a
connected person to that company, provides a loan to a company in which a trust
(either alone or together with a beneficiary of that trust, a spouse of such a
beneficiary or a person related to such a beneficiary or spouse within the second
degree of blood relation) directly or indirectly holds at least 20% of the equity
shares or voting rights,
provided that the trust is a connected person in relation to the natural person or the
company providing the loan or any of their connected persons. The natural person or
company does not have to provide the loan directly to the trust as section 7C also
applies in respect of indirect loans.
REMEMBER
The effect of section 7C is two-fold. Firstly, if the person that advanced the loan either
cancels or writes off the outstanding loan amount owing by the trust or company,
that person cannot claim a deduction, loss or allowance in respect of that waiver (for
example in terms of either section 11(i) (bad debts) or (j) (provision for bad debts)).
The person can also not claim a capital loss in respect of the cancellation or write-off
of the outstanding debt (for example in terms of paragraph 56 of the Eighth Schedule)
(section 7C(2)).
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16.10 Chapter 16: Taxation of trusts
Secondly, if the loan is either a low-interest or an interest-free loan, the natural person
who advanced the loan or at whose instance a company advanced the loan, is
deemed to have made a donation to the trust that is subject to donations tax. The
amount of the deemed donation is calculated as the difference between the interest
calculated at the official rate and the interest that the trust or company actually paid
(if any) (section 7C(3)). The daily simple interest method must be used in determining
the interest that would have been charged had the loan been subject to interest at the
official rate of interest (section 7D(b)).
REMEMBER
• The definition of the ‘official rate of interest’ for purposes of this calculation can be
found in section 1 of the Act. In the case of a loan denominated in South African rand,
the official rate of interest represents the sum of the South African repurchase rate
(more commonly known as the repo rate of the South African Reserve Bank) plus 1%.
For loans denominated in foreign currency, the official rate of interest represents the
equivalent of the South African repurchase rate applicable to such currency plus 1%.
• At the time of publication of this book, the official rate of interest in South Africa was
7,25% (November 2022).
The deemed donation in terms of section 7C(3) is deemed to have been made by the
person on the last day of the year of assessment of the trust and is subject to donations
tax. If the donation has been made to a company, the donation is deemed to have been
made by the person on the last day of the year of assessment of the company. The rate
at which donations tax is levied depends on the aggregate value of property donated
by the natural person on or after 1 March 2018 that was subject to donations tax,
including the amount of the deemed donation made under section 7C(3). The first R30
million of the value of property donated on or after 1 March 2018 is subject to donations
tax at 20%, whereas the excess (above R30 million) is subject to donations tax at 25%
(refer to chapter 17 for detail regarding donations tax).
Example 16.12
Jan Jorris sold a block of flats at its market value of R15 million to a trust on 1 March 2022.
The sale was financed by Jan by means of an interest-free loan to the trust. Jan and the
trust are connected persons. Jan did not make any donations during the 2023 year of
assessment and the aggregate value of all donations made by Jan from 1 March 2018
(including any donation resulting from the current transaction) does not exceed
R30 million.
You are required to explain to Jan what the effect of section 7C on the above information
will be, if any. You can assume that the official rate of interest is 7,25% and that the trust
made no capital repayments on the loan.
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A Student’s Approach to Taxation in South Africa 16.10
Solution 16.12
R
Jan provided a loan to the trust and he is a connected person to the trust.
The provisions of section 7C must be considered.
The loan is interest free and Jan will be deemed to have made a donation to
the trust on 28 February 2023. The amount of the deemed donation is
calculated as follows:
Interest calculated at the official rate of interest (R15 million × 7,25%) 1 087 500
Less: Interest incurred by the trust (nil)
Deemed donation 1 087 500
Jan is a natural person and is entitled to a R100 000 general donations tax exemption
during a year of assessment (refer to chapter 17 for detail regarding donations tax). Jan
will thus be liable for donations tax on R987 500 (R1 087 500 – R100 000) in respect of this
deemed donation.
Jan must pay the donations tax of R197 500 (R987 500 × 20%) to SARS by 31 March 2023.
In the case where a company provides a loan to a trust or to another company at the
instance of more than one natural person who is a connected person to that company,
the deemed donation for purposes of section 7C(3) is regarded as having been made
by each of those natural persons in accordance with their respective interests in the
equity shares or voting rights of that company relative to the aggregate interests held
by such persons in that company (section 7C(4)).
Example 16.13
Thami Sebeela owns 60% of the equity shares in AA (Pty) Ltd while Mogale Lethiba owns
the remaining 40% of the equity shares. Thami and Mogale are also beneficiaries of the
BB Trust. At the instance of Thami and Mogale, AA (Pty) Ltd loans an amount, interest free,
to the BB Trust.
Does section 7C apply to the loan between AA (Pty) Ltd and the BB Trust and if yes, what
are the effects for Thami and Mogale?
Solution 16.13
Thami and Mogale are both connected persons in relation to the BB Trust (they are
beneficiaries of the trust) and AA (Pty) Ltd (they are natural persons who each hold at
least 20% of the equity shares in the company). The loan to a trust does not need to be
directly provided by the natural person. If the loan is provided to the trust by a company
(in this case AA (Pty) Ltd) at the instance of one or more natural persons who are
connected persons in relation to that company, section 7C applies.
Because the loan is provided to the trust by the company at the instance of Thami and
Mogale, they are regarded as having donated the difference between the interest
calculated at the official rate of interest and the interest incurred by the trust, in their
respective shareholding ratios.
continued
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16.10 Chapter 16: Taxation of trusts
Example 16.14
Assume the same information as in Example 16.12, except that Jan transferred his claim to
the loan owing by the trust to a beneficiary of that trust, Ben Mtsweni, on
15 November 2022. Assume that no repayments had been made on the loan during the
2023 year of assessment and that the outstanding balance of the loan remained fixed at
R15 million. You can further assume that neither Jan nor Ben made any donations during
the 2023 year of assessment and that the aggregate value of all donations made by each of
them from 1 March 2018 (including any donation resulting from the current transaction)
does not exceed R30 million.
You are required to explain what the effect of section 7C on the above information will
be, if any. You can assume that the official rate of interest is 7,25%.
Solution 16.14
R
Jan is a connected person to the trust and provided an interest-free loan to that
trust during the year of assessment. Consequently, Jan will be deemed in terms
of section 7C to have made a donation to that trust on the last day of the year
of assessment (28 February 2023). The amount of the donation is calculated as
follows:
Interest calculated at the official rate of interest until the date of transferring 771 678
his claim to a loan owing by the trust (R15 million × 7,25% × 259 / 365)
Less: Interest incurred by the trust (nil)
Deemed donation 771 678
continued
705
A Student’s Approach to Taxation in South Africa 16.10
Jan is a natural person and is entitled to a R100 000 general donations tax
exemption during a year of assessment. He is therefore liable for donations
tax on R671 678 (R771 678 – R100 000) in respect of this deemed donation. Jan
must pay the donations tax of R134 336 (R671 678 × 20%) to SARS by
31 March 2023.
Further to the above, Ben will be treated under section 7C(1A) as having
provided a loan to the trust in the amount of the claim acquired to an amount
owing by that trust (that is to say R15 million). As a beneficiary, Ben is a
connected person to the trust and he is therefore deemed to have provided
the loan to the trust on the date of acquiring the claim to that loan, namely on
15 November 2022. Consequently, Ben is deemed under section 7C(1A) to
have made a donation to the trust on the last day of the year of assessment of
the trust (28 February 2023) of an amount calculated as follows:
Interest calculated at the official rate of interest from the date of acquiring the
claim to a loan owing by the trust (R15 million × 7,25% × 106 / 365) 315 822
Less: Interest incurred by the trust (nil)
Deemed donation 315 822
As a natural person, Ben is entitled to a R100 000 general donations tax exemption during
a year of assessment. He is therefore liable for donations tax on R215 822 (R315 822 – R100
000) in respect of this deemed donation. Ben must pay the donations tax of
R43 164 (R215 822 × 20%) to SARS by 31 March 2023.
Example 16.15
Patrick O’Malley, a beneficiary of the ABC Trust, sold a luxury motor vehicle with a market
value of R4 million to ABC (Pty) Ltd on 1 March 2022. The sale was financed by Patrick by
means of an interest-free loan to the company. Patrick holds 15% of the equity shares in
ABC (Pty) Ltd, while the ABC Trust holds the remaining 85% equity shares.
continued
706
16.10 Chapter 16: Taxation of trusts
You are required to explain to Patrick what the effect of section 7C on the above situation
will be, if any. You can assume that the official rate of interest is 7,25% and that neither
Patrick nor the ABC Trust made any donations during the 2023 year of assessment. You
can further assume that the aggregate value of all donations made by Patrick from 1
March 2018 (including any donation resulting from the current transaction) does not
exceed R30 million. ABC (Pty) Ltd made no capital repayments on the loan. ABC (Pty)
Ltd has a 30 June year-end.
Solution 16.15
The interest-free loan that Patrick provided to ABC (Pty) Ltd triggers a
deemed donation under section 7C since Patrick is a connected person in
relation to the ABC Trust (as a beneficiary of the trust) and the trust holds
at least 20% of the equity shares in that company. Consequently, the
provisions of section 7C apply and Patrick is deemed to have made a
donation to the ABC Trust on 30 June 2023. The amount of the deemed
donation is calculated as follows:
R
Interest calculated at the official rate of interest (R4 million × 7,25%) 290 000
Less: Interest incurred by the company (nil)
Deemed donation 290 000
As a natural person, Patrick is entitled to a R100 000 general donations tax exemption
during a year of assessment (refer to chapter 17 for detail regarding donations tax). He
is therefore liable for donations tax on R190 000 (R290 000 – R100 000) in respect of this
deemed donation. Patrick must pay the donations tax of R38 000 (R190 000 × 20%) to
SARS by 31 July 2023.
Will the answer above differ if the ABC Trust held only 10% of the equity
shares in ABC (Pty) Ltd?
707
A Student’s Approach to Taxation in South Africa 16.10
Section 7C(1B) only applies if a trust (being a connected person to the natural person
or company that subscribed for the preference share) holds, whether alone or
together with any beneficiary of that trust, at least 20% of the equity shares or voting
rights in the company that issued the preference share. The natural person or
company that subscribed for the preference share is deemed to have made a donation
to this trust on the last day of the year of assessment of the company. The deemed
donation is calculated as the difference between the interest at the official rate of
interest on the deemed loan to the company and the interest incurred by the company
on that loan (being the dividends that accrued in respect of the preference shares).
Example 16.16
On 1 March 2022, Cecil Meyer who is a beneficiary of the ABC Trust, subscribes for
preference shares in ABC (Pty) Ltd at a total subscription price of R3 million. The ABC
Trust holds 20% of the equity shares in ABC (Pty) Ltd. On 31 January 2023, dividends of
R20 000 accrued to Cecil in respect of the preference shares held in ABC (Pty) Ltd.
You are required to explain to Cecil what the effect of section 7C on the above situation
will be, if any. You can assume that the official rate of interest is 7,25% and that Cecil did
not make any donations during the 2023 year of assessment. You can further assume that
the aggregate value of all donations made by Cecil from 1 March 2018 (including any
donation resulting from the current transaction) does not exceed R30 million. ABC (Pty)
Ltd has a 31 January year-end.
Solution 16.16
R
Cecil is a connected person to the ABC Trust (as a beneficiary of the trust)
and subscribed for preference shares in ABC (Pty) Ltd, a company in
which the ABC Trust holds at least 20% of the equity shares. Conse-
quently, Cecil is deemed to have made a loan equal to the subscription
price of the shares (R3 million) to ABC (Pty) Ltd on 1 March 2022 for
purposes of section 7C. The dividends of R20 000 that accrued in respect
of the preference shares are deemed to be interest incurred by ABC (Pty)
Ltd in respect of this deemed loan. Consequently, Cecil is deemed to have
made a donation to the ABC Trust on 31 January2023. The amount of the
deemed donation is calculated as follows:
Interest calculated at the official rate of interest
(R3 million × 7,25% × 337 / 365) 200 815
Less: Interest incurred by the company (20 000)
Deemed donation 180 815
As a natural person, Cecil is entitled to a R100 000 general donations tax exemption
during a year of assessment (refer to chapter 17 for detail regarding donations tax). He
is therefore liable for donations tax on R80 815 (R180 815 – R100 000) in respect of this
deemed donation. Cecil must pay the donations tax of 16 163 (R80 815 × 20%) to SARS
by 28 February 2023.
708
16.10 Chapter 16: Taxation of trusts
It is evident that the primary target of section 7C is high net worth individuals.
Where an interest-free loan is granted by a natural person to a trust or a company,
which attracts a deemed donation at the maximum rate of 7,25% on the capital
amount, this provision will only result in a donations tax liability if the loan provided
to the trust exceeds R1 379 310. This will be the effect if the taxpayer made no other
donations during the year of assessment, since the entire annual donations tax
exemption of R100 000 can be used to diminish the deemed donation of R100 000
(R1 379 310 × 7,25%) resulting from the interest-free loan.
Section 7C does not apply to all instances where loans were provided by connected
persons to trusts or to companies that are at least 20% owned by such trusts. If a loan
is provided to such a trust or company in the following circumstances, the provisions
of section 7C are not applicable (section 7C(5)):
• the loan is advanced to a trust or company that is an approved public benefit
organisation (PBO) or an approved small business funding entity;
• the loan is advanced to a trust to obtain a vested interest in the income and assets
of the trust and there are no discretionary powers in the trust (so-called ‘bewind’ or
business trusts);
• the loan is advanced to a special trust as defined;
• the loan is advanced to a trust or company that used the loan to fund the
acquisition of a residence that is used either by the natural person or his or her
spouse as a primary residence;
• the loan is subject to the transfer pricing provisions in section 31 that apply to
transactions between residents and non-residents;
• the loan is advanced in terms of ‘sharia compliant financing arrangement’
(financing that complies with Islamic principles);
• the loan is subject to the dividends tax provisions in terms of section 64E(4) (refer
to chapter 11); or
• the loan is advanced to an employee share incentive trust, provided that certain
requirements are met. Firstly, the trust must have been created solely for purposes
of the incentive scheme. The loan must further be provided by the scheme com-
pany or, if it is provided by another person, it must be in support of the trust ac-
quiring shares in the scheme company. Moreover, the trust may only offer equity
instruments (as contemplated in section 8C) relating to or deriving value from
shares in the scheme company to a full-time employee or a director of that com-
pany. Finally, a person who holds (either alone or together with connected per-
sons) at least 20% of the equity shares or voting rights in the scheme company may
not participate in that employment incentive scheme.
The introduction of section 7C into the Act is an indication that the revenue author-
ities are focusing their attention on the use of trusts for tax planning opportunities.
This was confirmed in the Second and Final Report on Estate Duty of the Davis Tax
Committee.
709
A Student’s Approach to Taxation in South Africa 16.10–16.11
REMEMBER
710
16.11 Chapter 16: Taxation of trusts
• If none of the provisions in section 7 apply, the income of a trust is taxed either in
the hands of the beneficiary (where that beneficiary has a vested right) or in the
hands of the trust (section 25B read with section 7).
Example 16.17
Shazia Tayob donates a fixed deposit of R100 000 to her minor child. During the current
year of assessment, the fixed deposit earns interest amounting to R12 000.
You are required to explain the income tax consequences of the above.
Solution 16.17
Although the interest income of R12 000 accrues to Shazia’s minor child, the full amount
is included in Shazia Tayob’s income. The interest income of R12 000 will retain its nature
in Shazia’s hands and will qualify for the basic interest exemption to which Shazia is
entitled as a natural person.
CASE:
Commissioner for South African Revenue Services
v Woulidge 63 SATC 483
Facts: Judgment:
The taxpayer set up two similar trusts for For section 7(3) to apply it requires a dis-
his minor children who were both in- position made wholly or to an appreciable
come and capital beneficiaries under the extent gratuitously and out of liberality
terms of the trusts. The taxpayer sold the or generosity. The court ruled that there
shares which he held in four companies was indeed an appreciable degree of
to the trusts. gratuitousness as far as the forbearance of
interest was concerned, but the market-
The purchase price was left on loan related purchase price, the terms of the
account and although the agreement of deed of sale and the subsequent payment
sale entitled the taxpayer to charge of that purchase price constituted due
interest on the loan account, he did not consideration in respect of the sale itself.
do so. Half the shares were sold and Accordingly, only the forbearance of
from the proceeds, income was gen- interest was gratuitous and not the sale
erated. SARS contended that the original itself. It was clear that the in duplum-rule
sale of the shares to the trusts was a could only be applied in the real world of
simulation or, at the very least, contained commerce and economic activity where it
a considerable element of gratuitousness served considerations of public policy in
and consequently all the income received the protection of borrowers against ex-
or accrued by virtue of that sale should ploitation by lenders. The result is a gra-
have been taxed in the taxpayer’s hands. tuitous disposition and that very element
continued
711
A Student’s Approach to Taxation in South Africa 16.11
REMEMBER
• The interest-free portion of the transaction does in fact activate the application of
section 7, but no donations tax is payable.
• Although the Woulidge case establishes an important principle, it was specifically
applicable to the facts of that case. It was not necessary for the court to decide whether the
transaction was a sham or not, but it remains a risk in any such transaction and the
application of section 80A must also always be examined.
Example 16.18
The assets of the XYZ Trust consist of investments amounting to R1 million. The
investments were funded by means of an interest-free loan that Asmali Kader made to the
trust on 1 March 2019. A market-related interest rate on a similar loan is 10%. The trust
received no income before the current year of assessment. The trust’s investment income
for the current year of assessment amounts to R450 000 and the full amount was paid out
to Asmali’s minor child, Kaja.
You are required to explain the income tax consequences of the above for the current year
of assessment.
Solution 16.18
The interest-free loan is deemed to be a ‘donation, settlement or other disposition’ and
it activates the application of section 7. Section 7(3) stipulates that the income
distributed to Kaja is deemed to be taxable in the hands of the parent. The R450 00 0
may therefore be deemed to be taxable in the hands of Asmali, but the amount is
limited to R400 000 (R1 million at 10% interest per year for four years (2020, 2021, 2022
and 2023)). The R400 000 represents the interest saving to the trust over the four years.
The excess of R50 000 (R450 000 – R400 000) reverts to Kaja (the minor) and is taxable in
his hands.
712
16.11–16.12 Chapter 16: Taxation of trusts
CASE:
Armstrong v Commissioner for Inland Revenue
10 SATC 1
Facts: £2,469 returned by the taxpayer, disre-
Under the will of her husband, the tax- garding the allocation made to dividends
payer was entitled to receive during her which were exempt from normal income
lifetime the whole of the net income of tax.
the residue of his estate. Shortly after his
Judgment:
death, a family arrangement was entered
into, under which the taxpayer’s interest The intervention of a representative tax-
was vested in a trust. The trustees were payer (trust) to receive the dividend from
obliged to pay to the taxpayer a fixed the company for the benefit of the ulti-
amount each year. The balance of the mate beneficiary did not deprive the latter
income, after providing for expenses, was of the exemption, since the dividend did
divided between the taxpayer’s daughters. not lose its character as a dividend when
For the year of assessment, the taxpayer the trustees paid it over to the taxpayer.
returned an income of £2,469 and her
return indicated that of this sum £1,495 Principle:
was derived from dividends and £974 The ‘conduit pipe’-principle is described,
from rents and interest. The Commissioner namely that income derived by a trust
for Inland Revenue levied normal does not lose its identity when it is
income tax upon the whole amount of received by the beneficiary.
The Armstrong case established the important principle that a trust is a conduit. The
conduit principle, however, is also contained in the wording of section 25B(1) of the
Act.
The income received by the trust retains its identity until distributed to beneficiaries.
For example, if the trust receives local dividends, the dividends retain their nature in
the hands of a beneficiary with a vested right and the applicable exemption for local
dividends (section 10(1)(k)) are available to that beneficiary. Other examples include
713
A Student’s Approach to Taxation in South Africa 16.12–16.13
that income of a capital nature remains capital; income from a foreign source remains
subject to the rules of determining the source of income for non-residents; foreign
dividend income is eligible for the foreign dividend exemptions in terms of section 10B;
and interest income for the exemptions referred to in section 10(1)(h) and (i).
REMEMBER
• In the Rosen case the court found that the income had to be distributed in the year in
which it was earned to retain its identity. If income is therefore distributed out of
retained income, the income will lose its identity and will be treated as capital in nature.
However, when dividend income is paid out in the form of an annuity, it retains its
nature as a dividend, but it loses the general dividend exemption in terms of sec-
tion 10(1)(k) due to the provisions of section 10(2)(b). Similarly, where foreign divi-
dend income is paid in the form of an annuity, it loses the complete foreign dividend
exemptions contained in section 10B(2) and the partial foreign dividend exemption
contained in section 10B(3) due to the provisions of section 10B(5). Section 10B(5)
further provides that any payments out of a foreign dividend do also not qualify for
the foreign dividend exemptions under section 10B(2) and 10B(3). Local interest
income paid out by way of an annuity still retains the basic interest exemption in
terms of section 10(1)(i)). However, local interest received by non-residents in the
form of an annuity loses the exemption in terms of section 10(1)(h).
REMEMBER
• The effect of both sections 10(2)(b) and 10B(5) is similar in that all exemptions in respect
of local and foreign dividends are lost if dividends are paid out in the form of an annui-
ty. Furthermore, if a payment is made out of a foreign dividend, such an amount does
not qualify for the foreign dividend exemptions under section 10B(2) and (3).
Example 16.19
Magdalena Kwaso is the only beneficiary of the Madala Trust and has a vested right to all
the income of the testamentary trust. During the current year of assessment, the trust
received rental income amounting to R100 000. Deductible expenses in the trust
amounted to R20 000 for the year. No amount was distributed to Magdalena.
You are required to explain the income tax consequences for the current year of assessment.
714
16.13 Chapter 16: Taxation of trusts
Solution 16.19
This is a testamentary trust and therefore there can be no income tax consequences for the
donor. The beneficiary is therefore taxed on all income to which she has a vested right.
Magdalena has a vested right to the full R100 000 income and she is entitled to claim the
R20 000 expenses as a deduction. Her taxable income is therefore R80 000 (R100 000 –
R20 000).
A beneficiary is not entitled to set off the expenditure or losses of a trust against his or
her other taxable income. Therefore, any deductions or allowances attributed to the
beneficiary under section 25B(3) are limited to the amounts of income of the trust to
which the beneficiary has a vested right, and which are included in the income of the
beneficiary (section 25B(4)).
The remaining deductions and allowances exceeding the income vested in the
beneficiary are firstly applied against the taxable income of the trust, if that trust is
subject to normal tax in South Africa. The deduction may not create or increase an
assessed loss in the hands of the trust (section 25B(5)(a)). Any surplus deductions and
allowances that exceeds the taxable income of the trust is again deemed to be an
amount that is deductible by the beneficiary in the following year of assessment. If
the trust is not subject to normal tax in South Africa, the expenses that are not
deductible in the hands of the beneficiary are merely carried forward, without being
utilised by the trust, and are deemed to be an amount that is deductible by the
beneficiary in the following year (section 25B(5)(b)). The excess expenditure or losses
that are deemed to be amounts deductible by the beneficiary in the following year is
once again limited to amounts that accrue to the beneficiary from that trust (sec-
tion 25B(6).
Example 16.20
Magdalena Kwaso is the only beneficiary of the Madala Trust, a South African tax
resident trust, and has a vested right only to the gross rental income of the testamentary
trust. During the first year, the trust received rental income amounting to R100 000 and
interest income amounting to R12 000. Deductible rental expenses for the year amounted
to R120 000. No amount was paid out to Magdalena during the first year.
During the second year, the trust received rental income amounting to R80 000 and
interest income amounting to R10 000. Deductible rental expenses for the year amounted
to R75 000. An amount of R10 000 of the rental income was distributed to Magdalena
during the second year.
You are required to calculate the tax consequences of the above for the applicable years of
assessment.
715
A Student’s Approach to Taxation in South Africa 16.13
Solution 16.20
R R
First year: Magdalena Kwaso
Rental income 100 000
Less: Rental expenditure (limited to the rental income) (100 000)
Taxable income – Magdalena nil
Deductible expenditure still available
Total expenditure 120 000
Less: Deducted by Magdalena (100 000)
Expenditure still available 20 000
First year: Madala Trust
Interest income 12 000
Less: Rental expenditure brought forward from Magdalena
(no deduction – not incurred in the production of
interest income) (nil)
Taxable income – Madala Trust 12 000
Deductible expenditure still available
Brought forward from Magdalena 20 000
Applied in the trust (nil)
Expenditure still available – carried forward to second year 20 000
716
16.13–16.14 Chapter 16: Taxation of trusts
REMEMBER
• A beneficiary who obtains a vested right to the income of a trust, may only claim
permissible deductions and allowances to the extent that such amounts form part of his
or her ‘income’ for the year of assessment. For example, if a non-resident beneficiary
obtains a vested right to the income of a trust that has been derived from a source
outside South Africa, no deductions or allowances would be claimable by the
beneficiary against such an amount.
• A trustee remuneration paid to the beneficiary (who may also be a trustee) as well as
interest due to the beneficiary may be claimed as deductions in the trust. Such income
must be disregarded when determining the maximum amount deductible for the
beneficiary in respect of vested income from the trust.
• Only tax-deductible expenses in the trust may be claimed as a deduction by the beneficiary.
continued
717
A Student’s Approach to Taxation in South Africa 16.14
718
16.14 Chapter 16: Taxation of trusts
REMEMBER
• If the donor dies during the year of assessment, section 7 applies only to the period the
donor was alive. After that person’s death there is no donor that can be taxed, therefore
only the beneficiary (if the beneficiary has a vested right) or the trust can be taxed.
719
A Student’s Approach to Taxation in South Africa 16.14
REMEMBER
Example 16.21
According to the last testament of the late Duncan McLoid, a testamentary trust was
established and on the date of his death, all his assets were transferred to this trust.
His will stipulates that the income derived from the assets should be divided as follows:
• 40% of the gross rentals to my only daughter, Mary;
• the remainder of gross rentals to my only son, James;
• notwithstanding the above, the trustee shall in each year apply 331/3% of the gross interest on
investment towards the maintenance, education and welfare of my son and daughter in such
proportions as he in his sole discretion shall think fit.
Subject to the above, all other income shall be set aside and accumulated for the future benefit of
any children of my son, James.
continued
720
16.14 Chapter 16: Taxation of trusts
Solution 16.21
STEP 1: Compile a table that allocates the different incomes and distributions
Rent Interest Total
R R R
Income of trust (Note 5) 610 000 450 000 1 060 000
Less: Distributions and vested rights
Mary (resident) (244 000) (60 000) (304 000)
James (resident) (366 000) (90 000) (456 000)
Undistributed income nil 300 000 300 000
STEP 2: Calculate the taxable income of the donor (not applicable as he is deceased)
STEP 3: Calculate the taxable income of the beneficiaries
(Remember to cross each amount off in the table as you include it in the taxable income of
the beneficiary.)
Mary R
Rent from the trust (vested payment) 244 000
Interest from the trust (discretionary payment) (Note 2) 60 000
Total 304 000
Less: Basic interest exemption (23 800)
Income 280 200
Less: Trustee remuneration (Note 1)
(R30 000 × R244 000 / R610 000) + (R22 500 × R60 000 / R450 000) (15 000)
Taxable income 265 200
continued
721
A Student’s Approach to Taxation in South Africa 16.14
James
Rent from the trust (vested payment) 366 000
Interest from the trust (discretionary payment) (Note 2) 90 000
Total 456 000
Less: Basic interest exemption (23 800)
Income 432 200
Less: Trustee remuneration (Note 1)
(R30 000 × R366 000 / R610 000) + (R22 500 × R90 000 / R450 000) (22 500)
Taxable income 409 700
STEP 4: Calculate the taxable income of the trust
Trust
Interest on investment (Note 3) 300 000
Less: Trustee remuneration (Note 1) (R22 500 × R300 000 / R450 000) (15 000)
Taxable income (Note 4) 285 000
Notes
1. Beneficiaries are liable for tax on any part of the income of a trust to which they are
entitled (section 25B(1)). Each is entitled to the basic interest exemption as provided
for in section 10(1)(i). The portion of trustee remuneration that is attributable to the
income distributed to the beneficiary is deductible in terms of section 25B(3) in the
hands of the beneficiary.
2. In terms of the will, the trustee is obliged to pay 33 1/3% of the interest on the invest-
ment for the maintenance of the two children in such proportions as he thinks fit.
These discretionary payments are taxed in the hands of the beneficiaries (section 25B(2))
after deducting the trustee’s remuneration (section 25B(3)).
3. The right to the remainder of the income vests in undetermined heirs, that is to say
James’ future children. As no beneficiary is entitled to this income yet, it is taxable in
the hands of the trust (section 25B(1)).
4. The taxable income of a trust is determined in the ordinary way. The expenditure
incurred in the production of income is allowed. Therefore, the remaining trustee’s
remuneration is deductible from the interest on the investment. The trust is not
entitled to the section 10(1)(i) basic interest exemption, which is available only to a
natural person. It is also not entitled to the primary, secondary or tertiary rebates for
the same reason.
5. The beneficiaries are entitled to the gross amounts of interest and rentals, therefore,
the trustees’ remuneration is excluded from the table compiled in Step 1.
722
16.14 Chapter 16: Taxation of trusts
Example 16.22
Below is the income statement of an inter vivos trust created by Zelda Smith who donated
all the assets to the trust. In terms of the trust deed, Xavier Smith is entitled to an annuity
of R240 000 and Yolandi Smith is entitled to 50% of the net income remaining after
payment of the annuity. The balance of the receipts and accruals shall be paid out to
Xavier upon Yolandi’s death. Should Xavier die before Yolandi, the balance of the receipts
and accruals of the trust will be paid to Yolandi. Xavier and Yolandi are both majors and
residents of South Africa. All taxpayers are younger than 65 years of age.
Income statement of trust
R R
Trustee’s remuneration 48 000 Rent 480 000
Property expenses Interest
(allowable) 164 000 Dividends from South 320 000
Property expenses African companies which qualify
(disallowed alterations) 108 000 for the section 10(1)(k) exemption 160 000
Annuity to Xavier 240 000
Share of net income Yolandi
(50% of R400 000) 200 000
Surplus accumulated 200 000
960 000 960 000
You are required to calculate the taxable income of all the relevant parties for the current
year of assessment.
Solution 16.22
STEP 1: Compile a table that allocates the different incomes and distributions
Divi-
Total Rent Interest dends
R R R R
Amount 960 000 480 000 320 000 160 000
Less: Trustee remuneration (48 000) (24 000) (16 000) (8 000)
(Note 1) (Note 2) (Note 2) (Note 3) (Note 4)
912 000 456 000 304 000 152 000
Less: Property expenses
(allowable) (164 000) (164 000) nil nil
748 000 292 000 304 000 152 000
Less: Property expenses
(disallowable) (Note 5) (108 000) (108 000) nil nil
640 000 184 000 304 000 152 000
Less: Annuity Xavier (240 000) (69 000) (114 000) (57 000)
(Note 8) (Note 9) (Note 10)
400 000 115 000 190 000 95 000
Less: Award Yolandi (200 000) (57 500) (95 000) (47 500)
(Note 11) (Note 12) (Note 13)
Accumulated in trust 200 000 57 500 95 000 47 500
continued
723
A Student’s Approach to Taxation in South Africa 16.14
Notes
1. The beneficiaries are entitled to the net amounts of rent, interest and dividends and
therefore the trustees’ remuneration is included in the table compiled in Step 1 (this
is in contrast to the scenario in Example 16.21).
2. (R480 000 / R960 000) × R48 000
3. (R320 000 / R960 000) × R48 000
4. (R160 000 / R960 000) × R48 000
5. When, in terms of the trust deed, the beneficiaries are entitled to the net income only,
it is submitted that the trust is liable for tax on inadmissible expenditure. Therefore,
the trust will be liable for tax on the inadmissible property expenses of R108 000 and
on the portion of trustee remuneration that is attributable to local dividends since
section 23(f) prohibits a deduction for expenditure incurred in the production of
exempt income. SARS follows this procedure in practice.
6. Because the donation made by Zelda is subject to a stipulation or condition that
neither party will receive the income retained by the trust until the death of the other
party, section 7(5) deems the income retained in the trust to be Zelda’s income.
continued
724
16.14 Chapter 16: Taxation of trusts
7. The annuity of R240 000 falls into gross income (section 1) and consists of R69 000
rent, R114 000 interest and R57 000 dividends. The income retains its nature through
the trust. It should be noted that the provisions of section 10(2)(b) will be applicable
resulting in Xavier not being entitled to the section 10(1)(k) exemption since he
receives the dividend income by way of an annuity. However, he will still qualify for
the interest exemption in terms of section 10(1)(i).
8. (R184 000 / R640 000) × R240 000
9. (R304 000 / R640 000) × R240 000
10. (R152 000 / R640 000) × R240 000
11. (R115 000 / R400 000) × R200 000
12. (R190 000 / R400 000) × R200 000
13. (R95 000 / R400 000) × R200 000
With regards to the calculation at Note 11 note of the following:
If the calculation was done as (R184 000 / R640 000 × R200 000), the answer would also
have been R57 500. However, the calculation is done as (R115 000 / R400 000 × R200 000)
because sometimes there are distributions in a table that are not proportional and that
will not always give the same answer. The principle is the same for the calculations at
Note 12 and Note 13.
Example 16.23
During his lifetime, James Joyce created a trust for the benefit of the following beneficiaries:
• his son, Marcus Joyce, who is 32 years old, resides permanently in Australia and
operates his business there;
• his son, Karl Joyce, who is 25 years old and lives in the Republic;
• his unmarried daughter, Gillian Joyce, who is 15 years old and lives in the Republic; and
• his mother, Mrs Caroline Joyce (60 years old), who is a widow and lives in the Republic.
James Joyce also lives in South Africa and donated the following assets to the trust:
• shares in South African companies; and
• the use of a large office building in Johannesburg for a period of ten years. At the end
of the ten-year period, Mr Joyce will regain the full right of ownership of the property.
The office building was erected before 2007.
Mrs Caroline Joyce, 60 years old and grandmother of the children, also donated certain
assets to the trust:
• a block of flats in Pretoria that she inherited from her deceased husband; and
• a patent that her deceased husband developed that is used by a manufacturing com-
pany in the Republic.
The following clauses, among others, appear in the trust deed:
(i) An annuity of R1 000 per month is payable to Mrs Caroline Joyce for the rest of her
life.
(ii) After deduction of the trustee remuneration and the annuity to Mrs Caroline Joyce,
one-third of the net income of the trust is payable to Marcus and one-third to Karl.
continued
725
A Student’s Approach to Taxation in South Africa 16.14
(iii) The trustee may distribute as much of the remaining third to Gillian for her
education as is necessary according to his discretion. The rest of the income must
be left in the trust until Gillian turns 25, when the balance must be paid out to her
and she must share in the income with her brothers on an equal basis. If Gillian
should die before the age of 25, the unpaid balance will be distributed to her
brothers.
(iv) Mr Joyce reserved the right to transfer Gillian’s right to her share of the trust
income in equal parts to her brothers if she were to marry before the age of
25 years.
(v) The trustees’ remuneration amounts to 5% of the net income of the trust, before the
deduction of any distributions to the beneficiaries. The trustees are all independent
third parties.
(vi) All distributions of income are paid proportionately from all sources of income.
(vii) All income received by the trust was received from a source within the Republic.
The trustee compiled the following income and expenditure account for the current year
ending on 28 February:
R R
Local dividends received 18 600
Net rental on office building in Johannesburg 186 900
Royalties 33 000
Local interest (there is no causal link with any donation,
settlement or other disposition) 4 500
Net rental on block of flats in Pretoria 360 000
603 000
Less: Trustees’ remuneration (30 150)
572 850
Less: Annuity paid to Mrs Joyce
(R1 000 × 12 months) (12 000)
560 850
Less: Distribution to Marcus (R560 850 × 1 / 3) 186 950
Distribution to Karl (R560 850 × 1 / 3) 186 950
Distribution to Gillian 60 000 (433 900)
126 950
You are required to calculate the taxable income of all the relevant parties with regard to
the current year of assessment.
726
16.14 Chapter 16: Taxation of trusts
Solution 16.23
STEP 1: Compile a table that allocates the different incomes and distributions.
Letting Letting
Dividends Royalties Interest Total
of office of flats
Non-
Donor James James Caroline Caroline
donation
R R R R R R
Net income 18 600 186 900 33 000 4 500 360 000 603 000
Less: Expenses
Trustee
remuneration (930) (9 345) (1 650) (225) (18 000) (30 150)
Net income after trustee
remuneration 17 670 177 555 31 350 4 275 342 000 572 850
Less: Distributions and
vested rights (13 755) (138 206) (24 402) (3 328) (266 209) (445 900)
Caroline (annuity
– resident) (Note 1) 370 3 719 657 90 7 164 12 000
Distributions: Marcus
(non-resident) 5 767 57 945 10 231 1 395 111 612 186 950
Karl (resident) 5 767 57 945 10 231 1 395 111 612 186 950
Gillian (minor/
resident) 1 851 18 597 3 283 448 35 821 60 000
Undistributed
income 3 915 39 349 6 948 947 75 791 126 950
continued
727
A Student’s Approach to Taxation in South Africa 16.14
continued
728
16.14 Chapter 16: Taxation of trusts
continued
729
A Student’s Approach to Taxation in South Africa 16.14
730
16.15 Chapter 16: Taxation of trusts
16.15.1 General
The general provisions with regard to capital gains tax are discussed in chapter 10.
Capital gains tax is contained in the Eighth Schedule to the Act and only the specific
aspects that relate to trusts are discussed here.
A ‘trust’ is deemed to be a person other than a natural person and when the total
capital gain or loss is calculated, trusts (other than paragraph (a) special trusts) are not
entitled to the annual exclusion of R40 000. The inclusion rate for a taxable capital gain for
trusts (other than special trusts) is 80% of the net capital gain for that year of assess-
ment. A trust therefore pays capital gains tax at an effective rate of 36% (80% × 45%).
The disposal of an asset by a trust, for example by vesting it in a beneficiary, is subject
to the general principles applicable to disposals, base cost and proceeds, as well as the
general anti-avoidance stipulations and the loss limitation rules. For example, the
disposal of an asset to a beneficiary for consideration which is not at arm’s-length is
subject to the same rules applicable to connected persons in paragraph 38 of the
Eighth Schedule, while the disposal of an asset by a trust could also trigger the loss
limitation rules under paragraph 39 of the Eighth Schedule.
A capital gain resulting from the disposal of an asset by a trust is taxable either in the
hands of the trust, the beneficiary or, where an attribution rule is applicable, the
person who made the donation, settlement or other disposition to the trust.
731
A Student’s Approach to Taxation in South Africa 16.15
for capital gains tax in terms of the Eighth Schedule to the Act. Paragraph 73
stipulates that the amount of income in terms of section 7 together with the amount of
‘capital gains’ that are attributed to a person in terms of the Eighth Schedule may not
exceed the amount of the benefit. ‘Benefit’ from the ‘donation, settlement or other
disposition’ means the amount that the person to whom the donation, settlement or
other disposition was made, benefited due to the fact that it was made for no or
inadequate consideration, including consideration in the form of interest.
Example 16.24
Abrie Verhoef (a resident of the Republic) sold a block of flats to a trust. The selling price
of R1 000 000 was still outstanding and interest was levied at 5%. A market-related
interest rate is deemed to be 15%. During the current year of assessment, rental income
amounting to R60 000 was earned. One of the flats in the block was sold to a third party
and a capital gain of R89 000 was realised by the trust. The trust is a discretionary trust
and no portion of the income or capital gain was paid out to any beneficiary. Abrie is still
alive.
You are required to calculate the taxable income of all the relevant parties with regard to
the current year of assessment.
Solution 16.24
In terms of section 7(5), the part of the rental income that can be attributed to the dona-
tion, settlement or other disposition (the low-interest loan) is taxable in the hands of
Abrie. R40 000 (((15% – 5%) / 15%) × R60 000) of the total rental income of R60 000 is
therefore taxable in the hands of Abrie.
In terms of paragraph 70, R59 333 (((15% – 5%) / 15%) × R89 000) of the total capital gain
of R89 000 will be attributed to Abrie. However, the amount to be attributed to Abrie in
total in terms of both section 7(5) and paragraph 70 must be limited to R100 000. The
benefit that Abrie gives to the trust is the forfeited interest of 10% (15% – 5%), which
amounts to R100 000 (R1 000 000 × 10%) for the year.
R40 000 has already been taxed in Abrie’s hands in terms of section 7(5) and therefore the
entire R59 333 of the capital gain can also be attributed to Abrie in terms of paragraph 70.
The Act does not prescribe a specific order for the application and limitation of the
different sections. The limitation might thus apply proportionally as well. The trust will
be taxed on the R20 000 rental income (R60 000 – R40 000 (taxed in the hands of the
donor)) to which the provisions of section 7(5) do not apply as well as the R29 667 capital
gain (R89 000 – R59 333 (taxed in the hands of the donor)) to which the provisions of
paragraph 70 do not apply.
In circumstances where a natural person provides a loan to a trust and the parties are
connected persons, regard must also be given to the provisions of section 7C (refer to
16.10).
732
16.15 Chapter 16: Taxation of trusts
Although paragraph 70 (equivalent to section 7(5)) is excluded, the effect is not differ-
ent. The wording in the Eighth Schedule is only clearer and, where it had to be
determined by case law that section 7(1) was stronger than section 7(5), it is clear in
the Eighth Schedule that paragraph 70 (equivalent to section 7(5)) is not applicable
when vesting occurs in a South African resident (equivalent to section 7(1)).
The general rule is that the capital gain is brought into account for the purposes of
determining the total capital gain or total capital loss of the trust and not necessarily
the person in whose hands the profit finally ends up.
Exceptions to the rule are the attribution rules in paragraphs 68 to 71 (excluding
paragraph 70) as well as the following provisions:
• the capital gain determined with the vesting of an asset in a resident beneficiary is
brought into account in the hands of such beneficiary, unless the beneficiary is an
approved public benefit organisation, a tax-exempt entity as contemplated in
paragraph 62(a) to (e) or an employee in which a section 8C equity instrument is
vested (refer to chapter 14 for further details regarding section 8C). This is the case
when the trust realised a capital gain (or would have realised a capital gain had
that trust been a resident), because a trust asset was transferred to a beneficiary
who is a resident (paragraph 80(1));
• when an asset is not transferred to a resident beneficiary, but the trust realises a
capital gain, for example by disposing of an asset to an independent third party,
such a capital gain, or an amount derived from that capital gain, is disregarded by
the trust and included in the hands of a resident beneficiary of that trust who has a
vested right to that amount or acquires a vested right to such an amount
(paragraph 80(2)). However, if the beneficiary is an approved public benefit
organisation or a tax-exempt entity contemplated in paragraph 62(a) to (e), the
capital gain is taxed in the hands of the trust.
• in some instances, an amount that that is derived by a resident beneficiary, other
than an approved public benefit organisation or a tax-exempt person contemplated
in paragraph 62(a) to (e), through vesting from a non-resident trust must be taken
into account by that beneficiary as a capital gain in determining the aggregate
capital gain or loss for the year of assessment. This is the case if that amount was
derived directly or indirectly from that non-resident trust or another non-resident
trust in respect of the disposal of an asset during the same year of assessment,
provided that the amount would have constituted a capital gain had the trust that
disposed of the asset been a resident (paragraph 80(2A)).
When the trust realises a capital gain and does not distribute it, and no beneficiary
who is a South African resident has a vested right thereto, it is taxable either in the
hands of the donor in terms of paragraph 70 or in the hands of the trust.
There are no attribution rules with regard to capital losses in a trust and only the trust
can bring such losses into account.
733
A Student’s Approach to Taxation in South Africa 16.15–16.17
REMEMBER
16.16 Summary
In this chapter, a detailed explanation is given of the tax principles of trusts. The
income from a trust is usually taxed in the hands of the person receiving the income,
unless sections 25B and 7 deem it to be taxable in the hands of another person.
The general rule is that the capital gain is brought into account for the purposes of
determining the total capital gain or total capital loss of the trust. Exceptions to the
rule are the attribution rules in paragraphs 68 to 72 as well as when an asset or capital
gain vests in or is distributed to a beneficiary who is a resident.
It is clear that the taxation of trusts is complicated and a taxpayer’s tax risk is very
high if trusts are used without tax experts being consulted.
The next section contains a number of practical questions that the student may use to
test his or knowledge of the taxation of trusts.
Question 16.1
The Nightingale Trust is a non-resident discretionary trust with a February year end. The
trust was established in die United States in 2014 by way of a donation of $100 by a non-
resident who has since passed away. The trust has two beneficiaries, namely Mr X (a South
African resident) and Mr Y (a non-resident). Neither of the beneficiaries have a vested
right to any of the income or capital of the foreign trust.
On 1 March 2022, Mr X granted an interest-free loan (denominated in US dollar) to the
foreign trust. The trust used the entire loan to finance the purchase of a block of flats situated
in the United States.
During the 2023 year of assessment, the trust received rental income from the letting of this
block of flats (assume such rental income is from a source outside the Republic). The trust
had no other receipts or accruals for 2023. The trust distributed 50% of the rental income
earned during 2023 to Mr Y, while retaining the other 50% of the rental income in the
foreign trust.
734
16.17 Chapter 16: Taxation of trusts
Answer 16.1
Mr X
• Section 7(8) of the Act applies to attribute the rental income received by or accrued to
the Nightingale Trust from the letting of the block of flats to Mr X to the extent that such
income is attributable to a donation, settlement or other disposition (such as the
interest-free loan) provided by Mr X to the trust.
• The rental income attributable to Mr X in terms of section 7(8) is limited to the amount
of gratuitousness (refer to the Woulidge case). In the case of an interest-free loan, the
amount of gratuitousness would be the shortfall in the market-related interest not
charged on the loan.
• If the rental income earned by the Nightingale Trust during the year exceeds the
maximum amount attributable to Mr X, it must be considered whether such an excess is
taxable in the hands of a beneficiary who obtained a vested right to such income
(through a distribution made by the trustees) or in the trust itself (where the rental
income is retained in the trust).
• Section 7C applies further to trigger a deemed donation in the hands of Mr X since he is
a natural person who provided an interest-free loan to a trust in relation to which he is a
connected person (being a beneficiary of that trust). Provided that none of the
exclusions listed in section 7C(5) applies, the shortfall in interest between the ‘official
rate of interest’ and the interest actually charged (being nil) would be deemed to be a
donation made by Mr X to the trust. Since the loan to the trust is denominated in US
dollar, the official rate of interest is the US equivalent of the South African repurchase
rate plus 1%.
• The donation is deemed to take place on 28 February 2023 (being the last day of the year
of assessment of the trust). As a natural person, Mr X is eligible for an annual donations
tax exemption of R100 000, which can be utilised against this donation. The excess is
subject to donations tax, which is levied at a rate of 20% on the first R30 million of the
value of the deemed donation, whereas the value above R30 million is subject to
donations tax at 25%. Mr X must settle the donations tax by 31 March 2023.
Mr Y
• Mr Y is not subject to South African income tax on rental income that accrued to him
through the distribution made by the Nightingale Trust. As a non-resident, Mr Y is only
subject to South African income tax in respect of receipts and accruals from a South
African source and the rental income is not from a South African source. Consequently,
any portion of the rental income that is not attributable to Mr X under section 7 (in
consequence of exceeding the amount of gratuitousness) is not subject to tax in the
hands of Mr Y.
The Nightingale Trust
As a non-resident, the trust is only subject to South African income tax on receipts and
accruals from a South African source. The rental income retained in the trust is therefore not
subject to South African income tax in the hands of the trust as it is not from a South African
source. In a similar vein, any portion of the rental income that is not attributable to Mr X
under section 7 is not taxed in the hands of the foreign trust.
735
11
17 Donations tax
Page
17.1 Introduction ....................................................................................................... 738
17.2 Levying of donations tax (sections 54 and 58) .............................................. 739
17.3 Rate at which tax is levied (section 64)........................................................... 740
17.4 Persons liable for payment (sections 55 and 59) ........................................... 740
17.4.1 Property deemed to be donated by another person ..................... 740
17.4.1.1 Spouses married in community of property
(section 57A) ................................................................... 740
17.4.1.2 Donation by companies or other entities on the
instruction of another (section 57) ............................... 740
17.4.2 Recoupment of donations tax paid (section 59) ............................ 741
17.5 Period in which payment must occur (section 60) ....................................... 741
17.6 Calculation of donations tax ............................................................................ 741
17.7 Specific exemptions (section 56)...................................................................... 743
17.8 General exemptions (section 56(2))................................................................. 746
17.9 Value: Property other than limited interests (section 62) ............................ 748
17.10 Value: Limited interests (section 62) .............................................................. 749
17.10.1 Fiduciary right and usufruct ......................................................... 749
17.10.2 Annuities .......................................................................................... 751
17.10.3 Bare dominium .................................................................................. 752
17.11 Summary ............................................................................................................ 754
17.12 Examination preparation ................................................................................. 755
737
A Student’s Approach to Taxation in South Africa 17.1
17.1 Introduction
When a donation is made, the amount donated may in certain circumstance be de-
ducted when calculating taxable income. This deduction is regulated by section 18A
of the Income Tax Act 58 of 1962 (the Act) (refer to chapter 5), which provides for the
deduction of donations to certain public benefit organisations. This deduction must
not in any manner be confused with the concept of ‘donations tax’.
Donations tax is a separate tax and bears no relation to the normal tax calculation or
the deduction of certain donations to benefit organisations. Donations tax is also
regulated by the Act and is contained in Part V of the Act from sections 54 to 64. It is,
therefore, important that the transactions that are subject to donations tax be identi-
fied, and that a separate calculation be performed for them. Donations tax is only
applicable to residents of the Republic.
Donations tax is a form of capital transfer tax. It is not a tax that is levied on income,
but on the transfer of capital (assets/property). In South Africa, we have two forms of
capital transfer tax, namely donations tax and estate duty. When a person dies, estate
duty is payable on the net value of the property in that person’s estate. Persons
would therefore be able to prevent an estate duty liability accruing if they donated all
their property to someone else before the date of their death. The purpose of dona-
tions tax is to prevent this avoidance practice. For example, should an individual
know that they are to die the following day and they donate some of their assets
before their death, donations tax would be payable on it. Both donations tax and
estate duty are levied at the same rate.
Tax statistics
During the 2021 fiscal year R602 million was collected as donations tax.
Critical questions
When a person deals with donations tax, the person is usually confronted with the follow-
ing questions:
• Which transactions attract donations tax?
• At which rate is donations tax calculated?
• Are there certain transactions that are deemed to be donations?
• Which specific donations are exempt from donations tax?
• Is there a general exemption applicable to all persons?
• Who is responsible for the payment of donations tax?
• When is the donations tax payable?
738
17.2–17.3 Chapter 17: Donations tax
REMEMBER
739
A Student’s Approach to Taxation in South Africa 17.4
Legislation:
Section 1: Interpretation
‘spouse’, in relation to any person, means a person who is the partner of such person—
(a) in a marriage or customary union recognised in terms of the laws of the Republic;
(b) in a union recognised as a marriage in accordance with the tenets of any religion; or
(c) in a same-sex or heterosexual union which the Commissioner is satisfied is intended
to be permanent,
and ‘married’, ‘husband’ or ‘wife’ shall be construed accordingly: Provided that a mar-
riage or union contemplated in paragraph (b) or (c) shall, in the absence of proof to the
contrary, be deemed to be a marriage or union without community of property;
740
17.4–17.6 Chapter 17: Donations tax
REMEMBER
• The person who gives the instruction to donate must be a resident although the entity
does not have to be a resident. Donations tax is only levied on South African residents.
REMEMBER
• Donations tax is payable per donation. It is not calculated for a year of assessment or tax
period.
continued
741
A Student’s Approach to Taxation in South Africa 17.6
Step 4: Determine the value of the donation (refer to 17.9 and 17.10). Reduce
the value with any consideration paid.
Step 5: Reduce the value by the balance of the general exemption applicable to
the person (refer to 17.8).
Step 6: Adjust the balance of the general exemption still available for the year
of assessment. The answer may not be negative and is limited to nil. If
the beginning of a new year of assessment commences, the full general
exemption applies again.
Step 7: Multiply the answer in Step 5 by the donations tax rate (20%/25%).
Example 17.1
Silo Zilkaatz is a resident of the Republic and owns all the shares in ABC (Pty) Ltd. The
issued share capital of ABC (Pty) Ltd consists of ten shares of R1 each. ABC (Pty) Ltd
owns a fixed property with a market value of R1 000 000 as well as a positive bank bal-
ance of R10. The market value of the company is R1 000 010. It was decided that the com-
pany would issue an additional ten ordinary shares of R1 each to Silo’s son, Tobia. Tobia
received the shares and paid R10 for them. No other disposals, either by Silo or ABC (Pty)
Ltd, were made during that year of assessment.
You are required to discuss and calculate the donations tax effects of the above transac-
tions.
Solution 17.1
Although the disposal was made by ABC (Pty) Ltd, it is deemed as having been made by
Silo Zilkaats. Silo is the sole shareholder and therefore controls the company. Any deci-
sion of the company is actually made by Silo, and the disposition was made on Silo’s
instruction. Silo is therefore the donor and he is a resident of the Republic.
A disposal of property has definitely taken place, but whether it is a donation still has
to be determined. The nominal value of the shares issued to Tobia is R10 and he paid
R10. It was thus not a gratuitous disposition. Silo and Tobia are connected persons and the
application of section 58(1) must be examined.
R
The market value of the company before the disposal 1 000 010
The cash paid for the additional shares 10
The total market value of the company 1 000 020
continued
742
17.6–17.7 Chapter 17: Donations tax
R
Tobia received 50% of the shares (R1 000 020 × 50%)
(20 shares in total, of which he received ten) 500 010
Thus, there was a donation because less was paid than what is considered
as adequate consideration.
No specific exemption is available.
The value of the donation is the value of the disposal less the consideration paid
(R500 010 – R10) = R500 000
The full general exemption is still available (refer to 17.8). Therefore, R500 000 – R100 000 =
R400 000. (As section 57 is applicable – property is deemed to be donated by Silo and
therefore he is liable for donations tax, the R100 000 exemption for natural persons
applies.)
Hereafter, Rnil available for the rest of the year of assessment.
Donations tax payable of R80 000 (R400 000 × 20%).
In this example, how can there be a donation if he paid for the shares?
Example 17.2
Suppose Margaret Mtombe must undergo a life-threatening operation. She promises her
eldest daughter that she may have her wedding ring should she die during this operation.
If Margaret survives the operation, she will retain her wedding ring and no donations tax
is payable. The donation is a donatio mortis causa and therefore exempt. If Margaret should
die during the operation, there is still no donations tax payable, but the wedding ring will
then form part of the property that is included for estate duty purposes (refer to 12.4.3).
743
A Student’s Approach to Taxation in South Africa 17.7
• Donations from which the donee receives no benefit before the death of the donor
(section 56(1)(d)).
This donation does not occur specifically with death in mind, but takes place if
Margaret Mtombe should tell her daughter that she could have her wedding ring
the day she died – whenever that may be.
REMEMBER
• A donation to a trust where the beneficiaries only benefit from the donation upon the death
of the donor, does not qualify for this exemption.
• A donation that is cancelled within six months of the date upon which it took effect
(section 56(1)(e)).
• Any donation made by or to a traditional council, community or a tribe referred to
in section (10)(1)(t)(vii) (section 56(1)(f)).
• Donations that consist of a right to property located outside the Republic, if the
donor obtained the property:
– before the donor became a resident of the Republic for the first time; or
– by bequest/inheritance from someone who was not ordinarily resident in the
Republic at the date of their death; or
– by a donation from a person (excluding a company) who was not ordinarily
resident in the Republic on the date of the donation; or
– from funds obtained from the sale of the property in the three points referred to
above, or if the donor sold such property and replaced it with other properties
(that were also located outside the Republic and were financed from the pro-
ceeds on the sale of the foreign property) (section 56(1)(g)).
• Donations made by or to a person referred to in the following sections (exempt
organisations) (section 56(1)(h)):
– section 10(1)(a): any sphere of the Government;
– section 10(1)(cA): institutions, boards or bodies conducting scientific, technical or
industrial research, or providing necessary or useful services to
the State or general public, or promoting commerce, industry
or agriculture;
– section 10(1)(cE): a political party;
– section 10(1)(cN): public benefit organisations approved by the Commissioner in
terms of section 30(3);
– section 10(1)(cO): recreational clubs approved by the Commissioner in terms of
section 30A;
– section 10(1)(cQ): small business funding entity;
– section 10(1)(d): funds, including pension funds, provident funds, retirement
annuity funds and benefit funds; or
– section 10(1)(e): share block companies or body corporates.
744
17.7 Chapter 17: Donations tax
• Voluntary awards:
– which must be included in the gross income of the recipient or donee in terms
of one of the following paragraphs of the definition of gross income in section 1:
* paragraph (c): certain amounts derived for services rendered;
* paragraph (d): certain amounts derived on, among others, the termination of
services; or
* paragraph (i): taxable fringe benefits.
– the gain in respect of which must be included in the income of the donee in
terms of:
* section 8A: gains made by directors of companies or employees in respect of
rights to acquire marketable securities;
* section 8B: taxation of amounts derived from broad-based employee share
plans; or
* section 8C: taxation of directors and employees on the vesting of equity
instruments (section 56(1)(k)).
– from 1 March 2022 any work done and paid for by a capital asset given to
someone appointed by the employee doing the work, will be subject to dona-
tions tax.
• Donations made in terms of and in pursuance of a trust. These are donations made
by the trust to a beneficiary and not donations made to the trust. Donations to a
trust still remain subject to donations tax (section 56(1)(l)).
• Donations that consist of a right (excluding a fiduciary right, usufruct or similar
right) to the use or occupation of property used for farming purposes without consid-
eration or for inadequate consideration should the donee be a child of the donor
(section 56(1)(m)).
• Donations by a company recognised as a public company in terms of section 38
(section 56(1)(n)).
• Donations, should the property consist of the full ownership in immovable goods, if:
– that immovable property was obtained by a donee that was entitled to a grant
or service in terms of the Land Reform Programme; and
– the Minister of Land Affairs (or a person designated by them) approved the
specific project in terms of which the immovable property was obtained, in
terms of the terms and conditions prescribed by that Minister, in consultation
with the Commissioner;
– or the immovable property was acquired by a person in terms of land reform
initiatives of the National Development Plan (section 56(1)(o)).
• A donation by a company to another company (that is to say a resident), if both
companies are members of the same group of companies (section 56(1)(r)).
• So much of a bona fide contribution that the donor contributes to the maintenance
of someone as the Commissioner considers reasonable (section 56(2)(c)). (This
donor does not only have to be a natural person.)
745
A Student’s Approach to Taxation in South Africa 17.7–17.8
REMEMBER
• It is important that these exemptions are not confused with the qualifying donations in
section 18A. These exemptions are the donations on which no donations tax is payable,
while the section 18A type of donations determine which are deductible for income tax
purposes.
Although some donations that are deductible in terms of section 18A are also exempt
from donations tax, all donations that are exempt from payment of donations tax are
not necessarily deductible for income tax purposes.
746
17.8 Chapter 17: Donations tax
Example 17.3
Margaret Madela made the following donations during the current year of assessment:
3 March – R23 000 to her brother
15 July – R75 000 to her granddaughter on her 21st birthday
5 January – R8 000 to her brother
31 January – R5 000 to her 19-year-old son to assist him with his study fees
You are required to calculate the donations tax liability of Margaret Madela for each of
the above donations.
Solution 17.3
3 March
The donation is for R23 000. No specific exemption is applicable. Margaret is a natural per-
son and may therefore apply the R100 000 annual general exemption to this donation. This
R23 000 donation is therefore exempt and the balance of the annual general exemption that
can still be used in the future is R77 000 (R100 000 – R23 000).
15 July
The donation is for R75 000. No specific exemption is available. The full R75 000 is exempt
because the balance of the annual general exemption can be used. The remaining balance
of the annual general exemption after this donation is R2 000 (R77 000 – R75 000).
5 January
The donation is for R8 000. No specific exemption is available. R2 000 is exempt because
the balance of the annual general exemption can be used. The remaining balance of the
donation attracts donations tax of R1 200 (20% × (R8 000 – R2 000)).
31 January
The donation is R5 000. This is for the bona fide maintenance of her son and therefore qual-
ifies for a specific exemption and the full amount is exempt from donations tax.
Why did they not deduct the R100 000 general deductions from the
donation in January – the 1st of January is a new year?
REMEMBER
• Donations tax is calculated per donation and paid over to SARS. There is no annual
calculation for the year of assessment.
• The general exemption however is linked to a year of assessment. If the full exemption
is not used in the year of assessment, it falls away and no portion thereof can be carried
forward to the following year.
747
A Student’s Approach to Taxation in South Africa 17.9
REMEMBER
• When an amount represents a donation because, according to the opinion of the Commis-
sioner, it was not disposed of at a fair market value, the value of the donation must be
reduced by the amount of the consideration paid.
Section 58(2) provides for a possible deemed donation where section 8C (taxation of
directors and employees on vesting of equity instruments) is applicable. The main
purpose of section 8C is to defer the taxation of restricted equity instruments until a
later date so that the full level of gain on the instrument is properly taxed at ordinary
rates. Hence, taxpayers in these circumstances have a strong incentive to artificially
trigger ordinary rates of tax at an early date before the appreciation of the equity
instrument is fully realised. One potential way of avoiding section 8C is to sell re-
stricted equity instruments at an early date either in a non-arm’s length transaction or
to connected persons (section 8C(5)). Section 58(2) counteracts these avoidance schemes
by deeming the restricted instrument to be donated at the time that it is deemed to
vest for purposes of section 8C. The value for donations tax is the fair market value of
that instrument at that time, reduced with an amount of consideration in respect of
that transaction.
748
17.10 Chapter 17: Donations tax
Usufruct
A usufruct is created when a beneficiary becomes the rightful owner of the benefits
of the fruit, income or usufruct of a concern, but acquires no claim to the right of
ownership as such. For example, Abel bequeaths his farm to his son, Benso, subject to
a usufruct in favour of Abel’s wife, Violet. At Abel’s death, the farm is transferred to
Benso and the title deed states that Violet has a usufruct on the farm. Violet is known
as the usufructuary and Benso the bare dominium holder.
A usufruct is attached to the person of the usufructuary and cannot be transferred to
someone else. The usufructuary may transfer their right to enjoyment of the matter to
someone else, but that does not mean that this person becomes the new usufructuary.
At the death of the usufructuary, the usufruct automatically expires. Therefore,
should Violet have a usufruct on a farm, and she gives Xander the enjoyment thereof,
Xander cannot obtain any further benefits after Violet’s death, since Violet’s right
expires on the date of her death.
At the expiry of the usufruct, the owner’s bare dominium grows to full ownership and
they become the owner of the concern, free of the usufruct by someone else.
At the death of the owner of the bare dominium, the matter is disposed of in the estate
of the owner of the bare dominium and it does not automatically fall to the usufructu-
ary. (It therefore differs from the fiduciary right in this respect.)
749
A Student’s Approach to Taxation in South Africa 17.10
Step 1: Calculate the fair market value of the property subject to the limited
interest.
Step 2: Calculate the annual value of the right by multiplying the fair market
value by 12%.
Step 3: Determine the life expectancy of the donor (the life expectancy is
obtained from the life expectancy Table A (refer to Appendix C).
The next birthday and gender of the donor are used to read the life
expectancy from the table.
Step 6: Multiply the answer in Step 2 by the answer in Step 5 to obtain the
value for donations tax purposes.
REMEMBER
• Should the property consist of books, paintings, statues and other objects of art, the
annual value (amount in Step 2) is the average net receipts during the three preceding
years of assessment of the person who was entitled to the right of enjoyment thereof
(before the donation became effective).
Example 17.4
On 30 June of the current year of assessment, Mr Johan Olufsen donated the usufruct of a
block of flats that he owned to his father, Kristen Olufsen. The fair market value of the
block of flats on this date was R1 000 000. Mr Kristen Olufsen is currently 60 years old
and Mr Johan Olufsen 34 years old.
You are required to calculate the value of the usufruct for donations tax purposes.
750
17.10 Chapter 17: Donations tax
Solution 17.4
R
Value of the full ownership of the property 1 000 000
Annual value (R1 000 000 × 12%) 120 000
Johan’s (donor) life expectancy is 33,94 years. This is based on his age on his
next birthday (35) and obtained from Table A in Appendix C. The expectancy
in the male column is used.
Kristen’s (donee) life expectancy is 14,01 years. On his next birthday he will
be 61 years old, obtained from the male column.
The shorter period of donor’s life expectancy and donee’s life expectancy is
obviously 14,01 years. The applicable discounting factor per Table A is 6,63010.
Value for donations tax purposes (R120 000 × 6,63010) 795 612
17.10.2 Annuities
There is no definition for an annuity, but in ITC 761 10 SATC 103 it was determined
that the following elements need to be present before there can be an annuity:
• it must be an annual payment;
• the payment must be repetitive in nature; and
• someone must have the obligation of making the payment.
Step 1: Calculate the annual value of the annuity. (Amounts that are payable
monthly must be multiplied by 12 and amounts that are payable six-
monthly (bi-annually) must be multiplied by two to obtain the annual
value. An amount that is payable annually is not adjusted and is used
just like that as the annual value.)
Step 2: Determine the life expectancy of the donor (the life expectancy is
obtained from the life expectancy table (Table A) (refer to Appendix
C). The next birthday and gender of the donor are used to read from
the table.
Step 3: Determine the life expectancy of the donee or if the annuity is obtained
for a fixed shorter period, such shorter period.
continued
751
A Student’s Approach to Taxation in South Africa 17.10
Step 5: Multiply the answer of Step 1 by the answer of Step 4 to calculate the
value for donations tax purposes.
Example 17.5
On 1 May of the current year of assessment, Mr James Barker donated a life annuity of
R10 000 (per annum) to Craig Barker, a cousin of James Barker. James Barker is 39 years
old and Craig Barker is 21 years old.
You are required to calculate the value of the usufruct for donations tax purposes.
Solution 17.5
Annuity per annum R10 000
Life expectancy of James Barker (donor); next birthday 40 29,54 years
Life expectancy of Craig Barker (donee); next birthday 22 45,65 years
The shortest period is 29,54 years and the applicable discounting rate
is 8,04030.
Value of annuity for donations tax purposes (R10 000 × 8,04030) R80 403
Step 1: Calculate the fair market value of the property that is subject to the
limited interest.
Step 2: Calculate the annual value of the right by multiplying the fair market
value by 12%.
continued
752
17.10 Chapter 17: Donations tax
Step 3: Determine the life expectancy of the usufructuary or if the right is held
for a shorter period, such period. Select the shortest period. (The life
expectancy of the donor is thus irrelevant for the purpose of this calcu-
lation.)
Step 4: Obtain the applicable discounting rate for the period in Step 3 per
Table A or if it is a fixed period, use Table B.
Step 6: Reduce the fair market value (Step 1) by the answer as per Step 5 to
calculate the value of the bare dominium for donations tax purposes
(Step 1 minus Step 5).
Example 17.6
On 1 June of the current year of assessment, Mr Zückerman donated the usufruct of an
office building to his son, Abraham. On the same date, he donated the bare dominium to
his brother, Solomon. The fair market value of the property on that date amounted to
R3 000 000. The ages of these persons on the date of the donation are as follows:
Mr Zückerman: 49
Abraham: 18
Solomon: 57
You are required to calculate the value of both the usufruct and the bare dominium for
donations tax purposes.
Solution 17.6
Usufruct R
Fair market value 3 000 000
Annual value (R3 000 000 × 12%) 360 000
Life expectancy of Mr Zückerman (donor) is 21,47; next birthday 50
Life expectancy of Abraham (usufructuary) is 48.31; next birthday 19
21,47 is the shorter period. Applicable discounting rate is 7,60201
Value of usufruct for donations tax purposes (R360 000 × 7,60201) 2 736 724
Bare dominium
Fair market value 3 000 000
Annual value (R3 000 000 × 12%) 360 000
Life expectancy of Abraham (usufructuary) is 48,31; next birthday 19
Discounting rate is 8,29841
Therefore, R360 000 × 8,29841 2 987 428
Value of the bare dominium for donations tax purposes
(R3 000 000 – R2 987 428) 12 572
continued
753
A Student’s Approach to Taxation in South Africa 17.10–17.11
Note
The total value of the donation of the usufruct and bare dominium on the property
amounts to R2 736 724 + R12 572 = R2 749 296. Donations tax may therefore be reduced if
the property is divided into a usufruct and bare dominium. However, there is a saving
only if the person who was given the usufruct is younger than the donor.
REMEMBER
• Should the Commissioner be of the opinion that any of the properties in the calculation
of the limited interests cannot reasonably expect to produce an annual yield of 12%, the
annual yield is an amount determined by the Commissioner.
• Any discretionary decision of the Commissioner in terms of the sections that apply to
donations tax is subject to objection and appeal.
• Should the determination of the life expectancy of a person (excluding a natural person)
be made, it is taken over a period of 50 years (for example in the case of a trust or a
company).
• In the case of a natural person, the life expectancy is based on their age on their next
birthday (after the date on which the donation became effective).
• When the donee has paid any consideration for the obtaining of the limited right, this
consideration is deducted to determine the value on which the donations tax is payable.
17.11 Summary
In this chapter, a short summary of the principles of donations tax are given. A tax-
payer may donate property in an attempt to decrease their normal tax burden or to
reduce their estate that will eventually be subject to estate duty. Donations tax there-
fore limits the benefits that a taxpayer may obtain from these tax evasion practices.
Although the donations tax calculation is done separately, a donation may have
donations tax effects as well as other tax effects:
• Donations of property could result in capital gains tax. When an asset is donated, it
is deemed that the person disposed of the asset at market value for capital gains
tax purposes.
• Income resulting from amounts donated could activate the provisions of section 7
of the Act and the income may then be taxed in the donor’s hands, although they
did not receive the income themselves (sections 7(1) to 7(10)).
• Donations of assets on which wear and tear have been claimed may result in a
recoupment of the wear-and-tear allowances.
The next section contains a question that can be completed to evaluate your
knowledge on donations tax.
754
17.12 Chapter 17: Donations tax
Question 17.1
Gere Richard was born in England and is currently 50 years of age. He has been a resident
in the Republic for the past 11 years.
Gere Richard made the following donations during the current year of assessment (ending
28 February 2023):
1. On 1 April he donated his house with 15 bedrooms, situated in England, to Peter
Prince, who was 40 years old. Gere Richard purchased this house 16 years ago at a cost
of R500 000. The market value at the date of the donation amounted to R900 000.
2. On 30 June, he sold his total rights in a recording of ‘Women are Pretty’ to a local
record company, in which he also has an interest, for R3 500 000. The accountant
estimated the market value of these rights on the transaction date at R5 000 000. SARS
accepted the accountant’s valuation as reasonable.
3. On 1 August, he gave Roberts Julia his three Picasso paintings. The market value
amounted to R1 880 000. The paintings were valued at R700 000 ten years ago.
4. Three years ago he inherited his mother’s piano in terms of her will. His mother had
been a resident of England. On 1 September, when he donated the piano to Wonder
Stevie for his 45th birthday, the market value amounted to R390 000. The piano was
never brought to the Republic.
5. On 27 November, he donated R1 000 000 to the Government for purposes of the National
Development Programme (NDP).
6. On 30 January, he donated the usufruct of his Gauteng home to his friend, Fraizer
Brandon, who turned 39 on this date. The bare dominium was donated on the same date
to Nelson Leslie, currently 36 years old. The fair market value of the house amounted
to R4 800 000 on 30 January.
Gere Richard makes the following donation during the following year of assessment (end-
ing 28 February 20234:
7. On 7 March he donates the usufruct of his holiday home in Durban to Slater Christian
for a ten-year period. On 7 March the fair market value of the house amounted to
R1 250 000. Slater Christian is currently 33 years old. Gere Richard will turn 51 on
10 March.
755
A Student’s Approach to Taxation in South Africa 17.12
Answer 17.1
Donations tax payable on each of the donations
Exempt Taxed Donations
Date Donee Amount
portion portion tax at 20%
R R R R
01/04 Peter Prince
(Note 1) 900 000 900 000 nil Nil
30/06 Record company
(Note 2) 1 500 000 100 000 1 400 000 280 000
01/08 Roberts Julia 1 880 000 nil 1 880 000 376 000
01/09 Wonder Stevie
(Note 3) 390 000 390 000 nil Nil
27/11 NDP
(Note 4) 1 000 000 1 000 000 nil Nil
30/01 Fraizer Brandon 4 341 387 nil 4 341 387 868 277
Nelson Leslie
(Note 5) 168 787 nil 168 787 33 757
07/03 Slater Christian
(Note 6) 847 530 100 000 747 530 149 506
Notes
1. Exempt in terms of section 56(1)(g)(i) – immovable property situated outside the
Republic, purchased before the donor became a resident of the Republic.
2. Market value less proceeds = R5 000 000 – R3 500 000 = R1 500 000.
Deemed donation in terms of section 58(1) – inadequate consideration received.
R100 000 is exempt in terms of section 56(2)(b).
3. Exempt in terms of section 56(1)(g)(ii) – donor acquired property by inheritance from a
non-resident at the date of the non-resident’s death. Property situated outside the
Republic.
4. Exempt in terms of section 56(1)(h) – donation to local government.
continued
756
17.12 Chapter 17: Donations tax
5. Usufruct
Annual value R4 800 000 × 12% = R576 000.
Gere Richard’s life expectancy (based on age of 51 on next birthday) is another
20,72 years.
Fraizer Brandon’s life expectancy (based on age of 40 on next birthday) is another
29,54 years.
Use the shorter life expectancy of 20,72, which has a present value factor of 7,53713.
Thus: R576 000 × 7,53713 = R4 341 387.
Bare dominium
Annual value R4 800 000 × 12% = R576 000
Life expectancy of usufructuary (Fraizer Brandon) is another 29,54 years, which has a
present value factor of 8,04030.
Thus: R576 000 × 8,04030 = R4 631 213.
R R
Bare dominium 168 787
Market value of house 4 800 000
Less: Usufruct value (4 631 213)
6. Usufruct holiday home
Annual value R1 250 000 × 12% = 150 000
Gere Richard’s life expectancy is another 20,72 years.
Slater Christian’s life expectancy (based on age of 34 on
next birthday) is another 34,84 years.
Since the period of ten years is shorter than Gere Rich-
ard’s and Slater Christian’s life expectancies, we use
ten years which has a present value factor of 5,6502
(refer to Appendix D).
Thus: R150 000 × 5,6502 = 847 530
The full R100 000 annual exemption is again available as this donation was made in the
next year of assessment.
757
18 Estate duty
Page
18.1 Introduction ....................................................................................................... 761
18.2 Calculation of estate duty ................................................................................ 761
18.2.1 Ordinary residents ............................................................................ 761
18.2.2 Non-residents .................................................................................... 762
18.2.3 Systematic calculation of estate duty .............................................. 762
18.3 Property (Step 1) (section 3)............................................................................. 764
18.3.1 General definition of property (section 3(2)) ................................. 764
18.3.1.1 Valuation of property as per general definition
(section 5(1)) ..................................................................... 765
18.3.2 Limited interests and annuities included as property
(section 3(2)) ....................................................................................... 766
18.3.2.1 Valuation of limited interests (section 5(1)(b)) ............ 767
18.3.2.2 Valuation of annuities (section 5(1)(c) and (d)) ........... 771
18.4 Deemed property (Step 2) (section 3(3)) ........................................................ 774
18.4.1 Domestic insurance policies on the life of the deceased
(section 3(3)(a))................................................................................... 774
18.4.2 Any property donated under a donatio mortis causa or in
terms whereby the donee receives no benefit until the death
of the donor (section 3(3)(b)) ............................................................ 777
18.4.3 Claim against the spouse under section 3 of the Matrimonial
Property Act 88 of 1984 (section 3(3)(cA)) ...................................... 777
18.4.4 Property that the deceased was, immediately prior to
their death, competent to dispose of for their own benefit
or for the benefit of their estate (section 3(3)(d)) ........................... 779
18.4.5 Contributions to retirement funds (section 3(3)(e) ........................ 780
18.4.6 General ................................................................................................ 780
759
A Student’s Approach to Taxation in South Africa
Page
18.5 Deductions (Step 3) (section 4) ........................................................................ 780
18.5.1 Funeral and death-bed expenses (section 4(a)) ............................. 780
18.5.2 Debts due to persons ordinarily resident within the Republic
(section 4(b)) ....................................................................................... 781
18.5.3 All allowable costs in the administration and liquidation
of the estate (section 4(c)) ................................................................. 781
18.5.4 Sundry expenditure incurred in meeting the requirements
of the Master or the Commissioner of SARS (section 4(d)) .......... 781
18.5.5 Certain foreign assets and rights thereto (section 4(e)) ................ 781
18.5.6 Any debt due by the deceased to persons ordinarily resident
outside the Republic (section 4(f)) ................................................... 782
18.5.7 Deductions of certain limited interests (section 4(g)) ................... 782
18.5.8 Bequests to public benefit organisations (section 4(h)) ................ 783
18.5.9 Improvements made by the beneficiary (section 4(i)) .................. 783
18.5.10 Improvements made to property by a holder of a limited
interest (section 4(j)) .......................................................................... 784
18.5.11 Claim against the spouse under section 3 of the Matrimonial
Property Act 88 of 1984 (section 4(lA)) ........................................... 785
18.5.12 Limited interest and annuity charged against property
created by a predeceased spouse (section 4(m)) ............................ 785
18.5.13 Books, pictures, statuary and other objects of art
(section 4(o)) ....................................................................................... 786
18.5.14 Deemed property taken into account in valuing unlisted
shares (section 4(p)) ........................................................................... 786
18.5.15 Property accruing to the surviving spouse (section 4(q)) ............ 787
18.6 Section 4A abatement (Step 4) ......................................................................... 787
18.7 Successive death rebate (Step 7) ...................................................................... 788
18.8 Deduction of foreign death duty (Step 7) (section 16) ................................. 791
18.9 Deduction of transfer duty (Step 7) (section 16) ........................................... 791
18.10 Persons liable for payment of estate duty (Step 8) (section 13) .................. 791
18.11 Assessment......................................................................................................... 793
18.12 Marriage in community of property .............................................................. 794
18.13 Summary ............................................................................................................ 795
18.14 Examination preparation ................................................................................. 796
760
18.1–18.2 Chapter 18: Estate duty
18.1 Introduction
John’s father died last year. He bequeathed all his assets to John’s mother. Unfortu-
nately, there were also a lot of liabilities (debts, like clothing accounts, cell phone
accounts etc.) still to be paid on date of death. All the available cash was used to settle
these liabilities.
After the executor prepared the accounts for the Master, the estate duty liability was
calculated to be R130 000. As the cash was depleted, some of the assets in the estate
needed to be sold in order to raise cash for the estate duty liability.
Estate duty is one of the most significant taxes on wealth currently charged in South
Africa. The purpose of estate duty is to tax the transfer of wealth from one person to
another in the event of death. The Estate Duty Act 45 of 1955 came into operation on
1 April 1955 and replaced the Death Duties Act 29 of 1922. The Estate Duty Act is
administered by the Commissioner of the South African Revenue Service (SARS)
whose office is responsible for the collection of estate duty. The Estate Duty Act is the
statute that creates the obligation to pay estate duty and deals with the adminis-
tration of the collection process.
Every executor or administrator of a deceased estate is compelled to compute the
estate duty liability in the estate they are administering. It is also the responsibility of
this executor or administrator to pay this duty to the Commissioner.
The estate duty addendum is a subsection of the liquidation and distribution account
for a deceased estate in terms of the Administration of Estates Act 66 of 1965.
Tax statistics
The estate duty collected during the 2020/2021 year of assessment amounted to
R2 316 million according to Tax Statistics 2021. It was only 0.0018532% of the total tax rev-
enue collected.
761
A Student’s Approach to Taxation in South Africa 18.2
According to the court case Cohen v CIR 1946 AD 174, 13 SATC 362, a person is ordi-
narily resident in the country to which they would naturally and as a matter of course
return to from their wanderings. In Kuttel v CIR 54 SATC 298, 1992 (3) SA 242 (A), the
courts stated that a person is ordinarily resident in a country if the person has their
real or ordinary home in that country (refer to 2.3).
Certain foreign property does not attract estate duty if it qualifies for a deduction
(refer to 18.5.5).
18.2.2 Non-residents
Estate duty is also payable on assets physically located in the Republic irrespective
of where the owner was residing at the date of their death. Double-tax agreements
are entered into with certain other countries to prevent the same property being
dutiable twice. The agreement with the country where the non-resident lives must be
consulted in order to determine if estate duty can be levied in South Africa.
Calculation of the amount of estate duty that the estate is liable for
Step 1: R
Determine the value of property (section 3(2))
(refer to 18.3). xxxx
continued
762
18.2 Chapter 18: Estate duty
R
Step 6: Calculate the estate duty by multiplying the dutiable
amount (Step 5) by 20% on the first R30 000 000 and by
25% on amounts over that. xxxx
Step 8: Determine whether any persons are liable for the estate
duty and recover the duty from them (refer to 18.10). (xxxx)
Amount of estate duty due by the estate xxxx
Example 18.1
Ernst Dlamini, ordinarily resident in the Republic, died on 25 March. Information relating
to his estate is as follows:
R
Property in the Republic 2 400 000
Property in the United Kingdom 1 400 000
Deemed property in the Republic 200 000
Allowable deductions 150 000
Section 4A abatement 3 500 000
You are required to calculate the estate duty on the dutiable amount of Ernst’s estate.
Solution 18.1
R
Property in the Republic 2 400 000
Property in the United Kingdom 1 400 000
Value of property 3 800 000
Deemed property in the Republic 200 000
Gross value of estate (R3 800 000 + R200 000) 4 000 000
Allowable deductions (150 000)
Net value of estate (R4 000 000 – R150 000) 3 850 000
Section 4A abatement (3 500 000)
Dutiable amount of the estate (R3 850 000 – R3 500 000) 350 000
Estate duty payable (R350 000 × 20%) 70 000
763
A Student’s Approach to Taxation in South Africa 18.2–18.3
REMEMBER
• When ordinarily resident in the Republic, estate duty is levied on all the person’s assets
at date of death. Where the assets of such a person are located is irrelevant. Both the
assets located in the Republic and United Kingdom could attract estate duty in South
Africa.
764
18.3 Chapter 18: Estate duty
The result of the above-mentioned exclusions is that a person not ordinarily resident
in the Republic must only include movable and immovable fixed property located in
the Republic in their estate at the date of their death.
For example, if a person who ordinarily resides in Spain owns property in both Spain
and in the Republic at the date of their death, only the fixed property in the Republic
attracts estate duty in the Republic.
Once it has been established that an item must be included in property, the value of
these items needs to be calculated. Section 5 of the Estate Duty Act sets out these
valuation rules.
765
A Student’s Approach to Taxation in South Africa 18.3
Legislation:
Section 3(2)
(a) any fiduciary, usufructuary or other like interest in property (including a right to an
annuity charged upon any property) held by the deceased immediately prior to his
death;
(b) any right to an annuity (other than a right to an annuity charged upon any property)
enjoyed by the deceased immediately prior to his death which accrued to some other
person on the death of the deceased.
766
18.3 Chapter 18: Estate duty
Step 1: Calculate the fair market value of the property to which the limited
interest is attached.
Step 2: Establish the annual value of the right by multiplying the fair market
value of the property by 12% (the Commissioner may allow a lower
percentage to arrive at the annual value if the annual yield of the asset
is less than 12%).
Step 3: Calculate the life expectancy of the person to whom the benefit is
being transferred. The age at their next birthday is used. (This infor-
mation is taken from the life expectancy table (Table A) issued in
terms of the Estate Duty Act – refer to Appendix C for a copy of such
table. If the person to whom the benefit is being transferred is not a
natural person, a life expectancy of 50 years should be used.)
Step 4: Determine the period for which the beneficiary is entitled to hold the
limited right.
Step 5: Calculate the present value of the annual value over the shorter
period of your answer in Step 3 or Step 4, using a discount rate of 18%
per annum. (The rate to be used is also provided in the life expectancy
table (Table A) issued in terms of the Estate Duty Act, that provides
the present value of R1 per annum capitalised at 18% over the expec-
tation of a person’s life (or Table B issued in terms of the Estate Duty
Act, that provides the present value of R1 per annum capitalised at
12% over fixed periods). Refer to Appendix D for a copy of such
table.)
By following the above steps, the value of a usufruct in a fixed property could be
calculated. To be able to calculate the bare dominium in terms of section 5(1)(f), the
value of the usufruct must be subtracted from the market value of the asset at the
date of death of the deceased.
Example 18.2
Simon Mamabolo, ordinarily resident in the Republic, died on 2 September during the
current year of assessment. Simon held a fiduciary right over property immediately prior
to his death. This fiduciary right must be transferred to his sister, Elsie, aged 47 at date of
Simon’s death. The property was worth R1 000 000 at the time of Simon’s death.
You are required to calculate the value of the fiduciary right to be included in Simon’s
estate.
767
A Student’s Approach to Taxation in South Africa 18.3
Solution 18.2
The fair market value of the property: R1 000 000.
The annual value of the right: R1 000 000 × 12% = R180 000.
The life expectancy of the fideicommissary (Elsie) according to Table A (Elsie will be
48 years old when she celebrates her next birthday, resulting in a life expectancy of
28,41 years).
Compare the answer in life expectancy of beneficiary with the period that the beneficiary
is entitled to hold the limited right: Elsie is entitled to the benefit for the rest of her life:
28,41 years.
The present value of the limited interest to be included in Simon’s estate:
R180 000 × 8,000 26 (Table A) = R960 031.
Example 18.3
Johannes van Zyl, ordinarily resident in the Republic, died on 25 May. Johannes held a
usufructuary right over property immediately prior to his death. The usufruct passes to
his brother, Gert, aged 34 at the date of Johannes’ death, for a period of 20 years where-
after it will go to Johannes’ sister. The property is worth R1 000 000 at the time of Johan-
nes’ death.
You are required to calculate the estate duty on the dutiable amount of Johannes’ estate.
Solution 18.3
The fair market value of the property: R1 000 000.
The annual value of the right: R1 000 000 × 12% = R180 000.
The life expectancy of the person to whom the benefit is being transferred according to
Table A is 33,94 years (Gert will be 35 years old when he celebrates his next birthday).
Compare the answer in life expectancy of beneficiary with the period that the beneficiary
is entitled to hold the limited right: Gert will be entitled to the benefit for the next
20 years. Shorter period of the two: 20 years.
The present value of the limited interest to be included in Johannes’ estate: R180 000 ×
7,469 4 (Table B) = R896 328.
If Gert had been entitled to the benefit for the rest of his life and not a fixed
period of 20 years, how much would have been included in Johannes’
estate?
In addition to the above, there are two provisos that apply in valuing a usufruct,
namely:
First proviso
If the bare dominium holder paid a consideration for the bare dominium from the
creator of the usufruct (the original owner) and the full right to enjoyment then
768
18.3 Chapter 18: Estate duty
accrues to this bare dominium holder, the value to be included in the estate of the
usufructuary must be reduced, for example where a man (original owner) bequests a
farm to his son (who pays a bequest price) subject to his wife having the right of use
of the farm, that is to say the usufruct.
The value of the reduction is the cost of the bare dominium, when it was originally
acquired, plus interest at 6% per annum from date of acquisition to date of death of the
usufructuary. The Estate Duty Act is not clear on whether this interest should be
calculated as being compound or simple interest. It would be more beneficial for the
deceased to use compound interest, as this will provide a bigger deduction.
Two steps are, therefore, added to the above steps to calculate the value of a limited
interest for estate duty purposes if the bare dominium holder paid for the bare
dominium.
Step 6: Determine the cost of the bare dominium when it was originally
acquired plus interest at 6% per annum from date of acquisition to
date of death of the usufructuary.
Example 18.4
Phineas Kumalo sold the bare dominium of his farm, Devon, to David Kruger (aged 20 on
date of transaction) for an amount of R500 000 on 26 February 20 years ago, but reserves
the usufruct over the farm for himself. Phineas died on 26 February of the current year at
the age of 69. The fair market value of Devon on 26 February of the current year is
R850 000.
You are required to determine the value of the usufruct to be included in Phineas’ estate.
Solution 18.4
The fair market value of the property: R850 000.
The annual value of the right: R850 000 × 12% = R102 000.
The life expectancy of the person to whom the benefit is being transferred according to
Table A is 28,69 years (David will be 41 years old when he celebrates his next birthday).
Compare the answer in life expectancy of the beneficiary with the period that the benefi-
ciary is entitled to hold the limited right: David will be entitled to the benefit for the rest
of his life (28,69 years).
The present value of the annual value to be included in Phineas’ estate:
R102 000 × 8,010 67 = R817 088.
continued
769
A Student’s Approach to Taxation in South Africa 18.3
As the bare dominium holder paid for the bare dominium the following applies:
Determine the cost of the bare dominium when it was originally acquired plus interest at
6% per annum from date of acquisition to date of death of the usufructuary:
R500 000 × 1,0620 = R1 603 568.
The present value of the limited interest to be included in Phineas’ estate:
R817 088 – R1 603 568 = Rnil. The value cannot be negative, therefore, it is limited to Rnil.
Second proviso
On the death of the usufructuary, the value placed on the usufruct passing to the bare
dominium holder, which now gives them full ownership, cannot be more than the
market value of property at date of death less the value of the bare dominium when it
was first created.
This is only applicable when the usufruct and the bare dominium were created in the
same disposition.
Therefore, another four steps are added to the above steps to calculate the value of a
limited interest for estate duty purposes, if the usufruct passes to the bare dominium
holder.
Step 9: Calculate the value of the bare dominium when it was first created
(market value on the date it was first created less the answer of Steps 1
to 5), with the exception that the age of the usufructuary on the date
these limited interests were first created should now be used in calcu-
lating Step 3.
Step 10: Reduce the value calculated in Step 8 with the value calculated in
Step 9.
Step 11: The value to be included as property must be the lowest value of the
answers found in Steps 5, 7 or 10.
Example 18.5
On 3 January (ten years ago), the grandfather of Saartjie and Danie van der Walt
bequeathed his farm to his two grandchildren. Saartjie was 19 years old and Danie 16 on
the date of their grandfather’s death. Saartjie received the usufructuary interest and Danie
the bare dominium. The value of the property was R250 000 on date of acquisition of these
limited rights. Saartjie’s usufruct ceases on 3 January of the current year due to her sud-
den death in a motor vehicle accident. Danie acquires full ownership on this date. The fair
market value of the property on the day of Saartjie’s death is R380 000.
You are required to determine the value of the usufruct to be included in Saartjie’s estate.
770
18.3 Chapter 18: Estate duty
Solution 18.5
The fair market value of the property: R380 000.
The annual value of the right: R380 000 × 12% = R45 600.
The life expectancy of the person to whom the benefit is being transferred according to
Table A is 41,20 years (Danie will be 27 years old when he celebrates his next birthday).
Compare the answer in life expectancy of beneficiary with the period that the beneficiary
is entitled to hold the limited right: Danie will be entitled to the benefit for the rest of his
life (41,20 years).
The present value of the annual value to be included in Saartjie’s estate: R45 600 × 8,25516
= R376 435.
As the value of the usufruct passes to the bare dominium holder and the usufruct, and the
bare dominium was created at the same time, apply the following:
The market value of the property at date of death: R380 000.
The value of the bare dominium when it was first created: market value at date when the
bare dominium was acquired less the value of the usufruct therein = R250 000 – (R250 000
× 12% × 8,31584 (Saartjie’s life expectancy was 54,41 years as her next birthday would
have been her 20th)) = R525.
Reduce market value of the property at date of death with value of the bare dominium
when it was first created: R380 000 – R525 = R379 475.
The present value of the limited interest to be included in Saartjie’s estate must be the
lowest value of the present value of the annual value = R376 435, or amount calculated
above = R379 475. An amount of R376 435 should therefore be included.
771
A Student’s Approach to Taxation in South Africa 18.3
Step 2: Calculate the life expectancy of the person to whom the benefit is
being transferred – if the annuity ceases, the owner of the property;
otherwise the person to whom it is transferred (this information is
taken from the life expectancy table (Table A) issued in terms of the
Estate Duty Act). If the person to whom the benefit is being trans-
ferred is not a natural person, a life expectancy of 50 years should be
used.
Step 3: Determine the period that the beneficiary is entitled to hold the lim-
ited right for. (If the annuity ceases, this step will not be applicable.)
Step 4: Calculate the present value of the annual amount over the shorter
period of your answer in Step 2 or Step 3 using a discount rate of 18%
per annum (the rate to be used is also provided in the life expectancy
table (Table A) issued in terms of the Estate Duty Act that provides
the present value of R1 per annum capitalised at 18% over the expect-
ation of a person’s life, or Table B issued in terms of the Estate Duty
Act that provides the present value of R1 per annum capitalised at
18% over fixed periods).
Example 18.6
Christine Rappard was entitled to an annuity of R5 000 per month from the income of
property held in a trust. On her death her daughter, Elsa, aged 31, is entitled to receive
the annuity.
You are required to determine the value of the annuity to be included in Christine’s
estate.
Solution 18.6
The annual amount of the annuity: R5 000 × 12 months = R60 000.
The life expectancy of the person to whom the benefit is being transferred (Elsa) accord-
ing to Table A is 42,96 years (Elsa will be 32 years old on her next birthday).
Compare the life expectancy of Elsa with the period that the beneficiary is entitled to hold
the limited right: Elsa will be entitled to the benefit for the rest of her life (42,96 years).
The present value of the annuity charged against property to be included in Christine’s
estate: R60 000 × 8,269 30 (Table A) = R496 158.
continued
772
18.3 Chapter 18: Estate duty
If the annuity Christine received from the income of property held in the
trust ceased on the date of her death, how much would have been included
in her estate?
Step 2: Calculate the life expectancy of the person to whom the benefit is
being transferred (this information is taken from the life expectancy
table (Table A) issued in terms of the Estate Duty Act). If the person to
whom the benefit is being transferred is not a natural person, a life
expectancy of 50 years should be used.
Step 3: Compare the answer in Step 2 with the period the beneficiary is
entitled to hold the limited right.
Step 4: Calculate the present value of the annual value over the shorter period
of your answer in Step 2 or Step 3 using a discount rate of 12% per
annum (the rate to be used is also provided in the life expectancy table
(Table A) issued in terms of the Estate Duty Act that provides the pre-
sent value of R1 per annum capitalised at 12% over the expectation of
a person’s life; or Table B, issued in terms of the Estate Duty Act, that
provides the present value of R1 per annum capitalised at 12% over
fixed periods).
773
A Student’s Approach to Taxation in South Africa 18.3–18.4
Example 18.7
Ernst Grobbelaar died on 1 November of the current year of assessment. In terms of an
annuity contract he is entitled to an annuity of R6 000 per annum for a period of 60 years.
Ernst only received the annuity for five years before his death. In terms of Ernst’s will,
this annuity must accrue for the remaining period (55 years) to his son Ivan (16 years).
You are required to determine the value of the annuity to be included in Ernst’s estate.
Solution 18.7
The annual amount of the annuity is R6 000 (already an annual value).
The life expectancy of the person to whom the benefit is being transferred (Ivan) accord-
ing to Table A is 50,12 years (Ivan will be 17 years old on his next birthday).
Compare life expectancy of Ivan with the period that the beneficiary is entitled to hold the
limited right: Ivan will be entitled to the benefit for a period of 55 years.
Use the shorter of the two periods above: Therefore, 50,12 years.
The present value of the annuity not charged against property to be included in Ernst’s
estate: R6 000 × 8,304 89 (Table A) = R49 829.
774
18.4 Chapter 18: Estate duty
himself was the beneficiary and the proceeds paid out to the executor. The require-
ment for inclusion in the estate of the deceased (as deemed property for estate duty
purposes) is not whether the deceased was the owner of the policy or not, but whether
it was their life which was assured.
There are three situations where the amount is not included as deemed property in
the deceased’s estate:
• If the amount of the policy is payable to the surviving spouse or child of the
deceased under a duly registered ante-nuptial or postnuptial contract. A ‘child’ is
defined in the Act to include an adopted person.
• If the policy was taken out or acquired (for example by way of session) by a part-
ner or a person who holds shares or a like interest in a company of which the
deceased also held shares or a like interest on the day of death of the deceased, to
enable that person to acquire the whole or part of the interest or shares of the
deceased. In addition, for this policy to be excluded from deemed property, the
person whose life was insured must not have been responsible for payment of
premiums. These policies are commonly referred to as ‘buy-and-sell’ policies. It is
possible that the proceeds of the policy may exceed the amount required to buy the
interest of the deceased. If the difference in the proceeds of the policy and the val-
uation of the partnership or company as at date of death is substantial, the Com-
missioner may exercise their discretion and not allow the exclusion. The ground
for the disallowance in such a case is the ‘intention of the parties’. However, if the
difference can be verified, for instance by a general drop in that specific type of
business which occurred shortly before the death of the partner or co-shareholder,
the intention of the parties is beyond doubt.
• If the policy was taken out by a third party (not effected by or at the instance of the
deceased), the proceeds are then payable to such person. This policy must also
meet the following requirements:
– the Commissioner must be satisfied that no premium was paid by the deceased;
– no amount that is recoverable will be paid into the estate of the deceased;
– no amount may be used for the benefit of a relative of the deceased or a person
wholly or partly dependent on the deceased for their maintenance. Relative in
relation to a person means the spouse of such person or anybody related to them
or their spouse within the third degree of consanguinity, or a spouse of anybody
so related. An adopted child is deemed to be related to their adoptive parent
within the first degree of consanguinity; and
– no amount should also be payable to a family company of the deceased in terms
of this policy. The Estate Duty Act (section 1) defines a family company in rela-
tion to a deceased person:
Any company (other than a company whose shares are quoted on a recognised
stock exchange) which at any relevant time was controlled or capable of being
controlled directly or indirectly, whether through a majority of the shares thereof
or any other interest therein or in any other manner whatsoever, by the deceased
or by the deceased and one or more of his relatives.
The value of a domestic insurance policy that needs to be included is the proceeds
(full amount due and recoverable) of the policy.
775
A Student’s Approach to Taxation in South Africa 18.4
If the beneficiary of the policy (other than the deceased) paid the premiums, the pro-
ceeds can be reduced by the amount of premiums plus interest at 6% per annum.
If spouses are married in community of property and premiums were borne by the
joint estate with the surviving spouse being the beneficiary under the policy, 50% of
the premiums plus interest at 6% thereon is allowed as a deduction.
The definition of ‘spouse’ refers to a person in relation to the deceased at the time of
death where that person was their partner:
• in a marriage or customary union recognised in terms of the laws of the Republic;
• in a union recognised as a marriage in accordance with the tenets of any religion;
or
• in a same-sex or heterosexual union, which the Commissioner is satisfied is
intended to be permanent.
The amount to be included cannot be reduced if the deceased paid the premiums
himself.
Example 18.8
Jan Matla had a policy taken out by his wife, Linda (to whom he was married out of
community of property), on his life. Their ante-nuptial contract did not mention anything
regarding this policy. Linda was the sole beneficiary under the policy and had paid all the
premiums. Jan Matla died and the policy paid out an amount of R1 million. The pre-
miums (including interest at 6%) paid by Linda amounted to R380 000.
You are required to determine the value of the insurance policy to be included in Jan’s
estate.
Solution 18.8
R
Proceeds of the policy (Note) 1 000 000
Less: Premiums plus interest (paid by Linda) (380 000)
Value of insurance policy 620 000
Note
The policy is not excluded, as it was not in terms of an ante-nuptial or postnuptial con-
tract.
776
18.4 Chapter 18: Estate duty
REMEMBER
• This amount is an allowable deduction under section 4(q) as property accruing to the
surviving spouse (refer to 18.5.15).
• Section 5(1)(d)bis determines that if the annuity received from the domestic insurance
policy on the life of the deceased ceases to be payable within five years after the death
of the deceased because:
– of the death of the annuitant within that period; or
– where the annuitant is the widow of the deceased, because of the remarriage within
that period,
the value of the annuity in the re-assessed estate of the predeceased shall be deemed to
be an amount equal to the lesser of:
– the aggregate of the amounts that accrued to the annuitant in respect of the annuity
and any amounts that accrued to the person or the person’s estate upon or as a result
of the termination of the annuity; or
– the capitalised value of the annuity.
777
A Student’s Approach to Taxation in South Africa 18.4
A provision for indexing is made and the inflation rate reflected in the consumer
price index is used in practice for this calculation.
If an amount is due to the deceased under this system, it is included as part of
deemed property in the estate.
Example 18.9
On 10 March five years ago, Simon and Martha Mhlari were married out of community of
property under the accrual system. Simon died on 18 May during the current year. The
following information relates to their estates:
1. The values of the estates as stipulated in their ante-nuptial contract were converted to
rand using the inflation rate reflected in the consumer price index:
(a) Simon R250 000 (rand value in the current year)
(b) Martha R550 000 (rand value in the current year)
2. The values of their estates on the day of Simon’s death:
(a) Simon R550 000
(b) Martha R1 750 000
3. A bequest of R250 000 to Martha on 28 March in the current year from the estate of her
late father is included in the value of her estate on the day of Simon’s death (18 May)
but her father’s will stipulated that it is free of the communal estate.
You are required to calculate the amount to be included in Simon’s estate in respect of the
Matrimonial Property Act.
Solution 18.9
Simon Martha
R R
End value of the estate 550 000 1 750 000
Less: Amounts excluded (250 000)
550 000 1 500 000
Less: Commencement value (250 000) (550 000)
Accrual 300 000 950 000
Difference in accrual (R950 000 – R300 000) 650 000
Accrual to be included in Simon’s estate (R650 000 / 2) 325 000
778
18.4 Chapter 18: Estate duty
Example 18.10
Johannes Labuschagne died on 30 September of the current year and was the only trustee
and beneficiary of the JL Trust. There was only one asset in the JL Trust, namely a farm
(on which bona fide farming was being carried on) with an open-market value of
R920 000 on the date of Johannes’ death.
You are required to determine the value of the property that has to be included in Johan-
nes’ estate (if any).
Solution 18.10
As Johannes was the only trustee and beneficiary of the JL Trust, he was competent to
dispose of the farm for his own benefit immediately prior to his death. The farm in the
trust, therefore, has to be included in Johannes’ estate in terms of section 3(3)(d) at
R644 000 (being the fair market value, that is to say the market value (R920 000) reduced
by 30%).
REMEMBER
• If the deceased was a sole trustee but not a beneficiary (they also had no rights to
change the beneficiary) of a trust, the property will not form part of their estate as they
could not dispose of it for their own benefit. The deceased could thus exercise control
over property without attracting this provision.
In the situation where a deceased was entitled to receive the profits from a trust in
terms of section 3(3)(d), the inclusion is the annual value of such profits capitalised at
12% over the life expectancy (from Table A) of the deceased immediately prior to the
date of their death (section 5(1)(f)ter).
Example 18.11
Petro van Jaarsveld died on 30 November of the current year of assessment at the age of
47 and was the only trustee and beneficiary of the PVJ Trust. The PVJ Trust was a busi-
ness trust from which Petro received profits amounting to R20 000 per year.
You are required to determine the value of the asset (if any) that has to be included in
Petro’s estate.
779
A Student’s Approach to Taxation in South Africa 18.4–18.5
Solution 18.11
As Petro was the only trustee and beneficiary of the PVJ Trust, she was competent to dis-
pose of the business for her own benefit immediately prior to her death. The profits that
are distributed to Petro each year have to be included in her estate as deemed property in
terms of section 3(3)(d). The profits will be capitalised at a rate of 12% per year over
Petro’s life expectancy immediately prior to the date of her death. Her life expectancy on
the day immediately prior to her death in terms of the life expectancy table (Table A) was
28,41 years (as she would have been 48 years old on her next birthday).
The current value of the annual value that has to be included in Petro’s estate:
R20 000 × 8,00026 = R160 005,20.
18.4.6 General
The annual value of the right of enjoyment of property, which is subject to a fiduci-
ary, usufructuary or other interest consisting of books, pictures, statuary or objects of
art, shall be deemed to be the average net receipts (if any) derived by the person
entitled to such right of enjoyment of such property during the three years immedi-
ately preceding the date of death of the deceased.
780
18.5 Chapter 18: Estate duty
781
A Student’s Approach to Taxation in South Africa 18.5
Example 18.12
Gert Geringer (the deceased) was ordinarily resident in the Republic all his life. Gert owes
persons not ordinarily resident in the Republic debts amounting to R1 500 000.
At date of death, Gert owned property in the United Kingdom of R1 150 000, inherited
from his uncle who is not ordinarily resident in the Republic.
You are required to determine the net value of the above two items in Gert’s estate.
Solution 18.12
R
United Kingdom property 1 150 000
Less: Property inherited from a person not ordinarily
resident in the Republic (1 150 000)
Less: Foreign debt (R1 500 000 – R1 150 000) (350 000)
(350 000)
REMEMBER
• The only portion of the R1 500 000 expenditure that will be allowed as a deduction is
the portion of R350 000 (the amount by which the foreign debt exceeds the foreign
property not included in the estate: R1 500 000 – R1 150 000) if this debt is settled from
other property in the estate.
782
18.5 Chapter 18: Estate duty
Another example is if the deceased was entitled to an annuity they received by way
of a donation and, on their death, the annuity reverts to the donor. This annuity
qualifies for a deduction in terms of this section.
If in the case of an annuity charged on property, the right accrues to the person who
is the owner of the property, the value of the annuity is allowed as a deduction if the
owner was the donor.
This deduction is therefore available if the annuity reverts to the donor who is
the current owner of the property. It is important to remember the deduction is
applicable only if the deceased obtained their right to the annuity or limited interest
by way of a donation.
Example 18.13
Madie du Toit effected improvements amounting to R20 000 to property owned by her
father, Nico. These improvements were done during Nico’s lifetime and with his consent.
The market value of this property (a house) is R1 150 000 at the date of Nico’s death. The
improvements made by Madie increased the value of the house by R12 000.
Nico’s will stipulates that the property will be transferred to Madie.
You are required to determine the net value to be included in Nico’s estate.
783
A Student’s Approach to Taxation in South Africa 18.5
Solution 18.13
R
Market value of property on date of death 1 150 000
Less: The value by which the property has been enhanced due to the
improvements made by the beneficiary (12 000)
Net value to be included in Nico’s estate 1 138 000
REMEMBER
• The expenditure must have been incurred during the lifetime of the deceased and with
their consent before a deduction can be claimed.
Example 18.14
Carl Lubbe donated a bare dominium over property to Julia Mhlangu (39 years old at next
birthday) who effected improvements at a cost of R50 000. He kept the usufruct for him-
self. Upon Carl’s death, the market value of the property is R250 000 without taking the
improvements into account. If the improvements made by Julia are taken into account,
the market value of the property is R400 000. The usufruct goes to the holder of the bare
dominium.
You are required to determine the net value of the limited interest to be included in
Carl’s estate.
784
18.5 Chapter 18: Estate duty
Solution 18.14
R
Calculate the value of the limited interest to be included in the estate using
the market value on date of death: the value of the limited interest based on
the market value of R400 000 (R400 000 × 12% × 8,19866 (Julia’s factor)). 393 536
Recalculate the value of the limited interest using the market value of the
property ignoring the improvements effected: the value of the limited interest
based on the market value of R250 000 (R250 000 × 1% × 8, 19866) 245 960
The deduction allowed against the value of the limited interest (147 576)
The net value of the limited interest in Carl’s estate. 245 950
REMEMBER
• If the spouses were married in community of property, only 50% of the value of the
limited interest is deductible as only half of the interest formed part of the estate of the
predeceased spouse.
785
A Student’s Approach to Taxation in South Africa 18.5
REMEMBER
• The lending period should have started before date of death of the deceased for this
deduction to take effect.
Example 18.15
Marie Botha owned 100% of the shares of Stay Trim (Pty) Ltd. The company took out a
life insurance policy on her life that will pay out an amount of R300 000 on Marie’s death.
The policy does not qualify for an exemption in terms of section 3(3)(a). Upon Marie’s
death, the value of her shares in the company will be enhanced with the value of the life
insurance policy by R210 000 (the value of the policy less income tax thereon). The value
placed on her shares in Stay Trim (Pty) Ltd (by an independent assessor) is R985 000.
You are required to determine the net value to be included in Marie’s estate in respect of
the above-mentioned transaction.
786
18.5–18.6 Chapter 18: Estate duty
Solution 18.15
R
Value of unlisted shares 985 000
Value of deemed property – life insurance policy 300 000
Less: Value of deemed property taken into account in valuing the
unlisted share (210 000)
Net property to be included in Marie’s estate 1 075 000
REMEMBER
• The abatement can never be more than the net value of the estate.
• If both spouses die simultaneously, for example in a car accident, the person whose
estate has the lowest net value is deemed to have passed away first.
• If the predeceased person (first dying) had more than one spouse and they inherited,
the abatement used to reduce the net value of the estate must be shared pro rata.
• If the deceased had more than one predeceased spouses, the reduction is limited to the
current value of the abatement (which is R3 500 000).
787
A Student’s Approach to Taxation in South Africa 18.6–18.7
Example 18.16
Magie passed away two years after her husband, Petrus Baloy. Petrus left R600 000 cash
to his only son. Magie was the only heir to the rest of Petrus’ estate. The net value of
Petrus’ estate (before Magie’s inheritance) was R4 500 000. Magie’s assets on date of her
death was R6 500 000.
You are required to determine the estate duty payable by Petrus’ and Magie’s estates.
Solution 18.16
R
Petrus
Value of the estate (given) 4 500 000
Less: Section 4(q) deduction (surviving spouse) (3 900 000)
NET VALUE OF THE ESTATE 600 000
Less: Section 4A abatement (Note) (600 000)
TAXABLE VALUE OF THE ESTATE nil
Magie
NET VALUE OF ESTATE (GIVEN) 6 500 000
Less: Section 4A abatement (Note) (6 400 000)
TAXABLE VALUE OF THE ESTATE 100 000
Note
Each estate qualifies for a R3 500 000 section 4A abatement. The value of the abatement is,
however, limited to the net value of the estate, therefore the value of the abatement in Petrus’
estate is R600 000. As Magie was Petrus’ spouse, her estate qualifies for twice the value of the
abatement less the amount used by Petrus. Her estate qualifies for a total abatement of
(R3 500 000 plus [R3 500 000 minus R600 000]) = R6 400 000.
REMEMBER
• If the second-dying person was a residuary heir in the estate of the first-dying, they are
regarded as having borne the estate duty attributable to the property they inherited.
Estate duty that is not apportioned to a person is payable out of the residue of the estate
and the residuary heirs are therefore regarded as bearing the estate duty on their por-
tions of the residue.
788
18.7 Chapter 18: Estate duty
This reduction is allowed provided that the property was included in the estate of
both the first-dying and second-dying persons.
The deduction allowed is as follows:
Deduction allowed on successive deaths Deduction
If the deceased dies within two years of the death of the first-dying person 100%
If the deceased dies more than two years, but not more than four years
after the death of the first-dying person 80%
If the deceased dies more than four years, but not more than six years after
the death of the first-dying person 60%
If the deceased dies more than six years, but not more than eight years
after the death of the first-dying person 40%
If the deceased dies more than eight years, but not more than ten years
after the death of the first-dying person 20%
If the deceased dies more than ten years after the death of the first-dying
person nil%
The deduction cannot exceed the estate duty attributable to the property in the estate
of the first-dying person.
Step 1: Calculate the normal estate duty liability in the second-dying person’s
estate.
Step 2: Determine the net value of property in the first-dying person’s estate.
Net value = value of property (included in both the first-dying and
second-dying persons’ estates) less any relating expenses.
Step 5: Calculate the proportion of the estate duty in the second-dying per-
son’s estate attributable to the answer in Step 4.
Step 6: Multiply your answer in Step 5 with the percentage prescribed in the
Schedule to the Estate Duty Act, determined according to the length
of time between the two deaths.
continued
789
A Student’s Approach to Taxation in South Africa 18.7
Step 7: Compare your answer in Step 6 with the estate duty paid by the first-
dying person on the applicable assets without the reduction of any
percentages. The lesser of the two amounts qualifies as the successive
death rebate.
Step 8: Deduct this rebate from the total estate duty liability as calculated.
Example 18.17
Tom Maloy died five years after his father, Joseph Maloy. Tom was the only legatee as he
was the only child. The net value of Joseph’s estate was R1 750 000. The estate duty paid
by Tom in respect of his father’s estate amounted to R187 500.
The property he inherited from his father declined in value and, on the date of Tom’s
death, it was worth R910 000. Tom also owned other property and deemed property
amounting to R3 340 000. Liabilities and expenditure in Tom’s estate were R220 000,
which relates 45% to the assets inherited from his father and 55% to his own assets.
You are required to determine the estate duty payable by Tom’s estate.
Solution 18.17
R
The normal estate duty liability in Tom’s estate:
Property inherited from his father 910 000
Other property 3 340 000
GROSS VALUE OF ESTATE 4 250 000
Less: Liabilities (220 000)
NET VALUE OF ESTATE 4 030 000
Less: Abatement (3 500 000)
DUTIABLE AMOUNT OF ESTATE 530 000
Estate duty at 20% 106 000
The net value of property in Joseph’s estate: R1 750 000.
The net value of property in Tom’s estate: R910 000 less expenditure relating to the prop-
erty (45% × R220 000) = R811 000.
Determine the lesser: R811 000.
The proportion of the estate duty in Tom’s estate attributable to inheritance: R811 000 /
R4 030 000 (net estate) = 20,12%.
20,12% × R106 000 (estate duty) = R21 332
Tom died five years after Joseph and a 60% deduction is applicable: R21 332 × 60% =
R12 799.
The estate duty payable by Joseph was R187 500. R12 799 qualifies as the successive death
rebate as this is the lesser of rebate and estate duty paid by Joseph.
Deduct this rebate from the total estate duty calculated: R106 000 – R12 799 = R93 201 to
derive at the final estate duty liability.
790
18.8–18.10 Chapter 18: Estate duty
791
A Student’s Approach to Taxation in South Africa 18.10
REMEMBER
• The property received by the legatee should be identical to the property that formed
part of the dutiable amount in the deceased’s estate before the legatee becomes liable
for a portion of the estate duty. This means that if the market value of a farm is included
in the estate of the deceased, and the deceased’s will determines that the usufruct and
bare dominium of the farm are bequeathed to two different legatees, the legatees cannot
be held responsible for the estate duty in terms of section 13. The reason is that the usu-
fruct and bare dominium did not form two separate assets in the deceased’s estate.
The portion of the estate duty recoverable from the beneficiary is the value of the
benefit in proportion to the net value of the estate multiplied by the estate duty pay-
able.
In all other scenarios, the executor is responsible for the payment of estate duty and
the duty cannot be recovered from the beneficiary.
Example 18.18
The value of Altie Pieters’ estate on date of death:
R
Fixed property 4 325 000
Value of insurance policy payable to Gert 80 000
GROSS VALUE OF ESTATE 4 405 000
Less: Liabilities not relating to the insurance policy (220 000)
NET VALUE OF ESTATE 4 185 000
Less: Abatement (3 500 000)
DUTIABLE AMOUNT OF ESTATE 685 000
Estate duty at 20% 137 000
You are required to determine the apportionment of the estate duty to the various benefi-
ciaries in Altie’s estate.
Solution 18.18
The liability of R137 000 can be apportioned as follows:
Gert is liable for estate duty amounting to:
The value of the benefit in proportion to the net value of the estate multiplied by the
estate duty
= R80 000/R4 185 000 × R137 000 = R2 619
The estate is liable for estate duty on the fixed property net of deductions:
(R4 325 000 – R220 000)/R4 185 000 × R137 000 = R134 381
The portion attributable to Gert plus the estate’s portion equals the total estate duty calcu-
lated: R2 619 + 134 381 = R137 000.
792
18.11 Chapter 18: Estate duty
18.11 Assessment
The executor has to submit a return on the prescribed form with the taxable amount
to the Master of the High Court.
The Commissioner shall assess the estate duty payable and issue a notice of assess-
ment to the executor of the estate. If a notice of assessment had not been issued in
time, it is deemed that the notice was issued on the date the estate became distribut-
able or in cases where the value of the estate is less than the prescribed amount in
section 18(3) of the Administration of Estates Act, the date the death notice is given to
the Master.
The Commissioner may declare a person to be the agent of another person. The agent
may be required to make a payment of the estate duty or interest in respect of the
other person. The Commissioner must have the same remedies against all property of
any kind vested in or under the control or management of an agent or trustee as the
Commissioner would have against the property of a person liable to pay a duty or
interest and in such a full and ample manner.
The duty payable must be paid on such date and at such place as the Commissioner
prescribes in the notice of assessment.
SARS has issued a quick guide on estate duty and the following principles are guide-
lines from this guide. Estate duty is due within one year of the date of death or
30 days from the date of assessment, if an assessment is issued within one year of
date of death. After this date interest is charged on the outstanding amount (Tax
Administration Act: section 187).
If the executor does not pay the tax within the set time, a senior officer of SARS may
rule that the interest is not payable if the late payment is due to:
• natural or human-made disasters;
• a civil disturbance or disruption in services; or
• serious illness or accident.
Payment of estate duty may be tendered to any branch office to SARS without formal
documentation (such as an assessment). It is, however, necessary to reflect the Mas-
ter’s number, date of death and identity number of the deceased.
The Commissioner has the power to raise an additional assessment if they are satis-
fied that any amounts have not been assessed that should have been.
If additional assets are found within five years of completion of the estate and a
supplementary liquidation and distribution account is prepared, the notice of assess-
ment is deemed to have been issued on the date the supplementary liquidation and
distribution account became distributable.
If additional assets are found after five years of completion of the estate and a sup-
plementary liquidation and distribution account is prepared, it is deemed that these
assets are the only asset of the estate and that the death of the deceased occurred on
the date on which the additional property is shown in the supplementary liquidation
and distribution account.
If the executor or another person is not satisfied with the assessment raised by the
Commissioner, they may object and appeal against that assessment under the same
provisions as determined in the Act.
793
A Student’s Approach to Taxation in South Africa 18.12
Example 18.19
Rajan was married in community of property to Tasnim. At the date of Rajan’s death, the
executor in the couple’s joint estate found the following:
R
Residence 4 850 000
Furniture and household effects 1 650 000
Fixed deposit 400 000
Liabilities (including funeral costs of R10 000) 100 000
Rajan was also the holder of a usufruct over a farm. The usufruct was valued at R150 000.
The usufruct now accrued to Tasnim.
You are required to determine the estate duty payable into Rajan’s estate.
794
18.12–18.13 Chapter 18: Estate duty
Solution 18.19
R
Residence 4 850 000
Furniture and household effects 1 650 000
Fixed deposit 400 000
6 900 000
Less: Liabilities (excluding funeral costs of R10 000) (90 000)
6 810 000
Less: One half (due to marriage in community of property) (3 405 000)
Value of Rajan’s half of the joint estate 3 405 000
Add: Value of the usufruct 150 000
GROSS VALUE OF ESTATE 3 555 000
Less: Funeral costs (10 000)
NET VALUE OF ESTATE 3 545 000
Less: Abatement (3 500 000)
DUTIABLE AMOUNT OF ESTATE 45 000
Estate duty at 20% 9 000
18.13 Summary
When calculating the estate duty on death, one first needs to ascertain whether the
deceased was a person ordinarily resident in the Republic or not. The property and
deemed property of the deceased must be valued and added together to determine
the gross estate. The allowable deductions will reduce the gross estate to the net
estate. Every individual in the Republic is entitled to a R3 500 000 abatement. Estate
duty is then levied at 20% on the dutiable amount of the deceased’s estate on the first
R30 000 000 and by 25% on amounts over that.
The next section contains a question that can be completed to evaluate your
knowledge on estate duty.
795
A Student’s Approach to Taxation in South Africa 18.14
Question 18.1
Sean Ferreira, ordinarily resident in the Republic, dies on 25 May of the current year of
assessment. His wife died two years before, leaving him with their two sons, Neil and Lee.
No estate duty was payable on her estate as her net value of the estate was R500 000.
Information relating to Sean’s estate is as follows:
R
1. Residence in Mooikloof – valuation 6 000 000
The residence is bequeathed to Neil Ferreira, Sean’s son. Two years
before his father’s death, with his father’s written approval, Neil
effected improvements to the residence at a cost of R20 000. These
improvements increased the value of the residence by R50 000 at the
date of death of the deceased.
2. At the date of his death, Sean owned a squash court complex in
respect of which he had donated the usufruct to his sons, Neil (50%)
and Lee (50%), on 1 January of the previous year, at which date the
complex was worth R200 000. At the date of Sean’s death, the market
value was R250 000. This is the only donation Sean made during his
life.
3. Furniture and private property – valuation 950 000
4. The farm (Bona-fide farming activities) ‘Dumela’ in the Brits district
• Market value 500 000
5. On Sean’s death, his business partner, Steve, was paid out R800 000
on a life policy taken out on Sean’s life by Steve. Steve had taken out
the policy to enable him, in the event of Sean’s death, to purchase
Sean’s shares in a private company they jointly owned. This had
been agreed upon between Sean and Steve and the company was re-
sponsible for the payment of the premiums.
6. Auditor’s valuation of Sean’s interest in above-mentioned company 600 000
The interest was sold for R500 000 to Steve in terms of an agreement
between the deceased and Steve.
7. Proceeds from selling of fixed property in Sydney (Australia) 1 505 000
Sean obtained this property as a donation from his aunt 30 years ago.
She is an Australian resident.
8. Water and electricity due to the City Council of Sydney on the prop-
erty in Sydney (refer to Note 7 above) 40 000
9. At the date of his death, Sean controlled the profits of a trust. He had
the right to decide what should happen to the profits and was also
entitled to dispose of them. This right is deemed to be property in
terms of section 3(3)(d) of the Estate Duty Act. The Commissioner
has determined the annual value of such profits at R1 000.
continued
796
18.14 Chapter 18: Estate duty
R
10. 15 years prior to his death, Sean received a Lamborghini as a donation
from his uncle. At that date, the car was worth R110 000. His uncle
died a week after his generous gesture and Sean paid the donations
tax of R20 000 in respect of the donation. At the date of Sean’s death,
the car was worth R70 000.
11. Bank overdraft – bank in South Africa 129 733
12. Outstanding income tax due by Sean as calculated by the executor 7 225
13. Executor’s remuneration and masters fees 287 700
Answer 18.1
R R
Residence – Mooikloof 5 950 000
Market value 6 000 000
Less: Value of improvements by beneficiary (50 000)
Bare dominium – squash court complex
Fair market value 250 000
Less: ½ usufruct over Neil’s life (age next birthday = 28) that
is to say ½ × 12% of R250 000 × 8,246 77 and (123 702)
Less: ½ usufruct over Lee’s life (age next birthday = 29) that
is to say ½ × 12% of R250 000 × 8,237 37 (123 561) 2 737
Furniture and private property 950 000
Dumela market value reduced by 30% 350 000
Proceeds of life policy (exempt in terms of section 3(3)(a)) nil
Shares in private company
Valued by an independent valuer 600 000
Property in Sydney 1 505 000 1 505 000
Water and electricity – not deductible as the applicable
property is exempt nil
continued
797
A Student’s Approach to Taxation in South Africa 18.14
R R
Profits of a trust of which the deceased was, immediately prior
to his death, competent to dispose of
Valued over life expectancy of Sean at date of death (age next
birthday = 68) R1 000 × 5,734 03 5 734
Lamborghini (Note) 70 000
Gross value of estate 9 433 471
Bank overdraft (129 733)
South African Revenue Services (SARS) (7 225)
Executors remuneration and Master’s fees (287 700)
Less: Value of the Sydney property as was received by
means of a donation from a non-South African
resident (section 4(e)) (1 505 000)
Net value of estate 7 503 813
Less: Abatement (6 500 000)
Dutiable estate (Note) 1 003 813
Estate duty payable at 20% 200 763
Note
• As Sean’s wife died two years before, Sean qualifies for an additional section 4A rebate.
The rebate in his estate will be (R3 500 000 plus (R3 500 000 minus R500 000)) = R6 500 000.
• Although Sean paid the donations tax on the Lamborghini, there is no section in the
Estate Duty Act that allows for it as a deduction in the estate.
798
Administrative
19 procedures
Exempt Taxable
Gross income – – Deductions = Tax payable
income income
Adjustments
Partnerships Companies Trusts for tax
avoidance
Page
19.1 Introduction ......................................................................................................... 800
19.2 Powers and duties of the Commissioner for the South African
Revenue Services (sections 2 to 12) and the role of the
Tax Ombud (sections 14 to 21) .......................................................................... 803
19.3 Step by step approach ......................................................................................... 804
19.3.1 Registration .......................................................................................... 805
19.3.2 Returns .................................................................................................. 805
19.3.2.1 Prescribed form and place (section 25) ............................ 805
19.3.2.2 Notice by the Commissioner and the manner of
furnishing returns ............................................................... 806
19.3.2.3 Books, accounts and records ............................................. 808
19.4 Advance tax rulings (sections 75 to 90) ............................................................ 809
19.5 Reportable arrangements (sections 34 to 39) ................................................... 811
19.5.1 Definitions ............................................................................................ 811
19.5.2 Disclosure ............................................................................................. 813
19.5.3 Consequences ....................................................................................... 813
19.6 Assessments ......................................................................................................... 814
19.6.1 Original assessments (section 91) ...................................................... 814
799
A Student’s Approach to Taxation in South Africa 19.1
Page
19.6.2 Additional and reduced assessments (sections 92 and 93) .......... 814
19.6.3 Jeopardy assessments (section 94) .................................................. 814
19.6.4 Estimation of assessments (section 95) ........................................... 815
19.6.5 Finality of assessments (sections 99 and 100) ................................ 815
19.6.6 Withdrawal of assessments (section 98) ......................................... 817
19.6.7 Record of assessments (section 97) ................................................. 817
19.7 Penalties and additional tax ............................................................................ 818
19.7.1 Fixed-amount penalties (section 211) ............................................. 818
19.7.2 Percentage-based penalties (section 213) ....................................... 819
19.7.3 Understatement penalty (section 222) ............................................ 820
19.7.4 Criminal offences (sections 234 to 238)........................................... 821
19.8 Dispute resolution (sections 101 to 150) ......................................................... 823
19.8.1 Objection (section 104) ...................................................................... 824
19.8.2 Settlement of disputes (sections 142 to 150)................................... 825
19.8.3 Appeal (sections 107 to 141) ............................................................. 828
19.9 Burden of proof (section 102) .......................................................................... 832
19.10 Payment, recovery and refund of tax ............................................................. 832
19.10.1 Date for payment of tax and interest on overdue payments
(sections 162 and 187 to 189) ............................................................ 832
19.10.2 Payment and recovery: Third parties (sections 179 to 184) ......... 833
19.10.3 Suspension of payment of tax in dispute (section 164) ................ 834
19.10.4 Waiver, write-off or compromise of amounts payable
(sections 195 to 199)........................................................................... 834
19.11 Refunds (sections 190 and 191) ....................................................................... 835
19.12 Registration of tax practitioners (section 240) ............................................... 835
19.13 Reporting of unprofessional conduct (sections 239 to 243) ......................... 836
19.14 Summary ............................................................................................................ 837
19.15 Examination preparation ................................................................................. 838
19.1 Introduction
The previous chapters have focused on the calculation of taxable income and tax
payable. The Tax Administration Act (the TAA), which was promulgated on 4 July
2012, contains the general provisions relating to the returns and assessments, objec-
tion and appeal rules, the payment and recovery of tax, representative taxpayers and
various miscellaneous matters. This chapter focuses on some of the general principles
contained in the TAA and the administrative matters still listed in the Income Tax
Act.
800
19.1 Chapter 19: Administrative procedures
Critical questions
When a taxpayer deals with administrative procedures, the following questions arise:
• In what form and place must returns be submitted?
• Who is liable to render an income tax return?
• For which period must a return be rendered?
• Who is liable to register as a taxpayer?
• Who is liable to register as a tax practitioner?
• Under what circumstances are penalties and additional tax imposed by the Commis-
sioner?
• What are the requirements that must be met before an arrangement must be reported to
the Commissioner?
• What types of advance tax rulings can be issued by the Commissioner?
• Under what circumstances is an assessment issued by the Commissioner?
• How are objection and appeal rules applied?
• Who carries the burden of proof in terms of section 102?
• When must tax be paid and how is interest charged on outstanding amounts of tax?
• What are the tax consequences of being a representative taxpayer?
The TAA contains several of the administrative provisions that SARS must apply
when conducting administrative procedures for any of the acts under its jurisdiction.
The TAA consists of 20 chapters with several provisions and parts under each chap-
ter. The outline provided below aims to give some guidance of where to find relevant
sections. Note that only sections that apply to the majority of taxpayers are discussed
in this chapter.
Legislation:
Tax Administration Act
continued
801
A Student’s Approach to Taxation in South Africa 19.1
It is important to firstly list some of the definitions applicable to the TAA that are
covered in this chapter.
802
19.1–19.2 Chapter 19: Administrative procedures
Legislation:
Section 1: Definitions
‘Assessment’ means the determination of the amount of tax liability or refund, by way of
self-assessment by the taxpayer or assessment by SARS.
‘Business day’ means a day which is not a Saturday, Sunday or public holiday, and for
purposes of determining the days or a period allowed for complying with the provisions of
Chapter 9 (dispute resolutions, objection and appeals) excludes the days between
16 December of each year and 15 January of the following year, both days inclusive.
‘Date of assessment’ means –
(a) in the case of an assessment by SARS, the date of the issue of the notice; or
(b) in the case of self-assessment by the taxpayer –
(i) if a return is required, the date that the return is submitted; or
(ii) if no return is required, the date of the last payment of the tax for the tax period
or, if no payment was made in respect of the tax period, the effective date.
‘International tax agreement’ means –
(a) an agreement entered into with the government of another country in accordance
with a tax Act; or
(b) any other agreement entered into between the competent authority of the Republic
and the competent authority of another country relating to the automatic exchange of
information under an agreement referred to in paragraph (a).
‘Return’ means a form, declaration, document or other manner of submitting information
to SARS that incorporates a self-assessment, is a basis on which an assessment is to be
made by SARS or incorporates relevant material required under section 25, 26 or 27 or a
provision under a tax Act requiring the submission of a return.
‘SARS official’ means –
(a) the Commissioner;
(b) an employee of SARS; or
(c) a person contracted or engaged by SARS, other than an external legal representative,
for purposes of the administration of a tax Act and who carries out the provisions of a
tax Act under the control, direction or supervision of the Commissioner.
‘Self-assessment’ means an amount of tax payable under a tax Act, which has been deter-
mined by a taxpayer and submitting a return which incorporates the determination of the
tax or if no return is required, making a payment of the tax.
‘Tax Act’ means this Act or an Act, or portion of an Act, referred to in section 4 of the SARS
Act, excluding the Customs and Excise Act, the Customs Control Act, 2014 and the Cus-
toms Duty Act, 2014.
803
A Student’s Approach to Taxation in South Africa 19.2–19.3
After the year of assessment has ended, there are certain steps and procedures that
both the taxpayer and SARS must follow. Many of these steps are legislated in the
TAA and the Income Tax Act. This chapter examines some of the key aspects that
take place during each step in relation to taxpayers.
Step 3: Where a taxpayer is uncertain about how SARS will interpret or apply
certain sections, the taxpayer can request an advance tax ruling (refer
to 19.4).
continued
804
19.3 Chapter 19: Administrative procedures
Step 5: SARS uses the information provided on the tax return to issue an
assessment indicating how much tax the taxpayer still owes or will
receive back (refer to 19.6).
Step 6: Where the taxpayer has not adhered to the prescribed form or dates,
penalties and additional tax are levied by SARS when assessing the
return (refer to 19.7).
Step 7: Where the taxpayer is not satisfied with the assessment, they may
object or appeal against the assessment (refer to 19.8 and 19.9).
Step 8: Once the dispute has been settled, SARS refunds any amount due to
the taxpayer or the taxpayer settles any additional amount of tax due
to SARS (refer to 19.10 and 19.11).
19.3.1 Registration
A person is obliged to apply or can voluntarily apply for registration with SARS
under a tax Act. He/she must do so within the applicable period provided for in a tax
Act or within 21 business days of becoming obliged to register where no period is
provided for in the particular tax Act. He/she must apply in the prescribed form and
manner. Failure to do so will be regarded as the person not having applied for regis-
tration.
Once a person has been registered, he/she must notify SARS within 21 business days
of any changes relating to postal, physical and electronic addresses, representative
taxpayer, banking details or other details required by the Commissioner by public
notice.
Once registered, the taxpayer is allocated a reference number that must be included
in all returns or other documents submitted to SARS. Failure to do so may result in
the submitted documents being invalid.
19.3.2 Returns
19.3.2.1 Prescribed form and place (section 25)
A taxpayer is obliged to submit a return for each tax period. All returns must be
submitted in the prescribed form and manner (including electronically) at the place as
prescribed by the Commissioner before the date specified in an Act or announcement
by the Commissioner.
805
A Student’s Approach to Taxation in South Africa 19.3
REMEMBER
An individual who has a total income of less than R500 000 (for the 2021/2022 year of
assessment, same as it was in 2020/2021), does not need to submit a tax return, provided:
• he/she was employed by one employer (remember, if the person had two employers,
he/she needs to submit a return irrespective of the income earned);
• he/she has no car allowance or other income (for example interest or rent);
• he/she is not claiming tax-related deductions (for example medical expenses, retire-
ment, travel);
continued
806
19.3 Chapter 19: Administrative procedures
• he/she received interest from a source in South Africa that did not exceed –
– R23 800 if he is below the age of 65 years; or
– R34 500 if he aged 65 years or older;
• dividends were paid to him/her and he was a non-resident during the year of assess-
ment.
Returns submitted electronically (via the eFiling system) have a later date for submission
than those filed manually (paper-based).
It is the duty of all persons who are required by the TAA to furnish returns to apply
for the prescribed forms.
A person failing to furnish returns will not be relieved from any administrative
penalty simply because he never received a notice calling on him to furnish them or
the prescribed form was never delivered to him.
The Commissioner may also call upon a person to render an interim return prior to
the issue of the annual notice and may make an assessment for that period on the
basis of that return.
A person who is not obliged to render a return may do so voluntarily within three
years after the end of that year for the purpose of having his liability for tax assessed.
The word ‘income’ must be construed as including any aggregate capital gain or
aggregate capital loss.
• Electronic format
The Commissioner may, in the case of a return rendered by a taxpayer or his auth-
orised agent in electronic format, accept electronic or digital signatures as valid sig-
natures.
The Minister may make rules and regulations prescribing the procedures for submit-
ting a return in electronic format and the requirements for electronic or digital sig-
natures.
REMEMBER
807
A Student’s Approach to Taxation in South Africa 19.3
• Company
In the case of a company, the return must be for the whole period of the relevant
financial year of that company comprising the year of assessment.
808
19.3–19.4 Chapter 19: Administrative procedures
REMEMBER
• Every person (including companies) liable for tax must submit a return of their income.
• Every return must be signed by the taxpayer himself or his duly authorised agent.
• Electronic signatures are accepted as valid signatures.
• All returns must be submitted to the Commissioner within the prescribed period.
809
A Student’s Approach to Taxation in South Africa 19.4
In certain circumstances the Commissioner may reject an application for an ATR, for
example where the ATR concerns:
• an opinion on the market value of an asset;
• the interpretation of the laws of a foreign country;
• the pricing of goods or services supplied by or rendered to a connected person in
relation to the ‘applicant’ or a ‘class member’;
• transactions that are hypothetical or not seriously considered;
• a matter which can be resolved by SARS issuing a directive under the Fourth
Schedule to the Income Tax Act;
• whether a person is a labour broker, independent contractor or personal service
provider;
• frivolous or vexatious issues;
• an opinion on alternative courses of action;
• the application is submitted for academic purposes;
• an issue that is currently being disputed with SARS, or is the subject of draft legis-
lation, or is pending before the courts; or
• a matter that would be unduly time-consuming or resource-intensive (section 80).
In addition to the above, the Commissioner may publish lists of issues in respect of
which applications for rulings will be rejected. Before giving a ruling, the Commis-
sioner may request additional information and, if this is not given, the application
may be rejected without a refund of the fee.
810
19.4–19.5 Chapter 19: Administrative procedures
REMEMBER
• Binding private rulings are binding upon the Commissioner only with respect to the
applicant and the proposed transaction.
• Binding class rulings are only binding upon the Commissioner with respect to a specific
class of persons in respect of a proposed transaction or ruling.
• Non-binding private opinions do not have any binding effect on the Commissioner.
• Binding private rulings, binding class rulings and binding general rulings must be
published by the Commissioner, unless a similar ruling has already been published
(section 87).
19.5.1 Definitions
Arrangement
An ‘arrangement’ means a transaction, operation, scheme, agreement or understand-
ing (whether enforceable or not).
Financial benefit
A reduction in the cost of finance, including interest, finance charges, costs, fees, and
discounts in the redemption amount.
Participant
In relation to a reportable arrangement means:
• a promoter;
• a person who directly or indirectly derives or is deemed to derive a tax or financial
benefit by virtue of an arrangement; or
• any other person who is party to an arrangement listed in a public notice.
Pre-tax profit
In relation to a reportable arrangement means the profit of a participant resulting
from that arrangement before deducting normal tax. The profit must be determined in
accordance with International Financial Reporting Standards after taking into account
all costs and expenditure incurred by that participant in connection with the arrange-
ment and after deducting foreign taxes paid or payable by that participant.
811
A Student’s Approach to Taxation in South Africa 19.5
Promoter
In relation to an arrangement, means a person who is principally responsible for
organising, designing, selling, financing or managing the arrangement.
Tax benefit
Tax benefit includes avoidance, postponement, reduction or evasion of liability for
tax.
Subject to the exclusion below, section 35 (‘reportable arrangements legislation’) is
generally triggered where an arrangement:
• provides for interest, finance costs, fees or other charges that are partially or wholly
dependent on the assumptions relating to the tax treatment of that arrangement
(other than by reason of a change in any law administered by the Commissioner);
• has any of the characteristics of, or characteristics which are substantially similar
to, the indicators of a lack of commercial substance in terms of the impermissible
tax avoidance arrangements;
• is or will be disclosed by a participant as a financial liability for purposes of Inter-
national Financial Reporting Standards but not for income tax purposes;
• does not result in a reasonable expectation of a pre-tax profit for a participant; or
• results in a reasonable expectation of a pre-tax profit for a participant that is less than
the value of those tax benefits to that participant on a present value basis.
Section 36 provides that the following arrangements are not reportable arrangements:
• a debt in terms of which:
– the borrower receives an amount of cash and agrees to repay at least the same
amount of cash to the lender at a determinable future date; or
– the borrower receives a fungible asset and agrees to return an asset of the same
kind and of the same or equivalent quantity and quality to the lender at a deter-
minable future date;
• a lease;
• a transaction undertaken through an exchange regulated in terms of the Financial
Markets Act 19 of 2012; or
• a transaction in participatory interests in a scheme regulated in terms of the Collec-
tive Investment Schemes Control Act 45 of 2002.
Provided that:
• the arrangement:
– is undertaken on a stand-alone basis and is not directly or indirectly connected
to, or directly or indirectly dependent upon, any other arrangement (whether
entered into between the same or different parties); or
– would have qualified as having been undertaken on a stand-alone basis as
required above, were it not for a connected arrangement that is entered into for
the sole purpose of providing security and no tax benefit is obtained or en-
hanced by entering into such security arrangement;
812
19.5 Chapter 19: Administrative procedures
19.5.2 Disclosure
Section 37(1) provides that the participant in a reportable arrangement must disclose
the required information regarding the arrangement, to the Commissioner at the
place as the Commissioner may determine within 45 days after the date:
• the arrangement becomes a reportable arrangement; or
• he becoming a participant of a reportable arrangement.
SARS may extend the period of 45 days by no more than 45 days when he is satisfied
that reasonable ground exists for the delay in reporting the arrangement.
The participant need not disclose the required information if he is in possession of a
written statement from either the promoter or another participant that they have
disclosed the required information.
In terms of section 38 the following information must be provided to the Commis-
sioner in relation to the reportable arrangement:
• a detailed description of all its steps and key features;
• a detailed description of the assumed tax benefits for all participants, including,
but not limited to, tax deductions and deferred income;
• the names, registration numbers and registered addresses of all participants;
• a list of all its agreements; and
• any financial model that embodies its projected tax treatment.
The Commissioner must issue a reportable arrangement reference number to each
participant. This is, however, only for administrative purposes.
19.5.3 Consequences
Section 212 provides that:
– a participant (as defined in section 34) who fails to disclose the required infor-
mation in respect of a reportable arrangement; or
– an intermediary (as defined in the regulations issued where an “international tax
standard” is defined) who fails to disclose the information required under the regu-
lations;
is liable to a penalty of R50 000 for each month that the failure continues (up to 12
months), in the case of a participant or intermediary (other than the promotor) who
was party to an arrangement, or R100 000 per month in the case of the promoter.
The amount of the ‘penalty’ is doubled if the amount of the anticipated ‘tax benefit’
(as defined in section 34) for the ‘participant’ by reason of the arrangement exceeds
R5 000 000, and is tripled if the benefit exceeds R10 000 000.
813
A Student’s Approach to Taxation in South Africa 19.6
19.6 Assessments
Once a taxpayer has submitted the relevant tax forms, SARS assesses the taxpayer
and issues an assessment (for example an ITA34 letter) which reflects a tax liability or
a refund amount. However, before this step, SARS may decide to investigate the
taxpayer and perform an audit by requesting information from the taxpayer. This is
dealt with in Chapters 5 and 6 of the TAA. These chapters are not covered here.
An assessment must be issued by SARS before it can enforce the collection of an
outstanding tax liability. The following types of assessments exist:
• original assessments (including self-assessments);
• additional or reduced assessments; or
• jeopardy assessments.
814
19.6 Chapter 19: Administrative procedures
Legislation:
Section 99: Period of limitations for issuance of
assessments
(1) SARS may not make an assessment in terms of this Chapter—
(a) three years after the date of assessment of an original assessment by SARS;
(b) in the case of self-assessment for which a return is required, five years after the date
of assessment of an original assessment—
(i) by way of self-assessment by the taxpayer; or
(ii) if no return is received, by SARS;
(c) in the case of a self-assessment for which no return is required, after the expiration of
five years from the—
(i) date of the last payment of the tax for the tax period; or
(ii) effective date, if no payment was made in respect of the tax for the tax period;
continued
815
A Student’s Approach to Taxation in South Africa 19.6
816
19.6 Chapter 19: Administrative procedures
REMEMBER
817
A Student’s Approach to Taxation in South Africa 19.7
Administrative
Understatement Criminal
non-compliance
penalties offences
penalties
Reportable
arrangement
&
Mandatory
disclosure
penalty
818
19.7 Chapter 19: Administrative procedures
The penalty system provides for recurring monthly penalties for each month that an
income tax return remains outstanding. For the first time, the penalty amounts are
determined according to the taxpayer’s taxable income:
Assessed loss or taxable income for preceding year Penalty
R
Assessed loss 250
R0–R250 000 250
R250 001–R500 000 500
R500 001–R1000 000 1 000
R1 000 001–R5 000 000 2 000
R5 000 001–R10 000 000 4 000
R10 000 001–R50 000 000 8 000
Above R50 000 000 16 000
Taxpayers with multiple outstanding income tax returns will receive a penalty
assessment notice in writing or electronically (for registered eFilers) of the imposition
of a penalty regarding each outstanding return.
Should they fail to submit these outstanding returns within 30 days, a second penalty
– increasing by the same amount – will be imposed. The new regulations allow for
penalties to be imposed each month or part thereof for up to 35 months.
Where a taxpayer fails to pay penalties by the due date, the penalty will be collected
without further notice. As part of the collection process SARS will approach employ-
ers, or other parties in control of their funds, to act as agents. Such employers or third
parties will be required to debit the outstanding amount from the defaulting taxpay-
er’s salary or other funds and pay it over to SARS. Failure by an agent to pay the
amount to SARS constitutes a criminal offence.
Taxpayers penalised under the regulations may apply for relief from the penalties by
completing a Remission Request form if there were reasonable or exceptional circum-
stances responsible for their non-compliance.
Note that there is also a reportable arrangement and mandatory disclosure penalty
under section 212 where a participant (as defined in section 37) fails to disclose in-
formation in respect of a reportable arrangement as required by section 37 (refer to
19.5.3).
819
A Student’s Approach to Taxation in South Africa 19.7
Step 2: Calculate the shortfall: The correct amount of tax due for the period and
the amount declared or reported by the taxpayer. (If the taxpayer fails
to submit a return the amount declared or reported is considered as
nil).
Step 3: Multiply the percentage (Step 1) with the shortfall (Step 2).
The TAA also states that the understatement penalty must be reduced in certain
situations.
Legislation:
Section 223(3): Remittance of understatement penalty
(3) SARS must remit a penalty imposed for a ‘substantial understatement’ if SARS is satis-
fied that the taxpayer—
(a) made full disclosure to SARS of the arrangement, as defined in section 34, that gave
rise to the prejudice to SARS or the fiscus by no later than the date that the relevant re-
turn was due; and
continued
820
19.7 Chapter 19: Administrative procedures
Voluntary Voluntary
If disclosure disclosure
Standard obstructive, after before
Behaviour
case or if it is a notification notification
‘repeat case’ of audit or of audit or
investigation investigation
Substantial understatement 10% 20% 5% 0%
Reasonable care not taken 25% 50% 15% 0%
in completing return
No reasonable grounds for 50% 75% 25% 0%
‘tax position’ taken
Impermissible avoidance 75% 100% 35% 0%
arrangement
Gross negligence 100% 195% 50% 5%
Intentional tax evasion 150% 200% 75% 10%
821
A Student’s Approach to Taxation in South Africa 19.7
A person who wilfully or negligently takes or fails to take certain actions is guilty of
an offence and, upon conviction, is liable for a fine or for imprisonment for a period
not exceeding two years. The following actions constitute offences:
Legislation:
Section 234: Criminal offences relating to
non-compliance with tax acts
822
19.8 Chapter 19: Administrative procedures
continued
823
A Student’s Approach to Taxation in South Africa 19.8
Step 3: SARS must notify the taxpayer if an objection has been allowed, disal-
lowed or partly allowed (section 106):
• The taxpayer must be informed of the decision by SARS.
• The reasons for the decision and the procedure on how to lodge an
appeal must be supplied.
• If applicable, a new assessment must be issued.
824
19.8 Chapter 19: Administrative procedures
• when the grounds for the objection are based wholly or mainly on a change in
practice generally prevailing that applied on the date of the assessment.
The Commissioner must, upon receipt of the notice of objection made on a form NOO
or ADR1, either reduce or alter the assessment or disallow the objection. He must
send the taxpayer notice of the alteration, reduction or disallowance and record any
alteration or reduction made in the assessment.
When no objections are made to an assessment or where objections have been al-
lowed or withdrawn, the assessment or reduced or altered assessment is, subject to
the right of appeal, final and conclusive.
Settle
To ‘settle’ means to resolve a dispute by compromising any disputed liability, other
than by way of either the Commissioner or the person concerned accepting the other
party’s interpretation:
• of the facts;
• the law applicable to those facts; or
• of both the facts and the law.
825
A Student’s Approach to Taxation in South Africa 19.8
826
19.8 Chapter 19: Administrative procedures
827
A Student’s Approach to Taxation in South Africa 19.8
APPEAL
ADR PROCESS OR
LITIGATION
HIGH COURT
OR
SUPREME COURT OF
APPEAL
A taxpayer who wishes to appeal against the results of an objection must submit a
Notice of Appeal (NOA) within 30 days after delivery of the notice of disallowance of
the objection (or an extended period if reasonable grounds or exceptional circum-
stances exist). The NOA must indicate the grounds of the appeal. It may indicate
whether or not the taxpayer wishes to make use of the ADR procedures.
828
19.8 Chapter 19: Administrative procedures
SARS will appoint a facilitator who is a trained and experienced SARS officer. The
facilitator is bound by a code of conduct and must seek a fair, equitable and legal
resolution of the matter. The process is also governed by a set of terms and conditions
to which the taxpayer agrees.
SARS will determine the ADR process and the facilitator will arrange an ADR meet-
ing and notify all parties. The meeting is conducted in an informal manner and dur-
ing the meeting both parties will state their case and provide evidence. During the
process, the facilitator will endeavour to resolve the dispute between the parties.
The taxpayer can represent himself or if the facilitator agrees to it, in exceptional
circumstances, the taxpayer can be represented by a representative of his choice.
Where the dispute is resolved between SARS and the taxpayer, it must be recorded
and signed and, where necessary, SARS will issue a revised assessment to give effect
to the agreement reached.
If the dispute is not resolved, the taxpayer may continue on appeal to the Tax Board
or the Tax Court.
If the amount in dispute is less than R500 000, the parties can agree within 30 days of
the notice of appeal that the Tax Board can hear the case. If the case cannot be heard
by the Tax Board, it must be referred to a Tax Court. The parties must meet within 45
days after the issue of the notice of appeal or failed ADR. During this meeting the
parties may agree to a limitation of the issues in dispute. Minutes of this limitation of
issue meeting must be prepared within 20 days.
Within 10 days after the completion of the minutes of the limitation of issue meeting,
SARS must issue a statement of the grounds of assessment. Hereafter, the taxpayer
has 10 days to issue a statement of the grounds of appeal. Sixty days after the discov-
ery process is complete, a pre-trial meeting must be held. During the meeting the
parties must attempt to reach a settlement. If no settlement can be reached, the
minutes of the meeting must be prepared within ten days of the meeting. The case
can then be placed before the Tax Court. The documents placed before the court must
include the minutes of the pre-trial meeting.
829
A Student’s Approach to Taxation in South Africa 19.8
830
19.8 Chapter 19: Administrative procedures
• one of the members dies, retires or becomes otherwise incapable of acting in that
capacity, the hearing of an appeal must proceed before the President and remain-
ing members.
The judgment of the remaining judges and members will be the judgment of the
court.
The Commissioner or a person authorised by him may appear in support of the
assessment on the hearing of an appeal, and the taxpayer may appear in person or be
represented by his council, attorney or agent.
The Tax Court may act in one of the following ways:
• order the assessment under appeal to be amended, reduced or confirmed or refer
the assessment back to the Commissioner for further investigation and assessment
or make an appropriate order in a procedural matter. Any such assessment is sub-
ject to objection and appeal (section 129);
• reduce, confirm or increase the amount of an additional tax imposed when the
appeal is against the amount of an additional tax imposed by the Commissioner
(section 129);
• confirm or amend another decision of the Commissioner that is subject to appeal;
or (section 129);
• hear an interlocutory application (an application within the matter being heard)
and decide on procedural matters as provided for in the rules of the Tax Court
(section 117).
Judgments or decisions of the court must be published for general information, in a
form that does not reveal the identity of the appellant.
A decision of the Tax Court is final, subject to the right of both the taxpayer and the
Commissioner to appeal to the High Court.
831
A Student’s Approach to Taxation in South Africa 19.8–19.10
suspension may be revoked at any time if the prescribed provisions of the TAA are
complied with. If an objection is successful, the payment made by the taxpayer is
refunded. The section further obliges SARS to pay interest on that amount (refer to
11.10.3 for further information regarding section 164).
REMEMBER
• A taxpayer must carry out certain steps to lodge an objection and appeal.
• An objection must be lodged within 30 business days after the date of assessment or
after reasons for the assessment have been obtained.
• An appeal can be lodged to the Tax Board, Tax Court or High Court.
832
19.10 Chapter 19: Administrative procedures
The Commissioner may prescribe the time by which payment made on a business
day must be received by the Commissioner and payment received after that time is
deemed to have been made on the first business day following that day.
Section 167 provides for payment of outstanding tax by means of an instalment
payment agreement. If amounts are outstanding SARS can appoint a third party to
collect the outstanding tax debt on its behalf (section 179 to 184).
833
A Student’s Approach to Taxation in South Africa 19.10
satisfied that the person is or was negligent or acted fraudulently. The TAA also
contains rules to ensure payment of outstanding tax in cases where companies are
wound up or assets transferred to connected persons.
If a person knowingly assists in dissipating a taxpayer’s assets in order to obstruct the
collection of tax, the person is jointly and severally liable with the taxpayer for the tax
to the extent that the person’s assistance reduces the assets available to pay the tax-
payer’s tax debt.
REMEMBER
834
19.11–19.12 Chapter 19: Administrative procedures
REMEMBER
• The Commissioner is entitled to first set off any refundable amount of tax against any
outstanding amount of tax debt before making a refund to the taxpayer.
835
A Student’s Approach to Taxation in South Africa 19.12–19.13
836
19.13–19.14 Chapter 19: Administrative procedures
REMEMBER
• Where a professional person assists a taxpayer in the avoidance of tax, the Commis-
sioner is entitled to report it to the controlling body concerned.
19.14 Summary
Every taxpayer must submit a return of income earned during a tax year. He is then
assessed on this income by the Commissioner who determines the amount of tax
payable by the taxpayer for such tax year. If the taxpayer is not satisfied with the tax
assessed, he can then lodge an objection against such assessment and if his objection
is sustained, appeal to either the Tax Board or Tax Court. If the taxpayer agrees with
the assessment or is successful with his objection and appeal, he must pay the tax
when it becomes due or is payable, or interest will be charged on the outstanding
amount of tax. If a taxpayer does not submit a return, he is guilty of an offence and
liable to a fine or imprisonment if convicted. He may also suffer additional tax in
certain circumstances.
The next section contains practical questions where your knowledge on administra-
tive procedures is tested.
837
A Student’s Approach to Taxation in South Africa 19.15
Question 19.1
You are a chartered accountant and a member of the Independent Regulatory Board for Au-
ditors. Lina Mbokasi has been a client of yours for a number of years. You have completed
her provisional and final tax returns for the past three years as a result of a verbal request
made by her.
During March another client requested you to prepare IT3(b) forms, ‘Return of Income
from Investments, Property, Rights and Royalties’, on its behalf. While completing this
request, you established that this client paid rentals of R78 000 to Lina Mbokasi during the
previous year of assessment for a property belonging to Lina Mbokasi.
You immediately contact Lina and ask her about this property and the resulting income
and why she has not informed you about it. She replies by saying that she inherited this
property five years ago and, as she understood, inheritances are to be tax-free and she
failed to see the necessity to provide you with this information.
After informing her of the correct tax position in relation to the income earned form this
inherited property, she wants to know what the Commissioner is likely to do about it
should he come to find out about it.
Answer 19.1
The Commissioner could do the following about this matter:
• The Commissioner will issue an additional assessment in respect of the amount that
was omitted.
• The Commissioner may call for a certificate from me detailing the extent of work I have
done on your returns.
• You have been guilty of omitting an amount that ought to have been included. The fact
that I completed the return on your behalf does not relieve you from this offence. You
will be liable for an understatement penalty based on the value of the understatement.
• In addition to the additional tax for which you are liable, as detailed above, you will
also be liable for a penalty of a fine or imprisonment for a period not exceeding 24
months.
• You are also guilty of evading taxation and will therefore be subject to a fine or impris-
onment for a period not exceeding five years.
• If the Commissioner is of the opinion that I assisted you in avoiding the payment of
tax, he would be entitled to lodge a complaint with my controlling body (the Inde-
pendent Regulatory Board for Auditors). It, in turn, is entitled to deal with the matter in
a manner as it sees fit. It is probable that disciplinary action would be taken against me by
the Independent Regulatory Board for Auditors.
838
Appendices
APPENDIX A
2023 tax rates
(i) Persons (other than companies and trusts)
Taxable income Rates of tax
Not exceeding R226 00 ................................................. 18 per cent of taxable income
Exceeding R226 00 but not exceeding R353 100 R40 680 plus 26 per cent of the amount by which
taxable income exceeds R226 000
Exceeding R353 100 but not exceeding R488 700 .... R73 726 plus 31 per cent of the amount by which
taxable income exceeds R353 100
Exceeding R488 700 but not exceeding R641 400 ... R115 762 plus 36 per cent of the amount by
which taxable income exceeds R488 700
Exceeding R641 400 but not exceeding R817 600 ... R170 734 plus 39 per cent of the amount by which
taxable income exceeds R641 400
Exceeds R817 600 but not exceeding R1 731 600 .... R239 452 plus 41 per cent of the amount by which
taxable income exceeds R817 600
Exceeds R1731 600 .......................................................... R614 192 plus 45 per cent of the amount by which
taxable income exceeds R1 731 600
continued
839
A Student’s Approach to Taxation in South Africa
840
Appendices
APPENDIX B
Life expectancy and present value tables (Table A)
Present value of R1
Age Expectation of life Age
per annum for life
Male Female Male Female
0 64,74 72,36 8,327 91 8,331 05 0
1 65,37 72,74 8,328 28 8,331 14 1
2 64,50 71,87 8,327 76 8,330 91 2
3 63,57 70,93 8,327 14 8,330 64 3
4 62,63 69,97 8,326 44 8,330 33 4
5 61,69 69,02 8,325 67 8,329 99 5
6 60,74 68,06 8,324 80 8,329 61 6
7 59,78 67,09 8,323 81 8,329 18 7
8 58,81 66,11 8,322 71 8,328 69 8
9 57,83 65,14 8,321 46 8,328 15 9
10 56,85 64,15 8,320 07 8,327 53 10
11 55,86 63,16 8,318 49 8,326 84 11
12 54,87 62,18 8,316 73 8,326 08 12
13 53,90 61,19 8,314 80 8,325 22 13
14 52,93 60,21 8,312 65 8,324 27 14
15 51,98 59,23 8,310 29 8,323 20 15
16 51,04 58,26 8,307 70 8,322 03 16
17 50,12 57,29 8,304 89 8,320 71 17
18 49,21 56,33 8,301 80 8,319 26 18
19 48,31 55,37 8,298 41 8,317 64 19
20 47,42 54,41 8,294 71 8,315 84 20
21 46,53 53,45 8,290 61 8,313 83 21
22 45,65 52,50 8,286 13 8,311 61 22
23 44,77 51,54 8,281 17 8,309 12 23
24 43,88 50,58 8,275 64 8,306 33 24
25 43,00 49,63 8,269 59 8,303 26 25
26 42,10 48,67 8,262 74 8,299 81 26
27 41,20 47,71 8,255 16 8,295 95 27
28 40,30 46,76 8,246 77 8,291 71 28
29 39,39 45,81 8,237 37 8,286 97 29
30 38,48 44,86 8,226 94 8,281 70 30
31 37,57 43,91 8,215 38 8,275 83 31
32 36,66 42,96 8,202 57 8,269 30 32
33 35,75 42,02 8,188 36 8,262 10 33
34 34,84 41,07 8,172 62 8,254 00 34
35 33,94 40,13 8,155 36 8,245 09 35
36 33,05 39,19 8,136 47 8,235 17 36
37 32,16 38,26 8,115 58 8,224 26 37
continued
841
A Student’s Approach to Taxation in South Africa
Present value of R1
Age Expectation of life Age
per annum for life
Male Female Male Female
38 31,28 37,32 8,092 74 8,211 99 38
39 30,41 36,40 8,067 81 8,198 66 39
40 29,54 35,48 8,040 30 8,183 86 40
41 28,69 34,57 8,010 67 8,167 62 41
42 27,85 33,67 7,978 44 8,149 83 42
43 27,02 32,77 7,943 44 8,130 12 43
44 26,20 31,89 7,905 47 8,108 81 44
45 25,38 31,01 7,863 80 8,085 27 45
46 24,58 30,14 7,819 24 8,059 56 46
47 23,79 29,27 7,771 09 8,031 19 47
48 23,00 28,41 7,718 43 8,000 26 48
49 22,23 27,55 7,662 36 7,966 17 49
50 21,47 26,71 7,602 01 7,929 50 50
51 20,72 25,88 7,537 13 7,889 67 51
52 19,98 25,06 7,467 48 7,846 46 52
53 19,26 24,25 7,393 87 7,799 65 53
54 18,56 23,44 7,316 31 7,748 34 54
55 17,86 22,65 7,232 34 7,693 55 55
56 17,18 21,86 7,144 14 7,633 63 56
57 16,52 21,08 7,051 78 7,568 96 57
58 15,86 20,31 6,952 25 7,499 27 58
59 15,23 19,54 6,850 04 7,423 21 59
60 14,61 18,78 6,742 06 7,341 35 60
61 14,01 18,04 6,630 10 7,254 57 61
62 13,42 17,30 6,512 32 7,160 20 62
63 12,86 16,58 6,393 01 7,060 46 63
64 12,31 15,88 6,268 22 6,955 37 64
65 11,77 15,18 6,137 89 6,841 61 65
66 11,26 14,51 6,007 26 6,723 93 66
67 10,76 13,85 5,871 65 6,598 93 67
68 10,28 13,20 5,734 03 6,466 35 68
69 9,81 12,57 5,591 82 6,328 18 69
70 9,37 11,96 5,451 65 6,184 66 70
71 8,94 11,37 5,307 75 6,036 07 71
72 8,54 10,80 5,167 44 5,882 78 72
73 8,15 10,24 5,024 37 5,722 22 73
continued
842
Appendices
Present value of R1
Age Expectation of life Age
per annum for life
Male Female Male Female
74 7,77 9,70 4,878 76 5,557 43 74
75 7,41 9,18 4,734 90 5,388 93 75
76 7,07 8,68 4,593 54 5,217 27 76
77 6,73 8,21 4,446 63 5,046 79 77
78 6,41 7,75 4,303 09 4,870 92 78
79 6,10 7,31 4,158 98 4,693 89 79
80 5,82 6,89 4,024 40 4,516 47 80
81 5,55 6,50 3,890 51 4,343 99 81
82 5,31 6,13 3,768 02 4,173 15 82
83 5,09 5,78 3,652 76 4,004 82 83
84 4,89 5,45 3,545 46 3,839 88 84
85 4,72 5,14 3,452 32 3,679 21 85
86 4,57 4,85 3,368 64 3,523 71 86
87 4,45 4,58 3,300 66 3,374 26 87
88 4,36 4,33 3,249 07 3,231 75 88
89 4,32 4,11 3,225 97 3,102 96 89
90 4,30 3,92 3,214 38 2,989 12 90
The above tables have been extracted from Government Notice R1942 dated
23 September 1977.
843
A Student’s Approach to Taxation in South Africa
APPENDIX C
Annuity table (Table B)
Present value of R1 per annum capitalised at 12% over fixed periods
Year Amount Year Amount Year Amount Year Amount Year Amount
1 0,892 9 21 7,562 0 41 8,253 4 61 8,325 0 81 8,332 5
2 1,690 0 22 7,644 6 42 8,261 9 62 8,325 9 82 8,332 6
3 2,401 8 23 7,718 4 43 8,260 8 63 8,326 7 83 8,332 6
4 3,037 4 24 7,784 3 44 8,276 4 64 8,327 4 84 8,332 7
5 3,604 8 25 7,843 1 45 8,282 5 65 8,328 1 85 8,332 8
6 4,111 4 26 7,895 7 46 8,288 0 66 8,328 6 86 8,332 8
7 4,563 8 27 7,942 6 47 8,292 8 67 8,329 1 87 8,332 9
8 4,967 6 28 7,984 4 48 8,297 2 68 8,239 6 88 8,333 0
9 5,328 2 29 8,021 8 49 8,301 0 69 8,330 0 89 8,333 0
10 5,650 2 30 8,055 2 50 8,304 5 70 8,330 3 90 8,333 0
11 5,937 7 31 8,085 0 51 8,307 6 71 8,330 7 91 8,333 1
12 6,194 4 32 8,111 6 52 8,310 4 72 8,331 0 92 8,333 1
13 6,423 6 33 8,135 4 53 8,312 8 73 8,331 2 93 8,333 1
14 6,628 2 34 8,156 6 54 8,315 0 74 8,331 4 94 8,333 1
15 6,810 9 35 8,175 5 55 8,317 0 75 8,331 6 95 8,333 2
16 6,974 0 36 8,192 4 56 8,318 7 76 8,331 8 96 8,333 2
17 7,119 6 37 8,207 5 57 8,320 3 77 8,332 0 97 8,333 2
18 7,249 7 38 8,221 0 58 8,321 7 78 8,332 1 98 8,333 2
19 7,365 8 39 8,233 0 59 8,322 9 79 8,332 3 99 8,333 2
20 7,469 4 40 8,243 8 60 8,324 0 80 8,332 4 100 8,333 2
844
Appendices
APPENDIX D
Write-off periods based on Interpretation Note No. 47
Period of write-off
Item
(Number of years)
Adding machines 6
Air conditioners
Window type 6
Mobile 5
Room unit 10
Air conditioning assets (excluding pipes, ducting and vents):
Air handling units 20
Cooling towers 15
Condensing sets 15
Chillers:
Absorption type 25
Centrifugal 20
Aircraft: Light passenger/commercial/helicopters 4
Arc welding equipment 6
Artefacts 25
Balers 6
Battery chargers 5
Bicycles 4
Boilers 4
Bulldozers 3
Bumping flaking 4
Carports 5
Cash registers 5
Cell phone antennae 6
Cell phone masts 10
Cellular telephones 2
Cheque writing machines 6
Cinema equipment 5
Cold drink dispensers 6
Communication systems 5
Compressors 4
Computers
Mainframe 5
Personal 3
Computers software (main frames)
Purchased 3
Self developed 1
Computers software (personal computers) 2
Concrete mixers (portable) 4
Concrete transit mixers 3
Containers (large metal type used for transport freight) 10
Crop sprayers 6
Curtains 5
Debarking equipment 4
Delivery vehicles 4
Demountable partitions 6
Dental and doctors’ equipment 5
Dictaphones 3
Drilling equipment (water) 5
Drills 6
continued
845
A Student’s Approach to Taxation in South Africa
Period of write-off
Item
(Number of years)
Electric saws 6
Electrostatic copiers 6
Engraving equipment 5
Escalators 20
Excavators 4
Fax machines 3
Fertiliser spreaders 6
Firearms 6
Fire extinguishers (loose units) 5
Fire detection systems 3
Fishing vessels 12
Fitted carpets 6
Food bins 4
Food-conveying systems 4
Fork-lift trucks 4
Front-end loaders 4
Furniture and fittings 6
Gantry cranes 6
Garden irrigation equipment (movable) 5
Gas cutting equipment 6
Gas heaters and cookers 6
Gearboxes 4
Gear shapers 6
Generators (portable) 5
Generators (standby) 15
Graders 4
Grinding machines 6
Guillotines 6
Gymnasium equipment
Cardiovascular equipment 2
Health testing equipment 5
Weights and strength equipment 4
Spinning equipment 1
Other 10
Hairdressers’ equipment 5
Harvesters 6
Heat dryers 6
Heating equipment 6
Hot water systems 5
Incubators 6
Ironing and pressing equipment 6
Kitchen equipment 6
Knitting machines 6
Laboratory research equipment 5
Lathes 6
Laundromat equipment 5
Law reports: Sets (legal practitioners) 5
Lift installations (goods/passengers) 12
Medical theatre equipment 6
Milling machines 6
Mobile caravans 5
Mobile cranes 4
Mobile refrigeration units 4
continued
846
Appendices
Period of write-off
Item
(Number of years)
Motors 4
Motorcycles 4
Motorised chain saws 4
Motorised concrete mixers 3
Motor mowers 5
Musical instruments 5
Navigation systems 10
Neon signs and advertising boards 10
Office equipment – electronic 3
Office equipment – mechanical 5
Oxygen concentrators 3
Ovens and heating devices 6
Ovens for heating food 6
Packaging and related equipment 4
Paintings (valuable) 25
Pallets 4
Passenger cars 5
Patterns, tooling and dies 3
Pellet mills 4
Perforating equipment 6
Photocopying equipment 5
Photographic equipment 6
Planers 6
Pleasure craft etc. 12
Ploughs 6
Portable safes 25
Power tools (hand-operated) 5
Power supply 5
Public address systems 5
Pumps 4
Race horses 4
Radar systems 5
Radio communication equipment 5
Refrigerated milk tankers 4
Refrigeration equipment 6
Refrigerators 6
Runway lights 5
Sanders 6
Scales 5
Security systems (removable) 5
Seed separators 6
Sewing machines 6
Shakers 4
Shop fittings 6
Solar energy units 5
Special patterns and tooling 2
Spin dryers 6
Spot welding equipment 6
Staff training equipment 5
Surge bins 4
Surveyors
Instruments 10
Field equipment 5
continued
847
A Student’s Approach to Taxation in South Africa
Period of write-off
Item
(Number of years)
Tape-recorders 5
Telephone equipment 5
Television and advertising films 4
Television sets, video machines and decoders 6
Textbooks 3
Tractors 4
Trailers 5
Traxcavators 4
Trolleys 3
Trucks (heavy duty) 3
Trucks (other) 4
Truck mounted cranes 4
Typewriters 6
Vending machines (including video game machines) 6
Video cassettes 2
Warehouse racking 10
Washing-machines 5
Water distillation and purification plant 12
Water tankers 4
Water tanks 6
Weighbridges (movable parts) 10
Wire line rods 1
Workshop equipment 5
X-ray equipment 5
848
Appendices
APPENDIX E
Table of interest rates contained in the Income Tax Act, 1962
Fringe benefit low interest loans – paragraph (a) of the definition of ‘official rate of in-
terest’ in paragraph 1 of the Seventh Schedule to the Act
Date from Date to Rate
1.08.2020 30.11.2021 4.50%
1.12.2021 31.01.2022 4.75%
1.02.2022 31.03.2022 5.00%
1.04.2022 31.05.2022 5.25%
1.06.2022 31.07.2022 5.75%
1.08.2022 30.09.2022 6.50%
1.10.2022 30.11.2022 7.25%
1.12.2022 Until change in the repo rate 8.00%
Interest payable by taxpayers on an amount of tax which is not paid on the date pre-
scribed for payment – paragraph (b) of the definition of ‘prescribed rate’ in section 1 of the
Act
Date from Date to Rate
01.11.2020 28.02.2022 7.00%
01.03.2022 30.04.2022 7.25%
01.05.2022 30.06.2022 7.50%
01.07.2022 31.08.2022 7.75%
01.09.2022 31,10.2022 8.25%
01.11.2022 31.12.2022 9.00%
01.01.2023 Until change in PFMA* rate 9.75%
* Public Finance Management Act 1 of 1999
Interest payable to taxpayers on credit amounts under section 89quat(4) of the Act –
paragraph (a) of the definition of ‘prescribed rate’
Date from Date to Rate
01.11.2020 28.02.2022 3.00%
01.03.2022 30.04.2022 3.25%
01.05.2022 30.06.2022 3.50%
01.07.2022 31.08.2022 3.75%
01.09.2022 31.10.2022 4.25%
01.11.2022 31.12.2022 5.00%
01.01.2023 Until change in PFMA* rate 5.75%
* Public Finance Management Act 1 of 1999
849
A Student’s Approach to Taxation in South Africa
APPENDIX F
Employee-owned vehicles (section 8(1))
Scale of values
Value of the vehicle (including VAT) Fixed cost Fuel cost Maintenance
cost
Simplified method:
Where the amount of the allowance is based on the actual distance travelled by the
receiver (employee) and no other compensation is received (except for parking and
toll fees), a rate per kilometre of 418 cents can be used at the option of the employee.
850
Appendices
APPENDIX G
Master’s fees applicable to estates from 1 January 2018 (Government Gazette No
41 224)
Total value according to executor’s or curator’s account Master’s Fees
Under R250 000 Nil
Between R250 000 and R399 999 R600
From R400 000 with each increase of a full R100 000 Add R200
To a maximum of R7 000
On an estate of R3 600 000 and more
851
Index
Para
A
Accrued to ................................................................................................................................................. 3.5
Acquisition or disposal of trading stock ......................................................................................... 8.3.10
Actually incurred .................................................................................................................................. 7.3.2
Additional tax ......................................................................................................................................... 19.7
Administrative penalties....................................................................................................................... 19.7
Advance tax rulings ............................................................................................................................... 19.4
Advertising ............................................................................................................................................... 7.5
Alimony ................................................................................................................................................. 4.2.2
Allowances .............................................................................................................................................. 14.4
Allowance on credit sales .................................................................................................................... 8.5.3
Amounts received in respect of services rendered, employment or holding an office ................. 4.2.3
Annual exclusion for capital gains tax .......................................................................................... 10.11.5
Annuities ................................................................................................................................................ 4.2.1
Former employees ............................................................................................................................. 8.4.2
Appeal ................................................................................................................................................... 19.8.3
Apportionment ...................................................................................................................................... 7.3.6
Assessed capital loss ............................................................................................................................ 10.13
Assessed losses ....................................................................................................................................... 8.11
Assessments ............................................................................................................................................ 19.6
of donations tax ..................................................................................................................................... 17
period of ................................................................................................................................................. 3.6
year of ..................................................................................................................................................... 3.6
Assets ............................................................................................................................................. 9.5, 10.3.1
acquired for less than market value ............................................................................................. 14.3.2
cost .......................................................................................................................................................... 9.5
connected persons ......................................................................................................................... 10.12.6
disposal of....................................................................................................................... 9.11, 10.3.3, 10.5
manufacturing process ........................................................................................................................ 9.8
recoupment on the sale of .............................................................................................................. 9.11.2
replacement assets......................................................................................................................... 10.14.2
right of use ........................................................................................................................................ 14.3.2
used by small business corporation .................................................................................................. 9.7
wasting ................................................................................................................................................... 7.5
853
A Student’s Approach to Taxation in South Africa
Para
Awards
by the CCMA ................................................................................................................................... 12.4.8
by the Labour Court........................................................................................................................ 12.4.8
B
Bad debts ................................................................................................................................................ 8.5.1
Bare dominium valuation .................................................................................................................. 17.10.3
Bargaining council, contribution by employer ............................................................................ 14.3.14
Base cost ................................................................................................................................................... 10.6
Beneficiary fund awards ..................................................................................................................... 6.3.2
Blocked foreign fund ............................................................................................................................... 3.5
Bribes ..................................................................................................................................................... 7.4.13
Burden of proof ...................................................................................................................................... 19.9
Bursaries ............................................................................................................................................... 14.5.3
C
Calculation of taxable income ............................................................................................................... 1.4,
Individual ......................................................................................................................................... 13.3.5
Of a company ...................................................................................................................................... 11.3
Cancellation of contracts ...................................................................................................................... 6.6.4
Capital
allowances ................................................................................................................................................ 9
fixed ..................................................................................................................................................... 7.3.5
floating ................................................................................................................................................ 7.3.5
gain ....................................................................................................................................................... 10.4
loss ........................................................................................................................................................ 10.4
nature, deemed ..................................................................................................................................... 3.7
Capital gains tax .................................................................................................................................... 10.2
20% rule ............................................................................................................................................... 10.9
application ........................................................................................................................................... 10.2
base cost ............................................................................................................................................... 10.6
determination whether transaction subject to ............................................................................ 10.3.3
donations and .................................................................................................................................. 10.5.2
proceeds ............................................................................................................................................... 10.5
time-apportioned base cost............................................................................................................... 10.8
Carrying on a trade .................................................................................................................................. 7.2
Cash or otherwise .................................................................................................................................... 3.4
Ceasing to be tax resident .................................................................................................................. 10.3.3
Close corporation ..................................................................................................................................... 1.3
Closing stock .......................................................................................................................................... 8.3.2
Collective investment schemes, individuals ................................................................................. 5.2.3.1
Commercial building allowance....................................................................................................... 9.10.2
Commissioner, powers of .................................................................................................................... 19.2
Company
definition ............................................................................................................................................... 11.2
classification of.................................................................................................................................... 11.7
collection of tax due ........................................................................................................................... 11.6
854
Index
Para
Company (continued)
distributions ........................................................................................................................................ 11.8
low-interest and interest-free loans to companies ...................................................................... 17.13
preference shares in .............................................................................................................. 17.13, 16.10
tax rates ................................................................................................................................................ 11.3
taxable income .................................................................................................................................... 11.3
Compensation ........................................................................................................................................ 3.7.3
Compensation for personal injury, exclusion capital gains tax ............................................. 10.11.4.3
Compulsory annuities ........................................................................................................................ 15.3.4
Connected persons ................................................................................................................................... 9.2
Consumable stores ................................................................................................................................ 8.3.7
Contracts, future expenditure on .................................................................................................. 14.3.3.2
Contributions to funds ......................................................................................................................... 8.4.1
Contributed tax capital....................................................................................................................... 11.9.2
Controlled foreign companies ............................................................................................................ 3.6.1
Copyright ............................................................................................................................................. 9.13.1
Cost of an asset ......................................................................................................................................... 9.5
Criminal offences ................................................................................................................................ 19.7.4
D
Damages .................................................................................................................................................... 7.5
Debt
concession or compromise in respect of ................................................................................... 14.4.9.3
doubtful .............................................................................................................................................. 8.5.2
payment of employee’s ................................................................................................................ 14.3.15
waiving ........................................................................................................................................... 10.12.7
Deceased estates, disposals ............................................................................................................ 18.3.1.1
Deductions
double..................................................................................................................................................... 8.7
prohibited .............................................................................................................................................. 7.4
specific ....................................................................................................................................................... 8
Deemed inclusions in income
conditional right to income .............................................................................................................. 16.8
donations between residents and non-residents .......................................................................... 16.9
minor children ........................................................................................................................... 16.7, 16.7
spouses ................................................................................................................................................. 16.6
Definitions
‘asset’ ................................................................................................................................................. 10.3.1
‘company’ ............................................................................................................................................ 11.2
‘contributed tax capital’.................................................................................................................. 11.9.2
‘determined value’ ........................................................................................................................... 6.3.4
‘dividend’.............................................................................................................................. 4.2.13, 11.9.1
‘donation’ for purposes of donations tax’ ..................................................................................... 17.2
‘gross income’ ........................................................................................................................... 3.2, 13.2.2
‘group of companies ......................................................................................................................... 6.6.3
‘official rate of interest’ .................................................................................................................... 6.3.8
‘personal service provider’ ............................................................................................................ 11.4.2
855
A Student’s Approach to Taxation in South Africa
Para
Definitions (continued)
‘property’ for purposes of donations tax ....................................................................................... 17.4
‘small business corporation’ .......................................................................................................... 11.4.1
‘trust’ .................................................................................................................................................... 16.2
Deposits ..................................................................................................................................................... 3.5
Designs .................................................................................................................................................. 9.13.1
Determined value, definition .............................................................................................................. 14.3.4
Disability pensions................................................................................................................................ 6.3.1
Disability compensation ...................................................................................................................... 6.3.1
Discharge or release of obligation .................................................................................................. 14.3.15
Disposal
deemed disposal upon ceasing to be tax resident ...............................................................................
for capital gains tax ......................................................................................................................... 10.3.3
of assets ................................................................................................................................................ 10.5
timing of ............................................................................................................................................ 10.3.4
to a spouse ...................................................................................................................................... 10.14.3
by a trust in terms of share incentive scheme ..................................................................... 17.12.5.13
deceased estates ................................................................................................................................ 17.18
equity shares in foreign company ......................................................................................... 17.12.5.12
Disposal of immovable property by a non-resident person .......................................................... 5.4.3
Dispute resolution.................................................................................................................................. 19.8
Dividends .................................................................................................................................. 4.2.13, 6.3.4
beneficial owner of a ....................................................................................................................... 11.9.8
definition ............................................................................................................................................ 11.9.1
by way of an annuity ........................................................................................................................ 6.3.4
foreign .................................................................................................................................... 6.3.4, 5.2.3.1
from a REIT ........................................................................................................................................ 6.3.4
from collective investment schemes .............................................................................................. 6.3.4
local dividends................................................................................................................................... 6.3.4
856
Index
Para
Donations tax ............................................................................................................................................. 17
calculation of ....................................................................................................................................... 17.6
definition of ‘donation’ for purposes of ........................................................................................... 17.2
definition of ‘property’ for purposes of ........................................................................................... 17.4
general exemption for a donor other than a natural person ....................................................... 17.8
general exemption from, for natural persons ................................................................................ 17.8
levying of ............................................................................................................................................. 17.2
non-residents....................................................................................................................................... 17.7
payment and assessment of ..................................................................................................... 17.4, 17.5
rate of .................................................................................................................................................... 17.3
recoupment of .................................................................................................................................. 17.4.2
specific exemptions from .................................................................................................................. 17.7
Double deductions ................................................................................................................................... 8.7
Doubtful debts ....................................................................................................................................... 8.5.2
E
Employee-related expenses .................................................................................................................... 8.4
Employees’ tax ........................................................................................................................................ 12.2
Administration ................................................................................................................................... 12.5
calculation of ....................................................................................................................................... 12.3
for directors of private companies and close corporations ...................................................... 12.4.5
identifying correct rate to use ....................................................................................................... 12.4.1
Employment
Benefits ................................................................................................................................................. 14.2
of non-residents ................................................................................................................................. 5.3.1
outside the Republic ......................................................................................................................... 6.3.3
Enduring benefit ................................................................................................................................... 7.3.5
Entertainment ........................................................................................................................................... 7.5
Estate duty .................................................................................................................................................. 18
claim in terms of Matrimonial Property Act .............................................................................. 18.4.3
contributions to retirement funds ............................................................................................... 18.4.5
deductions ........................................................................................................................................... 18.5
determination of amount, payable ....................................................................................... 18.2, 18.10
determination of dutiable amount .................................................................................................. 18.2
domestic policies of insurance on the life of the deceased ....................................................... 18.4.1
donatio mortis causa .......................................................................................................................... 18.4.2
liability of foreign death duties and double tax agreements ...................................................... 18.8
marriage in community of property ............................................................................................. 18.12
property ................................................................................................................................ 18.3, 18.3.1.1
deemed to be property .................................................................................................................. 18.4
of which the deceased was competent to dispose for own benefit ..................................... 18.4.4
rapid succession rebate ..................................................................................................................... 18.7
transfer duty ........................................................................................................................................ 18.9
valuation of
bare dominium ......................................................................................................................... 18.3.2.1
limited interests ........................................................................................................................ 18.3.2.1
right to an annuity .................................................................................................................... 18.3.2.2
Ex gratia payments ............................................................................................................................... 7.3.4
Exclusions for capital gains tax .......................................................................................................... 10.11
857
A Student’s Approach to Taxation in South Africa
Para
Exempt
Assets that produce exempt income, exclusion from capital gains tax ............................ 10.11.4.6
bodies and persons .............................................................................................................................. 6.3
persons, exclusion from capital gains tax .............................................................................. 10.11.4.5
dividends ............................................................................................................................................ 6.3.4
fringe benefits .................................................................................................................................... 6.3.2
foreign dividends .............................................................................................................................. 6.3.4
foreign services .................................................................................................................................. 6.3.2
income .................................................................................................................................................... 6.1
interest ................................................................................................................................................. 6.3.4
purchased annuity ............................................................................................................................ 6.3.4
scholarships and bursaries ................................................................................................... 6.3.2,15.5.3
Exercising an option, exclusion of capital gains tax .................................................................... 10.12.4
Expenditure and losses ........................................................................................................................ 7.3.1
Expenses and allowances of salaried taxpayers ................................................................... 13.4.1, 14.4
F
Fines......................................................................................................................................................... 7.4.4
Foreign
dividends ............................................................................................................................................ 6.3.4
dividends expenditure ................................................................................................................... 7.4.15
entertainers and sportspersons ....................................................................................................... 5.4.4
income .................................................................................................................................................... 5.2
pensions .............................................................................................................................................. 6.3.1
services ................................................................................................................................................ 6.3.3
tax rebates .................................................................................................................................... 1.5.6, 5.5
exchange transactions .......................................................................................................................... 8.2
Forfeited deposits .............................................................................................................................. 10.12.3
Free or cheap services......................................................................................................................... 14.3.7
Fringe benefits ................................................................................................................................ 4.2.11,14
From a source in the Republic ............................................................................................................... 5.3
Funeral benefits ..................................................................................................................................... 6.3.2
Funeral expenses ................................................................................................................................. 18.5.1
Future expenditure on contracts ........................................................................................................ 8.6.3
G
Gambling, lottery and prizes .............................................................................................................. 3.7.3
Gambling, games and competitions, exclusion for capital gains tax .................................... 10.11.4.4
General deduction formula ................................................................................................................... 7.3
Gifts and inheritances ............................................................................................................... 3.7.3, 11, 12
Goodwill .......................................................................................................................................... 3.7.3, 7.5
Government grants ............................................................................................................................... 3.4.5
Gross income............................................................................................................................................. 3.2
definition ................................................................................................................................................. 3.2
special inclusions ..................................................................................................................................... 4
Group of companies .............................................................................................................................. 11.2
858
Index
Para
H
Home office expenses ......................................................................................................................... 13.3.2
I
Illegal receipts ........................................................................................................................................... 3.5
Immovable assets……………………… ............................................................................................... 9.10
Improvements .................................................................................................................................... 9.3, 9.6
In favour of ................................................................................................................................................ 3.5
Inclusion rate for capital gains tax .................................................................................................... 10.15
Income
earning operations ............................................................................................................................... 4.7
foreign ................................................................................................................................................. 5.2.3
gross ....................................................................................................................................................... .3.2
of minors ................................................................................................................................................ 5.4
specific .................................................................................................................................................... 5.2
Income Tax Act ...................................................................................................................................... 1.3.3
Independent contractor ...................................................................................................................... 12.4.3
Industrial policy project allowance .................................................................................................. 4.13.1
Inheritances ......................................................................................................................................... 3.7, 12
Insurance
Cessation ........................................................................................................................................... 7.4.14
policy premiums.............................................................................................................................. 4.2.14
employer owned............................................................................................................................ 14.3.12
premiums .......................................................................................................................................... 7.4.16
Intangible assets ................................................................................................................................ 10.12.2
Intellectual Property ........................................................................................................................... 9.13.2
Intention.................................................................................................................................................. 3.7.1
Interest ............................................................................................................................................................
exemption ................................................................................................................................. 5.3.2, 6.3.4
received, non-residents .................................................................................................................... 5.3.2
paid on debt ..................................................................................................................................... 14.3.8
K
‘Know-how’ payments ......................................................................................................................... 4.2.9
Kruger Rands ......................................................................................................................................... 3.7.3
L
Labour broker ...................................................................................................................................... 12.4.4
Learnership agreements ....................................................................................................................... 8.4.4
Lease premiums .................................................................................................................................. 9.12.2
Leased assets ........................................................................................................................................... 9.12
Leasehold improvements .................................................................................................................. 9.12.3
Legal expenses ....................................................................................................................................... 8.6.1
859
A Student’s Approach to Taxation in South Africa
Para
Limitation
of capital losses ................................................................................................................................. 10.12
of losses ................................................................................................................................................ 13.6
exclusion rule ................................................................................................................................. 5.6.2
Limitation of capital allowances ............................................................................................... 5.15, 10.12
depreciable assets ............................................................................................................................ 5.15.2
lessors ................................................................................................................................................ 5.15.1
Living annuities ................................................................................................................................... 15.3.2
Loans, subsidy ..................................................................................................................................... 14.3.9
Long-term insurance, exclusion of capital gains tax ................................................................ 10.11.4.2
Low-cost housing ................................................................................................................................ 5.12.4
Low interest loans ............................................................................................................................... 14.3.8
Lump sums
received from an employer ............................................................................................................... 15.3
Foreign ................................................................................................................................................ 6.3.2
Public sector funds ....................................................................................................................... 15.4.1.2
received on retirement ......................................................................................................... 4.2.6, 15.4.4
received on withdrawal or resignation ....................................................................................... 15.4.2
taxation of ............................................................................................................................................ 15.4
M
Manufacture, process of ................................................................................................................... 9.4, 9.8
Manufacturing
building allowance .......................................................................................................................... 9.10.1
plant and machinery ......................................................................................................................... 9.7.1
Meals, refreshments and vouchers................................................................................................... 14.3.5
Medical
aid contributions by employers .................................................................................................. 14.3.10
credits .................................................................................................................................................. 7.6.5
expenses tax credit ............................................................................................................................ 1.5.5
lump sum payments. ...................................................................................................................... 4.13.4
scheme fees tax credit ....................................................................................................................... 1.5.4
services ................................................................................................................................................ 14.3.11
Micro businesses ................................................................................................................................. 6.12.4
Motor vehicle, right of use ................................................................................................................. 14.3.4
N
Non-resident companies ....................................................................................................................... 11.5
Non-residents, exemptions ............................................................................................................... 5.3,5.2
Non-resident’s income ............................................................................................................................ 5.3
Non-residents, royalties ....................................................................................................................... 5.3.2
Non-trade expenditure......................................................................................................................... 7.4.7
Notional interest .................................................................................................................................... 7.4.8
860
Index
Para
Normal tax............................................................................................................................................ 13.5.2
credits .................................................................................................................................... 13.5.4, 13.5.5
rebates ................................................................................................................................... 13.5.3, 13.5.6
Not of a capital nature ................................................................................................................... 3.7, 7.3.5
O
Objection ............................................................................................................................................... 19.8.1
Objective tests ........................................................................................................................................ 3.7.2
Official rate of interest, definition ............................................................................................. 6.3.8, 16.10
Opening stock ........................................................................................................................................ 8.3.3
Options................................................................................................................................................ 10.12.4
Ordinarily resident ........................................................................................................................ 3.3.1, 5.2
Other amounts included in gross income .......................................................................................................4
P
Patents, designs, trademarks and copyright .................................................................................. 9.13.1
Partnerships .............................................................................................................................................. 1.3
PAYE ........................................................................................................................................................ 12.3
Payment, recovery and refund of tax ............................................................................................... 19.10
Penalties .................................................................................................................................................. 7.4.4
Pension fund contributions ................................................................................................. 13.4.2,14.3.13
Pensions ................................................................................................................................................ 15.3.1
Period of assessment ............................................................................................................................... 3.6
Personal injury, compensation for .............................................................................................. 10.11.4.3
Personal service provider ...................................................................................................... 11.4.2, 12.4.2
Personal-use assets exclusion.......................................................................................................... 10.11.2
‘Physical presence’ test ......................................................................................................................... 3.3.2
Premiums
paid ...................................................................................................................................................... 5.3.2
Prepaid expenses ...................................................................................................................................... 8.9
Pre-trade expenses ....................................................................................................................... 4.2.2, 8.10
Primary residence exclusion ........................................................................................................... 10.11.1
Private maintenance expenditure ...................................................................................................... 7.4.1
Private or domestic expenditure ........................................................................................................ 7.4.2
Prizes .......................................................................................................................................................... 3.5
Proceeds ................................................................................................................................................... 10.5
Process of manufacture ........................................................................................................................... 9.4
Production of income ........................................................................................................................... 7.3.4
Prohibited deductions ............................................................................................................................. 7.4
Provident fund contributions.............................................................................................. 13.4.2, 14.3.13
Provisions ............................................................................................................................................... 7.4.5
Provisional tax ........................................................................................................................................ 12.6
companies ................................................................................................................................... 11.6, 12.6
individuals........................................................................................................................................... 12.6
penalties ............................................................................................................................................ 12.6.5
861
A Student’s Approach to Taxation in South Africa
Para
Public benefit organistions, donations to ........................................................................................ 13.4.3
Public benefit organistions, donations to, exclusion from capital gains tax ........................ 10.11.4.7
Public funds, gratuity from ............................................................................................................... 15.4.3
Public officers......................................................................................................................................... 6.4.3
Purchased annuity ................................................................................................................................ 6.3.4
Purchase of stock ................................................................................................................................... 8.3.4
Q
Qualifying annuities .............................................................................................................................. 15.5
R
Rebates .................................................................................................................................................. 13.5.3
foreign tax ......................................................................................................................................... 13.5.6
normal tax ......................................................................................................................................... 13.5.6
Receipts ...................................................................................................................................................... 3.5
of non-residents ............................................................................................................................. 5.1–5.4
or accruals of a capital nature ..................................................................................................... 3.7, 3.9
Recoupment ................................................................................................................. 9.11.2, 9.11.3, 9.11.4
Recoverable expenditure ..................................................................................................................... 7.4.3
Recurrent expenses ............................................................................................................................... 7.3.4
Refreshments ....................................................................................................................................... 14.3.5
Refunds .................................................................................................................................................. 19.11
Registration of taxpayers ................................................................................................................... 19.3.1
Reimbursive allowance ......................................................................................................................... 14.4
Release of obligation ......................................................................................................................... 14.3.15
Relocation benefits .............................................................................................................................. 14.3.2
Remuneration ...................................................................................................................................... 12.3.2
variable.............................................................................................................................................. 12.3.5
Rental paid ........................................................................................................................................... 9.12.1
Repairs ....................................................................................................................................................... 9.3
Reportable arrangements ...................................................................................................................... 19.5
Resident of the Republic ......................................................................................................................... 3.3
Residential buildings .......................................................................................................................... 9.10.3
Restraint of trade payments .................................................................................................... 7.4.11, 8.4.3
Retirement annuity fund contributions............................................................................. 13.4.2, 14.3.13
Retirement benefits, exclusion of capital gains tax .................................................................. 10.11.4.1
Retirement funds, contributions to .................................................................................... 13.4.2, 14.3.13
Returns .................................................................................................................................................. 19.3.2
Right of use
Accommodation .............................................................................................................................. 14.3.6
Asset .................................................................................................................................................. 14.3.3
Motor vehicle ................................................................................................................................... 14.3.4
Ring-fencing of assessed losses............................................................................................................ 13.6
Roll-overs of capital gains or losses .................................................................................................. 10.14
Royalties, non-residents ....................................................................................................................... 5.3.2
862
Index
Para
S
Salaries and wages ................................................................................................................................... 7.5
Sale of assets ............................................................................................................................................ 10.5
Scholarships ........................................................................................................................................... 6.4.3
Seasonal workers ................................................................................................................................. 12.4.7
Section 6quat rebate.................................................................................................................................. 5.5
Settlement of disputes ........................................................................................................................ 19.8.2
Security expenses ..................................................................................................................................... 7.5
Share dealers (trading stock) ............................................................................................................. 8.3.12
Small business
capital gain exclusion ................................................................................................................... 10.11.3
corporations ................................................................................................................................. 11.4, 9.7
funding entity ..................................................................................................................................... 4.14
Sole trader.................................................................................................................................................. 1.3
Source of income ...................................................................................................................................... 5.2
Social responsibility expenses ............................................................................................................. 7.3.4
Special inclusions ........................................................................................................................................ 4
Specific deductions ............................................................................................................................. 13.3,8
Sterilisation of assets............................................................................................................................. 3.7.3
Subjective tests ....................................................................................................................................... 3.7.1
Subsistence allowance ........................................................................................................................ 14.4.2
Suspect trades ...................................................................................................................................... 13.6.1
Suspension of payment in dispute ................................................................................................. 19.10.3
T
Tax
implications of enterprise type .......................................................................................................... 1.3
ombud .................................................................................................................................................. 19.2
returns ............................................................................................................................................... 19.3.2
Tax practitioners ................................................................................................................................... 19.12
Taxable income
company ....................................................................................................................................... 1.5, 11.3
calculation of ................................................................................................................................ 1.4, 13.2
Taxation of retirement benefits ............................................................................................................ 15.4
Tax-free investment
dividends ....................................................................................................................................... 13.3.1.3
interest ............................................................................................................................................ 13.3.1.3
Theft losses ............................................................................................................................................. 7.3.4
Time-apportionment base cost ............................................................................................................ 10.8
Trade, carrying on a ................................................................................................................................. 7.2
Trademarks .......................................................................................................................................... 14.4.1
863
A Student’s Approach to Taxation in South Africa
Para
Trading stock .................................................................................................................................. 8.3, 8.3.1
acquired for no consideration ......................................................................................................... 8.3.6
consumable stores ............................................................................................................................. 8.3.7
closing stock ....................................................................................................................................... 8.3.2
opening stock ..................................................................................................................................... 8.3.3
purchases ............................................................................................................................................ 8.3.4
Training...................................................................................................................................................... 7.5
Transfer costs ....................................................................................................................................... 14.5.2
Transfer of listed securities to offshore exchange ........................................................................... 6.3.3
Transfer pricing ................................................................................................................................... 11.9.1
Travel allowances................................................................................................................................ 14.4.1
True nature of transaction ................................................................................................................... 4.8.1
Trusts
definition ........................................................................................................................................ 1.3, 16.2
annuities............................................................................................................................................. 16.12
calculation of interest .................................................................................................................... 16.11.3
capital gains tax ................................................................................................................................ 16.15
inter vivos trust .................................................................................................................................... 16.2
limitation of losses............................................................................................................................ 16.13
loans between trusts and connected persons .............................................................................. 16.10
nature of income (conduit) ............................................................................................................. 16.12
person liable for tax ........................................................................................................................... 16.4
right to income .................................................................................................................................... 16.5
tax rates ................................................................................................................................................ 16.3
testamentary trust .............................................................................................................................. 16.2
Types of enterprises ................................................................................................................................. 1.3
U
Unemployment insurance benefit funds .......................................................................................... 6.3.2
Uniform allowance ............................................................................................................................. 14.5.1
Unlawful activities .............................................................................................................................. 7.4.13
Unprofessional conduct ...................................................................................................................... 19.13
V
Vacant property ........................................................................................................................................ 7.5
Valuation
date value .......................................................................................................................................... 10.10
of annuity ........................................................................................................................................ 17.10.2
of bare dominium ................................................................................................................ 17.10.3, 18.3.2
of fiduciary ......................................................................................................................... 17.10.1,18.3.2
of property of limited interest ....................................................................................................... 18.3.2
of property other than limited interests ................................................................................ 17.9, 18.3
of usufructuary .............................................................................................................................. 16.10.1
Valuation date value............................................................................................................................ 10.10
864
Index
Para
Value-added tax ................................................................................................................................ 2.1, 2.2
accounting basis ................................................................................................................................ 2.3.1
adjusted cost ........................................................................................................................................ 2.26
apportionment .................................................................................................................................... 2.14
calculation of ......................................................................................................................................... 2.3
commercial accommodation ...................................................................................................... 2.11.3.2
connected persons ............................................................................................................... 2.15.2, 2.16.2
documentation ........................................................................................................................... 2.18, 2.19
enterprise ............................................................................................................................................ 2.7.1
electronic services............................................................................................................................... 2.25
exempt supplies ............................................................................................................................... 2.11.4
financial services ............................................................................................................................. 2.11.1
fixed property ..................................................................................................................................... 2.24
second-hand goods ........................................................................................................................ 2.22
fringe benefits .................................................................................................................................. 2.12.4
goods, definition ............................................................................................................................. 2.6.2.1
imports ............................................................................................................................................ 2.8, 2.9
income tax and .................................................................................................................................... 2.36
indemnity payments ....................................................................................................................... 2.12.2
input tax ............................................................................................................................................... 2.17
change-of-use adjustments .................................................................................................. 2.26–2.30
instalment credit agreements ....................................................................................................... 2.23
irrecoverable debt (bad debt) ....................................................................................................... 2.32
prohibited deductions ................................................................................................................... 2.21
second-hand goods ........................................................................................................................ 2.22
leasehold improvements ................................................................................................................... 2.31
non-supply .......................................................................................................................................... 2.13
output tax........................................................................................................................................ 2.4- 2.7
refunds ................................................................................................................................................ 2.3.5
registration ......................................................................................................................... 2.6.3.1, 2.6.3.2
instalment credit agreements ........................................................................................... 2.15.3, 2.23
rental agreements ............................................................................................................... 2.15.3, 2.23
returns, assessments and objections............................................................................................... 2.3.3
rulings .................................................................................................................................................. 2.33
services, definition ......................................................................................................................... 2.6.2.2
supply of goods and services ............................................................................................................. 2.6
to branches .................................................................................................................................... 2.12.3
tax avoidance ...................................................................................................................................... 2.34
tax periods .......................................................................................................................................... 2.3.2
temporarily applied ........................................................................................................................... 2.26
termination of an enterprise (ceasing to be a vendor) .............................................................. 2.12.1
time of supply of goods and ........................................................................................................... 2.15,
value of supply of goods and services ............................................................................................ 2.16
zero-rated supplies............................................................................................................................. 2.10
going concern ................................................................................................................................... 2.10.3
goods ................................................................................................................................................. 2.10.1
services .............................................................................................................................................. 2.10.2
Variable remuneration ....................................................................................................................... 12.3.5
Vouchers ............................................................................................................................................... 14.3.5
865
A Student’s Approach to Taxation in South Africa
Para
W
Wages ......................................................................................................................................................... 7.5
Waiver or cancellation of a debt ..................................................................................................... 10.12.7
War pensions ............................................................................................................................................ 6.2
Wear-and-tear allowances ...................................................................................................................... 9.9
Withholding tax........................................................................................................................................ 5.4
on disposal of immovable property ............................................................................................... 5.4.3
on dividends ....................................................................................................................................... 11.9
on foreign entertainers and sports persons .................................................................................. 5.4.4
on interest ........................................................................................................................................... 5.4.1
on royalties ......................................................................................................................................... 5.4.2
Workmen’s compensation ...................................................................................................................... 6.2
Y
Year of assessment ............................................................................................................... 3.6, 8.3.9, 7.3.3
866